COVERAGE MERCANTILE LAW2015 BAR EXAMINATIONS

I. Letters of CreditA. Definition of Letter of Credit

Letters of credit (L/C) are those issued by one merchant to another, or for the purpose of attending to a commercial transaction. (Art. 567, Code of Commerce)

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

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

B. Nature of Letter of Credit1. Financial device – L/Cs are developed by merchants as a convenient and relatively safe

mode of dealing with sales of goods to satisfy the seemingly irreconcilable interests of a seller, who refuses to part with his goods before he is paid, and a buyer, who wants to have control of the goods before paying. (Bank of America, NT&SA v. Court of Appeals, 1993)

2. Composite of three distinct contracts:a. First Contract between the party applying for the L/C (buyer/ importer/ account

party) and the party for whose benefit the L/C is issued (seller/ exporter/ beneficiary).

b. Second Contract between the buyer and the issuing bank. This contract is sometimes called the "Application and Agreement" or the "Reimbursement Agreement".

c. Third Contract between the issuing bank and the seller, in order to support the contract, under (a) above (Reliance Commodities v. Daewoo, 1993).

C. Parties to a Letter of Credit (Rights and Obligations)1. Applicant/Buyer/Importer

-procures the letter of credit, purchases the goods and obliges himself to reimburse the issuing bank upon receipt of the documents title.

2. Issuing Bank -one which, whether a paying bank or not, Issues the letter of credit and undertakes to pay the seller upon receipt of the draft and proper documents of title from the seller and to surrender them to the buyer upon reimbursement.

3. Beneficiary/Seller/Exporter - in whose favor the instrument is executed. One who delivers the documents of title and draft to the issuing bank to recover payment.

The number of parties may be increased. Modern letters of credit usually involve bank to bank‐ ‐ transactions. The following additional parties may be:1. Advising/notifying bank

-the correspondent bank (agent) of the issuing bank through which it advises the beneficiary of the LC.

2. Confirming bank - bank which, upon the request of the beneficiary, confirms the LC issued.

3. Paying bank - bank on which the drafts are to be drawn, which may be the issuing bank or another bank not in the city of the beneficiary

4. Negotiating bank - bank in the city of the beneficiary which buys or discounts the drafts contemplated by the LC, if such draft is to be drawn on the opening bank not in the city of the beneficiary.

A. Basic Principles of Letter of Credit1. Doctrine of Independence

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

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

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

The “Fraud exception rule.” It provides that the untruthfulness of a certificate accompanying a demand for payment under a standby letter of credit may qualify as fraud sufficient to support an injunction against payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)

3. Doctrine of Strict ComplianceThe settled rule in commercial transactions involving letters of credit requires that the documents tendered by the seller must strictly conform to the terms of the letter of credit. Otherwise, the issuing bank or the concerned correspondent bank is not obliged to perform its undertaking under the contract.

The documents tendered by the seller/beneficiary must strictly conform to the terms of the letter of credit. The tender of documents must include all documents required by the letter. Thus, a correspondent bank which departs from what has been stipulated under the LC acts on its own risk and may not thereafter be able to recover from the buyer or the issuing bank, as the case may be, the money thus paid to the beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209, Apr. 30, 1991)

III. Trust Receipts LawA. Definition of a Trust Receipt Transaction

It is any transaction between the entruster and entrustee:1. Whereby the entruster who owns or holds absolute title or security interests over certain

specified goods, documents or instrument, releases the same to the possession of entrustee upon the latter’s execution of a TR agreement.

2. Wherein the entrustee binds himself to hold the designated goods in trust for the entruster and, in case of default, to sell such goods, documents or instrument with the obligation to turn over to the entruster the proceeds to the extent of the amount owing to it or to turn over the goods, documents or instrument itself if not sold. (Sec. 4, P.D. 115)

B. Definition of a Trust ReceiptIt is the written or printed document signed by the entrustee in favor of the entruster containing terms and conditions substantially complying with the provisions of PD 115.

C. Concept of a Trust Receipt Transaction A commercial document (Sec. 4, P.D. 115) A commercial transaction – It is a separate and independent security transaction intended

to aid in financing importers and retail dealers who do not have sufficient funds. (Nacu v. CA, G.R. No. 108638, Mar. 11, 1994)

Letters of credit and trust receipts are not negotiable instrument, but drafts issued in connection with letters of credit are negotiable instruments. Hence, while the presumption of consideration under the negotiable instrument law may not necessarily be applicable to trust receipts and letters of credit, the presumption that the drafts drawn in connection with the letters of credit have sufficient consideration applies. (Lee v. CA, G.R. No. 117913, Feb. 1, 2002)

1. Loan/Security FeatureA trust receipt arrangement is endowed with its own distinctive features and characteristics. Under that set up, a bank extends a loan covered by the Letter of Credit, with the trust‐ receipt as a security for the loan. In other words, the transaction involves a loan feature represented by the letter of credit, and a security feature which is in the covering trust receipt. A trust receipt, therefore, is a security agreement, pursuant to which a bank acquires a "security interest" in the goods. It secures an indebtedness and there can be no such thing as security interest that secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and America, G.R. No. 73271, May 29, 1987)

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

2. Ownership of the Goods, Documents and Instruments under a Trust ReceiptEntrustee is the factual owner of the goods, documents and instruments (Prudential Bank v. NLRC). Entruster is the real owner of the goods, documents and instruments.

D. Rights of the EntrusterThe entruster shall have the following rights:

1. Right to the proceeds from the sale of the goods, documents or instruments released under a trust receipt to the entrustee to the extent of the amount owing to the entruster or as appears in the trust receipt; OR

2. Right to the return of the goods, documents or instruments in case of non-sale; AND3. Right to the enforcement of all other rights conferred on him in the trust receipt provided

such are not contrary to the provisions of the TRL.4. Right to cancel the trust and take possession of the goods, documents or instruments subject

of the trust or of the proceeds realized therefrom at any time upon default or failure of the entrustee to comply with any of the terms and conditions of the trust receipt or any other agreement between the entruster and the entrustee.

5. Right to sell the goods, documents or instruments at public or private sale at least five days notice to the defaulting entrustee of the intention to sell.

6. Right to purchase the goods, documents or instruments at a public sale.7. Right to recover the deficiency from the entrustee should the proceeds of the sale not be

sufficient (Sec. 7)

1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent Purchasers for ValueAs between the entruster and the creditors of the entrustee, the entruster has a better right over the goods. His security interest in goods, documents, or instruments pursuant to the written terms of a trust receipt shall be valid as against all creditors of the entrustee for the duration of the trust receipt agreement. (Sec. 12, P.D. 115)

A purchaser in good faith can defeat the rights of the entruster over the goods. He acquires goods, documents or instruments free from the entruster's security interest. (Sec. 11, P.D. 115)

E. Obligation of the Entrustee1. To hold the goods, documents or instruments in trust for the entruster and shall dispose of

them strictly in accordance with the terms and conditions of the trust receipt;2. To receive the proceeds in trust for the entruster and turn over the same to the entruster to

the extent of the amount owing to the entruster or as appears on the trust receipt;3. To insure the goods for their total value against loss from fire, theft, pilferage or other

casualties;4. To keep said goods or proceeds thereof whether in money or whatever form, separate and

capable of identification as property of the entruster;5. To return the goods, documents or instruments in the event of non-sale or upon demand of

the entruster; and6. To observe all other terms and conditions of the trust receipt not contrary to the provisions of

the TRL. (Sec. 9)

F. Liability of the Entrustee1. To hold good, documents and instruments (GDI) in trust for the entruster and to dispose of

them strictly in accordance with the terms of TR;2. To receive the proceeds of the sale for the entruster and to turn over the same to the

entruster to the extent of amount owing to the entruster;3. To insure GDI against loss from fire, theft, pilferage or other casualties.4. To keep GDI or the proceeds thereof, whether in money or whatever form, separate and

capable of identification as property of the entruster;5. To return GDI to the entruster in case they could not be sold or upon demand of the

entruster; and6. To observe all other conditions of the trust receipts. (Sec. 9, P.D. 115)

1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or InstrumentsThe order in the application of proceeds or the TR transactions:

1. Expenses of the sale2. Expenses derived from storing the goods3. Principal obligation

The entrustee is liable for the deficiency but any excess shall likewise belong to him. (Sec. 7, P.D. 115)

2. Return of Goods, Documents or Instruments in Case of Sale

The obligation of the entrustee in case the goods, documents or instruments were not sold is to return the goods, documents, or instruments to the entrustor. (Sec. 4, P.D. 115)

3. Liability for Loss of Goods, Documents or InstrumentsThe entrustee shall bear the loss of goods which are the subject of TR. Loss of goods, documents or instruments which are the subject of a TR, pending their disposition, irrespective of whether or not it was due to the fault or negligence of the entrustee, shall not extinguish his obligation to the entruster for the value thereof. (Sec. 10, P.D. 115)

4. Penal Sanction if Offender is a CorporationThe TR Law declares the failure to turn over goods or proceeds realized from sale thereof, as a criminal offense under Art. 315(l)(b) of RPC (estafa). The law is violated whenever the entrustee or person to whom trust receipts were issued fails to: (a) return the goods covered by the trust receipts; or (b) return the proceeds of the sale of said goods. (Metropolitan Bank v. Tonda, G.R. No. 134436, Aug. 16, 2000)

B. Remedies Available1. In case of default or failure of the entrustee to comply with the trust receipt agreement -

Entruster may cancel the trust receipt agreement, take possession of the goods, documents, instruments, and sell the same at any private or public sale at least five days from notice of intention to sell to the entrustee. The proceeds of any such sale, whether public or private, shall be applied (a) to the payment of the expenses thereof; (b) to the payment of the expenses of re-taking, keeping and storing the goods, documents or instruments; (c) to the satisfaction of the entrustee's indebtedness to the entruster (Sec. 7)

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

3. In case of failure to turn over proceeds of the sale of the goods, documents or instruments or to return the same in case of non-sale - Entruster may file a criminal complaint for estafa (Art. 315 (b) of the Revised Penal Code) against the entrustee (Sec. 13)

C. Warehouseman’s LienA warehouseman shall have a lien on goods deposited or on the proceeds thereof in his hands:

(1) For all lawful charges for storage and preservation of the goods;(2) For all lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering and other charges and expenses in relation to such goods;(3) For all reasonable charges and expenses for notice, and advertisements of sale; and(4) For sale of the goods where default had been made in satisfying the warehouseman's lien (Sec. 27)

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

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

III. Negotiable Instruments LawA. Forms and Interpretation

1. Requisites of Negotiabilitya) Words that appear on the face of negotiable instrumentb) Requirements enumerated in Section 1 of NILc) Intention of the parties by considering the whole of the instrumentsd) In writing and signed by the maker or drawere) Contains an unconditional promise or order to pay a sum certain in moneyf) Payable on demand, or at a fixed or determinable future time

g) Payable to order or to bearer (so called badges of negotiability)h) If addressed to a drawee, he must be named or otherwise indicated with reasonable

certainty. (Sec. 1)2. Kinds of Negotiable Instruments

Promissory notes (PN) – An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184)Bill of exchange (BOE) – An unconditional order in writing addressed by one person to another signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. (Sec. 126)

B. Completion and Delivery1. Insertion of Date

a) Where an instrument expressed to be payable at a fixed period after date is issued undated, orb) Where the acceptance of an instrument payable at a fixed period after sight is undated

2. Completion of BlanksThe holder has a prima facie authority to complete it.A signature on a blank paper delivered by the person making the signature in order that the paper may be converted into a negotiable instrument operates as a prima facie authority to fill it up as such for any amount. (Sec. 14)

3. Incomplete and Undelivered InstrumentsNot valid against the party whose signature was placed before delivery, whether the holder is a holder in due course or not. With respect, however, to a holder in due course, non delivery must be proved‐ because as to him, there is a prima facie presumption of delivery.

4. Complete but Undelivered InstrumentsIt is incomplete and revocable until delivery of the instrument for the purpose of giving it effect.(Sec. 16)

C. Signature1. Signing in Trade Name

As a general rule, only persons whose signatures appear on an instrument are liable thereon. But one who signs in a trade or assumed name is liable as if he signed his own name (Sec. 18 [2]). It is necessary, however, that the party who signed intended to be bound by his signature.

2. Signature of AgentThe requisites are complied with, the legal effects of an agent’s signature in a negotiable instrument are:

a) His signature will bind his principalb) He will be exempt from personal liability

3. Indorsement by Minor or CorporationNot void. The incapacity of the infant is not a defense which can be availed of by prior parties. However, it does not destroy the right of such an infant indorser to disaffirm under the rules of infancy.

Passes property thereinVoidable. Therefore, parties prior to the minor or corporation cannot escape liability by setting up as defense the incapacity of the indorsers.A minor, however, may be held bound by his signature in an instrument where he is guilty of actual fraud committed by specifically stating that he is of age. (PNB v. CA, G.R. No. L 34404, June 25, 1980)‐

4. Forgery - is the counterfeit making or fraudulent alteration of any writing.

Q: When is there forgery?← A: Signature is affixed by one who does not claim to act as an agent and who has no authority to bind the

person whose signature he has forged.Q: What is the effect when there is forgery?

GR: It does NOT render the instrument void. The signature is wholly inoperative, and no right to retain the instrument, or to give a discharge thereof, or to enforce payment thereof against any party to it, is acquired through or under such signature. (Cut off rule)‐

XPN: If the party against whom it is sought to enforce such right is precluded from setting up forgery or want of authority.(Sec. 23)Where the forged signature is not necessary to the holder’s title, in which case, the forgery may be disregarded. (Sec. 48)

D. ConsiderationIt is an inducement to a contract that is the cause, price or impelling influence, which induces a party to

enter into a contract.Q: What is the effect of want of consideration?A: It becomes a matter of defense as against any person not a holder in due course (Sec. 28);Q: What is the effect of partial failure of consideration?A: Partial failure of consideration is a defense pro tanto, whether the failure is an ascertained and liquidated amount or otherwise (Sec. 28)

E. Accommodation PartyQ: Who is an accommodation party?A: One who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person.(Sec. 29)Q: What are the requisites to be an accommodation party?A:

a) Accommodation party must sign as maker, drawer, acceptor or indorserb) No value is received by the accommodation party for the accommodated party; andc) The purpose is to lend the name.

Q: What are the requisites to be an accommodation party?

A:a) Accommodation party must sign as maker, drawer, acceptor or indorserb) No value is received by the accommodation party for the accommodated party; andc) The purpose is to lend the name.

Note: It does not mean, however, that one cannot be an accommodation party merely because he has received some consideration for the use of his name. The phrase “without receiving value therefor” only means that no value has been received for the instrument and not for lending his name.

F. NegotiationQ: When is an instrument negotiated?A: An instrument is negotiated when it is transferred from one person to another in such a manner as to constitute the transferee the holder thereof. (Sec. 30)

Note: A holder is the payee or indorser of a bill or note, who is in possession of it, or the bearer thereof. (Sec. 191)

←2. Distinguished from Assignment

only negotiable instrument may be negotiated.

non negotiable; instrument may be assigned absent of any prohibition against assignment written on its face.

the transferee, if he is a hidc may acquire better rights than his transferor.

the transferee can have no better rights than his transferor; he merely steps into the shoes of the assignor.

the holder can hold the drawer liable and the indorsers liable if

the transferee has no right of recourse for payment against

the party primarily liable does not pay.

immediate parties

NEGOTIATION ASSIGNMENT3. Modes of Negotiation

G.What are the methods of negotiation?

A:

1. If payable to bearer ‐ it is negotiated by delivery2. If payable to order ‐ it is negotiated by the indorsement of the holder completed by delivery. (Sec. 30)

H. What is the effect, if any, if a bearer instrument is negotiated by indorsement and delivery?

A: A bearer instrument, even when indorsed specially, may nevertheless be further negotiated by delivery, but the person indorsing specially shall be liable as endorser to only such holders as make title through his endorsement (once a bearer instrument, always a bearer instrument). (Sec. 40)

Note: This rule does not apply to an instrument originally payable to order but is converted into bearer instrument because the only or last indorsement is an indorsement in blank.

1. Kinds of Indorsements← A. Special (Sec. 34)–Specifies the person to whom or to whose order the instrument is to be payable.

Also known as specific indorsement or indorsement in full.← B. Blank (Sec. 34) –Specifies no indorsee.← C. Instrument is payable to bearer and may be negotiated by delivery;

May be converted to special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of indorsement(Sec. 35).

Absolute–The indorser binds himself to pay:a) upon no other condition than failure of prior parties to do sob) upon due notice to him of such failure

Conditional –Right of the indorsee is made to depend on the happening of a contingent event. Party required to pay may disregard the conditions (Sec. 39)

Restrictive –When the instrument:a) Prohibits further negotiation of the instrument (it destroys the negotiability of the instrument);b) Constitutes the indorsee the agent of the indorser; (Sec. 36)c) Vests the title in the indorsee in trust for or to the use of some persons. But mere absence of words

implying power to negotiate does not make an instrument restrictive.

Qualified(Sec. 34)– constitutes the indorser a mere assignor of the title to the instrument. It is made by adding to the indorser’s signature words like, without recourse (serves as an ordinary equitable assignment) (Sec. 38)

Joint–indorsement made payable to 2 or more persons who are not partners. (Sec. 41)Note: All of them must indorse unless the one indorsing has authority to indorse for the others

Irregular(Sec. 64)– A person who, not otherwise a party to an instrument, places thereon his signature in blank before delivery.

Facultative –Indorser waives presentment and notice of dishonor, enlarging his liability and his indorsement.

Successive – indorsement to two persons in succession.

Note: Any of them can indorse to effect negotiation of the instrument.

I. Rights of the Holder

Q: Who is a holder?A: The payee or indorsee of a bill or note who is in possession of it or the bearer thereof. (Sec. 191)Q: What are the classes of holders?A:

Holders in general (Simple Holders). (Sec. 51)Holders for value. (Sec. 26)Holders in due course. (Secs. 52, 57)

What are the rights of a holder in general?

A:Right to sueRight to receive payment (Sec. 51)

Note: If the payment is in due course, the instrument is discharged

1. Holder in Due CourseQ: Who is a holder in due course (HIDC)?He who takes a negotiable instrument:

A. That is complete and regular upon its face;Note: Absence of the required documentary stamp will not make the instrument incomplete. (It is not a requisite of negotiability under Sec. 1 and it is not a material particular under Sec. 125)

B. Became the holder before it was overdue, and without notice that it has been previously dishonored, if such was the fact;Note: if the instruments is payable on demand, the date of maturity is determined by the date of presentment, which must be made within a reasonable time after its issue, if it is a note, or after the last negotiation thereof, if it is a bill of exchange. (Secs. 71 and 143[a])

Where transferee receives notice of any infirmity in the instrument of defect in the title of the person negotiating the same before he had paid the full amount agreed to be paid, he will be deemed a holder in due course only to the extent of the amount paid by him. (Sec. 54)

C. Took it in good faith and for value;

D. At the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in thetitle of the person negotiating it. (Sec. 52)Note: Knowledge of the agent is constructive knowledge to the principal.

2. Defenses Against the Holder

Real Defenses – those that are available against all parties, both immediate and remote, including holders in due course.

Personal Defenses –defenses which are not available against a holder in due course. Those which grow out of the agreement or conduct of a particular person in regard to the instrument which renders it inequitable or him,

J. Liabilities of Parties

1. MakerK. What are the liabilities a maker?

A:A. Engages to pay according to the tenor of the instrument; andB. Admits the existence of the payee and his then capacity to indorse. (Sec.60)Note: Liability of the maker is primary and unconditional.

Q: When is a maker precluded from setting up these defenses?‐A:

← A. That payee is a fictitious person← B. That payee was insane, a minor, or a corporation acting ultra vires.

2. DraweQ. To whom is the drawer secondarily liable?

A: The holder. Any of the indorsers intervening between holder and drawer who is compelled to pay by the holder, the drawer will be liable to that indorser so compelled to pay

←3. Acceptor

What are the liabilities of an acceptor?a) Engages to pay according to the tenor of his acceptanceb) Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw

the instrumentc) Admits the existence of the payee and his then capacity to indorse. (Sec. 62)Note: Drawee does not become liable until he accepts the instrument in which case he becomes an acceptor.

When is an acceptor is precluded from setting up these defenses?‐a. That the drawer is non existent or fictitious‐b. That the drawer’s signature is a forgeryc. That there is no consideration between him and the drawer

4. IndorserWho is deemed an indorser?A: A person placing his signature upon an instrument otherwise than as maker or acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words his intention to be bound in some other capacity. (Sec. 63)Note: A person who places his indorsement on an instrument negotiable by delivery incurs all liabilities of an indorser. (Sec. 67)

5. WarrantiesWhat are the warranties provided by the person negotiating an instrument?

A:a. That the instrument is genuine and in all respects what it purports to beb. That he has good title to itc. That all prior parties had capacity to contractd. That he has no knowledge of any fact which would impair the validity of the instrument or render it useless.

L. Presentment for Payment

What is presentment for payment (PP)?The presentation of an instrument to the person primarily liable for the purpose of demanding and receiving payment.

How should presentment be made?GR: Instrument must be exhibited to the person from whom payment is demanded; when paid, it must be delivered to person paying it. (Sec. 74)

XPN: When exhibition is excused:← A. Debtor does not demand to see the instrument and refuses payment on some other grounds; or← B. Instrument is lost or destroyed.

2. Necessity of Presentment for Payment

When is PP necessary?PP is only necessary to charge persons secondarily liable (Sec. 70). But PP is not necessary in the following instances:- As to drawer, where he has no right to expect or require that the drawee or acceptor will pay the instrument (Sec. 79)- As to indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented (Sec. 80)

When dispensed with under Sec. 82, such as:a) Where, after the exercise of reasonable diligence, presentment cannot be madeb) Where the drawee is a fictitious personc) By waiver of presentment, express or impliedd) When the instrument has been dishonored by non acceptance‐

3. Parties to Whom Presentment for Payment Should Be MadeWho are the parties to whom presentment for payment should be made?Presentment for payment must be made the primary party – to the (1) maker in case of a promissory note, or to the (2) acceptor in case of an accepted bill. If the bill of exchange or check is payable on demand, the presentment must be made to the drawee although he is not liable on the bill.Note: If the person primarily liable is absent or inaccessible, then presentment must be made to any person of sufficient discretion at the proper place of presentment.

4. Dispensation with Presentment for Payment

What is the effect when presentment is not made?Drawer and the indorsers are discharged from their secondary liability unless such presentment is excused.

When is the delay in making presentment excused?A. When caused by circumstances beyond the control of the holder; andB. Not imputable to his default, misconduct, or negligence (Sec. 81).

Note: Only the delay in presentment is excused and not the presentment itself. Hence, as soon as the cause of delay ceases to operate, presentment must be made with reasonable diligence (Sec. 81).

5. Dishonor by Non-PaymentWhen is an instrument dishonored by non payment?‐A: Non payment upon due presentation. Happens when:‐A. The instrument is duly presented for payment to party primarily liable;&B. It is either refused or cannot be obtained.

Non payment without presentation. Happens when:‐A. Presentment is excusedB. the instrument is overdueC. it is unpaid

What is the effect of dishonor by non payment?‐As to the holder, after an instrument has been dishonored by non payment, the person secondarily liable‐ becomes the principal debtors and he need not proceed against the person primarily liable.

M. Notice of Dishonor

What is notice of dishonor?A: Given by the holder to the parties secondarily liable, drawer and each indorser, that the instrument was dishonored by non payment or non acceptance by the drawee/maker.‐ ‐Note: Persons primarily liable need not be given notice of dishonor because they are the ones who dishonored the instrument.

Q: What are the purposes for requiring notice of dishonor?A:A. To inform parties secondarily liable that the maker or acceptor has failed to meet his engagement.B. To advise them that they are required to make payment.←← What is the liability of person secondarily liable when instrument dishonored?← After the necessary proceedings for dishonor had been duly taken, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder. (Sec. 84)

2. Parties to Be Notified

To whom must notice be given?Notice of dishonor should be given to:

The drawer; orHis agent (Sec. 97)

Where party is dead – to a personal representative or sent to the last residence or last place of business of the deceased (Sec. 98)

When the parties to be notified are partners – notice to any one partner though there has been a dissolution (Sec. 99)

Parties Who May Give Notice and Dishonor

Who gives the notice?

A:HolderAnother in behalf of the holder

Any party to the instrument who may be compelled to pay and who, upon taking it up, would have a right to reimbursement from the party to whom notice is given. (Sec. 90)

3. Effect of Notice

What is the effect of notice of dishonor if given by or on behalf of the holder?Notice of dishonor inures to the benefit of:

All holders subsequent to the holder who has given notice; andAll parties prior to the holder but subsequent to the party to whom notice has been given and against whom

they may have a right of recourse. (Sec. 92)

What is the effect of notice of dishonor if given by party entitled thereto?Notice of dishonor inures to the benefit of:The holder; andAll parties subsequent to the party to whom notice is given (Sec. 93).

4. Form of NoticeWhat is the form and contents of a notice of dishonor?

A:Oral; orIn writing

It may be given by personal delivery, or by mail (Sec. 96)

Must contain the following:Description of the instrument;

Statement that it has been presented for payment or for acceptance and that it has been dishonored (If protest is necessary, notice must also contain a statement that it has been protested).

Statement that the party giving the notice intends to look for the party addressed for payment.

← Note: A written notice need not be signed, and an insufficient notice may be supplemented or validated by verbal communication. A misdescription of the instrument does not vitiate the notice unless the party to whom the notice is given is in fact misled thereby. (Sec. 95)

5. Waiver

When may waiver of notice be given?A:

Before the time of giving notice has arrived; or

After the omission to give due notice.(Sec. 109)

What are the ways to give a waiver of notice?

It can either be:Express; or

Implied (e.g. Payment by an indorser after he learns of the default of the maker admission of liability after dishonor). (Sec. 109)

Who are affected by the waiver of notice?

All parties (if embodied on the face of the instrument); or

← Particular indorser (if written above the signature of such indorser) (Sec. 110)

6. Dispensation with NoticeWhen is notice of dishonor not necessary?

Waiver of notice. (Sec. 109)Waiver of protest. (Sec. 111)

When after due diligence, notice cannot be given. (Sec. 112)

Drawer in cases under Sec. 114Indorser in cases under Sec. 115; and

Where due notice of dishonor by non acceptance has been given (notice of dishonor by non payment‐ ‐ not necessary). (Sec. 116)

With regard to the drawer, when can a notice of dishonor be dispensed with?

When drawer and drawee is the same person

Drawee is fictitious or does not have the capacity to contract

Drawer is person to whom the instrument is presented for payment

(he is the one who dishonored the instrument)

Drawer has no right to expect or require that the drawee or acceptor will honor the instrument.

Drawer has countermanded the payment (e.g. stop payment order)

(Sec.114)

7. Effect of Failure to Give NoticeWhat is the effect of omission of a previous holder to give notice of dishonor by non acceptance‐ ?

A: It does not prejudice the rights of a holder in due course subsequent to the omission to present the instrument to the drawee for acceptance and notify the drawer and indorsers if acceptance is refused. (Sec. 117)

When should the notice be given?

A:

GR: As soon as instrument was dishonored (Sec. 102) – Party is allowed one entire day for the purpose of giving notice.

XPN: Delay is excused (Sec. 113)

Note: An instrument cannot be dishonored by non payment until after the maturity‐

Parties reside in the same place

Place of business – Before close of business hours on the day following

Residence – Before the usual hours of rest on the day following

By mail – Deposited in the post office in time to reach him in the usual course on the day following

(Sec. 103)

Parties reside in different places

By mail – Deposited in the post office in time to go by mail (actual departure in the course of mail from the post office in which the notice was deposited) the day following the day of dishonor.

If no mail – At a convenient hour (of the sender) on that day, by the next mail thereafter

Other than by post office (e.g. personal messenger) – Within the time that notice would have been received in due course of mail, if it has been deposited in the post office within the time specified in(Sec. 104)

Time of notice to antecedent parties – Same time for giving notice that the holder has after the dishonor (Sec. 107)

← Note: Actual receipt of the party within the time specified by law is sufficient though not sent in the places specified above. (Sec. 108)

K. Discharge of Negotiable Instrument

1. Discharge of Negotiable InstrumentL. What is discharge?

A: It is the release of all parties, whether primary or secondary, from the obligations arising thereunder. It renders the instrument without force and effect, and consequently, it can no longer be negotiated .

Q: What are the methods for discharge of instrument?

A:a. Payment by principal debtor:

← By or on behalf of principal debtor← At or after its maturity← To the holder thereof

← In good faith and without notice that the holder’s title is defective

b. Payment by accommodated party

c. Intentional cancellation of instrument by the holder (by expressly stating it in the instrument or when the instrument is torn up, burned or destroyed)

d. Any act which discharges a simple contract for the payment of money under Art. 1231 of the NCC specifically remission, novation, and merger.

Note: Loss of the negotiable instrument will not extinguish liability; compensation is not available so long as an obligation is evidenced by a negotiable instrument.

(Commercial Law Review, Villanueva, 2009ed)

e. Reacquisition by principal debtor in his own right. Reacquisition must be:

← By the principal debtor

← In his own right

← At or after date of maturity (instrument is discharged; if made before, it may be renegotiated)

(Sec. 119)←

2. Discharge of Parties Secondarily LiableWhat are the methods of discharge of secondary parties?

A:

Any act which discharges the instrument;

Intentional cancellation of his signature by the holder Discharge of prior party which may be made when signature is stricken out

Valid tender of payment by a prior party;

Release of the principal debtor, unless holder expressly reserves his right of recourse against the said subsequent parties

Extension of time of payment, unless:

Extension is consented to by such party

Holder expressly reserves his right of recourse against such party.

(Sec. 120)

What are the effects of payment by persons secondarily liable?

A:Instrument is not discharged

It only cancels his own liability and that of the parties subsequent to him

GR: Instrument may be renegotiated

XPN:

Where it is payable to the order of a third person, and has been paid by the drawer; and

Where it is paid by the accommodated party

Note: (a) and (b) has the same effect as payment by the party primarily liable.

← Person paying is remitted to his former rights (as regards prior parties) and he may strike out his own and all subsequent indorsements. (Sec. 121)

3. Right of Party Who Discharged InstrumentGR: The party so discharging the instrument is remitted to his former rights as regards all prior parties, and he may strike out his own and all subsequent indorsements, and again negotiate the instrument.

XPN:

Where it is payable to the order of a third person, and has been paid by the drawee; & It was made or accepted for accommodation, and has been paid by the party accommodated.

4. Renunciation by HolderWhat is renunciation?

A: The act of surrendering a claim or right with or without recompense (a personal defense).

Q: How is renunciation by holder made?

A:Must be written

If oral, the instrument must be surrendered to the person primarily liable. (Sec. 122)

What are the effects of renunciation?

A:

Made in favor of principal debtor made at or after the maturity (made absolutely and unconditionally) of the instrument – discharges the instrument

(Sec. 122)

Made in favor of a secondary party may be made by the holder before, at or after maturity – discharges only the secondary parties and all subsequent to him (Sec. 122)

Renunciation does not affect the rights of a holder in due course without notice. (Sec. 120)

What is the rule regarding cancellation of an instrument?

← A: It is presumed intentional. It is inoperative if unintentional, or under a mistake or without the authority of the holder. But where an instrument or any signature appears to have been cancelled, burden of proof lies on the party who alleges that the cancellation was made unintentionally, or under a mistake or without authority. (Sec. 123)

M. Material Alteration

1. ConceptWhat is a material alteration?

← A: Any change in the instrument which affects or changes the liability of the parties in any way.What constitutes a material alteration?

Any alteration which changes the:Date

Sum payable, either principal or interest;

Time or place of paymentNumber or relations of the parties

Medium or currency in which payment is to be made; or

Adds a place of payment when no place of payment is specified, or any other change or addition which alters the effect of the instrument in any respect.

(Sec. 125)

← Note: The change in the date of indorsement is not material where the date is not necessary to fix the maturity of the instrument.

2. Effect of Material AlterationWhat is the effect of material alteration which is not apparent?

A:

Avoids the instrument except against:

A party who has made the alteration;

A party who authorized or assented to the alteration; or

The indorsers who indorsed subsequent to the alteration (because of their warranties)

If negotiated to a HIDC, he may enforce the payment thereof according to its original tenor against the party prior to the alteration. He may also enforce payment thereof against the party responsible for the alteration for the altered amount.

If negotiated to a NHIDC, he cannot enforce payment against the party prior to the alteration. He may however enforce payment according to the altered tenor from the person who caused the alteration and from the indorsers. (Sec. 124)

Is there material alteration when the serial number of a check had been altered?

← No. An alteration is said to be material if it alters the effect of the instrument. It means an unauthorized change in an instrument that purports to modify in any respect the obligation of a party or an unauthorized addition of words or numbers or other change to an incomplete instrument relating to the obligation of a party. The alteration of the serial number of a check did not change the relations between the parties nor the effect of the instrument. Hence, the alteration on the serial number of a check is not a material alteration. (International Corporate Bank vs. CA, G.R. No. 141968, Feb. 12, 2001

N. Acceptance

1. DefinitionWhat is acceptance of a bill?

A: A signification by the drawee of his assent to the order of the drawer (Sec. 132).

Q: What is the effect of acceptance?

← A: Upon acceptance, the bill, in effect becomes a note. The drawee who thereby becomes an acceptor assumes the liability of the maker (which is primary liability) and the drawer, that of the first indorser.

2. MannerO. What are the requisites for acceptance?

A:

1. In writing, except constructive acceptance and to a foreign bill payable in another state (unless the other state requires for written acceptance)

2. Signed by the drawee (without it, he is not liable)

3. Must express a promise to pay money (not goods)

4. Delivered to the holder (before delivery or notification, acceptor may revoke or cancel his acceptance).

P. What are the kinds of acceptance?

A:

General – Assents without qualification to the order of the drawer (Sec. 139).

Note: A holder may refuse to accept a qualified acceptance and if he does not obtain an unqualified acceptance, he may treat the bill as dishonored by non acceptance.‐

Qualified – An acceptance which in express terms varies the effect of the bill as drawn (Sec. 139).Conditional – makes payment by the acceptor dependent on the fulfillment of a condition therein stated.

Partial – an acceptance to pay part only of the amount for which the bill is drawn.

Local – an acceptance to pay only at a particular place.Qualified as to time

The acceptance of some one or more of the drawees but not of all. (Sec. 141)

Constructive/implied

Drawee to whom the bill is delivered for acceptance destroys it; or

Drawee refuses, within 24 hours after such delivery, or within such time as is given him, to return the bill accepted or non accepted‐

Extrinsic – the acceptance is written on

paper other than the bill itself. To be binding upon the acceptor:

Acceptance must be shown to the person to whom the instrument is negotiated; and

Such person must take the bill for value on the faith of such acceptance (Sec. 134).

Virtual – conditions:

Unconditional promise in writing to accept a bill

Promise made before it is drawn

Any person who, upon faith thereof, received the bill for value.

(Sec. 135)←

2. Time for AcceptanceWhat is the time allowed for the drawee to make the acceptance?

A: The drawer has 24 hours after presentment to decide whether or not he will accept the bill. The acceptance, if given, dates as of the day of presentation. (Sec. 136)

← Note: Drawee bank is not entitled to 24 hours to decide whether or not to pay a check since a check is presented for payment, not acceptance.

3. Rules Governing AcceptanceWhat is the effect of accepting an instrument with a qualified acceptance?

GR: When the holder takes a qualified acceptance the drawer and indorsers are discharged from liability on the bill.

XPN:

1.When they have expressly or impliedlyauthorized the holder to take aqualified acceptance, or

2. Subsequently assent thereto

3.Implied assent (when they did notexpress their dissent to the holderwithin a reasonable time when theyreceived a notice of qualifiedacceptance). (Sec. 142)

Q: When may an incomplete bill be accepted?

A: Acceptance may be made before the bill has been signed by the drawer or while otherwise incomplete, or after it is overdue, or even after it has been dishonored by non acceptance or non payment. ‐ ‐ (Sec. 138)

Q: What is the effect of the certification by the drawee bank?

A: Certification implies that the check is drawn upon sufficient funds in the hand of the drawee, that they have been set apart for its satisfaction and that they shall be so applied whenever the check is presented for payment. Where a check is certified by the bank on which it is drawn, the certification is equivalent to acceptance (New Pacific Timber v. Seneris, G.R. No. L 41764, Dec. 19, 1980).‐

Q. Presentment for AcceptanceWhat is presentment for acceptance (PA)?

A: Production or exhibition of a bill of exchange to the drawee for his acceptance or payment (also includes presentment for payment).

Q: What are the rules as to PA?

A:

← GR : PA is not necessary to render any party to the bill liable. (par.2, Sec. 143)

2. Time/Place/Manner of PresentmentHow must PA be made?

A:

← By or on behalf of the holder← At a reasonable hour on a business day← Before the bill is overdue; and

← To the drawee or some person authorized to accept or refuse to accept on his behalf. When:

← Addressed to 2 or more drawees not partners – To all (except when one was given authority)

← Drawee is dead – To his personal representative

Note: Where drawee is dead, PA is not required.

← Drawee is bankrupt or insolvent or has made an assignment for the benefit of creditors – To him or to his trustee or assignee. (Sec. 145)

←3. Effect of Failure to Make Presentment

What is the effect of failure to make presentment?

Failure to make such presentment will discharge the drawer from liability or to the extent of the loss caused by the delay (Republic of

the Philippines vs. PNB, G.R. No. L 16106, December 30, 1961).‐

When may delay in making PA be excused?

A:

Bill drawn payable elsewhere than at the place of business or the residence of the drawee; andHolder has no time, with the exercise of reasonable diligence, to present the bill for acceptance before presenting it for payment on the day that it falls due.

(Sec. 147)

When is presentment excused?

A:

Drawee is dead, or has absconded, or is a fictitious person not having capacity to contract by bill

After exercise of reasonable diligence, presentment cannot be made; or

Although presentment has been irregular, acceptance has been refused on some other ground. (Sec. 148)←4. Dishonor by Non-Acceptance

When is a bill dishonored by non acceptance?‐

A:

5. When it is duly presented for acceptance and such an acceptance is refused or cannot be obtained; or

6. When presentment for acceptance is excused, and the bill is not accepted.

(Sec. 149)

What is the duty of the holder where bill is not accepted?

A: The person presenting it must treat the bill as dishonored by non acceptance or he loses the right of recourse‐ against the drawer and indorsers. (Sec. 150)

Q: What are the rules when a bill is dishonored by non acceptance?‐

A:

Right of recourse against all secondary party accrues to the holder

No presentment for payment is necessary since dishonor of the instrument by non payment is to be‐ expected

If the instrument is accepted after it has been dishonored by non acceptance presentment for payment‐ is necessary upon maturity; and

In case of non payment, holder must give the corresponding notice of dishonor; otherwise, secondary‐ parties are discharged.←

R. Promissory NotesWhat is a promissory note?

A: An unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand, or at a fixed or determinable future time, a sum certain in money to order or to bearer. (Sec. 184 NIL)

What are the special types of promissory notes?

A:

Certificate of deposit – a written acknowledgment by a bank of the receipt of money on deposit on which the bank promises to pay to the depositor or to him or his order or to some other person or to him or his order, or to a specified person or bearer, on demand or on a fixed date, often with interest.

Bonds – A promise, under seal, to pay money.

Registered bond – one payable only to the person whose name appears on the face of the certificate.

Coupon bond – one to which are attached coupons which entitle the holder to interest when due.

Bank Note – PN of issuing bank payable to bearer on demand and intended to circulate as money.

Due Bill ‐ An instrument where one person acknowledges his indebtedness to another

Mortgage Note – an instrument secured by either a real or personal property.

Title retaining Note ‐ – an instrument used to secure the purchase price of goods

Collateral Note – it is used when the maker pledges securities to the payee to secure the payment of the amount of the note

Judgment Note – this is a note to which

power of attorney is added enabling the payee to take judgment against the maker without the formality of a trial if the note is not paid on its due date.

←

S. Checks

1. DefinitionWhat is a check?

← A: It is a bill of exchange drawn on a bank and payable on demand (Sec. 185). It must be presented for payment within a reasonable time after its issue or the drawer shall be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186)

2. KindsWhat are the different kinds of checks?

A:

Cashier’s or manager’s check – Drawn by the bank’s cashier or manager, as the case may be, upon the bank itself and deemed accepted by the act of issuance.

Traveler’s check – Upon which the holder’s signature must appear twice, one to be affixed by him at the time it is issued and the second counter signature, to be affixed by him in the presence of the payee‐ before it is paid, otherwise, it is incomplete.

Certified check – Bears upon its face an agreement by the drawee bank that the check will be paid on presentation.

Memorandum check – “Memo” is written across its face, signifying that drawer will pay holder absolutely without need of presentment.

What is a crossed check? What are the effects of crossing a check? Explain.

A crossed check is a check with two (2) parallel lines, written diagonally on the upper right corner thereof. It is a warning to the drawee bank that payment must be made to the right party; otherwise the bank has no authority to use the drawer's funds deposited with the bank. To be assured that it will avoid any mistake in paying to the wrong party, banks adopted the policy that crossed checks must be deposited in the payee's account. When withdrawal is made, the banks can be sure that they are paying to the right party. The crossing becomes a warning also to whoever deals with the said instrument to inquire as to the purpose of its issuance. Otherwise, if something wrong happens to the payment thereof, that person cannot claim to be a holder in due course. Hence, he is subject to the personal defense on the part of the drawer that there is breach of trust committed by the payee in not complying with the drawer's instruction.(2005 Bar Question)

What is a stale check?

A check which has not been presented for payment within a reasonable time after its issue. It is valueless and thus, should not be paid. A check becomes stale 6 months from date of issue.

What is the effect of a stale check?

The drawer and all indorsers are discharged from liability thereon. (Sec. 188)

What is a memorandum check?

← A memorandum check is an evidence of debt against the drawer and although may not be intended to be presented, has the same effect as an ordinary check and if passed on to a third person, will be valid in his hands like any other check. (People v. Nitafan, G.R. No. 75954, Oct. 22, 1992

3. Presentment for Paymenta. Time

: Within what time must a check be presented?

A: Within a reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay (Sec. 186).

a. Effect of Delay

: What is the effect of delay to make presentment for payment?

A: The indorser shall be discharged from liability.T.(PNB vs. Seeto, G.R. No. L 4388, August 13, 1952)‐

Note: See also Sec. 186 and above.

A check was dishonored due to material alteration. Creditor filed an action against drawee bank for the amount. Is the creditor entitled?

A: No. If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the payee holder cannot, as‐ provided under Sections 185 and 189 of the NIL, sue the bank. The payee should instead sue the drawer who might in turn sue the bank. This is so because no privity of contract exists between the drawee bank and the‐ payee (Villanueva v. Nite, G.R. No. 148211, July 25, 2006).

Q: When will the delivery of a check produce the effect of payment even if the same had not been encashed?

A: If the debtor was prejudiced by the creditor's unreasonable delay in presentment. Acceptance of a check implies an undertaking of due diligence in presenting it for payment. If no such presentment was made, the drawer cannot be held liable irrespective of loss or injury sustained by the payee. Payment will be deemed effected and the obligation for which the check was given as conditional payment will be discharged. (Pio Barretto Realty Corp. v. CA, G.R. No. 132362, June 28, 2001).

IV. INSURANCE CODEA. CONCEPT OF INSURANCE

Insurance is a type of contract. It is an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event. (Sec. 2[a], Insurance Code)

In general, an insurance contract is a promise by one person to pay another, money or any other thing of value upon the happening of a fortuitous event beyond the effective control of either party in which the promise has an interest apart from the contract (Edwin W Patterson, Essentials of Insurance Law, p. 10, 1957 Ed., published by McGraw-Hill Book Co., Inc.) In insurance, the insurer for a stipulated consideration, undertakes to compensate the insured for a future loss, damage or liability on a specified subject caused by a specified event or peril. (Sec. 3[g], Insurance Code) A written insurance contract is called a policy. (Sec. 49, Insurance Code)

B. ELEMENTS OF AN INSURANCE CONTRACT

1. Existence of Insurable Interest – The insured possesses an interest of some kind susceptible of pecuniary estimation, known as “insurable interest”.

2. Risk of loss – The insured is subject to a risk of loss through the destruction or impairment of that interest by the happening of designated perils.

3. Assumption of Risk – The insurer assumes that risk of loss for a consideration.

4. Scheme to distribute losses – Such assumption of risk is part of a general scheme to distribute actual losses among a large group or substantial number of persons bearing a similar risk.Note: Because of this element, an insurance contract is therefore a risk-distributing device.

5. Payment of premium – As consideration for the insurer’s promise, the insured makes a ratable contribution called “premium”, to a general insurance fund.

Note: All the elements must be present, otherwise there can be no contract of insurance, and even if the contract contains all the elements, it is not an insurance contract within the context of the Insurance Code if the primary purpose of the parties is the rendering of service and not the indemnification of a party for loss, damage, or liability incurred by the latter.

C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS

1. Consensual – A contract of insurance is perfected by the meeting of the minds of the parties. Acceptance of the offer therefore perfects the contract.Note: Insurance contracts through correspondence follow the “cognition theory” wherein an acceptance made by the latter shall not bind the person making the offer except from the time it came to his knowledge (Enriquez v. Sun Life Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).

2. Voluntary – The parties may incorporate such terms and conditions as they may deem convenient provided they do not contravene any provision of the law and are not opposed to public policy, law, morals, good customs and public order.

General Rule: The taking out of an insurance contract is not compulsory.Exception: Liability insurance may be required by law in certain instances such as for motor vehicles (Secs. 373-389, Insurance Code), or employees (Arts. 168-184, Labor Code), or as a condition to granting a license to conduct a business or calling affecting the public safety or welfare.

3. Aleatory – Liability of the insurer depends upon some contingent event.Note: An aleatory contract is a contract where one or both of the parties reciprocally bind themselves to give or do something in consideration of what the other shall give or do upon the happening of an event which is uncertain, or which is to occur at an indeterminate time (Art. 2010. Civil Code).

4. Unilateral – It imposes legal duties only on insurer who promises to indemnify in case of loss.5. Conditional – It is subject to conditions the principal one of which is the happening of the event

insured against. In addition to this main condition, the contract usually includes many other conditions (such as payment of premium or performance of some other act) which must be complied with as precedent to the right of the insured to claim benefit under it.

6. Contract of indemnity – General Rule: The insurer promises to make good only the loss of the insured.Exception: A life insurance is not a contract of indemnity. It is not applicable to life insurance policies because life is not capable of pecuniary estimation. The only situation where the principle of indemnity is applicable to life insurance is if the amount in the policy is fixed. An example would be in a case where a creditor insures the life of his debtor to the extent of the latter’s debt to the former.

7. Personal – Between the insurer and the insured each party having in view the character, credit and conduct of the other.

8. Property – Since insurance is a contract, it is property in legal contemplation. But unlike property policies, life insurance policies are generally assignable or transferrable like any “chose action”. They are in the nature of property and do not represent a personal agreement between the insurer and insured.

9. Risk-distributing device – Insurance serves to distribute the risk of economic loss among as many as possible of those who are subject to the same kind of loss.

10. Onerous – There is a valuable consideration called premium.

D. CLASSES

1. MARINEa.) Marine insurance, defined.Marine Insurance is an insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or fixed period of time.

b.) Vessels contemplated in marine insurance.Those used, or at least, intended for navigation. Example, one for shipping, chartering, voyage and the like. Vessels which are used for museums or those that are stationary are not entitled to be insured under a marine insurance.

c.) What marine insurance includes.

Marine insurance includes:1. Insurance against loss or damage to:

a. Vessels, craft, aircraft, vehicles, goods, freight, cargoes, merchandise, effects, disbursements, profits, moneys, securities, choses in action, instruments of debt, valuable papers, bottomry, and respondentia interests and all other kinds of property and interests therein, in respect to, appertaining to or in connection with any and all risks or perils of navigation transit or transportation; or while being assembled, packed, crated, baled, compressed or similarly prepared for shipment or while waiting shipment, or during any delays, storage, transshipment, or reshipment incident thereto, including war risks, marine builder’s risks, and all personal property floater risks.

b. Person or property in connection with or appertaining to a marine, inland marine, transit or transportation insurance, including liability for loss of or damage arising out of or in connection with the construction, repair, operation, maintenance or use of the subject matter of such insurance (but not including life insurance or surety bonds nor insurance against loss by reason of bodily injury to any person arising out of the ownership, maintenance, or use of automobiles);

c. Precious stones, jewels, jewelry, and precious metals whether in the course of transportation or otherwise; and

d. Bridges, tunnels and other instrumentalities of transportation and communication (excluding buildings, their furniture and furnishings, fixed contents and supplies held in storage); piers, wharves, docks and slips, and other aids to navigation and transportation, including dry docks and marine railways, dams and appurtenant facilities for the control of waterways.

2. “Marine protection and indemnity insurance,” which means insurance against, or against legal liability of the insured for, loss, damage, or expense incident to ownership, operation, chartering, maintenance, use, repair, or construction of any vessel, craft or instrumentality in use in ocean or inland waterways, including liability of the insured for personal injury, illness or death or for loss of or damage to the property of another person. (Sec. 101, Insurance Code)Measure of indemnity:a. Valued policy – the parties are bound by the valuation, if the insured had some interest

at risk and there is no fraud on his part. (Sec. 158, Insurance Code) b. Open policy – the following rules shall apply in estimating a loss:

i. The value of the ship is its value at the beginning of the risk, including all articles or charges which add to its permanent value or which are necessary to prepare it for the voyage insured;

ii. The value of the cargo is its actual cost to the insured, when laden on board, or where that cost cannot be ascertained, its market value at the time and place of lading, adding the charges incurred in purchasing and placing it on board, but without reference to any loss incurred in raising money for its purchase, or to any drawback on its exportation, or to the fluctuation of the market at the port of destination, or to expenses incurred on the way or on arrival;

iii. The value of freightage is the gross freightage, exclusive of primage, without reference to the cost of earning it; and

iv. The cost of insurance is in each case to be added to the value thus estimated. (Sec. 163, Insurance Code)

d.) Two major divisions of marine insurance.1. Ocean marine insurance – covers primarily sea perils.

Scope:a. Ships or hullsb. Goods or cargoesc. Earnings such as freight, passage, money, commissions, or profitsd. Liability incurred by the owner or any party interested in or responsible for the insured

property by reason of maritime perils

2. Inland marine insurance – covers primarily the land or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of transportation. It also covers risks of lake, river, or other inland waterway transportation and other waterborne perils outside of those risks that fall definitely within the ocean marine category.

Classes (scope):a. Property in transit – provides protection for property frequently exposed to loss while it

is in transportation from one location to another.b. Bailee liability – provides protection to persons who have temporary custody of the

goods or personal property of others, such as carriers, laundrymen, warehousemen, and garage keepers.

c. Fixed transportation property – covers bridges, tunnels, and other instrumentalities of transportation and communication, although as a matter of fact they are fixed property. They are so insured because they are held to be an essential part of the transportation system.

d. Floater – provides insurance to follow the insured property wherever it may be located, subject always to the territorial limits of the contract. Floater policies may be issued for such items as jewelry, furs, works of art, contractor’s equipment, theoretical property, salesmen samples, and others.

e.) “Perils of the sea” or “perils of navigation”, defined.It includes only those casualties due to the unusual violence or extraordinary action of wind and wave, or to other extraordinary causes connected with navigation.f.) “Perils of the ship”, defined.It is a loss which, in the ordinary course of events, results from: 1. The natural and inevitable action of the sea 2. The ordinary wear and tear of the ship 3. The negligent failure of the ship’s owner to provide the vessel with proper equipment to convey the cargo under ordinary conditions.

g.) Does an insurer undertake to insure against “perils of the ship”?General Rule: No.

Exception: In the absence of any stipulation to the contrary, the insurer does not undertake to insure against perils of the ship. The purpose of an ocean marine policy is to secure an indemnity against accidents which may happen not against event which must happen.h.) “All risks” marine insurance policy.General Rule: It is that policy which insures against all causes of conceivable loss or damage. Exception: 1. As otherwise excluded in the policy; or 2. Due to fraud or intentional misconduct on the part of the insured. (Choa Tiek v. CA, G.R. No.

84507, Mar. 15, 1990) This type of policy grants greater protection than that afforded by the “perils clause.”

i.) Burden of proof in an “all risks” marine insurance policy.The insured under an "all risks insurance policy" has the initial burden of proving that the cargo was in good condition when the policy attached and that the cargo was damaged when unloaded from the vessel; thereafter, the burden then shifts to the insurer to show the exception to the coverage.

j.) Extent of the insurable interest in marine insurance.As to the:

1. Shipowner a. Over the vessel to the extent of its value, except that if chartered, the insurance is only

up to the amount not recoverable from the charterer. (Sec. 102) b. If hypothecated by a bottomry loan, the insurable interest is only up to the excess of the

values of the vessel over the amount of the bottomry loan. (Sec. 103) c. He also has an insurable interest on expected freightage. (Sec. 105)

2. Cargo owner – over the value of the cargo and expected profits. (Sec. 107) 3. Charterer – over the amount he is liable to the ship owner, if the ship is lost or damaged

during the voyage. (Sec. 108)4. Creditor/lender – amount of the loan

k.) Concealment in marine insurance, defined.It is the failure to disclose any material fact or circumstance which in fact or law is within, or which ought to be within the knowledge of one party and of which the other has no actual or presumptive knowledge.l.) Is information of the belief or expectation of a third person, in reference to a material fact, material?Yes. Thus, there is concealment where the insured at the time of application for insurance did not disclose the opinion of marine experts who inspected the vessel insured that it was unseaworthy. (Sec. 110)m.) When insured presumed to have knowledge of a prior loss in marine insurance.The insured is presumed to have knowledge, at the time of insuring, of a prior loss, if the information might possibly have reached him in the usual mode of transmission and at the usual rate of communication. (Sec. 111)n.) Matters, when concealed, do not vitiate the entire insurance contract, but merely exonerates the insurer from a loss resulting from the risk concealed.1. National character of the insured 2. The liability of the thing insured to capture and detention 3. The liability to seizure from breach of foreign laws of trade 4. The want of necessary documents 5. The use of false and simulated papers. (Sec. 112)o.) Effect of false representation by the insured.1. Intentional – Any misrepresentation of a material fact made with fraudulent intent avoids the

policy. 2. Not intentional – If the misrepresentation is not intentional or fraudulent but the fact

misrepresented is material to the risk, the insurer may rescind the contract from the time representation becomes false.

p.) Effect of falsity as to expectation.

Representations of expectation or intention, unless made with fraudulent intent, their failure of fulfillment is not ground for rescission. (Sec. 114)q.) Warranty in marine insurance, defined.It is a stipulation, either express or implied, forming part of the policy as to some fact, condition or circumstance relating to the risk. (Hearn v. Equitable Safety Ins. Co., 30 Wall. 494, 22 L. Ed. 398.)r.) Implied warranties in marine insurance.1. Seaworthiness. (Sec. 115) 2. Non deviation from the agreed voyage. (Secs. 123, 124, 125) ‐3. Non engagement from illegal venture. ‐4. Warranty of neutrality the ship will carry neutrality of the ship or cargo where such nationality‐

or neutrality is expressly warranted. (Sec. 122) 5. Presence of insurable interest s.) Seaworthiness, defined.It is a relative term depending upon the nature of the ship, voyage, service and goods denoting in general, a ship’s fitness to perform the service and to encounter the ordinary perils of the voyage, contemplated by the parties to the policy. (Sec. 116)t.) When warranty of seaworthiness complied with.General Rule: The warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk. (Sec. 117) There is no implied warranty that the vessel will remain in seaworthy condition throughout the life of the policy.

Exception: 1. In the case of time policy the ship must be seaworthy at the commencement of every voyage‐

she may undertake. (Sec. 117 [a]) 2. In the case of cargo policy each vessel upon which cargo is shipped or transshipped must be‐

seaworthy at the commencement of each particular voyage. (Sec. 117 [b]) 3. In the case of voyage policy contemplating a voyage in different stages the ship must be‐

seaworthy at the commencement of each portion. (Sec. 117) u.) Scope of the seaworthiness of a vessel.A warranty of seaworthiness extends not only to the condition of the structure of the ship itself, but requires that it be properly laden, and provided with a competent master, a sufficient number of competent officers and seamen, and the requisite appurtenances and equipment, such as ballasts, cables and anchors, cordage and sails, food, water, fuel and lights, and other necessary or proper stores and implements for the voyage. (Sec. 118)v.) Deviation in marine insurance policy, defined.Deviation is a departure of the vessel from the course of the voyage, or an unreasonable delay in pursuing the voyage, or the commencement of an entirely new voyage. (Sec. 125)w.) Four cases of deviation in marine insurance.1. Departure from the course of sailing fixed by mercantile usage between the places of beginning

and ending specified in the policy. (Sec. 123) 2. Departure from the most natural, direct, and advantageous route between the places specified

if the course of sailing is not fixed by mercantile usage. (Sec. 124)3. Unreasonable delay in pursuing the voyage. (Sec. 125) 4. The commencement of an entirely different voyage. x.) Two kinds of deviation.a. Proper – This will not vitiate a policy of marine insurance because deviation is considered

justified or caused by actual necessity which is equal in importance to such deviation. (Sec. 126) b. Improper – The insurer becomes immediately absolved from further liability under the policy for

losses occurring subsequent to the deviation because deviation is considered to be without just cause. Every deviation not specified in Sec.126 is improper. (Sec. 127)

y.) Two kinds of total loss.1.Actual total loss - exists when the subject matter of the insurance is wholly destroyed or lost or when it is so damaged as no longer to exist in its original character.

2.Constructive total loss - one which the loss, although not actually total, is of such a character that the insured is entitled, if he thinks fit, to treat it as total by abandonment. It is also called, a “technical loss”.z.) What actual total loss, constitutes. 1.A total destruction of the thing insured 2.The irretrievable loss of the thing by sinking, or by being broken up 3.Any damage to the thing which renders it valueless to the owner for the purpose for which he held it; or 4.Any other event which effectively deprives the owner of the possession, at the port of destination, of the thing insured. (Sec. 132) aa.) Constructive total loss, defined.1.Actual loss of more than ¾ of the value of the object 2.Damage reducing value by more than ¾ of the value of the vessel and of cargo; and 3.Expense of transshipment exceeds ¾ of the value of the cargo. bb.) Rights of the insured in case of general average.General Rule: The insurer is liable for any general average loss where it is payable or has been paid by the insured in consequence of a peril insured against. The insured may either hold the insurer directly liable for the whole of the insured value of the property sacrificed for the general benefit, subrogating him to his own right of contribution or demand contribution from the other interested parties as soon as the vessel arrives at her destination.Exception: There can be no recovery for general average loss against the insurer: 1.After the separation of the interests liable to contribution, that is to say, after the cargo liable for contribution has been removed from the vessel; or 2.When the insured has neglected or waived his right to contribution. Note: General average is a principle of law whereby, when it is decided by the master of a vessel, acting for all the interest concerned to sacrifice a part of a venture exposed to a common and imminent peril in order to save the rest, the interests so saved are compelled to contribute ratably or proportionately to the owner of the interest sacrificed, so that the cost of the sacrifice shall fall equally upon all. (Hector S. De Leon, The Law on Insurance, 2003) cc.) Free from Particular Average Clause (FPA Clause), defined.A clause agreed upon in a policy of marine insurance in which it is stated that the insurer shall not be liable for a particular average. The insurer is liable only for general average and not for particular average unless such particular average loss as the effect of depriving the insured of the possession at the port of destination of the whole of the thing insured. (Sec. 138) dd.) Limit as to liability of insurer.The liability of the insurer for any general average loss is limited to the proportion of contribution attaching to his policy value where this is less than the contributing value of the thing insured. (Sec. 164)ee.) Abandonment in marine insurance, defined.It is the act of the insured by which, after a constructive total loss he declared the relinquishment to the insurer of his interest in the thing insured. (Sec. 140)

ff.) Requisites for the validity of abandonment.1. There must be an actual relinquishment by the person insured of his interest in the thing insured. (Sec. 140) 2. There must be a constructive total loss. (Sec. 141) 3. The abandonment must neither be partial nor conditional. (Sec. 142) 4. It must be made within a reasonable time after receipt of reliable information of the loss. (Sec. 143) 5. It must be factual. (Sec. 144)

6. It must be made by giving notice thereof to the insurer which may be done orally or in writing. (Sec. 145); and7. The notice of abandonment must be explicit and must specify the particular cause of abandonment. (Sec. 146) gg.) When the insured, by a contract of marine insurance, may abandon the thing insured.1. If more than three fourths thereof in value is actually lost, or would have to be expended to‐ recover it from the peril 2. If it is injured to such an extent as to reduce its value more than three fourths ‐3. If the thing insured is a ship, and the contemplated voyage cannot be lawfully performed without incurring either an expense to the insured of more than three fourths the value of the thing‐ abandoned or a risk which a prudent man would not take under the circumstances; or 4. If the thing insured is cargo or freightage, and the voyage cannot be performed, nor another ship procured by the master, within a reasonable time and with reasonable diligence to forward the cargo, without incurring the like expense or risk mentioned in the preceding sub paragraph. But‐ freightage cannot in any case be abandoned, unless the ship is also abandoned. (Sec. 141) hh.) Effects of acceptance of abandonment.1.The insurer becomes at once liable for the whole amount of the insurance and also becomes entitled to all rights which insured possessed in the thing insured. (Sec. 148)2.It fixes the rights of the parties; whether express or implied, is conclusive upon them (Sec. 153), and irrevocable. (Sec. 154)3.It stops the insurer to rely on any insufficiency in the form, time, or right, of abandonment. Whether the insured has a right to abandon is immaterial where the abandonment is accepted and there is no fraud. 4.On accepted abandonment of a ship, the freightage earned subsequent to the loss belongs to the insurer of the ship. But freightage earned previously belongs to the insurer of said freightage who is subrogated to the rights of the insured up to the time of the loss. (Sec. 155) ii.) When co insurance exist.‐There is co insurance if the value of the insured’s interest exceeds the amount of insurance; he is‐ considered the co insurer for an amount determined by the difference between the insurance taken‐ out and the value of the property. A marine insurer is liable upon a partial loss only for such proportion of the amount insured by him as the loss bears to the value of the whole interest of the insured in the property insured (Sec. 159).jj.) Requisites for co insurance.‐There is co insurance when the following requisites concur: ‐a.The amount of insurance is less than the insured’s insurable interest; b.The loss is partial. kk.) Formula to determine the amount recoverable.(Partial) Loss X Amount of Insurance = Amount of recovery Value of thing Insured ll.) When loss of profits conclusively presumed. When profits are valued and insured by a contract of marine insurance, a loss of them is conclusively presumed from a loss of the property out of which they were expected to arise, and the valuation fixes their amount. (Sec. 162)

2. FIREa.) Fire insurance, defined. It is a contract of indemnity by which the insurer, for a consideration, agrees to indemnify the insured against loss of or damage by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies. (Sec. 169)b.) Concept of fire.

“Spontaneous combustion is usually a rapid oxidation. Fire is oxidation which is so rapid as to produce either a flame or glow. Fire is always caused by combustion, but combustion does not always cause fire. The word ‘spontaneous’ refers to the origin of the combustion.it means the internal; development without the action of an external agent. Combustion or spontaneous combustion may be so rapid as to produce fire, but until it does so, combustion cannot be said to be fire.” (Western Woolen Mills, Co. v. Northern Assur. Co., 139 Fed. 637)c.) Ocean marine and fire policies, dinguished.

OCEAN MARINE

FIRE INSURANCE

A policy of insurance on a vessel engaged in navigation is a contract of marine insurance although it insures against fire risks only.

Where the hazard is fire alone and the subject is an unfinished vessel, never afloat for a voyage, the contract to insure is a fire risk, especially in the absence of an express agreement that it shall have the incidents of marine policy, or where it insures materials in a shipyard for use in constructing vessels.

d.) When alteration in the thing insured entitles the insurer to rescind.In order that the insurer may rescind a contract of fire insurance for any alteration made in the use or condition of the thing insured, the following requisites must be present:

1. The use or condition of the thing is specially limited or stipulated in the policy; 2. Such use or condition as limited by the policy is altered; 3. The alteration is made without the consent of the insurer; 4. The alteration is made by means within the control of the insured; and 5. The alteration increases the risk.

e.) Measure of indemnity in open and valued policies in fire insurance.a. Open Policies - The expense necessary to replace the thing lost or injured in the condition it was at the time of the injury. b. Valued Policies - The valuation stated in the policy, in the absence of fraud.

f.) Co insurance clause, defined.‐It is that clause which requires the insured to maintain insurance to an amount equal to the value or specified percentage of the value of the insured property under penalty of becoming co insurer to‐ the extent of such deficiency. (Sec. 174)Note: The insured is not a co insurer under fire policies in the absence of stipulation. ‐g.) Fall of building clause, defined.It is that clause which provides, in a fire insurance policy, that if the building or any part thereof falls, except as a result of fire, all insurance by the policy shall immediately cease. h.) Option to rebuild clause, defined.The clause which gives the insurer the option to rebuild the destroyed property instead of paying the indemnity. This clause serves to protect the insurer against unfair appraisals friendly to the insured. (Sec. 174)

3. CASUALTYa.) Casualty insurance, defined.It is that which covers loss or liability arising from accident or mishap, excluding those falling under types of insurance as fire or marine. (Sec. 176)b.) Two divisions of casualty insurance.

a. Accident or health insurance – Insurance against specified perils which may affect the person and/or property of the insured such as personal accident, robbery or theft, damage to or loss of motor vehicle, insolvency of debtors, defalcation of employees, etc. b. Third party liability insurance – Insurance against specified perils which may give rise to liability on the part of the insured of claims for injuries to others or for damage to their property, such as workmen’s compensation, motor vehicle liability, professional liability, products liability, etc.c.) “Accident” and “accidental” as used in accident policy, defined.The terms “accident” and “accidental”, as used in accident policy have not acquired any technical meaning. They are construed by the courts in their ordinary and common acceptation. Thus, the terms have been taken to mean that which happens by chance or fortuitously, without intention or design, and which is unexpected, unusual and unforeseen. This presupposes the lack of intention to commit the wrong resulting from the event that happens.d.) Rules on “third party liability insurance”.1. Insurable interest is based on the interest of the insured in the safety of the persons, and their property, who may maintain an action against him in case of their injury or destruction respectively. 2. In a third party liability (TPL) insurance contract, the insurer assumes the obligation by paying the injured third party to whom the insured is liable. Prior payment by the insured to the third person is not necessary in order that the obligation may arise. The moment the insured becomes liable to third persons, the insured acquires an interest in the insurance contract which may be garnished like any other credit. 3. In burglary, robbery and theft insurance, the opportunity to defraud the insurer (moral hazard) is so great that insurer have found it necessary to fill up the policies with many restrictions designed to reduce the hazard. Persons frequently excluded are those in the insured’s service and employment. The purpose of the exception is to guard against liability should theft be committed by one having unrestricted access to the property. 4. Right of third party injured to sue the insurer of party at fault depends on whether the contract of insurance is intended to benefit third persons also or only the insured.e.) When an injured person has the right to sue insurer of the party at fault.

a. Indemnity against third party liability – injured third party can directly sue the insurer.b. Indemnity against actual loss or payment – third party has no cause of action against the

insurer. The third person’s recourse is limited to the insured alone. The contract is solely for the insurer to reimburse the insured for liability actually satisfied by him.

f.) Liability insurance, defined.It has been said to be a contract of indemnity for the benefit of the insured and those in privity with him, or those to whom the law upon the grounds of public policy extends the indemnity against liability.g.) Basis and extent of insurer’s liability.1. Contract of insurance2. Sum limited in the contracth.) Differences between the liability of the insurer and that of the insured in case of indemnity against third person liability.

INSURER INSUREDa. The liability is direct but the insurer cannot be held solidarily liable with the insured and other parties at fault.

a. Liability is direct and can be held liable with all the parties at fault.

b. Liability is based on contract

b. Liability is based on tort.

c. The third party‐ liability is only up to the extent of the insurance policy and that required by law

c. The liability extends to the amount of actual and other damages. (Heirs of George Y. Poe v. Malayan Insurance Company, Inc. G.R. No. 156302, Apr. 7, 2009)

i.) “No action” clause, defined.It is a requirement in a policy of liability insurance which provides that suit and final judgment be first obtained against the insured, that only thereafter can the person injured recover on the policy. (Guingona v. Del Monte, G.R. No. L 21806, Aug. 17, 1967) ‐Note: A “no action” clause must yield to the provisions of the Rules of Court regarding multiplicity of suits. (Shafter v. RTC, G.R. No. 78848, Nov. 14, 1988)

4. SURETYSHIPa.) Suretyship, defined.It is an agreement whereby the surety guarantees the performance by another of an undertaking or an obligation in favor of a third party. (Sec. 177)b.) Nature of liability of surety.1. Solidary with the bond obligor 2. Limited to the amount in the bond (it cannot be extended by implication) 3. Determined strictly by the terms of the contract of suretyship in relation to the principal contract between the obligor and the obligee c.) Suretyship and property insurance, distinguished.

SURETYSHIP PROPERTY INSURANCE

It is an accessory contract.

The principal contract itself.

There are three parties: the surety, obligor/debtor, and the obligee/creditor.

There are only two parties: insurer and insured

More of a credit accommodation with the surety assuming primary liability

A contract of indemnity

Surety is entitled to reimbursement from the principal and his guarantors for the loss it may suffer under the contract.

No right of recovery for the loss the insurer may sustain except when the insurer is entitled to subrogation.

A bond may be cancelled by or with the consent of the obligee or by the commissioner or by the court.

May be cancelled unilaterally either by the insured or by the insurer on

grounds provided by law.

Requires acceptance of the obligee before it becomes valid and enforceable.

Does not need acceptance of any third party.

A risk shifting device,‐ the premium paid being in the nature of a service fee.

A risk‐distributing device, the premium paid being considered a ratable contribution to a common fund.

d.) Rules in the payment of premiums in suretyship.

1. The premium becomes a debt as soon as the contract of suretyship or bond is perfected and delivered to the obligor;

2. The contract of suretyship or bonding shall not be valid and binding unless and until the premium therefore has been paid;

3. Where the obligee has accepted the bond, it shall be valid and enforceable notwithstanding that the premium has not been paid; (Philippine Pryce Assurance Corp. v. CA, G.R. No. 107062, Feb. 21, 1994)

4. If the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall collect only a reasonable amount;

5. If the non acceptance of the bond be due to the fault or negligence of the surety, no service‐ fee, stamps, or taxes imposed shall be collected by the surety; and

6. In the case of continuing bond (for a term longer than one year or with no fixed expiration date), the obligor shall pay the subsequent annual premium as it falls due until the contract is cancelled. (Sec. 179)

e.) Types of surety bonds.1. Contract bonds – These are connected with construction and supply contracts. They are for the protection of the owner against a possible default by the contractor or his possible failure to pay materialmen, laborers and sub contractors. ‐

The position of surety, therefore, is to answer for a failure of the principal to perform in accordance with the terms and specifications of the contract. There may be two bonds:

a. Performance bond – One covering the faithful performance of the contract; andb. Payment bond – One covering the payment of laborers and material men.

2. Fidelity bonds – They pay an employer for loss growing out of a dishonest act of his employee. For the purposes of underwriting, they are classified as:

a. Industrial bond – One required by private employers to cover loss through dishonesty of employees; and b. Public official bond – One required of public officers for the faithful performances of their duties and as a condition of entertaining upon the duties of their offices.

3. Judicial bonds – They are those which are required in connection with judicial proceedings.

5. LIFEa.) Life insurance, defined.

It is that which is payable upon the death of a person or on his surviving a specified period, or otherwise contingently on the continuance of cessation of life (Sec. 181). It is a mutual agreement by which a party agrees to pay a given sum on the happening of a particular event contingent on the duration of human life, in consideration of the payment of a smaller sum immediately, or in periodical payments by the other party.

b.) Parties involved in the policy.

1. The owner of the policy;2. The person whose life is the subject of the policy, also known as the cestui que vie; and3. The beneficiary to whom the proceeds are paid.

Note: One person might occupy all three positions by naming his estate as beneficiary; or each of the three (3) positions may be held by a separate property.

c.) Kinds of life insurance policies.1. Ordinary life, general life or old line policy – Insured pays a premium every year until he dies.

Surrender value after 3 years. 2. Limited payment – Insured pays premium for a limited period. It is payable only at the death

of the insured. 3. Endowment – Insured pays a premium for a specified period. If he outlives the period, the face

value of the policy is paid to him; if not, his beneficiaries receive benefit. 4. Term insurance – Insured pays once only, and he is insured for a specified period. If he dies

within the period, his beneficiaries benefit. If he outlives the period, no person benefits from the insurance. Also known as temporary insurance.

5. Industrial life – Life insurance entitling the insured to pay premiums weekly, or where premiums are payable monthly or oftener

6. Variable contract – Any policy or contract on either a group or individual basis issued by an insurance company providing for benefits or other contractual payments or values thereunder to vary so as to reflect investment results of any segregated portfolio of investment.

d.) Effect if the beneficiary will fully bring about the death of the insured.General Rule: The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal, accomplice; accessory in willfully bringing about the death of the insured, in which event, the nearest relative of the insured shall receive the proceeds of said insurance, if not otherwise disqualified. Exception: 1. The beneficiary acted in self defense; ‐2. The insured’s death was not intentionally caused (e.g., thru accident); 3. Insanity of the beneficiary at the time he killed the insured. e.) When the insurer liable in case of suicide.1. The suicide is committed after the policy has been in force for a period of 2 years from the date of its issue or of its last reinstatement;2. The suicide is committed after a shorter period provided in the policy although within the 2 year period; and3. The suicide is committed in the state of insanity regardless of the date of commission, unless suicide is an excepted risk. (Sec. 183) Note: The policy cannot provide a period longer than 2 years. If the policy provides for a longer period and the suicide is committed within said period but after 2 years, the insurer is liable. The insurer is not liable if it can show that the policy was obtained with the intention to commit suicide even in the absence of any suicide exclusion in the policy.f.) Measure of indemnity under a policy of insurance upon life or health. Unless the interest of a person insured is susceptible of exact pecuniary measurement, the measure of indemnity under a policy of insurance upon life or health is the sum fixed in the policy. (Sec. 186)

6. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCEa.) Motor vehicle liability insurance, defined. It is a protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of a motor vehicle by its owner. b.) Purpose of motor vehicle liability insurance.The purpose of motor vehicle liability insurance is to give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of financial capability of motor vehicle owners of operators responsible for the accident sustained. (First Integrated Bonding Insurance Co., Inc. v. Hernando, G.R. No. L 51221, July 31, 1991) ‐c.) Passenger, defined.Any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle’s operator or his agents to ride without fare. (Sec. 386, [b])d.) Third party, defined. ‐Any person other than a passenger as defined in this section and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment. (Sec. 386, [c]) e.) “Motor vehicle owner”, defined.It means the actual legal owner of a motor vehicle, whose name such vehicle is duly registered with the Land Transportation Office. (Sec. 386, [d]) f.) “Land transportation operator”, defined.It means the owner or owners of motor vehicles for transportation of a passenger for compensation, including school buses. (Sec. 386, [e])g.) No fault indemnity clause, defined.The no fault indemnity clause is a clause where the insurer is required to pay a third party injured or killed in an accident without the necessity of proving fault or negligence on the part of the insured. There is a stipulated maximum amount to be recovered.h.) Rules under the “no fault clause”.1. The total indemnity in respect of any one person shall not exceed P15,000 for all motor vehicles (Insurance Memorandum Circular No. 4 2006) ‐2. Proof 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 only 4. In case of an occupant of a vehicle, the claim shall lie against the insurer of the vehicle in which the occupant is riding, mounting or dismounting from 5. In any other case, claim shall lie against the insurer of the directly offending vehicle 6. In all cases, the right of the party paying the claim to recover against the owner of the vehicle responsible for the accident shall be maintained i.) Authorized driver clause, defined.The authorized driver clause indemnifies the insured owner against loss or damage to the car but limits the use of the insured vehicle to: a. The insured himself; or b. Any person who drives on his order or with his permission. (Villacorta v. Insurance Commissioner, G.R. No. 54171, Oct. 28, 1980) j.) Main purpose of an authorized driver clause.The main purpose is to require a person other than the insured, who drives the car on the insured’s order, such as, his regular driver, or with his permission, such as a friend or member of the family or

the employees of a car service or repair shop to be duly licensed drivers and have no disqualification to drive a motor vehicle. (Villacorta v. Insurance Commission, G.R. No. L 54171, Oct. 28, 1980)‐k.) Theft clause, defined.It is that clause which includes theft as among the risks insured against. Where a car is unlawfully and wrongfully taken without the knowledge and consent of the owner, such taking constitutes “theft” and it is the theft clause, not the authorized driver clause which should apply. (Palermo v. Pyramid Inc., G.R. No. L 36480, May 31, 1988) ‐l.) Cooperation clause, defined.It is that clause which provides that the insured shall give all such information and assistance as the insurer may require, usually including attendance at trials or hearings.m.) Persons subject to the compulsory motor vehicle liability insurance requirement.1. Motor vehicle owner (MVO) or one who is the actual legal owner of a motor vehicle in whose name such vehicle is registered with the LTO; or 2. Land transportation operator (LTO) or one who is the owner of a motor vehicle or vehicles being used for conveying passengers for compensation including school buses. n.) Substitutes for a compulsory motor vehicle liability insurance policy.MVOs or LTOs, instead of a CMLVI policy, may either: 1. Post a surety bond with the Insurance Commissioner who shall be made the obligee or creditor in the bond in such amount or amounts required as limits of indemnity to answer for the same losses sought to be covered by a CMLVI policy; or 2. Make a cash deposit with the Insurance Commission in such amount or amounts required as limits of indemnity for the same purpose.

E. INSURABLE INTEREST

1. In life/Health

a.) Two general classes of life policies.a. Insurance upon one’s life – are those taken out by the insured upon his own life (Section

10[a]) for the benefit of himself, or of his estate, in case it matures only at his death, for the benefit of third person who may be designated as beneficiary.

The question of insurable interest is immaterial where the policy is procured by the person whose life is insured. A person who insures his own life can designate any person as his beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured subject to the limits under Article 739 and 2012 of the NCC. Note: An application for insurance on one’s own life does not usually present an insurable interest question. b. Insurance upon life of another – are those taken out by the insured upon the life of another.

(Sec. 10 [a], [b], [c] and [d]) Where a person names himself beneficiary in a policy he takes on the life of another, he must have insurable interest in the life of the latter.

b.) For whose life and health does a person have an insurable interest?a. Of himself, of his spouse and of his children. b. Of any person on whom he depends wholly or in part for education or support, or in whom he

has a pecuniary interest; Note: Mere blood relationship or mere relationship by affinity does not constitute an insurable interest; there must be a risk of monetary loss from the insured’s death.

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

d. Of any person upon whose life any estate or interest vested in him depends. (Sec. 10) c.) Persons under Sec. 10, (c) who have an insurable interest on the life and health of a person.A creditor may name himself as beneficiary in a policy he takes on the life of his debtor. The death of the debtor may either prevent payment if his estate is not sufficient to pay his debts or delay such

payment if an administrator has to be appointed to settle his estate. Except Section 10, (a) of the Insurance Code, an insurance contract partakes the nature of a contract of indemnity.d.) Extent of the creditor’s recovery upon the death of the debtor.General Rule: Limited to the amount of his interest (the amount owing to him). Exception: If the debtor is the insured and the creditor is named beneficiary, the creditor will be entitled to the whole proceeds of the policy upon the debtor’s death, though his credit may be much less. Note: The debtor was the one who applied for the insurance, to insure his own life. Exception to Exception: 1. If debtor applied for insurance and designated creditor in compliance with creditor’s requirement that debtor will take insurance to insure creditor’s interest. 2. A person may take a policy on the life of his business partner because the latter’s death may result in an interruption of business operations which can be in turn cause financial loss. 3. A business firm can take out a policy on the life of its officers or employees whose services proved valuable to the business. The proceeds are not taxable income but constitute indemnity to the employer for the loss which the business suffers because of the death of a valued officer or employee. e.) When insurable interest must exist.1. Life or health insurance

General Rule: Insurable interest in life or health must exist when the insurance takes effect, bur need not exist thereafter or when the loss occurs. (Sec. 19) Exception: a. When the insurance is taken by the creditor on the life of the debtor, the creditor is required

to have an insurable interest not only at the time of the contract but also at the time of the debtor’s death because in this case, it is considered as a contract of indemnity.

b. When the insurance is taken by the employer on the life of the employee.

2. Property Insurance – When the insurance takes effect and when the loss occurs, but need not exist in the meantime. (Sec. 19)

2. In Propertya.) What an insurable interest in property constitutes.1. An existing interest – The existing interest in the property may be legal or equitable title.

Examples of insurable interest arising from legal title: a. Trustee, as in the case of the seller of property not yet delivered; b. Mortgagor of the property mortgaged; c. Lessor of the property leased Examples of insurable interest arising from equitable title: a. Purchaser of property before delivery or before he has performed the conditions of the sale b. Mortgagee of property mortgaged; c. Mortgagor, after foreclosure but before the expiration of the period within which

redemption is allowed

2. An inchoate interest founded on an existing interest Example: A stockholder has an inchoate interest in the property of the corporation of which he is a stockholder, which is founded on an existing interest arising from his ownership of shares in the corporation

3. An expectancy coupled with an existing interest in that out of which the expectancy arises. Note: Expectancy to be insurable must be coupled with an existing interest or founded on an actual right to the thing or upon any valid contract for it. (Sec. 16)

b.) Measure of insurable interest in property.The extent to which the insured might be damnified by loss or injury thereof. (Sec. 17). Insurable interest in property does not necessarily imply a property interest in, or lien upon, or possession of,

the subject matter of the insurance, and neither title nor a beneficial interest is requisite to the existence thereof. It is sufficient that the insured is so situated with reference to the property that would be liable to loss should it be injured or destroyed by the peril against which it is insured. Anyone has an insurable interest in property who derives a benefit from its existence or would suffer loss from its destruction. (Gaisano Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839, June 8, 2006) c.) Extent of insurable interest of a common carrier or depository in a thing held by him.To the extent of his liability but not to exceed the value thereof (Sec. 15). This is so because the loss of the thing by the carrier or depository may cause liability against him to the extent of its value.d.) Time when insurable interest in property must existAn interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime. (Sec. 19)

3. Double insurance and Over insurancea.) Double insurance and over insurance, distinguished.

DOUBLE INSURANCE

OVER INSURANCE

There may be no over insurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured.

When the amount of the insurance is beyond the value of the insured’s insurable interest.

Two or more insurers.

There may be only one insurer, with whom the insured takes insurance beyond the value of his insurable interest.

Not prohibited by law, unless there is a stipulation to the contrary.

Prohibited by law because it is a wagering contract and no longer a contract of indemnity.

b.) When double insurance exists. Double insurance exists where the same person is insured by several insurers separately, in respect to the same subject and interest. (Sec. 95)c.) Requisites of double insurance.1. Person insured is the same;2. Two (2) or more insurers insuring separately; 3. Subject matter is the same;4. Interest insured is the same; and 5. Risk or peril insured against is the same d.) Purpose of the rule on double insurance.The purpose of the rule on double insurance is to prevent over insurance and thus avert the‐ perpetration of fraud. The public, as well as the insurer, is interested in preventing the situation in

which a loss would be profitable to the insured (Pioneer Insurance and Surety Corp v. Yap, G.R. No. L 36232, Dec. 19, 1974)‐e.) Is double insurance prohibited by law? No. A person may therefore procure two or more insurances to cover his property. What is prohibited by law is over insurance.f.) Rules where the insured is over insured by double insurance.‐

1. The insured, unless the policy otherwise provides, may claim payment from the insurers in such order as he may select, up to the amount which the insurers are severally liable under their respective contracts.

2. Where the policy under which the insured claims is a valued policy, the insured must give credit as against the valuation for any sum received by him under any other policy without regard to the actual value of the subject matter insured.

3. Where the policy under which the insured claims is an unvalued policy he must give credit, as against the full insurable value, for any sum received by him under any policy.

4. Where the insured receives any sum in excess of the valuation in the case of valued policies, or of the insurable value in the case of unvalued policies, he must hold such sum in trust for the insurers, according to their right of contribution among themselves.

5. Each insurer and the other insurers, to contribute ratably to the loss in proportion to the amount for which he is liable under his contract. (Sec. 96)

4. Multiple or Several Interests on Same Property

a.) Instances where more than one insurable interest may exist on the same property.a. In trust, both trustor and trustee have insurable interest over the property in trust. b. In a corporation, both the corporation and its stockholders have insurable interest over

the assets. c. In partnership both the firm and partners has insurable interest over its assets. d. In assignment both the assignor and assignee has insurable interest over the property

assigned. e. In lease, the lessor, lessee and sub lessees have insurable interest over the property in‐

lease. f. In mortgage, both the mortgagor and mortgagee have insurable interest over the

property mortgaged. b.) Is the insurable interest of mortgagor and mortgagee in case of a mortgaged property the same? Each has an insurable interest in the property mortgaged and this interest is separate and distinct from the other. Therefore, insurance taken by one in his name only and in his favor alone does not inure to the benefit of the other. The same is not open to objection that there is double insurance. (Sec. 8)c.) Extent of insurable interest of mortgagor and mortgagee.

a. Mortgagor – To the extent of its value as owner of the property. The loss or destruction of the property insured will not extinguish the mortgage debt. The exception is in marine insurance.

b. Mortgagee – To the extent of the debt. Such interest continues until the mortgage debt is extinguished. The property relied on as mortgaged is only a security. In insuring the property, he is not insuring the property itself but his interest or lien thereon.

F. PERFECTION OF THE CONTRACT OF INSURANCE

Q: What is a policy of insurance? A: It is the written instrument in which the contract of insurance is set forth (Sec. 49). It is the written document embodying the terms and stipulations of the contract of insurance between the insured and insurer. It is not necessary for the perfection of the contract.

Q: What is the form of an insurance contract? A: May be verbal or in writing, or partly in writing and partly verbal. However, the law provides that no policy of insurance shall be issued or delivered unless in the form previously approved by the Insurance Commission.

Q: When is the insurance contract perfected? A: When the assent or consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. Mere offer or proposal is not contemplated . (De Lim v. Sun Life Assurance Co., G.R. No. L 15774, Nov. 29, 1920)‐

F.1. OFFER AND ACCEPTANCE/CONSENSUAL

Q. How offer is made in property and liability insurance? A. It is the insured who makes an offer to the insurer, who accepts the offer, rejects it, or makes a counter offer.‐ The offer is usually accepted by an insurance agent on behalf of the insurer.

Q. How offer is made in Life and Health Insurance? A. it depends upon whether the insured pays the premium at the time he applies for insurance.

1. If he does not pay the premium, his application is considered an invitation to the insurer to make an offer, which he must then accept before the contract goes into effect.

2. If he pays the premium with his application, his application will be considered an offer.

Q. When is there an acceptance? A. Where the application for insurance constitutes an offer by the insured, a policy is issued strictly in accordance with the offer is an acceptance of the offer that perfects the contract.

F.1.a. Delay in Acceptance

Q. When can there be an issuance of policy without acceptance? A. If the issued policy does not conform to the insured’s application, it is an offer to the insured which he may accept or reject.

Q. What is the effect of delay? A. Unreasonable delay in returning the premium raises the presumption of acceptance of the insurance application. (Gloria v. Philippine American Life Ins. Co., [CA}73 O.G. [No.37] 8660)

Q: When does the policy become binding? A: 1. When all the conditions precedent stated in the offer have been satisfied; and 2. When delivered

F.1.b. Delivery of Policy

Q: What are the requisites for a valid delivery? A: 1. Intention of the insurer to give legal effect as a completed instrument; 2. Word or act by insurer putting the instrument beyond his legal, though not necessarily physical control; 3. Insured must acquiesce in this intention.

Q: What are the 2 types of delivery? A:

1. Actual – delivery to the person of the insured.

2. Constructive

a. By mail – If policy was mailed already and premium was paid and nothing is left to be done by the insured, the policy is considered constructively delivered if insured died before receiving the policy.

b. By agent – If delivered to the agent of the insurer, whose duty is ministerial, or delivered to the agent of the insured, the policy is considered constructively delivered.

Q: What is the importance of delivery? A: 1. It becomes the evidence of the making of a contract and of its terms; 2. It is considered as communication of the insurer’s acceptance of the insured’s offer; 3. It becomes the determination of policy period; 4. It marks the end of insurer’s opportunity to decline coverage.

F.2. PREMIUM PAYMENT

Q: What is premium? A: It is an agreed price for assuming and carrying the risk – that is, the consideration paid an insurer for undertaking to indemnify the insured against a specified peril.

Q: What is the difference between premium and assessment? A: Premium is levied and paid to meet anticipated losses, while assessment are collected to meet actual losses. Also, while premium is not a debt, assessment properly levied, unless otherwise expressly agreed, is a debt.

Q: When does payment of premium become a debt or obligation? A: 1. In fire, casualty and marine insurance, the premium payable becomes a debt as soon as the risk attaches. 2. In life insurance, the premium becomes a debt only when, in the case of the first premium, the contract has

become binding, and in the case of subsequent premiums, when the insurer has continued the insurance after maturity of the premium, in consideration of the insured’s express or implied promise to pay.

Q: Does non payment of balance of premiums cancel the policy? ‐A: No, a contrary rule would place exclusively in the hands of the insured the right to decide whether the contract should stand or not. (Philippine Phoenix Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R. No. L‐22684, Aug. 31, 1967)

Q: What are the effects of non payment of premiums? ‐A: Non payment of the ‐ first premium unless waived, prevents the contract from becoming binding notwithstanding the acceptance of the application or the issuance of the policy.

Non payment of the ‐ subsequent premiums does not affect the validity of the contracts unless, by express stipulation, it is provided that the policy shall in that event be suspended or shall lapse.

Q: Is the fire insurance policy a binding one even if the premium stated in the policy is not paid? A: No, insurance is a contract whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown contingent event.

The consideration is the premium. The premium must be paid at the time and in the way and manner specified in the policy, and if not, the policy will lapse and be forfeited by its own terms.

The non payment of consideration constitutes inability of the agreement ‐ (Philippine Surety and Insurance Company v. Woodwork, Inc., G.R. No. L 25317, Aug. 6, 1979)‐

Q: If the applicant failed to pay premium and instead execute a promissory note in favor of the insurer payable within 30 days which was accepted by the latter, is the insurer liable in case of loss? A: Yes, the insurer is liable because there has been a perfected insurance contract. The insurer accepted the promise of the applicant to pay the insurance premium within thirty 30 days from the effective date of policy. By so doing, it has implicitly agreed to modify the tenor of the insurance policy and in effect, waived any provision therein that it would only pay for the loss or damage in case the same occurs after the payment of the premium. Considering that the insurance policy is silent as to the mode of payment, insurer is deemed to have accepted the promissory note in payment of the premium. This rendered the policy immediately operative on the date it was delivered. (Capital Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R. No. L 22375, July 18, 1975)‐

Q: Can fortuitous event excuse the insured from not paying the premiums? A:

GR: No, non payment of premiums does not merely suspend but put an end to an insurance contract since‐ the time of the payment is peculiarly of the essence of the contract. XPN:

1. The insurer has become insolvent and has suspended business, or has refused without justification a valid tender of premiums. (Gonzales v. Asia Life Ins. Co., G.R. No. L 5188, Oct. 29, 1952) ‐

2. Failure to pay was due to the wrongful conduct of the insurer. 3. The insurer has waived his right to demand payment.

Q: What is the effect of acceptance of premium? A: Acceptance of premium within the stipulated period for payment thereof, including the agreed grace period, merely assures continued effectivity of the insurance policy in accordance with its terms. (Stoke v. Malayan Insurance Co., Inc., G.R. No. L 34768, Feb. 28, 1984) ‐

Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is bound by its agent’s acknowledgment of the receipt of payment of premium.

Q: What is the effect of payment of premium by post dated check? ‐A: Delivery of a promissory note or a check will not be sufficient to make the policy binding until the said note or check has been converted into cash. This is consistent with Article 1249 of the Civil Code.

Q: What if there was no premium paid, may the insurer recover the unpaid premium from the insured? A: No, the continuance of the insurer’s obligation is conditioned upon the payment of the premium, so that no recovery can be had upon a lapsed policy, the contractual relation between the parties having ceased. If the peril insured against had occurred, the insurer would have had a valid defense against recovery under the policy.

Q: What is the “cash and carry” rule? A:

GR: No policy or contract of insurance issued by an insurance company is valid and binding unless and until the premium thereof has been paid. Any agreement to the contrary is void. (2003 Bar Question) XPN: A policy is valid and binding even when there is non payment of premium: ‐

1. In case of life or industrial life policy whenever the grace period provision applies.

2. When there is acknowledgment in a policy of a receipt of premium, which the law declares to be conclusive evidence of payment, even if there is stipulation therein that it shall not be binding until the premium is actually paid. This is without prejudice however to right of insurer to collect corresponding premium. (Sec. 77)

3. When there is an agreement allowing the insured to pay the premium in installments and partial payment has been made at the time of loss (Makati Tuscany Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992).

4. When there is an agreement to grant the insured credit extension for the payment of the premium. (Art. 1306, NCC), and loss occurs before the expiration of the credit term. (UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, Apr. 4, 2001).

5. When estoppel bars the insurer to invoke non recovery on the policy. ‐

6. When the public interest so requires, as determined by the Insurance Commissioner

E.g.: In compulsory motor vehicle insurance, if the policy was issued without payment of premium by the vehicle owner, the insurer will still be held liable. To rule otherwise would prejudice the 3rd party victim.

Q: What is the effect of acknowledgment of receipt of premium in policy? A: Conclusive evidence of its payment, in so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until the premium is actually paid (Sec. 78).

When the policy contains such written acknowledgment, it is presumed that the insurer has waived the condition of prepayment. It hereby creates a legal fiction of payment. The presumption is however, extended only to the question of the binding effect of the policy.

As far as the payment of the premium itself is concerned , the acknowledgment is only a prima facie evidence of the fact of such payment. The insurer may still dispute its acknowledgment but only for the purpose of recovering the premium due and unpaid. Whether payment was indeed made is a question of fact.

Q: Is the insurance company liable when a car, bought on installment basis, met an accident but the car is not yet fully paid?A: Yes, when insured and insurer have agreed to the payment of premium by installments and partial payment has been made at the time of loss, then the insurer becomes liable. When the car loss happened on the 5th month, the six months agreed period of payment had not yet elapsed. The owner may recover from Peninsula Insurance Company, but the latter has the right to deduct the amount of unpaid premium from the insurance proceeds. (2006 Bar Question)

F.3. NON-DEFAULT OPTIONS IN LIFE INSURANCEQ: What are the devices used to prevent the forfeiture of a life insurance after the payment of the first premium? A: 1. Grace period – After the payment of the first premium, the insured is entitled to a grace period of 30 days within which to pay the succeeding premiums. (Sec. 227,(a)). 2. Cash surrender value – The amount the insurer agrees to pay to the holder of the policy if he surrenders it and releases his claim upon it. (Cyclopedia Law Dictionary, 3rd ed., 1077)

3. Extended insurance – It is where the insured is given a right, upon default, after payment of at least three full annual premiums (see Sec. 227 [f]) to have the policy continued in force from the date of default for a time either stated or equal to the amount as the net value of the policy taken as a single premium, will purchase. (De Leon, The Insurance Code of the Philippines Annotated, 2006)

4. Paid up Insurance – The insured is given a right, upon default, after the payment of at least three annual premiums to have the policy continued in force from the date of default for the whole period of the insurance without further payment of premiums.(ibid.) It results to a reduction of the original amount of insurance, but for the same period originally stipulated.(6 Couch 2d., 355; 37 C.J.S. 364)

5. Automatic Loan Clause – A stipulation in the policy providing that upon default in payment of premium, the same shall be paid from the loan value of the policy until that value is consumed. In such a case, the policy is continued in force as fully and effectively as though the premiums had been paid by the insured from funds derived from other sources.(6 Couch 2d., 383)

6. Reinstatement – Provision that the holder of the policy shall be entitled to reinstatement of the contract at anytime within 3 years from the date of default in the payment of premium, unless the cash surrender value has been paid, or the extension period expired, upon production of evidence of insurability satisfactory to the company and the payment of all overdue premiums and any indebtedness to the company upon said policy. (Sec. 227, (j)).

F.6. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCEQ. What is purpose of the Reinstatement Provision? A. The purpose of the provision is to clarify the requirements for restoring a policy to premium paying status‐ after it has been permitted to lapsed.

Q. Within what period shall the holder of the policy be entitled to reinstatement of the contract? A. The law requires that the policy owner be permitted to reinstate the policy, subject to the violations specified, any time within three (3) years from the date of default of premium payment. A longer period, being more favorable to the insured, may be used.

Q. Is reinstatement of a lapsed policy an absolute right of the insured? A. Reinstatement is not an absolute right of the insured, but discretionary on the part of the insurer, which has the right to deny reinstatement if it were not satisfied as to the insurability of the insured, and if the latter did not pay all overdue premiums and other indebtedness to the insurer. (McGuire vs. Manufacturer’s Life Ins. Co., 87 Phil. 370).

Q. What does Evidence of Insurability includes? A. Evidence of Insurability is broader phrase than “Evidence of Good Health” and includes such other factors as the insured’s occupation, habits, financial condition, and other risk selection factors.

Q. A life insurance policy lapsed. The insured applied for reinstatement of the policy and paid only a part of the overdue premiums. Subsequently, the insured died. Was the insurer liable? A. The insurer is was not liable as the policy was not reinstated. The failure to pay the balance of the overdue premiums prevented reinstatement and recovery of the face value of the policy. (Andres vs. Crown Life Ins. Co., 55 O.G. 3483).

F.5. REFUND OF PREMIUMS

Q: When is the insured entitled to recover premiums already paid or a portion thereof? A: 1. Whole: a. When no part of the thing insured has been exposed to any of the perils insured against (Sec. 79) b. When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent (Sec.81). c. When the insurance is voidable because of the existence of facts of which the insured was ignorant without

his fault (Sec.81). d. When the insurer never incurred any liability under the policy because of the default of the insured other than

actual fraud (Sec. 81). e. When rescission is granted due to insurer’s breach of contract (Sec. 74).

2. Pro rata: a. When the insurance is for a definite period and the insured surrenders his policy before the termination

thereof; (Sec. 79 [b]); except:

i. Policy not made for a definite period of time; ii. Short period rate is agreed upon; iii. Life insurance policy.

b. When there is over insurance. The premiums to be returned shall be proportioned to the amount by which ‐the aggregate sum insured in all the policies exceeds the insurable value of the thing at risk. (Sec. 82)

i. In case of over insurance by double insurance, the insurer is not liable for the total amount of the ‐insurance taken, his liability being limited to the property insured. Hence, the insurer is not entitled to that portion of the premium corresponding to the excess of the insurance over the insurable interest of the insured.

ii. In case of over insurance by several insurers, the insured is entitled to a ratable return of the premium, ‐proportioned to the amount by which the aggregate sum insured in all the policies exceeds the insurable value of the thing insured (Sec. 82).

E.g. Where there is a total over insurance of P500,000.00 in an aggregate P2,000,000.00 policy (P1,500,000.00 is only the insurable value), 25% (proportion of P500k to P2M) of the premiums paid to the several insurers should be returned.

Q: When insured not entitled to return of premiums paid? A: 1. The risk has already attached and the risk is entire and indivisible; 2. In life policies; 3. If contract is void ab initio because of fraud by the insured; 4. If contract is illegal and the parties are in pari delicto.

G. RESCISSION OF INSURANCE CONTRACTS

Q. What are the instances wherein a contract of insurance may be rescinded? A. 1. Concealment 2. Misrepresentation/ omission 3. Breach of warranties

G.1. Concealment

Q: What is concealment? A: Concealment is a neglect to communicate that which a party knows and ought to communicate. (Sec. 26) Q: What are the requisites in concealment? A: 1. A party knows a fact which he neglects to communicate or disclose to the other party 2. Such party concealing is duty bound to disclose such fact to the other 3. Such party concealing makes no warranty as to the fact concealed 4. The other party has no means of ascertaining the fact concealed 5. The fact must be material

Q: What is the test of materiality? A: It is determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the advantages of the proposed contract, or in making his inquiries. (Sec. 31)

Q: What is the presumption when the insured failed to convey the nature of the facts to the insurer? A:

GR: The failure of the insured to communicate is intentional rather than inadvertent.

XPN: In the absence of evidence of the uninsurability of a person afflicted with chronic cough, concealment thereof is no ground for annulment of the policy.

Q: How does it differ from materiality in marine insurance? A: Rules on concealment are stricter since the insurer would have to depend almost entirely on the matters communicated by the insured. Thus, in addition to material facts, each party must disclose all the information he possesses which are material to the information of the belief or expectation of a third person, in reference to a material fact. But a concealment in a marine insurance in any of the following matters enumerated under Section 110, Insurance Code does not vitiate the entire contract, but merely exonerates the insurer from a loss resulting from the risk concealed.

Q: What is the test in ascertaining the existence of concealment? A: If the applicant is aware of the existence of some circumstances which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked.

Q: What are the matters that need not be disclosed? A:

GR: The parties are not bound to communicate information of the following matters: 1. Those which the other knows 2. Those which, in the exercise of ordinary care, the other ought to know and of which, the former has no

reason to suppose him ignorant 3. Those of which the other waives communication 4. Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not

otherwise material 5. Those which relate to a risk excepted from the policy and which are not otherwise material; 6. The nature or amount of the interest of one insured (except if he is not the owner of the property insured,

Sec. 34).

XPN: In answer to inquiries of the other. (Sec. 30)

Q: What are the matters that must be disclosed even in the absence of inquiry? A: 1. Those material to the contract 2. Those which the other has no means of ascertaining 3. Those as to which the party with the duty to communicate makes no warranty

Q: May the right to information of material facts be waived? A: Yes. 1. By the terms of the contract 2. By the failure to make an inquiry as to such facts, where they are distinctly implied in other facts from which

information is communicated. (Sec. 33)

Q: What are the effects of concealment? A: 1. If there is concealment under Section 27, the remedy of the insurer is rescission since concealment vitiates

the contract of insurance. 2. The party claiming the existence of concealment must prove that there was knowledge of the fact concealed

on the part of the party charged with concealment. 3. Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the

injured party to rescind the contract of insurance. (Sec. 27) 4. The matter concealed need not be the cause of loss.

5. To be guilty of concealment, a party must have knowledge of the fact concealed at the time of the effectivity of the policy.

Q: When should concealment take place in order that the policy may be avoided?A: At the time the contract is entered into and not afterwards. The duty of disclosure ends with the completion of the contract. Waiver of medical examination in a non medical insurance contract renders even more material‐ the information required of the applicant concerning previous condition of health and diseases suffered, for such information necessarily constitutes an important factor which the insurer takes into consideration in deciding whether to issue the policy or not. Failure to communicate information acquired after the effectivity of the policy will not be a ground to rescind the contract.

Q: What are the instances whereby concealment made by an agent procuring the insurance binds the principal? A. 1. Where it was the duty of the agent to acquire and communicate information of the facts in question; 2. Where it was possible for the agent, in the exercise of reasonable diligence to have made of the insurance contract.

Note: Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will avoid the policy, despite the good faith of the insured.

G.2. MISREPRESENTATIONS/OMISSIONS

Q: What is representation? A: An oral or written statement of a fact or condition affecting the risk made by the insured to the insurance company, tending to induce the insurer to assume the risk.

Q: What are the kinds of representation? A: 1. Oral or written; (Sec. 36) 2. Affirmative; (Sec. 39) or 3. Promissory. (Sec. 42) Q: What is an affirmative representation? A: Any allegation as to the existence or non existence of a fact when the contract begins. (‐ e.g. the statement of the insured that the house to be insured is used only for residential purposes is an affirmative representation).

Q: What is a promissory representation? A: Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance.

Q: When should representation be made? A: At the time of, or before, issuance of the policy. (Sec. 37)

Q: What is misrepresentation? A: It is an affirmative defense. To avoid liability, the insurer has the duty to establish such a defense by satisfactory and convincing evidence. (Ng Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L 30685, May 30,‐ 1983)

Q: What are the requisites of a false representation (misrepresentation)? A: 1. The insured stated a fact which is untrue; 2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively

as true without knowing it to be true and which has a tendency to mislead;

3. Such fact in either case is material to the risk.

Q: What is the test of materiality? A: It is to be determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the representation is made, in forming his estimates of the disadvantages of the proposed contract or in making his inquiries (similar with concealment). (Sec. 46)

Q: What are the effects of misrepresentation?A: 1. It renders the insurance contract voidable at the option of the insurer, although the policy is not thereby

rendered void ab initio. The injured party entitled to rescind from the time when the representation becomes false;

2. When the insurer accepted the payment of premium with the knowledge of the ground for rescission, there is waiver of such right;

3. There is no waiver of the right of rescission if the insurer had no knowledge of the ground therefore at the time of acceptance of premium payment

Q: What is the effect of collusion between the insurer’s agent and the insured? A: It vitiates the policy even though the agent is acting within the apparent scope of his authority. The agent ceases to represent his principal. He, thus, represents himself; so the insurer is not estopped from avoiding the policy.

Q: What are the characteristics of representation?A: 1. Not a part of the contract but merely a collateral inducement to it 2. Oral or written 3. Made at the time of, or before issuing the policy and not after 4. Altered or withdrawn before the insurance is effected but not afterwards 5. Must be presumed to refer to the date the contract goes into effect. (Sec. 42)

Q: What are the similarities of concealment and representation? A: 1. Refer to the same subject matter and both take place before the contract is entered. 2. Concealment or representation prior to loss or death gives rise to the same remedy; that is rescission or

cancellation. 3. The test of materiality is the same. (Secs. 31, 46) 4. The rules of concealment and representation are the same with life and non life insurance. ‐5. Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of

concealment or false representation. 6. Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the

agreement, the rules on concealment and representation apply likewise to the insurer. Q: How does concealment differ from misrepresentation? A: In concealment, the insured withholds the information of material facts from the insurer, whereas in misrepresentation, the insured makes erroneous statements of facts with the intent of inducing the insurer to enter into the insurance contract.

Q: How is concealment and misrepresentation applied in case of loss or death? A:

GR: If the concealment or misrepresentation is discovered before loss or death, the insurer can cancel the policy. If the discovery is after loss or death, the insurer can refuse to pay. XPN: The incontestability clause under paragraph 2 of Section 48. XPN to XPN:

1. Non payment of premiums. (‐ Secs. 77, 22 [b], 228 [b], 203 [b])

2. Violation of condition. (Secs. 227 [b], 228 [b]) 3. No insurable interest 4. Cause of death was excepted or not covered 5. Fraud of a vicious type 6. Proof of death was not given. (Sec. 242) 7. That the conditions of the policy relating to military or naval service. (Secs. 227 [b], 228 [b]) 8. That the action was not bought within the time specified. (Sec. 62)

Q: What is the remedy of the injured party in case of misrepresentation? A: If there is misrepresentation, the injured party is entitled to rescind from the time when the representation becomes false.

Q: When should the right to rescind the contract be exercised? A: The right to rescind must be exercised previous to the commencement of an action on the contract. (the action referred to is that to collect a claim on the contract)

Q. What is Omission? A. The failure to communicate information of matters proving or tending to prove the falsity of warranty.

Q. What is the effect of Omission? A. The contract of insurance may be rescinded.

Q. In case of Omission, who is entitled to rescind the contract? A. The insurer is entitled to rescind the contract

G.3. BREACH OF WARRANTIES

Q: What are warranties? A: Statements or promises by the insured set forth in the policy itself or incorporated in it by proper reference, the untruth or non fulfillment of which in any respect, and without reference to whether the insurer was in fact‐ prejudiced by such untruth or non fulfillment render the policy voidable by the insurer. ‐

Q: What is the purpose of warranties? A: To eliminate potentially increasing moral or physical hazards which may either be due to the acts of the insured or to the change of the condition of the property.

Q: What is the basis of warranties? A: The insurer took into consideration the condition of the property at the time of effectivity of the policy.

Q: What are the kinds of warranties?A: 1. Express – an agreement contained in the policy or clearly incorporated therein as part thereof whereby the

insured stipulates that certain facts relating to the risk are or shall be true, or certain acts relating to the same subject have been or shall be done.

2. Implied – It is deemed included in the contract although not expressly mentioned.

Peculiar only to marine insurance, and therefore is deemed included in the contract, although not expressly mentioned:

a. That the ship will not deviate from the agreed voyage unless deviation is proper b. That the ship will not engage in illegal venture c. Warranty of neutrality, that the ship will carry the requisite documents of nationality or neutrality where

such nationality or neutrality is warranted

d. Presence of insurable interest e. That the ship is seaworthy at the time of the commencement of the insurance contract.

Q: What are the effects of breach of warranty? A: 1. Material

GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the contract. XPN:

a. Loss occurs before the time of performance of the warranty; b. The performance becomes unlawful at the place of the contract; and c. Performance becomes impossible.

2. Immaterial GR: It will not avoid the policy.

XPN: When the policy expressly provides or declares that a violation thereof will avoid it.

For instance, an “Other Insurance Clause” which is a condition in the policy requiring the insured to inform the insurer of any other insurance coverage of the property. A violation of the clause by the insured will not constitute a breach unless there is an additional provision stating that the violation thereof will avoid the policy. (Sec. 75)

Q: What is the effect of a breach of warranty without fraud? A: The policy is avoided only from the time of breach (Sec. 76) and the insured is entitled: 1. To the return of the premium paid at a pro rata from the time of breach if it occurs after the inception of the

contract; or 2. To all premiums if it is broken during the inception of the contract.

H. CLAIMS SETTLEMENT AND SUBROGATION

H.1. Notice and Proof of Loss

Q: What is loss in insurance? A: The injury, damage or liability sustained by the insured in consequence of the happening of one or more of the perils against which the insurer, in consideration of the premium, has undertaken to indemnify the insured. It may be total, partial, or constructive in Marine Insurance.

Q: What is notice of loss? A: It is the more or less formal notice given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against.

Q: What are the conditions before the insured may recover on the policy after the loss?A: 1. The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give

notice to the insurer; (Sec. 88) 2. When required by the policy, insured must present a preliminary proof loss which is the best evidence he

has in his power at the time. (Sec. 89)

Q: What are the purposes of notice of loss?A: 1. To give insurer information by which he may determine the extent of his liability; 2. To afford the insurer a means of detecting any fraud that may have been practiced upon him; and

3. To operate as a check upon extravagant claims. Q: What are the instances when the defects in the notice or proof of loss are considered waived?A: When the insurer: 1. Writes to the insured that he considers the policy null and void as the furnishing of notice or proof of loss

would be useless; 2. Recognizes his liability to pay the claim; 3. Denies all liability under the policy 4. Joins in the proceedings for determining the amount of the loss by arbitration, making no objections on

account of notice and preliminary proof; or 5. Makes Objection on any ground other than the formal defect in the preliminary proof.

Q: When is delay in the presentation of notice or proof of loss deemed waived? A: If caused by: 1. Any act of the insurer; and 2. By failure to take objection promptly and specifically upon that ground. (Sec. 91)

Q: What is proof of loss? A: It is the more or less formal evidence given the company by the insured or claimant under a policy of the occurrence of the loss, the particulars thereof and the data necessary to enable the company to determine its liability and the amount thereof.

H.2. Guidelines on Claims Settlement

Q. What is Claim Settlement? A. Claim settlement is the indemnification of the suffered by the insured. The claimant may be the insured or reinsured, the insurer who is entitled to subrogation, or a third party who has a claim against the insured.

Q. What are the rules in Claim Settlement? A. 1. No insurance company doing business in the Philippines shall refuse, without justifiable cause, to pay or

settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices.

2. Evidence as to numbers and types of valid and justifiable complaints to the Commissioner against an insurance company, and the Commissioner’s complaint experience with other insurance companies writing similar lines of insurance shall be admissible in evidence in an administrative or judicial proceeding brought under this section (Sec. 241)

Q. What is the purpose of the rule? A. To eliminate unfair claim settlement practices.

H.2.a. Unfair Claims Settlement: Sanctions

Q. What are the acts which constitute unfair claim settlement practices? A. 1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue. 2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising

under its policies. 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its

policies. 4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of calims submitted in

which liability has become reasonably clear; or

5. Compelling policyholders to institute suits to recover amounts due under its policies by offering without justifiable reason substantially less than the amounts ultimately recovered in suits brought by them. (Sec. 241, Par.1)

Q. What is the sanction for the insurance companies which engaged to unfair settlement practices? A. Sec. 241 enumerates the grounds which shall be considered as sufficient as sufficient cause of the suspension or revocation of an insurance company’s certificate of authority.

Q. What is the obligation of the insurer with regard to the insured’s decision to compromise third party claim? A. Where a policy gives the insurer a control of the decision to settle claim or to litigate it, the insurer nevertheless is required to observe a certain measure of consideration for the interest of the insured. The rule has come to be generally accepted that while the express terms of the policy do not impose of the insurer the duty to claim settle the claim at all costs, there is an implied duty on his part to give due consideration to the interest of the insured in its exercise of the option to reject a compromise settlement and proceed with litigation. In insurance contracts, the law requires strict observance of the standards of good faith and fair dealing on the part of the insurer.

Q: What is the effect of refusal or failure to pay the claim within the time prescribed? A: Secs. 242, 243 and 244 provide that the insurer shall be liable to pay interest twice the ceiling prescribed by the Monetary Board which means twice 12% per annum (legal rate of interest prescribed in CB No. 416) or 24% per annum interest on the proceeds of the insurance from the date following the time prescribed in Secs. 242 or 243 until the claim is fully satisfied (Prudential Guarantee and Assurance, Inc. v. Trans Asia Shipping Lines, Inc. G.‐ R. No. 151890, June 20, 2006)

H.2.b. Prescription of Action

Q: What are the rules on the prescriptive period? A:

1. The parties to a contract of insurance may validly agree that an action on the policy should be brought within a limited period of time, provided such period is not less than 1 year from the time the cause of action accrues. If the period agreed upon is less than 1 year from the time the cause of action accrues, such agreement is void. (Sec. 63)

a. The stipulated prescriptive period shall begin to run from the date of the insurer’s rejection of the claim filed by the insured or beneficiary and not from the time of loss.

b. In case the claim was denied by the insurer but the insured filed a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration (Sun Life Office, Ltd. vs. CA, GR. No. 89741, Mar 13, 1991)

2. If there is no stipulation or the stipulation is void, the insured may bring the action within 10 years in case the contract is written.

3. In a comprehensive motor vehicle liability insurance (CMVLI), the written notice of claim must be filed within 6 months from the date of the accident; otherwise, the claim is deemed waived even if the same is brought within 1 year from its rejection. (Vda. De Gabriel vs. CA, GR No. 103883, Nov 14, 1996)

4. The suit for damages, either with the proper court or with the Insurance Commissioner, should be filed within 1 year from the date of the denial of the claim by the insurer, otherwise, claimant’s right of action shall prescribe. (Sec. 384)

Q: What is the prescriptive period in commencing an action? A: Within one year from time cause of action accrues.

Q. From what time shall the period of prescription be computed in case the insured asked for reconsideration of the denial of claim? A. In case the claim was denied by the insurer but the insured file a petition for reconsideration, the prescriptive period should be counted from the date the claim was denied at the first instance and not from the denial of the reconsideration. To rule otherwise would give the insured a scheme or devise to waste time until any evidence which may be considered against him is destroyed. (Sun life Office, Ltd. vs. CA, 195 SCRA 193; Asked, V [a}, 1996 Bar Exams.).

Q. What is the prescriptive period of prescription in motor vehicle insurance? A. It is one year from denial of the claim and not from the date of the accident.

Q. What is the Principle of Subrogation? A. If the plaintiff’s property has been insured, and he has received indemnity from the insurance company for the injury or loss arising out of wrong or breach of contract complained of, the insurance company shall be subrogated to the rights of the insured against the wrongdoer or the person who has violated the contract. ( Art. 2207, NCC)

Q: Should there be a contract before the insurer be subrogated? A: The principle of subrogation inures to the insurer without any formal assignment or any express stipulation to that effect in the policy. Said right is not dependent upon nor does it grow out of any private contract. Payment to the insured makes the insurer a subrogee in equity. (Malayan Insurance Co., Inc. v. CA, G.R. No. L 36413, Sept.‐ 26, 1988)

Q: What are the rules on indemnity? A: 1. Applies only to property insurance except when the creditor insures the life of his debtor 2. Insurance contracts are not wagering contracts or gambling contracts.

Q: What are the purposes of subrogation? A: 1. To make the person who caused the loss legally responsible for it 2. To prevent the insured from receiving double recovery from the wrongdoer and the insurer 3. To prevent the tortfeasors from being free from liability and is thus founded on consideration of public

policy

Q: What are the rules on subrogation? A: 1. Applicable only to property insurance – the value of human life is regarded as unlimited and therefore, no

recovery from a third party can be deemed adequate to compensate the insured’s beneficiary. 2. The right of insurer against a third party is limited to the amount recoverable from latter by the insured.

Q: What if the amount paid by the insurance company does not fully cover the injury or loss? A: The aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury. (Art. 2207, NCC)

Q: What are the instances where the right of subrogation does not apply? A: 1. Where the insured by his own act releases the wrongdoer or third party liable for loss or damage from

liability 2. The insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such

rights as the insured may have 3. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith

settled the insured claim for loss 4. Where the insurer pays the insured for a loss or risk not covered by the policy

5. Life insurance For recovery of loss in excess of insurance coverage. V. Transportation Laws

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

1. Diligence required of common carriersExtraordinary diligence or that extreme measure of care or caution which persons of unusual prudence and circumspection use for securing and preserving their own property or rights. The law requires common carriers to render service with the greatest care and utmost foresight.

2. Liabilities of common carriersWith respect to the transfer of goods: liability begins with the actual delivery of the goods for transportation, and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance.

With respect to the transport of passengers: begins from the moment the person who purchases the ticket from the carrier presents himself at the proper place and in a proper manner to be transported. The relation of carrier and passenger continues until the passenger has been landed at the port of destination and has left the vessel owner’s dock or premises. Once created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises.

B. Vigilance over goods

1. Exempting causesGR: the common carrier is presumed to have been at fault or to have acted negligently when the goods transported are lost, destroyed or deteriorated,

XPN: when the same is due to any of the following causes only:1. Caso Fortuito2. Act of the public enemy in war, whether international or civil3. Act or omission of the shipper or owner of the goods

a. Requirement of absence of negligenceGR: it is the express obligation of common carriers to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.

XPN: being a mere presumption, however, the same is rebuttable by proof that the common carrier had exercised extraordinary diligence as required by law in the performance of its contractual obligation, or that the injury suffered by the passenger was solely due to a fortuitous event.

b. Absence of delayThe absence of delay is important in case of natural disaster because if a common carrier incurs in delay in transporting the foods, such disaster shall not free such carriers from responsibility.

c. Due diligence to prevent or lessen the loss

To be exempted from liability, the common carrier must prove:1. The natural disaster was the proximate and only cause of the loss2. That the common carrier has exercised due diligence to prevent or minimize loss before,

during and after the occurrence of flood, storm, other natural disasters or acts of war.

2. Contributory negligenceGR: if the shipper or owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause thereof being the negligence of the common carrier, the latter shall be liable for damages, which however, shall be equitably reduced.

XPN: in a collision case and allision cases, the parties are liable for their own damages.

3. Duration of liabilitya. Delivery of goods to common carrier

Delivery must be made, actual or constructive, to the consignee or to the person who has a right to receive them.

b. Actual or constructive deliveryIt is the delivery of a representation of property or means of possession that is construed by a court as sufficient to show the transferor’s intent or to put the property under the transferee’s control

c. Temporary unloading or storageGR: the common carrier’s duty to observe extraordinary diligence in the vigilance over the goods remain in full force and effect even when they are temporarily unloaded or stored in transit.

XPN: when the shipper or owner has made use of the right of stoppage in transitu.

4. Stipulation for limitation of liabilitya. Void stipulations

i. That the goods are transported at the risk of the owner or shipperii. Any similar stipulation that is unreasonable, unjust and contrary to public policyiii. That the common carrier will not be liable for any loss, destruction or deterioration of

the goodsiv. That the common carrier need not observe any diligence in the custody of the goodsv. That the common carrier shall exercise a degree of diligence less than that of a good

father of a family or a man of ordinary prudence in the vigilance over the movables transported

vi. That the common carrier is not responsible for the loss, destruction or deterioration of goods on account of the defective condition of the car, vehicle, etc.

b. Limitation of liability to fixed amountGR: under the warsaw convention, a stipulation limiting the maximum recoverable amount of airlines as common carriers is valid provided that the provisions of the convention limiting the liability are printed in the airway bill.

XPN: the warsaw convention shall not apply in:a. Willful misconduct by the common carrierb. Default amounting to willful misconductc. Accepting goods without airway bill

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

GR: the liability of the common carrier shall not exceed the stipulation in a contract of carriage even if the loss or damage results from the carrier’s negligence.

XPN: where the shipper or owner of the goods declare a greater value and corresponding freight.

5. Liability for baggage of passengersa. Checked-in baggageb. Baggage in possession of passengers

C. Safety of Passengers1. Void stipulations

The following are void stipulations in a contract of carriage of goods:1. That the goods are transported at the risk of the owner or shipper2. Any similar stipulation that is unreasonable, unjust and contrary to public policy3. That the common carrier will not be liable for any loss, destruction or deterioration of the

goods4. That the common carrier need not observe any diligence in the custody of the goods5. That the common carrier shall exercise a degree of diligence less than that of a good father of

a family or a man of ordinary prudence in the vigilance over the movables transported6. That the common carrier is not responsible for the loss, destruction or deterioration of goods

on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage.

7. That the common carrier’s liability for acts committed by thieves or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished

8. That the common carrier shall not be responsible for the acts or omissions of his or its employees.

2. Duration of liabilityThe duty exists from the moment the person offers to be transported places himself in the care and control of the common carrier who accepts him as such passenger. The duty continues until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or has had a reasonable opportunity to leave the carrier’s premises and to look after his baggage and prepare for his departure.

a. Waiting for carrier or boarding of carrierIt is the duty of common carriers of passengers, including common carriers by railroad train, streetcar or motorbus, to stop their conveyances a reasonable length of time in order to afford passengers an opportunity to board and enter, and they are liable for injuries suffered by boarding passengers resulting from the sudden starting up or jerking of their conveyances while they are doing so.

b. Arrival at destinationOnce created, the relationship will not ordinarily terminate until the passenger has, after reaching his destination, safely alighted from the carrier’s conveyance or had a reasonable opportunity to leave the carrier’s premises. All persons who remain on the premises a reasonable time after leaving the conveyance are to be deemed passengers, and what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances, and included a reasonable time to see after his baggage and prepare for his departure.

3. Liability of acts of othersa. Employees

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

b. Other passengers and strangersA common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the carrier’s employees through the exercise of the diligence of a good father of a family would have prevented or stopped the act or omission.

4. Extent of liability for damagesThe following are the kinds of damages that may be recovered in case of death of a passenger:

1. Indemnity for the death of the victim2. Indemnity for loss of earning capacity of the deceased3. Moral damages4. Exemplary damages5. Attorney’s fees and expenses of litigation6. Interest in proper cases

D. Bill of Lading1. Three-Fold character

It is a receipt for the goods shipped and a contract to transport and deliver the same as therein stipulated.

1. As a receipt, it recites the date and place of shipment, described the goods as to quantity, weight, dimensions, identification marks and condition, quality and value.

2. As a contract, it names the contracting parties, which include the consignee, fixes the route, destination, and freight rate or charges and stipulated the rights and obligations assumed by the parties.

3. As a document of title it regulated the relations between a carrier and a holder of the same.

2. Delivery of goodsa. Period of delivery

If a period has been fixed for the delivery of the goods, it must be made within such time, and, for failure to do so, the carrier shall pay the indemnity stipulated in the bill of lading, neither the shipper nor the consignee being entitled to anything else.

b. Delivery without surrender of bill of ladingc. Refusal of consignee to take delivery

1. When a part of the goods transported are delivered and the consignee is able to prove that he cannot make use of the part without the others

2. If the cargo consists of liquids and they have leaked out, nothing remaining in the containers but 1/4 of their contents, on account of inherent defect of cargo.

3. If the goods are damaged and such damage renders the foods useless for the particular purpose for which they are to be used.

4. If there is delay on account of the fault of the carrier

3. Period for filing claims1. Immediately after delivery - if the damage is apparent or2. Within 24 hours from delivery - if the damage is not apparent

4. Period for filing actionsFir coastwise or carriage within the Philippines, within 6 years if no bill of lading has been issued or within 10 years if a bill of lading has been issued. For international carriage from foreign port to the Philippines within 1 year from delivery of goods or the date when the goods have been delivered.

E. Maritime Commerce

1. Charter Parties a. Bareboat/ Demise Charter

The ship owner gives possession of the entire vessel to the charterer. In turn, the charterer supplies, equips, and mans the vessel. The charterer is the owner pro hac vice.

b. Time Charter Vessel is chartered for a particular time or duration. While the ship owner still retains possession and control of the vessel, the charterer has the right to use all vessel’s facilities. The charterer may likewise designate vessel’s destination.

c. Voyage /Trip Charter

A voyage charter is a contract wherein the ship was leased for a single voyage for the conveyance of goods, in consideration of the payment of freight. The shipowner retains the possession, command and navigation of the ship, the charterer merely having use of the space in the vessel in return for his payment of freight. An owner who retains possession of the ship remains liable as carrier and must answer for loss or non delivery of the goods received for transportation. (Cebu Salvage Corp.‐ vs. Philippine Home Assurance Corp., G.R. No. 150403, Jan. 25, 2007)

2. Liability of ship Owners and Shipping Agents a. Liability of Acts of Captain Shipowner /shipping agents are liable for the following acts of captain :

1. Damages suffered by the vessel and its cargo by reason of want of skill or negligence on his part;

2. Thefts committed by the crew, reserving his right of action against the guilty parties;

3. Losses, fines, and confiscations imposed an account of violation of customs, police, health, and navigation laws and regulations;

4. Losses and damages caused by mutinies on board the vessel or by reason of faults committed by the crew in the service and defense of the same, if he does not prove that he made timely use of all his authority to prevent or avoid them;

5. Those caused by the misuse of the powers;

6. For those arising by reason of his going out of his course or taking a course which he should not have taken without sufficient cause, in the opinion of the officers of the vessel, at a meeting with the shippers or supercargoes who may be on board. No exceptions whatsoever shall exempt him from this obligation;

7. For those arising by reason of his voluntarily entering a port other than that of his destination, outside of the cases or without the formalities referred to in Article 612; and

8. For those arising by reason of non observance of the provisions contained in the regulations on ‐situation of lights and maneuvers for the purpose of preventing collisions (Art. 618).

b. Exceptions to Limited Liability

1. Repairs and provisioning of the vessel before the loss of the vessel; (Art. 586)

2. Insurance proceeds. If the vessel is insured, the proceeds will go to the persons entitled to claim from the shipowner; (Vasquez v. CA, G.R. No. L 42926, Sept. 13, 1985)‐

3. Workmen’s Compensation cases (now Employees’ Compensation under the Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17, 1946)

4. When the shipowner is guilty of fault or negligence;Note: But if the captain is the one who is guilty, doctrine may still be invoked, hence, abandonment is still an option.

5. Private carrier; or6. Voyage is not maritime in character.

3. Accidents and Damages in Maritime Commerce a. General Average

Damages or expenses deliberately caused in order to save the vessel, its cargo or both from real and known risk All persons having an interest in the vessel and cargo therein at the time of the occurrence of the average shall contribute.

b. Collisions Collision is the impact of two moving vessels. The governing liabilities of parties in case of collision are as follows:

1. One vessel at fault – The ship owner of such vessel shall be liable for all resulting damages.

2. Both vessels at fault – Each vessel shall suffer their respective losses but as regards the owners of the cargoes, both vessels shall be jointly and severally liable.

3. Vessel at fault not known – Each vessel shall suffer its own losses and both shall be solidarily liable for loses or damages on the cargo. (Doctrine of Inscrutable Fault).

4. Fortuitous event – Each shall bear its own damage.

5. Third vessel at fault – The third vessel shall be liable for losses and damages sustained.

4. Carriage of Goods by Sea Act

a. Application

It will only be applied in terms of loss or damage of goods transported to and from Philippine ports in foreign trade. It may also apply to domestic trade when there is a paramount clause in the contract.

b. Notice of Loss or Damage

1. If the damage is apparent – Notice must be immediately given. The notice may either be in writing or orally.

2. If the damage is not apparent – Notice must be given within 3 days after delivery.

c. Period of Prescription

The suit should be brought within one year from:

1.Delivery of the goods, in case of damage; or2.The date when the goods should have been delivered, in case of loss.

d. Limitation of Liability

1.The liability limit is set at $500 per package or customary freight unless he nature and value of such goods is declared by the shipper.

2.Shipper and carrier may agree on another maximum amount, but not more that amount of damage actually sustained..

F. The Warsaw Convention 1. applicability

This Convention applies to all international carriage of persons, luggage or goods performed by aircraft for reward. It applies equally to gratuitous carriage by aircraft performed by an air transport undertaking

2. Limitation of Liability a. liability to Passengers

In the carriage of passengers the liability of the carrier for each passenger is limited to the sum of 125,000 francs. Where, in accordance with the law of the Court seised of the case, damages may be awarded in the form of periodical payments, the equivalent capital value of the said payments shall not exceed 125,000 francs. Nevertheless, by special contract, the carrier and the passenger may agree to a higher limit of liability. (article 22 warsaw convention)

b. liability for Checked Baggage

The air carrier is liable for destruction, loss or damage to baggage up to 1000 SDRs (approximate amount in local currency). In the case of checked baggage, it is liable even if not at fault, unless the baggage was defective.

c. Liability for Handcarried Baggage

Hand luggage or cabin baggage (also commonly referred to as carry-on baggage) is the type of luggage that passengers are allowed to carry along in the passenger compartment of a vehicle and contain valuables and items needed during the journey. The carrier’s liability for cabin luggage is limited to 2,250 SDRs per passenger.

3. Willful Misconduct

The definition of "willful misconduct" depends in some measure on which court is deciding the issue. Some common factors that courts will consider are:

1. Knowledge that an action will probably result in injury or damage2. Reckless disregard of the consequences of an action, or3. Deliberately failing to discharge a duty related to safety. Courts may also

consider other factors. VI. The Corporation Code

A. Corporation1. Definition(Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)Sec. 2 Corporation defined – A corporation is an artificial being created by operation of law, having the rights of succession and the powers attributes and properties, expressly authorized by law or incident to its existence.Art. 44(3) The following are juridical persons – Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are governed by laws creating or recognizing them. Private corporations are regulated by laws of general application on the subject. Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.Art. 1775 Association and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership.“corporation is an artificial being created by operation of law. It has a personality separate and distinct from the persons composing it, as well as from any other legal entity to which it may be related.” PNB v. Andrada Electric & Eng’ring Co., 381 SCRA 244 (2002).

“an artificial being” - a person created by law or by state; legal fiction “created by law” – its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporationthe definition of a corporation is merely a guide and does not really provide for thebasis of a corporation

Q. Why is it important to know that the corporation is a juridical person?A. To be able to know that the corporation is able to contract with othersQ. Why does the definition of a corporation involve a statement “creature of the law”?A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of limited existence, outside its powers, it does not exist2. Four Corporate Attributes

(based on Section 2)

A ) A CORPORATION IS AN ARTIFICIAL BEING (“ Ability to Contract and Transact ”)- a person created by law or by state; a legal fiction

B) CREATED BY OPERATION OF LAW (“Creature of the Law”)-its existence is dependent upon the consent or grant of the state EXCEPT corporation by estoppel and de facto corporation

C) WITH RIGHT OF SUCCESSION (“Strong Juridical Personality”)-the corporation exist despite the death of its members as a corporation has a personality separate and distinct from that of its individual stockholders. The separate personality remains even if there has been a change in the members and stockholders of the corporation

D ) HAS THE POWERS ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (“Creature of Limited Powers”)

B. Classes of Corporations

What are the classifications of corporation?

1. As to Corporation Code:

a. STOCK CORPORATION one which have capital stock divided into shares and are authorized to distribute‐ to the holders of such shares dividends or allotments or the surplus profits on the basis of the shares held. ( Sec 3 )

b. NON STOCK CORPORATION‐ is one which do not issue shares and are created not for profit but for‐ public good and welfare and where no part of its income is distributable as dividends to its members, trustees, or officers. (Sec 87)

2. As to the number of persons who compose them:

a. Corporation aggregate corporation consisting of more than one member or corporator; ‐b. Corporation Sole religious corporation which consists of one member or corporator only and his successor. ‐

3. As to whether they are for religious purpose or not:

a. Ecclesiastical corporation one organized for religious purpose ‐b. Lay corporation one organized for a purpose other than for religion. ‐

4. As to whether they are for charitable purpose or not:

a. Eleemosynary‐ one established for religious purposes b. Civil one established for business or profit ‐

5. As to state or country under or by whose laws they have been created:

a. Domestic one incorporated under the laws of the Philippines ‐b. Foreign one formed, organized, or existing under any laws other than those of the Philippines and whose‐ laws allow Filipino citizens and corporations to do business in its own country or state. (Sec 123)

6. As to their legal right to corporate existence:

a. De jure one existing both in fact and in law ‐b. De facto one existing in fact but not in law ‐

7. As to whether they are open to the public or not:

a. Close one which is limited to selected persons or members of the family. ‐ (Sec 96 105 ‐b. Open one which is open to any person who may which to become a stockholder or member thereto ‐

8. As to their relation to another corporation

a. Parent or Holding one which is related to another corporation that it has the power either, directly or‐ indirectly to, elect the majority of the director of such other corporation b. Subsidiary one which is so related to another corporation that the majority of its directors can be elected‐ either, directly or indirectly, by such other corporation

9. As to whether they are corporations in a true sense or only in a limited sense:

a. True one which exists by statutory authority ‐b. Quasi one which exist without formal legislative grant. ‐

i. Corporation by prescription one which has exercised corporate powers for an indefinite period‐ without interference on the part of the sovereign power and which by fiction of law, is given the status of a corporation; ii. Corporation by estoppel one which in reality is not a corporation, either de jure or de facto,‐ because it is so defectively formed, but is considered a corporations in relation to those only who, by reason of theirs acts or admissions, are precluded from asserting that it is not a corporation.

10. As to whether they are for public (government) or private purpose:

a. Public one formed or organized for the government or a portion of the State ‐b. one formed for some provate purpose, benefit or end

What are the requisites of a de facto corporation?

1. Organized under a valid law. 2. Attempt in good faith to form a corporation according to the requirements of the law.

Note: The Supreme Court requires that Articles of Incorporation have already been filed with the SEC and the corresponding certificate of incorporation is obtained.

Use of corporate powers. Note: The corporation must have performed the acts which are peculiar to a corporation like entering into a subscription agreement, adopting by laws, and electing directors. ‐

How is the status of a de facto corporation attacked? A: The existence of a de facto corporation shall not be inquired into collaterally in any private suit to which such corporation may be a party. Such inquiry may be made by the Solicitor General in a quo warranto proceeding. (Sec. 20)

Note: However, as long as it exists, a de facto corporation enjoys all attributes of a corporation until the State questions its existence. In comparison with a corporation by estoppel where the stockholders are liable as general partners, stockholders in a de facto corporation are liable as a de jure corporation. Hence, up to the extent of their share holdings.

Distinguish de facto corporation from corporation by estoppel.

A: DE FACTO CORPORATIONa) There is existence in law;b) The dealings among the parties on a corporate basis is not required;

c) When requisites are lacking, it can be corporation by estoppels;

Whereas:

B. CORPORATION BY ESTOPPEL a) There is no existence in law; b) The dealings among the parties on a corporate basis is required; c) It will be considered a corporation in any shape or form

CORPORATE POWERS

The kinds of powers of corporation?

1. Express powers – Granted by law, Corporation Code, and its Articles of Incorporation or Charter, and administrative regulations

2. Inherent/incidental powers – Not expressly stated but are deemed to be within the capacity of corporate entities.

3. Implied/necessary powers – Exists as a necessary consequence of the exercise of the express powers of the corporation or the pursuit of its purposes as provided for in the Charter

General powers of a corporation: 1. To sue and be sued 2. Of succession 3. To adopt and use of Corporate seal 4. To amend its Articles of Incorporation 5. To adopt its By laws ‐6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for non stock corporations‐ :

admit members 7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal

property, securities and bonds; 8. To Enter into merger or consolidation 9. To Make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar

purposes, provided that no donation is given to any a. Political party, b. Candidate and c. Partisan political activity.

10. To establish Pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees – basis of which is the labor code

11. To exercise Other powers essential or necessary to carry out its purposes.

When does the power to sue and be sued commence? A: Upon issuance by SEC of Certificate of Incorporation.

What are the limitations of the corporation in dealing with property? 1. In dealing with any kind of property, it must be in the furtherance of the purpose for which

the corporation was organized. 2. Constitutional limitations – cannot acquire public lands except by lease.

With regard to private land, 60% of the corporation must be owned by the Filipinos, same with the acquisition of a condo unit.

Note: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed the allowed foreign equity, what the law disqualifies is the corporation from owning land.

Special law – subject to the provisions of the Bulk Sales Law

What are the requisites for a valid donation? A: 1. Donation must be reasonable 2. Must be for valid purposes including public welfare, hospital, charitable, cultural, scientific, civic or similar

purposes 3. Must not be an aid in any

a. Political party, b. Candidate and c. Partisan political activity

4. Donation must bear a reasonable relation to the corporation’s interest and not be so remote and fanciful.

The specific powers of a corporation: 1. Power to extend or shorten corporate term. (Sec. 37) 2. Increase or decrease corporate stock. (Sec. 38) 3. Incur, create, or increase bonded indebtedness. (Sec. 38) 4. Deny pre emptive right. ‐ (Sec. 39) 5. Sell, dispose, lease, encumber all or substantially all of corporate assets. (Sec. 40) 6. Purchase or acquire shares. (Sec. 41) 7. Invest corporate funds in another corporation or business for other purpose other than

primary purpose .(Sec. 42) 8. Declare dividends out of unrestricted retained earnings. (Sec. 43) 9. Enter into management contract with another corporation (not with an individual or a

partnership – within general powers) whereby one corporation undertakes to manage all or substantially all of the business of the other corporation for a period not longer than five (5) years for any one term. (Sec. 44)

10. Amend Articles of Incorporation. (Sec. 16)

SPECIFIC POWERSPOWER TO EXTEND OR SHORTEN CORPORATE TERM

Note: May be used as means to voluntarily dissolve a corporation The procedural requirements in extending/shortening corporate term are the following: 1. Majority vote of the Board of Directors or Board of Trustees; 2. Ratification by 2/3 of the SH representing outstanding capital stock or by at least 2/3 of the members in case

of non stock corporation; ‐3. Written notice of the proposed action and of the time and place of the meeting shall be addressed to each

stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally;

4. Copy of the amended AOI shall be submitted to the SEC for its approval; and 5. In case of special corporation, a favorable recommendation of appropriate government agency. (Sec. 37)

Note: The extension must be done during the lifetime of the corporation not earlier than 5 years prior to the expiry date unless exempted. The extension must not exceed 50 years. After the term had expired without extension, the corporation is dissolved. The remedy of the stockholders is reincorporation. Any dissenting stockholder may exercise his appraisal right in case of shortening or extending corporate term (Sec. 37). POWER TO INCREASE OR DECREASE CAPITAL STOCK The procedural requirements in increasing or decreasing capital stock are the following:

1. Majority vote of the BOD;

2. Ratification by stockholders representing 2/3 of the outstanding capital stock; 3. Written notice of the proposed increase or diminution of the capital stock and of the time and place of

the stockholder’s meeting at which the proposed increase or diminution of the capital stock must be addressed to each stockholder at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally

4. A certificate in duplicate must be signed by a majority vote of the directors of the corporation and countersigned by the chairman and the secretary of the stockholder’s meeting, setting forth:

A. That the foregoing requirements have been complied with; B. The amount of increase or diminution of the capital stock; C.If an increase of the capital stock, the amount of capital stock or number of shares of no

par stock actually subscribed, the names, nationalities and residences of the persons subscribing, the amount

D. of capital stock or number of no par stock subscribed by each, and the amount paid by each on his subscription in cash or property, or the amount of capital stock or number of shares of no par stock allotted to each stockholder if such increase is for the purpose of making effective stock dividend authorized;

E.The amount of stock represented at the meeting; and F.The vote authorizing the increase or diminution of the capital stock

Note: The increase or decrease in the capital stock or the incurring, creating or increasing bonded indebtedness shall require prior approval of the SEC.

*Additional requirement with respect to the increase of capital stock:

The application to be filed with the SEC shall be accompanied by the sworn statement of the treasurer of the corporation, showing that at least 25% of the amount subscribed has been paid either in cash or property or that there has been transferred to the corporation property the valuation of which is equal to 25% of the subscription.

*The basis of the required 25% subscription: It shall be based on the additional amount by which the capital stock increased and not on the total capital stock as increased.

Note: There will be no treasurer’s affidavit in case of decrease in capital stock. Corporation need not exhaust its original capital before increasing capital stock.

*Additional requirement with respect to the decrease of capital stock: The same must not prejudice the right of the creditors.

*The ways of increasing or decreasing the capital stock? By increasing or decreasing the:

1.Number of shares and retaining the par value; 2.Par value of existing shares without increasing or decreasing the number of shares; 3.Number of shares and increasing or decreasing the par value.

POWER TO DENY PRE-EMPTIVE-RIGHTS

Pre emptive right: ‐It is the preferential right of shareholders to subscribe to all issues or disposition of shares of any class in

proportion to their present shareholdings. (Sec. 39)

Purpose of pre emptive right: ‐

To enable the shareholder to retain his proportionate control in the corporation and to retain his equity in the surplus.

Questions: 1) Is there pre emptive right on the re issuance of treasury shares? ‐ ‐

Yes. When a corporation reacquires its own shares which thereby become treasury shares, all shareholders are entitled to pre emptive right when the corporation reissues or sells these treasury shares. The‐ re issuance of treasury shares is not among the exception provided by Sec. 39 when pre emptive right does not‐ ‐ exist.

2) May pre emptive right be waived by the stockholder? ‐Yes when the stockholder fails to exercise his pre emptive right after being notified and given an‐

opportunity to avail of such right. 3) Is the pre emptive right of a stockholder transferable? ‐

Yes, unless there is an express restriction in the AOI.

4) When can the corporation deny pre emptive right? ‐The corporation can deny pre emptive right if the articles of incorporation or amendment thereto‐

denies such right.

Distinguish pre emptive right from right of first refusal. ‐

A: PRE EMPTIVE RIGHT ‐ RIGHT OF FIRST REFUSAL

May be exercised even when there is no express provision of law

Arises only by virtue of contractual stipulations but is also granted under the provisions on close corporation

Pertains to unsubscribed portion of the authorized capital stock. A right that may be claimed against the corporation. It includes treasury shares.

Exercisable against another stockholder of the corporation of his shares of stock

POWER TO SELL OR DISPOSE OF CORPORATE ASSETS:

Procedural requirements are the following:

1. Majority vote of the Board of Directors or Board of Trustees 2. Ratification by stockholders representing at least 2/3 of the outstanding capital stock or by at least

2/3 of the members in case of non stock corporation ‐3. Written notice of the proposed action and of the time and place of the meeting addressed to each

stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addressee in the post office with postage prepaid, or served personally. (Sec. 40)

Note: *The sale of the assets shall be subject to the provisions of existing laws on illegal combinations and

monopolies. After such authorization or approval by the stockholders the board may, nevertheless, in its discretion, abandon such SLEMPO. (Sec. 40)

*Any dissenting stockholder shall have the option to exercise his appraisal right.

Questions:

What is meant by substantially all of corporate assets? If the corporation would be:

a) rendered incapable of continuing the business, or b) accomplishing the purpose for which it was incorporated.

When may the corporation forgo the ratification by Stockholders/ members?

1. If sale is necessary in the usual and regular course of business; 2. If the proceeds of the sale or other disposition of such property and assets are to be appropriated for the

conduct of the remaining business; 3. If the transaction does not cover all or substantially all of the assets.

What is the effect of sale of all or substantially all of assets of one corporation to another corporation?

General Rule: The selling corporation of all or substantially all of the assets of the purchasing corporation shall not be

liable for the debts of the transferor corporation.

Exception: Express or implied assumption of liabilities; Merger or consolidation; If the purchase was in fraud of creditors; If the purchaser becomes a continuation of the seller;

If there is violation of the Bulk Sales Law. POWER TO ACQUIRE SHARES:

Can a corporation acquire its own shares?

General Rule: In the absence of statutory authority, the corporation cannot acquire its own shares;

Exception: SEC Opinion, Oct. 12, 1992, imposed the following conditions on its exercise:

a) The capital of the corporation must not be impaired; b) Legitimate and proper corporate objective is advanced; c) Condition of the corporate affairs warrants it; d) Transaction is designed and carried out in good faith e) Interest of creditors not impaired, that is, not violative of the trust fund doctrine.

Note: Sec. 41 of the Code requires that: a) the acquisition should be for a legitimate corporate purpose; and b) there should be unrestricted retained earnings [URE].

Instances where corporation may acquire its own shares:

1. To eliminate fractional shares out of stock dividends; 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale and to purchase delinquent shares sold during said sale;

3. To pay dissenting or withdrawing stockholders (in the exercise of the stockholder’s appraisal right);

4. To acquire treasury shares; 5. Redeemable shares regardless of existence of retained earnings; 6. To effect a decrease of capital stock; 7. In close corporations, when there is a deadlock in the management of the business.

POWER TO INVEST CORPORATE FUNDS IN ANOTHER CORPORATION OR BUSINESS:

What are the requirements? 1. Approval by the majority vote of the Board of Directors or Board of Trustee 2. Ratification by stockholders representing at least 2/3 of the outstanding

capital stock or by at least 2/3 of the members in case of non stock‐ corporation

3. Ratification must be made at a meeting duly called for the purposes, and 4. Prior written notice of the proposed investment and the time and place of

the meeting shall be made addressed to each stockholder or member by mail or by personal service.

Note: Investment of a corporation in a business which is in line with its primary purpose requires only the approval of the board. Any dissenting stockholder shall have appraisal right.

POWER TO DECLARE DIVIDENDS OUT OF UNRESTRICTED RETAINED EARNINGS (URE)

The following are the requirements?

1. Existence of unrestricted retained earnings 2. Resolution of the board 3. In case of stock dividend, resolution of the board with the concurrence of votes representing 2/3 of

outstanding capital. Questions:

*What are unrestricted retained earnings? These are retained earnings which have not been reserved or set aside by the board of directors for

some corporate purpose.

*Who are entitled to receive dividends? The stockholders of record date in so far as the corporation is concerned; if there is no record date, the

stockholders at the time of declaration of dividends (not at the time of payment).

Note: In case of transfer, dividends declared before the transfer of shares belong to the transferor and those declared after the transfer belongs to the transferee.

*Who are entitled to receive dividends in case of mortgaged or pledged shares? General Rule:

The mortgagor or the pledgor has the right to receive the dividends.

Exception:When the mortage or pledge is recorded in the books of the corporation, in such a case then the

mortgagee or pledgee is entitled to receive the dividends.

Forms of Dividends:

1) Cash Cash dividends due on delinquent stock shall first be applied to the unpaid balance on the subscription

plus cost and expenses. 2) Stock

Stock dividends are withheld from the delinquent stockholder until his unpaid subscription is fully paid.

3) Property Stockholders are entitled to dividends PRO RATA based on the total number of shares and not on the‐

amount paid on shares.

Questions:

When may corporation declare dividends?

General Rule: Even if there are existing profits, BOD has discretion to determine whether dividends are to be declared.

Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid in‐ capital stock. Exception to Exception:

a. Definite corporate expansion projects approved by the board of directors; b. Corporation is prohibited under any loan agreement with any financial institution or creditor from

declaring dividends without its/his consent and such consent has not yet been secured; c. The retention is necessary under special circumstances obtaining in the corporation, such as when there

is a need for special reserve for probable contingencies.

What if there is a wrongful or illegal declaration of dividends? The Board of Directors is liable. The stockholders should return the dividends to the corporation (solutio indebiti).

What are the sources of dividends?

General Rule: Dividends can only be declared out of actual and bona fide unrestricted retained earnings.

Exception: Dividends can be declared out of capital in the following instances: a. Dividends from investments wasting assets corporation; b. Liquidating dividends

What are the sources of retained earnings? Is it available for dividends?

A: SOURCES OF RETAINED EARNINGS

AVAILABILITY FOR DIVIDENDS

Paid in surplus ‐ – It is the difference between the par value and the issued value or selling price of the shares

It cannot be declared as cash dividend but can be declared only as stock dividends

Revaluation surplus – Increase in the value of a fixed asset as a result of its appreciation. They are by nature subject to fluctuations.

Cannot be declared as dividends because there is no actual gain (gain in paper only).

Reduction surplus–the surplus arises from the reduction of the

It cannot be declared as cash dividend but can be

par value of the issued shares of stocks.

declared only as stock dividends

Gain from Sale of Real Property Available as dividends Treasury Shares Cannot be declared as

stock or cash dividends but it may be declared as property dividend

Operational Income Income Available as dividends

Distinguish cash and stock dividends?

CASH DIVIDENDS STOCK DIVIDENDS Part of general fund Part of capital Results in cash outlay

No cash outlay

Not subject to levy by corporate creditors

Once issued, can be levied by corporate creditors because they’re part of corporate capital

Declared only by the board of directors at its discretion (majority of the quorum only, not majority of all the board)

Declared by the board with the concurrence of the stockholders representing at least 2/3 of the outstanding capital stock at a regular/special meeting

Does not increase the corporate capital

Corporate capital is increased

Its declaration creates a debt from the corporation to each of its stockholders

No debt is created by its declaration

If received by individual: subject to tax; If received by corporation: not subject to tax

Not subject to tax either received by individual or a corporation

Cannot be revoked after announcement

Can be revoked despite announcement but before issuance

Applied to the unpaid balance of delinquent shares

Can be withheld until payment of unpaid balance of delinquent shares

POWER TO ENTER INTO MANAGEMENT CONTRACT

Management contract:

It is any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec. 44)

Note: Sec. 44 refers only to a management contract with another corporation. Hence, it does not apply to management contracts entered into by a corporation with natural persons.

The following are the requirements:

1. Contract must be approved by the majority of the BOD or BOT of both managing and managed corporation; 2. Ratified by the stockholders owning at least the majority of the outstanding capital stock, or members in case

of a non stock corporation, of both the managing and the managed corporation, at a meeting duly called for‐ the purpose

3. Contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the outstanding capital stock entitled to vote, 2/3 members when:

a. Stockholders representing the same interest in both of the managing and the managed corporation own or control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation;

b. Majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the managed corporation.

What is the allowed period for every management contract entered into by the corporation?

General Rule: Management contract shall be entered into for a period not longer than 5 years for any one term.

Exception: In cases of service contracts or operating agreements which relate to the exploitation, development,

exploration or utilization of natural resources, it may be entered for such periods as may be provided by the pertinent laws or regulations.

ULTRA VIRES ACTS:

Ultra Vires acts:

Those powers that are not conferred to the corporation by law, by its AOI and those that are not implied or necessary or incidental to the exercise of the powers so conferred. (Sec 45)

Types of ultra vires acts:

1. Acts done beyond the powers of the corporation (through BOD) 2. Ultra vires acts by corporate officers 3. Acts or contracts which are per se illegal as being contrary to law.

Doctrine of apparent authority:

If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority.

When is the corporation estopped to deny ratification of contracts or acts entered by its officers or agents?

Generally, when the corporation has knowledge that its officers or agents exceed their power, it must promptly disaffirm the contract or act, and allow the other party or third person to act in the belief that it was authorized or has been ratified. Otherwise, if it acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be implied. (Premiere Development Bank vs. CA, G.R. No. 159352, Apr. 14, 2004)

Consequences of an ultra vires act:

Ultra vires acts entered into by the board of directors binds the corporation and the courts will not interfere unless terms are oppressive and unconscionable.

These are the effects for the specific acts:

1. Executed contract – courts will not set aside or interfere with such contracts 2. Executory contracts – no enforcement even at the suit of either party (void and unenforceable) 3. Partly executed and partly executory – principle of “no unjust enrichment at expense of another” shall

apply 4. Executory contracts apparently authorized but ultra vires – the principle of estoppel shall apply.

(Gamboa vs. Victoriano, G.R. No. L 43324. May 5, 1979) ‐

Distinctions between ultra vires acts and illegal acts:

ULTRA VIRES ACT ILLEGAL ACTS Not necessarily unlawful, but outside the powers of the corporation

Unlawful; against law, morals, public policy, and public order

Can be ratified Cannot be ratifiedCan bind the parties if wholly or partly executed

Cannot bind the parties

What are the remedies in case of ultra vires act?

1. State a. Obtain a judgment of forfeiture; or b. The SEC may suspend or revoke the certificate of registration

2. Stockholders a. Injunction; or b. Derivative suit

3.Creditors ‐ Nullification of contract in fraud of creditors.

Doctrine of Individuality of Subscription:

A subscription is one entire and indivisible whole contract. It cannot be divided into portions. (Sec. 64)

Doctrine of equality of shares?

Where the articles of incorporation do not provide for any distinction of the shares of stock, all shares issued by the corporation are presumed to be equal and enjoy the same rights and privileges and are also subject to the same liabilities. (Sec. 6)

TRUST FUND DOCTRINE:

Trust fund doctrine: The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which the corporation may not dissipate. The creditors may sue the stockholders directly for the latter’s unpaid subscription.

Exceptions to the trust fund doctrine:

The Code allows distribution of corporate capital only in these instances:

1. Amendment of the Article of Incorporation to reduce authorized capital stock; 2. Purchase of redeemable shares by the corporation regardless of existence of unrestricted retained earnings; 3. Dissolution and eventual liquidation of the corporation.

How are corporate powers exercised?

1. By the shareholders – The shareholders participate in controlling the affairs of the corporation by exercising their right to vote. They can elect the directors who will actually govern the important matters that are still reserved to them by the Corporation Code. (Aquino, 2006)

2. By the Board of Directors – The Board of Directors is primarily responsible for the governance of the corporation. Their primary duty is to set the policies for the accomplishment of the corporate objectives. (Art. 3, Revised Code of Corporate Governance). They elect the officers who carry out the policies

3. By the Officers – They are elected by the Board of Directors tasked to carry out the policies laid down by the Board, the articles of incorporation and the by-laws;

J. DISSOLUTION AND LIQUIDATION:

Dissolution of Corporation:

It is the extinguishment of the franchise of a corporation and the termination of its corporate existence.

Modes of dissolution of corporation:

a) Voluntary; and b) Involuntary dissolution.

Voluntary modes of dissolution of a corporation:

1. Where no creditors are affected Procedure:

a) Majority vote of the board of directors or trustees; and b) Resolution duly adopted by the affirmative vote of the stockholders owning at least 2/3 of the

outstanding capital stock or at least 2/3 of the members at a meeting duly called for that purpose. c) A copy of the resolution authorizing the dissolution shall be certified by a majority of the board of

directors or trustees and countersigned by the secretary of the corporation. d) Such copy shall be filed with SEC. (Sec. 118)

2. Where creditors are affected Procedure: a. Filing a petition for dissolution with the SEC b. Such petition must be signed by majority of the board of directors or trustees c. Must also be verified by the president or secretary or one of its directors d. The dissolution was resolved upon by the affirmative vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members at a meeting duly called for that purpose. e. If there is no sufficient objection, and the material allegations of the petition are true, a judgment shall be rendered dissolving the corporation and directing such disposition of its assets as justice requires, and may appoint a receiver to collect such assets and pay the debts of the corporation. (Sec. 119)

3.By shortening the corporate term – A voluntary dissolution may be effected by amending the AOI to shorten its corporate term pursuant to

the provisions of the Code. A copy of the amended AOI shall be submitted to the SEC. Upon approval of the amended AOI of the expiration of the shortened term, the corporation shall be deemed dissolved without any further proceedings, subject to the provisions of the Code on liquidation. As an additional requirement, the SEC requires to submit the final audited financial statement not older than 60 days before the application for shortening the corporate term.

4. In case of a corporation sole, by submitting to the SEC for approval, a verified declaration of dissolution (Sec.115). This merely needs the affidavit of the presiding elder. No need for a board resolution. 5. By merger or consolidation, whereby the constituent corporations automatically cease upon issuance by the SEC of the certificate of merger or consolidation, except the surviving or consolidated corporation which shall continue to exist. (Secs. 79 and 80)

6. Expiration of the corporate term (Sec. 11).

Involuntary modes of dissolution of a corporation:

1. By expiration of corporate term 2. Failure to organize and commence transaction of its business within 2 years

from date of incorporation (Sec. 22). 3. Continuous inoperation for a period of at least 5 years. 4. Legislative dissolution. In this case, a corporation created by special law is

dissolved also by a special law. 5. Dissolution of SEC on grounds under existing laws.

What are examples of dissolution by the SEC under existing laws? Examples of dissolution by the SEC under special laws are:

1. Failure to file by laws within the required period but, according to a SEC Opinion, SEC will‐ give it the opportunity to explain such failure and not automatically dissolve the corporation.

2. By order of the SEC upon a verified petition and after proper notice and hearing on the ground of serious misrepresentation as to what the corporation can do or is doing to the great prejudice of or damage to the general public.

3. Revocation or forfeiture of the franchise or certificate of incorporation due to its misuse or non use pursuant to ‐ quo warranto proceedings filed by the Solicitor General.

4. Failure to file required reports

Modes of liquidation?

1. By the corporation itself or its board of directors or trustees; (Sec. 122, par. 1) 2. By a trustee to whom the assets of the corporation had been conveyed. (Sec.

122, par. 2); (Board of Liquidators v. Kalaw, G.R. No. L 18805, Aug. 14, 1967) ‐3. By a management committee or rehabilitation receiver appointed by SEC; (Sec.

119, last par.)

Questions:

*Does a corporation in the process of liquidation have legal authority to engage in any new business?

No, a corporation in the process of liquidation has no legal authority to engage in any new business, even if the same

is in accordance with the primary purpose stated in its article of incorporation.

*What are the consequences if the liquidation is not terminated within the 3 year period? ‐

1. Pending suits for or against the corporation which were initiated prior to the expiration of the 3 year period‐ shall continue. (Gelano v. CA, G.R. No. L 39050, Feb. 24, 1981) ‐

2. New actions may still be filed against the trustee of the corporation even after the expiration of the 3‐year period but before the affairs of said corporation have been finally liquidated or settled by the trustee . (Republic v. Marsman, G.R. No. L 18956 Apr. 27, 1972) ‐

3. A corporation which has a pending action which cannot be finished within the 3 year period is authorized to‐ convey all its property, including pending choses of action, of a trustee to enable it to prosecute and defend suits by or against the corporation beyond the 3 year period. Where no trustee is appointed, its counsel‐ who prosecuted and represented the interest of the corporation may be considered as trustee of said corporation, at least with respect to the matter in litigation (Gelano v. CA, G.R. No. L 39050, Feb. 24, 1981).‐ The directors may also be permitted to continue as trustees to complete the liquidation. (Clemente v. CA, G.R. No. 82407, Mar. 27, 199

4. The creditors of the corporation who were not paid may follow the property of the corporation that may have passed to its stockholders unless barred by prescription or laches or disposition of said property in favor

*What is the rationale behind the 3 year period? ‐

The continuance of a corporation’s legal existence for three years for the purpose of enabling it to close up its business is necessary to enable the corporation to collect the demands due it as well as to allow its creditors to assert the demands against it.

*May the corporation, through its president condone penalties and charges after it had been placed under receivership?

No. The appointment of a receiver operates to suspend the authority of a corporation and of its directors and officers over its property and effects, such authority being reposed in the receiver (Yam v. CA, G.R. No. 104726 Feb 11, 1999).

*When may the Commission appoint a receiver to undertake the winding up and liquidation of a corporation?

Where the application for dissolution of a corporation is upon application, affecting rights of creditors, or involuntarily initiated by verified complaint, the Commission may appoint a receiver to undertake the winding up rather than entrust the responsibility to directors and corporate officers.

*What is the effect if the corporation appoints a trustee and convey all its property to him for the benefit of stockholders, members, creditors and other persons in interest?

After such conveyance to the trustee, all interest which the corporation had in the property terminates and the legal interests vests in the trustee, subject to the beneficial interest of stockholders, members, creditors or other persons in interest.

Q: When does the act of the officers bind the corporation?

A: 1. If it is provided in the by laws ‐2. If authorized by the board

A: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agent’s authority. Q: When is the corporation estopped to deny ratification of contracts or acts entered by its officers or agents?

C. Nationality of Corporations

1. Place of Incorporation TestThis means that corporate nationality

shall be in accordance with the laws of the country where it was created or organized.Example: If X-Corp is organized in accordance with Philippine laws, then it is a Filipino corporation; if in accordance with Chinese laws, it is a Chinese corporation. 2. Control Test

The citizenship of the corporation is determined by the citizenship of its controlling stockholders. If the controlling stockholders of a corporation are American corporation; it is an American corporation.

A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60% and where the 60-40 Filipino-alien is not in doubt. 3. Grandfather Rule

Applied in determining the nationality of a corporation. It traces the nationality of the stockholders of investors so as to ascertain the nationality of the corporation where the investment is made.

D. Corporate Juridical Personality1. Doctrine of Separate Juridical Personality - A Corporation has a personality Separate and

Distinct from its Stockholders or Members a. Liability for Torts and Crimes - TORTS: A tort is a wrongful act that injures

or interferes with another's person or property. A tort case is a civil court proceeding. The accused is the

"defendant" and the victim is a "plaintiff." The charges are brought by the plaintiff. If the

defendant loses, the defendant has to pay damages to the plaintiff.

CRIMES: A crime is a wrongful act that the state or federal government has identified as a crime. A criminal case is a criminal proceeding. The accused is also called a 'defendant". The victim is the person who has been hurt or the state of Georgia or other governmental entity. The charges are brought by the government. If the defendant loses, the defendant must serve a sentence. A fine is paid to the government

and there is possible restitution to the victim.

b. Recovery of Moral Damages

2. Doctrine of Piercing the Corporate Veil - While a corporation cannot generally be

made liable for acts or liabilities of its stockholders or members, and vice versa because a corporation has a personality separate and distinct from its stockholders or members, however, the corporate existence is disregarded under this doctrine where the corporation is formed or used for illegitimate purposes or justify wrong or evade a just and valid obligation. In such a case, the corporation and the stockholders shall be considered as one and the same.

- Separate and Distinct personality of the corporation and its stockholders are pierced and treated as one in case the corporation is used as cloak for illegal acts.

a. Grounds for Application of Doctrine- corporation is formed or used for

illegitimate purposes- justify wrong- evade a just and valid obligation

b. Test in Determining Applicability- Avoidance on redress of fraud- Prevention of the evasion of statute

or law- Prevention of the evasion of

contract- Internal corporate dealings

disregarding corporate entity where third persons are not involved

- Corporate agencies or affiliates of other corporations

H. Stockholders and Members – owner of stocks in a corporation

1. Rights of Stockholders and Members- right to vote at stockholders

meetings either in person or proxy- To receive his proportionate share

of the profits of the corporation by way of dividends

- To approve the declaration of stock dividends

- Pre-emptive right- To inspect corporate books and

records- Right to financial statements- Right to Appraisal- Right to participate proportionately

in the distribution of corporate assets upon corporate liquidation following dissolution and winding up

- Right to file derivative suit- Right to the issuance of a certificate

of stock upon compliance with the conditions which entitle him to one

a. Doctrine of Equality of Shares – The shares issued by a corporation are presumed to be equal.2. Participation in Managementa. Proxy – authority given by a stockholder to another to vote for him at a shareholders meeting.b. Voting Trust – irrevocable proxies. One created by an agreement between a group of the stockholders of a corporation and a trustee, or by a group of identical agreements between individual stockholders and a common trustee, whereby it is provided that for a term of years, or for a period contingent upon a certain event, or until the agreement is terminated, control over the stock owned by such stockholders, either for certain purposes or for all, shall be lodged in the trustee, either with or without a reservation to the owners or persons designated by them of the power to direct how such control shall be used.c. Cases When Stockholders’ Action is Requiredi. By a Majority Voteii. By a Two-Thirds Voteiii. By Cumulative Voting3. Proprietary Rightsa. Right to Dividendsb. Right of Appraisalc. Right to Inspectd. Pre-Emptive Righte. Right to Votef. Right to Dividendsg. Right of First Refusal4. Remedial Rights

a. Individual Suitb. Representative Suitc. Derivative Suit5. Obligation of a Stockholder6. Meetingsa. Regular or Speciali. When and Whereii. Noticeb. Who Calls the Meetingsc. Quorumd. Minutes of the MeetingL. Mergers and Consolidations

1. Definition and Concept - Merger is the absorption of one or more

corporations by another existing corporation, which retains its identity and takes over the rights, privileges, franchises and properties, and assumes all the liabilities and obligations of the absorbed corporation(s) in the same manner as if it had itself incurred such liabilities or obligations. The absorbing corporation continues its existence while the life or lives of the other corporation(s) is/are terminated. Consolidation is the union of two or more corporations into a single

new corporation, called the consolidated corporation, all the constituent corporations thereby ceasing to exist as separate entities. The consolidated corporation shall thereupon and thereafter possess all the rights, privileges, immunities, franchises and

properties, and assume all the liabilities and obligations of each of the constituent corporations in the same manner as if it had itself incurred such liabilities or obligations.

2. Constituent vs. Consolidated Corporation Constituent -A word used as a correlative to

"attorney," to denote one who constitutes another his agent or invests the other with authority to act for him. ' It is also used in the language of politics, as a correlative to "representative," the constituents of a legislator being those whom he represents and whose interests he is to care for in public affairs; usually the electors of his district.

Consolidated Corporation- The combining of assets, liabilities and other financial items of two or more entities into one. In the context of financial accounting, the term consolidate often refers to the consolidation of financial statements, where

all subsidiaries report under the umbrella of a parent company. These statements are called consolidated financial statements. Consolidation also refers to the merger and acquisition of smaller companies into larger companies. A consolidation, however, differs from a merger in that the

consolidated companies could also result in a new entity, whereas in a merger one company absorbs the other and remains in existence while the other is dissolved.

3. Plan of Merger or Consolidation-Two or more corporations may merge into a

single corporation which shall be one of the constituent corporations or may consolidate into a new single corporation which shall be the consolidated corporation.

4. Article of Merger or Consolidation- A. Upon receiving the approvals required by

Sections 53-14-1, 53-14-2 and 53- 14-3 NMSA 1978, articles of merger or articles of consolidation shall be executed by each corporation by an authorized officer and shall set forth: (1) the plan of merger or the plan of consolidation; (2) as to each corporation, either: (a) the number of shares outstanding, and, if the shares of any class are entitled to vote as a class, the

designation and number of outstanding shares of each such class; or (b) a statement that the vote of shareholders is not required by virtue of Subsection D of Section 53-14- 3 NMSA 1978; 112 53-14-5 BUSINESS CORPORATIONS; MERGERS AND CONSOLIDATIONS 53-14-5 (3) as to each corporation the approval of whose

shareholders is required, the number of shares voted for and against the plan, respectively, and, if the shares of any class are entitled to vote as a class, the number of shares of each such class voted for and against the plan, respectively; and (4) as to the

acquiring corporation in a plan of exchange, a statement that the adoption plan and performance of its terms were duly approved by its board of directors and such other requisite corporate action, if any, as may be required of it.

B. The original of the articles of merger, consolidation or exchange together with a copy, which may be signed, photocopied or conformed, shall be delivered to the commission [secretary of state]. If the commission [secretary of state] finds that the

articles conform to law, it shall, when all fees have been paid: (1) endorse on the original and copy the word "filed" and the month, day and year of the filing; (2) file the original in its office; and (3) issue a certificate of merger, consolidation or exchange to

which it shall affix the file-stamped copy. C. The certificate of merger, consolidation or

exchange, together with the file-stamped copy of the articles affixed to it shall be returned by the commission [secretary of state] to the surviving, new or acquiring corporation or its representative.

5. Procedure

Any two or more domestic corporations may consolidate into a new corporation pursuant to a plan of consolidation approved in the manner provided in the Business Corporation Act [Chapter 53, Articles 11 to 18 NMSA 1978]. The board

of directors of each corporation shall, by a resolution adopted by each such board, approve a plan of consolidation setting forth:

A. the names of the corporations proposing to consolidate, and the name of the new corporation into which they propose to consolidate, which is hereinafter designated as the "new corporation";

B. the terms and conditions of the proposed consolidation;

C. the manner and basis of converting the shares of each corporation into shares, obligations or other securities of the new corporation or any other

corporation or, in whole or in part, into cash or other property;

D. with respect to the new corporation, all of the statements required to be set forth in articles of incorporation for corporations organized under the Business Corporation Act [Chapter 53, Articles 11 to 18 NMSA 1978]; and

E. other provisions with respect to the proposed consolidation as deemed

necessary or desirable.6. Effectivity

(A) Unless a later date is specified in the agreement, a merger or consolidation under sections 1729.35 and 1729.36of the Revised Code is effective when the certificate of merger or consolidation is filed in accordance with section1729.38 of the Revised Code. If, after filing the certificate but before the merger or consolidation is effective, the merger or consolidation is amended or abandoned, as provided in divisions (E) and (F) of section 1729.35 of the Revised Code, an authorized officer of each constituent association shall sign a certificate of amendment or abandonment stating that the agreement of merger or consolidation has been amended or abandoned and the date of such action, and shall file the certificate in the same manner as the certificate of merger or consolidation. Any certificate of amendment or abandonment shall be filed prior to

the date the merger or consolidation would otherwise be effective.

(B) In the case of a merger, the surviving association or entity is the one designated in the agreement. In the case of a consolidation, the new association or entity is the one designated in the agreement. The separate existence of all constituent

associations or entities in the agreement, except the surviving or new association or entity, ceases upon

the effective date of the merger or consolidation.(C) The surviving or new association or entity

possesses all the rights and all the property of each constituent association or entity, and is responsible for all their obligations. Title to any property is vested in the surviving or new association or entity with no reversion or impairment of the property caused by the merger or consolidation. A merger or consolidation shall not be considered an assignment. No right of any creditor shall be impaired by the merger or consolidation without the creditor's consent.

(D) If the surviving organization is an association, the articles of incorporation are amended to the extent provided in the agreement of merger.

7.LimitationA bond covenant that restricts in some way a

firm's ability to merge or consolidate with another firm.

8.EffectsUnless the commission [secretary of state]

disapproves pursuant to Subsection A of Section 53-18-2 NMSA 1978, a merger, consolidation or exchange shall become effective upon delivery of the articles of merger, consolidation or exchange to the commission [secretary of state] or on such later date, not more than thirty days subsequent to the delivery thereof to the commission[secretary of state], as shall be provided for in the plan. When a merger or consolidation has become effective:

A. the several corporations parties to the plan of merger or consolidation shall be a single

corporation, which, in the case of a merger, shall be that corporation designated in the plan of merger as the surviving corporation and, in the case of a

consolidation, shall be the new corporation provided for in the plan of consolidation;

B. the separate existence of all corporations parties to the plan of merger or consolidation, except the surviving or new corporation, shall cease;

C. the surviving or new corporation shall have all the rights, privileges, immunities and

powers and shall be subject to all the duties and liabilities of a corporation organized under the

Business Corporation Act [Chapter 53, Articles 11 to 18 NMSA 1978];

D. the surviving or new corporation shall there upon possess all the rights, privileges, immunities and franchises of a public or private nature of each of the merging or consolidating corporations; and all property, real, personal and mixed and all debts due on whatever account, including subscriptions to shares, and all other chooses in action and every other interest of, or belonging to, or due to, each of the corporations so merged or consolidated shall be taken and deemed to be transferred to and vested in such single corporation without further act or deed, and the title to any real estate, or any interest therein, vested in any of such corporations shall not revert or be in any way impaired by reason of the merger or consolidation;

E. the surviving or new corporation shall thenceforth be responsible and liable for all the liabilities and obligations of each of the corporations so merged or consolidated, and any claim existing or action or proceeding pending by or against any of such corporations may be prosecuted as if the merger or consolidation had not taken place, or the surviving or new corporation may be substituted in its place. Neither the rights of creditors nor any liens upon the property of any such corporation shall be impaired by the merger or consolidation;

F. in the case of a merger, the articles of incorporation of the surviving corporation shall be deemed to be amended to the extent, if any, that changes in its articles of incorporation are stated in the plan of merger, and, in the case of a consolidation, the statements set forth in the articles of consolidation and which are required or permitted to be set forth in the articles of incorporation of corporations

organized under the Business Corporation Act shall be deemed to be the original articles of incorporation of the new corporation; and

G. when a merger, consolidation or exchange has become effective, the shares of the corporation or corporations party to the plan that are, under the terms of the plan, to be converted or exchanged shall cease to exist, in the case of a merger or consolidation, or be deemed to be exchanged, in the case of an exchange, and the holders of such shares shall thereafter be entitled only to the shares, obligations, other securities, cash or other property into which they shall have been converted or for which they shall have been exchanged, in accordance with the plan, subject to any rights under Section 53-14-4 NMSA 1978.

E. Incorporation and Organization

1. Promoter

Who Are Promoters?“Promoter” is a person who, acting alone or with others, takes initiative in founding and organizing the business or enterprise of the issuer and receives consideration there for.(Sec. 3.10, Securities Regulation Code [R.A. 8799])

The definition of promoter is important to determine the liability for promoter’s contract. Before you can make a promoter liable, you must be able to determine who is the promoter. He must be the one who takes initiative on the founding and organization of the business venture which eventually ends up as the corporation being organized.Q: Promoter v. AgentA: The promoters are not the corporation itself, and although they may be regarded, for certain purposes as sustaining to the corporation a relationship similar to that of an agent, strictly speaking they cannot be regarded as such, there being at that time no existing principal.Q: Promoter v. TrusteeA: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be entirely disinterested, while persons engaged in promotion expect to receive and seek to obtain a liberal award or profit for their initiative.

a. Liability of Promoter Personal Liability of Promoter on Pre-Incorporation Contracts

GENERAL RULE: Promoters are personally liable on their contracts made on behalf of a corporation to be formed.EXCEPTION: If there is an express or implied agreement to the contrary. It must be noted that the fact that the corporation when formed has adopted or ratified the contract does not release the promoter from responsibility unless a novation was intended.

WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915) Individual promoters cannot escape liability where they buy machinery, receive them in their possession and authorize one member to issue a note, in contemplation of organizing a corporation which was not formed. (see Campos' notes p. 258-259). The agent is

personally liable for contracts if there is no principal. The making of partial payments by the corporation, when later formed, does not release the promoters here from liability because the corporation acted as a mere stranger paying the debt of another, the acceptance of which by the creditor does not release the debtors from liability over the balance. Hence, there is no adoption or ratification. HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963) The rule is that if the contract is partly to be performed before incorporation, the promoters solely are liable. Even if the promoter signed "on behalf of corporation to be formed, who will be obligor," there was here an intention of the parties to have a present obligor, because three-fourths of the payment are to be made at the time the drawings or plans in the architectural contract are completed, with or without incorporation. A purported adoption by the corporation of the contract must be expressed in a novation or agreement to that effect. The promoter is liable unless the contract is to be construed to mean: 1) that the creditor agreed to look solely to the new corporation for payment; or 2) that the promoter did not have any duty toward the creditor to form the corporation and give the corporation the opportunity to assume and pay the liability. QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961) The promoters here are not liable because the contract imposed no obligation on them to form a corporation and they were not named there as obligors/promissors. The

creditor-plaintiff was aware of the inexistence of the corporation but insisted on naming it as obligor because the planting season was fast approaching and he needed to dispose of the seedlings. There was no intent here by plaintiff-creditor to look to the promoters for the performance of the obligation. This is an exception to the general rule that promoters are personally liable on their contracts, though made on behalf of a corporation to be formed.

b. Liability of Corporation for Promoter’s ContractsLiability of Corporation for Promoter’s

ContractsWhile a

corporation could not have been a party to a promoter's contract since it did yet exist at the time the contract was entered into and thus could not possibly have had an agent who could legally bind it, the corporation may make the contracts its own and become bound thereon if, after incorporation, it:

(1) Adopts or ratifies the contract; or

(2) Accepts its benefits with knowledge of the terms thereof.

It must be

noted, however, that the contract must be adopted in its entirety; the corporation cannot adopt only the part that is beneficial to it and discard that which is burdensome. Moreover, the contract must be one which is

within the powers of the corporation to enter, and one which the usual agents of the company have express or implied authority to enter.

McARTHUR V. TIMES PRINTING CO. (48 Minn. 319, 51 N.W. 216; 1892) It is not a requisite that a corporation's adoption or acceptance of a promoter's contract be expressed, but it may be inferred from acts or acquiescence on the part of the corporation, or its authorized agents, as any similar original contract might be shown. The right of agents to adopt an agreement originally made by promoters depends upon the purposes of the corporation and the nature of the agreement. The agreement must be one which the corporation itself could make and one which the usual agents of the company have express or implied authority to enter into.CLIFTON v. TOMB (21 F. 2d 893;

1921) Whatever may be the proper legal theory by which a corporation may be bound by the contract (ratification, adoption, novation, a continuing offer to be accepted or rejected by the corporation), it is necessary in all cases that the corporation should have full knowledge of the facts, or at least should be put upon such notice as would lead, upon reasonable inquiry, to the knowledge of the facts.CAGAYAN FISHING DEV. CO. v.

SANDIKO (65 Phil. 223; 1937) A promoter could not have acted as agent for a corporation

that had no legal existence. A corporation, until organized, has no life therefore no faculties. The corporation had no juridical personality to enter into a contract. Also see Caram v. CA

Corporate Rights under Promoter’s Contracts

Should the other contracting party fail to perform its part of the bargain, the corporation which has adopted or ratified the contract may either sue for:(1) Specific

performance; or(2) Damages

resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute sufficient adoption or ratification to give the corporation a cause of action.

BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)

When the corporation was formed, the incorporators took upon themselves the whole thing, and ratified all that had been done on its behalf. Though there was no formal assignment of the contract to the corporation, the acts of the incorporators were an adoption of the contract. Therefore the corporation has the right to sue for damages for the breach of contract.

3. Corporate Name - Limitations on Use of Corporate NameCorporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit , 60 Phil. 549[1934]). Sec. 18 Corporate Name – No corporate name may be allowed by the SEC if the proposed name is identical or deceptively confusing or similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws. When a change in the corporate name is approved, the Commission shall issue an amended certificate of incorporation under the amended name.

Sec. 42 Power to invest corporate funds in another corporation or business or for any other purpose – Subject to the provisions of this Code, a private corporation may invest its funds in any other corporation or business or for any other purpose other than the primary purpose for which it was organized when approved by a majority of the board of directors or trustees and ratified by the stockholders representing 2/3 of the outstanding capital stock or at least 2/3 of the members in case of non-stock corporations, at a stockholders’ or members meeting duly called for the purpose. Written notice of the proposed investment and the time and place of the meeting shall be addressed to each stockholder or member at his place of residence as shown on the books of the corporation and deposited to the addresse in the post office with postage prepaid, or served personally: Provided: That any dissenting stockholder shall have appraisal right as provided in this Code: Provided, however, That where the investment by the corporation is reasonably necessary to accomplish its primary purpose as stated in the articles of incorporation, the approval of the stockholders or members shall not be necessary.

Parties organizing a corporation must choose a name at their peril; and the use of a name similar to one adopted by another corporation, whether a business or a nonprofit organization, if misleading or likely to injure the exercise of its corporate functions, regardless of intent, may be prevented by the corporation having a prior right. Ang MgaKaanib sa Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372 SCRA171 (2001).

Similarity in corporate names between two corporations would cause confusion to the public especially when the purposes stated in their charter are also the same type of business. Universal Mills Corp. v. Universal Textile Mills Inc. , 78 SCRA 62 (1977).

Section 18 of Corporation Code expressly prohibits the use of a corporate name which is “identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws.” The policy behind the foregoing prohibition is to avoid fraud upon the public that will occasion to deal with the entity concerned, the evasion of legal obligations and duties, and the reduction of difficulties of administration and supervision over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252 (2002); Lyceum of the

Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).

A corporation has no right to intervene in a suit using a name, not even its acronym, other than its registered name, as the law requires and not another name which it had not registered.Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253(1997).

There would be no denial of due process when a corporation is sued and judgment is rendered against it under its unregistered trade name, holding that “[a] corporation maybe sued under the name by which it makes itself known to its workers.” Pison-Arceo Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997).

A corporation may change its name by the amendment of its articles of incorporation, but the same is not effective until approved by the SEC. Philippine First Insurance Co. v.Hartigan , 34 SCRA 252 (1970).

A change in the corporate name does not make a new corporation, and has no effect on the identity of the corporation, or on its property, rights, or liabilities. Republic Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).

The name of a corporation is very important, the incorporators constituting as body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein. Such name is fatal in commercial transactions. The public may only know the corporation through its name. The name of a corporation is (1) essential to its existence (2) it cannot change its name xcept in the manner provided by the statute (3) by that name alone is it authorized to transact business and (4) it is through its name that a corporation can sue and be sued and perform all other legal acts.

SEC reserves the right to order a corporation to change name when it appears that there is an identical name.

Guidelines on Corporate Names:1.) Name must contain “Corp.” or “Inc.”2.) Name must not tend to mislead or confuse the public and must not contain such descriptive words as “excellent” “fair” “good”, etc.3.) Name must not be similar to a name already used by another partnership or corporation.

4.) If proposed name contains a word similar to a word already used as a part of the firm name of a registered corporation, proposed name must contain two other words different from the name of the company already registered.5.) If name or surname used as part of corporate name, the incorporators must have a basis for such surname; it being one of the incorporators: Otherwise, consent of the person whose name is being used must be submitted.6.) If it contains initials, it must contain an explanation of the meaning and relevance or reason thereof.7.) The use of the words “State” “Maharlika” and “Baranggay” are prohibited and reserved for the government. The following words when used must at least relate to the line of business namely: Financing and Investment. The following words are prohibited from being used namely: National, Engineer, Architect.

4. Corporate TermCorporate Term (Sec. 11)

Sec. 11 Corporate Term – A corporation shall exist for a period not exceeding fifty years (50) from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty years (50) in any single instance by an amendment of the articles of incorporation in accordance with this Code; Provided, that no extension can be made earlier than five years (5) prior to the original or subsequent expiry dates unless there are justifiable reasons for an earlier extension as may be determined by the SEC.

The purpose of the limit emphasizes the contractual nature of the corporation – the extension must be approved by the State. No extension of term can be effected once dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v. SEC, 24 SCRA 269 (1968)

5. Minimum Capital Stock and Subscription Requirements

Sec. 12. Minimum capital stock required of stock corporations. - Stock corporations incorporated under this Code shall not be required to have any minimum authorized capital stock except as otherwise specifically provided for by special law, and subject to the provisions of the following section. Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of incorporation. - At least

twenty-five percent (25%) of the authorized capital stock as stated in the articles of incorporation must be subscribed at the time of incorporation, and at least twenty-five (25%) per cent of the total subscription must be paid upon subscription, the balance to be payable on a date or dates fixed in the contract of subscription without need of call, or in the absence of a fixed date or dates, upon call for payment by the board of directors: Provided, however, That in no case shall the paid-up capital be less than five Thousand (P5,000.00) pesos. Q: Does the Corp. Code expressly provide for a minimum requirement of the authorized capital stock?

A: Under Sec. 12 there is no minimum requirement but the Code says that “in no case shall the paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is theminimum.77

Q: Why is the maximum capitalization required to be indicated?

A: (1) To protect the stockholders and also it limits the issuance of capital stock and the extent of the voting power or capacity of a stockholder (2) Because of accountability. Whether a corporation is going to do good or bad will depend upon the assets its holds. The only way by which the State can look at the accountability of a corporation in terms of assets it receives is to get a maximum so that if the corporation wants to go beyond that, it has to go back to the State.

Q: What is the 25%-25% rule?A: It means that of the authorized capital stock applied for, 25% thereof must be subscribed. Of the 25% subscribed thereof must be paid up. Example, a corporation is by 5 individuals and they ask for an authorized capital stock of P2M, how much must each subscribe to?P125,000.

RATIONALE: The purpose of such a requisition is that the State may be assured of the successful prosecution of the work and that creditors of the company may have to the extent, at least, of the required subscription, the means of obtaining satisfaction for their claims.

Q: Must each subscribe equally?

A: No

6. Articles of Incorporationa. Nature and Function of Articles

The article of incorporation is

1.) A CONTRACT – an agreement that gives rise to obligations:

a.)Between the corporation and the state (because it is under the AI by which the state grants the primary franchise.) state manifests its consent through the SEC while the corporation manifests its consent by the filing of the AI, through the incorporators and eventually through the Board of Directors.b.)Between the state and

stockholdersc.)Between the corporation and stockholders -> the stockholders manifest their consent through their subscription of stocks and through voting -> as against the corporation, the stockholders do not have individual standing but only standing as a group.d.)Among stockholders -> in

this situation they now have individual standing.

e.)Between the stockholders and the Board of Directors

f.)Between the corporation and the public (since the AI is a public document.)

2.) A PUBLIC DOCUMENT – because it is registered with the SEC. Such works with the doctrine of public notice that when the public deals with the corporation, the contents of AI binds them whether they in fact have seen the AI or not. When a person enters into a contractor any transaction with a corporation whether or not he has checked with the SEC the terms and conditions of the AI, he will be bound by it. He cannot claim ignorance of the charter of the corporation.

Nature of Charter: The charter is in the nature of a contract between the corporation and the government.

Government of P.I. v. Manila Railroad Co., 52 Phil. 699 (1929).GOVERNMENT OF P.I. v. MANILA RAILROAD CO.

Facts: The GPI filed a petition for mandamus in the SC to compel the Manila Railroad and Jose Paez, its manager to provide and equip the telegraph poles of the company in Tarlac and LaUnion with crosspieces for 6 telegraph wires belonging to the government which, it alleged, are necessary for public service between certain municipalities. Petitioner relies on Sec. 84 of Act No.1459 which provides that the railroad company shall establish a telegraph line for the use of the railroad and that such posts may be used for government wires and shall be sufficient for crosspieces to carry the number of wires which the government may consider necessary for public service. Petitioner contends that since 6 crosspieces are now necessary for public service, the company should provide sufficient crosspieces. Respondent answers by saying that the Charter of Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and contended that the Government is entitled to only 4 wires.

Held: Petition denied. Inasmuch as Act No. 1510 is the charter of the Manila Railroad Co. constitutes a contract between the corporation and the government, it would seem that the corporation is governed by its contract and not by the

provisions of the general law. But from a reading of the charter it will be seen that there is no indication that the government intended to impose upon said company any other conditions or obligations not expressly found in the said contract or charter. Section 84 of the Corp. Law was intended to apply to all railways in the Philippines which did not have a special charter or contract. Act No. 1510 applies only to Manila Railroad and being a special charter, its adoption had the effect of superseding the provisions of the corporation law which are applicable to railroads in general. The charter of a corporation is a contract between three parties: (1) it is a contract between the state and the corporation to which the charter is granted (2) it is a contract between stockholders and the state (3) it is a contract between the corporation and its stockholders. A special charter constitutes a contract between the corporation and the government and as such are both equally bound by its provisions. For the State to impose an obligation or a duty upon the respondent corporation, not expressly provided in the charter would amount to a violation of said contract. The provisions of Act 1459 relate to the number of wires which the government may place upon poles of the company are different and more onerous than the provisions of the charter.

NOTE: Articles of Incorporation cannot prevail over statutory provisions. Such cannot overcome the law. However in the case of GPI, its special charter overruled the Gen. Law

on the ground that the former is both a contract and a law. Thus, its charter as a law creates an amendment to all other laws. In the same manner, if the former were a mere contract then the case would have been decided differently

b. ContentsSec. 14 Contents of the Articles of Incorporation – All corporations organized under this code shall file with the SEC articles of incorporation in any of the official languages duly signed and acknowledged by all of the incorporators, containing substantially the following matters, except as otherwise prescribed by this Code or by special law:

1.The name of the corporation;2.The specific purpose or purposes for which the corporation is being incorporated. Where a corporation has more than one stated purpose, the articles of incorporation shall state which is the primary purpose and which is/are the secondary purpose or purposes: Provided, that a non-stock corporation may not include a purpose which would change or contradict its nature as such;3.The place where the principal office of the corporation is to be located, which must be within the Philippines;4.The term for which the corporation is to exist;5.The names, nationalities and residences of the incorporators;6.The number of directors and trustees which shall not be less than five nor more than fifteen;7.The names, nationalities and residences of persons who shall act as directors or

trustees until the first regular directors or trustees are duly elected and qualified in accordance with this Code;8.If it be a stock corporation, the amount of its authorized capital stock in lawful money of the Philippines, the number of shares to which it is divided, and in case the share are parvalue shares, the par value of each, the names, nationalities and residences of the original subscribers, and the amount subscribed and paid by each on his subscription, and if some or all of the shares are without par value, such fact must be stated;9.If it be a non-stock corporation, the amount of its capital, the names, nationalities and residences of the contributors and the amount contributed by each; and10.Such other matters as are not inconsistent with law and which the incorporators may deem necessary and convenient. The SEC shall not accept the articles of incorporation of any stock corporation unless accompanied by a sworn statement of the Treasurer elected by the subscribers showing that at least twenty-five percent (25%) of the authorized capital stock of the corporation has been subscribed and at least twenty-five percent (25%) of the total subscription has been fully paid to him in actual cash and/or in property the fair valuation of which is equal to at least twenty-five percent (25%) of said subscription, such paid-up capital being not less than P5,000.

Sec. 15 Forms of Articles of Incorporation – Unless otherwise prescribed by special law, articles of incorporation of all domestic corporations shall comply substantially with the following form: …

NOTE: The form goes into the validity and enforceability of the Articles of Incorporation.

CORPORATE NAME

A corporation cannot use a name which is:

1. identical or deceptively or confusingly similar to that of any existing corporation or to any other name protected by law; or 2. patently deceptive, confusing or contrary to law.

The law gives a corporation no express or implied authority to assume another name that is unappropriated; still less that of another corporation, which is expressly set apart from it and protected by law. (Red Line Transportation Co. vs. Rural Transit Co.) A word or phrase originally incapable of exclusive appropriation with reference to an article on the market, because geographically or otherwise descriptive, might nevertheless have been used so long and so exclusively by one producer with reference to his article that, in that trade and to that branch of the purchasing public, the word or phrase has come to mean that the article was his product. (Doctrine of secondary meaning, Lyceum of the Philippines, Inc. vs.CA) A corporation's right to use its corporate and trade name is a property right, a right in rem, which it may assert and protect against the world in the same manner as it may protect its tangible property, real or personal, against trespass or conversion. It is regarded, to a certain

extent, as a property right and one which cannot be impaired or defeated by subsequent appropriation by another corporation in the same field. (Philips Export B.V. vs. CA) To come within the scope of the prohibition of Sec. 18, two requisites must be proven, namely:

1. That the complainant corporation acquired a prior right over the use of such corporate name; and 2. The proposed name is either: (a) identical or (b) deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law; or (c) patently deceptive, confusing or contrary to existing law. (Philips Export B.V. vs. CA)

In determining the existence of confusing similarity in corporate names, the test is whether the similarity is such as to mislead a person using ordinary care and discrimination. Proof of actual confusion need not be shown. It suffices that confusion is probably or likely to occur. (Philips Export B.V. vs. CA) A corporation has an exclusive right to the use of its name, which may be protected by injunction upon a principle similar to that upon which persons are protected in the use of trademarks and tradenames. (Philips Export B.V. vs. CA) A mere change in the name of a corporation, either by the legislature or by the corporators or stockholders under legislative authority, does not, generally speaking, affect the identity of the corporation, nor in any way affect the rights, privileges or

obligations previously acquired or incurred by it.

PURPOSE CLAUSE

A corporation has only such powers as are expressly granted to it by law and by its articles of incorporation including those which are incidental to such conferred powers, those reasonably necessary to accomplish its purpose and those which may be incidental to its existence. Reasons for requiring a statement of purposes or objects:

1. In order that the stockholder who contemplates on an investment in a business enterprise shall know within what lines of business his money is to be put at risk. 2. So that the board of directors and management may know within what lines of business they are authorized to act. 3. So that anyone who deals with the company may ascertain whether a contract or transaction into which he contemplates entering is one within the general authority of the management.

If the corporate purpose or objective includes any purpose under the supervision of another government agency, prior clearance and/or approval of the concerned government agencies or instrumentalities will be required. General limitations on the purpose clause:

1. The purpose must be lawful.

2. The purpose must be specific or stated concisely although in broad or general terms. 3. If there is more than one purpose, the primary as well as the secondary ones must be specified. 4. The purpose must be capable of being lawfully combined.

THE PRINCIPAL OFFICE

The residence of the corporation is the place of its principal office as may be indicated in its articles of incorporation and may, therefore, be sued only at that place. (CRS vs. Antillon)

TERM OF EXISTENCE

Sec. 11. Corporate term. - A corporation shall exist for a period not exceeding fifty (50) years from the date of incorporation unless sooner dissolved or unless said period is extended. The corporate term as originally stated in the articles of incorporation may be extended for periods not exceeding fifty (50) years in any single instance by an amendment of the articles of incorporation, in accordance with this Code; Provided, That no extension can be made earlier than five (5) years prior to the original or subsequent expiry date(s) unless there are justifiable reasons for an earlier extension as may be determined by the Securities and Exchange Commission.

INCORPORATORS

Sec. 10. Number and qualifications of incorporators. - Any number of natural persons not less than five (5) but not more than fifteen (15), all of legal age and a majority of whom are

residents of the Philippines, may form a private corporation for any lawful purpose or purposes. Each of the incorporators of a stock corporation must own or be a subscriber to at least one (1) share of the capital stock of the corporation.

General rule: Only natural persons can be incorporators. Exception: Cooperatives and corporations primarily organized to hold equities in rural banks. Minors are not qualified to become incorporators.

THE DIRECTORS/TRUSTEES

General rule: There must be at least 5 but not more than 15 directors or trustees in a private corporation. Exceptions:

1. Educational corporations registered as a non-stock corporation whose number of trustees, though not less than 5 and not more than 15 should be divisible by 5; 2. In close corporations where all the stockholders are considered as members of the board of directors thereby effectively allowing 20 members in the board; and 3. Corporation sole.

The by-laws may provide for additional qualifications and disqualifications. However, it may not do away with the minimum disqualifications laid down by the Code. Qualifications:

1. Directors must own at least one (1) share of the capital stock of the corporation.

Trustees must be members. 2. A majority of the directors or trustees must be residents of the Philippines.

Disqualifications: 1. Conviction by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this Code committed within five (5) years prior to the date of election or appointment. 2. Other disqualifications under applicable special laws.

A by-laws may validly provide that no person may be elected as director unless he owns a specified number of shares required for the directorate qualification. It may likewise disqualify a stockholder from being elected into office if he has a substantial interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director. In order to be eligible as a director, what is material is the legal title to, not beneficial ownership, of the stock as appearing on the books of the corporation. (Lee vs. CA) If no election is conducted or no qualified candidate is elected, the incumbent director shall continue to act as such in a hold over capacity until the election is held and a qualified candidate is so elected. (Detective and Protective Bureau vs. Cloribel)

CAPITALIZATION

Authorized capital – the maximum amount fixed in the articles to be subscribed and paid-in or secured to be paid by the subscribers.

Subscribed capital stock – the total number of shares and its total value for which there are contracts for their acquisition or subscription. Paid-up capital stock – the actual amount or value which has been actually contributed or paid to the corporation in consideration of the subscriptions made thereon. Stocks shall not be issued for a consideration less than the par or issued price thereof.

Consideration for the issuance of stock may be any or a combination of any two or more of the ff:

1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed or services actually rendered to the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or future services.

Shares of stock and their classification

Shares of stock designate the interest or right which the stockholder has in the management of the corporation, and in the surplus profits and, in case of distribution, in all assets remaining after the payment of its debts. Stock certificate is a document or instrument evidencing the interest of a stockholder in the corporation. The shares of stock of stock corporations may be divided into classes or series of shares, or both, any of which classes or series of shares may have such rights, privileges or restrictions as may be stated in the articles of incorporation. Purpose of classification:

1. To specify and define the rights and privileges of the stockholders. 2. For regulation and control of the issuance of sale of corporate securities for the protection of purchasers and stockholders. 3. As a management control device. 4. To comply with statutory requirements. 5. To better insure return on investment. 6. For flexibility in price.

Except as otherwise provided in the articles of incorporation and stated in the certificate of stock, each share shall be equal in all respects to every other share.

Common and preferred shares

Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be any, but without any preference or advantage in that respect over any other stockholder or class of stockholders. Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect to the payment of dividends and/or with

respect to distribution of capital upon liquidation. Limitations on preferred stock:

1. Must be issued with a stated par value; and 2. The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.

The guarantee to preference as to dividends does not create a relation of debtor and creditor between the corporation and the holders of such stock. The board has the discretion to determine whether or not to declare dividends. Preferred shares are presumed to be non-participating. Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference.

Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid. In absence of express stipulation, preferred shares are presumed to be non-cumulative. Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same. Types of non-cumulative preferred shares:

1. Discretionary dividend type – gives the holder of such shares the right to have dividends paid thereon in a particular year depending on the

judgment or discretion of the board of directors. 2. Mandatory if earned type – impose a positive duty on directors to declare dividends every year when profits are earned. 3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in dividends if there were profits earned during the previous years but dividends were not declared.

Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote. Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with other shares.

Par and no par value shares

Par value shares – those whose value are fixed in the articles of incorporation. Par value shares cannot be issued nor sold by the corporation at less than par. No par value shares – those whose issued price are not stated in the certificate of stock but which may be fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or by the by-laws, or in the absence thereof, by the stockholders themselves. Limitations of no par value shares:

1. Such shares, once issued, are deemed fully paid and thus, non assessable; 2. The consideration for its issuance should not be less than P5.00; 3. The entire consideration for its issuance constitutes capital, hence, not

available for dividend declaration; 4. They cannot be issued as preferred stock; and 5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan associations.

Advantages to the issuance of no par value shares:

1. Flexibility in price; 2. Evasion of the danger of liability upon watered stock; and 3. Disappearance of personal liability on the part of the holder thereof for unpaid subscription.

Voting and non-voting shares

Voting shares – gives the holder thereof the right to vote and participate in the management of the corporation through the exercise of such right, either at the election of the board of directors, or in any manner requiring the stockholder‟s approval. Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate paragraph of Sec. 6. Only preferred and redeemable shares may be denied the right to vote. There must always be a class or series of shares which have complete voting rights. Non-voting shares shall nevertheless

be entitled to vote on the following matters: 1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property;

4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Founders’ shares

Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission. Redeemable shares

Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the

articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares.

Treasury shares

Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. Treasury shares may again be issued for a price less than par. Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of stock. (CIR vs. Manning)

OTHER MATTERS

Classes of shares, as well as the preferences or restrictions on any such class (§6)

Denial or restriction of pre-emptive right (§39)

Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity (§15(11))

c. Amendment

Amendments to the Articles of IncorporationSec. 16 Amendment of Articles of Incorporation – Unless otherwise prescribed by this Code or by special law and for legitimate purposes, any provision or matter stated in the articles of incorporation may be amended by a majority vote of the board of directors or trustees and the vote or written assent of the stockholders representing at least 2/3 of the outstanding capital stock, without prejudice to the appraisal right of dissenting stockholders in accordance with the

provisions of this Code, or the vote or written assent of at least 2/3 of the members if it be a non-stock corporation. The original and amended articles together shall contain all provisions required by law to set out in the articles of incorporation. Such articles, as amended shall be indicated by underscoring the change or changes made, and a copy thereof duly certified under oath by the corporate secretary and a majority of the directors or trustees stating the fact that said amendment or amendments have been duly approved by the required vote of the stockholders or members shall be submitted to the SEC. The amendments shall take effect upon their approval by the SEC or from the date of the filing with the said Commission if not acted upon within six (6) months from the date of filing for a cause not attributable to the corporation.

NOTES: The matter to be amended, even if it does not concern the Board, must always be concurred with by the Board. More importantly, the impetus to amend must always come from the Board. The stockholders merely ratify such amendment. Such is the case because he Board constitutes the centralized management. The impetus of the Board comprises the obligatory force of the contracts entered into.

2/3 votes are needed in AI while a majority is needed in amending by laws -> Such is the case to make it easier to amend by-laws

d. Non-Amenable Items Information about the original

incorporators o Names of incorporators

listed in original Articles of Incorporation

o Citizenship and residences of the Incorporators

o Names, citizenship and original subscription of the incorporators

o Names and contribution of each member. If you want to change names and contribution of each member, you can update it in your General Information Sheet (GIS).

Name of the designated Treasurer. If you want to change your corporation’s treasurer, you can update it in the General Information Sheet (GIS).

7. Registration and Issuance of Certificate of Incorporation

FILING OF ARTICLES AND PAYMENT OF FEES

Corporations governed by special laws have to submit a recommendation from the appropriate government agency to the effect that such articles are in accordance with law

a) banks, banking and quasi-banking institutions, b) building and loan associations,c) trust companies and other financial intermediaries,d) insurance companies,e) public utilities,f) educational institutions, andg) other corporations governed by special laws (§17)

Non-stock corporations that intend to solicit gifts, donations, and contributions from the public at large for the benefit of an indefinite number of persons must secure a Certificate of Registration from the Insurance Commissioner.

Failure to file AOI will prevent due incorporation of the proposed corporation and will not give rise to its juridical personality (§19). It will not even be a defacto corporation (§20)

1. Unless the certificate of incorporation has been issued, there can be no d facto corporation (Hall vs. Piccio, 1950)2. Campos—this statement should not be taken as an absolute principle, but in

the light of the circumstances before the court.

EXAMINATION OF ARTICLES BY SEC; APPROVAL OR REJECTION

The SEC may reject any AOI thereto if the same is not in compliance with the requirements of this Code (§17)

The SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment. (§ 17)

GROUNDS FOR DISAPPROVINF ARTICLES OF INCORPORATION

a) AOI does not substantially the form prescribedb) Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulationsc) Treasurer’s Affidavit concerning the amount of capital subscribed and or paid is falsed) Percentage requirement of ownership of Filipino citizens as required by the Constitution not complied with.

After consulting with BOI, NEDA, appropriate government agency, SEC may deny registration of any corporation if its establishment will not be consistent with declared national policies

Certificate of authority required of the following:

a) Insurance Companies- Insurance Commissionb) Banks, Building and Loan Associations, Finance Companies-Monetary Boardc) Educational Institutions- Secretary of Educationd) Public Utilities- Board of Power, Board of Transportation, National telecommunication Commission, etc..

Remedy in case of rejection of AOI:

by petition for review in accordance

with the Rules of Court (§6, last par., PD 902-A)

ISSUANCE OF CERTIFICATE OF INCORPORATION

A private corporation formed or organized under this Code commences to have corporate existence and juridical personality and is deemed incorporated from the date the Securities and Exchange Commission issues a certificate of incorporation under its official seal (§19)

Thereupon the incorporators, stockholders/members and their successors shall constitute a body politic and corporate under the name stated in the articles of incorporation for the period of time mentioned therein, unless said period is extended or the corporation is sooner dissolved in accordance with law. (Ibid)

If incorporators are found guilty of fraud in procuring Certificate of Incorporation, SEC may revoke the same after proper notice and hearing (§6(I), PD 902-A)

8. Adoption of By-Lawsa. Nature and Functions of By-Laws

By-laws – are rules and ordinances made by a corporation for its own government; to regulate the conduct and define the duties of the stockholders or members towards the corporation and among themselves. They are rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or member and directors and officers with relation thereto and among themselves in their relation to it.

Q. Distinguish by-laws from AoIA. The AoI is not an internal document that binds the parties to a corporate setting. It is also a document that binds the State. The BL is an intramural document, its supposed to bind the inner workings of a corp.Q. Are the AoI and BL public documents?

A. Yes, both are public documents because they are not valid and binding without the approval of the SECQ. Does the BL have to be approved by the SEC?A. Yes, prior to the approval of the SEC, the by-laws are not binding since the code expressly requires the approval of the SEC to be binding upon the SHs and members. Absent the codal provision, it is binding because of a corp.’s inherent power to adopt its own by-laws.Q. Do BL bind the public?A. As a general rule, BL provisions do not bind the public, except if the third person has knowledge of the BL provision.

Gokongwei v. SEC, 89 SCRA 337 [1979];

FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San Miguel Corp. In 1972 also, Consolidated Foods Corp. acquired SMC shares amounting to P543,959. John Gokongwei, the president and controlling stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried to get a seat in the SMC BoD but was rejected by the SH’s n the grounds that he was engaged in a competitive business and his securing a seat in the BoD would subject SMC to great disadvantages. On September 18, 1976 respondent SH’s amended the by-laws of SMC, Gokongwei contends that:

1. the BoD acted without authority & in usurpation of the power of the SH’s since the computation of 2/3 vote was based on the authorized capital stock as of 1961 & not as of 19762. The authority granted in 1961 was also extended in 1962 & 1963 when said authority was supposed to cease to exist3. Prior to said amendment, petitioner had all the qualifications as Director & that as a substitute SH he has the right to vote & be voted as director & that in amending the by-laws, the corp. purposely provided for Gokongwei’s disqualification& deprived him of his vested right.4. Gokongwei further alleges that the corp. has no inherent power to disqualify a SH & that provision allowing the BoD to consider such

factors as business & family relations is unreasonable & oppressive, thus void.

Gokongwei prays that the amended by laws be declared null & void. He also wanted to inspect and get a copy of certain documents pertaining to the corp. The SEC allowed him to see the minutes of the meeting only. So he filed an MR & a petition with the SC due to the alleged deliberate inability of the SCE to action on his petition. The SEC had earlier ruled in denying the MR, allowing Gokongwei to run as director but he should not sit as such if elected until there is a decision on the validity of the by-laws. The SMC answered by saying that he is engaged in a business antagonistic to SMC & that in allowing him to sit in the BoD, he would have access to SMC trade secrets and plans. It says that the amended by laws were adopted to preserve & protect SMC from danger which was based in its right for self-preservation.

ISSUE: Whether or not the amended by-laws of SMC disqualifying a competitor from nomination or election to the BoD of SMC are valid and reasonable?

HELD: 1.Every corp. has the inherent right to adopt by-laws for its internal government & to regulate the conduct & prescribe the rights and duties of its members towards itself &among themselves in reference to the management of its affairs. This is expressly recognized by Sec. 21 of the Corp. Code & has been enunciated in Gov’t vs. El Hogar.2.Any person who buys stocks in a corp. does so with the knowledge that its affairs are dominated by a majority of the stockholders & that he impliedly contracts that the will of the majority shall govern in all matters within the limits of the AoI & By-laws. A stockholder is said to have parted with his right to regulate the disposition of his property which he invested in the corporation. Thus, no contract between the SHs and corp. wasinfringed.

3.Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote or written assent of the Sh’s representing at least t 2/3

of the subscribed capital stock. If it changes, diminishes or restricts the rights of SHs, the dissenting minority has only the right to object in writing & demand payment of their share. Petitioner has no vested right to be elected director.

4.A director stands in a fiduciary relation to the corp. & its SHs. He has control & guidance of corporate affairs & property & hence, of the property interests of SHs. Equity recognizes that SHs are properties of corporate interest & are ultimately the only beneficiaries thereof. Thus, he cannot serve 2 adverse masters without detriment to one of them He cannot utilize his inside information & strategic position to his own preferment.

5.An amendment to the by-laws which renders a SH ineligible to be a director, if he be also director in a competitor corp. has been sustained valid. This is based on the principle that where the director is employed in the service of a rival corp. he cannot serve both but must betray one or the other. Such an enactment merely advances the benefit of the corp. & for its own good. Corporate officers are not permitted to use their position of trust &confidence to further their private interests.

6.DOCTRINE OF CORPORATE OPORTUNITY – rests on the unfairness of an officer or director taking advantage of an opportunity for his own personal profit where the interest of the corporation calls for protection. Here BoD members have access to marketing strategies, pricing structure, budget for expansion, R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The questioned amendment of the by-laws was done to prevent the creation or an oppositor for an officer or director of SMC, also an officer of a competing corp. from taking advantage of the information which he as director to promote his individual corporate interests to the detriment of SMC, it would be hard to avoid any possibility of Gokongwei’s taking advantage of his position as SMC director.

7.The SC grants the petition regarding Gokongwei’s petition to examine the book and records of SMC 8.However, it sustained the validity of the amendment to the by-laws without prejudice to the question of actual disqualification of Gokongwei to run if elected to sit as SMC director being decided, after proper hearing by the SMC BoD, whose decisions shall be appealable to the SEC & to the SC, unless disqualified, the prohibition in the said by-laws will not apply to Gokongwei.

Peña v. CA, 193 SCRA 717 (1991)

FACTS: PAMBUSCO original owners of the lots in question, mortgaged the same to DBP inconsideration of P935,000. This mortgage was foreclosed and said properties were awarded to Rosita Peña as highest bidder in the foreclosure sale. The Board of PAMBUSCO, through three of itsmembers resolved to assign its to one of its members, Atty. Joaquin Briones, to execute and sign a deed of assignment for and in behalf of PAMBUSCO in favor of any interested party. Thus, Briones executed a deed of Assignment of PAMBUSCO’s redemption right over the subject lots in favor of Marelino Enriquez. The latter then redeemed the said properties and a certificate of redemption dated Aug. 15, 1975 was issued. Enriquez executed a deed of absolute sale of the subject properties in favor of plaintiff-appellants, the spouses Rising T. Yap and Catalina Lugue. Peña wrote the sheriff notifying him that the redemption was not valid as it was made under avoid deed of assignment. She then requested the recall of the said redemption and a restraint on any registration or transaction regarding the lots. Defendant Peña through counsel wrote the sheriff asking for execution of a deed of final sale in her favor on the ground that the one year period of redemption has long elapsed without any valid redemption having been exercised. Plaintiff Yap wrote defendant Peña asking for payment for back rentals in the amount of P42,750.00 for the use and occupancy of the land and house. Later, the spouses Yap were prompted to file

the instant caseon the ground that being registered owners, they have the right to enforce their right to possession against defendant who has been allegedly in unlawful possession thereof. It was contended that plaintiffs could not have acquired ownership over the subject properties under a deed of absolute sale executed in their favor by one Marcelino Enriquez who likewise could not have become the owner of the properties in question by redeeming the same under a void deed of assignment. The defense was that since the deed of assignment executed by PAMBUSCO in favor of Enriquez was void ab initio for being an ultra vires act of its board of directors and for being without any valuable consideration, it could not have had any legal effect. TC found for petitioner.CA reversed.

HELD: In order that the SEC can take cognizance of a case, the controversy must pertain to any of the following relationships:

a. between corp., partnership or assoc. and the public

b. between the corp. and its SH, members, officers

c. between corp. and the state in so far as its franchise, permit or license to operate is concerned

d. among the stockholders, partners or associates themselves. Neither petitioner nor respondents Yap spouses are stockholders or officers of PAMBUSCO. Consequently, the issue of the validity of the series of transactions may be resolved only byte regular courts. The by-laws of a corporation are its own private laws which substantially have the same effect as the laws of the corporation. They are in effect written into the charter. In this sense, they become art of the fundamental law of the corporation which the corporation and its directors and officers must comply with. Only three out of five directors of PAMBUSCO convened on November 19, 1974 by virtue of a

prior notice of a special meeting. There was no quorum to validly transact business since, under Section 4 of the amended by-laws hereinabove reproduced; at least 4 members must be present to constitute a quorum in a special meeting of the BoD. The AoI or by-laws of the corp. may fix a greater number than the majority than the majority of the number of board members to constitute the quorum necessary for the valid transaction f business. Being a dormant corp. for several years, it was highly irregular, if not anomalous, for a group of three individuals representing themselves to be the directors of respondent PAMBUSCO to pass a resolution disposing of the only remaining asset of the corporation in favor of a former corporate officer. The latest list of SH of respondent PAMBUSCO on file with the SEC does not show that the said alleged directors were among the SHs of respondent PAMBUSCO. Since the disposition of said redemption right of PAMBUSCO by virtue of the questions ed resolution was not approved by the required number of SHs under the law, the said resolution, as well as the subsequent assignment executed assigning to respondent Enriquez the said right of redemption should be struck down as null and void.

As the “rules and regulations or private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it,” by-laws are indispensable to corporations. These may not be

essential to corporate birth but certainly, these are required by law for an orderly governance and management of corporations. Loyola Grand Villas Homeowners v. CA,276 SCRA 681 (1997)

b. Requisites of Valid ByLaws

Requirements and procedure for adoption of by-laws:

1. The by laws must not be inconsistent with the Code; 2. If adopted prior to incorporation:

a. Approved and signed by all the incorporators; b. Submitted together with the articles of incorporation to the SEC;

3. If adopted subsequent to incorporation:

a. Adopted within one (1) month after receipt of official notice of the issuance of its certificate of incorporation by the SEC; b. Affirmative vote of the stockholders representing at least a majority of the outstanding capital stock, or of at least a majority of the members in case of non-stock corporations, c. Signed by the stockholders or members voting for them d. Kept in the principal office of the corporation, subject to the inspection of the stockholders or members during office hours. e. A copy thereof, duly certified to by a majority of the directors or trustees countersigned by the secretary of the corporation, must be filed with the SEC which shall be attached to the original articles of incorporation.

4. Certification of the appropriate government agency concerned to the effect that such by-laws or amendments are in accordance with law.

5. Issuance by the Securities and Exchange Commission of a certification that the by-laws are not inconsistent with this Code.

Contents of by-laws: 1. The time, place and manner of calling and conducting regular or special meetings of the directors or trustees; 2. The time and manner of calling and conducting regular or special meetings of the stockholders or members; 3. The required quorum in meetings of stockholders or members and the manner of voting therein; 4. The form for proxies of stockholders and members and the manner of voting them; 5. The qualifications, duties and compensation of directors or trustees, officers and employees; 6. The time for holding the annual election of directors of trustees and the mode or manner of giving notice thereof; 7. The manner of election or appointment and the term of office of all officers other than directors or trustees; 8. The penalties for violation of the by-laws; 9. In the case of stock corporations, the manner of issuing stock certificates; and 10. Such other matters as may be necessary for the proper or convenient transaction of its corporate business and affairs.

By-laws are subordinate to the articles of incorporation, the Corporation Code and other statutes which form part of the corporate charter. By-laws become effective only upon the approval of the SEC

Time of filing: 1. Prior to incorporation – must be signed by all the incorporators, must be filed together with the articles of incorporation 2. After incorporation – approval of at least a majority of the outstanding capital stock

I. Failure to file by-laws may result to suspension or revocation of corporate franchise after proper notice and hearing

II. Failure to file by-laws does not result in automatic dissolution. (LGVHA vs. CA)

III. By-laws are internal rules an cannot bind, effect or prejudice third persons without knowledge. (Fleisher vs. Botica Nolasco)

Elements of a valid by laws: 1. It must not be contrary to law, public policy or morals. 2. It must not be inconsistent with the articles of incorporate. 3. It must be general and uniform in its effect or applicable to all alike or those similarly situated. 4. It must not impair obligations and contracts or vested rights. 5. It must be reasonable.

c. Binding Effects

China Banking Corp. v. Court of Appeals, 270 SCRA 503(1997).

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club pledged his Stock Certificate to petitioner China Banking. Petitioner wrote VGCCI requesting that the aforementioned pledge agreement be recorded in its books. Later, Calapatia obtained a loan of P20,000 from petitioner, payment of which was secured by the aforestated pledge agreement still existing between Calapatia and petitioner. Due to Calapatia’s failure to pay his obligation, petitioner filed a petition for extra-judicial foreclosure. Petitioner informed VGCCI of the above-mentioned foreclosure proceedings and requested that the pledged stock be transferred to its name. However, VGCCI wrote petitioner expressing its inability to

accede to petitioner’s request due to Calapatia’s unsettled accounts with the club.

Despite the foregoing, Notary Public de Vera held a public auction and petitioner emerged as the highest bidder, VGCCI sent Calapatia a notice demanding full payment of his overdue account in the amount of P18,783.24. VGCCI caused to be published in the newspaper Daily Express a notice of auction sale by VGCCI of its subject share of stock and thereafter filed a case with the RTC of Makati for the nullification. The RTC dismissed the case for lack of jurisdiction over the subject matter on the theory that it involves an intra-corporate dispute.

Petitioner filed a complaint with the SEC. The Commission en banc believed that appellant-petitioner had a prior right over the pledged share and because of pledgor’s failure to pay the principal debt upon maturity, appellant-petitioner could proceed with the foreclosure sale of the pledged share. The auction sale conducted by appellee-respondent Club was declared null and void. The CA rendered its decision nullifying and setting aside the orders of the SEC and its hearing officers on the ground of lack of jurisdiction over the subject. The CA declared that the controversy between CBC and VGCCI is not intra-corporate.

HELD: VGCCI claims a prior right over the subject share anchored mainly on Sec. 3, Art. VIII of its by-laws which provides that after a member shall have been posted as delinquent, the Board may order his/her/its share sold to satisfy the claims of the club. It is pursuant to this provision that VGCCI also sold the subject share at public auction, of which it was the highest bidder. VGCCI caps its argument by asserting

that its corporate by-laws could prevail. The SEC therefore took proper cognizance of the instant case.

Moreover, VGCCI completely disregarded petitioner’s right as pledgee. It even failed to give petitioner notice of said auction sale. Such actuations of VGCCI thus belie its claim of good faith. In defending its actions, VGCCI likewise maintains that petitioner is bound by its by-laws. It argues that the G.R. is that third persons are not bound by the by-laws of a corporation since they are not privy to thereto. The exception to this is when 3rd persons have actual or constructive knowledge of the same. In the case at bar, petitioner had actual knowledge of the by-laws of private respondent when petitioner foreclosed the pledge made by Calapatia and when petitioner purchased the share foreclosed. Thus, the petitioner purchased the said share subject to the right of the PR to sell the said shares for reasons of delinquency and the right of PR to have a first lien on said shares as these rights are provided for in the by-laws very clearly.

In order to be bound, the 3rd party must have acquired knowledge of the pertinent by-laws at the time the transaction or agreement between said 3rdparty and the shareholder was entered into, in this case, at the time the pledge agreement was executed. Petitioner’s belated notice of said by-laws at the time of the foreclosure will not suffice. By-laws signify the rules and regulations of private laws enacted by the corporation to regulate, govern and control its own actions, affairs and concerns and its stockholders or members and directors and officers with relation thereto and among themselves in their relation to it. The

purpose of a by-law is to regulate the conduct and define the duties of the members towards the corporation and among themselves.

Note: Knowledge of the by-laws must be present at the time of the perfection of the contract. Such is not the case here, knowledge of the by-laws was had only during the proceedings, as such, it cannot bind China Bank. However, one may argue in the same way in Land Titles, where banks are required to go beyond the face of the title as they are institutions endowed with public interest; in this case China Bank should have inquired into such by-laws before entering into the transactions mentioned.

“Neither can we concede that such contract would be invalid just because the signatory thereon was not the Chairman of the Board which allegedly violated the corporation’s by-laws. Since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice third persons who deal with the corporation, unless they have knowledge of the same.”

PMI Colleges v. NLRC, 277SCRA 462 (1997)

FACTS: PMI is an educational institution offering courses on basic seaman training and other marine-related courses hired private respondent as contractual instructor with an agreement that the latter shall be paid at an hourly rte of P30 t P50. PR then organized classes in marine engineering. PR another instructors were compensated for services rendered during the first three periods of the above-mentioned contract. However, for reasons unknown to PR, he stopped receiving payment for the succeeding rendition of services.

Repeated demands having likewise failed, PR was soon constrained to file a complaint seeking payment for salaries earned. PMI contended that classes in the courses offered which complainant claimed to have remained unpaid were not held in the school premises of PMI. Only PR knew whether classes were indeed conducted. Later in the proceedings, petitioner manifested that Mr. Tomas Cloma Jr., a member of the petitioners BoD wrote a letter to the Chairman of the Board clarifying the case of PR and stating therein that under PMI’s by-laws, only the Chairman is authorized to sign any employment contract. A decision was rendered by the Labor Arbiter finding for PR. The NLRC affirmed.

HELD: The contract would be invalid just because the signatory was not the chairman which allegedly violated PMI by-laws but since by-laws operate merely as internal rules among the stockholders, they cannot affect or prejudice 3rd persons who deal with the corporation in good faith unless they have knowledge of the same. No proof appears on record that PR ever knew anything about the provisions of said by-laws. Petitioner itself merely asserts the same without even bothering to attach a copy or excerpt thereof to show that there is such a provision. That this allegation has never been denied by PR does not necessarily signify admission

d. Amendment or Revision

Two modes of amending or repealing by laws or adopting a new one: 1. By a majority vote of the directors or trustees and the majority vote of the outstanding capital stock or members, at a regular or special meeting called for that purpose; or

2. By the board of directors alone when delegated by 2/3 of the outstanding capital stock or members Delegated power to amend, repeal

or adopt by-laws may be revoked Incorporation of an invalid by-law

provision is not a misdemeanor. It does not justify the dissolution of the corporation. (Govt. vs. El Hogar)

The by-laws may disqualify a stockholder from being elected into office if he has a substantial interest in a competitor corporation to avoid any possible adverse effects of conflicting interest of a director. (Gokongwei, Jr. vs. SEC)

F. Corporate Powers1. General Powers, Theory of General Capacity2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Termb. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded Indebtednessc. Power to Deny Pre-Emptive Rightsd. Power to Sell or Dispose of Corporate Assetse. Power to Acquire Own Sharesf. Power to Invest Corporate Funds in Another Corporation or Businessg. Power to Declare Dividendsh. Power to Enter Into Management Contract

i. Ultra Vires Acts

i. Applicability of Ultra ViresDoctrineii. Consequences of Ultra Vires Acts

3. How Exerciseda. By the Shareholdersb. By the Board of Directorsc. By the Officers

4. Trust Fund Doctrine

G. Board of Directors and Trustees

Composition & Qualification of Directors.- the board of directors of a corporation organized in accordance with Philippine must be composed of not less than five (5) but not more than fifteen (15) directors.

Qualifications: 1.) he must be a natural person;2.) he must be capacitated to enter into

contracts;3.) he must have at least one (1) share of stock

which shall stand as his own name in the books of the corporation.

The director need not have both the legal and beneficial interests of the shares registered in his name. The legal title to the one (1) share is sufficient to qualify him as a director, provided he is the registered

owner of such share in the stock and transfer book of the corporation.

4.) Majority of the directors must be residents of the Philippines;

5.) A director must not be convicted of any offense punishable by imprisonment of more than six (6) years, or a violation of the corporation code within five (5) years prior to his election.

PRINCIPAL FUNCTIONS OF THE BOARD OF DIRECTORS The principal functions of board of directors:1.) It is governing body of the corporation. The

board, unless restricted by its charter or by-laws, shall have full control and management of the corporate business property. The shareholders may, however, override the decision of the board by unanimous vote. (not only majority)

2.) It is the custodian of all corporate properties; and,

3.) It formulates all corporate policies and controls management.

1. Doctrine of Centralized ManagementManagement of corporation business is vested

in the board of directors which is the governing and controlling body of the corporation. Stockholders are not required to participate directly in the management of the corporation.

2. Business Judgment Rule or Doctrine of Business opportunity

This doctrine refers to the case when a director or officer of the corporation is presented with a business venture which can very well be handled profitably by the corporation, he must give that business opportunity to the corporation and not to appropriate it for himself. If he fails to turn it over to the corporation, he shall be held liable to refund to the corporation whatever profits and benefits he may have derived from such business opportunity. 3. Tenure, Qualifications and Disqualifications of Directors or Trustees

No person convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years, or a violation of this code, committed within five (5) years prior to the date of his election or appointment, shall

qualify as a director, trustee or officer of any corporation. 4. Elections

a. Cumulative Voting/Straight Voting The manner of voting may be straight or cumulative. However, present corporations are resorting to the cumulative voting in order to insure the election of more directors to represent their interests in the board.

Stockholders align themselves as the majority or minority group and they apply the cumulative system so that they can get elected as many directors as they can possibly get with their pooled or accumulated votes to represent each group’s interest in the Board of Directors.

The term of office of the directors is only for one (1) year, but they are entitled to run for reelection if they so desire. b. Quorum The quorum in a Board of Directors’ meeting shall be constituted by a majority of directors, and every decision of at least a majority of the directors present in the meeting shall be considered a valid corporate act. All things taken up in a meeting without a quorum shall be null and void.

5. Removal Directors may be removed with or without cause by the prescribed vote of 2/3 of the outstanding capital stock of a stock corporation, or by vote of members of a non-stock corporation either at a regular meeting or at a special meeting called for the purpose. However, this section prohibits removal without cause of any director representing the minority stockholders.

SEC jurisdiction over removal – it is the SEC and not the NLRC which has original and exclusive jurisdiction over cases involving the removal from employment of corporate officers.

A corporate officer’s dismissal is always a corporate act and/or an intra-corporate controversy. In intra-corporate matters, such as those affecting the corporate matters, such as those affecting the corporation, its directors, trustees, officers and shareholders, the issue of consequential damages may be resolved and adjudicated by the SEC.

6. Filling of VacanciesVacancies in the board of directors due to causes other than removal, such as expiration of the term or death, are filled up by a majority vote of the remaining directors if they still constitute a quorum, or by the stockholders in a regular meeting called for that purpose. The director elected to fill a vacancy shall serve only for the unexpired term of his predecessor in office.

Cases when vacancies in the board of directors may be filled up by stockholders only:i. In case of removal of a director;ii. If the remaining directors do

not constitute a quorum;iii. If there is to be an increase in

the number of directors.

7. CompensationAs a rule, directors are not paid any compensation for performing their duties and functions as members of the Board. They receive per diem only for every meeting they attend.

However, by the vote of stockholders representing at least a majority of the outstanding capital stock at a regular or special stockholder’s meeting, the directors may be granted extra compensation in addition to regular per diems. Or as long may be provided in the by-laws.

Instances when directors may be additional granted compensation:

1.) When there is an express provision in the by-laws fixing their composition;

2.) When approved by at least a majority of the outstanding capital stock at a regular or special meeting;3.) In no case shall the total yearly compensation of directors exceed 10% of the net income before income tax of the corporation during the preceding year.

8. Fiduciaries Duties and Liability Rules Directors are fiduciary officers and

occupy as a board the position of trusteeship in relation to the stockholders from whom they derive their power to control and direct the affairs of the corporation, and therefore shall exercise not only care and diligence but utmost good faith in the management of corporate affairs. Thus, directors shall be solitarily liable for damages suffered by the corporation, its stockholders or members and other persons due to:

a.) their willful vote or assent to unlawful acts of the corporation;

b.) their gross negligence or bad faith in directing the affairs of the corporation;

c.) for acquiring any personal or pecuniary interest in conflict with their duties as directors and officers of the corporation.

A director, trustee or officer of the corporation shall also be liable as trustee for the corporation:

a.) he acquires personal and adverse interest In the corporate matters;

b.) he fails to turn over to the corporation all profits which otherwise would have accrued to the corporation.

9. Responsibility for CrimesA corporation, being a juridical entity may act

only through its directors, officers and employees. Obligations incurred in them, acting as such corporate agents, are not theirs but the direct accountabilities of the corporation they represent. 10. Inside Information

According to the Securities Regulations Code, “insider” means (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer;

(c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available tote public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or self-regulatory organization or who has access to material information about an issuer or a security that is not generally available to the public; (e) a person who learns such information by a communication from any of the foregoing insiders.

11. Contractsa. By Self-Dealing Directors with the

CorporationA director or trustee may validly

enter into a contract with hold own corporation if:

(1.) his presence in the board is not required to constitute a quorum in the board meeting for the approval of his contract;

(2.) his vote is not necessary for the approval of the contract;

(3.) the contract is fair and reasonable; and,

(4.) if it is an officer who is dealing with the corporation he has the authorization given by the board of directors.

b. Between Corporations with

Interlocking DirectorsAn interlocking director is one

who serves as a director in two or more corporations. Such contract is subject to following conditions:

(a) that the contract is fair and reasonable;

(b) that there is no fraud;(c) that the interlocking

director’s presence is not necessary to constitute a quorum in both corporations;

(d) that his vote is not necessary for the approval of the contract.

c. Management ContractsManagement contracts are

agreements whereby as corporation, subject to some legal requirements, delegates the power of its management to another person or to another corporation for a certain period as stipulated in the agreement, but not exceeding five (5) years for any one term.

12. Executive Committee

It is a committee created by the BOD as authorized in the by-laws and is composed of three (3) directors. Its principal function is to assist the Board in the governance of the corporation, the execution of its management policies, and in the performance of such other matters as may be delegated it in the by-laws or by a majority vote of the Board.

However, the Executive Committee cannot perform any of the following:

1.) approval of any action for which shareholders’ approval is also required;

2.) the filling of vacancies in the board;

3.) the amendment or repeal of by-laws or the adoption of new by-laws;

4.) the amendment or repeal of any resolution of the board which by its express terms is not so amendable or repealable;

5.) a distribution of cash dividends tot the shareholders.

13. MeetingsMeetings of directors, trustees,

stockholders, or members may be regular or special.

a. Regular or Speciali. When and WhereIn case of regular meetings, in

case of stockholders may be held annually on the date fixed in the by-laws or on any date in April each year as determined by the BOD. In the case of the directors, regular meetings may be held monthly or as provided in the by-laws.

These are held at the principal place of business of the corporation but for the BOD may be held also at any specified place.

On the other hand, in the case of special meetings of either the BOD or the stockholders may be provided in the by-laws or from time to time as deemed necessary.

ii. NoticeWritten notice of the meeting

must be sent two (2) weeks prior to the scheduled meeting to all stockholders of record. In special meetings, it is sent one (1) week prior to the meeting.

b. Who PresidesWhen there is no person

authorized to call a meeting, a stockholder or member may petition the SEC to authorize the calling of a meeting. Upon showing of good cause therefore, the SEC may issue an order to the petitioning stockholder or member authorizing him to call a meeting of the corporation after first giving the proper notice to the stockholders required by this Code or the by-laws.

c. Quorum

Quorum is a majority of the members or officers of an organization or body that, when duly assembled, is a requisite number to do business. It shall consist of the stockholders representing a majority of the outstanding capital stock or majority of the members in a non-stock corporation.

d. Rule on Abstention - Considered as not counted.

H. Stockholders and Members1. Rights of a Stockholder and Members

a. Doctrine of Equality of Shares2. Participation in Management

a. Proxyb. Voting Trustc. Cases When Stockholders’ Action is

Requiredi. By a Majority Voteii. By a Two-Thirds Voteiii. By Cumulative Voting

3. Proprietary Rightsa. Right to Dividendsb. Right of Appraisalc. Right to Inspectd. Pre-Emptive Righte. Right to Votef. Right to Dividendsg. Right of First Refusal

4. Remedial Rightsa. Individual Suitb. Representative Suitc. Derivative Suit

5. Obligation of a Stockholder6. Meetings

a. Regular or Speciali. When and Whereii. Notice

b. Who Calls the Meetingsc. Quorumd. Minutes of the Meetings

I. Capital Structure

1. Subscription Agreements

Q: What is a subscription contract? A: It is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase or some other contract. (Sec. 60) Q: What are the kinds of subscription contracts? A: 1. GR: Pre incorporation subscription ‐ –

entered into before the incorporation and irrevocable for a period of six (6) months from the date of subscription unless all other subscribers consent or if the corporation failed to materialize. It cannot also be revoked after filing the Articles of Incorporation with the SEC (Sec. 61)

XPN: When creditors will be prejudiced thereby.

2. Post incorporation subscription ‐ – entered into after incorporation.

Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of fully paid shares by a stockholder to a third person is a sale. But it seems that assignment by a subscriber of his unpaid subscription would

require that the requisites for valid release from subscription must be complied with

Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application

Not necessarily required to be in writing Once subscription contract is perfected, SH

becomes the debtor of the corporation. He is liable to pay any unpaid portion of the subscription. He can also be made personally liable to the creditors of the corporation to the extent of his unpaid subscription

General Rule: SH is not liable to pay interest on his unpaid subscription.

Exception: if required by the by-laws (§66)

2. Consideration for Stocks

Stocks shall not be issued for a consideration less than the par or issued price thereof.

Consideration for the issuance of stock may be any or a combination of any two or more of the following:

a) Actual cash paid to the corporation;b) Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued

o Valuation of consideration other than actual cash, or consists of intangible property such as patents of copyrights – initially be determined by the incorporators or the board of directors, subject to approval by the SEC.o Note: Property should not be encumbered. Otherwise, it would impair the consideration

c) Labor performed for or services actually rendered to the corporation (must be capable of being valuated);

d) Previously incurred indebtedness of the corporation;e) Amounts transferred from unrestricted retained earnings to stated capital (declaration of stock dividends); andOL LAWf) Outstanding shares exchanged for stocks in the event of reclassification or conversion.

Prohibited consideration: Shares of stock shall not be issued in exchange for promissory notes or future service (because realization is uncertain)

Future service may be used as consideration provided that certificates of stock will be issued only after the performance of such services.

Same consideration applies for the issuance of bonds by the corporation.

Fixing of issued price of no-par value shares:The issued price of no-par value shares may be fixed:a) in the AOI orb) by the BOD pursuant to authority conferred upon it by the AOI or the by-laws, orc) in the absence thereof, by the SHs representing at least a majority of the outstanding capital stock at a meeting duly called for the purpose.

The value of the consideration received must be equal to the issue price of the shares of stocks which in no case shall be less than par

3. Shares of Stocka. Nature of Stock

b. Subscription AgreementsIt is a contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed. It is considered as such notwithstanding the fact that the parties refer to it as purchase or some other contract. (Sec. 60)

c. Consideration for Shares of Stock

Consideration for the issuance of stock may be any or a combination of any two or more of the ff: 1. Actual cash paid to the corporation; 2. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued; 3. Labor performed or services actually rendered to the corporation; 4. Previously incurred indebtedness by the corporation; 5. Amounts transferred from unrestricted retained earnings to stated capital; and 6. Outstanding shares in exchange for stocks in the event of reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or future services.

d. Watered Stocki. Definition

Q: What is a watered stock? A: A stock issued in exchange for cash, property, share, stock dividends, or services lesser than its par value.

Watered Stocks include stocks: 1. Issued

without consideration (bonus share)

2. Issued for a consideration other

than cash, the fair valuation of which is less than its par or issued value (discount share)

3. Issued as stock dividend when there are no sufficient retained earnings to justify it

4. Issued as fully paid when the corporation has received a lesser sum of money than its par or issued value

Note: “Water” in the stock represents the difference between the fair market value at the time of the issuance of the stock and the par or issued value of said stock. Both par and no par stocks can thus be watered stocks.

Watered stocks refer only to original issue of stocks but not to a subsequent transfer of such stocks by the corporation.

ii. Liability of Directors for Watered Stocks

Q: What is the extent of the liability of directors who consented to the issuance of a watered stock? A: Directors who consent to the issuance of a watered stock are personally liable. Although the general rule is that directors, trustees or officers are not solidarily liable with the corporation, consenting to the issuance of a watered stock is one of the exceptions.

Note: Pursuant to Sec. 65 of the Corporation Code, a director or officer who consents to the issuance of a watered stock or having knowledge thereof does not forthwith express his written objection with the corporate secretary is liable jointly and severally with the stockholder concerned for the water in the stock in favor of the corporation and its creditors.

iii. Trust Fund Doctrine for Liability for Watered Stocks

Q: What is the trust fund doctrine? A: The subscribed capital stock of the corporation is a trust fund for the payment of debts of the corporation which the creditors have the right to look up to satisfy their credits, and which

the corporation may not dissipate.

Q: Where does the solidary liability of directors consenting to the issuance of watered stock emanates? A: The solidary liability of the directors emanates from the fiduciary character of the position of director or corporate officer.

e. Situs of the Shares of Stock

Q: Where is the situs of shares of stock? A: The situs of shares of stock is the country where the corporation is domiciled.

Note: For purposes of execution, attachment, garnishment or auction sale, it is not the domicile or the residence of the owner of the shares but the domicile or residence of the corporation, which is the place of its principal business, which determines the situs of the shares of stock.

f. Classes of Shares of Stock

Common stock – a stock which entitles its owner to an equal pro-rata division of profits, if there be any, but without any preference or advantage in that respect over any other stockholder or class of stockholders. Preferred stock – a stock that gives the holder a preference over the holder of common stocks with respect to the payment of dividends and/or with

respect to distribution of capital upon liquidation.

Limitations on preferred stock:

1. Must be issued with a stated par value; and 2. The preferences must be stated in the articles of incorporation and in the certificate of stock, otherwise, each share shall be, in all respect, equal to every other share.

The guarantee to preference as to dividends does not create a relation of debtor and creditor between the corporation and the holders of such stock. The board has the discretion to determine whether or not to declare dividends. Preferred shares are presumed to be non-participating.

Participating preferred shares – the holders thereof are still given the right to participate with the common stockholders in dividends beyond their stated preference.

Cumulative preferred share – those that entitle the owner thereof to payment not only of current dividends but also back dividends not previously paid whether or not, during the past years, dividends were declared or paid.

In absence of express stipulation, preferred shares are presumed to be non-cumulative. Non-cumulative preferred shares – those which grant the holders of such shares only to the payment of current dividends but not back dividends, when and if dividends are paid, to the extent agreed upon before any other stockholders are paid the same.

Types of non-cumulative preferred shares:

1. Discretionary dividend type – gives the holder of such

shares the right to have dividends paid thereon in a particular year depending on the judgment or discretion of the board of directors. 2. Mandatory if earned type – impose a positive duty on directors to declare dividends every year when profits are earned. 3. Earned cumulative or dividend credit – gives the holder thereof the right to arrears in dividends if there were profits earned during the previous years but dividends were not declared.

Unless the right to vote is clearly withheld, a preferred stockholder has the right to vote. Preference upon liquidation must be clearly indicated otherwise they shall be placed on equal footing with other shares.

Par and no par value shares Par value shares – those whose value are fixed in the articles of incorporation. Par value shares cannot be issued nor sold by the corporation at less than par. No par value shares – those whose issued price are not stated in the certificate of stock but which may be fixed in the articles of incorporation, or by the board of directors when so authorized by the said articles or by the by-laws, or in the absence thereof, by the stockholders themselves. Limitations of no par value shares:

1. Such shares, once issued, are deemed fully paid and thus, non assessable; 2. The consideration for its issuance should not be less than P5.00; 3. The entire consideration for its issuance constitutes capital, hence, not available for dividend declaration; 4. They cannot be issued as preferred stock; and 5. They cannot be issued by banks, trust companies, insurance companies, public utilities and building and loan associations.

Advantages to the issuance of no par value shares:

1. Flexibility in price; 2. Evasion of the danger of liability upon watered stock; and 3. Disappearance of personal liability on the part of the holder thereof for unpaid subscription.

Voting and non-voting shares

Voting shares – gives the holder thereof the right to vote and participate in the management of the corporation through the exercise of such right, either at the election of the board of directors, or in any manner requiring the stockholder‟s approval. Non-voting shares – do not grant the holder thereof the right to vote except under the penultimate paragraph of Sec. 6. Only preferred and redeemable shares may be denied the right to vote.

There must always be a class or series of shares which have complete voting rights.

Non-voting shares shall nevertheless be entitled to vote on the following matters:

1. Amendment of the articles of incorporation; 2. Adoption and amendment of by-laws; 3. Sale, lease, exchange, mortgage, pledge or other disposition of all or substantially all of the corporate property; 4. Incurring, creating or increasing bonded indebtedness; 5. Increase or decrease of capital stock; 6. Merger or consolidation of the corporation with another corporation or other corporations; 7. Investment of corporate funds in another corporation or business in accordance with this Code; and 8. Dissolution of the corporation.

Except as provided in the penultimate paragraph of Sec. 6, the vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights.

Founders’ shares

Sec. 7. Founders‟ shares. - Founders' shares classified as such in the articles of incorporation may be given certain rights and privileges not enjoyed by the owners of other stocks, provided that where the exclusive right to vote and be voted for in the election of directors is granted, it must be for a limited period not to exceed five (5) years subject to

the approval of the Securities and Exchange Commission. The five-year period shall commence from the date of the aforesaid approval by the Securities and Exchange Commission.

Redeemable shares Redeemable shares may be issued by the corporation when expressly so provided in the articles of incorporation. They may be purchased or taken up by the corporation upon the expiration of a fixed period, regardless of the existence of unrestricted retained earnings in the books of the corporation, and upon such other terms and conditions as may be stated in the articles of incorporation, which terms and conditions must also be stated in the certificate of stock representing said shares.

Treasury shares Treasury shares are shares of stock which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the board of directors. Treasury shares may again be issued for a price less than par. Treasury shares have no voting and dividend rights. Such rights are only granted to outstanding shares of stock. (CIR vs. Manning)

4. Payment of Balance of Subscriptiona. Call by Board of Directors

Q: How does the board of directors call for the payment of unpaid subscription?

A: A call is made in a form of board resolution that unpaid subscription to the capital stock are due and payable

and the same or such percentage thereof shall be collected, together with all accrued interest, on a specified date and that if no payment is made within 30 days from said date, all stocks covered by said subscription shall thereupon become delinquent and shall be subject to public auction sale.

Q: Is the call of the board of directors always necessary to collect payment for unpaid subscription? A: No. A call is not necessary where the

subscription contract specifies the date of payment.

b. Notice Requirement

Q: What is the notice requirement in case there is a call of the board of directors for payment of subscription? A: The notice of the call has to be served on the stockholders concerned in the manner prescribed in the call, which may either be by registered mail and/or personal delivery and publication.

c. Sale of Delinquent Sharesi. Effect of Delinquency

Q: What are the effects of stock delinquency? A: 1. Upon the stockholder

a. Accelerates the entire amount of the unpaid subscription;

b. Subjects the shares to interest expenses and costs;

c. Disenfranchises the shares from any right that inheres to the to a

stockholder, except the right to dividends (but which shall be applied to any amount due on said shares, or, in the case of stock dividends, to be withheld by the corporation until full payment of the delinquent shares. (Sec. 43)

2. Upon the director owning delinquent shares

a. If the delinquent stockholder is a director, the director shall continue to be a director but he cannot run for re‐election (Sundiang and Aquino, Reviewer in Commercial Law, 2006)

b. A delinquent stockholder seeking to be elected as director may not be a candidate for, not be duly

elected to, the board.

ii. Call by Resolution of the Board of Directors

Q: Does a call of the board of directors required to declare a stock delinquent? A: No. Stocks become delinquent when the unpaid subscription and accrued interests thereon are not paid within 30 days from their due date as specified in the subscription contract or in the call by the board of directors. The delinquency is automatic after said 30 day period and does not need a declaration by the board making the stock delinquent.

iii. Notice of Sale

Q: What is the notice requirement in case of sale of delinquent stock? A: The notice of sale and copy of the board resolution ordering the sale shall be: 1. Sent to every

delinquent stockholder either personally or by registered mail or;

2. Published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation, as specified in its

articles of incorporation, is located.

iv. Auction Sale and the Highest Bidder

Q: What is the procedure for the auction sale of a delinquent share? A: The procedure is as follows: 1. The board of

directors shall pass a board resolution ordering the sale of delinquent stock.

2. A notice of sale and copy of the board resolution ordering the sale shall be sent to every delinquent stockholder either personally or by registered mail or; published once a week for 2 consecutive weeks in a newspaper of general circulation in the province or city where the principal office of the corporation, as specified in its articles of incorporation, is located.

3. The minimum bid shall be the full amount of the balance on the subscription plus the accrued interest, cost of advertisement and expenses of sale for the smallest number of shares.

4. The sale will be awarded to the

highest bidder who will be given a certificate of sale and the same will be registered in the books of the corporation.

5. Should there be no bidder, the corporation may bid for the same if it has unrestricted earnings to cover the amount.

5. Certificate of Stocka. Nature of the Certificate

A certificate of stock is the best evidence of the rights and status of a SH (although not a condition precedent to the acquisition of such rights), and is convenient for the purposes of transfer (Campos).

Contents of a certificate:- certifies that the person named is a holderor owner of a stated number of shares- kind of shares issued- date of issuance- par value, if par value shares- signed by the proper officer of the corp.(usually the pres., and the sec.)- bears the corporate seal

A certificate of stock is a prima facie proof that the stock described therein is valid and genuine in the absence of an evidence to the contrary

b. Uncertificated Shares

Q: What is an uncertificated share?

A: An uncertificated share is a subscription duly recorded in the corporate books but has no corresponding certificate of stock yet issued. Q: May a stockholder alienate his shares even if there is no certificate of stock issued by the corporation? A: Yes. The absence of a certificate of stock does not preclude the stock holder from alienating or transferring his shares of stock.Q: In case of a fully paid subscription but the corporations has not yet issued a certificate of stock, how can the transfer be effected? A: In case of a fully paid subscription, without the corporation having issued a certificate of stock, the transfer may be effected by the subscriber or stockholder executing a contract of sale of deed of assignment covering the number of shares sold and submitting said contract or deed to the corporate secretary for recordal. Q: How are transfers of subscription not fully paid done? A: In case of subscription not fully paid, the corporation may record such transfer, provided that the transfer is approved by the board of directors and the transferee executes a verified assumption of obligation to pay the unpaid balance of the subscription.

c. Negotiabilityi. Requirements for Valid

Transfer of Stocks

Q: Is a stock certificate negotiable? A: No. It is regarded as quasi‐negotiable in the sense that it may be transferred by endorsement coupled with delivery.

Q: Why is a stock certificate not negotiable? A: Because the holder thereof takes it without prejudice to such rights or defenses as the registered owners or

transferor’s creditor may have under the law, except insofar as such rights or defenses are subject to the limitations imposed by the principles governing estoppel. (De los Santos v. Republic, G.R. No. L‐4818, Feb. 28, 1955)

Q: What are the requirements for a valid transfer of stock? A:

1. The certificate of stock must be duly endorsed by the transferor or his legal representative.

2. There must be delivery of the stock certificate.

3. To be valid against third parties, the transfer must be recorded in the books of the corporation. (G.R. No. 124535, September 28, 2001)

d. Issuancei. Full Payment

A corporation may now, in the absence of provisions in their by laws to the‐ contrary, apply payments made by subscribers‐stockholders, either as:

Full payment for the corresponding number of shares of stock, the par value of each of which is covered by such payment; or

ii. Payment Pro-Rata

Payment pro rata ‐ to each and all the entire number of shares subscribed for. (Baltazar v. Lingayen Gulf Electric Power Co., Inc, G.R. No. L 16236‐ ‐38, June 30, 1965)

Q: What is the Doctrine of Individuality of Subscription? A: A subscription is one entire and indivisible whole contract.

It cannot be divided into portions. (Sec. 64)

e. Lost or Destroyed Certificates

Requirements and procedure for issuance of new certificates of stock in lieu of those lost, stolen or destroyed: 1. The registered owner of a certificate of stock in a corporation or his legal representative shall file with the corporation an affidavit in triplicate setting forth:

a. The circumstances as to how the certificate was lost, stolen or destroyed; b. The number of shares represented by such certificate; c. The serial number of the certificate; and d. The name of the

corporation which issued the same. 2. He shall also submit such other information and evidence which he may deem necessary. 3. Publication of a notice in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the registered owner of such certificate of stock. 4. If no contest has been presented within 1 year from the date of the last publication, the right to make such contest shall be barred and said corporation shall cancel in its books the certificate of stock which has been lost, stolen or destroyed and issue in lieu thereof new certificate of stock. However, the registered owner may file a bond or other security, effective for a period

of 1 year, for such amount and in such form and with such sureties as may be satisfactory to the board of directors, in which case a new certificate may be issued even before the expiration of the one 1 year period. 5. If a contest has been presented to said corporation or if an action is pending in court regarding the ownership of said certificate of stock, the issuance of the new certificate of stock shall be suspended until the final decision by the court regarding the ownership of said certificate of stock. Except in case of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against any corporation which shall have issued certificate of stock in lieu of those lost, stolen or destroyed pursuant to the procedure above-described.

6. Stock and Transfer Booka. Contents

Q: What are the contents of a stock and transfer book? A: 1. All stocks in the name of

the stockholders alphabetically arranged

2. Amount paid and unpaid on all stocks and the date of payment of any installment

3. Alienation, sale or transfer of stocks

4. Other entries as the by‐laws may prescribe

b. Who May Make Valid Entries

Q: Who may make proper entries in stock and transfer books?

A: The obligation and duty falls on the corporate secretary. If

the corporate secretary refuses to comply, the stockholder may rightfully bring suit to compel performance. The stockholder cannot take the law on to his hands; otherwise such entry shall be void. (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997)

7. Disposition and Encumbrance of Sharesa. Allowable Restrictions on the Sale of Shares

Q: Can a stockholder dispose of his shares without any restriction? A: Shares of stock are regarded as personal property of the stockholder and as a general rule, he may dispose of them as he sees fit unless the corporation has been dissolved, or unless the right to do so has been restricted in the articles of incorporation and in the stock certificate or the owner’s right of disposing his shares has been hampered by his own actions. Q: Can the corporation provide regulations to the sale/transfer of the shares of stockholders? A: Yes, but the authority granted to a corporation to regulate the transfer of its stock does not empower it to restrict the right of a stockholder to transfer his shares, but merely authorizes the adoption of regulations as to the formalities and procedure to be followed in effecting transfer (Thomson vs. CA, G.R. No. 116631, October 28, 1998). Q: What are the requisites for a restriction to be valid? A: To be valid, restrictions on the sale/transfer of shares must be: 1. Provided in the articles of

incorporation and 2. it must be printed at the

back of the certificate of stock.

Note: The latter requirement is needed to bind third persons who may buy or deal with the shares of stock.

b. Sale of Partially Paid SharesQ: May a shareholder sell his shares if the payment of his subscription is incomplete? A: Yes. The incomplete payment of the subscription does not preclude the subscriber from alienating his shares of stock. Since in this case, there is still no stock certificates that can be issued (See Sec. 64), the transfer may thru a “Share Purchase Agreement Contract.”

c. Sale of a Portion of Shares Not Fully Paid

Q: Is the sale of a portion of shares not fully paid allowed? A: Yes, in case of delinquent shares.

d. Sale of All of Shares Not Fully Paid

Q: Is the sale of shares of not fully paid subscription allowed?

A: Yes but to bind the corporation, consent of the corporation shall be obtained unless not allowed by AOI.

e. Sale of Fully Paid SharesQ: Is the sale of fully paid shares allowed? A: Yes, even without the consent of the corporation as long as the requisites for the valid transfer of shares are complied.

f. Requisites of a Valid TransferQ: What are the requirements for a valid transfer of stock already fully paid and covered by stock certificates?A:

1. There must be a delivery of the stock certificate.

2. The certificate of stock must be duly endorsed by the transferor or his legal representative.

3. To be valid against third parties, the transfer must be recorded in the books of the corporation (Rural Bank of Lipa vs. CA, G.R. No. 124535, September 28, 2001).

g. Involuntary Dealings with SharesQ: What is involuntary dealing? A: It refers to such writ, order or process issued by a court of record affecting shares of stocks which by law should be registered to be effective, and also to such instruments which are not the willful acts of the registered owner and which may have been executed even without his knowledge or against his consent.

J. Dissolution and Liquidation1. Modes of Dissolution

a. Voluntaryi. Where No Creditors Are

Affectedii. Where Creditors Are

Affectediii. By Shortening of Corporate

Termb. Involuntary

i. By Expiration of Corporate Term

ii. Failure to Organize and Commence Business Within 2 Years from Incorporationiii. Legislative Dissolutioniv. Dissolution by the SEC on

Grounds under Existing Laws2. Methods of Liquidation

a. By the Corporation Itselfb. Conveyance to a Trustee within a

Three-Year Periodc. By Management Committee or Rehabilitation Receiverd. Liquidation after Three Years

K. Other Corporations1. Close Corporations

Requirements to be a Close Corporation:a.) all of the corporation’s stocks

issued of all classes shall be held or owned by not more than twenty (20) persons;

b.) all stocks issued shall be subject to one or more restrictions on transfer permitted by this title;

c.) the corporation shall not list in any stock exchange or make any public offering of any of its stocks of any class.

A corporation is not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights are owned or controlled by another corporation.

Any corporation may be incorporated as a close corporation except the following which vested with public interest:

i.) mining or oil companies;

ii.) stock exchanges;iii.) banks and insurance

companies;iv.) public utilities,

educational, and other corporations vested with public interest.

a. Characteristics of a Close CorporationManagement of corporate business is by the stockholders and not by

the board of directors, in which case:

i.) stockholders do not need to meet to elect directors;

ii.) stockholders shall be deemed to be the directors;

iii.) stockholders shall be subject to liabilities pertaining to directors.

b. Validity of Restrictions on Transfer of Shares

All charter restrictions on the transfer of shares must appear in: 1.) the articles of

incorporation;2.) the by-laws;3.) the certificate of stock;

Otherwise, such restrictions will not be binding on any purchaser in good faith. The most common restriction is similar to the right of pre-emption of stockholders in an open stock corporation.

c. Issuance or Transfer of Stock in Breach of Qualifying ConditionsStock of a close corporation is not transferrable when issued for transferred to:

1.) a person not entitled to be a holder under the articles of incorporation;

2.) to a person not qualified as per the certificate of stock;

3.) to persons exceeding the required twenty (20);

4.) in violation of the restrictions specified in the certificate;

5.) to a person who has notice that –

a. he is not eligible;

b. that the issue to him would

exceed the required twenty stockholders permitted to hold stock; or,

c. the transfer to him is in violation of the restriction or transfer of stock.

d. When Board Meeting is Unnecessary or Improperly Held

When Unnecessary:(1.) Before or after

such action is taken written consent thereto is signed by all the directors;

(2.) All the stockholders have actual or implied knowledge of the action and make no prompt objection thereto in writing;

(3.) The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders;

(4.) All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.

When Improperly Held If a director’s meeting is

held without proper call or notice, an action taken therein within corporate powers is deemed ratified by a director who failed to attend, unless he

promptly files his written objection with the secretary of the corporation after having knowledge thereof.

e. Pre-Emptive RightThe pre-emptive right

of stockholders in close corporation shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.

f. Amendment of Articles of Incorporation

Any amendment to the articles of Incorporation to:

1.) Delete or remove any provision in the articles of incorporation; or

2.) Reduce a quorum or voting requirement in the Articles requires the affirmative vote of at least two-thirds (2/3) of the outstanding capital stock, whether with or without voting rights, or of such greater proportion of shares as provided in the Articles of Incorporation.

g. DeadlocksDeadlock means

stagnation in the management of the corporation’s business and affairs due to the split and divided action of directors or stockholders such that the required vote for the approval

of any corporate act cannot be obtained.

2. Non-Stock Corporations

a. DefinitionA non-stock

corporation is one where no part of its income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution.

b. Purposes

Non-stock corporations may be formed or organized for charitable, religious, educational, professional, cultural, fraternal, literary, scientific, social, civic, service, or similar purposes, like trade, industry, agricultural and like chambers, or any combination thereof, subject to the special provisions of this title governing particular classes of non-stock corporations.

c. Treatment of Profits

The provisions governing stock corporations, when pertinent, shall be applicable to non-stock corporations, except as may be covered by specific provisions of this title.

d. Distribution of Assets upon Dissolution

Rules for Distribution:1.) All liabilities and

obligations of the corporation shall be made therefor;

2.) Assets held by the corporation upon a condition requiring return, transfer, or conveyance, and which condition occurs by reason of this dissolution,

shall be returned, transferred, or conveyed in accordance with the requirements;

3.) Assets received and held by the corporation subject to limitations permitting their use only for charitable, religious, benevolent, educational, or similar purposes;

4.) Assets other than those mentioned in the preceding paragraphs, if any, shall be distributed in accordance with the provisions of the articles of incorporation or the by-laws;

5.) In any other case, assets may be distributed such people, societies, organizations or corporations, whether or not organized for profit.

3. Religious Corporations

Religious corporations may be incorporated by one or more persons, such corporation may be classified into corporation sole and religious societies.

4. Foreign Corporations

Foreign Corporation is one which is organized or chartered under the laws of an outside state or country.

a. Bases of Authority over Foreign

Corporationsi. Consent

Obtaining of license, which is tantamount to consent, is required to subject

the foreign corporation doing business in the Philippines to the jurisdiction of the courts.

ii. Doctrine of “Doing Business” (related to definition under the

Foreign Investments Act, R.A. No. 7042)

Under R.A. 5455, “doing business” in the Philippines means soliciting of orders, purchases, service contracts, opening offices management, has supervision or control of any domestic subsidiary, or performing any other act which implies a continuity of commercial dealings or arrangements.

b. Necessity of a License to Do Businessi. Requisites for Issuance of a

LicenseForeign Corporations are

required to get a license by the Bureau of Investments if:

(a) It owns more than 40% of the voting stocks of a domestic corporation; or,

(b) It owns more than 30% of the authorized capital stock of a domestic corporation.

ii. Resident AgentA resident agent maybe

either an individual residing in the Philippines or a domestic corporation lawfully transacting business I the Philippines; provided, that in the case of an individual, he must be of good moral character and of sound financial standing.

c. Personality to Sue

No foreign corporation transacting business in the Philippines without a license, or its successor or assigns, shall be permitted to maintain or intervene in any action, suit or

proceeding in any court or administrative agency of the Philippines. Such corporation maybe sued, or proceeded against, before the Philippine courts or administrative tribunals on any valid cause of action recognized under the Philippine laws.

d. Suability of Foreign Corporations/ e. Instances When Unlicensed

Foreign Corporations May Be Allowed to Sue Isolated TransactionsThe basis of suability is that any

foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class, save and except such as only provided for the creation, formation, organization or dissolution of corporations or such as fix the relations, liabilities, responsibilities or duties of stockholders, members, or officers, of corporations to each other or to other corporation.

f. Grounds for Revocation of LicenseAmong other others, they are, as

follows:1.) Failure to file its

annual report or pay any fees as required by this code;

2.) Failure to appoint and maintain a resident agent in the Philippines as required by this title;

3.) Failure, after change of its resident agent or of his address, to submit to submit to the SEC a statement of such change as required by this title;

4.) Failure to submit to the SEC an authenticated copy

of any amendment to its articles of incorporation or by-laws or of any articles of merger or consolidation within the time prescribed by this title;

A misrepresentation of any material matter in any application, report, affidavit or other document submitted such corporation pursuant to this title.VII. Securities Regulation Code

(R.A. No. 8799)A. State Policy, Purpose

The establishment of a socially conscious, free market that:

(1) Regulates itself;(2)Encourage the widest participation of ownership in enterprises;(3) Enhance the democratization of wealth;(4) Promote the development of the capital market;(5) Protect investors;(6) Ensure full and fair disclosure about securities;(7) Minimize if not totally eliminate insider trading and other fraudulent or manipulative devices and practices which create distortions in the free market (Sec. 2).

B. Securities Required to Be RegisteredGeneral rule: Securities shall not be sold or offered for sale or distribution to the public within the Philippines, without a registration statement duly filed with and approved by the Commission (Sec. 8.1) [N.B. The Securities Regulation Code (SRC) regulates public offering within the Philippines.]

1. Exempt Securities1. Any security issued or

guaranteed by the Government of the Philippines/ its political subdivision or agency/its instrumentality/ or any person controlled or supervised thereby; [N.B. Rationale for the exception: The public does not

need protection from the government itself. The government will always be solvent to pay its obligations because of its ability to raise revenues through taxation.]

2. Any security issued or guaranteed by the government of any country with which the Philippines maintains diplomatic relations, or by any state, province or political subdivision thereof on the basis of reciprocity: Provided, that the Commission may require compliance with the form and content for disclosures the Commission may prescribe; [Rationale for the exception: This is rooted in comity among nations.]

3. Certificates issued by a receiver or by a trustee in bankruptcy duly approved by the proper adjudicatory body; [Rationale: This is not a public offering. Besides, protection is already afforded by that “proper adjudicatory body” and additional SEC protection is not necessary.]

4. Any security or its derivatives the sale or transfer of which, by law, is under the supervision and regulation of the Office of the Insurance Commission, Housing and Land Use Rule Regulatory Board, or the Bureau of Internal Revenue. [Rationale: The issuers are governmental agencies covered by exception (a) above. SEC protection would be a duplication.]

5. Any security issued by a bank except its own shares of stock (Sec. 9.1) [Rationale: Banks are under the supervision of the Bangko Sentral. SEC protection is a duplication.]

6. Any class of security with respect to which the SEC finds that registration is not

necessary in the public interest and for the protection of investors (Sec. 9.2)

2. Exempt Transactions1. Any judicial sale, or sale by an

executor, administrator, guardian, receiver or trustee in insolvency or bankruptcy.

2. Those sold by a pledge, mortgagee, or any other similar lien holder, to liquidate a bona fide debt (a security pledged in good faith as security for such debt

3. Those sold or offered for sale in an isolated transaction, the owner not being an underwriter

4. Distribution by the corporation of securities to its stockholders as dividends;

5. Sale of capital stock of a corporation to its own stockholders exclusively

6. Bonds or notes secured by a mortgage are sold to a single purchaser at a single sale

7. Delivery of security in exchange for any other security pursuant to the right of conversion

8. Broker’s transactions executed upon the customer’s orders

9. Share subscriptions prior to incorporation or in pursuance of an increase in its authorized capital stock

10. Exchange of securities by the issuer with its existing security holders exclusively

11. Sale by issuer to fewer than 20 persons in the Philippines during any 12 month period

12. Sale to banks, investment houses, insurance companies and any entities ruled qualified by the SEC

C. Procedure for Registration of Securities1. Application – All securities required

to be registered shall be registered through the filing by issuer with SEC, of a sworn registration statement.

2. Prospectus – The registration statement shall include any prospectus required or permitted to be delivered;

3. Other information – The information required for the registration of any kind and all securities shall include, among others, the effect of the securities’ issue on ownership, on the mix of ownership, especially foreign and local ownership;

4. Signatories to registration statement – The registration statement shall be signed by the issuer’s:

1. Executive officer2. Principal operating officer3. Comptroller4. Principal accounting officer5. Corporate secretary or

persons performing similar functions

Note: it shall be accompanied by a duly verified resolution of the BoD of the issuer

5. Written consent of expert – The written consent of the expert named as having certified any part of the registration statement or any document used in connection therewith shall also be filed

6. Certification by selling stockholders – Where the registration statement includes:

1. Shares to be sold by the selling shareholders

2. A written certification by such selling shareholders as to the accuracy of any part of the registration statement contributed by such selling shareholders shall also be filed

7. Fees – The issuer shall pay to the SEC; the SEC shall prescribe by rule, diminishing the fees in inverse proportion, the value of the aggregate price of the offering

8. Notice and publication – Notice of the filing of the registration statement shall be immediately published by the issuer in two newspapers of general circulation in the Philippines; once a week for

two consecutive weeks, reciting that:

1. A registration statement has been filed, and

2. The aforesaid registration statement and papers attached thereto are open to inspection at the SEC during business hours.

Note: copies shall be furnished to interested parties at a reasonable charge.

9. SEC Power for production of books – The SEC may:

1. Compel the production of all the books and papers of such issuer

2. Administer oaths10. Examine the officers of such issuer,

or any other person connected therewith as to its business and affairs

11. Ruling – Within 45 days after the date of the filing of the registration statement, or by such later date to which the issuer has consented, the SEC shall declare the registration statement effective or rejected, unless the applicant is allowed to amend the registration statement.

D. Prohibitions on Fraud, Manipulation and Insider Trading

1. Manipulation of Security Prices1. Transactions intended to

create active trading:a. Wash Sale –

engaging in transaction in which there is no genuine change in the actual ownership of a security

b. Matched Sale – There is a change of ownership in the securities by entering an order for the purchase/sale of security with the knowledge that a

simultaneous order of substantially the same size, time, and price, for the sale or purchase of any such security, has or will be entered by or for the same or different parties.

c. Similar transactions where there is no change of beneficial ownership.

2. Engaging in transactions which induce price to increase or decrease:

a. Marking the close – buying and selling securities at the close of the market to alter the closing price of the security.

b. Painting the tape – engaging in a series of transactions in securities that are reported publicly to give the impression of activity or price movement in a security.

c. Squeezing the float – refers to taking advantage of a shortage of securities in the market by controlling the demand side and exploiting market congestion during such shortages in a way to create artificial prices.

d. Hype and dump – engaging in buying activity at increasingly higher prices and then selling securities in

the market at the higher prices.

e. Boiler room operations – the use of high pressure sale tactics to promote purchase and sale of securities

f. Daisy chain – it refers to a series of purchase and sales of the same issue at successively higher prices by the same group of people with

2. Short SalesIt is the selling of shares which the seller does not actually own or possess and therefore he cannot, himself, supply the delivery.

3. Fraudulent Transactions1. Obtaining money or

property by means of any untrue statement of a material fact

2. Engaging in any act, transaction, practice or course of business, which operates as a fraud or deceit upon any person.

4. Insider TradingA purchase or sale made by an insider or his relative within the second degree shall be presumed to be effected while in possession of material non public information if‐ transacted after such information came into existence but prior to the public dissemination of such information, and lapse of reasonable time for the market to absorb such information.

An insider is a person in possession of corporate information not generally available to the public.

E. Protection of Investors1. Tender Offer Rule

Publicly declared intention to buy securities of public companies given to all stockholders by:

1. Filing with the SEC a declaration to that effect, and paying the filing fee.

2. Furnishing the issuer a statement containing the information required of the issuers as SEC may prescribe, including subsequent or additional materials.

3. Publishing all requests or invitations for tender, or materials making a tender offer or requesting or inviting letters of such security.

Tender offer is in place to protect the interest of minority stockholders of a target company against any scheme that dilutes the share value of the investments. It affords such minority shareholders the opportunity to withdraw or exit from the company under reasonable terms, a chance to sell their shares at the same price as those of the majority stockholders.

2. Rules on Proxy SolicitationRequisite for valid proxy solicitation:

1. It must be in writing2. It must be signed by the

stockholder or his duly authorized representative

3. It must be filed before the scheduled meeting with the corporate secretary (Sec. 20)

Note: The proxy shall be valid only for the meeting for which it is intended. No proxy shall be valid and effective for a period longer than 5 years at one time.

3. Disclosure RuleIt begins at registration and continues periodically thru periodic report.

May be suspended when on the first day of the fiscal year if it has less than 100 shareholders (Rule 17.1, SRC IRR).

General rule: Disclosure does not end because once a reporting company, it remains as such even when registration of securities has been revoked (Rule 13 SCR IRR).

Exception: If the primary license is revoked.

Exception to the exception: In case of hospitals and educational institutions if the primary license is revoked, disclosure requirement still continues because of public interest.

F. Civil LiabilityGrounds for civil liability to arise:

1. False Registration Statement. (Sec. 56)

2. Fraud with connection to prospectus, communications and reports. (Sec. 57)

3. Fraud in connection with security transactions. (Sec. 58)

4. Manipulation of security prices. (Sec. 60)

5. Insider trading. (Sec. 61)

Prescriptive period for filing of action: 2 years after the discovery of the facts constituting the cause of action and within 5 years after such cause of action accrued.

VIII. Banking Laws A. The New Central Bank Act (R.A. No. 7653)

1. State Policies The State shall maintain a central monetary

authority that shall function and operate as an independent and accountable body corporate in the discharge of its mandated responsibilities concerning money, banking and credit. (Sec. 1)

2. Creation of the Bangko Sentral ng Pilipinas (BSP)

Nature of the BSP(1) A central monetary authority;(2) An independent and accountable body; and(3) A government-owned corporation but enjoys fiscal and administrative autonomy. (Secs. 1 & 2, NCBA)

The BSP shall have a capitalization of P50B to be fully subscribed by the Government. (Sec. 2)

3. Responsibility and Primary Objective Primary Objectives(1) To maintain price stability conducive to a balanced and sustainable growth of the economy.(2) To promote and maintain monetary stability and the convertibility of the peso.Other Responsibilities(1) To provide policy directions in the areas of money, banking, and credit(2) To supervise operations of banks (Sec. 3, NCBA)All powers, duties and functions vested by law in the Central Bank of the Philippines not inconsistent with the NCBA shall be deemed transferred to the BSP. All references to the Central Bank of the Philippines in any law or special charters shall be deemed to refer to the BSP. (Sec. 136, NCBA)

4. Monetary Board—Powers and Functions Monetary BoardThe body through which the powers and functions of the Bangko Sentral is exercised (Sec 6, NCBA)Powers and Functions(1) Issue rules and regulations it considers necessary for the effective discharge of the responsibilities and exercise of the powers vested in it;(2) Direct the management, operations, and administration of Bangko Sentral, organize its personnel and issue such rules and regulations as it may deem necessary or desirable for this purpose;(3) Establish a human resource management system which governs the selection, hiring, appointment, transfer, promotion, or dismissal of all personnel;(4) Adopt an annual budget for and authorize such expenditures by Bangko Sentral as are in the interest of the effective administration and operations of Bangko Sentral in accordance with applicable laws and regulations; and

(5) Indemnify its members and other officials of Bangko Sentral, including personnel of the departments performing supervision and examination functions, against all costs and expenses reasonably incurred by such persons in connection with any civil or criminal action, suit or proceeding, to which any of them may be made a party by reason of the performance of his functions or duties, unless such members or other officials is found to be liable for negligence or misconduct. (Sec. 15, NCBA)

5. How the BSP Handles Banks in Distress Liquidity – Ability of an asset to be converted into cash. An entity is liquid when it is able to pay its liabilities when they fall due.Solvency – When current assets are more than current liabilities, providing the ability to pay debts. An entity is solvent when it is able to meet its long term obligations/liabilities.Insolvency – When the actual market value of assets are insufficient to pay its liabilities, not considering capital stock and surplus which are not liabilities for such purpose. An entity is insolvent when it is unable to meet current and long-term obligations.a. Conservatorship

Applicability(1) When a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors (Sec. 29)(2) Determination is to be made by the MB on the basis of a report submitted by the appropriate supervising or examining department (Sec. 29)Period and termination(1) Period: shall not exceed 1 year (Sec. 29)(2) The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned (Sec. 29)(3) Grounds for termination of conservatorship by MB:(a) When it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary(b) When, on the basis of the report of the conservator or of its own findings, the MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors (the bank or quasi-bank would then be placed under receivership) (Sec. 29)

Effects of conservatorship(1) Bank/Quasi-bank retains juridical personality(2) Not a precondition to the designation of a receiver, and;(3) Perfected transactions cannot be repudiated

b. Closure Close now, hear later scheme Sec. 29 of the Central Bank Act does NOT contemplate prior notice and hearing before a bank may be directed to stop operations and placed under receivership. It is enough that such action is made subject of a subsequent judicial review. When the law provides for the filing of a case within 10 days after the receiver takes charge of the assets of the bank, it is unmistakable that the assailed actions should precede the filing of the case. The legislature could not have intended to authorize “no prior notice and hearing” in the bank’s closure and at the same time allow a suit to annul it on the basis of absence thereof (Central Bank vs. Cam GR No. 76118, March 30, 1993)

c. Receivership GroundsWhenever the MB finds that a bank or quasi-bank:(1) Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community;(2) Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or(3) Cannot continue in business without involving probable losses to its depositors or creditors; or(4) Has willfully violated a cease-and-desist order under Sec. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institutionReceiver(1) If a banking institution: the PDIC(2) If a quasi-bank: any person of recognized competence in banking or financeThe appointment of a receiver shall be vested exclusively in the MB. And the designation of a conservator is not a

precondition to the designation of a receiver.Powers and duties of a receiver(1) Immediately gather and take charge of all the assets and liabilities of the institution(2) Administer the assets for the benefit of the creditors(3) Exercise the general powers of a receiver under the Revised Rules of Court(4) Not to pay or commit any act that will involve the transfer or disposition of any asset of the institution, except:(a) Administrative expenditures(b) Receiver may deposit or place funds in non-speculative investments(5) Subject to prior approval of the MB, determine, as soon as possible, but not later than 90 days from take-over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public. The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution.

d. Liquidation Should the determination be that the institution cannot be rehabilitated or permitted to resume business, the MB shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with the liquidation of the institution.Procedure(1) The receiver shall file ex parte with the proper RTC, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to the liquidation plan adopted by the PDIC (if quasi-bank, liquidation plan adopted by the MB)(2) Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice,(a) Adjudicate disputed claims against the institution,(b) Assist the enforcement of individual liabilities of the stockholders, directors, and officers, and

(c) Decide on other issues as may be material to implement the liquidation plan(3) The receiver shall convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code. The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution.DispositionsIn case of a liquidation of a bank or quasi-bank, after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on concurrence and preference of credit in the Civil Code. (Sec. 31, NCBA)All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank shall be used to pay the costs of proceedings, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with other additional expenses caused thereby.The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available to creditors. (Sec. 32, NCBA)Effects of Appointment of Receiver/Liquidation(1) Retention of juridical personality(2) Suspension of operations/ Stoppage of business(3) Assets are deemed in custodial legis, i.e., exempt from garnishment, levy or execution(4) Stay of execution of judgment to prevent depletion of bank assets(5) Bank is not liable to pay interest on deposits which accrued during the period of suspension of operation(6) Restriction of bank’s capacity to do new business (new loans, deposits) but with obligation to collect preexisting debts

6. How the BSP Handles Exchange Crisis

a. Legal Tender Power All notes and coins issued by the BSP shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private.Limitation: Coins shall be legal tender in amounts not exceeding P50 for denominations of 25 centavos and above, and in amounts not exceeding P20 for denominations of 10 centavos or less unless otherwise fixed by the MB.The maximum amount of coins to be considered as legal tender is: [BSP Circular 537 (2006) ]1. P1,000.00 for denominations of 1-Piso, 5-Piso and 10-Piso coins; and2. P100.00 for denominations of 1-sentimo, 5-sentimo, 10-sentimo, and 25-sentimo coins. (Sec. 52)

b. Rate of Exchange The MB shall:(1) Determine the exchange rate policy of the country;(2) Determine the rates at which the Bangko Sentral shall buy and sell spot exchange;(3) Establish deviation limits from the effective exchange rate or rates as it may deem proper.(4) Determine the rates for other types of foreign exchange transactions by the BSP, including purchases and sales of foreign notes and coins.Limitation: The margins between the effective exchange rates and the rates established by the MB may not exceed the corresponding margins for spot exchange transactions by more than the additional costs or expenses involved in each type of transactions. (Sec. 74)

B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)

1. Purpose (1) To give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding; and(2) So that the people’s money may be properly utilized by banks in authorized loans to assist in the economic development of the country. (Sec. 1)The absolute confidentiality rule in R.A. No. 1405 actually aims at protection from unwarranted inquiry or investigation if the

purpose of such inquiry or investigation is merely to determine the existence and nature, as well as the amount of the deposit in any given bank account. (China Banking Corp. v. Ortega, 1973)

2. Prohibited Acts (1) No person, government official, bureau or office may examine, inquire into or look into such deposits; and(2) No official or employee of any banking institution may disclose to any unauthorized person any information concerning said deposits. (Sec. 3)

3. Deposits Covered All peso-denominated deposits of whatever nature with banks or banking institutions in the Philippines are hereby considered as of an absolutely confidential nature and may not be examined. [N.B. The confidentiality of foreigncurrency deposits is governed by the Foreign Currency Deposit Act.]Includes investments in bonds issued by the Philippine Government, its political subdivisions and its instrumentalities, regardless of the currency of denomination. (Sec. 2)Under the RA 1405, bank deposits are statutorily protected or recognized zones of privacy. (People v. Estrada, G.R. No. 164368, April 2, 2009; Marquez v. Desierto, G.R. No. 135882, June 27, 2001, 359 SCRA 772; Ople v. Torres, G.R. No. 107737. October 1, 1999, 316 SCRA 43)The term deposits as used in RA 1405 is to be understood broadly and not limited only to accounts which give rise to a creditor-debtor relationship between the depositor and the bank.If the money deposited under an account may be used by banks for authorized loans to third persons, then such account, regardless of whether it creates a creditor-debtor relationship between the depositor and the bank, falls under the category of accounts which the law precisely seeks to protect for the purpose of boosting the economic development of the country.Considering the use of the phrase “of whatever nature” RA 1405 applies not only to money which is deposited but also to those which are invested. Thus, the protection afforded by RA 1405 extends to

trust accounts. (Ejercito v. Sandiganbayan (Special Division), 2006)

4. Exceptions (1) Upon written permission of the depositor;(2) In cases of impeachment;(3) Upon order of a competent court in cases of:(a) Bribery;(b) Dereliction of duty of public officials; or(4) Where the money deposited or invested is the subject matter of the litigation. (Sec. 2)By the phrase "subject matter of the action" is meant "the physical facts, the things real or personal, the money, lands, chattels, and the like, in relation to which the suit is prosecuted, and not the delict or wrong committed by the defendant. (Mathay v. Consolidated Bank and Trust Company, 1974).We note with approval the difference between the "subject of the action" from the "cause of action." We also find petitioner's definition of the phrase "subject matter of the action" is consistent with the term "subject matter of the litigation," as the latter is used in the Bank Deposits Secrecy Act.Where the plaintiff is fishing for information so it can determine the culpability of private respondent and the amount of damages it can recover from the latter. It does not seek recovery of the very money contained in the deposit. The subject matter of the dispute may be the amount of P999,000.00 that petitioner seeks from private respondent as a result of the latter's alleged failure to inform the former of the discrepancy; but it is not the P999,000.00 deposited in the drawer's account. By the terms of R.A. No. 1405, the "money deposited" itself should be the subject matter of the litigation. (Union Bank v. Court of Appeals, 1999)The exception applies to cases of concealment of illegally acquired property in anti-graft cases. The inquiry into illegally acquired property – or property NOT "legitimately acquired" – extends to cases where such property is concealed by being held by or recorded in the name of other persons. (Banco Filipino v. Purisima, 1988)

The exception even extends to cases of concealment of illegally acquired property not involving anti-graft cases as long as money deposited was the subject matter of litigation. (Mellon Bank, N.A. v. Magsino, 1990)Other Exceptions(1) Upon order of a competent court in cases of unexplained wealth under Sec. 8 of RA 3019 or the Anti- Graft and Corrupt Practices Act (PNB v. Gancayco, 1965; Banco Filipino v. Purisima, 1988; Marquez v. Desierto, 2001)(2) When inquiry is conducted under the authority of the Commissioner of Internal Revenue into the bank accounts of the following:(a) A decedent in order to determine his gross estate(b) Any taxpayer who has filed an application for compromise of his tax liability, which application shall include a written waiver of his privilege under RA 1405 or under other general or special laws Note: Information obtained from banks and financial institutions may be furnished to a foreign tax authority pursuant to an existing convention or agreement. (Sec. 6(F), NIRC, as amended by RA 10021)(3) Upon order of a competent court in cases under the Anti-Money Laundering Act of 2001 (RA 9160, hereinafter “AMLA”), when there is probable cause that the deposits or investments involved are in any way related to an unlawful activity or a money laundering offense, except that no court order required if:(a) Funds or property involved consists of investments; or (b) Said investments are related to:(i) Kidnapping for ransom(ii) Unlawful activities under Comprehensive Drugs Act of 2002 (RA 9165);(iii) Hijacking and other violations under RA 6235; and(iv) Destructive arson and murder, including those perpetrated by terrorists against non-combatants and similar targets.(4) BSP inquiry or examination in the course of its periodic or special examination of the bank (Sec. 11, AMLA).(5) Disclosure of certain information about bank deposits which have been dormant for

at least 10 years, to the Treasurer of the Philippine in a sworn statement, a copy of which is posted in the bank premises. (Sec. 2, Unclaimed Balances Law [Act No. 3926, as amended])(6) The PDIC and/or the BSP can inquire into or examine deposit accounts and all information related thereto in case there is a finding of unsafe and unsound banking practice (Sec. 8, paragraph 8, R.A. 3591, as amended by R.A. 9576).

5. Garnishment of Deposits, including Foreign Deposits

General rule: The prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment (China Banking Corporation v. Ortega, 1973; Philippine Commercial and Industrial Bank v. Court of Appeals, 1991)“…the prohibition against examination of or inquiry into a bank deposit under Republic Act 1405 does not preclude its being garnished to insure satisfaction of a judgment. Indeed there is no real inquiry in such a case, and if the existence of the deposit is disclosed the disclosure is purely incidental to the execution process. It is hard to conceive that it was ever within the intention of Congress to enable debtors to evade payment of their just debts, even if ordered by the Court, through the expedient of converting their assets into cash and depositing the same in a bank.” (China Banking Corporation v. Ortega, 1973)Exception: Foreign Currency Deposits – The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (Sec. 8, Foreign Currency Deposit Act)General rule: Foreign currency deposits are confidential.Exceptions:(1) Upon written permission of the depositor (Sec. 8, Foreign Currency Deposit Act ; Intengan vs CA ; 2002)(2) Upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 [as in the case of peso deposits, supra]

(3) During Bangko Sentral’s periodic or special examinations [as in the case of peso deposits, supra], and (4) Disclosure of the Treasurer of the Philippines when the unclaimed balances law applies (Act 3936, as amended by PD 679)(5) BSP/PDIC inquiry if there is a finding of unsafe and unsound banking practice (as in the case of peso deposits, supra)(6) In Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed, pro hac vice, garnishment of foreign currency deposits stating: “If we rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.”

C. General Banking Law of 2000 (R.A. No. 8791) 1. Definition and Classification of Banks

Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. (Sec. 3.1, GBL)Core banking Functions:(1) Taking of deposits from the public(2) Lending out these funds (Morales, The Philippine GBL Annotation).Classification of Banks:(1) Universal Banks (UB) – These used to be called expanded commercial banks and their operations are primarily governed by the GBL. They can exercise the powers of an investment house and invest in non-allied enterprises. They have the highest capitalization requirement.(2) Commercial Banks (KB) – These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than a UB and cannot exercise the powers of an investment house and invest in non-allied enterprises.(3) Thrift Banks – These are:

(a) Savings and mortgage banks;(b) Stock savings and loan associations; and(c) Private development banks (Sec. 3.2)

Note: The term ‘thrift banks’ also refers to any banking corporation organized for the following purposes:(i) Accumulating the savings of depositors and investing them, together with capital loans secured by bonds, mortgages in real estate and insured improvements thereon, chattel mortgage, bonds and other forms of security or in loans for personal or household finance, whether secured or unsecured, or in financing for homebuilding and home development; in readily marketable and debt securities; in commercial papers and accounts receivables, drafts, bills of exchange, acceptances or notes arising out of commercial transactions; and in such other investments and loans which the Monetary Board may determine as necessary in the furtherance of national economic objectives;(ii) Providing short-term working capital, medium- and long-term financing, to businesses engaged in agriculture, services, industry and housing; and(iii) Providing diversified financial and allied services for its chosen market and constituencies especially for small and medium enterprises and individuals. (Sec.3(a), R.A. 7906)(4) Cooperative Banks – These are banks organized primarily to make financial and credit services available to cooperatives and their members. It may perform any or all of the services offered by a rural bank, including the operation of an FCDU subject to certain conditions. (Morales, The Philippine GBL Annotation)Note: A cooperative bank is one organized for the primary purpose of providing a wide range of financial services to cooperatives and their members. (Art. 23(i), R.A. 9520)(5) Islamic Banks – These are banks the business dealings and activities of which are subject to the basic principles and rulings of Islamic Shari’a. The Al Amanah Islamic Investment Bank of the Philippines, which was created by RA 6848, is the only Islamic bank in the country at this time.Note: Islamic Bank refers to the Al-Amanah Islamic Investment Bank of the Philippines, created under R.A. 6848. (See Sec. 44(1) and Sec. 2, R.A. 6848)

(6) Rural Banks – Mandated to make needed credit available and readily accessible in the rural areas on reasonable terms and which are primarily governed by the Rural Banks Act of 1992 (RA 7353)(7) Other Classifications of Banks – As determined by the Monetary Board, i.e., Philippine Veterans Bank (RA 3518), Landbank of the Philippines (RA 3844), Development Bank of the Philippines (RA 85)

2. Distinction of Banks from Quasi-Banks and Trust Entities

As Opposed to Quasi-banksQuasi-banks (QB) refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit-substitute instruments, for purposes of relending the funds so borrowed or using them to purchase receivables and other obligations. (last paragraph of Sec. 4)The term “deposit substitutes” is defined as funds obtained from the public, other than deposits, through the issuance, endorsement, or acceptance of deposit-substitute instruments for the borrower's own account, for the purposeof relending or purchasing of receivables and other obligations. It includes bankers acceptances, promissory notes, participations, certificates of assignment and similar instruments with recourse, and repurchase agreements. (Sec. 95, New Central Bank Act, hereinafter “NCBA”)As Opposed to Trust EntitiesA Trust Entity is a stock corporation or a person duly authorized by the Monetary Board to engage in trust business. (Sec. 79, GBL)A Trust Business is any activity resulting from trusteeship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of beneficiaries.

3. Bank Powers and Liabilities a. Corporate Powers

General powers incident to corporations(1) To sue and be sued in its corporate name;

(2) Succession by its corporate name for the period stated in the AOI and the certificate of incorporation(3) To adopt and use a corporate seal(4) To amend its AOI(5) To adopt by-laws, not contrary to law, morals, or public policy, and to amend or repeal them(6) To issue or sell stocks to subscribers and to sell treasury stocks.(7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, including securities and bonds of other corporations, as the transaction of the lawful business of the corporation may reasonably and necessarily require, subject to the limitations prescribed by law and the Constitution(8) To enter into merger or consolidation(9) To make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: provided that no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity(10) To establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees(11) To exercise such other powers as may be essential or necessary to carry out its purposes as stated in the AOI. (Sec. 36, Corporation Code)

b. Banking and Incidental Powers All such powers as may be necessary to carry on the business of commercial banking (Sec. 29)(1) Accepting drafts – By accepting a draft, a bank creates a “banker’s acceptance”, which is a negotiable time draft or bill of exchange drawn on and accepted by a commercial bank. This is different from “trade acceptance”, which is accepted by the buyer. (Morales, The Philippine GBL Annotation)(2) Issuing letters of credit (3) Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt(4) Accepting or creating demand deposits Deposit function

General rule: Only a Universal Bank (UB) Commercial Bank (KB) can accept or create demand deposits.Exception: Banks other than a UB or KB with prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board (Sec. 33, GBL)

4. Diligence Required of Banks — Relevant Jurisprudence

Banks should observe diligence that is higher than that expected from a good father of a family. Notwithstanding the degree of diligence required, a bank is not expected to be infallible (Prudential Bank vs. CA, 2000).Fiduciary Nature of Banks(1) Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages.(2) Under Sec. 2, the degree of diligence is “high standards of integrity and performance” and no longer “highest degree of diligence” as was decided prior to the effectivity of the General Banking Law of 2000 but also (mistakenly) even thereafter. In numerous cases, the Supreme Court has held that the highest degree of diligence and care is expected from banks (Simex International v. CA [1990]; Philippine Bank of Commercev. CA [1997]; Westmont Bank v. Ong [2002]; Solidbank v. Spouses Tan [2003]; Samsung Construction v. FEBTC [2004]; Citibank, N.A. v. Spouses Cabamongan [2006]; Philippine Savings Bank v. Chowking Food Corporation [2008]; Bank of America NT &SA v. Philippine Racing Club [2009].

5. Nature of Bank Funds and Bank Deposits As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its depositors with meticulous care, always having in mind the fiduciary nature of their relationship.In every case, the depositor expects the bank to treat his account with the utmost fidelity, whether such account consists only of a few hundred pesos or of millions. The bank must record every single transaction accurately, down to the last centavo, and as promptly as possible. This has to be done if the account is to reflect at any given time the amount of money the depositor can

dispose as he sees fit, confident that the bank will deliver it as and to whomever he directs. A blunder on the part of the bank, such as the failure to duly credit him his deposits as soon as they are made, can cause the depositor not a little embarrassment if not financial loss and perhaps even civil and criminal litigation (Simex International v. CA, 1990).Banks are expected to exercise the highest degree of diligence in the selection and supervision of their employees (PCI Bank v. CA, 2001).It cannot be over emphasized that the banking business is impressed with public interest. Of paramount importance is the trust and confidence of the public in general in the banking industry. Consequently, the diligence required of banks is more than that of a Roman pater familias or a good father of a family. The highest degree of diligence is expected (Phil. Savings Bank v. Chowking Food Corporation,2008).The banking business is so impressed with public interest where the trust and confidence of the public in general is of paramount importance such that the appropriate standard of diligence must be a high degree of diligence, if not the utmost diligence (Bank of America NT&SA v. Phil. Racing Club, 2009).Under the doctrine of last clear chance, a bank may be held liable for loss despite the negligence of a depositor.Examples of these cases are the following:(1) For disbursing funds to a dishonest employee despite the employee’s failure to strictly abide with the bank’s internal procedure. (PBC v. CA, 1997)(2) Allowing the execution of a mortgage on parcels of land as security for a loan not owned by the prospective borrower. (Canlas v. Court of Appeals, 2000)(3) Crediting the deposit in favor of another depositor, a check where the signature of the drawer was forged. (Westmont Bank v. Ong, 2002)(4) Encashing pre-signed checks of the depositor which were stolen by its employee. (Bank of America NT & SA v. Philippine Racing Club, 2009)

A bank is liable to a depositor when it honored and paid on a forged check against the depositor’s account even if the bank followed its internal procedure in preventing a faulty discharge. (Samsung Construction v. FEBTC, 2004)In Gempesaw v. Court of Appeals (1993), a bank was held liable for damages for failing to follow its internal procedures in paying on a forged check despite the gross negligence on the part of the depositor.

6. Stipulation on Interests The Monetary Board may prescribe the maturities, as well as related terms and conditions for various types of bank loans and other credit accommodations.Any change by the Board in the maximum maturities shall apply only to loans and other credit accommodations made after the date of such action.The Monetary Board shall regulate the interest imposed on micro finance borrowers by lending investors and similar lenders such as, but not limited to, the unconscionable rates of interest collected on salary loans and similar credit accommodations (Sec. 43, GBL)

7. Grant of Loans and Security Requirements a. Ratio of Net Worth to Total Risk Assets

The minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts [i.e. net worth: total risk assets] (Sec. 34, GBL)General rule: A bank must conform to the risk-based capital ratio prescribed by the MBExceptions: The MB may alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year.(1) In case of a bank merger or consolidation; OR(2) When a bank is under rehabilitation under a program approved by the BSP; (Sec. 34, GBL)PurposeA bank must not be allowed to expand the volume of its loans and investments in a manner that is disproportionate to its net worth. (MORALES, Phil. Gen. Banking Law)Effect of non-compliance(1) The MB may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net

profits be used to increase the capital accounts of the bank until the minimum requirement has been met.(2) The MB may restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the RP and the BSP and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the RP, until the minimum required capital ratio has been restored. (Sec. 34, GBL)

b. Single Borrower’s Limit General rule: The total loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, or corporation or other entity shall at no time exceed 20% of the net worth of such bank. (Sec. 35.1,GBL)Exceptions:(1) The Monetary Board otherwise prescribes for reasons of national interest. (Sec. 35.1, GBL) Now, the single borrower’s limit is 25% of the net worth of the lending bank.(2) Wholesale lending activities of government banks to participating institutions for relending to end-userborrowers: separate limit of 35% net worth. (BSP Circular No. 425 dated March 25, 2004)

c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their Related Interests)

General rule: No director or officer of any bank:(1) Shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank, nor(2) Shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bankExceptions:(1) Valid insider lending (Sec. 36, GBL)(2) Loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders (Sec. 36, GBL)Requirements for valid insider lending(1) In the regular course of business;

(2) Upon terms not less favorable to the bank than those offered to others;(3) There is a written approval of the majority of all the directors of the bank, excluding the director concerned;(Except: granted to officers under a fringe benefit plan approved by the BSP;(4) The required approval shall be entered upon the record of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP;(5) Limited to an amount equivalent to the DOSRI borrower’s unencumbered deposits and book value of his paid-in capital contribution in the bank (Sec. 36, GBL)Exceptions:(1) Non-risk items; and(2) Loans in the form of fringe benefits.A DOSRI borrower is required to waive the secrecy of his “deposits of whatever nature in all banks in the Philippines.” (Sec. 26, NCBA)PurposeThe general policy behind DOSRI rules is to level the lending field between the “insiders” and the “outsiders”. The objective is to prevent the bank from becoming a captive source of finance for DOSRI. (Morales, The Philippine General Banking Law, Opinion)Loan-Loss ProvisioningThe following are subject to regulation by the Monetary Board:(1) The amount of reserves for bad debts or doubtful accounts or other contingencies; and(2) The writing off of loans, other credit accommodations, advances and other assets. (Sec. 49, GBL)PurposeFor effective banking supervision. There is a problem of mismatch when a loan becomes non-performing. The bank is paying interest on the money it borrowed from the depositors or other placers of funds, but is not recouping that interest from the loan it made. Eventually, the bank may have to write off loan losses against profits. To cushion this eventuality, the bank is required to set aside reserved for bad debts and other doubtful accounts or

contingencies. (Morales, The Philippine General Banking Law, Opinion)To address the non-performing asset problem, RA 9182 Special Purpose Vehicle Act was passed. The Monetary Board approved certain accounting guidelines on the sale by banks and other financial institutions for housing under the said Act. (MORALES, The Philippine GBL Annotation) [N.B. RA 9182 is no longer in effect.]

IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)

A. Intellectual Property Rights in General

1. Intellectual Property Rights Those property rights which result from the

physical manifestation of original thought. Refers to the totality of all rights which the law

recognizes in favor of the author, composer, painter, artist, scientist, or any other person with respect to the creations or product of his intellect, and consists of principally, in his right to authorize or refuse the publication or production of such creations or products.

Coverage: (Sec. 4, IPC)1. Copyright2. Related rights or neighboring rights of

copyright3. Patents4. Mark5. Geographical indications6. Industrial designs7. Layout designs (topographies) of integrated

circuits8. Protection of undisclosed information

2. Differences between Copyrights, Trademarks and Patent

COPYRIGHT – confined to literary or artistic works which are original creations in the literary or artistic domain protected from the moment of their creation.

PATENT INVENTIONS – any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable (Sec. 21, IPC)

TRADEMARK – any visible sign capable of distinguishing the goods or services of an enterprise and shall include a stamped or marked container of goods (Sec. 121.1, IPC)

3. Technology Transfer Arrangements Technology Transfer Arrangements are contracts or

agreements involving the transfer of systematic knowledge for the manufacture of a product, the application of a process, or rendering of a service including management contracts; and the transfer, assignment or licensing of all forms of intellectual property rights, including licensing of computer software except computer software developed for mass market. (Sec. 4.2, IPC)

B. Patents A patent is a statutory monopoly which protects

against unlicensed use of the patented device or process even by one who discovers it properly through independent research.

Purposes:1. The Patent Law seeks to foster and reward

invention;2. It prompts disclosures of inventions to

stimulate further innovation and to permit the public to practice the invention once the patent expires;

3. The stringent requirements for patent protection seek to ensure that ideas in the public domain remain there for the free use of the public.

Principles:1. Test of Non-Obviousness – If any person

possessing ordinary skill in the art was able to draw the inferences and the constructs that the supposed inventor drew from prior art, then the latter did not really invent.

2. Unity of invention – The application shall relate to one invention only or to a group of inventions forming a single general inventive step. (Sec. 38.1, IPC)

REQUISITES OF PATENTABILITY:1. Any technical solution of a problem in any

field of human activity.2. Novelty – an invention shall be considered

new if it does not form part of a prior art.3. Inventiveness – an invention involves

inventive step if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. (Sec. 26, IPC)

4. Industrial applicability – an invention that can be produced and used in any industry (Sec. 27, IPC)

PRIOR ART shall consist of:1. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention; and2. The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: Provided, That the application which has validly claimed the filing date of an earlier application under Section 31 of this Act, shall be prior art with effect as of the filing date of such earlier application: Provided further, That the applicant or the inventor identified in both applications are not one and the same.

1. Patentable Inventions1. Useful machine2. Product3. Process4. Improvement of any of items 1, 2 and 35. Micro-organism6. Non-biological and microbiological process

2. Non-Patentable Inventions (Sec. 22, IPC)1. Discoveries, scientific theories and

mathematical methods;2. Schemes, rules and methods of performing

mental acts, playing games or doing business, and programs for computers;

3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods;

4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. This provision shall not apply to micro-organisms and non-biological and microbiological processes.

Provisions under this subsection shall not preclude Congress to consider the enactment of a law providing sui generis protection of plant varieties and animal breeds and a system of community intellectual rights protection.

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

3. Ownership of a Patent a. Right to a Patent

The right granted to an inventor by the State, or by the regional office acting for several States, which allows the inventor to exclude anyone else from commercially exploiting his invention for a limited period.

The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or more persons have jointly made an invention, the right to a patent shall belong to them jointly. (Sec. 28, IPC)

b. First-to-File Rule If two (2) or more persons have made the

invention separately and independently of each other, the right to the patent shall belong to the person who filed an application for such invention, or where two or more applications are filed for the same invention, to the applicant who has the earliest filing date or, the earliest priority date. (Sec. 29, IPC)

c. Inventions Created Pursuant to a Commission (Sec. 30, IPC)

1. The person who commissions the work for inventions created pursuant to a commission, unless otherwise provided in the contract.

2. If the employee made the invention in the course of his employment contract:

The employee, if the inventive activity is not part of his regular duties even if the employee uses the time, facilities and materials of the employer.

The employer, if the invention is the result of the performance of his regularly assigned duties, unless there is an agreement, express or implied, to the contrary.

d. Right of Priority (Sec. 31, IPC) An application for patent filed by any person

who has previously applied for the same invention in another country which by treaty, convention, or law affords similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application: Provided, That:

(a) the local application expressly claims priority;

(b) it is filed within twelve (12) months from the date the earliest foreign application was filed; and

(c) a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines.

4. Grounds for Cancellation of a Patents Cancellation of Patents - Any interested

person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds:(a) That what is claimed as the invention is

not new or Patentable;(b) That the patent does not disclose the

invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or

(c) That the patent is contrary to public order or morality.

Where the grounds for cancellation relate to some of the claims or parts of the claim, cancellation may be effected to such extent only.

5. Remedy of the True and Actual Inventor If a person, who was deprived of the patent

without his consent or through fraud is declared by final court order or decision to be the true and actual inventor, the court shall order for his substitution as patentee, or at the option of the true inventor, cancel the patent, and award actual and other damages in his favor if warranted by the circumstances. (Sec. 68, IPC)

6. Rights Conferred by a Patent A patent shall confer on its owner the

following exclusive rights:(a) Where the subject matter of a patent is

a product, to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product;

(b) Where the subject matter of a patent is a process, to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling

or offering for sale, or importing any product obtained directly or indirectly from such process.

Patent owners shall also have the right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. (Sec. 71, IPC)

7. Limitations of Patent Rights (Sec. 72, IPC) The owner of a patent has no right to

prevent third parties from performing, without his authorization, the acts referred to in Section 71 in the following circumstances:

1. Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market;

2. Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, That it does not significantly prejudice the economic interests of the owner of the patent;

3. Where the act consists of making or using exclusively for the purpose of experiments that relate to the subject matter of the patented invention;

4. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical prescription or acts concerning the medicine so prepared;

5. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country entering the territory of the Philippines temporarily or accidentally: Provided, That such invention is used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and not used for the manufacturing of anything to be sold within the Philippines.

a. Prior User (Sec. 73, IPC) Any prior user, who, in good faith was using

the invention or has undertaken serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to

continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect.

The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made.

b. Use by the Government (Sec. 74, IPC) A Government agency or third person

authorized by the Government may exploit the invention even without agreement of the patent owner where:(a) The public interest, in particular, national

security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or

(b) A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee is anti-competitive.

8. Patent Infringement It constitutes:

1. The making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or

2. the use of a patented process without the authorization of the patentee.

Remedies:1. Civil action - Any patentee, or anyone

possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before a court of competent jurisdiction, to recover from the infringer such damages sustained thereby, plus attorney's fees and other expenses of litigation, and to secure an injunction for the protection of his rights.

If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty.

The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages

sustained: Provided, That the award does not exceed three (3) times the amount of such actual damages.

The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation.

Anyone who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing the patented invention and not suitable for substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and severally liable with the infringer. (Sec. 76, IPC)

2. Criminal action - If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable therefor and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime. (Sec. 84, IPC)

a. Tests in Patent Infringement i. Literal Infringement

Resort must be had, in the first instance, to words of the claim. If the accused matter clearly falls within the claim, infringement is committed.

Minor modifications are sufficient to put the item beyond literal infringement.

ii. Doctrine of Equivalents There is infringement where a device

appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result.

b. Defenses in Action for Infringement In an action for infringement, the

defendant, in addition to other defenses available to him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on which a petition of cancellation can be brought.

9. Licensing Modes:

a. Voluntary – the grant by the patent owner to a third person of the right to exploit a patented invention.

Rights of a licensor - In the absence of any provision to the contrary in the technology transfer arrangement, the grant of a license shall not prevent the licensor from granting further licenses to third person nor from exploiting the subject matter of the technology transfer arrangement himself.

b. Compulsory - The Director of Legal Affairs may grant a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, under any of the following circumstances:1. National emergency or other

circumstances of extreme urgency;2. Where the public interest, in

particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; or

3. Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive; or

4. In case of public non-commercial use of the patent by the patentee, without satisfactory reason;

5. If the patented invention is not being worked in the Philippines on a commercial scale, although capable of being worked, without satisfactory reason: Provided, That the importation of the patented article shall constitute working or using the patent.

10. Assignment and Transmission of Rights Transmission of Rights - Patents or

applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. Inventions and any right, title or interest in and to patents and inventions covered thereby, may be assigned or transmitted:1. by inheritance or bequest, or 2. may be the subject of a license

contract.

Assignment of Inventions - An assignment may be:1. of the entire right, title or interest in

and to the patent and the invention covered thereby, or

2. of an undivided share of the entire patent and invention, in which event the parties become joint owners thereof. An assignment may be limited to a

specified territory. Form of Assignment - The

assignment must be:1. in writing, 2. acknowledged before a notary

public or other officer authorized to administer oath or perform notarial acts, and

3. certified under the hand and official seal of the notary or such other officer.

4. Recorded in the IPO - Such instruments shall be void as

against any subsequent purchaser or mortgagee for valuable consideration and without notice, unless, it is so recorded in the Office, within three (3) months from the date of said instrument, or prior to the subsequent purchase or mortgage

C. Trademarks 1. Definition of Marks, Collective Marks, Trade Names

"Mark" - means any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods.

"Collective mark"- means any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark.

"Trade name" - means the name or designation identifying or distinguishing an enterprise.

2. Acquisition of Ownership of Mark The rights in a mark shall be acquired through

valid registration. (Sec. 122, IPC)

1. Acquisition of Ownership of Trade Name Trade names and business names are acquired

through adoption and use. Registration is not required.

4. Non- Registrable Marks: A mark cannot be registered if it:

(a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute;

(b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political subdivisions, or of any foreign nation, or any simulation thereof;

(c) Consists of a name, portrait or signature identifying a particular living individual

except by his written consent, or the name, signature, or portrait of a deceased President of the Philippines, during the life of his widow, if any, except by written consent of the widow;

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an earlier filing or priority date, in respect of:

(i) The same goods or services, or(ii) Closely related goods or services, or(iii) If it nearly resembles such a mark as

to be likely to deceive or cause confusion;

(e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration, and used for identical or similar goods or services: Provided, That in determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark;

(f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the preceding paragraph, which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for: Provided, That use of the mark in relation to those goods or services would indicate a connection between those goods or services, and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use;

(g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services;

(h) Consists exclusively of signs that are generic for the goods or services that they seek to identify;

(i) Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in

everyday language or in bona fide and established trade practice;

(j) Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services;

(k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value;

(l) Consists of color alone, unless defined by a given form; or

(m) Is contrary to public order or morality. As regards signs or devices mentioned in

paragraphs (j), (k), and (l), nothing shall prevent the registration of any such sign or device which has become distinctive in relation to the goods for which registration is requested as a result of the use that have been made of it in commerce in the Philippines. The Office may accept as prima facie evidence that the mark has become distinctive, as used in connection with the applicant's goods or services in commerce, proof of substantially exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5) years before the date on which the claim of distinctiveness is made.

The nature of the goods to which the mark is applied will not constitute an obstacle to registration

5. Prior Use of Mark as a Requirement Actual prior use in Commerce in the Philippines

has been abolished as a condition for the registration of a trademark. (RA 8293)

Non-use of a Mark When Excused - Non-use of a mark may be excused:1. if caused by circumstances arising

independently of the will of the trademark owner. Lack of funds shall not excuse non-use of a mark.

2. The use of the mark in a form different from the form in which it is registered, which does not alter its distinctive character, shall not be ground for cancellation or removal of the mark and shall not diminish the protection granted to the mark.

3. The use of a mark in connection with one or more of the goods or services belonging to the class in respect of which the mark is registered shall prevent its cancellation or

removal in respect of all other goods or services of the same class.

4. The use of a mark by a company related with the registrant or applicant shall inure to the latter's benefit, and such use shall not affect the validity of such mark or of its registration: Provided, That such mark is not used in such manner as to deceive the public. If use of a mark by a person is controlled by the registrant or applicant with respect to the nature and quality of the goods or services, such use shall inure to the benefit of the registrant or applicant.

6. Tests to Determine Confusing Similarity between Marks a. Dominancy Test

Focuses on the similarity of the prevalent features of the competing marks. If the competing trademark contains the main or essential dominant features of another, and confusion is likely to result, infringement takes place.

b. Holistic Test Confusing similarity is to be determined on the

basis of visual, aural, connotative comparisons and overall impressions engendered by the marks in controversy as they are encountered in the marketplace.

7. Well-Known Marks A mark which a competent authority of the

Philippines has designated to be well-known internationally and in the Philippines.

8. Rights Conferred by Registration 1. The owner of a registered mark shall have

the exclusive right to prevent all third parties not having the owner's consent from using in the course of trade identical or similar signs or containers for goods or services which are identical or similar to those in respect of which the trademark is registered where such use would result in a likelihood of confusion. In case of the use of an identical sign for identical goods or services, a likelihood of confusion shall be presumed.

2. The exclusive right of the owner of a well-known mark which is registered in the Philippines, shall extend to goods and services which are not similar to those in

respect of which the mark is registered: Provided, That use of that mark in relation to those goods or services would indicate a connection between those goods or services and the owner of the registered mark: Provided further, That the interests of the owner of the registered mark are likely to be damaged by such use. (Sec. 147, IPC)

9. Use by Third Parties of Names, etc. Similar to Registered Mark

Registration of the mark shall not confer on the registered owner the right to preclude third parties from using bona fide their names, addresses, pseudonyms, a geographical name, or exact indications concerning the kind, quality, origin, or time of production or of supply, of their goods or services.

10. Infringement and Remedies a. Trademark Infringement

Any person who shall, without the consent of the owner of the registered mark:1. Use in commerce any reproduction,

counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or

2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such reproduction, counterfeit, copy or colorable imitation to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive, shall be liable in a civil action for infringement by the registrant for the remedies hereinafter set forth: Provided, That the infringement takes place at the moment any of the acts stated in Subsection 155.1 or this subsection are committed regardless of whether there is

actual sale of goods or services using the infringing material.

b. Damages In any suit for infringement, the owner of the

registered mark shall not be entitled to recover profits or damages unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake, or to deceive.

c. Requirement of Notice Such knowledge is presumed if the registrant

gives notice that his mark is registered by displaying with the mark the words '"Registered Mark" or the letter R within a circle or if the defendant had otherwise actual notice of the registration.

11. Unfair Competition - Unfair Competition, Rights, Regulation and Remedies. -

Rights: A person who has identified in the mind of the public the goods he manufactures or deals in, his business or services from those of others, whether or not a registered mark is employed, has a property right in the goodwill of the said goods, business or services so identified, which will be protected in the same manner as other property rights.

Unfair competition: Any person who shall employ deception or any other means contrary to good faith by which he shall pass off the goods manufactured by him or in which he deals, or his business, or services for those of the one having established such goodwill, or who shall commit any acts calculated to produce said result, shall be guilty of unfair competition, and shall be subject to an action therefor.

In particular, and without in any way limiting the scope of protection against unfair competition, the following shall be deemed guilty of unfair competition:(a) Any person, who is selling his goods and

gives them the general appearance of goods of another manufacturer or dealer, either as to the goods themselves or in the wrapping of the packages in which they are contained, or the devices or words thereon, or in any other feature of their appearance, which would be likely to influence purchasers to believe that the goods offered are those of a manufacturer or

dealer, other than the actual manufacturer or dealer, or who otherwise clothes the goods with such appearance as shall deceive the public and defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent of any vendor engaged in selling such goods with a like purpose;

(b) Any person who by any artifice, or device, or who employs any other means calculated to induce the false belief that such person is offering the services of another who has identified such services in the mind of the public; or

(c) Any person who shall make any false statement in the course of trade or who shall commit any other act contrary to good faith of a nature calculated to discredit the goods, business or services of another.

Remedies: Civil, criminal and administrative remedies as provided by Sections 156, 157 and 161 of the IPC.

12. Trade Names or Business Names A name or designation may not be used as a

trade name if by its nature or the use to which such name or designation may be put, it is contrary to public order or morals and if, in particular, it is liable to deceive trade circles or the public as to the nature of the enterprise identified by that name.(a) Notwithstanding any laws or regulations providing for any obligation to register trade names, such names shall be protected, even prior to or without registration, against any unlawful act committed by third parties.(b) In particular, any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public, shall be deemed unlawful.

13. Collective Marks Collective Marks – is a mark used by the

members of a cooperative, an association or other collective group or an organization.

Application for registration of a collective mark - shall designate the mark as a collective mark and shall be accompanied by a copy of the agreement, if any, governing the use of the collective mark.

Grounds for cancellation of the registration of a collective mark –

1. if the person requesting the cancellation proves that only the registered owner uses the mark, or

2. if he uses or permits its use in contravention of the agreements

3. or that he uses or permits its use in a manner liable to deceive trade circles or the public as to the origin or any other common characteristics of the goods or

The registration of a collective mark, or an application therefor shall not be the subject of a license contract. (Sec. 167, IPC)

D. Copyrights1. Basic Principles, Sections 172.2, 175 and 181What is a copyright?“Copyright is the legal protection extended to the owner of the rights in an original work.

“Original work” refers to every production in the literary, scientific and artistic domain. Among the literary and artistic works enumerated in the IP Code includes books and other writings, musical works, films, paintings and other works, and computer programs.

Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as their content, quality and purpose. Thus, it does not matter if, in the eyes of some critics, a certain work has little artistic value. So long as it has been independently created and has a minimum of creativity, the same enjoys copyright protection.” (http://www.ipophil.gov.ph/index.php/services/copyright/ownership-and-rights)Who is entitled to a copyright?A person to be entitled to a copyright must be the original creator of the work. He must have created it by his own skill, labor and judgment without directly copying or evasively imitating the work of another. (Chuan vs CA, G.R. No. 130360. August 15, 2001)What is the scope of a copyright?…the scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. (Kho vs CA, G.R. No. 115758. March 19, 2002)The copyright does not extend to an idea, procedure, process, system, method of operation, concept, principle, or discovery, regardless of the form in which it is described, explained, illustrated, or embodied in such work. (Joaquin Jr vs Drilon, G.R. No. 108946. January 28, 1999)When is copyright vested?

Literary and artistic works "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation (Sec. 172.1). These works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as their content, quality and purpose. (Sec. 172.2)Is copyright the same as the covered material object?Section 181. Copyright and Material Object. - The copyright is distinct from the property in the material object subject to it. Consequently, the transfer or assignment of the copyright shall not itself constitute a transfer of the material object. Nor shall a transfer or assignment of the sole copy or of one or several copies of the work imply transfer or assignment of the copyright. 2. Copyrightable WorksCopyright, in the strict sense of the term, is purely a statutory right. It is a new or independent right granted by the statute, and not simply a pre-existing right regulated by the statute. Being a statutory grant, the rights are only such as the statute confers, and may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute.Since . . . copyright in published works is purely a statutory creation, a copyright may be obtained only for a work falling within the statutory enumeration or description. (Joaquin Jr vs Drilon, G.R. No. 108946. January 28, 1999)a. Original Works

What are original works?SECTION 172. Literary and Artistic Works. 172.1. Literary and artistic works, hereinafter referred to as "works", are original intellectual creations in the literary and artistic domain protected from the moment of their creation and shall include in particular:

1. Books, pamphlets, articles and other writings;

2. Periodicals and newspapers; 3. Lectures, sermons, addresses, dissertations

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

4. Letters;5. Dramatic or dramatico-musical

compositions; choreographic works or entertainment in dumb shows;

6. Musical compositions, with or without words;

7. Works of drawing, painting, architecture, sculpture, engraving, lithography or other

works of art; models or designs for works of art;

8. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art;

9. Illustrations, maps, plans, sketches, charts and three-dimensional works relative to geography, topography, architecture or science;

10. Drawings or plastic works of a scientific or technical character;

11. Photographic works including works produced by a process analogous to photography; lantern slides;

12. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings;

13. Pictorial illustrations and advertisements;14. Computer programs; and15. Other literary, scholarly, scientific and

artistic works.172.2. Works are protected by the sole fact of their creation, irrespective of their mode or form of expression, as well as of their content, quality and purpose.

b. Derivative WorksWhat are derivative works?Derivative works are creations that are based on an existing work. Thus, the series of film “Harry Potter” is a derivative work based on the novel of the same title. (Essentials of Intellectual Property Law, E. Salao, 2nd edition, 2012)SECTION 173. Derivative Works. 173.1. The following derivative works shall also be protected by copyright:

a. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; and b. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents.

173.2. The works referred to in paragraphs (a) and (b) of Subsection 173.1 shall be protected as new works: Provided however, That such new work shall not affect the force of any subsisting copyright upon the original works employed or any part thereof, or be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works.

Who is a publisher?A publisher is someone who makes public something. This word has evolved to mean as someone who is engaged in the business of publishing reading materials such as books, newspapers and magazines. Publishers of songs are usually called record producer. In the film industry, it is usually called movie producer. (Essentials of Intellectual Property Law, E. Salao, 2nd edition, 2012)What does rights does a publisher have?Sec. 174 provides;a. the right to publish granted by the author, his

heirs, or assigns b. the publisher shall have a copyright consisting

merely of the right of reproduction of the typographical arrangement of the published edition of the work. (n)

3. Non-Copyrightable WorksWhat are non-copyrightable works? . The following are unprotected subject matter (Sec. 175):

a. any idea, procedure, system, method or operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work;

b. to news of the day and other miscellaneous facts having the character of mere items of press information; and

c. or any official text of a legislative, administrative or legal nature, as well as any official translation thereof.

In addition Sec. 176.1 states: No copyright shall subsist in any work of the Government of the Philippines. When is it considered a “work of the Government of the Philippines”?

a. The work was created by an officer or employee of the Philippine Government or any of its subdivisions and instrumentalities, including GOCCs; and

b. The work was done as part of his regularly prescribed official duties.

General rule: Prior approval of the government agency or office wherein the work is created shall be necessary for exploitation of such work for profit. Such agency or office may, among other things, impose as a condition the payment of royalties. (Sec. 176.1)Exception: The author of speeches, lectures, sermons, addresses, and dissertations mentioned in the preceding paragraphs shall have the exclusive right of making a collection of his works.

Can the government be a copyright owner?Yes. Sec. 176.3 provides that the Government is not precluded from receiving and holding copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or republication by the Government in a public document of any work in which copyright is subsisting be taken to cause any abridgment or annulment of the copyright or to authorize any use or appropriation of such work without the consent of the copyright owner.4. Rights of Copyright OwnerWHAT ARE THE TWO TYPES OF RIGHTS UNDER COPYRIGHT? There are two types of rights under copyright:

(1) economic rights, so-called because they enable the creator to obtain remuneration from the exploitation of his works by third parties, and(2) moral rights, which makes it possible for the creator to undertake measures to maintain and protect the personal connection between himself and the work.

Economic rights include (Sec. 177):1) Reproduction2) Transformation 3) First public distribution4) Rental5) Public display6) Public performance7) Other communication to the public of the

work.

Moral rights include:1) Right of Attribution2) Right of Alteration3) Right of Integrity (object to any prejudicial

distortion)4) Right to restrain use of his name.

Exception to the moral rights When an author contributes to a collective

work, his right to have his contribution attributed to him is deemed waived unless he expressly reserves it. A collective work is a work which has been created by two (2) or more natural persons at the initiative and under the direction of another with the understanding that it will be disclosed by the latter under his own name and that contributing natural persons will not be identified.

In the absence of a contrary stipulation at the time an author licenses or permits

another to use his work, the necessary editing, arranging or adaptation of such work, for publication, broadcast, use in a motion picture, dramatization, or mechanical or electrical reproduction in accordance with the reasonable and customary standards or requirements of the medium in which the work is to be used, shall not be deemed to contravene the author's rights secured by this chapter. Nor shall complete destruction of a work unconditionally transferred by the author be deemed to violate such rights.

o Resale right: In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This right shall exist during the lifetime of the author and for fifty (50) years after his death.

Related rights Authors create works to disseminate them to as

large an audience as possible. Obviously, they cannot do the dissemination by themselves. They need the help of persons or entities who contribute substantial creative, technical or organizational skill in the process of making the works available to the public and whose interests ought to be protected to encourage them to continue with their work. Hence, their rights are referred to as “related rights” or “neighboring rights” since they are related to or are neighboring on the author’s copyright.

Thus, we have the related rights of: (a) performers; (b) producers of sound recordings; and (c) broadcasting organizations.

(Source:http://www.ipophil.gov.ph/index.php/services/copyright/ownership-and-rights)

5. Rules on Ownership of Copyright (Sec. 178)Creator To Whom It Belongs

Single Creator Author of the work, his heirs or assigns

Joint Creator If work consists of UNIDENTIFIABLE parts, co-authors jointly as co-owners, unless there is an agreement to the contrary.

If work consists of IDENTIFIABLE parts, author of each part own the that he has created.

Employee’s Creation

If the creation is PART of his regular duties: employer, unless there is agreement to the contrary.If it is NOT: employee

Commissioned Work

Work itself: person commissioningCopyright: creator, unless there is a written stipulation to the contrary.

Cinematographic Works

For exhibition purposes: producerFor all other purposes: producer, author of the scenario, composer, film director, author of the work.

Anonymous and Pseudonymous Works

Publishers are deemed representative of the author, unless:1. The contrary appears;2. Pseudonyms or

adopted name leaves no doubt as to the author’s identity; or author discloses his identity.(Sec. 179)

Collective Works

Contributor is deemed to have waived his right unless he expressly reserves it. (Sec. 195)

Letters

Writer.However, the court may authorize their publication or dissemination if the public good or the interest of justice so requires. (Art. 223, New Civil Code)

(Table from San Beda 2009 Commercial Law Reviewer)

What is the duration of the protection granted various categories of works?

Category of Work

Duration of Protection

Provision of Law

Books, writings, articles, musical

Liefe-time of author PLUS fifty

Section 213.1, et

compositions, dramatico-musical works, etc.

years thereafter seq

Works of applied art

Twenty-five years from the time of making

Section 213.4

Photographic works

Fifty year from publication, if published or from making, if unpublished

Section 213.5

Audio-visual works, including recordings on optical or magnetic media

Fifty years from date of making if unpublished and from publication if published.

Section 213.6

(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by Fr. Ranhilio Callangan Aquino)

What other protection is afforded under Part IV of the Intellectual Property Code?

Category Scope of Protection Provision of Law

Performances of actos, singers, musicians, dancers and other in similar positions.

1. Broadcasting or telecasting of their performance;

2. Fixation of their unfixed performance;

3. Authorizing the direct or indirect reproductions of their performance in any form;

4. Authorizing the first public distribution of the original and copies of the fixed forms of their performance;

5. Authorizing commercial rental of the original and copies of the

Section 203.1 et seq.

Section 205

Section 206

fixed forms of their performance;

6. Authorizing communication to the public of their performance by such means as television.

Important:These rights cease the moment the performer authorizes broadcast/telecast or fixation of her performance

She is entitled though to additional remuneration per broadcast or communication to the public to at least 5% of original compensation.

Procedures of sound recording

1. Right to reproduce

2. Right to distribute: either through sale or rental

3. Right to authorized commercial rental

4. Right to single equitable remuneration when recording directly used for broadcasting or communication to the public.

Section 208

Section 209

Broadcasting organizations (Broadcast = Telecast)

1. Right to prevent rebroadcasting of broadcasts;

2. Recording of their

Section 211

broadcasts for the purpose n to the of communication to the public;

3. The use of such recording for fresh transmission or recording.

Note though:There is no prohibition of the private recording of any broadcast or telecast, as long as this is for private education, etc. use.

It is however a legal possibility for a foreign broadcasting organization to which we have access in the Philippines to prohibit altogether the fixation of their broadcasts.

1961 Rome ConventionArticle 13.b

(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by Fr. Ranhilio Callangan Aquino)

6. Limitations on CopyrightWhat are the limitations on copyright? (GF-PARRI)1) G eneral limitations (Sec. 184);2) F air use (Sec. 185);3) In case of a work of architecture, the right to

control the reconstruction or rehabilitation in the same style as the original of the building (Sec. 186);

4) P rivate reproduction of a published work in a single copy by a natural person for research and private study (Sec. 187);

5) R epographic reproduction in a single copy by non-profit libraries, under certain circumstances (Sec 188);

6) R eproduction, under certain circumstances, of a computer program in one back-up copy by the lawful owner of this program (Sec. 189);

7) I mportation for personal purposes under certain conditions (Sec. 190).

(from San Beda 2009 Commercial Law Reviewer)

What are the general limitations on copyright? The following acts shall not constitute infringement of copyright:

1) Performance of a work, once it has been lawfully made accessible to the public, if done privately and free of charge or for a charitable or religious institution or society.

2) The making of quotations from a published work if they are compatible with fair use and only to the extent justified for the purpose.

3) Communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works of the same nature

4) As part of reports of current events (e.g. music played or tunes on the occasion of a sporting event and such tunes were picked up during a new coverage of the event).

5) For teaching purposes, provided that the source and of the name of the author, if appearing in the work, are mentioned.

6) Recording made in educational institutions of a work included in a broadcast for the use of such educational institutions, provided that such recording must be deleted within a reasonable period after they were first broadcast.

7) The making of ephemeral recordings by a broadcasting organization by means of its own facilities and for use in its own broadcast.

8) The use made of a work by or under the direction or control of the government, by the National Library or by educational, scientific or professional institutions where such use is in the public interest and is compatible with fair use.

9) The public performance of a work, in a place where no admission fee is charged.

10) Public display of the original or a copy of the work not made by means of a film, slide, television image or otherwise on screen or by means of any other device or process (e.g. Public display using posters mounted on walls and display boards).

11) Any use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner. (from UST Golden Notes 2011)

a. Doctrine of Fair UseWhat Is Fair Use?In its most general sense, a fair use is any copying of copyrighted material done for a limited and “transformative” purpose, such as to comment upon, criticize, or parody a copyrighted work. Such uses can be done without permission from the copyright owner. In other words, fair use is a defense against a claim of copyright infringement. (http://fairuse.stanford.edu/overview/fair-use/what-is-fair-use/)Fair use is a legal doctrine that permits limited use of copyrighted material without acquiring permission from the rights holders. It is one type of limitation and exception to the exclusive rights copyright law grants to the author of a creative work. (https://en.wikipedia.org/wiki/Fair_use)Section 185. Fair Use of a Copyrighted Work. - 185.1. The fair use of a copyrighted work for criticism, comment, news reporting, teaching including multiple copies for classroom use, scholarship, research, and similar purposes is not an infringement of copyright. Decompilation, which is understood here to be the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs may also constitute fair use.Sec. 185 also includes the criteria to determine fair use as follows:

(a) The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes;

(b) The nature of the copyrighted work;(c) The amount and substantiality of the portion used

in relation to the copyrighted work as a whole; and

(d) The effect of the use upon the potential market for or value of the copyrighted work.

185.2. The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the above factors.b. Copyright InfringementWhat is copyright infringement?Infringement of a copyright is a trespass on a private domain owned and occupied by the owner of the copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is a synonymous term in this connection, consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. (Columbia Pictures, Inc. v. CA)What ris the difference between copyright infringement and plagiarism?Copyright Infringement Plagiarism The unauthorized use of copyrighted material in a manner that violates one of the copyright owner’s exclusive rights, such as the right to reproduce or perform the copyrighted work, or to make derivative works that build upon it.

The use of another’s information, language, or writing, when done without proper acknowledgment of the original source.

Copyright infringement is a very broad term that describes a variety of acts. It may be duplication of work, rewriting a piece, performing a written work or doing anything that is normally considered to be the exclusive right of the copyright holder.

Plagiarism is specific as it refers only to using someone else’s work without proper acknowledgment.

There is no copyright infringement on public documents.

Public documents can be plagiarized so long as it is not acknowledged.

(from UST Golden Notes 2011)

Statutorily protected material

Examples of works:

Acts of Infringement

1. Books and other writings;

2. Periodicals

Published or unpublished articles;

Reproducing

Adapting; all forms of transforma

and newspapers;

Electronic or e-Books are books. Web-site publications are covered as are web-pages, including sound and movie recordings available on the Internet (Electronic Commerce Act, R.A. 8792, Section 33,b)

Music or movie files on the Internet.

tion Selling or

transferring ownership of the object unless one is already the lawful owner thereof

Importation of the work

(Applies to all material objects protected by copyright) (Section 177) Unauthoriz

ed copying, reproduction, dissemination, distribution, use, removal, alteration, substitution, modification, storage, uploading, downloading, communication, making available to the public, broadcasting. (Electronic Commerce Act, R.A. 8792, Section 33,b)

3. Lectures and oral presentations, whether or

Lectures delivered by a reviewer for the Bar Exams

Unauthorized compilation (by recording

reduced to writing or not;

whether in writing or not; homilies delivered by a priest, whether he has notes or not.

or tranascription) of the orally delivered pieces Section 176.2

4. Letters; Besides the I.P. Code provisions, see Art. 723, Civil Code

5. Dramatic or dramatico-musical compositions; choreography

Operas, operettas, musicals;Note: Popular dance steps – “ballroom dancing” – not included.

Public performance or other forms of communication to the public.

Section 177.6

6. Musical compositions

-ditto-

7. Drawings, paintings, architecture, sculpture, other works of art and models thereof

Architectural plansPainting of Joya;Clay models of sculptural works

Constructing the building that reproduces the whole or a substantial part of the architectural work

Section 1868. Works of

applied art;

9. Illustrations, maps, plans, sketches, charts

Decorative prints of shirts or blouses or skirts; Creatively devised formats of blank forms or even receipts;

10. Drawings or plastic works of a scientific or technical

Acetate transparencies found in medical books

character illustrating body parts; Plastic models of molecular structures

11. Photographic and similar products

Photographs whether on traditional film or digital format.

12. Audiovisual works and cinematographic works

Piracy of optical & magnetic media

13. Pictorial illustrations and advertisements;

14. Computer programs;

15. Other literary, scholarly, scientific and artistic works.Section 172

Software, including databases (excluding mere data)

R.A.9293, Section 19

(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by Fr. Ranhilio Callangan Aquino)

What are the available remedies in case of copyright infringement?

1. Injunction2. Damages, including legal costs and other expenses,

as he may have incurred due to the infringement as well as the profits the infringer may have made due to such infringement

3. Impounding during the pendency of the action sales invoices and other documents evidencing sales

4. Destruction without any compensation all infringing copies

5. Moral and exemplary damages (Sec. 216.1); or

6. Seizure and impounding of any article, which may serve as evidence in the court proceedings. (Sec. 216.2)

What are the criminal penalties in case of copyright infringement?

1. Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the first offense.

2. Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from One hundred fifty thousand pesos to Five hundred thousand (P500,000) for the second offense.

3. Imprisonment of six (6) years and one day to nine (9) years plus a fine ranging from Five hundred thousand pesos (P500,000) to P1,500,000 for the third offense.

4. In all cases, subsidiary imprisonment in cases of insolvency.

What is affidavit evidence? An affidavit made before the notary public in actions for infringement, reciting the facts required to be stated under the IPC. (Sec. 216.1)

Note: As a prima facie proof, the affidavit shifts the burden of proof to the defendant, to prove the ownership of the copyrighted work.(All three Q & A above from UST Golden Notes 2011)

E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)`What courts shall observe the Rules of Procedure for Intellectual Property Rights Cases?

SEC. 2. In what courts applicable. — These Rules shall be observed by the Regional Trial Courts designated by the Supreme Court as Special Commercial Courts.

Will the regular rules apply?

SEC. 3. Applicability of the regular rules. — When the court determines that the civil or criminal action involves complex issues, it shall issue a special order that the regular procedure prescribed in the Rules of Court shall apply, stating the reason therefor. Where applicable, the Rules of Court shall apply suppletorily to proceedings under these Rules.

Are orders issued by the court executor?

SEC. 4. Executory nature of orders. — Any order issued by the court under these Rules is immediately executory unless restrained by a superior court.

Is there a need for verification of documents filed with the court?

SEC. 5. Verification and supporting documents. — Any pleading, motion, opposition, defense or claim filed by any interested party shall be supported by verified statements that the affiant has read the same and that the factual allegations therein are true and correct of his personal knowledge or based on authentic records, and shall contain as annexes such documents as may be deemed by the party submitting the same as supportive of the allegations in the affidavits.

What is the duty of the clerk of court?

SEC. 6. Duty of the clerk of court. — It shall be the duty of the branch clerk of court to notify in writing the Director-General of the intellectual Property Office (IPO) of any action, suit or roceeding involving a copyright, trademark, service mark, patent, industrial design, utility model, undisclosed information and technology transfer agreement. Such notice shall set forth: the names and addresses of the litigants and the copyright, trademark, service mark, patent or design registrations involved and, where applicable, the numbers of their certificates of registration. The notice shall be submitted within one (1) month after the filing thereof.

What rules of procedure must be observed for violation of intellectual property rights in civil actions and criminal actions?

Civil Actions Criminal ActionsRULE 2. NATURE OF PROCEEDINGS

SEC 1. Scope. — Rules 2 to 9 shall apply to all civil actions for violations of intellectual property rights provided for in Republic Act 8293 or the Intellectual Property Code, as amended, including civil actions for infringement of Patent (Section 76), Utility Model (Section 108) and Industrial Design (Section

Rule 10 NATURE OF PROCEEDINGS

SEC 1. Scope. — Rules 10 to 15 shall apply to all criminal actions for violations of intellectual property rights provided for in Republic Act 8293 or the Intellectual Property Code, as amended, including Repetition of

119), Trademark Infringement (Section 155 in relation to Section 163), Unfair Competition (Section 168 in relation to Section 163), actions concerning trademark license contracts (Section 150 in relation to Section 163), actions concerning imported merchandise or goods bearing infringing marks or trade names (Section 166 in relation to Section 163), actions for cancellation of the registration of a collective mark (Section 167 in relation to Section 163), False Designations of Origin; False Description or Representation (Section 169 in relation to Section 163), Breach of Contract (Section 194), civil actions for infringement of copyright, moral rights, performers' rights, producers' rights, and broadcasting rights (Sections 177, 193, 203, 208, 211, and 216), and other violations of intellectual property rights as may be defined by law.

SEC. 2. Special Commercial Courts in the National Capital Judicial Region with authority to issue writs of search and seizure enforceable nationwide. — Special Commercial Courts in Quezon City, Manila, Makati, and Pasig shall have authority to act on applications for the issuance of writs of search and seizure in civil actions for violations of the Intellectual Property Code, which writs shall be enforceable nationwide.

Infringement of Patent (Section 84), Utility Model (Section 108) and Industrial Design (Section 119), Trademark Infringement (Section 155 in relation to Section 170), Unfair Competition (Section 168 in relation to Section 170), False Designations of Origin; False Description or Representation (Section 169.1 in relation to Section 170), infringement of copyright, moral rights, performers' rights, producers' rights, and broadcasting rights (Section 177, 193, 203, 208 and 211 in relation to Section 217), and other violations of intellectual property rights as may be defined by law.

SEC. 2. Special Commercial Courts in the National Capital Judicial Region with authority to issue search warrants enforceable nationwide. Special Commercial Courts in Quezon City, Manila, Makati, and Pasig shall have authority to act on applications for the issuance of search warrants involving violations of the Intellectual Property Code, which search warrants shall be enforceable

The issuance of these writs shall be governed by the rules prescribed in Re: Proposed Rule on Search and Seizure in Civil Actions for Infringement of Intellectual Property Rights (A.M. No. 02-1-06-SC, which took effect on February 15, 2002). Within their respective territorial jurisdictions, the Special Commercial Courts in the judicial regions where the violation of intellectual property rights occurred shall have concurrent jurisdiction to issue writs of search and seizure.

nationwide. Within their respective territorial jurisdictions, the Special Commercial Courts in the judicial regions where the violation of intellectual property rights occurred shall have concurrent jurisdiction to issue search warrants.

Accordingly, the Executive Judges are hereby relieved of the duty to issue search warrants involving violations of the Intellectual Property Code in criminal cases as stated in Sec. 12, Chapter V of A.M. No. 03-8-02-SC (Guidelines on the Selection and Appointment of Executive Judges and Defining their Powers, Prerogatives and Duties).

Rule 3 COMMENCEMENT OF ACTION

SECTION 1. Pleadings. — The only pleadings allowed to be filed are the complaints, compulsory counterclaims and cross-claims pleaded in the answer, and the answers thereto. All pleadings shall he verified.

SEC. 2. Who may file an action under these Rules. — Any intellectual property right owner, or anyone possessing any right, title or interest under claim of ownership in any intellectual property right,

Rule 11 COMMENCEMENT OF ACTION

SECTION 1. How commenced. — The filing of criminal cases falling within the scope of this Rule shall be by information after a prior verified complaint is filed under Rule 12 on Preliminary Investigation.

When the information is filed, the verified complaint and the affidavits of witnesses

whose right may have been violated, may file an action under these Rules.

Any person who is a national or who is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or extends reciprocal rights to nationals of the Philippines by law, shall be entitled to file an action under these Rules.

Any foreign national or juridical person who meets the requirements of the immediately preceding paragraph, and does not engage in business in the Philippines, may also file an action under these Rules.

SEC. 3. Form and contents of the complaint. — The complaint shall be verified and shall state the full names of the parties to the case. Facts showing the capacity of a party to sue or be sued, or the authority of a party to sue or be sued in a representative capacity, or the legal existence of an organized association of persons that is made a party, must be averred. In case of juridical persons, proof of capacity to sue must be attached to the complaint.

The complaint shall contain

together with other evidence, in such number of copies as there are accused plus two (2) copies for the court's files, shall be attached thereto.

In case of failure to attach the complaint, affidavit and evidence, the court shall order the investigating prosecutor, through the court's designated prosecutor, to submit the said requirements before the pre-trial.

SEC. 2. Where to file. — The information, together with attachments, shall be filed with the court referred to in Section 2 of Rule 1, which has jurisdiction over the territory where any of the elements of the offense occurred.

SEC. 3. When warrant of arrest may issue. — Within ten (10) days from the filing of the information, the judge shall personally evaluate the information together with the resolution of the prosecutor and its supporting documents. The judge may immediately dismiss the case if the evidence on record clearly fails to establish probable cause, if he finds probable cause, he shall issue a warrant of arrest, or a

a concise statement of the ultimate facts constituting the complainant's cause or causes of action. It shall specify the relief(s) sought, but it may add a general prayer for such further or other relief(s) as may be deemed just or equitable.

The affidavits in question-and-answer format referred to in Sec. 5 hereof and the relevant evidence shall be made part of the complaint.

The complaint shall include a certification that the party commencing the action has not filed any other action or proceeding involving the same issue or issues before any tribunal or agency nor is such action or proceeding pending in other quasi-judicial bodies; Provided, however, that if any such action is pending, the status of the same must be stated, and should knowledge thereof be acquired after the filing of the complaint, the party concerned shall undertake to notify the court within five (5) days from such knowledge.

When the party-litigant is a corporation, the verification/certification of non-forum shopping required should be executed by a natural person duly authorized by the corporation, through a special power of attorney or a board resolution for the purpose, attached to the complaint.

commitment order if the accused has already been arrested. In case of doubt on the existence of probable cause, the judge may order the prosecutor to present additional evidence within five (5) days from notice and the issue must be resolved by the court within fifteen (15) days from the presentation of the additional evidence.

SEC. 4. Disposition of goods seized pursuant to search warrant. — If a criminal action has been instituted, only the trial court shall rule on a motion to quash a search warrant or to suppress evidence obtained thereby or to release seized goods.

It shall be the duty of the applicant or private complainant to file a motion for the immediate transfer of the seized goods to the trial court, which motion shall be immediately acted upon by the issuing court.

If no criminal action has been instituted, the motion to quash a search warrant or to suppress evidence obtained thereby or to release seized goods may be filed in and resolved by the

The complaint shall further be accompanied by proof of payment of docket and other lawful fees. Failure to comply with the foregoing requirements shall not be remedied by mere amendment of the complaint. The court, motu proprio, shall dismiss the case without prejudice.

The submission of a false certification or non-compliance with any of the undertakings therein shall constitute indirect contempt, without prejudice to the corresponding administrative, civil and criminal liabilities. If the acts of a party or his counsel clearly constitute willful and deliberate forum shopping, the same shall be a ground for summary dismissal with prejudice and shall constitute direct contempt

SEC. 4. Prohibited pleadings. — The following pleadings are prohibited:

a) Motion to dismiss; b) Motion for a bill of particulars;c) Motion for reconsideration of a final order or judgment, except with regard to an order of destruction issued under Rule 20 hereof; d) Reply;e) Petition for relief from judgment; f) Motion for extension of time to file pleadings or other written submissions, except for the answer for meritorious

issuing court. If pending resolution of the motion, a criminal case is meanwhile filed in another court, the incident shall be transferred to and resolved by the latter court.

Upon motion of the party whose goods have been seized, with notice to the applicant, the issuing court may quash the search warrant and order the return of the seized goods if no criminal complaint is filed within sixty (60) days from the issuance of the search warrant.

If no criminal action is filed before the office of the prosecutor and no motion for the return of the seized goods is filed within sixty (60) days from the issuance of the search warrant, the issuing court shall require the parties, including the private complainant, if any, to show cause why the search warrant should not be quashed.

SEC. 5. Prohibited motions. — The following motions shall not be allowed:

a) Motion to quash the information, except on the ground of lack of jurisdiction; b) Motion for extension of time

reasons; g) Motion for postponement intended for delay;h) Third-party complaint; i) Intervention; j) Motion to hear affirmative defenses; and k) Any pleading or motion which is similar to or of like effect as any of the foregoing.

SEC. 5. Affidavits. — The affidavits required to be submitted with the complaint shall be in questionand-answer format numbered consecutively, and shall state only facts of direct personal knowledge of the affiants which are admissible in evidence. The affidavits shall also show the competence of the affiants to testify to the matters stated therein.

A violation of this requirement may subject the party or the counsel who submits the same to disciplinary action, and shall be a ground for the court to order that the inadmissible affidavit or portion thereof be expunged from the records.

SEC. 6. Failure to file complaint where a writ of search and seizure is issued. — Upon motion of the party whose goods have been seized, with notice to the applicant, the issuing court may lift its writ and order the return of the seized goods if no case is filed with the

to file affidavits or any other papers; and c) Motion for postponement intended for delay.

appropriate court and/or appropriate quasi-judicial agency, including the Intellectual Property Office of the Philippines, within thirty-one (31) calendar days from the date of issuance of the writ.

If no motion for the return of the seized goods is filed within sixty (60) days from the issuance of the writ under the preceding paragraph, the court shall order the disposal of the goods, as may be warranted, after hearing with notice to the parties.Rule 4 ANSWER

SEC 1. Summons. — The summons and the complaint, including its attachments, shall be served not later than five (5) days from receipt of the complaint by the court to which it is assigned or raffled.

SEC. 2. Service of summons, orders and other court processes. — Summons, orders and other court processes may be served by the sheriff, his deputy or other proper court officer or for justifiable reasons, by the counsel or representative of the plaintiff or any suitable person authorized by the court issuing the summons.

Any private person who is authorized by the court to serve summons, orders and other court processes shall, for that purpose, be considered an officer of the court.

Rule 12 PRELIMINARY INVESTIGATION

SEC 1. Complaint. — The complaint shall be filed with the Department of Justice or the office of the prosecutor that has jurisdiction over the offense charged:

a) The complaint shall state the full name of the complainant and the facts showing the capacity or authority of the complaining witness to institute a criminal action in a representative capacity, and the legal existence of an organized association of persons that is instituting the criminal action. In case of juridical persons, proof of capacity to sue must be attached to the complaint.

When the defendant is a foreign private juridical entity, service may be made on its resident agent designated in accordance with law for that purpose, or, if there be no such agent, on the government official designated by law to that effect, or on any of its officers or agents within the Philippines.

If the foreign private juridical entity is not registered in the Philippines or has no resident agent, service may, with leave of court, be effected out of the Philippines through any of the following means:

a) By personal service coursed through the appropriate court in the foreign country with the assistance of the Department of Foreign Affairs;b) By publication once in a newspaper of general circulation in the country where the defendant may be found and by serving a copy of the summons and the court order by registered mail at the last known address of the defendant;c) By facsimile or any recognized electronic means that could generate proof of service; ord) By such other means as the court may, in its discretion, direct. Should either personal or substituted service fail, summons by publication shall be

Where the complainant is a juridical person not registered in the Philippines, documents proving its legal existence and/or its capacity to sue, such as a certificate of registration or extracts from relevant commercial registries or offices having jurisdiction over said entities, shall be accepted if these are originals or in case of public documents, certified true copies thereof executed by the proper officer of such registries or offices. Where the complainant is a foreign national or is domiciled or has a real and effective industrial establishment in a country which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition to which the Philippines is also a party, or extends reciprocal rights to national of the Philippines by law, the verified complaint must contain such facts showing entitlement to file

allowed. In the case of juridical entities, summons by publication shall be done by indicating the names of the officers or their duly authorized representative.

SEC. 3. Answer. — Within fifteen (15) days from service of summons, the defendant shall file his answer to the complaint and serve a copy thereof on the plaintiff. Affirmative and negative defenses not pleaded in the answer shall be deemed waived, except when the court has no jurisdiction over the subject matter, when there is another action pending between the same parties for the same cause, or when the action is barred by a prior judgment or by the statute of limitations. Cross-claims and compulsory counterclaims not asserted in the answer shall be considered barred. The answer to counterclaims or cross-claims shall be filed and served within ten (10) days from service of the answer in which they are pleaded.

SEC. 4. Effect of failure to answer. — Should the defendant fail to answer the complaint within the period stated above, the court, motu proprio or on motion of the plaintiff, shall render judgment as may be warranted by the allegations of the complaint, as well as the affidavits and other evidence on record, unless the court in its discretion

the action.

b) The complaint shall state the address of the respondent and shall be in such number of copies as there are respondents, plus two (2) copies for the investigating prosecutor. The complaint shall be subscribed and sworn to before any prosecutor or government official authorized to administer oath, or, in their absence or unavailability, before a notary public. The administering officer must certify that he personally examined the complainant and that he is satisfied that the complainant voluntarily executed and understood the complaint.

c) The complaint shall be accompanied by the affidavits of the complainant and his witnesses, as well as other supporting documents to establish probable cause. Notarized affidavits of witnesses shall be allowed and admitted as part of the complaint,

requires the plaintiff to submit additional evidence. Such reception of additional evidence may be delegated to the clerk of court. In no case shall the court award a relief beyond or different from that prayed for; Provided, that the court may, in its discretion, reduce the amount of damages and attorney's fees claimed for being excessive or otherwise unconscionable.

SEC. 5. Affidavits. — The affidavits required to be submitted with the answer shall be in questionand-answer format numbered consecutively, and shall state only facts of direct personal knowledge of the affiants which are admissible in evidence. The affidavits shall also show the competence of the affiants to testify to the matters stated therein.

A violation of this requirement may subject the party or the counsel who submits the same to disciplinary action, and shall be ground for the court to order that the inadmissible affidavit or portion thereof be expunged from the records.

provided that affidavits executed by non-residents of the Philippines shall be duly authenticated by the concerned Philippine consular or diplomatic office.

d) In instances where multiple complaints are filed by the same complainant, copies of the supporting documents shall be admitted after they are compared with and shown to be faithful reproductions of the originals or certified documents referred to in subparagraphs (a) and (c) above.

SEC. 2. Procedure. — The preliminary investigation shall be conducted as follows:

a) Within ten (10) days after the filing of the complaint, the investigating prosecutor, on the basis of the complaint and the affidavits and other evidence accompanying the same, may dismiss the case outright for being patently without basis or merit and order the release of the accused if in custody, and/or

seized articles in custody, if any.

b) When the complaint is not dismissed pursuant to the immediately proceeding paragraph, the investigating prosecutor, within ten (10) days from the filing of the complaint, shall issue an order to the respondent attaching thereto a copy of the complaint and its supporting affidavits and documents, and require the respondent to submit his counter-affidavit and the affidavits of his witnesses and other documentary evidence in the format required under Section 1 hereof, wherever applicable, serving copies thereof on the complainant not later than ten (10) days from receipt of said order. The counter-affidavits shall be subscribed and sworn to and certified as provided in paragraphs (b) and (c) of Section 1 hereof. The respondent shall not be allowed to file a motion to dismiss in lieu of a counter-affidavit.

c) If the respondent cannot be served with the order of the investigating prosecutor, or if served, does not submit counter- affidavits within the ten (10) day period, the investigating prosecutor shall resolve the complaint based on the evidence presented by the complainant.

d) The investigating prosecutor may set a hearing if there are facts and issues to be clarified from a party or a witness. The parties can be present at the hearing but without the right to examine or cross-examine. They may, however, submit to the investigating prosecutor questions which may be asked to the party or witness concerned. Within ten (10) days from the last written submission by the parties or the expiration of the period for such submission, the investigating prosecutor shall determine whether or not there is sufficient ground to

hold the respondent for trial.

SEC. 3. When accused lawfully arrested without warrant. — When a person is lawfully arrested without a warrant, the information may be filed by a prosecutor without need of such investigation provided an inquest had been conducted in accordance with existing Rules.

Before the information is filed, the person arrested may ask for a preliminary investigation in accordance with this Rule, but he must sign a waiver of the provisions of Article 125 of the Revised Penal Code, as amended, in the presence of his counsel. Notwithstanding the waiver, he may apply for bail and the investigation must be terminated within fifteen (15) days from its inception.

After the filing of the information in court without preliminary investigation, the accused may, within five (5) days from the time he learns of its filing, ask for a preliminary investigation with the

same right to adduce evidence in his defense as provided in this Rule.

Rule 5 MODES OF DISCOVERY

SEC 1. In general. — A party can avail of any of the modes of discovery not later than thirty (30) days from the joinder of issues.

SEC. 2. Objections. — Any mode of discovery, such as interrogatories, request for admission, production or inspection of documents or things, may be objected to within ten (10) days from receipt of the request for discovery and only on the ground that the matter requested is manifestly incompetent, immaterial, or irrelevant or is undisclosed information or privileged in nature, or the request is for harassment. The requesting party may comment in writing within three (3) days from receipt of the objection. Thereafter, the court shall rule on the objection not later than ten (10) days from receipt of the comment or the expiration of the three-day period.

SEC. 3. Compliance. — Compliance with any mode of discovery shall be made within ten (10) days from receipt of the request for discovery, or if there are objections, from notice of the ruling of the court.

SEC. 4. Sanctions. — The sanctions prescribed by the Rules of Court in relation to the modes of discovery

shall apply.Rule 6 PRE-TRIAL

SEC 1. Pre-trial; mandatory nature. — Within five (5) days after the period for availing of, or compliance with, any of the modes of discovery prescribed in Rule 5 hereof, whichever comes later, the handling court shall immediately set the case for pre-trial and direct the parties to submit their respective pre-trial briefs.

The parties shall file with the court and furnish each other copies of their respective pre-trial briefs in such manner as to ensure receipt by the court, and the other party at least five (5) days before the date set for the pre-trial. The parties shall set forth in their pre-trial briefs, among other matters, the following:

a) Brief statement of the nature of the case, which shall summarize the theory or theories of the party in clear and concise language;b) Allegations expressly admitted by either or both parties; c) Allegations deemed admitted by either or both parties; d) Documents not specifically denied under oath by either or both parties; e) Amendments to the pleadings; f) Statement of the issues, which shall separately summarize the factual and legal issues involved in the

Rule 13 ARRAIGNMENT AND PRE-TRIAL

SEC 1. Arraignment. — The arraignment shall be conducted in accordance with Rule 116 of the Rules of Court. If the accused is in custody for the crime charged, he shall be immediately arraigned. If the accused enters a plea of guilty, he shall forthwith be sentenced. After arraignment, the court shall immediately schedule the case for pre-trial.

SEC. 2. Referral to mediation. — Before conducting the trial, the court shall call the parties to a pretrial. Upon appearance of the parties during pre-trial, the judge shall order the parties to appear before the Philippine Mediation Center for court-annexed mediation on the civil aspect of the criminal action. The pre-trial judge shall suspend the court proceedings while the case is undergoing mediation. Upon termination of the mediation proceedings, the court shall continue with the pre-trial.

SEC. 3. Pre-trial. — During the pre-trial, a

case; g) Names, addresses and contact numbers of affiants and their judicial affidavits supporting the parties' respective positions on each of the issues; h) All other pieces of evidence, whether documentary or otherwise, and their respective purposes;i) Specific proposals for an amicable settlement;j) Possibility of referral to mediation or other alternative modes of dispute resolution; k) Requests for closed door hearings in cases involving trade secrets, undisclosed information and patents; andl) Such other matters as may aid in the just and speedy disposition of the case.

SEC. 2. Nature and purpose of pre-trial. — Upon appearance of the parties during the pre-trial, the court shall order the parties to appear before the Philippine Mediation Center in accordance with mediation rules of the Supreme Court.

Should the parties fail to settle the case after mediation, the pairing court shall conduct judicial dispute resolution (JDR) conferences upon request of the court handling the case in accordance with the guidelines of the Supreme Court.

Pending mediation before the Philippine Mediation Center and JDR with the

stipulation of facts may be entered into, or the propriety of allowing the accused to enter a plea of guilty to a lesser offense may be considered, or such other matters as may be taken up to clarify the issues and to ensure a speedy disposition of the case. However, no admission by the accused shall be used against him unless reduced to writing and signed by the accused and his counsel. A refusal or failure to stipulate shall not prejudice the accused.

The pre-trial shall be terminated not later than thirty (30) days from the date of its commencement, excluding the period for mediation and JDR. Should a party desire to present additional affidavits or counter affidavits as part of his direct evidence, he shall so manifest during the pre-trial, stating the purpose thereof. If allowed by the court, the additional affidavits of the prosecution or the counter-affidavits of the defense shall be submitted to the court and served on the adverse party not later than three (3) days after the termination of the

pairing court, the court handling the case shall suspend the proceedings. If either mediation or JDR fails, the case shall be returned to the court with dispatch for the pre-trial.

Before the pre-trial, the court may require the marking of documentary or object evidence by the branch clerk of court or any authorized court personnel.

During the pre-trial, the court shall, with its active participation, ensure that the parties consider in detail all of the following:

a) The possibility of an amicable settlement; b) Facts that need not be proven, either because they are matters of judicial notice, or expressly or deemed admitted; c) Permissible amendments to the pleadings; d) The possibility of obtaining stipulations and admissions of facts and documents; e) Objections to the admissibility of testimonial, documentary and other evidence; f) Submission of judicial affidavits of witnesses and objections to the form or substance of any affidavit, or part thereof; g) Simplification of the issues; and h) Such other matters as may aid in the speedy and summary disposition of the case.

pre-trial. If the additional affidavits are presented by the prosecution, the accused may file his counter-affidavits and serve the same on the prosecution within three (3) days from such service.

Before the pre-trial, the court may require the marking of documentary or object evidence by the branch clerk of court or any authorized court personnel.

SEC. 4. Non-appearance at the pre-trial. — If the counsel for the accused or the prosecutor does not appear at the pre-trial and does not offer an acceptable excuse for his lack of cooperation, the court may impose proper sanctions or penalties.

SEC. 5. Record of pre-trial — Within five (5) days after the termination of the pre-trial, the court shall issue an order stating the matters taken up therein, including but not limited to:

a) Plea bargaining; b) The stipulations or admissions entered into by the parties; c) Whether, on the basis of the

SEC. 3. Effect of failure to appear. — The failure of the plaintiff to submit a pre-trial brief within the specified period or to appear in the pre-trial shall be a cause for the dismissal of the complaint with prejudice, unless otherwise ordered by the court. The defendant who submits a pre-trial brief and who appears during the pre-trial shall be entitled to a judgment on the counterclaim unless the court requires evidence ex parte for a judgment. Any cross-claim shall be dismissed.

The failure of the defendant to submit a pre-trial brief within the specified period or to appear in the pre-trial shall be a cause for the dismissal of the counterclaim. The plaintiff who submits a pre-trial brief and who appears during the pre-trial shall be entitled to a judgment on the complaint unless the court requires evidence ex parte for a judgment.

SEC. 4. Termination. — The pre-trial shall be terminated not later than thirty (30) working days after its commencement, excluding the period for mediation and judicial dispute resolution (JDR).

SEC. 5. Record of pre-trial. — The proceedings in the pre-trial shall be recorded, excluding mediation and JDR. Within ten (10) days after the termination of the pre-trial, the court

stipulations and admissions made by the parties, judgment may be rendered without the need of further proceedings, in which event judgment shall be rendered within thirty (30) days from issuance of the order; d) A clear specification of material facts which remain controverted; e) Trial dates of each party;f) Such other matters intended to expedite the disposition of the case.

shall issue an order which shall recite in detail the matters taken up in the pre-trial, the actions taken on such matters, the amendments allowed in the pleadings, and the agreements or admissions made by the parties as to any of the matters considered. The court shall rule on all objections to or comments on the admissibility of any documentary or other evidence, including any affidavit or any part thereof. The court shall indicate whether the case shall be submitted for decision immediately after pre-trial, or on the basis of position papers, or after clarificatory hearing, or after trial.

SEC. 6. Submission of position papers. — If the case is to be submitted for decision on the basis of position papers, the court, in the Pre-Trial Order, shall direct the parties to file simultaneously their respective position papers, setting forth the law and the facts relied upon by them and attaching thereto affidavits of their witnesses in question-and-answer format numbered consecutively, and other evidence on the factual issues defined in the order, together with their respective draft decisions, if so desired, within a non-extendible period of thirty (30) days from receipt of the order. No reply or rejoinder shall be allowed.

SEC. 7. Clarificatory hearing

or hearings following pre-trial. — If there are matters to be clarified, the court shall include in the Pre-Trial Order the schedule of clarificatory hearing or hearings, which must commence within thirty (30) days from the termination of the pre-trial, and be completed not later than fifteen (15) days thereafter. At least three (3) days before the scheduled clarificatory hearing, the parties may submit clarificatory questions which the court, in its discretion, may propound.

SEC. 8. Schedule of trial. — If the court deems it necessary to hold trial, the court shall include in the Pre-Trial Order the schedule of hearings to be conducted expeditiously and completed not later than sixty (60) days from the date of the initial trial which must commence within thirty (30) days from the termination of the pre-trial.Rule7 CLARIFICATORY HEARING AND TRIAL

SEC. 1. Clarificatory hearings. — During clarificatory hearing or hearings, the parties must have representatives and their counsels ready for questioning by the court.

Immediately after termination of such clarificatory hearing or hearings, the court shall order the parties to simultaneously file, within ten (10) days from such

Rule 14 TRIAL

SEC 1. Affidavits and other evidence at the trial. — The Court shall hear the evidence of the parties on the trial dates agreed upon by them during the pre-trial. The affidavits of the witnesses of the parties which form part of the record of the case, such as those submitted: (a) during the preliminary

date, their respective position papers as required under Section 6, Rule 6, above.

SEC. 2. Clarificatory hearing or hearings following submission of position papers. — Upon submission of the parties' position papers immediately after the pre-trial as required under Sec. 6 of the preceding Rule, and the court deems it necessary to hold clarificatory hearing or hearings on any matter before rendering judgment, it shall set the case for such purpose.

The order setting the case for clarificatory hearing must be issued not later than fifteen (15) days after receipt of the last position papers or the expiration of the period for filing the same and the clarificatory hearing must be scheduled within fifteen (15) days from the issuance of such order and completed not later than fifteen (15) days.

During said clarificatory hearing or hearings, the parties must have representatives and their counsels ready for questioning by the court.

SEC. 3. Judicial affidavits. — The judicial affidavits shall serve as the direct testimonies of the witnesses during trial, subject to cross-examination by the adverse party.

SEC. 4. Period of trial. A

investigation; and/or (b) during the pre-trial, shall constitute the direct testimonies of the witnesses who executed them. Such witnesses may be subjected to cross examination by the adverse party.

SEC. 2. Conduct of trial. — The court shall conduct hearings expeditiously so as to ensure speedy trial. Each party shall have a maximum period of sixty (60) days to present his evidence-in-chief on the trial dates agreed upon during the pre-trial.

SEC. 3. Submission of memoranda. — Upon termination of trial, the court may order the parties to submit within a non-extendible period of thirty (30) days their memoranda setting forth the law and the facts relied upon by them.

SEC. 4. Judgment. — The court shall promulgate the judgment not later than sixty (60) days from the time the case is submitted for decision, with or without the memoranda. A copy of the judgment shall be furnished the IPO.

period not exceeding thirty (30) days shall be allotted to the plaintiff and a similar period to the defendant in the manner prescribed in the Pre-Trial Order. The failure of a party to present a witness on a scheduled trial date shall be deemed a waiver of such trial date. However, a party may present such witness or witnesses within the party's remaining allotted trial dates. No extension shall be allowed by the judge except for justifiable reasons.

SEC. 5. Offer of and ruling on exhibits. Evidence presented during the trial and not otherwise admitted by the parties or ruled upon by the court during the pre-trial shall be offered orally immediately after the completion of the presentation of evidence of the party concerned. The opposing party shall immediately raise the objections on the offer of exhibits and thereafter, the court shall at once rule on the offer and objections in open court.

In case the court requires the submission of written formal offer of exhibits, the same shall be submitted to the court within five (5) days from completion of the presentation of the evidence of the party, furnishing copies thereof on the other party, who may submit comments or objections to the formal offer within five (5) days from receipt. The court

shall make its ruling on the offer within five (5) days from the expiration of the period to file comments or objections.

SEC. 6. Mandatory submission of draft decisions. — Immediately after an oral ruling on the last offer of evidence, the court shall order the parties to simultaneously submit their respective draft decisions, within a non-extendible period of thirty (30) days. In case the ruling is in writing, the court shall order the parties to simultaneously submit their respective draft decisions within a nonextendible period of thirty (30) days from receipt of the order.Rule 8 JUDGMENT

SEC 1. Judgment immediately after pre-trial. — Where the case is submitted for decision immediately after pre-trial in accordance with Sec. 5, Rule 6, the court shall render judgment within forty-five (45) days after pre-trial.

SEC. 2. Judgment after submission of position papers. — Within forty-five (45) days after receipt of the last position paper, affidavits, documentary and real evidence, or the expiration of the period for filing the same under Sec. 6 of Rule 6 and Sec. 1 of Rule 7, the court shall render judgment on the basis of the parties' position papers, affidavits, documentary and real

evidence.

SEC. 3. Judgment after clarificatory hearing. — Within forty-five (45) days after termination of clarificatory hearing or hearings under Sec. 7 of Rule 6 and Sec. 2 of Rule 7, the court shall render judgment.

SEC. 4. Judgment after trial. — Within sixty (60) days after receipt of the draft decision of the parties under Sec. 6 of Rule 7, the court shall render judgment.

SEC. 5. Judgments executory pending appeal. — Unless restrained by a higher court, the judgment of the court shall be executory even pending appeal under such terms and conditions as the court may prescribe.Rule 9 APPEAL

SEC 1. Who may appeal. — Any party may appeal from a judgment or final order.

SEC. 2. How appeal taken. — All decisions and final orders shall be appealable to the Court of Appeals through a petition for review under Rule 43 of the Rules of Court.

The petition for review shall be taken within fifteen (15) days from notice of the decision or final order of the Regional Trial Court designated by the Supreme Court as Special Commercial Courts. Upon proper motion and the payment of the full

Rule 15 APPEAL

SEC 1. Who may appeal. — Any party may appeal from a judgment or final order, unless the accused will be placed in double jeopardy.

SEC. 2. How appeal taken. — The appeal shall be taken in the manner provided under Rule 122 of the Rules of Court.

amount of the legal fee prescribed in Rule 141, as amended, and before the expiration of the reglementary period, the Court of Appeals may grant an additional period of fifteen (15) days within which to file the petition for review. No further extension shall be granted except for the most compelling reasons and in no case to exceed fifteen (15) days.

What are the common rules on admissibility and weight of evidence?

Under Rule 16, these are:SECTION 1. Evidence of good faith. — In cases of patent infringement, trademark infringement, and copyright infringement, fraudulent intent on the part of the defendant or the accused need not be established. Good faith is not a defense unless the defendant or the accused claims to be a prior user under Sections 73 and 159 of the Intellectual Property Code or when damages may be recovered under Sections 76, 156, and 216 of the Code.

SEC. 2. Foreign official documents. — All official records kept in a foreign country, including certificates of registration, shall be admissible if authenticated by the proper consular office of the Philippines having jurisdiction over the country where such records and/or certificates are kept. However, such authentication of foreign official documents may be the subject of the agreement of the parties.

SEC. 3. Deposition of foreign witness. — The deposition of any witness abroad shall be taken within six (6) months from the date of the order allowing the deposition, unless the failure to take the deposition within the period is caused by a fortuitous event, fraud, accident, mistake or excusable negligence.

SEC. 4. Presumptions in the Intellectual Property Code. — The presumptions in the Intellectual Property Code on patents, trademarks and copyright shall apply to these Rules.

SEC. 5. Suppletory application of the rules on discovery and evidence. — Unless inconsistent with these Rules, the rules on discovery and evidence under the Rules of Court shall apply.

What evidence would be needed in patents cases?

Rule 17EVIDENCE IN PATENT CASESSECTION 1. Burden of proof in patent infringement; presumption regarding process patents. —

a) The burden of proof to substantiate a charge for patent infringement rests on theparty alleging the same, subject, however, to sub-Section b) below, and otherapplicable laws.b) If the subject matter of a patent is a process for obtaining a product, any identicalproduct is presumed to have been obtained through the use of the patented processif; (i) the product is new; or (ii) there is substantial likelihood that the identical productwas made by the process and the owner of the patent has been unable, despitereasonable efforts, to determine the process actually used. In such cases, the courtshall then order the defendant or alleged infringer to prove that the process to obtainthe identical product is different from the patented process, subject to the court'sadoption of measures to protect, as far as practicable, said defendant or allegedinfringer's manufacturing and business secrets.

SEC. 2. Patents issued presumed valid. —a) In all cases, a letters patent issued by the Intellectual Property Office - Bureau ofPatents, or its predecessor or successor-agencies, is prima facie evidence of itsexistence and validity during the term specified therein against all persons, unless the same has already been cancelled or voided by a final and executory judgment ororder.b) Moreover, letters patents issued by the Intellectual Property Office — Bureau ofPatents, or its predecessor or successor-agencies, are presumed to have beenvalidly issued by said government agency in accordance with applicable laws, unlessotherwise contradicted or overcome by other admissible evidence showing that thesame was irregularly issued.

SEC. 3. Presumption regarding knowledge of existing patent rights. — For purposes of awarding damages in patent infringement cases, it is presumed that the defendant or alleged infringer knew of the existence of a patent over a protected invention or process, if: (a) on the patented invention or product manufactured using the patented process; (b) on the container or package in which said article is supplied to the public; or (c) on the advertising material relating to the patented product orprocess, are placed the words "Philippine Patent" with the number of the patent.

SEC. 4. Request for technical advice. — In patent infringement cases, the court, motu proprio or upon motion by a party, may order the creation of a committee of three (3) experts to provide advice on the technical aspects of the patent in dispute. Within thirty (30) days from receipt of the order creating the committee, each side shall nominate an expert, who shall then both be appointed by the court. The court shall appoint the third expert from a list submitted by the experts of each side. All fees and expenses relating to the appointment of a committee shall be initially equally shouldered bythe parties but may later on be adjudicated by the court in favor of the prevailing party.To assist in the trial involving highly-technical evidence or matters, the court may also request the IPO to provide equipment, technical facilities, and personnel.

SEC. 5. Application to utility models and industrial designs. — The above rules shall likewise be applicable to infringement cases involving utility models and industrial designs.

What evtidence is required in trademark infringement and unfair competition cases?

Rule 18 provides:

SECTION 1. Certificate of registration. — A certificate of registration of a mark shall be prima facie evidence of:

a) the validity of the registration;b) the registrant's ownership of the mark; andc) the registrant's exclusive right to use the same in connection with the goods orservices and those that are related thereto specified in the certificate.

SEC. 2. Well-known mark. — In determining whether a mark is well-known, account shall be taken of the knowledge of the relevant sector of the public, rather than of the public at large, including knowledge in the

Philippines which has been obtained as a result of the promotion of the mark. The following criteria or any combination thereof may be taken into account in determining whether a mark is well-known:

a) the duration, extent and geographical area of any use of the mark; in particular, the

duration, extent and geographical area of any promotion of the mark, including

advertising or publicity and the presentation, at fairs or exhibitions, of the goods

and/or services to which the mark applies;b) the market share, in the Philippines and in other

countries, of the goods and/or services to which the mark applies;c) the degree of the inherent or acquired distinction

of the mark;d) the quality-image or reputation acquired by the

mark;e) the extent to which the mark has been registered

in the world;f) the exclusivity of registration attained by the mark

in the world;g) the extent to which the mark has been used in the

world;h) the exclusivity of use attained by the mark in the

world;i) the commercial value attributed to the mark in the

world;j) the record of successful protection of the rights in

the mark;k) the outcome of litigations dealing with the issue of

whether the mark is a well-known mark; andl) the presence or absence of identical or similar

marks validly registered for or used on identical or similar goods or services and owned by persons other than the person claiming that his mark is a well-known mark.

Provided, further, that the mark is well-known both internationally and in the Philippines.

SEC. 3. Presumption of likelihood of confusion. — Likelihood of confusion shall be presumed in case an identical sign or mark is used for identical goods or services.

SEC. 4. Likelihood of confusion in other cases. — In determining whether one trademark is confusingly similar to or is a colorable imitation of another, the court must consider the general impression of the ordinary purchaser, buying under the normally prevalent conditions in trade and giving the attention such purchasers usually give in buying that class of

goods. Visual, aural, connotative comparisons and overall impressions engendered by the marks in controversy as they are encountered in the realities of the marketplace must be taken into account. Where there are both similarities and differences in the marks, these must be weighed against one another to see which predominates.

In determining likelihood of confusion between marks used on non-identical goods or services, several factors may be taken into account, such as, but not limited to:

a) the strength of plaintiff’s mark;b) the degree of similarity between the plaintiffs and the defendant's marks;c) the proximity of the products or services;d) the likelihood that the plaintiff will bridge the gap;e) evidence of actual confusion;f) the defendant's good faith in adopting the mark;g) the quality of defendant's product or service; and/orh) the sophistication of the buyers.

"Colorable imitation" denotes such a close or ingenious imitation as to be calculated to deceiveordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, as to cause him to purchase the one supposing it to be the other. SEC. 5. Determination of similar and dissimilar goods or services. — Goods or services may not be considered as being similar or dissimilar to each other on the ground that, in any registration or publication by the Office, they appear in different classes of the Nice Classification.

SEC. 6. Intent to defraud or deceive. — In an action for unfair competition, the intent to defraud ordeceive the public shall be presumed:

a) when the defendant passes off a product as his by using imitative devices, signs ormarks on the general appearance of the goods, which misleads prospective purchasers into buying his merchandise under the impression that they are buyingthat of his competitors;b) when the defendant makes any false statement in the course of trade to discredit the goods and business of another; orc) where the similarity in the appearance of the goods as packed and offered for sale is so striking.

SEC. 7. Generic marks. — A registered mark shall not be deemed to be the generic name of goods or services solely because such mark is also used as a name of or to identify a unique product or service.

The test for determining whether the mark is or has become the generic name of goods or services on or in connection with which it has been used shall be the primary significance of the mark to the relevant public rather than purchaser motivation.

What evidence is required in copyright cases?

Rule 19 states:SEC 1. When copyright presumed to subsist. — In copyright infringement cases, copyright shall be presumed to subsist in the work or other subject matter to which the action relates, and ownership thereof shall be presumed to belong to complainant if he so claims through affidavit evidence under Section 218 of the Intellectual Property Code, as amended, unless defendant disputes it and shows or attaches proof to the contrary in his answer to the complaint. A mere denial of the subsistence of copyright and/or ownership of copyright based on lack of knowledge shall not be sufficient to rebut the presumption.

SEC. 2. Effect of registration and deposit. — Registration and deposit of a work with the National Library or the Intellectual Property Office shall not carry with it the presumption of ownership of the copyright by the registrant or depositor, nor shall it be considered a condition sine qua non to a claim of copyright infringement.

SEC. 3. Presumption of authorship. — The natural person whose name is indicated on a work in the usual manner as the author shall, in the absence of proof to the contrary, be presumed to be the author of the work. This presumption applies even if the name is a pseudonym, provided the pseudonym leaves no doubt as to the identity of the author.The person or body corporate whose name appears on an audiovisual work in the usual mannershall, in the absence of proof to the contrary, be presumed to be the maker of said work.SEC. 4. International registration of works. — A statement concerning a work, recorded in an international register in accordance with an international treaty to which the Philippines is or may become a party, shall be construed as true until the contrary is proved, except:

a) Where the statement cannot be valid under Republic Act No. 8293, as amended, or any other law concerning intellectual property; or

b) Where the statement is contradicted by another statement recorded in the

international register.

What is the order of destruction?

Rule 20, Sec. 1 provides:At any time after the filing of the complaint or information, the court, upon motion and after due notice and hearing where the violation of the intellectual property rights of the owner is established, may order the destruction of the seized infringing goods, objects and devices, including but not limited to, sales invoices, other documents evidencing sales, labels, signs,prints, packages, wrappers, receptacles, and advertisements and the like used in the infringing act.Such hearing shall be summary in nature with notice of hearing to the defendant or accused to his last known address to afford the defendant or accused the opportunity to oppose the motion.

What are the conditions for a valid Order of Destruction?

Under Rule 20, Sec. 2, the conditions are:a) An inventory and photographs of the seized

infringing goods have been taken before destruction at the place where the seized infringing

goods are stored;b) The taking of the inventory and photographs must

be witnessed and attested to by: (1) the accused or counsel or agent, or in their

absence, an officer of the barangay where the seized infringing goods are stored; (2) the complainant, his representative or counsel; (3) the public officer who seized the items or a

representative of his office; and (4) a court officer authorized by the court to

supervise the destruction of the seized infringing goods;

c) Representative samples of the seized infringing goods have been retained in a

number and nature as to suffice for evidentiary purposes;

d) An inventory of the representative samples has been made by the persons

enumerated under (b) above;e) The court officer authorized to supervise the

destruction has submitted a report

thereon, within five (5) days from the date of destruction, to which is attached (i) the

inventory and photographs of the seized infringing goods and (ii) the inventory of the

representative samples; andf) The applicant has posted a bond in an amount fixed

by the court

Are representative samples admissible?

Rule 20, SEC. 3. Admissibility of representative samples. — Representative samples of the goods, objects and devices referred to in this Rule, together with the inventory and photographs of the same, shall be admissible in lieu of the actual items.

What are the reportorial requirements?

In Rule 21, Sec. 1: Within thirty (30) days from the issuance of the decision or final order, the court shall furnish the IPO a copy of the decision or final order.

X. SPECIAL LAWSANTI-MONEY LAUNDERING ACT (R.A. No. 9160, as amended by R.A. No. 9194)Policy of the Law

1. To protect and preserve the integrity and confidentiality of bank accounts and to ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity.

2. To pursue the State’s foreign policy to extend cooperation in transnational investigation and prosecutions of persons involved in money laundering activities wherever committed.

Covered Institutions/Covered Persons- Natural or juridical refer to

(a) Banks, non-banks, quasi-banks, trust, entities, foreign exchange dealers, pawnshops, money changers. Remittance, and transfer companies and other similar entities and all other persons and their subsidiaries and affiliates supervised or regulated by the Bangko Sentral ng Pilipinas (BSP)

(b) Insurance companies, pre-need companies and all other persons supervised or regulated by the Insurance Commission (IC)

(c) Securities dealers, brokers, salesmen, investment houses and other similar persons managing securities or rendering services as investment, agent, advisor, or consultant

(c.1) mutual funds, close,-end investment companies, common trust funds, and other similar persons(c.1.2) other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property supervised or regulated by the Securities and Exchange Commission (SEC)

(d) Jewelry dealers in precious metals, who as a business, trade in precious metals, for transactions in excess of One million pesos (PhP1,000,000.00)

(e) Jewelry dealers in precious stones, who as a business, trade in precious stones, for transactions in excess of One million pesos (PhP 1,000,000.00)

(f) Company service providers which, as a business, provide any of the following services to third parties.(1) acting as a formation agent of juridical persons(2) acting as (or arranging for another person to act as) a director or corporate secretary of a company, a partner of a partnership or a similar position in relation to other juridical persons(3) providing a registered office, business address or accommodation, correspondence, or administrative address for a company, a partnership or a similar position in relation to other juridical persons(4) acting as (or arranging for another person to act as) a nominee shareholder for another person.

(g) persons who provide any of the following services:(1) managing of client money, securities or other assets(2) management of bank, savings or securities accounts(3) organization of contributions for the creation, operation or management of companies; and(4) creation, operation or management of juridical persons or arrangements and buying and selling business entities.

Exclusions: The term “covered persons” shall exclude lawyers and accountants

Requisites for Exclusion:(a) Acting as independent legal professionals

(b) In relation to information concerning their clients or

(c) Where disclosure of information would compromise client confidences or the attorney-client relationship

Obligations of Covered InstitutionsCustomer Identification

Covered institutions shall establish and record the true identity of its clients based on official documents. They shall maintain a system of verifying the rue identity of their clients and in case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf.

The provisions of existing laws to the contrary notwithstanding, anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited. Peso and foreign currency non-checking numbered accounts shall be allowed. The BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts.Record Keeping

All records of all transactions of covered institutions shall be maintained and safely stored for five (5) years from the date of translations. With respect to closed accounts, the records on customer identification, account files and business correspondence shall be preserved and safely stored for at least five (5) years from the dates when they were closed.

Reporting of Covered and Suspicious TransactionsCovered persons shall report to the AMLC all

covered transactions and suspicious transactions within five (5) working days from occurrence thereof, unless the AMLC prescribes a different period not exceeding fifteen (15) working days.

Lawyers and accountants acting as independent legal professionals are not required to report covered and suspicious transactions if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.

Should a transaction be determined to be both a covered transaction and a suspicious transaction, the covered institution shall be required to report the same as a suspicious transaction.

When reporting covered or suspicious transactions and a suspicious transactions to the AMLC, covered persons and their officers and employees are prohibited from communicating, directly, or indirectly in any manner or by any means, to any person or entity, the

media, the fact that a covered or suspicious transaction has been reported or is about to be reported, the contents of the report or any other information in relation thereto. Neither may such reporting be published or aired in any manner of form by the mass media, electronic mail or other similar devices. In case of violation thereof, the concerned officer and employee of the covered person and media shall be held criminally liable.Covered Transactions

Is a transaction in cash or other equivalent monetary instrument involving a total amount in excess of five hundred thousand pesos (PhP 500,000.00) within one (1) banking day.Suspicious Transactions

Are transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist:

1. There is no underlying legal or trade obligation, purpose or economic justification

2. The client is not properly identified3. The amount involved is not commensurate

with the business or financial capacity of the client

4. Taking into account all known circumstances , it may be perceived that the cleint’s transaction is structured in order to avoid being the subject of reporting requirements under the Act

5. Any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or the client’s past transactions with the covered institution

6. The transactions is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed

7. Any transactions that is similar or analogous to any of the foregoing.

When is Money Laundering Committed Money laundering is committed by any person

who, knowing that any monetary instrument or property represents, involves or related to the proceeds of any unlawful activity:

(a) Transacts said monetary instrument or property(b) Converts, transfers, disposes of, moves,

acquires, possesses or uses said monetary instrument or property

(c) Conceals or disguises the true nature, source, location, disposition, movement, or ownership

of or rights with respect to said monetary instrument or property

(d) Attempts or conspires to commit money laundering offenses referred to in paragraphs (a), (b), or (c)

(e) Aids, abets assists in or counsels the commission of the money laundering offenses referred to in paragraphs (a), (b) or (c) above and

(f) Performs or fails to perform any act as a result of which he facilities the offense of money laundering referred to in paragraphs (a), (b) or (c) aboveMoney laundering is also committed by any

covered person who, knowing that a covered or suspicious transactions is required under this Act to ve reported to the Anti-Money Laundering Council (AMLC) fails to do so.Unlawful Activities or Predicate Crimes

Refers to any act or omission or series or combination thereof involving or having direct relation to the following:

(a) Kidnapping for ransom under Article 267 of Act No. 3815 otherwise known as the Revised Penal Code as amended

(b) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165 otherwise known as the Comprehensive Dangerous Drugs Act of 2002;

(c) Section 3 paragraphs B, C, E, G, H and I of Republic Act. No. 3019, as amended otherwise known as the Anti-Graft and Corrupt Practices Act;

(d) Plunder under Republic Act No. 7080 as amended

(e) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of the Revised Penal Code, as amended

(f) Jueteng and Masiao punished as illegal gambling under Presidential Decree No. 1602

(g) Piracy on the high seas under the Revised Penal Code, as amended and Presidential Decree No. 532

(h) Qualified theft under Article 310 of the Revised Penal Code, as amended

(i) Swindling under Article 315 and other forms of Swindling under Article 316 of the Revised Penal Code as amended

(j) Smuggling under Republic Act Nos. 455 and 1937

(k) Violations of Republic Act No. 8792, otherwise known as the Electronic Commerce Act of 2000

(l) Hijacking and other violations under Republic Act No. 6235, destructive arson and murder as defined under the Revised Penal Code, as amended

(m) Terrorism and conspiracy to commit terrorism as defined and penalized under Sections 3 and 4 or Republic Act No. 9372

(n) Financing of Terrorism under Section 4 and offenses punishable under Sections 5, 6 and 7 and 8 of Republic Act No. 10168, otherwise known as Terrorism Financing Prevention and Suppression Act No. 2012

(o) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code as amended and Corruption of Public Officers unbder Article 212 of the Revised Penal Code, as amended

(p) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215 and 216 of the Revised Penal Code, as amended

(q) Malversation of Public Funds an Property under Articles 217 and 222 of the Revised Penal Code, as amended

(r) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169, and 176 of the Revised Penal Code, as amended

(s) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as the Anti-Trafficking in Persons Act of 2003

(t) Violations of Sections 101 to 107 and 110 of Republic Act No. 7942 otherwise known as the Philippine Fisheries Code of 1998

(u) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705, otherwise known as the Revised Forestry Code of the Philippines, as amended

(v) Violations of Section 27 (c), (e), (f), (g) and (i) of Republic Act No. 9147 otherwise known as the Wildlife Resources Conservation ande Protection Act

(w) Violation of Section 7(b) of the Republic Act No. 9072 otherwise known as the National Caves and Cave Resources Management Protection Act

(x) Violation of Republic Act No. 6539 otherwise known as the Anti-Carnapping Act of 2002, as amended

(y) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as amended otherwise known as the decree Codifying

the Laws on Illegal/Unlawful Possession, Manufacture, Dealing In, acquisition or Disposition of Firearms, Ammunition or Explosives

(z) Violation of Presidential Decree No. 1612 otherwise known as the Anti-Fencing Law;

Anti-Money Laundering Council (AMLC)The Anti-Money Laundering Council is hereby

created and shall be composed of:1. The Governor of the Bangko Sentral ng Pilipinas

as Chairman2. The Commissioner of the Insurance Commission

and the 3. Chairman of the Securities of Exchange

Commission as membersFunctionsThe AMLC shall act unanimously in the discharge of its functions as defined hereunder:

(1) To require and receive covered or suspicious tyransaction reports from covered institutions

(2) To issue orders addressed to the appropriate Supervising, Authority or the covered institutions to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction or suspicious transaction report or request for assistance from a foreign State, or believed by the Council, on the basis for substantial evidence to be in whole or in part, wherever located, representing, involving or related to directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity

(3) To institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General

(4) To cause the filing of complaints with the Department of Justice or the Ombudsman for the prosecution of money laundering offenses

(5) To investigate suspicious transactions and covered transactions deemed suspicious after an investigation by the AMLC, money laundering activities and other violations of this Act

(6) To apply before the Court of Appeals ex parte for the freezing of any monetary instrument or property alleged to be laundered, proceeds from or instrumentalities used in or intended for use in any unlawful activity as defined in Section 3(1) hereof

(7) To implement such measures as may be necessary and justified under this Act to the counteract money laundering

(8) To receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act

(9) To develop education programs on the pernicious effects of money laundering, the methods and techniques used in the money laundering, the viable means of preventing money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders.

(10)To enlist the assistance of any branch, department, bureau,office, agency, or instrumentality of the government including government-owned and controlled corporations, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection, and investigation of money laundering offenses and prosecution of offenders and

(11)To impose administrative sanctions for the violation of laws,rules and regulations and orders and resolutions issued pursuant thereto.

(12)To require the Land Registration Authority and all its Registries of Deeds to submit to the AMLC, reports on all real estate transactions involving an amount in excess of Five Hundred Thousand Pesos (PhP500,000.00). within fifteen (15) days from the date of registration of the transaction, in a form to be prescribed by the AMLC. The AMLC may also require the Land Registration Authority and all its Registries of Deeds to submit copies of relevant documents of all real estate transactions.

FREEZING OF MONEY INSTRUMENT OR PROPERTYUpon a verified ex parte petition by the AMLC and

after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may issue a freeze order which shall not exceed six (6) months depending upon the circumstances of the case. Provided that if there is no case filed against a person whose account has been frozen within the period determined by the court, the freeze order shall be deemed ipso facto lifted; provided further that this new rule shall not apply to pending cases in the courts. In any case, the court should act on the petition to freeze within 24 hours from filing of the petition. If the application is filed a day before a non-working day, the computation of the twenty-

four(24) hour period shall exclude the non-working days.A person whose account has been frozen may file a

motion to lift the freeze order and the court must resolve this motion before the expiration of the freeze order.No court shall issue a temporary restraining order

or a writ of injunction against any freeze order except the Supreme Court.

AUTHORITY TO INQUIRE INTO BANK DEPOSITSNotwithstanding the provisions of Republic Act

No.1405 as amended, Republic Act No. 8791 and other laws, the AMLC may inquire into or examine any particular deposit or investment, including related accounts, with any banking institution or non0bank financial institution upon order of any competent court based on ex parte application in cases of violations of this Act, when it has been established that there is probable cause that the deposits or investments, including related accounts involved, are related to an unlawful activity as defined in Section 3(1) hereof or a money laundering offense under Section 4 hereof; except that no court order shall be required in cases involving activities defined in Section 3(i)(1),(2), and (12)hereof and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1),(2) and (12) which are punishable under the penal laws of other countries, and terrorism and conspiracy to commit terrorism as defined and penalized under Republic Act No. 9372.The Court of Appeals shall act on the application to

inquire into or examine any deposit or investment with any banking institution or non-bank financial institution within twenty-four (24) hours from filing of the application.Nothing contained in this Act nor in related

antecedent laws or existing agreements shall be construed to allow the AMLC to participate in any manner in the operations of the BIR. (Section 20, RA10365, amending RA 9160)The authority to inquire into or examine the main

account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference. Likewise, the constitutional injunction against ex post facto laws and bills of attainder shall be respected in the implementation of this Act.To ensure the compliance with this Act, the Bangko

Sentral nang Pilipinas may in the course of a periodic or special examination, check the

compliance of a covered institution with the requirements of the AMLA and its implementing rules and regulations.

For purposes of this section, related accounts, the funds and resources of which originated from and/or are materially linked to the monetary instrument(s) or property(ies) subject of the freeze order.

Acourt order exparte must first be obtained before the AMLC can inquire into these related accounts. Provided that the procedure for the ex parte application of the ex parte court order for the principal account shall be the same with that of the related accounts.

The authority to inquire into or examine the main account and the related accounts shall comply with the requirements of Article III, Sections 2 and 3 of the 1987 Constitution, which are hereby incorporated by reference (RA 9160,as amended by RA 10167)

FOREIGN INVESTMENT ACT (R.A.No. 7042)Policy of the Law

It is the policy of the State to attract, promote and welcome productive investments in activities which significantly contribute to National industrialization and socio-economic development to the extent that foreign investment is allowed in such activity by the Constitution and relevant laws from

(a) Foreign individuals (b) Partnerships(c) Corporations(d) Governments, including their political

subdivisionsForeign investments shall be encouraged in the

enterprises that significantly expand livelihood and employment opportunities for Filipinos by:

(a) Enhancing economic value of farm products(b) Promoting the welfare of Filipino

consumers(c) Expanding the scope, quality, and volume of

exports and their access to foreign markets(d) And/or transferring relevant technologies in

agriculture, industry and support servicesForeign investment shall be welcome as a

supplement to Filipino capital and technology in those enterprises serving mainly the domestic marketGeneral Rule:

There are no restrictions on extent of foreign ownership or Export Enterprises. In domestic market enterprises, foreigners can invests as much as 100% equityException: In the areas included in the negative list.

Foreign-owned firms catering mainly to the domestic market shall be encouraged to undertake measures that will gradually increase Filipino participation in their businesses by

(a) Taking in Filipino partners(b) Electing Filipinos to the board of director(c) Implementing transfer of technology to

Filipinos(d) Generating more employment for the

economy; and(e) Enhancing skills of Filipino workers

DEFINITION OF TERMSForeign Investment

It is an equity investment made by non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange.Doing Business in the Philippines

Foreign corporations are considered “doing or transacting business” in the Philippines if they are:

1. Soliciting orders, service contracts and opening offices whether called liason offices of branches

2. Appointing representatives, distributors, domiciled in the Philippines or who stay for a period or periods totaling 180 days or more

3. Participating in the management, supervision or control of any domestic business, firm, entity or corporation in the Philippines

4. Doing any act or acts that imply a continuity of commercial dealings or arrangements and contemplate to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of, the purpose and object of its organization.

Instances that are considered as “not doing or transacting business” in the Philippines for foreign corporations:

1. Mere investment as shareholder and exercise of rights as investor

2. Having a nominee director or officer to represent its interest in the corporation

3. Appointing a representative or distributor which transacts business in its own name and for its own account

4. Publication of a general advertisement through any print or broadcast media;

5. Maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines

6. Consignment by the foreign corporation of equipment with a local company to be used in the processing of products of export

7. Collecting information in the Philippines; 8. Performing services auxiliary to an existing

isolated contract of sale which are not on a continuing basis (R.A. 7042, Sec. 3(d) ).

Export EnterpriseIt is a enterprise wherein a manufacturer,

processor or service (including tourism) enterprise exports sixty percent (60%) or more of its output or wherein a trader purchases products domestically and exports sixty percent (60%) or more of such purchases. (Section 3(e) RA 7042)

Domestic Market EnterpriseIt is an enterprise which produces goods for sale or

renders services to the domestic market entirely or if exporting a portion of its output fails to consistency export at least 60% thereof (R.A. 7042,Section 3 (f))

REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALSPhilippine Nationals

1. A citizen of the Philippines2. A domestic partnership or association wholly

owned by citizens of the Philippines3. Corporations organized under Philippine laws of

which 60% of the capital stock outstanding and entitled to vote owned and held by Filipino citizens

4. Corporations organized abroad and registered as doing business in the Philippines under the Corporation Code of which 100% of the capital stock entitled to vote belong to Filipinos; and

5. Trustee of funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least sixty (60%) percent of the fund will accrue to the benefit of the Philippine nationals.

Non-Philippine Nationals1. Those who do not belong to the definition of

the Philippine National2. A non-Philippine national may own fully a

domestic market enterprise.3. A non-Philippine national may own up to 100%

of a domestic market enterprise. (RA 7042 Sec.7)

Requirements for a non-Philippine national to own up to 100% of a domestic market enterprise

1. A non-Philippine national must register with the SEC or with the Bureau of Trade Regulation and Consumer Protection (BTRCP) of DTI in the case

of single proprietorship for it to do business or invest in a domestic enterprise up to 100% of its capital

2. The participation of non-Philippine national in the enterprise must not be prohibited orlimited to a smaller percentage by existing law and/or under Foreign Investment Negative List (RA 7042,Sec.5)

Imposition of additional limitation on the extent of foreign ownership in an enterprise other than those provided for under RA 7042 by the SEC or BTRCPGeneral Rule:

The SEC or BTRCP, as the case may be, shall not impose any limitations on the extent of foreign ownership in an enterprise additional to those provided in RA 7042.Exceptions:

1. That any enterprise seeking to avail of incentive under the Omnibus Investment Code of 1987 must apply for registration with the Board of Investment Code of 1987 must apply for registration with the Board of Investments (BOI),which shall process such application for registration in accordance with the criteria for evaluation prescribed in said Code

2. That anon-Philippine national intending to engage in the same line of business as an existing joint venture, in which he or his majority shareholder is a substantial partner, must disclose the fact and the names and addresses of the partners in the existing joint venture in his application for registration with the SEC

FOREIGN INVESTMENT IN EXPORT ENTERPRISESRules:

1. Foreign investment in export enterprises whose products and services do not fall within lists A and B of the Foreign Investment Negative List is allowed up to 100% ownership

2. Export enterprises which are non-Philippine nationals shall register with BOI and submit the reports that may be required to ensure continuing compliance of the export enterprise with its export requirement

3. BOI shall advise SEC or BTRCP as the case may be of any export enterprise that fails to meet the export ratio requirement

4. The SEC or BTRCP shall thereupon order the non-complying export enterprise to reduce its sales to the domestic market to not more than 40% of its total production, failure to comply

with such SEC or BTRCP order, without justifiable reason shall subject the enterprise to cancellation of SEC or BTRCP registration, and/or the penalties provided in this law. (RA 7042 Sec.6)

FOREIGN INVESTMENT DOMESTIC MARKET ENTERPRISEA domestic enterprise may change its status to

export enterprise the Domestic market enterprise consistently exports in each year thereof sixty percent (60%) or more of its output over a three (3) year period (RA 7042, Sec.7)

FOREIGN INVESTMENT NEGATIVE LISTIt is a list of areas of economic activity whose

foreign ownership is limited to a maximum of 40% of the equity capital of the enterprises engaged therein.List A of the Foreign Investment Negative ListFilipino Ownership must be (100% Filipino Owned, Zero Percent (0%) foreign equity1. Cooperatives2. Manufacture of Firecrackers and other

pyrotechnic devices3. Manufacture, repair, stockpiling and/or

distribution of biological, chemical, and radiological weapons and anti-personnel mines(Various treaties to which the Philippines is a signatory and conventions supported by the Philippines)

4. Mass media except recording5. Utilization of marine resources6. Manufacture, repair, stockpiling and/or

distribution of nuclear weapons7. Cockpits8. Small-scale mining9. Private security agencies10. Retail trade enterprises with paid-up capital of

less than US$ 2.5M80% Filipino Owned (up to 25% foreign equity)1. Contracts for the construction and repair of

locally funded public works except:a. Infrastructure/development

projects covered in RA 7718b. Projects which are foreign funded

or assisted and required to undergo international competitive bidding

2. Private recruitment whether for local or overseas employment

3. Contracts for the construction of defense-related structures

4. Under the flag law, in the purchase of articles for the government preference shall be given to materials and supplies produced, made or manufactured in the Philippines and to domestic entities. Domestic entities mean any citizen of the Philippines or commercial company at least 75% of the capital of which is owned by citizens of the Philippines.

70% Filipino Owned (Up to thirty percent (30%) foreign equity)1. Advertising2. Corporations engaged in pawnshop business60% Filipino Owned (up to forty percent (40%) foreign equity1. Contracts for the supply of materials, goods,

and commodities to GOCC, agency or municipal corporation

2. Ownership of private lands3. Ownership/establishment and administration of

educational institutions4. Adjustment Companies5. Culture, production, milling, processing, trading,

excepting, retailing of rice and corn and acquiring by barter, purchase or otherwise rice and corns and the by-products thereof

6. Exploration, development, and utilization of natural resources

7. Ownership of condominium units where the common areas in the condominium project are co-owned by the owners of the separate units or owned by a corporation

8. Operation and management of public utilities9. Project proponent and Facility Operator of a

BOT project requiring a public utilities franchise10. Manufacture, repair, storage, and/or

distribution of products/ingredients requiring PNP clearance

11. Operation of deep sea commercial fishing vessel 12. Corporations engaged in Coastwise shipping40% Filipino Owned (up to sixty percent (60%) foreign equity1. Financing companies regulated by the SEC2. Investment houses regulated by the SEC

LIST B OF THE FOREIGN INVESTMENT NEGATIVE LIST General Rule: Defense-related activities, requiring prior clearance

and authorization from the Department of National Defense to engage in such activity such as the:a. Manufactureb. Repairc. Storage

d. Distribution of firearms, ammunition, lethal weapons, military ordinance, explosives, pyrotechnics, similar materials

Exception:a. Such manufacturing or repair activity is

specifically authorized with a substantial export component to a non-Philippine national by the Secretary of National Defense, or

b. Those that have implications on public health and morals, such as the manufacture and distribution of all dangerous drugs, all forms of gambling, nightclubs, bars beer houses, dance halls, sauna and steam bathhouses, massage clinics

LIST C OF THE FOREIGN INVESTMENT NEGATIVE LISTList C shall contain the areas of investment in which existing enterprises already serve adequately the needs of the economy and the consumer and do not require further foreign investments as determined by NEDA and approved by the President and promulgated in a Presidential Proclamation