Commercial Law

Bar 2011 Notes

Roland Glenn T. Tuazon
Ateneo de Manila University
TABLE OF CONTENTS:
1. NEGOTIABLE INSTRUMENTS LAW
2. MERCANTILE INSTRUMENTS:
a. LETTERS OF CREDIT
b. TRUST RECEIPTS LAW
c. WAREHOUSE RECEIPTS LAW
d. CHATTEL MORTGAGE LAW
e. REAL ESTATE MORTGAGE/FORECLOSURE
f . SECURITIES REGULATION CODE
g. FOREIGN INVESTMENTS ACT
3. INSURANCE
4. INTELLECTUAL PROPERTY LAW
5. BANKING LAWS
a. TRUTH IN LENDING ACT
b. ANTI-MONEY LAUNDERING ACT
c. PHIL. DEPOSIT INSURANCE LAW
d. CONFIDENTIALITY OF DEPOSITS
e. GENERAL BANKING LAW
f . CENTRAL BANK ACT
6. CORPORATION LAW
7. TRANSPORTATION LAW
ANNEX 1: IN-DEPTH DISCUSSION ON LATTER PART OF NIL
Negotiable Instruments Law
HISTORY: contrast a negotiable instrument with a non-negotiable PN:
o First objection: a person stepping into the shoes of the seller is
exposed otherwise to the defenses that the buyer may launch
against the seller
Laws solution exempt from personal defenses
o Second objection: I dont know the maker, I just know the one
negotiating it to me. How will I know hes solvent?
Laws solution will make the indorser liable
regardless (Accumulation of secondary contracts)
The more indorsers, the more you can sue
Two general parts in the law:
1
o 1 what makes an instrument negotiable
o 2 rights and obligations of parties
Two basic forms:
o Promise to pay (PN)
o Order to pay (bill of exchange)
What If it does not comply with requisites of negotiability?
o If it does not comply with the requisites of negotiability, it is still a
contract, but not covered by the NIL.
Either:
o Payable to order negotiated by indorsement, and delivery
o Payable to bearer delivery is sufficient
o N.B. If payable to a specific person, it is not negotiable
What are the four basic contracts involved?
o 1. Making
o 2. Drawing
o 3. Negotiating
o 4. Accepting
To show consent
o N.B. But for all, there must be delivery
What are the basic principles of the NIL?
o 1. Bad faith
If a person is in BF, he cannot invoke defenses.
Ex. Issued a negotiable instrument to pay for a car that
is defective. The indorsee knows that the car is
defective, he is in bad faith.
o 2. Estoppel
Ex. A father allowing a son to steal a check and forge
his signature is estopped from denying it
o 3. Comparative fault
If a bank honors a check with a forged signature, the
bank is considered negligent too
But if the negligence of the drawer outweighs the
negligence of the bank, the law shifts the fault to the
drawer
o 4. The law will only protect you from personal defenses if you
are a holder in due course (Sec. 52)
Good faith
With value
Before overdue (see below)
With no notice of defenses
o 5. General rule: there must be demand , before an instrument
becomes overdue. Exception: If time is of the essence.
Ex. Reserve requirements of banks must be kept
afloat, so overnight, banks sometimes transact with
each other
2
An overdue instrument is shouting to the high
heavens I have been dishonored!
Requisites and kinds of negotiable instruments
What are the requirements for a negotiable instrument?
o 1a. It must be in writing
o 1b. It must be signed symbol of consent
If one signed another name or a symbol, it will bind him
if he intended for it to bind him
Location is immaterial
o 2a. Must contain a promise or order to pay
Need not use exact words, even equivalent words are
fine
Creates a NEW obligation to pay, not a mere
acknowledgement of an old debt
Exception 1: date of payment is mentioned, or
at least, a date of maturity
Exception 2: insertion of or order (words of
negotiability) in the old terms
Authorization to pay or a mere request does not create
a binding obligation to pay.
o 2b. The promise to pay or order must be unconditional
Do not look into evidence aliunde. You must confine
yourself within the four corners of the instrument to
deem whether it is absolute.
Distinguish between uncertain events and certain
events, although indeterminate (ex. Moment of death)
o 2c. Sum certain, and payable in money
Because it is meant to be a substitute for money
Specify the denomination; cannot just be a number.
o 3. Payable on demand or on a determinable future time
o 4. Payable to order or bearer
Need not use exact words, but there must be
reasonable certainty so people know from whom they
could demand payment
Ex. instead of order pay to X or his indorsees; pay
to X or his assigns
Ex. instead of bearer pay to X or holder; pay to X
or possessor
o 5. Where the instrument is addressed to a drawee, he must be
named or otherwise indicated with reasonable certainty
If name of the drawee is left blank, it is an incomplete
instrument which can be filled up as a remedy
When is a sum certain:
o Does a stipulation of interest still make it a sum certain?
Yes. It must be in writing.
N.B. Remember the rules on unconscionable interest
rates
o When does the interest become 12% by default?
3
1. Unconscionable interest
2. Stipulated an interest but no rate
o What is required for the instrument to be valid?
1. Amount of installments must be indicated
2. Date of maturity of each installment specified
Ex. Promise to pay Jose Cruz or order P100,000 in 10
installments. not negotiable
N.B. You have to specify both AMOUNT and WHEN
EACH is due. You cannot just give the starting point
(ex. Nov 2005)
o Does the stipulation of an acceleration clause make it a
sum certain?
Yes. An acceleration clause: failure to pay an
installment will make the entire balance due and
demandable.
o Is it valid to stipulate payment in foreign currency?
Yes. If you talk about an exchange rate, you have to
talk about at least two currencies. It cannot be just
one.
o Is I will pay reasonable attorneys fees in case there is
failure to pay a sum certain?
Yes. Because you know how much is due at the date
of maturity. This is the reckoning point at the date of
maturity, the sum is still certain.
N.B. Stipulations on attorneys fees are always subject
to court control anyway.
When is a promise is unconditional:
o Do instructions on how payment will be entered in the
books of account affect unconditionality?
No.
o Does reimburse yourself from X fund affect
unconditionality?
No.
o What is the test?
It must indicate the source of reimbursement, not
source of payment. The latter is not negotiable.
What about treasury warrants?
It is not negotiable because it is payable out
of a particular fund.
When does reference to a particular fund not
destroy negotiability?
Payment must not be limited to come from
such fund.
o What is the rule on how the original obligation came about?
In general, it does not affect unconditionality
But not if mention of the original contract makes the
instrument subject to the formers terms and conditions
o Does mention of a CM securing the original obligation make
it non-negotiable?
4
Negotiable, because the promise to pay is still
conditional, as long as it is not dependent to the CM.
When is it payable at a determinable future time:
o Distinguish between various insecurity clauses:
1
st
situation: Pay Jose Cruz or order; if the holder feels
insecure, he may demand that I post reasonable
securities, and if I fail to do so, he can declare the
entire balance due and demandable.
One view: non-negotiable date of maturity
becomes uncertain because holder can
accelerate payment, and there is an
additional undertaking other than payment of
money.
Other view: negotiable the undertaking to
put up a security is merely an accessory
obligation. The date of maturity is not
uncertain because acceleration is within
control of the maker; he can prevent it by
giving the additional security. (better view)
2
nd
situation: same if the holder feels unsecure, he
can declare the entire balance due and demandable.
It is not negotiable, because here, the holder
has the absolute option to make the
obligation due and demandable.
o Differentiate:
When the maker may choose to pay before a certain
date, it is still negotiable (ex. on or before June 15)
Why?
o It benefits everyone because all
other secondary contracts are
discharged.
When the holder may absolutely choose to have the
obligation due, it is not negotiable.
Why?
o Everybody becomes secondarily
liable by ripening their obligation.
o What if its hinged upon a contingency?
Non-negotiable even if the condition occurs.
o Philippine Education v. Soriano: A money order is not
negotiable, because although it says pay to the order of, under
Postal Regulations, obligation to pay is conditional, depending
on different grounds where the post office can refuse to pay.
Also, it can only be indorsed once.
o Does an extension clause affect negotiability?
No, if the extension is for a definite time too.
Ex. Payable within 2 years from date, subject
to one year extension
Option to extend belongs to holder or maker/acceptor.
What additional provisions do not affect negotiability:
o What is the general rule?
Other obligation or undertaking aside from payment of
money makes it non-negotiable (secured by CM over
my car, which I will keep in good condition)
5
o What are the exceptions?
1. Authority for holder to foreclose pledge, CM, or
collateral securities
2. Authorizes confession of judgment if instrument not
paid upon maturity
N.B. the SC said, however, this is a void
stipulation
3. Waiver of benefit of law
4. Waiver of notice of dishonor
5. Waiver of venue
6. Waiver of exemption from execution
o What if the holder has the option to require something other
than payment of money?
It is valid, as long as the other option is money.
Ex. If option is upon holder to demand either
cash or rice, it is still negotiable because the
holder can ALWAYS demand money
If the maker has the option, not valid.
What omissions do not affect negotiability?
o 1. Not dated
o 2. Failure to mention consideration
It is presumed in this contract
o 3. Does not specify place where it is drawn or payable
o 4. Bears a seal
o 5. Designates currency in which payment will be made
When it is payable on demand?
o 1. Upon sight or presentation
o 2. Instrument is silent on when payment is made
o 3. When it is overdue
As to the maker, he is discharged
BUT as to the indorser, it is upon demand
Upon whose order may an order instrument be paid?
o 1. Payee (who is not maker, drawer, or drawee)
o 2. Drawer
Ex. Jose Cruz writing a check saying Pay to the order
of Jose Cruz (better than making a check paid to
cash)
In this example, it is not complete until Jose indorses it,
because there has to be delivery (at least two parties
to a contract)
o 3. Drawee
o 4. Two or more payees jointly
Ex. Pay to the order of Jose Cruz AND Manuel Santos
6
o 5. One or some of several payees
Ex. Pay to the order of Jose Cruz OR Manuel Santos
Contra: For drawees, it CANNOT be alternative or
successive, but it can be jointly.
Ex. drawee can be drawn against A and B
but not A or B
o 6. Holder of an office for the time being
Ex . Treasurer of the city of Makati
o What if the drawee is not indicated with reasonable
certainty?
It is not negotiable.
When it is payable to bearer?
o 1. To bearer
Caltex: The Certificates of Time Deposit [in this case]
are negotiable instruments. The documents provide
that the amounts deposited shall be repayable to the
depositor. And who, according to the document, is the
depositor? It is the bearer.
o 2. To person or bearer
o 3. Order of fictitious person
What is the general rule?
There must be intent by the maker or drawer
of the NI that the instrument be issued to a
fictitious person (knowledge is paramount)
Weller and Martin: Either partner can sign or issue
checks. X wanted to steal money from the partnership.
He drew a check payable to a corporation where he
was just the corporate secretary. He was just the corp.
sec., and was not authorized to indorse; but he
indorsed the check to himself nonetheless. Y, his
partner, sued the bank for restoration of the amount.
HELD: it is payable to bearer. The Drawer did not
intend the payee (the Corporation) to get the proceeds
of the check, EVEN IF the payee actually existed or
not. It fell under this provision.
If, however, the company required two
signatories to all checks, and X signed it with
intent to steal, and Y signed it not knowing
Xs intent, then it does not become payable to
bearer. For the payee to be fictitious, both
must have same intent.
American Sash: Had a payroll clerk, who prepares
checks payable to employees. He then makes the
officers sign the checks. Clerk padded payroll with
ghost employees, had the officers sign the checks (the
officers did not know that the employees didnt exist),
and the clerk collected money. Issue: is this payable
to fictitious persons. These ghost employees did not
actually exist. HELD: It was not a bearer instrument.
The DRAWERS were the officers who signed the
checks. Their intent controls. So the checks DID NOT
become payable to bearer because they DID NOT
KNOW that the ghost employees were not part of the
payroll.
Rodriguez v. PNB: Employees of PNB formed a
savings and loan association (SLA). Rodriguez
spouses meanwhile, had current accounts with PNB.
Whenever the SLA lends to members, it issues post-
dated checks. But most of the time, the SLA does not
7
have enough money. The borrowers thus endorse the
checks to Rodriguez; in turn, Rodriguez rediscounts
the checks (issuing checks lower than face value).
The SLA has a policy: when a member has an
outstanding loan, they cannot get another loan. So the
officers who wanted to borrow more, to circumvent this,
they made it appear that it is the other members who
are borrowing. The SLA, in accordance with the usual
procedure, issued post-dated checks to the supposed
borrowers (but really for the officers). The officers
indorsed the checks to Rodriguez. Rodriguez issued
discounted checks. PNB found out about this and
closed the SLA account. Meanwhile, the checks
issued to Rodriguez, which bounced because the SLA
account was shut down since the checks they issued
were cleared, and the checks issued to them were
from a closed account. Contention of spouses: How
can PNB accept the indorsement of those checks,
when the ones who indorsed were the officers and not
the supposed borrowers. Contention of PNB: it is
intended for fictitious persons, since there was no
intent that they actually get the money (even if the
supposed borrowers really exist). HELD: Rodriguez
spouses won. For the checks to be considered as
payable to fictitious persons, the fact must be known to
the person issuing the negotiable instrument. Here,
the Rodriguez spouses did not know that the supposed
payees were not the real borrowers (when it fact it was
the officers). PNB must reinstate the amounts to the
Rodriguez spouses.
o 4. Payee is not name of existing person
Classic example: payable to cash
o 5. Last indorsement is in blank
Completion and delivery
What is the effect of ante-dating or post-dating?
o Does not affect negotiability
When can the holder insert a date in the instrument?
o When the date of acceptance is not inserted by the drawee, the
holder may insert date of issue or date of acceptance
o What if he places the wrong date?
If negotiated to a holder in due course, that is the
correct date as far as the holder in due course is
concerned even if it is not
Purpose: the law protects a holder in due course, who
is relying on that date in good faith
o But what if the one who put the wrong date presented it for
payment to the acceptor/drawee?
Not valid. Cannot claim because he was not in GF.
o A check drawn by X says Pay to the order of Y P10000 thirty
days after sight. It was accepted by E on Sept. 15, but did not
date the instrument. Y negotiated it to Z, telling the latter that
the instrument was accepted November 1. Z placed in the
instrument this date.
Can he collect from E?
Yes, even if it is more than 30 days from
acceptance. Z is a HIDC and the Nov 1 date
is true as to him.
If Y inserted the wrong date instead and did not
indorse it to Z, can he collect from E?
No. He is not a HIDC.
8
What is the rule for incomplete but delivered instruments?
o When it is wanting of a material particular the person
possessing it has prima facie authority to fill up the blanks
CONTROLLING FACTOR: The blank or incomplete
instrument must have been delivered with intent that
the holder turn it into a negotiable instrument
o In a case, a person signed an instrument in blank and left it
with the bank. The bank filled it up with an amount. What
happens?
The amount inserted by the bank controls.
o What are the two requirements for this instrument to be
enforceable?
1. It must be filled up in accordance with the authority
given to him
2. It must be filled up within reasonable time
o X gave a check with a blank amount to Y, telling Y that he
should fill it up according to what X ultimately owes Y, but not
over P50000. X owes Y P30000, but Y put P60000.
Can Y collect P60000 from X?
No. It was beyond the authority given him.
Y indorsed the check to Z, a HIDC. Can Z collect
P60000 from X?
Yes. The defense does not apply to him.
o X asked Y to sign a piece of paper claiming that it was a
witness signature that the Z will pay X what Z owes. But X
actually made it appear that it was a PN where Y promised to
pay money to her. HELD: The court believed the contention
that Y never intended for the signature to be for a PN. There
must be intent to leave a signature to make a PN.
What about incomplete and undelivered instruments?
o Will not be a valid contract in the hands of any holder, as
against the person whose signature was placed on the
instrument prior to delivery (real defense)
BUT indorsers are liable
o Ex. X left signed checks, and an employee took them and filled
up amounts. This is an incomplete and undelivered instrument.
o Ex. X went abroad and left signed checks for payment of debts.
Abusive employees put their own names and signed their own
names. HELD: By pre-signing checks and leaving them with
employees, it became possible for them to do this. The officers
were negligent and shared in the loss (60-40).
What about complete but undelivered instruments?
o The NI is incomplete until delivered, but this does not prejudice
a HIDC
o Ex. You cannot sue if you hold checks that were not delivered to
you. You never acquired a right over them.
BUT a HIDC will not be subject to this defense it is a
personal defense
o BPI Family Savings: BPI issued a check payable to City
Treasurer of Iloilo to pay for local taxes. They did not deliver it
to the treasurer, and just gave it to the employee. The
employee used it to pay for somebody elses local taxes. HELD:
There was no payment because BPI never delivered it to the
city treasurer, so BPI cannot claim to have paid.
9
o Associated Bank: Somebody was selling RTW clothes, and
shopping malls (buyers) issued crossed checks. Somehow, the
checks fell into the hands of someone else, who indorsed it to
someone else, and were deposited to Associated Bank. The
seller was wondering why she wasnt being paid. [If you are
legalistic, the RTW seller must sue the shopping malls, etc.,
because the checks were not delivered to her. In turn, the
shopping malls, etc. must sue the drawee banks, and then the
drawee banks sue Associated Bank why it cleared the checks.
HELD: The SC allowed the RTW seller to sue Associated Bank
directly because it cleared the checks.
o It may be shown that delivery between immediate parties is
conditional, or for a special purpose.
o Ex. A godson is taking the CPA test, but X is not in the
Philippines. He gave P10,000 check on the condition that he
pass the test. The godson cannot enforce payment on the
check. BUT if the godson negotiates the check to a holder in
due course, the law will protect the HDC.
Rules of interpretation
1. Words prevail over figures
o Romero: Amount indicated in words is One Million Two
Hundred Pesos. Amount in figures: 1,200,000. Balance in the
account is 1,100,000. The check bounced. The words
prevailed.
2. Payment of interest
o Runs from date from instrument
o Or if none, date of issue
3. If not dated, assumed to be dated from time of issue
4. Written > printed provisions
5. If ambiguous whether a bill or note, the holder has the option to treat it
as either
6. Ambiguous role of signature deemed an indorser
o Because the indorser has the least liability among all characters
in a NI
7. If I promise to pay note is signed by two or more persons deemed
solidarily liable
Signature
What is the general rule as to signatures?
o A person whose signature does not appear on the instrument is
not liable
What are the exceptions?
o 1. Duly authorized agent signing for principal
o 2. Forger liable for signature he forges
o 3. Signature in separate paper (allonge) because the
instrument has no more space
o 4. Estoppel
o 5. Signing under trade/assumed name
o 6. Instrument can be negotiated by mere delivery
What must an agent write to avoid personal liability?
o 1. Agent must disclose he is an agent
o 2. Disclose his principal
10
3. He has authority
What if the party is a minor or a corporation without capacity?
o Maker of a PN cannot refuse to pay to a holder on the ground
that the indorser is a minor. Neither can he raise the defense
that the prior indorsee is a minor.
o ONLY the minor can raise the defense of minority, no one else.
o Can apply this principle by analogy to other incapacitated
persons (Ex. corporation action ultra vires)
o Exceptions:
1. The minor actively misrepresented his age and it
appears that he is physically of such age
2. Minor kept fruits/benefits
3. Minor spent the money in good faith
Forgery
What if a persons signature is forged?
o Did not give consent to the contract
o Except when he is estopped
What are the kinds of forgery?
o 1. Signature is copied
o 2. Fraud in esse contractus (fraud in factum)
Misled to signing instrument, not knowing it was a
negotiable instrument
o 3. Duress amounting to forgery
It must be duress in the execution (ex. Grab the hand
of the intimidated), NOT duress in inducement
o 4. Fraudulent impersonation
In general, it is NOT a forgery
The person to whom the note was given is presumed
to be intended to receive the note (because he knew
the intended payee)
Four general rules for forgeries:
o 1. A party whose signature is forged is not liable unless hes
estopped
o 2. An acceptor who pays on a BOE cannot recover the money
because he admits the genuineness of the signature of the
drawer
o 3. A Holder in Due Course acquires good title if forged
indorsement is not necessary for his title
Ex. in a bearer instrument
o 4. A person negotiating an instrument after forgery is liable (due
to warranties)
Forgery of promissory note:
o A. Order instrument: A (signature forged by B)-B-C-D-E
E cannot collect from A (not bound)
E can collect from B (forger)
E can collect from C, D as indorsers (warranted the
instrument)
11
o B. Bearer instrument: A (signature forged by B)-B-C-D-E
Indorsing an instrument that need not be indorsed
leads to a warrant of such
o C. Order instrument: A-B-C (signature forged by D)-D-E
E cannot collect from A or B (since it is an order
instrument, there is a cut-off to A and B, since Cs
signature is forged)
E cannot collect from C (no consent)
E can collect from D as indorser/forger
o D. Bearer instrument: A -B or bearer-C (signature forged by D)-
D-E
N.B. This is an instrument payable to bearer; delivery
is sufficient, no need for indorsement.
Can E collect from A?
Depends. If E is not a holder in due course, A
will claim that there was no delivery of
complete instrument by B since C stole it from
him
If E is a holder in due course, he may collect
from A since it is payable to bearer
Can E run after C?
No, Cs indorsement was forged
Neither can he run after B, because he
cannot trace his right to him [cut off by the
forgery].
He can run after D, because by indorsing the
instrument (even if bearer), he warranted it.
o N.B. if a bearer instrument is indorsed
even if it is not needed, the indorser warrants
the instrument as what it purports to be.
Forgery of Bill of Exchange:
o A. Order instrument: A (signature forged by B) and then
indorsed to C-D-E. X accepted as drawee.
Can E collect from A?
No. No consent.
Can E run after X?
Yes. By accepting, X admits the instrument is
genuine.
What is Xs remedy?
o Sue B, the forger.
Can E run after B?
o Yes (forger)
Can E run after C and D?
Yes. Warranted by indorsement
o B. Same, but X did not accept.
How does the answer change?
12
Same for everyone, except E cannot run after
X because he did not accept.
o C. Same as A, but bearer instrument.
How does the answer change?
Same rules on indorsement of a bearer
instrument if there was indorsement even
if there is no need to do so, there is warrant of
the genuineness of the instrument by the
indorsers.
o D. Bearer instrument, but an indorsers signature was forged
Even if Cs indorsement to D is forged, the
payee can still collect from A (because he just
promised to pay the bearer). Remedy of the
acceptor is to just run after the thief.
o E. BOE issued by A payable to B or order C (signature forged
by D)-D-E. X accepted and paid.
Can X debit As account?
No, because it went against As order to pay
B or order, which was cut off by the forgery of
Cs signature.
Can X get money back from E?
Yes, because X only admits As signature as
genuine (it was) and not the indorsers
signatures.
Can E run after A, B, or C?
No. They were all cut off by the forgery.
Can E run after D?
Yes, he forged.
o F. BOE issued by A payable to B or bearer C (signature
forged by D)-D-E. X accepted and paid.
Can X debit As account?
Yes, because A promised to pay the bearer.
Can X get money back from E?
No. E is the bearer.
What is the remedy?
C can run after D, the forger.
o G. BOE issued by A payable to B or bearer C (signature
forged by D)-D-E. X did not accept.
Can E run after X?
No, X did not accept.
Can E run after C?
No, did not consent.
Can E run after D?
Yes (warranted and forged)
Can E run after B?
No, cut off by the forgery.
Can E run after A?
13
Yes, can go after A if E is a HDC. BUT cannot
go after A if E is not HDC. N.B. (reason:
complete but undelivered instrument is a
personal defense)
What are the exceptions to these general rules?
o 1. When there is estoppel (ex. father saying that his sons
forgery of his signature was genuine)
o 2. When there is unreasonable delay by the drawer in informing
the drawee about the forgery
Drawer can check the statements sent by the bank to
him
Test : If the drawer had acted quickly, would the
drawee have been able to stop or freeze payment?
X left a check book with his friend, who was in the car. The friend forged
his signature in a check book left lying there.
o HELD: Not negligent; no reason to suspect friend of bad faith.
An external auditor was hired to reconcile records. He managed to forge
the signatures of the officers of Casa Montessori over a long time. Sued
bank, which refused to reinstate the amounts. Bank argued Casa was
negligent.
o HELD: An external auditor is not an employee. It is an
independent contractor, so you cannot blame Casa for
negligence in hiring an employee.
o Estoppel does not apply, because Casa had no way to know the
auditor was stealing money, because he was precisely the one
tasked with safeguarding the school records and comparing with
bank records.
Effect of comparative fault?
o Split accountability for the loss (usually 50-50 but can adjust
depending on level of negligence)
Illustrate comparative fault principle:
o Robbers broke into Triumph Lumber. Check book was stolen,
but Triumph did not report it to the bank. Robbers were able to
cash checks.
HELD: Triumph was negligent for not reporting the
theft. The bank should also be held negligent for
authenticating the checks.
o MWSS did not have their checks printed by the central bank.
They had a private printing press print their checks. The
signatures of the officers of MWSS were forged. PNB paid.
HELD: MWSS must bear the loss for failing to
exercise caution did not ask printing press to
surrender plates, account for spoilage, and MWSS did
not examine the signatures in the bank returns.
o Ilusorio was leaving for abroad and he left his checkbook with
his secretary, who he asked to reconcile bank statements.
Secretary forged his signature.
HELD: Ilusorio should bear the loss for his negligence.
He trusted his secretary.
o Gempesaw owes several groceries. She trusted a bookkeeper
blindly. When she ordered supplies, the bookkeeper prepared
the checks, and Gempesaw signed the checks without verifying
the statements. The bookkeeper was able to steal more than
P1M.
HELD: Negligent; did not confirm or examine the
invoices, receipts, etc. before signing the checks used
to pay the suppliers.
14
o Province of Tarlac had account with PNB. Province issues
checks to the physician/head of the clinic. The cashier already
retired, but he was still hanging around. Cashier was able to
forge when he picked up the checks.
HELD: Province was negligent, for allowing the
cashier to pick up the checks even when he was
retired, so he was able to indorse the checks through
forgeries. Split accountability 50-50.
What is the general duty of the collecting bank when the
indorsement is forged?
o The collecting bank must return the money to the drawee bank,
because the payee did not indorse the check.
o N.B. This is NOT a case of negotiation, but presentment for
payment. So the collecting bank cannot claim there was
warranty.
X, employee of Ford, was tasked to pay sales tax (P18M), made a check
payable to Insular Bank (for payees account only), the authorized
collecting agent of BIR. X showed a fake BIR receipt to Ford. Instead, X
deposited a worthless check with Insular Bank, which X substituted for
the check issued by Ford. In their internal records, X made it appear the
worthless check was deposited. X stole the real check, and Citibank
honored it. X collected from Bank of America. Ford had to pay BIR
again. They sued.
o HELD: Citibank must return the money to Ford, because Ford
ordered it to pay the BIR, which Citibank disobeyed. It says for
payees account only and there was no indorsement from BIR.
Citibank was guilty only of negligence.
o Citibank manager (who was complicit) was criminally liable.
o JJ doesnt agree with the court as regards Insular Banks
liability.
o Check: G.R. 121413 29 Jan. 2001
Rules on clearing
o Checks are brought to a clearing house and are run through a
clearing house. They check the magnetic strips on the checks.
The amount will then be transferred to the collecting bank.
o Then the checks will be physically given to the drawee bank.
The drawee bank has 24 hours to honor/dishonor the check.
o If it dishonors it, the drawee bank returns the check to the
clearing house. The computer will return the amounts paid.
o Any return beyond 24 hours: time-barred.
Here, the doctrine applies to the forged signature of the
drawer.
This 24 hour rule SHOULD NOT apply when it is the
payees or indorsees signature that is forged, because
the drawee bank has no way to find out, until the
drawer informs them.
(But the SC has at times wrongly applied the 24 hour
rule to the payees forged signature.)
o New rules (to prevent ping-pong of checks):
If a check is dishonored, you can only present it one
more time. [Usual reason why one failure is allowed
drawn against insufficient funds]
What is the effect when the drawee bank does not
return the check within 24 hours?
The drawee cannot ask the computer to
reverse the entries.
15
BUT you are not precluded from suing to
collect after. But since the computer cannot
reverse, while you are litigating, you do not
have the amount.
Consideration and Holders for Value
IMPT THINGS TO REMEMBER:
o 1. Failure of consideration is a personal defense. This usually
applies when X and Y have a transaction and Xs instrument
bounces, but Ys prestation is only partially fulfilled.
o 2. But if you bring in a third party (HIDC), then failure of
consideration is not a defense anymore.
o 3. As discussed in the next section, an accommodation party is
liable to a Holder for Value.
Under the law, consideration is presumed
o Travel Inc.: Travel agency sued on the basis of a bouncing
check issued by a guy bringing in passengers. The CA was
wrong for asking the agency to prove the value of the ticket
purchased. There is a presumption of valuable consideration,
and that the check was for such amount.
o Ex. in BP 22, there is no need to prove the check was issued for
valuable consideration
In civil law, generosity, love, affection, etc. are valid consideration.
o [N.B. Sundiang says love and affection, etc. cannot be
considered valuable consideration. But Jack says that a
donation is a simple contract and the law simply requires
consideration sufficient to support a simple contract. So love
and affection is valuable consideration.]
Rule on holder for value vis--vis prior parties :
o Rule: Where value is given for the NI, the holder is a holder for
value in respect to all parties who became such prior to [the time
consideration was given]
o A issued a PN to B, but there is no consideration. B
indorsed it to C for consideration. C, then to D. What is Ds
status as holder for value?
D is a holder for value with respect to A, B, and C
because C gave value. A and b are parties who
became bound prior to the value given.
What is the rule on holder who has a lien on the instrument?
o He is a holder for value only to the extent of the lien.
o Ex. Company appealing a lost case posts supersedeas bond
(ex. P500000). Surety Company asks for collateral. The surety
company is a holder for value to the extent of P500K, even if the
company issued a certificate of time deposit negotiable for P1M.
What is the nature of absence of consideration?
o 1. Defense against a person not a HIDC (personal defense)
o 2. Partial failure of consideration is a proportionate defense.
Ex. Somebody issued a check for P20000 for 10 sacks
of rice. The check bounced. The seller however only
delivered 5 sacks of rice. HELD: He can only sue for
P10000
Want of consideration between drawer and payee cannot be invoked as
defense of drawee who accepted a BOE
o A drew a BOE for the amount of P10M in favor of B, the
payee, in exchange for 10 cars. B only delivered 5 cars. X,
the drawee, did not accept. Can A launch the defense of
partial failure of consideration against B?
16
Yes. Want of consideration is a defense against the
payee.
o [Same facts] X accepted. Can X refuse to pay on account of
partial failure of consideration?
No. The acceptor cannot use want of consideration as
defense. By accepting, he admits authority of the
drawer to draw the instrument, and that he will pay.
Accommodation party
Who is an accommodation party?
o Signs as party but does not received consideration or value
therefore, from the underlying contract. Only lends his credit.
What is the accommodation partys liability?
o Liable to a holder for value, even if the holder for value knew
him as merely an accommodation party at the time that holder
took the instrument.
Ex. Some banks try to get borrowers to get surety
companies to sign borrowing agreements. Surety
companies charge premiums for signing as co-makers.
The surety company, not receiving any part of the
proceeds, is deemed an accommodation party.
Must there be independent consideration for the accommodation?
o No, it is not an absolute prerequisite. The consideration that
supports the surety is the same consideration for the original
obligation.
May a corporation be an accommodation party?
o As a general rule: a corporation cannot be an accommodation
party to an instrument, because there is no business purpose to
such [unless that is the business of the corporation].
Prudencio: Construction project. The constructor borrowed from PNB
working capital. The bank required two other signors. The firm got the
Prudencio spouses who issued checks. The project was failing. PNB
agreed to release part of the security money to help the project. But the
project died anyway. PNB sued Prudencio spouses. HELD: Prudencio
spouses are accommodation parties. The court held that PNB is not a
holder in due course, because it knew that the spouses did not receive
consideration. When PNB released a portion of the money, it was in BF.
o JJs comment: the law says Holder for value not HIDC. You
cannot claim PNB was in bad faith when it released the money
because the project was already failing. PNB took a risk, rather
than ensure the certain failure of the project, the released funds
could have improved the project.
o Sec. 52: definition of HIDC point in which a person must be is
in GF is when he took the instrument. The release of the funds
happened long after.
o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes
accommodation parties liable to holders for value, then the
Prudencio Spouses should pay PNB because PNB is a holder
for value!
X was exchanging a post-dated check for cash to the disbursing officer of
AFP. AFP asked Y, Xs sister, to sign as accommodation indorser. The
check bounced. Y was acquitted for conspiracy charges, but was held
civilly liable. Correct?
o HELD: Yes. Thats what an accommodation party is tasked to
do when the check bounces, she pays.
Negotiation
Can bearer instruments be negotiated?
o Yes. When a bearer instrument is indorsed although
unnecessary, it is still ultimately negotiated.
17
o See Caltex case. When pledging a NI, there are no specific
provisions. Fall back on the NCC. Must comply with
requirements of putting it in a public instrument and
indorsement.
Where must the indorsement appear?
o On the instrument itself or to a paper attached to it
What must be indorsed?
o The entire instrument. Indorsing only part of the amount will
make it cumbersome.
o 1. Prohibited to indorse to 2 or more indorsees severally.
Ex: A check for P100K is negotiated to Jose Cruz for
50K and Manuel Santos for P50K.
Ratio: This in effect is two indorsements of 50K each
(two partial indorsements)
o 2. PARTIAL indorsement is treated under law as an assignment.
It is subject to personal defenses.
EXCEPTION: When it has been paid in part (ex. on
installments)
Types of indorsements:
o Special specified person to whom it is being indorsed
o Blank does not name any person
Indorsement of an order instrument in blank can
convert the indorsement into a special indorsement by
writing his name
This ensures that the order instrument does not
become a bearer instrument
Ex. A issued a PN to B or order for P10K. B
indorses it to C, but in blank. What can C do?
C can insert To C over the signature to keep
it an order instrument.
C CANNOT put To C, waiving notice of
dishonor. The contract must be consistent
with the tenor of the indorsement
Types of restrictive indorsements:
Negotiability Passing of
title
Consideration
presumed
Defense
available
Pay to Jose
Cruz only
X Yes Yes X, because
indorsee is a
HIDC,
defenses
against
indorser
cannot apply
to him
To Jose
Cruz, for
collection
only (as
agent only)
Yes, but
subject to
same
restriction
that he only
holds it for
collection
X, because
the indorsee
is a mere
agent of the
indorser
X, because
there is no
transfer of title
Yes,
defenses
against
indorser can
be raised
against
indorsee
because he
is just an
agent
To Jose
Cruz, as
trustee for
Glenn
Tuazon
(indorsee
named as
Yes, but
subject to
same trust
Yes Yes, because
there is
transfer of title
X, because
title
transfers
18
trustee)
Rights of indorsee in restrictive indorsement:
o A) collect payment
o B) bring action indorser could bring
o C) transfer rights, if allowed to do so
What is a qualified indorsement?
o Done by writing without recourse although the instrument is
still negotiable
o This can be done if the instrument will fall due for a long time
(ex. 5 years), and the indorser does not want to be insecure for
such a long time.
o But qualified indorser still has some warranties under Sec. 65;
1. Genuine as to what it purports to be
(ex. not forged or materially altered)
2. Warrants his valid title
3. All prior parties have capacity to contract
4. That he is not aware of any fact that makes the
instrument valueless
(ex. that the maker is insolvent)
o Ex. A issues a PN to B or order for P50K. B indorses to C,
then C to D. D indorses to E without recourse.
Can E collect from D?
No. The indorsement is qualified.
If As signature turned out to be forged, can E
collect from D?
Yes. Because he warranted that the
instrument is genuine as to what it purports to
be.
If D turned out to have forged Cs indorsement to
him, can E collect from D?
Yes, more so. He warranted his valid title to
E.
What is the effect of a conditional indorsement?
o 1. The maker (or acceptor) may disregard the condition because
the maker made an unconditional promise to pay. The indorser
cannot change the original obligation
o 2. The maker can also say lets wait and see if the condition is
fulfilled
o 3. If the maker pays, but the conditioned turned out to be
unfulfilled after, the remedy of the conditional indorser is to run
after the indorsee to get back the money. The conditional
indorser cannot run after the maker/acceptor because the M/A
has every right to dispose of his obligation while he feels
solvent.
What is the effect of an indorser signing of an instrument payable to
bearer?
o It can still be indorsed through mere delivery
o But the special indorser is only liable to those who can make
title through his indorsement
19
o Rule: a bearer instrument is always a bearer instrument
o Contra: a WHR can be converted from a bearer to an order
instrument by a special indorsement
What if the instrument is payable to two or more payees?
o All must endorse
o But if they are partners, there is mutual agency
What if the instrument payable to a cashier or fiscal officer?
o Assumed that the instrument is payable to the corporation he
represents
What is the effect if the name is misspelled?
o Must indorse the instrument according to the misspelled name,
because other parties will not know that there was a mistake
made
o If he wants, after signing as the misspelled name, he can sign
his real name, so it will appear wrong name indorsed to real
name
What if there is date attached to the negotiation?
o The date is presumed to be correct, but rebuttable.
o If there is no date, the negotiation is presumed to have been
done before it was overdue
Useful to establish HIDC
What if it indicates a place?
o Law of that country will govern as to questions of indorsement
N.B. Not every restrictive indorsement will destroy negotiability
o Only that in subsection A (Pay to X only) will destroy
o Crossed check is still negotiable
Can strike out an indorsement not needed for his title:
o Ex. bearer instrument: can strike out indorsements B to E
o If its an order instrument, can E strike out B?
No. Because it is payable to the order of B. You
cannot take him out, or else, E cannot draw title to the
instrument.
o ABCDE. E cancels the indorsement of C to D. He
loses the right to run after C. D is also discharged, because D
lost his chance to run after C.
o RULE: The indorser who is struck out and ALL indorsers after
him are eliminated
Ex. If there is indorsement from A to Z, and you cancel
C, persons C to Y are discharged.
What about Instruments transferred without indorsement?
o Transferee will only step into the shoes of the transferor
o So defenses against transferor apply to the transferee too
o But the transferee can compel the transferor to indorse it
o What is the time period to determine if he is a HIDC?
The reckoning point is that time of indorsement, not the
initial transfer
20
Ex. Did not know necklace was fake at time of transfer;
knew it was fake at time of indorsement = not HIDC
Indorsement to a prior indorser:
o Ex. A-B-C-D-E-B
o Can B run after C, D, and E?
No. Because they in turn can run after B too!
There is compensation under law. The law will not
allow them to run around in circles.
Rights of the Holder
What are the rights of a holder?
o 1. Can sue in own name
o 2. Payment in due course discharges the instrument
Payment at or after maturity is in due course, and
without notice his title is defective
Holder in due course (Sec 52)
o Requisites:
1. Instrument is complete and regular on its face
2. Must have become a holder before it was overdue
and without notice of prior dishonor, if so
3. Took it in GF and for value
4. When he took, no notice of infirmity in instrument or
defect in title of the indorser
This elaborates #3
When is there defect in the title of the indorser?
If he took it through unlawful means (ex. stole
it), illegal consideration (ex. issued for
marijuana), or negotiated it in breach of faith,
fraud (ex. issued for fake ring), or duress (ex.
issued as ransom money)
o Rule on instruments payable on installments and HIDC:
Status on payment Knowledge Effect
An installment has not
been paid and there is
no acceleration clause
Holder is aware HDC as to installments
not due on the face of
the instrument
An installment is not
paid and there is an
acceleration clause
(automatic)
Holder is aware Not a HDC
An installment is not
paid and there is an
acceleration clause
(automatic)
Holder is not aware HDC as to installments
not due on the face of
the instrument
An installment is not
paid and there is an
optional acceleration
clause
Holder not aware of the
exercise of this option
HDC as to installments
not due on the face of
the instrument
An installment is not
paid and there is an
optional acceleration
clause
Holder is aware of its
exercise
Not a HDC
What is the test to know whether or not he is a HIDC?
o A holder must be aware that something is wrong, but chose not
to investigate further as to not be a HDC.
o Check: was it honest for him to take the instrument under these
circumstances?
21
X issued a crossed check to Y, in order to buy a car from Z. However, Y
took the check and paid it to ABC hospital, and the value of the check
was greater than his bill to ABC hospital (which gave change). X stopped
payment. ABC sued X. X launched defense of failure of consideration.
Issue: is ABC a HIDC?
o No. Since the check was crossed, it can only be deposited.
ABC should have inquired as to the title of Y, but it did not.
o If the checks are crossed, the taker must inquire as to the nature
of the indorsers title
X paid Y a check, drawn against ABC bank. Y altered the amounts. Y
deposited it in DEF (her bank). Y told DEF not to present the check for
payment right away, even if it was already due, and to let Y to draw the
amount anyway. The alteration was discovered. ABC refused to pay.
DEF sued to recover. Is DEF a HDC?
o No. The circumstances show that the check was already due
but Y asked DEF not to present it for payment yet. And DEF
allowed Y to withdraw even if the check has not been cleared
yet.
The claimant received a check that was not indorsed to it by the payee,
and the check had a notice of prior dishonor due to DAIF (drawn against
insufficient funds).
o HELD: Claimant is not a HIDC.
In two cases, there was lack or failure of consideration between the
maker/drawer and payee of the NI. In one case, it was merely issued as
security, and in the other, the car delivered had the wrong chassis
number. But in both cases, the payee already indorsed the check to
another person.
o HELD: Those persons are HIDCs and the defense of failure/lack
of consideration does not vest.
May a payee be a HIDC?
o Yes, because the law simply provides holder. A payee is a
holder, too.
What about negotiation of an instrument payable on demand after
an unreasonable length of time?
o Holder is not a HIDC.
o Consider the nature of the instrument, customs, and particular
facts
What about a transferee who receives notice of infirmity before he
has paid the full amount agreed upon as consideration for the
instrument?
o He is a HIDC only to the extent of the amount paid by him.
o Ex. X issued a post-dated check to Y with value of P100K, and
X told Y to just pay him P80K right away because X could not
wait for the maturity of the check. Y has only paid P40K so far.
Then Y found out that the check was issued for a fake ring. The
check was presented but it was dishonored. Y sued Z, the
drawer. Can he collect?
HELD: Yes, but only to P50K, since that is half the
value of the check, and Y only paid half of the agreed
consideration. He is a HIDC only to the extent of half
the check.
What are the rights of a HIDC?
o 1. Sue in own name and receive payment
o 2. Free from personal defenses
o 3. May enforce payment against all parties liable thereon
22
o Exception: when he cannot recover full payment
37 restrictive indorsement [GT: I dont know why.]
Maybe JJ meant qualified indorsement under
38?
54 notice before full amount is paid
124 when materially altered, a HDC may still enforce
against the maker/drawee according to the original
tenor of the instrument
General rule: the instrument is avoided as to
those not party to the alteration or did not
indorse it
o But not everyone can invoke real defenses against a HDC. For
instance, an indorser warrants an instrument is genuine in all
respects it purports to be. Also, an acceptor warrants the
authority of the drawer to pay.
Personal defenses Real defenses
Theres a contract with some
inequitable or iniquitous fact behind it
No contract because an element is
missing; or void against public policy
Voidable contract Void contract
Ex: no consideration, undelivered
complete instrument, acquired by
force/illegal means, illegal
consideration, negotiation in breach
of faith, mistake, ultra vires act of
corporation
Ex; material alteration (so the consent
is not anymore to this instrument);
undelivered incomplete instrument
(no consent); forgery (no consent);
minority (lack of capacity)
Not applicable to HDC Applicable to HDC
Personal defenses are available against a non-HDC. This does not mean
the non-HDC cannot collect. It just means that personal defenses may
be raised against him.
(58b) IMPT. Shelter Principle (GT)
o What it simply says is that a holder who (1) derives title from a
HDC (2 ) and is not a party to the illegality or fraud has the
same rights as the HDC as to the prior parties to the indorser,
even if he is not.
o Ex. A was induced by B through fraud to issue a PN to B or
order. B C, who was NOT aware of the fraud (HDC). C D
who was aware of the fraud but not a party to it. What is the
effect?
D is a holder in due course as to the parties prior to the
indorser (A and B)
What if D indorses it to E, who is not an HDC?
Since E derives title from D, who is not an
HDC, E does not have the rights of an HDC.
o There can be no curing. So D cant indorse the instrument to
F, an HDC, and have it re-indorsed back to him to cure his
title. He resumes his position as not a HDC.
PRESUMPTION:
o General rule every holder is a HDC
o Exception if it is shown that the title of the negotiator is
defective, then the holder has to prove that either the holder or
the negotiator is a HDC
o Exception to the exception the exception does not apply to a
party that has become bound to the instrument prior to the
acquisition of defective title
Ex. A B C D E. D swindled C, then indorsed to
E.
When E runs after A, he is not required to
prove that he is a HDC because A was bound
23
to the instrument before the defective title
occurred.
Fossum:
o X issued a check to Y, but there was failure of consideration. Y
negotiated to Z, who was not a HIDC (he was aware of the
failure of consideration between X and Y). Z sued X to collect.
X refused and raised personal defense of lack of consideration.
What is the implication?
The burden of proof shifts upon Z to prove that either Z
or Y is a HIDC. In this case, it failed to do so.
In this case, Z loses the presumption of being HDC
because Ys title, as negotiating party, is defective. Y
has no benefit of the presumption because it is not a
holder anymore.
Liabilities of parties
Obligations Warranties
Maker Pay according to tenor 1. Existence of payee
2. Capacity of payee to
indorse
Drawer If dishonored, and
process of dishonor
completed:
1. He will pay the
amount to holder,
2. Or to a subsequent
indorser who pays for it
<But drawer may
express stipulation
limiting his liability>
1. Existence of payee
2. Capacity of payee to
indorse
3. On due presentment,
it will be accepted/paid
according to its tenor
Acceptor Pay according to tenor
of acceptance
1. Existence of drawer,
2. Genuineness of
drawers signature
3. Drawers capacity
and authority to draw
4. Existence of payee
and capacity to indorse
Qualified indorser or
indorser by delivery
1. Instrument is genuine
and is what it purports
to be
2. He has good title
3. All prior parties had
capacity to contract
4. Has no knowledge of
any fact that would
impair the instrument
<IF BY DELIVERY
warranties only extend
to immediate
transferee>
General indorser Either:
1. Upon due
presentment he will
accept/pay according to
tenor
2. Or if dishonored, he
will pay the amount to
the holder, or to a
subsequent indorser
compelled to pay it
1. Instrument is genuine
and is what it purports
to be
2. He has good title
3. All prior parties had
capacity to contract
4. The instrument is
valid and subsisting at
the time of his
indorsement
Liability of Maker:
o X issued a PN to Y. Y collected, by X failed to pay. He lodged
the defense that he used the money to pay for his sick
daughters expenses, and his daughter is a beneficiary of a trust
administered by Y.
HELD: X must pay. He made an unconditional
promise to pay. What he did with the money is none of
the courts business.
Liability of drawer:
o What is the nature of the drawers liability?
24
Merely secondary liable only if the instrument is
dishonored.
He can put without recourse to limit his liability.
o D issued a check to P, drawn against BPI. P presented for
payment, and BPI debited Ds account. However, P was unable
to receive the money because BPI withheld payment, pending
investigation of some anomalies. P ran after D.
HELD: D must pay, even if his account has already
been debited. He warranted that P will be paid, and if
not, he will make good the check.
Liability of acceptor:
o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered
the amount to P40000, and negotiated to H. H presented it for
acceptance to E. E accepted it. For how much can the check
be enforced against the acceptor?
View 1: P40000 because that is the tenor of the
acceptance.
View 2 (better view): Acceptance is assent to the order
of the drawer (132), which is just P4000. He did not
consent to P40000, since there must be knowledge.
(124) In fact, for a HDC, even if there is alteration, he
can enforce payment according to the original tenor
o Acceptor admits existence of drawer because without the
drawer, the BOE cannot exist. He admits authority of the
drawer to draw.
o Acceptor admits existence and capacity of payee to indorse,
because the instrument is meant to circulate.
o N.B. Acceptor does not admit signature of indorser.
What is an irregular indorser?
o He signs in blank before delivery. He is called such because you
would normally expect the payee as the first signature there.
But here, the irregular indorsers signature is found there first.
o What is his liability?
He is actually an accommodation party
Must be an additional party (not a regular party
signing again will not increase the credit value of the
check)
o A (X irregular indorser) B C D E:
X is liable to B, C, D and E.
RULE: liable to all subsequent parties. (If payable to
the maker or drawer or bearer, he is liable to all parties
subsequent to the maker or drawer)
What are the warranties where negotiation is by delivery?
o See the list of warranties in the law [see table]
o Person negotiating by delivery: only liable to the person to
whom he delivered the instrument. Not liable to subsequent
parties
o Unlike a general indorser, a qualified indorser does not warrant
that the instrument will be paid. He is liable only if the maker or
acceptor is insolvent and he is aware of that fact (since here,
there is a breach of warranty).
o N.B. In general, a qualified indorser or one negotiating by
delivery DOES NOT ANSWER FOR SOLVENCY. It only
warrants the four listed warranties and is liable for breach of
such. Examples:
25
Breach of W1 (genuine) : the instrument is forged
Breach of W2 (good title) : He stole the NI
Breach of W3 (prior parties had capacity to contract) :
Prior party is a minor
Breach of W4 (no knowledge of fact that would impair
the instrument): Knew that M/D was insolvent; or that
there was failure of consideration
o What is the underlying principle behind this?
Same as Statute of Frauds. An undertaking to answer
for the debt of another must be in writing to be
enforceable. He must be only liable to the person he
dealt with
What is the liability of a general indorser?
o 1. Same as first 3 warranties of qualified indorser
o 2. Last warranty he warrants that the instrument is valid and
subsisting
o If maker is insolvent, even if the indorser was not aware, he is
liable.
o X deposited (through indorsement) a check with ABC bank,
drawn against DEF bank. X was able to withdraw money
although not cleared. Eventually, the check bounced. ABC
asked for return of money.
HELD: X must pay. When he indorsed, he warranted.
If for any reason (whatever reason) the drawee does
not pay, he is liable.
o There is a 45-day holding period if the check deposited is drawn
abroad. But RCBC accommodates employees, allowing them to
withdraw right away. An employee X, received a check, and
deposited. Bank required X to indorse the check as an irregular
indorser. She was then allowed to withdraw. Some employee
(Y) placed below the indorsement: valid up 75,000 pesos only.
The drawee bank dishonored the check, since the indorsement
was irregular. RCBC asked X to return the immediately
withdrawn money.
HELD: RCBC cannot collect. The check was
dishonored because of the partial indorsement made
by Y. This is why the American bank dishonored.
o Signature of indorser was forged. Payee presented the check
for payment to the drawee. It was paid. Payee signed at the
back. Then the forgery was discovered. Must the payee
reimburse drawee?
No. It did not indorse the check. The signature is to
acknowledge payment, not to indorse.
o The law mentions that warranties of general indorser apply
only to HDC. Should we follow this?
JJ doesnt think so.
What if it is indorsed when not required?
o He incurs liabilities of an indorser, whether general or qualified
What is the presumption?
o Indorsers are presumed to be liable in the manner in which they
indorsed. But parole evidence however may be accepted to
prove otherwise.
o Ex. A B C, C can prove that while Bs signature appears
first, C indorsed it to him
26
What if the rule for indorsement by agent?
o If he fails to disclose that he is just an agent, or fails to disclose
his principal, he will be liable as an indorser
Click here for longer discussion on presentment, acceptance, and dishonor
and some parts not included in the syllabus
How to enforce liability (presentment, dishonor)
How do you enforce liability to those primarily liable?
o 1. No need to do anything to hold a maker liable because he
already promised to pay.
o 2. A drawee is liable once he accepts the instrument.
How do you charge those secondarily liable?
o In a PN:
1. Presentment for payment made within required
period to the maker (and then dishonored by non-
payment)
2. Notice of dishonor is given to the secondarily liable
party
o In a BOE:
1. Presentment for acceptance to the drawee OR
negotiation within reasonable time after it was acquired
in the following instances:
A. Bill payable after sight or acceptance
needed to fix maturity of instrument
B. Bill expressly requires acceptance
C. Bill is payable elsewhere than residence or
place of business of drawee
2. If dishonored by non-acceptance:
A. Give notice of dishonor to the indorsers
and drawer
B. (If foreign bill, protest for dishonor by non-
acceptance)
3. If the bill is accepted:
A. Presentment for payment to the acceptor
o If dishonored by non-payment, give
notice of dishonor to those
secondarily liable
B. (If foreign bill, protest for dishonor by non-
payment)
When is presentment for payment necessary?
o For primary persons never necessary
o For secondary persons, generally needed to make presentment
except:
1. To drawer who has no right to expect that the
drawee or acceptor will pay
2. Indorser where the instrument was made or
accepted for his accommodation and he has no reason
to expect instrument will be paid if presented
3. Dispensed with under Sec. 82:
27
A) after exercise of reasonable diligence,
presentment cannot be made
B) drawee is fictitious person
C) waiver or presentment
4. Instrument dishonored by non-acceptance
What are the requisites for presentment for payment?
o 1. Presented by the holder or some person authorized by him
o 2. Made at reasonable hour on business day on proper date
o 3. At proper place
o 4. To person primarily liable, or if absent, to any person found at
the place where presentment is made
o 5. Person must exhibit the instrument and surrender it
X drew a check in 1990. The holder, Y, presented the check to the
drawee bank only in 1994. It was dishonored by the bank. Y gave
notice of dishonor to X. What is the ruling?
o The dishonor was proper because it was presented beyond
reasonable time. Reasonable time is relative, depending on
circumstances. But for checks, they become stale in 6 months.
o X is no longer liable based on the check. But if there is an
underlying contract between X and Y, X is still liable
contractually just not through that particular check.
What is the implication of failure to make proper presentment for
payment? Does it discharge the person primarily liable?
o It discharges those secondarily liable on the instrument.
o It does not discharge the person primarily liable (maker or
drawee/acceptor) because its their obligation. But the payee
or holder cannot demand interest subsequent to maturity and
costs of collection.
When is a bill required to be presented for acceptance?
o [See enumeration above payable after sight etc., expressly
required, payable elsewhere]
o Note that a check does not fall under this enumeration
When is presentment for acceptance excused or dispensed with?
o 1. DELAY EXCUSED for bill payable elsewhere than place of
business or residence of drawee and the holder failed to present
for acceptance even after reasonable diligence
The delay thats excused is the delay in presenting it
for payment due to the delay in presentment for
acceptance
o 2. Drawee is dead, has absconded, is fictitious, or has no
capacity to contract
o 3. Presentment cannot be made even after exercise of
reasonable diligence
o 4. Although presentment has been irregular, acceptance refused
on some other ground
Requisites for valid acceptance?
o 1. In writing
o 2. Signed by the drawee
o 3. Drawee must assent to the promise to pay a sum certain in
money and not any other means
28
o What is proof of acceptance?
It must be written on the instrument itself
If there is acceptance and the holder requests that it be
written on the bill, but the drawee refuses treat it as
dishonored by non-acceptance
o What if it is written on another paper?
It only binds the acceptor to persons to whom it is
shown to and on faith thereof, accepted the bill for
value
o What is the rule on future bills?
If there is an unconditional promise in writing to accept
a bill before it is drawn, and a person on faith thereof
took a bill for value
When is a bill deemed accepted?
o 1. Bill delivered to the drawee and he destroys the same
o 2. Bill delivered to the drawee but he refuses within 24 hours or
within other period allowed by the holder to return the bill
What are the kinds of acceptance?
o 1. Conditional payment dependent on a condition
o 2. Partial only for part of the amount
o 3. Local only on a particular place
o 4. Qualified as to time
o 5. Acceptance of some of the drawees but not all
What is the rule on qualified acceptances?
o The holder has a right to refuse a qualified acceptance and
deem it as dishonor by non-acceptance.
o If he accepts qualified acceptance, the drawer and indorsers are
discharged from liability on the bill.
Unless they assent to the qualified acceptance
They must express dissent to the holder within
reasonable time from receipt of notice of the qualified
acceptance
Who should give notice of dishonor?
o 1. The holder
o 2. His agent or representative
o 3. Any party who may be compelled to pay (e.g. indorsers)
o 4. Agent of #3
Who benefits from the notice?
o If given by the holder, benefits all subsequent holders and all
prior parties who have a right of recourse against the party to
whom it was given
Ex. M P or order A B C D (holder). M
dishonors:
D may notify C since C may be compelled to
pay D. C may then notify any person who
may be liable to him (P, A, or B). And so on.
If D notified B straight up, C benefits because
he need not notify B.
29
o If given by indorser who may be compelled to pay, it benefits the
holder and all parties subsequent to the party to whom notice
was given
Same example:
If D notified C, and C notified P, then D
benefits through the notice of C, an indorser.
It also benefits A and B.
What is the effect of valid notice of dishonor?
o Immediate right of recourse against the secondarily liable party
arises. He becomes primarily liable.
How must notice be given?
o Parties reside in same place:
1. If at place of business, given before close of
business hours the next day
2. If at residence, given before usual hours of rest the
next day
3. If sent by mail, deposited in post office in time to
reach him in usual course the next day
o Parties reside in different places
1. If sent by mail, deposited in post office in time to go
by mail the day follow day of dishonor. If there is no
mail then, on the next mail thereafter
2. If given through other means, within time that it
would be received in due course of mail in the same
time frame as above
When is notice of dishonor not required in general?
o In general: when after exercise of reasonable diligence, it
cannot be given or it does not reach the parties
When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o 3. Drawer is the person to whom instrument was presented for
payment
Ex. C went to the office of X, the drawee, but he was
not there. But R, the drawer, who was the office
manager, was there. And the drawer dishonored.
o 4. Drawer has no right to expect that drawee or acceptor will
honor
Ex. X withdrew her money from her bank account and
issued a check to cover for expected proceeds of
jewelry she had to sell. She failed to sell the jewelry.
The check was in the hands of Y who had ABC
investment house rediscount it. The check bounced.
HELD: X had no right to expect the bank will pay
because she withdrew all her funds.
o 5. Drawer countermanded payment
Meaning, drawer stopped payment.
o N.B. In all these cases, the drawer KNEW that there was or
would be dishonor.
When is notice of DH not needed to be given to indorser?
o 1. Drawee is fictitious person or has no capacity to contract and
the indorser is aware of this fact upon indorsement
30
o 2. Indorser is the person to whom presentment for payment was
made
o 3. Instrument was made or accepted for his accommodation
Drawer Indorser
Drawer and drawee same person
Drawee fictitious or no capacity Drawee is fictitious or no capacity,
and indorser knows
Drawer is to whom instrument was
presented for payment
Indorser is to whom instrument was
presented for payment
Drawer has no right to expect it will
be paid by drawee
Made or accepted for indorsers
accommodation (same principle: no
right to expect it will be paid)
Drawer countermanded
When can there be waiver of notice of dishonor?
o 1. Before actual time for giving it comes
o 2. Or after failure to give it
o Can waiver be implied?
Yes.
o Who is affected by a waiver in an instrument?
If written on the instrument all the parties
If written over a signature just that person
o Waiver of protest
Includes presentment and notice of dishonor (steps to
hold a person secondarily liable)
Failure to give notice of dishonor by non-acceptance does not prejudice
rights of a HIDC subsequent to the omission.
o Ex. A drew a BOE payable to B. B indorsed to C. C presented
the BOE for acceptance to X. X dishonored the instrument. C
did not give notice of dishonor to A or B. C indorsed the
instrument to D, a HIDC. D will not be precluded by Cs failure
to give notice of DH to A and B.
Discharge
How is a negotiable instrument discharged?
o 1. Payment in due course by holder
o 2. Payment in due course by accommodated party
o 3. Intentional cancellation by holder
o 4. Any other act that discharges simple contract for money
o 5. Principal debtor becomes holder of instrument in his own right
How those secondarily liable are discharged:
o 1. Discharge of instrument
o 2. Intentional cancellation of his signature by the holder
o 3. Discharge of a prior party
o 4. Valid tender of payment by prior party
o 5. Release of principal debtor, unless holders right of recourse
against secondarily liable party is expressly reserved
o 6. By extension of time of payment or right to enforce instrument
Except if secondarily liable party assents
Or right to recourse is expressly reserved
What is the effect of an absolute and unconditional renunciation?
31
o A holder renouncing against prior parties terminates recourse
to that party
o If against primarily liable person discharges the instrument
o But it does not affect subsequent HIDC . So if C renounces all
claims against A and B, then negotiates it to D, who is a HIDC,
D is not prejudiced by the prior renunciation.
What is the form of renunciation?
o It must be absolute and unconditional
o If it is merely oral and the instrument is not surrendered, the
renunciation is not effective.
o It is not effective if unintentional or by mistake
OTHER methods of discharge:
o 48 striking out indorsements (relieves that person and all
those subsequent to him)
o 89 those secondarily liable to whom notice was not given
o 122 renunciation by holder
o 142 qualified acceptance by drawee discharges those
secondarily liable
Unless they assent to it. Failure to dissent within
reasonable time is an assent
o 186 stale check
o 188 holder of a check procures it to be accepted or certified
Material Alteration
What is the effect of a material alteration?
o Discharges all parties not party to the alteration
o Binds the one who made the alteration, those who assented,
and subsequent indorsers
What is the right of a HIDC?
o If he is not party to the alteration, he may enforce it according to
the instruments original tenor
What is a material alteration?
o 1. Date goes into the obligation
o 2. Sum payable, principal or interest into amount
o 3. Time or place of payment into enforcement
o 4. Number or relations of parties into obligation
o 5. Medium or currency of payment into amount
A issued a PN to B for 4K. B indorsed to C. C changed the amount
to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is Es
right?
o Enforce the instrument for 4K against A or B
o Enforce the instrument for 40K against C (made the alteration)
or D (indorsed and warranted)
BOE
Can a BOE be addressed to more than one drawee?
o Depends. If joint drawees, yes.
o If alternative or successive, no.
When can a BOE be considered a PN?
32
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o But can the holder treat it as a BOE still?
Yes.
Promissory notes and checks
What is the nature of a check?
o Special kind of BOE.
o No need to present for acceptance you can present them for
payment immediately
o Rules on BOE apply to checks too, such as the 24 hour
acceptance rule. If you dont return it in 24 hours, it is deemed
accepted
What are cashiers and managers checks?
o Drawer and drawee is the same
What are memorandum checks?
o Its just usually used as evidence of credit, by a drawer who
received goods. He usually redeems it for cash
What is a travelers check?
o You sign it twice (first as a specimen signature, and second
when paying. You present your passport too)
Crossing a check has three consequences:
o 1. Can be negotiated only once
o 2. Cannot be encashed; must be deposited
General can be deposited in any bank
Special must be deposited only in that bank
o 3. To be a HIDC, the holder must inquire as to what purpose the
check was issued for
o But is it still negotiable?
Yes, it is still negotiable.
o What if you try to encash a crossed check?
It will be denied. You cannot run after the drawer
because there is no proper presentment for payment
Payee of a check presented a check in the morning; the bank said the
drawer had insufficient funds. Presented again in the afternoon, but the
computers are offline, so the bank accepted it. Bank found out after and
chased after the payee to recover.
o HELD: By accepting, the bank admitted authority of drawer to
draw.
Customer bought a managers check and asked that his account be
debited to purchase it. The bank realized that it made a mistake because
the account was actually closed. The customer already used the check
to buy goods.
o HELD: It was a managers check so the store owner was a
HIDC.
Certified checks:
o Banks usually do not do this anymore
Check must be presented for payment within reasonable amount of time
o Banking practice: 6 months, or else stale
33
o What happens when the check goes stale?
View one (2 cases): the obligation is discharged.
Payment of an obligation with an NI the obligation is
discharged when there is encashment or the value is
impaired due to the fault of the holder.
View two: the obligation remains because the drawers
bank account was not prejudiced. And there was no
loss caused by the delay. This will only happen if the
bank becomes insolvent, that if the payee didnt dilly-
dally, he would have received money.
Sito: When the payee delays in presenting a check for payment, the
indorsers are discharged, because they have an interest to discharge
their potential secondary liability. Unreasonable delay will discharge
them.
o So contrast the rules: the drawer will not be discharged; the
indorsers will be discharged
MERCANTILE INSTRUMENTS
Letters of credit
What is a Letter of Credit (LOC)?
o An instrument issued by banks on behalf of a customer
authorizing a beneficiary to draw a draft/drafts which will be
honored upon presentation to the bank
o Must be drawn in accordance with the terms and conditions
specified in the letter of credit
o Purpose : to ensure certainty of payment
Illustrate the nature of a LOC:
o ABC Company wants to buy chemicals from Dupont. But
Dupont has no assurance that when it ships chemicals, it will be
paid. So ABC gets a letter of credit (LOC) with PBC. PBC then
corresponds with a bank in the US (ex. Citibank) PBC will
transmit to Citibank the text of the LOC, through SWIFT.
Dupont then finds out that when it delivers the chemicals, the
bank will pay him. Since the bank is more trustworthy, Dupont is
now willing to sell the materials.
o Dupont ships the chemicals to PBC. So when the bill of lading
arrives, PBC will tell ABC Company that the goods arrived. PBC
tells ABC Company that it will release the goods if there is a
trust receipt arrangement between them. So the proceeds of
the goods can be used to pay PBC if ABC does not pay.
o Dupont will not collect directly from PBC. Dupont will issue a
BOE addressed to PBC, to pay Dupont. Dupont then submits
the bill of lading, delivery receipt, etc. to PBC as proof of
delivery so that Dupont will be paid.
What is the nature of a LOC?
o A contract between the customer who applied for it and the
bank, with a stipulation in favor of a third person
o An LOC is a primary, absolute, and unconditional obligation. It
cannot be affected by defects in the underlying obligation
Philamlife: X took a loan from ABC. ABC required X
to open a standby LOC from Z bank. Z bank issued
the LOC, payable when ABC shows documents
proving that X defaulted on the loan. ABC gave this
document. Z bank, however, refused to pay the whole
amount stating that X informed it that X had already
made some payments, so these have to be deducted.
HELD: Cannot do this! The LOC is a primary,
34
absolute, and unconditional obligation. It is not an
accessory obligation, so the defect in the underlying
contract cannot affect it. If there really was
overpayment, X just has to run after ABC.
o Purposes:
1. Safe mode of importing goods
2. Reduce risk of nonpayment
3. Substitute for and support the agreement of
purchase (although not necessary to perfect it)
Types of LOC?
o 1. Commercial LOC
issued as payment pursuant to contract of sale
The seller will be paid if the seller gives proof that he
complied with obligation to deliver
o 2. Stand-by LOC
Secondary payment mechanism, where a seller is paid
upon certification of a partys non-performance of an
agreement
Show proof that the applicant has not performed his
contract
o 3. Confirmed LOC
Beneficiary stipulates that the obligation of the issuing
bank should also be the obligation of another bank to
himself (usually the notifying bank)
o 4. Back-to-back LOC
Credit with identical documentary requirements and
covering the same merchandise as another LOC
except for a difference in the price of the merchandise
as shown by the invoice and the draft
The second LOC can be negotiated only after the first
is negotiated
When is it considered a consummated contract?
o When the bank pays the creditor (seller-exporter), and not when
the debtor-buyer pays the bank because the bank can give an
extension of payment to the debtor.
What is the governing law?
o 1. Governed now by UCP 600 (Uniform Customs and Practice
for Documentary Credits). This is revised every 10 years or so.
The observance of UCP is justified by Art. 2 of the
Code of Commerce, which provides that in the
absence of a particular provision in the COC,
commercial transactions are governed by usages and
customs.
o 2. Code of Commerce, Art. 568:
LOC must be issued in favor of a definite person and
not to order
Limited to fixed or specific amount or to an
undetermined amount but with maximum limit stated
exactly
Who are the parties to a letter of credit (essential) and their
obligations?
o 1. Buyer (applicant)
35
procures LOC
obliges to reimburse the bank upon receipt of
documents title
o 2. Issuing bank
undertakes to pay seller upon receipt of draft and
proper documents needed
and to surrender the documents to the buyer upon
reimbursement
Obligation is solidary with the buyer. It is a primary
obligation (unlike a guaranty, which requires default by
the obligor)
o 3. Seller (beneficiary)
ships goods to the buyer
delivers documents of title and draft to the issuing bank
to recover payment
o Who are the optional parties?
1. Advising (notifying) bank
May be utilized to convey to the seller the
existence of the credit
BUT does not assure that the issuing bank
will pay and may refuse to accept the drafts
without being liable
2. Confirming bank
Lends credence to the LOC issued by a
lesser known issuing bank
Is directly liable to pay the seller-beneficiary
3. Paying bank
Undertakes to encash drafts drawn by the
seller-exporter
4. Negotiating bank
Instead of going to the place of the issuing
bank to claim payment, the buyer may
approach another bank to have the draft
discounted
There are 3 underlying contracts in a LOC:
o 1. Application of customer for LOC
where customer-buyer undertakes that he will
reimburse the bank when it pays the draft, and also
pays for bank charges
o 2. LOC
bank tells beneficiary-seller that if it draws the draft, it
will pay him after submitting documents
o 3. Underlying contract of sale between buyer and seller
Independence principle (always asked in Bar)
o Basic principle: cannot invoke defect in one of the other 3
contracts to avoid compliance with obligation
o A bank which issued a LOC is obliged to pay the draft so long
as the beneficiary submits the documents required by the LOC,
without verifying if he actually complied with the obligation in the
underlying contract
36
o Banks deal with documents only! They do not deal with
goods nor are they required to examine them.
Ex. Seller-beneficiary submitted the documents
required, so the bank must pay, even if the goods
delivered turned out to be fake.
o PBC v. Chua Tiep Seng: The bank does not guarantee the
genuineness of the documents submitted to it. All that is
required is the bank act in good faith.
o There was a case (Feati Bank) where somebody shipped
timber to someone abroad. There was an agreement that
payment is by LOC. Among the documents is a certification of
the buyer that the goods delivered were the proper goods. The
buyer collected the goods but refused to send the certification!
HELD: The LOC requires buyers certification, so the bank need
not pay. (This is a stupid move by the seller, because he is at
the mercy of the buyer.)
o A seller can commit fraud by submitting forged or false
documents. To combat this, the buyer may require a surveyors
certificate to examine the goods. But the seller may always give
a fake one if he really wanted to defraud the buyer.
Interpretation of Letters of Credit MUST BE STRICT (Rule of Strict
Compliance)
o 1. Particular genus If the LOC requires that the seller submit
an invoice for pine lumber, but the invoice states pine timber,
the bank may refuse to pay
o 2. Quality specifications If the LOC requires Italian marble
and the document just says marble, the bank may refuse to
pay
o 3. Misspellings If the LOC requires noodles but the document
says woodles the Bank may refuse to pay who knows what a
woodle is or could be.
When the bank discovers a discrepancy, what does it do?
o It forwards the documents to the buyer and notifies the latter of
discrepancies it discovered. If the buyer agrees to waive the
discrepancy, then the bank pays. If the buyer does not waive,
the bank does not pay.
o Cojack: Buyer is a con artist, so it ordered 3M worth of bags
from Cojac company. It opened a letter of credit, and the
condition is that an invoice from Cojack be submitted. Cojac
submitted an invoice, of course, without the misspelled K. The
bank asked the buyer if he waives the discrepancy; the buyer
refused. The bank did not pay. Later, the buyer just paid 1M to
Cojac.
Red clause
o A clause, usually written in red ink, where the beneficiary/seller
may get payment in advance, meaning, even if the
beneficiary/seller has not yet delivered the goods to the buyer.
This is usually because the beneficiary will purchase goods from
a third party producer that does not accept anything but cash
(hunters, lumberjacks, etc.). If the beneficiary does not deliver
the goods, too bad. The buyer still bears the risk.
Evergreen clause
o A provision that allows an expiring LOC to be automatically
extended for indefinite number of periods until the issuing bank
informs the beneficiary of its termination.
o Ex. A foreign company not doing business here sues and asks
for a provisional remedy. The court requires a bond, so the
company obtains one from a surety firm. The surety firm
requires that the company open a stand-by LOC with a bank,
37
which will pay the surety firm if the company is held liable. This
LOC will most likely contain an evergreen clause, to keep
renewing it until the case is over.
May the seller in the Feati bank case (where the buyer refused to
issue a certification so the seller was not paid) sue the
correspondent bank when it failed or advance funds?
o No. The correspondent bank cannot be sued unless it
confirmed the letter of credit. It becomes solidarily liable.
Revocable, irrevocable
o Revocable: no need to notify the beneficiary, can be done
anytime
o Usually its irrevocable, for certainty of payment
Revolving letter of credit
o Automatically replenishes, whether per month, when the amount
is finished, or it can be cumulative, etc.
Bank lien over applicants property
o Usual stipulation in a LOC if the applicant has a deposit there,
too.
o CASE: The depositor/applicant owed the bank for a LOC, but he
also assigned the certificate of time deposit to a third party, who
has the better right?
o HELD: The bank. It had a lien on the deposit.
FRAUD EXCEPTION: when can there be enjoinment of payment in a
stand-by LOC?
o 1) Proof of fraud is strong, 2) fraud must involve abuse of
independence principle, 3) irreparable injury (Transfield)
o Distinguish between out and out fraud vis--vis failure to
meet specifications:
In a landmark case by the CA of New York, instead of
the seller delivering goods, he delivered rubbish. The
court allowed the buyer to have a preliminary injunction
to stop payment be issued because this involves out-
and-out fraud.
However, if there is mere failure to meet specifications,
you cannot enjoin payment
Metro v. Daway: Case for corporate rehabilitation does not suspend
payment from a stand-by LOC. It is a solidary obligation, there is no need
to exhaust the resources of the applicant corporation that applied for the
stand-by LOC.
Trust receipts
What is a Trust receipt transaction (TRT)?
o The entruster (bank), who has absolute title over the goods,
releases these to the entrustee
o The entrustee (buyer) executes and delivers a trust receipt,
where:
1. He holds the goods in trust for the entruster
2. Sell or otherwise dispose of the goods
3. Turn over to the bank/entruster the proceeds of the
sale to the extent he is indebted
4. Or turn over the goods to the bank, in case unsold
Note: if the entrustee returns the goods, he does not incur any further
liability. The entruster/bank then sells the goods
38
What is the nature of the entrusters title?
o The entruster has a security interest. By fiction of law,
ownership is with the entruster-bank, until it has been paid or
the proceeds of sale turned over to him.
o But since it is a mere security interest, the entruster is not
responsible as principal in the contracts entered into by the
entrustee. The entrustee bears the losses (ex. if the imported
goods burn or are stolen).
o Since the entrustee is not the owner of the goods he cannot
mortgage them yet. Or, at least, he has no free disposal of them
yet.
Allied Banking: X imported goods, and opened a LOC with ABC bank.
When the equipment arrived, X took the goods from ABC and issued a
trust receipt in ABCs favor. X installed the goods in his factory. X failed
to pay. ABC sued X for violation of PD 115. X claimed the goods were
not covered because he did not sell nor manufacture/process them.
HELD: The goods were covered. It says sell or otherwise dispose.
Otherwise dispose covers the installed goods.
o Otherwise dispose can cover giving goods to a sister
company
For estafa, there has to be misappropriation
o Meralco/steel towers case: X fabricated steel towers (hired by
Meralco). X imported materials, which X received and gave a
trust receipt to ABC bank for. X used the materials to build the
steel towers. But Meralco hasnt paid X yet, so X couldnt pay
ABC bank. ABC sued X for estafa. HELD: No estafa, no
misappropriation.
o Another case: X could not sell the goods covered by the TR.
X tried returning the goods to ABC, but it refused. HELD: X did
not commit estafa.
Can the trustee execute a Chattel Mortgage over the goods covered
by the TR?
o No. He does not have free disposition of the property.
Can a TR cover a purchase independent from the credit?
o No.
o Illustrate: X purchased goods. Independent of this purchase, X
applied for a credit facility with ABC bank. ABC bank required X
to sign a trust receipt for the goods he just purchased. HELD:
This is invalid. The bank did not have any lien or title to the
goods; they were purchased separately from the credit
application.
Can TR apply even to domestic transactions?
o Yes, TR can apply even in domestic transactions
What is the nature of ownership/security interest?
o X imported puka shells, covered by a trust receipt with ABC
bank. X failed to sell the puka shells. X decided to return the
shells and claim he is not liable anymore because X claimed
ABC was the real owner of the shells and X just held it in trust.
HELD: X is wrong. ABC can still recover the money.
A TRT is a security transaction, and the buyer is still
really the owner of the goods; it just relies on a legal
fiction to create a lien. ABC still has the right to
recover the money; or it can sell the goods.
o PNB Case: The bank getting back the goods does not
terminate the obligation. It just has a lien, and to realize it, the
bank must foreclose otherwise, it is pactum comissorium. The
bank then returns the excess or runs after the deficiency.
Rights and liabilities of parties:
39
o 1. Entruster not liable in any sale or contract entered into by the
entrustee. He merely has a security interest.
o 2. Entrustee bears risk of loss thus, loss of the goods does not
extinguish the obligation
o 3. A purchaser for value and in GF of goods covered by TR is
free from entrusters security interest
o 4. Failure of entrustee to turn over proceeds of the sale
constitutes estafa or may be basis of suit for damages
o 5. If the parties agree to reschedule debts and impose
conditions incompatible with the TR, then there is a novation
and no liability under TRL avails.
Warehouse Receipts Law
What are the three functions of a WHR?
o 1. Contract for deposit
o 2. Evidence of receipt of goods
o 3. Represents the goods and operates as a transferable
document that carries with it control over the goods
When is a WHR negotiable?
o If payable to order or bearer
o If payable to order or bearer, can one insert a stipulation
that it is non-negotiable?
No. The stipulation is void.
o This is a key difference between WHR and negotiable
instruments:
For NIs, a negotiable instrument can be made non-
negotiable.
For negotiable WHR, it cannot be converted into a non-
negotiable WHR. The stipulation is void.
o What if an order instrument is only delivered but not
indorsed?
1. Transferee acquires right against the transferor
2. There is no direct obligation by the WHM against the
transferee
3. The transferee can compel the transferor to
complete the negotiation by indorsing the instrument
o What is the effect of negotiation?
1. The holder receives title to the goods as the indorser
had [NOTE: the holder never obtains better rights than
the indorser, unlike under the NIL] and title that the
depositor had over the goods
X stole goods from Y and deposited with
WHM. X negotiated the WHR to Z. WHM
found out that the goods were stolen and
delivered them to Y. Can Z hold WHM
liable?
o No. The depositor, X, never had title
over the goods, so the transferee Z
never acquired title over them either.
2. Direct obligation of the WHM to hold the goods for
him
40
o Who can negotiate a WHR?
1. Owner thereof
2. Person to whom possession of the WHR has been
entrusted to by the owner, if by the terms of the receipt:
1. The WHM must deliver the goods to the
order of the person to whom possession has
been entrusted, or
2. If at the time of the entrusting, the receipt is
in such form that it may be negotiated by
mere delivery
Can a thief negotiate a WHR?
YES, but the WHR must be in such form that
he need not forge any signature.
When is it non-negotiable?
o Not payable to order or bearer AND there is a large print,
usually in red, that it is non-negotiable
N.B. so if its order or bearer the WHM cannot insist
on putting the red print that its non-negotiable
o What is the consequence of not marking it so?
If someone relied in GF that it is negotiable and acted
upon it, it will be treated as negotiable.
What is the rule on duplicate WHR?
o Same as non-negotiable if the holder thought in GF that it was
the original, he could sue the WHM for damages
What is the effect of absence of any of the required provisions to be
found on a WHR?
o It does not invalidate the WHR. WHRs are liberally construed to
better serve their purpose.
What is the right of a transferee of a non-negotiable WHR?
o 1. Title of the goods subject to the terms of any agreement with
the transferor
o 2. Right to notify the WHM of the transfer and acquire the direct
obligation of the WHM to hold the goods for him
o What is implication of failure to notify the WHM of the
transfer?
Prior to notification, the title of the transferee can be
defeated by: a) an attaching or executing creditor of
the transferor, or by b) notification by the transferor or
another transferee of a second transfer
Ex. X deposited 10 crates of goods with WHM.
WHM delivered a non-negotiable receipt to X. X
transferred the WHR to Y, for value. Meanwhile, C,
a creditor of X, obtained a judgment against X for
unpaid debt and was levying against the 10 crates
of goods. Who has a better right?
C, because Y did not obtain title over the
goods due to lack of notification to the WHM.
If Y had informed WHM of the transfer prior to
the levy, then Y would have had a better right.
What are the obligations of the WHM?
o 1. Safeguard the goods
41
o 2. Deliver the goods
To deliver
What are the conditions before the WHM delivers the goods?
o 1. Holder pays the WHMs liens
o 2. If the WHR is negotiable, to surrender the receipt
o 3. Readiness and willingness to sign an acknowledgment of
receipt of the goods
To whom must the WHM deliver the goods to discharge his liability?
o 1. Person lawfully entitled to the goods or his agent
o 2. Person entitled to delivery under non-negotiable WHR or who
has authority from the person entitled to delivery (SPA)
o 3. For negotiable WHR, the person in possession
o When is there misdelivery or conversion?
1. Delivery to one not in fact lawfully entitled to the
goods
2. The holder of a WHR informs the WHM prior to
delivery not to make such delivery, but he still did
3. The bailee had information that the delivery he was
about to make was to one not lawfully entitled to the
possession of the goods, but he still did
Rules on refusal to deliver:
o 1. WHM cannot refuse to deliver the goods just because of a
third party claim
But he may submit the situation for interpleader
o 2. WHM is excused for failure to deliver if he sold the goods to
satisfy an unpaid lien
o 3. WHM is excused for selling perishable or hazardous goods
What are valid defenses for non-delivery or misdelivery?
o 1. Loss or destruction of goods fortuitously
o 2. WHM has a right over the goods
A. Failure to satisfy the WHMs lien
B. legal title over the goods through transfer
o 3. Holder of receipt does not comply with requirements
Failure to surrender the WHR
Failure to satisfy the WHMs lien
Failure to show willingness to sign an acknowledgment
when the goods are delivered, upon request by the
WHM
o 4. Right or title of third persons
A. Request by person lawfully entitled to goods to
WHM not to deliver the goods
Can lead to interpleader
B. WHM has information that the delivery about to be
made was to one not lawfully entitled to possession of
the goods
WHM ascertains the facts first
42
C. Disposed to third person to satisfy WHMs lien or
because the goods are perishable
D. Delivery to claimant with better right
E. Attachment or levy by creditor where the document
is surrendered or its negotiation is enjoined, or
document is impounded
F. Document of title is attached by creditor
What is the effect of alteration?
o Unlike in NIL, it does not discharge the WHM. The WHM is
liable under the original tenor of the WHR.
What is the effect of loss of the receipt?
o The claimant has to file a case in court and get a court order
telling the WHM to deliver the goods, after proof of loss. He
also has to post a bond, in case the WHR falls in the hands of a
person who took it in GF and for value. The latter goes against
the bond.
How does a creditor go about attaching/levying the goods covered
by a negotiable WHR?
o Ask for enjoinment of indorsement or renegotiation of the receipt
have the WHR frozen or surrendered, so it doesnt end up in
the hands of someone who takes it for value and in GF. Until
this is done, the WHM cannot be compelled to deliver.
The WHM in general, as a bailee, cannot claim ownership over the
goods. What are the exceptions?
o 1. WHR negotiated to him, so takes the goods in his own right
o 2. Has unpaid lien, so he foreclosed it and bought the goods
during auction
What if the WHM delivers the goods without asking for surrender of
the WHR?
o He is liable for damages to any person who takes the WHR in
GF and for value.
o What if the WHM makes partial delivery of the goods?
He must cancel the WHR and issue a new one
reflecting the balance of the goods, or indicate partial
delivery on the receipt.
Again, failure to do so makes him liable to one who
takes the WHR in GF and for value.
Can an unpaid seller claim right over the goods over the holder of
the receipt who purchased it for value?
o No. The vendors lien does not affect the transfer of title to the
purchaser for value.
o X sold Y 10 sacks of rice on credit. Y deposited the sacks
with WHM, who issued a receipt. Y delivered the receipt to
Z who purchased it for value and for good faith. Who has a
better right over the rice, Z or X who is still unpaid?
Z. While X has a vendors lien, it cannot defeat the
rights of a purchaser for value of the receipt.
The only way for the unpaid seller to get the goods is
to validly reacquire to the receipt from Z and surrender
the receipt for cancellation.
What is the effect of pledge of a receipt?
o The pledgee is in the same footing as a vendee for purposes of
the WHR law. He is thus also preferred.
o Except of course, once the underlying obligation is paid, the
pledgee has to return the WHR to the pledgor.
43
o X sold Y 10 sacks of rice by quedan, on credit. Y loaned
money from ABC bank and to secure his indebtedness, Y
delivered the quedan to ABC bank. Y died. Who has the
better right, ABC bank (pledgee) or X (unpaid seller)?
Same principle as above ABC bank wins. Even as a
pledgee, it has the same preference as a purchaser.
Xs recourse is run after Ys estate.
What are the warranties of the transferor?
o NOTE: MOST IMPORTANTLY the indorser or one who
negotiates for value is not a guarantor. He is not liable to the
bona fide purchaser if the WHM fails to deliver the goods. He
does not guarantee to performance of the WHM of his duty.
o 1. The receipt is genuine
o 2. He has a legal right to negotiate or transfer it
o 3. He has no knowledge of any fact which would impair the
validity or worth of the receipt
o 4. He has a right to transfer title to the goods and that the goods
are merchantable or fit for a particular purpose
What is the rule on attachment or levy of the goods covered by a
negotiable receipt?
o There can be no attachment or levy of the goods unless the
receipt is first surrendered to the WHM or its negotiation is
enjoined
o What can the creditor do?
1. Have the courts attach the receipt
2. Compel the holder to deliver the receipt to him by
injunction or otherwise
o What if the receipt is non-negotiable?
Remember the discussion above about whether the
transferee was able to notify the WHM first before the
creditor could attach or levy.
To safeguard
If the goods are lost, he is presumed to be at fault
But not for fortuitous events
What is the duty in keeping goods?
o He must segregate the goods belonging to different depositors
o But he is allowed to commingle if:
It is stipulated
It is customary to do so
What are the rules on commingled goods?
o Each depositor gets a pro rata portion of the common mass
upon claim
o What happens if there is partial loss?
The depositors also share in the loss proportionately
Key distinctions between NI and Negotiable WHR:
Negotiable Instrument Negotiable WHR
When deliberately altered, becomes
void
When altered, still valid, but it may be
enforced only according to the
original tenor
If payable to bearer, always remain
so payable regardless of the way it
was endorsed, whether specially or in
blank
If payable to bearer and it is
endorsed specially, it will be
converted in a receipt deliverable to
order
44
HDC may obtain a title better than the
negotiating party
Endorsee, even if he is a HDC,
obtains only such title as the person
negotiating had over the goods
WHMs lien
What are included in the WHMs lien?
o 1. All lawful charges for storage and preservation
o 2. All lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering, and other charges in
relation to the goods
o 3. Reasonable charges and expenses for notice,
advertisements, and for sale of goods (to satisfy WHM lien)
What is the rule on notice?
o The charges present at the time of issue of the WHR must be
stated or else there is no lien. He will only have a lien on
charges occurring after the WHR was issued.
What are the properties subject to the lien?
o 1. All goods deposited belonging to the person liable for the
claims
o 2. All goods belonging to others which have been deposited by
the person who is liable for the claims if the person has been
entrusted with possession of the goods, such that a pledge by
him of the goods at the time of deposit would have been valid
When is the lien lost?
o 1. Surrendering possession of the goods
But can he claim a lien over other goods deposited
to him but under different bailments?
No. His lien only pertains to that one and the
same bailment, which was lost upon
surrender.
o 2. Refusing to deliver the goods when he should have complied
How is the lien enforced?
o 1. Valid refusal to deliver the goods until the lien is satisfied
o 2. Causing EJ sale of the property and applying the proceeds to
the value of the lien
o 3. Filing civil action for collection of claims
INSURANCE
In general
Elements:
o 1. Insured possesses interest susceptible of pecuniary
estimation
o 2. Insured is subject to risk of loss
o 3. As consideration, the insured pays premium
Someone organized a jeepney association. They give membership fees
and if a driver gets into an accident, the association pays indemnity.
Sued by Insurance Commission for not having license to do Insurance
Business.
o Held: Was conducting insurance business without license. All
requisites concurred.
45
o Contra Maxicare: Even if all elements are present, but if primary
purpose of contract is to provide services, then it is not an
insurance contract. In Maxicare there is no insurance contract
because physicians pay for the first six sessions of therapy after
injury or loss, but the main purpose is to give medical services.
But here, even if you did not get injured or sick, you can avail of
medical checkup.
What are the characteristics of an insurance contract?
o 1. Aleatory
If you dont lose what was insured, there is no
indemnity.
o 2. Personal
It does not adhere to the property insured because the
personality of both parties is crucial and is the primary
consideration for the contract.
Ex. teenagers will be charged higher insurance over
cars.
The buyer of a car, for instance, will only be insured if
the insurance company allows for an endorsement of
the sellers insurance contract.
o 3. Unilateral
It is only the insurer that has an obligation to perform
(the insured already paid).
o 4. Conditional
Can you insure against losing the lottery?
o No, this is wagering.
Parties
Who can be the insurer?
o One authorized by the Insurance Commission
Who can be insured?
o Anyone except a public enemy (citizen of a country with which
the Philippines is at war with)
o Wenfeld: German company filed claim with Insurance
Company, and the Philippines was under US at that time. The
Germany and USA were at war (WWII) so the company cannot
collect.
What is the standing of mortgagors to sue on an insurance contract
and what is the effect of his acts?
o 1. The mortgagor can sue the insurance company if it does not
pay.
o 2. If the mortgagor performs an act that prejudices, the
mortgagee cannot collect.
Ex. The Mortgagor brought fireworks to the building
and it exploded. The mortgagee cannot collect.
o 3. The mortgagor can have the mortgagee perform acts that
benefit the contract
Insurable interest
When is there insurable interest over life?
o 1. Own life, spouse and children
Children even if emancipated
Spouse need valid and existing marriage
46
o 2. Based on support or pecuniary interest
Ex. a key basketball player you signed for your team; a
concert impresario in an opera you organized
o 3. Based on legal obligation, whose death might delay or
prevent performance
o 4. Any person upon whose life any estate or interest vested in
him depends
Ex. X is allowed to stay in the family home of his
parents as usufruct. They have interest to continue the
life of their parents
o Note: for the first, mere relationship is enough. For 2-4, there
must be pecuniary interest. So the interest of the creditor over
the debtors life ceases upon full payment.
So mere friendship does not fall under any of the
categories.
When is there insurable interest over property?
o 1. Existing interest
o 2. Inchoate interest on an existing interest
Ex. stocks, which is based on subscription contract
o 3. Expectancy coupled with existing interest
o N.B. MAIN DIFFERENCE: there must be a valid pecuniary
interest
What is the value of insurable interest over property?
o The insurance cannot go beyond the value of the property
o Whereas in life, you cannot put value over life of a person
EXCEPT: if there is a way to place pecuniary value in
the life of the person.
Who can be the beneficiary in life insurance?
o 1. If over own life, he can designate anybody, even if the latter
has no insurable interest.
But: you cannot name one to whom you are prohibited
to make donations to
Ex. co-guilty party of adultery/concubinage
o 2. If you are the beneficiary, you need to have insurable interest
over the life of the insured
X took an insurance policy over his own life for 1M and named his
friend Y as beneficiary. X died, and his debt to Y is worth 50k. The
executor of Xs estate claims only 50k must go to Y and the 950k
must go to Xs estate. Correct?
o No. Since the insured took a policy out of his own life, he is free
to name anyone as beneficiary.
o The rule would be different if Y took an insurance out of Xs life
the insurable interest is only P50k.
Can the insured change the beneficiary?
o Yes, unless it was made irrevocable in the policy.
o If the beneficiary is irrevocable, can it still be changed?
Yes. But if irrevocable, can only change beneficiary
with the latters consent.
47
Ex. A father made his child an irrevocable beneficiary
of an insurance contract. If the father wanted to
revoke, the child must consent.
What is the rule for beneficiaries in life insurance?
o 1. The beneficiary/assignee must have insurable interest
o 2. If the policy is going to be assigned, the insurer must consent
o Contra: Assignment of a life insurance policy
The assignee need not have insurable interest
When does the beneficiary forfeit?
o If he causes the insureds death.
Except: When the killing is lawful (ex. self-defense, the
beneficiary is the executioner in death penalty)
o What is the effect of unlawful killing?
Benefits go to the estate of the insured
Various situations re: insurable interest over property:
o 1. Importer has insurable interest in goods he is buying even if
undelivered, because he can compel delivery. The seller also
has insurable interest because he has legal title.
o 2. Contractor has insurable interest over the building he is
erecting because under the law, he bears the risk of loss prior to
completion.
o 3. Mortgagor and Mortgagee both have insurable interest
o 4. Lessor and lessee both have insurable interest
o 5. Mere possessor.
Ex. X Colleges was allowed to use a building by the
owner, as a school. It insured the building. It caught
fire. HELD: There was insurable interest.
o 6. Partners, over the property of a partnership
o 7. Carrier, over goods it is transporting since he will be liable
o 8. WH man, over goods for safekeeping since he will be liable
What is the nature of a mere contingent interest over something?
o Not insurable.
o Ex. Creditor with no collateral over properties of buyer
o Ex. Expectant heir
o Ex. Fictitious contract of sale (completely simulated)
Can smuggled property be insured?
o No against public policy
When must insurable interest exist in life insurance?
o In life, need only exist when the policy takes effect
o Ex. X insured his wifes life. They annulled their marriage. But
the wife failed to revoke the insurance. X can collect.
When must interest exist in property insurance?
o When the policy takes effect and when loss occurs
o Need not exist in the meantime
48
Ex. Owned a car, insured, then sold it. Then
repurchased, and then loss in fire.
o A person mortgaged his building. The property had been sold in
foreclosure. Then it was lost by fire. He had no more right to
redemption. HELD: Lost insurable interest.
o What if he still possessed the right of redemption?
He still has insurable interest
What happens when there is change of interest?
o If you sold your car, if the buyer wants insurance, you have to
endorse the policy.
o Change in interest after the loss does not change indemnity. It
is already an accrued liability at this time. It is a chose in action.
o Change in interest in one or more listed things:
A taxi company insured 20 units. Sold 4 of them. The
insurance over 16 is still valid.
o Change of interest in will or succession does not avoid
insurance.
X insured Family Home against fire. X died and
children inherited. The house burned. The children
can collect.
What if the children bought the house from the
father when he was still alive?
Insurance does not transfer.
o For co-owners, partners, etc:
X Y and Z co-owned a house. X bought Y and Zs
shares and became sole owner. The house burned.
Insurance company must pay because X was part of
the original insured.
But if there is a new person brought into the group, the
insurance is avoided.
Can one stipulate against insurable interest?
o No. Stipulation that there need not be an insurance interest for
an insurance contract NULL AND VOID.
What is the interest of a mortgagor over property he mortgaged?
o The extent of the value of the property
o How can the mortgagee be made the beneficial payee in the
mortgagors policy?
1. Assign (with insurers consent) or pledge (no need
for insurers consent) the insurance K
2. The original policy may have a mortgage clause or
there is a rider making the policy payable to the
mortgagee as long as he has interest (loss payable
clause)
3. Independent contract between mortgagor and
mortgagee
4. Acquired by the mortgagor under a contract duty to
insure the mortgagees benefit (in which case the
mortgagee acquires an equitable lien on proceeds
collected by the mortgagor)
What is the extent of the mortgagees interest on the property
mortgaged to him?
o To the extent of the debt secured
o The interest exists until the debt is extinguished
49
o N.B. the mortgagee may procure the policy and have the
mortgagor pay for the premiums
Distinguish:
o Standard/union mortgage clause subsequent acts of
mortgagor cannot affect the rights of the mortgagee
o Open/loss payable mortgage clause acts of the mortgagor can
affect the mortgagees rights, because the former is a party to
the contract
D had a loan of 3M from C. To secure it, D mortgaged his house
worth 5M in favor of C.
o Who has insurable interest over the house?
D 5M (value of house)
C 3M (extent of loan)
o Will insurance procured by D in his own name and for his
own benefit inure to benefit of C?
No. Insurance is a personal contract and just like any
other contract, it just involves the parties unless there
is a stipulation pour autrui (see examples above)
But under Art. 2127 of the NCC, the mortagee has an
equitable lien on the proceeds of the policy.
o C procured insurance. D fully paid C. The house burned
down. Can C recover? Can D recover?
No and no. C has no more insurable interest. D is not
a party to the insurance contract.
Concealment
What is the nature of concealment?
o Failure to communicate what a party knows and ought to
communicate
o Need not be intentional
What is the consequence?
o Insurer can rescind
Requisites:
o 1. Party must have known the fact concealed
Ex. he did not know he had cancer
o 2. Must be material to the policy
Test:
Insurer would not have entered into the
contract had he known of the fact concealed
or the conditions in the K would have been
different
Concealment in life insurance:
Failure to disclose serious ailments
Need not disclose very minor sickness/injury
A Couple got an insurance policy for their mongoloid
baby, but they did not say he was a mongoloid.
HELD: concealment
There is a law prohibiting insurance companies from
refusing to issue insurance to someone with AIDS, as
long as he discloses that he has AIDS
50
Is good faith a defense in concealment?
No. Whether it is intentional or unintentional,
the injured party can rescind.
So if X, a laundrywoman, did not disclose that
she had stomach cancer because she did not
know, there is still concealment.
o 3. Party must make no warranty of the fact concealed
In this case, if there was a warranty, the violation is not
a concealment but a breach of contract
o 4. Other party has no means to ascertain the fact concealed
If a party discloses that he has been hospitalized and
gave the contact # of the hospital, the insurers failure
to look into his records there were means to
ascertain the fact
If the agent commits a concealment, the applicant will be bound by that,
the insured made the agent his own agent for the purpose of filling up the
application form
There are matters the party need not indicate:
o 1. Insurer could have known
The inspectors went to the place and found that it was
near a squatters area. But the company issued a fire
insurance policy anyway. A fire broke out. The
insurance company cannot use the defense that it was
near a squatters area, because it sent inspectors.
o 2. Matters of public knowledge/insurer should have known
Insured an oil tanker. Cannot use the defense, why
did you not disclose that there was a war in
Afghanistan. They should have known.
o 3. Information of ones own judgment.
o 4. Matters which pertain to excluded or exempted risks.
Ex. need not disclose that members of NPA are
burning houses in their neighborhood if the fire
insurance policy exempts rebellion/coup/etc.-related
destruction
What if the insured dies from another reason apart from the fact
concealed?
o Insurer still not liable because it wouldnt have issued a policy.
Can there be waiver?
o Yes. Either express (in the terms of insurance) or implied (as
when there is failure to make follow up inquiries as to facts
already communicated).
Is there need to disclose nature or amount of ones interest?
o No. EXCEPT if one is not the absolute owner of the insured
property.
Representations
What is a representation in general?
o Statements made to induce the other party to enter into the
contract
What is a misrepresentation?
o 1. Untrue statement
51
o 2. With knowledge and intent to deceive; or stated as true
without knowing it to be true and which tends to mislead
o 3. Fact is material
What is the consequence?
o Voidable at option of insurer
o But waived for acceptance of premium payments despite
knowledge of ground for rescission
What are the kinds of representations?
o PROMISSORY: Representation as to the future
o AFFIRMATIVE: Representation as to a present fact
What is the nature of a representation?
o Can be written or oral
o Representation is not part of the contract. It is a collateral
inducement.
o But it may qualify as an implied warranty
As a rule, parole evidence is not allowed to vary the terms and conditions
of the contract. It may qualify an implied warranty. It is imposed by law.
When is a representation presumed to refer to?
o A representation is presumed to refer to the date on which the
policy goes into effect.
o If somebody applied to insure his vessel. Ex. voyage from
Manila to Cebu. Where is the vessel? It is anchored in
Manila Yacht Club. But it is actually in Curimao. However,
when the policy takes effect and the vessel is in Manila already,
there is no misrepresentation.
What if the insured has no personal knowledge of a fact?
o He may repeat the information he has on the subject which he
believes to be true
o Ex. There is a question in life insurance about medical history of
the family. If one thinks his father died as a soldier, in action,
when he actually died of AIDS, and he says the former.
o But if the info came from the insureds agent, and exercise of
due diligence was possible, he is liable for the truth of the
statement
o Ex. There is no misrepresentation because he relied on what
the physician told him.
Representation is false if facts do not coincide with what was asserted
o Test for defense: substantially true in every particular
material to the risk
o EXCEPT: Marine insurance where what is required is the
exact and whole truth
o Ex. Have you ever applied for a life insurance policy and the
application was rejected? He said no. But before, he had an
application denied, but then accepted on reconsideration.
HELD: No misrepresentation.
o Do you take alcoholic beverages? Applicant said no. But he
has been drinking since he was 16. He died of liver failure.
HELD: Misrepresentation. But if he only drank small
amounts on cocktail parties, it is not material. There is
no misrepresentation.
52
o Insured filled up the application form. The insurance company
said that they will only accept if the applicant is not more than 60
years old. He was more than 60 years old.
HELD: he wrote on the application form his date of
birth, but the company still issued a policy. There was
no misrepresentation.
Test of materiality?
o SAME AS CONCEALMENT.
o If the other party would not have entered into the contract, or
under different conditions
Warranties
Express or implied:
o Express found in terms and conditions
o Implied imposed by law
Only exists in Marine insurance
Usually embodied in a rider
o These riders, issued with the policy, need not be signed
What is the difference of warranties from representations?
o Warranties are express and placed in the contract
o Representations are not written and are but collateral
inducements
May relate to:
o Past ex. warranty that insured was never confined
o Present ex. warranty that insured is in good health
o Future ex. warranty in fire insurance that owner of property will
not store flammable materials
When does non-compliance with a future warranty not avoid the
policy?
o 1. Loss occurs prior to the warranty taking effect
o 2. Performance becomes unlawful
o 3. Performance becomes impossible
Give an example:
o Somebody tried to insure his house for fire. Inspectors said his
neighborhood is not nice. Insurer said that it will insure, but
insured must put up a firewall within 30 days. A fire razed his
house in 10 days.
o HELD: the insurer is liable. Same if there is no cement
available (impossible) or if it becomes unlawful.
What is the effect of violation of warranty?
o Allows the other party to rescind.
o Even if not rescinded, it can be launched as defense by the
insurer.
o Can the insured argue that it is not material?
No. The fact that it is in the policy entitles the insurer
to rescind. The basis is not materiality but breach of
contract.
When there is breach of warranty, it is presumed to be
material.
53
If there is a breach of warranty, and loss occurs EVEN IF not related to
the breach of warranty, the insurer is not liable.
o Ex. cannot bring explosive materials into his house. He brought
fireworks inside. His kitchen caught fire without relation to the
fireworks. Insurer not liable.
o Because the risk increased regardless.
o What is the exception?
When it is merely incidental to the business. For
instance, placing alcohol to retouch the varnish of
ones insured furniture store does not breach the
warranty against placing inflammable materials.
Ex. where there was gasoline in the warehouse for
consumption of the owners car within 2 days. Or
mothballs in a drug store.
Double insurance not just to those he acquired before but also the
future. Failure to give information is a breach of warranty.
o X obtained fire insurance over his house with Insurer A. He
warranted against past and future double insurance. Then
he obtained fire insurance over his house with Insurer B.
The same clause is included. The house burns down. Is
Insurer A liable? Is insurer B liable?
Both are not liable. There was breach of future double
insurance warranty for contract A and breach of past
double insurance for contract B.
o X insured his stocks in trade. Mortgaged them, and insured
them again, where there is loss proceeds go to mortgagee. Fire
destroyed the things. Insurer said X did not disclose second
insurance.
HELD: No need to disclose. Different interests
involved. First goes to the mortgagor. Second goes to
the mortgagee. It is not double insurance.
When is there a waiver by the insurer?
o Despite knowledge of the breach, it accepts the renewal
premium
X was issued an ordinary drivers license. Can only drive 4 wheeled
vehicles. He drove a 10 wheeler. Vehicle involved in accident.
o HELD: Insurer not liable because X is not authorized to drive
the 10-wheeled vehicle.
How is the authorized driver clause interpreted?
o Usually it means that its just the owner of the policy and an
authorized third party with a license that must drive the vehicle.
o Is the expiration of ones license a violation of the
authorized driver clause?
No. While it may be a violation of the law, it does not
violate the authorized driver clause that would breach
the warranties in an insurance policy.
The requirement for a license applies for a third party
not the insured himself.
o When the car is stolen or misused by a repairman, is it a
violation of the ADC?
No. It is considered theft under the policy.
What does under influence of liquor clause mean?
o No need to actually be drunk, as long as he is under the
influence
54
When there is breach of warranty without fraud, what is the rule?
o It only exempts the insurer from the time the breach occurred.
o Give an example.
X obtained fire insurance over his house. Warranted
against storage of inflammable materials. On Sept 31,
a fire broke out. On December 31 he stored
inflammable materials (fireworks) then a fire broke out.
The insurer is not liable for the Dec 31 fire, but is liable
for the Sept fire.
o What if there was fraud, i.e. there were inflammable
materials inside the house?
The policy doesnt attach in the first place.
Compare a warranty from a representation:
Warranty Representation
Part of the contract Collateral inducement
Written in policy/rider Need not be written
Conclusively presumed to be material Must be established to be material
Fact must be strictly complied with Fact can be merely substantially true
Rescission of insurance contracts
Sec48(a) action to rescind
If insurer has right to rescind, insurer must rescind prior to
commencement of action on the contract
Tender of premiums and notice that the policy is cancelled before suit is
deemed a rescission
Sec 48(b) incontestability clause
If a life insurance policy has been in force for at least 2 years since first
effect or last reinstatement insurer is BARRED from questioning it or
alleging misrepresentation or concealment, or deceit/fraud
o N.B. Really, what you are barring are defenses against
fraudulent misrepresentation or concealment, but not anything
else
Requisites for incontestability clause:
o 1. Life insurance
o 2. Payable proceeds upon death
o 3. In force for 2 years since issuance or reinstatement
Can the 2 year period be shortened by agreement?
Yes, but it cannot be lengthened by
stipulation.
o What if the policy lapsed but was reinstated?
The 2 year period will run again.
BUT there are still defenses that can be invoked even after this
period:
o 1. Claimant has no insurable interest
o 2. Uncovered risks (ex. insured engaged in car racing)
o 3. Policy lapsed and insured did not pay
o 4. Policy was entered into pursuant to scheme to kill insured
(vicious fraud)
o 5. Someone substituted for the insured during medical test
55
This fraud is not barred by the clause there is NO
perfected contract with the insured because it was
another person
o 6. If insured is riding in a plane and it is not a commercial flight
(ex. 8-seater plane)
o 7. Entered into military without consent
o 8. Failure to furnish proof of death
o 9. Action not filed on time
What defenses are barred?
o 1. Misrepresentation
o 2. Concealment
o 3. Fraud
When must the two year period lapse?
o It must have lapsed while the insured was alive. If the insured
dies within two years, the heirs cannot wait for the 2 years to
lapse and claim incontestability.
The Policy
What is a preliminary policy/cover note?
o Has terms and conditions of policy that will be issued.
Insurance company cannot collect separate premium on
preliminary policy and actual policy.
o Common in car insurance and marine insurance
Because there is still some delay or information to be
determined (ex. looking for third-party liability in car
insurance first [give to LTO the cover note] or looking
for adequate carrier for goods for marine goods since
the policy depends on the state of the boat
What must be the form of policies?
o Must be in printed form. It cant be handwritten anymore.
Before you issue a new policy, the terms and conditions have to
be approved by insurance commission.
What is the rule on riders and additional attached clauses?
o Does not bind insured UNLESS the descriptive name/title of the
rider or clause is mentioned and written on the blank spaces in
the policy
What is the rule on additional riders or clauses issued after the
original?
o Must be countersigned by the insured or owner
o N.B. No need for signature of insured for earlier riders and
additional clauses
When must a policy be issued upon issue of cover note?
o Within 60 days, the policy must be issued.
If the cover note extends beyond 60 days, written
agreement of insured must be obtained.
But now: there is a circular that allows cover notes to
extend beyond 60 days.
Who receives insurance proceeds?
o Applied exclusively to person in whose name or for whose
benefit the policy is made
56
o If description is so general that it may comprehend any class or
persons, only he who can show it was intended to include him
can claim the benefit.
When does insurance taken by one partner or part-owner apply to
the interest of his co-partners or co-owners?
o The terms of the policy must be applicable to the joint or
common interest
Rules on interpretation:
o If the provision is clear, there is no room to interpret
o Tantoco Terminal: had two mills. Old mill was insured. When
the new mill was finished it was insured. The policy however
mentioned the old mill. Burned. Insurer refused.
HELD: Clearly they intended the new mill to be
insured, not the old one even if the policy says
otherwise.
o Fortune: Security guard and driver of armored van had
possession of the money. They stole money. Insurance
company refused to pay because it claimed they were not
employees of the company, but the agency.
HELD: The insurance company pays. The very
purpose of the insurance is to insure against acts of
those holding the money, which in this case are the
two.
What is an Open policy?
o There must be a maximum amount mentioned. It is a maximum
liability of the insurer.
o So there can be an amount mentioned, but you still have to
quantify the value within this amount.
What is a Valued policy?
o One expressing a policy that the thing be valued at a specified
sum
Ex. Marine policies are usually this
What is a Running policy?
o Successive insurances
Ex. Goodyear, instead of getting insurance whenever it
ships tires to distributors, it gets a running policy that
covers all of these
o In any case, it would have to notify the insurance company
which would issue an indorsement, for it to be covered
What is the rule on validity of agreements limiting times for
commencing action?
o In general, a clause in an insurance policy that action upon the
policy must be brought upon by the insured within a certain
period is valid
o But if the period fixed is less than one year from the time cause
of action accrues, the stipulation is void (the period becomes the
default 10 years, from a written contract)
In industrial life insurance period cannot be less than
6 months from accrual of cause of action
o When does cause of action accrue?
From rejection of the claim by the insurer, because
prior to this, there is no necessity to bring suit yet
o What if the clause says that action must be brought one
year from loss?
57
Its void, because you have to submit your claim to the
insurer first, and this takes time. The insurer might
decide beyond one year sometimes. In this case, the
action given to the insured will be less than 1 year from
the time cause of action accrues.
o N.B. One year period to file a case is not like period for appeal.
Asking for reconsideration from the company does not suspend
running of the period.
When can non-life policies be cancelled?
o 1. Only with prior notice AND
o 2. On the following grounds:
1. Non-payment of premium
2. Conviction of crime from acts increasing hazard
insured against
3. Discovery of fraud/material misrepresentation
4. Discovery of willful or reckless acts increasing
hazard insured against
Ex. a bus company that always gets into
accidents every week
5. Physical changes in property that makes it
uninsurable
6. Determination by Commissioner that continuation of
policy will place the insurer in violation of the code
Ex. Maximum risk it can insure is 20% of its
net worth (Ex. 100M net worth, so they can
issue up to 20M). It can issue policies
beyond that but it must be reinsured.
Notice of cancellation:
o 1. Must be in writing
o 2. State ground for cancellation
o 3. State that if the insured asks for the facts as basis, the insurer
will disclose
When can there be automatic renewal in a non-life policy?
o Insured can automatically renew the policy as long as he is
willing to pay the premium
o Except: 45 days before expiration of policy, the insurer informs
him that it will not renew
If insurer does not do this, insured can renew as a
matter of right
Policy written for term longer than 1 year, it will be treated as written for
successive terms of 1 year
o Ex. construction contract requires policy covering the building as
it is completed. There were 2 fires, and 3 years. It will be
treated as if it is expiring at every anniversary of the policy.
Premiums
When is the insurer entitled to the payment of the premium?
o As soon as the thing insured is exposed to the peril insured
against
What is the effect of payment of premium to the liability of the
insurer?
o Notwithstanding any agreement to the contrary, no policy is
binding until the premium has been paid.
58
What are the exceptions?
o 1. An acknowledgement under the policy that the premium has
been paid is conclusive evidence, even if there is no actual
payment yet
But this does not estop the insurer from recovering the
payments afterwards
o 2. Payment in installments
Makati Tuscany: In fact, if only a few installments
were paid, the insurer can sue to collect the rest
Tibay: The policy provided that it will not be binding
until all installments have been paid. Thus, here,
Makati Tuscany does not apply.
o 3. Grace period in life and industrial life policies by default,
there is a 30 day grace period. But it can be increased
o 4. Grant of credit by the insurer to the insured
Masagana added this. There was a market insuring its
premises with UCPB since 1988, and every year there
is usually a 60-90 credit period to pay renewal. The
market burned within the period and UCPB paid the
premiums a day after. The insurer was held liable.
o 5. Estoppel
As in Masagana where UCPB always granted
Masagana a credit period.
What is Cash Surrender Value?
o Amount of cash the insurer receives upon surrender of the life
insurance policy prior to maturity
What is Paid-up Insurance?
o When the insured defaults, he gets the cash surrender value.
The insurer then applies the cash surrender value to check how
much insurance it can buy until the end of the policy.
o Can the insured apply for reinstatement at the end of the
policy?
Yes, but he has to undergo medical examination again
to show he is insurable, and pay the premium in
arrears
What are the rules on refund of premium?
o Insured entitled to a refund of the premium if no part of the
interest was exposed to the peril
Ex. Insured shipment of rice was never shipped
o What if the insurance is for a particular period and there
was surrender prior to the end of the period?
Entitled to refund corresponding to unexpired time
Deducting any previous payment of the insurer due to
losses
o What the exception to partial refund rule?
In life insurance, because the insurance on human life
is not divisible. So no matter how short, the insured is
not entitled to a return of the premium.
o X insured a shipment of goods from Manila to Cebu. Can
he can cancel it halfway, i.e. when it is in Romblon, and ask
for refund of premium?
59
No. The insurer was already exposed to the risk; he
cannot ask or the return of the premium. It is not
divisible.
o What if the contract is avoided due to fault of the insurer?
Insured gets the premium returned.
o Avoided due to fault of the insured, but not actual fraud?
Insured gets return of premium, if the insurer did not
incur any liability.
Ex. Pre-condition for fire insurance over house is to
build a firewall. Insured didnt get to build it, so the
policy never attached.
o Avoided due to fault of insured, with actual fraud?
No return.
Ex. Insured claimed he had a firewall, but he really did
not.
Can there be return of the premium due to over insurance?
o Yes. The insured gets a ratable return of the premium.
o Ex. a house worth 10M is insured for 10M with X, 5M with Y, 5M
with Z. Paid premiums: 10K to X, 5K to Y, 5K to Z. He is
entitled to return of premium: 5K from X, 2.5K from Y, 2.5K from
Z.
Agreement not to transfer the policy after loss has occurred is void,
because at that time, the liability has accrued. It is a chose in action.
Loss, claims settlement, subrogation
When will the occurrence of the peril insured against make the
insurer liable?
o 1. If it is the immediate cause.
Ex. Insured against fire. Faulty wiring exploded
(proximate cause) and led to fire.
o 2. If it is the proximate cause of the immediate cause
Ex. Insured against fire. Fire broke out and burned
down a tree, which fell and destroyed a house.
o 3. If it is damaged in the process of rescuing the insured against
the peril insured against.
Ex. Saving insured furniture from a house fire. When
they were brought out, they were stolen. Insurer is
liable.
Ex. Fire broke out in neighbors house. To prevent the
fire from spreading to the other house contained
insured furniture, the firemen pointed their hoses. The
furniture was soaked and damaged insurer is liable.
When is the insurer not liable even if there is loss?
o 1. The insurer is not liable for loss caused by connivance of
insured
Ex. told someone to steal his car, sell parts, and claim
insurance
o 2. Loss from unlawful act not liable
Ex. committed arson
o 3. Loss in which peril insured against is only a remote cause
Ex. fire insurance policy covers store and stocks in
trade. The house across the street caught fire.
Everyone congregated. While distracted, robbers
60
broke into the store and stole the stocks in trade. Fire
is just a remote cause.
o 4. Loss, the proximate cause of which is an excepted risk
Fire insurance policies say that they do not cover loss
due to coup detat, rebellion, riots, etc.
o 5. Loss where the insured is guilty of gross negligence
SMC hired a shipping company to transport thousand
cases of beer. The SMC rep met the captain and told
the latter that the boat should be moved to a safer
place since there is a typhoon brewing. The captain
ignored it and tied the barge to the wharf. During the
typhoon the rope broke, the barge was cut loose.
Burden is on the insurer to prove that it is an excepted risk
o But for fire insurance, the burden is on the insured to prove that
it is not under an exempted risk
o Ratio: because the thing is in possession of the insured, so he
can best give an explanation for the loss
How must notice to the insurer of loss be given?
o 1. Notice must be given without unnecessary delay
If reported an unreasonable time later ex. 6 months
opportunity is gone
Usually policies have a provision that claims must be
filed within a certain time. Beyond that, barred.
Delay in presentation of a claim/proof of loss is waived
if the insurance company did not invoke that as a
reason to deny the claim
o 2. When proof is required, insured is not required to give proof
that stands in court
Noda: police report should be sufficient
Defects in the notice or substantiation thereof which
the insurer didnt specify are waived, because the
insured is usually a layman
o 3. If the policy requires a certificate, and the insured cannot
produce it, it is enough to say that he cannot produce it not
because the document is prejudicial but because he could not
procure it
I cannot submit the report not because the contents
of the report are prejudicial, but because the
investigator is abroad and cannot be found
What is the rule on subrogation and release of liability?
o General rule: when the insurer pays the insured, the insurer
becomes subrogated to the rights of the insured and can run
after the wrongdoer
o But the insurer will be discharged from its liability to the insured
if the insured committed any act that would prevent the insurer
from recovering from the wrongdoer
In motor vehicle insurance, the insured settled with the
wrongdoer for P2500. The insured still claimed from
the insurer, which paid. The insurer ran after the
wrongdoer, which raised the defense that there was a
settlement. The insurer thus can recover from the
insured because it paid by mistake.
o What are the grounds when there is no subrogation?
1. Insured by his own act releases the wrongdoer from
liability
61
2. Insurer mistakenly paid for an excepted risk
3. Life insurance
4. Recovery of loss in excess of insurance coverage
Double insurance
Requisites:
o 1. Insured must be the same
Ex. mortgagor mortgagee not the same
o 2. Several insurers
If someone takes an insurance from Insurer X, then
takes another after 6 months, no double insurance
o 3. Same subject matter
Ex. factory and stocks in trade not the same
o 4. Same interest
Ex. Insured property with proceeds payable to him,
then mortgaged same property with proceeds payable
to the mortgagee for his interest no double insurance
o 5. Risk is the same
Ex. against fire, and then against earthquake not the
same
What is the consequence of double insurance?
o Usually there is a clause in insurance policies that will release
insurers from liability if there is double insurance
What is the consequence of over-insurance?
o The insurers can ask for reimbursement based on proportionate
liability
o Ex. A house worth 10M is insured for 10M with X, 5 M with Y,
5M with Z:
Owner cannot recover more than 10M, the value of the
house
If owner recovered 10M from X, X can ask for 2.5M
from Y and 2.5M from Z.
In the same way, depending on who the owner collects
from, they have to reimburse each other in the said
proportions.
o In car insurance policies, there is a usual clause that for over-
insurance you can just collect proportionately. So two insurers
covering a car worth P500K can only be liable for P250K each,
and nothing more.
Reinsurance
What is reinsurance?
o Insurer obtains another insurance to cover for loss for liability
due to the original insurance
o The reinsurer is a liability insurer
o What is retrocession?
Subsequent layers after the first reinsurance
Two types:
o Treaty
o Facultative case by case
62
Can a reinsurer intervene in the original action?
o A reinsurer cannot intervene in the case of insurer and insured
because the reinsurer has his own interest anyway. So he has
to wait until the original insurer sues the reinsurer to recover, if it
wants to raise defenses.
Insurance is covered by the rule of uberrimae fides
What is the nature of a contract of reinsurance?
o It is presumed to be against liability, not damages. So even if
the original insurer fails to pay, the reinsurer will be liable to pay.
Most of the time, there is a clause that says that the original reinsurance
need not litigate with every reinsurer. If the original insurer paid, the
reinsurers will pay too. They will rise and fall with the fortunes of the
original insurer.
Can the insured sue the reinsurer directly?
o No. There is no privity of contract between them.
What is the exception?
o The cut-through clause
Insured can go straight to the reinsurer
o Ok in California, invalid in England
Marine insurance
What is an all-risk policy?
o All the insured has to prove is that the property was lost; no
need to prove that it was due to fortuitous events.
o The only defense the insurer can raise is that the loss was due
to misconduct of the insured.
What is its not an all-risk policy?
o It only covers perils of the sea.
Perils of the sea:
o 1. Connected with navigation
o 2. Unusual movement of the sea/winds
There must be a fortuitous event. A normal typhoon is
not a fortuitous event.
It does not cover perils of the ship. What are these?
o If the ship is not sea worthy, or that the cause is due to the poor
condition of the ship.
o Ex. if it springs a leak.
What is barratry?
o Insuring against the willful misconduct of the master or crew, not
mere wrong judgment.
o A ship captain cuts loose a barge. Was this barratry?
Just an error of judgment. There has to be willful
misconduct by the master or crew of the ship. So the
insured cannot claim from the barratry clause.
When is arrest of the ship recoverable from?
o Covers arrest of the ship by administrative or executive order
as settled in English jurisprudence. But in Malayan our SC
included arrest by court order.
What is the insurable interest of the owner of a vessel that has been
chartered?
63
o Only the amount which the charterer did not agree to cover, in
case of loss.
o Ex. the ship is worth 10M. The charterer agreed to pay 5M in
case of loss. The insurable interest is 5M.
What is freight?
o It is the expected profits of the owner of a ship which has been
chartered to ship goods. These expected profits (freight) can be
insured.
o What is the insurable interest of the charterer?
To the extent that can be indemnified for his loss.
o O is the owner of a boat. C chartered it, agreeing to pay
P500K if the vessel arrives safely and C was able to solicit
goods paying freight of P600K. The vessel sinks. What
happens?
C need not pay O, because the ship did not arrive
safely.
C can only collect 100K because that is the profit which
was lost.
Insurer answers for general average
o Those who were saved will contribute to the general average
o Insurance policy will cover share in general average
o DOES NOT cover particular average
Ex. fruits became rotten due to nature of the fruits
Rule on concealment is stricter, because the ship is usually in the high
seas so the insurer is at a disadvantage harder to inspect.
What is the different rule as to concealment in marine insurance?
o Usually, the cause of the loss need not be due to the fact
concealed. But for the following matters, concealment does not
avoid the policy EXCEPT if these were also the cause of the
loss:
1. National character of the insured
2. Liability of the thing to capture/detention
3. Liability to seizure due to breach of foreign laws
4. Want of necessary documents
5. Use of false/simulated papers
o Ex. Insured conceal that certain important documents are
missing. The vessel encountered a perfect storm and sank.
The insurer is still liable even if there was concealment, because
the fact concealed was not the cause of the loss.
What is the different rule as to belief of a third person as to marine
insurance?
o Marine insurance belief of a third person as regards what is
material
o Ex. surveyor saying that the ship is not seaworthy MUST BE
DISCLOSED it is material
What is the rule on misrepresentation as to expectation?
o If there is no fraud, misrepresentation as to expectation does not
avoid the policy.
o Ex. The insurer asks the owner when the vessel will go out to
sea, and the latter said April. The vessel only went to sea on
June. The misrepresentation was not tainted with fraud and
does not avoid the policy.
64
Subject Ordinary insurance Marine insurance
Concealment Can rescind even if
concealed fact was not
cause of loss
Five exceptional
grounds apply
Belief of a third person Need not be disclosed;
immaterial
Must be disclosed;
material
Misrepresentation as to
expectation
Can rescind If there is no fraud,
cannot rescind
Implied warranties N/A Four implied warranties
automatically apply
What is the presumption on knowledge of loss?
o There is a presumption if the knowledge of the loss could have
been received by the owner in usual rate of communication.
What are the implied warranties?
o 1. Sea worthy
May there be a waiver of warranty of
seaworthiness?
Yes. If there is a waiver, even if the ship is
not seaworthy, the insurer is still liable.
o 2. will not deviate
o 3. Will not engage in illegal ventures
o 4. It will carry necessary papers if nationality was expressly
warranted
When is a ship seaworthy?
o If it can perform the services and encounter the peril of the
voyage contemplated.
o Warranty of seaworthiness extends from the hull also that it is
properly laden, and the complement of the vessel (master, etc.)
is fit
When must a ship be seaworthy?
o At the start of the voyage
o If there are different portions of the voyage, it must be
seaworthy in all such portions
o If it is an insurance of cargo taken by different ships, all the
ships must be seaworthy
o What if the ship becomes unseaworthy during the voyage?
There must be no delay in the repairs; else, the insurer
is discharged.
What must the voyage route follow?
o Usual maritime usage
o If none, then the most natural, direct, and advantageous
Deviation
Three types of deviation?
o 1. Departure from course of the voyage
o 2. Unreasonable delay in pursuing the voyage
o 3. Commencement of an entirely different voyage
When it is proper to make deviations?
o 1. Caused by circumstances which neither the master or owner
has control
65
Ex. when there is a typhoon
o 2. Necessary to comply with a warranty or avoid a peril (whether
insured against or not)
Ex. when the engine gets busted
o 3. Made in GF, upon reasonable belief to avoid a peril
Ex. received of reports waiting in ambush, thus
deviated
o 4. Made in GF, to save human life or another ship
Once the vessel deviates, even if it returns to the original route, the
insurer is exonerated.
Loss
Loss is either total or partial
Total loss is either:
o A. Actual total loss
Actual loss of the thing, renders it valueless
Examples of total loss:
1. Total destruction
o Ex. the ship burned
2. Loss by sinking or being broken up
o The ship sank or was broken up,
making it irretrievable
3. Damage to thing rendering it valueless for
the purpose it was shipped
o Ex. palay got wet and became
seedlings
o Ex. a race horse broke its legs, so it
cannot race anymore
4. Any other event depriving the owner of
possession of the thing at the port of
destination
o Ex. Ship was ordered seized
Is there need for abandonment for actual total
loss?
No, the insurer become liable upon actual
total loss
o B. Constructive total loss
Unique in marine insurance
Abandonment is act of insured after constructive total
loss. He relinquishes his share to the insurer
If damage is more than of value of property insured,
insured can declare constructive total loss
What if the ship cannot continue but the cargo is transferred, what
is the effect?
o The marine policy on the cargo remains
o The insurer is liable for expenses for transfer, discharge,
storage, reshipment, and all other expenses to save the cargo
o What if loss occurs?
The insurer is liable for the general average\
66
What are the requisites of abandonment?
o 1. Actual relinquishment by the person insured of his interest
over the thing insured
o 2. Constructive total loss
o 3. Unconditional and not partial abandonment
o 4. Made within reasonable time from receipt of information of
loss
o 5. Must be factual
Ex. So in a case where the shipment of oranges was
reportedly lost, but they actually just ripened during the
trip and were sold by the captain, there is no factual
basis for abandonment
o 6. Give notice to insurer whether orally or in writing
o 7. Notice of abandonment must specify the particular cause
What is the effect of abandonment?
o The insurer gets all the interest of the insured over the vessel
(ex. salvage, proceeds of the salvage, etc.)
This same effect will result if the insurer paid as if there
was actual total loss as if there had been
abandonment
o Acts done in good faith by the agents of the insured after
abandonment is for the risk/benefit of the insurer (ex. effort to
repair the ship is for the risk/benefit of the insurer. So the
insurer pays for it, and if the ship gets repaired, benefits.)
Insurer is liable for those acts of insured in good faith
o Ex. salvors fee, repairs in GF
Acceptance:
o If abandonment is proper but insurer refuses unjustly, it does not
prejudice the insured
o Acceptance of the abandonment can be express or implied
Mere silence of insurer after notice is not an
acceptance
o Acceptance is conclusive and cannot be revoked [except if the
ground is not factual, like the oranges case]
o What if the insurer unjustly refuses to accept the
abandonment?
The insured can sell the vessel and earn scrap value.
The insurer is liable for the balance.
Upon accepted abandonment, who is entitled to the earned
freightage?
o Freightage earned before the loss to the insurer of the
freightage
o Freightage earned after the loss to the insurer of the ship
Measure of indemnity
What is the Co-insurance clause?
o It applies by default only to marine insurance. It has to be
stipulated in fire or other insurance.
o The prerequisites are:
1. Loss is partial
2. The property is insured for less than its total value
67
o What is the effect?
The insurer is liable only for the difference between the
amount of insurance and the value of the property.
o Huh? Give an example na lang.
Vessel X was worth 1M but was insured for only 800K.
It was damaged to the extent of 200K. The insured
can recover 160,000 which is 1/5 of 800k (since 200K
is 1/5 of 1M)
What is the difference in what the insured can recover if the profits
are separately insured and if not?
o Profits separately insured: Sugar being shipped is worth 100M
and has expected profit of 120M. 50M worth of sugar was
destroyed. Insured can recover 60M as insurance for expected
profit.
(Because for every 5 M of sugar it earns 6M sugar
[100:120], so loss of 50M worth of sugar is loss of 60M
in profits)
o Not separately insured: Sugar being shipped is worth 100M and
has expected profit of 120M. 50M worth of sugar was
destroyed. Insured can recover of 20M, which is 10M for
expected profit.
Is a marine insurer liable for expenses attendant upon damage and
subsequent repairs?
o Yes, the insurance is liable pursuant to sue and labor
expenses, because the insurer is presumed to be willing to incur
these expenses to avoid loss.
Is a marine insurer liable for contribution expenses made by the
insured for general average loss?
o Yes.
Fire insurance
What are the requisites of alteration?
o 1. Change in the use or condition of a thing insured
o 2. Which is limited by the policy
o 3. Without consent of insurer
o 4. Through means within control of insured
o 5. Increasing the risk
What is the consequence of alteration?
o The insurer can rescind the contract
Give an example of alteration that increases the risk.
o Conversion of a bookstore to a restaurant
Give an example which does not.
o Conversion of a residential condominium into an office
condominium.
What is a hostile fire and friendly fire?
o Hostile fire fire that escapes and burns in a place where it is
not supposed to
o Friendly fire fire that burns in a place where it is supposed to
burn
Friendly fire can convert into hostile fire
o X is seeking to recover from the insurer for soot marks
caused on the wall by a gas stove burner. Can X recover?
No. The marks were caused by friendly fire.
68
Does co-insurance apply to fire insurance?
o Not by law. But it is a standard clause placed by companies.
What is the rule on valuation for fire insurance (if there is none
provided in the policy)?
o The valuation must reflect depreciation suffered by the property
before it was burned.
o SMC had a building worth 100M, which burned. But instead
of depreciating, the value of construction materials that
year skyrocketed. So SMC is trying to recover insurance
based on those new prices. But the insurer claimed SMC
thus was underinsured in this case. SMC said that it was
not, based on the old prices. What happens?
SMC cannot use new valuation for the amount to be
recovered, and old prices to disclaim underinsurance.
What is the effect if the insurance gives the insurer the option to
rebuild the property instead of paying?
o This is valid. The contract is novated and it becomes a contract
for a piece of work.
o The insurer becomes liable for quality of the work done.
Casualty insurance
If intentional injuries caused by the insured or a third person are
excepted, what does intentional mean?
o Exercise of reasoning faculties, consciousness, and volition of
the person.
o It is the intention of the person inflicting the injury that controls.
o Usual accident policy doesnt cover death or injury caused by
assault or murder. You have to pay extra to cover this.
What does accident or accidental mean?
o No technical meaning. Something that happens by chance or
fortuitously, without design or intention.
o Is this the same as no fault?
No. It just distinguishes itself from intentional.
What is the rule on third party liability?
o There can be a provision allowing a third party to directly sue
the insurer.
But the insurer is not solidarily liable; just directly liable.
The liability of the insurer is contractual, not quasi-
delictual. The liability of the insurer is limited by the
policy.
o If there is no such provision, the contracts are separate, so the
third person cannot sue the insurer.
o What if the indemnity is against actual loss or payment?
The third party cannot sue the insurer, because it has
to wait for the insured to pay him. The insured
recovers from the insurer.
o What if the indemnity is against liability?
The insured need not pay first before proceeding
against the insurer.
Is the insurer liable even if the insured commits criminal
negligence?
69
o Yes. This is still accidental. What is not covered is intentional
or deliberate criminal acts.
A guy was showing off his gun. A friend asked if it was loaded, and
he said no. To prove it, he pointed the gun at himself and pulled the
trigger. There was a bullet. He died. Can the heirs collect?
o HELD: Yes, because it was accidental.
o JJs viewpoint: No, because he was stupid.
Sometimes, there is a clause where the insurer will defend the case on
behalf of the insured in court. In a case, the insured sued the insurer not
because of the liability clause (because the insured was not yet made
liable) but because the insurer was negligent in defending the case.
Suretyship
What is suretyship?
o Agreement where surety guarantees the performance by
another of an undertaking or obligation in favor of a third party.
Examples?
o Fidelity bond contract of insurance against loss from
misconduct
o Fidelity guaranty insurance for consideration, one agrees to
indemnify the assured against loss arising from want of integrity,
fidelity, or honesty of persons holding positions of trust
What is the nature of a suretyship agreement?
o Solidary agreement, but only to the extent of the contractual
amount in the bond
o The court/obligee is not concerned w/n the premium has been
paid. It will go against the surety when the obligation is not paid
or the insured absconds.
What if the bond is not accepted?
o The principal-applicant is entitled to return of the premiums paid.
o But not entitled to return of taxes paid (ex. DST) and other
service fees, like what was spent to review the application.
o What is the exception?
If there was fault of the insurance company, leading to
denial of the application. Even the taxes paid shall be
returned.
What is a continuing bond?
o One that will last until the end of the case. The company is
entitled to charge premiums every year.
Life insurance
Kinds:
o 1. Ordinary life, general life, or old line policy
Insured pays a premium every year until he dies.
Surrender value after 3 years.
o 2. Limited payment policy
Insured pays premium for limited period. If he outlives
the period, he does not get anything.
o 3. Endowment policy
Insured pays premium for specified period. If he
outlives the period, the face value of the policy is paid
to him. If not, the beneficiaries receive the benefit.
o 4. Term insurance
70
Insured pays premium only once, and is insured for a
specified period. If he outlives the period, no person
benefits from the insurance.
No cash surrender value.
N.B. kind of like life insurance policies you take before
flying commercial
o 5. Industrial life
Insured pays premiums weekly, or monthly, or oftener
What is the effect of death of insured through suicide?
o The insurer is only liable if the insured committed suicide after
the policy has been in force for a period of two years from date
of issue or last reinstatement, unless shorter period is provided
o If the suicide was committed in a state of insanity, the insurer is
liable too, regardless of date of suicide
The business of insurance
Certificate of authority from the Commissioner lasts one year
What is the margin of solvency for insurance companies?
o For a domestic firm, the excess of its admitted assets excluding
paid-up capital, over the amount of liabilities, unearned
premiums, and reinsurance reserves
o For a foreign firm, the excess of its admitted assets in the
Philippines excluding security deposits, over the amount of
liabilities, unearned premiums, and reinsurance reserves
Agents and brokers:
o Must be licensed
Soliciting for compensation without license criminally
liable
o Rebate of premiums is also prohibited.
o Can agreements regarding kickbacks be enforced?
No, they are illegal.
Compulsory motor vehicle liability insurance
Third party excludes
o Driver, etc.
o Relative by affinity/consanguinity within 2
nd
degree
o Employee [see qualification]
What if a provision says that final judgment is needed before liability
attaches?
o Its a void provision. If you have to wait until final judgment, it
will take a really long time.
What is the no fault clause?
o The injured third party or passenger can claim for death or injury
without necessity of proving fault or negligence, under the ff
conditions:
o 1. Indemnity shall not exceed P15,000
N.B. this value can adjust please check
o 2. Ff proof of loss is sufficient to substantiate the claim:
If theres death, death certificate
If theres injury, medical certificate
71
In all cases, police report
o 3. Claim is against one motor vehicle only
From whom must the insured claim against?
o If a passenger, mounting, or dismounting the vehicle, against
the insurer of the vehicle he is riding in
o Else, against the insurer of the directly offending vehicle
What is the right of the insurer paying under the no-fault clause?
o It can directly claim against the owner of the offending vehicle
What if the claim exceeds the amount awarded under the no fault
clause?
o If the claim exceeds 15,000, then the insured can still claim it
from the insurer, but he has to prove there was negligence or
fault.
o The insurer cannot ask the insured to waive the rest of the claim
as a precondition to pay under the no fault clause.
What are the important periods?
o Claim from the insurer within 6 months from accident
o Go to court within 1 year from denial of claim
Importance of a license:
o If the one recovering is the driver himself, he can recover
damages even if his license is expired. The authorized driver
clause does not apply to the owner.
o If it is someone else, who is authorized, he must have a valid
license
o What if the car is unlawfully taken and driven by a person
who is not authorized?
The theft clause applies, and not the authorized driver
clause
Ex. a repairman took the car out for a joyride
Intellectual Property Law
In general
What do intellectual property rights cover?
o 1. Copyright
o 2. Trademarks
o 3. Geographic indications
Indication identifying a good as originating in a certain
place where a given quality, characteristic, or
reputation is attributable to the place
o 4. Industrial designs
o 5. Patents
o 6. Layout designs of integrated circuits
o 7. Protection of undisclosed information
Natural and legal persons can prevent information
lawfully within their control from being disclosed to,
acquired by, or used by others without their consent in
a manner contrary to honest commercial practices.
As long as:
72
A. It is a secret
B. It has commercial value because it is a
secret
C. It has been subject or reasonable steps to
keep it a secret
Differentiate between copyrights, trademarks, and patents:
o Copyright : literary and artistic works which are original
intellectual creations, protection upon creation
o Trademark : visible sign of distinguishing goods (servicemark if
services) of an enterprise, including stamped or marked
container of goods
o Patent : technical solution of a problem in any field of human
activity which is new, involves an inventive step, and industrially
applicable
What are technology transfer agreements?
o Contracts involving transfer of systematic knowledge for the
manufacture of a product, application of process, rendering of
service (including management contracts), and transfer,
assignment, or licensing of all forms of IP rights (including non-
mass market computer software)
o N.B. this cannot cover mass market software such as Windows
Copyright
Rights of intellectual creator exists from moment of creation
o Even if you havent registered yet with the National Library
Who owns the copyright?
One creator Creator, heirs, assigns
Joint creators, where individual parts
are not identifiable
Co-owned by authors
Joint creators, if the joint authorship
consists of separate and identifiable
parts
Copyright over the parts they
prepared
Commissioned work Creator (although the commissioning
person owns the work)
Audio-visual work For exhibition, producer
For other purposes: producer, author
of scenario, composer, director, photo
director, author of work
Anonymous Publisher
But if the writer can be identified (ex.
Quijano de Manila is Nick Joaquin, he
still gives consent)
Employees work in regular course of
employment
Employer
Employees work, if not part of his
duties
Employee
What are covered:
o Even choreography, musical compositions, drawings, paintings,
architecture, sculptures, computer etc.
o Are email and letters also covered?
Yes. Any form of text is covered.
o Can a dictionary be copyrighted?
A dictionary can be copyrighted. While no one has a
monopoly on words, the court held that the original
writer used his judgment in selecting which words will
be used.
o For DVDs?
73
The producer, music composer, director of
photography, screenwriter, author of the work on which
the movie is based, etc.
But for collecting, the producer has the right
o Architect exclusive rights over the plans he makes.
Also covered by special law
You cannot use these same plans to make another
building
Are derivative works also covered by copyright?
o Yes, but you have to get the consent of the original creator.
Examples of these are dramatizations of novels,
translations, or adaptations (ex. Miss Saigon, from
Madame Butterfly)
o What about compilations?
Yes, they are covered by the rule on derivative works.
This involves judgment of, for instance, the best
Filipino short stories. So he has to get the consent of
those whose stories he included in the compilation.
And if someone else wants to make another
compilation, he cannot use the same set of stories
since these were chosen by the first compiler; unless,
of course, he gets permission.
What is the main principle?
o To be protected it must be original.
What are not copyrightable?
o 1. Mere data, idea, procedure, system, etc. even if embodied in
a work
o 2. News of the day or miscellaneous facts amounting to press
information
o 3. Official text of legislative, administrative, or legal nature, and
their translations
o 4. Works of the government
But if the work will be economically exploited, need
permission of the government agency
Transfer or assignment of copyright:
o If you sell, mortgage, convey your copyright, you must register it
with the National Library to bind third parties.
o The transfer or assignment must be in writing
What if an authors work is distorted?
o Owner can object to the distortion of his work.
o Will transfer to new media distort a work?
No.
How long is the copyright?
o Lifetime of author + 50 years
o What if there are several authors?
From death of last author
o What if the author is anonymous?
74
Count 50 years from first publication (commence from
Jan 1 following the date of publication)
What if the authors identity is found out?
You change the period to his lifetime + 50
years
o What if its work of applied art (artistic creation with
utilitarian functions or incorporated in a useful article)?
25 years from making
o What about broadcast?
20 years from date of broadcast
o They are not extended by assignment
The economic rights of author need his permission for:
o 1. Reproduction or substantial reproduction (ex. photocopying
an entire book)
o 2. Derivative works
o 3. Public distribution or exhibition
Businesses started playing certain songs to drum
up business. Is this exploitation of the work?
Technically, this is economic exploitation of
the work.
Ex. The character Charlie Brown is copyrighted. So
sporting goods cannot use Charlie Brown on their
goods. Or a bakery cannot use Cookie Monster.
Some artist connoisseurs bought Xs paintings for a cheap price.
Then they sold the paintings for a fortune when he became famous.
What is Xs right?
o He must get 5% of the selling price. (Sec 200 Droit de suede)
o This ensures that the artist benefits from the higher price
o This right exists as long as the copyright exists.
What is infringement?
o Piracy or substantial reproduction, and so much is taken that the
value of the original work is substantially diminished
Is infringement the same as plagiarism?
o No. Every act of infringement is plagiarism. Not every act of
plagiarism is infringement.
o Plagiarism is passing off the work of another as ones own. It
may consist of copying verbatim the work of another w/o
acknowledgement, or rewriting in ones own words the idea
expressed by another
BUT you cannot have a copyright over an idea. So
copying an idea is plagiarism, but not infringement.
Must copying be substantial for plagiarism?
o No. Because infringement requires substantial copying,
plagiarism does not.
o Case: There was a book on grammar and styles of writing, and
it quoted actual literary works exhibiting those figures of speech.
There was infringement when another book copied even the
same examples.
Is intent needed for plagiarism?
75
o Law requires bad faith or intentionality
o But academic institutions as a matter of discipline remove this
requirement
There must be copying for there to be infringement. How do you
establish this?
o Through circumstantial evidence
o Ex. a book has a missing page 23. Another book that is similar
is also missing page 23.
Action for infringement. Remedies?
o 1. Injunction to restrain infringement
o 2. Payment of damages
Within 4 years
But usually its hard to prove the amount lost since
infringers do not have accounts or receipts. So usually
temperate damages are awarded.
o 3. Order delivery under oath of the infringing works and
tools/instruments that produced the work
Moral and exemplary damages awarded
o 4. Criminal case
When is there no infringement of copyright?
o [Limited use]
o 1. Used for the benefit of a charitable institution, or if privately
and for free
o 2. Ephemeral recordings by broadcasting organization using
own facilities for broadcast use
Production of works as part of current events
Ex. newscast covering ribbon cutting in an event, and
the camera caught a mural in the footage this is valid
use, the artist cannot demand money
o [Valid purpose]
o 3. Used as teaching aid
Ex. using Filipino folk dance songs to teach native
dances
o 4. Used for judicial proceedings or giving advice
Ex. citing law book in legal opinion or memorandum to
court
o 5. Fair use
For criticism.
Ex. quoting portions of a book for comment
For research and private study
o [Back-up]
o 6. Reproduction by libraries of fragile works, isolated articles in
composite works, brief portions of published work, or to preserve
or replace a copy
o 7. One back-up copy of computer programs
Four factors to determine fair use:
76
o 1. Purpose
If one is citing portions of a work because one is
writing a brief or a thesis, is this fair use?
Yes.
If one is citing portions to use for an anthology, is
this fair use?
No. This is economic exploitation
o 2. Nature of work
What is example of nature preventing copyright?
Trying to copyright the phone book invalid
because of nature of the work
Example of a statement that can be reproduced?
Ex. simple fact that Rizal died on December
30. Cannot claim that one stole that fact from
another book.
o 3. Extent
Amount of work used
Infringement requires substantial copying. But this
does not just involve quantitative, but also qualitative
Ex. Quoth the raven nevermore is just five
words but is qualitatively the heart of the E.A.
Poes The Raven
Ex. In a satirical work, you are poking fun at
another work. For it to work, the
viewer/listener must identify the work being
satirized. So copying must really be
substantial.
Libraries can make photocopies (ex. the book is fragile
already ex. Maximo Kalaws The Malolos Congress or
Apolinario Mabinis books). If you only need isolated
portions of the work for a thesis or research; instead of
photocopying the whole book, you can just copyright
the 10 or so pages.
To complete a set, where it is missing one book or so,
and it cannot be procured the library can borrow a
book and photocopy it
o 4. Effect on the market
Patents
What can be patented?
o 1. Any technical solution to a human problem which is new,
involves an inventive step, and industrially applicable
Ex. Machine, computer, cellphone, product, medicines,
process, etc.
Example of process:
Developing a synthetic replacement for wood
alcohol to prevent jamming the barrel of a gun
o 2. An improvement on current machines
Ex. colored television, 3G phones
o 3. Microorganisms created artificially in a laboratory
Ex. those to combat oil slicks
77
Budapest treaty: governs the patentability of
microorganisms
What cannot be patented?
o 1. Discoveries
Newton cannot patent the law on gravity
But he can patent inventions based on it
Ex. parachutes
o 2. Mathematical methods, scientific formulae, schemes, forms,
or methods to do mental acts
o 3. Methods for treatment of animal or human bodies
If patented, patients have to pay royalties to get
treatment, which is not humanitarian
Contra: machines used for treatment can be patented
o 4. Plant varieties, animals, etc.
o 5. Aesthetic creations
Covered by industrial design
o 6. Against public policy
Ex. invention to help commit suicide
To patent an invention:
o 1. New
When is it not new?
1. Already available to the public anywhere in
the world
o Ex. a plow
2. Prior filed or effective patent, utility model,
or industrial design
When is prior disclosure of the information in the
patent in the 12 months preceding application for
patent non-prejudicial?
1. Disclosed by the inventor
2. Disclosed by the patent office and the
information was in an application filed by the
inventor or a third party who got the
information from the inventor but did not get
his consent in filing the application
3. Disclosed by third party who obtained the
information directly/indirectly from the inventor
o 2. Involves an inventive step
If it is useful, but it is not an invention and anyone with
mechanical skill can do it it cannot be patented
Ex. putting a block of wood over two rollers to rewind
printer ribbon is not patentable. It does not show flash
of genius
o 3. Industrially applicable
Something that spins perpetually. Has no industrial
use, so it cannot be patented.
The rule on invention patents: who wins?
78
o First to file gets the right.
o The same rule applies for industrial design
o Must be registered with intellectual property office.
What is the first-to-file rule?
o First to file first to apply wins.
o If they file the same day, they will be joint owners of the patent.
o What is the right to priority for a foreign registered patent?
If there was an earlier application for patent filed in a
foreign country that allows same rights for Filipino
citizens, then one can use that date of filing in the
foreign country as the same date of filing in the
subsequent Filipino application
Provided, that it is filed within 12 months of earliest
foreign registration and the local application expressly
claims this priority rule
What is the remedy of the actual inventor after proving in court that
the one who filed attained it through fraud?
o 1. Order patent to be cancelled OR
o 2. Substitute the actual inventor in the patent (alternative)
If two or more persons invented it?
o The patent is owned jointly
Ex. Wright brothers over flying machine
o What if it is commissioned?
Follow their agreement.
If there is none, the one who commissioned the work
owns the patent.
o What about employees?
If it is part of his duties, it belongs to the employer. If it
is not, he owns the patents.
Ex. an employee in the NFA invented a
machine to salvage rotten rice. It belongs to
him because its not his job to do it.
What is the value of registration?
o Assignments in order to bind third parties must be registered
with the Intellectual Property Office. Otherwise, subsequent
buyers or mortgagees in good faith will be protected.
What is an industrial design?
o Any composition, lines, colors, etc. which form a pattern for
making a product. Ornamental design may be copyrighted
Ex. design for jewelry, clothes, shoes, cars, tiles, etc.
o Compare to: Integrated circuits electronic components of
digital equipment (ex. cars with electronic keys, elevators, etc.)
What is required for it to be registrable?
o The design must be new.
Someone copied a design for a suitcase from a foreign
catalogue. This is cannot be registered under
industrial design.
Someone registered as industrial design the Y design
on jockey briefs.
79
How long is the term of protection for ID?
o Term of protection for industrial design is 5 years, renewable for
two consecutive terms of 5 years.
EXCEPT : period of 10 years for layout design
o Period starts from first commercial exploitation anywhere in the
world
Compare patents and industrial design:
o Limitations of the right of owners of industrial design are the
same as patents, but industrial design cannot be the subject of
compulsory licensing
What is the term of a patent?
o 20 years from date of filing of application
What is infringement?
o Infringement is the making, using, or importing of the patent of
the product without authorization by the owner
o But importation of medicines has been excluded parallel
importation is allowed (see notes below)
What are the grounds to cancel registration of a patent?
o 1. What is patented is not new or patentable
o 2. Patent does not disclose the invention in a manner sufficiently
clear and complete for it to be carried out by a person skilled in
the art
o 3. Patent is contrary to public order or morality
Two tests to determine infringement:
o 1. Literal infringement
When you file an application for a patent, you submit a
claim explaining how the product works. If you
compare the patented product with the claim, and it is
exactly the same, then it is literal infringement.
o 2. Doctrine of equivalence
If you appropriate an invention and make some
changes, but it performs substantially the same
functions, and it achieves the same results, its the
same thing.
N.B. Having the same effect, but not proving that it
achieves it through the same means does not prove
equivalence
What is contributory infringement?
o Aside from the infringer, anyone who induces the infringer or
provides the infringer with the component knowing that it is
specially adapted for infringing and not for any other use is an
infringer too.
o Betamax case: the VCR was alleged as being used to pirate,
but it was proved to be usable for lawful purposes
Is an improver an infringer?
o Yes, if there is no consent from the owner of the patent.
What if there is a pending petition to cancel a patent?
o A petition for infringement may prosper, because it is still
effective.
Can a foreign corporation not doing business here sue for
infringement?
80
o Yes, as long as its country gives Filipinos reciprocal right to do
this.
Defenses against infringement?
o 1. Prescription
Action prescribes after 4 years from infringement
o 2. Patent is not new or patentable
o 3. Patent does not disclose an invention in a manner that will
make a skilled person to make that invention
o 4. Against public policy
Remedies?
o 1. Damages
If the damages cannot be readily ascertained, the court
can award reasonable royalty
Court may treble the actual damages (equivalent to
exemplary damages) so trebling and exemplary
damages are mutually exclusive
o 2. Injunction
o 3. Destruction of infringing product and implements used to
make that product
o 4. Cancellation of patent if the invention is not new, patentable,
or does not disclose the invention sufficiently to make a person
skilled in the art to produce it
o 5. Criminal action against the infringer for repeated infringement
even after finality of judgment against him
Cheaper Medicines Law amendments:
o The CML provides for what medicines cannot be patented.
o If you just discovered a new form for the medicine it is not
patentable as a separate invention.
Ex. Medicine sold in liquid form, and then converted to
capsule form. It cannot be patented.
o Neither if you just discover a new property, but did not add a
new chemical reagent.
Ex. Viagra was originally used for heart ailments, but
serendipitously they discovered it can cure erectile
dysfunction. It cannot be patented again because
there was no chemical reagent added.
Voluntary licensing:
o IPL regulates technology transfers.
o There was a decree providing for regulation of technology
transfer arrangements. We cannot abolish it, for being
constitutionally mandated, so it was restored, when initially
omitted.
Prohibited provisions in licensing agreements:
o [Anti-competitive measures]
o 1. That the licensee must get goods, products, raw materials
from specific sources. Then the license becomes a captive
market of the supplier.
o 2. Prohibits the use of competitive technology, and the
technology transfer agreement was not exclusive
o 3. Require that the technology recipient should not contest the
validity of any of the patents of the tech supplier
81
o [Too much control]
o 4. The licensor can fix the sale or resale price of the products
produced under the license
o 5. Restricting volume and structure of production
o 6. Prohibit the licensee to export the product, except if it is
because some other country has exclusive contract with the
owner of the patent
o [Exploitative benefit to licensor]
o 7. Gives licensor option to buy the product used by the licensee
(purchase option)
o 8. Obligates licensee to transfer for free to the licensor the
improvements or licensed obtained through the licensed
technology
o 9. Exempting the licensor from obligations under the agreement
or to third parties brought about by suits re: use of the licensed
product
o [Beyond actual use]
o 10. Require payments of royalties for patents which are not
used
o 11. Restricting use of the technology even after expiration of the
patent
o 12. Require payment of patents after expiration of agreement
o [Anti-adaptation]
o 13. Restricting R&D of the licensee which gear towards
adaptation/application of the technology to local context, or for
new products, processes, or equipment
o 14. Preventing licensee from adapting imported technology to
local conditions or introducing innovations to it, as long as it
does not impair the quality standards imposed by the licensor
o [Catch-basin]
o 15. Analogous cases
Law provides compulsory provisions :
o 1. Philippine Law must govern
o 2. In case of litigation, proper court in the Philippines governs
o 3. If there is arbitration, venue is Philippines or a neutral country
only
Governed by UNCITRAL rules or ICC ONLY
o 4. Licensor bears all taxes
When may the IPO grant exceptions from prohibited or mandatory
provisions?
o If there is substantial benefit for the country:
High technology content
Increase in for-ex earnings
Generate jobs
What if the agreement does not comply with the prohibited or
mandatory provisions?
o It is unenforceable
What is the right of the licensor and licensee?
82
o The licensor is not prohibited from entering into licensing
agreement with a third person or exploiting the subject matter
himself
UNLESS there is provision to the contrary
o The licensee can exploit the subject matter of the agreement
during the whole term
What are rules on the rights of the owner of the patent?
o 1. For patented products: restrain, prohibit, and prevent
unauthorized persons from making, using, selling, or importing
the product
o 2. For patented processes: restrain, prohibit, and prevent
unauthorized persons from using the process or manufacturing,
dealing with, using, selling, or importing any product obtained
directly/indirectly from the process
What are the limits on these patent rights i.e. when can the owner
of the patent not claim the rights above?
o 1. When product has been put on the market by the patent
owner or with his consent
If you bought the patented product, you should be able
to use the product. So the old rule that you can buy an
IBM product but you cannot use it unless you pay a
royalty is not allowed.
The moment a patented medicine is allowed to be
used anywhere in the world. Ex. it was registered in
the US and the inventor allows it to be used elsewhere,
automatically you can use it here. (Of course you must
buy the patented medicine)
o 2. Charitable purpose
o 3. Valid parallel importation
o 4. Where the act is done privately, for non-commercial purposes
o 5. Used for educational/scientific purposes
Once a patent expires, the owner loses his exclusive
rights and anybody can make that invention. But in the
case of medicines, use of that for experiment should
be allowed even if the patent has not yet expired. You
need lead time to study that medicine (ex. 3 years), so
the moment the patent expires, they will be ready to
produce that medicine.
o 6. Act is to prepare a medicine in accordance with prescription
or acts concerning the medicine so prepared, by a pharmacy or
medical professional, for individual cases
o 7. Government or a 3
rd
person authorized by government may
exploit an invention when public interest, national security,
safety, etc. requires it
Ex. if there is public health need for a medicine and the
demand is not fulfilled by the supply, the government
can import it
If a person is allowed to use it for these needs, the use
is non-exclusive (so others can use it too)
This use can only be enjoined by the
Supreme Court
o 8. Invention is used in a ship, vessel, craft, or land vehicle of
another country entering Philippine territory temporarily or
accidentally
It must be exclusively used for the vessel
What is the prior user rule?
83
o When there is a prior user in GF of the invention or has
undertaken serious preparations to do so, before the filing or
priority date of the application by another, the prior user can
keep on using the invention even when the patent is granted to
another.
o The right of the prior user may only be transferred along with the
enterprise or business, and not separately.
When can the government use the invention even without prior
agreement by the patent owner (compulsory licensing)?
o 1. National emergency
o 2. Public interest/national security, health, development of vital
national economy
o 3. Judicial or administrative determination that the exploitation of
the patent has been used for anti-competitive purposes
o 4. Has not satisfied the demands of the market (for medicine)
o 5. Public non-commercial use of the patent with no satisfactory
reason
o 6. Where the demand for patented medicine is not being met,
and on reasonable terms determined by the Sec. of Health
What is the effect/role of compulsory licensing?
o N.B. Most cases involve medicine.
o Compulsory license in medicine usually is done to decrease
prices through competition
Petition to compulsory license:
o Can only be filed after four years from filing of the application of
the patent, or three years from the date the patent, whichever
ends later must fall within both periods
o Medicines anytime
What are the terms of the licensing agreement?
o Usually parties are given time to negotiate terms and conditions
of compulsory license, but then the Director will step in after
Trademarks
What is a trademark?
o Visible sign capable of distinguishing goods/services/enterprise
Ex. including Coca-Cola bottle, which was specially
designed
What can be a trademark?
o 1. Anything fanciful can be used as a trademark. If a word is
arbitrary and fanciful, it is entitled to immediate protection.
Ex. selecta (Spanish word for selected), maiden form
bra, Big Mac, Citi
o 2. Secondary meaning is only required if it is originally not
trademarkable, but after long use, it has acquired another
meaning
What cannot be registered?
o [public policy]
o 1. Immoral
o 2. Public order or morality
84
o [same or misleading]
o 1. Identical with a registered mark
A. Referring to same goods/services or closely related
goods/services
Ex. Ang Tibay is registered for shoes and
slippers. Ang Tibay cannot be registered for
pants and shirts, because theyre both
haberdashery products and its reasonable to
assume they expanded.
B. Not exactly identical but one is a colorable imitation
that could cause confusion (see tests below)
C. Too similar to a trademark known around the world
D. Identical to a translation of a foreign trademark
Ex. Promesa soaps becomes promise
o 2. Deceptive
o 3. Likely to mislead public publicly known symbol
Ex. red/white/blue barbershop pole
o [relating to persons]
o 4. May disparage or falsely create belief that it is related to a
person living or dead
o 5. With signature of living individual unless with his consent
o 6. Name of deceased president during lifetime of the widow,
except with the latters consent
o [generic symbols]
o 7. National symbol
o 8. Flag of Philippines or other foreign country
o 9. Uses geographical indicator known for that product
Ex. Isabella tobacco
o 10. Signs that are customary or usual in everyday language
o 11. Signs that are used to designate the kind or quality of the
product
Ex. Shoes or Funeral Parlor
o 12. Over a color or shape
o 13. Emblem of the United Nations (under special law)
What if the applicant is registering a similar trademark for closely
related goods?
o The prior trademark will be protected.
o Examples of closely related goods (INVALID):
Ex. X-7 Soap X-7 Pomade (both bathroom
products)
Ex. Wonder Beauty Soap Wonder Laundry Soap
o Examples of not closely related goods (VALID):
Ex. Esso Oil =/= Esso Cigarettes
Ex. Bruth briefs =/= Bruth soaps
85
Ex. cigarettes =/= liquor
Ex. Jollibee sandals =/= Jollibee restaurant
What are the tests to determine if two products are confusingly
similar?
o 1. Dominance test
This looks past trivial differences
This applies if a questioned TM contained the main
pictures of the older TM, such that confusion would
likely result
Deception need not be actually proved
Ex. Both Paddocks and Dockers jeans had the words
as the dominant design, and not the eagle, so its not
confusingly similar to Levis
o 2. Holistic test
Consider the TMs in their entirety
What must be considered?
1. Relevant market (is it targeted to
physicians? Illiterate household helpers?)
Ex. Physicians are less likely to be confused
2. Kind of product, since more expensive
products will have more prudent buyers
o Ordinary household items are not
purchased with great care.
Examples:
Ex. Fruit of Eve was challenged by Fruit of
the Loom. Fruit of Eve was rectangular with
concave sides, and just had a green apple.
Fruit of Loom was circular, and had a red
apple, with bananas, and grapes.
Ex. Lorenzana Patis had a carp. Lorenz patis
had a bangus and had the same font.
Ex. Lard was sold with a big Roman V.
Another used III
Ex. Black Cat Tea and Black Dog Tea
Ex. Master Roast and Famous Master, since
the dominant word is master
What if the TM is internationally well-known?
o It can be protected even if not sold here, whether or not
registered
o Passage of time will not bar action to protect that international
trademark
What is the rule on secondary meanings?
o Trademarks which originally may not be registrable may be
registered if it already obtained a second meaning.
Ex. California manufacturing
Not just the State but the manufacturer of
Ladys Choice mayonnaise
Ex. Some colors or shapes
o What are the requirements?
86
1. The use of such as a trademark must be exclusive
2. The name has been used for at least 5 years (long
period of time, according to law)
Is prior use necessary to register a trademark?
o No. Prior use is no longer a requirement to register a trademark
When must a registered trademark be used?
o Within 3 years from registration
o What if you did not use it?
If you did not use it, you must file an affidavit of non-
use and explain why. Otherwise, it will be cancelled.
o What is the ONLY acceptable reason?
Force majeure
N.B. other reasons like poor economy are invalid
How long is the duration of registration?
o 10 years, with indefinite renewal for similar periods
What if someone just imports or distributes a foreign product?
o He cannot register the TM. He does not own it.
Can a TM be assigned or transferred?
o Yes. A trademark may be assigned or transferred without
transferring the business.
What is the principle in registration?
o The law adopts the Torrens principle. If the assignment is to
bind third parties, it must be registered in the IPO.
o Otherwise a third party may buy it in GF.
What are the inter partes cases (contested cases before the IPO)?
o 1. Opposition against registration of mark
Within 30 days after publication
Ground: registration will damage the
oppositor
o 2. Petition to cancel the registration of mark
A. Within 5 years of registration
Ground: confusingly similar
B. Any time
Grounds:
o 1. Mark became generic (aspirin
became generic, cellophane,
Thermos bottle)
o 2. Abandonment failure to use for
uninterrupted period of 3 years
o 3. Misrepresentation of source of
goods
o N.B. compare this with periods for actions under copyright and
patent which are generally both 4 years
When is there infringement of trademark?
87
o Use, copying, etc.
o Includes preparatory steps to carry out the sale of goods
This applies to those who make fake shirts. They
make the shirts first, without attaching the label. They
will only sell the label when they are about the sell the
shirts. So this way, even if they havent attached the
labels, the manufacturer can be held liable for
infringement.
o Copying, counterfeiting, making colorable imitations of TMs and
using it for labels, packages, etc.
Three elements to prove infringement?
o 1. The TM is valid
o 2. The plaintiff owns it
o 3. There is likelihood of confusion due to use of defendant
When is registration not needed for an action?
o 1. For unfair competition
A. Passing off a product format of another
B. Giving goods the appearance of another
o 2. False designation of origin
The law says the right is acquired from time of registration.
When is this counted?
o From filing of the date of application
o Or from the priority date. This is when there is actual
registration in other countries covered by the reciprocity rule.
Types of confusion?
o 1. Confusion of goods
o 2. Confusion of business
Goods are different but the product can be
reasonably assumed to originate form the plaintiff,
deceiving the public
Chattel Mortgage
What are the requisites of Chattel Mortgage?
o 1. Constituted to provide security for a principal obligation
If the principal obligation fails, there can be no CM
o 2. The mortgagor must be the absolute owner of the property
mortgaged
X bought a car and placed it up for CM. But when he
signed the CM mortgage, the car hasnt been delivered
to him yet.
HELD: Cannot CM the car because delivery
is needed to transfer ownership.
Seller sold an oil tanker, and seller has not been fully
paid. They agreed the buyer will not register the
property until there has been full payment. The buyer
breached the agreement and registered it.
HELD: The registration was valid, because
the mortgagee was in GF and the buyer was
the absolute owner by that time anyway.
88
o 3. Must have free disposal of the property
Trustee cannot CM property because he has no free
disposal
o 4. Must be personal property
Ex. moving vehicles, shares of stock, machinery
placed by persons on property of another, etc.
Can personal property considered real property
under the NCC by subject to CM?
Yes.
What is the status of standing crops?
They are real property under the NCC but
personal property under CM Law, so it can be
chattel mortgaged.
Property which may be real property under
the NCC may be personal property under
special law.
The parties considered the house as personal
property, and subjected it to CM. Does it bind
them and third parties?
By estoppel this classification binds the
parties. But this does not bind third parties,
because it will not occur to third parties to
check with the CM registry if real property is
treated as personal.
o 5. Mortgage must be registered
If the residence of the mortgagor and the property are
in different places, they must be registered in both
places
Ex. Shares of stock have situs in the principal
office of the corporation (ex. Makati) and the
mortgagor lives in Pasig. It must be
registered in both.
Register with appropriate specialized agency:
If Motor Vehicle, with LTO, aircraft, Civil
Aeronatics, ships, Maritime office, copyright,
National Library, trademark, IPO.
What if it is not registered?
Valid between the parties, but not against
third persons.
o 6. Affidavit of GF
What if there is no affidavit of GF?
Binds the parties, but not third parties.
But if a third party actually knows of the execution of a
CM and the CM was done in good faith, it will bind the
third party.
Can the CM extend to improvements and future property?
o No.
o Contra: In REM, the mortgage extends to improvements
introduced on the real property by the mortgagor.
Ex. REM over land with one property, and another
building is built, the REM extends on it.
89
o There was a CM over machines in a factory. But then more
machines were introduced later on. Does the CM extend
over the new improvements?
No. Because the machines were treated as personal
property so the parties are estopped and cannot apply
the REM principle.
Can a CM secure future loans or indebtedness?
o No. Cannot constitute CM to provide security for future
indebtedness, whereas REM can be used to do this. The
provision that it will cover future loans is void.
You can amend the CM over the first loan to cover the
new one if the first loan still exists.
If the first loan has been extinguished, you constitute a
new CM.
o Because here, the parties have to swear that they constituted it
to secure a valid obligation and not to defraud creditors.
o You cannot swear by an obligation that does not exist yet.
Someone mortgaged his car and it was completely wrecked,
collected money from Insurance, and bought a new car, does the
CM cover the new car?
o No. Must constitute a new CM.
Who owns the property under CM? Can he sell it?
o Still the mortgagor. He can sell the property since he retains
ownership.
o The sale is valid, but he can be liable under the RPC for selling
something that has been mortgaged under CM Law.
If a personal property was mortgaged and the mortgagor has a
judgment creditor who levied on the property mortgaged, who wins?
o The creditor must respect the CM. He can only garnish on the
equity of redemption and not the property itself.
If the mortgagor defaults, can the mortgagee appropriate the
property?
o No. This is pactum commissorium which is invalid.
o Can the mortgagee take the property?
Not forcibly. He can file for replevin to get it, and then
sell it.
Is a private sale of the property to foreclose valid?
o Yes.
To foreclose, what is needed?
o 1. Publication in the newspaper is not needed,
o 2. Notice must be posted in two or more public places, where
the mortgagee resides or where the property is located at least
10 days before the sale.
o 3. Notice to mortgagor
o What if there is a stipulation as to where the property must
be sold?
It must be followed
What if the proceeds of the foreclosure exceed the amount owed?
o Return to the mortgagor.
90
o If there is deficiency, the E can run after mortgagor for it.
o Exception?
Art 1484. Sale of property payable in installment basis.
If sale was done to cover for the balance of the price, if
the foreclosure sale results in deficiency, the E can no
longer sue for payment of the deficiency.
Extrajudicial foreclosure of REM
What is required before property can be foreclosed extra-judicially?
o There must be stipulation giving the mortgagee a SPA to
foreclose it extra-judicially.
If a loan is overdue, what will not preclude foreclosure of the REM?
o 1. Allegations that the mortgagee did not furnish the mortgagor
an updated statement of account
o 2. Negotiation for restructuring of the loan
What is the rule on interest rates?
o While the ceiling rates on interests have been lifted by the
monetary board, it doesnt mean the parties can stipulate on any
rate of interest. If it is unconscionable, it will be void.
Ex. 5% a month or 6% a month are contra bonus
mores for being unconscionable.
o What is the effect of this on the foreclosure?
The foreclosure is thus void, because you have to first
determine the amount that is properly due to the
mortgagee.
o What if the provision says the bank can unilaterally
increase the interest?
The provision is void, violating mutuality of contracts
in the NCC. The parties have to agree in advance a
formula on how to increase the interest rate. This will
make the formula valid.
What if the foreclosure was done in another place as opposed to
what was stipulated in the agreement?
o Valid. If there were no words of exclusivity, there is waiver of
venue (Rule 4 of ROC).
What is the notice requirement?
o 1. Notice must be published once a week for 3 consecutive
weeks in a newspaper of general circulation
N.B. If you publish it on Monday the first week, it must
ALWAYS be Monday the next two weeks. Not
Wednesday or Friday.
o 2. It must be posted in 3 public places where the property is
located
o Is personal notice to the mortgagor needed? What if there
is failure to do so?
No need. No effect.
o What if there was no posting but there was publishing?
It is sufficient.
91
o What if the sale is postponed?
You must give notices again through posting and
publishing.
o What are the exceptions?
1. Sale not finished that day and will continue the next
day
2. Waiver (see below What if mortgagor talks to the
bank)
o What if there are clerical errors in spelling the name of the
mortgagor?
If the property is properly described, then it is valid.
o But what if the notice puts the wrong date when the
mortgage was executed?
This made the foreclosure invalid because there was
no mortgage constituted on that date
What if the mortgagor talks to the bank before foreclosure
promising to pay the loan, and the bank makes him sign a waiver of
republication, is it valid?
o Yes.
o While commentators have said that third parties who want to
buy the property will be prejudiced since they did not know, this
waiver is valid because it is for the benefit of the owner of the
property.
Can the foreclosure be done by a Notary Public and not a sheriff?
o Yes, although the courts now require the payment of filing fees
for foreclosure even if it is a notary public who does it. The
judge also has to confirm it after.
To what extent does Rule 39 apply to EJ foreclosure of mortgage?
o Only to the extent of redemption.
o But not for other provisions, such as the requirement in Rule 39
that the sheriff must sell the properties one by one and stop as
soon as the loan is covered. So if a subdivision developer
mortgaged all the lots, they can be sold in EJ foreclosure lump
sum.
What happens to the excess or deficiency after foreclosure?
o Excess goes to mortgagor
o Mortgagee can sue for payment of deficiency
Is there a right to redemption?
o Yes.
How do you redeem?
o 1. Tender the correct redemption price, or
o 2. File a case to compel delivery of property for redemption
(tantamount to tender of payment)
BUT this doctrine is based on the premise that the
redemption price is not settled. If the redemption price
is not disputed, this doctrine does not apply. If after
filing the case, the redemption price was determined
when before it was unknown, he must then tender the
redemption price.
Can the parties agree to extend the redemption period?
92
o Yes, this is valid.
o Ex. In a case, the sheriff placed that there are 2 years to redeem
and the bank-mortgagee did not object.
Under the Banking Law, i.e. the mortgagee is a bank, what is
provided?
o If the mortgagor is a natural person, he has one year to redeem.
If the property is covered by Torrens title, count from registration
of the sale.
o If the mortgagor is an artificial person like a corporation, the
redemption period is three months from date of sale or the date
when the deed of sale was registered whichever comes first.
In the ROC, if real property is sold on execution you have to pay 1%
per month for interest. What if the lender-mortgagee is a bank?
o The rate stipulated on the loan document governs.
What if there are two loans falling due on two dates, where one was
due, and the second fell due during redemption?
o The R must pay for BOTH loans; otherwise the first redemption
is not valid.
What can the buyer of the foreclosed property do?
o He can ask for a writ of possession. Granting this is ministerial
and non-litigious. This is ex parte and there is no need to
require presentation of evidence.
o He must just allege that there was a valid mortgage, default,
foreclosure sale, and the sale was according to Act 3135.
When can you ask for a writ of possession?
o Either during redemption period or after lapse of redemption
period.
o Does the rule in Rule 39 where enforcement of decision is
through motion for 5 years and independent action til 10
years apply here?
No. This right is imprescriptible.
o What if you enter into a new contract ex. a K of lease?
That new contract will govern the relationship of the
parties. You cannot file for writ of possession you file
for ejectment.
o To whom can the writ of possession not be enforced
against?
The writ of possession cannot be enforced against a
third party who is in possession of the land in GF and
is not in privity with the parties in the mortgage. The
case has to be ejectment.
o What if the owner-mortgagor of the property has a lessee
on the property?
A lessee stands in privity with the owner of the property
so the lessee has to respect the writ of possession.
But the writ of possession cannot be enforced
against the lessee when:
1. The lease hasnt expired and it is
annotated on the title
2. The lease is not annotated but the buyer
has actual knowledge
93
3. House Rental Law: if the property of the
apartment is covered by the House Rental
Law, the buyer must honor the lease even if it
is not registered. He cannot evict the tenant
until the expiration of the contract
o What if a third partys rights are adverse against the owner-
mortgagor?
If the rights of the third party are adverse against the
mortgagor, it cannot be enforced against him because
it violates due process. It violates their rights without
prior hearing.
Ex. A third party claims that he bought the
property prior to it being mortgaged.
How can the mortgagor question the validity of foreclosure?
o Within 30 days from when buyer takes possession, the
mortgagor can file a petition to annul the foreclosure sale.
N.B. if he fails to file the petition within the 30 day
period, it will be barred.
o But what if possession hasnt been delivered yet (since you
count the period from there)?
When no writ of possession has yet been issued, the
mortgagor can file a case to litigate to question the
validity of foreclosure (ordinary civil case)
What if the owners duplicate remained with the mortgagor (since he
failed to surrender it), and there was failure to register?
o The court should order the register of deeds to annotate the
deed of sale even if the owners duplicate was not given.
o Otherwise, the owner can prevent mortgage from being effective
just by withholding the owners duplicate.
N.B. for other aspects of CM Law and REM Law, see Civil Law and Remedial
Law notes.
Truth in Lending Act
What is the purpose of the law?
o To protect citizens from lack of awareness as to true cost of
credit by assuring full disclosure of the cost
o To prevent uninformed use of credit to the detriment of national
economy
What is the basic obligation of the lender?
o The debtor must be informed how much it is costing him to
borrow money the charges he has to pay
Which creditors are covered?
o 1. Any person engaged in the business of extending credit, who
requires a finance charge
o 2. Any person engaged in the business of loaning or selling
property/services on a time, credit, or installment basis (either as
principal or agent), who requires a finance charge
What does the Act cover?
o 1. Any loan, mortgage, deed of trust, advance, or discount
o 2. Any contract to sell, contract of sale property or services, on
installment basis;
94
o 3. Lease purchase contract with financing company
o 4. Hire, bailment, lease of property
o 5. Option, demand, lien, pledge, or claim against property or
money
o 6. Purchase, acquisition of, or any credit upon the security of
any obligation arising from any of the foregoing
What must be indicated?
o Cash price
o How much downpayment will go to the principal, and the interest
o Total amount to be financed + finance charges
Percentage of finance charges vis--vis total amount
Central bank prescribed a form to be used by banks to give this
information. But this law is not limited to financial institutions. This law
even covers private persons (5-6 lending, for instance).
o What if the form is not given to the debtor?
Need not follow the exact form, as long as the
instrument reveals the pertinent information
Effects of failure to comply?
o 1. The credit agreement is still binding
o 2. The borrower is entitled to be paid double the finance charges
(not less than 100 pesos, not more than 2,000 pesos)
o 3. When the debtor sues the creditor for payment of finance
charges, he can get attys fees.
o 4. The creditor who did not comply with the law may be
prosecuted criminally
Manual of regulation for banks
o If a bank lends more than P500,000, it can charge a handling
fee.
o If that was not disclosed in the statement to comply with the
Truth in Lending Act, the bank cannot charge the handling fee
The statement given did not mention that the bank can increase the
penalty in case of default. Can the bank charge this increase in a
penalty?
o No.
Anti Money Laundering Act
What is money laundering?
o Crime where proceeds of illegal activity are transacted, to make
them appear to have originated from legitimate sources
Who are guilty?
o 1. Person who transacts the money coming from the illegal
activity
o 2. He who knows that the money came from an illegal source,
but performs acts to facilitate the transaction
Ex. Bank officer who helps open bank account, with
knowledge that the funds came from kidnapping
o 3. Person who does not comply with disclosure requirements of
law
95
Who are covered?
o 1. Banks
o 2. Quasi-banks
o 3. Financing institutions (ex. financing companies, pawnshops,
investment houses, trust companies, institutions supervised by
Central Bank, insurance companies, securities dealers, brokers,
investment houses, investment managers, mutual funds,
common trust funds, pre-need companies, foreign exchange
corporations, money changers)
o 4. Those engaged in exchange of valuable property like jewelry,
paintings, etc.
Does it cover real estate companies?
o NO. So if someone uses illegally obtained money to buy land,
the real estate company is not required to comply with AMLA.
What are the two kinds of transactions?
o 1. Covered transactions
More than P500,000 or its equivalent on one banking
day
Automatically, these have to be reported although
legitimate
o 2. Suspicious transactions
The amount is irrelevant, even if less than P500,000. If
it is suspicious, it mus be reported.
Ex. there is no underlying legal or trade obligation or
justification.
Ex. the transaction is structured to avoid reporting (for
instance, instead of remitting an amount more than
P500,000, everyday he remits P499,999.)
The underlying crimes whose commission will give rise to violation
of AMLA:
o [By public officers]
o 1. Violation of Graft and corrupt practices
o 2. Plunder
o [Grave crimes with property implications]
o 1. Kidnap for ransom
o 2.Violation of dangerous drugs law
o 3. Piracy
o 4. Hijacking, destructive arson, murder
(N.B. this is the HK-MAD enumeration + piracy)
o [Obtaining property illegally]
o 1. Robbery and extortion
o 2. Jueteng and illegal betting on jai alai
o 3. Qualified theft
o 4. Swindling
o 5. Smuggling
o [Commercial violations]
96
o 1. Violation of e-commerce law
o 2. Securities regulation code violation
What is the composition of the AMLC?
o 1. Governor of Bangko Sentral, 2. Chairman of SEC, 3.
Insurance Commissioner
How are decisions reached?
o Decisions must be unanimous (all 3 of them)
Powers of the AMLC?
o 1. Implement measures to prevent AML
o 2. Coordinate with foreign countries for enforcement of AML
o 3. Investigate transactions
o 4. Recommend for prosecution
o 5. Apply for order, ex parte, for freezing accounts (with the CA)
o 6. Could institute forfeiture proceedings
o 7. Enforce sanctions for violations
What are duties of covered institutions?
o Establish true identities of their clients
o Are anonymous accounts allowed?
No. The Bank must know who actually owns the
account, even if its just numbers indicated.
What is the effect of compliance with required reporting under this
law?
o Transaction is removed from coverage of law on secrecy of
bank deposits
o The officers who make the reports in GF are given immunity
from prosecution.
Petition for ex-parte order to freeze an account:
o Filed with the CA
o The freeze order is valid for 20 days.
But it may extend the period
o Contra: in the case of inquiring into deposits or investments, it
is not ex parte so the court has to conduct a hearing first.
General rule: The AMLC must get court order to investigate any deposit
in accordance with this law. Then they have to establish probable cause.
o When is court order not required to inquire?
In case of: kidnapping, DDL, hijacking, destructive
arson, and murder (HK-MAD)
Contrast with powers of the BSP?
o The BSP is authorized to inquire into any deposit or investment
to ensure that the Bank is complying with this law.
o It may be done in accordance with its regular annual inspection,
or through special examination.
o So the Monetary Board can inspect the accounts even without
the order.
97
Phil. Deposit Insurance Corporation Law
What is the mandatory coverage of the PDIC?
o The law requires that checking accounts, savings accounts, and
time deposits must be insured with the PDIC
o Does the PDIC law cover trust accounts?
No. Remember this. It applies to deposits.
o What about other obligations of the banks?
If considered deposit liabilities upon order of the PDIC,
may be covered also
o Deposits of a branch of a domestic bank abroad (ex. BPI
has a branch abroad) what is the rule?
Not required to be insured.
But the domestic bank may ask the PDIC to insure the
deposits of the branches abroad.
What banking transactions are not covered by insurance?
o 1. Investment products like bonds, securities, trust receipts
o 2. Deposit accounts that are unfunded
Ex. Issued a check that bounced, so he had no money.
Then the bank closed. Cannot recover from PDIC.
o 3. Deposits from unsafe/unsound bank practices
o 4. Proceeds from money laundering
o 5. Contents of safety deposit box
What is the maximum coverage?
o P500,000
What is the period to claim?
o Within 2 years from actual takeover by the receiver
Somebody has a current account, saving accounts, time deposits,
and if you add it all up, the value exceeds P500000. If the bank
closes, how much can he collect?
o P500000 only. You add it up. Its not per account.
What is the rule to determine what is covered?
o Add up all deposits altogether. But if he has another deposit in
another capacity (ex. guardian of minor, administrator of estate),
this is a different capacity so its another P500K. (Per capacity
rule)
o X has a separate account and a joint account (X and/or Y).
What is the rule?
Two separate accounts, one for the separate account,
one for the joint account.
The rule is that joint accounts are insured separately
from any individually-owned account.
What if there are two or more depositors, such as in a joint account?
o The P500K will be divided among them unless there is a
different agreement.
o What if the account is held jointly by a juridical entity and
one or more natural persons?
98
It is presumed that the deposit entirely belongs to the
corporation. The natural persons are assumed to be
just officers.
If you have a person with several joint accounts, then what is the
total he can get?
o Add all joint accounts together, and subject to the ceiling
o Ex. three separate joint accounts, with A, B, and with C, then his
share will be added up and the shares on the three accounts
cannot exceed P500K
What if the depositor owes the bank too?
o There will be set-off with what he collects.
Two ways for PDIC to comply:
o 1. Hand over the money to the depositor
o 2. Open another account in another bank in the name of the
depositor
What is the right of PDIC after payment?
o There is subrogation, so in liquidation of the bank, the PDIC can
represent the depositor.
What if there is monetary or financial instability in the banking
system?
o If established by the Monetary Board, the PDIC directors may
adjust the maximum coverage. But they must be unanimous
and it will have to be approved by the President.
What if somebody owns a negotiable certificate and it is payable to
bearer?
o He cannot collect unless his name is recorded in the books of
the bank.
Can a person split his deposits or create fictitious accounts?
o No. It is illegal to create fictitious deposit accounts or split
deposits to circumvent the maximum liability in case of closure
of the bank.
o Ex. He has 1M so he transfers P500K to the name of his
relative.
What is the period to pay?
o It must be within 120 days from closure of the bank. If beyond
this, there is no payment, it is a criminal act.
Decisions of PDIC are FINAL. What is the remedy?
o Certiorari.
Corporation Law
Corporation, defined
It is an artificial person, created by law.
o What is the implication?
It cannot recover moral damages since it cannot
experience wounded feelings, mental anguish, etc.
It can, however, recover damages for besmirched
reputation.
It has the right of succession. What is this?
99
o Stockholders may come and go but its personality remains the
same
Cannot perform an act unless authorized by law.
o As opposed to natural persons who can do anything as long as
not prohibited by law
Does a defective incorporation result into partnership?
o No. A partnership requires delectus personarum, which is not
always existent in a corporation, so it is not a fall back.
o But the liability of persons who form a defective corporation
they are liable as partners.
o Those who merely subscribed are not liable as such.
Nationality of corporations
Primary test:
o Place of incorporation test is the principal doctrine: country
under whose laws it was organized
When does the control test also apply in addition to the place of
incorporation test?
o 1. Exploitation of natural resources
o 2. Operating public utilities, mass media, advertising
o 3. War-time test
During war time, the nationality of a private corporation
is determined by control test
o 4. Grandfather rule
What is the Grandfather rule in corporations and how did the FIA
change it?
o XYZ and ABC both own 50% of the corporation. ABC is 50%
Filipino and 50% foreign. XYZ is 60% Filipino and 40% foreign.
What are the implications?
XYZ makes it 30% Filipino and 20% foreign. ABC
makes it 25% and 25%. So it becomes 55% Filipino
and 45% foreign.
How did the foreign investments act change this rule?
o XYZ becomes 100% Filipino because it is at least 60% Filipino.
So XYZ contributes full 50% Filipino ownership, added to ABCs
25% = the corporation is 75% Filipino and is thus qualified to
own land.
Corporate juridical personality
It has separate juridical personality.
Implications?
o The corporate property does not belong to SHs. The SHs
cannot recover property or intervene in a case of the corporation
to recover property.
Case: A SH sued to annul foreclosure of a mortgage.
He wanted to annotate a notice lis pendens. This was
not allowed because he was just a SH.
Case: SH cannot question the search warrant filed by
the government against a corporation, or a
sequestration order against the corporation.
o If there is a judgment against corporation, it cannot be enforced
against property of the SHs, and vice versa.
100
o A SH cannot be sued if the corporation breaches its contract.
The purpose of the law is justice and fairness. Therefore, when the law
creates a device like the corporate vehicle, and it is abused, the law will
not allow that. So there is piercing the veil of corporate fiction.
When is there piercing?
o 1. If it is used to commit fraud, violate the law, etc. (fraud
cases)
Requisites for this to apply?
1. Complete control, not just of stocks but
also policy and business practice
2. Control used to commit fraud or wrong
3. Proximately causes injury or loss
Case: There was a tax imposed on the sale of cars of
a corporation. This companys 95% owner would sell
the cars exclusively to the second corporation, owned
95% of his wife, for a very cheap price, and the wifes
corporation sells to the public. This was tax fraud and
there was piercing.
o 2. In the internal dealings, if the SHs show that they are not
treating the corporation as a separate juridical personality (alter
ego cases)
The corporation is only a conduit or alter ego of the
controlling SH.
Here, no fraudulent intent but there is systemic
disregard for separate juridical personality, and so third
persons could not be expected to be bound by such
Ex. there was a controlling SH where she gave four
minor employees 1 share each, and had the four
endorse the certificates in blank to her. The controlling
SH also confused her own funds with the corporations.
There were no meetings held, etc.
Is mere control of a corporation sufficient to pierce?
o No. It must be control plus something else.
o If a holding company is exercising control over management of
a subsidiary this is in itself is not enough. The management
must be control for the purpose of committing fraud.
Against whom can you invoke this rule against?
o You can invoke this only against the majority SHs. You cannot
invoke it against minority SHs.
Can the corporation use piercing for its favor?
o No. The underlying basis for piercing is that the separate
juridical personality is being used to commit fraud. The
corporation cannot invoke it for its favor.
o Ex. A SH sued on behalf of a corporation, claiming that since he
was the controlling SH, the veil must be pierced. INVALID
cannot use piercing for the corporations favor.
Piercing can apply even for affiliate companies:
o Ex. Merrill-Lynch Phils. was organized. The AOI said primary
purpose is to transmit orders of customers if you want to play
the stock market abroad. A client placed an order to sell his
holdings of silver. Merrill-Lynch NY delayed it, and by the time it
was sold, the price of silver plummeted. The client sued both M-
L Philippines and M-L NY. MLP said the contract was with
MLNY. MLNY said it was not doing business in the Philippines
101
so it cannot be sued. HELD: MLNY earns business in the
Philippines but circumvents it through MLP. So it was pierced.
In piercing cases, how can an officer be held liable while still
respecting the due process clause?
o The general rule is that a judgment cannot bind a person not
impleaded in a case. Check if the officers were actually given
the chance to be apprised and be involved in the defense of the
case.
o If the officers were sued in their official capacity, there is no
problem. When the corporation however has ceased to exist
already it has been held as an exception to the rule that an
officer must be impleaded under AC Ransom.
What is the corporations liability for torts?
o Corporation liable for a tortuous act by an officer or agent only
when the corporation has expressly directed the commission of
the act
o Who is this proved?
1. Corporation issued a resolution
2. Corporation took advantage of the act
What is the corporations liability for criminal acts?
o An officer may be held personally liable for the crime per se if
there is a law expressly making the person liable for the
corporations criminal offense
Capital Structure
What is needed to form a corporation?
o 5-15 incorporators
Majority are residents
Only natural persons
At least one share each
o Can a corporation be a subscriber?
Yes. A corporation can be a subscriber but not an
incorporator.
What is the maximum corporate life?
o 50 years, extendible for additional periods of 50 years
o You can only extend in the last five years of its corporate
existence
Minimum required paid up capital?
o Generally, none
Except for banks, public utilities, insurance companies,
etc.
o For all, at least 25% of the authorized shares must be
subscribed
o At least 25% of those must be paid.
Minimum paid-up is P5000.
o Must everyone pay for 25% of their subscriptions?
It is not required that everyone must pay 25%.
Someone can pay less, although one paid 100%.
You just have to pay the 25%, total.
A corporation may be stock or non-stock (NS).
102
o Stock:
1. Must have shares and
2. Must be authorized to declare dividends
So country clubs are NS because they cannot
declare dividends
o A government corporation is governed by its own special Law.
But the Corporation Code is suppletory to its charters.
So there can be no amendment of the Special Law
authorizing that there be less than 5 directors because
the Corporation Code is still suppletorily applicable.
Distinguish:
o Corporators: those who compose the corporation
o Incorporators: sign the AOI
o SHs: for stock corporation
o Members: for NS
What is the 25-25 rule?
o At least 25% of the authorized capital stock must be subscribed,
and 25% of the subscription must be paid
o What if 5 natural persons held 1 share each and the rest of
the shares are held by a holding company? Is this valid?
Yes. While a corporation cannot be an incorporator, it
can be a subscriber. You count the subscription of the
corporation to see whether the 25-25 rule is met.
Classification of shares:
o Generally, broad discretion.
o Shares are presumed to be equal, so unless provided
otherwise, they get same voting rights, dividends.
What are exceptions to this general rule?
o 1. Shares must not be denied voting rights unless:
A. Preferred
B. Redeemable
o 2. Banks, trust companies, insurance companies, etc. are not
allowed to issue no-par-value shares.
Because they need capital.
o 3. Preferred shares must be par value shares.
What are preferred shares as to assets?
Priority in distribution of assets in case of
liquidation
What are preferred shares as to dividends?
Priority in distribution of dividends in case of
liquidation
Can preferred shares be given preference over
creditors?
No, because this violates Trust Fund
Doctrine.
Ex. You are liquidating a corporation. You
cannot benefit shares prior to the creditors.
103
o 4. Cumulative vs. Non-cumulative shares
Cumulative preferred shares: entitle holders to
payment of current dividends AND back dividends
before holders of common shares are paid
Non-cumulative preferred shares: entitle holders to
payment of current dividends only, before holders of
common shares are paid
o 5. Participating vs. non-participating
Participating: entitle holders to participate with holders
of common shares in retained earnings after the
stipulated dividend paid to preferred shares
i.e. paid their dividends, THEN still share in
the common pie
Non-participating: entitle holders only to stipulated
preferred dividends and nothing more
This is the DEFAULT RULE
o 6. You can classify shares according to nationalization
requirements.
Ex. SMC (class A shares can only be owned by
Filipinos, class B anyone) to make sure its always
60% owned by Filipinos
o 7. Redeemable shares
How can these be issued?
May only be issued when expressly provided
in the AOI. Terms and conditions stated in
AOI.
What happens in redemption?
Corporation pays money in exchange for the
stock. Option rests entirely upon the
corporation, and cannot be compelled or
refused.
Shares deemed retired after redemption.
What is required for the corporation to do?
Corp required to maintain a sinking fund to
cover for redemption price if required to
redeem
No need for unrestricted retained earnings
before shares are redeemed but there must
be sufficient assets to pay creditors/answer
for operations, or else there can be no
redemption (The latter qualification is based
on the Trust Fund Doctrine)
o 8. Founders shares
If theres a right to exclusively for or be voted for as
director, it must not be for a period exceeding 5 years
What are treasury shares?
o Those issued and fully paid for, and then reacquired by the
corporation
Still considered issued; not considered as outstanding
Considered fully paid for and held by the corporation
o May be distributed as property dividends
o What is their status?
104
Not outstanding, not cancelled. In a state of dormancy,
which in the possession of the corporation. They will
become outstanding again when the corporation sells
the treasury shares
o Can there be stock dividends declared from treasury
shares?
No. These are not outstanding. Cannot vote and
cannot have dividends declared from them. This is a
tax evasion scheme.
Besides, the terminology is wrong. You can only
declare stock dividends from authorized but unissued
shares. From treasury shares, you can declare
property dividends.
o Can cash dividends be declared from the shares?
NOT entitled to dividends because the corporation
cannot declare dividends for itself
When do non-voting shares vote?
o [Key agreements]
1. AOI amendment
2. BLs adoption and amendment
o [Property-related]
1. Increase/decrease of bonded indebtedness
2. Increase/decrease of capital stock
3. Sale/disposition of all/substantially all of corporate
property
o [Changes in the corporation]
1. Merger/consolidation
2. Investment of funds in another corporation or
another business purpose
3. Corporate dissolution
What are watered stocks?
o 1. Issued without consideration
o 2. Discounted shares
o 3. Issued as stock dividend when there are no sufficient retained
earnings/surplus
o Who is liable?
Solidary liability of director/officer who issued it and all
those who didnt oppose it in writing which was filed to
the secretary
Liability is the difference in value
Incorporation and organization
Who is a promoter?
o Promoter one who, acting alone or with others, takes initiative
in founding and organizing business/enterprise and receives
consideration for it.
Distinguish:
o Promoters contracts : both parties know corporation doesnt
exist yet
105
o Contracts entered into with defective corporations (de facto or
by estoppel): at least one party is unaware that the corporation
is not yet constituted
What is pre-incorporation subscription?
o 1. Acquisition of unissued stock in existing or still to be formed
corporation is deemed a subscription regardless of appellation
o 2. Subscription is irrevocable for 6 months
1. But revocation valid thereafter if the corporation did
not materialize (offer theory)
2. Or all other subscribers consented to the revocation
(contract theory)
When is revocation disallowed already?
When the AOI have been submitted to SEC
o Is a corporation bound by a promoters contract once it is
formed?
It is not, unless it had received benefits from the
contract by the time it was constituted
What about other promoters contracts?
o In general contract law this would have been void because a
non-existent corporation cannot give consent until it is formed,
but these are exceptions to this general rule.
o What is needed to validate and enforce promoters
contracts?
The corporation has to ratify the acts when it is formed
o Who are personally liable for the promoters contracts?
The investors who are the moving spirit behind the
incorporation personally liable for expenses incurred by
the corporation. Those who are not are not.
Promoters are also and personally liable for pre-
incorporation expenses.
Subscription:
o Subscription, not payment, grants rights to stockholders, even if
not fully paid for. Holders of non-delinquent shares have all the
rights of a stockholder.
o This is a consensual contract
No need for tradition, unlike sales shares deemed
issued already.
Only need to register in the Stock and Transfer Book
for dispositions, so no need to register for issuance
Not covered by SOF because subscription itself
executes the contract.
o When a condition for issuance of shares is void, then it becomes
a pure, valid subscription agreement. Ignore the condition.
What is valid consideration for issuance of shares?
o 1. Actual cash
Cannot be a PN or future services
o 2. Property:
Actually received, necessary or convenient for
corporate purpose, with fair valuation
Appraised by SEC
106
o 3. Labor actually performed
o 4. Previously incurred indebtedness
o 5. Amounts transferred from unrestricted retained earnings to
stated capital
o 6. Outstanding shares exchanged for stocks in event of
reclassification/conversion
What if the consideration is unlawful?
o It would violate the TFD if the subscription is deemed void. So
its better to just consider the subscription valid, but the
consideration void.
o The subscriber has outstanding payable consideration in cash,
and the directors/officers are liable for watered stocks.
Articles of incorporation:
o 1. Name of the corporation
Registration of business names is with SEC
o 2. Purposes
Can have several secondary purposes so if the primary
purpose does not become profitable, you can shift
without amending the AOI
SEC can only reject if patently illegal
o 3. Place of principal business
Must be in the Philippines
The SEC now requires that you put even the street and
number
o 4. Term for which it will exist
Period of maximum 50 years, extendable
No extension until last 5 years of term
o 5. Names, nationalities, residences of directors
o 6. Names, nationalities, residences of incorporators
o 7. If a Stock Corporation, amount of authorized capital stock
If there are par value shares, the amount each
The amount subscribed and paid each by the
incorporators
What is required for amendment?
o Must be authorized by 2/3 of the SHs and majority of the
directors
o When does it take effect?
Upon approval by SEC
Or lapse of six months from filing
Grounds for disapproving application/amendment?
o 1. Articles not sufficient in form
o 2. Purpose is illegal, unconstitutional, illegal, immoral, etc.
o 3. Treasurers affidavit is false
o 4. Did not comply with nationalization requirement
107
N.B. Applies where required. The SEC will endorse it
with the relevant government agency (education
CHED, etc.)
What is the requirement as to the name?
o Required to submit undertaking that you will change the
corporate name if it is the same or confusingly similar.
o What must be considered?
1. The same/confusingly similar name
2. Engaged in the same line of business
Can you make a corporation that practices a profession?
o No.
o Acevedo: It is not engaged in the practice of optometry. It hires
employees engaged in optometry. So its allowed.
How does the SEC check for the starting capital?
o When you incorporate, the SEC will require you to waive
secrecy of bank deposits, so they can check starting capital.
o Can the proceeds of a bank loan be counted as paid-up
capital?
No. This is a liability, not paid-up capital. You cannot
include it.
When does a de facto corporation exist?
o 1. Valid law under which it was organized
o 2. Attempt in good faith to form a corporation
There must also be a certificate issued by the SEC
with a blue ribbon and the seal. Without this, cannot
claim to be a corporation.
o 3. User of corporate powers
What is the scope of the de facto corporation doctrine?
o Situations where the defective enterprise contracts with an
outsider. The suit by or against the defective enterprise must be
against the de facto corporation and not the individuals behind
it.
Can its existence be attacked collaterally?
o No. Just directly, through quo warranto, and only by the Sol-
Gen.
What is the nature of its acts?
o Valid, like that of a de jure corporation.
o Even the acts of the officers are valid, although they also have
liabilities of valid officers.
Can a corporation to practice a profession be a de facto
corporation?
o No. There is no law allowing that.
What is a corporation by estoppel?
o So defective in form that it is neither de jure or de facto, but it is
a corporation as to those who cannot deny its corporate
existence.
When it applies:
o Someone must deal with the association like a corporation and
contracted with this association, and after receiving benefits,
108
claims that the association is not a corporation. So it covers
obligations to the defective corporation.
Differences between de facto and estoppel?
o 1. De facto has real existence in law; estoppel has none
o 2. De facto may exist even if there are no dealings between
parties on a corporate basis; estoppel needs these
o 3. A corporation cannot be de facto unless the requisites are
present; estoppel, even without any requisite
Two associations of jeep drivers incorporated as NS, non-profit. They
agreed to merge. One president got majority votes. The other guy
refused to recognize the others win and continued to collect dues.
o HELD: There was no intra-corporate dispute because there
was no valid merger; there were no articles of merger. There is
no corporation by estoppel because both presidents knew they
did not merge.
What is the nature of the liabilities of those behind a corporation by
estoppel?
o If the incorporators knew there was no corporation (fraud)
liable as general partners (all properties)
o If the incorporators did not know or there was no fraud liable
as limited partners (only properties they intended to invest)
Can the person behind the corporation claim that it is a corporation
by estoppel, when the person was being sued for execution of
properties (because the corporation did not exist)?
o No. Cannot invoke this. Because the person KNOWS that
there was no corporation, so there was no genuine belief on his
part.
What are by-laws?
o Intramural document, to govern intra-corporate relationship.
When are by-laws valid?
o 1. Do not contravene law
o 2. Reasonable and non-discriminatory
o 3. Do not contradict Articles of Incorporation
If there is conflict, AOIs win out
Is it possible that an express by-law provision be violated and still
bind the corporation?
o Yes, as long as there is corporate approval through the BOD,
express or implied, whether empowered or ratified.
When can a third party be bound by by-laws?
o He must be duly informed in time of the pertinent provisions,
actually or constructively. Otherwise, he cannot be prejudiced
by the by-laws because its an intramural document.
How can BLs be adopted?
o Majority vote of outstanding capital stock.
o What if BLs are not adopted within 1 month from
incorporation?
Not a ground to automatically dissolve the corporation,
but it can be a ground for the SEC to revoke the
certificate.
o How can BLs be amended or repealed?
1. Majority of BOD + Majority of outstanding capital
stock
109
2. 2/3 of outstanding capital stock may delegate to the
BOD the power to amend or repeal the by-laws.
N.B. Majority of outstanding capital stock may
revoke this delegation.
What should be included in the by-laws?
o 1. When regular and special meetings are held
o 2. Quorum
o 3. Proxies
o 4. Qualifications, duties, compensation of directors or officers
Can impose additional qualifications (like minimum
number of shares)
o 5. When annual election of officers is done, and manner of
appointment
o 6. Manner of issuance of stock certificates
o Citibank: By-laws allowed country managers to sue and defend
lawsuits, and delegate this power. So a delegation of this power
to the lawyer is valid.
Valley Golf: A member pledged his proprietary shares to Chinabank. He
forfeited, and Chinabank foreclosed and bought the shares. Chinabank
sought registration of the shares by Valley Golf refused because the
shares were delinquent. Valley Golf claimed its bylaws gave it a lien over
proprietary shares.
o HELD: Valley Golf lost. By-laws do not bind third parties
without actual knowledge.
Corporate Powers
What is the underlying theory behind corporate powers?
o All powers are exercised by the BOD.
o No person or officer can bind the corporation; it has to be the
BOD. Agents must not exceed the power granted by BOD.
o There are instances, however, where stockholders or members
have to give their consent this is where the underlying
contractual relationship is being altered or amended.
A Corporation can sue or be sued in its own name. It must indicate its
corporate name in the pleadings and not use an acronym
A. Power to extend or shorten corporate term:
o Majority of BOD + 2/3 of OCS
o There is right of appraisal for dissenting stockholders (although
some commentators say there shouldnt be for mere shortening
of corporate term)
B. Power to increase or decrease capital stock:
o Majority of BOD + 2/3 of OCS
o Need SEC approval:
For increase to check whether there is subscription
to at least 25% of increased stock, and at least 25%
paid-up
For decrease it must not prejudice corporate
creditors
o Until approval, the funds are just held by the corporation in trust
for the stockholders. Its not part of paid-up capital yet.
o Is there a right of appraisal?
110
No
C. Power to create, incur, or increase bonded indebtedness:
o Majority of BOD + 2/3 of OCS
o What is a bonded indebtedness?
Usually a very large amount
With first lien on important corporate assets
For a long period of time
o Need SEC approval
To check if the corporation has at least P25M net worth
and 3 years operating experience
o Is there a right of appraisal?
No
D. Power to deny preemptive rights:
o Where is there a right of preemption by SHs?
1. If there is increase of capital stock OR
2. If the corporation acquired treasury shares
o What is the purpose of preemption?
So a SH can prevent dilution of his % ownership.
o When is there no right to preemption?
1. Provided for in the AOI
2. Shares issued to comply with order to make a public
offering to comply with the law
3. When the shares issued are in exchange for
property for a corporate purpose
4. Conversion of corporate debt to SH equity
E. Sale/lease/exchange/mortgage all or substantially all of its
property:
o Majority of BOD + 2/3 of OCS
o What is the test of substantially all?
W/N it can still continue business afterwards.
Qualitative test, whereas it is quantitative for all.
o Compare to sale in usual and regular course of business, which
is covered by business judgment doctrine. This does not need
SH approval.
o Is there a right of appraisal?
Yes
F. Power to purchase own shares:
o What is required?
The corporation must have unrestricted retained
earnings
o Exception?
Redeemable shares, which do not require URE for
them to be redeemed by the corporation
111
o When can the corporation buy shares from SHs?
1. To eliminate fractional shares because of stock
dividends
2. To collect indebtedness out of an unpaid
subscription
3. To pay dissenting or withdrawing stockholders
entitled to payment of their shares
4. To decrease cost of doing business, by decreasing
amount of dividends to be paid in the future
5. Other similar situations (non-exclusive enumeration)
o What happens to the shares?
They become treasury shares. These cannot vote.
G. Power to invest corporate funds in another corporation or
business:
o When do you need SH approval?
If it is in line with the primary purpose of the company,
then you dont need SH approval
If it is not, you need Majority of BOD + 2/3 of OCS
o Example:
SMC buying a brewery abroad is in line with primary
purpose
Mau Sugar Central buying a company manufacturing
sugar bags same doctrine
o What is the nature of investing in another corporation,
deposit accounts, money markets, treasury bills, and the
like?
These do not require SH approval because this fits in
the power, discretion, and purpose of corporation to
obtain best returns.
THUS, the investment in another corporation that
requires SH approval above implies some
management power involved of the other company,
and not just investment per se.
H. Power to declare dividends:
o It must have unrestricted retained earnings. Otherwise, it will be
illegal. In effect you are returning the investment of the SHs.
Creditors can sue the SHs for the dividends they
illegally obtained
o In what forms?
Stock, property, or cash dividends
For property or cash dividends, no need for
SH approval
For stock dividends, 2/3 SH approval is needed
o Presumed that rights of shares are equal. So they will receive
the same amount.
o Even if a subscription has not been fully paid, the SH will
receive dividends. What is the exception?
If it is delinquent. The cash dividends will be applied to
his outstanding dues.
112
o A corporation made public offering of shares with par value
of P100. But it was able to sell it in the stock market for a
premium, i.e. P120/share. What happens to the premium
surplus?
The surplus cannot be declared as cash or stock
dividends, because dividends can only be declared
from corporate earnings.
They must be retained as part of capital.
o Nielsen had a mgt. contract with Lepanto mining (because
Nielsen had technical expertise). During the war, the
Japanese took over the management of Lepanto. After the
war, Nielsen wanted to continue the unexpired management
contract with Lepanto, and the latter refused. The
agreement included that everything Lepanto declared
dividends, part of it should go to Nielsen. HELD:
Lepanto is guilty of breach of contract, and must pay
Nielsen, including the dividends that were not given.
o Stock dividends can only be declared out of the authorized, but
unissued shares. Treasury shares cannot be declared as stock
dividends, but as property dividends.
Book keeping entry: from retained earnings capital
o Sometimes property is reappraised to increase value. What
are the conditions?
1. There are earnings from operations
2. The property must have depreciated
So land cannot be reappraised
3. The depreciation allowance must have been
deducted
o Stock corporations are prohibited from retaining surplus profits
in excess of 100% of paid-in capital stock.
Exceptions?
1. Justified by definite corporate expansion
projects approved by the board
2. Corporation obtained a loan and there is a
condition in the loan that the corporation
cannot declare dividends without creditors
approval
3. Special circumstances justify retention
If you invoke any of these provisions, your financial
statements must include an explanation
The power to demand dividends is one of the few
powers of SHs where they can initiate action.
o Once a cash dividend has been declared, it cannot anymore be
revoked. Because otherwise, a corporation can manipulate the
price. (Ex. the corporation says we will declare dividends in a
month, so prices go up and shares are bought. If they can
revoke it, then the prices can go down and the corporation can
re-buy the shares.)
o What are the tax implications?
There is no tax consequence for stock dividends,
because its still the same pie, cut in smaller pieces
You only get taxed when you sell the stocks.
o Dividends will be given to stock holders in the books. If a sale of
shares is made and the buyer is not put into the stock and
transfer book, it only binds the parties but not the corporation.
113
So the remedy is the seller gets the dividends and
turns it over to the buyer
I. Management contracts
o There is now regulation of management contracts to prevent
abuse. It is usually done when one company has technical or
special expertise.
o Requirement?
Approval by BOD
And majority of the SHs of BOTH corporations
o Except, when are 2/3 votes needed from the managed
corporation?
1. If a SH or SHs who own stocks in both corporations
have more than 1/3 of shares in managing corporation
2. Majority of BOD in the managing corporation is
majority of BOD in the managed corporation
o Validity?
5 years for any one term. You can keep renewing it.
o Does the principle that a principal can terminate an agent
any time apply here?
No. This is a contract for lease of services.
o What if the management contract is with an outsider
individual and not a corporation?
No need for SH approval because the corporation is
really just appointing an agent in this instance.
Power Requirements Non-
voting
stocks
vote?
Appraisal
right?
Increase or decrease
corporate term
Majority of BOD + 2/3 of
OCS
Yes Yes
Increase or decrease
capital stock
Majority of BOD + 2/3 of
OCS
Yes Yes
Create, incur,
increase bonded
indebtedness
Majority of BOD + 2/3 of
OCS
Yes No
Denying pre-emptive
rights
1. Provided in AOI
2. Comply with public
offering law
3. For property
4. Debt for equity
No No
Substantially all of
property
Majority of BOD + 2/3 of
OCS
Yes Yes
Purchase own
shares
1. Eliminate fractions
2.Pay subscription
indebtedness
3. Pay appraising SH
4. Decrease cost of
business
5. Other similar
No No
Invest corporate
funds in another
business
Majority of BOD + 2/3 of
OCS
Yes Yes (if
going into
another
line of
business)
Declare dividends URE exceeding 100% of
paid-in capital stock
(subject to exceptions)
Can be demanded by SHs
No No
Enter into
management
contracts
Majority of BOD + Majority
of OCS of managing
company + Majority of
OCS of managed
company
Change to 2/3 of OCS of
managed company if:
1. Common SH/s possess
Yes No
114
more than 1/3 shares in
managing company, or
2. Commonly shared
majority of BOD
Ultra vires acts:
o What is the scope of a corporations allowable powers?
Powers of corporation include those necessary to
achieve the primary purpose:
Ex. a hotel can hire entertainers
o What are the type of ultra vires acts?
1. Acts done beyond powers of the corporation, as
provided by law or AOI
2. Acts on behalf of a corporation done by those
without authority
3. Acts which are per se illegal
o What is the SCs attitude in interpreting whether acts are
ultra vires?
Strict, if the act is per se illegal.
If the act is not per se illegal, as long as fairly
incidental and reasonably necessary to corporate
purpose, acts are deemed valid.
But if the AOI or purpose clause has limiting words,
then the court will hold the corporation to such limited
business.
Ex. Transportation of goods by water
o What is the effect if an act is ultra vires?
First type of ultra vires : void and does not bind the
corporation, but can be ratified by the SHs through:
1. Performance
2. Ratification
3. Estoppel
Second type : no authority so unenforceable contract
But if the corporation cloaked the person with
apparent authority, the corporation cannot
deny the contract entered into by that person
with external indicia of authority
Third type : always void
o When can ultra vires be invoked?
For purposes of enforceability, if it has been fully
executed by both sides, one cannot invoke ultra vires
If it has been partially executed (by one side), it cannot
be invoked because one side is in estoppel
If it is merely executory on both sides then ultra vires
can be invoked
Can a corporation guarantee the debt of another?
o No, because it might prejudice the claims of its creditors and it
violates the trust fund doctrine
o When is it valid?
If it has a business purpose, for instance:
115
1. A mother company guaranteeing the debt
of the subsidiary
2. Will result in increased business
3. Will enhance the chances of collecting from
the party whose obligation is guaranteed
What is the Trust Fund Doctrine?
o Capital stock, property, and other assets of the corporation are
regarded as equity in trust for the payment of corporate
creditors.
o Implications:
Corporation may not dissipate the subscribed capital
stock (which the creditors can check to satisfy their
credits).
Creditors may sue SHs directly for unpaid subscription.
o Examples of when the TFD is violated:
1. Corporation releases or condones payment of
unpaid subscription.
2. Payment of dividends without URE.
3. Properties transferred in fraud of creditors.
4. Properties disposed or undue preference given to
some creditors even if the corporation is insolvent.
o The TFD is the backbone as to why there is a strict procedure in
distribution of corporate assets, and that it can only be done if:
1) there is amendment of AOI to decrease ACS, 2) purchase of
redeemable shares regardless of URE, 3) dissolution and
liquidation of the corporation. The Corporation cannot distribute
assets whimsically.
Stockholders and members
Who can vote?
o Any share, except those deprived of right to vote, which is
allowed only for preferred and redeemable shares
o There must always be a class with complete voting rights
o For joint owners of shares, consent of all is needed, unless one
is constituted an agent
o Pledgor or mortgagor still votes for his shares.
Take note of instances when even non-voting shares can vote
(fundamental changes in the corporation)
What are the kinds of meetings of SHs?
o Meetings may be regular or special.
o Provision on meetings applies only if there is no provision in the
bylaws or articles to the contrary.
What matters can be taken up?
o General meeting: anything can be taken up
o Special meeting: only matters previously indicated can be taken
up
If everybody is present and nobody objected, it is
tantamount to waiver
But if some were absent and those present waived,
those absent may question the waiver
Where must it be held?
o City or municipality where the corporation is located
116
Metro Manila considered a city
o Need not be in the office
What determines quorum?
o What is provided for in the BLs. Most of the time its a majority
o Once a quorum is announced to be present, the SH is
competent to take up matters, even if some leave after
What is the power of executors, administrators, receivers, and
guardians?
o Can vote the shares of stocks they administer without need for
proxy
What if there are two or more owners of shares?
o They must go together, but if and/or, either can vote
o If both attend and cannot agree on how to vote, the vote is not
counted
There are different devices how to get votes. How?
o 1. Proxy solicitation
o 2. Voting trusts
o 3. Pooling agreement, where several SHs agree to vote their
shares together
What are required for a valid proxy agreement?
o 1. In writing
o 2. Signed by the SH
o 3. Filed with corporate secretary before the meeting
o How long is a proxy valid?
Unless it provides that it is a continuing proxy, its only
valid for the period for which it was issued
o What is the ceiling for continuous proxies?
5 years, maximum validity
o Is it revocable?
Yes, unless it is coupled with an interest
If he shows up to vote, the attendance to vote will
result in nullifying the proxy, unless it is coupled with
an interest
BUT he must show up to vote. If he doesnt vote, it
doesnt revoke the proxy.
What are required for a valid voting trust agreement?
o 1. In writing and notarized
o 2. Cannot exceed 5 years at a time (except for longer loan)
o 3. Certified true copy of agreement filed with the corporation and
SEC
o What is the maximum duration?
5 years
o What are the powers of the trustee?
Trustee is qualified to sit in the board
117
If the voting trust agreement was given to a lender, as
is required in a loan agreement, it is coupled with an
interest
o Can the voting trust agreement be coterminous with a loan?
Yes. It will remain until the loan has been paid; for
instance, 10 years.
o Is it revocable for a period of time?
No, because it is based on contract, unlike proxies
which are based on agency.
o Who receives dividends?
The trustee, with obligation to turn over dividends to
the beneficial owner.
Derivative suits requisites?
o 1. Cause of action which calls for such remedy
If its covered by business judgment rule, cannot sue
There must be violation of the rights of the corporation
not just the private parties
The cause of action must benefit the corporation, and
not the particular stockholder bringing suit
o 2. Must be filed in the name of the corporation
Since the cause of action belongs to the corporation,
the corporation gets the damages that are awarded
o 3. Must be a SH when the offense was committed, but the acts
continued when he became one
o 4. Must have exhausted intra-corporate remedies
Unless excused
Ex. BOD of corporation granted its own directors
excessive compensation. No need to compel the BOD
to file a suit on behalf of the corporation since the
object of the suit is to nullify the BODs own acts. This
is futile.
o 5. No right of appraisal for the rights complained of
Contrast with other kinds of suits?
o Individual suit brought by the SH in his own name against the
corporation for a wrong directly inflicted on him
o Representative suit brought by SH in his own behalf and all
other SHs similarly situated when a wrong is inflicted on them as
a group
Nature of right to inspection?
o 1. SHs: to protect themselves
Must be exercised in his interest as SH for some
purpose germane to the corporations interest. But the
corporation has the burden of proof to contest GF.
o 2. Directors: broader, because they make decisions
o Remedies for refusal to allow inspection?
Mandamus
Criminal case
Damages
o Grounds to deny inspection?
1. Must improperly use information received before
118
2. Asking for trade secrets
3. No good faith
4. No valid purpose
Ex. bought one share just to inspect
o What is the rule for SHs of corporations with wholly-owned
subsidiaries?
Even if not a SH of the subsidiary, if consistent with
equity, GF, and fairness, the SH can inspect records of
the subsidiary
Appraisal rights:
o Any dissenting SH can ask to be bought out.
o When is there appraisal right?
1. Amendment affects the rights of SHs
2. Creating preferred shares
3. Shortening or extending corporate life
4. Increase authorized capital stock
5. Going into another line of business
6. Merger/consolidation
7. Corp. sells, leases, mortgages, encumbers, or
disposes all or substantially all of its assets
8. Close corporations (anytime)
o N.B. If the amendment does not affect the rights of SHs (ex.
change of corporate name), no appraisal rights.
o What is the rule for close corporations?
Can ask anytime to be bought out
o When can a SH be asked to be bought out?
Must have voted against the action, not for the action.
o When can the SH exercise right?
Within 30 days of the action
o What is the value of shares based on?
Value the day before the action was done. This is
because the action would inevitably change the value
of the shares.
What if they cannot decide on the value of the
shares within 60 days from the time the action was
taken?
Appraisal will be done
Pay within 30 days after award was made
Cost of appraisal borne by corporation. But if
the value offered is close to the value offered
by the corporation, then the SH will bear the
cost because it was close to the amount
offered by the corporation.
o SH cannot be paid unless there are unrestricted retained
earnings, otherwise you violate the Trust Fund doctrine.
Exception?
119
For close corporations, where even if there
are no UREs he can ask to be bought out.
o What is the effect of appraisal?
The SH will lose all his rights, except to receive
payment
o When will his right to be paid cease?
1. Demand for payment is withdrawn with consent of
corporation, or
2. Act he is protesting against is reversed or
disapproved by SEC, or
3. SEC says he is not entitled to appraisal rights
What is the effect of this?
His SH rights will be restored
o When will his SH rights be restored?
1. Any of the three above
2. The corp. fails to pay within 30 days
What are the obligations of SHs?
o 1. Liability to corporation for unpaid subscription
o 2. Liability to corporation for interest on unpaid subscription if
required by by-laws
o 3. Liability to creditors of corporation for unpaid subscription
o 4. Liability for watered stock
Solidary with corporate officers responsible
o 5. Liability for dividends unlawfully paid
o 6. Liability for failure to create corporation
Directors and officers
Powers of the corporation are vested where?
o Board
Can the president make a decision on behalf of the corporation,
without board authorization?
o No. It does not bind the corporation
o Islamic directory of the Phils: Acquired parcel of land. When
martial law was declared, the members of the Board fled to the
Middle East. A corrupt member of the board sold the land to
Iglesia. HELD: Invalid, because it was not the board that sold
to INC.
o A corporate officer cannot file a case for BP22. There must be
board authorization.
Requirements to be a director?
o 1.Must own at least 1 share of stock in his name in the STB
What if he is merely holding that as trustee?
He is still qualified.
The by-laws can require a bigger number (ex. 50K
shares for San Miguel)
The moment a SH ceases to hold even one share, he
automatically ceases to be a director
120
o 2. Majority of directors must be Philippine residents
o 3. Independent directors
Required for banks (at least 2) and listed companies
(either 2 or 20% of board, whichever is fewer)
o 4. Not disqualified:
A. Criminal offense punishable by more than 6 years
B. Or violation of Corp. Code 5 years prior to election
C. Public officials, appointed or elected, cannot serve
in BOD of non-rural banks
Directors must be elected every year among the SHs of the
corporation. At what point must the director be a SH, at point of
nomination or assumption of office?
o There are conflicting decisions in US jurisprudence (some say
when nominated, some say upon assumption of office). Majority
view: enough when he assumes office.
o JJ believes that the minority rule must prevail The provision
says that they must be elected from among the holders of stock.
So he must be a SH at time of election.
There are two devises peculiar to election of directors:
o 1. Proxy voting
A person need not be personally present to vote; can
just give written proxy.
Even if his shares have not been fully paid, as long as
not delinquent
o 2. Cumulative voting
If someone holds multiple shares, he can cast all those
votes for one person (ex. 1,000 shares 1,000 votes
in favor of one person)
o Can the board pass a resolution prohibiting proxy voting
and cumulative voting?
No. Its provided by law as mechanisms to allow
minority SHs to win positions as directors.
What if shares are delinquent?
o Not allowed to vote
How may a director be removed?
o 2/3 vote of SHs (or members if non-stock)
o In what kind of meeting?
At regular or special meeting, but the notice must
specifically state removal of the officer will be taken up
o What if its not mentioned?
Cannot be taken up
Who are the directors that cannot be removed without cause?
o 1. Director representing minority of SHs
o 2. Independent directors (as required by law either 2
independent directors or 20% of the board, whichever is less)
The law mentions conviction as a DQ for becoming a member of the
board. Can the By laws add other qualifications?
o Yes.
121
o For instance, providing that SHs holding shares in rival
companies cannot run for the board.
Term of office of directors?
o Usually one year.
o But if the annual meeting is delayed, they remain in hold-over
capacity until successors are elected.
How are vacancies filled? (CLV DISCUSSION)
o 1. Special vote by majority of directors
Assuming they still compose a quorum
o 2. General or special meeting of SHs
This is required when the remaining directors do not
compose a quorum anymore
o 3. If vacancy is due to increase in seats must be through
election by SHs
o What is the term of the replacement?
Only the unexpired term of the one replaced
Do they get compensation?
o None, except:
1, If the by-laws provide
2. Reasonable per diems.
o Who fixes the compensation?
SHs, not directors; otherwise, there would be conflict of
interest
SHs can give directors performance bonus.
o Is there a limit to director compensation?
The total yearly compensation of the directors cannot
exceed 10% of the income prior to tax.
o What about officers?
The prohibitions re: compensation do not apply to them
because they perform services beyond the ordinary
duties of a director
Special qualifications of officers:
o President must be director
o Sec must be resident of Philippines and a citizen
o Treasurer need not be a director
Can an officer occupy two or more positions?
o Yes.
o Exceptions:
1. President cannot be the same as treasurer
2. President cannot be the same as secretary
o Because there are some requirements that require assent of
President and treasurer/secretary as check and balance.
There were two separate conflicting lists of officers shown. Which
wins out?
o The ones mentioned in the General Information Sheet win out
because its required to be filed with the SEC.
122
What is the business judgment rule?
o Courts will not set aside decisions/resolutions of officers of the
corporation unless there is bad faith or illegality or gross
negligence
o Courts will not second guess the wisdom of the officers even if
there are losses
Differentiate treatment of officers from non-officers?
o 1. Officers are hired or fired by the BOD in exercise of business
judgment. Non-officers are protected by security of tenure.
o 2. Officers are subject to common law duties of loyalty and
diligence. Non-officers are not bound by these.
When can officers be held personally liable?
o 1a. Assented to patently unlawful act of corporation
Ex. approved bribe
o 1b. Bad faith
Ex. fired a manager who was instituting reforms to
prevent shenanigans bad faith
Ex. cooked the books of account to pretend losses, to
justify retrenchment
o 1c. Gross negligence
o 1d. Conflict of interest
o 2. Issued watered stock or being aware of this, did not object to
the corporate secretary.
o 3. Bound oneself solidarily to the obligations of the corporation
o 4. By provision of law
Examples of bad faith:
o Did not remit SSS collections
o A director acquired interest adverse to the corporation
o Director received kickback from contractors
o Grabbed corporate opportunity (ex. the director bought a goods
up for sale which is in the line of business of the company which
he works in)
What is the duty of loyalty?
o The Doctrine of corporate opportunity. Directors or Trustees
who acquire personal or pecuniary interest in conflict with their
duty as director are liable solidarily for damages.
o Officer X acquires interest adverse to corporation. What are
his responsibilities?
1. Liable for all damages to the corporation
2. Compensate for all lost potential profits
CANNOT be waived/ratified
o Officer Y by virtue of his office acquires a business
opportunity for himself which should belong to the
corporation. What are his responsibilities?
1. Account all profits to the corporation
2. Refund profits that would have accrued to the
corporation
o Which can be waived or ratified?
123
Adverse interest cannot be ratified or waived by the
SHs
Business opportunity can be ratified by 2/3 of the
outstanding capital stock
What is the nature of contracts of the corporation with its own
directors and officers?
o They are voidable. The corporation has the exclusive right to
annul the contract.
o When will it be not voidable?
1. Presence of the director must not be needed for
quorum
2. His vote was not be needed to approve the contract
3. The contract was fair and reasonable
It must be an arms-length transaction
4. If the party is an officer, prior authorization of the
BOD
o What is the effect of the first two defects?
Can be ratified by the SHs in a meeting with full
disclosure.
What about contracts between corporations with interlocking
directors?
o They are not per se prohibited.
o But if a director has substantial interest in one and minimal in
another, he would be tempted to favor the first.
When is there substantial interest?
When his equity exceeds 20%.
o What is the effect if a director has substantial interest in
one and minimal in the other corporation?
1. Presence of director must not be needed for quorum
2. His vote was not needed to approve the contract
N.B. these are the same first two requirements as in
self-dealing directors
What is an executive committee?
o By laws can provide for it, composed of at least 3 members of
the BOD.
N.B. They must be directors.
o What powers are delegated?
The BOD must specify what powers are delegated.
The BOD cannot just make a blanket delegation of its
powers to the Ex Com.
o What cannot be delegated?
1. Matters requiring SH approval
2. Filling vacancies in the board
3. Amending/repealing by-laws
4. Amending/repealing board resolution which by its
express terms cannot be amended/repealed
124
5. Declaration of stock dividends
o What is the power of the board over resolutions of the Ex
Com?
BOD can approve or revoke it.
What is the exception?
When rights of third parties are involved.
Ex. A third party entered into a K with the Ex
Com, relying in good faith on the power of the
Ex Com to enter into contracts.
Powers are vested on the board. An officer acting alone cannot
bind the board. What is the exception?
o Ratification by the authority who should have performed that act.
What is the general scope of powers of the officers of a
corporation?
o Can operate without authorization on the usual course of
business, or administrative matters
o Ex. Insurance company can sell insurance even without board
resolution
Capital affairs
What are the requisites to issue a certificate of stock (COS)?
o 1. Signed by the P/VP and countersigned by the secretary/asst.
secretary
o 2. Delivery of the COS
o 3. Pay par value of the shares (or entire value if no par value)
o 4. Original certificate surrendered, if the shares are being
transferred
What are the remedies of the SH when the corporation refuses to
issue a COS?
o 1. Specific performance
o 2. Damages if specific performance not granted
o 3. Mandamus to compel issuance of COS
o 4. Rescind the subscription contract
What is the nature of the duty to issue a COS?
o It is ministerial , so even if there is a case filed, the buyer must
be given a certificate
What are the unpaid claims contemplated by the law?
o Payment for subscription, not unpaid claims for monthly dues
When is the COS issued?
o No certificate will be issued until full amount paid
What is the nature of a subscription contract?
o It is indivisible.
o If somebody has not yet paid full subscription, he cannot assign
part of the shares; it is all or nothing
o If he sells all the shares, it is a novation of contract, with a
substitution of debtor.
So you need corporations consent.
125
The buyer becomes the debtor for the unpaid balance.
What is the nature of shares of stock?
o Quasi-negotiable. Just like N.I., endorse at the back and
deliver. All transfer of shares are valid just between the parties
until registered in the STB.
o No need to execute separate deed of sale or assignment,
because they are quasi-negotiable.
o If there is a deed of sale which is a public document, it is akin to
delivery even if the stock certificate is not itself delivered (as in
usual rule in Sales Law).
How does one sell shares?
o 1. He must Sign AND deliver the COS; and
Mere signing without delivery no sale
o 2. Have transaction recorded in the STB
What if there is a conflict between the Stock and Transfer Book and
the AOI?
o The AOI wins. The AOI is the basic contract between the SHs
and the corporation, while the STB is merely kept for
convenience.
Who may post in the STB?
o The president cannot post the entries, it must be the Secretary.
o If the secretary refuses, compel performance, but one cannot
record the entries himself.
What are the allowable restrictions in sale of shares?
o Procedural : Restriction must appear in the AOI, BL, and COS
o Substantive : Not more onerous than allowing the corporation to
purchase the shares of the transferring SH for reasonable terms
What if the seller of the COS is not the true owner?
o The buyer cannot get valid title.
o The first buyer, however, was given a fake COS. Effect?
None. The real owner cannot be deprived.
o What if the first buyer sold to a second buyer, signing and
delivering the fake COS?
The new buyer will be protected. Give her shares too.
The corporation runs after the seller for damages.
What is the exception?
When there are no more shares to issue. In
this case, the new buyer does not obtain any
shares, but can sue for damages.
Directors responsible for issuance of shares who issue watered-
down stocks and those who know about it and didnt give their
objections:
o Solidarily liable with the non-paying SH
If someone only paid part of the stocks, when must the rest be paid?
o 1. By provision
o 2. Upon call by the directors
o What is the nature of the call?
126
It must be uniform for all, not just for particular
persons.
o When is there interest payable?
Only if there is a provision
If there is no rate mentioned, just that interest must be
paid, apply the legal rate
What is the nature of the unpaid portion of the subscription?
o It is an asset of the corporation, and is thus a receivable
o What is the implication?
Creditors can run after these.
A. But first they have to sue the corporation,
and if unsatisfied, the creditors can sue SHs
on unpaid subscriptions.
B. If the corporation is insolvent, the SHs can
automatically be included as co-defendants.
If after 30 days of call there is no payment, what happens?
o 1. The shares become delinquent.
o 2. The directors can auction the shares
Personal notice sent through registered mail
Published in newspaper of GC for 2 weeks
o How can the SH prevent sale of the shares?
Pay unpaid dues, interest, and costs (for publication,
etc.)
o How is the bidding for the shares done?
There is a fixed price, but those willing to accept the
least amount of shares for the highest price get it.
o What if there are dividends before sale?
They will be applied to the unpaid dues.
o If the SH wants to question the sale, what are
prerequisites?
File case within 6 months from the date of sale
He must tender payment of unpaid dues and interest
What is the other option of the corporation, apart from auction of the
shares?
o Sue the SH in a collection case.
What is the remedy for a lost COS?
o 1. Owner submits affidavit of loss
o 2. Corporation verifies the affidavit and publishes notice in
newspaper of GC for 3 consecutive weeks at owners expense
o 3. After 1 year from publication, right to contest is barred and the
corporation can issue a new COS to the SH
o What if the applicant issues a bond to cover for damages?
The 1 year period is waived
o What if there is a contest of the application?
127
The corporation cannot issue COS until resolved
o What is the free and harmless clause?
If there is no bad faith or gross negligence, there can
be no action against the corporation for issuance of the
new certificate
o What if the corporation fails to comply with the procedure
above and just issues a new COS?
It is valid, but the corporation cannot avail of the free
and harmless clause
What is the rule on involuntary dealings with shares?
o A. Mortgage, if not covered by COS
Mortgage binding on third parties with notice
o B. Mortgage, if covered by COS
Register in the CM registry of both the domicile of the
owner and place of principal office of the corporation
No need to register if the COS was delivered
to the pledgee/mortgagee
No need to log in the STB
o C. Attachment or levy
Creditor must leave with the president or managing
agent a copy of the writ and a notice stating the stock
was attached
Priority rules:
o A. Two judgment creditors
Whoever serves writ first
o B. Judgment creditor v. mortgagee/pledgee
Whichever is first in service of writ v. registry in CM
registry
o C. Mortgagee/pledgee v. buyer/assignee
First between registry v. STB entry
o D. Judgment creditor v. buyer/assignee
First between service of writ v. STB entry
Dissolution and liquidation
When and how can a corporation voluntarily dissolve?
o 1. Vote of majority of BOD + 2/3 of OCS
What if dissolution will not prejudice any creditor?
1. Just need SEC approval
2. After 3 consecutive weeks publication in
newspaper of GC, dissolution takes effect
What if creditors are affected?
1. Petition filed and all the names of the
creditors will be mentioned.
2. Set for hearing, so if someone has
objections, he can oppose.
3. Order published in newspaper of GC for 3
consecutive weeks
128
4. SEC will decide w/n dissolution is proper
o 2. Amending the AOI, shortening corporate life
Fastest and simplest way
Who decides on dissolution?
o The SEC
o There must be a tax clearance first from the BIR before the SEC
dissolves a corporation (because this is the last chance to
recover taxes)
Involuntary dissolution:
o 1. Based on grounds provided in the Corp. Code (see above)
o 2. Violations of PD 902-A (SEC reorganization act see above
for some acts)
o 3. Quo Warranto
What are the specific grounds?
o 1. Does not commence business within 2 years from its
registration
o 2. Suspended transactions for 5 years
o 3. Failure to adopt and file BLs within required time
o 4. Offended provision of law for creation (or renewal)
o 5. Commission or omission of act deemed as surrender of
corporate rights
o 6. Misuse or right or privilege granted by law
o 7. Receiver recommended against continuation of business
o 8. Serious misrepresentation to public
o 9. Refusal to comply with SEC order leading to grave abuse of
franchise
o 10. Failure to file reports with SEC within prescribed period
What if the corporation claims that the economy was depressed and
there was no demand for its goods; thus, there was no business?
o Even so, it has to file an ITR and the general information sheet,
even if not operating.
Is dissolution automatic?
o No, the SEC determines the cause first.
Can a minority stockholder file a dissolution case?
o Yes.
o For what grounds?
1. Majority is mismanaging assets
2. Dissipating its assets
3. Fraudulently disposing its properties
o Can a receiver be appointed in an action for involuntary
dissolution?
Yes.
N.B. You do not dissolve a corporation for every single minor infraction.
This is like the death penalty for corporations.
129
o Ex. do not dissolve a company just because one employee does
not wear an ID
o Ex. but you can dissolve a corporation that engages in banking
without authorization from the Monetary Board because it harms
public interest
Where is the dissolution case filed?
o SEC, not RTC
Three ways of providing for mechanics for dissolution:
o 1. Directors themselves can take care of winding up
o 2. Appoint trustee to whom they assign assets of the
corporation; will acquire legal title over properties of corporation
to pay off creditors and distributing the residue to SH
N.B. Three year period does not count anymore if this
option is chosen
o 3. Receiver appointed
What is the effect of dissolution on existing rights and obligations?
o It does not impair its rights and obligations
o Ex. Even if a corporation has been dissolved, it must still be paid
How long must winding up be?
o Three years from the time SEC approved dissolution
What can the corporation do and not do during this period?
o It can only wind up its affairs disposing its properties. It cannot
for example renew a contract of lease. It must not pertain to
acts of that of a going concern.
Will corporate dissolution abate any ongoing case against or filed
by the corporation not finished within the three year period?
o Yes, under the old rule.
o This now only applies if:
1. The directors are in charge of winding up (option 1)
2. Receivership (option 3)
But not if under trusteeship (option 2), because suit
can be filed against the trustee provided the
prescriptive period has not lapse. The trust will last
until the affairs have been wound up.
o What is the common practice now for the cases that are still
pending before the three years end?
Appoint a trustee. The lawyer handling the case is
often constituted as the trustee himself. Sometimes,
its the directors themselves that are the trustees.
Non-stock/non-profit
What are the characteristics of NSNP corporations?
o 1. No shares of stock
o 2. Not be authorized to declare dividends
As indicated in the by-laws or AOI
Only exception: distribution as a consequence of
dissolution
o 3. Eleemosynary purpose
130
For what purposes may a NSNP corporation be organized?
o 1. Charitable
o 2. Religious order, to manage its properties
o 3. Educational
o 4. Others: professional associations, cultural, fraternal, literary,
scientific, social, civic service, similar purpose like chambers of
commerce
What is the rule on the right to vote?
o By default, each member may vote
o Unless limited, broadened, or denied in the AOI or BLs
o For stock corporations, even non-voting shares vote for
certain transactions. Does this rule apply to NSNP?
No. They can even be denied voting rights for these
fundamental issues, unlike in stock corporations.
o NSNP corporations can make classifications of members.
Example:
Golf and country clubs for instance have honorary
members. But usually associate and honorary
members do not have voting rights, just playing rights.
What are the peculiar rules in proxy voting?
o Can be allowed to vote by e-mail or similar means.
o Membership is not transferred in proxies.
Ex. X is a member of a golf and country club. He died.
His son Y inherits his shares. He does not
automatically become a member. He has to be
approved first. But he has proprietary rights, so he can
sell it, pledge it, etc.
What is the policy in elections of the board?
o 1. There can be more than 15 directors
Purpose: to broaden representation
o 2. By default, the voting is staggered, 1/3 of positions are voted
for every year (for policy continuation)
N.B. But you can also provide that everybody will be
elected every year or any other system
How are assets distributed upon dissolution?
o 1. Pay all liabilities and obligations of the corporation
o 2. Return all assets held by corporation with resolutory condition
of dissolution
o 3. Transfer assets received by the corporation subject to
limitations of usage for eleemosynary purposes to organizations
with similar purpose
o 4. Other assets distributed according to BLs or AOI, or follow
plan of distribution
Can a NSNP corporation be converted to a stock corporation
through amendment of AOI?
o No, because this is tantamount to distribution of profits to the
members. You have dissolve the NSNP corporation first.
Close corporations
Why are close corporations important?
131
o Most corporations in the Philippines are family corporations.
What is the definition of a close corporation? What are the features
that make up a close corporation?
o 1. AOI provides there are at most 20 SHs and none more
o 2. There are restrictions on transfers
Ex. before a SH sells shares, he must ask permission
from the other SHs
Usually it provides too that if none of the SHs are
willing to buy the shares, it must be offered to the
corporation itself
o 3. Prohibition on listing shares in the stock market
o 4. Articles may provide for classification of shares
Ex. If there are three brothers, there can be class A, B,
and C shares one for each brother and his family, to
ensure that each has equal ownership; can only hold
shares of the class pertaining to his family
o 5. Can provide for higher quorum or voting requirements
o 6. Can agree that the SHs manage the corporation and not the
directors
In this case, the SHs have powers, duties, obligations
of directors
Which corporations are not allowed to be close corporations?
o Those vested with public interest.
o Specifically:
1. Mining companies, oil companies
2. Stock exchanges, banks, insurance companies
3. Public utilities
4. Schools
How can the restrictions on transfers bind third parties?
o 1. Must appear in AOI, and
o 2. Must also appear in BLs, and
o 3. Must also appear at the back of the COS
Whats the effect of pre-incorporation agreements?
o They remain binding even after incorporation
o Ex. a pre-agreement that the president comes from Family A,
the treasurer from Family B, etc.
When are board meeting not necessary?
o Board meetings not necessary if everyone signs or SHs know
that the board members were signing minutes without a meeting
and they did not object.
What is the nature of the preemptive right?
o Covers ALL issuances of stock.
o There is right of pre-emption even if debt is being converted to
equity.
What is required for amendment of AOI?
132
o If the amendment seeks to delete any provision required by the
title on Close Corporations or reduce quorum/voting requirement
not valid or effective unless there is 2/3 vote of OCS (all, even
those with no voting rights), or a higher proportion of votes if
required by AOI.
What are the remedies that may be done by SEC in case of deadlock
in close corporations?
o 1. Amend/alter provision in the AOI that causes the deadlock
o 2. Alter, prohibit, or cancel any resolution or action of the
corporation, board, SHs, or officers
o 3. Require the purchase of the shares of a SH even if there are
no unrestricted retained earnings
o 4. Appoint a provisional director as tiebreaker
o 5. For extreme cases, dissolving the corporation
Educational corporations
How many trustees must be there?
o Always multiples of five (5, 10, 15, etc.)
How long must their terms be?
o Five years
o Every year, only 1/5 is elected to provide for continuity
o But can there be contrary stipulations as to term and
elections of trustees?
Yes.
Religious corporations
How can a religious organization administer its properties?
o 1. NSNP corporation
o 2. Corporation sole
One person only: ex. the Archbishop
o 3. Religious aggregate or society
How does a corporation sole come about?
o 1. File affidavit with the SEC, stating that:
A. the affiant is the head of a religious sect and would
want to be corporation sole
B. His religion allows him to incorporate as a
corporation sole
C. He is charged with administration of properties
o 2. Submit the following:
A. Inventory
B. Manner for choosing successor
C. Where he will hold office
Can the archbishop be a foreigner and hold land?
o Yes. He is actually just administering it, and the property really
belongs to the faithful.
What if the corporation sole wants to dispose property?
133
o He must get authorization from RTC unless his religion allows
him to dispose or mortgage real property
What is the nature of a religious aggregate or society?
o Incorporated to manage its properties.
o The articles provide that members constitute a religious society
and at least 2/3 of members have agreed to incorporate.
Foreign corporations
What is a foreign corporation?
o 1. One formed, organized, existing under laws other than those
of the Philippines
o 2. AND whose laws allow Philippine corporations to do business
there
What is the effect of a foreign corporation having no license and
doing business?
o It cannot sue.
o If its not doing business, and has no license: can sue.
What is required to do business here:
o Must appoint resident agent to receive summonses for the
corporation
Resident agent required to be in good financial
standing
o What else must it do?
To say that if it has no resident agent, summonses
may be served to the SEC
Also, any officer in the Philippines may be served with
summons
X is a foreign corporation with no license. It entered into a contract
with another corporation, which breached the contract. X got a
license, and then it sued. The other corporation said that the
contract is void. Valid?
o The contract is valid; the only effect is that there is no power to
sue for the foreign corp. Here, it can sue.
How can you sue a corporation not doing business here and also
without a license?
o Make the action quasi in rem by attaching its property to obtain
jurisdiction over it.
What if the corporation is doing business and is not licensed and
the other party was aware of it?
o Then it cannot have the case dismissed because the other party
benefited from the contract.
When is it considered doing business?
o 1. There must be habituality. Transactions must not be isolated.
If the corporation is just buying here, its not doing
business because there is no profit from buying
Except isolated transactions that indicate intent to
habitually do business is doing business. Ex. renting
out a space for lease and sending officers here.
o 2. Substantial portion of the business of the primary purpose of
the corporation
If a shipping company goes here and hires a cook,
thats not doing business because its not as
134
substantial portion of its business of the primary
purpose
o 3. Contract consummated in the Philippines
If the contract is consummated abroad then the foreign
corporation is not doing business here
Foreign investments act has a definition of what is doing business.
The definition includes:
o 1. Soliciting orders
Even if its isolated transaction, as long as its
indicative of doing business
o 2. Service contracts
o 3. Opening offices
Whether liaison office or branch
o 4. Appointing representatives or distributors who are either
Domiciled here
Or staying here for at least 180 days
o 5. Participating in management, supervision, or control of any
domestic business, firm, entity, or corporation here
o 6. Any other acts implying continuity of dealings/operations here
What doing business under FIA does not include:
o 1. Mere investment of a foreign entity in a local entity or exercise
of rights as investor
o 2. Having nominee officer or director to represent its interests in
that local corporation
o 3. Having a distributor or representative doing business in its
own name
What are the grounds to revoke a license?
o 1. Failure to file annual report or pay fees
o 2. Failure to appoint or maintain a resident agent
o 3. Failure to submit to SEC notice of change of resident agent or
address
o 4. Failure to submit to SEC notice of amendment of AOI or by-
laws or articles of mergers/consideration
o 5. Misrepresentation of material matter
o 6. Failure to pay taxes or fees due to the Government
o 7. Transacting business outside of purpose clause
o 8. Transacting business as agent of foreign corporation not
licensed to do business here
o 9. Any other ground that would render it unfit to do business
here
Merger and consolidation
What is a merger, and what is a consolidation?
o Merger one corporation absorbed by another
o Consolidation combine to form a new corporation
What is the procedure?
135
o 1. Plan for merger or consolidation drafted by each corporations
BOD
Approved by majority of BOD and at least 2/3 of OCS
Any amendment subject to same voting requirement
o 2. Articles of merger or consolidation executed by each
corporation, signed by P or VP and certified by Sec/Asst. Sec,
setting forth:
A. Plan of merger or consolidation
B. For stock corporation, the number of outstanding
shares, and for non stock, the number of members
C. The result of voting
o 3. Four copies of Articles submitted to SEC for approval
For special corporations, must have approval of the
designated government agency as well (ex. banks)
Can dissenting SHs exercise appraisal right?
o Yes.
When does merger or consolidation take place?
o Upon SEC approval
What is the effect of merger or consolidation?
o 1. The separate existence of the absorbed corporation will
cease to exist
o 2. Acquire rights, portfolio of business, and assume liabilities of
the absorbed corporations
o Is it bound to absorb the employees?
No, as long as it is done in GF. The decision to retain
employees is within legitimate sphere of management
prerogative.
XYZ corp issued a PN to D. XYZ was then absorbed by ABC. D then
sought to enforce the PN against ABC. Is it liable, even if the PN
was in XYZs name?
o Yes. ABC assumed XYZs liabilities.
Laws on confidentiality of bank transactions (RA 1405)
What is the purpose of this law?
o To encourage people to deposit in banks and avoid private
hoarding
What is secrecy of bank deposits?
o Bank deposits and investment in bonds issued by the
government are confidential
o The very existence of the account is confidential
Who are covered by the prohibition under law?
o Prohibition against giving details is only limited to bank officers
and employees. So this prohibition does not cover private
persons.
What deposits are covered?
o 1. ALL DEPOSITS OF WHATEVER NATURE, with banks or
banking institutions
136
o 2. Investments in bonds issued by the Philippine Government,
its subdivisions and instrumentalities
Does this law cover trust accounts?
o Yes.
o The law says that deposits of whatever kind or nature are
covered by this law. So concept of deposit is not limited to
savings, time, or current deposits.
Exceptions?
o 1. Depositor gave written consent
o 2. If a bank officer or SH will borrow money from his own bank,
hes required to waive secrecy of bank deposits
o 3. Examination in an impeachment case
o 4. When there is an order from the court in cases of bribery or
dereliction of duty
o 5. When the money/bank account is the subject matter of the
litigation
Even if it is no longer in the possession of the
defendant
Ex. in a case, the money was transferred from account
to account to make it difficult to trace
Ex. To settle the estate of the deceased (in Special
Proceedings)
Contra: X sold treasury bills to Y for a sum of money.
X refused to deliver the bills. Y sued for specific
performance. Y then wanted to examine the bank
account of X.
HELD: This is NOT covered by this exception
because the account is not the subject matter
of litigation.
o 6. Under the AMLA, the AMLC can inquire into deposits where
there is probable case of money laundering (some requiring
court order, some not see discussion of AMLA), or if there are
covered or suspicious transactions
o 7. Under the HSA, Anti-terror council can apply with CA for
authority to examine deposits upon probable cause of
commission of terrorism/conspiracy
o 8. Under the NIRC, the CIR can examine bank deposits if:
1. The depositor died, to check net estate
2. Taxpayer applied for compromise of tax liability on
ground that he is in no financial position to pay
3. Upon the request of information from the foreign tax
authority pursuant to an international convention or
agreement to which the Philippines is party
o 9. The PDIC may examine deposits in case of findings that
banks engage in unsafe or unsound bank practices
o 10. Under the Unclaimed Balances Act, disclosure to the
Treasurer of the Philippines of dormant deposits of at least 10
years
Gangcaico: The OMB Law provides that the OMB can inquire into bank
deposits during investigation. This was the old doctrine. But in this case
it was reversed. Requisites now before OMB can examine:
o 1. There must be a case in court already
o 2. The account must be clearly identified
137
o 3. Inspection covers only the account identified
o 4. Bank employees and owner are notified
Is there a violation of secrecy of bank deposits if the account is
garnished?
o No, there is none. Bank accounts can still be garnished. The
amount is not actually disclosed.
Foreign Currency Deposits Act
o Foreign deposits are exempt from examination
o And also exempt from garnishment
BUT see exception below, in the rape case
Judgment was rendered against a foreign national
who raped a Filipino child. He escaped. The only
source of money he had was a foreign currency
deposit with Chinabank. The bank argued it
cannot be garnished. HELD:
It can be garnished. The FCDA was for the
purposes of encouraging investment, which
this situation does not fall under.
o Only one exception under the FCDA itself:
Depositor gave written consent
o Which exceptions under other laws apply to FCDA?
1. AMLA exceptions
2. HSA exceptions
3. NIRC exceptions
o Who can inquire?
1. PDIC
2. AMLC
N.B. But not the Anti-terrorism council because the law
forgot to provide for it
General Banking Law:
o There is secrecy of bank transactions. No officer or employee
may disclose information about funds or property belonging to
private individuals without court order. This covers all funds and
property, unlike FCDA.
o It covers even safety deposit boxes.
o It does not cover public officials accounts (ex. Clarissa Ocampo
during impeachment trial) requisites:
1. Funds belonged to public officer
2. It was disclosed to an official body (ex. Senate)
3. And it was by court processes
General Banking Law
Types, def ini t i on
What is the definition of banks?
o An entity engaged in lending funds obtained in the form of
deposits
o Receives money from the public and lends it out to them
138
o What is required?
Banks must be STOCK corporation with funds
obtained from the public
Public means that there must be at least 20
depositors
How are banks classified?
o 1. Universal banks
o 2. Commercial banks
o 3. Thrift banks (RA 7906 primary)
A. Savings and mortgage banks
B. Stock savings and loan associations
C. Private development banks
o 4. Rural banks (RA 7353 primary)
o 5. Cooperative banks (RA 6938)
o 6. Islamic banks (RA 6848)
What are the powers of a universal bank?
o 1. Everything commercial banks can do
o 2. Powers of an investment house
o 3. Power to invest in non-allied enterprises
What are the powers of a commercial bank, in addition to ordinary
powers?
o [Instruments]
o 1. Accepting and issuing LOC
o 2. Discounting and negotiating PNs, drafts, BOEs, and
evidences of debt
o 3. Accepting and creating demand deposits (checks and drafts)
o [Deposit, credit]
o 4. Receiving other types of deposits and deposit substitutes
o 5. Extending credit
o [Foreign exchange, securities]
o 6. Buying and selling foreign exchange, gold, and silver bullion
o 7. Acquiring marketable bonds and debt securities
What are thrift banks?
o Those that provide short-term working capital, medium-to-long
term financing to businesses engaged in agriculture, services,
industry, and housing, by
o 1. Accumulating savings of depositors and investing them
o 2. Capital loans secured by mortgages, bonds, CM, etc.
What are rural banks?
o Those that provide credit facilities to farmers and merchants, to
their cooperatives, people of rural communities
o Special rules:
1. Can have elective or appointive local officials serve
as director, officer, or consultant
2. Must have purely 100% Filipino equity
139
3. Cooperatives or corporations primarily organized to
hold equities in rural banks may be incorporators
What are cooperative banks?
o Those organized primarily to provide financial and credit
services to cooperatives
What are quasi-banks?
o Entities engaged in borrowing through deposit substitutes for the
purpose of relending or purchasing receivables/other obligations
o (Ex. money market placements)
What are trust entities?
o Trust entities are those authorized by the MB to act as trustee or
administrator of any trust, or hold property in trust or on deposit
for benefit/use of others.
o These funds and properties in trust must be kept separate from
those held under general banking functions.
Central Bank (CB) supervises bank operations.
o CB can examine companies where banks or quasi-banks have
controlling interest
o Nobody can engage in banking or quasi-banking without
Monetary Board authorization.
Shares, etc
What kind of shares can banks issue?
o Banks can only issue par-value shares so you can ensure it met
the minimum paid-up capital requirement.
Can banks acquire their own shares?
o No, unless given as security as loan.
o The bank has to dispose these shares within six months after it
got them.
What is the limit on ownership of shares?
o Unlike the former law, the GBL does not impose a limit on the
number of shares that can be owned by the same family or
related interest.
o Rules on family groups and related interests
What are family groups?
Stockholdings of individuals related to each
other within 4
th
degree of consanguinity or
affinity, legitimate or common law, are
considered family groups.
What are related interests?
Two or more corporations owned or controlled
by the same group of persons or family group
are related interests.
What is required?
The family group or related interests MUST
disclose such fact in all their transactions with
the bank.
o Foreign individuals and foreign non-bank corporations can only
own up to 40% of total voting shares of a local bank.
The restriction here refers to TOTAL equity
participation of foreigners in the bank
140
What is the test of foreign citizenship under this
rule?
Control test of majority stockholders, and not
place of incorporation
o Filipino individuals and domestic non-bank corporations can
only own up to 40% of the voting stock of a local bank.
The restriction here refers to individual equity
participation of non-bank domestic corporations
o Foreign banks
Up to 60% equity of domestic banks (see discussion
immediately below)
Equity investments of universal banks in financial allied enterprises:
o Universal bank can own up to 100% equity of a thrift bank, rural
bank, or financial allied enterprise
o Universal or commercial bank can own up to 100% voting stock
of only one other universal or commercial bank.
Type of shareholder Limitation on shares
Family groups, related interests Unlimited, but must disclose
Foreign individuals and non-bank
foreign corporations
40% of total voting shares of local
bank
Filipino individuals and domestic non-
ban k corporations
40% individual equity
Foreign banks 60% equity of domestic banks
Universal bank 100% equity of thrift bank, rural bank,
or financial allied enterprise
100% equity of only one other
universal or commercial bank
Commercial bank 100% equity of only one other
universal or commercial bank
What are the three modes of entry for foreign banks in the
Philippines?
o 1. Acquiring up to 60% of an existing domestic bank
o 2. Investing up to 60% of a new banking subsidiary incorporated
under Philippine laws
o 3. Establishing branches with full banking authority
o What is common among the three?
Need MB approval
o What is the extent of their powers?
Same functions and privileges as a Philippine bank of
the same category
o When is a head office guarantee required?
Only for establishment of branches (mode 3)
Requirements on directors?
o 5-15
o At least 2 must be independent not connected with the bank,
its subsidiaries, or affiliates
o What if there are bank mergers?
Can have up to 21.
Appointive or elective official limits?
o Cannot work in a bank, whether part or full time.
o Exceptions?
141
1.Incidental to financial assistance (ex. PDIC gave
financial assistance; can require that an officer sit as
trustee in that companys law)
2. Provided by existing laws (ex. DBP is required to
invest in all rural banks, so they can have people sit in
the boards)
How can meetings be conducted?
o Can conduct meetings by teleconference or video conference.
Rule on banks and their branches:
o Universal and commercial banks may open branches in the
Philippines or abroad with prior approval by the CB.
o A bank and its branches shall be treated as one unit.
Powers of banks
Special powers of commercial banks (and universal)?
o Commercial banks automatically have the power to engage in
quasi-banking.
o Can automatically accept opening of current accounts
Unlike other banks (e.g. saving and mortgage or thrift
banks) which can accept current accounts, only with
special authorization from Monetary Board.
o Commercial banks can invest in allied enterprises, subject to
MB approval.
N.B. For universal, even non-allied enterprises
Universal banks:
o Universal banks may act as an investment house
o But universal banks HAVE TO list shares in the stock market
What is the nature of deposits?
o They are in the nature of simple loans. Thus, the bank is the
debtor, and the depositor is the creditor.
o Thus, the bank can make use as its own the money deposited.
The money is not held in trust or for safekeeping.
o Third persons may not have a right to the money deposited
unless there is court order for garnishment. The debtor-creditor
relationship is between the bank and the depositor, and not third
persons.
o Officers are not liable for estafa if they used the money
deposited or failed to return the amount.
o Does right to compensation exist?
Yes. The bank can set-off indebtedness of the
depositor with deposits, if the requisites apply.
BUT the bank must inform the depositor prior to such
set-off.
What is the degree of diligence required to be exercised by banks?
o Extraordinary diligence in the handling of deposits
o What about deposit substitutes (ex. money market
placements)?
Just ordinary diligence
o What are essential for a bank to be a mortgagee in GF?
142
1. Ascertain mortgagors title or ownership of the
property mortgaged
2. Check both duplicate original title of the property and
the title in the ROD
3. Conduct ocular inspection of the property if there is
something which would arouse suspicion and require
an ocular inspection
Single Borrowers Limit (SBL) the law limits this to 20% of net worth
of the bank to a single borrower
o The MB has discretion to raise this
o In computing this, if the loan is secured with treasury bills or CB
bills, bills of lading, trust receipts, and other readily-marketable
goods the ceiling can be increased by 10%
o Who are included in the calculated of SBL?
Loan to corporation where the SB has majority interest,
subsidiaries of a corporation, members of a
partnership/association
o What is not included?
1. Loans that are secured by obligations of the BSP or
the government
2. Loans covered by assignment of deposits
maintained in the lending bank and held in the
Philippines
3. Loans under LOC to extent covered by the margin
deposits (security deposit by a customer with a broker
for futures or option contracts)
4. Other non-risk items as specified by the MB
DOSRI loans (bank exposure to Directors, Officers, Stockholders and
Related Interests)
o What are requisites to be covered under the DOSRI rule?
1. Borrower is a director, officer, stockholder, or has
related interest
2. He contracts a loan or any form of financial
accommodation
3. The loan or accommodation is from:
a) his bank,
b) a bank that is a subsidiary of a bank
holding company [and both his bank and
lending bank are subsidiaries],
c) a bank in which controlling proportion of
shares is owned by the same interest that
owns a controlling proportion of shares of his
bank
4. The loan or financial accommodation is in excess of
5% of capital and surplus of the lending bank or in the
maximum amount allowed by law, whichever is lower
o Generally, DOSRI transactions are allowed, however, what
restrictions must be complied with?
1. Procedural: Approved by majority of the directors
excluding the director concerned
2. Terms must be arms-length
3. Limits on amount that would be lent
143
Loan must be limited also to amount
equivalent to his encumbered deposits and
book value of their paid-in capital contribution
to the bank
o N.B. so, not just his deposits but
also his paid-in capital contribution
When does an individual ceiling not
apply?
o 1. Fringe benefits extended by the
bank to officers
o 2. Loans by cooperative banks to
members
o 3. Secured by collateral which MB
considers as non-risk items
4. Aggregate ceiling
The MB may regulate amount of loans,
credits, accommodations extended to
DOSRIs, including bank investment in their
enterprises.
Current Manual for Regulation of Banks
provision sets ceilings:
o 15% of total loan portfolio of bank
o 100% of combined capital accounts
o Whichever is lower
5. Reportorial requirement: approval of the loan must
be entered in bank records and a copy of the entry
transmitted to the Supervising and Examination Sector
of the BSP
Value of collaterals?
o If secured by REM up to 75% of value of property
o 60% of the improvements
o CM 75%
Statement of purpose:
o When a borrower loans money from a bank, he must state his
purpose for doing so
o If he diverts it for some other reason, the bank may demand
immediate payment
Foreclosure:
o Check special laws on banks foreclosure [already know this]
Note that the purchaser in the auction sale, whether
judicial or extra-judicial shall have the right to enter
upon and take possession of the property immediately
after the date of the confirmation of the auction sale
o If the property will be redeemed, the mortgagor must pay
amounts due on the mortgage. Ex. there are two loans secured
by the REM, and the 2
nd
loan became due during redemption
period, he must pay both.
Total investment in real estate, including equipment for use by the
bank:
o 1. Cannot exceed 50% of capital
o 2. If it acquires real property it must be disposed within 5 years
144
Is it valid to stipulate that the bank will not be liable for losses of
property in the safety deposit box?
o This is void. This is a bailment and this is part of the nature of
the obligation.
o Stipulation that a bank is not liable for delay in wire-transfer is
similarly void.
Can a bank engage in insurance?
o No.
o But the bank can sell insurance policies if the insurance
company is a subsidiary or affiliate of the bank.
Prohibitions
Prohibitions against officers or employees:
o 1. Making false records of transactions affecting the operations
of the bank
o 2. Disclosing bank deposits to unauthorized persons without
prior court authorization
o 3. Overvaluing securities
o 4. Accept gifts or fees to approve a loan
o 5. Outsourcing inherent bank functions
Ex. lending and accepting deposits
o 6. Employing employees with lengthy probationary periods
Cannot do the usual S.M. practice for bank tellers
(replacing them every 5 months or so)
o 7. Engaging in unsafe or unsound banking practice:
A. material loss/damage or abnormal risk/danger to
institution
B. same, to depositors, creditors, investors, SH, public
in general
C. undue injury or unwarranted benefits through
manifest partiality, evident BF, or gross negligence
D. manifestly and grossly disadvantageous to the bank
(w/n the officer or director profits)
o 8. Declaring dividends:
A. that are greater than accumulated net profits
B. if its clearing account with BSP is overdrawn
C. deficient in required liquidity floor for government
deposits for 5 days or more
D. does not comply with liquidity standards/ratios
E. committed major violation as prescribed by BSP
An urban bank was closed, and that some favored clientele received
advance warning so they could take out their loans. Is there a
violation?
o Yes, this was an act that caused unwarranted benefit to parties
due to partiality, bad faith, etc.
Head office guarantees prompt payment by its Philippine branches.
Banco Filipino: SC appointed judge Cosico to receive evidence and he
made a finding that Banco Filipino (BF) must be closed. The sc issued a
resolution that these hearings were not thorough, so they appointed
Judge Ynares. Ynares said BF was solvent and had 1B in assets. The
closure violated due process because the bank was closed before the
145
investigation was finished. The law was then changed saying that a bank
may be closed before completing examination.
BPI family bank had three depositors. A deposited a check issued by B.
The money inside Bs account came from an authorization allegedly
signed by C to debit his account and transfer the amount to B. Depositor
C claimed it was forged so the bank debited the account of A, because
the money was eventually credited to him. HELD: Wrong, because
money was the medium of exchange. Money is money, and no evidence
of title is required to transfer.
o Ex. A robber held up passengers in a jeepney and went to a
department store to buy clothes using the money. The victims
cannot claim the money back from the store. This the analogy of
the SCs reasoning.
Senator Villar floated bonds abroad in dollars and started Camella
Homes. There were talks that Ayala will start a joint venture with
Camella. A customer asked to invest her funds in the long term
commercial papers of Camella homes. But Ayala did not push through
with the JV. The long term papers plunged in value, so the customer lost
money. The customer sued the bank. HELD: The customer bears the
risks because she gave the instructions to the bank. She cannot blame
the bank for her bad investment decision.
Central Bank Act (RA 7653)
What are the State policies?
o 1. State maintains a central monetary authority that functions
and operates as an independent and accountable body
corporate in discharging mandated responsibilities re: money,
banking, and credit.
o 2. BSP is a GOCC that enjoys fiscal and administrative
autonomy.
Creation of the Bangko Sentral ng Pilipinas (BSP):
o It is the central monetary authority mentioned above
What is the responsibility and primary objective of the BSP?
o 1. Provide policy directions in areas of money, banking, and
credit.
o 2. Supervise operations of banks
o 3. Exercise regulatory powers over finance companies and
quasi-banks and those performing quasi-banking functions
What is the Monetary Board (MB)?
o It exercises the powers and functions of the BSP
o It is composed of 7 members, appointed by the President for 6-
year terms:
1. Governor of BSP (treated as department head
subject to CONA confirmation)
2. Cabinet member designated by President
3. 5 from private sector (staggered terms)
How does the Monetary Board (MB) act?
o It needs 4 votes to approve any decision
o In case of emergency, the governor with 2 concurring
members of the board can act on any matter requiring MB
decision
But have to report to the President and Congress
within 72 hours
What steps can the MB take when the bank is under distress?
146
o 1. Place it under conservatorship
When the bank is having liquidity problems
What are the powers of the conservator?
1. Take charge of assets, liabilities, and
management thereof
2. Reorganize the management of the bank
3. Collect all monies and debts due the bank
4. Exercise all powers necessary to restore
viability
5. Can overrule the decisions of the bank
officers/directors when it will prejudice the
bank
o To what power does this apply?
Only to defective contracts
o Can it apply to valid contracts?
No. This will impair
freedom of contracts
How long can conservatorship last?
1 year. Afterwards, it will be determined if it
can survive
When is conservatorship terminated?
1. MB is satisfied the institution can operate
on its own and conservatorship is no longer
necessary
2. Continuance of business will involve
probable loss to depositors or creditors
move on to receivership/liquidation (see next
part)
o 2. Receivership
Must there be prior conservatorship?
No.
What is the difference?
The bank must be in insolvent here
When can you declare receivership?
1. Unable to pay liabilities as they become
due in the ordinary course of business
o Does not include inability to pay due
to extraordinary demands
o Ex. Equitable bank run after
impeachment trial
2. Insufficient realizable assets to meet
liabilities
3. Cannot continue without probable loss to
depositors or creditors
4. Willfully violated cease and desist order
that has become final, or dissipation of assets
of the bank
o In this case, forbidding from doing
business and appointment of PDIC
as receiver is summary
147
Who is the statutory receiver?
The PDIC is the statutory receiver
But if quasi-bank, any person of recognized
competence in banking or finance
Duties of the receiver?
1. Gather and take charge of all assets and
liabilities, and administer these for the
creditors
2. General powers of receiver in ROC
o Cannot pay or dissipate any of the
assets UNLESS it is for
administrative expenditures
3. May deposit or place funds of the institution
in non-speculative interests
Case: Manila Banking was placed under receivership.
The officers sold real property belonging to Manila
Banking and the receiver approved it.
HELD: Invalid. The moment the bank was
placed under receivership, the officers lost
their authority to dispose its properties
because they now pass under the control of
the receiver. The receiver cannot approve
the sale because his powers are limited to
acts of administration.
What must the receiver decide within 90 days from
taking over?
1. Whether the institution may be rehabilitated
or is in a condition that it may resume
business (with safety to general public and
creditors).
o MB must approve this determination
of resumption
2. Otherwise, proceed to liquidation
o 3. Liquidation
What is the close now, hear later scheme?
No prior hearing needed to appoint a receiver
and close the bank. It is enough that
subsequent judicial review is given. To
require prior hearing would defeat purpose of
closure.
General Bank: It was closed and nobody was willing
to invest fresh capital. Allied Bank bought and
rehabilitated it. The old orders to close it were
questioned. They claimed there was an unusual bank
run. But the court found that there was bankruptcy
because they extended unlimited credit facilities
What happens in liquidation?
1. Receiver files ex parte in the RTC petition
for assistance in liquidation
o According to liquidation plan by
PDIC (or MB, if quasi-bank)
2. RTC adjudicates disputed claims against
the institution, liabilities of officers and
employees, and issues re: liquidation plan
148
3. Convert assets to cash and pay claims
according to concurrence and preference of
credits
Effect of receivership or liquidation?
1. Assets of institution cannot be garnished,
attached, levied, executed
o Because they are deemed in
custodia legis when in the hands of
the receiver
2. No preference even if the claimant-
depositor obtained a writ of preliminary
attachment
o Remedy is to join in liquidation
proceedings.
3. Appointment of receiver does not dissolve
corporation. It does not eliminate legal
personality of bank. It can sue and be sued,
but all actions pass through the
receiver/liquidator.
Can the BSP forbid the bank to do business?
Yes, but when the BSP decides this, the bank
can still foreclose mortgages and the
prescriptive period to foreclose is not tolled.
Is an insolvent bank closed by the BSP liable to
pay interests on deposits of clients?
No. A bank cannot pay interest when it is not
operating.
But interests on loans extended by the BSP
are still demandable.
What is the character of all these remedies?
o No prior hearing required
o Final and executory
o What is the remedy?
Within 10 days, file a petition for certiorari
o From when do you count the 10 days?
Count from receipt of order by the BOD
Filing must be authorized by majority of SHs interest
MB may impose sanctions including liquidation of a bank when:
o [violations]
o 1. There are violations of articles and by-laws
o 2. Willful failure to comply with banking law/regulation of Mb
o 3. Conducting business with irregularities
o [re: information and supervision]
o 4. Failure to submit reports
o 5. Refusal of examination
o 6. Willfully making false statements to MB
What is the provisional remedy against erring officers?
149
o 1. MB may place under preventive suspension any officer of the
bank pending investigation up to 120 days
o 2. If the officers continue with the violation, can issue a cease
and desist order
Officers can request for a hearing within 5 days from
order to question the cease and desist order, or else it
becomes final
Only the CB can issue currency and all notes issued by the CB are
legal currency:
o Coins, denominations of 25c, 10c, and 5c are legal tender up to
100 pesos.
o Denominations of 1, 5, and 10 are legal tender up to 1000
pesos.
o N.B. The old rates were 25 and 50 pesos, but they have been
changed to these rates in 2006 by CB Circular 537
o Someone went shopping in the supermarket and paid coins
to the cashier, total more than 1000 pesos. The cashier
said it is not legal tender. Is she correct?
Yes.
o What is its powers regarding money function?
May prevent circulation of foreign currency or of
currency substitutes, or of reproduction of facsimiles of
BSP notes
Investigate, make arrests, conduct search and seizure
in accordance with law to maintain integrity of currency
What is the responsibility and primary objective of the BSP?
o Maintain price stability conducive to a balanced and sustainable
growth of the economy. Promote and maintain monetary
stability and the convertibility of the peso.
There are different tools held by the MB for this purpose:
o 1. CB maintains international reserves. The CB maintains an
account with the Federal Reserve system in the US. The CB
thus can buy and sell foreign currency.
o 2. With concurrence of MB and with president, the MB can
restrict sales of foreign currency. Back in the 60s the MB
ordered all banks to surrender all their foreign currency to the
CB.
o 3. Require exchange obtained by anyone to be sold to the bank.
There are laws on paper saying that upon earning
money in dollars, you have to sell them to the bank
within 5 days. But because of our commitment to the
IMF, this is not implemented anymore.
The MB can:
o 1. Determine exchange policy,
o 2. Require banks to sell excess foreign exchange,
o 3. Buy and sell credit instruments from banks (Discount policy)
Extend loans and advances (w/ charges and interests)
to banking institutions to influence volume of credit
o 4. Extend loans to banks for up to 7 days without collateral for
the sake of liquidity
This can influence the volume of credit, consistent with
the objective of price stability
150
o 5. In national emergency, by vote of at least 5 members, the MB
can approve of extraordinary loans
Amount must not exceed 50% of the banks total
deposits and deposit substitutes
Loans released in two tranches (installments)
o 6. Can buy and sell debt instruments (Open Market
Operations)
BSP may buy and sell in the open market evidence of
indebtedness directly issued by the government or by a
government instrumentality (and guaranteed by the
Government)
o 7. Reserve requirements can increase this (to decrease the
amount available for loans by the banks) vis--vis deposit
liabilities
Securities Regulations Code
State policy and SEC
What is the purpose and scheme of the Securities Regulations
Code?
o 1. Protect public investors from fraudulent schemes
o 2. Encourage public investments by regulating sale and
disposition of securities
o 3. Establish a socially conscious free market that self-regulates,
encourages widest participation of ownership in enterprises,
enhance democratization of wealth, and promote development
of capital market
o 4. Protect investors, ensure full and fair disclosure of securities,
minimize/eliminate insider trading and fraudulent/manipulative
devices that distort the free market
Composition of SEC:
o 1 chairperson, 4 commissioners
o Collegial body
o 7 year terms each
What are the powers and functions of the SEC?
o [Registration and supervisory]
o 1. Jurisdiction and supervision over business organizations
o 2. Approve, reject, suspend, revoke, require amendments to
registration statements, and registration/licensing applications
o 3. Supervise, monitor, suspend, take over exchanges, clearing
agencies, and SROs
o [Regulation]
o 1. Regulate, investigate, supervise activities of persons to
ensure compliance with SRC
o 2. Compel officers of registered corporations or association to
call meetings of SHs or members
o 3. Issue subpoenas duces tecum or summon witnesses in
proceedings, or procure books
o [quasi-legislative]
o 1. Formulate policies and recommendations on issues re:
securities market and make recommendations to Congress
151
o 2. Issue rules and regulations and opinions
o [compliance and punishment]
o 1. Impose sanctions for violation of rules and regulations
o 2. Enlist aid and support of government agencies to implement
its powers and functions
o 3. Issue cease and desist orders to prevent fraud/injury to public
o 4. Punish for contempt according to ROC
o 5. Suspend or revoke the franchises or certificates of
registration
o 6. Exercise necessary or incidental powers
Which cases have been transferred to RTC jurisdiction from the
SEC?
o 1. Investors and corporate affairs
Particularly fraudulent devices and schemes employed
by directors detrimental to public interest/other firms
Ex. insider trading, etc.
o 2. State and corporate affairs
In relation to legal existence of corporations,
partnerships, and associations
o 3. Intra-corporate and partnership relations
e.g. Controversies in election, appointment or directors
or trustees
o 4. Petitions for suspension of payment corporate rehabilitation
Registration of securities
What is an investment contract requisites?
o 1. Investment of money
N.B. a no money out transaction is not an investment
o 2. In a common enterprise
N.B. thus charitable institutions are not covered
o 3. With expectation of profits
o 4. To be derived primarily from efforts of others
N.B. So if the investor contributes actual work, its not
an investment contract
What are securities?
o Shares, participation, or interests in a corporation/commercial
enterprise/profit-making venture, and evidenced by a certificate,
contract, instrument (written or electronic)
o In particular:
1. Shares of stock, bonds, debentures, notes, evidence
of indebtedness, asset-backed securities
2. Investment Ks, certificates of interest or participation
in profit-sharing agreement, certificates of deposit for
future subscription
Investment K a person seeks to use the
money of others on the promise of profits
152
3. Fractional undivided interests in oil, gas, or other
mineral rights
4. Derivatives (options and warrants)
Options contracts that give the buyer the
right to buy/sell an underlying security at a
predetermined price on or before an expiry
date
o Call options rights to buy
o Put options rights to sell
Warrants right to subscribe/purchase new
shares or existing shares in a company on or
before an expiry date
5. Certificates of assignments, certificates of
participation, trust certificates, voting trust certificates,
and the like
6. Proprietary or non-proprietary membership
certificates in corporations; other instruments
o XYZ borrows money from persons and in exchange issues
postdated checks in an amount equivalent to their value +
interest, maturing after 2 months. The lenders can re-lend
these amounts after and even increase contribution when
the checks mature. The SEC found out and issued a cease
and desist order for selling unregistered securities. Is the
SEC right?
Yes, it is. It is one thing to issue checks for isolated
transactions, but another for an elaborate scheme that
turns postdated checks as instruments for pseudo-
investment. Securities also include commercial
papers evidencing indebtedness of any person or
entity.
What are specific examples of securities?
o A foreign exchange trading transaction is an investment contract
o Pyramiding scheme is an investment contract
Because there is expectation of profit from the efforts
of other people (you get commissions)
o Someone with exploration contracts for oil or gas can sell
participation rights
o Derivatives limitless (depends on creativity of the human
mind)
Different from spot trading. Spot trading is where X
bought $1000 (where exchange rate is 43 pesos to a
dollar), but the seller gives credit: 10 days to pay.
Here, you are not speculating, you have already
agreed to a price, you are just given credit.
Whereas in derivatives, you must have a license from
the MB.
Rules on registration?
o 1. No securities can be sold or offered without registration
statement filed with and approved by the SEC
o 2. Prior to sale, information on securities made available to each
prospective purchaser
Which securities need not be registered?
o 1. Security issued or guaranteed by the Phil. Government,
political subdivision or agency, or instrumentality of government
o 2. Security issued or guaranteed by government of any country
with which Philippines maintains diplomatic relations (or
subdivision) on the basis of reciprocity
153
o 3. Certificates issued by receiver/trustee in bankruptcy approved
by proper adjudicatory body
o 4. Security or derivatives which sale or transfer is under
supervision of Insurance Comm, HLURB, BIR
o 5. Security issued by a bank except its own shares of stock
o N.B. Usually these are issued by the government or
regulated by another agency. For instance, certificates issued
in bankruptcy proceedings, lots, condominiums, securities
issued by banks.
o Why are they exempt securities?
These are non-speculative in nature. The return on
investment is somewhat assured.
What transactions are exempt from registration?
o [A. isolated and minor transactions]
o 1. Isolated transactions
Not in repeated and successive transactions
o 2. Sale of securities to less than 20 persons within 12 months
(deemed isolated)
o [B. with existing underlying relationships]
o 1. Stock dividends (to existing SHs)
o 2. Sale of shares to existing SHs
o 3. Issue and delivery of security in exchange for any other
security of the same issuer pursuant to right of conversion
If a corporation floated bonds and there is an option to
exchange it for stocks
o 4. Pre-incorporation subscription or pursuant to increase in
A.C.S. without compensation or remuneration for the
transaction and where purpose of solitication is to comply with
legal requirements
o 5. Exchange of securities by the issuer with its existing security
holders exclusively, where no remuneration is paid
o [C. secured by mortgage and the like]
o 1. Sale by pledgee or mortgagee foreclosing
o 2. Issuance of bonds secured by mortgage, where the entire
mortgage + all the bonds/notes secured thereby sold to one
buyer (who is the underwriter)
Ex. Meralco will float $500M bonds secured by
mortgage on its assets. One bank bought all that.
This is exempt.
o [D. sophisticated transactions]
o 1. Judicial sale or any extra-judicial sale/execution sale by
admin/guardian/receiver/trustee in insolvency or bankruptcy
o 2. Brokers transactions, executed upon customers orders, on
any registered exchange or trading market
o 3. Sale to banks, etc. and other sophisticated investors not
needing protection from the SEC
Bank
Regulated investment house
Insurance company
154
Pension fund/retirement plan maintained by the RP
government or those authorized by government
Investment company
Others, as deemed by the SEC
Grounds for disapproving application for registration of securities?
o 1. If corporation is insolvent
o [violations]
o 2. Violation of SRC
o 3. Engaged in fraudulent transactions or about to engage in
such
o 4. Issuing officer/SH convicted of moral turpitude or fraud
o [misinformation or lack thereof]
o 5. False or misleading annotations as to material facts
o 6. Failed to comply with conditions for registration
o 7. Registration is inaccurate or incomplete
Protection of investors
What is the shift of the Philippine securities registration system?
o It has shifted from a merit-based system to a disclosure-based
system. So even if securities are potentially valueless (ex.
issued by a company on the brink of insolvency), as long as
these facts are properly disclosed, the SEC will not deny
registration.
What is a tender offer?
o Publicly announced intention by a person or group of persons to
acquire equity securities of a public company (a type of
takeover bid).
It is a public, open offer to all stockholders of the
corporation.
It is an offer for them to tender their shares on the
terms specified in the offer.
o Purpose: To protect minority SHs from any scheme to dilute
their shares. It gives them the chance to exit the company
under reasonable terms and the chance to sell their shares at
the same price as those of majority SHs.
When is a tender offer required?
o If a person or group intends to acquire:
1. At least 35% equity of a listed corporation
2. At least 35% equity of an unlisted corporation, if it
has at least 50M+ assets and 200 SHs with at least
100 shares each
3. At least 35% of equity of a listed corporation over a
period of 12 months
o NOTE: in the codal this was 15% and 30% but the SEC rules
changed these to 35%
o N.B. This requirement applies even to indirect means of
acquiring control
Ex. Shares of mother corp. which owns a subsidiary
will be sold
What are not covered by the tender offer rule?
155
o [New stocks]
o 1. Purchase from unissued capital
o 2. Purchase of shares from increase in ACS
o [In relation to proceedings]
o 1. Purchases in connection with privatization undertaken by the
government
o 2. Purchases in connection with corporate rehabilitation under
court supervision
o 3. Merger or consolidation
o [Public sales]
o 1. Purchases through open market at prevailing market price
o 2. Purchase in connection with foreclosure proceedings
involving a pledge/security arrangement
What is the procedure for making a tender offer?
o 1. File a declaration with SEC of intent to make tender offer
o 2. Furnish the issuer of securities the necessary info
o 3. Publish and send out requests/invitation to tender shares
o 4. SHs deposit securities pursuant to the offer or request
Requisites if the depositor wants to withdraw the
securities deposited?
1. Done throughout period the offer remains
open, and
2. Not yet been accepted by the offeror, and
3. After 60 days from the date of the original
tender offer or request
o except as the SEC may otherwise
prescribe
o What if the securities offered exceeded what the
person/group intend to purchase?
The offered securities are purchased pro rata,
disregarding fractions
This rule also covers: securities deposited within 10
days from increased consideration offer
N.B. if the person/group offers higher consideration to
attract more offers, the initial depositors must also be
given the higher consideration
What is proxy solicitation?
o A request that a corporate shareholder authorize another person
to cast the shareholders vote at a corporate meeting.
What is the rule on proxy solicitation?
o No broker or dealer can give any proxy in respect to any
security carried for the account of the customer to a person
other than the customer, if without express written authorization
of the customer
o A broker or dealer who holds or acquires proxy for at least 10%
of the shares must identify who the beneficial owner is, within 10
days of acquisition, in a report given to:
1. SEC,
156
2. Issuer of the security, and
3. The exchange where the security is traded
Prohibited and Fraudulent Acts
What are prohibited acts?
o [Market manipulations]
o 1. Manipulation of security prices, false transactions, where to
falsely show active trading, there are multiple transactions
Wash sales (transaction that involves no change in
beneficial ownership thereof)
Matched orders
Market rigging or jiggling
o 2. Effecting alone or with others a series of transactions in
securities that:
Raise price to induce purchase
Depress price to induce sale
Create active trading to induce purchase/sale through
manipulative devices
o 3. Series of transactions for purchase/sale of security to peg, fix,
or stabilize its price
o 4. Manipulative or deceptive devices or contrivance in purchase
or sale of security
o [Deception]
o 1. Circulate or disseminate information that the price of a
security will rise or fall because of manipulative market
operations
o 2. Make false/misleading statement with respect to material
facts, which he knew or had ground to believe was
false/misleading to induce purchase or sale of any security
What are covered by the short-swing profit rule?
o Directors, officers, and principal stockholders (owns more than
10% of a particular class of securities) (i.e. corporate insiders)
who enter into a purchase-and-sale or sale-and-purchase
transaction within a gap of 6 months
o What is the effect?
The corporate insider must return any profits derived to
the securities-issuer
o What transactions are exempted from forfeiture of profits?
1. If the securities were acquired in good faith in
connection with a debt contracted prior
2. If the beneficial owner was not such both at the time
of purchase and sale
o When is suit filed?
2 years from when profit was realized, in the RTC
Brought by the issuer, or the owner of the securities
issued by the issuer if after 60 days from request to
prosecute, the issuer fails to do so
What is a short sale?
157
o It is the sale of a security that the seller doesnt own. A short
seller often borrows shares from a broker and sells them to a
third person, hoping the price will drop. He then buys back from
the public, at a lower price, the same number and type of shares
he borrowed from the broker and returns them, profiting from the
lower value of shares.
o N.B. This is perfectly legal. Contrast this with the short-swing
profit sale (which the code actually calls short sales)
What are fraudulent transactions?
o Obtain money or property through untrue statements
o Involves deceit
What is insider trading? (Usually asked in the Bar)
o Illegal for an insider to buy or sell security while in possession of
material information not available to the public
Unless that insider proves that the information was not
obtained from insider relationship
Or if he had reason to believe the other party knew of
this information or he himself made it known
o Who is an insider?
1. Issuer
2. Officer of issuer
3. Person whose relationship gives him access to
material information
4. Government employee, director, etc. (of SEC) with
access to this information
5. Person who learns this info from the foregoing
persons
N.B. not if it wasnt communicated to the
person (ex. just randomly stumbled upon a
letter containing such information)
o When is information material?
If it will affect the price
Or important in the decision to buy, sell, or hold the
security
Civil liabilities:
o Any person acquiring a security may sue if the registration or
statement is untrue as to a material fact
o Who:
1. Issuer and every person who signed the registration
statement
2. [See enumeration in the Code] prospectus,
fraudulent transactions, insider trading, etc.
Time sharing:
o Can offer staying in cottages, clubs, etc. to non-members
because sometimes they are empty. These are securities that
must be registered.
What is the effect of contracts made in violation of the SRC?
o 1. Void as regards the rights of any person who, in violation of
any such provision, shall have made or engaged in the
performance of the contract
158
Ex. Company who knowingly issued unregistered
securities (the infirmity of which the buyer wasnt aware
of) cannot file action for specific performance to
compel payment
N.B. It is unilaterally void only as for the violator. So
the buyer can void it because the seller was fraudulent,
but the seller cannot decide to invoke that it is void.
o 2. Void as regards a non-party to the contract who was aware of
the violation
Transportation Law
Distinguish common carrier from private carrier:
Common carrier Private carrier
Holds self out in common to all
persons who choose to employ him
Agrees to carry persons/goods for
hire in a special agreement
Bound to all who offer such goods as
it is accustomed to carry and tender
reasonable compensation
Only by virtue of special agreement
Subject to regulation; as a public
service
Not subject to regulation to same
regulations
Extraordinary diligence Diligence of GFF
Cannot stipulate exemption from
liability for negligence (void against
PP)
May validly stipulate such
What are common carriers?
o Hold themselves out to the public as ready to engage in carrying
goods or passengers or both for compensation as public
employment.
Even if thats not his primary business
Does not need to have a regular schedule, and can
have limited service (ex. school bus)
o What about transportation of oil through a pipeline?
Still a common carrier it does not have to be a
vehicle.
o Is a travel agency a common carrier?
No, it only makes arrangements for the passenger.
What is the level of diligence for a common carrier?
o Extraordinary diligence, as opposed to GFF for a private carrier
o Both in transportation of persons and custody of goods
o Can a common carrier invoke the last clear chance
defense?
No, it is a defense in quasi-delict, but does not apply to
liability of passengers.
o What about diligence in selection and supervision of
employees?
No, its just a defense in quasi-delict but not breach of
transportation contract.
o What about defects in the parts, even if brand new?
Its still not a defense. Even if its brand new, the
common carrier cannot be complacent. Defect in
components or car part is not a good defense.
What are the defenses available to the carrier?
o 1. Fortuitous event
159
When is fortuitous event not allowed to be
invoked?
If there is negligence or delay
When is extraordinary diligence required, even
during a fortuitous event?
Before, during, and even after the event
(fortuitous event does not justify major delays
after the event)
If there is failure to comply with this there is
concurrent negligence by the transporter
Is fire a fortuitous event?
As a rule, no, except if caused by lightning.
Its traceable to human negligence.
What about robbery?
Robbers must be acting with irresistible force
o 2. Acts of public enemy in war
o 3. Acts or omissions of the shipper or owner
o 4. Character of the goods or faulty packaging
Character of goods: ex. ripening of fruits
Faulty packaging: If obvious from external
appearance that they are not properly packed, and still
the carrier accepted it, it is liable.
An owner under-declared the weight of his
package to save money. The carrier accepted it.
This caused the goods to spill from the package.
Held?
There is shared liability. Extraordinary
diligence includes the carrier examining the
goods and noticing that they are obviously
under-declared.
o 5. Order of competent public authority
o 6. Exercise of extraordinary diligence
If the goods are damaged or lost, what is
presumed?
The carrier is presumed to have been in fault
Burden of proof is on the carrier to prove exercise of
extraordinary diligence
When does responsibility of the carrier begin?
o From the time the goods were placed in its possession until the
goods are actually delivered
o Carrier was delivering hemp, but it cannot approach the wharf
because the water was shallow. It sent a lighter to send the
hemp, but it sank.
HELD: The carrier is liable. The transportation through
the lighter was a preparatory act to delivery, and so
was within the K of transportation.
o Carrier was delivering oil, and when it got to the wharf, it was
pumping oil into a tank. The hose was severed, without the
carrier noticing, and the oil placed in the tanks spilled into the
water. Caltex, the shipper, sued.
160
HELD: No final delivery yet because the oil spilled
back. Carrier was liable.
o X was waiting for the LRT on the platform, after buying a token
and entering the turnstile. He got into an altercation with the
guard who assaulted him. X fell onto the tracks and got hit by
the train. Is LRT liable?
Yes, because he was there in pursuit of boarding the
LRT.
o After alighting a bus, but waiting to pick up luggage, the same
bus hit one of the passengers. Is the bus liable?
Yes, responsibility only ends after passage of
reasonable time and opportunity to leave the
destination.
The contract of carriage does not automatically end
upon alighting. Contract of carriage includes chance to
get the baggage.
Upon landing on the dock, and the goods were placed in a
warehouse, but there was no consignee was there delivery?
o No.
o What are the defenses?
1. There was delivery
Notice given to consignee re: the arrival of the
goods
Given reasonable opportunity to remove them
or dispose of them
2. There was exercise of extraordinary diligence
When does the K of transportation terminate?
o 1. When the goods are actually received
o 2. When there is unreasonable delay in receiving the goods
What is the implication?
The carrier becomes a depositary, and
diligence is reduced to GFF.
o What if the goods were placed in a bonded warehouse prior
to loading or in transit?
The common carrier is still liable, because it has
control and responsibility over the goods
How could the carrier avoid liability?
o Through stoppage in transitu
This is exercised by the seller/owner, before it has
reached the consignee. Its as if the owner never
parted with ownership of the goods.
o Legal effect: the contract of carriage is terminated; the shipper
becomes akin to a warehouseman/bailee
What is the nature of services of an arrastre operator?
o The legal relationship between the arrastre operator and the
consignee is akin to that of warehouseman/depositary and
depositor
o Maritime law does not apply to govern the arrastre operators
responsibility
When is a stipulation limiting carrier liability valid?
161
o It must be reasonable to be valid.
o What are unreasonable?
1. No liability at all
2. Limited liability up to a certain amount
3. Goods transported at risk of owner
4. Exercise of diligence less than GFF
N.B. so this is the minimum
5. That the common carrier is not liable for acts of its
employees
o What is valid:
1. Limiting carrier liability in case of strikes or riots
2. Limiting liability up to a certain amount UNLESS the
shipper declares the actual damage
o N.B. if the carrier is a private carrier, such stipulations otherwise
deemed unreasonable are valid.
Which countrys laws govern the transshipment of goods between
countries?
o The law of the country wherein the goods will be shipped
governs.
o Ex. If there are two carriers (A and B) with a transshipment
agreement and As transportation ends in Davao, its liability is
governed by Philippine law even if B proceeds to deliver to USA.
What specific laws will govern under Philippine law?
o Primary: New Civil Code provision on common carriers
o Secondary: Code of Commerce and other special laws: Public
Service Act, Customs and Tariff Code, Civil Aeronautics Act
o Tertiary: Carriage of Goods by Sea Act
o Can the parties deviate from this hierarchy?
Yes. Stipulate in contract of carriage what laws should
govern (Paramount Clause). It applies by reason of
contract, as long as it is not against public policy.
What are the rules governing baggage of passengers?
o If it is checked in, liable as common carrier
o If it is hand carried, it is considered necessary deposit only
required to exercise diligence of GFF
How does gratuitous transportation affect stipulation limiting
liability?
o It becomes valid
o But not for willful acts and gross negligence
Contributory negligence of passenger will not exculpate carrier but
minimize liability
o Ex. Passenger left his elbow hanging out the bus window, got hit
and severed. His contributory negligence reduced the carriers
liability.
o A bus was cruising along the highway. One passenger ran
amuck and started hurting the passengers with a knife. The
other passengers panicked and ran out, and fell, died.
162
HELD: The bus company was liable because a
passenger ran amuck and the employees did not do
anything, stop the bus, or whatever.
o A bystander threw a stone at a bus and it struck a passenger.
Carrier liable?
HELD: No. It has no control over this occurrence. It is
required to exercise extraordinary diligence but is not
an absolute insurer.
What is the rule re: explosives, etc?
o Airline companies liable because they are authorized to
search bags
o Bus not authorized to search bags, so not liable.
If the carrier ends up in an accident, what are the remedies of the
passenger?
o A passenger can sue under breach of contract or quasi-delict.
o N.B. Breach of contract is easier to prove because there is
presumption and the defense of diligence in
selection/supervision is not available.
o Why would you sue under quasi-delict then?
There are more damages recoverable, but the case is
tougher. But you can recover moral damages from
physical injuries here.
What damages can be recovered in breach of contract?
o 1. Passenger was injured:
Medical expenses
Loss of income if incapacitated to work
Attorneys fees, if the carrier unjustifiably resisted the
claim
If the driver was negligent, you cannot impose
exemplary damages on the employer unless there is
something that makes the employer liable (ex.
awareness of the drivers recklessness)
Moral damages?
General rule: not demandable
Exceptions:
o Obligor acted in bad faith or fraud
o Gross negligence tantamount to bad
faith
o 2. Passenger died
Medical expenses
Funeral expenses
Where there is no proof of funeral expenses,
award of 25K as temperate damages
Moral damages
Exemplary damages apply same doctrine above
Lost income
(80 actual age) (annual income) (2/3) =
indemnity
163
What bout injuries caused by acts or omissions of employees of the
common carrier?
o The CC is liable EVEN IF the act was done in violation of orders,
or beyond scope of the employees authority (Respondeat
superior)
o Must be in the course of his employment
Ex. If the liability is for damages caused to another
automobile, then diligence of GFF is a defense.
Ex. But if at the same time, there is liability for injuries
caused to passenger, diligence of GFF is not a
defense.
What if the passenger was caused by co-passenger or stranger?
o If the act of the stranger could have been prevented or stopped
by the personnel using GFF, there is liability.
o If not, it is a fortuitous event.
Can this liability be eliminated by stipulation, posted notices,
statements on tickets, or otherwise?
o No.
Warsaw Convention
When does the Warsaw Convention apply?
o To transport of persons, baggage, goods in international air
transport
o Although domestic flights may apply it in a Paramount clause
When is there international transport?
o 1. Point of departure and point of destination are in two high
contracting States to the convention
o 2. Point of departure and point of destination is within one high
contracting State, and there is an intermediate point, which is a
State that may or may not be a high contracting party
o What is the single operation rule?
The moment a person is covered by the WC, then it
also covers even domestic portions of the itinerary
Ex. ML Amsterdam Madrid Barcelona
o KLM issues a ticket from ML to Amsterdam. Then it helps
the passenger secure a ticket from Amsterdam to Paris, but
flown through Air France. Is KLM liable for problems in the
flight to Paris?
NO. It is a mere agent of the other airline company.
What documents are involved in international transport by air?
o Passenger ticket
o Baggage check
o Airway bill
Is the issuance of an airway bill necessary in order to establish
contract of carriage?
o Yes, because an airway bill is a document that would establish a
contract of carriage between the carrier and the owner of goods.
It establishes receipt of goods and the condition of the goods
loaded on board.
Can the carrier accept the goods without issuing an airway bill?
164
o Yes, but it would be liable to the shipper, had it delivered the
goods to the consignee without asking for surrender of the
airway bill.
o The carrier will be liable to shipper for misdelivery.
o Also liable to real person with lawful right over the goods who
holds the airway bill.
When does the right of the shipper to dispose the goods cease?
o From the time when the right of the consignee begins (when the
goods are delivered to the latter)
o He couldnt recall the goods anymore or stop delivery in transit.
If the consignee refuses to exercise his rights as consignee, what
happens?
o The shipper resumes right over the goods and can exercise
rights and obligations over goods under Warsaw Convention
Rights of consignee upon arrival of goods at port of destination:
o 1. Right to demand from the carrier to deliver the airway bill and
the goods to him
o 2. Pay transportation costs to carrier if stipulated
When is the consignee allowed to enforce provisions of contract
(airway bill)?
o 1. Goods not delivered before expiry of 7 days from the time
they were supposed to arrive
o 2. Goods are missing
o N.B. Consignee will have right to enforce rights under contract
of carriage
When must claim notice be given to the carrier?
o Baggage loss: 3 days from receipt of baggage
o Goods loss: 7 days from receipt of goods
o Delay in delivery of baggage or goods: 14 days from delivery
o What if the consignee does not give such claim notice to
the carrier?
Further action by the consignee is barred (similar to the
rule in the Code of Commerce and unlike COGSA)
o See directly below for period to file claims in cour
What is the period to file claims for damages in court?
o 2 years from arrival at the destination, or when arrival should
have happened, or stoppage of carriage
o What is the exception for period to file claims?
Action based on passenger being humiliated (follow
tort law) 4 years
o Where can you sue the airline company?
1. Where you bought the ticket
2. Where the airline company was incorporated
3. Where the airline company has its principal office
4. Point of destination
o In a roundtrip flight (ex. SF ML SF), can you sue in
ML?
165
No, because in a roundtrip flight, your point of
departure is the same as your point of destination.
When can you sue in ML?
If the return date is left open. Meaning, ML is
the point of destination.
Who is the defendant?
o 1. As regards passengers:
In case of successive carriers, the carrier in which the
accident or delay occurred
Unless by express agreement, the first carrier
assumed liability for the whole journey
o 2. As regards baggage or goods:
Passenger or consignor can sue first carrier,
Passenger or consignee can sue last carrier, or
Against carrier I which destruction, damage, or loss
occurred
N.B. all carriers are jointly and severally liable
What is the liability of carriers to passengers?
o Liable for death or injury if caused on board, during
embarkation, or disembarkation
What is the period of responsibility for the air carrier?
o As soon as the carrier has possession and custody over the
baggage and goods
What are the defenses available to the carrier?
o 1. Carrier/agents took all necessary measures to avoid damage
or it was impossible to take these measures
o 2. Error in piloting and the carrier/agents had taken all
necessary measures to prevent the accident or it was
impossible to take these measures
Ex. pilot mistakenly identified one airport as another
o 3. Error in handling of aircraft and the carrier/agents had taken
all necessary measures to prevent the accident or it was
impossible to take these measures
o 4. Error in navigating and the carrier/agents had taken all
necessary measures to prevent the accident or it was
impossible to take these measures
o 5. Contributory negligence
Liability reduced appropriately by the degree of
negligence contributed by the shipper/consignees
What is the concept of limited liability?
o Liability to passengers (injury on board, injury during
embarkation or disembarkation, or delay) or goods (damage or
delay) is limited to the stated amounts.
When does limited liability NOT apply?
o Limited liability does not apply when there is dol or willful
misconduct
Ex. the PAL situation where bags were unloaded so it
could take in more freight
Ex. Recklessness in handling luggage
166
What is the limitation of liability?
o 1. Carriage of passengers 250K francs
Except if by special contract, the carrier and
passenger agree to a higher limit
o 2. Carriage of registered baggage and cargo 250 francs per kg
(of the baggage concerned, not total baggage)
Except if the passenger or consignor has made a
special declaration of interest in the delivery and has
paid a supplementary sum if it is required
In this case, what happens to the liability?
The limit will be the declared amount
Unless it is proven the actual value is higher
o 3. Hand-carried baggage 5K francs per passenger
o What is the effect of the Guatemala Protocol?
Increased limits to $100K for passenger and $1K for
baggage, but its not yet effective
Do you apply Warsaw Convention when suing on a tort? (Ex.
humiliation)
o No.
When a passenger is downgraded, can he recover damages?
o Yes.
How much are airlines allowed to overbook?
o Up to 10%.
o If everybody shows up, then the airline company asks for
volunteers to be transferred to the next flight.
o If no one wants to be transferred, the last ones to check in will
be left behind.
o N.B. But our SC does not accept this reasoning.
X and his wife went to HK with another couple, with their friends. When
they were returning, X was informed that he was being transferred to first
class, against his wishes. He sued.
o HELD: He won. There was still a breach of contract, in spite of
the upgrade.
X was a soprano who was scheduled to perform in KL. X booked with
Sing Air a flight from Frankfurt to ML, and then ML to KL. Because of the
bad weather, Sing Air wasnt able to fly her to ML on time to reach KL.
So X just flew directly to KL with another flight and wasnt able to practice,
and performed badly.
o HELD: Sing Air was liable; it was not beyond remedy. Couldve
booked another flight to make it possible.
A Northwest flight was aborted so the passengers were all rebooked in
different NW flights. A family was rebooked in an itinerary that was more
roundabout and longer compared to other passengers.
o HELD: NW was liable.
PAL in a stopover unloaded pieces of baggage of its passengers to take
in additional cargo and freight.
o HELD: this was bad faith, leading to moral damages.
Unloading baggage to prevent airplane from being overweight, for safety
considerations
o HELD: not liable
167
JAL was unable to land in MLA for two weeks because Pinatubo erupted
and the runway had lahar.
o HELD: It is a fortuitous event. JAL not liable for
accommodations, food, etc.
Immigration refuses to let a passenger leave due to defects in
passport/travel documents.
o HELD: This is not the airlines fault.
Maritime law
What is the 3-fold character of a BOL?
o 1. Contract
o 2. Receipt for goods
o 3. Symbol of the goods
What does a clean bill of lading bar?
o Any argument by the shipper that the goods were damaged
when it received them. The clean BOL shows that they were in
good condition when received.
What if the package appears unfit for transportation?
o The carrier can refuse to accept the goods
What if the carrier suspects the goods as misdeclared?
o It can open the package. If the carrier is right, the owner
shoulders costs of inspection. If the carrier is wrong, it bears the
costs.
When can the consignee of the goods refuse to take delivery of the
goods and just claim damages?
o 1. When the partial loss makes the entire thing useless
o 2. When the damage makes the goods useless for the purpose
for which they were intended
o 3. Delay through fault of carrier
o 4. Damage apparent from external appearance of package
When must claim be made?
Immediately, or else barred
What if the damage is not apparent?
Within 24 hours from receipt, or else barred
When does this provision not apply?
For international shipping, the COGSA
applies
If goods are transshipped, who is liable?
o The ultimate carrier
o What if the goods were actually damaged during the first
leg?
The ultimate carrier is still liable
It can just sue the prior carrier for reimbursement
o Against whom does the shipper or consignee have right of
action?
Carrier who executed the transportation contract, or
other carriers who received the goods without
reservation
168
When does a reservation have no effect in relieving
responsibility?
When the carrier who made the reservation is
responsible
When must the consignee pay for freight and expenses?
o Within 24 hours of receipt
o Otherwise, the carrier may ask that the goods be dissolved until
enough to pay arrears
The contract between buyer and seller stated that there should be
no transshipment. The shipping company issued a BOL which
stated on its face that there will be transshipment. When the goods
arrived, the buyer refused to receive the goods. The seller sued the
vessel. HELD?
o The seller lost. The BOL clearly stated that there will be
transshipment but the seller agreed.
The goods which arrived to the buyer did not meet specifications so
the buyer refused to receive the goods. The carriage piled up. Who
is liable?
o The consignee. The contract of sale and the contract of
shipment are two different contracts. The consignee should
have just received the goods and sued the seller.
The goods were shipped from ML to Davao by one shipper, then
Davao to SF by another. The goods were damaged upon arrival in
Davao, but suit was made upon arrival in SF. HELD?
o Period for filing the claim was barred. Should have claimed in
Davao.
Registration of vessels with the Maritime Industry Authority
o Where the sale was not registered, the sale does not bind third
persons
Goods arrived at the pier. Then the vessel hired a harbor pilot,
which crashed and damaged the goods. Claim was against the
vessel. Vessel claimed it was not liable because the harbor pilot
was not part of the crew. HELD?
o Vessel liable. The captain still retained control over the vessel.
When he saw that the harbor pilot was about to crash the ship,
he should have intervened.
Responsibilities of ship owners and ship agents?
o 1. Acts of the captain
o 2. Contracts signed by the captain to repair, provision, or equip
the vessel
o 3. For indemnities due to third persons due to conduct in the
care of the goods
o 4. Quasi-delict in case of negligence in selection/supervision of
employees
o 5. Collision due to the fault of the captain
Real and hypothecary nature of maritime commerce:
o If liability is incurred, it is not the owner that incurs the liability
attaches to the thing. So if the vessel sinks, the liability is
extinguished.
The liability of the ship owner is limited to the value of
the vessel, earned freightage, and proceeds of
insurance. No vessel, no liability.
What is the effect of abandonment?
169
Abandonment of the vessel and all her
equipment and freight leads to exemption
from liability.
o What are the exceptions (usually asked)?
1. If the ship owner is at fault (i.e. the vessel is not
seaworthy)
Ex. the ship did not have enough lifeboats
2. The vessel was insured the proceeds of the
insurance will take the place of the vessel
3. Even if the vessel sinks, the ship owner will be liable
for repairs and provisioning of the vessel undertaken
before its loss
N.B.: workmans compensation is not anymore an
exception the sinking of the ship is irrelevant for
claims for injury, sickness, or death in the course of
employment. File claim with ECC
What are Charter parties?
o In essence, a lease of the vessel
o What are the basic types of CPs?
1. Bareboat charter
The ship owner turns over the possession of
the vessel to the charterer
The charterer undertakes to provide the
officers, supplies, provisions during the
voyage
What is owner pro hac vice?
o Owner for this occasion
o If it is a public carrier, it temporarily
becomes a private carrier (diligence
becomes GFF)
2. Time charter
Contract for the use of the vessel for a
specific duration or voyages
3. Voyage charter/contract of affreightment
Contract for carriage of goods from one or
more ports of loading to one or more ports of
unloading
o What is the nature of the time/vessel charter?
The owner of the ship retains ownership and control
If the charterer does not pay, there is a lien by the ship
owner over the goods
In a bareboat charter, there is no such lien if
the charterer does not pay the ship owner
The vessel remains a common carrier
o In a charter party with a private carrier, a stipulation that the ship
owner will not be liable for damages is valid, or a stipulation that
the owner will not be liable for damages due to fault of the
captain is valid.
Averages
o Averages may be particular or general
o Items mentioned in Art. 809 and 811 are merely illustrative. It is
not exhaustive.
170
General averages Particular averages
Common danger to vessel and cargo None
Deliberate sacrifice of part of the
vessel or cargo, with authority
Accidental damage
Inured to common benefit No such common benefit
All persons with interest in the vessel
and cargo saved must contribute in
the indemnity
Owner of the thing damaged bears
damage alone
General average samples:
o [Enemies and bad people!]
o 1. Goods or cash invested in redemption of the vessel or cargo
captured by pirates/enemies, etc. or expenses for repair
o 2. Curing and maintaining members of the crew who were
wounded in defending the vessel or saving it
o 3. Wages of member of the crew detained as hostage
o [Too heavy, brother]
o 1. Goods jettisoned to lighten the vessel
o 2. Removing or transferring portion of cargo to lighten the vessel
o 3. Loss suffered in value of goods sold at arrivals under stress
to lighten load
o [Emo solutions]
o 1. Cables or masts cut or anchors and chains abandoned
o 2. Damages suffered by goods through opening made in vessel
for draining (to avoid sinking)
o 3. Floating a vessel intentionally stranded to save it
o 4. Damage to the vessel which had to be opened, scuttled, or
broken to save cargo
o [Expenses pursuant to average]
o 1. Expenses to liquidate average
o 2. Wages of crew of a vessel chartered by the month during the
time vessel was detained by force majeure
When are there particular averages?
o The damage did not benefit persons interested in the cargo
o Ex. fruits became rotten
o Ex. pirates intercepted the vessel, so the captain threw money
overboard
What are the requisites of general averages?
o 1. There is common danger
There is no common danger when the damage was
due to fault of the captain
o 2. For common safety part of the vessel/cargo is sacrificed
foundation of general averages
o 3. It was successful
o 4. Legal steps should have been taken before general average
is made
i.e. the captain conferred with the officers, the cargo
owner, entered in log book, marine protest made
Protest must be made within 24 hours (unless the
captain is injured, or is unable to do so for some
reason)
171
What are the rules on apportionment of liability in collisions?
(Maritime tort)
o The provisions on civil tort do not apply
ex. last clear chance, rule of comparative fault, due
diligence in selection/supervision of employee
o If two vessels collided and it is the fault of one:
Latter bears it own costs
Bears the other vessels costs
Bears cost of goods damaged
o If both are at fault:
Each one will bear its loss
Do not consider LCC, comparative fault, etc.
Solidarily liable for the damaged goods onboard both
vessels
o If you cannot tell which one is at fault:
Same rules as if both are at fault
Rule of inscrutable fault
o If a third vessel is at fault:
The third vessel is liable for losses and damages
o If collision was due to fortuitous event:
Each shall bear their own damage
What is the doctrine of error in extremis in collisions?
o There are three zones in collision:
First time up to the moment when risk of collision
begins
Second when risk of collision begins until the
moment it becomes a practical certainty
Third when collision is certain up to the time of
impact
o Thus, even when a ship with right of way suddenly changes its
course during third zone, in an effort to avoid collision due to the
other vessels fault, the act is in extremis and cannot create
responsibility on the part of the former (meaning, since its a
useless effort, the ship with right of way must not be penalized
for it).
Carriage of goods by sea act/COC
When does the COGSA apply?
o Shipment from foreign country to the Philippines
o It is valid for parties in inter-island shipping to stipulate that the
COGSA applies
Even if the cargo owner did not file a claim, it can still sue. Filing a claim
is not a condition precedent.
1 year period to file a case
o Count the one year from the last day delivery was made (if
unloaded Mon-Wed, count from Wed)
o If the goods were not delivered, count it from the last day the
vessel was here and could have delivered the goods
172
o Does the provision in the civil code that the filing of the
claim interrupts the prescriptive period apply?
No, it does not. Public policy dictates expeditious
disposition of the cases under COGSA.
o Can the consignee-insured sue the insurer instead?
No. This is a circumvention of the rule. The insurer
will step into his shoes and will find himself barred from
recovery.
o When does the one year prescription not apply?
1. Agreement by parties to extend the period
2. In case of misdelivery delivered to wrong party
Apply NCC: 10 years under a written K, 5
years if suing under tort
3. Delay in the delivery of the goods
o IMPT: COGSA doesnt apply to misdelivery and delayed
delivery. COGSA only applies to non-delivery and damaged
goods.
$500/carton limit
o BUT if the nature and value of the goods are stated in the bill of
lading and the BOL indicates this greater amount, the ship
owner is liable for that greater amount
It must apply on the BOL itself, not a mere reference to
another document
Compare the prescriptive periods:
o Code of commerce:
Period to file a claim:
Immediately if damage is apparent
Within 24 hours if damage is not apparent
What is the caveat?
o For both cases, the claim must be
made before the payment of the
transportation charge
Prescription for court claim
Claim is a condition precedent
For non-delivery or misdelivery:
o Within 6 years if there is no BOL
o Within 10 years if there is a BOL
o COGSA :
Claim is not a condition precedent. But periods are
here anyway:
Immediately if damage is apparent
Within 3 days from delivery if damages is not
apparent
Prescription for court claim
Within 1 year form delivery or when the goods
should have been delivered
Public service law
What are not public utilities:
173
o In the old law, ice plants were regulated as public utility, but
when the PSC was abolished, there is no more body regulating
them.
o In case of tricycles, it is now the municipalities/cities who issue
certificates of public convenience
o A shipyard is not a public utility, because you have to render
services to the public. A shipyard does not.
The law mentions entities that are not public utilities:
o Warehouses
o Vehicles drawn by animals
o Bancas, tugboats, lighters
o Tricycles
o Pedal-driven pedicabs
o Public utilities operated by national or local government
Ex. PNR, Olongapo City power plant
But these are regulated by appropriate regulatory
agency
Can foreigners own public utility properties?
o Mere ownership of the properties used by public utilities does
not make one a public utility. So a foreign entity can own the
LRT facilities and lease it out.
In case of radio and telecommunication companies, what is
required?
o A legislative franchise. What is granted is a certificate of
necessity and public convenience.
o If legislative franchise is not required, its just a certificate of
public convenience.
o So: if the legislative grants a franchise, its a CNPC. If no
legislative franchise is needed and what is just needed is
authorization given by the regulatory body, its a CPC.
When can a CPC be revoked?
o 1. Violation or refusal to comply with order, rule or regulation of
the authority
o 2. Holder is just a dummy
o 3. Holder ceases operations or abandons services
Requirements to get a Certificate of Public convenience?
o 1. Applicant must be Filipino or corp/association organized in
the Philippines and 60% Filipino
o 2. Applicant must prove public service and interest is promoted
o 3. Applicant is financially capable
What is the prior operator rule?
o Before allowing a new applicant to come in, a prior operator
must first be given the chance to expand his service
o Provided that his service is efficient, to prevent ruinous
competition
Not all competition is ruinous competition, but the
returns in income should drastically lower the income
of the prior operator that he loses a lot of money
o Exceptions?
1. Prior operator is operating less units than authorized
174
2. Operator denies there is a need to expand his
service
3. The old operator did not apply until a new applicant
emerged
4. Service of the prior operator must be deficient
5. Prior operator given a chance to expand but failed to
do so
6. Abandoned his service
7. Routes are different, although partially overlapping
Who has the burden of proof to establish need for public
transportation service?
o Always the applicant
Unlawful acts:
o 1. Provide unsafe or inadequate service
o 2. Charge rates not authorized
Up to how long is suspension allowed?
o Director can suspend up to 30 days the certificate of authority.
Acts requiring commission approval:
o 1. Fixing rates
BUT Usually regulatory agencies are allowed to issue
provisional rate increases
This needs no hearing. Reason: they are temporary by
nature and subject to adjustment after final hearing.
o 2. Construct, maintain, operate new units to extend facilities
Somebody had a certificate of public convenience for
inter-island shipping and had one vessel which was
indicated. It became unseaworthy, and he sold the
CPC. The sale is void because there was no valid
subject matter of the sale.
NOTE: the CPC indicates what units will be used. If
you replace the unit you have to get approval.
o 3. Increase capitalization
o 4. Sell, mortgage, lease, encumber its CPC and properties
o Sale of units covered by a CPC without commission
approval valid?
Yes, but only between the parties and not to third
persons.
What is the standard that should be used when an admin body fixes
rates of public utilities?
o The only standard is that it must be reasonable and just.
o Factors considered:
1. Rate of return (usually 12%)
2. Rate base
3. Return itself or computed revenue to be earned by
the public utility
There is a circular saying that provincial buses can charge more or less
with allowed variance of up to 15% in costs. Is this valid?
o No, because this is undue delegation.
175
What is the fair rate of return for investment?
o 12% - citing US jurisprudence
o But the SC also approved using present value of properties
used to render public service as basis
o Meralco case: Court adopted the present value of the assets
used to render services as basis to determine rate of return.
Now and then, this is why power plants can submit adjusted
rates because they just had their assets reappraised, and these
increased in value.
If a customer claims he was overcharged, where does he file?
o With the courts
o NOT with regulatory agency, because this does not involve rate-
fixing.
o Same file with the court if you want to question how Meralco
arrived at its calculations and to ask for an explanation on the
particulars.
If a customer claims that his service of electricity was improperly
disconnected, where does he file?
o With the ERC, which has the power to direct the power
companies to reconnect the service
Generally: need 72 hour notice prior to disconnection of service
o EPIRA provision
If a customer was caught in flagrante delicto using a
jumper, the service can be disconnected immediately.
o Requisites?
1. Caught in flagrante delicto
When the owner was not present and just his
househelper was, there, not in flagrante
2. A representative of the ERC or officer of the law
must be present when the inspection was conducted
When is notice and hearing required?
o 1. Issuance of CPC/CNPC
o 2. Fixing standards and qualifications
o 3. Fixing standards of measuring quantity
o 4. Establishment of rules to secure accuracy of meters and
measuring appliances
o 5. Order to compel operators to furnish proper service
o 6. Allowing extension of facilities
When is notice and hearing not required?
o 1. Investigation of public utilities
o 2. Valuation of properties of public utilities
o 3. Examination and test of measuring appliances
o 4. Grant of special permits to make extra or special trips in
territories specified in the certificate
o 5. Investigation of accidents
o 6. Compel compliance with law and regulations
Kabit system is this legal?
o No, because someone not financially capable to render public
service will be able to do so. So to protect the public, the actual
176
operator and ostensible operator (grantee of franchise) are
SOLIDARILY liable to victims.
o But the ostensible operator (with the franchise) can sue the
actual operator for indemnity.
o Can the ostensible operator sue the actual operator to
recover units which were the subject of Kabit system?
No. They are in pari delicto. You cant come to court
with unclean hands.
o Kabit system jurisprudence talks about liabilities to third
parties. So if a kabit jeepney is hit by a truck from behind, the
truck is still liable.
If a taxi was used as a get-away vehicle by robbers, can the CPC be
cancelled?
o No, not unless there is proof of collusion.
Foreign investments act
What is the policy of the FIA?
o To attract and promote foreign investments in activities that
contribute to national development and socio-economic
development of the country, to the extent allowed by the
Constitution
o In general, no restrictions on foreign investments, except for
industries in the negative list, but foreign firms are encouraged
to undertake measures to gradually improve Philippine
participation in the enterprise
Define foreign investment:
o Equity investment by non-Philippine nationals in the form of
foreign exchange or assets actually transferred to the
Philippines, and duly registered with the BSP which shall
assess/appraise the other assets other than foreign exchange
Define doing business:
o 1. Soliciting orders
o 2. Service contracts
o 3. Opening offices whether liaison offices or branches
o 4. Appointing representatives staying in the Philippines 180
days or more
o 5. Participating in management of domestic business
o 6. Any other act that implies continuity of business dealings for
commercial gain or pursuant to objective of the organization
o Does not include:
1. Mere investment as SH in domestic firm
2. Exercising rights as SH or having nominee
director/officer in that corporation
3. Appointing representative/distributor that acts in its
own name
Define export enterprise:
o Enterprise where the manufacturer, processor, or service
(including tourism) enterprise exports at least 60% of its output
o Or purchase-and-export of at least 60% of the products
Define domestic market enterprise:
177
o Enterprise which produces goods for sale or renders service to
the domestic market entirely, or export fails to consistently reach
at least 60% of its output
Is there need for prior approval before a non-Philippine enterprise
may invest or do business in the Philippines?
o None. The enterprise just has to register with the SEC or the
BTRCP (for sole proprietorships, the Bureau of Trade
Regulation and Consumer Protection).
o The SEC or BTRCP cannot limit the amount of investment made
by the firm.
Of course, subject to constitutional limitations and the
negative lists.
o If they seek incentives, register with the BOI.
What is the rule on foreign investments in export-oriented
enterprises?
o Can be up to 100%, if not on the negative lists
o If the export-oriented enterprise is not a Philippine national,
register with BOI, which will check compliance with the 60%
export requirement, and require reduction of domestic sales if
they fail to comply, under threat of cancellation of registration by
the SEC/BTRCP.
What is the rule on foreign investments in domestic market
enterprises?
o Can be up to 100%, if not prohibited or limited in the
Constitution or negative lists
Negative lists:
o Board of Investments draws up negative list A and B.
o List A: covers business enterprises reserved for Filipinos by the
Constitution and specific laws.
o List B: commercial activities which are nationalized and:
1. Defense-related activities due to national security
reasons
Unless approved by the Sec. of National
Defense
2. Activities which impact public health and morals
Ex. manufacture and sale of dangerous drugs
(since there are drugs that are regulated, not
totally prohibited)
3. Small and medium sized domestic enterprises
where the paid in capital is less than $200,000
But if it involves highly-advanced technologies
(approved by DOST) or they employ at least
50 employees the paid up capital can be at
least $100,000
o Outside of these two lists, its open to all foreigners.
What is the right of Natural Born Filipinos and naturalized citizens?
o They have the same rights as Filipinos although they have lost
their citizenship as to investments.
o Ex. in rural banks
o Natural born Filipinos who lost their citizenships can acquire up
to 3 hectares of rural land or 500 sq. m. of urban land
o Cannot acquire more than 2 lots, which must be in different
municipalities or cities
178
Annex 1: in-depth discussion of presentment,
dishonor, acceptance in NIL
Presentment for payment
When is presentment for payment necessary? When is it not
necessary?
o Presentment for payment not necessary to charge the primarily
liable person
Maker and acceptor
If the instrument is payable in special place and he is
able and willing to pay there at maturity = such
willingness is equivalent to tender of payment
What does this imply?
o If the person primarily liable is there
on the place where it is payable on
the stated time, holder loses right to
recover interest due subsequent to
maturity + costs of collection
o BUT he does not lose the right to get
paid
o But for those secondarily liable (indorsers and drawer) there is
need for presentment for payment
What if the holder does not make presentment to
the person primarily liable?
Those secondarily liable are discharged
But he can still go after the person primarily
liable
So, the bottomline: the instrument must be
presented for payment on date it is due to
charge the secondarily liable persons see
Sec. 71 for special rules on when an
instrument must be presented
o What is presentment?
Production of BOE to drawee for acceptance or
payment, or acceptor for payment, or of a PN to the
maker for payment
o What constitutes presentment?
1. Personal demand for payment
2. Readiness to present the note and surrender it if
paid
Sec 71
o Instrument not payable on demand
Make presentment on date due
o instrument payable on demand
Must be presented within reasonable time from issue
If its a BOE, you make it after a reasonable time after
last negotiation
What does negotiation here cover?
o Negotiation for value, not negotiation
for collection between banks
179
Sec 72 when presentment is sufficient
o REQUISITES:
1. Made by holder or agent
2. Reasonable hour on business day
3. At proper place defined
4. To person primarily liable
Is absent/inaccessible to any person found
in place where presentment is made
o There is a wife who presented a negotiable certificate of time
deposit. Bank refused to pay her because they paid the
husband. HELD: it was not presented by the husband, but the
wife. Bank should pay the wife.
Sec 73 proper place for presentment
o If there is a stipulation where presentment must be made, it
must be made there.
o If none provided, but address of maker is stated, go there
o If none provided, to usual place of business/residence
o Wherever he may be found/last known place of
business/residence
Sec 74
o NI must be exhibited to the person from whom payment is
demanded
o So he can check genuineness
o This is why telephone as demand is not allowed
o First Pacific (?) Check negotiated by car dealer to financing
company. When the instrument not paid, company sued maker
and indorser. Indorser said he was discharged because there
was no proper presentment for payment. HELD: Letter of
demand is not sufficient. Law requires that the instrument be
shown to the maker. Therefore, presentment not valid and
indorsement is discharged.
o Failure excused on two grounds:
1) Instrument was lost
2) payment refused on some other ground
Ex. no funds, and not because it was not
shown
Sec 75
o Presentment where instrument payable at bank must be made
during banking hours. Law assumes that the bank will be the
source of the funds.
o But if presentment is made beyond banking hours, it is valid if
the funds will not come from the bank, as long as it falls on the
date of maturity.
Sec 76-78
o Applies when principal debtors is:
Dead
Liable as partners
Liable as Joint debtors
o If there is an address stipulated, pay there.
o If dead, give to executor/admin
180
If there is one, and he can be found with reasonable
diligence
o If partners, to any of the partners
Even if dissolved already
o If joint debtors, to all of them
When presentment is not required to charge those secondarily liable:
o DRAWER presentment not required to charge the drawer
when there is no reasonable expectation that the drawee or
acceptor will pay the instrument
Ex. knows there are no funds or there is stoppage of
payment
o INDORSER when instrument was made/accepted for
indorsers accommodation, and indorser has no reason to
expect it will be paid if presented
Fortuitous event excuses delay in presentment
Presentment for PAYMENT excused if:
o 1. Cannot be done even after reasonable diligence
o 2. Drawee is fictitious person
o 3. Waiver of presentment express or implied
When is an instrument dishonored by non-payment?
o 1. Duly presented for payment and payment is refused or cannot
be obtained
o 2. Presentment is excused and it is overdue and unpaid
What is the effect of dishonor by non-payment?
o Under the law, the moment it is dishonored, there is immediately
a right of recourse against those secondarily liable. NO NEED
to go to the primarily liable.
Sec 85
o If payable in a fixed period, it must be paid on that day
o If on a Sunday or holiday, then go to next business day
o If on a Saturday
On next business day. Because even if some offices
hold business on Saturday, they are usually half day.
The law wants a whole business day
Except instruments payable on demand can present
before 12 noon, Saturday, if it is not a holiday
o Contrast:
Ex. Payable on Friday. But it was declared a public
holiday. So it becomes Saturday. But the law says
present it on next business day. So Monday.
Ex. BUT if it is payable on demand then the
maker/acceptor MUST pay provided it is presented on
working hours of Saturday.
Sec 86
o Time exclude first day, include last day
Sec 87 when instrument is payable at a bank
o Implied: that it is an order to the bank to pay for account of the
principal debtor
o First National bank: PN payable at FNB. Maker had sufficient
funds. But holder did not show up at day of maturity. Dilly-
181
dallied then the maker became insolvent. Had he shown up
by then, he would have been paid. HELD: No. The fact
remains that he is the maker, so he is primarily liable, and
should pay.
o N.B. Remember, failure to make proper presentment only
discharges those secondarily liable. The primarily liable person
is still liable, although the holder may not claim interest
subsequent to maturity and costs of collection.
Sec 88 Payment in due course
o 1. At or after maturity
o 2. To the holder
o 3. By the debtor, in GF and w/o notice that the holders title is
defective
Notice of dishonor
Sec 89 dishonor
o Give notice of dishonor
o Any party may be compelled to pay it to the holder with right of
reimbursement
o A B C D E
D giving notice to B will benefit E
o Notice given by a holder benefits all subsequent holders and
prior parties that have right of recourse against the one given
notice against
o Notice may be given by holder himself or agent of the holder.
Sec 90 Who can give notice of dishonor
o 1. Holder
o 2. Agent of holder
o 3. Party to the instrument who may be compelled to pay the
holder, but only to those other parties he may seek
reimbursement from
o 4. Agent of such party
o What about strangers?
Cannot give notice, except as agents
o Who is considered a stranger?
Party discharged from the instrument
Person primarily liable who dishonored the instrument
Sec 91
o Notice may be given by a party or an agent
o Agent need not be authorized by the party
Because this is beneficial
o If the agent wants to give notice, on a instrument dishonored on
Monday, two options:
A) notify principal
On Tuesday
Principal has until Wednesday to notify
secondarily liable parties
B) notify parties who are secondarily liable
182
o If agent receives notice of dishonor, he must be authorized
Because this is prejudicial
Form of notice:
o In writing or oral
As long as it sufficiently describes the instrument and
indicates that it has been dishonored
Misdescription does not vitiate notice unless the party
to whom it is given is in fact misled
o Personal or through mail
o If written, need not be signed
In sufficient written notice may be supplemented by
verbal/oral communication
Rule as to jointly liable parties:
o If partners?
Notice to one is notice to all
o If joint payees or joint indorsees who indorse?
Sec 68 treats them as solidarily liable
o If joint drawers or joint accommodation indorsers, and
others not covered by 68?
Give notice to all
Sec 103 and 104 time within which notice must given
o Know the difference in rules where parties reside in the same
place (103) or different places (104)
o SAME PLACE:
1. If given at place of business before close of
business hours the next day
2. If given at residence before usual hours of rest the
next day
3. If by mail sufficient to reach him the next day
o DIFF PLACES:
1. If by post office in time to go by mail the next day;
if no mail at a convenient hour that day, the next mail
2. If not by post office within the time it would have
been received in due course had it been sent by post
office
o N.B. This same time is counted again, after a party receives
notice of dishonor, to give that party a chance to give notice to
antecedent parties
What is the effect of miscarriage in mails?
o Sec 105 if notice was duly addressed and deposited in the
post-office, due notice is deemed given
o What is deposit in the post office?
Deposited in any branch of the P.O.
Deposited in any P.O. box
Sec 108: WHERE notice must be sent
o 1. Post office nearest to residence or where he is accustomed to
receiving letters
o 2. To place of business or residence
183
o 3. Place where he is sojourning
o If notice is actually received, although not according to
these provisions, what happens?
It is still valid
When can there be waiver of notice of dishonor?
o 1. Before actual time for giving it comes
o 2. Or after failure to give it
o Can waiver be implied?
Yes.
Who is affected by a waiver in an instrument?
o If written on the instrument all the parties
o If written over a signature just that person
Waiver of protest
o Includes presentment and notice of dishonor (steps to hold a
person secondarily liable)
When is notice of DH not needed to be given to drawer?
o 1. Drawer and drawee are the same person
o 2. Drawee is fictitious person or has no capacity to contract
o 3. Drawer is the person to whom instrument was presented for
payment
Ex. C went to the office of X, the drawee, but he was
not there. But R, the drawer, who was the office
manager, was there. And the drawer dishonored.
o 4. Drawer has no right to expect that drawee or acceptor will
honor
Ex. X withdrew her money from her bank account and
issued a check to cover for expected proceeds of
jewelry she had to sell. She failed to sell the jewelry.
The check was in the hands of Y who had ABC
investment house rediscount it. The check bounced.
HELD: X had no right to expect the bank will pay
because she withdrew all her funds.
o 5. Drawer countermanded payment
Meaning, drawer stopped payment.
o N.B. In all these cases, the drawer KNEW that there was or
would be dishonor.
When is notice of DH not needed to be given to indorser?
o 1. Drawee is fictitious person or has no capacity to contract and
the indorser is aware of this fact upon indorsement
o 2. Indorser is the person to whom presentment for payment was
made
o 3. Instrument was made or accepted for his accommodation
Drawer Indorser
Drawer and drawee same person
Drawee fictitious or no capacity Drawee is fictitious or no capacity,
and indorser knows
Drawer is to whom instrument was
presented for payment
Indorser is to whom instrument was
presented for payment
Drawer has no right to expect it will
be paid by drawee
Made or accepted for indorsers
accommodation (same principle: no
right to expect it will be paid)
Drawer countermanded
184
If an instrument was not accepted, and notice of dishonor by non-
acceptance is given, is there need to give notice of dishonor by non-
payment?
o No.
o What is the exception?
If it was accepted in the meantime.
Failure to give notice of dishonor by non-acceptance does not prejudice
rights of a HIDC subsequent to the omission.
o Ex. A drew a BOE payable to B. B indorsed to C. C presented
the BOE for acceptance to X. X dishonored the instrument. C
did not give notice of dishonor to A or B. C indorsed the
instrument to D, a HIDC. D will not be precluded by Cs failure
to give notice of DH to A and B.
Acceptance
Acceptance assent to order of drawer
o Must be in writing and signed by drawee
What if the drawee refuses to sign?
If drawee refused to write and sign, holder
may treat it as dishonored
What if the acceptance is written on a different
sheet of paper?
It does not bind the drawee, except to
someone to whom it is shown and receives
the bill for value upon faith thereof
NB: this applies when the bill exists as of time
of acceptance
What if there is a promise to accept in writing?
Deemed an actual acceptance in favor of
those who receive the bill for value upon faith
thereof
NB: this applies for bills that do not exist yet
when the promise is made (Ex. BOE pursuant
to a LOC)
o Cannot be other than payment of money
Must accept within 24 hours from presentment
o Acceptance deemed done on date of presentment
o When is a bill deemed accepted?
Failed to act on it within 24 hours
Does the drawee have a right to retain the
bill for the whole 24 hours?
o No. The holder can ask for it back.
But the drawee will still have the rest
of the 24 hours to decide.
Destroys the bill
NB: destruction must be on purpose
o What are the special situations when can the drawee accept
pa rin?
1. Even before it is signed by the drawer
2. Even when it is incomplete
3. When it is overdue
185
4. Dishonored by prior non-acceptance or non-
payment
What is the special rule if the bill was dishonored
by prior non-acceptance, but it was accepted
thereafter?
The holder can consider the date of first
presentment as date of acceptance
Kinds of acceptance:
o 1. General
Includes local but not confined only at a particular
place
o 2. Qualified
Conditional
Partial
Local (ONLY at a particular place)
As to time
Only some of drawees, but not all
What is the right of parties as to qualified acceptance?
o Holder can deem it DH by non-acceptance
o If holder allows qualified acceptance, indorser and drawer
discharged
Unless they assent
Failure to dissent is assent
Presentment for acceptance
When is presentment for acceptance needed?
o 1. Bill payable after sight or acceptance needed to fix maturity of
instrument
o 2. Bill expressly requires acceptance
o 3. Bill is payable elsewhere than residence or place of business
of drawee
o What about other cases?
No need for presentment for acceptance to render any
party to the bill liable
What is the option of the holder?
o Must present the bill for acceptance within reasonable time
o Or negotiate the bill within reasonable time
What is the consequence of failure to present for acceptance?
o Discharges those secondarily liable
Time for presentment same as presentment for payment
Special rule when there is little time to present for acceptance
before presenting for payment, where presentment for acceptance is
needed?
o Delay caused by prior presentment for acceptance is excused
and does not discharge those secondarily liable
When is presentment for acceptance excused?
o 1. Drawee is dead, has absconded, fictitious, lacks capacity
186
o 2. Cannot make presentment even after reasonable diligence
o 3. Although presentment is irregular, acceptance refused on
some other ground
What if a bill is DH by non-acceptance?
o Immediate recourse to secondarily liable parties avail; no need
for presentment for payment
[Step-by-step guide on presentment for acceptance, dishonor, payment]
Step 1: Presentment for acceptance required if
o 1. BOE is payable after sight, or acceptance is needed to fix the
maturity of the instrument
o 2. BOE expressly requires presentment for acceptance
o 3. BOE payable elsewhere apart from residence or place of
business of drawee
OTHER OPTION May choose to negotiate it within a reasonable time
Consequence: will discharge drawer and all other indorsers
EXCEPTIONS no need to present if/or treated as dishonored if:
o 1. Drawee is dead, has absconded, fictitious, or lacks capacity
to contract
o 2. Presentment cannot be made even after reasonable diligence
o 3. Although presentment is irregular, acceptance was refused
on some other ground
Step 2: Give notice of dishonor by non-acceptance to secondarily liable
persons
o EXCEPT, no need to give notice: if instrument was
made/accepted for his accommodation and he has no reason to
expect the instrument will be paid if presented
o AND will not prejudice rights of HIDC after omission to give
notice of dishonor
o IF foreign bill,
Protest for non-acceptance or protest for non-payment
needed
Except
1. If instrument was made/accepted for his
accommodation and he has no reason to
expect the instrument will be paid if presented
2. Delay is excused for fortuitous
circumstances
Except: will not prejudice rights of HIDC after omission
to protest
Step 3: Give notice of dishonor by non-payment to secondarily liable
persons (if dishonored by non-payment)
o See notes above
o EXCEPT: When presentment for payment is excused
1. Drawee is fictitious person
2. Presentment cannot be made even after reasonable
diligence
3. Waiver of presentment, express or implied
Protest
187
Protest necessary for DH of a bill that on its face appears to be a foreign
bill
Made by Notary Public or respectable resident + two or more credible
witnesses
When must it be done?
o Day of DH
o If bill is noted in the notarial register, protest may be made
anytime
Where?
o Place of DH
o Except when expressly payable at the residence/business of
another person apart from the drawee
What is protest for better security?
o If the drawee was adjudged bankrupt or insolvent, or made
assignment for benefit of creditors even before the bill matures
o Is this mandatory?
Nope
o What is the purpose?
To inform the drawer/indorsers that the drawee is
insolvent and therefore they should prepare to pay
When is protest excused or dispensed with?
o Dispensed with for same grounds notice of DH is dispensed
with
o Excused for fortuitous event
When is protest also done?
o When bill is lost, destroyed, wrongly detained protest made on
copy/written particulars of the bill
Bills in set
Main Principle: each part of the bill, numbered and referring to the other
parts, the whole of the parts constitute one bill
o [usually, it is done to ensure that bills can be collected from
even if one part is lost in the mail or so]
o [So usually bills in a set are several copies of the same thing,
sent separately]
What if different parts are negotiated to different HIDCs?
o The one whose title accrues first is the true owner
o But the one who gets acceptance or payment first is the one
who will be able to collect
Indorser of two different parts is liable on every such part
How should the drawee accept?
o Accept on any part, and on one part ONLY. If he accepts on
multiple parts and these are severed, he is liable on all parts.
o If he pays and did not get back the part with the acceptance,
and it once again falls in the hands of an HIDC, he can still be
liable
Discharge of one part is discharge of all
188