ATE NEO

CENTRAL
BAR OPERATIONS 2019

JORGE ALFONSO C. MELO

Bar Review Coordinator

LEILA S. LiM
Bar Review Secretariat

ATENEO CENTRAL BAR OPERATIONS

PATRICK EDWARD BALISONG

Chairman

KATRINA Y. COSCOLLUELA JONATHAN VICTOR NOEL CZARINA CHER CUERPO

g e n ic a t h e r e s e ENDALUZ JOHN STEPHEN PANGILINAN BENIGNO ENCISO
^ j|mjp|sjratjon Committee Heads^ Academics Committee Heads Hotel Operations CommitteeTieads

DEAN JOSE MARIA HOFILENA

ATTY. ROEL REFRAN
ATTY. IVY PATDU
ATTY, FELICISIMO AGAS III
COMMERCIAL LAW Faculty Advisers

ISABELLA NAGUIAT
CHRISTINE LEONG
CLAUDINE BERNAS
PAOLO GABRIEL BAUTISTA
COMMERCIAL LAW Subject Heads

EUNICE A. MALAYO
FRANCES CHRISTINE F. SAYSON
Central Bar Operations
Academics Understudies

GIA MORDENO
MOIRA SARMIENTO NICK! VINE CAPUCHiNG
JEBEL CLAUDIO
MAE SAMPANG ELDEN ROCAMORA
REI LUIS DOMINGO
REMEDIAL LAW Volunteers
ATENEO CENTRAL
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| I. LETTER S OF C R ED IT A N D TR U S lT R E C E IP TS | b. To cause the Extrajudicial sale of the goods and apply

the proceeds to the value of the lien (Id., Secs. 33 &
34); and
A. BASIC CONCEPTS
c. By Other means allowed by law to a creditor against his
debtor, for the collection from the depositor of all the
Q: What is a letter of credit?
charges which the depositor has bound himself to pay.
A: It is a written instrument whereby the writer (i.e., a bank
(Id., Sec. 32);
client) requests or authorizes the addressee (i.e., a bank)
d. or Other remedies allowed by law for the enforcement
to pay money or deliver goods to a third person and
of lien against personal property (Id., Sec. 35)
assumes responsibility for payment of debt therefor to the
addressee. (Transfield Philippines, Inc. v. Luzon Hydro
B. RIGHTS AND OBLIGATIONS OF PARTIES
Corporation, G.R. 146717, 2004)
Q: Can a bank refuse payment if the proper
Q: What is the independence principle in letters of
documents have been presented to it?
credit?
A: No. The purpose of a commercial letter of credit is to
A: It means that in determining if the beneficiary of the
insure payment of a definite amount upon presentation of
letter of credit complied with it, the bank is required to
documents. The bank only deals with documents; it has
examine only the documents presented. It is precluded
nothing to do with the quality of the merchandise.
from determining whether or not the beneficiary actually
(Prudential Bank v. IAC, G.R. No. 74886, 1992)
complied with the underlying contract. (Bank o f America v.
Court of Appeals, G.R. No. 105395, 1993)
Q: What are the three distinct and independent
contracts in a letter of credit? (SBL)
Q: What is the exception to the independence principle
A:
in letters of credit transactions?
a. Sale between the Seller and the buyer;
A: Fraud Exception Rule - Fraud (fraudulent abuse of the
b. Contract of Buyer with issuing bank; and
credit, in case of collusion between the
c. The Letter of credit itself, wherein the bank promises to
correspondent/paying bank and the exporter/seller of the
pay pursuant to the terms and conditions of the letters
goods) is an exception to the independence principle. That
of credit. This assures seller of prompt payment,
is, the untruthfulness of a certificate accompanying a
independent of any breach of the main sales contract.
demand for payment under a letter of credit may qualify as
(Keng Hua Paper Products Co., Inc. v. Court of
fraud sufficient to support an injunction against payment.
Appeals, G.R. No. 116863, 1998)
(Transfield Philippines v. Luzon Hydro Corp., G.R. No.
146717, 2004)
Q: What are the rights of the Parties in a letter of
credit?
Q: What is the doctrine of strict compliance?
A:
A: The documents tendered by the seller or beneficiary
a. The person paying shall have the right to demand proof
must strictly conform to the terms of the letters of credit,
of identity of the person in whose favor the letter of
i.e. they must include all documents required by the letter
credit was issued (Code of Commerce, Art. 569(3))
of credit. Thus, a correspondent bank which departs from
b. In case of non-payment, person to whom the letter of
what has been stipulated in the letter of credit, as when it
credit is addressed may institute an action involving
accepts a faulty tender, acts at its own risk and may not be
execution (Code of Commerce, Art. 571(2)).
able to recover from the buyer or the issuing bank, as the
case may be, the money paid to the beneficiary. (Feati
Q: What are the obligations of the parties in a letter of
Bank v. CA, G.R. No. 94209, 1991)
credit?
A:
Q: What is a warehouseman's lien?
a. DRAWER of the letter of credit
A: It is a lien over the goods deposited with him is his
• Liable to the person on whom it was issued for the
security for the payment of the charges, money advanced,
and other expenses owed to the warehouseman. Clearly, amount paid (Code of Commerce, Art. 569, par. 1)
the lien exists for the benefit of the warehouseman. • In case of revocation, he must inform the bearer and
(Warehouse Receipts Law, Sec. 27) the person to whom it is addressed (Code of
Commerce, Art. 570)
Q: What are the remedies of a warehouseman having b. BEARER of letter of credit
a valid lien against a person demanding the goods? • Pay the amount received without delay (Code of
A: The following are the remedies available to a Commerce, Art. 571, par. 1)
warehouseman having a valid lien against the person c. NOTIFYING BANK
demanding the goods: (REO2) • To notify and/or transmit the documentary of credit
a. To Refuse to deliver the goods until the lien is satisfied to the seller-beneficiary
(Warehouse Receipts Law, Sec. 31)\ • Assumes no liability

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d. NEGOTIATING BANK
• Buys/discounts a draft under the letter of credit
• Liability depends upon the negotiation
o Before negotiation, it has no liability with respect
to the seller
o After negotiation, there is a contractual
relationship prevailing between the negotiating
and the seller
e. CONFIRMING BANK
• Assumes a direct obligation to the seller
Q: Distinguish the liabilities of a notifying bank, a
negotiating bank and a confirming bank?
A: A notifying bank undertakes to inform the seller-
beneficiary that a letter of credit exists. Its obligation is
limited to this duty and assumes no liability to pay under
the letter of credit.
A negotiating bank purchases drafts at a discount from the
seller-beneficiary and presents them to the issuing bank
for payment. Prior to negotiation, a negotiating bank has
no obligation. A contractual relationship between the
negotiating bank and the seller-beneficiary arises only after
the negotiating bank purchases or discounts the drafts.
A confirming bank confirms that the letter of credit will be
honored by the issuing bank. A confirming bank, by such
confirmation, insures that the letter of credit will be paid in
accordance with its terms. It therefore assumes a direct
obligation to the seller-beneficiary. (HSBC v. National Steel
Corporation, 2016)
Q: What is a trust receipt transaction?
A: It is a transaction by and between the entruster and the
entrustee, where the entruster, who owns and hoids
absolute title to or security Interest over certain specified
goods, documents or instruments, releases the same to
the possession of the entrustee upon the latter’s execution
and delivery to the entruster and the trust receipt (Trust
Receipts Law, P.D. No. 115, Sec. 4)
The nature of a trust receipt transaction is inconsistent with
that of an assignment of credit as the latter necessarily
involves an absolute conveyance of title. (Bangko Sentral
ng Pilipinas v. Libo-ob, G, R, No, 173864, November 23,
2015)
Q: What are the rights of the entruster?
A:
a. Entitled to the proceeds from the sale of goods,
documents or instruments
b. Entitled to the return of the goods, etc. In case of non­
sale
c. To enforce all other rights conferred to him under TRL.
d. To cancel the trust, take possession of the goods or
instruments or of proceeds realized therefrom upon the
default of the entrustee.
e. To sell the goods in a public or private sale upon notice
to the entrustee in case of default.
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f. May purchase at the intended public sale (TRL, Sec. 7)
g. Extent of security interest:
o As against innocent purchaser for value: not
preferred (TRL, Sec. 11)
o As against creditors of the entrustee: preferred
(TRL, Sec. 12)
Q: What are the liabilities of the entruster in any sale
or contract made by the entrustee?
A: The entruster is not responsible as principal or as
vendor under any sale or contract to sell made by the
entrustee by virtue of such interest or having given the
entrustee the liberty to sell or otherwise dispose of the
goods, documents or instruments under the terms of the
trust receipt transaction.
Q: Does the repossession of the goods under the trust
receipt suffice to satisfy the principal loan obligation.
A: No. The entrustee remains liable for the deficiency after
the proceeds of the sale have been applied to the payment
of expenses and debt (Landl & Company, et. al v. MBTC,
G.R. No. 159622, 2004).
Q: What acts or omissions of the entrustee would
constitute estafa? (MAD)
A.
a. Misappropriation of the proceeds of the goods involved
(RPC, Art 315 [1b], Lee v. Rod//, G.R. No. 80544, 1989)
b. Non-payment of the Amount involved
c. Failure to Deliver proceeds of sale or to return the
goods not sold (Ong v. CA, G.R. No. 119858, 2003)
Q: Who bears the risk of ioss of the goods under a
trust receipt transaction?
A: The entrustee. (TRL, Sec. 10)
Q: What is the liability of the president of a corporation
who signs a guarantee clause under a trust receipt in
his personal capacity?
A: He is liable personally and solidarily for the obligations
of the trust receipt by signing the guarantee clause in his
personal capacity. (Ildefonso Crisologo v. People of the
Philippines, G.R. No. 199481, 2012)
Q: Can a "trust receipt" transaction involve goods
which the parties know are not returnable to the
trustor?
A: No. When both parties enter into an agreement knowing
that the return of the goods subject to the "trust receipt" is
not possible, it is NOT a trust receipt transaction. The
transaction becomes a mere loan where the supposed
"trustee's" only obligation is to return the proceeds of the
sale of the goods subject to the "trust receipts". (Sps. Dela
Cruz vs. Planters Producers, Inc., G.R. No. 158649, 2013)
Q: G applied for and was granted by PPI a regular
credit line with trust receipts as collaterals. G
submitted a list of their assets in support of her credit
application for participation in the Special Credit
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Scheme (SCS) of PPL G signed a Trust Receipt/SCS, fraud (Prudential Bank v. IAC, G.R. No. 74886, December
indicating the invoice number, quantity, value and 8, 1992; See also Sarmiento and Limpin v. CA, G.R. No.
names of the agricultural inputs she received “upon 122502, 2002).
the trust” of PPL

When G failed to pay the obligation, PPI brought

against G a complaint for the recovery of a sum of
money. Did the two transaction documents signed by
G express the intent of the parties to establish a
creditor-debtor relationship between G and PPI?
A: Yes. The contract established a debtor-creditor
relationship; the trust receipt was just collateral for the
credit line. G signed the application for credit facilities
indicating that a trust receipt would serve as collateral for
the credit line. G, as the dealer signed the list of their
assets that they tendered to PPI “to support our credit
application in connection with our participation to your
Special Credit Scheme.” G further signed the Trust
Receipt/SCS documents defining her obligations under the
agreement, and also the invoice pursuant to the agreement
with PPI, indicating her having received PPI products on
various dates. The contract, its label notwithstanding, thus
was not a trust receipt transaction in legal contemplation or
within the purview of the Trust Receipts Law. (Sps. Dela
Cruz v. Planters Products, Inc., G.R. No. 158649, 2013).

C.REMEDIES AVAILABLE

Q: What are the remedies available?

A:
1. Criminal
The failure of an entrustee to turn over the proceeds of the
sale of the goods, documents or instruments covered by a
trust receipt to the extent of the amount owing of the
entruster or as appears in the trust receipt or to return said
goods, documents or instruments if they were not sold or
disposed of in accordance with the terms of the trust
receipt shall constitute the crime of estafa (TRL, Sec. 13)
In order to be validly prosecuted for estafa in relation to
Sec. 13, they:
a. Have the obligation to sell and remit the proceeds
thereof to the entruster, or return the goods if not sold;
b. Misappropriated the goods and/or the proceeds of the
sale;
c. Performed such acts with abuse of confidence to the
prejudice of the entruster; and,
d. Demand was made on the entrustee (Metropolitan
Bank and Trust Company v. Jimmy Go and Benjamin
Go, G.R. No. 155647, 2007).

2. Civil
After commencing criminal action for violation of the Trust
Receipts Law, the entruster may enforce civil liability
arising out of the trust receipt in a separate civil action.
Under Article 33 of the Civil Code, a civil action for
damages, entirely separate and distinct from the criminal
action, may be brought by the injured party in cases of
defamation, fraud and physical injuries. Estafa falls under
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r II. NEGOTIABLE IN S TR U M E N T s T avT 1 A: (END)

a. The check cannot be Encashed but can only be
A. REQUISITES OF NEGOTIABILITY deposited in the bank;
b. It may be Negotiated only once - to one who has a bank
Q: What are the essential formal requisites of a account;
negotiable instrument? (WS-UDON) c. It serves as a warning that the check was issued for a
A: Definite purpose, and the holder is not a holder in due
a. in Writing; course unless he Inquired If he received It pursuant to
that purpose. (Bataan Cigar and Cigarette Factory, Inc.
b. Signed by the maker or drawer;
v. Court of Appeals, G.R. No. 93048, 1994)
c. Contains an Unconditional promise or order to pay a
sum certain in money;
B. FORGERY AND MATERIAL ALTERATION
d. Payable on Demand, or at a fixed or determinable
tuture timo.................... - ~~~~~ .... .. .. .....
e. Payable to Order or to bearer; and, Q: What are the effects of forgery?
f. Where it is a bill of exchange, the drawee must be A: General Rule: It is inoperative. Hence, no right to retain
the instrument, or give a discharge therefor, or enforce
Named or otherwise indicated iherein wiih reasonable
certainty. (NIL, Sec.1) payment thereof against any party thereto can be acquired
through or under such signature. (NIL, Sec. 23)
NOTE: Electronic messages, (e.g. instructions given
Q: Who are the persons precluded from setting up the
through electronic messages giving authority to debit a
defense of forgery?
certain account), are not negotiable instruments as they do
A:
not comply with the requisites of negotiability under Sec. 1
a. Those who by their acts, silence, or negligence, are
of the NIL. (HSBC vs. CIR, G.R. No. 166018, 2014)
estopped from setting up the defense of forgery
b. Those who warrant or admit the genuineness of the
Q: What happens when any of the formal requisites are
lacking? signatures in question (NIL, Sec. 23), namely:
i. Indorsers (NIL, Sec. 68)
A: It is not negotiable and the provisions of the Negotiable
ii. Acceptors (NIL, Sec. 62)
Instruments Law do not apply. The requirement that is
ns. Persons negotiating by delivery (NIL, Sec. 64)
lacking cannot be supplied by using a separate instrument
in which that requirement appears. (El Blanco Espanol-
Q: What are the legal consequences when a drawee
Filipino v. McKay, G.R. No. L-7790, 1914)
bank honors a forged check?
A: In the case of a forged check, the drawee bank Is
Q: What is the effect if no date of maturity is specified
considered as paying out of its own funds and cannot
in the instrument?
charge the amount so paid to the depositor. The drawee
A: It shall be payable upon demand. (NIL, Sec. 7)
bank, however, can go against the collecting bank If the
collecting bank indorses a check bearing a forged
Q. What is the effect o f a conditional prom ise or order
indorsement and presents it to the drawee bank. In this
to pay?
case, it is the collecting bank that guarantees all prior
A: It is not a negotiable instrument as it depends on a
indorsements including the forged indorsement itseif.
contingent event. (NIL, Sec. 3)
Therefore, the collecting bank is the one held ultimately
liable. (Traders Royal Bank vs. Radio Philippine Network,
Q: What is the fictitious-payee rule and who should be
Inc., G.R. No. 138510, 2002)
liable under it?
A: As a rule, when the payee is fictitious or not intended to
Q: What Is the rule on the liability of signatories?
be the true recipient of the proceeds, the negotiable
A: General Rule: Only persons whose signatures appear
instrument is considered as a bearer instrument.
on an instrument are liable thereon. A person whose
signature does not appear on the instrument is not liable.
In a fictitious-payee situation, the drawee bank is absolved
(NIL, Sec. 18)
from liability and the drawer bears the loss. The underlying
theory is that one cannot expect a fictitious payee to
Exceptions: (AFP-AU)
negotiate the check by placing his indorsement
a. Where a duly authorized Agent signs for a person, the
thereon. And since the drawer knew this limitation, he must
latter is liable. (NIL, Sec. 10)
have intended for the instrument to be negotiated by mere
b. A Forger is liable even if his signature does not appear
delivery. However, the drawee bank shall also become
thereon. (NIL, Sec. 23)
liable when it acts dishonestly and when it is a party to the
c. A person who is Precluded from setting up forgery as a
fraud. (PNB v. Rodriguez, G.R. No. 170325, 2008)
defense. (NIL, Sec. 23)
d. Acceptance of a bill of exchange is written on a piece
Q: What are the effects of a crossed check?
of paper, other than the bill itself. (NIL, Sec. 134)
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Unconditional promise in advance to accept a bill of
exchange before it is drawn; which acceptance must be in
writing. (NIL, Sec. 135)
Q: What are material alterations? (DST-NCM)
A: They are alterations that change the
a. Date,
b. Sum payable
c. Time or place of payment,
d. Number of relations of parties,
e. Currency in which payment is to be made or one which
adds a place of payment where no place of payment is
specified,
f. OR any change or addition which alters the instrument
in any Material respect. (NIL, Sec. 125)
C. NEGOTIATION
Q: What constitutes negotiation?
A: An instrument is negotiated when it is transferred from
one person to another in such manner as to constitute the
transferee the holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is negotiated
by the indorsement of the holder completed by delivery.
(NIL, Sec. 30)
Q: What are the modes of negotiation of a negotiable
instrument?
A: (Dl)
a. Negotiation by Delivery
If the instrument is payable to bearer (NIL, Sec. 9), then
the instrument is negotiated by mere delivery. Any
person in possession of an instrument payable to
bearer is always the bearer thereof, even if he has no
legal right to it.
b. Negotiation by Indorsement
If the instrument is payable to order (NIL, Sec. 8), two
steps are needed to effect negotiation: (ID)
a) Indorsement by the payee of the present holder; and
b) The Delivery to the next holder.
Q: What constitutes an indorsement in instruments
payable to order?
A: It must be an indorsement of the entire instrument. A
partial indorsement or one which transfers the instrument
to two or more indorsees severally, does not operate as a
negotiation of the instrument. However, where the
instrument has been paid in part, it may be indorsed as to
the residue. (NIL, Sec. 32)
D. RIGHTS OF THE HOLDER
Q: Who is a holder in due course? (COGI)
A: One who has taken the instrument under the following
conditions:
a. Instrument is Complete and regular upon its face;
b. He became the holder of it before it was Overdue, and
without notice that it had been previously dishonored, if
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such was the fact;
c. He took it in Good faith and for value;
d. At the time it was negotiated to him, he had no notice
of any infirmity in the instrument or defect in the title of
the person negotiating it. (NIL, Sec. 52)
NOTE: Every holder is deemed prima facie to be a holder
in due course. However, when it is shown that the title of
any person who has negotiated the instrument was
defective, the burden is on the holder to prove that he or
some person under whom he claims acquired the title as
holder in due course. This last-mentioned rule does not
apply in favor of a party who became bound on the
instrument prior to the acquisition of the defective title.
(NIL, Sec. 59)
Q: What are the rights of a holder in due course?
A: A holder in due course
a. Holds the instrument free from any defect of title of prior
parties
b. Free from defenses available to prior parties among
themselves, and
c. May enforce payment of the instrument for the full
amount thereof against all parties liable thereon. (NIL,
Sec. 57)
Q: What are the rights of a holder who is not a holder
in due course? (OPID)
A:
a. May sue in his Own name.
b. May receive Payment and if it is in due course, the
instrument is discharged.
c. Holds the instrument subject to the same defenses as
if it were non-negotiable.
d. If he Derives his title through a holder in due course and
is not a party to any fraud or illegality thereto, has all the
rights of such holder in due course. (NIL, Sec. 57 & 58)
Q: Can a payee be a holder in due course?
A: Yes. Holder means the payee or indorsee of the bill or
note, who is in possession of it, or the bearer thereof. (NIL,
Sec. 191)
E. LIABILITIES OF PARTIES
Q: Who are primarily liable in a negotiable instrument?
(MA) (NIL, Sec. 192)
A:
a. Maker - in a promissory note
b. Acceptor - in a bill of exchange
Q: Who are secondarily liable? (IDI)
A:
a. In a promissory note:
1. indorser
b. In a bill of exchange:
1. Drawer
2. indorser (NIL, Sec. 192)
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F. PRESENTMENT FOR PAYMENT
Q: When is the presentment of payment required to be
made? When is it not required?
A: Presentment for payment is not necessary to charge
persons primarily liable. It is required only to charge
persons secondarily liable, except:
a) As to the drawer, where he has no right to expect or
require that the drawee or acceptor will pay the
instrument. (NIL, Sec. 79)
b) As to indorser, where the instrument was made or
accepted for his accommodation and he has no reason
to expect that the instrument will be paid if presented.
(NIL, Sec. 80)
Q: When mav presentment of payment be dispensed
with? (RFWD)
A:
a. Where, after the exercise of Reasonable diligence,
presentment cannot be made;
b. Where the drawee is a Fictitious person;
c. By Waiver of presentment, express or implied;
d. When the instrument has been Dishonored by non-
acceptance under Sec. 83. (NIL, Sec. 82)
G. NOTICE OF DISHONOR
Q: To whom must a notice of dishonor be given?
A: General rule: A notice of dishonor due to non-
acceptance or non-payment must be given to the (1)
drawer and (2) each indorser otherwise they wiil be
discharged from liability. {NIL, Sec. 89)
Exceptions: (W-DDD-IP)
a. Waiver of notice of dishonor (NIL, Sec. 109)
b. Notice of dishonor is Dispensed with (NIL, Sec. 112)
c. Notice of dishonor need not be given to the Drawer
i. Drawer and drawee are the same person;
ii. Drawee is a fictitious person or a person not having
capacity to contract,
iii. Drawer is the person to whom the instrument is
presented for payment;
iv. Drawer has no right to expect or require that the
drawee or acceptor will honor the instrument;
v. Drawer has countermanded payment. (NIL, Sec.
114)
d. Notice of dishonor need not be given to the indorser
i. Drawee is a fictitious person or person not having
capacity to contract, and the indorser is aware of
that fact at the time he indorsed the instrument;
ii. Indorser is the person to whom the instrument is
presented for payment;
iii. Instrument was made or accepted for indorser’s
accommodation. (NIL, Sec. 115)
e. When Due notice of dishonor by non-acceptance has
previously been given, a subsequent notice of dishonor
by non-payment need not be given (NIL, Sec. 116)
f. When omission to give a notice of dishonor by non-
acceptance does not Prejudice the rights of a holder in
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due course subsequent to the omission (NIL, Sec. 117)
NOTE: The drawee is not liable until he accepts the bill.
{NIL, Sec. 127)
H. DISCHARGE OF NEGOTIABLE INSTRUMENT
Q: How Is a negotiable Instrument discharged?
A:
a. By payment in due course by or on behalf of the
principal debtor;
b. By payment in due course by the party accommodated,
where the instrument is made or accepted for his
accommodation;
c. By the intentional cancellation thereof by the holder;
d. By any other act which will discharge a simple contract
for the payment of money;
e. When the principal debtor becomes the holder of the
instrument at or after maturity in his own right. {NIL,
Sec. 119)
I. PRESENTMENT FOR ACCEPTANCE
Q: What Is acceptance and what are its requisites?
A: Acceptance is the signification by the drawee of his
assent to the order of the drawer. It is an act by which a
person on whom the BOE is drawn assents to the request
of the drawer to pay it. (NIL, Sec. 132) Its requisites are:
(W=SEC)
a. In Writing;
b. Signed by the drawee;
c. Must not Express that the drawee will perform his
promise by any other means than payment of money;
and
d. Communicated or delivered to the holder.
J. PROMISSORY NOTES
Q: What is a promissory note?
A: A promissory note is an unconditional promise in writing
made by one person to another, signed by the maker,
engaging to pay on demand, or at a fixed or determinable
future time, a sum certain in money to order or to bearer.
Where the note is drawn to the maker’s own order, it is not
complete until indorsed by him. (NIL, Sec. 184)
K. CHECKS
Q: What is a check?
A: A check is a bill of exchange drawn on a bank and
payable on demand. (NIL, Sec. 185)
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Suretyship is an agreement whereby a party called the

j III. INSURANCE CODE “surety” guarantees the performance by another party
called the “principal obligor” of an obligation or undertaking
in favor of a third party called the “obligee.” It includes
A. BASIC CONCEPTS
official recognizances, stipulations, bonds or undertakings
issued by any company by virtue of and under the
Q: What laws govern the contract of Insurance?
provisions of Act No. 536, as amended by Act No. 2206.
A:
(Insurance Code, Sec. 177)
a. P.D. No. 612, as amended by R.A. No. 10607
(hereinafter Insurance Code);
Q: What does “doing or transacting an insurance
b. Special Laws, such as R.A. No. 1161 (Social Security
business” mean?
Act)
A:
c. Civil Code, for matters not expressly provided for in #1
1. Making or proposing to make, as insurer any insurance
and #2
contract; Making, or proposing to make, as surety, any
contract of suretyship as a vocation and not as merely
Q: What is a contract of insurance?
incidental to any other legitimate business or activity of
A: It is:
the surety;
a. An agreement;
2. Doing any kind of business including a reinsurance
b. Whereby one undertakes for a consideration;
business, specifically recognized as constituting the
c. To indemnify another against loss, damage or liability
doing of an insurance business within the meaning of
d. Arising from an unknown or contingent event.
this Code;
(Insurance Code, Sec. 2[a]).
3. Doing or proposing to do any business in substance
equivalent to any of the foregoing in a manner designed
Q: What may be insured?
A: Any contingent or unknown event, whether past or to evade the provisions of this Code. (Insurance Code,
Sec. 2[b])
future, which may damnify a person having an insurable
interest, or create a liability against him, may be insured
Q: What considerations are required in an insurance
against, subject to the provisions of this chapter.
contract?
A: General Rule: An insurance business consists in
The consent of the spouse is not necessary for the validity
undertaking, for a consideration, to indemnify another
of an insurance policy taken out by a married person on his
against loss, damage or liability arising from an unknown
or her life or
or contingent event.
that of his or her children.
Exception: Those not formally designated as insurance
All rights, title and interest in the policy of insurance taken
businesses but are deemed “doing or transacting an
out by an original owner on the life or health of the person
insurance business”
insured shall automatically vest in the latter upon the death
of the original owner, unless otherwise provided for in the
The fact that no profit is derived from the making of
policy. (Insurance Code, Sec. 3)
insurance contracts, agreements or transactions or that no
separate or direct consideration is received therefor, shall
Q: What is a contingent event?
not be deemed conclusive to show that the making thereof
A: A contingent event is one that is not certain to take
does not constitute the doing or transacting of an insurance
place.
business. (Insurance Code, Sec. 2[b])
An unknown past event is one which had already
Q: Is a Protection and Indemnity Club considered as
happened, but one is unaware if it happened or not.
doing insurance business?
A protection and indemnity club is an association
An unknown past event may be a designated event only in
composed of shipowners generally formed for the specific
cases where it has happened already but the parties do not
purpose of providing insurance cover against third-party
know about it, e.g., prior loss of a ship at sea (applicable
liabilities of its members. It is a mutual insurance
only to marine insurance). (De Leon, The Insurance Code
association. (Steamship Mutual v. Sulpicio Lines, G.R. No.
of the Philippines Annotated [2014])
196072, 2017)
Q: What is a Contract of Suretyship?
B. SUBJECT MATTER
A: A contract of suretyship is also considered an
insurance contract, if made by a surety who is doing
Q: What risks or perils may be insured?
insurance business. (P.D. No. 612, as amended by R.A.
A:
No. 10607 [hereinafter Insurance Code], Sec. 2[af).

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a. Any contingent or unknown event, whether past or
future, which may damnify (cause damage to) a person
having an insurable interest; or
b. Any contingent or unknown event, whether past or
future, which may create a liability against the person
insured (Insurance Code, Sec. 3)
Q: Can past events be insured in a Marine insurance?
A: A past event which may be insured against is peculiar
to Marine Insurance. A person insured by a contract of
marine insurance is presumed to have knowledge, at the
time of insuring, of a prior loss, if the Information might
possibly have reached him in the usual mode of
transmission and at the usual rate of communication.
(Insurance Code, Sec. 111)
Q: Give an example of a contingent liability?
A: Reinsurance
Q: Can the risks involved in the drawing of any lottery,
or for or any chance or ticket in a lottery drawing a
prize be insured against?
A: No, Section 3 does not apply to risks involved in the
drawing of any lottery, or for or any chance or ticket in a
lottery drawing a prize be insured against (Insurance Code,
Sec. 4)
Q: W hat are the elements of a Lottery?
A:
a. Consideration;
b. Prizes; and
C 'Q|Ygjrj£e
does not create a new, and a wager, he creates a risk
therefore, non-existing risk of loss to himself where no
of loss to the purchaser. suck risk existed
The purchaser faces an previously.
already existing risk of
economic loss (“insurable
interest”)._______________
In both cases, one party promises to pay a given sum to
the other upon the occurrence of a given future event,
the promise being conditioned upon the payment of, or
agreement to pay, a stipulated amount by the other party
to the contract. In either case, one party may receive
more, or much more, than he paid or agreed to pay.
Q: What is an insurable interest?
A: It Is an interest which the law requires the owner of an
insurance policy to have in the thing or person insured.
General Rule: It is pecuniary in nature.
A person is deemed to have an insurable interest in the
subject matter insured where he has a relation or
connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation and
will suffer pecuniary loss or damage from Its destruction,
termination or injury by the happening of the event insured
against. (Lalican v. Insular Life Insurance Co, G.R. No.
183526, 2009)
Exception: In life insurance, the expectation of benefit
from the continued life of that person need not be of
pecuniary nature.

There is no lottery where a company, to promote the sale Q: What are the insurable interests in different classes
of certain products, resorts to a scheme which envisions of Insurance?
the giving away for free of certain prizes for the purchase A:
of said products, for the participants are not required to pay 1. In Life Or Health
more than the usual price of the products. Here, prizes can a. Himself, of his spouse and of his children;
be obtained without any additional consideration (Phil. If a person will insure the life of another payable to
Refining Co v. Faiomar, G.R. No. L-29062, 1987) himself, he must have insurable interest on the life of
the person whose life he is insuring.
Q: Distinguish between an Insurance Contract and a
Gambling Contract. b. Any person on whom he depends wholly or in party for
A: education or support, or in whom he has pecuniary
Insurance Contract Gambling Contract interest;
The parties seek to The parties contemplate
distribute possible loss by gain through mere Note: Persons obliged to support each other: See
reason of mischance. chance. Family Code, A r t,195
The insurer seeks to avoid The gambler courts
misfortune. fortune. c. Any person under a legal obligation to him for the
The contract tends to payment of money, or respecting property or services,
The contract tends to
increase the inequality of of which death or illness might delay or prevent the
equalize fortune.
fortune. performance; and
Whatever one person
What one insures against Note: A creditor may insure his debtor’s life for the
wins from a wager is lost
is not at the expense of purpose of protecting his debt, but only to the extent of
by the other wagering
another insured person. the amount of the debt and the cost of carrying the
party.
The purchase of insurance As soon as a party makes insurance on the debtor’s life

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d. Any person upon whose life any estate or interest
vested in him depends. (Insurance Code, Sec. 10)
Q: Distinguish between Life Insurance Policy and Civil
Donation.
A:
Life Insurance Policy Civil Donation
This is also founded on An act of liberality whereby
liberality, as the a person disposes
beneficiary will receive the gratuitously a thing or right
proceeds of the said in favor of another who
insurance accepts it
As a consequence, the proscription in Civil Code, Art. 739
should equally operate in life insurance contracts (Insular
Life v. Ebrado, G.R. No. L-44059, 1977)
Q: Who is a beneficiary?
A: Person who is named or designated in a contract of life,
health, or accident insurance as the one who is to receive
the benefits which become payable, according to the terms
of the contract, upon the death of the insured (44 Am. Jur.
2d. 639 cited in de Leon, 2010, p. 96).
Q: Who can be designates as a beneficiary?
A: General rule: When one insures his own life, he may
designate any person as the beneficiary, whether or not
the beneficiary has an insurable interest in the life of the
insured.
Exceptions: Persons specified in Article 739 of the Civil
Code cannot be designated:
a. Those made between persons who were guilty of
adultery or concubinage (conviction is not a condition
precedent);
b. Those made between persons found guilty of the same
criminal offense, in consideration thereof;
c. Those made to a public officer or his wife, descendants
or ascendants by reason of his office.
In order for Article 739 to apply, it is not required that
there be a previous conviction for adultery or
concubinage, due to the wording of “preponderance of
evidence” (Insular Life v. Ebrado, G.R. No. L-44059, 1977)
Q: When is the estate entitled to the proceeds of the
insurance?
A:
a. Where the insured has not designated any beneficiary;
or
b. When the designated beneficiary is disqualified by law
to receive the proceeds (Heirs of Maramag v.
Maramag, G.R. No. 181132, 2009)
Note:
• The designation is revocable unless the right to revoke
is expressly waived in the policy.
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• If the insured or beneficiary is a minor, and the amount
involved does not exceed P50,000.00, the father or,in
his absence or incapacity, the mother may exercise the
minor’s rights under the policy, without the need of a
court authority or a bond.
• If the premiums are paid out of the conjugal funds, the
proceeds are considered conjugal.
If the beneficiary is other than the insured’s estate, the
source of premiums would not be relevant (BPI v.
Posadas, G.R. No. L-34583, 1931).
Q: Does the insured have the right to change
beneficiary in life insurance?
A: General Rule: The insured shall have the right to
change the beneficiary he designated in the policy.
(Insurance Code, Sec. 11)
Exception: If the insured expressly waived his right to
change the beneficiary, this makes the latter an
irrevocable beneficiary. But despite the waiver, he can
still change the beneficiary, provided that he obtains the
beneficiary’s consent. (Insurance Code, Sec. 11)
Q: When can the interest of a beneficiary in an
insurance policy be forfeited?
A: The interest of a beneficiary in a life insurance policy
shall be forfeited when the beneficiary is the principal,
accomplice, or accessory in willfully bringing about the
death of the insured; in which event, the nearest relative of
the insured shall receive the proceeds of said insurance if
not otherwise disqualified.
The share forfeited shall be paid as follows:
a. To the other beneficiaries if not disqualified;
b. If no other beneficiaries, in accordance with the policy
contract; (e.g. to the contingent or substitute of
beneficiaries)
c. If policy contract is silent, to the estate of the insured.
(Insurance Code, Sec. 12)
Q: In property insurance, to what should insurable
interest pertain to?
A:
a. Property itself;
b. Any relation thereto; or
c. Liability in respect thereof (Insurance Code, Sec. 13)
Q: In property insurance, what may consist insurable
interest consist in?
A:
a. An existing interest;
b. An inchoate interest founded on an existing interest; or
c. An expectancy, coupled with an existing interest in that
out of which the expectancy arises (Insurance Code,
Sec. 14)
Q: How is insurable interest in property measured?
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A: The measure of an insurable interest in property is the
23
extent to which the insured might be damnified by loss or
injury thereof. (Insurance Code, Sec. 17)
In general, a person has an insurable interest in the 24
property, if he derives pecuniary benefit or advantage from
its preservation or would suffer pecuniary loss, damage or
prejudice by its destruction whether he has or has no title
In, or lien upon, or possession of the property. Hence,
pecuniary interest over the property is always necessary.
A change of interest by will or succession on
the death of the insured
A transfer to interest by one of several
partners, joint owners, or owners in
common, who are jointly insured, to the
others
When a policy is so framed that it will inure
to the benefit of whomsoever, during the
57
continuance of the risk, may become the
owner of the interest insured

Existence of insurable Interest is a matter of public policy. Note: When there is an express prohibition against
Hence, the principle of estoppel cannot be invoked. alienation in the policy, in case of alienation, the contract
of insurance is not merely suspended but is avoided.
Q: Distinguish between insurable Interest in life and in (Civil Code, Art. 1306)
property.
A: Q: What change of interest suspends an Insurance
LIFE | PROPERTY Contract?
Basis A: The change of interest contemplated by law is an
May be based on Based on pecuniary absolute transfer of the insured’s entire interest in the
pecuniary interest, affinity, interest property insured to one not previously interested or
or consanguinity insured. In the following cases, the policy is not
When Interest Must Exist suspended: (ML2R2)
In life insurance (save that Must exist when the a. Execution of a Mortgage
effected by creditor on life insurance takes effect and b. Lease of the insured property
of debtor), it is enoughs when the loss occurs, but c. Vendor who has a Lien on the property sold until the
that insurable interest need not exist in the purchase price is paid or the conditions of the sale are
exists at the time the policy meantime performed
takes effect and need not d. Judgment debtor whose property has been sold on
exist at the time of the loss execution (Right to redeem)
Amount of Insurable Interest e. Mortgagor whose property has been foreclosed (Right
General Rule: no limit Limited to the actual of redemption)
Except: if insurabie vaiue of damage/ injury/
interest is based on loss Note: In a chattel mortgage, there is no alienation within
creditor-debtor the meaning of the insurance law until the mortgagee
relationship (only to the acquires a right to take possession of the property by
extent of the credit or debt) default of the mortgagor under the terms of the mortgage.
Beneficiary need not Person to whom loss is (Bachrach v. British American Ass’n. Co., G.R. No. L-5715,
possess an insurable payable must have 1910)
interest in the life of the insurable interest in the
insured. property insured. Q: What are the rules on the extent of insurable
interest in a mortgage situation?
Q: What is the effect of the change in the interest of a A:
thing to the insurance policy? • Interest is separate and distinct from the other. In case
A: General rule: A change in interest in the thing insured both of them take out separate insurance policies on
without a change in insurance does not transfer the policy the same property, or one policy covering their
but suspends it until the interest in the thing and the interest respective interests, there is no double insurance.
in the insurance are vested in the same person. • Mortgagor, as owner, may insure the property
mortgaged to the full value of such property.
Exceptions • Mortgagee can insure the same only to the extent of
SEC. EXCEPTIONS the amount of his credit.
20 Life, health, and accident insurance
A change of interest in the thing insured Q: What are the rules on insurance policy taken by the
21 after the occurrence of an injury which mortgagor for the benefit of the mortgagee, or policy
results in a loss assigned to the mortgagee?
A change of interest in one or more of A:
22 several things, separately insured by one
.policy..............................................
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• The insurance is still deemed to be upon the interest
of the mortgagor who does not cease to be a party to
the original contract.
• Any act of the mortgagor, prior to the loss, which would
otherwise avoid the insurance, will have the same
effects, although the property is in the hands of the
mortgagee.
• Any act, which under the contract of insurance is to be
performed by the mortgagor, may be performed by the
mortgagee with the same effect as if it has been
performed by the mortgagor.
• Upon the occurrence of the loss, the mortgagee is
entitled to recover to the extent of his credit and the
balance, if any, is payable to the mortgagor since such
policy is for the benefit of both the mortgagor and
mortgagee.
• Upon recovery of the mortgagee to the extent of his
credit from the insurer, the mortgagor is released from
his indebtedness. (Insurance Code, Sec. 8)
Q: What happens when the mortgagee takes an
insurance for his own interest:
A:
• The mortgagee may collect from the insurer upon the
occurrence of the loss to the extent of his credit.
• Unless otherwise stated in the policy, the mortgagor
has no right to collect the balance of the proceeds of
the policy after payment of the interest of the
mortgagee.
• The insurer, upon payment to the mortgagee-insured,
becomes subrogated to the rights of the mortgagee
against the mortgagor and may collect the debt of the
mortgagor to the extent of the amount paid to the
mortgagee.
Q: What is a standard or union mortgage clause?
A: If a fire insurance policy contains this, the acts of the
mortgagor do not affect the mortgagee. It makes a
separate and distinct contract of insurance on the interest
of the mortgagee.
Q: What is an Open or Loss-Payable Mortgage Clause?
A: It is a contract which provides that the payment of loss
to the mortgagee, if any, will be according to his interest as
it may appear in the contract. Under such clause, the acts
of the mortgagor will affect the mortgagee.
Double Insurance and Over Insurance
Q: What is Double Insurance?
A: It exists when the same person is insured by several
insurers separately in respect to same subject and interest.
It is not prohibited by law. But it may be contractually
prohibited by another insurance clause. When there is
double insurance and over insurance results, the insured
can claim in case of loss only up to the agreed valuation or
up to the full insurable value from any, some or all insurers,
without prejudice to the insurers ratably apportioning the
payments. Insured can also recover before or after the
loss, from both insurers the excess premium he has paid.
Q: What are the requisites of double insurance?
A:
a. The person injured is the same;
b. There are two or more insurers insuring separately;
c. The subject matter is the same;
d. The interest insured is also the same;
e. The risk or peril insured against is likewise the same.
(Malayan Insurance v. Philippine First Insurance, G.R.
No. 184300, 2012)
Q: What is over insurance?
A: It exists when the amount of insurance is beyond the
value of the insured’s insurable interest.
In case of over-insurance by double insurance, insurer is
not liable for total amount of insurance taken, his liability is
limited to the amount of insurable interest on property
insured. Insurer is not entitled to portion of premium
corresponding to the excess of insurance over the
insurable interest of the insured
Premiums to be returned where there is over-insurance by
several insurers shall be proportioned to the amount by
which aggregate sum insured in all policies exceeds the
insurable value of the thing at risk.
Q: Distinguish between Double Insurance and Over
Insurance.
A:
DOUBLE INSURANCE OVER INSURANCE
There may be no over Amount of insurance is
insurance as when the sum beyond the value of the
total of the amounts of the insured’s insurable
policies issued does not interest
exceed the insurable
interest of the insured.
Several insurers involved May have only one
insurer involved
Reinsurance
Q: What is reinsurance?
A: It is one by which an insurer procures a third person to
insure him against loss or liability by reason of such original
insurance. In every reinsurance contract, the original
contract of insurance and the contract of reinsurance are
separate and distinct and covered by separate policies.
Q: Distinguish between Policy of Insurance and
Reinsurance.
A:
POLICY OF REINSURANCE
INSURANCE
Written document Any contract by which an
embodying the terms and insurer procures a 3rd

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stipulations of the person to insure him Exceptions: road rollers, trolley cars, street sweepers,
contract of insurance against loss or liability by sprinklers, lawn mowers, bulldozers, graders, forklifts,
between the insured and reason of an original amphibian trucks, and cranes if not used in public
insurer insurance highways, vehicles which run only on rails or tracks, and
Formal written instrument The original contract of tractors, trailers and traction engines of all kinds used
evidencing the contract of insurance and the contract exclusively for agricultural purposes.
insurance of reinsurance are covered
by separate policies Q: What is the required scope of the coverage?
A:
Q: Distinguish between double insurance and OWNERS OF OPERATORS OF
reinsurance. PRIVATE MOTOR LAND
A: VEHICLES TRANSPORTATION
DOUBLE INSURANCE REINSURANCE Comprehensive against 3rd
Involves the same Insurance of different party liability for death or
Comprehensive against
interest interests bodily injuries
3rd party liability for death
Insurer remains in such Insurer becomes an insured or bodily injuries
capacity in relation to insurer In case a private motor
vehicle is being used to
The insurer may extend
Insured in the 1st Original insured has no transport passengers for
additional other risks at its
contract is a party in interest in reinsurance compensation, such
option
interest in the 2nd contract coverage shall, in addition,
contract include passenger liability
Subject of insurance is Subject of insurance is the
property original insurer’s risk Q: What are the rules of Comprehensive Third Party
Insured has to give his Consent of original insured, Liability Insurance?
consent not necessary A: (CTPL)
• Registration of any vehicle will not be made or renewed
The reinsurance contracts were correctly issued in favor of without complying with the requirements
Plaridel. By its nature, reinsurance contracts are issued in • The protection may be complied with using any of the
favor of the direct insurer because the subject of such following:
contracts is the direct insurer’s risk, in this case, Plaridel’s a. Insurance policy
contingent liability to MSAPL, and not the risk assumed b. Surety bond
under the original policy. With or without reinsurance, the c. Cash bond
obligation of the surety to the party against whom writ of • The purpose of CTPL is to give immediate financial
attachment is issued remains the same (Communication assistance to victims of motor vehicle accidents and/or
and Information Systems Corporation v. Mark Sensing their dependents, especially if they are poor regardless
Australia, G.R. No. 192159, 2016). of the financial capability of motor vehicle owners or
operators responsible for the accident. (First Integrated
No fault clause, suicide, and incontestability clause Bonding and Ins. Co., Inc. v. Hernando, G.R. No.
51221, 1991).
Q: What is Compulsory Motor Vehicle Liability
Insurance (CMVLI)? Q: What is a “No Fault” Clause?
A: It is a protection coverage that will answer for legal A: The injured third party or passenger or heirs of the
liability for losses and damages for bodily injuries and/or deceased is given the option to file a claim for death or
property damage that may be sustained by another arising injury without the necessity of proving fault or negligence
from the use and operation of a motor vehicle by its owner. of any kind.

It is unlawful for any land transportation operator or owner
of a motor vehicle to operate the same in public highways
unless there is an insurance or guaranty to indemnify the
death or bodily injury of a third party or passenger arising
from the use thereof. (Insurance Code, Sec. 387)
Q: What is a motor vehicle?
A: It shall mean any vehicle propelled by any power other
than muscular power using the public highways (R.A. No.
4136, Sec. 3[a])
Q: What are the conditions fo r application of no fault
clause?
A:
a. The claim must be for death or bodily injuries only
(property damage/liability not included).
b. The total indemnity in respect of any person shall not
exceed five thousand pesos - this is the minimum legal
limit. Insurance companies issue policies for more than
five thousand pesos. The legal limit under the New
Insurance Code is 15,000 pesos.

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c. The following proofs of loss, when submitted under
oath, shall be sufficient evidence to substantiate the
claim;
i. Police report of accident; and
ii. Death certificate and evidence sufficient to establish
the proper payee; or,
iii. Medical report and evidence or medical or hospital
disbursement in respect of which refund is claimed.
d. Claim may be made against one motor vehicle only;
i. Against the insurer of the vehicle where one is a
passenger
ii. in any other case, the offending vehicle
Q: Who can be a Claimant?
A: The claimant or victim may be a “passenger” or a “third
party” (Insurance Code, Sec. 391)
a. Passenger - Any fare paying person being
transported and conveyed in and by a motor vehicle
for transportation of passengers for compensation,
including persons expressly authorized by law or by
the vehicle’s operator or his agents to ride without fare.
(Insurance Code, Sec. 386[b]]
b. Third Party - Any person other than a passenger as
defined in this section and shall also exclude a
member of the household, or a member of the family
within the second degree of consanguinity or affinity,
of a motor vehicle owner or land transportation
operator, as likewise defined herein, or his employee
in respect of death, bodily injury, or damage to property
arising out of and in the course of employment
(Insurance Code, Sec. 386[c])
1. Notice of Claim - must be presented within six (6)
months from the date of the accident. Otherwise, the
claim is deemed waived.
2. Bringing an Action or Suit: The action must be filed
in court of the Insurance Commission within one (1)
year from denial of the claim.
Prescription starts to run from the denial of the claim by
the Insurance Company (Summit Guaranty and
Insurance Co. v. Arnaldo, G.R. No. L-48546, 1988)
3. Payment of Claims - If there is an agreement, the
insurance company shall forthwith ascertain the truth
and extent of the claim and make payment within five
(5) working days after reaching an agreement.
If no agreement is reached, the insurance company
shall pay only the no-fault indemnity without prejudice
to the claimant from pursuing his claim further, in which
case, he shall not be required or compelled by the
insurance company to execute any quit claim or
document releasing it from liability under the policy of
insurance or surety bond issued.
Note: If the policy provides for indemnity against
liability, the insurer can be sued directly by a third
person. But, if the policy provides for “reimbursement
after actual payment by the insured”, or for the
indemnity against loss, a third person has no cause of
action against the insurer (Bonifacio Brothers v. Mora,
G.R. No. 20853, 1967).

Q: From whom shall the claim be made?
A:
• In the case of an occupant of a vehicle, claim shall lie
against the insurer of the vehicle in which the occupant
is riding, mounting or dismounting from.
• If not an occupant, claim shall lie against the insurer of
the directly offending vehicle.
While insurer’s liability may be direct, it does not mean
that the insurer can be held solidarily liable with the
insured. The insurer’s liability is based on contract; that
of the insured is based on torts. Furthermore, the
insurer’s liability is limited to the amount of the
insurance coverage (Pan Malayan Insurance Corp. v.
CA, G.R. No. 81026, 1990).

The claimant is not free to choose from which insurer he
will claim the "no-fault indemnity" as the law, by using the
word "shall," makes it mandatory that the claim be made
against the insurer of such vehicle. That said vehicle might
not be the one that caused the accident is of no moment
since the law itself provides that the party paying the claim
may recover against the owner of the vehicle responsible
for the accident. (Perla Compania de Seguros v. Ancheta,
G.R. No. L-49699 August 8, 1988)
Q: What is the Authorized Driver Clause?
A: A stipulation in a motor vehicle insurance which
provides that the driver, other than the insured owner, must
be duly licensed to drive the motor vehicle otherwise the
insurer is excused from liability. The clause means that the
insurer indemnifies the insured owner against loss or
damage to the car but limits the use of the insured vehicle
to the insured himself or any person who drove on his order
or with his permission.

Q: Who is an authorized driver?

Note: In all cases, the right of the party paying the claim to
A: Authorized driver refers to:
recover against the owner of the vehicle responsible for the
accident shall be maintained. (Insurance Code, Sec. 391) a. The insured;
b. Any person driving on the insured’s order or with his
Q: What are the periods governing claims settlement? permission, provided that the person driving is
A: permitted in accordance with the licensing, or other
laws or regulations to drive the motor vehicle and is not
disqualified from driving such motor vehicle by order of
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a court of law or by reason of any enactment or
regulation in that behalf
Note: If the claimant was able to present a driver’s license,
the same is presumed to be genuine. The license will still
be sustained in the absence of proof that it was not validly
issued (CCC Insurance Corporation v. CA, G.R. No.
26167, 1970).
A driver (not the--insured himself) who holds an expired
driver’s license is not an authorized driver (Gutierrez v.
Capita! Insurance Co., G.R. No. 30892, 1984).
Q: What is a Theft Clause?
A: The risks insured against in the policy may include theft.
If there is such a provision and the vehicle was unlawfully
taken, the insurer is liable under the theft clause and the
authorized driver clause does not apply. The insured can
recover even if the thief has no driver’s license. (Peria
Compania de Seguros v. CA, G.R. No. 96452, 1992)
Q: What is the scope of life insurance?
A:
a. Insurance on human life
b. Insurance appertaining thereto or connected therewith
may be payable:
i. On the death of the insured;
ii. On his surviving a specified period
(endowment/annuities); and
iii. Otherwise, contingently on the continuance or
cessation of life (endowment/annuities)
Note: Life insurance policies are always VALUED policies.
Q: What are the classifications of Life Insurance?
A:
a. Individual Life - insurance on human lives and
insurance appertaining thereto or connected therewith;
b. Group Life - A blanket policy covering a number of
individuals
c. Industrial Life - A form of life insurance under which
the premiums are payable either monthly or oftener, if
the face amount of insurance provided in any policy is
not more than five hundred times that of the current
statutory minimum daily wage in the City of Manila and
if the words “industrial” policy are printed upon the
policy as part of the descriptive matter.
Q: What are the kinds of Life Insurance?
A:
a. Whole Life or Ordinary Policies - the insured agrees
to pay annual, semi-annual or quarterly premiums while
he lives. The insurer agrees to pay the face value of
the policy upon the death of the insured.
b. Limited Payment Life Policies - a whole life or
ordinary policy where premiums are paid only for a
specified period of years.
c. Term Policy - insured pays only once and insurer’s
liability arises only upon the death of the insured within
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the agreed term as period, if the latter survives the
period, the contract terminates and the insurer is not
liable.
d. Endowment Policy - insurer agrees to pay a certain
sum to the insured if the latter outlives a designated
period; if he dies before that time, the proceeds are paid
to the beneficiary
e. Life Annuity - debtor binds (the insurer) himself to pay
an annual pension or Income during the life of one or
more persons in consideration of a capital consisting of
money or other property, whose ownership is
transferred to him with the burden of income.
Q: What is a Variable Contract?
A: Any policy or contract on either a group or individual
basis issued by an insurance company providing for
benefits or other contractual payments or values
thereunder to vary so as to reflect investment results of any
segregated portfolio of investment.
Q: What are the rules on transferability of Life
Insurance Contracts?
A: A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he has
an insurable interest or not, and such person may recover
upon it whatever the insured might have recovered.
(Insurance Code, Sec. 184)
Ail life insurance policies are declared by law to be
assignable regardless of whether the assignee has an
insurable interest in the life of the insured or not (Sun Life
Assur. Co. o f Canada v. Ingersoll, G.R. No. 16475, 1921)
Q: Is the beneficiary’s consent necessary in the
assignment of the policy?
A: The necessity of the consent of the beneficiary depends
if there is a waiver of the right to change the beneficiary.
See discussion on Parties To An Insurance Contract (c)
Q: What is the liability of the insurer in case of suicide?
A: The insurer is LIABLE in the following cases:
a. Suicide was committed after the policy has been in
force for a period of two years from the date of its issue
or its last reinstatement;
b. Suicide committed in a state of insanity regardless of
the date of the commission of the suicide; or
c. If committed after the lapse of a shorter period in the
policy (Insurance Code, Sec. 183)
Note: Any stipulation extending the two-year period is void.
The insurer is NOT LIABLE in the following cases:
a. The suicide is not by reason of insanity and is
committed within the two-year period;
b. The suicide is by reason of insanity but is not among
the risks assumed by the insurer regardless of the date
of commission; and
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c. The insurer can show that the policy was obtained with
the intention to commit suicide even in the absence of
any suicide exclusion in the policy.
Q: What is the effect is the insured is killed by the
beneficiary?
A: General Rule: The interest of a beneficiary in a life
insurance policy shall be forfeited when the beneficiary is
the principal, accomplice, or accessory in willfully bringing
about the death of the insured. In such a case, the share
forfeited shall pass on to the other beneficiaries, unless
otherwise disqualified. In the absence of other
beneficiaries, the proceeds shall be paid in accordance
with the policy contract. If the policy contract is silent, the
proceeds shall be paid to the estate of the insured.
(Insurance Code, Sec. 12)
Exceptions:
a. Accidental killing;
b. Self-defense; and
c. Insanity of the beneficiary at the time he killed the
insured
Incontestability Clause
Q: What are the requisites of Incontestability Clause?
A:
a. The insurance is a life insurance policy.
b. It is payable on the death of the insured.
c. It has been in force during the lifetime of the insured for
at least 2 years from its date of issue or of its last
reinstatement. The period of 2 years may be shortened
but it cannot be extended by stipulation.
Q: When does incontestability clause set in?
A: Whichever is earlier, between:
• Within 2 years from the date of issuance or its last
reinstatement; or
• Upon the insurer’s death (Sun Life v. Sibya, G.R. No.
211212, 2016)
Note: In an earlier ruling, the Supreme Court ruled that the
insured dying eleven months after the effectivity of the
insurance policy allows the insurer to contest any
misrepresentation made in the policy due to the one year
incontestability clause (Florendo vs. Philam Plans, Inc.,
G.R. No. 186983, 2012).
Q: What defenses are not barred by Incontestability
Clause?
A:
a. Person taking the insurance lacked insurable interest
as required by law;
b. Cause of the death of the insured is excepted risk;
c. Premiums have not been paid;
d. Conditions of the policy relating to military or naval
service have been violated;
e. The fraud is of a particularly vicious type, wherein:
i. The policy was taken in furtherance of a scheme to
murder the insured;
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ii. The insured instituted another person for the
medical examination; and,
iii. The beneficiary feloniously killed the insured;
f. Beneficiary failed to furnish proof of death or to comply
with any condition imposed by the policy after the loss
has happened; or,
g. Action was not brought within the time specified.
B. PERFECTION OF THE INSURANCE CONTRACT
1. Offer and Acceptance / Consensual
Q: What is the nature of an insurance contract?
A: It is a consensual contract. A contract of insurance must
be assented to by both parties, either in person or through
their agents and so long as an application for insurance
has not been either accepted or rejected, it is merely a
proposal or an offer to make a contract. (Perez v. CA, G.R.
No. 112329, 2000)
Also, according to Enriquez v. Sun Life Assurance (G.R.
No. L-15895, 1920):
(1) Submission of application, even with premium payment
is a mere offer on the part of the applicant, and does
not bind the insurer;
(2) An insurance contract is also not perfected where the
applicant dies before the approval of his application or
it does not appear that the acceptance of the application
ever came to the knowledge of the applicant;
(3) An acceptance made by letter shall not bind the person
making the offer except from the time it came to his
knowledge.
a. Delay in Acceptance - A contract of insurance, like
other contracts, must be assented to by the parties
either in person, or by their agents. Under the law,
assent or consent is manifested by the meeting of the
offer and the acceptance upon the thing and the cause
which are to constitute the contract. If an application
has not been either accepted or rejected, there is no
contract yet as it is merely and offer or proposal
(Insurance, de Leon, p.176).
b. Delivery of Policy - The delivery of a policy is not,
however, a prerequisite to a valid contract of
insurance. The contract may be completed prior to
delivery of the policy or even without delivery of the
policy depending on the intention of the parties
(Insurance, de Leon, p.180).
Q: Is form required for the perfection of a contract of
insurance?
A: No. The policy is the formal written instrument
evidencing the contract of insurance entered into between
the insured and the insurer. No form is required to perfect
a contract of insurance.
Q: What are the requirements as to the form of
Insurance Contracts?
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A:
1. No policy, certificate or contract of insurance shall be
issued or delivered within the Philippines unless in the
form previously approved by the Commissioner; and
2. No application form shall be used with, and no rider,
clause, warranty or endorsement shall be attached to,
printed or stamped upon such policy, certificate or
contract unless the form of such application, rider,
clause, warranty or endorsement has been approved
by the Commissioner. (Insurance Code, Sec. 232)
Note: The policy is the formal written instrument
evidencing the contract of insurance entered into between
the insured and the insurer. No form is required to perfect
a contract of insurance.
Q: What is a Cover Note?
A: It is a contract for temporary insurance for a reasonable
time until the policy or policies can be written or issued by
the insurer.
Also called: Binding Receipt or Slip, Interim, Temporary
or Provisional Policy
Q: What are the rules on Cover Notes?
A:
1. Insurance companies doing business in the Philippines
may issue cover notes to bind insurance temporarily,
pending the issuance of the policy.
2. A cover note shall be deemed to be a contract of
insurance within the meaning of Section 1(1) of the
Code.
3. No cover note shall be issued or renewed unless In the
form previously approved by the Insurance
Qommiccjor^
4. A cover note shall be valid and binding for a period not
exceeding sixty (60) days from the date of its issuance,
whether or not the premium therefor has been paid, but
such cover note may be cancelled by either party upon
at ieast seven (7) days notice io the other party.
5. If a cover note is not so cancelled, a policy of insurance
shall, within sixty (60) days after the issuance of such
cover note, be issued in lieu thereof. Such policy shall
include within its terms the identical insurance bond
under the cover note and the premium therefor.
6. A cover note may be extended or renewed beyond the
aforementioned period written approval provided that
with upon the certification of sixty (60) days with the of
the Insurance Commission, such written approval may
be dispensed of the president, vice-president, or
general manager of the insurance company concerned
that the risks involved, the values of such risks and/or
the premiums therefor have not as yet been determined
or established and that such extension or renewal is not
contrary to and is not for the purpose of violating any
provisions of the Insurance Code, or of any of the
rulings, instructions, circulars, orders or decisions of the
Insurance Commissioner. (Ins. Memo. Cir. No. 3-75,
Sept. 29,1975, effective Oct. 21,1976.)
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7. The fact that no separate premium was paid on the
cover note before the loss insured against occurred,
does not militate against its binding effect as an
insurance contract. By their nature, cover notes do not
contain particulars that would serve as basis for the
computation of the premiums and consequently, no
separate premiums are intended or required to be paid
therefor (Pacific Timber Export Corp. v. CA, G.R. No. L-
38613,1982)
Q: What is an Insurance Policy?
A: A written document issued by the insurer to the
insured, embodying the terms and conditions of their
contract of insurance.
The policy is not necessary for the perfection of the
contract. The Policy is only the formal written instrument
evidencing the contract. It is required, however, that all
policies issued or delivered must be in the form previously
approved by the Insurance Commission.
The BEST EVIDENCE that a contract has been entered
into between the insurer and the insured is the DELIVERY
of the policy by the insurer to the insured.
Q: What is a rider?
A: Attachment to an insurance policy that modifies the
conditions of the policy by expanding or restricting its
benefits or excluding certain conditions from the
coverage.
Q: What are the form al requirements of riders?
A: Riders, together with other attachments to the policy,
like clause, warranty or endorsements, are not binding on
the insured unless:
a. The descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy and;
b. Countersigned by the insured or owner.
Exception: No need to countersign if the rider or other
attachment is applied for by the insured or owner of the
policy
A rider containing an “Automatic Increase Clause” - one
that increases the coverage subject to the attainment of a
certain age of the insured - is not a separate contract. It is
part of the original policy which is in the nature of a
conditional obligation (Commissioner of Internal Revenue
v. Lincoln Philippine Life Insurance Company, G.R. No.
119176, March 19, 2001).
Note: If there is inconsistency between the policy and the
rider, the rider prevails, it being the later and a more
deliberate expression of the agreement of the parties.
Q: What are the formal requirements of a Policy?
A:
a. in printed form which may contain blank spaces;
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b. Any word, phrase, clause, mark, sign, symbol,
signature, number or word necessary to complete the
contract of insurance shall be written in the blank
spaces provided therein. (Insurance Code, Sec. 50)
Q: What are the contents of an Insurance Policy?
A:
a. The parties between whom the contract is made;
b. The amount to be insured except in the cases of open
or running policies;
c. The premium, or if the insurance is of a character where
the exact premium is only determinable upon the
termination of the contract, a statement of the basis and
rates upon which the final premium is to be determined;
d. The property or life insured;
e. The interest of the insured in property insured, if he is
not the absolute owner thereof;
f. The risks insured against; and
g. The period during which the insurance is to continue.
(Insurance Code, Sec. 51)
o <
: What are the different kinds of policies?
a. Open or Unvalued Policy - Value of thing insured is
not agreed upon, but left to be ascertained in case of
loss;(ex. Marine and Fire Insurances) (Insurance Code,
Sec. 60)
In an open policy, the value of the property insured is
not agreed upon, although the parties may agree on the
maximum amount of recovery or limit to the liability of
the insurer. In case of loss, this amount must be
considered, by agreement of the insurer and the
insured, the actual value of the property in the absence
of evidence of greater or lesser value. (Dev’t Ins. Corp.
v. IAC, G.R. No. L-71360, 1986).
b. Valued Policy - Definite valuation is agreed upon by
both parties, and written on the face of the policy; (ex.
Marine and Fire Insurances) (Insurance Code, Sec. 51)
c. Running Policy - Also called Floating, Adjustable,
Blanket or Declaration Policy; Contemplates
successive insurances and which provides that the
subject of the policy may from time to time be defined.
(Insurance Code, Sec. 62)
Q: What stipulations in an insurance contract are
void?
A:
a. Stipulations for the payment of loss whether the person
insured has or has not any interest in the property
insured; or
b. The policy shall be received as proof of such interest,
or
c. Policies executed by way of gaming or wagering.
2. Premium Payment
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Q: What is a premium?
A: Premium is the consideration paid to an insurer for
undertaking to indemnify the insured against a specified
peril.
An insurer is entitled to payment of the premium as soon
as the thing insured is exposed to the peril insured against.
Q: What are the effects of non-payment of premium?
A: General Rule:
1. Non-payment of first premium - prevents the contract
from becoming binding notwithstanding the acceptance
of the application or the issuance of the policy.
But non-payment of the balance of the premium due
does not produce the cancellation of the contract. (Phil.
Phoenix Surety & Insurance v. Woodworks, G.R. No. L-
22684, Aug. 31, 1967).
2. Subsequent premiums - does not affect the validity of
the contracts unless, by express stipulation, it is
provided that the policy shall in that event be
suspended or shall lapse.
Exceptions:
1. In case of life and industrial life whenever the grace
period provision applies.
a. Individual Life or Endowment Insurance and
Group Life Insurance - Grace period of either thirty
(30) days or one (1) month within which the payment
of any premium after the first may be made
b. Industrial Life Insurance - Grace period is four (4)
weeks, and where premiums are payable monthly,
either thirty (30) days or one (1) month.
2. Where the insurer acknowledged in the policy or
contract of insurance itself the receipt of premium, even
if premium has not been actually paid, as expressly
provided by Section 78 itself. (Insurance Code, Sec. 78)
3. Where the parties agreed that premium payment shall
be in installments and partial payment has been made
at the time of loss (Makati Tuscany Condominium v.
Court o f Appeals, G.R. No. 95546, 1992; Gaisano v.
Development Insurance and Surety Corp., G.R. No.
190702, 2017)
Cf. Where the policy provides for payment in premium
in full before the “policy shall be deemed effective, valid,
and binding upon the company” - the partial payment
is merely treated as a deposit and does not make the
policy binding. (Sps. Tibay v. CA, G.R. No. 119655,
1996)
4. Where the insurer granted the insured a credit term for
the payment of the premium, and loss occurs before the
expiration of the term (Makati Tuscany Condominium v.
Court o f Appeals, G.R. No. 95546, 1992; Gaisano v.
Development Insurance and Surety Corp., G.R. No.
190702, 2017)
5. Where the insurer is in estoppel as when it has
consistently granted a 60 to 90-day credit term for the
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payment of premiums. (Gaisano v. Development
Insurance and Surety Corp., G.R. No. 190702, 2017).
Q: Is the agent authorized to receive premium?
A: Where an insurer authorizes an insurance agent or
broker to deliver a policy to the insured, it is deemed to
have authorized said agent to receive the premium in its
behalf
The insurer is also bound by its agent’s acknowledgement
of receipt of payment of premium (American Home
Assurance Co. v. Chua, G.R. No. 130421,1999).
Given the provisions of the Insurance Code, which is a
special law, the applicable rate of interest shall be that
imposed in a loan or forbearance of money as imposed by
the BSP. The unpaid amount due from insurer is a
forbearance of money. So the proper rate applies
(Stronghold Insurance Co., Inc. v. Pamana Island Resort
Hotel and Marina Club, Inc., G.R. No. 174838, 2016).
Q: What is are non-default options in Life Insurance?
A: The options available to a policyholder in case of non­
payment of premium after three full annual premiums have
been paid are:
a. Received-tire" cash surrender value
b. Apply such value as the premium for an extended
insurance
c. Apply such value as the premium for a paid-up
insurance
d. Secure from such value an automatic premium loan
before the expiration of the grace period
Q: What is a cash surrender value?
A: An amount to be paid to the insured upon surrender of
the policy contract.
An amount which the insurance company holds in trust for
the insured to be delivered to him upon demand. It is
therefore a iiabiiiiy of the company to the insured.
(Manufacturer’s Life Insurance v. Meer, G.R. No. L-2910,
1951)
Q: What are the alternatives to cash surrender value
a) Extended Insurance/Term Insurance - Where
insurance is "extended," the insured is given the right,
upon default, after the payment of at least three full
annual premiums (see Sec. 227[f].), to have the policy
continued in force from the date of default for a time
either stated or equal to the amount as the net value of
the policy taken as a single premium, will purchase. In
case of death of the insured within the extended term,
he may recover the face value of the policy. Extended
insurance is sometimes called "term insurance,"
"temporary insurance," or "paid-up extended
insurance." (De Leon, The Insurance Code of the
Philippines Annotated [2014])
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COMMERCIAL LAW
b) Paid-up Insurance - Where insurance is "paid-up,"
the insured is given the right, upon default, after the
payment of at least three annual premiums (Ibid.) to
have the policy continued in force from the date of
default for the whole period of the insurance without
further payment of premiums. In case of death of the
insured, he may recover only the "paid-up" value of the
policy, usually less than the "paid-up" premiums, under
the same conditions as the original policy. Technically,
the term "paid-up" insurance is often referred to as
"reduced paid- up" insurance. (De Leon, The
Insurance Code of the Philippines Annotated [2014])
c) Automatic Premium Loan - This provision protects
against the unintentional lapse of the contract by
advancing, in the form of policy loan, the unpaid
amount of a premium due. The automatic premium
loan is advantageous to the policy owner because it
helps to continue the contract and all its features in full
force and effect.
Conditions:
a. In the event of default in premium payment, the
Premium Loan provision shall only apply if
requested in writing by thepolicyholder either in the
application or at any time before the expiration of
the grace period.
b. The moment there is default in premium payment
andno option has been elected either in the
application or within thetime specified in the policy,
one of the paid-up options specified therein shall
automatically take effect. (De Leon, The Insurance
Code of the Philippines Annotated [2014])
Q: What are the rules on the reinstatement of a lapsed
policy of Life Insurance?
A: A provision that the policyholder shall be entitled to have
the policy reinstated at any time within three years from the
date of default of premium payment unless the cash
surrender vaiue has been auiy paid, or the extension
period has expired, upon production of evidence of
insurability satisfactory to the company and upon payment
of all overdue premiums and any indebtedness to the
company upon said policy, with interest rate not exceeding
that which would have been applicable to said premiums
and indebtedness in the policy years prior to reinstatement.
Q: What are the requisites for reinstatement of lapsed
Life Insurance Policy?
A:
a. Application shall be made within three years from the
date of lapse;
b. There should be a production of evidence of the good
health of the insured:
c. If the rate of premium depends upon the age of the
Beneficiary, there should likewise be a production of
evidence of his or her good health;
d. There should be presented such other evidence of
insurability at the date of application for reinstatement;
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e. There should be no change which has taken place in
such good health and insurability subsequent to the
date of such application and before the policy is
reinstated; and
f. All overdue premiums and other indebtedness in
respect of the policy, together with interest at six per
cent, compounded annually, should first be paid.
(Andres v. Crown Life Insurance Co., G.R. No. L-
10874, 1958)
Insular Life’s argument was that the two-year contestability
period of the reinstated insurance policy had not lapsed
inasmuch as the insurance policy was reinstated only on
December 27, 1999. The Court notes that the
reinstatement was conditioned upon the payment of
additional premium not only prospectively, that is, to cover
the remainder of the annual period of coverage, but also
retroactively, that is for the period starting June 22, 1999.
An insurance contract is a contract of adhesion which must
be construed liberally in favor of the insured and strictly
against the insurer in order to safeguard the latter’s interest
(The Insular Life Assurance Company v. Paz Khu, G.R.
No. 195176, 2016).
What are the rules on the refund of Premiums?
A: The insured is entitled to return of premiums paid if the
follow requisites are met:
a. The thing insured was never exposed to the risks
insured against;
b. Contract is voidable due to the fraud or
misrepresentation of insurer;
c. Insurer never incurred liability;
d. When the insurance is for a definite period and the
insured surrenders his policy before the termination
thereof (pre-termination);
e. Contract is voidable because of the existence of facts
of which the insured was ignorant without his fault;
f. When there is over-insurance; and
g. When rescission is granted due to the insurer’s breach
of contract.
Q: When should interest be paid on refund of
Premium?
A: Sections 243 and 244 of the Insurance Code explicitly
provide for payment of interest when there is unjustified
refusal or withholding of payment of claim by the insurer.
Article 2209 of the Civil Code likewise provides for
payment of interest when the debtor is in delay. However,
in cases where the refusal to refund insurance premiums
is because the insurer wants to rescind the insurance
contract on account of concealment, the insurance
company did not unreasonably deny or withhold the
insurance proceeds (Sun Life v. Tan Kit, G.R. No. 183272,
2014).
Q: Is premium necessary for Suretyship?
A: General rule: Premium is also necessary in order for
the contract of suretyship or bond to be binding.
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Exception: Where the obligee has accepted the bond, it
is binding even if the premium has not been paid subject
to the right of the insurer to recover the premium from its
principal (Philippine Pryce Assurance Corporation v. CA,
G.R. No. 107062, 1994).
Note:
• The official receipts in question serve as proof of
payment of the premium for one year on each surety
bond. It does not, however, automatically mean that
the surety bond is effective for only one (1) year. In fact,
the effectivity of the bond is not wholly dependent on
the payment of premium (Country Bankers Insurance
Corporation v. Antonio Lagman, G.R. No. 165487,
2011).
• A policy of insurance upon life or health may pass by
transfer, will or succession to any person, whether he
has an insurable interest or not, and such person may
recover upon it whatever the insured might have
recovered.
• On the other hand, property insurance cannot be
transferred without the consent of the insurer because
the insurer approved the policy based on the personal
qualification and the insurable interest of the insured. If
there is transfer of property insurance without such
consent, the insurance policy is suspended and will not
be avoided until the interest in the thing and the interest
in the insurance are vested in the same person.
B. RIGHTS AND OBLIGATIONS OF THE PARTY
Q: Who are the parties to an insurance contract?
A:
1. Insurer
2. Insured
3. Beneficiary
Q: Who is an insurer?
A: The party who assumes or accepts the risk of loss and
undertakes for a consideration to indemnify the insured or
to pay him a certain sum on the happening of a specified
contingency or event;
Q: Who may be an insurer?
A:
1. A foreign or domestic company or corporation; or
2. A partnership or an association
Q: What are Insurance Corporations?
A: They are corporations formed or organized:
a. To save any person or persons or other corporations
harmless from loss, damage, or liability from any
unknown or future or contingent event, or
b. To indemnify or to compensate any person or persons
or other corporations for any such loss, damage, or
liability, or
c. To guarantee the performance of, or compliance with,
contractual obligations or the payment of debt of others.
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An Insurance Corporation must have:
a Sufficient Capital and assets required under the
Insurance Code and pertinent regulations issued by the
Commission; and
b. A Certificate of Authority to operate issued by the
Insurance Commission which should be renewable
every 3 years. (New Insurance Code, Sec. 193)
Q: Who is an Insured?
A: The-per^on--in -whose-favor--the-Gontract is operative and
who is indemnified against or is to receive a sum upon the
happening of a specified event.
Q: What are the requisites for a person to be insured
under a Contract of Insurance? (CIP)
A:
a. He must be competent to enter into a contract;
b. He must possess an insurable interest in the subject
of the insurance; and
c. He must not be a public enemy (citizen or subject of a
country with whom the Philippines is at war) (Insurance
Code, Sec. 7)
Q: What are the effects of war on existing Insurance
Contracts?
A:
1. Property Insurance - An insurance policy ceases to
become valid and enforceable as soon as the insured
becomes a public enemy. However, premium paid by
the insured (public enemy) shall be returned by the
insurer (Filipinas Compania de Seguros v. Christern
Huenefield & Co„ G.R.No. 1-2294,1951)
2. Life Insurance - The contract is abrogated but the
insured is entitled to the case or reserve value of the
policy (if any), which is the excess of the premiums paid
over the actual risk carried during the years when the
poiicy had been in force (Consiantino v. Asia Life
Insurance, G.R. No. L-1669, 1950)
Note: Where the loss occurs after the end of the war, the
contract is not revived.
Q: What are the rules governing insurance obtained by
married persons?
A: The consent of the spouse is not necessary for the
validity of an Insurance policy taken out by a married
person on his or her life or that or his or her children
(Insurance Code, Sec. 3, 2) or that of her husband
(Insurance Code, Sec. 10)
She may also take out insurance on her paraphernal or
separate property, or on property given to her by her
husband (Harding v. Commercial Union Assurance, G.R.
No. L-12707, 1918)
Note: Family Code, Art. 73: While either spouse may
exercise any legitimate activity without the consent of the
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other, the latter may object on valid, serious, and moral
grounds.
Q: Who is a beneficiary?
A: Person designated to receive proceeds of policy when
risk attaches since it is possible that the insured may
assign the proceeds of the insurance to someone else.
Note: There are only two parties to a contract of insurance,
the insured and the insurer. The beneficiary is NOT a party
to the contract unless he is the party to be insured.
C. RESCISSION OF INSURANCE CONTRACTS
Q: What are the primary concerns of the Insurer?
A:
a. Correct estimation of risk which enables insurer to
determine if he will approve the policy application and if
so at what premium rate;
b. Delimitation of the risk;
c. Control of risk to guard against increase in risk;
d. Determine if loss occurs and if so the amount thereof.
What are the devices of the insurer in ascertaining and
controlling risks?
A:
a. Concealment
b. Representations
c. Warranties - Statements or promises by the insured,
whether expressed, implied, affirmative or promissory,
set forth in the poiicy itself or incorporated in it by proper
reference, the untruth or non-fulfilment of which in any
respect, and without reference to whether the insurer
was in fact prejudiced by such untruth or non-fulfilment
renders the policy voidable by the Insurer.
d. Conditions
e. Exceptions - Stipulations excluding certain specified
risks that otherwise would be included under the
general language describing the risks assumed.
Q: What is concealment?
A: A neglect to communicate that which a party knows
and ought to communicate (Insurance Code, Sec. 26)
Q: What are the requisites of concealment?
A:
a. A party knows the fact which he neglects to
communicate or disclose to the other;
b. Such party concealing is duty-bound to disclose such
fact to the other;
c. Such party concealing makes no warranty of the fact
concealed; and
d. The other party has not the means of ascertaining the
fact concealed
Good faith is no defense in concealment. The Insurance
Code dispenses with proof of fraudulent intent in cases of
rescission due to concealment, but not so in cases of
rescission due to false representations. (Vda. De Canilang
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v. CA, G.R. No. 92492, 1993; The Insular Life Assurance
Co., Ltd. v. Heirs of Alvarez, G.R. Nos. 207526 & 210156,
2018)
Q: Should fraud be proved in concealment?
A: General Rule: Fraud need not be proven in order to
prove concealment. Good faith is not a defense. (Saturnino
v. Phil. American Life Insurance, G.R. No. L-16163, 1963)
Exception: When the concealment is made by the insured
in relation to the falsity of a warranty, the non-disclosure
must be intentional and fraudulent in order that the contract
may be rescinded. (Insurance Code, Sec. 29)
Q: What are the effects of concealment?
A: General Rule: Concealment, whether intentional or not,
entitles the injured party to rescind a contract of insurance,
even if the death or loss is due to a cause not related to
the concealed matter (Insurance Code, Sec. 27)
Exceptions:
a. Incontestability Clause (Insurance Code, Secs. 48 and
233[b])
b. Concealment made after the contract has become
effective;
c. Waiver or estoppel;
d. In marine insurance, in situations where concealment
does not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from the
risk concealed (Insurance Code, Sec. 112)
Q: What are the instances when concealment made by
an agent procuring insurance binds the principal?
A:
a. Where it was the duty of the agent to acquire and
communicate information of the facts in question;
b. Where it was possible for the agent, in the exercise of
reasonable diligence, to have made the communication
before the making of the insurance contract.
Failure on the part of the insured to disclose such facts
known to his agent, or wholly due to the fault of the agent,
will avoid the policy, despite the good faith of the insured.
Q: When should an item be disclosed to the other, in
good faith, even without inquiry?
A:
• Party concealing must have knowledge of the facts
concealed;
• Facts concealed must be material to the risk;
• Party is duty bound to disclose such fact to the other;
• Party concealing makes no warranty as to the facts
concealed;
• Other party has no other means of ascertaining the
facts concealed.
Q: Is inquiry needed for an item to be disclosed?
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A: General Rule: Neither party to the insurance contract
is bound to communicate information on the following
matters
Exception: Except in answer to the inquiries of the other:
a. Those of which the other knows;
b. That which, in the exercise of ordinary care, the other
ought to know and of which the former has no reason
to suppose his ignorance, i.e. political situation, general
usages of trade;
c. Those of which the other waives communication;
d. Those which prove or tend to prove the existence of the
risk excluded by a warranty and which are not otherwise
material;
e. Those which relate to a risk excepted from the policy
and which are not otherwise material.
Q: Should insurable interest be disclosed?
A: General rule: The insured is not required to
communicate the nature (or kind) or the amount of his
insurable interest in the life or property insured to the
insurer. (Insurance Code, Sec. 34)
Exceptions:
a. When the insurer makes inquiry from the insured of the
nature or amount of the latter’s insurable interest,
whether in life or property insurance;
b. Insurance policy must specify the interest of the insured
in the property insured, if he is not the absolute owner
thereof. (Insurance Code, Sec. 51)
Q: How is disclosure of material facts waived?
A:
a. By the terms of the insurance (express waiver); or
b. By the neglect to make inquiry as to such facts, where
they are distinctly implied in other facts which
information is communicated (implied waiver). (Sec. 33,
Insurance Code)
Q: Does a party have the duty to disclose his
opinions?
A: Neither party is bound to communicate his mere
opinion, speculation, intention or expectation even upon
inquiry, because such opinion would add nothing to the
appraisal of the application. (Insurance Code, Sec. 35)
Q: How is materiality determined?
A: Materiality is to be determined not by the event, but
solely by the probable and reasonable influence of the
facts upon the party to whom the communication is due:
a. In forming his estimate of the disadvantages of the
proposed contract; or
b. In making his inquiries. (Insurance Code, Sec. 31)
Q: What is the test of materiality?
A: Was the insurer misled or deceived into entering a
contract obligation or in fixing the premium of insurance by
a withholding of material information or facts within the
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assured’s knowledge or presumed knowledge? (Argente v.
West Coast Life, G.R. No. L-24899, 1928)
It is sufficient that his non-disclosure misled the insurer in
forming his estimates of the risks of the proposed
insurance policy or in making inquiries (Sunlife Assurance
Company v. CA, G.R. No. 105135, 1995).
The materiality of the existence of other insurance
contracts against fire upon the same property insured,
when its disclosure is one of the conditions specified in the
fire insurance policy, is not open to doubt (Union Mfg. v.
Phil. Guaranty, G.R. No. L-27932, October 30, 1972)
Q: What is the rule on materiality in medical
examinations
A: General rule: non-disclosure is concealment
In non-medical insurance (which does away with the usual
medical examination before the policy is issued), the
waiver by said insurance company makes the previous
health conditions of the insured more material (Saturnino
v. Phil. American Life Ins., G.R. No. L-16163, 1963)
Where the applicant concealed the fact that he had
pneumonia, diabetes or syphillis, the policy is avoided
although the eause of the death (e.g., plane- crash) be
to ta lly unconnected with the material fact concealed or
misrepresented.
The withholding by the applicant, father of one- year-old
insured, of the fact that his daughter was typically a
mongoloid child, of which he was fully aware, as such a
congenital physical defect could never be ensconced nor
disguised, in supplying essential data for the insurance
application form which fact is material to the contract,
constitutes fraudulent concealment (Great Pacific v. CA,
G.R. No. L-31845, 1979)
Exception: Imprecise description of information is not
concealment
Where the insured lacked sufficient medical knowledge as
to enable him to distinguish between “peptic ulcer” and
“tumor” the insured cannot claim that he was deceived into
entering into the contract.
In the absence of evidence that the Insured had sufficient
medical knowledge as to enable him to distinguish
between "peptic ulcer" and a "tumor," his statement that
said tumor was "associated with peptic ulcer of the
stomach" should be construed as an expression made in
good faith of his belief as to the nature of his ailment and
operation. Such statement must be presumed to have
been made by him without knowledge of its incorrectness
and without any deliberate intent on his part to mislead the
insurer. (Ng Zee v. Asian Crusader, G.R. No. L-30685,
1983)
Q: What is misrepresentation?
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A: It is a factual statement made by the insured at the
time of, or prior to, the issuance of the policy, to give
information to the insurer and otherwise induce him to
enter into the insurance contract.
A representation cannot qualify an express provision in a
contract of insurance but it may qualify an implied
warranty, (insurance Code, Sec. 40)
Q: In what form may misrepresentation be made?
A: Oral or written. (Insurance Code, Sec. 36)
Q: When may misrepresentation be made?
A: It may be made orally or in writing. It may be made at
the time of, or before, the issuance of the policy. (Insurance
Code, Sec. 37)
It may be altered or withdrawn before the insurance is
effected, but not afterwards. (Insurance Code, Sec. 41)
Q: What are the requisites for misrepresentations?
A:
a. The insured stated a fact which is untrue;
b. Such fact was stated with knowledge that it is untrue
and with intent to deceive or which he states positively
as true without knowing it to be true and which has a
tendency to mislead;
c. Such fact in either case is material to the risk.
Q: Is misrepresentation an affirmative defense?
A: Yes. To avoid liability, the insurer has the duty to
establish such a defense by satisfactory and convincing
evidence. (Ng Gan Zee v. Asian Crusader, G.R. No. L-
30685, 1983)
The fraudulent intent on the part of the Insured must be
established to entitle the insurer to rescind the contract.
Misrepresentation as a defense of the insurer to avoid
liability is an affirmative defense and the duty to establish
such defense by satisfactory and convincing evidence
rests upon the insurer. (Manuiife Philippines v. Ybanez,
G.R. No. 204736, 2016)
Q: What are the different kinds of representation?
A:
a. Affirmative - an affirmation of a fact existing when the
contracts begins; or
b. Prom issory - a statement by the Insured concerning
what is to happen during the term of the insurance.
Q: What is the effect of expressions of opinion or
expectation on insurance policy?
A: A representation of the expectation, intention, belief,
opinion or judgment of the insured, although false, WILL
NOT AVOID a policy of insurance if there is no actual fraud
in inducing the acceptance of the risk, or its acceptance at
a lower rate of premium (Philam Health Systems v. CA,
G.R. No. 125678, 2002);
Q: What is adoption of misrepresentation?
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A: An insured who signed the pension plan application, d. Promissory - The insured stipulates that certain facts
adopted as his own the written representations and or conditions shall exist or thin shall be done or omitted.
declarations embodied in it (Ma. Lourdes S. Florendo vs.
Philam Plans, Inc., Perla Abcede, et at., G.R. No. 186983, Q: Distinguish between warranty and representation.
2012). A:
WARRANTY REPRESENTATION
Q: What is the effect of misrepresentation? Part of the contract Collateral Inducement
A: If there is misrepresentation, the injured party is entitled Written on the policy or in Need not be written
to rescind from the time when the representation becomes a valid rider or attachment
false. (Insurance Code, Sec. 45)
Generally conclusively Should be established to
Q: When can the injured party can rescind the presumed to be material be material
contract? Falsity or non-fulfilment Falsity renders the policy
A: operates as a breach of voidable or rescissible on
a. The representation fails to correspond with the facts contract the ground of fraud
(Insurance Code, Sec. 44); and Fact warranted must be Requires only to be
b. It is false in a material point (Insurance Code, Sec. 45) strictly complied with substantially true

Note: The materiality of a representation is determined by Q: Where should the express warranty be contained?
the same rules as the materiality of concealment. A:
(Insurance Code, Sec. 46) a. The policy itself; or
b. In another instrument signed by the insured and
Q: Distinguish between concealment and referred to in the policy as making a part of it
misrepresentation.
A: Q: What is the effect of breach of warranty?
CONCEALMENT MISREPRESENTATION A: General Rule: The violation of a material warranty or
The insured withholds The insured makes erroneous other material provision of the policy gives the insurer the
information of material statements of facts with the right to rescind the insurance policy (Insurance Code,
facts from the insurer; intent of inducing the insurer to Sec. 74)
enter into the insurance
contract; Note: A policy may declare that a violation of specified
Passive form of the Active form of the act provisions thereof shall avoid it. Otherwise, the breach of
act an immaterial provision does not avoid the policy.
Usually occurs prior to May be made at the time of the (Insurance Code, Sec. 75)
making of the issuance of the contract
insurance contract Exception: The below instances of warranties relating to
the future
Q: What is warranty? a. Loss occurs before the time of performance of the
A: A statement or promise set forth in the policy or by warranty;
reference incorporated therein, the untruth or non­ b. The performance becomes unlawful;
fulfillment of which in any respect, and without reference to c. Performance becomes impossible. (Insurance Code,
whether insurer was in fact prejudiced by such untruth or Sec. 73)
non-fulfillment, renders the policy VOIDABLE by the
insurer. Note: Waiver or estoppel may also prevent the insurer
from being discharged from liability (Pioneer v. Yap, G.R.
Q: What are the different kinds of warranties? No. L-36232, 1974)
A:
a. Express - An agreement contained in the policy or Q: What is an “Other Insurance” Clause?
clearly incorporated therein as part thereof whereby the A: This is a clause in the policy that provides that the policy
insured stipulates that certain facts relating to the risk shall be void if the insured procures additional insurance
are or shall be true or certain acts relating to the same without the consent of the insurer. The purpose is to
subjects have been or shall be done. prevent over-insurance and thus to avert the possibility of
b. Implied - Warranties that are deemed included in the a perpetration of fraud. It is a warranty that entitles the
contract, although not expressly mentioned. They are insurer to rescind in case of breach.
found usually in marine insurance.
c. Affirmative - Asserts the existence of a fact or The “other insurance ciause” may be subject to waiver but
condition at the time it is made; the waiver must either be express or if it is to be implied
from conduct mainly, said conduct must be clearly

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indicative of a clear intent to waive such right. There must
be clear showing that the insurer knew about the violation
of the clause (General Insurance and Surety Corp. v. Ng
Hua, G.R. No 14373, 1960).
1. Exercise of the right to rescind
Note: This only applies when the grounds relied upon for
rescission are concealment and misrepresentation.
Q: When should the right to rescind be exercised?
A:
a. Non-Life Policy - Prior to the commencement of an
action on the contract
b. Life Policy - Before the incontestability clause sets in
Q: What are the grounds for the cancellation of a non­
life policy by the insurer?
A:
a. Non-payment of premium;
b. Conviction of a crime out of acts increasing the hazard
insured against;
c praucj or material misrepresentation;
d. Willful or reckless acts or omissions increasing the risk
insured against;
e. Physical changes in the property insured making it
uninsurable; and
f. Determination by the Insurance Commissioner that the
policy would violate the Insurance Code. (Sec. 64,
Insurance Code)
Q: What are the requisites for the cancellation by
insurer (other than life insurance contracts)?
A:
a. Prior notice of cancellation to insured;
b. Notice must be based on the occurrence after effective
date of the policy of one or more of the grounds
mentioned;
c. Notice must be in writing, mailed or delivered to the
insured at the address shown in the poiicy; and
d. Notice must state the grounds relied upon and upon
request of insured, to furnish facts on which
cancellation is based.
Prior Notice is required to prevent the cancellation of the
policy, without allowing the insured ample opportunity to
negotiate for other insurance in its stead for his own
protection (Saura Import & Export v .P h il International
Surety, G.R. No. L-15184, 1963).
Q: When should Non-Life Insurance be renewed?
A: The insured shall be entitled to renew the policy upon
payment of the premium due on the effective date of the
renewal. Policy written:
• Term of less than one (1)year- considered as if written
for a term of one (1) year
• Term longer than one (1) year or any policy with no
fixed expiration date - considered as if written for
successive policy periods or terms of one (1) year
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Exception: The insurer at least forty-five (45) days in
advance of the end of the policy period mails or delivers to
the named insured at the address shown in the policy
notice of its intention not to renew the policy or to condition
its renewal upon reduction of limits or elimination of
coverages (Insurance Code, Sec. 66)
D. LOSS
1. Notice and Proof of Loss
Q: When is the insurer liable for loss?
A:
• Unless otherwise provided by the policy, an insurer is
liable for a loss of which a peril insured against was the
proximate cause, although a peril not contemplated by
the contract may have been a remote cause of the loss
(Insurance Code, Sec. 86)
• The thing insured is rescued from a peril insured
against that would otherwise have caused a loss, if, in
the course of such rescue, the thing is exposed to a
peril not insured against, which permanently deprives
the insured of its possession, in whole or in part; or
where a loss is caused by efforts to rescue the thing
insured from a peril insured against (Insurance Code,
Sec. 87)
• Loss, the proximate cause of which is the peril insured
against;
• Loss, the immediate cause of which is the peril insured
against except where proximate cause is an excepted
peril;
• Loss through the negligence of insured except where
there was gross negligence amount to willful act; and
• Loss caused by efforts to rescue the thing from peril
insured against - if during the course of rescue, the
thing is exposed to a peril not insured against, which
permanently deprives the Insured of its possession, In
whole or in part.
Q: When is the insurer not liable for loss?
A:
• Loss of which the peril insured against was only a
remote cause. (Insurance Code, Sec. 86)
• Loss caused by the willful act or through the
connivance of the insured; but he is not exonerated by
the negligence of the insured, or of the insurance
agents or others (Insurance Code, Sec. 89)
• Loss by insured’s willful act or gross negligence;
• Loss due to connivance of the insured;
• Loss where the excepted peril is the proximate cause.
Q: Are the notice of loss and proof of loss mandatory
requirements?
A: Yes. The requirements of the notice of loss and
obligation to file a proof of loss are conditions with which
the insured MUST comply before there is any liability on
the part of the insurer.
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Q: When should notice of loss be given?
A: Without unnecessary delay or within a reasonable time.
In compulsory third party motor vehicle insurance, notice
of claim must be filed within 6 months from the date of the
accident, otherwise, the claim shall be deemed waived.
(Insurance Code, Sec. 384)
A requirement of the policy that notice of loss be given
immediately or fortwith requires the giving of notice within
a reasonable time (Bachrach v. Britain Am. Assur. Co.,
G.R. No. L-5715, 1910)
Q: In what form should the notice of notice or proof of
loss be made?
A: In case of loss upon fire insurance, the law requires
written notice. (Insurance Code, Sec. 90)
For other kinds of insurance, absent any stipulation in the
policy, notice or proof may be given orally or in writing.
Q: When are defects in a notice of loss waived?
A: All defects in a notice of loss, or in preliminary proof
thereof, which the insured might remedy, and which the
insurer omits to specify to him, without unnecessary delay,
as grounds of objection, are waived. (Insurance Code,
Sec. 92)
Q: When is delay in the presentation of notice or proof
of loss deemed waived?
A: Delay in the presentation to an insurer of notice or proof
of loss is waived if caused by any act of him, or if he omits
to take objection promptly and specifically upon that
ground. (Insurance Code, Sec. 93)
Q: What are the rules on the payment of proceeds?
A:
Life Insurance
• The proceeds shall be paid immediately upon the
maturity of the policy (survival benefits) if there is such
a maturity date.
• If the policy matures by the death of the insured, within
sixty (60) days after presentation of the claim and filing
of the proof of the death of the insured.
Property Insurance
• Proceeds shall be paid within thirty (30) days after
proof of loss is received by the insurer and
ascertainment of the loss or damage is made either by
agreement or by arbitration.
• If no ascertainment is made within 60 days after receipt
of proof of loss, the loss shall be paid within 90 days.
2. Guidelines on Claims Settlement
Q: What are unfair claims settlement and sanctions?
A: Any of the following acts by an insurance company, if
committed without just cause and performed with such
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frequency as to indicate a general business practice, shall
constitute unfair claim settlement practice. It shall be
considered sufficient cause for the suspension or
revocation of the company's certificate of authority:
• Knowingly misrepresenting to claimants’ pertinent
facts or policy provisions relating to coverage at issue;
• Failing to acknowledge with reasonable promptness
pertinent communications with respect to claims
arising under its policies;
• Failing to adopt and implement reasonable standards
for the prompt investigation of claims arising under its
policies;
• Not attempting in good faith to effectuate prompt, fair
and equitable settlement of claims submitted in which
liability has become reasonable clear; or
• Compelling policyholders to institute suits to recover
amounts due under its policies by offering without
justifiable reason substantially less than the amounts
ultimately recovered in suits brought by them.
a. Prescription of Action
Q: What is the nature of the condition for the filing of a
claim?
A: The condition contained in the insurance policy that
claims must be presented within one year after rejection is
not merely a procedural requirement. The condition is an
important matter, essential to a prompt settlement of
claims against insurance companies, as it demands that
insurance suits be brought by the insured while the
evidence as to the origin and cause of destruction have not
yet disappeared.
It is in the nature of a condition precedent to the liability of
the insurer, or in other terms, a resolutory cause, the
purpose of which is to terminate all liabilities in case the
action is not filed by the insured within the period
stipulated. (Sun Insurance v. CA, G.R. No. 8974, 1991)
Q: When should the action be commenced?
A:
a. If there is a stipulation in the policy - The stipulation
in the policy, if not contrary to Sec. 63, will prevail. (Teal
Motor v. Orient Insurance, G.R. No. 39797, 1934)
b. If there is no express stipulation in the policy - As
the policy is a written contract, the action prescribes in
10 years. (Civil Code, Art. 1144)
Q: What is the limitation on the period to file claim?
A: A condition, stipulation, or agreement in any policy of
insurance, limiting the time for commencing an action
thereunder to a period of less than one year from the time
when the cause of action accrues, is void. (Insurance
Code, Sec. 63)
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In compulsory third party motor vehicle insurance, action
for suit or recovery of damages due to ioss or injury must
be brought with the proper Commissioner or the courts
within 1 year from denial of the claim, otherwise, the
claimant’s right of action shall prescribe. (Insurance Code,
Sec. 384)
Note; In Industrial life insurance, the period cannot be less
than 6 years after the cause of action accrues, (insurance
Code, Sec. 231[d])
Q: When does the insured’s cause of action begin to
run?
A: The prescriptive period for an insured’s action for
indemnity should be reckoned from the “final rejection” of
the claim (H.H. Hoiiero Construction v. GSIS, G.R. No,
152334, 2014).
Rationale: Before such final rejection, there is no real
necessity for bringing suit (Eagle Starv. Chia Yu,G.R. No.
L-5915, 1955).
Action or suit must be brought in proper cases, with
Commission or the courts within one year from the denial
of the claim, otherwise, the claimant’s right of action shall
prescribe (Jacqueline Jimenez Vda. De Gabriel v. CA,
G.R. No. 103883, 1996).
b. Subrogation
Q: What is subrogation?
A: Substitution of one person in place of another with
reference to a lawful claim or right, so that he who Is
substituted succeeds to the rights of the other in relation to
a debt or claim, including Its remedies and securities (LSC
v. Chubb, G.R. No. 147724. 2004)
The right of subrogation has its roots in equity. It is
designed to promote and to accomplish justice and is the
mode which equity adopts to compei the uitimate payment
of a debt by one who in justice and good conscience ought
to pay. (Delsan Transport v. CA, G.R. No. 127897, 2001)
Q: What is the legal basis of subrogation?
A: If the plaintiffs property has been insured, and he has
received indemnity from the insurance company for the
Injury or loss arising out of the wrong or breach of contract
complained of, the insurance company shall he subrogated
to the rights of the insured against the wrongdoer or the
person who has violated the contract. If the amount paid
by the insurance company does not fully cover the injury
or loss, the aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury (Civil
Code, Art. 2207)
Q: To what kind of insurance policy does subrogation
apply?
A: Subrogation only applies to property insurance: “If the
plaintiff’s property is insured...” (Civil Code, Art. 2207)
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Note: Subrogation also applies in reinsurance. A reinsurer,
on payment of a loss, acquires the same rights by
subrogation as in similar cases where the original insurer
pays a loss. (Pioneer Insurance Co v. CA, G.R. Nos. 84197
& 84157, 1989)
Q: When does subrogation occur?
A:
1. If the plaintiff s property has been insured, and
2. He has received indemnity from the insurance
company for the injury or loss arising out of the wrong
or breach of contract complained of (Civil Code, Art.
2207)
It is not dependent upon, nor does it grow out of, any privity
of contract or upon written assignment of claim. It accrues
simply upon payment by the insurance company of the
insurance claim. (Delsan Transport v. CA, G.R. No.
127897, 2001)
The presentation of the marine insurance policy is not
necessary for the exercise of the insurer’s right to
subrogation. It accrues upon payment of insurance claim
(Asian Terminals, Inc. v. Malayan Insurance, G.R. No.
171406, 2011).
The subrogation receipt, by itself, is sufficient to establish
not only the relationship of insurer and the assured shipper
of the lost cargo, but also the amount paid to settle the
insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance
claim. (Asian Terminals, Inc. v. Malayan Insurance, G.R.
No. 171406, 2011).
As subrogee of the rights and interest of the consignee,
R&B Insurance has the right to seek reimbursement from
either Loadmasters or Glodel or both for breach of contract
and/or tort (Loadmasters Customs Services, Inc. v. Glodel
Brokerage Corporation and R & B insurance Corporation,
G.R. No. 179446, 2011).
Q: What is the effect of subrogation on the prescriptive
period to sue the person causing the loss or injury?
A: The insurer acquires a fresh 10-year period arising
from law. (Vector Shipping v. AH AC, G.R. No. 159213,
2013)
Q: What is the extent of the insurer’s right to recover
from the 3rd person?
A: The right of insurer to recover from 3rd party is limited to
the amount recoverable from the latter by the insured. The
insurer cannot recover in full the amount it paid to the
insured if it is greater than that to which the insured could
lawfully lay claim against the person causing the ioss (Rizal
Surety v. Manila Railroad, G.R. No. L-24043, 1968)
Q: What are the cases when there is no right of
subrogation?
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a. The insured by his own act releases the

wrongdoer/third person liable for the loss;
b. Where the insurer pays the insured for a loss or
risk not covered by the policy;
c. In life insurance;
d. For recovery of loss in excess of insurance
coverage. (Malayan Insurance v. CA, G.R. No.
81026, 1990)

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| IV. TRANSPORTATION
A. COMMON CARRIERS
1. Concept
Q: What is a contract of transportation?
A: It is a contract where natural or juridical persons bind
themselves to transport persons, goods or both for
compensation offering their services to the public.
Q: What laws govern a contract of transportation?
A:
a. New Civil Code
b. Code of Commerce
c. Special Laws
In all matters not regulated by the Civil Code, the rights and
obligations of common carriers shall be governed by the
Code of Commerce and by special laws. (Civil Code, Art.
1766)
Q: Who are the parties to the contract of
transportation?
A:
1, In a Carriage of Passenger:
a. Carrier: The party who binds himself to transport
persons, goods or both. The carrier may be a
common carrier or a private carrier.
o Corporations, firms or associations engaged
in the business of carrying or transporting
passengers or goods or both, by land, water,
or air, for compensation, offering their services
to the public (Civil Code, Art. 1732)
r dobci iQci JJUUIIO
conveyance by virtue of an express or implied
r n n t m r t u/ith th o r n m m n n rarri^ r
what is the equivalent thereof (Jesusa Vda. de
Nueca v. Manila Railroad Company, G.R. No.
31731-R, 1968)
2. In a Carriage of Goods
a. Shipper: The person who delivers the goods to the
carrier for transportation and pays the consideration,
or on whose behalf payment is made (Aquino &
Hernando a t 4).
b. Carrier: (see earlier discussion)
c. Consignee: The party who receives the goods or
cargo. The consignee and the shipper may be the
same.
2. Common Carrier vs. Private Carrier
Q: Distinguish between common carrier and private
carrier
A:
COMMERCIAL LAW
COMMON CARRIER PRIVATE CARRIER
1 Required to exercise Required to exercise only
extraordinary diligence ordinary diligence
Holds out service to the Holds out service to a
public single person or entity
There is presumption of There is no presumption of
fault or negligent in case of fault or negligence
loss destruction or
deterioration of goods or
death or injury of
passengers
Stipulations iimiting iiabiiity Stipulations iimiting Iiabiiity
are governed by law are governed by principle
of “autonomy of contracts”
A private carrier is one which, without being engaged in the
business of carrying as a public employment, undertakes
to deliver goods or passengers for compensation (Home
Insurance v. American Steamship, G.R. No. L-25599,
1968)
The distinction between a common carrier and private
character lies in the character of the business, such that if
the undertaking is a single transaction, not a part of the
general business or occupation, although involving the
carriage of goods for a fee, the person or corporation
offering such service is a private carrier. (Schmitz
Transport v. Transport Venture, G.R. No. 150255, 2005)
Q: Does it mean that if a carrier does not transport
passengers, goods, or both as its principal business it
is not a common carrier but a private carrier?
A: No. Art. 1732 of the Civil Code makes no distinction
between one, whose principal business activity is the
carrying of persons or goods or both, and one who does
such carrying only as an ancillary activity (“sideline”). (De
Guzman vs. Court of Appeals, G.R. No. L-47822, 1988)
na\/inn fa ro nr Q: In what instances is a common carrier converted to
a private carrier?
A: A charter party may transform a common carrier into a
private carrier. However, it must be a bareboat or demise
charter where the charterer mans the vessel with his own
people and becomes, in effect, the owner for the voyage
or service stipulated (Caltex v. Sulpicio Lines, G.R. No.
131166, 1999)
Q: What are the requisites to be a Common Carrier?
A: (PECC)
a. Engaged in business of carrying or transporting goods
or passengers whether as principal or ancillary
business and whether on regular/scheduled or
occasional/unscheduled basis.
b. Offers its services to the Public whether to the general
population or narrow segment of general population
c. For Compensation or fixed price or rate
d. Control of operation or cargo (De Guzman v. CA, G.R.
No. L-47822, 1988)
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Q: What are the instances when the supreme court
held a person, partnership, firm or corporation as a
common carrier?
A:
a. A customs broker is a COMMON CARRIER due to
transportation of goods being integral to the nature of
the business (Calvo v. UCPB, G.R. No. 148496, 2002)
b. Under the Petroleum Act of the Philippines (R.A. No.
387), oil pipeline operators are considered common
carriers (First Philippine Industrial Corp v. CA, G.R. No.
125948, 1998)
c. The operator of a beach resort that accepts clients by
virtue of a tour package - contracts that included
transportation to and from the resort and the point of
departure is considered as a common carrier. Its
services are so intertwined with its main business as to
be properly considered ancillary thereto. (Cruz v. Sun
Holidays, G.R. No. 186312, 2010)
d. The bus principally used as a bus service for school
children, and which was hired by a group of
persons although the owners were not engaged in the
business of public transportation is a common carrier
(Fabre, Jr. v. CA, G.R. No. 11127, 1996)
e. A freight forwarder’s liability is limited to damages
arising from its own negligence, including negligence in
choosing the carrier; however, where the forwarder
contracts to deliver goods to their destination instead of
merely arranging for their transportation, it becomes
liable as a common carrier for loss or damage to goods.
(Unsworth Transport v. CA, G.R. No. 166250, 2010)
Instance Where the Supreme Court Held a Person,
Partnership, Firm or Corporation NOT as a Common
Carrier
A travel agency is NOT a common carrier. Its covenant
with its customers is simply to make travel arrangements
in their behalf. The relationship between the travel agency
and the passenger is, at most, one of agency (Crisostomo
v. CA, G.R. No. 138334, 2003)
An exclusive contractor and hauler, rendering or offering
its services to an individual or entity (FGU Insurance v.
G.P. Sarmiento Trucking, G.R. No. 141910, 2002)
3. Diligence Required of Common Carriers
Q: What does the extraordinary diligence or
responsibility of common carrier regarding
passengers entail?
A:
a. To carry passengers safely as far as human care and
foresight can provide,
b. Using utmost diligence of a very cautious person,
c. With due regard for all the circumstances (Sulpicio v.
First Lepanto, G.R. No. 140349, 2005).
Q: Is the common carrier an insurer of absolute
safety?
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COMMERCIAL LAW
A: No. The common carrier is not required to exercise all
the care, skill or diligence the human mind can conceive
nor does it free the passenger from all possible risks.
(Japan Airlines v. CA, G.R. No. 118664, 1998)
B. OBLIGATIONS AND LIABILITIES
Q: What are the liabilities of common carriers?
A: See discussion below on Vigilance over Goods and
Safety of Passengers.
Q: What are the rules in apportioning of liability?
A: While the Court ruled in previous cases that the
registered owner or operator of a passenger vehicle is
jointly and severally liable with the driver of the said vehicle
for damages incurred by passengers or third persons as a
consequence of injuries or death sustained in the operation
of the said vehicle, in no case is the actual owner of the
passenger vehicle exempted from liability. In fact, the
registered owner or operator has the right to be
indemnified by the real or actual owner of the amount that
he may be required to pay as damage for the injury caused.
(R Transport vs. Luisito Yu, G.R. No 174161, 2015)
1. Vigilance over Goods
Q: What does extraordinary diligence or responsibility
of common carrier regarding transport of goods
entail?
A:
a. To transport with greatest skill and utmost foresight
b. Utmost vigilance of very cautious person, according to
all circumstances
Q: What happens when goods transported are lost,
destroyed or deteriorated, or when a passenger dies
or is injured?
A: General Rule: The common carrier is presumed to
have been at fault or to have acted negligently when the
goods transported are lost, destroyed or deteriorated, or
when a passenger dies or is injured.
This is not a conclusive but disputable presumption, and it
may be overcome by contrary evidence of defenses.
Exceptions (C ivil Code, Art. 1734): When the same is
due to any of the following causes only: (FESCO)
a. Flood, Earthquake, Storm, lightning or Other natural
disaster or Calamity
b. Act of the public Enemy in war, whether international
or civil.
c. Act or omission of the Shipper or owner of the goods.
d. The Character of the goods or defects in the packing
or in the containers.
e. Order or act of competent authority
Q: What are the conditions to avail of the defense of
flood, earthquake, storm, lightning or other natural
disaster or calamity?
A:
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a. Natural disaster was the proximate & only cause When the private respondent did furnish the common
b. Exercise of diligence to prevent or minimize loss before, carrier with an inaccurate weight of the payloader, the
during and after the occurrence of the natural disaster common carrier is nonetheless liable, for the damage
c. No delay (Civil Code, Art. 1740) caused to the machinery could have been avoided by the
exercise of reasonable skill and attention on its part in
Q: What are the requisites for caso fortuito which overseeing the unloading of such a heavy equipment. It
would exempt the carrier from liability? was the duty of its Chief Officer to determine the weight of
A: (HIFI) heavy cargoes before accepting them (Compania Maritime
a. The event must be independent of Human will v. CA, G.R. No. 31379, 1997)
b. The occurrence must render it Impossible for the debtor
to fulfill the obligation in a normal manner Q: What are the conditions to avail of the defense of
c. The obligor must be Free of participation In, or “the character of the goods or defects in the
aggravation of, the injury to the creditor, and packing or in the containers”?
d. The event must have been Impossible to foresee, or if A:
it could be foreseen, must have been impossible to a. Exercise of due diligence to forestall or prevent loss
avoid. b. Immediate protest by the carrier if the problem with the
goods or the packing or containers is visible; otherwise,
Fire may not be considered a natural disaster or calamity, carrier may be in estoppel
unless it is caused by lightning or by other natural disasters
or calamities (Eastern Shipping Lines v. IAC, G.R. No. Even granting, for the sake of argument, that the subject
69044, 1987) cargo was already in a damaged condition at the time it
was accepted for transportation, the carrier is not relieved
Heavy seas and rains are not caso fortuito, but normal from its responsibility to exercise due care in handling the
occurrences that an ocean-going vessel would encounter merchandise and in employing the necessary precautions
(Id.) to prevent the cargo from further deteriorating. (Iron Bulk
Shipping Phils. Co., v. Remington Industrial, G.R. No.
Mechanical defects are not force majeure if the same were 136960, 2003)
discoverable by regular and adequate inspections
(Necesito v. Paras, G.R. No. L-10605, 1958) Q: What are the conditions to avail of the defense of
“order or act of competent authority”?
A tire blow-out is not considered a fortuitous event, as A: With or without power to issue order (Ganzon v. CA,
there are human factors involved in the situation (Yobido G.R. No. L-48757, 1988)
v. CA, G.R. No. 113003, 1997)
Note: Mere proof of delivery of the goods in good order to
Highjacking is not an exempting cause under Art. 1734. a common carrier and of their arrival in bad order at their
However, common carriers are not held liable for the acts destination constitutes a prima facie case of fault or
or events which cannot be foreseen or are inevitable, negligence against the carrier. (Eastern Shipping Lines vs.
provided that they exercised extraordinary diligence (De BPi, G.R. No 182864, 2015)
Guzman v. CA, G.R. No. L-47822, 1988)
Summary Tabie: Art. 1734 and Defenses
Q: What are the conditions to avail of the defense of DEFENSES CONDITIONS TO AVAIL
“act of the public enemy in war, whether international Natural disaster, like flood, Proximate and only
or civil”? storm, earthquake, cause;
A: lightning (1734[1J)
a. Act was the proximate & only cause Exercise of diligence to
b. Exercise of diligence to prevent or minimize loss before, Act of public enemy in war, prevent or minimize loss;
during and after the act whether iniernaiionai or and
c. No delay (Civil Code, Art. 1740) c iv il(1734[2])
No delays 739, 1740)
Q: What are the conditions to avail of the defense of if owner or shipper is the
“act or omission of the shipper or owner of the proximate cause,
goods”? exempting
A:
a. If proximate cause, exempting Act or omission of owner or If there is contributory
b. If contributory negligence, mitigating shipper of goods (1734[3]) negligence, mitigating
c. Immediate protest by the carrier; otherwise, carrier may (1741)
be in estoppel
Immediate protest by
carrier; else: estoppel
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Exercise of due diligence
to forestall or prevent loss
Character of goods or
(1742)
defect in the packing or
container (1734[4])
Immediate protest by
carrier; else: estoppel
Said public authority had
Order or act of competent
the power to issue the
public authority (1734[5])
order (1743)
Q: Is delivery of the common carrier to the customs
authorities considered as delivery to the consignee so
as to end the carrier’s extraordinarily responsibility
over the goods?
A: No. Delivery of the cargo to the customs authorities is
not delivery to the consignee or “to the person who has a
right to receive them,” The goods are still in the hands of
the government and the owner cannot exercise dominion
over them. However, the parties may agree to limit the
liability of the carrier. (Lu Do v. Binamira, G.R. No. L-9840,
1957)
Q: What is the effect of the passenger’s contributory
negligence on the liability of the common carrier?
A: The contributory negligence of the passenger does not
bar recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
carrier, but the amount of damages shall be equitably
reduced.
Q: Are there exceptions to Article 1741 which
provides: “If the shipper or owner contributed to the
loss, destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
carrier, the latter shall be liable on damages, which
however, shall be equitably reduced?”
A: Yes. In collision cases (moving object strikes another
moving object) and allision cases (moving object strikes a
stationary object). In such cases, the parties are liable for
their own damage.
Q: In transportation of goods, what is the duration of
extraordinary responsibility?
A: Lasts from the time the goods are unconditionally
placed in the possession of, and received by the carrier for
transportation until the same are delivered, actually or
constructively, by the carrier to the consignee or to the
person who has a right to receive them or to his duly
authorized agent and a reasonable time is given him to
remove the goods. (Nedlloyd B.V. Rotterdam v Glow Laks,
G.R. No. 156330, 2014)
• Even when the goods are temporarily unloaded or
stored in transit, unless shipper used right of stoppage
in transitu.
Stoppage In Transitu
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COMMERCIAL LAW
Right of an unpaid seller to stop delivery and regain
possession of the goods while they are in transit to the
buyer who has been declared bankrupt/insolvent
• Even during the time of the storage at warehouse of
common carrier at place of destination, until consignee
is advised of good’s arrival and has had opportunity to
remove or dispose of them.
Q: Is the surrender of the original Bill of Lading a
condition precedent for a Common Carrier to be
discharged of its contractual obligation?
A: No. If surrender of the original Bill of Lading is not an
option, acknowledgment of the delivery by signing the
delivery receipt suffices (National Trucking and Forwarding
v. Lorenzo Shipping, G.R. No. 153563, 2005)
Stipulations for Limitations of Liability
Q: In a contract of transportation of goods, what are
the requisites for a stipulation limiting the liability of
the common carrier to less than extraordinary
diligence to be valid?
A: (WVR)
a. In Writing
b. Supported by a Valuable consideration other than the
service rendered by the common carrier
c. Reasonable, just, and not contrary to public policy.
Q: What stipulations are valid?
A:
a. Limited to value of goods appearing in Bill of Lading
(Civil Code, Art. 1749)]
b. Fixed sum that is reasonable and just and agreed upon
(Civil Code, Art. 1750)
o Reasonable and just under the circumstances; and
o It is fairly and freely agreed upon
c. Liability for delay due to strike or riot (Civil Code, Art.
1748)
Q: What factors should be considered when refusing
stipulations limiting liability?
A:
a. Refusal to carry goods, UNLESS stipulation limiting
liability is signed by shipper (Civil Code, Art. 1746)
b. Delay or deviation, without just cause (Civil Code, Art.
1747)
c. Lack or presence of competition (Civil Code, Art. 1751)
Q: In a contract of transportation of goods, when is a
stipulation limiting liability void?
A: (UUC)
a. Unreasonable
b. Unjust
c. Contrary to public policy
Q: What stipulations are prohibited in a contract of
carriage?
A: (OLD-FETUs)
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a j ^ at goods are transported at the risk of the Owner b. Exception: Airline companies are required to inspect
or shipper; each and every cargo brought into the aircraft (R.A. No.
b>, That the common carrier will not be Liable for any loss, 6235, Sec. 8)
destruction, or deterioration of the goods;
c. That the common carrier need not observe any Q: What are the different kinds of baggage?
Diligence in the custody of the goods; a. Checked-In: Those that are delivered to carrier
d. That the common carrier shall exercise a degree of b. Hand-Carried: Those in the passenger’s custody
diligence less than that of a good Father of a family, or
of a man of ordinary prudence in the vigilance over the Q: Distinguish between hand-carried baggage and
movables transported; checked-inbaggage?
e That the common carrier shall not be responsible for the A:
acts or omission of his or its Employees; HAND-CARRIED CHECK
f. That the common carrier's liability for acts committed by Applicable Rule
Jhieves, or of robbers who do not act with grave or Civil Code, Arts. 1998, Civil Code, Arts. 1733-
irresistible threat, violence or force, is dispensed with or 2000-2003 1753
diminished; Legal Nature of Baggage
g. That the common carrier is not responsible for the loss, Necessary deposit “Goods”
destruction, or deterioration of goods on account of the Diligence by Common Carrier
defective condition of the car, vehicle, ship, airplane or Diligence of a depositary
other equipment Used in the contract of carriage. Extraordinary diligence
(ordinary diligence)

Q: What is the liability of the common carrier in the
absence of a rejection clause in a contract of carriage
of goods?
A: In the absence of a “rejection clause” in a contract of
carriage of goods, Articles 361, 362, 364, 365 of the Code
of Commerce become applicable. The aforementioned
provisions, in summary, state that if the goods are
delivered but arrived at the destination in damaged
condition, the remedies to be pursued by the consignee
depend on the extent of damage on the goods. (Loadstar
Shipping Company, incorporated v. Malayan insurance
Company, incorporated, G.R. No. 185565, 2014)
Q: What is the liability of the common carrier for the
baggage of passengers?
A: The checked-in baggage is considered “goods” and the
passenger is considered the snipper/consignee.
i ~ ___i____ ___ l ---------- -: ----l i----------------------------- xi—
r u i i idi iu - u d i i i c u u a y y a y c , u i c
will be governed by the Civil Code provisions on
hotelkeepers and innkeepers. The carrier is required to
exercise ordinary diligence and is considered a depositary
(Civil Code, Art. 1754)
Q: Does a common carrier have a duty to inspect?
A:
a. General Rule: Carrier may only inquire into the nature
of the passenger’s baggage, but not search nor inspect
its contents
Inquiry may be made as to the nature of passengers’
baggage, but beyond this, constitutional boundaries are
already in danger of being transgressed (Nocum v.
Laguna Tayabas, G.R. No. L-23733, October 31,
1969).
-------------------------------: u : i : x . .
j c ^ p u iiijiu m iy
Q: What are the requisites for common carrier’s
liability for hand-carried baggage (Necessary
Deposit)?
A:
a. Notice was given to the common carrier, or to their
employees, of the baggage brought by the passengers;
and
b. Passenger took precautions which the common carrier
advised relative to the care and vigilance of their
baggage (Civil Code, Art. 1998)
Q: What are the instances when a common carrier is
not responsible for the loss and injury to passengers’
hand-carried baggage?
A: (FAT)
a. Those which may proceed from any Force Maieure
(Civil Code, Art. 2000)
±1— ------------
b. Loss due to the Act of passenger or his agents or if the
u i u it; L d i iic i
loss arises from the character of the things (Civil Code,
Art. 2000); and
C. Acts of Jhief or robbers, done with the use of arms or
through irresistible force (Civil Code, Art. 2001)
The relationship between the consignee and the arrastre
operator is bailor-bailee or depositor- depositary. An
arrastre operator does not render any service of a maritime
nature. (Unknown Owner o f MV China vs. AsianTerminals,
G.R. No 195661, 2015)
Thus, an arrastre operator should adhere to the same
degree of diligence as that legally expected of a
warehouseman or a common carrier as set forth in
Warehouse Receipts Act and Article 1733 of the Civil
Code. As custodian of the shipment discharged from the
vessel, the arrastre operator must take good care of the
same and turn it over to the party entitled to its possession.

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(Marina Port Service, Inc. v. American Home Assurance
Corporation, G.R. 201822, 2015)
Q: What are the rules in cases of multi- carriers?
A: When there are several carriers who successively
transport goods, or there is a single “through bill of lading”
issued by one carrier and honored by other carriers, the
following are the rules:
a. Last carrier assumes the obligation of the previous
carriers.
b. But last carrier, if not directly responsible, may proceed
against previous carriers.
c. Shipper/consignee has cause of action against carrier
who executed the contract or other carriers who
received goods without reservation.
d. Carriers who made a reservation may still be liable for
their own acts.
Note: Carriers with reservations are NOT relieved of
responsibilities for their own acts
2, Safety Of Passengers
Q: Who is a passenger?
A: One who travels in a public conveyance by virtue of an
express or implied contract with the common carrier paying
fare or what is equivalent thereof. (Jesusa Vda. De Nueca
v. Manila Railroad Company, G.R. No. 31731-R, 1968)
Q: Who are NOT considered as passengers?
A:
a. One who has not yet boarded any part of a vehicle
regardless of whether or not he has a ticket;
b. One who remains on a carrier for an unreasonable
length of time after he has been afforded every safe
opportunity to alight;
c. One who has boarded by fraud, stealth, or deceit;
d. One who attempts to board a moving vehicle,
although he has a ticket, unless he attempt be with
the knowledge and consent of the carrier;
e. One who has boarded a wrong vehicle, has been
properly informed of such fact, and on alighting, is
injured by the carrier; or
f. One who rides any part of the vehicle which is
unsuitable or dangerous or which he knows is not
designed or intended for passengers
Q: When does the presumption of negligence arise?
A: If the passenger is injured or killed, there is a
presumption of negligence against a carrier. (Civil Code,
Art. 1756)
It is presumed that a person driving a motor vehicle has
been negligent if at the time of the mishap, he was violating
a traffic regulation, unless there is proof to the contrary.
(Sps. Estrada v. Philippine Rabbit, G.R. 203902, 2017)
Q: What defenses are available to common carrier?
A: (FEPNG)
a. Fortuitous event
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COMMERCIAL LAW
b. Extraordinary diligence
c. Passenger is jaroximate cause of death or injury
d. Employees could not have prevented by ordinary
diligence the willful act or negligence of other
passengers or strangers (which caused the death)
e. If the contract of carriage is gratuitous and there is no
willful act or negligence on the part of the carrier, a
stipulation limiting liability is valid
Q: What stipulations are void?
A: General Rule: The responsibility of a common carrier
cannot be dispensed with or lessened by stipulation, by
posting of notices, or by statements on tickets. A reduced
fare cannot justify limited liability.
Exception: If the carriage is gratuitous or for free, a
stipulation limiting liability is valid.
Exception to the Exception: The stipulation does not
cover willful acts or gross negligence of the carrier. (Civil
Code, Arts. 1757-1759)
Reason: Waiver of future fraud or gross negligence is
invalid (Civil Code, Art. 1172)
Note: Moral damages may be recovered in an action for
breach of contract of transportation when death results.
Even if the passenger does not die, the passenger can
recover moral damages if the carrier is guilty of fraud or
bad faith. However, only the passenger is entitled to moral
damages not anyone else.
Q: What is duration of the liability of common carriers
as to passengers’ safety?
A: As to the commencement of the duty to exercise
extraordinary diligence, there are two views:
Liberal View v. Strict View
When the passenger places himself in the
LIBERAL care and control of the common carrier
VIEW who accepts him as a passenger
(Philippine law adopts this view)
STRICT When the passenger actually boards or
VIEW places a part of his body inside the carrier
For buses, a bus slowing down means that it is offering
itself to prospective passengers as a common carrier. A
passenger who signals for a ride with his thumb signifies
that he is offering himself as a passenger. (Dangwa v. CA,
G.R. No. 95582, 1991)
Note:
• Do not confuse perfection of the contract of carriage
with the start or commencement of the duty to exercise
extraordinary diligence. The contract of carriage may
be perfected in January while the duty to exercise
extraordinary diligence may only start or commence in
March.
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• The duty to exercise extraordinary diligence
terminates, when the passenger alights from the
vehicle at the place of destination and has reasonable
opportunity to leave the common carrier’s premises.
• For passengers of ships, the Supreme Court has ruled
that a reasonable time to leave and pick up baggage
is an hour after arrival (Aboitiz Shipping v. CA, G.R.
No. 84458, 1989).
Q: What are the liabilities of a common carrier for the
acts of others?
A:
a. Employees - Common carriers are liable even if the
employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carrier.
Note: The defense of the exercise of all the diligence
of a good father in the selection and supervision of
their employees is appropriate only in quasi-delict or
culpa aquiliana. Such defense is not available in culpa
contractual and therefore, a common carrier cannot
raise such defense in action brought by its passengers
based on contract.
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused
to a victim of an accident involving the vehicle owner
and driven by 2 different persons. (De/a Cruz v.
Octaviano, G.R. 219649, 2017)
b. Passengers - Common Carriers are liable if its
employees could have prevented by ordinary diligence
the willful act or negligence of other passengers or
strangers.
C. DEFENSES AVAILABLE TO A COMMON CARRIER
1. Proof of Negligence
Q: When does the presumption of fauit of negligence
arise?
A: There is presumption of fault or negligence in case of
loss destruction or deterioration of goods or death or injury
of passengers because common carriers are required to
exercise extraordinary diligence.
2. Diligence of a good father of a family in the
selection and supervision of the employees
Q: Is the defense of the exercise of all the diligence of
a good father in the selection and supervision of their
employees applicable in cases for breach of contract
of carriegae?
A: No. Such defense is appropriate only in quasi-delict or
culpa aquiliana but not in culpa contractual and therefore,
a common carrier cannot raise such defense in action
brought by its passengers based on contract.
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The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused to a
victim of an accident involving the vehicle owner and driven
by 2 different persons. (De/a Cruz v. Octaviano. G.R.
219649, 2017)
3. Fortuitous event
Q: What are the requisites for caso fortuito which
would exempt the carrier from liability?
A: (HIFI)
a. The event must be independent of Human will
b. The occurrence must render it Impossible for the debtor
to fulfill the obligation in a normal manner
c. The obligor must be Free of participation in, or
aggravation of, the injury to the creditor, and
d. The event must have been Impossible to foresee, or if
it could be foreseen, must have been impossible to
avoid.
Q: What are the conditions to avail of the defense of
fortuitous event?
A:
a. Natural disaster was the proximate & only cause
b. Exercise of diligence to prevent or minimize loss before,
during and after the occurrence of the natural disaster
c. No delay (Civil Code, Art. 1740)
Fire may not be considered a natural disaster or calamity,
unless it is caused by lightning or by other natural disasters
or calamities (Eastern Shipping Lines v. IAC, G.R. No.
69044, 1987)
Heavy seas and rains are not caso fortuito, but normal
occurrences that an ocean-going vessel would encounter
0d.)
Mechanical defects are not force majeure if the same were
discoverable by regular and adequate inspections
(Necesito v. Paras, G.R. No. L-10605, 1958)
A tire blow-out is not considered a fortuitous event, as
there are human factors involved in the situation (Yobido
v. CA, G.R. No. 113003, 1997)
Highjacking is not an exempting cause under Art. 1734.
However, common carriers are not held iiabie for the acts
or events which cannot be foreseen or are inevitable,
provided that they exercised extraordinary diligence (De
Guzman v. CA, G.R. No. L-47822, 1988)
4. Contributory negligence
Q: What is the effect of the passenger’s contributory
negligence?
A: The contributory negligence of the passenger does not
bar recovery of damages for his death or injuries, if the
proximate cause thereof is the negligence of the common
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carrier, but the amount of damages shall be equitably
reduced.
Q: Are there exceptions to Article 1741 which
provides: “If the shipper or owner contributed to the
loss, destruction, or deterioration of the goods, the
proximate cause thereof being the negligence of the
carrier, the latter shall be liable on damages, which
however, shall be equitably reduced?”
A: Yes. In collision cases (moving object strikes another
moving object) and allision cases (moving object strikes a
stationary object). In such cases, the parties are liable for
their own damage.
5. Doctrine of last clear chance
Q: What is the defense of doctrine of last clear
chance?
A: That the person who has the last fair chance to avoid
the impending harm and fails to do so is chargeable with
the consequences, without reference to the prior
negligence of the other party. (Picart v. Smith, G.R. No. L-
12219, 1918)
The doctrine of last clear chance states that where both
parties are negligent but the negligent act of one is
appreciably later than that of the other, or where it is
impossible to determine whose fault or negligence caused
the loss, the one who had the last clear opportunity to avoid
the loss but failed to do so is chargeable with the loss.
(Lapanday Agricultural and Development Corporation v.
Angola, G.R. No. 153076, 2007)
The rule is that the antecedent negligence of a person
does not preclude recovery of damages caused by the
supervening negligence of the latter, who had the last fair
chance to prevent the impending harm by the exercise of
due diligence. (PNR v. Vizcara, G.R. No. 190022, 2012)
Note: Last Clear Chance Doctrine does not apply in
maritime law. Neither does the concept of contributory
negligence. (Reason: Code of Commerce provides for
specific rules on allocation of liabilities - see Art. 827)
D. EXTENT OF LIABILITY
1. Recoverable Damages
Q: When may moral damages be recovered?
A:
a, In breach of contract of carriage, there must be fraud,
bad faith, or death (Sps. Estrada v. Philippine Rabbit
Bus Lines, G.R. No. 203902, 2017)
b. Only injured passengers are entitled to moral damages
due to injuries (Sulpicio Lines v. Curso, G.R. No.
175100, 2010)
o In case of death, heirs are entitled to moral damages
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Q: A passenger brought into the bus a box which he
declared to contain clothes and other harmless items.
It turned out that the box contained firecrackers. A
passenger was injured when the firecrackers
exploded. Is the carrier liable?
A: No. The carrier is not liable. It exercised extraordinary
diligence. It is to be presumed that a passenger will not
take with him anything dangerous to the life and limbs of
his co-passengers, not to speak of his own. Not to be
considered lightly is the right to privacy to which each
passenger is entitled. (Nocum v. Laguna Tayabas Bus Co.,
G.R. No. L-23733, 1969)
Note: The Supreme Court ruled in Fortune Express v. CA
(G.R. No. 119756, 1999) that: “Under the circumstances,
simple precautionary measures to protect the safety of
passengers, such as frisking passengers and inspecting
their baggages, preferably with non-intrusive gadgets such
as metal detectors, before allowing them on board could
have been employed without violating the passenger’s
constitutional rights. In Gacal v. Philippine Air Lines, Inc.,
a common carrier can be liable for failing to prevent a
hijacking by frisking passengers and inspecting their
baggages.”
Q: What if the carrier is an airplane?
While there is no law that authorizes bus operators to open
the luggage of their passengers, RA 6235 (Acts Inimical to
Civil Aviation) gives airline companies authority to open
and investigate packages and cargoes loaded on board.
Should the personnel of the airline fail to discover
explosives, it could only be due to their failure to exercise
the utmost diligence of very cautious persons for which the
carrier may be held liable.
Q: What is the registered owner rule for common
carriers?
A:
• General rule: The registered owner is liable directly
and primarily to the general public or to third persons
and not the actual owner or driver of the vehicle.
• Reason: For easy identification.
• Recourse: The registered owner may seek
reimbursement from the actual owner or driver of the
vehicle (the real party at fault) by filing a cross-claim or
third-party complaint in the same case. (BA Finance v.
CA, G.R. No. 98275, 1992)
• Exception: In case of a stolen vehicle, the registered
owner may not be held liable. The Supreme Court has
ruled that to rule otherwise would be absurd (Duavit v
CA, G.R. No. 82318, 1989)
Q: Does the registered owner rule apply even in sales
/ leases?
A: Yes. The Registered Owner is not allowed to escape
responsibility by proving that a 3rd person is the actual and
real owner (Villanueva v. Domingo, G.R. No. 144274,
2004)
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The registered owner rule applies even if the registered
owner leased the vehicle to another who is the actual
operator.
Defense: The lessor-owner should register the lease
contract with the LTO in order for the lessor-owner to be
free from liability (PCI Leasing and Finance v. UCPB
General Insurance, G.R. No. 162267, 2G08)
Q: What is the ££kabit system”?
A: Kabit system is an arrangement whereby a person who
has been granted a certificate of public convenience allows
other persons who own motor vehicles to operate under
his license sometimes for a fee or percentage of the
earnings.
This is contrary to public policy and therefore void and
inexistent under Art. 1409 of the Civil Code. This
arrangement is a circumvention of the requirement for
license.
Registered owner and buyer who enter into said
transaction are in pari delicto. Therefore, the courts will not
help either of them. (Clean hands doctrine)
2. Stipulations limiting liability
Q: What are the rules on the validity of stipulations
limiting liability?
A: General Rule: The responsibility of a common carrier
cannot be dispensed with or lessened by stipulation, by
posting of notices, or by statements on tickets. A reduced
fare cannot justify limited liability.
Exception: If the carriage is gratuitous or for free, a
stipulation limiting liability is valid.
Exception to the Exception: The stipulation does not
cover wiiifui acts or gross negiigence of the carrier. (Civii
Code, Arts. 1757-1759)
Reason: Waiver of future fraud or gross negiigence is
invalid (Civil Code, Art. 1172)
Note: Moral damages may be recovered in an action for
breach of contract of transportation when death results.
Even if the passenger does not die, the passenger can
recover moral damages if the carrier is guilty of fraud or
bad faith. However, only the passenger is entitled to moral
damages not anyone else.
Q: What is the duration of liability of common
carriers?
A: As to the commencement of the duty to exercise
extraordinary diligence, there are two views:
Liberal View v. Strict View___________________
LIBERAL When the passenger places himself in the
VIEW care and control of the common carrier
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who accepts him as a passenger
(Philippine law adopts this view)
STRICT When the passenger actually boards or
VIEW places a part of his body inside the carrier
For buses, a bus slowing down means that it is offering
itself to prospective passengers as a common carrier. A
passenger who signals for a ride with his thumb signifies
that he is offering himself as a passenger. (Dangwa v. CA,
G.R. No. 95582, 1991)
Note:
• Do not confuse perfection of the contract of carriage
with the start or commencement of the duty to exercise
extraordinary diligence. The contract of carriage may
be perfected in January while the duty to exercise
extraordinary diligence may only start or commence in
March.
• The duty to exercise extraordinary diligence
terminates, when the passenger alights from the
vehicle at the place of destination and has reasonable
opportunity to leave the common carrier’s premises.
• For passengers of ships, the Supreme Court has ruled
that a reasonable time to leave and pick up baggage
is an hour after arrival (Aboitiz Shipping v. CA, G.R.
No. 84458, 1989).
Q: What Is the liability of common carriers for the
acts of others?
A:
a. Employees - Common carriers are liable even if the
employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carrier.
Note: The defense of the exercise of all the diligence
of a good father in the selection and supervision of
their employees is appropriate only in quasi-delict or
culpa aquiliana. Such defense is not available in culpa
contractual and therefore, a common carrier cannot
raise such defense in action brought by its passengers
based on contract.
The driver and the owner of the vehicle, regardless of
relationship, are solidary liable to the injuries caused
to a victim of an accident involving the vehicle owner
and driven by 2 different persons. (Dela Cruz v.
Octaviano, G. R. 219649, 2017)
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b. Passengers - Common Carriers are liable if its
employees could have prevented by ordinary diligence
the willful act or negligence of other passengers or
strangers.
Q: What are the factors to be considered when
refusing stipulations limiting liability?
A:
a. Refusal to carry goods, UNLESS stipulation limiting
liability is signed by shipper (Civil Code, Art. 1746)
b. Delay or deviation, without just cause (Civil Code, Art.
1747)
c. Lack or presence of competition (Civil Code, Art. 1751)
Q: In a contract of transportation of goods, when is a
stipulation limiting liability void?
A: (UUC)
a. Unreasonable
b. Unjust
c. Contrary to public policy
3. The Warsaw Convention
Q: What are the causes of action against the carrier
under the Warsaw Convention?
A:
a. Damage sustained in the event of the death or
wounding of a passenger taking place on board the
aircraft or in the course of any of the operations of
embarking or disembarking
b. Loss or damage to any checked in baggage or goods
sustained during the transport by air
c. Delay in the transport by air of passengers, baggage,
or goods
Note:
• The enumeration of causes of action is not an
exclusive list. The Warsaw Convention does not
preclude operation of the Civil Code and other
pertinent laws. (Cathay Pacific Airways, LTD. v. Court
of Appeals, G.R. No. 60501, 1993)
• In the carriage of passengers and baggage, if the
carrier proves that the damage was caused by or
contributed to by the negligence of the persons
suffering the damage the court may, in accordance
with the provisions of its own law, exonerate the carrier
wholly or partly from his liability. (Warsaw, Art. 21(1))
• In the carriage of cargo, if the carrier proves that the
damage was caused by or contributed by the
negligence or other wrongful act or omission of the
person claiming compensation, or the person whom he
derives his rights, the carrier shall be wholly or partly
exonerated from his liability to the claimant to the
extent that such negligence or wrongful act or omission
caused or contributed to the damage. (Warsaw, Art.
21 ( 2))
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• The Warsaw Convention allows the carrier to use
contributory negligence as a defense.
Q: What is the definition of transport by air?
A: It is the period during which the baggage or goods are
in the charge of the carrier, whether in an airport or on
board an aircraft, or in the case of landing outside an
airport, in any place whatsoever.
Q: Where should the plaintiffs action for damages be
filed?
A: It must be brought, either at the: (DPCDR)
a. Domicile of the carrier;
b. Principal place of business of carrier;
c. Place where the contract has been made;
d. Place of destination
e. Residence of plaintiff (added by Montreal Convention)
Q: What are the limitation on the liability of carriers
under the Warsaw Convention?
A:
a. For each passenger - limited to 250,000 francs
b. For goods and checked in baggage - limited to 250
francs per kilogram
c. For hand carry - limited to 5,000 francs per passenger
Q: When is the limitation on liability inapplicable?
A: (WDWW)
a. Willful misconduct
b. Default amounting to willful misconduct
c. Accepting passengers without ticket
d. Accepting goods without airway bill or baggage without
baggage check
Q: When is the right to damages extinguished?
A: The right to damages shall be extinguished if an
action is not brought within 2 years counted from date
of arrival at the place of destination or from date on which
the aircraft ought to have arrived or from date on which
the transportation stopped. (Warsaw, Art. 29)
Q: When is the 2-year period prescription
inapplicable?
A: If the cause of action is based on the Civil Code such
as 4 years if the action is based on tort or quasi-delict
(United Airlines v. Uy, G.R. No. 127768, 1999)
Where the plaintiff was forestalled from filing an action
because of the defendant-airline’s delaying tactics (United
Airlines v. Uy, G.R. No. 127768, 1999)
Q: When should notice be given?
A:
a. Damage to baggage: within 3 days from receipt
b. Damage to goods: within 7 days from receipt
c. Delay: within 21 days from receipt
Source: The Montreal Convention, Article 31(2), to wit:
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‘in the case of damage, the person entitled to delivery

must complain to the carrier forthwith after the
discovery of the damage, and, at the latest, within
seven days from the date of receipt in the case of
checked baggage and fourteen days from the date of
receipt in the case of cargo. In the case of delay, the
complaint must be made at the latest within twenty-one
days from the date on which the baggage or cargo
have been placed at his or her disposal.”

This Is an amendment to article 26(2) of the Warsaw

Convention which states that notice should be done
within 14 days from the delay.

Note: The notice requirement constitutes a condition

precedent. Failure to comply with a condition precedent
constitutes failure to state a cause of action as a ground
for a motion to dismiss. (Federal Express Corp. v.
American Home Insurance Co., GR No. 150094, 2004)
• Code of Commerce - notice of claim is a condition
precedent to filing an action
• COGSA - notice of claim is not a condition precedent
to filing an action
• Warsaw Convention - notice of claim is a condition
precedent to filing an action

Page 38 of 85
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V. C O RPO RATIO N CO DE
A, GENERAL PRINCIPLES
Q: What is the definition of a Corporation?
A: It is an artificial being created by operation of law,
having the right of succession and the powers, attributes
and properties expressly authorized by law or incident to
its existence. (Corporation Code [ “CC”], Sec.2)
Q: When does a corporation acquire corporate
existence?
A: From the date the SEC issues a Certificate of
Incorporation under its official seal. (CC, Sec. 19)
Q: May corporations ever have a cause of action for
moral damages?
A: General rule: A corporation, being an artificial person
and having existence only in legal contemplation cannot
recover moral damages as it cannot suffer physical
suffering and mental anguish (Prime White Cement v IAC,
G.R. No. L-68555, 1993).
Exception: A corporation with a good reputation, if
besmirched, is allowed to recover moral damages upon
proof of existence of factual basis of damage (actual injury)
and its causal relation (Crystal v. BPl, G.R. No. 172428,
2008).
Q: May a corporation be held liable for tort? Liable for
a crime?
A:
a. For Tort - The corporation can be held civilly liable
when the act was committed by the officer or agent
under the express authority of the Board of Directors
or Stockholders. (PNB v. CA, G.R. No. L-27155, 1978)
b. For Crime - General Rule: Corporations cannot
commit felonies under the RPC for it is incapable of the
requisite intent to commit these crimes. It also cannot
commit crimes that are punishable under special laws
because crimes are personal in nature requiring
personal performance of overt acts. Thus, a corporation
can neither be arrested nor imprisoned.
Exceptions: If a crime is committed by a corporation
pursuant to a statute that imposes criminal liability on a
corporation, the directors, officers, employees or other
officers thereof responsible for the offense shall be
charged and penalized for the crime, precisely because
of the nature of the crime and the penalty therefore.
However, corporation may be charged and prosecuted
for a crime if the imposable penalty is fine (Ching v.
Secretary of Justice, G.R. No. 164317, 2006). Q: How do you determine compliance with Filipino-
foreign ownership requirements by corporations
1. Nationality of corporations engaged in nationalized or partly nationalized
industries?
Q: What are the three tests in determining the A: For purposes of determining compliance with statutory
Page 39 of 85
COMMERCIAL LAW
nationality of the corporation?
A:
a. Place of Incorporation Test - determined by the
country under whose laws it has been organized and
registered. This is the principal doctrine on the test of
the nationality of a corporation in the Philippines. (CC,
Sec. 123)
b. Control Test - In cases involving properties, business
or industries reserved for Filipinos, in addition to the
place of incorporation test, the nationality of a
corporation is determined by the nationality of the
“controlling stockholders”.
Under the control test, shares belonging to corporations
or partnerships at least 60% of the capital of which is
owned by Filipino citizens shall be considered as of
Philippine nationality.’ Under the liberal Control Test,
there is no need to further trace the ownership of the
60% (or more) Filipino stockholdings of the Investing
Corporation since a corporation which is at least 60%
Filipino-owned is considered as Filipino. (Narra Nickel
Mining and Development Corp. v. Redmont
Consoidated Mines Corp., G.R. No. 195580, 2014)
For stocks to be deemed owned and held by Philippine
citizens or Philippine nationals, mere legal title is not
enough to meet the required Filipino equity. Full
beneficial ownership of the stocks, coupled with
appropriate voting rights is essential. Thus, stocks, the
voting rights of which have been assigned or
transferred to aliens cannot be considered held by
Philippine citizens or Philippine nationals. (Roy III v.
Herbosa, etaI., G.R. No. 207246, 2016)
c. Grandfather Rule - Where corporate shareholders are
present, the percentage of the Filipino equity in
corporations is computed by attributing the nationality
of the second or subsequent tier of ownership to
determine the nationality of the corporate shareholder.
Q: What is the prevailing rule in determining the
nationality of a corporation engaged in nationalized or
partly nationalized industries—the control test or the
grandfather rule?
A: The Control test is still the prevailing mode of
determining whether or not a corporation is a Filipino
corporation. But when there is doubt based on attendant
facts and circumstances, in the 60-40 Filipino equity
ownership in the corporation, then it may apply the
grandfather rule. (Narra Nickel Mining and Development
Corp. v. Redmont Consoidated Mines Corp., G.R. No.
195580, 2014)
ATENEO CENTRAL
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and Constitutional ownership requirements, the required
percentage of Filipino ownership shall be applied to BOTH
(a) the total number of shares entitled to vote in the election
of directors; AND (b) the total number of outstanding
shares of stock, whether or not entitled to vote. (Roy III v.
Herbosa, G.R. No. 207246, November 22, 2016)
2. Doctrine of separate juridical personality
Q: If A Inc. buys the shares of B Inc., which later
becomes insolvent, will A Inc. be answerable for the
debts of B Inc.?
A: Where the corporation buys all the shares of another
corporation, this will not operate to dissolve the acquired
corporation and the two corporations still maintain their
separate corporate entities. Consequently, a corporation
which buys all the shares of another corporation which
becomes insolvent will not be liable for the latter’s debts.
(PNB v. Hydro Resources Contractors Corp, G.R. No.
167530, 2013)
Q; What is the “doctrine of limited liability”?
A: Stockholders in a stock corporation are personally liable
for corporate debts and liabilities only to the extent of what
they have invested (paid-up capital) and what they have
promised to invest in the corporation (unpaid
subscriptions). (San Juan Structural and Steel Fabricators,
Inc. v. CA, G.R. No. 129459,1998)
Q: Sps X and Y entered into a Contract to Sell with
Corp A for the purchase of 100-square meters lot as
part of the subdivision project of the latter. They
agreed that Corp A would execute the final deed of
sale upon full payment of the Sps X and Y. However,
Corp A failed to deliver the deed and title of the land
despite the full payment and repeated demands of
the spouses. Thus, the spouses filed a complaint for
specific performance or rescission with damages
against Corp A and the members of its Board of
Directors. Should the Board of Directors be held
iiabie by the spouses?
A: (PERLAS-BERNABE) No. Settled is the rule that in
the absence of malice and bad faith, as in this case,
officers of the corporation cannot be made personally
liable for liabilities of the corporation which, by iegal
fiction, has a personality separate and distinct from its
officers, stockholders, and member. (Gotesco Properties,
Inc. v. Spouses Fajardo, G.R. No. 201167, February 27,
2013)
3. Doctrine of piercing the corporate veil
Q: What are the instances where the doctrine of
piercing the veil of corporate fiction may be applied?
A: The doctrine of piercing the corporate veil applies only
in three (3) basic areas, namely:
a. defeat of public convenience as when the corporate
fiction is used as a vehicle for the evasion of an existing
obligation;
Page 40 of 85
COMMERCIAL LAW
b. fraud cases or when the corporate entity is used to
justify a wrong, protect fraud, or defend a crime; or
c. alter ego cases, where a corporation is merely a farce
since it is a mere alter ego or business conduit of a
person, or where the corporation is so organized and
controlled and its affairs are so conducted as to make it
merely an instrumentality, agency, conduit or adjunct of
another corporation. (PNB v. Hydro Resources
Contractors Corp., G.R. No. 167530, 167561, 167603,
2013)
Q: Is mere ownership by a single stockholder or by
another corporation of all or nearly all of the capital
stock of a corporation sufficient reason for
disregarding the fiction of separate corporate
personalities?
A: It is not of itself a sufficient reason for disregarding the
fiction of separate corporate personalities. Moreover, to
disregard the separate juridical personality of a
corporation, the wrongdoing cannot be presumed, but
must be clearly and convincingly established. (Mayor v.
Tiu, G.R. No. 203770, 2016)
Q: Will an officer who signs a contract on behalf of a
corporation be liable for the obligations of the
corporation under such contract?
A: The mere execution of a contract by an officer acting on
behalf of the corporation is not sufficient basis for the veil
of corporate fiction to be pierced in order to hold the officer
liable. (Saverio v. Puyat, G.R. No. 186433, 2013)
Q. What must be established in alter-ego cases?
A: (CUP)
a. Control by the stockholders— not mere stock control but
r>r\im rvlntr> rJr\rv>i i-».-i-fl/-»!>-» fin o in r > o r > r»nlir>\i o n r l k i i p i n n f > p
ounipicic u u iiiiiia u u ii
t~ \f
ui iii lai iuco, ai ivi uuoii iuoo
practice in relation to the transaction assailed;
b. Use of such control to commit fraud or wrong;
c. Injury is Proximately caused by the control and breach
of duty. (Philippine National Bank v. Hydro Resources
Contractors Corporation, G.R. No. 16760, 2013)
B. STOCK VS. NON-STOCK CORPORATIONS
Q: What are some of the important differences
between a stock and a non-stock corporation?
A:
STOCK NON-STOCK
Free transferability of Membership and all rights
stocks arising therefrom are purely
personal and non-transferable
(unless otherwise provided in
the articles of incorporation or
by-laws)
Non-voting stocks may Members may be denied
still vote on certain entirely of their voting rights in
matters the articles of incorporation or
by-laws
Proxy representation Proxy representation may be
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cannot be denied denied in articles
incorporation or by-laws
Delinquency of stock Right to vote or be voted upon
automatically is suspended only when the
suspends the right to delinquent stockholder
vote or be voted upon disenfranchised under the
articles of incorporation or by­
laws
Quorum is determined Quorum is determined by the
by the number of number of actual living
outstanding voting members with voting rights
stocks
Only cumulative voting GR: straight voting in the
in the election of election of trustees
directors EX: cumulative voting, only if
stated in the articles of
incorporation or by-laws
5-15 members in the Board of Trustees may
Board of Directors exceed 15 members
Board appoints the Board appoints the officers.
officers Members may also directly
elect officers, unless
otherwise provided in the
articles of incorporation of by­
laws
(Villanueva, Philippine Corporate Law 883-900 (2013))
NOTE: A stock corporation may be converted into a non­
stock corporation by mere amendment of the articles of
incorporation. On the other hand, a non-stock corporation
must be dissolved first and thereafter, the members may
organize the stock corporation. (See Villanueva,
Philippine Corporate Law 901-902 (2013))
of editorial box despite it not being incorporated. (Macasaet
v. Co, Jr. G.R. No. 156759, 2013)
D. BOARD OF DIRECTORS AND TRUSTEES
is
Q: Is it valid to amend By-Laws in order to place
additional qualifications for members of the Board of
Directors?
A: It is valid to amend By-Laws to place more qualifications
for members of the Board of Directors other than those
required in the Corporation Code. The law only provides
for minimum qualifications that corporations are free to
expand.
As held in Gokongwei v. SEC (G.R. No. L-45911, 1979),
every corporation has the inherent power to adopt by-laws
for internal government and to regulate the conduct and
relationships of its members even in the absence of
enabling specific provisions in the charter.
Q: What are the requisites for the removal of a
Director?
A: (MN-2/3-C)
a. Regular meeting or special Meeting of the stockholders
or members called for the purpose;
b. Previous Notice to the stockholders or members of the
intention to remove;
c. Removal must be by a vote of the stockholders
representing at least 2/3 of the outstanding capital stock
or at least 2/3 of the members, as the case may be;
d. Director may be removed with or without Cause, unless
he was elected by the minority, in which case, it is
required that there is cause for removal. (CC, Sec. 28)

C. DE FACTO CORPORATIONS AND CORPORATIONS 1. Doctrine of centralized management

BY ESTOPPEL
Q: What are the elements of a de facto corporation?
A:
a. Valid law under which incorporated;
b. Attempt in good faith to incorporate or “colorable
compliance;”
c. Assumption of corporate powers; and
d. Issuance of certificate of incorporation.
(Arnold Hall v. Piccio, G.R. No. L-2598, 1950)
Jurisprudence settled that "[t]he filing of articles of
incorporation and the issuance of the certificate of
incorporation are essential for the existence of a de facto
corporation." (Missionary Sisters o f Our Lady o f Fatima v.
Alzona, G.R. No. 224307, August 6, 2018)
Q: What is the doctrine of “Centralized
Management”?
A: The corporate powers of corporations shall be
exercised, all business conducted and all property of such
corporations controlled and held by the board of directors
or trustees to be elected from among the holders of stocks,
or where there is no stock, from among the members of the
corporation (CC, Sec. 23).
One of the rights of a stockholder is the right to participate
in the control or management of the corporation. This is
exercised through his vote in the election of directors
because it is the board of directors that controls or
manages the corporation. (Gamboa v. Teves, G.R. No.
176579, 2011)

Q: What is a corporation by estoppel? 2. Business judgment rule

A: There is a corporation by estoppel when persons
assume to act as a corporation knowing it to be without Q: What is the “Business Judgment Rule”?
authority to do so. Such as when an ostensible corporation A: It provides that questions of policy or management are
represents itself to the public to be a corporation in its left solely to the honest decision of officers and directors of
a corporation and the courts are without authority to
substitute their judgment for the judgment of the board of
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directors; so long as it acts in good faith its orders are not refunding the same, notwithstanding that he risked his
reviewable by the courts or the SEC. (PSE v. CA, G.R. No. funds in the venture. (CC, Secs. 31 & 34; Gokongwei, Jr.
125469, 1997) v. SEC, G.R. No. L-45911, 1979)

The rule has two consequences:
a. The resolution, contracts and transactions of the Board,
cannot be overturned or set aside by the stockholders,
members or the courts; and
b. Directors and duly authorized officers cannot be held
personally liable for acts or contracts done with the
exercise of their business judgment. (Villanueva,
Philippine C orporate Law 316 (2013))
Q: What are the exceptions to the Business Judgment
Rule?
A: (EFC)
a. When the Corporation Code Expressly provides
otherwise;
b. When the directors or officers acted with Fraud, gross
negligence or in bad faith; and
c. When the directors or officers act against the
corporation in Conflict of interest situation. (CC, Sec.
31)
Q: What are the requisites for the Doctrine of
Corporate Opportunity to apply?
A: (ANI)
a. Corporation is financially Able to undertake the
business opportunity.
b. From the Nature of the business opportunity, it is in line
with corporation’s business and is of practical
advantage to the corporation.
c. Corporation has an interest or a reasonable
expectancy.
d. By embracing the opportunity, the self-interest of the
officer or director will be brought in to seize the
opportunity for himself. (Id.)

3. Duties, liabilities, and responsibility for unlawful

acts

Q: What is the rule on liability of Directors, Trustees

and Officers?
A: General Rule: Corporate personality is a shield against
personal liability of corporate officers. (Consolidated Bank
v. Court of Appeals, G.R. No. 141767, 2001)

HOWEVER, personal liability of a corporate director,

trustee or officer along (although not necessarily) with the
corporation may so validly attach, as a rule, only when:
(ABC-WAL)
a. He Assents to a patently unlawful act of the corporation
(CC, Sec. 31)
b. Bad faith or gross negligence in directing its affairs (CC,
Sec. 31)
c. Conflict of interest resulting in damage to the
corporation, its stockholders or other persons (CC,
Secs. 31 & 34)
d. He consents to the issuance of Watered stocks or,
having knowledge thereof, he does not forthwith file
with the corporate secretary his written objection
thereto (CC, Sec.65)\
e. He Agrees to hold himself personally and solidarily
liable with the corporation;
f. He is made personally liable by a specific provision of
Law. (CC, Sec. 144; Tramat Mercantile v. Court of
Appeals, G.R. No. 111008, 1994.)

Q: What is the doctrine of corporate opportunity?

A: A director or corporate officer who, by virtue of his office,
acquires for himself a business opportunity which should
belong to the corporation, is guilty of disloyalty and should,
therefore, account to the latter for all such profits by
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Q: When will a contract entered into between
corporations having interlocking directors become
valid?
A: A contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone, if:
a. There is no fraud; and
b. The contract is fair and reasonable under the
circumstances
When the interest of the interlocking director in one
corporation is substantial (more than 20% of the
outstanding capital stock) and nominal (less than 20%) in
another corporation, the contract is valid provided: (QVF)
a. Presence of such director or trustee in the board
meeting in which the contract was approved was not
necessary to constitute a Quorum for such meeting;
b. Vote of such director or trustee was not necessary for
the approval of the contract;
c. Contract is Fair and reasonable under the
circumstances. (CC, Sec. 33)
Q: Are violations of Sections 31 and 34 of the
Corporation Code, which discusses disloyalty of
directors, punishable under Section 144 (penal
provision) of the Corp. Code?
A: No. Considering the object and policy of the Corporation
Code to encourage the use of the corporate entity as a
vehicle for economic growth, we cannot espouse a strict
construction of Sections 31 and 34 as penal offenses in
relation to Sec. 144 in the absence of unambiguous
statutory language and the legislative intent to that effect.
Had the Legislature intended to attach penal sanctions to
said sections, it could have expressly stated such intent in
the same manner it did for Section 74 of the same Code
that the violation thereof is likewise considered an offense
under Section 144. (lent v. Tullet, Inc., G.R. No. 189158,
2016)
Q: What are watered stocks and what is the liability
arising from its issuance?
A: Watered stocks are
a. stocks issued for a consideration less than its par or
issued value; or
b. Stocks issued for a consideration other than cash,
valued in excess of its fair value (CC, Sec. 65)
The officer or director who consents to the issuance of
watered stock or who having knowledge of such issuance,
does not express objection thereto, is solidarily liable with
the stockholder for the difference in value. (CC, Sec. 65)
E. POWERS OF CORPORATIONS
Q: May a stock corporation purchase or acquire its
own shares? (FDA)
A: Yes. For legitimate corporate purposes including but not
limited to:
a. Eliminate Fractional shares (arising out of stock
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dividend declaration);
b. Collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in a
delinquency sale, and to purchase delinquent shares
sold during said sale; and to
c. Pay dissenting stockholders under Appraisal right
The corporation must have unrestricted retained earnings
to cover stocks purchased or acquired (CC, Sec. 41)
1. How powers are exercised
Q: How does a corporation exercise its powers?
A: (PERLAS BERNABE) [It is a] well-entrenched rule that
a corporation exercises its powers through its board of
directors and/or its duly authorized officers and agents,
except in instances where the Corporation Code requires
stockholders' approval for certain specific acts. (Tom v.
Rodriguez, G.R. No. 215764, July 6, 2015)
2. Ultra vires doctrine
Q: What are ultra vires acts?
A: These are acts done by a corporation outside of those
conferred by the corporation code or by its AOI and those
that are not necessary or incidental to the exercise of the
powers so conferred. (CC, Sec. 45)
Q: What is required to ratify an ultra vires act?
A: The corporation may ratify the unauthorized acts of its
corporate officer. The substance of the doctrine is
confirmation after conduct, amounting to a substitute for a
prior authority. Ratification can be made either expressly
or impliedly like silence or acquiescence and acceptance
of benefits (Yasuma v. Heirs of Cecilio De Villa, G.R. No.
150350, 2006). Illegal acts cannot be ratified.
Q: What is the Doctrine of Apparent Authority?
A: If a corporation knowingly permits one of its officers, or
any other agent, to act within the scope of an apparent
authority, it holds him out to the public possessing the
power to so do those acts; and thus, the corporation will,
as against anyone who has in good faith dealt with it
through such agent, be estopped from denying the agent’s
authority. (Francisco v. GSIS, G.R. No. L-18287, 1963)
Q: Can an officer of a corporation be a third person in
contract with the said corporation and thus, be
allowed to invoke Doctrine of Apparent Authority?
A: Yes. While it is true that the doctrine cannot be invoked
by one who is not a third party, an officer of a corporation
can actually be a third person in contract with the
corporation. (People’s Aircargo v. Court of Appeals, G.R.
No. 117847, 1998)
3. Trust fund doctrine
Q: What is the Trust Fund Doctrine?
A: The subscribed capital stock of the corporation is a trust
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fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits.
Corporations may not dissipate this, and the creditors may
sue the stockholders directly for their unpaid subscriptions.
(Phil. Trust Co. v. Rivera, G.R. No. 18058,1923)
Q: What is the scope of the Trust Fund Doctrine?
A: Generally, it encompasses the subscribed capital stock
of ihe corporation.
When the corporation is insolvent, it encompasses not
only the capital stock but also their properties and assets
generally regarded in equity as a trust fund for the-payment
of the corporate debts. All assets and property belonging
to the corporation held in trust for the benefit of creditors
that were distributed or in the possession of the
stockholders, regardless of full payment of their
subscriptions may be reached by the creditors in
satisfaction of its claim. (Halley v. Printwell, G.R. No.
157549, 2011)
F. STOCKHOLDERS AND MEMBERS
Q: What is a subscription agreement?
A: Any contract for the acquisition of unissued stock in an
existing corporation or a corporation still to be formed shall
be deemed a subscription within the meaning of this Title,
notwithstanding the fact that the parties refer to it as a
purchase or some other contract. (CC, Sec 60)
Q: What are the subscription and payment
requirements upon an increase in capital stock?
A: Upon an increase in capital stock:
a. At least 25% of the increase in capital stock must be
subscribed
b. At least 25% of amount subscribed has been paid in
actual cash or property. (CC, Sec. 38)
Q: X is a subscriber of shares of stock who fails to fully
pay the value for such shares. If X decides to assign
these to a third person, who becomes liable for the
unpaid dues?
A: The third person becomes liable to the corporation for
the unpaid dues. In the case of Interport, the assignment
of the subscription agreements was considered a form of
novation by substitution of a new debtor and which
required the consent of or notice to the creditor. The
change of debtor took place when the original subscriber,
R.C. Lee, assigned the Interport shares under the
subscription agreements to a third person SSI so that the
latter became obliged to settle the 75% unpaid balance on
the subscription.
Interport was duly notified of the assignment and, as such,
could no longer refuse to recognize the transfer of the
subscription agreements to SSI. This extinguished the
obligation of R.C. Lee to Interport. As such, Interport was
no longer obliged to accept any payment from R.C. Lee
because the latter had ceased to be privy to the
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subscription agreements. It was now legally bound to
accept SSI’s tender of payment as the new debtor.
(Interport Resources Corporation v. Security Specialist,
Inc., G.R. No. 154069, 2016)
Q: X was chairman and owned 70.82% shares of stock
of Company A. X died intestate and without issue and
was survived by her husband Y. Believing that he is
already the controlling-stockholder of Company A, Y
by virtue of such self-adjudication called for a Special
Stockholders' and Re-Organizational Meeting. Is the
meeting organized by Y legal and valid?
A: (PERLAS-BERNABE) At the time Y called for a
meeting, he was already the owner of 74.98% shares of
stock of Company A as a result of his inheritance of X’s
ownership thereof. However, records are bereft of any
showing that the transfer of X’s shares of stock to Y had
been registered in the Stock and Transfer Book when he
made such. As there was no showing that he was able to
remedy the situation by the time the meeting was held, the
conduct of such meeting should all be declared null and
void, in the other meeting conducted by Z, such meeting
shall also be rendered null and void as it was conducted
without a quorum as only two Board members attended the
same and that it exceeded the number of Directors
explicitly stated in the FSVCI Articles of Incorporation.
Also, the contents of the GIS should not be deemed
conclusive as to the identities of the registered
stockholders of the corporation, as well as their respective
ownership of shares of stock, as the controlling document
should be the corporate books, specifically the Stock and
Transfer Book. (F & S Velasco Company, Inc., Irwin J.
Seva, Rosina B. Velasco-Scribner, Mercedezsunico, and
Jose Saturnino O. Veiasco v. Dr. Rommel L. Madrid,
Peterpaul L. Danao, Manuel L. Arimado, And Maureen R.
Labalan, G.R. No. 208844, November 10, 2015)
1. Doctrine of equality of shares
Q: What is the doctrine of equality of shares?
A: [U]nder the doctrine of equality of shares — all stocks
issued by the corporation are presumed equal with the
same privileges and liabilities, provided that the Articles of
incorporation is silent on such differences. (Commissioner
o f Internal Revenue v. Court o f Appeals, G.R. No. 108576,
Jan. 20, 1999)
Q: May a corporation create various classes of shares
with different rights?
A: Yes. The shares of stock of stock corporations may be
divided into classes or series of shares, or both, any of
which classes or series of shares may have such rights,
privileges or restrictions as may be stated in the articles of
incorporation: Provided, That no share may be deprived of
voting rights except those classified and issued as
"preferred" or "redeemable" shares, unless otherwise
provided in this Code: Provided, further, That there shall
always be a class or series of shares which have complete
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voting rights. (CC, Sec. 6)
Q: What matters are non-voting shares allowed to vote
in?
A: (A2B2CD-IM)
a. Amendment of Articles
b. Sale, lease, exchange, mortgage, pledge or disposition
of All or substantially all of corporate property
c. Adoption/Amendment of By- Laws
d. Incur, create, increase Bonded indebtedness
e. Increase, decrease Capital stock
f. Dissolution of corporation
g. Investment of funds in another corporation
h. Merger/consolidation with another corporation (CC,
Sec. 6)
2. Proprietary rights
Q: What is the right of appraisal and when can one
exercise such rights?
A: It is the right of any dissenting stockholder to have his
shares bought back by the corporation at fair value. It may
be exercised in the following cases: (TRISM)
a. Extension of corporate Term; (CC, Sec. 37)
b. Change in the Rights of stockholders, authorize
preferences superior to those stockholders, or restrict
the right of any stockholder (CC, Sec. 81);
c. investing of corporate funds in another business or
purpose (CC, Sec. 42);
d. Sale or disposition all or substantially all assets of
corporation (CC, Sec. 81);
e. Merger or consolidation. (CC, Sec. 81)
Q: When are appraisal rights extinguished?
A: (WA-SEC)
a. Dissenting stockholder Withdraws the demand with the
corporation’s consent;
b. Proposed action previously dissented to is Abandoned;
c. SEC disapproves the dissented action.
d. SEC determines that the shareholder is not entitled to
the appraisal right (CC, Sec. 84)
Q: P held shares of stock of R, a domestic corporation.
R decided to amend its articles of incorporation to
remove stockholders’ pre-emptive rights to newly
issued shares of stock but the petitioners voted
against it and demanded payment of their shares at
P2/share based on book value. However, R found that
the fair value was unacceptable and insisted it should
only be P0.41/share considering it had no unrestricted
retained earnings to cover the amount. Due to the
disagreement, an appraisal committee was
constituted. The committee reported its valuation of
P2.5/share and so P demanded payment based on that.
Still, R refused to pay the dissenting stockholders.
Can payment be made to any dissenting stockholder
in case the R has no available unrestricted retained
earnings?
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A: No. As a general rule, a stockholder who dissents from
a certain corporate action has the right to demand payment
of the fair value of his or her shares and that is known as
right of appraisal. (CC, Sec. 81)
Notwithstanding the foregoing, no payment shall be made
to any dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover the
payment.
In case the corporation has no available unrestricted
retained earnings in its books, Sec. 83 of the CC provides
that if the dissenting stockholder is not paid the value of his
shares within 30 days after the award, his voting and
dividend rights shall immediately be restored.
The trust fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of the
shares of stocks of the withdrawing stockholders. The
creditors of a corporation have the right to assume that the
board of directors will not use the assets of the corporation
to purchase its own stock for as long as the corporation
has outstanding debts and liabilities.
There can be no distribution of assets among the
stockholders without first paying corporate debts. Thus,
any disposition of corporate funds and assets to the
prejudice of creditors is null and void. (Turner v. Lorenzo
Shipping Corporation, G.R. No. 157479, November 24,
2010)
a. Right to dividends
Q: Under what circumstances may a corporation
declare dividends?
A:
a. A corporation may only declare dividends from
unrestricted retained earnings appearing on its books.
b. Dividends must be paid in amounts proportional to all
stockholders on the basis of outstanding stock held by
them.
c. Cash or property dividends, can be declared from
unrestricted retained earnings by a proper resolution of
the Board of Directors.
d. Stock dividends, however, must be declared by a
proper resolution of the Board of Directors from existing
unrestricted retained earnings and ratified by
stockholders representing at least 2/3 of the
outstanding capital stock of the corporation, obtained in
a meeting duly called for the purpose. (CC, Sec. 43)
Q: May cash and stock dividends be sourced from
capital stock?
A: No. All cash and stock dividends are always paid out of
the unrestricted retained earnings (also called surplus
profit) of the corporation. If the corporation has no
unrestricted retained earnings, the dividends would have
to be sourced from the capital stock. This is illegal.
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It violates the Trust Fund Doctrine, which provides that
the capital stock of the corporation is a trust fund to be kept
intact during the life of the corporation for the benefit of the
creditors of the corporation. (CIR v. CA, G.R. No. 108576,
1999)
Q: When can a corporation legally choose not to
declare dividends despite accumulating surplus
profits in excess of 100% of their paid in capital stock?
“ .'.(E L N )........................... ..........................................“.- .......... ‘
A: Stock corporations are prohibited from retaining surplus
profits in excess of 100% percent of their paid-in capital
stock, except:
a. When justified by definite corporate Expansion projects
or programs approved by the board of directors;
b. When the corporation is prohibited under any Loan
agreement with any financial institution or creditor,
whether local or foreign, from declaring dividends
without its/his consent, and such consent has not yet
been secured;
c. When it can be clearly shown that such retention is
Necessary under special circumstances obtaining in
the corporation, such as when there is need for special
reserve for probable contingencies. (CC, Sec. 43)
b. Right to inspect
Q: Under what circumstances may a stockholder be
denied his right to examine corporate records?
A: If such stockholder has improperly used any information
through any prior examination of the records or minutes of
such corporation or of any other corporation, or was not
acting in good faith or for a legitimate purpose in making
his demand. (CC, Sec. 74) But if the right is to be denied,
the burden of proof is upon the corporation to show that the
purpose of the shareholder is improper, by way of defense.
(Terelay Investment and Development Corporation v.
Yulo, G.R. No. 160924, 2015).
Q: Can the stockholder inspect corporate records
while the corporation is in the process of liquidation?
A: Yes. Secs. 122 and 145 of the CC explicitly provide for
the continuation of the body corporate for 3 years after
dissolution. The rights and remedies against, or liabilities
of, the officers shall not be removed or impaired by reason
of dissolution of the corporation. As such, a stockholder’s
right to inspect corporate records subsists during the
period of liquidation. Hence, a stockholder has a right to
demand for inspection of records. (Chua, et al. v. People,
G.R. No. 216146, 2016)
Q: X filed a complaint against Y Corp. praying that he
be allowed to inspect Y Corp.’s corporate books and
records, minutes of meetings, and financial
statements. X claimed to be a bona fide stockholder of
Y Corp. and attached copies of stock certificates
indorsed in his favor on the dorsal portion of the
original holders. Y Corp. claimed that X was not a
stockholder. To verify X’s stock ownership, the RTC
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asked X to produce his stock certificates. After X failed
to produce his stock certificates, the RTC dismissed
the complaint. Is the presentation of a stock certificate
a condition sine qua non for proving one’s
shareholding in a corporation?
A: No. Although a stock certificate is prima facie evidence
that the holder is a shareholder of the corporation, the
possession of the certificate is not the sole determining
factor of one’s stock ownership. A stock certificate is
merely the paper representative or tangible evidence of the
stock itseif and of the various interests therein. The
certificate is not stock in the corporation but is merely
evidence of the holder's interest and status in the
corporation, his ownership of the share represented
thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the
corporation and the stockholder, but it is not essential to
the existence of a share in stock or the creation of the
relation of shareholder to the corporation.
There are other competent means of establishing one’s
shareholdings in a corporation, such as official receipts of
payments for subscriptions of shares, copies duly certified
by the SEC stating that the corporation had issued shares
in favor of the complainant, and the General Information
Sheet. (Insigne v. Abra Valley Colleges, G.R. No. 204089,
2015)
Alternative answer:
Although the presentation of a stock certificate is not a
condition sine qua non for proving one’s shareholding in a
corporation, the corporation may refuse recognition of X’s
status as a shareholder on the ground that the corporation
is not bound by any transfer of shares uniii the transfer is
recorded in the Stock and Transfer Book. (CC, Sec. 63)
c. Pre-emptive right
Q: What is a pre-emptive right?
A: It is the shareholders’ right to subscribe to all issues or
dispositions of shares of any class in proportion to his
present stockholdings, the purpose being to enable the
shareholder to retain his proportionate control in the
corporation.
This right may be denied by the articles of incorporation or
an amendment thereto. (CC, Sec. 39)
Q: How is the pre-emptive right exercised?
A: It must be exercised in accordance with the AOI or the
By-Laws. If the Articles of Incorporation and the By-Laws
are silent, the BOD may fix a reasonable time within which
the stockholders may exercise the right.
d. Right of first refusal
Q: What is the right of first refusal?
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A: It provides that a stockholder who may wish to sell or
assign his shares must first offer the shares to the
corporation or to the existing stockholders of the
corporation. Only when the corporation or the other
stockholders do not or fail to exercise their option, is the
offering stockholder at liberty to dispose of his shares to
third parties. (Villanueva, P hilippine Corporate La w 422-
23(2013))
3. Intra-corporate disputes
Q: What are the two tests to determine if a case
involves an intra-corporate dispute?
A: To determine if a case involves an intra-corporate
controversy, the courts have applied two tests: the
relationship test and the nature of the controversy test.
Under the relationship test, the existence of any of the
following relationships makes the conflict intra-corporate:
(1) between the corporation, partnership or association
and the public; (2) between the corporation, partnership or
association and the State insofar as its franchise, permit or
license to operate is concerned; (3) between the
corporation, partnership or association and its
stockholders, partners, members or officers; and (4)
among the stockholders, partners or associates
themselves.
On the other hand, the nature of the controversy test
dictates that "the controversy must not only be rooted in
the existence of an intra-corporate relationship, but must
as well pertain to the enforcement of the parties' correlative
rights and obligations under the Corporation Code and the
internal and intra-corporate regulatory rules of the
corporation." (Phil. Communications Satellite Corp. v.
Sandiganbayan 5th Division, G.R. No. 203023, June 17,
2015)
Q: Who has jurisdiction over intra-corporate disputes?
A: The RTC Commercial Courts have jurisdiction. Section
5 of the Securities Regulation Code transferred the
jurisdiction of the (SEC) over intra-corporate disputes to
RTCs designated by the Supreme Court as commercial
courts. The existence of an intra-corporate dispute must be
clearly alleged in the complaint.
Q: Who is a corporate officer?
A: Corporate officers are those officers of the corporation
who are given that character by (1) the Corporation Code
[i.e., President, Corporate Secretary, or Corporate
Treasurer] or (2) by the corporation’s charter or by-laws.
(Wesleyan University v. Maglaya, Sr., G.R. No. 212774,
2016)
Under the second type, in order for an individual to be
considered a corporate officer, as against an ordinary
employee, two things must concur: (a) the creation of a
position under the corporation’s charter or by-laws, and (b)
the election is by the directors or stockholders. (Id.)
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Q: In what instance does a claim of “illegal dismissal”
become an intra-corporate dispute?
A: It is only when the officer claiming to have been illegally
dismissed is classified as such corporate officer that the
issue is deemed an intra-corporate dispute which falls
within the jurisdiction of the RTC. A corporate officer’s
dismissal is always a corporate act, or an intra-corporate
controversy which arises between a stockholder and a
corporation, and the nature is not altered by the reason or
wisdom with which the Board may have in taking such
action.
The issue of the alleged termination involving a corporate
officer, not a mere employee, is not a simple labor problem
but a matter that comes within the area of corporate affairs
and management and is a corporate controversy in
contemplation of the Corporation Code. (Id.)
Q: Distinguish individual suits, representative suits
and derivative suits.
A: A stockholder suing on account of wrongful or
fraudulent corporate actions (undertaken through
directors, associates, officers, or other persons) may sue
in any of three (3) capacities: as an individual; as part of a
group or specific class of stockholders; or as a
representative of the corporation.
Individual suits are filed when the cause of action belongs
to the individual stockholder personally, and not to the
stockholders as a group or to the corporation, e.g., denial
of right to inspection and denial of dividends to a
stockholder. If the cause of action belongs to a group of
stockholders, such as when the rights violated belong to
preferred stockholders, a class or representative suit may
be filed to protect the stockholders in the group.
[A] derivative suit "is an action filed by stockholders to
enforce a corporate action." A derivative suit, therefore,
concerns "a wrong to the corporation itself." The real party
in interest is the corporation, not the stockholders filing the
suit. The stockholders are technically nominal parties but
are nonetheless the active persons who pursue the action
for and on behalf of the corporation.
The determination of the appropriate remedy hinges on the
object of the wrong done. When the object is a specific
stockholder or a definite class of stockholders, an
individual suit or class/representative suit must be resorted
to. When the object of the wrong done is the corporation
itself or "the whole body of its stock and property without
any severance or distribution among individual holders," it
is a derivative suit that a stockholder must resort to.
(Florete, Jr. v. Florete, G.R. No. 174909 & 177275, 2016)
Q: What are the requirements of a derivative suit?
A: (SEAN)
a. Plaintiff was Stockholder or member at the time the
questioned act or transaction subject of the action
occurred, as well as at the time the action was filed and
remains as such during the pendency of the action;
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b. Plaintiff exercised all reasonable efforts and alleges the
same with particularity in the complaint, to Exhaust all
remedies available under the articles of incorporation,
by-laws, or rules governing the corporation;
c. No Appraisal right are available for the acts complained
of; and
d. Suit is not a Nuisance or harassment suit (Interim Rules
of Procedure for Intra-Corporate Controversies, Rule 8,
Sec. 1).
The fifth requisite for filing derivative suits, while not
included in the enumeration, is implied In the first
paragraph of Rule 8, Section 1 of the Interim Rules: The
action brought by the stockholder or member must be "in
the name of [the] corporation or association.” This
requirement has already been settled in jurisprudence.
(Villamor, J r v. Umale, G.R. Nos. 172843 & 172881, 2014)
Q: Is a family/close corporation exempt from the
requirements of a derivative suit?
A: A family/close corporation is not exempt from complying
with the clear requirements and formalities of the rules for
filing a derivative suit. There is nothing in the pertinent laws
or rules which state that there is a distinction between
family corporations and other types of corporations in the
institution by a stockholder of a derivative suit. (Ang v. Ang,
G.R. No. 201675, 2013)
G. FOREIGN CORPORATIONS
1. WHAT CONSTITUTES “ DOING BUSINESS”
Q: When are foreign corporations deemed to be doing
business?
A: (CAPS2=BRA)
a. Any act or acts that Imply a Continuity of commercial
dealings or arrangements, and contemplate to some
extent the performance of acts or works or the exercise
of some functions normally incident to and in
progressive prosecution of, the purpose and object of
its organization.
b. Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling
180 days or more;
c. Participating in the management, supervision or control
of any domestic business, firm, entity, or corporation in
the Philippines;
d. Soliciting orders, Service contracts, opening BRAnches
or liaison offices (Foreign Investments Act [ “FIA”], Sec.
3(d))
Q: Under the FIA, what are some instances where
foreign corporations are not deemed to be doing
business? (NIO)
A:
a. Having a Nominee director or officer to represent its
interests in such corporation;
b. Mere investment as a share-holder by a foreign entity
in a domestic corporation duly registered to do business
and/or the exercise of rights as such investor; and
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c. Appointing a representative or distributor domiciled in
the Philippines which transacts business in its Own
name and for its own account. (FIA, Sec. 3(d))
Q: What are two tests used in order to determine
whether a foreign corporation is doing business in the
Philippines?
A:
a. Isolated Transaction Test - Single or isolated acts,
contracts, or transactions of foreign corporations are
not regarded as carrying on of business. (MR Holdings,
Ltd. v. Sajar, G.R. No. 138104, 2002) A foreign
corporation needs no license to sue before Philippine
courts on an isolated transaction. Even a series of
transactions which are occasional, incidental, and
casual— not of a character to indicate a purpose to
engage in business— do not constitute the doing or
engaging in business as contemplated by law. (Lorenzo
Shipping v. Chubb and Sons, G.R. No. 147724, 2004)
NOTE: Where a single act or transaction, however, is
not merely incidental or casual but indicates the foreign
corporation’s intent to do other business in the
Philippines, said single act or transaction constitutes
doing business. (Far East International v. Nankai
Kogyo, G.R. No. L-13525, 1962)
b. Twin Characterization Test - The twin
characterization test to determine whether a foreign
corporation is engaged in business in the Philippines:
i. First, whether a foreign corporation is maintaining or
continuing In the Philippines "the body or
SUBSTANCE of the business or enterprise for
which it was organized or whether is has
substantially retired from it and turned it over to
another."
ii. Second, "doing business" is defined to necessarily
imply "a CONTINUITY of commercial dealings and
arrangements, and contemplates, to that extent, the
performance of acts or works or the exercise of
some of the functions normally incident to, and in
progressive prosecution of, the purpose and object
of its organization." (Mentholatum Co v Mangaliman,
G.R. No. L47701, 1941)
2. Personality to sue and suability
Q: What are the rules regarding the right of a foreign
corporation to bring a suit in PH courts?
A: The principles regarding the right of a foreign
corporation to bring suit in Philippine courts may be
condensed in four statements:
a. If a foreign corporation does business in the Philippines
without a license = cannot sue before the Philippine
courts;
b. If a foreign corporation does business in the Philippines
without a license, a Philippine citizen or entity which has
contracted with said corporation may be estopped from
challenging the foreign corporation’s corporate
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personality in a suit brought before Philippine courts;
c. If a foreign corporation is not doing business in the
Philippines = it needs no license to sue before
Philippine courts on an isolated transaction or on a
cause of action entirely independent of any business
transaction;
d. If a foreign corporation does business in the
Philippines with the required license^ can sue before
Philippine courts on any transaction. (Agilent
Technologies Singapore v. Integrated Silicon
Technology, G.R. No. 154618, 2004)
H. MERGERS AND CONSOLIDATIONS
I. Concept2
Q: What is the difference between merger and
consolidation?
A:
MERGER CONSOLIDATION
Occurs when one or Occurs when two or more
more corporations are existing corporations are
absorbed by another combined to form a new
corporation which corporation
remains in existence (i.e., A + B = C)
while the others are
dissolved
(i.e., A + B = A)
2. Effects and limitations
Q: What are the effects of merger or consolidation?
A: Merger or consolidation shall have the following effects:
a. The constituent corporations shall become a single
corporation which, in case of merger, shall be the
surviving corporation designated in the plan of merger;
and, in case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation;
b. The separate existence of the constituent corporations
shall cease, except that of the surviving or the
consolidated corporation;
c. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code;
d. The surviving or the consolidated corporation shall
thereupon and thereafter possess all the rights,
privileges, immunities and franchises of each of the
constituent corporations; and all properties of the
constituent corporations shall be deemed to be
transferred to and vested in such surviving or
consolidated corporation without further act or deed;
and
e. The surviving or consolidated corporation shall be
responsible and liable for all the liabilities and
obligations of each of the constituent corporations in the
same manner as if such surviving or consolidated
corporation had itself incurred such liabilities or
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obligations; (CC, Sec. 80)
Q: Will the surviving entity in a merger be liable for
monetary awards in favor of an employee that was
illegally dismissed by the absorbed corporation?
A: (PERLAS-BERNABE) Section 80 of the Corporation
Code of the Philippines clearly states that one of the effects
of a merger is that the surviving company shall inherit not
only the assets, but also the liabilities of the corporation it
merged with.
In this case, it is worthy to stress that both AMSFC and
DFC are guilty of acts constitutive of constructive dismissal
performed against Baya. As such, they should be deemed
as solidarily liable for the monetary awards in favor of
Baya. Meanwhile, Sumifru, as the surviving entity in its
merger with DFC, must be held answerable for the latter's
liabilities, including its solidary liability with AMSFC arising
herein. Verily, jurisprudence states that "in the merger of
two existing corporations, one of the corporations survives
and continues the business, while the other is dissolved
and all its rights, properties and liabilities are acquired by
the surviving corporation. (Sumifru Corporation v. Bernabe
Baya, G.R. No. 188269, 2017)
Q: Yu bought several golf and country club shares
from MADCI. Regrettably, MADCI did not develop the
supposed project. Yu then demanded the return of his
payment, but MADCI could not return it anymore
because all its assets had been transferred. Through
the acts of YIL, MADCI sold all its lands to YILPI and,
subsequently to YICRI. On one hand, Yu now claims
that YICRI inherited the obligations of MADCI. On the
other hand, the YICRI counters that it did not assume
such liabilities because the transfer of assets was not
committed in fraud of the MADCI's creditors.
(1) What is a business-enterprise transfer?
A: A business-enterprise transfer is one where the
transferee corporation’s interest goes beyond the assets
and properties of the transferor and it desires to acquire
the latter's business enterprise, including its goodwill. The
transferee purchases not only the assets of the transferor,
but also its business. As a result of the sale, the transferor
is merely left with its juridical existence, devoid of its
industry and earning capacity. (Y-l Leisure Phils., Inc. v.
Yu, G.R. No. 207161, 2015)
(2) What is the effect of a business-enterprise transfer
on the liabilities of the transferor?
A: As a general rule, contracts, including the rights and
obligations arising therefrom, are valid and binding only
between the contracting parties and their successors-in-
interest. Under the Nell Doctrine, since the transferee
corporations are not in privity with the contracts between
the transferor corporation and its creditors, the transfer of
all the assets of a corporation to another shall not render
the transferee liable for the transferor’s liabilities, except:
a. Where the transferee expressly or impliedly
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agrees to assume such debts; designed to protect the creditors of the transferor
b. Where the transaction amounts to a consolidation corporation and does not depend on deceit of the
or merger of the corporations; transferee. As such, fraud is not an essential element for
c. Where the transferee corporation is merely a the application of the doctrine. (Id.)
continuation of the transferor corporation; and
d. Where the transaction is entered into fraudulently
in order to escape liability for such debts.

The business-transfer doctrine faiis under the third

exception stated above. In a business-enterprise
transfer, the transferee is liable for the debts and liabilities
of his transferor arising from the business enterprise
conveyed. Under a business-enterprise transfer, the
purchasing or transferee corporation necessarily continues
the business of the selling or transferor corporation. Given
that the transferee corporation acquired not only the assets
but also the business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the former.
(Id.)

(3) What is the relationship between the sale of all or

substantially all of a corporation’s assets under Sec.
40 of the Corp. Code and the business-enterprise
transfer doctrine?
A: Sec. 40 refers to the sale, lease, exchange or
disposition of all or substantially all of the corporation's
assets, including its goodwill. The sale under this provision
does not contemplate an ordinary sale of all corporate
assets; the transfer must be of such degree that the
transferor corporation is rendered incapable of continuing
its business or its corporate purpose.

Clearly, Sec. 40 suitably reflects the business-enterprise

transfer doctrine whereby the transferee corporation
necessarily continued the business of the transferor
corporation. As such, the transfer of all or substantially all
the property from one corporation to another under Sec. 40
necessarily entails the assumption of the transferor's
liabilities, notwithstanding the absence of any agreement
on the assumption of obligations. The transfer of all its
business, properties and assets without the consent of its
creditors must certainly include the liabilities; or else, the
assignment will place the assignor's assets beyond the
reach of its creditors. (Id.)

NOTE: Not every transfer of the entire corporate assets

would qualify under Section 40. it does not apply (1) if the
sale of the entire property and assets is necessary in the
usual and regular course of business of corporation, or (2)
if the proceeds of the sale or other disposition of such
property and assets will be appropriated for the conduct of
its remaining business. Thus, the litmus test to determine
the applicability of Sec. 40 would be the capacity of the
transferor corporation to continue its business after the
sale of all or substantially all its assets. (Id.)

(4) Is fraud necessary before the transferee can be

held liable?
A: No. The business-enterprise transfer doctrine is
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TABLE OF ENUMERATIONS
Topic | Acronym | Enumeration
CORPORATION CODE
1. Attributes of a corporation AOS-P a. Artificial being with separate and distinct personality;
b. Created by Operation of law;
c. Has the right of Succession;
d. Has the Powers and attributes conferred by law or incident to
its existence.
2. Alter Ego Piercing: What CUP a. Control by the stockholders— not mere stock control but
must be established complete domination of finances, policy and business practice
in relation to the transaction assailed;
b. Use of such control to commit fraud or wrong;
c. Injury is Proximately caused by the control and breach of duty.
3. When may the SEC deny a IPC a. Names which are Identical, deceptively or confusingly similar
corporate name to that of any existing corporation including internationally
known foreign corporation through not used in the Philippines;
b. Names already Protected by law;
c. Names which are Contrary to law, morals or public policy.
4. Exceptions to the Business EFC a. When the Corporation Code Expressly provides otherwise;
Judgment Rule b. When the directors or officers acted with Fraud, gross
negligence or in bad faith; and
c. When the directors or officers act against the corporation in
Conflict of interest situation. (Corp. Code, Sec. 31)
5. Matters which cannot be DAVA3 a. Distribution of cash Dividends to the shareholders
acted upon by an Executive b. Approval of any action for which shareholders’ approval is also
Committee required
c. Filing of Vacancies in the board
d. Amendment or repeal of any resolution of the board which by
its express terms is not so amendable or repealable
e. Amendment or repeal of by-laws
f. Adoption of new by-laws
6. Requisites to remove a MN-2/3-C a. Regular meeting or special Meeting of the stockholders or
director members called for the purpose;
b. Previous Notice to the stockholders or members of the
intention to remove;
c. Vote of the stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the members, as the
case may be;
d. Director may be removed with or without Cause, unless he
was elected by the minority, in which case, it is required that
there is cause for removal.
7. Requisites of a valid contract QVF a. Presence of such director or trustee in the board meeting in
entered into between which the contract was approved was not necessary to
corporations having constitute a Quorum for such meeting;
interlocking directors b. Vote of such director or trustee was not necessary for the
approval of the contract;
c. Contract is Fair and reasonable under the circumstances
8. Instances where a director, ABC-WAL a. Assents to a patently unlawful act of the corporation (Corp.
trustee, or officer may be Code, Sec. 31)
personally liable b. Bad faith or gross negligence in directing its affairs (Corp.
Code, Sec. 31)
c. Conflict of interest resulting in damage to the corporation, its
stockholders or other persons (Corp. Code, Secs. 31 & 34)
d. Consents to the issuance of Watered stocks or, having
knowledge thereof, he does not forthwith file with the corporate
secretary his written objection thereto (Corp. Code, Sec.65);
e. Agrees to hold himself personally and solidarity liable with the
corporation;

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f. Made personally liable by a specific provision of Law.

9. Instances when corporation
may purchase its own stock
10. Some instances when a
stock corporation may
choose not to declare
dividends, even if surplus
profits are in excess of 100%
of the paid-in capital stock
11. Instances when non-voting
shares are allowed to vote
12. Requisites of Doctrine of
Corporate Opportunity
13. How shares are transferred
14. Remedies of a corporation to
enforce payment of stocks
15. Instances when right to
appraisal may be exercised
16. Instances when appraisal
rights are extinguished
17. Foreign corporations
deemed “doing business”
FDI a. Eliminating Fractional shares (arising out of stock dividend
declaration);
b. Purchasing Delinquent shares arising from delinquency of
shares proceedings;
c. Paying dissenting stockholders under Appraisal right
ELN a. Justified by definite corporate Expansion projects or programs
approved by the board of directors;
b. Corporation is prohibited under any Loan agreement with any
financial institution or creditor, whether local or foreign, from
declaring dividends without its/his consent, and such consent
has not yet been secured;
c. Retention is Necessary under special circumstances obtaining
in the corporation, such as when there is need for special
reserve for probable contingencies.
A2B2CD-!M a. Amendment of Articles
b. Sale, lease, exchange, mortgage, pledge or disposition of All
or substantially all of corporate property
c. Adoption/Amendment of By- Laws
d. Incur, create, increase Bonded indebtedness
e. Increase or decrease Capital stock
f. Dissolution of corporation
g. Investment of funds in another corporation
h. Merger/consolidation with another corporation
ANI a. Corporation is financially Able to undertake the business
opportunity.
b. From the Nature of the business opportunity, it is in line with
corporation’s business and is of practical advantage to the
corporation.
c. Corporation has an Interest or a reasonable expectancy, by
embracing the opportunity.
iDR a. Indorsement by the owner or his attorney-in-fact or other
person legally authorized to make the transfer
b. Delivery of the certificate of stock
c. To be valid against third parties, it must be jRecorded in the
books of the corporation
DJCW a. Delinquent sale
b. Judicial action
c. Collection from cash dividends and Withholding of stock
dividends
TRISM a. Extension or reduction of corporate Term;
b. Change in the Rights of stockholders, authorize preferences
superior lo those stockholders, or restrict the right of any
stoekholder;
c. Investing of corporate funds in another business or purpose;
d. Sale or disposition all or substantially all assets of corporation;
e. Merger or consolidation.
WA-SEC a. Dissenting stockholder withdraws the demand with the
corporation’s consent;
b. Proposed action previously dissented is Abandoned;
c. SEC disapproves the dissented action. (
CAPS2-BRA a. Any act that implies a Continuity of commercial dealings or
arrangements, and contemplate to some extent the
performance of acts or works or the exercise of some functions
normally incident to and in progressive prosecution of, the
purpose and object of its organization.

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18. Foreign corporations not
deemed “doing business”
19. Two tests to determine
whether business is deemed
“doing business”
20. Requirements of a derivative
suit
21. Modes to dissolve a VISE
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b. Appointing representatives, distributors domiciled in the
Philippines or who stay for a period or periods totaling 180
days or more;
c. Participating in the management, supervision or control of any
domestic business, firm, entity, or corporation in the
Philippines;
d. Soliciting orders, Service contracts, opening BRAnches or
liaison offices
NIO a. Having a Nominee director or officer to represent its interests
in such corporation;
b. Mere Investment as a share-holder by a foreign entity in a
domestic corporation duly registered to do business and/or the
exercise of rights as such investor; and
c. Appointing a representative or distributor domiciled in the
Philippines which transacts business in its Own name and for
its own account.
IT a. Isolated Transaction Test
b. Jwin Characterization Test
SEAN a. Plaintiff was Stockholder/member at the time the questioned
act/transaction subject to the action occurred, as well as at the
time the action was filed and remains as such during the
pendency of the action;
b. Plaintiff exercised all reasonable efforts and alleges with
particularity in the complaint, to Exhaust all remedies
available, under the articles of incorporation, by-laws, or rules
governing the corporation;
c. No Appraisal right available for the acts complained of; and
d. Suit is not a Nuisance/harassment suit.
a. Voluntary
b. Involuntary
c. Shortening corporate term
d. Expiration of the term
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VI. SECURITIES REGULATION CODE (R.A. No.
___________________ 8799)___________________
A. REGISTRATION REQUIREMENT: EXEMPTIONS
Q: What are securities?
A: "Securities" are shares, participation or interests in a
corporation or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instruments, whether written or electronic in character, it
includes:
a. Shares of stocks, bonds, debentures, notes evidences
of indebtedness, asset-backed securities;
b. Investment contracts, certificates of interest or
participation in a profit sharing agreement, certifies of
deposit for a future subscription;
c. Fractional undivided interests in oil, gas or other
mineral rights;
d. Derivatives like option and warrants;
e. Certificates of assignments, certificates of participation,
trust certif,cates, voting trust certificates or similar
instruments
f. Proprietary or nonproprietary membership certificates
incorporations;and
g. Other instruments as may in the future be determined
by the Commission.
(Securities Regulation Code [ “SRC”], Sec. 3)
Q: What are the elements of an investment contract?
(ICE-P)
A: According to the Turner Test, an investment contract is
a transaction, contract, or scheme whereby a person
a. Makes an Investment of money,
b. in a Common enterprise,
c. With the Expectation of profits,
d. To be derived Primarily (i.e., does not have to be solely)
from the efforts of others. (Power Homes Unlimited
Corporation v SEC, G R No 164182, 2008)
Q: Should all securities offered for sale to the public in
the Philippines be registered with the SEC?
A:
• GENERAL RULE: Yes, all securities before being
offered for sale or distribution within the Philippines
must first be registered with SEC, and information on
the securities shall be made available to a prospective
purchaser. (SRC, Sec. 8)
• EXCEPTION: Exempt securities and exempt
transactions
Q: Which securities are exempt from registration?
A: (GOFOB-IHB-B)
a. Securities issued or guaranteed by the G o vernment,
subdivisions/ instrumentalities;
b. Securities issued or guaranteed by FOreign
government with which the Philippines has diplomatic
relations;
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c. Securities issued by receiver/ trustee in Bankruptcy
approved by the proper adjudicatory body;
d. Securities under the supervision and regulation of the
Insurance Commission, HLURB, or the BIR;
e. Securities issued by a Bank except its own shares of
stock
f. Any other class of security which the SEC may add
through its rules and regulations (SRC, Sec. 9)
Q: Which transactions are exempt from registration?
A: (JPID-CSC-BEPA20-BI3PO)
a. Judicial sale, or sale by an executor, administrator,
guardian or receiver or trustee in insolvency or
bankruptcy;
b. By or on account of a Pledge holder or mortgagee or
any other similar lien holder;
c. isolated transactions;
d. Distribution of stock dividend or other distribution out of
surplus;
e. Sale of Capital stock of a corporation to its own
stockholders exclusively - stock which has already
been issued;
f. Issuance of bonds or notes Secured by mortgage upon
real estate or tangible personal property;
g. Issue and delivery of any security in exchange for any
other security of th e same issuer pursuant to a right of
Conversion, provided the security so surrendered has
been registered or was, when sold, exempt from
registration;
h. Broker’s transactions
i. Exchange of securities by issuer with its existing
security holders exclusively, wherein the securities
exchanged are not from the same issuer;
j. Share subscriptions Prior to the incorporation or
pursuant to an increase in Authorized capital stock;
k. Sale bv issuer to fewer than 20 persons during any 12-
month period;
l. Sale to qualified buyers:
i. Banks,
ii. investment house,
iii. investment company,
iv. Insurance company,
v. Pension fund/ retirement plan maintained by the
Government,
vi. Other person determined by the SEC as qualified
buyers;
m. Other transactions exempt by the SEC. (SRC, Sec. 10)
Q: X sold securities to Y. Y then discovered that the
securities sold to him were not registered with the
Securities and Exchange Commission. Moreover, the
terms and conditions covering the subscription to the
securities were likewise not submitted to the SEC for
approval. Asserting that X violated the Securities
Regulation Code, Y filed a complaint to declare the
nullification of the contract and damags before the
Regional Trial Court. X filed a motion to dismiss,
alleging that the complaint must be first filed with the
SEC. Should the complaint be first filed with the SEC?
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A: (PERLAS BERNABE) NO. Records show that
petitioners' complaint constitutes a civil suit for declaration
of nullity of contract and sums of money with damages,
which stemmed from respondent's alleged sale of
unregistered securities, in violation of the various
provisions of the SRC. The complained acts of X fall under
Section 57 of the SRC. Cases falling under Section 57 of
the SRC, which pertain to civil liabilities arising from
violations of the requirements for offers to sell or the sale
of securities, as well as other civil suits under Sections 56,
58, 59, 60, and 61 of the SRC shall be exclusively brought
before the regional trial courts. This is different from
criminal suits under the SRC where the SEC exercises
primary jurisdiction. (Pua v. Citibank, G.R. No. 180064,
September 16, 2013)
B. PROHIBITIONS ON FRAUD. MANIPULATION. AND
INSIDER TRADING
Q: Who is an Insider?
A: (IDF-GDO-L)
a. issuer;
b. Director or officer of, or person controlling, the issuer;
c. Person whose relationship or Former relationship to the
issuer gives or gave him access to material information
about the issuer or the security that is not generally
available to the public;
d. Government employee, or Director, or Officer of an
exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
e. Person who Learns such information by communication
from any of the foregoing insiders. (SRC, Sec. 3.8)
Q: What are the requirements for prohibited insider
trading?
A: (IMP)
a. The trader is an Insider
b. The information of the issuer that the insider has is
Material non-public information
c. The insider buys or sells securities of the issuer while
in Possession of such information. (SRC, Sec. 27)
Q: What is material non-public information?
A: Information not generally disclosed to the public and
would (a) likely affect the market price once disseminated
to the public and after the lapse of a reasonable time for
the market to absorb the information or (b) be considered
by a reasonable person as important in determining his
course of action vis-a-vis the securities. (SRC, Sec. 27.2)
Q: Is mere communication by the insider of material
non-public information punishable?
A: Yes. It shall be unlawful for any insider to communicate
material non-public information about the issuer or the
security to any person who, by virtue of the
communication, becomes an insider, where the insider
believe that such person will likely buy or sell a security of
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the issuer communicating the information knows or has
reason to while in possession of such information. (SRC,
Sec 27.3)
Q: When does a presumption of insider trading arise?
A: A purchase or sale of a security made by an insider, or
such insider’s spouse or relatives by affinity or
consanguinity within the 2nd degree (legitimate or common
law) shall be presumed to be insider trading if transacted
after such information came into existence but prior to
dissemination of such information to the public and the
lapse of a reasonable time for the market to absorb such
information. (SRC, Sec. 27.1)
Q: How is the presumption rebutted?
A: This presumption shall be rebutted upon a showing by
the purchaser or seller that he was not aware of the
material non-public information at the time of the purchase
or sale. (SRC, Sec. 27.1)
Q: X is a director of Philex Mining Corporation, which
is listed in the PSE. On 3 January 2015, X buys ten
million shares of Philex for P1 or a total of P10
million. On 7 May 2015, the market price of Philex
rises to P2. The next day X sells ten million shares for
P20 million earning a cool profit of P10 million.
a. Is X liable for insider trading?
b. May Philex Mining Corporation recover the P10
million profit from Mr. Dineros?
A:
a. No, Mr. X is not liable for insider trading. Under the
Securities Regulation Code, in order to be liable for
insider trading, the insider must trade securities while in
possession of material non-public information regarding
the securities or the issuer. Here there is no showing
that X was in possession of material non-public
information regarding the issuer Philex Mining or its
securities or shares. Hence X is not liable for insider
trading.
b. Yes, Philex Mining Corporation may recover the P10
million profit from Mr. Dineros. Under the Securities
Regulation Code, any short-swing profit or one
obtained by a director from selling a security of a
corporation of which he is a director within 6 months
from the purchase of the said security shall be
recoverable by the issuer. Here, X a director of the
issuer Philex Mining Corporation sold the Philex Mining
shares within a period of 6 months from his purchase
thereof and obtained a P10 million profit. Hence, X
obtained a short-swing profit and Philex Mining may
recover the same.
Q: What is short swing profit?
A: It is a regulation which requires certain persons (owner
of more than 10% of shares of a company, a director or
officer of such corp.) to return any profits made from the
purchase and sale of company stock if both transactions
occur within a 6-month period.
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Exception: Unless the security was acquired in good faith
in connection with a debt previously contracted. (SRC,
Sec. 23.2)
Q: What are fraudulent transactions?
A: It shall be unlawful for any person, directly or indirectly,
in connection with the purchase or sale of any securities
to:
a. Employ any device, scheme or artifice to defraud;
b. Obtain money or property by means of any untrue
statement of a material fact or any omission to state a
material fact necessary in order to make the statements
made, in the light of the circumstances under which
they were made, not misleading; or
c. Engage in any act, transaction, practice or course of
business which operates or would operate as a fraud of
deceit upon any person. (Sec 26, Securities and
Regulation Code)
Q: What are the other devices or practices on
manipulation of security of prices? (WMR-SRDM-CFP)
A:
a. Wash sales - by effecting transactions which do not
involve any change in beneficial ownership;
b. Improper Matched orders - by entering an order for the
purchase or sale of security with the knowledge that a
simultaneous order or orders of substantially the same
size, time and price for the sale or purchase of any such
security, has or will be entered by or for the same or
different parties;
c. Market Rigging or jiggling - performing similar act
where there is no change In beneficial ownership, or
other acts which tend to create a false appearance of
active trading;
d.
In securities that:
- Raises the price to induce the purchase of a
security,
- Depresses the price to induce the sale, or
- Creates Active trading to induce such purchase or
sale through Manipulative devices (i.e., marking the
close, painting the tape, squeezing the float, hype
and ump, improper matched orders, boiler room
operations, scalping, daisy chain, flipping);
e. To Circulate information that the price of any security
listed in an exchange will or is likely to rise or fall
because of manipulative market operations;
f. To make False or misleading statement with respect to
any material fact, which he knew or had reasonable
ground to believe was so false or misleading, for the
purpose of inducing the purchase or sale of any security
listed or traded in an exchange;
g- To effect whether alone or with others, series of
transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of
Pegging, fixing or stabilizing the price of such security,
unless otherwise allowed by the SRC. (SRC, Sec. 24.1)
Q: What is a Short Sale?
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A: It means any sale of a security which the seller does not
own or any sale which is consummated by the delivery of
a security borrowed by, or for the account of the seller with
the commitment of the seller or securities borrower to
return or deliver said securities or their equivalent to the
lender on a determined or determinable future date. (2015
SRC Rules, Rule 24.2-2)
C, PROTECTION OF INVESTORS
1. Tender offer rule
Q: What is a tender offer?
A: “ Tender offer" means a publicly announced intention by
a person acting alone or in concert with other persons to
acquire
a. outstanding equity securities of a public company, or
b. outstanding equity securities of an associate or related
company of such public company which controls the
said public company. (2015 SRC-IRR, Rule 19.1.8)
NOTE: A public company under the SRC refers to:
a. Any corporation with a securities listed on an
Exchange, or
b. Any corporation with assets exceeding P50M and has
200 or more holders each holding at least 100 shares
of a class of its equity securities (2015 SRC-IRR, Rule
3.1.16)
Q: Under what circumstances is a tender offer
mandatory?
A: A tender offer Is mandatory In the following Instances:
a. Any person or group of persons acting in concert, who
intends to acquire thirty-five percent (35%) of the
outstanding voting shares or such outstanding voting
shares that are sufficient to gain control of the board in
a public company in one or more transactions within a
period of twelve (12) months, shall disclose such
intention and contemporaneously make a tender offer
for the percentage sought to all holders of such
securities within the said period.; and
b. If any acquisition that would result in ownership of over
fifty percent (50%) of the total outstanding equity
securities of a public company, the acquirer shall be
required to make a tender offer under this Rule for ail
the outstanding eguitv securities to all remaining
stockholders of the said company at a price supported
by a fairness opinion provided by an independent
financial advisor or equivalent third party. The acquirer
in such a tender offer shall be required to accept all
securities tendered. (2015 SRC Rules, Rule 19.2)
NOTE: Under the first instance, if the tender offer is
oversubscribed, the aggregate amount of securities to
be acquired at the close of the tender offer shall be
proportionately distributed across shareholders who
wish to tender their shares. Under the second instance,
the acquirer is required to accept all securities
tendered, even if the tender offer is oversubscribed.
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(2015 SRC Rules, Rule 19.2)
Q: What are the exceptions to the mandatory offer
rule? (U-IP-FROM)
A: Unless the acquisition of equity securities is intended to
circumvent or defeat the objectives of the tender offer
rules, the mandatory tender offer requirement shall not
apply to the following purchases of securities:
a. From the Unissued capital stock; Provided, the
acquisition will not result to a 50% or more ownership
of securities by the purchaser or such percentage that
is sufficient to gain control of the board;
b. From an Increase in authorized capital stock;
c. In connection with a Privatization undertaken by the
Philippine government;
d. In connection with Foreclosure proceedings involving a
duly constituted pledge or security arrangement where
the acquisition is made by the debtor or creditor;
e. In connection with corporate Rehabilitation under court
supervision;
f. In the Open market at the prevailing market price; and
g. Merger or consolidation.
Q: UCC is a publicly listed corporation and has two
principal stockholders. The principal stockholders
and their percentage of stock ownership are as
follows:
U C H C - 60.51%
Cemco - 17.03%
On the other hand, majority of UCHC’s stocks
(amounting to 51%) were owned by BCI and ACC in the
following proportions:
B C I-2 1 .3 1 %
ACC - 29.69%
Cemco owned 9% of UCHC
Subsequently, BCI and ACC disclosed that they would
sell their shares in UCHC to Cemco. This sale would
mean that Cemco would acquire a total of 53% of UCC
through direct and indirect ownership. Is this subject
to the mandatory tender offer rule?
A: Yes. Under the SRC, when a person seeks to acquire
at least 35% of a listed corporation or if less than 35%, the
acquisition would amount to ownership of more than 50%
of the corporation, he is required to make a mandatory
tender offer. This applies even though ownership was
acquired indirectly. (Cemco Holdings Inc. v. National Life
Insurance, G.R. No. 171815, 2007)
2. Rules on proxy solicitation
Q: What is the rule on the validity of proxies?
A: GENERAL RULE: a proxy is valid only for the meeting
for which it is intended.
EXCEPTION: If otherwise provided in the proxy.
LIMITATION TO THE EXCEPTION: No proxy shall be
valid and effective for longer than 5 years at one time. (Sec.
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20.3, Securities Regulation Code)
Q: When can a broker / dealer give any proxy / consent
/ authorization in respect of any security carried for the
account of the customer to a person other than his or
her customer?
A: The broker / dealer may give any proxy / consent /
authorization in respect of any security carried for the
account of the customer to a person other than his or her
customer when there is written authorization of such
customer. (Sec. 20.4, Securities Regulation Code.) This
proxy executed by the broker shall be accompanied by a
certification under oath stating that before the proxy was
given to the broker, he had duly obtained the written
consent of the persons in whose account the shares are
held (Rule 20.11.2.18, 2015 SRC-IRR).
3. Disclosure rule
Q: X Co., a private property company owned by X and
Y, has assets worth more than Php200 million and
plans to sell commercial papers worth Php50 million
to 10 banks and 11 insurance companies. Is X Co.
subject to any disclosure requirement under the
Securities Regulation Code?
A: No. Section 17.2 of the SRC provides that the
reportorial requirements under the Code apply only to
three types of issuers:
a. An issuer which has sold a class of its securities
pursuant to a registration statement,
b. An issuer with a class of securities listed for trading on
an Exchange, and
c. An issuer with assets of at least P50m and having 200
or more holders, each holding at least 100 shares of a
class of its equity securities.
X Co. does not fall under any of the categories listed
above. First, it did not have to file a registration statement,
as sale of commercial papers to the banks and insurance
companies is an exempt transaction. Second, X Co. is a
private company, and is not listed on an Exchange. Third,
while X Co. has assets amounting to P200m, it is owned
by only 2 people, namely, X and Y.
While an exemption from filing of a registration statement
does not necessarily imply an exemption from disclosure
requirements under the SRC, X Co. is not subject to such
requirements because it does not fall under any of the
three types of issuers stated above.
Q: In addition to the three types of issuers stated
under Sec. 17.2 of the SRC, who are required to make
disclosures?
A: Where an issuer is covered by the Disclosure Rule (i.e.,
one that falls under any of the three types under Sec. 17.2),
any person who directly or indirectly acquires the beneficial
ownership of 5% or more of any class of equity securities
of said issuer must file a sworn statement within 5 business
days after such acquisition to the issuer, to the Exchange
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where the security is traded (if listed), and to the SEC.

(SRC, Sec. 18; 2015 SRC Rules, Rule 18.1.1)

NOTE: Sec. 18 says “more than 5%” but the IRR Rule
18.1.1 requires a minimum of 5% only.

Where an issuer is covered by the Disclosure Rule, the

following individuals are also covered by the same:
a. Principal stockholder (i.e., one who is, directly or
indirectly, the beneficial owner of 10% or more of any
class of any security of the issuer), and
b. Director or officer of the issuer (SRC, Sec. 23; 2015
SRC Rules, Rule 23.1)

Those listed under Sec. 23 must file two kinds of

statements with the SEC and Exchange where the security
is traded (if listed):
a. Within 10 days after becoming a principal stockholder,
director, or officer, they must file a statement indicating
the amount of securities of such issuer of which he is
the beneficial owner, and
b. Within 10 days after the close of each calendar month,
if there has been any change in the person’s ownership
during the month, the person must file a statement
indicating his ownership at the end of the month, and
the changes that have occurred over the month. "(SRC,
2015 SEC Rules, Rule 23.1.1)

NOTE: Sec. 23 says “more than 10%” but Rule 23.1

requires a minimum of 5% only.

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a. Failure of prompt corrective action as declared by the

I VII. BANKING LAWS Monetary Board; or (new PDIC Charter, Sec. 11[a][1])
b. Request by a bank to be placed under resolution. (New
A. THE NEW CENTRAL BANK ACT (R.A. NO. 76531 PDIC Charter, Sec. 11[a][2])

1. Handling of banks in distress The PDIC shall inform the bank of its eligibility for entry into
resolution. Within a period of 180 days from a bank’s entry
into resolution, the PDIC, through the affirmative vote of at
Q: What is conservatorship?
least 5 members of the board, shall determine whether the
A: Conservatorship involves the appointment of a
bank may be resolved through the purchase of all its
conservator to preserve the assets of the bank when the
assets and ssumption of all its liabilities, or merger or
latter is illiquid, and take measures. (NCBA, Sec. 29)
consolidation with, or its acquisition, by a qualified investor.
Q: When is conservatorship available? (New PDIC Charter, Sec. 11[e])
A: Whenever, on the basis of a report submitted by the
appropriate supervising or examining department, the Upon a determination by the PDIC that the bank may not
Monetary Board finds that a bank or quasi-bank is: be resolved, the Monetary Board may act in accordance
a. In a state of continuing inability; or with Section 30 of the NCBA.
b. Unwillingness to maintain a condition of liquidity
Q: What Are the grounds for receivership under the
deemed adequate to protect the interest of depositors
New Central Bank Act (NCBA)?
and creditors (NCBA, Sec. 29):
A: Whenever the Monetary Board finds that a bank or
quasi-bank - (UIPV)
The Monetary Board May:
a. Is unable to pay its liabilities as they become due in the
a. Take charge, for a period not exceeding 1 year, of the
ordinary course of business (cash flow test) (NCBA,
assets, liabilities, and the management thereof;
b. Reorganize the management; Sec. 30[a]);
c. Collect all monies and debts due said bank; and b. Exception: Inability to pay caused by extraordinary
demands induced by financial panic in the banking
d. Exercise all powers necessary to restore its viability,
community (bank run)
with power to overrule or revoke the actions of the
c. Has insufficient realizable assets to meet its liabilities
previous management and board of directors of the
(balance sheet test) (NCBA, Sec. 30[b]);
bank or quasi-bank
d. Continue in business without involving probable losses
to its depositors and creditors (NCBA, Sec. 30[c]); or
A bank conservator appointed by the BSP has no power to
e. Has willfully violated a cease-and-desist order under
unilaterally rescind perfected contracts entered into by the
NCBA, Sec. 37 (Administrative Sanctions) that has
previous management, such as a CBA, on the mere
become final and involves acts or transactions which
assertion that such contracts are highly disadvantageous
amount to fraud or a dissipation of assets (NCBA, Sec.
to the bank. (Producers Bank v. NLRC, G.R. No. 118069,
30[d])
1998). The power to revoke or rescind contracts pertains
to the courts.
Q: What are the grounds under the General Banking
Law (hereinafter GBL) wherein the Monetary Board
Q: What is the effect when the Monetary Board orders
may summarily and without need for prior hearing
the closure of a bank?
close a banking institution and place it under
A: Whenever a bank is ordered closed by the Monetary
receivership of the Philippine Deposit Insurance
Board, the PDIC shall be designated as receiver and it
Corporation:
shall proceed with the takeover and liquidation of the
A: (NSP)
closed bank in accordance with R.A. No. 3591. (R.A. No.
a. If the bank or quasi-bank notifies the BSP or publicly
3591, Sec. 12[a], as amended by R.A. No. 10846
announces a bank holiday (GBL, Sec. 53); or
[hereinafter New PDIC Charter])
b. If the bank or quasi-bank in any manner suspends the
payment of its deposit liabilities continuously for more
Receivership is the stage within which the PDIC manages
than 30 days (GBL, Sec. 53); or
the affairs of the closed bank and preserves its assets for
c. If a bank persists in conducting its business in an
the benefit of creditors (R.A. No. 9302, Sec. 10[a][b])
unsafe or unsound manner GBL, Sec. 56) and the
receiver determines that the bank cannot be
Q: What are the grounds for resolution of a bank?
rehabilitated or permitted to resume business.
A: The grounds for resolution under the New PDIC
Charter (New PDIC Charter, Sec. 11): The PDIC, in
Q: What happens to banks which are closed by the
coordination with the BSP, may commence the resolution
Monetary Board?
of a bank upon - (FR)
A: Under the new PDIC Charter, banks closed by the
Monetary Board shall no longer be rehabilitated. The
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PDIC, as receiver, shall immediately proceed with the
takeover and liquidation. (New PDIC Charter; Sec. 12[a])
Q: What is the effect of the new PDIC Charter on
receivership?
A: Under the new PDIC Charter, banks closed by the
Monetary Board shall no longer be rehabilitated. The
PDIC, as receiver, shall immediately proceed with the
takeover and liquidation. (New PDIC Charter, Sec. 12[a])
Q: What are the modes of liquidation under the New
PDIC Charter?
A:
a. Conventional Liquidation (New PDIC Charter, Sec.
16) - The assets gathered by the receiver shall be
evaluated and verified as to their existence, ownership,
condition, and other factors to determine their realizable
value.
b. Purchase of Assets and/or Assumption of
Liabilities (New PDIC Charter, Sec. 15) - The
receiver shall have the authority to facilitate and
implement the purchase of the assets of the closed
bank and the assumption of its liabilities by another
insured bank, without need for approval of the
liquidation court. The exercise of this authoirty shall be
in accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other
laws, subject to such terms and conditions as the PDIC
may prescribe. The disposition of the branch licenses
and other bank licenses of the closed bank shall be
subject to the approval of the BSP.
Q: Corp A entered a three- way merger with Bank A
and Corp B for purposes of rehabilitating Bank A.
However, Bank A continued to experience financial
difficulties that led the president and chairman of Bank
A to voluntarily turn over its full control BSP.
Subsequently, BSP placed Bank A under the
receivership of PDIC. Thereafter, PDIC informed BSP
that Bank A cannot be rehabilitated. Thus, the
Monetary Board passed a resolution and informed the
board of directors of Bank A for the liquidation of the
latter. However, the stockholders contested that the
Monetary Board should have made its own
independent factual determination of the bank's
viability before ordering its liquidation. Did the
Monetary Board commit grave abuse of discretion in
ordering the liquidation of Bank A pursuant to PDIC’s
findings alone?
A: No. Section 30 of the New Central Bank Act provides
that PDIC as a receiver shall immediately gather and take
charge of all the assets and liabilities of the institution,
administer the same for the benefit of its creditors, and
exercise the general powers of a receiver under the
Revised Rules of Court. If the receiver determines that the
institution cannot be rehabilitated or permitted to resume
business, the Monetary Board shall notify in writing the
board of directors of its findings and direct the receiver to
proceed with the liquidation of the institution. Thus, under
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the New Central Bank Act, the Monetary Board is not
required to make its own factual determination of the
bank’s viability and that the Board’s only responsibility is to
inform the Bank A’s board of the directors. (Apex
Bancrights Holding, Inc. vs BSP, G.R. No. 214866,
October 2, 2017.)
Q: What are the effects of placing a bank under
liquidation?
A: The officers, employees, deputies, assistants and
agents of the receiver shall have no liability and shall not
be subject to any action, claim or demand in connection
with any act done or omitted to be done by them in good
faith in connection with the exercise of their powers and
functions under the PDIC charter and other applicable
laws, or other actions duly approved by the court. (New
PDIC Charter, Sec. 13[d])
The placement of a bank under liquidation shall have the
following effects:
a. On the CORPORATE FRANCHISE or existence
(New PDIC Charter, Sec. 15[e][1]) - Upon placement
by the Monetary Board of a bank under liquidation, it
shall continue as a body corporate until the termination
of the winding up period
Note: Winding up period is 6 months from the date of
publication of notice of the approval by the court of the
final asset distribution plan of the closed bank. (New
PDIC Charter, Sec. 16[c])
Such continuation as a body corporate shall only be for
the purpose of liquidating, settling and closing its
assets
Receiver shall represent the closed bank in all cases
by or against the closed bank and prosecute and
defend suits by or against it
Note: In no case shall the bank be reopened and
permitted to resume baking business after being
placed under liquidation.
fa. On the POWERS AND FUNCTIONS of its directors,
officers and stockholders (DOS) (New PDIC
Charter, Sec. 15[e][2]) - The powers, voting rights,
functions and duties, as well as the allowances,
remuneration and perquisites of the DOS of such bank
are TERMINATED upon its closure.
DOS shall be BARRED from interfering in any way with
the assets, records, and affairs of the bank
Note: The receiver shall exercise all authorities as may
be required to facilitate the liquidation of the closed
bank for the benefit of all its creditors.
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c. On the ASSETS (New PDIC Charter, Sec. 15[e][3])
- Upon service of closure, all the assets of the closed
bank shall be deemed in custodia legis in the hands of
the receiver, and as such, these assets may not be
subject to attachment, garnishment, execution, levy or
any other court processes
A judge, officer of the court or any person who shall
issue, order, process or cause the issuance or
implementation of the garnishment order, levy,
attachment or execution, shall be liable
Provided: collaterals securing the loans and advances
granted by the BSP shall not be included in the assets
of the closed bank for distribution to other creditors
Provided, further: the proceeds in excess of the
amount secured shall be returned by the BSP to the
receiver
Note: Any preliminary attachment or garnishment on
any of the assets of the closed bank existing at the time
of closure shall not give any preference to the
attaching or garnishing party. Upon motion of the
receiver, the preliminary attachment or garnishment
shall be lifted and/or discharged.
d. On LABOR RELATIONS (New PDIC Charter, Sec.
15[e][4]) - The employer-employee relationship
between the closed bank and its employees shall be
deemed terminated upon service of the notice of
closure of the bank
Payment of separation pay or benefits provided for by
law shall be made from available assets of the bank in
accordance with the Rules on Concurrence and
Preference of Credits under the Civil Code or other
laws
e. On CONTRACTUAL OBLIGATIONS (New PDIC
Charter, Sec. 15[e][5]) - Receiver may cancel,
terminate, rescind or repudiate any contract of the
closed bank that is not necessary for the orderly
liquidation of the bank, or is grossly disadvantageous
to the closed bank, or for any ground provided by law
f. On INTEREST PAYMENTS (NewPDIC Charter, Sec.
15[e][6]) - The liability of a bank to pay interest on
deposits and all other obligations as of closure shall
cease upon its closure without prejudice to NCBA,
Sec. 85
Provided: The receiver shall have the authority,
without need for approval of the liquidation court, to
assign, as payment to secured creditors, the bank
assets serving as collaterals to their respective loans
up to the extent of the outstanding obligations
including interests as of date of closure (valuation
based on the prevailing market value of the collaterals)
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Note: The BSP shall collect interest and other appropriate
charges on all loans and advances it extends, the closure,
receivership or liquidation of the debtor-institution
notwithstanding. (NCBA, Sec. 85)
g. On Liability for penalties and surcharges for later
payment and nonpayment of TAXES (New PDIC
Charter, Sec. 15[e][7]) - From the time of closure, the
closed bank shall not be liable for the payment of
penalties and surcharges arising from the late
payment or non-payment of real property tax, capital
gains tax, transfer tax and similar charges
h. On BANK CHARGES AND FEES on services (New
PDIC Charter, Sec. 15[e][8]) - Receiver may impose
charges and fees for services rendered after bank
closure such as the execution of pertinent deeds and
certifications
i. On ACTIONS PENDING for or against the closed
bank (New PDIC Charter, Sec. 15[e][9]) - General
Rule: Actions pending for or against the closed bank
in any court or quasi-judicial body shall, upon motion
of the receiver, be suspended for a period not
exceeding 180 days and referred to mandatory
mediation
Exception: Actions pending before the Supreme
Court
j. On FINAL DECISIONS against the closed bank
(New PDIC Charter, Sec. 15[e][10]) - Execution and
enforcement of a final decision of a court other than
the liquidation court against the assets of a closed
bank shall be STAYED
Prevailing party shall file the final decision as a claim
with the liquidation court and settled in accordance
with the Rules on Concurrence and Preference of
Credits under the Civil Code or other laws
k. Docket and other COURT FEES (New PDIC
Charter, Sec. 15[e][11]) - Payment of docket and
other court fees relating to all cases or actions filed by
the receiver with any judicial or quasi-judicial bodies
shall be deferred until the action is terminated with
finality
Any such fees shall constitute as a first lien on any
judgment in favor of the closed bank or in case of
unfavorable judgment, such fees shall be paid in
liquidation costs and expenses during the distribution
of the assets.
All assets, records, and documents in the possession
of the closed bank at the time of its closure are
presumed held by the bank in the concept of an owner.
(New PDIC Charter, Sec. 15[e][12])
ATENEO CENTRAL
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The exercise of authority, functions, and duties by the
receiver shall be presumed to have been performed in
the regular course of business. (New PDIC Charter,
Sec. 15[e][13])
Assets and documents of the closed bank shall retain
their private nature even if administered by the
receiver. (New PDIC Charter, Sec. 15[e][14])
Note: Matters relating to the exercise by the receiver
of the functions shall be subject to visitorial audit only
by the COA.
B. LAW ON SECRECY OF BANK DEPOSITS (R.A. NO.
1405. AS AMENDED)
Q: What is the scope of confidentiality of bank
deposits?
A: All deposits of whatever nature with banks or banking
institutions in the Philippines including investments in
bonds issued by the Government of the Philippines, its
political subdivisions and its instrumentalities are
considered as an absolutely confidential nature and may
not be examined, inquired or looked into by any person,
government official, bureau or office. (Bank Secrecy Law,
Sec. 2)
Q: What are the exceptions to the rule on bank
secrecy?
A: (CICL)
a. Upon written Consent of the depositor
b. Impeachment cases
c. Court order in cases of bribery or dereliction of duty of
public officials
a. In cases where the money deposited or invested is the
subject matter of the Litigation. (Bank Secrecy Law,
Sec. 2)
NOTE: Other exceptions provided under special laws
(PLANO-AMLAP-CHIB)
a. Inquiry into illegally acquired amounts under the
Plunder Law (RA 7080)
b. Upon order of competent court in cases involving
unexplained wealth under the ANti-Graft and Corrupt
Practices Act (RA 3019)
c. In-camera inspection by the Ombudsman under the
Ombudsman Act (RA 6770, Sec. 15(8))
d. Upon court order when there is probable cause that the
deposits or investments involved are in any way related
to money laundering or an unlawful activity under the
AMLA (AMLA, Sec. 11)
e. BSP and PDIC may inquire into or examine deposit
accounts and all information related thereto in case
there is unsafe or unsound banking practice (PDiC
Charter, as amended, Sec. 8)
f. Inquiry by the Commissioner of Internal Revenue under
certain circumstances (National Internal Revenue
Code, Sec. 6(f))
g. Upon written order of the Court of Appeals under Sec.
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27 of the Human Security Act
h. Examination by an Independent auditor hired by the
bank (DOJ Opinion No. 243, Series of 1957; Marquez
v. Desierto, G.R. No. 135882, 2001)
i. BSP inquiry into or examination of deposits or
investments with any bank, when the inquiry or exam is
made in the course of BSP’s periodic or special exam
of said bank (AMLA, Sec. 11)
Q: What is the rule on in-camera inspection by the
Ombudsman of a bank deposit?
A: Before an in-camera inspection may be aiiowea:
a. There must be a pending case before a court of
competent jurisdiction.
b. The account must be clearly identified, the inspection
limited to the subject matter of the pending case.
c. The bank personnel and the account holder must be
notified to be present during the inspection
d. Such inspection may cover only the account identified
in the pending case. (Marquez v. Desierto, G.R. No.
135882, 2001)
Q: What is the effect of the AMLA on the secrecy of
bank deposits?
A: It adds another exception to the rule of secrecy of bank
deposits. Thus, the AMLC may inquire into or examine any
deposit or investment with any banking institution or non­
bank financial institution upon order of competent court in
cases of violation of AMLA when it is established that there
is probable cause that the deposits or investments involved
are in any way related to:
a. A money laundering offense under Sec. 4 of the AMLA
or
b. An unlawful activity as defined under Sec. 3(i) of the
AMLA.
NOTE: No court order is necessary in cases involving:
a. Kidnapping for ransom
b. Drug-related offenses under Secs. 4,5,6, and 8-16,
R.A. 9165
c. Hijacking, destructive arson, and murder (AMLA, as
amended, Sec. 11)
Q: What is the nature and coverage of secrecy of
foreign deposits under the Foreign Currency Deposits
Act?
A: All foreign currency deposits are considered of an
absolutely confidential nature and shall be exempt from
attachment, garnishment, or any other order or process of
any court, legislative body, government agency, or any
administrative body whatsoever. (Foreign Currency
Deposit Act [ “FCDA”], Sec. 8)
Q: What are the exceptions to the secrecy of foreign
currency deposits?
A: (CBC-AMLAP)
a. Upon the written Consent of the depositor (FCDA, Sec.
8)
b. BSP inquiry into or examination of deposits or
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investments with any bank, when the inquiry or exam is

made in the course of BSP’s periodic or special exam
of said bank (AMLA, Sec. 11)
c. Inquiry by the Commissioner of Internal Revenue under
certain circumstances (National Internal Revenue
Code, Sec. 6(f))
d. Court order in cases of violation of AMLA when it is
established that there probable cause that the deposits
or investments involved are in any way related to a
money laundering offense (AMLA, Sec. 11) Order of
competent court is not required in:
e. Kidnapping for ransom
f. Drug trafficking
g. Hijacking, destructive arson, and murder
h. BSP and PDIC may inquire may inquire into or examine
deposit accounts and all information related thereto in
case there is unsafe or unsound banking practice
(PDIC Charter, as amended, Sec. 8)

NOTE: Impeachment constitutes an exception to the Bank

Secrecy Law for peso deposits, but not the foreign
currency deposits.

Q: Does garnishment of bank accounts violate the Law

on Secrecy of Bank Deposits?
A: No. Bank accounts may be garnished by the creditors
of the depositor. There is no violation of the Law on
Secrecy of Bank Deposits if the accounts are garnished. It
was not the intention of the legislature to place bank
deposits beyond the reach of execution to satisfy a final
judgment. Its purpose is merely to secure information as to
the name of the depositor and whether or not the
defendant had a deposit in said bank, only for purposes of
garnishment. Any disclosure is purely incidental to the
execution process. (China Banking v. Ortega, G.R. No L-
34964, 1973)

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COPYRIGHT upon creation

VIII. INTELLECTUAL PROPERTY LAW (exclude
Implementing Rules and Regulations) TRADEMARK upon issuance of the trademark
certificate
A. INTELLECTUAL PROPERTY RIGHTS IN GENERAL
Term of Protection
Q: What intellectual rights should be registered? (TPC) PATENT 20 years
A:
a. Trademarks COPYRIGHT generally up to 50 years after the
b. Patents death of the author
c. Copyrights (See generally Intellectual Property Code
[ “IP Code”]) TRADEMARK 10 years

Q: Differentiate Trademark, Copyright and Patent. Q: What is Franchising?

A: A: Franchising is a business method of expansion that
As to subject Matter allows an individual or group of individuals to market a
product or a service and to use of the patent, trademark,
PATENT A product, process or any trade name and the systems prescribed by the owner.
improvement of the foregoing which (Tesoro v. Metro Manila Retreaders, Inc. (Bandag), G.R.
is a technical solution of a problem. No. 171482, 2014.)

COPYRIGHT A literary or artistic work B. PATENTS

TRADEMARK Any sign to distinguish the goods or
Q: What is a patent?
services of an enterprise.
A: A patent is a grant issued by the government through
Elements the Intellectual Property Office of the Philippines (IPO). It
is an exclusive right granted for a product, process or an
PATENT 1. Any technical solution of a improvement of a product or process which is new,
problem in a field of human inventive and useful given to its inventor the right to
activity exclude others from making, using, or selling the product
2. Has a patentable subject; of his invention during the life of the patent.
3. the invention must be new
(novelty); Q: What are the elements of a patent?
4. involves an inventive step; (non- A:
obvious) and
An invention is novel if it does not
5. Which is industrially applicable Element of
form part of the prior art. (IP Code,
Novelty
COPYRIGHT 1. Literary or artistic work Sec. 23)
2. Independently created An in v / o n t i r v n inv/r»lv#oo or-* im / n n ti\ / n
/All IllYV /llliU li I liV U H U O .......................... ....
3. Has a minimum of creativity
step if, having regard to prior art, It Is
TRADEMARK 1. Any visible sign Element of not obvious to a person skilled in the
2. Capable of distinguishing the Inventive Step art at the time of filing date or priority
goods or services of an date of application claiming the
enterprise invention (IP Code, Sec. 23)
3. Must not be excluded by the laws
An invention that can be produced
How Registered Element of
and used in any industry shall be
Industrial
PATENT Intellectual Property Office industrially applicable. (IP Code, Sec.
Applicability
27)
COPYRIGHT the National Library

TRADEMARK Intellectual Property Office
When Protection Starts
PATENT upon issuance of letters of patent by
the Intellectual Property Office
Q: What are the requirements for the patentability of
an invention? (TINA)
A: An inventor may register
a. Any Technical solution of a problem in a field of human
activity;
b. Which involves an Inventive step;
c. Which is new (Novelty); and

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d. Which is industrially Applicable (IP Code, Sec. 21)
Q: What are non-patentable inventions?
A: (DSM-MPC2-SURGE-BIO-AES)
a. Discoveries, Scientific theories and Mathematical
methods;
b. Schemes, rules and methods of performing Mental
acts, Playing games or doing business, and programs
for Computers;
c. Anything which is Contrary to public order or morality
d. Methods for treatment of human or animal body by
SURGErv or therapy, and diagnostic methods practiced
on the human body; BUT products and composition for
use in any of these methods are patentable;
e. Plant varieties or animal breeds or essentially
B io logical process for the production of plants or
animals; BUT micro-organisms and non-biological and
microbiological processes are patentable;
f. AESthetic creations (IP Code, Sec. 22)
Q: To whom does a right to a patent belong?
A: To the inventor, heirs, or assigns. When 2 or more
persons jointly made an invention, the right to a patent
shall belong to them jointly. (IP Code, Sec. 28)
Q: As regards employees and employers, to whom
does a right to a patent belong?
A: In case the employee made the invention in the course
of his employment contract, the patent shall belong to:
a. The employee, if the inventive activity is not a part of
his regular duties even if the employee uses the time,
facilities and materials of the employer.
b. The employer, if the invention is the result of the
performance of his regularly-assigned duties, unless
there is an agreement, express or implied, to the
contrary. (IP Code, Sec. 30.2)
Q: What is the First to File Rule?
A: When two or more persons have made the invention
separately and independently of each other, the right to the
patent shall belong to the person who filed an application
for such an invention, or the applicant who has the earliest
filing or priority date (IP Code, Sec. 29).
Q: What is the term of a patent?
A: Term of Patent shall be 20 years from the filing date of
the application. (IP Code, Sec. 54)
Q: May the Director of Legal Affairs grant license to
exploit patented invention even without agreement of
the patent owner? (EMPUB-COMP-CWD)
A: Yes, but under the following circumstances -
a. National EMerqencv or other circumstances of extreme
urgency;
b. PUBlic interest, in particular, national security, nutrition,
health or development of other vital sectors of national
economy as determined by the appropriate agency of
the Government, so requires;
c. Where a judicial or administrative body has determined
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that manner of exploitation by patent owner or his
licensee is anti-COMPetitive; or
d. In case of public non-Commercial use of patent by
patentee, without satisfactory reason;
e. If patented invention is not being Worked in Philippines
on commercial scale, although capable of being
worked, without satisfactory reason: Provided that
importation of patented article shall constitute working
or using the patent.
f. Where the Demand for patented drugs and medicines
is not being met to an adequate extent and on
reasonable terms, as determined by the Secretary of
the DOH (IP Code, Sec. 93, as amended)
Q: What are the grounds for cancellation of a patent?
A: Interested party may, upon petition and payment of
required fee, petition to cancel patent or any claim thereof,
or parts of claim, on any of the following grounds:
a. The claimed invention does not qualify for registration
as a utility model and is among the inventions which are
not patentable;
b. The description and the claims do not comply with the
prescribed requirements;
c. No drawing which is necessary for the understanding of
the invention was furnished; and
d. The owner of the registration of the utility model is not
the inventor or his successor in title.
Note: Where the grounds for cancellation relate to some of
claims or parts of claim, cancellation may be effected to
such extent only.
Q: What is the remedy of the true and actual inventor?
A: When true and actual inventor is deprived of patent
without his consent or through fraud, and so declared by
final order, court shall order for his substitution as
patentee, or at the option of true inventor, cancel the
patent, and award actual and other damages in his favor
as warranted. Actions should be filed within 1 year from
application.
Q: What are the rights conferred by a patent?
A:
a. Where patent covers a PRODUCT - to restrain,
prohibit, and prevent any unauthorized person or entity
from making, using, offering for sale, selling, or
importing that product; as well as to assign, or transfer
by succession the patent, and to conclude licensing
contracts for the same.
b. Where patent covers a PROCESS - to restrain, prevent
or prohibit any unauthorized person or entity from using
process, and from manufacturing, dealing in, using,
selling or offering for sale, or importing any product
obtained directly or indirectly from such process; as well
as to assign, or transfer by succession the patent, and
to conclude licensing contracts for the same. (Sec. 46,
IP Code)
Q: What are the limitations on patent rights? (PEM2S)
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A: No patent infringement arises in the following
circumstances:
a. Act is done Privately and on a non-commercial scale or
for a non-commercial purpose: Provided, That it does
not significantly prejudice the economic interests of the
owner of the patent;
b. Act consists of making or using exclusively for the
purpose of Experiments that relate to the subject matter
of the patented invention;
c. Acl consists of the preparation for individual cases, in a
pharmacy or by a medical professional, of a Medicine
in accordance with a medical prescription or acts
concerning the medicine so prepared;
d. Using a patented product which has been put on the
Market in the Philippines by the owner of the product,
or with his express consent, insofar as such use is
performed after that product has been so put on the
said market;
e. Invention is used in any Ship, vessel, aircraft, or land
vehicle of any other country entering the territory of the
Philippines temporarily or accidentally: Provided, That
such invention is used exclusively for the needs of the
ship, vessel, aircraft, or land vehicle and not used for
the manufacturing of anything to be sold within the
Philippines. (IP Code, Sec. 72)
Q: What are the limitations on the use of invention by
the government?
A: (SENR-TRO)
a. The Scope and duration of the use shall be limited to
the purpose for which it was authorized;
b. Such use shall be non-Exclusive; (IP Code, Sec. 74.2)
c. The right holder shall be Notified as soon as reasonably
practicable; (IP Code, Sec. 74.2)
d. The right holder shall be paid adequate Remuneration
in the circumstances of each case, taking into account
the economic value of the authorization; (IP Code, Sec.
74.2)
e. All cases arising on such matters shall be cognizable
by courts with appropriate jurisdiction, provided that no
court, except the Supreme Court, shall issue a TRO or
preliminary injunction or such order provisional
remedies that will prevent its immediate execution; (IP
Code, Sec. 74.3)
NOTE: There shall be no patent infringement in cases of
use of invention by government (IP Code, Sec. 76)
Q: Distinguish patents, utility models, and industrial
design.
A: PATENTS are any technical solution of a problem in
any field of human activity which is
a. New,
b. Involves an inventive step and,
c. Is industrially applicable shall be patentable. (IP Code,
Sec. 21)
UTILITY MODELS vary from an invention, for which a
patent for invention is, likewise available, on at least 3
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aspects:
a. The requisite of “inventive step” in a patent for invention
is not required.
b. The maximum term of protection is only 7 years,
compared to a patent which is 20 years, both reckoned
from the date of the application,
c. The provisions on utility model dispense with its
substantive examination and prefer for a less
complicated system. (Ching v. Salinas, G.R. No.
161295, 2005)
INDUSTRIAL DESIGNS are any composition of lines or
colors or any three-dimensional form, whether or not
associated-with lines or colors: Provided that such
composition or form gives a special appearance to and can
serve as pattern for an industrial product or handicraft. (IP
Code, Sec. 112) Term of protection is 5 years, renewable
for not more than 2 consecutive times. (15 years) (IP Code,
Sec. 118)
Q: What Is patent infringement?
A: It constitutes the (a) making, using, offering for sale,
selling or importing patented product or obtained from
patented processes or (b) use of patented processes
without authorization of patentee. (IP Code, Sec. 76.1)
Q: What are the tests used to determine if there was
patent infringement? (LE)
A: In determining infringement of patent, two tests have
been established:
a. LITERAL INFRINGEMENT - in using iiterai
infringement as a test, resort must be made to the
words of the claim. If the challenged matter clearly falls
within the claim, literal infringement exists. To
determine whether the challenged matter fails within
the literal meaning of the patent claim, the claims of the
patent and the challenged matter should be compared
within the overall context of the claims and
specifications, to determine whether there is exact
identity of ail material elements.
b. DOCTRINE OF EQUIVALENTS - When a device
appropriates a prior invention by incorporating its
innovative concept and, albeit with some modification
and change, performs substantially the same function
in substantially the same way to achieve substantially
the same result. (Smith Kline Beckman Corp v. CA,
G.R. No. 126627, 2003).
C. TRADEMARKS
Q: Distinguish between trademarks, collective marks
and trade names
A:
TRADEMARK COLLECTIVE TRADE NAME
MARK
Any visible sign Any visible sign The name or
capable of designated as designation
distinguishing such in the identifying or
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the goods application for distinguishing registration of the mark without actual use thereof, the
(TRADEMARK) registration and an enterprise (IP former prevails over the latter. For a rule widely accepted
or services capable of Code, and firmly entrenched, because it has come down through
(SERVICE distinguishing Sec.121.3) is the years, is that actual use in commerce or business is a
MARK) of an the origin or any defined by the pre-requisite to the acquisition of the right of ownership.
enterprise and other common same law as The IP Code has dispensed with the requirement of prior
shall include a characteristic, including use at the time of registration. Although prior use is basis
stamped or including the “individual for ownership of trade and business names. (Shangri- La
marked quality of goods names and International Hotel Management v. Developers Group of
container of or services of surnames, firm Companies, G.R. No. 159938, 2006)
goods. (IP different names,
CODE, enterprises tradenames, Notwithstanding any laws or regulations providing for any
Sec.121.1) which use the devices or obligation to register trade names, such names shall be
sign under the words used by protected, even prior to or without registration, against any
control of the manufacturers, unlawful act committed by third parties. (IP Code, Sec.
registered owner industrialists, 165.2.a)
of the collective merchants,
mark; (IP Code, agriculturalists, Q: What is the effect of registration?
Sec.121.2, see and others to A: The registration of trademark under Sec. 21 of the law
also Sec. 167) identify their is required to give notice that this mark is registered by
business, displaying the same with the words: “Registered Phil.
vocations, or Patent Office.”
occupations; the
names or titles Failure to mark will prevent the registrant from recovering
lawfully adopted damages for infringement, unless the offender has actual
and used by notice of the same. The victim, however, still has a cause
natural or of action under other laws. (Cagayan v. CA, G.R. No.
juridical 78413, 1959)
persons,
unions, and any Q: Must a trademark always be registered before it can
manufacturing, be protected?
industrial, A: No. A mark that is considered by the competent
commercial, authority of the Philippines to be well-known internationally
agricultural or and in the Philippines, whether or not it is registered here,
other is protected. (Fredco Manufacturing v. President and
organizations Fellows of Harvard College, G.R No. 185917, 2011) A
COMMERCIAL “well-known mark” cannot be registered by another in the
LAW Philippines. (IP Code, Sec. 123.1(e))
engaged in
trade or Q: What marks cannot be registered?
commerce.” A:
(Etepha v. a. Consists of an immoral, deceptive or scandalous matter
Director of or a matter which may disparage or falsely suggest a
Patents, G.R. connection with persons living or dead, institutions,
No. L-20635, beliefs, or national symbols, or bring them into
1966)_________ contempt or disrepute;
b. Consists of the flag or coat of arms or other insignia of
the Philippines or any of its political subdivisions, or of
Q: How is ownership over a mark acquired? any foreign nation, or any simulation of them;
A: Prior to RA 8293, the rights to a trademark were c. Consists of a name, portrait or signature identifying a
acquired through the “first-to-use” system (RA 166) particular living individual except by his written consent,
At present, the rights in a mark shall be acquired through or the name, signature, or portrait of a deceased
REGISTRATION. (IP Code, Sec. 122) President of the Philippines during the lifetime of his
widow, except by written consent of the widow;
Q: What is the concept of actual use? d. Is identical with a registered trademark belonging to a
A: Prior to the IP Code, ownership of a mark or trade name different proprietor or a trademark with an earlier filing
may be acquired not necessarily by registration but by or priority date under any of the following
adoption and use in trade or commerce. As between circumstances:
actual use of a mark without registration, and • Refers to same goods or services;
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• Refers to closely related goods or services; or o
• Nearly resembles such a trademark as to be likely
to deceive or cause confusion;
e. Is identical with or confusingly similar to or is a
translation of a trademark, which is considered by the
competent authority of the Philippines to be well-known
internationally and in the Philippines, whether it is
registered in the Philippines, as being already the
trademark of someone other than the applicant for
registration, and used for identical or similar goods or
services. In determining whether a mark is well-known,
account should be taken of the knowledge of the
relevant sector of the public, rather than of the public at
large, including knowledge in the Philippines which has
been obtained as a result of the promotion of the
trademark;
f. Is identical with or confusingly similar to or is a
translation of a trademark considered well-known which
is registered in the Philippines as regards to goods or
services which are not similar to those with respect to
which registration is applied for. The use of the
trademark in relation to those goods or services
indicates a connection between those goods and
services and the owner of the registered trademark,
and the interests of the owner of the registered
trademarks are likely to be damaged by such use;
g. Is likely to mislead the public, particularly as to the
nature, quality, characteristics or geographical origin of
the goods or services.
h. Consists exclusively of signs that are generic for the
goods or services they seek to identify;
i. Consists exclusively of signs or of indications that have
became customary or usual to designate the goods or
services, in everyday language or in bona fide and
established trade practice;
]. Consists exclusively of signs or of indications that may
serve in trade to designate the kind, quality, quantity,
intended purpose, value, geographical origin, time or
production of the goods or rendering of the services or
other characteristics of the goods or service;
k. Consists of shapes that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value;
l. Consists of color alone, unless defined by a given form;
m. Is contrary to public order or morality;
n |s emblem, official seal, or name of the United
Nations, whether in its full or abbreviated form. (IP
Code, Sec. 123)
Q: What are the criteria in determining a well-known
mark?
A:
a. Duration, extent and geographical area of any use of
the mark, in particular, the duration, extent and
geographical area of any promotion of the mark,
including advertising or publicity and the presentation,
at fairs or exhibitions, of the goods and/or services to
which the mark applies;
b. Market share, in the Philippines and in other countries,
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of the goods and/or services to which the mark applies;
c. Degree of the inherent or acquired distinction of mark;
d. Quality-image or reputation acquired by the mark;
e. Extent to which the mark has been registered in world;
f. Exclusivity of use attained by the mark in the world;
g. Extent to which the mark has been used in the world;
h. Exclusivity of use attained by the mark in the world;
i.Commercial value attributed to the mark in the world;
j. Record of successful protection of the rights in the
mark;
k. Outcome of litigations dealing with the issue of whether
the mark is a weii-known mark; and,
l. Presence or absence of identical or similar marks
validly registered for or used on identical or similar
goods or services and owned by persons other than the
person claiming that his mark is a well-known mark.
(Rules and Regulations On Trademarks, Service
marks, Tradenames and Marked or Stamped
Containers, Rule 102)
Q: What is “priority right” in trademark registration?
A: An application for registration of a mark filed in the
Philippines by a person referred to in Section 3, and who
previously duiy filed an application for registration of the
same mark in one of those countries, shall be considered
as filed as of the day the application was first filed in the
foreign country.
No registration of a mark in the Philippines by a person
described in this section shall be granted until such mark
has been registered in the country of origin of the applicant.
(Sec. 131, IP Code)
Q: What are the rights conferred to the owner of a
registered mark?
A: The owner of a registered mark shall have the exclusive
right to prevent all third parties not having the owner's
consent from using in the course of trade identical or
similar signs or containers for goods or services which are
identical or similar to those in respect of which the
trademark is registered where such use would result in a
likelihood of confusion. In case of the use of an identical
sign for identical goods or services, a likelihood of
confusion shall be presumed.
The exclusive right of the owner of a well-known mark
defined in Subsection 123.1(e) which is registered in the
Philippines, shall extend to goods and services which are
not similar to those in respect of which the mark is
registered: Provided, That use of that mark in relation to
those goods or services would indicate a connection
between those goods or services and the owner of the
registered mark: Provided, further, That the interests of the
owner of the registered mark are likely to be damaged by
such use. (Sec. 147, IP Code)
Q: What are the grounds for the cancellation of a
registered mark?
A:
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a. Any person who believes that he will be damaged by
the registration of a mark may ask for the cancellation
of a registered mark within 5 years from its
registration.
b. At any time, if the registered mark:
• Become the generic name for the goods or services
• Has been abandoned
• Registration was obtained fraudulently
• Is being used by, or with the permission of, the
registrant so as to misrepresent the source of the
goods or services on or in connection with which the
mark is used
c. At any time, if the registered owner of the mark without
legitimate reason, fails to use the mark within the
Philippines (Sec. 151, IP Code)
Q: What are the elements of trademark infringement?
A: (RSC3)
a. Trademark being infringed is Registered in the IPO;
however, in infringement of trade name, the same need
not be registered;
b. Infringing mark or trade name is used in connection with
the Sale, offering for sale, or advertising of any goods,
business or services; or the infringing mark or trade
name is applied to labels, signs, prints, packages,
wrappers, receptacles or advertisements intended to be
used upon or in connection with such goods, business
or services;
c. Trademark or trade name is reproduced, counterfeited,
Copied, or colorably imitated by the infringer;
d. Use or application of the infringing mark or trade name
is likely to cause Confusion or mistake or to deceive
purchasers or others as to the goods or services
themselves or as to the source or origin of such goods
or services themselves or as origin of such goods or
services or the identity of such business; and
e. No Consent of the trademark or trade name owner or
the assignee thereof. (IP Code, Sec. 155; Prosource
International v. Horphag Research Management SA,
G.R. No. 180073, 2009)
Q: When is it a colorable imitation?
A: The following factors shall be used in determining
whether the goods are related:
a. Classification of goods
b. Nature of the goods
c. Descriptive properties, physical attributes or essential
characteristics of the goods, with reference to their
form, composition, texture or quality; and
d. Style of distribution and marketing of the goods,
including how the goods are displayed and sold.
(Societe Des Produits Nestle, S.A. v. Dy, Jr., G.R. No.
172276, 2010)
Q: What is the Doctrine of Secondary Use?
A: The registration of a common name or a geographical
location may be permitted under the doctrine of secondary
meaning which is applied where it is proven that:
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a. This common term has been in use for many years; and
b. The public has associated the products of applicant
with this common term. (De la Rama Steamship v.
NDC, No. L-26966, 1970)
Q: What are the tests to determine similarity and
likelihood of confusion in trademark resemblance?
A: (HOL-DOM)
a. HOLISTIC OR TOTALITY TEST - Applied in Del Monte
Corporation vs. CA (1990) — the trademarks in their
entirety as they appear in their respective labels or hang
tags must also be considered.
b. DOMINANCY TEST - Applied in Asia Brewery, Inc. vs.
CA (1993) — focuses on the similarity of the essential
or dominant features; whether the use of the marks
involved is likely to cause confusion or mistake in the
mind of the public or deceive purchasers.
NOTE: In Emerald v. CA (G.R. No. 100098, 1995), the
Court emphasized that the key factor to examine is the
likelihood of confusion among “ordinary purchasers” who
are acquainted with the product (i.e., those who usually
buy the product as opposed to those who have never
bought the product). Against this premise, the Court
seemed to make a distinction between expensive and
inexpensive goods, as follows:
• Expensive goods - the casual buyer is predisposed to
be more cautious and discriminating in and would
prefer to mull over his purchase. Confusion and
deception, then, is less likely. The two products cannot
be compared piece-meal. They have to be compared
as a whole. Holistic Test applies.
• Inexpensive goods - Buyers are not as cautious.
Dominancy Test applies.
Q: Did the SC abandon the Holistic Test?
A: The holistic test was abandoned by the Supreme Court
in the cases of McDonald's Corporation v. L.C. Big Mak
Burger, Inc. (2004) and Societe des Produits Nestle, S.A.
v. CA (2001). However, it came back and was used in Diaz
v. People (2013) and in at least 2 more cases after
McDonalds and Nestle.
Q: LEVI’s filed a criminal complaint against VD for
infringement of its registered trademarks particularly
the LEVI’s “501” jeans. LEVI’s claimed that VD sold the
alleged counterfeit jeans at his tailoring shops. VD
admitted being the owner of the shops searched, but
countered that he did not manufacture LEVI’s jeans,
and that he used the label “LS Jeans Tailoring” in the
jeans that he made and sold which was also registered
with the Intellectual Property Office. The jeans he
produced were easily recognizable because of such
label, the names of the customers were placed inside
the pockets, and each of the jeans had an “LSJT” red
tab; that “LS” stood for “Latest Style;” and that the
leather patch on his jeans had two buffaloes, not the
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two horses of LEVI’s. Is VD liable for trademark
infringement under the Intellectual Property Code?
A: No. There are two tests to determine likelihood of
confusion of trademarks; namely: the dominancy test
(similarity of the main, prevalent, or essential features of
the competing trademarks) and the holistic test (the
entirety of the marks, including labels and packaging, are
considered in determining confusing similarity). The
Supreme Court used the holistic test, following the case of
Emerald Garment v. CA, G.R. No. 100098, 1995, which
also involved infringement of jeans.
In this case, the maong pants or jeans made and sold by
LEVI’s, which included “501,” were very popular in the
Philippines. The consuming public knew that the original
“501” jeans were under a foreign brand and quite
expensive. Such jeans could be purchased only in malls or
boutiques as ready-to-wear items, and were not available
in tailoring shops like those of VD’s. Neither can the “501”
be acquired on a “made-to-order” basis. Under the
circumstances, the consuming public could easily discern
if the jeans were original or fake “501,” or were
manufactured by other brands of jeans.
Moreover, based on the certificate issued by the
Intellectual Property Office, ”LS JEANS TAILORING” was
a registered trademark of VD. He had registered his
trademark prior to the filing of the present cases. The
Intellectual Property Office would certainly not have
allowed the registration had VD’s trademark been
confusingly similar with the registered trademark for
LEVI’S 501 jeans. (Viciorio P. Diaz v. People and Levi
Strauss [Phils.] Inc., G.R. No. 180677, 2013)
Q: What are the essentia! elements for Unfair
Competition?
A: (CONF-INT)
a. CONFusinq similarity in the general appearance of the
goods, and
b. [NTent to deceive the public and defraud a competitor.
(McDonald's Corp. v. L.C. Big Mak Burger, Inc., G.R.
No. 143993, 2004)
The confusing similarity may or may not result from
similarity in the marks, but may result from other external
factors in the packaging or presentation of the goods. The
intent to deceive and defraud may be inferred from the
similarity of the appearance of the goods as offered for sale
to the public. Actual fraudulent intent need not be shown.
Unfair competition is broader than trademark infringement
and includes passing off goods with or without trademark
infringement. (MacDonald's Corp v. L.C. Big Mak Burger,
G.R. No. 143993, 2004)
Q: Correlate trademark infringement with unfair
competition.
A: Unfair competition is broader than trademark
infringement. It includes passing off goods with or without
trademark infringement. Trademark infringement is a form
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of unfair competition. It constitutes unfair competition when
there is actual or probable deception of the public because
of the general appearance of the goods. There can be
trademark infringement without unfair competition when
the infringer discloses on the labels that he is the
manufacturer of the goods and thus prevents the public
from being deceived that the goods originated from the
trademark owner. (MacDonald's Corp v. L.C. Big Mak
Burger, G.R. No. 143993, 2004)
There is unfair competition when there is a passing off (or
palming off) or attempting to pass off upon the public of the
goods or business of one person as the goods or business
of another with the end and probable effect of deceiving
the public. (Pilipinas Shell v. Romars International. G.R.
No. 189669, 2015)
Q: Can there be trademark infringement without unfair
competition?
A: There can be trademark infringement without unfair
competition as when the infringer discloses on the labels
containing the mark that he manufactures the goods, thus
preventing the public from being deceived that the goods
originate from the trademark owner. (MacDonald's Corp v.
L.C. Big Mak Burger, G.R. No. 143993, 2004)
Q: What are the differences between trademark
infringement and unfair competition?
A:
TRADEMARK UNFAIR
INFRINGEMENT COMPETITION
Essence Unauthorized use of Passing off one’s
a mark. goods as that of
another.
Intent Not necessary that Intent to deceive or
there be bad faith. bad faith is
present.
Registra­ Prior registration of Registration Is not
tion mark alleged to be necessary.
infringed is required.
(Del Monte Corp. v. CA, G.R. No. L-78325, 1990)
Q: What is the duration of certificate or registration?
A: 10 years. Provided that the registrant, shall within 1 year
from 5th anniversary of registration date, file a declaration
of actual use and evidence to that effect, or shall show valid
reasons based on the existence of obstacles to such use.
Otherwise, mark shall be removed from IPO Register. (IP
Code, Sec. 145)
Q: What are the amendments under RA 9502 to the
rights conferred to an owner of a registered mark
provided in the IP Code?
A: The owner of a registered mark shall have no right to
prevent the use in the course of trade of identical or similar
signs or containers and there shall be no infringement of
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trademarks or trade names when it comes to cases of
importation of drugs and medicines allowed under the
act. (RA 9502, Sec. 14 and 15)
D. COPYRIGHTS
Q: What works can be protected by a copyright?
A: (ADOP)
a. Architectural Designs
b. Derivative Works (IP Code, Sec. 173)
c. Original Literary and Artistic Works (IP Code, Sec. 172)
i. Books, pamphlets, articles, and other writings
ii. Periodicals and newspapers
iii. Lectures, sermons, addresses, dissertations
prepared for oral delivery
iv. Letters
v. Dramatic or dramatico-musical compositions,
choreographic works or entertainment in dumb
shows
vi. Musical compositions
vii. Works of drawing, painting, architecture,
sculpture, engraving, lithography or other works of
art; models or designs for works of art
viii. Original ornamental designs or models for article
of manufacture
ix. Illustrations, maps, plans, sketches, charts, and
three-dimensional works relative to geography,
topography, architecture or science
x. Drawings or plastic works of a scientific or
technical character
xi. Photographic works
xii. Audiovisual works and cinematographic works
xiii. Pictorial illustrations and advertisements
xiv. Computer programs
xv. Other literary, scholarly, scientific and artistic
works
d. Published Edition of Work (IP Code, Sec. 174)
Q: What are the rights of a copyright owner?
A: A copyright owner has the exclusive right to carry out,
authorize or prevent the following acts: (RETRANS - FIR -
DPPR - OTHER)
a. Reproduction of the work or substantial portion of the
work;
b. Transformation of the work;
c. First public distribution of the original and each copy of
the work by sale or other forms of transfer of ownership;
d. Dramatization, translation, adaptation, abridgment,
arrangement or other transformation of the work;
e. Public display of the original or a copy of the work;
f. Public performance of the work;
g. Rental of the original or a copy of an audiovisual or
cinematographic work, a work embodied in a sound
recording, a computer program, a compilation of data
and other materials or a musical work in graphic form,
irrespective of the ownership of the original or the copy
which is the subject of the rental; and
h. Other communication to the public of the work.
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Q: What are the rules on copyright ownership?
A:
a. For original literary and artistic works, copyright shall
belong to the author of the work;
b. In works of joint authorship, the co-authors shall be the
original owners of the copyright and in the absence of
agreement, their rights shall be governed by the rules
on co-ownership. If, however, a work of joint authorship
consists of parts that can be used separately and the
author of each part can be identified, the author of each
part shall be the original owner of the copyright in the
part that he has created;
c. For work created by an author during and in the course
of his employment, the copyright shall belong to:
• The employee, if the creation of the object of
copyright is not a part of his regular duties even if
the employee uses the time, facilities and materials
of the employer.
• The employer, if the work is the result of the
performance of his regularly-assigned duties, unless
there is an agreement, express or implied, to the
contrary.
d. For work commissioned by a person other than an
employer of the author and who pays for it and the work
is made in pursuance of the commission, the person
who so commissioned the work shall have ownership of
the work, but the copyright thereto shall remain with the
creator, unless there is a written stipulation to the
contrary;
e. In audiovisual work, the copyright shall belong to the
producer, the author of the scenario, the composer of
the music, the film director, and the author of the work
so adapted. However, subject to contrary or other
stipulations among the creators, the producer shall
exercise the copyright to an extent required for the
exhibition of the work in any manner, except for the right
to collect performing license fees for the performance
of musical compositions, with or without words, which
are incorporated into the work; and
f. In respect of letters, the copyright shall belong to the
writer subject to the provisions of Article 723 of the Civil
Code.
g. For anonymous and pseudonymous works, the
publishers shall; be deemed to represent the authors of
articles and other writings published without the names
of the authors or under pseudonyms.
Q: What works are not subject to copyright?
A:
a. Any idea, procedure, system, method of operation,
concept, principle, discovery or mere data as such,
even if they are expressed, explained, illustrated or
embodied in a work;
b. News of the day and other miscellaneous facts having
the character of mere items of press information; or
c. Any official text of a legislative, administrative or legal
nature, as well as any official translation thereof
d. Works of the Government.
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Q: If the engineering or technical drawings of an
advertising display unit (light box) are granted
copyright protection (copyright certificate of
registration) by the National Library, is the light box
depicted in such engineering drawings ipso facto
also protected by such copyright?
A: The copyright protection extended only to the technical
drawings and not to the light box itself because the latter
was not at all in the category of “prints, pictorial
illustrations, advertising copies, labels, tags and box
wraps It could not have possibly stretched out to include
the underlying light box. Copyright, in the strict sense of
the term, is purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute confers. It
may be obtained and enjoyed only with respect to the
subjects and by the persons, and on terms and conditions
specified in the statute. Accordingly, it can cover only the
works falling within the statutory enumeration or
description. (Pearl & Dean (Phil.), Inc. vs. Shoemart, Inc.
G.R. No. 148222, 2003)
Q. What are the terms of protection for a copyright?
A:
TYPE OF WORK TERM
Life of the author, plus 50 years
Sole Authorship after his death
(IP Code, Sec. 213.1)
Life of the last surviving author,
Joint Authorship plus 50 years after his death
(IP Code, Sec. 213.2)
50 years from publication or 50
years from making if unpublished:
Provided that if the author's
Anonymous or
identity is revealed prior to the
Pseudonymous
expiration of such period,
Work
protection shall be as provided in
sole authorship
(IP Code, Sec. 213.3)
Works of Applied 25 vears from the date of makinq
Art (IP Code, Sec. 213.4)
50 years from publication or from
Photographic or
date of making if unpublished
Audio-visual work
(IP Code, Secs. 213.5 & 213.6)
Q: What are the limitations on copyright?
A: The following acts shall not constitute infringement of
copyright:
a. The recitation or performance of a work, once it has
been lawfully made accessible to the public, if done
privately and free of charge or if made strictly for a
charitable or religious institution or society;
b. The making of quotations from a published work if they
are compatible with fair use and only to the extent
justified for the purpose, including quotations from
newspaper articles and periodicals in the form of press
summaries: Provided, That the source and the name of
the author, if appearing on the work, are mentioned;
c. The reproduction or communication to the public by
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COMMERCIAL LAW
mass media of articles on current political, social,
economic, scientific or religious topic, lectures,
addresses and other works of the same nature, which
are delivered in public if such use is for information
purposes and has not been expressly reserved:
Provided, That the source is clearly indicated;
d. The reproduction and communication to the public of
literary, scientific or artistic works as part of reports of
current events by means of photography,
cinematography or broadcasting to the extent
necessary for the purpose;
e. The inclusion of a work in a publication, broadcast, or
other communication to the public, sound recording or
film, if such inclusion is made by way of illustration for
teaching purposes and is compatible with fair use:
Provided, That the source and the name of the author,
if appearing in the work, are mentioned;
f. The recording made in schools, universities, or
educational institutions of a work included in a
broadcast for the use of such schools, universities or
educational institutions: Provided, That such recording
must be deleted within a reasonable period after they
were first broadcast: Provided, further, That such
recording may not be made from audiovisual works
which are part of the general cinema repertoire of
feature films except for brief excerpts of the work;
g. The making of ephemeral recordings by a broadcasting
organization by means of its own facilities and for use
in its own broadcast;
h. The use made of a work by or under the direction or
control of the Government, by the National Library or by
educational, scientific or professional institutions where
such use is in the public interest and is compatible with
fair use;
i. The public performance or the communication to the
public of a work, in a place where no admission fee is
charged in respect of such public performance or
communication, by a club or institution for charitable or
educational purpose only, whose aim is not proDt
making, subject to such other limitations as may be
provided in the Regulations;
j. Public display of the original or a copy of the work not
made by means of a film, slide, television image or
otherwise on screen or by means of any other device or
process: Provided, That either the work has been
published, or, that the original or the copy displayed has
been sold, given away or otherwise transferred to
another person by the author or his successor in title;
and
k. Any use made of a work for the purpose of any judicial
proceedings or for the giving of professional advice by
a legal practitioner.
Q: What is the fair use doctrine?
A: It is the fair use of copyrighted work for criticism, news
reporting, teaching (including multiple copies for classroom
use), research, and similar purposes and is not an
infringement of copyright. (IP Code, Sec. 185.1) It is a valid
defense in infringement cases. (ABS-CBN v. Gozon, G.R.
ATENEO CENTRAL
BAR OPERATIONS 2019 COMMERCIAL LAW

No. 195956, 2015) Corporation v. Rolando Manansala, G.R. No. 166391,

Factors to determine fair use:
a. Purpose and Character of the use
b. Nature of the Copyrighted work
c. Amount and Substantiality of the portion used in
relation to the whole thing as a whole
d. Effect of the use on the potential market or the value of
the copyrighted work (IP Code, Sec. 185.1)
Decompilation = Fair Use
a. Reproduction/translation of code
b. To achieve interoperability of an independently created
computer program (IP Code, Sec. 185.1)
Q: What is the essence of copyright infringement?
A: The essence of copyright infringement under Sec. 5 of
P.D. 49 is not merely the unauthorized “manufacturing” of
intellectual works but rather the unauthorized performance
of any of the acts covered by Sec. 5, to copy, distribute,
multiply and sell intellectual works. (NBI-Microsoft Corp. v.
Hwang, G.R. No. 147043, 2005.)
Q: What are the elements of Copyright Infringement?
A: (VAL-U)
a. Existence of a V A Lid copyright
b. Unauthorized copying, distribution, reproduction, or
sale of copyrighted work (NBI-Microsoft Corp. v.
Hwang, G.R. No. 147043, 2005)
i. Direct evidence of actual copying
ii. Indirect evidence of access to the original work
October 21, 2015)
Q: What is the essence of intellectual piracy?
A: Infringement of copyright, or piracy, consists in the doing
by any person, without the consent of the owner of the
copyright, of anything the sole right to do which is conferred
by statute on the owner of the copyright. A copy of a piracy
is an infringement of the original, and it is no defense that
the pirate, in such cases, did not know what works he was
indirectly copying, or did not know whether or not he was
infringing any copyright; he at least knew that what he was
copying was not his, and he copied at his peril.
In determining the question of infringement, the amount of
matter copied from the copyrighted work is an important
consideration. To constitute infringement, it is not
necessary that the whole or even a large portion of the
work shall have been copied. If so much is taken that the
value of the original is sensibly diminished, or the labors of
the original author are substantially and to an injurious
extent appropriated by another, that is sufficient in point of
law to constitute a piracy. (Columbia Pictures, Inc. v. Court
o f Appeals, G.R. No. 110318, 1996)

Q: Private respondent, without authority from

petitioner, was engaged in distributing and selling
petitioner’s computer software programs. A private
investigator accompanied by an NBI agent, was able
to purchase 6 CD-ROMS containing the various
programs belonging to petitioner. A search warrant
was served on private respondent’s premises and
yielded several illegal copies of the programs. Did the
mere selling of pirated computer software constitute
copyright infringement?
A: The gravamen of copyright infringement is not merely
the authorized manufacturing of intellectual works but
rather the unauthorized performance of any acts covered
by Sec. 5 of PD 49. Accordingly, the commission of such
acts without copyright owner’s consent constituted
actionable copyright infringement. PD 49 already
acknowledged the existence of computer programs as
works or creations protected by copyright. To hold that the
legislative intent was to require that the computer
programs be first photographed, photoengraved, or
pictorially illustrated as a condition for the commission of
infringement invites ridicule. In this case, the mere sale of
the illicit copies of the software programs was enough to
show the existence of probable cause for copyright
infringement. There was no need to prove who copied,
replicated or reproduced the software programs. (Microsoft

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IX. ANTI-MONEY LAUNDERING LAW (R.A 9160,
AS AMENDED BY R.A. 9194, R.A. 10167; and
_________________R.A. 10365)________________
A. COVERED INSTITUTIONS AND THEIR
OBLIGATIONS
Q: What are the covered persons under the AMLA?
A: (BISECJ2-FDAN-MMOJ-CAS)
a. Banks, non-banks, quasi-banks, trust entities,
foreign exchange dealers, pawnshops, money
changers, remittance and transfer companies and
other similar entities supervised or regulated by
BSP;
b. Insurance companies, pre-need companies, and
all other persons supervised or regulated by the
Insurance Commission
c. SEC supervised/regulated persons/entities
i. Securities dealers, brokers, salesmen,
investment houses, and other entities
managing securities or rendering services as
investment agents, advisor, or consultants;
ii. Mutual fund, closed-end investment
companies, common trust funds, pre-need
companies, and other similar entities;
iii. Foreign exchange corporations, money
changers, money payment, remittance, and
transfer companies, and other similar entities;
and
iv. Other entities administering/ dealing in
currency, commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar monetary
instruments or property
d. Jewelry dealers in precious metals for transactions
in excess of P1M;
e. Jewelry dealers in precious stones for transactions
in excess of P1M;
f. Company service providers which, as a business,
provide any of the following services to third
parties:
L Acting as a Formation agent of juridical
persons;
ii. Acting as (or arranging for another person to
act as) a Director or corporate secretary of a
corporation, a partner of a partnership, or a
similar position in relation to other juridical
persons;
iii. Providing a registered office, business
address or Accommodation, correspondence
or administrative address for a company, a
partnership or any other iegai person or
arrangement; and
iv. Acting as (or arranging for another person to
act as) a Nominee shareholder for another
person;
g. Persons who provide any of the following services:
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COMMERCIAL LAW
i. Managing of client money, securities or other
assets;
ii. Management of bank, savings or securities
accounts;
iii. Organization of contributions for the creation,
operation or management of companies; and
iv. Creation, operation or management of
Juridical persons or arrangements, and
buying and selling business entities.
h. Casinos, including internet and ship-based
casinos, with respect to their casino cash
transactions related to their gaming operations.
Casinos are businesses "authorized by the
appropriate government agency to engage in
gaming operations." (AMLA, as amended, Sec. 3)
NOTE: “Covered persons” shall exclude lawyers and
accountants acting as independent legal professionals in
relation to information concerning their clients or where
disclosure of information would compromise client
confidences or the attorney-client relationship: Provided,
That these lawyers and accountants are authorized to
practice in the Philippines and shall continue to be subject
to the provisions of their respective codes of conduct
and/or professional responsibility or any of its
amendments" (td.)
B. COVERED AND SUSPICIOUS TRANSACTIONS
Q: What are covered transactions?
A: Transactions in cash or other equivalent monetary
Instrument involving a total amount in excess of
Php500,000.00 within 1 banking day (AMLA, as amended,
Sec. 3(b))
Q: What are deemed “suspicious transactions”?
(CUSP-IUA)
A: Transactions with “covered institutions,” regardless of
the amount involved, where any of the following
circumstances exist:
a. Amount involved is not commensurate with the
business or financial Capacity of the client;
b. No Underlying legal or trade obligation, purpose or
economic justification;
c. Client's transaction is Structured in order to avoid being
the subject of reporting requirements under the Act;
d. Circumstances relating to the transaction which are
observed to deviate from the -Profile--of- the client and/or
the client's past transactions with the covered
institution;
e. Client is not properly Identified;
f. Transaction is in a way related to an Unlawful activity or
offense under this Act that is about to be, is being or
has been committed; or
g. Analogous transactions (AMLA. as amended. Sec. 3(b-
W
C. SAFE HARBOR PROVISION
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Q: What is the safe harbor provision?
A: No administrative, criminal or civil or civil proceedings
shall lie against any person for having made a covered
transaction report in the regular performance of his duties
and in good faith, whether or not such reporting results in
any criminal prosecution under AMLA or any other
Philippine law (BSP Circular 706 dated January 5, 2011)
D. WHEN IS MONEY LAUNDERING COMMITTED
Q: When is money laundering committed?
A: Money laundering is committed when the proceeds of
an unlawful activity are transacted thereby making them
appear to have originated from legitimate sources. (AMLA,
as amended, Sec. 4)
It is committed by any person who, knowing that any
monetary instrument or property represents, involves, or
relates to the proceeds of any unlawful activity:
a. Transacts said monetary instrument or property;
b. Converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or
property;
c. Conceals or disguises the true nature, source, location,
disposition, movement or ownership of or rights with
respect to said monetary instrument or property;
d. Attempts or conspires to commit money laundering
offenses referred to in paragraphs (a), (b) or (c);
e. Aids, abets, assists in or counsels the commission of
the money laundering offenses referred to in
paragraphs (a), (b) or (c) above; and
f. Performs or fails to perform any act as a result of which
he facilitates the offense of money laundering referred
to in paragraphs (a), (b) or (c) above. (AMLA, as
amended, Sec. 4)
Money laundering is also committed by any covered
person who, knowing that a covered or suspicious
transaction is required under the AMLA to be reported to
the Anti-Money Laundering Council (AMLC), fails to do so.
(AMLA, as amended, Sec. 4)
Q: What are the “unlawful activities” under the AMLA?
(KDGQ-HDM-JERP2S3-TRI-FIRECART-F6-M2AP-
BCVWS)
A: Act or omission or series or combination thereof,
involving or having relation to the following:
a. Kidnapping for ransom
b. Drug-related offenses
c. Graft and corrupt practices
d. Qualified theft
e. Hijacking, Destructive arson and Murder
f. Jueteng and masiao
g. Violations of E-commerce Act of 2000
h. Robbery and extortion
i. Plunder
j. Piracy on the high seas
k. Swindling
l. Smuggling
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m. Fraudulent practices under the Securities Regulation
Code
n. Human-Jrafficking related offenses
o. Illegal Recruitment under Migrant Workers and
Overseas Filipinos Act
p. Intellectual Property Code related offenses
q. Illegal FIREarms related offenses
r. CARnapping
s. Terrorism and conspiracy to commit terrorism
t. Financing terrorism
u. Fencing
v. Frauds and Illegal exactions and transactions
w. Forgeries and Counterfeiting
x. Forestry Code related offenses
y. Fisheries Code related offenses
z. Mining related offenses
aa.Malversation of public funds
bb. Child Abuse
cc. Child Pornography
dd. Bribery
ee. National Caves and Cave Resources Management
Protection Act
ff. Anti-Voyeurism
gg.Wildlife Resources Conservation and Protection Act
related offenses
hh. Felonies or offenses of Similar nature punishable under
the penal laws of other countries. (AMLA, as amended,
Sec. 3(1))
Q: Can there be a separate conviction for money
laundering and the unlawful activity constituting it?
A: Yes, the prosecution of relating to money laundering
offenses shall proceed independently of any proceeding
relating to the unlawful activity. (AMLA, as amended, Sec.
6)
E. AUTHORITY TO INQUIRE INTO BANK DEPOSITS
Q: What is the general rule on inquiring into bank
deposits?
A: General Rule: Court Order Required
Notwithstanding the provisions of Republic Act No. 1405,
as amended; Republic Act No. 6426, as amended;
Republic Act No. 8791; and other laws:
The AMLC may inquire into or examine any particular
deposit or investment, including related accounts, with any
banking institution or non-bank financial institution upon
order of any competent court based on:
a. An ex parte application in cases of violations of this Act;
b. When it has been established that there is probable
cause that the deposits or investments, including
related accounts involved, are related to an unlawful
activity as defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof;
Q: What are the exceptions?
A: No court order shall be required in the following cases:
a. Kidnapping for ransom under Art. 267, RPCLsepJ(2)
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Violations of the Comprehensive Dangerous Drugs Act

of 2002 (R.A. No. 9165, Secs. 4, 5, 6, 8. 9, 10, 12, 13,
14, 15, and 16);
h. Highjacking and other violations under R.A. No. 6235;
c. Destructive arson and murder under the RPC, including
those perpetrated by terrorists against non-combatant
persons and similar targets;
d. Felonies or offenses of a nature similar to those
mentioned above, which are punishable under the
penal laws or other countries; and
e. Terrorism and conspiracy to commit terrorism as
defined and penalized under R.A. No. 9372 (R.A. No.
10167, Sec. 2)

F. FREEZING AND FORFEITURE

Q: State the rule on freezing of a monetary instrument

or property under AMLA.
A: The CA may issue a freeze order effective immediately
for a period not exceeding 6 months
a. Upon application ex parte by the AMLC
b. After determination that probable cause exists that any
monetary instrument or property is in any way related
to an unlawful activity.

If no case has been filed against a person whose account

has been frozen within the period determined by the court,
the freeze order shall be deemed ipso facto lifted. (AMLA,
as amended, Sec. 10)

Q: What is the remedy of a person whose account has

been frozen?
A: He may file a motion to lift the freeze order and the court
must resolve this motion before the expiration of the freeze
order.

No court shall issue a temporary restraining order or a writ

of injunction against any freeze order, except the Supreme
Court. (AMLA, as amended, Sec. 10)

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X. ELECTRONIC COMMERCE ACT OF 2000 (R.A.
No. 8792) AND A.M. NO. 01-7-01-SC OR THE
RULES OF ELECTRONIC EVIDENCE
A. LEGAL RECOGNITION OF ELECTRONIC DATA
MESSAGES. DOCUMENTS. AND SIGNATURES
Q: What is an electronic data message?
A: Electronic data message refers to information
generated, sent, received or stored by electronic, optical or
similar means. (R.A. No. 8792, Sec. 5[c])
Information shall not be denied legal effect, validity or
enforceability solely on the grounds that it is in the data
message purporting to give rise to such legal effect, or that
it is merely referred to in that electronic data message.
(R.A. No. 8792, Sec. 6)
A facsimile transmission cannot be considered as
electronic evidence. It is not the functional equivalent of
an original under the Best Evidence Rule and is not
admissible as electronic evidence. (MCC v. Ssangyong,
G.R. No. 170633, 2007)
Q: What is an electronic document?
A: Electronic document refers to information or the
representation of information, data, figures, symbols or
other modes of written expression, described or however
represented, by which a right is established or an
obligation extinguished, or by which a fact may be prove
and affirmed, which is receive, recorded, transmitted,
stored, processed, retrieved or produced electronically.
(R.A. No. 8792, Sec. 5[f])
For evidentiary purposes, an electronic document shall be
the functional equivalent of a written document under
existing laws. (R.A. No. 8792, Sec. 7)
It includes digitally signed documents and any print-out or
output, readable by sight or other means, which accurately
reflects the electronic data message or electronic
document. (REE, Rule 2, Sec. 1(h))
Q: What is an electronic signature?
A: Electronic signature refers to any distinctive mark,
characteristic and/or sound in electronic form, representing
the identity of a person and attached to or logically
associated with the electronic data message or electronic
document or any methodology or procedures employed or
adopted by a person and executed or adopted by such
person with the intention of authenticating or approving an
electronic data message or electronic document. (R.A. No.
8792, Sec. 5[e])
Q: When may the E-Commerce Act apply in actions
related to contracts of carriage of goods?
A: In the following actions:
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a. (i) furnishing the marks, number, quantity or weight of
goods; (ii) stating or declaring the nature or value of
goods; (iii) issuing a receipt for goods; (iv) confirming
that goods have been loaded;
b. (i) notifying a person of terms and conditions of the
contract; (ii) giving instructions to a carrier;
c. (i) claiming delivery of goods; (ii) authorizing release of
goods; (iii) giving notice of loss of, or damage to goods;
d. giving any other notice or statement in connection with
the performance of the contract;
e. undertaking to deliver goods to a named person or a
person authorized to claim delivery;
f. granting, acquiring, renouncing, surrendering,
transferring or negotiating rights in goods;
g. acquiring or transferring rights and obligations under
the contract. (R.A. No. 8792, Sec. 25)
Q: What are the rules relating to Transport Documents
under the E-Commerce Act?
A:
a. Where the law requires that any action referred to
contract of carriage of goods be carried out in writing or
by using a paper document, that requirement is met if
the action is carried out by using one or more data
messages or electronic documents.
b. Paragraph (1) applies whether the requirement there in
is in the form of an obligation or whether the law simply
provides consequences for failing either to carry out the
action in writing or to use a paper document.
c. If a right is to be granted to, or an obligation is to be
acquired by, one person and no person, and if the law
requires that, in order to effect this, the right or
obligation must be conveyed to that person by the
transfer, or use of, a paper document, that requirement
is met if the right or obligation is conveyed by using one
or more electronic data messages or electronic
documents unique;
d. For the purposes of paragraph (3), the standard of
reliability required shall be assessed in the light of the
purpose for which the right or obligation was conveyed
and in the light of all the circumstances, including any
relevant agreement.
e. Where one or more data messages are used to effect
any action in subparagraphs (f) and (g) of Section 25,
no paper document used to effect any such action is
valid unless the use of electronic data message or
electronic document has been terminated and replaced
by the used of paper documents. A paper document
issued in these circumstances shall contain a statement
of such termination. The replacement of the electronic
data messages or electronic documents by paper
documents shall not affect the rights or obligation of the
parties involved.
f. If a rule of laws is compulsorily applicable to a contract
of carriage of goods which is in, or is evidenced by, a
paper document, that rule shall not be inapplicable to
such a contract of carriage of goods which is evidenced
by one or more electronic data messages or electronic
documents by reason of the fact that the contract is
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evidenced by such electronic data messages or 3. By any other means satisfactory to the judge as
electronic documents instead of by a paper document. establishing the genuineness of the electronic
(R.A. No. 8792, Sec. 26) signature.

B. ADMISSIBiLTY AND EVIDENTIAL WEIGHT OF Q: What is an ephemeral electronic communication?

ELECTRONIC DATA MESSAGE OR ELECTRONIC
DOCUMENT
Q: What is the scope and coverage of the Rules on
electronic evidence?
A: These Rules shall apply to all civil actions and
proceedings, as well as quasi-judicial and administrative
cases. (REE, Rule 1 Sec. 2)
The REE also applies to criminal actions. As to the
admissibility of the text messages, the RTC admitted them
in conformity with the Court’s earlier Resolution applying
the Rules on Electronic Evidence to criminal actions.
(People v. Enojas, G.R. No. 204894, 2014)
Q: When is an electronic document admissible as
evidence?
A: An electronic document is admissible in evidence if:
a. It complies with the rules on admissibility prescribed by
the Rules of Court and related laws; and
b. it Is authenticated in the manner prescribed by these
Rules. (REE, Rule 3, Sec. 2)
A: Ephemeral electronic communication refers to
telephone conversations, text messages, chatroom
sessions, streaming audio, streaming video, and other
electronic forms of communication the evidence of which
is not recorded or retained. (REE, Rule 2, Sec. 1(k))
Q: When Is an ephemeral electronic communication
admissible as evidence?
A: Audio, photographic and video evidence of events, acts
or transactions shall be admissible provided: (REE, Rule
11, Sec. 1)
1. It shall be shown, presented or displayed to the court;
and
2. It shall be identified, explained or authenticated by the
person who made the recording (a party to the
ephemeral evidence or has personal knowledge
thereof) or by some other person competent to testify
on the accuracy thereof.

Q: What are the rules on authentication under the

REE?
A:
a. Private Electronic Documents - before any private
electronic document offered as authentic is received in
evidence, its authenticity must be proved by any of the
following means: (REE, Rule 5, Sec. 2)
1. By evidence that it had been digitally signed by the
person purported to have signed the same;
2. By evidence that other appropriate security
procedures or devices as may be authorized by the
Supreme Court or by law for authentication of
electronic documents were applied to the document;
or
3. By other evidence showing its integrity and reliability
to the satisfaction of the Judge.

NOTE: A document electronically notarized in

accordance with the rules promulgated by the Supreme
Court shall be considered as a public document and
proved as a notarial document under the Rules of
Court. (REE, Rule 5, Sec. 3)

b. Electronic Signatures - An electronic signature may

be authenticated in any of the following manner: (REE,
Rule 6, Sec. 2)
1. By evidence that a method or process was utilized
to establish a digital signature and verify the same;
2. By any other means provided by law; or;

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\ XI. DATA PRIVACY ACT (R.A. No. 10173)
A. PERSONAL v. SENSITIVE PERSONAL
INFORMATION
Q: What is a personal information?
A: Refers to any information whether recorded in a
material form or not, from which the identity of an individual
is apparent or can be reasonably and directly ascertained
by the entity holding the information, or when put together
with other information would directly and certainly identify
an individual
• Information about an identified or identifiable person
Example: A company ID number is personal
information because it is about an identifiable person.
It can be put together with records of a company’s
Human Resource Department to directly identify an
individual
In Breyer v. Germany, the Court of Justice of the
European Union ruled that a dynamic internet protocol
address (IP address) may be considered personal data,
(because additional information may be made available
by the internet service provider to identify a person)
Q: What is a sensitive personal information?
A: Refers to personal information:
a. About an individual’s race, ethnic origin, marital status,
age, color, and religious, philosophical or political
affiliations;
b. About an individual’s health, education, genetic or
sexual life of a person, or to any proceeding for any
offense committed or alleged to have been committed
by such person, the disposal of such proceedings, or
the sentence of any court in such proceedings;
c. Issued by government agencies peculiar to an
individual which includes, but not limited to:
1. Social Security numbers
2. Previous or current health records
3. Licenses or its denials
4. Suspension or revocation
5. Tax returns
d. Specifically established by an executive order or an act
of Congress to be kept classified
• Sensitive personal information is personal
information, that is specifically considered by law to
be sensitive in nature.
• Note that the law also covers privileged information.
Q: Why is it important to distinguish between personal
and sensitive information?
A: Sensitive personal information requires stronger data
protection or security measures. The criteria to allow
processing of sensitive personal information is stricter.
When what is involved in a personal data breach is
sensitive personal information, mandatory breach
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notification is generally required. Penalties for violation of
1 the Data Privacy Act will be higher if sensitive personal
information is involved.
B. SCOPE
Q: What is the scope of the Act?
A: In general, applies to the processing of all types of
personal information and to any natural and juridical
person involved in personal information processing,
including:
• Personal information controllers and processors who:
o Use equipment that are located in the Philippines,
regardless if found or established in Philippines
o Maintain an office, branch or agency in the
Philippines
Provided, publishers, editors or duly accredited reporters
of any newspaper, magazine or periodical of general
circulation are given protection from being compelled to
reveal the source of any news report or information
appearing in said publication which was related in
confidence to such publisher, editor, or reporter (Sec. 5 RA
10173 in relation to RA 53)
Q: What is processing?
A: Refers to any operation performed upon the personal
data including, but not limited to: collection, recording,
organization, storage, updating or modification, retrieval,
consultation, use, consolidation, blocking, erasure or
destruction.
Q: What are the types of personal information?
A: Personal Information, Sensitive Personal Information,
Privileged Information
Q: Who are the natural and juridical person involved in
personal information processing?
A:
a. Personal Information Controllers - refers to a natural
or juridical person, or any other body who controls the
processing of personal data, or instructs another to
process personal data on its behalf; does not refer to
the employee in charge of computer systems,
encoders, or the head of IT department.
b. Personal Information Processors - refers to any
natural or juridical person or any other body to whom a
personal information controller may outsource or
instruct the processing of personal data pertaining to a
data subject.
If a personal information processor uses the personal
information any other purpose not provided by the
controller, then the personal information processor
becomes the personal information controller.
• Covers only information about individuals (natural
persons) and not juridical persons (Information
about a comoany is outside the scope)
ATENEO CENTRAL
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• The Personal Information Controllers (PIC) or
Personal Information Processor (PIP) may be
juridical persons.
• Example: A customer ordering from a fast food
chain will call a hotline number being operated by a
call center, to be able to order from the fast food
chain. -> The customer is the data subject, the fast
food chain the PIC, and the call center the PIP. The
fast food chain (PIC) outsourced to the call center
(PIP) processing of personal information of
customer.
Q: Does the Act have extraterritorial application?
A: GENERAL RULE: The law has extraterritorial
application to the extent that a particular company has links
to the Philippines, with due consideration to international
law and comity. (Ex, Processing done in Philippines,
Company doing business in Philippines)
EXCEPTIONS:
a) Information about any individual who is or was an officer
or employee of a government institution that relates to
the position or functions of the individual including:
1. Fact that the individual or is or was an officer or
employee of the government institution;
2. The title, business address and office telephone
number of the individual;
3. The classification, salary range and responsibilities
of the position held by the individual;
4. Name of the individual on a document prepared by
the individual in the course of employment with the
government
b) Information about an individual who is or was
performing service under contract for a
government institution ihai reiaies to ihe services
performed, including:
1. Terms of the contract
2. Name of the individual given in the course of the
performance of services
c) Information relating to any discretionary benefit of a
financial nature, such as:
1. Granting of a license or permit given by the
government to an individual, including the name of
individual and exact nature of the benefit
d) Personal information processed for journalistic,
artistic, literary or research purposes
e) Information necessary in order to carry out the
functions o f public authority
1. Processing of personal data for the performance by
the independent
2. Central monetary authority
3. Law enforcement and regulatory agencies, of their
constitutionally and statutorily mandated functions
f) Information necessary for banks and other financial
institutions under the jurisdiction of the central
monetary authority or Banko Sentral ng Pilipinas,
to comply the Anti-Money Laundering Act and other
applicable laws
COMMERCIAL LAW
g) Personal information originally collected from
residents of foreign jurisdictions in accordance with
the laws of those foreign jurisdictions, including any
applicable data privacy laws, which is being processed
in the Philippines
• Those outside the scope refer to information only.
The National Privacy Commission has opined that
entities or agencies processing personal information
remain to be covered by the DPA, and are subject
to requirements of implementing security measures
even if the particular information being processed is
outside ihe scope.
* Example: Banks remain covered by the DPA and
must secure the personal information they hold,
even if part of the information they have are outside
the scope of the DPA (Ex. Reporting suspicious
transcations under AMLA)
C. PROCESSING OF PERSONAL INFORMATION
1. General Data Privacy Principles
Q: What are the rules on the processing of personal
information?
A: General Rule: Processing of personal information shall
beallowed;
Subject to the following:
a. Compliance with requirements of this act and other
laws allowing disclosure of information to the public
b. Adherence to the principles of transparency, legitimate
purpose and proportionality.
Q: What is the rule on transparency?
A: Data subject must be aware of the nature, purpose and
extent of the processing of his or her personal data. Any
information relating to the processing of personal data
should be easy to access and understand.
Q: What is the legitimate purpose rule?
A: Processing of information shall be compatible with a
declared and specified purpose which must not be contrary
to law, morals, or public policy.
Q: What is the proportionality rule?
A: Processing shall be adequate, relevant, suitable,
necessary, and not excessive in relation to a declared and
specified purpose. Personal information shall be
processed only if the purpose of the processing could not
be reasonably be fulfilled by other means.
Personal Information must, be:
a. Collected for specified and legitimate purposes
determined and declared before, or as soon as
reasonably practicable after collection, and later
processed in a way compatible with such declared
purposes only;
b processed fairly and lawfully;
c. Accurate, relevant and, where necessary for purposes
for which it is to be used, be kept up to date;
ATENEO CENTRAL
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o Inaccurate or incomplete data must be rectified,
supplemented, destroyed or their further processing
restricted
d. Adequate and not excessive in relation to the purposes
for which they are collected and processed;
e. Retained only for as long as necessary for the fulfillment
of the purposes for which the data was obtained or for
the establishment, exercise or defense of legal claims,
or for legitimate business purposes, or as provided by
law;
f. Kept in a form which permits identification of data
subjects for no longer than is necessary for the
purposes for which data were collected and processed
1. Provided, personal information collected for other
purposes may lie processed for historical, statistical
or scientific purposes, and in cases laid down in law
may be stored for longer periods
2. Adequate safeguards are guaranteed by said laws
authorizing their processing
Personal information controller must ensure
implementation of personal information processing
principles set out herein
Q: What is the criteria for lawful processing?
A: Processing of personal information (not sensitive or
privileged) shall be permitted only if:
a. Not otherwise prohibited by law; and
b. When at least one of the following conditions exist:
1. Data subject has given consent;
2. Processing is necessary and is related to the
fulfillment of a contract with data subject;
3. Necessary for compliance with a legal obligation to
which personal information controller is subject;
4. Necessary to protect vitally important interests of
data subject;
5. Necessary in order to respond to national
emergency, comply with public order and safety, or
to fulfill functions of public authority
6. Necessary for purposes of legitimate interests
pursued by the personal information controller or by
a third party to whom data is disclosed
i. EXCEPT where such interests are overridden by
fundamental rights and freedoms of the data
subject
Criteria for Processing of Sensitive Personal Information
and Privileged Information
Q: What are the rules on the processing of sensitive
personal information and privileged information?
A: Generally, processing of sensitive personal information
and privileged information shall be prohibited
EXCEPT in the following cases:
a. Data subject has given consent, specific to the purpose
prior to the processing, or in the case of privileged
information, all parties to the exchange have given
consent prior to processing;
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b. Processing is provided for by existing laws and
regulations;
1. Such regulations guarantee the protection of
sensitive personal and privileged information
2. Consent of the data subjects are not required by law
or regulation
c. Processing is necessary to protect the life and health of
the data subject or another person, and the data subject
is not legally or physically able to express his or her
consent prior to the processing;
d. Processing is necessary to achieve lawful and
noncommercial objectives of public organizations and
associations;
1. Only confined to the bona fide members of these
organizations
2. Sensitive information are not transferred to third
parties
3. Consent of data subject was obtained prior to
processing
e. Processing is necessary for Medical treatment, carried
out by a medical practitioner or institution, and an
adequate level of protection of personal information is
ensured;
f. Personal information necessary for the protection of
lawful rights and interests of natural or legal persons in
court proceedings, or the establishment, exercise or
defense of legal claims, or when provided to
government or public authority
Q: Can the processing of personal information be
subcontracted?
A: A personal information controller may subcontract the
processing of personal information.
The personal information controller must ensure that
proper safeguards are in place to ensure the confidentiality
of the personal information processed, prevent its
unauthorized use, and comply with processing
requirements.
Q: When can the principle of privileged
communication be invoked?
A: Personal information controllers may invoke the
principle of privileged communication over privileged
information that they lawfully control or process. Subject to
existing laws and regulations, any evidence gathered on
p rivile g e d inform ation is inadm issible.
P. RIGHTS OF THE DATA SUBJECT
Q: What are the rights of data subjects?
A: Rights of data subjects, in general, include:
a. Right to be informed on matters pertaining to the
processing of personal data, including intended
changes to the processing;
b. Right to object to the processing of personal data;
c. Right to access upon demand;
d. Right to correct errors and inaccuracies in the personal
data being processed;
ATE MED CENTRAL
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e. Right to erasure or blocking of personal data when no

longer necessary for the purpose of collection, and
when rights of data subjects are already being violated;
f. Right to data portability, or the right to request for copies
of his or personal data which are being processed by
electronic means in commonly used formats;
g. Right to damages when the data subject is injured by
an unlawful or unauthorized processing, or by other
acts violating his or her rights; and
h. Right to file a complaint with the National Privacy
Commission
• DPA aiso has provisions on transmissibiiitv of rights
of data subject to lawful heirs and assigns of the
data subject at any time after the death of the data
subject, or when the data subject is incapacitated or
incapable of exercising rights
• Limitation of rights of data subject: depending on
circumstances, rights of data subjects may not apply
or may be limited for:
(1) Scientific and statistical research
(2) Investigations in relation to any criminal,
administrative or tax liabilities

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SC, Rule 2, Sec. 1)

IN S O LV E N C Y A C T OF 2010 (R.A. 10142)
INVOLUNTARY
A. BASIC CONCEPTS WHO GROUNDS
Any creditor or group of 1. No genuine issue of fact
Q: What is rehabilitation? creditors with a claim of, or law on the claim/s of
A: It is the restoration of the debtor to a condition of or the aggregate of the petitioner/s, and that
successful operation and solvency, if it is shown that whose claims is: the due and demandable
a. its continuance of operation is economically feasible a) At least payments thereon have
and Php1,000,000 or, not been made for at
b. its creditors can recover by way of the present value of b) At least 25% of the least 60 days,
payments projected in the plan, more if the debtor subscribed capital 2. Debtor has failed
continues as a going concern than if it is immediately stock or partners' generally to meet his
liquidated. (FRIA, Sec. 4(gg)) contributions, liabilities as they fall due,
whichever is higher or
Q: What is insolvency? may initiate involuntary 3. At least one creditor,
A: The financial condition of a debtor that is generally proceedings against the other than petitioner/s,
unable to pay its or his liabilities as they fall due in the debtor. (A.M. No. 12-12- has initiated foreclosure
ordinary course of business or has liabilities that are 11-SC, Rule 2, Sec. 4) proceedings against the
greater than its or his assets (FRIA, Sec. 4[p]) debtor that will prevent
the debtor from paying
B. MODES OF REHABILITATION its debts as they become
due or will render it
Q: What are the three main types of rehabilitation insolvent.
proceedings? (COP) (A.M. No. 12-12-11-SC,
A: Rule 2, Sec. 5)
a. Court supervised
b. Out of Court or Informal Q: What is the legal effect of the approval of a pre­
c. Pre-negotiated (See generally FRIA) negotiated plan?
A: Approval of a pre-negotiated plan shall have the same
Q: Who may initiate court supervised proceedings? legal effect as confirmation of a judicially supervised plan.
A: _____________ (FRIA, Sec. 82)
VOLUNTARY
Q: What are the minimum requirements of an out-of-
WHO GROUNDS
court or informal restructuring agreements and
When approved by: a) One or more of its
rehabilitation plans?
a) Owner of a sole members foresee
A: (A-67SEC-75UNSEC-85ALL)
proprietorship the impossibility of
a. Debtor must Agree to the out-of-court or informal
b) Majority of partners of a meeting debts when
restructuring/workout agreement or Rehabilitation Plan;
partnership they respectively fall
b. Approved by creditors representing at least 67% of the
c) Majority vote of the due, and
SECured obligations of the debtor;
Board of b) The financial
c. Approved by creditors representing at least 75% of the
Directors/Trustees, and distress would likely
UNSECured obligations of the debtor; and
authorized by the vote adversely affect the
d. Approved by creditors holding at least 85% of ALL
of stockholders financial condition
liabilities, secured and unsecured, of the debtor. (FRIA,
representing at least 2/3 and/or operations of
Sec. 84)
of the outstanding the other members
capital stock or 2/3 of of the group and/or
Q: What are the minimum requirements of a pre­
members, in case of a the participation of
negotiated rehabilitation plan?
corporation the other members
A: The pre-negotiated rehabilitation plan, before being
d) Insolvent debtor may of the group is
approved by the court, must be endorsed or approved by
initiate by filing a essential under the
creditors holding at least 2/3 of the total liabilities of the
petition for rehabilitation terms and
debtor, including secured creditors holding more than 50%
based on the grounds conditions of the
of the total secured claims of the debtor and unsecured
provided proposed
creditors holding more than 50% of the total unsecured
e) A group of debtors may Rehabilitation Plan.
claims of the debtor. (FRIA, Sec. 76)
file a joint petition based (A.M. No. 12-12-11-
on grounds provided SC, Rule 2, Sec. 1)
Q: What are the effects of Commencement Order?
(A.M. No. 12-12-11-
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A: (P2SLC)
a. Vest the rehabilitation with all the Powers and
functions
b. Prohibit or otherwise serve as the legal basis
rendering null and void the results of any
extrajudicial activity or process to seize property, sell
encumbered property, or otherwise attempt to
collection or enforce a claim against the debtor after
commencement date unless otherwise allowed
c. Serve as the legal basis for rendering null and void
any Setoff
u. Serve as the legal basis for rendering null and void
the perfection of any Lien
e. Consolidate the resolution of all legal proceedings
by and against the debtor to the court. (FRIA, Sec.
17)
Q: What are the minimum qualifications of a
rehabilitation receiver?
A: (CR-MIKE-CONF)
a. Filipino Citizen or has been Residing in the Philippines
in the 6 months immediately preceding his nomination;
b. Good Moral character and with acknowledged Integrity,
impartiality and independence;
c. Possess:
L The relevant training and/br Experience that may be
necessary to enable him to properly discharge the
duties and obligations of a rehabilitation receiver,
and
ii. The requisite Knowledge of insolvency and other
relevant commercial laws, rules and procedures;
and
d. No CONFlict of interest: Provided, That such conflict of
interest may be waived, expressly or impliedly, by a
party who may be prejudiced thereby. (FRIA, Sec. 29)
Q: What is the role of a management committee?
A: It takes the place of the management and the governing
body of the debtor and assumes their rights and
responsibilities. (FRIA, Sec. 37)
Q: What is a rehabilitation plan?
A: A plan by which the financial well-being and viability of
an insolvent debtor can be restored using various means
including, but not limited to, debt forgiveness, debt
rescheduling, reorganization or quasi- reorganization,
dacion en pago, debt-equity conversion and sale of the
business (or parts of it) as a going concern, or setting-up
of new business entity, or other similar arrangements as
may be approved by the court or creditors. (FRIA, Sec.
4(H))
Q: What is a Cram Down Effect?
A: The power of the rehabilitation court to approve and
implement a rehabilitation plan notwithstanding the
objection of the majority of creditors. The “cram-down”
clause is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to the
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COMMERCIAL LAW
rehabilitation, absent due regard to the greater long-term
benefit of all stakeholders. Otherwise stated, it forces the
creditors to accept the terms and conditions of the
rehabilitation plan, preferring long-term viability over
immediate but incomplete recovery. (Victorio-Aquino v.
Pacific Plans, Inc., G.R. No. 193108, 2014)
C. LIQUIDATION
Q: Who may file for liquidation of debts?
A: Voluntary - An individual debtor whose properties are
not sufficient to cover his liabilities, and owing debts
exceeding PhpSOO,000.00, may apply to be discharged
from his debts and liabilities by filing a verified petition with
the court of the province or city in which he has resided for
6 months prior to the filing of such petition. (FRIA, Sec.
103)
Involuntary - Any creditor or group of creditors with a claim
of, or with claims aggregating at least Php500,000.00 may
file a verified petition for liquidation with the court of the
province or city in which the individual debtor resides.
(FRIA, Sec. 105)
Q: What is a liquidator?
A: A natural person or juridical entity appointed as such by
the court and entrusted with such powers and duties. If the
liquidator is a juridical entity, it must designate a natural
person who possesses all the qualifications and none of
the disqualifications as its representative, it being
understood that the juridical entity and the representative
are solidarity liable for all obligations and responsibilities of
the liquidator. (FRIA, Sec. 4(w))
Q: What should be enumerated in the liquidation pian?
A: As a minimum, all the assets of the debtor and a
schedule of liquidation of the assets and payment of the
claims. (FRIA, Sec. 129)
Q: What are the effects of a liquidation order?
A: (VCD-SF)
a. Legal title to and control of all the assets of the debtor,
except those that may be exempt from execution, shall
be deemed Vested in the liquidator or, pending his
election or appointment, with the court;
b. All Contracts of the debtor shall be deemed terminated
and/or breached, unless the liquidator, within 90 days
from the date of his assumption of office, declares
otherwise and the contracting party agrees;
c. Juridical debtor shall be deemed Dissolved and its
corporate or juridical existence terminated;
d. No Separate action for the collection of an unsecured
claim shall be allowed. Such actions already pending
will be transferred to the Liquidator for him to accept
and settle or contest. If the liquidator contests or
disputes the claim, the court shall allow, hear and
resolve such contest except when the case is already
on appeal. In such a case, the suit may proceed to
judgment, and any final and executor judgment therein
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for a claim against the debtor shall be filed and allowed
in court; and
e. No Foreclosure proceeding shall be allowed for a
period of 180 days. (FRIA, Sec. 113)
Q: What rule should be followed as regards the order
of preference of credits?
A: The Liquidation Plan and its Implementation shall
ensure that the concurrence and preference of credits as
enumerated in the Civil Code and other relevant laws shall
be observed, unless a preferred creditor voluntarily waives
his preferred right. For purposes of this chapter, credits for
services rendered by employees or laborers to the debtor
shall enjoy first preference under Article 2244 of the Civil
Code, unless the claims constitute legal liens under Article
2241 and 2242 thereof. (FRIA, Sec. 133)
proceedings, creditors may compel a debtor who is
undergoing rehabilitation to liquidate instead. (FRIA,
Sec. 91)
Q: Who may file petition for suspension of payments?
A: An individual debtor who, possessing sufficient property
to cover all his debts but foreseeing the impossibility of
meeting them when they respectively fall due, may file a
verified petition that he be declared in the state of
suspension of payments by the court of the province or city
in which he has resides for 6 months prior to the filing of
his petition. (FRIA, Sec. 94)

Q: Upon completion of the liquidation, what should the

court do?
A: The court shall issue an Order approving the report and
ordering the SEC to remove the debtor from the registry of
legal entities. (FRIA, Sec. 134)

Q: When is the liquidation proceeding deemed

terminated?
A: Upon receipt of evidence showing that the debtor has
been removed from the registry of legal entities at the SEC.
The court shall issue an Order terminating the
proceedings. (FRIA, Sec. 135)

D.SUSPENSION OF PAYMENTS: SUSPENSION

ORDER

Q: What are the effects of stay or suspension order?

A: (CJDP)
a. Suspend all actions or proceedings, in court or
otherwise, for the enforcement of Claims against the
debtor;
b. Suspend all actions to enforce any Judgment,
attachment or other provisional remedies against the
debtor;
c. Prohibit the debtor from selling, encumbering,
transferring or Disposing in any manner any of its
properties except in the ordinary course of business;
and
d. Prohibit the debtor from making any Payment of its
liabilities outstanding as of the commencement date
except as may be provided herein. (FRIA, Sec. 16(q))

Q: While undergoing rehabilitation proceedings, may

a juridical debtor or a creditor opt to undergo
liquidation instead?
A:
a. Voluntary - An insolvent juridical debtor may apply for
liquidation by filing a petition for liquidation with the
court. (FRIA, Sec. 90)
b. Involuntary - At any time during the pendency of or after
court-supervised or pre-negotiated rehabilitation

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