2009 Commercial Law Reviewer

Copyright Page
Copyright and all other relevant rights over this material are owned jointly by the University of the Philippines College of Law, the Faculty Editor and the Student Editorial Team. The ownership of the work belongs to the University of the Philippines College of Law. No part of this book shall be reproduced or distributed without the consent of the UP College of Law. All rights are reserved.
REVIEWER IN COMMERCIAL LAW
Table of Contents
INTELLECTUAL PROPERTY LAW

CHAPTER 1: PATENTS I. General Principles A. Patentable Inventions Utility Models Industrial Designs Layout Designs of Integrated Circuits B. Non-Patentable Inventions C. Registration of Patents and Rights Conferred II. Patent Infringement A. Definition B. Tests of Infringement C. Defenses D. Remedies III. Licensing A. Voluntary Licensing B. Compulsory Licensing IV. Assignment and Transfer CHAPTER 2: TRADEMARKS I. Trade Name What may NOT be used as Trade Name Ownership of Trade Name Right of Owner of Trade Name II. Trademark A. Functions B. Acquisition of Ownership C. Who May Apply for Registration D. What May Not be Registered E. Tests to Determine Confusing Similarity between Marks F. Well-Known Mark III. Registration IV. Infringement A. Remedies for Infringement B. Limitations on Action for Infringement V. Unfair Competition 3 3 3 4 5 5 5 5 9 9 9 9 10 10 10 12 12 14 14 14 14 14 14 14 15 15 15 16 17 17 19 19 20 20 CHAPTER 3: COPYRIGHT I. General Principles II. Criteria for Copyright Protection A. Originality B. Expression III. Works Protected by Copyright A. Original Literary and Artistic Works B. Derivative Works IV. Non-Copyrightable Works V. Rights Conferred by Copyright A. Copyright or Economic Right B. Moral Rights C. Droit de Suite VI. Ownership of Copyright VII. Duration of Copyright VIII. Infringement Remedies for Infringement IX. Limitations to the Rights of Copyright X. Neighboring Rights XI. Transfer and Assignment 22 22 22 22 23 23 23 23 24 24 24 25 25 25 26 26 26 27 28 28
Table of Contents
TRANSPORTATION & PUBLIC UTILITIES LAW

Chapter I. GENERAL CONSIDERATIONS
I. Public Utilities II. Transportation
31 31 33 37 37 37 38 38 38 39 39 39 39 40 41 42 42 43 43 43 44 44 44 44 44 45 45 45 45 46 46 46 47
Chapter II. COMMON CARRIERS I. In General A. Concept of Common Carrier B. Nature of Business; Power of the State to Regulate C. Nature and Basis of Liability D. Classes of Common Carriers E. Laws Applicable II. Common Carriage of Goods A. Liability and Presumption of Negligence B. Exemption from Liability C. Duration of Extraordinary Responsibility D. Stipulation/Agreement Limiting Liability E. Applicable Law on Foreign Trade F. Rules on Passenger Baggage III. Common Carriers of Passengers A. Nature and Extent of Responsibility B. Duration of Responsibility C. Presumption of Negligence D. Force Majeure E. Limitation of Liability; Validity of Stipulations F. Responsibility for Acts of Employees G. Responsibility for Acts of Strangers and Co-Passengers H. Duty of Passenger; Effect of Contributory Negligence IV. Damages Recoverable from Common Carriers A. In General B. Actual or Compensatory C. Moral Damages D. Exemplary Damages E. Nominal, Temperate, and Liquidated F. Attorneys Fees and Interest
Chapter III. OVERLAND TRANSPORTATION I. Scope of Overland Transportation II. Nature of Contract III. Effect of Civil Code IV. Contract of Carriage A. Bill of Lading B. Refusal to Transport C. Doubtful Declaration of Contents D. No Bill of Lading V. Responsibility of the Carrier A. When It Commences B. Route C. Care of Goods D. Delivery VI. Rights and Obligations of Shipper and/or Consignee VII. Applicability of Provisions Chapter IV. ADMIRALTY AND MARITIME COMMERCE I. Source of Law II. Concept of Admiralty; Jurisdiction III. Vessels A. Meaning B. Nature and Acquisition IV. Persons Participating in Maritime Commerce A. Shipowners and Shipagents B. Captains and Managers C. Other Officers and Crew D. Supercargoes V. Accidents and Damages in Maritime Commerce A. Averages B. Arrival Under Stress C. Collisions D. Shipwreck VI. Special Contracts A. Charter Parties B. Loans on Bottomry and Respondentia C. Bill of Lading D. Passengers on Sea Voyage VII. Carriage of Goods by Sea Act Chapter V. WARSAW CONVENTION I. Definition and Applicability II. Liabilities III. Limitation on Liability IV. When Limitations Unavailable V. Conditions on Liability VI. Venue of Court Actions
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CORPORATION LAW
CHAPTER I. INTRODUCTION A. Definition B. Attributes of a Corporation 1. Artificial being 2. Created by operation of law 3. Has the right of succession 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence C. Jurisdiction D. Other Types of Business Organizations CHAPTER II. CLASSIFICATION OF CORPORATIONS A. Stock corporation B. Non-Stock corporation C. Other classifications 1. Public corporation 2. Private 3. Close 4. Educational 5. Religious sole and aggregate 6. Eleemosynary 7. Domestic 8. Foreign 9. Corporation created by special laws or charters 10. Subsidiary 11. Parent CHAPTER III. FORMATION OF CORPORATIONS A. Components of a Corporation 1. Incorporators 2. Corporators 3. Foreign incorporators / corporators B. Steps in the Formation of a Corporation 1. Promotion a. Liability of corporation on promoters contracts b. Personal liability of promoters c. Compensation of promoters 2. Drafting the Articles of Incorporation a. Definition of Terms b. Contents of Articles of Incorporation 3. Filing with SEC and payment of fees 4. Issuance of Certificate of Incorporation 5. Internal Organization and 74 74 74 74 74 74 Commencement of Business C. De Facto Corporation 1. Requisites of De Facto Corporation 2. De Jure vs. De Facto Corporation D. Corporation by Estoppel CHAPTER IV. THE CORPORATE ENTITY A. The Doctrine of Separate Juridical Entity B. Piercing the Corporate Veil Doctrine 1. An Equitable Remedy 2. Extent of Legal Effects 3. Application of Piercing Doctrine 4. Parent-Subsidiary Relationship C. Nationality 1. Place of Incorporation Test 2. The Grandfather Rule 3. Control Test 4. War-time Test 5. Investment Test CHAPTER V. CORPORATE POWERS A. Express Powers 1. General Powers 2. Special/Specific Powers B. Inherent/Incidental Powers C. Implied Powers D. Ultra Vires Acts 1. Definition 2. Types 3. Effects 4. Remedies CHAPTER VI. INTERNAL ORGANIZATION OF THE CORPORATION A. By-laws 1. Definition 2. Adoption 3. Requirements 4. Effectivity 5. Amendment or repeal B. Directors/Trustees 1. Qualifications 2. Election of Directors/Trustees 3. Methods of Voting 4. Exercise of Corporate Powers 5. Meetings of the Board 6. Removal of Directors / Trustees 7. Executive Committee C. Corporate Officers 82 82 82 83 85 86 86 86
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1. Who are Corporate Officers 2. Disqualifications 3. Authority of Corporate Officers D. Stockholders or Members 1 Rights of Stockholders 2 Obligations of Stockholders 3 Stockholders/Members Meeting 4 Corporate Acts Requiring Approval of ALL stockholders/members 5 Other instances requiring Stockholders/Members Action 6 Limitations on Right to Vote 7 Appraisal Right CHAPTER VII. MANAGEMENT AND CONTROL A. Devices Affecting Control 1. Proxy 2. Voting Trust Agreement 3. Pooling and Voting Agreements B. Duties and Liabilities of Directors 1. Three-fold Duties of Directors 2. Self-dealing Director 3. Fixing the Compensation of Directors and Officers 4. Interlocking Directors 5. Seizing Corporate Opportunity 6. Using Inside Information C. Duties and Liabilities of Officers D. Duties of Controlling Stockholders E. Remedies in Case of Mismanagement F. Right of Inspection G. Derivative Suits CHAPTER VIII. CAPITAL STRUCTURE A. Classification of Shares B. Subscription Contract 1. Status as a Shareholder 2. Types of subscription contract 3. Interest on unpaid subscription C. Pre-emptive Right 1. Definition 2. Limitations on the Exercise of Preemptive Right 3. Interest on unpaid subscription D. Consideration for Issuance of Shares 1. Forms of consideration 2. Limitations on Consideration E. Watered Stocks 1. Definition 2. Liability of Directors or
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Officers F. Delinquent Shares 1. Definition 2. Effects of Delinquency G. Enforcement of Payment 1. Delinquency Sale 2. Court Action 3. Collection from Cash Dividends and Withholding of Stock Dividends H. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock I. Certificate of Stock J. Lost or Destroyed Certificate K. Tender Offer CHAPTER IX. DIVIDENDS AND PURCHASE OF CORPORATION OF ITS OWN SHARES A. Forms of Dividends B. Other Classes of Dividends C. Source of Dividends D. Declaration of Dividends E. Treasury Shares 1. Definition 2. Instances When Corporation May Acquire its Own Shares 3. Remedies in Case of Improper Purchase CHAPTER X. TRANSFER OF SHARES A. Manner of Transfer B. Registration of Transfer 1. Effects of Lack of Registration 2. Remedy if Registration is refused C. Restrictions on Transfer 1. Validity of Restrictions 2. Presumptions D. Unauthorized Transfers 1. Certificates Indorsed in Blank 2. Forged Transfers E. Collateral Transfers CHAPTER XI. AMENDMENTS OF CORPORATE CHARTER A. General B. Specific 1. Increase in Capital Stock 2. Decrease of Capital Stock 3. Change in Corporate Name C. Grounds for Disapproving Amendment CHAPTER XII. DISSOLUTION A. Voluntary Dissolution 1. Expiration of term 2. Voluntary dissolution when no
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creditors are affected 3. Voluntary dissolution when creditors are affected 4. Dissolution by minority in close corporations 5. Failure to organize; cessation of business for 5 years B. Involuntary Dissolution 1. Revocation of certificate of Registration 2. Quo Warranto Proceedings C. Effects of Dissolution 1. Loss of Juridical Personality 2. Executory Contracts 3. Winding Up and Liquidation D. The Trust Fund Doctrine and the Distribution of Assets CHAPTER XIII. CORPORATE COMBINATIONS A. Definition B. Procedure C. Effects of Merger/Consolidation D. Effectivity of Merger/ Consolidation E. De Facto Merger F. Sale of All or Substantially All Assets CHAPTER XIV. FOREIGN CORPORATIONS A. Definition of Terms B. Tests of Doing Business in the Philippines C. Doing Business Under the Foreign Investment Act D. Jurisprudential Rules on Not Doing Business in the Philippines E. Requisites for the Issuance of License to Do Business F. Power to Sue and Be Sued of Foreign Corporations G. Laws Applicable on Foreign Corporations
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CHAPTER XV. CLOSE CORPORATIONS A. Requirements B. Characteristics C. Restrictions on Transfer of Shares 1. Validity of Restrictions 2. Presumptions D. Deadlocks 1. Requisites 2. Power of SEC E. Distinctions Between Close and Regular Corporations CHAPTER XVI. NON-STOCK CORPORATIONS A. Purposes B. Rights of Members C. Conversion D. Order of Distribution of Assets Upon Dissolution CHAPTER XVII. SPECIAL CORPORATIONS A. Educational Corporations B. Religious Corporations 1. Corporation Sole 2. Religious Societies
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Table of Contents
BANKING LAWS
CHAPTER I. GENERAL BANKING LAW OF 2000 (RA 8791) III. General Concepts A. Definition B. Nature of Business IV. Classification of Banks V. Authority of the BSP over Banks A. Regulatory Powers B. Supervisory Powers C. Policy Direction VI. Organization of Banks A. Conditions for Organization B. Ownership of Banks C. Directors and Officers VII. Operation of Banks A. Core Banking B. Operations of a KB and UB C. Prudential Measures D. Other Functions E. Prohibited Functions F. Some Requirements for the Operation of Banks VIII. Foreign Banks CHAPTER II. THE NEW CENTRAL BANK ACT (RA 7653) I. General Provision II. Organization of the BSP A. Monetary Board B. Governor/Deputy Governor III. Operation of the BSP A. Supervision and Examination B. Handling of Banks in Distress C. Monetary Administration D. As Banker and Financial Adviser of the Government E. Other Operations F. Prohibited Operations CHAPTER III. LAW ON SECRECY OF BANK DEPOSITS (RA 1405) I. Purposes II. Coverage III. Prohibited Acts IV. Exceptions V. Penalty 132 132 132 132 133 133 133 133 133 134 134 134 135 137 137 139 139 142 145 146 147 149 149 149 149 150 150 150 150 152 156 157 157 159 159 159 159 159 160 CHAPTER IV. TRUTH IN LENDING ACT (RA 3765) I. Policy II. Disclosure Statement III. Coverage IV. Sanctions CHAPTER V. ANTI-MONEY LAUNDERING ACT (RA 9160 as amended by RA 9194) I. Policies II. Coverage III. Obligations of Covered Institutions A. Customer Identification B. Record Keeping C. Reporting of Covered and Suspicious Transactions IV. Freeze Order V. Forfeiture Provisions VI. Anti-Money Laundering Council CHAPTER VI. FOREIGN CURRENCY DEPOSIT ACT (RA 6426) I. Confidentiality II. Privileges 161 161 161 161 161
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BILLS & NOTES

CHAPTER I. GENERAL CONCEPTS A. Negotiable Instruments B. Applicability of the Negotiable Instruments Law C. Characteristics of Negotiable Instruments D. Kinds of Negotiable Instruments E. Parties to a Negotiable Instruments F. Comparative Tables CHAPTER II. NEGOTIABILITY A. Determination of Negotiability B. Requisites of Negotiability C. Omissions and Provisions Not Affecting Negotiability D. Interpretation of Negotiable Instruments CHAPTER III. TRANSFER A. Modes B. Process of Negotiation 1. Delivery and Issuance 2. Indorsement 3. Subsequent Negotiation C. Kinds of Indorsement D. Unindorsed Instruments E. Cancellation of Instrument F. Indorsement by Agent G. Presumption as to Indorsement CHAPTER IV. HOLDERS A. General Concepts B. Holder in Due Course 1. Requisites of a Holder in Due Course 2. Rights of a Holder in Due Course C. Holder NOT in Due Course D. Accommodation CHAPTER V. DEFENSES EQUITIES A. Incapacity B. Illegality C. Forgery D. Material Alteration E. Fraud F. Duress G. Absence or failure Consideration H. Prescription I. Irregularity in Delivery AND 170 170 170 171 171 171 171 173 173 173 175 176 177 177 177 177 177 177 177 178 179 179 179 180 180 180 180 182 182 182 183 183 183 183 186 186 187 187 187 187 CHAPTER VI. PARTIES WHO ARE LIABLE A. Primarily Liable 1. General Concepts 2. Maker 3. Drawee 4. Acceptor B. Secondarily Liable 1. Drawer 2. General or Unqualified Indorser 3. Irregular Indorser 4. Order of Liability Among Indorsers 5. Liability of an Agent C. Limited Liability D. Order of Liability E. Liabilities vs. Warranties CHAPTER VII. OF LIABILITY A. B. C. D. E. F. G. ENFORCEMENT 188 188 188 188 188 188 189 189 189 189 189 189 190 190 190 191 191 191 191 193 194 195 196 197 197 197 197 197 197 197 197 197 197 199 199 199 199
Liabilities of Parties Steps to charge parties liable Presentment Acceptance Notice of Dishonor Protest Acceptance or payment for honor
CHAPTER VIII. DISCHARGE A. Definition B. Discharge of the Instrument 1. By payment in due course 2. By intentional cancellation 3. By reacquisition of principal debtor in his own right 4. By renunciation of holder 5. By material alteration 6. By other acts C. Discharge of Secondary Parties CHAPTER IX. CHECKS A. Certification of Checks B. Cross Checks C. Types of Checks
of
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INSURANCE LAW
CHAPTER I. INTRODUCTION I. Definitions II. Applicable laws CHAPTER II. CONTRACT OF INSURANCE I. Elements II. Characteristics III. Kinds of Insurance Contracts IV. Perfection V. Premium Payments VI. Risks Insured Against VII.Construction CHAPTER III. PARTIES TO THE CONTRACT I. Insurer II. Insured III. Beneficiary IV. Other parties CHAPTER IV. INSURABLE INTEREST I. Insurable Interest II. Insurable Interest in Life III. Insurable Interest in Property IV. Transfer of Policy V. Transfer of Interest VI. Double Insurance, Over Insurance and Reinsurance VII. Multiple or Several Interest on the Same Property CHAPTER V. POLICY I. Insurance Contract vs. Insurance Policy II. Forms and Contents III. Rider and Endorsements IV. Cover Notes V. Life vs. Non-Life Insurance Policies VI. Open, Valued and Running Policies 202 202 202 203 203 203 204 204 205 206 206 207 207 207 208 210 212 212 212 213 214 214 215 216 217 217 217 217 217 218 218 CHAPTER VI. RESCISSION OF INSURANCE CONTRACTS I. Concealment II. Misrepresentation III. Warranties IV. Conditions V. Right of rescission VI. Cancellation of non-life insurance policy VII. Incontestability Clause CHAPTER VII. RISKS AND COVERAGES I. Risks in Life Insurance II. Risks in Fire Insurance III. Risks in Casualty or Accident Insurance IV. Risks in Compulsory Motor Vehicle Liability Insurance CHAPTER VIII. SPECIAL KINDS OF INSURANCE CONTRACTS I. Marine Insurance II. Fire insurance III. Casualty or accidental insurance IV. Motor Vehicle Compulsory Insurance CHAPTER IX. CLAIMS, SETTLEMENT, AND SUBROGATION I. Liability for Loss II. Requisites for Recovery from Insurance III. Notice and Proof of Loss IV. Claims Settlement V. Prescription of Action VI. Time of Payment VII. Subrogation VIII. Insurance Commission 219 219 220 221 222 222 222 223 224 224 224 224 225 226 226 231 232 233 234 234 234 234 235 236 236 236 237
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SPECIAL LAWS
CHAPTER I. WAREHOUSE RECEIPTS LAW (ACT 2137) I. Scope and Applicability II. Contents of Warehouse Receipt III. Kinds of Warehouse Receipts IV. Construction of Warehouse Receipts V. Duties and Liabilities of a Warehouseman VI. Attachment or Levy on Negotiable Receipts VII. Warehousemans Lien CHAPTER II. GENERAL BONDED WAREHOUSE ACT (ACT 3893 AS AMENDED BY RA 247) I. Purpose and Applicability II. Duties of a Bonded Warehouseman III. Liabilities IV. Warehouse Receipts Law v General Bonded Warehouse Act CHAPTER III. TRUST RECEIPTS LAW (PD 115) I. Purpose of the Law II. Definition and Nature III. Comparison to Other Transactions IV. Parties to the Transaction V. Rights and Obligations of the Parties VI. Violations and Remedies CHAPTER IV. CHATTEL MORTGAGE LAW (ACT NO. 1508) I. Definitions, Requisites and Characteristics II. Properties and Obligations Covered III. Form IV. Right of Mortgagee to Possess V. Remedies VI. Comparative Tables CHAPTER V. REAL ESTATE MORTGAGE LAW (ACT NO. 3135 AS AMENDED) I. Definition and Applicability II. Effects of Real Estate Mortgage III. Remedies in Case of Default IV. Foreclosure V. Deficiency Claims VI. Redemption VII. Purchasers Right Of Possession CHAPTER VI. THE ANTI-DUMMY LAW (CA NO. 108, AMENDED BY PD NO. 715) I. Definition II. Acts Punished III. Penalties IV. Nationalization or Filipinization Laws 240 240 240 241 241 241 243 244 CHAPTER VIII. LETTERS OF CREDIT I. II. III. IV. V. VI. Definition Parties Liabilities Rule of Strict Compliance Independence Principle Kinds of letters of credit 259 259 259 260 260 260 260 262 262 262 262 263 264 264 CHAPTER VII. FOREIGN INVESTMENT ACT OF 1991 (RA NO. 7042, AMENDED BY RA NO. 8179) I. Philippine National II. Doing Business III. Not Doing Business IV. Test to Determine Whether One is Doing Business
257 257 257 257 257
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CHAPTER IX. INSOLVENCY LAW I. Concept and Purpose II. Comparisons III. Suspension of Payments IV. Voluntary Insolvency V. Involuntary Insolvency VI. Specific Provisions CHAPTER X. INTERIM RULES OF PROCEDURE FOR INTRACORPORATE CONTROVERSIES (A.M. NO. 01-2-04-SC) I. General Provisions II. Procedure III. Election Contests IV. Inspection of Corporate Books and Records V. Derivative Suits VI. Management Committee VII. Provisional Remedies VIII. Sanctions CHAPTER XI. RULES OF PROCEDURE ON CORPORATE REHABILITATION I. Coverage II. Construction of Terms III. General Provisions IV. Stay Order V. Rehabilitation Receiver VI. Rehabilitation Plan VII. Debtor-Initiated Rehabilitation VIII. Creditor-Initiated Rehabilitation IX. Pre-Negotiated Rehabilitation X. Recognition of Foreign Proceedings
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CHAPTER 1: PATENTS I. General Principles A. Patentable Inventions Utility Models Industrial Designs Layout Designs of Integrated Circuits B. Non-Patentable Inventions C. Registration of Patents and Rights Conferred II. Patent Infringement A. Definition B. Tests of Infringement C. Defenses D. Remedies III. Licensing A. Voluntary Licensing B. Compulsory Licensing IV. Assignment and Transfer CHAPTER 2: TRADEMARKS I. Trade Name What may NOT be used as Trade Name Ownership of Trade Name Right of Owner of Trade Name II. Trademark A. Functions B. Acquisition of Ownership C. Who May Apply for Registration D. What May Not be Registered E. Tests to Determine Confusing Similarity between Marks F. Well-Known Mark III. Registration IV. Infringement A. Remedies for Infringement B. Limitations on Action for Infringement V. Unfair Competition 3 3 3 4 5 5 5 5 9 9 9 9 10 10 10 12 12 14 14 14 14 14 14 14 15 15 15 16 17 17 19 19 20 20 CHAPTER 3: COPYRIGHT I. General Principles II. Criteria for Copyright Protection A. Originality B. Expression III. Works Protected by Copyright A. Original Literary and Artistic Works B. Derivative Works IV. Non-Copyrightable Works V. Rights Conferred by Copyright A. Copyright or Economic Right B. Moral Rights C. Droit de Suite VI. Ownership of Copyright VII. Duration of Copyright VIII. Infringement Remedies for Infringement IX. Limitations to the Rights of Copyright X. Neighboring Rights XI. Transfer and Assignment 22 22 22 22 23 23 23 23 24 24 24 25 25 25 26 26 26 27 28 28
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Chapter 1. Patents
Intellectual Property Law

FACULTY-STUDENT EDITORIAL BOARD AND LECTURES COMMITTEE Prof. Gwen Grecia-de Vera
FACULTY EDITOR
COMMERCIAL LAW Krizelle Poblacion Christina Ortua

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD
ACADEMICS COMMITTEE Samantha Poblacion

DIRECTOR FOR ACADEMICS EDITOR-IN-CHIEF
INTELLECTUAL PROPERTY LAW Leo Zulueta Benjoe Panahon

LEAD WRITERS
Jason Mendoza
DEPUTY HEAD
Rania Joya
DEPUTY DIRECTOR FOR ACADEMICS LAYOUT HEAD
Malds Menzon
LOGISTICS, HR
-------Kae Guerrero
PRINTING AND DISTRIBUTION
Zorayda Daarol Nicole Torres Ludee Polido

WRITERS
-------Leo Zulueta
LOGO, COVER AND TEMPLATE DESIGN
What are the IPs under the IP Code? 1. Patents 2. Copyrights 3. Trademarks Distinction among patents/trademarks/copyright
PEARL AND DEAN VS. SHOEMART (2003) Trademark, copyright and patents are different intellectual property rights that cannot be interchanged with one another. A trademark is any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods. In relation thereto, a trade name means the name or designation identifying or distinguishing an enterprise. Meanwhile, the scope of a copyright is confined to literary and artistic works which are original intellectual creations in the literary and artistic domain protected from the moment of their creation. Patentable inventions, on the other hand, refer to any technical solution of a problem in any field of human activity which is new, involves an inventive step and is industrially applicable. SAMSON VS. DAWAY and CATERPILLAR, INC. (2004) Which court has jurisdiction over criminal and civil cases for violation of intellectual property rights? In the case at bar, R.A. No. 8293 and R.A. No. 166 are special laws conferring jurisdiction over violations of intellectual property rights to the Regional Trial Court. They should therefore prevail over R.A. No. 7691, which is a general law. Hence, jurisdiction over the instant criminal case for unfair competition is properly lodged with the Regional Trial Court even if the penalty therefor is imprisonment of less than 6
years, or from 2 to 5 years and a fine ranging from P50,000.00 to P200,000.00. In fact, to implement and ensure the speedy disposition of cases involving violations of intellectual property rights under R.A. No. 8293, the Court issued A.M. No. 02-1-11-SC dated February 19, 2002 designating certain Regional Trial Courts as Intellectual Property Courts. On June 17, 2003, the Court further issued a Resolution consolidating jurisdiction to hear and decide Intellectual Property Code and Securities and Exchange Commission cases in specific Regional Trial Courts designated as Special Commercial Courts.
Chapter 1. Patents
I. GENERAL PRINCIPLES A. PATENTABLE INVENTIONS UTILITY MODELS INDUSTRIAL DESIGNS LAYOUT DESIGNS OF INTEGRATED CIRCUITS B. NON PATENTABLE INVENTIONS C. REGISTRATION OF PATENTS AND RIGHTS CONFERRED II. PATENT INGRINGEMENT A. DEFINITION B. TESTS OF INFRINGEMENT C. DEFENSES D. REMEDIES III. LICENSING A. VOLUNTARY LICENSING B. COMPULSORY LICENSING IV. ASSIGNMENT AND TRANSFER
I. General Principles A. Patentable Inventions (Sec.21)

1. Elements of Patentable Inventions a. Provides a technical solution of a problem in any field of human activity
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b. Involves an inventive step - if, having regard to prior art, it is not obvious to a person skilled in the art at the time of the filing date or priority date of the application claiming the invention. (Sec. 26) Note: Under the Cheaper Medicines Act, in the case of drugs and medicines, there is no inventive step if the invention results from the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or the mere discovery of any new property or new use for a known substance, or the mere use of a known process unless such known process results in a new product that employs at least one new reactant. c. Industrially applicable the invention can be produced and used in any industry. (Sec. 27) d. Novelty - an invention shall not be considered new if it forms part of a prior art. (Sec. 23) 2. What is prior art? (Sec. 24) a. Everything which has been made available to the public anywhere in the world, before the filing date or the priority date of the application claiming the invention b. The whole contents of an application for a patent, utility model, or industrial design registration, published in accordance with this Act, filed or effective in the Philippines, with a filing or priority date that is earlier than the filing or priority date of the application: 3. What is non-prejudicial disclosures? The disclosure of information contained in the application during the twelve (12) months preceding the filing date or the priority date of the application shall not prejudice the applicant on the ground of lack of novelty if such disclosure was made by: (a) The inventor; (b) A patent office and the information was contained (a) in another application filed by the inventor and should not have been disclosed by
the office, or (b) in an application filed without the knowledge or consent of the inventor by a third party which obtained the information directly or indirectly from the inventor; or (c) A third party which obtained the information directly or indirectly from the inventor. (Sec. 25)
Utility Models
A utility model is a new model of implement or tolls or of an industrial product or of part of it which does not possess the quality of invention but which is of practical utility by reason of its form, construction or composition. To qualify for registration, a utility model must be new and industrially applicable. Requirements Registration a) b) c) d) for Application for
Request for registration Description of the utility model Claim or claims Drawings or pictorial representation disclosing completely the utility model e) Payment of the filing fee Term of Patent (Sec. 109.3) A utility model registration shall expire at the end of the seventh year after the date of the filing of the application without renewal Grounds for Cancellation (Sec. 109.4) (a) That the claimed invention does not qualify for registration as a utility model and does not meet the requirements of registrability (b) That the description and the claims do not comply with the prescribed requirements (c) That any drawing which is necessary for the understanding of the invention has not been furnished (d) That the owner of the utility model registration is not the inventor or his successor in title Prescription Period for cancellation of patent One year from the date of publication (sec. 70)
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Chapter 1. Patents
Industrial Designs (Sec. 112.1)

An Industrial Design is any composition of lines or colors or any three dimensional form, whether or not associated with lines or colors: Provided, that such composition or form gives a special appearance to and can serve as pattern for an industrial product or handicraft;
Note: The Cheaper Medicines Act amended Section 22 (1). In addition to discoveries, scientific theories and mathematical methods, the IP Code now includes, in the case of drugs and medicines: 1. the mere discovery of a new form or new property of a known substance which does not result in the enhancement of the known efficacy of that substance, or 2. the mere discovery of any new property or new use for a known substance, or 3. the mere use of a known process unless such known process results in a new product that employs at least one new reactant.
Layout Designs (Topographies) Integrated Circuits
of
Integrated Circuit means a product, in its final form, or an intermediate form, in which the elements, at least one of which is an active element and some or all of the interconnections are integrally formed in and/or on a piece of material, and which is intended to perform an electronic function (Sec. 112.2) Layout-Design is synonymous with 'Topography' and means the threedimensional disposition, however expressed, of the elements, at least one of which is an active element, and of some or all of the interconnections of an integrated circuit, or such a threedimensional disposition prepared for an integrated circuit intended for manufacture. (Sec. 112.3)
C. Registration of Rights Conferred 1. Principles
Patents
and
B. Non-Patentable Inventions (Sec.22)

The following shall be excluded from patent protection: 1. Discoveries, scientific theories and mathematical methods; 2. Schemes, rules and methods of performing mental acts, playing games or doing business, and programs for computers; 3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practiced on the human or animal body. This provision shall not apply to products and composition for use in any of these methods; 4. Plant varieties or animal breeds or essentially biological process for the production of plants or animals. (Not applicable to micro-organisms and nonbiological and microbiological processes) 5. Aesthetic creations; and 6. Anything which is contrary to public order or morality.
BAR Question [2006]
No Patent, No Protection (Pearl & Dean v. Shoemart, August 15, 2003) The ultimate goal of a patent system is to bring new designs and technologies into the public domain through disclosure. Ideas, once disclosed to the public without the protection of a valid patent, are subject to appropriation without significant restraint.
BAR Question [1981, 1989]
First-to-File Rule (Sec.29) i. If two (2) or more persons have made the invention separately and independently of each other the right to the patent shall belong to the person who filed an application for such invention ii. Where two or more applications are filed for the same invention patent will issue to the applicant who has the earliest filing date or, the earliest priority date. iii. If two or more applications for the same invention have the same filing date or priority date, the patent will be issued jointly to all applicants Right to Priority (Sec. 31) An application for patent filed by any person who has previously applied for the same invention in another country which by treaty, convention, or law affords
BAR Question [2005]
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Chapter 1. Patents
similar privileges to Filipino citizens, shall be considered as filed as of the date of filing the foreign application, provided that: i. the local application expressly claims priority; ii. it is filed within twelve (12) months from the date the earliest foreign application was filed; and iii. a certified copy of the foreign application together with an English translation is filed within six (6) months from the date of filing in the Philippines. Unity of Invention (Sec. 38) This means that an application for a patent shall relate to one invention only or to a group of inventions forming a single general inventive concept.
Filing Date (Sec. 40) The filing date of a patent application shall be the date of receipt by the IPO of at least the following elements: i. An express or implicit indication that a Philippine patent is sought; ii. Information identifying the applicant; and iii. Description of the invention and one (1) or more claims in Filipino or English. If any of these elements is not submitted within the period set by the Regulations, the application shall be considered withdrawn. Contents of Patent Application (Sec. 32) i. A request for the grant of a patent (Sec.34)
The application shall disclose the invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art. Where the application concerns a microbiological process or the product thereof and involves the use of a microorganism which cannot be sufficiently disclosed in the application in such a way as to enable the invention to be carried out by a person skilled in the art, and such material is not available to the public, the application shall be supplemented by a deposit of such material with an international depository institution. (Sec. 35)
2. Filing of Application
Who has (Sec.28) the right to the patent?
ii. A description of the invention
General Rule: The right to patent belongs to the inventor, his heirs, or assigns. Exception: Work-For-Hire Doctrine (Sec. 30) i.
BAR Question [1990]
The employer has the right to the patent if the invention is the result of the performance of the employees regularly assigned duties ii. In case of inventions created pursuant to a commission, the person who commissions the work shall own the patent Exceptions Doctrine to the Work-For-Hire
iii. Drawings necessary for understanding of the invention iv. One or more claims
the
A claim is one which defines the matter for which protection is sought (Sec. 36) Claims are technical descriptions of what is the subject that is sought to be protected, considered as the most important part of the application.
(employee owns the right to the patent): i. If the inventive activity is not a part of his regular duties even if the employee uses the time, facilities, and materials of the employer ii. If the parties agree, expressly or impliedly, that the right shall pertain to the employee
v. An abstract
An abstract is a concise summary, preferably in not more than 150 words, of the disclosure of the invention as contained in the description, claims and drawings, drafted in a way as to allow a clear understanding of a technical problem, the gist of the solution of the problem through invention, and the principal use of the invention. (Catindig, Commercial Law Reviewer)
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3. Procedure for Grant of Invention Patent After Filing the Application

Procedure for the grant of a patent According a filing date to the application (Sec. 41) ii. Examination of compliance by applicant with the formal requirements specified in Section 32, i.e., contents of application (Sec. 42) iii. Classification of application and search for prior art (Sec. 43) iv. Publication of patent application in the IPO Gazette (Sec. 44) v. Inspection of the application documents by any interested party concerning the patentability of the invention (Secs. 44.2 and 47) vi. Written request by the applicant, within 6 months from the date of publication of his patent application, for the substantive examination by the IPO of his application (Sec.48) vii. Grant the patent (Sec.50), or refusal of the examiner to grant the patent (Sec. 51); in the latter case, the refusal may be appealed to the Director of the Bureau of Patents viii. Publication of the grant of the patent in the IPO Gazette (Sec. 52) i. Term Patent 20 years without renewal (Sec. 54) ii. Utility Model 7 years without renewal (Sec.109.3) iii. Industrial Design 5 years, renewable twice (Sec. 118.2) i. Cancellation of Patent (Sec 61.1) Any interested person may, upon payment of the required fee, petition to cancel the patent or any claim thereof, or parts of the claim, on any of the following grounds: i. That what is claimed as the invention is not new or Patentable; ii. That the patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by any person skilled in the art; or iii. That the patent is contrary to public order or morality. Prescription Period for cancellation of patent One year from the date of publication (sec. 70)
4. Rights Conferred by Patent

(Sec. 71) Where the subject matter is a product to restrain, prohibit and prevent any unauthorized person or entity from making, using, offering for sale, selling or importing that product; ii. Where the subject matter is a process to restrain, prevent or prohibit any unauthorized person or entity from using the process, and from manufacturing, dealing in, using, selling or offering for sale, or importing any product obtained directly or indirectly from such process. iii. The right to assign, or transfer by succession the patent, and to conclude licensing contracts for the same. i.
BAR Question [1990]
5. Limitations Patentees
i.
on
the
Rights
of
In general (Sec. 72) The owner of a patent has no right to prevent third parties from performing, without his authorization, the acts referred to in Section 71 in the following circumstances: (a) Using a patented product which has been put on the market in the Philippines by the owner of the product, or with his express consent, insofar as such use is performed after that product has been so put on the said market; Provided, that, with regard to drugs and medicines, the limitation on patent rights shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party (as amended by the Cheaper Medicines Act) (b) Where the act is done privately and on a non-commercial scale or for a non-commercial purpose: Provided, That it does not significantly
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prejudice the economic interests of the owner of the patent; (c) Where the act consists of making or using exclusively for experimental use of the invention for scientific purposes or educational purposes and such other activities directly related to such scientific or educational experimental use; (as amended by the Cheaper Medicines Act) (d) In the case of drugs and medicines, where the act includes testing, using, making or selling the invention including any data related thereto, solely for purposes reasonably related to the development and submission of information and issuance of approvals by government regulatory agencies required under any law of the Philippines or of another country that regulates the manufacture, construction, use or sale of any product: Provided, That, in order to protect the data submitted by the original patent holder from unfair commercial use provided in Article 39.3 of the TRIPS Agreement, the Intellectual Property Office, in consultation with the appropriate government agencies, shall issue the appropriate rules and regulations necessary therein not later than 120 days after the enactment of this law; (as amended by the Cheaper Medicine Act) (e) Where the act consists of the preparation for individual cases, in a pharmacy or by a medical professional, of a medicine in accordance with a medical shall apply after a drug or medicine has been introduced in the Philippines or anywhere else in the world by the patent owner, or by any party authorized to use the invention: Provided, further, That the right to import the drugs and medicines contemplated in this section shall be available to any government agency or any private third party.
serious preparations to use the invention in his enterprise or business, before the filing date or priority date of the application on which a patent is granted, shall have the right to continue the use thereof as envisaged in such preparations within the territory where the patent produces its effect. The right of the prior user may only be transferred or assigned together with his enterprise or business, or with that part of his enterprise or business in which the use or preparations for use have been made. iii. Use of Invention by Government (Sec. 74) A Government agency or third person authorized by the Government may exploit the invention even without agreement of the patent owner where: (a) The public interest, in particular, national security, nutrition, health or the development of other sectors, as determined by the appropriate agency of the government, so requires; or (b) A judicial or administrative body has determined that the manner of exploitation, by the owner of the patent or his licensee is anticompetitive All cases arising from the implementation of this provision shall be cognizable by courts with appropriate jurisdiction provided by law. No court, except the Supreme Court of the Philippines, shall issue any temporary restraining order or preliminary injunction or such other provisional remedies that will prevent its immediate execution. Note: The use by the Government, or third person authorized by the Government shall be subject, to the conditions set forth in Sections 95 to 97 and 100 to 102 on compulsory licensing.
ii. Prior User (Sec. 73) Any prior user, who, in good faith was using the invention or has undertaken
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II. Patent Infringement A. Patent Infringement (Sec. 76.1)

Patent Infringement is the making, using, offering for sale, selling, or importing a patented product or a product obtained directly or indirectly from a patented process, or the use of a patented process without the authorization of the patentee
BAR Question [1992]
infringement; equivalents.
and
[b]
the
doctrine
of
Contributory Infringement (Sec. 76.6)

Anyone who actively induces the infringement of a patent or provides the infringer with a component of a patented product or of a product produced because of a patented process knowing it to be especially adopted for infringing the patented invention and not suitable for substantial non-infringing use shall be liable as a contributory infringer and shall be jointly and severally liable with the infringer.
Literal infringement test - resort must be had in the first instance to the words of the claim. To determine whether the particular item falls within the literal meaning of the patent claims, the court must juxtapose the claims of the patent and the accused product within the overall context of the claims and specifications, to determine whether there is exact identity of all material elements. Doctrine of equivalents - an infringement also occurs when a device appropriates a prior invention by incorporating its innovative concept and, albeit with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result. Smith Klein Beckman Corporation v. CA (2003) The doctrine of equivalents provides that an infringement also takes place when a device appropriates a prior invention by incorporating its innovative concept and, although with some modification and change, performs substantially the same function in substantially the same way to achieve substantially the same result The principle or mode of operation must be the same or substantially the same. The doctrine of equivalents thus requires satisfaction of the function-means-andresult test, the patentee having the burden to show that all three components of such equivalency test are met.
Del Rosario v CA, (1996) It is elementary that a patent may be infringed where the essential or substantial features of the patented invention are taken or appropriated, or the device, machine or other subject matter alleged to infringe is substantially identical with the patent invention. In order to infringe a patent, a machine or device must perform the same function, or accomplish the same result by identical or substantially identical means and the principle or mode of operation must be substantially the same. Creser Precision Systems, Inc. v. CA, et al., (1998) Only the patentee or his successor-ininterest may file an action for infringement. Moreover, there can be no infringement of a patent until a patent has been issued, since whatever right one has to the invention covered by the patent arises alone from the grant of patent. In short, a person or entity who has not been granted letter of patent over an invention and has not acquired any rights or title thereto either as an assignee or a licensee, has no cause of action for infringement because the right to maintain an infringement suit depends upon the existence of a patent.
C. Defenses in Infringement
Action
for
1. Invalidity of patent or claim (Sec. 81) 2. Existence of ground for cancellation under Sec. 61 (Sec. 81) Note: Defendant may also Prosecution History Estoppel raise
What is Prosecution History Estoppel?
B. Tests of Infringement
Godines v. CA, (1993) Tests have been established to determine infringement. These are [a] literal
Advance Transformer Co. v. Levinson, 837 F.2d 1081, 5 U.S.P.Q.2d (BNA) 1600 (Fed. Cir. 1988) The patentee is precluded from claiming as part of the patented product that which he
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had to excise or modify in order to avoid patent office rejection, and he may omit any additions he was compelled to add by patent office regulations.
A court must interpret a patentees claims in light of the patents prosecution history in the Patent or Trademark Office. The patents prosecution history, or file wrapper, is the complete record of all proceedings in the Patent and Trademark Office and any express representations made by the applicant about the claims scope. So, in defining the meaning of the key terms in a claim, the court may refer to the prosecution history of the patent. (Vicente Amador, Intellectual Property Fundamentals)
from the infringer such damages sustained thereby, plus attorney's fees and other expenses of litigation, and to secure an injunction for the protection of his rights.
4. Criminal Action for infringement (Sec.84)
repeated
D. Remedies Infringement
Against
Patent
1. Civil Action for Damages

If the damages are inadequate or cannot be readily ascertained with reasonable certainty, the court may award by way of damages a sum equivalent to reasonable royalty. (Sec. 76.3) The court may, according to the circumstances of the case, award damages in a sum above the amount found as actual damages sustained: Provided, that the award does not exceed three (3) times the amount of such actual damages.
If infringement is repeated by the infringer or by anyone in connivance with him after finality of the judgment of the court against the infringer, the offenders shall, without prejudice to the institution of a civil action for damages, be criminally liable therefor and, upon conviction, shall suffer imprisonment for the period of not less than six (6) months but not more than three (3) years and/or a fine of not less than One hundred thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000), at the discretion of the court. The criminal action herein provided shall prescribe in three (3) years from date of the commission of the crime.
Burden of Proof for Process Patents (Sec.80) The burden of proof is on the defendant or alleged infringer. If the subject matter of a patent is a process for obtaining a product, any identical product shall be presumed to have been obtained through the use of the patented process if the product is new or there is substantial likelihood that the identical product was made by the process and the owner of the patent has been unable despite reasonable efforts, to determine the process actually used.
(Sec. 76.4) Limitations: a. Recoverable damages are limited to acts of infringement committed within 4 years before the institution of the action (sec. 79) b. Notice requirement damages cannot be recovered if the infringer did not know, or had no reasonable grounds to know, of the patent (Sec. 76)
III.Licensing
1. Voluntary Licensing (Sec. 85) 2. Compulsory Licensing (Sec. 93)
2. Destruction of disposal of infringing goods, etc. (Sec. 76.5)

The court may, in its discretion, order that the infringing goods, materials and implements predominantly used in the infringement be disposed of outside the channels of commerce or destroyed, without compensation.
A. Voluntary Licensing
Voluntary Licensing is the grant by the patent owner to a third person of the right to exploit the patented invention Mandatory Provisions (Sec. 88) The following provisions shall be included in voluntary license contracts: 1. That the laws of the Philippines shall govern the interpretation of the same and in the event of litigation, the venue
3. Injunction (76.2)
Any patentee, or anyone possessing any right, title or interest in and to the patented invention, whose rights have been infringed, may bring a civil action before a court of competent jurisdiction, to recover
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shall be the proper court in the place where the licensee has its principal office; 2. Continued access to improvements in techniques and processes related to the technology shall be made available during the period of the technology transfer arrangement; 3. In the event the technology transfer arrangement shall provide for arbitration, the Procedure of Arbitration of the Arbitration Law of the Philippines or the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) or the Rules of Conciliation and Arbitration of the International Chamber of Commerce (ICC) shall apply and the venue of arbitration shall be the Philippines or any neutral country; and 4. The Philippine taxes on all payments relating to the technology transfer arrangement shall be borne by the licensor. Prohibited Clauses (Sec. 87) The following provisions shall be deemed prima facie to have an adverse effect on competition and trade: 1. Those which impose upon the licensee the obligation to acquire from a specific source capital goods, intermediate products, raw materials, and other technologies, or of permanently employing personnel indicated by the licensor; 2. Those pursuant to which the licensor reserves the right to fix the sale or resale prices of the products manufactured on the basis of the license; 3. Those that contain restrictions regarding the volume and structure of production; 4. Those that prohibit the competitive technologies in exclusive technology agreement; use of a nontransfer
6. Those that obligate the licensee to transfer for free to the licensor the inventions or improvements that may be obtained through the use of the licensed technology; 7. Those that require payment of royalties to the owners of patents for patents which are not used; 8. Those that prohibit the licensee to export the licensed product unless justified for the protection of the legitimate interest of the licensor such as exports to countries where exclusive licenses to manufacture and/or distribute the licensed product(s) have already been granted; 9. Those which restrict the use of the technology supplied after the expiration of the technology transfer arrangement, except in cases of early termination of the technology transfer arrangement due to reason(s) attributable to the licensee; 10. Those which require payments for patents and other industrial property rights after their expiration, termination arrangement; 11. Those which require that the technology recipient shall not contest the validity of any of the patents of the technology supplier; 12. Those which restrict the research and development activities of the licensee designed to absorb and adapt the transferred technology to local conditions or to initiate research and development programs in connection with new products, processes or equipment; 13. Those which prevent the licensee from adapting the imported technology to local conditions, or introducing innovation to it, as long as it does not impair the quality standards prescribed by the licensor; 14. Those which exempt the licensor for liability for non-fulfillment of his responsibilities under the technology transfer arrangement and/or liability arising from third party suits brought about by the use of the licensed product or the licensed technology; and
5. Those that establish a full or partial purchase option in favor of the licensor;
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15. Other clauses with equivalent effects. What is the effect of non-conformance with any of the provisions of Secs. 87 and 88? The technology transfer arrangement shall automatically be rendered unenforceable, unless said technology transfer arrangement is approved and registered with the Documentation, Information and Technology Transfer Bureau under the provisions of Section 91 on exceptional cases. (Sec. 88) Exceptional Cases (Sec. 91) 1. In exceptional or meritorious cases where substantial benefits will accrue to the economy, such as high technology content, increase in foreign exchange earnings, employment generation, regional dispersal of industries and/or substitution with or use of local raw materials 2. The case of BOI-registered companies with pioneer status
commercial scale, although capable of being worked, without satisfactory reason 6. If the invention protected by a patent, hereafter referred to as the "second patent," within the country cannot be worked without infringing another patent, hereafter referred to as the "first patent," granted on a prior application or benefiting from an earlier priority, a compulsory license may be granted to the owner of the second patent to the extent necessary for the working of his invention, subject to certain conditions. 7. Manufacture and export of drugs and medicines to any country having insufficient or no manufacturing capacity in the pharmaceutical sector to address public health problems: Provided, That, a compulsory license has been granted by such country or such country has, by notification or otherwise, allowed importation into its jurisdiction of the patented drugs and medicines from the Philippines in compliance with the TRIPS Agreement (as amended by Cheaper Medicines Act)
B. Compulsory Licensing
Compulsory Licensing is the grant of the Director of Legal Affairs of a license to exploit a patented invention, even without the agreement of the patent owner, in favor of any person who has shown his capability to exploit the invention, Grounds (Secs. 93-97) 1. National emergency or other circumstances of extreme urgency; 2. Where the public interest, in particular, national security, nutrition, health or the development of other vital sectors of the national economy as determined by the appropriate agency of the Government, so requires; or 3. Where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anticompetitive; or 4. In case of public non-commercial use of the patent by the patentee, without satisfactory reason; 5. If the patented invention is not being worked in the Philippines on a
IV. Assignment and Transfer

The assignment may be of the entire patent or a portion thereof, or be limited to a specified territory (Sec. 104) Transmission of Rights (Sec. 103) Patents or applications for patents and invention to which they relate, shall be protected in the same way as the rights of other property under the Civil Code. Inventions and any right, title or interest in and to patents and inventions covered thereby, may be assigned or transmitted by inheritance or bequest or may be the subject of a license contract. Requirements for Recording of Assignment 1. It must be in writing and accompanied by an English translation, if it is in a language other than English of Filipino 2. It must be notarized 3. It must be accompanied by an appointment of a resident agent, if the assignee is not residing in the Philippines 4. It must identify the letters patent involved by number and date and give
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the name of the owner of the patent and the title of the invention. In the case of an application for a patent, it should state the application number and the filing date of the application and give the name of the applicant and the title of the invention. If the assignment was executed concurrently with or subsequent to the execution of the application but before the application is filed or before its application number is ascertained, it should adequately identify the application by its date of execution, the name of the applicant, and the title of the invention. 5. It must be accompanied by the required fees. (Sec. 105; Rules and Regulations on Inventions, Rule 1200) Is an assignment required to be recorded with the IPO to be binding between the assignor and assignee? No. However, such registration would be necessary to bind third parties. An assignment would be void as against any subsequent purchaser or mortgagee for valuable consideration and without notice unless recorded in the IPO within 3 months from the date of the assignment or prior to the subsequent purchase or mortgage.
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Chapter 2. Trademarks
I. TRADE NAME WHAT MAY NOT BE USED AS TRADE NAME OWNERSHIP OF TRADE NAME RIGHT OF OWNER OF TRADE NAME TRADEMARK A. FUNCTIONS B. ACQUISITION OF OWNERSHIP C. WHO MAY APPLY FOR REGISTRATION D. WHAT MAY NOT BE REGISTERED E. TESTS TO DETERMINE CONFUSING SIMILARITY BETWEEN MARKS F. WELL-KNOWN MARK REGISTRATION INFRINGEMENT A. REMEDIES FOR INFRINGEMENT B. LIMITATIONS ON ACTION FOR INFRINGEMENT UNFAIR COMPETITION
II. Trademark
Any visible sign capable of distinguishing the goods (trademark) or services (service mark) of an enterprise and shall include a stamped or marked container of goods (Sec. 121.1).
Trademark Any visible sign which is adopted and used to identify the source of origin of goods, and which is capable of distinguishing them from goods emanating from a competitor. Service Mark Any visible sign capable of distinguishing the services of an enterprise from the service of other enterprises. Collective Mark Any visible sign designated as such in the application for registration and capable of distinguishing the origin or any other common characteristic, including the quality of goods or services of different enterprises which use the sign under the control of the registered owner of the collective mark.
II.
III. IV.
V.
I. Trade Name
The name or designation identifying or distinguishing an enterprise (Sec. 121.3) Converse Rubber Corp. v. Universal Rubber Products, Inc., (April 28, 1980) Any individual name or surname, firm name, device or word used by manufacturers, industrialists, merchants, and others to identify their businesses, vocations or occupations What May Not be Used as Trade Name: 1. If by its nature or the use to which the name or designation may be put, it is contrary to public order or morals. 2. If it is liable to deceive trade circles or the public as to the nature of the enterprise identified by the name 3. If the trade name is similar to a mark or a trade name owned by another person and its use would likely mislead the public. Ownership of Trade Name: Trade names are protected even prior to or without registration. The ownership of a trade name is acquired through adoption and use. Right of Owner of Trade Name: The IPC deems unlawful any subsequent use of the trade name by a third party, whether as a trade name or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead the public.
A. Functions
1. Indicate origin or ownership 2. To secure him who has been instrumental in bringing into the mark of a superior article of merchandise the fruit of his industry and skill; 3. To assure the public that they are producing the genuine article; 4. To prevent fraud and imposition; 5. To protect the manufacturer against substitution and sale of an inferior and different article as its product; and 6. Guarantee the quality of the goods
MIRPURI VS CA AND BARBIZON CORP (1999) Trademarks deal with the psychological function of symbols and the effect of these symbols on the public at large. Trademarks play a significant role in communication, commerce and trade, thus, all agreements concerning industrial property, like those on trademarks and trade names, are intimately connected with economic development. They speed up transfer of technology and industrialization, and thereby bring about social and economic progress.
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B. Acquisition of Ownership
The ownership of a mark is acquired through registration (Sec. 122). The IPC does NOT anymore provide for prior use as a condition for ownership of a mark. However, the applicant or the registrant must file a declaration of actual use of the mark within 3 years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register (Sec 124.2). Registration is necessary to file a case for infringement. But it is not necessary to file a case for unfair competition.
the Philippines, during the life of his widow, except by written consent of the widow; 4. Is identical with a registered mark of another or a mark with an earlier filing or priority date, in respect of: a. The same goods or services, or b. Closely related goods or services, or c. If it nearly resembles such a mark as to be likely to deceive or cause confusion; 5. Is identical with, or confusingly similar to, or constitutes a translation of a wellknown mark, whether or not registered in the Philippines, and used for identical or similar goods or services; 6. Is identical with, or confusingly similar to, or constitutes a translation of a wellknown mark which is registered in the Philippines, and used for goods or services which are not similar; 7. Likely to mislead the public, particularly as to the nature, quality, characteristics or geographical origin of the goods or services; 8. Consists exclusively of signs that are generic for the goods or services that they seek to identify; 9. Consists exclusively of signs or of indications that have become customary or usual to designate the goods or services in everyday language or in a bona fide and established trade practice; 10. Consists exclusively of signs or of indications that may serve in trade to designate the kind, quality, quantity, intended purpose, value, geographical origin, time or production of the goods or rendering of the services, or other characteristics of the goods or services; 11. Consists of shapes that may be necessitated by technical factors or by the nature of the goods themselves or factors that affect their intrinsic value; 12. Consists of color alone, unless defined by a given form; or 13. Is contrary to public order or morality.
C. Who May Apply for Registration

(Sec. 3) Any person may apply for registration who is domiciled or has a real and effective industrial establishment in a country: 1. Which is a party to any convention, treaty or agreement relating to intellectual property rights or the repression of unfair competition, to which the Philippines is also a party, or 2. Extends reciprocal rights to national of the Philippines by law. Unno Commercial Enterprises, Inc. v. General Milling Corp.,(February 28, 1983) The right of registration belongs to the owner of the mark.
D. What May Not Be Registered

(Sec. 123.1): A mark cannot be registered if it: 1. Consists of immoral, deceptive or scandalous matter, or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt or disrepute; 2. Consists of flags, coat of arms or other insignia of the Philippines or any foreign country; 3. Consists of a name, portrait or signature identifying a particular living individual except by his written consent, or of a deceased President of
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E. Tests to Determine Confusing Similarity Between Marks

As to the marks involved 1. Colorable Imitation Societe des Produits Nestle, S.A. v. CA, (2001) Colorable imitation denotes such a close or ingenious imitation as to be calculated to deceive ordinary persons, or such a resemblance to the original as to deceive an ordinary purchaser giving such attention as a purchaser usually gives, as to cause him to purchase the one supposing it to be the other. In ascertaining whether one mark is confusingly similar to or is a colorable imitation of another, no set rules can be deduced. Each case must be decided on its own merits. 2. Holistic Test Del Monte Corporation, et al. v. CA, (1990) To determine whether a trademark has been infringed, we must consider the mark as a whole and not as dissected. If the buyer is deceived, it is attributable to the marks as a totality, not usually to any part of it. The court therefore should be guided by its first impression, for the buyer acts quickly and is governed by a casual glance, the value of which may be dissipated as soon as the court assumed to analyze carefully the respective features of the mark. 3. Dominancy Test Asia Brewery v. CA and San Miguel, (1993) Infringement is determined by the test of dominancy rather than by differences or variations in the details of one trademark and of another. Similarity in size, form and color, while relevant is not conclusive. If the competing trademark contains the main or essential or dominant features of another, and confusion is likely to result, infringement takes place. McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., (2004) In determining likelihood of confusion, there are two tests, the
dominancy test and the holistic test. The dominancy test focuses on the similarity of the prevalent features of the competing trademarks that might cause confusion. In contrast, the holistic test requires the court to consider the entirety of the marks as applied to the products, including the labels and packaging, in determining confusing similarity. The SC has relied on the dominancy test which considers the dominant features in the competing marks in determining whether they are confusingly similar. Under the dominancy test, courts give greater weight to the similarity of the appearance of the product arising from the adoption of the dominant features of the registered mark, disregarding minor differences. Courts will consider more the aural and visual impressions created by the marks in the public mind, giving little weight to factors like prices, quality, sales outlets and market segments.
BAR Question [1996]
As to the goods or services in connection with which the marks are used (Doctrine of Related Goods/Services) 1. Goods are related when they belong to the same class or have the same descriptive properties or physical attributes, or they serve the same purpose or flow through the same channel of trade. 2. The use of identical marks on noncompeting but related goods may likely cause confusion. 3. Corollarily, the use of identical marks on non-competing and unrelated goods is not likely to cause confusion. General Rule: The trademark protection extends only to goods or services related to those specified in the certificate of registration. Exception: Expansion of Business Rule (zone of reasonable expansion) also to those goods or services that are related
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thereto specified in the certificate (Sec. 138). Sta. Ana v. Maliwat, G.R. No. 23023, (April 31, 1968) All cases in which the use by the junior appropriator is likely to lead to a confusion of source as where prospective buyers would be misled into thinking that the complaining party has extended his business into another field.
Protection marks
extended
to
well-known
(a) If not registered in the Philippines (Sec 123.1 (e)) A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark which is considered by the competent authority of the Philippines to be well-known internationally and in the Philippines, whether or not it is registered here, as being already the mark of a person other than the applicant for registration and used for identical goods or services. In determining whether a mark is well-known, account shall be taken of the relevant sector of the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark. (b) If registered in the Philippines (Sec 123.1 (f)) A mark cannot be registered if it is identical with or confusingly similar to, or constitutes a translation of a mark considered well-known in accordance with the Sec. 123.1 (e), which is registered in the Philippines with respect to goods or services which are not similar to those with respect to which registration is applied for.
F. Well-Known Mark
A mark which a competent authority of the Philippines has designated to be wellknown internationally and in the Philippines. In determining whether a mark is wellknown, account shall be taken of the knowledge of the relevant sector of the public, rather than the public at large, including knowledge in the Philippines which has been obtained as a result of the promotion of the mark.
Rights conferred by a well-known discussed under REGISTRATION Mark
BAR Question [2005]
Determinants (need not concur): 1. The duration, extent and geographical area of any use of the mark; 2. The market share in the Philippines and other countries of the goods/services to which the mark applies; 3. The degree of the inherent or acquired distinction of the mark; 4. The quality-image or reputation acquired by the mark; 5. The extent to which the mark has been registered in the world; 6. The exclusivity of the registration attained by the mark in the world; 7. The extent of use of the mark in the world; 8. The exclusivity of use in the world; 9. The commercial value attributed to the mark in the world; 10. The record of successful protection of the rights in the mark; 11. The outcome of litigations dealing with the issue of whether the mar is wellknown; and 12. The presence or absence of identical or similar marks validly registered or used on other similar goods (Rule on Trademarks, Rule 102).
III.Registration A. Requirements of Application

(See Sec. 124.1)
The applicant or the registrant shall file a declaration of actual use of the mark with evidence to that effect, within 3 years from the filing date of the application. Otherwise, the application shall be refused or the mark shall be removed from the Register (Sec. 124.2) One application may relate to several goods and/or services, whether they belong to one class or to several classes of the Nice Classification (Sec. 124.3)
What may NOT be registered (refer to Sec. 123.1 above)
Page 17 of 278
B. Priority Right
An application for registration of mark filed in the Philippines by a person who qualifies under the reciprocity rule and who previously filed an application for registration of the same mark in one of those countries shall be considered as filed as of the day the application was first filed in the foreign country (Sec. 131).
The registrant is required to file a declaration of actual use, and evidence to that effect, within 1 year from the 5th anniversary of the date of registration of the mark; otherwise the mark shall be removed from the Register (Sec. 145).
F. Rights Conferred by Registration

Exclusive right to restrain/ prohibit/ prevent third persons from using identical or similar signs for identical or similar goods or services (Sec. 147.1).
C. Conditions
1. The application must be filed within 6 months from the date of earliest foreign application. Its certified copy passed within 3 months from the date of filing in the Philippines. 2. The following should concur: (a) the foreign country/country of origin has allowed the mark and (b) the country of origin is the applicants domicile or has a bona fide commercial establishment. 3. The owner of the Philippine registration may not sue prior to the granting of the registration, unless the mark is considered well-known as provided for in the IPC. 4. The priority right may not be based upon a foreign application that has been withdrawn, abandoned, or otherwise disposed of in the country of origin (Rule 202, Trademark Laws).
G. Rights Conferred by a Well-Known Mark

1. Right to be protected whether or not it is registered in the Philippines; 2. If registered, extension of protection to goods and services which are not similar to those in respect of which the mark is registered, provided that: a. The use of the mark in relation to unrelated or dissimilar goods or services would indicate a connection between those goods or services and the owner of the mark; and b. The interests of the owner of the registered mark are likely to be damaged by such use.
H. Limitations on Such Rights:

1. Duration (except that, inasmuch as the registration of a trademark could be renewed every 10 years, a trademark could conceivably remain registered forever); 2. Territorial (except well-known marks).
D. Certificate of Registration
It shall be prima facie evidence of: 1. Validity of registration; 2. Registrants ownership of the mark; and 3. The registrants exclusive right to use the same in connection with the goods or services and those that are related thereto (Sec. 138).
I.
Opposition
E. Duration of Registration
The duration of a trademark registration is 10 years, renewable for periods of 10 years each renewal. The request for renewal must be made within 6 months before or after the expiration of the registration (Sec. 145).
Any person who believes that he would be damaged by the registration of a mark may, upon payment of the fee, file an opposition to the application. The opposition must be in writing, verified and must state the facts and the grounds on which the opposition is based. Time to file: 30 days after publication of application; if unverified, the verified opposition must be filed within 2 months from such filing BUT
Page 18 of 278
it may be extended for 1 month and maximum period does not exceed 4 months from publication of application (Sec. 134).
J. Cancellation
(Sec. 151) Upon petition, with due process and hearing, based on the following grounds:
Within 5 years from registration Belief that the registered mark has damaged or will damage the petitioner At any time 1. Becomes the generic name for the goods or services for which it has registered; or 2. Has been abandoned; or 3. The registration was obtained fraudulently or contrary to the provisions of the IPC; or 4. Is being used by, or with the permission of the registrant so as to misrepresent the source of the goods or services in connection with which the mark is used 5. If the registered owner of the mark, without legitimate reason, fails to use the mark within the Philippines, or to cause it to be used in the Philippines by virtue of a license, for an uninterrupted period of at least 3 years.
the class in which the mark is registered. 4. The use of a mark by a company related to the applicant/registrant. 5. The use of a mark by a person controlled by the registrant (Sec. 152).
IV. Infringement
(Sec. 155) 1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a registered mark or the same container or a dominant feature thereof in connection with the sale, offering for sale, distribution, advertising of any goods or services including other preparatory steps necessary to carry out the sale of any goods or services on or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive; or 2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a dominant feature thereof and apply such to labels, signs, prints, packages, wrappers, receptacles or advertisements intended to be used in commerce upon or in connection with the sale, offering for sale, distribution, or advertising of goods or services or in connection with which such use is likely to cause confusion, or to cause mistake, or to deceive
Note: In order to bring a civil action for infringement, it is not required that there be an actual sale of the goods or services using the infringing material. Infringement takes place upon the mere use or reproduction of the registered mark.
BAR Question (1991)
A. Remedies for Infringement

1. Action for damages; 2. Injunction: 3. Impounding of sales invoices and other documents; 4. Double damages in case of actual intent to defraud or to mislead (Sec. 156); 5. Court order for the disposal or destruction of the infringing goods (Sec. 157); 6. Criminal Action; 7. Administration sanctions In any suit for infringement the owner of the registered mark shall not be entitled to
K. Non-Use of a Mark When Excused

1. If caused by circumstances arising independently of the will of the owner. Lack of funds not excused. 2. A use which does not alter its distinctive character though the use is different from the form in which it is registered. 3. Use of mark in connection with one or more of the goods/services belonging to
Page 19 of 278
recover damages or profits unless the acts have been committed with knowledge that such imitation is likely to cause confusion, or to cause mistake or to deceive (Sec. 158). Any foreign national who qualifies under the principle on reciprocity and does not engage in business in the Philippines, whether or not it is licensed to do business in the Philippines, may bring civil or administrative action for: 1. Opposition 2. Cancellation 3. Infringement 4. Unfair Competition 5. False designation of origin or false description (Sec. 160)
implied consent and other fair and equitable considerations. McDonalds Corporation v. L.C. Big Mak Burger, Inc., et al., (2004) To establish trademark infringement, the following elements must be shown: (1) the validity of the mark; (2) the plaintiffs ownership of the mark; and (3) the use of the mark or its colorable imitation by the alleged infringer results in likelihood of confusion. Of these, it is the element of likelihood of confusion that is the gravamen of trademark infringement. Two types of confusion arise from the use of similar or colorable imitation marks, namely, confusion of goods (product confusion) and confusion of business (source or origin confusion). While there is confusion of goods when the products are competing, confusion of business exists when the products are non-competing but related enough to produce confusion or affiliation.
B. Limitations Infringement
(Sec. 159)
on
Action
for
1. No action for infringement could be taken against a person who, in good faith and before the filing date or priority date, was using the mark for the purposes of his business or enterprise. Note, however, that such person may assign or transfer his right to use the registered mark only together with his business or enterprise. 2. Only an injunction against future printing may be imposed upon an innocent infringing printer. 3. Similarly, only an injunction against the presentation of infringing advertising matter in future issues may be imposed on innocent infringing printer. Mighty Corporation v. E. & J. Gallo Winery, (2004) A crucial issue in any trademark infringement case is the likelihood of confusion, mistake or deceit as to the identity, source or origin of the goods or identity of the business as a consequence of using a certain mark. Likelihood of confusion is admittedly a relative term, to be determined rigidly according to the particular (and sometimes peculiar) circumstances of each case. In determining likelihood of confusion, the court must consider: (a) the resemblance between the trademarks; (b) the similarity of the goods to which the trademarks are attached; (c) the likely effect on the purchaser; and (d) the registrants express or
V. Unfair Competition
(Sec. 128) It is the use by a person of deception or any other means contrary to good faith by which he passes off the goods manufactured by him or in which he deals, or his business or services, for those of another person who has established goodwill in the goods such person manufactures or deals in, or his business or services, or who shall commit any acts calculated to produce said result. Some acts of unfair competition are as follows: 1. Giving ones goods the general appearance of goods of another manufacturer; 2. Inducing the false belief that one is offering the services of another who has identified such services in the minds of the public; 3. Making any false statement calculated to discredit the goods, business or services of another
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Del Monte Corporation, et al. v. CA,(1990) The following are the distinctions between infringement of trademark and unfair competition: Trademark Infringement Unauthorized use of a trademark Fraudulent intent is unnecessary Prior registration of the trademark is a prerequisite to the action Unfair Competition Passing off of ones goods as those of another Fraudulent intent is essential Registration is not necessary
Mighty Corporation v. E. & J. Gallo Winery, (2004) The law on unfair competition is broader and more inclusive than the law on trademark infringement. The latter is more limited but it recognizes a more exclusive right derived from the trademark adoption and registration by the person whose goods or business is first associated with it. Hence, even if one fails to establish his exclusive property right to a trademark, he may still obtain relief on the ground of his competitors unfairness or fraud. Conduct constitutes unfair competition if the effect is to pass off on the public the goods of one man as the goods of another. McDonalds Corporation v. L.G. Big Mak Burger, Inc., et al., (2004) The elements of an action for unfair competition are: (1) confusing similarity in the general appearance of the goods; and (2) intent to deceive the public and defraud a competitor. The confusing similarity may or may not result from similarity in the marks, but may result from other external factors in the packaging or presentation of the goods. The intent to deceive and defraud may be inferred from the similarity in appearance of the goods as offered for sale to the public. Actual fraudulent intent need not be shown.
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Chapter 3. Copyright
Chapter 3: Copyright
I. GENERAL PRINCIPLES II. CRITERIA FOR COPYRIGHT PROTECTION A. ORIGINALITY B. EXPRESSION III. WORKS PROTECTED BY COPYRIGHT A. ORIGINAL LITERARY AND ARTISTIC WORKS B. DERIVATIVE WORKS IV. NON-COPYRIGHTABLE WORKS V. RIGHTS CONFERRED BY COPYRIGHT A. COPYRIGHT OR ECONOMIC RIGHT B. MORAL RIGHTS C. DROIT DE SUITE VI. OWNERSHIP OF COPYRIGHT VII. DURATION OF COPYRIGHT VIII. INFRINGEMENT REMEDIES FOR INFRINGEMENT IX. LIMITATIONS TO THE RIGHTS OF COPYRIGHT X. NEIGHBORING RIGHTS XI. TRANSFER AND ASSIGNMENT
D. The copyright is distinct from the property in the material object subject to it.
(Sec 181).
E. Copyright is a Statutory Right

Pearl and Dean vs. Shoemart (2003) Copyright, in the strict sense of the term is purely a statutory right. Being a mere statutory grant, the rights are limited to what the statute confers. It may be obtained and enjoyed only with respect to the subjects and by the persons, and on terms and conditions specified in the statute. Accordingly, it can cover only the works falling within the statutory enumeration or description.
I. General Principles A. Works are Protected by the Sole Fact of Their Creation
(Sec 172.2) Principle of Automatic Protection Under the Berne Convention, the enjoyment and exercise of copyright, including moral rights, shall not be the subject of any formality.
II. Criteria for Copyright Protection A. Originality

1. the work is an independent creation of the author; 2. it must not be copied; and 3. it must involve some intellectual effort. Ching Kian Chuan vs. CA (2001) A person to be entitled to a copyright must be the original creator of the work. He must have created it by his own skill, labor and judgment without directly copying or evasively imitating the work of another. Ching vs. Salinas (2005) By originality is meant that the material was not copied, and evidences at least minimal creativity; that it was independently created by the author and that it possesses at least some minimal degree of creativity. Copying is shown by proof of access to copyrighted material and substantial similarity between the two works. The applicant must thus demonstrate the existence and validity of copyright because in the absence of copyright protection, even the original creation may be freely copied.
B. Protection Extends Only to the Expression of an Idea, Not the Idea Itself
(Sec 175) Joaquin Jr. et al vs. Drilon, et al (1999) The format or mechanics of a TV show is not copyrightable as copyright does not extend to ideas, procedures, processes, systems, methods of operation, concepts, principles or discoveries regardless of the form in which they are described, explained, illustrated or embodied.
C. Copyright is not a right to do anything, but to stop others from doing something. It is therefore a negative right
(Amador, 1998ed).
Page 22 of 278
B. Expression (Fixed in a Tangible Medium)

To be fixed, a work must be embodied in a medium sufficiently permanent or stable to permit it to be perceived, reproduced or otherwise communicated for more than a transitory duration. There is no work for copyright purposes unless there is something tangible. It is fixation that defines the time from when copyright subsists. Before the time of fixation, there can be no infringement.
K. Photographic works including works produced by a process analogous to photography; lantern slides; L. Audiovisual works and cinematographic works and works produced by a process analogous to cinematography or any process for making audio-visual recordings; M. Pictorial illustrations and advertisements; N. Computer programs; and O. Other literary, scholarly, scientific and artistic works. Note: Civil Code provision on copyright pertaining to letters Art. 721. By intellectual creation, following persons acquire ownership: the
Note: Such requirement is deemed fulfilled by documents or works in digital form since the E-Commerce Act classifies such as electronic documents.
BAR Question [2007]
(1) The author with regard to his literary, dramatic, historical, legal, philosophical, scientific or other work; xxx Art. 722. The author and composer, mentioned in Nos. 1 and 2 of the preceding article shall have the ownership of their creations even before the publication of the same. Once their works are published, their rights are governed by the Copyright laws. xxx Art. 723. Letters and other private communications in writing are owned by the person to whom they are addressed and delivered, but they cannot be published or disseminated without the consent of the writer or his heirs. However, the court may authorize their publication or dissemination if the public good or the interest of justice so requires.
III.
Works Protected by Copyright
A. Original Literary and Artistic Works

(Sec. 172.2) This includes (Sec 172.1): A. Books, pamphlets, articles and other writings; B. Periodicals and newspapers; C. Lectures, sermons, addresses, dissertations prepared for oral delivery, whether or not reduced in writing or other material form; D. Letters;
BAR Question [2007]
E. Dramatic or dramatico-musical compositions; choreographic works or entertainment in dumb shows; F. Musical compositions, with or without words; G. Works of drawing, painting, architecture, sculpture, engraving, lithography or other works of art; designs or models for works of art; H. Original ornamental designs or models for articles of manufacture, whether or not registrable as an industrial design, and other works of applied art; I. Illustrations, maps, plans, sketches, charts and three dimensional works relative to geography, topography, architecture or science; J. Drawings or plastic works of a scientific or technical character;
B. Derivative Works
(Sec 173) This includes (Sec 173.1): A. Dramatizations, translations, adaptations, abridgments, arrangements, and other alterations of literary or artistic works; B. Collections of literary, scholarly or artistic works, and compilations of data and other materials which are original by reason of the selection or coordination or arrangement of their contents.
Page 23 of 278
Derivative works are protected as new works provided they shall not (Sec 173.2): 1. affect the force of any subsisting copyright upon the original works employed or any part thereof; or 2. be construed to imply any right to such use of the original works, or to secure or extend copyright in such original works.
Useful article doctrine- Works whose sole purpose is utilitarian have no separate artistic value. This can be distinguished from a work of applied art, which has utilitarian functions but there is an identifiable artistic work or creation incorporated thereto.
G. Pleadings;
IV. Non-Copyrightable Works

A. An idea, procedure, system, method of operation, concept, principle, discovery or mere data as such, even if they are expressed, explained, illustrated or embodied in a work (Sec. 175); B. News of the day and other miscellaneous facts having the character of mere items of press information (Sec. 175);
Illustration: The writings of a columnist in a newspaper are subject to copyright, but if he mentions a news item like a bomb explosion in a certain place, he cannot claim protection regarding this news item (Catindig reviewer).
H. Original decisions tribunals.
of
courts
and
V. Rights Conferred by Copyright

Copyright or Economic Rights (Sec. 177); Moral Rights (Sec. 193); and Right to participate in the gross proceeds of the sale or lease of the original work or Droit de Suite (Sec. 200).
A. Copyright or Economic Right

Sec. 177- Copy or Economic Rights. Subject to the provisions of Chapter VII, copyright or economic rights shall consist of the exclusive right to carry out, authorize or prevent the following acts: 1. Reproduction of the work or substantial portion of the work; 2. Dramatization, translation, adaptation, abridgement, arrangement or other transformation of the work; 3. The first public distribution of the original and each copy of the work by sale or other forms of transfer of ownership; 4. Rental of the original or a copy of an audiovisual or cinematographic work, a work embodied in a sound recording, a computer program, a compilation of data and other materials or a musical work in graphic form, irrespective of the ownership of the original or the copy which is the subject of the rental; 5. Public display of the original or a copy of the work; 6. Public performance of the work; and 7. Other communication to the public of the work.
BAR Question [1995]
C. Any official text of a legislative, administrative or legal nature, as well as any official translation thereof (Sec. 175); D. Works of the Government of the Philippines (Sec. 176.1); However, prior approval of the government agency or the office wherein the work is created shall be necessary for the exploitation of such work for profit. Such agency or office may impose as a condition the payment of royalties. No prior approval of conditions shall be required for the purpose of statutes, rules and regulations, and speeches, lectures, sermons, addresses, and dissertations, pronounced, read or rendered in courts of justice, before administrative agencies, in deliberative assemblies and in meetings of public character (Sec. 176.1). E. Works of the public domain These include works whose term of copyright protection has expired. F. Useful articles
Economic rights also give the author the right to assign the copyright and/or the material object in whole or in part, and they allow the owner to derive financial reward from the use of his works by others.
Page 24 of 278
B. Moral Rights
Sec. 193- Scope of Moral Rights. The author of a work shall, independently of the economic rights in Sec. 177 or the grant of an assignment or license with respect to such right, have the right: 1. To require that the authorship of the works be attributed to him, in particular, the right to his name, as far as practicable, be indicated in a prominent way on the copies, and in connection with the public use of his work; 2. To make any alterations of his work prior to, or to withhold it from publication; 3. To object to any distortion, mutilation or other modification of, or other derogatory action in relation to his work which would be prejudicial to his honor or reputation; and 4. To restrain the use of his name with respect to any work not of his own creation or in a distorted version of his work.
Works not Covered (Sec. 201) - prints, etchings, engravings, works of applied art, or works of similar kind wherein the author primarily derives gain from the proceeds of reproductions. First Sale Doctrine After the first sale of the lawfully made copy of the copyrighted work, anyone who is the owner of that copy can sell or dispose of that copy in any way without any liability for copyright infringement. The first sale of an authorized copy of the work exhausts the authors right to control distribution of copies.
VI. Ownership of Copyright

Single Creator of an Original Work (Sec. 178.1) Belongs to the author of the work Belongs of the coauthors; in the absence of agreement, their rights shall be governed by the rules on co-ownership. However, if the work consists of parts that can be used separately and identified, the author of each part owns the copyright of the part he has created.
Term of Moral Rights For the lifetime of the author and 50 years after his death. General Rule: Moral rights can be waived in writing, expressly stating such waiver (Sec. 195) or by contribution to a collective work unless such is expressly reserved (Sec. 196). Exception: Even if made in writing, waiver is still not valid if: a. use of the name of the author, title of his work, or his reputation with respect to any version or adaptation of his work, which because of alterations substantially tends to injure the literary or artistic reputation of another author; b. it uses the name of the author in a work that he did not create. Moral rights are not assignable or subject to license (Sec. 198)
Works of Joint Authorship (178.2)
Work created during the course of employment (178.3)
Belongs to the employee if the creation is not a part of his regular duties, even if he used the time, facilities and materials of the employer. However, belongs to the employer if the work is in the performance of the employees regular duties unless there is an agreement to the contrary.
BAR Question [2008)
C. Droit de Suite
Sec. 200 Sale or Lease of Work. In every sale or lease of an original work of painting or sculpture or of the original manuscript of a writer or composer, subsequent to the first disposition thereof by the author, the author or his heirs shall have an inalienable right to participate in the gross proceeds of the sale or lease to the extent of five percent (5%). This right shall exist during the lifetime of the author and for fifty (50) years after his death.
Work commissioned by a person other than the employer (178.4)
The person who commissioned the work holds ownership of the work per se, but copyright remains with the creator unless there was a stipulation to the contrary.
Audio visual works (178.5)
Belongs to the producer, author of the scenario, composer of the music, film director, and author
Page 25 of 278
Letters (178.6)
Anonymous and pseudonymous works (179)
Collective (196)
works
of the adapted work. However, subject to stipulations, the producers shall exercise the copyright as may be required for the exhibition of the work, except for the right to collect license fees for the performance of musical compositions in the work. Belongs to the writer, but the court may authorize their publication or dissemination of the public good or interest of justice requires, pursuant to Art. 723, New Civil Code Publishers are deemed to represent the authors, unless the contrary appears, the pseudonyms or adopted names leave no doubt as to the authors identity or if the author discloses his identity. A contributor is deemed to have waived his right unless he expressly reserves it.
by a process analogous to photography or any process for making audio-visual recordings (213.6)
unpublished, 50 from the making.
years
VIII. Infringement
Habana et al vs. Robles et al (1999) Infringement consists in the doing by any person, without the consent of the owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the copyright. For there to be substantial reproduction of a book, it does not necessarily require that the entire copyrighted work, or even a large portion of it, be copied. If so much is taken that the value of the original work is substantially diminished, there is an infringement of copyright and to an injurious extent, the work appropriated. It is no defense that the pirate did not know whether or not he was infringing any copyright; he at least knew that what he was copying was not his, and he copied at his peril. In cases of infringement, copying alone is not what is prohibited. The copying must produce am injurious effect. Microsoft Corp vs. Maxicorp Inc (2004) Copyright infringement and unfair competition are not limited to the act of selling counterfeit goods. They cover a whole range of acts from copying, assembling, packaging to marketing, including the mere offering for sale of counterfeit goods.
VII. Duration Of Copyright

Single Creator (Sec. 213.1) Protected during the life of the author and for 50 years after his death. Also applies to posthumous works. Economic rights protected during the life of the last surviving author and for 50 years after his death. Protected for 50 years from the date when the work was first lawfully published; Except where the authors identity is revealed or no longer in doubt, 213.1/213.2 shall apply. If the works have not been published, protected for 50 years from the making of the work. Protected for 25 years from the making. Protected for 50 years from publication; if unpublished, 50 years from the making. Protected for 50 years from publication; if
Joint (213.2)
Creation
Remedies for Infringement

Injunction,; Actual, Moral and Exemplary Damages; Impounding of documents evidencing sales, articles and packaging that infringe copyright and implements for making them; Destruction without compensation of infringing copies and devices and the means of making infringing copies. Imprisonment and finedepending on the value of the infringing materials produced and the damage the copyright owner has suffered by reason of the infringement
Anonymous and pseudonymous works (213.3)
Civil (Sec 216)
Works of Applied Art (213.4) Photographic Works (213.5) Audiovisual works, or works produced
Criminal (217)
Page 26 of 278
Administrative
Administrative action; Cease and Desist Orders; Forfeiture of the paraphernalia used in committing the offense; Administrative fines
broadcasting to the extent necessary for the purpose; e. Inclusion of a work in a publication, broadcast or other communication to the public, sound recording or film if made by way of illustration for teaching purposes compatible with fair use and the source and the name of the author appearing on work, must be mentioned; f. Recording made in schools, universities, or educational institutions of a work included in a broadcast for the use of schools, universities or educational institutions. Such recording must be deleted within a reasonable period; such recording may not be made from audiovisual works which are part of the general cinema, repertoire of feature films except of brief excerpts of the work;
General Rule: Mere possession infringing goods is not punishable
of
Exception: Unless one can prove that the possessor knows or ought to know that the goods in his possession are infringing copies of the work and are held for the purpose of: 1. Selling, letting for hire or by way of trade, offering or exposing the article for sale or hire; 2. Distributing the article for trade or for any other purpose to an extent that will prejudice the rights of the copyright owner; 3. Trade exhibit of the article (Sec. 217.3)
g. Making of ephemeral recordings; (i) by a broadcasting organization, (ii) by means of its work or facilities, (iii) for use in its own broadcast; h. Use made of a work by or under the direction or control of the government for public interest compatible with fair use; i. Public performance or the communication to the public of a work in a place where no admission fee is charged by a club on institution for charitable or educational purpose only and the aim is not profit-making; Public display of the original or a copy of the work not made by means of a film, slide, television, image or otherwise on screen or by means of any other device or process either the work has been published, sold, given away, or transferred to another person by the author or his successor in title; Use made of a work for the purpose of any judicial proceedings or for the giving of professional advice by a legal practitioner.
IX. Limitations Copyright

(Sec. 184)
to
the
Rights
of
A. General Limitations
The following shall infringement of copyright: NOT constitute
a. Recitation or performance of a work: (i) made accessible to the public, (ii) privately done, (iii) free of charge, (iv) strictly for a charitable or religious institution; b. Making of quotations from a published work: (i) compatible with fair use, (ii) extent is justified by the purpose, (iii) source and name of the author, appearing on work, must be mentioned; c. Reproduction or communication to the public by mass media of articles on current political, social, economic, scientific or religious topic, lectures, addresses and other works, delivered in public: (i) for information purposes, (ii) not expressly reserved, and (iii) source is already indicated; d. Reproduction and communication the public of literary, scientific artistic works as part of reports current events by means photography, cinematography to or of of or
j.
k.
BAR Question [2006]
B. Fair Use
(Sec. 185) Fair Use Doctrine The fair use of copyrighted criticism, news reporting, work for teaching
Page 27 of 278
(including multiple copies for classroom use), research and similar purposes is not an infringement of copyright. A privilege, in persons other than the owner of the copyright, to use the copyrighted material in a reasonable manner without his consent, notwithstanding the monopoly granted to the owner by the copyright. It is meant to balance the monopolies enjoyed by the copyright owner with the interests of the public and of society. Decompilation Refers to the reproduction of the code and translation of the forms of the computer program to achieve the inter-operability of an independently created computer program with other programs. This may also constitute fair use (Sec. 185.1). Factors to be Considered to Determine if the Use is Fair Use 1. The purpose and character of the use, including whether such use is of a commercial nature or is for non-profit educational purposes; 2. The nature of the copyrighted work; 3. The amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. The effect of the use upon the potential market for or value of the copyrighted work (Sec. 185.1). The fact that a work is unpublished shall not by itself bar a finding of fair use if such finding is made upon consideration of all the factors (Sec. 185.2).
X. Neighboring Rights
Covered are Rights of the Performer (Sec. 203), Rights of Producers of Sound Recordings (Sec. 208) and Rights of Broadcasting Organizations (Sec. 211). These rights encompass moral rights, specifically the right of the performer to claim to be identified as the performer. Also included is the right to proceeds in subsequent transfers, which is equivalent to 5% of the compensation received for the original performance. Term of protection (Sec 215)Performances not incorporated in recordings Sound or Image and Sound Recordings and Performances Incorporated therein Broadcasts 50 years from the end of the year in which the performance took place 50 years from the end of the year in which the recording took place 20 years from the date the broadcast took place
Neighboring rights do not apply to: 1) exclusive use of a natural person for his own personal purposes; 2) short excerpts for reporting current events; 3) sole use for the purpose of teaching or scientific research; 4) fair use of the broadcast.
XI. Transfer and Assignment

Copyright may be assigned in whole or in part. The assignee is then entitled to all the rights and remedies which the assignor had (Sec 180.1). However, copyright is not deemed assigned inter vivos unless there is a written indication of such intention (Sec 180.2). Submission of a literary, artistic or photographic work to a newspaper or other periodical for publication shall constitute a license to only make a single publication unless a greater right is expressly granted. If 2 or more persons own the copyright jointly, consent of all of them is necessary to grant licenses (Sec. 180.3).
C. In a work of architecture, the right

to control the reconstruction or rehabilitation in the same style as the original of the building (Sec. 186)
D. Private reproduction of published work in a single copy by a natural

person for research and private study (Sec. 187)
BAR Question [1998]
E. Reprographic reproduction in a single copy by non-profit libraries,

under certain circumstances (Sec. 188)
F. Reproduction, under certain circumstances, of a computer program in one back-up copy by the
lawful owner of the program (Sec. 189)
G. Importation for personal purposes

under certain conditions (Sec. 190).
- end of IPL Page 28 of 278
Table of Contents
TRANSPORTATION AND PUBLIC UTILITIES LAW

Chapter I. GENERAL CONSIDERATIONS
I. Public Utilities II. Transportation
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Chapter II. COMMON CARRIERS I. In General A. Concept of Common Carrier B. Nature of Business; Power of the State to Regulate C. Nature and Basis of Liability D. Classes of Common Carriers E. Laws Applicable II. Common Carriage of Goods A. Liability and Presumption of Negligence B. Exemption from Liability C. Duration of Extraordinary Responsibility D. Stipulation/Agreement Limiting Liability E. Applicable Law on Foreign Trade F. Rules on Passenger Baggage III. Common Carriers of Passengers A. Nature and Extent of Responsibility B. Duration of Responsibility C. Presumption of Negligence D. Force Majeure E. Limitation of Liability; Validity of Stipulations F. Responsibility for Acts of Employees G. Responsibility for Acts of Strangers and Co-Passengers H. Duty of Passenger; Effect of Contributory Negligence IV. Damages Recoverable from Common Carriers A. In General B. Actual or Compensatory C. Moral Damages D. Exemplary Damages E. Nominal, Temperate, and Liquidated F. Attorneys Fees and Interest
Chapter III. OVERLAND TRANSPORTATION I. Scope of Overland Transportation II. Nature of Contract III. Effect of Civil Code IV. Contract of Carriage A. Bill of Lading B. Refusal to Transport C. Doubtful Declaration of Contents D. No Bill of Lading V. Responsibility of the Carrier A. When It Commences B. Route C. Care of Goods D. Delivery VI. Rights and Obligations of Shipper and/or Consignee VII. Applicability of Provisions Chapter IV. ADMIRALTY AND MARITIME COMMERCE I. Source of Law II. Concept of Admiralty; Jurisdiction III. Vessels A. Meaning B. Nature and Acquisition IV. Persons Participating in Maritime Commerce A. Shipowners and Shipagents B. Captains and Managers C. Other Officers and Crew D. Supercargoes V. Accidents and Damages in Maritime Commerce A. Averages B. Arrival Under Stress C. Collisions D. Shipwreck VI. Special Contracts A. Charter Parties B. Loans on Bottomry and Respondentia C. Bill of Lading D. Passengers on Sea Voyage VII. Carriage of Goods by Sea Act Chapter V. WARSAW CONVENTION I. Definition and Applicability II. Liabilities III. Limitation on Liability IV. When Limitations Unavailable V. Conditions on Liability VI. Venue of Court Actions
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Chapter I. General Considerations
Transportation and Public Utilities Law

FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

TRANSPORTATION & PUBLIC UTILITIES LAW Emee Macabales

LEAD WRITER Awi Mayuga Mario Vincent Diaz Nicole Torres Niner Guiao Mona Lisa Barro Marvin Ibarra WRITERS
Jason Mendoza
DEPUTY HEAD
Rania Joya
Malds Menzon
LOGISTICS, HR
-------Kae Guerrero
-------Leo Zulueta
Chapter 1. General Considerations

I. PUBLIC UTILITIES II. TRANSPORTATION
I. Public Utilities
(Asked in 92, 93, 95, 98 and 00)
What is a Public Utility?

It is a business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. Two tests for determining public utility: 1. Is it engaged in regularly supplying the public with some commodity or service? (per definition in Albano v. Reyes below) 2. If #1 is uncertain, is it a public service as defined in the Public Service Law under CA 146 Sec. 13(b)? If it falls under any one of the examples given under CA 146 Sec 13(b), then it is a public utility.
Kilusang Mayo Uno v. Garcia (1994) Public utilities are privately owned and operated businesses whose services are essential to the general public. They are enterprises which specially cater to the needs of the public and conduce to their comfort and convenience. As such, public utility services are impressed with public interest and concern. When, therefore, one devotes his property to a use in which the public has an interest, he, in effect grants to the public an interest in that use, and must submit to the control by the public for the common good, to the extent of the interest he has thus created.
Albano v. Reyes (1989). A public utility is a business or service engaged in regularly supplying the public with some commodity or service of public consequence, such as electricity, gas, water, transportation, telephone or telegraph services. Apart from statutes which define public utilities that are within the purview of such statutes, it would be difficult to construct a definition of a public utility which would fit every conceivable case. As its name indicates, however, the term public utility implies a public use and service to the public. Tatad v Garcia While a franchise is needed to operate these facilities to serve the public, they do not by themselves constitute a public utility. What constitutes a public utility is not their ownership but their use to serve the public. In law, there is a clear distinction between the "operation" of a public utility and the ownership of the facilities and equipment used to serve the public. The right to operate a public utility may exist independently and separately from the ownership of the facilities. One can own said facilities without operating them as a public utility, or conversely, one may operate a public utility without owning the facilities used to serve the public. The devotion of property to serve the public may be done by the owner or by the person in control thereof who may not necessarily be the owner thereof.
What does regularly supplying the public mean? The utility must hold itself out to the public as a public utility by demand and as a matter of right, and not by permission. To determine what constitutes regularity, look at it from the perspective of the public, and not the operator.
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It is a service or a readiness to serve an indefinite portion of the population subject only to the limitations of the service as given by the grant such that [the utility] incurs a liability as a violation of its duty if it refuses, such that the availment of the service has become, through time, a matter of right and not of mere privilege. (also in US v. Tan Piaco) To whom does public refer to? Is the word public in public utility the same in public service? There are three senses of the word public in Transportation Law: a) public utility; b) public service; and c) definition of a common carrier under Art. 1732 of the Civil Code. To determine a public utility, the two tests above & the definition under Albano v. Reyes apply. Are all public utilities commodities or service of public consequence? Yes. All public utilities have a public consequence. But not all businesses bearing public consequence are public utilities. This is because almost all types of business have some form of regulation from the State. What service/s on the part of the public utility is considered unlawful? It shall be unlawful for any public service to provide or maintain any service that is unsafe, improper, or inadequate, or withhold or refuse any service which can reasonably be demanded and furnished, as founded and determined by the Commission in a final order which shall be conclusive and shall effect in accordance with this Act, upon appeal or otherwise. (Sec. 19 [a], CA No. 146) What are some examples of unlawful acts of public utility companies? 1. Engaging in public service business without first securing the proper certificate; 2. Providing or maintaining unsafe, improper or inadequate service as determined by the proper authority; 3. Committing any act of unreasonable and unjust preferential treatment to any particular person, corporation or entity as determined by the proper authority; 4. Refusing or neglecting to carry public mail upon request (Secs. 18 and 19, CA No. 146).
What is a Public Service?

A person who owns, operates, manages or controls in the Philippines for hire or compensation, with general or limited clientele, whether permanent, occasional or accidental, and done for general business purposes, any common carrier or public utility, ice plants, power and water supplies, communication and similar public services (Sec. 13b, CA No. 146).
Kilusang Mayo Uno Labor Center v. Garcia Jr. (1994) In determining public need, the presumption of need for a service shall be deemed in favor of the applicant. Public convenience and necessity exists when the proposed facility or service meets a reasonable want of the public and supply a need which the existing facilities do not adequately supply. The existence or nonexistence of public convenience and necessity is therefore a question of fact that must be established by evidence, real and/or testimonial; empirical data; statistics and such other means necessary, in a public hearing conducted for that purpose. The object and purpose of such procedure, among other things, is to look out for, and protect, the interests of both the public and the existing transport operators.
1. 2. 3. 4.
What are the purposes of the Public Service Act (CA No. 146)? To secure adequate, sustained service for the public at the least possible cost; To protect the public against unreasonable charges and poor, inefficient service; To protect and secure investments in public services; To prevent ruinous competition.
What is the difference between a public utility and a public service? For all intents and purposes, they are the same and are used interchangeably. However, public utility is a broader concept that embraces public service. A public service is necessarily a public utility, but not all public utilities are public services. When is a public utility not a public service? If it is not included in the enumeration in the Public Service Act (CA 146 Sec. 13(b)) and Albano v. Reyes.
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How do they differ in Constitutional restrictions and requirements? If a business is a public utility, then it is subject to the limitations and restrictions provided for in the 1987 Constitution (Art. 12, Secs. 11,17,18,19) Since a public service is necessarily a public utility, therefore public services are subject to the same Constitutional limitations and restrictions. If a public utility is not a public service, it is still subject to the same Constitutional limitations and restrictions. Therefore, Public Utility = Constitution Public Service = Constitution + Public Service Act
NOTE: Art. 1766. In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws.
Public Nature
What is a Certificate of Public Convenience (CPC)? A CPC is any authorization to operate a public service issued by the pertinent government agency (DOTC, NTC LTFRB, etc) for the operation of public services for which no franchise, either municipal or legislative, is required by law) e.g. motor vehicles. It constitutes neither a franchise nor a contract; it does not confer property rights, it is a mere license or privilege (Pantranco v. PSC). Such privilege is forfeited when the grantee fails to comply with his commitments to serve the public and public necessity. However, these certificates represent property rights to the extent that if the rights which any public utility is exercising pursuant to the lawful orders of the PSC (now DOTC) has been invaded by another public utility, in appropriate cases, actions may be maintained by the complainant public utility. It is a property and has a considerable value and can be the subject of sale or attachment (Cogeo-Cubao Operators and Drivers Assn. vs. CA, Raymundo vs. Luneta Motor Co.). The revocation of this certificate deprives the grantee of no vested right. New and additional burdens, alteration of the certificate, or even revocation or annulment thereof is reserved to the State (Luque vs. Villegas, 30 SCRA 408). What is a Certificate of Public Convenience & Necessity (CPCN)? It is a certificate issued by the pertinent government agency to a public service to which any political subdivision has granted a franchise under RA 667 after the pertinent government agency has approved the same under Sec. 16(b). It is an authorization issued by the pertinent government agency for the operation of public services for which a franchise is required by law (e.g. electric, telephone).
II. Transportation Definition

The movement of goods or persons from one place to another, by a carrier (Blacks Law Dictionary). What is a contract of transportation? It is a contract whereby a person, natural or juridical, obligates themselves to transport persons, things, news, from one place to another, by land, air or water, for a fixed price or compensation. It is the removal of goods or persons from one place to another. It is a relationship which is imbued with the public interest. Who are the parties to the contract of transportation?: 1. Shipper - one who gives rise to the contract of transportation by agreeing to deliver the things or news to be transported, or to present his own person or those of other or others in the case of transportation of passengers. 2. Carrier or conductor - one who binds himself to transport person, things, or news, as the case may be, or one employed in or engaged in the business of carrying good for others for hire 3. Consignee - the party to whom the carrier is to deliver the things being transported; to whom the carrier may lawfully make delivery in accordance with its contract of carriage. The shipper and the consignee may be the same person.
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What is the difference between a CPC & a CPCN? Unlike a CPC, a CPCN requires a franchise from Congress. The public utility cannot be issued a CPCN and cannot operate, therefore, without a franchise from Congress What is a franchise? It is a legislative grant from Congress or a local legislative body. If it is of nationwide application (e.g. Philippine Air Lines), then it must take the form of a Republic Act. How does one get a franchise? It is the same procedure for any law (file a bill, 3 readings in Congress, etc) The applicant must a)prove that he or she is a Filipino citizen; b) demonstrate financial capacity, and c) must show that he or she is applying for a business of public convenience, that the public shall benefit from the grant of the franchise. Is a franchise enough in order to operate? No. All public utilities require either a CPC or CPCN to operate. Those public utilities for which franchises have been granted still require a CPCN in order to operate. Those public utilities that did not require a franchise for there creation still require a CPC in order to operate. What are the grounds for the suspension and revocation of CPCs & CPCNs issued? 1. The facts and circumstances on the strength of which said certificate was issued have been misrepresented or materially changed; 2. The holder has violated or willfully refused to comply with any order, rule or regulation of the commission; 3. The common carrier repeatedly fails to comply with his or its duty to observe extraordinary diligence. Does the sale of a CPC, CPCN or other properties of the public utility have to be approved before it is sold to a third person? No. The approval of the sale of CPCs, CPCNs or other properties does not affect the validity (perfection) of the sale between the parties as long as all the elements of a contract are met. This only affects the relation of the parties to the DOTC or to 3rd parties. If there is no approval, then the sale does not bind the DOTC or 3rd parties.
The controlling registration.
factor
therefore
is
the
If a stockholder of a public utility transfers his stock to the 3rd person, is there a need to obtain the approval of the DOTC? It depends. If the transfer results in the transferee owning more than 40% of the stock of the public utility, then the approval of the DOTC is needed. When must the approval of the DOTC be secured? Before or after the execution of the contract. What if the transferee is an alien? The transfer is VOID. An alien cannot own more than 40% of the stock of a public utility. Which public utilities are exempted from getting a CPC? Under the Public Service Law, Sec. 14, the following are exempted from getting a CPC: (a) Warehouses; (b) Vehicles drawn by animals and bancas moved by oar or sail, and tugboats and lighters; (c) Airships within the Philippines except as regards the fixing of their maximum rates on freight and passengers; (d) Radio companies except with respect to the fixing of rates; (e) Public services owned or operated by any instrumentality of the National Government or by any governmentowned or controlled corporation, except with respect to the fixing of rates. (As amended by Com. Act 454, RA No. 2031 and RA No. 2677)
Raymundo v. Luneta Motor Corporation (1933) CPCs secured by public service operators are liable to execution, and the Public Service Commission is authorized to approve the transfer of the certificates of public convenience to the execution creditor.
What is the Prior Operator Rule? The prior operator rule works to protect the prior operator if it maintains an adequate service and is able to meet the demands of the public. His or her investment is protected by not allowing a subsequent operator to be granted a license for the same route. The policy is not to issue a certificate to a second operator to cover the same field and in competition with a first
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operator who is rendering sufficient, adequate and satisfactory service. The prior operator must first be given an opportunity to improve its service, if inadequate or deficient. Where the operator either fails or neglects to make the improvement or effect the increase in services, especially when given the opportunity, new operators should be given the chance to give the services needed by the public. The rationale for this rule is for the preservation of public convenience and to prevent ruinous competition in order that the interests of the public would be conserved and preserved. What is the Prior Applicant Rule? The rule presupposes a situation where two interested persons apply for a certificate to operate a public utility in the same community over which no person has as yet granted any certificate. If it turns out, after the hearing, that the circumstances between the two applicants are more or less equal, then the applicant who applied ahead of the other, will be granted the certificate. This rule is subordinated under the Prior Operator Rule. What is the Protection of Investment Rule? It means that one of the purposes of the Public Service Act is to protect and conserve investments which have already been made for that purpose by public service operators. 1. What are some of the instances where the prior operator rule does NOT apply? When the CPC or CPCN granted to the applicant is a maiden franchise that covers a new route, even if it overlaps with the route of the prior operator; Where the corporate existence of the prior operator has expired; Regular operators are preferred over irregular operators. The Commission cannot grant a CPC or CPCN that comprises a larger territory than that applied for; Where public interest would be better served by the new operator; When the application of the rule would be conducive to monopoly.
How do you know whether there is ruinous competition enough for the prior operator rule to take effect? Ruinous competition means that there is actual ruin of the business of the operator; that the existing operator will not gain enough profits if another person is allowed to enter the business; that which will result in the deprivation of sufficient gain in respect of reasonable return of investment, therefore the oppositor, alleging this, must show that he will be deprived of a reasonable return on his investment.
The mere possibility of reduction in the earnings of the business or the deterioration in the income of his business is not sufficient to prove ruinous competition. It must be shown that the business would not have sufficient gains to pay a fair rate of interest on his capital investments. Does the prior operator rule create a monopoly? Legally speaking, there cannot be a monopoly when a property is operated as a public utility. The prior operator rule does not encourage a monopoly because the theory is that one operator keeps the prices low.
Batangas Transportation Co. v. Cayetano Orlanes (1928) So long as the 1st licensee keeps and performs the terms and conditions of its license and complies with the reasonable rules and regulations of the Commission and meets the demands of the public, it should have more or less of a bested and preferential right over a person who seeks to acquire another and a later license over same route. Otherwise, the first licensee would not have protection on his investment and would be subject to ruinous competition and this defeat the very purpose and intent for the PSC was created.
2. 3. 4. 5. 6.
What is the Kabit System? (Asked in 90 and 05) A system whereby a person who has been granted a certificate of public convenience allows other persons who own motor vehicles to operate under such license, for a fee or percentage of such earnings. Although not penalized outright as a criminal offense, the "kabit system" is invariably recognized as being contrary to public policy and, therefore, void and inexistent under Art 1409 of the Civil Code. "Kabit System" has been identified as one of the root causes of graft and corruption in
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the government transportation offices. It is a "pernicious system" that cannot be too severely condemned. It constitutes an imposition upon the good faith of the government. It is an abuse of a certificate of public convenience, which is a special privilege granted by the government (Teja Marketing v. IAC). What is an example of the kabit system? A, a grantee of a CPC from the LTFRB, is given the authority to operate 10 units of taxis. B, a non-grantee, wishes to operate as a common carried and kabits with the CPC of A who will obtain approval from the LTFRB to operate another taxi. The taxi will be registered in the name of A, who will be paid by B. Assume that A executed a deed of sale in favor of B in case B decides not to go on with the arrangement, in order to safeguard the rights of B. However, in case of injury to a passenger of the taxi actually operated by B (and previously sold to B as well) it is still A who will be liable. The illegal contract of sale between A & B cannot be put up as a defense. A does not have a cause of action against B either. They are in pari delicto.
Teja Marketing v. IAC (1987) Parties operated under an arrangement, commonly known as the "kabit system" whereby a person who has been granted a certificate of public convenience allows another person who owns motor vehicles to operate under such franchise for a fee. A certificate of public convenience is a special privilege conferred by the government. Although not outrightly penalized as a criminal offense, the kabit system is invariably recognized as being contrary to public policy and, therefore, void and in existent under Article 1409 of the Civil Code.
to danger and injury by increasing the hazard of travel. Valencia therefore is only required to observe ordinary care, and is not in duty bound to exercise extraordinary diligence as required of a common carrier by our law (Art. 1755 & 1756, new CC).
What are the rights and obligations of parties arising from transactions relating to transportation absent a transportation contract?
Lara v. Valencia (1958) The owner and driver of a vehicle owes to accommodation passengers or invited guests merely the duty to exercise reasonable care so that they may be transported safely to their destination. Thus, The rule is established by the weight of authority that the owner or operator of an automobile owes the duty to an invited guest to exercise reasonable care in its operation, and not unreasonably to expose him
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Chapter II. Common Carriers

I. IN GENERAL A. CONCEPT OF COMMON CARRIER B. NATURE OF BUSINESS; POWER OF THE STATE TO REGULATE C. NATURE AND BASIS OF LIABILITY D. CLASSES OF COMMON CARRIERS E. LAWS APPLICABLE II. COMMON CARRIAGE OF GOODS A. LIABILITY AND PRESUMPTION OF NEGLIGENCE B. EXEMPTION FROM LIABILITY C. DURATION OF EXTRAORDINARY RESPONSIBILITY D. STIPULATION/AGREEMENT LIMITING LIABILITY E. APPLICABLE LAW ON FOREIGN TRADE F. RULES ON PASSENGER BAGGAGE III. COMMON CARRIERS OF PASSENGERS A. NATURE AND EXTENT OF RESPONSIBILITY B. DURATION OF RESPONSIBILITY C. PRESUMPTION OF NEGLIGENCE D. FORCE MAJEURE E. LIMITATION OF LIABILITY; VALIDITY OF STIPULATIONS F. RESPONSIBILITY FOR ACTS OF EMPLOYEES G. RESPONSIBILITY FOR ACTS OF STRANGERS AND CO-PASSENGERS H. DUTY OF PASSENGER; EFFECT OF CONTRIBUTORY NEGLIGENCE IV. DAMAGES RECOVERABLE FROM COMMON CARRIERS A. IN GENERAL B. ACTUAL OR COMPENSATORY C. MORAL DAMAGES D. EXEMPLARY DAMAGES E. NOMINAL, TEMPERATE, AND LIQUIDATED F. ATTORNEYS FEES AND INTEREST
4. It holds out to the public as ready to engage in the transportation of goods of the kind to which his business is confined (cf. First Phil. Industrial v. CA) Why is there a need to determine whether it is a common carrier or not? Common carriers are subject to the presumption of negligence. In order to rebut this presumption, they must show that they employed extraordinary diligence. Do you need a CPC or CPCN in order to become a common carrier? No. It is the conduct that makes you a common carrier. (De Guzman v. CA) The liability arises from the Civil Code.
FGU v. Sarmiento Trucking The true test of a common carrier is the carriage of passengers or goods, providing space for those who opt to avail themselves of its transportation services for a fee. US v. Tan Piaco These trucks, so far as indicated by the evidence and as far as the appellant is concerned, furnished service under special agreements to carry particular persons and property. . . . So long as the individual or co-partnership, etc., etc., is engaged in a purely private enterprise, without attempting to render service to all who may apply, he can in no sense be considered a public utility, for public use. "Public use" means the same as "use by the public; it is not confined to privileged individuals, but is open to the indefinite public. If the use is merely optional with the owners, or the public benefit is merely incidental, it is not a public use, authorizing the exercise of the jurisdiction of the public utility commission. Public use is not synonymous with public interest. The true criterion by which to judge of the character of the use is whether the public may enjoy it by right or only by permission. De Guzman v. CA Art 1732 of the Civil Code (definition of common carriers) makes no distinction between one whose principal business activity is the carrying of persons or goods or both, and one who does such carrying only as an ancillary activity (in local idiom, as "a sideline"). It also avoids making any distinction between a person or enterprise offering transportation service on a regular or scheduled basis and one offering such service on an occasional, episodic or unscheduled basis. Neither does it distinguish between a carrier offering its services to the "general public," i.e., the general community or population, and one who offers services or solicits business only from a narrow segment of the general population.
I. In General A. Concept of Common Carrier

(Asked in 91, 92, 96, 00 and 02)
Art. 1732 Civil Code Common carriers are persons, corporations, firms or associations engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public.
What are the elements of a common carrier? 1. It is engaged in the business of carrying or transporting goods for others as a public employment 2. It is for compensation or for hire 3. It is operated generally as a business and not as a casual occupation
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Note: De Guzman v. CA effectively broadens the scope of what is considered a common carrier.
First Phil. Industrial Corp v. CA The test for determining whether a party is a common carrier of goods is: (1). He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for person generally as a business and not as a casual occupation; (2) He must undertake to carry goods of the kind to which his business is confined; (3). He must undertake to carry by the method by which his business is conducted and over his established roads; and (4)The transportation must be for hire.
contractual, was direct and immediate, and its non-performance could not be excused by proof that the fault was morally imputable to Manila Railroads servants. There was no contributory negligence on the part of Cangco.
What laws govern over common carriers? The Civil Code primarily governs over common carriers. The Code of Commerce and special laws have suppletory effect. What are the limitations on the power to regulate common carriers? The same rules on due process apply to the regulation of common carriers.
D. Classes of Common Carriers

Nature COMMON Holds itself out to public as ready to carry for hire Bound to carry all for compensation Subject regulation to PRIVATE Agreement with private individual to carry for hire Not bound to carry unless there is special agreement Not subject to same regulation as common carriers Of a good father May stipulate exemption from liability or future negligence
B. Nature of Business and Power of the State to Regulate

Under Art 1765 of the Civil Code, the Land Transportation Franchising and Regulatory Board (LTFRB) may on its own motion or on petition cancel after due hearing the CPC of a common carrier that repeatedly fails to observe the extraordinary diligence required.
Pantranco v. PSC When one devotes his property to a use in which the public has an interest, he, in effect, grants to the public an interest in that use, and must submit to be controlled by the public for the common good, to the extent of the interest he has thus created. He may withdraw his grant by discounting the use, but so long as he maintains the use he must submit to control. This right of the state to regulate public utilities is founded upon the police power. A certificate of public convenience constitutes neither a franchise nor a contract, confers no property right, and is a mere license or privilege.
Basis for Consideration
Regulation
Diligence Stipulation on Liability
Extraordinary Cannot stipulate exemption from liability
C. Nature and Basis of Liability

NATURE: bound to observe extraordinary diligence BASIS OF LIABILITY: nature of their business and public policy (Art 1733)
Cangco v. MRR The liability of the carrier is contractual in nature. It arises from the contract of carriage. The liability is direct and immediate, and differs from presumptive responsibility for the negligence of [Manila Railroads] servants. The contract of Manila Railroad Company to transport Cangco carried with it the duty to carry him safely and provide safe means of entering and leaving its trains. That duty, being
What are the classes of carriers? Common or private As to the object: goods or persons What is the difference between a common carrier and a private carrier?
COMMON - It holds itself out as ready to engage in the transportation of goods or persons for hire as a public employment and not as a casual occupation whether: 1. regular or scheduled 2. occasional, episodic or unscheduled 3. offered to the general public or merely a narrow segment of the general population (De Guzman v. CA) PRIVATE - Carriers who transport or undertake to transport goods or persons in a particular instance for hire or for reward
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E. Laws Applicable
PRIMARILY: Civil Code SUPPLEMENTARILY: Code of Commerce and other special laws (Art 1766) Liability for loss, destruction or deterioration of goods: laws of country to where the goods are to be transported (Art 1753)
The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the occurrence of the flood, storm or natural disaster (Art 1739) 3. The common carrier must not have been guilty of delay (Art 1740) 4. The shipment was at shippers risk (Art 361, Code of Commerce)
2.
II. Common Carriage of Goods A. Liability and Negligence Presumption of
(Asked in 90, 91 and 97) GENERAL RULE: Common carriers are responsible for the loss, destruction, or deterioration of the goods EXCEPTION: if due to any of the following causes only (1) Flood, storm, earthquake, lightning, or other natural disaster or calamity; (2) Act of the public enemy in war, whether international or civil; (3) Act of omission of the shipper or owner of the goods; (4) The character of the goods or defects in the packing or in the containers; (5) Order or act of competent public authority. NOTE: The presumption of negligence does not apply in these cases. Common carriers REMEDY to overcome the presumption of negligence: prove that they observed extraordinary diligence
Ynchausti vs. Dexter (1920) The mere proof of delivery of goods in good order to a carrier, and of their arrival at the place of destination in bad order, makes out a prima facie case against the carrier, so that if no explanation is given as to how the injury occurred, the carrier must be held responsible. It is incumbent upon the carrier to prove that the loss was due to accident or some other circumstance inconsistent with its liability.
Martini v. Macondray (1919) The master is responsible for the safe & proper stowage of the cargo, & there is no doubt that by the general maritime law he is bound to secure the cargo safely under deck. If the master carries goods on deck w/o the consent of the shipper, he does it at his own risk. If they are damaged or lost in consequence of their being thus exposed, he cannot protect himself from responsibility by showing that they were damaged or lost by the dangers of the seas. When the shipper consents to his goods being carried on deck, he takes the risks of any damage or loss sustained as a consequence of their being so carried. Eastern Shipping Lines v. IAC (1987) Fire may not be considered a natural disaster/calamity. This must be so as it arises almost invariably from some act of man or by human means. It does not fall within the category of an act of God unless caused by lightning or boy other natural disaster/calamity. It may even be caused by the actual fault or privity of the carrier.
2. Act of Public Enemy What are the requisites for exemption due to the act of a public enemy? 1. The act of the public enemy must have been the proximate and only cause (Art 1739) 2. The common carrier must exercise due diligence to prevent or minimize the loss before, during and after the act of the public enemy causing the loss, destruction or deterioration of the goods. (Art 1739) 3. Act or Omission of Shipper What are the requisites for exemption due to the act or omission of the shipper? 1. The act or omission of the shipper must have been the proximate and only cause (Art 1741) 2. If the shipper owner merely contributed to the loss, destruction or deterioration of the goods, the proximate cause being the negligence of the common carrier,
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B. Exemption from Liability

1. Natural Disaster What are the requisites for exemption due to natural disaster? 1. The natural disaster must have been the proximate and only cause (Art 1739)
then the common carrier shall be liable for the damages, which shall, however, be equitably reduced. (Art 1741) 4. Character of Goods What are the requisites for exemption due to character of goods? 1. the character of the goods or defects in packing or containers (Art 1739) 2. The common carrier must exercise due diligence to forestall or lessen the (Art 1739)
DAMAGE Ascertainable from package Only upon opening the package WHEN TO CLAIM Claim for damages must be made upon receipt Claim for damages may be made within 24 hours upon receipt
C. Duration of Responsibility
Extraordinary
GENERAL RULE: extraordinary diligence over goods even when the goods are temporarily unloaded or stored in transit EXCEPTION: shipper or owner made use of the right of stoppage in transitu When does extraordinary diligence for goods start? Extraordinary diligence starts from the time the goods are loaded into the vessels. When does extraordinary diligence for goods stop? Extraordinary diligence ends when the goods are discharged and delivered to the consignee. What does unconditionally placed mean? It means that the shipper cannot get the goods back from the common carrier at will. When is the contract of transportation perfected? A contract of transportation is consensual in nature; therefore it is perfected at the meeting of the minds of the parties. What if the goods are only for safekeeping? If the common carrier received the goods not for transportation but only for safekeeping, where the goods have already been purchased by the shipper and ready for transportation, then the duty of extraordinary diligence has not yet started. Who are these persons or entities who have a right to receive the goods? These persons include agents, brokers, and the like. What is stoppage in transitu? This is the act by which the unpaid vendor of goods stops their progress and resumes possession of them constructively while they are in the court of transit from him to the purchaser, and not yet actually delivered to the latter. The duty of the common carrier to exercise extraordinary diligence ends in the middle of the journey or transit. When the buyer of the goods becomes insolvent, the unpaid seller who has parted
After such periods OR transportation charges have been paid, no more claims for damages will be entertained. (Art 366, Code of Commerce)
Southern Lines v. CA (1962) If the fact of improper packing is known to the carrier or its servants or apparent upon ordinary observation, but [the carrier] accepts the goods notwithstanding such condition, it is not relieved of liability for loss or injury resulting therefrom.
5. Order of Competent Authority What are the requisites for exemption due to an order of competent authority? 1. There must be an order or act of competent authority (Art 1743) 2. The said public authority must have had the power to issue the order. If the officer acts without legal process, then the common carrier will be held liable (Art 1743)
Ganzon v. CA (1988) The intervention of the municipal officials was not of a character that would render impossible the fulfillment by the carrier of the obligation. The petitioner was not duty bound to obey the illegal order to dump into the sea the scrap iron. There is absence of sufficient proof that the issuance of the order was attended with such force or intimidation as to completely overpower the will of petitioners employees. The mere difficulty in the fulfillment of the obligation is not force majeure. Melencio-Herrera, dissent: Through the order or act of competent public authority, the performance of the contractual obligation was rendered impossible. Apparently, the seizure and destruction of the goods was done under legal process or authority so that petitioner should be freed from responsibility.
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with the possession of the goods at any time while they are in transit, may resume the possession of the goods as he would have had if he had never parted with the possession.
Compania Maritima v. Insurance Company of North America (1964) The liability of the carrier as common carrier begins with the actual delivery of the goods for transportation, and not merely with the formal execution of a receipt or bill of lading; the issuance of a bill of lading is not necessary to complete delivery and acceptance. Even where it is provided by statute that liability commences with the issuance of the bill of lading, actual delivery and acceptance are sufficient to bind the carrier. Lu Do v. Binamira (1957) While delivery of the cargo to the customs authorities is not delivery to the consignee, or to the person who has a right to receive them, contemplated in Article 1736, because in such case the goods are still in the hands of the Government and the owner cannot exercise dominion over them, however the parties may agree to limit the liability of the carrier considering that the goods have still to through the inspection of the customs authorities before they are actually turned over to the consignee. This is a situation where we may say that the carrier losses control of the goods because of a custom regulation and it is unfair that it be made responsible for what may happen during the interregnum.
(3) That the common carrier need not observe any diligence in the custody of the goods; (4) That the common carrier shall exercise a degree of diligence less than that of a good father of a family, or of a man of ordinary prudence in the vigilance over the movables transported; (5) That the common carrier shall not be responsible for the acts or omission of his or its employees; (6) That the common carrier's liability for acts committed by thieves, or of robbers who do not act with grave or irresistible threat, violence or force, is dispensed with or diminished; (7) That the common carrier is not responsible for the loss, destruction, or deterioration of goods on account of the defective condition of the car, vehicle, ship, airplane or other equipment used in the contract of carriage. Art. 1751 Civil Code The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy.
2. As to Amount of Liability
Art. 1749 Civil Code A stipulation that the common carrier's liability is limited to the value of the goods appearing in the bill of lading, unless the shipper or owner declares a greater value, is binding. Art. 1750 Civil Code A contract fixing the sum that may be recovered by the owner or shipper for the loss, destruction, or deterioration of the goods is valid, if it is reasonable and just under the circumstances, and has been fairly and freely agreed upon. Shewaram v. PAL (1966) There are two requisites that must be fulfilled in order that the liability of PAL be limited according to the stipulations behind the ticket stub: 1. that the contract is just and reasonable under the circumstances 2. that the contract was fairly and freely agreed upon (per Art. 1750) The fact that the conditions are printed at the back of the ticket stub in letters so small that they are hard to read would not warrant the presumption that plaintiff was aware of those conditions such that he had fairly and freely agreed to those conditions. Ong Yiu v. CA (1979) While the passenger had not signed the plane ticket, he is nevertheless bound by the provision thereof; such provisions have been held to be part of the contract of carriage and valid and binding upon the passenger regardless of the
D. Stipulations/Agreement Limiting Liability

(Asked in 2002) 1. As to Diligence Required
Art. 1744 Civil Code A stipulation between the common carrier and the shipper or owner limiting the liability of the former for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy. Art. 1745 Civil Code Any of the following or similar stipulations shall be considered unreasonable, unjust and contrary to public policy: (1) That the goods are transported at the risk of the owner or shipper; (2) That the common carrier will not be liable for any loss, destruction, or deterioration of the goods;
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latters lack of knowledge or assent to the regulation. It is what is known as a contract of adhesion wherein one party imposes a ready made form of contract on the other. The one who adheres to the contract is in reality free to reject it entirely. A contract limiting liability upon an agreed valuation does not offend against the policy of the law forbidding one from contracting against his own negligence.
his personal custody or in that of his employee. As to other baggage, the rules in Articles 1998 and 2000 to 2003 concerning the responsibility of hotel-keepers shall be applicable.
3. Factors Affecting Agreement

Art. 1746 Civil Code An agreement limiting the common carrier's liability may be annulled by the shipper or owner if the common carrier refused to carry the goods unless the former agreed to such stipulation. Art. 1747 Civil Code If the common carrier, without just cause, delays the transportation of the goods or changes the stipulated or usual route, the contract limiting the common carrier's liability cannot be availed of in case of the loss, destruction, or deterioration of the goods. Art. 1748 Civil Code An agreement limiting the common carrier's liability for delay on account of strikes or riots is valid.
When hotel-keeper liable In the following cases, the hotel-keeper is liable regardless of the amount of care exercised: 1. loss or injury is caused by his servants or employees as well as by strangers (Art 2000) provided that notice has been given and proper precautions taken (Art 1998) 2. loss is caused by the act of a thief or robber done without the use of arms and irresistible force (Art 2001) When hotel-keeper not liable 1. loss or injury is caused by force majeure (Art 2000), theft or robbery by a stranger (not by hotel-keepers servant or employee) with the use of arms or irresistible force (Art 2001), etc unless he is guilty of fault or negligence in failing to provide against the loss or injury from his cause 2. loss is due to the acts of the guests, his family, servants, or visitors (Art 2002) 3. loss arises from the character of the things brought into the hotel (Art 2002)
Art. 2003 Civil Code The hotel-keeper cannot free himself from responsibility by posting notices to the effect that he is not liable for the articles brought by the guest. Any stipulation between the hotelkeeper and the guest whereby the responsibility of the former as set forth in articles 1998 to 2001 is suppressed or diminished shall be void.
4. Stipulations Limiting Liability

Art. 1751 Civil Code The fact that the common carrier has no competitor along the line or route, or a part thereof, to which the contract refers shall be taken into consideration on the question of whether or not a stipulation limiting the common carrier's liability is reasonable, just and in consonance with public policy. Art. 1752 Civil Code Even when there is an agreement limiting the liability of the common carrier in the vigilance over the goods, the common carrier is disputably presumed to have been negligent in case of their loss, destruction or deterioration.
E. Applicable Law on Foreign Trade

Art. 1753 Civil Code The law of the country to which the goods are to be transported shall govern the liability of the common carrier for their loss, destruction or deterioration.
F. Rules on Passenger Baggage

(asked in 97 and 98)
Art. 1754 Civil Code The provisions of Articles 1733 to 1753 shall apply to the passenger's baggage which is not in
What is a passenger baggage? They are the things that a passenger will bring with him consistent with a temporary absence from where he lives. Passenger baggage must have a direct relationship with the passenger who is travelling. e.g. A balikbayan box or suitcase is passenger baggage. However, 10,000 cans of corned beef is not considered as passenger baggage. They are considered as goods. If you carry goods with you, you cannot bring them with you as part of your [passenger] contract of carriage. You will need to get a separate contract of carriage (bill of lading) in order to transport them. These goods will then be transported whether or not you are physically travelling with them.
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What are the kinds of passenger baggage and the laws applicable to them? 1. Passenger baggage in the custody of the passenger (e.g. carry-on luggage). These are considered as necessary deposits. Articles 1998, 2000-2003 apply. 2. Passenger baggage not in the custody of the passenger (e.g. checked-in luggage). Arts. 1733-1753 on extraordinary diligence apply. The liability is greater for baggage that is in the custody of the carrier in contrast if such is in the possession of the passenger.
Spouses Landingin v. PANTRANCO (1970) When a passenger dies or is injured, the presumption is that the common carrier is at fault or that it acted negligently (Article 1756). This presumption is only rebutted by proof on the carrier's part that it observed the "extraordinary diligence" required in Article 1733 and the "utmost diligence of very cautious persons" required in Article 1755 (Article 1756). Necesito v. Paras While the carrier is not an insurer of the safety of the passengers, it should nevertheless be held answerable for the flaws of its equipment, if such flaws were discoverable. The rationale for the common carriers liability for manufacturing defects is the fact that the passenger has neither choice nor control over the carrier in the selection and use of the equipment and appliances in use by the carrier. Having no privity whatever with the manufacturer or vendor of the defective equipment, the passenger has no remedy against him.
III.Common Carriage of Passengers

(Asked in 97 and 01)
A.
Nature and Responsibility
Extent
of
Art. 1733 Civil Code Common carriers, from the nature of their business and for reasons of public policy, are bound to observe extraordinary diligence in the vigilance over the goods and for the safety of the passengers transported by them, according to all the circumstances of each case. Such extraordinary diligence in the vigilance over the goods is further expressed in Articles 1734, 1735, and 1745, Nos. 5, 6, and 7, while the extraordinary diligence for the safety of the passengers is further set forth in Articles 1755 and 1756. Art. 1755 Civil Code A common carrier is bound to carry the passengers safely as far as human care and foresight can provide, using the utmost diligence of very cautious persons, with a due regard for all the circumstances.
B.
Duration of Responsibility
La Mallorca v. CA (1966) It has been recognized as a rule that the relation of carrier and passenger does not cease at the moment the passenger alights from the carrier's vehicle at a place selected by the carrier at the point of destination, but continues until the passenger has had a reasonable time or a reasonable opportunity to leave the carrier's premises. And, what is a reasonable time or a reasonable delay within this rule is to be determined from all the circumstances. Aboitiz vs CA It is of common knowledge that, by the very nature of petitioner's business as a shipper, the passengers of vessels are allotted a longer period of time to disembark from the ship than other common carriers such as a passenger bus. Such vessels are capable of accommodating a bigger volume of both as compared to the capacity of a regular commuter bus. Consequently, a ship passenger will need at least an hour as is the usual practice, to disembark from the vessel and claim his baggage whereas a bus passenger can easily get off the bus and retrieve his luggage in a very short period of time.
Is there any difference between the extraordinary diligence for goods and for persons? In the case of transport of persons, there are no exceptions to the presumption of negligence in the case of injuries or death, unlike in goods under Art. 1734.
Isaac v. A. L. Ammen Transportation (1975) It is the prevailing rule that it is negligence per se for a passenger on a railroad voluntarily or inadvertently to protrude his arm, hand, elbow, or any other part of his body through the window of a moving car beyond the outer edge of the window or outer surface of the car, so as to come in contact with objects or obstacles near the track, and that no recovery can be had for an injury which but for such negligence would not have been sustained.
Does the duty of extraordinary diligence occur right at the perfection of the contract of transportation? The perfection of the contract of carriage does not necessarily coincide with the commencement of the duty of extraordinary diligence. It may occur at the same time or later.
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Does the duty of extraordinary diligence get interrupted? No. In PAL v. CA, it was held that PAL had to continue to exercise extraordinary diligence even in the case of stranded passengers until they have reached their final destination. Is there a duty of extraordinary diligence for comfort and safety? No. The duty really only involves bringing the person to the destination. But in PAL v. CA, the Court held that PAL had the duty to provide all means and comfort and convenience to its passengers when they got stranded.
injuries to passengers through the negligence or willful acts of the former's employees, although such employees may have acted beyond the scope of their authority or in violation of the orders of the common carriers. This liability of the common carriers does not cease upon proof that they exercised all the diligence of a good father of a family in the selection and supervision of their employees. Art. 1760 Civil Code The common carrier's responsibility prescribed in the preceding article cannot be eliminated or limited by stipulation, by the posting of notices, by statements on the tickets or otherwise.
C.
Presumption of Negligence
Art. 1756 In case of death of or injuries to passengers, common carriers are presumed to have been at fault or to have acted negligently, unless they prove that they observed extraordinary diligence as prescribed in Arts 1733 and 1755.
Maranan v. Perez (1967) It is enough that the assault happens within the course of the employee's duty. It is no defense for the carrier that the act was done in excess of authority or in disobedience of the carrier's orders. The carrier's liability here is absolute in the sense that it practically secures the passengers from assaults committed by its own employees. At least three very cogent reasons underlie this rule. As explained in Texas Midland R.R. vs. Monroe: (1) the special undertaking of the carrier requires that it furnish its passenger that full measure of protection afforded by the exercise of the high degree of care prescribed by the law, inter alia from violence and insults at the hands of strangers and other passengers, but above all, from the acts of the carrier's own servants charged with the passenger's safety; (2) said liability of the carrier for the servant's violation of duty to passengers, is the result of the former's confiding in the servant's hands the performance of his contract to safely transport the passenger, delegating therewith the duty of protecting the passenger with the utmost care prescribed by law; and (3) as between the carrier and the passenger, the former must bear the risk of wrongful acts or negligence of the carrier's employees against passengers, since it, and not the passengers, has power to select and remove them.
Is the last clear chance doctrine applicable in contracts of carriage? No. The contract of carriage is contractual in nature. This doctrine is a defense only for torts and quasi-delicts.
D. Force Majeure
Bachelor Express v. CA Force majeure is not in itself a defense. Extraordinary diligence is the defense. Proof of force majeure becomes relevant in complying with the requirement of extraordinary diligence.
E.
Limitation of Liability; Validity of Stipulations
Art. 1757 Civil Code The responsibility of a common carrier for the safety of passengers as required in Articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. Art. 1758 Civil Code When a passenger is carried gratuitously, a stipulation limiting the common carrier's liability for negligence is valid, but not for wilful acts or gross negligence. The reduction of fare does not justify any limitation of the common carrier's liability.
G. Responsibility for Acts Strangers and Co-passengers
of
F.
Responsibility Employees
for
Acts
of
Art. 1759 Civil Code Common carriers are liable for the death of or
Art. 1763 Civil Code A common carrier is responsible for injuries suffered by a passenger on account of the willful acts or negligence of other passengers or of strangers, if the common carrier's employees through the exercise of the diligence of a good father of a family could have prevented or stopped the act or omission.
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Pilapil v. CA (1989) In consideration of the right granted to it by the public to engage in the business of transporting passengers and goods, a common carrier does not give its consent to become an insurer of any and all risks to passenger and goods. It merely undertakes to perform certain duties to the public as the law imposes, and holds itself liable for any breach thereof. Under Art. 1763, a tort committed by a stranger which causes injury to a passenger does not accord the latter a cause of action against the carrier. The negligence for which a common carrier is held responsible is the negligent omission by the carrier's employees to prevent the tort from being committed when the same could have been foreseen and prevented by them. Further, when the violation of the contract is due to the willful acts of strangers, as in the instant case, the degree of care essential to be exercised by the common carrier for the protection of its passenger is only that of a good father of a family.
does not bar recovery of damages for his death or injuries, if the proximate cause thereof is the negligence of the common carrier, but the amount of damages shall be equitably reduced.
IV. Damages Recoverable Common Carriers A. In General
from
Art. 2197 Civil Code Damages may be: (1) Actual or compensatory; (2) Moral; (3) Nominal; (4) Temperate or moderate; (5) Liquidated; or (6) Exemplary or corrective.
B.
Actual or Compensatory
What is the common carriers responsibility towards employees? The common carrier is responsible even beyond the scope of authority and in violation of orders compared to quasidelicts under Art. 2180, which exempts the employer if it was done outside of employment. However, there must be a reasonable connection between the act and the contract of carriage.
ACT DONE In good faith LIABILITY OF OBLIGOR Only natural and probable consequences of the breach, which have could have reasonably been foreseen All damages which may be reasonably attributed to breach
One is entitled to an adequate compensation only for pecuniary loss suffered and duly proved. (Art 2199) These actual and compensatory damages include those profits which the obligee failed to obtain. (Art 2200)
Cariaga v. Laguna Tayabas Bus Co. (1960) From the deposition of Dr. Romeo Gustilo, a neurosurgeon, it appears that, as a result of the injuries suffered by Edgardo, his right forehead was fractured necessitating the removal of practically all of the right frontal lobe of his brain. From the testimony of Dr. Jose A. Fernandez, a psychiatrist, it may be gathered that, because of the physical injuries suffered by Edgardo, his mentality has been so reduced that he can no longer finish his studies as a medical student; that he has become completely misfit for any kind of work; that he can hardly walk around without someone helping him, and has to use a brace on his left leg and feet. The lower court found that the removal of the right frontal lobe of the brain of Edgardo reduced his intelligence by about 50%; that due to the replacement of the right frontal bone of his head with a tantalum plate Edgardo has to lead a quite and retired life because "if the tantalum plate is pressed in or dented it would cause his death." The impression one gathers from this evidence is that, as a result of the physical injuries suffered by Edgardo Cariaga, he is now in a helpless condition, virtually an invalid, both physically and mentally. His award of actual damages is thus increased to P25,000. However, he cannot recover moral damages as LTB never acted fraudulently or in bad faith. Villa Rey v. CA (1970) The determination of the amount involves 2 factors.
In bad faith, fraud, malice or wanton attitude
What is the common carriers responsibility towards strangers? Art. 1763 imposes only the duty of ordinary diligence. In Bachelor Express, the Court held that the common carrier has a duty of extraordinary diligence for the act of a copassenger. However, in Pilapil, the standard of diligence is only ordinary diligence, (Art. 1763), referring to the acts of strangers.
H. Duty of Passenger; Effect Contributory Negligence
of
Art. 1761Civil Code The passenger must observe the diligence of a good father of a family to avoid injury to himself. Art. 1762 Civil Code The contributory negligence of the passenger
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1.
The number of years on the basis of which the damages shall be computed and 2. The rate at which the losses sustained by his sisters should be fixed The determination of the indemnity to be awarded to the heirs of a deceased person has therefore no fixed basis. Much is left to the discretion of the court considering the moral and material damages involved, and so it has been said that "(t)here can be no exact or uniform rule for measuring the value of a human life and the measure of damages cannot be arrived at by precise mathematical calculation, but the amount recoverable depends on the particular facts and circumstances of each case. The life expectancy of the deceased or of the beneficiary, whichever is shorter, is an important factor. As to the rate: total earnings less expenses necessary in the creation of such earnings and income (net earnings) Pan Am World v. IAC, supra (1988) The rule laid down in Mendoza vs PAL is clear: Under Art. 1107, a debtor in good faith like the defendant herein, may be held liable only for damages that were foreseen or might have been foreseen at the time the contract of transportation was entered into. In the absence of a showing that PAN AMs attention was called to the special circumstances requiring prompt delivery of respondent Pangans luggages, PAN AM cannot be held liable for the cancellation of Pangans contracts as it could not have foreseen such an eventuality when it accepted the luggages for transit.
Fores v. Miranda (1959) Moral damages are not recoverable in damage actions predicted on a breach of the contract of transportation, in view of Articles 2219 and 2220 of the new Civil Code. An exception to this rule is Art 1764 which makes the common carrier expressly subject to the rule of Art. 2206, that entitles the deceased passenger to "demand moral damages for mental anguish by reason of the death of the deceased" but where the injured passenger does not die, moral damages are not recoverable unless it is proved that the carrier is guilty of malice or bad faith.
Air France v. Carrascoso (1966) There was a contract to furnish a first class passage. The contract was breached when the airline failed to furnish the first class ticket at Bangkok. There was bad faith when Air Frances employee compelled Carrascoso to leave his first class seat for an economy class one by forcibly ejecting him.
D. Exemplary Damages
Art. 2229 Civil Code Exemplary or corrective damages are imposed, by way of example or correction for the public good, in addition to the moral, temperate, liquidated or compensatory damages. Art. 2232 Civil Code In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Art. 2233 Civil Code Exemplary damages cannot be recovered as a matter of right; the court will decide whether or not they should be adjudicated. Mecenas v. CA In discussing the rule of exemplary damages in law, the Supreme Court looks to it as an instruction to serve the ends of law and public policy by reshaping socially deleterious behaviors, specifically in the case, to compel common carriers to control their employees, to tame their reckless instincts, and to force them to take adequate care of humans beings and their property.
C.
Moral Damages
General Rule: moral damages are not recoverable in actions predicated on a breach of contract of carriage Exception: 1. where death results 2. where it is proved that carrier was guilty of fraud or bad faith, even if death does not result Bad faith is a breach of a known duty through some motive of interest or ill will. Moral damages for mental anguish by reason of the death may be claimed by the spouse, legitimate and illegitimate descendants and ascendants of the deceased. (Art 2206) No proof of pecuniary loss is necessary in order that moral, nominal, temperate, liquidated or exemplary damages may be awarded. Assessment of such damages is discretionary to the court. (Art 2216)
E.
Nominal, Liquidated
Temperate
and
Art. 2221 Civil Code Nominal damages are adjudicated in order that a right of the plaintiff, which has been violated or invaded by the defendant, may be vindicated or recognized, and not for the purpose of indemnifying the plaintiff for any loss suffered by him.
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Chapter II. Common Carriers compensation and employer's liability laws; (9) In a separate civil action to recover civil liability arising from a crime; (10) When at least double judicial costs are awarded; (11) In any other case where the court deems it just and equitable that attorney's fees and expenses of litigation should be recovered. (12) In all cases, the attorney's fees and expenses of litigation must be reasonable.
Art. 2224 Civil Code Temperate or moderate damages, which are more than nominal but less than compensatory damages, may be recovered when the court finds that some pecuniary loss has been suffered but its amount can not, from the nature of the case, be provided with certainty. Art. 2226 Civil Code Liquidated damages are those agreed upon by the parties to a contract, to be paid in case of breach thereof. Art. 1757 Civil Code The responsibility of a common carrier for the safety of passengers as required in Articles 1733 and 1755 cannot be dispensed with or lessened by stipulation, by the posting of notices, by statements on tickets, or otherwise. Alitalia v. IAC (1990) Dr. Pablo is not entitled to be compensated for loss or damage to her luggage since they were ultimately delivered to her. She is however entitled to nominal damages, which is adjudicated in order that the right of the passenger, which has been violated or invaded, may be vindicated or recognized, and not for the purpose of indemnifying the passenger for any loss suffered. Saludo v. CA The lamentable actuations of TWA's employees leave much to be desired, particularly so in the face of petitioners' grief over the death of their mother, exacerbated by the tension and anxiety wrought by the impasse and confusion over the failure to ascertain over an appreciable period of time what happened to her remains. Airline companies are hereby sternly admonished that it is their duty not only to cursorily instruct but to strictly require their personnel to be more accommodating towards customers, passengers and the general public.
Art. 2210 Civil Code Interest may, in the discretion of the court, be allowed upon damages awarded for breach of contract. Art. 2212 Civil Code Interest due shall earn legal interest from the time it is judicially demanded, although the obligation may be silent upon this point. (1109a)
1. 2. 3. 4. 5.
What damages may be recovered in case of death of a passenger?

indemnity for the death of the victim indemnity for loss of earning capacity of the deceased moral damages attorneys fees and expenses of litigation interest (in proper cases)
1. 2. 3. 4. 5. 6. 7.
In fixing a greater amount of damages for death of a passenger, what may the courts consider?
life expectancy of the deceased pecuniary loss to the plaintiff or beneficiary loss of support loss of service loss of society mental suffering of beneficiaries medical and funeral expenses
F.
Attorneys Fees and Interest
Art. 2208 Civil Code In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial costs, cannot be recovered, except:
(1) (2) When exemplary damages are awarded; When the defendant's act or omission has compelled the plaintiff to litigate with third persons or to incur expenses to protect his interest; In criminal cases of malicious prosecution against the plaintiff; In case of a clearly unfounded civil action or proceeding against the plaintiff; Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's plainly valid, just and demandable claim; In actions for legal support; In actions for the recovery of wages of household helpers, laborers and skilled workers; In actions for indemnity under workmen's
(3) (4) (5) (6) (7) (8)
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Chapter III. Overland Transportation

I. II. III. IV. SCOPE OF OVERLAND TRANSPORTATION NATURE OF CONTRACT EFFECT OF CIVIL CODE CONTRACT OF CARRIAGE A. BILL OF LADING B. REFUSAL TO TRANSPORT C. DOUBTFUL DECLARATION OF CONTENTS D. NO BILL OF LADING V. RESPONSIBILITY OF THE CARRIER A. WHEN IT COMMENCES B. ROUTE C. CARE OF GOODS D. DELIVERY VI. RIGHTS AND OBLIGATIONS OF SHIPPER AND/OR CONSIGNEE VII. APPLICABILITY OF PROVISIONS
III.Effect of Civil Code

Art 1766, Civil Code In all matters not regulated by this Code, the rights and obligations of common carriers shall be governed by the Code of Commerce and by special laws.
IV. Contract of Carriage A. Bill of Lading

Definition, Subject Matter
What does the Code of Commerce cover? It governs over overland transportation and maritime admiralty. It governs only commercial contracts. Commercial contracts involving common carriers: refer first to the Civil Code, then to the Code of Commerce Private carriers involved in commercial contracts: refer first to the Code of Commerce, then to the Civil Code, but excluding the Civil Code provisions on common carriers
What is a bill of lading? It may be defined as a written acknowledgment of the receipt of goods and an agreement to transport and to deliver them at a specified place to a person named or on his order. It comprehends all methods of transportation. Each bill of lading is a contract in itself and the parties are bound by its terms. A bill of lading is also a receipt, and it is likewise a symbol of the goods covered by it. It is also a document of title. Who are the parties to a bill of lading? 1. shipper 2. consignee 3. carrier Essential Terms in a Bill of Lading 1. the name of the carrier, the date of shipment, 2. the points of departure and arrival, 3. the price, and with regard to baggage, 4. the number and weight of the packages, with any other indications in order to easily identify them. (Article 352, Code of Commerce)
I. Scope of Overland Transportation

What is overland transport? Overland transport applies to transport on land and on small bodies of water, waterways, both natural and artificial, including transport on rivers which are not very large. (If it is transport at sea, then it is admiralty)
Form, Contents
Specific Contents of a Bill of Lading 1. The name, surname, and domicile of the shipper. 2. The name, surname, and domicile of the carrier. 3. The name, surname and domicile of the person to whom or to whose order the goods are addressed, or whether they are to be delivered to the bearer of the said bill. 4. A description of the goods, stating their generic character, their weight, and the external marks or signs of the packages containing the same.
II. Nature of Contract

A contract considered commercial when: 1. It involves merchandise or any commercial goods. 2. No matter what its object may be, the carrier is a merchant or is customarily engaged in making transportation for the public. (Article 349, Code of Commerce)
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5. The cost of the transportation. 6. The date on which the shipment is made. 7. The place of the delivery to the carrier. 8. The place and time at which the delivery is to be made to the consignee. 9. The damages to be paid by the carrier in case of delay, if any agreement is made on this point. (Article 351, Code of Commerce) Shipments made over railroads The bills of lading or declarations of shipment furnished by the shipper should refer, with regard to the rate, terms, and special conditions of the transportation, to the schedules and regulations. (Article 351, Code of Commerce) Is the form material? No. As long as it contains an acknowledgment by the carrier of the receipt of goods for transportation, it is in legal effect, a bill of lading.
witnesses, in the presence of the shipper or of the consignee. In the absence of the shipper or consignee, the examination shall be made before a notary. If the declaration should be correct, the expenses caused by the examination and repacking the packages shall be defrayed by the carrier, and in a contrary case by the shipper. (Article 357, Code of Commerce)
D. No Bill of Lading
In the absence of a bill of lading the claims of the parties shall be decided by the legal proofs that each one may submit in support of his claims, in accordance with the general provisions established for commercial contracts. (Article 354, Code of Commerce) Shipments made by railroads Should no schedule by determined, the carrier must apply the rate of the merchandise paying the lowest, with the conditions inherent therein, always including such statement or reference to them in the bill of lading which he delivers to the shipper. Is a bill of lading essential to a contract of transportation? No. While under Art. 350 the shipper and the common carrier may mutually demand that a bill of lading be made, it is not obligatory. The fact that a bill of lading is not issued does not preclude the existence of a contract of transportation. Where no bill of lading is issued, the disputes between the parties shall be decided according to the rules laid down in Art. 354.
Function
1. It is the legal basis of the contract between the shipper and the carrier 2. All disputes as to the execution and fulfillment of the contract shall be decided on the basis of the bill of lading only, except forgery or material errors in the drafting. 3. The obligations and actions between the parties shall be canceled upon return of the bill of lading, unless the claims which the contracting parties desired to reserve are reduced to writing (Article 353, Code of Commerce) If in case of loss, the consignee shall give the carrier a receipt for the goods delivered, this receipt producing the same effects as the return of the bill of lading.
V. Responsibility of the Carrier A. When it commences

Commences from the moment the carrier receives the merchandise: 1. in person or 2. through a person entrusted thereto in the place indicated for their reception (Article 355, Code of Commerce)
B. Refusal to Transport
Carrier may refuse to accept packages which appear unfit for transportation If transportation is made by railway and the shipment is insisted on, the company shall be exempt from all liability if its objections are so stated in the bill of lading. (Article 356, Code of Commerce)
B. Route
General Rule: Carrier cannot change the route if there is an agreement between the shipper and the carrier
C. Doubtful Declaration of Contents

In case of a well founded suspicion, the carrier may examine the package before
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Effect: Liable for damages Exception: Force Majeure. In case of an increase in transportation charges, he shall be reimbursed for said increase after presenting the formal proof thereof. (Article 359, Code of Commerce)
Partial Delivery: The consignee may refuse to receive them, when he proves that he can not make use thereof without the others. (Article 363, Code of Commerce) Only a Reduction in the Value of Goods: The obligation of the carrier shall be reduced to the payment of the amount of said reduction in value, after appraisal by experts. (Article 364, Code of Commerce) When consignee may refuse to receive goods: 1. Partial Delivery (Article 363, Code of Commerce) 2. When the goods are rendered useless for purposes of sale or consumption in the use for which they are properly destined. [Effect: consignee may demand payment of the goods at current market prices] 3. In case part of the goods is in good condition, the consignee may refuse to receive only the damaged goods if separation is possible. (Article 365, Code of Commerce) In case of dispute as to the condition of the goods, the same shall be examined by experts appointed by the parties, and the third one, in case of disagreement, appointed by the judicial authority. If the persons interested should not agree with the report, said judicial authority shall order the deposits of the merchandise in a safe warehouse, and the parties interested shall make use of their rights in the proper manner. (Article 367, Code of Commerce) 2. To whom Delivery is Made The carrier must deliver to the consignee designated in the bill of lading. Otherwise, he shall be liable for the damages that may arise therefrom. (Article 368, Code of Commerce) 3. Judicial Deposit Judicial Deposit may be made if the consignee: a. is not found at the domicile indicated in the bill of lading, b. refuses to pay the transportation charges and expenses, c. refuses to receive the goods, the deposit of said goods shall be ordered by the municipal judge.
C. Care of Goods
General Rule: Merchandise shall be transported at the risk and venture of the shipper Effect: All damages and impairment suffered by the goods during the transportation, by reason of accident, force majeure, or by virtue of the nature or defect of the articles, shall be for the account and risk of the shipper. The proof of these accidents is incumbent on the carrier. (Article 361, Code of Commerce) The carrier shall be liable 1. if it is proved that they occurred on account of his negligence or 2. because he did not take the precautions usually adopted by careful persons, unless the shipper committed fraud in the bill of lading, making him believe that the goods were of a class or quality different from what they really were. The carrier shall proceed with the sale of the goods and place them at the disposal, of the judicial authority or the officials determined by special provisions, in case of: a. loss of goods through force majeure b. there being no time for the owner to dispose of the goods (Article 362, Code of Commerce)
D. Delivery
1. Conditions of Goods The carrier shall be obliged to deliver the goods transported in the same condition in which, according to the bill of lading, they were at the time of their receipt, without any detriment or impairment. Effects: No delivery: The carrier shall be obliged to pay the value of the goods not delivered at the point where they should have been and at the time the delivery should have taken place.
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The deposit shall have all the effects of a delivery. (Article 369, Code of Commerce) 4. When to be Made Rule: Period fixed for the delivery of the goods Effect of Noncompliance: The carrier shall pay the indemnity agreed upon in the bill of lading. If no indemnity is fixed, the carrier shall be liable for the damages which may have been caused by the delay. (Article 370, Code of Commerce) If no period is fixed, the carrier shall be under the obligation to forward the goods in the first shipment of the same or similar merchandise which he may make to the point of delivery (Article 358, Code of Commerce) 5. Two or More Carriers The succeeding carrier by virtue of agreements or combined services with other carriers shall: a. assume the obligations of the carriers who preceded him, b. reserve his right to proceed against the latter if he should not be directly responsible for the fault which gives rise to the claim of the shipper or of the consignee c. assume all the actions and rights of those who may have preceded him in the transportation. The sender and the consignee shall have an immediate right of action against: a. the carrier who executed the transportation contract, or b. the other carriers who received the goods transported without reserve. The reservations made by the latter shall not exempt them from the liabilities they may have incurred by reason of their own acts. (Article 373, Code of Commerce) 6. Obligation to Keep Registry Transportation agents shall be obliged to keep a special registry in which there shall be entered, in progressive order of numbers and dates, all the goods the transportation of which is undertaken, stating the circumstances required by Articles 350 et seq. for the responsive bills of lading. (Article 378, Code of Commerce)
7. Compliance Regulations
with
Administrative
The carrier shall be liable for all the consequences arising from noncompliance on his part with the formalities prescribed by the laws and regulations of the public administration during the entire course of the trip and on the arrival at the point of destination. Exception: when his omission arises from his having been induced into error by false statements of the shipper in the declaration of the merchandise.
If the carrier has acted in accordance with a formal order received from the shipper or consignee of the merchandise both shall incur liability. (Article 377, Code of Commerce)
VI. Rights and Obligations of Shipper and/or Consignee A. Right to Damages

1. Condition Imposed on Right When to claim for damages
WHEN TO CLAIM Claim for damages must be made upon receipt Claim for damages may be made within 24 hours upon receipt DAMAGE Ascertainable from package Only upon opening the package
After such periods OR transportation charges have been paid, no more claims for damages will be entertained. (Art 366, Code of Commerce) 2. Amount of Damages for Loss In case of lost or mislaid goods: The appraisement of the goods which the carrier must pay shall be fixed in accordance with what is stated in the bill of lading. (Article 372, Code of Commerce) A stipulation limiting the liability of the carrier for the loss, destruction, or deterioration of the goods to a degree less than extraordinary diligence shall be valid, provided it be: (1) In writing, signed by the shipper or owner; (2) Supported by a valuable consideration other than the service rendered by the common carrier; and (3) Reasonable, just and not contrary to public policy. (Art. 1744, Civil Code)
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3. Amount of Damages for Delay The amount cannot exceed the current price of the goods transported on the day and at the place where the delivery was to have been made. (Article 371(3), Code of Commerce)
Effect of Delay in Payment: Carrier may request the judicial sale of the goods (Article 374, Code of Commerce) Lien: The goods transported shall be obligated to answer for the transportation charges and for the expenses and fees. (Article 375, Code of Commerce, Art. 2241, Civil Code) Duration: This right shall be limited to eight days after the delivery has been made, and after said prescription the carrier shall have no further right of action than that corresponding to an ordinary creditor. (Article 375, Code of Commerce) The preference of the carrier to the payment of what is due him shall not be affected by the bankruptcy of the latter, provided the action is brought within the eight days mentioned in Article 375. (Article 376, Code of Commerce)
B. Right to Abandon
Instances when abandonment is proper:
1. Delay on account of the fault of the carrier (Article 371, Code of Commerce) Procedure: Inform the carrier in writing before the arrival of the same at the point of destination. The carrier shall satisfy the total value of the goods, as if they had been lost or mislaid. 2. Partial delivery of the goods. (Article 363, Code of Commerce) If part of the goods transported should be delivered the consignee may refuse to receive them, when he proves that he can not make use thereof without the others. 3. Goods Rendered Useless (Article 365, Code of Commerce) If, on account of the damage, the goods are rendered useless for purposes of sale or consumption in the use for which they are properly destined the consignee shall not be bound to receive them, and may leave them on the hands of the carrier, demanding payment therefor at current market prices.
E. Obligation Lading
to
Return
Bill
of
C. Right to Change Consignment

Conditions for Change of Consignment: 1. No change in the place where delivery is to be made 2. At the time of making the change of the consignee the bill of lading subscribed by the carrier be returned to him, if one were issued 3. Bill of lading to be exchanged for another containing the novation of the contract. 4. The expenses arising from the change of consignment shall be defrayed by the shipper. (Article 360, Code of Commerce)
After the contract has been complied with the bill of lading issued by the carrier shall be returned to him, and by virtue of the exchange of this certificate for the article transported, the respective obligations and actions shall be considered as canceled, unless in the same act the claims which the contracting parties desired to reserve are reduced to writing, exception being made of the provisions of Article 366. If in case of loss or for any other reason whatsoever, the consignee can not return upon receiving the merchandise the bill of lading subscribed by the carrier, he shall give said carrier a receipt for the goods delivered, this receipt producing the same effects as the return of the bill of lading. (Article 353. (2) (3), Code of Commerce)
VII. Applicability of Provisions

The provisions contained in Articles 349 et seq. shall also be understood as relating to persons who, although they do not personally effect the transportation of commercial goods, contract to do so through others, either as contractors for a special and fixed transaction or as freight and transportation agents. In either case they shall be subrogated to the place of the carriers with regard to the obligations and liability of the latter, as well as with regard to their right. (Article 379, Code of Commerce)
D. Obligation to Pay Transportation Charges

Rule: Consignee shall pay expenses and transportation charges on the goods received after twenty-four hours have elapsed from the time of the delivery.
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Chapter IV. Admiralty and Maritime Commerce

I. SOURCE OF LAW II. CONCEPT OF ADMIRALTY; JURISDICTION III. VESSELS A. MEANING B. NATURE AND ACQUISITION IV. PERSONS PARTICIPATING IN MARITIME COMMERCE A. SHIPOWNERS AND SHIPAGENTS B. CAPTAINS AND MANAGERS C. OTHER OFFICERS AND CREW D. SUPERCARGOES V. ACCIDENTS AND DAMAGES IN MARITIME COMMERCE A. AVERAGES B. ARRIVAL UNDER STRESS C. COLLISIONS VI. SPECIAL CONTRACTS A. CHARTER PARTIES B. LOANS ON BOTTOMRY AND RESPONDENTIA C. BILL OF LADING D. PASSENGERS ON SEA VOYAGE VII. CARRIAGE OF GOODS BY SEA ACT
III.Vessels A. Meaning
Vessels are those engaged in navigation, whether coastwide or on the high seas, including floating docks, pontoons, dredges, scows, and any other floating apparatus destined for the services of the industry or maritime commerce. Vessels engaged in the business of carrying or transporting passengers or goods for compensation, offering their services to the public, are common carriers, and are governed primarily by the Civil Code and suppletorily by the Code of Commerce and special laws.
B. Nature and Acquisition

Lopez v. Duruelo The word vessel used in the section was not intended to include all ships, craft or floating structures of every kind without limitation, and the provision of that section should not be held to include minor craft engaged only in river or bay traffic. Vessels of a minor nature, such as river boats and those carrying passengers from ship to shore, are governed as to their liability in passengers by the Civil Code.
I. Source of Law
Main source of law: Code of Commerce If common carrier, apply Civil Code first, then Code of Commerce and special laws. Maritime law includes coastwise, oceanwise and commercial laws.
Article 573, Code of Commerce Merchant vessels constitute property which may be acquired and transferred by any of the means recognized by law. The acquisition of a vessel must be included in a written instrument, which shall not produce any effect with regard to third persons if not recorded in the mercantile registry. The ownership of a vessel shall also be acquired by the possession thereof in good faith for three years, with a good title duly recorded. In the absence of any of these requisites, uninterrupted possession for ten years shall be necessary in order to acquire ownership. A captain can not acquire by prescription the ship of which he is in command.
II. Concept Jurisdiction
of
Admiralty;
Admiralty is distinguished from overland transportation based on two factors: a. Size of the vessel b. Size of the body of water over which a vessel traverses.
BP 129 Section 19. Jurisdiction in civil cases. Regional Trial Courts shall exercise exclusive original jurisdiction: xxx (3) In all actions in admiralty and maritime jurisdiction where he demand or claim exceeds One hundred thousand pesos (P300,000.00) or , in Metro Manila, where such demand or claim exceeds Two hundred thousand pesos (400,000.00); (as amended by R.A. 7691)
Vessels shall continue to be considered as personal property. (Article 585, Code of Commerce)
IV. Persons Participating in Maritime Commerce A. Shipowners and Shipagents

1. Definition Shipowner has possession, control and management of the vessel and the consequent right to direct her navigation
Under BP 129, it is the amount of the claim that is relevant in determining jurisdiction of the courts over cases involving admiralty.
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and receive freight earned and paid, while his possession continues. Shipagent is the person intrusted with the provisioning of a vessel, or who represents her in the port in which she happens to be. 2. Liabilities The owner of a vessel and the agent shall be civilly liable for the acts of the captain and for the obligations contracted by the latter to repair, equip, and provision the vessel. (Article 586, Code of Commerce) The agent shall also be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried Exemption: abandonment of the vessel (Article 587, Code of Commerce) The owner or agent shall not be liable for the obligations contracted by the captain if the latter exceeds his powers and privileges. However, if the amounts claimed were made use of for the benefit of the vessel, the owner or agent shall be liable. (Article 588, Code of Commerce) The captain shall be civilly liable to the agent, and the latter to the third persons who may have made contracts with the former: 1. For all the damages suffered by the vessel and his cargo by reason of want of skill or negligence on his part. If a misdemeanor or crime has been committed he shall be liable in accordance with the Penal Code. 2. For all the thefts committed by the crew, reserving his right of action against the guilty parties. 3. For the losses, fines, and confiscations imposed an account of violation of the laws and regulations of customs, police, health, and navigation. 4. For the losses and damages caused by mutinies on board the vessel, or by reason of faults committed by the crew in the service and defense of the same, if he does not prove that he made full use of his authority to prevent or avoid them. 5. For those arising by reason of an undue use of powers and non-fulfillment of the obligations which are his in accordance with Articles 610 and 612. 6. For those arising by reason of his going out of his course or taking a course
which he should not have taken without sufficient cause, in the opinion of the officers of the vessel, at a meeting with the shippers or supercargoes who may be on board. No exception whatsoever shall exempt him from this obligation. 7. For those arising by reason of his voluntarily entering a port other than his destination, with the exception of the cases or without the formalities referred to in Article 612. 8. For those arising by reason of the nonobservance of the provisions contained in the regulations for lights and evolutions for the purpose of preventing collisions. (Article 618, Code of Commerce) 3. Part Owners The association of part-owners shall be governed by the resolutions of a majority of the members. If there are only two part owners, in case of disagreement, the member having the largest interest shall be decisive. If the interests are equal, it shall be decided by lot. (Article 589, Code of Commerce) A vessel can not be detained, attached or levied upon execution in her entirety for the private debts of a part owner, but shall be limited to the interest the debtor may have in the vessel. (Article 589, Code of Commerce) The owners of a vessel shall be civilly liable in the proportion of their contribution to the common fund, for the results of the acts of the captain. Exemption: Abandonment of his part of the vessel (Article 590 Code of Commerce) All the part owners shall be liable, in proportion to their respective ownership, for: a. the expenses of repairs to the vessel, b. other expenses which are incurred by virtue of a resolution of the majority. c. the expenses of maintenance, equipment, and provisioning of the vessel, necessary for navigation. (Article 591, Code of Commerce) 4. Relations with the Captain The agent may discharge the duties of captain of the vessel. If two or more coowners request the position of captain, the disagreement shall be decided by a vote of the members; and if the vote should result
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in a tie, the position shall be given to the part owner having the larger interest in the vessel. If the interest should be the same, the matter shall be decided by lot. (Article 596, Code of Commerce) The agent shall agree with the captain, and shall contract in the name of the owners, regarding repairs, details of equipment, armament, provisions, fuel, and freight of the vessel, and, in general, in all that relates to the requirements of navigation. (Article 597, Code of Commerce) The agent shall indemnify the captain for all the expenses he may have incurred from his own funds or from those of other persons, for the benefit of the vessel. (Article 602, Code of Commerce) The agent shall have a right to discharge the captain and members of the crew: a. before a vessel goes out to sea: When the contract does not state a definite period, he shall have a right to discharge them by paying them the salaries earned according to their contracts, and without any indemnity. (Article 603, Code of Commerce) b. during the voyage: the captain or member of the crew shall receive their salary until the return to the place where the contract was made, unless there are good reasons for the discharge (Article 604, Code of Commerce) c. if there is a contract for a definite period or voyage: the captain or member of the crew shall not be discharged until the fulfillment of their contracts, except for reasons of insubordination in serious matters, robbery, theft, habitual drunkenness, and damage caused to the vessel or to its cargo by malice or manifest or proven negligence. (Article 605, Code of Commerce) d. if captain is part-owner: Captain can not be discharged without the agent returning him the amount of his interest therein (Article 606, Code of Commerce) 5. Voyage and Charter Contracts The agent can not order a new voyage, nor make contracts for a new charter, nor insure the vessel, without the authority of her owner or by virtue of a resolution of the majority of the co-owners, unless these privileges were granted him in the certificate of his appointment.
If he should insure the vessel without authority, he shall be secondarily liable for the solvency of the underwriter. (Article 598, Code of Commerce)
Standard Oil v. Castelo (1921) It is important to remember that the owner of the ship ordinarily has vastly more capital embarked upon a voyage than has any individual shipper of cargo. Moreover, the owner of the ship, in the person of the captain, has complete and exclusive control of the crew and of the navigation of the ship, as well as of the disposition of the cargo at the end of the voyage. It is therefore proper that any person whose property may have been cast overboard by order of the captain should have a right of action directly against the ship's owner for the breach of any duty which the law may have imposed on the captain with respect to such cargo. The evident intention of the Code, taken in all of its provisions, is to place the primary liability upon the person who has actual control over the conduct of the voyage and who has most capital embarked in the venture, namely, the owner of the ship, leaving him to obtain recourse, as it is very easy to do, from other individuals who have been drawn into the venture as shippers. Yu Con v. Ipil (1916) It is well and good that the shipowner be not held criminally liable for such crimes or quasi crimes; but he cannot be excused from liability for the damage and harm which, in consequence of those acts, may be suffered by the third parties who contracted with the captain, in his double capacity of agent and subordinate of the shipowner himself. In maritime commerce, the shippers and passengers in making contracts with the captain do so through the confidence they have in the shipowner who appointed him; they presume that the owner made a most careful investigation before appointing him, and, above all, they themselves are unable to make such an investigation, and even though they should do so, they could not obtain complete security, inasmuch as the shipowner can, whenever he sees fit, appoint another captain instead.
6. Doctrine of Exceptions
Limited
Liability
and
The real and hypothecary nature of the liability of the shipowner or agent had its origin in the prevailing continues of the maritime trade and sea voyages during the medieval ages, attended by innumerable hazards and perils. To offset against these adverse conditions and encourage shipbuilding and maritime commerce, it was deemed necessary to confine the liability of the owner or agent arising from the operation of a ship to the
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vessel, equipment, and freight, or insurance, if any, so that if the shipowner or agent abandoned the ship, equipment, and freight, his liability was extinguished. The agent shall be civilly liable for the indemnities in favor of third persons which arise from the conduct of the captain in the care of the goods which the vessel carried; but he may exempt himself therefrom by abandoning the vessel with all her equipments and the freight he may have earned during the voyage. (Article 587, Code of Commerce) The owners of a vessel shall be civilly liable in the proportion of their contribution to the common fund, for the results of the acts of the captain, referred to in Article 587. Each part owner may exempt himself from this liability by the abandonment before a notary of the part of the vessel belonging to him. (Article 590, Code of Commerce) In case of collision, the liability of the shipowner shall be understood as limited to the value of the vessel with all her appurtenances and all the freight earned during the voyage. (Article 837, Code of Commerce) Liability for wages of the captain and the crew and for advances made by the ship agent if the vessel is lost by shipwreck or capture. (Article 643, Code of Commerce)
Yangco v. Laserna et al (1941) If the shipowner or agent may in any way be held civilly liable at all for injury to or death of passengers arising from the negligence of the captain in cases of collisions or shipwrecks, his liability is merely co-extensive with his interest in the vessel such that a total loss thereof results in its extinction. In arriving at this conclusion, the fact is not ignored that the illfated S. S. Negros, as a vessel engaged in interisland trade, is a common carrier, and that the relationship between the petitioner and the passengers who died in the mishap rests on a contract of carriage. But assuming that petitioner is liable for a breach of contract of carriage, the exclusively "real and hypothecary nature" of maritime law operates to limit such liability to the value of the vessel, or to the insurance thereon, if any. In the instant case it does not appear that the vessel was insured. Art. 587 of the Code of Commerce appears to deal only with the limited liability of shipowners or agents for damages arising from the misconduct of the captain in the care of the goods which the vessel carries, but this is a mere deficiency of language and in no way indicates the true extent of such liability.
Exceptions to the Doctrine of Limited Liability: a. Claims under the Workmens Compensation (Abueg vs San Diego) b. Expenses for repairing, provisioning and equipping the vessel c. Injury or damage due to the fault of the shipowner d. Vessel is insured e. Vessel is not abandoned or there was no total loss. 7. Specific Rights and Prerogatives a. Right of option of purchase and withdrawal in the sales made to strangers to be exercised within 9 days following the record of the sale in the registry and by delivering the price at once. (Article 575, Code of Commerce) Preference in the charter of the vessel by offering equal conditions and price (Article 593, Code of Commerce) Right to elect a manager who shall represent the owners. The appointment of director or agent shall be revocable at the will of the members. (Article 594, Code of Commerce) Right to demand profits by means of an executory action without further requisites than the acknowledgment of the signatures of the instrument approving the account. (Article 601, Code of Commerce)
b. c.
d.
B. Captains and Managers

1. Powers Inherent powers of a captain or master of a vessel: 1. To appoint or make contracts with the crew in the absence of the agent and propose said crew, should said agent be present; but the agent shall not be permitted to employ any member against the captain's express refusal. 2. To command the crew and direct the vessel to the port of its destination, in accordance with the instructions he may have received from the agent. 3. To impose, in accordance with the agreements and the laws and regulations of the merchants marine, on board the vessel, correctional punishment upon those who do not comply with his orders or who conduct themselves against discipline, holding a preliminary investigation on the crimes committed on board the vessel on the high seas, which shall be turned over to
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the authorities, who are to take cognizance thereof, at the first port touched. 4. To make contracts for the charter of the vessel in the absence of the agent or of her consignee, acting in accordance with the instructions received and protecting the interests of the owner most carefully. 5. To adopt all the measures which may be necessary to keep the vessel well supplied and equipped, purchasing for the purpose all that may be necessary, provided there is no time to request instructions of the agent. 6. To make, in similar urgent cases and on a voyage, the repairs to the hull and engines of the vessel and to her rigging and equipment which are absolutely necessary in order for her to be able to continue and conclude her voyage; but if she should arrive at a point where there is a consignee of the vessel, he shall act in concurrence with the latter. (Article 610, Code of Commerce) When the captain has no funds and does not expect to receive any from the agent, he shall procure the funds: 1. By requesting said funds of the consignees or correspondents of a vessel. 2. By applying to the consignees of the cargo or to the persons interested therein. 3. By drawing on the agent. 4. By borrowing the amount required by means of a bottomry bond. 5. By selling a sufficient amount of the cargo to cover the amount absolutely necessary to repair the vessel, and to equip her to pursue the voyage. (Article 611, Code of Commerce) 2. Duties a. In case of knowledge of appearance of privateers or men of war: To make head to the nearest neutral port, inform his agent or shippers, and await an occasion to sail under convoy, or until the danger is over or he has received express orders from the ship agent or the shippers. (Article 623, Code of Commerce) b. In case of a hurricane or if the cargo suffered damages or averages: To make a protest within 24 hours following his arrival and ratify it within 24 hours
upon arrival at his destination. (Article 624, Code of Commerce) c. Upon arrival at the port of destination: To get the necessary permission from the health and customs officers, and perform the other formalities required by the regulations of the administration, delivering the cargo without any defalcation, to the consignee, and in a proper case, the vessel, rigging and freightage to the ship agent. (Article 625, Code of Commerce) 3. Prohibited Acts and Transactions a. The captain cannot make any transaction for his exclusive account. Should he do so, the profit shall belong to the other persons in interest but losses shall be for his own exclusive account (Article 613, Code of Commerce) b. Indemnify for all the losses in case he fails to complete the voyage, save in case of a fortuitous event (Article 614, Code of Commerce) c. Without the consent of the agent, to have himself substituted by another person (Article 615, Code of Commerce) d. Contract loans on respondentia or borrow money on bottomry for his own transactions, except on the portion of the vessel he owns. (Article 617, Code of Commerce) e. Borrowing money on bottomry or pledging or selling the merchandise without the formalities required by the Code (Article 621, Code of Commerce)
C. Other Officers and Crew

1. Duties A sailor contracted to serve on a vessel cannot: a. rescind his contract b. fail to comply therewith except: by reason of a legitimate impediment c. pass from the service of one vessel to another without obtaining written consent. effects: the second contract shall be void, and the captain may choose between forcing him to fulfill the service to which he first bound himself or look for a person to substitute him at his expense. The sailor shall also lose the wages earned on the first contract (Article 635, Code of Commerce)
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2. Rights a. Duration of the period fixed in the contract: He cannot be discharged until the end of the return voyage (Article 636, Code of Commerce) exception: i. The perpetration of a crime which disturbs order on the vessel. ii. Repeated offenses of insubordination, against discipline, or against the fulfillment of the service. iii. Repeated incapacity or negligence in the fulfillment of the service to be rendered. iv. Habitual drunkenness. v. Any occurrence which incapacitates the sailor to carry out the work under his charge, with the exception of the provisions contained in Article 644. vi. Desertion. (Article 637, Code of Commerce) The captain cannot abandon any member of his crew on land or on sea, except when the member is: i. guilty of some crime ii. imprisoned iii. delivered to a competent authority b. Before setting out on a voyage: He may be dismissed for any reason. The captain is obliged to pay him his wages as if he had rendered services. (Article 637, Code of Commerce) c. If voyage is revoked by the agent or charterers: The member of the crew shall be indemnified. d. Revocation or change of the voyage: Increase in the wages if necessary, but no reduction in the wages agreed upon. (Article 638, Code of Commerce) e. Revocation of the voyage arose from a just cause independent of the will of the agent or charterer and the vessel should not have left the port: Members of the crew shall not have any other right than to receive the wages earned up to day when revocation took place. (Article 639, Code of Commerce) f. Vessel and freight are totally lost by reason of capture or wreck: Right of the
crew to demand any wages shall be extinguished. If a portion of the vessel or freight should be saved, the crew shall retain their rights on the salvage on the remainder of the vessel as well as value of the freightage or the cargo saved. (Article 643, Code of Commerce) g. Sailor becomes sick: He shall not lose his right to wages during the voyage, unless the sickness is the result of his own fault. If the sickness should be caused by an injury received in the service or defense of the vessel the sailor shall be attended and cured from the common funds. (Article 644, Code of Commerce) h. Sailor dies: If a sailor should die during the voyage his heir shall be given the wages earned and not received. If he should have died a natural death and should have been engaged on wages there shall be paid what may have been earned up to the date of his death. If the death should have occurred in the defense of the vessel, the sailor shall be considered as living, and his heirs shall be paid, at the end of the voyage, the full amount of wages or the full part of the profits due him as to the others of his grade. (Article 645, Code of Commerce) 1. 2. 3. 4. Just Causes for Revocation of the Voyage A declaration of war or interdiction of commerce with the power to whose territory the vessel was bound. The blockade of the port of destination or the breaking out of an epidemic after the agreement. The prohibition to receive in said port the goods which make up the cargo of the vessel. The detention or embargo of the same by order of the Government, or for any other reason independent of the will of the agent. The inability of the vessel to navigate. (Article 640, Code of Commerce)
5.
The officers and the crew of the vessel shall be exempted from all obligations contracted, if they deem it proper, in the following cases: 1. If, before the beginning of the voyage, the captain attempts to change it, or there occurs a naval war with the power to which the vessel was destined.
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2. If a disease should break out and be officially declared epidemic in the port of destination. 3. If the vessel should change owner or captain. (Article 647, Code of Commerce)
1. Simple or Particular Simple or particular averages shall be all the expenses and damages caused to the vessel or to her cargo which have not redounded to the benefit and common profit of all the persons interested in the vessel and her cargo, and especially the following: 1. The damages suffered by the cargo from the time of its embarkation until it is unloaded, either on account of the nature of the goods or by reason of an accident at sea or force majeure, and the expenses incurred to avoid and repair the same. 2. The damages suffered by the vessel in her hull, rigging, arms, and equipment, for the same causes and reasons, from the time she puts to sea from the port of departure until she anchored in the port of destination. 3. The damages suffered by the merchandise loaded on deck, except in coastwise navigation, if the marine ordinances allow it. 4. The wages and victuals of the crew when the vessel should be detained or embargoed by a legitimate order or force majeure, if the charter should have been for a fixed sum for the voyage. 5. The necessary expenses on arrival at a port, in order to make repairs or secure provisions. 6. The lowest value of the goods sold by the captain in arrivals under stress for the payment of provisions and in order to save the crew, or to cover any other requirement of the vessel against which the proper amount shall be charged. 7. The victuals and wages of the crew during the time the vessel is in quarantine. 8. The damage suffered by the vessel or cargo by reason of an impact or collision with another, if it were accidental and unavoidable. If the accident should occur through the fault or negligence of the captain, the latter shall be liable for all the damage caused. 9. Any damage suffered by the cargo through the faults, negligence, or barratry of the captain or of the crew, without prejudice to the right of the owner to recover the corresponding indemnity from the captain, the vessel, and the freight. (Article 809, Code of Commerce) The owner of the goods which gave rise to the expense or suffered the damage shall
D. Supercargoes
What is a supercargo? He or she is an agent of the owner of goods shipped as cargo on a vessel, who has charge of the cargo on board, sells the same to the best advantage in the foreign markets, buys cargo to be brought back on the return voyage of the ship, and comes home with it. Duties of a Supercargo: a. He shall discharge on board the vessel the administrative duties which the agent or shippers may have assigned them; b. He shall keep an account and record of their transactions in a book (Article 649, Code of Commerce) c. He cannot, without special authorization or agreement, make any transaction for their own account during the voyage, with the exception of the ventures which, in accordance with the custom of the port of destination, they are permitted to do. d. He is not permitted to invest in the return trip more than the profits from the ventures, unless there is a special authorization thereto from the principals. (Article 651, Code of Commerce)
V. Accidents and Damages Maritime Commerce A. Averages
in
The following shall be considered averages: 1. All extraordinary or accidental expenses which may be incurred during the navigation for the preservation of the vessel or cargo, or both. 2. All damages or deterioration the vessel may suffer from the time she puts to sea from the port of departure until she casts anchor in the port of destination, and those suffered by the merchandise from the time it is loaded in the port of shipment until it is unloaded in the port of consignment. (Article 806, Code of Commerce)
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bear the simple or particular averages. (Article 810, Code of Commerce) 2. Gross or General General or gross averages shall be all the damages and expenses which are deliberately caused in order to save the vessel, her cargo, or both at the same time, from a real and known risk, and particularly the following: 1. The goods or cash invested in the redemption of the vessel or cargo captured by enemies, privateers, or pirates, and the provisions, wages, and expenses of the vessel detained during the time the arrangement or redemption is taking place. 2. The goods jettisoned to lighten the vessel, whether they belong to the vessel, to the cargo, or to the crew, and the damage suffered through said act by the goods kept. 3. The cables and masts which are cut or rendered useless, the anchors and the chains which are abandoned in order to save the cargo, the vessel, or both. 4. The expenses of removing or transferring a portion of the cargo in order to lighten the vessel and place her in condition to enter a port or roadstead, and the damage resulting therefrom to the goods removed or transferred. 5. The damage suffered by the goods of the cargo through the opening made in the vessel in order to drain her and prevent her sinking. 6. The expenses caused through floating a vessel intentionally stranded for the purpose of saving her. 7. The damage caused to the vessel which it is necessary to break open, scuttle, or smash in order to save the cargo. 8. The expenses of curing and maintaining the members of the crew who may have been wounded or crippled in defending or saving the vessel. 9. The wages of any member of the crew detained as hostage by enemies, privateers, or pirates, and the necessary expenses which he may incur in his imprisonment, until he is returned to the vessel or to his domicile, should he prefer it. 10. The wages and victuals of the crew of a vessel chartered by the month during the time it should be embargoed or detained by force majeure or by order of the Government, or in order to repair
the damage caused for the common good. 11. The loss suffered in the value of the goods sold at arrivals under stress in order to repair the vessel because of gross average. 12. The expenses of the liquidation of the average. (Article 811, Code of Commerce) 13. If in lightening a vessel on account of a storm, in order to facilitate her entry into a port or roadstead, part of her cargo should be transferred to lighters or barges and be lost, the owner of said part shall be entitled to indemnity, as if the loss has originated from a gross average (Article 817, Code of Commerce) 14. If, as a necessary measure to extinguish a fire in a port; roadstead; creek, or bay, it should be decided to sink any vessel, this loss shall be considered gross average, to which the vessels saved shall contribute. a. Essential Requisites
In order to recover the costs and expenses, the following are necessary: i. Previous resolution of the captain adopted after deliberation with the sailing mate and other officers ii. Hearing of the persons interested. In case an interested person should not be heard, he shall not contribute to the gross average. (Article 813, Code of Commerce) iii. Resolution to be entered in the log book, stating the motives and reasons therefore as well as the votes and reason for disagreement (Article 814, Code of Commerce) iv. Minutes to be signed by all the persons present or in urgent cases, the captain. v. Captain shall deliver one copy of the minutes to the maritime judicial authority of the first port he may make within 24 hours and ratify it under oath (Article 814, Code of Commerce)
Magsaysay Inc vs Agan (1955) Requisites for General Average: 1. There must be a common danger. This means, that both the ship and the cargo, after it has been loaded, are subject to the same danger, whether during the voyage, or in the port of loading or unloading, that the danger arises from the accidents of the sea, dispositions of the authority, or faults of men, provided that the circumstances
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2. 3. 4.
producing the peril should be ascertained and imminent or may rationally be said to be certain and imminent. This last requirement excludes measures undertaken against a distant peril. That for the common safety, part of the vessel or of the cargo or both is sacrificed deliberately. That from the expenses or damages caused follows the successful saving of the vessel and cargo. That the expenses or damages should have been incurred or inflicted after taking proper legal steps and authority.
the fault of one of the parties to the adventure; but this shall not prejudice any remedies which may be open against that party for such fault.
B. Arrival Under Stress

1. When Made If the captain during the navigation should believe that the vessel can not continue the voyage to the port of destination on account of: a. the lack of provisions, b. well founded fear of seizure, privateers or pirates, or c. by reason of any accident of the sea disabling her to navigate. He shall assemble the officers and shall call the persons interested in the cargo who may be present, and who may attend the meeting without the right to vote; and if, after examining the circumstances of the case, the reasons should be considered well founded, it shall be decided to make the nearest and most convenient port drafting and entering in the log book the proper minutes, which shall be signed by all. (Article 819, Code of Commerce) The arrival under stress shall not be considered legal in the following cases: 1. If the lack of provisions should arise from the failure to take the necessary provisions for the voyage, according to usage and custom, or if they should have been rendered useless or lost through bad stowage or negligence in their care. 2. If the alleged risk of enemies, privateers, or pirates is not based on well known, manifest, positive or justifiable facts. 3. If the injury to the vessel should have been caused by reason of her not being repaired, rigged, equipped, and arranged in a convenient manner for the voyage, or by reason of some erroneous order of the captain. 4. Whenever malice, negligence, want of foresight, or lack of skill on the part of the captain is the reason for the act causing the damage. (Article 820, Code of Commerce) 2. Expenses The expenses caused by the arrival under stress shall always be for the account of the
b. Effects All the persons having an interest in the vessel and cargo at the time of the occurrence of the average shall contribute. (Article 812, Code of Commerce) c. Jettison Order of Jettison: 1. Those which are on deck, beginning with those which embarrass the handling of the vessel or damage her, preferring, if possible, the heaviest ones and those of least utility and value. 2. Those in the hold, always beginning with those of the greatest weight and smallest value, to the amount and number absolutely indispensable. (Article 815, Code of Commerce) d. Jason Clauses (York - Antwerp Rules) The York-Antwerp Rules is an international system of rules (they are not law or international treaties, but are just widely in use) for the liquidation and payment of average to avoid the problem of characterization. The Jason Clause is a standard provision in maritime contracts. It provides for uniform rules on adjustment, proof and liquidation of avergaes in maritime accidents to address various systems of determining the same. (Rule D) Rights to contribution in general average shall not be affected, though the event which gave rise to the sacrifice or expenditure may have been due to
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shipowner or agent, but the latter shall not be liable for the damage which may be caused the shippers by reason of the arrival under stress, provided that it is legitimate. Otherwise, the shipowner or agent and the captain shall be jointly liable. (Article 821, Code of Commerce)
D. Shipwreck
The losses and deteriorations suffered by a vessel and her cargo by reason of shipwreck or stranding shall be individually for the account of the owners, the part of the wreck which may be saved belonging to them in the same proportion. (Article 840, Code of Commerce) Wreck or Stranding caused by malice, negligence or lack of skill of the captain or the vessel is insufficiently repaired and prepared: The owner or the freighters may demand indemnity of the captain for the damages caused to the vessel or cargo by the accident. (Article 841, Code of Commerce) Goods saved from the wreck shall be liable for the payment of the expenses of the salvage. Said amount must be paid by the owners of the goods before they are delivered to them. (Article 842, Code of Commerce)
C. Collisions
(Asked in 95 and 98 Bar Exams) Collision the impact of two vessels both of which are moving. Allision the striking of a moving vessel against one that is stationary. 1. Classes and Effects a. Fortuitous Collision: Each vessel and her cargo shall be liable for their own damage (Article 830, Code of Commerce) b. Vessel forced to collide with another one by a third vessel: Owner of third vessel shall indemnify for the losses and damages caused (Article 831, Code of Commerce) c. By reason of fortuitous event, vessel properly anchored and moored collides with another: The injury occasioned shall be looked upon as particular average to the vessel run into. (Article 832, Code of Commerce) d. Culpable: The owner of the vessel at fault shall indemnify the losses and damages suffered, after an expert appraisal. (Article 826, Code of Commerce) e. Both vessels may be blamed for the collision: Each one shall be liable for his own damages, and both shall be jointly responsible for the losses and damages suffered by their cargoes. (Article 827, Code of Commerce) f. Inscrutable Fault (it can not be decided which of the two vessels was the cause of the collision): Each one shall be liable for his own damages, and both shall be jointly responsible for the losses and damages suffered by their cargoes. (Article 828, Code of Commerce) Asked in 97 Bar Exams
VI. Special Contracts A. Charter Parties

1. Definition A charter party is a contract by virtue of which the owner or agent of a vessel binds himself to transport merchandise or persons for a fixed price. It is a contract by which the owner or agent of the vessel leases for a certain price the whole or portion of a vessel for the transportation of the goods or persons from one port to another. Towage contract vessel is one port is not a charter party. It is a for the hire of services by which a engaged to tow another vessel from to another for consideration.
Kinds: As to extent of vessel hired: a. Total b. Partial - charterer as a rule does not acquire the right to fix the date when the vessel should depart, unless such right is expressly granted in the contract
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As to time: a. Until a fixed day or for a determined number of days or months b. For a voyage As to freightage: a. For a fixed amount for the whole cargo b. For a fixed rate per ton c. For so much per month As to control over the vessel: a. Demise or Bareboat charter: Under the demise or bareboat charter of the vessel, the charterer will generally be regarded as the owner for the voyage or service stipulated. The charterer mans the vessel with his own people and becomes the owner pro hac vice, subject to liability to others for damages caused by negligence. To create a demise, the owner of a vessel must completely and exclusively relinquish possession, command and navigation thereof to the charterer, anything short of such a complete transfer is a contract of affreightment (time or voyage charter party) or not a charter party at all. (Puromines vs CA) b. Contract of Affreightment A contract of affreightment is one in which the owner of the vessel leases part or all of its space to haul goods for others. It is a contract for special service to be rendered by the owner of the vessel and under such contract the general owner retains the possession, command and navigation of the ship, the charterer or freighter merely having use of the space in the vessel in return for his payment of the charter hire. (Puromines vs CA)
Owner Pro Hac Vice demise charter to whom the owner of the vessel has completely and exclusively relinquished possession, command and navigation of the vessel. In this kind of charter, the charterer mans and equips the vessel and assumes all responsibility for navigation, management and operation. He thus acts as the owner of the vessel in all important aspects during the duration of the charter. 2. Forms and Effects Drawn in duplicate Signed by the contracting parties
The charter party shall include the following statements: 1. The kind, name, and tonnage of the vessel. 2. Her flag and port of registry. 3. The name, surname, and domicile of the captain. 4. The name, surname, and domicile of the agent, if the latter should make the charter party. 5. The name, surname, and domicile of the charterer, and if he states that he is acting by commission, that of the person for whose account he makes the contract. 6. The port of loading and unloading. 7. The capacity, number of tons or weight, or measure which they respectively bind themselves to load and transport, or whether it is the total cargo. 8. The freightage to be paid, stating whether it is to be a fixed amount for the voyage or so much per month, or for the space to be occupied, or for the weight or measure of the goods of which the cargo consists, or in any other manner whatsoever agreed upon. 9. The amount of primage to be paid to the captain. 10. The days agreed upon for loading and unloading. 11. The lay days and extra lay days to be allowed and the rate of demurrage. (Article 652, Code of Commerce) If the freight should be received without the charter party having been signed, the contract shall be understood as executed in accordance with what appears in the bill of lading, which shall be the only instrument with regard to the freight to determine the rights and obligations of the owner, of the captain, and of the charterer. (Article 653, Code of Commerce)
Puromines, Inc. vs. Court of Appeals Although a charter party may transform a common carrier into a private one, the same however is not true in a contract of affreightment on account of the distinctions between a contract of affreigment and a demise or bareboat charter.
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Is there a valid contract if there was no charter party and bill of lading? If we take Art. 653 literally, no. However, if we take into account the fact that delivery of the cargo does not constitute the making of a contract but rather the partial performance thereof, the mere fact of delivery and receipt of such cargo, the good faith and mutual consent with which they have been made, should be a better substitute for the charter party than the bill of lading which is nothing more than proof of such delivery. What is primage? It was formerly a small allowance or compensation payable to the master and marines of a ship, to the former for the use of his cables and ropes to discharge the goods of the merchant; to the latter for the lading and unlading in any port of haven. Today, it is no longer a gratuity but is included in the freight rate. What is demurrage? It is the sum fixed by the contract of carriage, or which is allowed, as remuneration to the owner of a ship for the detention of his vessel beyond the number of days allowed by the charter party for loading and unloading of for sailing. It is an extended freight or reward to the vessel in compensation for the earnings she is improperly caused to lose. What are lay days? Lay days are days allowed to charter parties for loading and unloading the cargo.
Loan on Respondentia
It is a contract made on the goods laden on board the ship, and which are to be sold or exchanged in the course of the voyage, the borrowers personal responsibility being deemed the principal security for the performance of the contract. The lender must be paid his principal and interest, though the ship perishes, provided that the goods are saved.
Ordinary Loan Collateral is not required Collateral may be any property, real or personal Absolutely repayable Loan on Bottomry or Respondentia Collateral required
Subject to usury law Need not be in writing except the interest Need not be registered to be binding on third persons Loss of collateral does not extinguish the same
Collateral must be a vessel or cargo subject to maritime risks Depends upon the safe arrival at the port of the collateral of the loan Not subject to usury law Must be in writing Must be registered in the registry of vessels of the port of entry of registry of the vessel Loss of collateral extinguishes the same
2. Character of Loan A loan on bottomry or respondentia shall be considered that which the repayment of the sum loaned and the premium stipulated, under any condition whatsoever, depends on the safe arrival in port of the goods on which it is made, or of their value in case of accident. (Article 719, Code of Commerce) 3. Form Loans on bottomry or respondentia may be executed: 1. By means of a public instrument. 2. By means of a bond signed by the contracting parties and the broker who took part therein. 3. By means of a private instrument. (Article 720, Code of Commerce) In a bottomry or respondentia bond there must be stated: 1. The kind, name, and registry of the vessel. 2. The name, surname, and domicile of the captain.
B. Loans on Respondentia
1. Definition
Bottomry
and
Loan on Bottomry It is a contract in the nature of a mortgage, by which the owner of the ship borrows money for the use, equipment and repair of the vessel for a definite term, and pledges the ship as a security for its repayment, with maritime or extraordinary interest on account of the maritime risks to be borne by the lender, it being stipulated that if the ship be lost in the course of the specific voyage or during the limited time, by any of the perils enumerated in the contract, the lender shall also lose his money.
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3. The names, surnames, and domicile of the person giving and of the person receiving the loan. 4. The amount of the loan and the premium stipulated. 5. The time for repayment. 6. The goods pledged to secure repayment. 7. The voyage for which the risk is run. (Article 721, Code of Commerce) 4. On What Constituted a. b. c. d. e. On the hull of the vessel. On the rigging. On the equipment, provisions, and fuel. On the engine, if the vessel is a steamer. On the cargo. (Article 724, Code of Commerce)
The bill of lading may be issued to bearer, to order, or in the name of a specific person, and must be signed within twentyfour hours after the cargo has been received on board. (Article 706, Code of Commerce) Four true copies of the original bill of lading shall be made, all of which shall be signed by the captain and by the freighter. Of these copies the freighter shall keep one and send another to the consignee; the captain shall take two, one for himself and another for the agent. (Article 707, Code of Commerce) 2. Probative Value A bill of lading drawn up in accordance with the provisions of this title shall be proof as between all those interested in the cargo and between the latter and the underwriters, proof to the contrary being reserved by the latter. (Article 709, Code of Commerce)
No loans can be made on the salaries of the crew, nor on the profits which it is expected to earn. (Article 725, Code of Commerce) 5. By Whom The captain can not contract loans on respondentia, and should he do so the contracts shall be void. Neither can he borrow money on bottomry for his own transactions, except on the portion of the vessel he owns, provided no money has been previously borrowed on the whole vessel, and provided there does not exist any other kind of lien or obligation thereon. When he is permitted to do so, he must necessarily state what interest he has in the vessel. (Article 617, Code of Commerce)
D. Passengers on Sea Voyage

1. Nature of Contract: Non-transferrable without the consent of the captain or of the consignee. (Article 605, Code of Commerce) 2. Obligations of Passengers Should the passage price not have been agreed upon, the judge or court shall summarily fix it, after a statement of experts. (Article 693, Code of Commerce) The captain shall be given preference over the other creditor with respect to the goods belonging to the passenger with for the collection of freight. (Article 704, Code of Commerce) Should the passenger not arrive on board at the time fixed, or should leave the vessel without permission from the captain, when the latter is ready to leave the port, the captain may continue the voyage and demand the full passage price. (Article 694, Code of Commerce) The passenger shall conform to the orders given by the captain, without any distinction whatsoever (Article 700, Code of Commerce)
C. Bill of Lading
1. Form Provisions in the bill of lading; 1. The name, registry, and tonnage of the vessel. 2. The name of the captain and his domicile. 3. The port of loading and that of unloading. 4. The name of the shipper. 5. The name of the consignee, if the bill of lading is issued to order. 6. The quantity, quality, number of packages, and marks of the merchandise. 7. The freight and the primage stipulated.
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3. Rights of Passengers a. Voyage is suspended before beginning the voyage through the fault of the captain or passengers: The passengers shall be entitled to have their passage refunded and to recover the losses and damages b. Suspension due to force majeure: The passengers shall only be entitled to the return of the passage money (Article 697, Code of Commerce) c. Voyage already begun is interrupted: Passengers obliged to pay only the passage in proportion to the distance covered, and shall not be entitled to recover for losses and damages if due to force majeure, but have a right to indemnity if the interruption should have been caused by the captain exclusively. If passenger agrees to await the repair of the vessel, he can not be required to pay any increased price of passage, but his living expenses during the delay shall be for his own account. d. Delay in the departure of the vessel: Passengers shall have a right to remain on board and to be furnished with food for the account of the vessel, unless the delay is due to an accidental cause or to force majeure. If the delay should exceed ten days, the passengers who request it shall be entitled to the return of the passage; and if it were due exclusively to the captain or agent they may demand indemnity for losses and damages.
b. If the private carrier is coming to the Philippines: First: COGSA Second: Code of Commerce Third: Civil Code (excluding rules on common carriers) c. If the private or common carrier is from the Philippines to a foreign country: Apply the law of the foreign country (per Art. 1753, CC) UNLESS the parties make COGSA applicable Hierarchy of laws: 1) Art. 1766, CC (COGSA as only in matters not regulated by this Code) this notwithstanding the fact that COGSA is a special law. Goods in a foreign country shipped to the Philippines are governed by the Civil Code 2) Art. 1753, CC 2. Limitation on Liability Under Sec. 4(5), the limit is set at a maximum of $500 per package or customary freight unit.
Belgian Overseas vs. Philippine First Insurance (2002) The Civil Code does not limit the liability of the common carrier to a fixed amount per package. In all matters not regulated by the Civil Code, the right and the obligations of common carriers shall be governed by the Code of Commerce and special laws. Thus, the COGSA, which is suppletory to the provisions of the Civil Code, supplements the latter by establishing a statutory provision limiting the carrier's liability in the absence of a shipper's declaration of a higher value in the bill of lading. In the case before us, there was no stipulation in the Bill of Lading limiting the carrier's liability. Neither did the shipper declare a higher valuation of the goods to be shipped. Petitioners' liability should be computed based on US$500 per package and not on the per metric ton price declared in the Letter of Credit.
VII. Carriage of Goods by Sea Act

(Commonwealth Act No. 65) 1. Applicability COGSA is a special law that governs all contracts of carriage of goods by sea between or to and from the Philippine ports. Application of laws:
3. Notice of Claim Notice and the general nature of the loss or damage must be given in writing to the carrier or his agent at the port of discharge before or at the time of the removal of the goods. (Sec. 3 (6))
a. If the common carrier is coming to the Philippines: First: Civil Code Second: COGSA (in foreign trade) Third: Code of Commerce
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Belgian Overseas vs. Philippine First Insurance (2002) First, the provision of COGSA provides that the notice of claim need not be given if the state of the goods, at the time of their receipt, has been the subject of a joint inspection or survey. Prior to unloading the cargo, an Inspection Report as to the condition of the goods was prepared and signed by representatives of both parties. Second, as stated in the same provision, a failure to file a notice of claim within three days will not bar recovery if it is nonetheless filed within one year. This one-year prescriptive period also applies to the shipper, the consignee, the insurer of the goods or any legal holder of the bill of lading. "Inasmuch as the neither the Civil Code nor the Code of Commerce states a specific prescriptive period on the matter, the COGSAwhich provides for a one-year period of limitation on claims for loss of, or damage to, cargoes sustained during transit--may be applied suppletorily to the case at bar."
goods should have been delivered; Provided, that if a notice of loss for damage; either apparent or concealed, is not given as provided for in this section, that fact shall not effect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered.
4. Prescription of Claim (Asked in 92, 95, 00 and 04 Bar Exams) In any event the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the goods should have been delivered. The absence of a notice shall not affect or prejudice the right of the shipper to bring suit within one year after the delivery of the goods or the date when the goods should have been delivered. (Sec. 3 (6))
Filipino Merchants Insurance, Inc. v. Alejandro (1986) Clearly, the coverage of the Act includes the insurer of the goods. Otherwise, what the Act intends to prohibit after the lapse of the oneyear prescriptive period can be done indirectly by the shipper or owner of the goods by simply filing a claim against the insurer even after the lapse of one year. Maritime Agencies & Services, Inc. v. CA The period for filing the claim is one year, in accordance with the Carriage of Goods by Sea Act. This was adopted and embodied by our legislature in Com. Act No. 65 which, as a special law, prevails over the general provisions of the Civil Code on prescription of actions. Section 3(6) of that Act provides as follows: In any event, the carrier and the ship shall be discharged from all liability in respect of loss or damage unless suit is brought within one year after delivery of the goods or the date when the
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Chapter V. Warsaw Convention

I. DEFINITION AND APPLICABILITY III. LIABILITIES IV. LIMITATION ON LIABILITY V. WHEN LIMITATIONS UNAVAILABLE VI. CONDITIONS ON LIABILITY VII. VENUE OF COURT ACTIONS
III.Limitation on Liability
1. Passengers General Rule: $100,000 per passenger Exception: Agreement to a higher limit 2. Checked-in baggage General Rule: $20 per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value.
I. Definition and Applicability

International air transportation: Transportation by air between points of contact of two high contracting parties, or those countries that have acceded to the Convention. Applicability of the Convention The Convention is applicable to: 1. International transport by air 2. Transport of persons, baggage, or goods Under the Warsaw Convention, there are two categories of "international transportation by air": 1. That where the place of departure and the place of destination are situated within the territories of two High Contracting Parties regardless of whether or not there be a break in the transportation or a transshipment; and 2. That where the place of departure and the place of destination are within the territory of a single High Contracting Party if there is an agreed stopping place within a territory subject to the sovereignty, mandate or authority of another power, even though the power is not a party to the Convention.
3. Hand-carried baggage $1000/passenger 4. Goods to be shipped General Rule: $20 per kilogram Exception: In case of special declaration of value and payment of a supplementary sum by consignor, carrier is liable to not more than the declared sum unless it proves the sum is greater than actual value. An agreement relieving the carrier from liability or fixing a lower limit is null and void. (Art. 23) Carrier is not entitled to the foregoing limit if the damage is caused by willful misconduct or default on its part. (Art. 25)
Alitalia v. CA The WC does not operate as an exclusive enumeration of the instances of an absolute limit of the extent of liability. It does not preclude the application of the Civil Code and other pertinent local laws. It does not regulate or exclude liability for other breaches of contract by the carrier, or misconduct of its employees, or for some particular or exceptional type of damage.
II. Liabilities
1. The liabilities are: Damage sustained in the event of the death or wounding of a passenger taking place on board the aircraft or in the course of any of the operations of embarking or disembarking Loss or damage to any checked baggage or goods sustained during the transport by air Delay in the transport by air of passengers, baggage, or goods
IV. When Limitations Unavailable

1. 2. 3. 4. When can a common carrier not avail itself of this limitation? Willful misconduct Default amounting to willful misconduct Accepting passengers without ticket Accepting goods without airway bill or baggage without baggage check
2. 3.
NOTE: Enumeration of causes of action as above stated is not an exclusive list. (Northwest Airlines vs. Cuenca)
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V. Conditions on Liability
Action for Damages 1. Notice of Claim A written complaint must me made within: a. 3 days from receipt of baggage b. 7 days from receipt of goods c. In case of delay, 14 days from receipt of baggage/goods The complaint is a condition precedent. Without the complaint, the action is barred except in case of fraud on the part of the carrier. (Art. 26) 2. Prescriptive Period Action must be filed within 2 years from: a. date of arrival at the destination b. date of expected arrival c. date on which the transportation stopped. (Art. 29)
VI. Venue of Court Actions

In Santos vs Northwest Orient Airlines, it was held that the provisions of Article 28 (1) of the Warsaw Convention concern jurisdiction, not merely venue. Thus, actions for damages must be brought, at the option of the plaintiff, either: 1. Before the court of the domicile of the carrier: 2. Court of principal place of business of carrier; 3. Court where he has a place of business through which the contract has been made; 4. Before the court at the place of destination (Art. 28 (1))
- end of Transportation and Public Utilities Law -
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Table of Contents
CORPORATION LAW
CHAPTER I. INTRODUCTION A. Definition B. Attributes of a Corporation 1. Artificial being 2. Created by operation of law 3. Has the right of succession 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence C. Jurisdiction D. Other Types of Business Organizations CHAPTER II. CLASSIFICATION OF CORPORATIONS A. Stock corporation B. Non-Stock corporation C. Other classifications 1. Public corporation 2. Private 3. Close 4. Educational 5. Religious sole and aggregate 6. Eleemosynary 7. Domestic 8. Foreign 9. Corporation created by special laws or charters 10. Subsidiary 11. Parent CHAPTER III. FORMATION OF CORPORATIONS A. Components of a Corporation 1. Incorporators 2. Corporators 3. Foreign incorporators / corporators B. Steps in the Formation of a Corporation 1. Promotion a. Liability of corporation on promoters contracts b. Personal liability of promoters c. Compensation of promoters 2. Drafting the Articles of Incorporation a. Definition of Terms b. Contents of Articles of Incorporation 3. Filing with SEC and payment of fees 4. Issuance of Certificate of Incorporation 5. Internal Organization and 74 74 74 74 74 74 Commencement of Business C. De Facto Corporation 1. Requisites of De Facto Corporation 2. De Jure vs. De Facto Corporation D. Corporation by Estoppel CHAPTER IV. THE CORPORATE ENTITY A. The Doctrine of Separate Juridical Entity B. Piercing the Corporate Veil Doctrine 1. An Equitable Remedy 2. Extent of Legal Effects 3. Application of Piercing Doctrine 4. Parent-Subsidiary Relationship C. Nationality 1. Place of Incorporation Test 2. The Grandfather Rule 3. Control Test 4. War-time Test 5. Investment Test CHAPTER V. CORPORATE POWERS A. Express Powers 1. General Powers 2. Special/Specific Powers B. Inherent/Incidental Powers C. Implied Powers D. Ultra Vires Acts 1. Definition 2. Types 3. Effects 4. Remedies CHAPTER VI. INTERNAL ORGANIZATION OF THE CORPORATION A. By-laws 1. Definition 2. Adoption 3. Requirements 4. Effectivity 5. Amendment or repeal B. Directors/Trustees 1. Qualifications 2. Election of Directors/Trustees 3. Methods of Voting 4. Exercise of Corporate Powers 5. Meetings of the Board 6. Removal of Directors / Trustees 7. Executive Committee C. Corporate Officers 82 82 82 83 85 86 86 86
74 75 75 77 77 77 77
87
CORPORATION LAW
89 89 89 89 89
78 78 78 78 78 79 79
91 91
91
80
82 82
93
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Table of Contents
1. Who are Corporate Officers 2. Disqualifications 3. Authority of Corporate Officers D. Stockholders or Members 1 Rights of Stockholders 2 Obligations of Stockholders 3 Stockholders/Members Meeting 4 Corporate Acts Requiring Approval of ALL stockholders/members 5 Other instances requiring Stockholders/Members Action 6 Limitations on Right to Vote 7 Appraisal Right CHAPTER VII. MANAGEMENT AND CONTROL A. Devices Affecting Control 1. Proxy 2. Voting Trust Agreement 3. Pooling and Voting Agreements B. Duties and Liabilities of Directors 1. Three-fold Duties of Directors 2. Self-dealing Director 3. Fixing the Compensation of Directors and Officers 4. Interlocking Directors 5. Seizing Corporate Opportunity 6. Using Inside Information C. Duties and Liabilities of Officers D. Duties of Controlling Stockholders E. Remedies in Case of Mismanagement F. Right of Inspection G. Derivative Suits CHAPTER VIII. CAPITAL STRUCTURE A. Classification of Shares B. Subscription Contract 1. Status as a Shareholder 2. Types of subscription contract 3. Interest on unpaid subscription C. Pre-emptive Right 1. Definition 2. Limitations on the Exercise of Preemptive Right 3. Interest on unpaid subscription D. Consideration for Issuance of Shares 1. Forms of consideration 2. Limitations on Consideration E. Watered Stocks 1. Definition 2. Liability of Directors or
94
Officers F. Delinquent Shares 1. Definition 2. Effects of Delinquency G. Enforcement of Payment 1. Delinquency Sale 2. Court Action 3. Collection from Cash Dividends and Withholding of Stock Dividends H. Rights and Obligations of Holders of Unpaid but Non-delinquent Stock I. Certificate of Stock J. Lost or Destroyed Certificate K. Tender Offer CHAPTER IX. DIVIDENDS AND PURCHASE OF CORPORATION OF ITS OWN SHARES A. Forms of Dividends B. Other Classes of Dividends C. Source of Dividends D. Declaration of Dividends E. Treasury Shares 1. Definition 2. Instances When Corporation May Acquire its Own Shares 3. Remedies in Case of Improper Purchase CHAPTER X. TRANSFER OF SHARES A. Manner of Transfer B. Registration of Transfer 1. Effects of Lack of Registration 2. Remedy if Registration is refused C. Restrictions on Transfer 1. Validity of Restrictions 2. Presumptions D. Unauthorized Transfers 1. Certificates Indorsed in Blank 2. Forged Transfers E. Collateral Transfers CHAPTER XI. AMENDMENTS OF CORPORATE CHARTER A. General B. Specific 1. Increase in Capital Stock 2. Decrease of Capital Stock 3. Change in Corporate Name C. Grounds for Disapproving Amendment CHAPTER XII. DISSOLUTION A. Voluntary Dissolution 1. Expiration of term 2. Voluntary dissolution when no
106 107
107 108 108 108
98 98
99
109 109 109 109 110 111

CORPORATION LAW
101 101 101 101 102 103 103 105
112 112 112
112 112 113 114 114 114
105
106 106
115 116 116
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Table of Contents
creditors are affected 3. Voluntary dissolution when creditors are affected 4. Dissolution by minority in close corporations 5. Failure to organize; cessation of business for 5 years B. Involuntary Dissolution 1. Revocation of certificate of Registration 2. Quo Warranto Proceedings C. Effects of Dissolution 1. Loss of Juridical Personality 2. Executory Contracts 3. Winding Up and Liquidation D. The Trust Fund Doctrine and the Distribution of Assets CHAPTER XIII. CORPORATE COMBINATIONS A. Definition B. Procedure C. Effects of Merger/Consolidation D. Effectivity of Merger/ Consolidation E. De Facto Merger F. Sale of All or Substantially All Assets CHAPTER XIV. FOREIGN CORPORATIONS A. Definition of Terms B. Tests of Doing Business in the Philippines C. Doing Business Under the Foreign Investment Act D. Jurisprudential Rules on Not Doing Business in the Philippines E. Requisites for the Issuance of License to Do Business F. Power to Sue and Be Sued of Foreign Corporations G. Laws Applicable on Foreign Corporations
117
117
CHAPTER XV. CLOSE CORPORATIONS A. Requirements B. Characteristics C. Restrictions on Transfer of Shares 1. Validity of Restrictions 2. Presumptions D. Deadlocks 1. Requisites 2. Power of SEC E. Distinctions Between Close and Regular Corporations CHAPTER XVI. NON-STOCK CORPORATIONS A. Purposes B. Rights of Members C. Conversion D. Order of Distribution of Assets Upon Dissolution CHAPTER XVII. SPECIAL CORPORATIONS A. Educational Corporations B. Religious Corporations 1. Corporation Sole 2. Religious Societies
124 124 124 124 124
125 128 128 128 128 128 129 129 129

CORPORATION LAW
119 120 120 120 120 120 121 121 122 122 122 122 122 123 123 123
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Chapter I. Introduction
Corporation Law
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

CORPORATION LAW Krystal Uy Reizl Tanchico

LEAD WRITERS
Jason Mendoza
DEPUTY HEAD
Rania Joya
Malds Menzon
LOGISTICS, HR
-------Kae Guerrero
Jan Barcena JR Santos

WRITERS
-------Leo Zulueta
A. DEFINITION B. ATTRIBUTES OF A CORPORATION 1. ARTIFICIAL BEING 2. CREATED BY OPERATION OF LAW 3. HAS THE RIGHT OF SUCCESSION 4. HAS THE POWERS, ATTRIBUTES AND PROPERTIES EXPRESSLY AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE C. JURISDICTION D. OTHER TYPES OF BUSINESS ORGANIZATIONS
Pilipinas Broadcasting Network vs. Ago Medical and Educational Center (2005). Criminal Liability Since a corporation as a person is a mere legal fiction, it cannot be proceeded against criminally because it cannot commit a crime in which personal violence or malicious intent is required. Criminal action is limited to the corporate agents guilty of an act amounting to a crime and never against the corporation itself (West Coast Life Ins. Co. vs. Hurd [1914], Time Inc. vs. Reyes [1971]).
CORPORATION LAW
A. Definition
A corporation is an artificial being created by operation of law, having the right of succession and the powers, attributes, and properties expressly authorized by law or incident to its existence. (Sec. 2, Corporation Code)
2. Created by operation of law Mere consent of the parties corporation is not sufficient. must give its consent either special law (in case of corporations) or a general Corporation Code in case corporations). to form a The State through a government law (i.e., of private
B. Attributes of a Corporation
1. An artificial being A corporation exists by fiction of law, hence, it can act only through its directors, officers and employees. Moral Damages cannot be awarded in favor of corporations because they do not have feelings and mental state. They may not even claim moral damages for besmirched reputation (NAPOCOR vs Philipp Brothers Oceanic, 2001). However, a corporation can recover moral damages under Art 2219 (7) if it was the victim of defamation
3. Has the right of succession Its continued existence during its stated term cannot be affected by any change in the members or stockholders or by any transfer of shares by a stockholder to a 3rd person. 4. Has the powers, attributes and properties expressly authorized by law or incident to its existence As a mere creature of law, it can exercise only such powers as the law may choose to grant it, either expressly or impliedly.
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C. Jurisdiction
(Asked in 91 and 96) According to the Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC), which took effect on April 1, 2001, the Regional Trial Court has jurisdiction over cases involving the following: (FIEDI) 1. Devices or schemes employed by, or any act of, the BOD, business associates, officers or partners, amounting to Fraud or misrepresentation which may be detrimental to the interest of the public and/or of the stockholders, partners or members of any corporation, partnership, or association; 2. Controversies arising out of Intracorporate, partnership, or association relations, between and among stockholders, members or associates; and between, any or all of them and the corporation, partnership, or association
of which they are stockholders, members or associates, respectively; 3. Controversies in the Election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; 4. Derivative suits; and 5. Inspection of corporate books.
Unlad Resources Development Corp. vs. Dragon (2008, Nachura): Q: Who has jurisdiction on cases involving intra-corporate controversies? A: Under Sec. 5.2 of RA 8799, SECs jurisdiction over all cases enumerated under Sec. 5, PD 902-A was transferred to the Regional Trial Court which has jurisdiction over the principal office of the corporation, partnership or association concerned
D. Other Types of Business Organizations

1. Sole Proprietorship is composed of the proprietor himself and his employees but it has no personality separate and distinct from the proprietor. Partnership and Corporation Distinguished Partnership Creation Corporation 2. Partnership two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing the profits among themselves (Art 1767).
CORPORATION LAW
created by mere agreement of the created by parties operation of law may be organized by only two persons requires at least 5 incorporators
Extent Liability
of partners are personally liable for stockholders are liable only to the partnership debts extent of their investment/subscription (in the absence of an agreement) management is centralized in a board of every partner is an agent of the directors or trustees partnership A partnership may exercise any power authorized by the partners provided it is not contrary to law, morals, customs, public order or public policy (Art. 1306, CC) A corporation can exercise only the powers expressly granted by law or implied from those granted or incident to its existence
Management
Powers
Nature of based on mutual trust and confidence has more stability since a corporation Relation-ship (delectus personae) has right of succession; dissolution its existence is precarious since death needs consent of the State (SEC) or unilateral act of a partner may bring about dissolution
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3. Joint Account (Asked in 00) - an arrangement whereby merchants may interest themselves in the transaction of other merchants, contributing thereto
the amount of capital they may agree upon, and participating in the favorable and unfavorable results thereof in the proportion they may determine.
Joint Account and Partnership Distinguished (Asked in 00) Joint Account Partnership Has personality separate and distinct from the partners
Juridical Personality Business Name Management
No juridical personality
No commercial name common to all Can adopt a partnership name participants can be adopted (Art 241, Code of Commerce) ONLY the ostensible partner manages and ALL general transacts business in his own name and managers under his individual liability (Art 241, Code of Commerce) partners are
Parties cases
in Only the ostensible partner the person ALL general partners may be carrying on the joint business can be sued liable even up to the extent of by and is liable to other persons their personal properties 6. Cooperative duly registered association or persons, with common bond of interest, who have voluntarily joined together to achieve lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits. (Sec. 3, RA 6938 or The Cooperative Code of the Philippines)
4. Business Trust a legal relation whereby one person, called the trustor, conveys a property to another, called the trustee, for the benefit of a person called the beneficiary (Art. 1440 CC). 5. Joint Venture an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks (Kilosbayan vs. Guingona, 1994)
CORPORATION LAW
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Chapter II. Classification of Corporations
Chapter II. Classification of Corporations

A. STOCK CORPORATION B. NON-STOCK CORPORATION C. OTHER CLASSIFICATIONS
C. Other Classifications
1. Public corporation (Asked in 04) One formed or organized for the government or a particular state. Its purpose is for the general good and welfare. 2. Private corporation (Asked in 04) One formed for some private purpose, benefit, aim or end. 3. Close corporation (Sec. 96) 4. Educational corporation One organized for educational purposes (Sec. 106). 5. Religious corporations a. Corporation sole is one formed for the purpose of administering and managing, as trustee, the affairs, property and temporalities of any religious denomination, sect, or church, by the chief archbishop, bishop, priest, rabbi, or other presiding elder of such religious denomination, sect or church (Sec. 110). b. Corporation aggregate is a religious corporation incorporated by more than one person. 6. Eleemosynary corporation organized for a charitable purpose One
A. Stock Corporation
(Asked in 01 and 04) One which has a capital stock divided into shares and is authorized to distribute to the holders of such shares dividends or allotments of the surplus profits (i.e., retained earnings on the basis of the shares held (Sec. 3) It is organized for profit. The governing body of a stock corporation is usually the Board of Directors (except in certain instances, e.g. close corporations).
B. Non-Stock Corporation
(Asked in 04) All other corporations are non-stock corporations (Sec. 3) One where no part of the income is distributable as dividends to its members, trustees, or officers, subject to the provisions of the Code on dissolution. Not organized for profit. Its governing body is usually the Board of Trustees.
CORPORATION LAW
7. Domestic corporation A domestic corporation is one formed, organized, or existing under the laws of the Philippines. 8. Foreign corporation One formed, organized or existing under any laws other than those of the Philippines and whose law allows Filipino citizens and corporations to do business in its own country and state (Sec. 123). 9. Corporation created by special laws or charter (Sec. 4) - Corporations which are governed primarily by the provisions of the special law or charter creating them. Corporation Code has suppletory application. 10. Subsidiary corporation one in which control, usually in the form of ownership of majority of its shares, is in another corporation (the parent corporation). 11. Parent corporation its control lies in its power to elect the subsidiarys directors thus controlling its management policies.
CIR vs. Club Filipino de Cebu (1962): There are two elements for a stock corporation to exist: 1) Capital stock divided into shares, and 2) An authority to distribute to the holders of such shares, dividends or allotments of the surplus profits on the basis of shares held. (Test of WON stock corporation) Even if there is a statement of capital stock, the corporation is still NOT a stock corporation if dividends are NOT supposed to be declared, that is, there is no distribution of retained earnings.
Under Sec. 43 of the Corporation Code, a corporation is deemed to have the power to declare dividends. Thus, so long as the corporation has capital stock and there is no prohibition in its Articles of Incorporation or in its bylaws for it to declare dividends, such corporation is a stock corporation.
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Chapter III. Formation of Corporations

A. COMPONENTS OF A CORPORATION 1. INCORPORATORS 2. CORPORATORS 3. FOREIGN INCORPORATORS/CORPORATORS B. STEPS IN THE FORMATION OF A CORPORATION 1. PROMOTION A. LIABILITY OF CORPORATION ON PROMOTERS CONTRACTS B. PERSONAL LIABILITY OF PROMOTERS C. COMPENSATION OF PROMOTERS 2. DRAFTING THE ARTICLES OF INCORPORATION A. DEFINITION OF TERMS B. CONTENTS OF ARTICLES OF INCORPORATION 3. FILING WITH SEC AND PAYMENT OF FEES 4. ISSUANCE OF CERTIFICATE OF INCORPORATION 5. INTERNAL ORGANIZATION AND COMMENCEMENT OF BUSINESS C. DE FACTO CORPORATION 1. REQUISITES OF DE FACTO CORPORATION 2. DE JURE VS. DE FACTO CORPORATION D. CORPORATION BY ESTOPPEL
3. Foreign Incorporators/Corporators
(Asked in 05) General Rule: All incorporators/ corporators may be foreigners. Exceptions: Fully nationalized corporations. or partly
A. Components of a Corporation 1. Incorporators

are those stockholders or members mentioned in the articles as originally forming and composing the corporation and who are signatories thereof. Requirements: a. Natural persons b. Of legal age c. Must own or subscribe to at least one share of stock of the corporation (Genuine interest) d. 5-15 incorporators who must sign the articles of incorporation e. Majority of the incorporators must be residents of the Philippines Original subscribers Persons whose names are mentioned in the Articles, but not as incorporators; they do not sign the Articles.
a. Where NO foreign stockholder is allowed. Mass media except recording (Art. XVI, Sec. 11 of the Constitution; Presidential Memorandum dated 04 May 1994) Retail trade enterprises with paid-up capital of less than US$2.5 Million (Sec. 5 of RA 8762) Private security agencies (Sec. 4 of RA 5487) Small-scale mining (Sec. 3 of RA 7076) Utilization of natural resources (Art. XII, Sec. 2 of the Constitution) Ownership, operation and management of cockpits (Sec. 5 of PD 449) Manufacture, repair, stockpiling and/or distribution of nuclear weapons (Art. II, Sec. 8 of the Constitution) Manufacture, repair, stockpiling and/or distribution of biological, chemical and radiological weapons and anti-personnel mines (Various treaties to which the Philippines is a signatory and conventions supported by the Philippines) Manufacture of firecrackers and other pyrotechnic services (Sec. 5 of RA 7183) b. Up to 20% foreign equity. Private radio communications network (RA 3846) c. Up to 25% foreign equity. Private recruitment, whether for local or overseas, employment (Art. 27 of PD 442) Construction and repair of locally funded works (Sec. 1 of CA 541, LOI 630) Construction of defense-related structures (Sec. 1 of CA 541)
CORPORATION LAW
2. Corporators - are stockholders or

members who join the corporation after its incorporation.
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d. Up to 40% foreign equity. Exploration, development and utilization of natural resources (Art. XII, Sec. 2 of the Constitution). Realty companies and other corporations that own private lands (Art. XII, Sec. 7 of the Constitution; Ch. 5, Sec. 22 of CA 141; Sec. 4 of RA 9182). Operation and management of public utilities (Art. XII, Sec. 11 of the Constitution; Sec. 16 of CA 146) Culture, production, milling, processing, trading except retail of rice and corn and by-products (Sec. 5 of PD 194; Sec. 15 of RA 8762). Adjustment companies (Sec. 323 of PD 612 as amended by PD 1814). Sauna and steam bath bathhouses, massage clinics and similar activities. e. Up to 60% foreign equity. Financing companies regulated by SEC (Sec. 6 of RA 5980 as amended by RA 8556) Investment houses (Sec. 5 of PD 129 as amended by RA 8366)
B. Steps in the Corporation
Formation
of
* Promotion Drafting the Articles of Incorporation

corporate name purpose clause principal office term of existence incorporators & directors capital stock; subscription treasurer-in-trust treasurers affidavit other matters
Filing with SEC; Payment of the filing and publication fees Issuance of the Certificate of Incorporation by the SEC (if, after examination, all the papers filed are in order) Internal Organization (by-laws, election of officers) & Commencement of business operations
CORPORATION LAW
1. Promotion Promoters are persons who, acting

alone or with others, take initiative in founding and organizing the business or enterprise of the issuer and receives consideration therefor (RA 8799, The Securities Regulation Code). a. Liability of corporation promoters contracts on
General Rule: A corporation is NOT bound by the contract. Since the corporation did not yet exist at the time of the contract, it could not have had an agent who could legally bind it. Exceptions: A corporation may be bound by the contract if it makes the contract its own by: 1. Adoption or ratification of the ENTIRE contract.
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2. Acceptance of benefits under the contract with knowledge of the terms thereof. b. Personal liability of promoters General Rule: The promoter binds himself PERSONALLY & assumes the responsibility of looking to the proposed corp. for reimbursement. Exceptions: Any express or implied agreement to the contrary, or novation of the contract c. Compensation of Promoters General Rule: The corporation is NOT liable to pay compensation because this would be an imposition on innocent investors. (Ballantine) Exceptions: 1. If after it is formed, corporation expressly promises to do so 2. Services done partly before and partly after incorporation and the corporation takes the benefits thereof Note: The Securities Act authorizes a promotion fee IF it is provided for in the registration statement of the securities involved.
3. Capital Stock is an amount fixed in the AOI (where shares are with par value) and is unaffected by profits and losses. It limits the maximum amount or number of shares that may be issued without formal amendment of the articles of incorporation (See Sec. 38). 4. Authorized Capital Stock - is synonymous with capital stock where the shares of the corporation have par value. If the shares of stock have no par value, the corporation has no ACS, but it has capital stock the amount of which is not specified in the AOI as it cannot be determined until all the shares have been issued. In this case, the two terms are not synonymous (DE LEON). 5. Subscribed Capital Stock - It is the amount of the capital stock subscribed whether fully paid or not. It connotes an original subscription contract for the acquisition by a subscriber of unissued shares in a corporation (Secs. 60 and 61) 6. Outstanding Capital Stock - it is the total shares of stock issued under the binding subscription agreements to subscribers or stockholders, whether or not fully or partially paid, except treasury shares (Sec. 137). It is broader than subscribed capital stock. 7. Paid-up Capital - Portion of the authorized capital stock which has been subscribed and paid (See Sec. 13). 8. Unissued Capital Stock - It is that portion of the capital stock that is not issued or subscribed. It does not vote and draws no dividends. 9. Legal Capital - It is the amount equal to the aggregate par value and/or issued value of the outstanding capital stock (DE LEON).
CORPORATION LAW
2. Drafting the Articles Incorporation (AOI) a. Definition of Terms
of
1. Articles of Incorporation constitutes the charter of the corporation and defines the contractual relationships between the State and the corporation, the stockholders and the State, and the corporation and the stockholders. 2. Capital - It is used broadly to indicate the entire property or assets of the corporation. In the strict sense, it refers to that portion of the net assets paid by the stockholders as consideration for the shares issued to them, which is utilized for the prosecution of the business of the corporation (DE LEON, Corporation Code of the Philippines)
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b. Contents of Incorporation
Articles
of
registered (Chua Gan vs. Samahang Magsasaka, 1935). 4. Term of existence Maximum life of 50 years. Extendible for a period not exceeding 50 years at any one instance. No extension, however, can be made earlier than 5 years before the end of the term. (Sec. 11) Extension requires an amendment of the AOI. Any dissenting stockholder may exercise his appraisal right (Sec. 37). 5. Names, citizenship and residences of incorporators 6. Number, names, citizenship and residences of directors/trustees. (Asked in 05 and 08) Directors is used for stock corporations, trustees for nonstock corporations. General Rule: not less than 5 but not more than 15 directors/trustees Exception: In non-stock corporations, the articles or bylaws may provide for more than 15 trustees (Sec. 92). In educational non-stock corporations, trustees may NOT exceed 15. Number of trustees shall be in multiples of 5 (Sec. 108). In nationalized industries, aliens may be directors of a corporation only in such number as may be proportional to their allowable ownership of shares. 7. If stock corporation, amount of authorized capital stock, number of shares AOI must state the authorized capital stock in lawful money of the Philippines, the number of shares into which the ACS is divided, and the par value of each par value shares (Sec. 14(8), Sec. 15(7)). 8. In par value stock corporations, the par value of each share. 9. Number of shares and amounts of subscription of subscribers which
1. Corporate name Must not be identical or deceptively or confusingly similar to that of any existing corporation or to any other name already protected by law or is patently deceptive, confusing or contrary to existing laws (Sec. 18). Must include the word Corporation or Inc Change of corporate name requires the amendment of the AOI: majority vote of the board and the vote or written assent of stockholders holding 2/3 of the outstanding capital stock (Sec. 16).
Republic Planters Bank vs. CA (1992): Amendment of a corporations AOI changing its corporate name does not extinguish the personality of the original corporation. It is the same corporation with a different name, and its character is not changed. Consequently, the new corporation is still liable for the debts and obligations of the old corporation.
CORPORATION LAW
2. Purpose clause Must indicate the PRIMARY and SECONDARY purposes if there are more than one purpose, which should not contradict or change the nature of the corporation (Sec. 14(2)) Must not be patently unconstitutional, illegal, immoral, and contrary to government rules and regulations (Sec. 17 (2)). Must not be for the purpose of practicing a profession 3. Principal office Must be within the Philippines (Sec. 14 (3)) AOI must specify both province or city or town where it is located Important in (1) determining venue in an action by or against the corporation (2) determining the province where a chattel mortgage of shares should be
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shall not be less than 25% of authorized capital stock. 10. Amount paid by each subscriber on their subscription, which shall not be less than 25% of subscribed capital and shall not be less than P5,000. 11. Name of treasurer elected by the subscribers. 12. Other matters. Classes of shares, as well as the preferences or restrictions on any such class (Sec. 6). Denial or restriction of preemptive right (Sec.39). Prohibition against transfer of stock which would reduce stock ownership to less than the required minimum in the case of a nationalized business or activity (Sec. 15(11)).
4. Issuance of Certificate Incorporation by SEC
of
3. Filing with SEC and payment of fees

Documents to be filed with SEC (Asked in 02): a. Articles of Incorporation b. Treasurers Affidavit certifying that 25% of the total authorized capital stock has been subscribed and at least 25% of such has been fully paid in cash or property. c. Bank certificate covering the paidup capital. d. Letter authority authorizing the SEC to examine the bank deposit and other corporate books and records to determine the existence of paid-up capital. e. Undertaking to change the corporate name in case there is another person or entity with same or similar name that was previously registered. f. Certificate of authority from proper government agency whenever appropriate like BSP for banks and Insurance Commission for insurance corporations. (SUNDIANG AND AQUINO, Reviewer on Commercial Law)
The SEC shall give the incorporators reasonable time to correct or modify the objectionable portions of the articles or amendment (Sec. 17). Grounds for disapproving AOI: (Sec. 17) AOI does not SUBSTANTIALLY comply with the form prescribed Purpose is patently unconstitutional, illegal, immoral, contrary to government rules and regulations Treasurers Affidavit concerning the amount of capital subscribed and or paid is false Required percentage of ownership of Filipino citizens has not been complied with. REMEDY in case of rejection of AOI - petition for review in accordance with the Rules of Court (6, last par., PD 902-A) Commencement of corporate existence and juridical personality upon issuance of certificate of Incorporation (Sec. 19) REVOCATION of certificate of incorporation if incorporators are found guilty of fraud in procuring the same after due notice and hearing (Sec. 6(I), PD 902-A)
CORPORATION LAW
5. Internal
Organization and Commencement of Business Operations includes the adoption of

by-laws and election officers
C. De Facto Corporation
(Asked in 04)
1. Requisites Corporation
of
De
Facto
a. Valid statute There can be no de facto corporation under a statute subsequently declared unconstitutional. (Mun. of Balabagan vs. Benito, 1969) b. User of corporate powers in GOOD FAITH - there is transaction of business in some way as if it were a corporation (e.g., taking subscriptions to and issuing shares
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of stock, buying lot, constructing, and leasing a building) c. Substantial or Colorable compliance in GOOD FAITH A corporation must have been issued a certificate of incorporation to be able to claim in good faith that it is a de facto corporation. (Hall vs. Piccio, 1950)
2. De Jure vs. De Facto Corporations

DE JURE One created in strict or substantial conformity with the statutory requirements for incorporation. DE FACTO One which actually exists for all practical purposes as a corporation but which has no legal right to corporate existence as against the State. Right to exercise powers cannot be inquired into collaterally in any private suit. But such inquiry may be made by the State in a quo warranto proceeding (SUNDIANG AND AQUINO).
Right to exist cannot be successfully attacked even in a direct proceeding by the State
CORPORATION LAW
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Substantial Compliance No effect DE JURE
MANDATORY
NON ENTITY No Compliance No compliance
REQUISITES DE FACTO
DIRECTORY
No Compliance
No effect
DE JURE
If the following are present: 1. Apparently valid law 2. Colorable attempt in GOOD FAITH to incorporate 3. User in GOOD FAITH of corporate powers
CORPORATION LAW
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D. Corporation by Estoppel
(Asked in 04) It is a status acquired by persons who assume to act as a corporation knowing it to be without authority. Such persons shall be liable as general partners for all debts, liabilities and damages incurred or arising as a result thereof (Sec. 21). When such ostensible corporation is sued on any transaction entered by it as a corporation or any tort committed by it as such, it shall not be allowed to use as a defense its lack of corporate personality (Sec. 21). One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on the ground that there was in fact no corporation (Sec. 21). NOTE: An unincorporated corporation is not barred from transacting business before the commencement of corporate existence. Limit: the persons acting as such shall be personally liable.
Lozano vs. delos Santos (1997): Q: Action involving two incorporated drivers associations that decided to unite and elect one set of officers to be given authority to collect the daily dues of the drivers who are members of the consolidated association. A: Doctrine of estoppel applies when persons assume to form a corporation and exercise corporate functions and enter into business relations with third persons. Where there are no third persons involved and the conflict arises only among those assuming to form a corporation, who therefore know that it has not been registered, there is no corporation by estoppel. International Express Travel v. CA, (2000): Q. In what instances and to whom does the doctrine of estoppel applies? A: The doctrine of corporation by estoppel may apply to: a third party - a 3rd party who had dealt with an unincorporated association as a corporation may be precluded from denying its corporate existence on a suit brought by the alleged corporation on the contract even if he did not know of the defective incorporation. 3rd party is considered to have admitted the existence of
a corporation by the fact that he dealt with it as a corporation. the alleged corporation - when a third person has entered into a contract with an association which represented itself to be a corporation, the association is estopped from denying its corporate capacity in a suit against it by such 3rd person. It cannot allege lack of personality to be sued to evade responsibility on a contract it has entered into and by virtue of which it has received advantages and benefits associates as partners - when business associates fraudulently misrepresents the existence of a corporation and the 3rd party contacts with the association as a corporation without knowing the serious defects in its incorporation, such 3rd party may sue associates as general partners. Where both the associates and the 3rd party were ignorant of the defective incorporation, 3rd party cant hold the associates liable since they were in good faith. If 3rd party knew of defects in incorporation and still dealt with the corporation, he must be deemed to have chosen to deal with the corporation as such and should be limited in his recovery to the corporate assets.
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Chapter IV. The Corporate Entity

I. A. THE CORPORATE ENTITY THE DOCTRINE OF SEPARATE JURIDICAL ENTITY B. PIERCING THE CORPORATE VEIL DOCTRINE 1. AN EQUITABLE REMEDY 2. EXTENT OF LEGAL EFFECTS 3. APPLICATION OF PIERCING DOCTRINE 4. PARENT-SUBSIDIARY RELATIONSHIP C. NATIONALITY 1. PLACE OF INCORPORATION TEST 2. THE GRANDFATHER RULE 3. CONTROL TEST 4. WAR-TIME TEST 5. INVESTMENT TEST
B. Piercing Doctrine
the
Corporate
Veil
(Asked in 91, 01 and 04) 1. An Equitable Remedy - Piercing the veil of corporate entity is merely an equitable remedy, and may be awarded only in cases when the corporate fiction is used to defeat public convenience, justify wrong, protect fraud or defend crime or where the corporation is a mere alter ego or business conduit of a person. 2. Extent of Legal Effects - The application of the piercing doctrine to a particular case does not deny the corporation of legal personality for any and all purposes, but only for the particular transaction or instance for which the doctrine was applied. (Koppel Phil. Inc. vs. Yatco, 1946) 3. Application of Piercing Doctrine If done to defraud the government of taxes due it. If done to evade payment of civil liability. If done by a corporation which is merely a conduit or alter ego of another corporation. If done to evade compliance with contractual obligations. If done to evade financial obligation to its employees.
Seaoil vs Autocorp Group ( 2008, Nachura): Q: Is a corporation liable for the individual acts of its stockholders or members? Is there an exception to the general rule? A: It is settled that a corporation has a personality separate and distinct from its individual stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter. The corporation may not be held liable for the obligations of the persons composing it, and neither can its stockholders be held liable for its obligation. Of course, this Court has recognized instances when the corporations separate personality may be disregarded. However, we have also held that the same may only be done in cases where the corporate vehicle is being used to defeat public convenience, justify wrong, protect fraud, or defend crime. Moreover, the wrongdoing must be clearly and convincingly established. It cannot be presumed.
A. The Doctrine Juridical Entity
of
Separate
(Asked in 95, 96, 99 and 00) 1. Concept - A corporation has a personality separate and distinct from that of its stockholders and members and is not affected by the personal rights, obligations, and transactions of the latter. 2. Property - SHs have no claim on corporate property as owners, but mere expectancy or inchoate right to the same upon dissolution of the corporation after all corporate creditors have been paid. Such right is limited only to their equity interest (doctrine of limited liability). Although stockholders interest in the corporation may be attached by his personal creditor, corporate property cannot be used to satisfy his claim (Wise & Co. vs. Man Sun Lung, 1940). 3. Liability for torts - as a separate juridical personality, a corporation can be held liable for torts committed by its officers for corporate purpose (PNB vs. CA, 1978). 4. Constitutional Rights - Corporate entities are entitled to due process, equal protection, and protection against unreasonable searches and seizures. However, a corporation is not entitled to the privilege against self-incrimination (Bataan Shipyard & Engg Co. vs. PCGG, 1987)
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4. Parent-subsidiary relationship General Rule: The mere fact that a corporation owns all or substantially all of the stocks of another corporation is NOT sufficient to justify their being treated as one entity. Exceptions: The subsidiary is a mere instrumentality of the parent corporation, given the following circumstances (PNB vs. Ritratto Group, 2001): The parent corporation owns all or most of the subsidiarys capital stock. The parent and subsidiary corporations have common directors or officers. The parent corporation finances the subsidiary. The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its incorporation. The subsidiary has grossly inadequate capital. The parent corporation pays the salaries and other expenses or losses of the subsidiary. The subsidiary has substantially no business except with parent corporation or no assets except those conveyed to or by the parent corporation. In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a department or division of the parent corporation or its business or financial responsibility is referred to as the parent corporations own. The parent corporation uses the property of the subsidiary as its own. The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take their orders from the parent corporation in the latters interest. The formal ledger requirements of the subsidiary are not observed.
a. Domestic corporations organized and governed under and by Philippine laws b. Foreign corporations organized under laws other than those of the Philippines an can operate only in the territory of the state under whose laws it was formed. However, they may be licensed to do business here. 2. The Grandfather Rule It is a method of determining the nationality of a corporation which in turn is owned in part by another corporation by breaking down the equity structure of the shareholder corporation. It involves the computation of Filipino ownership of a corporation in which another corporation of partly Filipino and partly foreign equity owns capital stock. The percentage of shares held by the second corporation in the first is multiplied by the latters own Filipino equity, and the product of these percentages is determined to be the ultimate Filipino ownership of the subsidiary corporation (SEC Opinion re; Silahis International Hotel, 4 May 1987). 3. Control Test A corporation shall be considered a Filipino corporation if the Filipino ownership of its capital stock is at least 60%, and where the 60-40 Filipino-alien equity ownership is NOT in doubt (SEC Opinion dated 6 November 1989; DOJ Opinion No. 18, s. 1989). Therefore, its shareholdings in another corporation shall be considered to be of Filipino nationality when computing the percentage of Filipino equity of that second corporation (SEC Opinion dated 23 November 1993). Control test is applied in the following: a. Exploitation of natural resources Only Filipino citizens or corporations whose capital stock are at least 60% owned by Filipinos can qualify to exploit natural resources. (Sec. 2, Art. XII, Consti.) b. Public Utilities - xxx no franchise, certificate or any other form of authorization for the operation of a public utility shall be granted except to citizens of the Philippines or to corporations or associations organized under the laws of the Philippines at least 60% of whose
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C. Nationality of Corporation
1. Place of Incorporation test The corporation is a national of the country under whose laws it is organized or incorporated (Sec. 123)
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capital is owned by such citizens. (Sec. 11, Art. XII, Consti.) 4. War-time Test If the controlling stockholders are enemies, then the nationality of the corporation will be based on the citizenship of the majority stockholders in times of war (Filipinas Compania de Seguros v Christian Huenfeld, 1951). 5. Investment Test A Philippine National is a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines, or a trustee of the funds for pension or other employee retirement or separation benefits, where the trustee is a Philippine national and at least 60% of the fund will accrue to the benefit of Philippine nationals. (Sec. 3(a) and (b), Foreign Investments Act of 1991, RA7042)
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Chapter V. Corporate Powers

(Asked in 02 and 07)
A. EXPRESS POWERS 1. GENERAL POWERS 2. SPECIAL/SPECIFIC POWERS B. INHERENT/INCIDENTAL POWERS C. IMPLIED POWERS D. ULTRA VIRES ACTS 1. DEFINITION 2. TYPES 3. EFFECTS 4. REMEDIES
b. Increase or decrease Capital stock (Sec. 38) c. Incur, create or increase Bonded indebtedness (Sec. 38) d. Deny Preemptive right (Sec. 39) e. Sell or otherwise Dispose of substantially all its assets f. Acquire its own shares (Sec. 41) g. Invest in another corporation or business (Sec. 42) h. Declare dividends (Sec. 43) i. Enter into Management contracts (Sec. 44) Notes: 2 general restrictions on the power of the corporation to acquire and hold properties: property must be reasonably and necessarily required by the business that the power shall be subject to the limitations prescribed by other special laws and the constitution (corporation may not acquire more than 30% of voting stocks of a bank; corporations are restricted from acquiring public lands except by lease of not more than 1000 hectares)
A. Express Powers
Granted by law, Corporation Code, and its Articles of Incorporation or Charter 1. General Powers of Corporations (Sec. 36) a. Sue and be sued in its corporate name; b. Succession; c. Adopt and use a corporate seal; d. Amend its Articles of Incorporation; e. Adopt by-laws; f. For stock corporations - issue or sell stocks to subscribers and sell treasury stocks; for non-stock corporation - admit members to the corporation; g. Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and otherwise deal with such real and personal property, pursuant to its lawful business; h. Enter into merger or consolidation with other corporations as provided in the Code; i. Make reasonable donations, including those for the public welfare or for hospital, charitable, cultural, scientific, civic, or similar purposes: Provided, no corporation, domestic or foreign, shall give donations in aid of any political party or candidate or for purposes of partisan political activity; j. Establish pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees; and k. Exercise such other powers as may be essential or necessary to carry out its purposes. 2. Special/Specific Powers (Sec. 37-44) TCB PDA IDM (DIP CAB MDT) a. Extend or shorten the corporate Term (Sec. 37)
CORPORATION LAW
B. Inherent/Incidental Powers
Not expressly stated but are deemed to be within the capacity of corporate entities
C. Implied/Necessary Powers
These powers are deemed to exist because of the following provisions: Except such as are necessary or incidental to the exercise of the powers so conferred (Sec. 36) Such powers as are essential or necessary to carry out its purpose or purposes as stated in the AOI catchall phrase (Sec. 45)
D. The Ultra Vires Acts (Sec. 45)

1. Definition Ultra Vires acts are those acts which a corporation is not empowered to do or perform because they are not conferred by its AOI or by the Corporation Code, or not necessary or incidental to the exercise of the powers so conferred.
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2. Types of Ultra Vires Acts a. Acts done beyond the powers of the corporation as provided in the law or its articles of incorporation; b. Acts or contracts entered into in behalf of a corporation by persons who have no corporate authority (Note: This is technically ultra vires acts of officers and not of the corporation); c. Acts or contracts, which are per se illegal as being contrary to law. (VILLANUEVA, Philippine Corporate Law) 3. Effects of Ultra Vires Acts a. Executed contract courts will not set aside or interfere with such contracts; b. Executory contracts no enforcement even at the suit of either party (void and unenforceable); c. Part executed and part executory principle of no unjust enrichment at expense of another shall apply; d. Executory contracts apparently authorized but ultra vires the principle of estoppel shall apply.
ULTRA VIRES ACTS Not necessarily unlawful, but outside the powers of the corporation Can be ratified Can bind the parties if wholly or partly executed ILLEGAL ACTS Unlawful; against law, morals, public policy, and public order Cannot be ratified Cannot bind the parties
CORPORATION LAW
Seaoil vs Autocorp Group (2008, Nachura): An ultra vires act is distinguished from illegal act, the former being voidable which may be enforced by performance, ratification, or estoppel, while the latter is void and cannot be validated.
4. Remedies in Case of Ultra Vires Acts a. State 1. Forfeiture by judgment of Court 2. Suspension or revocation of the certificate of registration by the SEC b. Stockholders 1. Injunction 2. Derivative suit c. Creditors 1. Nullification of contract in fraud of creditors
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Chapter VI. Internal Organization of the Corporation

A. BY-LAWS 1. DEFINITION 2. ADOPTION 3. REQUIREMENTS 4. EFFECTIVITY 5. AMENDMENT OR REPEAL B. DIRECTORS/TRUSTEES 1. QUALIFICATIONS 2. ELECTION OF DIRECTORS/TRUSTEES 3. METHODS OF VOTING 4. EXERCISE OF CORPORATE POWERS 5. MEETINGS OF THE BOARD 6. REMOVAL OF DIRECTORS/TRUSTEES 7. EXECUTIVE COMMITTEE C. CORPORATE OFFICERS 1. WHO ARE CORPORATE OFFICERS 2. DISQUALIFICATIONS 3. AUTHORITY OF CORPORATE OFFICERS D. STOCKHOLDERS OR MEMBERS 1. RIGHTS OF STOCKHOLDERS 2. OBLIGATIONS OF STOCKHOLDERS 3. STOCKHOLDERS/MEMBERS MEETING 4. CORPORATE ACTS REQUIRING APPROVAL OF ALL STOCKHOLDERS/MEMBERS 5. OTHER INSTANCES REQUIRING STOCKHOLDERS/MEMBERS ACTION 6. LIMITATIONS ON RIGHT TO VOTE 7. APPRAISAL RIGHT
governance and management of corporations but they are not essential to corporate birth. Therefore, failure to file them within the period required by law by no means tolls the automatic dissolution of a corporation
3. Requirements (Sec. 46)

Must be approved by the affirmative vote of the stockholders representing the majority of the outstanding capital stock or majority of members (if filed prior to incorporation, approved and signed by all incorporators) Must be kept in the principal office of the corporation; subject to inspection of stockholder or member during office hours (Sec. 74)
4. Effectivity of By-Laws
ONLY from the issuance of SEC of certification that bylaws are not inconsistent with the Code CANNOT bind stockholders or corporation pending approval
CORPORATION LAW
5. Amendment or Repeal (Sec. 48)

Majority vote of the members of the Board and majority vote of the OCS or members, in a meeting duly called for the purpose Delegation to the BOD of power to amend or repeal by-laws by vote of stockholders representing 2/3 of the OCS or 2/3 of the members Revocation of the delegated power by majority vote only
A. By-Laws
(Asked in 98, 00 and 01)
1. Definition
By-laws are mere internal rules among stockholders and cannot affect or prejudice 3rd persons who deal with the corporation unless they have knowledge of the same (China Banking Corp v CA, 1997)
B. Directors/Trustees 1. Qualifications
a. If STOCK, director must own at least 1 share of the capital stock, which stock shall stand in his own name (Sec. 23). If NON-STOCK, trustee must be a member. b. Majority of the directors/trustees must be residents. c. Not have been convicted by final judgment of an offense punishable by imprisonment for a period exceeding 6 years or a violation of the Corporation Code, committed within five years from the date of his election. (Sec. 27) d. Natural person e. Of Legal Age f. Other qualifications as may be prescribed in the by-laws of the corporation.
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2. Adoption of by-laws (Sec. 46)

Within 1 month after receipt of official notice of the issuance of its certificate of incorporation by the SEC. Prior to incorporation - approved and signed by all the incorporators & submitted to SEC together with AOI
Loyola Grand Villas Homeowners Assn vs. CA (1997): Q: What happens when there is failure to file the By-laws on time? A: Failure to file the by-laws within that period does not imply the "demise" of the corporation. By-laws may be required by law for an orderly
2. Election of Directors/Trustees
a. There must be present, in person or by proxy, the owners of majority of the OCS or majority of the members entitled to vote in the meeting. b. Election may be by ballot if requested. c. A stockholder cannot be deprived in the articles of incorporation or in the by-laws of his statutory right to use any of the methods of voting in the election of directors. d. No delinquent stock shall be voted. e. The candidates receiving the highest number of votes shall be declared elected.
Exceptions: 1. Executive Committee duly authorized in the by-laws; 2. A contracted manager which may be an individual, a partnership, or another corporation. Note: In case the contracted manager is another corporation, the special rule in Sec. 44 applies. 3. In case of close corporations, the stockholders may manage the business of the corporation instead by a board of directors, if the articles of incorporation so provide.
Spouses Constantine Firme vs. Bukal Enterprises and Development Corporation (2003): The power to purchase real property is vested in the board of directors or trustees. While a corporation may appoint agents to negotiate for the purchase of real property needed by the corporation, the final say will have to be with the board, whose approval will finalize the transaction.
3. Methods of Voting
a. Straight Voting b. Cumulative voting for one candidate a stockholder is allowed to concentrate his votes and give one candidate as many votes as the number of directors to be elected multiplied by the number of his shares shall equal. Illustration: If there are 5 directors to be elected and Pedro, as shareholder, has 100 shares, Pedro can give 500 (5 x 100 shares) votes to just one candidate. c. Cumulative voting by distribution - a stockholder may cumulate his shares by multiplying the number of his shares by the number of directors to be elected and distribute the same among as many candidates as he shall see fit. Illustration: In the illustration above, Pedro may choose to give 100 votes to candidate 1, 100 votes to candidate 2, 100 votes to candidate 3, 150 votes to candidate 4, and 50 votes to candidate 5.
CORPORATION LAW
b. Requisites of a VALID Corporate Act by the Board of Directors 1. The Board must act as a BODY in a meeting. 2. There must be a VALIDLY constituted meeting. 3. There act must be supported by a MAJORITY OF THE QUORUM duly assembled (Exception: Election of officers requires a vote of majority of all the members of the board) 4. The act must be within the powers conferred on the Board.
5. Meetings of the Directors/Trustees
Board
of
4. Exercise
of
Corporate
Powers
(Asked in 93 and 98) a. Board as Repository of Corporate Powers General Rule: The corporate powers of the corporation shall be exercised, all business conducted and all property of such corporation controlled and held by the board of directors or trustees. (Sec. 23)
a. When? (Sec.53) Regular meetings of directors or trustees shall be held monthly, unless the by-laws provide otherwise. Special meetings of the board of directors or trustees may be held at any time upon the call of the president or as provided in the bylaws.
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b. Where? (Sec. 53) Meetings of directors or trustees of corporations may be held anywhere in or outside of the Philippines, unless the by-laws provide otherwise. c. Who May Attend? The members of the Board themselves; directors in Board meetings cannot be represented or voted by proxies. d. Who Presides? (Sec. 54) The president, unless the by-laws provide otherwise. e. Notice Requirements (Sec. 53) Notice of regular or special meetings stating the date, time and place of the meeting must be sent to every director or trustee at least one (1) day prior to the scheduled meeting, unless otherwise provided by the bylaws. Notice of meeting is subject to waiver f. Quorum Requirements (Sec. 25) General Rule: Majority of the number of directors or trustees as fixed in the articles of incorporation. Exception: Unless the articles of incorporation or the by-laws provide for a greater majority, or in case of election of officers where a vote of a majority of all the members of the board is needed.
board resolution or by-laws (See Sec. 35). Limitations: a. Must be provided for in the by-laws and composed of not less than 3 members of the board appointed by the board. b. Must act by a majority vote of all of its members. c. CANNOT act on the following: 1. Matters needing stockholder approval (Sec. 35); 2. Filling up of board vacancies; 3. Amendment, repeal or adoption of by-laws (Sec. 35); 4. Amendment or repeal of any resolution of the Board which by its express terms is not amendable or repealable (Sec. 35); 5. Cash dividend declaration (Sec. 35); and 6. Acts which would render the BOD powerless and free from all responsibilities imposed on it by law (CAMPOS, The Corporation Code: Comments, Notes and Selected Cases).
CORPORATION LAW
C. Corporate Officers 1. Who are Corporate Officers (POST)

a. President must be a director; b. Treasurer may or may not be a director; as a matter of sound corporate practice, must be a resident and citizen of the Phil (SEC opinion) c. Secretary need not be a director unless required by the by-laws; must be a resident and citizen of the Philippines; and d. Other officers as may be provided in the by-laws. Notes: Any two (2) or more positions may be held concurrently by the same person, EXCEPT that no one shall act as president and secretary or as president and treasurer at the same time. Additional qualifications of officers may be provided for in the by-laws (Sec. 47(5)).
6. Removal
of
Directors/Trustees
(Asked in 91 and 01) General Rule: Removal may be with or without cause. Exception: A minority director elected through cumulative voting cannot be removed without cause (Sec. 28) Other requisites: a. Vote of the stockholders representing at least 2/3 of the OCS or the members entitled to vote b. At a regular or special meeting after proper notice is given
7. Executive Committee
A body created by the by-laws and composed of some members of the board which, subject to the statutory limitations, has all the authority of the board to the extent provided in the
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2. Disqualifications (Sec. 27)

a. Convicted by final judgment of an offense punishable by imprisonment for a period exceeding six (6) years b. Convicted by final judgment of a violation of the Corporation Code committed within five (5) years prior to the date of his election or appointment
3. Authority of Corporate Officers

A person dealing with a corporate officer is put on inquiry as to the scope of the latters authority but an innocent person cannot be prejudiced if he had the right to presume under the circumstances the authority of the acting officers.
Associated Bank vs. Pronstroller (2008, Nachura): Q: What is the Doctrine of Apparent Authority? A: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority, it holds him out to the public as possessing the power to do those acts; the corporation will, as against anyone who has in good faith dealt with it through such agent, be estopped from denying the agents authority. CORPORATE OFFICER Position is provided for in the by-laws or under the Corporation Code RTC has jurisdiction in case of labor dispute CORPORATE EMPLOYEE Employed by the action of the managing officer of the corporation NLRC has jurisdiction in case of labor disputes
4. Proportionate participation in the distribution of assets in liquidation (Sec. 122) 5. Right to transfer of stocks in corporate books (Sec. 63) 6. Pre-emptive right (Sec. 39) e. Right to inspect books and records (Sec. 74) f. Right to be furnished with the most recent financial statements/financial report (Sec. 75) g. Right to recover stocks unlawfully sold for delinquent payment of subscription (Sec. 69) h. Right to file individual suit, representative suit and derivative suits
2. Obligations of Stockholders
a. Liability to the corporation for unpaid subscription (Sec. 67) b. Liability to the corporation for interest on unpaid subscription if so required by the by-laws (Sec. 66) c. Liability for watered stocks (Sec. 65) d. Liability for dividends unlawfully paid (Sec. 31 and 43) e. Liability for assuming to act as a corporation knowing it to be without authority (Sec. 21)
CORPORATION LAW
3. Stockholders Meeting
(Asked in 93)
or
Members
General Rule: Stockholders or members approval is expressed in a meeting duly called and held for the purpose. Exception: Referendum or written assent of the stockholders or members in case of amendment of AOI (Sec. 16) a. When? (Sec. 50) Regular meetings of stockholders or members shall be held annually on a date fixed in the by-laws, or if not so fixed, on any date in April of every year as determined by the board of directors or trustees. b. Where? Stock: City or municipality where the principal office of the corporation is located, or, if practicable, in the principal office of the corporation: Provided, Metro
D. Stockholders or Members 1. Rights of Stockholders

(Asked in 96) a. Direct or indirect participation in management (Sec. 6) b. Voting rights (Sec. 6) c. Right to remove directors (Sec. 28) d. Proprietary rights 1. Right to dividends (Secs. 43 and 71 ) 2. Appraisal right (Sec. 81) 3. Right to issuance of stock certificate for fully paid shares (Sec. 64)
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Manila shall be considered a city or municipality. (Sec. 51) Non-stock: Any place even outside the place where the principal office is located, in case of non-stock corporations (Sec. 93) c. Who May Attend and Vote? Stockholders, either in person or by proxy Pledgors or mortgagors (Sec. 55) Pledgee or mortgagee, IF expressly given such right by the pledgor or mortgagor in writing which is recorded on the corporate books. Executors, administrators, receivers, and other legal representatives duly appointed by the court, without need of any written proxy. ALL joint owners of stocks, or any one of them with the consent of ALL the co-owners, unless there is a written proxy, signed by all the co-owners Any one of the joint owners of shares owned in an "and/or" capacity or a proxy thereof d. Who Presides? The president, unless the bylaws provide otherwise. (Sec. 54) Any petitioning stockholder or member upon order of the SEC when there is no person authorized to call a meeting. Such petitioning stockholder or member shall preside thereat until at least a majority of the stockholders or members present have chosen one of them as presiding officer. (Sec. 50) e. Notice Requirements (Sec. 50) Regular Meetingwritten notice sent to all SH or members at least 2 weeks prior to the meeting, unless a different period is required by the by-laws Special Meetingwritten notice sent at least 1 week prior to the meeting, unless otherwise provided in the by-laws. Subject to waiver, expressly or impliedly (i.e., attendance despite no notice) Failure to give notice would render a meeting VIODABLE at
the instance of an absent stockholder, who was not notified of the meeting (Board v. Tan, 1959). f. Quorum Requirements (Sec. 52) 1. General: stockholders representing majority of the OCS or majority of the members Exception: the Code or the bylaws provide otherwise 2. Where quorum is present at the start of a lawful meeting, stockholders present cannot without justifiable cause break the quorum by walking out from said meeting so as to defeat the validity of any act proposed and approved by the majority. (Thus, stockholders can break the quorum for justifiable causes.) (Johnston vs. Johnston, 1965 CA decision) g. Improperly Held Meetings All proceedings & transactions at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be VALID even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (Sec. 51)
CORPORATION LAW
4. Corporate Acts Requiring Approval of ALL Stockholders or Members

General Rule: Vote necessary to approve a particular corporate act as provided in this Code shall be deemed to refer only to stocks with voting rights Exceptions: Voting and non-voting shares shall be entitled to vote in the following cases: a. Amendment of Articles of Incorporation b. Extend or Shorten Corporate Term c. Increase or Decrease of Capital Stock d. Incurring, Creating or Increasing Bonded Indebtedness e. Sale, Lease, Mortgage or Other Disposition of Substantially all corporate assets
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f.
Investment of funds in another corporation or business or for any purpose other than the primary purpose for which it was organized Requisites (Asked in 95): Approval of majority of the board of directors or trustees Ratification by the stockholders representing at least 2/3 of the OCS or the members at a meeting duly called for the purpose Written notice addressed to each stockholder or member at his place of residence as shown on the books of the corporation Appraisal right available to dissenting stockholders or members NOTES: If it is the same purpose or incidental or related to its PRIMARY purpose, the board can invest the corporate fund WITHOUT the consent of the stockholders. No appraisal right. If the investment is in another corporation of different business or purpose BUT in pursuance of the SECONDARY purpose, the affirmative vote of majority of the board consented by stockholders/ members is required. If the investment is OUTSIDE the purpose/s for which the corporation was organized, AOI must be amended first.
members of BOTH the managing and the managed corporation (at meeting duly called) 2/3 vote required of the managed corporation when: Where a SH/s representing the same interest of both the managing and the managed corporations own or control more than 1/3 of the total OCS entitled to vote of the managing corporation; or Where a majority of the members of the BOD of the managing corporation also constitute a majority of the members of the BOD of the managed corporation
c. Fixing the Consideration of No-par shares (Sec. 62) d. Fixing the Compensation of Directors (Sec. 30)
6. Limitations on Right to Vote

a. Non-voting shares are not entitled to vote except as provided for in the last paragraph of Sec. 6. b. Preferred or redeemable shares may be deprived of the right to vote c. Fractional shares of stock cannot be voted. d. Treasury shares have no voting rights as long as they remain in the treasury. e. No delinquent stock shall be voted (Sec. 71) f. A transferee of stock cannot vote if his transfer is not registered in the stock and transfer book of the corporation.
CORPORATION LAW
g. Adoption, Amendment and Repeal of By-Laws (Sec. 48) h. Merger and Consolidation i. Dissolution of the Corporation
5. Other instances requiring stockholders action (voting shares only)

a. Declaration of Stock Dividends b. Management Contracts (Sec. 44) Any contract whereby a corporation undertakes to manage or operate ALL OR SUBSTANTIALLY ALL of the business of another corporation for a period NOT longer than 5 years Approval by the BOD Approval by SH owning at least the majority of the OCS or the
7. Appraisal Right
(Asked in 99 and 07) Right to withdraw from the corporation and demand payment of the fair value of the shares after dissenting from certain corporate acts involving fundamental changes in corporate structure (Sec. 81). a. Instances of appraisal right (Sec. 81) 1. Extension or reduction or corporate term (Sec. 11)
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2. Change in the rights of stockholders, authorize preferences superior to those stockholders, or restrict the right of any stockholder (Sec. 81) 3. Investment of corporate funds in another business or purpose (Sec. 42) 4. Sale or disposal of all or substantially all assets of the corporation (Sec. 81) 5. Merger or consolidation (Sec. 81) b. Requirements for exercise of appraisal right(Secs. 82, 86) Stockholder must have voted against the corporate act. Stockholder must make a written demand on the corporation within 30 days after the vote was taken for payment of the fair value of his shares on the said date. Stockholder must submit the certificates to the corporation for notation within ten (10) days after demand for payment. Otherwise, right to appraisal may be terminated at the option of corporation. c. Effect of demand (Sec. 83) ALL rights accruing to such shares, including voting and dividend rights, shall be suspended EXCEPT the right of such stockholder to receive payment of the fair value thereof Immediate RESTORATION of voting and dividend rights if the dissenting stockholder is not paid the value of his shares within 30 days after the award. d. Extinguishment of appraisal right (Sec. 84) Withdrawal of demand by the stockholder WITH CONSENT of the corporation Abandonment of the proposed action Disapproval by SEC of the proposed action
CORPORATION LAW
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Chapter VII. Management and Control

A. DEVICES AFFECTING CONTROL 1. PROXY 2. VOTING TRUST AGREEMENT 3. POOLING AND VOTING AGREEMENTS DUTIES AND LIABILITIES OF DIRECTORS 1. THREE-FOLD DUTIES OF DIRECTORS 2. SELF-DEALING DIRECTOR 3. FIXING THE COMPENSATION OF DIRECTORS AND OFFICERS 4. INTERLOCKING DIRECTORS 5. SEIZING CORPORATE OPPORTUNITY 6. USING INSIDE INFORMATION DUTIES AND LIABILITIES OF OFFICERS DUTIES OF CONTROLLING STOCKHOLDERS REMEDIES IN CASE OF MISMANAGEMENT RIGHT OF INSPECTION DERIVATIVE SUITS
B.
C. D. E. F. G.
A. Devices Affecting Control

General Rule: Extent of control is proportional to the number of shares owned by the SH Exceptions: proxy device, voting trust agreements, pooling and voting agreements, cumulative voting, classification of shares, restriction on transfer of shares, additional qualifications for directors, founders shares, management contracts, and unusual quorum and voting requirements
Stockholders and members may vote in person or by proxy in all meetings of stockholders or members (Sec. 58). 2. Voting Trust Agreement(Asked in 92) An arrangement created by one or more stockholders for the purpose of conferring upon a trustee or trustees the right to vote and other rights pertaining to the shares for a period not exceeding five (5) years at any time (Sec. 59). 3. Pooling and Voting Agreements Agreement between 2 or more stockholders to vote their shares in the same way. It does NOT involve a transfer of stocks but is merely a private agreement.
POOLING AND VOTING AGREEMENTS Consensual Merely an agreement to vote in the same way. Valid so long as they are not fraudulent or do not limit BOD discretion (except in close corporations). No formalities required Merely a contract between SHs. No transfer. Owner still exercises voting rights.
CORPORATION LAW
1. Proxy
PROXY Principal agent Proxy cant exceed delegated authority. TRUSTEE
Trustee-beneficiary The only limit to authority is that the act must be for the benefit of trustee. (fiduciary obligation)
Must be in writing Copy must be filed with the corporation. No transfer. Proxy exercises voting rights only for a specific mtg (unless otherwise provided) Proxy cannot be director Revocable at will in any manner, EXCEPT if coupled with an interest. Max of 5 yrs at a time SEC can pass on validity
Must be in writing and notarized Copy must be filed with SEC and the corporation. Transfer of legal title to trustee. Trustee exercises absolute voting rights continuously, subj only to fiduciary duty. Trustee can be director Irrevocable, as long misconduct or fraud.
as
no
Max of 5 yrs at a time (unless coterminus with loan)
Owner can be director. Revocable by consent or mutual termination. If unilateral termination, liable for damages. No maximum period.
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B. Duties and Liabilities of Directors
1. Three-fold Duties of Directors

Duty Obedience Violation under Sec. 31 Willfully and knowingly vote for or assent to patently unlawful acts of the corporation Guilty of gross negligence or bad faith in directing the affairs of the corporation Acquire any personal or pecuniary interest in conflict with their duty as such directors or trustees (VILLANUEVA)
Diligence Loyalty
necessary to constitute a quorum for such meeting; b. That the vote of such director or trustee was not necessary for the approval of the contract; c. That the contract is fair and reasonable under the circumstances; and d. That in case of an officer, the contract has been previously authorized by the board of directors. Ratification: In case of absence of the first two conditions above, contract may be ratified if: a. Stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract. b. Full disclosure of the adverse interest of the directors or trustees involved is made at such meeting. c. Contract is fair and reasonable under the circumstances.
a. Duty of Obedience Directors must direct the affairs of the corporation only in accordance with the purposes for which it was organized. b. Duty of Diligence Directors are expected to possess at least ordinary knowledge and skill to enable them to make sound business decision and to exercise reasonable care in the management of the corporation
Business Judgment Rule General Rule: Directors cannot be held liable for mistakes or errors in the exercise of their business judgment if they acted in good faith, with due care & prudence. Contracts intra vires entered into by the board of directors are binding upon the corp. & courts will not interfere. Exception: If the contracts are so unconscionable & oppressive as to amount to a wanton destruction of the rights of the minority.
3. Fixing the Compensation Directors and Officers (Sec. 30)

(Asked in 91)
of
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General rule: Directors are only entitled to per diems, which are reasonable Exception: When AOI, by-laws, or an advance contract provides for compensation
Western Institute of Technology vs. Salas (1997): The position of being chairman and ViceChairman, like that of treasurer and secretary, are not considered directorship positions but officership positions that would entitle the occupants to compensation. Likewise, the limitation placed under Sec. 30 of the Corporation Code that directors cannot receive compensation exceeding 10% of the net income of the corporation would not apply to the compensation given to such positions since it is being given in their capacity as officers of the corporation and not as board members.
c. Duty of Loyalty Directors should not attempt to acquire or acquire an interest adverse to their duties as such directors.
2. Self-dealing Director (Sec. 32)

General: A contract of the corporation with one or more of its directors or trustees is VOIDABLE, at the option of such corporation. Exception: Such contract is VALID if all of the following conditions are present: a. That the presence of such director or trustee in the board meeting in which the contract was approved was not
4. Interlocking directors (Sec. 33)

(Asked in 95 and 96) a. If the interests of the interlocking director in the corporations are both substantial (stockholdings exceed 20% of outstanding capital stock).
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General rule: A contract between two or more corporations having interlocking directors shall not be invalidated on that ground alone. Exception: If contract is fraudulent or not fair and reasonable. b. If the interest of the interlocking director in one of the corporations is nominal (stockholdings 20% or less) while substantial in the other, the contract shall be VALID, if the following conditions are met: 1. The presence of such director or trustee in the board meeting in which the contract was approved was NOT necessary to constitute a quorum for such meeting 2. That the vote of such director or trustee was not necessary for the approval of the contract 3. That the contract is fair and reasonable under the circumstances. Where (1) and (2) are absent, the contract can be ratified by the vote of the stockholders representing at least 2/3 of the outstanding capital stock or at least 2/3 of the members in a meeting called for the purpose voted to ratify the contract, provided that: 1. full disclosure of the adverse interest of the directors/trustees involved is made on such meeting; 2. the contract is fair and reasonable under the circumstances. 5. Seizing corporate (Sec. 34) (Asked in 01 and 05)
Doctrine of Corporate Opportunity If there is presented to a corporate officer or director a business opportunity which: a. corporation is financially able to undertake b. from its nature, is in line with corporations business and is of practical advantage to it; and c. one in which the corporation has an interest or a reasonable expectancy. By embracing the opportunity, the self-interest of the officer or director will be brought into conflict with that of his corporation. Hence, the law does not permit him to be seize the opportunity even if he will use his own funds in the venture. (SUNDIANG AND AQUINO)
6. Using inside information

(Secs. 3.8, 23.2, 27, 61, 71.2, Securities Regulation Code) (Asked in 94 and 04) The fiduciary position of insiders1, directors, and officers prohibits them from using confidential information relating to the business of the corporation to benefit themselves or any competitor corporation in which they may have a mere substantial interest. Since loss and prejudice to the corporation is not a requirement for liability, the corporation has a cause of action as long as there is unfair use of inside information It is inside information if it is not generally available to others and is acquired because of the close relationship of the director or officer of the corporation General rule: (Majority view) Directors owe no fiduciary duty to stockholders but they may deal with each other at fair and reasonable terms, as if they were unrelated. No duty to disclose facts known to the director or officer. Exception:
CORPORATION LAW
opportunity
General Rule: Where a director, by virtue of his office, acquires for himself a business opportunity which should belong to the corporation, thereby obtaining profits to the prejudice of such corporation, he must account to the latter for all such profits by refunding the same Exception: His act has been ratified by a vote of the stockholders owning or representing at least two-thirds (2/3) of the outstanding capital stock.
Insider means: (a) the issuer; (b) a director or officer (or person performing similar functions) of, or a person controlling the issuer; (c) a person whose relationship or former relationship to the issuer gives or gave him access to material information about the issuer or the security that is not generally available to the public; (d) a government employee, or director, or officer of an exchange, clearing agency and/or selfregulatory organization who has access to material information about an issuer or a security that is not generally available to the public; or (e) a person who learns such information by a communication from any of the foregoing insiders (3.8, Sec Regulations Code)
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Special Facts Doctrine: Conceding the absence of a fiduciary relationship in the ordinary case, courts nevertheless hold that where special circumstances or facts are present which make it inequitable for the director to withhold information from the stockholder, the duty to disclose arises and concealment is fraud (Strong vs. Repide, 1909).
D. Duties of Stockholders
Controlling
C. Duties and Liabilities of Officers

The provisions on seizing corporate opportunity and disloyalty (Secs. 31 and 34) shall also apply to corporate officers Note: Members of the BOD who are also officers are held to a more stringent liability because they are in-charge of day-to-day activities (CAMPOS).
DOCTRINE OF LIMITED LIABILITY Shields the corporators from corporate liability beyond their agreed contribution to the capital or shareholding in the corporation. DOCTRINE OF IMMUNITY Protects a person acting for and in behalf of the corporation from being himself personally liable for his authorized actions
A majority stockholder is subject to the duty of good faith when he acts by voting at a stockholders meeting with respect to a matter in which he has a personal interest Controlling stockholders may dispose of their shares at any time and at such price as they choose provided they do not pervert these prerogatives by transferring office to persons who are known as intending to raid the corporate treasury or otherwise improperly benefit themselves. It is fraudulent for a stockholder to buy from another stockholder without disclosing his identity Principal stockholders are likewise prohibited from using inside information in the purchase and sale of equity security
E. Remedies in Mismanagement
Case
of
CORPORATION LAW
Tramat Mercantil, Inc. vs. CA, (1994), reiterated in Atrium Management Corp. v. CA, (2001): Liability of Director, Trustee or Officer (Asked in 96 and 97) Personal liability of a corporate director, trustee or officer along (although not necessarily) with the corporation may so validly attach, as a rule, only when: He assents (a) to a patently unlawful act of the corporation, or (b) for bad faith or gross negligence in directing its affairs, or (c) for conflict of interest, resulting in damages to the corporation, its stockholders or other persons; He consents to the issuance of watered stocks or who, having knowledge thereof, does not forthwith file with the corporate secretary his written objection thereto; He agrees to hold himself personally and solidarily liable with the corporation; or He is made, by a specific provision of law, to personally answer for his corporate action
1. Receivership 2. Injunction if the act has not been done 3. Dissolution if the abuse amounts to a ground for quo warranto but the Solicitor General refuses to act 4. Derivative suit filed with the RTC
F. Right of Inspection
1. Basis of Right As the beneficial owners of the business, the stockholders have the right to know the financial condition and management of corporate affairs. 2. Records/Books to be Kept (Sec. 74) a. Books that record all business transactions of the corporation which shall include contract, memoranda, journals, ledgers, etc; b. Minute book for meetings of the SHs/members; c. Minute book for meetings of the board/trustees; d. Stock and transfer book. stock transfer agent - One engaged principally in the business of registering transfers of stocks in behalf of a stock corporation (licensed by the SEC). The corporate secretary is the one duly authorized
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to make entries in the stock and transfer book.

Torres et al vs. CA (1997) It is the corporate secretary's duty and obligation to register valid transfers of stocks and if said corporate officer refuses to comply, the transferor-stockholder may rightfully bring suit to compel performance.
G. Derivative Suits
(Asked in 93) Suits of stockholders based on wrongful or fraudulent acts of directors or other persons. 1. Requisites of Derivative Actions a. That the stockholder or member at the time the acts or transactions subject of the action occurred and the time the action was filed; b. That the stockholder exerted all reasonable efforts, and alleges the same with particularity in the complaint, to exhaust all remedies available under the AOI, by-laws, laws or rules governing the corporation or partnership to obtain the relief he desires. c. That there is no appraisal right available for the act(s) complained of; and d. That the suit is not a nuisance or harassment suit. (Rule 8, Interim Rules of Procedure for IntraCorporate Controversies)
Bitong vs. CA (1998): The power to sue and be sued in any court by a corporation even as a stockholder is lodged in the BOD that exercises its corporate powers and not in the president or officer thereof. But where corporate directors are guilty of a breach of trust, not of mere error of judgment or abuse of discretion, and intra-corporate remedy is futile or useless, a SH may institute a derivative suit in behalf of himself and other SHs and for the benefit of the corporation, to bring about a redress of the wrong inflicted directly upon the corporation and indirectly upon the stockholders.
3. Financial Statements (Sec. 75) Within 10 days from written request, the corporation shall furnish its most recent financial statement (balance sheet and profit or loss statement as of last taxable year) 4. Requirements for the exercise of the right of inspection (Sec. 74) a. It must be exercised at reasonable hours on business days and in the place where the corporation keeps all its records (i.e., principal office). b. The stockholder has not improperly used any information he secured through any previous examination. c. Demand is made in good faith or for a legitimate purpose. If the corporation or its officers contest such purpose or contend that there is evil motive behind the inspection, the burden of proof is with the corporation or such officer to show the same.
Gokongwei vs. SEC (1979): TEST to determine whether the purpose is legitimate A legitimate purpose is one which is germane to the interests of the stockholder as such and not contrary to the interests of the corporation.
CORPORATION LAW
5. Remedies when inspection is refused a. Mandamus b. Injunction c. Action for damages d. File an action under Sec. 144 to impose a penal offense by fine and/or imprisonment
2. Jurisdiction over derivative suits lies with the RTC (Sec. 5.2, Securities Regulation Code) 3. Other suits by stockholders/members a. Individual Actions those brought by the shareholder in his own name against the corporation when a wrong is directly inflicted against him. b. Representative or Class Actions those brought by the stockholder in behalf of himself and all other stockholders similarly situated when a wrong is committed against a group of stockholders.
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Chapter VIII. Capital Structure

A. CLASSIFICATION OF SHARES B. SUBSCRIPTION CONTRACT 1. STATUS AS A SHAREHOLDER 2. TYPES OF SUBSCRIPTION CONTRACT 3. INTEREST ON UNPAID SUBSCRIPTION C. PRE-EMPTIVE RIGHT 1. DEFINITION 2. LIMITATIONS ON THE EXERCISE OF PREEMPTIVE RIGHT 3. INTEREST ON UNPAID SUBSCRIPTION D. CONSIDERATION FOR ISSUANCE OF SHARES 1. FORMS OF CONSIDERATION 2. LIMITATIONS ON CONSIDERATION E. WATERED STOCKS 1. DEFINITION 2. LIABILITY OF DIRECTORS OR OFFICERS F. DELINQUENT SHARES 1. DEFINITION 2. EFFECTS OF DELINQUENCY G. ENFORCEMENT OF PAYMENT 1. DELINQUENCY SALE 2. COURT ACTION 3. COLLECTION FROM CASH DIVIDENDS AND WITHHOLDING OF STOCK DIVIDENDS H. RIGHTS AND OBLIGATIONS OF HOLDERS OF UNPAID BUT NON-DELINQUENT STOCK I. CERTIFICATE OF STOCK J. LOST OR DESTROYED CERTIFICATE K. TENDER OFFER
General Rule: No share may be deprived of voting rights Exceptions: 1. Preferred or 2. Redeemable shares, 3. Provided by the Code There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS Doctrine of Equality of Shares Each share shall be EQUAL in ALL respects to every other share, except as otherwise provided in the AOI and stated in the certificate of stock (Sec. 6) 1. Common Shares The most common type of shares which enjoy no preference but the owners thereof are entitled to management of the corporation and to equal pro-rata division of profits after preference. 2. Preferred Shares Stocks which are given preference by the issuing corporation in dividends and the distribution of assets of the corporation in case of liquidation or such other preferences as may be stated in the AOI which are not violative of the Corporation Code. Limitations: a. Preferred shares can only be issued with par value. b. Preferred shares must be stated in the Articles of Incorporation and in the certificate of stock. c. The BOD may fix the terms and conditions only when so authorized by the AOI and such terms and conditions shall be effective upon filing a certificate thereof with the SEC. 3. Par value shares These are shares with a stated value set out in the AOI. This remains the same regardless of the profitability of the corporation. This gives rise to financial stability and is the reason why banks, trust corporations, insurance companies and building and loan associations must always be organized with par value shares. Par value is minimum issue price of such share in the AOI which must be stated in the certificate
CORPORATION LAW
Sources of Financing 1. Contributions by stockholders (Equity) 2. Loans or advances from creditors (Borrrowing) 3. Profits that the business may earn
A. Classification of Shares (Sec. 6)

Shares of stock of stock corporations may be divided into classes or series of shares or both. Each class or series of shares may have rights, privileges or restrictions, as stated in the AOI. Classification of shares: 1. Common shares 2. Preferred shares 3. Par value shares 4. No-par value shares 5. Founders shares 6. Redeemable shares 7. Treasury shares 8. Convertible shares 9. Non-voting shares
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4. No-par value shares These are shares without a stated value. Limitations: a. No-par value shares cannot have an issue price of less than P5.00 per share (Sec. 6). b. They shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable to the corporation or to its creditors in respect thereto (Sec. 6). c. Entire consideration received by the corporation for its no-par value shares shall be treated as capital and shall not be available for distribution as dividends (Sec. 6). d. AOI must state the fact that the corporation issues no-par shares and the number of shares. e. Banks, insurance companies, trust companies, building and loan associations, and public utilities cannot issue no-par value shares (Sec. 6). f. The issued price may be fixed in the AOI, or by the BOD pursuant to authority conferred upon it by the AOI, and by majority vote of the outstanding shares in a meeting called for the purpose (Sec. 62). 5. Founders Shares (Sec. 7) These are shares, classified as such in the AOI, which are given certain rights and privileges not enjoyed by the owners of other stocks. (7) Where exclusive right to vote and be voted for in the election of directors is granted, such right must be for a limited period not to exceed 5 years subject to approval by SEC. 5 year period shall commence from date of approval by SEC. (Ibid) 6. Redeemable Shares These are shares which permit the issuing corporation to redeem or purchase its own shares (Sec. 8). Limitations: a. Redeemable shares may be issued only when expressly provided for in the AOI (Sec. 8). b. The terms and conditions affecting said shares must be stated both in the AOI and in the certificate (Sec. 8).
c. Redeemable shares may be deprived of voting rights in the AOI, unless otherwise provided in the Code. d. The corporation is required to maintain sinking fund to answer for redemption price if the corporation is required to redeem. e. The redeemable shares are deemed retired upon redemption unless otherwise provided in the AOI. f. Unrestricted retained earnings is NOT necessary before shares can be redeemed but there must be sufficient assets to pay the creditors and to answer for operations (Republic Planters Banks vs. Agana, 1997). Redemption cannot be made if such redemption will result in insolvency or inability of the corporation to meet its obligations (SEC Opinion, 24 Aug 1987). 7. Treasury Shares These are shares which have been issued and fully paid for, but subsequently re-acquired by the issuing corporation by purchase, redemption, donation or through some other lawful means. Such shares may again be disposed of for a reasonable price fixed by the BOD (Sec. 9). Note: Delinquent stocks, which are stocks that have not been fully paid, may become treasury stocks upon bid of the corporation in absence of other bidders (Sec.68). 8. Convertible shares A type of preferred stock that the holder can exchange for a predetermined number of common shares at a specified time. 9. Non-voting shares (Sec. 6) General Rule: Non-Voting Shares are not entitled to vote. Exceptions: a. Amendment of the AOI b. Adoption and amendment of by-laws c. Sale, lease, exchange, other disposition of all or substantially all of the corporate property d. Incurring, creating or increasing bonded indebtedness e. Increase or decrease of capital stock f. Merger and consolidation g. Investment of corporate funds in another corporation or business h. Dissolution of the corporation
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CORPORATION LAW
B. Subscription Contract
Sec. 60. Subscription contract. Any contract for the acquisition of unissued stock in an existing corporation or a corporation still to be formed shall be deemed a subscription contract within the meaning of this Title, notwithstanding the fact that the parties refer to it as a purchase or some other contract.
person is a sale. Transfer of unissued shares is subscription. Shareholders are not creditors of the corporation with respect to their shareholdings thereto and the principle of compensation or set-off has no application. Subscription contract is NOT required to be in writing.
1. Status as Shareholder A person becomes a shareholder the moment he: a. enters into a subscription contract with an existing corporation (he is a stockholder upon acceptance of the corporation of his offer to subscribe whether the consideration is fully paid or not). b. purchases treasury shares from the corporation c. acquires shares from existing shareholders by sale or any other contract (SUNDIANG AND AQUINO) 2. Types of subscription contracts a. Pre-incorporation subscription It is a subscription for shares of stock of a corporation still to be formed. Irrevocable for a period of at least 6 months from the date of subscription, or after the submission of the AOI to the SEC. Revocable only when all of the other subscribers consent to the revocation, or when the incorporation fails to materialize within six (6) months or within a longer period as my be stipulated in the contract of subscription. b. Post-incorporation subscription It is entered into after the incorporation. 3. Interest on unpaid subscription General Rule: Stockholder is NOT liable to pay interest on his unpaid subscription. Exception: Such rate as may be fixed in the by-laws or the legal rate (Sec. 66). Notes: Transfer for consideration of treasury shares is a sale by the corporation (not subscription). A transfer of previously issued shares by a stockholder to a third
C. Pre-emptive Right (Sec. 39, 102)

(Asked in 99, 01 and 04) 1. Definition Pre-emptive right is an option privilege of an existing stockholder to subscribe to a proportionate part of shares subsequently issued by the corporation before the same can be disposed of in favor of others; this right includes all issues and disposition of shares of any class SHs of a stock corporation shall enjoy pre-emptive right to subscribe to ALL ISSUES OR DISPOSITIONS of shares of any class, in proportion to their respective shareholdings. 2. Limitations to exercise of preemptive right (Sec. 39): a. Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public; b. It shall NOT extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt c. It shall not take effect if denied in the AOI or an amendment thereto. 3. Remedies in case of unwarranted denial: a. Injunction b. Mandamus The suit should be individual and not derivative because the wrong done is to the stockholders individually c. SEC can cancel shares if the third party is not innocent
CORPORATION LAW
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D. Consideration shares
for
issuance
of
1. Forms of Consideration (Sec. 62) a. Actual cash b. Property, tangible or intangible, actually received by the corporation and necessary or convenient for its use and lawful purposes at a fair valuation equal to the par or issued value of the stock issued Valuation is initially determined by the incorporators or the board of directors, subject to approval by the SEC. Note: Property should not be encumbered. Otherwise, it would impair the consideration c. Labor performed for or services actually rendered to the corporation; d. Previously incurred indebtedness of the corporation; e. Amounts transferred from unrestricted retained earnings to stated capital (declaration of stock dividends); and f. Outstanding shares exchanged for stocks in the event of reclassification or conversion. 2. Limitations on Consideration: a. Stocks shall not be issued for a consideration less than the par or issued price thereof. b. Shares of stock shall not be issued in exchange for promissory notes or future service. Notes: Promissory notes and future service may be used as consideration provided that certificates of stock will be issued only after actual encashment of promissory note or performance of such services. Same consideration applies for the issuance of bonds by the corporation.
much less than the par value or issued value of the shares. These include the following (See Sec. 65): a. Issued without consideration (bonus share) b. Issued as fully paid when the corporation has received less sum of money than its par or issued value (discounted share) c. Issued for consideration other than actual cash (i.e., property or services), the fair valuation of which is less than its par or issued value d. Issue stock dividend when there are no sufficient retained earnings or surplus to justify it. Note: Subsequent increase in the value of the property used in paying the stock does not do away with the water in the stock. The existence of such water is determined at the time of issuance of the stock. 2. Liability of directors or officers Any director or officer of a corporation consenting to the issuance of stocks or who, having knowledge thereof, does not forthwith express his objection in writing and file the same with the corporate secretary shall be SOLIDARILY liable with the stockholder concerned to the corporation and its creditors for the difference in value (Sec. 65).
CORPORATION LAW
F. Delinquent Shares
1. Definition These are shares for which the corresponding subscription or balance remains unpaid after a grace period of 30 days from the date specified in the contract of subscription or from the date stated in the call made by the BOD. 2. Effects of stock delinquency a. No delinquent stock shall be voted for or be entitled to vote or to representation at any stockholers meeting b. The holder thereof shall NOT be entitled to any of the rights of a stockholder except the right to dividends. c. Such shares shall be subject to delinquency sale.
E. Watered Stocks
1. Definition These are shares issued as fully paid-up when in fact the consideration agreed to and accepted by the directors of the corporation was something known to be
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G. Enforcement of Payment
(Asked in 97) 1. Delinquency sale a. Procedure for delinquency sale (Sec. 68) 1. Call for payment made by the BOD. 2. Notice of call served on each stockholder. 3. Notice of delinquency issued by the BOD upon failure of the stockholder to pay within 30 days from date specified. 4. Service of notice of delinquency on the non-paying subscriber, PLUS publication in a newspaper of general circulation in the province or city where the principal office of the corporation is located, once a week for two (2) consecutive weeks. Note: Requirements on notice and publication are mandatory. Lacking such requirements, the stockholder may question the sale as provided under Sec. 69. 5. Public auction - the highest bidder is one who is willing to pay the balance of the subscription for the least number of shares. If there are no bidders, the corporation must bid for the whole number of shares regardless of how much the SH has paid. Such stocks will pertain to the corporation as fully paid treasury stocks. b. Irregularities in the delinquency sale (Sec. 69) 1. Action to recover delinquent stock must be on the ground of irregularity or defect in the notice of sale. 2. Party seeking to recover must first pay or tender to the party holding the stock the sum for which the same was sold, with interest from the date of sale at the legal rate. 3. The action shall be commenced within six months from the date of sale.
2. Court Action (Sec. 70) General Rule: A valid call is a prerequisite to liability where court action is the remedy chosen. (Da Silva v. Aboitiz, 1923). Exceptions: a. The subscription contract specifies a date of payment. b. The corp. has become insolvent All unpaid subscriptions are immediately recoverable in a court action by the assignee in insolvency (Velasco vs. Poizat, 1918) Defense: The SH may contend that the subscription was induced by fraudulent misrepresentation, provided he is not barred by ratification, or guilty of laches. 3. Collection from cash dividends and withholding of stock dividends CASH DIVIDENDS due on delinquent stock shall first be applied to the unpaid balance on the subscription plus costs and expenses (Sec. 43). STOCK DIVIDENDS shall be withheld from the delinquent stockholder until his unpaid subscription is fully paid (Sec. 43).
CORPORATION LAW
H. Rights and Obligations of Holders of Unpaid Non-Delinquent Stock

Sec. 72.Rights of unpaid shares. Holders of subscribed shares not fully paid which are not delinquent shall have ALL the rights of a stockholder.
1. Holders of unpaid subscribed shares which are not delinquent shall have ALL the rights of a stockholder (Sec. 72) 2. Such holders shall not be charged with interest unless otherwise stipulated (Sec. 66). 3. No certificate of stock shall be issued to such holders until the full amount of their subscription, together with the interest and expenses if any, has been paid (Sec. 64) 4. No shares of stock against which the corporation holds any unpaid claim shall be transferable in the books of the corporation (Sec. 63). Notes:
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A subscription contract is unconditional (i.e., obligation to pay must not be subject to any contingencies) and indivisible (as to the amount and transferabilityFua Cun v. Summers, 1923). Hence, if the subscriber paid 20% of his subscription, he is not entitled to the issuance of certificates corresponding to 20% of the shares. Unpaid claim refers to any unpaid subscription and not to any indebtedness which a subscriber may owe the corporation rising from any other transaction (China Banking Corp. vs. CA, 1997).
barred after the expiration of the oneyear period. 4. Issuance of new certificates before 1 year period if the registered owner files a bond and there is no pending contest regarding the ownership of said certificates. Note: Except in cases of fraud, bad faith, or negligence on the part of the corporation and its officers, no action may be brought against the corporation which shall have issued certificates of stock in lieu of those lost, stolen or destroyed pursuant to the above procedure.
I. Certificate of Stock
A certificate of stock is the best evidence of the rights and status of a SH (not a condition precedent to the acquisition of such rights). General rule: The entire subscription must be paid first before the certificates of stock can be issued. Partial payments are to be applied pro rata to each share of stock subscribed. (Nava v Peers Mktg Corp and Fua Cun v Summers, 1923). Exception: In the Baltazar v Lingayen Gulf Electric Power Company case, it was the practice of the corporation to issue certificates of stock to its individual SHs for unpaid shares of stock and to give full voting power to shares fully paid.
K. Tender Offer (Asked in 02)

It is a publicly announced intention of a person acting alone or in concert with other persons to acquire equity securities of a public company (Rule 19, Amended IRR of The Securities Regulation Code published on 13 Feb 2004).
CORPORATION LAW
J. Lost or Destroyed Certificate

(Sec. 73) Procedure for re-issuance in case of loss, stolen or destroyed certificates: 1. Registered owner to file an affidavit of loss with the corporation. 2. Publication of notice of loss in a newspaper of general circulation published in the place where the corporation has its principal office, once a week for 3 consecutive weeks at the expense of the owner of the certificate of stock 3. Cancellation of the certificate in the books of the corporation and issuance of new certificates, after the expiration of 1 year from the date of the last publication and there is no contest. The right to make such contest shall be
Instances where tender offer is required to be made: 1. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares in a public company. 2. Any person or group of persons acting in concert intends to acquire 35% or more of equity shares in a public company in one or more transactions within a period of 12 months. 3. Any acquisition of even less than 35% results in ownership of over 51% of the total outstanding equity securities of a public company.
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Chapter IX. Dividends and Purchase of Corporation of Its Own Shares

A. B. C. D. E. FORMS OF DIVIDENDS OTHER CLASSES OF DIVIDENDS SOURCE OF DIVIDENDS DECLARATION OF DIVIDENDS TREASURY SHARES 1. DEFINITION 2. INSTANCES WHEN CORPORATION MAY ACQUIRE ITS OWN SHARES 3. REMEDIES IN CASE OF IMPROPER PURCHASE
Liability to corporate creditors When declared and Since it is still part of paid becomes absolute corporate property, property of the SH and may be reached by cannot be reached by corporate creditors corporations creditors in the absence of fraud
B. Other Classes of Dividends

1. Optional Dividenddividend which gives the stockholder an option to receive cash or stock dividend. 2. Composite Dividenddividend partly in cash and partly in stocks. 3. Preferred or preferential dividend dividend payable to one class of SHs in priority to that to be paid to another class. 4. Cumulative Dividenddividend which is contracted to be paid at a certain rate at stated times and if net earnings at any dividend period are NOT sufficient to pay the contract dividend, it is to be made out of subsequent net earnings. 5. Scrip dividenddividend in the form of a writing or certificate issued to a SH entitling him to the payment of money, stock or other benefit at some future time inasmuch as the corporation at the time such dividends are declared does not have sufficient cash. 6. Bond Dividenddividend distributed in bonds of the corporation to the SHs 7. Liquidating Dividendsdividends which are actually distributions of the assets of the corporation upon dissolution.
A. Forms of Dividends
1. Cash 2. Property 3. Stock Stock dividends are distributions of the corporations own stocks to stockholders. It involves a transfer of earnings to capital stock and does not represent income on the part of the SH. Limitations on the issue of stock dividends: a. There must be unissued shares of the corporation. If there are none, there must be an increase in capital stock first, which requires an amendment of the AOI. b. There must be unrestricted retained earnings. c. Stock dividends should not be issued to non-stockholders even for services rendered (Nielson v. Lepanto Consolidated Mines, 1968).
Cash Dividends Authority to declare Declared only by the board of directors at its discretion Stock Dividends Declared by the board with the concurrence of the SHs representing at least 2/3 of the OCS at a regular/special meeting Doesnt involve any disbursement of funds
CORPORATION LAW
C. Source of Dividends
Unrestricted retained earnings (URE) are the undistributed earnings of the corporation which have not been allocated for any managerial, contractual or legal purposes and which are free for distribution to the SHs as dividends. Should there be any capital deficit, subsequent profits, if any, during succeeding periods must 1st be applied to cover the deficit, and only the profits remaining after eliminating the deficit, can be considered as URE. General Rule: Dividends cannot be declared out of capital since the trust fund doctrine will be violated.
Disbursement of funds Involves a disbursement to the SHs of accumulated earnings Corporate capital Does not increase the corporate capital Creation of debts Its declaration creates a debt from the corporation to each of its SHs
Corporate increased
Capital
is
No debt is created by its declaration
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TRUST FUND DOCTRINE (Asked in 07)

Boman Environmental Development Corporation vs. CA (1988): Trust Fund Doctrine means that the capital stock, properties and other assets of a corporation are regarded as equity in trust for the payment of corporate creditors. Stated simply, the trust fund doctrine states that all funds received by the corporation in payment of the shares of stock shall be held in trust for the corporate creditors and other stockholders of the corporation. Under such doctrine no fund shall be used to buy back the issued shares of stock except only in instances specifically allowed by the Corporation Code.
1. the company has sufficient income from the operations from which the depreciation on the appraisal increase is charged 2. the company has no deficit at the time the depreciation on the reappraisal increase was charged to operations 3. such depreciation on the appraisal increase previously charged to operations is not erased or impaired by subsequent losses, otherwise, only that portion not impaired by subsequent losses is available for dividend (SEC Opinion dated March 18, 1992 and August 22, 1991) Q: Can dividends be distributed on Gains on sale of real property? A: Yes. Gains on sale of the corporations real properties are part of retained earnings. Retained earnings include not only earnings realized from the ordinary course of business of the corp but also transactions not associated with but incidental to or necessary in keeping the business for which the corporation was organized. HOWEVER, there must be surplus profits. The corporation cannot distribute gains from the sale as dividends if the remaining assets after distribution is less than the amount of legal or stated capital and liabilities (SEC Opinion dated May 9, 1990)
Exceptions: 1. liquidating dividends 2. dividends from investments in wasting asset corporation Wasting asset corporation is a corporation solely or principally engaged in the exploitation of wasting assets to distribute the net proceeds derived from exploitation of their holdings i.e. mines, oil well, patents, leaseholds
Q: Can dividends be distributed out of PAID-IN SURPLUS? A: NO. Paid-in surplus is the difference between the par value and the issued value or selling price of the shares, and are not considered profits earned in the conduct of the business of the corporation. They are considered part of capital (SEC Opinions April 18, 1988) Exception: The SEC allows the distribution of paid-in surplus if: 1. They be declared only as stock dividends 2. No creditor is prejudiced 3. No resulting impairment of capital (SEC Opinion dated October 19, 1989) Applicable also to reduction surplusthose arising from the reduction of the par value of the issued shares of stocks (SEC Opinion dated August 8, 1991) Q: Can dividends be distributed Revaluation or Re-appraisal Surplus? out of
CORPORATION LAW
D. Declaration of Dividends
(Asked in 91, 01 and 05) WHO? 1. Board of Directors alonecash, property dividends. 2. Board of Directors with approval of stockholders representing not less than 2/3 of the OCSstock dividends. CAN BOD BE COMPELLED TO DECLARE? General Rule: Declaration of dividends is discretionary upon the BOD. It is payable only when there are profits earned by the corporation and even if there are existing profits, the BOD has discretion to determine WON it should be declared (Republic Planters Bank v Agana, 1997) Exceptions: 1. When the decision is tainted w/ bad faith, fraud or gross negligence 2. If the court finds, upon complaint of a SH, that profits were accumulated in excess of 100% of the corporations paid-in capital stock, it
A: No. Revaluation surplus or the increase in the value of assets cannot be considered earning of the corporation. They are by nature subject to fluctuations Exception: the SEC allows distribution of the portion of the increase in the value of fixed assets as a result of revaluation after the assets are depreciated and the depreciation is charged against the operation provided:
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may order the corporation distribute dividends
to
Exceptions to the exception: a. when justified by definite corporate expansion projects or programs approved by the board of directors; or b. when the corporation is prohibited under any loan agreement with any financial institution or creditor, whether local or foreign, from declaring dividends without its/his consent, and such consent has not yet been secured; or c. when it can be clearly shown that such retention is necessary under special circumstances obtaining in the corporation, such as when there is need for special reserve for probable contingencies (Sec. 43). WHEN RIGHT TO DIVIDEND VESTS? General rule: Upon lawful declaration by the BOD, dividends become a debt owing to the SH. No revocation can be made. Exceptions: 1. Dividends are revocable if NOT yet announced or communicated to the stockholders. 2. Stock dividends even if already declared may be revoked prior to actual issuance since these are not distributions but merely represent changes in the capital structure. Note: Right to dividends vests upon declaration so whoever owns the stock at such time also owns the dividends. Subsequent transfer of stock would not carry with it right to dividends UNLESS agreed upon by the parties.
Treasury shares may be issued as property dividends provided that the retained earnings has not been subsequently impaired by losses. Treasury shares do not have voting rights so long as they remain as such (Sec. 57). 2. Instances when corporation may acquire its own shares a. A corporation must have unrestricted retained earnings in acquiring own shares except: 1. shares are acquired in the redemption of redeemable shares (Sec. 8) 2. shares are re-acquired to effect a decrease in capital stock approved by the SEC (Sec. 38) 3. shares are reacquired by a close corporation pursuant to the order of the SEC acting to arbitrate a deadlock (Sec. 104) b. The acquisition must be for a legitimate purpose, such as the following: 1. To eliminate fractional shares arising out of stock dividends 2. To collect or compromise an indebtedness to the corporation, arising out of unpaid subscription, in a delinquency sale, and to purchase delinquent shares sold during said sale 3. To pay dissenting or withdrawing stockholders entitled to payment for their shares under the provisions of this Code (appraisal right, Sec. 81). 3. Remedies in case of Improper Purchase a. Creditors prejudiced by the repurchase can go after the selling SHs to recover what was paid to them. b. Directors who were negligent or in BF for approving the repurchase can be held personally responsible. c. Prejudiced SH can also go after BOD who approved purchase (when their dividends are reduced, remaining assets cant cover debts, etc).
CORPORATION LAW
E. Treasury Shares
(Asked in 05) 1. Definition Treasury shares are shares of stocks which have been issued and fully paid for, but subsequently reacquired by the issuing corporation by purchase, redemption, donation or through some other lawful means (Sec. 9). Notes:
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Chapter X. Transfer of Shares

(Asked in 96, 97, 01 and 04)
A. MANNER OF TRANSFER B. REGISTRATION OF TRANSFER 1. EFFECTS OF LACK OF REGISTRATION 2. REMEDY IF REGISTRATION IS REFUSED C. RESTRICTIONS ON TRANSFER 1. VALIDITY OF RESTRICTIONS 2. PRESUMPTIONS D. UNAUTHORIZED TRANSFERS 1. CERTIFICATES INDORSED IN BLANK 2. FORGED TRANSFERS E. COLLATERAL TRANSFERS
B. Registration of Transfer
a. Effects of lack of registration a. Transferee cannot vote b. Transferee cannot be voted for c. Transferee cannot prevail over rights of a subsequent attaching creditor (Uson v. Diosomito, 1935). d. Transferee not entitled to dividends. e. Stockholder of record has the right to participate in meetings. Notes: Until registration is accomplished, the transfer though valid between the parties CANNOT be effective against the corporation. Nevertheless, the stockholder can still transfer his interest in the corporation by way of a Deed of Assignment. b. Remedy if registration is refused Transferee may petition the court for a writ of mandamus to compel the corporation to do so (Price v. Sulu Development Corp., 1933)
A. Manner of Transfer
Shares of stock represented by certificates may be transferred as follows (Sec. 63): 1. Delivery of the certificate and 2. Indorsement by the owner or his attorney-in-fact or other person legally authorized to make the transfer 3. Recording of the transfer in the books of the corporation to be VALID against third parties If not represented by certificates: 1. Shares may be transferred by means of a deed of assignment. 2. Such transfer is duly recorded in the books of the corporation.
Rural Bank of Salinas vs. CA (1992) Is registration in corporate books necessary for transfer of shares of stock? NO. Shares of stock are personal property and may be transferred by delivery. Registration in corporate books is not necessary. The corporation may not impose any restriction on such transfer. The right of transferee/assignee to have stocks transferred to his name is inherent right, duty of the corporation to register the transfer is ministerial. Razon vs. IAC (1992): How to transfer Shares of Stock? a) Shares of stock is transferred by delivery and endorsement of the stock certificate b) Such mode of transfer is not complied with in this case c) In the books of the corporation, Chudian is still the owner of the stocks. He was even elected member of the board which proves that he is a stockholder d) One who claims ownership should show that the same was transferred to him in accord with the valid mode of transfer. This petitioner failed to show. Endorsement is a mandatory requirement of law for an effective transfer.
CORPORATION LAW
C. Restrictions on Transfer
General Rule: Shares of stock so issued are personal property and may be transferred (Sec. 63). (FREE TRANSFERABILITY OF SHARES) Exception: In CLOSE corporations, restrictions on the right to transfer shares may be provided in the AOI, by-laws and certificates (Sec. 98).
D. Unauthorized Transfers
1. Certificates indorsed in blank (Theory of Quasi-Negotiability) where the stockholder indorses his certificate in blank in such a manner as to clothe whoever may be in possession of it with apparent authority to deal with the shares as the latters own, he will be estopped from claiming the shares as against a bonafide purchaser. (Santamaria v. Hongkong & Shanghai Bank, 1951) 2. Forged transfers if the corporation should issue a new certificate pursuant to a forged transfer, it incurs no liability to the person in whose favor it issued it
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and may demand cancellation.
its
return
for
But with respect to a subsequent purchaser in good faith and for value, the corporation is estopped from denying the validity of the newly issued certificate because by issuing such, it has represented that the person named therein is a stockholder of the corporation. An exception is when the recognition of the original and new subscriber will result to an overissue of shares. In such case, the new SH would now have the right to damages against the corporation and the latter against those who made false representation (Hodges vs. Lezama, 1965).
E. Collateral Transfers
Shares of stock being personal property may be the subject matter of pledge or chattel mortgage. Such collateral transfers need NOT be registered since Sec. 63 of the Code applies only to absolute transfer (Monserrat vs. Ceron, 1933). Thus, the registration in the corporate books of pledges and chattel mortgages of shares CANNOT have any legal effect.
Lim Tay v CA (1998): Q: Will pledged shares automatically entitle the pledgee to record transfer in the books? A: NO. Corporate secretary cannot be compelled to record transfer. The duty of a corporate secretary to record transfers of stocks is ministerial. However, he cannot be compelled to do so when the transferees title to said shares has no prima facie validity or is uncertain. Mandamus will not issue to establish a right but only to enforce one already established. Pledgee failed to establish a legal right. He is not owner of the shares without foreclosure and purchase at auction. He is merely a pledgee. Chempil Export & Import Corp vs. CA (1995) Attachment or mortgage of shares of stock need not be registered in the corporations stock and transfer books as a chattel mortgage over shares of stock doesnt involve a transfer or shares and only absolute transfers of shares are required to be recorded in the stock and transfer book to have force and effect as against 3rd persons.
CORPORATION LAW
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Chapter XI. Amendments of Corporate Charter

A. GENERAL B. SPECIFIC 1. INCREASE IN CAPITAL STOCK 2. DECREASE OF CAPITAL STOCK 3. CHANGE IN CORPORATE NAME C. GROUNDS FOR DISAPPROVING AMENDMENT
A. General 1. Procedure Majority vote of directors or trustees and the vote or written assent of the stockholders representing 2/3 of outstanding capital stock or 2/3 or members of non-stock corporations (Sec. 16). 2. Effectivity Upon approval of SEC or from the date of filing if not acted upon by SEC within 6 months from the date of filing provided that delay cannot be attributed to the corporation. 3. Congress The passage of statutes amending the Corporation Code or special laws may result in the amendment of the AOI provided that no vested rights are impaired (Sec. 145).
b. Requirements 1. Approval by a majority vote of the board of directors 2. Ratification of stockholders representing 2/3 of the OCS at a meeting duly called for the purpose 3. Filing with the SEC a certificate of increase of capital stock 4. Filing with the SEC a Treasurers Affidavit showing that 25% of the increased capital stock (should be increase in capital stock) is subscribed and 25% thereof paid. 5. Issuance by the SEC of a certificate of filing. From and after such issuance, the capital stock shall stand increased. Note: The above requirements also apply in reduction of capital stock. c. Appraisal Right Appraisal right may be exercised when the increase in capital stock has the effect of creating shares with preferences superior to those of existing ones (Sec. 81). 2. Reduction of capital stock a. Ways of Decreasing Capital Stock 1. By decreasing the number of shares and retaining the par value 2. By decreasing the par value of existing shares without changing the number of shares 3. By decreasing the number of shares and decreasing the par value b. Limitation on the reduction No decrease of the capital stock shall be approved by the Commission if its effect shall prejudice the rights of corporate creditors (Sec. 38). c. Appraisal Right Appraisal right may be exercised if the reduction of capital stock has the effect of altering the rights of any stockholder or class of stockholders (Sec. 81). d. Exception to the Trust Fund Doctrine Except by decrease of capital stock and as otherwise allowed by this
CORPORATION LAW
B. Specific Amendments
General Rule: Amendment of the AOI may be approved by the required number of stockholders/members by mere referendum or written assent. (Sec. 16) Exceptions: Stockholders/members approval of the amendment should be made in a meeting duly called for the purpose in the following instances: 1. Increase of capital stock (Sec. 38) (Asked in 99 and 01) a. Ways of Increasing Capital Stock 1. By increasing the number of shares and retaining the par value 2. By increasing the par value of existing shares without changing the number of shares 3. By increasing the number of shares and increasing the par value
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Code, no corporation shall distribute any of the assets or property except upon lawful dissolution and after payment of all its debts and liabilities (Sec. 122). 3. Change in corporate term (Sec. 37) a. Requirements 1. Approved by a majority vote of the board of directors or trustees and 2. Ratified at a meeting by the stockholders representing at least two-thirds (2/3) of the outstanding capital stock or by at least two-thirds (2/3) of the members in case of non-stock corporations. b. Appraisal right may be exercised (Sec. 81)
C. Grounds for disapproving amendment (Sec. 17) (NUTO)

1. Amendment is not substantially with the form prescribed 2. Purpose patently unconstitutional, illegal, immoral, contrary to government rules and regulations 3. Treasurers Affidavit concerning the amount of capital stock subscribed and/or paid is false 4. Percentage requirement of ownership by Filipino citizens as required by the Constitution not complied with Note: The SEC shall give the incorporators a reasonable time within which to correct or modify the objectionable portions of the articles or amendment.
CORPORATION LAW
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Chapter XII. Dissolution

(Asked in 02)
A. VOLUNTARY DISSOLUTION 1. EXPIRATION OF TERM 2. VOLUNTARY DISSOLUTION WHEN NO CREDITORS ARE AFFECTED 3. VOLUNTARY DISSOLUTION WHEN CREDITORS ARE AFFECTED 4. DISSOLUTION BY MINORITY IN CLOSE CORPORATIONS 5. FAILURE TO ORGANIZE; CESSATION OF BUSINESS FOR 5 YEARS B. INVOLUNTARY DISSOLUTION 1. REVOCATION OF CERTIFICATE OF REGISTRATION 2. QUO WARRANTO PROCEEDINGS C. EFFECTS OF DISSOLUTION 1. LOSS OF JURIDICAL PERSONALITY 2. EXECUTORY CONTRACTS 3. WINDING UP AND LIQUIDATION D. THE TRUST FUND DOCTRINE AND THE DISTRIBUTION OF ASSETS
least 2/3s of the OCS or 2/3 of members. e. A copy of the resolution shall be certified by the majority of the directors or trustees and countersigned by the secretary. f. The signed and countersigned copy will be filed with the SEC and the latter will issue the certificate of dissolution. Note: Thus, except for the expiration of its term , no dissolution can be effective without some act of the state (Daguhoy Enterprises v. Ponce, 1954) 3. Voluntary dissolution when creditors are affected (Sec. 119) a. Approval of the stockholders representing at least 2/3 of the OCS or 2/3 of members in a meeting called for that purpose. b. Filing of a petition with the SEC signed by majority of directors or trustees or other officers having the management of its affairs verified by the President or Secretary or Director. Claims and demands must be stated in the petition. c. If the petition is sufficient in form and substance, the SEC shall issue an order fixing a hearing date for objections. d. A copy of the order shall be published at least once a week for 3 consecutive weeks in a newspaper of general circulation, or if there is no newspaper in the city or municipality of the principal office, posting for 3 consecutive weeks in 3 public places is sufficient. e. Objections must be filed no less than 30 days nor more than 60 days after the entry of the Order. f. After the expiration of the time to file objections, a hearing shall be conducted upon prior 5 day notice to hear the objections. g. Judgment shall be rendered dissolving the corporation and directing the disposition of assets. The judgment may include appointment of a receiver. 4. Dissolution by minority in close corporations (Sec. 105) Any stockholder of a close corporation may, by written petition to the SEC,
Dissolution of a corporation is the extinguishment of its franchise and the termination of its corporate existence.
CORPORATION LAW
A. Voluntary Dissolution
1. Expiration of term Once the period expires, the corporation is automatically dissolved without any other proceeding and it cannot thereafter be considered a de facto corporation. A voluntary dissolution may be effected by amending the AOI. Upon approval of the amended AOI or the expiration of the shortened term, as the case may be, the corporation shall be deemed dissolved without any further proceedings (Sec. 120). 2. Voluntary dissolution when no creditors are affected (Sec. 118) a. A meeting must be held on the call of directors or trustees. b. Notice of the meeting should be given to the stockholders by personal delivery or registered mail at least 30 days prior to the meeting. c. The notice of meeting should also be published for 3 consecutive weeks in a newspaper published in the place. d. The resolution to dissolve must be approved by the majority of the directors/trustees and approved by the stockholders representing at
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compel the dissolution of such corporation: a. whenever any of the acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder b. whenever corporate assets are being misapplied or wasted. 5. Failure to organize and commence business; cessation of business for 5 years (Sec. 22) a. Failure to formally organize and commence the transaction of its business or construction of its works within two years - its corporate powers shall cease and the corporation is deemed dissolved Transacting business implies a continuity of acts or dealings in the accomplishment of the purpose for which the corporation was formed (Mentholatum vs. Mangaliman, 1946) Formal organization includes not only the adoption of the by-laws but also the establishment of the body which will administer the affairs of the corporation and exercise its powers b. Failure to operate for at least 5 consecutive years after commencement of business ground for suspension or revocation of its corporate franchise or certificate of incorporation. Note: The corporation may show that the failure to commence its business or to continuously operate is due to causes beyond its control (Sec. 22).
c.
d. e. f.
g.
to the great prejudice of or damage to the general public Refusal to comply or defiance of any lawful order of the Commission restraining commission of acts which would amount to a grave violation of its franchise Continuous inoperation for a period of at least five years Failure to file by-laws within the required period Failure to file required reports in appropriate forms as determined by the Commission within the prescribed period Other grounds
Other grounds: a. Violation by the corporation of any provision of the Corporation Code (Sec. 144 BP 68) b. In case of a deadlock in a close corporation, and the SEC deems it proper to order the dissolution of the corporation as the only practical solution to the dispute (Sec. 104 BP 68) 2. Quo Warranto Proceedings (Sec. 2, Rule 66 ROC) Grounds: a. When it has offended against a provision of an Act for its creation and renewal b. When it has forfeited its privileges and franchises by nonuser c. When it has committed or omitted an act which amounts to a surrender of its corporate rights, privileges or franchise d. When it has misused a right, privilege, or franchise conferred upon it by law or when it has exercised a right, privilege or franchise in contravention of law
CORPORATION LAW
B. Involuntary Dissolution
1. Revocation of certificate of registration (Sec. 121) A corporation may be dissolved by the SEC, upon a verified complaint and after proper notice and hearing, on the following grounds (Sec. 6, par i, PD 902A): a. Fraud in procuring its certificate of registration b. Serious misrepresentation as to what the corporation can or is doing
C. Effects of Dissolution
1. Loss of juridical personality Corporation loses its juridical personality and can no longer lawfully continue its business except for the purpose of winding up. For this purpose, it may sue and be sued, although upon the expiration of three years, all pending actions by or against the dissolved corporation abate (National Abaca Corp. vs. Pore, 1961)
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It cannot even be a de facto corporation, hence subject to collateral attack (Buenaflor vs. Camarines Sur Industry Corp., 1960) It cannot enter into new contracts which would have the effect of continuing the business (Cebu Port Labor Union vs. States Marine Co, 1957)
its corporate rights (Leyte Asphalt & Mineral Oil Co. Ltd., v. Block Johnston & Breenbrawn, 1928) b. Period of Liquidation General Rule: A corporation whose corporate existence has been terminated shall be continued for 3 years after the time when it would have been so dissolved. Exceptions: In case the corporate assets are conveyed to a trustee or a receiver appointed by the SEC, the three year limitation will NOT apply (Sumera v. Valencia, 1939) Even if no trustee or receiver was appointed and the 3-year period has already expired, the following were considered as trustees: 1. Counsel of record with respect to the matter in litigation (Gelano vs. CA, 1981) 2. BOD itself may be deemed trustees by legal implication to complete the corporate liquidation (Clemente vs. CA, 1995) 3. Those with pecuniary interest in the assets, such as stockholders and creditors (Ibid) c. Escheat Any asset distributable to any creditor/SH/member who is unknown or cannot be found shall be escheated to the city or municipality where such assets are located.
Phil. Veterans Bank v. Employees Union (2001): Q: What is the difference between Liquidation and Rehabilitation? A: Liquidation is the winding up of a corporation so that assets are distributed to those entitled to receive them. It is the process of reducing assets to cash, discharging liabilities and dividing surplus or loss. On the other hand, rehabilitation contemplates a continuance of corporate life and activities in an effort to restore and reinstate the corporation to its former position of successful operation and solvency. Both cannot be undertaken at the same time.
2. Executory contracts General Rule: Executory contracts remain valid and existing. Under Sec. 145 of the Code, no right or remedy in favor of or against the corporation, its stockholders, members, directors, trustees, or officers shall be removed or impaired by the subsequent dissolution of said corporation.) Exception: Contracts for personal services such as employment contracts of officers and employees where the dissolution is involuntary or the result of merger or consolidation. 3. Winding Up and Liquidation (Asked in 97, 00 and 01) Liquidation is the process by which all the assets of the corporation are converted into liquid assets (cash) in order to facilitate the payment of obligations to creditors, and the remaining balance if any is to be distributed to the stockholders. It is a proceeding in rem. a. Modes of Liquidation 1. By Board of Directors 2. Through a trustee to whom the properties are conveyed From and after any such conveyance by the corporation of its property in trust for the benefit of its SH/members/creditors and others in interest, all interest which the corporation had in the property terminates, the legal interest vests in the trustees, and the beneficial interest in the stockholders, members, creditors or other persons in interest. 3. By management committee or rehabilitation receiver However, the mere appointment of a receiver, without anything more does not result in the dissolution of the corporation nor bar it from the existence of
CORPORATION LAW
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D. The Trust Fund Doctrine and the Distribution of Assets

General rule: A corporation CANNOT distribute any of its assets or property except upon lawful dissolution and only after payment of all its debts and liabilities (last par., Sec. 122). Exceptions: 1. Decrease in capital stock resulting in a surplus which can then be distributed to stockholders provided no creditors are prejudiced (Sec. 122) 2. As otherwise allowed by the Code: a. Deadlock in a close corporation (Sec. 104) b. Redemption of redeemable shares (Sec. 8) Note: The TRUST FUND DOCTRINE is embodied in the last paragraph of Sec. 122. As held in Phil. Trust Co. vs. Rivera (1923), the capital stock, property and other assets of the corporation are regarded as equity in trust for the payment of the corporate creditors. The subscribed capital stock of the corporation is a trust fund for the payment of the debts of the corporation which the creditors have the right to look up to satisfy their credits. Corporation may not dissipate this and the creditors may sue stockholders directly for the unpaid subscription.
CORPORATION LAW
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Chapter XIII. Corporate Combinations

A. B. C. D. DEFINITION PROCEDURE EFFECTS OF MERGER/CONSOLIDATION EFFECTIVITY OF MERGER/ CONSOLIDATION E. DE FACTO MERGER F. SALE OF ALL OR SUBSTANTIALLY ALL ASSETS
5. Submission of Four (4) copies of the Articles of Merger or Articles of Consolidation to the SEC for approval. 6. If necessary, the SEC shall set a hearing, notifying all corporations concerned at least 2 weeks before. 7. Issuance of certificate of merger or consolidation.
C. Effects of Merger or Consolidation

(Sec. 80) 1. The constituent corporations shall become a single corporation. 2. The separate existence of the constituents shall cease, except that of the surviving or the consolidated corporation. 3. The surviving or the consolidated corporation shall possess all the rights, privileges, immunities and powers and shall be subject to all the duties and liabilities of a corporation. 4. The surviving or the consolidated corporation shall possess all rights, privileges, immunities and franchises of each constituent corporation and the properties shall be deemed transferred to the surviving or consolidated corporation. 5. All liabilities of the constituents shall pertain to the surviving or the consolidated corporation. 6. Any claim, action or proceeding pending by or against any of the constituent corporations may be prosecuted by or against the surviving or consolidated corporation; and 7. The rights of the creditors or lien upon the property of any of each constituent corporation shall not be impaired by such merger or consolidation.
A. Definition
Merger a corporation absorbs the other and remains in existence while the others are dissolved. Consolidation a new corporation is created, and consolidating corporations are extinguished
B. Procedure (Secs. 76-79)

1. The board of each corporation shall draw up a plan of merger or consolidation setting forth: a. Names of the corporation involved; b. Terms and mode of carrying it; c. Statement of changes, if any, in the present articles of the surviving corporation to be formed in the case of consolidation. 2. Plan for merger or consolidation shall be approved by majority vote of each of the board of the concerned corporations at separate meetings, and a vote of 2/3 of the members or of stockholders representing 2/3 of the outstanding capital stock. 3. Any amendment to the plan must be approved by the majority vote of the board members or trustees of the constituent corporations and affirmative vote of 2/3 of the outstanding capital stock or members. 4. Articles of Merger or Articles of Consolidation shall be executed by each of the constituent corporations, signed by the president or vice-president, and certified by the secretary or assistant secretary setting forth: a. Plan of merger or consolidation; b. For stock corporation, the number of shares outstanding; for nonstock, the number of members; c. As to each corporation, number of shares or members voting for and against such plan respectively.
CORPORATION LAW
D. Effectivity of Consolidation
(Asked in 99)
Merger
or
Upon issuance of the certificate of merger or consolidation, such merger or consolidation shall become effective (Sec. 79). PNB v. Andrada Electric & Engr. Co., Inc. (2002): Merger or consolidation does not become effective by mere agreement of the constituent corporations. The approval of the SEC is required.
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E. De Facto Merger
One corporation acquires all or substantially all of the properties of another corporation in exchange for shares of stock of the acquiring corporation. The acquiring corporation would end-up with the business enterprise of the selling corporation whereas the latter would end up with basically its remaining assets being the shares of stock of the acquiring corporation and may then distribute it as liquidating dividend to its stockholders. (VILLANUEVA)
4. Distinctions between Sale of Assets and Merger/ Consolidation

Merger and Consolidation 1.Sale of assets is always involved 2.There is automatic assumption of liabilities 3.There is continuance of the enterprise and of the stockholders 4.Title to the assets are transferred by operation of law 5.The constituent corporations are automatically dissolved Sale of Assets 1.Merger/consolidation is not always involved 2.Purchasing corporation is not generally liable for the debts and liabilities of the selling corporation 3.The selling corporation ordinarily contemplates a liquidation of the enterprise 4.Transfer of title is by virtue of contract 5.The selling corporation is not dissolved by the mere transfer of all its property
F. Sale of All or Substantially All Assets

(Asked in 96) 1. Requisites a. Approval of majority of the directors or trustees b. Assent of stockholders representing 2/3 of OCS or 2/3 of members in a meeting duly called for the purpose after written notice c. Compliance with the formalities of the Bulk Sales Law. 2. When covered A sale or other disposition shall be deemed to cover substantially all corporate property and assets if thereby the corporation would be rendered incapable of continuing the business or accomplishing the purpose for which it was incorporated Sec 40). 3. Effect on creditors General Rule: Where one sells or otherwise transfers ALL of its assets to another corporation, the latter is not liable for the debts and liabilities of the transferor. Exceptions: a. Purchaser agrees to assume such debts; b. Transaction amounts to merger or consolidation; c. Purchasing corporation is merely a continuation of selling corporation; and d. Fraudulent transactions (Edward J. Nell Co. v. Pacific Farms Inc., 1965).
CORPORATION LAW
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Chapter XIV. Foreign Corporations

A. DEFINITION OF TERMS B. TESTS OF DOING BUSINESS IN THE PHILIPPINES C. DOING BUSINESS UNDER THE FOREIGN INVESTMENT ACT D. JURISPRUDENTIAL RULES ON NOT DOING BUSINESS IN THE PHILIPPINES E. REQUISITES FOR THE ISSUANCE OF LICENSE TO DO BUSINESS F. POWER TO SUE AND BE SUED OF FOREIGN CORPORATIONS G. LAWS APPLICABLE ON FOREIGN CORPORATIONS
2. Contract test A foreign corporation is doing business in the Philippines if the contracts entered into by the foreign corporation or by an agent acting under the control and direction of the foreign corporation are consummated in the Philippines (Pacific vegetable Oil vs. Singson, 1955).
C. Doing Business Under the Foreign Investment Act of 1991 (RA 7042)
(Asked in 98 and 02) 1. Doing Business a. Soliciting orders, service contracts, or opening offices; b. Appointing representatives, distributors domiciled in the Philippines or who stay for a period or periods totalling 180 days or more; c. Participating in the management, supervision, or control of any domestic business, firm, entity, or corporation in the Philippines; d. Any act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to some extent the performance of acts or works r the exercise of some functions normally incident to and in progressive prosecution of , the purpose and object of its organization. 2. Not Doing Business a. Mere investment as shareholder and exercise of rights as investor; b. Having a nominee director or officer to represent its interest in the corporation; c. Appointing a representative or distributor which transacts business in its own name and for its own account.
A. Definition of Terms
Foreign Corporation One formed, organized, or existing under any laws other than those of the Philippines and whose laws allow Filipino citizens and corporations to do business in its own country or state (Sec. 123). Resident Agent An individual, who must be of good moral character and of sound financial standing, residing in the Philippines, or a domestic corporation lawfully transacting business in the Philippines, designated in a written power of attorney by a foreign corporation authorized to do business in the Philippines, on whom any summons and other legal processes may be served in all actions or other legal proceedings against the foreign corporation (Sec. 127-128).
CORPORATION LAW
B. Tests of Doing Business in the Philippines

(Asked in 98 and 02) 1. Twin Characterization Test a. Under the Continuity Test, doing business implies a continuity of commercial dealings and arrangements, and contemplates to some extent the performance of acts or works or the exercise of some functions normally incident to and in progressive prosecution of the purpose and object of the organization. b. Under the Substance Test, a foreign corporation is doing business in the country if it is continuing the body or substance of the enterprise of business for which it was organized (Mentholatum vs. Mangaliman, 1941)
D. Jurisprudential Rules on Doing Business in Philippines
Not the
1. Products manufactured off-shore and returned back to foreign corporation (Agilent Tech. Singapore Ltd. v. Integrated Silicon Tech. Phils. Corp., 2004)
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2. Single isolated transaction (MarshallWells Co. v. Henry Eiser & Co, 1924). Multiple transactions are still considered a single transaction where there are constantly failed attempts in complying with the same by one of the contracting parties (Antam Consolidated v. CA, 1986). 3. Trademark protection; foreign corporations not doing business are merely protecting their property rights (General Garments v. Director of Patents, 1971). 4. A foreign firm which does business through middlemen acting on their own names shall not be deemed doing business in the Philippines. (Le Chemise Lacoste v. Fernandez, 1984).
Instances when Unlicensed Foreign Corporations can Sue: 1. Isolated transactions; 2. Action to protect good name, goodwill, and reputation of a foreign corporation; 3. The subject contracts provide that Philippine courts will be the venue to controversies; 4. A license subsequently granted enables the foreign corporation to sue on contracts executed before the grant of the license; 5. Recovery of misdelivered property; 6. Where the unlicensed foreign corporation has a domestic corporation.
Agilent Tech. Singapore Ltd. vs. Integrated Silicon Tech. Phils. Corp., (2004): The principles on the right of a corporation to bring suit in Philippines:
1.
foreign
E. Requisites for the Issuance of License to Do Business

1. The foreign corporation should file a verified application containing and together with the following (See Sec. 125): a. Designated resident agent who will receive summons and notices for the corporation; a special power of attorney should also be submitted for such purpose b. An agreement that if it ceases to transact business or if there is no more resident agent, summons shall then be served through the SEC c. Oath of Reciprocity stating that the foreign corporations country allows Filipino citizens and corporations to do business in said country 2. Within 60 days from issuance of license, the corporation should deposit at least P100,000 (cash, property, bond) for the benefit of creditors subject to further deposit every six months (See Sec. 126).
2.
3.
4.
if a foreign corporation does business in the Philippines without a license, it cannot sue before Philippine courts; if a foreign corporation is not doing business in the Philippines, it needs no license to sue before Philippine courts on an isolated transaction or on a cause of action entirely independent of any business transaction; if a foreign corporation does business in the Philippines without a license, a Philippine citizen or entity which has contracted with said corporation may be estopped from challenging the foreign corporations corporate personality in a suit brought before Philippine courts; and If a foreign corporation does business in the Philippines with the required license, it can sue before Philippine courts on any transaction.
CORPORATION LAW
G. Laws applicable corporation
on
foreign
General Rule: Any foreign corporation lawfully doing business in the Philippines shall be bound by all laws, rules and regulations applicable to domestic corporations of the same class. Exceptions: Foreign law shall govern on the following matters: 1. Creation, formation, organization or dissolution of corporations or 2. Those which fix the relations, liabilities, responsibilities, or duties of stockholders, members, or officers of corporations to each other or to the corporation.
F. Power to Sue and Be Sued of Foreign Corporations

Sec. 133. Doing business without a license. No foreign corporation transacting business in the Philippines without a license, or its successors or assigns, shall be permitted to maintain or intervene in any action, suit, or proceeding in any court or administrative agency of the Philippines; but such corporation may be sued or proceeded against before Philippine courts or administrative tribunals on any valid cause of action recognized under Philippine laws.
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Chapter XV. Close Corporations

A. REQUIREMENTS B. CHARACTERISTICS C. RESTRICTIONS ON TRANSFER OF SHARES 1. VALIDITY OF RESTRICTIONS 2. PRESUMPTIONS D. DEADLOCKS 1. REQUISITES 2. POWER OF SEC E. DISTINCTIONS BETWEEN CLOSE AND REGULAR CORPORATIONS
C. Restrictions on Transfer of Shares

1. Validity of Restrictions (AO) (Sec. 98) a. Restrictions must appear in the articles of incorporation and in the by-laws as well as in the certificate of stock; otherwise, the same shall not be binding on any purchaser thereof in good faith. b. Restrictions shall not be more onerous than granting the existing stockholders or the corporation the option to purchase the shares within a specified period. After expiration of said period and upon failure of the existing stockholders or the corporation to purchase said shares, the transferring stockholder may sell his shares to any third person. 2. Presumptions (Sec. 99): a. If the stock certificate CONSPICUOUSLY shows the restriction, the purchaser or transferee is CONCLUSIVELY presumed to have notice of the restriction, provided this appears in the AOI. b. Where a conclusive presumption of notice arises, the corporation may, at its option, refuse to register the transfer, unless (1) all the stockholders have consented to the transfer, or (2) the AOI has been properly amended to remove the restriction. c. If it appears in the certificate, but NOT CONSPICUOUSLY, then although he may be presumed to have notice of the restriction, he can prove the contrary.
A. Requirements for Corporations (Sec. 96)
Close
1. The AOI must state that the number of stockholders shall not exceed 20. 2. The AOI must contain restriction on the transfer of issued stocks (which must appear in the AOI, by-laws and certificate of stock) Restriction on the transfer must NOT be more onerous than granting the existing SH or corporation the option to purchase the shares. 3. The stocks cannot be listed in the stock exchange nor be publicly offered. 4. The corporation must NOT be mining company, stock exchange, oil company, bank, insurance company, public utility, educational institution or other corporation declared to be vested with public interest. 5. At least 2/3 of its voting stock or voting rights must NOT be owned or controlled by another corporation which is not a close corporation.
CORPORATION LAW
B. Characteristics
1. The stockholders themselves can directly manage the corporation and perform the functions of directors without need of election (Sec. 97): a. When they manage, stockholders are liable as directors; b. There is no need to call a meeting to elect directors; c. The stockholders are liable for tort. 2. Despite the presence of the requisites, the corporation shall not be deemed a close corporation if at least 2/3 of the voting stocks or voting rights belong to a corporation which is not a close corporation (Sec. 96).
D. Deadlocks
(Asked in 95): 1. Requisites a. The directors or stockholders are so divided respecting the management of the corporation's business and affairs b. The votes required for any corporate action cannot be obtained that the business and affairs of the corporation can no longer be conducted to the advantage of the stockholders generally
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2. Powers of the SEC in case of Deadlock in Close Corporations a. Cancel or alter any provision in the articles of incorporation or bylaws b. Cancel, alter or enjoin any resolution of the corporation c. Direct or prohibit any act of the corporation d. Require the purchase at their fair value of shares of any stockholder either by any stockholder or by the corporation regardless of the availability of unrestricted retained earnings. e. Appoint a provisional director f. Dissolve the corporation g. Granting such other relief as the circumstances may warrant.
E. Distinctions Between Close and Regular Corporations

CLOSE CORPORATIONS 1. Management / Board Authority There can be classification of directors into one or more classes, each of whom may be voted for and elected solely by a particular class of stock; and The articles of incorporation of a close corporation may provide that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. So long as this provision continues in effect: No meeting of stockholders need be called to elect directors Unless the context clearly requires otherwise, the stockholders of the corporation shall be deemed to be directors for the purpose of applying the provisions of this Code The stockholders of the corporation shall be subject to all liabilities of directors. The articles of incorporation may likewise provide that all officers or employees or that specified officers or employees shall be elected or appointed by the stockholders, instead of by the board of directors. Meetings Unless the by-laws provide otherwise, any action by the directors of a close corporation without a meeting shall nevertheless be deemed valid if: 1. Before or after such action is taken, written consent thereto is signed by all the directors; or All the stockholders have actual or implied knowledge of the action and make There are no classification of board of directors
CORPORATION LAW
REGULAR CORPORATIONS
Corporate Powers devolved upon board of directors whose powers are executed by officers. Cannot provide that it be managed by stockholders
Board of directors must be elected in a stockholders meeting Stockholders of a corporation are separate and distinct from directors
Officers must be elected by the Board of Directors
2.
The directors or trustees shall not act individually nor separately but as a body in a lawful meeting. They will act only after discussion and deliberation of matters before them. Contracts entered into without a formal board resolution does not bind the corporation except when ratified or when majority of the board has knowledge of the contract and the contract benefited the corporation. Absence of a prompt objection in writing does not ratify acts done by directors without a valid meeting. There must be express or implied
2.
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CLOSE CORPORATIONS no prompt objection thereto in writing; or 3. The directors are accustomed to take informal action with the express or implied acquiescence of all the stockholders; or All the directors have express or implied knowledge of the action in question and none of them makes prompt objection thereto in writing.
REGULAR CORPORATIONS ratification. Express ratification may consist of a Board Resolution to that effect Implied ratification may consist of acceptance of benefits from said unauthorized act while having knowledge of said act Failure to give notice would render a meeting voidable. Attendance to a meeting despite want of notice will be deemed implied waiver All proceedings had and any business transacted at any meeting of the stockholders or members, if within the powers or authority of the corporation, shall be valid even if the meeting be improperly held or called, provided all the stockholders or members of the corporation are present or duly represented at the meeting. (51) No share may be deprived of voting rights, except Preferred or Redeemable shares, unless otherwise provided by the Code There shall always be a class/series of shares which have a COMPLETE VOTING RIGHTS EACH SHARE SHALL BE EQUAL IN ALL RESPECTS TO EVERY OTHER SHARE, except as otherwise provided in the AOI For Board of directors, the by-laws or AOI can provide for a greater majority in quorum For stockholders, the AOI can provide for a different percentage in quorum Limitations on the exercise of pre-emptive right: Such pre-emptive right shall not extend to shares to be issued in compliance with laws requiring stock offerings or minimum stock ownership by the public;
4.
If a director's meeting is held without proper call or notice, an action taken therein within the corporate powers is deemed ratified by a director who failed to attend, unless he promptly files his written objection with the secretary of the corporation after having knowledge thereof.
3.
Voting / Quorum The AOI may provide for a classification of directors into one or more classes, each of which may be voted for and elected solely by a particular class of stock.
CORPORATION LAW
The AOI may provide for a greater quorum or voting requirements in meetings of stockholders or directors than those provided in this Code. Pre-emptive Right The pre-emptive right of stockholders in close corporations shall extend to all stock to be issued, including reissuance of treasury shares, whether for money, property or personal services, or in payment of corporate debts, unless the articles of incorporation provide otherwise.
a.
4.
b. Not extend to shares to be issued in good faith with the approval of the stockholders representing two-thirds (2/3) of the outstanding capital stock, in exchange for property needed for corporate purposes or in payment of a previously contracted debt c. Shall not take effect if denied in the Articles of Incorporation or an amendment thereto.
5.
Transferability Restrictions on the right to transfer shares must appear in the AI and in the by-laws as well as in the certificate of stock otherwise the same shall not be binding on any purchaser thereof in good faith Withdrawal Right Any stockholder of a close corporation may, for any reason, compel the said corporation to Stockholders may require the corporation to buy-back their shares at fair value when the Restrictions on the right to transfer not allowed
6.
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CLOSE CORPORATIONS purchase his shares at their fair value, which shall not be less than their par or issued value, when the corporation has sufficient assets in its books to cover its debts and liabilities exclusive of capital stock Any stockholder of a close corporation may, by written petition to the SEC, compel the dissolution of such corporation whenever: Any of acts of the directors, officers or those in control of the corporation is illegal, or fraudulent, or dishonest, or oppressive or unfairly prejudicial to the corporation or any stockholder, or Corporate assets are being misapplied or wasted.
REGULAR CORPORATIONS Corporation has unrestricted Retained Earnings: a. In case any amendment to the articles of incorporation which has the effect of: changing or restricting the rights of any stockholder or class of shares, or authorizing preferences in any respect superior to those of outstanding shares of any class, or extending or shortening the term of corporate existence b. In case of sale, lease, exchange, transfer, mortgage, pledge or other disposition of all or substantially all of the corporate property and assets as provided in the Code; and c. In case of merger or consolidation d. Extension or shortening of the term of the corporation (37) e. Diversion of funds of corporation from primary purpose to secondary purpose (41) The corporation may buy-back shares of stockholders subject to the following limitations (Treasury shares): There must be unrestricted retained earnings Must be for a legitimate purpose
CORPORATION LAW
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Chapter XVI. Non-Stock Corporations
Chapter XVI. Non-Stock Corporations

A. B. C. D. PURPOSES RIGHTS OF MEMBERS CONVERSION ORDER OF DISTRIBUTION OF ASSETS UPON DISSOLUTION
there is a resulting new corporation (SEC Opinion, May 13, 1992) 3. A stock corporation may be converted into a non-stock corporation by mere amendment provided all the requirements are complied with. Its rights and liabilities will remain.
A. Purposes Corporations
of
Non-stock
1. Charitable 2. Religious 3. Educational 4. Professional 5. Cultural 6. Fraternal 7. Literary 8. Scientific 9. Social 10. Civic services 11. Similar purposes, such as chambers or combinations trade, industry or agriculture
D. Order of Distribution of Assets Upon Dissolution of Close Corporation

1. All its creditors shall be paid. 2. Assets held subject to return on dissolution shall be delivered back to the givers. 3. Assets held for charitable, religious purposes, etc., without a condition for their return on dissolution, shall be conveyed to one or more organizations engaged in similar activities as dissolved corporation 4. All other assets shall be distributed to members, as provided in the AOI pr bylaws.
CORPORATION LAW
B. Rights of Members
1. Right to Vote A member is entitled to one vote. However, such right may be broadened, limited, or denied in the AOI or by-laws (Sec. 89). 2. Right to Transfer Membership General Rule: A member cannot transfer his membership (and the rights arising therefrom) in a non-stock corporation. Exception: AOI or by-laws may provide for their transferability (Sec. 90).
C. Conversion
1. A non-stock corporation cannot be converted into a stock corporation through mere amendment of its AOI. This would violate Sec. 87 which prohibits distribution of income as dividends to members. Giving the members shares is tantamount to distribution of its assets or income (SEC Opinion, March 20, 1995). 2. A non-stock corporation can be converted into a stock corporation only if the members dissolve it first and then organize a stock corporation. However,
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Chapter XVII. Special Corporations
Chapter XVII. Special Corporations

E. EDUCATIONAL CORPORATIONS F. RELIGIOUS CORPORATIONS 1. CORPORATION SOLE 2. RELIGIOUS SOCIETIES
A. Educational Corporations
Stock or non-stock organized to provide teaching or instruction. corporations facilities for
A favorable recommendation of the DECS is essential for the approval of its articles and by-laws. It is primarily governed by special laws and suppletorily by the provisions of the Code.
B. Religious Corporations
1. Corporation Sole (Asked in 04) A special form of corporation, usually associated with clergy and consists of one person only and his successors, who are incorporated by law to give some legal capacities and advantages. A corporation sole does not have any nationality but for purposes of applying our nationalizations laws, nationality is determined by the nationality of the members (Roman Catholic Apostolic Church vs. Land Registration Commission, 1957). A registered corporation sole can acquire land if its members constitute at least 60% Filipinos (SEC Opinion, 8 August 1994). 2. Religious Societies Non-stock corporation formed by a religious society, group, diocese, synod, or district of any religious denomination, sect, or church after getting the approval of 2/3 of its members.
CORPORATION LAW
- end of Corporation Law -
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Table of Contents
BANKING LAWS
CHAPTER I. GENERAL BANKING LAW OF 2000 (RA 8791) I. General Concepts A. Definition B. Nature of Business II. Classification of Banks III. Authority of the BSP over Banks A. Regulatory Powers B. Supervisory Powers C. Policy Direction IV. Organization of Banks A. Conditions for Organization B. Ownership of Banks C. Directors and Officers V. Operation of Banks A. Core Banking B. Operations of a KB and UB C. Prudential Measures D. Other Functions E. Prohibited Functions F. Some Requirements for the Operation of Banks VI. Foreign Banks CHAPTER II. THE NEW CENTRAL BANK ACT (RA 7653) I. General Provision II. Organization of the BSP A. Monetary Board B. Governor/Deputy Governor III. Operation of the BSP A. Supervision and Examination B. Handling of Banks in Distress C. Monetary Administration D. As Banker and Financial Adviser of the Government E. Other Operations F. Prohibited Operations CHAPTER III. LAW ON SECRECY OF BANK DEPOSITS (RA 1405) I. Purposes II. Coverage III. Prohibited Acts IV. Exceptions V. Penalty CHAPTER IV. TRUTH IN LENDING ACT (RA 3765) I. Policy II. Disclosure Statement III. Coverage IV. Sanctions 132 132 132 132 133 133 133 133 133 134 134 134 135 137 137 139 139 142 145 146 147 149 149 149 149 150 150 150 150 152 156 157 157 159 159 159 159 159 160 161 161 161 161 161
BANKING LAWS
CHAPTER V. ANTI-MONEY LAUNDERING ACT (RA 9160 as amended by RA 9194) I. Policies II. Coverage III. Obligations of Covered Institutions A. Customer Identification B. Record Keeping C. Reporting of Covered and Suspicious Transactions IV. Freeze Order V. Forfeiture Provisions VI. Anti-Money Laundering Council CHAPTER VI. FOREIGN CURRENCY DEPOSIT ACT (RA 6426) I. Confidentiality II. Privileges
162 162 162 163 163 163 163 164 164 165
167 167 167
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Chapter I. General Banking Law of 2000
Banking Laws
FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

CORPORATION LAW Rency Corrige

LEAD WRITER
Jason Mendoza
DEPUTY HEAD
Rania Joya
Malds Menzon
LOGISTICS, HR
Ben Evangelista Raissa Villanueva

WRITERS
-------Kae Guerrero
-------Leo Zulueta
Chapter I. General Banking Law of 2000 (RA 8791)

I. II. III. GENERAL CONCEPTS A. DEFINITION B. NATURE OF BUSINESS CLASSIFICATION OF BANKS AUTHORITY OF THE BSP OVER BANKS A. REGULATORY POWERS B. SUPERVISORY POWERS C. POLICY DIRECTION ORGANIZATION OF BANKS A. CONDITIONS FOR ORGANIZATION B. OWNERSHIP OF BANKS C. DIRECTORS AND OFFICERS OPERATION OF BANKS A. CORE BANKING B. OPERATIONS OF A KB AND UB C. PRUDENTIAL MEASURES D. OTHER FUNCTIONS E. PROHIBITED FUNCTIONS F. SOME REQUIREMENTS FOR THE OPERATION OF BANKS FOREIGN BANKS
As opposed to Quasi-banks: Quasi-banks (QB) refer to entities engaged in the borrowing of funds through the issuance, endorsement or assignment with recourse or acceptance of deposit substitutes for purposes of relending or purchasing of receivables and other obligations. (last paragraph of Sec. 4)
IV.
B. Nature of Business
Imbued with Public Interest: The banking industry is declared as indispensable to the national interest. (Sec. 22) Fiduciary Nature of Banks Failure on the part of the bank to satisfy the degree of diligence required of banks may warrant the award of damages Under Sec. 2, the degree of diligence is high standards of integrity and performance, however, SC decisions has not been uniform as to the type of diligence required Highest degree of care (BPI vs. CA and Napiza 2000) Higher than diligence of a good father of a family (CBTC vs. CA 2003) Highest degree of care and diligence (Samsung Construction vs FEBTC 2004) notwithstanding the amount of diligence required, a bank is not expected to be infallible (Prudential Bank vs. CA 2000)
V.
BANKING LAWS
VI.
Policy of the Law: To promote and maintain a stable and efficient banking and financial system that is globally competitive, dynamic and responsive to the demands of a developing economy. (Sec. 2)
I. General Concepts A. Definition

Banks shall refer to entities engaged in the lending of funds obtained in the form of deposits. (Sec. 3.1)
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Simex International vs. CA (1990): As a business affected with public interest and because of the nature of its functions, the bank is under obligation to treat the accounts of its deposits with meticulous care, always having in mind the fiduciary nature of their relationship.
However, banks need no separate licence to engage in quasi-banking. (Sec. 6) Persons or entities found to be performing banking or quasi-banking functions without authority from the BSP shall be subject to appropriate sanctions under the NCBA and other applicable laws. (Sec. 6) The determination of whether a person or entity is performing a banking or quasibanking functions without BSP authority shall be decided by the Monetary Board. To resolve such issue, the Monetary Board may through the appropriate supervising and examining department of the BSP, examine, inspect or investigate the books and records of such person or entity. (Sec. 6)
II. Classification of Banks (Sec. 3)

Universal Banks. (UB) These are those that used to be called expanded commercial banks and whose operations are now primarily governed by the GBL. They can exercise the powers of an investment house and invest in nonallied enterprises. They have the highest capitalization requirement. Commercial Banks. (KB) These are ordinary or regular commercial banks, as distinguished from a universal bank. They have a lower capitalization requirement than a UB and cannot exercise the powers of an investment house and invest in non-allied enterprises. Thrift Banks. These are a. savings and mortgage banks, b. stock savings and loan associations, and c. private development banks Cooperative Banks. These are banks organized primarily to make financial and credit services available to cooperative banks. Islamic Banks. These are banks whose business dealings and activities are subject to the basic principles and rulings of Islamic Sharia, such as the Al Amanah Islamic Investment Bank of the Philippines which was created by RA 6848 Other classifications of banks as determined by the Monetary Board.
B. Supervisory Powers
RULE: The operations and activities of banks shall be subject to supervision of the BSP. (Sec. 4) Scope: Banks, quasi-banks, trust entities, and other financial institutions which under special laws are subject to BSP supervision. (Sec. 4) Apart from banking institutions and quasibanks, the BSP may also examine an enterprise which is wholly or majorityowned or controoled by the bank.. (Sec. 7) Examination of such enterprises must only be in the course of examination of the bank. The legislative intent, as explained in the deliberations of the Senate, is to limit the possibility of abuse. (Catindig, Notes on Selected Commercial Laws, opinion)
BANKING LAWS
C. Policy Direction
RULE: The BSP shall provide policy direction in the areas of money, banking and credit. (Sec. 5). This includes: a. Prescribing ratios, ceilings, limitations or other forms of regulation on different types of accounts b. Exempting certain transactions from ratios, ceilings and limitations Service Fees: The Bangko Sentral may charge equitable rates, commissions or fees, as may be
III.Authority of the BSP Over Banks A. Regulatory Powers

RULE: Prior authority from the BSP to engage in banking operations or quasi banking function is required. (Sec. 6)
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prescribed by the Monetary Board for supervision, examination and other services which it renders under this Act. (Sec. 65) Systemic Risk: It is conventional wisdom that a failing or defaulting bank can demolish the aura of confidence for all banks and undermine the stability of the banking system. Causes: a. Interbank linkages if banks have huge interbank deposits with a failed bank, they may in turn experience liquidity problems b. Payment system if a bank is unable to settle its payment obligations to other banks at the end of the day, it makes these other banks in danger of defaulting on their own payment obligations to their counterparties c. Public perception that if there is a failing or failed bank, there may be a perception that other banks are in the same situation. In the light of this possible risk, regulatory or prudential measures are put in place. (Morales, The Philippine General Banking Law, opinion)
No BSP certificate of authority, no SEC registration of any bank (Sec. 14) Requirements for issuance of certificate of authority: 1. All requirements of existing laws and regulations have been complied with 2. The public interest and economic conditions justify the authorization 3. The amount of capital, the financing, organization, direction and administration, as well as the integrity and responsibility of the organizers and administrators reasonably assure the safety of deposits and the public interest (Sec. 14.1 to 14.3)
B. Ownership of Banks
Stockholdings restriction: a. Filipinos and domestic non-bank corporation, individually, may own up to 40% of the voting stock of a domestic bank b. Foreign individuals and non-bank corporations, aggregately, may own or control up to 40% of the voting stock of a domestic bank. (Sec. 11; BSP Circular No. 256, dated August 15, 2000) However, under Sec. 8 of RA 7721, Philippine corporations whose shares of stock are listed in the PSE or are of long standing for at least 10 years shall have the right to acquire, purchase or own up to 60% of the voting stock of a domestic bank.
BANKING LAWS
IV. Organization of Banks A. Conditions for Organization

Conditions for organization: 1. Entity must be a stock corporation and must only issue par value stocks; 2. Its funds must be obtained from the public, (20 or more persons); and 3. Minimum capital requirements prescribed by the MB for each category of banks must be satisfied (Sec. 8, Sec. 9) RULE: Prohibition on Treasury Stocks, unless: 1. Authorized by the MB 2. The stock so purchased or acquired shall within 6 months from the time the of its purchase or acquisition, be sold or disposed of at a public or private sale. (Sec. 10) Shares of the parent bank held by a subsidiary financial allied undertaking in a consolidated statement of condition are considered treasury shares. (BSP Circular No. 280 dated March 29, 2001, as amended)
Grandfather rule: The citizenship of the corporation which is a stockholder in a bank shall follow the citizenship of the controlling stockholders of the corporation, irrespective of the place of incorporation. (Sec. 11) Controlling stockholders mean individuals holding more than 50% of the voting stock of the corporate stockholder of the bank. (BSP Circular No. 256) Full disclosure of stockholdings of family groups or related interests: Family group means individuals related to each other within the fourth degree of consanguinity or affinity, legitimate or common-law (Sec. 12) Related interest means two or more corporations owned or controlled by the
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same family group persons. (Sec. 13)
or
same group of
C. Directors and Officers

Composition: At least 5, and a maximum of 15 members of the board of directors of bank, 2 of whom shall be independent directors. (Sec. 15) An "independent director" shall mean a person other than an officer or employee of the bank, its subsidiaries or affiliates or related interests. (Sec. 15) In the case of a bank merger or consolidation, the number of directors shall not exceed 21. (Sec. 17) Qualifications/Disqualifications of Directors (BSP Circular 296 dated September 17, 2001) A director shall have the following minimum qualifications: a. At least 25 years of age at the time of his election or appointment; b. At least a college graduate or have at least 5 years experience in business; c. Must have attended a special seminar for board of directors conducted or accredited by the BSP: d. Must be fit and proper for the position of a director of the bank/quasibank/trust entity. The Monetary Board may a. Prescribe, pass upon and review the qualifications and disqualifications of individuals elected or appointed bank directors or officers b. Disqualify, suspend or remove any bank director or officer who commits or omits an act which render him unfit for the position. (Sec. 16) Persons permanently disqualified from being directors: (Section X143.1(a) Manual of Regulations for Banks) a. Directors/officers/employees permanently disqualified by the MB; b. Persons who have been convicted by final judgment for offenses involving dishonesty or breach of trust; c. Persons who have been convicted by final judgment for violation of banking laws;
d. Persons who have been judicially declared insolvent, spendthrift or incapacitated to contract; or e. Directors, officers or employees of closed banks/quasi-banks/trust entities whowere responsible for such institutions closure. Persons temporarily disqualified from being directors: (Section X143.1(b) Manual of Regulations for Banks) a. Directors/officers/employees disqualified by the MB b. Persons who refuse to fully disclose the extent of their business interest. This disqualification shall be in effect as long as the refusal persists; c. Directors who have been absent or who have not participated for whatever reasons in more than 50% of all meetings, both regular and special, of the board of directors during their incumbency, or any 12 month period during said incumbency. This disqualification applies for purposes of the succeeding election; d. Persons who are delinquent in the payment of their obligations. Delinquency in the payment of obligations means that an obligation of a person with a bank/quasi bank/trust entity where he/she is a director or officer, or at least two obligations with other banks/financial institution, under different credit lines or loan contracts, are past due. This disqualification shall be in effect as long as the delinquency persists. e. Persons convicted for offenses involving dishonesty, breach of trust or violation of banking laws but whose conviction has not yet become final and executory; f. Directors and officers of closed banks/quasi-banks/trust entities pending their clearance by the MB; g. Directors disqualified for failure to observe/discharge their duties and responsibilities prescribed under existing regulations. This disqualification applies until the lapse of the specific period of disqualification or upon approval by the MB; Directors who failed to attend the special seminar for board of directors required; h. Persons dismissed/terminated from employment for cause. This disqualification shall be in effect until they have cleared themselves of involvement in the alleged irregularity;
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i. j.
Those under preventive suspension; or Persons with derogatory records with the NBI, court, police, interpol and monetary authority (central bank) of other countries (for foreign directors and officers) involving violation of any law, rule or regulation of the Government or any of its instrumentalities adversely affecting the integrity and/or ability to discharge the duties of a bank/quasi bank/trust entity director/officer. This disqualification applies until they have cleared themselves of involvement in the alleged irregularity.
Qualifications/disqualifications of officers (BSP Circular 296 dated Sept. 17, 2001) a. At least 21 years of age; b. At least a college graduate, or have at least 5 years experience in banking or trust operations or related activities or in a field related to his position and responsibilities, or have undergone training in banking or trust operations acceptable to the appropriate supervising and examining department of the BSP: Provided, however, That trust officers shall have at least 2 years of actual experience or training in trust operations or fund management or other related fields; and c. Must be fit and proper for the position he is being proposed/appointed to. d. The disqualifications for directors mentioned for shall likewise apply to officers, except persons who refuse to fully disclose the extent of their business interest and directors disqualified for failure to observe/discharge their duties and responsibilities. e. Except as may be authorized, the spouse or a relative within the 2nd degree of consanguinity or affinity of any person holding the position of Chairman, President, Executive Vice President or any position of equivalent rank, General Manager, Treasurer, Chief Cashier or Chief Accountant is disqualified from holding or being elected or appointed to any of said positions in the same bank/quasi-bank; and the spouse or relative within the second degree of consanguinity or affinity of any person holding the position of Manager, Cashier, or Accountant of a branch or office of a bank/quasi-bank/trust entity is
disqualified from holding or being appointed to any of said positions in the same branch or office. f. In the case of UBs, CBs, and TBs, any appointive or elective officials whether full time or part time, except in cases where such service is incident to financial assistance provided by the government or government-owned or controlled corporations or in cases allowed under existing law. g. In the case of Cooperative Banks, any officer or employee of the Cooperative Development Authority or any elective public official, except a barangay official. h. Except as may otherwise be allowed under The Anti-Dummy Law, as amended, foreigners cannot be officers or employees of banks. Prohibition on Public Officials as officers of banks: RULE: No appointive or elective official whether full-time or part-time shall at the same time serve as officer of any private bank. EXCEPTIONS: a. otherwise provided in the Rural Banks Act, b. in cases where such service is incident to financial assistance provided by the government or a government-owned or controlled corporation to the bank c. otherwise provided under existing laws (Sec.19) Responsibility of directors for corporate governance: The board of directors is primarily responsible for the corporate governance of the bank/quasibank/trust entity. To ensure good governance of the bank/quasibank/trust entity, the board of directors should establish strategic objectives, policies and procedures that will guide and direct the activities of the bank/quasibank/ trust entity and the means to attain the same as well as the mechanism for monitoring managements performance. (BSP Circular 283)
PCI Bank vs. CA, 2001 As a general rule, a banking corporation is liable for the wrongful or tortuous acts and declarations of its officers or agents within the course and scope of their employment. A bank holding out its officers and agents as worthy of confidence will not be permitted to profit by the frauds these officers or agents were enabled to
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perpetrate in the apparent course of their employment; nor will it be permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank therefrom.
A. Core Banking 1. Deposit Function

Only a UB or KB can accept demand deposits Exception: Banks other than a UB or KB with prior approval of, and subject to such conditions and rules as may be prescribed by the Monetary Board (Sec. 33) Types of Deposits: 1. Time Deposit - Interest rate stipulated depending on the number of days. During this period, the money deposited cannot be withdrawn. High interest rates. 2. Savings Deposit - Bank pays an interest rate, but not as high as time deposits. 3. Demand Deposits/Current Accounts No interest is paid by the bank because the depositor can take out his funds any time. It is called demand deposit because the depositor can withdraw the money he deposited on the very same day when he deposited it. (Villanueva, Commercial Law Review, opinion) Presumption of ownership of deposits: It is presumed that money deposited in a bank account belongs to the person in whose name the deposit account is opened.
BPI v. CA (1994) A bank is under no duty or obligation to make an application or set-off against the deposit accounts of a borrower. To apply the deposit to the payment of a loan is a privilege, a right of set-off which the bank has the option to exercise, but not the obligation. CA Agro-industrial Dev. Corp. v. CA (1983) The rent of safety deposit boxes is a special kind of deposit and cannot be characterized as an ordinary contract of lease because the full and absolute possession and control of the deposit box is not given to the renters. The prevailing rule is that the relation between the bank renting out and the renter is that of bailer and bailee the bailment being for hire and mutual benefit.
When Monetary Board may regulate the compensation and other benefits of directors and officers: Only in exceptional cases and when the circumstances warrant, such as but not limited to: 1. when a bank is under comptrollership or conservatorship 2. when a bank is found by the Monetary Board to be conducting business in an unsafe or unsound manner 3. when a bank is found by the Monetary Board to be in an unsatisfactory financial condition. (Sec. 18)
V. Operation of Banks
Banking Days and Hours: All banks including their branches and offices shall transact business on all working days (Mondays to Fridays, except holidays) for at least 6 hours a day. (Sec. 21) Banks or any of their branches or offices may open for business on Saturdays, Sundays or holidays for at least 3 hours a day; Provided that banks which opt to open on days other than working days shall report to the BSP the additional days during which they or their branches or offices shall transact business. (Sec. 21) Bank Branches: UBs or KBs may open branches or other offices within or outside the Philippines upon prior approval of the BSP. (Sec. 20) A bank and its branches and offices shall be treated as one unit. (Sec. 20) Strikes and Lockouts: Notwithstanding the provisions of any law to the contrary, any strike or lockout involving banks, if unsettled after 7 calendar days shall be reported by the BSP to the Secretary of Labor who may assume jurisdiction over the dispute or decide it or certify the same to the NLRC for compulsory arbitration. However, the President of the Philippines may at any time intervene and assume jurisdiction over such labor dispute in order to settle or terminate the same. (Sec. 22)
BANKING LAWS
2. Loan Function
Know your customer rule: Before granting a loan or other credit accommodation, a bank must ascertain that the debtor is capable of fulfilling its commitments to the bank. (Sec. 40)
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The bank may demand from its credit applicants a statement of their assets and liabilities and of their income and expenditure and such information as may be prescribed by law or by rules and regulations of MB to enable the bank to properly evaluate the credit application which includes the corresponding financial statements submitted for taxation purposes to the BIR. (Sec. 40) Credit enhancement If the borrower is less than creditworthy, third persons may enhance his credit by providing guarantees and other security devices in favor of the bank. (Morales, The Philippine General Banking Law, opinion) If there is material misrepresentation, the bank may: a. Terminate any loan or other credit accommodation granted on the basis of said statements; and b. Shall have the right to demand immediate repayment or liquidation of the obligation (Sec. 40) Limit on Loans, Credit Accommodations and Guarantees:
Real Estate Shall not exceed 75% of the appraised value of the respective reas estate security, plus 60% of the appraised value of the insured improvements, and such loans may be made to the owner of the real estate or to his assignees EXC: the Monetary Board otherwise prescribes (Sec. 37) Shall not exceed 75% of the appraised value of the security, and such loans and other credit accommodations may be made to the title-holder of the chattels and intangible properties or his assignees EXC: the Monetary Board otherwise prescribes (Sec. 38)
Effect of lack of banks prior approval: The bank shall have the right to terminate the loan or other credit accommodation and demand immediate repayment of the obligation. (Sec. 39) Amortization on Loans and Other Credit Accommodations: a. In case of loans and other credit accommodations with maturities of more than 5 years, provisions must be made for periodic amortization payments, but such payments must be made at least annually: Provided, however, That when the borrowed funds are to be used for purposes which do not initially produce revenues adequate for regular amortization payments therefrom, the bank may permit the initial amortization payment to be deferred until such time as said revenues are sufficient for such purpose, but in no case shall the initial amortization date be later than 5 years from the date on which the loan or other credit accommodation is granted. b. In case of loans and other credit accommodations to microfinance sectors, the schedule of loan amortization shall take into consideration the projected cash flow of the borrower and adopt this into the terms and conditions formulated by banks.(Sec. 44) Prepayment of Loans by Borrower: A borrower may prepay the unpaid balance of any bank loan and other credit accommodation: a. At any time prior to the agreed maturity date b. In whole or in part c. Subject to such reasonable terms and conditions as may be agreed upon between the bank and its borrower. (Sec. 45) Development Assistance Incentives: The BSP shall provide incentives to banks which, without government guarantee, extend loans to finance educational institutions, cooperatives, hospitals and other medical services, socialized or low cost housing, local government units and other activities with social content. (Sec. 46)
BANKING LAWS
Security of chattels and intagible properties (patents, trademarks, tade names, and copyrights)
Grant of Loans: a. Only in amounts and for the periods of time essential for the effective completion of the operations to be financed (Sec. 39) b. Consistent with safe and sound banking practices (Sec. 39) Purpose of Loans: Purpose must be stated in the application and in the contract between the bank and the borrower. (Sec. 39)
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B. Operations of a KB and UB
Powers
KB a. gen. powers incident to corporations b. all such powers as may be necessary to carry on the business of commercial banking (Sec. 29)
Equity investments
allied enterprises financial or non-financial (Sec. 30)
UB a. gen. powers incident to corporations b. all such powers as may be necessary to carry on the business of commercial banking c. powers of an investment house d. power to invest in non-allied enterprises (Sec. 23) Allied and nonallied enterprises financial or non-financial (Sec. 24)
Equity investments of a KB in nonfinancial allied enterprises: A KB may own up to 100% of the equity in a non-financial allied enterprise. (Sec. 32) Equity investments of UB: 1. The total investment in equities of allied and non-allied enterprises shall not exceed 50% of the net worth of the bank 2. The equity investment in any one enterprise, whether allied or non-allied, shall not exceed 25% of the net worth of the bank EXCEPTTION: the Monetary Board otherwise prescribes (Sec. 30) Equity investments of a UB in financial allied enterprises: 1. A UB may own up to 100% of the equity of a thrift bank, a rural bank, or a financial allied enterprise. 2. A publicly-listed UB or KB may own up to 100% of the voting stock of only one other UB or KB (SEC. 25) Equity investments of a UB in nonfinancial allied enterprises: A UB may own up to 100% of the equity in a non-financial allied enterprise. (Sec. 26) Equity investments of a UB in non-allied enterprises: The equity investment of a UB, or of its wholly or majority-owned subsidiaries, in a single non-allied enterprise shall not exceed 35% of the total equity in that enterprise nor shall it exceed 35% of the voting stock in that enterprise. (Sec. 27) Equity investments in quasi-banks: 40% equity investment for both UB and KB (Sec. 28)
BANKING LAWS
Necessary powers of a KB: a. Accepting drafts b. Issuing letters of credit c. Discounting and negotiating promissory notes, drafts, bills of exchange, and other evidence of debt d. Accepting or creating demand deposits e. Receiving other types of deposits and deposit substitutes f. Buying and selling foreign exchange and gold or silver bullion g. Acquiring marketable bonds and other debt securities h. Extending credit All are subject to such rules as the Monetary Board may promulgate. (Sec. 29) Equity investments of KB: 1. The total investment in equities of allied enterprises shall not exceed 35% of the net worth of the bank 2. The equity investment in any one enterprise shall not exceed 25% of the net worth of the bank Equity investments of a KB in financial allied enterprises: 1. A KB may own up to 100% of the equity of a thrift bank or a rural bank 2. For other financial allied enterprises, including another bank, such investment shall remain a minority holding in that enterprise. (Sec. 31)
C. Prudential Measures 1. Capital Adequacy

A bank must conform to the risk-based capital ratio prescribed by the MB EXCEPT: a. In case of a bank merger or consolidation, b. When a bank is under rehabilitation under a program approved by the BSP (Sec. 34) c. The MB may alter or suspend compliance with such ratio whenever necessary for a maximum period of 1 year
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Risk-based capital ratio: The minimum ratio which the net worth of a bank must bear to its total risk assets which may include contingent accounts [i.e. net worth : total risk assets] (Sec. 34) Purpose: A bank must not be allowed to expand the volume of its loans and investments in a manner that is disproportionate to its net worth. (Morales, The Philippine General Banking Law, opinion) Effect of non-compliance: 1. The MB may limit or prohibit the distribution of net profits by such bank and may require that part or all of the net profits be used to increase the capital accounts of the bank until the minimum requirement has been met. 2. The MB may restrict or prohibit the acquisition of major assets and the making of new investments by the bank, with the exception of purchases of readily marketable evidences of indebtedness of the RP and the BSP and any other evidences of indebtedness or obligations the servicing and repayment of which are fully guaranteed by the RP, until the minimum required capital ratio has been restored. (Sec. 33)
warehouse receipts or other similar documents transferring or securing title b. Covering readily marketable, nonperishable goods c. Which must be fully covered by insurance (Sec. 35.2) Purpose: To prevent the bank from making excessive loans and other credit accommodations to a single borrower or corporate group, including guarantees for the account of such borrower or group. Tha bank is prohibited from placing many eggs in the basket of one client. [It] is a damage-control mechanism [and] a device for risk amelioration. (Morales, The Philippine General Banking Law, opinion) Basis for determining compliance: The basis for determining compliance with the SBL is the total credit commitment of the bank to the borrower. (Sec. 35.1) Inclusions in the ceiling: a. the direct liability of the maker or acceptor of paper discounted with or sold to such bank and the liability of a general indorser, drawer or guarantor who obtains a loan or other credit accommodation from or discounts paper with or sells papers to such bank; b. in the case of an individual who owns or controls a majority interest in a corporation, partnership, association or any other entity, the liabilities of said entities to such bank; c. in the case of a corporation, all liabilities to such bank of all subsidiaries in which such corporation owns or controls a majority interest; and d. in the case of a partnership, association or other entity, the liabilities of the members thereof to such bank. (35.3) Guidelines on the wholesale lending of government banks: a. it shall apply only to loans granted by participating financial institutions (PFIs) on a wholesale bases for on lending to end-user borrowers b. it shall apply only to loan programs funded by multilateral, international, or local development agencies, organizations, or institutions, especially designed for wholesale lending activities of government banks
2. Single Borrowers Limit

The total loans, credit accommodations and guarantees that may be extended by a bank to any person, partnership, association, or corporation or other entity shall at no time exceed 20% of the net worth of such bank. (Sec. 35.1) EXCEPTIONS: 1. The Monetary Board otherwise prescribes for reasons of national interest (Sec. 35.1) 2. Wholesale lending activities of government banks to particiapting institutions for relending to end-user borrowers: separate limit of 35% net worth. (BSP Circular No. 425 dated Mach 25, 2004) Increase of limit: The Monetary Board may increase the limit prescribed by an additional 10% of the net worth, when: a. The additional liabilities of any borrower are adequately secured by trust receipts, shipping documents,
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c. the end-user borrowers of the PFIs shall be subject to the 25% SBL, not the increased ceiling of 35%; and d. government banks shall observe appropriate criteria for accrediting PFIs and for the grant/renewal of credit lines to accredited PFIs BSP Circular No. 425 dated Mach 25, 2004) Exclusions from the ceiling: Loans and other credit accommodations a. secured by obligations of the BSP or of the Philippine Government b. fully guaranteed by the government as to the payment of principal and interest c. covered by assignment of deposits maintained in the lending bank and held in the Philippines d. under letters of credits to the extent covered by margin deposits e. specified by the Monetary Board as nonrisk items (Sec. 35.5) Combination of liabilities: The MB may prescribe the combination of the liabilities of subsidiary corporations or members of the partnership, association, entity or such individual under certain circumstances, including but not limited to any of the following situations: a. the parent corporation, partnership, association, entity or individual guarantees the repayment of the liabilities; b. the liabilities were incurred for the accommodation of the parent corporation or another subsidiary or of the partnership or association or entity or such individual; or c. the subsidiaries though separate entities operate merely as departments or divisions of a single entity. (35.4) Loans and other credit accommodations, deposits maintained with, and usual guaranteed by a bank to any other bank or non-bank entity, whether locally or abroad, shall be subject to the limits as herein prescribed. (35.6)
b. shall he become a guarantor, endorser or surety for loans from such bank to others, or in any manner be an obligor or incur any contractual liability to the bank EXCEPTIONS: 1. valid insider lending (Sec. 36) 2. loans, credit accommodations and guarantees extended by a cooperative bank to its cooperative shareholders (Sec. 36) Requirements for valid insider lending: a. in the regular course of business b. upon terms not less favorable to the bank than those offered to others (Sec. 36) c. there is a written approval of the majority of all the directors of the bank, excluding the director concerned. (Except: granted to officers under a fringe benefit plan approved by the BSP (Sec. 36)) d. the required approval shall be entered upon the record of the bank and a copy of such entry shall be transmitted forthwith to the appropriate supervising and examining department of the BSP (Sec. 36) e. limited to an amount equivalent to the DOSRI borrowers respective unencumbered deposits and book value of their paid-in capital contribution in the bank EXC: 1. non-risk items 2. loans in the form of fringe benefits (Sec. 36)
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A DOSRI borrower is required to waive the secrecy of his deposits of whatever nature in all banks in the Philippines. (Sec. 26, New Central Bank Act)
Purpose: To prevent the bank from becoming a captive source of finance for DOSRI. (Morales, The Philippine General Banking Law, opinion)
4. Loan-Loss Provisioning 3. DOSRI (Directors, Officers, Stockholders and their Related Interests)
No director or officer of any bank a. shall, directly or indirectly, for himself or as the representative or agent of others, borrow from such bank nor The following are subject to regulation by the Monetary Board a. the amount of reserves for bad debts or doubtful accounts or other contingencies. b. the writing off of loans, other credit accommodations, advances and other assets (Sec. 49)
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Purpose: For effective banking supervision. There is a problem of mismatch when a loan becomes non-performing. The bank is paying interest on the money it borrowed from the depositors or other placers of funds, but is not recouping that interest from the loan it made. Eventually, the bank may have to write off loan losses against profits. To cushion this eventuality, the bank is required to set aside reserved for bad debts and other doubtful accounts or contingencies. (Morales, The Philippine General Banking Law, opinion)
6. PDIC Insurance
Banks are required to insure their deposit liabilities with the PDIC. Partial Insurance: Each depositor is a beneficiary of the insurance for a maximum amount of P250,000, or its foreign currency equivalent in the case of an FCDU deposit. Note: Effective 01 June 2009, the PDIC maximum deposit insurance coverage shall be increased from P250,000 to P500,000 for each depositor pursuant to RA 9576. Purpose: Full insurance might encourage risky banking activities. = to limit moral hazard
5. Reserves
Purposes: a. To control the volume of money created by the credit operations of the banking system, the BSP requires all banks to maintain reserves against their deposit and deposit-substitute liabilities. b. As a ready source of funds that will respond to unusually large number of withdrawals or preterminations of deposits or deposit-substitutes, taking in the shape of a bank run. (Morales, The Philippine General Banking Law, opinion) Two types of reserves: a. Statutory legal reserve Now at 11% (BSP Circular No. 491 dated July 12, 2005) For deposit-substitutes: 2% (BSP Circular No. 444 dated August 18, 2004) For foreign currency deposit units: 100% (BSP Circular No. 1389 dated April 13, 1993, as amended); 30% of this cover must be in the form of liquid assets (BSP Circular-Letter dated June 6, 1997, as cited in Morales) b. Liquidity reserve Now deposits should be placed in the Reserve Deposit Account of the BSP for at least 3 months (BSP Circular No. 539 dated August 9, 2006) The BSP shall not pay interest on the reserves maintained with it unless the Monetary Board decides otherwise as warranted by circumstances. (Sec. 94, New Central Bank Act)
D. Other Functions 1. Ownership of Real Property and Foreclosure of Real Estate Mortgage
A bank may acquire real estate as shall be necessary for its own use in the conduct of its business Conditions: a. The total investment in such real estate and improvements thereof including bank equipment shall not exceed 50% of combined capital accounts b. The equity investment of a bank in another corporation engaged primarily in real estate shall be considered as part of the banks total investment in real estate, unless otherwise provided by the Monetary Board (Sec. 51) Exception: 1. Such as shall be mortgaged to it in good faith by way of security for debts; 2. Such as shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealings; or 3. Such as it shall purchase at sales under judgments, decrees, mortgages, or trust deeds held by it and such as it shall purchase to secure debts due it. (Sec. 52) Any real property acquired or held under these circumstances shall be disposed of by the bank within a period of 5 years or as may be prescribed by the MB. (Sec. 52)
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BANKING LAWS
Foreclosure of REM: A bank may foreclose, whether judicially or extrajudicially, any mortgage on real estate which is security for any loan or other credit accommodation granted (Sec. 47) Right of redemption of mortgagor: The mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right to redeem the property: within 1 year after the sale of the real estate by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. (Sec. 47) Right of redemption of mortgagor who is a juridical person in an extrajudicial foreclosure: Redeem the property not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than 3 months after foreclosure, whichever is earlier. (Sec. 47) Owners of property that has been sold in a foreclosure sale prior to the effectivity of the GBL shall retain their redemption rights until their expiration. (Sec. 47) The purchaser shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. (Sec. 47) Any petition in court to enjoin or restrain the conduct of foreclosure proceedings shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding.
Trust Entity: A stock corporation or a person duly authorized by the Monetary Board to engage in trust business. (Sec. 79) Prudent Man Rule: A trust entity shall administer the funds or property under its custody with the diligence that a prudent man would exercise in the conduct of an enteprise of a like character and with similar aims. (Sec. 80) Rule on Self-Dealing: No trust entity shall engage in self-dealing except when: a. The transaction is specifically authorized by the trustor, and b. The relationship of the trustee and the other party involved is fully disclosed to the trustor or beneficiary of the trust prior to the transaction (Sec. 80) Self Dealing: Purchase or acquire property from Sell, transfer, assign, or lend money or property to Purchase debt instruments of, any of the departments, directors, officers, stockholders, or employees of the trust entity, relatives within the 1st degree of consanguinity or affinity, or the related interests, of such directors, officers and stockholders. (Sec. 80) Trust Business Requirements: 1. Registration of AOI and By-Laws of a Trust Entity: The SEC shall not register the AOI and ByLaws or any amendment thereto, of any trust entity, unless accompanied by a certificate of authority issued by the BSP. (Sec. 81) 2. Minimum Capitalization: (Sec. 82) Min. paid-in capital: a. if non-bank: combined capital accounts of not less than P250,000,000 (Subsec. 440Q.1 of the Manual of Regulations for Non-Bank Financial Institutions) b. if domestic bank: combined capital accounts must not be less than the min. capital prescribed by the Monetary Board for such bank but in no case be less than P250,000,000 (Subsec. 404.1.a of the Manual of Regulations for Banks) c. if stand-alone trust company (not affiliated to a bank): P300,000 (Morales, The Philippine General Banking Law)
BANKING LAWS
2. Trust Operations
Only a trust entity shall act as a trustee or administer any trust or hold property in trust or on deposit for the use, benefit, or on behoof of others. (Sec. 79)
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Combined capital accounts: the total of capital stock, retained earnings and profit and loss summary, net of (a) such unbooked valuation reserves and other capital adjustments as may be required by the BSP, and (b) total outstanding unsecured credit accommodations, both direct and indirect, to DOSRI Powers of a Trust Entity: a. Trust Business any activity resulting from trusteeship involving the appointment of a trustee by a trustor for the administration, holding, management of funds and/or properties of the trustor by the trustee for the use, benefit or advantage of the trustor or of beneficiaries b. Other fiduciary business any activity of a licensed trust bank resulting from a contract or agreement whereby the bank binds itself to render services or to act in a representative capacity such as in agency, guardianship, administratorship of wills, properties and estates, executorship, receivership, and other similar services which do not create or result in a trusteeship. c. Investment management activity any activity resulting from a contract or agreement primarily for financial return whereby the bank (the investment manager) binds itself to handle or manage investible funds or any investment portfolio in a representative capacity as financial or managing agent, adviser, consultant or administrator of financial or investment management, advisory, consultancy or any similar arrangement which does not create or result in a trusteeship. (Morales, The Philippine General Banking Law, opinion) Deposit requirement: Before transacting trust business, every trust entity shall deposit with the BSP, as security for the faithful performance of its trust duties, cash or securities cash or securities approved by the Monetary Board in an amount equal to or not less than P500,000 or such higher amount as may be fixed by the Monetary Board (Sec. 84) A trust entity so long as it shall continue to be solvent and comply with laws or regulations shall have the right:
a. to collect the interest earned on such securities deposited with the BSP b. to exchange the securities for others, from time to time, with the approval of the BSP (Sec. 84) If the trust entity fails to comply with any law or regulation, the BSP shall retain such interest on the securities deposited with it for the benefit of rightful claimants. (Sec. 84)
All claims rising out of the trust business of a trust entity shall have priority over all other claims as regards the deposit. (Sec. 84) Bond requirement: No bond or other security shall be required by the court from a trust entry for the faithful performance of its duties as courtappointed trustee, executor, administrator, guardian, receiver, or depositary. However, the court may, upon proper application with it showing special cause therefore, require the trust entity to post a bond or other security for the protection of funds or property confided to such entity. (Sec. 86) Separation of Trust Business from General Business: The following must be kept separate and distinct: a. the trust business and all funds, properties or securities received by any trust entity as executor, administrator, guardian, trustee, receiver, or depositary from the general business including all other funds, properties, and assets of such trust entity b. the accounts of all such funds, properties, or securities from the accounts of the general business of the trust entity (Sec. 87) The separation of assets is warranted because the trust department is not the beneficial owner of the assets held in trust. (Morales, The Philippine General Banking Law, opinion) Investments of a Trust Entity Limitations: The lending and investment of funds and other assets acquired by a trust entity as executor, administrator, guardian, trustee, receiver or depositary of the estate of any minor or other incompetent person shall be
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limited to loans or investments as may be prescribed by law, the Monetary Board or any court of competent jurisdiction, EXCEPT: Otherwise directed by the instrument creating the trust (Sec. 88) Investments of a Trust Entity Real Estate Acquisition: Governed by Sec. 52. (Sec. 89) may acquire real estate which are: 1. mortgage to in good faith by way of security for debts 2. conveyed to it in satisfaction of debts previously contracted in the course of its dealings 3. purchased at sales under judgments, decrees, mortgages, or trust deeds held by it and purchased to secure debts due to it But such real property shall be disposed of within 5 years Investments of a Trust Entity Investment of Non-Trust Funds: The investment of funds other than trust funds of a trust entity which is a bank, financing company or an investment house shall be governed by the relevant provisions of the GBL and other applicable laws. (Sec. 90) Sanctions and Penalties: A trust entity or any of its officers and directors found to have willfully violated any pertinent provisions of the GBL shall be subject to the sanction and penalties provided under Sec. 66 of the GBL and Sec. 36 and 37 of the New Central Bank Act. (Sec.91) under the GBL: suspension for the officers and directors and dissolution for the corporation under the NCBA: fines of P50,000 to P200,000, or imprisonment of 2 10 years, or both; and administrative sanctions, which include fines, suspension of certain privileges, revocation of license, etc. Exemption of Trust Assets from Claims: No assets held by a trust entity in its capacity as trustee shall be subject to any claims other than those of the parties interested in the specific trust. (Sec. 92)
3. Other Banking Services

Other Banking Services 1. Receive in custody funds, documents and valuable objects; 2. Act as financial agent and buy and sell, by order of and for the account of their customers, shares, evidences of indebtedness and all types of securities; 3. Make collections and payments for the account of others and perform such other services for their customers as are not incompatible with banking business; 4. Upon prior approval of MB, act as managing agent, adviser, consultant or administrator of investment management/advisory/consultancy accounts; and 5. Rent out safety deposit boxes. (Sec. 53)
E. Prohibited Functions
Prohibition to act as insurer: A bank shall not directly engage in insurance business as the insurer. (Sec. 54) Prohibited Transactions of Directors, Officers, Employees, or Agents of Any Bank: 1. Making false entries in any bank report or statement or participating in any fraudulent transaction, thereby affecting the financial interest of, or causing damage to, the bank or any person; 2. Without order of a court of competent jurisdiction, disclosing to any unauthorized person any information relative to the funds or properties in the custody of the bank belonging to private individuals, corporations, or any other entity: Provided, That with respect to bank deposits, the provisions of existing laws shall prevail; 3. Accepting gifts, fees or commissions or any other form of remuneration in connection with the approval of a loan or other credit accommodation from said bank; 4. Overvaluing or aiding the overvaluing of any security for the purpose of influencing in any way the actions of the bank or any bank; or 5. Outsourcing inherent banking functions. (SubSec. 55.1)
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Prohibited transactions of borrowers of bank 1. Fraudulently overvaluing property offered as security for a loan or other credit accommodation from the bank; 2. Furnishing false or misrepresenting or suppressing material facts for the purpose of obtaining, renewing, or increasing a loan or other credit accommodation or extending the period thereof; 3. Attempting to defraud the said bank in the event of a court action to recover a loan or other credit accommodation; or 4. Offering any director, officer, employee or agent of a bank any gift, fee, commission, or any other form of compensation in order to influence such persons into approving a loan or other credit accommodation application.(SubSec. 55.2) Prohibition on conduct of business in an unsafe or unsound manner: A bank must not conduct business in an unsafe or unsound manner. (Sec. 56) EFFECT OF VIOLATION: The MB may, without prejudice to the administrative sanctions provided in Sec. 37 of the NCBA, a. take action under Sec. 30 of the same Act b. and/or immediately exclude the erring bank from clearing, the provisions of law to the contrary notwithstanding. (Sec. 56) Prohibition on Dividend Declaration: No bank or QB shall declare dividends, if at the time of declaration: 1. Its clearing account with the BSP is overdrawn; or 2. It is deficient in the required liquidity floor for government deposits for 5 or more consecutive days; or 3. It does not comply with the liquidity standards/ratios prescribed by the BSP for purposes of determining funds available for dividend declaration; or 4. It has committed a major violation as may be determined by the BSP. (Sec. 57)
F. Some Requirements Operation of Banks
for
the
Independent Auditor: The MB may require a bank, QB or trust entity to engage the services of an independent auditor to be chosen by the bank, QB or trust entity concerned from a list of CPAs acceptable to the MB. The MB may also direct the board of directors of a bank, QB, trusty entity and/or the individual members thereof, to conduct, either personally or by a committee created by the board, an annual balance sheet audit of the bank, QB or trust entity to review the internal audit and control system of the bank, QB or trust entity and to submit a report of such audit. (Sec. 58) Financial Statements: Every bank, QB or trust entity shall submit to the appropriate supervising and examining department of the BSP financial statements in such form and frequency as may be prescribed by the BSP. (Sec. 60) Publication of Capital Stock: A bank, QB or trust entity incorporated under the laws of the Phils. shall not publish the amount of its authorized or subscribed capital stock without indicating at the same time and with equal prominence, the amount of its capital actually paid up. (Sec. 62) Electronic Transactions: The BSP shall have full authority to regulate the use of electronic devices, such as computers, and processes for recording, storing and transmitting information or data in connection with the operations of a bank, QB or trust entity, including the delivery of services and products to customers by such entity. (Sec. 59) Advertisement or Business Representation: No person, association, or corporation unless duly authorized to engage in the business of a bank, quasi-bank, trust entity, or savings and loan association shall advertise or hold itself out as being engaged in the business of such bank, quasi-bank, trust entity, or association, or use in connection with its business title, the word or words bank, banking, banker, quasi-bank, quasi-banking, quasibanker, savings and loan association,
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trust corporation, trust company, or words of similar import or transact in any manner the business of any such bank, corporation or association. (Sec. 64) Penalties for Violation: Unless otherwise provided, the violation of any of the provisions of this Act shall be subject to Secs 34, 35, 36 and 37 of the NCBA. If the offender is a director or officer of a bank, quasi-bank or trust entity, the MB may also suspend or remove such director or officer. If the violation is committed by a corporation, such corporation may be dissolved by quo warranto proceedings instituted by the Sol.Gen.. (Sec. 66) Settlement of Disputes: The provisions of any law to the contrary notwithstanding, the BSP shall be consulted by other government agencies or instrumentalities in actions or proceedings initiated by or brought before them involving controversies in banks, QBs or trust entities arising out of and involving relations between and among their directors, officers or stockholders, as well as disputes between any or all of them and the bank, QBs or trust entity of which they are directors, officers or stockholders. (Sec. 63) Conservatorship: The grounds and procedure for placing a bank and quasi-bank under conservatorship as well as, the powers and duties of the conservator appointed for the bank shall be governed by the provisions of the New Central Bank Act. (Sec. 67) Voluntary Liquidation: In case of voluntary liquidation of any bank organized under the laws of the Philippines, or of any branch or office in the Philippines of a foreign bank, written notice of such liquidation shall be sent to the Monetary Board before such liquidation is undertaken (Sec. 68) Receivership and Involuntary Liquidation: The grounds and procedures for placing a bank and quasi-bank under receivership or liquidation, as well as the powers and duties of the receiver or liquidator appointed for the bank shall be governed by the New Central Bank Act. Provided, that the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond, executed in favor of the
BSP, in an amount to be fixed by the court. (Sec. 69)
VI. Foreign Banks

Transacting Business in the Philippines Ways: 1. through the establishment of local branches 2. through the conduct of offshore banking 3. through the acquisition of voting stock in a domestic bank If there are more than 1 local branches, all such branches shall be treated as 1 unit for the purpose of the GBL and all references to the Philippine branches of foreign banks shall be held to refer to such units (Sec. 74) The head office of such local branches shall fully guarantee the prompt payment of all liabilities of its Philippine branch in order to provide effective protection of the interests of the depositors and other creditors of the local branches. (Sec. 75) Residents and citizens of the Philippines who are creditors of the local branch shall have preferential rights to the assets of such branch in accordance with existing laws. (Sec. 75) The MB shall adopt measures as may be necessary to ensure that at all times the control of 70% of the resources or assets of the entire banking system is held by banks which are at least majority-owned by Filipinos. (Sec. 73) Any right, privilege or incentive granted to a foreign bank shall be equally enjoyed by and extended under the same conditions to banks organized under the Philippine laws. (Sec. 73)
BANKING LAWS
Summons and Legal Process: Service may be made upon: a. the Philippine agent or head of any foreign bank designated to accept such service b. the Philippine agent or head authorized by the bank to accept such service c. the BSP Deputy Governor In-Charge of the supervising and examining departments Laws Applicable: In all matters not specifically covered by special provisions applicable only to a foreign bank or its branches and other offices in the Philippines any foreign bank licensed to do business in the Philippines shall be bound by the provisions of the
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GBL, all other laws, rules and regulations applicable to banks organized under the laws of the Philippines of the same class, except those that provide for the creation, formation, organization or dissolution of corporations or for the fixing of the relations, liabilities, responsibilities, or duties of stockholders, members, directors or officers of corporations to each other or to the corporation. (Sec. 77) Revocation of License of a Foreign Bank: The Monetary Board may revoke the license to transact business in the Philippines of any foreign bank, if it finds that the foreign bank a. is insolvent b. is in imminent danger of being insolvent c. if it continues to do business, will involve probable loss to those transacting business in the Philippines. (Sec. 78) After the revocation of its license, a. It shall be unlawful for any such foreign banks to transact business in the Philippines unless its license is renewed or reissued b. The BSP shall take the necessary action to protect the creditors of such foreign bank and the public (Sec. 78)
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Chapter II. The New Central Bank Act (RA 7653)

I. GENERAL PROVISION II. ORGANIZATION OF THE BSP A. MONETARY BOARD B. GOVERNOR/DEPUTY GOVERNOR III. OPERATION OF THE BSP A. SUPERVISION AND EXAMINATION B. HANDLING OF BANKS IN DISTRESS C. MONETARY ADMINISTRATION D. AS BANKER AND FINANCIAL ADVISER OF THE GOVERNMENT E. OTHER OPERATIONS F. PROHIBITED OPERATIONS
alternate (an Undersecretary in his department) 3. 5 members from the private sector (Sec. 6) No member of the MB may be reappointed more than once. (Sec. 6) Qualifications: 1. Natural-born citizens of the Philippines 2. At least 35 years old (the Governor must be at least 40 years old) 3. Of good moral character 4. Of unquestionable integrity 5. Of known probity and patriotism 6. With recognized competence in social and economic disciplines (Sec. 8) Disqualifications: 1. Direct connection with any multilateral banking or financial institution 2. Substantial interest in any private bank in the Philippines, within 1 year prior to his appointment (Sec. 9) Prohibitions on the members: 1. To be a director, officer, employee, consultant, lawyer, agent or stockholder of any bank, quasi-bank, or any other institution which is subject to supervision or examination by the BSP 2. To hold any other public office or public employment during their tenure 3. To be employed in any multilateral banking or financial institution within 2 years after the expiration of his term EXCEPTION: when he serves as an official representative of the government to such institution (Sec. 9)
BANKING LAWS
I. General Provision
BSP Nature: A. A central monetary authority B. An independent and accountable body C. A government-owned corporation but enjoys fiscal and administrative autonomy. (Sec. 1 and Sec. 2) BSP Objectives: A. To maintain price stability conducive to a balanced and sustainable growth of the economy (primary objective) B. To promote and maintain monetary stability and the convertibility of the peso (Sec. 3) BSP Responsibilities: A. To provide policy directions in the areas of money, banking, and credit B. To supervise operations of banks (Sec. 3) All powers, duties and functions vested by law int eh Central Bank of the Philippines not inconsistent with the NCBA shall be deemed transferred to the BSP. All references to the Central Bank of the Philippines in any law or special charters shall be deemed to refer to the BSP. (Sec. 136)
II. Organization of the BSP A. Monetary Board

Composition: terms (Sec. 6) 7 members with 6-year
Removal of any member of the MB: 1. If the member is subsequently disqualified under Sec. 8 2. If he is physically or mentally incapacitated that he cannot properly discharge his duties and responsibilities and such incapacity has lasted for more than 6 months 3. If he is guilty of acts or operations which are of fraudulent or illegal character or which are manifestly opposed to the aims and interests of the BSP 4. If he no longer possesses the qualifications under Sec. 8 (Sec. 10) Vacancies: Cause: death, resignation, or removal of any member
Members: 1. The BSP Governor or his designated alternate (a deputy governor) 2. A Cabinet member to be designated by the President or his designated
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Effect: a new member will be appointed to complete the unexpired period of the term of the member concerned (Sec. 7) Salaries: Fixed by the Phil. President at a sum commensurate to the importance and responsibility attached (Sec. 13) Meetings: 1. held at least once a week 2. called by the Governor or by 2 MB members 3. the complete records of the proeedings and deliberations of the MB including the tapes and transcripts of stenographic notes are to be maintained and preserved (Sec. 11) 4. deputy governors may attend (Sec. 12) 5. any member with personal or pecuniary interest in any matter in the agenda shall disclose his interest and shall retire from the meeting when the matter is taken up (Sec. 14) Quorum: Presence of 4 constitute a quorum (Sec. 11) members
must be an interval of at least 12 months between annual examinations) (Sec. 28) The bank concerned shall afford the head of the appropriate supervising and examining departments and his authorized deputies full opportunity to examine its books, cash and available assets and general condition at any time during banking hours when requested to do so by the BSP. (Sec. 28) Non-disclosure of papers: RULE: None of the reports and other papers relative to such examinations shall be open to inspection by the public EXCEPTION: if the publicity is incidental to the proceedings authorized or is necessary for the prosecution of violations in connection with the business of such institutions. (Sec. 28) No Restraining Order or Injunction on the BSP: RULE: No restraining order or injunction shall be issued by the court enjoining the BSP from examining any institution subject to supervision or examination by the BSP EXCEPTION: existence of a convincing proof that the action of the BSP is plainly arbitrary and made in bad faith and the petitioner or plaintiff files with the clerk or judge of the court in which the action is pending a bond executed in favor of the BSP (Sec. 25)
Decisions: Concurrence of at least 4 members, except as otherwise provided in the NCBA (Sec. 11)
B. Governor/Deputy Governor
Governor: The Governor shall be the chief executive officer of the BSP Deputy Governor(s): 1. to be appointed by the Governor, with the approval of the MB 2. not more than 3 (Sec. 21)
B. Handling of Banks in Distress

BANKING LAWS
1. Conservatorship
Applicability: when a bank or a quasi-bank is in a state of continuing inability or unwillingness to maintain a condition of liquidity deemed adequate to protect the interest of depositors and creditors (Sec. 29) determination is to be made by the Monetary on the basis of a report submitted by the appropriate supervising or examining department (Sec. 29) Period and Termination: Period: shall not exceed 1 year (Sec. 29) The expenses attendant to the conservatorship shall be borne by the bank or quasi-bank concerned (Sec. 29)
III.
Operation of the BSP
A. Supervision and Examination

Coverage: Banking institutions and quasi-banks, including their subsidiaries and affiliates engaged in allied activities. (Sec. 25) The supervising and examining department head, personally or by deputy, shall examine the books of every banking institution once in every 12 months, and at such other times as the MB by an affirmative vote of 5 members, may deem expedient (there
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Grounds for termination of conservatorship by MB: a. When it is satisfied that the institution can continue to operate on its own and the conservatorship is no longer necessary b. When, on the basis of the report of the conservator or of its own findings, the MB determines that the continuance in business of the institution would involve probable loss to its depositors or creditors (the bank or quasi-bank would then be placed under receivership) (Sec. 29)
2. Receivership
Grounds: Whenever the MB finds that a bank or quasi-bank: a. Is unable to pay its liabilities as they become due in the ordinary course of business: Provided, That this shall not include inability to pay caused by extraordinary demands induced by financial panic in the banking community; b. Has insufficient realizable assets, as determined by the BSP, to meet its liabilities; or c. Cannot continue in business without involving probable losses to its depositors or creditors; or d. Has willfully violated a cease and desist order under Sec. 37 that has become final, involving acts or transactions which amount to fraud or a dissipation of the assets of the institution Receiver: a. if a banking institution: the PDIC b. if a quasi-bank: any person of recognized competence in banking or finance (Sec. 30) The appointment of a receiver shall be vested exclusively with the MB. And the designation of a conservator is not a precondition to the designation of a receiver. (Sec. 30) Powers and Duties of a Receiver: a. Immediately gather and take charge of all the assets and liabilities of the institution b. Administer the assets for the benefit of the creditors c. Exercise the general powers of a receiver under the Revised Rules of Court d. Not to pay or commit any act that will involve the transfer or disposition of any asset of the institution, except: 1. administrative expenditures 2. receiver may deposit or place funds in non-speculative investments e. Subject to prior approval of the MB, determine, as soon as possible, but not later than 90 days from take over, whether the institution may be rehabilitated or otherwise placed in such a condition so that it may be permitted to resume business with safety to its depositors and creditors and the general public
Qualifications of a Conservator: The conservator should be competent and knowledgeable in bank operations and management. (Sec. 29) The appointment of a conservator shall be vested exclusively with the MB. (Sec. 30) Powers and Duties of a Conservator: a. To take charge of the assets, liabilities, and the management thereof b. To reorganize the management c. To collect all monies and debts due said institution, and d. To exercise all powers necessary to restore its viability e. To report and be responsible to the MB f. To overrule or revoke the actions of the previous management and board of directors of the bank or quasi-bank. (Sec. 29)
First Philippine International Bank vs CA (1996) While the Central Bank law gives vast and far reaching powers to the conservator of a bank, such powers must be related to the preservation of the assets of the bank, the reorganization of the management and the restoration of viability. Such powers cannot extend to the post-facto repudiation of perfected transactions, otherwise they would infringe against the non-impairment clause of the Constitution.
BANKING LAWS
Remunerations: The conservator shall receive remuneration in an amount not to exceed 2/3 of the salary of the president of the institution in 1 year, payable in 12 equal monthly payments EXC: a conservator connected with the BSP, in which case said conservator shall not be entitled to receive any remuneration or emolument. (Sec. 29)
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The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution. (Sec. 30)
concurrence and preference of credit in the Civil Code. (Sec. 31) All revenues and earnings realized by the receiver in winding up the affairs and administering the assets of any bank or quasi-bank shall be used to pay the costs of proceedings, salaries of such personnel whose employment is rendered necessary in the discharge of the liquidation together with other additional expenses caused thereby. The balance of revenues and earnings, after the payment of all said expenses, shall form part of the assets available to creditors. (Sec. 32) No restraining order: The actions of the MB shall be final and executory and may not be restrained or set aside by the court (for both receivership and liquidation) EXCEPTION: petition for certiorari on the following grounds: a. the action was taken in excess of jurisdiction b. the action was taken with grave abuse of discretion as to amount to lack or excess of jurisdiction CONDITIONS: a. may only be filed by the stockholders of record representing the majority of the capital stock b. may only be filed within 10 days from receipt by the board of directors of the institution of the order directing receivership, liquidation or conservatorship. (Sec. 30)
BANKING LAWS
3. Liquidation
Should the determination be that the institution cannot be rehabilitated or permitted to resume business, the MB shall notify in writing the board of directors of the institution of its findings and direct the receiver to proceed with the liquidation of the institution. (Sec. 30) Procedure: 1. The receiver shall file ex parte with the proper RTC, and without requirement of prior notice or any other action, a petition for assistance in the liquidation of the institution pursuant to the liquidation plan adopted by the PDIC (if quasi-bank, liquidation plan adopted by the MB) 2. Upon acquiring jurisdiction, the court shall, upon motion by the receiver after due notice, a. adjudicate disputed claims against the institution, b. assist the enforcement of individual liabilities of the stockholders, directors, and officers, and c. decide on other issues as may be material to implement the liquidation plan 3. The receiver shall convert the assets of the institutions to money, dispose of the same to creditors and other parties, for the purpose of paying the debts of such institution in accordance with the rules on concurrence and preference of credit under the Civil Code The assets of the institution under receivership and liquidation shall be deemed in custodia legis and shall be exempt from any order of garnishment, levy, attachment, or execution. (Sec. 30) Dispositions: In case of a liquidation of a bank or quasibank, after payment of the cost of proceedings, including reasonable expenses and fees of the receiver to be allowed by the court, the receiver shall pay the debts of such institution, under order of the court, in accordance with the rules on
C. Monetary Administration
Peso The unit of monetary value in the Philippines is the "peso," which is represented by the sign "P." The peso is divided into 100 equal parts called "centavos," which are represented by the sign "c." (Sec. 48) Means of Payment Currency: Currency: all Philippine notes and coins issued or circulating in accordance with the provisions of this Act. (Sec. 49) Issuance: The BSP shall have the sole power and authority to issue currency, within the territory of the Philippines. (Sec. 50) Liability for Notes and Coins:
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Notes and coins issued by the BSP shall be liabilities of the BSP and may be issued only against, and in amounts not exceeding, the assets of the BSP. Said notes and coins shall be a first and paramount lien on all assets of the BSP. The BSP's holdings of its own notes and coins shall not be considered as part of its currency issue and, accordingly, shall not form part of the assets or liabilities of the BSP. (Sec. 51)
Legal Tender Power (Asked in 2000 Bar Exams) All notes and coins issued by the BSP shall be fully guaranteed by the Government of the Republic of the Philippines and shall be legal tender in the Philippines for all debts, both public and private: Provided, however, That, unless otherwise fixed by the MB, coins shall be legal tender in amounts not exceeding P50 for denominations of 25 centavos and above, and in amounts not exceeding P20 for denominations of 10 centavos or less. (Sec. 52) Monetary Administration Domestic Monetary Stabilization: The MB shall endeavor to control any expansion or contraction in monetary aggregates which is prejudicial to the attainment or maintenance of price stability. (Sec. 61) Monetary Administration International Monetary Stabilization: The BSP shall exercise its powers to preserve the international value of the peso and to maintain its convertibility into other freely convertible currencies, primarily for, although not necessarily limited to, current payments for foreign trade and invisibles. (Sec. 64) In order to maintain the international stability and convertibility of the Philippine peso, the BSP shall maintain international reserves adequate to meet any foreseeable net demands on the BSP for foreign currencies. Purchases in Gold: The BSP may buy and sell gold in any form, subject to such regulations as the MB may issue. The purchases and sales of gold authorized by this section shall be made in the national currency at the prevailing international market price as determined by the MB. (Sec. 69)
Purchases in Gold and Foreign Exchange: The BSP may buy and sell foreign notes and coins, and documents and instruments of types customarily employed for the international transfer of funds. The BSP may engage in future exchange operations. The BSP may engage in foreign exchange transactions with the following entities or persons only: 1. Banking institutions operating in the Philippines; 2. The Government, its political subdivisions and instrumentalities; 3. Foreign or international financial institutions; 4. Foreign governments and their instrumentalities; and 5. Other entities or persons which the MB is hereby empowered to authorize as foreign exchange dealers, subject to such rules and regulations as the MB shall prescribe. (Sec. 70) Operations with Foreign Entities: The MB may authorize the BSP to grant loans to and receive loans from foreign banks and other foreign or international entities, both public and private, and may engage in such other operations with these entities as are in the national interest and are appropriate to its character as a central bank. The BSP may also act as agent or correspondent for such entities. Upon authority of the MB, the BSP may pledge any gold or other assets which it possesses as security against loans which it receives from foreign or international entities. (Sec. 75)
BANKING LAWS
Loans to Banking And Other Financial Institutions: Credit Policy: The rediscounts, discounts, loans and advances which the BSP is authorized to extend to banking institutions shall be used to influence the volume of credit consistent with the objective of price stability. (Sec. 81) Normal Credit Operations: The BSP may normally and regularly carry on the following credit operations with banking institutions operating in the Philippines: 1. Commercial credits. The BSP may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments with maturities of not more than 180 days from the date of their rediscount, discount or
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acquisition by the BSP and resulting from transactions related to: a. the importation, exportation, purchase or sale of readily saleable goods and products, or their transportation within the Philippines; b. the storing of non-perishable goods and products which are duly insured and deposited, under conditions assuring their preservation, in authorized bonded warehouses or in other places approved by the MB. 2. Production credits. The BSP may rediscount, discount, buy and sell bills, acceptances, promissory notes and other credit instruments having maturities of not more than 360 days from the date of their rediscount, discount or acquisition by the BSP and resulting from transactions related to the production or processing of agricultural, animal, mineral, or industrial products. Documents or instruments acquired in accordance with this subsection shall be secured by a pledge of the respective crops or products: Provided, however, That the crops or products need not be pledged to secure the documents if the original loan granted by the BSP is secured by a lien or mortgage on real estate property 70% of the appraised value of which equals or exceeds the amount of the loan granted. 3. Other credits. Special credit instruments not otherwise rediscountable under 1 and 2 may be eligible for rediscounting in accordance with rules and regulations which the BSP shall prescribe. Whenever necessary, the BSP shall provide funds from non-inflationary sources: Provided, however, That the MB shall prescribe additional safeguards for disbursing these funds. 4. Advances. The BSP may grant advances against the following kinds of collaterals for fixed periods which, with the exception of advances against collateral named in clause (4) of the present subsection, shall not exceed 180 days: a. gold coins or bullion; b. securities representing obligations of the BSP or of other domestic institutions of recognized solvency; c. the credit instruments to which reference is made in 1;
d. the credit instruments to which reference is made 2, for periods which shall not exceed 360 days; e. utilized portions of advances in current amount covered by regular overdraft agreements related to operations included under 1 and 2, and certified as to amount and liquidity by the institution soliciting the advance; f. negotiable treasury bills, certificates of indebtedness, notes and other negotiable obligations of the Government maturing within 3 years from the date of the advance; and g. negotiable bonds issued by the Government of the Philippines, by Philippine provincial, city or municipal governments, or by any Philippine Government instrumentality, and having maturities of not more than 10 years from the date of advance. Advances made against the collateral named in clauses (f) and (g) may not exceed 80% of the current market value of the collateral. Special Credit Operation: The BSP may extend loans and advances to banking institutions for a period of not more than 7 days without any collateral for the purpose of providing liquidity to the banking system in times of need. (Sec. 83) Emergency Credit Operation: The MB may, by a vote of at least 5 of its members, authorize the BSP to grant extraordinary loans or advances to banking institutions secured by assets as defined hereunder a. Periods of national and/or local emergency b. Periods of imminent financial panic which directly threaten monetary and banking stability, c. Normal periods for the purpose of assisting a bank in a precarious financial condition or under serious financial pressures brought by unforeseen events, or events which, though foreseeable, could not be prevented by the bank concerned (Sec. 84) Condition for a and b: while such loans or advances are outstanding, the debtor
BANKING LAWS
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institution shall not, except upon prior authorization by the MB, expand the total volume of its loans or investments. (Sec. 84) Conditions for c: the MB has ascertained that the bank is not insolvent and has the assets defined hereunder to secure the advances (Sec. 84) Credit Terms RULE: The BSP shall collect interest and other appropriate charges on all loans and advances it extends, the closure, receivership or liquidations of the debtorinstitution notwithstanding. (Sec. 85) Open Market Operations for the BSPs Account: The open market purchases and sales of securities by the BSP shall be made exclusively in accordance with its primary objective of achieving price stability. (Sec. 90) How: 1. Purchase and sales in the open market government securities (Sec. 91) 2. Issuance and negotiation of freely negotiable evidences of indebtedness of the BSP Only in cases of extraordinary movement in price levels (Sec. 92) and may be acquired by the BSP before their maturity (Sec. 92) BSP Portfolio: At least once every month the MB shall review the portfolio of the BSP in relation to its future credit policy. In reviewing the BSP's portfolio, the MB shall especially consider whether a sufficiently large part of the portfolio consists of assets with early maturities, in order that a contraction in BSP credit may be effected promptly whenever the national monetary policy so requires. (Sec. 93) Bank Reserves All banks operating in the Philippines shall be required to maintain reserves against their deposit liabilities (uniform application) The MB may, at its discretion, also require all banks and/or quasibanks to maintain reserves against funds held in trust and liabilities for deposit substitutes EXC: deposits and deposit substitutes with remaining maturities of 2 years or more, as well as interbank borrowings (Sec. 94)
Deposits maintained by banks with the BSP as part of their reserve requirements shall be exempt from attachment, garnishments, or any other order or process of any court, government agency or any other administrative body issued to satisfy the claim of a party other than the Government, or its political subdivisions or instrumentalities. (Sec. 103)
Required Reserves: 1. Against Peso Deposits. The MB may fix and, when it deems necessary, alter the minimum reserve ratios to peso deposits, as well as to deposit substitutes, which each bank and/or quasi-bank may maintain, and such ratio shall be applied uniformly to all banks of the same category as well as to quasi-banks. (Sec. 96) 2. Against Foreign Currency Deposits. The MB is similarly authorized to prescribe and modify the minimum reserve ratios applicable to deposits denominated in foreign currencies. (Sec. 97) 3. Against Unused Balances of Overdraft Lines. In order to facilitate BSP control over the volume of bank credit, the MB may establish minimum reserve requirements for unused balances of overdraft lines. The powers of the MB to prescribe and modify reserve requirements against unused balances of overdraft lines shall be the same as its powers with respect to reserve requirements against demand deposits. (Sec. 98) Selective Regulation Of Bank Operations: Guiding Principle: The MB shall use the powers granted to it to ensure that the supply, availability and cost of money are in accord with the needs of the Philippine economy and that bank credit is not granted for speculative purposes prejudicial to the national interests. (Sec. 104) Regulations: 1. Margin Requirements Against Letters of Credit the MB may at any time prescribe minimum cash margins for the opening of letters of credit, and may relate the size of the required margin to the nature of the transaction to be financed. (Sec. 105) 2. Required Security Against Bank Loans in order to promote liquidity
BANKING LAWS
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and solvency of the banking system, the MB may issue such regulations as it may deem necessary with respect to the maximum permissible maturities of the loans and investments which the banks may make, and the kind and amount of security to be required against the various types of credit operations of the banks. (Sec. 106) 3. Portfolio Ceilings whenever the MB considers it advisable to prevent or check an expansion of bank credit, it may place an upper limit on the amount of loans and investments which the banks may hold, or may place a limit on the rate of increase of such assets within specified periods of time. The MB may apply such limits to the loans and investments of each bank or to specific categories thereof. In no case shall the MB establish limits which are below the value of the loans or investments of the banks on the date on which they are notified of such restrictions. The restrictions shall be applied to all banks uniformly and without discrimination. (Sec. 107) 4. Minimum Capital Ratios the MB may prescribe minimum ratios which the capital and surplus of the banks must bear to the volume of their assets, or to specific categories thereof, and may alter said ratios whenever it deems necessary. (Sec. 108) Coordination of Credit Policies By Government Institutions: GOCCs which perform banking or credit functions shall coordinate their general credit policies with those of the MB. The MB may, whenever it deems it expedient, make suggestions or recommendations to such corporations for the more effective coordination of their policies with those of the BSP. (Sec. 109)
subdivisions and instrumentalities. (Sec. 116) BSP as Financial Advisor of the Government: 1. Render opinion, as shall be requested by the Government, in the following a. credit operation of the government abroad based on the gold and foreign exchange resources and obligations of the antion and on the effects of the proposed operation on the balance of payments and on monetary aggregates b. borrowing within the Philipines on the probable effects of the proposed operation on monetary aggregates, the price level, and the balance of payments (Sec. 123) 2. The Deputy Governor designated by the Governor shall be an ex-officio member of the NEDA in order to assure effective communication betweent eh economic, financial and fiscal policies of the government and the monetary, credit and exchange policies of the BSP (Sec. 124) BSP Support of the Government Securities Market: Securities Stabilization Fund 1. shall be administered by the BSP for the account of the Government 2. the operations of the SSF shall consist of purchases and sales, in the open market, of bonds and other evidences of indebtedness issued or fully guaranteed by the Government. The purpose of these operations shall be to increase the liquidity and stabilize the value of said securities in order thereby to promote investment in government obligations. The MB shall use the resources of the SSF to prevent, or moderate, sharp fluctuations in the quotations of said government obligations, but shall not endeavor to alter movements of the market resulting from basic changes in the pattern or level of interest rates. (Sec. 120) 3. The SSF shall retain net profits which it may make on its operations, regardless of whether said profits arise from capital gains or from interest earnings. The SSF shall correspondingly bear any net losses which it may incur. (Sec. 122)
BANKING LAWS
D. As Banker and Financial Adviser of the Government

BSP as Banker of the Government: The BSP shall act as a banker of the government, its political subdivisions and instrumentalities. (Sec. 110) Remuneration: The BSP may charge equitable rates, commissions or fees for services which it renders to the government, its political
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E. Other Operations 1. Conduct Statistics of Research and
Purpose: For the guidance of the MB in the formulation and implementation of its policies (Sec. 22) Data: Forecasts of the balance of payment of the Philippines, statistics on the monthly movement of the monetary aggregates and of prices and other statistical series and economic studies useful for the formulation and analysis of monetary, banking, credit and exchange policies. (Se. 22) Authority of BSP to obtain data and information: a. through a request b. from government offices and instrumentalities, or government-owned or controlled corporations c. any data which it may require for the proper discharge of its functions and responsibilities d. can be enforced through the issuance of a subpoena for the production of the books and records (refusal of the subpoena without justifiable cause = contempt) (Sec. 23)
monetary aggregates not later than 90 days after the end of each quarter c. the preceding years budget and profit and loss statement of the BSP showing in reasonable detail the result of its operations d. a review of the state of the financial system 120 days after the end of each semester e. abnormal movements in monetary aggregates and the general price level as soon as practicalbe and not later than 72 hours after they are taken, remedial measures in response to such abnormal movements (Sec. 39) f. annual report on the condition of the BSP including a review of the policies and measures adopted by the MB during the past year and an analysis of the economic and financial circumstances which gave rise to said policies and measures (Sec. 40) Effect of failure to comply with the annual report: Failure to comply with the reportorial requirement without justifiable reason as may be determined by the MB shall cause the withholding of the salary of the personnel concerned until the requirements are complied with. (Sec. 40) Signatures on Statements: The balance sheets and other financial statements of the BSP shall be signed by a. the officers responsible for their preparation b. the Governor c. the auditor of the BSP. (Sec. 41)
2. Training of Technical Personnel

The BSP shall promote and sponsor the training of technical personnel in the field of money and banking and shall defray the costs of study, at home or abroad, of: a. qualified BSP employees b. promising university graduates c. any other qualified persons determined by proper competitive examinations (Sec. 24)
BANKING LAWS
F. Prohibited Operations
Prohibitions on BSP Personnel: In addition to the prohibitions found in RA 3019 and 6713, personnel of the BSP are hereby prohibited from: 1. being an officer, director, lawyer or agent, employee, consultant or stockholder, directly or indirectly, of any institution subject to supervision or examination by the BSP, except: a. non-stock savings and loan associations and provident funds organized exclusively for employees of the BSP, and b. as otherwise provided in the NCBA 2. directly or indirectly requesting or receiving any gift, present or pecuniary or material benefit for himself or
3. Reportorial Requirements
a. general balance sheet showing the volume and composition of the BSPs assets and liabilities as of the last working day of the month within 60 days after the end of each month except for December which shall be submitted within 90 days after the end hereof b. analysis of economic and financial developments, including the condition of net international reserves and
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another, from any institution subject to supervision or examination by the BSP; 3. revealing in any manner, except under orders of the court, the Congress or any government office or agency authorized by law, or under such conditions as may be prescribed by the MB, information relating to the condition or business of any institution. This prohibition shall not be held to apply to the giving of information to the MB or the Governor of the BSP, or to any person authorized by either of them, in writing, to receive such information; and 4. borrowing from any institution subject to supervision or examination by the BSP shall be prohibited unless said borrowings are adequately secured, fully disclosed to the MB, and shall be subject to such further rules and regulations as the MB may prescribe: Provided, however, That personnel of the supervising and examining departments are prohibited from borrowing from a bank under their supervision or examination. (Sec. 27) Prohibitions on the BSP: 1. acquisition of shares of any kind or accept them as collateral 2. participation in the ownership or management of any enterprise, either directly or indirectly 3. being engaged in development banking EXCEPTION: outstanding loans obtained or extended for development financing (Sec. 128)
BANKING LAWS
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Chapter III. Law on Secrecy of Bank Deposits (RA 1405)

I. II. III. IV. V. PURPOSES COVERAGE PROHIBITED ACTS EXCEPTIONS PENALTY
Banco Filipino vs Purisima (1988) The exception applies to cases of concealment of illegally acquired property in anti-graft cases. The inquiry into illegally acquired property or property NOT "legitimately acquired" extends to cases where such property is concealed by being held by or recorded in the name of other persons. Mellon Bank, N.A. vs. Magsino, (1990) The exception extends to cases of concealment of illegally acquired property not involving antigraft cases.
I. Purposes
A. To give encouragement to the people to deposit their money in banking institutions and to discourage private hoarding B. So that the peoples money may be properly utilized by banks in authorized loans to assist in the economic development of the country. (Sec. 1)
II. Coverage
All deposits of whatever nature with banks or banking institutions in the Philippines are hereby considered as of an absolutely confidential nature and may not be examined. (Sec. 2) Includes investments in bonds issued by the Philippine Government, its political subdivisions and its instrumentalities. (Sec. 2)
III.Prohibited Acts
1. No person, government official, bureau or office may examine, inquire into or look into such deposits; and 2. No official or employee of any banking institution may disclosure to any unauthorized person any information concerning said deposits (Sec. 3).
IV. Exceptions
A. Upon written permission of the depositor B. In cases of impeachment C. Upon order of a competent court in cases of: a. bribery b. dereliction of duty of public officials, or c. where the money deposited or invested is the subject matter of the litigation. (Sec. 2)
Other exceptions: 1. upon order of a competent court in cases of unexplained wealth under RA 3019 or the Anti-Graft and Corrupt Practices Act (PNB v. Gancayco, 1965; Banco Filipino v. Purisima, 1988; Marquez v. Desierto, 2001) 2. when inquiry is conducted under the authority of the Commissioner of Internal Revenue into the bank accounts of the following: a. a decedent in order to determine his gross estate b. any taxpayer who has filed an application for compromise of his tax liability, which application shall include a written waiver of his privilege under RA 1405 or under other general or special laws. (Sec. 6(F) NIRC) 3. in the following cases under the AntiMoney Laundering Lact of 2001 (RA 9160): 4. Under Sec. 26 of RA 7653 or the New Central Bank Act of 1993, when the examination is conducted pursuant to the required waiver of the secrecy of deposits (of whatever nature in all banks in the Philippines) made by any DOSRI 5. Disclosure of certain information about bank deposits which have been dormant for at least 10 years, to the Treasurer of the Philippine in a sworn statement, a copy of which is posted in the bank premises. (Sec. 2, Unclaimed Balances Law (Act No. 3926, as amended)) [NOT considered as EXCEPTIONS]: a. In 1981, PD 1792 added the following grounds when the bank can be compelled to reveal the amount of a depositor: i. made in the course of a special or general examination of a bank and
BANKING LAWS
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is specifically authorized by the Monetary Board after being satisfied that there is reasonable ground to believe that a bank fraud or serious irregularity has been or is being committed and that it is necessary to look into the deposit to establish such fraud or irregularity, or ii. made by an independent auditor hired by the bank to conduct its regular audit provided that the examination is for audit purposes only and the results thereof shall be for the exclusive use of the bank. However, Sec. 135 of RA 7653 or the New Central Bank Act reverted RA 1405 to its version prior to the promulgation of the decree. a) Thus Villanueva says that these two instances as excluded from the enumeration of exceptions to the secrecy of bank deposits (Villanueva, Commercial Law Review, opinion). b) Morales however notes that with the Amendment of the AntiMoney Laundering Act of 2001, exception (1) has been substantially resurrected. While there is no similar development of exception (2), the exclusion of the BSP examiners and independent auditors from the coverage of the Secrecy of Bank Deposits Law finds basis in Opinion No. 243 (s. 1975) of then Secretary of Justice Pedro Tuason. (Morales, The Philippine General Banking Law, opinion) b. It used to be believed that the RA 1405 did not apply to the Ombudsman, on account of his authority under Sec. 15(8) of RA 6770 or the Ombudsman Act of 1989 to examine and have access to bank accounts and records. However, the SC (Marquez v. Desierto, 2001) restricted the Ombudsmans power as follows: before an in camera inspection may be allowed, there must be a pending case before a court of competent jurisdiction. Further, the account must be clearly identified, the inspection limited to the subject matter of the pending case before the court of competent jurisdiction. The bank personnel and the account holder must be notified to be present during the
inspection, and such inspection may cover only the account identified in the pending case. (Morales, The Philippine General Banking Law) c. Further, it is interesting to note that the Secretary of Justice in his Opinion No. 13 (s. 1987) concluded that the Presidential Commission on Good Government can compel banks to disclose or produce bank records without violating the bank secrecy laws. (Morales, The Philippine General Banking Law) d. Moreover, under Sec. 1(d) of RA 6382 (1990), which created the Davide Commission that conducted a fact finding investigation of the failed coup d etat of December 1989, the commission had the power to ask the Monetary board to disclose information on and/or grant authority to examine bank deposits, trust finds, or banking transactions in the name of and/or utilized by a person, natural or juridical, under investigation by the Commission, in any bank or banking institution in the Philippines, when the Commission has reasonable ground to believe that said deposits, trust or investment funds, or banking transactions have been used in support of furtherance of the objectives of the coup d etat. (Morales, The Philippine General Banking Law)
V. Penalty
Imprisonment of not more than 5 years or a fine of not more than P20,000 or both, in the discretion of the court (Sec. 5)
BANKING LAWS
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Chapter IV. Truth in Lending Act (RA 3765)
Chapter IV. Truth in Lending Act (RA 3765)

I. II. III. IV. POLICY DISCLOSURE STATEMENT COVERAGE SANCTIONS
g.
any purchase, or other acquisition of, or any credit upon the security of, any obligation of claim arising out of any of the foregoing; and h. any transaction or series of transactions having a similar purpose or effect (Sec. 3 (2))
I. Policy
Protection of the citizens from a lack of awareness of the true cost of credit to the user by assuring a full disclosure of such cost with a view of preventing the uninformed used of credit to the detriment of the national economy (Sec. 2)
Outside the coverage: a. those that do not involve the payment of any finance charge by the debtor b. those in which the debtor is the one specifying a definite and fixed set of credit terms such as bank deposits, insurance contracts, sales of bonds, etc. (Sec. 3 of CB Circular No. 158)
II. Disclosure Statement

Any creditor shall furnish to each person to whom credit is extended, prior to the consummation of the transaction, a clear statement in writing setting forth, to the extent applicable and in accordance with rules and regulations prescribed by the Monetary Board of the BSP, the following information: 1. the cash price or delivered price of the property or service to be acquired; 2. the amounts, if any, to be credited as down payment and/or trade-in; 3. the difference between the amounts set forth under 1 and 2; 4. the charges, individually itemized, which are paid or to be paid by such person in connection with the transaction but which are not incident to the extension of the credit; 5. the total amount to be financed; 6. the finance charge expressed in terms of pesos and centavos; and 7. the percentage that the fiance bears to the total amount to be financed expressed as a simple annual rate on the outstanding unpaid balance of the obligation. (Sec. 4)
IV. Sanctions
a. Any creditor who in connection with any credit transaction fails to disclose to any person any information in violation of this Act or any regulation issued thereunder shall be liable to such person in the amount of P100 or in an amount equal to twice the finance charged required by such creditor in connection with such transaction, whichever is greater, except that such liability shall not exceed P2,000 on any credit transaction. Action to recover such penalty may be brought by such person within one year from the date of the occurrence of the violation, in any court of competent jurisdiction. (Sec. 6 (a)) b. Any person who willfully violates any provisions of this Act or any regulation issued thereunder shall be fined not less than P1,000 or more than P5,000 or imprisonment for not less than 6 months, nor more than 1 year or both (Sec. 6 (c)) RULE: The validity or enforceability of any contract or transaction is not affected. EXCEPTION: failure to disclose the required information (Sec. 6)
BANKING LAWS
III.Coverage
a. any loan, mortgage, deeds of trust, advance or discount; b. any conditional sales contract; c. any contract to sell, or sale or contract of sale of property or services, either for present or future delivery, under which part or all of the price is payable subsequent to the making of such sale or contract; d. any rental-purchase contract e. any contract or arrangement for the hire, bailment, or leasing of property f. any option, demand, lien, pledge, or other claim against or for the delivery of, property or money;
Exemption: No punishment or penalty provided by this Act shall apply to the Philippine Government or any agency or any political subdivision thereof. (Sec. 6 (d)) Final judgment as prima facie evidence: A final judgment hereafter rendered in any criminal proceeding under this Act to the effect that a defendant has willfully violated this Act shall become prima facie evidence against such defendant in an action or proceeding brought by any other party against such defendant under this Act as to all matters respecting which said judgment would be an estoppel as between the parties thereto. (Sec. 6 (e))
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Chapter V. Anti-Money Laundering Act (RA 9160 as amended)
Chapter V. Anti-Money Laundering Act (RA 9160 as amended by RA 9194)

I. POLICIES II. COVERAGE III. OBLIGATIONS OF COVERED INSTITUTIONS A. CUSTOMER IDENTIFICATION B. RECORD KEEPING C. REPORTING OF COVERED AND SUSPICIOUS TRANSACTIONS IV. FREEZE ORDER V. FORFEITURE PROVISIONS VI. ANTI-MONEY LAUNDERING COUNCIL
Prohibited Acts 1. Transacting or attempting to transact with monetary instrument or property, knowing such to represent, involve, or relate to the proceeds of any unlawful activity 2. Facilitating the offense of money laundering referred to in 1 by knowingly performing or failing to perform any act 3. Knowingly failing to disclose and file a report with the Anti-Money Laundering Commission (AMLC) of any monetary instrument or property as required (Sec. 4) Covered Transactions: Transactions in cash or other equivalent monetary instrument involving a total amount in excess of P500,000 within 1 banking day (Sec. 3(b)) Suspicious Transactions: Transactions with covered institutions, regardless of the amounts involved, where any of the following circumstances exist: 1. There is no underlying legal or trade obligation, purpose or economic justification; 2. The client is not properly identified; 3. The amount involved is not commensurate with the business or financial capacity of the client; 4. Taking into account all known circumstances, it may be perceived that the client's transaction is structured in order to avoid being the subject of reporting requirements under the Act; 5. Any circumstances relating to the transaction which is observed to deviate from the profile of the client and/or the client's past transactions with the covered institution; 6. The transactions is in a way related to an unlawful activity or offense under this Act that is about to be, is being or has been committed; or 7. Any transactions that is similar or analogous to any of the foregoing. (Sec. 3(b-1)) Covered Institutions: 1. Banks, non-banks, quasi-banks, trust entities, and all other institutions and their subsidiaries and affiliates supervised or regulated by the BSP; 2. Insurance companies and all other institutions supervised or regulated by the PDIC; and 3. The following entities supervised or regulated by SEC:
I. Policies
A. To protect and preserve the integrity and confidentiality of bank accounts B. To ensure that the Philippines shall not be used as a money laundering site for the proceeds of any unlawful activity C. Consistent with its foreign policy, to extend cooperation in transnational investigations and prosecutions of persons involved in money laundering activities whenever committed. (Sec. 2 RA 9160) Policy against political harassment: A. AMLA shall not be used for political prosecution or harassment or as an instrument to hamper competition in trade and commerce B. No case for money laundering may be filed against and no assets shall be frozen, attached or forfeited to the prejudice of a candidate for an electoral office during an election period (Sec. 16)
BANKING LAWS
II. Coverage
Money Laundering is a crime whereby the proceeds of an unlawful activity are transacted, thereby making them appear to have originated from legitimate sources. (Sec. 4) Any person may be charged with and convicted of both the offense of money laundering and the unlawful activity. Any proceeding relating to the unlawful activity shall be given precedence over the prosecution of any offense or violation under RA 9160, as amended, without prejudice to freezing and other remedies provided RA 9160. (Sec. 6)
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a. securities dealers, brokers, salesmen, investment houses and other similar entities managing securities or rendering services as investment agent, advisor, or consultant b. mutual funds, close and investment companies, common trust funds, pre-need companies and other similar entities, c. foreign exchange corporations, money changers, money payment, remittance, and transfer companies and other similar entities, and d. other entities administering or otherwise dealing in currency, commodities or financial derivatives based thereon, valuable objects, cash substitutes and other similar monetary instruments or property (Sec. 3(a))
customer identification, account files and business correspondence for at least 5 years from the dates when they were closed (sec. 9(b))
C. Reporting of Covered Suspicious Transactions
and
a. report to the AMLC all covered transactions and suspicious transactions within 5 working days from occurrences thereof, unless the Supervising Authority prescribes a longer period not exceeding 10 working days. b. when reporting covered or suspicious transactions, covered institutions and their officers and employees shall not be deemed to have violated the Secrecy of Bank Deposits Act (RA 1405), the Foreign Currency Deposits Act (RA 6426) and the General Banking Law of 2000 (RA 8791) and other similar laws, but they are prohibited from communicating, directly or indirectly, in any manner or by an means, to any person, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. In case of violation thereof, the concerned officer and employee of the covered institution shall be criminally liable. However, no administrative, criminal or civil proceedings, shall lie against any person for having made a covered or suspicious transaction report in the regular performance of his duties in good faith, whether or not such reporting results in any criminal prosecution under this Act of any other law. c. when reporting covered or suspicious transactions to the AMLC, covered institutions and their officers and employees are prohibited from communicating directly or indirectly, in any manner or by any means, to any person or entity, the media, the fact that a covered or suspicious transaction report was made, the contents thereof, or any other information in relation thereto. Neither may such reporting be published or aired in any manner or form by the mass media, electronic mail, or other similar devices. In case of violation thereof, the concerned officer
III.Obligations Institutions
(Asked in 2006)
of
Covered
A. Customer Identification
1. establish and record the true identity of its clients based on official documents 2. maintain a system of verifying th true identity of their clients 3. in the case of corporate clients, require a system of verifying their legal existence and organizational structure, as well as the authority and identification of all persons purporting to act on their behalf (Sec. 9) Anonymous accounts, accounts under fictitious names, and all other similar accounts shall be absolutely prohibited EXC: peso and foreign currency nonchecking numbered accounts (but the BSP may conduct annual testing solely limited to the determination of the existence and true identity of the owners of such accounts) (Sec. 9(a))
BANKING LAWS
B. Record Keeping
1. maintain and safely store all records of all transactions of covered institutions for 5 years from the date of the transactions 2. with respect to closed accounts, to preserve and safely store the records on
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and employee of the covered institution and media shall be held criminally liable. (Sec. 9(c))
IV. Freeze Order

Procedure: a. The Court of Appeals may issue a freeze order which shall be effective immediately 1. upon application ex parte by the AMLC and 2. after determination that probable cause exists that any monetary instrument or property is in any way related to an unlawful activity, b. The freeze order shall be for a period of 20 days unless extended by the court. (Sec. 10) Examination of Accounts: 1. by the AMLC a. notwithstanding the provisions of the Secrecy of Bank Deposits Act, the Foreign Currency Deposits Act, the GBL and other laws b. upon order of any competent court in cases of violation of the AMLA when it has been established that there is probable cause that the deposits or investments are related to an unlawful activity or a moneylaundering offense EXC: (no court order required) 1. Kidnapping 2. Drug Trafficking 3. Hijacking, destructive arson and murder, including those perpetrated by terrorists against non-combatant persons and similar targets 2. by the BSP made in te course of a periodic or special examination, in accordance with the rules of examination of the BSP(Sec. 11)
Claim on Forfeited Assets: a. Where the court has issued an order of forfeiture of the monetary instrument or property in a criminal prosecution for any money laundering offense, the offender or any other person claiming an interest therein may apply, by verified petition, b. for a declaration that the same legitimately belongs to him and c. for segregation or exclusion of the monetary instrument or property corresponding thereto. The verified petition shall be filed with the court which rendered the judgment of conviction and order of forfeiture, within fifteen days from the date of the order or forfeiture, in default of which the said order shall become final and executory. This provision shall apply in both civil and criminal forfeiture. Payment in Lieu of Forfeiture: Where the court has issued an order of forfeiture of the monetary instrument or property subject of a money laundering offense, and said order a. cannot be enforced because any particular monetary instrument or property b. cannot, with due diligence, be located, or c. has been substantially altered, destroyed, diminished in value or otherwise rendered worthless by any act or omission, directly or indirectly, attributable to the offender, or d. has been concealed, removed, converted or otherwise transferred to prevent the same from being found or to avoid forfeiture thereof, or e. is located outside the Philippines or has been placed or brought outside the jurisdiction of the court, or f. has been commingled with other monetary instruments or property belonging to either the offender himself or a third person or entity, thereby rendering the same difficult to identify or be segregated for purposes of forfeiture, in an amount equal to the value of said monetary instrument or property This provision shall apply in both civil and criminal forfeiture. (Sec. 12)
BANKING LAWS
V. Forfeiture Provisions
Civil Forfeiture: When there is a covered transaction report made, and the court has, in a petition filed for the purpose ordered the seizure of any monetary instrument or property, in whole or in part, directly or indirectly, related to said report the Revised Rules of Court on civil forfeiture shall apply
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VI. Anti-Money Laundering Council

Composition: 1. BSP Governor (chairman) 2. Insurance Commissioner 3. SEC Chairman Functions: 1. To require and receive covered or suspicious transaction reports from covered institutions; 2. To issue orders addressed to the appropriate Supervising Authority or the covered institutions or to request for assistance from a foreign State to determine the true identity of the owner of any monetary instrument or property subject of a covered transaction or suspicious transaction report, believed by the Council, on the basis of substantial evidence, to be, in whole or in part, wherever located, representing, involving, or related to directly or indirectly, in any manner or by any means, the proceeds of an unlawful activity 3. To institute civil forfeiture proceedings and all other remedial proceedings through the Office of the Solicitor General; 4. To cause the filing of complaints with the DOJ or the Ombudsman for the prosecution of money laundering offenses; 5. To investigate suspicious transactions and covered transactions deemed suspicious after an investigation by AMLC, money laundering activities and other violations of the AMLA; 6. To apply before the Court of Appeals, ex parte, for the freezing of any monetary instrument or property alleged to be the proceeds of any unlawful activity; 7. To implement such measures as may be necessary and justified under the AMLA to counteract money laundering; 8. To receive and take action in respect of, any request from foreign states for assistance in their own anti-money laundering operations provided in this Act; 9. To develop educational programs on the pernicious effects of money laundering, the methods and techniques used in the money laundering, the viable means of preventing money laundering and the effective ways of prosecuting and punishing offenders; 10. To enlist the assistance of any branch, department, bureau, office, agency, or
instrumentality of the government, including GOCCs, in undertaking any and all anti-money laundering operations, which may include the use of its personnel, facilities and resources for the more resolute prevention, detection, and investigation of money laundering offenses and prosecution of offenders; and 11. To impose administrative sanctions for the violation of laws, rules, regulations, and orders and resolutions issued pursuant thereto (Sec. 7) Mutual Assistance Among States: 1. Request for Assistance from a Foreign State: The AMLC may execute the request or refuse to execute the same and inform the foreign State of any valid reason for not executing the request or for delaying the execution thereof. The principles of mutuality and reciprocity shall, for this purpose, be at all times recognized. 2. Power of the AMLC to Act on a Request for Assistance from a Foreign State: The AMLC may execute a request for assistance from a foreign State by: a. tracking down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful activity under the procedures laid down in the AMLA; b. giving information needed by the foreign State within the procedures laid down in this Act; and c. applying for an order of forfeiture of any monetary instrument or property in the court: Provided, That the court shall not issue such an order unless the application is accompanied by an authenticated copy of the order of a court in the requesting State ordering the forfeiture of said monetary instrument or property of a person who has been convicted of a money laundering offense in the requesting State, and a certification of an affidavit of a competent officer of the requesting State stating that the conviction and the order of forfeiture are final and that no further appeal lies in respect or either. 3. Obtaining Assistance from Foreign States: The AMLC may make a request to any foreign State for assistance in:
BANKING LAWS
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a. tracking down, freezing, restraining and seizing assets alleged to be proceeds of any unlawful activity; b. obtaining information that it needs relating to any covered transaction, money laundering offense or any other matter directly or indirectly, related thereto; c. to the extent allowed by the law of the Foreign State, applying with the proper court therein for an order to enter any premises belonging to or in the possession or control of, any or all of the persons named in said request, and/or search any or all such persons named therein and/or remove any document, material or object named in said request: Provided, That the court shall not issue such an order unless the application is accompanied by an authenticated copy of the order of a court in the requesting State ordering the forfeiture of said monetary instrument or property of a person who has been convicted of a money laundering offense in the requesting State, and a certification of an affidavit of a competent officer of the requesting State stating that the conviction and the order of forfeiture are final and that no further appeal lies in respect or either. 4. Limitations on Request for Mutual Assistance AMLC may refuse to comply: a. Where the action sought by the request contravenes any provision of the Constitution or b. The execution of a request is likely to prejudice the national interest of the Philippines EXC: there is a treaty between the Philippines and the requesting State relating to the provision of assistance in relation to money laundering offenses. 5. Requirements for Requests for Mutual Assistance from Foreign State: A request for mutual assistance from a foreign State must: a. confirm that an investigation or prosecution is being conducted in respect of a money launderer named therein or that he has been convicted of any money laundering offense; b. state the grounds on which any person is being investigated or prosecuted for
c. d.
e.
f.
g.
h.
money laundering or the details of his conviction; gives sufficient particulars as to the identity of said person; give particulars sufficient to identity any covered institution believed to have any information, document, material or object which may be of assistance to the investigation or prosecution; ask from the covered institution concerned any information, document, material or object which may be of assistance to the investigation or prosecution; specify the manner in which and to whom said information, document, material or object detained pursuant to said request, is to be produced; give all the particulars necessary for the issuance by the court in the requested State of the writs, orders or processes needed by the requesting State; and contain such other information as may assist in the execution of the request.
Extradition: The Philippines shall negotiate for the inclusion of money laundering offenses as herein defined among extraditable offenses in all future treaties (Sec. 13) Amendment: One of the many amendments made by RA 9194 was the deletion of the phrase that provided that The provisions of this Act shall not apply to deposits and investments made prior to its effectivity.
BANKING LAWS
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Chapter VI. Foreign Currency Deposit Act (RA 6426)
Chapter VI. Foreign Currency Deposit Act (RA 6426)

I. CONFIDENTIALITY II. PRIVILEGES The FCDA allowed any person to deposit, and banks to accept deposit, any foreign currency acceptable as part of the Philippines international reserve.
II. Privileges
1. Tax exemption the FCD, including interests and all other income or earnings of such deposits, are exempt from any an all taxes whatsoever irrespective of whether or not these deposits are made by residents or nonresidents and, in the latter case, irrespective of whether or not the nonresidents are engaged in trade or business in the Philippines (Sec. 6) 2. Exemption from attachment, garnishment or any other order or process of any court, legislative or administrative body, or government agency whatsoever (Sec. 8) EXC: the CA, upon application ex parte by the AMLC and after determination that a probable cause exists that any monetary instrument or property is in any way related to an unlawful activity, the AMLC, may freeze the account (Sec. 10, RA9160)
I. Confidentiality
All foreign currency deposits authorized under the Secrecy Law as well as under PD1034 are declared and considered of an absolutely confidential nature and, except upon the written permission of the depositor, in no instance shall be examine, inquired or looked into by any person, government official, bureau or office, whether judicial or administrative, or legislative of any other entity whether public or private. (Sec. 8) The foreign currency deposits shall be exempt from attachment, garnishment, or any other order or process of any court, legislative body, government agency or any administrative body whatsoever. (Sec. 8) Exceptions 1. upon written permission of the depositor (Sec. 8, Foreign Currency Deposit Act ; Intengan vs CA ; 2002) 2. upon order of a competent court in cases of violation of the Anti-Money Laundering Act of 2001 [as in the case of peso deposits, supra] 3. during Bangko Sentrals periodic or special examinations [as in the case of peso deposits, supra], and 4. disclosure ot the Treasurer of the Philippines when the unclaimed balances law applies (Act 3936, as amended by PD 679) 5. In Salvacion vs. CB (1997), where a Filipino child was raped by a foreigner, the SC allowed garnishment of foreign currency deposits stating : We rule that the questioned Section 113 of CB Circular No. 960 which exempts from attachment, garnishment, or any other order or process of any court. Legislative body, government agency or any administrative body whatsoever, is applicable to a foreign transient, injustice would result especially to a citizen aggrieved by a foreign guest.
BANKING LAWS
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Table of Contents
BILLS AND NOTES

CHAPTER I. GENERAL CONCEPTS A. Negotiable Instruments B. Applicability of the Negotiable Instruments Law C. Characteristics of Negotiable Instruments D. Kinds of Negotiable Instruments E. Parties to a Negotiable Instruments F. Comparative Tables CHAPTER II. NEGOTIABILITY A. Determination of Negotiability B. Requisites of Negotiability C. Omissions and Provisions Not Affecting Negotiability D. Interpretation of Negotiable Instruments CHAPTER III. TRANSFER A. Modes B. Process of Negotiation 1. Delivery and Issuance 2. Indorsement 3. Subsequent Negotiation C. Kinds of Indorsement D. Unindorsed Instruments E. Cancellation of Instrument F. Indorsement by Agent G. Presumption as to Indorsement CHAPTER IV. HOLDERS A. General Concepts B. Holder in Due Course 1. Requisites of a Holder in Due Course 2. Rights of a Holder in Due Course C. Holder NOT in Due Course D. Accommodation CHAPTER V. DEFENSES EQUITIES A. Incapacity B. Illegality C. Forgery D. Material Alteration E. Fraud F. Duress G. Absence or failure Consideration H. Prescription I. Irregularity in Delivery AND 183 183 183 183 186 186 187 of 187 187 187 170 170 170 171 171 171 171 173 173 173 175 176 177 177 177 177 177 177 177 178 179 179 179 180 180 180 180 182 182 182 CHAPTER VI. PARTIES WHO ARE LIABLE A. Primarily Liable 1. General Concepts 2. Maker 3. Drawee 4. Acceptor B. Secondarily Liable 1. Drawer 2. General or Unqualified Indorser 3. Irregular Indorser 4. Order of Liability Among Indorsers 5. Liability of an Agent C. Limited Liability D. Order of Liability E. Liabilities vs. Warranties CHAPTER VII. ENFORCEMENT OF LIABILITY A. Liabilities of Parties B. Steps to charge parties liable C. Presentment D. Acceptance E. Notice of Dishonor F. Protest G. Acceptance or payment for honor CHAPTER VIII. DISCHARGE A. Definition B. Discharge of the Instrument 1. By payment in due course 2. By intentional cancellation 3. By reacquisition of principal debtor in his own right 4. By renunciation of holder 5. By material alteration 6. By other acts C. Discharge of Secondary Parties CHAPTER IX. CHECKS A. Certification of Checks B. Cross Checks C. Types of Checks 188 188 188 188 188 188 189 189 189 189 189 189 190 190 190 191 191 191 191 193 194 195 196 197 197 197 197 197 197 197 197 197 197 199 199 199 199
NEGOTIABLE INSTRUMENTS LAWI
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Chapter I. General Concepts
Bills and Notes

FACULTY EDITOR

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

BILLS AND NOTES Ma. Cecilia Jimenez

LEAD WRITER
Jason Mendoza
DEPUTY HEAD
Rania Joya
Malds Menzon
LOGISTICS, HR
Emil Rey Balaleng

WRITER
-------Kae Guerrero
-------Leo Zulueta

A. NEGOTIABLE INSTRUMENTS B. APPLICABILITY OF THE NEGOTIABLE INSTRUMENTS LAW C. CHARACTERISTICS OF NEGOTIABLE INSTRUMENTS D. KINDS OF NEGOTIABLE INSTRUMENTS E. PARTIES TO A NEGOTIABLE INSTRUMENTS F. COMPARATIVE TABLES
the delivery of such an instrument does not, by itself, operate as payment. Mere delivery of checks does not discharge the obligation under a judgment. The obligation is not extinguished and remains suspended until the payment by commercial document is actually realized.
I. General Concepts A. Negotiable Instruments (NI)

(Asked in 02, 05) Written contract for the payment of money, by its form and on its face, intended as substitute for money and intended to pass from hand to hand to give the holder in due course (HDC) the right to hold the same and collect the sum due. Instruments are negotiable when they conform to all the requirements prescribed by the NIL (Act 2031, 03 February 1911). Although considered as medium for payment of obligations, negotiable instruments are not legal tender (Sec. 60, New Central Bank Act, R.A. 7653).
Negotiable instruments shall produce the effect of payment only when they have been encashed or when through the fault of the creditor they have been impaired. (Art. 1249, Civil Code) BUT a CHECK which has been cleared and credited to the account of the creditor shall be equivalent to a delivery to the creditor of cash.
TIP: Memorize the two most important provisions of the NIL : Sec. 1 (Forms of negotiable instruments) and Sec. 52 (What constitutes a holder in due course)
B. Applicability of the Instruments Law (NIL)
Negotiable
General Rule: The provisions of the NIL are not applicable if the instrument involved is not negotiable.
BPI vs Royeca, (2008, Nachura): Q: Can the delivery of a negotiable instrument discharge an obligation? A: Settled is the rule that payment must be made in legal tender. A check is not legal tender and, therefore, cannot constitute a valid tender of payment. Since a negotiable instrument is only a substitute for money and not money,
Exception: In the case of Borromeo vs. Amancio Sun (1999), the SC applied Sec. 14 of the NIL by analogy in a case involving a Deed of Assignment of shares which was signed in blank to facilitate future assignment of the same shares. The SC observed that the situation is similar to Sec. 14 where the blanks in an instrument may be filled up by the holder, the signing in blank being with the assumed authority to do so.
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C. Characteristics Instruments
(Asked in 05)
of
Negotiable
1. Capable of being transferred from one person to another has the effect of transferring title from one person to another so as to make the latter a holder entitled to payment thereof 2. Capable of accumulating contracts resulting from indorsements at the back
2. Bill of Exchange a. Drawer - one who gives the order to pay money to a third party b. Drawee - person to whom the bill is addressed and who is ordered to pay. He becomes an acceptor when he indicates his willingness to pay the bill c. Payee - party in whose favor the bill is drawn or is payable Where there is indorsement: a. Indorser - the payee of an instrument who transfers it to another by signing it at the back thereof b. Indorsee - person to whom the indorser negotiates the instrument, who, by such negotiation, becomes the holder of the instrument.
D. Kinds of Negotiable Instruments

(Asked in 02) 1. Promissory Note (Sec. 184) a. An unconditional promise in writing b. Made by one person to another c. Signed by the maker d. Engaging to pay on demand, or at a fixed or determinable future time e. A sum certain in money to order or to bearer f. Where a note is drawn to the maker's own order, it is not complete until indorsed by him. 2. Bill of Exchange (Sec. 126) a. An unconditional order in writing b. Addressed by one person to another c. Signed by the person giving it d. Requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time e. A sum certain in money to order or to bearer
Check - A bill of exchange drawn on a bank payable on demand. (Sec. 185). It is the most common form of bill of exchange. Instances when a bill of exchange may be treated as a promissory note: The drawer and the drawee are the same person; or Drawee is a fictitious person; or Drawee does not have the capacity to contract (Sec. 130) Where the bill is drawn on a person who is legally absent; Where the bill is ambiguous (Sec. 17[e])
F. Comparative Tables
1. Negotiable vs. Non-negotiable
Negotiable Instruments Contains all the requisites of Sec. 1 of the NIL Transferable by negotiation or by assignment HDC may have better rights than Transferor Prior parties warrant payment A holder in due course takes the NI free from personal defenses Non-negotiable Instruments Does not contain all the requisites of Sec. 1 of the NIL Transferable only by assignment Transferee acquires rights only of his Transferor Prior parties merely warrant legality of Title All defenses available to prior parties may be raised against the last transferee
E. Parties to a Negotiable Instrument

1. Promissory note a. Maker - one who makes promise and signs the instrument b. Payee - party to whom the promise is made or the instrument is payable
Illustrations (Asked in 05): a. Postal Money Order NOT a negotiable instrument because of the conditions appearing at the back thereof, thereby making the order conditional, contrary to Sec. 1 of the NIL (Phil. Education Co. vs. Soriano, 1971). b. Certificate of Time deposit NEGOTIABLE instrument because it is an acknowledgment in writing by the bank of the amount of deposit with a promise to repay the same to the depositor or bearer thereof at a specific time (Caltex vs. CA, 1992). c. Letter of Credit NOT negotiable because it is NOT payable to order or
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bearer and is generally conditional. Hence, it does not comply with Sec. 1 of the NIL. d. Warehouse receipts NOT negotiable because their subject matter is things or goods and not a sum certain in money as required by Sec. 1 of the NIL. e. Treasury warrants payable from a specific fund NOT negotiable instruments as they are payable out of a particular fund which may or may not exist, thereby making the order conditional, contrary to Sec. 1 of the NIL 2. Negotiable Instruments Negotiable Documents (Asked in 05)
Negotiable Instruments Governed by the Negotiable Instruments Law Contains all the requisites of Sec. 1 of the NIL Subject is a sum certain in money Have right of recourse against intermediate parties who are secondarily liable Holder in dues course may have rights better than transferor Instrument itself property of value is
Death of a drawer of a BOE, with the knowledge of the bank, does not revoke the authority of the drawee to pay. May be presented for payment within reasonable time after its last negotiation. May be payable on demand or at a fixed or determinable future time
Death of the drawer of a check, with the knowledge of the bank, revokes the authority of the banker to pay. Must be presented for payment within a reasonable time after its issue. Always payable on demand
vs.
Negotiable Documents Governed by the Civil Code Does not contain all the requisites of Sec. 1 of the NIL Subject is goods No secondary liability of intermediate parties Transferee merely steps into the shoes of the transferor Instrument is merely evidence of title; thing of value are the goods mentioned in the document
3. Promissory Note vs. Bill of Exchange

Promissory note Unconditional promise Involves 2 parties Maker is primarily liable Only one presentment: for payment Bill of exchange Not necessarily drawn on a deposit. The drawee need not be a bank Bill of exchange Unconditional order Involves 3 parties Drawer is only secondarily liable Two presentments: for acceptance and for payment Check It is necessary that a check be drawn on a bank deposit. Otherwise, there would be fraud.
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Chapter II. Negotiability

A. DETERMINATION OF NEGOTIABILITY B. REQUISITES OF NEGOTIABILITY C. OMISSIONS AND PROVISIONS NOT AFFECTING NEGOTIABILITY D. INTERPRETATION OF NEGOTIABLE INSTRUMENTS
2. Containing an unconditional promise to pay or order to pay

Sec. 3. When promise is unconditional. An unqualified order or promise to pay is unconditional within the meaning of this Act, though coupled with: (a) An indication of a particular fund out of which reimbursement is to be made or a particular account to be debited with the amount; or (b) A statement of the transaction which gives rise to the instrument. But an order or promise to pay out of a particular fund is not unconditional.
A. Determination of Negotiability Caltex Phils. v. CA (1992): In determining the negotiability of an instrument, the instrument in its entirety and by what appears on its face must be considered. It must comply with the requirements of Sec. 1 of the Negotiable Instruments Law. PBCOM vs. Aruego (1993): The acceptance of a bill of exchange is not important in the determination of its negotiability. The nature of acceptance is important only on the determination of the kind of liabilities of the parties involved
a. UNCONDITIONAL The promise or order to pay, to be unconditional, must be unqualified. Metropolitan Bank vs. CA, (1991): A NIL is conditional when reference to the fund clearly indicates an intention that such fund alone should be the source of payment. b. ORDER OR PROMISE TO PAY As to promissory note Promise to pay should be express on the face of the instrument Word "promise" is not absolutely necessary. Any expression equivalent to a promise is sufficient. Mere acknowledgment of a debt insufficient As to bill of exchange: Order - command or imperative direction; the instrument, by its nature, demanding a right. Words which are equivalent to an order are sufficient. A mere request or authority to pay does not constitute an order. Although the mere use of polite words like "please" does not of itself deprive the instrument of its characteristics as an order, its language must clearly indicate a demand upon the drawee to pay. 3. Sum payable must be certain A sum is certain if from the face of the instrument it can be mathematically computed.
B. Requisites of Negotiability (Asked in 92, 93, 96, 97, 00, 02, 05, 07)
Sec. 1. Form of negotiable instruments. An instrument to be negotiable must conform to the following requirements: (a) It must be in writing and signed by the maker or drawer; (b) Must contain an unconditional promise or order to pay a sum certain in money; (c) Must be payable on demand, or at a fixed or determinable future time; (d) Must be payable to order or to bearer; and (e) Where the instrument is addressed to a drawee, he must be named or otherwise indicated therein with reasonable certainty.
1. In writing and signed by the maker or drawer a. No person liable on the instrument whose signature does not appear thereon. b. One who signs in a trade or assumed name liable to same extent as if he had signed in his own name (Sec. 18). c. Signature of party may be made by duly authorized agent; no particular form of appointment necessary (Sec. 19) d. "In writing" - includes print; written or typed e. Signature is binding so long it is intended or adopted as the signature of the signer or made with his authority.
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Sec. 2. What constitutes certainty as to sum. The sum payable is a sum certain within the meaning of this Act, although it is to be paid: (a) with interest; or (b) by stated installments; or (c) by stated installments, with a provision that, upon default in payment of any installment or of interest, the whole shall become due; or (d) with exchange, whether at a fixed rate or at the current rate; or (e) with costs of collection or an attorney's fee, in case payment shall not be made at maturity.
d. AT A DETERMINABLE FUTURE TIME

Sec. 4. Determinable future time; what constitutes. An instrument is payable at a determinable future time, within the meaning of this Act, which is expressed to be payable: (a) At a fixed period after date or sight; or (b) On or before a fixed or determinable future time specified therein; or (c) On or at a fixed period after the occurrence of a specified event which is certain to happen, though the time of happening be uncertain. An instrument payable upon a contingency is not negotiable, and the happening of the event does not cure the defect.
4. Payable in money a. Capable of being transformed into money. b. NON NEGOTIABLE: an instrument which contains an order or promise to do an act in addition to the payment of money 5. Payable on demand, or at a fixed or determinable future time a. Time of payment must be certain b. ON DEMAND
Sec. 7 . When payable on demand. An instrument is payable on demand: (a) When it is so expressed to be payable on demand, or at sight, or on presentation; or (b) In which no time for payment is expressed. Where an instrument is issued, accepted, or indorsed when overdue, it is, as regards the person so issuing, accepting, or indorsing it, payable on demand.
Demand instruments: Holder may call for payment any time; maker has an option to pay at any time, and the refusal of the holder to accept payment will terminate the running of interest, if any, but the obligation to pay the note remains.
Effect of acceleration provisions: If option (absolute or conditional) to accelerate maturity is on the maker, still NEGOTIABLE. If option to accelerate is on the holder and can be exercised only after the happening of a specified event/act over which he has no control (conditional), still NEGOTIABLE. Provisions extending time of payment General rule: Negotiability not affected. Effect is similar with that of an acceleration clause at the option of the maker. Exception: Where a note with a fixed maturity provides that the maker has the option to extend time of payment until the happening of contingency, instrument NOT negotiable. The time for payment may never come at all.
6. Payable to order or to bearer (Asked in 98) a. Must contain Words of Negotiability

c. AT A FIXED TIME Only on the stipulated date, and not before, may the holder demand its payment. Should he fail to demand payment, the instrument becomes overdue but remains valid and negotiable. It is merely converted to a demand instrument.
b. Caltex vs. CA (1992): The negotiability or non-negotiability of an instrument is determined from the face of the instrument itself. Where words "or bearer" printed on a check are cancelled by the drawer, instrument becomes not negotiable.
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c. PAYABLE TO BEARER
Sec. 9. When payable to bearer. The instrument is payable to bearer: (a) When it is expressed to be so payable; or (b) When it is payable to a person named therein or bearer; or (c) When it is payable to the order of a fictitious or non-existing person, and such fact was known to the person making it so payable; or (d) When the name of the payee does not purport to be the name of any person; or (e) When the only or last indorsement is an indorsement in blank.
to the order of: (a) A payee who is not maker, drawer, or drawee; or (b) The drawer or maker; or (c) The drawee; or (d) Two or more payees jointly; or (e) One or some of several payees; or (f) The holder of an office for the time being. Where the instrument is payable to order, the payee must be named or otherwise indicated therein with reasonable certainty.
Examples: Expressed to be so payable "I promise to pay the bearer the sum." Payable to a person named therein or bearer "Pay to A or bearer." Payable to the order of a fictitious person or non-existing person, and such fact was known to the person making it so payable Pay to John Doe or order." Name of payee does not purport to be the name of any person "Pay to cash;" "Pay to sundries." Only or last indorsement is an indorsement in blank.
Consolidated Plywood Industries vs. IFC Leasing, (1987): Without the words "to order" or "to the order of," the instrument is payable only to the person designated therein and is therefore non-negotiable. For order instruments - negotiation requires delivery and indorsement of the transferor.
7. If bill of exchange, drawee named or designated with reasonable certainty a. Applies only to bill of exchange b. A bill may be addressed to 2 or more drawees jointly whether they are partners or not but not to 2 or more drawees in the alternative or in succession (Sec. 128, NIL).
C. Omissions and Provisions Affecting Negotiability

Omissions and Provisions That Do Not Affect Negotiability 1. Non-dating of the instrument 2. Non-specification of value given, or that any value had been given 3. Non-specification of place where it is drawn or place where it is payable 4. Bears a seal 5. Designation of particular kind of currency in which payment is to be made
Not
d. Ang Tek Lian vs. CA, (1950): A check drawn payable to the order of cash is a check payable to bearer, and the bank may pay it to the person presenting it for payment without the drawer's indorsement. e. Fictitious payee rule It is not necessary that the person referred to in the instrument is really non-existent or fictitious to make the instrument payable to bearer. The person to whose order the instrument is made payable may in fact be existing but he is till fictitious or non-existent under Sec. 9(c) of the NIL if the person making it so payable does not intend to pay the specified persons. f. PAYABLE TO ORDER
Additional Provisions That Do Not Affect Negotiability 1. Authorizes the sale of collateral securities on default; Authorizes confession of judgment on default; Waives the benefit of law intended to protect the debtor; or Allows the creditor the option to require something in lieu of money.
2.
3.
4.
Sec. 8. When payable to order. The instrument is payable to order where it is drawn payable to the order of a specified person or to him or his order. It may be drawn payable
NOTE: Negotiability is affected when instrument contains a promise or order to do any act in addition to the payment of money.
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D. Interpretation Instruments
of
Negotiable
1. Sum expressed in words takes precedence over sum in numbers; BUT where words are so ambiguous or uncertain, reference to the figures should be made. 2. Where interest is stipulated, without specification of the starting date, the interest runs from the date of the instrument, and if undated, from the issue thereof. 3. An undated instrument is considered dated as of time issued. 4. Written provisions prevail over printed provision. 5. Where the instrument is ambiguous as to whether it is a note or a bill, the holder may treat it as either at his election 6. When the capacity of signatory is not clear, he is to be deemed an indorser G. I promise to pay when signed by two or more persons is deemed to be jointly and severally signed 7. Evangelista vs. Mercator Finance (2003): Where two promissory notes, both employing the terms I promise to pay, were each signed by two or more persons, a solidary (joint and several) liability on each note is created on the part of the signors.
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Chapter III. Transfer

A. MODES B. PROCESS OF NEGOTIATION 1. DELIVERY AND ISSUANCE 2. INDORSEMENT 3. SUBSEQUENT NEGOTIATION C. KINDS OF INDORSEMENT D. UNINDORSED INSTRUMENTS E. CANCELLATION OF INSTRUMENT F. INDORSEMENT BY AGENT G. PRESUMPTION AS TO INDORSEMENT
and intentional delivery by him is presumed until the contrary is proved b. if it is in the hands of a HDC, the presumption is conclusive Presumption as to date a. Date is not an essential element of negotiability b. An undated instrument is considered to be dated as of the time it was issued
A. Modes
1. Negotiation 2. Assignment
NEGOTIATION The transfer of the instrument from one person to another so as to constitute the transferee as holder thereof (Sec.30). ASSIGNMENT The transferee does not become a holder and he merely steps into the shoes of the transferor. Any defense available against the transferor is available against the transferee.
B. Process of Negotiation
If payable to bearer negotiated by delivery (Sec. 30) If payable to order negotiated by indorsement of the holder and completed by delivery (Sec. 30) 1. Delivery and Issuance Delivery means transfer of possession of instrument by the maker or drawer, with intent to transfer title to the payee and recognize him as holder thereof. Issuance is the first delivery of the instrument complete in form to a person who takes it as a holder (Sec. 191). Requisites a. Mechanical act of writing the instrument completely and in accordance with the requirements of Section 1; and b. The delivery of the complete instrument by the maker or drawer to the payee or holder with the intention of giving effect to it. Presumption of delivery a. Where the instrument is no longer in the possession of a party whose signature appears thereon, a valid
2. Indorsement Signature of the indorser, without additional words, is a sufficient indorsement (Sec. 31) Where placed The indorsement must be written (Sec. 31): a. On the instrument itself, or b. On a separate piece of paper attached to the instrument called allonge Must be of the ENTIRE instrument CANNOT indorse a part only of the amount payable; BUT if the instrument has been paid in part, then the instrument may be indorsed as to the residue (Sec. 32) CANNOT transfer the instrument to two or more indorsees severally (Sec. 32) 3. Subsequent negotiation Renegotiation to prior parties
Sec. 50. When prior party may negotiate instrument. Where an instrument is negotiated back to a prior party, such party may, subject to the provisions of this Act, reissue and further negotiable the same. But he is not entitled to enforce payment thereof against any intervening party to whom he was personally liable.
C. Kinds of Indorsement
As to manner of future method of negotiation 1. Special Specifies the person to whom/to whose order the instrument is to be payable; indorsement of such indorsee is necessary to further negotiation. A special indorser is liable to all subsequent holders, unless the
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instrument is an originally bearer instrument, in which case he is liable only to those who take title through his indorsement (Sec 40). 2. Blank Specifies no indorsee, instrument so indorsed is payable to bearer, and may be negotiated by delivery The holder may convert a blank indorsement into a special indorsement by writing over the signature of the indorser in blank any contract consistent with the character of the indorsement. An order instrument may be converted into a bearer instrument by means of a blank indorsement. But a bearer instrument remains as such whether it has been indorsed specially or in blank. It is the liability of the indorser which is affected. As to title transferred 1. Restrictive Such indorsement either: Prohibits further negotiation of instrument Constitutes indorsee as agent of indorser Vests title in indorsee in trust for another Rights of Restrictive Indorsee: Receive payment Bring any action thereon that the indorser could bring. Transfer his rights as such indorsee, but all subsequent indorsees acquire only the title of first indorsee under restrictive indorsement. 2. Non-restrictive As to kind of liability assumed by indorser 1. Qualified Constitutes indorser as mere assignor of title (e.g., without recourse) (Sec. 38). But this does not mean that the transferee only has the rights of an assignee. Transfer remains a negotiation and transferee can
still be a holder capable of acquiring a title free from defenses of prior parties. 2. Non-qualified As to presence/absence of express limitations 1. Conditional Placed by indorser upon primary obligors privileges of paying the holder Additional condition annexed to indorsers liability (Sec. 39). Where an indorsement is conditional, a party required to pay the instrument may disregard the condition, and make payment to the indorsee or his transferee, whether condition has been fulfilled or not 2. Unconditional Other Kinds of Indorsement 1. Absolute One by which the indorser binds himself to pay, upon no other condition than the failure of prior parties to do so, and of due notice to him of such failure 2. Joint Where instrument payable to the order of two or more payees or indorsees not partners, all must indorse, unless the one indorsing has authority to endorse for the others (Sec. 41) 3. Irregular Where a person, not otherwise a party to the instrument, places thereon his signature in blank before delivery, he is liable as indorser
D. Unindorsed Instruments
Sec. 49. Transfer without indorsement; effect of. Where the holder of an instrument payable to his order transfers it for value without indorsing it, the transfer vests in the transferee such title as the transferor had therein, and the transferee acquires in addition, the right to have the indorsement of the transferor. But for the purpose of determining whether the transferee is a holder in due course, the negotiation takes effect as of the time when the indorsement is actually made.
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E. Cancellation of Indorsements
Sec. 48. Striking out indorsement. The holder may at any time strike out any indorsement which is not necessary to his title. The indorser whose indorsement is struck out, and all indorsers subsequent to him, are thereby relieved from liability on the instrument.
F. Indorsement by Agent
Sec. 20. Liability of person signing as agent, and so forth. Where the instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words describing him as an agent, or as filling a representative character, without disclosing his principal, does not exempt him from personal liability.
G. Presumption as to Indorsements
Sec. 47. Continuation of negotiable character. An instrument negotiable in its origin continues to be negotiable until it has been restrictively indorsed or discharged by payment or otherwise.
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Chapter IV. Holders
Chapter IV. Holders

A. GENERAL CONCEPTS B. HOLDER IN DUE COURSE 1. REQUISITES OF A HOLDER IN DUE COURSE 2. RIGHTS OF A HOLDER IN DUE COURSE C. HOLDER NOT IN DUE COURSE D. ACCOMMODATION
a. That the instrument is complete and regular upon its face It is incomplete when it is wanting in any material particular or particular proper to be inserted in a NI without which the same will not be complete. Material Particulars A change in the ff. is considered a material alteration (Sec. 125): Date Sum payable Either for principal or interest Time or place of payment Number or relations of the parties Medium or currency in which payment is to be made Or which adds a place of payment where no place of payment is specified
A. General Concepts
1. Holder is a payee or indorsee of a bill or note who is in possession of it, or the bearer thereof (Sec. 191). 2. Rights of a holder (Sec. 51) 1. sue thereon in his own name 2. payment to him in due course discharges instrument. 3. Chan Wan vs. Tan Kim, (1960): The only disadvantage of a holder who is not a holder in due course is that the negotiable instrument is subject to defenses as if it were non-negotiable.
B. Holders in due course (HDC)

HDC under Sec. 52 HDC under Sec. 58: A holder who derives title to the instrument through a HDC has all the rights of the latter even though he himself satisfies none of the requirements of due course holding HDC under Sec. 59 (presumption): Every holder is deemed prima facie to be a holder in due course.
b. That he became the holder of it before it was overdue and without notice that it had been previously dishonored, if such was the fact OVERDUE The ff. cannot be HDCs: (Sec. 53) A holder who became such after the date of maturity of the instrument (instrument is overdue); In case of demand instruments, a holder who negotiates it after an unreasonable length of time after its issue Instruments with fixed maturity but subject to acceleration: ultimate date of maturity is the date of maturity for the purpose of determining whether a purchaser is a HDC Undated instruments: Prima facie presumption that it was negotiated before it was overdue (Sec. 45). Note: An overdue instrument is still negotiable, but it is subject to the defense existing at the time of the transfer. An instrument is not invalid for the reason only that it is ANTE-DATED OR POSTDATED provided not done for an illegal or fraudulent purpose. The person to whom an instrument
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1. Requisites of a holder in due course

Sec. 52. What constitutes a holder in due
course. A holder in due course is a holder who has taken the instrument under the following conditions: (a) That it is complete and regular upon its face; (b) That he became the holder of it before it was overdue, and without notice that it has been previously dishonored, if such was the fact; (c) That he took it in good faith and for value; (d) That at the time it was negotiated to him, he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it.
Chapter IV. Holders
so dated is delivered acquires the title thereto as of the date of delivery (Sec. 12). c. That he took it in good faith AND for value VALUE Any consideration sufficient to support a simple contract. An antecedent or pre-existing debt constitutes value, whether the instrument is payable on demand or at a future time (Sec. 25) HOLDER FOR VALUE Where value has at any time been given for the instrument, the holder is deemed a HFV in respect to all parties who become such prior to that time (Sec. 26); and Where the holder has a lien on the instrument, he is deemed a HFV to the extent of his lien (Sec .27). Presumption: Every NI is deemed prima facie issued for valuable consideration; and every person whose signature appears thereon is deemed to have become a party thereto for value (Sec. 24). Bayani vs. People, (2004): Such presumption cannot be overcome by the petitioners bare denial of receipt of the consideration. GOOD FAITH Holder must have taken the instrument in good faith and that at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. NOT a Holder in GOOD FAITH: Holder acted in bad faith or holder had NOTICE OF DEFECT. ACTUAL KNOWLEDGE
Sec 56. What constitutes notice of defect To constitute notice of an infirmity in the instrument or defect in the title of the person negotiating the same, the person to whom it is negotiated must have had actual knowledge of the infirmity or defect, or knowledge of such facts that his action in taking the instrument amounted to bad faith.
d. That at the time it was negotiated to him he had no notice of any infirmity in the instrument or defect in the title of the person negotiating it. SUSPICIOUS CIRCUMSTANCES BAD FAITH - does not require actual knowledge of the exact fraud that was practiced; knowledge that there was something wrong about the assignors acquisition of title is sufficient.
State Investment House vs. IAC (1989): A check with 2 parallel lines in the upper left hand corner means that it could only be deposited and may not be converted to cash. Consequently, such circumstance should put the payee on inquiry and upon him devolves the duty to ascertain the holders title to the check or the nature of his possession. Failing in this respect, the payee is declared guilty of gross negligence amounting to legal absence of good faith and as such the consensus of authority is to the effect that the holder of the check is not a holder in good faith.
DEFECTIVE TITLE Title is NOT defective when at the time it was negotiated to him, he had NO notice of: any infirmity in instrument any defect in title of person negotiating Title is DEFECTIVE when (Sec. 55): instrument / signature obtained by fraud, duress, force or fear or other unlawful means OR for an illegal consideration; or instrument is negotiated in breach of faith, or fraudulent circumstances NOTICE of infirmity or defect actual knowledge of the infirmity or defect OR knowledge of such facts that his action in taking the instrument amounted to bad faith (Sec.56) RIGHT of a transferee who receives NOTICE of any infirmity or defect BEFORE he has PAID THE FULL amount for the instrument. He will be deemed a HDC only to the extent of the amount therefore paid by him (Sec.54)
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Chapter IV. Holders
2. Rights of a Holder in Due Course

a. To sue on the instrument in his own name (Sec. 51) b. To receive payment on the instrument discharges the instrument (Sec. 51) c. Holds instrument free of any defect of title of prior parties (Sec. 51) d. Free from defenses available to prior parties among themselves (Sec. 57) e. May enforce payment of instrument for full amount, against all parties liable (Sec. 57) f. Only a HDC may enforce payment on the promissory note (BPI vs. Alfred Berwin & Co, 1928).
Prior parties can avail against him any defense among these prior parties and prevent the said holder from collecting in whole or in part the amount stated in the instrument
D. Accommodation Party
(Asked in 91, 96, 98, 05)
Sec. 29. Liability of accommodation party. An accommodation party is one who has signed the instrument as maker, drawer, acceptor, or indorser, without receiving value therefor, and for the purpose of lending his name to some other person. Such a person is liable on the instrument to a holder for value, notwithstanding such holder, at the time of taking the instrument, knew him to be only an accommodation party.
C. Holder NOT in Due Course 1. Presumption in Course Holding Favor of Due
1. Liability
The person to whom the instrument thus executed is subsequently negotiated has a right of recourse against the accommodation party in spite of the formers knowledge that no consideration passed between the accommodation and accommodated parties (Sec. 29).
Stelco Marketing Corp. vs. C.A. (1992): Liable on the instrument to a holder for value notwithstanding such holder at the time of the taking of the instrument knew him to be only an accommodation party. Hence, As regards, an AP, the 4th condition, i.e., lack of notice of infirmity in the instrument or defect in the title of the persons negotiating it, has no application.
Every holder is deemed prima facie to be a holder in due course (Sec. 59). a. BURDEN SHIFTS when it is shown that the title of any person who has negotiated the instrument was defective. Holder MUST PROVE that he or some person under whom he claims acquired the title as a holder in due course. b. But the last mentioned rule does not apply in favor of a party who became bound on the instrument prior to the acquisition of such defective title. (Sec. 59) c. However, this presumption arises only in favor of a person who is a holder as defined in Sec. 191, meaning a payee or indorsee of a bill or note, who is in possession of it, or the bearer thereof.
2. Accommodation Party as Surety

a. AP is generally regarded as a surety for the party accommodated; b. When AP makes payment to holder of the note, he has the right to sue the accommodated party for reimbursement (Agro Conglomerates, Inc. vs. CA 2000).
2. Holder Not In Due Course

a. One who became a holder of an instrument without any, some or all of the requisites under Sec. 52. b. With respect to demand instruments, if it is negotiated an unreasonable length of time after its issue, the holder is deemed not a holder in due course. (Sec. 53) c. Rights of a holder not in due course: It can enforce the instrument and sue under it in his own name.
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Chapter V. Defenses and Equities

(Asked in 95, 98, 07)
A. B. C. D. E. F. G. INCAPACITY ILLEGALITY FORGERY MATERIAL ALTERATION FRAUD DURESS ABSENCE OR FAILURE CONSIDERATION H. PRESCRIPTION I. IRREGULARITY IN DELIVERY
OF
REAL DEFENSES Those that attach to the instrument itself and are available against all holders, whether in due course or not, but only by the parties entitled to raise them. (a.k.a absolute defenses) 1. Material Alteration; 2. Want of delivery of incomplete instrument; 3. Duress amounting to forgery; 4. Fraud in factum or fraud in esse contractus; 5. Minority (available to the minor only); 6. Marriage in the case of a wife; 7. Insanity where the insane person has a guardian appointed by the court; 8. Ultra vires acts of a corporation 9. Want of authority of agent; 10. Execution of instrument between public enemies; 11. Illegality if declared void for any purpose 12. Forgery.
PERSONAL DEFENSES Those which are available only against a person not a holder in due course or a subsequent holder who stands in privity with him. (a.k.a. equitable defenses) 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. Absence or failure of consideration, partial or total; Want of delivery of complete instrument; Insertion of wrong date in an instrument; Filling up of blank contrary to authority given or not within reasonable time; Fraud in inducement; Acquisition of instrument by force, duress, or fear; Acquisition of the instrument by unlawful means; Acquisition of the instrument for an illegal consideration; Negotiation in breach of faith; Negotiation under circumstances that amount to fraud; Mistake; Intoxication (according to better authority); Ultra vires acts of corporations where the corporation has the power to issue negotiable paper but the issuance was not authorized for the particular purpose for which it was issued; Want of authority of agent where he has apparent authority; Insanity where there is no notice of insanity on the part of the one contracting with the insane person; and Illegality of contract where the form or consideration is illegal.
14. 15. 16.
A. Incapacity
REAL defense but available only to the incapacitated party (ex. minor or corporation); the indorsement or assignment of the instrument by a corp. or by an infant passes the property therein, notwithstanding that from want of capacity, the corp. or infant may incur no liability thereon (Sec. 22).
2. REAL when the law expressly provides for illegality as a real defense (statutory declaration of illegality).
C. Forgery
(Asked in 90, 92, 95, 97, 00, 01, 04, 05) Counterfeit making or fraudulent alteration of any writing, which may consist of: a. Signing of anothers name with intent to defraud; or b. Alteration of an instrument in the name, amount, name of payee, etc. with intent to defraud.
B. Illegality
1. In general, a PERSONAL defense even if 1409 of the Civil Code provides that a contract with an illegal cause is void.
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General Rule: When a signature is forged or made without the authority of the person, the signature (not instrument itself and the genuine signatures) is wholly inoperative Effects: No right to retain the instrument No right to give a discharge therefore Nor right to enforce payment thereof against any party thereto, can be acquired through or under such signature Rules on Forgery 1. Promissory Note
Exception: Unless the party against whom it is sought to enforce such right is precluded from setting up the forgery or want of authority (Sec. 23). Persons precluded from setting up defense of forgery 1. Those who warrant or admit the genuineness of the signature in question. This includes indorsers, persons negotiating by delivery and acceptors. 2. Those who, by their acts, silence, or negligence, are estopped from setting up the defense of forgery.
ORDER INSTRUMENT Makers forged signature 1. 2. 3. Maker is not liable because he never became a party to the instrument. Indorsers subsequent to forgery are liable because of their warranties. Party who the made the forgery is liable. 1. 2. 3.
BEARER INSTRUMENT Maker is not liable. Party who made the forgery is liable. Indorsers may be made liable to those persons who obtain title through their indorsements. Maker is liable. (Indorsement is not necessary to title and the maker engages to pay holder) Party who made the forgery is liable Maker is liable. (indorsement is not necessary to title and the maker engages to pay the holder) Indorser whose signature was forged not liable to one who is not a HDC provided the instrument is mechanically complete before the forgery. Party who made the forgery is liable.
Payees forged
signature
1. Maker and payee not liable. 2. Indorsers subsequent to forgery are liable.
1. 2.
Indorsers signature forged
3. Party who made the forgery is liable. 1. Maker, payee and indorser whose signature was forged is not liable. 2. Indorsers subsequent to forgery are liable. (Because of their warranties) Party who made the forgery is liable.
1.
2.
3.
3.
1. Bill of Exchange
Drawers signature forged
ORDER INSTRUMENT 1. Drawer is not liable because he was never a party to the instrument. 2. Drawee is liable if it paid (no recourse to drawer) because he admitted the genuiness of the drawers signature. Drawee cannot recover from the collecting bank because there is no privity between the collecting bank and the drawer. The latter does not give any
BEARER INSTRUMENT 1. Drawer is not liable.
2. Drawee is liable if it paid.

Drawee cannot recover from the collecting bank. 3. Party who made the forgery is liable.
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3. 4. 5. 6. 7.
Payees forged
signature
warranty regarding the signature of the drawer. (Associated Bank vs. CA) Indorsers subsequent to forgery liable (such as collecting bank or last endorser) Party who made the forgery is liable Drawer, drawee and payee not liable. Indorsers subsequent to forgery are liable. (such as collecting bank) Party who made the forgery is liable
1. Drawer is liable 2. Drawee is liable 3. Payee is not liable 4. Collecting bank is liable because of warranty 5. Party who made the forgery is liable 1. Drawer is liable. (indorsement not necessary to title) 2. Drawee is liable. 3. Indorser whose signature was forged is liable because indorsement is not necessary to title. 4. Party who made the forgery is liable.
Indorsers signature forged
1. drawer, payee and indorser whose signature was forged not liable. 2. Drawee is liable if it paid. 3. Indorsers subsequent to forgery are liable. (such as collecting bank) 4. Party who made the forgery is liable.
Acceptance and payment under mistake A bank is bound to know the signatures of its depositors. If bank pays a forged check it must be considered as making the payment out of its own funds and cannot charge the account of the depositor whose signature was forged (PNB vs. Quimpo 1988). Consequently, if a bank pays a forged check, it must be considered as paying out of its funds and cannot charge the amount so paid to the account of the depositor. A bank is liable, irrespective of its good faith, in paying a forged check (Samsung Construction Co. vs. Far East Bank and Trust Co., 2004). Extensions of Price vs. Neal doctrine Doctrine: As between equally innocent persons, the drawee who pays money on a check or draft the signature on which was forged CANNOT recover the money from the one who received it. The drawee is bound to know the signature of its depositor. The bar to recovery is extended to overdrafts and stop payment orders. Overdraft occurs when a check is issued for an amount more than what the drawer has in deposit with the drawee bank.
Rule: The drawee who pays the holder of the bill cannot recover from the holder what he paid under mistake Stop Payment Order is one issued by the drawer of a check countermanding his first order to the drawee bank to pay the check. Rule: The drawee bank is bound to follow the order, provided it is received prior to its certification or payment of the check.
Effects of Negligence of Depositor If such negligence was the proximate cause of the loss, the bank (drawee) is NOT liable It is the duty of the depositor/drawer to carefully examine banks statements, cancelled checks, his check stubs, and other pertinent records within a reasonable time and to report any errors without unreasonable delay. If a drawer/depositors negligence and delay should cause a bank to honor a forged check, drawer cannot later complain should bank refuse to recredit his account. When drawee may recover from drawer Where the instrument is originally a bearer instrument,
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because the indorsement can be disregarded as being unnecessary to the holders title Indorsement forged by an employee or agent of the drawer If due to the drawers negligence/delay, the forgery is not discovered until it is too late for the bank to recover from the holder or the forger When drawee may not recover from holder Where the instrument is originally a bearer instrument , because the indorsement can be disregarded as being unnecessary to the holders title If drawee fails to act promptly , if he delays in informing the holder whom he paid Between Drawee Bank and Collecting Bank Collecting bank only liable for forged indorsements and not forgeries of the drawer or makers signature (PNB v CA, 1968). The collecting bank or last indorser generally suffers the loss because it has the duty to ascertain the genuineness of all prior indorsements considering that the act of presenting the check for payment to the drawee is an assertion that the party making the presentment had done its duty to ascertain the genuineness of the indorsements (BPI v CA, 1992). In presenting the checks for clearing the collecting agent, made an express guarantee on the validity of all the prior endorsements. The drawee bank is not similarly situated as the collecting bank because the former makes no warranty as to the genuineness of any indorsement. The drawee banks duty is but to verify the genuineness of the drawers signature and not of the indorsement because the drawer is its client. Where the negligence of the drawee bank is the proximate cause of the collecting banks payment of a check with a forged indorsement, the drawee bank
may be held liable to the collecting bank. When both are guilty of negligence, the degree of negligence of each will be weighed in considering the amount of loss which each should bear (BPI v CA, 1992)
D. Material Alteration
(Asked in 95, 96, 99) Any change in the instrument which affects or changes the liability of the parties in any way. Effects: a. Alteration by a party Avoids the instrument except as against the party who made, authorized, or assented to the alteration and subsequent indorsers. However, if an altered instrument is negotiated to a HDC, he may enforce payment thereof according to its original tenor regardless of whether the alteration was innocent or fraudulent. b. Alteration by a stranger (spoliation)- the effect is the same as where the alteration is made by a party which a HDC can recover on the original tenor of the instrument (Sec. 124). Changes in the following constitute material alterations (Sec. 125): 1. Date 2. Sum payable, either for principal or interest 3. Time or place of payment 4. Number or relations of the parties 5. Medium or currency in which payment is to be made 6. That which adds a place of payment where no place of payment is specified 7. Any other change or addition which alters the effect of the instrument in any respect.
E. Fraud
Fraud in factum or fraud in inducement The person who signs the instrument intends to sign the same as a NI but was induced by fraud Fraud in esses contractus or fraud in execution The person is induced to sign an instrument not knowing its character as a bill or note Page 186 of 278
BPI vs Franco, (2007, Nachura) Q: Can a bank unilaterally freeze a depositors account on the suspicion that the depositor was involved in a multi-million peso scam carried out against the bank? A: NO. The deposit of money in banks is governed by the Civil Code provisions on simple loan or mutuum. As there is a debtor-creditor relationship between a bank and its depositor, a bank ultimately acquired ownership of the deposits, but such ownership is coupled with a corresponding obligation to pay the depositor an equal amount on demand. The bank cannot prevent the depositor from demanding payment by drawing checks against his current account, or asking for the release of the funds in his savings account. To grant any bank the right to take whatever action it pleases on deposits which it supposes are derived from shady transactions, would open the floodgates of public distrust in the banking industry. Article 559 which permits an owner who has lost or has been unlawfully deprived of a movable to recover the exact same thing is not applicable in the case at bar since what is involved here is money which is a generic and fungible thing.
intention of transferring title to the instrument. b. As to HDC, it is conclusively presumed that there was valid delivery; and c. As against an immediate party and remote party who is not a HDC, presumption of a valid and intentional delivery is rebuttable. 3. Incomplete instrument undelivered (Sec 15) a. Who may be estopped from raising the real defense under Sec 15? A drawee bank whose negligent custody of the checks, after partial execution, contributed to its escape. b. If completed and negotiated without authority, not a valid contract against a person who has signed before delivery of the contract even in the hands of HDC but subsequent indorsers are liable. This is a real defense. 4. Incomplete instrument delivered (Sec. 14) a. Holder has prima facie authority to fill up the instrument. b. The instrument must be filled up strictly in accordance with the authority given and within reasonable time c. HDC may enforce the instrument as if filled up according to no. 2.
F. Duress
There may be cases where the duress employed is so serious that it will give rise to a real defense because of the lack of contractual intent. Although the signer may know what he is signing, there may be wanting the intent or willingness to be bound. Then it becomes a real defense.
G. Absence or Consideration
failure
of
Personal defense to the prejudiced party and available against any person not HDC.
H. Prescription
Refers to extinctive prescription and may be raised even against a HDC. Under the Civil Code, the prescriptive period of an action based on a written contract is 10 years from accrual of cause of action.
I. Irregularity in Delivery
(Asked in 97, 02, 04, 05) 2. Complete instrument undelivered (Sec. 16). a. Between immediate parties and those who are similarly situated, delivery must be coupled with the
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Chapter VI. Parties Who are Liable

A. PRIMARILY LIABLE 1. GENERAL CONCEPTS 2. MAKER 3. DRAWEE 4. ACCEPTOR SECONDARILY LIABLE 1. DRAWER 2. GENERAL OR UNQUALIFIED INDORSER 3. IRREGULAR INDORSER 4. ORDER OF LIABILITY AMONG INDORSERS 5. LIABILITY OF AN AGENT LIMITED LIABILITY ORDER OF LIABILITY LIABILITIES VS. WARRANTIES
2. Maker
B.
a. Promises to pay the instrument according to its tenor b. Admits existence of payee and his then capacity to indorse. c. Therefore, IS PRECLUDED from setting up the following defenses: the payee is a fictitious person the payee was insane, a minor, or a corporation acting ultra vires
3. Drawee
Drawee: A person on whom a bill of exchange or check is drawn and who is ordered to pay it. a. Liability of drawee to HOLDER NOT liable on the instrument until he accepts it and even a holder in due course cannot sue him on the instrument before his acceptance A bill/check of itself does NOT operate as an assignment of the funds in the hands of the drawee/bank (Sec 189), and the drawee/bank is NOT liable on the bill unless and UNTIL he/it ACCEPTS (or certifies) the same (Sec. 127). b. Liability of drawee to DRAWER Before payment or certification by the bank, the drawer may countermand the order, and payment thereafter to the payee by the bank is wrongful. Since a check is not an assignment of the drawers fund, the bank is liable for paying it in disregard of the countermand. Moreover, drawee can no longer recover what it voluntarily paid to the holder of the uncertified and unaccepted instrument.
C. D.
E.
A. Primarily Liable
(Secs. 60 and 62)
1. General Concepts
Persons who by the terms of the instrument are absolutely required to pay the same. a. Maker of promissory note b. Acceptor of bill of exchange Unconditionally liable; he is duty bound to pay the holder at date of maturity, WON holder demands payment from him, and he is not relieved from liability even if the instrument should become overdue due to failure of holder to make such demand.
Acceptor or Drawee A. Engages to pay according to the tenor of his acceptance; B. Admits the existence of the drawer, the genuineness of his signature and his capacity and authority to draw the instrument; and C. Admits the existence of the payee and his capacity to indorse. A bill of itself does not operate as an assignment of funds in the hands of the drawee available for the payment thereof and the drawee is not liable unless and until he accepts the same (Sec.127)
Maker A. Engages to pay according to the tenor of the instrument; and B. Admits the existence of the payee and his capacity to indorse.
4. Acceptor
(Asked in 98) Upon acceptance, the acceptor engages to pay the bill according to the tenor of his acceptance, and admits the following (Sec. 62): a. existence of drawer b. genuineness of his signature c. his capacity and authority to draw the instrument d. existence of payee and his then capacity to endorse
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B. Secondarily Liable (Secs. 61, 64 and 66)

(Asked in 07)
DRAWER A. Admits the existence of the payee and his capacity to indorse; GENERAL INDORSER A. Warrants all subsequent HDC a. That the instrument is genuine and in all respect what it purports to be b. He has good title to it; c. All prior parties had capacity to contract d. The instrument is, at the time of endorsement, valid and subsisting. B. Engages that the instrument will be accepted or paid by the party primarily liable; and C. Engages that if instrument is dishonored proper proceedings brought, he will pay to party entitled to be paid. the and are the B. Engages that the instrument will be accepted or paid, or both, as the case may be, according to its tenor; and C. If the instrument is dishonored and necessary proceedings on dishonor be duly taken, he will pay to the party entitled to be paid. B. If instrument payable to order of maker or drawer or to bearer, he is liable to all parties subsequent to the maker or drawer. C. If he signs for accommo-dation of the payee, he is liable to all parties subse-quent to the payee. IRREGULAR INDORSER A person, not otherwise a party to an instrument, places his signature thereon in blank before delivery (Sec. 64). A. If instrument payable to the order of a 3rd person, he is liable to the payee and subsequent parties.
1. Drawer
Sec. 61. Liability of drawer. The drawer by drawing the instrument admits the existence of the payee and his then capacity to indorse; and engages that, on due presentment, the instrument will be accepted or paid, or both, according to its tenor, and that if it be dishonored and the necessary proceedings on dishonor be duly taken, he will pay the amount thereof to the holder or to any subsequent indorser who may be compelled to pay it. But the drawer may insert in the instrument an express stipulation negativing or limiting his own liability to the holder.
3. Irregular Indorser
When a person not otherwise a party to an instrument, places thereon his signature in blank before delivery, he is liable as an indorser, in accordance w/ these rules: a. Instrument payable to order of 3rd person: liable to payee and to all subsequent parties b. Instrument payable to the order of maker/drawer, or payable to bearer: liable to all parties subsequent to maker/drawer c. Signs for accommodation of payee, liable to all parties subsequent to payee (Sec 64)
Limiting Liability: drawer may insert in the instrument an express stipulation negativing/limiting his own liability to the holder.
4. Order of Liability among Indorsers

(Sec. 68) a. Among themselves: liable prima facie in the order they indorse, but proof of another agreement admissible b. Holder may sue any of the indorsers, regardless of order of indorsement c. Joint payees/indorsees deemed to indorse jointly and severally
2. General or Unqualified Indorser

Every person who indorses WITHOUT qualification (Sec. 66.) A person placing his signature upon an instrument other than as a maker, drawer, or acceptor unless he indicates by appropriate words his intention to be bound in some other capacity (Sec. 63). A person, who places his signature on an instrument negotiable by delivery, incurs all the liabilities of an indorser (Sec. 67).
5. Liability of an AGENT
a. Agency Signature of any party may be made by duly authorized agent, established as in ordinary agency
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Signature per procuration operates as notice that the agent has limited authority to sign, and the principal is bound only in case the agent in so signing acted within the actual limits of his authority b. Liability General rule: Where person adds to his signature words indicating that he signs on behalf of a principal, not liable if he was duly authorized Exceptions: a. Mere addition of words describing him as an agent without disclosing his principal b. Where a broker or agent negotiates an instrument without indorsement, he incurs all liabilities in Sec. 65, unless he discloses name of principal and fact that hes only acting as agent. (Sec. 69)
Warrants that he has no knowledge of any fact which would impair the validity of the instrument or render it valueless
Warrants that the instrument is, at the time of his indorsement, valid and subsisting
D. Order of Liability
General rule: One whose signature does not appear on the instrument shall not be liable thereon. Exceptions: a. The principal who signs through an agent is liable; b. The forger is liable; c. One who indorses in a separate instrument (allonge) or where an acceptance is written on a separate paper is liable; d. One who signs his assumed or trade name is liable; and e. A person negotiating by delivery (as in the case of a bearer instrument) is liable to his immediate indorsee. Notes: There is no order of liability among the indorsers as against the holder. He is free to choose to recover from any indorser in case of dishonor of the instrument (AQUINO). As respect one another, indorsers are liable prima facie in the order in which they indorse unless the contrary is proven (Sec.68)
C. Limited Liability (Sec. 65, Metropol

Financing v. Sambok, 1983)
QUALIFIED INDORSER Every person negotiating instrument by delivery or by a qualified endorsement warrants that: A. Instrument is genuine and in all respects what it purports to be; B. He has good title to it; C. All prior parties had capacity to contract; D. He has no knowledge of any fact which would impair the validity of the instrument or render it valueless. PERSON NEGOTIATING BY MERE DELIVERY OR BY QUALIFIED INDORSEMENT No secondary liability; but is liable for breach of warranty A. Warranties same as those of qualified indorsers; and B. Warranties extend to immediate transferee only. PERSON NEGOTIATING BY DELIVERY
E. Liabilities vs. Warranties

Primary and secondary liability of parties Makes the parties liable to pay the sum certain in money stated in the instrument. Warranties of parties Impose no direct obligation to pay in the absence of breach thereof. In case of breach, the person who breached the same may either be liable or barred from asserting a particular defense. Does not require presentment and notice of dishonor. (CAMPOS)
GENERAL INDORSER
Conditioned on presentment and notice of dishonor (CAMPOS)
There is secondary liability, and warranties

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Chapter VII. Enforcement of Liability

A. B. C. D. E. F. G. LIABILITIES OF PARTIES STEPS TO CHARGE PARTIES LIABLE PRESENTMENT ACCEPTANCE NOTICE OF DISHONOR PROTEST ACCEPTANCE OR PAYMENT FOR HONOR
c. If bill is accepted, then present the bill for payment to the acceptor. d. If dishonored upon presentment for payment: Notice of dishonor to persons secondarily liable. Protest for dishonor by nonpayment in case of foreign bill.
C. Presentment
(Asked in 94) 1. Definition a. The production of a Bill of Exchange to the drawee for his ACCEPTANCE, or to the drawer or acceptor for PAYMENT; or b. The production of a PN to the party liable for payment 2. Presentment for acceptance a. When necessary
Sec. 143. When presentment for acceptance must be made. Presentment for acceptance must be made: (a) Where the bill is payable after sight, or in any other case, where presentment for acceptance is necessary in order to fix the maturity of the instrument; or (b) Where the bill expressly stipulates that it shall be presented for acceptance; or (c) Where the bill is drawn payable elsewhere than at the residence or place of business of the drawee. In no other case is presentment for acceptance necessary in order to render any party to the bill liable.
A. Liabilities of Parties
1. Primary liability The unconditional promise attaches the moment the maker makes the instrument while the acceptors assent to the unconditional order attaches the moment he accepts the instrument. No further act is necessary in order for the liability to accrue. Presentment for payment is all that is necessary. 2. Secondary liability
B. Steps to charge parties liable

1. Steps in promissory note (indorsers) a. Presentment for payment to the maker. b. Notice of dishonor should be given, if dishonored by non-payment. 2. Steps in bill of exchange a. Presentment for acceptance in the following instances: a. Where the bill is payable after sight, or when it is necessary in order to fix the maturity of the instrument; b. Where the bill expressly stipulates that it shall be presented for acceptance; c. Where bill is drawn payable elsewhere than at the residence or place of business of the drawee. (Sec. 143) Note: In all the above cases, the holder must either present the bill for acceptance or negotiate it within a reasonable time; otherwise, the drawer and all indorsers are discharged (Sec. 144) b. If dishonored by non-acceptance: Notice of dishonor given to drawer and indorsers. Protest in case of a foreign bill.
b. Effect of non-presentment within reasonable time drawer and all indorsers discharged (Sec. 144). What is reasonable time involves a consideration of the nature of the instrument, usage of trade or business with respect to the instrument, and the facts of each case. c. How made
Sec. 145. Presentment; how made. Presentment for acceptance must be made by or on behalf of the holder at a reasonable hour, on a business day and before the bill is overdue, to the drawee or some person authorized to accept or refuse acceptance on his behalf; and (a) Where a bill is addressed to two or more drawees who are not partners, presentment must be made to them all unless one has authority to accept or refuse acceptance for
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all, in which case presentment may be made to him only; (b) Where the drawee is dead, presentment may be made to his personal representative; (c) Where the drawee has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors, presentment may be made to him or to his trustee or assignee.
f.
Dishonor and Effects
d. When made
Sec. 146. On what days presentment may be made. A bill may be presented for acceptance on any day on which negotiable instruments may be presented for payment under the provisions of Sections seventy-two and eighty-five of this Act. When Saturday is not otherwise a holiday, presentment for acceptance may be made before twelve o'clock noon on that day. Sec. 72. What constitutes a sufficient presentment. Presentment for payment, to be sufficient, must be made: (a) By the holder, or by some person authorized to receive payment on his behalf; (b) At a reasonable hour on a business day; (c) At a proper place as herein defined; (d) To the person primarily liable on the instrument, or if he is absent or inaccessible, to any person found at the place where the presentment is made. Sec. 85. Time of maturity. Every negotiable instrument is payable at the time fixed therein without grace. When the day of maturity falls upon Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day except that instruments payable on demand may, at the option of the holder, be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday.
Sec. 149. When dishonored by nonacceptance. A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted. Sec. 150. Duty of holder where bill not accepted. Where a bill is duly presented for acceptance and is not accepted within the prescribed time, the person presenting it must treat the bill as dishonored by nonacceptance or he loses the right of recourse against the drawer and indorsers. Sec. 151. Rights of holder where bill not accepted. When a bill is dishonored by non-acceptance, an immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary.
3. Presentment for payment a. When necessary In order to charge the drawer and indorsers (Sec. 70) b. When NOT necessary To charge the person primarily liable on the instrument (Sec. 70) To charge the drawer where he has no right to expect or require that the drawee or acceptor will pay the instrument. (Sec. 79) To charge an indorser where the instrument was made or accepted for his accommodation and he has no reason to expect that the instrument will be paid if presented. (Sec. 80) c. When Excused Where, after the exercise of reasonable diligence, presentment cannot be made; Where the drawee is a fictitious person; By waiver of presentment, express or implied. d. When a bill is dishonored by nonacceptance immediate right to recourse accrues to holder (Sec. 151)
e. When Excused
Sec. 148. Where presentment is excused. Presentment for acceptance is excused and a bill may be treated as dishonored by non-acceptance in either of the following cases: (a) Where the drawee is dead, or has absconded, or is a fictitious person or a person not having capacity to contract by bill. (b) Where, after the exercise of reasonable diligence, presentment can not be made. (c) Where, although presentment has been irregular, acceptance has been refused on some other ground.
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e. In case of waiver of protest, whether in the case of a foreign bill of exchange or other NI deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor. (Sec. 111) f. Date and time of presentment: bearing fixed maturity / not payable on demand on the day it falls due if day of maturity falls on Sunday or a holiday, the instruments falling due or becoming payable on Saturday are to be presented for payment on the next succeeding business day (Sec. 85) Payable on demand within a reasonable time after its issue, iv at the option of the holder, may be presented for payment before twelve o'clock noon on Saturday when that entire day is not a holiday (Sec. 85) Demand bill of exchange within a reasonable time after the last negotiation. (Sec. 71) Note: Although presentment was made within a reasonable time from last negotiation, it may have been made within an unreasonable time from issuance. Thus holder may still not be a holder in due course under Sec. 71 g. Check - must be presented for payment within reasonable time after its issue or drawer will be discharged from liability thereon to extent of loss caused by delay 4. Dishonor by Nonpayment
Sec. 83. When instrument dishonored by nonpayment. The instrument is dishonored by non-payment when: (a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid. Sec. 84. Liability of person secondarily liable, when instrument dishonored. Subject to the provisions of this Act, when the instrument is dishonored by non-payment, an immediate right of recourse to all parties secondarily liable thereon accrues to the holder.
D. Acceptance
The signification by the drawee of his assent to the order of the drawer. 1. Form: Must be in writing and signed by the drawee and must not express that the drawee will perform his promise by any other means than the payment of money. (Sec. 132) If request for a written acceptance is refused, the holder may treat the bill as dishonored (Sec. 133) 2. Kinds: a. General -assents without qualification to the order of the drawer b. Qualified - which in express terms varies the effect of the bill as drawn Conditional - makes payment by the acceptor dependent on the fulfillment of a condition therein stated Partial - an acceptance to pay part only of the amount for which the bill is drawn. Local - an acceptance to pay only at a particular place. Qualified as to time - the acceptance of some one or more of the drawees but not of all. (Sec. 141) 3. Implied Acceptance If after 24 hours, the drawee fails to return the instrument. He is also deemed to have accepted the instrument when he destroys the same.
FEBTC vs. Gold Palace Jewellery Co, (Nachura, 2008): Q: What is the implication of payment without acceptance by a drawee A: Act No. 2031, or the Negotiable Instruments Law (NIL), explicitly provides that the acceptor, by accepting the instrument, engages that he will pay it according to the tenor of his acceptance. This provision applies with equal force in case the drawee pays a bill without having previously accepted it. His actual payment of the amount in the check implies not only his assent to the order of the drawer and a recognition of his corresponding obligation to pay the aforementioned sum, but also, his clear compliance with that obligation. Actual payment by the drawee is greater than his acceptance, which is merely a promise in writing to pay. The payment of a check includes its acceptance.
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E. Notice of dishonor
(Asked in 96) Notice given by holder or his agent to party or parties secondarily liable that the instrument was dishonored by nonacceptance by the drawee of a bill or by non-payment by the acceptor of a bill or by non-payment by the maker of a note. (Sec. 89) 1. Requisites: a. Given by holder or his agent, or by any party who may be compelled by the holder to pay (Sec. 90) b. Given to secondary party or his agent (Sec. 97) c. Given within the periods provided by law (Sec. 102) d. Given at the proper place (Secs. 103 and 104) 2. When dispensed with: a. When party to be notified knows about the dishonor, actually or constructively (Secs. 114-117) b. If waived (Sec. 109) c. When after due diligence, it cannot be given (Sec. 112). 3. To whom given a. Non-acceptance (bill) to persons secondarily liable, namely, the drawer and indorsers as the case may be. b. Non-payment (both bill and note) indorsers. Note: Notice must be given to persons secondarily liable. Otherwise, such parties are discharged. Notice may be given to the party himself or to his agent. 4. By whom given
Sec. 90. By whom given. The notice may be given by or on behalf of the holder, or by or on behalf of any party to the instrument who might be compelled to pay it to the holder, and who, upon taking it up, would have a right to reimbursement from the party to whom the notice is given.
(a) It is duly presented for payment and payment is refused or cannot be obtained; or (b) Presentment is excused and the instrument is overdue and unpaid.
Effect: There is an immediate right of recourse by the holder against persons secondarily liable. However, notice of dishonor is generally required. (Sec. 84) b. Dishonor by non-acceptance
Sec. 149. When dishonored by nonacceptance. A bill is dishonored by non-acceptance: (a) When it is duly presented for acceptance and such an acceptance as is prescribed by this Act is refused or can not be obtained; or (b) When presentment for acceptance is excused and the bill is not accepted.
Effect: Immediate right of recourse against the drawer and indorsers accrues to the holder and no presentment for payment is necessary., (Sec. 151) c. Dishonor in the hands of an Agent Agent can do either of the following: Directly give notice to persons secondarily liable thereon; or Give notice to his principal. In such case, he must give notice within the time allowed by law as if he were a holder. (Sec. 94) d. Waiver of Notice of Dishonor
Sec. 109. Waiver of notice. Notice of dishonor may be waived either before the time of giving notice has arrived or after the omission to give due notice, and the waiver may be expressed or implied. Sec. 110. Whom affected by waiver. Where the waiver is embodied in the instrument itself, it is binding upon all parties; but, where it is written above the signature of an indorser, it binds him only.
a. Dishonor by non-payment
Sec. 83. When instrument dishonored by nonpayment. The instrument is dishonored by non-payment when:
a. Notice of dishonor is not required to be given to the drawer in any of the ff. cases: Drawer and drawee are the same; Drawee is a fictitious person or not having the capacity to contract;
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Drawer is the person to whom the instrument is presented for payment; The drawer has no right to expect or require that the drawee or acceptor swill honor the instrument; Where the drawer has countermanded payment. (Sec. 114)
4. Contents a. The time and place of presentment b. The fact that presentment was made and the manner thereof c. The cause or reason for protesting the bill d. The demand made and the answer given, if any, or the fact that the drawee or acceptor could not be found. (Sec. 153). 5. By whom
Sec. 154. Protest, by whom made. Protest may be made by: (a) A notary public; or (b) By any respectable resident of the place where the bill is dishonored, in the presence of two or more credible witnesses.
b. Notice of dishonor is not required to be given to an indorser in the ff. cases: Drawee is a fictitious person or does not have the capacity to contract, and indorser was aware of that fact at the time he indorsed the instrument; Indorser is the person to whom the instrument is presented for payment; Instrument was made or accepted for his accommodation. (Sec. 115) c. An omission to give notice of dishonor by non-acceptance does not prejudice the rights of a holder in due course subsequent to the omission. (Sec. 117)
6. Time
Sec. 155. Protest; when to be made. When a bill is protested, such protest must be made on the day of its dishonor unless delay is excused as herein provided. When a bill has been duly noted, the protest may be subsequently extended as of the date of the noting.
F. Protest
1. Definition Testimony of some proper person that the regular legal steps to fix the liability of drawer and indorsers have been taken 2. When necessary
Sec. 152. In what cases protest necessary. Where a foreign bill appearing on its face to be such is dishonored by nonacceptance, it must be duly protested for nonacceptance, by nonacceptance is dishonored and where such a bill which has not previously been dishonored by nonpayment, it must be duly protested for nonpayment. If it is not so protested, the drawer and indorsers are discharged. Where a bill does not appear on its face to be a foreign bill, protest thereof in case of dishonor is unnecessary.
7. Place a. At the place where it is dishonored, EXCEPT bill drawn payable at the place of business or residence of person other than the drawee has been dishonored by non-acceptance b. It must be protested for nonpayment at the place where it is expressed to be payable c. No further presentment for payment to, or demand on, the drawee is necessary. (Sec. 156) 8. Protest for better security against the drawer and indorsers where the acceptor has been adjudged a bankrupt or an insolvent or has made an assignment for the benefit of creditors before the bill matures (Sec. 158)
3. Form a. Annexed to the bill or must contain a copy thereof, and b. Must be under the hand and seal of the notary making it
9. Delay excused a. When caused by circumstances beyond the control of the holder b. When not imputable to his default, misconduct, or negligence c. When the cause of delay ceases to operate, the bill must be noted or protested with reasonable diligence
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10. When protest dispensed with- by any circumstance which would dispense with notice of dishonor (Sec. 159). 11. Waiver of protest - deemed to be a waiver not only of a formal protest but also of presentment and notice of dishonor (Sec.111).
G. Acceptance or payment for honor

1. Acceptance for honor Practice of accepting for honor is obsolete When bill may be accepted for honor. When a BE has been: a. protested for dishonor by nonacceptance or protested for better security and b. not overdue Any person not being a party already liable may, with the CONSENT of the holder, intervene and accept the bill supra protest for the honor of any party liable thereon or for the honor of the person for whose account the bill is drawn. The acceptance for honor may be for part only of the sum for which the bill is drawn Where there has been an acceptance for honor for one party, there may be a further acceptance by a different person for the honor of another party. (Sec. 161) Referee in case of need person whose name is inserted by the drawer of a bill and any indorser to whom the holder may resort in case bill is dishonored by non-acceptance or non-payment; option of the holder to resort to the referee (Sec. 131)
2. Payment for honor

Sec. 171. Who may make payment for honor. Where a bill has been protested for nonpayment, any person may intervene and pay it supra protest for the honor of any person liable thereon or for the honor of the person for whose account it was drawn.
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Chapter VIII. Discharge

A. DEFINITION B. DISCHARGE OF THE INSTRUMENT 1. BY PAYMENT IN DUE COURSE 2. BY INTENTIONAL CANCELLATION 3. BY REACQUISITION OF PRINCIPAL DEBTOR IN HIS OWN RIGHT 4. BY RENUNCIATION OF HOLDER 5. BY MATERIAL ALTERATION 6. BY OTHER ACTS C. DISCHARGE OF SECONDARY PARTIES
a. payment in due course by or on behalf of principal debtor b. payment in due course by party accommodated where party is made/ accepted for accommodation 2. By intentional cancellation
Sec. 123. Cancellation; unintentional; burden of proof. A cancellation made unintentionally or under a mistake or without the authority of the holder, is inoperative but where an instrument or any signature thereon appears to have been cancelled, the burden of proof lies on the party who alleges that the cancellation was made unintentionally or under a mistake or without authority.
A. Definition
The release of all parties, whether primary or secondary, from the obligation on the instrument; renders the instrument nonnegotiable
B. Discharge of the Instrument

Sec. 119. Instrument; how discharged. A negotiable instrument is discharged: (a) By payment in due course by or on behalf of the principal debtor; (b) By payment in due course by the party accommodated, where the instrument is made or accepted for his accommodation; (c) By the intentional cancellation thereof by the holder; (d) By any other act which will discharge a simple contract for the payment of money; (e) When the principal debtor becomes the holder of the instrument at or after maturity in his own right.
3. By reacquisition of principal debtor in his own right Principal debtor becomes holder of instrument at or after maturity in his own right 4. By renunciation of holder
Sec. 122. Renunciation by holder The holder may expressly renounce his rights against any party to the instrument before, at, or after its maturity. An absolute and unconditional renunciation of his rights against the principal debtor made at or after the maturity of the instrument discharges the instrument. But a renunciation does not affect the rights of a holder in due course without notice. A renunciation must be in writing unless the instrument is delivered up to the person primarily liable thereon.
1. By payment in due course (Asked in 00)

Sec. 88. What constitutes payment in due course. Payment is made in due course when it is made at or after the maturity of the payment to the holder thereof in good faith and without notice that his title is defective.
If payment is made before maturity and the note is negotiated to a HDC, the latter may recover on the instrument. Payment to one of several payees or indorsees in the alternative discharges the instrument, but payment to one of several joint payees or joint indorsers is not a discharge. The party receiving payment must have been authorized by others to receive payment. By whom made:
5. By material alteration Material alteration w/o assent of all parties liable avoids instrument except as against party to alteration and subsequent indorsers (Sec. 124) 6. By other acts Any other act which discharges a simple contract for payment of money (Art. 1231 of the Civil Code), ex.. issuance of a renewal notenovation
C. Discharge of Secondary Parties

1. Grounds under Section 120
Sec. 120. When persons secondarily liable on the instrument are discharged. A person secondarily liable on the instrument is discharged: (a) By any act which discharges the instrument;
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(b) By the intentional cancellation of his signature by the holder; (c) By the discharge of a prior party; (d) By a valid tender or payment made by a prior party; (e) By a release of the principal debtor unless the holder's right of recourse against the party secondarily liable is expressly reserved; (f) By any agreement binding upon the holder to extend the time of payment or to postpone the holder's right to enforce the instrument unless made with the assent of the party secondarily liable or unless the right of recourse against such party is expressly reserved.
2. Other grounds: a. Failure to make due presentment (Secs. 70, 144) b. Failure to give notice of dishonor c. Certification of check at instance of holder d. Reacquisition by prior party e. Where instrument negotiated back to a prior party, such party may reissue and further negotiate, but not entitled to enforce payment vs. any intervening party to whom he was personally liable f. Where instrument is paid by party secondarily liable, its not discharged, but the party so paying it is remitted to his former rights as regard to all prior parties and he may strike out his own and all subsequent indorsements, and again negotiate instrument, except: where its payable to order of 3rd party and has been paid by drawer or where its made/accepted for accommodation and has been paid by party accommodated
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Chapter IX. Checks
Chapter IX. Checks

A. CERTIFICATION OF CHECKS B. CROSS CHECKS C. TYPES OF CHECKS Sec. 185. Check, defined. A check is a bill of exchange drawn on a bank payable on demand. Except as herein otherwise provided, the provisions of this Act applicable to a bill of exchange payable on demand apply to a check.
A. Certification of Checks
1. An agreement whereby the bank against whom a check is drawn, undertakes to pay it at any future time when presented for payment. 2. A check of itself does not operate as an assignment of any part of the funds to the credit of the drawer with the bank. The bank is not liable to the holder, unless and until it accepts or certifies the check. (Sec. 189) 3. A check must be presented for payment within reasonable time after its issue or the drawer will be discharged from liability thereon to the extent of the loss caused by the delay. (Sec. 186) 4. Effects a. Equivalent to acceptance (Sec. 187) and is the operative act that makes banks liable b. Assignment of the funds of the drawer in the hands of the drawee (Sec. 189) c. If obtained by the holder, discharges the persons secondarily liable thereon (Sec. 188) 5. Refusal of drawee bank to certify: The holder has no action against the bank but he has a right of action against the drawer. The drawer in turn has right of action against the bank based on the original contact of deposit between them.
institution, or only the words and company. Under usual practice, crossing a check is done by placing two parallel lines diagonally on the left top portion of the check (State Investment House vs. IAC, 1989). The crossing may be special wherein between the two parallel lines is written the name of a bank or a business institution, in which case the drawee should pay only with the intervention of that bank or company, or crossing may be general wherein between two parallel diagonal lines are written the words "and Co." or none at all as in the case at bar, in which case the drawee should not encash the same but merely accept the same for deposit (supra). 2. Effects: Bataan Cigar vs. CA (1994) a. That the check may not be encashed; it may only be deposited with the bank; b. That the check may be negotiated only once to a person who has an account with the bank; and c. That it serves as a warning to a holder that the check has been issued for a definite purpose.
C. Types of checks
1. Cashiers Check One drawn by the cashier of a bank, in the name of the bank against the bank itself payable to a third person. It is a primary obligation of the issuing bank and accepted in advance upon issuance (Tan vs. CA 1994). 2. Managers Check A check drawn by the manager of a bank in the name of the bank itself payable to a third person. It is similar to the cashiers check as to the effect and use. 3. Memorandum Check A check given by a borrower to a lender for the amount of a short loan, with the understanding that it is not to be presented at the bank, but will be redeemed by the maker himself when the loan falls due and which understanding is evidenced by writing the word memorandum, memo or mem on the check. 4. Certified Check An agreement whereby the bank against whom a check is drawn undertakes to pay it at any future time when presented for payment. (Sec. 187)
B. Crossed Check
(Asked in 91, 94, 95, 96, 04, 05)
1. Definition The NIL is silent with respect to crossed checks, although the Code of Commerce makes reference to such instruments. Article 541 of the Code of Commerce states: The maker or any legal holder of a check shall be entitled to indicate therein that it be paid to a certain banker or institution, which he shall do by writing across the face the name of said banker or
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Table of Contents
INSURANCE LAW
CHAPTER I. INTRODUCTION I. Definitions II. Applicable laws CHAPTER II. CONTRACT OF INSURANCE I. Elements II. Characteristics III. Kinds of Insurance Contracts IV. Perfection V. Premium Payments VI. Risks Insured Against VII.Construction CHAPTER III. PARTIES TO THE CONTRACT I. Insurer II. Insured III. Beneficiary IV. Other parties CHAPTER IV. INSURABLE INTEREST I. Insurable Interest II. Insurable Interest in Life III. Insurable Interest in Property IV. Transfer of Policy V. Transfer of Interest VI. Double Insurance, Over Insurance and Reinsurance VII. Multiple or Several Interest on the Same Property CHAPTER V. POLICY I. Insurance Contract vs. Insurance Policy II. Forms and Contents III. Rider and Endorsements IV. Cover Notes V. Life vs. Non-Life Insurance Policies VI. Open, Valued and Running Policies CHAPTER VI. RESCISSION OF INSURANCE CONTRACTS I. Concealment II. Misrepresentation III. Warranties IV. Conditions V. Right of rescission VI. Cancellation of non-life insurance policy VII. Incontestability Clause 202 202 202 203 203 203 204 204 205 206 206 207 207 207 208 210 212 212 212 213 214 214 215 216 217 217 217 217 217 218 218 219 219 220 221 222 222 222 223 CHAPTER VII. RISKS AND COVERAGES I. Risks in Life Insurance II. Risks in Fire Insurance III. Risks in Casualty or Accident Insurance IV. Risks in Compulsory Motor Vehicle Liability Insurance CHAPTER VIII. SPECIAL KINDS OF INSURANCE CONTRACTS I. Marine Insurance II. Fire insurance III. Casualty or accidental insurance IV. Motor Vehicle Compulsory Insurance CHAPTER IX. CLAIMS, SETTLEMENT, AND SUBROGATION I. Liability for Loss II. Requisites for Recovery from Insurance III. Notice and Proof of Loss IV. Claims Settlement V. Prescription of Action VI. Time of Payment VII. Subrogation VIII. Insurance Commission 224 224 224 224 225 226 226 231 232 233 234 234 234 234 235 236 236 236 237
INSURANCE LAW
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Insurance Law
FACULTY EDITOR
INSURANCE LAW
COMMERCIAL LAW Krizelle Marie Poblacion Maria Christina Ortua

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

INSURANCE LAW Francis Ray-an Baybay

LEAD WRITER
Jason Mendoza
DEPUTY HEAD
Rania Joya
Malds Menzon
LOGISTICS, HR
-------Kae Guerrero
Micha Arias Francesa Cordon Cha Mendoza Ludee Pulido

WRITERS
-------Leo Zulueta
I. DEFINITIONS A. CONTRACT OF INSURANCE B. DOING OR TRANSACTING INSURANCE BUSINESS II. APPLICABLE LAWS
or liability arising from an unknown or contingent event.

AN
I. Definitions A. Contract of Insurance

Insurance An agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event (Sec. 2, par.2) White Gold Marine Services vs. Pioneer (2005) An insurance contract is a contract of indemnity Wherein one undertakes for a consideration To indemnify another against loss, damage, or liability Arising from an unknown or contingent event. Regulation by the state through a license or certification of authority is necessary since a contract of insurance involves public interest.
Supplementary Rule Although the business is not formally designated as one of insurance and no profit is derived or no separate or direct consideration is received, It is deemed to be doing an insurance business, If it undertakes any of the following circumstances: 1. Making or proposing to make, as insurer, any insurance contract 2. Making or proposing to make, as surety, any contract of suretyship as a vocation not as a mere incident to any other legitimate business of a surety 3. Doing any insurance business, including a reinsurance business 4. Doing or proposing to do any business in substance equivalent to any of the above (Sec. 2, par. 4).
II. Applicable Laws

1. Insurance Code of 1978 (PD 1460, as amended) 2. Civil Code a. Article 739 and 2012 (void donations) b. Article 2011 (applicability of the Civil Code) c. Article 2021-2027 (life annuity contracts) d. Article 2186 (compulsory motor vehicle liability insurance) e. Article 2207 (right of subrogation). 3. Special Laws a. PD1146(Revised Government Service Insurance Act) b. RA 1161 (Social Security Act of 1954) c. RA 656 (Property Insurance Law)
B. Doing or Transacting Insurance Business
An
General Rule An insurance business consists in undertaking, for a consideration, to indemnify another against loss, damage
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Chapter II. Contract of Insurance

I. ELEMENTS A. INSURABLE INTEREST B. RISK OF LOSS C. ASSUMPTION OF RISK D. PAYMENT OF PREMIUM E. SCHEME TO DISTRIBUTE LOSSES II. CHARACTERISTICS A. CONTRACT OF ADHESION B. ALEATORY C. CONTRACT OF INDEMNITY D. RISK DISTRIBUTING DEVICE E. UBERRIMAE FIDES CONTRACT III. KINDS OF INSURANCE CONTRACTS A. LIFE INSURANCE B. NON-LIFE INSURANCE C. CONTRACTS OF BONDING OR SURETYSHIP IV. PERFECTION V. PREMIUM PAYMENTS A. PREMIUM B. VALIDITY OF CONTRACT UPON PAYMENT C. AUTHORITY TO RECEIVE PREMIUM D. EFFECT OF PAYMENT BY POST-DATED CHECK E. RETURN OF PREMIUMS F. PREMIUMS IN SURETYSHIP CONTRACTS VI. RISKS INSURED AGAINST VII. CONSTRUCTION
II. Characteristics
A. Contract of Adhesion (Fine Print Rule) The contract is presented to the insured already in its printed form by which he either takes it or leaves it. Ambiguity in the insurance contract shall be interpreted liberally in favor of the insured and strictly against the insurer. B. Aleatory The obligation of the insurer to pay depends on the happening of an event which is uncertain, or though certain is to occur at an indeterminate time (Art. 2010 CC). However, the insurance contract is in a sense commutative since the premium paid by the insured is deemed the equivalent of the protection given by the insurer (SUNDIANG AND AQUINO, Reviewer on Commercial Law). C. Contract of Indemnity The insured who has insurable interest over the property is only entitled to recover the amount of actual loss sustained And the burden is upon him to establish the amount of such loss. 1. Applies only to property insurance except when the creditor insures the life of his debtor. 2. Life insurance is not a contract of indemnity. 3. Insurance contracts are not wagering contracts (Sec. 4). D. A Risk Distributing Device By paying a pre-determined amount into a general fund out of which payment will be made for an economic loss of a defined type, Each member contributes to a small degree toward compensation for losses suffered by any member of the group. E. Uberrimae Fides Contract (Principle of Utmost Good Faith) Each party is required to disclose conditions affecting the risk of which he is aware, or material fact which the applicant knows and those which he ought to know. Violation of this duty gives the aggrieved party the right to rescind the contract.
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INSURANCE LAW
I. Elements (IRAPS)
A. Insurable Interest The interest of the insured in a thing or a life Capable of pecuniary estimation B. Risk of Loss The happening of designated events, Either unknown or contingent, Past or future, Will subject such interest to some kind of loss, Whether in the form of injury, damage, or liability C. Assumption of Risk The insurer promises to pay or indemnify such loss In a fixed or ascertainable amount D. Payment of Premium The premium is a ratable consideration Paid by the insured to a general insurance fund For the insurers assumption of risk E. Scheme to Distribute the Losses This assumption of risk is part of a general scheme to distribute the loss Among a large number of persons Exposed to similar risks.
III.Kinds of Insurance Contracts A. Life Insurance

1. Individual Life Insurance on human lives and insurance appertaining thereto or connected therewith (Sec. 179) 2. Group Life A blanket policy covering a number of individuals who are usually a cohesive group. The policy need not be in printed form and may be typewritten, but the law prescribes the contents of such policy (Secs. 50 and 228). 3. Industrial Life A form of life insurance under which a. The premiums are payable either monthly or oftener; b. Face amount of insurance provided in any policy is not more than 500 times that of the current statutory minimum daily wage in the City of Manila; and c. The words "industrial policy" are printed upon the policy (Sec. 229).
It shall be deemed to be an insurance contract if made by a surety who or which, as such, is doing an insurance business (Secs. 175 and 2, par.3).
INSURANCE LAW
IV. Perfection Insurance
of
Contract
of
The insurance contract is consensual and is therefore perfected the moment there is a meeting of minds with respect to the object and the cause or consideration. What is being followed in insurance contracts is what is known as the cognition theory.
Enriquez vs. Sun Life Assurance Co. of Canada (1920): Herrer applied for insurance and paid the premium, however, he died before he received the notice of acceptance on his application sent by Sun Life from its Montreal head office. Held: The insurance contract cannot be perfected without the notice of acceptance coming to the knowledge of the applicant. Under the CC, consent is shown concurrence of offer and acceptance. by the
B. Non-Life Insurance
Includes policies covering risks to which property may be exposed, as well as those which cover the risk of liability to third persons. It covers a specified period of time (not more than 1 year) and has a definite period of coverage.
An acceptance made by letter shall not bind the person making the offer except from the time it came to his knowledge, known as the cognition theory. Great Pacific Life Assurance Corp. vs. CA (1999): Note that in insurance contracts, the insured is the one making the offer by submitting an application to the insurer and the latter accepts the offer by approving the application. Thus, mere submission of the application without the corresponding approval of the policy does not result in the perfection of the contract of insurance.
1. Marine (Secs. 99166) 2. Fire (Secs. 167173) Insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies (Sec. 167). 3. Casualty / Liability (Sec. 174) Insurance covering loss or liability arising from accident or mishap, Not falling exclusively within the scope of other types of insurance.
C. Contracts of Bonding Suretyship (Secs. 175178)
or
NOTE: Offer when the insured submits an application to the insurer Acceptance when the insurer approves the application Effectivity upon payment of premium, provided there has been an approval of the application.
An agreement whereby a surety guarantees the performance by the obligor of an obligation or undertaking in favor of the obligee.
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V. Premium Payments
A. Premium the agreed price for assuming and carrying the risk, that is, the consideration paid an insurer for undertaking to indemnify the insured against the specified peril. B. Validity of Contract Upon Payment General Rule NO insurance policy issued or renewal is valid and binding until actual payment of the premium. Any agreement to the contrary is void (Sec. 77). Exceptions 1. In case of life and industrial life whenever the grace period provision applies (Sec. 77). 2. Where there is an acknowledgment in the contract or policy of insurance that the premium has already been paid (Sec. 78) 3. Where there is an agreement to grant the insured credit term for the payment of the premium despite full awareness of Sec. 77, 4. Where there is an agreement allowing the insured to pay premium in installment and partial payment has been made at the time of the loss (See Makati Tuscany vs. CA) 5. Where the parties are barred by estoppels (See UCPB vs, Masagana)
Makati Tuscany v CA (1992): The policies are valid even if the premiums due are paid in installments because the records clearly show that the two parties intended the policies to be binding and effective notwithstanding the staggered payment of the premiums. The acceptance of the installment payments over the period of 3 years speaks loudly of the intention of insurer to honor the policies it issued to Makati Tuscany. Sec 77 merely prohibits the parties from stipulating that the policy is valid even if premiums were not paid, but it does not expressly prohibit an agreement granting credit extensions. Sec. 78 also allows the insurer to waive the condition of full payment by acknowledging in the policy that there has been receipt of premium despite the fact that premium is actually unpaid. If the Code allows a waiver when no actual payment has been made, then a waiver should
also be allowed in this case where the insurer has already acknowledged receipt of partial payment.
INSURANCE LAW
UCPB Gen. Ins. v Masagana Telemart (1999): Sec 77 of the Insurance Code cannot be strictly applied. Exceptions to Sec 77 are: a.) In case of a life or industrial life policy whenever the grace period applies b.) Sec 78: An acknowledgment in a policy or contract of insurance of the receipt of premium is conclusive evidence of its payment, so far as to make the policy binding, notwithstanding any stipulation therein that it shall not be binding until premium is actually paid. c.) If the parties have agreed to the payment in installments of the premium and partial payment has been made at the time of the loss. d.) The insurer may grant credit extension for the payment of the premium e.) It would be unjust and inequitable if recovery on the policy would not be permitted against UCPB, which consistently granted the 60-90 day credit term for the payment of the premiums despite its full awareness of Sec. 77. Estoppel bars it from taking refuge under the action, since Masagana relied on good faith on such a practice.
C. Authority of agent to receive premium Where an insurer authorizes an insurance agent or broker to deliver a policy to the insured, it is deemed to have authorized said agent to receive the premium in its behalf. The insurer is also bound by its agents acknowledgment of receipt of payment of premium (American Home Assurance Co. vs. Chua, 1999). D. Effect of payment by postdated check The payment of premium by a postdated check at a stated maturity subsequent to the loss is insufficient to put the insurance into effect. Payment however by a check bearing a date prior to the loss, assuming availability of funds, would be sufficient even if it remains unencashed at the time of the loss. The subsequent effects of encashment would retroact to the date of the instrument and its
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acceptance by the creditor (VITUG, Pandect on Commercial Law). E. Return of Premiums 1. If the thing insured was never exposed to the risks insured against (Sec. 79) 2. Contract is voidable due to the fraud or misrepresentation of insurer 3. Insurer never incurred liability (Sec. 81) 4. When the insurance is for a definite period and the insured surrenders his policy before the terminations thereof 5. Contract is voidable because of the existence of facts of which the insured was ignorant without his fault 6. When there is over-insurance (Sec. 82) 7. When rescission is granted due to the insurers breach of contract F. Premiums in Suretyship Contracts Payment of premiums is also necessary to make suretyship contracts binding.
Philippine Pryce Assurance Corp. vs. CA (1994): Generally, premium is also necessary in order for the contract of suretyship or bond to be binding. However, where the obligee has accepted the bond, it is binding even if the premium has not been paid subject to the right of the insurer to recover the premium from its principal.
or ticket in a lottery drawing a price is NOT allowed (Sec.4). It may result in profit which is not true in insurance which only seek to indemnify against losses.
INSURANCE LAW
VII. Construction of Insurance

The ambiguous terms (and exceptions or conditions) are to be construed strictly against the insurer, and liberally in favor of the insured. However, if the terms are clear, there is no room for interpretation (Calanoc vs. Court of Appeals, 1955).
Qua Chee Gan vs. Law Union (1955): When the policy contains a condition which renders it voidable at its inception, and this result is known to the insurer, it will be presumed to have intended to waive the conditions and to execute a binding contract, rather than to have deceived the insured into thinking he is insured when in fact he is not, and to have taken his money without consideration. The insurance company insurance contract. is liable on the
Geagonia vs. CA (1995): It is a cardinal principle forfeitures are not favored
of
law
that
and that any construction which would result in the forfeiture of the policy benefits for the person claiming, will be avoided, if it is possible to construe the policy in a manner which would permit recovery, as, for example, by finding a waiver for such forfeiture. Provisions, conditions or exceptions in policies which tend to work a forfeiture of insurance policies should be construed most strictly against those for whose benefits they are inserted, and most favorably toward those against whom they are intended to operate. Gulf Resorts vs Philippine Charter Insurance Corporation (2005): When there is an apparent change of the wording of an insurance contract but no corresponding change in the amount of premium paid, it will be interpreted to mean that there was NO intended change at all. An assumption of additional risk is presumed to cause a commensurate additional premium because the premium, not the mere wording of the policy, is a more accurate indication of such an assumption of additional risk.
VI. Risks Insured Against (Secs 3-5)

Any contingent or unknown event, whether past or future, Which may damnify a person having an insurable interest or creates a liability against him (Sec.3).
General Rule A future event is the only event that can be covered by an insurance contract. Exception A past event may be covered by a marine insurance if the loss of the vessel in the past could not have been known by ordinary means of communication (SUNDIANG AND AQUINO). NOTE: Insurance for or against the drawing of any lottery, or for or against any chance
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Chapter III. Parties to the Contract

I. INSURER A. GENERAL CONSIDERATIONS B. INSURANCE CORPORATIONS C. DOMESTIC VS. FOREIGN INSURANCE CORPORATIONS II. INSURED A. WHO MAY BE INSURED B. RIGHTS OF INSURED OVER LIFE INSURANCE POLICY III. BENEFICIARY A. GENERAL CONSIDERATIONS B. KINDS OF BENEFICIARY C. PERSONS WHO CANNOT BE NAMED BENEFICIARY D. RULES IN DESIGNATION OF BENEFICIARY E. RIGHT TO CHANGE BENEFICIARY F. RECOVERY OF PROCEEDS IV. OTHER PARTIES A. ASSIGNEE B. AGENT/TRUSTEE C. PARTNER/CO-OWNER D. MORTGAGOR/MORTGAGEE Sec. 51. The policy must specify the parties between whom the contract is made.
Or to guarantee the performance of or compliance with contractual obligations or the payment of debts of others: 1. Are regulated by the State 2. Must have a certificate of authority to operate issued by the Insurance Commissioner (Sec. 187). 3. Must possess sufficient capital and assets (Sec. 186).
INSURANCE LAW
C. Domestic vs. Foreign Corporations (Sec. 184)

Domestic Insurance Corporation Domestic company shall include companies formed, organized or existing under the laws of the Philippines.
Insurance
Foreign Insurance Corporation Foreign company when used without limitation shall include companies formed, organized, or existing under any laws other than those in the Philippines.
I. Insurer A. General Considerations

Insurer Party who assumes or accepts the risk of loss and undertakes for a consideration to indemnify the insured or to pay him a certain sum on the happening of a specified contingency or event (Sec. 184) Who May Be Insurers? Individuals, partnerships, associations, or corporation or even GOCCs, who are duly authorized by the Insurance Commission to engage in insurance business (Sec. 6, 184 - 187) Who May Not Be Insurers? Banking institutions are not allowed to engage in insurance business (General Banking Act 173)
Requirements for Foreign Insurance Corporations 1. Appointment of a resident of the Philippines as a general agent on whom any notice or proof of loss may be served and on whom summons and other processes may be served. 2. Must possess paid-up unimpaired assets or capital and reserve not less than that required of domestic corporations. 3. Must deposit for the benefit and security of policy holders, securities satisfactory to the Commission. 4. Its investments should not exceed 20% of the net worth of foreign corporation or 20% of the capital of the registered enterprise.
II. Insured
Party in whose favor the contract is operative and who is indemnified against loss, or is to receive a certain sum upon the happening of a specified contingency or event; BUT the proceeds need not go to him but to a designated beneficiary or someone to whom the insured assigns the proceeds to.
B. Insurance Corporations (Sec. 185)

Corporations formed or organized to save any person or persons or other corporations harmless from loss, damage, or liability Arising from any unknown or future or contingent event, Or to indemnify or to compensate any person or persons or other corporations for any such loss, damage, or liability,
A. Who may be insured

(Asked in 2002) Anyone, with capacity to enter into a contract, with an insurable interest and must not be a public enemy (Sec. 7). NOTE: 1. Public Enemy
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A citizen or subject of a nation at war with the Philippines and does not include robbers, thieves, and criminals. A private corporation, if controlled by enemy aliens regardless of place of incorporation may be an enemy corporation.
Proceeds of a life insurance policy become the exclusive property of the beneficiary upon death of the insured.
INSURANCE LAW
B. Kinds of Beneficiary
1. Insured himself One who bought the policy and paid the premiums; An immediate party to the contract usually called the assured (creditor insures debtors life). 2. Third person who paid a consideration When the insured took up the policy for the benefit of the creditor or to secure some other obligation; Beneficiary is not a party to the contract. 3. Third person through mere bounty of insured When no consideration is paid yet the third party to the contract or the estate of the insured is made beneficiary
Filipinas Cia de Seguros v. Christen Huenefeld and Co. (1951): Property insurance entered into before the war automatically loses its binding effect the moment the insurer becomes a public enemy.
2. Minor (Sec. 3 par.3) The exception allowing a minor to enter into an insurance contract is no longer controlling since under RA 6809 a person is of legal age at 18 years and may enter into any kind of insurance contract. 3. Insurance by a married woman A married woman may take out an insurance on her life or that of her children without the consent of her husband (Sec.3 par.2), or that of her husband, having an insurable interest in the latter (Sec.10)
C. Persons who CANNOT be named Beneficiary

Any person who is forbidden from receiving any donation under Art. 739 (NCC) cannot be named beneficiary of a life insurance policy By the person who cannot make any donation to him (Art. 2012 CC), to wit: 1. Those who are guilty of adultery or concubinage with the insured at the time of designation; 2. Those who were found guilty with the insured of the same criminal offense committed in consideration of the designation; criminal conviction necessary 3. A public officer or his wife, descendants and ascendants designated by reason of his office (Art. 739, CC) NOTE: Only the designation of said persons is void but the policy remains binding, proceeds will inure to the estate of the insured.
B. Rights of Insured insurance policy
over
life
1. Right to assign/change beneficiary (Sec. 11 and 56) 2. Right to borrow 3. Right to dividends
III.Beneficiary
(Asked in 97,98,01,05)
A. General Considerations
1. Person designated to receive the benefits or the proceeds of the policy when risk attaches. 2. Cestui que vie Person on whose life the insurance is written; must be a risk acceptable to the insurer.
Illustration. A husband takes out a policy on his wifes life, proceeds payable to their son. Husband insured, wife cestui que vie, and son beneficiary.
D. Rules in Designation of Beneficiary

1. When one insures his own life, he may designate any person as the beneficiary, whether or not the beneficiary has an insurable interest in the life of the insured, provided that he is not disqualified by law (ie public enemy, and persons in Art. 793)
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2. If a person will insure the life of another payable to himself as beneficiary, he must have an insurable interest on that others life (Sec.10) 3. In property insurance, the beneficiary must have an insurable interest in such property, which must exist not only at the time the policy takes effect but also when the loss occurs (Secs. 13 & 18) 4. The designation is revocable unless the right to revoke is expressly waived in the policy (Sec.11) 5. If the insured or beneficiary is a minor, and the amount involved does not exceed P50,000.00, the father, in the absence or incapacity, the mother may exercise the minors rights under the policy, without the need of a court authority or bond.
d. Insured cannot destroy the policy because the beneficiary may continue the policy by himself paying the premiums due. (Art. 1236 CC) e. Insured cannot take the cash surrender value of the policy f. Insured cannot allow his creditors to attach or execute on the policy g. Insured cannot change the irrevocable designation to revocable 3. When the beneficiary dies before the insured: a. If such beneficiary is irrevocable, and hence has a vested interest in the policy, his/her legal representatives or his/her estate are entitled to the proceeds of the insurance, unless the proceeds were made payable to the beneficiary only if living. b. If the beneficiary is revocable, and therefore has no vested interest in the policy at the time of his death, his estate or legal representatives derive no interest from or through him, but the proceeds passes to the estate of the insured. c. In case of an insurance policy taken out by an original owner on the life or health of a minor, all rights, title and interest in the policy shall automatically vest in the minor upon the death of the original owner, unless otherwise provided for in the policy (Sec.3, par.5). NOTE The interest of a beneficiary in a life insurance policy shall be forfeited when the beneficiary is the principal accomplice or accessory in willfully bringing about the death of the insured in which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. (Sec. 12) The right to receive the proceeds of life insurance policies shall follow the order of intestate succession in the Civil Code in default of any specific designation in the policy.
INSURANCE LAW
E. Right to Change Beneficiary

1. General Rule a. The insured shall have the personal right to change the designated beneficiary without the consent of the latter. b. Beneficiary acquires no vested right but only an expectancy of receiving proceeds under the insurance. c. Such right cannot be exercised by the representatives or assignees of the insured upon his death. Exception If right to change the beneficiary is EXPRESSLY WAIVED in the policy. Exception to the Exception EVEN if the designation of beneficiary is irrevocable, under Articles 43, 40, 50 and 64 of the Family Code, the innocent spouse may revoke such designation of the other spouse who acted in bad faith. 2. Effects of Irrevocable Designation of Beneficiary: (B-ADATAC) a. Beneficiary acquires an absolute vested interest to all benefits under the policy. b. Insured cannot add a new beneficiary because such would diminish the benefits expected by the original beneficiary. c. Insured cannot assign the policy because such would be tantamount to an implied waiver of the right to revoke.
F. Recovery of the Proceeds

(Asked in 90) General Rule Only the person designated in the policy as the insured or the beneficiary shall
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be entitled to recover the proceeds of the policy. Exceptions 1. A third person may recover from the policy as against the insured if there has been a prior contract of express or implied trust between the insured and the third person. 2. A third person may recover from the policy as against the insurer only if such person has been specifically given the right of recovery in the insurance policy.
Vda. de Consuegra vs. GSIS (1971): Life Insurance and retirement insurance are separate and distinct funds. Life Insurance is paid to whoever is named the beneficiary and may not necessarily be the heir of the insured. Retirement benefits on the other hand, are primarily intended for the benefit of the employee to provide for his old age, incapacity, etc. If the employee reaches the age of retirement, he gets the benefits even to the exclusion of the beneficiary named in the policy. The beneficiary of the retirement insurance can only claim such proceeds if the employee dies before retirement. If there is no beneficiary designated in the policy, benefits will accrue to the estate, hence Diaz is also entitled to the retirement benefits.
A change of interest in one or more of several things, separately insured by one policy (Sec. 22); d. A change of interest by will or succession on the death of the insured (Sec. 23); e. A transfer of interest by one of several persons, joint owners or owners in common, jointly insured, to the others (Sec.24); f. When a policy will inure to the benefit of the one who may become the new owner of the interest insured during the continuance of the risk (Sec. 57); and g. When there is an express prohibition against alienation in the policy, in which case alienation will cause the contract to be avoided, not suspended (Art. 1306, Sec. 24, CC) c. 2. Agent or trustee If an agent or trustee takes out an insurance policy for the benefit of his principal or beneficiary, he shall state that the latter is the real party in interest by designating himself as an agent or trustee in the insurance policy itself. He can also signify his designation by some other general words in the policy.
Valenzuela vs. CA (1990): The general rule that the principal reserves the right to terminate the agent-principal relationship at its will admits of an exception: when the agency has been given not only for the interests of the principal but of 3rd persons or for the mutual interest of agent and principal. Also, an insurance agent cant be held liable for all uncollected premiums under his account because the remedy for non-payment of premiums is the termination of any insurance policy.
INSURANCE LAW
IV. Other Parties A. Assignee

1. General Rule If the thing insured is assigned to another, the policy is deemed suspended until the assignee also becomes the owner of the policy. The assignor cannot recover on the policy after the transfer since he has already lost insurable interest over the thing. Exceptions The general rule on suspension of policy is not applicable in the following cases: a. In life, health and accident insurance (Sec. 20) b. A change of interest in the thing insured after an injury occurs resulting in a loss (Sec. 21);
3. Partner or Co-owner Insurable interest in the property of a partnership exists in both the partnership and the partners and a partner has an insurable interest in the firm property which will support the policy taken out thereon for his own benefit. But a partner who takes out the policy in his own name limits the coverage to his individual share unless the terms clearly show the policy was meant to cover all the shares.
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4. Mortgagor/Mortgagee General Rule When a mortgagor takes out an insurance policy on his own name but stipulates that the proceeds shall be payable to the mortgagee, or assigns the said policy to the mortgagee, the insurance shall be deemed to be upon the insurable interest of the mortgagor. Rules Applicable a. Any act of the mortgagor prior to the loss, which would otherwise avoid the insurance, shall have the same effect even if the property insured is in the hands of the mortgagee. b. Any act which would have to be performed by the mortgagor may be performed by the mortgagee, with the same effect as if it were performed by the former. c. If an insurer assents to the transfer of an insurance from a mortgagor to a mortgagee, and, at the time of his assent, imposes further obligation on the assignee, making a new contract with him, the act of the mortgagor cannot affect the rights of said assignee. Supplementary Rules a. On the insurable interest of mortgagor and mortgagee: Separate insurable interests each has his own insurable interest in the mortgaged property which is kept separate from each other. The benefits of such belong to the insured alone and if the two insure the same property or take out a policy covering their respective interests, this is not double insurance. Extent of insurable interest of mortgagor The owner-mortgagor has an interest to the extent of the propertys value even if the mortgage debt equals it since the loss or destruction of the insured property will not extinguish his debt. Extent of insurable interest of mortgagee He or his assignee has an interest to the extent of the debt secured, the property used as security. His interest is prima facie the value mortgaged, only as to the amount owed, not exceeding the value of the property. Extent of amount of recovery Mortgagor - only up to full amount of loss
Mortgagee - up to the amount of credit at the time of the loss or the value of the property
INSURANCE LAW
b. Insurance by mortgagee of his own interest Right in case of loss the mortgagee is entitled to proceeds if loss happens before payment of mortgage. Subrogation of insurer to the right of the mortgagee mortgagees claim passes by subrogation to the insurer to the extent of the insurance money paid. Change of creditor - Payment by the insurer to the mortgagee due to loss does not extinguish the principal obligation but only changes the creditor. The mortgagee CANNOT claim both the insurance and the debt. c. Insurance taken out by mortgagor for his own benefit as owner proceeds wont go to the mortgagee who has no greater right than unsecured creditors. d. Insurance taken out by mortgagor for the mortgagees benefit loss is payable to the mortgagee (usual practice), to the extent of the credit. Upon payment of the proceeds to the extent of the credit, the debt is extinguished. The mortgagee can be made the beneficial payee by: Becoming the assignee of the policy with insurers consent; Becoming the mere pledge without such consent; A rider (Sec. 50), making the policy payable to the Mortgagee as his interest may appear, may be attached; A standard mortgage clause containing a collateral independent contract between the two parties may be attached; or The policy, though by its terms payable to the mortgagor, may have been procured by a mortgagor under a contract duty to insure for the mortgagees benefit, where the latter acquires an equitable line upon the proceeds.
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Chapter IV. Insurable Interest

(Asked in 91,94,97,99,00,02)
I. II. INSURABLE INTEREST INSURABLE INTEREST IN LIFE A. WHO HAS INSURABLE INTEREST OVER WHOSE LIFE B. TIME OF EXISTENCE OF INSURABLE INTEREST III. INSURABLE INTEREST IN PROPERTY A. FORMS OF INSURABLE INTEREST B. NATURE OF INSURABLE INTEREST C. INSURABLE INTEREST OF SPECIFIC PERSONS D. MEASURE OF INSURABLE INTEREST IN PROPERTY E. TIME OF EXISTENCE F. DISTINCTIONS BETWEEN INSURABLE INTEREST IN PROPERTY AND INSURABLE INTEREST IN PROPERTY IV. TRANSFER OF POLICY A. LIFE INSURANCE B. PROPERTY INSURANCE C. CASUALTY INSURANCE V. TRANSFER OF INTEREST VI. DOUBLE INSURANCE, OVER INSURANCE AND REINSURANCE VII. MULTIPLE OR SEVERAL INTEREST ON THE SAME PROPERTY A. OPEN MORTGAGE OR LOSS PAYABLE MORTGAGE CLAUSE B. UNION MORTGAGE OR STANDARD MORTGAGE CLAUSE C. CONTRACTS OF BONDING OR SURETYSHIP
II. Insurable Interest in Life A. Who has insurable interest over whose life?
Sec. 10 Every person has an insurable interest in the life and health: (a) Of himself, of his spouse and of his children; (b) Of any person on whom he depends wholly or in part for education or support, or in whom he has a pecuniary interest; (c) Of any person under a legal obligation to him for the payment of money, or respecting property or services, of which death or illness might delay or prevent the performance; and (d) Of any person upon whose life any estate or interest vested in him depends.
INSURANCE LAW
I. Insurable Interest
Interest which the law requires policy owner to have in the person or thing insured, the absence of which renders the contract void. A person is said to have an insurable interest in the subject matter insured where he has a relation or connection with, or concern in it that he will derive pecuniary benefit or advantage from its preservation and will suffer pecuniary loss or damage from its destruction, termination, or injury by the happening of the event insured against. Rationale for requiring it: 1. To avoid constituting insurance as a wagering contract, because the insured has an interest in the preservation or protection of the subject of the insured. 2. To avoid a moral hazard, wherein the insured will have nothing to lose but everything to gain with the happening of the event insured against. 3. Limits the amount that can be recovered in indemnity insurance.
1. Interest in ones own life Each has unlimited interest in his own life, whether the insurance is for the benefit of himself or another. the beneficiary designated need NOT have any interest in the life of the insured. 2. Interest in life of another a. General Rule The insured must have pecuniary interest in the life of another. Such interest exists whenever the insured has a responsible expectation of deriving benefit from the continuation of the life of the other person or of suffering detriment through its termination. Exception In par. (a) (spouse and children), mere relationship is sufficient. b. CREDITOR may take out insurance on the life of his debtor. BUT his insurable interest is only up to the amount of the debt. c. When the OWNER of the policy insures the life of another (CESTUI QUE VIE) and designates a third party as BENEFICIARY, BOTH the owner and beneficiary must have an insurable interest in the life of the cestui que vie. d. ASSIGNEE is not required to have insurable interest in the life of the insured, for to require such interest in him is to diminish the investment value of the contract to the owner. Note however that assignment is different from a change in the designated beneficiary.
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e. When the beneficiary is the PRINCIPAL, ACCOMPLICE, or ACCESSORY in willfully bringing about the death of the insured = Interest of beneficiary in life insurance policy is FORFEITED (Sec. 12).
B. Nature of Insurable Interest

1. EXISTING interest May arise from legal title (Ex: interest of a mortgagor, lessor, assignee) May also arise from equitable title (Ex: purchaser of property before delivery, builder of a building under construction) 2. INCHOATE interest founded on an existing interest Must be founded on an existing contract but not yet clearly defined or identified. (Ex: stockholders inchoate interest in the properties of the corporation, such interest being based on his owned shares) 3. EXPECTANCY, coupled with an existing interest in that out of which the expectancy arises (Ex: farmers interest over his future crops grown on land owned by him at the time of the issuance of the policy)
INSURANCE LAW
B. Time of existence of insurable interest

General Rule Insurable interest is needed only at inception (Sec. 19). Exceptions 1. Creditors insurance taken on the life of the debtor Insurable interest disappears, once the debt has been paid. At this point, the creditor/insured can no longer recover on the policy. 2. Companys insurance taken on the life of an employee - insurable interest disappears once the employee leaves the company, in which case, the company can no longer recover on the policy.
III.Insurable Interest in Property

Sec. 13. Every interest in property, whether real or personal, or any relation thereto, or liability in respect thereof, of such nature that a contemplated peril might directly damnify the insured, is an insurable interest.
C. Insurable Persons
Interest
of
Specific
A. Forms of Insurable Interest

1. INTEREST in the property itself Ex: Ownership of or a lien on property. 2. RELATION to such property Ex: Interest of a commission agent on goods he is selling. 3. LIABILITY in respect thereof Ex: Interest of carrier on cargo which he has to carry safely to its destination, such interest being limited to the extent of his liability.
Sec. 14 An insurable interest in propery may consist in: (a) An existing interest; (b) An inchoate interest founded on an existing interest; or (c) An expectancy, coupled with an existing interest in that out of which the expectancy arises. Sec. 16 A mere contingent or expectant interest in anything, not founded on an actual right to the thing, nor upon any valid contract for it, is not insurable.
1. Stockholder/partner in a firm has inchoate right to dividends in case firm earns profits and to share in the assets after payment of corporate debts upon a firm's liquidation. 2. General Creditor does not have insurable interest in a debtor's property. 3. Judgment Creditor - has insurable interest in debtors property because he's given a right to levy (general lien). 4. Mortgage Creditor - has insurable interest (lien) which is recognized by Insurance Code (Sec. 8).
D. Measure of insurable interest in property

Sec. 15. A carrier or depository of any kind has an insurable interest in a thing held by him as such, to the extent of his liability but not to exceed the value thereof.
E. Time of existence
Sec. 19. An interest in property insured must exist when the insurance takes effect, and when the loss occurs, but need not exist in the meantime; and interest in the life or health of a person insured must exist when the insurance takes effect, but need not exist thereafter or when the loss occurs.
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General Rule Interest must exist BOTH at inception and at time of loss, but not in the meantime. Exceptions 1. A change in interest over the thing insured AFTER the loss contemplated. The insured may sell the remains without prejudice to his right to recover. 2. A change of interest in one or more several distinct things, separately insured by one policy. This does not avoid the insurance as to the others 3. A change in interest by will or success upon the death of the insured 4. A transfer of interest by one of several partners, joint owners, or owners in common who are jointly insured. The acquiring co-owner has the same interest; his interest merely increases upon acquiring other co-owners interest.
IV. Transfer of Policy

(Asked in 91) A. Life Insurance Interest can be transferred even without the insurers consent, unless there is a stipulation to the contrary (Sec. 181). B. Property Insurance Interest cannot be transferred without the insurers consent, because the insurer has approved the policy based on the personal qualifications and insurable interest of the insured C. Casualty Insurance Interest cannot be transferred without the insurer's consent, because the moral hazards present are as great as those in property insurance.
INSURANCE LAW
F. Distinctions between Insurable Interest in Property and Insurable Interest in Life

Insurable Interest in Property Limited to actual value of the interest thereon Must exist when the insurance takes effect and when the loss occurs, BUT need not exist in the meantime Must have legal basis Must have insurable interest over the thing insured Insurable Interest in Life Unlimited (save in life insurance effected by a creditor on the life of the debtor) Must exist at the time of the loss
V. Transfer of Interest
General Rule The mere transfer of a thing insured does not transfer the policy, but suspends it until the same person becomes the owner of both the policy and the thing insured (Sec. 58). The insurance proceeds shall be applied exclusively to the proper interest of the person in whose name or for whose benefit it is made unless otherwise specified in the policy (Sec. 53).
Extent
Time when Insurable Interest Must Exist
Expectation of Benefit to Be Derived Beneficiarys Interest
Need NOT legal basis
have
Need not have insurable interest over the life of the insured if the insured himself secured the policy. But if the insurance was obtained by the beneficiary, the latter must have insurable interest over the life of the insured. (SUNDIANG)
Exceptions 1. Life, health and accident insurance (Sec. 20) 2. A change in interest in a thing insured, after the occurrence of an injury, which results in a loss (Sec. 21) 3. A change in interest in one or more of several distinct things, separately insured by one policy (Sec. 22). 4. A change in interest, by will or succession, on the death of the insured (Sec. 23). 5. Transfer of interest by one of several partners, joint owners, or owners in common, who are jointly insured, to the others (Sec. 24). 6. When a policy is so framed that it will inure to the benefit of whomsoever, during the continuance of the risk, may become the owner of the interest insured (Sec. 57).
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7. When there is an express prohibition against alienation in the policy, in which case, the insurance contract is avoided (Art. 1306, NCC) NOTE: When there is an express prohibition against alienation in the policy, in case of alienation, the contract of insurance is not merely suspended but avoided.
any other insurance covering the property insured 5. Double Insurance vs. Over-Insurance
Double insurance Amount of the insurance is beyond the value of the insureds insurable interest Over-insurance There may be no overinsurance as when the sum total of the amounts of the policies issued does not exceed the insurable interest of the insured.
INSURANCE LAW
VI. Double Insurance, Insurance, Reinsurance A. Over-Insurance

(Asked in 08)
Over
There may be only one insurer involved There are always several insurers
This happens when the amount of the insurance policy or policies exceed the value of the insurable interest. 1. In case of loss, the insurer is bound to pay only up to the extent of the real value of the property lost. BUT, the insured may recover the amount of the premium corresponding to the excess in value of the property. 2. The insured may claim payment from the insurers in such order as he may select, up to the amount for which the insurers are severally liable under their respective contracts.
C. Reinsurance
A contract by which an insurer procures a third person to insure him against loss or liability by reason of such original insurance (Sec. 95); the original insurance contract is separate and distinct from the reinsurance contract.
1. Reinsurance treaty An agreement between two insurance companies whereby one agrees to cede and the other to accept reinsurance business pursuant to provisions specified in the treaty (DE LEON). 2. Double Insurance (Asked in 94)
Double Insurance Same interest Insurer remains as the insurer. Insured is a party in interest in the insurance contracts. Property is the subject matter Insured has to give his consent.
B. Double Insurance
(Asked in 93,99,05) 1. It exists where the same person is insured by several insurers separately in respect to the same subject and interest (Sec. 93) 2. Requisites a. same person insured b. two or more insurers separately insuring c. same subject matter d. same interest insured e. same risk or peril insured against 3. The insured CANNOT recover above the value of property, for otherwise, the insurance would constitute wagering. 4. It is not prohibited by law but it may be prohibited by an other insurance clause. Additional or other insurance clause A condition in the policy requiring the insured to inform the insurer of
vs.
Reinsurance
Reinsurance Different interest Insurer becomes the insured in relation to the reinsurer. The original insured is not a party in the reinsurance contract. The original insurer's risk is the subject matter. Insureds consent is not necessary.
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VII. Multiple or Several Interest on the Same Property (Secs. 8 9) A. Open mortgage or loss payable mortgage clause
A mortgage that can be paid-off prior to maturity without penalty; mortgagee is the beneficiary for insurance taken by mortgagor.
INSURANCE LAW
1. The insurance is on the interest of the mortgagor; so, he does not cease to be a party to the contract. His acts, prior to the loss, which would otherwise avoid the insurance, affects the mortgagee, even if the property is in the hands of the latter. (Secs. 8 & 9) 2. In case of loss, the mortgagee is entitled to recover up to the extent of his credit, and should the amount he recovers be equal to the amount of his credit, then the debt is extinguished.
B. Union mortgage mortgage clause
or
standard
1. Mortgagee may perform the acts of mortgagor. 2. Subsequent acts of the mortgagor or owner do NOT prejudice the mortgagee's interest is protected. 3. When a mortgagee insured his own interest and a loss occurs, he is entitled to recover on the insurance. However, he may no longer claim against the mortgagor, for his claim is discharged up to the amount the insurer has paid him (Palileo vs. Cosio, 1955).
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Chapter V. Policy
Chapter V. Policy
I. II. III. IV. V. VI. INSURANCE CONTRACT VS. INSURANCE POLICY FORMS AND CONTENTS RIDER AND ENDORSEMENTS COVER NOTES LIFE VS. NON-LIFE INSURANCE POLICIES OPEN, VALUED AND RUNNING POLICIES
III.Rider and Endorsements

Endorsements: any provision added to the contract altering its scope or application (DE LEON, The Insurance Code of the Philippines Annotated). Clauses: an agreement between the insurer and the insured on certain matters relating to the liability of the insurer in case of loss (DE LEON). Warranty: inserted or attached to a policy to eliminate specific potential increases of hazard during the policy term owing to: 1) actions of the insured or 2) condition of the property Riders Printed stipulations usually attached to the policy because they constitute additional stipulations between the parties. (Ang Giok Chip vs. Springfield, 1931). It must be attached to the policy in order to be binding In case of conflict between a rider and the printed stipulations in the policy, the rider prevails, as being a more deliberate expression of the agreement of the contracting parties (ALVENDIA, The Law of Insurance in the Philippines).
INSURANCE LAW
I. Insurance Contract vs. Insurance Policy

An insurance policy is different from the contract itself. Contract of insurance: an agreement whereby one undertakes for a consideration to indemnify another against loss, damage or liability arising from an unknown or contingent event (Sec. 2 (1)). Policy of insurance: the written instrument in which a contract of insurance is set forth (Sec. 49) An insurance policy is NOT essential to the validity of an insurance contract, for so long as all the essential elements for the existence of a valid contract (consent, object, consideration and competent parties) are present.
II. Forms and Contents

Policy shall be in printed form which may contain blank spaces (Sec. 50). Express warranties must also be contained in the policy, or in another instrument signed by the insured and referred to in the policy as making a part of it. The insurance policy must AT LEAST contain the following (Sec. 51) PARPIRD: Parties Amount of insurance, except in open or running policies Rate of premium Property or life insured Interest of the insured in the property if he is not the absolute owner Risk insured against; and Duration of the insurance.
IV. Cover Notes

Definition: A concise and temporary written contract issued to the insurer through its duly authorized agent embodying the principal terms of an expected policy of insurance. Applicable Rules: It is intended to give temporary insurance protection coverage to the applicant pending the acceptance or rejection of his application, or until the issuance of a formal policy, provided that it is later determined that the applicant was insurable at the time it was issued. (Sec. 52) It is a binding contract and has full force and effect during its duration, provided it is in the Code's previously prescribed form. It is good only for 60 days, unless a longer period is approved by the Insurance Commissioner. (Sec. 52) It may be cancelled by either party ONLY after at least 7-days notice to the other party.
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Chapter V. Policy
If it is not cancelled, a policy shall be issued within 60 days after the issuance of the cover note. The written approval of the Insurance Commissioner for the extension or renewal of the cover note may be dispensed with upon showing that the risks involved, the values of such risks and/or premiums therefor have not as yet been determined or established and that such extension or renewal is not contrary to and is not for the purpose of violating any provisions of the Insurance Code, or of any of the rulings, instructions, circulars, orders or decisions of the Insurance Commissioner. Insurance companies may impose, on the cover notes, a deposit premium equivalent to at least 25% of the estimated premium of the intended insurance coverage but never less than 500 pesos.
Insurer only pays the actual cash value of the property as determined at the time of loss.
INSURANCE LAW
B. Valued Policy
Sec. 61. A valued policy is one which expresses on its face an agreement that the thing insured shall be valued at a specific sum.
One in which the parties expressly agree on the value of the subject matter of the insurance. Two values: Face value of the policy which is the maximum amount insurer pays in case of loss Value of the thing insured In the absence of fraud or mistake, the agreed value of the thing insured will be paid in case of total loss of the property, unless the insurance is for a lower amount
Binding receipt: a mere acknowledgment on behalf of the company that its branch office had received from the applicant the insurance premium and had accepted the application subject to processing by the head office
C. Running Policy
Sec. 62. A running policy is one which contemplates successive insurances, and which provides that the object of the policy may be from time to time defined, especially as to the subjects of insurance, by additional statements or indorsements.
V. Life Insurance Policies vs. NonLife Insurance Policies

In a life insurance policy, the liability of the insurer is measured by the face value of the policy (because the value of a human life cannot be measured in actual monetary terms). Non-life insurance policies may be open, valued or running (Sec. 59).
Intended to provide indemnity for property which cannot well be covered by a valued policy because of its frequent change of location and quantity, or for property of such a nature as not to admit of a gross valuation. Contemplates successive insurances.
VI. Open, Valued Policies
and
Running
A. Open or Unvalued Policy

Sec. 60. An open policy is one in which the value of the thing insured is not agreed upon, but is left to be ascertained in case of loss.
One in which a certain agreed sum is written on the face of the policy not as the value of the property insured, but as the maximum limit of the insurers liability (i.e. face value) in case of destruction by the peril insured against.
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Chapter VI. Rescission of Insurance Contracts

I. CONCEALMENT A. DEFINITION B. REQUISITES C. EFFECTS OF CONCEALMENT D. TEST OF MATERIALITY E. CAUSE OF LOSS F. MATTERS WHICH NEED TO BE DISCLOSED G. MATTERS WHICH NEED NOT BE DISCLOSED II. MISREPRESENTATION A. REPRESENTATIONS B. KINDS OF REPRESENTATIONS C. REQUISITES OF FALSE REPRESENTATION D. EFFECT OF MISREPRESENTATION E. REPRESENTATION OF OPINION F. CONCEALMENT VS. MISREPRESENTATION III. WARRANTIES A. DEFINITION B. PURPOSE C. KINDS OF WARRANTIES D. EFFECT OF BREACH OF WARRANTY E. IMMATERIAL PROVISIONS F. WARRANTY VS. REPRESNTATIOM IV. CONDITIONS A. DEFINITION B. KINDS C. WARRANTIES VS. CONDITIONS V. RIGHT OF RESCISSION A. GROUNDS B. WAIVER OF RIGHT TO RESCIND C. LIMITATIONS TO THE RIGHT OF THE INSURER TO RESCIND VI. CANCELLATION OF NON-LIFE INSURANCE POLICY A. GROUNDS B. REQUIREMENTS VII. INCONTESTABILITY CLAUSE A. DEFINITION B. REQUISITES C. DEFENSES
4. The other party has not the means of ascertaining the fact concealed. 5. The fact concealed is material.
INSURANCE LAW
C. Effects of Concealment
It vitiates the contract and entitles the insurer to rescind, even if the death or loss is due to a cause not related to the concealed matter (Sec. 27). NOTE: Good Faith is NOT a defense in concealment. Sec. 27 clearly provides that, the concealment whether intentional or unintentional entitles the injured party to rescind the contract of insurance.
D. Test of Materiality
General Rule Determined not by the event, but solely by the probable and reasonable influence of the facts upon the party to whom the communication is due, in forming his estimate of the advantages of the proposed contract, or in making his inquiries (Sec. 31). Exceptions 1. Incontestability clause 2. Matters under Sec.110 insurance)
(marine
I. Concealment
(Asked in 96, 97, 01)
A. Definition
Concealment A neglect to communicate that which a party knows and ought to communicate (Sec. 26).
B. Requisites
1. A party knows a fact which he neglects to communicate or disclose to the other. 2. Such party concealing is duty bound to disclose such fact to the other. 3. Such party concealing makes no warranty of the fact concealed.
NOTE: NON-MEDICAL INSURANCE: The waiver of medical examination in a nonmedical insurance contract renders even more material the information required of the applicant concerning the previous conditions of health and diseases suffered. (Sunlife vs. Sps. Bacani, 1995). OPINION: Where matters of opinion or judgment are called for, answers made in good faith and without intent to deceive will not avoid the policy even though they are untrue. Reason: The insurer cannot rely on those statements. He must make further inquiry. (Philamcare Health Systems vs. CA, 2002). Concealment must take place at the time the contract is entered into in order that the policy may be avoided. Information obtained after the perfection of the contract is no longer necessary to be disclosed by the insured, even if the policy has not been issued
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E. Cause of Loss
The matter concealed need NOT be the cause of loss. In Sunlife Assurance vs. CA (1995), the Court held that the fact that the matter concealed had no bearing to the cause of death is NOT important because it is well settled that the insured need not die of the disease he had failed to disclose to the insurer. It is sufficient that his nondisclosure misled the insurer in forming his estimates of the risks of the proposed policy or in making inquiries.
The right to information of material fact may be waived either expressly, by the terms of insurance or impliedly by neglecting to make inquiry as to the facts already communicated. g. If the interest of the insured to the property being insured is absolute then there is no necessity to disclose the extent of his interest, if not then he is required to disclose under Section 51 h. Matters of opinion. f.
INSURANCE LAW
II. Misrepresentation A. Representations

Factual statements made by the insured at the time of, or prior to, the issuance of the policy (Sec. 37) to give information to the insurer and induce him to enter into the insurance contract.
F. Matters which Disclosed
Need
to
Be
1. Matters material to the contract 2. Matters which the other has not the means of ascertaining the said facts 3. Matters as to which the party with the duty to communicate makes no warranty. NOTE: If the applicant is aware of the existence of some circumstance which he knows would influence the insurer in acting upon his application, good faith requires him to disclose that circumstance, though unasked (VANCE, The Law of Insurance).
B. Kinds of Representations
1. Affirmative Any allegation as to the existence or non-existence of a fact when the contract begins 2. Promissory Any promise to be fulfilled after the contract has come into existence or any statement concerning what is to happen during the existence of the insurance. A promise representation is substantially a condition or warranty.
G. Matters which Disclosed
Need
NOT
Be
Sec. 32. Each party to a contract of insurance is bound to know all the general causes which are open to his inquiry, equally with that of the other, and which may affect the political or material perils contemplated; and all general usages of trade.
C. Requisites of Representation (Misrepresentation)
False
a. Matters already known to the insurer b. Matters of which the insurer waives communication he is in estoppel. c. Matters that concern only risks excepted, either expressly or by warranty, from the liability assumed under the policy. **Important Note: The undisclosed fact must NOT BE MATERIAL otherwise the insured is still bound to make disclosure. d. Information of the nature or amount of the interest of one insured except if inquired upon by the insurer. e. Matters each party are bound to know such as public events, general information etc.
1. The insured stated a fact which is untrue. 2. Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true without knowing it to be true and which has a tendency to mislead. 3. Such fact in either case is material to the risk. NOTE: 1. There is false representation if the matter is true at the time it was made/represented but false at the time the contract takes effect. (Sec. 44). Remedy of injured party is rescission (Sec. 45).
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2. NO false representation if the matter is true at the time the contract takes effect although false at the time it was made/represented.
III. Warranties A. Definition

INSURANCE LAW
D. Effect of Misrepresentation
The injured party is entitled to rescind from the time when the representation becomes false. (Sec. 45)
E. Representation of Opinion
General Rule A representation of the expectation, belief, opinion, or judgment of the insured, although false, will NOT avoid the policy, even if such was material to the risk (DE LEON). Exception Such representation will avoid the policy if there is a CONCURRENCE OF MATERIALITY AND FRAUDULENCE OR INTENT TO DECEIVE. However, if the representation is one of fact, the insurer need only prove the materiality of the representation, because in such cases the intent to deceive is presumed (DE LEON). NOTE: If a statement of fact, fraudulent intent is presumed. Hence, materiality of the misrepresented fact will avoid the contract.
Statement or promise by the insured Set forth in the policy or by reference incorporated therein, The untruth or non-fulfillment of which in any respect, and without reference to whether insurer was in fact prejudiced by such untruth or non-fulfillment, Renders the policy voidable by the insurer (VANCE).
B. Purpose
To eliminate potentially increasing hazards which may either be due to the acts of the insured or to the change to the condition of the property.
C. Kinds of Warranties
1. Express 2. Implied - it is deemed included in the contract although not expressly mentioned. 3. Affirmative Warranty is one which asserts the existence of a fact or condition at the time it is made (Sec. 68). 4. Promissory Warranty or Executory Warranty is one where the insured stipulates that certain facts or conditions pertaining to the risk shall exist or that certain things with reference thereto shall be done or omitted. It is in the nature of a condition subsequent (Secs. 72 & 73).
F. Concealment vs. Misrepresentation

CONCEALMENT MISREPRESENTATION Insured makes erroneous Insured withholds statements of facts with the information of intent of inducing the material facts insurer to enter into the from the insurer insurance contract Determined by the same rules as to materiality Same effects on the part of the insured; insurer has right to rescind Injured party is entitled to rescind a contract of insurance on ground of concealment or false representation, whether intentional or not Rules on concealment and representation apply likewise to the insurer as insurance contract is one of utmost good faith
D. Effect of Breach of Warranty

General Rule It gives the insurer the right to rescind (Secs. 74 and 76). Exceptions 1. loss occurs before the time of performance of the warranty 2. the performance becomes unlawful 3. performance becomes impossible (Sec. 73) Rule on Immaterial Provisions General Rule Not all breach of the provisions in the policy may give the right to rescind the policy. Immaterial provisions do not avoid the policy (Sec. 75).
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Exception When the parties stipulate that violation of particular provision, though normally immaterial, shall avoid the policy. In effect, the parties converted immaterial provision into material (SUNDIANG). the one
Nature
E. Warranty vs. Representation

WARRANTY Part of the contract Written on the policy, actually or by reference Presumed material Must be strictly complied with REPRESENTATION Mere collateral inducement May be written in the policy or may be oral. Must be proved to be material Requires only substantial truth and compliance
Conditions Precedent a. If the insured person contracts and warrants that if the representations made by him in his application for insurance are not true, the policy shall be null and void, such statements are not conditions precedent but rather of the nature of a defeasance. b. promissory warranties are usually regarded as conditions subsequent to be performed after the policy has become a valid contract, nonperformance of which will work a defeasance.
Warranties
INSURANCE LAW
V. Right of Rescission A. Grounds

1. 2. 3. 4. Concealment Misrepresentation Breach of material warranty Breach of a condition subsequent
IV. Conditions A. Definition

Events signifying in its broadest sense either an occurrence or a non-occurrence that alters the previously existing legal relations of the parties to the contract. They may be conditions conditions subsequent. precedent or
B. Waiver of the right to rescind:

Acceptance of premium payments despite the knowledge of the ground for rescission (Sec. 45).
C. Limitations on the right of the insurer to rescind:

1. Non-life such right must be exercised prior to the commencement of an action on the contract; 2. Life such right must be availed of during the first two years from the date of issue of policy or its last reinstatement; prior to incontestability. (Sec. 48)
B. Kinds:
1. Condition Precedent calls for the happening of some event before the contract shall be binding between the parties. 2. Condition Subsequent pertains to the contract of insurance after the risk has attached and during the existence thereof.
VI. Cancellation of Insurance Policy
Non-Life
C. Warranties vs. Conditions

Warranties Effect does not suspend or defeat the operation of the contract, but a breach affords either the remedy expressly provided in the contract or that furnished by law Conditions Precedent one without the performance of which the contract, although in form executed by the parties and delivered, does not spring into life; a limitation to the attachment of risk
Right of the insurer to abandon the contract on the occurrence of certain grounds after the effectivity date of a nonlife policy.
A. Grounds
1. Non-payment of premium 2. Conviction of a crime out of acts increasing the hazard insured against 3. Discovery of fraud or material misrepresentation 4. Discovery of willful or reckless acts of omissions increasing the hazard insured against;
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5. Physical changes in property making the property uninsurable 6. Determination by the Insurance Commissioner that the continuation of the policy would violate the Insurance Code. (Sec. 64)
C. Defenses
BARRED DEFENSES OF THE INSURER 1. Policy is void ab initio 2. Policy is rescindable by reason of the fraudulent concealment or misrepresentati on of the insured or his agent DEFENSES NOT BARRED 1. That the person taking the insurance lacked insurable interest as required by law; That the cause of the death of the insured is an excepted risk; That the premiums have not been paid (Secs. 77, 227[b], 228[b], 230[b]); That the conditions of the policy relating to military or naval service have been violated (Secs. 227[b], 228[b]); That the fraud is of a particularly vicious type; That the beneficiary failed to furnish proof of death or to comply with any condition imposed by the policy after the loss has happened; or That the action was not brought within the time specified.
INSURANCE LAW
B. Requirements
1. Prior notice of cancellation to the insured 2. Notice must be in writing, mailed or delivered to the named insured at the address shown in the policy 3. Notice must state which of the grounds set forth in Sec. 64 is relied upon and upon request of the insured, the insurer must furnish facts on which the cancellation is based; NOTE: Grounds should have existed after the effectivity date of the policy.
2. 3.
4.
5. 6.
VII. Incontestability Clause

(Asked in 91, 94, 97 and 98)
A. Definition
Clause in life insurance policy that stipulates that the policy shall be incontestable after a stated period.
7.
B. Requisites
1. Life insurance policy 2. Payable on the death of the insured 3. It has been in force during the lifetime of the insured for a period of at least two years from the date of its issue or of its last reinstatement. NOTE: The period of 2 years may be shortened but it cannot be extended by stipulation. Incontestability only deprives the insurer of those defenses which arise in connection with the formation and operation of the policy prior to loss (DE LEON).
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Chapter VII. Risks and Coverages
CHAPTER VII. COVERAGES
RISKS
AND
I. RISKS IN LIFE INSURANCE II. RISKS IN FIRE INSURANCE A. HOSTILE VS FRIENDLY FIRE B. MEASURE OF INDEMNITY III. RISKS IN CASUALTY OR ACCIDENT INSURANCE A. INTENTIONAL VS. ACCIDENTAL B. NO ACTION CLAUSE IV. RISKS IN COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
which would result in the forfeiture of the policy benefits will be avoided if it is possible to construe the policy in a manner which would allow recovery (see page 8). Moreover, a contrary interpretation would result in the forfeiture of the beneficiarys interest on mere imputations of his participation in the killing of the insured.
INSURANCE LAW
Exceptions a. Accidental killing b. Self-defense c. Insanity of the beneficiary at the time he killed the insured
I. Risks in Life Insurance A. Risks in Life Insurance

1. Suicide (Asked in 95) Insurer is liable in the following cases: a. If committed after two years from the date of the policys issue or its last reinstatement; b. If committed in a state of insanity regardless of the date of the commission unless suicide is an excepted peril. (Sec. 180-A) c. If committed after a shorter period provided in the policy. Any stipulation extending the 2-year period is null and void. 2. At the hands of the law (E.g. by legal execution) It is one of the risks assumed by the insurer under a life insurance policy in the absence of a valid policy exception (VANCE). 3. Killing by the beneficiary General Rule The interest of a beneficiary in a life insurance policy Shall be forfeited when the beneficiary is the principal accomplice or accessory in willfully bringing about the death of the insured, In which event, the nearest relative of the insured shall receive the proceeds of said insurance if not otherwise disqualified. (Sec. 12)
Note: Conviction of the beneficiary is necessary before his interest in the insurance policy is forfeited in favor of the nearest relative of the insured. This is consistent with the cardinal principle of law that forfeitures are not favored, and that any construction
II. Risks in Fire Insurance A. Hostile vs. Friendly Fire

HOSTILE FIRE One that escapes from the place where it was intended to burn and ought to be. Insurer is liable FRIENDLY FIRE One that burns in a place where it was intended to burn and ought to be Insurer is not liable
B. Measure of Indemnity
1. Open policy - only the expense necessary to replace the thing lost or injured in the condition it was at the time of the injury 2. Valued policy - the parties are bound by the valuation, in the absence of fraud or mistake
III.Risks in Casualty or Accident Insurance A. Intentional vs. Accidental

1. Intentional Implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieve from liability as stipulated (Biagtan v. the Insular Life Assurance Co. Ltd., 1972). 2. Accidental That which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen.
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Chapter VII. Risks and Coverages
B. Liability vs. Indemnity

1. Liability insurance Insurer assumes the obligation to pay the third party in whose favor the liability of the insured arises. Liability of the insurer attaches as soon as the liability of the insured to the third party is established. Insurer is liable regardless of whether or not the insured has paid the third party (CAMPOS, Insurance). 2. Indemnity insurance NO action will lie against the insurer unless brought by the insured for loss ACTUALLY sustained and paid by him. Liability of the insurer attaches only AFTER the insured has paid his liability to the third party (CAMPOS).
owners or operators responsible for the accident sustained (Shafer v. Judge, RTC, 1988). Claimants/victims may be a passenger or a 3rd party It applies to all vehicles whether public or private vehicles.
INSURANCE LAW
NOTE: It is the only compulsory insurance coverage under the Insurance Code
C. No Action Clause
A requirement in a policy of liability insurance which provides that suit and final judgment be first obtained against the insured; that only thereafter can the person injured recover on the policy. (Guingon vs. Del Monte, 1967)
IV. Risks in Compulsory Motor Vehicle Liability Insurance (CMVLI)

A species of compulsory insurance that provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. The Land Transportation Office shall NOT allow the registration or renewal of registration of any motor vehicle unless such insurance is obtained (Sec. 376, as amended by PD 1455). To the extent that motor vehicle insurance is compulsory, it must be a LIABILITY policy (Sec. 373(f)), and the provision making it merely an indemnity insurance CANNOT have any effect (CAMPOS). Purpose: To give immediate financial assistance to victims of motor vehicle accidents and/or their dependents, especially if they are poor regardless of the financial capability of motor vehicle
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Chapter VIII. Special Kinds of Insurance Contracts

I. MARINE INSURANCE A. DEFINITION B. KINDS OF MARINE INSURANCE C. RISKS COVERED D. PARTIES WITH INSURABLE INTEREST E. PERILS OF THE SEA VS. PERILS OF THE SHIP F. BAREBOAT CHARTER VS. CONTRACT OF AFFREIGHTMENT G. IMPLIED WARRANTIES H. SEAWORTHINESS I. IMPROPER DEVIATION J. CONCEALMENT K. AVERAGE L. LOSS M. ABANDONMENT N. CO-INSURANCE CLAUSE II. FIRE INSURANCE A. RISKS COVERED B. PREREQUISITES TO RECOVERY C. SPECIAL CLAUSES IN FIRE INSURANCE CONTRACTS III. CASUALTY OR ACCIDENTAL INSURANCE A. DEFINITION B. KINDS C. INTENTIONAL VS. ACCIDENTAL TEST IV. MOTOR VEHICLE COMPULSORY INSURANCE A. DEFINITION B. METHODS OF COVERAGE C. PARTIES AFFECTED D. NO-FAULT CLAUSE E. SPECIAL CLAUSES
exposed during a certain voyage or a fixed period of time
or other inland waterway transportation and other waterborne perils outside of those risks that fall definitely within the ocean marine category
INSURANCE LAW
C. Risks Covered
1. In General a. Vessels, goods, freight, cargo, merchandise, profits, money, valuable papers, bottomry and respondentia, and interest in respect to all risks or perils of navigation; b. Persons or property in connection with marine insurance; c. Precious stones, jewels, jewelry and precious metals whether in the course of transportation or otherwise; and d. Bridges, tunnels, piers, docks and other aids to navigation and transportation. (Sec. 99) e. Cargo can be the subject of marine insurance, and once it is entered into, the implied warranty of seaworthiness immediately attaches to whoever is insuring the cargo, whether he be the shipowner or not. (Roque v. IAC, 1985). 2. Marine Protection and Indemnity Insurance
I. Marine Insurance A. Definition

Insurance against risks connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be exposed during a certain voyage or a fixed period of time. (Sec. 99)
D. Parties with Insurable Interest

1. Shipowner a. Over the vessel to the extent of its value Exceptions: if chartered, the insurable interest is only up to the amount not recoverable from the charterer. (Sec. 100). If the charterer compensated the shipowner the whole value in case of the loss, NO INSURABLE INTEREST If hypothecated by bottomry, the insurable interest is only the excess of its value over the amount secured by bottomry. (Sec. 101) b. Over expected 103). freightage. (Sec.
B. Kinds of Marine Insurance

Ocean Marine Insurance an insurance against risk connected with navigation, to which a ship, cargo, freightage, profits or other insurable interest in movable property, may be Inland Marine Insurance it is of comparatively recent origin and covers primarily the land or over the land transportation perils of property shipped by railroads, motor trucks, airplanes, and other means of transportation. It also covers risks of lake, river,
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If price is to be paid for the carriage of goods: insurable interest exists when goods are: a. Actually on board b. There is some contract for putting the goods on board c. Both ship and goods are ready for the specific voyage (Sec. 104)
G. Implied warranties
1. That the ship is seaworthy at the inception of the insurance (Sec. 113) 2. That the ship will NOT deviate from agreed voyage unless deviation is proper (Sec. 123, 124, 125) 3. That the ship will NOT engage in an illegal venture 4. Warranty of possession of documents of neutrality; that the ship will carry the requisite documents of nationality or neutrality is expressly warranted 5. Presence of insurable interest
INSURANCE LAW
2. Cargo owner Over the cargo and expected profits (Sec. 105). 3. Charterer 1. Over the vessel up to the extent of the amount he is liable to the shipowner, if the ship is lost or damaged during the voyage (Sec. 106) 2. Over his expected profits or freightage if he accepts cargoes from the other persons for a fee. 3. Over his own cargo or his clients cargo. (SUNDIANG)
H. Seaworthiness
When the ship is reasonably fit to perform the service and to encounter the ordinary perils of the voyage contemplated by the parties to the policy, Considering the nature of the ship, the voyage and the service to be performed (Sec. 114)
E. Perils of the Sea vs. Perils of the Ship

(Asked in 98)
Perils of the Sea Covered by marine insurance Denote nature accidents peculiar to the sea which 1. do not happen by intervention of man 2. cannot be prevented by human prudence Perils of the Ship Not covered by marine insurance Go Tiaoco v. Union Insurance(1919): 1. Natural and inevitable 2. Ordinary wear and tear 3. Negligent failure of ship owner to provide proper equipment
Requisites of Seaworthiness Extends not only to condition of ships structure, but requires (Sec.116): 1. Ship to be properly laden 2. Competent master 3. Sufficient number of competent officers and seamen 4. Requisite appurtenances and equipment 5. In a fit state as to repair, equipment, crew and in all other respects to perform the ordinary perils of navigation 6. Must also be in a suitable condition to carry the cargo put on board or intended to be put on board. General Rule The warranty of seaworthiness is complied with if the ship be seaworthy at the time of the commencement of the risk. Prior or subsequent unseaworthiness is not a breach of the warranty nor is it material that the vessel arrives in safety at the end of her voyage. Exceptions 1. Time policy - the ship must be seaworthy at the commencement of every voyage she may undertake (Sec. 115a) 2. Cargo policy - each vessel upon which the cargo is shipped or
F. Bareboat Charter vs. Contract of Affreightment

Demise/Bareboat charter Charterer regarded as owner of vessel voyage stipulated as the charter includes both the vessel and its crew Charter is liable Common carrier is deemed as private carrier Contract of Affreightment Owner of vessel leases part or all of its space to haul goods for others Shipowner liable Still a common carrier so required to exercise Extraordinary diligence
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transshipped must be seaworthy at the commencement of each particular voyage (Sec. 115b) 3. Voyage policy -contemplating a voyage in different stages, the ship must be seaworthy at the commencement of each portion 4. Ship becomes unseaworthy during the voyage to which an insurance is related, delay in repairing the defect exonerates the insurer on ship or shipowners interest from liability from any loss arising therefrom. (Sec. 118) Scope of Seaworthiness 1. INSURANCE ON CARGO: it must be properly loaded, stowed, dunnaged, and secured so as not to imperil the navigation of the vessel to cause injury to the vessel or cargo. 2. INSURANCE ON VESSEL: ship is not unseaworthy because of some defect in loading or stowage which is easily curable by those on board, and was cured before the loss. 2. DECK CARGO: carrying it raises a presumption of unseaworthiness which can be overcome only by showing affirmatively that the deck cargo was not likely to interfere with the due management of the vessel. Due diligence not a defense Warranty precludes an defense that insured had exercised due diligence to make the ship seaworthy Ship must ACTUALLY be seaworthy. Seaworthiness as to cargo Ship may be seaworthy for purpose of insurance on the ship, but may still be unseaworthy for purpose of insurance of the cargo.
route if not fixed by mercantile usage 3. Unreasonable delay in pursuing voyage 4. Commencement of an entirely different voyage (Secs. 121-123) Instances of Proper Deviation 1. When caused by circumstances outside the control of the ship captain or ship owner. 2. When necessary to comply with a warranty or to avoid a peril; 3. When made in good faith to avoid a peril; 4. When made in good faith to save human life or to relieve another vessel in distress (Sec. 124)
INSURANCE LAW
J. Concealment
Belief and expectation of a third person in reference to a material fact is material and must be disclosed (Sec. 108). This is contrary to the general rule that matters of belief, judgment or opinion of third persons, except experts, are not material. General Rule Concealment of the following matters will NOT vitiate the marine insurance contract: National character of the insured Liability of insured thing to capture or detention Liability to seizure from breach of foreign laws Want of necessary documents Use of false or simulated papers Exception When the matters above are the cause of the loss
I. Improper Deviation
(Asked in 05) A departure from the course of the voyage insured, or an unreasonable delay in pursuing the voyage or the commencement of an entirely different voyage (Sec.123) Instances of deviation: 1. the course of the sailing fixed by mercantile usage 2. Departure of vessel from the most natural, direct and advantageous
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Marine Insurance Other Insurance What Must Be Communicated (in GF + w/n his knowledge all facts material to the contract all facts material to the contract all facts which he makes no warranty all facts which he makes no warranty all facts which the other has not the means of all facts which the other has not the means of ascertaining (Sec. 28) ascertaining (Sec. 28) all information which he possesses material to the risk What Need Not Be Communicated (Sec. 30) Information 1. already known to the other party 2. the other party ought to know w/ exercise of ordinary care + the former has no reason to suppose him ignorant 3. already waived 4. related to a risk excluded by a warranty + not material 5. related to a excepted risk + not material Information or Belief of a 3rd Party Material and must be communicated General Rule Not material, need not be communicated Exception proceeds from an agent of the insured whose duty is to give information Effect of concealment If the fact concealed involves the following, there is Concealment of any material fact will vitiate the not vitiation of the entire contract BUT merely entire contract, WON the loss results from the fact exonerates the insurer from a risk resulting from concealed. the concealed fact: The national character of the insured; The liability of the thing insured to capture and detention; The liability to seizure from breach of foreign laws of trade; The want of necessary documents; The use of false and simulated papers. (Sec. 110)
INSURANCE LAW
K. Average
General Average All expenses and damages which are deliberately caused in order to save the vessel, its cargo or both from a real known risk Intentionally caused Borne by owners of articles saved pro-rata 1. Common danger: Certain and imminent (and known) 2. Part of the vessel is sacrificed 3. Expenses follows from the successful saving of the vessel or other cargo 4. Expenses incurred ONLY after taking proper legal steps and authority (Magsaysay v. Agan, 1955) GR: Insurer Liable if the owner of the articles saved seeks right of contribution. X: Cannot recover against the insurer 1. After separation of interests liable to contribution 2. Insured has neglected or waived his right to contribution Particular Average All expenses and damages caused to the vessel or cargo which have not incurred to the common benefit NOT intentionally caused Borne only by the owner of the property
GR: Insurer Liable to the proportion of contribution attaching to the policy value of the thing insured X: if partial loss excluded by the policy
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L. Loss
1. 2. 3. 4. Actual Total destruction; 1. Irretrievable loss by sinking; Damage rendering the thing valueless; or 2. Total deprivation of owner of possession of thing insured. (Sec. 130) 3. Constructive Actual loss of more than of the value of the object; Damage reducing value by more than of the value of the vessel and of cargo; and Expense of transshipment exceed of value of cargo or the ship. (Sec. 131, in relation to Sec. 139) Notice of Abandonment necessary to recover as for the total loss; insured may: 1. Abandon goods or vessel to the insurer and claim for whole insured value (Sec. 139) 2. Without abandoning vessel, claim for partial actual loss (Sec. 155) -INSURANCE LAW
Notice of Abandonment not necessary
May be presumed from the continued absence of a ship without being heard of (length of time for presumption to apply depends on the circumstances) (Sec. 132) Insured entitled to payment without notice of abandonment
1.
2. 3.
Insured has the right to abandon the thing insured by relinquishing to the insurer his interest in such thing, entitling him to recover for a total loss thereof (Sec. 138) Insurer acquires all rights over the thing insured (Sec. 146) If abandonment is not proper or properly made, the insurer would still be liable as upon the Actual Total Loss, deducting from the amount any proceeds from the thing insured which may have come to the hand of the insured.
M. Abandonment
Abandonment is the act of the insured by which, after a constructive total loss, he declared the relinquishment to the insurer of his interest in the thing insured. (Secs. 138 - 155) The insured has right to abandon ONLY if peril insured against causes a loss of more than the thing insured or where the value is reduced by more than
6. It must be made by giving notice thereof to the insurer which may be done orally or in writing (Sec. 143) 7. Notice must be explicit and must specify the particular cause of the abandonment (Sec. 144) Effects of Acceptance 1. Upon receiving notice of abandonment, the insurer may accept or reject abandonment. 2. Insurer becomes liable for whole amount of insurance and becomes entitled to all the rights which the insured has over the thing 3. The parties rights become fixed. 4. The insurer may no longer rely on any insufficiency in the form, time or right of abandonment. WON the insured has a right to abandon is immaterial where offer is already accepted and there is no fraud. 5. EXCEPTION to the general effects of acceptance: when the ground upon which it was made proves to be unfounded. 6. Abandonment can be sustained only upon the ground specified in the notice
Constructive loss = more than 75% loss = full recovery of the full amount in the policy) Requisites 1. There must be actual relinquishment by the person insured of his interest in the thing insured (Sec. 138) 2. There must be constructive total loss (Sec. 139). 3. It must be total and absolute (Sec. 140) 4. It must be within a reasonable time after the receipt of reliable information of the loss (Sec. 141) 5. It must be factual (Sec. 142)
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N. Co-insurance Clause
Where the property is insured for less than its value, the insured is considered a co-insurer for the difference between the amount of insurance and the value of the property. Requisites 1. The loss is partial 2. The amount of insurance is less than the value of the property insured. Formula to determine the extent of the insurers liability:
Loss Value x Insurance = Insurers Liability (SUNDIANG)
started out as a friendly fire but escapes from its original place or it becomes too strong as it becomes out of control; It may also be a friendly fire but unsuitable materials were used to light the fire and becomes inherently dangerous and uncontrollable Insurer liable
lighting, heating manufacturing.
or
INSURANCE LAW
Insurer NOT Liable
B. Prerequisites to recovery:
1. Notice of loss must be immediately given, unless delay is waived expressly or impliedly by the insurer 2. Proof of loss according to best evidence obtainable. Delay may also be waived expressly or impliedly by the insurer
NOTE: It is very crucial to determine whether a marine vessel is covered by a marine insurance or fire insurance. The determination is important for 2 reasons: 1. Rules on constructive total loss and abandonment applies only to marine insurance 2. Rule on co-insurance applies primarily to marine insurance 3. Rule on co-insurance applies to fire insurance only if expressly agreed upon (AGBAYANI, OPINION).
C. Special clauses in Fire Insurance contracts

1. Storage of Hazardous Things General Rule Render policy void Exception a. Essential to business b. Causal/temporary use c. Would not increase the risk insured against Sole and unconditional ownership a. Sole: no one else has any interest b. Unconditional: quality of ownership not limited or affected by accommodation Other insurance clause: Insured should inform the insurer about any existing insurance over the property insured and should obtain the latters consent to any future additional insurance thereon, under the penalty of forfeiting all the benefits under the policy. Chattel mortgage clause: The policy will become void if the insured property should be subject of a chattel mortgage without the consent of the insurer. Alienation clause: The interest of the insured in the policy would be forfeited if the insured property is alienated without the consent of the insurer. However, even without such a
II. Fire Insurance

(Asked in 01)
Sec. 167. As used in this Code, the term "fire insurance" shall include insurance against loss by fire, lightning, windstorm, tornado or earthquake and other allied risks, when such risks are covered by extension to fire insurance policies or under separate policies.
2.
3.
A. Risks Covered
1. 2. 3. 4. 5. 6. Fire Lightning Windstorm Tornado Earthquake Other allied risks
Friendly Fire Fire that burns in a place where it is supposed to burn. It is employed for the ordinary purpose of
4.
Hostile Fire Fire that escapes and burns in a place where it is not supposed to be. May also refer to fire that
5.
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stipulation, the lack of insurable interest of the insured at the time of the loss would prevent the insured from recovering under Sec. 19 (CAMPOS). 6. Unoccupancy and vacancy clause: aims to prevent risk. 7. Nonsafe clause: Put records of changing stocks inside fire-proof vault to prevent guesswork
2. Accidental That which happens by chance or fortuitously, without intention or design, which is unexpected, unusual and unforeseen.
INSURANCE LAW
IV. Compulsory Motor Vehicle Insurance A. Definition

A species of compulsory insurance that provides for protection coverage that will answer for legal liability for losses and damages for bodily injuries or property damage that may be sustained by another arising from the use and operation of motor vehicle by its owner. (Secs. 373 - 375)
III.Casualty or Accidental Insurance A. Definition

Sec. 174. Casualty insurance is insurance covering loss or liability arising from accident or mishap, excluding certain types of loss which by law or custom are considered as falling exclusively within the scope of other types of insurance such as fire or marine. It includes, but is not limited to, employer's liability insurance, motor vehicle liability insurance, plate glass insurance, burglary and theft insurance, personal accident and health insurance as written by non-life insurance companies, and other substantially similar kinds of insurance.
B. Methods of Coverage
1. Insurance policy 2. Surety bond 3. Cash deposit
C. Parties affected
1. Owner of vehicle: the actual legal owner of a motor vehicle, in whose name such vehicle is duly registered with the Land Transportation Commission; 2. Passenger: any fare paying person being transported and conveyed in and by a motor vehicle for transportation of passengers for compensation, including persons expressly authorized by law or by the vehicle's operator or his agents to ride without fare 3. Third-party: any person other than a passenger as defined in this section and shall also exclude a member of the household, or a member of the family within the second degree of consanguinity or affinity, of a motor vehicle owner or land transportation operator, as likewise defined herein, or his employee in respect of death, bodily injury, or damage to property arising out of and in the course of employment. (As amended by Presidential Decree No. 1814 and 1981).
B. Kinds
1. Employers liability insurance: damages or injury to workmen as caused by 2. Motor vehicle insurance (see later section) 3. Plate gloss insurance: against loss from braking of glass windows 4. Burglary and theft insurance 5. Personal accident and health insurance: from expense and loss in injuries or diseases 6. Workmens Compensation insurance: industrial accident, causally or disease
C. Intentional vs. Accidental: test

1. Intentional Implies the exercise of the reasoning faculties, consciousness and volition. Where a provision of the policy excludes intentional injury, it is the intention of the person inflicting the injury that is controlling. If the injuries suffered by the insured clearly resulted from the intentional act of the third person, the insurer is relieve from liability as stipulated (Biagtan v. the Insular Life Assurance Co. Ltd., 1972).
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D. No-fault clause
(Asked in 94) A clause that allows the victim (injured person or heirs of the deceased) an option to file a claim for death or injury without the necessity of proving fault or negligence of any kind (Sec. 378)
INSURANCE LAW
Note: Sec. 378 refers only to death or injury of the passenger or third party. Hence, damages to property are NOT covered by the provisions on no-fault insurance. In such cases, the liability of the insured for such damages must be established.
Rules 1. Total indemnity - maximum of P5,000 2. Proofs of loss a. Police report of accident; b. Death certificate and evidence sufficient to establish proper payee; c. Medical report and evidence of medical or hospital disbursement. 3. Claim may be made against one motor vehicle only 4. Proper insurer from which to claim a. In case of an occupant: Insurer of the vehicle in which the occupant is riding, mounting or dismounting from; b. In any other case: Insurer of the directly offending vehicle. (Sec. 378)
E. Special Clauses
1. Authorized Driver Clause (Asked in 91, 93): A clause which aims to indemnify the insured owner against loss or damage to the car but limits the use of the insured vehicle to the insured himself or any person who drives on his order or with his permission 2. Theft Clause: A clause which includes theft as among the risks insured against. 3. Cooperation Clause: A clause which provides in essence that the insured shall give all such information and assistance as the insurer may require, usually requiring attendance at trials or hearings
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Chapter IX. Claims, Settlement, and Subrogation

IX. LIABILITY FOR LOSS X. REQUISITES FOR RECOVERY INSURANCE XI. NOTICE AND PROOF OF LOSS XII. CLAIMS SETTLEMENT XIII. PRESCRIPTION OF ACTION XIV. TIME OF PAYMENT XV. SUBROGATION XVI. INSURANCE COMMISSION FROM
Proximate Cause An event that sets all other events in motion without any intervening or independent case, without which the injury or loss would not have occurred.
Remote Cause An event preceding another in a causal chain, but separated from it by other events
INSURANCE LAW
III.Notice and Proof of Loss A. Notice of Loss - The formal notice

given the insurer by the insured or claimant under a policy of the occurrence of the loss insured against. The purpose is to apprise the insurance company so that it may make proper investigation and take such action as may be necessary to protect its interest. It is necessary as the insurer cannot be liable to pay a claim unless he receives notice of that claim. Under Sec. 88 insurer is exonerated if notice of loss is not given to the insurer by the insured or by the person entitled to the benefit without unnecessary delay. It has been held however that formal notice of loss is not necessary if insurer has actual notice of loss already.
In fire insurance Required Failure to give notice will defeat the right of the insured to recover. In other types of insurance Not required Failure to give notice will not exonerate the insurer, unless there is a stipulation in the policy requiring the insured to do so.
I. Liability for Loss

(Asked in 96, 05, 07)
Loss for which insurer is liable Loss the proximate cause of which is the peril insured against (Sec. 84); Loss the immediate cause of which is the peril insured against except where proximate cause is an excepted peril; Loss through negligence of insured except where there was gross negligence amounting to willful acts; and Loss caused by efforts to rescue the thing from peril insured against; Loss for which insurer is not liable Loss by insureds willful act;
Loss due to connivance of the insured (Sec. 87); and
Loss where the excepted peril is the proximate cause.
If during the course of rescue, the thing is exposed to a peril not insured against, which permanently deprives the insured of its possession, in whole or in part (Sec. 85).
B. Proof of Loss - The formal evidence

given the insurance company by the insured or claimant under a policy of the occurrence of the loss, the particulars and the data necessary to enable the company to determine its liability and the amount. Is not tantamount to proof or evidence under the law on evidence. Proof of loss is intended to: Give the insurer information by which he may determine the extent of his liability. Afford him a means of detecting any fraud that may have been practiced upon him.
II. Requisites for Recovery From Insurance (IPL-p)

1. The insured must have insurable interest in the subject matter; 2. That interest is covered by the policy; 3. There must be a loss; and 4. The loss must be proximately caused by the peril insured against.
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IV. Claims Settlement

A. No insurance company doing business in the Philippines shall refuse, without just cause, to pay or settle claims arising under coverages provided by its policies, nor shall any such company engage in unfair claim settlement practices. (Sec. 241) B. Unfair Claims Settlement Sec. 241 (1) provides instances of unfair claims settlement done by an insurance company: 1. Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue;
CLAIMS Maturity
2. Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its policies; 3. Failing to adopt and implement reasonable standards for the prompt investigation of claims arising under its policies; 4. Not attempting in good faith to effectuate prompt, fair and equitable settlement of claims submitted in which liability has become reasonably clear; 5. Compelling policyholders to institute suits to recover amounts due under its polices by offering without justifiable reason substantially less than the amounts ultimately recovered in suites brought by them.
NON-LIFE INSURANCE Upon happening of event insured against Event must occur within the period specified in policy, otherwise insurer has no liablity Within 30 days after (1) Proof of loss is received by insurer; and (2) Ascertainment of loss or damage is made either by agreement between the insured and insurer or by arbitration If ascertainment not made within 60 days after such receipt by insurer of proof of loss, loss or damage shall be paid within 90 days after such receipt. Entitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the monetary board (unless refusal to pay is based on ground that claim in fraudulent) In case damages awarded, this includes attorneys fees and other expenses incurred due to delay (plus the interest)
INSURANCE LAW
Delivery of Proceeds
LIFE INSURANCE Upon death of the person insured; 2. Upon his surviving a specific period 3. Otherwise contingently on the continuance or cessation of life (Sec. 180) GENERAL RULE: Immediately upon maturity of policy. 1. EXCEPTION: If payable in INSTALLMENTS or as an ANNUITY, when such installments or annuities become due IF MATURITY IS UPON DEATH: Within 60 days after presentation of claim and filing of proof of death of insured. Entitles beneficiary to collect interest on the proceeds of policy for the duration of the delay at rate of twice ceiling prescribed by the monetary board (unless refusal to pay is based on ground that claim in fraudulent) In case damages awarded, this includes attorneys fees and other expenses incurred due to delay (plus the interest)
Effect of Refusal or Failure to pay claim within time prescribed: In case of litigation, it is the duty of the Commissioner or the Court to determine WON claim has been unreasonably denied of withheld. Failure to pay any such claim within the time prescribed shall be considered prima facie evidence of unreasonable delay in payment.
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V. Prescription of Action
(Asked in 96)
Sec. 63. A condition, stipulation, or agreement in any policy of insurance, limiting the time for commencing an action thereunder to a period of less than one year from the time when the cause of action accrues, is void.
VI. Time of Payment

LIFE POLICIES Maturing upon the expiration of the term The proceeds are immediately payable to the insured, unless they are made payable in installments or as annuity, in which case, the installments or annuities shall be paid as they become due. NON-LIFE POLICIES The proceeds shall be paid within 30 days after the receipt by the insurer of proof of loss, and ascertainment of the loss or damage by agreement of the parties or by arbitration but not later than 90 days from such receipt of proof of loss whether or not ascertainment is had or made.
INSURANCE LAW
Rules: 1. In the absence of an express stipulation in the policy, it being based on a written contract, the action prescribes in 10 years. 2. However the parties may validly agree on a shorter period provided it is not less than one year from the time the cause of action accrues. In motor vehicle insurance, action prescribes in one year. 3. The cause of action accrues from the rejection of the claim of the insured and not from the time of loss. The period for filing claim is not merely a procedural requirement. It is essential for the prompt settlement of claims as it demands for suits to be brought while the evidence as to the origin and cause of the loss or destruction has not yet disappeared. It is a condition precedent to the insurers liability or a resolutory cause in case the action is not filed by the insured within the stipulated period. The Insurance Commissioner has the power to adjudicate disputes relating to an insurance companys liability to an insured under a policy. A complaint or claim filed with such official is considered an action or suit the filing of which would have the effect of tolling the suspending the running of the prescriptive period.
Art. 1144. The following action must be brought within ten years from the time the right of action accrues: (1) Upon a written contract; (2) Upon an obligation created by law (3) Upon a judgment. (n)
Maturing at the death of the insured, occurring prior to the expiration of the term stipulated The proceeds are payable to the beneficiaries within 60 days after presentation and filing of proof of death.
VII. Subrogation
Normal incident of indemnity insurance as a legal effect of payment; insurer steps into the shoes of insured Note: There is only property insurance. subrogation in
Rules: 1. NO need of a formal assignment or an express stipulation in the policy. It is a legal effect of payment. 2. The insurer can only recover from the third person what the insured could have recovered. Thus, there can be no recovery if the insurer voluntarily paid even if the loss is not covered by the policy. 3. The insured can no longer recover from the offended party what was paid to him by the insurer but he can recover any deficiency, that is, if his damages is more than what was paid. The deficiency is not covered by the right of subrogation. 4. The insurer must present the policy as evidence to determine the extent of its coverage (Wallen Phil. Shipping vs. Prudential Guarantee, 2003).
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Cases Where There is No Right of Subrogation 1. Where the insured by his own act releases the wrongdoer or third party liable for the loss or damage; 2. Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the insureds claim for loss; 3. Where the insurer pays the insured for a loss or risk not covered by the policy (Pan Malayan Insurance Company v. CA, 1997). 4. In life insurance 5. For recovery of loss in excess of insurance coverage (DE LEON).
B. Circumstances when the Commissioner May Revoke or Suspend the License of an Insurer
1. If insurance contract is in unsound condition (Sec. 247). 2. If it has failed to comply with the provisions of law or regulations obligatory upon it (Sec. 247). 3. Its conditions or methods of business is such as to render its proceedings hazardous to the public or to its policy holders (Sec. 247). 4. That its paid up capital stock, or its available cash assets, or its security deposits, as the case may be, is impaired or deficient (Sec. 247). 5. That the margin of solvency required of each company is deficient (Sec. 247). 6. That the insurer engages in unfair settlement practices (Sec. 241).
INSURANCE LAW
Manila Mahogany vs. CA (1987): By the act of Manila Mahogany issuing a release claim to SMC, the right of Zenith against SMC is nullified since the insurer can be subrogated to only such rights as the insured may have, should the insured, after receiving payment from the insurer, release the wrongdoer who causes the loss, the insurer loses his rights against him. But in such a case the insurer will be entitled to recover from the insured whatever it has paid, unless it was made with the consent of the insurer.
VIII. Insurance Commission A. Jurisdiction of Commission (Sec. 416)
Insurance
1. 2. 3. 4.
Includes the following as long as any SINGLE CLAIM, excluding interests, costs and attorneys fees, does NOT EXCEED 100,000.00: Claims and complaints involving liability of insurer under any kind of policy or contract Suretyship Reinsurance Mutual Benefit membership certificates
NOTE: The Insurance Commission has concurrent jurisdiction with the regular courts to hear and decide claims for which an insurer may be answerable.
- end of Insurance Law -
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Table of Contents
SPECIAL LAWS
CHAPTER I. WAREHOUSE RECEIPTS LAW (ACT 2137) I. Scope and Applicability II. Contents of Warehouse Receipt III. Kinds of Warehouse Receipts IV. Construction of Warehouse Receipts V. Duties and Liabilities of a Warehouseman VI. Attachment or Levy on Negotiable Receipts VII. Warehousemans Lien CHAPTER II. GENERAL BONDED WAREHOUSE ACT (ACT 3893 AS AMENDED BY RA 247) I. Purpose and Applicability II. Duties of a Bonded Warehouseman III. Liabilities IV. Warehouse Receipts Law v General Bonded Warehouse Act CHAPTER III. TRUST RECEIPTS LAW (PD 115) I. Purpose of the Law II. Definition and Nature III. Comparison to Other Transactions IV. Parties to the Transaction V. Rights and Obligations of the Parties VI. Violations and Remedies CHAPTER IV. CHATTEL MORTGAGE LAW (ACT NO. 1508) I. Definitions, Requisites and Characteristics II. Properties and Obligations Covered III. Form IV. Right of Mortgagee to Possess V. Remedies VI. Comparative Tables CHAPTER V. REAL ESTATE MORTGAGE LAW (ACT NO. 3135 AS AMENDED) I. Definition and Applicability II. Effects of Real Estate Mortgage III. Remedies in Case of Default IV. Foreclosure V. Deficiency Claims VI. Redemption VII. Purchasers Right Of Possession CHAPTER VI. THE ANTI-DUMMY LAW (CA NO. 108, AMENDED BY PD NO. 715) I. Definition II. Acts Punished III. Penalties IV. Nationalization or Filipinization Laws 240 240 240 241 241 241 243 244 CHAPTER VIII. LETTERS OF CREDIT I. Definition II. Parties III. Liabilities IV. Rule of Strict Compliance V. Independence Principle VI. Kinds of letters of credit CHAPTER IX. INSOLVENCY LAW I. Concept and Purpose II. Comparisons III. Suspension of Payments IV. Voluntary Insolvency V. Involuntary Insolvency VI. Specific Provisions CHAPTER X. INTERIM RULES OF PROCEDURE FOR INTRACORPORATE CONTROVERSIES (A.M. NO. 01-2-04-SC) I. General Provisions II. Procedure III. Election Contests IV. Inspection of Corporate Books and Records V. Derivative Suits VI. Management Committee VII. Provisional Remedies VIII. Sanctions CHAPTER XI. RULES OF PROCEDURE ON CORPORATE REHABILITATION I. Coverage II. Construction of Terms III. General Provisions IV. Stay Order V. Rehabilitation Receiver VI. Rehabilitation Plan VII. Debtor-Initiated Rehabilitation VIII. Creditor-Initiated Rehabilitation IX. Pre-Negotiated Rehabilitation X. Recognition of Foreign Proceedings 259 259 259 260 260 260 260 262 262 262 262 263 264 264 CHAPTER VII. FOREIGN INVESTMENT ACT OF 1991 (RA NO. 7042, AMENDED BY RA NO. 8179) I. Philippine National II. Doing Business III. Not Doing Business IV. Test to Determine Whether One is Doing Business
257 257 257 257 257
SPECIAL LAWS
245 245 245 245 245 246 246 246 246 247 247 248 249 249 249 249 250 250 250
266 266 266 268 268 268 269 270 270
252 252 252 252 252 253 253 254
271 271 272 272 272 274 275 275 277 277 278
25 255 255 255 255
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Chapter I. Warehouse Receipts Law
Special Laws
FACULTY EDITOR
COMMERCIAL LAW COMMERCIAL LAW Krizelle Poblacion Christina Ortua

SUBJECT EDITORS
LECTURES Edel Cruz

HEAD

Jason Mendoza
DEPUTY HEAD
SPECIAL LAWS Marvin Ibarra

LEAD WRITER Angela De Guzman Cecilia Therese Giuao Jo Blanca Labay Wilhelmina Mayuga Nicole Torres Cristina Yambot James Donato Linus Madamba WRITERS
Rania Joya
Malds Menzon
LOGISTICS, HR
-------Leo Zulueta
SPECIAL LAWS
Viktor Fontanilla
LAYOUT TEAM
-------Kae Guerrero
Chapter I. Warehouse Receipts Law (Act 2137)

I. II. III. IV. SCOPE AND APPLICABILITY CONTENTS OF WAREHOUSE RECEIPT KINDS OF WAREHOUSE RECEIPTS CONSTRUCTION OF WAREHOUSE RECEIPTS V. DUTIES AND LIABILITIES OF A WAREHOUSEMAN VI. ATTACHMENT OR LEVY ON NEGOTIABLE RECEIPTS VII. WAREHOUSEMANS LIEN
Receipts not issued by a warehouseman, although in the form of warehouse receipts, are not warehouse receipts
II. Contents of Warehouse Receipt A. Essential Terms (Sec 2)

1. 2. 3. 4. 5. 6. 7. 8. location of the warehouse date of issue of receipt consecutive number of receipt person to whom goods are deliverable rate of storage charges description of goods or packages signature of warehouseman warehousemans ownership of or interest in goods 9. statement of advances made and liabilities incurred NOTE: No particular form is required or specified, but the terms above must be embodied in every warehouse receipt. The date of issue appearing in the receipt indicates prima facie the date when the contract of deposit is perfected and when the storage charges shall begin to run against the depositor.
American Foreign Banking Corporation v Herridge (1927): The mere fact that the goods deposited are incorrectly described does not make ineffective the receipt when the identity of the goods is fully established by evidence. Thus, its endorsement and delivery shall constitute a sufficient transfer of the title to the goods.
I. Scope and Applicability A. Scope

All warehouses, whether public or private, bonded or not.
B. Application
The special law applies to warehouse receipts issued by a warehouseman as defined in Sec. 58(a); while the Civil Code, to other cases where receipts are not issued by a warehouseman
C. Who May Receipts

Issue
Warehouse
Only a warehouseman; but a duly authorized officer or agent of a warehouseman may do so. A warehouseman is a person lawfully engaged in the business of storing goods for profit.
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B. Effect of Omission Essential Term
of
Any
B. Non-negotiable Receipt
Non-negotiable Receipt Receipt in which it is stated that the goods received will be delivered to the depositor or to any other specified person. A non-negotiable receipt must contain the word non-negotiable. Failure to do so will make a holder who (1) purchased for value AND (2) supposing it to be negotiable, may at his option treat it as negotiable.
1. Validity of receipt is not affected 2. Warehouseman will be liable for damages 3. Negotiability of receipt not affected 4. The contract will be converted to an ordinary deposit
C. Terms that Cannot Be Included

1. Those contrary to this Act (e.g. exemption from liability for misdelivery in Sec. 10, not giving statutory notice in case of sale of goods in Sec. 33 and 34). 2. Exemption from liability and negligence. 3. Those contrary to law, morals, good customs, public order or public policy.
IV. Construction of Warehouse Receipts

Liberal construction of the law in favor of bona fide holders. This has no application to actions against any party other than a warehouseman.
SPECIAL LAWS
III.Kinds of Warehouse Receipts A. Negotiable Receipt

Negotiable Receipt Receipt in which it is stated that the goods received will be delivered to the bearer or to the order of any person named in such receipt. A provision in a negotiable receipt that it is non-negotiable is void. Duplicate Receipts apply only to negotiable warehouse receipts Whenever more than one negotiable receipt is issued for the same goods, the word DUPLICATE shall be placed on the face of the receipt except the one first issued. Effect The warehouseman shall be liable for damages for failing to do this to anyone who purchased the subsequent receipt (1) for value, and (2) supposing it to be an original, even though the purchase be after delivery of the goods by the warehouseman to the holder of the original receipt. Negotiable receipts negotiable by delivery 1. if the goods are deliverable to the bearer; or 2. when indorsed in blank; or 3. person to whose order the goods are delivered or by a subsequent indorsee indorsed it to bearer. A negotiable warehouse receipt is not a negotiable instrument in the same sense as in the NIL.
V. Duties and Liabilities of a Warehouseman A. Principal Obligations Warehouseman of a
1. To take care of the goods, and be liable for failure to exercise care; but he is not liable for loss or injury which could not have been avoided, unless there is a stipulation to the contrary. 2. To deliver the goods to the holder of the receipt or the depositor upon demand, accompanied with: a. An offer to satisfy the warehousemans lien: Because a warehouseman may refuse delivery until his lien is satisfied. b. An offer to surrender the receipt: For the protection of the warehouseman and to avoid criminal liability; this is subject to waiver. c. An offer to sign when the goods are delivered, an acknowledgment that they have been delivered. But, the warehouseman may still refuse delivery on the grounds of some lawful excuse: a. Sec. 10: he has been requested by the person lawfully entitled to the goods not to make delivery; he has information that the delivery about to be made was to one not lawfully entitled to the goods;
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b. Sec. 16: He has acquired title to the goods which was derived from transfer made by the depositor at the time of the deposit for storage or subsequent thereto the warehousemans lien; c. Sec. 18: If there are several claimants to the goods; d. Sec. 21: If the goods were lost and he had no fault; e. Sec. 36: He has already lawfully sold the goods
NOTE: This is applicable ONLY to negotiable receipts but NOT to a situation where there was a valid sale in accordance with Sec. 36 5. Issuing receipt for non-existing goods or misdescribed goods (Sec. 20) EXCEPTION: If the description consists merely of marks or labels upon the goods or upon the packages containing them, etc., the warehouseman is not liable even if the goods are not of the kind as indicated in the marks or labels 6. In case of lost or destroyed receipts (Sec. 14) A warehouseman must deliver to the one who has the receipt but if such was lost, a competent court may order the delivery of the goods only: i. upon proof of the loss or destruction of the receipt; and ii. upon giving of a bond with sufficient securities The warehouseman is still liable to a holder of the receipt for value without notice since the warehouseman can secure himself in the bond given. 7. Failure to take care of the goods (Sec. 12) 8. Failure to give notice in case of sales of goods to satisfy his lien (Sec. 33) or because the goods are perishable and hazardous (Sec. 34)
B. Persons to Whom the Goods Must Be Delivered

1. Persons lawfully entitled to the possession of the goods or its agent 2. Persons entitled to deliver under: a. a non-negotiable receipt; or b. with written authority 3. Person in possession of a negotiable receipt (which was lawfully negotiated) NOTE: A warehouseman does not have a cause of action against a person to whom he misdelivered the thing, unless the depositor sues him.
SPECIAL LAWS
C. Acts for Which a Warehouseman is Liable

1. Failure to stamp duplicate on copies of a negotiable receipt (Sec. 6 and 15) 2. Failure to place non-negotiable on a nonnegotiable receipt (Sec. 7) 3. Misdelivery of the goods (Sec. 10) a. To one not lawfully entitled to possession - Liable for conversion b. To a person entitled to delivery under a nonnegotiable receipt or written authorization OR person in possession of a negotiable receipt Still liable for conversion if: i. prior to delivery, he had been requested NOT to make such delivery ii. he had received notice of the adverse claim or title of a 3rd person 4. Failure to effect cancellation of a negotiable receipt upon delivery of the goods (Sec. 11)
D. Alteration of Receipts
Effect of Alteration
Effect whether fraudulent or not, authorized or not, the warehouseman is liable on the altered receipt according to its original tenor The warehouseman is liable according to the terms of the receipts as altered the warehouseman is liable on the altered receipt according to its original term warehouseman is liable according to the original tenor to a: a. purchaser of the receipt for Alteration Alteration immaterial
Alteration material but authorized Material alteration innocently made Material alteration fraudulently made
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value without notice; and b. to the alterer and subsequent purchasers with notice (BUT his liability is limited only to delivery as he is excused from any other liability)
Even a fraudulent alteration cannot divest the title of the owner of stored goods and the warehouseman is liable to return them to the owner. But a bona fide holder acquires no right to the goods under a negotiable receipt which has been stolen or lost or which the indorsement has been forged.
Effect: i. he will be relieved from liability in delivering the goods to the person whom the court finds to have better right; ii. he is liable for refusal to deliver to the rightful claimant when it is required to have an interpleader; c. He may not do (a) and (b) Effect: He will be liable after a lapse of a reasonable time, of conversion as of the date of the original demand for the goods. This does NOT apply to cases where the warehouseman himself makes a claim to the goods.
SPECIAL LAWS
E. Ownership as a Defense
1. Ownership is not a defense for refusal to deliver. The warehouseman cannot refuse to deliver the goods on the ground that he has acquired title or right to the possession of it unless such is derived: a. directly or indirectly from a transfer made by the depositor at the time of the deposit for storage or subsequent thereto; b. from the warehousemans lien 2. Adverse title of a 3rd person is not a defense for refusal to deliver by a warehouseman to his bailor on demand, except: a. To persons to whom the goods must be delivered (Sec. 9) b. To the person who wins in the interpleader case (Sec. 17) c. To the person he finds to be entitled to the possession after investigation (Sec. 18) d. To the buyer in case there was a valid sale of the goods (Sec. 36)
G. Commingling of Deposited Goods

General Rule A warehouseman may not mingle goods belonging to different depositors. Exception In case of fungible goods of the same kind and grade provided: 1. he is authorized by agreement 2. he is authorized by custom Effects 1. each depositor shall own the entire mass in common and entitled to his portion 2. warehouseman is severally liable to each depositor for the care and redelivery of their portion as if the goods had been kept separate
F. Duty of Warehouseman When There Are Several Claimants

1. The warehouseman may either: a. Investigate and determine within a reasonable time the validity of the claims, and deliver to the person whom he finds is entitled to the possession of the goods Effect: He is not excused from liability in case he makes a mistake b. He may bring interpleader. a complaint in
VI. Attachment or Levy on Negotiable Receipts

A warehouseman has the obligation to hold the goods for the owner or for the person to whom the negotiable receipt has been duly negotiated. Therefore, the goods cannot be attached or levied upon under an execution, unless: a. the document be first surrendered; or b. the negotiation is enjoined, or c. the document is impounded by the court
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The warehouseman cannot be compelled to deliver the goods until: a. the receipt is surrendered to him; b. it is impounded by the court (Sec. 25)
warehouseman as debtor with authority to make a valid pledge A warehouseman has NO lien on goods belonging to another and stored by a stranger in fraud of the true owners right.
The above rules do not apply if the person depositing is not the owner of the goods or one who has not the right to convey title to the goods binding upon the owner. The remedy of a creditor whose debtor owns a negotiable receipt is to ask for an attachment of the negotiable receipt, not on the goods. The goods themselves cannot readily be attached or levied upon by ordinary legal process
D. Loss of Lien
1. Voluntarily surrendering possession of goods constitutes a waiver or abandonment A warehouseman may NOT claim a lien on other goods of the same depositor for unpaid charges on the goods surrendered if the goods were delivered to him under different receipts. 2. Wrongfully refusing to deliver the goods to a person who holds the receipt or the depositor upon DEMAND accompanied with: a. an offer to satisfy the warehousemans lien (because a warehouseman may refuse delivery until his lien is satisfied) b. an offer to surrender the receipt i. for the protection of the warehouseman and to avoid criminal liability ii. this is subject to waiver c. an offer to sign when the goods are delivered, an acknowledgment that they have been delivered
SPECIAL LAWS
VII. Warehousemans Lien A. Extent of Warehousemans Lien

1. lawful charges for a. storage, and b. preservation of the goods 2. lawful claims for a. money advanced b. labor c. interest d. weighing e. insurance f. cooperating g. transportation 3. other charges and expenses in relation to such goods 4. reasonable charges and expenses for notice and advertisements of sale 5. sale of the goods where defaults has been made in satisfying the lien
E. Remedies of a Warehouseman
1. Even if without lien, all remedies allowed by law to a creditor against his debtor for collection of charges; 2. By refusing to deliver the goods until his lien is satisfied; 3. All remedies allowed by law for the enforcement of a lien against personal property and recovery of any deficiency in case it exists after the sale of the property; 4. By causing the extrajudicial sale of the property and applying the proceeds to the value of the lien
B. Extent of Negotiable Issued
the Lien When a Receipt Has Been
1. charges for storage and preservation of the goods 2. other charges expressly enumerated (#2 b, c, d and e above) although the amount is NOT stated For claims not specified, the warehouseman shares pro rata with the other creditors of the depositor the balance of the proceeds of the sale for the satisfaction of the claims.
F. Effects of Extrajudicial Sale

1. Warehouseman is NOT liable for nondelivery even if the receipt was given for the goods when they were deposited be negotiated 2. When the sale was made without the publication required and before the time specified by law, such sale is void and the purchaser of the goods acquires no title in them
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C. Goods Subject to Lien

1. goods of the depositor who is liable to the warehouseman as debtor wherever such goods are deposited; 2. goods of other persons stored by the depositor who is liable to the
Chapter II. General Bonded Warehouse Act
Chapter II. General Bonded Warehouse Act (Act 3893 as amended by RA 247)
I. II. III. IV. PURPOSE AND APPLICABILITY DUTIES OF A BONDED WAREHOUSEMAN LIABILITIES WAREHOUSE RECEIPTS LAW v GENERAL BONDED WAREHOUSE ACT
I. Purpose and Applicability A. Purpose

1. regulate the business of receiving commodities for storage 2. protect depositors by giving them a direct recourse against the bond filed by the warehouseman in case of the latters insolvency 3. encourage the establishment of more warehouses
2. Give the necessary bond of not less than 33 1/3% of the market value of the maximum quantity or commodities to be received. 3. Insure the commodity against fire (Sec. 6) 4. To keep a complete record of: a. the commodities received by him, b. the receipts issued therefor of the withdrawals, c. the liquidations and all receipts returned to and cancelled by him. 5. Report to the Director of Bureau of Commerce and Industry concerning the warehouse and the conditions, contents, operations, and business. 6. Observe rules and regulations of the Bureau of Domestic Trade (Sec. 9) Person injured by warehousemans breach of his duties may sue on the band to recover damages on account of the breach. In case bond is insufficient to cover the market value of the commodity stored, he may sue on any the warehousemans property or assets not exempt by law from attachment or execution. (Sec. 7)
SPECIAL LAWS
B. Applicability
The Act applies to a warehouseman engaged in the business of receiving commodity for storage, including contracts or transactions wherein 1. the warehouseman is obligated to return the very same commodity delivered to him or pay its value 2. commodity delivered is to bemilled for and on account of its owner 3. commodity delivered is commingled with commodity delivered by or belonging to other persons, and the warehouseman is obligated to return commodity of the same kind, or pay its value Illegal and prohibited goods may not be validly received.
Gonzales vs Go Tiong (1958) Though it is desirable that receipts issued by a bonded warehouseman should conform to the provisions of the Warehouseman Receipts Law, said provisions are not mandatory. The issuance of a warehouse receipt in the form provided by the Act is merely permissive and directory and not obligatory.
III.Liabilities
CIVIL Breach of obligations secured by the bond 1. 2. CRIMINAL Engaging in business covered by the GBWA in violation of the license requirement Receiving a quantity of commodity greater than the warehouse capacity or that specified in the license, if the goods are lost or destroyed Connivance with a warehouseman for the purpose of evading the license requirement
3.
IV. Warehouse Receipts Law General Bonded Warehouse Act

WRL 1. Prescribes the mutual duties and rights of a warehouseman (who issues warehouse receipts) and his depositor 2. Covers all warehouses whether bonded or not
II. Duties of Warehouseman
Bonded
GBWA Regulates and supervises warehouses which put up a bond
1. Storage of Commodities without discrimination between persons desiring to avail themselves of warehouse facilities.
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Chapter III. Trust Receipts Law
Chapter III. Trust Receipts Law (P.D. 115)

I. II. III. IV. V. PURPOSE OF THE LAW DEFINITION AND NATURE COMPARISON TO OTHER TRANSACTIONS PARTIES TO THE TRANSACTION RIGHTS AND OBLIGATIONS OF THE PARTIES VI. VIOLATIONS AND REMEDIES
I. Purpose of the Law

A. To encourage the use of and promote transactions based on trust receipts; encourage and promote the use of trust receipts as an additional and convenient aid to commerce and trade. B. To regulate trust receipt transactions in order to assure the protection of the rights and the enforcement of the obligations of the parties involved. C. To declare the misuse or misappropriation of goods or the proceeds realized from the sale of goods released under trust receipts as an offence punishable under Article 315, RPC. (Sec. 2) D. To punish the dishonesty and abuse of confidence in the handling of money or goods to the prejudice of another regardless of whether or not the latter is the owner. (Colineres vs. CA, 2000)
the purpose of which is to serve as security for a loan. 2. Allied Banking vs. Ordonez (1990): Applies even to goods not destined for sale or manufacture, and would include items obtained to repair and maintain equipment used in business. 3. People vs. Cuevo (1981): [No agency relationship is established.] An entrustees breach of trust, however, subjects him to criminal and civil liability for estafa. 4. Not a Trust Receipt Transaction: sale of goods/documents/instruments by a person in the business of selling such for profit who, at the outset of the transaction, has, as against the buyer: a. general property rights in such goods/ documents/ instruments, OR b. who sells the same to the buyer on credit, retaining title or other interest as security for the payment of the purchase price.
PD 115 Although the entrustee is not the owner of the goods, anyone who buys from him acquires good title over the goods. Even if the entrustee is not the owner, he bears risk of loss while the goods are in his possession. Civil Code Buyer acquires only whatever title the seller has at the time the sale is perfected. (Art. 1505) Generally, owner bears the loss.
SPECIAL LAWS
II. Definition and Nature

Trust Receipt Transaction is a transaction between an entruster and an entrustee whereby the entruster, who owns or holds absolute title or security interests or instruments, releases the same to the possession of the entrustee upon the latters execution and delivery to the entruster of a trust receipt wherein the entrustee binds himself to hold the specified goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents of instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or the goods, documents or instruments themselves if they are unsold or not otherwise disposed of. (Sec. 4)
III. Comparison Transactions

Other Transactions
to
Other
A. Nature of Trust Receipts

1. Landi & Co. (Phil.), Inc. vs. Metropolitan Bank (2004): A trust receipt is merely a collateral agreement,
Trust Receipt Transaction Subjects the No lien is Chattel property to a created over Mortgage lien the property Financer Person Pledge possesses the financed property possesses the property There is a sale No sale of the Conditional of the property property from Sale from the seller entruster to to the buyer entrustee 1. Tripartite Consignment 1. Bipartite 2. Consignor 2. Seller retains does not ownership retain of the title to property the property (Notes on Selected Commercial Laws: A Guide for Bar Reviewees, Tristan Catindig, 2003 ed.)
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Colinares vs. CA (2000) This situation belies what normally obtains in a pure trust receipt transaction where goods are owned by the bank and only released to the importer in trust subsequent to the grant of the loan. The bank acquires a security interest in the goods. The ownership of the merchandise continues to be vested in the person who had advanced payment until he has been paid in full, or if the merchandise has already been sold, the proceeds of the sale should be turned over to him. The bank takes full title to the goods and continues to hold that as his indispensable security until the goods are sold and the vendee is called upon to pay for them. Trust receipts partake of the nature of a conditional sale where the importer becomes absolute owner of the imported merchandise as soon as he has paid its price. Consolidated Bank vs. CA (2001) The delivery of the goods subject to the TR occurred long before the TR itself was executed. This situation is inconsistent with what normally obtains in a pure TR transaction, wherein goods belong in ownership to the bank and are only released to the importer in trust after the loan is granted.
C. Seller of the Goods

Not strictly and actually a party to the TR transaction, but a party to the contract of sale with the buyer/importer (entrustee).
D. Purchaser in Good Faith

Any purchaser of goods from an entrustee with the right to sell, or of documents or instruments through their customary form of transfer, who buys such for value and in good faith from the entrustee, acquires said goods, documents or instruments free from the entrusters security interest. (Sec. 11)
SPECIAL LAWS
V. Rights And Obligations Of Parties A. Rights of the Parties

Entruster Entitled to the proceeds from the sale of the goods, documents or instruments to the extent of the amount owing to the entruster or as appears in the trust receipt Entitled to the return of the goods, documents or instruments in case of non-sale, Entitled to the enforcement of all other rights conferred on him in the trust receipt Cancel the trust and take possession of the subject of the trust or of the proceeds upon default or failure of the entrustee Sell the goods, documents or instruments at public or private sale upon default of the entrustee after notice to the latter Prudential Bank vs NLRC (1995) The security interest of the entruster is not merely an empty or idle title. To a certain extent, such interest becomes a "lien" on the goods because the entruster's advances will have to be settled first before the entrustee can consolidate Entrustee To receive the surplus from the public sale
IV. Parties to the Transaction A. Entruster

1. Lender/financier 2. Person holding title over the goods, documents or instruments subject of a TR transaction; releases possession of the goods upon execution of TR 3. Not the owner of the goods, but merely a holder of security interest 4. Garcia vs. CA: If it is made to appear in the TR as the owner of the goods purchased, it is merely theoretical, an artificial expedient and more of fiction than fact. (However, also see Prof. Catindigs contrary view, as well as Colinares vs. CA, and Prudential Bank vs. IAC.)
To have possession of the goods as a condition for his liability under the Trust Receipt Law (Ramos vs. CA)
B. Entrustee
1. Borrower/buyer/importer 2. Person to whom the goods are delivered for sale or processing in trust, with the obligation to return the proceeds of the sale of goods or the goods themselves to the entruster 3. The owner of the goods purchased the law imposes upon him the risk of loss of the goods. Res perit domino. 4. DBP vs. Prudential Bank (2005): The entrustee has no authority to mortgage goods covered by TR.
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his ownership over the goods. The law warrants the validity of petitioner's security interest as against all creditors of the trust receipt agreement. The only exception is when the properties are in the hands of an innocent purchaser for value and in good faith. Prudential Bank vs NLRC (1995) The goods covered by trust receipts cannot be levied upon by creditors of the entrustee.
VI. Violation and Remedies

People vs. Nitafan (1992) The TR law punishes the dishonesty and abuse of confidence in the handling of money or goods it does not seek the enforcement of the loan. Thus, there can be no violation of a right against imprisonment for non-payment of a debt. PD 115, like BP 22, punishes the act not as an offense against property, but as an offense against public order. Thus the law states that a breach of a TR agreement makes one liable for estafa. The offense is malum prohibitum. There is no need to prove damage to the entrustor. Prudential vs. IAC: Apart from estafa, the entrustee is also liable for damages under Art. 33, CC.
B. Obligations of the Parties

Entruster To give possession of the goods to the entrustee Entrustee To hold the goods, documents or instruments in trust for the entruster and shall dispose of them strictly in accordance with the terms and conditions of the trust receipt To receive the proceeds in trust for the entruster and turn over the same to the extent of the amount owing to the entruster or as appears on the trust receipt To insure the goods for their total value against loss from fire, theft, pilferage or other casualties To keep said goods or proceeds separate and capable of identification To return the goods, documents or instruments in the event of non-sale or upon demand To observe all other terms and conditions of the trust receipt To bear the risk of loss irrespective of WON it was due to his fault or negligence
SPECIAL LAWS
Effect of Compliance Before criminal charge: NO crim. Liability After charge, before conviction: EXTINGUISHMENT of criminal liability
To give at least 5 days notice to the entrustee of the intention to sell the goods at an intended public sale
The liability of the entrustee accrues upon his failure to comply with his obligation to return. It is not absolutely necessary that the entruster cancels the trust and take possession of the goods to be able to enforce his rights under this law.
Allied vs. Ordonez The penal provision of PD 115 encompasses any act violative of the obligation covered by the trust receipt. It is not limited to the transactions in goodswhich are to be sold, reshipped or storesd, but also applies to goods processed as a component of a product ultimately sold to the general public. Sarmiento Jr. vs. CA (2002) The breach of obligation of a TR agreement is separate and distinct from any criminal liability for misuse and/or misappropriation of goods or proceeds realized from the sale of goods, documents or instruments released under trust receipts, punishable under Sec. 13 of the TR law in relation to Art. 315(1)(b) of the RPC. Being based on an obligation ex contractu and not ex delicto, the civil action may proceed independently of the criminal proceedings instituted against petitioners regardless of the result of the latter. Tupaz VI, et. al. vs. CA and BPI (2005) Here, BPI chose not to file a separate civil action to recover payment under the TRs. Instead, respondent bank sought to recover payment in criminal case nos. 8848 and 8849. Although the TC acquitted Jose Tupaz, his acquittal did NOT extinguish his criminal liability. ... Acquittal in a criminal case for estafa does not extinguish civil liability arising from breach of trust receipt contract. Phil. Blooming vs. CA PF 115 allows the bank to take possession of the goods covered by the TRs. Thus, even though the bank took possession of the goods covered by the TRs, the entrustees remained liable for the entire amount of the loans covered by the TRs.
State Investment vs CA (2000) The entruster not entitled to proceeds of sale of goods not covered by trust receipt. Vintola vs. IBAA (1987) The liability of entrustee not extinguished by return of goods to entruster. The entruster did not become the real owner of the goods; it was merely the holder of a security title for the advances in had made to the entrustee. The goods remain the entrustees own property.
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Chapter IV. Chattel Mortgage Law
Chapter IV. Chattel Mortgage Law (Act No. 1508)

I. II. III. IV. V. VI. DEFINITIONS, REQUISITES AND CHARACTERISTICS PROPPERTIES AND OBLIGATIONS COVERED FORM RIGHT OF MORTGAGEE TO POSSESS REMEDIES COMPARATIVE TABLES
3. Those contemplated in an express stipulation and in a supplement to the mortgage subsequently executed in strict compliance with the Chattel Mortgage Law.
B. Obligations Covered
Only obligations existing at the constitution of the mortgage Although a promise expressed in a chattel mortgage to include debts that are yet to be contracted can be a binding commitment that can be compelled upon, the security itself does not arise until after a chattel mortgage agreement covering the newly contracted debt is executed either by e fresh chattel mortgage or by amending the old contract.
I. Definitions, Requisites Characteristics
and
A chattel mortgage is a contract by virtue of which personal property is recorded in the Chattel Mortgage Register as security for the performance of an obligation Essential Requisites a. Secure an Obligation b. Absolute Ownership by the mortgagor c. Free Disposal by the mortgagor Characteristics a. Accessory It is constituted to secure the performance of a principal obligation b. Formal Registration is required to bind third parties. c. Unilateral It produces only obligations on the part of the creditor to free the thing from the encumbrance on fulfillment of the obligation. d. Constituted on personal properties.
SPECIAL LAWS
III.Form A. Registered
The mortgage must be Registered in the Chattel Mortgage Registry in the registry of deeds of the province where: 1. If the property is located where the mortgagor resides a. The mortgage resides OR b. The property is situated if he is a non-resident 2. If the property is located at a different place than where the mortgagor resides a. The mortgage resides AND b. The property is situated if he is a non-resident Effects 1. Registration creates a real right or a lien which follows the chattel wherever in goes. 2. An unregistered mortgage is binding between parties but does not bind third person
II. Properties Covered
and
Obligations
A. Properties Covered
Only property described therein and not like or substituted property thereafter acquired Exception A stipulation in the mortgage extending its scope and effect to after-acquired property is valid and binding where the after acquired property is: 1. Goods perishable or subject to inevitable wear and tear. (Peoples Bank v. Dahican Lumber Co.) 2. Future property is a renewal of or in substitution for goods on hand when the mortgage was executed, or is purchased with the proceeds of sale of such goods. (Torres and Limjap)
B. Affidavit of Good Faith

The parties are required to executed an affidavit of good faith. Affidavit of Good faith in the contract of chattel mortgage is an oath wherein the parties severally swear that (1) the mortgage is made for the purpose of securing the obligation specified in conditions thereof, and for no other purpose and (2) that the same is just and valid obligation and (3) one not entered into for the purpose of fraud.
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Effects 1. It gives the mortgage a preferred status. 2. Its absence vitiates the mortgage against third persons without notice like creditors and subsequent encumbrancers. (Liluis v. Manila Standard Company)
VI. Comparative Tables A. Chattel Mortgage and Pledge

Chattel Mortgage Delivery of the property to the mortgagee is not necessary Registration in the Chattel Mortgage Register is necessary to bind third persons Procedure for the sale is found in Sec. 14 of Act No. 1508 If the property is foreclosed, the excess over the amount due goes to the debtor Creditor may recover any deficiency except if chattel mortgage is a security for the purchase of personal property in installments (see Recto Law, Act 4122) Pledge Delivery of the property to the pledge is necessary Registration in the Registry of Property is not necessary
SPECIAL LAWS
Delivery
IV. Right of Mortgagee to Possess

Before default No right to possess. After default The right of the mortgagee to take the mortgage property which is to be foreclosed is implied from the provisions giving him the right to sell.
Registration
V. Remedies
1. Original action for collection of money or 2. Extra-judicial Foreclosure Procedure for Extrajudicial Foreclosure 1. 30 days after the time of the condition is broken, the mortgagee may cause the mortgaged property to be sold at public auction by a public officer. 2. Applications for extra-judicial foreclosure of mortgage whether under the direction of the sheriff or a notary public shall be filed with the executive judge through the Clerk of Court 3. The chattel mortgage may be sold at a public sale or private sale. 4. There must be at least 10 days notice previous to the sale of the (1) mortgagor or person holding under him, and persons holding subsequent mortgages of the time and place of the sale either by notice in writing directed to him or left at his abode in the municipality or sent by mail if he does not reside within the municipality. This notice must also be (2) posted at two or more public places in the municipality, There can be a deficiency claim except in circumstances where the Recto Law (Sale by Installment) is applicable: a. Exact fulfillment of the obligation, should the vendee fail to pay; b. Cancel the sale, should the vendees failure to pay cover two or more installments; c. Foreclosure (choosing this option BARS recovery of deficiency)
Procedure for Sale
Procedure is found in Art 2112 of the Civil Code Debtor is not entitled to the excess unless it is otherwise agreed or except in the case of a legal pledge Creditor cannot recover deficiency even if agreed upon
Excess
Deficiency
B. Chattel Mortgage and Pacto de Retro

Chattel Mortgage Accessory contract Title to the thing mortgage is not transferred Pacto de Retro Principal contract Title to the subject matter is transferred to the vendee a retro but subject to the redemption of the vendor Affidavit of good faith is not required.
Nature Transfer title of
Affidavit of Good Faith
Affidavit of good faith is required
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C. Chattel Mortgage and Real Estate Mortgage

Chattel Mortgage Thing mortgaged must be a personal or movable property Mortgagor cannot alienate the thing mortgaged without the consent of the mortgagee No right of redemption Real Estate Mortgage Thing mortgaged must be real or immovable property Mortgagor can alienate the thing mortgaged without the consent of the morgagee and any such prohibition is void There can be right of redemption in extrajudicial foreclosure and in judicial foreclosure by banks Affidavit of Goof faith is not required
Subject Matter
Alienation
SPECIAL LAWS
Right of Redemption
Affidavit of Good Faith
Affidavit of Goof faith is required
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Chapter V. Real Estate Mortgage Law
Chapter V. Real Estate Mortgage Law (Act No. 3135 as amended)

I. DEFINITION AND APPLICABILITY II. EFFECTS OF REAL ESTATE MORTGAGE III. REMEDIES IN CASE OF DEFAULT IV. FORECLOSURE V. DEFICIENCY CLAIMS VI. REDEMPTION VII. PURCHASERS RIGHT OF POSSESSION
I. Definition and Applicability

A real estate mortgage is a contract whereby the debtor secures to the creditor the fulfillment of a principal obligation, specially subjecting to such security immovable property or real rights over immovable property which obligation shall be satisfied with the proceeds of the sale of said property or rights in case the said obligation is not complied with at the time stipulated Act 3135 applies if a special power to extrajudicially foreclose the mortgage is inserted to the real estate mortgage contract. Rule 68 of the Rules of Court applies if the real estate mortgage is silent as to the manner of foreclosing the mortgage.
If mortgagor is dead (Rules of Court, Rule 86 Sec 7) 1. Waive the mortgage and claim the entire debt from the estate of the mortgagor as an ordinary claim against the estate 2. Judicial foreclosure and claim the deficiency from the estate 3. Rely on the mortgage and foreclose the same at anytime within the period of the statute of limitations without right to claim for deficiency 4. Extrajudicial foreclosure under Act 3135 before it is barred by prescription without right to file a claim for any deficiency (Vda de Jacob v. CA, GR No. L-88602, April 6, 1990)
SPECIAL LAWS
IV. Foreclosure
Foreclosure is a remedy available to the mortgagee where he subjects the mortgaged property to the satisfaction of the obligation to secure for which the mortgage was given. Procedure: 1. File an application for extrajudicial foreclosure with the Executive Judge through the Clerk of Court who is also the Ex-officio Sheriff (AM No 99-10-0500) 2. The venue is the place where each of the mortgaged property is located. Should a place within the province be a subject of stipulation, the sale shall be held at the stipulated place or in the municipal building of the municipality where the property or part thereof is situated If the stipulation of the parties as to venue does not contain restrictive words indicating exclusivity of venue, the stipulated place is considered only as an additional, not a limiting venue (Langkaan v. UCPB) 3. Publication and posting of notice Notice shall be given by posting notices of sale for not less than 20 days in at least 3 public places of the municipality or city where the property is situated. If the property is worth more than P400.00 such notice shall also be published once a week for at least 3 consecutive weeks in a newspaper of
II. Effects of Real Estate Mortgage A. Effect of real estate mortgage

1. Creates a real right. A registered mortgage lien is considered inseparable from the property inasmuch as it is a right in rem 2. Creates merely an encumbrance. Real estate mortgage does not involve transfer, cession or conveyance of property but only constitutes a lien. It does not give the mortgagee a right to the possession of the property unless it contains a provision to that effect
B. Effects of invalidity of mortgage

1. Principal obligation remains valid 2. Mortgage deed remains as evidence of personal obligation
III.Remedies in Case of Default

If the mortgagor is alive 1. Ordinary action for collection of money 2. Judicial or extrajudicial foreclosure of mortgaged property
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general circulation municipality.
in
the
city
or
4. Public auction sale Time: made between 9am and 4pm Under the direction of the a. Sheriff of the province b. Municipality or auxiliary municipal judge of the municipality in which the sale has to be made c. Or notary public of said municipality The creditor, trustee or any person authorized to act for the creditor, may participate in the bidding and purchase, as any other bidder, unless the contrary is expressly provided in the mortgage or trust deed under which the sale is made No auction sale shall be held unless there are at least 2 participating bidders (in case of second sale, if there is only 1 bidder, the sale shall proceed) If the proceeds of the sale are in excess of the amount claimed by the mortgagee, the excess must be turned over to the mortgagor. 5. Certificate of sale Issued by the Clerk of Court must be approved by the Executive Judge or in his absence, the Vice-Executive Judge. No certificate of sale shall be issued in favor of the highest bidder until all fees shall have been paid. 6. The certificate of sale filed with the Register of Deeds, who shall make a brief memorandum on the certificate of title. 7. When the redemption period has expired, the clerk of court shall archive the records.
When the mortgagor is not the debtor. The action for the recovery of such deficiency must be directed against the debtor
VI. Redemption
Redemption is a transaction by which the mortgagor reacquires or buys back the property which may have passed under the mortgage or divests the property of the lien which the mortgagee may have created. Kinds 1. Equity of redemption refers to the right of the mortgagor in case of judicial foreclosure to recover the mortgaged property after his default in the performance of the conditions of the mortgage. 2. Right of redemption is the right of the mortgagor in case of extrajudicial foreclosure to redeem the mortgaged property within a certain period after it was sold for the satisfaction of the mortgaged debt. Rule on Right of Redemption Period within which to exercise right is 1 year from the date of registration of certificate of sale with the appropriate Registry of Deeds. Purchaser has the absolute right to a writ of possession upon failure to exercise right Where mortgaged property is sold to 3rd party, only the right to redeem the property and the right to posses, use and enjoy the property during the same is transferred (the mortgagee may redeem it at the amount of the principal obligation plus interest until time of actual redemption and not the purchase price). The mortgagee need not recognize the redemption made by the 3rd party when the sale is not registered or made without the consent of mortgagee. When the sale is effected with fraud, the same is null and void. Who may exercise the right of redemption? 1. Mortgagor or one in privity of title with mortgagor; 2. Successor-in-interest: a. One to whom the debtor has transferred his right of redemption; b. One to whom the debtor has conveyed his interest ion the
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SPECIAL LAWS
V. Deficiency Claims
Where the proceeds of the sale are insufficient to cover the debt in an extrajudicial foreclosure of mortgage, the mortgagee is entitled to claim the deficiency from the debtor. The mortgagee, in extrajudicial foreclosure, has the right to recover deficiency judgment within 10 years from the time the right of action accrues.
property for the proposed redemption; c. One who succeeds to the interest of the debtor by operation of law; d. One or more of debtors who were joint owners of the property sold; e. The wife as regards her husbands homestead by reason of the fact that some portion of her husbands title passes to her; f. Compulsory heir. Requisites for a Valid Redemption 1. The redemption must be made within 1 year from the date of registration of the certificate of sale. 2. Payment of the purchase price of the property plus 1% percent interest per month together with the taxes thereon, if any paid by the purchaser and the amount of his prior lien, if any with the same rate of interest computed from the date of registration of the sale up to the time of redemption 3. Written notice of the redemption must be served on the officer who made the sale and duplicate file with the proper Registry of Deeds. 4. Tender of payment must be for full amount of purchase price, otherwise, to allow payment by installment would be to allow the indefinite extension of the redemption period (Estanislao, Jr. vs. Court of Appeals).
accordance with the Act 3135. If the petition is meritorious, the bond shall be disposed of in favor of the debtor. Either party may appeal the order of the judge in accordance with PD 1529 but the order of possession shall continue in effect during the pendency of the appeal (Sec. 8) After the lapse of redemption period, the mortgagor is divested of his rights to the mortgaged property and the vendees right of possession of the property shall become final. Consolidation of the title becomes a matter of right on the part of purchaser and the issuance of certificate of title in his favor becomes ministerial upon the Registry of Deeds. To obtain possession, the purchaser may either ask for a writ of possession or bring an independent action such a suit for ejectment (Javelosa v. CA, GR No. L124292, December 10 1996). Sales made under RA 8791 (General Banking Law): After the date of the confirmation of the auction sale, the winning bidder has the right to enter upon and take possession of such property and administer the same in accordance with law.
SPECIAL LAWS
VII. Purchasers Right of Possession

During the redemption period, purchaser is allowed to take possession of the foreclosed property upon filing of an ex parte application and approval of a bond in the amount equivalent to the use of the property for a period of 12 months (Sec. 7). However, a writ of possession may be issued in an extrajudicial foreclosure of real estate mortgage only if the debtor is in possession and no 3rd party had intervened (Philippine National Bank v. CA). The debtor may, in the proceedings in which possession was requested, not later than 30 days after the purchaser was given possession, petition to set aside the sale and cancel the writ of possession specifying the damages suffered by him because the mortgage was violated or the sale was not made in
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Chapter VI. The Anti-Dummy Law
Chapter VI. The Anti-Dummy Law (CA No. 108, amended by PD No. 715)
I. II. III. IV. DEFINITION ACTS PUNISHED PENALTIES NATIONALIZATION LAWS
thereof whether as an officer, employee or laborer except technical personnel authorized by the Sec. of Justice.
Technical personnel: any person who has special, extraordinary or practical knowledge, especially of a scientific or mechanical occupation Exception: some special laws do not require prior authority of DOJ Description of duties, NOT designation of position (i.e. technical consultant) is controlling
OR
FILIPINIZATION
I. Definition
It is an act to punish the evasion of the law on nationalization of certain: Rights, Franchises, or Privileges. PD 715 amended CA 108 by allowing foreigners to have limited representation in the governing board of corporations or associations in proportion to their allowable participation in the equity of said entities.
E. Any person who knowingly aids, assists or abets in the planning, consummation or perpetration of any acts enumerated above.
SPECIAL LAWS
III.Penalties
A. Imprisonment for 5-15 years AND fine of not less than the value of the right, franchise or privilege acquired in violation of this law (but in no case less than P5,000) B. Forfeiture of such right, franchise or privilege and the property or business acquired in violation of this law C. Dismissal of any public official whose spouse violates this act if they live together D. Dissolution of any corporation violating this act E. Criminal liability for officers of such corporation
II. Acts Punished

A. Simulation of minimum capital stock: where constitution or law requires that a certain percentum of capital be owned by Filipinos before a Right, Franchise, Privilege, Property or Business (RFPPB) can be exercised, it is unlawful to falsely simulate the existence of such minimum stock or capital as owned by such citizen in order to evade such provision B. Permit or allow the use, exploitation or enjoyment of certain RFPPB by a person, corporation or association not possessing the requisites prescribed by the Constitution or other Phil. Laws C. Leases, transfers or conveys RFPPB to a person, corporation or association not qualified under the Constitution or other laws D. Permits or allows any person, not possessing the qualifications required by the Constitution or other laws to acquire, use, exploit or enjoy other RFPPB expressly reserved for Filipinos to intervene in the: 1. Management, 2. Operation, 3. Control, or 4. Administration
IV. Nationalization or Filipinization Laws A. Definition

It is a law which limits a certain economic activity or the exercise or enjoyment of a certain right, franchise, privilege, property or business only to Filipino citizens or to corporations or associations a certain percentage of which is owned by Filipino citizens.
B. Examples of Areas Governed

Areas Governed Disposition, exploitation, development or utilization of Natural Resources Filipino citizenship or equity requirements Can only be done by: 1. Filipino citizens; or 2. Corporations incorporated in RP with at least 60% Filipino ownership
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Chapter VI. The Anti-Dummy Law
Operation Utilities
of
Public
Ownership Media
of
Mass
Ownership, control and administration of Educational Institutions
Practice of ALL Professions Acquisition of Alienable Lands of the Public Domain
1. Filipino citizens; or 2. Corporations incorporated in RP with at least 60% Filipino ownership 1. Filipino citizens; or 2. Corporations incorporated in RP with 100% Filipino ownership 1. Filipino citizens; or 2. Corporations incorporated in RP with at least 60% Filipino ownership exception: schools established by religious groups and mission boards Filipino citizens only (natural persons) 1. Filipino citizens; 2. Corporations incorporated in RP with at least 60% Filipino ownership; 3. Former natural-born citizens of RP, as transferees with certain restrictions; or 4. Alien heirs as transferees in case of intestate succession
E. Extent of Nationalization of Employment in Nationalized Enterprises

The Anti-Dummy Law bans the employment of aliens in all entities engaged in nationalized activities and the ban on alien employment includes even minor or clerical or non-control positions. In King vs. Hernaez (1962), the SC held that the employment of 3 Chinese nationals as purchasers and salesmen in a grocery business, required by the Retail Trade Nationalization Law to be wholly owned by Filipino citizens or Filipino entities, violated the AntiDummy Law. NOTE: The ban on alien employment extends to both completely nationalized and partially nationalized activities.
SPECIAL LAWS
F. Exceptions to the Ban on Alien Employment

1. aliens employed as technical personnel, authorized by the Sec. of Justice 2. aliens elected as members of the Board of Directors or governing body of the enterprise engaged in partially nationalized activities (this is NOT allowed in completely nationalized activities) NOTE: Aliens can be elected as such only in proportion to their allowable participation or share in the capital of such entities.
C. Distinction between Completely Nationalized and Partially Nationalized Activities

Completely Partially Nationalized Nationalized Exercise or enjoyment of which are expressly reserved by the Consti or laws to: 1. Filipino citizens, Corporations or OR associations at least 2. Corporations or 60% of the capital of associations wholly which is owned by owned by such citizens Filipinos
D. Relation of Anti-Dummy Law to Nationalization Laws

Universal Corn Products, Inc. v. Rice & Corn Board, 1967: By itself, a Filipinization law does not necessarily entail restriction on the employment of aliens in the nationalized enterprise; but the Anti-Dummy Law complements these nationalization laws by nationalizing employment in these enterprises.
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Chapter VII. Foreign Investment Act
Chapter VII. Foreign Investment Act of 1991 (RA No. 7042, amended by RA No. 8179)
I. II. III. IV. PHILIPPINE NATIONAL DOING BUSINESS NOT DOING BUSINESS TEST TO DETERMINE WHETHER ONE IS DOING BUSINESS
Foreign Investment shall mean an equity investment made by non-Philippine national in the form of foreign exchange and/or other assets actually transferred to the Philippines and duly registered with the Central Bank which shall assess and appraise the value of such assets other than foreign exchange. (Sec. 3.c.)
domestic business, firm, entity or corporation in the Philippines; and F. any other act or acts which imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts and works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization.
III. What acts are NOT considered as doing business?

SPECIAL LAWS
A.
I. Who is a Philippine National?

A. a citizen of the Philippines B. a domestic partnership or association wholly owned by citizens of the Philippines C. a corporation organized under the laws of the Philippines of which at least 60% of the capital stock outstanding and entitled to vote is owned and held by citizens of the Philippines D. a corporation organized abroad and registered as doing business in the Philippines under the Corporation Code and 100% of stocks is owned by Filipinos E. a trustee of funds for pension or other employee retirement or separation benefits where: 1. the trustee of funds is a Philippine national, and 2. at least 60% of the fund will accrue to the benefit of the Philippine national.
B. C.
D. E.
F.
G. H.
II. What are acts considered as doing business?

A. soliciting orders; B. service contracts; C. opening offices, whether liaison offices or branches; D. appointing representatives or distributors operating under full control of the foreign corporation domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totaling 180 days or more; E. participating in the management, supervision, and control of any
mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor; having a nominee director or officer to represent its interests in such corporation; and appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account. the publication of a general advertisement through any print or broadcast media; maintaining a stock of goods in the Philippines solely for the purpose of having the same processed by another entity in the Philippines; consignment by a foreign entity of equipment with a local company to be used in the processing of products for export; collecting information in the Philippines; and performing services auxiliary to an existing isolated contract of sale which are not on a continuing basis, such as installing in the Philippines machinery it has manufactured or exported to the Philippines, servicing the same, training domestic workers to operate it, and similar incidental services.
IV. What are the TESTS used to determine WON a company is doing business?
1. Continuity Test WON its act or acts imply a continuity of commercial dealings or arrangements, and contemplate to that 2. Substance Test WON the foreign corporation is continuing the body or substance of the business or enterprise
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Chapter VII. Foreign Investment Act
extent the performance of acts and works, or the exercise of some of the functions normally incident to and in progressive prosecution of commercial gain or of the purpose and object of the business organization (Mentholatum vs. Mangaliman, 1941)
for which it was organized, or whether it has substantially retired from it and turned it over to another
Note: There is NO GENERAL RULE as to what constitutes "doing business in the Philippines. Each case must be judged in the light of its peculiar circumstances.
Agilent Technologies Singapore (PTE) Ltd. vs. Integrated Silicon Technology Philippines Corp. et. al., 2004: By and large, to constitute doing business, the activity to be undertaken in the Philippines is one that is for profit-making.
SPECIAL LAWS
Far East International Import and Export Corporation v. Nankai Kogyo, 1987: The acts of corporations should be distinguished from a single or isolated business transaction or occasional, incidental and casual transactions which do not come within the meaning of the law. Where a single act or transaction, however, is not merely incidental or casual but indicates the foreign corporation's intention to do other business in the Philippines, said single act or transaction constitutes "doing" or "engaging in" or "transacting" business in the Philippines.
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Chapter VIII. Letters of Credit
Chapter VIII. Letters Of Credit

I. DEFINITION II. PARTIES III. LIABILITIES IV. RULE OF STRICT COMPLIANCE V. INDEPENDENCE PRINCIPLE VI. KINDS OF LETTERS OF CREDIT
Letter of Credit v. Trust Receipt

Trust Receipt The entruster, who holds an absolute title or security interests over certain goods, documents or instruments, releases the same to the entrustee, who executes the trust receipt. The entrustee binds himself to hold the goods, documents or instruments in trust for the entruster and to sell or otherwise dispose of the goods, documents and instruments with the obligation to turn over to the entruster the proceeds thereof to the extent of the amount owing to the entruster, or as appears in the trust receipt, or return the goods, documents or instruments themselves if they are unsold, or not otherwise disposed of, in accordance with the terms and conditions specified in the trust receipt.
I. Definition
ART 567. Code of Commerce Letters of credit are those issued by one merchant to another or for the purpose of attending to a commercial transaction. ART 568. Code of Commerce The essential conditions of letters of credit shall be: 1. To be issued in favor of a definite person and not to order. 2. To be limited to a fixed and specified amount, or to one or more undetermined amounts, but within a maximum the limits of which has to be stated exactly. Those which do not have any of these last circumstances shall be considered as mere letters of recommendation. Prudential Bank vs. IAC (1992) An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. MWSS vs. Daway (2004) Letters of credit are absolute undertakings to pay the money advanced or the amount for which credit is given on the faith of the instrument. They are primary obligations and not accessory contracts and while they are security arrangements, they are not converted thereby into contracts of guaranty. What distinguishes letters of credit from other accessory contracts, is the engagement of the issuing bank to pay the seller once the draft and other required shipping documents are presented to it.
Letter of Credit An engagement by a bank or other person made at the request of a customer that the issuer will honor drafts or other demands for payment upon compliance with the conditions specified in the credit. The bank merely substitutes its own promise to pay for the promise to pay of one of its customers who in return promises to pay the bank the amount of funds mentioned in the letter of credit plus credit or commitment fees mutually agreed upon.
SPECIAL LAWS
II. Parties
ART 569. The drawer of a letter of credit shall be liable to the person on whom it was issued, for the amount paid by virtue thereof, within the maximum fixed therein. Letters of credit may not be protested even should they not be paid, nor shall the bearer thereof acquire any right of action by reason of such non-payment against the person who issued it. The person paying shall have the right to demand the proof of the identity of the person in whose favor the letter of credit was issued.
3 Distinct and Independent Contracts Involved in a Letter of Credit: 1. The contract of sale between the buyer and the seller; 2. The contract of the buyer with the issuing bank; and 3. The letter of credit proper.
1. The buyer, who procures the letter of credit and obliges himself to reimburse the issuing bank upon receipt of the documents of title; 2. The issuing bank, or the bank issuing the letter of credit, which undertakes to pay the seller upon receipt of the draft
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and proper documents of titles and to surrender the documents to the buyer upon reimbursement; and 3. The seller, who in compliance with the contract of sale ships the goods to the buyer and delivers the documents of title and draft to the issuing bank to recover payment. (Bank of America, NT and SA vs. CA) NOTE: The number of parties may be increased to include: 1. An advising (notifying) bank, which may be utilized to convey to the seller the existence of the credit; 2. A confirming bank which will lend credence to the letter of credit issued by a lesser known issuing bank; the confirming bank is directly liable to pay the seller-beneficiary; 3. A paying bank which undertakes to encash the drafts drawn by the exporter/seller; 4. Instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank, or negotiating bank to have the draft discounted. (Bank of America, NT and SA vs. CA)
place where payment was made on the place where it is repaid. ART. 572. If the bearer of a letter of credit does not make use thereof within the period agreed upon with the drawer, or, in default of a period fixed, within six months, counted from its date in any point in the Philippines, and within twelve months anywhere outside thereof, it shall be void in fact and in law.
IV. Rule of Strict Compliance

Feati Bank & Trust Co. vs. CA (1991) Commercial transactions involving letters of credit that the documents tendered must strictly conform to the terms of the letter of credit. The tender of documents by the beneficiary (seller) must include all documents required by the letter. A correspondent bank which departs from what has been stipulated under the letter of credit, as when it accepts a faulty tender acts on its own risks and it may not thereafter be able to recover from the buyer or the issuing bank the money paid to the beneficiary.
SPECIAL LAWS
V. Independence Principle
Keng Hua Paper Products vs. CA Contracts involved in a letter of credit are to be maintained in a state of perpetual separation. The undertaking of the bank to pay, accept and pay drafts or negotiate and/or fulfill any obligation under the credit is not subject to claims or defenses by the applicant resulting from his relationship with the issuing bank or the beneficiary. In the same manner, the beneficiary can in no case avail himself of the contractual relationships existing between the banks or between the applicant and the issuing bank. BPI vs De Reny Fabric (1970) A direct consequence of the independence principle is the rule than banks only deal with documents and not with the goods, services or obligations to which they relate.
III.Liabilities
ART. 569. The drawer of a letter of credit shall be liable to the person on whom it was issued, for the amount paid by virtue thereof, within the maximum fixed therein. Letters of credit may not be protested even should they not be paid, nor shall the bearer thereof acquire any right of action by reason of such non-payment against the person who issued it. The person paying shall have the right to demand the proof of the identity of the person in whose favor the letter of credit was issued.
Unless the contrary is expressly provided for, the liability of the issuing bank is solidary with the buyer-applicant.( MWSS vs. Daway)
ART. 570. The drawer of a letter of credit may annul it, informing the bearer and the person to whom it is addressed of such revocation. ART. 571. The bearer of a letter of credit shall pay the amount received to the drawer without delay. Should he not do so, an action involving execution may be brought to recover it, with legal interest and the current exchange in the
VI. Kinds of Letters of Credit

(Aquino, Notes and Cases on Banks, Negotiable Instruments and other Commercial Documents) 1. Confirmed Letters of Credit- where the beneficiary stipulates that the obligation of the opening bank shall also be made the obligation of another bank (also the bank that notifies) to him.
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2. Irrevocable Letters of Credit- is a definite undertaking on the part of the issuing bank; it constitutes the engagement of the bank to the beneficiary and bona fide holders of drafts drawn and/or documents presented thereunder, that the provisions for payment, acceptance or negotiation contained in the credit will be duly fulfilled, provided that all the terms and conditions of the credit are complied with. 3. Revolving Letter of Credit- provides for renewed credit to become available as soon as the opening bank has advised that the negotiating or paying bank that the drafts already drawn by the beneficiary have been reimbursed to the opening bank by the buyer. 4. Back-to-Back Letter of Credit- a credit with identical documentary requirements and covering the same merchandise as another letter of credit, except for a difference in the price of the merchandise as shown by the invoice and the draft. The second letter or credit can be negotiated only after the first is negotiated. 5. Standby Letter of Credit- a security arrangement for the performance of certain obligations. It can be drawn against only if another business transaction is not performed. It may be issued in lieu of a performance bond.
SPECIAL LAWS
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Chapter IX. Insolvency Law

I. CONCEPT AND PURPOSE II. COMPARISONS III. SUSPENSION OF PAYMENTS IV. VOLUNTARY INSOLVENCY V. INVOLUNTARY INSOLVENCY VI. SPECIFIC PROVISIONS No bond is required for the petition Order of adjudication may be granted ex parte Debtor must not have committed an act of insolvency Petition must be filed with the RTC where petitioner-debtor resided for 6 months prior to the filing
creditor by assignment within 30 days prior to the filing of the petition A bond is required for insolvency proceedings Order is granted only after a hearing Debtor must have committed an act of insolvency before the creditors can file the petition Length of residence of the debtor is immaterial
I.
Concept and Purpose
Under Phil. law, bankruptcy is the same as insolvency. Insolvency: relative condition of a debtors assets and liabilities that the assets, if all made immediately available, would not be sufficient to pay the liabilities. There are two principal laws available to a corporation seeking debt relief. These are, (1) the Insolvency Law and (2) Presidential Decree No. 902-A. PURPOSE 1. Equitable distribution of the properties of the debtor among the creditors 2. To afford the individual debtor a fresh start in life NOTE: the Insolvency Law does not grant discharge to a corporate debtor
SPECIAL LAWS
II. Comparisons
Suspension of Payments Purpose: To suspend or delay payments of debts Insolvency Proceedings Purpose: To compel presentment of all debts, whether due or not, and to secure a complete discharge from such debts Creditors receive less than what they are entitled to, or some creditors may not even receive anything Debtors assets are not sufficient to cover liabilities Involuntary Insolvency 3 or more creditors are the petitioners Debtor must have at least 3 creditors Creditors must be Phil. residents whose credits accrued in the Philippines, and none of them became a
Amount of indebtedness is not affected, but only the time for paying them is postponed Debtor has sufficient property to cover his liabilities Voluntary Insolvency Debtor is the petitioner Debtor may have only one creditor No requirements WRT creditors
Suspension of Payments Individual Corporation, Partnership, or Association (CPA) Governing Law Act No. 1956 Act No. 1956 P.D. No. 902A Jurisdiction RTC (Act No. RTC (Act No. RTC (R.A. No. 1956) 1956) 8799) Grounds Debtor has C.P.A. debtor a. C.P.A. has sufficient has sufficient sufficient property but property but property to foresees the foresees the cover all its impossibility impossibility debts but of meeting of meeting foresees the them when them when impossibility they they fall due of meeting respectively them when fall due they respectively fall due, OR; b. C.P.A. has no sufficient assets to cover its liabilities but is under management of a Rehabilitation Receiver or Management Committee (Sec. 5[d], P.D. 902-A)
III. Suspension of Payments

Nature: The debtor who, possessing sufficient property to cover all his debts, foresees the impossibility of meeting them when they fall due, may petition that he be declared in the state of suspension of payments by the court of the province / city
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in which he has resided for the preceding 6 months. (Sec 2) Purpose: To seek postponement of the payment of debts in order to provide the debtor a given period to convert some of his properties to cash. Basis: The probability of the debtors inability to meet his obligations when they respectively fall due, despite the fact that he has sufficient assets to cover all his liabilities. Effect: commences upon the filing of the petition. Who May File 1. An individual debtor; 2. Corporation, partnership or association Procedure: 1. Debtor files petition in court; 2. Court orders meeting of creditors and publication (Ratio: Suspension of payments is a proceeding in rem, so publication is needed to acquire jurisdiction); 3. Meeting of creditors for the consideration of the debtor's proposition 4. Action by the creditors upon the debtors proposition. Approval must be by the majority, which is 2/3 of the creditors voting upon the position. Claims represented by the majority must amount to at least 3/5 of the total liabilities of the debtor 5. Objections to the decision which must be made within 10 days following the meeting 6. Issuance of order by the court directing that the agreement be carried out in case the decision is declared valid, or when no objection to aid decision has been presented 7. If the decision of the meeting be negative, the proceeding shall be terminated and the creditors shall at liberty to enforce the rights which may correspond to them. Effect of Filing Petition 1. On execution pending against debtor It shall be suspended before the sale of the property is made thereunder 2. On execution against property specially mortgaged
The execution against property especially mortgaged is exempted from the provisions of this section 3. On action to collect sum of money still to be filed against debtor No creditor other than those mentioned in Sec 91 shall institute proceedings to collect his claim from the moment that suspension of payments is applied for and while the proceedings are pending. 4. Debtor may not dispose of his property, except in the ordinary course of the business in which he is engaged 5. Debtor cannot make any payments outside of the necessary or legitimate expenses of this business
SPECIAL LAWS
IV. Voluntary Insolvency

Procedure 1. Filing of petition by insolvent debtor Debtor must owe at least P1,000 Petition must be filed in the RTC where he resided 6 months prior to the filing Once the petition is filed, ipso facto takes away and deprives the debtor petitioner of the right to do or commit any act of preference as to creditors, pending the final adjudication 2. If the petition is in order, Court shall issue an Order of Adjudication (i.e. that the debtor is declared insolvent). The order must be published. Effects of order a. All assets of debtor placed in sheriffs custody until a receiver or assignee is assigned. b. Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property. c. All civil proceedings vs. the insolvent are stayed, except those pertaining to foreclosure of secured liens Meeting of creditors for election of an Assignee in Insolvency Conveyance of debtors property to assignee in insolvency Liquidation of assets and payment of debts Composition, if agreed upon. Composition: debtor offers to pay his creditors a certain percentage of their claims in consideration of his release from liability
3. 4. 5. 6.
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7. Discharge of the debtor, except in case of composition. NOTE: This is not applicable to corporations 8. Objection to discharge of debtor, if any 9. Appeal in certain cases
VI. Specific Provisions
V. Involuntary Insolvency
Who may petition for involuntary insolvency: 1. Debtors who have the qualifications required by the Insolvency Law; and 2. Their credits must be those contemplated by the Insolvency Law. Procedure: 1. Filing of petition by 3 or more resident creditors (can be natural or juridical persons) 2. Petition must allege at least 1 act of Insolvency 3. After the petition is filed, the court shall issue an order of adjudication, which shall retroact to date of filing of petition. Effects of order a. All assets of debtor placed in sheriffs custody until a receiver or assignee is assigned. b. Payment to debtor of any debt or delivery of any property due to him is forbidden. He also cannot transfer or convey any of his property. c. All civil proceedings vs. the insolvent are stayed, except those pertaining to foreclosure of secured liens 4. Summons to the debtor 5. Answer or motion to dismiss filed by debtor 6. Hearing of petition 7. Order of adjudication declaring debtor insolvent 8. Publication and service of order of court 9. Meeting of creditors to elect an assignee in insolvency 10. Conveyance of debtors property to assignee in insolvency 11. Liquidation of assets and payment of debts 12. Composition, if agreed upon by debtors and creditors 13. Discharge of the debtor, except in case of composition. NOTE: Discharge not applicable to corporations 14. Objection to discharge of debtor, if any 15. Appeal to Supreme Court
Order of Distribution 1. Equitable claims under Sec. 48 2. Preferred claims WRT specific movable property and specific immovable property under Art. 2241 and 2242, CC; 3. Preferred claims as to unencumbered property of the debtor which shall be paid in the order named in Art. 2244; 4. Common or ordinary credits which shall be paid pro rata regardless of dates under Art. 2245. Composition A proceeding in insolvency proceedings, which is voluntary on the part of the debtor and his creditors, in which a debtor offers to pay his creditors a certain percentage of their claims in consideration of his release from liability. Requisites: a. Offer must be made after the filling of the Schedule of the debtors property and the list of his creditors. b. Offer must be accepted in writing by a majority of the creditors representing a majority of the claims which have been allowed; c. Offer must be made only after the insolvent deposits the consideration to be paid to the creditors ; d. Accepted offer must be confirmed by the court. Effects of Confirmation: a. The consideration shall be distributed as the judge shall direct; b. The insolvency proceedings shall be terminated. c. The title to the insolvents estate shall revest in him. d. The insolvent shall be released from his debts. Discharge Judicial clearance of an insolvent debtor from all claims except those expressly reserved by law. Debts which are not discharged: a. Taxes and assessments due to the Government, whether national or local; b. Any debts created by fraud, embezzlement of the debtor; c. Any debt created by the defalcation as a public officer or while acting in a fiduciary capacity;
SPECIAL LAWS
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d. Debt of any person liable for the same debt, for or with the insolvent debtor, either as partner, joint contractor, indorser, surety or otherwise; e. Debts of a corporation; f. Claim for support; g. Discharged debt but revived by a subsequent new promise to pay; h. Debts which have not been duly scheduled in time for proof and allowance, unless the creditors had notice or actual knowledge of the insolvency proceedings, are not discharged as to such creditors; i. Claims for unliquidated damages arising out of pure tort; j. Claims of secured creditors; k. Claims not in existence or not mature at the time of discharge; l. Claims that are contingent at the time of discharge. Fraudulent Preference If debtor transferred property to any person to give him preference, and such transfer took place within 30 days period from the date of cleavage, such transfer may be set aside by proper court action by the assignee. A fraudulent preference is committed when the debtor procures any part of his property to be attached, sequestered or seized on execution or makes any payment, pledge, mortgage, assignment, transfer, sale or conveyance of any part of his property, whether directly or indirectly, absolutely or conditionally, to anyone under the following circumstances: 1. The debtor is insolvent or in contemplation of insolvency; 2. The transaction in question is made within 30 days before the filing of a petition by or against the debtor; 3. It is made with a view to giving preference to any creditor or person having a claim against him; 4. The person receiving a benefit thereby has reasonable cause to believe; 5. That the transfer is made with a view to prevent his property from coming to his assignee in insolvency or to prevent the same from being distributed ratably among his creditors or to defeat the object of or any way hinder the operation of or evade the provisions of the Insolvency Law.
Transfer It includes the sale and every other and different modes of disposing of or parting with property, or the possession of property, absolutely or conditionally, as a payment, pledge, mortgage, gift or security. A deposit of money is not a transfer. Effect of Fraudulent Transfer: Any conveyance or assignment fraudulently made is void as against the creditors of the insolvent debtor,
SPECIAL LAWS
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Chapter X. Interim Rules of Procedure for Intra-corporate Controversies
Chapter X. Interim Rules of Procedure for Intra-Corporate Controversies (A.M. No. 01-2-04-SC)
I. II. III. IV. GENERAL PROVISIONS PROCEDURE ELECTION CONTESTS INSPECTION OF CORPORATE BOOKS AND RECORDS V. DERIVATIVE SUITS VI. MANAGEMENT COMMITTEE VII. PROVISIONAL REMEDIES VIII. SANCTIONS
Factors in determining whether a suit is a nuisance or harassment suit:
1. The extent of the shareholding or interest of the initiating stockholder or member; 2. Subject matter of the suit; 3. Legal and factual basis of the complaint; 4. Availability of appraisal rights for the act or acts complained of; and 5. Prejudice or damage to the corporation, partnership, or association in relation to the relief sought. The Rules of Court shall apply suppletorily. All DECISIONS AND ORDERS issued under these Rules 1. Shall be immediately executory. 2. Shall not be stayed by appeals or petitions taken therefrom UNLESS restrained by an appellate court. Venue
SPECIAL LAWS
I. General Provisions
Applicability
A. Devices or schemes employed by, or any act of, 1. the board of directors, 2. business associates, 3. officers or partners, a. amounting to fraud or misrepresentation which may be detrimental to the interest of i. the public and/or of ii. the stockholders, partners, or members of any corporation, partnership, or association; B. Controversies arising out of 1. intra-corporate, partnership, or association relations, between and among stockholders, members, or associates; and 2. between, any or all of them and the corporation, partnership, or association of which they are stockholders, members, or associates, respectively; C. Controversies in the election or appointment of directors, trustees, officers, or managers of corporations, partnerships, or associations; D. Derivative suits; and E. Inspection of corporate books. Nuisance and harassment suits are prohibited and shall be dismissed by the court motu proprio or upon motion.
1. Regional Trial Court which has jurisdiction over the PRINCIPAL OFFICE of the corporation, partnership, or association concerned or 2. The action must be filed in the city or municipality where the HEAD OFFICE is located IN CASES WHERE the principal office of the corporation, partnership or association is registered in the SEC as Metro Manila All cases filed under these Rules shall be tried by judges designated by the Supreme Court to hear and decide cases Transferred from the SEC to the RTC and Filed directly with said courts pursuant to RA 8799 (Securities Regulation Code).
II. Procedure A. Filing of a Verified Complaint

THE COMPLAINT SHALL STATE OR CONTAIN: 1. the names, addresses, and other relevant personal or judicial circumstances of the parties; 2. all facts material and relevant to the plaintiff's cause or causes of action, which shall be supported by affidavits of the plaintiff or his witnesses and copies
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of documentary and other evidence supportive of such cause or causes of action; 3. the law, rule, or regulation relied upon, violated, or sought to be enforced; 4. a certification against forum shopping; and 5. the relief sought.
1. 2. 3. 4.
Patently incompetent, Immaterial, Irrelevant or Privileged in nature.
B. Service of Summons and Complaint Not Later Than 5 Days from Filing of Complaint
Defendant Domestic Corporation To whom service shall be made
Compliance with mode of discovery shall be made: 1. Within 10 days from receipt of the discovery device, or 2. From receipt of the ruling of the court, if there are objections SANCTIONS for failure to avail of, or refusal to comply with, the modes of discovery: 1. Sanctions prescribed in the Rules of Court; 2. Declare a party non-suited or as in default if refusal to comply is patently unjustified
SPECIAL LAWS
Statutory or corporate officers as fixed by the by-laws Respective secretaries Partnership Any of the managing or general partners Respective secretaries Association Any of its officers Respective secretaries Foreign Private Juridical Entity Transacting Resident agent business in the designated for such Phil. purpose (IF no designated agent) Has transacted Government official business in the designated by law Phil. Any of its officers or agents within the Philippines
F. Pre-Trial
The order setting the case for pre-trial conference and directing the submission of pre-trial briefs shall be issued and served WITHIN 5 DAYS after the period for 1. availment of, and 2. compliance with the modes of discovery whichever comes later, The parties shall file with the court and furnish each other copies of their respective pre-trial brief in such manner as to ensure its receipt at least 5 days before date of pretrial. The preliminary conference shall be terminated not later than ten (10) days after its commencement, whether or not the parties have agreed to settle amicably. If the court determines that judgment may be rendered upon the pleadings, affidavits and other evidence submitted court may order the parties to file their respective memoranda within a period of 20 days (non-extendible) from receipt of order court shall render judgment not later than 90 days from the expiration of the period to file the memoranda. Within ten (10) days after the termination of the pre-trial, the court shall issue a pretrial order. After the pre-trial, the court may render judgment, either full or partial, as the evidence presented during the pre-trial may warrant.
C. Answer Filed Within 15 Days from Service of Summons

EFFECT OF FAILURE TO ANSWER 1. Considered in default and 2. Upon motion or motu proprio, Court shall render judgment as the records may warrant.
D. Answer to Counterclaims or Crossclaims Filed Within 10 Days from Service of Answer in which They are Pleaded E. Modes of Discovery
Modes of discovery may be availed of by the parties not later than 15 days from the joinder of issues. Objections may be made within 10 days from receipt of the discovery device and only on the grounds that the matter requested is:
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G. Trial
WITNESSES; Only persons whose affidavits were submitted may be presented as witnesses, except in cases specified in Section 8, Rule 2 of these Rules. The affidavits of the witnesses shall serve as their direct testimonies, subject to crossexamination in accordance with existing rules on evidence. TRIAL SCHEDULE; Unless judgment is rendered pursuant to Rule 4 of these Rules, the hearings shall be held not later than 30 days from the date of the pre-trial order shall be completed not later than 60 days from the date of the initial hearing, 30 days of which shall be allotted to the plaintiffs and 30 days to the defendants as prescribed in the pre-trial order. Evidence shall be offered in writing in case: not otherwise admitted by the parties or not ruled upon by the court during the pre-trial conference WHEN?; Not later than 5 days from the completion of the presentation of evidence of the party concerned.
IV. Inspection of and Records
Corporate
Books
The provisions of this Rule shall apply to disputes exclusively involving the rights of stockholders or members under Sec. 74 and 75 of the Corpo Code of the Phil to: 1. inspect the books and records and/or 2. be furnished financial statements of a corporation
V. Derivative Suits
Actions brought by a stockholder or member in the name of a corporation or association provided, that: 1. He was a stockholder or member a. at the time the acts or transactions subject of the action occurred and b. the time the action was filed; 2. He exerted all reasonable efforts to exhaust all remedies available to obtain the relief he desires under the: a. articles of incorporation, b. by-laws, c. laws or d. rules governing the corporation or partnership; 3. No appraisal rights are available for the acts or acts complained of; and 4. The suit is not a nuisance or harassment suit. Approval of the court shall be required for: 1. Discontinuance, compromise or settlement of the derivative action 2. Any sale of shares of the complaining stockholders during the pendency of the action If the court determines that the interest of the stockholders or members will be substantially affected by the discontinuance, compromise or settlement, The court may direct that notice, by publication or otherwise, be given to the stockholders or members whose interest it determines will be so affected
SPECIAL LAWS
H. Filing of memoranda within 30 days from receipt of the order to be made after last offer of evidence. I. Decision not later than 90 days from lapse of period to file memoranda. III.Election Contests
Refers to any controversy or dispute involving: A. Title or claim to any elective office in a stock or non-stock corporation, B. Validation of proxies, C. Manner and validity of elections, and D. Qualifications of candidates, including the proclamation of winners, to the office of : 1. Director, 2. Trustee or 3. Other officer directly elected by: a. stockholders in a close corporation or b. members of a non-stock corporation where the article of incorporation or by-laws so provide.
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VI. Management Committee

Appointment of a management committee may be applied for the by a party 1. AS AN INCIDENT to any of the cases filed under: a. these Rules or b. the Interim Rules Corporate Rehabilitation 2. WHEN there is imminent danger of: a. Dissipation, loss, wastage or destruction of assets or other properties; and b. Paralyzation of its business operations which may be prejudicial to the interest of the minority stockholders, partieslitigants or the general public Qualifications of a RECEIVER: 1. Of known probity, integrity and competence and 2. Without any conflict of interest The RECEIVER and the MEMBERS OF THE MANAGEMENT COMMITTEE in the exercise of their powers and performance of their duties are: 1. considered officers of the court and 2. shall be under its control and supervision. MANAGEMENT COMMITTEE shall be: 1. Composed of 3 members 2. Chosen by the court. 3. Appointed after due notice and hearing QUALIFICATIONS OF THE MANAGEMENT COMMITTEE taken into consideration by the court: 1. Expertise and acumen to manage and operate a business similar in size and completely as that the corporation, association or partnership sought to be put under management committee; 2. Knowledge in management and finance; 3. Good moral character, independence and integrity; 4. A lack of a conflict of interest as defined in these Rules; and 5. Willingness and ability to file a bond in such amount as may be determined by the court.
Member of a management committee deemed to have a CONFLICT OF INTEREST if he is: 1. Engaged in a line of business which completes with the corporation, association or partnership sought to be placed under management; 2. A director, officer or stockholder charged with mismanagement, dissipation or wastage of the properties of the entity under management; or 3. Related by consanguinity or affinity within the fourth civil degree to any director, officer or stockholder charged with mismanagement, dissipation or wastage of the properties of the entity under management. Upon assumption to office of the management committee the receiver 1. shall immediately render a report and 2. turn over the management and control of the entity under his receivership to the management committee. The management committee shall have the power to take custody of and control all assets and properties owned or possessed by the entity under management. It shall 1. Take the place of the management and board of directors of the entity under management, 2. Assume their rights and responsibilities, and 3. Preserve the entity's assets and properties in its possession. Action or decision by management committee requires the concurrence of a majority of its members The chairman of the management committee shall be chosen by the members from among themselves. The committee may delegate its management functions as may be necessary to operate the business of the entity under management and preserve its assets. Transactions deemed fraudulent and are rescissible Transactions by previous management and directors
SPECIAL LAWS
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1. If made within 30 days prior to the appointment of the receiver or management committee or 2. During their incumbency as receiver or management committee. Entitlement to reasonable professionals fees reimbursement of expenses, which shall be considered as administrative expenses, shall be allowed to: 1. Receiver or 2. Management committee and 3. Persons hired by the management committee The receiver and members of the management committee and the persons employed by them shall not be subject to any action, claim or demand in connection with: 1. Any act done or omitted by them in good faith in the exercise of their functions and powers 2. All official acts and transactions of the receiver or management committee duly approved or ratified by the court The management committee shall make a REPORT to the court on the state/ general condition of the corporation, partnership or association under management 1. Within 60 days from the appointment of its members 2. Every 3 months or as often as the court may require A member of the management is DEEMED REMOVED 1. upon appointment by the court of his replacement 2. chosen in accordance with Section 4 of this Rule The management committee shall be DISCHARGED AND DISSOLVED: 1. Whenever the court, on motion of motu proprio, has determined that the necessity for the management committee no longer exist; 2. By agreement of the parties; and 3. Upon termination of the proceedings. The management committee shall then submit its final report and render accounting of its management within such reasonable time.
VII. Provisional Remedies

Provisional remedies in the Rules of Court is available to the parties Requirements for issuance of TRO or status quo orders: 1. Only in exceptional cases 2. After hearing and 3. Posting of bond.
VIII. Sanctions A. Sanctions counsel of the parties or

SPECIAL LAWS
The court may, upon motion motu proprio, impose appropriate sanctions when: 1. The court determines that the action is a nuisance or harassment suit; 2. A pleading, motion or other paper is filed in violation of Section 7, Rule 1 of these Rules; 3. A party omits or violates the certification required under Section 4, Rule 2 of these Rules; 4. Unwarranted denials in the answer to the complaint; 5. Willful concealment or non-disclosure of material facts or evidence; Sanctions may include an order to pay the other party reasonable expenses incurred including attorney's fees.
B. Disciplinary judge
sanctions
on
the
The presiding judge may be subject to disciplinary action in case of; 1. Failure to observe this special summary procedures prescribed in these Rules; or 2. Failure to issue a pre-trial order in form prescribed in these Rules.
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Chapter XI. Rules of Procedure on Corporate Rehabilitation
Chapter XI. Rules of Procedure on Corporate Rehabilitation1

I. COVERAGE II. CONSTRUCTION OF TERMS III. GENERAL PROVISIONS IV. STAY ORDER V. REHABILITATION RECEIVER VI. REHABILITATION PLAN VII. DEBTOR-INITIATED REHABILITATION VIII. CREDITOR-INITIATED REHABILITATION IX. PRE-NEGOTIATED REHABILITATION X. RECOGNITION OF FOREIGN PROCEEDINGS
D. Distinction between Corporate Rehabilitation and Insolvency

Corporate Rehabilitation The debtor has sufficient property to cover all its indebtedness The payment of debts is delayed to allow the debtor to look for sources to generate income to continue its business and pay its obligations under a courtapproved repayment scheme Insolvency The debtors assets are insufficient to cover the liabilities Payments of the obligations are not deferred, in fact, presentment for payment of all obligations, due or contingent, is required to secure a complete discharge from such obligations Preferences of credits are respected
As to sufficiency of property As to subject
REHABILITATION: the restoration of the debtor to a position of successful operation and solvency, if it is shown that its continuance of operation is economically feasible and its creditors can recover by way of the present value of payments projected in the plan more if the corporation continues as a going concern than if it immediately liquidated (Rule 2, Sec. 1).
SPECIAL LAWS
I. Coverage A. Scope (Rule 1 Sec. 1)

1. A Petitions for rehabilitation filed by corporations, partnerships, and associations pursuant to Presidential Decree No. 902-A as amended. 2. Cases for rehabilitation transferred from SEC to the RTC pursuant to RA. 8799 (The Securities Regulation Code)
As to effect on the creditors
As to effect on the debtor
B. The Rehabilitation Court

Any RTC designated by the SC to be a rehabilitation court. These courts are vested with exclusive and original jurisdiction to try and decide corporate rehabilitation cases arising within their respective territorial jurisdictions
All the creditors, whether secured or unsecured, stand on EQUAL FOOTING and are required to queue for the payment of their claims The debtor continues to do business pursuant to the court approved rehabilitation plan
The receiver takes over the properties of the insolvent and payment of the indebtedness discharges the debtor from its obligations
E. Distinction between Corporate Rehabilitation and Suspension of Payments

Corporate Rehabilitation The payment of the indebtedness is deferred to allow the debtor a breathing spell from the enforcement of claims by its creditors Suspension of Payments Payment is deferred to allow the creditors to meet and determine how best the debtor could make payment of their claims
C. Cases NOT covered by the Rules:

1. Rehabilitation cases filed by individuals; 2. Corporations for which particular provisions of the Corporation Code provide for specific remedies relative to incidents arising from financial or other kinds of distress.
The Rules took effect on January 16, 2009. These Rules supplant the Interim Rules on Corporate Rehabilitation enacted earlier this decade. However, for Bar Review Purposes, the Interim Rules and the new Rules are in this Reviewer
1
As subject
to
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As effect
to
Corporate Rehabilitation The debtor is allowed to present a plan for its recovery and how it could pay the claims of its creditors. The plan can be approved over the objections of the creditor.
As to approval of proposal
The court has absolute power to approve or disapprove the rehabilitation plan
Suspension of Payments No such plan of recovery is presented , but merely an agreement proposed by the debtor on how payment should be made. This agreement must have conformity of the creditors to make it effective. It is the creditors who approve the plan of payment. Such approval is made by 3/5 of the liabilities held by 2/3 of the creditors present at the meeting.
speedy, and where the issues are resolved with dispatch, or with the least possible delay. Venue (Rule 3 Sec. 2)
Initiated debtor creditors by or the its RTC having jurisdiction over the territory where the debtors principal office is located RTC which has jurisdiction over the principal office of the parent company Place indicated in their respective licenses as their principal office in the Philippines or where they can be served summons in the Philippines.
Joint petition by a group of companies Foreign corporations or their subsidiaries which are authorized to do business in the Philippines
SPECIAL LAWS
Service of pleadings Service of pleadings may be done via fax or email. The date of transmissions shall be deemed the date of service Where the pleading or document is voluminous, the court may, upon motion, waive the requirement of service, provided that: 1. A copy is filed with the court and is made available for examination and reproduction 2. A notice of filing and availability is served on the parties.
II. Construction of Terms

General Rule The policy of LIBERAL construction has been adopted. Exception Where the acts of the court, the debtor, or creditor are prescribed to be done within specified periods. This is because the reglementary periods are considered indispensable interdictions against needless delays.
NOTE: Upon motion, the court may issue an order to protect trade secrets or other confidential research, development or commercial information belonging to the debtor. (Rule 3 Sec. 4) Upon motion, the court may nullify any transfer of property or any other conveyance, sale, payment or agreement made in violation of its stay order or in violation of these Rules. (Rule 3 Sec. 6) Any order issued by the court under these Rules is immediately executory.
III.General Provisions
Nature of Proceeding It is a special proceeding. It is initiated to establish the fact that while the debtor possesses sufficient property to cover its debts at the time they fall due such properties are illiquid and can be turned to cash under a plan that it submits to the court for approval. It is an in rem proceeding, where jurisdiction is acquired by publication (Rule 3 Sec. 1) Is is a summary and non-adversarial proceeding. It should be brief and
IV. Stay Order

The rationale behind the stay order is to give a breathing spell from its creditors. The automatic stay also provides creditor protection. Without it, certain creditors would be able to pursue their own remedies against the debtors property.
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If the petitioner is sufficient in form and substance, the court shall issue an order: 1. Appointing a rehabilitation receive and fixing his bond; 2. Staying enforcement of all claims, except: a. claims against letters of credit and similar security arrangements issued by a third party to secure the payment of the debtor's obligations; b. foreclosure by a creditor of property not belonging to a debtor under corporate rehabilitation; c. where the owner of such property sought to be foreclosed is also a guarantor or one who is not solidarily liable, said owner shall be entitled to the benefit of excussion as such guarantor; 3. Prohibiting the debtor from selling, encumbering, transferring, or disposing in any manner any of its properties except in the ordinary course of business; 4. Prohibiting the debtor from making any payment of its liabilities (except in E, F and G) 5. Prohibiting the debtor's suppliers of goods or services from withholding supply of goods and services in the ordinary course of business for as long as the debtor makes payments for the services and goods supplied after the issuance of the stay order; 6. Directing the payment in full of all administrative expenses incurred after the issuance of the stay order; 7. Directing the payment of new loans or other forms of credit accommodations obtained for the rehabilitation of the debtor with prior court approval; 8. fixing the dates of the initial hearing on the petition not earlier than forty-five (45) days but not later than sixty (60) days from the filing thereof; 9. Directing the petitioner to publish the Order in a newspaper of general circulation in the Philippines once a week for two (2) consecutive weeks; 10. directing the petitioner to furnish a copy of the petition and its annexes, as well as the stay order, to the creditors named in the petition and the appropriate regulatory agencies
such as, but not limited to, the SEC, the BSP, the Insurance Commission, the National Telecommunications Commission, the HLURB and the ERC; 11. Directing the petitioner that foreign creditors with no known addresses in the Philippines be individually given a copy of the stay order at their foreign addresses; 12. Directing all creditors and all interested parties (including the regulatory agencies concerned) to file and serve on the debtor a verified comment on or opposition to the petition, with supporting affidavits and documents, not later than fifteen (15) days before the date of the first initial hearing and putting them on notice that their failure to do so will bar them from participating in the proceedings; and 13. Directing the creditors and interested parties to secure from the court copies of the petition and its annexes within such time as to enable themselves to file their comment on or opposition to the petition and to prepare for the initial hearing of the petition. Period of Stay Order From the date of its issuance until the approval of the rehabilitation plan or the dismissal of the petition. (Rule 3 Sec. 9) Grounds Relief from, Modification, or Termination of Stay Order 1. Any of the allegations in the petition, contents of any attachment, or the verification thereof has ceased to be true; 2. A creditor does not have adequate protection over property securing its claims; a. The debtor fails or refuses to honor a pre-existing agreement to keep the property insured; b. The debtor fails or refuses to take commercially reasonable steps to maintain the property; or c. The property has depreciated to an extent that the creditor is undersecured 3. The debtor's secured obligation is more than the FMV of the property subject of the stay and such
SPECIAL LAWS
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property is not necessary for the rehabilitation of the debtor; or 4. The property covered by the stay order is not essential or necessary to the rehabilitation and the creditor's failure to enforce its claim will cause more damage to the creditor than to the debtor.
shall have the powers, duties and functions of a receiver under Presidential Decree No. 902-A Considered as an officer of the court. He shall be primarily tasked to study the best way to rehabilitate the debtor and to ensure that the value of the debtor's property is reasonably maintained pending the determination of whether or not the debtor should be rehabilitated, as well as implement the rehabilitation plan after its approval
V. Rehabilitation Receiver A. Qualifications (Rule 3 Sec. 11)

1. Expertise and acumen to manage and operate a business similar in size and complexity to that of the debtor; 2. Knowledge in management, finance and rehabilitation of distressed companies; 3. General familiarity with the rights of creditors in suspension of payments or rehabilitation and general understanding of the duties and obligations of a rehabilitation receiver; 4. Good moral character, independence and integrity; 5. Lack of conflict of interest; A rehabilitation receiver may be deemed to have a conflict of interest if: a. He is creditor or stockholder of the debtor; b. He is engaged in a line of business which competes with the debtor; c. He is, or was within 2 years from the filing of the petition, a director, officer, or employee or the auditor or accountant of the debtor; d. He is or was within 2 years from the filing of the petition, an underwriter of the outstanding securities of the debtor; e. He is related by consanguinity or affinity within the fourth civil degree to any creditor, stockholder, director, officer, employee, or underwriter of the debtor; or f. He has any other direct or indirect material interest in the debtor or any creditor. (Rule 3 Sec. 11) 6. Willingness and ability to file a bond.
C. Grounds for Dismissal of Rehabilitation Receiver (Rule 3 Sec.

17) 1. if he fails, without just cause, to perform any of his powers and functions; 2. on any of the grounds for removing a trustee under the general principles of trusts
SPECIAL LAWS
D. Other Matters
Oath and Bond Before entering upon his duties, the rehabilitation receiver must first be sworn in and post a bond executed in favor of the debtor in such sum as the court may direct. (Rule 3 Sec. 13) Fees and Reimbursement The rehabilitation receiver and the persons hired by him shall be entitled to reasonable professional fees and entitled to reimbursement of expenses which shall be considered as administrative expenses. (Rule 3 Sec. 14) "Administrative Expenses" shall refer to 1. reasonable and necessary expenses that are incurred in connection with the filing of the petition; 2. expenses incurred in the ordinary course of business after the issuance of the stay order, excluding interest payable to the creditors for loans and credit accommodations existing at the time of the issuance of the stay order, and 3. other expenses that are authorized under this Rules. (Rule 2, Sec. 1)
B. Powers and Functions Rehabilitation Receiver
of
He shall not take over the management and control of the debtor but shall closely oversee and monitor the operations of the debtor during the pendency of the proceedings. For this purpose, the rehabilitation receiver
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Immunity from Suit He shall not be subject to any action, claim or demand in connection with any act done or omitted by him in good faith in the exercise of his functions and powers herein conferred. (Rule 3 Sec. 15) Reports He hall file a written report every 3 months to the court or as often as the court may require on the general condition of the debtor. The report shall include, at the minimum, interim financial statements of the debtor (Rule 3 Sec. 16)
5. Any compromises on amounts or rescheduling of timing of payments by the debtor shall be binding on creditors regardless of whether or not the plan is successfully implemented. (Rule 3 Sec. 20)
C. Repayment Period
If the rehabilitation plan extends the period for the debtor to pay its contractual obligations, the new period should not extend beyond 15 years from the expiration of the stipulated term existing at the time of filing of the petition. (Rule 3 Sec. 19)
SPECIAL LAWS
VI. Rehabilitation Plan A. Contents

1. the desired business targets or goals and the duration and coverage of the rehabilitation; 2. the terms and conditions of such rehabilitation; 3. the material financial commitments to support the rehabilitation plan; 4. the means for the execution of the rehabilitation plan; 5. a liquidation analysis setting out for each creditor that the present value of payments it would receive under the plan is more than that which it would receive if the assets of the debtor were sold by a liquidator within a 6-month period from the estimated date of filing of the petition; and 6. such other relevant information to enable a reasonable investor to make an informed decision on the feasibility of the rehabilitation plan. (Rule 3 Sec. 18)
D. Revocation of Rehabilitation Plan on Grounds of Fraud

Upon motion, within ninety (90) days from the approval of the rehabilitation plan, and after notice and hearing, the court may revoke the approval thereof on the ground that the same was secured through fraud. (Rule 3 Sec. 21)
E. Alteration or Modification Rehabilitation Plan
of
An approved rehabilitation plan may, upon motion, be altered or modified if, in the judgement of the court, such alteration or modification is necessary to achieve the desired targets or goals set forth therein. (Rule 3 Sec. 22)
VII. Debtor-Initiated Rehabilitation Process: A. Filing Petition

Who May File? 1. Any debtor who foresees the impossibility of meeting its debts when they respectively fall due, may petition the proper regional trial court for rehabilitation. 2. A group of companies may jointly file when one or more of its constituent corporations foresee the impossibility of meeting debts when they respectively fall due, and the financial distress would likely adversely affect the financial condition and/or operations of the other member companies of the group is essential under the terms and conditions of the proposed rehabilitation plan.
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B. Effects of Approval
1. The plan and its provisions shall be binding upon the debtor and all persons who may be affected thereby; 2. The debtor shall comply with the provisions of the plan and shall take all actions necessary to carry out the plan; 3. Payments shall be made to the creditors in accordance with the plan; 4. Contracts and other arrangements between the debtor and its creditors shall be interpreted as continuing to apply to the extent that they do not conflict with the provisions of the plan; and
Inapplicability of the Doctrine on Ultimate Facts In ordinary complaints, the rule is that what should be pleaded are only the ultimate facts or essential facts constituting the pleasers cause of action. Such rule does not apply to pleadings in corporate rehabilitation. This is because there is a need to fully and fairly disclose to the creditors and other interested parties information sufficiently adequate for them to make an informed decision whether to oppose or merely comment on the petition.
B. Opposition Petition
or
Comment
to
By Whom: Creditor of the debtor or any interested party shall file his verified opposition to or comment on the petition When: Not later than fifteen (15) days before the date of the initial hearing fixed in the stay order. After the 15 day period, leave of court is required.
1. Approval or endorsement of creditors holding at least 2/3 of the total liabilities of the debtor including secured creditors holding more than 50% of the total secured claims of the debtor and unsecured creditors holding more than 50% of the total unsecured claims of the debtor; 2. Complies with the requirements specified in Section 18 of Rule 3; 3. Would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a 6 month period from the date of filing of the petition; and 4. The rehabilitation receiver has recommended approval of the plan.
SPECIAL LAWS
F. Comments on or Opposition to Rehabilitation Plan

When: Not later than sixty (60) days from the date of the last initial hearing Who: Any creditor or interested party of record may file comments on or opposition to the proposed rehabilitation plan, with a copy given to the rehabilitation receiver. The court shall conduct summary and nonadversarial proceedings to receive evidence, if necessary, in hearing the comments on and opposition to the plan.
C. Initial Hearing D. Additional Hearings

Additional hearings must be concluded not later than 90 days from the initial date of the initial hearing fixed in the stay order
E. Court Oder
Made within 20 days from last hearing If there is NO merit in the petition: Court shall immediately dismiss If there is merit: Court shall refer the petition and its annexes to the rehabilitation receiver who shall evaluate the rehabilitation plan and submit his recommendations to the court not later than ninety (90) days from the date of the last initial hearing If the debtor and creditors agree on a new rehabilitation plan, the order shall so state the fact and require the rehabilitation receiver to supply the details of the plan and submit it for the approval of the court not later than 6 days from the date of the last initial hearing. The court shall approve the new plan upon concurrence of the following
G. Creditors Meeting
When Held: At any time before he submits his evaluation on the debtor-proposed rehabilitation plan to the court AND If no new rehabilitation plan is agreed upon by the debtor and the creditors The rehabilitation receiver, either alone or with the debtor, shall meet with the creditors or any interested party to discuss the plan with a view to clarifying or resolving any matter connected therewith. No specific format for the meeting has been provided by the Rules, but the meeting may be conducted following the manner or procedure of an ordinary meeting of stockholders of a corporation.
Page 276 of 278
H. Approval
When: Within 1 year from the date of filing of the petition UNLESS the court, for good cause shown, is able to secure an extension of the period from the SC Approval Despite Opposition (Sec. 11) Follows the CRAM DOWN method, meaning that the court may approve the plan despite objections if certain conditions are met. The court may approve a rehabilitation plan even over the opposition of creditors of the debtor if, in its judgment, the rehabilitation of the debtor is feasible and the opposition of the creditors is manifestly unreasonable if the following are present: 1. The rehabilitation plan complies with the requirements specified in Section 18 of Rule 3; 2. The rehabilitation plan would provide the objecting class of creditors with payments whose present value projected in the plan would be greater than that which they would have received if the assets of the debtor were sold by a liquidator within a six (6)month period from the date of filing of the petition; and 3. The rehabilitation receiver has recommended approval of the plan.
an affidavit showing the written approval or endorsement of creditors holding at least 2/3 of the total liabilities of the debtor, including secured creditors holding more than 50% of the total secured claims of the debtor and unsecured creditors holding more than 50% of the total unsecured claims of the debtor
B. Issuance of Order C. Approval

Within 10 days from the date of the second publication of the order the court shall approve the rehabilitation plan UNLESS a creditor or other interested party submits a verified objection
SPECIAL LAWS
D. Objection to Petition Rehabilitation Plan

Who Any creditor or interested party.
or
VIII. Creditor-Initiated Rehabilitation

Who may file? Any creditor or creditors holding at least 20% of the debtor's total liabilities may file a petition with the proper RTC for rehabilitation of a debtor that cannot meet its debts as they respectively fall due. Requirements Must be verified accompanied by a rehabilitation plan and a list of at least three (3) nominees to the position of rehabilitation receiver
The objection shall be limited to the following: 1. The petition or the rehabilitation plan or their attachments contain material omissions or are materially false or misleading; 2. The terms of rehabilitation are unattainable; or 3. The approval or endorsement of creditors required under Section 1 of this Rule has not been obtained
Hearing on Objections (Sec. 5) not earlier than ten (10) days and no longer than twenty (20) days from the date of the second if objections meritorious, it shall direct the petitioner to cure the defect within a period fifteen (15) days from receipt of the order.
E. Period for Approval Rehabilitation Plan
of
IX. Pre-Negotiated Rehabilitation A. Requirements

A debtor that foresees the impossibility of meeting its debts as they fall due may, by itself or jointly with any of its creditors, file a verified petition for the approval of a prenegotiated rehabilitation plan, supported by
Not later than 120 days from the date of the filing of the petition If the court fails to do so within said period, the rehabilitation plan shall be deemed approved.
Page 277 of 278
F. Revocation of Rehabilitation Plan
Approved
C. Recognition of Proceeding, Requisites
Foreign
When: Not later than thirty (30) days from the approval upon motion and after notice and hearing. Grounds: 1. approval was secured by fraud 2. petitioner has failed to cure the defect ordered by the court
1. The proceeding is a foreign proceeding as defined herein; 2. The person or body applying for recognition is a foreign representative as defined herein; and 3. The petition meets the requirements of Section 3 of this Rule
D. Period to Recognize X. Recognition Proceedings A. Scope

This rule shall apply where: 1. assistance is sought in a Philippine court by a foreign court or a foreign representative in connection with a foreign proceeding; 2. assistance is sought in a foreign State in connection with a domestic proceeding governed by these Rules; or 3. a foreign proceeding and a domestic proceeding are concurrently taking place. The sole fact that a petition is filed pursuant to this Rule does not subject the foreign representative or the foreign assets and affairs of the debtor to the jurisdiction of the local courts for any purpose other than the petition.
of
Foreign
Within thirty (30) days from the filing thereof
E. Effects of Recognition of Foreign Proceeding

Upon recognition of a foreign proceeding: 1. Commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities is stayed; provided, that such stay does not affect the right to commence individual actions or proceedings to the extent necessary to preserve a claim against the debtor. 2. Execution against the debtor's assets is stayed; and 3. The right to transfer, encumber or otherwise dispose of any assets of the debtor is suspended.
SPECIAL LAWS
B. Non-Recognition Proceeding
of
Foreign
Court may refuse recognition: 1. the action would be manifestly contrary to the public policy of the Philippines; and 2. if the court finds that the country of which the petitioner is a national does not grant recognition to a Philippine rehabilitation proceeding in a manner substantially in accordance with this Rule
- end of Special Laws
- end of Commercial Law Page 278 of 278

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