2009 commercial law reviewer

Copyright Page

Copyright and all other relevant rights over this material are owned jointly by

the University of the Philippines College of Law, the Faculty Editor and the

Student Editorial Team.

The ownership of the work belongs to the University of the Philippines College

of Law. No part of this book shall be reproduced or distributed without the

consent of the UP College of Law.

All rights are reserved.

REVIEWER IN COMMERCIAL LAW Table of Contents

i

INTELLECTUAL PROPERTY LAW

CHAPTER 1: PATENTSI. General Principles

A. Patentable InventionsUtility ModelsIndustrial DesignsLayout Designs of IntegratedCircuits

B. Non-Patentable InventionsC. Registration of Patents and

Rights ConferredII. Patent Infringement

A. DefinitionB. Tests of InfringementC. DefensesD. Remedies

III. LicensingA. Voluntary LicensingB. Compulsory Licensing

IV. Assignment and Transfer

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599991010101212

CHAPTER 2: TRADEMARKSI. Trade Name

What may NOT be used as TradeNameOwnership of Trade NameRight of Owner of Trade Name

II. TrademarkA. FunctionsB. Acquisition of OwnershipC. Who May Apply for RegistrationD. What May Not be RegisteredE. Tests to Determine Confusing

Similarity between MarksF. Well-Known Mark

III. RegistrationIV. Infringement

A. Remedies for InfringementB. Limitations on Action for

InfringementV. Unfair Competition

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CHAPTER 3: COPYRIGHTI. General PrinciplesII. Criteria for Copyright Protection

A. OriginalityB. Expression

III. Works Protected by CopyrightA. Original Literary and Artistic

WorksB. Derivative Works

IV. Non-Copyrightable WorksV. Rights Conferred by Copyright

A. Copyright or Economic RightB. Moral RightsC. Droit de Suite

VI. Ownership of CopyrightVII. Duration of CopyrightVIII. Infringement

Remedies for InfringementIX. Limitations to the Rights of

CopyrightX. Neighboring RightsXI. Transfer and Assignment

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TRANSPORTATION & PUBLIC UTILITIES LAW

Chapter I. GENERALCONSIDERATIONSI. Public UtilitiesII. Transportation

313133

Chapter II. COMMON CARRIERSI. In General

A. Concept of Common CarrierB. Nature of Business; Power of

the State to RegulateC. Nature and Basis of LiabilityD. Classes of Common CarriersE. Laws Applicable

II. Common Carriage of GoodsA. Liability and Presumption of

NegligenceB. Exemption from LiabilityC. Duration of Extraordinary

ResponsibilityD. Stipulation/Agreement

Limiting LiabilityE. Applicable Law on Foreign

TradeF. Rules on Passenger Baggage

III. Common Carriers of PassengersA. Nature and Extent of

ResponsibilityB. Duration of ResponsibilityC. Presumption of NegligenceD. Force MajeureE. Limitation of Liability;

Validity of StipulationsF. Responsibility for Acts of

EmployeesG. Responsibility for Acts of

Strangers and Co-PassengersH. Duty of Passenger; Effect of

Contributory NegligenceIV. Damages Recoverable from

Common CarriersA. In GeneralB. Actual or CompensatoryC. Moral DamagesD. Exemplary DamagesE. Nominal, Temperate, and

LiquidatedF. Attorney’s Fees and Interest

373737

3838383939

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424243

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4545454646

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Chapter III. OVERLANDTRANSPORTATIONI. Scope of Overland

TransportationII. Nature of ContractIII. Effect of Civil CodeIV. Contract of Carriage

A. Bill of LadingB. Refusal to TransportC. Doubtful Declaration of

ContentsD. No Bill of Lading

V. Responsibility of the CarrierA. When It CommencesB. RouteC. Care of GoodsD. Delivery

VI. Rights and Obligations ofShipper and/or Consignee

VII. Applicability of Provisions

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484848484849

49494949495050

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Chapter IV. ADMIRALTY ANDMARITIME COMMERCEI. Source of LawII. Concept of Admiralty;

JurisdictionIII. Vessels

A. MeaningB. Nature and Acquisition

IV. Persons Participating inMaritime CommerceA. Shipowners and ShipagentsB. Captains and ManagersC. Other Officers and CrewD. Supercargoes

V. Accidents and Damages inMaritime CommerceA. AveragesB. Arrival Under StressC. CollisionsD. Shipwreck

VI. Special ContractsA. Charter PartiesB. Loans on Bottomry and

RespondentiaC. Bill of LadingD. Passengers on Sea Voyage

VII. Carriage of Goods by Sea Act

5353

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5353565759

59596162626262

64656566

Chapter V. WARSAW CONVENTIONI. Definition and ApplicabilityII. LiabilitiesIII. Limitation on LiabilityIV. When Limitations UnavailableV. Conditions on LiabilityVI. Venue of Court Actions

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CORPORATION LAW

CHAPTER I. INTRODUCTIONA. DefinitionB. Attributes of a Corporation

1. Artificial being2. Created by operation of law3. Has the right of succession4. Has the powers, attributes

and properties expresslyauthorized by law or incidentto its existence

C. JurisdictionD. Other Types of Business

Organizations

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CHAPTER II. CLASSIFICATION OFCORPORATIONSA. Stock corporationB. Non-Stock corporationC. Other classifications

1. Public corporation2. Private3. Close4. Educational5. Religious sole and aggregate6. Eleemosynary7. Domestic8. Foreign9. Corporation created by special

laws or charters10. Subsidiary11. Parent

77777777

CHAPTER III. FORMATION OFCORPORATIONSA. Components of a Corporation

1. Incorporators2. Corporators3. Foreign incorporators /

corporatorsB. Steps in the Formation of a

Corporation1. Promotion

a. Liability of corporation onpromoters’ contracts

b. Personal liability ofpromoters

c. Compensation ofpromoters

2. Drafting the Articles ofIncorporationa. Definition of Termsb. Contents of Articles of

Incorporation3. Filing with SEC and payment

of fees4. Issuance of Certificate of

Incorporation5. Internal Organization and

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Commencement of BusinessC. De Facto Corporation

1. Requisites of De FactoCorporation

2. De Jure vs. De FactoCorporation

D. Corporation by Estoppel

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CHAPTER IV. THE CORPORATEENTITYA. The Doctrine of Separate Juridical

EntityB. Piercing the Corporate Veil

Doctrine1. An Equitable Remedy2. Extent of Legal Effects3. Application of Piercing

Doctrine4. Parent-Subsidiary

RelationshipC. Nationality

1. Place of Incorporation Test2. The Grandfather Rule3. Control Test4. War-time Test5. Investment Test

86

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CHAPTER V. CORPORATE POWERSA. Express Powers

1. General Powers2. Special/Specific Powers

B. Inherent/Incidental PowersC. Implied PowersD. Ultra Vires Acts

1. Definition2. Types3. Effects4. Remedies

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CHAPTER VI. INTERNALORGANIZATION OF THECORPORATIONA. By-laws

1. Definition2. Adoption3. Requirements4. Effectivity5. Amendment or repeal

B. Directors/Trustees1. Qualifications2. Election of Directors/Trustees3. Methods of Voting4. Exercise of Corporate Powers5. Meetings of the Board6. Removal of Directors /

Trustees7. Executive Committee

C. Corporate Officers

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1. Who are Corporate Officers2. Disqualifications3. Authority of Corporate Officers

D. Stockholders or Members1 Rights of Stockholders2 Obligations of Stockholders3 Stockholders’/Members’

Meeting4 Corporate Acts Requiring

Approval of ALLstockholders/members

5 Other instances requiringStockholders’/Members’Action

6 Limitations on Right to Vote7 Appraisal Right

94

CHAPTER VII. MANAGEMENT ANDCONTROLA. Devices Affecting Control

1. Proxy2. Voting Trust Agreement3. Pooling and Voting

AgreementsB. Duties and Liabilities of Directors

1. Three-fold Duties of Directors2. Self-dealing Director3. Fixing the Compensation of

Directors and Officers4. Interlocking Directors5. Seizing Corporate Opportunity6. Using Inside Information

C. Duties and Liabilities of OfficersD. Duties of Controlling StockholdersE. Remedies in Case of

MismanagementF. Right of InspectionG. Derivative Suits

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101101102

CHAPTER VIII. CAPITALSTRUCTUREA. Classification of SharesB. Subscription Contract

1. Status as a Shareholder2. Types of subscription contract3. Interest on unpaid

subscriptionC. Pre-emptive Right

1. Definition2. Limitations on the Exercise of

Preemptive Right3. Interest on unpaid

subscriptionD. Consideration for Issuance of

Shares1. Forms of consideration2. Limitations on Consideration

E. Watered Stocks1. Definition2. Liability of Directors or

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OfficersF. Delinquent Shares

1. Definition2. Effects of Delinquency

G. Enforcement of Payment1. Delinquency Sale2. Court Action3. Collection from Cash

Dividends and Withholding ofStock Dividends

H. Rights and Obligations of Holdersof Unpaid but Non-delinquentStock

I. Certificate of StockJ. Lost or Destroyed CertificateK. Tender Offer

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108108108

CHAPTER IX. DIVIDENDS ANDPURCHASE OF CORPORATION OFITS OWN SHARESA. Forms of DividendsB. Other Classes of DividendsC. Source of DividendsD. Declaration of DividendsE. Treasury Shares

1. Definition2. Instances When Corporation

May Acquire its Own Shares3. Remedies in Case of Improper

Purchase

109109109109110111

CHAPTER X. TRANSFER OFSHARESA. Manner of TransferB. Registration of Transfer

1. Effects of Lack of Registration2. Remedy if Registration is

refusedC. Restrictions on Transfer

1. Validity of Restrictions2. Presumptions

D. Unauthorized Transfers1. Certificates Indorsed in Blank2. Forged Transfers

E. Collateral Transfers

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CHAPTER XI. AMENDMENTS OFCORPORATE CHARTERA. GeneralB. Specific

1. Increase in Capital Stock2. Decrease of Capital Stock3. Change in Corporate Name

C. Grounds for DisapprovingAmendment

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CHAPTER XII. DISSOLUTIONA. Voluntary Dissolution

1. Expiration of term2. Voluntary dissolution when no

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creditors are affected3. Voluntary dissolution when

creditors are affected4. Dissolution by minority in

close corporations5. Failure to organize; cessation

of business for 5 yearsB. Involuntary Dissolution

1. Revocation of certificate ofRegistration

2. Quo Warranto ProceedingsC. Effects of Dissolution

1. Loss of Juridical Personality2. Executory Contracts3. Winding Up and Liquidation

D. The Trust Fund Doctrine and theDistribution of Assets

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CHAPTER XIII. CORPORATECOMBINATIONSA. DefinitionB. ProcedureC. Effects of Merger/ConsolidationD. Effectivity of Merger/

ConsolidationE. De Facto MergerF. Sale of All or Substantially All

Assets

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CHAPTER XIV. FOREIGNCORPORATIONSA. Definition of TermsB. Tests of “Doing Business in the

Philippines”C. “Doing Business Under the

Foreign Investment ActD. Jurisprudential Rules on “Not

Doing Business in the Philippines”E. Requisites for the Issuance of

License to Do BusinessF. Power to Sue and Be Sued of

Foreign CorporationsG. Laws Applicable on Foreign

Corporations

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CHAPTER XV. CLOSECORPORATIONSA. RequirementsB. CharacteristicsC. Restrictions on Transfer of Shares


D. Deadlocks1. Requisites2. Power of SEC

E. Distinctions Between Close andRegular Corporations

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CHAPTER XVI. NON-STOCKCORPORATIONSA. PurposesB. Rights of MembersC. ConversionD. Order of Distribution of Assets

Upon Dissolution

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CHAPTER XVII. SPECIALCORPORATIONSA. Educational CorporationsB. Religious Corporations

1. Corporation Sole2. Religious Societies

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vi

BANKING LAWS

CHAPTER I. GENERAL BANKINGLAW OF 2000 (RA 8791)III. General Concepts

A. DefinitionB. Nature of Business

IV. Classification of BanksV. Authority of the BSP over

BanksA. Regulatory PowersB. Supervisory PowersC. Policy Direction

VI. Organization of BanksA. Conditions for OrganizationB. Ownership of BanksC. Directors and Officers

VII.Operation of BanksA. Core BankingB. Operations of a KB and UBC. Prudential MeasuresD. Other FunctionsE. Prohibited FunctionsF. Some Requirements for the

Operation of BanksVIII. Foreign Banks

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CHAPTER II. THE NEW CENTRALBANK ACT (RA 7653)I. General ProvisionII. Organization of the BSP

A. Monetary BoardB. Governor/Deputy Governor

III. Operation of the BSPA. Supervision and ExaminationB. Handling of Banks in DistressC. Monetary AdministrationD. As Banker and Financial

Adviser of the GovernmentE. Other OperationsF. Prohibited Operations

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CHAPTER III. LAW ON SECRECYOF BANK DEPOSITS (RA 1405)I. PurposesII. CoverageIII. Prohibited ActsIV. ExceptionsV. Penalty

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CHAPTER IV. TRUTH IN LENDINGACT (RA 3765)I. PolicyII. Disclosure StatementIII. CoverageIV. Sanctions

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CHAPTER V. ANTI-MONEYLAUNDERING ACT (RA 9160 asamended by RA 9194)I. PoliciesII. CoverageIII. Obligations of Covered

InstitutionsA. Customer IdentificationB. Record KeepingC. Reporting of Covered and

Suspicious TransactionsIV. Freeze OrderV. Forfeiture ProvisionsVI. Anti-Money Laundering Council

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CHAPTER VI. FOREIGNCURRENCY DEPOSIT ACT (RA6426)I. ConfidentialityII. Privileges

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BILLS & NOTES

CHAPTER I. GENERAL CONCEPTSA. Negotiable InstrumentsB. Applicability of the Negotiable

Instruments LawC. Characteristics of Negotiable

InstrumentsD. Kinds of Negotiable InstrumentsE. Parties to a Negotiable

InstrumentsF. Comparative Tables

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CHAPTER II. NEGOTIABILITYA. Determination of NegotiabilityB. Requisites of NegotiabilityC. Omissions and Provisions Not

Affecting NegotiabilityD. Interpretation of Negotiable

Instruments

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CHAPTER III. TRANSFERA. ModesB. Process of Negotiation

1. Delivery and Issuance2. Indorsement3. Subsequent Negotiation

C. Kinds of IndorsementD. Unindorsed InstrumentsE. Cancellation of InstrumentF. Indorsement by AgentG. Presumption as to Indorsement

177177177177177177177178179179179

CHAPTER IV. HOLDERSA. General ConceptsB. Holder in Due Course

1. Requisites of a Holder in DueCourse

2. Rights of a Holder in DueCourse

C. Holder NOT in Due CourseD. Accommodation

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182182182

CHAPTER V. DEFENSES ANDEQUITIESA. IncapacityB. IllegalityC. ForgeryD. Material AlterationE. FraudF. DuressG. Absence or failure of

ConsiderationH. PrescriptionI. Irregularity in Delivery

183183183183186186187

187187187

CHAPTER VI. PARTIES WHO ARELIABLEA. Primarily Liable

1. General Concepts2. Maker3. Drawee4. Acceptor

B. Secondarily Liable1. Drawer2. General or Unqualified

Indorser3. Irregular Indorser4. Order of Liability Among

Indorsers5. Liability of an Agent

C. Limited LiabilityD. Order of LiabilityE. Liabilities vs. Warranties

188188188188188188189189

189189

189189190190190

CHAPTER VII. ENFORCEMENTOF LIABILITY

A. Liabilities of PartiesB. Steps to charge parties liableC. PresentmentD. AcceptanceE. Notice of DishonorF. ProtestG. Acceptance or payment for honor

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CHAPTER VIII. DISCHARGE

A. DefinitionB. Discharge of the Instrument

1. By payment in due course2. By intentional cancellation3. By reacquisition of principal

debtor in his own right4. By renunciation of holder5. By material alteration6. By other acts

C. Discharge of Secondary Parties

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CHAPTER IX. CHECKSA. Certification of ChecksB. Cross ChecksC. Types of Checks

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INSURANCE LAW

CHAPTER I. INTRODUCTIONI. DefinitionsII. Applicable laws

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CHAPTER II. CONTRACT OFINSURANCEI. ElementsII. CharacteristicsIII. Kinds of Insurance ContractsIV. PerfectionV. Premium PaymentsVI. Risks Insured AgainstVII.Construction

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CHAPTER III. PARTIES TO THECONTRACTI. InsurerII. InsuredIII. BeneficiaryIV. Other parties

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CHAPTER IV. INSURABLE INTERESTI. Insurable InterestII. Insurable Interest in LifeIII. Insurable Interest in PropertyIV. Transfer of PolicyV. Transfer of InterestVI. Double Insurance, Over Insurance

and ReinsuranceVII. Multiple or Several Interest on the

Same Property

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CHAPTER V. POLICYI. Insurance Contract vs. Insurance

PolicyII. Forms and ContentsIII. Rider and EndorsementsIV. Cover NotesV. Life vs. Non-Life Insurance PoliciesVI. Open, Valued and Running Policies

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CHAPTER VI. RESCISSION OFINSURANCE CONTRACTSI. ConcealmentII. MisrepresentationIII. WarrantiesIV. ConditionsV. Right of rescissionVI. Cancellation of non-life insurance

policyVII. Incontestability Clause

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CHAPTER VII. RISKS ANDCOVERAGESI. Risks in Life InsuranceII. Risks in Fire InsuranceIII. Risks in Casualty or Accident

InsuranceIV. Risks in Compulsory Motor Vehicle

Liability Insurance

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CHAPTER VIII. SPECIAL KINDS OFINSURANCE CONTRACTSI. Marine InsuranceII. Fire insuranceIII. Casualty or accidental insuranceIV. Motor Vehicle Compulsory

Insurance

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CHAPTER IX. CLAIMS,SETTLEMENT, AND SUBROGATIONI. Liability for LossII. Requisites for Recovery from

InsuranceIII. Notice and Proof of LossIV. Claims SettlementV. Prescription of ActionVI. Time of PaymentVII. SubrogationVIII. Insurance Commission

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SPECIAL LAWS

CHAPTER I. WAREHOUSE RECEIPTSLAW (ACT 2137)I. Scope and ApplicabilityII. Contents of Warehouse ReceiptIII. Kinds of Warehouse ReceiptsIV. Construction of Warehouse

ReceiptsV. Duties and Liabilities of a

WarehousemanVI. Attachment or Levy on Negotiable

ReceiptsVII. Warehouseman’s Lien

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CHAPTER II. GENERAL BONDEDWAREHOUSE ACT (ACT 3893 ASAMENDED BY RA 247)I. Purpose and ApplicabilityII. Duties of a Bonded WarehousemanIII. LiabilitiesIV. Warehouse Receipts Law v General

Bonded Warehouse Act

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CHAPTER III. TRUST RECEIPTS LAW(PD 115)I. Purpose of the LawII. Definition and NatureIII. Comparison to Other TransactionsIV. Parties to the TransactionV. Rights and Obligations of the

PartiesVI. Violations and Remedies

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CHAPTER IV. CHATTEL MORTGAGELAW (ACT NO. 1508)I. Definitions, Requisites and

CharacteristicsII. Properties and Obligations CoveredIII. FormIV. Right of Mortgagee to PossessV. RemediesVI. Comparative Tables

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CHAPTER V. REAL ESTATEMORTGAGE LAW (ACT NO. 3135 ASAMENDED)I. Definition and ApplicabilityII. Effects of Real Estate MortgageIII. Remedies in Case of DefaultIV. ForeclosureV. Deficiency ClaimsVI. RedemptionVII. Purchaser’s Right Of Possession

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CHAPTER VI. THE ANTI-DUMMYLAW (CA NO. 108, AMENDED BYPD NO. 715)I. DefinitionII. Acts PunishedIII. PenaltiesIV. Nationalization or Filipinization

Laws

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CHAPTER VII. FOREIGNINVESTMENT ACT OF 1991 (RA NO.7042, AMENDED BY RA NO. 8179)I. Philippine NationalII. Doing BusinessIII. Not Doing BusinessIV. Test to Determine Whether One is

Doing Business

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CHAPTER VIII. LETTERS OF CREDIT

I. DefinitionII. PartiesIII. LiabilitiesIV. Rule of Strict ComplianceV. Independence PrincipleVI. Kinds of letters of credit

259259259260260260260

CHAPTER IX. INSOLVENCY LAWI. Concept and PurposeII. ComparisonsIII. Suspension of PaymentsIV. Voluntary InsolvencyV. Involuntary InsolvencyVI. Specific Provisions

262262262262263264264

CHAPTER X. INTERIM RULES OFPROCEDURE FOR INTRA-CORPORATE CONTROVERSIES(A.M. NO. 01-2-04-SC)I. General ProvisionsII. ProcedureIII. Election ContestsIV. Inspection of Corporate Books and

RecordsV. Derivative SuitsVI. Management CommitteeVII. Provisional RemediesVIII. Sanctions

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CHAPTER XI. RULES OFPROCEDURE ON CORPORATEREHABILITATIONI. CoverageII. Construction of TermsIII. General ProvisionsIV. Stay OrderV. Rehabilitation ReceiverVI. Rehabilitation PlanVII. Debtor-Initiated RehabilitationVIII. Creditor-Initiated

RehabilitationIX. Pre-Negotiated RehabilitationX. Recognition of Foreign Proceedings

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INTELLECTUAL PROPERTY LAW

CHAPTER 1: PATENTSI. General Principles

A. Patentable InventionsUtility ModelsIndustrial DesignsLayout Designs of IntegratedCircuits

B. Non-Patentable InventionsC. Registration of Patents and

Rights ConferredII. Patent Infringement

A. DefinitionB. Tests of InfringementC. DefensesD. Remedies

III. LicensingA. Voluntary LicensingB. Compulsory Licensing

IV. Assignment and Transfer

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CHAPTER 2: TRADEMARKSI. Trade Name

What may NOT be used as TradeNameOwnership of Trade NameRight of Owner of Trade Name

II. TrademarkA. FunctionsB. Acquisition of OwnershipC. Who May Apply for RegistrationD. What May Not be RegisteredE. Tests to Determine Confusing

Similarity between MarksF. Well-Known Mark

III. RegistrationIV. Infringement

A. Remedies for InfringementB. Limitations on Action for

InfringementV. Unfair Competition

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CHAPTER 3: COPYRIGHTI. General PrinciplesII. Criteria for Copyright Protection

A. OriginalityB. Expression

III. Works Protected by CopyrightA. Original Literary and Artistic

WorksB. Derivative Works

IV. Non-Copyrightable WorksV. Rights Conferred by Copyright

A. Copyright or Economic RightB. Moral RightsC. Droit de Suite

VI. Ownership of CopyrightVII. Duration of CopyrightVIII. Infringement

Remedies for InfringementIX. Limitations to the Rights of

CopyrightX. Neighboring RightsXI. Transfer and Assignment

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REVIEWER IN COMMERCIAL LAW Chapter 1. Patents

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Intellectual Property LawFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE

Prof. Gwen Grecia-de VeraFACULTY EDITOR

ACADEMICS COMMITTEE

Samantha PoblacionDIRECTOR FOR ACADEMICS

EDITOR-IN-CHIEF

Rania JoyaDEPUTY DIRECTOR FOR ACADEMICS

LAYOUT HEAD

--------Kae Guerrero

PRINTING AND DISTRIBUTION

COMMERCIAL LAW

Krizelle PoblacionChristina OrtuaSUBJECT EDITORS

INTELLECTUAL PROPERTYLAW

Leo ZuluetaBenjoe Panahon

LEAD WRITERS

Zorayda DaarolNicole TorresLudee Polido

WRITERS

LECTURES

Edel CruzHEAD

Jason MendozaDEPUTY HEAD

Malds MenzonLOGISTICS, HR

--------Leo Zulueta

LOGO, COVER AND TEMPLATE DESIGN

What are the IPs under the IP Code?

1. Patents2. Copyrights3. Trademarks

Distinction amongpatents/trademarks/copyright

PEARL AND DEAN VS. SHOEMART(2003)

Trademark, copyright and patents are differentintellectual property rights that cannot beinterchanged with one another. A trademark isany visible sign capable of distinguishing thegoods (trademark) or services (service mark) ofan enterprise and shall include a stamped ormarked container of goods. In relation thereto, atrade name means the name or designationidentifying or distinguishing an enterprise.Meanwhile, the scope of a copyright is confinedto literary and artistic works which are originalintellectual creations in the literary and artisticdomain protected from the moment of theircreation. Patentable inventions, on the otherhand, refer to any technical solution of aproblem in any field of human activity which isnew, involves an inventive step and isindustrially applicable.

SAMSON VS. DAWAY and CATERPILLAR, INC.(2004)

Which court has jurisdiction over criminaland civil cases for violation of intellectualproperty rights?

In the case at bar, R.A. No. 8293 and R.A.No. 166 are special laws conferring jurisdictionover violations of intellectual property rights tothe Regional Trial Court. They should thereforeprevail over R.A. No. 7691, which is a generallaw. Hence, jurisdiction over the instantcriminal case for unfair competition is properlylodged with the Regional Trial Court even if thepenalty therefor is imprisonment of less than 6

years, or from 2 to 5 years and a fine rangingfrom P50,000.00 to P200,000.00.

In fact, to implement and ensure the speedydisposition of cases involving violations ofintellectual property rights under R.A. No. 8293,the Court issued A.M. No. 02-1-11-SC datedFebruary 19, 2002 designating certain RegionalTrial Courts as Intellectual Property Courts. OnJune 17, 2003, the Court further issued aResolution consolidating jurisdiction to hear anddecide Intellectual Property Code and Securitiesand Exchange Commission cases in specificRegional Trial Courts designated as SpecialCommercial Courts.

Chapter 1. Patents

I. GENERAL PRINCIPLESA. PATENTABLE INVENTIONS

UTILITY MODELSINDUSTRIAL DESIGNSLAYOUT DESIGNS OF INTEGRATED

CIRCUITSB. NON PATENTABLE INVENTIONSC. REGISTRATION OF PATENTS AND

RIGHTS CONFERREDII. PATENT INGRINGEMENT

A. DEFINITIONB. TESTS OF INFRINGEMENTC. DEFENSESD. REMEDIES

III. LICENSINGA. VOLUNTARY LICENSINGB. COMPULSORY LICENSING

IV. ASSIGNMENT AND TRANSFER

I. General Principles

A. Patentable Inventions (Sec.21)

1. Elements of Patentable Inventions

a. Provides a technical solution of aproblem in any field of humanactivity


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having regard to prior art, it is notobvious to a person skilled in the artat the time of the filing date orpriority date of the applicationclaiming the invention. (Sec. 26)Note: Under the Cheaper MedicinesAct, in the case of drugs andmedicines, there is no inventive stepif the invention results from themere discovery of a new form or newproperty of a known substancewhich does not result in theenhancement of the known efficacyof that substance, or the merediscovery of any new property ornew use for a known substance, orthe mere use of a known processunless such known process resultsin a new product that employs atleast one new reactant.

c. Industrially applicable – theinvention can be produced and usedin any industry. (Sec. 27)

d. Novelty - an invention shall not beconsidered new if it forms part of aprior art. (Sec. 23)

2. What is prior art? (Sec. 24)

a. Everything which has been madeavailable to the public anywhere inthe world, before the filing date orthe priority date of the applicationclaiming the invention

b. The whole contents of an applicationfor a patent, utility model, orindustrial design registration,published in accordance with thisAct, filed or effective in thePhilippines, with a filing or prioritydate that is earlier than the filing orpriority date of the application:

3. What is non-prejudicial disclosures?

The disclosure of information containedin the application during the twelve (12)months preceding the filing date or thepriority date of the application shall notprejudice the applicant on the ground oflack of novelty if such disclosure wasmade by:

(a) The inventor;(b) A patent office and the information

was contained (a) in anotherapplication filed by the inventor andshould not have been disclosed by

the office, or (b) in an applicationfiled without the knowledge orconsent of the inventor by a thirdparty which obtained theinformation directly or indirectlyfrom the inventor; or

(c) A third party which obtained theinformation directly or indirectlyfrom the inventor. (Sec. 25)

Utility Models

A utility model is a new model of implementor tolls or of an industrial product or of partof it which does not possess the quality ofinvention but which is of practical utility byreason of its form, construction orcomposition. To qualify for registration, autility model must be new and industriallyapplicable.

Requirements for Application forRegistration

a) Request for registrationb) Description of the utility modelc) Claim or claimsd) Drawings or pictorial representation

disclosing completely the utility modele) Payment of the filing fee

Term of Patent (Sec. 109.3)

A utility model registration shall expire atthe end of the seventh year after the date ofthe filing of the application without renewal

Grounds for Cancellation (Sec. 109.4)

(a) That the claimed invention does notqualify for registration as a utility modeland does not meet the requirements ofregistrability

(b) That the description and the claims donot comply with the prescribedrequirements

(c) That any drawing which is necessary forthe understanding of the invention hasnot been furnished

(d) That the owner of the utility modelregistration is not the inventor or hissuccessor in title

Prescription Period for cancellation ofpatent

One year from the date of publication (sec.70)


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WIndustrial Designs (Sec. 112.1)

An Industrial Design is any compositionof lines or colors or any three dimensionalform, whether or not associated with linesor colors: Provided, that such compositionor form gives a special appearance to andcan serve as pattern for an industrialproduct or handicraft;

Layout Designs (Topographies) ofIntegrated Circuits

Integrated Circuit means a product, inits final form, or an intermediate form, inwhich the elements, at least one of whichis an active element and some or all of theinterconnections are integrally formed inand/or on a piece of material, and whichis intended to perform an electronicfunction (Sec. 112.2)

Layout-Design is synonymous with'Topography' and means the three-dimensional disposition, howeverexpressed, of the elements, at least one ofwhich is an active element, and of someor all of the interconnections of anintegrated circuit, or such a three-dimensional disposition prepared for anintegrated circuit intended formanufacture. (Sec. 112.3)

B. Non-Patentable Inventions (Sec.22)

The following shall be excluded from patentprotection:1. Discoveries, scientific theories and

mathematical methods;2. Schemes, rules and methods of

performing mental acts, playing gamesor doing business, and programs forcomputers;

3. Methods for treatment of the human oranimal body by surgery or therapy anddiagnostic methods practiced on thehuman or animal body. This provisionshall not apply to products andcomposition for use in any of thesemethods;

4. Plant varieties or animal breeds oressentially biological process for theproduction of plants or animals. (Notapplicable to micro-organisms and non-biological and microbiological processes)

5. Aesthetic creations; and6. Anything which is contrary to public

order or morality.

BAR Question [2006]

Note: The Cheaper Medicines Act amendedSection 22 (1). In addition to discoveries,scientific theories and mathematicalmethods, the IP Code now includes, in thecase of drugs and medicines:

1. the mere discovery of a new formor new property of a knownsubstance which does not result inthe enhancement of the knownefficacy of that substance, or

2. the mere discovery of any newproperty or new use for a knownsubstance, or

3. the mere use of a known processunless such known process resultsin a new product that employs atleast one new reactant.

C. Registration of Patents andRights Conferred

1. Principles

No Patent, No Protection (Pearl & Dean v. Shoemart, August 15,

2003)The ultimate goal of a patent system is tobring new designs and technologies into thepublic domain through disclosure. Ideas,once disclosed to the public without theprotection of a valid patent, are subject toappropriation without significant restraint.

BAR Question [1981, 1989]

First-to-File Rule (Sec.29)i. If two (2) or more persons have made

the invention separately andindependently of each other the rightto the patent shall belong to theperson who filed an application forsuch invention

ii. Where two or more applications are filedfor the same invention patent willissue to the applicant who has theearliest filing date or, the earliestpriority date.

iii. If two or more applications for the sameinvention have the same filing date orpriority date, the patent will be issuedjointly to all applicants

BAR Question [2005]

Right to Priority (Sec. 31)

An application for patent filed by anyperson who has previously applied forthe same invention in another countrywhich by treaty, convention, or law affords


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Wsimilar privileges to Filipino citizens, shallbe considered as filed as of the date offiling the foreign application, providedthat:

i. the local application expressly claimspriority;

ii. it is filed within twelve (12) months fromthe date the earliest foreign applicationwas filed; and

iii. a certified copy of the foreignapplication together with an Englishtranslation is filed within six (6) monthsfrom the date of filing in the Philippines.

Unity of Invention (Sec. 38)

This means that an application for a patentshall relate to one invention only or to agroup of inventions forming a single generalinventive concept.

2. Filing of Application

Who has the right to the patent?(Sec.28)

General Rule: The right to patent belongsto the inventor, his heirs, or assigns.

BAR Question [1990]

Exception: Work-For-Hire Doctrine (Sec.30)

i. The employer has the right to the patentif the invention is the result of theperformance of the employee’s regularlyassigned duties

ii. In case of inventions created pursuantto a commission, the person whocommissions the work shall own thepatent

Exceptions to the Work-For-HireDoctrine

(employee owns the right to the patent):i. If the inventive activity is not a part of

his regular duties even if the employeeuses the time, facilities, and materialsof the employer

ii. If the parties agree, expressly orimpliedly, that the right shall pertain tothe employee

Filing Date (Sec. 40)

The filing date of a patent application shallbe the date of receipt by the IPO of at leastthe following elements:

i. An express or implicit indication that aPhilippine patent is sought;

ii. Information identifying the applicant;and

iii. Description of the invention and one (1)or more claims in Filipino or English.

If any of these elements is not submittedwithin the period set by the Regulations,the application shall be consideredwithdrawn.

Contents of Patent Application (Sec. 32)

i. A request for the grant of a patent(Sec.34)

ii. A description of the inventionThe application shall disclose the inventionin a manner sufficiently clear and completefor it to be carried out by a person skilled inthe art. Where the application concerns amicrobiological process or the productthereof and involves the use of a micro-organism which cannot be sufficientlydisclosed in the application in such a way asto enable the invention to be carried out by aperson skilled in the art, and such materialis not available to the public, the applicationshall be supplemented by a deposit of suchmaterial with an international depositoryinstitution. (Sec. 35)

iii. Drawings necessary for theunderstanding of the invention

iv. One or more claimsA claim is one which defines the matter forwhich protection is sought (Sec. 36)Claims are technical descriptions of what isthe subject that is sought to be protected,considered as the most important part of theapplication.

v. An abstractAn abstract is a concise summary,preferably in not more than 150 words, ofthe disclosure of the invention ascontained in the description, claims anddrawings, drafted in a way as to allow aclear understanding of a technicalproblem, the gist of the solution of theproblem through invention, and theprincipal use of the invention. (Catindig,Commercial Law Reviewer)


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W3. Procedure for Grant of Invention

Patent After Filing theApplication

Procedure for the grant of a patent

i. According a filing date to theapplication (Sec. 41)

ii. Examination of compliance byapplicant with the formalrequirements specified in Section 32,i.e., contents of application (Sec. 42)

iii. Classification of application and searchfor prior art (Sec. 43)

iv. Publication of patent application inthe IPO Gazette (Sec. 44)

v. Inspection of the applicationdocuments by any interested partyconcerning the patentability of theinvention (Secs. 44.2 and 47)

vi. Written request by the applicant, within6 months from the date of publication ofhis patent application, for thesubstantive examination by the IPO ofhis application (Sec.48)

vii. Grant the patent (Sec.50), or refusal ofthe examiner to grant the patent (Sec.51); in the latter case, the refusal maybe appealed to the Director of theBureau of Patents

viii.Publication of the grant of the patentin the IPO Gazette (Sec. 52)

Term

i. Patent – 20 years without renewal (Sec.54)

ii. Utility Model – 7 years without renewal(Sec.109.3)

iii. Industrial Design – 5 years, renewabletwice (Sec. 118.2)

Cancellation of Patent (Sec 61.1)

Any interested person may, upon paymentof the required fee, petition to cancel thepatent or any claim thereof, or parts of theclaim, on any of the following grounds:i. That what is claimed as the invention is

not new or Patentable;ii. That the patent does not disclose the

invention in a manner sufficiently clearand complete for it to be carried out byany person skilled in the art; or

iii. That the patent is contrary to publicorder or morality.

Prescription Period for cancellation ofpatent

One year from the date of publication (sec.70)

4. Rights Conferred by Patent(Sec. 71)

i. Where the subject matter is a product -to restrain, prohibit and prevent anyunauthorized person or entity frommaking, using, offering for sale, sellingor importing that product;

ii. Where the subject matter is a process -to restrain, prevent or prohibit anyunauthorized person or entity fromusing the process, and frommanufacturing, dealing in, using,selling or offering for sale, or importingany product obtained directly orindirectly from such process.

iii. The right to assign, or transfer bysuccession the patent, and toconclude licensing contracts for thesame.

BAR Question [1990]

5. Limitations on the Rights ofPatentees

i. In general (Sec. 72)

The owner of a patent has no right toprevent third parties from performing,without his authorization, the actsreferred to in Section 71 in the followingcircumstances:

(a) Using a patented product which hasbeen put on the market in thePhilippines by the owner of theproduct, or with his expressconsent, insofar as such use isperformed after that product hasbeen so put on the said market;

Provided, that, with regard todrugs and medicines, the limitationon patent rights shall apply after adrug or medicine has beenintroduced in the Philippines oranywhere else in the world by thepatent owner, or by any partyauthorized to use the invention:

Provided, further, That the right toimport the drugs and medicinescontemplated in this section shall beavailable to any government agencyor any private third party (asamended by the Cheaper MedicinesAct)

(b) Where the act is done privately andon a non-commercial scale or for anon-commercial purpose: Provided,That it does not significantly


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Wprejudice the economic interests ofthe owner of the patent;

(c) Where the act consists of making orusing exclusively for experimentaluse of the invention for scientificpurposes or educational purposesand such other activities directlyrelated to such scientific oreducational experimental use; (asamended by the Cheaper MedicinesAct)

(d) In the case of drugs and medicines,where the act includes testing,using, making or selling theinvention including any data relatedthereto, solely for purposesreasonably related to thedevelopment and submission ofinformation and issuance ofapprovals by government regulatoryagencies required under any law ofthe Philippines or of anothercountry that regulates themanufacture, construction, use orsale of any product:

Provided, That, in order to protectthe data submitted by the originalpatent holder from unfaircommercial use provided in Article39.3 of the TRIPS Agreement, theIntellectual Property Office, inconsultation with the appropriategovernment agencies, shall issue theappropriate rules and regulationsnecessary therein not later than 120days after the enactment of this law;(as amended by the CheaperMedicine Act)

(e) Where the act consists of thepreparation for individual cases, ina pharmacy or by a medicalprofessional, of a medicine inaccordance with a medical shallapply after a drug or medicine hasbeen introduced in the Philippinesor anywhere else in the world by thepatent owner, or by any partyauthorized to use the invention:Provided, further, That the right toimport the drugs and medicinescontemplated in this section shall beavailable to any government agencyor any private third party.

ii. Prior User (Sec. 73)

Any prior user, who, in good faith wasusing the invention or has undertaken

serious preparations to use theinvention in his enterprise or business,before the filing date or priority date ofthe application on which a patent isgranted, shall have the right to continuethe use thereof as envisaged in suchpreparations within the territory wherethe patent produces its effect.

The right of the prior user may only betransferred or assigned together withhis enterprise or business, or with thatpart of his enterprise or business inwhich the use or preparations for usehave been made.

iii. Use of Invention by Government(Sec. 74)

A Government agency or third personauthorized by the Government mayexploit the invention even withoutagreement of the patent owner where:

(a) The public interest, in particular,national security, nutrition, healthor the development of other sectors,as determined by the appropriateagency of the government, sorequires; or

(b) A judicial or administrative bodyhas determined that the manner ofexploitation, by the owner of thepatent or his licensee is anti-competitive

All cases arising from theimplementation of this provision shallbe cognizable by courts withappropriate jurisdiction provided bylaw. No court, except the SupremeCourt of the Philippines, shall issue anytemporary restraining order orpreliminary injunction or such otherprovisional remedies that will preventits immediate execution.

Note: The use by the Government, orthird person authorized by theGovernment shall be subject, to theconditions set forth in Sections 95to 97 and 100 to 102 on compulsorylicensing.


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WII. Patent Infringement

A. Patent Infringement (Sec. 76.1)Patent Infringement is the making, using,offering for sale, selling, or importing apatented product or a product obtaineddirectly or indirectly from a patentedprocess, or the use of a patented processwithout the authorization of the patentee

BAR Question [1992]

Contributory Infringement (Sec. 76.6)

Anyone who actively induces the infringement ofa patent or provides the infringer with acomponent of a patented product or of a productproduced because of a patented processknowing it to be especially adopted for infringingthe patented invention and not suitable forsubstantial non-infringing use shall be liable asa contributory infringer and shall be jointly andseverally liable with the infringer.

Del Rosario v CA, (1996)It is elementary that a patent may beinfringed where the essential or substantialfeatures of the patented invention are takenor appropriated, or the device, machine orother subject matter alleged to infringe issubstantially identical with the patentinvention. In order to infringe a patent, amachine or device must perform the samefunction, or accomplish the same result byidentical or substantially identical meansand the principle or mode of operation mustbe substantially the same.

Creser Precision Systems, Inc. v. CA, etal., (1998)

Only the patentee or his successor-in-interest may file an action forinfringement. Moreover, there can be noinfringement of a patent until a patent hasbeen issued, since whatever right one hasto the invention covered by the patentarises alone from the grant of patent. Inshort, a person or entity who has not beengranted letter of patent over an inventionand has not acquired any rights or titlethereto either as an assignee or a licensee,has no cause of action for infringementbecause the right to maintain aninfringement suit depends upon theexistence of a patent.

B. Tests of Infringement

Godines v. CA, (1993)Tests have been established to determineinfringement. These are [a] literal

infringement; and [b] the doctrine ofequivalents.

Literal infringement test - resort must behad in the first instance to the words of theclaim. To determine whether the particularitem falls within the literal meaning of thepatent claims, the court must juxtapose theclaims of the patent and the accusedproduct within the overall context of theclaims and specifications, to determinewhether there is exact identity of allmaterial elements.

Doctrine of equivalents - an infringementalso occurs when a device appropriates aprior invention by incorporating itsinnovative concept and, albeit with somemodification and change, performssubstantially the same function insubstantially the same way to achievesubstantially the same result.

Smith Klein Beckman Corporation v. CA(2003)

The doctrine of equivalents provides that aninfringement also takes place when a deviceappropriates a prior invention byincorporating its innovative concept and,although with some modification andchange, performs substantially the samefunction in substantially the same way toachieve substantially the same result… Theprinciple or mode of operation must bethe same or substantially the same.

The doctrine of equivalents thus requiressatisfaction of the function-means-and-result test, the patentee having the burdento show that all three components of suchequivalency test are met.

C. Defenses in Action forInfringement

1. Invalidity of patent or claim (Sec. 81)2. Existence of ground for cancellation

under Sec. 61 (Sec. 81)

Note: Defendant may also raiseProsecution History Estoppel

What is Prosecution History Estoppel?

Advance Transformer Co. v. Levinson,837 F.2d 1081, 5 U.S.P.Q.2d (BNA) 1600(Fed. Cir. 1988)

The patentee is precluded from claiming aspart of the patented product that which he


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Whad to excise or modify in order to avoidpatent office rejection, and he may omit anyadditions he was compelled to add bypatent office regulations.

A court must interpret a patentee’s claims inlight of the patent’s prosecution history in thePatent or Trademark Office. The patent’sprosecution history, or file wrapper, is thecomplete record of all proceedings in the Patentand Trademark Office and any expressrepresentations made by the applicant about theclaim’s scope. So, in defining the meaning of thekey terms in a claim, the court may refer to theprosecution history of the patent. (VicenteAmador, Intellectual Property Fundamentals)

D. Remedies Against PatentInfringement

1. Civil Action for Damages

If the damages are inadequate or cannot bereadily ascertained with reasonable certainty,the court may award by way of damages a sum

equivalent to reasonable royalty. (Sec. 76.3)

The court may, according to the circumstancesof the case, award damages in a sum above theamount found as actual damages sustained:Provided, that the award does not exceed three(3) times the amount of such actual damages.

(Sec. 76.4)

Limitations:a. Recoverable damages are limited to acts

of infringement committed within 4years before the institution of the action(sec. 79)

b. Notice requirement – damages cannotbe recovered if the infringer did notknow, or had no reasonable grounds toknow, of the patent (Sec. 76)

2. Destruction of disposal ofinfringing goods, etc. (Sec. 76.5)

The court may, in its discretion, order thatthe infringing goods, materials andimplements predominantly used in theinfringement be disposed of outside thechannels of commerce or destroyed,without compensation.

3. Injunction (76.2)

Any patentee, or anyone possessing anyright, title or interest in and to the patentedinvention, whose rights have beeninfringed, may bring a civil action before acourt of competent jurisdiction, to recover

from the infringer such damages sustainedthereby, plus attorney's fees and otherexpenses of litigation, and to secure aninjunction for the protection of his rights.

4. Criminal Action for repeatedinfringement (Sec.84)

If infringement is repeated by the infringer or byanyone in connivance with him after finality ofthe judgment of the court against the infringer,the offenders shall, without prejudice to theinstitution of a civil action for damages, becriminally liable therefor and, upon conviction,shall suffer imprisonment for the period of notless than six (6) months but not more than three(3) years and/or a fine of not less than Onehundred thousand pesos (P100,000) but notmore than Three hundred thousand pesos(P300,000), at the discretion of the court. Thecriminal action herein provided shall prescribein three (3) years from date of the commission ofthe crime.

Burden of Proof for Process Patents(Sec.80)

The burden of proof is on the defendant oralleged infringer.

If the subject matter of a patent is a processfor obtaining a product, any identicalproduct shall be presumed to have beenobtained through the use of the patentedprocess if the product is new or there issubstantial likelihood that the identicalproduct was made by the process and theowner of the patent has been unabledespite reasonable efforts, to determine theprocess actually used.

III.Licensing

1. Voluntary Licensing (Sec. 85)2. Compulsory Licensing (Sec. 93)

A. Voluntary Licensing

Voluntary Licensing is the grant by thepatent owner to a third person of the rightto exploit the patented invention

Mandatory Provisions (Sec. 88)The following provisions shall be includedin voluntary license contracts:

1. That the laws of the Philippines shallgovern the interpretation of the sameand in the event of litigation, the venue


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Wshall be the proper court in the placewhere the licensee has its principaloffice;

2. Continued access to improvements intechniques and processes related to thetechnology shall be made availableduring the period of the technologytransfer arrangement;

3. In the event the technology transferarrangement shall provide forarbitration, the Procedure of Arbitrationof the Arbitration Law of the Philippinesor the Arbitration Rules of the UnitedNations Commission on InternationalTrade Law (UNCITRAL) or the Rules ofConciliation and Arbitration of theInternational Chamber of Commerce(ICC) shall apply and the venue ofarbitration shall be the Philippines orany neutral country; and

4. The Philippine taxes on all paymentsrelating to the technology transferarrangement shall be borne by thelicensor.

Prohibited Clauses (Sec. 87)The following provisions shall be deemedprima facie to have an adverse effect oncompetition and trade:

1. Those which impose upon the licenseethe obligation to acquire from a specificsource capital goods, intermediateproducts, raw materials, and othertechnologies, or of permanentlyemploying personnel indicated by thelicensor;

2. Those pursuant to which the licensorreserves the right to fix the sale orresale prices of the productsmanufactured on the basis of thelicense;

3. Those that contain restrictionsregarding the volume and structure ofproduction;

4. Those that prohibit the use ofcompetitive technologies in a non-exclusive technology transferagreement;

5. Those that establish a full or partialpurchase option in favor of the licensor;

6. Those that obligate the licensee totransfer for free to the licensor theinventions or improvements that may beobtained through the use of the licensedtechnology;

7. Those that require payment of royaltiesto the owners of patents for patentswhich are not used;

8. Those that prohibit the licensee toexport the licensed product unlessjustified for the protection of thelegitimate interest of the licensor suchas exports to countries where exclusivelicenses to manufacture and/ordistribute the licensed product(s) havealready been granted;

9. Those which restrict the use of thetechnology supplied after the expirationof the technology transfer arrangement,except in cases of early termination ofthe technology transfer arrangementdue to reason(s) attributable to thelicensee;

10.Those which require payments forpatents and other industrial propertyrights after their expiration, terminationarrangement;

11.Those which require that the technologyrecipient shall not contest the validity ofany of the patents of the technologysupplier;

12.Those which restrict the research anddevelopment activities of the licenseedesigned to absorb and adapt thetransferred technology to localconditions or to initiate research anddevelopment programs in connectionwith new products, processes orequipment;

13.Those which prevent the licensee fromadapting the imported technology tolocal conditions, or introducinginnovation to it, as long as it does notimpair the quality standards prescribedby the licensor;

14.Those which exempt the licensor forliability for non-fulfillment of hisresponsibilities under the technologytransfer arrangement and/or liabilityarising from third party suits broughtabout by the use of the licensed productor the licensed technology; and


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W15.Other clauses with equivalent effects.

What is the effect of non-conformancewith any of the provisions of Secs. 87and 88?

The technology transfer arrangement shallautomatically be rendered unenforceable,unless said technology transferarrangement is approved and registeredwith the Documentation, Information andTechnology Transfer Bureau under theprovisions of Section 91 on exceptionalcases. (Sec. 88)

Exceptional Cases (Sec. 91)1. In exceptional or meritorious cases

where substantial benefits will accrue tothe economy, such as high technologycontent, increase in foreign exchangeearnings, employment generation,regional dispersal of industries and/orsubstitution with or use of local rawmaterials

2. The case of BOI-registered companieswith pioneer status

B. Compulsory Licensing

Compulsory Licensing is the grant of theDirector of Legal Affairs of a license toexploit a patented invention, even withoutthe agreement of the patent owner, in favorof any person who has shown his capabilityto exploit the invention,

Grounds (Secs. 93-97)1. National emergency or other

circumstances of extreme urgency;

2. Where the public interest, in particular,national security, nutrition, health orthe development of other vital sectors ofthe national economy as determined bythe appropriate agency of theGovernment, so requires; or

3. Where a judicial or administrative bodyhas determined that the manner ofexploitation by the ownerof the patent or his licensee is anti-competitive; or

4. In case of public non-commercial use ofthe patent by the patentee, withoutsatisfactory reason;

5. If the patented invention is not beingworked in the Philippines on a

commercial scale, although capable ofbeing worked, without satisfactoryreason

6. If the invention protected by a patent,hereafter referred to as the "secondpatent," within the country cannot beworked without infringing anotherpatent, hereafter referred to as the "firstpatent," granted on a prior applicationor benefiting from an earlier priority, acompulsory license may be granted tothe owner of the second patent to theextent necessary for the working of hisinvention, subject to certain conditions.

7. Manufacture and export of drugs andmedicines to any country havinginsufficient or no manufacturingcapacity in the pharmaceutical sector toaddress public health problems:Provided, That, a compulsory licensehas been granted by such country orsuch country has, by notification orotherwise, allowed importation into itsjurisdiction of the patented drugs andmedicines from the Philippines incompliance with the TRIPS Agreement(as amended by Cheaper Medicines Act)

IV.Assignment and Transfer

The assignment may be of the entire patentor a portion thereof, or be limited to aspecified territory (Sec. 104)

Transmission of Rights (Sec. 103)Patents or applications for patents andinvention to which they relate, shall beprotected in the same way as the rights ofother property under the Civil Code.

Inventions and any right, title or interest inand to patents and inventions coveredthereby, may be assigned or transmitted byinheritance or bequest or may be thesubject of a license contract.

Requirements for Recording ofAssignment1. It must be in writing and accompanied

by an English translation, if it is in alanguage other than English of Filipino

2. It must be notarized3. It must be accompanied by an

appointment of a resident agent, if theassignee is not residing in thePhilippines

4. It must identify the letters patentinvolved by number and date and give


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Wthe name of the owner of the patent andthe title of the invention. In the case ofan application for a patent, it shouldstate the application number and thefiling date of the application and givethe name of the applicant and the titleof the invention. If the assignment wasexecuted concurrently with orsubsequent to the execution of theapplication but before the application isfiled or before its application number isascertained, it should adequatelyidentify the application by its date ofexecution, the name of the applicant,and the title of the invention.

5. It must be accompanied by the requiredfees.(Sec. 105; Rules and Regulations on

Inventions, Rule 1200)

Is an assignment required to berecorded with the IPO to be bindingbetween the assignor and assignee?

No. However, such registration would benecessary to bind third parties. Anassignment would be void as against anysubsequent purchaser or mortgagee forvaluable consideration and without noticeunless recorded in the IPO within 3 monthsfrom the date of the assignment or prior tothe subsequent purchase or mortgage.

REVIEWER IN COMMERCIAL LAW Chapter 2. Trademarks

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WChapter 2. Trademarks

I. TRADE NAMEWHAT MAY NOT BE USED AS TRADE

NAMEOWNERSHIP OF TRADE NAMERIGHT OF OWNER OF TRADE NAME

II. TRADEMARKA. FUNCTIONSB. ACQUISITION OF OWNERSHIPC. WHO MAY APPLY FOR REGISTRATIOND. WHAT MAY NOT BE REGISTEREDE. TESTS TO DETERMINE CONFUSING

SIMILARITY BETWEEN MARKSF. WELL-KNOWN MARK

III. REGISTRATIONIV. INFRINGEMENT

A. REMEDIES FOR INFRINGEMENTB. LIMITATIONS ON ACTION FOR

INFRINGEMENTV. UNFAIR COMPETITION

I. Trade Name

The name or designation identifying ordistinguishing an enterprise (Sec. 121.3)

Converse Rubber Corp. v. UniversalRubber Products, Inc., (April 28, 1980)

Any individual name or surname, firmname, device or word used bymanufacturers, industrialists, merchants,and others to identify their businesses,vocations or occupations

What May Not be Used as Trade Name:1. If by its nature or the use to which the

name or designation may be put, it iscontrary to public order or morals.

2. If it is liable to deceive trade circles orthe public as to the nature of theenterprise identified by the name

3. If the trade name is similar to a mark ora trade name owned by another personand its use would likely mislead thepublic.

Ownership of Trade Name:Trade names are protected even prior to orwithout registration. The ownership of atrade name is acquired through adoptionand use.

Right of Owner of Trade Name:The IPC deems unlawful any subsequentuse of the trade name by a third party,whether as a trade name or a mark orcollective mark, or any such use of asimilar trade name or mark, likely tomislead the public.

II. Trademark

Any visible sign capable of distinguishingthe goods (trademark) or services (servicemark) of an enterprise and shall include astamped or marked container of goods (Sec.121.1).

Trademark Service Mark CollectiveMark

Any visiblesign which isadopted andused toidentify thesource oforigin ofgoods, andwhich iscapable ofdistinguishingthem fromgoodsemanatingfrom acompetitor.

Any visiblesign capableofdistinguishingthe services ofan enterprisefrom theservice ofotherenterprises.

Any visiblesigndesignated assuch in theapplication forregistrationand capable ofdistinguishingthe origin orany othercommoncharacteristic,including thequality ofgoods orservices ofdifferententerpriseswhich use thesign under thecontrol of theregisteredowner of thecollectivemark.

A. Functions

1. Indicate origin or ownership2. To secure him who has been

instrumental in bringing into the markof a superior article of merchandise thefruit of his industry and skill;

3. To assure the public that they areproducing the genuine article;

4. To prevent fraud and imposition;5. To protect the manufacturer against

substitution and sale of an inferior anddifferent article as its product; and

6. Guarantee the quality of the goods

MIRPURI VS CA AND BARBIZON CORP (1999)Trademarks deal with the psychological functionof symbols and the effect of these symbols onthe public at large. Trademarks play asignificant role in communication, commerceand trade, thus, all agreements concerningindustrial property, like those on trademarksand trade names, are intimately connected witheconomic development. They speed up transferof technology and industrialization, and therebybring about social and economic progress.


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WB. Acquisition of Ownership

The ownership of a mark is acquiredthrough registration (Sec. 122). The IPCdoes NOT anymore provide for prior useas a condition for ownership of a mark.However, the applicant or the registrantmust file a declaration of actual use of themark within 3 years from the filing date ofthe application. Otherwise, the applicationshall be refused or the mark shall beremoved from the Register (Sec 124.2).

Registration is necessary to file a case forinfringement. But it is not necessary to filea case for unfair competition.

C. Who May Apply for Registration(Sec. 3)

Any person may apply for registration whois domiciled or has a real and effectiveindustrial establishment in a country:1. Which is a party to any convention,

treaty or agreement relating tointellectual property rights or therepression of unfair competition, towhich the Philippines is also a party, or

2. Extends reciprocal rights to national ofthe Philippines by law.

Unno Commercial Enterprises, Inc. v.General Milling Corp.,(February 28,1983)

The right of registration belongs to theowner of the mark.

D. What May Not Be Registered(Sec. 123.1):

A mark cannot be registered if it:

1. Consists of immoral, deceptive orscandalous matter, or matter whichmay disparage or falsely suggest aconnection with persons, living or dead,institutions, beliefs, or nationalsymbols, or bring them into contempt ordisrepute;

2. Consists of flags, coat of arms or otherinsignia of the Philippines or any foreigncountry;

3. Consists of a name, portrait orsignature identifying a particular livingindividual except by his writtenconsent, or of a deceased President of

the Philippines, during the life of hiswidow, except by written consent of thewidow;

4. Is identical with a registered mark ofanother or a mark with an earlier filingor priority date, in respect of:a. The same goods or services, orb. Closely related goods or services, orc. If it nearly resembles such a mark

as to be likely to deceive or causeconfusion;

5. Is identical with, or confusingly similarto, or constitutes a translation of a well-known mark, whether or not registeredin the Philippines, and used foridentical or similar goods or services;

6. Is identical with, or confusingly similarto, or constitutes a translation of a well-known mark which is registered in thePhilippines, and used for goods orservices which are not similar;

7. Likely to mislead the public, particularlyas to the nature, quality, characteristicsor geographical origin of the goods orservices;

8. Consists exclusively of signs that aregeneric for the goods or services thatthey seek to identify;

9. Consists exclusively of signs or ofindications that have become customaryor usual to designate the goods orservices in everyday language or in abona fide and established tradepractice;

10. Consists exclusively of signs or ofindications that may serve in trade todesignate the kind, quality, quantity,intended purpose, value, geographicalorigin, time or production of the goodsor rendering of the services, or othercharacteristics of the goods or services;

11. Consists of shapes that may benecessitated by technical factors or bythe nature of the goods themselves orfactors that affect their intrinsic value;

12. Consists of color alone, unless definedby a given form; or

13. Is contrary to public order or morality.


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WE. Tests to Determine Confusing

Similarity Between Marks

As to the marks involved1. Colorable Imitation

Societe des Produits Nestle, S.A.v. CA, (2001)

Colorable imitation denotes such aclose or ingenious imitation as to becalculated to deceive ordinarypersons, or such a resemblance tothe original as to deceive anordinary purchaser giving suchattention as a purchaser usuallygives, as to cause him to purchasethe one supposing it to be the other.In ascertaining whether one mark isconfusingly similar to or is acolorable imitation of another, noset rules can be deduced. Each casemust be decided on its own merits.

2. Holistic Test Del Monte Corporation, et al. v.

CA, (1990)To determine whether a trademarkhas been infringed, we mustconsider the mark as a whole andnot as dissected. If the buyer isdeceived, it is attributable to themarks as a totality, not usually toany part of it. The court thereforeshould be guided by its firstimpression, for the buyer actsquickly and is governed by a casualglance, the value of which may bedissipated as soon as the courtassumed to analyze carefully therespective features of the mark.

3. Dominancy Test Asia Brewery v. CA and San

Miguel, (1993)Infringement is determined by thetest of “dominancy” rather than bydifferences or variations in thedetails of one trademark and ofanother. Similarity in size, form andcolor, while relevant is notconclusive. If the competingtrademark contains the main oressential or dominant features ofanother, and confusion is likely toresult, infringement takes place.

McDonald’s Corporation v. L.C.Big Mak Burger, Inc., et al.,(2004)

In determining likelihood ofconfusion, there are two tests, the

dominancy test and the holistictest. The dominancy test focuses onthe similarity of the prevalentfeatures of the competingtrademarks that might causeconfusion. In contrast, the holistictest requires the court to considerthe entirety of the marks as appliedto the products, including the labelsand packaging, in determiningconfusing similarity. The SC hasrelied on the dominancy test whichconsiders the dominant features inthe competing marks in determiningwhether they are confusinglysimilar. Under the dominancy test,courts give greater weight to thesimilarity of the appearance of theproduct arising from the adoption ofthe dominant features of theregistered mark, disregarding minordifferences. Courts will considermore the aural and visualimpressions created by the marks inthe public mind, giving little weightto factors like prices, quality, salesoutlets and market segments.

BAR Question [1996]

As to the goods or services inconnection with which the marksare used (Doctrine of RelatedGoods/Services)1. Goods are related when they belong

to the same class or have the samedescriptive properties or physicalattributes, or they serve the samepurpose or flow through the samechannel of trade.

2. The use of identical marks on non-competing but related goods maylikely cause confusion.

3. Corollarily, the use of identicalmarks on non-competing andunrelated goods is not likely tocause confusion.

General Rule:The trademark protection extends onlyto goods or services related to thosespecified in the certificate ofregistration.

Exception:Expansion of Business Rule (zone ofreasonable expansion) – also to thosegoods or services that are related


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Wthereto specified in the certificate (Sec.138).

Sta. Ana v. Maliwat, G.R. No. 23023,(April 31, 1968)

All cases in which the use by the juniorappropriator is likely to lead to aconfusion of source as whereprospective buyers would be misled intothinking that the complaining party hasextended his business into anotherfield.

F. Well-Known Mark

A mark which a competent authority of thePhilippines has designated to be well-known internationally and in thePhilippines.

In determining whether a mark is well-known, account shall be taken of theknowledge of the relevant sector of thepublic, rather than the public at large,including knowledge in the Philippineswhich has been obtained as a result of thepromotion of the mark.

Rights conferred by a well-known Markdiscussed under REGISTRATION

BAR Question [2005]

Determinants (need not concur):1. The duration, extent and geographical

area of any use of the mark;2. The market share in the Philippines and

other countries of the goods/services towhich the mark applies;

3. The degree of the inherent or acquireddistinction of the mark;

4. The quality-image or reputationacquired by the mark;

5. The extent to which the mark has beenregistered in the world;

6. The exclusivity of the registrationattained by the mark in the world;

7. The extent of use of the mark in theworld;

8. The exclusivity of use in the world;9. The commercial value attributed to the

mark in the world;10. The record of successful protection of

the rights in the mark;11. The outcome of litigations dealing with

the issue of whether the mar is well-known; and

12. The presence or absence of identical orsimilar marks validly registered or usedon other similar goods (Rule onTrademarks, Rule 102).

Protection extended to well-knownmarks

(a) If not registered in thePhilippines (Sec 123.1 (e))

A mark cannot be registered if it isidentical with or confusingly similarto, or constitutes a translation of amark which is considered by thecompetent authority of thePhilippines to be well-knowninternationally and in thePhilippines, whether or not it isregistered here, as being already themark of a person other than theapplicant for registration and usedfor identical goods or services.

In determining whether a mark iswell-known, account shall be takenof the relevant sector of the public atlarge, including knowledge in thePhilippines which has been obtainedas a result of the promotion of themark.

(b) If registered in the Philippines(Sec 123.1 (f))

A mark cannot be registered if it isidentical with or confusingly similarto, or constitutes a translation of amark considered well-known inaccordance with the Sec. 123.1 (e),which is registered in thePhilippines with respect to goods orservices which are not similar tothose with respect to whichregistration is applied for.

III.Registration

A. Requirements of Application(See Sec. 124.1)

The applicant or the registrant shall file adeclaration of actual use of the mark withevidence to that effect, within 3 years from thefiling date of the application. Otherwise, theapplication shall be refused or the mark shall beremoved from the Register (Sec. 124.2)

One application may relate to several goodsand/or services, whether they belong to oneclass or to several classes of the NiceClassification (Sec. 124.3)

What may NOT be registered (refer to Sec.123.1 above)


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WB. Priority Right

An application for registration of mark filedin the Philippines by a person who qualifiesunder the reciprocity rule and whopreviously filed an application forregistration of the same mark in one ofthose countries shall be considered as filedas of the day the application was first filedin the foreign country (Sec. 131).

C. Conditions

1. The application must be filed within 6months from the date of earliest foreignapplication. Its certified copy passedwithin 3 months from the date of filingin the Philippines.

2. The following should concur:(a) the foreign country/country of

origin has allowed the mark and(b) the country of origin is the

applicant’s domicile or has a bonafide commercial establishment.

3. The owner of the Philippine registrationmay not sue prior to the granting of theregistration, unless the mark isconsidered well-known as provided forin the IPC.

4. The priority right may not be basedupon a foreign application that hasbeen withdrawn, abandoned, orotherwise disposed of in the country oforigin (Rule 202, Trademark Laws).

D. Certificate of Registration

It shall be prima facie evidence of:1. Validity of registration;2. Registrant’s ownership of the mark; and3. The registrant’s exclusive right to use

the same in connection with the goodsor services and those that are relatedthereto (Sec. 138).

E. Duration of Registration

The duration of a trademark registration is10 years, renewable for periods of 10years each renewal. The request forrenewal must be made within 6 monthsbefore or after the expiration of theregistration (Sec. 145).

The registrant is required to file adeclaration of actual use, and evidence tothat effect, within 1 year from the 5th

anniversary of the date of registration of themark; otherwise the mark shall be removedfrom the Register (Sec. 145).

F. Rights Conferred by Registration

Exclusive right to restrain/ prohibit/prevent third persons from using identicalor similar signs for identical or similargoods or services (Sec. 147.1).

G. Rights Conferred by a Well-KnownMark

1. Right to be protected whether or not itis registered in the Philippines;

2. If registered, extension of protection togoods and services which are notsimilar to those in respect of which themark is registered, provided that:a. The use of the mark in relation to

unrelated or dissimilar goods orservices would indicate a connectionbetween those goods or services andthe owner of the mark; and

b. The interests of the owner of theregistered mark are likely to bedamaged by such use.

H. Limitations on Such Rights:

1. Duration (except that, inasmuch as theregistration of a trademark could berenewed every 10 years, a trademarkcould conceivably remain registeredforever);

2. Territorial (except well-known marks).

I. Opposition

Any person who believes that he would bedamaged by the registration of a mark may,upon payment of the fee, file an oppositionto the application. The opposition must bein writing, verified and must state the factsand the grounds on which the opposition isbased.

Time to file:30 days after publication of application; ifunverified, the verified opposition must befiled within 2 months from such filing BUT


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Wit may be extended for 1 month andmaximum period does not exceed 4 monthsfrom publication of application (Sec. 134).

J. Cancellation(Sec. 151)

Upon petition, with due process andhearing, based on the following grounds:

Within 5 years fromregistration

At any time

Belief that theregistered mark hasdamaged or willdamage the petitioner

1. Becomes thegeneric name forthe goods orservices for whichit has registered; or

2. Has beenabandoned; or

3. The registrationwas obtainedfraudulently orcontrary to theprovisions of theIPC; or

4. Is being used by, orwith thepermission of theregistrant so as tomisrepresent thesource of the goodsor services inconnection withwhich the mark isused

5. If the registeredowner of the mark,without legitimatereason, fails to usethe mark withinthe Philippines, orto cause it to beused in thePhilippines byvirtue of a license,for anuninterruptedperiod of at least 3years.

K. Non-Use of a Mark When Excused

1. If caused by circumstances arisingindependently of the will of the owner.Lack of funds not excused.

2. A use which does not alter itsdistinctive character though the use isdifferent from the form in which it isregistered.

3. Use of mark in connection with one ormore of the goods/services belonging to

the class in which the mark isregistered.

4. The use of a mark by a company relatedto the applicant/registrant.

5. The use of a mark by a personcontrolled by the registrant (Sec. 152).

IV. Infringement(Sec. 155)

1. Use in commerce any reproduction,counterfeit, copy, or colorable imitationof a registered mark or the samecontainer or a dominant feature thereofin connection with the sale, offering forsale, distribution, advertising of anygoods or services including otherpreparatory steps necessary to carry outthe sale of any goods or services on orin connection with which such use islikely to cause confusion, or to causemistake, or to deceive; or

2. Reproduce, counterfeit, copy orcolorably imitate a registered mark or adominant feature thereof and applysuch to labels, signs, prints, packages,wrappers, receptacles or advertisementsintended to be used in commerce uponor in connection with the sale, offeringfor sale, distribution, or advertising ofgoods or services or in connection withwhich such use is likely to causeconfusion, or to cause mistake, or todeceive

Note: In order to bring a civil action forinfringement, it is not required that there be anactual sale of the goods or services using theinfringing material. Infringement takes placeupon the mere use or reproduction of theregistered mark.

BAR Question (1991)

A. Remedies for Infringement

1. Action for damages;2. Injunction:3. Impounding of sales invoices and other

documents;4. Double damages in case of actual intent

to defraud or to mislead (Sec. 156);5. Court order for the disposal or

destruction of the infringing goods (Sec.157);

6. Criminal Action;7. Administration sanctions

In any suit for infringement the owner ofthe registered mark shall not be entitled to


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Wrecover damages or profits unless the actshave been committed with knowledge thatsuch imitation is likely to cause confusion,or to cause mistake or to deceive (Sec. 158).

Any foreign national who qualifies underthe principle on reciprocity and does notengage in business in the Philippines,whether or not it is licensed to do businessin the Philippines, may bring civil oradministrative action for:1. Opposition2. Cancellation3. Infringement4. Unfair Competition5. False designation of origin or false

description (Sec. 160)

B. Limitations on Action forInfringement(Sec. 159)

1. No action for infringement could betaken against a person who, in goodfaith and before the filing date orpriority date, was using the mark forthe purposes of his business orenterprise. Note, however, that suchperson may assign or transfer his rightto use the registered mark only togetherwith his business or enterprise.

2. Only an injunction against futureprinting may be imposed upon aninnocent infringing printer.

3. Similarly, only an injunction against thepresentation of infringing advertisingmatter in future issues may be imposedon innocent infringing printer.

Mighty Corporation v. E. & J. GalloWinery, (2004)

A crucial issue in any trademarkinfringement case is the likelihood ofconfusion, mistake or deceit as to theidentity, source or origin of the goods oridentity of the business as aconsequence of using a certain mark.Likelihood of confusion is admittedly arelative term, to be determined rigidlyaccording to the particular (and sometimespeculiar) circumstances of each case. Indetermining likelihood of confusion, thecourt must consider: (a) the resemblancebetween the trademarks; (b) the similarity ofthe goods to which the trademarks areattached; (c) the likely effect on thepurchaser; and (d) the registrant’s express or

implied consent and other fair and equitableconsiderations.

McDonald’s Corporation v. L.C. Big MakBurger, Inc., et al., (2004)

To establish trademark infringement, thefollowing elements must be shown: (1) thevalidity of the mark; (2) the plaintiff’sownership of the mark; and (3) the use ofthe mark or its colorable imitation by thealleged infringer results in “likelihood ofconfusion.” Of these, it is the element oflikelihood of confusion that is thegravamen of trademark infringement.Two types of confusion arise from the use ofsimilar or colorable imitation marks,namely, confusion of goods (productconfusion) and confusion of business(“source or origin confusion”). While there isconfusion of goods when the products arecompeting, confusion of business existswhen the products are non-competing butrelated enough to produce confusion oraffiliation.

V. Unfair Competition(Sec. 128)

It is the use by a person of deception or anyother means contrary to good faith bywhich he passes off the goodsmanufactured by him or in which he deals,or his business or services, for those ofanother person who has establishedgoodwill in the goods such personmanufactures or deals in, or his businessor services, or who shall commit any actscalculated to produce said result. Someacts of unfair competition are as follows:1. Giving one’s goods the general

appearance of goods of anothermanufacturer;

2. Inducing the false belief that one isoffering the services of another who hasidentified such services in the minds ofthe public;

3. Making any false statement calculatedto discredit the goods, business orservices of another


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W Del Monte Corporation, et al. v.

CA,(1990)The following are the distinctions betweeninfringement of trademark and unfaircompetition:

TrademarkInfringement

UnfairCompetition

Unauthorized useof a trademark

Passing off ofone’s goods asthose of another

Fraudulent intentis unnecessary

Fraudulent intentis essential

Prior registrationof the trademarkis a prerequisiteto the action

Registration isnot necessary


Mighty Corporation v. E. & J. GalloWinery, (2004)

The law on unfair competition is broaderand more inclusive than the law ontrademark infringement. The latter is morelimited but it recognizes a more exclusiveright derived from the trademark adoptionand registration by the person whose goodsor business is first associated with it.Hence, even if one fails to establish hisexclusive property right to a trademark, hemay still obtain relief on the ground of hiscompetitor’s unfairness or fraud. Conductconstitutes unfair competition if the effectis to pass off on the public the goods of oneman as the goods of another.

McDonald’s Corporation v. L.G. Big MakBurger, Inc., et al., (2004)

The elements of an action for unfaircompetition are: (1) confusing similarity inthe general appearance of the goods; and(2) intent to deceive the public and defrauda competitor. The confusing similarity mayor may not result from similarity in themarks, but may result from other externalfactors in the packaging or presentation ofthe goods. The intent to deceive anddefraud may be inferred from the similarityin appearance of the goods as offered forsale to the public. Actual fraudulent intentneed not be shown.

REVIEWER IN COMMERCIAL LAW Chapter 3. Copyright

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WChapter 3: Copyright

I. GENERAL PRINCIPLESII. CRITERIA FOR COPYRIGHT PROTECTION

A. ORIGINALITYB. EXPRESSION

III. WORKS PROTECTED BY COPYRIGHTA. ORIGINAL LITERARY AND ARTISTIC

WORKSB. DERIVATIVE WORKS

IV. NON-COPYRIGHTABLE WORKSV. RIGHTS CONFERRED BY COPYRIGHT

A. COPYRIGHT OR ECONOMIC RIGHTB. MORAL RIGHTSC. DROIT DE SUITE

VI. OWNERSHIP OF COPYRIGHTVII.DURATION OF COPYRIGHTVIII. INFRINGEMENT

REMEDIES FOR INFRINGEMENTIX. LIMITATIONS TO THE RIGHTS OF

COPYRIGHTX. NEIGHBORING RIGHTSXI. TRANSFER AND ASSIGNMENT

I. General Principles

A. Works are Protected by the SoleFact of Their Creation(Sec 172.2)

Principle of Automatic ProtectionUnder the Berne Convention, the enjoymentand exercise of copyright, including moralrights, shall not be the subject of anyformality.

B. Protection Extends Only to theExpression of an Idea, Not theIdea Itself(Sec 175)

Joaquin Jr. et al vs. Drilon, et al (1999)The format or mechanics of a TV show isnot copyrightable as copyright does notextend to ideas, procedures, processes,systems, methods of operation, concepts,principles or discoveries regardless of theform in which they are described,explained, illustrated or embodied.

C. Copyright is not a right to doanything, but to stop others fromdoing something. It is therefore anegative right(Amador, 1998ed).

D. The copyright is distinct from theproperty in the material objectsubject to it.(Sec 181).

E. Copyright is a Statutory Right

Pearl and Dean vs. Shoemart (2003)Copyright, in the strict sense of the term ispurely a statutory right. Being a merestatutory grant, the rights are limited towhat the statute confers. It may beobtained and enjoyed only with respect tothe subjects and by the persons, and onterms and conditions specified in thestatute. Accordingly, it can cover only theworks falling within the statutoryenumeration or description.

II. Criteria for Copyright Protection

A. Originality1. the work is an independent creation

of the author;2. it must not be copied; and3. it must involve some intellectual

effort.

Ching Kian Chuan vs. CA (2001)A person to be entitled to a copyright mustbe the original creator of the work. He musthave created it by his own skill, laborand judgment without directly copyingor evasively imitating the work ofanother.

Ching vs. Salinas (2005)By originality is meant that the materialwas not copied, and evidences at leastminimal creativity; that it wasindependently created by the author andthat it possesses at least some minimaldegree of creativity. Copying is shown byproof of access to copyrighted material andsubstantial similarity between the twoworks. The applicant must thusdemonstrate the existence and validity ofcopyright because in the absence ofcopyright protection, even the originalcreation may be freely copied.


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WB. Expression (Fixed in a Tangible

Medium)

To be “fixed,” a work must be embodiedin a medium sufficiently permanent orstable to permit it to be perceived,reproduced or otherwise communicatedfor more than a transitory duration.

There is no work for copyright purposesunless there is something tangible.

It is fixation that defines the time fromwhen copyright subsists. Before thetime of fixation, there can be noinfringement.

Note: Such requirement is deemed fulfilledby documents or works in digital form sincethe E-Commerce Act classifies such aselectronic documents.

BAR Question [2007]

III. Works Protected by Copyright

A. Original Literary and ArtisticWorks(Sec. 172.2)

This includes (Sec 172.1):A. Books, pamphlets, articles and other

writings;B. Periodicals and newspapers;C. Lectures, sermons, addresses,

dissertations prepared for oral delivery,whether or not reduced in writing orother material form;

D. Letters;BAR Question [2007]

E. Dramatic or dramatico-musicalcompositions; choreographic works orentertainment in dumb shows;

F. Musical compositions, with or withoutwords;

G. Works of drawing, painting,architecture, sculpture, engraving,lithography or other works of art;designs or models for works of art;

H. Original ornamental designs or modelsfor articles of manufacture, whether ornot registrable as an industrial design,and other works of applied art;

I. Illustrations, maps, plans, sketches,charts and three dimensional worksrelative to geography, topography,architecture or science;

J. Drawings or plastic works of a scientificor technical character;

K. Photographic works including worksproduced by a process analogous tophotography; lantern slides;

L. Audiovisual works and cinematographicworks and works produced by a processanalogous to cinematography or anyprocess for making audio-visualrecordings;

M. Pictorial illustrations andadvertisements;

N. Computer programs; andO. Other literary, scholarly, scientific and

artistic works.

Note: Civil Code provision on copyrightpertaining to letters

Art. 721. By intellectual creation, thefollowing persons acquire ownership:

(1) The author with regard to hisliterary, dramatic, historical, legal,philosophical, scientific or otherwork; xxx

Art. 722. The author and composer,mentioned in Nos. 1 and 2 of the precedingarticle shall have the ownership of theircreations even before the publication of thesame. Once their works are published,their rights are governed by the Copyrightlaws. xxx

Art. 723. Letters and other privatecommunications in writing are owned bythe person to whom they are addressed anddelivered, but they cannot be published ordisseminated without the consent of thewriter or his heirs. However, the court mayauthorize their publication or disseminationif the public good or the interest of justiceso requires.

B. Derivative Works(Sec 173)

This includes (Sec 173.1):A. Dramatizations, translations,

adaptations, abridgments,arrangements, and other alterations ofliterary or artistic works;

B. Collections of literary, scholarly orartistic works, and compilations of dataand other materials which are originalby reason of the selection orcoordination or arrangement of theircontents.


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WDerivative works are protected as newworks provided they shall not (Sec 173.2):1. affect the force of any subsisting

copyright upon the original worksemployed or any part thereof; or

2. be construed to imply any right to suchuse of the original works, or to secure orextend copyright in such original works.

IV.Non-Copyrightable Works

A. An idea, procedure, system, method ofoperation, concept, principle, discoveryor mere data as such, even if they areexpressed, explained, illustrated orembodied in a work (Sec. 175);

B. News of the day and othermiscellaneous facts having thecharacter of mere items of pressinformation (Sec. 175); Illustration: The writings of a

columnist in a newspaper are subject tocopyright, but if he mentions a newsitem like a bomb explosion in a certainplace, he cannot claim protectionregarding this news item (Catindigreviewer).

C. Any official text of a legislative,administrative or legal nature, as wellas any official translation thereof (Sec.175);

D. Works of the Government of thePhilippines (Sec. 176.1); However, prior approval of the

government agency or the officewherein the work is created shall benecessary for the exploitation ofsuch work for profit. Such agencyor office may impose as a conditionthe payment of royalties. No priorapproval of conditions shall berequired for the purpose of statutes,rules and regulations, and speeches,lectures, sermons, addresses, anddissertations, pronounced, read orrendered in courts of justice, beforeadministrative agencies, indeliberative assemblies and inmeetings of public character (Sec.176.1).

E. Works of the public domain These include works whose term of

copyright protection has expired.

F. Useful articles

Useful article doctrine- Workswhose sole purpose is utilitarianhave no separate artistic value. Thiscan be distinguished from a work ofapplied art, which has utilitarianfunctions but there is an identifiableartistic work or creationincorporated thereto.

G. Pleadings;

H. Original decisions of courts andtribunals.

V. Rights Conferred by Copyright

Copyright or Economic Rights (Sec.177);

Moral Rights (Sec. 193); and Right to participate in the gross

proceeds of the sale or lease of theoriginal work or Droit de Suite (Sec.200).

A. Copyright or Economic Right

Sec. 177- Copy or Economic Rights. Subject tothe provisions of Chapter VII, copyright oreconomic rights shall consist of the exclusiveright to carry out, authorize or prevent thefollowing acts:1. Reproduction of the work or substantial

portion of the work;2. Dramatization, translation, adaptation,

abridgement, arrangement or othertransformation of the work;

3. The first public distribution of the originaland each copy of the work by sale or otherforms of transfer of ownership;

4. Rental of the original or a copy of anaudiovisual or cinematographic work, awork embodied in a sound recording, acomputer program, a compilation of dataand other materials or a musical work ingraphic form, irrespective of the ownershipof the original or the copy which is thesubject of the rental;

5. Public display of the original or a copy of thework;

6. Public performance of the work; and7. Other communication to the public of the

work.BAR Question [1995]

Economic rights also give the author theright to assign the copyright and/or thematerial object in whole or in part, andthey allow the owner to derive financialreward from the use of his works byothers.


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WB. Moral Rights

Sec. 193- Scope of Moral Rights. The authorof a work shall, independently of the economicrights in Sec. 177 or the grant of an assignmentor license with respect to such right, have theright:1. To require that the authorship of the works

be attributed to him, in particular, the rightto his name, as far as practicable, beindicated in a prominent way on the copies,and in connection with the public use of hiswork;

2. To make any alterations of his work prior to,or to withhold it from publication;

3. To object to any distortion, mutilation orother modification of, or other derogatoryaction in relation to his work which wouldbe prejudicial to his honor or reputation;and

4. To restrain the use of his name with respectto any work not of his own creation or in adistorted version of his work.

Term of Moral RightsFor the lifetime of the author and 50years after his death.

General Rule: Moral rights can bewaived in writing, expressly statingsuch waiver (Sec. 195) or bycontribution to a collective work unlesssuch is expressly reserved (Sec. 196).

Exception: Even if made in writing,waiver is still not valid if:a. use of the name of the author,

title of his work, or hisreputation with respect to anyversion or adaptation of hiswork, which because ofalterations substantially tendsto injure the literary orartistic reputation of anotherauthor;

b. it uses the name of the author ina work that he did not create.

Moral rights are not assignable orsubject to license (Sec. 198)

C. Droit de Suite

Sec. 200 Sale or Lease of Work. In every saleor lease of an original work of painting orsculpture or of the original manuscript of awriter or composer, subsequent to the firstdisposition thereof by the author, the author orhis heirs shall have an inalienable right toparticipate in the gross proceeds of the saleor lease to the extent of five percent (5%).This right shall exist during the lifetime ofthe author and for fifty (50) years after hisdeath.

Works not Covered (Sec. 201) - prints,etchings, engravings, works of applied art,or works of similar kind wherein the authorprimarily derives gain from the proceeds ofreproductions.

First Sale DoctrineAfter the first sale of the lawfully made copyof the copyrighted work, anyone who is theowner of that copy can sell or dispose ofthat copy in any way without any liabilityfor copyright infringement. The first sale ofan authorized copy of the work exhauststhe author’s right to control distribution ofcopies.

VI.Ownership of Copyright

Single Creator ofan Original Work(Sec. 178.1)

Belongs to the author ofthe work

Works of JointAuthorship (178.2)

Belongs of the co-authors; in the absenceof agreement, their rightsshall be governed by therules on co-ownership.However, if the workconsists of parts thatcan be used separatelyand identified, theauthor of each part ownsthe copyright of the parthe has created.BAR Question [1995, 2004]

Work createdduring the courseof employment(178.3)

Belongs to the employeeif the creation is not apart of his regular duties,even if he used the time,facilities and materials ofthe employer. However,belongs to the employerif the work is in theperformance of theemployee’s regular dutiesunless there is anagreement to thecontrary.

BAR Question [2008)

Workcommissioned bya person otherthan theemployer (178.4)

The person whocommissioned thework holdsownership of thework per se, butcopyright remainswith the creatorunless there was astipulation to thecontrary.BAR Question [1995, 2004]

Audio visual works(178.5)

Belongs to the producer,author of the scenario,composer of the music,film director, and author


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Wof the adapted work.However, subject tostipulations, theproducers shallexercise the copyrightas may be required forthe exhibition of thework, except for the rightto collect license fees forthe performance ofmusical compositions inthe work.

Letters (178.6)

Belongs to the writer, butthe court may authorizetheir publication ordissemination of thepublic good or interest ofjustice requires,pursuant to Art. 723,New Civil Code

Anonymous andpseudonymousworks (179)

Publishers are deemed torepresent the authors,unless the contraryappears, the pseudonymsor adopted names leaveno doubt as to theauthor’s identity or if theauthor discloses hisidentity.

Collective works(196)

A contributor is deemedto have waived his rightunless he expresslyreserves it.

VII. Duration Of Copyright

Single Creator (Sec.213.1)

Protected during the lifeof the author and for 50years after his death.Also applies toposthumous works.

Joint Creation(213.2)

Economic rightsprotected during the lifeof the last survivingauthor and for 50 yearsafter his death.

Anonymous andpseudonymousworks (213.3)

Protected for 50 yearsfrom the date when thework was first lawfullypublished; Exceptwhere the author’sidentity is revealed or nolonger in doubt,213.1/213.2 shall apply.If the works have notbeen published,protected for 50 yearsfrom the making of thework.

Works of AppliedArt (213.4)

Protected for 25 yearsfrom the making.

PhotographicWorks (213.5)

Protected for 50 yearsfrom publication; ifunpublished, 50 yearsfrom the making.

Audiovisual works,or works produced

Protected for 50 yearsfrom publication; if

by a processanalogous tophotography or anyprocess for makingaudio-visualrecordings (213.6)

unpublished, 50 yearsfrom the making.

VIII. Infringement

Habana et al vs. Robles et al (1999)Infringement consists in the doing byany person, without the consent of theowner of the copyright, of anything thesole right to do which is conferred bystatute on the owner of the copyright.For there to be substantial reproduction ofa book, it does not necessarily require thatthe entire copyrighted work, or even a largeportion of it, be copied. If so much is takenthat the value of the original work issubstantially diminished, there is aninfringement of copyright and to aninjurious extent, the work appropriated. Itis no defense that the pirate did notknow whether or not he was infringingany copyright; he at least knew that whathe was copying was not his, and he copiedat his peril. In cases of infringement,copying alone is not what is prohibited.The copying must produce am “injuriouseffect.”

Microsoft Corp vs. Maxicorp Inc (2004)Copyright infringement and unfaircompetition are not limited to the act ofselling counterfeit goods. They cover awhole range of acts from copying,assembling, packaging to marketing,including the mere offering for sale ofcounterfeit goods.


Remedies for Infringement

Civil(Sec 216)

Injunction,; Actual, Moraland Exemplary Damages;Impounding of documentsevidencing sales, articlesand packaging that infringecopyright and implementsfor making them;Destruction withoutcompensation of infringingcopies and devices and themeans of making infringingcopies.

Criminal(217)

Imprisonment and fine-depending on the value ofthe infringing materialsproduced and the damagethe copyright owner hassuffered by reason of theinfringement


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Administrative

Administrative action;Cease and Desist Orders;Forfeiture of theparaphernalia used incommitting the offense;Administrative fines

General Rule: Mere possession ofinfringing goods is not punishable

Exception: Unless one can provethat the possessor knows or oughtto know that the goods in hispossession are infringing copies ofthe work and are held for thepurpose of:1. Selling, letting for hire or by way

of trade, offering or exposing thearticle for sale or hire;

2. Distributing the article for tradeor for any other purpose to anextent that will prejudice therights of the copyright owner;

3. Trade exhibit of the article (Sec.217.3)

IX.Limitations to the Rights ofCopyright

A. General Limitations(Sec. 184)

The following shall NOT constituteinfringement of copyright:

a. Recitation or performance of a work: (i)made accessible to the public, (ii)privately done, (iii) free of charge, (iv)strictly for a charitable or religiousinstitution;

b. Making of quotations from a publishedwork: (i) compatible with fair use, (ii)extent is justified by the purpose, (iii)source and name of the author,appearing on work, must be mentioned;

c. Reproduction or communication to thepublic by mass media of articles oncurrent political, social, economic,scientific or religious topic, lectures,addresses and other works, delivered inpublic: (i) for information purposes, (ii)not expressly reserved, and (iii) sourceis already indicated;

d. Reproduction and communication tothe public of literary, scientific orartistic works as part of reports ofcurrent events by means ofphotography, cinematography or

broadcasting to the extent necessary forthe purpose;

e. Inclusion of a work in a publication,broadcast or other communication tothe public, sound recording or film ifmade by way of illustration for teachingpurposes compatible with fair use andthe source and the name of the authorappearing on work, must be mentioned;

f. Recording made in schools, universities,or educational institutions of a workincluded in a broadcast for the use ofschools, universities or educationalinstitutions. Such recording must bedeleted within a reasonable period; suchrecording may not be made from audio-visual works which are part of thegeneral cinema, repertoire of featurefilms except of brief excerpts of thework;

g. Making of ephemeral recordings; (i) by abroadcasting organization, (ii) by meansof its work or facilities, (iii) for use in itsown broadcast;

h. Use made of a work by or under thedirection or control of the governmentfor public interest compatible with fairuse;

i. Public performance or thecommunication to the public of a workin a place where no admission fee ischarged by a club on institution forcharitable or educational purpose onlyand the aim is not profit-making;

j. Public display of the original or a copyof the work not made by means of afilm, slide, television, image orotherwise on screen or by means of anyother device or process either the workhas been published, sold, given away,or transferred to another person by theauthor or his successor in title;

k. Use made of a work for the purposeof any judicial proceedings or forthe giving of professional advice bya legal practitioner.

BAR Question [2006]

B. Fair Use(Sec. 185)

Fair Use DoctrineThe fair use of copyrighted work forcriticism, news reporting, teaching


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W(including multiple copies for classroomuse), research and similar purposes is notan infringement of copyright. A privilege, in persons other than the

owner of the copyright, to use thecopyrighted material in a reasonablemanner without his consent,notwithstanding the monopoly grantedto the owner by the copyright. It ismeant to balance the monopoliesenjoyed by the copyright owner with theinterests of the public and of society.

Decompilation – Refers to thereproduction of the code and translationof the forms of the computer program toachieve the inter-operability of anindependently created computer programwith other programs. This may alsoconstitute fair use (Sec. 185.1).

Factors to be Considered toDetermine if the Use is Fair Use1. The purpose and character of the

use, including whether such use isof a commercial nature or is fornon-profit educational purposes;

2. The nature of the copyrighted work;3. The amount and substantiality of

the portion used in relation to thecopyrighted work as a whole; and

4. The effect of the use upon thepotential market for or value of thecopyrighted work (Sec. 185.1).

The fact that a work is unpublishedshall not by itself bar a finding offair use if such finding is made uponconsideration of all the factors (Sec.185.2).

C. In a work of architecture, the rightto control the reconstruction orrehabilitation in the same style as theoriginal of the building (Sec. 186)

D. Private reproduction of publishedwork in a single copy by a naturalperson for research and private study(Sec. 187)

BAR Question [1998]

E. Reprographic reproduction in asingle copy by non-profit libraries,under certain circumstances (Sec. 188)

F. Reproduction, under certaincircumstances, of a computerprogram in one back-up copy by thelawful owner of the program (Sec. 189)

G. Importation for personal purposesunder certain conditions (Sec. 190).

X. Neighboring Rights

Covered are Rights of the Performer(Sec. 203), Rights of Producers of SoundRecordings (Sec. 208) and Rights ofBroadcasting Organizations (Sec. 211).

These rights encompass moral rights,specifically the right of the performer toclaim to be identified as the performer.Also included is the right to proceeds insubsequent transfers, which isequivalent to 5% of the compensationreceived for the original performance.

Term of protection (Sec 215)-Performances

not incorporatedin recordings

50 years from the endof the year in which theperformance took place

Sound or Imageand Sound

Recordings andPerformancesIncorporated

therein

50 years from the endof the year in which the

recording took place

Broadcasts20 years from the date

the broadcast tookplace

Neighboring rights do not apply to:1) exclusive use of a natural person for

his own personal purposes;2) short excerpts for reporting current

events;3) sole use for the purpose of teaching

or scientific research;4) fair use of the broadcast.

XI.Transfer and Assignment

Copyright may be assigned in whole orin part. The assignee is then entitled toall the rights and remedies which theassignor had (Sec 180.1). However,copyright is not deemed assigned intervivos unless there is a writtenindication of such intention (Sec 180.2).

Submission of a literary, artistic orphotographic work to a newspaper orother periodical for publication shallconstitute a license to only make asingle publication unless a greater rightis expressly granted. If 2 or morepersons own the copyright jointly,consent of all of them is necessary togrant licenses (Sec. 180.3).

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REVIEWER IN COMMERCIAL LAW Table of ContentsT

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TRANSPORTATION AND PUBLIC UTILITIES LAW

Chapter I. GENERALCONSIDERATIONSI. Public UtilitiesII. Transportation

313133

Chapter II. COMMON CARRIERSI. In General

A. Concept of Common CarrierB. Nature of Business; Power of

the State to RegulateC. Nature and Basis of LiabilityD. Classes of Common CarriersE. Laws Applicable

II. Common Carriage of GoodsA. Liability and Presumption of

NegligenceB. Exemption from LiabilityC. Duration of Extraordinary

ResponsibilityD. Stipulation/Agreement

Limiting LiabilityE. Applicable Law on Foreign

TradeF. Rules on Passenger Baggage

III. Common Carriers of PassengersA. Nature and Extent of

ResponsibilityB. Duration of ResponsibilityC. Presumption of NegligenceD. Force MajeureE. Limitation of Liability;

Validity of StipulationsF. Responsibility for Acts of

EmployeesG. Responsibility for Acts of

Strangers and Co-PassengersH. Duty of Passenger; Effect of

Contributory NegligenceIV. Damages Recoverable from

Common CarriersA. In GeneralB. Actual or CompensatoryC. Moral DamagesD. Exemplary DamagesE. Nominal, Temperate, and

LiquidatedF. Attorney’s Fees and Interest

373737

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4545454646

4647

Chapter III. OVERLANDTRANSPORTATIONI. Scope of Overland

TransportationII. Nature of ContractIII. Effect of Civil CodeIV. Contract of Carriage

A. Bill of LadingB. Refusal to TransportC. Doubtful Declaration of

ContentsD. No Bill of Lading

V. Responsibility of the CarrierA. When It CommencesB. RouteC. Care of GoodsD. Delivery

VI. Rights and Obligations ofShipper and/or Consignee


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Chapter IV. ADMIRALTY ANDMARITIME COMMERCEI. Source of LawII. Concept of Admiralty;

JurisdictionIII. Vessels

A. MeaningB. Nature and Acquisition

IV. Persons Participating inMaritime CommerceA. Shipowners and ShipagentsB. Captains and ManagersC. Other Officers and CrewD. Supercargoes

V. Accidents and Damages inMaritime CommerceA. AveragesB. Arrival Under StressC. CollisionsD. Shipwreck

VI. Special ContractsA. Charter PartiesB. Loans on Bottomry and

RespondentiaC. Bill of LadingD. Passengers on Sea Voyage

VII. Carriage of Goods by Sea Act

5353

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5353565759

59596162626262

64656566

Chapter V. WARSAW CONVENTIONI. Definition and ApplicabilityII. LiabilitiesIII. Limitation on LiabilityIV. When Limitations UnavailableV. Conditions on LiabilityVI. Venue of Court Actions

68686868686969

REVIEWER IN COMMERCIAL LAW Chapter I. General Considerations

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Transportation and Public Utilities LawFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD



COMMERCIAL LAW


TRANSPORTATION & PUBLICUTILITIES LAW

Emee MacabalesLEAD WRITER

LECTURES

Edel CruzHEAD



--------Leo Zulueta

LOGO, COVER AND TEMPLATE

DESIGN

Awi MayugaNicole Torres

Mona Lisa Barro

Mario Vincent DiazNiner GuiaoMarvin Ibarra

WRITERS

Chapter 1. General Considerations

I. PUBLIC UTILITIESII. TRANSPORTATION

I. Public Utilities(Asked in 92, 93, 95, 98 and 00)

What is a Public Utility?

It is a business or service engaged inregularly supplying the public with somecommodity or service of public consequencesuch as electricity, gas, water,transportation, telephone or telegraphservice.

Two tests for determining publicutility:

1. Is it engaged in regularly supplying thepublic with some commodity or service?(per definition in Albano v. Reyes below)

2. If #1 is uncertain, is it a public serviceas defined in the Public Service Lawunder CA 146 Sec. 13(b)? If it fallsunder any one of the examples givenunder CA 146 Sec 13(b), then it is apublic utility.

Kilusang Mayo Uno v. Garcia (1994)Public utilities are privately owned and operatedbusinesses whose services are essential to thegeneral public. They are enterprises whichspecially cater to the needs of the public andconduce to their comfort and convenience. Assuch, public utility services are impressed withpublic interest and concern. When, therefore,one devotes his property to a use in which thepublic has an interest, he, in effect grants to thepublic an interest in that use, and must submitto the control by the public for the commongood, to the extent of the interest he has thuscreated.

Albano v. Reyes (1989).A public utility is a business or service engagedin regularly supplying the public with somecommodity or service of public consequence,such as electricity, gas, water, transportation,telephone or telegraph services. Apart fromstatutes which define public utilities that arewithin the purview of such statutes, it would bedifficult to construct a definition of a publicutility which would fit every conceivable case. Asits name indicates, however, the term publicutility implies a public use and service to thepublic.

Tatad v GarciaWhile a franchise is needed to operate thesefacilities to serve the public, they do not bythemselves constitute a public utility. Whatconstitutes a public utility is not their ownershipbut their use to serve the public.In law, there is a clear distinction between the"operation" of a public utility and the ownershipof the facilities and equipment used to serve thepublic. The right to operate a public utility mayexist independently and separately from theownership of the facilities. One can own saidfacilities without operating them as a publicutility, or conversely, one may operate a publicutility without owning the facilities used to servethe public. The devotion of property to serve thepublic may be done by the owner or by theperson in control thereof who may notnecessarily be the owner thereof.

What does “regularly supplying thepublic…” mean?

The utility must hold itself out to the publicas a public utility by demand and as amatter of right, and not by permission. Todetermine what constitutes regularity, lookat it from the perspective of the public, andnot the operator.


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WIt is a service or a readiness to serve anindefinite portion of the population subjectonly to the limitations of the service asgiven by the grant such that [the utility]incurs a liability as a violation of its duty ifit refuses, such that the availment of theservice has become, through time, a matterof right and not of mere privilege. (also inUS v. Tan Piaco)

To whom does “public” refer to? Isthe word “public” in “public utility”the same in “public service”?

There are three senses of the word “public”in Transportation Law: a) public utility; b)public service; and c) definition of acommon carrier under Art. 1732 of the CivilCode.

To determine a public utility, the two testsabove & the definition under Albano v.Reyes apply.

Are all public utilities commoditiesor service of public consequence?

Yes. All public utilities have a publicconsequence. But not all businessesbearing public consequence are publicutilities. This is because almost all types ofbusiness have some form of regulation fromthe State.

What service/s on the part of thepublic utility is considered unlawful?

It shall be unlawful for any publicservice to provide or maintain any servicethat is unsafe, improper, or inadequate, orwithhold or refuse any service which canreasonably be demanded and furnished, asfounded and determined by theCommission in a final order which shall beconclusive and shall effect in accordancewith this Act, upon appeal or otherwise.(Sec. 19 [a], CA No. 146)

What are some examples of unlawfulacts of public utility companies?

1. Engaging in public service businesswithout first securing the proper certificate;2. Providing or maintaining unsafe,improper or inadequate service asdetermined by the proper authority;3. Committing any act of unreasonable andunjust preferential treatment to anyparticular person, corporation or entity asdetermined by the proper authority;4. Refusing or neglecting to carry publicmail upon request (Secs. 18 and 19, CA No.146).

What is a Public Service?

A person who owns, operates, manages orcontrols in the Philippines for hire orcompensation, with general or limitedclientele, whether permanent, occasional oraccidental, and done for general businesspurposes, any common carrier or publicutility, ice plants, power and watersupplies, communication and similar publicservices (Sec. 13b, CA No. 146).

Kilusang Mayo Uno Labor Center v. Garcia Jr.(1994)

In determining public need, the presumption ofneed for a service shall be deemed in favor of theapplicant. Public convenience and necessityexists when the proposed facility or servicemeets a reasonable want of the public andsupply a need which the existing facilities do notadequately supply. The existence ornonexistence of public convenience andnecessity is therefore a question of fact thatmust be established by evidence, real and/ortestimonial; empirical data; statistics and suchother means necessary, in a public hearingconducted for that purpose. The object andpurpose of such procedure, among other things,is to look out for, and protect, the interests ofboth the public and the existing transportoperators.

What are the purposes of the PublicService Act (CA No. 146)?

1. To secure adequate, sustained servicefor the public at the least possible cost;

2. To protect the public againstunreasonable charges and poor,inefficient service;

3. To protect and secure investments inpublic services;

4. To prevent ruinous competition.

What is the difference between apublic utility and a public service?

For all intents and purposes, they are thesame and are used interchangeably.

However, public utility is a broader conceptthat embraces public service. A publicservice is necessarily a public utility, butnot all public utilities are public services.

When is a public utility not a publicservice?

If it is not included in the enumeration inthe Public Service Act (CA 146 Sec. 13(b))and Albano v. Reyes.


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restrictions and requirements?If a business is a public utility, then it issubject to the limitations and restrictionsprovided for in the 1987 Constitution (Art.12, Secs. 11,17,18,19) Since a publicservice is necessarily a public utility,therefore public services are subject to thesame Constitutional limitations andrestrictions.If a public utility is not a public service, it isstill subject to the same Constitutionallimitations and restrictions.

Therefore, Public Utility = ConstitutionPublic Service = Constitution +

Public Service Act

II. Transportation

Definition

The movement of goods or persons from oneplace to another, by a carrier (Black’s LawDictionary).

What is a contract of transportation?It is a contract whereby a person, naturalor juridical, obligates themselves totransport persons, things, news, from oneplace to another, by land, air or water, for afixed price or compensation. It is theremoval of goods or persons from one placeto another.

It is a relationship which is imbued withthe public interest.

Who are the parties to the contract oftransportation?:

1. Shipper - one who gives rise to thecontract of transportation by agreeing todeliver the things or news to betransported, or to present his ownperson or those of other or others in thecase of transportation of passengers.

2. Carrier or conductor - one who bindshimself to transport person, things, ornews, as the case may be, or oneemployed in or engaged in the businessof carrying good for others for hire

3. Consignee - the party to whom thecarrier is to deliver the things beingtransported; to whom the carrier maylawfully make delivery in accordancewith its contract of carriage. Theshipper and the consignee may be thesame person.

NOTE:Art. 1766. In all matters not regulated bythis Code, the rights and obligations ofcommon carriers shall be governed by theCode of Commerce and by special laws.

Public Nature

What is a Certificate of PublicConvenience (CPC)?

A CPC is any authorization to operate apublic service issued by the pertinentgovernment agency (DOTC, NTC LTFRB,etc) for the operation of public services forwhich no franchise, either municipal orlegislative, is required by law) e.g. motorvehicles.

It constitutes neither a franchise nor acontract; it does not confer property rights,it is a mere license or privilege (Pantranco v.PSC). Such privilege is forfeited when thegrantee fails to comply with hiscommitments to serve the public and publicnecessity. However, these certificatesrepresent property rights to the extent thatif the rights which any public utility isexercising pursuant to the lawful orders ofthe PSC (now DOTC) has been invaded byanother public utility, in appropriate cases,actions may be maintained by thecomplainant public utility.

It is a “property” and has a considerablevalue and can be the subject of sale orattachment (Cogeo-Cubao Operators andDrivers Assn. vs. CA, Raymundo vs. LunetaMotor Co.).

The revocation of this certificate deprivesthe grantee of no vested right. New andadditional burdens, alteration of thecertificate, or even revocation or annulmentthereof is reserved to the State (Luque vs.Villegas, 30 SCRA 408).

What is a Certificate of PublicConvenience & Necessity (CPCN)?

It is a certificate issued by the pertinentgovernment agency to a public service towhich any political subdivision has granteda franchise under RA 667 after thepertinent government agency has approvedthe same under Sec. 16(b). It is anauthorization issued by the pertinentgovernment agency for the operation ofpublic services for which a franchise isrequired by law (e.g. electric, telephone).


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& a CPCN?Unlike a CPC, a CPCN requires a franchisefrom Congress. The public utility cannot beissued a CPCN and cannot operate,therefore, without a franchise fromCongress

What is a franchise?It is a legislative grant from Congress or alocal legislative body. If it is of nationwideapplication (e.g. Philippine Air Lines), thenit must take the form of a Republic Act.

How does one get a franchise?It is the same procedure for any law (file abill, 3 readings in Congress, etc) Theapplicant must a)prove that he or she is aFilipino citizen; b) demonstrate financialcapacity, and c) must show that he or sheis applying for a business of publicconvenience, that the public shall benefitfrom the grant of the franchise.

Is a franchise enough in order tooperate?

No. All public utilities require either a CPCor CPCN to operate. Those public utilitiesfor which franchises have been granted stillrequire a CPCN in order to operate. Thosepublic utilities that did not require afranchise for there creation still require aCPC in order to operate.

What are the grounds for thesuspension and revocation of CPCs &CPCNs issued?

1. The facts and circumstances on thestrength of which said certificate wasissued have been misrepresented ormaterially changed;

2. The holder has violated or willfullyrefused to comply with any order, ruleor regulation of the commission;

3. The common carrier repeatedly fails tocomply with his or its duty to observeextraordinary diligence.

Does the sale of a CPC, CPCN or otherproperties of the public utility haveto be approved before it is sold to athird person?

No. The approval of the sale of CPCs,CPCNs or other properties does not affectthe validity (perfection) of the sale betweenthe parties as long as all the elements of acontract are met. This only affects therelation of the parties to the DOTC or to 3rdparties. If there is no approval, then thesale does not bind the DOTC or 3rd parties.

The controlling factor therefore is theregistration.

If a stockholder of a public utilitytransfers his stock to the 3rd person,is there a need to obtain the approvalof the DOTC?

It depends. If the transfer results in thetransferee owning more than 40% of thestock of the public utility, then the approvalof the DOTC is needed.

When must the approval of the DOTCbe secured?

Before or after the execution of thecontract.

What if the transferee is an alien?The transfer is VOID. An alien cannot ownmore than 40% of the stock of a publicutility.

Which public utilities are exemptedfrom getting a CPC?

Under the Public Service Law, Sec. 14, thefollowing are exempted from getting a CPC:(a) Warehouses;(b) Vehicles drawn by animals and bancas

moved by oar or sail, and tugboats andlighters;

(c) Airships within the Philippines exceptas regards the fixing of their maximumrates on freight and passengers;

(d) Radio companies except with respect tothe fixing of rates;

(e) Public services owned or operated byany instrumentality of the NationalGovernment or by any government-owned or controlled corporation, exceptwith respect to the fixing of rates. (Asamended by Com. Act 454, RA No. 2031and RA No. 2677)

Raymundo v. Luneta Motor Corporation(1933)

CPCs secured by public service operators areliable to execution, and the Public ServiceCommission is authorized to approve thetransfer of the certificates of public convenienceto the execution creditor.

What is the Prior Operator Rule?The prior operator rule works to protect theprior operator if it maintains an adequateservice and is able to meet the demands ofthe public. His or her investment isprotected by not allowing a subsequentoperator to be granted a license for thesame route. The policy is not to issue acertificate to a second operator to cover thesame field and in competition with a first


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Woperator who is rendering sufficient,adequate and satisfactory service. Theprior operator must first be given anopportunity to improve its service, ifinadequate or deficient. Where the operatoreither fails or neglects to make theimprovement or effect the increase inservices, especially when given theopportunity, new operators should be giventhe chance to give the services needed bythe public.

The rationale for this rule is for thepreservation of public convenience and toprevent ruinous competition in order thatthe interests of the public would beconserved and preserved.

What is the Prior Applicant Rule?The rule presupposes a situation where twointerested persons apply for a certificate tooperate a public utility in the samecommunity over which no person has as yetgranted any certificate. If it turns out, afterthe hearing, that the circumstancesbetween the two applicants are more or lessequal, then the applicant who appliedahead of the other, will be granted thecertificate.

This rule is subordinated under the PriorOperator Rule.

What is the Protection of InvestmentRule?

It means that one of the purposes of thePublic Service Act is to protect andconserve investments which have alreadybeen made for that purpose by publicservice operators.

What are some of the instanceswhere the prior operator rule doesNOT apply?

1. When the CPC or CPCN granted to theapplicant is a maiden franchise thatcovers a new route, even if it overlapswith the route of the prior operator;

2. Where the corporate existence of theprior operator has expired;

3. Regular operators are preferred overirregular operators.

4. The Commission cannot grant a CPC orCPCN that comprises a larger territorythan that applied for;

5. Where public interest would be betterserved by the new operator;

6. When the application of the rule wouldbe conducive to monopoly.

How do you know whether there isruinous competition enough for theprior operator rule to take effect?

Ruinous competition means that there isactual ruin of the business of the operator;that the existing operator will not gainenough profits if another person is allowedto enter the business; that which will resultin the deprivation of sufficient gain inrespect of reasonable return of investment,therefore the oppositor, alleging this, mustshow that he will be deprived of areasonable return on his investment.

The mere possibility of reduction in theearnings of the business or thedeterioration in the income of his businessis not sufficient to prove ruinouscompetition. It must be shown that thebusiness would not have sufficient gains topay a fair rate of interest on his capitalinvestments.

Does the prior operator rule create amonopoly?

Legally speaking, there cannot be amonopoly when a property is operated as apublic utility. The prior operator rule doesnot encourage a monopoly because thetheory is that one operator keeps the priceslow.

Batangas Transportation Co. v. CayetanoOrlanes (1928)

So long as the 1st licensee keeps and performsthe terms and conditions of its license andcomplies with the reasonable rules andregulations of the Commission and meets thedemands of the public, it should have more orless of a bested and preferential right over aperson who seeks to acquire another and a laterlicense over same route. Otherwise, the firstlicensee would not have protection on hisinvestment and would be subject to ruinouscompetition and this defeat the very purposeand intent for the PSC was created.

What is the Kabit System?(Asked in 90 and 05)

A system whereby a person who has beengranted a certificate of public convenienceallows other persons who own motorvehicles to operate under such license, for afee or percentage of such earnings.

Although not penalized outright as acriminal offense, the "kabit system" isinvariably recognized as being contrary topublic policy and, therefore, void andinexistent under Art 1409 of the Civil Code."Kabit System" has been identified as one ofthe root causes of graft and corruption in


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Wthe government transportation offices. It isa "pernicious system" that cannot be tooseverely condemned. It constitutes animposition upon the good faith of thegovernment. It is an abuse of a certificate ofpublic convenience, which is a specialprivilege granted by the government (TejaMarketing v. IAC).

What is an example of the “kabitsystem”?

A, a grantee of a CPC from the LTFRB, isgiven the authority to operate 10 units oftaxis. B, a non-grantee, wishes to operateas a common carried and “kabits” with theCPC of A who will obtain approval from theLTFRB to operate another taxi. The taxi willbe registered in the name of A, who will bepaid by B.

Assume that A executed a deed of sale infavor of B in case B decides not to go onwith the arrangement, in order to safeguardthe rights of B. However, in case of injury toa passenger of the taxi actually operated byB (and previously sold to B as well) it is stillA who will be liable. The illegal contract ofsale between A & B cannot be put up as adefense.

A does not have a cause of action against Beither. They are in pari delicto.

Teja Marketing v. IAC (1987)Parties operated under an arrangement,commonly known as the "kabit system" wherebya person who has been granted a certificate ofpublic convenience allows another person whoowns motor vehicles to operate under suchfranchise for a fee. A certificate of publicconvenience is a special privilege conferred bythe government. Although not outrightlypenalized as a criminal offense, the kabit systemis invariably recognized as being contrary topublic policy and, therefore, void and in existentunder Article 1409 of the Civil Code.

What are the rights and obligations ofparties arising from transactionsrelating to transportation absent atransportation contract?

Lara v. Valencia (1958)The owner and driver of a vehicle owes toaccommodation passengers or invited guestsmerely the duty to exercise reasonable care sothat they may be transported safely to theirdestination. Thus, “The rule is established bythe weight of authority that the owner oroperator of an automobile owes the duty to aninvited guest to exercise reasonable care in itsoperation, and not unreasonably to expose him

to danger and injury by increasing the hazard oftravel. Valencia therefore is only required toobserve ordinary care, and is not in duty boundto exercise extraordinary diligence as required ofa common carrier by our law (Art. 1755 & 1756,new CC).

REVIEWER IN COMMERCIAL LAW Chapter II. Common Carriers

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WChapter II. Common Carriers

I. IN GENERALA. CONCEPT OF COMMON CARRIERB. NATURE OF BUSINESS; POWER OF

THE STATE TO REGULATEC. NATURE AND BASIS OF LIABILITYD. CLASSES OF COMMON CARRIERSE. LAWS APPLICABLE

II. COMMON CARRIAGE OF GOODSA. LIABILITY AND PRESUMPTION OF

NEGLIGENCEB. EXEMPTION FROM LIABILITYC. DURATION OF EXTRAORDINARY

RESPONSIBILITYD. STIPULATION/AGREEMENT LIMITING

LIABILITYE. APPLICABLE LAW ON FOREIGN TRADEF. RULES ON PASSENGER BAGGAGE

III. COMMON CARRIERS OF PASSENGERSA. NATURE AND EXTENT OF

RESPONSIBILITYB. DURATION OF RESPONSIBILITYC. PRESUMPTION OF NEGLIGENCED. FORCE MAJEUREE. LIMITATION OF LIABILITY; VALIDITY

OF STIPULATIONSF. RESPONSIBILITY FOR ACTS OF

EMPLOYEESG. RESPONSIBILITY FOR ACTS OF

STRANGERS AND CO-PASSENGERSH. DUTY OF PASSENGER; EFFECT OF

CONTRIBUTORY NEGLIGENCEIV. DAMAGES RECOVERABLE FROM

COMMON CARRIERSA. IN GENERALB. ACTUAL OR COMPENSATORYC. MORAL DAMAGESD. EXEMPLARY DAMAGESE. NOMINAL, TEMPERATE, AND

LIQUIDATED

F. ATTORNEY’S FEES AND INTEREST

I. In General

A. Concept of Common Carrier(Asked in 91, 92, 96, 00 and 02)

Art. 1732 Civil CodeCommon carriers are persons, corporations,firms or associations engaged in the business ofcarrying or transporting passengers or goods orboth, by land, water, or air, for compensation,offering their services to the public.

What are the elements of a commoncarrier?

1. It is engaged in the business of carryingor transporting goods for others as apublic employment

2. It is for compensation or for hire3. It is operated generally as a business

and not as a casual occupation

4. It holds out to the public as ready toengage in the transportation of goods ofthe kind to which his business isconfined (cf. First Phil. Industrial v. CA)

Why is there a need to determinewhether it is a common carrier ornot?

Common carriers are subject to thepresumption of negligence. In order to rebutthis presumption, they must show that theyemployed extraordinary diligence.

Do you need a CPC or CPCN in orderto become a common carrier?

No. It is the conduct that makes you acommon carrier. (De Guzman v. CA) Theliability arises from the Civil Code.

FGU v. Sarmiento TruckingThe true test of a common carrier is the carriageof passengers or goods, providing space for thosewho opt to avail themselves of its transportationservices for a fee.

US v. Tan PiacoThese trucks, so far as indicated by the evidenceand as far as the appellant is concerned,furnished service under special agreements tocarry particular persons and property. . . . Solong as the individual or co-partnership, etc.,etc., is engaged in a purely private enterprise,without attempting to render service to all whomay apply, he can in no sense be considered apublic utility, for public use. "Public use" meansthe same as "use by the public”; it is notconfined to privileged individuals, but is open tothe indefinite public. If the use is merelyoptional with the owners, or the public benefit ismerely incidental, it is not a public use,authorizing the exercise of the jurisdiction of thepublic utility commission. Public use is notsynonymous with public interest. The truecriterion by which to judge of the character ofthe use is whether the public may enjoy it byright or only by permission.

De Guzman v. CAArt 1732 of the Civil Code (definition of commoncarriers) makes no distinction between onewhose principal business activity is the carryingof persons or goods or both, and one who doessuch carrying only as an ancillary activity (inlocal idiom, as "a sideline"). It also avoidsmaking any distinction between a person orenterprise offering transportation service on aregular or scheduled basis and one offering suchservice on an occasional, episodic orunscheduled basis. Neither does it distinguishbetween a carrier offering its services to the"general public," i.e., the general community orpopulation, and one who offers services orsolicits business only from a narrow segment ofthe general population.


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WNote: De Guzman v. CA effectivelybroadens the scope of what is considered acommon carrier.

First Phil. Industrial Corp v. CAThe test for determining whether a party is acommon carrier of goods is: (1). He must beengaged in the business of carrying goods forothers as a public employment, and must holdhimself out as ready to engage in thetransportation of goods for person generally as abusiness and not as a casual occupation; (2) Hemust undertake to carry goods of the kind towhich his business is confined; (3). He mustundertake to carry by the method by which hisbusiness is conducted and over his establishedroads; and (4)The transportation must be forhire.

B. Nature of Business and Power ofthe State to Regulate

Under Art 1765 of the Civil Code, the LandTransportation Franchising and RegulatoryBoard (LTFRB) may on its own motion or onpetition cancel after due hearing the CPC ofa common carrier that repeatedly fails toobserve the extraordinary diligencerequired.

Pantranco v. PSCWhen one devotes his property to a use in whichthe public has an interest, he, in effect, grants tothe public an interest in that use, and mustsubmit to be controlled by the public for thecommon good, to the extent of the interest hehas thus created. He may withdraw his grant bydiscounting the use, but so long as he maintainsthe use he must submit to control. This right ofthe state to regulate public utilities is foundedupon the police power. A certificate of publicconvenience constitutes neither a franchise nora contract, confers no property right, and is amere license or privilege.

C. Nature and Basis of Liability

NATURE: bound to observe extraordinarydiligence

BASIS OF LIABILITY: nature of theirbusiness and public policy (Art 1733)

Cangco v. MRRThe liability of the carrier is contractual innature. It arises from the contract of carriage.The liability is direct and immediate, and differsfrom presumptive responsibility for thenegligence of [Manila Railroad’s] servants.The contract of Manila Railroad Company totransport Cangco carried with it the duty tocarry him safely and provide safe means ofentering and leaving its trains. That duty, being

contractual, was direct and immediate, and itsnon-performance could not be excused by proofthat the fault was morally imputable to ManilaRailroad’s servants. There was no contributorynegligence on the part of Cangco.

What laws govern over commoncarriers?

The Civil Code primarily governs overcommon carriers. The Code of Commerceand special laws have suppletory effect.

What are the limitations on thepower to regulate common carriers?

The same rules on due process apply to theregulation of common carriers.

D. Classes of Common Carriers

COMMON PRIVATENature Holds itself

out to publicas ready tocarry for hire

Agreementwith privateindividual tocarry for hire

Basis forConsideration

Bound tocarry all forcompensation

Not bound tocarry unlessthere isspecialagreement

Regulation Subject toregulation

Not subject tosameregulation ascommoncarriers

Diligence Extraordinary Of a goodfather

Stipulationon Liability

Cannotstipulateexemptionfrom liability

May stipulateexemptionfrom liabilityor futurenegligence

What are the classes of carriers?Common or privateAs to the object: goods or persons

What is the difference between acommon carrier and a privatecarrier?

COMMON - It holds itself out as ready toengage in the transportation of goods orpersons for hire as a public employmentand not as a casual occupation whether:1. regular or scheduled2. occasional, episodic or unscheduled3. offered to the general public or merely a

narrow segment of the generalpopulation (De Guzman v. CA)

PRIVATE - Carriers who transport orundertake to transport goods or persons ina particular instance for hire or for reward


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WE. Laws Applicable

PRIMARILY: Civil Code

SUPPLEMENTARILY: Code of Commerceand other special laws (Art 1766)

Liability for loss, destruction ordeterioration of goods: laws of country towhere the goods are to be transported (Art1753)

II. Common Carriage of Goods

A. Liability and Presumption ofNegligence(Asked in 90, 91 and 97)

GENERAL RULE: Common carriers areresponsible for the loss, destruction, ordeterioration of the goods

EXCEPTION: if due to any of the followingcauses only(1) Flood, storm, earthquake, lightning, or

other natural disaster or calamity;(2) Act of the public enemy in war, whether

international or civil;(3) Act of omission of the shipper or owner

of the goods;(4) The character of the goods or defects in

the packing or in the containers;(5) Order or act of competent public

authority.NOTE: The presumption of negligence doesnot apply in these cases.

Common carrier’s REMEDY to overcomethe presumption of negligence: prove thatthey observed extraordinary diligence

Ynchausti vs. Dexter (1920)The mere proof of delivery of goods in good orderto a carrier, and of their arrival at the place ofdestination in bad order, makes out a primafacie case against the carrier, so that if noexplanation is given as to how the injuryoccurred, the carrier must be held responsible.It is incumbent upon the carrier to prove thatthe loss was due to accident or some othercircumstance inconsistent with its liability.

B. Exemption from Liability

1. Natural Disaster

What are the requisites forexemption due to natural disaster?

1. The natural disaster must have beenthe proximate and only cause (Art 1739)

2. The common carrier must exercise duediligence to prevent or minimize the lossbefore, during and after the occurrenceof the flood, storm or natural disaster(Art 1739)

3. The common carrier must not havebeen guilty of delay (Art 1740)

4. The shipment was at shipper’s risk (Art361, Code of Commerce)

Martini v. Macondray (1919)The master is responsible for the safe & properstowage of the cargo, & there is no doubt that bythe general maritime law he is bound to securethe cargo safely under deck. If the master carriesgoods on deck w/o the consent of the shipper, hedoes it at his own risk. If they are damaged orlost in consequence of their being thus exposed,he cannot protect himself from responsibility byshowing that they were damaged or lost by thedangers of the seas. When the shipperconsents to his goods being carried on deck,he takes the risks of any damage or losssustained as a consequence of their being socarried.

Eastern Shipping Lines v. IAC (1987)Fire may not be considered a naturaldisaster/calamity. This must be so as it arisesalmost invariably from some act of man or byhuman means. It does not fall within thecategory of an act of God unless caused bylightning or boy other natural disaster/calamity.It may even be caused by the actual fault orprivity of the carrier.

2. Act of Public Enemy

What are the requisites forexemption due to the act of a publicenemy?

1. The act of the public enemy must havebeen the proximate and only cause (Art1739)

2. The common carrier must exercise duediligence to prevent or minimize the lossbefore, during and after the act of thepublic enemy causing the loss,destruction or deterioration of thegoods. (Art 1739)

3. Act or Omission of Shipper

What are the requisites forexemption due to the act or omissionof the shipper?

1. The act or omission of the shipper musthave been the proximate and only cause(Art 1741)

2. If the shipper owner merely contributedto the loss, destruction or deteriorationof the goods, the proximate cause beingthe negligence of the common carrier,


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Wthen the common carrier shall be liablefor the damages, which shall, however,be equitably reduced. (Art 1741)

4. Character of Goods

What are the requisites forexemption due to character of goods?

1. the character of the goods or defects inpacking or containers (Art 1739)

2. The common carrier must exercise duediligence to forestall or lessen the (Art1739)

DAMAGE WHEN TO CLAIMAscertainable frompackage

Claim for damages mustbe made upon receipt

Only upon openingthe package

Claim for damages maybe made within 24 hoursupon receipt

After such periods OR transportationcharges have been paid, no more claims fordamages will be entertained.(Art 366, Code of Commerce)

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

5. Order of Competent Authority

What are the requisites forexemption due to an order ofcompetent authority?

1. There must be an order or act ofcompetent authority (Art 1743)

2. The said public authority must havehad the power to issue the order. If theofficer acts without legal process, thenthe common carrier will be held liable(Art 1743)

Ganzon v. CA (1988)The intervention of the municipal officials wasnot of a character that would render impossiblethe fulfillment by the carrier of the obligation.The petitioner was not duty bound to obey theillegal order to dump into the sea the scrap iron.There is absence of sufficient proof that theissuance of the order was attended with suchforce or intimidation as to completely overpowerthe will of petitioner’s employees. The meredifficulty in the fulfillment of the obligation isnot force majeure.Melencio-Herrera, dissent: Through the “orderor act” of “competent public authority,” theperformance of the contractual obligation wasrendered impossible. Apparently, the seizure anddestruction of the goods was done under legalprocess or authority so that petitioner should befreed from responsibility.

C. Duration of ExtraordinaryResponsibility

GENERAL RULE: extraordinary diligenceover goods even when the goods aretemporarily unloaded or stored in transit

EXCEPTION: shipper or owner made use ofthe right of stoppage in transitu

When does extraordinary diligencefor goods start?

Extraordinary diligence starts from the timethe goods are loaded into the vessels.

When does extraordinary diligencefor goods stop?

Extraordinary diligence ends when thegoods are discharged and delivered to theconsignee.

What does “unconditionally placed”mean?

It means that the shipper cannot get thegoods back from the common carrier at will.

When is the contract oftransportation perfected?

A contract of transportation is consensualin nature; therefore it is perfected at themeeting of the minds of the parties.

What if the goods are only forsafekeeping?

If the common carrier received the goodsnot for transportation but only forsafekeeping, where the goods have alreadybeen purchased by the shipper and readyfor transportation, then the duty ofextraordinary diligence has not yet started.

Who are these persons or entitieswho have “a right to receive” thegoods?

These persons include agents, brokers, andthe like.

What is stoppage in transitu?This is the act by which the unpaid vendorof goods stops their progress and resumespossession of them constructively whilethey are in the court of transit from him tothe purchaser, and not yet actuallydelivered to the latter. The duty of thecommon carrier to exercise extraordinarydiligence ends in the middle of the journeyor transit.

When the buyer of the goods becomesinsolvent, the unpaid seller who has parted


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Wwith the possession of the goods at anytime while they are in transit, may resumethe possession of the goods as he wouldhave had if he had never parted with thepossession.

Compania Maritima v. Insurance Company ofNorth America (1964)

The liability of the carrier as common carrierbegins with the actual delivery of the goods fortransportation, and not merely with the formalexecution of a receipt or bill of lading; theissuance of a bill of lading is not necessary tocomplete delivery and acceptance. Even where itis provided by statute that liability commenceswith the issuance of the bill of lading, actualdelivery and acceptance are sufficient to bindthe carrier.

Lu Do v. Binamira (1957)While delivery of the cargo to the customsauthorities is not delivery to the consignee, or“to the person who has a right to receive them”,contemplated in Article 1736, because in suchcase the goods are still in the hands of theGovernment and the owner cannot exercisedominion over them, however the parties mayagree to limit the liability of the carrierconsidering that the goods have still to throughthe inspection of the customs authorities beforethey are actually turned over to the consignee.This is a situation where we may say that thecarrier losses control of the goods because of acustom regulation and it is unfair that it bemade responsible for what may happen duringthe interregnum.

D. Stipulations/Agreement LimitingLiability(Asked in 2002)

1. As to Diligence Required

Art. 1744 Civil CodeA stipulation between the common carrier andthe shipper or owner limiting the liability of theformer for the loss, destruction, or deteriorationof the goods to a degree less than extraordinarydiligence shall be valid, provided it be:(1) In writing, signed by the shipper or owner;(2) Supported by a valuable consideration other

than the service rendered by the commoncarrier; and

(3) Reasonable, just and not contrary to publicpolicy.

Art. 1745 Civil CodeAny of the following or similar stipulations shallbe considered unreasonable, unjust andcontrary to public policy:(1) That the goods are transported at the risk of

the owner or shipper;(2) That the common carrier will not be liable

for any loss, destruction, or deterioration ofthe goods;

(3) That the common carrier need not observeany diligence in the custody of the goods;

(4) That the common carrier shall exercise adegree of diligence less than that of a goodfather of a family, or of a man of ordinaryprudence in the vigilance over the movablestransported;

(5) That the common carrier shall not beresponsible for the acts or omission of his orits employees;

(6) That the common carrier's liability for actscommitted by thieves, or of robbers who donot act with grave or irresistible threat,violence or force, is dispensed with ordiminished;

(7) That the common carrier is not responsiblefor the loss, destruction, or deterioration ofgoods on account of the defective conditionof the car, vehicle, ship, airplane or otherequipment used in the contract of carriage.

Art. 1751 Civil CodeThe fact that the common carrier has nocompetitor along the line or route, or a partthereof, to which the contract refers shall betaken into consideration on the question ofwhether or not a stipulation limiting thecommon carrier's liability is reasonable, just andin consonance with public policy.

2. As to Amount of Liability

Art. 1749 Civil CodeA stipulation that the common carrier's liabilityis limited to the value of the goods appearing inthe bill of lading, unless the shipper or ownerdeclares a greater value, is binding.

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

Shewaram v. PAL (1966)There are two requisites that must be fulfilled inorder that the liability of PAL be limitedaccording to the stipulations behind the ticketstub:

1. that the contract is just and reasonableunder the circumstances

2. that the contract was fairly and freely agreedupon (per Art. 1750)

The fact that the conditions are printed at theback of the ticket stub in letters so small thatthey are hard to read would not warrant thepresumption that plaintiff was aware of thoseconditions such that he had “fairly and freelyagreed” to those conditions.

Ong Yiu v. CA (1979)While the passenger had not signed the planeticket, he is nevertheless bound by the provisionthereof; such provisions have been held to bepart of the contract of carriage and valid andbinding upon the passenger regardless of the


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Wlatter’s lack of knowledge or assent to theregulation. It is what is known as a contract ofadhesion wherein one party imposes a readymade form of contract on the other. The one whoadheres to the contract is in reality free to rejectit entirely. A contract limiting liability upon anagreed valuation does not offend against thepolicy of the law forbidding one from contractingagainst his own negligence.

3. Factors Affecting Agreement

Art. 1746 Civil CodeAn agreement limiting the common carrier'sliability may be annulled by the shipper orowner if the common carrier refused to carry thegoods unless the former agreed to suchstipulation.

Art. 1747 Civil CodeIf the common carrier, without just cause,delays the transportation of the goods orchanges the stipulated or usual route, thecontract limiting the common carrier's liabilitycannot be availed of in case of the loss,destruction, or deterioration of the goods.

Art. 1748 Civil CodeAn agreement limiting the common carrier'sliability for delay on account of strikes or riots isvalid.

4. Stipulations Limiting Liability

Art. 1751 Civil CodeThe fact that the common carrier has nocompetitor along the line or route, or a partthereof, to which the contract refers shall betaken into consideration on the question ofwhether or not a stipulation limiting thecommon carrier's liability is reasonable, just andin consonance with public policy.

Art. 1752 Civil CodeEven when there is an agreement limiting theliability of the common carrier in the vigilanceover the goods, the common carrier is disputablypresumed to have been negligent in case of theirloss, destruction or deterioration.

E. Applicable Law on Foreign Trade

Art. 1753 Civil CodeThe law of the country to which the goods are tobe transported shall govern the liability of thecommon carrier for their loss, destruction ordeterioration.

F. Rules on Passenger Baggage(asked in 97 and 98)

Art. 1754 Civil CodeThe provisions of Articles 1733 to 1753 shallapply to the passenger's baggage which is not in

his personal custody or in that of his employee.As to other baggage, the rules in Articles 1998and 2000 to 2003 concerning the responsibilityof hotel-keepers shall be applicable.

When hotel-keeper liableIn the following cases, the hotel-keeper isliable regardless of the amount of careexercised:1. loss or injury is caused by his servants

or employees as well as by strangers(Art 2000) provided that notice has beengiven and proper precautions taken (Art1998)

2. loss is caused by the act of a thief orrobber done without the use of armsand irresistible force (Art 2001)

When hotel-keeper not liable1. loss or injury is caused by force

majeure (Art 2000), theft or robbery bya stranger (not by hotel-keeper’s servantor employee) with the use of arms orirresistible force (Art 2001), etc unlesshe is guilty of fault or negligence infailing to provide against the loss orinjury from his cause

2. loss is due to the acts of the guests, hisfamily, servants, or visitors (Art 2002)

3. loss arises from the character of thethings brought into the hotel (Art 2002)

Art. 2003 Civil CodeThe hotel-keeper cannot free himself fromresponsibility by posting notices to the effectthat he is not liable for the articles brought bythe guest. Any stipulation between the hotel-keeper and the guest whereby the responsibilityof the former as set forth in articles 1998 to2001 is suppressed or diminished shall be void.

What is a passenger baggage?They are the things that a passenger willbring with him consistent with a temporaryabsence from where he lives. Passengerbaggage must have a direct relationshipwith the passenger who is travelling.e.g. A balikbayan box or suitcase ispassenger baggage. However, 10,000 cansof corned beef is not considered aspassenger baggage. They are considered asgoods. If you carry goods with you, youcannot bring them with you as part of your[passenger] contract of carriage. You willneed to get a separate contract of carriage(“bill of lading”) in order to transport them.These goods will then be transportedwhether or not you are physically travellingwith them.


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W What are the kinds of passenger

baggage and the laws applicable tothem?

1. Passenger baggage in the custody of thepassenger (e.g. carry-on luggage). Theseare considered as necessary deposits.Articles 1998, 2000-2003 apply.

2. Passenger baggage not in the custody ofthe passenger (e.g. checked-in luggage).Arts. 1733-1753 on extraordinarydiligence apply. The liability is greaterfor baggage that is in the custody of thecarrier in contrast if such is in thepossession of the passenger.

III.Common Carriage of Passengers(Asked in 97 and 01)

A. Nature and Extent ofResponsibility

Art. 1733 Civil CodeCommon carriers, from the nature of theirbusiness and for reasons of public policy, arebound to observe extraordinary diligence in thevigilance over the goods and for the safety of thepassengers transported by them, according to allthe circumstances of each case.Such extraordinary diligence in the vigilanceover the goods is further expressed in Articles1734, 1735, and 1745, Nos. 5, 6, and 7, whilethe extraordinary diligence for the safety of thepassengers is further set forth in Articles 1755and 1756.

Art. 1755 Civil CodeA common carrier is bound to carry thepassengers safely as far as human care andforesight can provide, using the utmost diligenceof very cautious persons, with a due regard forall the circumstances.

Is there any difference between theextraordinary diligence for goods andfor persons?

In the case of transport of persons, thereare no exceptions to the presumption ofnegligence in the case of injuries or death,unlike in goods under Art. 1734.

Isaac v. A. L. Ammen Transportation (1975)It is the prevailing rule that it is negligence perse for a passenger on a railroad voluntarily orinadvertently to protrude his arm, hand, elbow,or any other part of his body through thewindow of a moving car beyond the outer edge ofthe window or outer surface of the car, so as tocome in contact with objects or obstacles nearthe track, and that no recovery can be had foran injury which but for such negligence wouldnot have been sustained.

Spouses Landingin v. PANTRANCO (1970)When a passenger dies or is injured, thepresumption is that the common carrier is atfault or that it acted negligently (Article 1756).This presumption is only rebutted by proof onthe carrier's part that it observed the"extraordinary diligence" required in Article 1733and the "utmost diligence of very cautious

persons" required in Article 1755 (Article 1756).

Necesito v. ParasWhile the carrier is not an insurer of the safetyof the passengers, it should nevertheless be heldanswerable for the flaws of its equipment, ifsuch flaws were discoverable. The rationale forthe common carrier’s liability for manufacturingdefects is the fact that the passenger has neitherchoice nor control over the carrier in theselection and use of the equipment andappliances in use by the carrier. Having noprivity whatever with the manufacturer orvendor of the defective equipment, the passengerhas no remedy against him.

B. Duration of Responsibility

La Mallorca v. CA (1966)It has been recognized as a rule that the relationof carrier and passenger does not cease at themoment the passenger alights from the carrier'svehicle at a place selected by the carrier at thepoint of destination, but continues until thepassenger has had a reasonable time or areasonable opportunity to leave the carrier'spremises. And, what is a reasonable time or areasonable delay within this rule is to bedetermined from all the circumstances.

Aboitiz vs CAIt is of common knowledge that, by the verynature of petitioner's business as a shipper, thepassengers of vessels are allotted a longer periodof time to disembark from the ship than othercommon carriers such as a passenger bus. Suchvessels are capable of accommodating a biggervolume of both as compared to the capacity of aregular commuter bus. Consequently, a shippassenger will need at least an hour as is theusual practice, to disembark from the vessel andclaim his baggage whereas a bus passenger caneasily get off the bus and retrieve his luggage ina very short period of time.

Does the duty of extraordinarydiligence occur right at theperfection of the contract oftransportation?

The perfection of the contract of carriagedoes not necessarily coincide with thecommencement of the duty of extraordinarydiligence. It may occur at the same time orlater.


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diligence get interrupted?No. In PAL v. CA, it was held that PAL hadto continue to exercise extraordinarydiligence even in the case of strandedpassengers until they have reached theirfinal destination.

Is there a duty of extraordinarydiligence for comfort and safety?

No. The duty really only involves bringingthe person to the destination. But in PAL v.CA, the Court held that PAL had the duty toprovide all means and comfort andconvenience to its passengers when theygot stranded.

C. Presumption of Negligence

Art. 1756In case of death of or injuries to passengers,common carriers are presumed to have been atfault or to have acted negligently, unless theyprove that they observed extraordinary diligenceas prescribed in Arts 1733 and 1755.

Is the last clear chance doctrineapplicable in contracts of carriage?

No. The contract of carriage is contractualin nature. This doctrine is a defense onlyfor torts and quasi-delicts.

D. Force Majeure

Bachelor Express v. CAForce majeure is not in itself a defense.Extraordinary diligence is the defense. Proof offorce majeure becomes relevant in complyingwith the requirement of extraordinary diligence.

E. Limitation of Liability; Validityof Stipulations

Art. 1757 Civil CodeThe responsibility of a common carrier for thesafety of passengers as required in Articles 1733and 1755 cannot be dispensed with or lessenedby stipulation, by the posting of notices, bystatements on tickets, or otherwise.

Art. 1758 Civil CodeWhen a passenger is carried gratuitously, astipulation limiting the common carrier's liabilityfor negligence is valid, but not for wilful acts orgross negligence.

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

F. Responsibility for Acts ofEmployees

Art. 1759 Civil CodeCommon carriers are liable for the death of or

injuries to passengers through the negligence orwillful acts of the former's employees, althoughsuch employees may have acted beyond thescope of their authority or in violation of theorders of the common carriers. This liability ofthe common carriers does not cease upon proofthat they exercised all the diligence of a goodfather of a family in the selection andsupervision of their employees.

Art. 1760 Civil CodeThe common carrier's responsibility prescribedin the preceding article cannot be eliminated orlimited by stipulation, by the posting of notices,by statements on the tickets or otherwise.

Maranan v. Perez (1967)It is enough that the assault happens within thecourse of the employee's duty. It is no defensefor the carrier that the act was done in excess ofauthority or in disobedience of the carrier'sorders. The carrier's liability here is absolute inthe sense that it practically secures thepassengers from assaults committed by its ownemployees.

At least three very cogent reasons underlie thisrule. As explained in Texas Midland R.R. vs.Monroe:(1) the special undertaking of the carrier

requires that it furnish its passenger thatfull measure of protection afforded by theexercise of the high degree of care prescribedby the law, inter alia from violence andinsults at the hands of strangers and otherpassengers, but above all, from the acts ofthe carrier's own servants charged with thepassenger's safety;

(2) said liability of the carrier for the servant'sviolation of duty to passengers, is the resultof the former's confiding in the servant'shands the performance of his contract tosafely transport the passenger, delegatingtherewith the duty of protecting thepassenger with the utmost care prescribedby law; and

(3) as between the carrier and the passenger,the former must bear the risk of wrongfulacts or negligence of the carrier's employeesagainst passengers, since it, and not thepassengers, has power to select and removethem.

G. Responsibility for Acts ofStrangers and Co-passengers

Art. 1763 Civil CodeA common carrier is responsible for injuriessuffered by a passenger on account of the willfulacts or negligence of other passengers or ofstrangers, if the common carrier's employeesthrough the exercise of the diligence of a goodfather of a family could have prevented orstopped the act or omission.


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WPilapil v. CA (1989)

In consideration of the right granted to it by thepublic to engage in the business of transportingpassengers and goods, a common carrier doesnot give its consent to become an insurer of anyand all risks to passenger and goods. It merelyundertakes to perform certain duties to thepublic as the law imposes, and holds itself liablefor any breach thereof.Under Art. 1763, a tort committed by a strangerwhich causes injury to a passenger does notaccord the latter a cause of action against thecarrier. The negligence for which a commoncarrier is held responsible is the negligentomission by the carrier's employees to preventthe tort from being committed when the samecould have been foreseen and prevented bythem. Further, when the violation of the contractis due to the willful acts of strangers, as in theinstant case, the degree of care essential to beexercised by the common carrier for theprotection of its passenger is only that of a goodfather of a family.

What is the common carrier’sresponsibility towards employees?

The common carrier is responsible evenbeyond the scope of authority and inviolation of orders compared to quasi-delicts under Art. 2180, which exempts theemployer if it was done outside ofemployment. However, there must be areasonable connection between the act andthe contract of carriage.

ACT DONE LIABILITY OF OBLIGORIn good faith Only natural and probable

consequences of the breach,which have could havereasonably been foreseen

In bad faith,fraud, maliceor wantonattitude

All damages which may bereasonably attributed tobreach

What is the common carrier’sresponsibility towards strangers?

Art. 1763 imposes only the duty of ordinarydiligence. In Bachelor Express, the Courtheld that the common carrier has a duty ofextraordinary diligence for the act of a co-passenger. However, in Pilapil, the standardof diligence is only ordinary diligence, (Art.1763), referring to the acts of strangers.

H. Duty of Passenger; Effect ofContributory Negligence

Art. 1761Civil CodeThe passenger must observe the diligence of agood father of a family to avoid injury to himself.

Art. 1762 Civil CodeThe contributory negligence of the passenger

does not bar recovery of damages for his deathor injuries, if the proximate cause thereof is thenegligence of the common carrier, but theamount of damages shall be equitably reduced.

IV.Damages Recoverable fromCommon Carriers

A. In General

Art. 2197 Civil CodeDamages may be:(1) Actual or compensatory;(2) Moral;(3) Nominal;(4) Temperate or moderate;(5) Liquidated; or(6) Exemplary or corrective.

B. Actual or Compensatory

One is entitled to an adequatecompensation only for pecuniary losssuffered and duly proved. (Art 2199)

These actual and compensatory damagesinclude those profits which the obligeefailed to obtain. (Art 2200)

Cariaga v. Laguna Tayabas Bus Co. (1960)From the deposition of Dr. Romeo Gustilo, aneurosurgeon, it appears that, as a result of theinjuries suffered by Edgardo, his right foreheadwas fractured necessitating the removal ofpractically all of the right frontal lobe of hisbrain. From the testimony of Dr. Jose A.Fernandez, a psychiatrist, it may be gatheredthat, because of the physical injuries suffered byEdgardo, his mentality has been so reduced thathe can no longer finish his studies as a medicalstudent; that he has become completely misfitfor any kind of work; that he can hardly walkaround without someone helping him, and hasto use a brace on his left leg and feet. The lowercourt found that the removal of the right frontallobe of the brain of Edgardo reduced hisintelligence by about 50%; that due to thereplacement of the right frontal bone of his headwith a tantalum plate Edgardo has to lead aquite and retired life because "if the tantalumplate is pressed in or dented it would cause hisdeath." The impression one gathers from thisevidence is that, as a result of the physicalinjuries suffered by Edgardo Cariaga, he is nowin a helpless condition, virtually an invalid, bothphysically and mentally. His award of actualdamages is thus increased to P25,000. However,he cannot recover moral damages as LTB neveracted fraudulently or in bad faith.

Villa Rey v. CA (1970)The determination of the amount involves 2factors.


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W1. The number of years on the basis of which

the damages shall be computed and2. The rate at which the losses sustained by

his sisters should be fixedThe determination of the indemnity to beawarded to the heirs of a deceased person hastherefore no fixed basis. Much is left to thediscretion of the court considering the moral andmaterial damages involved, and so it has beensaid that "(t)here can be no exact or uniform rulefor measuring the value of a human life and themeasure of damages cannot be arrived at byprecise mathematical calculation, but theamount recoverable depends on the particularfacts and circumstances of each case. The lifeexpectancy of the deceased or of the beneficiary,whichever is shorter, is an important factor.

As to the rate: total earnings less expensesnecessary in the creation of such earnings andincome (net earnings)

Pan Am World v. IAC, supra (1988)The rule laid down in Mendoza vs PAL is clear:Under Art. 1107, a debtor in good faith like thedefendant herein, may be held liable only fordamages that were foreseen or might have beenforeseen at the time the contract oftransportation was entered into. In the absenceof a showing that PAN AM’s attention was calledto the special circumstances requiring promptdelivery of respondent Pangan’s luggages, PANAM cannot be held liable for the cancellation ofPangan’s contracts as it could not have foreseensuch an eventuality when it accepted theluggages for transit.

C. Moral Damages

General Rule: moral damages are notrecoverable in actions predicated on abreach of contract of carriage

Exception:1. where death results2. where it is proved that carrier was guilty

of fraud or bad faith, even if death doesnot result

Bad faith is a breach of a known dutythrough some motive of interest or ill will.

Moral damages for mental anguish byreason of the death may be claimed by thespouse, legitimate and illegitimatedescendants and ascendants of thedeceased. (Art 2206)

No proof of pecuniary loss is necessary inorder that moral, nominal, temperate,liquidated or exemplary damages may beawarded. Assessment of such damages isdiscretionary to the court. (Art 2216)

Fores v. Miranda (1959)Moral damages are not recoverable in damageactions predicted on a breach of the contract oftransportation, in view of Articles 2219 and2220 of the new Civil Code.

An exception to this rule is Art 1764 whichmakes the common carrier expressly subject tothe rule of Art. 2206, that entitles the deceasedpassenger to "demand moral damages for mentalanguish by reason of the death of the deceased"but where the injured passenger does not die,moral damages are not recoverable unless it isproved that the carrier is guilty of malice or badfaith.

Air France v. Carrascoso (1966)There was a contract to furnish a first classpassage. The contract was breached when theairline failed to furnish the first class ticket atBangkok. There was bad faith when Air France’semployee compelled Carrascoso to leave his firstclass seat for an economy class one by forciblyejecting him.

D. Exemplary Damages

Art. 2229 Civil CodeExemplary or corrective damages are imposed,by way of example or correction for the publicgood, in addition to the moral, temperate,liquidated or compensatory damages.

Art. 2232 Civil CodeIn contracts and quasi-contracts, the court mayaward exemplary damages if the defendant actedin a wanton, fraudulent, reckless, oppressive, ormalevolent manner.Art. 2233 Civil CodeExemplary damages cannot be recovered as amatter of right; the court will decide whether ornot they should be adjudicated.

Mecenas v. CAIn discussing the rule of exemplary damages inlaw, the Supreme Court looks to it as aninstruction to serve the ends of law and publicpolicy by reshaping socially deleteriousbehaviors, specifically in the case, to compelcommon carriers to control their employees, totame their reckless instincts, and to force themto take adequate care of humans beings andtheir property.

E. Nominal, Temperate andLiquidated

Art. 2221 Civil CodeNominal damages are adjudicated in order that aright of the plaintiff, which has been violated orinvaded by the defendant, may be vindicated orrecognized, and not for the purpose ofindemnifying the plaintiff for any loss sufferedby him.


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WArt. 2224 Civil CodeTemperate or moderate damages, which aremore than nominal but less than compensatorydamages, may be recovered when the court findsthat some pecuniary loss has been suffered butits amount can not, from the nature of the case,be provided with certainty.

Art. 2226 Civil CodeLiquidated damages are those agreed upon bythe parties to a contract, to be paid in case ofbreach thereof.

Art. 1757 Civil CodeThe responsibility of a common carrier for thesafety of passengers as required in Articles 1733and 1755 cannot be dispensed with or lessenedby stipulation, by the posting of notices, bystatements on tickets, or otherwise.

Alitalia v. IAC (1990)Dr. Pablo is not entitled to be compensated forloss or damage to her luggage since they wereultimately delivered to her. She is howeverentitled to nominal damages, which isadjudicated in order that the right of thepassenger, which has been violated or invaded,may be vindicated or recognized, and not for thepurpose of indemnifying the passenger for anyloss suffered.

Saludo v. CAThe lamentable actuations of TWA's employeesleave much to be desired, particularly so in theface of petitioners' grief over the death of theirmother, exacerbated by the tension and anxietywrought by the impasse and confusion over thefailure to ascertain over an appreciable period oftime what happened to her remains.

Airline companies are hereby sternlyadmonished that it is their duty not only tocursorily instruct but to strictly require theirpersonnel to be more accommodating towardscustomers, passengers and the general public.

F. Attorney’s Fees and Interest

Art. 2208 Civil CodeIn the absence of stipulation, attorney's fees andexpenses of litigation, other than judicial costs,cannot be recovered, except:(1) When exemplary damages are awarded;(2) When the defendant's act or omission has

compelled the plaintiff to litigate with thirdpersons or to incur expenses to protect hisinterest;

(3) In criminal cases of malicious prosecution againstthe plaintiff;

(4) In case of a clearly unfounded civil action orproceeding against the plaintiff;

(5) Where the defendant acted in gross and evidentbad faith in refusing to satisfy the plaintiff'splainly valid, just and demandable claim;

(6) In actions for legal support;(7) In actions for the recovery of wages of household

helpers, laborers and skilled workers;(8) In actions for indemnity under workmen's

compensation and employer's liability laws;(9) In a separate civil action to recover civil liability

arising from a crime;(10) When at least double judicial costs are awarded;(11) In any other case where the court deems it just

and equitable that attorney's fees and expenses oflitigation should be recovered.

(12) In all cases, the attorney's fees and expenses oflitigation must be reasonable.

Art. 2210 Civil CodeInterest may, in the discretion of the court, beallowed upon damages awarded for breach ofcontract.

Art. 2212 Civil CodeInterest due shall earn legal interest from thetime it is judicially demanded, although theobligation may be silent upon this point. (1109a)

What damages may be recovered incase of death of a passenger?

1. indemnity for the death of the victim2. indemnity for loss of earning capacity of the

deceased3. moral damages4. attorney’s fees and expenses of litigation5. interest (in proper cases)

In fixing a greater amount ofdamages for death of a passenger,what may the courts consider?

1. life expectancy of the deceased2. pecuniary loss to the plaintiff or beneficiary3. loss of support4. loss of service5. loss of society6. mental suffering of beneficiaries7. medical and funeral expenses

REVIEWER IN COMMERCIAL LAW Chapter III. Overland Transportation

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WChapter III. Overland

Transportation

I. SCOPE OF OVERLAND TRANSPORTATIONII. NATURE OF CONTRACTIII. EFFECT OF CIVIL CODEIV. CONTRACT OF CARRIAGE

A. BILL OF LADINGB. REFUSAL TO TRANSPORTC. DOUBTFUL DECLARATION OF

CONTENTSD. NO BILL OF LADING

V. RESPONSIBILITY OF THE CARRIERA. WHEN IT COMMENCESB. ROUTEC. CARE OF GOODSD. DELIVERY

VI. RIGHTS AND OBLIGATIONS OF SHIPPERAND/OR CONSIGNEE

VII. APPLICABILITY OF PROVISIONS

What does the Code of Commercecover?

It governs over overland transportation andmaritime admiralty. It governs onlycommercial contracts.

Commercial contracts involving commoncarriers: refer first to the Civil Code, then tothe Code of Commerce

Private carriers involved in commercialcontracts: refer first to the Code ofCommerce, then to the Civil Code, butexcluding the Civil Code provisions oncommon carriers

I. Scope of Overland Transportation

What is overland transport?Overland transport applies to transport onland and on small bodies of water,waterways, both natural and artificial,including transport on rivers which are notvery large. (If it is transport at sea, then it isadmiralty)

II. Nature of Contract

A contract considered commercial when:1. It involves merchandise or any

commercial goods.2. No matter what its object may be, the

carrier is a merchant or is customarilyengaged in making transportation forthe public. (Article 349, Code ofCommerce)

III.Effect of Civil Code

Art 1766, Civil CodeIn all matters not regulated by this Code, therights and obligations of common carriers shallbe governed by the Code of Commerce and byspecial laws.

IV.Contract of Carriage

A. Bill of Lading

Definition, Subject Matter

What is a bill of lading?It may be defined as a writtenacknowledgment of the receipt of goods andan agreement to transport and to deliverthem at a specified place to a person namedor on his order. It comprehends all methodsof transportation.

Each bill of lading is a contract in itself andthe parties are bound by its terms. A bill oflading is also a receipt, and it is likewise asymbol of the goods covered by it. It is alsoa document of title.

Who are the parties to a bill oflading?

1. shipper2. consignee3. carrier

Essential Terms in a Bill of Lading1. the name of the carrier, the date of

shipment,2. the points of departure and arrival,3. the price, and with regard to baggage,4. the number and weight of the packages,

with any other indications in order toeasily identify them. (Article 352, Codeof Commerce)

Form, Contents

Specific Contents of a Bill of Lading1. The name, surname, and domicile of the

shipper.2. The name, surname, and domicile of the

carrier.3. The name, surname and domicile of the

person to whom or to whose order thegoods are addressed, or whether theyare to be delivered to the bearer of thesaid bill.

4. A description of the goods, stating theirgeneric character, their weight, and theexternal marks or signs of the packagescontaining the same.


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W5. The cost of the transportation.6. The date on which the shipment is

made.7. The place of the delivery to the carrier.8. The place and time at which the delivery

is to be made to the consignee.9. The damages to be paid by the carrier in

case of delay, if any agreement is madeon this point. (Article 351, Code ofCommerce)

Shipments made over railroadsThe bills of lading or declarations ofshipment furnished by the shipper shouldrefer, with regard to the rate, terms, andspecial conditions of the transportation, tothe schedules and regulations. (Article 351,Code of Commerce)

Is the form material?No. As long as it contains anacknowledgment by the carrier of thereceipt of goods for transportation, it is inlegal effect, a bill of lading.

Function

1. It is the legal basis of the contractbetween the shipper and the carrier

2. All disputes as to the execution andfulfillment of the contract shall bedecided on the basis of the bill of ladingonly, except forgery or material errorsin the drafting.

3. The obligations and actions between theparties shall be canceled upon return ofthe bill of lading, unless the claimswhich the contracting parties desired toreserve are reduced to writing (Article353, Code of Commerce)

If in case of loss, the consignee shall givethe carrier a receipt for the goods delivered,this receipt producing the same effects asthe return of the bill of lading.

B. Refusal to Transport

Carrier may refuse to accept packageswhich appear unfit for transportation

If transportation is made by railway and theshipment is insisted on, the company shallbe exempt from all liability if its objectionsare so stated in the bill of lading. (Article356, Code of Commerce)

C. Doubtful Declaration of Contents

In case of a well founded suspicion, thecarrier may examine the package before

witnesses, in the presence of the shipper orof the consignee.

In the absence of the shipper or consignee,the examination shall be made before anotary.

If the declaration should be correct, theexpenses caused by the examination andrepacking the packages shall be defrayedby the carrier, and in a contrary case by theshipper. (Article 357, Code of Commerce)

D. No Bill of Lading

In the absence of a bill of lading the claimsof the parties shall be decided by the legalproofs that each one may submit in supportof his claims, in accordance with thegeneral provisions established forcommercial contracts. (Article 354, Code ofCommerce)

Shipments made by railroadsShould no schedule by determined, thecarrier must apply the rate of themerchandise paying the lowest, with theconditions inherent therein, alwaysincluding such statement or reference tothem in the bill of lading which he deliversto the shipper.

Is a bill of lading essential to acontract of transportation?

No. While under Art. 350 the shipper andthe common carrier may mutually demandthat a bill of lading be made, it is notobligatory. The fact that a bill of lading isnot issued does not preclude the existenceof a contract of transportation. Where nobill of lading is issued, the disputesbetween the parties shall be decidedaccording to the rules laid down in Art.354.

V. Responsibility of the Carrier

A. When it commences

Commences from the moment the carrierreceives the merchandise:1. in person or2. through a person entrusted thereto in

the place indicated for their reception(Article 355, Code of Commerce)

B. Route

General Rule:Carrier cannot change the route if there isan agreement between the shipper and thecarrier


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WEffect:Liable for damagesException:Force Majeure. In case of an increase intransportation charges, he shall bereimbursed for said increase afterpresenting the formal proof thereof. (Article359, Code of Commerce)

C. Care of Goods

General Rule:Merchandise shall be transported at therisk and venture of the shipper

Effect:All damages and impairment suffered bythe goods during the transportation, byreason of accident, force majeure, or byvirtue of the nature or defect of the articles,shall be for the account and risk of theshipper.

The proof of these accidents is incumbenton the carrier. (Article 361, Code ofCommerce)

The carrier shall be liable1. if it is proved that they occurred on

account of his negligence or2. because he did not take the precautions

usually adopted by careful persons,unless the shipper committed fraud inthe bill of lading, making him believethat the goods were of a class or qualitydifferent from what they really were.

The carrier shall proceed with the sale ofthe goods and place them at the disposal, ofthe judicial authority or the officialsdetermined by special provisions, in case of:a. loss of goods through force majeureb. there being no time for the owner to

dispose of the goods (Article 362, Codeof Commerce)

D. Delivery

1. Conditions of Goods

The carrier shall be obliged to deliver thegoods transported in the same condition inwhich, according to the bill of lading, theywere at the time of their receipt, withoutany detriment or impairment.

Effects:No delivery: The carrier shall be obliged topay the value of the goods not delivered atthe point where they should have been andat the time the delivery should have takenplace.

Partial Delivery:The consignee may refuse to receive them,when he proves that he can not make usethereof without the others. (Article 363,Code of Commerce)

Only a Reduction in the Value ofGoods:

The obligation of the carrier shall bereduced to the payment of the amount ofsaid reduction in value, after appraisal byexperts. (Article 364, Code of Commerce)

When consignee may refuse toreceive goods:

1. Partial Delivery (Article 363, Code ofCommerce)

2. When the goods are rendered uselessfor purposes of sale or consumption inthe use for which they are properlydestined. [Effect: consignee maydemand payment of the goods atcurrent market prices]

3. In case part of the goods is in goodcondition, the consignee may refuse toreceive only the damaged goods ifseparation is possible. (Article 365,Code of Commerce)

In case of dispute as to the condition of thegoods, the same shall be examined byexperts appointed by the parties, and thethird one, in case of disagreement,appointed by the judicial authority.

If the persons interested should not agreewith the report, said judicial authority shallorder the deposits of the merchandise in asafe warehouse, and the parties interestedshall make use of their rights in the propermanner. (Article 367, Code of Commerce)

2. To whom Delivery is Made

The carrier must deliver to the consigneedesignated in the bill of lading. Otherwise,he shall be liable for the damages that mayarise therefrom. (Article 368, Code ofCommerce)

3. Judicial Deposit

Judicial Deposit may be made if theconsignee:a. is not found at the domicile indicated in

the bill of lading,b. refuses to pay the transportation

charges and expenses,c. refuses to receive the goods, the deposit

of said goods shall be ordered by themunicipal judge.


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WThe deposit shall have all the effects of adelivery. (Article 369, Code of Commerce)

4. When to be Made

Rule:Period fixed for the delivery of the goods

Effect of Noncompliance:The carrier shall pay the indemnity agreedupon in the bill of lading. If no indemnity isfixed, the carrier shall be liable for thedamages which may have been caused bythe delay. (Article 370, Code of Commerce)

If no period is fixed, the carrier shall beunder the obligation to forward the goods inthe first shipment of the same or similarmerchandise which he may make to thepoint of delivery (Article 358, Code ofCommerce)

5. Two or More Carriers

The succeeding carrier by virtue ofagreements or combined services with othercarriers shall:a. assume the obligations of the carriers

who preceded him,b. reserve his right to proceed against the

latter if he should not be directlyresponsible for the fault which gives riseto the claim of the shipper or of theconsignee

c. assume all the actions and rights ofthose who may have preceded him inthe transportation.

The sender and the consignee shall have animmediate right of action against:a. the carrier who executed the

transportation contract, or b. the othercarriers who received the goodstransported without reserve.

The reservations made by the latter shallnot exempt them from the liabilities theymay have incurred by reason of their ownacts. (Article 373, Code of Commerce)

6. Obligation to Keep Registry

Transportation agents shall be obliged tokeep a special registry in which there shallbe entered, in progressive order of numbersand dates, all the goods the transportationof which is undertaken, stating thecircumstances required by Articles 350 etseq. for the responsive bills of lading.(Article 378, Code of Commerce)

7. Compliance with AdministrativeRegulations

The carrier shall be liable for all theconsequences arising from noncomplianceon his part with the formalities prescribedby the laws and regulations of the publicadministration during the entire course ofthe trip and on the arrival at the point ofdestination.

Exception: when his omission arises fromhis having been induced into error by falsestatements of the shipper in the declarationof the merchandise.

If the carrier has acted in accordance with aformal order received from the shipper orconsignee of the merchandise both shallincur liability. (Article 377, Code ofCommerce)

VI.Rights and Obligations of Shipperand/or Consignee

A. Right to Damages

1. Condition Imposed on Right

When to claim for damagesDAMAGE WHEN TO CLAIMAscertainable frompackage

Claim for damages mustbe made upon receipt

Only upon openingthe package

Claim for damages maybe made within 24 hoursupon receipt

After such periods OR transportationcharges have been paid, no more claims fordamages will be entertained. (Art 366, Codeof Commerce)

2. Amount of Damages for Loss

In case of lost or mislaid goods:The appraisement of the goods which thecarrier must pay shall be fixed inaccordance with what is stated in the bill oflading. (Article 372, Code of Commerce)A stipulation limiting the liability of thecarrier for the loss, destruction, ordeterioration of the goods to a degree lessthan extraordinary diligence shall be valid,provided it be:(1) In writing, signed by the shipper or

owner;(2) Supported by a valuable consideration

other than the service rendered by thecommon carrier; and

(3) Reasonable, just and not contrary topublic policy. (Art. 1744, Civil Code)


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W3. Amount of Damages for Delay

The amount cannot exceed the currentprice of the goods transported on the dayand at the place where the delivery was tohave been made. (Article 371(3), Code ofCommerce)

B. Right to Abandon

Instances when abandonment is proper:

1. Delay on account of the fault of the carrier(Article 371, Code of Commerce)

Procedure:Inform the carrier in writing before thearrival of the same at the point ofdestination. The carrier shall satisfy thetotal value of the goods, as if they hadbeen lost or mislaid.

2. Partial delivery of the goods. (Article 363,Code of Commerce)If part of the goods transported should bedelivered the consignee may refuse toreceive them, when he proves that he cannot make use thereof without the others.

3. Goods Rendered Useless (Article 365,Code of Commerce)If, on account of the damage, the goodsare rendered useless for purposes of saleor consumption in the use for which theyare properly destined the consignee shallnot be bound to receive them, and mayleave them on the hands of the carrier,demanding payment therefor at currentmarket prices.

C. Right to Change Consignment

Conditions for Change of Consignment:1. No change in the place where delivery is to

be made2. At the time of making the change of the

consignee the bill of lading subscribed bythe carrier be returned to him, if one wereissued

3. Bill of lading to be exchanged for anothercontaining the novation of the contract.

4. The expenses arising from the change ofconsignment shall be defrayed by theshipper. (Article 360, Code of Commerce)

D. Obligation to Pay TransportationCharges

Rule:Consignee shall pay expenses andtransportation charges on the goods receivedafter twenty-four hours have elapsed from thetime of the delivery.

Effect of Delay in Payment:Carrier may request the judicial sale of thegoods (Article 374, Code of Commerce)

Lien:The goods transported shall be obligated toanswer for the transportation charges and forthe expenses and fees. (Article 375, Code ofCommerce, Art. 2241, Civil Code)

Duration:This right shall be limited to eight days afterthe delivery has been made, and after saidprescription the carrier shall have no furtherright of action than that corresponding to anordinary creditor. (Article 375, Code ofCommerce)

The preference of the carrier to the paymentof what is due him shall not be affected by thebankruptcy of the latter, provided the actionis brought within the eight days mentioned inArticle 375. (Article 376, Code of Commerce)

E. Obligation to Return Bill ofLading

After the contract has been complied with thebill of lading issued by the carrier shall bereturned to him, and by virtue of theexchange of this certificate for the articletransported, the respective obligations andactions shall be considered as canceled,unless in the same act the claims which thecontracting parties desired to reserve arereduced to writing, exception being made ofthe provisions of Article 366.

If in case of loss or for any other reasonwhatsoever, the consignee can not returnupon receiving the merchandise the bill oflading subscribed by the carrier, he shall givesaid carrier a receipt for the goods delivered,this receipt producing the same effects as thereturn of the bill of lading. (Article 353. (2) (3),Code of Commerce)


The provisions contained in Articles 349 etseq. shall also be understood as relating topersons who, although they do notpersonally effect the transportation ofcommercial goods, contract to do sothrough others, either as contractors for aspecial and fixed transaction or as freightand transportation agents.In either case they shall be subrogated to theplace of the carriers with regard to theobligations and liability of the latter, as wellas with regard to their right. (Article 379,Code of Commerce)

REVIEWER IN COMMERCIAL LAW Chapter IV. Admiralty and Maritime Commerce

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WChapter IV. Admiralty and

Maritime Commerce

I. SOURCE OF LAWII. CONCEPT OF ADMIRALTY;

JURISDICTIONIII. VESSELS

A. MEANINGB. NATURE AND ACQUISITION

IV. PERSONS PARTICIPATING IN MARITIMECOMMERCEA. SHIPOWNERS AND SHIPAGENTSB. CAPTAINS AND MANAGERSC. OTHER OFFICERS AND CREWD. SUPERCARGOES

V. ACCIDENTS AND DAMAGES IN MARITIMECOMMERCEA. AVERAGESB. ARRIVAL UNDER STRESSC. COLLISIONS

VI. SPECIAL CONTRACTSA. CHARTER PARTIESB. LOANS ON BOTTOMRY AND

RESPONDENTIAC. BILL OF LADINGD. PASSENGERS ON SEA VOYAGE

VII. CARRIAGE OF GOODS BY SEA ACT

I. Source of Law

Main source of law: Code of Commerce

If common carrier, apply Civil Code first,then Code of Commerce and special laws.Maritime law includes coastwise, oceanwiseand commercial laws.

II. Concept of Admiralty;Jurisdiction

Admiralty is distinguished from overlandtransportation based on two factors:a. Size of the vesselb. Size of the body of water over which avessel traverses.

BP 129 Section 19. Jurisdiction in civil cases. —Regional Trial Courts shall exercise exclusiveoriginal jurisdiction:

xxx(3) In all actions in admiralty and maritimejurisdiction where he demand or claim exceedsOne hundred thousand pesos (P300,000.00) or ,in Metro Manila, where such demand or claimexceeds Two hundred thousand pesos(400,000.00); (as amended by R.A. 7691)

Under BP 129, it is the amount of the claimthat is relevant in determining jurisdictionof the courts over cases involving admiralty.

III.Vessels

A. Meaning

Vessels are those engaged in navigation,whether coastwide or on the high seas,including floating docks, pontoons, dredges,scows, and any other floating apparatusdestined for the services of the industry ormaritime commerce. Vessels engaged in thebusiness of carrying or transportingpassengers or goods for compensation,offering their services to the public, arecommon carriers, and are governedprimarily by the Civil Code and suppletorilyby the Code of Commerce and special laws.

B. Nature and Acquisition

Lopez v. DurueloThe word vessel used in the section was not intendedto include all ships, craft or floating structures of everykind without limitation, and the provision of thatsection should not be held to include minor craftengaged only in river or bay traffic. Vessels of a minornature, such as river boats and those carryingpassengers from ship to shore, are governed as to theirliability in passengers by the Civil Code.

Article 573, Code of CommerceMerchant vessels constitute property which maybe acquired and transferred by any of the meansrecognized by law. The acquisition of a vesselmust be included in a written instrument, whichshall not produce any effect with regard to thirdpersons if not recorded in the mercantileregistry.

The ownership of a vessel shall also be acquiredby the possession thereof in good faith for threeyears, with a good title duly recorded.

In the absence of any of these requisites,uninterrupted possession for ten years shall benecessary in order to acquire ownership.

A captain can not acquire by prescription theship of which he is in command.

Vessels shall continue to be considered aspersonal property. (Article 585, Code ofCommerce)

IV.Persons Participating in MaritimeCommerce

A. Shipowners and Shipagents

1. Definition

Shipowner has possession, control andmanagement of the vessel and theconsequent right to direct her navigation


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Wand receive freight earned and paid, whilehis possession continues.

Shipagent is the person intrusted with theprovisioning of a vessel, or who representsher in the port in which she happens to be.

2. Liabilities

The owner of a vessel and the agent shall becivilly liable for the acts of the captain andfor the obligations contracted by the latterto repair, equip, and provision the vessel.(Article 586, Code of Commerce)

The agent shall also be civilly liable for theindemnities in favor of third persons whicharise from the conduct of the captain in thecare of the goods which the vessel carried

Exemption: abandonment of the vessel(Article 587, Code of Commerce)The owner or agent shall not be liable forthe obligations contracted by the captain ifthe latter exceeds his powers and privileges.However, if the amounts claimed weremade use of for the benefit of the vessel,the owner or agent shall be liable. (Article588, Code of Commerce)

The captain shall be civilly liable to theagent, and the latter to the third personswho may have made contracts with theformer:1. For all the damages suffered by the

vessel and his cargo by reason of wantof skill or negligence on his part. If amisdemeanor or crime has beencommitted he shall be liable inaccordance with the Penal Code.

2. For all the thefts committed by thecrew, reserving his right of actionagainst the guilty parties.

3. For the losses, fines, and confiscationsimposed an account of violation of thelaws and regulations of customs, police,health, and navigation.

4. For the losses and damages caused bymutinies on board the vessel, or byreason of faults committed by the crewin the service and defense of the same,if he does not prove that he made fulluse of his authority to prevent or avoidthem.

5. For those arising by reason of an undueuse of powers and non-fulfillment of theobligations which are his in accordancewith Articles 610 and 612.

6. For those arising by reason of his goingout of his course or taking a course

which he should not have taken withoutsufficient cause, in the opinion of theofficers of the vessel, at a meeting withthe shippers or supercargoes who maybe on board. No exception whatsoevershall exempt him from this obligation.

7. For those arising by reason of hisvoluntarily entering a port other thanhis destination, with the exception ofthe cases or without the formalitiesreferred to in Article 612.

8. For those arising by reason of thenonobservance of the provisionscontained in the regulations for lightsand evolutions for the purpose ofpreventing collisions. (Article 618, Codeof Commerce)

3. Part Owners

The association of part-owners shall begoverned by the resolutions of a majority ofthe members. If there are only two partowners, in case of disagreement, themember having the largest interest shall bedecisive. If the interests are equal, it shallbe decided by lot. (Article 589, Code ofCommerce)

A vessel can not be detained, attached orlevied upon execution in her entirety for theprivate debts of a part owner, but shall belimited to the interest the debtor may havein the vessel. (Article 589, Code ofCommerce)

The owners of a vessel shall be civilly liablein the proportion of their contribution tothe common fund, for the results of the actsof the captain.

Exemption: Abandonment of his part ofthe vessel (Article 590 Code of Commerce)

All the part owners shall be liable, inproportion to their respective ownership,for:a. the expenses of repairs to the vessel,b. other expenses which are incurred by

virtue of a resolution of the majority.c. the expenses of maintenance,

equipment, and provisioning of thevessel, necessary for navigation. (Article591, Code of Commerce)

4. Relations with the Captain

The agent may discharge the duties ofcaptain of the vessel. If two or more co-owners request the position of captain, thedisagreement shall be decided by a vote ofthe members; and if the vote should result


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Win a tie, the position shall be given to thepart owner having the larger interest in thevessel. If the interest should be the same,the matter shall be decided by lot. (Article596, Code of Commerce)

The agent shall agree with the captain, andshall contract in the name of the owners,regarding repairs, details of equipment,armament, provisions, fuel, and freight ofthe vessel, and, in general, in all thatrelates to the requirements of navigation.(Article 597, Code of Commerce)

The agent shall indemnify the captain forall the expenses he may have incurred fromhis own funds or from those of otherpersons, for the benefit of the vessel.(Article 602, Code of Commerce)

The agent shall have a right to dischargethe captain and members of the crew:a. before a vessel goes out to sea: When

the contract does not state a definiteperiod, he shall have a right todischarge them by paying them thesalaries earned according to theircontracts, and without any indemnity.(Article 603, Code of Commerce)

b. during the voyage: the captain ormember of the crew shall receive theirsalary until the return to the placewhere the contract was made, unlessthere are good reasons for the discharge(Article 604, Code of Commerce)

c. if there is a contract for a definiteperiod or voyage: the captain ormember of the crew shall not bedischarged until the fulfillment of theircontracts, except for reasons ofinsubordination in serious matters,robbery, theft, habitual drunkenness,and damage caused to the vessel or toits cargo by malice or manifest orproven negligence. (Article 605, Code ofCommerce)

d. if captain is part-owner: Captain cannot be discharged without the agentreturning him the amount of hisinterest therein (Article 606, Code ofCommerce)

5. Voyage and Charter Contracts

The agent can not order a new voyage, normake contracts for a new charter, norinsure the vessel, without the authority ofher owner or by virtue of a resolution of themajority of the co-owners, unless theseprivileges were granted him in thecertificate of his appointment.

If he should insure the vessel withoutauthority, he shall be secondarily liable forthe solvency of the underwriter. (Article598, Code of Commerce)

Standard Oil v. Castelo (1921)It is important to remember that the owner ofthe ship ordinarily has vastly more capitalembarked upon a voyage than has anyindividual shipper of cargo. Moreover, the ownerof the ship, in the person of the captain, hascomplete and exclusive control of the crew andof the navigation of the ship, as well as of thedisposition of the cargo at the end of the voyage.It is therefore proper that any person whoseproperty may have been cast overboard by orderof the captain should have a right of actiondirectly against the ship's owner for the breachof any duty which the law may have imposed onthe captain with respect to such cargo. Theevident intention of the Code, taken in all of itsprovisions, is to place the primary liability uponthe person who has actual control over theconduct of the voyage and who has most capitalembarked in the venture, namely, the owner ofthe ship, leaving him to obtain recourse, as it isvery easy to do, from other individuals who havebeen drawn into the venture as shippers.

Yu Con v. Ipil (1916)It is well and good that the shipowner be notheld criminally liable for such crimes or quasicrimes; but he cannot be excused from liabilityfor the damage and harm which, in consequenceof those acts, may be suffered by the thirdparties who contracted with the captain, in hisdouble capacity of agent and subordinate of theshipowner himself. In maritime commerce, theshippers and passengers in making contractswith the captain do so through the confidencethey have in the shipowner who appointed him;they presume that the owner made a mostcareful investigation before appointing him, and,above all, they themselves are unable to makesuch an investigation, and even though theyshould do so, they could not obtain completesecurity, inasmuch as the shipowner can,whenever he sees fit, appoint another captaininstead.

6. Doctrine of Limited Liability andExceptions

The real and hypothecary nature of theliability of the shipowner or agent had itsorigin in the prevailing continues of themaritime trade and sea voyages during themedieval ages, attended by innumerablehazards and perils.

To offset against these adverse conditionsand encourage shipbuilding and maritimecommerce, it was deemed necessary toconfine the liability of the owner or agentarising from the operation of a ship to the


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Wvessel, equipment, and freight, orinsurance, if any, so that if the shipowneror agent abandoned the ship, equipment,and freight, his liability was extinguished.

The agent shall be civilly liable for theindemnities in favor of third persons whicharise from the conduct of the captain in thecare of the goods which the vessel carried;but he may exempt himself therefrom byabandoning the vessel with all herequipments and the freight he may haveearned during the voyage. (Article 587,Code of Commerce)

The owners of a vessel shall be civilly liablein the proportion of their contribution tothe common fund, for the results of the actsof the captain, referred to in Article 587.

Each part owner may exempt himself fromthis liability by the abandonment before anotary of the part of the vessel belonging tohim. (Article 590, Code of Commerce)

In case of collision, the liability of theshipowner shall be understood as limited tothe value of the vessel with all herappurtenances and all the freight earnedduring the voyage. (Article 837, Code ofCommerce)

Liability for wages of the captain and thecrew and for advances made by the shipagent if the vessel is lost by shipwreck orcapture. (Article 643, Code of Commerce)

Yangco v. Laserna et al (1941)If the shipowner or agent may in any way beheld civilly liable at all for injury to or death ofpassengers arising from the negligence of thecaptain in cases of collisions or shipwrecks, hisliability is merely co-extensive with his interestin the vessel such that a total loss thereofresults in its extinction. In arriving at thisconclusion, the fact is not ignored that the ill-fated S. S. Negros, as a vessel engaged ininterisland trade, is a common carrier, and thatthe relationship between the petitioner and thepassengers who died in the mishap rests on acontract of carriage. But assuming thatpetitioner is liable for a breach of contract ofcarriage, the exclusively "real and hypothecarynature" of maritime law operates to limit suchliability to the value of the vessel, or to theinsurance thereon, if any. In the instant case itdoes not appear that the vessel was insured.Art. 587 of the Code of Commerce appears todeal only with the limited liability of shipownersor agents for damages arising from themisconduct of the captain in the care of thegoods which the vessel carries, but this is amere deficiency of language and in no wayindicates the true extent of such liability.

Exceptions to the Doctrine of LimitedLiability:a. Claims under the Workmen’s

Compensation (Abueg vs San Diego)b. Expenses for repairing, provisioning and

equipping the vesselc. Injury or damage due to the fault of the

shipownerd. Vessel is insurede. Vessel is not abandoned or there was no

total loss.

7. Specific Rights and Prerogatives

a. Right of option of purchase andwithdrawal in the sales made tostrangers to be exercised within 9 daysfollowing the record of the sale in theregistry and by delivering the price atonce. (Article 575, Code of Commerce)

b. Preference in the charter of the vesselby offering equal conditions and price(Article 593, Code of Commerce)

c. Right to elect a manager who shallrepresent the owners. The appointmentof director or agent shall be revocableat the will of the members. (Article 594,Code of Commerce)

d. Right to demand profits by means of anexecutory action without furtherrequisites than the acknowledgment ofthe signatures of the instrumentapproving the account. (Article 601,Code of Commerce)

B. Captains and Managers

1. Powers

Inherent powers of a captain or master of avessel:1. To appoint or make contracts with the

crew in the absence of the agent andpropose said crew, should said agent bepresent; but the agent shall not bepermitted to employ any memberagainst the captain's express refusal.

2. To command the crew and direct thevessel to the port of its destination, inaccordance with the instructions hemay have received from the agent.

3. To impose, in accordance with theagreements and the laws andregulations of the merchants marine, onboard the vessel, correctionalpunishment upon those who do notcomply with his orders or who conductthemselves against discipline, holding apreliminary investigation on the crimescommitted on board the vessel on thehigh seas, which shall be turned over to


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Wthe authorities, who are to takecognizance thereof, at the first porttouched.

4. To make contracts for the charter of thevessel in the absence of the agent or ofher consignee, acting in accordancewith the instructions received andprotecting the interests of the ownermost carefully.

5. To adopt all the measures which may benecessary to keep the vessel wellsupplied and equipped, purchasing forthe purpose all that may be necessary,provided there is no time to requestinstructions of the agent.

6. To make, in similar urgent cases and ona voyage, the repairs to the hull andengines of the vessel and to her riggingand equipment which are absolutelynecessary in order for her to be able tocontinue and conclude her voyage; butif she should arrive at a point wherethere is a consignee of the vessel, heshall act in concurrence with the latter.(Article 610, Code of Commerce)

When the captain has no funds and doesnot expect to receive any from the agent, heshall procure the funds:1. By requesting said funds of the

consignees or correspondents of avessel.

2. By applying to the consignees of thecargo or to the persons interestedtherein.

3. By drawing on the agent.4. By borrowing the amount required by

means of a bottomry bond.5. By selling a sufficient amount of the

cargo to cover the amount absolutelynecessary to repair the vessel, and toequip her to pursue the voyage. (Article611, Code of Commerce)

2. Duties

a. In case of knowledge of appearance ofprivateers or men of war: To make headto the nearest neutral port, inform hisagent or shippers, and await anoccasion to sail under convoy, or untilthe danger is over or he has receivedexpress orders from the ship agent orthe shippers. (Article 623, Code ofCommerce)

b. In case of a hurricane or if the cargosuffered damages or averages: To makea protest within 24 hours following hisarrival and ratify it within 24 hours

upon arrival at his destination. (Article624, Code of Commerce)

c. Upon arrival at the port of destination:To get the necessary permission fromthe health and customs officers, andperform the other formalities requiredby the regulations of the administration,delivering the cargo without anydefalcation, to the consignee, and in aproper case, the vessel, rigging andfreightage to the ship agent. (Article625, Code of Commerce)

3. Prohibited Acts and Transactions

a. The captain cannot make anytransaction for his exclusive account.Should he do so, the profit shall belongto the other persons in interest butlosses shall be for his own exclusiveaccount (Article 613, Code ofCommerce)

b. Indemnify for all the losses in case hefails to complete the voyage, save incase of a fortuitous event (Article 614,Code of Commerce)

c. Without the consent of the agent, tohave himself substituted by anotherperson (Article 615, Code of Commerce)

d. Contract loans on respondentia orborrow money on bottomry for his owntransactions, except on the portion ofthe vessel he owns. (Article 617, Code ofCommerce)

e. Borrowing money on bottomry orpledging or selling the merchandisewithout the formalities required by theCode (Article 621, Code of Commerce)

C. Other Officers and Crew

1. Duties

A sailor contracted to serve on a vesselcannot:a. rescind his contractb. fail to comply therewith

except: by reason of a legitimateimpediment

c. pass from the service of one vessel toanother without obtaining writtenconsent. effects: the second contract shall be

void, and the captain may choosebetween forcing him to fulfill theservice to which he first boundhimself or look for a person tosubstitute him at his expense. Thesailor shall also lose the wagesearned on the first contract (Article635, Code of Commerce)


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W2. Rights

a. Duration of the period fixed in thecontract: He cannot be discharged untilthe end of the return voyage (Article636, Code of Commerce) exception:

i. The perpetration of a crimewhich disturbs order on thevessel.

ii. Repeated offenses ofinsubordination, againstdiscipline, or against thefulfillment of the service.

iii. Repeated incapacity ornegligence in the fulfillment ofthe service to be rendered.

iv. Habitual drunkenness.v. Any occurrence which

incapacitates the sailor to carryout the work under his charge,with the exception of theprovisions contained in Article644.

vi. Desertion. (Article 637, Code ofCommerce)

The captain cannot abandon anymember of his crew on land or onsea, except when the member is:i. guilty of some crimeii. imprisonediii. delivered to a competent

authority

b. Before setting out on a voyage: He maybe dismissed for any reason. Thecaptain is obliged to pay him his wagesas if he had rendered services. (Article637, Code of Commerce)

c. If voyage is revoked by the agent orcharterers: The member of the crewshall be indemnified.

d. Revocation or change of the voyage:Increase in the wages if necessary, butno reduction in the wages agreed upon.(Article 638, Code of Commerce)

e. Revocation of the voyage arose from ajust cause independent of the will of theagent or charterer and the vessel shouldnot have left the port: Members of thecrew shall not have any other right thanto receive the wages earned up to daywhen revocation took place. (Article639, Code of Commerce)

f. Vessel and freight are totally lost byreason of capture or wreck: Right of the

crew to demand any wages shall beextinguished. If a portion of the vesselor freight should be saved, the crewshall retain their rights on the salvageon the remainder of the vessel as well asvalue of the freightage or the cargosaved. (Article 643, Code of Commerce)

g. Sailor becomes sick: He shall not losehis right to wages during the voyage,unless the sickness is the result of hisown fault. If the sickness should becaused by an injury received in theservice or defense of the vessel thesailor shall be attended and cured fromthe common funds. (Article 644, Code ofCommerce)

h. Sailor dies: If a sailor should die duringthe voyage his heir shall be given thewages earned and not received. If heshould have died a natural death andshould have been engaged on wagesthere shall be paid what may have beenearned up to the date of his death. If thedeath should have occurred in thedefense of the vessel, the sailor shall beconsidered as living, and his heirs shallbe paid, at the end of the voyage, thefull amount of wages or the full part ofthe profits due him as to the others ofhis grade. (Article 645, Code ofCommerce)

Just Causes for Revocation of theVoyage

1. A declaration of war or interdiction ofcommerce with the power to whoseterritory the vessel was bound.

2. The blockade of the port of destinationor the breaking out of an epidemic afterthe agreement.

3. The prohibition to receive in said portthe goods which make up the cargo ofthe vessel.

4. The detention or embargo of the sameby order of the Government, or for anyother reason independent of the will ofthe agent.

5. The inability of the vessel to navigate.(Article 640, Code of Commerce)

The officers and the crew of the vessel shallbe exempted from all obligationscontracted, if they deem it proper, in thefollowing cases:1. If, before the beginning of the voyage,

the captain attempts to change it, orthere occurs a naval war with the powerto which the vessel was destined.


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W2. If a disease should break out and be

officially declared epidemic in the portof destination.

3. If the vessel should change owner orcaptain. (Article 647, Code ofCommerce)

D. Supercargoes

What is a supercargo?He or she is an agent of the owner of goodsshipped as cargo on a vessel, who hascharge of the cargo on board, sells the sameto the best advantage in the foreignmarkets, buys cargo to be brought back onthe return voyage of the ship, and comeshome with it.

Duties of a Supercargo:a. He shall discharge on board the vessel

the administrative duties which theagent or shippers may have assignedthem;

b. He shall keep an account and record oftheir transactions in a book (Article649, Code of Commerce)

c. He cannot, without specialauthorization or agreement, make anytransaction for their own accountduring the voyage, with the exception ofthe ventures which, in accordance withthe custom of the port of destination,they are permitted to do.

d. He is not permitted to invest in thereturn trip more than the profits fromthe ventures, unless there is a specialauthorization thereto from theprincipals. (Article 651, Code ofCommerce)

V. Accidents and Damages inMaritime Commerce

A. Averages

The following shall be considered averages:1. All extraordinary or accidental expenses

which may be incurred during thenavigation for the preservation of thevessel or cargo, or both.

2. All damages or deterioration the vesselmay suffer from the time she puts tosea from the port of departure until shecasts anchor in the port of destination,and those suffered by the merchandisefrom the time it is loaded in the port ofshipment until it is unloaded in the portof consignment. (Article 806, Code ofCommerce)

1. Simple or Particular

Simple or particular averages shall be allthe expenses and damages caused to thevessel or to her cargo which have notredounded to the benefit and commonprofit of all the persons interested in thevessel and her cargo, and especially thefollowing:1. The damages suffered by the cargo from

the time of its embarkation until it isunloaded, either on account of thenature of the goods or by reason of anaccident at sea or force majeure, andthe expenses incurred to avoid andrepair the same.

2. The damages suffered by the vessel inher hull, rigging, arms, and equipment,for the same causes and reasons, fromthe time she puts to sea from the port ofdeparture until she anchored in theport of destination.

3. The damages suffered by themerchandise loaded on deck, except incoastwise navigation, if the marineordinances allow it.

4. The wages and victuals of the crewwhen the vessel should be detained orembargoed by a legitimate order or forcemajeure, if the charter should havebeen for a fixed sum for the voyage.

5. The necessary expenses on arrival at aport, in order to make repairs or secureprovisions.

6. The lowest value of the goods sold bythe captain in arrivals under stress forthe payment of provisions and in orderto save the crew, or to cover any otherrequirement of the vessel against whichthe proper amount shall be charged.

7. The victuals and wages of the crewduring the time the vessel is inquarantine.

8. The damage suffered by the vessel orcargo by reason of an impact or collisionwith another, if it were accidental andunavoidable. If the accident shouldoccur through the fault or negligence ofthe captain, the latter shall be liable forall the damage caused.

9. Any damage suffered by the cargothrough the faults, negligence, orbarratry of the captain or of the crew,without prejudice to the right of theowner to recover the correspondingindemnity from the captain, the vessel,and the freight. (Article 809, Code ofCommerce)

The owner of the goods which gave rise tothe expense or suffered the damage shall


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Wbear the simple or particular averages.(Article 810, Code of Commerce)

2. Gross or General

General or gross averages shall be all thedamages and expenses which aredeliberately caused in order to save thevessel, her cargo, or both at the same time,from a real and known risk, andparticularly the following:1. The goods or cash invested in the

redemption of the vessel or cargocaptured by enemies, privateers, orpirates, and the provisions, wages, andexpenses of the vessel detained duringthe time the arrangement or redemptionis taking place.

2. The goods jettisoned to lighten thevessel, whether they belong to thevessel, to the cargo, or to the crew, andthe damage suffered through said act bythe goods kept.

3. The cables and masts which are cut orrendered useless, the anchors and thechains which are abandoned in order tosave the cargo, the vessel, or both.

4. The expenses of removing ortransferring a portion of the cargo inorder to lighten the vessel and place herin condition to enter a port orroadstead, and the damage resultingtherefrom to the goods removed ortransferred.

5. The damage suffered by the goods of thecargo through the opening made in thevessel in order to drain her and preventher sinking.

6. The expenses caused through floating avessel intentionally stranded for thepurpose of saving her.

7. The damage caused to the vessel whichit is necessary to break open, scuttle, orsmash in order to save the cargo.

8. The expenses of curing and maintainingthe members of the crew who may havebeen wounded or crippled in defendingor saving the vessel.

9. The wages of any member of the crewdetained as hostage by enemies,privateers, or pirates, and the necessaryexpenses which he may incur in hisimprisonment, until he is returned tothe vessel or to his domicile, should heprefer it.

10. The wages and victuals of the crew of avessel chartered by the month duringthe time it should be embargoed ordetained by force majeure or by order ofthe Government, or in order to repair

the damage caused for the commongood.

11. The loss suffered in the value of thegoods sold at arrivals under stress inorder to repair the vessel because ofgross average.

12. The expenses of the liquidation of theaverage. (Article 811, Code ofCommerce)

13. If in lightening a vessel on account of astorm, in order to facilitate her entryinto a port or roadstead, part of hercargo should be transferred to lightersor barges and be lost, the owner of saidpart shall be entitled to indemnity, as ifthe loss has originated from a grossaverage (Article 817, Code of Commerce)

14. If, as a necessary measure to extinguisha fire in a port; roadstead; creek, or bay,it should be decided to sink any vessel,this loss shall be considered grossaverage, to which the vessels savedshall contribute.

a. Essential Requisites

In order to recover the costs andexpenses, the following are necessary:i. Previous resolution of the captain

adopted after deliberation with thesailing mate and other officers

ii. Hearing of the persons interested. Incase an interested person shouldnot be heard, he shall not contributeto the gross average. (Article 813,Code of Commerce)

iii. Resolution to be entered in the logbook, stating the motives andreasons therefore as well as thevotes and reason for disagreement(Article 814, Code of Commerce)

iv. Minutes to be signed by all thepersons present or in urgent cases,the captain.

v. Captain shall deliver one copy of theminutes to the maritime judicialauthority of the first port he maymake within 24 hours and ratify itunder oath (Article 814, Code ofCommerce)

Magsaysay Inc vs Agan (1955)Requisites for General Average:1. There must be a common danger. This

means, that both the ship and the cargo,after it has been loaded, are subject to thesame danger, whether during the voyage, orin the port of loading or unloading, that thedanger arises from the accidents of the sea,dispositions of the authority, or faults ofmen, provided that the circumstances


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Wproducing the peril should be ascertainedand imminent or may rationally be said tobe certain and imminent. This lastrequirement excludes measures undertakenagainst a distant peril.

2. That for the common safety, part of thevessel or of the cargo or both is sacrificeddeliberately.

3. That from the expenses or damages causedfollows the successful saving of the vesseland cargo.

4. That the expenses or damages should havebeen incurred or inflicted after taking properlegal steps and authority.

b. Effects

All the persons having an interest in thevessel and cargo at the time of theoccurrence of the average shallcontribute. (Article 812, Code ofCommerce)

c. Jettison

Order of Jettison:1. Those which are on deck, beginning

with those which embarrass thehandling of the vessel or damageher, preferring, if possible, theheaviest ones and those of leastutility and value.

2. Those in the hold, always beginningwith those of the greatest weightand smallest value, to the amountand number absolutelyindispensable. (Article 815, Code ofCommerce)

d. Jason Clauses (York - AntwerpRules)

The York-Antwerp Rules is aninternational system of rules (they arenot law or international treaties, but arejust widely in use) for the liquidationand payment of average to avoid theproblem of characterization.

The Jason Clause is a standardprovision in maritime contracts. Itprovides for uniform rules onadjustment, proof and liquidation ofavergaes in maritime accidents toaddress various systems of determiningthe same.

(Rule D)Rights to contribution in generalaverage shall not be affected, thoughthe event which gave rise to the sacrificeor expenditure may have been due to

the fault of one of the parties to theadventure; but this shall not prejudiceany remedies which may be openagainst that party for such fault.

B. Arrival Under Stress

1. When Made

If the captain during the navigation shouldbelieve that the vessel can not continue thevoyage to the port of destination on accountof:a. the lack of provisions,b. well founded fear of seizure, privateers

or pirates, orc. by reason of any accident of the sea

disabling her to navigate.

He shall assemble the officers and shall callthe persons interested in the cargo whomay be present, and who may attend themeeting without the right to vote; and if,after examining the circumstances of thecase, the reasons should be considered wellfounded, it shall be decided to make thenearest and most convenient port draftingand entering in the log book the properminutes, which shall be signed by all.(Article 819, Code of Commerce)

The arrival under stress shall not beconsidered legal in the following cases:1. If the lack of provisions should arise

from the failure to take the necessaryprovisions for the voyage, according tousage and custom, or if they shouldhave been rendered useless or lostthrough bad stowage or negligence intheir care.

2. If the alleged risk of enemies, privateers,or pirates is not based on well known,manifest, positive or justifiable facts.

3. If the injury to the vessel should havebeen caused by reason of her not beingrepaired, rigged, equipped, andarranged in a convenient manner forthe voyage, or by reason of someerroneous order of the captain.

4. Whenever malice, negligence, want offoresight, or lack of skill on the part ofthe captain is the reason for the actcausing the damage. (Article 820, Codeof Commerce)

2. Expenses

The expenses caused by the arrival understress shall always be for the account of the


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Wshipowner or agent, but the latter shall notbe liable for the damage which may becaused the shippers by reason of the arrivalunder stress, provided that it is legitimate.

Otherwise, the shipowner or agent and thecaptain shall be jointly liable.(Article 821, Code of Commerce)

C. Collisions(Asked in 95 and 98 Bar Exams)

Collision – the impact of two vessels bothof which are moving.

Allision – the striking of a moving vesselagainst one that is stationary.

1. Classes and Effects

a. Fortuitous Collision: Each vessel andher cargo shall be liable for their owndamage (Article 830, Code of Commerce)

b. Vessel forced to collide with anotherone by a third vessel: Owner of thirdvessel shall indemnify for the losses anddamages caused (Article 831, Code ofCommerce)

c. By reason of fortuitous event, vesselproperly anchored and mooredcollides with another: The injuryoccasioned shall be looked upon asparticular average to the vessel runinto. (Article 832, Code of Commerce)

d. Culpable: The owner of the vessel atfault shall indemnify the losses anddamages suffered, after an expertappraisal. (Article 826, Code ofCommerce)

e. Both vessels may be blamed for thecollision: Each one shall be liable forhis own damages, and both shall bejointly responsible for the losses anddamages suffered by their cargoes.(Article 827, Code of Commerce)

f. Inscrutable Fault (it can not be decidedwhich of the two vessels was the causeof the collision): Each one shall be liablefor his own damages, and both shall bejointly responsible for the losses anddamages suffered by their cargoes.(Article 828, Code of Commerce) Askedin 97 Bar Exams

D. Shipwreck

The losses and deteriorations suffered by avessel and her cargo by reason of shipwreckor stranding shall be individually for theaccount of the owners, the part of the wreckwhich may be saved belonging to them inthe same proportion. (Article 840, Code ofCommerce)

Wreck or Stranding caused by malice,negligence or lack of skill of the captain orthe vessel is insufficiently repaired andprepared: The owner or the freighters maydemand indemnity of the captain for thedamages caused to the vessel or cargo bythe accident. (Article 841, Code ofCommerce)

Goods saved from the wreck shall be liablefor the payment of the expenses of thesalvage. Said amount must be paid by theowners of the goods before they aredelivered to them. (Article 842, Code ofCommerce)

VI.Special Contracts

A. Charter Parties

1. Definition

A charter party is a contract by virtue ofwhich the owner or agent of a vessel bindshimself to transport merchandise orpersons for a fixed price.

It is a contract by which the owner or agentof the vessel leases for a certain price thewhole or portion of a vessel for thetransportation of the goods or persons fromone port to another.

Towage is not a charter party. It is acontract for the hire of services by which avessel is engaged to tow another vessel fromone port to another for consideration.

Kinds:

As to extent of vessel hired:a. Totalb. Partial - charterer as a rule does

not acquire the right to fix thedate when the vessel shoulddepart, unless such right isexpressly granted in the contract


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a. Until a fixed day or for adetermined number of days ormonths

b. For a voyage

As to freightage:a. For a fixed amount for the whole

cargob. For a fixed rate per tonc. For so much per month

As to control over the vessel:a. Demise or Bareboat charter:

Under the demise or bareboatcharter of the vessel, the chartererwill generally be regarded as theowner for the voyage or servicestipulated. The charterer mans thevessel with his own people andbecomes the owner pro hac vice,subject to liability to others fordamages caused by negligence. Tocreate a demise, the owner of avessel must completely andexclusively relinquish possession,command and navigation thereof tothe charterer, anything short ofsuch a complete transfer is acontract of affreightment (time orvoyage charter party) or not acharter party at all. (Puromines vsCA)

b. Contract of Affreightment

A contract of affreightment is one inwhich the owner of the vessel leasespart or all of its space to haul goodsfor others. It is a contract for specialservice to be rendered by the ownerof the vessel and under suchcontract the general owner retainsthe possession, command andnavigation of the ship, the chartereror freighter merely having use of thespace in the vessel in return for hispayment of the charter hire.(Puromines vs CA)

Puromines, Inc. vs. Court of Appeals

Although a charter party may transform acommon carrier into a private one, the samehowever is not true in a contract ofaffreightment on account of the distinctionsbetween a contract of affreigment and a demiseor bareboat charter.

Owner Pro Hac Vice – demise charter towhom the owner of the vessel hascompletely and exclusively relinquishedpossession, command and navigation of thevessel. In this kind of charter, the charterermans and equips the vessel and assumesall responsibility for navigation,management and operation. He thus actsas the owner of the vessel in all importantaspects during the duration of the charter.

2. Forms and Effects

Drawn in duplicate Signed by the contracting parties

The charter party shall include thefollowing statements:

1. The kind, name, and tonnage of thevessel.

2. Her flag and port of registry.3. The name, surname, and domicile of the

captain.4. The name, surname, and domicile of the

agent, if the latter should make thecharter party.

5. The name, surname, and domicile of thecharterer, and if he states that he isacting by commission, that of theperson for whose account he makes thecontract.

6. The port of loading and unloading.7. The capacity, number of tons or weight,

or measure which they respectively bindthemselves to load and transport, orwhether it is the total cargo.

8. The freightage to be paid, statingwhether it is to be a fixed amount forthe voyage or so much per month, or forthe space to be occupied, or for theweight or measure of the goods of whichthe cargo consists, or in any othermanner whatsoever agreed upon.

9. The amount of primage to be paid to thecaptain.

10. The days agreed upon for loading andunloading.

11. The lay days and extra lay days to beallowed and the rate of demurrage.(Article 652, Code of Commerce)

If the freight should be received without thecharter party having been signed, thecontract shall be understood as executed inaccordance with what appears in the bill oflading, which shall be the only instrumentwith regard to the freight to determine therights and obligations of the owner, of thecaptain, and of the charterer. (Article 653,Code of Commerce)


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no charter party and bill of lading?If we take Art. 653 literally, no. However, ifwe take into account the fact that deliveryof the cargo does not constitute the makingof a contract but rather the partialperformance thereof, the mere fact ofdelivery and receipt of such cargo, the goodfaith and mutual consent with which theyhave been made, should be a bettersubstitute for the charter party than the billof lading which is nothing more than proofof such delivery.

What is primage?It was formerly a small allowance orcompensation payable to the master andmarines of a ship, to the former for the useof his cables and ropes to discharge thegoods of the merchant; to the latter for thelading and unlading in any port of haven.Today, it is no longer a gratuity but isincluded in the freight rate.

What is demurrage?It is the sum fixed by the contract ofcarriage, or which is allowed, asremuneration to the owner of a ship for thedetention of his vessel beyond the numberof days allowed by the charter party forloading and unloading of for sailing. It is anextended freight or reward to the vessel incompensation for the earnings she isimproperly caused to lose.

What are lay days?Lay days are days allowed to charter partiesfor loading and unloading the cargo.

B. Loans on Bottomry andRespondentia

1. Definition

Loan on BottomryIt is a contract in the nature of a mortgage,by which the owner of the ship borrowsmoney for the use, equipment and repair ofthe vessel for a definite term, and pledgesthe ship as a security for its repayment,with maritime or extraordinary interest onaccount of the maritime risks to be borneby the lender, it being stipulated that if theship be lost in the course of the specificvoyage or during the limited time, by any ofthe perils enumerated in the contract, thelender shall also lose his money.

Loan on Respondentia

It is a contract made on the goods laden onboard the ship, and which are to be sold orexchanged in the course of the voyage, theborrower’s personal responsibility beingdeemed the principal security for theperformance of the contract. The lendermust be paid his principal and interest,though the ship perishes, provided that thegoods are saved.

Ordinary Loan Loan on Bottomry orRespondentia

Collateral is notrequired

Collateral required

Collateral may be anyproperty, real orpersonal

Collateral must be avessel or cargo subjectto maritime risks

Absolutely repayable Depends upon the safearrival at the port ofthe collateral of theloan

Subject to usury law Not subject to usurylaw

Need not be in writingexcept the interest

Must be in writing

Need not be registeredto be binding on thirdpersons

Must be registered inthe registry of vesselsof the port of entry ofregistry of the vessel

Loss of collateral doesnot extinguish thesame

Loss of collateralextinguishes the same

2. Character of Loan

A loan on bottomry or respondentia shall beconsidered that which the repayment of thesum loaned and the premium stipulated,under any condition whatsoever, dependson the safe arrival in port of the goods onwhich it is made, or of their value in case ofaccident. (Article 719, Code of Commerce)

3. Form

Loans on bottomry or respondentiamay be executed:

1. By means of a public instrument.2. By means of a bond signed by the

contracting parties and the broker whotook part therein.

3. By means of a private instrument.(Article 720, Code of Commerce)

In a bottomry or respondentia bondthere must be stated:

1. The kind, name, and registry of thevessel.

2. The name, surname, and domicile of thecaptain.


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W3. The names, surnames, and domicile of

the person giving and of the personreceiving the loan.

4. The amount of the loan and thepremium stipulated.

5. The time for repayment.6. The goods pledged to secure repayment.7. The voyage for which the risk is run.

(Article 721, Code of Commerce)

4. On What Constituted

a. On the hull of the vessel.b. On the rigging.c. On the equipment, provisions, and fuel.d. On the engine, if the vessel is a

steamer.e. On the cargo. (Article 724, Code of

Commerce)

No loans can be made on the salaries of thecrew, nor on the profits which it is expectedto earn. (Article 725, Code of Commerce)

5. By Whom

The captain can not contract loans onrespondentia, and should he do so thecontracts shall be void.

Neither can he borrow money on bottomryfor his own transactions, except on theportion of the vessel he owns, provided nomoney has been previously borrowed on thewhole vessel, and provided there does notexist any other kind of lien or obligationthereon. When he is permitted to do so, hemust necessarily state what interest he hasin the vessel. (Article 617, Code ofCommerce)

C. Bill of Lading

1. Form

Provisions in the bill of lading;1. The name, registry, and tonnage of the

vessel.2. The name of the captain and his

domicile.3. The port of loading and that of

unloading.4. The name of the shipper.5. The name of the consignee, if the bill of

lading is issued to order.6. The quantity, quality, number of

packages, and marks of themerchandise.

7. The freight and the primage stipulated.

The bill of lading may be issued to bearer,to order, or in the name of a specificperson, and must be signed within twenty-four hours after the cargo has been receivedon board. (Article 706, Code of Commerce)

Four true copies of the original bill of ladingshall be made, all of which shall be signedby the captain and by the freighter. Ofthese copies the freighter shall keep oneand send another to the consignee; thecaptain shall take two, one for himself andanother for the agent. (Article 707, Code ofCommerce)

2. Probative Value

A bill of lading drawn up in accordancewith the provisions of this title shall beproof as between all those interested in thecargo and between the latter and theunderwriters, proof to the contrary beingreserved by the latter. (Article 709, Code ofCommerce)

D. Passengers on Sea Voyage

1. Nature of Contract:Non-transferrable without the consent ofthe captain or of the consignee. (Article605, Code of Commerce)

2. Obligations of Passengers

Should the passage price not have beenagreed upon, the judge or court shallsummarily fix it, after a statement ofexperts. (Article 693, Code of Commerce)

The captain shall be given preference overthe other creditor with respect to the goodsbelonging to the passenger with for thecollection of freight. (Article 704, Code ofCommerce)

Should the passenger not arrive on boardat the time fixed, or should leave the vesselwithout permission from the captain, whenthe latter is ready to leave the port, thecaptain may continue the voyage anddemand the full passage price. (Article 694,Code of Commerce)

The passenger shall conform to the ordersgiven by the captain, without anydistinction whatsoever (Article 700, Code ofCommerce)


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W3. Rights of Passengers

a. Voyage is suspended before beginningthe voyage through the fault of thecaptain or passengers: The passengersshall be entitled to have their passagerefunded and to recover the losses anddamages

b. Suspension due to force majeure: Thepassengers shall only be entitled to thereturn of the passage money (Article697, Code of Commerce)

c. Voyage already begun is interrupted:Passengers obliged to pay only thepassage in proportion to the distancecovered, and shall not be entitled torecover for losses and damages if due toforce majeure, but have a right toindemnity if the interruption shouldhave been caused by the captainexclusively.

If passenger agrees to await therepair of the vessel, he can not berequired to pay any increased price ofpassage, but his living expenses duringthe delay shall be for his own account.

d. Delay in the departure of the vessel:Passengers shall have a right to remainon board and to be furnished with foodfor the account of the vessel, unless thedelay is due to an accidental cause or toforce majeure.

If the delay should exceed ten days,the passengers who request it shall beentitled to the return of the passage;and if it were due exclusively to thecaptain or agent they may demandindemnity for losses and damages.

VII. Carriage of Goods by Sea Act(Commonwealth Act No. 65)

1. Applicability

COGSA is a special law that governs allcontracts of carriage of goods by seabetween or to and from the Philippine ports.

Application of laws:

a. If the common carrier is coming to thePhilippines:First: Civil CodeSecond: COGSA (in foreign trade)Third: Code of Commerce

b. If the private carrier is coming to thePhilippines:First: COGSASecond: Code of CommerceThird: Civil Code (excluding rules oncommon carriers)

c. If the private or common carrier is fromthe Philippines to a foreign country:Apply the law of the foreign country (perArt. 1753, CC) UNLESS the partiesmake COGSA applicable

Hierarchy of laws:1) Art. 1766, CC (COGSA as only in

matters not regulated by this Code) thisnotwithstanding the fact that COGSA isa special law.

Goods in a foreign country shippedto the Philippines are governed by theCivil Code

2) Art. 1753, CC

2. Limitation on Liability

Under Sec. 4(5), the limit is set at amaximum of $500 per package orcustomary freight unit.

Belgian Overseas vs. Philippine FirstInsurance (2002)

The Civil Code does not limit the liability of thecommon carrier to a fixed amount per package.In all matters not regulated by the Civil Code,the right and the obligations of common carriersshall be governed by the Code of Commerce andspecial laws. Thus, the COGSA, which issuppletory to the provisions of the Civil Code,supplements the latter by establishing astatutory provision limiting the carrier's liabilityin the absence of a shipper's declaration of ahigher value in the bill of lading. In the casebefore us, there was no stipulation in the Bill ofLading limiting the carrier's liability. Neither didthe shipper declare a higher valuation of thegoods to be shipped. Petitioners' liability shouldbe computed based on US$500 per package andnot on the per metric ton price declared in theLetter of Credit.

3. Notice of Claim

Notice and the general nature of the loss ordamage must be given in writing to thecarrier or his agent at the port of dischargebefore or at the time of the removal of thegoods. (Sec. 3 (6))


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Insurance (2002)First, the provision of COGSA provides that thenotice of claim need not be given if the state ofthe goods, at the time of their receipt, has beenthe subject of a joint inspection or survey. Priorto unloading the cargo, an Inspection Report asto the condition of the goods was prepared andsigned by representatives of both parties.Second, as stated in the same provision, afailure to file a notice of claim within three dayswill not bar recovery if it is nonetheless filedwithin one year. This one-year prescriptiveperiod also applies to the shipper, the consignee,the insurer of the goods or any legal holder ofthe bill of lading. "Inasmuch as the neither theCivil Code nor the Code of Commerce states aspecific prescriptive period on the matter, theCOGSA—which provides for a one-year period oflimitation on claims for loss of, or damage to,cargoes sustained during transit--may beapplied suppletorily to the case at bar."

4. Prescription of Claim(Asked in 92, 95, 00 and 04 BarExams)

In any event the carrier and the ship shallbe discharged from all liability in respect ofloss or damage unless suit is broughtwithin one year after delivery of the goodsor the date when the goods should havebeen delivered.

The absence of a notice shall not affect orprejudice the right of the shipper to bringsuit within one year after the delivery of thegoods or the date when the goods shouldhave been delivered. (Sec. 3 (6))

Filipino Merchants Insurance, Inc. v.Alejandro (1986)

Clearly, the coverage of the Act includes theinsurer of the goods. Otherwise, what the Actintends to prohibit after the lapse of the one-year prescriptive period can be done indirectlyby the shipper or owner of the goods by simplyfiling a claim against the insurer even after thelapse of one year.

Maritime Agencies & Services, Inc. v. CAThe period for filing the claim is one year, inaccordance with the Carriage of Goods by SeaAct.

This was adopted and embodied by ourlegislature in Com. Act No. 65 which, as aspecial law, prevails over the general provisionsof the Civil Code on prescription of actions.Section 3(6) of that Act provides as follows: Inany event, the carrier and the ship shall bedischarged from all liability in respect of loss ordamage unless suit is brought within one yearafter delivery of the goods or the date when the

goods should have been delivered; Provided, thatif a notice of loss for damage; either apparent orconcealed, is not given as provided for in thissection, that fact shall not effect or prejudice theright of the shipper to bring suit within one yearafter the delivery of the goods or the date whenthe goods should have been delivered.

REVIEWER IN COMMERCIAL LAW Chapter V. Warsaw Convention

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WChapter V. Warsaw Convention

I. DEFINITION AND APPLICABILITYIII. LIABILITIESIV. LIMITATION ON LIABILITYV. WHEN LIMITATIONS UNAVAILABLEVI. CONDITIONS ON LIABILITYVII.VENUE OF COURT ACTIONS

I. Definition and Applicability

International air transportation:Transportation by air between points ofcontact of two high contracting parties, orthose countries that have acceded to theConvention.

Applicability of the ConventionThe Convention is applicable to:1. International transport by air2. Transport of persons, baggage, or goods

Under the Warsaw Convention, thereare two categories of "internationaltransportation by air":

1. That where the place of departure andthe place of destination are situatedwithin the territories of two HighContracting Parties regardless ofwhether or not there be a break in thetransportation or a transshipment; and

2. That where the place of departure andthe place of destination are within theterritory of a single High ContractingParty if there is an agreed stoppingplace within a territory subject to thesovereignty, mandate or authority ofanother power, even though the poweris not a party to the Convention.

II. Liabilities

The liabilities are:1. Damage sustained in the event of the

death or wounding of a passengertaking place on board the aircraft or inthe course of any of the operations ofembarking or disembarking

2. Loss or damage to any checked baggageor goods sustained during the transportby air

3. Delay in the transport by air ofpassengers, baggage, or goods

NOTE: Enumeration of causes of action asabove stated is not an exclusive list.(Northwest Airlines vs. Cuenca)

III.Limitation on Liability

1. PassengersGeneral Rule: $100,000 per passengerException: Agreement to a higher limit

2. Checked-in baggageGeneral Rule: $20 per kilogramException: In case of special declaration ofvalue and payment of a supplementary sumby consignor, carrier is liable to not morethan the declared sum unless it proves thesum is greater than actual value.

3. Hand-carried baggage$1000/passenger

4. Goods to be shippedGeneral Rule: $20 per kilogramException: In case of special declaration ofvalue and payment of a supplementary sumby consignor, carrier is liable to not morethan the declared sum unless it proves thesum is greater than actual value.

An agreement relieving the carrier fromliability or fixing a lower limit is null andvoid. (Art. 23)

Carrier is not entitled to the foregoing limitif the damage is caused by willfulmisconduct or default on its part. (Art. 25)

Alitalia v. CAThe WC does not operate as an exclusiveenumeration of the instances of an absolutelimit of the extent of liability. It does notpreclude the application of the Civil Code andother pertinent local laws. It does not regulateor exclude liability for other breaches of contractby the carrier, or misconduct of its employees, orfor some particular or exceptional type ofdamage.

IV.When Limitations Unavailable

When can a common carrier not availitself of this limitation?

1. Willful misconduct2. Default amounting to willful misconduct3. Accepting passengers without ticket4. Accepting goods without airway bill or

baggage without baggage check

REVIEWER IN COMMERCIAL LAW Chapter V. Warsaw Convention

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WV. Conditions on Liability

Action for Damages

1. Notice of ClaimA written complaint must me made within:a. 3 days from receipt of baggageb. 7 days from receipt of goodsc. In case of delay, 14 days from receipt of

baggage/goods

The complaint is a condition precedent.Without the complaint, the action is barredexcept in case of fraud on the part of thecarrier. (Art. 26)

2. Prescriptive Period

Action must be filed within 2 years from:a. date of arrival at the destinationb. date of expected arrivalc. date on which the transportation

stopped. (Art. 29)

VI.Venue of Court Actions

In Santos vs Northwest Orient Airlines, itwas held that the provisions of Article 28 (1)of the Warsaw Convention concernjurisdiction, not merely venue.

Thus, actions for damages must bebrought, at the option of the plaintiff,either:1. Before the court of the domicile of the

carrier:2. Court of principal place of business of

carrier;3. Court where he has a place of business

through which the contract has beenmade;

4. Before the court at the place ofdestination (Art. 28 (1))

- end of Transportation and Public Utilities Law -


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CORPORATION LAW

CHAPTER I. INTRODUCTIONA. DefinitionB. Attributes of a Corporation

1. Artificial being2. Created by operation of law3. Has the right of succession4. Has the powers, attributes

and properties expresslyauthorized by law or incidentto its existence

C. JurisdictionD. Other Types of Business

Organizations

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CHAPTER II. CLASSIFICATION OFCORPORATIONSA. Stock corporationB. Non-Stock corporationC. Other classifications

1. Public corporation2. Private3. Close4. Educational5. Religious sole and aggregate6. Eleemosynary7. Domestic8. Foreign9. Corporation created by special

laws or charters10. Subsidiary11. Parent

77777777

CHAPTER III. FORMATION OFCORPORATIONSA. Components of a Corporation

1. Incorporators2. Corporators3. Foreign incorporators /

corporatorsB. Steps in the Formation of a

Corporation1. Promotion


b. Personal liability ofpromoters

c. Compensation ofpromoters

2. Drafting the Articles ofIncorporationa. Definition of Termsb. Contents of Articles of

Incorporation3. Filing with SEC and payment

of fees4. Issuance of Certificate of

Incorporation5. Internal Organization and

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82

Commencement of BusinessC. De Facto Corporation


2. De Jure vs. De FactoCorporation

D. Corporation by Estoppel

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CHAPTER IV. THE CORPORATEENTITYA. The Doctrine of Separate Juridical

EntityB. Piercing the Corporate Veil

Doctrine1. An Equitable Remedy2. Extent of Legal Effects3. Application of Piercing

Doctrine4. Parent-Subsidiary

RelationshipC. Nationality

1. Place of Incorporation Test2. The Grandfather Rule3. Control Test4. War-time Test5. Investment Test

86

86

86

87

CHAPTER V. CORPORATE POWERSA. Express Powers

1. General Powers2. Special/Specific Powers

B. Inherent/Incidental PowersC. Implied PowersD. Ultra Vires Acts

1. Definition2. Types3. Effects4. Remedies

8989

898989

CHAPTER VI. INTERNALORGANIZATION OF THECORPORATIONA. By-laws

1. Definition2. Adoption3. Requirements4. Effectivity5. Amendment or repeal

B. Directors/Trustees1. Qualifications2. Election of Directors/Trustees3. Methods of Voting4. Exercise of Corporate Powers5. Meetings of the Board6. Removal of Directors /

Trustees7. Executive Committee


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1. Who are Corporate Officers2. Disqualifications3. Authority of Corporate Officers

D. Stockholders or Members1 Rights of Stockholders2 Obligations of Stockholders3 Stockholders’/Members’

Meeting4 Corporate Acts Requiring

Approval of ALLstockholders/members

5 Other instances requiringStockholders’/Members’Action

6 Limitations on Right to Vote7 Appraisal Right

94

CHAPTER VII. MANAGEMENT ANDCONTROLA. Devices Affecting Control

1. Proxy2. Voting Trust Agreement3. Pooling and Voting

AgreementsB. Duties and Liabilities of Directors

1. Three-fold Duties of Directors2. Self-dealing Director3. Fixing the Compensation of

Directors and Officers4. Interlocking Directors5. Seizing Corporate Opportunity6. Using Inside Information

C. Duties and Liabilities of OfficersD. Duties of Controlling StockholdersE. Remedies in Case of

MismanagementF. Right of InspectionG. Derivative Suits

9898

99

101101

101101102

CHAPTER VIII. CAPITALSTRUCTUREA. Classification of SharesB. Subscription Contract

1. Status as a Shareholder2. Types of subscription contract3. Interest on unpaid

subscriptionC. Pre-emptive Right

1. Definition2. Limitations on the Exercise of

Preemptive Right3. Interest on unpaid

subscriptionD. Consideration for Issuance of

Shares1. Forms of consideration2. Limitations on Consideration

E. Watered Stocks1. Definition2. Liability of Directors or

103103105

105

106

106

OfficersF. Delinquent Shares

1. Definition2. Effects of Delinquency

G. Enforcement of Payment1. Delinquency Sale2. Court Action3. Collection from Cash

Dividends and Withholding ofStock Dividends

H. Rights and Obligations of Holdersof Unpaid but Non-delinquentStock

I. Certificate of StockJ. Lost or Destroyed CertificateK. Tender Offer

106

107

107

108108108

CHAPTER IX. DIVIDENDS ANDPURCHASE OF CORPORATION OFITS OWN SHARESA. Forms of DividendsB. Other Classes of DividendsC. Source of DividendsD. Declaration of DividendsE. Treasury Shares

1. Definition2. Instances When Corporation

May Acquire its Own Shares3. Remedies in Case of Improper

Purchase

109109109109110111

CHAPTER X. TRANSFER OFSHARESA. Manner of TransferB. Registration of Transfer

1. Effects of Lack of Registration2. Remedy if Registration is

refusedC. Restrictions on Transfer


D. Unauthorized Transfers1. Certificates Indorsed in Blank2. Forged Transfers


112112112

112

112

113

CHAPTER XI. AMENDMENTS OFCORPORATE CHARTERA. GeneralB. Specific

1. Increase in Capital Stock2. Decrease of Capital Stock3. Change in Corporate Name

C. Grounds for DisapprovingAmendment

114114114

115

CHAPTER XII. DISSOLUTIONA. Voluntary Dissolution

1. Expiration of term2. Voluntary dissolution when no

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creditors are affected3. Voluntary dissolution when

creditors are affected4. Dissolution by minority in

close corporations5. Failure to organize; cessation

of business for 5 yearsB. Involuntary Dissolution

1. Revocation of certificate ofRegistration

2. Quo Warranto ProceedingsC. Effects of Dissolution

1. Loss of Juridical Personality2. Executory Contracts3. Winding Up and Liquidation

D. The Trust Fund Doctrine and theDistribution of Assets

117

117

119

CHAPTER XIII. CORPORATECOMBINATIONSA. DefinitionB. ProcedureC. Effects of Merger/ConsolidationD. Effectivity of Merger/

ConsolidationE. De Facto MergerF. Sale of All or Substantially All

Assets

120120120120

120121

121

CHAPTER XIV. FOREIGNCORPORATIONSA. Definition of TermsB. Tests of “Doing Business in the

Philippines”C. “Doing Business Under the

Foreign Investment ActD. Jurisprudential Rules on “Not

Doing Business in the Philippines”E. Requisites for the Issuance of

License to Do BusinessF. Power to Sue and Be Sued of

Foreign CorporationsG. Laws Applicable on Foreign

Corporations

122122

122

122

122

123

123

123

CHAPTER XV. CLOSECORPORATIONSA. RequirementsB. CharacteristicsC. Restrictions on Transfer of Shares


D. Deadlocks1. Requisites2. Power of SEC

E. Distinctions Between Close andRegular Corporations

124124124124

124

125

CHAPTER XVI. NON-STOCKCORPORATIONSA. PurposesB. Rights of MembersC. ConversionD. Order of Distribution of Assets

Upon Dissolution

128128128128

128

CHAPTER XVII. SPECIALCORPORATIONSA. Educational CorporationsB. Religious Corporations

1. Corporation Sole2. Religious Societies

129129129

REVIEWER IN COMMERCIAL LAW Chapter I. Introduction

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Corporation LawFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD



COMMERCIAL LAW


CORPORATION LAW

Krystal UyReizl TanchicoLEAD WRITERS

Jan BarcenaJR Santos

WRITERS

LECTURES

Edel CruzHEAD



--------Leo Zulueta


Chapter I. Introduction

A. DEFINITIONB. ATTRIBUTES OF A CORPORATION

1. ARTIFICIAL BEING2. CREATED BY OPERATION OF LAW3. HAS THE RIGHT OF SUCCESSION4. HAS THE POWERS, ATTRIBUTES AND

PROPERTIES EXPRESSLYAUTHORIZED BY LAW OR INCIDENTTO ITS EXISTENCE

C. JURISDICTIOND. OTHER TYPES OF BUSINESS

ORGANIZATIONS

A. Definition

A corporation is an artificial being createdby operation of law, having the right ofsuccession and the powers, attributes, andproperties expressly authorized by law orincident to its existence. (Sec. 2,Corporation Code)

B. Attributes of a Corporation

1. An artificial being

A corporation exists by fiction of law, hence,it can act only through its directors, officersand employees.

Moral Damages – cannot be awarded infavor of corporations because they donot have feelings and mental state.They may not even claim moraldamages for besmirched reputation(NAPOCOR vs Philipp Brothers Oceanic,2001). However, a corporation canrecover moral damages under Art 2219(7) if it was the victim of defamation

Pilipinas Broadcasting Network vs. AgoMedical and Educational Center (2005).

Criminal Liability – Since a corporationas a person is a mere legal fiction, itcannot be proceeded against criminallybecause it cannot commit a crime inwhich personal violence or maliciousintent is required. Criminal action islimited to the corporate agents guilty ofan act amounting to a crime and neveragainst the corporation itself (WestCoast Life Ins. Co. vs. Hurd [1914], TimeInc. vs. Reyes [1971]).

2. Created by operation of law

Mere consent of the parties to form acorporation is not sufficient. The Statemust give its consent either through aspecial law (in case of governmentcorporations) or a general law (i.e.,Corporation Code in case of privatecorporations).

3. Has the right of succession

Its continued existence during its statedterm cannot be affected by any change inthe members or stockholders or by anytransfer of shares by a stockholder to a 3rd

person.

4. Has the powers, attributes andproperties expressly authorized bylaw or incident to its existence

As a mere creature of law, it can exerciseonly such powers as the law may choose togrant it, either expressly or impliedly.


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WC. Jurisdiction

(Asked in 91 and 96)

According to the Interim Rules of Procedurefor Intra-Corporate Controversies (A.M. No.01-2-04-SC), which took effect on April 1,2001, the Regional Trial Court hasjurisdiction over cases involving thefollowing: (FIEDI)

1. Devices or schemes employed by, or anyact of, the BOD, business associates,officers or partners, amounting toFraud or misrepresentation which maybe detrimental to the interest of thepublic and/or of the stockholders,partners or members of anycorporation, partnership, or association;

2. Controversies arising out of Intra-corporate, partnership, or associationrelations, between and amongstockholders, members or associates;and between, any or all of them and thecorporation, partnership, or association

of which they are stockholders,members or associates, respectively;

3. Controversies in the Election orappointment of directors, trustees,officers, or managers of corporations,partnerships, or associations;

4. Derivative suits; and

5. Inspection of corporate books.

Unlad Resources Development Corp. vs. Dragon(2008, Nachura):

Q: Who has jurisdiction on cases involvingintra-corporate controversies?

A: Under Sec. 5.2 of RA 8799, SEC’sjurisdiction over all cases enumerated underSec. 5, PD 902-A was transferred to the RegionalTrial Court which has jurisdiction over theprincipal office of the corporation, partnership orassociation concerned

D. Other Types of Business Organizations

1. Sole Proprietorship – is composed ofthe proprietor himself and hisemployees but it has no personalityseparate and distinct from theproprietor.

2. Partnership – two or more persons bindthemselves to contribute money,property, or industry to a common fundwith the intention of dividing the profitsamong themselves (Art 1767).

Partnership and Corporation Distinguished

Partnership Corporation

Creation created by mere agreement of theparties

may be organized by only two persons

created byoperation of law

requires at least 5 incorporators

Extent ofLiability

partners are personally liable forpartnership debts

stockholders are liable only to theextent of their investment/subscription

Management (in the absence of an agreement)every partner is an agent of thepartnership

management is centralized in a board ofdirectors or trustees

Powers A partnership may exercise anypower authorized by the partnersprovided it is not contrary to law,morals, customs, public order orpublic policy (Art. 1306, CC)

A corporation can exercise only thepowers expressly granted by law orimplied from those granted or incidentto its existence

Nature ofRelation-ship

based on mutual trust and confidence(delectus personae) -its existence is precarious since deathor unilateral act of a partner maybring about dissolution

has more stability since a corporationhas right of succession; dissolutionneeds consent of the State (SEC)


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W3. Joint Account (Asked in 00) - an

arrangement whereby merchants mayinterest themselves in the transaction ofother merchants, contributing thereto

the amount of capital they may agreeupon, and participating in the favorableand unfavorable results thereof in theproportion they may determine.

Joint Account and Partnership Distinguished (Asked in 00)

Joint Account Partnership

JuridicalPersonality

No juridical personality Has personality separate anddistinct from the partners

BusinessName

No commercial name common to allparticipants can be adopted (Art 241, Code ofCommerce)

Can adopt a partnership name

Management ONLY the ostensible partner manages andtransacts business in his own name andunder his individual liability (Art 241, Code ofCommerce)

ALL general partners aremanagers

Parties incases

Only the ostensible partner – the personcarrying on the joint business – can be suedby and is liable to other persons

ALL general partners may beliable even up to the extent oftheir personal properties

4. Business Trust – a legal relationwhereby one person, called the trustor,conveys a property to another, calledthe trustee, for the benefit of a personcalled the beneficiary (Art. 1440 CC).

5. Joint Venture – an association ofpersons or companies jointlyundertaking some commercialenterprise; generally all contributeassets and share risks (Kilosbayan vs.Guingona, 1994)

6. Cooperative – duly registeredassociation or persons, with commonbond of interest, who have voluntarilyjoined together to achieve lawfulcommon social or economic end,making equitable contributions to thecapital required and accepting a fairshare of the risks and benefits. (Sec. 3,RA 6938 or The Cooperative Code of thePhilippines)

REVIEWER IN COMMERCIAL LAW Chapter II. Classification of Corporations

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Corporations

A. Stock Corporation(Asked in 01 and 04)

One which has a capital stock dividedinto shares and is authorized todistribute to the holders of such sharesdividends or allotments of the surplusprofits (i.e., retained earnings on thebasis of the shares held (Sec. 3)

It is organized for profit. The governing body of a stock

corporation is usually the Board ofDirectors (except in certain instances,e.g. close corporations).

B. Non-Stock Corporation(Asked in 04)

All other corporations are non-stockcorporations (Sec. 3)

One where no part of the income isdistributable as dividends to itsmembers, trustees, or officers, subjectto the provisions of the Code ondissolution.

Not organized for profit. Its governing body is usually the Board

of Trustees.

CIR vs. Club Filipino de Cebu (1962):

There are two elements for a stock corporationto exist:1) Capital stock divided into shares, and2) An authority to distribute to the holders ofsuch shares, dividends or allotments of thesurplus profits on the basis of shares held. (Testof WON stock corporation)

Even if there is a statement of capital stock, thecorporation is still NOT a stock corporation ifdividends are NOT supposed to be declared, thatis, there is no distribution of retained earnings.

Under Sec. 43 of the Corporation Code,a corporation is deemed to have thepower to declare dividends. Thus, solong as the corporation has capitalstock and there is no prohibition in itsArticles of Incorporation or in its by-laws for it to declare dividends, suchcorporation is a stock corporation.

C. Other Classifications

1. Public corporation (Asked in 04) Oneformed or organized for the governmentor a particular state. Its purpose is forthe general good and welfare.

2. Private corporation (Asked in 04) Oneformed for some private purpose,benefit, aim or end.

3. Close corporation (Sec. 96)4. Educational corporation - One

organized for educational purposes (Sec.106).

5. Religious corporationsa. Corporation sole is one formed for

the purpose of administering andmanaging, as trustee, the affairs,property and temporalities of anyreligious denomination, sect, orchurch, by the chief archbishop,bishop, priest, rabbi, or otherpresiding elder of such religiousdenomination, sect or church (Sec.110).

b. Corporation aggregate is a religiouscorporation incorporated by morethan one person.

6. Eleemosynary corporation – Oneorganized for a charitable purpose

7. Domestic corporation – A domesticcorporation is one formed, organized, orexisting under the laws of thePhilippines.

8. Foreign corporation – One formed,organized or existing under any lawsother than those of the Philippines andwhose law allows Filipino citizens andcorporations to do business in its owncountry and state (Sec. 123).

9. Corporation created by special lawsor charter (Sec. 4) - Corporationswhich are governed primarily by theprovisions of the special law or chartercreating them. Corporation Code hassuppletory application.

10. Subsidiary corporation – one in whichcontrol, usually in the form ofownership of majority of its shares, is inanother corporation (the parentcorporation).

11. Parent corporation – its control lies inits power to elect the subsidiary’sdirectors thus controlling itsmanagement policies.

A. STOCK CORPORATIONB. NON-STOCK CORPORATIONC. OTHER CLASSIFICATIONS

REVIEWER IN COMMERCIAL LAW Chapter III. Formation of Corporations

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Corporations

A. COMPONENTS OF A CORPORATION1. INCORPORATORS2. CORPORATORS3. FOREIGN

INCORPORATORS/CORPORATORSB. STEPS IN THE FORMATION OF A

CORPORATION1. PROMOTION

A. LIABILITY OF CORPORATION ONPROMOTERS’ CONTRACTS

B. PERSONAL LIABILITY OFPROMOTERS

C. COMPENSATION OF PROMOTERS2. DRAFTING THE ARTICLES OF

INCORPORATIONA. DEFINITION OF TERMSB. CONTENTS OF ARTICLES OF

INCORPORATION3. FILING WITH SEC AND PAYMENT OF

FEES4. ISSUANCE OF CERTIFICATE OF

INCORPORATION5. INTERNAL ORGANIZATION AND

COMMENCEMENT OF BUSINESSC. DE FACTO CORPORATION

1. REQUISITES OF DE FACTOCORPORATION

2. DE JURE VS. DE FACTOCORPORATION

D. CORPORATION BY ESTOPPEL

A. Components of a Corporation

1. Incorporators - are thosestockholders or members mentioned inthe articles as originally forming andcomposing the corporation and who aresignatories thereof.

Requirements:a. Natural personsb. Of legal agec. Must own or subscribe to at least

one share of stock of the corporation(Genuine interest)

d. 5-15 incorporators who must signthe articles of incorporation

e. Majority of the incorporators mustbe residents of the Philippines

Original subscribersPersons whose names are mentioned inthe Articles, but not as incorporators;they do not sign the Articles.

2. Corporators - are stockholders ormembers who join the corporation afterits incorporation.

3. ForeignIncorporators/Corporators(Asked in 05)

General Rule: All incorporators/corporators may be foreigners.

Exceptions: Fully or partlynationalized corporations.

a. Where NO foreign stockholder isallowed. Mass media except recording

(Art. XVI, Sec. 11 of theConstitution; PresidentialMemorandum dated 04 May1994)

Retail trade enterprises withpaid-up capital of less thanUS$2.5 Million (Sec. 5 of RA8762)

Private security agencies (Sec. 4of RA 5487)

Small-scale mining (Sec. 3 of RA7076)

Utilization of natural resources(Art. XII, Sec. 2 of theConstitution)

Ownership, operation andmanagement of cockpits (Sec. 5of PD 449)

Manufacture, repair, stockpilingand/or distribution of nuclearweapons (Art. II, Sec. 8 of theConstitution)

Manufacture, repair, stockpilingand/or distribution of biological,chemical and radiologicalweapons and anti-personnelmines (Various treaties to whichthe Philippines is a signatoryand conventions supported bythe Philippines)

Manufacture of firecrackers andother pyrotechnic services (Sec.5 of RA 7183)

b. Up to 20% foreign equity. Private radio communications

network (RA 3846)

c. Up to 25% foreign equity. Private recruitment, whether for

local or overseas, employment(Art. 27 of PD 442)

Construction and repair oflocally funded works (Sec. 1 ofCA 541, LOI 630)

Construction of defense-relatedstructures (Sec. 1 of CA 541)


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Wd. Up to 40% foreign equity.

Exploration, development andutilization of natural resources(Art. XII, Sec. 2 of theConstitution).

Realty companies and othercorporations that own privatelands (Art. XII, Sec. 7 of theConstitution; Ch. 5, Sec. 22 ofCA 141; Sec. 4 of RA 9182).

Operation and management ofpublic utilities (Art. XII, Sec. 11of the Constitution; Sec. 16 ofCA 146)

Culture, production, milling,processing, trading except retailof rice and corn and by-products(Sec. 5 of PD 194; Sec. 15 of RA8762).

Adjustment companies (Sec. 323of PD 612 as amended by PD1814).

Sauna and steam bathbathhouses, massage clinics andsimilar activities.

e. Up to 60% foreign equity. Financing companies regulated

by SEC (Sec. 6 of RA 5980 asamended by RA 8556)

Investment houses (Sec. 5 of PD129 as amended by RA 8366)

B. Steps in the Formation of aCorporation

1. Promotion

Promoters – are persons who, actingalone or with others, take initiative infounding and organizing the business orenterprise of the issuer and receivesconsideration therefor (RA 8799, TheSecurities Regulation Code).


General Rule: A corporation is NOTbound by the contract. Since thecorporation did not yet exist at thetime of the contract, it could nothave had an agent who could legallybind it.

Exceptions: A corporation may bebound by the contract if it makesthe contract its own by:1. Adoption or ratification of the

ENTIRE contract.

* Promotion

Drafting theArticles of Incorporation

corporate name purpose clause principal office term of existence incorporators & directors capital stock; subscription treasurer-in-trust treasurer’s affidavit other matters

Filing with SEC;Payment of the filing and

publication fees

Issuance of the Certificate ofIncorporation by the SEC (if, afterexamination, all the papers filed

are in order)

Internal Organization(by-laws, election of officers)

& Commencement of businessoperations


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W2. Acceptance of benefits under the

contract with knowledge of theterms thereof.

b. Personal liability of promoters

General Rule: The promoter bindshimself PERSONALLY & assumesthe responsibility of looking to theproposed corp. for reimbursement.

Exceptions: Any express or impliedagreement to the contrary, ornovation of the contract

c. Compensation of Promoters

General Rule: The corporation isNOT liable to pay compensationbecause this would be an impositionon innocent investors. (Ballantine)

Exceptions:1. If after it is formed, corporation

expressly promises to do so2. Services done partly before and

partly after incorporation andthe corporation takes thebenefits thereof

Note: The Securities Act authorizes apromotion fee IF it is provided for in theregistration statement of the securitiesinvolved.

2. Drafting the Articles ofIncorporation (AOI)

a. Definition of Terms

1. Articles of Incorporation -constitutes the charter of thecorporation and defines thecontractual relationships betweenthe State and the corporation, thestockholders and the State, and thecorporation and the stockholders.

2. Capital - It is used broadly toindicate the entire property orassets of the corporation. In thestrict sense, it refers to that portionof the net assets paid by thestockholders as consideration forthe shares issued to them, which isutilized for the prosecution of thebusiness of the corporation (DELEON, Corporation Code of thePhilippines)

3. Capital Stock is an amount fixed inthe AOI (where shares are with parvalue) and is unaffected by profitsand losses. It limits the maximumamount or number of shares thatmay be issued without formalamendment of the articles ofincorporation (See Sec. 38).

4. Authorized Capital Stock - issynonymous with capital stockwhere the shares of the corporationhave par value. If the shares ofstock have no par value, thecorporation has no ACS, but it hascapital stock the amount of which isnot specified in the AOI as it cannotbe determined until all the shareshave been issued. In this case, thetwo terms are not synonymous (DELEON).

5. Subscribed Capital Stock - It is theamount of the capital stocksubscribed whether fully paid ornot. It connotes an originalsubscription contract for theacquisition by a subscriber ofunissued shares in a corporation(Secs. 60 and 61)

6. Outstanding Capital Stock - it isthe total shares of stock issuedunder the binding subscriptionagreements to subscribers orstockholders, whether or not fully orpartially paid, except treasuryshares (Sec. 137). It is broader than“subscribed” capital stock.

7. Paid-up Capital - Portion of theauthorized capital stock which hasbeen subscribed and paid (See Sec.13).

8. Unissued Capital Stock - It is thatportion of the capital stock that isnot issued or subscribed. It doesnot vote and draws no dividends.

9. Legal Capital - It is the amountequal to the aggregate par valueand/or issued value of theoutstanding capital stock (DELEON).


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Wb. Contents of Articles of

Incorporation

1. Corporate name Must not be identical or

deceptively or confusinglysimilar to that of any existingcorporation or to any other namealready protected by law or ispatently deceptive, confusing orcontrary to existing laws (Sec.18).

Must include the word“Corporation” or “Inc”

Change of corporate namerequires the amendment of theAOI: majority vote of the boardand the vote or written assent ofstockholders holding 2/3 of theoutstanding capital stock (Sec.16).

Republic Planters Bank vs. CA (1992):

Amendment of a corporation’s AOIchanging its corporate name does notextinguish the personality of the originalcorporation. It is the same corporationwith a different name, and its characteris not changed. Consequently, the“new” corporation is still liable for thedebts and obligations of the “old”corporation.

2. Purpose clause Must indicate the PRIMARY and

SECONDARY purposes if thereare more than one purpose,which should not contradict orchange the nature of thecorporation (Sec. 14(2))

Must not be patentlyunconstitutional, illegal,immoral, and contrary togovernment rules andregulations (Sec. 17 (2)).

Must not be for the purpose ofpracticing a profession

3. Principal office Must be within the Philippines

(Sec. 14 (3)) AOI must specify both province

or city or town where it islocated

Important in (1) determiningvenue in an action by or againstthe corporation (2) determiningthe province where a chattelmortgage of shares should be

registered (Chua Gan vs.Samahang Magsasaka, 1935).

4. Term of existence Maximum life of 50 years.

Extendible for a period notexceeding 50 years at any oneinstance. No extension, however,can be made earlier than 5 yearsbefore the end of the term. (Sec.11)

Extension requires anamendment of the AOI. Anydissenting stockholder mayexercise his appraisal right (Sec.37).

5. Names, citizenship and residencesof incorporators

6. Number, names, citizenship andresidences of directors/trustees.(Asked in 05 and 08) “Directors” is used for stock

corporations, “trustees” for non-stock corporations.

General Rule: not less than 5but not more than 15directors/trusteesException: In non-stockcorporations, the articles or by-laws may provide for more than15 trustees (Sec. 92).

In educational non-stockcorporations, trustees may NOTexceed 15. Number of trusteesshall be in multiples of 5 (Sec.108).

In nationalized industries, aliensmay be directors of a corporationonly in such number as may beproportional to their allowableownership of shares.

7. If stock corporation, amount ofauthorized capital stock, number ofshares AOI must state the authorized

capital stock in lawful money ofthe Philippines, the number ofshares into which the ACS isdivided, and the par value ofeach par value shares (Sec.14(8), Sec. 15(7)).

8. In par value stock corporations, thepar value of each share.

9. Number of shares and amounts ofsubscription of subscribers which


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Wshall not be less than 25% ofauthorized capital stock.

10. Amount paid by each subscriber ontheir subscription, which shall notbe less than 25% of subscribedcapital and shall not be less thanP5,000.

11. Name of treasurer elected by thesubscribers.

12. Other matters. Classes of shares, as well as the

preferences or restrictions onany such class (Sec. 6).

Denial or restriction of pre-emptive right (Sec.39).

Prohibition against transfer ofstock which would reduce stockownership to less than therequired minimum in the case ofa nationalized business oractivity (Sec. 15(11)).

3. Filing with SEC and payment offees

Documents to be filed with SEC(Asked in 02):a. Articles of Incorporationb. Treasurer’s Affidavit certifying that

25% of the total authorized capitalstock has been subscribed and atleast 25% of such has been fullypaid in cash or property.

c. Bank certificate covering the paid-up capital.

d. Letter authority authorizing theSEC to examine the bank depositand other corporate books andrecords to determine the existence ofpaid-up capital.

e. Undertaking to change the corporatename in case there is anotherperson or entity with same orsimilar name that was previouslyregistered.

f. Certificate of authority from propergovernment agency wheneverappropriate like BSP for banks andInsurance Commission forinsurance corporations. (SUNDIANGAND AQUINO, Reviewer onCommercial Law)

4. Issuance of Certificate ofIncorporation by SEC The SEC shall give the incorporators

reasonable time to correct ormodify the objectionable portions ofthe articles or amendment (Sec. 17).

Grounds for disapproving AOI: (Sec.17)

AOI does not SUBSTANTIALLYcomply with the form prescribed

Purpose is patentlyunconstitutional, illegal,immoral, contrary to governmentrules and regulations

Treasurer’s Affidavit concerningthe amount of capital subscribedand or paid is false

Required percentage ofownership of Filipino citizenshas not been complied with.

REMEDY in case of rejection of AOI- petition for review in accordancewith the Rules of Court (§6, lastpar., PD 902-A)

Commencement of corporateexistence and juridicalpersonality – upon issuance ofcertificate of Incorporation (Sec.19)

REVOCATION of certificate ofincorporation – if incorporators arefound guilty of fraud in procuringthe same after due notice andhearing (Sec. 6(I), PD 902-A)

5. Internal Organization andCommencement of BusinessOperations – includes the adoption ofby-laws and election officers

C. De Facto Corporation(Asked in 04)


a. Valid statute - There can be node facto corporation under a statutesubsequently declaredunconstitutional. (Mun. ofBalabagan vs. Benito, 1969)

b. User of corporate powers in GOODFAITH - there is transaction ofbusiness in some way as if it were acorporation (e.g., takingsubscriptions to and issuing shares


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Wof stock, buying lot, constructing,and leasing a building)

c. Substantial or Colorablecompliance in GOOD FAITH – Acorporation must have been issueda certificate of incorporation to beable to claim “in good faith” that it isa de facto corporation. (Hall vs.Piccio, 1950)

2. De Jure vs. De Facto Corporations

DE JURE DE FACTO

One created in strict orsubstantial conformitywith the statutoryrequirements forincorporation.

One which actuallyexists for all practicalpurposes as acorporation but whichhas no legal right tocorporate existence asagainst the State.

Right to exist cannot besuccessfully attackedeven in a directproceeding by the State

Right to exercisepowers cannot beinquired intocollaterally in anyprivate suit. But suchinquiry may be madeby the State in a quowarranto proceeding(SUNDIANG ANDAQUINO).


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WD. Corporation by Estoppel

(Asked in 04)

It is a status acquired by persons whoassume to act as a corporation knowingit to be without authority. Suchpersons shall be liable as generalpartners for all debts, liabilities anddamages incurred or arising as a resultthereof (Sec. 21).

When such ostensible corporation issued on any transaction entered by it asa corporation or any tort committed byit as such, it shall not be allowed to useas a defense its lack of corporatepersonality (Sec. 21).

One who assumes an obligation to anostensible corporation as such, cannotresist performance thereof on theground that there was in fact nocorporation (Sec. 21).

NOTE: An unincorporated corporation isnot barred from transacting businessbefore the commencement of corporateexistence. Limit: the persons acting assuch shall be personally liable.

Lozano vs. delos Santos (1997):

Q: Action involving two incorporated drivers’associations that decided to unite and elect oneset of officers to be given authority to collect thedaily dues of the drivers who are members of theconsolidated association.

A: Doctrine of estoppel applies when personsassume to form a corporation and exercisecorporate functions and enter into businessrelations with third persons. Where there areno third persons involved and the conflictarises only among those assuming to form acorporation, who therefore know that it hasnot been registered, there is no corporationby estoppel.

International Express Travel v. CA, (2000):

Q. In what instances and to whom does thedoctrine of estoppel applies?

A: The doctrine of corporation by estoppel mayapply to:

a third party - a 3rd party who had dealt withan unincorporated association as a corporationmay be precluded from denying its corporateexistence on a suit brought by the allegedcorporation on the contract even if he did notknow of the defective incorporation. 3rd party isconsidered to have admitted the existence of

a corporation by the fact that he dealt with itas a corporation.

the alleged corporation - when a third personhas entered into a contract with an associationwhich represented itself to be a corporation, theassociation is estopped from denying itscorporate capacity in a suit against it by such3rd person. It cannot allege lack of personalityto be sued to evade responsibility on a contractit has entered into and by virtue of which it hasreceived advantages and benefits

associates as partners - when businessassociates fraudulently misrepresents theexistence of a corporation and the 3rd partycontacts with the association as a corporationwithout knowing the serious defects in itsincorporation, such 3rd party may sueassociates as general partners. Where boththe associates and the 3rd party were ignorant ofthe defective incorporation, 3rd party can’t holdthe associates liable since they were in goodfaith. If 3rd party knew of defects inincorporation and still dealt with thecorporation, he must be deemed to have chosento deal with the corporation as such and shouldbe limited in his recovery to the corporateassets.

REVIEWER IN COMMERCIAL LAW Chapter IV. The Corporate Entity

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WChapter IV. The Corporate Entity

I. THE CORPORATE ENTITYA. THE DOCTRINE OF SEPARATE JURIDICAL

ENTITYB. PIERCING THE CORPORATE VEILDOCTRINE

1. AN EQUITABLE REMEDY2. EXTENT OF LEGAL EFFECTS3. APPLICATION OF PIERCING DOCTRINE4. PARENT-SUBSIDIARY RELATIONSHIP

C. NATIONALITY1. PLACE OF INCORPORATION TEST2. THE GRANDFATHER RULE3. CONTROL TEST4. WAR-TIME TEST5. INVESTMENT TEST

A. The Doctrine of SeparateJuridical Entity(Asked in 95, 96, 99 and 00)

1. Concept - A corporation has apersonality separate and distinct fromthat of its stockholders and membersand is not affected by the personalrights, obligations, and transactions ofthe latter.

2. Property - SHs have no claim oncorporate property as owners, but mereexpectancy or inchoate right to thesame upon dissolution of thecorporation after all corporate creditorshave been paid. Such right is limitedonly to their equity interest (doctrine oflimited liability). Although stockholder’sinterest in the corporation may beattached by his personal creditor,corporate property cannot be used tosatisfy his claim (Wise & Co. vs. ManSun Lung, 1940).

3. Liability for torts - as a separatejuridical personality, a corporation canbe held liable for torts committed by itsofficers for corporate purpose (PNB vs.CA, 1978).

4. Constitutional Rights - Corporateentities are entitled to due process,equal protection, and protection againstunreasonable searches and seizures.However, a corporation is not entitled tothe privilege against self-incrimination(Bataan Shipyard & Eng’g Co. vs. PCGG,1987)

B. Piercing the Corporate VeilDoctrine(Asked in 91, 01 and 04)

1. An Equitable Remedy - Piercing theveil of corporate entity is merely anequitable remedy, and may beawarded only in cases when thecorporate fiction is used to defeat publicconvenience, justify wrong, protectfraud or defend crime or where thecorporation is a mere alter ego orbusiness conduit of a person.

2. Extent of Legal Effects - Theapplication of the piercing doctrine to aparticular case does not deny thecorporation of legal personality for anyand all purposes, but only for theparticular transaction or instance forwhich the doctrine was applied. (KoppelPhil. Inc. vs. Yatco, 1946)

3. Application of Piercing Doctrine If done to defraud the government of

taxes due it. If done to evade payment of civil

liability. If done by a corporation which is

merely a conduit or alter ego ofanother corporation.

If done to evade compliance withcontractual obligations.

If done to evade financial obligationto its employees.

Seaoil vs Autocorp Group ( 2008, Nachura):

Q: Is a corporation liable for the individual actsof its stockholders or members? Is there anexception to the general rule?

A: It is settled that a corporation has apersonality separate and distinct from itsindividual stockholders or members, and is notaffected by the personal rights, obligations andtransactions of the latter. The corporation maynot be held liable for the obligations of thepersons composing it, and neither can itsstockholders be held liable for its obligation.

Of course, this Court has recognizedinstances when the corporation’s separatepersonality may be disregarded. However, wehave also held that the same may only be donein cases where the corporate vehicle is beingused to defeat public convenience, justify wrong,protect fraud, or defend crime. Moreover, thewrongdoing must be clearly and convincinglyestablished. It cannot be presumed.


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W4. Parent-subsidiary relationship

General Rule: The mere fact that acorporation owns all or substantially allof the stocks of another corporation isNOT sufficient to justify their beingtreated as one entity.

Exceptions: The subsidiary is a mereinstrumentality of the parentcorporation, given the followingcircumstances (PNB vs. Ritratto Group,2001): The parent corporation owns all or

most of the subsidiary’s capitalstock.

The parent and subsidiarycorporations have common directorsor officers.

The parent corporation finances thesubsidiary.

The parent corporation subscribesto all the capital stock of thesubsidiary or otherwise causes itsincorporation.

The subsidiary has grosslyinadequate capital.

The parent corporation pays thesalaries and other expenses orlosses of the subsidiary.

The subsidiary has substantially nobusiness except with parentcorporation or no assets exceptthose conveyed to or by the parentcorporation.

In the papers of the parentcorporation or in the statements ofits officers, the subsidiary isdescribed as a department ordivision of the parent corporation orits business or financialresponsibility is referred to as theparent corporation’s own.

The parent corporation uses theproperty of the subsidiary as itsown.

The directors or executives of thesubsidiary do not act independentlyin the interest of the subsidiary buttake their orders from the parentcorporation in the latter’s interest.

The formal ledger requirements ofthe subsidiary are not observed.

C. Nationality of Corporation

1. Place of Incorporation testThe corporation is a national of the countryunder whose laws it is organized orincorporated (Sec. 123)

a. Domestic corporations – organized andgoverned under and by Philippine laws

b. Foreign corporations – organized underlaws other than those of the Philippinesan can operate only in the territory ofthe state under whose laws it wasformed. However, they may be licensedto do business here.

2. The Grandfather Rule It is a method of determining the

nationality of a corporation which inturn is owned in part by anothercorporation by breaking down theequity structure of the shareholdercorporation.

It involves the computation of Filipinoownership of a corporation in whichanother corporation of partly Filipinoand partly foreign equity owns capitalstock. The percentage of shares held bythe second corporation in the first ismultiplied by the latter’s own Filipinoequity, and the product of thesepercentages is determined to be theultimate Filipino ownership of thesubsidiary corporation (SEC Opinion re;Silahis International Hotel, 4 May1987).

3. Control Test A corporation shall be considered a

Filipino corporation if the Filipinoownership of its capital stock is at least60%, and where the 60-40 Filipino-alienequity ownership is NOT in doubt (SECOpinion dated 6 November 1989; DOJOpinion No. 18, s. 1989).

Therefore, its shareholdings in anothercorporation shall be considered to be ofFilipino nationality when computing thepercentage of Filipino equity of thatsecond corporation (SEC Opinion dated23 November 1993).

Control test is applied in the following:a. Exploitation of natural resources -

“Only Filipino citizens orcorporations whose capital stock areat least 60% owned by Filipinos canqualify to exploit natural resources.”(Sec. 2, Art. XII, Consti.)

b. Public Utilities - “xxx no franchise,certificate or any other form ofauthorization for the operation of apublic utility shall be granted exceptto citizens of the Philippines or tocorporations or associationsorganized under the laws of thePhilippines at least 60% of whose


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Wcapital is owned by such citizens. “(Sec. 11, Art. XII, Consti.)

4. War-time TestIf the controlling stockholders are enemies,then the nationality of the corporation willbe based on the citizenship of the majoritystockholders in times of war (FilipinasCompania de Seguros v Christian Huenfeld,1951).

5. Investment TestA “Philippine National” is a corporationorganized under the laws of the Philippinesof which at least 60% of the capital stockoutstanding and entitled to vote is ownedand held by citizens of the Philippines, or atrustee of the funds for pension or otheremployee retirement or separation benefits,where the trustee is a Philippine nationaland at least 60% of the fund will accrue tothe benefit of Philippine nationals. (Sec.3(a) and (b), Foreign Investments Act of1991, RA7042)

REVIEWER IN COMMERCIAL LAW Chapter V. Corporate Powers

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WChapter V. Corporate Powers(Asked in 02 and 07)

A. EXPRESS POWERS1. GENERAL POWERS2. SPECIAL/SPECIFIC POWERS

B. INHERENT/INCIDENTAL POWERSC. IMPLIED POWERSD. ULTRA VIRES ACTS

1. DEFINITION2. TYPES3. EFFECTS4. REMEDIES

A. Express Powers

Granted by law, Corporation Code, and itsArticles of Incorporation or Charter

1. General Powers of Corporations(Sec. 36)a. Sue and be sued in its corporate

name;b. Succession;c. Adopt and use a corporate seal;d. Amend its Articles of Incorporation;e. Adopt by-laws;f. For stock corporations - issue or sell

stocks to subscribers and selltreasury stocks; for non-stockcorporation - admit members to thecorporation;

g. Purchase, receive, take or grant,hold, convey, sell, lease, pledge,mortgage and otherwise deal withsuch real and personal property,pursuant to its lawful business;

h. Enter into merger or consolidationwith other corporations as providedin the Code;

i. Make reasonable donations,including those for the publicwelfare or for hospital, charitable,cultural, scientific, civic, or similarpurposes: Provided, no corporation,domestic or foreign, shall givedonations in aid of any politicalparty or candidate or for purposes ofpartisan political activity;

j. Establish pension, retirement, andother plans for the benefit of itsdirectors, trustees, officers andemployees; and

k. Exercise such other powers as maybe essential or necessary to carryout its purposes.

2. Special/Specific Powers (Sec. 37-44)TCB PDA IDM (DIP CAB MDT)a. Extend or shorten the corporate

Term (Sec. 37)

b. Increase or decrease Capital stock(Sec. 38)

c. Incur, create or increase Bondedindebtedness (Sec. 38)

d. Deny Preemptive right (Sec. 39)e. Sell or otherwise Dispose of

substantially all its assetsf. Acquire its own shares (Sec. 41)g. Invest in another corporation or

business (Sec. 42)h. Declare dividends (Sec. 43)i. Enter into Management contracts

(Sec. 44)

Notes: 2 general restrictions on the power ofthe corporation to acquire and holdproperties: property must be reasonably and

necessarily required by the business that the power shall be subject to the

limitations prescribed by other speciallaws and the constitution (corporationmay not acquire more than 30% ofvoting stocks of a bank; corporationsare restricted from acquiring publiclands except by lease of not more than1000 hectares)

B. Inherent/Incidental Powers

Not expressly stated but are deemed to bewithin the capacity of corporate entities

C. Implied/Necessary Powers

These powers are deemed to exist becauseof the following provisions: “Except such as are necessary or

incidental to the exercise of the powersso conferred” (Sec. 36)

“Such powers as are essential ornecessary to carry out its purpose orpurposes as stated in the AOI” – catch-all phrase (Sec. 45)

D. The Ultra Vires Acts (Sec. 45)

1. DefinitionUltra Vires acts are those acts which acorporation is not empowered to do orperform because they are not conferredby its AOI or by the Corporation Code,or not necessary or incidental to theexercise of the powers so conferred.

REVIEWER IN COMMERCIAL LAW Chapter V. Corporate Powers

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W2. Types of Ultra Vires Acts

a. Acts done beyond the powers of thecorporation as provided in the lawor its articles of incorporation;

b. Acts or contracts entered into inbehalf of a corporation by personswho have no corporate authority(Note: This is technically ultra viresacts of officers and not of thecorporation);

c. Acts or contracts, which are per seillegal as being contrary to law.(VILLANUEVA, PhilippineCorporate Law)

3. Effects of Ultra Vires Actsa. Executed contract – courts will not

set aside or interfere with suchcontracts;

b. Executory contracts – noenforcement even at the suit ofeither party (void andunenforceable);

c. Part executed and part executory– principle of “no unjust enrichmentat expense of another” shall apply;

d. Executory contracts apparentlyauthorized but ultra vires – theprinciple of estoppel shall apply.

ULTRA VIRES ACTS ILLEGAL ACTSNot necessarilyunlawful, but outsidethe powers of thecorporation

Unlawful; againstlaw, morals, publicpolicy, and publicorder

Can be ratified Cannot be ratified

Can bind the parties ifwholly or partlyexecuted

Cannot bind theparties

Seaoil vs Autocorp Group (2008, Nachura):

An ultra vires act is distinguished from illegalact, the former being voidable which may beenforced by performance, ratification, orestoppel, while the latter is void and cannot bevalidated.

4. Remedies in Case of Ultra Vires Actsa. State

1. Forfeiture by judgment of Court2. Suspension or revocation of the

certificate of registration by theSEC

b. Stockholders1. Injunction2. Derivative suit

c. Creditors1. Nullification of contract in fraud

of creditors

REVIEWER IN COMMERCIAL LAW Chapter VI. Internal Organization of the Corporation

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WChapter VI. Internal Organization

of the Corporation

A. BY-LAWS1. DEFINITION2. ADOPTION3. REQUIREMENTS4. EFFECTIVITY5. AMENDMENT OR REPEAL

B. DIRECTORS/TRUSTEES1. QUALIFICATIONS2. ELECTION OF DIRECTORS/TRUSTEES3. METHODS OF VOTING4. EXERCISE OF CORPORATE POWERS5. MEETINGS OF THE BOARD6. REMOVAL OF DIRECTORS/TRUSTEES7. EXECUTIVE COMMITTEE

C. CORPORATE OFFICERS1. WHO ARE CORPORATE OFFICERS2. DISQUALIFICATIONS3. AUTHORITY OF CORPORATE

OFFICERSD. STOCKHOLDERS OR MEMBERS

1. RIGHTS OF STOCKHOLDERS2. OBLIGATIONS OF STOCKHOLDERS3. STOCKHOLDERS’/MEMBERS’

MEETING4. CORPORATE ACTS REQUIRING

APPROVAL OF ALLSTOCKHOLDERS/MEMBERS

5. OTHER INSTANCES REQUIRINGSTOCKHOLDERS’/MEMBERS’ ACTION

6. LIMITATIONS ON RIGHT TO VOTE7. APPRAISAL RIGHT

A. By-Laws(Asked in 98, 00 and 01)

1. DefinitionBy-laws are mere internal rules amongstockholders and cannot affect orprejudice 3rd persons who deal with thecorporation unless they have knowledgeof the same (China Banking Corp v CA,1997)

2. Adoption of by-laws (Sec. 46) Within 1 month after receipt of

official notice of the issuance of itscertificate of incorporation by theSEC.

Prior to incorporation - approvedand signed by all the incorporators& submitted to SEC together withAOI

Loyola Grand Villas Homeowners Assn vs. CA(1997):

Q: What happens when there is failure to file theBy-laws on time?

A: Failure to file the by-laws within that perioddoes not imply the "demise" of the corporation.By-laws may be required by law for an orderly

governance and management of corporationsbut they are not essential to corporate birth.Therefore, failure to file them within the periodrequired by law by no means tolls the automaticdissolution of a corporation

3. Requirements (Sec. 46) Must be approved by the affirmative

vote of the stockholdersrepresenting the majority of theoutstanding capital stock ormajority of members (if filed prior toincorporation, approved and signedby all incorporators)

Must be kept in the principal officeof the corporation; subject toinspection of stockholder or memberduring office hours (Sec. 74)

4. Effectivity of By-Laws ONLY from the issuance of SEC of

certification that bylaws are notinconsistent with the Code

CANNOT bind stockholders orcorporation pending approval

5. Amendment or Repeal (Sec. 48) Majority vote of the members of the

Board and majority vote of the OCSor members, in a meeting dulycalled for the purpose

Delegation to the BOD of power toamend or repeal by-laws by vote ofstockholders representing 2/3 of theOCS or 2/3 of the members

Revocation of the delegated powerby majority vote only

B. Directors/Trustees

1. Qualificationsa. If STOCK, director must own at

least 1 share of the capital stock,which stock shall stand in his ownname (Sec. 23). If NON-STOCK,trustee must be a member.

b. Majority of the directors/trusteesmust be residents.

c. Not have been convicted by finaljudgment of an offense punishableby imprisonment for a periodexceeding 6 years or a violation ofthe Corporation Code, committedwithin five years from the date of hiselection. (Sec. 27)

d. Natural persone. Of Legal Agef. Other qualifications as may be

prescribed in the by-laws of thecorporation.


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W2. Election of Directors/Trustees

a. There must be present, in person orby proxy, the owners of majority ofthe OCS or majority of the membersentitled to vote in the meeting.

b. Election may be by ballot ifrequested.

c. A stockholder cannot be deprived inthe articles of incorporation or inthe by-laws of his statutory right touse any of the methods of voting inthe election of directors.

d. No delinquent stock shall be voted.e. The candidates receiving the highest

number of votes shall be declaredelected.

3. Methods of Votinga. Straight Votingb. Cumulative voting for one

candidate – a stockholder is allowedto concentrate his votes and giveone candidate as many votes as thenumber of directors to be electedmultiplied by the number of hisshares shall equal.Illustration: If there are 5 directorsto be elected and Pedro, asshareholder, has 100 shares, Pedrocan give 500 (5 x 100 shares) votesto just one candidate.

c. Cumulative voting by distribution- a stockholder may cumulate hisshares by multiplying the number ofhis shares by the number ofdirectors to be elected and distributethe same among as manycandidates as he shall see fit.Illustration: In the illustrationabove, Pedro may choose to give 100votes to candidate 1, 100 votes tocandidate 2, 100 votes to candidate3, 150 votes to candidate 4, and 50votes to candidate 5.

4. Exercise of Corporate Powers(Asked in 93 and 98)

a. Board as Repository of CorporatePowers

General Rule:The corporate powers of thecorporation shall be exercised, allbusiness conducted and all propertyof such corporation controlled andheld by the board of directors ortrustees. (Sec. 23)

Exceptions:1. Executive Committee duly

authorized in the by-laws;2. A contracted manager which

may be an individual, apartnership, or anothercorporation.

Note: In case the contractedmanager is another corporation,the special rule in Sec. 44applies.

3. In case of close corporations, thestockholders may manage thebusiness of the corporationinstead by a board of directors, ifthe articles of incorporation soprovide.

Spouses Constantine Firme vs. Bukal Enterprisesand Development Corporation (2003):

The power to purchase real property is vested inthe board of directors or trustees. While acorporation may appoint agents to negotiate forthe purchase of real property needed by thecorporation, the final say will have to be with theboard, whose approval will finalize thetransaction.

b. Requisites of a VALID CorporateAct by the Board of Directors

1. The Board must act as a BODYin a meeting.

2. There must be a VALIDLYconstituted meeting.

3. There act must be supported bya MAJORITY OF THE QUORUMduly assembled (Exception:Election of officers requires avote of majority of all themembers of the board)

4. The act must be within thepowers conferred on the Board.

5. Meetings of the Board ofDirectors/Trustees

a. When? (Sec.53)Regular meetings of directors ortrustees shall be held monthly,unless the by-laws provideotherwise.

Special meetings of the board ofdirectors or trustees may be held atany time upon the call of thepresident or as provided in the by-laws.


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Wb. Where? (Sec. 53)

Meetings of directors or trustees ofcorporations may be held anywherein or outside of the Philippines,unless the by-laws provideotherwise.

c. Who May Attend?The members of the Boardthemselves; directors in Boardmeetings cannot be represented orvoted by proxies.

d. Who Presides? (Sec. 54)The president, unless the by-lawsprovide otherwise.

e. Notice Requirements (Sec. 53)Notice of regular or special meetingsstating the date, time and place ofthe meeting must be sent to everydirector or trustee at least one (1)day prior to the scheduled meeting,unless otherwise provided by the by-laws.

Notice of meeting is subject towaiver

f. Quorum Requirements (Sec. 25)General Rule: Majority of thenumber of directors or trustees asfixed in the articles of incorporation.Exception: Unless the articles ofincorporation or the by-laws providefor a greater majority, or in case ofelection of officers where a vote of amajority of all the members of theboard is needed.

6. Removal of Directors/Trustees(Asked in 91 and 01)General Rule: Removal may be with orwithout cause.Exception: A minority director electedthrough cumulative voting cannot beremoved without cause (Sec. 28)

Other requisites:a. Vote of the stockholders

representing at least 2/3 of the OCSor the members entitled to vote

b. At a regular or special meeting afterproper notice is given

7. Executive CommitteeA body created by the by-laws andcomposed of some members of theboard which, subject to the statutorylimitations, has all the authority of theboard to the extent provided in the

board resolution or by-laws (See Sec.35).

Limitations:a. Must be provided for in the by-laws

and composed of not less than 3members of the board appointed bythe board.

b. Must act by a majority vote of all ofits members.

c. CANNOT act on the following:1. Matters needing stockholder

approval (Sec. 35);2. Filling up of board vacancies;3. Amendment, repeal or adoption

of by-laws (Sec. 35);4. Amendment or repeal of any

resolution of the Board which byits express terms is notamendable or repealable (Sec.35);

5. Cash dividend declaration (Sec.35); and

6. Acts which would render theBOD powerless and free from allresponsibilities imposed on it bylaw (CAMPOS, The CorporationCode: Comments, Notes andSelected Cases).


1. Who are Corporate Officers (POST)a. President – must be a director;b. Treasurer – may or may not be a

director; as a matter of soundcorporate practice, must be aresident and citizen of the Phil (SECopinion)

c. Secretary – need not be a directorunless required by the by-laws;must be a resident and citizen of thePhilippines; and

d. Other officers as may be provided inthe by-laws.

Notes: Any two (2) or more positions may

be held concurrently by the sameperson, EXCEPT that no one shallact as president and secretary or aspresident and treasurer at the sametime.

Additional qualifications of officersmay be provided for in the by-laws(Sec. 47(5)).


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W2. Disqualifications (Sec. 27)

a. Convicted by final judgment of anoffense punishable by imprisonmentfor a period exceeding six (6) years

b. Convicted by final judgment of aviolation of the Corporation Codecommitted within five (5) years priorto the date of his election orappointment

3. Authority of Corporate OfficersA person dealing with a corporate officeris put on inquiry as to the scope of thelatter’s authority but an innocentperson cannot be prejudiced if he hadthe right to presume under thecircumstances the authority of theacting officers.

Associated Bank vs. Pronstroller (2008, Nachura):

Q: What is the Doctrine of Apparent Authority?

A: If a corporation knowingly permits one of itsofficers, or any other agent, to act within thescope of an apparent authority, it holds him outto the public as possessing the power to dothose acts; the corporation will, as againstanyone who has in good faith dealt with itthrough such agent, be estopped from denyingthe agent’s authority.

D. Stockholders or Members

1. Rights of Stockholders(Asked in 96)a. Direct or indirect participation in

management (Sec. 6)b. Voting rights (Sec. 6)c. Right to remove directors (Sec. 28)d. Proprietary rights

1. Right to dividends (Secs. 43 and71 )

2. Appraisal right (Sec. 81)3. Right to issuance of stock

certificate for fully paid shares(Sec. 64)

4. Proportionate participation inthe distribution of assets inliquidation (Sec. 122)

5. Right to transfer of stocks incorporate books (Sec. 63)

6. Pre-emptive right (Sec. 39)e. Right to inspect books and records

(Sec. 74)f. Right to be furnished with the most

recent financialstatements/financial report (Sec. 75)

g. Right to recover stocks unlawfullysold for delinquent payment ofsubscription (Sec. 69)

h. Right to file individual suit,representative suit and derivativesuits

2. Obligations of Stockholdersa. Liability to the corporation for

unpaid subscription (Sec. 67)b. Liability to the corporation for

interest on unpaid subscription if sorequired by the by-laws (Sec. 66)

c. Liability for watered stocks (Sec. 65)d. Liability for dividends unlawfully

paid (Sec. 31 and 43)e. Liability for assuming to act as a

corporation knowing it to be withoutauthority (Sec. 21)

3. Stockholders’ or Members’Meeting(Asked in 93)

General Rule:Stockholders or members approval isexpressed in a meeting duly called andheld for the purpose.

Exception:Referendum or written assent of thestockholders or members in case ofamendment of AOI (Sec. 16)

a. When? (Sec. 50)Regular meetings of stockholders ormembers shall be held annually ona date fixed in the by-laws, or if notso fixed, on any date in April ofevery year as determined by theboard of directors or trustees.

b. Where?Stock: City or municipality wherethe principal office of thecorporation is located, or, ifpracticable, in the principal office ofthe corporation: Provided, Metro

CORPORATEOFFICER

CORPORATEEMPLOYEE

Position is providedfor in the by-laws orunder theCorporation Code

Employed by the actionof the managing officerof the corporation

RTC has jurisdictionin case of labordispute

NLRC has jurisdictionin case of labor disputes


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WManila shall be considered a city ormunicipality. (Sec. 51)

Non-stock: Any place even outsidethe place where the principal officeis located, in case of non-stockcorporations (Sec. 93)

c. Who May Attend and Vote? Stockholders, either in person or

by proxy Pledgors or mortgagors (Sec. 55) Pledgee or mortgagee, IF

expressly given such right by thepledgor or mortgagor in writingwhich is recorded on thecorporate books.

Executors, administrators,receivers, and other legalrepresentatives duly appointedby the court, without need ofany written proxy.

ALL joint owners of stocks, orany one of them with theconsent of ALL the co-owners,unless there is a written proxy,signed by all the co-owners

Any one of the joint owners ofshares owned in an "and/or"capacity or a proxy thereof

d. Who Presides? The president, unless the by-

laws provide otherwise. (Sec. 54) Any petitioning stockholder or

member upon order of the SECwhen there is no personauthorized to call a meeting.Such petitioning stockholder ormember shall preside thereatuntil at least a majority of thestockholders or memberspresent have chosen one of themas presiding officer. (Sec. 50)

e. Notice Requirements (Sec. 50) Regular Meeting—written notice

sent to all SH or members atleast 2 weeks prior to themeeting, unless a differentperiod is required by the by-laws

Special Meeting—written noticesent at least 1 week prior to themeeting, unless otherwiseprovided in the by-laws.

Subject to waiver, expressly orimpliedly (i.e., attendancedespite no notice)

Failure to give notice wouldrender a meeting VIODABLE at

the instance of an absentstockholder, who was notnotified of the meeting (Board v.Tan, 1959).

f. Quorum Requirements (Sec. 52)1. General: stockholders

representing majority of the OCSor majority of the membersException: the Code or the by-laws provide otherwise

2. Where quorum is present at thestart of a lawful meeting,stockholders present cannotwithout justifiable cause breakthe quorum by walking out fromsaid meeting so as to defeat thevalidity of any act proposed andapproved by the majority.(Thus, stockholders can breakthe quorum for justifiablecauses.) (Johnston vs. Johnston,1965 CA decision)

g. Improperly Held MeetingsAll proceedings & transactions atany meeting of the stockholders ormembers, if within the powers orauthority of the corporation, shall beVALID even if the meeting beimproperly held or called, providedall the stockholders or members ofthe corporation are present or dulyrepresented at the meeting. (Sec. 51)

4. Corporate Acts RequiringApproval of ALL Stockholders orMembers

General Rule:Vote necessary to approve a particularcorporate act as provided in this Codeshall be deemed to refer only to stockswith voting rights

Exceptions:Voting and non-voting shares shall beentitled to vote in the following cases:a. Amendment of Articles of

Incorporationb. Extend or Shorten Corporate Termc. Increase or Decrease of Capital

Stockd. Incurring, Creating or Increasing

Bonded Indebtednesse. Sale, Lease, Mortgage or Other

Disposition of Substantially allcorporate assets


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Wf. Investment of funds in another

corporation or business or for anypurpose other than the primarypurpose for which it was organizedRequisites (Asked in 95): Approval of majority of the board

of directors or trustees Ratification by the stockholders

representing at least 2/3 of theOCS or the members at ameeting duly called for thepurpose

Written notice addressed to eachstockholder or member at hisplace of residence as shown onthe books of the corporation

Appraisal right available todissenting stockholders ormembers

NOTES: If it is the same purpose or

incidental or related to itsPRIMARY purpose, the boardcan invest the corporate fundWITHOUT the consent of thestockholders. No appraisal right.

If the investment is in anothercorporation of different businessor purpose BUT in pursuance ofthe SECONDARY purpose, theaffirmative vote of majority of theboard consented bystockholders/ members isrequired.

If the investment is OUTSIDEthe purpose/s for which thecorporation was organized, AOImust be amended first.

g. Adoption, Amendment and Repeal ofBy-Laws (Sec. 48)

h. Merger and Consolidationi. Dissolution of the Corporation

5. Other instances requiringstockholders’ action (votingshares only)a. Declaration of Stock Dividendsb. Management Contracts (Sec. 44)

Any contract whereby a corporationundertakes to manage or operateALL OR SUBSTANTIALLY ALL of thebusiness of another corporation fora period NOT longer than 5 years

Approval by the BOD Approval by SH owning at least

the majority of the OCS or the

members of BOTH the managingand the managed corporation (atmeeting duly called)

2/3 vote required of themanaged corporation when: Where a SH/s representing

the same interest of both themanaging and the managedcorporations own or controlmore than 1/3 of the totalOCS entitled to vote of themanaging corporation; or

Where a majority of themembers of the BOD of themanaging corporation alsoconstitute a majority of themembers of the BOD of themanaged corporation

c. Fixing the Consideration of No-parshares (Sec. 62)

d. Fixing the Compensation ofDirectors (Sec. 30)

6. Limitations on Right to Votea. Non-voting shares are not

entitled to vote except asprovided for in the lastparagraph of Sec. 6.

b. Preferred or redeemable sharesmay be deprived of the right tovote

c. Fractional shares of stockcannot be voted.

d. Treasury shares have no votingrights as long as they remain inthe treasury.

e. No delinquent stock shall bevoted (Sec. 71)

f. A transferee of stock cannot voteif his transfer is not registered inthe stock and transfer book ofthe corporation.

7. Appraisal Right(Asked in 99 and 07)

Right to withdraw from the corporationand demand payment of the fair valueof the shares after dissenting fromcertain corporate acts involvingfundamental changes in corporatestructure (Sec. 81).

a. Instances of appraisal right (Sec.81)1. Extension or reduction or

corporate term (Sec. 11)


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W2. Change in the rights of

stockholders, authorizepreferences superior to thosestockholders, or restrict theright of any stockholder (Sec.81)

3. Investment of corporatefunds in another business orpurpose (Sec. 42)

4. Sale or disposal of all orsubstantially all assets of thecorporation (Sec. 81)

5. Merger or consolidation (Sec.81)

b. Requirements for exercise ofappraisal right(Secs. 82, 86) Stockholder must have voted

against the corporate act. Stockholder must make a

written demand on thecorporation within 30 daysafter the vote was taken forpayment of the fair value ofhis shares on the said date.

Stockholder must submit thecertificates to the corporationfor notation within ten (10)days after demand forpayment. Otherwise, right toappraisal may be terminatedat the option of corporation.

c. Effect of demand (Sec. 83) ALL rights accruing to such

shares, including voting anddividend rights, shall besuspended

EXCEPT the right of suchstockholder to receivepayment of the fair valuethereof

Immediate RESTORATION ofvoting and dividend rights ifthe dissenting stockholder isnot paid the value of hisshares within 30 days afterthe award.

d. Extinguishment of appraisalright (Sec. 84) Withdrawal of demand by

the stockholder WITHCONSENT of the corporation

Abandonment of theproposed action

Disapproval by SEC of theproposed action

REVIEWER IN COMMERCIAL LAW Chapter VII. Management and Control

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WChapter VII. Management

and Control

A. DEVICES AFFECTING CONTROL1. PROXY2. VOTING TRUST AGREEMENT3. POOLING AND VOTING AGREEMENTS

B. DUTIES AND LIABILITIES OF DIRECTORS1. THREE-FOLD DUTIES OF DIRECTORS2. SELF-DEALING DIRECTOR3. FIXING THE COMPENSATION OF

DIRECTORS AND OFFICERS4. INTERLOCKING DIRECTORS5. SEIZING CORPORATE OPPORTUNITY6. USING INSIDE INFORMATION

C. DUTIES AND LIABILITIES OF OFFICERSD. DUTIES OF CONTROLLING

STOCKHOLDERSE. REMEDIES IN CASE OF MISMANAGEMENTF. RIGHT OF INSPECTIONG. DERIVATIVE SUITS

A. Devices Affecting Control

General Rule: Extent of control isproportional to the number of shares ownedby the SH

Exceptions: proxy device, voting trustagreements, pooling and voting agreements,cumulative voting, classification of shares,restriction on transfer of shares, additionalqualifications for directors, founder’sshares, management contracts, andunusual quorum and voting requirements

1. Proxy

Stockholders and members may vote inperson or by proxy in all meetings ofstockholders or members (Sec. 58).

2. Voting Trust Agreement(Asked in 92)An arrangement created by one or morestockholders for the purpose of conferringupon a trustee or trustees the right to voteand other rights pertaining to the shares fora period not exceeding five (5) years at anytime (Sec. 59).

3. Pooling and Voting AgreementsAgreement between 2 or more stockholdersto vote their shares in the same way. Itdoes NOT involve a transfer of stocks but ismerely a private agreement.

PROXY TRUSTEE POOLING AND VOTINGAGREEMENTS

Principal –agent Trustee-beneficiary ConsensualProxy can’t exceed delegatedauthority.

The only limit to authority is thatthe act must be for the benefit oftrustee. (fiduciary obligation)

Merely an agreement to vote in thesame way.

Valid so long as they are notfraudulent or do not limit BODdiscretion (except in closecorporations).

Must be in writing Must be in writing and notarized No formalities requiredCopy must be filed with thecorporation.

Copy must be filed with SEC andthe corporation.

Merely a contract between SHs.

No transfer. Transfer of legal title to trustee. No transfer.Proxy exercises voting rightsonly for a specific mtg(unless otherwise provided)

Trustee exercises absolute votingrights continuously, subj only tofiduciary duty.

Owner still exercises voting rights.

Proxy cannot be director Trustee can be director Owner can be director.Revocable at will in anymanner, EXCEPT if coupledwith an interest.

Irrevocable, as long as nomisconduct or fraud.

Revocable by consent or mutualtermination. If unilateraltermination, liable for damages.

Max of 5 yrs at a time Max of 5 yrs at a time (unlesscoterminus with loan)

No maximum period.

SEC can pass on validity


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WB. Duties and Liabilities of Directors

1. Three-fold Duties of Directors

Duty Violation under Sec. 31Obedience Willfully and knowingly vote

for or assent to patentlyunlawful acts of thecorporation

Diligence Guilty of gross negligence orbad faith in directing theaffairs of the corporation

Loyalty Acquire any personal orpecuniary interest in conflictwith their duty as suchdirectors or trustees(VILLANUEVA)

a. Duty of ObedienceDirectors must direct the affairs of thecorporation only in accordance with thepurposes for which it was organized.

b. Duty of DiligenceDirectors are expected to possess atleast ordinary knowledge and skill toenable them to make sound businessdecision and to exercise reasonable carein the management of the corporation

Business Judgment Rule

General Rule: Directors cannot be held liable formistakes or errors in the exercise of theirbusiness judgment if they acted in good faith,with due care & prudence. Contracts intra viresentered into by the board of directors arebinding upon the corp. & courts will notinterfere.

Exception: If the contracts are sounconscionable & oppressive as to amount to awanton destruction of the rights of the minority.

c. Duty of LoyaltyDirectors should not attempt to acquireor acquire an interest adverse to theirduties as such directors.

2. Self-dealing Director (Sec. 32)

General: A contract of the corporation withone or more of its directors or trustees isVOIDABLE, at the option of suchcorporation.

Exception: Such contract is VALID if all ofthe following conditions are present:a. That the presence of such director or

trustee in the board meeting in whichthe contract was approved was not

necessary to constitute a quorum forsuch meeting;

b. That the vote of such director or trusteewas not necessary for the approval ofthe contract;

c. That the contract is fair and reasonableunder the circumstances; and

d. That in case of an officer, the contracthas been previously authorized by theboard of directors.

Ratification: In case of absence of the firsttwo conditions above, contract may beratified if:a. Stockholders representing at least 2/3

of the outstanding capital stock or atleast 2/3 of the members in a meetingcalled for the purpose voted to ratify thecontract.

b. Full disclosure of the adverse interest ofthe directors or trustees involved ismade at such meeting.

c. Contract is fair and reasonable underthe circumstances.

3. Fixing the Compensation ofDirectors and Officers (Sec. 30)(Asked in 91)

General rule: Directors are only entitled toper diems, which are reasonable

Exception: When AOI, by-laws, or anadvance contract provides for compensation

Western Institute of Technology vs. Salas (1997):

The position of being chairman and Vice-Chairman, like that of treasurer and secretary,are not considered directorship positions butofficership positions that would entitle theoccupants to compensation. Likewise, thelimitation placed under Sec. 30 of theCorporation Code that directors cannot receivecompensation exceeding 10% of the net incomeof the corporation would not apply to thecompensation given to such positions since it isbeing given in their capacity as officers of thecorporation and not as board members.

4. Interlocking directors (Sec. 33)(Asked in 95 and 96)

a. If the interests of the interlockingdirector in the corporations are bothsubstantial (stockholdings exceed 20%of outstanding capital stock).


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WGeneral rule: A contract between two ormore corporations having interlockingdirectors shall not be invalidated onthat ground alone.

Exception: If contract is fraudulent ornot fair and reasonable.

b. If the interest of the interlockingdirector in one of the corporations isnominal (stockholdings 20% or less)while substantial in the other, thecontract shall be VALID, if the followingconditions are met:1. The presence of such director or

trustee in the board meeting inwhich the contract was approvedwas NOT necessary to constitute aquorum for such meeting

2. That the vote of such director ortrustee was not necessary for theapproval of the contract

3. That the contract is fair andreasonable under thecircumstances.

Where (1) and (2) are absent, thecontract can be ratified by the vote ofthe stockholders representing at least2/3 of the outstanding capital stock orat least 2/3 of the members in ameeting called for the purpose voted toratify the contract, provided that:1. full disclosure of the adverseinterest of the directors/trusteesinvolved is made on such meeting;2. the contract is fair and reasonableunder the circumstances.

5. Seizing corporate opportunity(Sec. 34)(Asked in 01 and 05)

General Rule: Where a director, by virtueof his office, acquires for himself a businessopportunity which should belong to thecorporation, thereby obtaining profits to theprejudice of such corporation, he mustaccount to the latter for all such profits byrefunding the same

Exception: His act has been ratified by avote of the stockholders owning orrepresenting at least two-thirds (2/3) of theoutstanding capital stock.

Doctrine of Corporate Opportunity

If there is presented to a corporate officer ordirector a business opportunity which:a. corporation is financially able to undertakeb. from its nature, is in line with corporation’s

business and is of practical advantage to it;and

c. one in which the corporation has an interestor a reasonable expectancy.

By embracing the opportunity, the self-interestof the officer or director will be brought intoconflict with that of his corporation. Hence, thelaw does not permit him to be seize theopportunity even if he will use his own funds inthe venture. (SUNDIANG AND AQUINO)

6. Using inside information(Secs. 3.8, 23.2, 27, 61, 71.2, SecuritiesRegulation Code)(Asked in 94 and 04)

The fiduciary position of insiders1,directors, and officers prohibits themfrom using confidential informationrelating to the business of thecorporation to benefit themselves or anycompetitor corporation in which theymay have a mere substantial interest.

Since loss and prejudice to thecorporation is not a requirement forliability, the corporation has a cause ofaction as long as there is unfair use ofinside information

It is inside information if it is notgenerally available to others and isacquired because of the closerelationship of the director or officer ofthe corporation

General rule: (Majority view) Directorsowe no fiduciary duty to stockholdersbut they may deal with each other atfair and reasonable terms, as if theywere unrelated. No duty to disclosefacts known to the director or officer.

Exception:

1 “Insider” means: (a) the issuer; (b) a director orofficer (or person performing similar functions) of, or aperson controlling the issuer; (c) a person whoserelationship or former relationship to the issuer givesor gave him access to material information about theissuer or the security that is not generally available tothe public; (d) a government employee, or director, orofficer of an exchange, clearing agency and/or self-regulatory organization who has access to materialinformation about an issuer or a security that is notgenerally available to the public; or (e) a person wholearns such information by a communication from anyof the foregoing insiders (§3.8, Sec Regulations Code)


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WSpecial Facts Doctrine: Conceding theabsence of a fiduciary relationship inthe ordinary case, courts neverthelesshold that where special circumstancesor facts are present which make itinequitable for the director to withholdinformation from the stockholder, theduty to disclose arises and concealmentis fraud (Strong vs. Repide, 1909).

C. Duties and Liabilities of Officers

The provisions on seizing corporateopportunity and disloyalty (Secs. 31 and34) shall also apply to corporate officers

Note: Members of the BOD who are alsoofficers are held to a more stringent liabilitybecause they are in-charge of day-to-dayactivities (CAMPOS).

DOCTRINE OFLIMITED LIABILITY

DOCTRINE OFIMMUNITY

Shields the corporatorsfrom corporate liabilitybeyond their agreedcontribution to thecapital or shareholdingin the corporation.

Protects a personacting for and inbehalf of thecorporation frombeing himselfpersonally liable forhis authorized actions

Tramat Mercantil, Inc. vs. CA, (1994), reiteratedin Atrium Management Corp. v. CA, (2001):

Liability of Director, Trustee or Officer (Askedin 96 and 97)

Personal liability of a corporate director, trusteeor officer along (although not necessarily) withthe corporation may so validly attach, as a rule,only when: He assents (a) to a patently unlawful act of

the corporation, or (b) for bad faith or grossnegligence in directing its affairs, or (c) forconflict of interest, resulting in damages tothe corporation, its stockholders or otherpersons;

He consents to the issuance of wateredstocks or who, having knowledge thereof,does not forthwith file with the corporatesecretary his written objection thereto;

He agrees to hold himself personally andsolidarily liable with the corporation; or

He is made, by a specific provision of law, topersonally answer for his corporate action

D. Duties of ControllingStockholders

A majority stockholder is subject to theduty of good faith when he acts byvoting at a stockholders’ meeting withrespect to a matter in which he has apersonal interest

Controlling stockholders may dispose oftheir shares at any time and at suchprice as they choose provided they donot pervert these prerogatives bytransferring office to persons who areknown as intending to raid thecorporate treasury or otherwiseimproperly benefit themselves.

It is fraudulent for a stockholder to buyfrom another stockholder withoutdisclosing his identity

Principal stockholders are likewiseprohibited from using insideinformation in the purchase and sale ofequity security

E. Remedies in Case ofMismanagement

1. Receivership2. Injunction if the act has not been done3. Dissolution if the abuse amounts to a

ground for quo warranto but theSolicitor General refuses to act

4. Derivative suit filed with the RTC

F. Right of Inspection

1. Basis of RightAs the beneficial owners of thebusiness, the stockholders have theright to know the financial conditionand management of corporate affairs.

2. Records/Books to be Kept (Sec. 74)a. Books that record all business

transactions of the corporationwhich shall include contract,memoranda, journals, ledgers, etc;

b. Minute book for meetings of theSHs/members;

c. Minute book for meetings of theboard/trustees;

d. Stock and transfer book.stock transfer agent - One engagedprincipally in the business ofregistering transfers of stocks inbehalf of a stock corporation(licensed by the SEC). The corporatesecretary is the one duly authorized


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Wto make entries in the stock andtransfer book.

Torres et al vs. CA (1997)

It is the corporate secretary's duty andobligation to register valid transfers of stocksand if said corporate officer refuses to comply,the transferor-stockholder may rightfully bringsuit to compel performance.

3. Financial Statements (Sec. 75)Within 10 days from written request,the corporation shall furnish its mostrecent financial statement (balancesheet and profit or loss statement as oflast taxable year)

4. Requirements for the exercise of theright of inspection (Sec. 74)a. It must be exercised at reasonable

hours on business days and in theplace where the corporation keepsall its records (i.e., principal office).

b. The stockholder has not improperlyused any information he securedthrough any previous examination.

c. Demand is made in good faith or fora legitimate purpose. If thecorporation or its officers contestsuch purpose or contend that thereis evil motive behind the inspection,the burden of proof is with thecorporation or such officer to showthe same.

Gokongwei vs. SEC (1979):

TEST to determine whether the purpose islegitimate – A legitimate purpose is one which isgermane to the interests of the stockholder assuch and not contrary to the interests of thecorporation.

5. Remedies when inspection is refuseda. Mandamusb. Injunctionc. Action for damagesd. File an action under Sec. 144 to

impose a penal offense by fineand/or imprisonment

G. Derivative Suits(Asked in 93)

Suits of stockholders based on wrongful orfraudulent acts of directors or otherpersons.

1. Requisites of Derivative Actionsa. That the stockholder or member at

the time the acts or transactionssubject of the action occurred andthe time the action was filed;

b. That the stockholder exerted allreasonable efforts, and alleges thesame with particularity in thecomplaint, to exhaust all remediesavailable under the AOI, by-laws,laws or rules governing thecorporation or partnership to obtainthe relief he desires.

c. That there is no appraisal rightavailable for the act(s) complainedof; and

d. That the suit is not a nuisance orharassment suit. (Rule 8, InterimRules of Procedure for Intra-Corporate Controversies)

Bitong vs. CA (1998):

The power to sue and be sued in any court by acorporation even as a stockholder is lodged inthe BOD that exercises its corporate powers andnot in the president or officer thereof. But wherecorporate directors are guilty of a breach oftrust, not of mere error of judgment or abuse ofdiscretion, and intra-corporate remedy is futileor useless, a SH may institute a derivative suitin behalf of himself and other SHs and for thebenefit of the corporation, to bring about aredress of the wrong inflicted directly upon thecorporation and indirectly upon thestockholders.

2. Jurisdiction over derivative suits lieswith the RTC (Sec. 5.2, SecuritiesRegulation Code)

3. Other suits by stockholders/membersa. Individual Actions – those brought

by the shareholder in his own nameagainst the corporation when awrong is directly inflicted againsthim.

b. Representative or Class Actions –those brought by the stockholder inbehalf of himself and all otherstockholders similarly situated whena wrong is committed against agroup of stockholders.

REVIEWER IN COMMERCIAL LAW Chapter VIII. Capital Structure

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WChapter VIII. Capital Structure

A. CLASSIFICATION OF SHARESB. SUBSCRIPTION CONTRACT

1. STATUS AS A SHAREHOLDER2. TYPES OF SUBSCRIPTION CONTRACT3. INTEREST ON UNPAID SUBSCRIPTION

C. PRE-EMPTIVE RIGHT1. DEFINITION2. LIMITATIONS ON THE EXERCISE OF

PREEMPTIVE RIGHT3. INTEREST ON UNPAID SUBSCRIPTION

D. CONSIDERATION FOR ISSUANCE OFSHARES1. FORMS OF CONSIDERATION2. LIMITATIONS ON CONSIDERATION

E. WATERED STOCKS1. DEFINITION2. LIABILITY OF DIRECTORS OR

OFFICERSF. DELINQUENT SHARES

1. DEFINITION2. EFFECTS OF DELINQUENCY

G. ENFORCEMENT OF PAYMENT1. DELINQUENCY SALE2. COURT ACTION3. COLLECTION FROM CASH DIVIDENDS

AND WITHHOLDING OF STOCKDIVIDENDS

H. RIGHTS AND OBLIGATIONS OF HOLDERSOF UNPAID BUT NON-DELINQUENT STOCK

I. CERTIFICATE OF STOCK

J. LOST OR DESTROYED CERTIFICATE

K. TENDER OFFER

Sources of Financing1. Contributions by stockholders (Equity)2. Loans or advances from creditors

(Borrrowing)3. Profits that the business may earn

A. Classification of Shares (Sec. 6)

Shares of stock of stock corporations maybe divided into classes or series of shares orboth. Each class or series of shares mayhave rights, privileges or restrictions, asstated in the AOI.

Classification of shares:1. Common shares2. Preferred shares3. Par value shares4. No-par value shares5. Founder’s shares6. Redeemable shares7. Treasury shares8. Convertible shares9. Non-voting shares

General Rule: No share may be deprived ofvoting rightsExceptions:1. Preferred or2. Redeemable shares,3. Provided by the Code

There shall always be a class/series ofshares which have a COMPLETE VOTINGRIGHTS

Doctrine of Equality of SharesEach share shall be EQUAL in ALL respectsto every other share, except as otherwiseprovided in the AOI and stated in thecertificate of stock (Sec. 6)

1. Common SharesThe most common type of shares whichenjoy no preference but the ownersthereof are entitled to management ofthe corporation and to equal pro-ratadivision of profits after preference.

2. Preferred SharesStocks which are given preference bythe issuing corporation in dividends andthe distribution of assets of thecorporation in case of liquidation orsuch other preferences as may be statedin the AOI which are not violative of theCorporation Code.

Limitations:a. Preferred shares can only be issued

with par value.b. Preferred shares must be stated in

the Articles of Incorporation and inthe certificate of stock.

c. The BOD may fix the terms andconditions only when so authorizedby the AOI and such terms andconditions shall be effective uponfiling a certificate thereof with theSEC.

3. Par value sharesThese are shares with a stated value setout in the AOI. This remains the sameregardless of the profitability of thecorporation. This gives rise to financialstability and is the reason why banks,trust corporations, insurancecompanies and building and loanassociations must always be organizedwith par value shares.

Par value is minimum issue price ofsuch share in the AOI which must bestated in the certificate


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W4. No-par value shares

These are shares without a stated value.

Limitations:a. No-par value shares cannot have an

issue price of less than P5.00 pershare (Sec. 6).

b. They shall be deemed fully paid andnon-assessable and the holders ofsuch shares shall not be liable tothe corporation or to its creditors inrespect thereto (Sec. 6).

c. Entire consideration received by thecorporation for its no-par valueshares shall be treated as capitaland shall not be available fordistribution as dividends (Sec. 6).

d. AOI must state the fact that thecorporation issues no-par sharesand the number of shares.

e. Banks, insurance companies, trustcompanies, building and loanassociations, and public utilitiescannot issue no-par value shares(Sec. 6).

f. The issued price may be fixed in theAOI, or by the BOD pursuant toauthority conferred upon it by theAOI, and by majority vote of theoutstanding shares in a meetingcalled for the purpose (Sec. 62).

5. Founder’s Shares (Sec. 7) These are shares, classified as such

in the AOI, which are given certainrights and privileges not enjoyed bythe owners of other stocks. (§7)

Where exclusive right to vote and bevoted for in the election of directorsis granted, such right must be for alimited period not to exceed 5 yearssubject to approval by SEC. 5 yearperiod shall commence from date ofapproval by SEC. (Ibid)

6. Redeemable SharesThese are shares which permit theissuing corporation to redeem orpurchase its own shares (Sec. 8).

Limitations:a. Redeemable shares may be issued

only when expressly provided for inthe AOI (Sec. 8).

b. The terms and conditions affectingsaid shares must be stated both inthe AOI and in the certificate (Sec.8).

c. Redeemable shares may be deprivedof voting rights in the AOI, unlessotherwise provided in the Code.

d. The corporation is required tomaintain sinking fund to answer forredemption price if the corporationis required to redeem.

e. The redeemable shares are deemedretired upon redemption unlessotherwise provided in the AOI.

f. Unrestricted retained earnings isNOT necessary before shares can beredeemed but there must besufficient assets to pay the creditorsand to answer for operations(Republic Planters Banks vs. Agana,1997). Redemption cannot be madeif such redemption will result ininsolvency or inability of thecorporation to meet its obligations(SEC Opinion, 24 Aug 1987).

7. Treasury SharesThese are shares which have beenissued and fully paid for, butsubsequently re-acquired by the issuingcorporation by purchase, redemption,donation or through some other lawfulmeans. Such shares may again bedisposed of for a reasonable price fixedby the BOD (Sec. 9).

Note: Delinquent stocks, which arestocks that have not been fully paid,may become treasury stocks upon bidof the corporation in absence of otherbidders (Sec.68).

8. Convertible sharesA type of preferred stock that the holdercan exchange for a predeterminednumber of common shares at aspecified time.

9. Non-voting shares (Sec. 6)General Rule: Non-Voting Shares arenot entitled to vote.

Exceptions:a. Amendment of the AOIb. Adoption and amendment of by-lawsc. Sale, lease, exchange, other

disposition of all or substantially allof the corporate property

d. Incurring, creating or increasingbonded indebtedness

e. Increase or decrease of capital stockf. Merger and consolidationg. Investment of corporate funds in

another corporation or businessh. Dissolution of the corporation


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WB. Subscription Contract

Sec. 60. Subscription contract. Any contract forthe acquisition of unissued stock in an existingcorporation or a corporation still to be formedshall be deemed a subscription contract withinthe meaning of this Title, notwithstanding thefact that the parties refer to it as a purchase orsome other contract.

1. Status as ShareholderA person becomes a shareholder themoment he:a. enters into a subscription contract

with an existing corporation (he is astockholder upon acceptance of thecorporation of his offer to subscribewhether the consideration is fullypaid or not).

b. purchases treasury shares from thecorporation

c. acquires shares from existingshareholders by sale or any othercontract (SUNDIANG AND AQUINO)

2. Types of subscription contractsa. Pre-incorporation subscription

It is a subscription for shares ofstock of a corporation still to beformed. Irrevocable for a period of at

least 6 months from the date ofsubscription, or after thesubmission of the AOI to theSEC.

Revocable only when all of theother subscribers consent to therevocation, or when theincorporation fails to materializewithin six (6) months or within alonger period as my bestipulated in the contract ofsubscription.

b. Post-incorporation subscriptionIt is entered into after theincorporation.

3. Interest on unpaid subscription

General Rule: Stockholder is NOT liable topay interest on his unpaid subscription.

Exception: Such rate as may be fixed inthe by-laws or the legal rate (Sec. 66).

Notes:Transfer for consideration of treasuryshares is a sale by the corporation (notsubscription). A transfer of previouslyissued shares by a stockholder to a third

person is a sale. Transfer of unissuedshares is subscription.

Shareholders are not creditors of thecorporation with respect to theirshareholdings thereto and the principle ofcompensation or set-off has no application.

Subscription contract is NOT required to bein writing.

C. Pre-emptive Right (Sec. 39, 102)(Asked in 99, 01 and 04)

1. DefinitionPre-emptive right is an option privilegeof an existing stockholder to subscribeto a proportionate part of sharessubsequently issued by the corporationbefore the same can be disposed of infavor of others; this right includes allissues and disposition of shares of anyclass

SHs of a stock corporation shall enjoypre-emptive right to subscribe to ALLISSUES OR DISPOSITIONS of shares ofany class, in proportion to theirrespective shareholdings.

2. Limitations to exercise of pre-emptive right (Sec. 39):a. Such pre-emptive right shall not

extend to shares to be issued incompliance with laws requiringstock offerings or minimum stockownership by the public;

b. It shall NOT extend to shares to beissued in good faith with theapproval of the stockholdersrepresenting two-thirds (2/3) of theoutstanding capital stock, inexchange for property needed forcorporate purposes or in payment ofa previously contracted debt

c. It shall not take effect if denied inthe AOI or an amendment thereto.

3. Remedies in case of unwarranteddenial:a. Injunctionb. Mandamus

The suit should be individual andnot derivative because the wrongdone is to the stockholdersindividually

c. SEC can cancel shares if the thirdparty is not innocent


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WD. Consideration for issuance of

shares

1. Forms of Consideration (Sec. 62)a. Actual cashb. Property, tangible or intangible,

actually received by the corporationand necessary or convenient for itsuse and lawful purposes at a fairvaluation equal to the par or issuedvalue of the stock issued

Valuation is initially determined bythe incorporators or the board ofdirectors, subject to approval by theSEC.

Note: Property should not beencumbered. Otherwise, it wouldimpair the consideration

c. Labor performed for or servicesactually rendered to the corporation;

d. Previously incurred indebtedness ofthe corporation;

e. Amounts transferred fromunrestricted retained earnings tostated capital (declaration of stockdividends); and

f. Outstanding shares exchanged forstocks in the event ofreclassification or conversion.

2. Limitations on Consideration:a. Stocks shall not be issued for a

consideration less than the par orissued price thereof.

b. Shares of stock shall not be issuedin exchange for promissory notes orfuture service.

Notes:Promissory notes and future servicemay be used as considerationprovided that certificates of stockwill be issued only after actualencashment of promissory note orperformance of such services.

Same consideration applies for theissuance of bonds by thecorporation.

E. Watered Stocks

1. DefinitionThese are shares issued as fully paid-upwhen in fact the consideration agreed toand accepted by the directors of thecorporation was something known to be

much less than the par value or issuedvalue of the shares. These include thefollowing (See Sec. 65):a. Issued without consideration (bonus

share)b. Issued as fully paid when the

corporation has received less sum ofmoney than its par or issued value(discounted share)

c. Issued for consideration other thanactual cash (i.e., property orservices), the fair valuation of whichis less than its par or issued value

d. Issue stock dividend when there areno sufficient retained earnings orsurplus to justify it.

Note:Subsequent increase in the value of theproperty used in paying the stock doesnot do away with the water in the stock.The existence of such water isdetermined at the time of issuance ofthe stock.

2. Liability of directors or officersAny director or officer of a corporationconsenting to the issuance of stocks orwho, having knowledge thereof, doesnot forthwith express his objection inwriting and file the same with thecorporate secretary shall beSOLIDARILY liable with the stockholderconcerned to the corporation and itscreditors for the difference in value (Sec.65).

F. Delinquent Shares

1. DefinitionThese are shares for which thecorresponding subscription or balanceremains unpaid after a grace period of30 days from the date specified in thecontract of subscription or from thedate stated in the call made by theBOD.

2. Effects of stock delinquencya. No delinquent stock shall be voted

for or be entitled to vote or torepresentation at any stockholers’meeting

b. The holder thereof shall NOT beentitled to any of the rights of astockholder except the right todividends.

c. Such shares shall be subject todelinquency sale.


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WG. Enforcement of Payment

(Asked in 97)

1. Delinquency salea. Procedure for delinquency sale

(Sec. 68)1. Call for payment made by the

BOD.2. Notice of call served on each

stockholder.3. Notice of delinquency issued by

the BOD upon failure of thestockholder to pay within 30days from date specified.

4. Service of notice of delinquencyon the non-paying subscriber,PLUS publication in anewspaper of general circulationin the province or city where theprincipal office of thecorporation is located, once aweek for two (2) consecutiveweeks.Note:Requirements on notice andpublication are mandatory.Lacking such requirements, thestockholder may question thesale as provided under Sec. 69.

5. Public auction - the highestbidder is one who is willing topay the balance of thesubscription for the leastnumber of shares. If there areno bidders, the corporation mustbid for the whole number ofshares regardless of how muchthe SH has paid. Such stockswill pertain to the corporation asfully paid treasury stocks.

b. Irregularities in the delinquencysale (Sec. 69)1. Action to recover delinquent

stock must be on the ground ofirregularity or defect in thenotice of sale.

2. Party seeking to recover mustfirst pay or tender to the partyholding the stock the sum forwhich the same was sold, withinterest from the date of sale atthe legal rate.

3. The action shall be commencedwithin six months from the dateof sale.

2. Court Action (Sec. 70)General Rule: A valid call is aprerequisite to liability where courtaction is the remedy chosen. (Da Silvav. Aboitiz, 1923).

Exceptions:a. The subscription contract specifies a

date of payment.b. The corp. has become insolvent All

unpaid subscriptions areimmediately recoverable in a courtaction by the assignee in insolvency(Velasco vs. Poizat, 1918)

Defense: The SH may contend that thesubscription was induced by fraudulentmisrepresentation, provided he is notbarred by ratification, or guilty oflaches.

3. Collection from cash dividends andwithholding of stock dividendsCASH DIVIDENDS due on delinquentstock shall first be applied to theunpaid balance on the subscriptionplus costs and expenses (Sec. 43).

STOCK DIVIDENDS shall be withheldfrom the delinquent stockholder untilhis unpaid subscription is fully paid(Sec. 43).

H. Rights and Obligations of Holdersof Unpaid Non-Delinquent Stock

Sec. 72.Rights of unpaid shares. Holders ofsubscribed shares not fully paid which are notdelinquent shall have ALL the rights of astockholder.

1. Holders of unpaid subscribed shareswhich are not delinquent shall have ALLthe rights of a stockholder (Sec. 72)

2. Such holders shall not be charged withinterest unless otherwise stipulated(Sec. 66).

3. No certificate of stock shall be issued tosuch holders until the full amount oftheir subscription, together with theinterest and expenses if any, has beenpaid (Sec. 64)

4. No shares of stock against which thecorporation holds any unpaid claimshall be transferable in the books of thecorporation (Sec. 63).

Notes:


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WA subscription contract is unconditional(i.e., obligation to pay must not besubject to any contingencies) andindivisible (as to the amount andtransferability—Fua Cun v. Summers,1923). Hence, if the subscriber paid20% of his subscription, he is notentitled to the issuance of certificatescorresponding to 20% of the shares.

Unpaid claim refers to any unpaidsubscription and not to anyindebtedness which a subscriber mayowe the corporation rising from anyother transaction (China Banking Corp.vs. CA, 1997).

I. Certificate of Stock

A certificate of stock is the best evidence ofthe rights and status of a SH (not acondition precedent to the acquisition ofsuch rights).

General rule: The entire subscription mustbe paid first before the certificates of stockcan be issued. Partial payments are to beapplied pro rata to each share of stocksubscribed. (Nava v Peers Mktg Corp andFua Cun v Summers, 1923).

Exception: In the Baltazar v Lingayen GulfElectric Power Company case, it was thepractice of the corporation to issuecertificates of stock to its individual SHs forunpaid shares of stock and to give fullvoting power to shares fully paid.

J. Lost or Destroyed Certificate(Sec. 73)

Procedure for re-issuance in case of loss,stolen or destroyed certificates:1. Registered owner to file an affidavit of

loss with the corporation.2. Publication of notice of loss in a

newspaper of general circulationpublished in the place where thecorporation has its principal office, oncea week for 3 consecutive weeks at theexpense of the owner of the certificate ofstock

3. Cancellation of the certificate in thebooks of the corporation and issuanceof new certificates, after the expirationof 1 year from the date of the lastpublication and there is no contest. Theright to make such contest shall be

barred after the expiration of the one-year period.

4. Issuance of new certificates before 1year period if the registered owner filesa bond and there is no pending contestregarding the ownership of saidcertificates.

Note: Except in cases of fraud, badfaith, or negligence on the part of thecorporation and its officers, no actionmay be brought against the corporationwhich shall have issued certificates ofstock in lieu of those lost, stolen ordestroyed pursuant to the aboveprocedure.

K. Tender Offer (Asked in 02)

It is a publicly announced intention of aperson acting alone or in concert with otherpersons to acquire equity securities of apublic company (Rule 19, Amended IRR ofThe Securities Regulation Code publishedon 13 Feb 2004).

Instances where tender offer is required tobe made:1. Any person or group of persons acting

in concert intends to acquire 35% ormore of equity shares in a publiccompany.

2. Any person or group of persons actingin concert intends to acquire 35% ormore of equity shares in a publiccompany in one or more transactionswithin a period of 12 months.

3. Any acquisition of even less than 35%results in ownership of over 51% of thetotal outstanding equity securities of apublic company.

REVIEWER IN COMMERCIAL LAW Chapter IX. Dividends and Purchase of Corporation of Its Own Shares

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WChapter IX. Dividends andPurchase of Corporation of

Its Own Shares

A. FORMS OF DIVIDENDSB. OTHER CLASSES OF DIVIDENDSC. SOURCE OF DIVIDENDSD. DECLARATION OF DIVIDENDSE. TREASURY SHARES

1. DEFINITION2. INSTANCES WHEN CORPORATION MAY

ACQUIRE ITS OWN SHARES3. REMEDIES IN CASE OF IMPROPER

PURCHASE

A. Forms of Dividends

1. Cash2. Property3. Stock

Stock dividends are distributions of thecorporation’s own stocks tostockholders. It involves a transfer ofearnings to capital stock and does notrepresent income on the part of the SH.

Limitations on the issue of stockdividends:a. There must be unissued shares of

the corporation. If there are none,there must be an increase in capitalstock first, which requires anamendment of the AOI.

b. There must be unrestricted retainedearnings.

c. Stock dividends should not beissued to non-stockholders even forservices rendered (Nielson v. LepantoConsolidated Mines, 1968).

Cash Dividends Stock DividendsAuthority to declareDeclared only by theboard of directors atits discretion

Declared by the boardwith the concurrenceof the SHsrepresenting at least2/3 of the OCS at aregular/specialmeeting

Disbursement of fundsInvolves adisbursement to theSHs of accumulatedearnings

Doesn’t involve anydisbursement of funds

Corporate capitalDoes not increase thecorporate capital

Corporate Capital isincreased

Creation of debtsIts declaration createsa debt from thecorporation to each ofits SHs

No debt is created byits declaration

Liability to corporate creditorsWhen declared andpaid becomes absoluteproperty of the SH andcannot be reached bycorporation’s creditorsin the absence of fraud

Since it is still part ofcorporate property,may be reached bycorporate creditors

B. Other Classes of Dividends

1. Optional Dividend—dividend whichgives the stockholder an option toreceive cash or stock dividend.

2. Composite Dividend—dividend partly incash and partly in stocks.

3. Preferred or preferential dividend—dividend payable to one class of SHs inpriority to that to be paid to anotherclass.

4. Cumulative Dividend—dividend whichis contracted to be paid at a certain rateat stated times and if net earnings atany dividend period are NOT sufficientto pay the contract dividend, it is to bemade out of subsequent net earnings.

5. Scrip dividend—dividend in the form ofa writing or certificate issued to a SHentitling him to the payment of money,stock or other benefit at some futuretime inasmuch as the corporation at thetime such dividends are declared doesnot have sufficient cash.

6. Bond Dividend—dividend distributed inbonds of the corporation to the SHs

7. Liquidating Dividends—dividends whichare actually distributions of the assetsof the corporation upon dissolution.

C. Source of Dividends

Unrestricted retained earnings (URE) arethe undistributed earnings of thecorporation which have not been allocatedfor any managerial, contractual or legalpurposes and which are free for distributionto the SHs as dividends.

Should there be any capital deficit,subsequent profits, if any, duringsucceeding periods must 1st be applied tocover the deficit, and only the profitsremaining after eliminating the deficit, canbe considered as URE.

General Rule: Dividends cannot bedeclared out of capital since the trust funddoctrine will be violated.


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WTRUST FUND DOCTRINE(Asked in 07)

Boman Environmental Development Corporationvs. CA (1988):

Trust Fund Doctrine means that the capitalstock, properties and other assets of acorporation are regarded as equity in trust forthe payment of corporate creditors. Statedsimply, the trust fund doctrine states that allfunds received by the corporation in payment ofthe shares of stock shall be held in trust for thecorporate creditors and other stockholders of thecorporation. Under such doctrine no fund shallbe used to buy back the issued shares of stockexcept only in instances specifically allowed bythe Corporation Code.

Exceptions:1. liquidating dividends2. dividends from investments in wasting

asset corporationWasting asset corporation is acorporation solely or principally engagedin the exploitation of wasting assets todistribute the net proceeds derived fromexploitation of their holdings i.e. mines,oil well, patents, leaseholds

Q: Can dividends be distributed out of PAID-INSURPLUS?

A: NO. Paid-in surplus is the difference betweenthe par value and the issued value or sellingprice of the shares, and are not consideredprofits earned in the conduct of the business ofthe corporation. They are considered part ofcapital (SEC Opinions April 18, 1988)

Exception: The SEC allows the distribution ofpaid-in surplus if:1. They be declared only as stock dividends2. No creditor is prejudiced3. No resulting impairment of capital(SEC Opinion dated October 19, 1989)Applicable also to reduction surplus—thosearising from the reduction of the par value of theissued shares of stocks (SEC Opinion datedAugust 8, 1991)

Q: Can dividends be distributed out ofRevaluation or Re-appraisal Surplus?

A: No. Revaluation surplus or the increase in thevalue of assets cannot be considered earning ofthe corporation. They are by nature subject tofluctuationsException: the SEC allows distribution of theportion of the increase in the value of fixedassets as a result of revaluation after the assetsare depreciated and the depreciation is chargedagainst the operation provided:

1. the company has sufficient income from theoperations from which the depreciation on theappraisal increase is charged2. the company has no deficit at the time thedepreciation on the reappraisal increase wascharged to operations3. such depreciation on the appraisal increasepreviously charged to operations is not erased orimpaired by subsequent losses, otherwise, onlythat portion not impaired by subsequent lossesis available for dividend (SEC Opinion datedMarch 18, 1992 and August 22, 1991)

Q: Can dividends be distributed on Gains onsale of real property?

A: Yes. Gains on sale of the corporation’s realproperties are part of retained earnings.

Retained earnings include not only earningsrealized from the ordinary course of business ofthe corp but also transactions not associatedwith but incidental to or necessary in keepingthe business for which the corporation wasorganized.

HOWEVER, there must be surplus profits. Thecorporation cannot distribute gains from the saleas dividends if the remaining assets afterdistribution is less than the amount of legal orstated capital and liabilities (SEC Opinion datedMay 9, 1990)

D. Declaration of Dividends(Asked in 91, 01 and 05)

WHO?1. Board of Directors alone—cash,

property dividends.2. Board of Directors with approval of

stockholders representing not lessthan 2/3 of the OCS—stockdividends.

CAN BOD BE COMPELLED TODECLARE?General Rule: Declaration of dividendsis discretionary upon the BOD. It ispayable only when there are profitsearned by the corporation and even ifthere are existing profits, the BOD hasdiscretion to determine WON it shouldbe declared (Republic Planters Bank vAgana, 1997)

Exceptions:1. When the decision is tainted w/ bad

faith, fraud or gross negligence2. If the court finds, upon complaint of

a SH, that profits were accumulatedin excess of 100% of thecorporation’s paid-in capital stock, it


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Wmay order the corporation todistribute dividends

Exceptions to the exception:a. when justified by definite corporate

expansion projects or programsapproved by the board of directors;or

b. when the corporation is prohibitedunder any loan agreement with anyfinancial institution or creditor,whether local or foreign, fromdeclaring dividends without its/hisconsent, and such consent has notyet been secured; or

c. when it can be clearly shown thatsuch retention is necessary underspecial circumstances obtaining inthe corporation, such as when thereis need for special reserve forprobable contingencies (Sec. 43).

WHEN RIGHT TO DIVIDEND VESTS?General rule: Upon lawful declarationby the BOD, dividends become a debtowing to the SH. No revocation can bemade.

Exceptions:1. Dividends are revocable if NOT yet

announced or communicated to thestockholders.

2. Stock dividends even if alreadydeclared may be revoked prior toactual issuance since these are notdistributions but merely representchanges in the capital structure.

Note:Right to dividends vests upondeclaration so whoever owns the stockat such time also owns the dividends.Subsequent transfer of stock would notcarry with it right to dividends UNLESSagreed upon by the parties.

E. Treasury Shares(Asked in 05)

1. DefinitionTreasury shares are shares of stockswhich have been issued and fully paidfor, but subsequently reacquired by theissuing corporation by purchase,redemption, donation or through someother lawful means (Sec. 9).

Notes:

Treasury shares may be issued asproperty dividends provided that theretained earnings has not beensubsequently impaired by losses.

Treasury shares do not have votingrights so long as they remain as such(Sec. 57).

2. Instances when corporation mayacquire its own sharesa. A corporation must have

unrestricted retained earnings inacquiring own shares except:1. shares are acquired in the

redemption of redeemableshares (Sec. 8)

2. shares are re-acquired to effect adecrease in capital stockapproved by the SEC (Sec. 38)

3. shares are reacquired by a closecorporation pursuant to theorder of the SEC acting toarbitrate a deadlock (Sec. 104)

b. The acquisition must be for alegitimate purpose, such as thefollowing:1. To eliminate fractional shares

arising out of stock dividends2. To collect or compromise an

indebtedness to the corporation,arising out of unpaidsubscription, in a delinquencysale, and to purchase delinquentshares sold during said sale

3. To pay dissenting orwithdrawing stockholdersentitled to payment for theirshares under the provisions ofthis Code (appraisal right, Sec.81).

3. Remedies in case of ImproperPurchasea. Creditors prejudiced by the

repurchase can go after the sellingSHs to recover what was paid tothem.

b. Directors who were negligent or inBF for approving the repurchase canbe held personally responsible.

c. Prejudiced SH can also go after BODwho approved purchase (when theirdividends are reduced, remainingassets can’t cover debts, etc).

REVIEWER IN COMMERCIAL LAW Chapter X. Transfer of Shares

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WChapter X. Transfer of Shares(Asked in 96, 97, 01 and 04)

A. MANNER OF TRANSFERB. REGISTRATION OF TRANSFER

1. EFFECTS OF LACK OF REGISTRATION2. REMEDY IF REGISTRATION IS

REFUSEDC. RESTRICTIONS ON TRANSFER

1. VALIDITY OF RESTRICTIONS2. PRESUMPTIONS

D. UNAUTHORIZED TRANSFERS1. CERTIFICATES INDORSED IN BLANK2. FORGED TRANSFERS

E. COLLATERAL TRANSFERS

A. Manner of Transfer

Shares of stock represented by certificatesmay be transferred as follows (Sec. 63):1. Delivery of the certificate and2. Indorsement by the owner or his

attorney-in-fact or other person legallyauthorized to make the transfer

3. Recording of the transfer in the books ofthe corporation to be VALID againstthird parties

If not represented by certificates:1. Shares may be transferred by means of

a deed of assignment.2. Such transfer is duly recorded in the

books of the corporation.

Rural Bank of Salinas vs. CA (1992)Is registration in corporate books necessary fortransfer of shares of stock?NO. Shares of stock are personal property andmay be transferred by delivery. Registration incorporate books is not necessary. Thecorporation may not impose any restriction onsuch transfer. The right of transferee/assigneeto have stocks transferred to his name isinherent right, duty of the corporation to registerthe transfer is ministerial.

Razon vs. IAC (1992):How to transfer Shares of Stock?a) Shares of stock is transferred by delivery

and endorsement of the stock certificateb) Such mode of transfer is not complied with

in this casec) In the books of the corporation, Chudian is

still the owner of the stocks. He was evenelected member of the board which provesthat he is a stockholder

d) One who claims ownership should show thatthe same was transferred to him in accordwith the valid mode of transfer. Thispetitioner failed to show.

Endorsement is a mandatory requirement of lawfor an effective transfer.

B. Registration of Transfer

a. Effects of lack of registrationa. Transferee cannot voteb. Transferee cannot be voted forc. Transferee cannot prevail over rights

of a subsequent attaching creditor(Uson v. Diosomito, 1935).

d. Transferee not entitled to dividends.e. Stockholder of record has the right

to participate in meetings.

Notes:Until registration is accomplished, thetransfer though valid between theparties CANNOT be effective against thecorporation.

Nevertheless, the stockholder can stilltransfer his interest in the corporationby way of a Deed of Assignment.

b. Remedy if registration is refusedTransferee may petition the court for awrit of mandamus to compel thecorporation to do so (Price v. SuluDevelopment Corp., 1933)

C. Restrictions on Transfer

General Rule:Shares of stock so issued are personalproperty and may be transferred (Sec. 63).(FREE TRANSFERABILITY OF SHARES)

Exception:In CLOSE corporations, restrictions on theright to transfer shares may be provided inthe AOI, by-laws and certificates (Sec. 98).

D. Unauthorized Transfers

1. Certificates indorsed in blank –(Theory of Quasi-Negotiability) wherethe stockholder indorses his certificatein blank in such a manner as to clothewhoever may be in possession of it withapparent authority to deal with theshares as the latter’s own, he will beestopped from claiming the shares asagainst a bonafide purchaser.(Santamaria v. Hongkong & ShanghaiBank, 1951)

2. Forged transfers – if the corporationshould issue a new certificate pursuantto a forged transfer, it incurs no liabilityto the person in whose favor it issued it

REVIEWER IN COMMERCIAL LAW Chapter X. Transfer of Shares

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Wand may demand its return forcancellation.

But with respect to a subsequentpurchaser in good faith and for value,the corporation is estopped fromdenying the validity of the newly issuedcertificate because by issuing such, ithas represented that the person namedtherein is a stockholder of thecorporation.

An exception is when the recognition ofthe original and new subscriber willresult to an overissue of shares. Insuch case, the new SH would now havethe right to damages against thecorporation and the latter against thosewho made false representation (Hodgesvs. Lezama, 1965).


Shares of stock being personal propertymay be the subject matter of pledge orchattel mortgage. Such collateral transfersneed NOT be registered since Sec. 63 of theCode applies only to absolute transfer(Monserrat vs. Ceron, 1933). Thus, theregistration in the corporate books ofpledges and chattel mortgages of sharesCANNOT have any legal effect.

Lim Tay v CA (1998):

Q: Will pledged shares automatically entitle thepledgee to record transfer in the books?

A: NO. Corporate secretary cannot becompelled to record transfer. The duty of acorporate secretary to record transfers of stocksis ministerial. However, he cannot be compelledto do so when the transferees title to said shareshas no prima facie validity or is uncertain.Mandamus will not issue to establish a right butonly to enforce one already established. Pledgeefailed to establish a legal right. He is not ownerof the shares without foreclosure and purchaseat auction. He is merely a pledgee.

Chempil Export & Import Corp vs. CA (1995)

Attachment or mortgage of shares of stock neednot be registered in the corporation’s stock andtransfer books as a chattel mortgage over sharesof stock doesn’t involve a ‘transfer or shares’ andonly absolute transfers of shares are required tobe recorded in the stock and transfer book tohave force and effect as against 3rd persons.

REVIEWER IN COMMERCIAL LAW Chapter XI. Amendments of Corporate Charter

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WChapter XI. Amendments of

Corporate Charter

A. GENERALB. SPECIFIC

1. INCREASE IN CAPITAL STOCK2. DECREASE OF CAPITAL STOCK3. CHANGE IN CORPORATE NAME

C. GROUNDS FOR DISAPPROVINGAMENDMENT

A. General

1. ProcedureMajority vote of directors or trustees andthe vote or written assent of thestockholders representing 2/3 ofoutstanding capital stock or 2/3 ormembers of non-stock corporations (Sec.16).

2. EffectivityUpon approval of SEC or from the date offiling if not acted upon by SEC within 6months from the date of filing provided thatdelay cannot be attributed to thecorporation.

3. CongressThe passage of statutes amending theCorporation Code or special laws mayresult in the amendment of the AOIprovided that no vested rights are impaired(Sec. 145).

B. Specific Amendments

General Rule: Amendment of the AOI maybe approved by the required number ofstockholders/members by mere referendumor written assent. (Sec. 16)

Exceptions: Stockholders’/members’approval of the amendment should be madein a meeting duly called for the purpose inthe following instances:

1. Increase of capital stock (Sec. 38)(Asked in 99 and 01)a. Ways of Increasing Capital Stock

1. By increasing the number ofshares and retaining the parvalue

2. By increasing the par value ofexisting shares without changingthe number of shares

3. By increasing the number ofshares and increasing the parvalue

b. Requirements1. Approval by a majority vote of

the board of directors2. Ratification of stockholders

representing 2/3 of the OCS at ameeting duly called for thepurpose

3. Filing with the SEC a certificateof increase of capital stock

4. Filing with the SEC aTreasurer’s Affidavit showingthat 25% of the increased capitalstock (should be increase incapital stock) is subscribed and25% thereof paid.

5. Issuance by the SEC of acertificate of filing. From andafter such issuance, the capitalstock shall stand increased.

Note: The above requirements alsoapply in reduction of capital stock.

c. Appraisal RightAppraisal right may be exercisedwhen the increase in capital stockhas the effect of creating shares withpreferences superior to those ofexisting ones (Sec. 81).

2. Reduction of capital stocka. Ways of Decreasing Capital Stock

1. By decreasing the number ofshares and retaining the parvalue

2. By decreasing the par value ofexisting shares without changingthe number of shares

3. By decreasing the number ofshares and decreasing the parvalue

b. Limitation on the reductionNo decrease of the capital stockshall be approved by theCommission if its effect shallprejudice the rights of corporatecreditors (Sec. 38).

c. Appraisal RightAppraisal right may be exercised ifthe reduction of capital stock hasthe effect of altering the rights ofany stockholder or class ofstockholders (Sec. 81).

d. Exception to the Trust FundDoctrineExcept by decrease of capital stockand as otherwise allowed by this

REVIEWER IN COMMERCIAL LAW Chapter XI. Amendments of Corporate Charter

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WCode, no corporation shall distributeany of the assets or property exceptupon lawful dissolution and afterpayment of all its debts andliabilities (Sec. 122).

3. Change in corporate term (Sec. 37)a. Requirements

1. Approved by a majority vote ofthe board of directors or trusteesand

2. Ratified at a meeting by thestockholders representing atleast two-thirds (2/3) of theoutstanding capital stock or byat least two-thirds (2/3) of themembers in case of non-stockcorporations.

b. Appraisal right may be exercised(Sec. 81)

C. Grounds for disapprovingamendment (Sec. 17) (NUTO)

1. Amendment is not substantiallywith the form prescribed

2. Purpose patently unconstitutional,illegal, immoral, contrary togovernment rules and regulations

3. Treasurer’s Affidavit concerning theamount of capital stock subscribedand/or paid is false

4. Percentage requirement ofownership by Filipino citizens asrequired by the Constitution notcomplied with

Note:The SEC shall give the incorporators areasonable time within which to correct ormodify the objectionable portions of thearticles or amendment.

REVIEWER IN COMMERCIAL LAW Chapter XII. Dissolution

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WChapter XII. Dissolution

(Asked in 02)

A. VOLUNTARY DISSOLUTION1. EXPIRATION OF TERM2. VOLUNTARY DISSOLUTION WHEN NO

CREDITORS ARE AFFECTED3. VOLUNTARY DISSOLUTION WHEN

CREDITORS ARE AFFECTED4. DISSOLUTION BY MINORITY IN CLOSE

CORPORATIONS5. FAILURE TO ORGANIZE; CESSATION

OF BUSINESS FOR 5 YEARSB. INVOLUNTARY DISSOLUTION

1. REVOCATION OF CERTIFICATE OFREGISTRATION

2. QUO WARRANTO PROCEEDINGSC. EFFECTS OF DISSOLUTION

1. LOSS OF JURIDICAL PERSONALITY2. EXECUTORY CONTRACTS3. WINDING UP AND LIQUIDATION

D. THE TRUST FUND DOCTRINE AND THEDISTRIBUTION OF ASSETS

Dissolution of a corporation is theextinguishment of its franchise and thetermination of its corporate existence.

A. Voluntary Dissolution

1. Expiration of term Once the period expires, the

corporation is automaticallydissolved without any otherproceeding and it cannot thereafterbe considered a de factocorporation.

A voluntary dissolution may beeffected by amending the AOI. Uponapproval of the amended AOI or theexpiration of the shortened term, asthe case may be, the corporationshall be deemed dissolved withoutany further proceedings (Sec. 120).

2. Voluntary dissolution when nocreditors are affected (Sec. 118)a. A meeting must be held on the call

of directors or trustees.b. Notice of the meeting should be

given to the stockholders bypersonal delivery or registered mailat least 30 days prior to themeeting.

c. The notice of meeting should also bepublished for 3 consecutive weeks ina newspaper published in the place.

d. The resolution to dissolve must beapproved by the majority of thedirectors/trustees and approved bythe stockholders representing at

least 2/3s of the OCS or 2/3 ofmembers.

e. A copy of the resolution shall becertified by the majority of thedirectors or trustees andcountersigned by the secretary.

f. The signed and countersigned copywill be filed with the SEC and thelatter will issue the certificate ofdissolution.

Note:Thus, except for the expiration of itsterm , no dissolution can be effectivewithout some act of the state (DaguhoyEnterprises v. Ponce, 1954)

3. Voluntary dissolution when creditorsare affected (Sec. 119)a. Approval of the stockholders

representing at least 2/3 of the OCSor 2/3 of members in a meetingcalled for that purpose.

b. Filing of a petition with the SECsigned by majority of directors ortrustees or other officers having themanagement of its affairs verified bythe President or Secretary orDirector. Claims and demandsmust be stated in the petition.

c. If the petition is sufficient in formand substance, the SEC shall issuean order fixing a hearing date forobjections.

d. A copy of the order shall bepublished at least once a week for 3consecutive weeks in a newspaper ofgeneral circulation, or if there is nonewspaper in the city ormunicipality of the principal office,posting for 3 consecutive weeks in 3public places is sufficient.

e. Objections must be filed no lessthan 30 days nor more than 60 daysafter the entry of the Order.

f. After the expiration of the time tofile objections, a hearing shall beconducted upon prior 5 day noticeto hear the objections.

g. Judgment shall be rendereddissolving the corporation anddirecting the disposition of assets.The judgment may includeappointment of a receiver.

4. Dissolution by minority in closecorporations (Sec. 105)Any stockholder of a close corporationmay, by written petition to the SEC,


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Wcompel the dissolution of suchcorporation:a. whenever any of the acts of the

directors, officers or those in controlof the corporation is illegal, orfraudulent, or dishonest, oroppressive or unfairly prejudicial tothe corporation or any stockholder

b. whenever corporate assets are beingmisapplied or wasted.

5. Failure to organize and commencebusiness; cessation of business for 5years (Sec. 22)a. Failure to formally organize and

commence the transaction of itsbusiness or construction of itsworks within two years - itscorporate powers shall cease andthe corporation is deemed dissolved Transacting business implies a

continuity of acts or dealings inthe accomplishment of thepurpose for which thecorporation was formed(Mentholatum vs. Mangaliman,1946)

Formal organization includes notonly the adoption of the by-lawsbut also the establishment of thebody which will administer theaffairs of the corporation andexercise its powers

b. Failure to operate for at least 5consecutive years aftercommencement of business -ground for suspension or revocationof its corporate franchise orcertificate of incorporation.

Note:The corporation may show that thefailure to commence its business orto continuously operate is due tocauses beyond its control (Sec. 22).

B. Involuntary Dissolution

1. Revocation of certificate ofregistration (Sec. 121)A corporation may be dissolved by theSEC, upon a verified complaint andafter proper notice and hearing, on thefollowing grounds (Sec. 6, par i, PD 902-A):a. Fraud in procuring its certificate of

registrationb. Serious misrepresentation as to

what the corporation can or is doing

to the great prejudice of or damageto the general public

c. Refusal to comply or defiance of anylawful order of the Commissionrestraining commission of actswhich would amount to a graveviolation of its franchise

d. Continuous inoperation for a periodof at least five years

e. Failure to file by-laws within therequired period

f. Failure to file required reports inappropriate forms as determined bythe Commission within theprescribed period

g. Other grounds

Other grounds:a. Violation by the corporation of any

provision of the Corporation Code(Sec. 144 BP 68)

b. In case of a deadlock in a closecorporation, and the SEC deems itproper to order the dissolution ofthe corporation as the only practicalsolution to the dispute (Sec. 104 BP68)

2. Quo Warranto Proceedings (Sec. 2,Rule 66 ROC)Grounds:a. When it has offended against a

provision of an Act for its creationand renewal

b. When it has forfeited its privilegesand franchises by nonuser

c. When it has committed or omittedan act which amounts to asurrender of its corporate rights,privileges or franchise

d. When it has misused a right,privilege, or franchise conferredupon it by law or when it hasexercised a right, privilege orfranchise in contravention of law

C. Effects of Dissolution

1. Loss of juridical personality Corporation loses its juridical

personality and can no longerlawfully continue its businessexcept for the purpose of windingup. For this purpose, it may sueand be sued, although upon theexpiration of three years, all pendingactions by or against the dissolvedcorporation abate (National AbacaCorp. vs. Pore, 1961)


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W It cannot even be a de facto

corporation, hence subject tocollateral attack (Buenaflor vs.Camarines Sur Industry Corp., 1960)

It cannot enter into new contractswhich would have the effect ofcontinuing the business (Cebu PortLabor Union vs. States Marine Co,1957)

2. Executory contractsGeneral Rule: Executory contractsremain valid and existing. Under Sec.145 of the Code, no right or remedy infavor of or against the corporation, itsstockholders, members, directors,trustees, or officers shall be removed orimpaired by the subsequent dissolutionof said corporation.)Exception: Contracts for personalservices such as employment contractsof officers and employees where thedissolution is involuntary or the resultof merger or consolidation.

3. Winding Up and Liquidation (Asked in97, 00 and 01)Liquidation is the process by which allthe assets of the corporation areconverted into liquid assets (cash) inorder to facilitate the payment ofobligations to creditors, and theremaining balance if any is to bedistributed to the stockholders. It is aproceeding in rem.

a. Modes of Liquidation1. By Board of Directors2. Through a trustee to whom the

properties are conveyedFrom and after any suchconveyance by the corporation ofits property in trust for thebenefit of itsSH/members/creditors andothers in interest, all interestwhich the corporation had in theproperty terminates, the legalinterest vests in the trustees,and the beneficial interest in thestockholders, members,creditors or other persons ininterest.

3. By management committee orrehabilitation receiverHowever, the mere appointmentof a receiver, without anythingmore does not result in thedissolution of the corporationnor bar it from the existence of

its corporate rights (LeyteAsphalt & Mineral Oil Co. Ltd., v.Block Johnston & Breenbrawn,1928)

b. Period of LiquidationGeneral Rule: A corporation whosecorporate existence has beenterminated shall be continued for 3years after the time when it wouldhave been so dissolved.Exceptions: In case the corporate assets are

conveyed to a trustee or areceiver appointed by the SEC,the three year limitation willNOT apply (Sumera v. Valencia,1939)

Even if no trustee or receiverwas appointed and the 3-yearperiod has already expired, thefollowing were considered astrustees:1. Counsel of record with

respect to the matter inlitigation (Gelano vs. CA,1981)

2. BOD itself may be deemed“trustees” by legalimplication to complete thecorporate liquidation(Clemente vs. CA, 1995)

3. Those with pecuniaryinterest in the assets, suchas stockholders andcreditors (Ibid)

c. EscheatAny asset distributable to anycreditor/SH/member who isunknown or cannot be found shallbe escheated to the city ormunicipality where such assets arelocated.

Phil. Veterans Bank v. Employees Union (2001):Q: What is the difference between Liquidationand Rehabilitation?

A: Liquidation is the winding up of acorporation so that assets are distributed tothose entitled to receive them. It is the process ofreducing assets to cash, discharging liabilitiesand dividing surplus or loss. On the other hand,rehabilitation contemplates a continuance ofcorporate life and activities in an effort to restoreand reinstate the corporation to its formerposition of successful operation and solvency.Both cannot be undertaken at the same time.


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WD. The Trust Fund Doctrine and the

Distribution of Assets

General rule: A corporation CANNOTdistribute any of its assets or propertyexcept upon lawful dissolution and onlyafter payment of all its debts and liabilities(last par., Sec. 122).

Exceptions:1. Decrease in capital stock resulting in a

surplus which can then be distributedto stockholders provided no creditorsare prejudiced (Sec. 122)

2. As otherwise allowed by the Code:a. Deadlock in a close corporation

(Sec. 104)b. Redemption of redeemable shares

(Sec. 8)

Note: The TRUST FUND DOCTRINE isembodied in the last paragraph of Sec. 122.As held in Phil. Trust Co. vs. Rivera (1923),the capital stock, property and other assetsof the corporation are regarded as equity intrust for the payment of the corporatecreditors. The subscribed capital stock ofthe corporation is a trust fund for thepayment of the debts of the corporationwhich the creditors have the right to lookup to satisfy their credits. Corporation maynot dissipate this and the creditors may suestockholders directly for the unpaidsubscription.

REVIEWER IN COMMERCIAL LAW Chapter XIII. Corporate Combinations

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WChapter XIII. Corporate

Combinations

A. DEFINITIONB. PROCEDUREC. EFFECTS OF MERGER/CONSOLIDATIOND. EFFECTIVITY OF MERGER/

CONSOLIDATIONE. DE FACTO MERGERF. SALE OF ALL OR SUBSTANTIALLY ALL

ASSETS

A. Definition

Merger – a corporation absorbs the otherand remains in existence while the othersare dissolved.

Consolidation – a new corporation iscreated, and consolidating corporations areextinguished

B. Procedure (Secs. 76-79)

1. The board of each corporation shalldraw up a plan of merger orconsolidation setting forth:a. Names of the corporation involved;b. Terms and mode of carrying it;c. Statement of changes, if any, in the

present articles of the survivingcorporation to be formed in the caseof consolidation.

2. Plan for merger or consolidation shallbe approved by majority vote of each ofthe board of the concerned corporationsat separate meetings, and a vote of 2/3of the members or of stockholdersrepresenting 2/3 of the outstandingcapital stock.

3. Any amendment to the plan must beapproved by the majority vote of theboard members or trustees of theconstituent corporations and affirmativevote of 2/3 of the outstanding capitalstock or members.

4. Articles of Merger or Articles ofConsolidation shall be executed by eachof the constituent corporations, signedby the president or vice-president, andcertified by the secretary or assistantsecretary setting forth:a. Plan of merger or consolidation;b. For stock corporation, the number

of shares outstanding; for non-stock, the number of members;

c. As to each corporation, number ofshares or members voting for andagainst such plan respectively.

5. Submission of Four (4) copies of theArticles of Merger or Articles ofConsolidation to the SEC for approval.

6. If necessary, the SEC shall set ahearing, notifying all corporationsconcerned at least 2 weeks before.

7. Issuance of certificate of merger orconsolidation.

C. Effects of Merger or Consolidation(Sec. 80)

1. The constituent corporations shallbecome a single corporation.

2. The separate existence of theconstituents shall cease, except that ofthe surviving or the consolidatedcorporation.

3. The surviving or the consolidatedcorporation shall possess all the rights,privileges, immunities and powers andshall be subject to all the duties andliabilities of a corporation.

4. The surviving or the consolidatedcorporation shall possess all rights,privileges, immunities and franchises ofeach constituent corporation and theproperties shall be deemed transferredto the surviving or consolidatedcorporation.

5. All liabilities of the constituents shallpertain to the surviving or theconsolidated corporation.

6. Any claim, action or proceeding pendingby or against any of the constituentcorporations may be prosecuted by oragainst the surviving or consolidatedcorporation; and

7. The rights of the creditors or lien uponthe property of any of each constituentcorporation shall not be impaired bysuch merger or consolidation.

D. Effectivity of Merger orConsolidation(Asked in 99)

Upon issuance of the certificate of mergeror consolidation, such merger orconsolidation shall become effective (Sec.79).

PNB v. Andrada Electric & Engr. Co., Inc.(2002): Merger or consolidation does notbecome effective by mere agreement of theconstituent corporations. The approval ofthe SEC is required.

REVIEWER IN COMMERCIAL LAW Chapter XIII. Corporate Combinations

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WE. De Facto Merger

One corporation acquires all orsubstantially all of the properties of anothercorporation in exchange for shares of stockof the acquiring corporation. The acquiringcorporation would end-up with thebusiness enterprise of the sellingcorporation whereas the latter would endup with basically its remaining assets beingthe shares of stock of the acquiringcorporation and may then distribute it asliquidating dividend to its stockholders.(VILLANUEVA)

F. Sale of All or Substantially AllAssets(Asked in 96)

1. Requisitesa. Approval of majority of the directors

or trusteesb. Assent of stockholders representing

2/3 of OCS or 2/3 of members in ameeting duly called for the purposeafter written notice

c. Compliance with the formalities ofthe Bulk Sales Law.

2. When coveredA sale or other disposition shall bedeemed to cover substantially allcorporate property and assets if therebythe corporation would be renderedincapable of continuing the business oraccomplishing the purpose for which itwas incorporated Sec 40).

3. Effect on creditors

General Rule: Where one sells orotherwise transfers ALL of its assets toanother corporation, the latter is notliable for the debts and liabilities of thetransferor.

Exceptions:a. Purchaser agrees to assume such

debts;b. Transaction amounts to merger or

consolidation;c. Purchasing corporation is merely a

continuation of selling corporation;and

d. Fraudulent transactions (Edward J.Nell Co. v. Pacific Farms Inc., 1965).

4. Distinctions between Sale of Assetsand Merger/ Consolidation

Merger andConsolidation

Sale of Assets

1.Sale of assets isalways involved

1.Merger/consolidation isnot always involved

2.There isautomaticassumption ofliabilities

2.Purchasing corporationis not generally liable forthe debts and liabilitiesof the selling corporation

3.There iscontinuance ofthe enterpriseand of thestockholders

3.The selling corporationordinarily contemplatesa liquidation of theenterprise

4.Title to theassets aretransferred byoperation of law

4.Transfer of title is byvirtue of contract

5.The constituentcorporations areautomaticallydissolved

5.The selling corporation isnot dissolved by themere transfer of all itsproperty

REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations

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WChapter XIV. Foreign

Corporations

A. DEFINITION OF TERMSB. TESTS OF “DOING BUSINESS IN THE

PHILIPPINES”C. “DOING BUSINESS UNDER THE FOREIGN

INVESTMENT ACTD. JURISPRUDENTIAL RULES ON “NOT

DOING BUSINESS IN THE PHILIPPINES”E. REQUISITES FOR THE ISSUANCE OF

LICENSE TO DO BUSINESSF. POWER TO SUE AND BE SUED OF

FOREIGN CORPORATIONSG. LAWS APPLICABLE ON FOREIGN

CORPORATIONS

A. Definition of Terms

Foreign CorporationOne formed, organized, or existing underany laws other than those of the Philippinesand whose laws allow Filipino citizens andcorporations to do business in its owncountry or state (Sec. 123).

Resident AgentAn individual, who must be of good moralcharacter and of sound financial standing,residing in the Philippines, or a domesticcorporation lawfully transacting business inthe Philippines, designated in a writtenpower of attorney by a foreign corporationauthorized to do business in thePhilippines, on whom any summons andother legal processes may be served in allactions or other legal proceedings againstthe foreign corporation (Sec. 127-128).

B. Tests of “Doing Business in thePhilippines”(Asked in 98 and 02)

1. Twin Characterization Testa. Under the Continuity Test, doing

business implies a continuity ofcommercial dealings andarrangements, and contemplates tosome extent the performance of actsor works or the exercise of somefunctions normally incident to andin progressive prosecution of thepurpose and object of theorganization.

b. Under the Substance Test, a foreigncorporation is doing business in thecountry if it is continuing the bodyor substance of the enterprise ofbusiness for which it was organized(Mentholatum vs. Mangaliman, 1941)

2. Contract testA foreign corporation is doing businessin the Philippines if the contractsentered into by the foreign corporationor by an agent acting under the controland direction of the foreign corporationare consummated in the Philippines(Pacific vegetable Oil vs. Singson, 1955).

C. “Doing Business” Under theForeign Investment Act of 1991(RA 7042)(Asked in 98 and 02)

1. Doing Businessa. Soliciting orders, service contracts,

or opening offices;b. Appointing representatives,

distributors domiciled in thePhilippines or who stay for a periodor periods totalling 180 days ormore;

c. Participating in the management,supervision, or control of anydomestic business, firm, entity, orcorporation in the Philippines;

d. Any act or acts that imply acontinuity of commercial dealings orarrangements, and contemplate tosome extent the performance of actsor works r the exercise of somefunctions normally incident to andin progressive prosecution of , thepurpose and object of itsorganization.

2. Not Doing Businessa. Mere investment as shareholder and

exercise of rights as investor;b. Having a nominee director or officer

to represent its interest in thecorporation;

c. Appointing a representative ordistributor which transactsbusiness in its own name and for itsown account.

D. Jurisprudential Rules on “NotDoing Business in thePhilippines”

1. Products manufactured off-shore andreturned back to foreign corporation(Agilent Tech. Singapore Ltd. v.Integrated Silicon Tech. Phils. Corp.,2004)

REVIEWER IN COMMERCIAL LAW Chapter XIV. Foreign Corporations

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W2. Single isolated transaction (Marshall-

Wells Co. v. Henry Eiser & Co, 1924).Multiple transactions are stillconsidered a single transaction wherethere are constantly failed attempts incomplying with the same by one of thecontracting parties (Antam Consolidatedv. CA, 1986).

3. Trademark protection; foreigncorporations not doing business aremerely protecting their property rights(General Garments v. Director of Patents,1971).

4. A foreign firm which does businessthrough middlemen acting on their ownnames shall not be deemed doingbusiness in the Philippines. (Le ChemiseLacoste v. Fernandez, 1984).

E. Requisites for the Issuance ofLicense to Do Business

1. The foreign corporation should file averified application containing andtogether with the following (See Sec.125):a. Designated resident agent who will

receive summons and notices for thecorporation; a special power ofattorney should also be submittedfor such purpose

b. An agreement that if it ceases totransact business or if there is nomore resident agent, summons shallthen be served through the SEC

c. Oath of Reciprocity stating that theforeign corporation’s country allowsFilipino citizens and corporations todo business in said country

2. Within 60 days from issuance of license,the corporation should deposit at leastP100,000 (cash, property, bond) for thebenefit of creditors subject to furtherdeposit every six months (See Sec. 126).

F. Power to Sue and Be Sued ofForeign Corporations

Sec. 133. Doing business without a license.No foreign corporation transacting business inthe Philippines without a license, or itssuccessors or assigns, shall be permitted tomaintain or intervene in any action, suit, orproceeding in any court or administrative agencyof the Philippines; but such corporation may besued or proceeded against before Philippinecourts or administrative tribunals on any validcause of action recognized under Philippinelaws.

Instances when Unlicensed ForeignCorporations can Sue:1. Isolated transactions;2. Action to protect good name, goodwill,

and reputation of a foreign corporation;3. The subject contracts provide that

Philippine courts will be the venue tocontroversies;

4. A license subsequently granted enablesthe foreign corporation to sue oncontracts executed before the grant ofthe license;

5. Recovery of misdelivered property;6. Where the unlicensed foreign

corporation has a domestic corporation.

Agilent Tech. Singapore Ltd. vs. Integrated SiliconTech. Phils. Corp., (2004):

The principles on the right of a foreigncorporation to bring suit in Philippines:1. if a foreign corporation does business in the

Philippines without a license, it cannot sue beforePhilippine courts;

2. if a foreign corporation is not doing business inthe Philippines, it needs no license to sue beforePhilippine courts on an isolated transaction or ona cause of action entirely independent of anybusiness transaction;

3. if a foreign corporation does business in thePhilippines without a license, a Philippine citizenor entity which has contracted with saidcorporation may be estopped from challenging theforeign corporation’s corporate personality in asuit brought before Philippine courts; and

4. If a foreign corporation does business in thePhilippines with the required license, it can suebefore Philippine courts on any transaction.

G. Laws applicable on foreigncorporation

General Rule: Any foreign corporationlawfully doing business in the Philippinesshall be bound by all laws, rules andregulations applicable to domesticcorporations of the same class.

Exceptions: Foreign law shall govern onthe following matters:1. Creation, formation, organization or

dissolution of corporations or2. Those which fix the relations, liabilities,

responsibilities, or duties ofstockholders, members, or officers ofcorporations to each other or to thecorporation.

REVIEWER IN COMMERCIAL LAW Chapter XV. Close Corporations

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WChapter XV. Close Corporations

A. REQUIREMENTSB. CHARACTERISTICSC. RESTRICTIONS ON TRANSFER OF SHARES

1. VALIDITY OF RESTRICTIONS2. PRESUMPTIONS

D. DEADLOCKS1. REQUISITES2. POWER OF SEC

E. DISTINCTIONS BETWEEN CLOSE ANDREGULAR CORPORATIONS

A. Requirements for CloseCorporations (Sec. 96)

1. The AOI must state that the number ofstockholders shall not exceed 20.

2. The AOI must contain restriction on thetransfer of issued stocks (which mustappear in the AOI, by-laws andcertificate of stock)

Restriction on the transfer must NOT bemore onerous than granting the existingSH or corporation the option topurchase the shares.

3. The stocks cannot be listed in the stockexchange nor be publicly offered.

4. The corporation must NOT be miningcompany, stock exchange, oil company,bank, insurance company, publicutility, educational institution or othercorporation declared to be vested withpublic interest.

5. At least 2/3 of its voting stock or votingrights must NOT be owned or controlledby another corporation which is not aclose corporation.

B. Characteristics

1. The stockholders themselves candirectly manage the corporation andperform the functions of directorswithout need of election (Sec. 97):a. When they manage, stockholders

are liable as directors;b. There is no need to call a meeting to

elect directors;c. The stockholders are liable for tort.

2. Despite the presence of the requisites,the corporation shall not be deemed aclose corporation if at least 2/3 of thevoting stocks or voting rights belong toa corporation which is not a closecorporation (Sec. 96).

C. Restrictions on Transfer of Shares

1. Validity of Restrictions (AO) (Sec. 98)a. Restrictions must appear in the

articles of incorporation and inthe by-laws as well as in thecertificate of stock; otherwise, thesame shall not be binding on anypurchaser thereof in good faith.

b. Restrictions shall not be moreonerous than granting the existingstockholders or the corporation theoption to purchase the shareswithin a specified period. Afterexpiration of said period and uponfailure of the existing stockholdersor the corporation to purchase saidshares, the transferring stockholdermay sell his shares to any thirdperson.

2. Presumptions (Sec. 99):a. If the stock certificate

CONSPICUOUSLY shows therestriction, the purchaser ortransferee is CONCLUSIVELYpresumed to have notice of therestriction, provided this appears inthe AOI.

b. Where a conclusive presumption ofnotice arises, the corporation may,at its option, refuse to register thetransfer, unless(1) all the stockholders have

consented to the transfer, or(2) the AOI has been properly

amended to remove therestriction.

c. If it appears in the certificate, butNOT CONSPICUOUSLY, thenalthough he may be presumed tohave notice of the restriction, he canprove the contrary.

D. Deadlocks(Asked in 95):

1. Requisitesa. The directors or stockholders are so

divided respecting the managementof the corporation's business andaffairs

b. The votes required for any corporateaction cannot be obtained that thebusiness and affairs of thecorporation can no longer beconducted to the advantage of thestockholders generally


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W2. Powers of the SEC in case of

Deadlock in Close Corporationsa. Cancel or alter any provision in the

articles of incorporation or bylawsb. Cancel, alter or enjoin any

resolution of the corporationc. Direct or prohibit any act of the

corporationd. Require the purchase at their fair

value of shares of any stockholdereither by any stockholder or by thecorporation regardless of theavailability of unrestricted retainedearnings.

e. Appoint a provisional directorf. Dissolve the corporationg. Granting such other relief as the

circumstances may warrant.

E. Distinctions Between Close and Regular Corporations

CLOSE CORPORATIONS REGULAR CORPORATIONS

1. Management / Board Authority

There can be classification of directors intoone or more classes, each of whom may bevoted for and elected solely by a particularclass of stock; and

The articles of incorporation of a closecorporation may provide that the business ofthe corporation shall be managed by thestockholders of the corporation rather than bya board of directors. So long as this provisioncontinues in effect:

No meeting of stockholders need be called toelect directors

Unless the context clearly requires otherwise,the stockholders of the corporation shallbe deemed to be directors for the purposeof applying the provisions of this Code

The stockholders of the corporation shall besubject to all liabilities of directors.

The articles of incorporation may likewiseprovide that all officers or employees or thatspecified officers or employees shall be electedor appointed by the stockholders, instead ofby the board of directors.

There are no classification of board of directors

Corporate Powers devolved upon board of directorswhose powers are executed by officers. Cannotprovide that it be managed by stockholders

Board of directors must be elected in a stockholdersmeeting

Stockholders of a corporation are separate anddistinct from directors

Officers must be elected by the Board ofDirectors

2. Meetings

Unless the by-laws provide otherwise, anyaction by the directors of a close corporationwithout a meeting shall nevertheless bedeemed valid if:

1. Before or after such action is taken,written consent thereto is signed by allthe directors; or

2. All the stockholders have actual orimplied knowledge of the action and make

The directors or trustees shall not actindividually nor separately but as a body in alawful meeting. They will act only afterdiscussion and deliberation of matters beforethem. Contracts entered into without a formalboard resolution does not bind the corporationexcept when ratified or when majority of theboard has knowledge of the contract and thecontract benefited the corporation.

Absence of a prompt objection in writing doesnot ratify acts done by directors without a validmeeting. There must be express or implied


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WCLOSE CORPORATIONS REGULAR CORPORATIONS

no prompt objection thereto in writing; or

3. The directors are accustomed to takeinformal action with the express orimplied acquiescence of all thestockholders; or

4. All the directors have express or impliedknowledge of the action in question andnone of them makes prompt objectionthereto in writing.

If a director's meeting is held without propercall or notice, an action taken therein withinthe corporate powers is deemed ratified by adirector who failed to attend, unless hepromptly files his written objection with thesecretary of the corporation after havingknowledge thereof.

ratification.

Express ratification may consist of a BoardResolution to that effect

Implied ratification may consist of acceptance ofbenefits from said unauthorized act while havingknowledge of said act

Failure to give notice would render a meetingvoidable.

Attendance to a meeting despite want of noticewill be deemed implied waiver

All proceedings had and any businesstransacted at any meeting of the stockholders ormembers, if within the powers or authority ofthe corporation, shall be valid even if themeeting be improperly held or called, providedall the stockholders or members of thecorporation are present or duly represented atthe meeting. (§51)

3. Voting / Quorum

The AOI may provide for a classification ofdirectors into one or more classes, each ofwhich may be voted for and elected solely by aparticular class of stock.

The AOI may provide for a greater quorum orvoting requirements in meetings ofstockholders or directors than those providedin this Code.

No share may be deprived of voting rights,except Preferred or Redeemable shares, unlessotherwise provided by the Code

There shall always be a class/series of shareswhich have a COMPLETE VOTING RIGHTS

EACH SHARE SHALL BE EQUAL IN ALLRESPECTS TO EVERY OTHER SHARE, exceptas otherwise provided in the AOI

For Board of directors, the by-laws or AOI canprovide for a greater majority in quorum

For stockholders, the AOI can provide for adifferent percentage in quorum

4. Pre-emptive Right

The pre-emptive right of stockholders in closecorporations shall extend to all stock to beissued, including reissuance of treasuryshares, whether for money, property orpersonal services, or in payment of corporatedebts, unless the articles of incorporationprovide otherwise.

Limitations on the exercise of pre-emptive right:

a. Such pre-emptive right shall not extend toshares to be issued in compliance with lawsrequiring stock offerings or minimum stockownership by the public;

b. Not extend to shares to be issued in good faithwith the approval of the stockholdersrepresenting two-thirds (2/3) of the outstandingcapital stock, in exchange for property neededfor corporate purposes or in payment of apreviously contracted debt

c. Shall not take effect if denied in the Articles ofIncorporation or an amendment thereto.

5. Transferability

Restrictions on the right to transfer sharesmust appear in the AI and in the by-laws aswell as in the certificate of stock otherwise thesame shall not be binding on any purchaserthereof in good faith

Restrictions on the right to transfer not allowed

6. Withdrawal Right

Any stockholder of a close corporation may,for any reason, compel the said corporation to

Stockholders may require the corporation tobuy-back their shares at fair value when the


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purchase his shares at their fair value, whichshall not be less than their par or issuedvalue, when the corporation has sufficientassets in its books to cover its debts andliabilities exclusive of capital stock

Any stockholder of a close corporation may,by written petition to the SEC, compel thedissolution of such corporation whenever:Any of acts of the directors, officers or those

in control of the corporation is illegal, orfraudulent, or dishonest, or oppressive orunfairly prejudicial to the corporation orany stockholder, or

Corporate assets are being misapplied orwasted.

Corporation has unrestricted Retained Earnings:a. In case any amendment to the articles of

incorporation which has the effect of: changing or restricting the rights of

any stockholder or class of shares, or authorizing preferences in any respect

superior to those of outstandingshares of any class, or

extending or shortening the term ofcorporate existence

b. In case of sale, lease, exchange, transfer,mortgage, pledge or other disposition of allor substantially all of the corporate propertyand assets as provided in the Code; and

c. In case of merger or consolidationd. Extension or shortening of the term of the

corporation (§37)e. Diversion of funds of corporation from

primary purpose to secondary purpose (§41)

The corporation may buy-back shares ofstockholders subject to the following limitations(Treasury shares):There must be unrestricted retained earningsMust be for a legitimate purpose

REVIEWER IN COMMERCIAL LAW Chapter XVI. Non-Stock Corporations

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WChapter XVI. Non-Stock

Corporations

A. PURPOSESB. RIGHTS OF MEMBERSC. CONVERSIOND. ORDER OF DISTRIBUTION OF ASSETS

UPON DISSOLUTION

A. Purposes of Non-stockCorporations

1. Charitable2. Religious3. Educational4. Professional5. Cultural6. Fraternal7. Literary8. Scientific9. Social10. Civic services11. Similar purposes, such as chambers or

combinations trade, industry oragriculture

B. Rights of Members

1. Right to VoteA member is entitled to one vote.However, such right may be broadened,limited, or denied in the AOI or by-laws(Sec. 89).

2. Right to Transfer MembershipGeneral Rule: A member cannottransfer his membership (and the rightsarising therefrom) in a non-stockcorporation.Exception: AOI or by-laws may providefor their transferability (Sec. 90).

C. Conversion

1. A non-stock corporation cannot beconverted into a stock corporationthrough mere amendment of its AOI.This would violate Sec. 87 whichprohibits distribution of income asdividends to members. Giving themembers shares is tantamount todistribution of its assets or income (SECOpinion, March 20, 1995).

2. A non-stock corporation can beconverted into a stock corporation onlyif the members dissolve it first and thenorganize a stock corporation. However,

there is a resulting new corporation(SEC Opinion, May 13, 1992)

3. A stock corporation may be convertedinto a non-stock corporation by mereamendment provided all therequirements are complied with. Itsrights and liabilities will remain.

D. Order of Distribution of AssetsUpon Dissolution of CloseCorporation

1. All its creditors shall be paid.2. Assets held subject to return on

dissolution shall be delivered back tothe givers.

3. Assets held for charitable, religiouspurposes, etc., without a condition fortheir return on dissolution, shall beconveyed to one or more organizationsengaged in similar activities asdissolved corporation

4. All other assets shall be distributed tomembers, as provided in the AOI pr by-laws.

REVIEWER IN COMMERCIAL LAW Chapter XVII. Special Corporations

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WChapter XVII. Special

Corporations

E. EDUCATIONAL CORPORATIONSF. RELIGIOUS CORPORATIONS

1. CORPORATION SOLE2. RELIGIOUS SOCIETIES

A. Educational Corporations

Stock or non-stock corporationsorganized to provide facilities forteaching or instruction.

A favorable recommendation of theDECS is essential for the approval of itsarticles and by-laws.

It is primarily governed by special lawsand suppletorily by the provisions of theCode.

B. Religious Corporations

1. Corporation Sole (Asked in 04) A special form of corporation,

usually associated with clergy andconsists of one person only and hissuccessors, who are incorporated bylaw to give some legal capacities andadvantages.

A corporation sole does not have anynationality but for purposes ofapplying our nationalizations laws,nationality is determined by thenationality of the members (RomanCatholic Apostolic Church vs. LandRegistration Commission, 1957).

A registered corporation sole canacquire land if its membersconstitute at least 60% Filipinos(SEC Opinion, 8 August 1994).

2. Religious SocietiesNon-stock corporation formed by areligious society, group, diocese, synod,or district of any religiousdenomination, sect, or church aftergetting the approval of 2/3 of itsmembers.

- end of Corporation Law -


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BANKING LAWS

CHAPTER I. GENERAL BANKINGLAW OF 2000 (RA 8791)I. General Concepts

A. DefinitionB. Nature of Business

II. Classification of BanksIII. Authority of the BSP over

BanksA. Regulatory PowersB. Supervisory PowersC. Policy Direction

IV. Organization of BanksA. Conditions for OrganizationB. Ownership of BanksC. Directors and Officers

V. Operation of BanksA. Core BankingB. Operations of a KB and UBC. Prudential MeasuresD. Other FunctionsE. Prohibited FunctionsF. Some Requirements for the

Operation of BanksVI. Foreign Banks

132132132132133

133133133133134134134135137137139139142145

146147

CHAPTER II. THE NEW CENTRALBANK ACT (RA 7653)I. General ProvisionII. Organization of the BSP

A. Monetary BoardB. Governor/Deputy Governor

III. Operation of the BSPA. Supervision and ExaminationB. Handling of Banks in DistressC. Monetary AdministrationD. As Banker and Financial

Adviser of the GovernmentE. Other OperationsF. Prohibited Operations

149149149149150150150150152

156157157

CHAPTER III. LAW ON SECRECYOF BANK DEPOSITS (RA 1405)I. PurposesII. CoverageIII. Prohibited ActsIV. ExceptionsV. Penalty

159159159159159160

CHAPTER IV. TRUTH IN LENDINGACT (RA 3765)I. PolicyII. Disclosure StatementIII. CoverageIV. Sanctions

161161161161161

CHAPTER V. ANTI-MONEYLAUNDERING ACT (RA 9160 asamended by RA 9194)I. PoliciesII. CoverageIII. Obligations of Covered

InstitutionsA. Customer IdentificationB. Record KeepingC. Reporting of Covered and

Suspicious TransactionsIV. Freeze OrderV. Forfeiture ProvisionsVI. Anti-Money Laundering Council

162162162

163163163

163164164165

CHAPTER VI. FOREIGNCURRENCY DEPOSIT ACT (RA6426)I. ConfidentialityII. Privileges

167167167

REVIEWER IN COMMERCIAL LAW Chapter I. General Banking Law of 2000

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Banking LawsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD



COMMERCIAL LAW


CORPORATION LAW

Rency CorrigeLEAD WRITER

Ben EvangelistaRaissa Villanueva

WRITERS

LECTURES

Edel CruzHEAD



--------Leo Zulueta


Chapter I. General Banking Law of2000 (RA 8791)

I. GENERAL CONCEPTSA. DEFINITIONB. NATURE OF BUSINESS

II. CLASSIFICATION OF BANKSIII. AUTHORITY OF THE BSP OVER BANKS

A. REGULATORY POWERSB. SUPERVISORY POWERSC. POLICY DIRECTION

IV. ORGANIZATION OF BANKSA. CONDITIONS FOR ORGANIZATIONB. OWNERSHIP OF BANKSC. DIRECTORS AND OFFICERS

V. OPERATION OF BANKSA. CORE BANKINGB. OPERATIONS OF A KB AND UBC. PRUDENTIAL MEASURESD. OTHER FUNCTIONSE. PROHIBITED FUNCTIONSF. SOME REQUIREMENTS FOR THE

OPERATION OF BANKSVI. FOREIGN BANKS

Policy of the Law: To promote andmaintain a stable and efficient banking andfinancial system that is globallycompetitive, dynamic and responsive to thedemands of a developing economy. (Sec. 2)

I. General Concepts

A. Definition

Banks shall refer to entities engaged in thelending of funds obtained in the form ofdeposits. (Sec. 3.1)

As opposed to Quasi-banks:Quasi-banks (QB) refer to entities engagedin the borrowing of funds through theissuance, endorsement or assignment withrecourse or acceptance of depositsubstitutes for purposes of relending orpurchasing of receivables and otherobligations. (last paragraph of Sec. 4)

B. Nature of Business

Imbued with Public Interest:The banking industry is declared asindispensable to the national interest. (Sec.22)

Fiduciary Nature of Banks

Failure on the part of the bank tosatisfy the degree of diligencerequired of banks may warrant theaward of damages

Under Sec. 2, the degree of diligenceis “high standards of integrity andperformance”, however, SCdecisions has not been uniform asto the type of diligence required Highest degree of care (BPI vs.

CA and Napiza 2000) Higher than diligence of a good

father of a family (CBTC vs. CA2003)

Highest degree of care anddiligence (Samsung Constructionvs FEBTC 2004)

notwithstanding the amount ofdiligence required, a bank is notexpected to be infallible (PrudentialBank vs. CA 2000)


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Simex International vs. CA (1990):As a business affected with public interest andbecause of the nature of its functions, the bankis under obligation to treat the accounts of itsdeposits with meticulous care, always having inmind the fiduciary nature of their relationship.

II. Classification of Banks (Sec. 3)

Universal Banks. (UB)These are those that used to be calledexpanded commercial banks and whoseoperations are now primarily governed bythe GBL. They can exercise the powers ofan investment house and invest in non-allied enterprises. They have the highestcapitalization requirement.

Commercial Banks. (KB)These are ordinary or regular commercialbanks, as distinguished from a universalbank. They have a lower capitalizationrequirement than a UB and cannot exercisethe powers of an investment house andinvest in non-allied enterprises.

Thrift Banks.These area. savings and mortgage banks,b. stock savings and loan associations,

andc. private development banks

Cooperative Banks.These are banks organized primarily tomake financial and credit services availableto cooperative banks.

Islamic Banks.These are banks whose business dealingsand activities are subject to the basicprinciples and rulings of Islamic Shari’a,such as the Al Amanah Islamic InvestmentBank of the Philippines which was createdby RA 6848

Other classifications of banksas determined by the Monetary Board.

III.Authority of the BSP Over Banks

A. Regulatory Powers

RULE: Prior authority from the BSP toengage in banking operations or quasibanking function is required. (Sec. 6)

However, banks need no separate licence toengage in quasi-banking. (Sec. 6)

Persons or entities found to be performingbanking or quasi-banking functionswithout authority from the BSP shall besubject to appropriate sanctions under theNCBA and other applicable laws. (Sec. 6)

The determination of whether a person orentity is performing a banking or quasi-banking functions without BSP authorityshall be decided by the Monetary Board. Toresolve such issue, the Monetary Boardmay through the appropriate supervisingand examining department of the BSP,examine, inspect or investigate the booksand records of such person or entity. (Sec.6)

B. Supervisory Powers

RULE: The operations and activities ofbanks shall be subject to supervision of theBSP. (Sec. 4)

Scope:Banks, quasi-banks, trust entities, andother financial institutions which underspecial laws are subject to BSP supervision.(Sec. 4)

Apart from banking institutions and quasi-banks, the BSP may also examine anenterprise which is wholly or majority-owned or controoled by the bank.. (Sec. 7)

Examination of such enterprises must onlybe in the course of examination of thebank. The legislative intent, as explained inthe deliberations of the Senate, is to limitthe possibility of abuse. (Catindig, Notes onSelected Commercial Laws, opinion)

C. Policy Direction

RULE: The BSP shall provide policydirection in the areas of money, bankingand credit. (Sec. 5). This includes:a. Prescribing ratios, ceilings, limitations orother forms of regulation on different typesof accountsb. Exempting certain transactions fromratios, ceilings and limitations

Service Fees:The Bangko Sentral may charge equitablerates, commissions or fees, as may be


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prescribed by the Monetary Board forsupervision, examination and other serviceswhich it renders under this Act. (Sec. 65)

Systemic Risk:It is conventional wisdom that a failing ordefaulting bank can demolish the aura ofconfidence for all banks and undermine thestability of the banking system.Causes:a. Interbank linkages – if banks have huge

interbank deposits with a failed bank,they may in turn experience liquidityproblems

b. Payment system – if a bank is unable tosettle its payment obligations to otherbanks at the end of the day, it makesthese other banks in danger ofdefaulting on their own paymentobligations to their counterparties

c. Public perception – that if there is afailing or failed bank, there may be aperception that other banks are in thesame situation.

In the light of this possible risk, regulatoryor prudential measures are put in place.(Morales, The Philippine General BankingLaw, opinion)

IV.Organization of Banks

A. Conditions for Organization

Conditions for organization:1. Entity must be a stock corporation and

must only issue par value stocks;2. Its funds must be obtained from the

public, (20 or more persons); and3. Minimum capital requirements

prescribed by the MB for each categoryof banks must be satisfied (Sec. 8, Sec.9)

RULE: Prohibition on Treasury Stocks,unless:1. Authorized by the MB2. The stock so purchased or acquired

shall within 6 months from the time theof its purchase or acquisition, be sold ordisposed of at a public or private sale.(Sec. 10)

Shares of the parent bank held by asubsidiary financial allied undertaking in aconsolidated statement of condition areconsidered treasury shares. (BSP CircularNo. 280 dated March 29, 2001, asamended)

No BSP certificate of authority, no SECregistration of any bank (Sec. 14)

Requirements for issuance of certificateof authority:1. All requirements of existing laws and

regulations have been complied with2. The public interest and economic

conditions justify the authorization3. The amount of capital, the financing,

organization, direction andadministration, as well as the integrityand responsibility of the organizers andadministrators reasonably assure thesafety of deposits and the publicinterest (Sec. 14.1 to 14.3)

B. Ownership of Banks

Stockholdings restriction:a. Filipinos and domestic non-bank

corporation, individually, may own upto 40% of the voting stock of a domesticbank

b. Foreign individuals and non-bankcorporations, aggregately, may own orcontrol up to 40% of the voting stock ofa domestic bank. (Sec. 11; BSPCircular No. 256, dated August 15,2000)

However, under Sec. 8 of RA 7721,Philippine corporations whose shares ofstock are listed in the PSE or are of longstanding for at least 10 years shall have theright to acquire, purchase or own up to60% of the voting stock of a domestic bank.

Grandfather rule:The citizenship of the corporation which isa stockholder in a bank shall follow thecitizenship of the controlling stockholdersof the corporation, irrespective of the placeof incorporation. (Sec. 11)

Controlling stockholders mean individualsholding more than 50% of the voting stockof the corporate stockholder of the bank.(BSP Circular No. 256)

Full disclosure of stockholdings of familygroups or related interests:Family group means individuals related toeach other within the fourth degree ofconsanguinity or affinity, legitimate orcommon-law (Sec. 12)Related interest means two or morecorporations owned or controlled by the


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same family group or same group ofpersons. (Sec. 13)

C. Directors and Officers

Composition: At least 5, and a maximumof 15 members of the board of directors ofbank, 2 of whom shall be independentdirectors. (Sec. 15)

An "independent director" shall mean aperson other than an officer or employee ofthe bank, its subsidiaries or affiliates orrelated interests. (Sec. 15)

In the case of a bank merger orconsolidation, the number of directors shallnot exceed 21. (Sec. 17)

Qualifications/Disqualifications ofDirectors (BSP Circular 296 datedSeptember 17, 2001)A director shall have the followingminimum qualifications:a. At least 25 years of age at the time of

his election or appointment;b. At least a college graduate or have at

least 5 years experience in business;c. Must have attended a special seminar

for board of directors conducted oraccredited by the BSP:

d. Must be fit and proper for the positionof a director of thebank/quasibank/trust entity.

The Monetary Board maya. Prescribe, pass upon and review the

qualifications and disqualifications ofindividuals elected or appointed bankdirectors or officers

b. Disqualify, suspend or remove any bankdirector or officer who commits or omitsan act which render him unfit for theposition. (Sec. 16)

Persons permanently disqualified frombeing directors: (Section X143.1(a) Manualof Regulations for Banks)

a. Directors/officers/employeespermanently disqualified by the MB;

b. Persons who have been convicted byfinal judgment for offenses involvingdishonesty or breach of trust;

c. Persons who have been convicted byfinal judgment for violation of bankinglaws;

d. Persons who have been judiciallydeclared insolvent, spendthrift orincapacitated to contract; or

e. Directors, officers or employees ofclosed banks/quasi-banks/trustentities whowere responsible for suchinstitution’s closure.

Persons temporarily disqualified frombeing directors: (Section X143.1(b) Manualof Regulations for Banks)

a. Directors/officers/employeesdisqualified by the MB

b. Persons who refuse to fully disclose theextent of their business interest. Thisdisqualification shall be in effect as longas the refusal persists;

c. Directors who have been absent or whohave not participated for whateverreasons in more than 50% of allmeetings, both regular and special, ofthe board of directors during theirincumbency, or any 12 month periodduring said incumbency. Thisdisqualification applies for purposes ofthe succeeding election;

d. Persons who are delinquent in thepayment of their obligations.Delinquency in the payment ofobligations means that an obligation ofa person with a bank/quasi bank/trustentity where he/she is a director orofficer, or at least two obligations withother banks/financial institution, underdifferent credit lines or loan contracts,are past due. This disqualification shallbe in effect as long as the delinquencypersists.

e. Persons convicted for offenses involvingdishonesty, breach of trust or violationof banking laws but whose convictionhas not yet become final and executory;

f. Directors and officers of closedbanks/quasi-banks/trust entitiespending their clearance by the MB;

g. Directors disqualified for failure toobserve/discharge their duties andresponsibilities prescribed underexisting regulations. Thisdisqualification applies until the lapseof the specific period of disqualificationor upon approval by the MB; Directorswho failed to attend the special seminarfor board of directors required;

h. Persons dismissed/terminated fromemployment for cause. Thisdisqualification shall be in effect untilthey have cleared themselves ofinvolvement in the alleged irregularity;


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i. Those under preventive suspension; orj. Persons with derogatory records with

the NBI, court, police, interpol andmonetary authority (central bank) ofother countries (for foreign directorsand officers) involving violation of anylaw, rule or regulation of theGovernment or any of itsinstrumentalities adversely affecting theintegrity and/or ability to discharge theduties of a bank/quasi bank/trustentity director/officer. Thisdisqualification applies until they havecleared themselves of involvement in thealleged irregularity.

Qualifications/disqualifications ofofficers (BSP Circular 296 dated Sept. 17,2001)a. At least 21 years of age;b. At least a college graduate, or have at

least 5 years experience in banking ortrust operations or related activities orin a field related to his position andresponsibilities, or have undergonetraining in banking or trust operationsacceptable to the appropriatesupervising and examining departmentof the BSP: Provided, however, Thattrust officers shall have at least 2 yearsof actual experience or training in trustoperations or fund management orother related fields; and

c. Must be fit and proper for the positionhe is being proposed/appointed to.

d. The disqualifications for directorsmentioned for shall likewise apply toofficers, except persons who refuse tofully disclose the extent of theirbusiness interest and directorsdisqualified for failure toobserve/discharge their duties andresponsibilities.

e. Except as may be authorized, thespouse or a relative within the 2nddegree of consanguinity or affinity ofany person holding the position ofChairman, President, Executive VicePresident or any position of equivalentrank, General Manager, Treasurer,Chief Cashier or Chief Accountant isdisqualified from holding or beingelected or appointed to any of saidpositions in the same bank/quasi-bank;and the spouse or relative within thesecond degree of consanguinity oraffinity of any person holding theposition of Manager, Cashier, orAccountant of a branch or office of abank/quasi-bank/trust entity is

disqualified from holding or beingappointed to any of said positions in thesame branch or office.

f. In the case of UBs, CBs, and TBs, anyappointive or elective officials whetherfull time or part time, except in caseswhere such service is incident tofinancial assistance provided by thegovernment or government-owned orcontrolled corporations or in casesallowed under existing law.

g. In the case of Cooperative Banks, anyofficer or employee of the CooperativeDevelopment Authority or any electivepublic official, except a barangayofficial.

h. Except as may otherwise be allowedunder “The Anti-Dummy Law”, asamended, foreigners cannot be officersor employees of banks.

Prohibition on Public Officials as officersof banks:RULE: No appointive or elective officialwhether full-time or part-time shall at thesame time serve as officer of any privatebank.

EXCEPTIONS:a. otherwise provided in the Rural Banks

Act,b. in cases where such service is incident

to financial assistance provided by thegovernment or a government-owned or -controlled corporation to the bank

c. otherwise provided under existing laws(Sec.19)

Responsibility of directors for corporategovernance:The board of directors is primarilyresponsible for the corporate governance ofthe bank/quasibank/trust entity. Toensure good governance of the bank/quasi-bank/trust entity, the board of directorsshould establish strategic objectives,policies and procedures that will guide anddirect the activities of the bank/quasi-bank/ trust entity and the means to attainthe same as well as the mechanism formonitoring management’s performance.(BSP Circular 283)

PCI Bank vs. CA, 2001As a general rule, a banking corporation is liablefor the wrongful or tortuous acts anddeclarations of its officers or agents within thecourse and scope of their employment. A bankholding out its officers and agents as worthy ofconfidence will not be permitted to profit by thefrauds these officers or agents were enabled to


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perpetrate in the apparent course of theiremployment; nor will it be permitted to shirk itsresponsibility for such frauds, even though nobenefit may accrue to the bank therefrom.

When Monetary Board may regulate thecompensation and other benefits ofdirectors and officers:Only in exceptional cases and when thecircumstances warrant, such as but notlimited to:1. when a bank is under comptrollership

or conservatorship2. when a bank is found by the Monetary

Board to be conducting business in anunsafe or unsound manner

3. when a bank is found by the MonetaryBoard to be in an unsatisfactoryfinancial condition. (Sec. 18)

V. Operation of Banks

Banking Days and Hours:All banks including their branches andoffices shall transact business on allworking days (Mondays to Fridays, exceptholidays) for at least 6 hours a day. (Sec.21)

Banks or any of their branches or officesmay open for business on Saturdays,Sundays or holidays for at least 3 hours aday; Provided that banks which opt to openon days other than working days shallreport to the BSP the additional daysduring which they or their branches oroffices shall transact business. (Sec. 21)

Bank Branches:UBs or KBs may open branches or otheroffices within or outside the Philippinesupon prior approval of the BSP. (Sec. 20)A bank and its branches and offices shallbe treated as one unit. (Sec. 20)

Strikes and Lockouts:Notwithstanding the provisions of any lawto the contrary, any strike or lockoutinvolving banks, if unsettled after 7calendar days shall be reported by the BSPto the Secretary of Labor who may assumejurisdiction over the dispute or decide it orcertify the same to the NLRC forcompulsory arbitration. However, thePresident of the Philippines may at anytime intervene and assume jurisdiction oversuch labor dispute in order to settle orterminate the same. (Sec. 22)

A. Core Banking

1. Deposit Function

Only a UB or KB can accept demanddeposits

Exception: Banks other than a UB or KBwith prior approval of, and subject to suchconditions and rules as may be prescribedby the Monetary Board (Sec. 33)

Types of Deposits:1. Time Deposit - Interest rate stipulated

depending on the number of days.During this period, the money depositedcannot be withdrawn. High interestrates.

2. Savings Deposit - Bank pays aninterest rate, but not as high as timedeposits.

3. Demand Deposits/Current Accounts -No interest is paid by the bank becausethe depositor can take out his fundsany time. It is called demand depositbecause the depositor can withdraw themoney he deposited on the very sameday when he deposited it. (Villanueva,Commercial Law Review, opinion)

Presumption of ownership of deposits:It is presumed that money deposited in abank account belongs to the person inwhose name the deposit account is opened.

BPI v. CA (1994)A bank is under no duty or obligation to makean application or set-off against the depositaccounts of a borrower. To apply the deposit tothe payment of a loan is a privilege, a right ofset-off which the bank has the option toexercise, but not the obligation.

CA Agro-industrial Dev. Corp. v. CA (1983)The rent of safety deposit boxes is a special kindof deposit and cannot be characterized as anordinary contract of lease because the full andabsolute possession and control of the depositbox is not given to the renters. The prevailingrule is that the relation between the bankrenting out and the renter is that of bailer andbailee the bailment being for hire and mutualbenefit.

2. Loan Function

“Know your customer” rule:Before granting a loan or other creditaccommodation, a bank must ascertainthat the debtor is capable of fulfilling itscommitments to the bank. (Sec. 40)


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The bank may demand from its creditapplicants a statement of their assets andliabilities and of their income andexpenditure and such information as maybe prescribed by law or by rules andregulations of MB to enable the bank toproperly evaluate the credit applicationwhich includes the corresponding financialstatements submitted for taxation purposesto the BIR. (Sec. 40)

Credit enhancementIf the borrower is less than creditworthy,third persons may enhance his credit byproviding guarantees and other securitydevices in favor of the bank. (Morales, ThePhilippine General Banking Law, opinion)

If there is material misrepresentation,the bank may:a. Terminate any loan or other credit

accommodation granted on the basis ofsaid statements; and

b. Shall have the right to demandimmediate repayment or liquidation ofthe obligation (Sec. 40)

Limit on Loans, Credit Accommodationsand Guarantees:Real Estate Shall not exceed 75% of the

appraised value of therespective reas estate security,plus 60% of the appraised valueof the insured improvements,and such loans may be made tothe owner of the real estate or tohis assigneesEXC: the Monetary Boardotherwise prescribes (Sec. 37)

Security ofchattels andintagibleproperties(patents,trademarks,tade names,andcopyrights)

Shall not exceed 75% of theappraised value of the security,and such loans and other creditaccommodations may be madeto the title-holder of the chattelsand intangible properties or hisassigneesEXC: the Monetary Boardotherwise prescribes (Sec. 38)

Grant of Loans:a. Only in amounts and for the periods of

time essential for the effectivecompletion of the operations to befinanced (Sec. 39)

b. Consistent with safe and sound bankingpractices (Sec. 39)

Purpose of Loans:Purpose must be stated in the applicationand in the contract between the bank andthe borrower. (Sec. 39)

Effect of lack of bank’s prior approval:The bank shall have the right to terminatethe loan or other credit accommodation anddemand immediate repayment of theobligation. (Sec. 39)

Amortization on Loans and Other CreditAccommodations:a. In case of loans and other credit

accommodations with maturities of morethan 5 years, provisions must be madefor periodic amortization payments, butsuch payments must be made at leastannually:

Provided, however, That when theborrowed funds are to be used forpurposes which do not initially producerevenues adequate for regularamortization payments therefrom, thebank may permit the initialamortization payment to be deferreduntil such time as said revenues aresufficient for such purpose, but in nocase shall the initial amortization datebe later than 5 years from the date onwhich the loan or other creditaccommodation is granted.

b. In case of loans and other creditaccommodations to microfinance sectors,the schedule of loan amortization shalltake into consideration the projectedcash flow of the borrower and adopt thisinto the terms and conditionsformulated by banks.(Sec. 44)

Prepayment of Loans by Borrower:A borrower may prepay the unpaid balanceof any bank loan and other creditaccommodation:a. At any time prior to the agreed

maturity dateb. In whole or in partc. Subject to such reasonable terms and

conditions as may be agreed uponbetween the bank and its borrower.(Sec. 45)

Development Assistance Incentives:The BSP shall provide incentives to bankswhich, without government guarantee,extend loans to finance educationalinstitutions, cooperatives, hospitals andother medical services, socialized or lowcost housing, local government units andother activities with social content. (Sec. 46)


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B. Operations of a KB and UB

KB UBPowers a. gen. powers

incident tocorporations

b. all suchpowers asmay benecessary tocarry on thebusiness ofcommercialbanking(Sec. 29)

a. gen. powersincident tocorporations

b. all suchpowers asmay benecessary tocarry on thebusiness ofcommercialbanking

c. powers of aninvestmenthouse

d. power toinvest innon-alliedenterprises(Sec. 23)

Equityinvestments

alliedenterprises –financial ornon-financial(Sec. 30)

Allied and non-alliedenterprises –financial ornon-financial(Sec. 24)

Necessary powers of a KB:a. Accepting draftsb. Issuing letters of creditc. Discounting and negotiating promissory

notes, drafts, bills of exchange, andother evidence of debt

d. Accepting or creating demand depositse. Receiving other types of deposits and

deposit substitutesf. Buying and selling foreign exchange

and gold or silver bulliong. Acquiring marketable bonds and other

debt securitiesh. Extending creditAll are subject to such rules as theMonetary Board may promulgate. (Sec. 29)

Equity investments of KB:1. The total investment in equities of allied

enterprises shall not exceed 35% of thenet worth of the bank

2. The equity investment in any oneenterprise shall not exceed 25% of thenet worth of the bank

Equity investments of a KB in financialallied enterprises:1. A KB may own up to 100% of the equity

of a thrift bank or a rural bank2. For other financial allied enterprises,

including another bank, suchinvestment shall remain a minorityholding in that enterprise. (Sec. 31)

Equity investments of a KB in non-financial allied enterprises:A KB may own up to 100% of the equity ina non-financial allied enterprise. (Sec. 32)

Equity investments of UB:1. The total investment in equities of allied

and non-allied enterprises shall notexceed 50% of the net worth of the bank

2. The equity investment in any oneenterprise, whether allied or non-allied,shall not exceed 25% of the net worth ofthe bank

EXCEPTTION: the Monetary Boardotherwise prescribes (Sec. 30)Equity investments of a UB in financialallied enterprises:1. A UB may own up to 100% of the equity

of a thrift bank, a rural bank, or afinancial allied enterprise.

2. A publicly-listed UB or KB may own upto 100% of the voting stock of only oneother UB or KB (SEC. 25)

Equity investments of a UB in non-financial allied enterprises:A UB may own up to 100% of the equity in

a non-financial allied enterprise. (Sec. 26)Equity investments of a UB in non-alliedenterprises: The equity investment of a UB, or of its

wholly or majority-owned subsidiaries,in a single non-allied enterprise shallnot exceed 35% of the total equity inthat enterprise nor shall it exceed 35%of the voting stock in that enterprise.(Sec. 27)

Equity investments in quasi-banks: 40% equity investment for both UB and

KB (Sec. 28)

C. Prudential Measures

1. Capital Adequacy

A bank must conform to the risk-basedcapital ratio prescribed by the MBEXCEPT:a. In case of a bank merger or

consolidation,b. When a bank is under rehabilitation

under a program approved by the BSP(Sec. 34)

c. The MB may alter or suspendcompliance with such ratio whenevernecessary for a maximum period of 1year


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Risk-based capital ratio:The minimum ratio which the net worth ofa bank must bear to its total risk assetswhich may include contingent accounts [i.e.net worth : total risk assets] (Sec. 34)

Purpose:A bank must not be allowed to expand thevolume of its loans and investments in amanner that is disproportionate to its networth. (Morales, The Philippine GeneralBanking Law, opinion)

Effect of non-compliance:1. The MB may limit or prohibit the

distribution of net profits by such bankand may require that part or all of thenet profits be used to increase thecapital accounts of the bank until theminimum requirement has been met.

2. The MB may restrict or prohibit theacquisition of major assets and themaking of new investments by thebank, with the exception of purchasesof readily marketable evidences ofindebtedness of the RP and the BSPand any other evidences ofindebtedness or obligations theservicing and repayment of which arefully guaranteed by the RP, until theminimum required capital ratio hasbeen restored. (Sec. 33)

2. Single Borrower’s Limit

The total loans, credit accommodations andguarantees that may be extended by a bankto any person, partnership, association, orcorporation or other entity shall at no timeexceed 20% of the net worth of such bank.(Sec. 35.1)EXCEPTIONS:1. The Monetary Board otherwise

prescribes for reasons of nationalinterest (Sec. 35.1)

2. Wholesale lending activities ofgovernment banks to particiaptinginstitutions for relending to end-userborrowers: separate limit of 35% networth. (BSP Circular No. 425 datedMach 25, 2004)

Increase of limit:The Monetary Board may increase the limitprescribed by an additional 10% of the networth, when:a. The additional liabilities of any borrower

are adequately secured by trustreceipts, shipping documents,

warehouse receipts or other similardocuments transferring or securing title

b. Covering readily marketable, non-perishable goods

c. Which must be fully covered byinsurance (Sec. 35.2)

Purpose:To prevent the bank from making excessiveloans and other credit accommodations to asingle borrower or corporate group,including guarantees for the account ofsuch borrower or group. Tha bank isprohibited from… placing many eggs in thebasket of one client. [It] is a damage-controlmechanism [and] a device for riskamelioration. (Morales, The PhilippineGeneral Banking Law, opinion)

Basis for determining compliance:The basis for determining compliance withthe SBL is the total credit commitment ofthe bank to the borrower. (Sec. 35.1)

Inclusions in the ceiling:a. the direct liability of the maker or

acceptor of paper discounted with orsold to such bank and the liability of ageneral indorser, drawer or guarantorwho obtains a loan or other creditaccommodation from or discounts paperwith or sells papers to such bank;

b. in the case of an individual who owns orcontrols a majority interest in acorporation, partnership, association orany other entity, the liabilities of saidentities to such bank;

c. in the case of a corporation, allliabilities to such bank of allsubsidiaries in which such corporationowns or controls a majority interest;and

d. in the case of a partnership, associationor other entity, the liabilities of themembers thereof to such bank. (35.3)

Guidelines on the wholesale lending ofgovernment banks:a. it shall apply only to loans granted by

participating financial institutions (PFIs)on a wholesale bases for on lending toend-user borrowers

b. it shall apply only to loan programsfunded by multilateral, international, orlocal development agencies,organizations, or institutions, especiallydesigned for wholesale lending activitiesof government banks


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c. the end-user borrowers of the PFIs shallbe subject to the 25% SBL, not theincreased ceiling of 35%; and

d. government banks shall observeappropriate criteria for accrediting PFIsand for the grant/renewal of credit linesto accredited PFIs BSP Circular No. 425dated Mach 25, 2004)

Exclusions from the ceiling:Loans and other credit accommodationsa. secured by obligations of the BSP or of

the Philippine Governmentb. fully guaranteed by the government as

to the payment of principal and interestc. covered by assignment of deposits

maintained in the lending bank andheld in the Philippines

d. under letters of credits to the extentcovered by margin deposits

e. specified by the Monetary Board as non-risk items (Sec. 35.5)

Combination of liabilities:The MB may prescribe the combination ofthe liabilities of subsidiary corporations ormembers of the partnership, association,entity or such individual under certaincircumstances, including but not limited toany of the following situations:a. the parent corporation, partnership,

association, entity or individualguarantees the repayment of theliabilities;

b. the liabilities were incurred for theaccommodation of the parentcorporation or another subsidiary or ofthe partnership or association or entityor such individual; or

c. the subsidiaries though separateentities operate merely as departmentsor divisions of a single entity. (35.4)

Loans and other creditaccommodations, deposits maintainedwith, and usual guaranteed by a bankto any other bank or non-bank entity,whether locally or abroad, shall besubject to the limits as hereinprescribed. (35.6)

3. DOSRI (Directors, Officers,Stockholders and their RelatedInterests)

No director or officer of any banka. shall, directly or indirectly, for himself

or as the representative or agent ofothers, borrow from such bank nor

b. shall he become a guarantor, endorseror surety for loans from such bank toothers, or in any manner be an obligoror incur any contractual liability to thebank

EXCEPTIONS:1. valid insider lending (Sec. 36)2. loans, credit accommodations and

guarantees extended by a cooperativebank to its cooperative shareholders(Sec. 36)

Requirements for valid insider lending:a. in the regular course of businessb. upon terms not less favorable to the

bank than those offered to others (Sec.36)

c. there is a written approval of themajority of all the directors of the bank,excluding the director concerned.(Except: granted to officers under afringe benefit plan approved by the BSP(Sec. 36))

d. the required approval shall be enteredupon the record of the bank and a copyof such entry shall be transmittedforthwith to the appropriatesupervising and examining departmentof the BSP (Sec. 36)

e. limited to an amount equivalent to theDOSRI borrower’s respectiveunencumbered deposits and book valueof their paid-in capital contribution inthe bankEXC:1. non-risk items2. loans in the form of fringe benefits

(Sec. 36)

A DOSRI borrower is required to waivethe secrecy of his “deposits of whatevernature in all banks in the Philippines.(Sec. 26, New Central Bank Act)

Purpose:To prevent the bank from becoming acaptive source of finance for DOSRI.(Morales, The Philippine General BankingLaw, opinion)

4. Loan-Loss Provisioning

The following are subject to regulation bythe Monetary Boarda. the amount of reserves for bad debts or

doubtful accounts or othercontingencies.

b. the writing off of loans, other creditaccommodations, advances and otherassets (Sec. 49)


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Purpose:For effective banking supervision. There is aproblem of mismatch when a loan becomesnon-performing. The bank is paying intereston the money it borrowed from thedepositors or other placers of funds, but isnot recouping that interest from the loan itmade. Eventually, the bank may have towrite off loan losses against profits. Tocushion this eventuality, the bank isrequired to set aside reserved for bad debtsand other doubtful accounts orcontingencies. (Morales, The PhilippineGeneral Banking Law, opinion)

5. Reserves

Purposes:a. To control the volume of money created

by the credit operations of the bankingsystem, the BSP requires all banks tomaintain reserves against their depositand deposit-substitute liabilities.

b. As a ready source of funds that willrespond to unusually large number ofwithdrawals or preterminations ofdeposits or deposit-substitutes, takingin the shape of a bank run. (Morales,The Philippine General Banking Law,opinion)

Two types of reserves:a. Statutory legal reserve

Now at 11% (BSP Circular No. 491dated July 12, 2005)For deposit-substitutes: 2% (BSPCircular No. 444 dated August 18,2004)For foreign currency deposit units:100% (BSP Circular No. 1389 datedApril 13, 1993, as amended); 30% ofthis cover must be in the form of liquidassets (BSP Circular-Letter dated June6, 1997, as cited in Morales)

b. Liquidity reserveNow deposits should be placed in theReserve Deposit Account of the BSP forat least 3 months (BSP Circular No. 539dated August 9, 2006)

The BSP shall not pay interest on thereserves maintained with it unless theMonetary Board decides otherwise aswarranted by circumstances. (Sec. 94, NewCentral Bank Act)

6. PDIC Insurance

Banks are required to insure their depositliabilities with the PDIC.

Partial Insurance:Each depositor is a beneficiary of theinsurance for a maximum amount ofP250,000, or its foreign currency equivalentin the case of an FCDU deposit.

Note: Effective 01 June 2009, the PDICmaximum deposit insurance coverage shallbe increased from P250,000 to P500,000 foreach depositor pursuant to RA 9576.

Purpose:Full insurance might encourage riskybanking activities. = to limit moral hazard

D. Other Functions

1. Ownership of Real Property andForeclosure of Real EstateMortgage

A bank may acquire real estate as shall benecessary for its own use in the conduct ofits business

Conditions:a. The total investment in such real estate

and improvements thereof includingbank equipment shall not exceed 50%of combined capital accounts

b. The equity investment of a bank inanother corporation engaged primarilyin real estate shall be considered aspart of the bank’s total investment inreal estate, unless otherwise providedby the Monetary Board (Sec. 51)

Exception:1. Such as shall be mortgaged to it in good

faith by way of security for debts;2. Such as shall be conveyed to it in

satisfaction of debts previouslycontracted in the course of its dealings;or

3. Such as it shall purchase at sales underjudgments, decrees, mortgages, or trustdeeds held by it and such as it shallpurchase to secure debts due it. (Sec.52)

Any real property acquired or held underthese circumstances shall be disposed of bythe bank within a period of 5 years or asmay be prescribed by the MB. (Sec. 52)


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Foreclosure of REM:A bank may foreclose, whether judicially orextrajudicially, any mortgage on real estatewhich is security for any loan or othercredit accommodation granted (Sec. 47)

Right of redemption of mortgagor:The mortgagor or debtor whose realproperty has been sold for the full or partialpayment of his obligation shall have theright to redeem the property: within 1 year after the sale of the real

estate by paying the amount due under the

mortgage deed, with interest thereon atthe rate specified in the mortgage, andall the costs and expenses incurred bythe bank or institution from the saleand custody of said property less theincome derived therefrom. (Sec. 47)

Right of redemption of mortgagor who isa juridical person in an extrajudicialforeclosure:Redeem the property not after, theregistration of the certificate of foreclosuresale with the applicable Register of Deedswhich in no case shall be more than 3months after foreclosure, whichever isearlier. (Sec. 47)

Owners of property that has been sold in aforeclosure sale prior to the effectivity of theGBL shall retain their redemption rightsuntil their expiration. (Sec. 47)

The purchaser shall have the right to enterupon and take possession of such propertyimmediately after the date of theconfirmation of the auction sale andadminister the same in accordance withlaw. (Sec. 47)

Any petition in court to enjoin orrestrain the conduct of foreclosureproceedings shall be given due courseonly upon the filing by the petitioner ofa bond in an amount fixed by the courtconditioned that he will pay all thedamages which the bank may suffer bythe enjoining or the restraint of theforeclosure proceeding.

2. Trust Operations

Only a trust entity shall act as a trustee oradminister any trust or hold property intrust or on deposit for the use, benefit, oron behoof of others. (Sec. 79)

Trust Entity:A stock corporation or a person dulyauthorized by the Monetary Board toengage in trust business. (Sec. 79)

Prudent Man Rule:A trust entity shall administer the funds orproperty under its custody with thediligence that a prudent man wouldexercise in the conduct of an enteprise of alike character and with similar aims. (Sec.80)

Rule on Self-Dealing:No trust entity shall engage in self-dealingexcept when:a. The transaction is specifically

authorized by the trustor, andb. The relationship of the trustee and the

other party involved is fully disclosed tothe trustor or beneficiary of the trustprior to the transaction (Sec. 80)

Self Dealing: Purchase or acquire property from Sell, transfer, assign, or lend money or

property to Purchase debt instruments of,any of the departments, directors, officers,stockholders, or employees of the trustentity, relatives within the 1st degree ofconsanguinity or affinity, or the relatedinterests, of such directors, officers andstockholders. (Sec. 80)

Trust Business Requirements:1. Registration of AOI and By-Laws of a

Trust Entity:The SEC shall not register the AOI and By-Laws or any amendment thereto, of anytrust entity, unless accompanied by acertificate of authority issued by the BSP.(Sec. 81)

2. Minimum Capitalization: (Sec. 82)Min. paid-in capital:a. if non-bank: combined capital accounts

of not less than P250,000,000 (Subsec.440Q.1 of the Manual of Regulations forNon-Bank Financial Institutions)

b. if domestic bank: combined capitalaccounts must not be less than themin. capital prescribed by the MonetaryBoard for such bank but in no case beless than P250,000,000 (Subsec.404.1.a of the Manual of Regulations forBanks)

c. if stand-alone trust company (notaffiliated to a bank): P300,000 (Morales,The Philippine General Banking Law)


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Combined capital accounts: the total ofcapital stock, retained earnings and profitand loss summary, net of (a) suchunbooked valuation reserves and othercapital adjustments as may be required bythe BSP, and (b) total outstandingunsecured credit accommodations, bothdirect and indirect, to DOSRI

Powers of a Trust Entity:a. Trust Business – any activity resulting

from trusteeship involving theappointment of a trustee by a trustorfor the administration, holding,management of funds and/or propertiesof the trustor by the trustee for the use,benefit or advantage of the trustor or ofbeneficiaries

b. Other fiduciary business – any activityof a licensed trust bank resulting from acontract or agreement whereby thebank binds itself to render services or toact in a representative capacity such asin agency, guardianship,administratorship of wills, propertiesand estates, executorship, receivership,and other similar services which do notcreate or result in a trusteeship.

c. Investment management activity –any activity resulting from a contract oragreement primarily for financial returnwhereby the bank (the investmentmanager) binds itself to handle ormanage investible funds or anyinvestment portfolio in a representativecapacity as financial or managing agent,adviser, consultant or administrator offinancial or investment management,advisory, consultancy or any similararrangement which does not create orresult in a trusteeship. (Morales, ThePhilippine General Banking Law,opinion)

Deposit requirement:Before transacting trust business, everytrust entity shall deposit with the BSP, assecurity for the faithful performance of itstrust duties, cash or securities cash or securities approved by the

Monetary Board in an amount equal to or not less than

P500,000 or such higher amount asmay be fixed by the Monetary Board(Sec. 84)

A trust entity so long as it shall continue tobe solvent and comply with laws orregulations shall have the right:

a. to collect the interest earned on suchsecurities deposited with the BSP

b. to exchange the securities for others,from time to time, with the approval ofthe BSP (Sec. 84)

If the trust entity fails to comply withany law or regulation, the BSP shallretain such interest on the securitiesdeposited with it for the benefit ofrightful claimants. (Sec. 84)

All claims rising out of the trust business ofa trust entity shall have priority over allother claims as regards the deposit. (Sec.84)

Bond requirement:No bond or other security shall be requiredby the court from a trust entry for thefaithful performance of its duties as court-appointed trustee, executor, administrator,guardian, receiver, or depositary.

However, the court may, upon properapplication with it showing special causetherefore, require the trust entity to post abond or other security for the protection offunds or property confided to such entity.(Sec. 86)

Separation of Trust Business fromGeneral Business:The following must be kept separate anddistinct:a. the trust business and all funds,

properties or securities received by anytrust entity as executor, administrator,guardian, trustee, receiver, ordepositary from the general businessincluding all other funds, properties,and assets of such trust entity

b. the accounts of all such funds,properties, or securities from theaccounts of the general business of thetrust entity (Sec. 87)

The separation of assets is warrantedbecause the trust department is not thebeneficial owner of the assets held in trust.(Morales, The Philippine General BankingLaw, opinion)

Investments of a Trust Entity –Limitations:The lending and investment of funds andother assets acquired by a trust entity asexecutor, administrator, guardian, trustee,receiver or depositary of the estate of anyminor or other incompetent person shall be


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limited to loans or investments as may beprescribed by law, the Monetary Board orany court of competent jurisdiction,EXCEPT:Otherwise directed by the instrumentcreating the trust (Sec. 88)

Investments of a Trust Entity – RealEstate Acquisition:Governed by Sec. 52. (Sec. 89) – mayacquire real estate which are:1. mortgage to in good faith by way of

security for debts2. conveyed to it in satisfaction of debts

previously contracted in the course ofits dealings

3. purchased at sales under judgments,decrees, mortgages, or trust deeds heldby it and purchased to secure debts dueto it

But such real property shall be disposed ofwithin 5 years

Investments of a Trust Entity –Investment of Non-Trust Funds:The investment of funds other than trustfunds of a trust entity which is a bank,financing company or an investment houseshall be governed by the relevant provisionsof the GBL and other applicable laws. (Sec.90)

Sanctions and Penalties:A trust entity or any of its officers anddirectors found to have willfully violatedany pertinent provisions of the GBL shall besubject to the sanction and penaltiesprovided under Sec. 66 of the GBL and Sec.36 and 37 of the New Central Bank Act.(Sec.91) under the GBL: suspension for the

officers and directors and dissolutionfor the corporation

under the NCBA: fines of P50,000 toP200,000, or imprisonment of 2 – 10years, or both; and administrativesanctions, which include fines,suspension of certain privileges,revocation of license, etc.

Exemption of Trust Assets from Claims:No assets held by a trust entity in itscapacity as trustee shall be subject to anyclaims other than those of the partiesinterested in the specific trust. (Sec. 92)

3. Other Banking Services

Other Banking Services1. Receive in custody funds, documents

and valuable objects;2. Act as financial agent and buy and sell,

by order of and for the account of theircustomers, shares, evidences ofindebtedness and all types of securities;

3. Make collections and payments for theaccount of others and perform suchother services for their customers as arenot incompatible with bankingbusiness;

4. Upon prior approval of MB, act asmanaging agent, adviser, consultant oradministrator of investmentmanagement/advisory/consultancyaccounts; and

5. Rent out safety deposit boxes. (Sec. 53)

E. Prohibited Functions

Prohibition to act as insurer:A bank shall not directly engage ininsurance business as the insurer. (Sec. 54)

Prohibited Transactions of Directors,Officers, Employees, or Agents of AnyBank:1. Making false entries in any bank report

or statement or participating in anyfraudulent transaction, therebyaffecting the financial interest of, orcausing damage to, the bank or anyperson;

2. Without order of a court of competentjurisdiction, disclosing to anyunauthorized person any informationrelative to the funds or properties in thecustody of the bank belonging to privateindividuals, corporations, or any otherentity: Provided, That with respect tobank deposits, the provisions of existinglaws shall prevail;

3. Accepting gifts, fees or commissions orany other form of remuneration inconnection with the approval of a loanor other credit accommodation fromsaid bank;

4. Overvaluing or aiding the overvaluing ofany security for the purpose ofinfluencing in any way the actions ofthe bank or any bank; or

5. Outsourcing inherent bankingfunctions. (SubSec. 55.1)


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Prohibited transactions of borrowers ofbank1. Fraudulently overvaluing property

offered as security for a loan or othercredit accommodation from the bank;

2. Furnishing false or misrepresenting orsuppressing material facts for thepurpose of obtaining, renewing, orincreasing a loan or other creditaccommodation or extending the periodthereof;

3. Attempting to defraud the said bank inthe event of a court action to recover aloan or other credit accommodation; or

4. Offering any director, officer, employeeor agent of a bank any gift, fee,commission, or any other form ofcompensation in order to influence suchpersons into approving a loan or othercredit accommodationapplication.(SubSec. 55.2)

Prohibition on conduct of business in anunsafe or unsound manner:A bank must not conduct business in anunsafe or unsound manner. (Sec. 56)EFFECT OF VIOLATION:The MB may, without prejudice to theadministrative sanctions provided in Sec.37 of the NCBA,a. take action under Sec. 30 of the same

Actb. and/or immediately exclude the erring

bank from clearing, the provisions oflaw to the contrary notwithstanding.(Sec. 56)

Prohibition on Dividend Declaration:No bank or QB shall declare dividends, if atthe time of declaration:1. Its clearing account with the BSP is

overdrawn; or2. It is deficient in the required liquidity

floor for government deposits for 5 ormore consecutive days; or

3. It does not comply with the liquiditystandards/ratios prescribed by the BSPfor purposes of determining fundsavailable for dividend declaration; or

4. It has committed a major violation asmay be determined by the BSP. (Sec.57)

F. Some Requirements for theOperation of Banks

Independent Auditor:The MB may require a bank, QB or trustentity to engage the services of anindependent auditor to be chosen by thebank, QB or trust entity concerned from alist of CPAs acceptable to the MB.

The MB may also direct the board ofdirectors of a bank, QB, trusty entityand/or the individual members thereof, toconduct, either personally or by acommittee created by the board, an annualbalance sheet audit of the bank, QB ortrust entity to review the internal audit andcontrol system of the bank, QB or trustentity and to submit a report of such audit.(Sec. 58)

Financial Statements:Every bank, QB or trust entity shall submitto the appropriate supervising andexamining department of the BSP financialstatements in such form and frequency asmay be prescribed by the BSP. (Sec. 60)

Publication of Capital Stock:A bank, QB or trust entity incorporatedunder the laws of the Phils. shall notpublish the amount of its authorized orsubscribed capital stock without indicatingat the same time and with equalprominence, the amount of its capitalactually paid up. (Sec. 62)

Electronic Transactions:The BSP shall have full authority toregulate the use of electronic devices, suchas computers, and processes for recording,storing and transmitting information ordata in connection with the operations of abank, QB or trust entity, including thedelivery of services and products tocustomers by such entity. (Sec. 59)

Advertisement or BusinessRepresentation:No person, association, or corporationunless duly authorized to engage in thebusiness of a bank, quasi-bank, trustentity, or savings and loan association shalladvertise or hold itself out as being engagedin the business of such bank, quasi-bank,trust entity, or association, or use inconnection with its business title, the wordor words “bank,” “banking,” “banker,”“quasi-bank,” “quasi-banking,” “quasi-banker,” “savings and loan association,”


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“trust corporation,” “trust company,” orwords of similar import or transact in anymanner the business of any such bank,corporation or association. (Sec. 64)

Penalties for Violation:Unless otherwise provided, the violation ofany of the provisions of this Act shall besubject to Secs 34, 35, 36 and 37 of theNCBA. If the offender is a director or officerof a bank, quasi-bank or trust entity, theMB may also suspend or remove suchdirector or officer. If the violation iscommitted by a corporation, suchcorporation may be dissolved by quowarranto proceedings instituted by theSol.Gen.. (Sec. 66)

Settlement of Disputes:The provisions of any law to the contrarynotwithstanding, the BSP shall beconsulted by other government agencies orinstrumentalities in actions or proceedingsinitiated by or brought before theminvolving controversies in banks, QBs ortrust entities arising out of and involvingrelations between and among theirdirectors, officers or stockholders, as wellas disputes between any or all of them andthe bank, QBs or trust entity of which theyare directors, officers or stockholders. (Sec.63)

Conservatorship:The grounds and procedure for placing abank and quasi-bank underconservatorship as well as, the powers andduties of the conservator appointed for thebank shall be governed by the provisions ofthe New Central Bank Act. (Sec. 67)

Voluntary Liquidation:In case of voluntary liquidation of any bankorganized under the laws of the Philippines,or of any branch or office in the Philippinesof a foreign bank, written notice of suchliquidation shall be sent to the MonetaryBoard before such liquidation isundertaken (Sec. 68)

Receivership and InvoluntaryLiquidation:The grounds and procedures for placing abank and quasi-bank under receivership orliquidation, as well as the powers andduties of the receiver or liquidatorappointed for the bank shall be governed bythe New Central Bank Act. Provided, thatthe petitioner or plaintiff files with the clerkor judge of the court in which the action ispending a bond, executed in favor of the

BSP, in an amount to be fixed by the court.(Sec. 69)

VI.Foreign Banks

Transacting Business in the Philippines -Ways:1. through the establishment of local

branches2. through the conduct of offshore banking3. through the acquisition of voting stock in

a domestic bank

If there are more than 1 local branches, allsuch branches shall be treated as 1 unit forthe purpose of the GBL and all referencesto the Philippine branches of foreign banksshall be held to refer to such units (Sec. 74)

The head office of such local branches shallfully guarantee the prompt payment of allliabilities of its Philippine branch in order toprovide effective protection of the interestsof the depositors and other creditors of thelocal branches. (Sec. 75)

Residents and citizens of the Philippineswho are creditors of the local branch shallhave preferential rights to the assets ofsuch branch in accordance with existinglaws. (Sec. 75)

The MB shall adopt measures as may benecessary to ensure that at all times thecontrol of 70% of the resources or assets ofthe entire banking system is held by bankswhich are at least majority-owned byFilipinos. (Sec. 73)

Any right, privilege or incentive grantedto a foreign bank shall be equallyenjoyed by and extended under thesame conditions to banks organizedunder the Philippine laws. (Sec. 73)

Summons and Legal Process:Service may be made upon:a. the Philippine agent or head of any foreign

bank designated to accept such serviceb. the Philippine agent or head authorized by

the bank to accept such servicec. the BSP Deputy Governor In-Charge of

the supervising and examiningdepartments

Laws Applicable:In all matters not specifically covered byspecial provisions applicable only to aforeign bank or its branches and otheroffices in the Philippines any foreign banklicensed to do business in the Philippinesshall be bound by the provisions of the


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GBL, all other laws, rules and regulationsapplicable to banks organized under thelaws of the Philippines of the same class,except those that provide for the creation,formation, organization or dissolution ofcorporations or for the fixing of therelations, liabilities, responsibilities, orduties of stockholders, members, directorsor officers of corporations to each other orto the corporation. (Sec. 77)

Revocation of License of a Foreign Bank:The Monetary Board may revoke the licenseto transact business in the Philippines ofany foreign bank, if it finds that the foreignbanka. is insolventb. is in imminent danger of being insolventc. if it continues to do business, will involve

probable loss to those transactingbusiness in the Philippines. (Sec. 78)

After the revocation of its license,a. It shall be unlawful for any such foreign

banks to transact business in thePhilippines unless its license is renewedor reissued

b. The BSP shall take the necessary action toprotect the creditors of such foreign bankand the public (Sec. 78)

REVIEWER IN COMMERCIAL LAW Chapter II. The New Central Bank Act (RA 7653)

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Chapter II. The New Central BankAct (RA 7653)

I. GENERAL PROVISIONII. ORGANIZATION OF THE BSP

A. MONETARY BOARDB. GOVERNOR/DEPUTY GOVERNOR

III. OPERATION OF THE BSPA. SUPERVISION AND EXAMINATIONB. HANDLING OF BANKS IN DISTRESSC. MONETARY ADMINISTRATIOND. AS BANKER AND FINANCIAL ADVISER

OF THE GOVERNMENTE. OTHER OPERATIONSF. PROHIBITED OPERATIONS

I. General Provision

BSP – Nature:A. A central monetary authorityB. An independent and accountable bodyC. A government-owned corporation but

enjoys fiscal and administrativeautonomy. (Sec. 1 and Sec. 2)

BSP – Objectives:A. To maintain price stability conducive to

a balanced and sustainable growth ofthe economy (primary objective)

B. To promote and maintain monetarystability and the convertibility of thepeso (Sec. 3)

BSP – Responsibilities:A. To provide policy directions in the areas

of money, banking, and creditB. To supervise operations of banks (Sec.

3)

All powers, duties and functions vestedby law int eh Central Bank of thePhilippines not inconsistent with theNCBA shall be deemed transferred tothe BSP. All references to the CentralBank of the Philippines in any law orspecial charters shall be deemed to referto the BSP. (Sec. 136)

II. Organization of the BSP

A. Monetary Board

Composition: 7 members with 6-yearterms (Sec. 6)

Members:1. The BSP Governor or his designated

alternate (a deputy governor)2. A Cabinet member to be designated by

the President or his designated

alternate (an Undersecretary in hisdepartment)

3. 5 members from the private sector (Sec.6)

No member of the MB may bereappointed more than once. (Sec. 6)

Qualifications:1. Natural-born citizens of the Philippines2. At least 35 years old (the Governor must

be at least 40 years old)3. Of good moral character4. Of unquestionable integrity5. Of known probity and patriotism6. With recognized competence in social

and economic disciplines (Sec. 8)

Disqualifications:1. Direct connection with any multilateral

banking or financial institution2. Substantial interest in any private bank

in the Philippines, within 1 year prior tohis appointment (Sec. 9)

Prohibitions on the members:1. To be a director, officer, employee,

consultant, lawyer, agent or stockholderof any bank, quasi-bank, or any otherinstitution which is subject tosupervision or examination by the BSP

2. To hold any other public office or publicemployment during their tenure

3. To be employed in any multilateralbanking or financial institution within 2years after the expiration of his termEXCEPTION: when he serves as anofficial representative of the governmentto such institution (Sec. 9)

Removal of any member of the MB:1. If the member is subsequently

disqualified under Sec. 82. If he is physically or mentally

incapacitated that he cannot properlydischarge his duties and responsibilitiesand such incapacity has lasted for morethan 6 months

3. If he is guilty of acts or operationswhich are of fraudulent or illegalcharacter or which are manifestlyopposed to the aims and interests of theBSP

4. If he no longer possesses thequalifications under Sec. 8 (Sec. 10)

Vacancies:Cause: death, resignation, or removal ofany member


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Effect: a new member will be appointed tocomplete the unexpired period of the termof the member concerned (Sec. 7)

Salaries: Fixed by the Phil. President at asum commensurate to the importance andresponsibility attached (Sec. 13)

Meetings:1. held at least once a week2. called by the Governor or by 2 MB

members3. the complete records of the proeedings

and deliberations of the MB includingthe tapes and transcripts ofstenographic notes are to be maintainedand preserved (Sec. 11)

4. deputy governors may attend (Sec. 12)5. any member with personal or pecuniary

interest in any matter in the agendashall disclose his interest and shallretire from the meeting when the matteris taken up (Sec. 14)

Quorum: Presence of 4 membersconstitute a quorum (Sec. 11)

Decisions: Concurrence of at least 4members, except as otherwise provided inthe NCBA (Sec. 11)

B. Governor/Deputy Governor

Governor:The Governor shall be the chief executiveofficer of the BSP

Deputy Governor(s):1. to be appointed by the Governor, with

the approval of the MB2. not more than 3 (Sec. 21)

III. Operation of the BSP

A. Supervision and Examination

Coverage: Banking institutions and quasi-banks,

including their subsidiaries andaffiliates engaged in allied activities.(Sec. 25)

The supervising and examiningdepartment head, personally or bydeputy, shall examine the books ofevery banking institution once in every12 months, and at such other times asthe MB by an affirmative vote of 5members, may deem expedient (there

must be an interval of at least 12months between annual examinations)(Sec. 28)

The bank concerned shall afford the head ofthe appropriate supervising and examiningdepartments and his authorized deputiesfull opportunity to examine its books, cashand available assets and general conditionat any time during banking hours whenrequested to do so by the BSP. (Sec. 28)

Non-disclosure of papers:RULE: None of the reports and otherpapers relative to such examinations shallbe open to inspection by the publicEXCEPTION: if the publicity is incidentalto the proceedings authorized or isnecessary for the prosecution of violationsin connection with the business of suchinstitutions. (Sec. 28)

No Restraining Order or Injunction onthe BSP:RULE: No restraining order or injunctionshall be issued by the court enjoining theBSP from examining any institution subjectto supervision or examination by the BSPEXCEPTION: existence of a convincingproof that the action of the BSP is plainlyarbitrary and made in bad faith and thepetitioner or plaintiff files with the clerk orjudge of the court in which the action ispending a bond executed in favor of theBSP (Sec. 25)

B. Handling of Banks in Distress

1. Conservatorship

Applicability: when a bank or a quasi-bank is in a

state of continuing inability orunwillingness to maintain a condition ofliquidity deemed adequate to protectthe interest of depositors and creditors(Sec. 29)

determination is to be made by theMonetary on the basis of a reportsubmitted by the appropriatesupervising or examining department(Sec. 29)

Period and Termination: Period: shall not exceed 1 year (Sec. 29) The expenses attendant to the

conservatorship shall be borne by thebank or quasi-bank concerned (Sec. 29)


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Grounds for termination ofconservatorship by MB:a. When it is satisfied that the

institution can continue to operateon its own and the conservatorshipis no longer necessary

b. When, on the basis of the report ofthe conservator or of its ownfindings, the MB determines thatthe continuance in business of theinstitution would involve probableloss to its depositors or creditors(the bank or quasi-bank would thenbe placed under receivership) (Sec.29)

Qualifications of a Conservator:The conservator should be competent andknowledgeable in bank operations andmanagement. (Sec. 29) The appointment of a conservator shall

be vested exclusively with the MB. (Sec.30)

Powers and Duties of a Conservator:a. To take charge of the assets, liabilities,

and the management thereofb. To reorganize the managementc. To collect all monies and debts due said

institution, andd. To exercise all powers necessary to

restore its viabilitye. To report and be responsible to the MBf. To overrule or revoke the actions of the

previous management and board ofdirectors of the bank or quasi-bank.(Sec. 29)

First Philippine International Bank vs CA(1996)

While the Central Bank law gives vast and farreaching powers to the conservator of a bank,such powers must be related to the preservationof the assets of the bank, the reorganization ofthe management and the restoration of viability.Such powers cannot extend to the post-factorepudiation of perfected transactions, otherwisethey would infringe against the non-impairmentclause of the Constitution.

Remunerations:The conservator shall receive remunerationin an amount not to exceed 2/3 of thesalary of the president of the institution in1 year, payable in 12 equal monthlypaymentsEXC: a conservator connected with theBSP, in which case said conservator shallnot be entitled to receive any remunerationor emolument. (Sec. 29)

2. Receivership

Grounds:Whenever the MB finds that a bank orquasi-bank:a. Is unable to pay its liabilities as they

become due in the ordinary course ofbusiness: Provided, That this shall notinclude inability to pay caused byextraordinary demands induced byfinancial panic in the bankingcommunity;

b. Has insufficient realizable assets, asdetermined by the BSP, to meet itsliabilities; or

c. Cannot continue in business withoutinvolving probable losses to itsdepositors or creditors; or

d. Has willfully violated a cease and desistorder under Sec. 37 that has becomefinal, involving acts or transactionswhich amount to fraud or a dissipationof the assets of the institution

Receiver:a. if a banking institution: the PDICb. if a quasi-bank: any person of

recognized competence in banking orfinance (Sec. 30)

The appointment of a receiver shall bevested exclusively with the MB. And thedesignation of a conservator is not aprecondition to the designation of areceiver. (Sec. 30)

Powers and Duties of a Receiver:a. Immediately gather and take charge of

all the assets and liabilities of theinstitution

b. Administer the assets for the benefit ofthe creditors

c. Exercise the general powers of areceiver under the Revised Rules ofCourt

d. Not to pay or commit any act that willinvolve the transfer or disposition of anyasset of the institution, except:1. administrative expenditures2. receiver may deposit or place funds

in non-speculative investmentse. Subject to prior approval of the MB,

determine, as soon as possible, but notlater than 90 days from take over,whether the institution may berehabilitated or otherwise placed insuch a condition so that it may bepermitted to resume business withsafety to its depositors and creditorsand the general public


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The assets of the institution underreceivership and liquidation shall bedeemed in custodia legis and shall beexempt from any order of garnishment,levy, attachment, or execution. (Sec. 30)

3. Liquidation

Should the determination be that theinstitution cannot be rehabilitated orpermitted to resume business, the MB shallnotify in writing the board of directors ofthe institution of its findings and direct thereceiver to proceed with the liquidation ofthe institution. (Sec. 30)

Procedure:1. The receiver shall file ex parte with the

proper RTC, and without requirement ofprior notice or any other action, apetition for assistance in the liquidationof the institution pursuant to theliquidation plan adopted by the PDIC (ifquasi-bank, liquidation plan adopted bythe MB)

2. Upon acquiring jurisdiction, the courtshall, upon motion by the receiver afterdue notice,a. adjudicate disputed claims against

the institution,b. assist the enforcement of individual

liabilities of the stockholders,directors, and officers, and

c. decide on other issues as may bematerial to implement theliquidation plan

3. The receiver shall convert the assets ofthe institutions to money, dispose ofthe same to creditors and otherparties, for the purpose of paying thedebts of such institution in accordancewith the rules on concurrence andpreference of credit under the CivilCode

The assets of the institution underreceivership and liquidation shall bedeemed in custodia legis and shall beexempt from any order of garnishment,levy, attachment, or execution. (Sec. 30)

Dispositions:In case of a liquidation of a bank or quasi-bank, after payment of the cost ofproceedings, including reasonable expensesand fees of the receiver to be allowed by thecourt, the receiver shall pay the debts ofsuch institution, under order of the court,in accordance with the rules on

concurrence and preference of credit in theCivil Code. (Sec. 31)

All revenues and earnings realized by thereceiver in winding up the affairs andadministering the assets of any bank orquasi-bank shall be used to pay the costs ofproceedings, salaries of such personnelwhose employment is rendered necessary inthe discharge of the liquidation togetherwith other additional expenses causedthereby. The balance of revenues andearnings, after the payment of all saidexpenses, shall form part of the assetsavailable to creditors. (Sec. 32)

No restraining order:The actions of the MB shall be final andexecutory and may not be restrained or setaside by the court (for both receivershipand liquidation)EXCEPTION: petition for certiorari on thefollowing grounds:a. the action was taken in excess of

jurisdictionb. the action was taken with grave abuse

of discretion as to amount to lack orexcess of jurisdiction

CONDITIONS:a. may only be filed by the stockholders of

record representing the majority of thecapital stock

b. may only be filed within 10 days fromreceipt by the board of directors of theinstitution of the order directingreceivership, liquidation orconservatorship. (Sec. 30)

C. Monetary Administration

PesoThe unit of monetary value in thePhilippines is the "peso," which isrepresented by the sign "P." The peso isdivided into 100 equal parts called"centavos," which are represented by thesign "c." (Sec. 48)

Means of Payment – Currency:Currency: all Philippine notes and coinsissued or circulating in accordance with theprovisions of this Act. (Sec. 49)

Issuance: The BSP shall have the solepower and authority to issue currency,within the territory of the Philippines. (Sec.50)

Liability for Notes and Coins:


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Notes and coins issued by the BSP shallbe liabilities of the BSP and may beissued only against, and in amounts notexceeding, the assets of the BSP. Saidnotes and coins shall be a first andparamount lien on all assets of the BSP.

The BSP's holdings of its own notes andcoins shall not be considered as part ofits currency issue and, accordingly,shall not form part of the assets orliabilities of the BSP. (Sec. 51)

Legal Tender Power (Asked in 2000 BarExams)All notes and coins issued by the BSP shallbe fully guaranteed by the Government ofthe Republic of the Philippines and shall belegal tender in the Philippines for all debts,both public and private: Provided, however,That, unless otherwise fixed by the MB,coins shall be legal tender in amounts notexceeding P50 for denominations of 25centavos and above, and in amounts notexceeding P20 for denominations of 10centavos or less. (Sec. 52)

Monetary Administration – DomesticMonetary Stabilization:The MB shall endeavor to control anyexpansion or contraction in monetaryaggregates which is prejudicial to theattainment or maintenance of pricestability. (Sec. 61)

Monetary Administration – InternationalMonetary Stabilization:The BSP shall exercise its powers topreserve the international value of the pesoand to maintain its convertibility into otherfreely convertible currencies, primarily for,although not necessarily limited to, currentpayments for foreign trade and invisibles.(Sec. 64)

In order to maintain the internationalstability and convertibility of the Philippinepeso, the BSP shall maintain internationalreserves adequate to meet any foreseeablenet demands on the BSP for foreigncurrencies.

Purchases in Gold:The BSP may buy and sell gold in any form,subject to such regulations as the MB mayissue. The purchases and sales of goldauthorized by this section shall be made inthe national currency at the prevailinginternational market price as determined bythe MB. (Sec. 69)

Purchases in Gold and Foreign Exchange:The BSP may buy and sell foreign notesand coins, and documents and instrumentsof types customarily employed for theinternational transfer of funds. The BSPmay engage in future exchange operations.The BSP may engage in foreign exchangetransactions with the following entities orpersons only:1. Banking institutions operating in the

Philippines;2. The Government, its political

subdivisions and instrumentalities;3. Foreign or international financial

institutions;4. Foreign governments and their

instrumentalities; and5. Other entities or persons which the MB

is hereby empowered to authorize asforeign exchange dealers, subject tosuch rules and regulations as the MBshall prescribe. (Sec. 70)

Operations with Foreign Entities:The MB may authorize the BSP to grantloans to and receive loans from foreignbanks and other foreign or internationalentities, both public and private, and mayengage in such other operations with theseentities as are in the national interest andare appropriate to its character as a centralbank. The BSP may also act as agent orcorrespondent for such entities. Uponauthority of the MB, the BSP may pledgeany gold or other assets which it possessesas security against loans which it receivesfrom foreign or international entities. (Sec.75)

Loans to Banking And Other FinancialInstitutions:Credit Policy: The rediscounts, discounts,loans and advances which the BSP isauthorized to extend to banking institutionsshall be used to influence the volume ofcredit consistent with the objective of pricestability. (Sec. 81)

Normal Credit Operations:The BSP may normally and regularly carryon the following credit operations withbanking institutions operating in thePhilippines:1. Commercial credits. — The BSP may

rediscount, discount, buy and sell bills,acceptances, promissory notes andother credit instruments with maturitiesof not more than 180 days from thedate of their rediscount, discount or


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acquisition by the BSP and resultingfrom transactions related to:a. the importation, exportation,

purchase or sale of readily saleablegoods and products, or theirtransportation within thePhilippines;

b. the storing of non-perishable goodsand products which are dulyinsured and deposited, underconditions assuring theirpreservation, in authorized bondedwarehouses or in other placesapproved by the MB.

2. Production credits. — The BSP mayrediscount, discount, buy and sell bills,acceptances, promissory notes andother credit instruments havingmaturities of not more than 360 daysfrom the date of their rediscount,discount or acquisition by the BSP andresulting from transactions related tothe production or processing ofagricultural, animal, mineral, orindustrial products. Documents orinstruments acquired in accordancewith this subsection shall be secured bya pledge of the respective crops orproducts: Provided, however, That thecrops or products need not be pledgedto secure the documents if the originalloan granted by the BSP is secured by alien or mortgage on real estate property70% of the appraised value of whichequals or exceeds the amount of theloan granted.

3. Other credits. — Special creditinstruments not otherwiserediscountable under 1 and 2 may beeligible for rediscounting in accordancewith rules and regulations which theBSP shall prescribe. Whenevernecessary, the BSP shall provide fundsfrom non-inflationary sources: Provided,however, That the MB shall prescribeadditional safeguards for disbursingthese funds.

4. Advances. — The BSP may grantadvances against the following kinds ofcollaterals for fixed periods which, withthe exception of advances againstcollateral named in clause (4) of thepresent subsection, shall not exceed180 days:a. gold coins or bullion;b. securities representing obligations of

the BSP or of other domesticinstitutions of recognized solvency;

c. the credit instruments to whichreference is made in 1;

d. the credit instruments to whichreference is made 2, for periodswhich shall not exceed 360 days;

e. utilized portions of advances incurrent amount covered by regularoverdraft agreements related tooperations included under 1 and 2,and certified as to amount andliquidity by the institution solicitingthe advance;

f. negotiable treasury bills, certificatesof indebtedness, notes and othernegotiable obligations of theGovernment maturing within 3years from the date of the advance;and

g. negotiable bonds issued by theGovernment of the Philippines, byPhilippine provincial, city ormunicipal governments, or by anyPhilippine Governmentinstrumentality, and havingmaturities of not more than 10years from the date of advance.

Advances made against the collateralnamed in clauses (f) and (g) may notexceed 80% of the current market valueof the collateral.

Special Credit Operation:The BSP may extend loans and advances tobanking institutions for a period of not more than 7 days without any collateral for the purpose of providing liquidity to

the banking system in times of need.(Sec. 83)

Emergency Credit Operation:The MB may, by a vote of at least 5 of itsmembers, authorize the BSP to grantextraordinary loans or advances to bankinginstitutions secured by assets as definedhereundera. Periods of national and/or local

emergencyb. Periods of imminent financial panic

which directly threaten monetary andbanking stability,

c. Normal periods – for the purpose ofassisting a bank in a precariousfinancial condition or under seriousfinancial pressures brought byunforeseen events, or events which,though foreseeable, could not beprevented by the bank concerned (Sec.84)

Condition for a and b: while such loans oradvances are outstanding, the debtor


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institution shall not, except upon priorauthorization by the MB, expand the totalvolume of its loans or investments. (Sec. 84)

Conditions for c: the MB has ascertainedthat the bank is not insolvent and has theassets defined hereunder to secure theadvances (Sec. 84)

Credit TermsRULE: The BSP shall collect interest andother appropriate charges on all loans andadvances it extends, the closure,receivership or liquidations of the debtor-institution notwithstanding. (Sec. 85)

Open Market Operations for the BSP’sAccount:The open market purchases and sales ofsecurities by the BSP shall be madeexclusively in accordance with its primaryobjective of achieving price stability. (Sec.90)How:1. Purchase and sales in the open market

government securities (Sec. 91)2. Issuance and negotiation of freely

negotiable evidences of indebtedness ofthe BSP Only in cases of extraordinary

movement in price levels (Sec. 92)and may be acquired by the BSPbefore their maturity (Sec. 92)

BSP Portfolio:At least once every month the MB shallreview the portfolio of the BSP in relation toits future credit policy. In reviewing theBSP's portfolio, the MB shall especiallyconsider whether a sufficiently large part ofthe portfolio consists of assets with earlymaturities, in order that a contraction inBSP credit may be effected promptlywhenever the national monetary policy sorequires. (Sec. 93)

Bank ReservesAll banks operating in the Philippines shallbe required to maintain reserves againsttheir deposit liabilities (uniform application)

The MB may, at its discretion, also requireall banks and/or quasibanks to maintainreserves against funds held in trust andliabilities for deposit substitutesEXC: deposits and deposit substitutes withremaining maturities of 2 years or more, aswell as interbank borrowings (Sec. 94)

Deposits maintained by banks with theBSP as part of their reserverequirements shall be exempt fromattachment, garnishments, or any otherorder or process of any court,government agency or any otheradministrative body issued to satisfy theclaim of a party other than theGovernment, or its political subdivisionsor instrumentalities. (Sec. 103)

Required Reserves:1. Against Peso Deposits. The MB may fix

and, when it deems necessary, alter theminimum reserve ratios to pesodeposits, as well as to depositsubstitutes, which each bank and/orquasi-bank may maintain, and suchratio shall be applied uniformly to allbanks of the same category as well as toquasi-banks. (Sec. 96)

2. Against Foreign Currency Deposits.The MB is similarly authorized toprescribe and modify the minimumreserve ratios applicable to depositsdenominated in foreign currencies. (Sec.97)

3. Against Unused Balances of OverdraftLines. In order to facilitate BSP controlover the volume of bank credit, the MBmay establish minimum reserverequirements for unused balances ofoverdraft lines. The powers of the MB toprescribe and modify reserverequirements against unused balancesof overdraft lines shall be the same asits powers with respect to reserverequirements against demand deposits.(Sec. 98)

Selective Regulation Of BankOperations:Guiding Principle: The MB shall use thepowers granted to it to ensure that thesupply, availability and cost of money are inaccord with the needs of the Philippineeconomy and that bank credit is notgranted for speculative purposes prejudicialto the national interests. (Sec. 104)

Regulations:1. Margin Requirements Against Letters

of Credit – the MB may at any timeprescribe minimum cash margins forthe opening of letters of credit, and mayrelate the size of the required margin tothe nature of the transaction to befinanced. (Sec. 105)

2. Required Security Against BankLoans – in order to promote liquidity


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and solvency of the banking system, theMB may issue such regulations as itmay deem necessary with respect to themaximum permissible maturities of theloans and investments which the banksmay make, and the kind and amount ofsecurity to be required against thevarious types of credit operations of thebanks. (Sec. 106)

3. Portfolio Ceilings – whenever the MBconsiders it advisable to prevent orcheck an expansion of bank credit, itmay place an upper limit on the amountof loans and investments which thebanks may hold, or may place a limit onthe rate of increase of such assetswithin specified periods of time. The MBmay apply such limits to the loans andinvestments of each bank or to specificcategories thereof. In no case shall theMB establish limits which are below thevalue of the loans or investments of thebanks on the date on which they arenotified of such restrictions. Therestrictions shall be applied to all banksuniformly and without discrimination.(Sec. 107)

4. Minimum Capital Ratios – the MB mayprescribe minimum ratios which thecapital and surplus of the banks mustbear to the volume of their assets, or tospecific categories thereof, and mayalter said ratios whenever it deemsnecessary. (Sec. 108)

Coordination of Credit Policies ByGovernment Institutions:GOCCs which perform banking or creditfunctions shall coordinate their generalcredit policies with those of the MB.

The MB may, whenever it deems itexpedient, make suggestions orrecommendations to such corporations forthe more effective coordination of theirpolicies with those of the BSP. (Sec. 109)

D. As Banker and Financial Adviserof the Government

BSP as Banker of the Government:The BSP shall act as a banker of thegovernment, its political subdivisions andinstrumentalities. (Sec. 110)

Remuneration:The BSP may charge equitable rates,commissions or fees for services which itrenders to the government, its political

subdivisions and instrumentalities. (Sec.116)

BSP as Financial Advisor of theGovernment:1. Render opinion, as shall be requested

by the Government, in the followinga. credit operation of the government

abroad – based on the gold andforeign exchange resources andobligations of the antion and on theeffects of the proposed operation onthe balance of payments and onmonetary aggregates

b. borrowing within the Philipines – onthe probable effects of the proposedoperation on monetary aggregates,the price level, and the balance ofpayments (Sec. 123)

2. The Deputy Governor designated by theGovernor shall be an ex-officio memberof the NEDA – in order to assureeffective communication betweent eheconomic, financial and fiscal policies ofthe government and the monetary,credit and exchange policies of the BSP(Sec. 124)

BSP Support of the GovernmentSecurities Market:Securities Stabilization Fund1. shall be administered by the BSP for the

account of the Government2. the operations of the SSF shall consist

of purchases and sales, in the openmarket, of bonds and other evidences ofindebtedness issued or fully guaranteedby the Government. The purpose ofthese operations shall be to increase theliquidity and stabilize the value of saidsecurities in order thereby to promoteinvestment in government obligations.The MB shall use the resources of theSSF to prevent, or moderate, sharpfluctuations in the quotations of saidgovernment obligations, but shall notendeavor to alter movements of themarket resulting from basic changes inthe pattern or level of interest rates.(Sec. 120)

3. The SSF shall retain net profits which itmay make on its operations, regardlessof whether said profits arise fromcapital gains or from interest earnings.The SSF shall correspondingly bear anynet losses which it may incur. (Sec. 122)


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E. Other Operations

1. Conduct of Research andStatistics

Purpose:For the guidance of the MB in theformulation and implementation of itspolicies (Sec. 22)Data:Forecasts of the balance of payment of thePhilippines, statistics on the monthlymovement of the monetary aggregates andof prices and other statistical series andeconomic studies useful for the formulationand analysis of monetary, banking, creditand exchange policies. (Se. 22)

Authority of BSP to obtain data andinformation:a. through a requestb. from government offices and

instrumentalities, or government-ownedor controlled corporations

c. any data which it may require for theproper discharge of its functions andresponsibilities

d. can be enforced through the issuance ofa subpoena for the production of thebooks and records (refusal of thesubpoena without justifiable cause =contempt) (Sec. 23)

2. Training of Technical Personnel

The BSP shall promote and sponsor thetraining of technical personnel in the fieldof money and banking and shall defray thecosts of study, at home or abroad, of:a. qualified BSP employeesb. promising university graduatesc. any other qualified persons determined

by proper competitive examinations(Sec. 24)

3. Reportorial Requirements

a. general balance sheet – showing thevolume and composition of the BSP’sassets and liabilities as of the lastworking day of the month within 60days after the end of each month exceptfor December which shall be submittedwithin 90 days after the end hereof

b. analysis of economic and financialdevelopments, including the conditionof net international reserves and

monetary aggregates – not later than 90days after the end of each quarter

c. the preceding year’s budget and profitand loss statement of the BSP –showing in reasonable detail the resultof its operations

d. a review of the state of the financialsystem – 120 days after the end of eachsemester

e. abnormal movements in monetaryaggregates and the general price level –as soon as practicalbe and not laterthan 72 hours after they are taken,remedial measures in response to suchabnormal movements (Sec. 39)

f. annual report on the condition of theBSP including a review of the policiesand measures adopted by the MBduring the past year and an analysis ofthe economic and financialcircumstances which gave rise to saidpolicies and measures (Sec. 40)

Effect of failure to comply with theannual report:Failure to comply with the reportorialrequirement without justifiable reason asmay be determined by the MB shall causethe withholding of the salary of thepersonnel concerned until the requirementsare complied with. (Sec. 40)

Signatures on Statements:The balance sheets and other financialstatements of the BSP shall be signed bya. the officers responsible for their

preparationb. the Governorc. the auditor of the BSP. (Sec. 41)

F. Prohibited Operations

Prohibitions on BSP Personnel:In addition to the prohibitions found in RA3019 and 6713, personnel of the BSP arehereby prohibited from:1. being an officer, director, lawyer or

agent, employee, consultant orstockholder, directly or indirectly, ofany institution subject to supervision orexamination by the BSP, except:a. non-stock savings and loan

associations and provident fundsorganized exclusively for employeesof the BSP, and

b. as otherwise provided in the NCBA2. directly or indirectly requesting or

receiving any gift, present or pecuniaryor material benefit for himself or


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another, from any institution subject tosupervision or examination by the BSP;

3. revealing in any manner, except underorders of the court, the Congress or anygovernment office or agency authorizedby law, or under such conditions asmay be prescribed by the MB,information relating to the condition orbusiness of any institution. Thisprohibition shall not be held to apply tothe giving of information to the MB orthe Governor of the BSP, or to anyperson authorized by either of them, inwriting, to receive such information;and

4. borrowing from any institution subjectto supervision or examination by theBSP shall be prohibited unless saidborrowings are adequately secured,fully disclosed to the MB, and shall besubject to such further rules andregulations as the MB may prescribe:Provided, however, That personnel ofthe supervising and examiningdepartments are prohibited fromborrowing from a bank under theirsupervision or examination. (Sec. 27)

Prohibitions on the BSP:1. acquisition of shares of any kind or

accept them as collateral2. participation in the ownership or

management of any enterprise, eitherdirectly or indirectly

3. being engaged in development bankingEXCEPTION: outstanding loansobtained or extended for developmentfinancing (Sec. 128)

REVIEWER IN COMMERCIAL LAW Chapter III. Law on Secrecy of Bank Deposits (RA 1405)

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Chapter III. Law on Secrecy ofBank Deposits (RA 1405)

I. PURPOSESII. COVERAGEIII. PROHIBITED ACTSIV. EXCEPTIONSV. PENALTY

I. Purposes

A. To give encouragement to the people todeposit their money in bankinginstitutions and to discourage privatehoarding

B. So that the people’s money may beproperly utilized by banks in authorizedloans to assist in the economicdevelopment of the country. (Sec. 1)

II. Coverage

All deposits of whatever nature with banksor banking institutions in the Philippinesare hereby considered as of an absolutelyconfidential nature and may not beexamined. (Sec. 2)

Includes investments in bonds issued bythe Philippine Government, its politicalsubdivisions and its instrumentalities. (Sec.2)

III.Prohibited Acts

1. No person, government official, bureauor office may examine, inquire into orlook into such deposits; and

2. No official or employee of any bankinginstitution may disclosure to anyunauthorized person any informationconcerning said deposits (Sec. 3).

IV.Exceptions

A. Upon written permission of thedepositor

B. In cases of impeachmentC. Upon order of a competent court in

cases of:a. briberyb. dereliction of duty of public officials,

orc. where the money deposited or

invested is the subject matter of thelitigation. (Sec. 2)

Banco Filipino vs Purisima (1988)The exception applies to cases of concealment ofillegally acquired property in anti-graft cases.The inquiry into illegally acquired property – orproperty NOT "legitimately acquired" – extendsto cases where such property is concealed bybeing held by or recorded in the name of otherpersons.

Mellon Bank, N.A. vs. Magsino, (1990)The exception extends to cases of concealment ofillegally acquired property not involving anti-graft cases.

Other exceptions:1. upon order of a competent court in

cases of unexplained wealth under RA3019 or the Anti-Graft and CorruptPractices Act (PNB v. Gancayco, 1965;Banco Filipino v. Purisima, 1988;Marquez v. Desierto, 2001)

2. when inquiry is conducted under theauthority of the Commissioner ofInternal Revenue into the bankaccounts of the following:a. a decedent in order to determine his

gross estateb. any taxpayer who has filed an

application for compromise of histax liability, which application shallinclude a written waiver of hisprivilege under RA 1405 or underother general or special laws. (Sec.6(F) NIRC)

3. in the following cases under the Anti-Money Laundering Lact of 2001 (RA9160):

4. Under Sec. 26 of RA 7653 or the NewCentral Bank Act of 1993, when theexamination is conducted pursuant tothe required waiver of the secrecy ofdeposits (of whatever nature in allbanks in the Philippines) made by anyDOSRI

5. Disclosure of certain information aboutbank deposits which have beendormant for at least 10 years, to theTreasurer of the Philippine in a swornstatement, a copy of which is posted inthe bank premises. (Sec. 2, UnclaimedBalances Law (Act No. 3926, asamended))

[NOT considered as EXCEPTIONS]:

a. In 1981, PD 1792 added the followinggrounds when the bank can becompelled to reveal the amount of adepositor:i. “made in the course of a special or

general examination of a bank and

REVIEWER IN COMMERCIAL LAW Chapter III. Law on Secrecy of Bank Deposits (RA 1405)

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is specifically authorized by theMonetary Board after being satisfiedthat there is reasonable ground tobelieve that a bank fraud or seriousirregularity has been or is beingcommitted and that it is necessaryto look into the deposit to establishsuch fraud or irregularity,” or

ii. “made by an independent auditorhired by the bank to conduct itsregular audit provided that theexamination is for audit purposesonly and the results thereof shall befor the exclusive use of the bank.”However, Sec. 135 of RA 7653 or theNew Central Bank Act reverted RA1405 to its version prior to thepromulgation of the decree.

a) Thus Villanueva says that thesetwo instances as excluded fromthe enumeration of exceptions tothe secrecy of bank deposits(Villanueva, Commercial LawReview, opinion).

b) Morales however notes that withthe Amendment of the Anti-Money Laundering Act of 2001,exception (1) has beensubstantially resurrected. Whilethere is no similar developmentof exception (2), the exclusion ofthe BSP examiners andindependent auditors from thecoverage of the Secrecy of BankDeposits Law finds basis inOpinion No. 243 (s. 1975) ofthen Secretary of Justice PedroTuason. (Morales, The PhilippineGeneral Banking Law, opinion)

b. It used to be believed that the RA 1405did not apply to the Ombudsman, onaccount of his authority under Sec.15(8) of RA 6770 or the OmbudsmanAct of 1989 to “examine and haveaccess to bank accounts and records.”However, the SC (Marquez v. Desierto,2001) restricted the Ombudsman’spower as follows: “…before an in camerainspection may be allowed, there mustbe a pending case before a court ofcompetent jurisdiction. Further, theaccount must be clearly identified, theinspection limited to the subject matterof the pending case before the court ofcompetent jurisdiction. The bankpersonnel and the account holder mustbe notified to be present during the

inspection, and such inspection maycover only the account identified in thepending case.” (Morales, The PhilippineGeneral Banking Law)

c. “Further, it is interesting to note thatthe Secretary of Justice in his OpinionNo. 13 (s. 1987) concluded that thePresidential Commission on GoodGovernment can compel banks todisclose or produce bank recordswithout violating the bank secrecylaws.” (Morales, The Philippine GeneralBanking Law)

d. “Moreover, under Sec. 1(d) of RA 6382(1990), which created the DavideCommission that conducted a factfinding investigation of the failed coupd’ etat of December 1989, thecommission had the power to ‘ask theMonetary board to disclose informationon and/or grant authority to examinebank deposits, trust finds, or bankingtransactions in the name of and/orutilized by a person, natural orjuridical, under investigation by theCommission, in any bank or bankinginstitution in the Philippines, when theCommission has reasonable ground tobelieve that said deposits, trust orinvestment funds, or bankingtransactions have been used in supportof furtherance of the objectives of thecoup d’ etat.’” (Morales, The PhilippineGeneral Banking Law)

V. Penalty

Imprisonment of not more than 5 years or afine of not more than P20,000 or both, inthe discretion of the court (Sec. 5)

REVIEWER IN COMMERCIAL LAW Chapter IV. Truth in Lending Act (RA 3765)

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Chapter IV. Truth in Lending Act(RA 3765)

I. POLICYII. DISCLOSURE STATEMENTIII. COVERAGEIV. SANCTIONS

I. Policy

Protection of the citizens from a lack ofawareness of the true cost of credit to theuser by assuring a full disclosure of such costwith a view of preventing the uninformed usedof credit to the detriment of the nationaleconomy (Sec. 2)

II. Disclosure Statement

Any creditor shall furnish to each person towhom credit is extended, prior to theconsummation of the transaction, a clearstatement in writing setting forth, to theextent applicable and in accordance withrules and regulations prescribed by theMonetary Board of the BSP, the followinginformation:1. the cash price or delivered price of the

property or service to be acquired;2. the amounts, if any, to be credited as

down payment and/or trade-in;3. the difference between the amounts set

forth under 1 and 2;4. the charges, individually itemized, which

are paid or to be paid by such person inconnection with the transaction but whichare not incident to the extension of thecredit;

5. the total amount to be financed;6. the finance charge expressed in terms of

pesos and centavos; and7. the percentage that the fiance bears to the

total amount to be financed expressed asa simple annual rate on the outstandingunpaid balance of the obligation. (Sec. 4)

III.Coverage

a. any loan, mortgage, deeds of trust,advance or discount;

b. any conditional sales contract;c. any contract to sell, or sale or contract of

sale of property or services, either forpresent or future delivery, under whichpart or all of the price is payablesubsequent to the making of such sale orcontract;

d. any rental-purchase contracte. any contract or arrangement for the hire,

bailment, or leasing of propertyf. any option, demand, lien, pledge, or other

claim against or for the delivery of,property or money;

g. any purchase, or other acquisition of, orany credit upon the security of, anyobligation of claim arising out of any ofthe foregoing; and

h. any transaction or series of transactionshaving a similar purpose or effect (Sec. 3(2))

Outside the coverage:a. those that do not involve the payment of

any finance charge by the debtorb. those in which the debtor is the one

specifying a definite and fixed set of creditterms such as bank deposits, insurancecontracts, sales of bonds, etc. (Sec. 3 ofCB Circular No. 158)

IV.Sanctions

a. Any creditor who in connection with anycredit transaction fails to disclose to anyperson any information in violation of thisAct or any regulation issued thereundershall be liable to such person in theamount of P100 or in an amount equal totwice the finance charged required bysuch creditor in connection with suchtransaction, whichever is greater, exceptthat such liability shall not exceed P2,000on any credit transaction. Action torecover such penalty may be brought bysuch person within one year from the dateof the occurrence of the violation, in anycourt of competent jurisdiction. (Sec. 6 (a))

b. Any person who willfully violates anyprovisions of this Act or any regulationissued thereunder shall be fined not lessthan P1,000 or more than P5,000 orimprisonment for not less than 6 months,nor more than 1 year or both (Sec. 6 (c))

RULE: The validity or enforceability of anycontract or transaction is not affected.EXCEPTION: failure to disclose the requiredinformation (Sec. 6)

Exemption:No punishment or penalty provided by thisAct shall apply to the Philippine Governmentor any agency or any political subdivisionthereof. (Sec. 6 (d))

Final judgment as prima facie evidence:A final judgment hereafter rendered in anycriminal proceeding under this Act to theeffect that a defendant has willfully violatedthis Act shall become prima facie evidenceagainst such defendant in an action orproceeding brought by any other party againstsuch defendant under this Act as to allmatters respecting which said judgmentwould be an estoppel as between the partiesthereto. (Sec. 6 (e))

REVIEWER IN COMMERCIAL LAW Chapter V. Anti-Money Laundering Act (RA 9160 as amended)

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Chapter V. Anti-MoneyLaundering Act (RA 9160 as

amended by RA 9194)

I. POLICIESII. COVERAGEIII. OBLIGATIONS OF COVERED

INSTITUTIONSA. CUSTOMER IDENTIFICATIONB. RECORD KEEPINGC. REPORTING OF COVERED AND

SUSPICIOUS TRANSACTIONSIV. FREEZE ORDERV. FORFEITURE PROVISIONSVI. ANTI-MONEY LAUNDERING COUNCIL

I. Policies

A. To protect and preserve the integrityand confidentiality of bank accounts

B. To ensure that the Philippines shall notbe used as a money laundering site forthe proceeds of any unlawful activity

C. Consistent with its foreign policy, toextend cooperation in transnationalinvestigations and prosecutions ofpersons involved in money launderingactivities whenever committed. (Sec. 2RA 9160)

Policy against political harassment:A. AMLA shall not be used for political

prosecution or harassment or as aninstrument to hamper competition intrade and commerce

B. No case for money laundering may befiled against and no assets shall befrozen, attached or forfeited to theprejudice of a candidate for an electoraloffice during an election period (Sec. 16)

II. Coverage

Money Laundering is a crime whereby theproceeds of an “unlawful activity” aretransacted, thereby making them appear tohave originated from legitimate sources.(Sec. 4)

Any person may be charged with andconvicted of both the offense of moneylaundering and the unlawful activity. Anyproceeding relating to the unlawful activityshall be given precedence over theprosecution of any offense or violationunder RA 9160, as amended, withoutprejudice to freezing and other remediesprovided RA 9160. (Sec. 6)

Prohibited Acts1. Transacting or attempting to transact

with monetary instrument or property,knowing such to represent, involve, orrelate to the proceeds of any “unlawfulactivity”

2. Facilitating the offense of moneylaundering referred to in 1 by knowinglyperforming or failing to perform any act

3. Knowingly failing to disclose and file areport with the Anti-Money LaunderingCommission (AMLC) of any monetaryinstrument or property as required (Sec.4)

Covered Transactions:Transactions in cash or other equivalentmonetary instrument involving a totalamount in excess of P500,000 within 1banking day (Sec. 3(b))

Suspicious Transactions:Transactions with covered institutions,regardless of the amounts involved, whereany of the following circumstances exist:1. There is no underlying legal or trade

obligation, purpose or economicjustification;

2. The client is not properly identified;3. The amount involved is not

commensurate with the business orfinancial capacity of the client;

4. Taking into account all knowncircumstances, it may be perceived thatthe client's transaction is structured inorder to avoid being the subject ofreporting requirements under the Act;

5. Any circumstances relating to thetransaction which is observed to deviatefrom the profile of the client and/or theclient's past transactions with thecovered institution;

6. The transactions is in a way related toan unlawful activity or offense underthis Act that is about to be, is being orhas been committed; or

7. Any transactions that is similar oranalogous to any of the foregoing. (Sec.3(b-1))

Covered Institutions:1. Banks, non-banks, quasi-banks, trust

entities, and all other institutions andtheir subsidiaries and affiliatessupervised or regulated by the BSP;

2. Insurance companies and all otherinstitutions supervised or regulated bythe PDIC; and

3. The following entities supervised orregulated by SEC:


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a. securities dealers, brokers,salesmen, investment houses andother similar entities managingsecurities or rendering services asinvestment agent, advisor, orconsultant

b. mutual funds, close and investmentcompanies, common trust funds,pre-need companies and othersimilar entities,

c. foreign exchange corporations,money changers, money payment,remittance, and transfer companiesand other similar entities, and

d. other entities administering orotherwise dealing in currency,commodities or financial derivativesbased thereon, valuable objects,cash substitutes and other similarmonetary instruments or property(Sec. 3(a))

III.Obligations of CoveredInstitutions(Asked in 2006)

A. Customer Identification

1. establish and record the true identity ofits clients based on official documents

2. maintain a system of verifying th trueidentity of their clients

3. in the case of corporate clients, requirea system of verifying their legalexistence and organizational structure,as well as the authority andidentification of all persons purportingto act on their behalf (Sec. 9)

Anonymous accounts, accounts underfictitious names, and all other similaraccounts shall be absolutely prohibited

EXC: peso and foreign currency non-checking numbered accounts (but the BSPmay conduct annual testing solely limitedto the determination of the existence andtrue identity of the owners of suchaccounts) (Sec. 9(a))

B. Record Keeping

1. maintain and safely store all records ofall transactions of covered institutionsfor 5 years from the date of thetransactions

2. with respect to closed accounts, topreserve and safely store the records on

customer identification, account filesand business correspondence for atleast 5 years from the dates when theywere closed (sec. 9(b))

C. Reporting of Covered andSuspicious Transactions

a. report to the AMLC all coveredtransactions and suspicioustransactions within 5 working daysfrom occurrences thereof, unless theSupervising Authority prescribes alonger period not exceeding 10 workingdays.

b. when reporting covered or suspicioustransactions, covered institutions andtheir officers and employees shall not bedeemed to have violated the Secrecy ofBank Deposits Act (RA 1405), theForeign Currency Deposits Act (RA6426) and the General Banking Law of2000 (RA 8791) and other similar laws,but they are prohibited fromcommunicating, directly or indirectly, inany manner or by an means, to anyperson, the fact that a covered orsuspicious transaction report wasmade, the contents thereof, or any otherinformation in relation thereto. In caseof violation thereof, the concernedofficer and employee of the coveredinstitution shall be criminally liable.However, no administrative, criminal orcivil proceedings, shall lie against anyperson for having made a covered orsuspicious transaction report in theregular performance of his duties ingood faith, whether or not suchreporting results in any criminalprosecution under this Act of any otherlaw.

c. when reporting covered or suspicioustransactions to the AMLC, coveredinstitutions and their officers andemployees are prohibited fromcommunicating directly or indirectly, inany manner or by any means, to anyperson or entity, the media, the factthat a covered or suspicious transactionreport was made, the contents thereof,or any other information in relationthereto. Neither may such reporting bepublished or aired in any manner orform by the mass media, electronicmail, or other similar devices. In case ofviolation thereof, the concerned officer


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and employee of the covered institutionand media shall be held criminallyliable. (Sec. 9(c))

IV.Freeze Order

Procedure:a. The Court of Appeals may issue a freeze

order which shall be effectiveimmediately1. upon application ex parte by the

AMLC and2. after determination that probable

cause exists that any monetaryinstrument or property is in any wayrelated to an “unlawful activity”,

b. The freeze order shall be for a period of20 days unless extended by the court.(Sec. 10)

Examination of Accounts:1. by the AMLC

a. notwithstanding the provisions ofthe Secrecy of Bank Deposits Act,the Foreign Currency Deposits Act,the GBL and other laws

b. upon order of any competent courtin cases of violation of the AMLA –when it has been established thatthere is probable cause that thedeposits or investments are relatedto an “unlawful activity” or a money-laundering offenseEXC: (no court order required)1. Kidnapping2. Drug Trafficking3. Hijacking, destructive arson and

murder, including thoseperpetrated by terrorists againstnon-combatant persons andsimilar targets

2. by the BSP made in te course of a periodic or

special examination, in accordancewith the rules of examination of theBSP(Sec. 11)

V. Forfeiture Provisions

Civil Forfeiture: When there is a covered transaction

report made, and the court has, in apetition filed for the purpose orderedthe seizure of any monetary instrumentor property, in whole or in part, directlyor indirectly, related to said report

the Revised Rules of Court on civilforfeiture shall apply

Claim on Forfeited Assets:a. Where the court has issued an order of

forfeiture of the monetary instrument orproperty in a criminal prosecution forany money laundering offense, theoffender or any other person claimingan interest therein may apply, byverified petition,

b. for a declaration that the samelegitimately belongs to him and

c. for segregation or exclusion of themonetary instrument or propertycorresponding thereto.

The verified petition shall be filed with thecourt which rendered the judgment ofconviction and order of forfeiture, withinfifteen days from the date of the order orforfeiture, in default of which the said ordershall become final and executory. Thisprovision shall apply in both civil andcriminal forfeiture.

Payment in Lieu of Forfeiture:Where the court has issued an order offorfeiture of the monetary instrument orproperty subject of a money launderingoffense, and said ordera. cannot be enforced because any

particular monetary instrument orproperty

b. cannot, with due diligence, be located,or

c. has been substantially altered,destroyed, diminished in value orotherwise rendered worthless by any actor omission, directly or indirectly,attributable to the offender, or

d. has been concealed, removed, convertedor otherwise transferred to prevent thesame from being found or to avoidforfeiture thereof, or

e. is located outside the Philippines or hasbeen placed or brought outside thejurisdiction of the court, or

f. has been commingled with othermonetary instruments or propertybelonging to either the offender himselfor a third person or entity, therebyrendering the same difficult to identifyor be segregated for purposes offorfeiture,

in an amount equal to the value of saidmonetary instrument or property

This provision shall apply in both civiland criminal forfeiture. (Sec. 12)


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VI.Anti-Money Laundering Council

Composition:1. BSP Governor (chairman)2. Insurance Commissioner3. SEC Chairman

Functions:1. To require and receive covered or

suspicious transaction reports fromcovered institutions;

2. To issue orders addressed to theappropriate Supervising Authority orthe covered institutions or to requestfor assistance from a foreign State todetermine the true identity of the ownerof any monetary instrument or propertysubject of a covered transaction orsuspicious transaction report, believedby the Council, on the basis ofsubstantial evidence, to be, in whole orin part, wherever located, representing,involving, or related to directly orindirectly, in any manner or by anymeans, the proceeds of an unlawfulactivity

3. To institute civil forfeiture proceedingsand all other remedial proceedingsthrough the Office of the SolicitorGeneral;

4. To cause the filing of complaints withthe DOJ or the Ombudsman for theprosecution of money launderingoffenses;

5. To investigate suspicious transactionsand covered transactions deemedsuspicious after an investigation byAMLC, money laundering activities andother violations of the AMLA;

6. To apply before the Court of Appeals, exparte, for the freezing of any monetaryinstrument or property alleged to be theproceeds of any “unlawful activity”;

7. To implement such measures as maybe necessary and justified under theAMLA to counteract money laundering;

8. To receive and take action in respect of,any request from foreign states forassistance in their own anti-moneylaundering operations provided in thisAct;

9. To develop educational programs on thepernicious effects of money laundering,the methods and techniques used inthe money laundering, the viable meansof preventing money laundering and theeffective ways of prosecuting andpunishing offenders;

10. To enlist the assistance of any branch,department, bureau, office, agency, or

instrumentality of the government,including GOCCs, in undertaking anyand all anti-money launderingoperations, which may include the useof its personnel, facilities and resourcesfor the more resolute prevention,detection, and investigation of moneylaundering offenses and prosecution ofoffenders; and

11. To impose administrative sanctions forthe violation of laws, rules, regulations,and orders and resolutions issuedpursuant thereto (Sec. 7)

Mutual Assistance Among States:1. Request for Assistance from a

Foreign State:The AMLC may execute the request orrefuse to execute the same and inform theforeign State of any valid reason for notexecuting the request or for delaying theexecution thereof. The principles ofmutuality and reciprocity shall, for thispurpose, be at all times recognized.

2. Power of the AMLC to Act on aRequest for Assistance from aForeign State:

The AMLC may execute a request forassistance from a foreign State by:a. tracking down, freezing, restraining and

seizing assets alleged to be proceeds ofany unlawful activity under theprocedures laid down in the AMLA;

b. giving information needed by the foreignState within the procedures laid downin this Act; and

c. applying for an order of forfeiture of anymonetary instrument or property in thecourt:

Provided, That the court shall notissue such an order unless theapplication is accompanied by anauthenticated copy of the order of acourt in the requesting State orderingthe forfeiture of said monetaryinstrument or property of a person whohas been convicted of a moneylaundering offense in the requestingState, and a certification of an affidavitof a competent officer of the requestingState stating that the conviction and theorder of forfeiture are final and that nofurther appeal lies in respect or either.

3. Obtaining Assistance from ForeignStates:

The AMLC may make a request to anyforeign State for assistance in:


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a. tracking down, freezing, restraining andseizing assets alleged to be proceeds ofany unlawful activity;

b. obtaining information that it needsrelating to any covered transaction,money laundering offense or any othermatter directly or indirectly, relatedthereto;

c. to the extent allowed by the law of theForeign State, applying with the propercourt therein for an order to enter anypremises belonging to or in thepossession or control of, any or all ofthe persons named in said request,and/or search any or all such personsnamed therein and/or remove anydocument, material or object named insaid request:

Provided, That the court shall notissue such an order unless theapplication is accompanied by anauthenticated copy of the order of acourt in the requesting State orderingthe forfeiture of said monetaryinstrument or property of a person whohas been convicted of a moneylaundering offense in the requestingState, and a certification of an affidavitof a competent officer of the requestingState stating that the conviction and theorder of forfeiture are final and that nofurther appeal lies in respect or either.

4. Limitations on Request for MutualAssistance – AMLC may refuse tocomply:

a. Where the action sought by the requestcontravenes any provision of theConstitution or

b. The execution of a request is likely toprejudice the national interest of thePhilippines

EXC: there is a treaty between thePhilippines and the requesting Staterelating to the provision of assistance inrelation to money laundering offenses.

5. Requirements for Requests forMutual Assistance from ForeignState:

A request for mutual assistance from aforeign State must:a. confirm that an investigation or

prosecution is being conducted inrespect of a money launderer namedtherein or that he has been convicted ofany money laundering offense;

b. state the grounds on which any personis being investigated or prosecuted for

money laundering or the details of hisconviction;

c. gives sufficient particulars as to theidentity of said person;

d. give particulars sufficient to identity anycovered institution believed to have anyinformation, document, material orobject which may be of assistance to theinvestigation or prosecution;

e. ask from the covered institutionconcerned any information, document,material or object which may be ofassistance to the investigation orprosecution;

f. specify the manner in which and towhom said information, document,material or object detained pursuant tosaid request, is to be produced;

g. give all the particulars necessary for theissuance by the court in the requestedState of the writs, orders or processesneeded by the requesting State; and

h. contain such other information as mayassist in the execution of the request.

Extradition:The Philippines shall negotiate for theinclusion of money laundering offenses asherein defined among extraditable offensesin all future treaties (Sec. 13)

Amendment:One of the many amendments made by RA9194 was the deletion of the phrase thatprovided that “The provisions of this Actshall not apply to deposits and investmentsmade prior to its effectivity.

REVIEWER IN COMMERCIAL LAW Chapter VI. Foreign Currency Deposit Act (RA 6426)

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Chapter VI. Foreign CurrencyDeposit Act (RA 6426)

I. CONFIDENTIALITYII. PRIVILEGES

The FCDA allowed any person todeposit, and banks to accept deposit,any foreign currency acceptable as partof the Philippines’ international reserve.

I. Confidentiality

All foreign currency deposits authorizedunder the Secrecy Law as well as underPD1034 are declared and considered of anabsolutely confidential nature and, exceptupon the written permission of thedepositor, in no instance shall be examine,inquired or looked into by any person,government official, bureau or office,whether judicial or administrative, orlegislative of any other entity whetherpublic or private. (Sec. 8)

The foreign currency deposits shall beexempt from attachment, garnishment, orany other order or process of any court,legislative body, government agency or anyadministrative body whatsoever. (Sec. 8)

Exceptions1. upon written permission of the

depositor (Sec. 8, Foreign CurrencyDeposit Act ; Intengan vs CA ; 2002)

2. upon order of a competent court incases of violation of the Anti-MoneyLaundering Act of 2001 [as in the caseof peso deposits, supra]

3. during Bangko Sentral’s periodic orspecial examinations [as in the case ofpeso deposits, supra], and

4. disclosure ot the Treasurer of thePhilippines when the unclaimedbalances law applies (Act 3936, asamended by PD 679)

5. In Salvacion vs. CB (1997), where aFilipino child was raped by a foreigner,the SC allowed garnishment of foreigncurrency deposits stating : We rule thatthe questioned Section 113 of CBCircular No. 960 which exempts fromattachment, garnishment, or any otherorder or process of any court.Legislative body, government agency orany administrative body whatsoever, isapplicable to a foreign transient,injustice would result especially to acitizen aggrieved by a foreign guest.

II. Privileges

1. Tax exemption – the FCD, includinginterests and all other income orearnings of such deposits, are exemptfrom any an all taxes whatsoeverirrespective of whether or not thesedeposits are made by residents or non-residents and, in the latter case,irrespective of whether or not the non-residents are engaged in trade orbusiness in the Philippines (Sec. 6)

2. Exemption from attachment,garnishment or any other order orprocess of any court, legislative oradministrative body, or governmentagency whatsoever (Sec. 8)EXC: the CA, upon application ex parteby the AMLC and after determinationthat a probable cause exists that anymonetary instrument or property is inany way related to an “unlawfulactivity”, the AMLC, may freeze theaccount (Sec. 10, RA9160)


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BILLS AND NOTES

CHAPTER I. GENERAL CONCEPTSA. Negotiable InstrumentsB. Applicability of the Negotiable

Instruments LawC. Characteristics of Negotiable

InstrumentsD. Kinds of Negotiable InstrumentsE. Parties to a Negotiable

InstrumentsF. Comparative Tables

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171171

171171

CHAPTER II. NEGOTIABILITYA. Determination of NegotiabilityB. Requisites of NegotiabilityC. Omissions and Provisions Not

Affecting NegotiabilityD. Interpretation of Negotiable

Instruments

173173173

175

176

CHAPTER III. TRANSFERA. ModesB. Process of Negotiation

1. Delivery and Issuance2. Indorsement3. Subsequent Negotiation

C. Kinds of IndorsementD. Unindorsed InstrumentsE. Cancellation of InstrumentF. Indorsement by AgentG. Presumption as to Indorsement

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CHAPTER IV. HOLDERSA. General ConceptsB. Holder in Due Course

1. Requisites of a Holder in DueCourse

2. Rights of a Holder in DueCourse

C. Holder NOT in Due CourseD. Accommodation

180180180

180

182182182

CHAPTER V. DEFENSES ANDEQUITIESA. IncapacityB. IllegalityC. ForgeryD. Material AlterationE. FraudF. DuressG. Absence or failure of

ConsiderationH. PrescriptionI. Irregularity in Delivery

183183183183186186187

187187187

CHAPTER VI. PARTIES WHO ARELIABLEA. Primarily Liable

1. General Concepts2. Maker3. Drawee4. Acceptor

B. Secondarily Liable1. Drawer2. General or Unqualified

Indorser3. Irregular Indorser4. Order of Liability Among

Indorsers5. Liability of an Agent

C. Limited LiabilityD. Order of LiabilityE. Liabilities vs. Warranties

188188188188188188189189

189189

189189190190190

CHAPTER VII. ENFORCEMENTOF LIABILITYA. Liabilities of PartiesB. Steps to charge parties liableC. PresentmentD. AcceptanceE. Notice of DishonorF. ProtestG. Acceptance or payment for honor

191191191191193194195196

CHAPTER VIII. DISCHARGEA. DefinitionB. Discharge of the Instrument

1. By payment in due course2. By intentional cancellation3. By reacquisition of principal

debtor in his own right4. By renunciation of holder5. By material alteration6. By other acts


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197197197197197

CHAPTER IX. CHECKSA. Certification of ChecksB. Cross ChecksC. Types of Checks

199199199199

REVIEWER IN COMMERCIAL LAW Chapter I. General Concepts

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Bills and NotesFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD



COMMERCIAL LAW


BILLS AND NOTES

Ma. Cecilia JimenezLEAD WRITER

Emil Rey BalalengWRITER

LECTURES

Edel CruzHEAD



--------Leo Zulueta


Chapter I. General Concepts

A. NEGOTIABLE INSTRUMENTSB. APPLICABILITY OF THE NEGOTIABLE

INSTRUMENTS LAWC. CHARACTERISTICS OF NEGOTIABLE

INSTRUMENTSD. KINDS OF NEGOTIABLE INSTRUMENTSE. PARTIES TO A NEGOTIABLE

INSTRUMENTSF. COMPARATIVE TABLES

I. General Concepts

A. Negotiable Instruments (NI)(Asked in 02, 05)

Written contract for the payment ofmoney, by its form and on its face,intended as substitute for money andintended to pass from hand to hand togive the holder in due course (HDC)the right to hold the same and collectthe sum due.

Instruments are negotiable when theyconform to all the requirementsprescribed by the NIL (Act 2031, 03February 1911).

Although considered as medium forpayment of obligations, negotiableinstruments are not legal tender (Sec.60, New Central Bank Act, R.A. 7653).

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

A: Settled is the rule that payment must bemade in legal tender. A check is not legal tenderand, therefore, cannot constitute a valid tenderof payment. Since a negotiable instrument isonly a substitute for money and not money,

the delivery of such an instrument does not,by itself, operate as payment. Mere delivery ofchecks does not discharge the obligation under ajudgment. The obligation is not extinguishedand remains suspended until the payment bycommercial document is actually realized.

Negotiable instruments shall producethe effect of payment only when theyhave been encashed or when throughthe fault of the creditor they have beenimpaired. (Art. 1249, Civil Code) BUT aCHECK which has been cleared andcredited to the account of the creditorshall be equivalent to a delivery to thecreditor of cash.

TIP: Memorize the two most importantprovisions of the NIL : Sec. 1 (Forms ofnegotiable instruments) and Sec. 52 (Whatconstitutes a holder in due course)

B. Applicability of the NegotiableInstruments Law (NIL)

General Rule: The provisions of the NIL arenot applicable if the instrument involved isnot negotiable.

Exception: In the case of Borromeo vs.Amancio Sun (1999), the SC applied Sec. 14of the NIL by analogy in a case involving aDeed of Assignment of shares which wassigned in blank to facilitate futureassignment of the same shares. The SCobserved that the situation is similar toSec. 14 where the blanks in an instrumentmay be filled up by the holder, the signingin blank being with the assumed authorityto do so.


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C. Characteristics of NegotiableInstruments(Asked in 05)

1. Capable of being transferred from oneperson to another – has the effect oftransferring title from one person toanother so as to make the latter aholder entitled to payment thereof

2. Capable of accumulating contractsresulting from indorsements at the back

D. Kinds of Negotiable Instruments(Asked in 02)

1. Promissory Note (Sec. 184)a. An unconditional promise in writingb. Made by one person to anotherc. Signed by the makerd. Engaging to pay on demand, or at a

fixed or determinable future timee. A sum certain in money to order or

to bearerf. Where a note is drawn to the

maker's own order, it is notcomplete until indorsed by him.

2. Bill of Exchange (Sec. 126)a. An unconditional order in writingb. Addressed by one person to anotherc. Signed by the person giving itd. Requiring the person to whom it is

addressed to pay on demand or at afixed or determinable future time

e. A sum certain in money to order orto bearer

Check - A bill of exchange drawn on a bankpayable on demand. (Sec. 185). It is the mostcommon form of bill of exchange.

Instances when a bill of exchange may betreated as a promissory note: The drawer and the drawee are the same

person; or Drawee is a fictitious person; or Drawee does not have the capacity to

contract (Sec. 130) Where the bill is drawn on a person who is

legally absent; Where the bill is ambiguous (Sec. 17[e])

E. Parties to a Negotiable Instrument

1. Promissory notea. Maker - one who makes promise

and signs the instrumentb. Payee - party to whom the promise

is made or the instrument is payable

2. Bill of Exchangea. Drawer - one who gives the order to

pay money to a third partyb. Drawee - person to whom the bill is

addressed and who is ordered topay. He becomes an acceptor whenhe indicates his willingness to paythe bill

c. Payee - party in whose favor the billis drawn or is payable

Where there is indorsement:a. Indorser - the payee of an

instrument who transfers it toanother by signing it at the backthereof

b. Indorsee - person to whom theindorser negotiates the instrument,who, by such negotiation, becomesthe holder of the instrument.

F. Comparative Tables

1. Negotiable vs. Non-negotiable

NegotiableInstruments

Non-negotiableInstruments

Contains all therequisites of Sec. 1of the NIL

Does not contain allthe requisites of Sec.1 of the NIL

Transferable bynegotiation or byassignment

Transferable only byassignment

HDC may havebetter rights thanTransferor

Transferee acquiresrights only of hisTransferor

Prior parties warrantpayment

Prior parties merelywarrant legality ofTitle

A holder in due coursetakes the NI free frompersonal defenses

All defenses available toprior parties may beraised against the lasttransferee

Illustrations (Asked in 05):a. Postal Money Order – NOT a negotiable

instrument because of the conditionsappearing at the back thereof, therebymaking the order conditional, contraryto Sec. 1 of the NIL (Phil. Education Co.vs. Soriano, 1971).

b. Certificate of Time deposit –NEGOTIABLE instrument because it isan acknowledgment in writing by thebank of the amount of deposit with apromise to repay the same to thedepositor or bearer thereof at a specifictime (Caltex vs. CA, 1992).

c. Letter of Credit – NOT negotiablebecause it is NOT payable to order or


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bearer and is generally conditional.Hence, it does not comply with Sec. 1 ofthe NIL.

d. Warehouse receipts – NOT negotiablebecause their subject matter is thingsor goods and not a sum certain inmoney as required by Sec. 1 of the NIL.

e. Treasury warrants payable from aspecific fund – NOT negotiableinstruments as they are payable out ofa particular fund which may or may notexist, thereby making the orderconditional, contrary to Sec. 1 of theNIL

2. Negotiable Instruments vs.Negotiable Documents(Asked in 05)

NegotiableInstruments

Negotiable Documents

Governed by theNegotiableInstruments Law

Governed by the CivilCode

Contains all therequisites of Sec. 1of the NIL

Does not contain allthe requisites of Sec.1 of the NIL

Subject is a sumcertain in money

Subject is goods

Have right of recourseagainst intermediateparties who aresecondarily liable

No secondary liabilityof intermediate parties

Holder in dues coursemay have rights betterthan transferor

Transferee merely stepsinto the shoes of thetransferor

Instrument itself isproperty of value

Instrument is merelyevidence of title; thingof value are the goodsmentioned in thedocument

3. Promissory Note vs. Bill of Exchange

Promissory note Bill of exchangeUnconditional promise Unconditional order

Involves 2 parties Involves 3 parties

Maker is primarilyliable

Drawer is onlysecondarily liable

Only onepresentment: forpayment

Two presentments: foracceptance and forpayment

Bill of exchange CheckNot necessarilydrawn on a deposit.The drawee need notbe a bank

It is necessary that acheck be drawn on abank deposit.Otherwise, there wouldbe fraud.

Death of a drawer of aBOE, with theknowledge of thebank, does not revokethe authority of thedrawee to pay.

Death of the drawer ofa check, with theknowledge of the bank,revokes the authority ofthe banker to pay.

May be presented forpayment withinreasonable time afterits last negotiation.

Must be presented forpayment within areasonable time afterits issue.

May be payable ondemand or at a fixedor determinable futuretime

Always payable ondemand

REVIEWER IN COMMERCIAL LAW Chapter II. Negotiability

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Chapter II. Negotiability

A. DETERMINATION OF NEGOTIABILITYB. REQUISITES OF NEGOTIABILITYC. OMISSIONS AND PROVISIONS NOT

AFFECTING NEGOTIABILITYD. INTERPRETATION OF NEGOTIABLE

INSTRUMENTS

A. Determination of Negotiability

Caltex Phils. v. CA (1992): Indetermining the negotiability of aninstrument, the instrument in itsentirety and by what appears on its facemust be considered. It must complywith the requirements of Sec. 1 of theNegotiable Instruments Law.

PBCOM vs. Aruego (1993): Theacceptance of a bill of exchange is notimportant in the determination of itsnegotiability. The nature of acceptanceis important only on the determinationof the kind of liabilities of the partiesinvolved

B. Requisites of Negotiability(Asked in 92, 93, 96, 97, 00, 02, 05, 07)

Sec. 1. Form of negotiable instruments.An instrument to be negotiable must conform tothe following requirements:(a) It must be in writing and signed by the

maker or drawer;(b) Must contain an unconditional promise or

order to pay a sum certain in money;(c) Must be payable on demand, or at a fixed or

determinable future time;(d) Must be payable to order or to bearer; and(e) Where the instrument is addressed to a

drawee, he must be named or otherwiseindicated therein with reasonable certainty.

1. In writing and signed by the maker ordrawer

a. No person liable on the instrumentwhose signature does not appearthereon.

b. One who signs in a trade or assumedname liable to same extent as if he hadsigned in his own name (Sec. 18).

c. Signature of party may be made by dulyauthorized agent; no particular form ofappointment necessary (Sec. 19)

d. "In writing" - includes print; written ortyped

e. Signature is binding so long it isintended or adopted as the signature ofthe signer or made with his authority.

2. Containing an unconditional promiseto pay or order to pay

Sec. 3. When promise is unconditional.An unqualified order or promise to pay isunconditional within the meaning of this Act,though coupled with:(a) An indication of a particular fund out of

which reimbursement is to be made or aparticular account to be debited with theamount; or

(b) A statement of the transaction which givesrise to the instrument.

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

a. “UNCONDITIONAL” The promise or order to pay, to be

unconditional, must be unqualified. Metropolitan Bank vs. CA, (1991): A

NIL is conditional when referenceto the fund clearly indicates anintention that such fund aloneshould be the source of payment.

b. “ORDER OR PROMISE TO PAY” As to promissory note

Promise to pay should beexpress on the face of theinstrument

Word "promise" is not absolutelynecessary. Any expressionequivalent to a promise issufficient.

Mere acknowledgment of a debtinsufficient

As to bill of exchange:

Order - command or imperativedirection; the instrument, by itsnature, demanding a right.

Words which are equivalent toan order are sufficient.

A mere request or authority topay does not constitute anorder. Although the mere use ofpolite words like "please" doesnot of itself deprive theinstrument of its characteristicsas an order, its language mustclearly indicate a demand uponthe drawee to pay.

3. Sum payable must be certain

A sum is certain if from the face of theinstrument it can be mathematicallycomputed.


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Sec. 2. What constitutes certainty as to sum.The sum payable is a sum certain within themeaning of this Act, although it is to be paid:(a) with interest; or(b) by stated installments; or(c) by stated installments, with a provision that,

upon default in payment of any installmentor of interest, the whole shall become due;or

(d) with exchange, whether at a fixed rate or atthe current rate; or

(e) with costs of collection or an attorney's fee,in case payment shall not be made atmaturity.

4. Payable in money

a. Capable of being transformed intomoney.

b. NON NEGOTIABLE: an instrumentwhich contains an order or promise todo an act in addition to the payment ofmoney

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

a. Time of payment must be certain

b. “ON DEMAND”

Sec. 7 . When payable on demand.An instrument is payable on demand:(a) When it is so expressed to be payable on

demand, or at sight, or on presentation; or(b) In which no time for payment is expressed.Where an instrument is issued, accepted, orindorsed when overdue, it is, as regards theperson so issuing, accepting, or indorsing it,payable on demand.

Demand instruments: Holder maycall for payment any time; makerhas an option to pay at any time,and the refusal of the holder toaccept payment will terminate therunning of interest, if any, but theobligation to pay the note remains.

c. “AT A FIXED TIME” Only on the stipulated date, and not

before, may the holder demand itspayment.

Should he fail to demand payment,the instrument becomes overdue butremains valid and negotiable. It ismerely converted to a demandinstrument.

d. “AT A DETERMINABLE FUTURE TIME”

Sec. 4. Determinable future time; whatconstitutes.An instrument is payable at a determinablefuture time, within the meaning of this Act,which is expressed to be payable:(a) At a fixed period after date or sight; or(b) On or before a fixed or determinable future

time specified therein; or(c) On or at a fixed period after the occurrence

of a specified event which is certain tohappen, though the time of happening beuncertain.

An instrument payable upon a contingency isnot negotiable, and the happening of the eventdoes not cure the defect.

Effect of acceleration provisions:

If option (absolute orconditional) to acceleratematurity is on the maker, stillNEGOTIABLE.

If option to accelerate is on theholder and can be exercisedonly after the happening of aspecified event/act over whichhe has no control (conditional),still NEGOTIABLE.

Provisions extending time ofpayment

General rule: Negotiability notaffected. Effect is similar withthat of an acceleration clause atthe option of the maker.

Exception: Where a note with afixed maturity provides that themaker has the option to extendtime of payment until thehappening of contingency,instrument NOT negotiable. Thetime for payment may nevercome at all.

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

a. Must contain Words of Negotiability

b. Caltex vs. CA (1992): The negotiabilityor non-negotiability of an instrument isdetermined from the face of theinstrument itself. Where words "orbearer" printed on a check arecancelled by the drawer, instrumentbecomes not negotiable.


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c. “PAYABLE TO BEARER”

Sec. 9. When payable to bearer.The instrument is payable to bearer:(a) When it is expressed to be so payable; or(b) When it is payable to a person named

therein or bearer; or(c) When it is payable to the order of a fictitious

or non-existing person, and such fact wasknown to the person making it so payable;or

(d) When the name of the payee does notpurport to be the name of any person; or

(e) When the only or last indorsement is anindorsement in blank.

Examples:

Expressed to be so payable"I promise to pay the bearer thesum…."

Payable to a person namedtherein or bearer"Pay to A or bearer."

Payable to the order of afictitious person or non-existingperson, and such fact wasknown to the person making itso payable“Pay to John Doe or order."

Name of payee does not purportto be the name of any person –"Pay to cash;""Pay to sundries."

Only or last indorsement is anindorsement in blank.

d. Ang Tek Lian vs. CA, (1950): A checkdrawn payable to the order of cash is acheck payable to bearer, and the bankmay pay it to the person presenting itfor payment without the drawer'sindorsement.

e. Fictitious payee ruleIt is not necessary that the personreferred to in the instrument is reallynon-existent or fictitious to make theinstrument payable to bearer. Theperson to whose order the instrument ismade payable may in fact be existingbut he is till fictitious or non-existentunder Sec. 9(c) of the NIL if the personmaking it so payable does not intend topay the specified persons.

f. “PAYABLE TO ORDER”

Sec. 8. When payable to order.The instrument is payable to order where it isdrawn payable to the order of a specified personor to him or his order. It may be drawn payable

to the order of:(a) A payee who is not maker, drawer, or

drawee; or(b) The drawer or maker; or(c) The drawee; or(d) Two or more payees jointly; or(e) One or some of several payees; or(f) The holder of an office for the time being.Where the instrument is payable to order, thepayee must be named or otherwise indicatedtherein with reasonable certainty.

Consolidated Plywood Industries vs.IFC Leasing, (1987): Without thewords "to order" or "to the orderof," the instrument is payable onlyto the person designated thereinand is therefore non-negotiable.

For order instruments - negotiationrequires delivery and indorsement ofthe transferor.

7. If bill of exchange, drawee named ordesignated with reasonable certainty

a. Applies only to bill of exchangeb. A bill may be addressed to 2 or more

drawees jointly whether they arepartners or not but not to 2 or moredrawees in the alternative or insuccession (Sec. 128, NIL).

C. Omissions and Provisions NotAffecting Negotiability

Omissions andProvisions

That Do Not AffectNegotiability

Additional ProvisionsThat Do Not Affect

Negotiability

1. Non-dating of theinstrument

2. Non-specificationof value given, orthat any valuehad been given

3. Non-specificationof place where itis drawn or placewhere it ispayable

4. Bears a seal5. Designation of

particular kindof currency inwhich paymentis to be made

1. Authorizes the saleof collateralsecurities ondefault;

2. Authorizesconfession ofjudgment on default;

3. Waives the benefit oflaw intended toprotect the debtor;or

4. Allows the creditorthe option to requiresomething in lieu ofmoney.

NOTE: Negotiability isaffected wheninstrument contains apromise or order to doany act in addition tothe payment of money.


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D. Interpretation of NegotiableInstruments

1. Sum expressed in words takesprecedence over sum in numbers; BUTwhere words are so ambiguous oruncertain, reference to the figuresshould be made.

2. Where interest is stipulated, withoutspecification of the starting date, theinterest runs from the date of theinstrument, and if undated, from theissue thereof.

3. An undated instrument is considereddated as of time issued.

4. Written provisions prevail over printedprovision.

5. Where the instrument is ambiguous asto whether it is a note or a bill, theholder may treat it as either at hiselection

6. When the capacity of signatory is notclear, he is to be deemed an indorser G.“I promise to pay” when signed by twoor more persons is deemed to be jointlyand severally signed

7. Evangelista vs. Mercator Finance (2003):Where two promissory notes, bothemploying the terms “I promise to pay”,were each signed by two or morepersons, a solidary (joint and several)liability on each note is created on thepart of the signors.

REVIEWER IN COMMERCIAL LAW Chapter III. Transfer

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Chapter III. Transfer

A. MODESB. PROCESS OF NEGOTIATION

1. DELIVERY AND ISSUANCE2. INDORSEMENT3. SUBSEQUENT NEGOTIATION

C. KINDS OF INDORSEMENTD. UNINDORSED INSTRUMENTSE. CANCELLATION OF INSTRUMENTF. INDORSEMENT BY AGENTG. PRESUMPTION AS TO INDORSEMENT

A. Modes

1. Negotiation

2. Assignment

NEGOTIATION ASSIGNMENTThe transfer of theinstrument from oneperson to another soas to constitute thetransferee as holderthereof (Sec.30).

The transferee does notbecome a holder and hemerely steps into theshoes of the transferor.Any defense availableagainst the transferor isavailable against thetransferee.

B. Process of Negotiation

If payable to bearer – negotiated by delivery(Sec. 30)

If payable to order – negotiated byindorsement of the holder and completed bydelivery (Sec. 30)

1. Delivery and Issuance

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

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

Requisitesa. Mechanical act of writing the

instrument completely and inaccordance with the requirements ofSection 1; and

b. The delivery of the completeinstrument by the maker or drawerto the payee or holder with theintention of giving effect to it.

Presumption of deliverya. Where the instrument is no longer

in the possession of a party whosesignature appears thereon, a valid

and intentional delivery by him ispresumed until the contrary isproved

b. if it is in the hands of a HDC, thepresumption is conclusive

Presumption as to datea. Date is not an essential element of

negotiabilityb. An undated instrument is

considered to be dated as of the timeit was issued

2. Indorsement Signature of the indorser, without

additional words, is a sufficientindorsement (Sec. 31)

Where placed – The indorsementmust be written (Sec. 31):a. On the instrument itself, orb. On a separate piece of paper

attached to the instrumentcalled “allonge”

Must be of the ENTIRE instrument CANNOT indorse a part only of

the amount payable; BUT if theinstrument has been paid inpart, then the instrument maybe indorsed as to the residue(Sec. 32)

CANNOT transfer the instrumentto two or more indorseesseverally (Sec. 32)

3. Subsequent negotiation

Renegotiation to prior parties

Sec. 50. When prior party may negotiateinstrument.Where an instrument is negotiated back to aprior party, such party may, subject to theprovisions of this Act, reissue and furthernegotiable the same. But he is not entitled toenforce payment thereof against any interveningparty to whom he was personally liable.

C. Kinds of Indorsement

As to manner of future method ofnegotiation

1. Special

Specifies the person to whom/towhose order the instrument is tobe payable; indorsement of suchindorsee is necessary to furthernegotiation.

A special indorser is liable to allsubsequent holders, unless the


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instrument is an originallybearer instrument, in whichcase he is liable only to thosewho take title through hisindorsement (Sec 40).

2. Blank

Specifies no indorsee,instrument so indorsed ispayable to bearer, and may benegotiated by delivery

The holder may convert a blankindorsement into a specialindorsement by writing over thesignature of the indorser inblank any contract consistentwith the character of theindorsement.

An order instrument may beconverted into a bearerinstrument by means of a blankindorsement.

But a bearer instrumentremains as such whether it hasbeen indorsed specially or inblank. It is the liability of theindorser which is affected.

As to title transferred

1. Restrictive Such indorsement either:

Prohibits further negotiationof instrument

Constitutes indorsee asagent of indorser

Vests title in indorsee intrust for another

Rights of Restrictive Indorsee: Receive payment Bring any action thereon

that the indorser couldbring.

Transfer his rights as suchindorsee, but all subsequentindorsees acquire only thetitle of first indorsee underrestrictive indorsement.

2. Non-restrictive

As to kind of liability assumed byindorser

1. Qualified

Constitutes indorser as mereassignor of title (e.g., “withoutrecourse”) (Sec. 38).

But this does not mean that thetransferee only has the rights ofan assignee. Transfer remains anegotiation and transferee can

still be a holder capable ofacquiring a title free fromdefenses of prior parties.

2. Non-qualified

As to presence/absence of expresslimitations

1. Conditional

Placed by indorser upon primaryobligor’s privileges of paying theholder

Additional condition annexed toindorser’s liability (Sec. 39).

Where an indorsement isconditional, a party required topay the instrument maydisregard the condition, andmake payment to the indorsee orhis transferee, whether conditionhas been fulfilled or not

2. Unconditional

Other Kinds of Indorsement

1. AbsoluteOne by which the indorser bindshimself to pay, upon no othercondition than the failure of priorparties to do so, and of due notice tohim of such failure

2. JointWhere instrument payable to theorder of two or more payees orindorsees not partners, all mustindorse, unless the one indorsinghas authority to endorse for theothers (Sec. 41)

3. IrregularWhere a person, not otherwise aparty to the instrument, placesthereon his signature in blankbefore delivery, he is liable asindorser

D. Unindorsed Instruments

Sec. 49. Transfer without indorsement; effectof.Where the holder of an instrument payable tohis order transfers it for value without indorsingit, the transfer vests in the transferee such titleas the transferor had therein, and the transfereeacquires in addition, the right to have theindorsement of the transferor. But for thepurpose of determining whether the transferee isa holder in due course, the negotiation takeseffect as of the time when the indorsement isactually made.


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E. Cancellation of Indorsements

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

F. Indorsement by Agent

Sec. 20. Liability of person signing as agent,and so forth.Where the instrument contains or a person addsto his signature words indicating that he signsfor or on behalf of a principal or in arepresentative capacity, he is not liable on theinstrument if he was duly authorized; but themere addition of words describing him as anagent, or as filling a representative character,without disclosing his principal, does not exempthim from personal liability.

G. Presumption as to Indorsements

Sec. 47. Continuation of negotiablecharacter.An instrument negotiable in its origin continuesto be negotiable until it has been restrictivelyindorsed or discharged by payment or otherwise.

REVIEWER IN COMMERCIAL LAW Chapter IV. Holders

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Chapter IV. Holders

A. GENERAL CONCEPTSB. HOLDER IN DUE COURSE

1. REQUISITES OF A HOLDER IN DUECOURSE

2. RIGHTS OF A HOLDER IN DUECOURSE

C. HOLDER NOT IN DUE COURSED. ACCOMMODATION

A. General Concepts

1. Holder is a payee or indorsee of a bill ornote who is in possession of it, or thebearer thereof(Sec. 191).

2. Rights of a holder (Sec. 51)1. sue thereon in his own name2. payment to him in due course

discharges instrument.3. Chan Wan vs. Tan Kim, (1960): The only

disadvantage of a holder who is not aholder in due course is that thenegotiable instrument is subject todefenses as if it were non-negotiable.

B. Holders in due course (HDC)

HDC under Sec. 52 HDC under Sec. 58: A holder who

derives title to the instrument through aHDC has all the rights of the latter eventhough he himself satisfies none of therequirements of due course holding

HDC under Sec. 59 (presumption):Every holder is deemed prima facie tobe a holder in due course.

1. Requisites of a holder in duecourse

Sec. 52. What constitutes a holder in duecourse.A holder in due course is a holder who hastaken the instrument under the followingconditions:(a) That it is complete and regular upon its face;(b) That he became the holder of it before it was

overdue, and without notice that it has beenpreviously dishonored, if such was the fact;

(c) That he took it in good faith and for value;(d) That at the time it was negotiated to him, he

had no notice of any infirmity in theinstrument or defect in the title of theperson negotiating it.

a. That the instrument is complete andregular upon its face

It is incomplete when it is wantingin any material particular orparticular proper to be inserted in aNI without which the same will notbe complete.

Material ParticularsA change in the ff. is considered amaterial alteration (Sec. 125):

Date Sum payable Either for principal or interest Time or place of payment Number or relations of the

parties

Medium or currency in whichpayment is to be made

Or which adds a place ofpayment where no place ofpayment is specified

b. That he became the holder of itbefore it was overdue and withoutnotice that it had been previouslydishonored, if such was the fact

“OVERDUE”The ff. cannot be HDCs: (Sec. 53)

A holder who became such afterthe date of maturity of theinstrument (instrument isoverdue);

In case of demand instruments,a holder who negotiates it afteran unreasonable length of timeafter its issue

Instruments with fixed maturitybut subject to acceleration:ultimate date of maturity is thedate of maturity for the purposeof determining whether apurchaser is a HDC

Undated instruments: Primafacie presumption that it wasnegotiated before it was overdue(Sec. 45).

Note: An overdue instrument is stillnegotiable, but it is subject to thedefense existing at the time of thetransfer.

An instrument is not invalid for thereason only that it is ANTE-DATEDOR POSTDATED provided not donefor an illegal or fraudulent purpose.The person to whom an instrument


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so dated is delivered acquires thetitle thereto as of the date of delivery(Sec. 12).

c. That he took it in good faith AND forvalue

“VALUE”

Any consideration sufficient tosupport a simple contract. Anantecedent or pre-existing debtconstitutes value, whether theinstrument is payable ondemand or at a future time (Sec.25)

“HOLDER FOR VALUE” Where value has at any time

been given for the instrument,the holder is deemed a HFV inrespect to all parties whobecome such prior to that time(Sec. 26); and

Where the holder has a lien onthe instrument, he is deemed aHFV to the extent of his lien(Sec .27).

Presumption: Every NI isdeemed prima facie issued forvaluable consideration; andevery person whose signatureappears thereon is deemed tohave become a party thereto forvalue (Sec. 24).

Bayani vs. People, (2004): Suchpresumption cannot beovercome by the petitioner’s baredenial of receipt of theconsideration.

“ GOOD FAITH” Holder must have taken the

instrument in good faith andthat at the time it was negotiatedto him he had no notice of anyinfirmity in the instrument ordefect in the title of the personnegotiating it.

NOT a Holder in GOOD FAITH:Holder acted in bad faith orholder had NOTICE OF DEFECT.

“ACTUAL KNOWLEDGE”

Sec 56. What constitutes notice ofdefectTo constitute notice of an infirmity inthe instrument or defect in the title ofthe person negotiating the same, theperson to whom it is negotiated musthave had actual knowledge of theinfirmity or defect, or knowledge of suchfacts that his action in taking theinstrument amounted to bad faith.

d. That at the time it was negotiated tohim he had no notice of any infirmityin the instrument or defect in thetitle of the person negotiating it.

“SUSPICIOUS CIRCUMSTANCES” BAD FAITH - does not require

actual knowledge of the exactfraud that was practiced;knowledge that there wassomething wrong about theassignor’s acquisition of title issufficient.

State Investment House vs. IAC (1989): Acheck with 2 parallel lines in the upper lefthand corner means that it could only bedeposited and may not be converted to cash.Consequently, such circumstance shouldput the payee on inquiry and upon himdevolves the duty to ascertain the holders’title to the check or the nature of hispossession. Failing in this respect, thepayee is declared guilty of grossnegligence amounting to legal absence ofgood faith and as such the consensus ofauthority is to the effect that the holderof the check is not a holder in good faith.

“DEFECTIVE TITLE”Title is NOT defective when at thetime it was negotiated to him, hehad NO notice of:

any infirmity in instrument any defect in title of person

negotiating

Title is DEFECTIVE when (Sec. 55):

instrument / signature obtainedby fraud, duress, force or fear orother unlawful means OR for anillegal consideration; or

instrument is negotiated inbreach of faith, or fraudulentcircumstances

NOTICE of infirmity or defect –actual knowledge of the infirmityor defect OR knowledge of suchfacts that his action in takingthe instrument amounted to badfaith (Sec.56)

RIGHT of a transferee whoreceives NOTICE of any infirmityor defect BEFORE he has PAIDTHE FULL amount for theinstrument. He will be deemed aHDC only to the extent of theamount therefore paid by him(Sec.54)


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2. Rights of a Holder in Due Course

a. To sue on the instrument in his ownname (Sec. 51)

b. To receive payment on the instrument–discharges the instrument (Sec. 51)

c. Holds instrument free of any defect oftitle of prior parties (Sec. 51)

d. Free from defenses available to priorparties among themselves (Sec. 57)

e. May enforce payment of instrument forfull amount, against all parties liable(Sec. 57)

f. Only a HDC may enforce payment onthe promissory note (BPI vs. AlfredBerwin & Co, 1928).

C. Holder NOT in Due Course

1. Presumption in Favor of DueCourse HoldingEvery holder is deemed prima facie tobe a holder in due course (Sec. 59).a. BURDEN SHIFTS when it is shown

that the title of any person who hasnegotiated the instrument wasdefective. Holder MUST PROVE thathe or some person under whom heclaims acquired the title as a holderin due course.

b. But the last mentioned rule doesnot apply in favor of a party whobecame bound on the instrumentprior to the acquisition of suchdefective title. (Sec. 59)

c. However, this presumption arisesonly in favor of a person who is aholder as defined in Sec. 191,meaning a “payee or indorsee of abill or note, who is in possession of it,or the bearer thereof.”

2. Holder Not In Due Course

a. One who became a holder of aninstrument without any, some or allof the requisites under Sec. 52.

b. With respect to demandinstruments, if it is negotiated anunreasonable length of time after itsissue, the holder is deemed not aholder in due course. (Sec. 53)

c. Rights of a holder not in duecourse:

It can enforce the instrumentand sue under it in his ownname.

Prior parties can avail againsthim any defense among theseprior parties and prevent thesaid holder from collecting inwhole or in part the amountstated in the instrument

D. Accommodation Party(Asked in 91, 96, 98, 05)

Sec. 29. Liability of accommodation party.An accommodation party is one who has signedthe instrument as maker, drawer, acceptor, orindorser, without receiving value therefor, andfor the purpose of lending his name to someother person. Such a person is liable on theinstrument to a holder for value,notwithstanding such holder, at the time oftaking the instrument, knew him to be only anaccommodation party.

1. Liability

The person to whom the instrumentthus executed is subsequentlynegotiated has a right of recourseagainst the accommodation party inspite of the former’s knowledge that noconsideration passed between theaccommodation and accommodatedparties (Sec. 29).

Stelco Marketing Corp. vs. C.A. (1992):Liable on the instrument to a holder for valuenotwithstanding such holder at the time of thetaking of the instrument knew him to be only anaccommodation party. Hence, As regards, an AP,the 4th condition, i.e., lack of notice of infirmityin the instrument or defect in the title of thepersons negotiating it, has no application.

2. Accommodation Party as Surety

a. AP is generally regarded as a surety forthe party accommodated;

b. When AP makes payment to holder ofthe note, he has the right to sue theaccommodated party for reimbursement(Agro Conglomerates, Inc. vs. CA 2000).

REVIEWER IN COMMERCIAL LAW Chapter V. Defenses and Equities

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Chapter V. Defenses and Equities(Asked in 95, 98, 07)

A. INCAPACITYB. ILLEGALITYC. FORGERYD. MATERIAL ALTERATIONE. FRAUDF. DURESSG. ABSENCE OR FAILURE OF

CONSIDERATIONH. PRESCRIPTIONI. IRREGULARITY IN DELIVERY

REAL DEFENSES PERSONAL DEFENSESThose that attach to the instrument itself andare available against all holders, whether in duecourse or not, but only by the parties entitled toraise them. (a.k.a absolute defenses)

Those which are available only against a person not aholder in due course or a subsequent holder whostands in privity with him. (a.k.a. equitable defenses)

1. Material Alteration;2. Want of delivery of incomplete instrument;3. Duress amounting to forgery;4. Fraud in factum or fraud in esse contractus;5. Minority (available to the minor only);6. Marriage in the case of a wife;7. Insanity where the insane person has a

guardian appointed by the court;8. Ultra vires acts of a corporation9. Want of authority of agent;10. Execution of instrument between public

enemies;11. Illegality – if declared void for any purpose12. Forgery.

1. Absence or failure of consideration, partial ortotal;

2. Want of delivery of complete instrument;3. Insertion of wrong date in an instrument;4. Filling up of blank contrary to authority given or

not within reasonable time;5. Fraud in inducement;6. Acquisition of instrument by force, duress, or fear;7. Acquisition of the instrument by unlawful means;8. Acquisition of the instrument for an illegal

consideration;9. Negotiation in breach of faith;10. Negotiation under circumstances that amount to

fraud;11. Mistake;12. Intoxication (according to better authority);13. Ultra vires acts of corporations where the

corporation has the power to issue negotiablepaper but the issuance was not authorized for theparticular purpose for which it was issued;

14. Want of authority of agent where he hasapparent authority;

15. Insanity where there is no notice of insanity onthe part of the one contracting with the insaneperson; and

16. Illegality of contract where the form orconsideration is illegal.

A. Incapacity

REAL defense but available only to theincapacitated party (ex. minor orcorporation); the indorsement orassignment of the instrument by a corp. orby an infant passes the property therein,notwithstanding that from want of capacity,the corp. or infant may incur no liabilitythereon (Sec. 22).

B. Illegality

1. In general, a PERSONAL defense even if1409 of the Civil Code provides that acontract with an illegal cause is void.

2. REAL when the law expressly providesfor illegality as a real defense (statutorydeclaration of illegality).

C. Forgery(Asked in 90, 92, 95, 97, 00, 01, 04, 05)

Counterfeit making or fraudulentalteration of any writing, which mayconsist of:a. Signing of another’s name with

intent to defraud; orb. Alteration of an instrument in the

name, amount, name of payee, etc.with intent to defraud.


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General Rule: When a signature isforged or made without the authority ofthe person, the signature (notinstrument itself and the genuinesignatures) is wholly inoperativeEffects:

No right to retain the instrument No right to give a discharge

therefore

Nor right to enforce payment thereofagainst any party thereto, can beacquired through or under suchsignature

Exception: Unless the party againstwhom it is sought to enforce such rightis precluded from setting up the forgeryor want of authority (Sec. 23).

Persons precluded from setting updefense of forgery1. Those who warrant or admit the

genuineness of the signature inquestion. This includes indorsers,persons negotiating by delivery andacceptors.

2. Those who, by their acts, silence, ornegligence, are estopped fromsetting up the defense of forgery.

Rules on Forgery

1. Promissory Note

ORDER INSTRUMENT BEARER INSTRUMENT

Maker’s signatureforged

1. Maker is not liable because he neverbecame a party to the instrument.

2. Indorsers subsequent to forgery areliable because of their warranties.

3. Party who the made the forgery isliable.

1. Maker is not liable.

2. Party who made the forgery isliable.

3. Indorsers may be made liableto those persons who obtaintitle through theirindorsements.

Payee’s signatureforged

1. Maker and payee not liable.

2. Indorsers subsequent to forgery areliable.

3. Party who made the forgery is liable.

1. Maker is liable. (Indorsement isnot necessary to title and themaker engages to pay holder)

2. Party who made the forgery isliable

Indorser’s signatureforged

1. Maker, payee and indorser whosesignature was forged is not liable.

2. Indorsers subsequent to forgery areliable. (Because of their warranties)

3. Party who made the forgery is liable.

1. Maker is liable. (indorsement isnot necessary to title and themaker engages to pay theholder)

2. Indorser whose signature wasforged not liable to one who isnot a HDC provided theinstrument is mechanicallycomplete before the forgery.


1. Bill of Exchange

ORDER INSTRUMENT BEARER INSTRUMENT

Drawer’s signatureforged

1. Drawer is not liable because he wasnever a party to the instrument.

2. Drawee is liable if it paid (norecourse to drawer) because headmitted the genuiness of thedrawer’s signature. Drawee cannotrecover from the collecting bankbecause there is no privity betweenthe collecting bank and the drawer.The latter does not give any

1. Drawer is not liable.

2. Drawee is liable if it paid.Drawee cannot recover fromthe collecting bank.



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warranty regarding the signature ofthe drawer. (Associated Bank vs.CA)

3. Indorsers subsequent to forgeryliable (such as collecting bank orlast endorser)

4. Party who made the forgery is liable

Payee’s signatureforged

5. Drawer, drawee and payee notliable.

6. Indorsers subsequent to forgery areliable. (such as collecting bank)

7. Party who made the forgery is liable

1. Drawer is liable

2. Drawee is liable

3. Payee is not liable4. Collecting bank is liable

because of warranty5. Party who made the forgery is

liable

Indorser’ssignature forged

1. drawer, payee and indorser whosesignature was forged not liable.

2. Drawee is liable if it paid.3. Indorsers subsequent to forgery are

liable. (such as collecting bank)4. Party who made the forgery is

liable.

1. Drawer is liable. (indorsementnot necessary to title)

2. Drawee is liable.3. Indorser whose signature was

forged is liable becauseindorsement is not necessaryto title.


Acceptance and payment undermistake

A bank is bound to know thesignatures of its depositors. If bankpays a forged check it must beconsidered as making the paymentout of its own funds and cannotcharge the account of the depositorwhose signature was forged (PNB vs.Quimpo 1988).

Consequently, if a bank pays aforged check, it must be consideredas paying out of its funds andcannot charge the amount so paidto the account of the depositor. Abank is liable, irrespective of itsgood faith, in paying a forged check(Samsung Construction Co. vs. FarEast Bank and Trust Co., 2004).

Extensions of Price vs. Neal doctrine

Doctrine: As between equallyinnocent persons, the drawee whopays money on a check or draft thesignature on which was forgedCANNOT recover the money fromthe one who received it. The draweeis bound to know the signature ofits depositor.

The bar to recovery is extended tooverdrafts and stop payment orders.

Overdraft occurs when a check isissued for an amount more thanwhat the drawer has in deposit withthe drawee bank.

Rule: The drawee who pays theholder of the bill cannot recoverfrom the holder what he paid undermistake

Stop Payment Order is one issuedby the drawer of a checkcountermanding his first order tothe drawee bank to pay the check.Rule: The drawee bank is bound tofollow the order, provided it isreceived prior to its certification orpayment of the check.

Effects of Negligence of Depositor If such negligence was the

proximate cause of the loss, thebank (drawee) is NOT liable It is the duty of the

depositor/drawer to carefullyexamine bank’s statements,cancelled checks, his checkstubs, and other pertinentrecords within a reasonable timeand to report any errors withoutunreasonable delay.

If a drawer/depositor’snegligence and delay shouldcause a bank to honor a forgedcheck, drawer cannot latercomplain should bank refuse torecredit his account.

When drawee may recover fromdrawer Where the instrument is

originally a bearer instrument,


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because the indorsement can bedisregarded as beingunnecessary to the holder’s title

Indorsement forged by anemployee or agent of the drawer

If due to the drawer’snegligence/delay, the forgery isnot discovered until it is too latefor the bank to recover from theholder or the forger

When drawee may not recover fromholder Where the instrument is

originally a bearer instrument ,because the indorsement can bedisregarded as beingunnecessary to the holder’s title

If drawee fails to act promptly , ifhe delays in informing the holderwhom he paid

Between Drawee Bank andCollecting Bank Collecting bank only liable for

forged indorsements and notforgeries of the drawer ormaker’s signature (PNB v CA,1968).

The collecting bank or lastindorser generally suffers theloss because it has the duty toascertain the genuineness of allprior indorsements consideringthat the act of presenting thecheck for payment to the draweeis an assertion that the partymaking the presentment haddone its duty to ascertain thegenuineness of the indorsements(BPI v CA, 1992).

In presenting the checks forclearing the collecting agent,made an express guarantee onthe validity of “all the priorendorsements.”

The drawee bank is not similarlysituated as the collecting bankbecause the former makes nowarranty as to the genuinenessof any indorsement. The draweebank’s duty is but to verify thegenuineness of the drawer’ssignature and not of theindorsement because the draweris its client.

Where the negligence of thedrawee bank is the proximatecause of the collecting bank’spayment of a check with a forgedindorsement, the drawee bank

may be held liable to thecollecting bank.

When both are guilty ofnegligence, the degree ofnegligence of each will beweighed in considering theamount of loss which eachshould bear (BPI v CA, 1992)

D. Material Alteration(Asked in 95, 96, 99)

Any change in the instrument whichaffects or changes the liability of theparties in any way.

Effects:a. Alteration by a party – Avoids the

instrument except as against theparty who made, authorized, orassented to the alteration andsubsequent indorsers. However, ifan altered instrument is negotiatedto a HDC, he may enforce paymentthereof according to its originaltenor regardless of whether thealteration was innocent orfraudulent.

b. Alteration by a stranger(spoliation)- the effect is the sameas where the alteration is made by aparty which a HDC can recover onthe original tenor of the instrument(Sec. 124).

Changes in the following constitutematerial alterations (Sec. 125):1. Date2. Sum payable, either for principal or

interest3. Time or place of payment4. Number or relations of the parties5. Medium or currency in which

payment is to be made6. That which adds a place of payment

where no place of payment isspecified

7. Any other change or addition whichalters the effect of the instrument inany respect.

E. Fraud

Fraud in factum orfraud in inducement

Fraud in essescontractus or fraud inexecution

The person who signsthe instrumentintends to sign thesame as a NI but wasinduced by fraud

The person is inducedto sign an instrumentnot knowing itscharacter as a bill ornote


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BPI vs Franco, (2007, Nachura)

Q: Can a bank unilaterally freeze a depositor’saccount on the suspicion that the depositor wasinvolved in a multi-million peso scam carried outagainst the bank?

A: NO. The deposit of money in banks isgoverned by the Civil Code provisions on simpleloan or mutuum. As there is a debtor-creditorrelationship between a bank and its depositor, abank ultimately acquired ownership of thedeposits, but such ownership is coupled with acorresponding obligation to pay the depositor anequal amount on demand. The bank cannotprevent the depositor from demanding paymentby drawing checks against his current account,or asking for the release of the funds in hissavings account. To grant any bank the right totake whatever action it pleases on depositswhich it supposes are derived from shadytransactions, would open the floodgates ofpublic distrust in the banking industry.Article 559 which permits an owner who has lostor has been unlawfully deprived of a movable torecover the exact same thing is not applicable inthe case at bar since what is involved here ismoney which is a generic and fungible thing.

F. Duress

There may be cases where the duressemployed is so serious that it will give riseto a real defense because of the lack ofcontractual intent. Although the signer mayknow what he is signing, there may bewanting the intent or willingness to bebound. Then it becomes a real defense.

G. Absence or failure ofConsideration

Personal defense to the prejudiced partyand available against any person not HDC.

H. Prescription

Refers to extinctive prescription and may beraised even against a HDC. Under the CivilCode, the prescriptive period of an actionbased on a written contract is 10 yearsfrom accrual of cause of action.

I. Irregularity in Delivery(Asked in 97, 02, 04, 05)

2. Complete instrument undelivered(Sec. 16).a. Between immediate parties and

those who are similarly situated,delivery must be coupled with the

intention of transferring title to theinstrument.

b. As to HDC, it is conclusivelypresumed that there was validdelivery; and

c. As against an immediate party andremote party who is not a HDC,presumption of a valid andintentional delivery is rebuttable.

3. Incomplete instrument undelivered(Sec 15)a. Who may be estopped from raising

the real defense under Sec 15? Adrawee bank whose negligentcustody of the checks, after partialexecution, contributed to its escape.

b. If completed and negotiated withoutauthority, not a valid contractagainst a person who has signedbefore delivery of the contract evenin the hands of HDC but subsequentindorsers are liable. This is a realdefense.

4. Incomplete instrument delivered(Sec. 14)a. Holder has prima facie authority to

fill up the instrument.b. The instrument must be filled up

strictly in accordance with theauthority given and withinreasonable time

c. HDC may enforce the instrument asif filled up according to no. 2.

REVIEWER IN COMMERCIAL LAW Chapter VI. Parties Who are Liable

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Chapter VI. Parties Who are Liable

A. PRIMARILY LIABLE1. GENERAL CONCEPTS2. MAKER3. DRAWEE4. ACCEPTOR

B. SECONDARILY LIABLE1. DRAWER2. GENERAL OR UNQUALIFIED

INDORSER3. IRREGULAR INDORSER4. ORDER OF LIABILITY AMONG

INDORSERS5. LIABILITY OF AN AGENT

C. LIMITED LIABILITYD. ORDER OF LIABILITY

E. LIABILITIES VS. WARRANTIES

A. Primarily Liable(Secs. 60 and 62)

1. General Concepts Persons who by the terms of the

instrument are absolutely required topay the same.a. Maker of promissory noteb. Acceptor of bill of exchange

Unconditionally liable; he is duty boundto pay the holder at date of maturity,WON holder demands payment fromhim, and he is not relieved from liabilityeven if the instrument should becomeoverdue due to failure of holder to makesuch demand.

Maker Acceptor or Drawee

A. Engages to payaccording to thetenor of theinstrument; and

B. Admits theexistence of thepayee and hiscapacity toindorse.

A. Engages to pay accordingto the tenor of hisacceptance;

B. Admits the existence ofthe drawer, the genuinenessof his signature and hiscapacity and authority todraw the instrument; and

C. Admits the existence ofthe payee and his capacityto indorse.

A bill of itself does notoperate as an assignment offunds in the hands of thedrawee available for thepayment thereof and thedrawee is not liable unlessand until he accepts thesame (Sec.127)

2. Makera. Promises to pay the instrument

according to its tenorb. Admits existence of payee and his then

capacity to indorse.c. Therefore, IS PRECLUDED from setting

up the following defenses: the payee is a fictitious person the payee was insane, a minor, or a

corporation acting ultra vires

3. DraweeDrawee: A person on whom a bill ofexchange or check is drawn and who isordered to pay it.

a. Liability of drawee to HOLDER NOT liable on the instrument until

he accepts it and even a holder indue course cannot sue him on theinstrument before his acceptance

A bill/check of itself does NOToperate as an assignment of thefunds in the hands of thedrawee/bank (Sec 189), and thedrawee/bank is NOT liable on thebill unless and UNTIL he/itACCEPTS (or certifies) the same(Sec. 127).

b. Liability of drawee to DRAWER Before payment or certification by

the bank, the drawer maycountermand the order, andpayment thereafter to the payee bythe bank is wrongful.

Since a check is not an assignmentof the drawer’s fund, the bank isliable for paying it in disregard ofthe countermand.

Moreover, drawee can no longerrecover what it voluntarily paid tothe holder of the uncertified andunaccepted instrument.

4. Acceptor(Asked in 98)

Upon acceptance, the acceptor engages topay the bill according to the tenor of hisacceptance, and admits the following (Sec.62):a. existence of drawerb. genuineness of his signaturec. his capacity and authority to draw the

instrumentd. existence of payee and his then capacity

to endorse


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B. Secondarily Liable (Secs. 61, 64 and 66)(Asked in 07)

DRAWER GENERAL INDORSER IRREGULAR INDORSER

A. Admits the existence of thepayee and his capacity toindorse;

B. Engages that theinstrument will be accepted orpaid by the party primarilyliable; and

C. Engages that if theinstrument is dishonored andproper proceedings arebrought, he will pay to theparty entitled to be paid.

A. Warrants all subsequent HDC -

a. That the instrument is genuineand in all respect what it purportsto be

b. He has good title to it;

c. All prior parties had capacity tocontract

d. The instrument is, at the timeof endorsement, valid andsubsisting.

B. Engages that the instrumentwill be accepted or paid, or both,as the case may be, according toits tenor; and

C. If the instrument is dishonoredand necessary proceedings ondishonor be duly taken, he willpay to the party entitled to bepaid.

A person, not otherwise a party toan instrument, places his signaturethereon in blank before delivery(Sec. 64).

A. If instrument payable to theorder of a 3rd person, he is liable tothe payee and subsequent parties.

B. If instrument payable to order ofmaker or drawer or to bearer, he isliable to all parties subsequent tothe maker or drawer.

C. If he signs for accommo-dationof the payee, he is liable to allparties subse-quent to the payee.

1. Drawer

Sec. 61. Liability of drawer.The drawer by drawing the instrument admitsthe existence of the payee and his then capacityto indorse; and engages that, on duepresentment, the instrument will be accepted orpaid, or both, according to its tenor, and that ifit be dishonored and the necessary proceedingson dishonor be duly taken, he will pay theamount thereof to the holder or to anysubsequent indorser who may be compelled topay it. But the drawer may insert in theinstrument an express stipulation negativing orlimiting his own liability to the holder.

Limiting Liability: drawer may insert inthe instrument an express stipulationnegativing/limiting his own liability tothe holder.

2. General or Unqualified Indorser Every person who indorses WITHOUT

qualification (Sec. 66.) A person placing his signature upon an

instrument other than as a maker,drawer, or acceptor unless he indicatesby appropriate words his intention to bebound in some other capacity (Sec. 63).

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

3. Irregular IndorserWhen a person not otherwise a party to aninstrument, places thereon his signature inblank before delivery, he is liable as anindorser, in accordance w/ these rules:a. Instrument payable to order of 3rd

person: liable to payee and to allsubsequent parties

b. Instrument payable to the order ofmaker/drawer, or payable to bearer:liable to all parties subsequent tomaker/drawer

c. Signs for accommodation of payee,liable to all parties subsequent to payee(Sec 64)

4. Order of Liability among Indorsers(Sec. 68)

a. Among themselves: liable prima facie inthe order they indorse, but proof ofanother agreement admissible

b. Holder may sue any of the indorsers,regardless of order of indorsement

c. Joint payees/indorsees deemed toindorse jointly and severally

5. Liability of an AGENTa. Agency Signature of any party may be made

by duly authorized agent,established as in ordinary agency


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Signature per procuration operatesas notice that the agent has limitedauthority to sign, and the principalis bound only in case the agent in sosigning acted within the actuallimits of his authority

b. Liability General rule: Where person adds to

his signature words indicating thathe signs on behalf of a principal, notliable if he was duly authorized

Exceptions:a. Mere addition of words

describing him as an agentwithout disclosing his principal

b. Where a broker or agentnegotiates an instrumentwithout indorsement, he incursall liabilities in Sec. 65, unlesshe discloses name of principaland fact that he’s only acting asagent. (Sec. 69)

C. Limited Liability (Sec. 65, MetropolFinancing v. Sambok, 1983)

QUALIFIEDINDORSER

PERSONNEGOTIATING BY

DELIVERYEvery personnegotiatinginstrument by deliveryor by a qualifiedendorsement warrantsthat:

A. Instrument isgenuine and in allrespects what itpurports to be;

B. He has good title toit;

C. All prior partieshad capacity tocontract;

D. He has noknowledge of any factwhich would impairthe validity of theinstrument or renderit valueless.

A. Warranties same asthose of qualifiedindorsers; and

B. Warranties extendto immediate transfereeonly.

PERSONNEGOTIATING BY

MERE DELIVERY ORBY QUALIFIEDINDORSEMENT

GENERALINDORSER

No secondary liability;but is liable for breachof warranty

There is secondaryliability, andwarranties

Warrants that he hasno knowledge of anyfact which wouldimpair the validity ofthe instrument orrender it valueless

Warrants that theinstrument is, at thetime of hisindorsement, validand subsisting

D. Order of Liability

General rule: One whose signature doesnot appear on the instrument shall not beliable thereon.

Exceptions:a. The principal who signs through an

agent is liable;b. The forger is liable;c. One who indorses in a separate

instrument (allonge) or where anacceptance is written on a separatepaper is liable;

d. One who signs his assumed or tradename is liable; and

e. A person negotiating by delivery (as inthe case of a bearer instrument) is liableto his immediate indorsee.

Notes: There is no order of liability among the

indorsers as against the holder. He isfree to choose to recover from anyindorser in case of dishonor of theinstrument (AQUINO).

As respect one another, indorsers areliable prima facie in the order in whichthey indorse unless the contrary isproven (Sec.68)

E. Liabilities vs. Warranties

Primary andsecondary liability of

parties

Warranties of parties

Makes the partiesliable to pay the sumcertain in moneystated in theinstrument.

Impose no directobligation to pay in theabsence of breachthereof. In case ofbreach, the person whobreached the samemay either be liable orbarred from asserting aparticular defense.

Conditioned onpresentment andnotice of dishonor(CAMPOS)

Does not requirepresentment andnotice of dishonor.(CAMPOS)

REVIEWER IN COMMERCIAL LAW Chapter VII. Enforcement of Liability

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Chapter VII. Enforcement ofLiability

A. LIABILITIES OF PARTIESB. STEPS TO CHARGE PARTIES LIABLEC. PRESENTMENTD. ACCEPTANCEE. NOTICE OF DISHONORF. PROTESTG. ACCEPTANCE OR PAYMENT FOR HONOR

A. Liabilities of Parties

1. Primary liabilityThe unconditional promise attaches themoment the maker makes theinstrument while the acceptor’s assentto the unconditional order attaches themoment he accepts the instrument. Nofurther act is necessary in order for theliability to accrue. Presentment forpayment is all that is necessary.

2. Secondary liability

B. Steps to charge parties liable

1. Steps in promissory note (indorsers)a. Presentment for payment to the

maker.b. Notice of dishonor should be given,

if dishonored by non-payment.

2. Steps in bill of exchangea. Presentment for acceptance in the

following instances:a. Where the bill is payable after

sight, or when it is necessary inorder to fix the maturity of theinstrument;

b. Where the bill expresslystipulates that it shall bepresented for acceptance;

c. Where bill is drawn payableelsewhere than at the residenceor place of business of thedrawee. (Sec. 143)

Note: In all the above cases, theholder must either present the billfor acceptance or negotiate it withina reasonable time; otherwise, thedrawer and all indorsers aredischarged (Sec. 144)

b. If dishonored by non-acceptance: Notice of dishonor given to

drawer and indorsers.

Protest in case of a foreign bill.

c. If bill is accepted, then present thebill for payment to the acceptor.

d. If dishonored upon presentment forpayment:

Notice of dishonor to personssecondarily liable.

Protest for dishonor by non-payment in case of foreign bill.

C. Presentment(Asked in 94)

1. Definitiona. The production of a Bill of Exchange

to the drawee for his ACCEPTANCE,or to the drawer or acceptor forPAYMENT; or

b. The production of a PN to the partyliable for payment

2. Presentment for acceptancea. When necessary

Sec. 143. When presentment for acceptancemust be made.Presentment for acceptance must be made:(a) Where the bill is payable after sight, or in

any other case, where presentment foracceptance is necessary in order to fix thematurity of the instrument; or

(b) Where the bill expressly stipulates that itshall be presented for acceptance; or

(c) Where the bill is drawn payable elsewherethan at the residence or place of business ofthe drawee.

In no other case is presentment for acceptancenecessary in order to render any party to the billliable.

b. Effect of non-presentment withinreasonable time – drawer and allindorsers discharged (Sec. 144). What is reasonable time involves

a consideration of the nature ofthe instrument, usage of tradeor business with respect to theinstrument, and the facts ofeach case.

c. How made

Sec. 145. Presentment; how made.Presentment for acceptance must be made by oron behalf of the holder at a reasonable hour, ona business day and before the bill is overdue, tothe drawee or some person authorized to acceptor refuse acceptance on his behalf; and(a) Where a bill is addressed to two or more

drawees who are not partners, presentmentmust be made to them all unless one hasauthority to accept or refuse acceptance for


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all, in which case presentment may be madeto him only;

(b) Where the drawee is dead, presentment maybe made to his personal representative;

(c) Where the drawee has been adjudged abankrupt or an insolvent or has made anassignment for the benefit of creditors,presentment may be made to him or to histrustee or assignee.

d. When made

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

Sec. 72. What constitutes a sufficientpresentment.Presentment for payment, to be sufficient, mustbe made:(a) By the holder, or by some person authorized

to receive payment on his behalf;(b) At a reasonable hour on a business day;(c) At a proper place as herein defined;(d) To the person primarily liable on the

instrument, or if he is absent orinaccessible, to any person found at theplace where the presentment is made.

Sec. 85. Time of maturity.Every negotiable instrument is payable at thetime fixed therein without grace. When the dayof maturity falls upon Sunday or a holiday, theinstruments falling due or becoming payable onSaturday are to be presented for payment on thenext succeeding business day except thatinstruments payable on demand may, at theoption of the holder, be presented for paymentbefore twelve o'clock noon on Saturday whenthat entire day is not a holiday.

e. When Excused

Sec. 148. Where presentment is excused.Presentment for acceptance is excused and a billmay be treated as dishonored by non-acceptancein either of the following cases:(a) Where the drawee is dead, or has

absconded, or is a fictitious person or aperson not having capacity to contract bybill.

(b) Where, after the exercise of reasonablediligence, presentment can not be made.

(c) Where, although presentment has beenirregular, acceptance has been refused onsome other ground.

f. Dishonor and Effects

Sec. 149. When dishonored by non-acceptance.A bill is dishonored by non-acceptance:(a) When it is duly presented for acceptance

and such an acceptance as is prescribed bythis Act is refused or can not be obtained; or

(b) When presentment for acceptance isexcused and the bill is not accepted.

Sec. 150. Duty of holder where bill notaccepted.Where a bill is duly presented for acceptanceand is not accepted within the prescribed time,the person presenting it must treat the bill asdishonored by nonacceptance or he loses theright of recourse against the drawer and

indorsers.

Sec. 151. Rights of holder where bill notaccepted.When a bill is dishonored by non-acceptance, animmediate right of recourse against the drawerand indorsers accrues to the holder and nopresentment for payment is necessary.

3. Presentment for paymenta. When necessary

In order to charge the drawer andindorsers (Sec. 70)

b. When NOT necessary To charge the person primarily

liable on the instrument (Sec.70)

To charge the drawer where hehas no right to expect or requirethat the drawee or acceptor willpay the instrument. (Sec. 79)

To charge an indorser where theinstrument was made oraccepted for his accommodationand he has no reason to expectthat the instrument will be paidif presented. (Sec. 80)

c. When Excused Where, after the exercise of

reasonable diligence,presentment cannot be made;

Where the drawee is a fictitiousperson;

By waiver of presentment,express or implied.

d. When a bill is dishonored by non-acceptance – immediate right torecourse accrues to holder (Sec.151)


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e. In case of waiver of protest, whetherin the case of a foreign bill ofexchange or other NI – deemed to bea waiver not only of a formal protestbut also of presentment and noticeof dishonor. (Sec. 111)

f. Date and time of presentment: bearing fixed maturity / not

payable on demand – on the dayit falls due if day of maturityfalls on Sunday or a holiday, theinstruments falling due orbecoming payable on Saturdayare to be presented for paymenton the next succeeding businessday (Sec. 85)

Payable on demand – within areasonable time after its issue, ivat the option of the holder, maybe presented for payment beforetwelve o'clock noon on Saturdaywhen that entire day is not aholiday (Sec. 85)

Demand bill of exchange –within a reasonable time afterthe last negotiation. (Sec. 71)

Note: Although presentment wasmade within a reasonable time fromlast negotiation, it may have beenmade within an unreasonable timefrom issuance. Thus holder maystill not be a holder in due courseunder Sec. 71

g. Check - must be presented forpayment within reasonable timeafter its issue or drawer will bedischarged from liability thereon toextent of loss caused by delay

4. Dishonor by Nonpayment

Sec. 83. When instrument dishonored by non-payment.The instrument is dishonored by non-paymentwhen:(a) It is duly presented for payment and

payment is refused or cannot be obtained; or(b) Presentment is excused and the instrument

is overdue and unpaid.

Sec. 84. Liability of person secondarily liable,when instrument dishonored.Subject to the provisions of this Act, when theinstrument is dishonored by non-payment, animmediate right of recourse to all partiessecondarily liable thereon accrues to the holder.

D. Acceptance

The signification by the drawee of hisassent to the order of the drawer.

1. Form: Must be in writing and signedby the drawee and must not expressthat the drawee will perform hispromise by any other means than thepayment of money. (Sec. 132) If requestfor a written acceptance is refused, theholder may treat the bill as dishonored(Sec. 133)

2. Kinds:a. General -- assents without

qualification to the order of thedrawer

b. Qualified - which in express termsvaries the effect of the bill as drawn Conditional - makes payment by

the acceptor dependent on thefulfillment of a condition thereinstated

Partial - an acceptance to paypart only of the amount forwhich the bill is drawn.

Local - an acceptance to payonly at a particular place.

Qualified as to time - theacceptance of some one or moreof the drawees but not of all.(Sec. 141)

3. Implied AcceptanceIf after 24 hours, the drawee fails toreturn the instrument. He is alsodeemed to have accepted theinstrument when he destroys the same.

FEBTC vs. Gold Palace Jewellery Co, (Nachura,2008):

Q: What is the implication of payment withoutacceptance by a drawee

A: Act No. 2031, or the Negotiable InstrumentsLaw (NIL), explicitly provides that the acceptor,by accepting the instrument, engages that hewill pay it according to the tenor of hisacceptance. This provision applies with equalforce in case the drawee pays a bill withouthaving previously accepted it. His actualpayment of the amount in the check impliesnot only his assent to the order of the drawerand a recognition of his correspondingobligation to pay the aforementioned sum,but also, his clear compliance with thatobligation. Actual payment by the drawee isgreater than his acceptance, which is merely apromise in writing to pay. The payment of acheck includes its acceptance.


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E. Notice of dishonor(Asked in 96)

Notice given by holder or his agent to partyor parties secondarily liable that theinstrument was dishonored by non-acceptance by the drawee of a bill or bynon-payment by the acceptor of a bill or bynon-payment by the maker of a note. (Sec.89)

1. Requisites:a. Given by holder or his agent, or by

any party who may be compelled bythe holder to pay (Sec. 90)

b. Given to secondary party or hisagent (Sec. 97)

c. Given within the periods provided bylaw (Sec. 102)

d. Given at the proper place (Secs. 103and 104)

2. When dispensed with:a. When party to be notified knows

about the dishonor, actually orconstructively (Secs. 114-117)

b. If waived (Sec. 109)c. When after due diligence, it cannot

be given (Sec. 112).

3. To whom givena. Non-acceptance (bill) – to persons

secondarily liable, namely, thedrawer and indorsers as the casemay be.

b. Non-payment (both bill and note) –indorsers.

Note:Notice must be given to personssecondarily liable. Otherwise, suchparties are discharged. Notice may begiven to the party himself or to hisagent.

4. By whom given

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

a. Dishonor by non-payment

Sec. 83. When instrument dishonored by non-payment.The instrument is dishonored by non-paymentwhen:

(a) It is duly presented for payment andpayment is refused or cannot be obtained; or

(b) Presentment is excused and the instrumentis overdue and unpaid.

Effect: There is an immediate right ofrecourse by the holder against personssecondarily liable. However, notice ofdishonor is generally required. (Sec. 84)

b. Dishonor by non-acceptance

Sec. 149. When dishonored by non-acceptance.A bill is dishonored by non-acceptance:(a) When it is duly presented for acceptance

and such an acceptance as is prescribed bythis Act is refused or can not be obtained; or

(b) When presentment for acceptance isexcused and the bill is not accepted.

Effect: Immediate right of recourseagainst the drawer and indorsersaccrues to the holder and nopresentment for payment is necessary.,(Sec. 151)

c. Dishonor in the hands of anAgentAgent can do either of the following: Directly give notice to persons

secondarily liable thereon; or Give notice to his principal. In

such case, he must give noticewithin the time allowed by lawas if he were a holder. (Sec. 94)

d. Waiver of Notice of Dishonor

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

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

a. Notice of dishonor is notrequired to be given to thedrawer in any of the ff. cases:

Drawer and drawee are thesame;

Drawee is a fictitious personor not having the capacity tocontract;


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Drawer is the person towhom the instrument ispresented for payment;

The drawer has no right toexpect or require that thedrawee or acceptor swillhonor the instrument;

Where the drawer hascountermanded payment.(Sec. 114)

b. Notice of dishonor is notrequired to be given to anindorser in the ff. cases:

Drawee is a fictitious personor does not have the capacityto contract, and indorser wasaware of that fact at the timehe indorsed the instrument;

Indorser is the person towhom the instrument ispresented for payment;

Instrument was made oraccepted for hisaccommodation.(Sec. 115)

c. An omission to give notice ofdishonor by non-acceptancedoes not prejudice the rights of aholder in due course subsequentto the omission. (Sec. 117)

F. Protest

1. DefinitionTestimony of some proper person thatthe regular legal steps to fix the liabilityof drawer and indorsers have beentaken

2. When necessary

Sec. 152. In what cases protest necessary.Where a foreign bill appearing on its face to besuch is dishonored by nonacceptance, it mustbe duly protested for nonacceptance, bynonacceptance is dishonored and where such abill which has not previously been dishonored bynonpayment, it must be duly protested fornonpayment. If it is not so protested, the drawerand indorsers are discharged. Where a bill doesnot appear on its face to be a foreign bill, protestthereof in case of dishonor is unnecessary.

3. Forma. Annexed to the bill or must contain

a copy thereof, andb. Must be under the hand and seal of

the notary making it

4. Contentsa. The time and place of presentmentb. The fact that presentment was made

and the manner thereofc. The cause or reason for protesting

the billd. The demand made and the answer

given, if any, or the fact that thedrawee or acceptor could not befound. (Sec. 153).

5. By whom

Sec. 154. Protest, by whom made.Protest may be made by:(a) A notary public; or(b) By any respectable resident of the place

where the bill is dishonored, in the presenceof two or more credible witnesses.

6. Time

Sec. 155. Protest; when to be made.When a bill is protested, such protest must bemade on the day of its dishonor unless delay isexcused as herein provided. When a bill hasbeen duly noted, the protest may besubsequently extended as of the date of thenoting.

7. Placea. At the place where it is dishonored,

EXCEPT bill drawn payable at theplace of business or residence ofperson other than the drawee hasbeen dishonored by non-acceptance

b. It must be protested for non-payment at the place where it isexpressed to be payable

c. No further presentment for paymentto, or demand on, the drawee isnecessary. (Sec. 156)

8. Protest for better security against thedrawer and indorsers — where theacceptor has been adjudged a bankruptor an insolvent or has made anassignment for the benefit of creditorsbefore the bill matures (Sec. 158)

9. Delay excuseda. When caused by circumstances

beyond the control of the holderb. When not imputable to his default,

misconduct, or negligencec. When the cause of delay ceases to

operate, the bill must be noted orprotested with reasonable diligence


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10.When protest dispensed with- by anycircumstance which would dispensewith notice of dishonor (Sec. 159).

11.Waiver of protest - deemed to be awaiver not only of a formal protest butalso of presentment and notice ofdishonor (Sec.111).

G. Acceptance or payment for honor

1. Acceptance for honor Practice of accepting for honor is

obsolete

When bill may be accepted forhonor. — When a BE has been:a. protested for dishonor by non-

acceptance or protested forbetter security and

b. not overdue

Any person not being a partyalready liable may, with theCONSENT of the holder, interveneand accept the bill supra protest forthe honor of any party liable thereonor for the honor of the person forwhose account the bill is drawn.

The acceptance for honor may be forpart only of the sum for which thebill is drawn

Where there has been an acceptancefor honor for one party, there maybe a further acceptance by adifferent person for the honor ofanother party. (Sec. 161)

Referee in case of need — personwhose name is inserted by thedrawer of a bill and any indorser towhom the holder may resort in casebill is dishonored by non-acceptanceor non-payment; option of theholder to resort to the referee (Sec.131)

2. Payment for honor

Sec. 171. Who may make payment for honor.Where a bill has been protested for non-payment, any person may intervene and pay itsupra protest for the honor of any person liablethereon or for the honor of the person for whoseaccount it was drawn.

REVIEWER IN COMMERCIAL LAW Chapter VIII. Discharge

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Chapter VIII. Discharge

A. DEFINITIONB. DISCHARGE OF THE INSTRUMENT

1. BY PAYMENT IN DUE COURSE2. BY INTENTIONAL CANCELLATION3. BY REACQUISITION OF PRINCIPAL

DEBTOR IN HIS OWN RIGHT4. BY RENUNCIATION OF HOLDER5. BY MATERIAL ALTERATION6. BY OTHER ACTS

C. DISCHARGE OF SECONDARY PARTIES

A. Definition

The release of all parties, whether primaryor secondary, from the obligation on theinstrument; renders the instrument non-negotiable

B. Discharge of the Instrument

Sec. 119. Instrument; how discharged.A negotiable instrument is discharged:(a) By payment in due course by or on behalf of

the principal debtor;(b) By payment in due course by the party

accommodated, where the instrument ismade or accepted for his accommodation;

(c) By the intentional cancellation thereof bythe holder;

(d) By any other act which will discharge asimple contract for the payment of money;

(e) When the principal debtor becomes theholder of the instrument at or after maturityin his own right.

1. By payment in due course(Asked in 00)

Sec. 88. What constitutes payment in duecourse.Payment is made in due course when it is madeat or after the maturity of the payment to theholder thereof in good faith and without noticethat his title is defective.

If payment is made before maturityand the note is negotiated to a HDC,the latter may recover on theinstrument.

Payment to one of several payees orindorsees in the alternativedischarges the instrument, butpayment to one of several jointpayees or joint indorsers is not adischarge. The party receivingpayment must have been authorizedby others to receive payment.

By whom made:

a. payment in due course by or onbehalf of principal debtor

b. payment in due course by partyaccommodated where party ismade/ accepted foraccommodation

2. By intentional cancellation

Sec. 123. Cancellation; unintentional; burdenof proof.A cancellation made unintentionally or under amistake or without the authority of the holder, isinoperative but where an instrument or anysignature thereon appears to have beencancelled, the burden of proof lies on the partywho alleges that the cancellation was madeunintentionally or under a mistake or withoutauthority.

3. By reacquisition of principal debtorin his own rightPrincipal debtor becomes holder ofinstrument at or after maturity in hisown right

4. By renunciation of holder

Sec. 122. Renunciation by holderThe holder may expressly renounce his rightsagainst any party to the instrument before, at,or after its maturity. An absolute andunconditional renunciation of his rights againstthe principal debtor made at or after thematurity of the instrument discharges theinstrument. But a renunciation does not affectthe rights of a holder in due course withoutnotice. A renunciation must be in writing unlessthe instrument is delivered up to the personprimarily liable thereon.

5. By material alterationMaterial alteration w/o assent of allparties liable avoids instrument exceptas against party to alteration andsubsequent indorsers (Sec. 124)

6. By other actsAny other act which discharges a simplecontract for payment of money (Art.1231 of the Civil Code), ex.. issuance ofa renewal note—novation


1. Grounds under Section 120

Sec. 120. When persons secondarily liable onthe instrument are discharged.A person secondarily liable on the instrument isdischarged:(a) By any act which discharges the instrument;

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(b) By the intentional cancellation of hissignature by the holder;

(c) By the discharge of a prior party;(d) By a valid tender or payment made by a

prior party;(e) By a release of the principal debtor unless

the holder's right of recourse against theparty secondarily liable is expresslyreserved;

(f) By any agreement binding upon the holderto extend the time of payment or to postponethe holder's right to enforce the instrumentunless made with the assent of the partysecondarily liable or unless the right ofrecourse against such party is expresslyreserved.

2. Other grounds:a. Failure to make due presentment

(Secs. 70, 144)b. Failure to give notice of dishonorc. Certification of check at instance of

holderd. Reacquisition by prior partye. Where instrument negotiated back

to a prior party, such party mayreissue and further negotiate, butnot entitled to enforce payment vs.any intervening party to whom hewas personally liable

f. Where instrument is paid by partysecondarily liable, it’s notdischarged, but the party so paying it is remitted

to his former rights as regard toall prior parties

and he may strike out his ownand all subsequentindorsements, and againnegotiate instrument, except:where it’s payable to order of 3rd

party and has been paid bydrawer or where it’smade/accepted foraccommodation and has beenpaid by party accommodated

REVIEWER IN COMMERCIAL LAW Chapter IX. Checks

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Chapter IX. Checks

A. CERTIFICATION OF CHECKSB. CROSS CHECKSC. TYPES OF CHECKS

Sec. 185. Check, defined.A check is a bill of exchange drawn on a bankpayable on demand. Except as herein otherwiseprovided, the provisions of this Act applicable toa bill of exchange payable on demand apply to acheck.

A. Certification of Checks

1. An agreement whereby the bank againstwhom a check is drawn, undertakes topay it at any future time whenpresented for payment.

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

3. A check must be presented for paymentwithin reasonable time after its issue orthe drawer will be discharged fromliability thereon to the extent of the losscaused by the delay. (Sec. 186)

4. Effectsa. Equivalent to acceptance (Sec. 187)

and is the operative act that makesbanks liable

b. Assignment of the funds of the drawerin the hands of the drawee (Sec. 189)

c. If obtained by the holder, dischargesthe persons secondarily liable thereon(Sec. 188)

5. Refusal of drawee bank to certify: Theholder has no action against the bankbut he has a right of action against thedrawer. The drawer in turn has right ofaction against the bank based on theoriginal contact of deposit betweenthem.

B. Crossed Check(Asked in 91, 94, 95, 96, 04, 05)

1. Definition The NIL is silent with respect to

crossed checks, although the Codeof Commerce makes reference tosuch instruments.

Article 541 of the Code of Commercestates: “The maker or any legalholder of a check shall be entitled toindicate therein that it be paid to acertain banker or institution, whichhe shall do by writing across theface the name of said banker or

institution, or only the words ‛and company.”

Under usual practice, crossing acheck is done by placing two parallellines diagonally on the left topportion of the check (StateInvestment House vs. IAC, 1989).

The crossing may be special whereinbetween the two parallel lines iswritten the name of a bank or abusiness institution, in which casethe drawee should pay only with theintervention of that bank orcompany, or crossing may begeneral wherein between twoparallel diagonal lines are writtenthe words "and Co." or none at all asin the case at bar, in which case thedrawee should not encash the samebut merely accept the same fordeposit (supra).

2. Effects: Bataan Cigar vs. CA (1994)a. That the check may not be encashed;

it may only be deposited with thebank;

b. That the check may be negotiated onlyonce to a person who has an accountwith the bank; and

c. That it serves as a warning to a holderthat the check has been issued for adefinite purpose.

C. Types of checks

1. Cashier’s CheckOne drawn by the cashier of a bank, inthe name of the bank against the bankitself payable to a third person. It is aprimary obligation of the issuing bankand accepted in advance upon issuance(Tan vs. CA 1994).

2. Manager’s CheckA check drawn by the manager of a bankin the name of the bank itself payable to athird person. It is similar to the cashier’scheck as to the effect and use.

3. Memorandum CheckA check given by a borrower to a lenderfor the amount of a short loan, with theunderstanding that it is not to bepresented at the bank, but will beredeemed by the maker himself whenthe loan falls due and whichunderstanding is evidenced by writingthe word “memorandum”, “memo” or“mem” on the check.

4. Certified CheckAn agreement whereby the bank againstwhom a check is drawn undertakes topay it at any future time whenpresented for payment. (Sec. 187)

- end of Bills & Notes -


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INSURANCE LAW

CHAPTER I. INTRODUCTIONI. DefinitionsII. Applicable laws

202202202

CHAPTER II. CONTRACT OFINSURANCEI. ElementsII. CharacteristicsIII. Kinds of Insurance ContractsIV. PerfectionV. Premium PaymentsVI. Risks Insured AgainstVII.Construction

203203203204204205206206

CHAPTER III. PARTIES TO THECONTRACTI. InsurerII. InsuredIII. BeneficiaryIV. Other parties

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CHAPTER IV. INSURABLE INTERESTI. Insurable InterestII. Insurable Interest in LifeIII. Insurable Interest in PropertyIV. Transfer of PolicyV. Transfer of InterestVI. Double Insurance, Over Insurance

and ReinsuranceVII. Multiple or Several Interest on the

Same Property

212212212213214214

215

216

CHAPTER V. POLICYI. Insurance Contract vs. Insurance

PolicyII. Forms and ContentsIII. Rider and EndorsementsIV. Cover NotesV. Life vs. Non-Life Insurance PoliciesVI. Open, Valued and Running Policies

217

217217217217218218

CHAPTER VI. RESCISSION OFINSURANCE CONTRACTSI. ConcealmentII. MisrepresentationIII. WarrantiesIV. ConditionsV. Right of rescissionVI. Cancellation of non-life insurance

policyVII. Incontestability Clause

219219220221222222

222223

CHAPTER VII. RISKS ANDCOVERAGESI. Risks in Life InsuranceII. Risks in Fire InsuranceIII. Risks in Casualty or Accident

InsuranceIV. Risks in Compulsory Motor Vehicle

Liability Insurance

224224224

224

225

CHAPTER VIII. SPECIAL KINDS OFINSURANCE CONTRACTSI. Marine InsuranceII. Fire insuranceIII. Casualty or accidental insuranceIV. Motor Vehicle Compulsory

Insurance

226226231232

233

CHAPTER IX. CLAIMS,SETTLEMENT, AND SUBROGATIONI. Liability for LossII. Requisites for Recovery from

InsuranceIII. Notice and Proof of LossIV. Claims SettlementV. Prescription of ActionVI. Time of PaymentVII. SubrogationVIII. Insurance Commission

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Insurance LawFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD



COMMERCIAL LAW

Krizelle Marie PoblacionMaria Christina Ortua

SUBJECT EDITORS

INSURANCE LAW

Francis Ray-an BaybayLEAD WRITER

Micha AriasFrancesa Cordon

Cha MendozaLudee Pulido

WRITERS

LECTURES

Edel CruzHEAD



--------Leo Zulueta


Chapter I. Introduction

I. DEFINITIONSA. CONTRACT OF INSURANCEB. DOING OR TRANSACTING AN

INSURANCE BUSINESSII. APPLICABLE LAWS

I. Definitions

A. Contract of Insurance

Insurance An agreement whereby one undertakes

for a consideration to indemnify anotheragainst loss, damage or liability arisingfrom an unknown or contingent event(Sec. 2, par.2)

White Gold Marine Services vs. Pioneer(2005) An insurance contract is a contract of

indemnity Wherein one undertakes for a

consideration To indemnify another against loss,

damage, or liability Arising from an unknown or contingent

event.

Regulation by the state through a license orcertification of authority is necessary sincea contract of insurance involves publicinterest.

B. Doing or Transacting AnInsurance Business

General Rule An insurance business consists in

undertaking, for a consideration, toindemnify another against loss, damage

or liability arising from an unknown orcontingent event.

Supplementary Rule Although the business is not formally

designated as one of insurance and noprofit is derived or no separate or directconsideration is received,

It is deemed to be doing an insurancebusiness,

If it undertakes any of the followingcircumstances:1. Making or proposing to make, as

insurer, any insurance contract2. Making or proposing to make, as

surety, any contract of suretyship as avocation not as a mere incident to anyother legitimate business of a surety

3. Doing any insurance business,including a reinsurance business

4. Doing or proposing to do any businessin substance equivalent to any of theabove (Sec. 2, par. 4).

II. Applicable Laws

1. Insurance Code of 1978(PD 1460, as amended)

2. Civil Codea. Article 739 and 2012 (void donations)b. Article 2011 (applicability of the Civil

Code)c. Article 2021-2027 (life annuity

contracts)d. Article 2186 (compulsory motor

vehicle liability insurance)e. Article 2207 (right of subrogation).

3. Special Lawsa. PD1146(Revised Government Service

Insurance Act)b. RA 1161 (Social Security Act of 1954)c. RA 656 (Property Insurance Law)

REVIEWER IN COMMERCIAL LAW Chapter II. Contract of Insurance

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I. ELEMENTSA. INSURABLE INTERESTB. RISK OF LOSSC. ASSUMPTION OF RISKD. PAYMENT OF PREMIUME. SCHEME TO DISTRIBUTE LOSSES

II. CHARACTERISTICSA. CONTRACT OF ADHESIONB. ALEATORYC. CONTRACT OF INDEMNITYD. RISK DISTRIBUTING DEVICEE. UBERRIMAE FIDES CONTRACT

III. KINDS OF INSURANCE CONTRACTSA. LIFE INSURANCEB. NON-LIFE INSURANCEC. CONTRACTS OF BONDING OR

SURETYSHIPIV. PERFECTIONV. PREMIUM PAYMENTS

A. PREMIUMB. VALIDITY OF CONTRACT UPON

PAYMENTC. AUTHORITY TO RECEIVE PREMIUMD. EFFECT OF PAYMENT BY POST-DATED

CHECKE. RETURN OF PREMIUMSF. PREMIUMS IN SURETYSHIP

CONTRACTSVI. RISKS INSURED AGAINST

VII. CONSTRUCTION

I. Elements (IRAPS)

A. Insurable Interest The interest of the insured in a

thing or a life Capable of pecuniary estimation

B. Risk of Loss The happening of designated events, Either unknown or contingent, Past or future, Will subject such interest to some

kind of loss, Whether in the form of injury,

damage, or liabilityC. Assumption of Risk

The insurer promises to pay orindemnify such loss

In a fixed or ascertainable amountD. Payment of Premium

The premium is a ratableconsideration

Paid by the insured to a generalinsurance fund

For the insurer’s assumption of riskE. Scheme to Distribute the Losses

This assumption of risk is part of ageneral scheme to distribute the loss

Among a large number of persons Exposed to similar risks.

II. Characteristics

A. Contract of Adhesion (Fine PrintRule) The contract is presented to the

insured already in its printed formby which he either “takes it or leavesit.”

Ambiguity in the insurance contractshall be interpreted liberally in favorof the insured and strictly againstthe insurer.

B. Aleatory The obligation of the insurer to pay

depends on the happening of anevent which is uncertain, or thoughcertain is to occur at anindeterminate time (Art. 2010 CC).

However, the insurance contract isin a sense commutative since thepremium paid by the insured isdeemed the equivalent of theprotection given by the insurer(SUNDIANG AND AQUINO,Reviewer on Commercial Law).

C. Contract of Indemnity The insured who has insurable

interest over the property is onlyentitled to recover the amount ofactual loss sustained

And the burden is upon him toestablish the amount of such loss.

1. Applies only to property insuranceexcept when the creditor insures thelife of his debtor.

2. Life insurance is not a contract ofindemnity.

3. Insurance contracts are notwagering contracts (Sec. 4).

D. A Risk Distributing Device By paying a pre-determined amount

into a general fund out of whichpayment will be made for aneconomic loss of a defined type,

Each member contributes to a smalldegree toward compensation forlosses suffered by any member ofthe group.

E. Uberrimae Fides Contract(Principle of Utmost Good Faith) Each party is required to disclose

conditions affecting the risk ofwhich he is aware, or material factwhich the applicant knows andthose which he ought to know.

Violation of this duty gives theaggrieved party the right to rescindthe contract.


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WIII.Kinds of Insurance Contracts

A. Life Insurance

1. Individual Life Insurance on human lives and

insurance appertaining thereto orconnected therewith (Sec. 179)

2. Group Life A blanket policy covering a number

of individuals who are usually acohesive group.

The policy need not be in printedform and may be typewritten, butthe law prescribes the contents ofsuch policy (Secs. 50 and 228).

3. Industrial Life A form of life insurance under which

a. The premiums are payable eithermonthly or oftener;

b. Face amount of insuranceprovided in any policy is notmore than 500 times that of thecurrent statutory minimum dailywage in the City of Manila; and

c. The words "industrial policy" areprinted upon the policy (Sec.229).

B. Non-Life Insurance

Includes policies covering risks to whichproperty may be exposed, as well asthose which cover the risk of liability tothird persons.

It covers a specified period of time (notmore than 1 year) and has a definiteperiod of coverage.

1. Marine (Secs. 99–166)2. Fire (Secs. 167–173)

Insurance against loss by fire,lightning, windstorm, tornado orearthquake and other allied risks,

when such risks are covered byextension to fire insurance policiesor under separate policies (Sec. 167).

3. Casualty / Liability (Sec. 174) Insurance covering loss or liability

arising from accident or mishap, Not falling exclusively within the

scope of other types of insurance.

C. Contracts of Bonding orSuretyship (Secs. 175–178)

An agreement whereby a suretyguarantees the performance by theobligor of an obligation or undertakingin favor of the obligee.

It shall be deemed to be an insurancecontract if made by a surety who orwhich, as such, is doing an insurancebusiness (Secs. 175 and 2, par.3).

IV.Perfection of Contract ofInsurance

The insurance contract is consensualand is therefore perfected the momentthere is a meeting of minds with respectto the object and the cause orconsideration.

What is being followed in insurancecontracts is what is known as the“cognition theory.”

Enriquez vs. Sun Life Assurance Co. of Canada(1920): Herrer applied for insurance and paidthe premium, however, he died before hereceived the notice of acceptance on hisapplication sent by Sun Life from its Montrealhead office.

Held: The insurance contract cannot beperfected without the notice of acceptancecoming to the knowledge of the applicant.

Under the CC, consent is shown by theconcurrence of offer and acceptance.

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

Great Pacific Life Assurance Corp. vs. CA (1999):

Note that in insurance contracts, the insured isthe one making the offer by submitting anapplication to the insurer and the latter acceptsthe offer by approving the application.

Thus, mere submission of the applicationwithout the corresponding approval of thepolicy does not result in the perfection of thecontract of insurance.

NOTE:Offer – when the insured submits anapplication to the insurerAcceptance – when the insurer approvesthe applicationEffectivity – upon payment of premium,provided there has been an approval of theapplication.


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WV. Premium Payments

A. Premium – the agreed price forassuming and carrying the risk, that is,the consideration paid an insurer forundertaking to indemnify the insuredagainst the specified peril.

B. Validity of Contract Upon PaymentGeneral Rule NO insurance policy issued or

renewal is valid and binding untilactual payment of the premium.

Any agreement to the contrary isvoid (Sec. 77).

Exceptions1. In case of life and industrial life

whenever the grace period provisionapplies (Sec. 77).

2. Where there is an acknowledgmentin the contract or policy ofinsurance that the premium hasalready been paid (Sec. 78)

3. Where there is an agreement togrant the insured credit term for thepayment of the premium despite fullawareness of Sec. 77,

4. Where there is an agreementallowing the insured to paypremium in installment and partialpayment has been made at the timeof the loss (See Makati Tuscany vs.CA)

5. Where the parties are barred byestoppels (See UCPB vs, Masagana)

Makati Tuscany v CA (1992):The policies are valid even if the premiumsdue are paid in installments because therecords clearly show that the two partiesintended the policies to be binding andeffective notwithstanding the staggeredpayment of the premiums.

The acceptance of the installment payments overthe period of 3 years speaks loudly of theintention of insurer to honor the policies itissued to Makati Tuscany.

Sec 77 merely prohibits the parties fromstipulating that the policy is valid even ifpremiums were not paid, but it does notexpressly prohibit an agreement granting creditextensions.Sec. 78 also allows the insurer to waive thecondition of full payment by acknowledging inthe policy that there has been receipt ofpremium despite the fact that premium isactually unpaid.

If the Code allows a waiver when no actualpayment has been made, then a waiver should

also be allowed in this case where the insurerhas already acknowledged receipt of partialpayment.

UCPB Gen. Ins. v Masagana Telemart (1999):Sec 77 of the Insurance Code cannot be strictlyapplied.

Exceptions to Sec 77 are:a.) In case of a life or industrial life policy

whenever the grace period appliesb.) Sec 78: An acknowledgment in a policy or

contract of insurance of the receipt ofpremium is conclusive evidence of itspayment, so far as to make the policybinding, notwithstanding any stipulationtherein that it shall not be binding untilpremium is actually paid.

c.) If the parties have agreed to the payment ininstallments of the premium and partialpayment has been made at the time of theloss.

d.) The insurer may grant credit extension forthe payment of the premium

e.) It would be unjust and inequitable ifrecovery on the policy would not bepermitted against UCPB, which consistentlygranted the 60-90 day credit term for thepayment of the premiums despite its fullawareness of Sec. 77.Estoppel bars it from taking refuge underthe action, since Masagana relied on goodfaith on such a practice.

C. Authority of agent to receivepremium Where an insurer authorizes an

insurance agent or broker to delivera policy to the insured,

it is deemed to have authorized saidagent to receive the premium in itsbehalf.

The insurer is also bound by itsagent’s acknowledgment of receipt ofpayment of premium (AmericanHome Assurance Co. vs. Chua,1999).

D. Effect of payment by postdatedcheck The payment of premium by a

postdated check at a statedmaturity subsequent to the loss isinsufficient to put the insuranceinto effect.

Payment however by a checkbearing a date prior to the loss,assuming availability of funds,would be sufficient even if it remainsunencashed at the time of the loss.

The subsequent effects ofencashment would retroact to thedate of the instrument and its


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Wacceptance by the creditor (VITUG,Pandect on Commercial Law).

E. Return of Premiums1. If the thing insured was never

exposed to the risks insured against(Sec. 79)

2. Contract is voidable due to the fraudor misrepresentation of insurer

3. Insurer never incurred liability (Sec.81)

4. When the insurance is for a definiteperiod and the insured surrendershis policy before the terminationsthereof

5. Contract is voidable because of theexistence of facts of which theinsured was ignorant without hisfault

6. When there is over-insurance (Sec.82)

7. When rescission is granted due tothe insurer’s breach of contract

F. Premiums in Suretyship Contracts—Payment of premiums is also necessaryto make suretyship contracts binding.

Philippine Pryce Assurance Corp. vs. CA (1994):Generally, premium is also necessary in orderfor the contract of suretyship or bond to bebinding.

However, where the obligee has accepted thebond, it is binding even if the premium has notbeen paid

subject to the right of the insurer to recover thepremium from its principal.

VI.Risks Insured Against (Secs 3-5)

Any contingent or unknown event,whether past or future,

Which may damnify a person having aninsurable interest or creates a liabilityagainst him (Sec.3).

General Rule A future event is the only event that can

be covered by an insurance contract.Exception A past event may be covered by a

marine insurance – if the loss of thevessel in the past could not have beenknown by ordinary means ofcommunication (SUNDIANG ANDAQUINO).

NOTE: Insurance for or against the drawing of

any lottery, or for or against any chance

or ticket in a lottery drawing a price isNOT allowed (Sec.4).

It may result in profit which is not truein insurance which only seek toindemnify against losses.

VII. Construction of Insurance

The ambiguous terms (and exceptionsor conditions) are to be construedstrictly against the insurer, and liberallyin favor of the insured.

However, if the terms are clear, there isno room for interpretation (Calanoc vs.Court of Appeals, 1955).

Qua Chee Gan vs. Law Union (1955):When the policy contains a condition whichrenders it voidable at its inception, and thisresult is known to the insurer,

it will be presumed to have intended to waivethe conditions and to execute a bindingcontract,

rather than to have deceived the insured intothinking he is insured when in fact he is not,and to have taken his money withoutconsideration.

The insurance company is liable on theinsurance contract.

Geagonia vs. CA (1995):It is a cardinal principle of law thatforfeitures are not favored

and that any construction which would resultin the forfeiture of the policy benefits for theperson claiming, will be avoided,

if it is possible to construe the policy in amanner which would permit recovery, as, forexample, by finding a waiver for suchforfeiture.

Provisions, conditions or exceptions in policieswhich tend to work a forfeiture of insurancepolicies should be construed most strictlyagainst those for whose benefits they areinserted, and most favorably toward thoseagainst whom they are intended to operate.

Gulf Resorts vs Philippine Charter InsuranceCorporation (2005):When there is an apparent change of thewording of an insurance contract

but no corresponding change in the amountof premium paid,

it will be interpreted to mean that there wasNO intended change at all.

An assumption of additional risk is presumed tocause a commensurate additional premiumbecause the premium, not the mere wordingof the policy, is a more accurate indication ofsuch an assumption of additional risk.

REVIEWER IN COMMERCIAL LAW Chapter III. Parties to the Contract

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WChapter III. Parties to the Contract

I. INSURERA. GENERAL CONSIDERATIONSB. INSURANCE CORPORATIONSC. DOMESTIC VS. FOREIGN INSURANCE

CORPORATIONSII. INSURED

A. WHO MAY BE INSUREDB. RIGHTS OF INSURED OVER LIFE

INSURANCE POLICYIII. BENEFICIARY

A. GENERAL CONSIDERATIONSB. KINDS OF BENEFICIARYC. PERSONS WHO CANNOT BE NAMED

BENEFICIARYD. RULES IN DESIGNATION OF

BENEFICIARYE. RIGHT TO CHANGE BENEFICIARYF. RECOVERY OF PROCEEDS

IV. OTHER PARTIESA. ASSIGNEEB. AGENT/TRUSTEEC. PARTNER/CO-OWNERD. MORTGAGOR/MORTGAGEE

Sec. 51. The policy must specify the partiesbetween whom the contract is made.

I. Insurer

A. General Considerations

InsurerParty who assumes or accepts the risk ofloss and undertakes for a consideration toindemnify the insured or to pay him acertain sum on the happening of aspecified contingency or event (Sec. 184)

Who May Be Insurers?Individuals, partnerships, associations, orcorporation or even GOCC’s, who are dulyauthorized by the Insurance Commissionto engage in insurance business (Sec. 6,184 - 187)

Who May Not Be Insurers?Banking institutions are not allowed toengage in insurance business (GeneralBanking Act 173)

B. Insurance Corporations (Sec. 185)

Corporations formed or organized to saveany person or persons or othercorporations harmless from loss, damage,or liability

Arising from any unknown or future orcontingent event,

Or to indemnify or to compensate anyperson or persons or other corporationsfor any such loss, damage, or liability,

Or to guarantee the performance of orcompliance with contractual obligations orthe payment of debts of others:1. Are regulated by the State2. Must have a certificate of authority to

operate issued by the InsuranceCommissioner (Sec. 187).

3. Must possess sufficient capital andassets (Sec. 186).

C. Domestic vs. Foreign InsuranceCorporations (Sec. 184)

Domestic InsuranceCorporation

Foreign InsuranceCorporation

“Domestic company”shall includecompanies formed,organized or existingunder the laws of thePhilippines.

“Foreign company” whenused without limitationshall include companiesformed, organized, orexisting under any lawsother than those in thePhilippines.

Requirements for Foreign InsuranceCorporations1. Appointment of a resident of the Philippines

as a general agent on whom any notice orproof of loss may be served and on whomsummons and other processes may beserved.

2. Must possess paid-up unimpaired assets orcapital and reserve not less than thatrequired of domestic corporations.

3. Must deposit for the benefit and security ofpolicy holders, securities satisfactory to theCommission.

4. Its investments should not exceed 20% ofthe net worth of foreign corporation or 20%of the capital of the registered enterprise.

II. Insured

Party in whose favor the contract is operativeand who is indemnified against loss, or is toreceive a certain sum upon the happening of aspecified contingency or event; BUT theproceeds need not go to him but to adesignated beneficiary or someone to whomthe insured assigns the proceeds to.

A. Who may be insured(Asked in 2002)

Anyone, with capacity to enter into a contract,with an insurable interest and must not be apublic enemy (Sec. 7).NOTE:1. Public Enemy


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W A citizen or subject of a nation at war

with the Philippines and does notinclude robbers, thieves, andcriminals.

A private corporation, if controlled byenemy aliens regardless of place ofincorporation may be an enemycorporation.

Filipinas Cia de Seguros v. Christen Huenefeldand Co. (1951):Property insurance entered into before the warautomatically loses its binding effect themoment the insurer becomes a public enemy.

2. Minor (Sec. 3 par.3) The exception allowing a minor to

enter into an insurance contract is nolonger controlling since under RA6809 a person is of legal age at 18years and may enter into any kind ofinsurance contract.

3. Insurance by a married woman A married woman may take out an

insurance on her life or that of herchildren without the consent of herhusband (Sec.3 par.2), or that of herhusband, having an insurable interestin the latter (Sec.10)

B. Rights of Insured over lifeinsurance policy

1. Right to assign/change beneficiary (Sec.11 and 56)

2. Right to borrow3. Right to dividends

III.Beneficiary(Asked in 97,98,01,05)

A. General Considerations

1. Person designated to receive the benefitsor the proceeds of the policy when riskattaches.

2. Cestui que viePerson on whose life the insurance iswritten; must be a risk acceptable to theinsurer.

Illustration. A husband takes out a policy on hiswife’s life, proceeds payable to their son. Husband –insured, wife – cestui que vie, and son – beneficiary.

Proceeds of a life insurance policy becomethe exclusive property of the beneficiaryupon death of the insured.

B. Kinds of Beneficiary

1. Insured himself One who bought the policy and paid

the premiums; An immediate party to the contract

usually called the assured (creditorinsures debtor’s life).

2. Third person who paid a consideration When the insured took up the policy

for the benefit of the creditor or tosecure some other obligation;

Beneficiary is not a party to thecontract.

3. Third person through mere bounty ofinsured When no consideration is paid yet the

third party to the contract or the estateof the insured is made beneficiary

C. Persons who CANNOT be namedBeneficiary—

Any person who is forbidden fromreceiving any donation under Art. 739(NCC) cannot be named beneficiary of alife insurance policy

By the person who cannot make anydonation to him (Art. 2012 CC), to wit:

1. Those who are guilty of adultery orconcubinage with the insured at the timeof designation;

2. Those who were found guilty with theinsured of the same criminal offensecommitted in consideration of thedesignation; criminal conviction necessary

3. A public officer or his wife, descendantsand ascendants designated by reason ofhis office (Art. 739, CC)

NOTE:Only the designation of said persons is void butthe policy remains binding, proceeds will inureto the estate of the insured.

D. Rules in Designation of Beneficiary

1. When one insures his own life, he maydesignate any person as the beneficiary,whether or not the beneficiary has aninsurable interest in the life of the insured,provided that he is not disqualified by law(ie public enemy, and persons in Art. 793)


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W2. If a person will insure the life of another

payable to himself as beneficiary, he musthave an insurable interest on that other’slife (Sec.10)

3. In property insurance, the beneficiary musthave an insurable interest in such property,which must exist not only at the timethe policy takes effect but also when theloss occurs (Secs. 13 & 18)

4. The designation is revocable unless theright to revoke is expressly waived in thepolicy (Sec.11)

5. If the insured or beneficiary is a minor,and the amount involved does notexceed P50,000.00, the father, in theabsence or incapacity, the mother mayexercise the minor’s rights under thepolicy, without the need of a courtauthority or bond.

E. Right to Change Beneficiary

1. General Rulea. The insured shall have the personal

right to change the designatedbeneficiary without the consent of thelatter.

b. Beneficiary acquires no vested right butonly an expectancy of receivingproceeds under the insurance.

c. Such right cannot be exercised by therepresentatives or assignees of theinsured upon his death.

ExceptionIf right to change the beneficiary isEXPRESSLY WAIVED in the policy.

Exception to the ExceptionEVEN if the designation of beneficiary isirrevocable,under Articles 43, 40, 50 and 64 of theFamily Code, the innocent spouse mayrevoke such designation of the otherspouse who acted in bad faith.

2. Effects of Irrevocable Designation ofBeneficiary: (B-ADATAC)a. Beneficiary acquires an absolute vested

interest to all benefits under the policy.b. Insured cannot add a new beneficiary

because such would diminish thebenefits expected by the originalbeneficiary.

c. Insured cannot assign the policybecause such would be tantamount toan implied waiver of the right to revoke.

d. Insured cannot destroy the policybecause the beneficiary may continuethe policy by himself paying thepremiums due. (Art. 1236 CC)

e. Insured cannot take the cashsurrender value of the policy

f. Insured cannot allow his creditors toattach or execute on the policy

g. Insured cannot change the irrevocabledesignation to revocable

3. When the beneficiary dies before theinsured:a. If such beneficiary is irrevocable, and

hence has a vested interest in thepolicy, his/her legal representativesor his/her estate are entitled to theproceeds of the insurance, unless theproceeds were made payable to thebeneficiary only “if living”.

b. If the beneficiary is revocable, andtherefore has no vested interest in thepolicy at the time of his death, hisestate or legal representatives derive nointerest from or through him, but theproceeds passes to the estate of theinsured.

c. In case of an insurance policy taken outby an original owner on the life orhealth of a minor, all rights, title andinterest in the policy shall automaticallyvest in the minor upon the death of theoriginal owner, unless otherwiseprovided for in the policy (Sec.3, par.5).

NOTE— The interest of a beneficiary in a life

insurance policy shall be forfeited whenthe beneficiary is the principalaccomplice or accessory in willfullybringing about the death of the insuredin which event, the nearest relative ofthe insured shall receive the proceeds ofsaid insurance if not otherwisedisqualified. (Sec. 12)

The right to receive the proceeds of lifeinsurance policies shall follow the orderof intestate succession in the CivilCode in default of any specificdesignation in the policy.

F. Recovery of the Proceeds(Asked in 90)

General Rule Only the person designated in the policy

as the insured or the beneficiary shall


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Wbe entitled to recover the proceeds ofthe policy.

Exceptions1. A third person may recover from the

policy as against the insured if therehas been a prior contract of express orimplied trust between the insured andthe third person.

2. A third person may recover from thepolicy as against the insurer only ifsuch person has been specifically giventhe right of recovery in the insurancepolicy.

Vda. de Consuegra vs. GSIS (1971):Life Insurance and retirement insurance areseparate and distinct funds.

Life Insurance is paid to whoever is named thebeneficiary and may not necessarily be the heir ofthe insured.

Retirement benefits on the other hand, areprimarily intended for the benefit of the employee –to provide for his old age, incapacity, etc.

If the employee reaches the age of retirement, hegets the benefits even to the exclusion of thebeneficiary named in the policy.

The beneficiary of the retirement insurance canonly claim such proceeds if the employee diesbefore retirement.

If there is no beneficiary designated in the policy,benefits will accrue to the estate, hence Diaz is alsoentitled to the retirement benefits.

IV.Other Parties

A. Assignee

1. General Rule If the thing insured is assigned to

another, the policy is deemedsuspended until the assignee alsobecomes the owner of the policy.

The assignor cannot recover on thepolicy after the transfer since he hasalready lost insurable interest over thething.

Exceptions The general rule on suspension of

policy is not applicable in the followingcases:

a. In life, health and accident insurance(Sec. 20)

b. A change of interest in the thinginsured after an injury occursresulting in a loss (Sec. 21);

c. A change of interest in one or moreof several things, separately insuredby one policy (Sec. 22);

d. A change of interest by will orsuccession on the death of the insured(Sec. 23);

e. A transfer of interest by one of severalpersons, joint owners or owners incommon, jointly insured, to the others(Sec.24);

f. When a policy will inure to thebenefit of the one who may becomethe new owner of the interestinsured during the continuance of therisk (Sec. 57); and

g. When there is an express prohibitionagainst alienation in the policy, inwhich case alienation will cause thecontract to be avoided, not suspended(Art. 1306, Sec. 24, CC)

2. Agent or trustee If an agent or trustee takes out an

insurance policy for the benefit of hisprincipal or beneficiary,

he shall state that the latter is the realparty in interest by designating himselfas an agent or trustee in the insurancepolicy itself.

He can also signify his designation bysome other general words in the policy.

Valenzuela vs. CA (1990):The general rule that the principal reserves theright to terminate the agent-principalrelationship at its will admits of an exception:

when the agency has been given not only for theinterests of the principal but of 3rd persons or forthe mutual interest of agent and principal.

Also, an insurance agent can’t be held liable forall uncollected premiums under his accountbecause the remedy for non-payment ofpremiums is the termination of anyinsurance policy.

3. Partner or Co-owner Insurable interest in the property of a

partnership exists in both thepartnership and the partners and apartner has an insurable interest in thefirm property which will support thepolicy taken out thereon for his ownbenefit.

But a partner who takes out the policyin his own name limits the coverage tohis individual share unless the termsclearly show the policy was meant tocover all the shares.


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W4. Mortgagor/Mortgagee General Rule

When a mortgagor takes out an insurancepolicy on his own name but stipulates thatthe proceeds shall be payable to themortgagee, or assigns the said policy to themortgagee,the insurance shall be deemed to be uponthe insurable interest of the mortgagor.

Rules Applicablea. Any act of the mortgagor prior to the

loss, which would otherwise avoid theinsurance,shall have the same effect even if theproperty insured is in the hands of themortgagee.

b. Any act which would have to beperformed by the mortgagor may beperformed by the mortgagee, with thesame effect as if it were performed bythe former.

c. If an insurer assents to the transfer ofan insurance from a mortgagor to amortgagee, and, at the time of hisassent, imposes further obligation onthe assignee, making a new contractwith him, the act of the mortgagorcannot affect the rights of saidassignee.

Supplementary Rulesa. On the insurable interest of

mortgagor and mortgagee: Separate insurable interests – each

has his own insurable interest in themortgaged property which is keptseparate from each other.The benefits of such belong to theinsured alone and if the two insurethe same property or take out a policycovering their respective interests,this is not double insurance.

Extent of insurable interest ofmortgagor – The owner-mortgagorhas an interest to the extent of theproperty’s valueeven if the mortgage debt equals itsince the loss or destruction of theinsured property will not extinguishhis debt.

Extent of insurable interest ofmortgagee – He or his assignee hasan interest to the extent of the debtsecured, the property used assecurity.His interest is prima facie the valuemortgaged, only as to the amountowed, not exceeding the value of theproperty.

Extent of amount of recovery Mortgagor - only up to full

amount of loss

Mortgagee - up to theamount of credit at the time ofthe loss or the value of theproperty

b. Insurance by mortgagee of hisown interest Right in case of loss – the

mortgagee is entitled to proceeds ifloss happens before payment ofmortgage.

Subrogation of insurer to theright of the mortgagee –mortgagee’s claim passes bysubrogation to the insurer to theextent of the insurance moneypaid.

Change of creditor - Payment bythe insurer to the mortgagee dueto loss does not extinguish theprincipal obligation but onlychanges the creditor. Themortgagee CANNOT claim both theinsurance and the debt.

c. Insurance taken out by mortgagorfor his own benefit as owner –proceeds won’t go to the mortgageewho has no greater right thanunsecured creditors.

d. Insurance taken out by mortgagorfor the mortgagee’s benefit – lossis payable to the mortgagee (usualpractice), to the extent of the credit.

Upon payment of the proceeds tothe extent of the credit, the debt isextinguished.

The mortgagee can be made thebeneficial payee by: Becoming the assignee of the

policy with insurer’s consent; Becoming the mere pledge without

such consent; A rider (Sec. 50), making the

policy payable to the Mortgagee“as his interest may appear”, maybe attached;

A “standard mortgage clause”containing a collateralindependent contract between thetwo parties may be attached; or

The policy, though by its termspayable to the mortgagor, mayhave been procured by amortgagor under a contract dutyto insure for the mortgagee’sbenefit, where the latter acquiresan equitable line upon theproceeds.

REVIEWER IN COMMERCIAL LAW Chapter IV. Insurable Interest

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WChapter IV. Insurable Interest(Asked in 91,94,97,99,00,02)

I. INSURABLE INTERESTII. INSURABLE INTEREST IN LIFE

A. WHO HAS INSURABLE INTERESTOVER WHOSE LIFE

B. TIME OF EXISTENCE OF INSURABLEINTEREST

III. INSURABLE INTEREST IN PROPERTYA. FORMS OF INSURABLE INTERESTB. NATURE OF INSURABLE INTERESTC. INSURABLE INTEREST OF SPECIFIC

PERSONSD. MEASURE OF INSURABLE INTEREST

IN PROPERTYE. TIME OF EXISTENCEF. DISTINCTIONS BETWEEN INSURABLE

INTEREST IN PROPERTY ANDINSURABLE INTEREST IN PROPERTY

IV. TRANSFER OF POLICYA. LIFE INSURANCEB. PROPERTY INSURANCEC. CASUALTY INSURANCE

V. TRANSFER OF INTERESTVI. DOUBLE INSURANCE, OVER INSURANCE

AND REINSURANCEVII. MULTIPLE OR SEVERAL INTEREST ON THE

SAME PROPERTYA. OPEN MORTGAGE OR LOSS PAYABLE

MORTGAGE CLAUSEB. UNION MORTGAGE OR STANDARD

MORTGAGE CLAUSEC. CONTRACTS OF BONDING OR

SURETYSHIP

I. Insurable Interest

Interest which the law requires policyowner to have in the person or thinginsured, the absence of which rendersthe contract void.

A person is said to have an insurableinterest in the subject matter insuredwhere he has a relation or connectionwith, or concern in it that he will derivepecuniary benefit or advantage from itspreservation and will suffer pecuniaryloss or damage from its destruction,termination, or injury by the happeningof the event insured against.

Rationale for requiring it:1. To avoid constituting insurance as a

wagering contract, because theinsured has an interest in thepreservation or protection of thesubject of the insured.

2. To avoid a moral hazard, wherein theinsured will have nothing to lose buteverything to gain with thehappening of the event insuredagainst.

3. Limits the amount that can berecovered in indemnity insurance.

II. Insurable Interest in Life

A. Who has insurable interest overwhose life?

Sec. 10 Every person has an insurable interestin the life and health:(a) Of himself, of his spouse and of his children;(b) Of any person on whom he depends wholly or

in part for education or support, or in whomhe has a pecuniary interest;

(c) Of any person under a legal obligation to himfor the payment of money, or respectingproperty or services, of which death orillness might delay or prevent theperformance; and

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

1. Interest in one’s own life— Each has unlimited interest in his

own life, whether the insurance isfor the benefit of himself or another.the beneficiary designated need NOThave any interest in the life of theinsured.

2. Interest in life of anothera. General Rule

The insured must havepecuniary interest in the life ofanother.

Such interest exists wheneverthe insured has a responsibleexpectation of deriving benefitfrom the continuation of the lifeof the other person or ofsuffering detriment through itstermination.

Exception In par. (a) (spouse and children),

mere relationship is sufficient.b. CREDITOR may take out insurance

on the life of his debtor. BUT hisinsurable interest is only up to theamount of the debt.

c. When the OWNER of the policyinsures the life of another (CESTUIQUE VIE) and designates a thirdparty as BENEFICIARY, BOTH theowner and beneficiary must have aninsurable interest in the life of thecestui que vie.

d. ASSIGNEE is not required to haveinsurable interest in the life of theinsured, for to require such interestin him is to diminish the investmentvalue of the contract to the owner.Note however that assignment isdifferent from a change in thedesignated beneficiary.


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We. When the beneficiary is the

PRINCIPAL, ACCOMPLICE, orACCESSORY in willfully bringingabout the death of the insured =Interest of beneficiary in lifeinsurance policy is FORFEITED(Sec. 12).

B. Time of existence of insurableinterest

General Rule Insurable interest is needed only at

inception (Sec. 19).

Exceptions1. Creditor’s insurance taken on the life of

the debtor - Insurable interestdisappears, once the debt has beenpaid. At this point, the creditor/insuredcan no longer recover on the policy.

2. Company’s insurance taken on the lifeof an employee - insurable interestdisappears once the employee leaves thecompany, in which case, the companycan no longer recover on the policy.

III.Insurable Interest in Property

Sec. 13. Every interest in property, whetherreal or personal, or any relation thereto, orliability in respect thereof, of such nature that acontemplated peril might directly damnify theinsured, is an insurable interest.

A. Forms of Insurable Interest

1. INTEREST in the property itselfEx: Ownership of or a lien on property.

2. RELATION to such propertyEx: Interest of a commission agent ongoods he is selling.

3. LIABILITY in respect thereofEx: Interest of carrier on cargo which hehas to carry safely to its destination,such interest being limited to the extentof his liability.

Sec. 14 An insurable interest in propery mayconsist in:

(a) An existing interest;(b) An inchoate interest founded on an existing

interest; or(c) An expectancy, coupled with an existing

interest in that out of which the expectancyarises.

Sec. 16 A mere contingent or expectant interestin anything, not founded on an actual right tothe thing, nor upon any valid contract for it, isnot insurable.

B. Nature of Insurable Interest

1. EXISTING interest May arise from legal title

(Ex: interest of a mortgagor, lessor,assignee)

May also arise from equitable title(Ex: purchaser of property beforedelivery, builder of a building underconstruction)

2. INCHOATE interest founded on anexisting interest Must be founded on an existing

contract but not yet clearly definedor identified.

(Ex: stockholder’s inchoate interestin the properties of the corporation,such interest being based on hisowned shares)

3. EXPECTANCY, coupled with an existinginterest in that out of which theexpectancy arises (Ex: farmer’s interest over his future

crops grown on land owned by himat the time of the issuance of thepolicy)

C. Insurable Interest of SpecificPersons

1. Stockholder/partner in a firm – hasinchoate right to dividends in case firmearns profits and to share in the assetsafter payment of corporate debts upon afirm's liquidation.

2. General Creditor – does not haveinsurable interest in a debtor's property.

3. Judgment Creditor - has insurableinterest in debtor’s property becausehe's given a right to levy (general lien).

4. Mortgage Creditor - has insurableinterest (lien) which is recognized byInsurance Code (Sec. 8).

D. Measure of insurable interest inproperty

Sec. 15. A carrier or depository of any kindhas an insurable interest in a thing held by himas such, to the extent of his liability but not toexceed the value thereof.

E. Time of existence

Sec. 19. An interest in property insured mustexist when the insurance takes effect, and whenthe loss occurs, but need not exist in themeantime;and interest in the life or health of a personinsured must exist when the insurance takeseffect, but need not exist thereafter or when theloss occurs.


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WGeneral RuleInterest must exist BOTH at inception andat time of loss, but not in the meantime.

Exceptions1. A change in interest over the thing

insured AFTER the loss contemplated.The insured may sell the remainswithout prejudice to his right to recover.

2. A change of interest in one or moreseveral distinct things, separatelyinsured by one policy. This does notavoid the insurance as to the others

3. A change in interest by will or successupon the death of the insured

4. A transfer of interest by one of severalpartners, joint owners, or owners incommon who are jointly insured. Theacquiring co-owner has the sameinterest; his interest merely increasesupon acquiring other co-ownersinterest.

F. Distinctions between InsurableInterest in Property and InsurableInterest in Life

InsurableInterest inProperty

InsurableInterest in Life

Extent Limited toactual valueof theinterestthereon

Unlimited (save inlife insuranceeffected by acreditor on the lifeof the debtor)

Time whenInsurableInterestMust Exist

Must existwhen theinsurancetakes effectand whenthe lossoccurs, BUTneed notexist in themeantime

Must exist at thetime of the loss

Expectationof Benefit toBe Derived

Must havelegal basis

Need NOT havelegal basis

Beneficiary’sInterest

Must haveinsurableinterest overthe thinginsured

Need not haveinsurable interestover the life of theinsured if theinsured himselfsecured thepolicy. But if theinsurance wasobtained by thebeneficiary, thelatter must haveinsurable interestover the life of theinsured.(SUNDIANG)

IV.Transfer of Policy(Asked in 91)

A. Life Insurance Interest can be transferred even

without the insurer’s consent,unless there is a stipulation to thecontrary (Sec. 181).

B. Property Insurance Interest cannot be transferred

without the insurer’s consent,because the insurer has approvedthe policy based on the personalqualifications and insurable interestof the insured

C. Casualty Insurance Interest cannot be transferred

without the insurer's consent,because the moral hazards presentare as great as those in propertyinsurance.

V. Transfer of Interest

General Rule The mere transfer of a thing insured

does not transfer the policy, butsuspends it until the same personbecomes the owner of both the policyand the thing insured (Sec. 58).

The insurance proceeds shall be appliedexclusively to the proper interest of theperson in whose name or for whosebenefit it is made unless otherwisespecified in the policy (Sec. 53).

Exceptions1. Life, health and accident insurance

(Sec. 20)2. A change in interest in a thing insured,

after the occurrence of an injury, whichresults in a loss (Sec. 21)

3. A change in interest in one or more ofseveral distinct things, separatelyinsured by one policy (Sec. 22).

4. A change in interest, by will orsuccession, on the death of the insured(Sec. 23).

5. Transfer of interest by one of severalpartners, joint owners, or owners incommon, who are jointly insured, to theothers (Sec. 24).

6. When a policy is so framed that it willinure to the benefit of whomsoever,during the continuance of the risk, maybecome the owner of the interestinsured (Sec. 57).


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W7. When there is an express prohibition

against alienation in the policy, inwhich case, the insurance contract isavoided (Art. 1306, NCC)

VI.Double Insurance, OverInsurance, Reinsurance

A. Over-Insurance(Asked in 08)

This happens when the amount of theinsurance policy or policies exceed thevalue of the insurable interest.

1. In case of loss, the insurer is bound topay only up to the extent of the realvalue of the property lost. BUT, theinsured may recover the amount of thepremium corresponding to the excess invalue of the property.

2. The insured may claim payment fromthe insurers in such order as he mayselect, up to the amount for which theinsurers are severally liable under theirrespective contracts.

B. Double Insurance(Asked in 93,99,05)

1. It exists where the same person isinsured by several insurers separatelyin respect to the same subject andinterest (Sec. 93)

2. Requisites—a. same person insuredb. two or more insurers separately

insuringc. same subject matterd. same interest insurede. same risk or peril insured against

3. The insured CANNOT recover above thevalue of property, for otherwise, theinsurance would constitute wagering.

4. It is not prohibited by law but it may beprohibited by an “other insuranceclause.”

Additional or “other insurance”clause— A condition in the policy requiring

the insured to inform the insurer of

any other insurance covering theproperty insured

5. Double Insurance vs. Over-Insurance

Double insurance Over-insuranceAmount of theinsurance isbeyond the valueof the insured’sinsurable interest

There may be no over-insurance as when thesum total of the amountsof the policies issued doesnot exceed the insurableinterest of the insured.

There may be onlyone insurerinvolved

There are always severalinsurers

C. Reinsurance

A contract by which an insurerprocures a third person to insure himagainst loss or liability by reason ofsuch original insurance (Sec. 95); theoriginal insurance contract is separateand distinct from the reinsurancecontract.

1. Reinsurance treatyAn agreement between two insurancecompanies whereby one agrees to cedeand the other to accept reinsurancebusiness pursuant to provisionsspecified in the treaty (DE LEON).

2. Double Insurance vs. Reinsurance(Asked in 94)—

Double Insurance ReinsuranceSame interest Different interestInsurer remains as theinsurer.

Insurer becomes theinsured in relation tothe reinsurer.

Insured is a party ininterest in theinsurance contracts.

The original insured isnot a party in thereinsurance contract.

Property is the subjectmatter

The original insurer'srisk is the subjectmatter.

Insured has to give hisconsent.

Insured’s consent isnot necessary.

NOTE:When there is an express prohibitionagainst alienation in the policy, in case ofalienation, the contract of insurance is notmerely suspended but avoided.


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WVII. Multiple or Several Interest on

the Same Property (Secs. 8 – 9)

A. Open mortgage or loss payablemortgage clause—

A mortgage that can be paid-off prior tomaturity without penalty; mortgagee isthe beneficiary for insurance taken bymortgagor.

1. The insurance is on the interest of themortgagor; so, he does not cease to be aparty to the contract.

His acts, prior to the loss, which wouldotherwise avoid the insurance, affectsthe mortgagee, even if the property is inthe hands of the latter. (Secs. 8 & 9)

2. In case of loss, the mortgagee is entitledto recover up to the extent of his credit,and should the amount he recovers beequal to the amount of his credit, thenthe debt is extinguished.

B. Union mortgage or standardmortgage clause

1. Mortgagee may perform the acts ofmortgagor.

2. Subsequent acts of the mortgagor orowner do NOT prejudice the mortgagee'sinterest is protected.

3. When a mortgagee insured his owninterest and a loss occurs, he is entitledto recover on the insurance. However,he may no longer claim against themortgagor, for his claim is dischargedup to the amount the insurer has paidhim (Palileo vs. Cosio, 1955).

REVIEWER IN COMMERCIAL LAW Chapter V. Policy

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WChapter V. Policy

I. INSURANCE CONTRACT VS. INSURANCEPOLICY

II. FORMS AND CONTENTSIII. RIDER AND ENDORSEMENTSIV. COVER NOTESV. LIFE VS. NON-LIFE INSURANCE POLICIESVI. OPEN, VALUED AND RUNNING POLICIES

I. Insurance Contract vs. InsurancePolicy

An insurance policy is different from thecontract itself.

Contract of insurance: anagreement whereby one undertakesfor a consideration to indemnifyanother against loss, damage orliability arising from an unknown orcontingent event (Sec. 2 (1)).

Policy of insurance: the writteninstrument in which a contract ofinsurance is set forth (Sec. 49)

An insurance policy is NOT essential tothe validity of an insurance contract, forso long as all the essential elements forthe existence of a valid contract(consent, object, consideration andcompetent parties) are present.

II. Forms and Contents

Policy shall be in printed form whichmay contain blank spaces (Sec. 50).

Express warranties must also becontained in the policy, or in anotherinstrument signed by the insured andreferred to in the policy as making apart of it.

The insurance policy must AT LEASTcontain the following (Sec. 51)PAR∙PIRD:

Parties Amount of insurance, except in

open or running policies Rate of premium Property or life insured

Interest of the insured in theproperty if he is not the absoluteowner

Risk insured against; and Duration of the insurance.

III.Rider and Endorsements

Endorsements: any provision added tothe contract altering its scope orapplication (DE LEON, The InsuranceCode of the Philippines Annotated).

Clauses: an agreement between theinsurer and the insured on certainmatters relating to the liability of theinsurer in case of loss (DE LEON).

Warranty: inserted or attached to apolicy to eliminate specific potentialincreases of hazard during the policyterm owing to: 1) actions of the insuredor 2) condition of the property

Riders

Printed stipulations usuallyattached to the policy because theyconstitute additional stipulationsbetween the parties. (Ang Giok Chipvs. Springfield, 1931).

It must be attached to the policy inorder to be binding

In case of conflict between a riderand the printed stipulations in thepolicy, the rider prevails, as being amore deliberate expression of theagreement of the contracting parties(ALVENDIA, The Law of Insurancein the Philippines).

IV.Cover Notes

Definition: A concise and temporarywritten contract issued to the insurerthrough its duly authorized agentembodying the principal terms of anexpected policy of insurance.

Applicable Rules: It is intended to give temporary

insurance protection coverage to theapplicant pending the acceptance orrejection of his application, or until theissuance of a formal policy, providedthat it is later determined that theapplicant was insurable at the time itwas issued. (Sec. 52)

It is a binding contract and has fullforce and effect during its duration,provided it is in the Code's previouslyprescribed form.

It is good only for 60 days, unless alonger period is approved by theInsurance Commissioner. (Sec. 52)

It may be cancelled by either partyONLY after at least 7-days notice to theother party.

REVIEWER IN COMMERCIAL LAW Chapter V. Policy

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W If it is not cancelled, a policy shall be

issued within 60 days after the issuanceof the cover note.

The written approval of the InsuranceCommissioner for the extension orrenewal of the cover notemay be dispensed with upon showingthat the risks involved, the values ofsuch risks and/or premiums thereforhave not as yet been determined orestablished and that such extension orrenewal is not contrary to and is not forthe purpose of violating any provisionsof the Insurance Code, or of any of therulings, instructions, circulars, ordersor decisions of the InsuranceCommissioner.

Insurance companies may impose, onthe cover notes, a deposit premiumequivalent to at least 25% of theestimated premium of the intendedinsurance coverage but never less than500 pesos.

Binding receipt: a mere acknowledgmenton behalf of the company that its branchoffice had received from the applicant theinsurance premium and had accepted theapplication subject to processing by thehead office

V. Life Insurance Policies vs. Non-Life Insurance Policies

In a life insurance policy, the liability ofthe insurer is measured by the facevalue of the policy (because the value ofa human life cannot be measured inactual monetary terms).

Non-life insurance policies may be open,valued or running (Sec. 59).

VI.Open, Valued and RunningPolicies

A. Open or Unvalued Policy

One in which a certain agreed sum iswritten on the face of the policy not as thevalue of the property insured, but as themaximum limit of the insurer’s liability (i.e.face value) in case of destruction by theperil insured against.

Insurer only pays the actual cash value ofthe property as determined at the time ofloss.

B. Valued Policy

Sec. 61. A valued policy is one whichexpresses on its face an agreement that thething insured shall be valued at a specificsum.

One in which the parties expressly agree onthe value of the subject matter of theinsurance.

Two values:

Face value of the policy which is themaximum amount insurer pays in caseof loss

Value of the thing insured In the absence of fraud or mistake, the

agreed value of the thing insured will bepaid in case of total loss of the property,unless the insurance is for a lower amount

C. Running Policy

Sec. 62. A running policy is one whichcontemplates successive insurances, andwhich provides that the object of the policymay be from time to time defined, especiallyas to the subjects of insurance, byadditional statements or indorsements.

Intended to provide indemnity for propertywhich cannot well be covered by a valuedpolicy because of its frequent change oflocation and quantity, or for property ofsuch a nature as not to admit of a grossvaluation.

Contemplates successive insurances.

Sec. 60. An open policy is one in which thevalue of the thing insured is not agreed upon,but is left to be ascertained in case of loss.

REVIEWER IN COMMERCIAL LAW Chapter VI. Rescission of Insurance Contracts

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WChapter VI. Rescission of

Insurance Contracts

I. CONCEALMENTA. DEFINITIONB. REQUISITESC. EFFECTS OF CONCEALMENTD. TEST OF MATERIALITYE. CAUSE OF LOSSF. MATTERS WHICH NEED TO BE

DISCLOSEDG. MATTERS WHICH NEED NOT BE

DISCLOSEDII. MISREPRESENTATION

A. REPRESENTATIONSB. KINDS OF REPRESENTATIONSC. REQUISITES OF FALSE

REPRESENTATIOND. EFFECT OF MISREPRESENTATIONE. REPRESENTATION OF OPINIONF. CONCEALMENT VS.

MISREPRESENTATIONIII. WARRANTIES

A. DEFINITIONB. PURPOSEC. KINDS OF WARRANTIESD. EFFECT OF BREACH OF WARRANTYE. IMMATERIAL PROVISIONSF. WARRANTY VS. REPRESNTATIOM

IV. CONDITIONSA. DEFINITIONB. KINDSC. WARRANTIES VS. CONDITIONS

V. RIGHT OF RESCISSIONA. GROUNDSB. WAIVER OF RIGHT TO RESCINDC. LIMITATIONS TO THE RIGHT OF THE

INSURER TO RESCINDVI. CANCELLATION OF NON-LIFE INSURANCE

POLICYA. GROUNDSB. REQUIREMENTS

VII. INCONTESTABILITY CLAUSEA. DEFINITIONB. REQUISITESC. DEFENSES

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

A. Definition

Concealment – A neglect to communicatethat which a party knows and ought tocommunicate (Sec. 26).

B. Requisites

1. A party knows a fact which he neglectsto communicate or disclose to the other.

2. Such party concealing is duty bound todisclose such fact to the other.

3. Such party concealing makes nowarranty of the fact concealed.

4. The other party has not the means ofascertaining the fact concealed.

5. The fact concealed is material.

C. Effects of Concealment

It vitiates the contract and entitles theinsurer to rescind, even if the death or lossis due to a cause not related to theconcealed matter (Sec. 27).

NOTE: Good Faith is NOT a defense in

concealment. Sec. 27 clearly provides that, “the

concealment whether intentional orunintentional entitles the injured party torescind the contract of insurance.”

D. Test of Materiality

General RuleDetermined not by the event, but solely bythe probable and reasonable influence ofthe facts upon the party to whom thecommunication is due, in forming hisestimate of the advantages of the proposedcontract, or in making his inquiries (Sec.31).

Exceptions1. Incontestability clause2. Matters under Sec.110 (marine

insurance)

NOTE: NON-MEDICAL INSURANCE: The

waiver of medical examination in a non-medical insurance contract renderseven more material the informationrequired of the applicant concerning theprevious conditions of health anddiseases suffered. (Sunlife vs. Sps.Bacani, 1995).

OPINION: Where matters of opinion orjudgment are called for, answers madein good faith and without intent todeceive will not avoid the policy eventhough they are untrue. Reason: Theinsurer cannot rely on thosestatements. He must make furtherinquiry. (Philamcare Health Systems vs.CA, 2002).

Concealment must take place at thetime the contract is entered into inorder that the policy may be avoided.Information obtained after theperfection of the contract is no longernecessary to be disclosed by theinsured, even if the policy has not beenissued


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WE. Cause of Loss

The matter concealed need NOT be thecause of loss.

In Sunlife Assurance vs. CA (1995), theCourt held that the fact that the matterconcealed had no bearing to the causeof death is NOT important because it iswell settled that the insured need notdie of the disease he had failed todisclose to the insurer.

It is sufficient that his nondisclosuremisled the insurer in forming hisestimates of the risks of the proposedpolicy or in making inquiries.

F. Matters which Need to BeDisclosed

1. Matters material to the contract2. Matters which the other has not the

means of ascertaining the said facts3. Matters as to which the party with the

duty to communicate makes nowarranty.

NOTE:If the applicant is aware of the existence ofsome circumstance which he knows wouldinfluence the insurer in acting upon hisapplication, good faith requires him todisclose that circumstance, thoughunasked (VANCE, The Law of Insurance).

G. Matters which Need NOT BeDisclosed

Sec. 32. Each party to a contract of insurance isbound to know all the general causes which areopen to his inquiry, equally with that of theother, and which may affect the political ormaterial perils contemplated; and all generalusages of trade.

a. Matters already known to the insurerb. Matters of which the insurer waives

communication – he is in estoppel.c. Matters that concern only risks

excepted, either expressly or bywarranty, from the liability assumedunder the policy. **Important Note: Theundisclosed fact must NOT BEMATERIAL otherwise the insured is stillbound to make disclosure.

d. Information of the nature or amountof the interest of one insured except ifinquired upon by the insurer.

e. Matters each party are bound to knowsuch as public events, generalinformation etc.

f. The right to information of materialfact may be waived either expressly, bythe terms of insurance or impliedly byneglecting to make inquiry as to thefacts already communicated.

g. If the interest of the insured to theproperty being insured is absolute thenthere is no necessity to disclose theextent of his interest, if not then he isrequired to disclose under Section 51

h. Matters of opinion.

II. Misrepresentation

A. Representations

Factual statements made by the insuredat the time of, or prior to, the issuanceof the policy (Sec. 37) to giveinformation to the insurer and inducehim to enter into the insurancecontract.

B. Kinds of Representations

1. AffirmativeAny allegation as to the existence ornon-existence of a fact when thecontract begins

2. PromissoryAny promise to be fulfilled after thecontract has come into existence or anystatement concerning what is to happenduring the existence of the insurance.A promise representation issubstantially a condition or warranty.

C. Requisites of a FalseRepresentation(Misrepresentation)

1. The insured stated a fact which isuntrue.

2. Such fact was stated with knowledgethat it is untrue and with intent todeceive or which he states positively astrue without knowing it to be true andwhich has a tendency to mislead.

3. Such fact in either case is material tothe risk.

NOTE:1. There is false representation if the

matter is true at the time it wasmade/represented but false at the timethe contract takes effect. (Sec. 44).Remedy of injured party is rescission(Sec. 45).


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W2. NO false representation if the matter is

true at the time the contract takes effectalthough false at the time it wasmade/represented.

D. Effect of Misrepresentation

The injured party is entitled to rescind fromthe time when the representation becomesfalse. (Sec. 45)

E. Representation of Opinion

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

ExceptionSuch representation will avoid the policy ifthere is a CONCURRENCE OFMATERIALITY AND FRAUDULENCE ORINTENT TO DECEIVE.However, if the representation is one of fact,the insurer need only prove the materialityof the representation, because in suchcases the intent to deceive is presumed (DELEON).

NOTE:If a statement of fact, fraudulent intent ispresumed. Hence, materiality of themisrepresented fact will avoid the contract.

F. Concealment vs.Misrepresentation

CONCEALMENT MISREPRESENTATION

Insured withholdsinformation ofmaterial factsfrom the insurer

Insured makes erroneousstatements of facts with theintent of inducing theinsurer to enter into theinsurance contract

Determined by the same rules as to materialitySame effects on the part of the insured; insurerhas right to rescindInjured party is entitled to rescind a contract ofinsurance on ground of concealment or falserepresentation, whether intentional or notRules on concealment and representation applylikewise to the insurer as insurance contract isone of utmost good faith

III. Warranties

A. Definition

Statement or promise by the insured Set forth in the policy or by reference

incorporated therein, The untruth or non-fulfillment of which

in any respect, and without reference towhether insurer was in fact prejudicedby such untruth or non-fulfillment,

Renders the policy voidable by theinsurer (VANCE).

B. Purpose

To eliminate potentially increasinghazards which may either be due to theacts of the insured or to the change tothe condition of the property.

C. Kinds of Warranties

1. Express2. Implied - it is deemed included in the

contract although not expresslymentioned.

3. Affirmative Warranty is one whichasserts the existence of a fact orcondition at the time it is made (Sec.68).

4. Promissory Warranty or ExecutoryWarranty is one where the insuredstipulates that certain facts orconditions pertaining to the risk shallexist or that certain things withreference thereto shall be done oromitted. It is in the nature of acondition subsequent (Secs. 72 & 73).

D. Effect of Breach of Warranty

General RuleIt gives the insurer the right to rescind(Secs. 74 and 76).

Exceptions—1. loss occurs before the time of

performance of the warranty2. the performance becomes unlawful3. performance becomes impossible (Sec.

73)

Rule on Immaterial Provisions

General Rule Not all breach of the provisions in the

policy may give the right to rescind thepolicy.

Immaterial provisions do not avoid thepolicy (Sec. 75).


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WExceptionWhen the parties stipulate that violation ofparticular provision, though normallyimmaterial, shall avoid the policy.

In effect, the parties converted theimmaterial provision into material one(SUNDIANG).

E. Warranty vs. Representation

WARRANTY REPRESENTATION

Part of the contract Mere collateralinducement

Written on thepolicy, actually orby reference

May be written in thepolicy or may be oral.

Presumed material Must be proved to bematerial

Must be strictlycomplied with

Requires only substantialtruth and compliance

IV.Conditions

A. Definition

Events signifying in its broadest senseeither an occurrence or a non-occurrencethat alters the previously existing legalrelations of the parties to the contract.

They may be conditions precedent orconditions subsequent.

B. Kinds:

1. Condition Precedent – calls for thehappening of some event before thecontract shall be binding between theparties.

2. Condition Subsequent – pertains to thecontract of insurance after the risk hasattached and during the existencethereof.

C. Warranties vs. Conditions

Warranties ConditionsPrecedent

Effect does not suspendor defeat theoperation of thecontract, but abreach affordseither the remedyexpresslyprovided in thecontract or thatfurnished by law

one without theperformance ofwhich thecontract, althoughin form executedby the parties anddelivered, does notspring into life; alimitation to theattachment of risk

Warranties ConditionsPrecedent

Nature a. If the insured person contracts andwarrants that if the representationsmade by him in his application forinsurance are not true, the policy shallbe null and void, such statements arenot conditions precedent but rather ofthe nature of a defeasance.b. promissory warranties are usuallyregarded as conditions subsequent tobe performed after the policy hasbecome a valid contract, non-performance of which will work adefeasance.

V. Right of Rescission

A. Grounds

1. Concealment2. Misrepresentation3. Breach of material warranty4. Breach of a condition subsequent

B. Waiver of the right to rescind:

Acceptance of premium paymentsdespite the knowledge of the ground forrescission (Sec. 45).

C. Limitations on the right of theinsurer to rescind:

1. Non-life – such right must be exercisedprior to the commencement of an actionon the contract;

2. Life – such right must be availed ofduring the first two years from the dateof issue of policy or its lastreinstatement; prior to“incontestability.” (Sec. 48)

VI.Cancellation of Non-LifeInsurance Policy

Right of the insurer to abandon thecontract on the occurrence of certaingrounds after the effectivity date of a non-life policy.

A. Grounds

1. Non-payment of premium2. Conviction of a crime out of acts

increasing the hazard insured against3. Discovery of fraud or material

misrepresentation4. Discovery of willful or reckless acts of

omissions increasing the hazardinsured against;


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W5. Physical changes in property making

the property uninsurable6. Determination by the Insurance

Commissioner that the continuation ofthe policy would violate the InsuranceCode. (Sec. 64)

B. Requirements

1. Prior notice of cancellation to theinsured

2. Notice must be in writing, mailed ordelivered to the named insured at theaddress shown in the policy

3. Notice must state which of the groundsset forth in Sec. 64 is relied upon andupon request of the insured, the insurermust furnish facts on which thecancellation is based;

NOTE:Grounds should have existed after theeffectivity date of the policy.

VII. Incontestability Clause(Asked in 91, 94, 97 and 98)

A. Definition

Clause in life insurance policy thatstipulates that the policy shall beincontestable after a stated period.

B. Requisites

1. Life insurance policy2. Payable on the death of the insured3. It has been in force during the lifetime

of the insured for a period of at leasttwo years from the date of its issue or ofits last reinstatement.

NOTE:The period of 2 years may be shortened butit cannot be extended by stipulation.

Incontestability only deprives the insurer ofthose defenses which arise in connectionwith the formation and operation of thepolicy prior to loss (DE LEON).

C. Defenses

BARREDDEFENSES

OF THE INSURER

DEFENSES NOTBARRED

1. Policy is voidab initio

2. Policy isrescindable byreason of thefraudulentconcealment ormisrepresentation of theinsured or hisagent

1. That the persontaking the insurancelacked insurableinterest as requiredby law;

2. That the cause of thedeath of the insuredis an excepted risk;

3. That the premiumshave not been paid(Secs. 77, 227[b],228[b], 230[b]);

4. That the conditions ofthe policy relating tomilitary or navalservice have beenviolated (Secs. 227[b],228[b]);

5. That the fraud is of aparticularly vicioustype;

6. That the beneficiaryfailed to furnish proofof death or to complywith any conditionimposed by the policyafter the loss hashappened; or

7. That the action wasnot brought withinthe time specified.

REVIEWER IN COMMERCIAL LAW Chapter VII. Risks and Coverages

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WCHAPTER VII. RISKS ANDCOVERAGES

I. RISKS IN LIFE INSURANCEII. RISKS IN FIRE INSURANCE

A. HOSTILE VS FRIENDLY FIREB. MEASURE OF INDEMNITY

III. RISKS IN CASUALTY OR ACCIDENTINSURANCEA. INTENTIONAL VS. ACCIDENTALB. NO ACTION CLAUSE

IV. RISKS IN COMPULSORY MOTOR VEHICLELIABILITY INSURANCE

I. Risks in Life Insurance

A. Risks in Life Insurance

1. Suicide (Asked in 95) Insurer is liable in the following

cases:a. If committed after two years from

the date of the policy’s issue or itslast reinstatement;

b. If committed in a state of insanityregardless of the date of thecommission unless suicide is anexcepted peril. (Sec. 180-A)

c. If committed after a shorter periodprovided in the policy.

Any stipulation extending the 2-yearperiod is null and void.

2. At the hands of the law (E.g. by legalexecution) It is one of the risks assumed by the

insurer under a life insurance policyin the absence of a valid policyexception (VANCE).

3. Killing by the beneficiary

General Rule The interest of a beneficiary in a life

insurance policy Shall be forfeited when the

beneficiary is the principalaccomplice or accessory in willfullybringing about the death of theinsured,

In which event, the nearest relativeof the insured shall receive theproceeds of said insurance if nototherwise disqualified. (Sec. 12)

Note: Conviction of the beneficiary isnecessary before his interest in the insurancepolicy is forfeited in favor of the nearestrelative of the insured. This is consistent withthe cardinal principle of law that forfeituresare not favored, and that any construction

which would result in the forfeiture of thepolicy benefits will be avoided if it is possibleto construe the policy in a manner whichwould allow recovery (see page 8). Moreover,a contrary interpretation would result in theforfeiture of the beneficiary’s interest on mereimputations of his participation in the killingof the insured.

Exceptionsa. Accidental killingb. Self-defensec. Insanity of the beneficiary at the

time he killed the insured

II. Risks in Fire Insurance

A. Hostile vs. Friendly Fire

HOSTILE FIRE FRIENDLY FIREOne that escapes fromthe place where it wasintended to burn andought to be.

One that burns in aplace where it wasintended to burn andought to be

Insurer is liable Insurer is not liable

B. Measure of Indemnity

1. Open policy - only the expensenecessary to replace the thing lost orinjured in the condition it was at thetime of the injury

2. Valued policy - the parties are boundby the valuation, in the absence offraud or mistake

III.Risks in Casualty or AccidentInsurance

A. Intentional vs. Accidental

1. Intentional – Implies the exercise of thereasoning faculties, consciousness andvolition.Where a provision of the policy excludesintentional injury, it is the intention ofthe person inflicting the injury that iscontrolling.If the injuries suffered by the insuredclearly resulted from the intentional actof the third person, the insurer is relievefrom liability as stipulated (Biagtan v.the Insular Life Assurance Co. Ltd.,1972).

2. Accidental – That which happens bychance or fortuitously, withoutintention or design, which isunexpected, unusual and unforeseen.

REVIEWER IN COMMERCIAL LAW Chapter VII. Risks and Coverages

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WB. Liability vs. Indemnity

1. Liability insurance Insurer assumes the obligation to

pay the third party in whose favorthe liability of the insured arises.

Liability of the insurer attaches assoon as the liability of the insured tothe third party is established.

Insurer is liable regardless ofwhether or not the insured has paidthe third party (CAMPOS,Insurance).

2. Indemnity insurance NO action will lie against the insurer

unless brought by the insured forloss ACTUALLY sustained and paidby him.

Liability of the insurer attaches onlyAFTER the insured has paid hisliability to the third party(CAMPOS).

C. No Action Clause

A requirement in a policy of liabilityinsurance which provides that suit andfinal judgment be first obtained against theinsured; that only thereafter can the personinjured recover on the policy. (Guingon vs.Del Monte, 1967)

IV.Risks in Compulsory MotorVehicle Liability Insurance(CMVLI)

A species of compulsory insurance thatprovides for protection coverage thatwill answer for legal liability for lossesand damages for bodily injuries orproperty damage that may be sustainedby another arising from the use andoperation of motor vehicle by its owner.

The Land Transportation Office shallNOT allow the registration or renewal ofregistration of any motor vehicle unlesssuch insurance is obtained (Sec. 376,as amended by PD 1455).

To the extent that motor vehicleinsurance is compulsory, it must be aLIABILITY policy (Sec. 373(f)), and theprovision making it merely anindemnity insurance CANNOT have anyeffect (CAMPOS).

Purpose: To give immediate financialassistance to victims of motor vehicleaccidents and/or their dependents,especially if they are poor regardless ofthe financial capability of motor vehicle

owners or operators responsible for theaccident sustained (Shafer v. Judge,RTC, 1988).

Claimants/victims may be a“passenger” or a “3rd party”

It applies to all vehicles whether publicor private vehicles.

NOTE:It is the only compulsory insurancecoverage under the Insurance Code

REVIEWER IN COMMERCIAL LAW Chapter VIII. Special Kinds of Insurance Contracts

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WChapter VIII. Special Kinds of

Insurance Contracts

I. MARINE INSURANCEA. DEFINITIONB. KINDS OF MARINE INSURANCEC. RISKS COVEREDD. PARTIES WITH INSURABLE

INTERESTE. PERILS OF THE SEA VS. PERILS OF

THE SHIPF. BAREBOAT CHARTER VS. CONTRACT

OF AFFREIGHTMENTG. IMPLIED WARRANTIESH. SEAWORTHINESSI. IMPROPER DEVIATIONJ. CONCEALMENTK. AVERAGEL. LOSSM. ABANDONMENTN. CO-INSURANCE CLAUSE

II. FIRE INSURANCEA. RISKS COVEREDB. PREREQUISITES TO RECOVERYC. SPECIAL CLAUSES IN FIRE

INSURANCE CONTRACTSIII. CASUALTY OR ACCIDENTAL INSURANCE

A. DEFINITIONB. KINDSC. INTENTIONAL VS. ACCIDENTAL TEST

IV. MOTOR VEHICLE COMPULSORYINSURANCEA. DEFINITIONB. METHODS OF COVERAGEC. PARTIES AFFECTEDD. NO-FAULT CLAUSEE. SPECIAL CLAUSES

I. Marine Insurance

A. Definition

Insurance against risks connected withnavigation, to which a ship, cargo,freightage, profits or other insurableinterest in movable property, may beexposed during a certain voyage or a fixedperiod of time. (Sec. 99)

B. Kinds of Marine Insurance

Ocean MarineInsurance

Inland Marine Insurance

an insuranceagainst riskconnected withnavigation, towhich a ship,cargo, freightage,profits or otherinsurable interestin movableproperty, may be

it is of comparativelyrecent origin and coversprimarily the land or overthe land transportationperils of property shippedby railroads, motortrucks, airplanes, andother means oftransportation. It alsocovers risks of lake, river,

exposed during acertain voyage ora fixed period oftime

or other inland waterwaytransportation and otherwaterborne perils outsideof those risks that falldefinitely within the oceanmarine category

C. Risks Covered

1. In Generala. Vessels, goods, freight, cargo,

merchandise, profits, money,valuable papers, bottomry andrespondentia, and interest inrespect to all risks or perils ofnavigation;

b. Persons or property in connectionwith marine insurance;

c. Precious stones, jewels, jewelryand precious metals whether inthe course of transportation orotherwise; and

d. Bridges, tunnels, piers, docks andother aids to navigation andtransportation. (Sec. 99)

e. Cargo can be the subject of marineinsurance, and once it is enteredinto, the implied warranty ofseaworthiness immediatelyattaches to whoever is insuringthe cargo, whether he be theshipowner or not. (Roque v. IAC,1985).

2. Marine Protection and IndemnityInsurance

D. Parties with Insurable Interest

1. Shipownera. Over the vessel to the extent of its

valueExceptions: if chartered, the insurable

interest is only up to theamount not recoverable fromthe charterer. (Sec. 100).If the charterer compensatedthe shipowner the whole valuein case of the loss, NOINSURABLE INTEREST

If hypothecated by bottomry,the insurable interest is onlythe excess of its value over theamount secured by bottomry.(Sec. 101)

b. Over expected freightage. (Sec.103).


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W If price is to be paid for the

carriage of goods: insurableinterest exists when goods are:a. Actually on boardb. There is some contract for

putting the goods on boardc. Both ship and goods are

ready for the specificvoyage (Sec. 104)

2. Cargo ownerOver the cargo and expected profits(Sec. 105).

3. Charterer1. Over the vessel up to the extent of

the amount he is liable to theshipowner, if the ship is lost ordamaged during the voyage (Sec.106)

2. Over his expected profits orfreightage if he accepts cargoesfrom the other persons for a fee.

3. Over his own cargo or his client’scargo. (SUNDIANG)

E. Perils of the Sea vs. Perils of theShip(Asked in 98)

Perils of the Sea Perils of the ShipCovered by marineinsurance

Not covered by marineinsurance

Denote natureaccidents peculiarto the sea which1. do not happen

by interventionof man

2. cannot beprevented byhumanprudence

Go Tiaoco v. UnionInsurance(1919):1. Natural and

inevitable2. Ordinary wear and

tear3. Negligent failure of

ship owner toprovide properequipment

F. Bareboat Charter vs. Contract ofAffreightment

Demise/Bareboatcharter

Contract ofAffreightment

Charterer regarded asowner of vessel voyage

stipulated as thecharter includes boththe vessel and its crew

Owner of vesselleases part or all ofits space to haulgoods for others

Charter is liable Shipowner liableCommon carrier isdeemed as private

carrier

Still a commoncarrier so required

to exerciseExtraordinary

diligence

G. Implied warranties

1. That the ship is seaworthy at theinception of the insurance (Sec. 113)

2. That the ship will NOT deviate fromagreed voyage unless deviation isproper (Sec. 123, 124, 125)

3. That the ship will NOT engage in anillegal venture

4. Warranty of possession of documentsof neutrality; that the ship will carrythe requisite documents of nationalityor neutrality is expressly warranted

5. Presence of insurable interest

H. Seaworthiness

When the ship is reasonably fit toperform the service and to encounterthe ordinary perils of the voyagecontemplated by the parties to thepolicy,Considering the nature of the ship,the voyage and the service to beperformed (Sec. 114)

Requisites of Seaworthiness— Extends not only to condition of ship’s

structure, but requires (Sec.116):1. Ship to be properly laden2. Competent master3. Sufficient number of competent

officers and seamen4. Requisite appurtenances and

equipment5. In a fit state as to repair, equipment,

crew and in all other respects toperform the ordinary perils ofnavigation

6. Must also be in a suitable condition tocarry the cargo put on board orintended to be put on board.

General Rule The warranty of seaworthiness is

complied with if the ship be seaworthyat the time of the commencementof the risk.Prior or subsequent unseaworthinessis not a breach of the warranty nor isit material that the vessel arrives insafety at the end of her voyage.

Exceptions1. Time policy - the ship must be

seaworthy at the commencement ofevery voyage she may undertake (Sec.115a)

2. Cargo policy - each vessel uponwhich the cargo is shipped or


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Wtransshipped must be seaworthy atthe commencement of each particularvoyage (Sec. 115b)

3. Voyage policy -contemplating avoyage in different stages, the shipmust be seaworthy at thecommencement of each portion

4. Ship becomes unseaworthy duringthe voyage to which an insurance isrelated, delay in repairing the defectexonerates the insurer on ship orshipowner’s interest from liabilityfrom any loss arising therefrom. (Sec.118)

Scope of Seaworthiness—1. INSURANCE ON CARGO: it must be

properly loaded, stowed, dunnaged,and secured so as not to imperil thenavigation of the vessel to causeinjury to the vessel or cargo.

2. INSURANCE ON VESSEL: ship is notunseaworthy because of some defectin loading or stowage which is easilycurable by those on board, and wascured before the loss.

2. DECK CARGO: carrying it raises apresumption of unseaworthinesswhich can be overcome only byshowing affirmatively that the deckcargo was not likely to interfere withthe due management of the vessel.

Due diligence not a defense Warranty precludes an defense that

insured had exercised due diligence tomake the ship seaworthy

Ship must ACTUALLY be seaworthy.

Seaworthiness as to cargo— Ship may be seaworthy for purpose of

insurance on the ship, but may stillbe unseaworthy for purpose ofinsurance of the cargo.

I. Improper Deviation(Asked in 05)

A departure from the course of the voyageinsured, or an unreasonable delay inpursuing the voyage or thecommencement of an entirely differentvoyage (Sec.123)

Instances of deviation:1. the course of the sailing fixed by

mercantile usage2. Departure of vessel from the most

natural, direct and advantageous

route if not fixed by mercantileusage

3. Unreasonable delay in pursuingvoyage

4. Commencement of an entirelydifferent voyage (Secs. 121-123)

Instances of Proper Deviation1. When caused by circumstances

outside the control of the shipcaptain or ship owner.

2. When necessary to comply with awarranty or to avoid a peril;

3. When made in good faith to avoida peril;

4. When made in good faith to savehuman life or to relieve anothervessel in distress (Sec. 124)

J. Concealment

Belief and expectation of a thirdperson in reference to a material factis material and must be disclosed(Sec. 108).This is contrary to the general rulethat matters of belief, judgment oropinion of third persons, exceptexperts, are not material.

General RuleConcealment of the following matterswill NOT vitiate the marine insurancecontract:

National character of the insured Liability of insured thing to

capture or detention Liability to seizure from breach of

foreign laws

Want of necessary documents Use of false or simulated papers

ExceptionWhen the matters above are the causeof the loss


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WMarine Insurance Other Insurance

What Must Be Communicated (in GF + w/n his knowledge all facts material to the contract all facts which he makes no warranty all facts which the other has not the means of

ascertaining (Sec. 28) all information which he possesses material to

the risk

all facts material to the contractall facts which he makes no warrantyall facts which the other has not the means of

ascertaining (Sec. 28)

What Need Not Be Communicated (Sec. 30)Information

1. already known to the other party2. the other party ought to know w/ exercise of ordinary care + the former has no reason to suppose

him ignorant3. already waived4. related to a risk excluded by a warranty + not material5. related to a excepted risk + not material

Information or Belief of a 3rd PartyMaterial and must be communicated General Rule—

Not material, need not be communicated

Exception—proceeds from an agent of the insured whose dutyis to give information

Effect of concealmentIf the fact concealed involves the following, there isnot vitiation of the entire contract BUT merelyexonerates the insurer from a risk resulting fromthe concealed fact: The national character of the insured; The liability of the thing insured to capture and

detention; The liability to seizure from breach of foreign laws

of trade; The want of necessary documents; The use of false and simulated papers. (Sec. 110)

Concealment of any material fact will vitiate theentire contract, WON the loss results from the factconcealed.

K. Average

General Average Particular AverageAll expenses and damages which are deliberatelycaused in order to save the vessel, its cargo or bothfrom a real known risk

All expenses and damages caused to the vessel orcargo which have not incurred to the commonbenefit

Intentionally caused NOT intentionally causedBorne by owners of articles saved pro-rata Borne only by the owner of the property1. Common danger: Certain and imminent (andknown)2. Part of the vessel is sacrificed3. Expenses follows from the successful saving ofthe vessel or other cargo4. Expenses incurred ONLY after taking properlegal steps and authority (Magsaysay v. Agan,1955)

GR: Insurer Liable if the owner of the articles savedseeks right of contribution.X: Cannot recover against the insurer

1. After separation of interests liable tocontribution

2. Insured has neglected or waived his rightto contribution

GR: Insurer Liable to the proportion of contributionattaching to the policy value of the thing insuredX: if partial loss excluded by the policy


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WL. Loss

Actual Constructive1. Total destruction;2. Irretrievable loss by sinking;3. Damage rendering the thing valueless; or4. Total deprivation of owner of possession of thing

insured. (Sec. 130)

1. Actual loss of more than ¾ of the value of theobject;

2. Damage reducing value by more than ¾ of thevalue of the vessel and of cargo; and

3. Expense of transshipment exceed ¾ of value ofcargo or the ship. (Sec. 131, in relation to Sec.139)

Notice of Abandonment not necessary Notice of Abandonment necessary to recoveras for the total loss; insured may:

1. Abandon goods or vessel to the insurer andclaim for whole insured value (Sec. 139)

2. Without abandoning vessel, claim for partialactual loss (Sec. 155)

May be presumed from the continued absence of aship without being heard of (length of time forpresumption to apply depends on thecircumstances) (Sec. 132)

--

Insured entitled to payment without notice ofabandonment

1. Insured has the right to abandon the thinginsured by relinquishing to the insurer hisinterest in such thing, entitling him to recoverfor a total loss thereof (Sec. 138)

2. Insurer acquires all rights over the thinginsured (Sec. 146)

3. If abandonment is not proper or properlymade, the insurer would still be liable as uponthe Actual Total Loss, deducting from theamount any proceeds from the thing insuredwhich may have come to the hand of theinsured.

M. Abandonment

Abandonment is the act of the insuredby which, after a constructive total loss,he declared the relinquishment to theinsurer of his interest in the thinginsured. (Secs. 138 - 155)

The insured has right to abandon ONLYif peril insured against causes a loss ofmore than ¾ the thing insured or wherethe value is reduced by more than ¾

Constructive loss = more than 75% loss =full recovery of the full amount in thepolicy)

Requisites1. There must be actual

relinquishment by the personinsured of his interest in the thinginsured (Sec. 138)

2. There must be constructive totalloss (Sec. 139).

3. It must be total and absolute (Sec.140)

4. It must be within a reasonabletime after the receipt of reliableinformation of the loss (Sec. 141)

5. It must be factual (Sec. 142)

6. It must be made by giving noticethereof to the insurer which may bedone orally or in writing (Sec. 143)

7. Notice must be explicit and mustspecify the particular cause of theabandonment (Sec. 144)

Effects of Acceptance1. Upon receiving notice of

abandonment, the insurer mayaccept or reject abandonment.

2. Insurer becomes liable for wholeamount of insurance and becomesentitled to all the rights which theinsured has over the thing

3. The parties’ rights become fixed.4. The insurer may no longer rely on

any insufficiency in the form,time or right of abandonment.WON the insured has a right toabandon is immaterial where offer isalready accepted and there is nofraud.

5. EXCEPTION to the general effects ofacceptance: when the ground uponwhich it was made proves to beunfounded.

6. Abandonment can be sustainedonly upon the ground specified inthe notice


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WN. Co-insurance Clause

Where the property is insured for lessthan its value, the insured is considereda co-insurer for the difference betweenthe amount of insurance and the valueof the property.

Requisites1. The loss is partial2. The amount of insurance is less

than the value of the propertyinsured.

Formula to determine the extent of theinsurer’s liability:

Loss x Insurance = Insurer’sValue Liability

(SUNDIANG)

NOTE: It is very crucial to determine whether a

marine vessel is covered by a marineinsurance or fire insurance.The determination is important for 2reasons:1. Rules on constructive total loss and

abandonment – applies only tomarine insurance

2. Rule on co-insurance – appliesprimarily to marine insurance

3. Rule on co-insurance applies to fireinsurance only if expressly agreedupon (AGBAYANI, OPINION).

II. Fire Insurance(Asked in 01)

Sec. 167. As used in this Code, the term "fireinsurance" shall include insurance against lossby fire, lightning, windstorm, tornado orearthquake and other allied risks, when suchrisks are covered by extension to fire insurancepolicies or under separate policies.

A. Risks Covered

1. Fire2. Lightning3. Windstorm4. Tornado5. Earthquake6. Other allied risks

Hostile Fire Friendly FireFire that escapes andburns in a placewhere it is notsupposed to be. Mayalso refer to fire that

Fire that burns in aplace where it issupposed to burn. It isemployed for theordinary purpose of

started out as afriendly fire butescapes from itsoriginal place or itbecomes too strong asit becomes out ofcontrol; It may also bea friendly fire butunsuitable materialswere used to light thefire and becomesinherently dangerousand uncontrollable

lighting, heating ormanufacturing.

Insurer liable Insurer NOT Liable

B. Prerequisites to recovery:

1. Notice of loss – must be immediatelygiven, unless delay is waived expresslyor impliedly by the insurer

2. Proof of loss – according to bestevidence obtainable. Delay may also bewaived expressly or impliedly by theinsurer

C. Special clauses in Fire Insurancecontracts

1. Storage of Hazardous ThingsGeneral Rule

Render policy void

Exception—a. Essential to businessb. Causal/temporary usec. Would not increase the risk insured

against2. Sole and unconditional ownership

a. Sole: no one else has any interestb. Unconditional: quality of ownership

not limited or affected byaccommodation

3. Other insurance clause: Insuredshould inform the insurer about anyexisting insurance over the propertyinsured and should obtain the latter’sconsent to any future additionalinsurance thereon, under the penalty offorfeiting all the benefits under thepolicy.

4. Chattel mortgage clause: The policywill become void if the insured propertyshould be subject of a chattel mortgagewithout the consent of the insurer.

5. Alienation clause: The interest of theinsured in the policy would be forfeitedif the insured property is alienatedwithout the consent of the insurer.However, even without such a


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Wstipulation, the lack of insurableinterest of the insured at the time of theloss would prevent the insured fromrecovering under Sec. 19 (CAMPOS).

6. Unoccupancy and vacancy clause:aims to prevent risk.

7. Nonsafe clause: Put records ofchanging stocks inside fire-proof vaultto prevent guesswork

III.Casualty or Accidental Insurance

A. Definition

Sec. 174. Casualty insurance is insurancecovering loss or liability arising from accident ormishap,excluding certain types of loss which by law orcustom are considered as falling exclusivelywithin the scope of other types of insurancesuch as fire or marine.It includes, but is not limited to, employer'sliability insurance, motor vehicle liabilityinsurance, plate glass insurance, burglary andtheft insurance, personal accident and healthinsurance as written by non-life insurancecompanies, and other substantially similarkinds of insurance.

B. Kinds

1. Employer’s liability insurance: damagesor injury to workmen as caused by

2. Motor vehicle insurance (see latersection)

3. Plate gloss insurance: against loss frombraking of glass windows

4. Burglary and theft insurance5. Personal accident and health insurance:

from expense and loss in injuries ordiseases

6. Workmen’s Compensation insurance:industrial accident, causally or disease

C. “Intentional” vs. “Accidental”:test

1. Intentional –Implies the exercise of the reasoningfaculties, consciousness and volition.Where a provision of the policy excludesintentional injury, it is the intention ofthe person inflicting the injury that iscontrolling.If the injuries suffered by the insuredclearly resulted from the intentional actof the third person, the insurer is relievefrom liability as stipulated (Biagtan v.the Insular Life Assurance Co. Ltd.,1972).

2. Accidental – That which happens bychance or fortuitously, withoutintention or design, which isunexpected, unusual and unforeseen.

IV.Compulsory Motor VehicleInsurance

A. Definition

A species of compulsory insurance thatprovides for protection coverage thatwill answer for legal liability for lossesand damages for bodily injuries orproperty damage that may be sustainedby another arising from the use andoperation of motor vehicle by its owner.(Secs. 373 - 375)

B. Methods of Coverage

1. Insurance policy2. Surety bond3. Cash deposit

C. Parties affected

1. Owner of vehicle: the actual legalowner of a motor vehicle, in whosename such vehicle is duly registeredwith the Land TransportationCommission;

2. Passenger: any fare paying personbeing transported and conveyed in andby a motor vehicle for transportation ofpassengers for compensation, includingpersons expressly authorized by law orby the vehicle's operator or his agents toride without fare

3. Third-party: any person other than apassenger as defined in this section andshall also exclude a member of thehousehold, or a member of the familywithin the second degree ofconsanguinity or affinity, of a motorvehicle owner or land transportationoperator, as likewise defined herein, orhis employee in respect of death, bodilyinjury, or damage to property arisingout of and in the course of employment.(As amended by Presidential Decree No.1814 and 1981).


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WD. “No-fault clause”

(Asked in 94)

A clause that allows the victim (injuredperson or heirs of the deceased) anoption to file a claim for death or injury

without the necessity of proving fault ornegligence of any kind (Sec. 378)

Note: Sec. 378 refers only to death orinjury of the passenger or third party.Hence, damages to property are NOTcovered by the provisions on “no-fault”insurance. In such cases, the liability ofthe insured for such damages must beestablished.

Rules1. Total indemnity - maximum of P5,0002. Proofs of loss

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.3. Claim may be made against one motor

vehicle only4. Proper insurer from which to claim -

a. In case of an occupant: Insurer ofthe vehicle in which the occupant isriding, mounting or dismountingfrom;

b. In any other case: Insurer of thedirectly offending vehicle. (Sec. 378)

E. Special Clauses

1. Authorized Driver Clause (Asked in 91,93): A clause which aims to indemnifythe insured owner against loss ordamage to the car but limits the use ofthe insured vehicle to the insuredhimself or any person who drives on hisorder or with his permission

2. Theft Clause: A clause which includestheft as among the risks insuredagainst.

3. Cooperation Clause: A clause whichprovides in essence that the insuredshall give all such information andassistance as the insurer may require,usually requiring attendance at trials orhearings

REVIEWER IN COMMERCIAL LAW Chapter IX. Claims, Settlement, and Subrogation

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WChapter IX. Claims, Settlement,

and Subrogation

IX. LIABILITY FOR LOSSX. REQUISITES FOR RECOVERY FROM

INSURANCEXI. NOTICE AND PROOF OF LOSSXII. CLAIMS SETTLEMENTXIII.PRESCRIPTION OF ACTIONXIV.TIME OF PAYMENTXV. SUBROGATIONXVI.INSURANCE COMMISSION

I. Liability for Loss(Asked in 96, 05, 07)

Loss for which insureris liable

Loss for whichinsurer is not liable

Loss the proximatecause of which is theperil insured against(Sec. 84);

Loss by insured’swillful act;

Loss the immediatecause of which is theperil insured againstexcept where proximatecause is an exceptedperil;

Loss due toconnivance of theinsured (Sec. 87); and

Loss throughnegligence of insuredexcept where there wasgross negligenceamounting to willfulacts; and

Loss where theexcepted peril is theproximate cause.

Loss caused by effortsto rescue the thingfrom peril insuredagainst;

If during the courseof rescue, the thingis exposed to a perilnot insured against,which permanentlydeprives the insuredof its possession, inwhole or in part (Sec.85).

II. Requisites for Recovery FromInsurance (IPL-p)

1. The insured must have insurable interestin the subject matter;

2. That interest is covered by the policy;3. There must be a loss; and4. The loss must be proximately caused by

the peril insured against.

Proximate Cause Remote CauseAn event that sets allother events inmotion without anyintervening orindependent case,without which theinjury or loss wouldnot have occurred.

An event precedinganother in a causalchain, but separatedfrom it by otherevents

III.Notice and Proof of Loss

A. Notice of Loss - The formal noticegiven the insurer by the insured orclaimant under a policy of theoccurrence of the loss insured against. The purpose is to apprise the

insurance company so that it maymake proper investigation and takesuch action as may be necessary toprotect its interest.

It is necessary as the insurer cannotbe liable to pay a claim unless hereceives notice of that claim.

Under Sec. 88 insurer is exoneratedif notice of loss is not given to theinsurer by the insured or by theperson entitled to the benefitwithout unnecessary delay.

It has been held however that formalnotice of loss is not necessary ifinsurer has actual notice of lossalready.

In fire insurance In other types ofinsurance

Required Not requiredFailure to give noticewill defeat the right ofthe insured to recover.

Failure to give noticewill not exonerate theinsurer, unless thereis a stipulation in thepolicy requiring the

insured to do so.

B. Proof of Loss - The formal evidencegiven the insurance company by theinsured or claimant under a policy ofthe occurrence of the loss, theparticulars and the data necessary toenable the company to determine itsliability and the amount. Is not tantamount to proof or

evidence under the law on evidence. Proof of loss is intended to:

Give the insurer information bywhich he may determine theextent of his liability.

Afford him a means of detectingany fraud that may have beenpracticed upon him.


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WIV.Claims Settlement

A. No insurance company doing businessin the Philippines shall refuse, withoutjust cause, to pay or settle claimsarising under coverages provided by itspolicies, nor shall any such companyengage in unfair claim settlementpractices. (Sec. 241)

B. Unfair Claims Settlement

Sec. 241 (1) provides instances ofunfair claims settlement done by aninsurance company:

1. Knowingly misrepresenting toclaimants pertinent facts or policyprovisions relating to coverages atissue;

2. Failing to acknowledge withreasonable promptness pertinentcommunications with respect toclaims arising under its policies;

3. Failing to adopt and implementreasonable standards for the promptinvestigation of claims arising underits policies;

4. Not attempting in good faith toeffectuate prompt, fair and equitablesettlement of claims submitted inwhich liability has becomereasonably clear;

5. Compelling policyholders to institutesuits to recover amounts due underits polices by offering withoutjustifiable reason substantially lessthan the amounts ultimatelyrecovered in suites brought by them.

CLAIMS LIFE INSURANCE NON-LIFE INSURANCEMaturity 1. Upon death of the person

insured;2. Upon his surviving a specific

period3. Otherwise contingently on

the continuance or cessationof life (Sec. 180)

Upon happening of eventinsured against

Event must occur within theperiod specified in policy,otherwise insurer has no liablity

Delivery of Proceeds GENERAL RULE: Immediately upon

maturity of policy.

EXCEPTION: If payable in

INSTALLMENTS or as anANNUITY, when suchinstallments or annuitiesbecome due

IF MATURITY IS UPON DEATH: Within 60 days after

presentation of claimand filing of proof ofdeath of insured.

Within 30 days after(1) Proof of loss is received by

insurer; and(2) Ascertainment of loss or

damage is made either byagreement between theinsured and insurer or byarbitration

If ascertainment not madewithin 60 days after such receiptby insurer of proof of loss, lossor damage shall be paid within90 days after such receipt.

Effect of Refusal or Failure topay claim within timeprescribed:

In case of litigation, it isthe duty of theCommissioner or theCourt to determine WONclaim has beenunreasonably denied ofwithheld.

Failure to pay any suchclaim within the timeprescribed shall beconsidered prima facieevidence of unreasonabledelay in payment.

Entitles beneficiary to collectinterest on the proceeds ofpolicy for the duration of thedelay at rate of twice ceilingprescribed by the monetaryboard (unless refusal to payis based on ground that claimin fraudulent)

In case damages awarded,this includes attorney’s feesand other expenses incurreddue to delay (plus theinterest)

Entitles beneficiary to collectinterest on the proceeds of policyfor the duration of the delay atrate of twice ceiling prescribed bythe monetary board (unlessrefusal to pay is based on groundthat claim in fraudulent)

In case damages awarded, thisincludes attorney’s fees and otherexpenses incurred due to delay(plus the interest)


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WV. Prescription of Action

(Asked in 96)

Sec. 63. A condition, stipulation, or agreementin any policy of insurance, limiting the time forcommencing an action thereunder to a period ofless than one year from the time when the causeof action accrues, is void.

Rules:1. In the absence of an express stipulation

in the policy, it being based on a writtencontract, the action prescribes in 10years.

2. However the parties may validly agreeon a shorter period provided it is notless than one year from the time thecause of action accrues. In motorvehicle insurance, action prescribes inone year.

3. The cause of action accrues from therejection of the claim of the insured andnot from the time of loss. The period for filing claim is not

merely a procedural requirement.It is essential for the promptsettlement of claims as it demandsfor suits to be brought while theevidence as to the origin and causeof the loss or destruction has not yetdisappeared.It is a condition precedent to theinsurer’s liability or a resolutorycause in case the action is not filedby the insured within the stipulatedperiod.

The Insurance Commissioner hasthe power to adjudicate disputesrelating to an insurance company’sliability to an insured under apolicy.A complaint or claim filed with suchofficial is considered an “action” or“suit” the filing of which would havethe effect of tolling the suspendingthe running of the prescriptiveperiod.

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

VI.Time of Payment

LIFE POLICIES NON-LIFE POLICIES

Maturing upon theexpiration of theterm – The proceedsare immediatelypayable to the insured,unless they are madepayable in installmentsor as annuity, in whichcase, the installmentsor annuities shall bepaid as they becomedue.

The proceeds shall bepaid within 30 daysafter the receipt by theinsurer of proof ofloss, andascertainment of theloss or damage byagreement of theparties or byarbitration but notlater than 90 daysfrom such receipt ofproof of loss whetheror not ascertainmentis had or made.

Maturing at the deathof the insured,occurring prior to theexpiration of theterm stipulated – Theproceeds are payable tothe beneficiaries within60 days afterpresentation and filingof proof of death.

VII. Subrogation

Normal incident of indemnity insurance asa legal effect of payment; insurer steps intothe shoes of insured

Note: There is only subrogation inproperty insurance.

Rules:1. NO need of a formal assignment or an

express stipulation in the policy. It is alegal effect of payment.

2. The insurer can only recover from thethird person what the insured couldhave recovered. Thus, there can be norecovery if the insurer voluntarily paideven if the loss is not covered by thepolicy.

3. The insured can no longer recover fromthe offended party what was paid to himby the insurer but he can recover anydeficiency, that is, if his damages ismore than what was paid. Thedeficiency is not covered by the right ofsubrogation.

4. The insurer must present the policy asevidence to determine the extent of itscoverage (Wallen Phil. Shipping vs.Prudential Guarantee, 2003).


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W Cases Where There is No Right of

Subrogation1. Where the insured by his own act

releases the wrongdoer or third partyliable for the loss or damage;

2. Where the insurer pays the insured thevalue of the loss without notifying thecarrier who has in good faith settled theinsured’s claim for loss;

3. Where the insurer pays the insured fora loss or risk not covered by the policy(Pan Malayan Insurance Company v.CA, 1997).

4. In life insurance5. For recovery of loss in excess of

insurance coverage (DE LEON).

Manila Mahogany vs. CA (1987): By the act ofManila Mahogany issuing a release claim toSMC, the right of Zenith against SMC is nullifiedsince the insurer can be subrogated to only suchrights as the insured may have, should theinsured, after receiving payment from theinsurer, release the wrongdoer who causesthe loss, the insurer loses his rights againsthim. But in such a case the insurer will beentitled to recover from the insured whatever ithas paid, unless it was made with the consent ofthe insurer.

VIII. Insurance Commission

A. Jurisdiction of InsuranceCommission (Sec. 416)

Includes the following as long as anySINGLE CLAIM, excluding interests,costs and attorney’s fees, does NOTEXCEED 100,000.00:

1. Claims and complaints involvingliability of insurer under any kind ofpolicy or contract

2. Suretyship3. Reinsurance4. Mutual Benefit membership certificates

B. Circumstances when theCommissioner May Revoke orSuspend the License of an Insurer

1. If insurance contract is in unsoundcondition (Sec. 247).

2. If it has failed to comply with theprovisions of law or regulationsobligatory upon it (Sec. 247).

3. Its conditions or methods of business issuch as to render its proceedingshazardous to the public or to its policyholders (Sec. 247).

4. That its paid up capital stock, or itsavailable cash assets, or its securitydeposits, as the case may be, isimpaired or deficient (Sec. 247).

5. That the margin of solvency required ofeach company is deficient (Sec. 247).

6. That the insurer engages in unfairsettlement practices (Sec. 241).

- end of Insurance Law -

NOTE:The Insurance Commission hasconcurrent jurisdiction with the regularcourts to hear and decide claims forwhich an insurer may be answerable.


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SPECIAL LAWS

CHAPTER I. WAREHOUSE RECEIPTSLAW (ACT 2137)I. Scope and ApplicabilityII. Contents of Warehouse ReceiptIII. Kinds of Warehouse ReceiptsIV. Construction of Warehouse

ReceiptsV. Duties and Liabilities of a

WarehousemanVI. Attachment or Levy on Negotiable

ReceiptsVII. Warehouseman’s Lien

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CHAPTER II. GENERAL BONDEDWAREHOUSE ACT (ACT 3893 ASAMENDED BY RA 247)I. Purpose and ApplicabilityII. Duties of a Bonded WarehousemanIII. LiabilitiesIV. Warehouse Receipts Law v General

Bonded Warehouse Act

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CHAPTER III. TRUST RECEIPTS LAW(PD 115)I. Purpose of the LawII. Definition and NatureIII. Comparison to Other TransactionsIV. Parties to the TransactionV. Rights and Obligations of the

PartiesVI. Violations and Remedies

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CHAPTER IV. CHATTEL MORTGAGELAW (ACT NO. 1508)I. Definitions, Requisites and

CharacteristicsII. Properties and Obligations CoveredIII. FormIV. Right of Mortgagee to PossessV. RemediesVI. Comparative Tables

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CHAPTER V. REAL ESTATEMORTGAGE LAW (ACT NO. 3135 ASAMENDED)I. Definition and ApplicabilityII. Effects of Real Estate MortgageIII. Remedies in Case of DefaultIV. ForeclosureV. Deficiency ClaimsVI. RedemptionVII. Purchaser’s Right Of Possession

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CHAPTER VI. THE ANTI-DUMMYLAW (CA NO. 108, AMENDED BYPD NO. 715)I. DefinitionII. Acts PunishedIII. PenaltiesIV. Nationalization or Filipinization

Laws

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CHAPTER VII. FOREIGNINVESTMENT ACT OF 1991 (RA NO.7042, AMENDED BY RA NO. 8179)I. Philippine NationalII. Doing BusinessIII. Not Doing BusinessIV. Test to Determine Whether One is

Doing Business

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CHAPTER VIII. LETTERS OF CREDITI. DefinitionII. PartiesIII. LiabilitiesIV. Rule of Strict ComplianceV. Independence PrincipleVI. Kinds of letters of credit

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CHAPTER IX. INSOLVENCY LAWI. Concept and PurposeII. ComparisonsIII. Suspension of PaymentsIV. Voluntary InsolvencyV. Involuntary InsolvencyVI. Specific Provisions

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CHAPTER X. INTERIM RULES OFPROCEDURE FOR INTRA-CORPORATE CONTROVERSIES(A.M. NO. 01-2-04-SC)I. General ProvisionsII. ProcedureIII. Election ContestsIV. Inspection of Corporate Books and

RecordsV. Derivative SuitsVI. Management CommitteeVII. Provisional RemediesVIII. Sanctions

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CHAPTER XI. RULES OFPROCEDURE ON CORPORATEREHABILITATIONI. CoverageII. Construction of TermsIII. General ProvisionsIV. Stay OrderV. Rehabilitation ReceiverVI. Rehabilitation PlanVII. Debtor-Initiated RehabilitationVIII. Creditor-Initiated

RehabilitationIX. Pre-Negotiated RehabilitationX. Recognition of Foreign Proceedings

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REVIEWER IN COMMERCIAL LAW Chapter I. Warehouse Receipts Law

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Special LawsFACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE


ACADEMICS COMMITTEE


EDITOR-IN-CHIEF


LAYOUT HEAD

Viktor FontanillaLAYOUT TEAM



COMMERCIAL LAWCOMMERCIAL LAW


SPECIAL LAWS

Marvin IbarraLEAD WRITER

Angela De GuzmanCecilia Therese Giuao

Jo Blanca LabayWilhelmina Mayuga

Nicole TorresCristina YambotJames Donato

Linus MadambaWRITERS

LECTURES

Edel CruzHEAD



--------Leo Zulueta


Chapter I. Warehouse ReceiptsLaw (Act 2137)

I. SCOPE AND APPLICABILITYII. CONTENTS OF WAREHOUSE RECEIPTIII. KINDS OF WAREHOUSE RECEIPTSIV. CONSTRUCTION OF WAREHOUSE

RECEIPTSV. DUTIES AND LIABILITIES OF A

WAREHOUSEMANVI. ATTACHMENT OR LEVY ON NEGOTIABLE

RECEIPTSVII.WAREHOUSEMAN’S LIEN

I. Scope and Applicability

A. Scope

All warehouses, whether public or private,bonded or not.

B. Application

The special law applies to warehousereceipts issued by a warehouseman asdefined in Sec. 58(a); while the Civil Code,to other cases where receipts are not issuedby a warehouseman

C. Who May Issue WarehouseReceipts

Only a warehouseman; but a dulyauthorized officer or agent of awarehouseman may do so.

A warehouseman is a person lawfullyengaged in the business of storinggoods for profit.

Receipts not issued by awarehouseman, although in the form ofwarehouse receipts, are not warehousereceipts

II. Contents of Warehouse Receipt

A. Essential Terms (Sec 2)

1. location of the warehouse2. date of issue of receipt3. consecutive number of receipt4. person to whom goods are deliverable5. rate of storage charges6. description of goods or packages7. signature of warehouseman8. warehouseman’s ownership of or

interest in goods9. statement of advances made and

liabilities incurred

NOTE: No particular form is required or

specified, but the terms above must beembodied in every warehouse receipt.

The date of issue appearing in thereceipt indicates prima facie the datewhen the contract of deposit isperfected and when the storage chargesshall begin to run against the depositor.

American Foreign Banking Corporation vHerridge (1927):

The mere fact that the goods deposited areincorrectly described does not makeineffective the receipt when the identity of thegoods is fully established by evidence. Thus, itsendorsement and delivery shall constitute asufficient transfer of the title to the goods.


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B. Effect of Omission of AnyEssential Term

1. Validity of receipt is not affected2. Warehouseman will be liable for

damages3. Negotiability of receipt not affected4. The contract will be converted to an

ordinary deposit

C. Terms that Cannot Be Included

1. Those contrary to this Act (e.g.exemption from liability for misdeliveryin Sec. 10, not giving statutory notice incase of sale of goods in Sec. 33 and 34).

2. Exemption from liability and negligence.3. Those contrary to law, morals, good

customs, public order or public policy.

III.Kinds of Warehouse Receipts

A. Negotiable Receipt

Negotiable Receipt—Receipt in which it is stated that thegoods received will be delivered to thebearer or to the order of any personnamed in such receipt.

A provision in a negotiable receipt thatit is non-negotiable is void.

Duplicate Receipts apply only tonegotiable warehouse receipts—“Whenever more than one negotiablereceipt is issued for the same goods, theword ‘DUPLICATE” shall be placed onthe face of the receipt except the onefirst issued.”

Effect—The warehouseman shall be liable fordamages for failing to do this to anyonewho purchased the subsequent receipt(1) for value, and (2) supposing it to bean original, even though the purchasebe after delivery of the goods by thewarehouseman to the holder of theoriginal receipt.

Negotiable receipts negotiable bydelivery—1. if the goods are deliverable to the

bearer; or2. when indorsed in blank; or3. person to whose order the goods are

delivered or by a subsequentindorsee indorsed it to bearer.

A negotiable warehouse receipt is not anegotiable instrument in the samesense as in the NIL.

B. Non-negotiable Receipt

Non-negotiable Receipt—Receipt in which it is stated that thegoods received will be delivered to thedepositor or to any other specifiedperson.

A non-negotiable receipt must containthe word “non-negotiable”. Failure to doso will make a holder who (1) purchasedfor value AND (2) supposing it to benegotiable, may at his option treat it asnegotiable.

IV.Construction of WarehouseReceipts

Liberal construction of the law in favor ofbona fide holders. This has no applicationto actions against any party other than awarehouseman.

V. Duties and Liabilities of aWarehouseman

A. Principal Obligations of aWarehouseman

1. To take care of the goods, and be liablefor failure to exercise care; but he is notliable for loss or injury which could nothave been avoided, unless there is astipulation to the contrary.

2. To deliver the goods to the holder of thereceipt or the depositor upon demand,accompanied with:a. An offer to satisfy the

warehouseman’s lien:Because a warehouseman may

refuse delivery until his lien issatisfied.

b. An offer to surrender the receipt: Forthe protection of the warehousemanand to avoid criminal liability; this issubject to waiver.

c. An offer to sign when the goods aredelivered, an acknowledgment thatthey have been delivered.

But, the warehouseman may still refusedelivery on the grounds of some lawfulexcuse:a. Sec. 10: he has been requested by

the person lawfully entitled to thegoods not to make delivery; he hasinformation that the delivery aboutto be made was to one not lawfullyentitled to the goods;


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b. Sec. 16: He has acquired title to thegoods which was derived fromtransfer made by the depositor atthe time of the deposit for storage orsubsequent thereto thewarehouseman’s lien;

c. Sec. 18: If there are severalclaimants to the goods;

d. Sec. 21: If the goods were lost andhe had no fault;

e. Sec. 36: He has already lawfully soldthe goods

B. Persons to Whom the Goods MustBe Delivered

1. Persons lawfully entitled to thepossession of the goods or its agent

2. Persons entitled to deliver under:a. a non-negotiable receipt; orb. with written authority

3. Person in possession of a negotiablereceipt (which was lawfully negotiated)

NOTE:A warehouseman does not have a cause ofaction against a person to whom hemisdelivered the thing, unless the depositorsues him.

C. Acts for Which a Warehousemanis Liable

1. Failure to stamp “duplicate” on copiesof a negotiable receipt (Sec. 6 and 15)

2. Failure to place “non-negotiable” on anonnegotiable receipt (Sec. 7)

3. Misdelivery of the goods (Sec. 10)a. To one not lawfully entitled to

possession - Liable for conversionb. To a person entitled to delivery

under a nonnegotiable receipt orwritten authorization OR person inpossession of a negotiable receipt -Still liable for conversion if:i. prior to delivery, he had been

requested NOT to make suchdelivery

ii. he had received notice of theadverse claim or title of a 3rdperson

4. Failure to effect cancellation of anegotiable receipt upon delivery of thegoods (Sec. 11)

NOTE:This is applicable ONLY to negotiablereceipts but NOT to a situation wherethere was a valid sale in accordancewith Sec. 36

5. Issuing receipt for non-existing goodsor misdescribed goods (Sec. 20)

EXCEPTION:If the description consists merely ofmarks or labels upon the goods or uponthe packages containing them, etc., thewarehouseman is not liable even if thegoods are not of the kind as indicated inthe marks or labels

6. In case of lost or destroyed receipts(Sec. 14)—

A warehouseman must deliver to theone who has the receipt but if such waslost, a competent court may order thedelivery of the goods only:i. upon proof of the loss or destruction

of the receipt; andii. upon giving of a bond with sufficient

securities

The warehouseman is still liable to aholder of the receipt for value withoutnotice since the warehouseman cansecure himself in the bond given.

7. Failure to take care of the goods (Sec.12)

8. Failure to give notice in case of sales ofgoods to satisfy his lien (Sec. 33) orbecause the goods are perishable andhazardous (Sec. 34)

D. Alteration of Receipts

Effect of AlterationAlteration EffectAlterationimmaterial

whether fraudulent or not,authorized or not, thewarehouseman isliable on the altered receiptaccording to its original tenor

Alterationmaterial butauthorized

The warehouseman is liableaccording to the terms of thereceipts as altered

Materialalterationinnocentlymade

the warehouseman is liable onthe altered receipt according toits originalterm

Materialalterationfraudulentlymade

warehouseman is liableaccording to the original tenorto a:a. purchaser of the receipt for


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value without notice; andb. to the alterer andsubsequent purchasers withnotice (BUT his liability islimited only to delivery as he isexcused from any otherliability)

Even a fraudulent alteration cannot divestthe title of the owner of stored goods andthe warehouseman is liable to return themto the owner. But a bona fide holderacquires no right to the goods under anegotiable receipt which has been stolen orlost or which the indorsement has beenforged.

E. Ownership as a Defense

1. Ownership is not a defense for refusalto deliver. The warehouseman cannotrefuse to deliver the goods on theground that he has acquired title orright to the possession of it unless suchis derived:a. directly or indirectly from a transfer

made by the depositor at the time ofthe deposit for storage orsubsequent thereto;

b. from the warehouseman’s lien

2. Adverse title of a 3rd person is not adefense for refusal to deliver by awarehouseman to his bailor on demand,except:a. To persons to whom the goods must

be delivered (Sec. 9)b. To the person who wins in the

interpleader case (Sec. 17)c. To the person he finds to be entitled

to the possession after investigation(Sec. 18)

d. To the buyer in case there was avalid sale of the goods (Sec. 36)

F. Duty of Warehouseman WhenThere Are Several Claimants

1. The warehouseman may either:a. Investigate and determine within a

reasonable time the validity of theclaims, and deliver to the personwhom he finds is entitled to thepossession of the goods

Effect: He is not excused fromliability in case he makes a mistake

b. He may bring a complaint ininterpleader.

Effect:i. he will be relieved from liability

in delivering the goods to theperson whom the court finds tohave better right;

ii. he is liable for refusal to deliverto the rightful claimant when itis required to have aninterpleader;

c. He may not do (a) and (b)

Effect: He will be liable after a lapseof a reasonable time, of conversionas of the date of the original demandfor the goods.

This does NOT apply to cases where thewarehouseman himself makes a claim tothe goods.

G. Commingling of Deposited Goods

General Rule—A warehouseman may not mingle goodsbelonging to different depositors.

ExceptionIn case of fungible goods of the same kindand grade provided:1. he is authorized by agreement2. he is authorized by custom

Effects1. each depositor shall own the entire

mass in common and entitled to hisportion

2. warehouseman is severally liable toeach depositor for the care andredelivery of their portion as if the goodshad been kept separate

VI.Attachment or Levy on NegotiableReceipts

A warehouseman has the obligation tohold the goods for the owner or for theperson to whom the negotiable receipthas been duly negotiated.

Therefore, the goods cannot beattached or levied upon under anexecution, unless:a. the document be first surrendered;

orb. the negotiation is enjoined, orc. the document is impounded by the

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The warehouseman cannot becompelled to deliver the goods until:a. the receipt is surrendered to him;b. it is impounded by the court (Sec.

25)

The above rules do not apply if the persondepositing is not the owner of the goods orone who has not the right to convey title tothe goods binding upon the owner.

The remedy of a creditor whose debtor ownsa negotiable receipt is to ask for anattachment of the negotiable receipt, not onthe goods. The goods themselves cannotreadily be attached or levied upon byordinary legal process

VII. Warehouseman’s Lien

A. Extent of Warehouseman’s Lien

1. lawful charges fora. storage, andb. preservation of the goods

2. lawful claims fora. money advancedb. laborc. interestd. weighinge. insurancef. cooperatingg. transportation

3. other charges and expenses in relationto such goods

4. reasonable charges and expenses fornotice and advertisements of sale

5. sale of the goods where defaults hasbeen made in satisfying the lien

B. Extent of the Lien When aNegotiable Receipt Has BeenIssued

1. charges for storage and preservation ofthe goods

2. other charges expressly enumerated (#2b, c, d and e above) although theamount is NOT stated

For claims not specified, the warehousemanshares pro rata with the other creditors ofthe depositor the balance of the proceeds ofthe sale for the satisfaction of the claims.

C. Goods Subject to Lien

1. goods of the depositor who is liable tothe warehouseman as debtor whereversuch goods are deposited;

2. goods of other persons stored by thedepositor who is liable to the

warehouseman as debtor with authorityto make a valid pledge

A warehouseman has NO lien on goodsbelonging to another and stored by astranger in fraud of the true owner’s right.

D. Loss of Lien

1. Voluntarily surrendering possession ofgoods — constitutes a waiver orabandonment

A warehouseman may NOT claim a lienon other goods of the same depositor forunpaid charges on the goodssurrendered if the goods were deliveredto him under different receipts.

2. Wrongfully refusing to deliver the goodsto a person who holds the receipt or thedepositor upon DEMAND accompaniedwith:a. an offer to satisfy the

warehouseman’s lien (because awarehouseman may refuse deliveryuntil his lien is satisfied)

b. an offer to surrender the receipti. for the protection of the

warehouseman and to avoidcriminal liability

ii. this is subject to waiverc. an offer to sign when the goods are

delivered, an acknowledgment thatthey have been delivered

E. Remedies of a Warehouseman

1. Even if without lien, all remediesallowed by law to a creditor against hisdebtor for collection of charges;

2. By refusing to deliver the goods untilhis lien is satisfied;

3. All remedies allowed by law for theenforcement of a lien against personalproperty and recovery of any deficiencyin case it exists after the sale of theproperty;

4. By causing the extrajudicial sale of theproperty and applying the proceeds tothe value of the lien

F. Effects of Extrajudicial Sale

1. Warehouseman is NOT liable for non-delivery even if the receipt was given forthe goods when they were deposited benegotiated

2. When the sale was made without thepublication required and before the timespecified by law, such sale is void andthe purchaser of the goods acquires notitle in them

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Chapter II. General BondedWarehouse Act (Act 3893 as

amended by RA 247)

I. PURPOSE AND APPLICABILITYII. DUTIES OF A BONDED WAREHOUSEMANIII. LIABILITIESIV. WAREHOUSE RECEIPTS LAW v GENERAL

BONDED WAREHOUSE ACT

I. Purpose and Applicability

A. Purpose

1. regulate the business of receivingcommodities for storage

2. protect depositors by giving them adirect recourse against the bond filed bythe warehouseman in case of the latter’sinsolvency

3. encourage the establishment of morewarehouses

B. Applicability

The Act applies to a warehousemanengaged in the business of receivingcommodity for storage, including contractsor transactions wherein1. the warehouseman is obligated to

return the very same commoditydelivered to him or pay its value

2. commodity delivered is to bemilled forand on account of its owner

3. commodity delivered is commingledwith commodity delivered by orbelonging to other persons, and thewarehouseman is obligated to returncommodity of the same kind, or pay itsvalue

Illegal and prohibited goods may not bevalidly received.

Gonzales vs Go Tiong (1958)Though it is desirable that receipts issued by abonded warehouseman should conform to theprovisions of the Warehouseman Receipts Law,said provisions are not mandatory. The issuanceof a warehouse receipt in the form provided bythe Act is merely permissive and directory andnot obligatory.

II. Duties of a BondedWarehouseman

1. Storage of Commodities withoutdiscrimination between persons desiringto avail themselves of warehousefacilities.

2. Give the necessary bond of not lessthan 33 1/3% of the market value of themaximum quantity or commodities tobe received.

3. Insure the commodity against fire (Sec.6)

4. To keep a complete record of:a. the commodities received by him,b. the receipts issued therefor of the

withdrawals,c. the liquidations and all receipts

returned to and cancelled by him.5. Report to the Director of Bureau of

Commerce and Industry concerning thewarehouse and the conditions,contents, operations, and business.

6. Observe rules and regulations of theBureau of Domestic Trade (Sec. 9)

Person injured by warehouseman’s breachof his duties may sue on the band torecover damages on account of the breach.In case bond is insufficient to cover themarket value of the commodity stored, hemay sue on any the warehouseman’sproperty or assets not exempt by law fromattachment or execution. (Sec. 7)

III.Liabilities

CIVIL CRIMINALBreach ofobligationssecured bythe bond

1. Engaging in business coveredby the GBWA in violation ofthe license requirement

2. Receiving a quantity ofcommodity greater than thewarehouse capacity or thatspecified in the license, if thegoods are lost or destroyed

3. Connivance with awarehouseman for thepurpose of evading the licenserequirement

IV.Warehouse Receipts Law vGeneral Bonded Warehouse Act

WRL GBWA1. Prescribes the mutualduties and rights of awarehouseman (who issueswarehouse receipts) and hisdepositor2. Covers all warehouseswhether bonded or not

Regulates andsuperviseswarehouseswhich put up abond

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Chapter III. Trust Receipts Law(P.D. 115)

I. PURPOSE OF THE LAWII. DEFINITION AND NATUREIII. COMPARISON TO OTHER TRANSACTIONSIV. PARTIES TO THE TRANSACTIONV. RIGHTS AND OBLIGATIONS OF THE

PARTIESVI. VIOLATIONS AND REMEDIES

I. Purpose of the Law

A. To encourage the use of and promotetransactions based on trust receipts;encourage and promote the use of trustreceipts as an additional andconvenient aid to commerce and trade.

B. To regulate trust receipt transactions inorder to assure the protection of therights and the enforcement of theobligations of the parties involved.

C. To declare the misuse ormisappropriation of goods or theproceeds realized from the sale of goodsreleased under trust receipts as anoffence punishable under Article 315,RPC. (Sec. 2)

D. To punish the dishonesty and abuse ofconfidence in the handling of money orgoods to the prejudice of anotherregardless of whether or not the latter isthe owner. (Colineres vs. CA, 2000)

II. Definition and Nature

Trust Receipt Transaction is atransaction between an entruster and anentrustee whereby the entruster, who ownsor holds absolute title or security interestsor instruments, releases the same to thepossession of the entrustee upon thelatter’s execution and delivery to theentruster of a trust receipt wherein theentrustee binds himself to hold thespecified goods, documents or instrumentsin trust for the entruster and to sell orotherwise dispose of the goods, documentsof instruments with the obligation to turnover to the entruster the proceeds thereof tothe extent of the amount owing to theentruster, or the goods, documents orinstruments themselves if they are unsoldor not otherwise disposed of. (Sec. 4)

A. Nature of Trust Receipts

1. Landi & Co. (Phil.), Inc. vs.Metropolitan Bank (2004): A trustreceipt is merely a collateral agreement,

the purpose of which is to serve assecurity for a loan.

2. Allied Banking vs. Ordonez (1990):Applies even to goods not destined forsale or manufacture, and would includeitems obtained to repair and maintainequipment used in business.

3. People vs. Cuevo (1981): [No agencyrelationship is established.] Anentrustee’s breach of trust, however,subjects him to criminal and civilliability for estafa.

4. Not a Trust Receipt Transaction: saleof goods/documents/instruments by aperson in the business of selling suchfor profit who, at the outset of thetransaction, has, as against the buyer:a. general property rights in such goods/

documents/ instruments, ORb. who sells the same to the buyer on

credit, retaining title or other interestas security for the payment of thepurchase price.

PD 115 Civil Code

Although the entrustee isnot the owner of thegoods, anyone who buysfrom him acquires goodtitle over the goods.

Buyer acquiresonly whatever titlethe seller has atthe time the sale isperfected. (Art.1505)

Even if the entrustee isnot the owner, he bearsrisk of loss while the goodsare in his possession.

Generally, ownerbears the loss.

III. Comparison to OtherTransactions

Other Transactions TrustReceipt

TransactionChattel

MortgageSubjects theproperty to alien

No lien iscreated overthe property

Pledge Financerpossesses theproperty

Personfinancedpossesses theproperty

ConditionalSale

There is a saleof the propertyfrom the sellerto the buyer

No sale of theproperty fromentruster toentrustee

Consignment 1. Bipartite2. Consignor

retainsownershipof theproperty

1. Tripartite2. Seller

does notretaintitle totheproperty

(Notes on Selected Commercial Laws: A Guidefor Bar Reviewees, Tristan Catindig, 2003 ed.)


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Colinares vs. CA (2000)This situation belies what normally obtains in apure trust receipt transaction where goods areowned by the bank and only released to theimporter in trust subsequent to the grant of theloan. The bank acquires a “security interest” inthe goods. The ownership of the merchandisecontinues to be vested in the person who hadadvanced payment until he has been paid in full,or if the merchandise has already been sold, theproceeds of the sale should be turned over tohim. The bank takes full title to the goods andcontinues to hold that as his indispensablesecurity until the goods are sold and the vendeeis called upon to pay for them. Trust receiptspartake of the nature of a conditional sale wherethe importer becomes absolute owner of theimported merchandise as soon as he has paid itsprice.

Consolidated Bank vs. CA (2001)The delivery of the goods subject to the TRoccurred long before the TR itself was executed.This situation is inconsistent with whatnormally obtains in a pure TR transaction,wherein goods belong in ownership to the bankand are only released to the importer in trustafter the loan is granted.

IV.Parties to the Transaction

A. Entruster

1. Lender/financier2. Person holding title over the goods,

documents or instruments subject of aTR transaction; releases possession ofthe goods upon execution of TR

3. Not the owner of the goods, but merelya holder of security interest

4. Garcia vs. CA: If it is made to appearin the TR as the owner of the goodspurchased, it is merely theoretical, anartificial expedient and more of fictionthan fact. (However, also see Prof.Catindig’s contrary view, as well asColinares vs. CA, and PrudentialBank vs. IAC.)

B. Entrustee

1. Borrower/buyer/importer2. Person to whom the goods are delivered

for sale or processing in trust, with theobligation to return the proceeds of thesale of goods or the goods themselves tothe entruster

3. The owner of the goods purchased – thelaw imposes upon him the risk of loss ofthe goods. Res perit domino.

4. DBP vs. Prudential Bank (2005): Theentrustee has no authority to mortgagegoods covered by TR.

C. Seller of the Goods

Not strictly and actually a party to the TRtransaction, but a party to the contract ofsale with the buyer/importer (entrustee).

D. Purchaser in Good Faith

Any purchaser of goods from an entrusteewith the right to sell, or of documents orinstruments through their customary formof transfer, who buys such for value and ingood faith from the entrustee, acquires saidgoods, documents or instruments free fromthe entruster’s security interest. (Sec. 11)

V. Rights And Obligations Of Parties

A. Rights of the Parties

Entruster EntrusteeEntitled to the

proceeds from the saleof the

goods, documents orinstruments to

the extent of theamount owing to the

entruster or asappears in the trust

receipt

To receive the surplusfrom the public

sale

Entitled to the returnof the goods,documents

or instruments in caseof non-sale,

To have possession ofthe goods as a

condition for hisliability under theTrust Receipt Law

(Ramos vs. CA)Entitled to the

enforcement of allother rights

conferred on him inthe trust receipt

Cancel the trust andtake possession of thesubject of the trust orof the proceeds upon

default or failure of theentrustee

Sell the goods,documents orinstruments at

public or private saleupon default of the

entrustee after noticeto the latter

Prudential Bank vs NLRC (1995)The security interest of the entruster is notmerely an empty or idle title. To a certain extent,such interest becomes a "lien" on the goodsbecause the entruster's advances will have to besettled first before the entrustee can consolidate


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his ownership over the goods. The law warrantsthe validity of petitioner's security interest asagainst all creditors of the trust receiptagreement. The only exception is when theproperties are in the hands of an innocentpurchaser for value and in good faith.

Prudential Bank vs NLRC (1995)The goods covered by trust receipts cannot belevied upon by creditors of the entrustee.

B. Obligations of the Parties

Entruster EntrusteeTo give possession of

the goods to theentrustee

To hold the goods,documents or

instruments in trustfor the entruster andshall dispose of themstrictly in accordancewith the terms and

conditions of the trustreceipt

To give at least 5 daysnotice to the

entrustee of theintention to sell the

goods at an intendedpublic sale

To receive the proceedsin trust for the

entruster and turnover the same to theextent of the amount

owing to theentruster or as

appears on the trustreceipt

To insure the goods fortheir total value

against loss from fire,theft, pilferage or other

casualtiesTo keep said goods or

proceeds separateand capable ofidentification

To return the goods,documents or

instruments in theevent of non-sale or

upon demandTo observe all other

terms and conditionsof the trust receipt

To bear the risk of lossirrespective of WON itwas due to his fault or

negligence

State Investment vs CA (2000)The entruster not entitled to proceeds of sale ofgoods not covered by trust receipt.

Vintola vs. IBAA (1987)The liability of entrustee not extinguished byreturn of goods to entruster. The entruster didnot become the real owner of the goods; it wasmerely the holder of a security title for theadvances in had made to the entrustee. Thegoods remain the entrustee’s own property.

VI.Violation and Remedies

People vs. Nitafan (1992)The TR law punishes the dishonesty and abuse

of confidence in the handling of money or goods– it does not seek the enforcement of the loan.Thus, there can be no violation of a right againstimprisonment for non-payment of a debt. PD115, like BP 22, punishes the act “not as anoffense against property, but as an offenseagainst public order.” Thus the law states that abreach of a TR agreement makes one liable forestafa. The offense is malum prohibitum. Thereis no need to prove damage to the entrustor.

Prudential vs. IAC:Apart from estafa, the entrustee is also liable fordamages under Art. 33, CC.

Effect of Compliance—

Before criminal charge: NO crim.Liability

After charge, before conviction:EXTINGUISHMENT of criminal liability

The liability of the entrustee accrues uponhis failure to comply with his obligation toreturn. It is not absolutely necessary thatthe entruster cancels the trust and takepossession of the goods to be able toenforce his rights under this law.

Allied vs. OrdonezThe penal provision of PD 115 encompasses anyact violative of the obligation covered by the trustreceipt. It is not limited to the transactions ingoodswhich are to be sold, reshipped or storesd,but also applies to goods processed as a componentof a product ultimately sold to the general public.

Sarmiento Jr. vs. CA (2002)The breach of obligation of a TR agreement isseparate and distinct from any criminal liability for“misuse and/or misappropriation of goods orproceeds realized from the sale of goods,documents or instruments released under trustreceipts,” punishable under Sec. 13 of the TR lawin relation to Art. 315(1)(b) of the RPC. Beingbased on an obligation ex contractu and not exdelicto, the civil action may proceed independentlyof the criminal proceedings instituted againstpetitioners regardless of the result of the latter.

Tupaz VI, et. al. vs. CA and BPI (2005)Here, BPI chose not to file a separate civil action torecover payment under the TR’s. Instead,respondent bank sought to recover payment incriminal case nos. 8848 and 8849. Although theTC acquitted Jose Tupaz, his acquittal did NOTextinguish his criminal liability. ... Acquittal in acriminal case for estafa does not extinguish civilliability arising from breach of trust receiptcontract.

Phil. Blooming vs. CAPF 115 allows the bank to take possession of thegoods covered by the TR’s. Thus, even though thebank took possession of the goods covered by theTR’s, the entrustees remained liable for the entireamount of the loans covered by the TR’s.

REVIEWER IN COMMERCIAL LAW Chapter IV. Chattel Mortgage Law

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Chapter IV. Chattel Mortgage Law(Act No. 1508)

I. DEFINITIONS, REQUISITES ANDCHARACTERISTICS

II. PROPPERTIES AND OBLIGATIONSCOVERED

III. FORMIV. RIGHT OF MORTGAGEE TO POSSESSV. REMEDIESVI. COMPARATIVE TABLES

I. Definitions, Requisites andCharacteristics

A chattel mortgage is a contract by virtue ofwhich personal property is recorded in theChattel Mortgage Register as security forthe performance of an obligation

Essential Requisitesa. Secure an Obligationb. Absolute Ownership by the mortgagorc. Free Disposal by the mortgagor

Characteristicsa. Accessory – It is constituted to secure

the performance of a principalobligation

b. Formal – Registration is required tobind third parties.

c. Unilateral – It produces only obligationson the part of the creditor to free thething from the encumbrance onfulfillment of the obligation.

d. Constituted on personal properties.

II. Properties and ObligationsCovered

A. Properties Covered

Only property described therein and notlike or substituted property thereafteracquired

Exception—A stipulation in the mortgage extending itsscope and effect to after-acquired propertyis valid and binding where the afteracquired property is:1. Goods perishable or subject to inevitable

wear and tear. (People’s Bank v.Dahican Lumber Co.)

2. Future property is a renewal of or insubstitution for goods on hand whenthe mortgage was executed, or ispurchased with the proceeds of sale ofsuch goods. (Torres and Limjap)

3. Those contemplated in an expressstipulation and in a supplement to themortgage subsequently executed instrict compliance with the ChattelMortgage Law.

B. Obligations Covered

Only obligations existing at theconstitution of the mortgage—Although a promise expressed in a chattelmortgage to include debts that are yet to becontracted can be a binding commitmentthat can be compelled upon, the securityitself does not arise until after a chattelmortgage agreement covering the newlycontracted debt is executed either by efresh chattel mortgage or by amending theold contract.

III.Form

A. Registered—

The mortgage must be Registered in theChattel Mortgage Registry in the registry ofdeeds of the province where:1. If the property is located where the

mortgagor residesa. The mortgage resides ORb. The property is situated if he is a

non-resident2. If the property is located at a different

place than where the mortgagor residesa. The mortgage resides ANDb. The property is situated if he is a

non-residentEffects—1. Registration creates a real right or a lien

which follows the chattel wherever ingoes.

2. An unregistered mortgage is bindingbetween parties but does not bind thirdperson

B. Affidavit of Good Faith—

The parties are required to executed anaffidavit of good faith.

Affidavit of Good faith in the contract ofchattel mortgage is an oath wherein theparties severally swear that (1) themortgage is made for the purpose ofsecuring the obligation specified inconditions thereof, and for no otherpurpose and (2) that the same is justand valid obligation and (3) one notentered into for the purpose of fraud.


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Effects—1. It gives the mortgage a preferred status.2. Its absence vitiates the mortgage

against third persons without noticelike creditors and subsequentencumbrancers. (Liluis v. ManilaStandard Company)

IV.Right of Mortgagee to Possess

Before default – No right to possess. After default – The right of the

mortgagee to take the mortgageproperty which is to be foreclosed isimplied from the provisions givinghim the right to sell.

V. Remedies

1. Original action for collection of moneyor

2. Extra-judicial Foreclosure

Procedure for Extrajudicial Foreclosure1. 30 days after the time of the

condition is broken, the mortgageemay cause the mortgaged property to besold at public auction by a publicofficer.

2. Applications for extra-judicialforeclosure of mortgage whether underthe direction of the sheriff or a notarypublic shall be filed with theexecutive judge through the Clerk ofCourt

3. The chattel mortgage may be sold at apublic sale or private sale.

4. There must be at least 10 days noticeprevious to the sale of the (1)mortgagor or person holding underhim, and persons holding subsequentmortgages of the time and place of thesale either by notice in writing directedto him or left at his abode in themunicipality or sent by mail if he doesnot reside within the municipality. Thisnotice must also be (2) posted at twoor more public places in themunicipality,

There can be a deficiency claim except incircumstances where the Recto Law (Saleby Installment) is applicable:a. Exact fulfillment of the obligation,

should the vendee fail to pay;b. Cancel the sale, should the vendee’s

failure to pay cover two or moreinstallments;

c. Foreclosure (choosing this option BARSrecovery of deficiency)

VI.Comparative Tables

A. Chattel Mortgage and Pledge

ChattelMortgage

Pledge

Delivery Delivery of theproperty tothe mortgageeis notnecessary

Delivery ofthe propertyto the pledgeis necessary

Registration Registrationin the ChattelMortgageRegister isnecessary tobind thirdpersons

Registrationin theRegistry ofProperty isnot necessary

Procedure forSale

Procedure forthe sale isfound in Sec.14 of Act No.1508

Procedure isfound in Art2112 of theCivil Code

Excess If the propertyis foreclosed,the excessover theamount duegoes to thedebtor

Debtor is notentitled to theexcess unlessit is otherwiseagreed orexcept in thecase of a legalpledge

Deficiency Creditor mayrecover anydeficiencyexcept ifchattelmortgage is asecurity forthe purchaseof personalproperty ininstallments(see RectoLaw, Act4122)

Creditorcannotrecoverdeficiencyeven if agreedupon

B. Chattel Mortgage and Pacto deRetro

ChattelMortgage

Pacto deRetro

Nature Accessorycontract

Principalcontract

Transfer oftitle

Title to thething mortgageis nottransferred

Title to thesubject matteris transferredto the vendee aretro butsubject to theredemption ofthe vendor

Affidavit ofGood Faith

Affidavit ofgood faith isrequired

Affidavit ofgood faith isnot required.


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C. Chattel Mortgage and Real EstateMortgage

ChattelMortgage

Real EstateMortgage

SubjectMatter

Thingmortgagedmust be apersonal ormovableproperty

Thingmortgagedmust be realor immovableproperty

Alienation Mortgagorcannotalienate thethingmortgagedwithout theconsent ofthemortgagee

Mortgagor canalienate thethingmortgagedwithout theconsent of themorgagee andany suchprohibition isvoid

Right ofRedemption

No right ofredemption

There can beright ofredemption inextrajudicialforeclosureand in judicialforeclosure bybanks

Affidavit ofGood Faith

Affidavit ofGoof faith isrequired

Affidavit ofGoof faith isnot required

REVIEWER IN COMMERCIAL LAW Chapter V. Real Estate Mortgage Law

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Chapter V. Real Estate MortgageLaw (Act No. 3135 as amended)

I. DEFINITION AND APPLICABILITYII. EFFECTS OF REAL ESTATE MORTGAGEIII. REMEDIES IN CASE OF DEFAULTIV. FORECLOSUREV. DEFICIENCY CLAIMSVI. REDEMPTIONVII.PURCHASER’S RIGHT OF POSSESSION

I. Definition and Applicability

A real estate mortgage is a contractwhereby the debtor secures to thecreditor the fulfillment of a principalobligation, specially subjecting to suchsecurity immovable property or realrights over immovable property whichobligation shall be satisfied with theproceeds of the sale of said property orrights in case the said obligation is notcomplied with at the time stipulated

Act 3135 applies if a special power toextrajudicially foreclose the mortgage isinserted to the real estate mortgagecontract.

Rule 68 of the Rules of Court applies ifthe real estate mortgage is silent as tothe manner of foreclosing the mortgage.

II. Effects of Real Estate Mortgage

A. Effect of real estate mortgage

1. Creates a real right. A registeredmortgage lien is considered inseparablefrom the property inasmuch as it is aright in rem

2. Creates merely an encumbrance. Realestate mortgage does not involvetransfer, cession or conveyance ofproperty but only constitutes a lien. Itdoes not give the mortgagee a right tothe possession of the property unless itcontains a provision to that effect

B. Effects of invalidity of mortgage

1. Principal obligation remains valid2. Mortgage deed remains as evidence of

personal obligation

III.Remedies in Case of Default

If the mortgagor is alive1. Ordinary action for collection of

money2. Judicial or extrajudicial foreclosure

of mortgaged property

If mortgagor is dead (Rules of Court,Rule 86 Sec 7)1. Waive the mortgage and claim the

entire debt from the estate of themortgagor as an ordinary claimagainst the estate

2. Judicial foreclosure and claim thedeficiency from the estate

3. Rely on the mortgage and foreclosethe same at anytime within theperiod of the statute of limitationswithout right to claim for deficiency

4. Extrajudicial foreclosure under Act3135 before it is barred byprescription without right to file aclaim for any deficiency (Vda deJacob v. CA, GR No. L-88602, April6, 1990)

IV.Foreclosure

Foreclosure is a remedy available to themortgagee where he subjects the mortgagedproperty to the satisfaction of the obligationto secure for which the mortgage was given.

Procedure:1. File an application for extrajudicial

foreclosure with the Executive Judgethrough the Clerk of Court who is alsothe Ex-officio Sheriff (AM No 99-10-05-00)

2. The venue is the place where each ofthe mortgaged property is located.

Should a place within the province be asubject of stipulation, the sale shall beheld at the stipulated place or in themunicipal building of the municipalitywhere the property or part thereof issituated

If the stipulation of the parties as tovenue does not contain restrictive wordsindicating exclusivity of venue, thestipulated place is considered only asan additional, not a limiting venue(Langkaan v. UCPB)

3. Publication and posting of notice—Notice shall be given by posting noticesof sale for not less than 20 days in atleast 3 public places of the municipalityor city where the property is situated. Ifthe property is worth more thanP400.00 such notice shall also bepublished once a week for at least 3consecutive weeks in a newspaper of


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general circulation in the city ormunicipality.

4. Public auction sale—Time: made between 9am and 4pmUnder the direction of thea. Sheriff of the provinceb. Municipality or auxiliary municipal

judge of the municipality in whichthe sale has to be made

c. Or notary public of saidmunicipality

The creditor, trustee or any personauthorized to act for the creditor,may participate in the bidding andpurchase, as any other bidder, unlessthe contrary is expressly provided in themortgage or trust deed under which thesale is made

No auction sale shall be held unlessthere are at least 2 participatingbidders (in case of second sale, if thereis only 1 bidder, the sale shall proceed)

If the proceeds of the sale are in excessof the amount claimed by themortgagee, the excess must be turnedover to the mortgagor.

5. Certificate of sale—Issued by the Clerk of Court must beapproved by the Executive Judge or inhis absence, the Vice-Executive Judge.No certificate of sale shall be issued infavor of the highest bidder until all feesshall have been paid.

6. The certificate of sale filed with theRegister of Deeds, who shall make abrief memorandum on the certificate oftitle.

7. When the redemption period hasexpired, the clerk of court shall archivethe records.

V. Deficiency Claims

Where the proceeds of the sale areinsufficient to cover the debt in anextrajudicial foreclosure of mortgage,the mortgagee is entitled to claim thedeficiency from the debtor.

The mortgagee, in extrajudicialforeclosure, has the right to recoverdeficiency judgment within 10 yearsfrom the time the right of actionaccrues.

When the mortgagor is not the debtor.The action for the recovery of suchdeficiency must be directed against thedebtor

VI.Redemption

Redemption is a transaction by which themortgagor reacquires or buys back theproperty which may have passed under themortgage or divests the property of the lienwhich the mortgagee may have created.

Kinds1. Equity of redemption refers to the

right of the mortgagor in case of judicialforeclosure to recover the mortgagedproperty after his default in theperformance of the conditions of themortgage.

2. Right of redemption is the right of themortgagor in case of extrajudicialforeclosure to redeem the mortgagedproperty within a certain period after itwas sold for the satisfaction of themortgaged debt.

Rule on Right of Redemption Period within which to exercise right is

1 year from the date of registrationof certificate of sale with theappropriate Registry of Deeds.

Purchaser has the absolute right to awrit of possession upon failure toexercise right

Where mortgaged property is sold to 3rd

party, only the right to redeem theproperty and the right to posses, useand enjoy the property during the sameis transferred (the mortgagee mayredeem it at the amount of the principalobligation plus interest until time ofactual redemption and not the purchaseprice).

The mortgagee need not recognize theredemption made by the 3rd party whenthe sale is not registered or madewithout the consent of mortgagee.

When the sale is effected with fraud, thesame is null and void.

Who may exercise the right ofredemption?1. Mortgagor or one in privity of title with

mortgagor;2. Successor-in-interest:

a. One to whom the debtor hastransferred his right of redemption;

b. One to whom the debtor hasconveyed his interest ion the


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property for the proposedredemption;

c. One who succeeds to the interest ofthe debtor by operation of law;

d. One or more of debtors who werejoint owners of the property sold;

e. The wife as regards her husband’shomestead by reason of the fact thatsome portion of her husband’s titlepasses to her;

f. Compulsory heir.

Requisites for a Valid Redemption1. The redemption must be made within 1

year from the date of registration of thecertificate of sale.

2. Payment of the purchase price of theproperty plus 1% percent interest permonth together with the taxes thereon,if any paid by the purchaser and theamount of his prior lien, if any with thesame rate of interest computed from thedate of registration of the sale up to thetime of redemption

3. Written notice of the redemption mustbe served on the officer who made thesale and duplicate file with the properRegistry of Deeds.

4. Tender of payment must be for fullamount of purchase price, otherwise, toallow payment by installment would beto allow the indefinite extension of theredemption period (Estanislao, Jr. vs.Court of Appeals).

VII. Purchaser’s Right of Possession

During the redemption period,purchaser is allowed to take possessionof the foreclosed property upon filing ofan ex parte application and approval ofa bond in the amount equivalent to theuse of the property for a period of 12months (Sec. 7).

However, a writ of possession may beissued in an extrajudicial foreclosure ofreal estate mortgage only if the debtor isin possession and no 3rd party hadintervened (Philippine National Bank v.CA).

The debtor may, in the proceedings inwhich possession was requested, notlater than 30 days after the purchaserwas given possession, petition to setaside the sale and cancel the writ ofpossession specifying the damagessuffered by him because the mortgagewas violated or the sale was not made in

accordance with the Act 3135. If thepetition is meritorious, the bond shallbe disposed of in favor of the debtor.Either party may appeal the order of thejudge in accordance with PD 1529 butthe order of possession shall continuein effect during the pendency of theappeal (Sec. 8)

After the lapse of redemption period,the mortgagor is divested of his rights tothe mortgaged property and thevendee’s right of possession of theproperty shall become final.Consolidation of the title becomes amatter of right on the part of purchaserand the issuance of certificate of title inhis favor becomes ministerial upon theRegistry of Deeds.

To obtain possession, the purchasermay either ask for a writ of possessionor bring an independent action such asuit for ejectment (Javelosa v. CA, GRNo. L124292, December 10 1996).

Sales made under RA 8791 (GeneralBanking Law): After the date of theconfirmation of the auction sale, thewinning bidder has the right to enterupon and take possession of suchproperty and administer the same inaccordance with law.

REVIEWER IN COMMERCIAL LAW Chapter VI. The Anti-Dummy Law

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Chapter VI. The Anti-Dummy Law(CA No. 108, amended by

PD No. 715)

I. DEFINITIONII. ACTS PUNISHEDIII. PENALTIESIV. NATIONALIZATION OR FILIPINIZATION

LAWS

I. Definition

It is an act to punish the evasion of the lawon nationalization of certain: Rights, Franchises, or Privileges.

PD 715 amended CA 108 by allowingforeigners to have limited representation inthe governing board of corporations orassociations in proportion to their allowableparticipation in the equity of said entities.

II. Acts Punished

A. Simulation of minimum capital stock:where constitution or law requires thata certain percentum of capital be ownedby Filipinos before a Right, Franchise,Privilege, Property or Business (RFPPB)can be exercised, it is unlawful to falselysimulate the existence of suchminimum stock or capital as owned bysuch citizen in order to evade suchprovision

B. Permit or allow the use, exploitation orenjoyment of certain RFPPB by aperson, corporation or association notpossessing the requisites prescribed bythe Constitution or other Phil. Laws

C. Leases, transfers or conveys RFPPB to aperson, corporation or association notqualified under the Constitution orother laws

D. Permits or allows any person, notpossessing the qualifications required bythe Constitution or other laws toacquire, use, exploit or enjoy otherRFPPB expressly reserved for Filipinosto intervene in the:1. Management,2. Operation,3. Control, or4. Administration

thereof whether as an officer, employeeor laborer except technical personnelauthorized by the Sec. of Justice.

“Technical personnel”: any person who hasspecial, extraordinary or practical knowledge,especially of a scientific or mechanical occupation Exception: some special laws do not require

prior authority of DOJ Description of duties, NOT designation of

position (i.e. technical consultant) iscontrolling

E. Any person who knowingly aids, assistsor abets in the planning, consummationor perpetration of any acts enumeratedabove.

III.Penalties

A. Imprisonment for 5-15 years AND fineof not less than the value of the right,franchise or privilege acquired inviolation of this law (but in no case lessthan P5,000)

B. Forfeiture of such right, franchise orprivilege and the property or businessacquired in violation of this law

C. Dismissal of any public official whosespouse violates this act if they livetogether

D. Dissolution of any corporation violatingthis act

E. Criminal liability for officers of suchcorporation

IV.Nationalization or FilipinizationLaws

A. Definition

It is a law which limits a certain economicactivity or the exercise or enjoyment of acertain right, franchise, privilege, propertyor business only to Filipino citizens or tocorporations or associations a certainpercentage of which is owned by Filipinocitizens.

B. Examples of Areas Governed

Areas Governed Filipino citizenship orequity requirements

Disposition,exploitation,development orutilization of NaturalResources

Can only be done by:1. Filipino citizens; or2. Corporationsincorporated in RP withat least 60% Filipinoownership

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Operation of PublicUtilities

1. Filipino citizens; or2. Corporationsincorporated in RP withat least 60% Filipinoownership

Ownership of MassMedia

1. Filipino citizens; or2. Corporationsincorporated in RP with100% Filipinoownership

Ownership, controland administration ofEducationalInstitutions

1. Filipino citizens; or2. Corporationsincorporated in RP withat least 60% Filipinoownership

exception: schoolsestablished byreligious groups andmission boards

Practice of ALLProfessions

Filipino citizens only(natural persons)

Acquisition ofAlienable Lands ofthe Public Domain

1. Filipino citizens;2. Corporationsincorporated in RP withat least 60% Filipinoownership;3. Former natural-borncitizens of RP, astransferees with certainrestrictions; or4. Alien heirs astransferees in case ofintestate succession

C. Distinction between CompletelyNationalized and PartiallyNationalized Activities

CompletelyNationalized

Partially Nationalized

Exercise or enjoyment of which are expresslyreserved by the Consti or laws to:1. Filipino citizens,OR2. Corporations orassociations whollyowned by such citizens

Corporations orassociations at least60% of the capital ofwhich is owned byFilipinos

D. Relation of Anti-Dummy Law toNationalization Laws—

Universal Corn Products, Inc. v. Rice & CornBoard, 1967:

By itself, a Filipinization law does notnecessarily entail restriction on the employmentof aliens in the nationalized enterprise; but theAnti-Dummy Law complements thesenationalization laws by nationalizingemployment in these enterprises.

E. Extent of Nationalization ofEmployment in NationalizedEnterprises

The Anti-Dummy Law bans theemployment of aliens in all entitiesengaged in nationalized activities andthe ban on alien employment includeseven minor or clerical or non-controlpositions.

In King vs. Hernaez (1962), the SC heldthat the employment of 3 Chinesenationals as purchasers and salesmenin a grocery business, required by theRetail Trade Nationalization Law to bewholly owned by Filipino citizens orFilipino entities, violated the Anti-Dummy Law.

NOTE: The ban on alien employmentextends to both completely nationalizedand partially nationalized activities.

F. Exceptions to the Ban on AlienEmployment

1. aliens employed as technicalpersonnel, authorized by the Sec. ofJustice

2. aliens elected as members of theBoard of Directors or governing bodyof the enterprise engaged in partiallynationalized activities (this is NOTallowed in completely nationalizedactivities)

NOTE: Aliens can be elected as suchonly in proportion to their allowableparticipation or share in the capital ofsuch entities.

REVIEWER IN COMMERCIAL LAW Chapter VII. Foreign Investment Act

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Chapter VII. Foreign InvestmentAct of 1991 (RA No. 7042,amended by RA No. 8179)

I. PHILIPPINE NATIONALII. DOING BUSINESSIII. NOT DOING BUSINESSIV. TEST TO DETERMINE WHETHER ONE IS

DOING BUSINESS

Foreign Investment shall mean an equityinvestment made by non-Philippinenational in the form of foreign exchangeand/or other assets actually transferred tothe Philippines and duly registered with theCentral Bank which shall assess andappraise the value of such assets otherthan foreign exchange. (Sec. 3.c.)

I. Who is a “Philippine National”?

A. a citizen of the PhilippinesB. a domestic partnership or association

wholly owned by citizens of thePhilippines

C. a corporation organized under the lawsof the Philippines of which at least 60%of the capital stock outstanding andentitled to vote is owned and held bycitizens of the Philippines

D. a corporation organized abroad andregistered as doing business in thePhilippines under the Corporation Codeand 100% of stocks is owned byFilipinos

E. a trustee of funds for pension or otheremployee retirement or separationbenefits where:1. the trustee of funds is a Philippine

national, and2. at least 60% of the fund will accrue

to the benefit of the Philippinenational.

II. What are acts considered as “doingbusiness”?

A. soliciting orders;B. service contracts;C. opening offices, whether liaison offices

or branches;D. appointing representatives or

distributors operating under full controlof the foreign corporation domiciled inthe Philippines or who in any calendaryear stay in the country for a period orperiods totaling 180 days or more;

E. participating in the management,supervision, and control of any

domestic business, firm, entity orcorporation in the Philippines; and

F. any other act or acts which imply acontinuity of commercial dealings orarrangements, and contemplate to thatextent the performance of acts andworks, or the exercise of some of thefunctions normally incident to and inprogressive prosecution of commercialgain or of the purpose and object of thebusiness organization.

III.What acts are NOT considered as“doing business”?

A. mere investment as a shareholder by aforeign entity in domestic corporationsduly registered to do business, and/orthe exercise of rights as such investor;

B. having a nominee director or officer torepresent its interests in suchcorporation; and

C. appointing a representative ordistributor domiciled in the Philippineswhich transacts business in its ownname and for its own account.

D. the publication of a generaladvertisement through any print orbroadcast media;

E. maintaining a stock of goods in thePhilippines solely for the purpose ofhaving the same processed by anotherentity in the Philippines;

F. consignment by a foreign entity ofequipment with a local company to beused in the processing of products forexport;

G. collecting information in thePhilippines; and

H. performing services auxiliary to anexisting isolated contract of sale whichare not on a continuing basis, such asinstalling in the Philippines machineryit has manufactured or exported to thePhilippines, servicing the same,training domestic workers to operate it,and similar incidental services.

IV.What are the TESTS used todetermine WON a company is “doingbusiness”?

1. Continuity Test 2. Substance TestWON its act or actsimply a continuity ofcommercial dealingsor arrangements, andcontemplate to that

WON the foreigncorporation iscontinuing the body orsubstance of thebusiness or enterprise

REVIEWER IN COMMERCIAL LAW Chapter VII. Foreign Investment Act

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extent the performanceof acts and works, orthe exercise of some ofthe functions normallyincident to and inprogressiveprosecution ofcommercial gain or ofthe purpose and objectof the businessorganization(Mentholatum vs.Mangaliman, 1941)

for which it wasorganized, or whetherit has substantiallyretired from it andturned it over toanother

Note: There is NO GENERAL RULE as towhat constitutes "doing business” in thePhilippines. Each case must be judged inthe light of its peculiar circumstances.

Agilent Technologies Singapore (PTE) Ltd. vs.Integrated Silicon Technology Philippines

Corp. et. al., 2004:By and large, to constitute “doing business”,the activity to be undertaken in thePhilippines is one that is for profit-making.

Far East International Import andExport Corporation v. Nankai Kogyo,

1987:The acts of corporations should bedistinguished from a single or isolatedbusiness transaction or occasional,incidental and casual transactions whichdo not come within the meaning of the law.Where a single act or transaction,however, is not merely incidental orcasual but indicates the foreigncorporation's intention to do otherbusiness in the Philippines, said singleact or transaction constitutes "doing" or"engaging in" or "transacting" businessin the Philippines.

REVIEWER IN COMMERCIAL LAW Chapter VIII. Letters of Credit

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Chapter VIII. Letters Of Credit

I. DEFINITIONII. PARTIESIII. LIABILITIESIV. RULE OF STRICT COMPLIANCEV. INDEPENDENCE PRINCIPLEVI. KINDS OF LETTERS OF CREDIT

I. Definition

ART 567. Code of CommerceLetters of credit are those issued by onemerchant to another or for the purpose ofattending to a commercial transaction.

ART 568. Code of CommerceThe essential conditions of letters of credit shallbe:1. To be issued in favor of a definite person and

not to order.2. To be limited to a fixed and specified

amount, or to one or more undeterminedamounts, but within a maximum the limitsof which has to be stated exactly.

Those which do not have any of these lastcircumstances shall be considered as mereletters of recommendation.

Prudential Bank vs. IAC (1992)An engagement by a bank or other person madeat the request of a customer that the issuer willhonor drafts or other demands for paymentupon compliance with the conditions specified inthe credit.

MWSS vs. Daway (2004)Letters of credit are absolute undertakings topay the money advanced or the amount forwhich credit is given on the faith of theinstrument. They are primary obligations andnot accessory contracts and while they aresecurity arrangements, they are not convertedthereby into contracts of guaranty. Whatdistinguishes letters of credit from otheraccessory contracts, is the engagement of theissuing bank to pay the seller once the draft andother required shipping documents arepresented to it.

3 Distinct and Independent ContractsInvolved in a Letter of Credit:1. The contract of sale between the

buyer and the seller;2. The contract of the buyer with the

issuing bank; and3. The letter of credit proper.

Letter of Credit v. Trust Receipt

Letter of Credit Trust ReceiptAn engagement by abank or other personmade at the request ofa customer that theissuer will honor draftsor other demands forpayment uponcompliance with theconditions specified inthe credit.

The entruster, whoholds an absolute titleor security interestsover certain goods,documents orinstruments, releasesthe same to theentrustee, whoexecutes the trustreceipt.

The bank merelysubstitutes its ownpromise to pay for thepromise to pay of oneof its customers who inreturn promises to paythe bank the amountof funds mentioned inthe letter of credit pluscredit or commitmentfees mutually agreedupon.

The entrustee bindshimself to hold thegoods, documents orinstruments in trustfor the entruster andto sell or otherwisedispose of the goods,documents andinstruments with theobligation to turn overto the entruster theproceeds thereof to theextent of the amountowing to the entruster,or as appears in thetrust receipt, or returnthe goods, documentsor instrumentsthemselves if they areunsold, or nototherwise disposed of,in accordance with theterms and conditionsspecified in the trustreceipt.

II. Parties

ART 569. The drawer of a letter of credit shallbe liable to the person on whom it was issued,for the amount paid by virtue thereof, within themaximum fixed therein.

Letters of credit may not be protested evenshould they not be paid, nor shall the bearerthereof acquire any right of action by reason ofsuch non-payment against the person whoissued it.

The person paying shall have the right todemand the proof of the identity of the person inwhose favor the letter of credit was issued.

1. The buyer, who procures the letter ofcredit and obliges himself to reimbursethe issuing bank upon receipt of thedocuments of title;

2. The issuing bank, or the bank issuingthe letter of credit, which undertakes topay the seller upon receipt of the draft


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and proper documents of titles and tosurrender the documents to the buyerupon reimbursement; and

3. The seller, who in compliance with thecontract of sale ships the goods to thebuyer and delivers the documents oftitle and draft to the issuing bank torecover payment. (Bank of America, NTand SA vs. CA)

NOTE:The number of parties may be increased toinclude:1. An advising (notifying) bank, which

may be utilized to convey to the sellerthe existence of the credit;

2. A confirming bank which will lendcredence to the letter of credit issued bya lesser known issuing bank; theconfirming bank is directly liable to paythe seller-beneficiary;

3. A paying bank which undertakes toencash the drafts drawn by theexporter/seller;

4. Instead of going to the place of theissuing bank to claim payment, thebuyer may approach another bank, ornegotiating bank to have the draftdiscounted. (Bank of America, NT andSA vs. CA)

III.Liabilities

ART. 569. The drawer of a letter of credit shallbe liable to the person on whom it was issued,for the amount paid by virtue thereof, within themaximum fixed therein.

Letters of credit may not be protested evenshould they not be paid, nor shall the bearerthereof acquire any right of action by reason ofsuch non-payment against the person whoissued it.

The person paying shall have the right todemand the proof of the identity of the person inwhose favor the letter of credit was issued.

Unless the contrary is expressly providedfor, the liability of the issuing bank issolidary with the buyer-applicant.( MWSSvs. Daway)

ART. 570. The drawer of a letter of credit mayannul it, informing the bearer and the person towhom it is addressed of such revocation.

ART. 571. The bearer of a letter of credit shallpay the amount received to the drawer withoutdelay. Should he not do so, an action involvingexecution may be brought to recover it, withlegal interest and the current exchange in the

place where payment was made on the placewhere it is repaid.

ART. 572. If the bearer of a letter of credit doesnot make use thereof within the period agreedupon with the drawer, or, in default of a periodfixed, within six months, counted from its datein any point in the Philippines, and withintwelve months anywhere outside thereof, it shallbe void in fact and in law.

IV.Rule of Strict Compliance

Feati Bank & Trust Co. vs. CA (1991)Commercial transactions involving letters ofcredit that the documents tendered must strictlyconform to the terms of the letter of credit. Thetender of documents by the beneficiary (seller)must include all documents required by theletter. A correspondent bank which departs fromwhat has been stipulated under the letter ofcredit, as when it accepts a faulty tender acts onits own risks and it may not thereafter be able torecover from the buyer or the issuing bank themoney paid to the beneficiary.

V. Independence Principle

Keng Hua Paper Products vs. CAContracts involved in a letter of credit are to bemaintained in a state of perpetual separation.The undertaking of the bank to pay, accept andpay drafts or negotiate and/or fulfill anyobligation under the credit is not subject toclaims or defenses by the applicant resultingfrom his relationship with the issuing bank orthe beneficiary. In the same manner, thebeneficiary can in no case avail himself of thecontractual relationships existing between thebanks or between the applicant and the issuingbank.

BPI vs De Reny Fabric (1970)A direct consequence of the independenceprinciple is the rule than banks only deal withdocuments and not with the goods, services orobligations to which they relate.

VI.Kinds of Letters of Credit(Aquino, Notes and Cases on Banks,Negotiable Instruments and otherCommercial Documents)

1. Confirmed Letters of Credit- wherethe beneficiary stipulates that theobligation of the opening bank shallalso be made the obligation of anotherbank (also the bank that notifies) tohim.


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2. Irrevocable Letters of Credit- is adefinite undertaking on the part of theissuing bank; it constitutes theengagement of the bank to thebeneficiary and bona fide holders ofdrafts drawn and/or documentspresented thereunder, that theprovisions for payment, acceptance ornegotiation contained in the credit willbe duly fulfilled, provided that all theterms and conditions of the credit arecomplied with.

3. Revolving Letter of Credit- providesfor renewed credit to become availableas soon as the opening bank hasadvised that the negotiating or payingbank that the drafts already drawn bythe beneficiary have been reimbursed tothe opening bank by the buyer.

4. Back-to-Back Letter of Credit- a creditwith identical documentaryrequirements and covering the samemerchandise as another letter of credit,except for a difference in the price of themerchandise as shown by the invoiceand the draft. The second letter orcredit can be negotiated only after thefirst is negotiated.

5. Standby Letter of Credit- a securityarrangement for the performance ofcertain obligations. It can be drawnagainst only if another businesstransaction is not performed. It may beissued in lieu of a performance bond.

REVIEWER IN COMMERCIAL LAW Chapter IX. Insolvency Law

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Chapter IX. Insolvency Law

I. CONCEPT AND PURPOSEII. COMPARISONSIII. SUSPENSION OF PAYMENTSIV. VOLUNTARY INSOLVENCYV. INVOLUNTARY INSOLVENCYVI. SPECIFIC PROVISIONS

I. Concept and Purpose

Under Phil. law, bankruptcy is the same asinsolvency.

Insolvency: relative condition of a debtor’sassets and liabilities that the assets, if allmade immediately available, would not besufficient to pay the liabilities.

There are two principal laws available to acorporation seeking debt relief. These are,(1) the Insolvency Law and (2)Presidential Decree No. 902-A.

PURPOSE1. Equitable distribution of the properties

of the debtor among the creditors2. To afford the individual debtor a fresh

start in life

NOTE: the Insolvency Law does not grantdischarge to a corporate debtor

II. Comparisons

Suspension ofPayments

InsolvencyProceedings

Purpose: To suspendor delay payments ofdebts

Purpose: To compelpresentment of alldebts, whether due ornot, and to secure acomplete dischargefrom such debts

Amount ofindebtedness is notaffected, but only thetime for paying them ispostponed

Creditors receive lessthan what they areentitled to, or somecreditors may not evenreceive anything

Debtor has sufficientproperty to cover hisliabilities

Debtor’s assets are notsufficient to coverliabilities

Voluntary Insolvency InvoluntaryInsolvency

Debtor is the petitioner 3 or more creditors arethe petitioners

Debtor may have onlyone creditor

Debtor must have atleast 3 creditors

No requirements WRTcreditors

Creditors must be Phil.residents whosecredits accrued in thePhilippines, and noneof them became a

creditor by assignmentwithin 30 days prior tothe filing of thepetition

No bond is required forthe petition

A bond is required forinsolvency proceedings

Order of adjudicationmay be granted exparte

Order is granted onlyafter a hearing

Debtor must not havecommitted an act ofinsolvency

Debtor must havecommitted an act ofinsolvency before thecreditors can file thepetition

Petition must be filedwith the RTC wherepetitioner-debtorresided for 6 monthsprior to the filing

Length of residence ofthe debtor isimmaterial

Suspension of PaymentsIndividual Corporation, Partnership, or

Association (CPA)Governing Law

Act No. 1956 Act No. 1956 P.D. No. 902-A

JurisdictionRTC (Act No.1956)

RTC (Act No.1956)

RTC (R.A. No.8799)

GroundsDebtor hassufficientproperty butforesees theimpossibilityof meetingthem whentheyrespectivelyfall due

C.P.A. debtorhas sufficientproperty butforesees theimpossibilityof meetingthem whenthey fall due

a. C.P.A. hassufficientproperty tocover all itsdebts butforesees theimpossibilityof meetingthem whentheyrespectivelyfall due, OR;b. C.P.A. hasno sufficientassets to coverits liabilitiesbut is undermanagementof aRehabilitationReceiver orManagementCommittee(Sec. 5[d], P.D.902-A)

III. Suspension of Payments

Nature: The debtor who, possessingsufficient property to cover all his debts,foresees the impossibility of meeting themwhen they fall due, may petition that he bedeclared in the state of suspension ofpayments by the court of the province / city


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in which he has resided for the preceding 6months. (Sec 2)

Purpose: To seek postponement of thepayment of debts in order to provide thedebtor a given period to convert some of hisproperties to cash.

Basis: The probability of the debtor’sinability to meet his obligations when theyrespectively fall due, despite the fact that hehas sufficient assets to cover all hisliabilities.

Effect: commences upon the filing of thepetition.

Who May File1. An individual debtor;2. Corporation, partnership or association

Procedure:1. Debtor files petition in court;2. Court orders meeting of creditors and

publication (Ratio: Suspension ofpayments is a proceeding in rem, sopublication is needed to acquirejurisdiction);

3. Meeting of creditors for theconsideration of the debtor's proposition

4. Action by the creditors upon thedebtor’s proposition. Approval must beby the majority, which is 2/3 of thecreditors voting upon the position.Claims represented by the majoritymust amount to at least 3/5 of the totalliabilities of the debtor

5. Objections to the decision which mustbe made within 10 days following themeeting

6. Issuance of order by the court directingthat the agreement be carried out incase the decision is declared valid, orwhen no objection to aid decision hasbeen presented

7. If the decision of the meeting be negative,the proceeding shall be terminated andthe creditors shall at liberty to enforcethe rights which may correspond tothem.

Effect of Filing Petition1. On execution pending against

debtor—It shall be suspended before the sale ofthe property is made thereunder

2. On execution against propertyspecially mortgaged—

The execution against propertyespecially mortgaged is exempted fromthe provisions of this section

3. On action to collect sum of moneystill to be filed against debtor—No creditor other than those mentionedin Sec 91 shall institute proceedings tocollect his claim from the moment thatsuspension of payments is applied forand while the proceedings are pending.

4. Debtor may not dispose of hisproperty, except in the ordinarycourse of the business in which he isengaged

5. Debtor cannot make any paymentsoutside of the necessary or legitimateexpenses of this business

IV. Voluntary Insolvency

Procedure1. Filing of petition by insolvent debtor

Debtor must owe at least P1,000 Petition must be filed in the RTC

where he resided 6 months prior tothe filing

Once the petition is filed, ipso factotakes away and deprives the debtorpetitioner of the right to do orcommit any act of preference as tocreditors, pending the finaladjudication

2. If the petition is in order, Court shallissue an Order of Adjudication (i.e.that the debtor is declared insolvent).The order must be published.

Effects of ordera. All assets of debtor placed in sheriff’s

custody until a receiver or assigneeis assigned.

b. Payment to debtor of any debt ordelivery of any property due to himis forbidden. He also cannot transferor convey any of his property.

c. All civil proceedings vs. the insolventare stayed, except those pertainingto foreclosure of secured liens

3. Meeting of creditors for election of anAssignee in Insolvency

4. Conveyance of debtor’s property toassignee in insolvency

5. Liquidation of assets and payment ofdebts

6. Composition, if agreed upon.Composition: debtor offers to pay his

creditors a certain percentage oftheir claims in consideration of hisrelease from liability


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7. Discharge of the debtor, except in caseof composition. NOTE: This is notapplicable to corporations

8. Objection to discharge of debtor, if any9. Appeal in certain cases

V. Involuntary Insolvency

Who may petition for involuntaryinsolvency:1. Debtors who have the qualifications

required by the Insolvency Law; and2. Their credits must be those

contemplated by the Insolvency Law.

Procedure:1. Filing of petition by 3 or more resident

creditors (can be natural or juridicalpersons)

2. Petition must allege at least 1 act ofInsolvency

3. After the petition is filed, the court shallissue an order of adjudication, whichshall retroact to date of filing of petition.Effects of ordera. All assets of debtor placed in sheriff’s

custody until a receiver or assigneeis assigned.

b. Payment to debtor of any debt ordelivery of any property due to himis forbidden. He also cannot transferor convey any of his property.

c. All civil proceedings vs. the insolventare stayed, except those pertainingto foreclosure of secured liens

4. Summons to the debtor5. Answer or motion to dismiss filed by

debtor6. Hearing of petition7. Order of adjudication declaring debtor

insolvent8. Publication and service of order of

court9. Meeting of creditors to elect an

assignee in insolvency10. Conveyance of debtor’s property to

assignee in insolvency11. Liquidation of assets and payment of

debts12. Composition, if agreed upon by debtors

and creditors13. Discharge of the debtor, except in case

of composition. NOTE: Discharge notapplicable to corporations

14. Objection to discharge of debtor, if any15. Appeal to Supreme Court

VI. Specific ProvisionsOrder of Distribution1. Equitable claims under Sec. 482. Preferred claims WRT specific movable

property and specific immovableproperty under Art. 2241 and 2242, CC;

3. Preferred claims as to unencumberedproperty of the debtor which shall bepaid in the order named in Art. 2244;

4. Common or ordinary credits which shallbe paid pro rata regardless of datesunder Art. 2245.

CompositionA proceeding in insolvency proceedings,which is voluntary on the part of the debtorand his creditors, in which a debtor offersto pay his creditors a certain percentage oftheir claims in consideration of his releasefrom liability.

Requisites:a. Offer must be made after the filling

of the Schedule of the debtor’sproperty and the list of his creditors.

b. Offer must be accepted in writing bya majority of the creditorsrepresenting a majority of the claimswhich have been allowed;

c. Offer must be made only after theinsolvent deposits the considerationto be paid to the creditors ;

d. Accepted offer must be confirmed bythe court.

Effects of Confirmation:a. The consideration shall be

distributed as the judge shall direct;b. The insolvency proceedings shall be

terminated.c. The title to the insolvent’s estate

shall revest in him.d. The insolvent shall be released from

his debts.

DischargeJudicial clearance of an insolvent debtorfrom all claims except those expresslyreserved by law.

Debts which are not discharged:a. Taxes and assessments due to the

Government, whether national orlocal;

b. Any debts created by fraud,embezzlement of the debtor;

c. Any debt created by the defalcationas a public officer or while acting ina fiduciary capacity;


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d. Debt of any person liable for thesame debt, for or with the insolventdebtor, either as partner, jointcontractor, indorser, surety orotherwise;

e. Debts of a corporation;f. Claim for support;g. Discharged debt but revived by a

subsequent new promise to pay;h. Debts which have not been duly

scheduled in time for proof andallowance, unless the creditors hadnotice or actual knowledge of theinsolvency proceedings, are notdischarged as to such creditors;

i. Claims for unliquidated damagesarising out of pure tort;

j. Claims of secured creditors;k. Claims not in existence or not

mature at the time of discharge;l. Claims that are contingent at the

time of discharge.

Fraudulent PreferenceIf debtor transferred property to any personto give him preference, and such transfertook place within 30 days period from thedate of cleavage, such transfer may be setaside by proper court action by theassignee.

A fraudulent preference is committed whenthe debtor procures any part of his propertyto be attached, sequestered or seized onexecution or makes any payment, pledge,mortgage, assignment, transfer, sale orconveyance of any part of his property,whether directly or indirectly, absolutely orconditionally, to anyone under the followingcircumstances:1. The debtor is insolvent or in

contemplation of insolvency;2. The transaction in question is made

within 30 days before the filing of apetition by or against the debtor;

3. It is made with a view to givingpreference to any creditor or personhaving a claim against him;

4. The person receiving a benefit therebyhas reasonable cause to believe;

5. That the transfer is made with a view toprevent his property from coming to hisassignee in insolvency or to prevent thesame from being distributed ratablyamong his creditors or to defeat theobject of or any way hinder theoperation of or evade the provisions ofthe Insolvency Law.

TransferIt includes the sale and every other anddifferent modes of disposing of or partingwith property, or the possession ofproperty, absolutely or conditionally, as apayment, pledge, mortgage, gift or security.A deposit of money is not a transfer.

Effect of Fraudulent Transfer: Anyconveyance or assignment fraudulentlymade is void as against the creditors of theinsolvent debtor,

REVIEWER IN COMMERCIAL LAW Chapter X. Interim Rules of Procedure for Intra-corporate Controversies

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Chapter X. Interim Rules ofProcedure for Intra-Corporate

Controversies(A.M. No. 01-2-04-SC)

I. GENERAL PROVISIONSII. PROCEDUREIII. ELECTION CONTESTSIV. INSPECTION OF CORPORATE BOOKS

AND RECORDSV. DERIVATIVE SUITSVI. MANAGEMENT COMMITTEEVII.PROVISIONAL REMEDIESVIII. SANCTIONS

I. General Provisions

Applicability

A. Devices or schemes employed by, or anyact of,1. the board of directors,2. business associates,3. officers or partners,

a. amounting to fraud ormisrepresentation which may bedetrimental to the interest ofi. the public and/or ofii. the stockholders, partners,

or members of anycorporation, partnership, orassociation;

B. Controversies arising out of1. intra-corporate, partnership, or

association relations, between andamong stockholders, members, orassociates; and

2. between, any or all of them and thecorporation, partnership, orassociation of which they arestockholders, members, orassociates, respectively;

C. Controversies in the election orappointment of directors, trustees,officers, or managers of corporations,partnerships, or associations;

D. Derivative suits; and

E. Inspection of corporate books.

Nuisance and harassment suits areprohibited and shall be dismissed by thecourt motu proprio or upon motion.

Factors in determining whether asuit is a nuisance or harassment suit:

1. The extent of the shareholding orinterest of the initiating stockholder ormember;

2. Subject matter of the suit;3. Legal and factual basis of the

complaint;4. Availability of appraisal rights for the

act or acts complained of; and5. Prejudice or damage to the corporation,

partnership, or association in relation tothe relief sought.

The Rules of Court shall apply suppletorily.

All DECISIONS AND ORDERS issued underthese Rules1. Shall be immediately executory.2. Shall not be stayed by appeals or

petitions taken therefrom UNLESSrestrained by an appellate court.

Venue

1. Regional Trial Court which hasjurisdiction over the PRINCIPAL OFFICEof the corporation, partnership, orassociation concerned or

2. The action must be filed in the city ormunicipality where the HEAD OFFICEis located IN CASES WHERE theprincipal office of the corporation,partnership or association is registeredin the SEC as Metro Manila

All cases filed under these Rules shall betried by judges designated by the SupremeCourt to hear and decide cases Transferred from the SEC to the RTC

and Filed directly with said courts pursuant

to RA 8799 (Securities RegulationCode).

II. Procedure

A. Filing of a Verified Complaint

THE COMPLAINT SHALL STATE ORCONTAIN:1. the names, addresses, and other

relevant personal or judicialcircumstances of the parties;

2. all facts material and relevant to theplaintiff's cause or causes of action,which shall be supported by affidavits ofthe plaintiff or his witnesses and copies


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of documentary and other evidencesupportive of such cause or causes ofaction;

3. the law, rule, or regulation relied upon,violated, or sought to be enforced;

4. a certification against forum shopping;and

5. the relief sought.

B. Service of Summons andComplaint Not Later Than 5 Daysfrom Filing of Complaint

Defendant To whom service shallbe made

DomesticCorporation Statutory or corporate

officers as fixed by theby-laws

Respective secretariesPartnership Any of the managing or

general partners Respective secretaries

Association Any of its officers Respective secretaries

Foreign Private Juridical EntityTransactingbusiness in thePhil.

Resident agentdesignated for suchpurpose

(IF no designated agent)Government official

designated by law Any of its officers or

agents within thePhilippines

Has transactedbusiness in thePhil.

C. Answer Filed Within 15 Days fromService of Summons

EFFECT OF FAILURE TO ANSWER1. Considered in default and2. Upon motion or motu proprio, Court

shall render judgment as the recordsmay warrant.

D. Answer to Counterclaims orCrossclaims Filed Within 10 Daysfrom Service of Answer in whichThey are Pleaded

E. Modes of Discovery

Modes of discovery may be availed of by theparties not later than 15 days from thejoinder of issues.

Objections may be made within 10 daysfrom receipt of the discovery device andonly on the grounds that the matterrequested is:

1. Patently incompetent,2. Immaterial,3. Irrelevant or4. Privileged in nature.

Compliance with mode of discovery shall bemade:1. Within 10 days from receipt of the

discovery device, or2. From receipt of the ruling of the court, if

there are objections

SANCTIONS for failure to avail of, or refusalto comply with, the modes of discovery:1. Sanctions prescribed in the Rules of

Court;2. Declare a party non-suited or as in

default if refusal to comply is patentlyunjustified

F. Pre-Trial

The order setting the case for pre-trialconference and directing the submission ofpre-trial briefs shall be issued and servedWITHIN 5 DAYS after the period for1. availment of, and2. compliance with the modes of discovery

whichever comes later,

The parties shall file with the court andfurnish each other copies of their respectivepre-trial brief in such manner as to ensureits receipt at least 5 days before date of pre-trial.

The preliminary conference shall beterminated not later than ten (10) days afterits commencement, whether or not theparties have agreed to settle amicably.

If the court determines that judgment maybe rendered upon the pleadings, affidavitsand other evidence submitted court may order the parties to file their

respective memoranda within a periodof 20 days (non-extendible) from receiptof order

court shall render judgment not laterthan 90 days from the expiration of theperiod to file the memoranda.

Within ten (10) days after the termination ofthe pre-trial, the court shall issue a pre-trial order.

After the pre-trial, the court may renderjudgment, either full or partial, as theevidence presented during the pre-trial maywarrant.


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G. Trial

WITNESSES; Only persons whose affidavitswere submitted may be presented aswitnesses, except in cases specified inSection 8, Rule 2 of these Rules.

The affidavits of the witnesses shall serveas their direct testimonies, subject to cross-examination in accordance with existingrules on evidence.

TRIAL SCHEDULE; Unless judgment isrendered pursuant to Rule 4 of these Rules,the hearings shall be held not later than 30 days

from the date of the pre-trial order shall be completed not later than 60

days from the date of the initial hearing, 30 days of which shall be allotted to the

plaintiffs and 30 days to the defendantsas prescribed in the pre-trial order.

Evidence shall be offered in writing in case: not otherwise admitted by the parties or not ruled upon by the court during the

pre-trial conference WHEN?; Not later than 5 days from the

completion of the presentation ofevidence of the party concerned.

H. Filing of memoranda within 30days from receipt of the order tobe made after last offer ofevidence.

I. Decision not later than 90 daysfrom lapse of period to filememoranda.

III.Election Contests

Refers to any controversy or disputeinvolving:A. Title or claim to any elective office in a

stock or non-stock corporation,B. Validation of proxies,C. Manner and validity of elections, andD. Qualifications of candidates, including

the proclamation of winners, to theoffice of:1. Director,2. Trustee or3. Other officer directly elected by:

a. stockholders in a closecorporation or

b. members of a non-stockcorporation where the article ofincorporation or by-laws soprovide.

IV. Inspection of Corporate Booksand Records

The provisions of this Rule shall apply todisputes exclusively involving the rights ofstockholders or members under Sec. 74and 75 of the Corpo Code of the Phil to:1. inspect the books and records and/or2. be furnished financial statements of a

corporation

V. Derivative Suits

Actions brought by a stockholder ormember in the name of a corporation orassociation provided, that:1. He was a stockholder or member

a. at the time the acts ortransactions subject of theaction occurred and

b. the time the action was filed;2. He exerted all reasonable efforts to

exhaust all remedies available toobtain the relief he desires underthe:a. articles of incorporation,b. by-laws,c. laws ord. rules governing the corporation

or partnership;3. No appraisal rights are available for

the acts or acts complained of; and4. The suit is not a nuisance or

harassment suit.

Approval of the court shall be requiredfor:1. Discontinuance, compromise or

settlement of the derivative action2. Any sale of shares of the

complaining stockholders during thependency of the action

If the court determines that the interestof the stockholders or members will besubstantially affected by thediscontinuance, compromise orsettlement, The court may direct thatnotice, by publication or otherwise, begiven to the stockholders or memberswhose interest it determines will be soaffected


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VI.Management Committee

Appointment of a managementcommittee may be applied for the by aparty–1. AS AN INCIDENT to any of the cases

filed under:a. these Rules orb. the Interim Rules Corporate

Rehabilitation2. WHEN there is imminent danger of:

a. Dissipation, loss, wastage ordestruction of assets or otherproperties; and

b. Paralyzation of its businessoperations which may beprejudicial to the interest of theminority stockholders, parties-litigants or the general public

Qualifications of a RECEIVER:1. Of known probity, integrity and

competence and2. Without any conflict of interest

The RECEIVER and the MEMBERS OFTHE MANAGEMENT COMMITTEE inthe exercise of their powers andperformance of their duties are:1. considered officers of the court and2. shall be under its control and

supervision.

MANAGEMENT COMMITTEE shall be:1. Composed of 3 members2. Chosen by the court.3. Appointed after due notice and

hearing

QUALIFICATIONS OF THEMANAGEMENT COMMITTEE taken intoconsideration by the court:1. Expertise and acumen to manage

and operate a business similar insize and completely as that thecorporation, association orpartnership sought to be put undermanagement committee;

2. Knowledge in management andfinance;

3. Good moral character,independence and integrity;

4. A lack of a conflict of interest asdefined in these Rules; and

5. Willingness and ability to file a bondin such amount as may bedetermined by the court.

Member of a management committeedeemed to have a CONFLICT OFINTEREST if he is:1. Engaged in a line of business which

completes with the corporation,association or partnership sought tobe placed under management;

2. A director, officer or stockholdercharged with mismanagement,dissipation or wastage of theproperties of the entity undermanagement; or

3. Related by consanguinity or affinitywithin the fourth civil degree to anydirector, officer or stockholdercharged with mismanagement,dissipation or wastage of theproperties of the entity undermanagement.

Upon assumption to office of themanagement committee the receiver1. shall immediately render a report

and2. turn over the management and

control of the entity under hisreceivership to the managementcommittee.

The management committee shall havethe power to take custody of and controlall assets and properties owned orpossessed by the entity undermanagement. It shall1. Take the place of the management

and board of directors of the entityunder management,

2. Assume their rights andresponsibilities, and

3. Preserve the entity's assets andproperties in its possession.

Action or decision by managementcommittee requires the concurrence of amajority of its members

The chairman of the managementcommittee shall be chosen by themembers from among themselves.

The committee may delegate itsmanagement functions as may benecessary to operate the business of theentity under management and preserveits assets.

Transactions deemed fraudulent and arerescissible—Transactions by previous managementand directors


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1. If made within 30 days prior to theappointment of the receiver ormanagement committee or

2. During their incumbency as receiveror management committee.

Entitlement to reasonable professionalsfees reimbursement of expenses, whichshall be considered as administrativeexpenses, shall be allowed to:1. Receiver or2. Management committee and3. Persons hired by the management

committee

The receiver and members of themanagement committee and thepersons employed by them shall not besubject to any action, claim or demandin connection with:1. Any act done or omitted by them

in good faith in the exercise of theirfunctions and powers

2. All official acts and transactions ofthe receiver or managementcommittee duly approved or ratifiedby the court

The management committee shall makea REPORT to the court on the state/general condition of the corporation,partnership or association undermanagement—1. Within 60 days from the

appointment of its members2. Every 3 months or as often as the

court may require

A member of the management isDEEMED REMOVED1. upon appointment by the court of

his replacement2. chosen in accordance with Section

4 of this Rule

The management committee shall beDISCHARGED AND DISSOLVED:1. Whenever the court, on motion of

motu proprio, has determined thatthe necessity for the managementcommittee no longer exist;

2. By agreement of the parties; and3. Upon termination of the

proceedings.The management committee shall thensubmit its final report and renderaccounting of its management withinsuch reasonable time.

VII. Provisional Remedies

Provisional remedies in the Rules ofCourt is available to the parties

Requirements for issuance of TRO orstatus quo orders:1. Only in exceptional cases2. After hearing and3. Posting of bond.

VIII. Sanctions

A. Sanctions of the parties orcounsel

The court may, upon motion motu proprio,impose appropriate sanctions when:1. The court determines that the action is

a nuisance or harassment suit;2. A pleading, motion or other paper is

filed in violation of Section 7, Rule 1 ofthese Rules;

3. A party omits or violates thecertification required under Section 4,Rule 2 of these Rules;

4. Unwarranted denials in the answer tothe complaint;

5. Willful concealment or non-disclosure ofmaterial facts or evidence;

Sanctions may include an order to pay theother party reasonable expenses incurredincluding attorney's fees.

B. Disciplinary sanctions on thejudge

The presiding judge may be subject todisciplinary action in case of;1. Failure to observe this special summary

procedures prescribed in these Rules; or2. Failure to issue a pre-trial order in form

prescribed in these Rules.

REVIEWER IN COMMERCIAL LAW Chapter XI. Rules of Procedure on Corporate Rehabilitation

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Chapter XI. Rules of Procedure onCorporate Rehabilitation1

I. COVERAGEII. CONSTRUCTION OF TERMSIII. GENERAL PROVISIONSIV. STAY ORDERV. REHABILITATION RECEIVERVI. REHABILITATION PLANVII.DEBTOR-INITIATED REHABILITATIONVIII. CREDITOR-INITIATED

REHABILITATIONIX. PRE-NEGOTIATED REHABILITATIONX. RECOGNITION OF FOREIGN

PROCEEDINGS

REHABILITATION: the restoration of thedebtor to a position of successful operationand solvency, if it is shown that itscontinuance of operation is economicallyfeasible and its creditors can recover byway of the present value of paymentsprojected in the plan more if thecorporation continues as a going concernthan if it immediately liquidated (Rule 2,Sec. 1).

I. Coverage

A. Scope (Rule 1 Sec. 1)

1. A Petitions for rehabilitation filed bycorporations, partnerships, andassociations pursuant to PresidentialDecree No. 902-A as amended.

2. Cases for rehabilitation transferred fromSEC to the RTC pursuant to RA. 8799(The Securities Regulation Code)

B. The Rehabilitation Court

Any RTC designated by the SC to be arehabilitation court. These courts arevested with exclusive and originaljurisdiction to try and decide corporaterehabilitation cases arising within theirrespective territorial jurisdictions

C. Cases NOT covered by the Rules:

1. Rehabilitation cases filed by individuals;2. Corporations for which particular

provisions of the Corporation Codeprovide for specific remedies relative toincidents arising from financial or otherkinds of distress.

1 The Rules took effect on January 16, 2009.These Rules supplant the Interim Rules onCorporate Rehabilitation enacted earlier thisdecade. However, for Bar Review Purposes, theInterim Rules and the new Rules are in thisReviewer

D. Distinction between CorporateRehabilitation and Insolvency

CorporateRehabilitation

Insolvency

As tosufficiencyofproperty

The debtor hassufficientproperty to coverall itsindebtedness

The debtor’sassets areinsufficient tocover theliabilities

As tosubject

The payment ofdebts is delayedto allow thedebtor to look forsources togenerate incometo continue itsbusiness and payits obligationsunder a court-approvedrepaymentscheme

Payments ofthe obligationsare notdeferred, infact,presentmentfor payment ofall obligations,due orcontingent, isrequired tosecure acompletedischarge fromsuchobligations

As toeffect onthecreditors

All the creditors,whether securedor unsecured,stand on EQUALFOOTING andare required toqueue for thepayment of theirclaims

Preferences ofcredits arerespected

As toeffect onthe debtor

The debtorcontinues to dobusinesspursuant to thecourt approvedrehabilitationplan

The receivertakes over theproperties ofthe insolventand paymentof theindebtednessdischarges thedebtor from itsobligations

E. Distinction between CorporateRehabilitation and Suspension ofPayments


Suspensionof Payments

As tosubject

The payment ofthe indebtednessis deferred toallow the debtora breathing spellfrom theenforcement ofclaims by itscreditors

Payment isdeferred toallow thecreditors tomeet anddeterminehow best thedebtor couldmakepayment oftheir claims


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Suspensionof Payments

As toeffect

The debtor isallowed topresent a planfor its recoveryand how it couldpay the claims ofits creditors. Theplan can beapproved overthe objections ofthe creditor.

No such planof recovery ispresented ,but merely anagreementproposed bythe debtor onhow paymentshould bemade. Thisagreementmust haveconformity ofthe creditorsto make iteffective.

As toapproval ofproposal

The court hasabsolute powerto approve ordisapprove therehabilitationplan

It is thecreditors whoapprove theplan ofpayment.Such approvalis made by3/5 of theliabilities heldby 2/3 of thecreditorspresent at themeeting.

II. Construction of Terms

General Rule—The policy of LIBERAL construction has

been adopted.

Exception—Where the acts of the court, the debtor, orcreditor are prescribed to be done withinspecified periods. This is because thereglementary periods are consideredindispensable interdictions against needlessdelays.

III.General Provisions

Nature of Proceeding It is a special proceeding. It is initiated

to establish the fact that while thedebtor possesses sufficient property tocover its debts at the time they fall duesuch properties are illiquid and can beturned to cash under a plan that itsubmits to the court for approval.

It is an in rem proceeding, wherejurisdiction is acquired by publication(Rule 3 Sec. 1)

Is is a summary and non-adversarialproceeding. It should be brief and

speedy, and where the issues areresolved with dispatch, or with the leastpossible delay.

Venue (Rule 3 Sec. 2)Initiated by thedebtor or itscreditors

RTC having jurisdictionover the territory wherethe debtor’s principaloffice is located

Joint petition by agroup of companies

RTC which hasjurisdiction over theprincipal office of theparent company

Foreign corporationsor their subsidiarieswhich are authorizedto do business in thePhilippines

Place indicated in theirrespective licenses astheir principal office inthe Philippines or wherethey can be servedsummons in thePhilippines.

Service of pleadings Service of pleadings may be done via fax

or email. The date of transmissionsshall be deemed the date of service

Where the pleading or document isvoluminous, the court may, uponmotion, waive the requirement ofservice, provided that:1. A copy is filed with the court and is

made available for examination andreproduction

2. A notice of filing and availability isserved on the parties.

NOTE: Upon motion, the court may issue an

order to protect trade secrets or otherconfidential research, development orcommercial information belonging to thedebtor. (Rule 3 Sec. 4)

Upon motion, the - court may nullifyany transfer of property or any otherconveyance, sale, payment or agreementmade in violation of its stay order or inviolation of these Rules. (Rule 3 Sec. 6)

Any order issued by the court underthese Rules is immediately executory.

IV.Stay Order

The rationale behind the stay order is togive a breathing spell from its creditors.The automatic stay also providescreditor protection. Without it, certaincreditors would be able to pursue theirown remedies against the debtor’sproperty.


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If the petitioner is sufficient in form andsubstance, the court shall issue anorder:1. Appointing a rehabilitation receive

and fixing his bond;2. Staying enforcement of all claims,

except:a. claims against letters of credit

and similar securityarrangements issued by a

third party to secure thepayment of the debtor'sobligations;

b. foreclosure by a creditor ofproperty not belonging to adebtor under corporaterehabilitation;

c. where the owner of suchproperty sought to be foreclosedis also a guarantor or one who isnot solidarily liable, said ownershall be entitled to the benefit ofexcussion as such guarantor;

3. Prohibiting the debtor from selling,encumbering, transferring, ordisposing in any manner any of itsproperties except in the ordinarycourse of business;

4. Prohibiting the debtor from makingany payment of its liabilities (exceptin E, F and G)

5. Prohibiting the debtor's suppliers ofgoods or services from withholdingsupply of goods and services in theordinary course of business for aslong as the debtor makes paymentsfor the services and goods suppliedafter the issuance of the stay order;

6. Directing the payment in full of alladministrative expenses incurredafter the issuance of the stay order;

7. Directing the payment of new loansor other forms of creditaccommodations obtained for therehabilitation of the debtor withprior court approval;

8. fixing the dates of the initial hearingon the petition not earlier thanforty-five (45) days but not laterthan sixty (60) days from the filingthereof;

9. Directing the petitioner to publishthe Order in a newspaper of generalcirculation in the Philippines once aweek for two (2) consecutive weeks;

10. directing the petitioner to furnish acopy of the petition and its annexes,as well as the stay order, to thecreditors named in the petition andthe appropriate regulatory agencies

such as, but not limited to, the SEC,the BSP, the InsuranceCommission, the NationalTelecommunications Commission,the HLURB and the ERC;

11. Directing the petitioner that foreigncreditors with no known addressesin the Philippines be individuallygiven a copy of the stay order attheir foreign addresses;

12. Directing all creditors and allinterested parties (including theregulatory agencies concerned) tofile and serve on the debtor averified comment on or opposition tothe petition, with supportingaffidavits and documents, not laterthan fifteen (15) days before the dateof the first initial hearing andputting them on notice that theirfailure to do so will bar them fromparticipating in the proceedings;and

13. Directing the creditors andinterested parties to secure from thecourt copies of the petition and itsannexes within such time as toenable themselves to file theircomment on or opposition to thepetition and to prepare for the initialhearing of the petition.

Period of Stay Order—From the date of its issuance until theapproval of the rehabilitation plan orthe dismissal of the petition. (Rule 3Sec. 9)

Grounds Relief from, Modification, orTermination of Stay Order—1. Any of the allegations in the

petition, contents of anyattachment, or the verificationthereof has ceased to be true;

2. A creditor does not have adequateprotection over property securing itsclaims;a. The debtor fails or refuses to

honor a pre-existing agreementto keep the property insured;

b. The debtor fails or refuses totake commercially reasonablesteps to maintain the property;or

c. The property has depreciated toan extent that the creditor isundersecured

3. The debtor's secured obligation ismore than the FMV of the propertysubject of the stay and such


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property is not necessary for therehabilitation of the debtor; or

4. The property covered by the stayorder is not essential or necessary tothe rehabilitation and the creditor'sfailure to enforce its claim will causemore damage to the creditor than tothe debtor.

V. Rehabilitation Receiver

A. Qualifications (Rule 3 Sec. 11)

1. Expertise and acumen to manage andoperate a business similar in size andcomplexity to that of the debtor;

2. Knowledge in management, finance andrehabilitation of distressed companies;

3. General familiarity with the rights ofcreditors in suspension of payments orrehabilitation and generalunderstanding of the duties andobligations of a rehabilitation receiver;

4. Good moral character, independenceand integrity;

5. Lack of conflict of interest; Arehabilitation receiver may be deemedto have a conflict of interest if:a. He is creditor or stockholder of the

debtor;b. He is engaged in a line of business

which competes with the debtor;c. He is, or was within 2 years from

the filing of the petition, a director,officer, or employee or the auditor oraccountant of the debtor;

d. He is or was within 2 years from thefiling of the petition, an underwriterof the outstanding securities of thedebtor;

e. He is related by consanguinity oraffinity within the fourth civil degreeto any creditor, stockholder,director, officer, employee, orunderwriter of the debtor; or

f. He has any other direct or indirectmaterial interest in the debtor orany creditor. (Rule 3 Sec. 11)

6. Willingness and ability to file a bond.

B. Powers and Functions ofRehabilitation Receiver

He shall not take over the managementand control of the debtor but shallclosely oversee and monitor theoperations of the debtor during thependency of the proceedings. For thispurpose, the rehabilitation receiver

shall have the powers, duties andfunctions of a receiver underPresidential Decree No. 902-A

Considered as an officer of the court. Heshall be primarily tasked to study thebest way to rehabilitate the debtor andto ensure that the value of the debtor'sproperty is reasonably maintainedpending the determination of whether ornot the debtor should be rehabilitated,as well as implement the rehabilitationplan after its approval

C. Grounds for Dismissal ofRehabilitation Receiver (Rule 3 Sec.17)

1. if he fails, without just cause, toperform any of his powers andfunctions;

2. on any of the grounds for removing atrustee under the general principles oftrusts

D. Other Matters

Oath and Bond—Before entering upon his duties, therehabilitation receiver must first besworn in and post a bond executed infavor of the debtor in such sum as thecourt may direct. (Rule 3 Sec. 13)

Fees and Reimbursement—The rehabilitation receiver and thepersons hired by him shall be entitled toreasonable professional fees andentitled to reimbursement of expenseswhich shall be considered asadministrative expenses. (Rule 3 Sec.14)

"Administrative Expenses" shall referto1. reasonable and necessary expenses

that are incurred in connection withthe filing of the petition;

2. expenses incurred in the ordinarycourse of business after theissuance of the stay order, excludinginterest payable to the creditors forloans and credit accommodationsexisting at the time of the issuanceof the stay order, and

3. other expenses that are authorizedunder this Rules. (Rule 2, Sec. 1)


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Immunity from Suit—He shall not be subject to any action,claim or demand in connection with anyact done or omitted by him in good faithin the exercise of his functions andpowers herein conferred. (Rule 3 Sec.15)

ReportsHe hall file a written report every 3months to the court or as often as thecourt may require on the generalcondition of the debtor. The report shallinclude, at the minimum, interimfinancial statements of the debtor (Rule3 Sec. 16)

VI.Rehabilitation Plan

A. Contents

1. the desired business targets or goalsand the duration and coverage of therehabilitation;

2. the terms and conditions of suchrehabilitation;

3. the material financial commitments tosupport the rehabilitation plan;

4. the means for the execution of therehabilitation plan;

5. a liquidation analysis setting out foreach creditor that the present value ofpayments it would receive under theplan is more than that which it wouldreceive if the assets of the debtor weresold by a liquidator within a 6-monthperiod from the estimated date of filingof the petition; and

6. such other relevant information toenable a reasonable investor to make aninformed decision on the feasibility ofthe rehabilitation plan. (Rule 3 Sec. 18)

B. Effects of Approval

1. The plan and its provisions shall bebinding upon the debtor and all personswho may be affected thereby;

2. The debtor shall comply with theprovisions of the plan and shall take allactions necessary to carry out the plan;

3. Payments shall be made to the creditorsin accordance with the plan;

4. Contracts and other arrangementsbetween the debtor and its creditorsshall be interpreted as continuing toapply to the extent that they do notconflict with the provisions of the plan;and

5. Any compromises on amounts orrescheduling of timing of payments bythe debtor shall be binding on creditorsregardless of whether or not the plan issuccessfully implemented. (Rule 3 Sec.20)

C. Repayment Period

If the rehabilitation plan extends the periodfor the debtor to pay its contractualobligations, the new period should notextend beyond 15 years from the expirationof the stipulated term existing at the time offiling of the petition. (Rule 3 Sec. 19)

D. Revocation of Rehabilitation Planon Grounds of Fraud

Upon motion, within ninety (90) days fromthe approval of the rehabilitation plan, andafter notice and hearing, the court mayrevoke the approval thereof on the groundthat the same was secured through fraud.(Rule 3 Sec. 21)

E. Alteration or Modification ofRehabilitation Plan

An approved rehabilitation plan may, uponmotion, be altered or modified if, in thejudgement of the court, such alteration ormodification is necessary to achieve thedesired targets or goals set forth therein.(Rule 3 Sec. 22)

VII. Debtor-Initiated Rehabilitation

Process:

A. Filing Petition—

Who May File?1. Any debtor who foresees the impossibility

of meeting its debts when theyrespectively fall due, may petition theproper regional trial court forrehabilitation.

2. A group of companies may jointly filewhen one or more of its constituent

corporations foresee the impossibility ofmeeting debts when they respectivelyfall due, and the financial distresswould likely adversely affect thefinancial condition and/or operations ofthe other member companies of thegroup is essential under the terms andconditions of the proposedrehabilitation plan.


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Inapplicability of the Doctrine on“Ultimate Facts”

In ordinary complaints, the rule is thatwhat should be pleaded are only the“ultimate facts” or essential factsconstituting the pleaser’s cause ofaction. Such rule does not apply topleadings in corporate rehabilitation.This is because there is a need to fullyand fairly disclose to the creditors andother interested parties informationsufficiently adequate for them to makean informed decision whether to opposeor merely comment on the petition.

B. Opposition or Comment toPetition

By Whom: Creditor of the debtor or anyinterested party shall file his verifiedopposition to or comment on the petition

When: Not later than fifteen (15) daysbefore the date of the initial hearing fixed inthe stay order. After the 15 day period,leave of court is required.

C. Initial Hearing

D. Additional Hearings

Additional hearings must be concluded notlater than 90 days from the initial date ofthe initial hearing fixed in the stay order

E. Court Oder

Made within 20 days from last hearing

If there is NO merit in the petition: Courtshall immediately dismiss

If there is merit: Court shall refer thepetition and its annexes to therehabilitation receiver who shall evaluatethe rehabilitation plan and submit hisrecommendations to the court not laterthan ninety (90) days from the date of thelast initial hearing

If the debtor and creditors agree on a newrehabilitation plan, the order shall so statethe fact and require the rehabilitationreceiver to supply the details of the planand submit it for the approval of the courtnot later than 6 days from the date of thelast initial hearing. The court shall approvethe new plan upon concurrence of thefollowing

1. Approval or endorsement of creditorsholding at least 2/3 of the totalliabilities of the debtor includingsecured creditors holding more than50% of the total secured claims of thedebtor and unsecured creditors holdingmore than 50% of the total unsecuredclaims of the debtor;

2. Complies with the requirementsspecified in Section 18 of Rule 3;

3. Would provide the objecting class ofcreditors with payments whose presentvalue projected in the plan would begreater than that which they wouldhave received if the assets of the debtorwere sold by a liquidator within a 6month period from the date of filing ofthe petition; and

4. The rehabilitation receiver hasrecommended approval of the plan.

F. Comments on or Opposition toRehabilitation Plan

When: Not later than sixty (60) days fromthe date of the last initial hearing

Who: Any creditor or interested party ofrecord may file comments on or oppositionto the proposed rehabilitation plan, with acopy given to the rehabilitation receiver.

The court shall conduct summary and non-adversarial proceedings to receive evidence,if necessary, in hearing the comments onand opposition to the plan.

G. Creditors’ Meeting

When Held: At any time before he submitshis evaluation on the debtor-proposedrehabilitation plan to the court ANDIf no new rehabilitation plan is agreed uponby the debtor and the creditors

The rehabilitation receiver, either alone orwith the debtor, shall meet with thecreditors or any interested party to discussthe plan with a view to clarifying orresolving any matter connected therewith.

No specific format for the meeting has beenprovided by the Rules, but the meeting maybe conducted following the manner orprocedure of an ordinary meeting ofstockholders of a corporation.


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H. Approval

When: Within 1 year from the date of filingof the petition UNLESS the court, for goodcause shown, is able to secure an extensionof the period from the SC

Approval Despite Opposition (Sec. 11)—

Follows the CRAM DOWN method, meaningthat the court may approve the plan despiteobjections if certain conditions are met.

The court may approve a rehabilitation planeven over the opposition of creditors of thedebtor if, in its judgment, the rehabilitationof the debtor is feasible and the oppositionof the creditors is manifestly unreasonableif the following are present:1. The rehabilitation plan complies with

the requirements specified in Section 18of Rule 3;

2. The rehabilitation plan would providethe objecting class of creditors withpayments whose present valueprojected in the plan would be greaterthan that which they would havereceived if the assets of the debtor weresold by a liquidator within a six (6)-month period from the date of filing ofthe petition; and3. The rehabilitation receiver has

recommended approval of the plan.

VIII. Creditor-Initiated Rehabilitation

Who may file?Any creditor or creditors holding at least20% of the debtor's total liabilities may filea petition with the proper RTC forrehabilitation of a debtor that cannot meetits debts as they respectively fall due.

RequirementsMust be verified accompanied by arehabilitation plan and a list of at leastthree (3) nominees to the position ofrehabilitation receiver

IX.Pre-Negotiated Rehabilitation

A. Requirements

A debtor that foresees the impossibility ofmeeting its debts as they fall due may, byitself or jointly with any of its creditors, filea verified petition for the approval of a pre-negotiated rehabilitation plan, supported by

an affidavit showing the written approval orendorsement of creditors holding at least2/3 of the total liabilities of the debtor,including secured creditors holding morethan 50% of the total secured claims of thedebtor and unsecured creditors holdingmore than 50% of the total unsecuredclaims of the debtor

B. Issuance of Order

C. Approval

Within 10 days from the date of the secondpublication of the order the court shallapprove the rehabilitation plan UNLESS acreditor or other interested party submits averified objection

D. Objection to Petition orRehabilitation Plan

Who— Any creditor or interested party.

The objection shall be limited to thefollowing:1. The petition or the rehabilitation

plan or their attachments containmaterial omissions or are materiallyfalse or misleading;

2. The terms of rehabilitation areunattainable; or

3. The approval or endorsement ofcreditors required under Section 1of this Rule has not been obtained

Hearing on Objections (Sec. 5) not earlier than ten (10) days and no

longer than twenty (20) days from thedate of the second

if objections meritorious, it shall directthe petitioner to cure the defect within aperiod fifteen (15) days from receipt ofthe order.

E. Period for Approval ofRehabilitation Plan

Not later than 120 days from the date ofthe filing of the petition

If the court fails to do so within saidperiod, the rehabilitation plan shall bedeemed approved.


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F. Revocation of ApprovedRehabilitation Plan

When: Not later than thirty (30) days fromthe approval upon motion and after noticeand hearing.

Grounds:1. approval was secured by fraud2. petitioner has failed to cure the defect

ordered by the court

X. Recognition of ForeignProceedings

A. Scope

This rule shall apply where:1. assistance is sought in a Philippine

court by a foreign court or a foreignrepresentative in connection with aforeign proceeding;

2. assistance is sought in a foreign Statein connection with a domesticproceeding governed by these Rules; or

3. a foreign proceeding and a domesticproceeding are concurrently takingplace.

The sole fact that a petition is filedpursuant to this Rule does not subject theforeign representative or the foreign assetsand affairs of the debtor to the jurisdictionof the local courts for any purpose otherthan the petition.

B. Non-Recognition of ForeignProceeding

Court may refuse recognition:1. the action would be manifestly contrary

to the public policy of the Philippines;and

2. if the court finds that the country ofwhich the petitioner is a national doesnot grant recognition to a Philippinerehabilitation proceeding in a mannersubstantially in accordance with thisRule

C. Recognition of ForeignProceeding, Requisites

1. The proceeding is a foreign proceedingas defined herein;

2. The person or body applying forrecognition is a foreign representative asdefined herein; and

3. The petition meets the requirements ofSection 3 of this Rule

D. Period to Recognize

Within thirty (30) days from the filingthereof

E. Effects of Recognition of ForeignProceeding

Upon recognition of a foreign proceeding:1. Commencement or continuation of

individual actions or individualproceedings concerning the debtor'sassets, rights, obligations or liabilities isstayed; provided, that such stay doesnot affect the right to commenceindividual actions or proceedings to theextent necessary to preserve a claimagainst the debtor.

2. Execution against the debtor's assets isstayed; and

3. The right to transfer, encumber orotherwise dispose of any assets of thedebtor is suspended.

- end of Special Laws –

- end of Commercial Law -