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Commercial Law Study Guide
Centralized Bar Operations 2007
Far Eastern University
Institute of Law
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Commercial Law Study Guide
Centralized Bar Operations 2007
Far Eastern University
Institute of Law
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Commercial Law Study Guide
Centralized Bar Operations 2007
Far Eastern University
Institute of Law
accessory contracts and while they are may be the opening bank or another
security arrangements, they are not bank not in the city of the beneficiary.
converted thereby into contracts of 7. Negotiating Bank –
guaranty. (Metropolitan vs. Daway) bank in the city of the beneficiary which
A letter of credit is a commercial buys or discounts the drafts
transaction because it is one of the contemplated by the LC, if such draft is
contracts provided for by the Code of to be drawn on the opening bank or on
Commerce not repealed by the Civil another designated bank not in the city
Code. (Bar Review Materials in of the beneficiary.
Commercial Law, Miravite, 2005 ed.) A mere
advertising or
Essential conditions: notifying bank is
1. Issued in favor of a definite person and not liable for a
not to order; breach of the
2. Amount fixed and specified. (Art. 568) letter of credit,
Note: If any of these essential conditions is not while a
present, the instrument is merely considered as confirming bank
a letter of recommendation. is liable in case
Duration: of breach
a. Upon the period fixed by the parties: or thereof. An
b. If none is fixed, 6 months from its date if advertising
used in the Philippines, or 12 months if used bank is bound
abroad. (Art. 572) only to check
Note: The LC becomes void if it is not used the apparent
within the period applicable. authenticity of
Perfection: LC are perfected from the moment the letter of
the correspondent bank makes payment to credit. (Bank of
persons in whose favor the LC has been America NT. &
opened. (Belman, Inc. vs. Central Bank, 104 SA vs. CA, G.R.
Phil. 887) No. 105395,
Parties December 10,
1. Applicant/buyer/importer – one who 1993)
purchases the goods, procures the LC, and Nature: The LC is the financial devise (mode of
obliges himself to reimburse the issuing bank payment) developed a s a convenient and
upon receipt of the documents of title. relatively safe mode of dealing with sales of
2. Issuing/opening bank – one which issues the goods to satisfy the seemingly irreconcilable
LC, and undertakes to pay the seller upon interests of a seller, who refuses to part with his
receipt of the draft and proper documents of title goods before he is paid, and a buyer, who wants
from the seller and to surrender them to the to have control of the goods before paying.
buyer upon reimbursement; and
3. Seller/exporter/beneficiary – one who sells the
goods to the buyer, and who delivers the draft
and documents to the issuing bank to recover Stages:
payment. 1. Contract of sale
The number of parties may be between the buyer and seller
increased. Modern letters of credit are 2. Application for LC by
usually not made between natural the buyer with the bank
persons. They involve bank- to bank 3. Issuance of LC by the
transactions. bank
4. Advertising/ Notifying 4. shipping of goods by the
Bank - the correspondent bank (agent) seller
of the opening bank through which it 5. Execution of draft and
advises the beneficiary of the LC. tender of documents by the seller
5. Confirming Bank – bank 6. Redemption of draft
which, upon the request of the (payment)and obtaining of documents by the
beneficiary, confirms the LC issued. issuing bank
7. reimbursement to the
6. Paying Bank – bank on
bank and obtaining of documents by the
which the drafts are to be drawn, which
buyer
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Commercial Law Study Guide
Centralized Bar Operations 2007
Far Eastern University
Institute of Law
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Commercial Law Study Guide
Centralized Bar Operations 2007
Far Eastern University
Institute of Law
beneficiary
Kinds of LC have been
reimbursed
CONFIRMED LC IRREVOCABLE LC to the
A LC issued by one A definite opening
bank confirmed by undertaking on the bank by the
another , in which part of the issuing buyer
case both banks are bank and constitutes
obligated to honor the engagement of Governing Law
drafts drawn in the bank to the 1. Code of Commerce
compliance with the beneficiary and bona 2. Uniform Customs and Practice for
credit fide holders of drafts Documentary Credits
drawn and or
documents Note: the Uniform Commercial Practice for
presented Documentary Credits allow Letters of Credit to
thereunder, that the be payable to order.
provisions for
payment,
acceptance and NEGOTIABLE INSTRUMENTS LAW
negotiation (Act No. 2031)
contained in the
credit will be fully I. General Concepts
fulfilled, provided
that all the terms and Negotiable Instrument (2005 Bar Exam) - a
conditions of the written contract for the payment of money which
credit are complied complies with the requirements of Sec. 1 of the
with. NIL, which by its form and on its face, is
The correspondent The issuing bank intended as a substitute for money and passes
bank gives an may not without the from hand to hand as money, so as to give the
absolute assurance consent of the holder in due course (HDC) the right to hold the
to the beneficiary beneficiary (seller) instrument free from defenses available to prior
that it will undertake and the applicant parties. (Reviewer on Commercial Law,
the issuing bank’s ( buyer) revoke his Sundiang and Aquino)
obligation as to its understanding under
own according to the the LC. Functions of Negotiable Instrument:
terms and conditions 1. Substitute for money
of the credit. 2. Medium of exchange
3. Tool used in commercial
transaction.
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Commercial Law Study Guide
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Far Eastern University
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Commercial Law Study Guide
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Far Eastern University
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Commercial Law Study Guide
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Far Eastern University
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4. Drafts, which are bills of exchange drawn by 1. Must be in writing, signed by the maker or
one bank upon another drawer;
All of these must comply with Sec. 1, NIL - Otherwise it cannot be a substitute for money.
Note: Letters of credit are not negotiable.
2. Must contain an unconditional promise or
Legal Tender order to pay a sum certain in money;
That kind of money that the law compels a
creditor to accept in payment of his debt when Certainty of sum payable.
tendered by the debtor in the right amount. The sum payable is a sum certain although it is
to be paid:
Note: A negotiable instrument although intended a. With interest; or
to be a substitute for money, is generally not a b. By stated installments; or
legal tender. c. By stated installments, with a provision
that, upon default in payment of any
Incidents in “Life” of Negotiable Instrument installment or of interest, the whole shall
1. Issue become due; or
2. Delivery d. With exchange, whether at a fixed rate
3. Negotiation or at the current rate; or
4. Presentment for acceptance, in certain kinds e. With costs of collection or an attorney's
of bills of exchange fee, in case payment shall not be made
5. Acceptance at maturity. (sec. 2)
6. Dishonor by non-acceptance Acceleration clause - renders whole debt due
7. Presentment for payment and demandable upon failure of obligor to
8. Dishonor by non-payment comply with certain conditions.
9. Notice of dishonor
10. Discharge When promise is unconditional
An unqualified order or promise to pay is
Issue - the first delivery of the instrument, unconditional though coupled with:
complete in form, to a person who takes it as a
a. An indication of a particular fund out of
holder.
which reimbursement is to be made or a
particular account to be debited with the
Delivery - transfer of possession, actual or
amount; or
constructive, from one person to another
b. A statement of the transaction which
Holder – refers to the:
gives rise to the instrument.
a. The payee or indorsee of a bill or note
who is in possession of it, or An order or promise to pay out of a particular
fund is not unconditional.
b. The bearer thereof (sec.191)
Bearer - the person in possession of a bill or
note which is payable to bearer.
Person - includes a body of persons, whether
incorporated or not.
II. Negotiability
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Commercial Law Study Guide
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1. The whole instrument itself c. waives the benefit of any law intended
2. Only what appears on the face of for the advantage or protection of the
the instrument obligor; or
3. Provisions of the NIL, Sec.1 d. gives the holder an election to require
something to be done in lieu of payment
BAR QUESTION (Q): Which of the of money.
following stipulations or features of a
promissory notes (PN) affect or do not
Confession of judgment – a written
affect its negotiability, assuming that the
statement signed by the defendant, setting
PN is otherwise negotiable? Indicate
forth the basis of liability and authorizing the
your answer by writing the paragraph
entry of judgment thereon.
number of the stipulation or feature of
the PN as shown below and your Kinds of confession of judgment
corresponding answer, either ‘Affected” a. cognivit actiomen – literally means “he
or “Not affected.” Explain. has confessed action”. It is a written
(a)The date of the PN is “February 30, confession of action by the defendant
2002.” acknowledging is indebtedness to the
(b)The PN bears interest payable on the plaintiff after the action has been filed. It
last day of each calendar quarter at a is given after the action is brought to
rate equal to 5% above the then save expenses.
prevailing 91-day Tbill rate as published b. relicta verificationem – literally means
at the beginning of such calendar “his pleadings being abandoned.” It is
quarter. confession of judgment by withdrawal of
(c)The PN gives the maker the option to the defense.
make payment either in money or in
quantity of palay of equivalent value. Note: However, warrants of attorney to confess
(d) The PN gives the holder the option judgment, are not authorized nor contemplated
either to require payment in money or to by our law. They are void as against public
require the maker to serve as the policy because they enlarge the field for fraud,
bodyguard or escort of the holder for 0 because under these instruments, the
days. promissory bargains away his right to a day in
SUGGESTED ANSWER (SA): court. The NIL does not sanction nor validated
(a) NOT AFFECTED. The date is not any provision otherwise illegal.
one of the requirements for negotiability.
(b) NOT AFFECTED. The interest is to Omissions and Provisions that do not affect
be computed at a particular time and is Negotiability (Sec. 6)
determinable. It does not make the sum The validity and negotiable character of an
uncertain or the promise conditional. instrument are not affected by the fact that:
(c) AFFECTED. Giving the maker an a. it is not dated; or
option renders the promise conditional.
(d) NOT AFFECTED. Giving the holder
b. does not specify the value given, or that
any value had been given therefore; or
an option does not make the promise
conditional. c. does not specify the place where it is
drawn or the place where it is payable;
or
d. bears a seal; or
e. designates a particular kind of current
money in which payment is to be made.
Additional provisions not affecting if it is not dated, the instrument will be
negotiability. considered to be dated as of the time it was
General Rule: the instrument is non-negotiable if issued.
it contains a promise or order to do any act in consideration for the instrument is
addition to the payment of money. presumed. (art. 154 NCC & sec. 25 NIL)
Exceptions: sec. 73 specifies where presentment for
a. authorizes the sale of collateral payment should be made when the place of
securities in case the instrument be not payment is not specified
paid at maturity; or
b. authorizes a confession of judgment if Rules of construction:
the instrument be not paid at maturity; or a. Where the sum payable is expressed in
words and also in figures and there is a
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Commercial Law Study Guide
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discrepancy between the two, the sum deemed a holder for value to the extent
denoted by the words is the sum of his lien.
payable; but if the words are ambiguous Effect of want of consideration: a matter
or uncertain, reference may be had to of defense as against any person not a
the figures to fix the amount; holder in due course; and partial failure of
b. Where the instrument provides for the consideration is a defense pro tanto,
payment of interest, without specifying whether the failure is an ascertained and
the date from which interest is to run, the liquidated amount or otherwise.
interest runs from the date of the Absence of consideration – total lack of any
instrument, and if the instrument is valid consideration for the contract is only a
undated, from the issue thereof; personal defense.
c. Where the instrument is not dated, it will Failure of consideration – failure or refusal or
be considered to be dated as of the time one party to do, perform or comply with the
it was issued; consideration agreed upon is also only a
d. Where there is a conflict between the personal defense.
written and printed provisions of the
instrument, the written provisions III. Transfer and Negotiation
prevail;
Types of transfers:
e. Where the instrument is so ambiguous
that there is doubt whether it is a bill or 1. Assignment - transfer of title to the
note, the holder may treat it as either at instrument, with the assignee generally
his election; taking only such title as his assignor has,
subject to all defenses available against his
f. Where a signature is so placed upon the
assignor;
instrument that it is not clear in what
capacity the person making the same 2. Negotiation - transfer of a negotiable
intended to sign, he is to be deemed an instrument from one person to another made
indorser; in such a manner as to constitute the
transferee the holder thereof
g. Where an instrument containing the
word "I promise to pay" is signed by two 3. By Operation of Law – such as by
or more persons, they are deemed to be succession, by insolvency.
jointly and severally liable thereon. (sec.
17) Distinctions between Negotiation and
Assignment
Consideration
NEGOTIATION ASSIGNMENT
Presumption of consideration. - every 1. Refers only to 1. Refers generally to
negotiable instrument is deemed prima facie
negotiable an ordinary
to have been issued for a valuable
instruments; contract;
consideration; and every person whose
2. The transferee is a 2. The transferee is an
signature appears thereon to have become
holder; assignee;
a party thereto for value.
3. A holder in due 3. An assignee is
Value - any consideration sufficient to course is subject subject to both real
support a simple contract. An antecedent or only to real and personal
pre-existing debt constitutes value; and is defenses; defenses;
deemed such whether the instrument is 4. Generally, an
payable on demand or at a future time. 4. A holder in due assignee merely
Holder for value – one who has given a course may acquire steps into the shoes
valuable consideration for the instrument a better right than of the assignor;
issued or negotiated to him. that of a prior party 5. An assignor does
• What constitutes holder for 5. A general indorser not warrant the
value: warrants the solvency of prior
where value has at any time been given solvency of prior parties unless
for the instrument, the holder is deemed parties; expressly stipulated
a holder for value in respect to all parties or the insolvency is
who become such prior to that time. known to him;
6. An assignor is liable
• where the holder has a lien on 6. An indorser is not even without notice
the instrument arising either from liable unless there of dishonor;
contract or by implication of law, he is be presentment and
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Commercial Law Study Guide
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Far Eastern University
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Commercial Law Study Guide
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Far Eastern University
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Commercial Law Study Guide
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Holder in Due Course (1996, 1998, 2000 Bar c. facts of the particular
Exams) case.
holder who has taken the instrument under • Effect: in the hands
the following conditions: of any holder other than a holder in due
course, a negotiable instrument is
a. That it is complete and regular upon its subject to the same defenses as if it
face; were non-negotiable.
b. That he became the holder of it before it General Rule: every holder is
was overdue, and without notice that it deemed prima facie to be a holder in due
has been previously dishonored, if such course
was the fact; Exception: when it is shown that the title of
c. That he took it in good faith and for any person who has negotiated the
value; instrument was defective, the burden is on
d. That at the time it was negotiated to him, the holder to prove that he or some person
he had no notice of any infirmity in the under whom he claims acquired the title as
instrument or defect in the title of the holder in due course (shifting of burden of
person negotiating it. proof).
When title defective - The title of a Limitation: the last-mentioned rule does not
person who negotiates an instrument is apply in favor of a party who became bound
defective when he obtained the instrument on the instrument prior to the acquisition of
or any signature thereto, by: such defective title. (sec. 59)
a. fraud, Rights of a holder in due
b. duress, or force and fear, course:
c. other unlawful means, a. he may sue on the instrument in his own
d. illegal consideration, name;
e. negotiation in breach of faith, b. he may receive payment and if payment
f. circumstances amounting to fraud. is in due course, the instrument is
g. discharged.
c. holds the instrument free from any
What constitutes notice of defect. - defect of title of prior parties,
The person to whom it is negotiated must d. holds the instrument free from defenses
have: available to prior parties among
a. actual knowledge of the infirmity themselves, and
or defect, or e. may enforce payment of the instrument
b. knowledge of such facts that his for the full amount thereof against all
action in taking the instrument parties liable thereon.
amounted to bad faith. (sec. 56)
Notice before full amount is paid - • Payment in due
where the transferee receives notice of any course is payment made:
infirmity in the instrument or defect in the title at or after the maturity of the instrument
of the person negotiating the same before to the holder thereof
he has paid the full amount agreed to be in good faith and without notice that his
paid, he will be deemed a holder in due title is defective.
course only to the extent of the amount paid
Shelter Rule:
by him.
a. derives his title through a holder in due
When person not deemed a holder in course, and
due course - where an instrument payable b. who is not himself a party to any fraud or
on demand is negotiated on an illegality affecting the instrument, has all
unreasonable length of time after its issue, the rights of such former holder in
the holder is not deemed a holder in due respect of all parties prior to the latter.
course.
• Reasonable time, Rights of a Holder NOT in
what constitutes. - regard is to be had to Due Course
the 1. He may sue on the
a. nature of the instrument, instrument in his own name;
b. the usage of trade or 2. He may receive
business with respect to such payment and if the payment is in
instruments, and the due course, the instrument is
discharged;
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Commercial Law Study Guide
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Indorser Drawer
1. A party to either a 1. A party only to a bill; Negotiating by Mere
note or a bill; 2. The drawer makes delivery or by Qualified General Indorser
2. Does not make any such admission; Indorsement
admission regarding 3. Makes no 1. No secondary liability; 1. With secondary
the existence of the warranties, but he liability;
payee and his capacity engages to pay after 2. Warrants that he has 2. Warrants that the
to indorse; and certain conditions are no knowledge of any instrument is, at
3. Has warranties. complied with. fact, which would the time of his
impair the validity of indorsement,
(2005 Bar Exam) the instrument or valid and
GENERAL IRREGULAR render it valueless. subsisting.
INDORSER INDORSER
1. Makes either a 1. Always makes a 4. Other parties who may be liable:
blank or special blank indorsement;
indorsement; 2. Indorses before its
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Commercial Law Study Guide
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General Rule: One whose signature does not accommodation party without first directing
appear on the instrument shall not be liable his action against the principal debtor
thereon. provided:
Exceptions: 1. he made the payment by virtue of
1. The principal who signs through an agent is judicial demand; or
liable; 2. the principal debtor is insolvent.
2. The forger is liable; Note: A corporation cannot act as an
3. One who indorses in a separate instrument accommodation party. The issuance or
(allonge) is liable; indorsement of negotiable instrument by a
4. One who signs his assumed or trade name corporation without consideration and for the
is liable; and accommodation of another is ultra vires.
5. A person negotiating by delivery (as in the (Crisologo v. CA, 117 SCRA 594).
case of a bearer instrument) is liable to his
immediate indorsee. Order of liability of indorsers:
1. among themselves – indorsers are liable
Requisites for an Agent to escape liability: prima facie in the order in which they
1. must be duly authorized; indorse; but evidence is admissible to show
2. add words to his signature indicating that he that, as between or among themselves, they
signs as an agent, that is, for or on behalf of have agreed otherwise (sec. 68)
a principal, or in a representative capacity;
and 2. to the holder – indorsers are liable in any
3. disclose his principal. order
A signature by “procuration”
operates as notice that the agent has but a
limited authority to sign, and the principal is Defenses (1996, 1998, 2004, 2005 Bar Exams)
bound only in case the agent in so signing Kinds:
acted within the actual limits of his authority. 1. Real/Absolute Defenses - those that attach
(sec. 21) to the instrument itself and are available
Indorsement or assignment of the NI against all holders, whether in due course or
by a corporation or by an infant passes the not.
property therein, notwithstanding that from Examples:
want of capacity, the corporation or infant 1. Alteration;
may incur no liability thereon. (sec. 22) 2. Non-delivery of incomplete
instrument;
Accomodation Party (1996, 1998, 2005 Bar 3. Duress amounting to forgery;
Exams) 4. Fraud in factum or fraud in esse
One who has signed the instrument as maker, contractus;
drawer, acceptor, or indorser, without receiving 5. Minority;
value therefor, and for the purpose of lending his 6. Marriage in the case of a wife;
name to some other person 7. Insanity where the insane
Liability: such a person is person has a guardian appointed by the
liable on the instrument to a holder for value, court;
notwithstanding such holder, at the time of 8. Ultra vires acts of a corporation,
taking the instrument, knew him to be only where the corporation is absolutely
an accommodation party. prohibited by its charter or statute from
Effects: issuing any commercial paper under any
circumstances;
1. accommodation party is
9. Want of authority of agent;
generally regarded as a surety for
10. Execution of instrument
the party accommodated;
between public enemies;
2. When accommodation party
11. Illegality of contract where it is
makes payment to holder of the
the contract or instrument itself which is
note, he has the right to sue the
expressly made illegal by statute; and
accommodated party for
12. Forgery.
reimbursement.
2. Personal/Equitable Defenses – those which
are available only against a person not a
Rights of accommodation
holder in due course or a subsequent holder
parties as against each other: the other may who stands in privity with him.
demand contribution from his co- Examples:
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Commercial Law Study Guide
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Commercial Law Study Guide
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Commercial Law Study Guide
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b. Where the bill expressly stipulates that it Acceptance: the signification by the drawee of
shall be presented for acceptance; or his assent to the order of the drawer. It is the act
by which the drawee manifests his consent to
c. Where the bill is drawn payable comply with the request contained in the bill of
elsewhere, then at the residence or exchange directed to him.
place of business of the drawee. (sec. How made :
143) 1) must be in writing
Note: in all the above cases, the holder must 2) signed by the drawee
either present the bill for acceptance or 3) must not express that the drawee will
negotiate it within a reasonable time; otherwise, perform his promise by any other means
the drawer and all indorsers are discharged. than the payment of money.
• the holder of the bill presenting the same for
How made: acceptance may require that the acceptance
1. made by or on behalf of the holder; be written on the bill, and if such request is
2. at a reasonable hour; refused, may treat the bill as dishonored.
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Commercial Law Study Guide
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makes a wager, he insurance does not 2. Where the insurer pays the insured the
creates a risk of loss create a new and value of the loss without notifying the
to himself where no non – existing risk of carrier who has in good faith settled the
such risk previously loss to the purchase insured’s claim for loss
existed 3. Where the insurer pays the insured for a
loss or risk not covered by the policy.
Contract of Adhesion or Fine Print Rule - (Pan Malayan Insurance Company v.
most of the terms of the contract do not CA, 184 SCRA 54)
result from mutual negotiations between the 4. in life insurance
parties as they are prescribed by the insurer 5. for recovery of loss in excess of
in printed form to which the insured “adhere” insurance coverage
if he chooses but which he cannot change.
Hence, in case of doubt, the contract shall • Should the insured, after
be interpreted strictly against the insurer and receiving payment from the insurer,
liberally in favor of the insured (Rizal Surety release by his own act the wrongdoer or
and Insurance Co. v. C.A.,336 SCRA 12 third party responsible for the loss or
[2000]. damage from liability, the insurer loses
Principle of Subrogation - A process of his rights against the wrongdoer since
legal substitution where the insurer steps the insurer can only be subrogated to
into the shoes of the insured and he avails of only such rights as the insured may
the latter’s rights against the wrongdoer at have. (Manila Mahogany Mfg. Corp. v.
the time of loss. CA, 154 SRA 668)
The principle of subrogation is a normal • If the amount paid by the
incident of indemnity insurance as a legal insurance company does not fully cover
effect of payment; it inures to the insurer the injury or loss, it is the aggrieved
without any formal assignment or any party, the insured, who is entitled to
express stipulation to that effect in the recover the deficiency from the person
policy. Said right is not dependent upon nor responsible for the loss or injury.
dos it grow out of any private contract.
Payment to the insured makes the insurer a Requisites for Recovery Upon Insurance
subrogee in equity (Malayan Insurance Co. 1. the insured must have an insurable
Inc., v. CA, 165 SCRA 536) interest in the subject matter;
• Purposes: 2. the interest is covered by the policy;
1. to make the person who caused the loss 3. there must be a loss;
responsible for it 4. the loss must be proximately caused by
2. to prevent the insured from receiving the peril insured against.
double recovery from the wrongdoer and
the insurer Construction of Insurance Contracts
- it is a method of implementing
the principle of indemnity The ambiguous terms are to be
3. to prevent tortfeasors from being free construed strictly against the insurer, and
from liability and is thus founded on liberally in favor of the insured. However, if
public policy. the terms are clear, there is no room for
• Rules: interpretation.
1. Applicable only to property insurance.
Reason: the value of human life is The word “intentional” as used in an
regarded as unlimited and therefore no accident policy excepting intentional injuries
recovery from a third party can be inflicted by the insured or any other person
deemed adequate to compensate the implies the reasoning faculties,
insured’s beneficiary consciousness and volition. The exception
2. The insurer can only recover from the does not speak of the purpose of inflicting
third person what the insured could have the injury but the fact that the same were
recovered. intentionally inflicted (Biagtan v. Insular Life
• No subrogation in the following Assurance Co., 44 SCRA 58)
instances:
1. Where the insured by his own act Distinguishing Elements of an Insurance
releases the wrongdoer or third party Contract (GRAIP)
liable for the loss or damage 1. Existence of an insurable interest
susceptible of pecuniary estimation
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Note: A contract possessing only the first 3 The relationship between the insurer
elements above is a risk-shifting device. If all the and the insured is that of a continent
elements, it is a risk-distributing device. debtor and creditor.
3. Beneficiary – person designated to receive
the proceeds of the policy when the risk attaches
II. CONTRACT OF INSURANCE Kinds of beneficiary:
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a. an existing interest
d. Of any person upon whose life any estate or
interest vested in him depends. An existing interest may be legal title or
equitable title.
When it should exist: Insurable interest
in the life of another need exist only at the b. any inchoate interest founded on an
time of perfection of the contract and need existing interest; or
not exist thereafter or when the loss occurs
A stockholder has an inchoate interest in
Amount: No limit in the amount the the property of the corporation of which
insured can insure his life except in a he is the stockholder which is founded
creditor-debtor relationship where the on an existing interest arising from his
creditor insures the life of his debtor, (the ownership of shares in the corporation.
limit of insurable interest is equal to the
amount of the debt) c. an expectancy coupled with an existing
When insurance taken by the creditor on interest in that out of which the
the life of the debtor for the benefit of the expectancy arises.
creditor: An insuring creditor could only
recover such amounts as remain unpaid at The measure of insurable interest in
the time of the death of the debtor. If the property is the extent to which the
whole debt has already been paid, recovery insured might be damnified by loss or
on the policy by the creditor is no longer injury thereof.
possible. Neither can the debtor recover for When it should exist: When the
he is not a privy to the contract of insurance insurance takes effect and when the loss
taken. occurs, but need not exist in the meantime
When insurance taken by debtor n his Amount: The measure of insurable
life for the benefit of the creditor: If at the interest in property is the extent to which the
time of the death of the debtor the whole insured might be damnified by loss or injury
debt has already been paid, the creditor can thereof (Section 17)
no longer recover on the policy because the Reason: this is because a contract of
principle of indemnity applies. Where the property insurance that gives the insured
debtor in good faith insures his life for the more than the indemnity of his actual loss
benefit of the creditor, full payment of the suffered by reason of the designated perils
debt does not invalidate the policy, in suh is a wagering policy contrary to public policy,
case, the proceeds shall go to the estate of hence, VOID.
the debtor.
When the debt becomes legally
unenforceable, by reason of being barred b INSURABLE INSURABLE
the statute of limitations or of a debtor’s INTER INTEREST IN
discharge of insolvency, it does not cut off EST IN PROPERTY
the insurable interest of the creditor. LIFE
Reason: the moral or equitable obligation of Must exist only at the Must exist at time
a debtor to pay his debt is not destroyed by time the policy takes the policy takes
the discharge which affects only the legal effect and need not effect and when the
obligation to pay. exist at the time of loss loss occurs
Consent of a person whose life is Insurable interest Insurable interest
insured is not essential to the validity of the unlimited except in life limited to actual
insurance taken by another, as long as the insurance effected by value of interest in
insured has a legal insurable interest at the creditor on life of debtor property insured
inception of the policy, the insurance
The expectation of An expectation of a
contract is VALID.
benefit to be derived benefit to be
from the continued derived from the
Insurable interest in property insurance
existence of life need continued existence
not have any legal of the property
Every interest in property whether real or
basis whatever. A insured must have
personal, or any relation thereto, or liability
reasonable probability a legal basis.
in respect thereof, of such nature that the
is sufficient without
contemplated peril might directly damnify the
more.
insured (Sec. 13), which may consist in:
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The beneficiary need The beneficiary contrary to law and public policy. (Cha v.
not have an insurable must have CA, 227 SCRA 690)
interest over the life of insurable interest
the insured if the over the thing STANDARD OR OPEN OR LOSS
insured himself secured insured. UNION PAYABLE
the policy. However, if MORTGAGE MORTGAGE CLAUSE
the life insurance was CLAUSE
obtained by the the subsequent the mortgagor does not
beneficiary, the latter acts of the cease to be a party to
must have an insurable mortgagor cannot the contract. Thus,
interest over the life of affect the rights of the acts of the
the insured. the assignee mortgagor affect the
mortgagee (Secs. 8
Insurable interest in case of a carrier or and 9)
depository
A carrier or depository of any kind has Effects of Loss Payable Clause:
an insurable interest in a thing held by him 1. the contract is deemed to be upon the
as such, to the extent of his liability but not interest of the mortgagor; hence, he does
to exceed the value thereof (Section 15) not cease to be a party to the contract;
Reason: the loss of the thing by the carrier 2. any act of the mortgagor prior to the loss
or depositor may cause liability against them which would otherwise avoid the insurance
to the extent of its value. affects the mortgagee even is the property is
in the hands of the mortgagee.
Insurable interest in case of mortgaged 3. any act, which under the contract of
property insurance is to be performed by the
The mortgagor and the mortgagee each mortgagor, may be performed by the
have an insurable interest in the property mortgagee with the same effect
mortgaged and this interest is separate and 4. in case of loss, the mortgagee is entitled
distinct from each other. Therefore, to the proceeds t the extent of his credit
insurance taken by one in his name and in 5. upon recovery of the mortgagee to the
his favor alone, does not inure to the benefit extent of his credit, his debt is extinguished
of the other.
a. Mortgagor: as the owner, has an insurable The rule on subrogation by the
interest to the extent of its value, even insurer to the right of the mortgagee does
though the mortgage debt equals such not apply in this case.
value. Reason: premium payment has been paid
Reason: the loss or destruction of the by the mortgagor and not by the mortgagee.
property insured will not extinguish the
mortgage debt Mortgage Redemption Insurance - a life
b. Mortgagee: his interest is only up to the insurance taken pursuant to a group mortgage
extent of the debt. Such interest continues redemption scheme by the lender of money on
until the mortgage debt is extinguished. the life of a mortgagor, who mortgages the
Reason: property relied on as mortgaged is house constructed to the extent of the mortgage
only a security. In insuring the property, he is indebtedness, such that if the mortgagor dies,
not insuring the property itself but only his the proceeds of his life insurance will be used to
interest or lien thereon. pay for his indebtedness and the deceased’s
In case if an insurance taken by the heirs will thereby be relieved from paying the
mortgagee alone and for his benefit, the unpaid balance of the loan. (Great Pacific Life
mortgagee, after recovery from the insurer, Assurance Corp. v. CA, 316 SCRA 677)
is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to Transfer of Interest
the insurer to the extent of the insurance 1. Life Insurance - It can be transferred even
money paid. (Palileo v. Caltex, 97 PHIL 919) without the consent of the insurer except when
there is a stipulation requiring the consent of the
insurer before the transfer.
The lessor cannot be validly a
beneficiary of a fire insurance policy, taken Reason: the policy does not represent a
by a lessee over his merchandise, and the personal agreement between the insured and
provision in the lease contract providing for the insurer.
such automatic assignment is void for being
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Is the consent of the beneficiary necessary to g. When there is an express prohibition against
the assignment of a life insurance policy? alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended
It depends. but avoided.
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3. Those as to which the party with the c. It is made at the same time of issuing
duty to communicate makes no warranty the policy or before but not after
(Secs. 67-76) d. It may be altered or withdrawn before
the insurance is effected but not
General Rule: Matters made subject of afterwards
special inquiries under Sec. 30 must be e. It always refers to the date the contract
deemed material, even though otherwise goes into effect
they might not be so regarded and the Kinds:
insured is required to make full and true 1. Affirmative– affirmation of a fact when
disclosure to questions asked. the contract begins; and (Sec. 37)
Exceptions: There is no duty to make a 2. Promissory – promise to be performed
disclosure on the following instances: after policy was issued. (Sec. 39)
1. Those which the other knows;
2. Those which, in the exercise of ordinary A representation may be made
care, the other ought to know, and of at the time of, or before, issuance of the
which the former has no reason to policy.
suppose him ignorant; A representation as to the future
3. Those of which the other waives is to be deemed a promise, unless it
communication; appears that it was merely a statement of
4. Those which prove or tend to prove the belief or expectation.
existence of a risk excluded by a
warranty, and which are not otherwise
Test of materiality: same as that
in concealment
material; and
5. Those which relate to a risk excepted Where the insured merely
from the policy and which are not signed the application form and made the
otherwise material. (Sec. 30) agent of the insurer fill the same for him, it
6. Information on the nature or amount of was held that by doing so, the insured made
the interest of one need not be the agent of the insurer his own agent and
communicated unless in an answer to he was responsible for his acts for that
an inquiry, except as prescribed by Sec. purpose. (Insular Life Assurance Co. v.
51. (Sec. 34) Feliciano, 74 PHIL 469)
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Effect of breach:
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In case of over insurance by several In fire insurance - it will defeat the right of the
insurers, the insured is entitled to a insured to recover;
ratable return of the premium, In other types of insurance – it will not exonerate
proportioned to the amount by which the the insurer unless there is a stipulation in the
aggregate sum insured in all policies policy to that effect.
exceeds the insurable value of the thing
insured. IX. DOUBLE INSURANCE (1999, 2005 Bar
Exams)
VIII. LOSS (1996, 2005 Bar Exams)
Overinsurance results when the insured insures
Loss - injury or damage sustained by the the same property for an amount greater than
insured in consequence of the happening of one the value of the property with the same
or more of the accidents or misfortune against insurance company.
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Where an insurer obtains reinsurance, except Cargo can be the subject of marine
under automatic reinsurance treaties, he must insurance, and once it is entered
communicate all the representations of the into, the implied warranty of
original insured, and also all the knowledge and seaworthiness immediately attaches
information he possesses, whether previously or to whoever is insuring the cargo,
subsequently acquired, which are material to the whether he be the shipowner or not.
risk. (Roque v. IAC, 139 SCRA 596)
B. Marine protection and indemnity insurance
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3. departure of the vessel from the most a. actual loss of more than ¾ of
natural, direct and advantageous route the value of the thing insured
is not fixed by mercantile usage b. damage reducing value by more
4. unreasonable delay in pursuing voyage than ¾ of the value of the vessel
5. commencement of an entirely different and of cargo
voyage c. expense of transshipment
exceed ¾ of the value of the
Kinds of deviation: cargo
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Option to Rebuild Clause: a clause giving the casualty insurance. Therefore, such casualty
insurer the option to reinstate or replace the insurance are governed by the general
property damaged or destroyed or any part provisions applicable to all types of
thereof, instead of paying the amount of the loss insurance, and outside of such statutory
or the damage. provisions, the rights and obligations of the
parties must be determined by their contract,
The insurer, after electing to rebuild, cannot be taking into consideration its purpose and
compelled to perform this undertaking by always in accordance with the general
specific performance because this is an principles of insurance law.
obligation to do, not to give. Remedy: ‘the same In burglary, robbery and theft insurance,
be executed at his cost’. (Art. 1167 Civil Code) the opportunity to defraud the insurer – the
moral hazard – is so great that insurers have
found it necessary to fill up the policies with
C. CASUALTY OR ACCIDENT INSURANCE many restrictions designed to reduce the
(2005 Bar Exam) hazard. Persons frequently excluded are
Concept those in the insured’s service and
Insurance covering loss or liability arising from employment. The purpose of the exception
accident or mishap, excluding certain types of is to guard against liability should theft be
loss which by law or custom are considered as committed by one having unrestricted
falling exclusively within the scope of other types access to the property (Fortune Insurance v.
of insurance such as fire or marine. CA, 244 SCRA 208)
Classifications:
1. Insurance against specified perils which
may affect the person and/or property of
the insured (Accident or health Liability insurable
insurance)
Ex: personal accident, robbery/theft 1. liability for quasi-delict or non-fulfillment of
insurance contract
2. Insurance against specified perils which 2. liability for criminal negligence
may give rise to liability on the part of
the insured for claims for injuries to or Liability of the insurer if insured was committing
damage to the property of others (Third a felony:
party liability insurance) Liabilities arising out of acts of negligence, which
are also criminal, are also insurable on the
Insurable interest is based on the ground that such acts are accidental. But liability
interest of the insured in the safety of consequences of deliberate criminal acts are not
persons, and their property, who may insurable.
maintain an action against him in case of
their injury or destruction, respectively. “Intentional” vs. “Accidental” as used in
Ex: workmen’s compensation, motor insurance policies:
vehicle liability 1. Intentional - implies the exercise of the
reasoning faculties, consciousness and volition.
In a third party liability (TPL) insurance Where a provision of the policy excludes
contract, the insurer assumes the intentional injury, it is the intention of the person
obligation by paying the injured third inflicting the injury that is controlling. If the
party to whom the insured is liable. Prior injuries suffered by the insured clearly resulted
payment by the insured to the third from the intentional act of the third person, the
person is not necessary in order that the insurer is relieved from liability as stipulated
obligation may arise. The moment the (Biagtan v. the Insular Life Assurance Co. Ltd.,
insured becomes liable to third persons, 44 SCRA 58, 1972)
the insured acquires an interest in the 2. Accidental - that which happens by chance or
insurance contract which may be fortuitously, without intention or design, which is
garnished like any other credit (Perla unexpected, unusual and unforeseen.
Compania de Seguro, Inc. v. Ramolete,
205 SCRA 487) Right of a third party injured to sue the
insurer of party at fault
Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable to
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Depends on whether the contract of insurance is A “no action clause” must yield to the provisions
intended to benefit third persons also or only the of the Rules of Court regarding multiplicity of
insured suits. (Shafer v. RTC, 167 SCRA 386)
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premium paid being device, premium paid 1. If committed after two years from the
in the nature of a as a ratable date of the policy’s issue or its last
service fee contribution to a reinstatement;
common fund 2. If committed after a shorter period
provided in the policy; and
3. If committed in a state of insanity
E. LIFE INSURANCE (1995, 2000 Bar Exams) regardless of the date of the commission
unless suicide is an excepted peril. (Sec.
Definition 180-A)
Insurance on human lives and insurance Note: Any stipulation extending the 2-
appertaining thereto or connected therewith year period is null and void.
which includes every contract or pledge for the 2. At the hands of the law (e.g. by legal
payment of endowments or annuities. execution)
It is one of the risks assumed by the
Kinds of life insurance insurer under a life insurance policy in
1. Ordinary Life, General Life or Old the absence of a valid policy exception.
Line Policy - insured pays a fixed premium Note: Justice Vitug believes that death
every year until he dies. Surrender value by suicide (if the insured is sane) or at
after 3 years. the hands of the law obviates against
2. Limited Payment Policy – insured recovery as being more in consonance
pays premium for a limited period. If he dies with public policy and as being implicit
within the period, his beneficiary is paid; if he under Section 87, ICP. (Pandect of
outlives the period, he does not get Commercial Law and Jurisprudence)
anything. 3. Killing by the beneficiary
3. Endowment Policy – pays premium General Rule: The interest of a beneficiary in a
for specified period. If he outlives the life insurance policy shall be forfeited when the
period, the face value of the policy is paid to beneficiary is the principal, accomplice or
him; if not, his beneficiaries receive the accessory in willfully bring about the death of the
benefit. insured, in which event, the nearest relative of
the insured shall receive the proceeds of said
4. Term Insurance – insurer pays once
insurance if not otherwise disqualified (Sec. 12)
only, and he is insured for a specified period.
Exceptions:
If he dies within the period, his beneficiaries
a. accidental killing
benefits. If he outlives the period, no person
b. self – defense
benefits from the insurance.
c. insanity of the beneficiary at the time he killed
the insured
5. Industrial Life - life insurance
entitling the insured to pay premiums
weekly, or where premiums are payable If the premiums paid came from
monthly or oftener; conjugal funds, the proceeds are considered
conjugal. If the beneficiary is other than the
6. Group Life – essentially a single
insured’s estate, the source of premiums
insurance contract that provides coverage would not be relevant (Del Val v. Del Val, 29
for many individuals. Examples: in favor of Phil 534).
employees, “mortgage redemption Reason: a natural person cannot be placed
insurance” in the same footing as a juridical person
7. Variable Contract – Any policy or
contract on either a group or individual basis Right to assign life insurance policy
issued by an insurance company providing
for benefits or other contractual payments 1. A policy of insurance upon life or health may
thereunder to vary so as to reflect pass by transfer, will or succession to any
investment results of any segregated person, whether he has an insurable interest or
portfolio of investment. not, and such person may recover upon it
whatever the insured might have recovered.
Liability of insurer in certain causes of death (Sec. 181)
of the insured
2. Notice to an insurer of a transfer or bequest
1. Suicide thereof is not necessary to preserve the validity
Insurer is liable in the following cases: of a policy of insurance upon life or health,
unless thereby expressly required. (Sec. 182)
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XII. COMPULSORY MOTOR VEHICLE No-fault Clause: a clause that gives the victim
LIABILITY INSURANCE (CMVLI) (injured person or heirs of the deceased) an
option to file a claim for death or injury without
A specie of compulsory insurance that provides the necessity of proving fault or negligence.
for protection coverage that will answer for legal
liability for losses and damages, for bodily Rules of recovery
injuries, or property damage that may be 1. Total indemnity: maximum of P5,000
sustained by another arising from the use and 2. Proof of loss:
operation of motor vehicle by its owner. a. police report of accident;
b. death certificate and evidence
Definitions: sufficient to establish proper payee
Motor Vehicle – any vehicle as defined in Sec. c. medical report and evidence of
3[a] of RA 4136, otherwise known as the “Land medical or hospital disbursement.
Transportation and Traffic Code.” 3. Claim may be made against one motor
Passenger – any fare – paying person being vehicle only
transported and conveyed in and by a motor
vehicle for transportation of passengers for 4. Proper insurer from which to claim –
compensation, including persons expressly a. In the case of an occupant: claim shall
authorized by law or by the vehicle’s operator or lie against the insurer of the vehicle in which
his agents to ride without fare. the occupant is riding, mounting or
dismounting from
Third Party – any person other than the b. in any other case: claim shall lie against
passenger, excluding a member of the the insurer of the directly offending vehicle.
household or a member of the family within the 5. In all cases, the right of the party paying the
second degree of consanguinity or affinity, of a claim to recover against the owner of the vehicle
motor vehicle owner or land transportation responsible for the accident shall be maintained.
operator, or his employee in respect of death or
bodily injury arising out of and in the course of The claimant is not free to choose from
employment. which insurer he will claim the “no fault
Owner or Motor Vehicle Owner – actual legal indemnity.” As the law, makes it mandatory that
owner of the motor vehicle, in whose name such the claim shall lie against the insurer of the
vehicle is duly registered with the Land vehicle in which the occupant is riding, mounting
Transportation Commission or dismounting from. The said vehicle might not
Land Transportation Operator – the owner or be the one that caused the accident is of no
owners of motor vehicles for transportation of moment since the law itself provides that the
passengers for compensation, including school party paying may recover against the owner of
buses. the vehicle responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta, 169
Purpose: to give immediate financial assistance SCRA 144).
to victims of motor vehicle accidents and/or their
dependents, especially if they are poor, This no-fault claim does not apply to
regardless of the financial capability of motor property damage. If the total indemnity of the
vehicle owners or operators responsible for the claim exceeds P5,000 and there is controversy
injury sustained. (Shafer vs Judge, RTC 167 in respect thereto, the finding of fault may be
SCRA 386) availed of by the insurer only as to the excess.
The P5,000 shall be paid without regard to fault.
Method of coverage (de Leon, The Insurance Code of the
1. insurance policy Philippines)
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carrier. Thus, the arrastre operator and the the carrier to the consignee or to the person who
common carrier are liable in solidum for the has the right to receive them (Art. 1736)
proper delivery of the goods to the
consignee (Eastern Shipping Lines v. CA, Liability remains:
234 SCRA 78) a. Even when goods are temporarily unloaded
or stored in transit unless the shipper or
TOWAGE A vessel is hired to bring owner has made use of the right of stoppage
another vessel to another in transitu (Art. 1737)
place b. And when goods are stored in the carrier’s
ARRASTRE A contract for unloading of warehouse at the place of destination until
goods from a vessel. the consignee has been advised of the
Services are not maritime. arrival thereof and had reasonable
They are in fact no different opportunity thereafter to remove or dispose
from those of a depositary them (Art. 1738)
or warehouseman.
c. Delivery to the customs authorities is not
STEVEDORIN Loading and unloading of
delivery to the consignee. However, the
G coastwise vessels calling
parties may agree to limit the liability of
at the port
carrier (Lu Do vs. Binamira, 101 Phil. 120)
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b. Carrier must exercise due diligence circumstances and has been fairly
to prevent or minimize loss before, and freely agreed upon. (Art. 1750)
during or after the act causing loss, c. Limiting carrier’s liability for
of goods (Art. 1739) delay on account of strikes or riots.
(Art. 1748)
Contributory Negligence
If shipper or owner merely contributed to Invalid Stipulations: (RL²NTD²)
the loss, the proximate cause thereof being a. Goods are transported at the risk of the
the negligence of carrier, the carrier shall still owner or shipper;
be liable for damages, but such shall be b. Carrier will not be liable for any loss of
equitably reduced (Art. 1741) goods;
c. Carrier need not observe any diligence in
Character of the Goods the custody of goods;
1. Even if damage d. Carrier shall exercise a degree of diligence
caused by the inherent less than that of a good father of a family;
defect/character of goods,
e. Carrier shall not be responsible for the acts
the common carrier must
or omissions of his or its employees;
exercise due diligence to
forestall or lessen loss (Art. f. Carrier’s liability for acts committed by
1742) thieves or robbers who do not act with grave
or irresistible threat, violence or force is
2. Carrier who, knowing
dispensed with or diminished;
the fact of improper packing
of the goods upon ordinary g. Carrier not responsible for the loss of goods
observation, still accepts the on account of defective condition of car,
goods notwithstanding such vehicle, ship or other equipment used in the
condition is not relieved of contract of carriage. (Art. 1745)
liability for loss resulting
therefrom (Southern Lines, Effect of Delay
Inc. v. CA, 4 SCRA 258) If, without just cause, (1) delays the
transportation of goods or (2) changes the
Order or Act of Public Authority stipulated or usual route, the contract limiting
Public authority must have power to the common carrier's liability cannot be
issue the order (Art. 1743). Where the officer availed of in case of loss of goods (Art.
acts without legal process, the common 1747)
carrier will be held liable.
Presumption despite stipulation
Stipulation Limiting Liability of Carrier (2002 Even when there is an agreement
Bar Exam) limiting the liability, the common carrier is
Common carrier and shipper may agree disputably presumed to have been negligent
on carrier’s observance of diligence to a in case of their loss. (Art. 1752)
degree less than extraordinary, provided
it be: Grounds for valid refusal to accept goods:
1. In writing, signed by shipper or owner; (DUO-CIEDSF)
2. Supported by a valuable consideration other 1. Dangerous objects or substances
than the service rendered by carriers; and including dynamites and other
explosives
3. Reasonable, just and not contrary to public
policy. (Art. 1744) 2. Unfit for transportation
3. Acceptance would result in
Valid Stipulations: overloading
a. Carrier's liability limited to the 4. Contrabands or illegal goods
value of goods appearing in the bill 5. Injurious to health
of lading, unless the shipper or 6. Goods will be exposed to untoward
owner declares a greater value. danger like flood, capture by enemies
(Art. 1749) and the like
b. Fixing the sum to be recovered 7. Goods like livestock will be exposed
by the owner or shipper, if it is to diseases
reasonable and just under the
8. Strike
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Characteristics: Abandonment
1. Real 1. Indispensable requirement before the
a) Similar to shipowner or ship agent can enjoy the
transactions over benefits of the limited liability principle. The
real property with only instance where such abandonment is
respect to effectivity dispensed with is when the vessel was
against third entirely lost.
persons which is 2. Only the ship owner and the ship agent can
done through make an abandonment
registration 3. What may be abandoned – vessel
b) Evidence of real 4. Instances:
nature is shown by 1. Civil liability from indemnities to
(1) limitation of third persons (Art. 587 Code of
liability of agents to Commerce)
actual value of the 2. Leakage of at least ¾ of
vessel and freight contents of cargo containing liquids (Art.
money; and (2) right 687)
to retain cargo and
embargo and
3. Constructive loss of vessel
detention of vessel (Sec. 138 Insurance Code)
(Luzon Stevedoring
Corp v. CA, 156 See notes on Overland Transportation
SCRA 169) for right of consignee to abandon goods
5. No procedure to be followed
6. No prescriptive period provided not
2. Hypothecary estopped from invoking the same or do acts
i) Liability of owner of vessel is inconsistent with abandonment
limited to the value of vessel 7. May be made to be exempted from the
(Doctrine of Limited Liability) following liabilities:
i. Civil liability to third persons arising from
the conduct of the captain in the
I. DOCTRINE OF LIMITED LIABILITY (1997, vigilance over the goods
1999, 2000 Bar Exams) ii. Proportionate contribution of co-owners
of the vessel to a common fund for the
“No vessel, no liability” results of the acts of the captain referred
The liability of ship owners is limited to to in Art. 587 Code of Commerce
the amount of interest in said vessel such iii. Civil liability incurred by the ship owner
that where vessel is entirely lost, the in case of collision
obligation is extinguished (Luzon
Stevedoring v. Escano, 156 SCRA 169) Admiralty Jurisdiction
Interest extends to: all actions in admiralty and maritime
a. Vessel itself jurisdiction where the claim exceeds
b. Equipments P300,000 or in Metro Manila, exceeds
c. Freightage P400,000 the RTC has jurisdiction (Sec.
d. Insurance proceeds (Chua v. IAC, 166 19(3) BP 129, as amended by RA 7691)
SCRA 183)
II. VESSELS
Exceptions:
1. Where injury or damage is due to Engaged in navigation, whether
ship owner’s fault coastwise or on the high seas, including
floating docks, pontoons, dredges, scows
2. Vessel is insured and any other floating apparatus destined for
3. Claims under Workmen’s
the services of the industry or maritime
Compensation
commerce. Excluded are local and foreign
4. Expenses for repair on vessel military vessels, bancas and other
before loss watercrafts of less than 3 tons gross
5. Vessel is not abandoned
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Who may contract: not extinguish the loan extinguishes the same
Bottomry – ship owner or ship agent.
Outside of the residence of the owners, the
captain. VI. ACCIDENTS
Respondentia – only the owner of the cargo,
except: (i) on the portion of the vessel he 1. Averages
owns, provided no money has been 2. Collision
previously borrowed on the whole vessel, 3. Arrival Under Stress
nor exists any other kind of lien or obligation 4. Shipwreck
chargeable against her; (ii) when he is
permitted to do so, he must necessarily state Protest– written statement by the master of a
what interest he has in the vessel vessel or any authorized officer, attested by
proper officer or a notary, to the effect that
Exceptions to the Hypothecary Nature of damages has been suffered by the ship.
Bottomry and Respondentia:
1. Loss due to inherent defect Required in the following instances:
2. Loss due to the barratry on the part of 1. Vessel makes an arrival under stress
the captain 2. Vessel is shipwrecked
3. Loss due to the fault of malice of the 3. Vessel has gone through hurricane or
borrower the captain has suffered damages or
4. Vessel was engaged in contraband averages
5. Cargo loaded on the vessel be different 4. Maritime collisions
in form that agreed upon
Note: Should be made within 24 hours following
When Bottomry/Respondentia Regarded as the arrival of the vessel at the first port.
Simple Loan Upon arrival at the place of destination, the
1. Lender loaned an amount larger captain shall ratify the protest within 24
than the value of the object due to hours.
fraudulent means employed by borrower
(Art. 726) Averages
2. Full amount of the loan is not 1. An extra-ordinary or
accidental expense incurred during the
used for the cargo or given on the goods
voyage in order to preserve the cargo,
if all of them could not have been
vessel or both; and
loaded, the balance will be considered a
simple loan (Art. 727) 2. All damages or
3. If the effects on which the deterioration suffered by the vessel from
departure to the port of destination, and
money is taken is not subjected to any
to the cargo from the port of loading to
risk (Art. 729)
the port consignment (Art. 806)
BOTTOMRY/ ORDINARY LOAN
Classes of Averages
RESPONDENTIA
1. Particular or Simple Average
May or may not have a Must have collateral
(i) Damage or expenses caused to the
collateral
vessel or cargo that did not inure to common
Collateral may be any Must be vessel or
benefit, and (ii) borne by respective owners
property cargo subject to
(Art. 809)
maritime risks
2. Gross or General Average
Absolutely repayable Depends upon the safe
arrival of the collateral a. Damage or expenses deliberately
at the port caused in order to save the vessel, its
Need not be in writing Must be in writing cargo or both from real and known risk
but interest shall not (Art. 811)
be due unless b. All the persons having an interest in the
expressly stipulated in vessel and the cargo therein at the time
writing of the occurrence of the average shall
Need not be registered Must be recorded in contribute to satisfy this average (Art.
to bind third persons the registry of vessels 812)
of the port of registry of c. Requisites:
the vessel 1. Common danger
Loss of collateral does Loss of collateral present
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(Santos III vs. Northwest Orient Airlines 210 until they have reached their final
SCRA 256) destination (Philippine Airlines v. CA,
4. Prescriptive period – 2 years from: 226 SCRA 423)
1. Arrival at the destination 2. Even where overbooking of passengers
2. Expected arrival is allowed as a commercial practice, the
3. Date on which the transportation airline company would still be guilty of
stopped (Art. 29) bad faith and still be liable for damages
5. Rule in case of various successive if it did not properly inform passenger
carriers that it could breach the contract of
1. In case of transportation of passengers carriage even if they were confirmed
– action is filed only against the carrier in passengers (Zalamea v. CA, 228 SCRA
which the accident or delay occurred unless 23)
there is an agreement whereby the first 3. An open-dated ticket constitutes a
carrier assumed liability for the whole complete contract between the carrier
journey. and passenger. Hence, the airline
2. Transportation of baggage or goods company is liable if it refused to confirm
i. Consignor can file an action a passenger’s flight reservation
against the first carrier and (Singson v. CA, 282 SCRA 149)
the carrier in which the 4. An airline company which issued a
damage occurred confirmed ticket to a passenger covering
ii. Consignee can file an action successive trips on different airlines can
against the last carrier and be held liable for damages occasioned
the carrier in which the by “bumping off” by one of the
damage occurred successive airlines (Lufthansa German
iii. These carriers are jointly Airlines v. CA, 238 SCRA 290)
and severally liable (Art. 30) 5. An airline ticket providing that carriage
Limit of Liability by successive air carriers is to be
regarded as a “single operation” is to
Passengers – $10,000 to
make the issuing carrier liable for the
$100,000 tortuous conduct of the other carrier. A
except: agreement to a higher limit printed provision in the ticket limiting
Checked-in baggage – $20 / kg liability only to its own conduct is not
except: consigner declared its value and enough to rebut that liability (KLM Royal
paid a supplementary sum, carrier liable to Dutch Airlines v. CA, 65 SCRA 237)
not more than the declared sum unless it
proves the sum is greater than its actual PUBLIC SERVICE ACT
value (CA 146, as amended)
Hand-carry baggage – $400 to (1995, 1998, 2000 Bar Exams)
$1000 / passenger (Art. 22 as amended
by Guatemala Protocol, 1971; Alitalia v. “Public Service” - Includes any person
IAC, supra) who may own, operate, manage, or
• An agreement relieving the carrier control in the Philippines for hire or
from liability or fixing a lower limit is compensation, with general or limited
null and void (Art. 23) clientele, whether permanent, occasional
or accidental, and done for general
• Carrier not entitled to the foregoing business purposes, any common carrier,
limit if the damage is caused by his railroad, street railway, traction railway,
willful misconduct or default (Art. 25) subway motor vehicle, steamboat, or
Special Rules on steamship line, ferries, and water craft,
Liabilities of Airline Carriers: shipyard, ice-plant, electric light, heat
1. In case of flight diversion due to bad and power or any public utility (Sec.
weather or other circumstances beyond 13(b) Commercial Act 146)
the pilot’s control, the relation between
carrier and passenger continues until A casual or incidental service devoid of
the latter has been landed at the port of public character and interest is not brought
destination and has left the carrier’s within the category (Luzon Stevedoring vs.
premises. The carrier should exercise PSC, 156 SCRA 169)
extraordinary diligence in safeguarding
the safety of its stranded passengers Certificate of Public Convenience
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No public service shall operate without 3. Where operator totally abandons the
having been issued a certificate of public service (Manzanal vs. Ausejo, 164
convenience (no franchise is required by SCRA 36)
law, e.g. common carriers) or a certificate of
public convenience and necessity (a prior NOTICE AND WHEN NOT
franchise is required by law, e.g. telephone HEARING REQUIRED REQUIRED
and other services) (Sec. 15 Comm. Act a. Issuance of 1. Investigation of
146) Certificate any matter
• Exceptions: b. Fixing of rates, concerning public
1. Warehouses tolls and charges service
2. Animal drawn vehicles and bancas c. Setting up of 2. Requiring
moved by oar or sail; tugboats standards and operators to
3. Airships, except for the fixing of classifications furnish safe,
maximum rates for fare and freight d. Establishment adequate and
4. Radio companies, except for rates fixing of rules to secure proper service
5. Public services owned or operated by accuracy of all 3. Requiring public
the government, except as to rates fixing meters and all services to pay
6. Ice plants measuring expenses of
7. Public markets appliances investigation
• The certificate constitutes neither a e. Issuance of 4. Valuation of
franchise nor a contract, confers no orders requiring properties of
property right, and is a mere license or establishment or public utilities
privilege. The holder of said certificate maintenance of 5. Examination and
does not acquire a property right in the extension facilities test of measuring
route covered thereby. Nor does it f. Revocation of appliances
confer any property right, interest or modification of 6. Grant of special
interest in the public highways. Certificate permits to make
Revocation of this certificate deprives g. Suspension of extra or special
him of no vested right. New and Certificate (except trips in territories
additional burdens, alteration of the when it is specified in
certificate, or even revocation or necessary to avoid certificate
annulment thereof is reserved to the serious and 7. Uniform
State (Luque vs. Villegas, 30 SCRA irreparable accounting
408) damage or system and
• It is a “property” and has a inconvenience to furnishing of
considerable value and can be the the public or annual reports
subject of sale or attachment (Coque- private interest, in 8. Compelling
Cubao Operators vs. CA, 207 SCRA which case, a compliance with
343) suspension not the laws and
more than 30 days regulations
Requirements for granting may be ordered
certificate: prior to the
1. Citizen of the Philippines, or a corporation, hearing)
etc. constituted and organized under the
laws of the Philippines at least 60% of its
stock or paid-up capital must belong entirely CORPORATION CODE OF THE PHILIPPINES
to citizens of the Philippines (BP 68)
2. Financially capable of undertaking the
proposed service
3. Proof of public necessity, interest and GENERAL PROVISIONS
convenience (KMU vs. Garcia, Jr., 239
SCRA 386) Corporation is an artificial being created by
operation of law, having the right of succession
Grounds for revocation of certificate: and the powers, attributes and properties
1. Where holder is a mere dummy expressly authorized by law or incident to its
2. Where operator ceased operation and existence. (Sec. 2)
placed his buses on storage
Attributes of a Corporation(CARP)
1. It is an artificial being.
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purposes. After A’s term expired, XYZ 3. Such control and breach of duty must
wanted to recover possession of the proximately cause the injury to the
cottage. A refused to surrender the plaintiff. (proximate cause)
cottage, contending that as a
stockholder and former President, he Distinctions between Corporation and
has the right to enjoy the properties of Partnership
the corporation. Is A’s contention CORPORATION PARTNERSHIP
correct? Explain. 1. Creation
SUGGESTED ANSWER (SA): A’s Created by operation Created by agreement
contention is not correct. A may own of law; of the parties;
shares of stock of XYZ Corp. but such
ownership does not entitle him to the
possession of any specific property of 2. Numbers of incorporators
the corporation or a definite portion 2. Requires at least 5 2. Requires at least 2
thereof. Neither is he a co-owner of incorporators; partners;
corporate property. Properties
registered in the name of the
3. Commencement of juridical personality
corporation are owned by it as an entity
separate and distinct from that of its Acquires juridical Acquires juridical
stockholders. Stockholders like A can personality from the personality form the
only own shares of stock in the date of issuance of the moment of execution
corporation. Such shares of stock do not certificate of of the contract of
represent specific corporate property. incorporation by the partnership
(Rebecca Boyer-Roxas vs. CA, 211 Securities and
SCRA 470) Exchange Commission
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One Man Corporation the Articles and acknowledged the same before
A corporation wherein all or substantially all of a notary public. They have no powers beyond
the stocks is held directly or indirectly by those vested in them by the statute.
one person. However, it should still follow Qualifications:
the formal requirements of a corporation 1. natural person;
(e.g. number of incorporators, board of 2. not less than 5 but not more
directors composed of stockholders owning than 15;
shares in a nominal capacity) in order to 3. of legal age;
validly enjoy the attributes of the 4. majority must be residents of the
corporation, so as to avoid the application Philippines; and
of the doctrine of piercing the veil of 5. each must own or subscribe to
corporate entity.
at least one share.
General Rule: Only natural persons can be
Tests to Determine Nationality of Corporation
incorporators.
1. INCORPORATION TEST – determined by
Exception: When otherwise allowed by law,
the state of incorporation, regardless of the
e.g., Rural Banks Act of 1992, where
nationality of the stockholders.
incorporated cooperatives are allowed to be
2. DOMICILE TEST – determined by the state
incorporators of rural banks.
where it is domiciled.
Note: However, it is undeniable that
The domicile of a corporation is the place corporations can be corporators.
fixed by the law creating or recognizing it; in the c. Stockholders – owners of shares of stock in a
absence thereof, it shall be understood to be the stock corporation
place where its legal representation is d. Members – corporators of a corporation which
established or where it exercise its principal has no capital stock
functions.
3. CONTROL TEST – determined by the
INCORPORATORS CORPORATORS
nationality of the controlling stockholders or
signatory to the stockholder (stock
members. This test is applied in times of war.
Articles of corporation) or
Also known as the WARTIME TEST.
Incorporation member (non-
stock corporation)
“Philippine National” under the Foreign
fait accompli; they may cease to
Investment Act (R.A. No. 7042):
accomplished fact be such if they
1. A corporation organized under the laws of the
(the Articles of subsequently lose
Philippines of which at least 60% of the
Incorporation cannot their qualifications
outstanding capital stock entitled to vote is
be amended to
owned and held by Filipino citizens;
replace them)
2. A foreign corporation licensed as doing
business in the Philippines of which 100% of the number is limited to no restriction as to
outstanding capital stock entitled to vote is 5-15 number
wholly owned by Filipinos; and must have may be such
However, it provides that where a corporation contractual capacity through a
and its non-Filipino stockholders own stocks in a guardian
SEC-registered enterprise, at least 60% of the
capital stock outstanding and entitled to vote of Other Components
both corporations and at least 60% of the a. Promoter - A person who, acting alone or with
members of the board of directors of both others, takes initiative in founding and organizing
corporations must be Filipino citizens (double the business or enterprise of the issuer and
60% rule). receives consideration therefor.
NOTE: The law applies the control test both with He is an agent of the incorporators but not of
respect to the ownership of shares entitled to the corporation.
vote and the membership in the board of Contracts by the promoter for and in behalf
directors. of a proposed corporation generally bind
only him, subject to and to the extent of his
Components of a Corporation representations, and not the corporation,
a. Corporators – those who compose a unless and until after these contracts are
corporation, whether as stockholders or ratified, expressly or impliedly, by its Board
members of Directors/Trustees.
b. Incorporators - They are those mentioned in b. Subscriber – persons who have agreed to
the Articles of Incorporation as originally forming take and pay for original, unissued shares of a
and composing the corporation, having signed corporation formed or to be formed.
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corporations issuing preferred shares, as well as b. The amendment is effected before the
in the case of banks, trust companies, insurance expiration of corporate term, for after dissolution
companies, building and loan associations, and by expiration of the corporate term there is no
public utilities. It is the total amount in the more corporate life to extend.
charter, which may be raised by the corporation c. The extension cannot be made earlier than 5
for its operations. years prior to the expiration date unless there
4. SUBSCRIBED CAPITAL STOCK - The total are justifiable reasons as determined by the
amount of the capital stock subscribed whether SEC.
fully paid or not.
5. OUTSTANDING CAPITAL STOCK - The Capital Stock Requirement
portion of the capital stock issued to subscribers General Rule: No
except treasury stocks. minimum authorized capital stock as long as
6. STATED CAPITAL – The capital stock divided the paid-up capital is not less than
into no par value shares. P5,000.00
7. PAID-UP CAPITAL – The amount paid by the Except:
stockholders on subscriptions from unissued a. as provided for by special law
shares of the corporation.
1. Domestic Insurance
Corporations - P500T capital stock; 50%
INCORPORATION AND ORGANIZATION
subscribed and the balance payable in
(2002, 2006 Bar Exams)
12 months.
2. Private Development Banks
Steps in the Creation of a Corporation
- P4M for class A
a. PROMOTION – a number of business
- P2M for class B
operations peculiar to the commercial world by
- P1M for class C
which a company is generally brought into
3. Investment Companies – paid
existence. (18 Am. Jur. 2d 647, cited in de Leon
up at least P500T
p. 116)
4. Savings and Loan Corporation –
b. INCORPORATION
to be fixed by the Monetary Board, but
Steps: not less than P100T
1. Drafting and execution of Articles of 5. Financing Companies
Incorporation by the incorporators and other Paid up: - P2M for Metro Manila
documents required for registration of the - P1M for Cities
corporation - P500T for others
2. Filing with the SEC of the articles of b. provided that at least 25% of the authorized
incorporation capital stock has been subscribed and at least
3. Payment of filing and publication fees 25% of the total subscription must be paid-up
4. Issuance by the SEC of the certificate of
incorporation Filipino Percentage Ownership Requirement
c. FORMAL ORGANIZATION AND No Foreign Equity
COMMENCEMENT OF THE TRANSACTION 1. Mass Media except recording (Art. XVI, Sec.
OF BUSINESS 11 of the Constitution; Presidential
These are Memorandum dated 04 May 1994)
conditions subsequent, which may be 2. Practice of all professions
satisfied by substantial compliance in order
that a corporation may legally continue as 3. Retail trade enterprises with paid-up capital
such. of less than US$2,500,000(Sec. 5 of RA
Formal 8762)
organization: 4. Cooperatives (Ch. III, Art. 26 of RA 6938)
1. Adoption of By-Laws and filing of the same 5. Private Security Agencies (Sec. 4 of RA
with the SEC; 5487)
2. Election of board of directors/trustees, and 6. Small-scale Mining (Sec. 3 of RA 7076)
officers; 7. Utilization of Marine Resources in
3. Establishment of principal office; archipelagic waters, territorial sea, and
4. Providing for subscription and payment of exclusive economic zone as well as small-
capital stock. scale utilization of natural resources in
rivers, lakes, bays, and lagoons (Art. XII,
Term of Existence Sec. 2 of the Constitution)
Limitations: 8. Ownership, operation and management of
a. The term shall not exceed 50 years in any one cockpits (Sec. 5 of PD 449)
instance.
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13. Private recruitment, whether for local or 27. Financing companies regulated by the
overseas employment (Art. 27 of PD 442) Securities and Exchange
14. Contracts for the construction and repair of Commission (Sec. 6 of RA 5980 as
locally-funded public works (Sec. 1 of CA amended by RA 8556)
541, LOI 630) except: 28. Investment houses regulated by the SEC
a) infrastructure/development projects (Sec. 5 of PD 129 as amended by RA 8366)
covered in RA 7718; and
b) projects which are foreign funded or Articles of Incorporation (AI)
assisted and required to undergo The document
international competitive bidding (Sec. prepared by the persons establishing a
2a of RA 7718) corporation and filed with the SEC
15. Contracts for the construction of defense- containing the matters required by the Code.
related structures (Sec. 1 of CA 541) Significance:
1. The issuance of a certificate of
Up to Thirty Percent (30%) Foreign Equity incorporation signals the birth of the
corporation’s juridical personality;
16. Advertising (Art. XVI, Sec. 11 of the 2. It is an essential requirement for the
Constitution) existence of a corporation, even a de facto
one.
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of Contents:
natural resources (Art. XII, Sec. 2 of the 1. name of corporation;
Constitution) 2. purpose/s, indicating the primary and
18. Ownership of private lands (Art. XII, Sec. 7 secondary purposes;
of the Constitution; Ch. 5, Sec. 22 of CA 3. place of principal office;
141; Sec. 4 of RA 9182) 4. term of existence;
19. Operation and management of public 5. names, citizenship and residences of
utilities (Art. XII, Sec. 11 of the Constitution; incorporators;
Sec. 16 of CA 146) 6. number, names, citizenship and residences
20. Ownership/establishment and administration of directors or trustees;
of educational institutions (Art. XIV, Sec. 4 of 7. names, nationalities, and residences of the
the Constitution) persons who shall act as directors or
21. Culture, production, milling, processing, trustees until the first regular ones are
trading excepting retailing, of rice and corn elected and qualified;
and acquiring, by barter, purchase or 8. if a stock corporation, the amount of its
otherwise, rice and corn and the by-products authorized capital stock, number of shares
thereof (Sec. 5 of PD 194;Sec. 15 of RA and in case the shares are par value shares,
8762 the par value of each share;
22. Contracts for the supply of materials, 9. names, residences, number of shares, and
goods and commodities to government- the amounts subscribed and paid by each of
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the original subscribers which shall not be 5. Date and place of execution of
less than 25% of authorized capital stock; the articles of incorporation;
10. if non-stock, the amount of capital, the 6. Witnesses to the signing and
names, residences, and amount paid by acknowledgment of the articles.
each contributor, which shall not be less
than 25% of total subscription; Grounds for rejection of AI or amendments
11. name of treasurer elected by subscribers; thereto
and 1. The articles or its amendment is not
12. if the corporation engages in a nationalized substantially in accordance with the form
industry, a statement that no transfer of prescribed
stock will be allowed if it will reduce the 2. The purposes of the corporation are patently
stock ownership of Filipinos to a percentage unconstitutional, illegal, immoral, or contrary to
below the required legal minimum. government rules and regulations
Amendment of AI 3. The Treasurer’s Affidavit concerning the
Limitations: amount of capital stock subscribed and/or paid is
1. The amendment of any provision or matters false
stated in the articles of incorporation is not 4. The required percentage of ownership of the
allowed when it will be contrary to the provisions capital stock to be owned by Filipino citizens has
or requirement prescribed by the Code or by not been complied with
special law or changes any provision in the
articles of incorporation stating an accomplished Grounds for Suspension or Revocation of
fact Certificate of Incorporation
2. It must be for legitimate purposes 1. Fraud in procuring its certificate of
3. It must be approved by the required vote of incorporation
the board of directors or trustees and the 2. Serious misrepresentation as to what the
stockholders or members corporation can do or is doing to the great
4. The original articles and amended articles prejudice of, or damage to, the general public
together must contain all provisions required by 3. Refusal to comply with or defiance of a lawful
law to be set out in the articles of incorporation order of the SEC restraining the commission of
5. Such articles, as amended, must be indicated acts which would amount to a grave violation of
by underscoring the changes made, and a copy its franchise
thereof duly certified under oath by the corporate 4. Continuous inoperation for a period of at least
secretary and a majority of the directors or 5 years
trustees stating that the amendments have been 8. Failure to file the by-laws within the required
duly approved by the required vote of the period
stockholders or members must be submitted to 9. Failure to file required reports
the SEC
6. The amendments shall take effect only upon
their approval by the SEC BOARD OF DIRECTORS/TRUSTEES
7. If the corporation is governed by special law, Qualifications:
the amendments must be accompanied by a 1. For a stock corporation, ownership of at least
favorable recommendation of the 1 share capital stock of the corporation in his
appropriate government agency. own name, and if he ceases to own at least one
Number of Votes for BOD: share in his own name, he automatically ceases
Majority vote to be a director. (Sec. 23) For a non-stock
Number of Votes of Corporators corporation, only members of the corporation
Vote or written assent of 2/3 of OCS/ members can be elected to seat in the Board of Trustees.
In order to be
Non-Amendable Facts in the AI eligible as a director, what is material is the
Those matters legal title to, not beneficial ownership of the
referring to facts existing as of the date of stocks appearing on the books of the
the incorporation such as: corporation
1. Names of incorporators; 2. A majority of the directors/trustees must be
2. Names of original subscribers to residents of the Philippines. (Sec. 23)
the capital stock of the corporation and 3. He must not have been convicted by final
their subscribed and paid up capital; judgment of an offense punishable by
3. Treasurer elected by the original imprisonment for a period exceeding 6 years or
subscribers; a violation of the Corporation Code, committed
4. Members who contributed to the within five years from the date of his election.
initial capital of a non-stock corporation; (Sec. 27)
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4. Only natural persons can be elected its board of directors and through its officers
directors/trustees. and agents when authorized by a board
• In case of corporate stockholders or resolution or by its by-laws. (Spouses
members, their representation in the board Constantine Firme vs. Bukal Enterprises
can be achieved by making their individual and Development Corporation, G.R. No.
representatives trustees of the shares or 146608, October, 23, 2003)
membership to make them
stockholders/members of record. Limitations on Powers of BOD/BOT
5. Other qualifications as may be prescribed in 1. Limitations imposed by the Constitution,
the by-laws of the corporation. statutes, articles of incorporation or by-laws.
6. Must be of legal age 2. Cannot perform constituent or those involving
fundamental changes in the corporation
Corporate Officers requiring the approval of stockholders or
1. President – must be a director; members.
2. Treasurer – may or may not be a director; as 3. Cannot exercise powers not possessed by the
a matter of sound corporate practice, must corporation. (The Corporation Code of the
be a resident Philippines Annotated, Hector de Leon, 2002
3. Secretary – need not be a director unless ed.)
required by the by-laws; must be a resident Nature of Powers of BOD/BOT (The
and citizen of the Philippines; and Corporation Code of the Philippines Annotated,
4. Such other officers as may be provided in the Hector de Leon, 2002 ed.)
by-laws. a. Under the Theory of Original Power, the
CORPORATE CORPORATE powers of the board of directors or trustees are
OFFICER EMPLOYEE ORIGINAL and UNDELEGATED. The
Position is provided Employed by the stockholders or members do not confer, nor can
for in the by-laws or action of the they revoke those powers.
under the managing officer of b. They are DERIVATIVE only in the sense of
Corporation Code the corporation being received from the State in the act of
RTC has NLRC has incorporation.
jurisdiction in case jurisdiction in case
of labor dispute of labor disputes Business Judgment Rule
A resolution or
BOD/BOT as Repositary of Powers transaction
General Rule: The corporate powers of the pursued within the
corporation shall be exercised, all business corporate powers
conducted and all property of such corporation and business
controlled and held by the board of directors or operations of the
trustees. (Sec. 23) corporation, and
Exceptions: passed in good
1. In case of an Executive Committee duly faith by the board
authorized in the by-laws; of directors, is
2. In case of a contracted manager which valid and binding,
may be an individual, a partnership, or and generally the
another corporation. Note: In case the courts have no
contracted manager is another corporation, authority to review
the special rule in Sec. 44 applies. the same and
3. In case of close corporations, the substitute their
stockholders may manage the business of own judgment,
the corporation instead by a board of even when the
directors, if the articles of incorporation so exercise of such
provide. power may cause
The power to losses to the
purchase real property is vested in the board corporation or
of directors or trustees. While a corporation decrease the
may appoint agents to negotiate for the profits of a
purchase of real property needed by the department.
corporation, the final say will have to be with (Philippine
the board, whose approval will finalize the Corporate Law,
transaction. A corporation can only exercise Cesar Villanueva,
its powers and transact its business through 2001 ed.)
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Limitations:
Consequences: a. At any meeting of stockholder or members
a. Resolutions and transactions entered into by called for the election of directors or trustees,
the Board within the powers of the corporation there must be present either in person or by
cannot be reversed by the courts not even on representative authorized to act by written proxy,
the behest of the stockholders. the owners of the majority of the outstanding
b. Directors and officers acting within such capital stock or majority of the members entitled
business judgment cannot be held personally to vote.
liable for such acts. (Philippine Corporate Law, b. The election must be by ballot if requested by
Cesar Villanueva, 2001 ed.) any voting member or stockholder.
c. A stockholder cannot be deprived in the
3-Fold Duties of Directors (Philippine articles of incorporation or in the by-laws of his
Corporate Law, Cesar Villanueva, 2001 ed.) statutory right to use any of the methods of
1. Duty of Obedience voting in the election of directors.
To direct the d. No delinquent stock shall be voted.
affairs of the corporation only in accordance e. The candidates receiving the highest number
with the purposes for which it was of votes shall be declared elected.
organized.
Legal Basis: The Methods of Voting
directors or trustees and officers to be a. Straight Voting – every stockholder may vote
elected shall perform the duties enjoined on such number of shares for as many persons as
them by law and the by-laws (Sec. 25) there are directors to be elected.
2. Duty of Diligence b. Cumulative voting for one candidate – a
Legal Basis: Directors or trustees who stockholder is allowed to concentrate his votes
willfully and knowingly vote for or assent to and give one candidate, as many votes as the
patently unlawful acts of the corporation or number of directors to be elected multiplied by
who are guilty of gross negligence or bad the number of his shares shall equal.
faith in directing the affairs of the corporation c. Cumulative voting by distribution - a
shall be liable jointly and severally for all stockholder may cumulate his shares by
damages resulting therefrom suffered by the multiplying the number of his shares by the
corporation, its stockholders or members number of directors to be elected and distribute
and other persons (Sec. 31) the same among as many candidates as he
3. Duty of Loyalty shall see fit.
Legal Basis: Directors or trustees who
Limitations on the Stockholder’s Right to
acquire any pecuniary or personal interest in
Vote
conflict with their duty as such directors or
1. Where the articles of incorporation
trustees shall be liable jointly and severally
for all damages resulting therefrom. (Sec. provides for classification of shares
pursuant to Sec. 6, non-voting shares
31)
are not entitled to vote except as
When a director or trustee attempts to
provided for in the last paragraph of
acquire or acquires in violation of his duty,
Sec. 6.
any interest adverse to the corporation in
2. Preferred or redeemable shares may
respect of any matter which has been
be deprived of the right to vote unless
reposed in him in confidence as to which
otherwise provided in the Code.
equity imposes a liability upon him to deal in
3. Fractional shares of stock cannot be
his own behalf, he shall be liable as trustee
voted.
for the corporation and must account for all
4. Treasury shares have no voting
the profits which otherwise would have
rights as long as they remain in the
accrued to the corporation (Sec. 31, 2nd
treasury.
par.)
5. Holders of stock declared delinquent
Where a director, by virtue of his office, by the board of directors for unpaid
acquires for himself a business opportunity subscription are not entitled to vote or
which should belong to the corporation, to a representation at any
thereby obtaining profits which should stockholder’s meeting.
belong to the corporation, he must account 6. A transferee of stock cannot vote if
to the latter for all such profits by refunding his transfer is not registered in the
the same (Sec. 34) stock and transfer book of the
corporation.
Elections of Directors/Trustees
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the director/trustee for damages under Sec. an entirely new transaction (Yao Ka Sin
31. Trading vs. CA, 209 SCRA 763).
Where any of the first two conditions is
absent, said contract must be ratified by the Compensation of Directors or Trustees
vote of the stockholders representing at General Rule: They shall be entitled to
least 2/3 of the outstanding capital stock or reasonable per diems only
2/3 of the members in a meeting called for Exception:
the purpose, provided that full disclosure of a. when their compensation is fixed in the by-
the adverse interest of the director/ trustee laws
involved is made at such meeting. b. when granted by the vote of stockholders
3. Contracts of interlocking directors representing at least a majority of the
Contracts entered into between outstanding capital stock at a regular or special
corporations with interlocking directors meeting
(interest of said directors is “substantial”, i.e. c. when they are also officers of the corporation
exceeding 20% of the outstanding capital
stock). Executive Committee
They are valid, provided that: A body created by the by-laws and
a. The contract is not fraudulent; and composed of some members of the board
b. The contract is fair and reasonable under which, subject to the statutory limitations,
the circumstances. has all the authority of the board to the
If the interlocking director’s interest in extent provided in the board resolution or by-
one corporation or corporations is “nominal” laws.
(not exceeding 20% of the outstanding Must be provided for in the by laws and
capital stock), then all the conditions composed of not less than 3 members of the
prescribed in Sec. 32 on self-dealing board appointed by the board.
directors must be present with respect to the May act by a majority vote of all of its
corporation in which he has nominal interest. members.
BAR Q: A, the President of XYZ Corp., Limitations on the Powers of the Executive
wrote a letter to B, offering to sell to the Committee
latter 5000 bags of cement at P100 per It cannot act on the following:
bag. B signed his conformity to the letter 1. Matters needing stockholder approval;
offer, and paid a down payment of 2. Filling up of board vacancies;
50000. A few days later, C the 3. Amendment, repeal or adoption of by-laws;
Corporate Secretary of XYZ Corp. 4. Amendment or repeal of any resolution of
informed B of the decision of the Board the Board which by its express terms is not
of Directors not to ratify the letter offer. amendable or repealable; and
However, since B had already paid the 5. Cash dividend declaration.
down payment, XYZ Corp. delivered
500 bags of cement which B accepted. POWERS OF THE CORPORATION
XYZ Corp. made it clear that the 1. Express Powers - granted by law,
delivery should be considered as an Corporation Code, and its Articles of
entirely new transaction. Thereafter, B Incorporation or Charter
sought to enforce the letter-offer. Is 2. Inherent/Incidental Powers – not
there a binding contract for the 5000 expressly stated but are deemed to be within
bags of cement? the capacity of corporate entities
SA: NO. There is no binding contract for 3. Implied/Necessary Powers – exists as a
the 5000 bags of cement. First, the facts necessary consequence of the exercise of
do not indicate that A, the President , the express powers of the corporation or the
was authorized by the Board of pursuit of its purposes as provided for in the
Directors to enter into the contract or Charter
that he was empowered to do so under Classification:
some provision of the by-laws of XYZ 1. Acts in the usual course of business
Corp. The facts do not indicate that A 2. Acts to protect debts owing to the corporation
has been clothed with the apparent 3. Acts which involve embarking in a different
power to execute the contracts or business usually to collect debts out of profits
agreements similar to it. Second, XYZ 4. Acts to protect or aid employees
Corp. has specifically informed B that it 5. Acts to increase business (The Corporation
has not ratified and that the delivery to B Code of the Philippines Annotated, Hector de
of the 500 bags, which A accepted, is Leon, 2002 ed.)
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Corporate Acts
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3. Where it has transferred the corporate An ultra vires act may be that of:
property in fraud of its creditors; and a. The corporation;
4. Where the corporation is insolvent. b. The Board of Directors; and
Coverage of the TFD: c. The corporate officers.
1. If the corporation is solvent, the TFD extends Effects of ultra vires act on:
to the capital stock represented by the a. Executed contract – courts will not set
corporation’s legal capital. aside or interfere with such contracts;
2. If the corporation is insolvent, the TFD b. Executory contracts – no enforcement
extends to the capital stock of the corporation as even at the suit of either party (void and
well as all of its property and assets. unenforceable);
Exceptions to the TFD: c. Part executed and part executory –
1. Redemption of redeemable shares (Sec. 8) principle of “no unjust enrichment at
2. In close corporation, when there should be a expense of another” shall apply; and
deadlock and the SEC orders the payment of the d. Executory contracts apparently
appraised value of the stockholder’s share. (Sec. authorized but ultra vires – the principle of
104) estoppel shall apply.
8. Power to enter into management contract Ultra Vires Acts and Illegal Acts
Ultra vires (“beyond powers”) refers only to an
EXECUTIVE MANAGEMENT act outside or beyond corporate powers,
COMMITTEE CONTRACT including those that may ostensibly be within
such powers but are, by general or special laws,
1. Its creation 1. Express power either prohibited or declared illegal. It is in this
must be provided of a corporation context that the Code has used the term.
for in the by-laws
Ultra Vires Acts Illegal Acts
2. A governing 2. Management Not necessarily Unlawful; against
body which company must unlawful, but law, morals, public
functions as the always be subject outside the powers policy, and public
board itself. to the superior of the corporation order
power of the board Can be ratified Cannot be ratified
to give specific Can bind the Cannot bind the
directions from parties if wholly or parties
time to time or to partly executed
recall the
delegation of
TEST whether or not a corporation may
managerial power.
perform an act: consider the logical and
necessary relation between the act questioned
and the corporate purpose expressed by law or
Ultra Vires (“beyond powers”) Act in the charter. If the act is lawful in itself and not
An act which is beyond the conferred prohibited, and is done for the purpose of
powers of a corporation or the purposes or serving corporate ends, and reasonably
objects for which it is created as defined by contributes to the promotion of those ends in a
the law of its organization. substantial and not in a remote and fanciful
An act done by a corporation outside of sense. (Montelibano vs. Bacolod-Murcia Milling
the express and implied powers vested in it Co., Inc., 5 SCRA 36)
by its charter and by the law.
Types: (Philippine Corporate Law, Remedies in Case of Ultra Vires Acts
Cesar Villanueva, 2001 ed.) 1. State
1. Acts done beyond the powers of the a. Obtain a judgment of forfeiture; or
corporation as provided in the law or its b. The SEC may suspend or revoke the
articles of incorporation; certificate of registration
2. Acts or contracts entered into in behalf 2. Stockholders
of a corporation by persons who have no a. Injunction; or
corporate authority (Note: This is b. Derivative suit
technically ultra vires acts of officers and 3. Creditors
not of the corporation); and a. Nullification of contract in fraud of creditors
3. Acts or contracts, which are per se
illegal as being contrary to law. BY-LAWS
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(1998, 2000, 2001 Bar Exams) e. The qualification, duties and compensation of
Rules of action adopted by a corporation directors or trustees, officers and employees
for its internal government and for the f. Time for holding the annual election of
regulation of conduct and prescribe the directors or trustees and the mode or manner of
rights and duties of its stockholders or giving notice thereof
members towards itself and among g. Manner of election or appointment and the
themselves in reference to the management term of office of all officers other than directors
of its affairs. or trustees
Functions: h. Penalties for violation of the by-laws
a. Supplement the articles of incorporation i. In case of stock corporations, the manner of
b. Provide for details not important enough to be issuing certificates
stated in the articles of incorporation j. Such other matters as may be necessary for
c. Continuing rule for the government of the the proper or convenient transaction of its
corporation and the individuals composing it corporate business and affairs
d. Define the rights and duties of corporate
officers and directors/trustees and of Articles of By-Laws
stockholders/members towards the corporation Incorporation
and among themselves Condition precedent Condition
e. Source of authority for corporate officers and in the acquisition of subsequent; its
agents of the corporation corporate existence; absence merely
Requisites for validity: furnishes a ground
a. Must not be contrary to law nor with the for the revocation
Corporation Code of the franchise
b. Must not be contrary to morals and public Essentially a For the internal
policy; contract between the government of the
c. Must not impair obligations and contracts; corporation and the corporation but has
d. Must be general and uniform; stockholders/ the force of a
e. Must be consistent with the charter or members; between contract between
articles of incorporation; and the stockholders/ the corporation
f. Must be reasonable, not arbitrary or member inter se, and the
oppressive. and between the stockholders/
Binding effect: corporation and the members, and
a. As to members and corporation State; between the
They have the force of contract between the stockholders and
members themselves.They are binding only members;
upon the corporation and on its members Executed before May be executed
and those having direction, management incorporation after incorporation.
and control of its affairs. Sec. 46 allows the
b. As to third persons filing of the by-laws
They are not bound to know the by-laws simultaneously
which are merely provisions for the with the Articles of
government of a corporation and notice to Incorporation
them will not be presumed. Amended by a May be amended
Reason: By-laws have no extra-corporate majority of the by a majority vote
force and are not in the nature of legislative directors/ trustees of the BOD and
enactments so far as third persons are and stockholders majority vote of
concerned. representing 2/3 of outstanding
Contents of By-Laws the outstanding capital stock or a
a. Time, place and manner of calling and capital stock, or 2/3 majority of the
conducting regular or special meetings of of the members in member in non-
directors or trustees case of non-stock stock corporation
b. Time and manner of calling and conducting corporations
regular or special meetings of the stockholder or Power to Power to amend
members amend/repeal or repeal by-laws
c. The required quorum in meeting of articles cannot be or adopt new by-
stockholders or members and the manner of delegated by the laws may be
voting therein stockholders/ delegated by the
d. The form for proxies of stockholders and members to the 2/3 of the
members and the manner of voting them board of directors/ outstanding
trustees capital stock or
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a. Upon the date specified in the the provisions of this Code until and unless he
subscription contract pays the amount due on his subscription with
b. Upon call by the Board of Directors accrued interest, and the cost and expenses of
2. Involuntary payment advertisement, if any.
a. Extra-judicial
i. Delinquency sale Procedure for the Sale of Delinquent Stocks
ii. Application of dividends Call by resolution demanding payment of the
b. Judicial action balance. However, if the contract of
Note: The prescriptive period in case of subscription prescribes the date of payment,
subscription of shares begins to run only from no call is necessary.
the time the board of directors declares that the Notice of the board resolution given to the
balance are due and payable. It does not begin stockholders by the corporate secretary,
to run from the date of the subscription. (Garcia either personally or by registered mail.
vs. Suarez, 67 Phil. 441) Publication of notice of call is not required.
Failure of the stockholder to pay within a grace
DELINQUENCY period of 30 days from the date specified in
1. If the subscription contract fixes the date for the contract of subscription or in the call, the
payment, failure to pay on such date shall stocks shall be declared delinquent and shall
render the entire balance due and payable be subject to sale.
with interest. Thirty days therefrom, if still Notice of delinquency served on the subscribers
unpaid, the shares become delinquent, as of either personally or registered mail and
the due date, and subject to sale, unless the publication in a newspaper of general
board declares otherwise. circulation in the province or the city where
2. If no date is fixed in the subscription principal office is located for once a week for
contract, the board of directors can make the 2 consecutive weeks. Notice shall state the
call for payment, and specify the due date. amount due on each subscription plus
The notice of call is mandatory. The failure accrued interest, and the date, time and
to pay on such date shall render the entire place of the sale which shall not be less than
balance due and payable with interest. Thirty 30 days nor more than 60 days from the
days therefrom, if still unpaid, the shares date the stocks become delinquent.
become delinquent, as of the date of call, Sale of the delinquent shares at public auction.
and subject to sale, unless the board
declares otherwise. Highest Bidder in Delinquency Sale
Effect: a. The person participating in the delinquency
A. Upon the stockholder sale who offers to pay the full amount of the
1. Accelerates the entire balance of the subscription together with the
amount of the unpaid subscription; accrued interest, costs of advertisement and
2. Subjects the shares to expenses of sale, for the smallest number of
interest, expenses and costs; shares. In other words, the amount of the bid
3. Disenfranchises the does not vary but only the number of shares to
shares from any right that inheres to a be bought changes and determines the highest
shareholder, except the right to bidder.
dividends (but which shall be applied to b. If there is no bidder as mentioned above, the
any amount due on said shares or, in corporation may bid for the same, and the total
the case of stock dividends, to be amount due shall be credited as paid in full in
withheld by the corporation until full the books of the corporation. Such shares shall
payment of the delinquent shares. be considered as treasury shares.
B. Upon the director owning delinquent shares
1. He can continue serving in that capacity Procedure for Issuance of New Certificate of
unless and until said shares are totally bidded Stock in lieu of Lost, Stolen or Destroyed
away, he continues to be the owner thereof and Ones
in the interim he is not disqualified. 1. Filing with the corporation an affidavit in
2. A delinquent stockholder seeking to be triplicate by the registered owner setting forth the
elected as director may not be a candidate for, circumstances as to how the certificate was lost,
nor be duly elected to, the board. stolen or destroyed, the number of shares, serial
Note: No delinquency stock shall be voted for or number of the certificate and the name of the
be entitled to vote or representation at any corporation that issued the same.
stockholders meeting, nor shall the holder be 2. Publication of notice of loss by the corporation
entitled to any of the rights of a stockholder in a newspaper of general circulation in the
except the right to dividends in accordance with
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place of the principal office, once a week for 3 authorized capital stock for subscription. If
consecutive weeks. subsequently, it offers the remaining
3. After the lapse of 1 year from the date of the unsubscribed portion, there would be
last publication, if no contest has been preemptive right as to the remaining portion
presented, the corporation shall cancel in its thus offered for subscription.
books the certificate of stock, which has been When pre-emptive right not available:
lost, stolen or destroyed, and issue in lieu a. When denied by the article of incorporation
thereof a new certificate of stock. b. Shares requiring stock offering or minimum
However, if the registered owner files a bond stock ownership by the public
or other securities as may be necessary to the c. Shares to be issued in good faith with the
board, the new certificate of stock may be issued approval of the stockholders representing 2/3 of
even before the expiration of one (1) year the outstanding capital stock, in exchange for
period. property needed for corporate purposes or in
payment of a previously contracted debt
Rights of Stockholders
1. Managerial Rights PRE-EMPTIVE RIGHT OF FIRST
a. Voting rights; and RIGHT REFUSAL
b. Right to remove directors May be exercised Arises only by
2. Proprietary Rights even when there virtue of
a. Right to dividends; is no express contractual
b. Right to issuance of stock certificate for provision of law stipulations but is
fully paid shares; also granted under
c. Proportionate participation in the the provisions on
distribution of assets in liquidation; Close Corporation
d. Right to transfer of stocks in corporate Pertains to Exercisable
books; unsubscribed against another
e. Right to recover stocks unlawfully sold portion of the stockholder of the
for delinquent payment of subscription authorized capital corporation of his
f. Preemptive right stock. A right that shares of stock
may be claimed
Preemptive Right of Stockholders (1999, against the
2001, 2004 BAR EXAMS) corporation
It is the shareholders’ preferential right
to subscribe to all issues or dispositions of 3. Remedial Rights
shares of any class in proportion to their a. Individual suit – a suit instituted by a
present stockholdings. shareholder for his own behalf against
the corporation;
Purpose: to enable the shareholder to
retain his proportionate control in the b. Representative suit – a suit filed by a
corporation and to retain his equity in the shareholder in his behalf and in behalf
surplus. likewise of other stockholders similarly
Extends to treasury shares in case of situated and with a common cause
their reissuance. against the corporation; and
If the shares preferentially offered to a c. Derivative suit – a suit filed in behalf of
stockholder are not subscribed or purchased the corporation by its shareholders (not
by him, it does not follow that said shares creditors whose remedies are merely
shall again be re-offered on a pro rata basis subsidiary such as accion subrogatoria
to stockholders who already exercised their and accion pauliana) upon a cause of
preemptive rights. There is no preemptive action belonging to the corporation, but
right with respect to the share to be re- not duly pursued by it, against any
offered. person or against the directors, officers
In case additional issues of originally and/or controlling shareholders of the
authorized shares: corporation.
Requisites:
General Rule: There is no preemptive (i) An existing cause of action in favor of
right. This is on the theory that when a
the corporation
corporation at its inception offers its first
(ii) The stockholder/member must first
shares, it is presumed to have offered all of
make a demand upon the corporation or
those which it is authorized to issue.
the management to sue unless such a
Exception: When a corporation at its
demand would be futile
inception offers only a specified portion of its
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SPECIAL CORPORATIONS
DISSOLUTION AND WINDING UP
1. Educational Corporation (LIQUIDATION)
A stock or non-stock corporation Dissolution
organized to provide facilities for teaching or Extinguishment of the franchise of a corporation
instruction. and the termination of its corporate existence.
A favorable recommendation of the Modes:
DECS is essential for the approval of its 1. Voluntary (2002 Bar Exam)
articles and by-laws. a) Application for dissolution with the SEC
It is primarily governed by special laws i. Where no creditors are affected
and suppletorily by the provisions of the ii. Where creditors are affected
Code. b) Shortening of the corporate term by
amending the articles of incorporation.
NON-STOCK EDUCATIONAL 2. Involuntary
EDUCATIONAL CORPORATION a) Expiration of the corporate term;
CORPORATION b) Failure to organize and commence
A non-stock A special business within 2 years from the date of
corporation corporation which issuance of the certificate of incorporation
may a stock or non- c) Legislative dissolution;
stock d) Quo warranto suit against a de facto
Governed by the Governed by corporation;
provisions on non- special laws and by e) Minority stockholders’ suit for dissolution
stock corporations the general on justifiable grounds; or
and suppletorily by provisions of the f) SEC dissolution, upon complaint and after
the provisions on Corporation Code notice and hearing, on the following grounds:
stock corporations i. The corporation was illegally
The number of The number of the organized;
board of trustees board of trustees ii. Continuous inactivity (subsequent to
may be more than should not be less incorporation, organization and
15 than 5 but not more commencement of business) for at
than 15. least 5 years;
iii. Serious dissension in the corporation;
The term of office The term of office of
or
of the board of the board of
iv. Commission by the corporation of
trustees shall be 3 trustees shall be 5
illegal or ultra vires acts or violations
years years
of the Code.
Effects of Dissolution
2. Religious Corporation a. Transfer of legal title to corporate property to
A corporation composed entirely of the stockholders who become co-owners thereof
spiritual persons and which is organized for b. Continuation of corporate business merely as
the furtherance of a religion or for an association without juridical personality
perpetuating the rights of the church or for c. Conveyance by the stockholders of their
the administration of church or religious work respective shareholdings toward the creation of
or property. It is different from an ordinary a new corporation to continue the business of
non-stock corporation organized for religious the old
purposes. d. Reincorporation of the dissolved corporation
Kinds: by refilling new articles of incorporation and by-
A) CORPORATION SOLE laws
- A special form of corporation, usually e. The corporation continues as a body
associated with the clergy, consisting of one corporate for 3 years for purposes of winding up
person only and his successors, who is f. Cessation of corporate existence for all
incorporated by law to give some legal purposes upon the expiration of the winding up
capacities and advantages; and period of 3 years. (The Corporation Code of the
B) RELIGIOUS SOCIETIES Philippines Annotated, Hector de Leon, 2002 ed.
- A non-stock corporation governed by a
board but with religious purposes. It is
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Liquidation (1997, 2000, 2001 Bar Exams) following ways: (1) physical division or
The process by which all the assets of the partition based on the proportion of the
corporation are converted into liquid assets value of their stockholdings; or (2)
(cash) in order to facilitate the payment of selling the property to a 3rd person and
obligations to creditors, and the remaining dividing the proceeds among the 5
balance, if any, is to be distributed to the stockholder in proportion to their
stockholders or members. stockholdings; or (3) after determination
Methods: of the value of the property, by
1. By the corporation itself through its assigning or transferring the property to
board of directors/trustees; one stockholder with the obligation on
2. By a trustee to whom the corporate the part of the said stockholder to pay
assets have been conveyed; and the other four stockholders the amount
3. By a management committee or in proportion to the value of the
rehabilitation receiver appointed by the stockholdings of each.
SEC.
Note: The 3-year period of liquidation does not
apply to Methods 2 and 3 as long as the trustee FOREIGN CORPORATION
or the receiver is appointed within the said (1995, 2002 Bar Exams)
period.
The termination of the life of a juridical Definition: A corporation formed, organized or
entity does not by itself cause the extinction existing under any law other than those of the
or diminution of the rights and liabilities of Philippines, and whose laws allow Filipino
such entity nor those of its owners and citizens and corporations to do business in its
creditors alike (see Sec. 145). own country or state. (Sec. 123)
The word “trustee” as sued in the The definition espouses the
corporation statute must be understood in its incorporation test and the reciprocity rule
general concept which could include the and is significant for licensing purposes.
counsel to whom was entrusted the It is not permitted to “transact or do
prosecution of the suit filed by the business in the Philippines” until it has
corporation. (Spouses Gelano vs. CA 103 secured a license for that purpose from the
SCRA 90) SEC and a certificate of authority from the
appropriate government agency.
Liquidation Rehabilitation
Connotes a Connotes a Resident Agent
winding up or reopening or An individual, who must be of good moral
settling with reorganization character and of sound financial standing,
creditors and residing in the Philippines, or a domestic
debtors corporation lawfully transacting business in the
Winding up Contemplates a Philippines, designated in a written power of
process so that continuance of attorney by a foreign corporation authorized to
assets may be corporate life in an do business in the Philippines, on whom any
distributed to those effort to restore the summons and other legal processes may be
entitled corporation to its served in all actions or other legal proceedings
former successful against the foreign corporation.
operation
Grounds for Revocation of License
BAR Q: XYZ Corp. shortened its 1. Failure to file annual reports required by the
corporate life by amending its articles of Code;
incorporation. It has no debts but owns 2. Failure to appoint and maintain a resident
several real estate properties in Metro agent;
Manila. How would said property be 3. Failure to inform the SEC of the change of
liquidated among the 5 stockholders of residence of the resident agent;
said corporation. Discuss the two 4. Failure to submit copy of amended articles
methods of liquidation. or by-laws or articles of merger or
SA: The real estate properties of XYZ consolidation;
Corp. can be liquidated among the five 5. A misrepresentation in material matters in
stockholders after the property has been reports;
conveyed by the corporation to the 5 6. Failure to pay taxes, imposts and
stockholders, by dividing or partitioning assessments;
it among themselves in any of the 7. Engage in business unauthorized by SEC;
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2. Foreign corporation not doing business in contemplated are those whose offices are
the Philippines: created by the Corporation Code or the by-laws.
a) Generally, it may not sue and be sued in
any court or administrative agency of the Intra-Corporate Dispute (1996, 1997, 2006 Bar
Philippines; Exams)
b) However, it may sue and be sued for Elements:
isolated transactions, as well as for those 1. Status or relationship of the parties –
which are casual or incidental thereto. controversy must be between and among
B. On contracts corporators, between corporators and the
The contracts contemplated are those that corporation
satisfy the “contract test” or those that make a 2. Nature of the question – intrinsic connection
foreign corporation as one “doing business in the with the regulation or the internal affairs of
Philippines.” the corporation
General Rule: The contracts are unenforceable. Examples:
They are enforceable only upon securing a 1. Action by a corporate officer to recover
license. compensation from the corporation
Exception: However, the contracts are null and 2. Action by a stockholder to compel issuance
void if they are contrary to law, morals, good of certificate of stocks
customs, public order and public policy. 3. Action for recovery of corporate funds
Note: Allegations in the complaint determines
Instances when a Foreign Corp may sue in jurisdiction.
the Philippines whether or not Licensed to
do Business thereat Grounds for Suspension or Cancellation of
1. To seek redress for an isolated business Certificate of Registration (SEC. 6[L])
transaction; 1. fraud in procuring registration;
2. To protect its corporate reputation, name, and 2. serious misrepresentation as to objectives of
goodwill; corporation;
3. To enforce a right not arising out of a 3. refusal to comply with lawful order of SEC;
business transaction, e.g. tort that occurred in 4. continuous inoperation for at least 5 years;
the Philippines; 5. failure to file by-laws within required period;
4. When the parties have contractually stipulated 6. failure to file reports; and
that Philippines is the venue of actions; and 7. Others similar grounds.
5. When the party sued is barred by the principle
of estoppel and/or principle of unjust enrichment Interim Rules of Procedute on Corporate
from questioning the capacity of the foreign Rehabilitation (effective December 15, 2000)
corporation.
Corporate Rehabilitation
SEC REORGANIZATION DECREE A process to try to conserve and administer the
O (P.D. No. 902-A) rig corporation’s assets in the hope that it may
i nal eventually be able to return from financial stress
and Exclusive Jurisdiction of the RTC (Sec. 5 to solvency.
in relation to Sec. 5.2 OF RA 8799): Nature: in rem, summary, and non-adversarial
1. Fraudulent devices and schemes employed Applicability: These Rules apply to petitions for
by directors detrimental to the public interest rehabilitation filed by corporations, partnerships
and to other firms; and associations pursuant to P.D. 902-A
2. Intra-corporate disputes; Steps:
3. Disputes with the state in relation to their 1. Filing verified petition with the appropriate
franchise and right to exist as such; RTC by:
4. Controversies in election, appointment of a. corporate debtor who foresees the
directors or trustees; impossibility of meeting its debts when
5. Petition to be declared in a state of they respectively fall due; or
suspension of payments; b. creditors holding at least 25% of the
6. Petition for rehabilitation; and debtor’s total liabilities;
7. Appointment of rehabilitation receiver or 2. The following shall be annexed to the petition:
management committee (provisional a. audited financial statements at end of its
remedies). last fiscal year;
b. interim financial statement;
Note: A corporate officer’s dismissal is always a c. schedule of debts and liabilities;
corporate act and/or an intra-corporate d. inventory of assets;
controversy. However, the corporate officers e. rehabilitation plan;
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8. Publication in 2 newspapers of general life, pension, interment, and other plans which
circulation in the Philippines, once a SEC shall approve. (Subsec. 3.9)
week for 2 consecutive weeks, reciting
that a registration statement has been Tender Offer (2002 Bar Exam)
filed; A publicly announced intention by a person
9. The SEC may compel the production of acting alone or in concert with other persons to
all the books of such Issuer, and may acquire equity securities of a “public company”
administer oaths to, and examine the It is mandatory to make a tender offer for
officers of such Issuer or any other equity shares of a public company in an
person connected therewith as to its amount equal to the number of shares
business and affairs; that the person intends to acquire in the
10. Within 45 days after the date of filing of following circumstances:
the registration statement, or by such a. The person intends to acquire 15%
later date to which the issuer has or more of the equity shares of a
consented, SEC shall declare the public company pursuant to an
registration statement effective or agreement made between or
rejected, unless the applicant is allowed among the person and one or more
to amend the registration statement. sellers;
b. The person intends to acquire 30%
Grounds for Rejection and Revocation: (Sec.
or more of the equity shares of a
13.1)
public company within a period of
1. The issuer:
12 months; or
a. has been judicially declared
insolvent; c. The person intends to acquire
b. has violated the provisions of the shares that would result in
Code or orders issued by the SEC; ownership of more than 50% of the
c. has been engaged in fraudulent equity shares of a public company.
transactions; (Sec. 19)
d. has made false or misleading Securities deposited may be withdrawn
representation in any material facts; at any time throughout the period that
e. has failed to comply with any the tender offer remains open and if the
requirement the SEC may impose securities deposited have not been
as a condition of registration; previously accepted for payment, and at
2. The registration statement is on its face any time after 60 days from the date of
inaccurate or incomplete, or includes ant the original tender offer or request or
untrue statement or omits to state a invitation.
material fact required to be stated Unlawful and Prohibited Acts Relating to
therein; Tender Offers: To make an untrue
3. The issuer, any officer, director or statement of a material fact or omit to
controlling person performing similar state any material fact in order to make
functions, has been convicted by a the statements made, not misleading, or
competent judicial or administrative to engage in any fraudulent, deceptive,
body (it includes a foreign court of or manipulative act or practices.
competent jurisdiction), of an offense
involving moral turpitude and/or fraud or How Tender Offer is made:
is restrained by the SEC or other bodies 1. By filing with the SEC a declaration to
for violation of securities, commodities make a tender offer;
and other related laws; 2. By furnishing the issuer or the originator
4. Non-production of all books and papers, of the security a statement containing
administration of oath or examination of such information required under Sec. 17
its officers as required by the SEC. of the SRC:
a. Annual Report (includes balance
Pre-Need Plans sheet, profit and loss statement);
Contracts which provide for the performance of and
future services or the payment of future b. Periodical reports for interim fiscal
monetary consideration at the time of actual periods; and
need, for which planholders pay in cash or 3. By publishing all request or invitations
installment at stated prices, with or without for tender, or materials, making a tender
interest or insurance coverages and includes offer or requesting on inviting letters of
such a security.
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required thereby, as well as the waiver itself, mortgages (GSIS v. Santiago, G.R. No.
shall be void. 155206, October 28, 2003)
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handling such withdrawal without its deposit liabilities continuously for more
accounts. requiring the than 30 days, the Monetary Board may
4. Drawings against presentation of a summarily and without need for prior
uncollected deposits passbook. (BPI v. hearing close such banking institution and
(uncleared checks) are CA) place it under receivership of the PDIC.
generally prohibited.
Deposits that are exempt from garnishment:
NOW ACCOUNTS TIME DEPOSITS 1. Foreign Currency Deposits .
(Negotiable Order of Exception: The SC ruled in Salvacion v.
Withdrawal) Central Bank of the Philippines (August 20,
Interest bearing An account with fixed 1997) that the FCD of an American tourist
deposit accounts that term who was found guilty of repeatedly raping a
combine the payable twelve (12) year old child is subject to
on demand feature of garnishment.
checks and investment 2. Those exempt under the Rules of Civil
feature of savings Procedure like the provision for the family for
account. four months.
2. Loan Function
Note: Demand , savings , NOW accounts , time Requirement for grant of loans:
deposits and deposit substitutes shall not be Before granting of a loan, a bank must
subject to interest ceilings. ascertain that the debtor is capable of
fulfilling his commitments to the bank.
Note: A bank other than a universal or Rules:
commercial bank must seek approval of 1. A bank may demand from its applicants a
Monetary Board before accepting or creating statement of their assets and liabilities and
demand deposits. (Sec. 33) of their income and expenditures and other
information.
Deposit Substitutes - An alternative form of 2. Should such statements prove to be false or
obtaining funds from the public, other than incorrect the bank may terminate any loan
deposits, through the issuance, granted on the basis of said statements and
endorsement, or acceptance of debt shall have the right to demand immediate
instruments for the borrower’s own repayment or liquidation of obligation (Sec.
account, for the purpose of re-lending or 40).
purchasing of receivables and other
obligations (Sec. 95, RA 7653).
CLASSIFICATION OF LOANS
Deposit Deposit Substitute Unclassified Loans Classified Loans
No security given to Guaranteed by Those that do not have Those that have
guarantee repayment; certificates and other a greater-than-normal extraordinary risks of
the depositor relies on instruments risk, and the borrower loss in collection due
the stability and has apparent ability to to some defects such
reputation of the bank. satisfy it in full and no as bad debts or those
loss in ultimate under litigation.
collection is
A bank has the right to set-off to the anticipated.
deposits in its hands for the payment of nay
outstanding indebtedness to it on the part of
the depositor (Gullas v. PNB, 62 Phil 519) Limitation on Loans, Credit Accomodations
and Gurantees (2002, 2006 Bar Exams)
Failure by the bank to pay the depositor is
failure to pay a simple loan and not a A. Single Borrower’s Limit
breach of trust (CBTC v. CA, G.R. No. the total amount of loans extended by a
138569, September 11,2003) bank to any person, partnership,
association, corporation or other entity shall
Suspension of Payment on Its Deposit at no time exceed 20% of the net worth of
Liabilities such bank.
In case a bank or quasi-bank notifies the The total amount of loans may be
BSP or publicly announces a bank holiday, increased by additional 10% of the net worth
or in any manner suspends the payment of of such bank provided the additional
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loans or credit accommodations, A bank shall grant loans and other credit
except when the mortgage, pledge accommodations only in amounts and for the
or assignment covers only said co- periods of time essential for the effective
owner’s undivided interest. completion of the operations to be financed.
c. Corporation with inter-locking Such grant of loans and other credit
directors or 20% of the capital accommodations shall be consistent with safe
stock is owned by the DOS and/or and sound banking practices. (Sec. 39)
their spouses or relative The Monetary Board is hereby authorized to
mentioned above, or wholly or issue such regulations as it may deem
majority owned or controlled by necessary with respect to unsecured loans or
any related entities in items (b), other credit accommodations that may be
(d), and (e). granted by banks.
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d. The resolution approving the loan shall be b. Make misrepresentations for the
entered in the records of the bank and purpose of obtaining, renewing, or
transmitted to the BSP. increasing a loan or extending the period
e. Waiver of secrecy of deposits of whatever thereof;
nature in all banks in the Philippines by the c. Attempt to defraud the said bank in the
borrower. No waiver is required if the event of a court action to recover a loan
related interests are the borrower. or other credit accommodation; or
f. Information obtained form examination are d. Offer any director, officer, employee or
strictly confidential. agent of a bank any gift, fee,
Other Functions commission, or any other form of
a. Receive in custody funds, documents and compensation in order to influence such
valuable objects; persons into approving a loan or other
b. Act as financial agent and buy and sell, by credit accommodation application.
order of and for the account of their 3. Prohibited acts by BSP officers - No
customer, shares, evidences of examiner, officer or employee of the
indebtedness and types of securities; Bangko Sentral or any department,
c. Make collection and payments for the bureau, office, branch or agency of the
account of others and perform such other Government that is assigned to
services for their customer as are not supervise, examine, assist or render
incompatible with banking business; technical assistance to any bank shall
d. Upon prior approval of the Monetary Board, make false reports or suppress material
act as managing agent, adviser, consultant facts.
or administrator of investment management/ 4. No bank shall employ casual or non
advisory/consultancy accounts; and regular personnel or too lengthy
e. Rent out safety deposit boxes. probationary personnel in the conduct of
its business involving bank deposits.
Note: The bank shall act as depositary or as an (Sec. 55)
agent shall keep the funds, securities and other 5. Conducting Business in an Unsafe or
effects which it receives duly separated from its Unsound Manner - In determining
own assets and liabilities. (Sec. 53) whether a particular act or omission,
which is not otherwise prohibited by any
Prohibitions: law, rule or regulation affecting banks,
1. Prohition to act as insurer - A bank shall not quasi-banks or trust entities, may be
directly engage in insurance business as the deemed as conducting business in an
insurer. (Sec. 54) unsafe or unsound manner for purposes
2. Prohibited transactions by bank officials - No of this Section, the Monetary Board shall
director, officer, employee, or agent of any consider any of the following
bank shall - circumstances:
a. Make false entries in any bank report or The act or omission has resulted or
statement or participate in any may result in material loss or
fraudulent transaction; damage, or abnormal risk or danger
b. Without order of a court of component to the safety, stability, liquidity or
jurisdiction, disclose to any unauthorized solvency of the institution;
person any information relative to the The act or omission has resulted or
funds or properties in the custody of the may result in material loss or
bank belonging to private individuals, damage or abnormal risk to the
corporations, or any other entity; institution's depositors, creditors,
c. Accept gifts or any other form of investors, stockholders or to the
remuneration in connection with the Bangko Sentral or to the public in
approval of a loan or other credit general;
accommodation from said bank; The act or omission has caused any
d. Overvalue or aid in overvaluing any undue injury, or has given any
security for the purpose of influencing in unwarranted benefits, advantage or
any way the actions of the bank or any preference to the bank or any party
bank; or in the discharge by the director or
e. Outsource inherent banking functions. officer of his duties and
3. Prohibited acts by borrower - No borrower of responsibilities through manifest
a bank shall - partiality, evident bad faith or gross
a. Fraudulently overvalue property offered inexcusable negligence; or
as security for a loan from the bank;
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institution shall be punished under the Act. Such power to revoke cannot extend to post
(Sec. 34) facto repudiation of perfected transactions,
otherwise they would infringe against the non-
False Statement. - The willful making of a impairment clause of the Constitution. Sec. 28-
false or misleading statement on a material A gives the conservator power to revoke
fact to the Monetary Board or to the contracts that are deemed defective – i.e., void,
examiners of the Bangko Sentral shall be voidable, unenforceable or rescissible. (First
punished. (Sec. 35) Phil. Int’l Bank v. CA, 252 SCRA 259)
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Demand Deposits – all those liabilities of the Purpose: to give encouragement to the people
Bangko Sentral and of other banks which are to deposit their money in banking institutions and
denominated in Philippine currency and are to discourage private hoarding so that the same
subject to payment in legal tender upon demand may be properly utilized by banks in authorized
by the presentation of checks. (Sec. 58) loans to assist in the economic development of
Checks representing demand deposits do not the country (Sec. 1)
have legal tender power and their acceptance in Acts prohibited:
the payment of debts, both public and private, is 1. the examination and inquiry or looking
at the option of the creditor. into all deposits of whatever nature with
However, a check which has been cleared and banks or banking institutions in the
credited to the account of the creditor shall be Philippines (including investments in
equivalent to a delivery to the creditor of cash in bonds issued by the Government of the
an amount equal to the amount credited to his Philippines, its political subdivisions and
account. its instrumentalities) by any person,
government official, bureau or office.
3 Important Tools to Achieve Price Stability: 2. the disclosure by any official or
1. Loans to Banks (Sec. 83) employee of any bank to any
- If BSP wants to increase money supply, unauthorized person of any information
it opens rediscount window concerning the said deposits.
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action it may initiate involving the Graft Law among the exceptions, the
said deposits. Supreme Court held that they should be
• A waiver of the Bank Secrecy Law is included. The only conclusion possible is
also required in case of loans that Section 8 of the Anti-Graft Law is
secured by a hold-out or an intended to amend Section 2 of Republic
assignment of certificates of time Act No. 1405 by providing an additional
deposits. (Section X315, Manual of exception to the rule against disclosure
Regulations for Banks). of band deposits.” (PNB v. Gancayco,
Where Funds Deposited are Subject of 15 SCRA 91 (1965).
Litigation
• This overturned an earlier case
• In a case where Sun Life brought a
decided by the High Court where it held
collection case to recover the
that a prosecution under the Anti-Graft
proceeds of a check it had issued, the
Law was not embraced within any of the
insurance company wanted to
exceptions to the Bank Secrecy Law that
determine how the defendant had
would allow disclosure by a bank of
applied the proceeds of the check.
information concerning a deposit.
The trial court allowed Sun Life to
(Tatalon Bario Council v. Bank of PI, 7
examine pertinent records of the bank
SCRA 10 (1963).
in which the check was deposited.
The Supreme Court held that the • In another case, the Supreme Court
examination was authorized by expanded the exception under the Anti-
Section 10 of Rule 57, on the Graft Law, when it allowed an examination
examination of a person whose not only of the accused’s deposits, but also
property has been attached and those of his spouse, ascendant,
person indebted to him or controlling descendants and relatives, and other
his property. The Court struck down persons as well. (Banco Filipino v. Hon.
the argument that the examination Fidel Purisima, 161 SCRA 576 (1988).
would violate the Bank Secrecy Law, Here, the Court declared as proper the
explaining that the examination fell production by subpoena duces tecum of
within the exception “in cases where bank records of transactions by or in the
the money deposited or invested is names of the wife, children and friends of a
the subject matter of litigation.” The special agent of the Bureau of customs
Court added that the examination of accused of having allegedly acquired
bank records was not a fishing property manifestly out of proportion to his
expedition, but rather a method by salary and lawful income. The Court
which Sun Life could trace the explained:
proceeds of the check that it paid to
• To sustain the petitioner’s theory,
the petitioners. (Onate v Hon Zeus
and restrict the inquiry only to
Abrogar, 230 SCRA 181(1994).
property held by or in the name of the
• In another case, Mellon Bank remitted government official or employee, or
$1 million rather that an intended his spouse and unmarried children, is
$1,000 to the recipient, who deposited unwarranted in the light of the
part of the remittance in a local bank. provisions of the statutes in question,
When personnel of the depositary and would make available to persons
bank testified on the bank deposits, in government who illegally acquire
the defense moved to strike out the property an easy and fool-proof
testimonies of the depositary bank’s means of evading investigation and
witnesses. The Supreme Court prosecution; all they would have to
allowed their testimonies to remain on do would be to simply place the
the record, stating Section 2 of said property in the possession or name
law allows the disclosure of bank of persons other than their spouse
deposits in cases where the money and unmarried children. This is an
deposited is the subject matter of the absurdity that we will not ascribe to
litigation. (Mellon Bank v. Magsino, the lawmakers.
190 SCRA 633.
Upon Order of the Ombudsman
Unexplained Wealth (RA3019)
• Although Section 8 of the law that
• Although the Bank Secrecy Law did created the Office of the
not include cases covered by the Anti- Ombudsman expressly granted the
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functions or duties but the employee author and for fifty years after the death of the
owns it if it is not part of his duties. last surviving author.
g) COLLECTIVE WORKS – Contributor is 3. Anonymous or a pseudonymous work – till the
deemed to have waived his right, unless end of fifty years following the date of their first
he expressly reserves it. publication. The fifty-year period commences
h) LETTERS – Writer. However, the court from January 1 following the date of publication.
may authorize their publication or 4. Work of applied art – twenty-five years from
dissemination if the public good or the the date of making.
interest of justice so requires. An artistic creation with utilitarian
functions or incorporated in a useful
BAR QUESTION (Q): May a person article, whether made by hand or
have photocopies of some pages of the produced on an industrial scale (Sec.
book of Professor Rosario made without 171.10)
violating the copyright law? 5. Photographic works – fifty years from the
SUGGESTED ANSWER (SA): YES. publication of the work, or from making if
The private reproduction of a published unpublished (the same term is given to audio-
work in a single copy, where the visual work produced by photography or
reproduction is made by a natural analogous processes).
person exclusively for research and 6. Broadcast – twenty years from the date of
private study, is permitted, without the broadcast.
authorization of the owner of the 7.Newspaper Article – Lifetime of the author and
copyright in the work. 50 years thereafter
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7. Importation for personal 10. Public display of the original or a copy of the
purposes under certain conditions. work not made by means of a film, slide,
television image or otherwise on screen or by
Acts that do not infringe copyright means of any other device or process provided
that either the work has been published, sold,
1. Recitation or performance of a given away, or transferred to another person by
work: the author or his successors in title
a. made accessible to the public 11. Any use made of a work for the purpose of
b. privately done any judicial proceedings; or for the giving of
c. free of charge professional advice by a legal practitioner
d. strictly for a charitable or
religious institution 12. Single copy reproduction of a published
2. Making of quotations from a work by natural person exclusively for research
published work: and private study (even without authorization of
a. compatible with fair use owner).
b. extent is justified by the purpose
c. source and name of the author, 13. Reproduction by libraries of:
appearing on work, must be mentioned a. fragile works
3. Reproduction or communication to the b. isolated articles in composite
public by mass media of articles on current works
political, social, economic, scientific or religious c. brief portions of published
topic, lectures, addresses and other works, d. work
delivered in public: e. to preserve or replace copy
a. for information purposes
b. not expressly reserved 14. One back-up copy of computer program
c. source is already indicated
4. Reproduction and communication to the Fair Use
public of literary, scientific or artistic works as
part of reports of current events by means of Fair use of a copyrighted work for
photography, cinematography or broadcasting to criticism, comment, news reporting, teaching
the extent necessary for the purpose. including multiple copies for classroom use,
scholarship, research and similar purposes
5. Inclusion of a work in a publication, is not an infringement of copyright.
broadcast, or other communication to the public, a) Factors to consider to determine
sound recording or film if made by way of whether use is fair or not: (P-A-N-E)
illustration for teaching purposes compatible with 1. Purpose and the
fair use and the source and name of the author, character of the use
appearing on work, must be mentioned. 2. Nature of the
6. Recording made in schools, universities, or copyrighted work
educational institutions of a work included in a 3. Amount and
broadcast for the use of such schools, substantially of the portion used
universities or educational institutions. Such 4. Effect of the use upon
recording must be deleted within a reasonable the potential market of the
period; such recording may not be made from copyrighted work.
audio-visual works which are part of the general
cinema repertoire of feature films except for brief Importation for Personal Purposes
excerpts of the work. The importation of a
7. Making of ephemeral recordings: copy of a work by an individual for his
a. by a broadcasting organization personal purposes shall be permitted without
b. by means of its own facilities the authorization of the author of, or other
c. for use in its own broadcast owner of copyright in, the work under the
8. Use made of a work by or under the following circumstances:
direction or control of the Government for public a) Copies of the work are not available in
interest compatible with fairs use. the Philippines, and:
9. Public performance or the communication to 1. One copy at one time is
the public of a work in a place where no imported, but strictly for
admission fee is charged by a club on institution individual use only
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the aim is not profit-making of the Philippine Government
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3.
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Charitable or educational infringing materials for the purpose of
Society or institution if not more evidence
than three copies per title Administrative:
provided they are not for sale. 1. administrative
b) Copies form parts of libraries and action
personal baggage belonging to persons 2. cease and desist
or families arriving from foreign countries order
and are not intended for sale: Provided, 3. forfeiture of
That such copies do not exceed three paraphernalia used in committing the
offense
Infringement 4. administrative
Any violation of the owner’s fines
exclusive rights conferred by law. (Justice
Vitug, Pandect of Commercial Law, 1997 BAR Q. Juan Xavier wrote and
ed.) published a story similar to an
An appropriation of a copyrighted unpublished copyrighted story of
work buy another who is not authorized. Manoling Santiago. It was, however,
Copying alone is not what is conclusively proven that Juan Xavier
prohibited. The copying must produce was not aware that the story of Manoling
injurious effect. The author’s work is the Santiago was protected by copyright.
product of his long and assiduous research Manoling Santiago sued Juan Xavier for
and for another to represent it, as one’s own infringement of copyright. Is Juan Xavier
is injury enough. (Habana vs. Robles) liable?
It is not necessary that the whole or SA: YES. Juan Xavier is liable for
even a large portion of the work shall have infringement of copyright. It is not
been copied. If so much is taken that the necessary that Juan Xavier is aware
value of the original is sensibly diminished, that the story of Manoling Santiago was
or the labors of the original author are protected by copyright. The work of
substantially and to an injurious extent Manoling Santiago wais protected from
appropriated by another, that is sufficient in the time of its creation.
point if law to constitute piracy. (Columbia
Pictures vs. CA) Plagiarism - The act of appropriating the
a) How Made – when there is literary composition of another, or parts or
piracy or substantial reproduction. If so passages of his writings, or the ideas or
much is taken that the value of the original language of the same and passing them off as
author are substantially and to an injurious the product of one’s mind. (Estela vs. Santiago)
extent appropriated by another (Habana v. - The incorporation in one’s own work that of
Robles, No. 131522, July 19, 1999) another without the proper acknowledgment
thereof.
b) Remedies
BAR Q. In an action for damages on
Judicial account of an infringement of a
a. Injunction to prevent copyright, the defendant (the alleged
infringement pirate) raised the defense that he was
b. Action for damages which unaware that what he had copied was a
should be filed within four years. copyright material. Would this defense
Damages are assessed on the basis of be valid?
the proof alleged by the plaintiff of sales SA: No. An intention to pirate is not
made by the defendant of the infringing an element of infringement. Hence, an
work minus whatever costs the honest intention is no defense to an
defendant may be able to prove and action for infringement.
appreciated by the court. ALTERNATIVE ANSWER: YES.
c. Criminal case. The infringer The owner of the copyright must make
also exposes himself to criminal liability others aware that the material in
wherein the law prescribes penalties of question is under or covered by a
imprisonment and fines, including copyright This is done by the giving of
subsidiary imprisonment in case of such notice at a prominent portion of the
insolvency. copyright material. When the alleged
pirate is thus made aware thereof; his
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act of pirating the copy material will shall be prima facie evidence of the
constitute infringement. validity of the registration, the
registrant’s ownership of the mark, and
TRADEMARKS of the registrant’s exclusive right to use
(1996, 2005 Bar Exams) the same.
This means that registrant’s right
Trademark – any visible sign capable of may be questioned by a person who has
distinguishing the goods or services of an a better right, including a prior actual
enterprise and shall include a stamped or user. This also includes persons with
marked container of goods. In relation thereto, a internationally known marks.
trade name means the name or designation d. Registration is also not
identifying or distinguishing an enterprise. (Kho important to protect the goodwill that
v. CA, No. 115758, March 11, 2002). Thus, the identifies in the mind of the public the
basic requirements are: goods he manufactures or deals in.
1. There must be a visible sign. e. Registration of a mark is not
2. It must be capable of necessary for purposes of filing a case
distinguishing the goods of an for unfair competition or false
enterprise. designation of origin (Secs. 168.2 and
Collective Mark – any visible sign 169,IPC). Unfair competition is present
designated as such in the application for when:1) there is passing of a product
registration and capable of distinguishing the format of another;2) giving goods or
origin or any other common characteristic, service the appearance of goods of
including the quality of goods or services of another.
different enterprises which use the sign under 2) When the law states the right is acquired
the control of the registered owner of the from the time of registration, it is acquired form
collective mark. the time of registration, it is actually referring to
There is no need to register trade names in the filing date of application.
order to secure protection for them. 1. the filing date of an application
shall be the date on which the IPO received
Functions: the following indications and elements:
a. To indicate the origin of i. express or implicit indication that the
the goods to which they are attached registration of the mark is sought
b. To guarantee the ii. identity of the applicant
standard of quality of the goods iii. indications sufficient to contact the
b. To advertise the applicant or his representative
goods (Mirpuri v. CA, 318 SCRA 516, 1999) iv. reproduction of the mark
v. list of goods or services for
How Marks are Acquired which registration is sought.
1) The rights in a mark shall be acquired 2. However, the right may also be
through registration with the Intellectual Property protected from the priority date. Subject
Office or IPO. to the rules on reciprocity, where the
1. Registration is necessary before application is filed in the Philippines and
one can file an action for infringement the same applicant previously filed an
2. Actual use application in the countries covered by
a. Prior use in the Philippines is not the reciprocity rule under Sec. 3 of the
required before registration IPC, the application is deemed filed as
b. However, there must be actual of the day the application was first filed
use after registration. The registrant as of the day the application was first
shall file a declaration of actual use of filed in the foreign country. However,
the mark with evidence to that effect there will be no registration in the
within 3 years from the filing date of Philippines until registered in such
application otherwise it may be foreign country.
cancelled. (Secs. 142.2 and 151(c), IPC) Ownership of a mark or trade name may
The registrant is required to file a be acquired not necessarily by
declaration of actual use and evidence registration but by adoption and use in
to that effect, or shall show valid reasons trade or commerce. As between actual
for non-use within one year from the fifth use of a mark without registration, and
anniversary date of registration. registration of the mark without actual
c. It is also provided that a use thereof, the former prevails over the
certificate of registration of a mark latter. For a rule widely accepted and
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registration, petition for the cancellation reasonably be assumed to originate from the
thereof, sue for unfair competition) include latter and the public would then be deceived into
persons whose internationally well-known the belief that there is some connection or
mark, whether or not registered, is identical business association between the parties which
with or confusingly similar to or constitutes a in fact is absent.
translation of a mark that is sought to be
registered or is actually registered. Confusion of Goods: The product or
b. There is also service of one is identical or similar to that of the
protection for internationally known marks other.
registered in the Philippines for goods that
are not similar with respect to which Colorable Imitation - Refers to such
registration is applied for. similarity in form, content, words, sound,
meaning, special arrangement or general
Rights Conferred appearance of the mark or trade name with that
1. The right to the exclusive of the other mark or trade name in their over-all
use of the mark for one’s own goods or presentation or in their essential, substantive
services . and distinctive parts as would likely mislead or
2. The right to prevent others confuse persons in the ordinary course of
from the use of the same mark for identical purchasing the genuine article.
goods or services in the course of trade.
3. The right to the exclusive Infringement
use of one’s already registered mark even How Committed:
for goods or services into which one’s 1. If a person, without the owner’s consent,
venture expands, if used by others for use in commerce any reproduction,
dissimilar products is likely to damage the counterfeit, copy or colorable imitation of
business interest of the first venturer (Sec. a registered mark or the same container
147, IPC). or a dominant feature thereof in
connection with the sale, offering for
Duration – Ten years subject to indefinite sale of any goods or services on or in
renewal for periods of ten year each. connection with which such use is likely
to cause confusion, or to cause mistake
Confusion of Trademarks: or to deceive. (Sec. 155.1,IPC)
The term confusing similarity refers to such 2. If a person, without the owner’s consent,
resemblance between a mark or trade name of a reproduce, counterfeit, copy or colorably
person and that of another as to likely when imitate a registered mark or a dominant
applied to or used on their respective goods, feature thereof and apply such
business or services cause confusion or mistake reproduction, counterfeit, copy or
on the part of the purchasers as to the goods or colorable imitation to labels, signs,
services themselves or as to their source or prints, packages, wrappers, receptacles
origin. or advertisements intended to be used in
The result of confusion is damage or commerce upon or in connection with
prejudice on the part of the owner of the senior the sale, offering for sale, distribution, or
mark or trade name as well as on the part of the advertising of goods or services on or in
buying public. connection with which such use is likely
to cause confusion, or to cause mistake,
or to deceive (Sec. 155.2,IPC).
TWO TYPES OF CONFUSION OF MARKS While an administrative cancellation of a
OR TRADE NAMES: registered trademark on any of the
grounds under Sec. 17 of R.A. No. 166,
1.Confusion of Goods or Services- a is within the ambit of the BPTTT, an
person’s goods or services are purchased as action for infringement or any other
those of another person, and the proper quality incidental remedy sought is within the
of the former reflects adversely on the latter’s jurisdiction of the ordinary courts.
reputation. An action for infringement or unfair
The confusing similar marks or trade competition, including the available
names are used on the same kind of products or remedies of injunction & damages in the
services. regular courts can proceed
2. Confusion of Business or Origin- exist independently or simultaneously with an
when one party’s product or service though action for the administrative cancellation
different from that of another, is such as might of a registered trademark in the BPTTT.
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FACTS: ER Co. used the trademark PHILIPPINE PLANTERS CORDIAL PEANUTS which was registered in
the IPO. JR Co. filed suit with the Director of Patents for the cancellation of the registration of Er Co.’s trademark
on the ground the trademark of ER Co. would likely deceive the buying public because JR Co.s trademark which
is also registered is PLANTERS COCKTAIL PEANUTS.
ISSUE: Is there confusing similarity between the two trademarks?
HELD: YES. Although “planters” is an ordinary word, nevertheless, it is used in the labels not to describe the
nature of the product but o project the source or origin of the salted peanuts. The word PLANTERS easily
attracts and catches the eye of the ordinary consumer and it is that word and none other that sticks in his mind
when he thinks of salted peanuts.(Phil. Nut Industry Inc. Vs. Standard Brands Inc., 65 SCRA 575, July 31, 1975)
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import the products that result from the process, Purpose: To prevent secret or fraudulent sales
an act is said to be prohibited. or conveyances of goods in bulk and, thereby,
2. Literal Infringement Test protect the creditors of the seller.
Resort, in the first, must be had to the “words” of
the claim. If the accused matter clearly falls Bulk Sale: Any sale, transfer, mortgage, or
within the claim, infringement is made out and assignment of: (SBE)
that is the end of it. 1. a stock of goods, wares, merchandise,
The claims of patent and the accused product provisions, or materials otherwise than
must be juxtaposed within the over-all context of in the ordinary course of trade and the
claims and specification. (Godines vs. CA, 226 regular prosecution of business;
SCRA 338) 2. all, or substantially all, of the business or
3.Doctrine of Equivalents Test trade theretofore conducted; and
If two devices do the same work in substantially
the same way, the same result, and produce
3. all, or substantially all, of the fixtures and
substantially the same result, they are the same equipment used in and about the
even though they differ in name, form or shape. business.
(Godines vs. CA, 226 SCRA 338)
It provides that an infringement also takes place Exceptions: (WOJAE)
when a device appropriates a prior invention by 1. written waiver from all the
incorporating its innovative concept and, creditors;
although with some modification and change, 2. sale or transfer is made in the
performs substantially the same function in ordinary course of business;
substantially the same way to achieve 3. sale by virtue of a judicial order;
substantially the same result. In other words, the 4. those sold by assignee or those
principle or mode of operation must be the same beyond the right of creditors; and
or substantially the same. The doctrine of
equivalents thus requires satisfaction of the
5. sale of properties exempt from
function means and result test, the patentee attachment or execution. (Rule 39,
having the burden to show that all three Sec.13, Rules of Court)
components of such equivalency test are met
(Smith Klein Beckman Corp. v CA, No. 126627, Duties of Seller, Mortgagor or Assignor in
August 14, 2003). Bulk: (SPIN-R)
The doctrine of equivalents cannot be 1. to deliver to the vendee, mortgagee, or
applied when the infringing invention is clearly his agent or representative a sworn
beyond what is written in the claim. written statement of the names and
addresses of all the creditors to whom
Doctrine of File Wrapper Estoppel the vendor or mortgagor may be
It balances the doctrine of equivalents. indebted, together with the amount of
Patentee is precluded from claiming as part of indebtedness due or owing, or to
patented product that which he had to excise or become due or owing by said vendor or
modify in order to avoid patent office rejection, mortgagor to each of said creditors.
and he may omit any additions he was 2. to apply the purchase or mortgage
compelled to add by patent office regulations. money to the pro rata payment of the
bona fide claims of the creditors of the
Defenses in Actions for Infringement: vendor or mortgagor.
1. invalidity of patent or claim 3. at least 10 days before the sale, transfer
2. existence of ground for or execution of a mortgage upon any
cancellation. stock of goods, wares, merchandise,
provisions or materials, in bulk, to make
a full detailed inventory thereof and to
preserve the same showing the quantity
and, to the extent possible, the cost
price to the vendor, transferor,
SPECIAL LAWS mortgagor or assignor of each article to
be included in the sale, transfer or
BULK SALES LAW mortgage.
(Act 3952) 4. notify every creditor whose name and
(1995, 1997, 1999, 2000, 2001, 2005, 2006 Bar address is set forth in the verified
Exams) statement of the vendor, transferor,
mortgagor, or assignor, at least 10 days
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—oOo—
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c. statement of advances made by the be the debtor who will bear the loss as the true
warehouseman for which he claims a intent to the parties is not the negotiation of the
lien; warehouse receipt with its consequent transfer
d. date of issue; of title but merely as security.
e. location of the warehouse; Kinds of Warehouse Receipt
f. language to indicate if the receipt 1. Negotiable – one which states that the
were negotiable or non-negotiable, that goods received by the warehouse will be
is, whether the goods received will be delivered:
delivered to the bearer, to a specified a. to the bearer or
person, or to a specified person or his b. to the order of any person named in
order; such receipt.
g. signature of the warehouseman or 2. Non-Negotiable – one which states that the
his agent; goods received by the warehouseman will
h. rate of storage charges; and be delivered to the depositor or to any other
i. description of the goods or the specified person.
packages containing them.
Distinctions between a Negotiable
Prohibited terms: Instrument and a Negotiable Warehouse
a. Such additional terms that are Receipt
contrary to the provisions of the
Warehouse Receipts Law;
b. Terms that reduces the degree of
diligence imposed by law. Distinctions between a Negotiable
Warehouse Receipt and a Non-Negotiable
Function of Warehouse Receipt: Warehouse Receipt
The negotiation of a warehouse receipt carries
with it the transfer of title over the commodity Negotiable Non-
covered by the receipt, so also with a negotiable
bill of lading. May be Negotiation Transfer or
Exception: Where a negotiable warehouse acquired assignment
receipt is indorsed and delivered to a creditor as through
collateral for a loan. Rights of Title to the title of the
the person goods of goods, as
Note: in case of loss of the commodity covered to whom it the person against the
by the receipt through a fortuitous event, it will is negotiating transferor
Negotiable Negotiable negotiated the receipt (merely
As to: Instrument Warehouse (holder)/ and title of steps into
Receipt transferee the person the shoes)
Subject Money Money to whose right to notify
Object of Instrument Goods order the the
value itself deposited goods warehousem
None for were to be an of the
Liability of delivered. transfer and
Secondary failure to
intermediate Direct acquire the
liability deliver the
parties obligation direct
goods
Valid but of the obligation of
enforceable warehouse the
Effect of man to warehousem
only in
deliberate Null and void hold an to hold
accordance
alteration possession the goods
with its
original tenor of the for him.
Can be goods for (Sec. 42)
An originally him as if
converted to
bearer the
Conversion an order
instrument warehouse
from bearer warehouse
will always man
to order receipt if
be such directly
specifically
endorsed contracted
Obtains only
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May obtain a which the 145
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liquidation, and of all receipts returned to The Trust Receipt Law does not seek to enforce
and cancelled by him. the payment of loans. Thus, there can be no
violation of the right against imprisonment for
Rights of Injured Person against non-payment of a debt. It is not an offense
Warehouseman: against property but an offense against public
He may sue on the bond put up by the order. (People vs. Nitafan, 207 SCRA 726)
warehouseman to recover the damages he
may have sustained on account of such Parties:
breach. 1. Entrustee –person having or taking
In case the bond is not sufficient to possession o goods, documents or
cover the full market value of the commodity instruments under a trust receipt transaction,
stored, he may sue on any property or and any successor in interest of such person
assets of the warehouseman not exempt by for the purpose or purposes specified in the
law from attachment and execution. trust receipt agreement.
2. Entruseor – person holding title over the
Offenses Penalized under the Act: goods, documents, or instruments subject of
a. engaging in the business of receiving a trust receipt transaction, and any
commodities for storage without the successor in interest of such person; not the
proper license (Sec. 11); owner of the goods, but merely a holder of
b. receiving a quantity of commodity security interest
greater than that specified in the license 3. Seller of the goods – Not strictly and
of the warehouseman (Sec. 12); actually a party to the trust receipt
c. conniving or entering into a combination transaction; but merely a party to the
with an unlicensed warehouseman for contract of sale with the buyer/importer
the purpose of avoiding compliance with (entrustee).
the requirement of obtaining a license
before engaging in the business of Note: On issuing trust receipts, the bank, if not
receiving commodities for storage (Sec. paid what is due it, will be preferred over other
13). creditors of the entrustee. He is not liable to the
buyer of the goods as vendor.
—oOo—
Rights of the Entruster: (PROCN)
1. Entitled to the proceeds from the sale of
TRUST RECEIPTS LAW goods, documents or instruments;
(PD 115) 2. Entitled to the return of goods , etc. in
(1997, 2005, 2006 Bar Exams) case of non-sale;
3. Enforce all other rights conferred on him
Definition: A commercial document whereby under the trust receipts;
the bank releases the goods in the possession 4. May cancel the trust and take
of the entrustee but retains ownership thereof possession of goods, etc. on case of breach
while the entrustee shall sell the goods and of trust agreement; and
apply the proceeds for the full payment of his 5. Give at least 5 days notice to the
liability with the bank. entrustee of the intention to sell the goods,
It is a written / printed document signed etc.; he may purchase at a public sale.
by the entrustee; The entruster’s security interest shall be
in favor of the entruster; valid as against all creditors of the
entrustee for the duration of the trust
whereby the latter releases the goods,
receipt agreement. Security interest of
documents or instruments to the possession
the entruster’s advances will have to be
of the former upon the entrustee’s promise:
settled first before the entrustee can
a. to hold said goods in trust for the
consolidate his ownership over the
entruster;
goods.
b. to sell the goods;
He is not liable as principal or vendor
c. turn over the proceeds thereof to the under any sale or contract to sell made
extent of what is owing to the entruster; by the entrustee.
or
No agency relationship is established in
d. to return the goods if unsold or for other
Trust Receipts Law.
purposes.
Obligations of Entrustee: (RTIDS-ROH)
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1. Receive the proceeds in trust for the over the goods or the proceeds realized
entruster; from the sale thereof, shall render the
2. Turn over the proceeds to the entruster offender liable for estafa under Article 315,
to the extent of the amount owing to the par. 1-b of the Revised Penal Code.
entruster or as appears on the trust receipt; If the violation or offense is committed
3. Insure the goods for their total value by a corporation, the penalty shall be
against loss from fire, theft, pilferage or other imposed upon the directors, officers,
casualties; employees or other officials or persons
4. Dispose the goods, etc. strictly in therein responsible for the offense, without
accordance with the terms and conditions of prejudice to the civil liabilities arising from
the trust receipt; the criminal offense. (Pilipinas Bank vs.
5. Keep said goods or proceeds thereof Ong, G.R. No. 133176)
separate and capable of identification as In the event of default by the entrustee
property of the entruster; the entruster need not demand the return of
6. Return the goods, etc. in the event of the unsold goods to be able to enforce his
non-sale or upon demand of the entruster; rights under the trust receipt.
7. Observe all other terms and conditions Fraud and deceit need not be proven for
of the trust receipt not contrary to law. and the offense is punished as malum prohibitum
8. Hold the goods, etc. in trust for the regardless of intent or malice.
entruster. Surrender of the goods to the bank, if
unsold merely extinguishes the entrustee’s
The risk of loss shall be borne by the criminal liability but is not relieved of its
entrustee. Loss of goods, etc. pending obligation to pay for the money borrowed.
disposition, whether due to the fault or Note: Mere failure to deliver the proceeds of the
negligence of the entrustee, shall not sale or the goods, if not sold, constitutes
extinguish his obligation to the entruster for violation of PD No. 115. However, what is being
the value thereof. punished by the law is the dishonesty and abuse
It is assumed that the title and of confidence in the handling of money or goods
possession is turned over to the entrustee. to the prejudice of another regardless of whether
The law does not cover sales on credit with the latter is the owner. The mala prohibita nature
the title or other interest being retained by of the offense notwithstanding, intent to misuse
the seller as security thereof. or misappropriate the goods or their proceeds
A purchaser for value and in good faith has to be established by the records. (Pilipinas
acquires said goods, etc. free from the Bank vs. Ong, G.R. No. 133176)
entruster’s security interest.
Trust Receipt Pledge
Civil Law Trust Receipts The property is in the The person doing the
Concepts Law Concept possession of the financing has
Although the person financed. possession of the
trustee is not the property.
Where there is a
owner of the goods There is no sale of the Conditional Sale
contract of sale, the
under a trust property from the There is a sale of the
buyer is to acquire
receipt (ownership entruster to the property from the seller
only whatever title
is retained by the entrustee. to the buyer.
the seller had at the
entrustor), anyone Chattel Mortgage
time the sale was Does not involve the
who acquires the Involves the creation of
perfected. (Art. creation of a lien.
goods from the a lien upon the
1505)
entrustee acquires property.
good title over the Consignment
The seller does not
goods. The consignor retains
retain title to the
Although the title to the property to
property but transfers
entrustee is not the secure the
Owner will bear the such title to the
owner of the goods indebtedness due form
risk of loss of the entruster.
covered by a trust the consignee.
object.
receipt, he bears
the risk of loss. —oOo—
Effects of breach of obligation:
Acts involving the violation of trust
receipts agreement, such as failure to turn
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Effect of its absence: the contract is General Rule: There is recovery of deficiency in
valid between the parties but will not bind all mortgages (chattel and real).
third person without notice. Reason: Mortgages as accessory contracts
serve only as securities and not for the
Where registered: satisfaction of the principal obligation. The
Resident: place of residence action may be brought within 10 years from the
time the cause of action accrues.
Non-resident: where the property is Exceptions:
situated 1. Chattel mortgage on the thing sold (Art. 1484,
Where the mortgagor resides in a place 1485 NCC)
different from where the property is situated: 2. Pledge (Art. 2115, NCC)
in the place where the mortgagor resides
and where the property is situated Equity of Redemption
Exception: Where the amount of the The following may redeem after the
mortgage is more than P500,000 registration condition of the chattel mortgage is broken
of the mortgage in the province where the but before the sale thereof:
property is situated is sufficient. 1. mortgagor;
2. a person holding a subsequent
Note: where motor vehicles are involved, the mortgage;
contract must be recorded also in the Land 3. a subsequent attaching creditor.
Transportation Office where the vehicle is
registered (Sec. 5(e), Revised Motor Vehicles An attaching creditor who
Law); redeems shall be subrogated to the
where the vehicle is a public utility and rights of the mortgagee and entitled
the mortgage is executed to guaranty a to foreclose the mortgage.
loan not payable within 1 year, the No right of redemption in chattel
approval of the Land Transportation mortgage after foreclosure sale
Franchising and Regulatory Board is (Cabral vs. Evangelista 28 SCRA
required. 1000).
Effect of failure to register: the contract is valid Right acquired by 2nd mortgagee and
between the parties but will not bind third person subsequent purchaser:
without notice. 1. Before payment of debt
After the mortgage is executed, the
Remedies of Mortgagee in case of Default by mortgagor has only an equity of
Mortgagor: redemption and only this right passes to
1. Foreclose the mortgage 30 days after the the 2nd mortgagee in case of a 2nd
condition is broken; mortgage.
General Rule: public auction As between the 1st and the 2nd
Exception: there is an agreement for private
mortgagee, the latter can only recover
sale; hence, the mortgagor is in estoppel to
the property from the former by paying
question it
him the mortgage debt.
Exception to the exception: when there is
fraud or duress
2. After payment of debt
2. Bring ordinary action to recover money; The judgment or attaching creditor who
Note: Remedies are alternative. purchased the property at the execution
sale could not acquire anything except
Distribution of proceeds of foreclosure sale: such right of redemption.
1. payment of the costs of keeping and He is not entitled to the actual
sale; possession and delivery of the property
2. payment of the obligation secured by without first paying the mortgage debt.
such mortgage;
3. payment of the obligation secured by —oOo—
subsequent mortgages; and
4. balance, if any shall be paid to the RECTO LAW
mortgagor. (Arts 1484 and 1485, NCC)
(1996, 1997 Bar Exams)
Rule on Recovery of Deficiency:
Applicability:
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Exception: In banks, the amount of loan, which to pay all his debts. The two types
interest, costs and expenses of sale less income of proceedings covered are:
derived by the bank (Sec. 47, General Banking 2.1 Voluntary Insolvency – it is the
Law). debtor who files the petition for
insolvency; and
Who may redeem: 2.2 Involuntary Insolvency – it is the
1. Mortgagor or one in privity of title with creditors who ask for the declaration
mortgagor; of the debtor’s insolvency.
2. Successor-in-interest: (TCS-JW)
SUSPENSION OF PAYMENTS
a. the one to whom the debtor has
transferred his right of redemption;
Note: The Regional Trial Court has jurisdiction
or
over a petition for suspension of payments. Sec.
b. one to whom the debtor has 5.2 of R.A. No. 8799 (Securities Regulation
conveyed his interest in the property Code) transferred petitions by corporations,
for the purpose of redemption; or partnerships, or associations to be declared in
c. one who succeeds to the interest of the state of suspension of payments from SEC
the debtor by operation of law; or to the RTC.
d. one or more joint debtors who were
joint owners of the property sold; or The following may file a petition for
e. the wife as regards her husband’s suspension of payments:
homestead by reason of the fact that 1.Individual Debtor
some portion of her husband’s title He may petition the court of the
passes to her. province or city in which he has resided
for six (6) months preceding the filing of
—oOo— his petition that he be declared in the
state of suspension of payments (Sec.
INSOLVENCY LAW 2).
(Act No. 1956) 2.Corporate Debtor
(1995, 1996, 1997, 1998, 2002, 2005 Bar The corporation may possess
Exams) sufficient property to cover all his debts
but foresees the impossibility of meeting
Purposes: them when they respectively fall due or
1. To effect equitable distribution of the in cases where the corporation has no
insolvent’s property among his creditors; assets to cover its liabilities but is under
and management of a Rehabilitation
2. To discharge the debtor from his Receiver or Management Committee.
liabilities so that he can start afresh with (Sec. 5 [d], PD 902-A)
the property set apart to him as exempt.
(Mindanao Motor line, Inc. v. Alforque Procedure: (PIPA-OC)
57 SCRA 98 [1974]) 1. Filing of petition by the debtor (Sec. 2).
Annexed is the schedule of creditors, a
Two Divisions of the Law statement of debtors assets and
1. Suspension of Payments (Sections 2 to liabilities, and the debtor’s proposal for
13) the suspension of payments
In suspension of payments, the debtor 2. Issuance by the court of an order calling
possesses sufficient property to cover all for a meeting of the creditors (Sec.3).
his debts, but foresees the impossibility
3. Publication of the order and service
of meeting them when they respectively
thereof on the creditors (Sec. 4).
fall due. The debtor can go to court and
ask for suspension of payments of his 4. Meeting of creditors for the approval or
debts: the creditors should give him disapproval of the debtor’s proposition
more time within which to convert some (Sec. 8).
of his properties to cash to be able to • The presence of creditors representing
pay his debts. at least 3/5 of the liabilities of the debtor
2. Insolvency Proceedings (Sections 14 to is the quorum required for the debtor’s
82) proposal to be properly approved (Sec.
Insolvency proceedings work under the 8).
premise that the debtor has neither cash
nor property of sufficient value with
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determining the effects provided for under Accord - an agreement between a debtor and a
the Insolvency Law. single creditor for a discharge of the obligation
When important: by a part payment or on different terms.
A creditor by assignment of credit made
within 30 days from date of cleavage When may a debtor apply for discharge:
shall be disqualified as petitioning Anytime after the expiration of 3 months
creditor. (Sec. 20) from the adjudication of insolvency BUT not
Attachment levied upon within a period later than 1 year from such adjudication.
of 30 days before the date of cleavage Failure to apply within the said period,
may be set aside by the assignee. (Sec. debtor loses his right to be discharged.
32) (Sec. 64)
Judgments on cases filed and decided But the debtor is still entitled to a
within 0 days prior to the date of SECOND DISCHARGE. The second
cleavage may be set aside by the discharge takes place:
assignee. (Sec. 32) after 6 years from the first discharge
Judgments on cases filed before 30 or,
days from the date of cleavage but within 6 years from the first
decided within 0 days because of discharge, if the second insolvency
confession o judgment or declaration of proceeding is INVOLUNTARY.
default of debtor may be set aside by (Sec. 65)
action of assignee. (Sec. 32)
Properties acquired after date of Legal Effects of Discharge: (C²ORS)
cleavage, after discharge of debtor in 1. The insolvent debtor is released from:
good faith shall not be liable for debts a. all his debts and liabilities set
incurred prior to date of cleavage forth in the schedule; and
Fraudulent references made within 30 b. all debts, liabilities or claims
days prior to the date of cleavage may which were or might have been
be set aside in an action brought by proved against the estate in
assignee. (Sec. 70) insolvency (Sec. 69)
2. Takes effect not from the date it
Composition was granted but retroacts to the date of
An agreement whereby the creditors of the commencement of the proceedings in
an insolvent agree to accept a certain insolvency.
percentage of their claims in full settlement 3. It operates as a discharge of the
of such claims. It is the method of dividing insolvent and future acquisitions, but
the estate of the insolvent debtor among his permits mortgagees and other lien
creditors. creditors to have their satisfaction out of
the mortgage or subject of the lien.
Discharge
The release of the debtor from his
4. It is a special defense which
may be pleaded and be a complete bar to
liabilities, which may be proved in the
all suits brought on any such debts,
insolvency proceedings such that they are
claims, liabilities or demands.
no longer a charge upon him.
5. Where a debtor is judicially
Only natural persons may ask for a declared insolvent, the remedy of the
discharge (Sec. 52)
guarantor or surety would be to file a
Requirements:
contingent claim in the insolvency
1. Debtor must have complied with
proceeding, if his rights as such guarantor
statutory requirements regarding
or surety is not to be barred by the
surrender of his assets for the benefit of
subsequent discharge of the insolvent
credits and regarding the rendition of an
debtor from all his liabilities.
account of his assets and liabilities.
2. He must have applied for discharge. and
Discharge does not apply to:
3. Debtor must not have committed any of
the acts of insolvency under Section 65
1. Assessmen
preventing discharge of a debtor.
ts due the government.
2. Debts due
to fraud, embezzlement, and defalcation
by the debtor.
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Powers:
Jurisdiction 1. Require and receive covered and suspicious
transactions reports from covered entities.
All cases on money laundering 2. Investigate suspicious transactions, covered
shall be within the jurisdiction of transactions deemed suspicious, money
RTCs. laundering activities and other violations of
However, those committed by the Act.
public officers, and private 3. Apply ex parte before the CA for the freezing
persons in conspiracy with such of any monetary instrument or property
public officers, shall be within alleged to be proceeds of any unlawful
the jurisdiction of the activity;
Sandiganbayan. 4. Institute forfeiture and other remedial
proceedings through the Solicitor General;
and
5. Seek court order to inquire into or examine
Freeze of Account any particular deposit with any banking or
non-bank financial institution.
The power of the AMLC to freeze
accounts has been deleted under RA —oOo—
9194
The Court of Appeals , upon application
ex parte 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 , may issue a freeze order which
shall be effective immediately.
The freeze order shall be for a period of
20 days unless extended by the court.
Composition:
1. BSP Governor – AMLC Chairman
2. Insurance Commission Chairman
3. SEC Chairman
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