COVERAGE MERCANTILE LAW

2015 BAR EXAMINATIONS

I. Letters of Credit
A. Definition of Letter of Credit
Letters of credit (L/C) are those issued by one merchant to another, or for the
purpose of attending to a commercial transaction. (Art. 567, Code of
Commerce)
A written instrument whereby the writer requests or authorizes the addressee
to pay money or deliver goods to a third person and assumes responsibility
for payment of debt therefor to the addressee (Transfield Philippines v. Luzon
Hydro, 2004).
An engagement by a bank or other person made at the request of a customer
that the issuer shall honor drafts or other demands of payment upon
compliance with the conditions specified in the credit (Prudential Bank v.
Intermediate Appellate Court, 1992).
B. Nature of Letter of Credit
1. Financial device L/Cs are developed by merchants as a convenient
and relatively safe mode of dealing with sales of goods to satisfy the
seemingly irreconcilable interests of a seller, who refuses to part with
his goods before he is paid, and a buyer, who wants to have control of
the goods before paying. (Bank of America, NT&SA v. Court of Appeals,
1993)
2. Composite of three distinct contracts:
a. First Contract between the party applying for the L/C (buyer/
importer/ account party) and the party for whose benefit the L/C is
issued (seller/ exporter/ beneficiary).
b. Second Contract between the buyer and the issuing bank. This
contract is sometimes called the "Application and Agreement" or
the "Reimbursement Agreement".

c. Third Contract between the issuing bank and the seller, in order
to support the contract, under (a) above (Reliance Commodities
v. Daewoo, 1993).
C. Parties to a Letter of Credit (Rights and Obligations)
1. Applicant/Buyer/Importer
-procures the letter of credit, purchases the goods and obliges himself
to reimburse the issuing bank upon receipt of the documents title.
2. Issuing Bank
-one which, whether a paying bank or not, Issues the letter of credit and
undertakes to pay the seller upon receipt of the draft and proper
documents of title from the seller and to surrender them to the buyer
upon reimbursement.
3. Beneficiary/Seller/Exporter
- in whose favor the instrument is executed. One who delivers the
documents of title and draft to the issuing bank to recover payment.
The number of parties may be increased. Modern letters of credit usually
involve banktobank transactions. The following additional parties may be:
1. Advising/notifying bank
-the correspondent bank (agent) of the issuing bank through which it
advises the beneficiary of the LC.
2. Confirming bank
- bank which, upon the request of the beneficiary, confirms the LC
issued.
3. Paying bank
- bank on which the drafts are to be drawn, which may be the issuing
bank or another bank not in the city of the beneficiary
4. Negotiating bank
- bank in the city of the beneficiary which buys or discounts the drafts
contemplated by the LC, if such draft is to be drawn on the opening
bank not in the city of the beneficiary.
A. Basic Principles of Letter of Credit
1. Doctrine of Independence
The principle of independence assures the seller or the beneficiary of
prompt payment independent of any breach of the main contract and

precludes the issuing bank from determining whether the main contract
is actually accomplished or not.
Under this principle, banks assume no liability or responsibility for the
form, sufficiency, accuracy, genuineness, falsification or legal effect of
any documents, or for the general and/or particular conditions stipulated
in the documents or superimposed thereon, nor do they assume any
liability or responsibility for the description, quantity, weight, quality,
condition, packing, delivery, value or existence of the goods
represented by any documents, or for the good faith or acts and/or
omissions, solvency, performance or standing of the consignor, the
carriers, or the insurers of the goods, or any other person whomsoever
(Transfield Philippines v. Luzon Hydro, 2004; Bank of America, NT&SA
v. Court of Appeals, 1993).
2. Fraud Exception Principle
The principle that limits the application of the independence principle
only to instances where it would serve the commercial function of the
credit and not when fraud attends the transaction.
The Fraud exception rule. It provides that the untruthfulness of a
certificate accompanying a demand for payment under a standby letter
of credit may qualify as fraud sufficient to support an injunction against
payment. (Transfield v. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004)
3. Doctrine of Strict Compliance
The settled rule in commercial transactions involving letters of credit
requires that the documents tendered by the seller must strictly conform
to the terms of the letter of credit. Otherwise, the issuing bank or the
concerned correspondent bank is not obliged to perform its undertaking
under the contract.
The documents tendered by the seller/beneficiary must strictly conform
to the terms of the letter of credit. The tender of documents must
include all documents required by the letter. Thus, a correspondent

bank which departs from what has been stipulated under the LC acts on
its own risk and may not thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the money thus paid to the
beneficiary. (Feati Bank and Trust Company v. CA, G.R. No. 940209,
Apr. 30, 1991)
III. Trust Receipts Law
A. Definition of a Trust Receipt Transaction
It is any transaction between the entruster and entrustee:
1. Whereby the entruster who owns or holds absolute title or security
interests over certain specified goods, documents or instrument,
releases the same to the possession of entrustee upon the latters
execution of a TR agreement.
2. Wherein the entrustee binds himself to hold the designated goods in
trust for the entruster and, in case of default, to sell such goods,
documents or instrument with the obligation to turn over to the entruster
the proceeds to the extent of the amount owing to it or to turn over the
goods, documents or instrument itself if not sold. (Sec. 4, P.D. 115)
B. Definition of a Trust Receipt
It is the written or printed document signed by the entrustee in favor of the
entruster containing terms and conditions substantially complying with the
provisions of PD 115.
C. Concept of a Trust Receipt Transaction
A commercial document (Sec. 4, P.D. 115)
A commercial transaction It is a separate and independent security
transaction intended to aid in financing importers and retail dealers who
do not have sufficient funds. (Nacu v. CA, G.R. No. 108638, Mar. 11,
1994)
Letters of credit and trust receipts are not negotiable instrument, but
drafts issued in connection with letters of credit are negotiable
instruments. Hence, while the presumption of consideration under the
negotiable instrument law may not necessarily be applicable to trust
receipts and letters of credit, the presumption that the drafts drawn in

connection with the letters of credit have sufficient consideration

applies. (Lee v. CA, G.R. No. 117913, Feb. 1, 2002)
1. Loan/Security Feature
A trust receipt arrangement is endowed with its own distinctive features
and characteristics. Under that setup, a bank extends a loan covered
by the Letter of Credit, with the trust receipt as a security for the loan. In
other words, the transaction involves a loan feature represented by the
letter of credit, and a security feature which is in the covering trust
receipt. A trust receipt, therefore, is a security agreement, pursuant to
which a bank acquires a "security interest" in the goods. It secures an
indebtedness and there can be no such thing as security interest that
secures no obligation. (Sps. Vintola vs. Insular Bank of Asia and
America, G.R. No. 73271, May 29, 1987)
A trust receipt arrangement does not involve a simple loan transaction
between a creditor and debtor-importer. Apart from a loan feature, the
trust receipt arrangement has a security feature that is covered by the
trust receipt itself. That second feature is what provides the much
needed financial assistance to our traders in the importation or
purchase of goods or merchandise through the use of those goods or
merchandise as collateral for the advancements made by a bank. The
title of the bank to the security is the one sought to be protected and not
the loan which is a separate and distinct agreement (People v. Nitafan,
1992)
2. Ownership of the Goods, Documents and Instruments under a
Trust Receipt
Entrustee is the factual owner of the goods, documents and instruments
(Prudential Bank v. NLRC). Entruster is the real owner of the goods,
documents and instruments.
D. Rights of the Entruster
The entruster shall have the following rights:

1. Right to the proceeds from the sale of the goods, documents or

instruments released under a trust receipt to the entrustee to the extent
of the amount owing to the entruster or as appears in the trust receipt;
OR
2. Right to the return of the goods, documents or instruments in case of
non-sale; AND
3. Right to the enforcement of all other rights conferred on him in the trust
receipt provided such are not contrary to the provisions of the TRL.
4. Right to cancel the trust and take possession of the goods, documents
or instruments subject of the trust or of the proceeds realized therefrom
at any time upon default or failure of the entrustee to comply with any of
the terms and conditions of the trust receipt or any other agreement
between the entruster and the entrustee.
5. Right to sell the goods, documents or instruments at public or private
sale at least five days notice to the defaulting entrustee of the intention
to sell.
6. Right to purchase the goods, documents or instruments at a public sale.
7. Right to recover the deficiency from the entrustee should the proceeds
of the sale not be sufficient (Sec. 7)
1. Validity of the Security Interest as Against the Creditors of the
Entrustee/Innocent Purchasers for Value
As between the entruster and the creditors of the entrustee, the
entruster has a better right over the goods. His security interest in
goods, documents, or instruments pursuant to the written terms of a
trust receipt shall be valid as against all creditors of the entrustee for
the duration of the trust receipt agreement. (Sec. 12, P.D. 115)
A purchaser in good faith can defeat the rights of the entruster over the
goods. He acquires goods, documents or instruments free from the
entruster's security interest. (Sec. 11, P.D. 115)
E. Obligation of the Entrustee
1. To hold the goods, documents or instruments in trust for the entruster
and shall dispose of them strictly in accordance with the terms and
conditions of the trust receipt;

2. To receive the proceeds in trust for the entruster and turn over the same
to the entruster to the extent of the amount owing to the entruster or as
appears on the trust receipt;
3. To insure the goods for their total value against loss from fire, theft,
pilferage or other casualties;
4. To keep said goods or proceeds thereof whether in money or whatever
form, separate and capable of identification as property of the entruster;
5. To return the goods, documents or instruments in the event of non-sale
or upon demand of the entruster; and
6. To observe all other terms and conditions of the trust receipt not contrary
to the provisions of the TRL. (Sec. 9)
F. Liability of the Entrustee
1. To hold good, documents and instruments (GDI) in trust for the entruster
and to dispose of them strictly in accordance with the terms of TR;
2. To receive the proceeds of the sale for the entruster and to turn over the
same to the entruster to the extent of amount owing to the entruster;
3. To insure GDI against loss from fire, theft, pilferage or other casualties.
4. To keep GDI or the proceeds thereof, whether in money or whatever
form, separate and capable of identification as property of the entruster;
5. To return GDI to the entruster in case they could not be sold or upon
demand of the entruster; and
6. To observe all other conditions of the trust receipts. (Sec. 9, P.D. 115)
1. Payment/Delivery of Proceeds of Sale or Disposition of Goods,
Documents or Instruments
The order in the application of proceeds or the TR transactions:
1. Expenses of the sale
2. Expenses derived from storing the goods
3. Principal obligation
The entrustee is liable for the deficiency but any excess shall likewise
belong to him. (Sec. 7, P.D. 115)
2. Return of Goods, Documents or Instruments in Case of Sale
The obligation of the entrustee in case the goods, documents or
instruments were not sold is to return the goods, documents, or
instruments to the entrustor. (Sec. 4, P.D. 115)
3. Liability for Loss of Goods, Documents or Instruments

The entrustee shall bear the loss of goods which are the subject of TR.
Loss of goods, documents or instruments which are the subject of a TR,
pending their disposition, irrespective of whether or not it was due to the
fault or negligence of the entrustee, shall not extinguish his obligation to
the entruster for the value thereof. (Sec. 10, P.D. 115)
4. Penal Sanction if Offender is a Corporation
The TR Law declares the failure to turn over goods or proceeds realized
from sale thereof, as a criminal offense under Art. 315(l)(b) of RPC
(estafa). The law is violated whenever the entrustee or person to whom
trust receipts were issued fails to: (a) return the goods covered by the
trust receipts; or (b) return the proceeds of the sale of said goods.
(Metropolitan Bank v. Tonda, G.R. No. 134436, Aug. 16, 2000)
B. Remedies Available
1. In case of default or failure of the entrustee to comply with the trust
receipt agreement - Entruster may cancel the trust receipt agreement,
take possession of the goods, documents, instruments, and sell the
same at any private or public sale at least five days from notice of
intention to sell to the entrustee. The proceeds of any such sale,
whether public or private, shall be applied (a) to the payment of the
expenses thereof; (b) to the payment of the expenses of re-taking,
keeping and storing the goods, documents or instruments; (c) to the
satisfaction of the entrustee's indebtedness to the entruster (Sec. 7)
2. In case of loss of the goods, documents, instruments -Entruster may
claim damages from the entrustee (Sec.10)
3. In case of failure to turn over proceeds of the sale of the goods,
documents or instruments or to return the same in case of non-sale Entruster may file a criminal complaint for estafa (Art. 315 (b) of the
Revised Penal Code) against the entrustee (Sec. 13)
C. Warehousemans Lien
A warehouseman shall have a lien on goods deposited or on the proceeds
thereof in his hands:
(1) For all lawful charges for storage and preservation of the goods;

(2) For all lawful claims for money advanced, interest, insurance,
transportation, labor, weighing, coopering and other charges and expenses
in relation to such goods;
(3) For all reasonable

charges

and

expenses

for

notice,

and

advertisements of sale; and

(4) For sale of the goods where default had been made in satisfying the
warehouseman's lien (Sec. 27)
General rule: A warehouseman shall have lien only for charges for storage of
goods subsequent to the date of the receipt.
Exception: When the receipt expressly enumerated other charges provided under Sec.
27 even though the amounts thereof are not stated in the receipt. (Sec. 30)
III. Negotiable Instruments Law
A. Forms and Interpretation
1. Requisites of Negotiability
a) Words that appear on the face of negotiable instrument
b) Requirements enumerated in Section 1 of NIL
c) Intention of the parties by considering the whole of the instruments
d) In writing and signed by the maker or drawer
e) Contains an unconditional promise or order to pay a sum certain in
money
f)

Payable on demand, or at a fixed or determinable future time

g) Payable to order or to bearer (so called badges of negotiability)

h) If addressed to a drawee, he must be named or otherwise indicated with
reasonable certainty. (Sec. 1)
2. Kinds of Negotiable Instruments
Promissory notes (PN) An unconditional promise in writing made by one person to
another, signed by the maker, engaging to pay on demand, or at a fixed or
determinable future time, a sum certain in money to order or to bearer. (Sec. 184)
Bill of exchange (BOE) An unconditional order in writing addressed by one person to
another signed by the person giving it, requiring the person to whom it is addressed to

pay on demand or at a fixed or determinable future time a sum certain in money to

order or to bearer. (Sec. 126)
B. Completion and Delivery
1. Insertion of Date
a) Where an instrument expressed to be payable at a fixed period after date is
issued undated, or
b) Where the acceptance of an instrument payable at a fixed period after sight
is undated
2. Completion of Blanks
The holder has a prima facie authority to complete it.
A signature on a blank paper delivered by the person making the signature in
order that the paper may be converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any amount. (Sec. 14)
3. Incomplete and Undelivered Instruments
Not valid against the party whose signature was placed before delivery, whether
the holder is a holder in due course or not. With respect, however, to a holder in
due course, nondelivery must be proved because as to him, there is a prima
facie presumption of delivery.
4. Complete but Undelivered Instruments
It is incomplete and revocable until delivery of the instrument for the purpose of
giving it effect.(Sec. 16)
C. Signature
1. Signing in Trade Name
As a general rule, only persons whose signatures appear on an instrument are liable
thereon. But one who signs in a trade or assumed name is liable as if he signed his
own name (Sec. 18 [2]). It is necessary, however, that the party who signed intended to
be bound by his signature.
2. Signature of Agent
The requisites are complied with, the legal effects of an agents signature in a
negotiable instrument are:
a) His signature will bind his principal
b) He will be exempt from personal liability

3. Indorsement by Minor or Corporation

Not void. The incapacity of the infant is not a defense which can be availed of by
prior parties. However, it does not destroy the right of such an infant indorser to
disaffirm under the rules of infancy.
Passes property therein
Voidable. Therefore, parties prior to the minor or corporation cannot escape
liability by setting up as defense the incapacity of the indorsers.
A minor, however, may be held bound by his signature in an instrument where he
is guilty of actual fraud committed by specifically stating that he is of age. (PNB
v. CA, G.R. No. L34404, June 25, 1980)
4. Forgery - is the counterfeit making or fraudulent alteration of any writing.
Q: When is there forgery?
A: Signature is affixed by one who does not claim to act as an agent and who
has no authority to bind the person whose signature he has forged.
Q: What is the effect when there is forgery?
GR: It does NOT render the instrument void. The signature is wholly inoperative, and
no right to retain the instrument, or to give a discharge thereof, or to enforce payment
thereof against any party to it, is acquired through or under such signature. (Cutoff
rule)
XPN: If the party against whom it is sought to enforce such right is precluded from
setting up forgery or want of authority.(Sec. 23)
Where the forged signature is not necessary to the holders title, in which case, the
forgery may be disregarded. (Sec. 48)
D.Consideration
It is an inducement to a contract that is the cause, price or impelling influence,
which induces a party to enter into a contract.
Q: What is the effect of want of consideration?
A: It becomes a matter of defense as against any person not a holder in due course
(Sec. 28);
Q: What is the effect of partial failure of consideration?

A: Partial failure of consideration is a defense pro tanto, whether the failure is an

ascertained and liquidated amount or otherwise (Sec. 28)
E.Accommodation Party
Q: Who is an accommodation party?
A: One who has signed the instrument as maker, drawer, acceptor, or indorser, without
receiving value therefor, and for the purpose of lending his name to some other person.
(Sec. 29)
Q: What are the requisites to be an accommodation party?
A:
a) Accommodation party must sign as maker, drawer, acceptor or indorser
b) No value is received by the accommodation party for the accommodated party;
and
c) The purpose is to lend the name.
Q: What are the requisites to be an accommodation party?
A:
a) Accommodation party must sign as maker, drawer, acceptor or indorser
b) No value is received by the accommodation party for the accommodated party; and
c) The purpose is to lend the name.
Note: It does not mean, however, that one cannot be an accommodation party merely
because he has received some consideration for the use of his name. The phrase
without receiving value therefor only means that no value has been received for the
instrument and not for lending his name.
F. Negotiation
Q: When is an instrument negotiated?
A: An instrument is negotiated when it is transferred from one person to another in
such a manner as to constitute the transferee the holder thereof. (Sec. 30)

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

2. Distinguished from Assignment

only negotiable instrument may be

non negotiable; instrument may be

negotiated.

assigned absent of any prohibition against

assignment written on its face.

the transferee, if he is a hidc may acquire

the transferee can have no better rights

better rights than his transferor.

than his transferor; he merely steps into

the holder can hold the drawer liable and

the shoes of the assignor.

the transferee has no right of recourse for

the indorsers liable if the party primarily

payment against immediate parties

liable does not pay.

NEGOTIATION ASSIGNMENT

3. Modes of Negotiation
G. What are the methods of negotiation?
A:
1. If payable to bearer it is negotiated by delivery
2. If payable to order it is negotiated by the indorsement of the holder completed by
delivery. (Sec. 30)
H. What is the effect, if any, if a bearer instrument is negotiated by indorsement
and delivery?
A: A bearer instrument, even when indorsed specially, may nevertheless be further
negotiated by delivery, but the person indorsing specially shall be liable as endorser to

only such holders as make title through his endorsement (once a bearer instrument,
always a bearer instrument). (Sec. 40)
Note: This rule does not apply to an instrument originally payable to order but is
converted into bearer instrument because the only or last indorsement is an
indorsement in blank.
1. Kinds of Indorsements
A. Special (Sec. 34)Specifies the person to whom or to whose order the
instrument is to be payable. Also known as specific indorsement or
indorsement in full.
B. Blank (Sec. 34) Specifies no indorsee.
C. Instrument is payable to bearer and may be negotiated by delivery;
May be converted to special indorsement by writing over the signature of the indorser in
blank any contract consistent with the character of indorsement(Sec. 35).
AbsoluteThe indorser binds himself to pay:
a)upon no other condition than failure of prior parties to do so
b)upon due notice to him of such failure
Conditional Right of the indorsee is made to depend on the happening of a
contingent event. Party required to pay may disregard the conditions (Sec. 39)
Restrictive When the instrument:
a)Prohibits further negotiation of the instrument (it destroys the negotiability of
the instrument);
b)Constitutes the indorsee the agent of the indorser; (Sec. 36)
c)Vests the title in the indorsee in trust for or to the use of some persons. But
mere absence of words implying power to negotiate does not make an
instrument restrictive.

Qualified(Sec. 34) constitutes the indorser a mere assignor of the title to the
instrument. It is made by adding to the indorsers signature words like, without
recourse (serves as an ordinary equitable assignment) (Sec. 38)
Jointindorsement made payable to 2 or more persons who are not partners. (Sec.
41)
Note: All of them must indorse unless the one indorsing has authority to indorse
for the others
Irregular(Sec. 64) A person who, not otherwise a party to an instrument, places
thereon his signature in blank before delivery.
Facultative Indorser waives presentment and notice of dishonor, enlarging his
liability and his indorsement.
Successive indorsement to two persons in succession.
Note: Any of them can indorse to effect negotiation of the instrument.
I. Rights of the Holder
Q: Who is a holder?
A: The payee or indorsee of a bill or note who is in possession of it or the bearer
thereof. (Sec. 191)
Q: What are the classes of holders?
A:
Holders in general (Simple Holders). (Sec. 51)
Holders for value. (Sec. 26)
Holders in due course. (Secs. 52, 57)
What are the rights of a holder in general?

A:
Right to sue
Right to receive payment (Sec. 51)
Note: If the payment is in due course, the instrument is discharged
1. Holder in Due Course
Q: Who is a holder in due course (HIDC)?
He who takes a negotiable instrument:
A. That is complete and regular upon its face;
Note: Absence of the required documentary stamp will not make the instrument
incomplete. (It is not a requisite of negotiability under Sec. 1 and it is not a
material particular under Sec. 125)
B. Became the holder before it was overdue, and without notice that it has been
previously dishonored, if such was the fact;
Note: if the instruments is payable on demand, the date of maturity is determined
by the date of presentment, which must be made within a reasonable time after
its issue, if it is a note, or after the last negotiation thereof, if it is a bill of
exchange. (Secs. 71 and 143[a])
Where transferee receives notice of any infirmity in the instrument of defect in the
title of the person negotiating the same before he had paid the full amount
agreed to be paid, he will be deemed a holder in due course only to the extent of
the amount paid by him. (Sec. 54)
C. Took it in good faith and for value;
D. At the time it was negotiated to him, he had no notice of any infirmity in the
instrument or defect in the
title of the person negotiating it. (Sec. 52)
Note: Knowledge of the agent is constructive knowledge to the principal.

2. Defenses Against the Holder

Real Defenses those that are available against all parties, both immediate and
remote, including holders in due course.
Personal Defenses defenses which are not available against a holder in due course.
Those which grow out of the agreement or conduct of a particular person in regard to
the instrument which renders it inequitable or him,
J. Liabilities of Parties
1. Maker
K. What are the liabilities a maker?
A:
A. Engages to pay according to the tenor of the instrument; and
B. Admits the existence of the payee and his then capacity to indorse. (Sec.60)
Note: Liability of the maker is primary and unconditional.
Q: When is a maker precluded from settingup these defenses?
A:
A. That payee is a fictitious person
B. That payee was insane, a minor, or a corporation acting ultra vires.
2. Drawe
Q. To whom is the drawer secondarily liable?
A: The holder. Any of the indorsers intervening between holder and drawer who is
compelled to pay by the holder, the drawer will be liable to that indorser so compelled to
pay

3. Acceptor

What are the liabilities of an acceptor?

a) Engages to pay according to the tenor of his acceptance
b) Admits the existence of the drawer, the genuineness of his signature and his
capacity and authority to draw the instrument
c) Admits the existence of the payee and his then capacity to indorse. (Sec. 62)
Note: Drawee does not become liable until he accepts the instrument in which case he
becomes an acceptor.
When is an acceptor is precluded from settingup these defenses?
a. That the drawer is nonexistent or fictitious
b. That the drawers signature is a forgery
c. That there is no consideration between him and the drawer
4. Indorser
Who is deemed an indorser?
A: A person placing his signature upon an instrument otherwise than as maker or
acceptor, is deemed to be an indorser, unless he clearly indicates by appropriate words
his intention to be bound in some other capacity. (Sec. 63)
Note: A person who places his indorsement on an instrument negotiable by delivery
incurs all liabilities of an indorser. (Sec. 67)
5. Warranties
What are the warranties provided by the person negotiating an instrument?
A:
a. That the instrument is genuine and in all respects what it purports to be
b. That he has good title to it
c. That all prior parties had capacity to contract

d. That he has no knowledge of any fact which would impair the validity of the
instrument or render it useless.

L. Presentment for Payment

What is presentment for payment (PP)?
The presentation of an instrument to the person primarily liable for the purpose of
demanding and receiving payment.
How should presentment be made?
GR: Instrument must be exhibited to the person from whom payment is demanded;
when paid, it must be delivered to person paying it. (Sec. 74)
XPN: When exhibition is excused:
A. Debtor does not demand to see the instrument and refuses payment on some
other grounds; or
B. Instrument is lost or destroyed.
2. Necessity of Presentment for Payment
When is PP necessary?
PP is only necessary to charge persons secondarily liable (Sec. 70). But PP is not
necessary in the following instances:
- As to drawer, where he has no right to expect or require that the drawee or acceptor
will pay the instrument (Sec. 79)
- As to indorser where the instrument was made or accepted for his accommodation
and he has no reason to expect that the instrument will be paid if presented (Sec. 80)
When dispensed with under Sec. 82, such as:
a) Where, after the exercise of reasonable diligence, presentment cannot be 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 nonacceptance
3. Parties to Whom Presentment for Payment Should Be Made
Who are the parties to whom presentment for payment should be made?
Presentment for payment must be made the primary party to the (1) maker in case of
a promissory note, or to the (2) acceptor in case of an accepted bill. If the bill of
exchange or check is payable on demand, the presentment must be made to the
drawee although he is not liable on the bill.
Note: If the person primarily liable is absent or inaccessible, then presentment must be
made to any person of sufficient discretion at the proper place of presentment.
4. Dispensation with Presentment for Payment
What is the effect when presentment is not made?
Drawer and the indorsers are discharged from their secondary liability unless such
presentment is excused.
When is the delay in making presentment excused?
A. When caused by circumstances beyond the control of the holder; and
B. Not imputable to his default, misconduct, or negligence (Sec. 81).
Note: Only the delay in presentment is excused and not the presentment itself. Hence,
as soon as the cause of delay ceases to operate, presentment must be made with
reasonable diligence (Sec. 81).
5. Dishonor by Non-Payment
When is an instrument dishonored by non payment?
A: Nonpayment upon due presentation. Happens when:
A. The instrument is duly presented for payment to party primarily liable;&
B. It is either refused or cannot be obtained.
Nonpayment without presentation. Happens when:

0 A. Presentment is excused
1 B. the instrument is overdue
2 C. it is unpaid
What is the effect of dishonor by non payment?
As to the holder, after an instrument has been dishonored by nonpayment, the person
secondarily liable becomes the principal debtors and he need not proceed against the
person primarily liable.
M. Notice of Dishonor
What is notice of dishonor?
A: Given by the holder to the parties secondarily liable, drawer and each indorser, that
the instrument was dishonored by nonpayment or nonacceptance by the
drawee/maker.
Note: Persons primarily liable need not be given notice of dishonor because they are
the ones who dishonored the instrument.
Q: What are the purposes for requiring notice of dishonor?
A:
A. To inform parties secondarily liable that the maker or acceptor has failed to meet his
engagement.
B. To advise them that they are required to make payment.

What is the liability of person secondarily liable when instrument dishonored?

After the necessary proceedings for dishonor had been duly taken, an immediate
right of recourse to all parties secondarily liable thereon accrues to the holder. (Sec.
84)
2. Parties to Be Notified
To whom must notice be given?

Notice of dishonor should be given to:

0 The drawer; or
1 His agent (Sec. 97)
2 Where party is dead to a personal representative or sent to the last residence or
last place of business of the deceased (Sec. 98)
3 When the parties to be notified are partners notice to any one partner though
there has been a dissolution (Sec. 99)

Parties Who May Give Notice and Dishonor

Who gives the notice?
A:
Holder
Another in behalf of the holder
Any party to the instrument who may be compelled to pay and who, upon taking it up,
would have a right to reimbursement from the party to whom notice is given. (Sec. 90)
3. Effect of Notice
What is the effect of notice of dishonor if given by or on behalf of the holder?
Notice of dishonor inures to the benefit of:
All holders subsequent to the holder who has given notice; and
All parties prior to the holder but subsequent to the party to whom notice has been
given and against whom they may have a right of recourse. (Sec. 92)
What is the effect of notice of dishonor if given by party entitled thereto?
Notice of dishonor inures to the benefit of:

The holder; and

All parties subsequent to the party to whom notice is given (Sec. 93).
4. Form of Notice
What is the form and contents of a notice of dishonor?
A:
Oral; or
In writing
It may be given by personal delivery, or by mail (Sec. 96)
Must contain the following:
Description of the instrument;
Statement that it has been presented for payment or for acceptance and that it
has been dishonored (If protest is necessary, notice must also contain a
statement that it has been protested).
Statement that the party giving the notice intends to look for the party addressed
for payment.
Note: A written notice need not be signed, and an insufficient notice may be

supplemented or validated by verbal communication. A misdescription of the

instrument does not vitiate the notice unless the party to whom the notice is
given is in fact misled thereby. (Sec. 95)
5. Waiver
When may waiver of notice be given?
A:

Before the time of giving notice has arrived; or

After the omission to give due notice.
(Sec. 109)
What are the ways to give a waiver of notice?
It can either be:
Express; or
Implied (e.g. Payment by an indorser after he learns of the default of the maker
admission of liability after dishonor). (Sec. 109)
Who are affected by the waiver of notice?

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

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

110)
6. Dispensation with Notice
When is notice of dishonor not necessary?

Waiver of notice. (Sec. 109)

Waiver of protest. (Sec. 111)
When after due diligence, notice cannot be given. (Sec. 112)
Drawer in cases under Sec. 114

Indorser in cases under Sec. 115; and

Where due notice of dishonor by non acceptance has been given (notice of
dishonor by nonpayment not necessary). (Sec. 116)
With regard to the drawer, when can a notice of dishonor be dispensed with?

When drawer and drawee is the same person

Drawee is fictitious or does not have the capacity to contract
Drawer is person to whom the instrument is presented for payment
(he is the one who dishonored the instrument)
Drawer has no right to expect or require that the drawee or acceptor will honor
the instrument.
Drawer has countermanded the payment (e.g. stop payment order)
(Sec.114)
7. Effect of Failure to Give Notice
What is the effect of omission of a previous holder to give notice of dishonor by
non acceptance?
A: It does not prejudice the rights of a holder in due course subsequent to the omission
to present the instrument to the drawee for acceptance and notify the drawer and
indorsers if acceptance is refused. (Sec. 117)

When should the notice be given?

A:
GR: As soon as instrument was dishonored (Sec. 102) Party is allowed one entire
day for the purpose of giving notice.
XPN: Delay is excused (Sec. 113)
Note: An instrument cannot be dishonored by nonpayment until after the
maturity

Parties reside in the same place

Place of business Before close of business hours on the day following
Residence Before the usual hours of rest on the day following
By mail Deposited in the post office in time to reach him in the usual course on
the day following
(Sec. 103)
Parties reside in different places
By mail Deposited in the post office in time to go by mail (actual departure in
the course of mail from the post office in which the notice was deposited) the
day following the day of dishonor.

If no mail At a convenient hour (of the sender) on that day, by the next mail
thereafter
Other than by post office (e.g. personal messenger) Within the time that
notice would have been received in due course of mail, if it has been
deposited in the post office within the time specified in
(Sec. 104)
Time of notice to antecedent parties Same time for giving notice that the holder
has after the dishonor (Sec. 107)
Note: Actual receipt of the party within the time specified by law is sufficient

though not sent in the places specified above. (Sec. 108)

K.Discharge of Negotiable Instrument
1. Discharge of Negotiable Instrument
L. What is discharge?
A: It is the release of all parties, whether primary or secondary, from the obligations
arising thereunder. It renders the instrument without force and effect, and consequently,
it can no longer be negotiated.
Q: What are the methods for discharge of instrument?
A:
a. Payment by principal debtor:
By or on behalf of principal debtor
At or after its maturity
To the holder thereof
In good faith and without notice that the holders title is defective

b. Payment by accommodated party

c. Intentional cancellation of instrument by the holder (by expressly stating it in the
instrument or when the instrument is torn up, burned or destroyed)
d. Any act which discharges a simple contract for the payment of money under Art.
1231 of the NCC specifically remission, novation, and merger.
Note: Loss of the negotiable instrument will not extinguish liability; compensation
is not available so long as an obligation is evidenced by a negotiable instrument.
(Commercial Law Review, Villanueva, 2009ed)
e. Reacquisition by principal debtor in his own right. Reacquisition must be:
By the principal debtor
In his own right
At or after date of maturity (instrument is discharged; if made before, it may be
renegotiated)
(Sec. 119)

2. Discharge of Parties Secondarily Liable

What are the methods of discharge of secondary parties?

A:

Any act which discharges the instrument;

Intentional cancellation of his signature by the holder Discharge of prior party which
may be made when signature is stricken out
Valid tender of payment by a prior party;
Release of the principal debtor, unless holder expressly reserves his right of
recourse against the said subsequent parties
Extension of time of payment, unless:
Extension is consented to by such party
Holder expressly reserves his right of recourse against such party.
(Sec. 120)
What are the effects of payment by persons secondarily liable?
A:
Instrument is not discharged
It only cancels his own liability and that of the parties subsequent to him
GR: Instrument may be renegotiated
XPN:
Where it is payable to the order of a third person, and has been paid by the
drawer; and
Where it is paid by the accommodated party

Note: (a) and (b) has the same effect as payment by the party primarily liable.
Person paying is remitted to his former rights (as regards prior parties) and

he may strike out his own and all subsequent indorsements. (Sec. 121)
3. Right of Party Who Discharged Instrument
GR: The party so discharging the instrument is remitted to his former rights as
regards all prior parties, and he may strike out his own and all subsequent
indorsements, and again negotiate the instrument.

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

4. Renunciation by Holder
What is renunciation?
A: The act of surrendering a claim or right with or without recompense (a personal
defense).
Q: How is renunciation by holder made?
A:
Must be written
If oral, the instrument must be surrendered to the person primarily liable. (Sec. 122)

What are the effects of renunciation?

A:
Made in favor of principal debtor made at or after the maturity (made absolutely and
unconditionally) of the instrument discharges the instrument
(Sec. 122)
Made in favor of a secondary party may be made by the holder before, at or after
maturity discharges only the secondary parties and all subsequent to him (Sec.
122)
Renunciation does not affect the rights of a holder in due course without notice.
(Sec. 120)
What is the rule regarding cancellation of an instrument?
A: It is presumed intentional. It is inoperative if unintentional, or under a

mistake or without the authority of the holder. But where an instrument or any
signature appears to have been cancelled, burden of proof lies on the party
who alleges that the cancellation was made unintentionally, or under a mistake
or without authority. (Sec. 123)
M. Material Alteration
1. Concept
What is a material alteration?
A: Any change in the instrument which affects or changes the liability of the

parties in any way.

What constitutes a material alteration?

Any alteration which changes the:
Date
Sum payable, either principal or interest;
Time or place of payment
Number or relations of the parties
Medium or currency in which payment is to be made; or
Adds a place of payment when no place of payment is specified, or any other
change or addition which alters the effect of the instrument in any respect.
(Sec. 125)
Note: The change in the date of indorsement is not material where the date

is not necessary to fix the maturity of the instrument.

2. Effect of Material Alteration
What is the effect of material alteration which is not apparent?
A:
Avoids the instrument except against:
0 A party who has made the alteration;
1 A party who authorized or assented to the alteration; or

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

warranties)
If negotiated to a HIDC, he may enforce the payment thereof according to its original
tenor against the party prior to the alteration. He may also enforce payment
thereof against the party responsible for the alteration for the altered amount.
If negotiated to a NHIDC, he cannot enforce payment against the party prior to the
alteration. He may however enforce payment according to the altered tenor from
the person who caused the alteration and from the indorsers. (Sec. 124)
Is there material alteration when the serial number of a check had been altered?
No. An alteration is said to be material if it alters the effect of the instrument.

It means an unauthorized change in an instrument that purports to modify in

any respect the obligation of a party or an unauthorized addition of words or
numbers or other change to an incomplete instrument relating to the obligation
of a party. The alteration of the serial number of a check did not change the
relations between the parties nor the effect of the instrument. Hence, the
alteration on the serial number of a check is not a material alteration.
(International Corporate Bank vs. CA, G.R. No. 141968, Feb. 12, 2001
N. Acceptance
1. Definition
What is acceptance of a bill?
A: A signification by the drawee of his assent to the order of the drawer (Sec. 132).
Q: What is the effect of acceptance?

A: Upon acceptance, the bill, in effect becomes a note. The drawee who

thereby becomes an acceptor assumes the liability of the maker (which is

primary liability) and the drawer, that of the first indorser.
2. Manner
O. What are the requisites for acceptance?
A:
1. In writing, except constructive acceptance and to a foreign bill payable in another
state (unless the other state requires for written acceptance)
2. Signed by the drawee (without it, he is not liable)
3. Must express a promise to pay money (not goods)
4. Delivered to the holder (before delivery or notification, acceptor may revoke or
cancel his acceptance).
P. What are the kinds of acceptance?
A:
General Assents without qualification to the order of the drawer (Sec. 139).
Note: A holder may refuse to accept a qualified acceptance and if he does not
obtain an unqualified acceptance, he may treat the bill as dishonored by non
acceptance.
Qualified An acceptance which in express terms varies the effect of the bill
as drawn (Sec. 139).

Conditional makes payment by the acceptor dependent on the fulfillment of

a condition therein stated.
Partial an acceptance to pay part only of the amount for which the bill is
drawn.
Local an acceptance to pay only at a particular place.
Qualified as to time
The acceptance of some one or more of the drawees but not of all. (Sec. 141)
Constructive/implied
Drawee to whom the bill is delivered for acceptance destroys it; or
Drawee refuses, within 24 hours after such delivery, or within such time as is
given him, to return the bill accepted or nonaccepted
Extrinsic the acceptance is written on
paper other than the bill itself. To be binding upon the acceptor:
Acceptance must be shown to the person to whom the instrument is
negotiated; and
Such person must take the bill for value on the faith of such acceptance (Sec.
134).
Virtual conditions:
Unconditional promise in writing to accept a bill

Promise made before it is drawn

Any person who, upon faith thereof, received the bill for value.
(Sec. 135)

2. Time for Acceptance

What is the time allowed for the drawee to make the acceptance?
A: The drawer has 24 hours after presentment to decide whether or not he will accept
the bill. The acceptance, if given, dates as of the day of presentation. (Sec. 136)
Note: Drawee bank is not entitled to 24 hours to decide whether or not to

pay a check since a check is presented for payment, not acceptance.

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

GR: When the holder takes a qualified acceptance the drawer and indorsers are
discharged from liability on the bill.
XPN:
1. when they have expressly or impliedly authorized the holder to take a qualified
acceptance or subsequently assent thereto.
2. Implied assent (when they did not express their dissent to the holder within a
reasonable time when they received a notice of qualified acceptance,
Q: When may an incomplete bill be accepted?

A: Acceptance may be made before the bill has been signed by the drawer or while
otherwise incomplete, or after it is overdue, or even after it has been dishonored by
nonacceptance or non payment. (Sec. 138)
Q: What is the effect of the certification by the drawee bank?
A: Certification implies that the check is drawn upon sufficient funds in the
hand of the drawee, that they have been set apart for its satisfaction and that
they shall be so applied whenever the check is presented for payment. Where
a check is certified by the bank on which it is drawn, the certification is
equivalent to acceptance (New Pacific Timber v. Seneris, G.R. No. L41764,
Dec. 19, 1980).
Q.Presentment for Acceptance
What is presentment for acceptance (PA)?
A: Production or exhibition of a bill of exchange to the drawee for his acceptance or
payment (also includes presentment for payment).
Q: What are the rules as to PA?
A:
GR: PA is not necessary to render any party to the bill liable. (par.2, Sec. 143)
2. Time/Place/Manner of Presentment
How must PA be made?
A:
By or on behalf of the holder
At a reasonable hour on a business day

 Before the bill is overdue; and

To the drawee or some person authorized to accept or refuse to accept on his
behalf. When:
Addressed to 2 or more drawees not partners To all (except when one was
given authority)
Drawee is dead To his personal representative
Note: Where drawee is dead, PA is not required.
Drawee is bankrupt or insolvent or has made an assignment for the benefit of
creditors To him or to his trustee or assignee. (Sec. 145)

3. Effect of Failure to Make Presentment

What is the effect of failure to make presentment?
Failure to make such presentment will discharge the drawer from liability or to the
extent of the loss caused by the delay (Republic of
the Philippines vs. PNB, G.R. No. L 16106, December 30, 1961).
When may delay in making PA be excused?
A:
Bill drawn payable elsewhere than at the place of business or the residence of
the drawee; and
Holder has no time, with the exercise of reasonable diligence, to present the bill
for acceptance before presenting it for payment on the day that it falls due.

(Sec. 147)
When is presentment excused?
A:
Drawee is dead, or has absconded, or is a fictitious person not having capacity to
contract by bill
After exercise of reasonable diligence, presentment cannot be made; or
Although presentment has been irregular, acceptance has been refused on some
other ground. (Sec. 148)

4. Dishonor by Non-Acceptance
When is a bill dishonored by nonacceptance?
A:
5. When it is duly presented for acceptance and such an acceptance is refused or
cannot be obtained; or
6. When presentment for acceptance is excused, and the bill is not accepted.
(Sec. 149)
What is the duty of the holder where bill is not accepted?
A: The person presenting it must treat the bill as dishonored by nonacceptance or he
loses the right of recourse against the drawer and indorsers. (Sec. 150)

Q: What are the rules when a bill is dishonored by nonacceptance?

A:
Right of recourse against all secondary party accrues to the holder
No presentment for payment is necessary since dishonor of the instrument by
nonpayment is to be expected
If the instrument is accepted after it has been dishonored by nonacceptance
presentment for payment is necessary upon maturity; and
In case of nonpayment, holder must give the corresponding notice of dishonor;
otherwise, secondary parties are discharged.

R. Promissory Notes
What is a promissory note?
A: An unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand, or at a fixed or determinable future time, a sum
certain in money to order or to bearer. (Sec. 184 NIL)
What are the special types of promissory notes?
A:
Certificate of deposit a written acknowledgment by a bank of the receipt of money
on deposit on which the bank promises to pay to the depositor or to him or his
order or to some other person or to him or his order, or to a specified person or
bearer, on demand or on a fixed date, often with interest.

Bonds A promise, under seal, to pay money.

Registered bond one payable only to the person whose name appears on the
face of the certificate.
Coupon bond one to which are attached coupons which entitle the holder to
interest when due.
Bank Note PN of issuing bank payable to bearer on demand and intended to
circulate as money.
Due Bill An instrument where one person acknowledges his indebtedness to
another
Mortgage Note an instrument secured by either a real or personal property.
Titleretaining Note an instrument used to secure the purchase price of goods
Collateral Note it is used when the maker pledges securities to the payee to
secure the payment of the amount of the note
Judgment Note this is a note to which
power of attorney is added enabling the payee to take judgment against the
maker without the formality of a trial if the note is not paid on its due date.

S.Checks
1. Definition
What is a check?

A: It is a bill of exchange drawn on a bank and payable on demand (Sec.

185). It must be presented for payment within a reasonable time after its issue
or the drawer shall be discharged from liability thereon to the extent of the loss
caused by the delay. (Sec. 186)
2. Kinds
What are the different kinds of checks?
A:
Cashiers or managers check Drawn by the banks cashier or manager, as the
case may be, upon the bank itself and deemed accepted by the act of issuance.
Travelers check Upon which the holders signature must appear twice, one to be
affixed by him at the time it is issued and the second counter signature, to be
affixed by him in the presence of the payee before it is paid, otherwise, it is
incomplete.
Certified check Bears upon its face an agreement by the drawee bank that the
check will be paid on presentation.
Memorandum check Memo is written across its face, signifying that drawer will
pay holder absolutely without need of presentment.
What is a crossed check? What are the effects of crossing a check? Explain.
A crossed check is a check with two (2) parallel lines, written diagonally on the upper
right corner thereof. It is a warning to the drawee bank that payment must be made to
the right party; otherwise the bank has no authority to use the drawer's funds deposited
with the bank. To be assured that it will avoid any mistake in paying to the wrong party,
banks adopted the policy that crossed checks must be deposited in the payee's
account. When withdrawal is made, the banks can be sure that they are paying to the

right party. The crossing becomes a warning also to whoever deals with the said
instrument to inquire as to the purpose of its issuance. Otherwise, if something wrong
happens to the payment thereof, that person cannot claim to be a holder in due course.
Hence, he is subject to the personal defense on the part of the drawer that there is
breach of trust committed by the payee in not complying with the drawer's instruction.
(2005 Bar Question)
What is a stale check?
A check which has not been presented for payment within a reasonable time after its
issue. It is valueless and thus, should not be paid. A check becomes stale 6 months
from date of issue.
What is the effect of a stale check?
The drawer and all indorsers are discharged from liability thereon. (Sec. 188)
What is a memorandum check?
A memorandum check is an evidence of debt against the drawer and

although may not be intended to be presented, has the same effect as an

ordinary check and if passed on to a third person, will be valid in his hands like
any other check. (People v. Nitafan, G.R. No. 75954, Oct. 22, 1992
3. Presentment for Payment
a.Time
: Within what time must a check be presented?
A: Within a reasonable time after its issue or the drawer will be discharged from liability
thereon to the extent of the loss caused by the delay (Sec. 186).

a. Effect of Delay
: What is the effect of delay to make presentment for payment?
A: The indorser shall be discharged from liability.
T.
(PNB vs. Seeto, G.R. No. L4388, August 13, 1952)
Note: See also Sec. 186 and above.
A check was dishonored due to material alteration. Creditor filed an action
against drawee bank for the amount. Is the creditor entitled?
A: No. If a bank refuses to pay a check (notwithstanding the sufficiency of funds), the
payeeholder cannot, as provided under Sections 185 and 189 of the NIL, sue the
bank. The payee should instead sue the drawer who might in turn sue the bank. This is
so because no privity of contract exists between the draweebank and the payee
(Villanueva v. Nite, G.R. No. 148211, July 25, 2006).
Q: When will the delivery of a check produce the effect of payment even if the
same had not been encashed?
A: If the debtor was prejudiced by the creditor's unreasonable delay in presentment.
Acceptance of a check implies an undertaking of due diligence in presenting it for
payment. If no such presentment was made, the drawer cannot be held liable
irrespective of loss or injury sustained by the payee. Payment will be deemed effected
and the obligation for which the check was given as conditional payment will be
discharged. (Pio Barretto Realty Corp. v. CA, G.R. No. 132362, June 28, 2001).
IV. INSURANCE CODE
A. CONCEPT OF INSURANCE

Insurance is a type of contract. It is an agreement whereby one undertakes for a

consideration to indemnify another against loss, damage or liability arising from
an unknown or contingent event. (Sec. 2[a], Insurance Code)
In general, an insurance contract is a promise by one person to pay another,
money or any other thing of value upon the happening of a fortuitous event
beyond the effective control of either party in which the promise has an interest
apart from the contract (Edwin W Patterson, Essentials of Insurance Law, p. 10,
1957 Ed., published by McGraw-Hill Book Co., Inc.) In insurance, the insurer for
a stipulated consideration, undertakes to compensate the insured for a future
loss, damage or liability on a specified subject caused by a specified event or
peril. (Sec. 3[g], Insurance Code) A written insurance contract is called a policy.
(Sec. 49, Insurance Code)
B. ELEMENTS OF AN INSURANCE CONTRACT
1. Existence of Insurable Interest The insured possesses an interest of some
kind susceptible of pecuniary estimation, known as insurable interest.
2. Risk of loss The insured is subject to a risk of loss through the destruction or
impairment of that interest by the happening of designated perils.
3. Assumption of Risk The insurer assumes that risk of loss for a
consideration.
4. Scheme to distribute losses Such assumption of risk is part of a general
scheme to distribute actual losses among a large group or substantial number
of persons bearing a similar risk.
Note: Because of this element, an insurance contract is therefore a riskdistributing device.
5. Payment of premium As consideration for the insurers promise, the insured
makes a ratable contribution called premium, to a general insurance fund.
Note: All the elements must be present, otherwise there can be no contract of
insurance, and even if the contract contains all the elements, it is not an
insurance contract within the context of the Insurance Code if the primary
purpose of the parties is the rendering of service and not the indemnification of a
party for loss, damage, or liability incurred by the latter.
C. CHARACTERISTICS AND NATURE OF INSURANCE CONTRACTS

1. Consensual A contract of insurance is perfected by the meeting of the minds

of the parties. Acceptance of the offer therefore perfects the contract.
Note: Insurance contracts through correspondence follow the cognition
theory wherein an acceptance made by the latter shall not bind the person
making the offer except from the time it came to his knowledge (Enriquez v.
Sun Life Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).
2. Voluntary The parties may incorporate such terms and conditions as they
may deem convenient provided they do not contravene any provision of the
law and are not opposed to public policy, law, morals, good customs and
public order.
General Rule: The taking out of an insurance contract is not compulsory.
Exception: Liability insurance may be required by law in certain instances
such as for motor vehicles (Secs. 373-389, Insurance Code), or employees
(Arts. 168-184, Labor Code), or as a condition to granting a license to conduct
a business or calling affecting the public safety or welfare.
3. Aleatory Liability of the insurer depends upon some contingent event.
Note: An aleatory contract is a contract where one or both of the parties
reciprocally bind themselves to give or do something in consideration of what
the other shall give or do upon the happening of an event which is uncertain,
or which is to occur at an indeterminate time (Art. 2010. Civil Code).
4. Unilateral It imposes legal duties only on insurer who promises to indemnify
in case of loss.
5. Conditional It is subject to conditions the principal one of which is the
happening of the event insured against. In addition to this main condition, the
contract usually includes many other conditions (such as payment of premium
or performance of some other act) which must be complied with as precedent
to the right of the insured to claim benefit under it.
6. Contract of indemnity
General Rule: The insurer promises to make good only the loss of the
insured.
Exception: A life insurance is not a contract of indemnity. It is not applicable
to life insurance policies because life is not capable of pecuniary estimation.
The only situation where the principle of indemnity is applicable to life
insurance is if the amount in the policy is fixed. An example would be in a

case where a creditor insures the life of his debtor to the extent of the latters
debt to the former.
7. Personal Between the insurer and the insured each party having in view the
character, credit and conduct of the other.
8. Property Since insurance is a contract, it is property in legal contemplation.
But unlike property policies, life insurance policies are generally assignable or
transferrable like any chose action. They are in the nature of property and do
not represent a personal agreement between the insurer and insured.
9. Risk-distributing device Insurance serves to distribute the risk of economic
loss among as many as possible of those who are subject to the same kind of
loss.
10. Onerous There is a valuable consideration called premium.
D. CLASSES
1. MARINE
a.) Marine insurance, defined.
Marine Insurance is an insurance against risks connected with navigation, to
which a ship, cargo, freightage, profits or other insurable interest in movable
property, may be exposed during a certain voyage or fixed period of time.
b.) Vessels contemplated in marine insurance.
Those used, or at least, intended for navigation. Example, one for shipping,
chartering, voyage and the like. Vessels which are used for museums or those
that are stationary are not entitled to be insured under a marine insurance.

c.) What marine insurance includes.

Marine insurance includes:
1. Insurance against loss or damage to:
a. Vessels, craft, aircraft, vehicles,

goods,

freight,

cargoes,

merchandise, effects, disbursements, profits, moneys, securities,

choses in action, instruments of debt, valuable papers, bottomry, and
respondentia interests and all other kinds of property and interests
therein, in respect to, appertaining to or in connection with any and
all risks or perils of navigation transit or transportation; or while being

assembled, packed, crated, baled, compressed or similarly prepared

for shipment or while waiting shipment, or during any delays,
storage, transshipment, or reshipment incident thereto, including war
risks, marine builders risks, and all personal property floater risks.
b. Person or property in connection with or appertaining to a marine,
inland marine, transit or transportation insurance, including liability
for loss of or damage arising out of or in connection with the
construction, repair, operation, maintenance or use of the subject
matter of such insurance (but not including life insurance or surety
bonds nor insurance against loss by reason of bodily injury to any
person arising out of the ownership, maintenance, or use of
automobiles);
c. Precious stones, jewels, jewelry, and precious metals whether in the
course of transportation or otherwise; and
d. Bridges, tunnels and other instrumentalities of transportation and
communication (excluding buildings, their furniture and furnishings,
fixed contents and supplies held in storage); piers, wharves, docks
and slips, and other aids to navigation and transportation, including
dry docks and marine railways, dams and appurtenant facilities for
the control of waterways.
2. Marine protection and indemnity insurance, which means insurance
against, or against legal liability of the insured for, loss, damage, or
expense incident to ownership, operation, chartering, maintenance,
use, repair, or construction of any vessel, craft or instrumentality in use
in ocean or inland waterways, including liability of the insured for
personal injury, illness or death or for loss of or damage to the property
of another person. (Sec. 101, Insurance Code)
Measure of indemnity:
a. Valued policy the parties are bound by the valuation, if the insured
had some interest at risk and there is no fraud on his part. (Sec. 158,
Insurance Code)
b. Open policy the following rules shall apply in estimating a loss:
i. The value of the ship is its value at the beginning of the risk,
including all articles or charges which add to its permanent

value or which are necessary to prepare it for the voyage

insured;
ii. The value of the cargo is its actual cost to the insured, when
laden on board, or where that cost cannot be ascertained, its
market value at the time and place of lading, adding the
charges incurred in purchasing and placing it on board, but
without reference to any loss incurred in raising money for its
purchase, or to any drawback on its exportation, or to the
fluctuation of the market at the port of destination, or to
expenses incurred on the way or on arrival;
iii. The value of freightage is the gross freightage, exclusive of
primage, without reference to the cost of earning it; and
iv. The cost of insurance is in each case to be added to the value
thus estimated. (Sec. 163, Insurance Code)
d.) Two major divisions of marine insurance.
1. Ocean marine insurance covers primarily sea perils.
Scope:
a. Ships or hulls
b. Goods or cargoes
c. Earnings such as freight, passage, money, commissions, or profits
d. Liability incurred by the owner or any party interested in or
responsible for the insured property by reason of maritime perils
2. Inland marine insurance covers primarily the land or over the land
transportation perils of property shipped by railroads, motor trucks,
airplanes, and other means of transportation. It also covers risks of lake,
river, or other inland waterway transportation and other waterborne perils
outside of those risks that fall definitely within the ocean marine
category.
Classes (scope):
a. Property in transit provides protection for property frequently
exposed to loss while it is in transportation from one location to
another.

b. Bailee liability provides protection to persons who have temporary

custody of the goods or personal property of others, such as carriers,
laundrymen, warehousemen, and garage keepers.
c. Fixed transportation property covers bridges, tunnels, and other
instrumentalities of transportation and communication, although as a
matter of fact they are fixed property. They are so insured because
they are held to be an essential part of the transportation system.
d. Floater provides insurance to follow the insured property wherever
it may be located, subject always to the territorial limits of the
contract. Floater policies may be issued for such items as jewelry,
furs, works of art, contractors equipment, theoretical property,
salesmen samples, and others.
e.) Perils of the sea or perils of navigation, defined.
It includes only those casualties due to the unusual violence or extraordinary
action of wind and wave, or to other extraordinary causes connected with
navigation.
f.) Perils of the ship, defined.
It is a loss which, in the ordinary course of events, results from:
1.
2.
3.

The natural and inevitable action of the sea

The ordinary wear and tear of the ship
The negligent failure of the ships owner to provide the vessel with

proper equipment to convey the cargo under ordinary conditions.

g.) Does an insurer undertake to insure against perils of the ship?
General Rule: No.
Exception: In the absence of any stipulation to the contrary, the insurer does
not undertake to insure against perils of the ship. The purpose of an ocean
marine policy is to secure an indemnity against accidents which may happen
not against event which must happen.
h.) All risks marine insurance policy.
General Rule: It is that policy which insures against all causes of
conceivable loss or damage.
Exception:

1. As otherwise excluded in the policy; or

2. Due to fraud or intentional misconduct on the part of the insured. (Choa
Tiek v. CA, G.R. No. 84507, Mar. 15, 1990) This type of policy grants
greater protection than that afforded by the perils clause.
i.) Burden of proof in an all risks marine insurance policy.
The insured under an "all risks insurance policy" has the initial burden of
proving that the cargo was in good condition when the policy attached and
that the cargo was damaged when unloaded from the vessel; thereafter, the
burden then shifts to the insurer to show the exception to the coverage.
j.) Extent of the insurable interest in marine insurance.
As to the:
1. Shipowner
a. Over the vessel to the extent of its value, except that if chartered, the
insurance is only up to the amount not recoverable from the
charterer. (Sec. 102)
b. If hypothecated by a bottomry loan, the insurable interest is only up to
the excess of the values of the vessel over the amount of the
bottomry loan. (Sec. 103)
c. He also has an insurable interest on expected freightage. (Sec. 105)
2. Cargo owner over the value of the cargo and expected profits. (Sec.
107)
3. Charterer over the amount he is liable to the ship owner, if the ship is
lost or damaged during the voyage. (Sec. 108)
4. Creditor/lender amount of the loan
k.) Concealment in marine insurance, defined.
It is the failure to disclose any material fact or circumstance which in fact or
law is within, or which ought to be within the knowledge of one party and of
which the other has no actual or presumptive knowledge.
l.) Is information of the belief or expectation of a third person, in reference to a
material fact, material?
Yes. Thus, there is concealment where the insured at the time of application
for insurance did not disclose the opinion of marine experts who inspected the
vessel insured that it was unseaworthy. (Sec. 110)

m.) When insured presumed to have knowledge of a prior loss in marine

insurance.
The insured is presumed to have knowledge, at the time of insuring, of a prior
loss, if the information might possibly have reached him in the usual mode of
transmission and at the usual rate of communication. (Sec. 111)
n.) Matters, when concealed, do not vitiate the entire insurance contract, but
merely exonerates the insurer from a loss resulting from the risk concealed.
1.
2.
3.
4.
5.

National character of the insured

The liability of the thing insured to capture and detention
The liability to seizure from breach of foreign laws of trade
The want of necessary documents
The use of false and simulated papers. (Sec. 112)

o.) Effect of false representation by the insured.

1. Intentional Any misrepresentation of a material fact made with fraudulent
intent avoids the policy.
2. Not intentional If the misrepresentation is not intentional or fraudulent but
the fact misrepresented is material to the risk, the insurer may rescind the
contract from the time representation becomes false.
p.) Effect of falsity as to expectation.
Representations of expectation or intention, unless made with fraudulent
intent, their failure of fulfillment is not ground for rescission. (Sec. 114)
q.) Warranty in marine insurance, defined.
It is a stipulation, either express or implied, forming part of the policy as to
some fact, condition or circumstance relating to the risk. (Hearn v. Equitable
Safety Ins. Co., 30 Wall. 494, 22 L. Ed. 398.)
r.) Implied warranties in marine insurance.
1.
2.
3.
4.

Seaworthiness. (Sec. 115)

Nondeviation from the agreed voyage. (Secs. 123, 124, 125)
Nonengagement from illegal venture.
Warranty of neutrality the ship will carry neutrality of the ship or cargo

where such nationality or neutrality is expressly warranted. (Sec. 122)

5. Presence of insurable interest
s.) Seaworthiness, defined.
It is a relative term depending upon the nature of the ship, voyage, service
and goods denoting in general, a ships fitness to perform the service and to

encounter the ordinary perils of the voyage, contemplated by the parties to the
policy. (Sec. 116)
t.) When warranty of seaworthiness complied with.
General Rule: The warranty of seaworthiness is complied with if the ship be
seaworthy at the time of the commencement of the risk. (Sec. 117) There is
no implied warranty that the vessel will remain in seaworthy condition
throughout the life of the policy.
Exception:
1. In the case of time policy the ship must be seaworthy at the
commencement of every voyage she may undertake. (Sec. 117 [a])
2. In the case of cargo policy each vessel upon which cargo is shipped or
transshipped must be seaworthy at the commencement of each particular
voyage. (Sec. 117 [b])
3. In the case of voyage policy contemplating a voyage in different stages
the ship must be seaworthy at the commencement of each portion. (Sec.
117)
u.) Scope of the seaworthiness of a vessel.
A warranty of seaworthiness extends not only to the condition of the structure
of the ship itself, but requires that it be properly laden, and provided with a
competent master, a sufficient number of competent officers and seamen, and
the requisite appurtenances and equipment, such as ballasts, cables and
anchors, cordage and sails, food, water, fuel and lights, and other necessary
or proper stores and implements for the voyage. (Sec. 118)
v.) Deviation in marine insurance policy, defined.
Deviation is a departure of the vessel from the course of the voyage, or an
unreasonable delay in pursuing the voyage, or the commencement of an
entirely new voyage. (Sec. 125)
w.) Four cases of deviation in marine insurance.
1. Departure from the course of sailing fixed by mercantile usage between
the places of beginning and ending specified in the policy. (Sec. 123)

2. Departure from the most natural, direct, and advantageous route between
the places specified if the course of sailing is not fixed by mercantile
usage. (Sec. 124)
3. Unreasonable delay in pursuing the voyage. (Sec. 125)
4. The commencement of an entirely different voyage.
x.) Two kinds of deviation.
a. Proper This will not vitiate a policy of marine insurance because
deviation is considered justified or caused by actual necessity which is
equal in importance to such deviation. (Sec. 126)
b. Improper The insurer becomes immediately absolved from further liability
under the policy for losses occurring subsequent to the deviation because
deviation is considered to be without just cause. Every deviation not
specified in Sec.126 is improper. (Sec. 127)
y.) Two kinds of total loss.
1.

Actual total loss - exists when the subject matter of the insurance is

wholly destroyed or lost or when it is so damaged as no longer to exist in its

original character.
2. Constructive total loss - one which the loss, although not actually total, is
of such a character that the insured is entitled, if he thinks fit, to treat it as total
by abandonment. It is also called, a technical loss.
z.) What actual total loss, constitutes.
1.
2.
3.

A total destruction of the thing insured

The irretrievable loss of the thing by sinking, or by being broken up
Any damage to the thing which renders it valueless to the owner for the

purpose for which he held it; or

4. Any other event which effectively deprives the owner of the possession,
at the port of destination, of the thing insured. (Sec. 132)
aa.) Constructive total loss, defined.
1.
2.

Actual loss of more than of the value of the object

Damage reducing value by more than of the value of the vessel and of

cargo; and
3. Expense of transshipment exceeds of the value of the cargo.
bb.) Rights of the insured in case of general average.

General Rule: The insurer is liable for any general average loss where it is
payable or has been paid by the insured in consequence of a peril insured
against.
The insured may either hold the insurer directly liable for the whole of the
insured value of the property sacrificed for the general benefit, subrogating
him to his own right of contribution or demand contribution from the other
interested parties as soon as the vessel arrives at her destination.
Exception: There can be no recovery for general average loss against the
insurer:
1.

After the separation of the interests liable to contribution, that is to say,

after the cargo liable for contribution has been removed from the vessel; or
2. When the insured has neglected or waived his right to contribution.
Note: General average is a principle of law whereby, when it is decided by the
master of a vessel, acting for all the interest concerned to sacrifice a part of a
venture exposed to a common and imminent peril in order to save the rest,
the interests so saved are compelled to contribute ratably or proportionately to
the owner of the interest sacrificed, so that the cost of the sacrifice shall fall
equally upon all. (Hector S. De Leon, The Law on Insurance, 2003)
cc.) Free from Particular Average Clause (FPA Clause), defined.
A clause agreed upon in a policy of marine insurance in which it is stated that
the insurer shall not be liable for a particular average.
The insurer is liable only for general average and not for particular average
unless such particular average loss as the effect of depriving the insured of
the possession at the port of destination of the whole of the thing insured.
(Sec. 138)
dd.) Limit as to liability of insurer.
The liability of the insurer for any general average loss is limited to the
proportion of contribution attaching to his policy value where this is less than
the contributing value of the thing insured. (Sec. 164)
ee.) Abandonment in marine insurance, defined.
It is the act of the insured by which, after a constructive total loss he declared
the relinquishment to the insurer of his interest in the thing insured. (Sec. 140)

ff.) Requisites for the validity of abandonment.

1.

There must be an actual relinquishment by the person insured of his

interest in the thing insured. (Sec. 140)

2. There must be a constructive total loss. (Sec. 141)
3. The abandonment must neither be partial nor conditional. (Sec. 142)
4. It must be made within a reasonable time after receipt of reliable
information of the loss. (Sec. 143)
5. It must be factual. (Sec. 144)
6. It must be made by giving notice thereof to the insurer which may be
done orally or in writing. (Sec. 145); and
7. The notice of abandonment must be explicit and must specify the
particular cause of abandonment. (Sec. 146)
gg.) When the insured, by a contract of marine insurance, may abandon the
thing insured.
1.

If more than threefourths thereof in value is actually lost, or would have

to be expended to recover it from the peril

2. If it is injured to such an extent as to reduce its value more than three
fourths
3. If the thing insured is a ship, and the contemplated voyage cannot be
lawfully performed without incurring either an expense to the insured of more
than threefourths the value of the thing abandoned or a risk which a prudent
man would not take under the circumstances; or
4. If the thing insured is cargo or freightage, and the voyage cannot be
performed, nor another ship procured by the master, within a reasonable time
and with reasonable diligence to forward the cargo, without incurring the like
expense or risk mentioned in the preceding subparagraph. But freightage
cannot in any case be abandoned, unless the ship is also abandoned. (Sec.
141)
hh.) Effects of acceptance of abandonment.
1.

The insurer becomes at once liable for the whole amount of the

insurance and also becomes entitled to all rights which insured possessed in
the thing insured. (Sec. 148)

2.

It fixes the rights of the parties; whether express or implied, is conclusive

upon them (Sec. 153), and irrevocable. (Sec. 154)

3. It stops the insurer to rely on any insufficiency in the form, time, or right,
of abandonment. Whether the insured has a right to abandon is immaterial
where the abandonment is accepted and there is no fraud.
4. On accepted abandonment of a ship, the freightage earned subsequent
to the loss belongs to the insurer of the ship. But freightage earned previously
belongs to the insurer of said freightage who is subrogated to the rights of the
insured up to the time of the loss. (Sec. 155)
ii.) When coinsurance exist.
There is coinsurance if the value of the insureds interest exceeds the
amount of insurance; he is considered the coinsurer for an amount
determined by the difference between the insurance taken out and the value
of the property.
A marine insurer is liable upon a partial loss only for such proportion of the
amount insured by him as the loss bears to the value of the whole interest of
the insured in the property insured (Sec. 159).
jj.) Requisites for coinsurance.
There is coinsurance when the following requisites concur:
a.
b.

The amount of insurance is less than the insureds insurable interest;

The loss is partial.

kk.) Formula to determine the amount recoverable.

(Partial) Loss

X Amount of Insurance = Amount of recovery

Value of thing Insured

ll.) When loss of profits conclusively presumed.
When profits are valued and insured by a contract of marine insurance, a loss
of them is conclusively presumed from a loss of the property out of which they
were expected to arise, and the valuation fixes their amount. (Sec. 162)
2. FIRE
a.) Fire insurance, defined.
It is a contract of indemnity by which the insurer, for a consideration, agrees to
indemnify the insured against loss of or damage by fire, lightning, windstorm,

tornado or earthquake and other allied risks, when such risks are covered by
extension to fire insurance policies or under separate policies. (Sec. 169)
b.) Concept of fire.
Spontaneous combustion is usually a rapid oxidation. Fire is oxidation which
is so rapid as to produce either a flame or glow. Fire is always caused by
combustion, but combustion does not always cause fire. The word
spontaneous refers to the origin of the combustion.it means the internal;
development without the action of an external agent. Combustion or
spontaneous combustion may be so rapid as to produce fire, but until it does
so, combustion cannot be said to be fire. (Western Woolen Mills, Co. v.
Northern Assur. Co., 139 Fed. 637)
c.) Ocean marine and fire policies, dinguished.
OCEAN

FIRE INSURANCE

MARINE
A policy of

Where the hazard is fire

insurance

alone and the subject is

on a vessel

an

engaged in

never afloat for a voyage,

navigation

the contract to insure is a

is

unfinished

vessel,

fire risk, especially in the

contract of

absence of an express

marine

agreement that it shall

insurance

have

although it

marine policy, or where it

insures

insures

against fire

shipyard

risks only.

constructing vessels.

the

incidents

materials
for

in

use

of
a
in

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

1. The use or condition of the thing is specially limited or stipulated in the

2.
3.
4.
5.

policy;
Such use or condition as limited by the policy is altered;
The alteration is made without the consent of the insurer;
The alteration is made by means within the control of the insured; and
The alteration increases the risk.

e.) Measure of indemnity in open and valued policies in fire insurance.

a. Open Policies - The expense necessary to replace the thing lost or
injured in the condition it was at the time of the injury.
b. Valued Policies - The valuation stated in the policy, in the absence of
fraud.
f.) Coinsurance clause, defined.

It is that clause which requires the insured to maintain insurance to an amount

equal to the value or specified percentage of the value of the insured property
under penalty of becoming coinsurer to the extent of such deficiency. (Sec.
174)
Note: The insured is not a coinsurer under fire policies in the absence of
stipulation.
g.) Fall of building clause, defined.
It is that clause which provides, in a fire insurance policy, that if the building or
any part thereof falls, except as a result of fire, all insurance by the policy shall
immediately cease.
h.) Option to rebuild clause, defined.
The clause which gives the insurer the option to rebuild the destroyed property
instead of paying the indemnity. This clause serves to protect the insurer
against unfair appraisals friendly to the insured. (Sec. 174)
3. CASUALTY
a.) Casualty insurance, defined.
It is that which covers loss or liability arising from accident or mishap,
excluding those falling under types of insurance as fire or marine. (Sec. 176)
b.) Two divisions of casualty insurance.

a. Accident or health insurance Insurance against specified perils which may

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

4. Right of third party injured to sue the insurer of party at fault depends on
whether the contract of insurance is intended to benefit third persons also or
only the insured.
e.) When an injured person has the right to sue insurer of the party at fault.
a. Indemnity against third party liability injured third party can directly sue
the insurer.
b. Indemnity against actual loss or payment third party has no cause of
action against the insurer. The third persons recourse is limited to the
insured alone. The contract is solely for the insurer to reimburse the
insured for liability actually satisfied by him.
f.) Liability insurance, defined.
It has been said to be a contract of indemnity for the benefit of the insured and
those in privity with him, or those to whom the law upon the grounds of public
policy extends the indemnity against liability.
g.) Basis and extent of insurers liability.
1. Contract of insurance
2. Sum limited in the contract
h.) Differences between the liability of the insurer and that of the insured in
case of indemnity against third person liability.
INSURER
INSURED
a. The liability is direct but the a. Liability is direct and can be held liable
insurer cannot be held solidarily with all the parties at fault.
liable with the insured and other
parties at fault.
b. Liability is based on contract
b. Liability is based on tort.
c. The thirdparty liability is only c. The liability extends to the amount of
up to the extent of the insurance actual and other damages. (Heirs of
policy and that required by law

George Y. Poe v. Malayan Insurance

Company, Inc. G.R. No. 156302, Apr. 7,
2009)

i.) No action clause, defined.

It is a requirement in a policy of liability insurance which provides that suit and
final judgment be first obtained against the insured, that only thereafter can the

person injured recover on the policy. (Guingona v. Del Monte, G.R. No. L
21806, Aug. 17, 1967)
Note: A no action clause must yield to the provisions of the Rules of Court
regarding multiplicity of suits. (Shafter v. RTC, G.R. No. 78848, Nov. 14, 1988)
4. SURETYSHIP
a.) Suretyship, defined.
It is an agreement whereby the surety guarantees the performance by another
of an undertaking or an obligation in favor of a third party. (Sec. 177)
b.) Nature of liability of surety.
1. Solidary with the bond obligor
2. Limited to the amount in the bond (it cannot be extended by implication)
3. Determined strictly by the terms of the contract of suretyship in relation to
the principal contract between the obligor and the obligee
c.) Suretyship and property insurance, distinguished.
SURETYSHIP
PROPERTY INSURANCE
It is an accessory contract.
The principal contract itself.
There are three parties: the surety, There are only two parties:
obligor/debtor, and the obligee/creditor.
insurer and insured
More of a credit accommodation with the A contract of indemnity
surety assuming primary liability
Surety is entitled to reimbursement from No right of recovery for the loss
the principal and his guarantors for the the insurer may sustain except
loss it may suffer under the contract.

when the insurer is entitled to

subrogation.
A bond may be cancelled by or with the May be cancelled
consent

of

the

obligee

or

by

commissioner or by the court.

Requires

acceptance

of

the

unilaterally

the either by the insured or by the

insurer on grounds provided by

law.
obligee Does not need acceptance of any

before it becomes valid and enforceable. third party.

A riskshifting device, the premium paid A riskdistributing
being in the nature of a service fee.

device,

the

premium paid being considered a

ratable contribution to a common
fund.

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

1. The premium becomes a debt as soon as the contract of suretyship or
bond is perfected and delivered to the obligor;
2. The contract of suretyship or bonding shall not be valid and binding
unless and until the premium therefore has been paid;
3. Where the obligee has accepted the bond, it shall be valid and
enforceable notwithstanding that the premium has not been paid;
(Philippine Pryce Assurance Corp. v. CA, G.R. No. 107062, Feb. 21,
1994)
4. If the contract of suretyship or bond is not accepted by, or filed with the
obligee, the surety shall collect only a reasonable amount;
5. If the nonacceptance of the bond be due to the fault or negligence of the
surety, no service fee, stamps, or taxes imposed shall be collected by the
surety; and
6. In the case of continuing bond (for a term longer than one year or with no
fixed expiration date), the obligor shall pay the subsequent annual
premium as it falls due until the contract is cancelled. (Sec. 179)
e.) Types of surety bonds.
1. Contract bonds These are connected with construction and supply
contracts. They are for the protection of the owner against a possible default
by the contractor or his possible failure to pay materialmen, laborers and sub
contractors.
The position of surety, therefore, is to answer for a failure of the principal to
perform in accordance with the terms and specifications of the contract.
There may be two bonds:
a.Performance bond One covering the faithful performance of the
contract; and
b.Payment bond One covering the payment of laborers and material
men.
2. Fidelity bonds They pay an employer for loss growing out of a dishonest
act of his employee.
For the purposes of underwriting, they are classified as:

a.Industrial bond One required by private employers to cover loss

through dishonesty of employees; and
b.Public official bond One required of public officers for the faithful
performances of their duties and as a condition of entertaining upon the
duties of their offices.
3. Judicial bonds They are those which are required in connection with
judicial proceedings.
5. LIFE
a.) Life insurance, defined.
It is that which is payable upon the death of a person or on his surviving a
specified period, or otherwise contingently on the continuance of cessation of
life (Sec. 181). It is a mutual agreement by which a party agrees to pay a given
sum on the happening of a particular event contingent on the duration of
human life, in consideration of the payment of a smaller sum immediately, or in
periodical payments by the other party.
b.) Parties involved in the policy.
1. The owner of the policy;
2. The person whose life is the subject of the policy, also known as the cestui
que vie; and
3. The beneficiary to whom the proceeds are paid.
Note: One person might occupy all three positions by naming his estate as
beneficiary; or each of the three (3) positions may be held by a separate
property.
c.) Kinds of life insurance policies.
1. Ordinary life, general life or old line policy Insured pays a premium
every year until he dies. Surrender value after 3 years.
2. Limited payment Insured pays premium for a limited period. It is
payable only at the death of the insured.

3. Endowment Insured pays a premium for a specified period. If he

outlives the period, the face value of the policy is paid to him; if not, his
beneficiaries receive benefit.
4. Term insurance Insured pays once only, and he is insured for a
specified period. If he dies within the period, his beneficiaries benefit. If
he outlives the period, no person benefits from the insurance. Also known
as temporary insurance.
5. Industrial life Life insurance entitling the insured to pay premiums
weekly, or where premiums are payable monthly or oftener
6. Variable contract Any policy or contract on either a group or individual
basis issued by an insurance company providing for benefits or other
contractual payments or values thereunder to vary so as to reflect
investment results of any segregated portfolio of investment.
d.) Effect if the beneficiary will fully bring about the death of the insured.
General Rule: The interest of a beneficiary in a life insurance policy shall be
forfeited when the beneficiary is the principal, accomplice; accessory in willfully
bringing about the death of the insured, in which event, the nearest relative of
the insured shall receive the proceeds of said insurance, if not otherwise
disqualified.
Exception:
1. The beneficiary acted in selfdefense;
2. The insureds death was not intentionally caused (e.g., thru accident);
3. Insanity of the beneficiary at the time he killed the insured.
e.) When the insurer liable in case of suicide.
1. The suicide is committed after the policy has been in force for a period of 2
years from the date of its issue or of its last reinstatement;
2. The suicide is committed after a shorter period provided in the policy
although within the 2 year period; and
3. The suicide is committed in the state of insanity regardless of the date of
commission, unless suicide is an excepted risk. (Sec. 183)
Note: The policy cannot provide a period longer than 2 years. If the policy
provides for a longer period and the suicide is committed within said period but
after 2 years, the insurer is liable.

The insurer is not liable if it can show that the policy was obtained with the
intention to commit suicide even in the absence of any suicide exclusion in the
policy.
f.) Measure of indemnity under a policy of insurance upon life or health.
Unless the interest of a person insured is susceptible of exact pecuniary
measurement, the measure of indemnity under a policy of insurance upon life
or health is the sum fixed in the policy. (Sec. 186)
6. COMPULSORY MOTOR VEHICLE LIABILITY INSURANCE
a.) Motor vehicle liability insurance, defined.
It is a protection coverage that will answer for legal liability for losses and
damages for bodily injuries or property damage that may be sustained by
another arising from the use and operation of a motor vehicle by its owner.
b.) Purpose of motor vehicle liability insurance.
The purpose of motor vehicle liability insurance is to give immediate financial
assistance to victims of motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial capability of motor vehicle
owners of operators responsible for the accident sustained. (First Integrated
Bonding Insurance Co., Inc. v. Hernando, G.R. No. L51221, July 31, 1991)
c.) Passenger, defined.
Any fare paying person being transported and conveyed in and by a motor
vehicle for transportation of passengers for compensation, including persons
expressly authorized by law or by the vehicles operator or his agents to ride
without fare. (Sec. 386, [b])
d.) Thirdparty, defined.
Any person other than a passenger as defined in this section and shall also
exclude a member of the household, or a member of the family within the
second degree of consanguinity or affinity, of a motor vehicle owner or land
transportation operator, as likewise defined herein, or his employee in respect
of death, bodily injury, or damage to property arising out of and in the course of
employment. (Sec. 386, [c])
e.) Motor vehicle owner, defined.

It means the actual legal owner of a motor vehicle, whose name such vehicle
is duly registered with the Land Transportation Office. (Sec. 386, [d])
f.) Land transportation operator, defined.
It means the owner or owners of motor vehicles for transportation of a
passenger for compensation, including school buses. (Sec. 386, [e])
g.) No fault indemnity clause, defined.
The no fault indemnity clause is a clause where the insurer is required to pay a
third party injured or killed in an accident without the necessity of proving fault
or negligence on the part of the insured. There is a stipulated maximum
amount to be recovered.
h.) Rules under the no fault clause.
1. The total indemnity in respect of any one person shall not exceed P15,000
for all motor vehicles (Insurance Memorandum Circular No. 42006)
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient to establish proper payee
c. Medical report and evidence of medical or hospital disbursement.
3. Claim may be made against one motor vehicle only
4. In case of an occupant of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding, mounting or dismounting from
5. In any other case, claim shall lie against the insurer of the directly offending
vehicle
6. In all cases, the right of the party paying the claim to recover against the
owner of the vehicle responsible for the accident shall be maintained
i.) Authorized driver clause, defined.
The authorized driver clause indemnifies the insured owner against loss or
damage to the car but limits the use of the insured vehicle to:
a. The insured himself; or
b. Any person who drives on his order or with his permission. (Villacorta v.
Insurance Commissioner, G.R. No. 54171, Oct. 28, 1980)
j.) Main purpose of an authorized driver clause.
The main purpose is to require a person other than the insured, who drives the
car on the insureds order, such as, his regular driver, or with his permission,
such as a friend or member of the family or the employees of a car service or
repair shop to be duly licensed drivers and have no disqualification to drive a

motor vehicle. (Villacorta v. Insurance Commission, G.R. No. L54171, Oct. 28,
1980)
k.) Theft clause, defined.
It is that clause which includes theft as among the risks insured against. Where
a car is unlawfully and wrongfully taken without the knowledge and consent of
the owner, such taking constitutes theft and it is the theft clause, not the
authorized driver clause which should apply. (Palermo v. Pyramid Inc., G.R.
No. L36480, May 31, 1988)
l.) Cooperation clause, defined.
It is that clause which provides that the insured shall give all such information
and assistance as the insurer may require, usually including attendance at
trials or hearings.
m.) Persons subject to the compulsory motor vehicle liability insurance
requirement.
1. Motor vehicle owner (MVO) or one who is the actual legal owner of a motor
vehicle in whose name such vehicle is registered with the LTO; or
2. Land transportation operator (LTO) or one who is the owner of a motor
vehicle or vehicles being used for conveying passengers for compensation
including school buses.
n.) Substitutes for a compulsory motor vehicle liability insurance policy.
MVOs or LTOs, instead of a CMLVI policy, may either:
1. Post a surety bond with the Insurance Commissioner who shall be made the
obligee or creditor in the bond in such amount or amounts required as limits of
indemnity to answer for the same losses sought to be covered by a CMLVI
policy; or
2. Make a cash deposit with the Insurance Commission in such amount or
amounts required as limits of indemnity for the same purpose.
E. INSURABLE INTEREST
1. In life/Health
a.) Two general classes of life policies.

a. Insurance upon ones life are those taken out by the insured upon his
own life (Section 10[a]) for the benefit of himself, or of his estate, in case
it matures only at his death, for the benefit of third person who may be
designated as beneficiary.
The question of insurable interest is immaterial where the policy is procured
by the person whose life is insured. A person who insures his own life can
designate any person as his beneficiary, whether or not the beneficiary has
an insurable interest in the life of the insured subject to the limits under
Article 739 and 2012 of the NCC.
Note: An application for insurance on ones own life does not usually
present an insurable interest question.
b. Insurance upon life of another are those taken out by the insured upon
the life of another. (Sec. 10 [a], [b], [c] and [d])
Where a person names himself beneficiary in a policy he takes on the life of
another, he must have insurable interest in the life of the latter.
b.) For whose life and health does a person have an insurable interest?
a. Of himself, of his spouse and of his children.
b. Of any person on whom he depends wholly or in part for education or
support, or in whom he has a pecuniary interest;
Note: Mere blood relationship or mere relationship by affinity does not
constitute an insurable interest; there must be a risk of monetary loss
from the insureds death.
c. Of any person under a legal obligation to him for the payment of money,
or respecting property or services, of which death or illness might delay
or prevent performance;
d. Of any person upon whose life any estate or interest vested in him
depends. (Sec. 10)
c.) Persons under Sec. 10, (c) who have an insurable interest on the life and
health of a person.
A creditor may name himself as beneficiary in a policy he takes on the life of
his debtor. The death of the debtor may either prevent payment if his estate is
not sufficient to pay his debts or delay such payment if an administrator has to

be appointed to settle his estate. Except Section 10, (a) of the Insurance Code,
an insurance contract partakes the nature of a contract of indemnity.
d.) Extent of the creditors recovery upon the death of the debtor.
General Rule: Limited to the amount of his interest (the amount owing to him).
Exception: If the debtor is the insured and the creditor is named beneficiary,
the creditor will be entitled to the whole proceeds of the policy upon the
debtors death, though his credit may be much less.
Note: The debtor was the one who applied for the insurance, to insure his own
life.
Exception to Exception:
1. If debtor applied for insurance and designated creditor in compliance with
creditors requirement that debtor will take insurance to insure creditors
interest.
2. A person may take a policy on the life of his business partner because the
latters death may result in an interruption of business operations which can be
in turn cause financial loss.
3. A business firm can take out a policy on the life of its officers or employees
whose services proved valuable to the business. The proceeds are not taxable
income but constitute indemnity to the employer for the loss which the
business suffers because of the death of a valued officer or employee.
e.) When insurable interest must exist.
1. Life or health insurance
General Rule: Insurable interest in life or health must exist when the
insurance takes effect, bur need not exist thereafter or when the loss
occurs. (Sec. 19)
Exception:
a. When the insurance is taken by the creditor on the life of the debtor, the
creditor is required to have an insurable interest not only at the time of the
contract but also at the time of the debtors death because in this case, it
is considered as a contract of indemnity.
b. When the insurance is taken by the employer on the life of the
employee.

2. Property Insurance When the insurance takes effect and when the loss
occurs, but need not exist in the meantime. (Sec. 19)
2. In Property
a.) What an insurable interest in property constitutes.
1. An existing interest The existing interest in the property may be legal or
equitable title.
Examples of insurable interest arising from legal title:
a. Trustee, as in the case of the seller of property not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased
Examples of insurable interest arising from equitable title:
a. Purchaser of property before delivery or before he has performed the
conditions of the sale
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the expiration of the period
within which redemption is allowed
2. An inchoate interest founded on an existing interest
Example: A stockholder has an inchoate interest in the property of the
corporation of which he is a stockholder, which is founded on an existing
interest arising from his ownership of shares in the corporation
3. An expectancy coupled with an existing interest in that out of which the
expectancy arises.
Note: Expectancy to be insurable must be coupled with an existing interest
or founded on an actual right to the thing or upon any valid contract for it.
(Sec. 16)
b.) Measure of insurable interest in property.
The extent to which the insured might be damnified by loss or injury thereof.
(Sec. 17). Insurable interest in property does not necessarily imply a property
interest in, or lien upon, or possession of, the subject matter of the insurance,
and neither title nor a beneficial interest is requisite to the existence thereof. It
is sufficient that the insured is so situated with reference to the property that
would be liable to loss should it be injured or destroyed by the peril against
which it is insured. Anyone has an insurable interest in property who derives a

benefit from its existence or would suffer loss from its destruction. (Gaisano
Cagayan, Inc. v. Insurance Company of North America, G.R. No. 147839,
June 8, 2006)
c.) Extent of insurable interest of a common carrier or depository in a thing
held by him.
To the extent of his liability but not to exceed the value thereof (Sec. 15). This
is so because the loss of the thing by the carrier or depository may cause
liability against him to the extent of its value.
d.) Time when insurable interest in property must exist
An interest in property insured must exist when the insurance takes effect,
and when the loss occurs, but need not exist in the meantime. (Sec. 19)
3. Double insurance and Over insurance
a.) Double insurance and over insurance, distinguished.
DOUBLE INSURANCE
OVER INSURANCE
There may be no over insurance as When the amount of the insurance
when the sum total of the amounts of is beyond the value of the insureds
the policies issued does not exceed the insurable interest.
insurable interest of the insured.
Two or more insurers.

There may be only one insurer, with

whom the insured takes insurance
beyond the value of his insurable

interest.
Not prohibited by law, unless there is a Prohibited by law because it is a
stipulation to the contrary.

wagering contract and no longer a

contract of indemnity.

b.) When double insurance exists.

Double insurance exists where the same person is insured by several insurers
separately, in respect to the same subject and interest. (Sec. 95)
c.) Requisites of double insurance.
1. Person insured is the same;
2. Two (2) or more insurers insuring separately;
3. Subject matter is the same;

4. Interest insured is the same; and

5. Risk or peril insured against is the same
d.) Purpose of the rule on double insurance.
The purpose of the rule on double insurance is to prevent overinsurance and
thus avert the perpetration of fraud. The public, as well as the insurer, is
interested in preventing the situation in which a loss would be profitable to the
insured (Pioneer Insurance and Surety Corp v. Yap, G.R. No. L36232, Dec.
19, 1974)
e.) Is double insurance prohibited by law?
No. A person may therefore procure two or more insurances to cover his
property. What is prohibited by law is over insurance.
f.) Rules where the insured is overinsured by double insurance.
1. The insured, unless the policy otherwise provides, may claim payment
from the insurers in such order as he may select, up to the amount
which the insurers are severally liable under their respective contracts.
2. Where the policy under which the insured claims is a valued policy, the
insured must give credit as against the valuation for any sum received
by him under any other policy without regard to the actual value of the
subject matter insured.
3. Where the policy under which the insured claims is an unvalued policy
he must give credit, as against the full insurable value, for any sum
received by him under any policy.
4. Where the insured receives any sum in excess of the valuation in the
case of valued policies, or of the insurable value in the case of unvalued
policies, he must hold such sum in trust for the insurers, according to
their right of contribution among themselves.
5. Each insurer and the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under his contract. (Sec.
96)
4. Multiple or Several Interests on Same Property
a.) Instances where more than one insurable interest may exist on the
same property.

a. In trust, both trustor and trustee have insurable interest over the
property in trust.
b. In a corporation, both the corporation and its stockholders have
insurable interest over the assets.
c. In partnership both the firm and partners has insurable interest over
its assets.
d. In assignment both the assignor and assignee has insurable interest
over the property assigned.
e. In lease, the lessor, lessee and sublessees have insurable interest
over the property in lease.
f. In mortgage, both the mortgagor and mortgagee have insurable
interest over the property mortgaged.
b.) Is the insurable interest of mortgagor and mortgagee in case of a
mortgaged property the same?
Each has an insurable interest in the property mortgaged and this interest is
separate and distinct from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure to the benefit of the
other. The same is not open to objection that there is double insurance.
(Sec. 8)
c.) Extent of insurable interest of mortgagor and mortgagee.
a. Mortgagor To the extent of its value as owner of the property. The
loss or destruction of the property insured will not extinguish the
mortgage debt. The exception is in marine insurance.
b. Mortgagee To the extent of the debt. Such interest continues until
the mortgage debt is extinguished. The property relied on as
mortgaged is only a security. In insuring the property, he is not
insuring the property itself but his interest or lien thereon.
F. PERFECTION OF THE CONTRACT OF INSURANCE
Q: What is a policy of insurance?
A: It is the written instrument in which the contract of insurance is set forth (Sec. 49). It
is the written document embodying the terms and stipulations of the contract of
insurance between the insured and insurer. It is not necessary for the perfection of the
contract.

Q: What is the form of an insurance contract?

A: May be verbal or in writing, or partly in writing and partly verbal. However, the law
provides that no policy of insurance shall be issued or delivered unless in the form
previously approved by the Insurance Commission.
Q: When is the insurance contract perfected?
A: When the assent or consent is manifested by the meeting of the offer and the
acceptance upon the thing and the cause which are to constitute the contract. Mere
offer or proposal is not contemplated. (De Lim v. Sun Life Assurance Co., G.R. No. L
15774, Nov. 29, 1920)
F.1. OFFER AND ACCEPTANCE/CONSENSUAL
Q. How offer is made in property and liability insurance?
A. It is the insured who makes an offer to the insurer, who accepts the offer, rejects it,
or makes a counteroffer. The offer is usually accepted by an insurance agent on behalf
of the insurer.
Q. How offer is made in Life and Health Insurance?
A. it depends upon whether the insured pays the premium at the time he applies for
insurance.
1. If he does not pay the premium, his application is considered an invitation to
the insurer to make an offer, which he must then accept before the contract goes into
effect.
2. If he pays the premium with his application, his application will be considered
an offer.
Q. When is there an acceptance?

A. Where the application for insurance constitutes an offer by the insured, a policy is
issued strictly in accordance with the offer is an acceptance of the offer that perfects the
contract.
F.1.a. Delay in Acceptance
Q. When can there be an issuance of policy without acceptance?
A. If the issued policy does not conform to the insureds application, it is an offer to the
insured which he may accept or reject.
Q. What is the effect of delay?
A. Unreasonable delay in returning the premium raises the presumption of acceptance
of the insurance application. (Gloria v. Philippine American Life Ins. Co., [CA}73 O.G.
[No.37] 8660)
Q: When does the policy become binding?
A:

1. When all the conditions precedent stated in the offer have been satisfied; and
2. When delivered
F.1.b. Delivery of Policy
Q: What are the requisites for a valid delivery?
A:
1.

Intention of the insurer to give legal effect as a completed instrument;

2.

Word or act by insurer putting the instrument beyond his legal, though not necessarily physical control;

3.

Insured must acquiesce in this intention.

Q: What are the 2 types of delivery?

A:
1. Actual delivery to the person of the insured.
2. Constructive

a. By mail If policy was mailed already and premium was paid and nothing is left to be done by the

insured,

the policy is considered constructively delivered if insured died before receiving the
policy.
b. By agent If delivered to the agent of the insurer, whose duty is ministerial, or
delivered to the agent of the insured, the policy is considered constructively delivered.
Q: What is the importance of delivery?
A:
1.

It becomes the evidence of the making of a contract and of its terms;

2.

It is considered as communication of the insurers acceptance of the insureds offer;

3.

It becomes the determination of policy period;

4.

It marks the end of insurers opportunity to decline coverage.

F.2. PREMIUM PAYMENT

Q: What is premium?
A: It is an agreed price for assuming and carrying the risk that is, the consideration
paid an insurer for undertaking to indemnify the insured against a specified peril.
Q: What is the difference between premium and assessment?
A: Premium is levied and paid to meet anticipated losses, while assessment are
collected to meet actual losses. Also, while premium is not a debt, assessment properly
levied, unless otherwise expressly agreed, is a debt.
Q: When does payment of premium become a debt or obligation?
A:
1. In fire, casualty and marine insurance, the premium payable becomes a debt as
soon as the risk attaches.
2. In life insurance, the premium becomes a debt only when, in the case of the first
premium, the contract has become binding, and in the case of subsequent
premiums, when the insurer has continued the insurance after maturity of the
premium, in consideration of the insureds express or implied promise to pay.

Q: Does nonpayment of balance of premiums cancel the policy?

A: No, a contrary rule would place exclusively in the hands of the insured the right to
decide whether the contract should stand or not. (Philippine Phoenix Surety &
Insurance, Co., Inc., v. Woodworks, Inc., G.R. No. L22684, Aug. 31, 1967)
Q: What are the effects of nonpayment of premiums?
A: Nonpayment of the first premium unless waived, prevents the contract from
becoming binding notwithstanding the acceptance of the application or the issuance of
the policy.
Nonpayment of the subsequent premiums does not affect the validity of the contracts
unless, by express stipulation, it is provided that the policy shall in that event be
suspended or shall lapse.
Q: Is the fire insurance policy a binding one even if the premium stated in the
policy is not paid?
A: No, insurance is a contract whereby one undertakes for a consideration to indemnify
another against loss, damage or liability arising from an unknown contingent event.
The consideration is the premium. The premium must be paid at the time and in the
way and manner specified in the policy, and if not, the policy will lapse and be forfeited
by its own terms.
The nonpayment of consideration constitutes inability of the agreement (Philippine
Surety and Insurance Company v. Woodwork, Inc., G.R. No. L25317, Aug. 6, 1979)
Q: If the applicant failed to pay premium and instead execute a promissory note
in favor of the insurer payable within 30 days which was accepted by the latter, is
the insurer liable in case of loss?
A: Yes, the insurer is liable because there has been a perfected insurance contract.
The insurer accepted the promise of the applicant to pay the insurance premium within
thirty 30 days from the effective date of policy. By so doing, it has implicitly agreed to

modify the tenor of the insurance policy and in effect, waived any provision therein that
it would only pay for the loss or damage in case the same occurs after the payment of
the premium. Considering that the insurance policy is silent as to the mode of payment,
insurer is deemed to have accepted the promissory note in payment of the premium.
This rendered the policy immediately operative on the date it was delivered. (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R. No. L22375, July 18, 1975)
Q: Can fortuitous event excuse the insured from not paying the premiums?
A:
GR: No, nonpayment of premiums does not merely suspend but put an end to an
insurance contract since the time of the payment is peculiarly of the essence of the
contract.
XPN:
1. The insurer has become insolvent and has suspended business, or has refused
without justification a valid tender of premiums. (Gonzales v. Asia Life Ins. Co., G.R.
No. L5188, Oct. 29, 1952)
2. Failure to pay was due to the wrongful conduct of the insurer.
3. The insurer has waived his right to demand payment.
Q: What is the effect of acceptance of premium?
A: Acceptance of premium within the stipulated period for payment thereof, including
the agreed grace period, merely assures continued effectivity of the insurance policy in
accordance with its terms. (Stoke v. Malayan Insurance Co., Inc., G.R. No. L34768,
Feb. 28, 1984)
Where an insurer authorizes an insurance agent or broker to deliver a policy to the
insured, it is deemed to have authorized said agent to receive the premium in its behalf.
The insurer is bound by its agents acknowledgment of the receipt of payment of
premium.
Q: What is the effect of payment of premium by postdated check?

A: Delivery of a promissory note or a check will not be sufficient to make the policy
binding until the said note or check has been converted into cash. This is consistent
with Article 1249 of the Civil Code.
Q: What if there was no premium paid, may the insurer recover the unpaid
premium from the insured?
A: No, the continuance of the insurers obligation is conditioned upon the payment of
the premium, so that no recovery can be had upon a lapsed policy, the contractual
relation between the parties having ceased. If the peril insured against had occurred,
the insurer would have had a valid defense against recovery under the policy.
Q: What is the cash and carry rule?
A:
GR: No policy or contract of insurance issued by an insurance company is valid and
binding unless and until the premium thereof has been paid. Any agreement to the
contrary is void. (2003 Bar Question)
XPN: A policy is valid and binding even when there is nonpayment of premium:
1. In case of life or industrial life policy whenever the grace period provision applies.
2. When there is acknowledgment in a policy of a receipt of premium, which the law
declares to be conclusive evidence of payment, even if there is stipulation therein
that it shall not be binding until the premium is actually paid. This is without prejudice
however to right of insurer to collect corresponding premium. (Sec. 77)
3. When there is an agreement allowing the insured to pay the premium in installments
and partial payment has been made at the time of loss (Makati Tuscany
Condominium Corp. v. CA, G.R. No. 95546, Nov. 6, 1992).
4. When there is an agreement to grant the insured credit extension for the payment of
the premium. (Art. 1306, NCC), and loss occurs before the expiration of the credit
term. (UCPB General Insurance v. Masagana Telemart, G.R. No. 137172, Apr. 4,
2001).

5. When estoppel bars the insurer to invoke nonrecovery on the policy.

6. When the public interest so requires, as determined by the Insurance Commissioner
E.g.: In compulsory motor vehicle insurance, if the policy was issued without
payment of premium by the vehicle owner, the insurer will still be held liable. To
rule otherwise would prejudice the 3rd party victim.
Q: What is the effect of acknowledgment of receipt of premium in policy?
A: Conclusive evidence of its payment, in so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until the premium is
actually paid (Sec. 78).
When the policy contains such written acknowledgment, it is presumed that the insurer
has waived the condition of prepayment. It hereby creates a legal fiction of payment.
The presumption is however, extended only to the question of the binding effect of the
policy.
As far as the payment of the premium itself is concerned, the acknowledgment is only a
prima facie evidence of the fact of such payment. The insurer may still dispute its
acknowledgment but only for the purpose of recovering the premium due and unpaid.
Whether payment was indeed made is a question of fact.
Q: Is the insurance company liable when a car, bought on installment basis, met
an accident but the car is not yet fully paid?
A: Yes, when insured and insurer have agreed to the payment of premium by
installments and partial payment has been made at the time of loss, then the insurer
becomes liable. When the car loss happened on the 5th month, the six months agreed
period of payment had not yet elapsed. The owner may recover from Peninsula

Insurance Company, but the latter has the right to deduct the amount of unpaid
premium from the insurance proceeds. (2006 Bar Question)
F.3. NON-DEFAULT OPTIONS IN LIFE INSURANCE
Q: What are the devices used to prevent the forfeiture of a life insurance after the
payment of the first premium?
A:

1.

Grace period After the payment of the first premium, the insured is entitled to a grace period of 30 days within which

to pay the succeeding premiums. (Sec. 227,(a)).

2. Cash surrender value The amount the insurer agrees to pay to the holder of the
policy if he surrenders it and releases his claim upon it. (Cyclopedia Law Dictionary, 3rd
ed., 1077)
3. Extended insurance It is where the insured is given a right, upon default, after
payment of at least three full annual premiums (see Sec. 227 [f]) to have the policy
continued in force from the date of default for a time either stated or equal to the
amount as the net value of the policy taken as a single premium, will purchase. (De
Leon, The Insurance Code of the Philippines Annotated, 2006)
4. Paid up Insurance The insured is given a right, upon default, after the payment of
at least three annual premiums to have the policy continued in force from the date of
default for the whole period of the insurance without further payment of premiums.
(ibid.) It results to a reduction of the original amount of insurance, but for the same
period originally stipulated.(6 Couch 2d., 355; 37 C.J.S. 364)
5. Automatic Loan Clause A stipulation in the policy providing that upon default in
payment of premium, the same shall be paid from the loan value of the policy until
that value is consumed. In such a case, the policy is continued in force as fully and
effectively as though the premiums had been paid by the insured from funds derived
from other sources.(6 Couch 2d., 383)

6. Reinstatement Provision that the holder of the policy shall be entitled to

reinstatement of the contract at anytime within 3 years from the date of default in the
payment of premium, unless the cash surrender value has been paid, or the
extension period expired, upon production of evidence of insurability satisfactory to
the company and the payment of all overdue premiums and any indebtedness to the
company upon said policy. (Sec. 227, (j)).
F.6. REINSTATEMENT OF A LAPSED POLICY OF LIFE INSURANCE
Q. What is purpose of the Reinstatement Provision?
A. The purpose of the provision is to clarify the requirements for restoring a policy to
premiumpaying status after it has been permitted to lapsed.
Q. Within what period shall the holder of the policy be entitled to reinstatement
of the contract?
A. The law requires that the policy owner be permitted to reinstate the policy, subject to
the violations specified, any time within three (3) years from the date of default of
premium payment. A longer period, being more favorable to the insured, may be used.
Q. Is reinstatement of a lapsed policy an absolute right of the insured?
A. Reinstatement is not an absolute right of the insured, but discretionary on the part of
the insurer, which has the right to deny reinstatement if it were not satisfied as to the
insurability of the insured, and if the latter did not pay all overdue premiums and other
indebtedness to the insurer. (McGuire vs. Manufacturers Life Ins. Co., 87 Phil. 370).

Q. What does Evidence of Insurability includes?

A. Evidence of Insurability is broader phrase than Evidence of Good Health and
includes such other factors as the insureds occupation, habits, financial condition, and
other risk selection factors.
Q. A life insurance policy lapsed. The insured applied for reinstatement of the
policy and paid only a part of the overdue premiums. Subsequently, the insured
died. Was the insurer liable?

A. The insurer is was not liable as the policy was not reinstated. The failure to pay the
balance of the overdue premiums prevented reinstatement and recovery of the face
value of the policy. (Andres vs. Crown Life Ins. Co., 55 O.G. 3483).
F.5. REFUND OF PREMIUMS
Q: When is the insured entitled to recover premiums already paid or a portion
thereof?
A:
1. Whole:
a. When no part of the thing insured has been exposed to any of the perils insured against (Sec. 79)
b. When the contract is voidable because of the fraud or misrepresentations of the insurer of his agent (Sec.81).
c. When the insurance is voidable because of the existence of facts of which the insured was ignorant without his fault
(Sec.81).
d. When the insurer never incurred any liability under the policy because of the default of the insured other than actual fraud
(Sec. 81).
e. When rescission is granted due to insurers breach of contract (Sec. 74).
2. Pro rata:
a. When the insurance is for a definite period and the insured surrenders his policy before the termination thereof; (Sec. 79
[b]); except:
i. Policy not made for a definite period of time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is overinsurance. The premiums to be returned shall be proportioned to the amount by which the aggregate
sum insured in all the policies exceeds the insurable value of the thing at risk. (Sec. 82)

i. In case of overinsurance by double insurance, the insurer is not liable for the
total amount of the insurance taken, his liability being limited to the property
insured. Hence, the insurer is not entitled to that portion of the premium
corresponding to the excess of the insurance over the insurable interest of the
insured.
ii. In case of overinsurance by several insurers, the insured is entitled to a ratable
return of the premium, proportioned to the amount by which the aggregate sum

insured in all the policies exceeds the insurable value of the thing insured (Sec.
82).
E.g. Where there is a total over insurance of P500,000.00 in an aggregate
P2,000,000.00 policy (P1,500,000.00 is only the insurable value), 25%
(proportion of P500k to P2M) of the premiums paid to the several insurers
should be returned.
Q: When insured not entitled to return of premiums paid?
A:
1. The risk has already attached and the risk is entire and indivisible;
2. In life policies;
3. If contract is void ab initio because of fraud by the insured;
4. If contract is illegal and the parties are in pari delicto.
G. RESCISSION OF INSURANCE CONTRACTS
Q. What are the instances wherein a contract of insurance may be rescinded?
A.
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties

G.1. Concealment
Q: What is concealment?
A: Concealment is a neglect to communicate that which a party knows and ought to
communicate. (Sec. 26)
Q: What are the requisites in concealment?
A:
1.

A party knows a fact which he neglects to communicate or disclose to the other party

2.

Such party concealing is duty bound to disclose such fact to the other

3. Such party concealing makes no warranty as to the fact concealed

4. The other party has no means of ascertaining the fact concealed

5. The fact must be material

Q: What is the test of materiality?
A: It is determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the communication is due, in forming his
estimate of the advantages of the proposed contract, or in making his inquiries. (Sec.
31)
Q: What is the presumption when the insured failed to convey the nature of the
facts to the insurer?
A:
GR: The failure of the insured to communicate is intentional rather than inadvertent.
XPN: In the absence of evidence of the uninsurability of a person afflicted with chronic
cough, concealment thereof is no ground for annulment of the policy.
Q: How does it differ from materiality in marine insurance?
A: Rules on concealment are stricter since the insurer would have to depend almost
entirely on the matters communicated by the insured. Thus, in addition to material facts,
each party must disclose all the information he possesses which are material to the
information of the belief or expectation of a third person, in reference to a material fact.
But a concealment in a marine insurance in any of the following matters enumerated
under Section 110, Insurance Code does not vitiate the entire contract, but merely
exonerates the insurer from a loss resulting from the risk concealed.
Q: What is the test in ascertaining the existence of concealment?
A: If the applicant is aware of the existence of some circumstances which he knows
would influence the insurer in acting upon his application, good faith requires him to
disclose that circumstance, though unasked.
Q: What are the matters that need not be disclosed?
A:

GR: The parties are not bound to communicate information of the following matters:
1.

Those which the other knows

2.

Those which, in the exercise of ordinary care, the other ought to know and of which, the former has no reason to suppose
him ignorant

3.

Those of which the other waives communication

4.

Those which prove or tend to prove the existence of a risk excluded by a warranty, and which are not otherwise material

5.

Those which relate to a risk excepted from the policy and which are not otherwise material;

6.

The nature or amount of the interest of one insured (except if he is not the owner of the property insured, Sec. 34).

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

Q: What are the matters that must be disclosed even in the absence of inquiry?
A:
1.

Those material to the contract

2.

Those which the other has no means of ascertaining

3.

Those as to which the party with the duty to communicate makes no warranty

Q: May the right to information of material facts be waived?

A: Yes.
1. By the terms of the contract
2. By the failure to make an inquiry as to such facts, where they are distinctly implied in
other facts from which information is communicated. (Sec. 33)
Q: What are the effects of concealment?
A:
1.

If there is concealment under Section 27, the remedy of the insurer is rescission since concealment vitiates the contract of
insurance.

2.

The party claiming the existence of concealment must prove that there was knowledge of the fact concealed on the part
of the party charged with concealment.

3.

Good faith is not a defense in concealment. Concealment, whether intentional or unintentional entitles the injured party
to rescind the contract of insurance. (Sec. 27)

4.

The matter concealed need not be the cause of loss.

5.

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

Q: When should concealment take place in order that the policy may be avoided?
A: At the time the contract is entered into and not afterwards. The duty of disclosure
ends with the completion of the contract. Waiver of medical examination in a non

medical insurance contract renders even more material the information required of the
applicant concerning previous condition of health and diseases suffered, for such
information necessarily constitutes an important factor which the insurer takes into
consideration in deciding whether to issue the policy or not. Failure to communicate
information acquired after the effectivity of the policy will not be a ground to rescind the
contract.
Q: What are the instances whereby concealment made by an agent procuring the
insurance binds the principal?
A.
1.

Where it was the duty of the agent to acquire and communicate information of the facts in question;

2.

Where it was possible for the agent, in the exercise of reasonable diligence to have made of the insurance contract.

Note: Failure on the part of the insured to disclose such facts known to his agent, or wholly due to the fault of the agent, will
avoid the policy, despite the good faith of the insured.
G.2. MISREPRESENTATIONS/OMISSIONS

Q: What is representation?
A: An oral or written statement of a fact or condition affecting the risk made by the
insured to the insurance company, tending to induce the insurer to assume the risk.
Q: What are the kinds of representation?
A:
1.

Oral or written; (Sec. 36)

2.

Affirmative; (Sec. 39) or

3.

Promissory. (Sec. 42)

Q: What is an affirmative representation?

A: Any allegation as to the existence or nonexistence of a fact when the contract
begins. (e.g. the statement of the insured that the house to be insured is used only for
residential purposes is an affirmative representation).
Q: What is a promissory representation?
A: Any promise to be fulfilled after the contract has come into existence or any
statement concerning what is to happen during the existence of the insurance.

Q: When should representation be made?

A: At the time of, or before, issuance of the policy. (Sec. 37)
Q: What is misrepresentation?
A: It is an affirmative defense. To avoid liability, the insurer has the duty to establish
such a defense by satisfactory and convincing evidence. (Ng Gan Zee v. Asian
Crusader Life Assn. Corp., G.R. No. L 30685, May 30, 1983)
Q: What are the requisites of a false representation (misrepresentation)?
A:
1.

The insured stated a fact which is untrue;

2.

Such fact was stated with knowledge that it is untrue and with intent to deceive or which he states positively as true
without knowing it to be true and which has a tendency to mislead;

3.

Such fact in either case is material to the risk.

Q: What is the test of materiality?

A: It is to be determined not by the event, but solely by the probable and reasonable
influence of the facts upon the party to whom the representation is made, in forming his
estimates of the disadvantages of the proposed contract or in making his inquiries
(similar with concealment). (Sec. 46)
Q: What are the effects of misrepresentation?
A:
1.

It renders the insurance contract voidable at the option of the insurer, although the policy is not thereby rendered void ab
initio. The injured party entitled to rescind from the time when the representation becomes false;

2.

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

3.

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

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

Q: What are the characteristics of representation?

A:
1.

Not a part of the contract but merely a collateral inducement to it

2.

Oral or written

3.

Made at the time of, or before issuing the policy and not after

4.

Altered or withdrawn before the insurance is effected but not afterwards

5.

Must be presumed to refer to the date the contract goes into effect. (Sec. 42)

Q: What are the similarities of concealment and representation?

A:

1.

Refer to the same subject matter and both take place before the contract is entered.

2.

Concealment or representation prior to loss or death gives rise to the same remedy; that is rescission or cancellation.

3.

The test of materiality is the same. (Secs. 31, 46)

4.

The rules of concealment and representation are the same with life and nonlife insurance.

5.

Whether intentional or not, the injured party is entitled to rescind a contract of insurance on ground of concealment or
false representation.

6.

Since the contract of insurance is said to be one of utmost good faith on the part of both parties to the agreement, the
rules on concealment and representation apply likewise to the insurer.

Q: How does concealment differ from misrepresentation?

A: In concealment, the insured withholds the information of material facts from the
insurer, whereas in misrepresentation, the insured makes erroneous statements of
facts with the intent of inducing the insurer to enter into the insurance contract.
Q: How is concealment and misrepresentation applied in case of loss or death?
A:
GR: If the concealment or misrepresentation is discovered before loss or death, the
insurer can cancel the policy. If the discovery is after loss or death, the insurer can
refuse to pay.
XPN: The incontestability clause under paragraph 2 of Section 48.
XPN to XPN:
1. Nonpayment of premiums. (Secs. 77, 22 [b], 228 [b], 203 [b])
2. Violation of condition. (Secs. 227 [b], 228 [b])
3. No insurable interest

4. Cause of death was excepted or not covered

5.

Fraud of a vicious type

6.

Proof of death was not given. (Sec. 242)

7. That the conditions of the policy relating to military or naval service. (Secs. 227 [b],
228 [b])
8. That the action was not bought within the time specified. (Sec. 62)
Q: What is the remedy of the injured party in case of misrepresentation?
A: If there is misrepresentation, the injured party is entitled to rescind from the time
when the representation becomes false.
Q: When should the right to rescind the contract be exercised?
A: The right to rescind must be exercised previous to the commencement of an action
on the contract. (the action referred to is that to collect a claim on the contract)
Q. What is Omission?
A. The failure to communicate information of matters proving or tending to prove the
falsity of warranty.
Q. What is the effect of Omission?
A. The contract of insurance may be rescinded.
Q. In case of Omission, who is entitled to rescind the contract?
A. The insurer is entitled to rescind the contract
G.3. BREACH OF WARRANTIES
Q: What are warranties?
A: Statements or promises by the insured set forth in the policy itself or incorporated in
it by proper reference, the untruth or nonfulfillment of which in any respect, and without
reference to whether the insurer was in fact prejudiced by such untruth or non
fulfillment render the policy voidable by the insurer.

Q: What is the purpose of warranties?

A: To eliminate potentially increasing moral or physical hazards which may either be
due to the acts of the insured or to the change of the condition of the property.
Q: What is the basis of warranties?
A: The insurer took into consideration the condition of the property at the time of
effectivity of the policy.
Q: What are the kinds of warranties?
A:
1.

Express an agreement contained in the policy or clearly incorporated therein as part thereof whereby the insured
stipulates that certain facts relating to the risk are or shall be true, or certain acts relating to the same subject have been or
shall be done.

2.

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

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

a. That the ship will not deviate from the agreed voyage unless deviation is proper
b. That the ship will not engage in illegal venture
c. Warranty of neutrality, that the ship will carry the requisite documents of
nationality or neutrality where such nationality or neutrality is warranted
d. Presence of insurable interest
e. That the ship is seaworthy at the time of the commencement of the insurance
contract.
Q: What are the effects of breach of warranty?
A:
1. Material
GR: Violation of material warranty or of material provision of a policy will entitle the other party to rescind the
contract.
XPN:
a. Loss occurs before the time of performance of the warranty;
b. The performance becomes unlawful at the place of the contract; and
c. Performance becomes impossible.

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

XPN: When the policy expressly provides or declares that a violation thereof will
avoid it.
For instance, an Other Insurance Clause which is a condition in the policy
requiring the insured to inform the insurer of any other insurance coverage of the
property. A violation of the clause by the insured will not constitute a breach
unless there is an additional provision stating that the violation thereof will avoid
the policy. (Sec. 75)
Q: What is the effect of a breach of warranty without fraud?
A: The policy is avoided only from the time of breach (Sec. 76) and the insured is
entitled:
1. To the return of the premium paid at a pro rata from the time of breach if it occurs
after the inception of the contract; or
2. To all premiums if it is broken during the inception of the contract.
H. CLAIMS SETTLEMENT AND SUBROGATION
H.1. Notice and Proof of Loss
Q: What is loss in insurance?
A: The injury, damage or liability sustained by the insured in consequence of the
happening of one or more of the perils against which the insurer, in consideration of the
premium, has undertaken to indemnify the insured. It may be total, partial, or
constructive in Marine Insurance.
Q: What is notice of loss?
A: It is the more or less formal notice given the insurer by the insured or claimant under
a policy of the occurrence of the loss insured against.

Q: What are the conditions before the insured may recover on the policy after the
loss?
A:
1.

The insured or some person entitled to the benefit of the insurance, without unnecessary delay, must give notice to the
insurer; (Sec. 88)

2.

When required by the policy, insured must present a preliminary proof loss which is the best evidence he has in his
power at the time. (Sec. 89)

Q: What are the purposes of notice of loss?

A:
1.

To give insurer information by which he may determine the extent of his liability;

2.

To afford the insurer a means of detecting any fraud that may have been practiced upon him; and

3.

To operate as a check upon extravagant claims.

Q: What are the instances when the defects in the notice or proof of loss are
considered waived?
A: When the insurer:
1. Writes to the insured that he considers the policy null and void as the furnishing of
notice or proof of loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the amount of the loss by arbitration,
making no objections on account of notice and preliminary proof; or
5. Makes Objection on any ground other than the formal defect in the preliminary proof.
Q: When is delay in the presentation of notice or proof of loss deemed waived?
A: If caused by:
1. Any act of the insurer; and
2. By failure to take objection promptly and specifically upon that ground. (Sec. 91)
Q: What is proof of loss?
A: It is the more or less formal evidence given the company by the insured or claimant
under a policy of the occurrence of the loss, the particulars thereof and the data
necessary to enable the company to determine its liability and the amount thereof.

H.2. Guidelines on Claims Settlement

Q. What is Claim Settlement?
A. Claim settlement is the indemnification of the suffered by the insured. The claimant
may be the insured or reinsured, the insurer who is entitled to subrogation, or a third
party who has a claim against the insured.
Q. What are the rules in Claim Settlement?
A.
1. No insurance company doing business in the Philippines shall refuse, without
justifiable cause, to pay or settle claims arising under coverages provided by its
policies, nor shall any such company engage in unfair claim settlement practices.
2. Evidence as to numbers and types of valid and justifiable complaints to the
Commissioner against an insurance company, and the Commissioners complaint
experience with other insurance companies writing similar lines of insurance shall be
admissible in evidence in an administrative or judicial proceeding brought under this
section (Sec. 241)
Q. What is the purpose of the rule?
A. To eliminate unfair claim settlement practices.
H.2.a. Unfair Claims Settlement: Sanctions
Q. What are the acts which constitute unfair claim settlement practices?
A.

1.

Knowingly misrepresenting to claimants pertinent facts or policy provisions relating to coverages at issue.

2.

Failing to acknowledge with reasonable promptness pertinent communications with respect to claims arising under its
policies.

3.

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

4.

Not attempting in good faith to effectuate prompt, fair and equitable settlement of calims submitted in which liability has
become reasonably clear; or

5. Compelling policyholders to institute suits to recover amounts due under its policies
by offering without justifiable reason substantially less than the amounts ultimately
recovered in suits brought by them. (Sec. 241, Par.1)
Q. What is the sanction for the insurance companies which engaged to unfair
settlement practices?
A. Sec. 241 enumerates the grounds which shall be considered as sufficient as
sufficient cause of the suspension or revocation of an insurance companys certificate
of authority.
Q. What is the obligation of the insurer with regard to the insureds decision to
compromise third party claim?
A. Where a policy gives the insurer a control of the decision to settle claim or to litigate
it, the insurer nevertheless is required to observe a certain measure of consideration for
the interest of the insured. The rule has come to be generally accepted that while the
express terms of the policy do not impose of the insurer the duty to claim settle the
claim at all costs, there is an implied duty on his part to give due consideration to the
interest of the insured in its exercise of the option to reject a compromise settlement
and proceed with litigation. In insurance contracts, the law requires strict observance of
the standards of good faith and fair dealing on the part of the insurer.
Q: What is the effect of refusal or failure to pay the claim within the time
prescribed?
A: Secs. 242, 243 and 244 provide that the insurer shall be liable to pay interest twice
the ceiling prescribed by the Monetary Board which means twice 12% per annum (legal
rate of interest prescribed in CB No. 416) or 24% per annum interest on the proceeds
of the insurance from the date following the time prescribed in Secs. 242 or 243 until
the claim is fully satisfied (Prudential Guarantee and Assurance, Inc. v. TransAsia
Shipping Lines, Inc. G. R. No. 151890, June 20, 2006)
H.2.b. Prescription of Action

Q: What are the rules on the prescriptive period?

A:
1. The parties to a contract of insurance may validly agree that an action on the
policy should be brought within a limited period of time, provided such period is not
less than 1 year from the time the cause of action accrues. If the period agreed
upon is less than 1 year from the time the cause of action accrues, such
agreement is void. (Sec. 63)
a. The stipulated prescriptive period shall begin to run from the date of the insurers
rejection of the claim filed by the insured or beneficiary and not from the time of loss.
b. In case the claim was denied by the insurer but the insured filed a petition for
reconsideration, the prescriptive period should be counted from the date the claim was
denied at the first instance and not from the denial of the reconsideration (Sun Life
Office, Ltd. vs. CA, GR. No. 89741, Mar 13, 1991)
2. If there is no stipulation or the stipulation is void, the insured may bring the
action within 10 years in case the contract is written.
3. In a comprehensive motor vehicle liability insurance (CMVLI), the written notice of
claim must be filed within 6 months from the date of the accident; otherwise, the
claim is deemed waived even if the same is brought within 1 year from its rejection.
(Vda. De Gabriel vs. CA, GR No. 103883, Nov 14, 1996)
4. The suit for damages, either with the proper court or with the Insurance
Commissioner, should be filed within 1 year from the date of the denial of the claim
by the insurer, otherwise, claimants right of action shall prescribe. (Sec. 384)
Q: What is the prescriptive period in commencing an action?
A: Within one year from time cause of action accrues.
Q. From what time shall the period of prescription be computed in case the
insured asked for reconsideration of the denial of claim?

A. In case the claim was denied by the insurer but the insured file a petition for
reconsideration, the prescriptive period should be counted from the date the claim was
denied at the first instance and not from the denial of the reconsideration. To rule
otherwise would give the insured a scheme or devise to waste time until any evidence
which may be considered against him is destroyed. (Sun life Office, Ltd. vs. CA, 195
SCRA 193; Asked, V [a}, 1996 Bar Exams.).
Q. What is the prescriptive period of prescription in motor vehicle insurance?
A. It is one year from denial of the claim and not from the date of the accident.
Q. What is the Principle of Subrogation?
A. If the plaintiffs property has been insured, and he has received indemnity from the
insurance company for the injury or loss arising out of wrong or breach of contract
complained of, the insurance company shall be subrogated to the rights of the insured
against the wrongdoer or the person who has violated the contract. (Art. 2207, NCC)
Q: Should there be a contract before the insurer be subrogated?
A: The principle of subrogation inures to the insurer without any formal assignment or
any express stipulation to that effect in the policy. Said right is not dependent upon nor
does it grow out of any private contract. Payment to the insured makes the insurer a
subrogee in equity. (Malayan Insurance Co., Inc. v. CA, G.R. No. L36413, Sept. 26,
1988)
Q: What are the rules on indemnity?
A:
1.

Applies only to property insurance except when the creditor insures the life of his debtor

2.

Insurance contracts are not wagering contracts or gambling contracts.

Q: What are the purposes of subrogation?

A:
1.

To make the person who caused the loss legally responsible for it

2.

To prevent the insured from receiving double recovery from the wrongdoer and the insurer

3.

To prevent the tortfeasors from being free from liability and is thus founded on consideration of public policy

Q: What are the rules on subrogation?

A:
1.

Applicable only to property insurance the value of human life is regarded as unlimited and therefore, no recovery from
a third party can be deemed adequate to compensate the insureds beneficiary.

2.

The right of insurer against a third party is limited to the amount recoverable from latter by the insured.

Q: What if the amount paid by the insurance company does not fully cover the
injury or loss?
A: The aggrieved party shall be entitled to recover the deficiency from the person
causing the loss or injury. (Art. 2207, NCC)
Q: What are the instances where the right of subrogation does not apply? A:
1.

Where the insured by his own act releases the wrongdoer or third party liable for loss or damage from liability

2.

The insurer loses his rights against the wrongdoer since the insurer can only be subrogated to only such rights as the
insured may have

3.

Where the insurer pays the insured the value of the loss without notifying the carrier who has in good faith settled the
insured claim for loss

4. Where the insurer pays the insured for a loss or risk not covered by the policy
5. Life insurance
For recovery of loss in excess of insurance coverage.
V. Transportation Laws
A. Common Carriers
Common carriers are persons, corporations, firms or associations engaged in the
business of carrying or transporting passengers or goods or both, by land, water or
air, for compensation, offering their services to the public.
1. Diligence required of common carriers
Extraordinary diligence or that extreme measure of care or caution which
persons of unusual prudence and circumspection use for securing and
preserving their own property or rights. The law requires common carriers to
render service with the greatest care and utmost foresight.
2. Liabilities of common carriers

With respect to the transfer of goods: liability begins with the actual delivery of
the goods for transportation, and not merely with the formal execution of a
receipt or bill of lading; the issuance of a bill of lading is not necessary to
complete delivery and acceptance.
With respect to the transport of passengers: begins from the moment the
person who purchases the ticket from the carrier presents himself at the proper
place and in a proper manner to be transported. The relation of carrier and
passenger continues until the passenger has been landed at the port of
destination and has left the vessel owners dock or premises. Once created,
the relationship will not ordinarily terminate until the passenger has, after
reaching his destination, safely alighted from the carriers conveyance or had a
reasonable opportunity to leave the carriers premises.

B. Vigilance over goods

1. Exempting causes
GR: the common carrier is presumed to have been at fault or to have acted
negligently when the goods transported are lost, destroyed or deteriorated,
XPN: when the same is due to any of the following causes only:
1. Caso Fortuito
2. Act of the public enemy in war, whether international or civil
3. Act or omission of the shipper or owner of the goods
a. Requirement of absence of negligence
GR: it is the express obligation of common carriers to carry the passengers
safely as far as human care and foresight can provide, using the utmost
diligence of very cautious persons, with a due regard for all the
circumstances.

XPN: being a mere presumption, however, the same is rebuttable by proof

that the common carrier had exercised extraordinary diligence as required
by law in the performance of its contractual obligation, or that the injury
suffered by the passenger was solely due to a fortuitous event.
b. Absence of delay
The absence of delay is important in case of natural disaster because if a
common carrier incurs in delay in transporting the foods, such disaster
shall not free such carriers from responsibility.
c. Due diligence to prevent or lessen the loss
To be exempted from liability, the common carrier must prove:
1. The natural disaster was the proximate and only cause of the loss
2. That the common carrier has exercised due diligence to prevent or
minimize loss before, during and after the occurrence of flood, storm,
other natural disasters or acts of war.
2. Contributory negligence
GR: if the shipper or owner merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof being the negligence of
the common carrier, the latter shall be liable for damages, which however, shall
be equitably reduced.
XPN: in a collision case and allision cases, the parties are liable for their own
damages.
3. Duration of liability
a. Delivery of goods to common carrier
Delivery must be made, actual or constructive, to the consignee or to the
person who has a right to receive them.
b. Actual or constructive delivery

It is the delivery of a representation of property or means of possession

that is construed by a court as sufficient to show the transferors intent or
to put the property under the transferees control
c. Temporary unloading or storage
GR: the common carriers duty to observe extraordinary diligence in the
vigilance over the goods remain in full force and effect even when they
are temporarily unloaded or stored in transit.
XPN: when the shipper or owner has made use of the right of stoppage
in transitu.
4. Stipulation for limitation of liability
a. Void stipulations
i.

That the goods are transported at the risk of the owner or shipper

ii. Any similar stipulation that is unreasonable, unjust and contrary to

public policy
iii. That the common carrier will not be liable for any loss, destruction or
deterioration of the goods
iv. That the common carrier need not observe any diligence in the
custody of the goods
v. That the common carrier shall exercise a degree of diligence less
than that of a good father of a family or a man of ordinary prudence
in the vigilance over the movables transported
vi. That the common carrier is not responsible for the loss, destruction
or deterioration of goods on account of the defective condition of the
car, vehicle, etc.
b. Limitation of liability to fixed amount
GR: under the warsaw convention, a stipulation limiting the maximum
recoverable amount of airlines as common carriers is valid provided that

the provisions of the convention limiting the liability are printed in the
airway bill.
XPN: the warsaw convention shall not apply in:
a. Willful misconduct by the common carrier
b. Default amounting to willful misconduct
c. Accepting goods without airway bill
c. Limitation of liability in absence of declaration of greater value
GR: the liability of the common carrier shall not exceed the stipulation in
a contract of carriage even if the loss or damage results from the
carriers negligence.
XPN: where the shipper or owner of the goods declare a greater value
and corresponding freight.
5. Liability for baggage of passengers
a. Checked-in baggage
b. Baggage in possession of passengers
C. Safety of Passengers
1. Void stipulations
The following are void stipulations in a contract of carriage of goods:
1. That the goods are transported at the risk of the owner or shipper
2. Any similar stipulation that is unreasonable, unjust and contrary to public
policy
3. That the common carrier will not be liable for any loss, destruction or
deterioration of the goods
4. That the common carrier need not observe any diligence in the custody
of the goods

5. That the common carrier shall exercise a degree of diligence less than
that of a good father of a family or a man of ordinary prudence in the
vigilance over the movables transported
6. That the common carrier is not responsible for the loss, destruction or
deterioration of goods on account of the defective condition of the car,
vehicle, ship, airplane or other equipment used in the contract of
carriage.
7. That the common carriers liability for acts committed by thieves or of
robbers who do not act with grave or irresistible threat, violence or force,
is dispensed with or diminished
8. That the common carrier shall not be responsible for the acts or
omissions of his or its employees.
2. Duration of liability
The duty exists from the moment the person offers to be transported places
himself in the care and control of the common carrier who accepts him as such
passenger. The duty continues until the passenger has, after reaching his
destination, safely alighted from the carriers conveyance or has had a
reasonable opportunity to leave the carriers premises and to look after his
baggage and prepare for his departure.
a. Waiting for carrier or boarding of carrier
It is the duty of common carriers of passengers, including common carriers
by railroad train, streetcar or motorbus, to stop their conveyances a
reasonable length of time in order to afford passengers an opportunity to
board and enter, and they are liable for injuries suffered by boarding
passengers resulting from the sudden starting up or jerking of their
conveyances while they are doing so.
b. Arrival at destination
Once created, the relationship will not ordinarily terminate until the
passenger has, after reaching his destination, safely alighted from the

carriers conveyance or had a reasonable opportunity to leave the carriers

premises. All persons who remain on the premises a reasonable time after
leaving the conveyance are to be deemed passengers, and what is a
reasonable time or a reasonable delay within this rule is to be determined
from all the circumstances, and included a reasonable time to see after his
baggage and prepare for his departure.
3. Liability of acts of others
a. Employees
Common carriers are liable for the death of or injuries to passengers
through the negligence or willful acts of the formers employees although
such employees may have acted beyond the scope of their authority or in
violation of the orders of the common carriers. The liability of the common
carriers does not cease upon proof that they exercised all the diligence of
a good father of a family in the selection and supervision of their
employees.
b. Other passengers and strangers
A common carrier is responsible for injuries suffered by a passenger on
account of the willful acts or negligence of other passengers or of
strangers, if the carriers employees through the exercise of the diligence
of a good father of a family would have prevented or stopped the act or
omission.
4. Extent of liability for damages
The following are the kinds of damages that may be recovered in case of
death of a passenger:
1. Indemnity for the death of the victim
2. Indemnity for loss of earning capacity of the deceased
3. Moral damages
4. Exemplary damages
5. Attorneys fees and expenses of litigation

6. Interest in proper cases

D. Bill of Lading
1. Three-Fold character
It is a receipt for the goods shipped and a contract to transport and deliver the
same as therein stipulated.
1. As a receipt, it recites the date and place of shipment, described the
goods as to quantity, weight, dimensions, identification marks and
condition, quality and value.
2. As a contract, it names the contracting parties, which include the
consignee, fixes the route, destination, and freight rate or charges and
stipulated the rights and obligations assumed by the parties.
3. As a document of title it regulated the relations between a carrier and a
holder of the same.
2. Delivery of goods
a. Period of delivery
If a period has been fixed for the delivery of the goods, it must be made
within such time, and, for failure to do so, the carrier shall pay the
indemnity stipulated in the bill of lading, neither the shipper nor the
consignee being entitled to anything else.
b. Delivery without surrender of bill of lading
c. Refusal of consignee to take delivery
1. When a part of the goods transported are delivered and the
consignee is able to prove that he cannot make use of the part
without the others
2. If the cargo consists of liquids and they have leaked out, nothing
remaining in the containers but 1/4 of their contents, on account of
inherent defect of cargo.

3. If the goods are damaged and such damage renders the foods
useless for the particular purpose for which they are to be used.
4. If there is delay on account of the fault of the carrier
3. Period for filing claims
1. Immediately after delivery - if the damage is apparent or
2. Within 24 hours from delivery - if the damage is not apparent
4. Period for filing actions
Fir coastwise or carriage within the Philippines, within 6 years if no bill of lading
has been issued or within 10 years if a bill of lading has been issued. For
international carriage from foreign port to the Philippines within 1 year from
delivery of goods or the date when the goods have been delivered.

E. Maritime Commerce
1. Charter Parties
a. Bareboat/ Demise Charter
The ship owner gives possession of the entire vessel to the charterer. In turn,
the charterer supplies, equips, and mans the vessel. The charterer is the
owner pro hac vice.
b. Time Charter
Vessel is chartered for a particular time or duration. While the ship owner still
retains possession and control of the vessel, the charterer has the right to use
all vessels facilities. The charterer may likewise designate vessels
destination.
c. Voyage /Trip Charter

A voyage charter is a contract wherein the ship was leased for a single
voyage for the conveyance of goods, in consideration of the payment of
freight. The shipowner retains the possession, command and navigation of
the ship, the charterer merely having use of the space in the vessel in return
for his payment of freight. An owner who retains possession of the ship
remains liable as carrier and must answer for loss or nondelivery of the
goods received for transportation. (Cebu Salvage Corp. vs. Philippine Home
Assurance Corp., G.R. No. 150403, Jan. 25, 2007)
2. Liability of ship Owners and Shipping Agents
a. Liability of Acts of Captain
Shipowner /shipping agents are liable for the following acts of captain :
1. Damages suffered by the vessel and its cargo by reason of want of skill or
negligence on his part;
2. Thefts committed by the crew, reserving his right of action against the
guilty parties;
3. Losses, fines, and confiscations imposed an account of violation of
customs, police, health, and navigation laws and regulations;
4. Losses and damages caused by mutinies on board the vessel or by reason
of faults committed by the crew in the service and defense of the same, if
he does not prove that he made timely use of all his authority to prevent or
avoid them;
5. Those caused by the misuse of the powers;
6. For those arising by reason of his going out of his course or taking a
course which he should not have taken without sufficient cause, in the
opinion of the officers of the vessel, at a meeting with the shippers or

supercargoes who may be on board. No exceptions whatsoever shall

exempt him from this obligation;
7. For those arising by reason of his voluntarily entering a port other than that
of his destination, outside of the cases or without the formalities referred to
in Article 612; and
8. For those arising by reason of nonobservance of the provisions contained
in the regulations on situation of lights and maneuvers for the purpose of
preventing collisions (Art. 618).
b. Exceptions to Limited Liability
1. Repairs and provisioning of the vessel before the loss of the vessel; (Art.
586)
2. Insurance proceeds. If the vessel is insured, the proceeds will go to the
persons entitled to claim from the shipowner; (Vasquez v. CA, G.R. No. L
42926, Sept. 13, 1985)

3. Workmens Compensation cases (now Employees Compensation under

the Labor Code); (Oching v. San Diego, G.R. No. 775, Dec. 17, 1946)
4. When the shipowner is guilty of fault or negligence;
Note: But if the captain is the one who is guilty, doctrine may still be invoked,
hence, abandonment is still an option.
5. Private carrier; or
6. Voyage is not maritime in character.

3. Accidents and Damages in Maritime Commerce

a. General Average
Damages or expenses deliberately caused in order to save the vessel, its
cargo or both from real and known risk

All persons having an interest in

the vessel and cargo therein at the time of the occurrence of the average
shall contribute.
b. Collisions
Collision is the impact of two moving vessels. The governing liabilities of
parties in case of collision are as follows:
1. One vessel at fault The ship owner of such vessel shall be liable for all
resulting damages.
2. Both vessels at fault Each vessel shall suffer their respective losses
but as regards the owners of the cargoes, both vessels shall be jointly and
severally liable.
3. Vessel at fault not known Each vessel shall suffer its own losses and
both shall be solidarily liable for loses or damages on the cargo. (Doctrine
of Inscrutable Fault).
4. Fortuitous event Each shall bear its own damage.
5. Third vessel at fault The third vessel shall be liable for losses and
damages sustained.
4. Carriage of Goods by Sea Act
a. Application

It will only be applied in terms of loss or damage of goods transported to

and from Philippine ports in foreign trade. It may also apply to domestic
trade when there is a paramount clause in the contract.

b. Notice of Loss or Damage

1. If the damage is apparent Notice must be immediately given. The
notice may either be in writing or orally.
2. If the damage is not apparent Notice must be given within 3 days after
delivery.
c. Period of Prescription
The suit should be brought within one year from:
1.Delivery of the goods, in case of damage; or
2.The date when the goods should have been delivered, in case of loss.
d. Limitation of Liability
1.The liability limit is set at $500 per package or customary freight unless
he nature and value of such goods is declared by the shipper.
2.Shipper and carrier may agree on another maximum amount, but not
more that amount of damage actually sustained..
F. The Warsaw Convention
1. applicability

This Convention applies to all international carriage of persons, luggage or goods

performed by aircraft for reward. It applies equally to gratuitous carriage by
aircraft performed by an air transport undertaking
2. Limitation of Liability
a. liability to Passengers
In the carriage of passengers the liability of the carrier for each passenger
is limited to the sum of 125,000 francs. Where, in accordance with the law
of the Court seised of the case, damages may be awarded in the form of
periodical payments, the equivalent capital value of the said payments
shall not exceed 125,000 francs. Nevertheless, by special contract, the
carrier and the passenger may agree to a higher limit of liability. (article 22
warsaw convention)
b. liability for Checked Baggage
The air carrier is liable for destruction, loss or damage to baggage up to
1000 SDRs (approximate amount in local currency).

In the case of

checked baggage, it is liable even if not at fault, unless the baggage was
defective.
c. Liability for Handcarried Baggage
Hand luggage or cabin baggage (also commonly referred to as carry-on
baggage) is the type of luggage that passengers are allowed to carry along
in the passenger compartment of a vehicle and contain valuables and
items needed during the journey. The carriers liability for cabin luggage is
limited to 2,250 SDRs per passenger.
3. Willful Misconduct

The definition of "willful misconduct" depends in some measure on which

court is deciding the issue. Some common factors that courts will consider are:
1. Knowledge that an action will probably result in injury or damage
2. Reckless disregard of the consequences of an action, or
3. Deliberately failing to discharge a duty related to safety. Courts may also
consider other factors.
VI. The Corporation Code
A. Corporation
1. Definition
(Section 2; Articles 44(3), 45, 46, and 1775, Civil Code)
Sec. 2 Corporation defined A corporation is an artificial being created by operation of
law, having the rights of succession and the powers attributes and properties, expressly
authorized by law or incident to its existence.
Art. 44(3) The following are juridical persons Corporations, partnerships and
associations for private interest or purpose to which the law grants a juridical
personality, separate and distinct from that of each shareholder, partner or member.
Art. 45 Juridical persons mentioned in Nos.1 and 2 of the preceding article are
governed by laws creating or recognizing them. Private corporations are regulated by
laws of general application on the subject. Partnerships and associations for private
interest or purpose are governed by the provisions of this Code concerning
partnerships.
Art. 46 Juridical persons may acquire and possess property of all kinds, as well as incur
obligations and bring civil or criminal actions, in conformity with the laws and
regulations of their organization.
Art. 1775 Association and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with
third persons, shall have no juridical personality, and shall be governed by the
provisions relating to co-ownership.
corporation is an artificial being created by operation of law. It has a personality
separate and distinct from the persons composing it, as well as from any other legal

entity to which it may be related. PNB v. Andrada Electric & Engring Co., 381 SCRA
244 (2002).
an artificial being - a person created by law or by state; legal fiction
created by law its existence is dependent upon the consent or grant of the
state EXCEPT corporation by estoppel and de facto corporation
the definition of a corporation is merely a guide and does not really provide for
thebasis of a corporation
Q. Why is it important to know that the corporation is a juridical person?
A. To be able to know that the corporation is able to contract with others
Q. Why does the definition of a corporation involve a statement creature of the
law?
A. To reiterate the fact that the corporation can only do acts given to it by the law. It is of
limited existence, outside its powers, it does not exist
2. Four Corporate Attributes
(based on Section 2)
A ) A CORPORATION IS AN ARTIFICIAL BEING ( Ability to Contract and Transact )
- a person created by law or by state; a legal fiction
B) CREATED BY OPERATION OF LAW (Creature of the Law)
-its existence is dependent upon the consent or grant of the state EXCEPT
corporation by estoppel and de facto corporation
C) WITH RIGHT OF SUCCESSION (Strong Juridical Personality)
-the corporation exist despite the death of its members as a corporation has a
personality separate and distinct from that of its individual stockholders. The
separate personality remains even if there has been a change in the members
and stockholders of the corporation
D ) HAS THE POWERS ATTRIBUTES AND PROPERTIES EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO ITS EXISTENCE (Creature of Limited
Powers)

B. Classes of Corporations
What are the classifications of corporation?
1. As to Corporation Code:
a. STOCK CORPORATION one which have capital stock divided into shares and
are authorized to distribute to the holders of such shares dividends or allotments or the
surplus profits on the basis of the shares held. ( Sec 3 )
b. NON STOCK CORPORATION is one which do not issue shares and are
created not for profit but for public good and welfare and where no part of its income is
distributable as dividends to its members, trustees, or officers. (Sec 87)
2. As to the number of persons who compose them:
a. Corporation aggregate corporation consisting of more than one member or
corporator;
b. Corporation Sole religious corporation which consists of one member or corporator
only and his successor.
3. As to whether they are for religious purpose or not:
a. Ecclesiastical corporation one organized for religious purpose
b. Lay corporation one organized for a purpose other than for religion.
4. As to whether they are for charitable purpose or not:
a. Eleemosynary one established for religious purposes
b. Civil one established for business or profit
5. As to state or country under or by whose laws they have been created:
a. Domestic one incorporated under the laws of the Philippines

b. Foreign one formed, organized, or existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and corporations to do business in its
own country or state. (Sec 123)
6. As to their legal right to corporate existence:
a. De jure one existing both in fact and in law
b. De facto one existing in fact but not in law
7. As to whether they are open to the public or not:
a. Close one which is limited to selected persons or members of the family. (Sec 96
105
b. Open one which is open to any person who may which to become a stockholder or
member thereto
8. As to their relation to another corporation
a. Parent or Holding one which is related to another corporation that it has the power
either, directly or indirectly to, elect the majority of the director of such other corporation
b. Subsidiary one which is so related to another corporation that the majority of its
directors can be elected either, directly or indirectly, by such other corporation
9. As to whether they are corporations in a true sense or only in a limited sense:
a. True one which exists by statutory authority
b. Quasi one which exist without formal legislative grant.
i. Corporation by prescription one which has exercised corporate powers
for an indefinite period without interference on the part of the sovereign power
and which by fiction of law, is given the status of a corporation;
ii. Corporation by estoppel one which in reality is not a corporation, either
de jure or de facto, because it is so defectively formed, but is considered a
corporations in relation to those only who, by reason of theirs acts or
admissions, are precluded from asserting that it is not a corporation.
10. As to whether they are for public (government) or private purpose:
a. Public one formed or organized for the government or a portion of the State

b. one formed for some provate purpose, benefit or end

What are the requisites of a de facto corporation?

1. Organized under a valid law.

2. Attempt in good faith to form a corporation according to the requirements of the law.
Note: The Supreme Court requires that Articles of Incorporation have already
been filed with the SEC and the corresponding certificate of incorporation is
obtained.
Use of corporate powers.
Note: The corporation must have performed the acts which are peculiar to a
corporation like entering into a subscription agreement, adopting bylaws, and
electing directors.
How is the status of a de facto corporation attacked?
A: The existence of a de facto corporation shall not be inquired into collaterally in any
private suit to which such corporation may be a party. Such inquiry may be made by the
Solicitor General in a quo warranto proceeding. (Sec. 20)
Note: However, as long as it exists, a de facto corporation enjoys all attributes of
a corporation until the State questions its existence.
In comparison with a corporation by estoppel where the stockholders are liable as
general partners, stockholders in a de facto corporation are liable as a de jure
corporation. Hence, up to the extent of their share holdings.
Distinguish de facto corporation from corporation by estoppel.
A: DE FACTO CORPORATION
a) There is existence in law;
b) The dealings among the parties on a corporate basis is not required;
c) When requisites are lacking, it can be corporation by estoppels;
Whereas:
B. CORPORATION BY ESTOPPEL
a) There is no existence in law;
b) The dealings among the parties on a corporate basis is required;
c) It will be considered a corporation in any shape or form
CORPORATE POWERS
The kinds of powers of corporation?

1. Express powers Granted by law, Corporation Code, and its Articles of

Incorporation or Charter, and administrative regulations
2. Inherent/incidental powers Not expressly stated but are deemed to be within
the capacity of corporate entities.
3. Implied/necessary powers Exists as a necessary consequence of the
exercise of the express powers of the corporation or the pursuit of its purposes
as provided for in the Charter
General powers of a corporation:
1. To sue and be sued
2. Of succession
3. To adopt and use of Corporate seal
4. To amend its Articles of Incorporation
5. To adopt its Bylaws
6. For Stock corporations: issue and sell stocks to subscribers and treasury stocks; for nonstock corporations: admit
members
7. To Purchase, receive, take or grant, hold, convey, sell, lease, pledge, mortgage and deal with real and personal property,
securities and bonds;
8. To Enter into merger or consolidation
9. To Make reasonable Donations for public welfare, hospital, charitable, cultural, scientific, civic or similar purposes,
provided that no donation is given to any
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish Pension, retirement, and other plans for the benefit of its directors, trustees, officers and employees basis of
which is the labor code
11. To exercise Other powers essential or necessary to carry out its purposes.
When does the power to sue and be sued commence?
A: Upon issuance by SEC of Certificate of Incorporation.
What are the limitations of the corporation in dealing with property?
1.

In dealing with any kind of property, it must be in the furtherance of the purpose for which the
corporation was organized.

2.

Constitutional limitations cannot acquire public lands except by lease.

With regard to private land, 60% of the corporation must be owned by the Filipinos, same with the acquisition of a
condo unit.
Note: No law disqualifies a person from purchasing shares in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the corporation from owning land.
Special law subject to the provisions of the Bulk Sales Law
What are the requisites for a valid donation?
A:
1. Donation must be reasonable
2. Must be for valid purposes including public welfare, hospital, charitable, cultural, scientific, civic or similar purposes
3. Must not be an aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a reasonable relation to the corporations interest and not be so remote and fanciful.

The specific powers of a corporation:

1. Power to extend or shorten corporate term. (Sec. 37)
2. Increase or decrease corporate stock. (Sec. 38)
3. Incur, create, or increase bonded indebtedness. (Sec. 38)
4. Deny preemptive right. (Sec. 39)
5. Sell, dispose, lease, encumber all or substantially all of corporate assets.
(Sec. 40)
6. Purchase or acquire shares. (Sec. 41)
7. Invest corporate funds in another corporation or business for other
purpose other than primary purpose .(Sec. 42)
8. Declare dividends out of unrestricted retained earnings. (Sec. 43)
9. Enter into management contract with another corporation (not with an
individual or a partnership within general powers) whereby one
corporation undertakes to manage all or substantially all of the business
of the other corporation for a period not longer than five (5) years for any
one term. (Sec. 44)
10.Amend Articles of Incorporation. (Sec. 16)
SPECIFIC POWERS
POWER TO EXTEND OR SHORTEN CORPORATE TERM
Note: May be used as means to voluntarily dissolve a corporation

The procedural requirements in extending/shortening corporate term are the

following:
1. Majority vote of the Board of Directors or Board of Trustees;
2. Ratification by 2/3 of the SH representing outstanding capital stock or by at least 2/3 of
the members in case of nonstock corporation;
3. Written notice of the proposed action and of the time and place of the meeting shall be
addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addressee in the post office with postage
prepaid, or served personally;
4. Copy of the amended AOI shall be submitted to the SEC for its approval; and
5. In case of special corporation, a favorable recommendation of appropriate government
agency. (Sec. 37)
Note: The extension must be done during the lifetime of the corporation not earlier than 5
years prior to the expiry date unless exempted. The extension must not exceed 50 years.
After the term had expired without extension, the corporation is dissolved. The remedy of
the stockholders is reincorporation.
Any dissenting stockholder may exercise his appraisal right in case of shortening or
extending corporate term (Sec. 37).
POWER TO INCREASE OR DECREASE CAPITAL STOCK
The procedural requirements in increasing or decreasing capital stock are the
following:
1. Majority vote of the BOD;
2. Ratification by stockholders representing 2/3 of the outstanding capital stock;
3. Written notice of the proposed increase or diminution of the capital stock and of the
time and place of the stockholders meeting at which the proposed increase or
diminution of the capital stock must be addressed to each stockholder at his place
of residence as shown on the books of the corporation and deposited to the
addressee in the post office with postage prepaid, or served personally
4. A certificate in duplicate must be signed by a majority vote of the directors of the
corporation and countersigned by the chairman and the secretary of the
stockholders meeting, setting forth:
A.
B.
C.

That the foregoing requirements have been complied with;

The amount of increase or diminution of the capital stock;
If an increase of the capital stock, the amount of capital stock or

number of shares of no par stock actually subscribed, the names,

nationalities and residences of the persons subscribing, the amount

D.

of capital stock or number of no par stock subscribed by each, and

the amount paid by each on his subscription in cash or property, or the

amount of capital stock or number of shares of no par stock allotted to
each stockholder if such increase is for the purpose of making effective
stock dividend authorized;
E. The amount of stock represented at the meeting; and
F.
The vote authorizing the increase or diminution of the capital stock
Note: The increase or decrease in the capital stock or the incurring, creating or
increasing bonded indebtedness shall require prior approval of the SEC.
*Additional requirement with respect to the increase of capital stock:
The application to be filed with the SEC shall be accompanied by the sworn
statement of the treasurer of the corporation, showing that at least 25% of the amount
subscribed has been paid either in cash or property or that there has been transferred to
the corporation property the valuation of which is equal to 25% of the subscription.
*The basis of the required 25% subscription:
It shall be based on the additional amount by which the capital stock increased and not on
the total capital stock as increased.
Note: There will be no treasurers affidavit in case of decrease in capital stock.
Corporation need not exhaust its original capital before increasing capital stock.
*Additional requirement with respect to the decrease of capital stock:
The same must not prejudice the right of the creditors.
*The ways of increasing or decreasing the capital stock?
By increasing or decreasing the:
1.
2.

Number of shares and retaining the par value;

Par value of existing shares without increasing or decreasing the

number of shares;
3.
Number of shares and increasing or decreasing the par value.

POWER TO DENY PRE-EMPTIVE-RIGHTS

Preemptive right:

It is the preferential right of shareholders to subscribe to all issues or disposition

of shares of any class in proportion to their present shareholdings. (Sec. 39)
Purpose of preemptive right:
To enable the shareholder to retain his proportionate control in the corporation
and to retain his equity in the surplus.
Questions:
1) Is there preemptive right on the reissuance of treasury shares?
Yes. When a corporation reacquires its own shares which thereby become
treasury shares, all shareholders are entitled to preemptive right when the corporation
reissues or sells these treasury shares. The reissuance of treasury shares is not
among the exception provided by Sec. 39 when preemptive right does not exist.
2) May preemptive right be waived by the stockholder?
Yes when the stockholder fails to exercise his preemptive right after being
notified and given an opportunity to avail of such right.
3) Is the preemptive right of a stockholder transferable?
Yes, unless there is an express restriction in the AOI.
4) When can the corporation deny preemptive right?
The corporation can deny preemptive right if the articles of incorporation or
amendment thereto denies such right.
Distinguish preemptive right from right of first refusal.
A: PREEMPTIVE RIGHT
RIGHT OF FIRST REFUSAL
May be exercised even when there is no Arises only by virtue of contractual
express provision of law

stipulations but is also granted under

the provisions on close corporation

Pertains to unsubscribed portion of the Exercisable
against
another
authorized capital stock. A right that may be stockholder of the corporation of his
claimed against the corporation. It includes shares of stock

treasury shares.

POWER TO SELL OR DISPOSE OF CORPORATE ASSETS:

Procedural requirements are the following:
1. Majority vote of the Board of Directors or Board of Trustees
2. Ratification by stockholders representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in case of nonstock corporation
3. Written notice of the proposed action and of the time and place of the meeting
addressed to each stockholder or member at his place of residence as shown
on the books of the corporation and deposited to the addressee in the post
office with postage prepaid, or served personally. (Sec. 40)
Note:
*The sale of the assets shall be subject to the provisions of existing laws on
illegal combinations and monopolies.
After such authorization or approval by the stockholders the board may, nevertheless,
in its discretion, abandon such SLEMPO. (Sec. 40)
*Any dissenting stockholder shall have the option to exercise his appraisal right.
Questions:
What is meant by substantially all of corporate assets?
If the corporation would be:
a) rendered incapable of continuing the business, or
b) accomplishing the purpose for which it was incorporated.
When may the corporation forgo the ratification by Stockholders/ members?
1. If sale is necessary in the usual and regular course of business;

2. If the proceeds of the sale or other disposition of such property and assets are to be
appropriated for the conduct of the remaining business;
3. If the transaction does not cover all or substantially all of the assets.
What is the effect of sale of all or substantially all of assets of one corporation to
another corporation?
General Rule:
The selling corporation of all or substantially all of the assets of the purchasing
corporation shall not be liable for the debts of the transferor corporation.
Exception:
Express or implied assumption of liabilities;
Merger or consolidation;
If the purchase was in fraud of creditors;
If the purchaser becomes a continuation of the seller;

If there is violation of the Bulk Sales Law.

POWER TO ACQUIRE SHARES:

Can a corporation acquire its own shares?
General Rule:
In the absence of statutory authority, the corporation cannot acquire its own shares;
Exception:
SEC Opinion, Oct. 12, 1992, imposed the following conditions on its exercise:
a) The capital of the corporation must not be impaired;
b) Legitimate and proper corporate objective is advanced;
c) Condition of the corporate affairs warrants it;
d) Transaction is designed and carried out in good faith
e) Interest of creditors not impaired, that is, not violative of the trust fund doctrine.
Note: Sec. 41 of the Code requires that:
a) the acquisition should be for a legitimate corporate purpose; and
b) there should be unrestricted retained earnings [URE].

Instances where corporation may acquire its own shares:

1.

To eliminate fractional shares out of stock dividends;

2.

To collect or compromise an indebtedness to the corporation, arising out of unpaid

subscription, in a delinquency sale and to purchase delinquent shares sold during said sale;

3.

To pay dissenting or withdrawing stockholders (in the exercise of the stockholders appraisal
right);

4.

To acquire treasury shares;

5.

Redeemable shares regardless of existence of retained earnings;

6.

To effect a decrease of capital stock;

7.

In close corporations, when there is a deadlock in the management of the business.

POWER TO INVEST CORPORATE FUNDS IN ANOTHER

CORPORATION OR

BUSINESS:
What are the requirements?
1. Approval by the majority vote of the Board of Directors or
Board of Trustee
2. Ratification by stockholders representing at least 2/3 of the
outstanding capital stock or by at least 2/3 of the members
in case of nonstock corporation
3. Ratification must be made at a meeting duly called for the
purposes, and
4. Prior written notice of the proposed investment and the
time and place of the meeting shall be made addressed to
each stockholder or member by mail or by personal
service.
Note: Investment of a corporation in a business which is in line with its primary purpose
requires only the approval of the board.
Any dissenting stockholder shall have appraisal right.

POWER TO DECLARE DIVIDENDS OUT OF UNRESTRICTED RETAINED EARNINGS

(URE)
The following are the requirements?
1. Existence of unrestricted retained earnings
2. Resolution of the board
3. In case of stock dividend, resolution of the board with the concurrence of votes
representing 2/3 of outstanding capital.
Questions:
*What are unrestricted retained earnings?
These are retained earnings which have not been reserved or set aside by the
board of directors for some corporate purpose.
*Who are entitled to receive dividends?
The stockholders of record date in so far as the corporation is concerned; if there
is no record date, the stockholders at the time of declaration of dividends (not at the
time of payment).
Note: In case of transfer, dividends declared before the transfer of shares belong
to the transferor and those declared after the transfer belongs to the transferee.

*Who are entitled to receive dividends in case of mortgaged or pledged shares?

General Rule:
The mortgagor or the pledgor has the right to receive the dividends.
Exception:
When the mortage or pledge is recorded in the books of the corporation, in
such a case then the mortgagee or pledgee is entitled to receive the dividends.

Forms of Dividends:
1) Cash
Cash dividends due on delinquent stock shall first be applied to the unpaid
balance on the subscription plus cost and expenses.
2) Stock
Stock dividends are withheld from the delinquent stockholder until his unpaid
subscription is fully paid.
3) Property
Stockholders are entitled to dividends PRORATA based on the total number of
shares and not on the amount paid on shares.
Questions:
When may corporation declare dividends?
General Rule: Even if there are existing profits, BOD has discretion to determine whether dividends are to be declared.
Exception: Stock corporations are prohibited from retaining surplus profits in excess of 100% of their paid in capital
stock.
Exception to Exception:
a.

Definite corporate expansion projects approved by the board of directors;

b.

Corporation is prohibited under any loan agreement with any financial institution or creditor from declaring
dividends without its/his consent and such consent has not yet been secured;

c.

The retention is necessary under special circumstances obtaining in the corporation, such as when there is a need for
special reserve for probable contingencies.

What if there is a wrongful or illegal declaration of dividends?

The Board of Directors is liable. The stockholders should return the dividends to the corporation (solutio indebiti).
What are the sources of dividends?
General Rule:
Dividends can only be declared out of actual and bona fide unrestricted retained earnings.
Exception: Dividends can be declared out of capital in the following instances:
a.

Dividends from investments wasting assets corporation;

b.

Liquidating dividends

What are the sources of retained earnings? Is it available for dividends?

A: SOURCES

OF RETAINED EARNINGS
AVAILABILITY FOR DIVIDENDS
Paidin surplus It is the difference between the It cannot be declared as cash dividend
par value and the issued value or selling price of but can be declared only as stock
the shares
dividends
Revaluation surplus Increase in the value of a Cannot be

declared

as

dividends

fixed asset as a result of its appreciation. They are because there is no actual gain (gain in
by nature subject to fluctuations.
paper only).
Reduction surplusthe surplus arises from the It cannot be declared as cash dividend
reduction of the par value of the issued shares of but can be declared only as stock
stocks.
Gain from Sale of Real Property
Treasury Shares

dividends
Available as dividends
Cannot be declared as stock or cash
dividends but it may be declared as
property dividend
Available as dividends

Operational Income Income

Distinguish cash and stock dividends?
CASH DIVIDENDS

STOCK DIVIDENDS

Part of general fund

Part of capital
Results in cash outlay
No cash outlay
Not subject to levy by corporate Once issued, can be levied by corporate
creditors

creditors because theyre part of corporate

capital
Declared only by the board of Declared by the board with the concurrence
directors at its discretion

of the stockholders representing at least 2/3

(majority of the quorum only, not of the outstanding capital stock at a

majority of all the board)
regular/special meeting
Does not increase the corporate Corporate capital is increased
capital
Its declaration creates a debt from No debt is created by its declaration
the corporation to each of its
stockholders
If received by individual: subject to Not subject to tax either received by

tax;

individual or a corporation

If received by corporation: not

subject to tax
Cannot
be

revoked

after Can be revoked despite announcement but

announcement
before issuance
Applied to the unpaid balance of Can be withheld until payment of unpaid
delinquent shares

balance of delinquent shares

POWER TO ENTER INTO MANAGEMENT CONTRACT

Management contract:
It is any contract whereby a corporation undertakes to manage or operate all or substantially all of the business of
another corporation, whether such contracts are called service contracts, operating agreements or otherwise. (Sec. 44)
Note: Sec. 44 refers only to a management contract with another corporation. Hence, it does not apply to
management contracts entered into by a corporation with natural persons.
The following are the requirements:
1. Contract must be approved by the majority of the BOD or BOT of both managing and managed corporation;
2. Ratified by the stockholders owning at least the majority of the outstanding capital stock, or members in case of a non
stock corporation, of both the managing and the managed corporation, at a meeting duly called for the purpose
3. Contract must be approved by the stockholders of the managed corporation owning at least 2/3 of the outstanding capital
stock entitled to vote, 2/3 members when:
a.

Stockholders representing the same interest in both of the managing and the managed corporation own or
control more than 1/3 of the total outstanding capital stock entitled to vote of the managing corporation;

b.

Majority of the members of the BOD of the managing corporation also constitute a majority of the BOD of the
managed corporation.

What is the allowed period for every management contract entered into by the corporation?
General Rule:
Management contract shall be entered into for a period not longer than 5 years for any one term.
Exception:
In cases of service contracts or operating agreements which relate to the exploitation, development, exploration or
utilization of natural resources, it may be entered for such periods as may be provided by the pertinent laws or regulations.

ULTRA VIRES ACTS:

Ultra Vires acts:
Those powers that are not conferred to the corporation by law, by its AOI and those that
are not implied or necessary or incidental to the exercise of the powers so conferred.
(Sec 45)
Types of ultra vires acts:
1. Acts done beyond the powers of the corporation (through BOD)
2. Ultra vires acts by corporate officers
3. Acts or contracts which are per se illegal as being contrary to law.
Doctrine of apparent authority:
If a corporation knowingly permits one of its officers, or any other agent, to act within
the scope

of an apparent authority, it holds him out to the public possessing the

power to do those acts; and thus, the corporation will, as against anyone who has in
good faith dealt with it through such agent, be estopped from denying the agents
authority.
When is the corporation estopped to deny ratification of contracts or acts entered by
its officers or agents?
Generally, when the corporation has knowledge that its officers or agents exceed their
power, it must promptly disaffirm the contract or act, and allow the other party or third
person to act in the belief that it was authorized or has been ratified. Otherwise, if it
acquiesces, with knowledge of the facts, or if it fails to disaffirm, ratification will be
implied. (Premiere Development Bank vs. CA, G.R. No. 159352, Apr. 14, 2004)
Consequences of an ultra vires act:

Ultra vires acts entered into by the board of directors binds the corporation and the
courts will not interfere unless terms are oppressive and unconscionable.
These are the effects for the specific acts:
1. Executed contract courts will not set aside or interfere with such contracts
2. Executory contracts no enforcement even at the suit of either party (void and
unenforceable)
3. Partly executed and partly executory principle of no unjust enrichment at
expense of another shall apply
4. Executory contracts apparently authorized but ultra vires the principle of
estoppel shall apply.
(Gamboa vs. Victoriano, G.R. No. L43324. May 5, 1979)
Distinctions between ultra vires acts and illegal acts:
ULTRA VIRES ACT
Not necessarily unlawful, but outside the powers

ILLEGAL ACTS
Unlawful; against law, morals, public

of the corporation

policy, and public order

Can be ratified
Cannot be ratified
Can bind the parties if wholly or partly executed Cannot bind the parties
What are the remedies in case of ultra vires act?
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of registration
2. Stockholders
a. Injunction; or
b. Derivative suit

3.Creditors
Nullification of contract in fraud of creditors.
Doctrine of Individuality of Subscription:
A subscription is one entire and indivisible whole contract. It cannot be divided
into portions. (Sec. 64)
Doctrine of equality of shares?
Where the articles of incorporation do not provide for any distinction of the
shares of stock, all shares issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are also subject to the same
liabilities. (Sec. 6)
TRUST FUND DOCTRINE:
Trust fund doctrine:
The subscribed capital stock of the corporation is a trust fund for the payment of debts
of the corporation which the creditors have the right to look up to satisfy their credits,
and which the corporation may not dissipate. The creditors may sue the stockholders
directly for the latters unpaid subscription.
Exceptions to the trust fund doctrine:
The Code allows distribution of corporate capital only in these instances:
1. Amendment of the Article of Incorporation to reduce authorized capital stock;
2. Purchase of redeemable shares by the corporation regardless of existence of
unrestricted retained earnings;
3. Dissolution and eventual liquidation of the corporation.

How are corporate powers exercised?

1. By the shareholders The shareholders participate in controlling the affairs of the
corporation by exercising their right to vote. They can elect the directors who will
actually govern the important matters that are still reserved to them by the
Corporation Code. (Aquino, 2006)
2. By the Board of Directors The Board of Directors is primarily responsible for the
governance of the corporation. Their primary duty is to set the policies for the
accomplishment of the corporate objectives. (Art. 3, Revised Code of Corporate
Governance). They elect the officers who carry out the policies
3. By the Officers They are elected by the Board of Directors tasked to carry out the
policies laid down by the Board, the articles of incorporation and the by-laws;

J. DISSOLUTION AND LIQUIDATION:

Dissolution of Corporation:
It is the extinguishment of the franchise of a corporation and the termination of its
corporate existence.
Modes of dissolution of corporation:
a) Voluntary; and
b) Involuntary dissolution.
Voluntary modes of dissolution of a corporation:
1. Where no creditors are affected
Procedure:
a) Majority vote of the board of directors or trustees; and

b) Resolution duly adopted by the affirmative vote of the stockholders owning at

least 2/3 of the outstanding capital stock or at least 2/3 of the members at a
meeting duly called for that purpose.
c) A copy of the resolution authorizing the dissolution shall be certified by a majority
of the board of directors or trustees and countersigned by the secretary of the
corporation.
d) Such copy shall be filed with SEC. (Sec. 118)
2. Where creditors are affected
Procedure:
a. Filing a petition for dissolution with the SEC
b. Such petition must be signed by majority of the board of directors or trustees
c. Must also be verified by the president or secretary or one of its directors
d. The dissolution was resolved upon by the affirmative vote of the stockholders
representing at least 2/3 of the outstanding capital stock or at least 2/3 of the
members at a meeting duly called for that purpose.
e. If there is no sufficient objection, and the material allegations of the petition are
true, a judgment shall be rendered dissolving the corporation and directing such
disposition of its assets as justice requires, and may appoint a receiver to collect
such assets and pay the debts of the corporation. (Sec. 119)
3.By shortening the corporate term
A voluntary dissolution may be effected by amending the AOI to shorten its
corporate term pursuant to the provisions of the Code. A copy of the amended AOI shall
be submitted to the SEC. Upon approval of the amended AOI of the expiration of the
shortened term, the corporation shall be deemed dissolved without any further
proceedings, subject to the provisions of the Code on liquidation. As an additional
requirement, the SEC requires to submit the final audited financial statement not older
than 60 days before the application for shortening the corporate term.

4. In case of a corporation sole, by submitting to the SEC for approval, a verified

declaration of dissolution (Sec.115). This merely needs the affidavit of the presiding
elder. No need for a board resolution.
5. By merger or consolidation, whereby the constituent corporations automatically
cease upon issuance by the SEC of the certificate of merger or consolidation, except
the surviving or consolidated corporation which shall continue to exist. (Secs. 79 and
80)
6. Expiration of the corporate term (Sec. 11).
Involuntary

modes of dissolution of a corporation:

1. By expiration of corporate term
2. Failure to organize and commence transaction of its business
within 2 years from date of incorporation (Sec. 22).
3. Continuous inoperation for a period of at least 5 years.
4. Legislative dissolution. In this case, a corporation created by
special law is dissolved also by a special law.
5. Dissolution of SEC on grounds under existing laws.

What are examples of dissolution by the SEC under existing laws?

Examples of dissolution by the SEC under special laws are:
1. Failure to file bylaws within the required period but, according to a SEC
Opinion, SEC will give it the opportunity to explain such failure and not
automatically dissolve the corporation.
2. By order of the SEC upon a verified petition and after proper notice and
hearing on the ground of serious misrepresentation as to what the
corporation can do or is doing to the great prejudice of or damage to the
general public.

3. Revocation or forfeiture of the franchise or certificate of incorporation

due to its misuse or nonuse pursuant to quo warranto proceedings filed
by the Solicitor General.
4. Failure to file required reports
Modes of liquidation?
1. By the corporation itself or its board of directors or trustees;
(Sec. 122, par. 1)
2. By a trustee to whom the assets of the corporation had been
conveyed. (Sec. 122, par. 2); (Board of Liquidators v. Kalaw,
G.R. No. L18805, Aug. 14, 1967)
3. By a management committee or rehabilitation receiver
appointed by SEC; (Sec. 119, last par.)
Questions:
*Does a corporation in the process of liquidation have legal authority to engage
in any new business?
No, a corporation in the process of liquidation has no legal authority to engage in
any new business, even if the same
is in accordance with the primary purpose stated in its article of incorporation.
*What are the consequences if the liquidation is not terminated within the 3year
period?
1.

Pending suits for or against the corporation which were initiated prior to the expiration of the 3 year period shall
continue. (Gelano v. CA, G.R. No. L39050, Feb. 24, 1981)
2.

New actions may still be filed against the trustee of the corporation even after the expiration of the 3 year period

but before the affairs of said corporation have been finally liquidated or settled by the trustee. (Republic v. Marsman,
G.R. No. L18956 Apr. 27, 1972)

3.

A corporation which has a pending action which cannot be finished within the 3year
period is authorized to convey all its property, including pending choses of action, of
a trustee to enable it to prosecute and defend suits by or against the corporation
beyond the 3year period. Where no trustee is appointed, its counsel who
prosecuted and represented the interest of the corporation may be considered as
trustee of said corporation, at least with respect to the matter in litigation (Gelano v.
CA, G.R. No. L39050, Feb. 24, 1981). The directors may also be permitted to
continue as trustees to complete the liquidation. (Clemente v. CA, G.R. No. 82407,
Mar. 27, 199

4. The creditors of the corporation who were not paid may follow the property of the
corporation that may have passed to its stockholders unless barred by prescription or
laches or disposition of said property in favor
*What is the rationale behind the 3year period?
The continuance of a corporations legal existence for three years for the purpose of
enabling it to close up its business is necessary to enable the corporation to collect
the demands due it as well as to allow its creditors to assert the demands against it.
*May the corporation, through its president condone penalties and charges after
it had been placed under receivership?
No. The appointment of a receiver operates to suspend the authority of a
corporation and of its directors and officers over its property and effects, such
authority being reposed in the receiver (Yam v. CA, G.R. No. 104726 Feb 11,
1999).
*When may the Commission appoint a receiver to undertake the winding up and
liquidation of a corporation?

Where the application for dissolution of a corporation is upon application,

affecting rights of creditors, or involuntarily initiated by verified complaint, the
Commission may appoint a receiver to undertake the winding up rather than
entrust the responsibility to directors and corporate officers.
*What is the effect if the corporation appoints a trustee and convey all its
property to him for the benefit of stockholders, members, creditors and other
persons in interest?
After such conveyance to the trustee, all interest which the corporation had in the
property terminates and the legal interests vests in the trustee, subject to the
beneficial interest of stockholders, members, creditors or other persons in
interest.
Q: When does the act of the officers bind the corporation?
A:
1.

If it is provided in the bylaws

2.

If authorized by the board

A: If a corporation knowingly permits one of its officers, or any other agent, to act within the scope of an apparent authority,
it holds him out to the public possessing the power to do those acts; and thus, the corporation will, as against anyone who has
in good faith dealt with it through such agent, be estopped from denying the agents authority.
Q: When is the corporation estopped to deny ratification of contracts or acts entered by its officers or agents?

C. Nationality of Corporations
1. Place of Incorporation Test
This means that corporate nationality shall be in accordance with the laws
of the country where it was created or organized.
Example: If X-Corp is organized in accordance with Philippine laws, then it is a
Filipino corporation; if in accordance with Chinese laws, it is a Chinese
corporation.
2. Control Test

The citizenship of the corporation is determined by the citizenship of its

controlling stockholders. If the controlling stockholders of a corporation are
American corporation; it is an American corporation.
A corporation shall be considered a Filipino corporation if the Filipino ownership
of its capital stock is at least 60% and where the 60-40 Filipino-alien is not in
doubt.
3. Grandfather Rule
Applied in determining the nationality of a corporation. It traces the
nationality of the stockholders of investors so as to ascertain the nationality of the
corporation where the investment is made.
D. Corporate Juridical Personality
1. Doctrine of Separate Juridical Personality
- A Corporation has a personality Separate and Distinct from its Stockholders or
Members
a. Liability for Torts and Crimes
- TORTS: A tort is a wrongful act that injures or interferes with another's
person or property. A tort case is a civil court proceeding. The accused is the
"defendant" and the victim is a "plaintiff." The charges are brought by the plaintiff. If
the defendant loses, the defendant has to pay damages to the plaintiff.
CRIMES: A crime is a wrongful act that the state or federal government has
identified as a crime. A criminal case is a criminal proceeding. The accused is also
called a 'defendant". The victim is the person who has been hurt or the state of
Georgia or
If the

other governmental entity. The charges are brought by the government.

defendant loses, the defendant must serve a sentence. A fine is paid to the

government

and there is possible restitution to the victim.

b. Recovery of Moral Damages

2. Doctrine of Piercing the Corporate Veil

- While a corporation cannot generally be made liable for acts or liabilities of its
stockholders or members, and vice versa because a corporation has a personality
separate and distinct from its stockholders or members, however, the corporate
existence is disregarded under this doctrine where the corporation is formed or used for
illegitimate purposes or justify wrong or evade a just and valid obligation. In such a
case, the corporation and the stockholders shall be considered as one and the same.
-

Separate

and

Distinct

personality

of

the

corporation

and

its

stockholders are pierced and treated as one in case the corporation is

used as cloak for illegal acts.
a.
-

Grounds for Application of Doctrine

corporation is formed or used for illegitimate purposes
justify wrong
evade a just and valid obligation

b.
-

Test in Determining Applicability

Avoidance on redress of fraud
Prevention of the evasion of statute or law
Prevention of the evasion of contract
Internal corporate dealings disregarding corporate entity where third

persons are not involved

Corporate agencies or affiliates of other corporations

H. Stockholders and Members owner of stocks in a corporation

1. Rights of Stockholders and Members
-

right to vote at stockholders meetings either in person or proxy

To receive his proportionate share of the profits of the corporation by

way of dividends

To approve the declaration of stock dividends

Pre-emptive right

To inspect corporate books and records

Right to financial statements

Right to Appraisal

Right to participate proportionately in the distribution of corporate

assets upon corporate liquidation following dissolution and winding up

Right to file derivative suit

Right to the issuance of a certificate of stock upon compliance with the

conditions which entitle him to one

a. Doctrine of Equality of Shares The shares issued by a corporation are presumed to be

equal.
2. Participation in Management
a. Proxy authority given by a stockholder to another to vote for him at a shareholders
meeting.
b. Voting Trust irrevocable proxies. One created by an agreement between a group of
the stockholders of a corporation and a trustee, or by a group of identical agreements
between individual stockholders and a common trustee, whereby it is provided that for a
term of years, or for a period contingent upon a certain event, or until the agreement is
terminated, control over the stock owned by such stockholders, either for certain purposes
or for all, shall be lodged in the trustee, either with or without a reservation to the owners
or persons designated by them of the power to direct how such control shall be used.
c. Cases When Stockholders Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right
e. Right to Vote
f. Right to Dividends
g. Right of First Refusal
4. Remedial Rights
a. Individual Suit
b. Representative Suit
c. Derivative Suit
5. Obligation of a Stockholder
6. Meetings
a. Regular or Special

i. When and Where

ii. Notice
b. Who Calls the Meetings
c. Quorum
d. Minutes of the Meeting

L. Mergers and Consolidations

1. Definition and Concept
- Merger is the absorption of one or more corporations by another existing
corporation,

which retains its identity and takes over the rights, privileges, franchises

and properties,

and assumes all the liabilities and obligations of the absorbed

corporation(s) in the same

manner as if it had itself incurred such liabilities or

obligations. The absorbing

corporation continues its existence while the life or lives of

the other corporation(s) is/are terminated. Consolidation is the union of two or more
corporations into a single

new corporation, called the consolidated corporation, all

the constituent corporations thereby ceasing to exist as separate entities. The

consolidated corporation shall

thereupon and thereafter possess all the rights,

privileges, immunities, franchises and

properties, and assume all the liabilities and

obligations of each of the constituent

corporations in the same manner as if it had

itself incurred such liabilities or obligations.

2. Constituent vs. Consolidated Corporation
Constituent -A word used as a correlative to "attorney," to denote one who
constitutes another his agent or invests the other with authority to act for him. ' It is
also used in the language of politics, as a correlative to "representative," the
constituents of a legislator being those whom he represents and whose interests he
is to

care for in public affairs; usually the electors of his district.

Consolidated Corporation- The combining of assets, liabilities and other

financial

items of two or more entities into one. In the context of financial accounting,

the term

consolidate often refers to the consolidation of financial statements, where

all subsidiaries report under the umbrella of a parent company. These statements
are

called

the merger and

consolidated
acquisition

consolidation, however, differs

financial
of

statements.

smaller

Consolidation

companies

into

larger

also

refers

to

companies.

from a merger in that the consolidated companies

could also result in a new entity, whereas in a merger one company absorbs the other
and remains in existence while the other is dissolved.
3. Plan of Merger or Consolidation
-Two or more corporations may merge into a single corporation which shall be
one of the constituent corporations or may consolidate into a new single corporation
which shall be the consolidated corporation.
4. Article of Merger or ConsolidationA. Upon receiving the approvals required by Sections 53-14-1, 53-14-2 and 5314-3 NMSA 1978, articles of merger or articles of consolidation shall be executed by
each corporation by an authorized officer and shall set forth: (1) the plan of merger
or the plan of consolidation; (2) as to each corporation, either: (a) the number of
shares
the

outstanding, and, if the shares of any class are entitled to vote as a class,
designation and number of outstanding shares of each such class; or (b) a

statement that the vote of shareholders is not required by virtue of Subsection D of

Section 53-14-

NMSA

1978;

112

53-14-5

BUSINESS

CORPORATIONS;

MERGERS AND CONSOLIDATIONS 53-14-5 (3) as to each corporation the approval

of whose shareholders is required, the number of shares voted for and against the
plan,

respectively, and, if the shares of any class are entitled to vote as a class, the

number of shares of each such class voted for and against the plan, respectively; and
(4) as to the

acquiring corporation in a plan of exchange, a statement that the

adoption plan and

performance of its terms were duly approved by its board of

directors and such other requisite corporate action, if any, as may be required of it.
B. The original of the articles of merger, consolidation or exchange together with
a copy, which may be signed, photocopied or conformed, shall be delivered to the
commission [secretary of state]. If the commission [secretary of state] finds that the
articles conform to law, it shall, when all fees have been paid: (1) endorse on the
original and copy the word "filed" and the month, day and year of the filing; (2) file
the

original in its office; and (3) issue a certificate of merger, consolidation or

exchange to

which it shall affix the file-stamped copy.

C. The certificate of merger, consolidation or

exchange, together with the file-

stamped copy of the articles affixed to it shall be returned by the commission

[secretary of state] to the surviving, new or acquiring corporation or its

representative.
5. Procedure
Any two or more domestic corporations may consolidate into a new corporation
pursuant to a plan of consolidation approved in the manner provided in the
Business Corporation Act [Chapter 53, Articles 11 to 18 NMSA 1978]. The
board

of directors of each corporation shall, by a resolution adopted by each

such

board, approve a plan of consolidation setting forth:

A. the names of the corporations proposing to consolidate, and the name
of the new

corporation into which they propose to consolidate, which is

hereinafter designated as

the "new corporation";

B. the terms and conditions of the proposed consolidation;

C. the manner and basis of converting the shares of each corporation into
shares, obligations or other securities of the new corporation or any other
corporation or, in whole or in part, into cash or other property;
D. with respect to the new corporation, all of the statements required to
be set forth in articles of incorporation for corporations organized under the
Business Corporation Act

[Chapter 53, Articles 11 to 18 NMSA 1978]; and

E. other provisions with respect to the proposed consolidation as deemed

necessary or desirable.
6. Effectivity
(A) Unless a later date is specified in the agreement, a merger or consolidation
under sections 1729.35 and 1729.36of the Revised Code is effective when the
certificate of merger or consolidation is filed in accordance with section1729.38 of the
Revised

Code. If, after filing the certificate but before the merger or consolidation is

effective, the merger or consolidation is amended or abandoned, as provided in

divisions (E) and (F) of section 1729.35 of the Revised Code, an authorized officer of
each constituent association shall sign a certificate of amendment or abandonment
stating that the

agreement of merger or consolidation has been amended or

abandoned and the date of such action, and shall file the certificate in the same
manner as the certificate of merger or consolidation. Any certificate of amendment or

abandonment shall be filed prior to the date the merger or consolidation would
otherwise be effective.
(B) In the case of a merger, the surviving association or entity is the one
designated in the agreement. In the case of a consolidation, the new association or
entity is the one designated in the agreement. The separate existence of all
constituent associations or

entities in the agreement, except the surviving or new

association or entity, ceases upon

the

effective

date

of

the

merger

or

consolidation.
(C) The surviving or new association or entity possesses all the rights and all
the

property of each constituent association or entity, and is responsible for all

their

obligations. Title to any property is vested in the surviving or new association or

entity with no reversion or impairment of the property caused by the merger or

consolidation. A merger or consolidation shall not be considered an assignment. No
right of any

creditor shall be impaired by the merger or consolidation without the

creditor's consent.
(D) If the surviving organization is an association, the articles of incorporation
are amended to the extent provided in the agreement of merger.

7.Limitation
A bond covenant that restricts in some way a firm's ability to merge or
consolidate with another firm.

8.Effects
Unless the commission [secretary of state] disapproves pursuant to Subsection
A of Section 53-18-2 NMSA 1978, a merger, consolidation or exchange shall become
effective upon delivery of the articles of merger, consolidation or exchange to the
commission [secretary of state] or on such later date, not more than thirty days
subsequent to the delivery thereof to the commission[secretary of state], as shall be
provided for in the plan. When a merger or consolidation has become effective:

A. the several corporations parties to the plan of merger or consolidation shall

be a single

corporation, which, in the case of a merger, shall be that corporation

designated in the plan of merger as the surviving corporation and, in the case of a
consolidation, shall be

the new corporation provided for in the plan of

consolidation;
B. the separate existence

of all corporations parties to the plan of merger or

consolidation, except the surviving or

new corporation, shall cease;

C. the surviving or new corporation shall have all the rights, privileges,
immunities and

powers and shall be subject to all the duties and

liabilities of a

corporation organized under the Business Corporation Act [Chapter 53, Articles 11
to 18 NMSA 1978];
D. the surviving or new corporation shall there upon possess all the rights,
privileges, immunities and franchises of a public or private nature of each of the
merging

or consolidating corporations; and all property, real, personal and mixed and

all debts

due on whatever account, including subscriptions to shares, and all other

chooses in

action and every other interest of, or belonging to, or due to, each of the

corporations so merged or consolidated shall be taken and deemed to be transferred

to and vested in
any real estate, or

such single corporation without further act or deed, and the title to
any interest therein, vested in any of such corporations shall not

revert or be in any way

impaired by reason of the merger or consolidation;

E. the surviving or new corporation shall thenceforth be responsible and liable

for all the liabilities and obligations of each of the corporations so merged or
consolidated, and any claim existing or action or proceeding pending by or against
any

of such corporations may be prosecuted as if the merger or consolidation had

not taken place, or the surviving or new corporation may be substituted in its place.
Neither the

rights of creditors nor any liens upon the property of any such

corporation shall be impaired by the merger or consolidation;

F. in the case of a merger, the articles of incorporation of the surviving
corporation shall be deemed to be amended to the extent, if any, that changes in its
articles of incorporation are stated in the plan of merger, and, in the case of a
consolidation, the statements set forth in the articles of consolidation and which are
required or permitted to be set forth in the articles of incorporation of corporations

organized under the Business Corporation Act shall be deemed to be the original
articles

of incorporation of the new corporation; and

G. when a merger, consolidation or exchange has become effective, the shares

of the corporation or corporations party to the plan that are, under the terms of the
plan, to be converted or exchanged shall cease to exist, in the case of a merger or
consolidation, or be deemed to be exchanged, in the case of an exchange, and the
holders of such shares shall thereafter be entitled only to the shares, obligations,
other securities, cash or other property into which they shall have been converted or
for which they shall have been exchanged, in accordance with the plan, subject to any
rights under Section 53-14-4 NMSA 1978.
E. Incorporation and Organization
1. Promoter
Who Are Promoters?
Promoter is a person who, acting alone or with others, takes initiative in founding and
organizing the business or enterprise of the issuer and receives consideration there for.
(Sec. 3.10, Securities Regulation Code [R.A. 8799])
The definition of promoter is important to determine the liability for promoters contract.
Before you can make a promoter liable, you must be able to determine who is the
promoter. He must be the one who takes initiative on the founding and organization of
the business venture which eventually ends up as the corporation being organized.
Q: Promoter v. Agent
A: The promoters are not the corporation itself, and although they may be regarded, for
certain purposes as sustaining to the corporation a relationship similar to that of an
agent, strictly speaking they cannot be regarded as such, there being at that time no
existing principal
.Q: Promoter v. Trustee
A: A promoter is also sometimes likened to a trustee. But a trustee is supposed to be
entirely disinterested, while persons engaged in promotion expect to receive and seek
to obtain a liberal award or profit for their initiative.

a. Liability of Promoter
Personal Liability of Promoter on Pre-Incorporation Contracts
GENERAL RULE: Promoters are personally liable on their contracts
made on behalf of a corporation to be formed.
EXCEPTION:

If there is an express or implied agreement to the

contrary. It must be noted that the fact that the corporation when formed
has adopted or ratified the contract does not release the promoter from
responsibility unless a novation was intended.
WELLS VS. FAY & EGAN CO. (143 Ga. 732, 85 S.E. 873; 1915)
Individual promoters cannot escape liability where they buy
machinery, receive them in their possession and authorize one
member to issue a note, in contemplation of organizing a
corporation which was not formed. (see Campos' notes p. 258-259).
The agent is personally liable for contracts if there is no principal.
The making of partial payments by the corporation, when later
formed, does not release the promoters here from liability because
the corporation acted as a mere stranger paying the debt of
another, the acceptance of which by the creditor does not release
the debtors from liability over the balance. Hence, there is no
adoption or ratification.
HOW & ASSOCIATES INC. VS. BOSS (222 F. Supp. 936; 1963)
The rule is that if the contract is partly to be performed before
incorporation, the promoters solely are liable. Even if the promoter
signed "on behalf of corporation to be formed, who will be obligor,"
there was here an intention of the parties to have a present obligor,
because three-fourths of the payment are to be made at the time the
drawings or plans in the architectural contract are completed, with or
without incorporation. A purported adoption by the corporation of the
contract must be expressed in a novation or agreement to that
effect. The promoter is liable unless the contract is to be construed
to mean: 1) that the creditor agreed to look solely to the new

corporation for payment; or 2) that the promoter did not have any
duty toward the creditor to form the corporation and give the
corporation the opportunity to assume and pay the liability.
QUAKER HILL VS. PARR (148 Colo. 45, 364 P. 2d 1056; 1961)
The promoters here are not liable because the contract imposed no
obligation on them to form a corporation and they were not named
there as obligors/promissors. The creditor-plaintiff was aware of the
inexistence of the corporation but insisted on naming it as obligor
because the planting season was fast approaching and he needed
to dispose of the seedlings. There was no intent here by plaintiffcreditor to look to the promoters for the performance of the
obligation. This is an exception to the general rule that promoters
are personally liable on their contracts, though made on behalf of a
corporation to be formed.
b. Liability of Corporation for Promoters Contracts
Liability of Corporation for Promoters Contracts
While a corporation could not have been a party to a
promoter's contract since it did yet exist at the time the
contract was entered into and thus could not possibly have
had an agent who could legally bind it, the corporation may
make the contracts its own and become bound thereon if, after
incorporation, it:
(1)
(2)

Adopts or ratifies the contract; or

Accepts its benefits with knowledge of the terms

thereof.
It must be noted, however, that the contract must be
adopted in its entirety; the corporation cannot adopt only the
part that is beneficial to it and discard that which is
burdensome. Moreover, the contract must be one which is
within the powers of the corporation to enter, and one which

the usual agents of the company have express or implied

authority to enter.
McARTHUR V. TIMES PRINTING CO. (48 Minn. 319,
51 N.W. 216; 1892)
It is not a requisite that a corporation's adoption or acceptance of a
promoter's contract be expressed, but it may be inferred from acts or
acquiescence on the part of the corporation, or its authorized
agents, as any similar original contract might be shown.
The right of agents to adopt an agreement originally made by
promoters depends upon the purposes of the corporation and the
nature of the agreement. The agreement must be one which the
corporation itself could make and one which the usual agents of the
company have express or implied authority to enter into.
CLIFTON v. TOMB (21 F. 2d 893; 1921)
Whatever may be the proper legal theory by which a corporation
may be bound by the contract (ratification, adoption, novation, a
continuing offer to be accepted or rejected by the corporation), it is
necessary in all cases that the corporation should have full
knowledge of the facts, or at least should be put upon such notice as
would lead, upon reasonable inquiry, to the knowledge of the facts.
CAGAYAN FISHING DEV. CO. v. SANDIKO (65 Phil. 223; 1937)
A promoter could not have acted as agent for a corporation that
had no legal existence. A corporation, until organized, has no life
therefore no faculties. The corporation had no juridical personality
to enter into a contract.
Also see Caram v. CA
Corporate Rights under Promoters Contracts
Should the other contracting party fail to perform its part of the bargain, the
corporation which has adopted or ratified the contract may either sue for:
(1)

Specific performance; or

(2)

Damages resulting from breach of contract.

The fact of bringing an action on the contract has been held to constitute
sufficient adoption or ratification to give the corporation a cause of action.
BUILDERS DUNTILE CO. v. DUNN (229 Ky. 569, 17 S.W. 2d 715; 1929)
When the corporation was formed, the incorporators took upon
themselves the whole thing, and ratified all that had been done on
its behalf. Though there was no formal assignment of the contract
to the corporation, the acts of the incorporators were an adoption of
the contract. Therefore the corporation has the right to sue for
damages for the breach of contract.
3. Corporate Name - Limitations on Use of Corporate Name
Corporate Name (Secs. 18, 14(1) and 42; Red Line Trans. v. Rural Transit , 60 Phil.
549[1934]).
Sec. 18 Corporate Name No corporate name may be allowed by the SEC if the
proposed name is identical or deceptively confusing or similar to that of any existing
corporation or to any other name already protected by law or is patently deceptive,
confusing or contrary to existing laws. When a change in the corporate name is
approved, the Commission shall issue an amended certificate of incorporation under
the amended name.
Sec. 42 Power to invest corporate funds in another corporation or business or for
any other purpose Subject to the provisions of this Code, a private corporation may
invest its funds in any other corporation or business or for any other purpose other than
the primary purpose for which it was organized when approved by a majority of the
board of directors or trustees and ratified by the stockholders representing 2/3 of the
outstanding capital stock or at least 2/3 of the members in case of non-stock
corporations, at a stockholders or members meeting duly called for the purpose.
Written notice of the proposed investment and the time and place of the meeting shall
be addressed to each stockholder or member at his place of residence as shown on the
books of the corporation and deposited to the addresse in the post office with postage
prepaid, or served personally: Provided: That any dissenting stockholder shall have

appraisal right as provided in this Code: Provided, however, That where the investment
by the corporation is reasonably necessary to accomplish its primary purpose as stated
in the articles of incorporation, the approval of the stockholders or members shall not
be necessary.
Parties organizing a corporation must choose a name at their peril; and the use of a
name similar to one adopted by another corporation, whether a business or a
nonprofit organization
, if misleading or likely to injure the exercise of its corporate functions, regardless of
intent, may be prevented by the corporation having a prior right. Ang MgaKaanib sa
Iglesia ng Dios Kay Kristo Hesus v. Iglesia ng Dios Kay Dristo Jesus, 372
SCRA171 (2001).
Similarity in corporate names between two corporations would cause confusion to the
public especially when the purposes stated in their charter are also the same type
of business. Universal Mills Corp. v. Universal Textile Mills Inc. , 78 SCRA 62
(1977).
Section 18 of Corporation Code expressly prohibits the use of a corporate name which
is identical or deceptively or confusingly similar to that of any existing corporation or to
any other name already protected by law or is patently deceptive, confusing or
contrary to existing laws. The policy behind the foregoing prohibition is to avoid fraud
upon the public that will occasion to deal with the entity concerned, the evasion of legal
obligations and duties, and the reduction of difficulties of administration and supervision
over corporations. Industrial Refractories Corp. v. Court of Appeals, 390 SCRA 252
(2002); Lyceum of the Philippines v. Court of Appeals, 219 SCRA 610, 615 (1993).
A corporation has no right to intervene in a suit using a name, not even its acronym,
other than its registered name, as the law requires and not another name which it had
not registered.
Laureano Investment and Dev. Corp. v. Court of Appeals, 272 SCRA 253(1997).

There would be no denial of due process when a corporation is sued and judgment is
rendered against it under its unregistered trade name, holding that [a] corporation
maybe sued under the name by which it makes itself known to its workers. PisonArceo Agricultural Dev. Corp. v. NLRC, 279 SCRA 312 (1997).
A corporation may change its name by the amendment of its articles of incorporation,
but the same is not effective until approved by the SEC. Philippine First Insurance Co.
v.Hartigan , 34 SCRA 252 (1970).
A change in the corporate name does not make a new corporation, and has no effect
on the identity of the corporation, or on its property, rights, or liabilities. Republic
Planters Bank v. Court of Appeals, 216 SCRA 738 (1992).
The name of a corporation is very important, the incorporators constituting as body
politic and corporate under the name stated in the articles of incorporation for the
period of time mentioned therein. Such name is fatal in commercial transactions. The
public may only know the corporation through its name.
The name of a corporation is (1) essential to its existence (2) it cannot change its
name xcept in the manner provided by the statute (3) by that name alone is it
authorized to transact business and (4) it is through its name that a corporation can sue
and be sued and perform all other legal acts.
SEC reserves the right to order a corporation to change name when it appears that
there is an identical name.
Guidelines on Corporate Names:
1.) Name must contain Corp. or Inc.
2.) Name must not tend to mislead or confuse the public and must not contain such
descriptive words as excellent fair good, etc.
3.) Name must not be similar to a name already used by another partnership or
corporation.

4.) If proposed name contains a word similar to a word already used as a part of the
firm name of a registered corporation, proposed name must contain two other words
different from the name of the company already registered.
5.) If name or surname used as part of corporate name, the incorporators must have a
basis for such surname; it being one of the incorporators: Otherwise, consent of the
person whose name is being used must be submitted.6.) If it contains initials, it must
contain an explanation of the meaning and relevance or reason thereof.7.) The use of
the words State Maharlika and Baranggay are prohibited and reserved for the
government. The following words when used must at least relate to the line of business
namely: Financing and Investment. The following words are prohibited from being used
namely: National, Engineer, Architect.

4. Corporate Term
Corporate Term (Sec. 11)
Sec. 11 Corporate Term A corporation shall exist for a period not exceeding fifty years
(50) from the date of incorporation unless sooner dissolved or unless said period is
extended. The corporate term as originally stated in the articles of incorporation may be
extended for periods not exceeding fifty years (50) in any single instance by an
amendment of the articles of incorporation in accordance with this Code; Provided, that
no extension can be made earlier than five years (5) prior to the original or subsequent
expiry dates unless there are justifiable reasons for an earlier extension as may be
determined by the SEC.
The purpose of the limit emphasizes the contractual nature of the corporation the
extension must be approved by the State. No extension of term can be effected once
dissolution stage has been reached, as it constitutes new business. Alhambra Cigar v.
SEC, 24 SCRA 269 (1968)
5. Minimum Capital Stock and Subscription Requirements

Sec. 12. Minimum capital stock required of stock corporations. - Stock

corporations incorporated under this Code shall not be required to have any minimum
authorized capital stock except as otherwise specifically provided for by special law,
and subject to the provisions of the following section.
Sec. 13. Amount of capital stock to be subscribed and paid for the purposes of
incorporation. - At least twenty-five percent (25%) of the authorized capital stock as
stated in the articles of incorporation must be subscribed at the time of incorporation,
and at least twenty-five (25%) per cent of the total subscription must be paid upon
subscription, the balance to be payable on a date or dates fixed in the contract of
subscription without need of call, or in the absence of a fixed date or dates, upon call
for payment by the board of directors: Provided, however, That in no case shall the
paid-up capital be less than five Thousand (P5,000.00) pesos.
Q: Does the Corp. Code expressly provide for a minimum requirement of the
authorized capital stock?
A: Under Sec. 12 there is no minimum requirement but the Code says that in no case
shall the paid up capital be less than P5,000 (Sec. 13). Thus it turns out that P5,000 is
theminimum.77

Q: Why is the maximum capitalization required to be indicated?

A: (1) To protect the stockholders and also it limits the issuance of capital stock and the
extent of the voting power or capacity of a stockholder
(2) Because of accountability. Whether a corporation is going to do good or bad will
depend upon the assets its holds. The only way by which the State can look at the
accountability of a corporation in terms of assets it receives is to get a maximum so that
if the corporation wants to go beyond that, it has to go back to the State.
Q: What is the 25%-25% rule?
A: It means that of the authorized capital stock applied for, 25% thereof must be
subscribed. Of the 25% subscribed thereof must be paid up. Example, a corporation is

by 5 individuals and they ask for an authorized capital stock of P2M, how much must
each subscribe to?P125,000.
RATIONALE: The purpose of such a requisition is that the State may be
assured of the successful prosecution of the work and that creditors of the
company may have to the extent, at least, of the required subscription, the
means of obtaining satisfaction for their claims.
Q: Must each subscribe equally?
A: No

6. Articles of Incorporation
a. Nature and Function of Articles

The article of incorporation is

1.) A CONTRACT an agreement that gives rise to obligations:
a.)Between the corporation and the state (because it is under the AI
by which the state grants the primary franchise.) state manifests its
consent through the SEC while the corporation manifests its consent
by the filing of the AI, through the incorporators and eventually
through the Board of Directors.
b.)Between the state and stockholders
c.)Between the corporation and stockholders -> the stockholders
manifest their consent through their subscription of stocks and
through voting -> as against the corporation, the stockholders do not
have individual standing but only standing as a group.
d.)Among stockholders -> in this situation they now have individual
standing.

e.)Between the stockholders and the Board of Directors

f.)Between the corporation and the public (since the AI is a public
document.)
2.) A PUBLIC DOCUMENT because it is registered with the SEC. Such
works with the doctrine of public notice that when the public deals with the
corporation, the contents of AI binds them whether they in fact have seen the
AI or not. When a person enters into a contractor any transaction with a
corporation whether or not he has checked with the SEC the terms and
conditions of the AI, he will be bound by it. He cannot claim ignorance of the
charter of the corporation.
Nature of Charter: The charter is in the nature of a contract between the
corporation and the government.
Government of P.I. v. Manila Railroad Co., 52 Phil. 699
(1929).GOVERNMENT OF P.I. v. MANILA RAILROAD CO.
Facts: The GPI filed a petition for mandamus in the SC to compel
the Manila Railroad and Jose Paez, its manager to provide and
equip the telegraph poles of the company in Tarlac and LaUnion with
crosspieces for 6 telegraph wires belonging to the government
which, it alleged, are necessary for public service between certain
municipalities. Petitioner relies on Sec. 84 of Act No.1459 which
provides that the railroad company shall establish a telegraph line
for the use of the railroad and that such posts may be used for
government wires and shall be sufficient for crosspieces to carry the
number of wires which the government may consider necessary for
public service. Petitioner contends that since 6 crosspieces are now
necessary for public service, the company should provide sufficient
crosspieces. Respondent answers by saying that the Charter of

Manila Railroad (Act No. 1510) repealed Sec. 84 of Act 1459 and
contended that the Government is entitled to only 4 wires.
Held: Petition denied. Inasmuch as Act No. 1510 is the charter of
the Manila Railroad Co. constitutes a contract between the
corporation and the government, it would seem that the corporation
is governed by its contract and not by the provisions of the general
law. But from a reading of the charter it will be seen that there is no
indication that the government intended to impose upon said
company any other conditions or obligations not expressly found in
the said contract or charter. Section 84 of the Corp. Law was
intended to apply to all railways in the Philippines which did not have
a special charter or contract. Act No. 1510 applies only to Manila
Railroad and being a special charter, its adoption had the effect of
superseding the provisions of the corporation law which are
applicable to railroads in general. The charter of a corporation is a
contract between three parties: (1) it is a contract between the state
and the corporation to which the charter is granted (2) it is a contract
between stockholders and the state (3) it is a contract between the
corporation and its stockholders. A special charter constitutes a
contract between the corporation and the government and as such
are both equally bound by its provisions. For the State to impose an
obligation or a duty upon the respondent corporation, not expressly
provided in the charter would amount to a violation of said
contract. The provisions of Act 1459 relate to the number of wires
which the government may place upon poles of the company are
different and more onerous than the provisions of the charter.
NOTE: Articles of Incorporation cannot prevail over statutory
provisions. Such cannot overcome the law. However in the case of
GPI, its special charter overruled the Gen. Law on the ground that
the former is both a contract and a law. Thus, its charter as a law

creates an amendment to all other laws. In the same manner, if the

former were a mere contract then the case would have been
decided differently
b. Contents
Sec. 14 Contents of the Articles of Incorporation All corporations organized
under this code shall file with the SEC articles of incorporation in any of the
official languages duly signed and acknowledged by all of the incorporators,
containing substantially the following matters, except as otherwise prescribed by
this Code or by special law:
1.The name of the corporation;
2.The specific purpose or purposes for which the corporation is
being incorporated. Where a corporation has more than one stated
purpose, the articles of incorporation shall state which is the primary
purpose and which is/are the secondary purpose or purposes:
Provided, that a non-stock corporation may not include a purpose
which would change or contradict its nature as such;
3.The place where the principal office of the corporation is to be
located, which must be within the Philippines;
4.The term for which the corporation is to exist;
5.The names, nationalities and residences of the incorporators;
6.The number of directors and trustees which shall not be less than
five nor more than fifteen;
7.The names, nationalities and residences of persons who shall act
as directors or trustees until the first regular directors or trustees are
duly elected and qualified in accordance with this Code;
8.If it be a stock corporation, the amount of its authorized capital
stock in lawful money of the Philippines, the number of shares to
which it is divided, and in case the share are parvalue shares, the
par value of each, the names, nationalities and residences of the
original subscribers, and the amount subscribed and paid by each

on his subscription, and if some or all of the shares are without par
value, such fact must be stated;
9.If it be a non-stock corporation, the amount of its capital, the
names, nationalities and residences of the contributors and the
amount contributed by each; and
10.Such other matters as are not inconsistent with law and which
the incorporators may deem necessary and convenient. The SEC
shall not accept the articles of incorporation of any stock
corporation unless accompanied by a sworn statement of the
Treasurer elected by the subscribers showing that at least twentyfive percent (25%) of the authorized capital stock of the corporation
has been subscribed and at least twenty-five percent (25%) of the
total subscription has been fully paid to him in actual cash and/or in
property the fair valuation of which is equal to at least twenty-five
percent (25%) of said subscription, such paid-up capital being not
less than P5,000.
Sec. 15 Forms of Articles of Incorporation Unless otherwise prescribed by
special law, articles of incorporation of all domestic corporations shall comply
substantially with the following form:
NOTE: The form goes into the validity and enforceability of the Articles of
Incorporation.
CORPORATE NAME
A corporation cannot use a name which is:
1. identical or deceptively or confusingly similar to that of any
existing corporation or to any other name protected by law; or
2. patently deceptive, confusing or contrary to law.
The law gives a corporation no express or implied authority to assume
another name that is unappropriated; still less that of another corporation,

which is expressly set apart from it and protected by law. (Red Line
Transportation Co. vs. Rural Transit Co.)
A word or phrase originally incapable of exclusive appropriation with
reference to an article on the market, because geographically or otherwise
descriptive, might nevertheless have been used so long and so
exclusively by one producer with reference to his article that, in that trade
and to that branch of the purchasing public, the word or phrase has come
to mean that the article was his product. (Doctrine of secondary meaning,
Lyceum of the Philippines, Inc. vs.CA)
A corporation's right to use its corporate and trade name is a property
right, a right in rem, which it may assert and protect against the world in
the same manner as it may protect its tangible property, real or personal,
against trespass or conversion. It is regarded, to a certain extent, as a
property right and one which cannot be impaired or defeated by
subsequent appropriation by another corporation in the same field.
(Philips Export B.V. vs. CA)
To come within the scope of the prohibition of Sec. 18, two requisites
must be proven, namely:
1. That the complainant corporation acquired a prior right
over the use of such corporate name; and
2. The proposed name is either: (a) identical or (b)
deceptively or confusingly similar to that of any existing
corporation or to any other name already protected by law; or
(c) patently deceptive, confusing or contrary to existing law.
(Philips Export B.V. vs. CA)

In determining the existence of confusing similarity in corporate names,

the test is whether the similarity is such as to mislead a person using
ordinary care and discrimination. Proof of actual confusion need not be
shown. It suffices that confusion is probably or likely to occur. (Philips
Export B.V. vs. CA)

A corporation has an exclusive right to the use of its name, which may
be protected by injunction upon a principle similar to that upon which
persons are protected in the use of trademarks and tradenames. (Philips
Export B.V. vs. CA)
A mere change in the name of a corporation, either by the legislature or
by the corporators or stockholders under legislative authority, does not,
generally speaking, affect the identity of the corporation, nor in any way
affect the rights, privileges or obligations previously acquired or incurred
by it.

PURPOSE CLAUSE
A corporation has only such powers as are expressly granted to it by law
and by its articles of incorporation including those which are incidental to
such conferred powers, those reasonably necessary to accomplish its
purpose and those which may be incidental to its existence.
Reasons for requiring a statement of purposes or objects:
1. In order that the stockholder who contemplates on an
investment in a business enterprise shall know within what
lines of business his money is to be put at risk.
2. So that the board of directors and management may know
within what lines of business they are authorized to act.
3. So that anyone who deals with the company may ascertain
whether a contract or transaction into which he contemplates
entering

is one

within

the general

authority of the

management.
If the corporate purpose or objective includes any purpose under the
supervision of another government agency, prior clearance and/or
approval of the concerned government agencies or instrumentalities will
be required.
General limitations on the purpose clause:

1. The purpose must be lawful.

2. The purpose must be specific or stated concisely although
in broad or general terms.
3. If there is more than one purpose, the primary as well as
the secondary ones must be specified.
4. The purpose must be capable of being lawfully combined.
THE PRINCIPAL OFFICE
The residence of the corporation is the place of its principal office as
may be indicated in its articles of incorporation and may, therefore, be
sued only at that place. (CRS vs. Antillon)
TERM OF EXISTENCE
Sec. 11. Corporate term. - A corporation shall exist for a period not
exceeding fifty (50) years from the date of incorporation unless sooner
dissolved or unless said period is extended. The corporate term as
originally stated in the articles of incorporation may be extended for
periods not exceeding fifty (50) years in any single instance by an
amendment of the articles of incorporation, in accordance with this Code;
Provided, That no extension can be made earlier than five (5) years prior
to the original or subsequent expiry date(s) unless there are justifiable
reasons for an earlier extension as may be determined by the Securities
and Exchange Commission.
INCORPORATORS
Sec. 10. Number and qualifications of incorporators. - Any number of
natural persons not less than five (5) but not more than fifteen (15), all of
legal age and a majority of whom are residents of the Philippines, may
form a private corporation for any lawful purpose or purposes. Each of the

incorporators of a stock corporation must own or be a subscriber to at

least one (1) share of the capital stock of the corporation.
General rule: Only natural persons can be incorporators.
Exception: Cooperatives and corporations primarily organized to hold
equities in rural banks.
Minors are not qualified to become incorporators.
THE DIRECTORS/TRUSTEES
General rule: There must be at least 5 but not more than 15 directors or
trustees in a private corporation.
Exceptions:
1.

Educational

corporations

registered

as

non-stock

corporation whose number of trustees, though not less than 5

and not more than 15 should be divisible by 5;
2. In close corporations where all the stockholders are
considered as members of the board of directors thereby
effectively allowing 20 members in the board; and
3. Corporation sole.
The

by-laws

may

provide

for

additional

qualifications

and

disqualifications. However, it may not do away with the minimum

disqualifications laid down by the Code.
Qualifications:
1. Directors must own at least one (1) share of the capital stock
of the corporation. Trustees must be members.
2. A majority of the directors or trustees must be residents of
the Philippines.
Disqualifications:
1. Conviction by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation
of this Code committed within five (5) years prior to the date of
election or appointment.
2. Other disqualifications under applicable special laws.
A by-laws may validly provide that no person may be elected as director
unless he owns a specified number of shares required for the directorate
qualification.

It may likewise disqualify a stockholder from being elected into office if

he has a substantial interest in a competitor corporation to avoid any
possible adverse effects of conflicting interest of a director.
In order to be eligible as a director, what is material is the legal title to,
not beneficial ownership, of the stock as appearing on the books of the
corporation. (Lee vs. CA)
If no election is conducted or no qualified candidate is elected, the
incumbent director shall continue to act as such in a hold over capacity until
the election is held and a qualified candidate is so elected. (Detective and
Protective Bureau vs. Cloribel)
CAPITALIZATION
Authorized capital the maximum amount fixed in the articles to be
subscribed and paid-in or secured to be paid by the subscribers.
Subscribed capital stock the total number of shares and its total value
for which there are contracts for their acquisition or subscription.
Paid-up capital stock the actual amount or value which has been
actually contributed or paid to the corporation in consideration of the
subscriptions made thereon.
Stocks shall not be issued for a consideration less than the par or issued
price thereof.
Consideration for the issuance of stock may be any or a combination of
any two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the
corporation and necessary or convenient for its use and lawful
purposes at a fair valuation equal to the par or issued value of
the stock issued;
3. Labor performed or services actually rendered to the
corporation;
4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to
stated capital; and
6. Outstanding shares in exchange for stocks in the event of
reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or future

services.

Shares of stock and their classification

Shares of stock designate the interest or right which the stockholder has
in the management of the corporation, and in the surplus profits and, in
case of distribution, in all assets remaining after the payment of its debts.
Stock certificate is a document or instrument evidencing the interest of a
stockholder in the corporation.
The shares of stock of stock corporations may be divided into classes or
series of shares, or both, any of which classes or series of shares may
have such rights, privileges or restrictions as may be stated in the articles
of incorporation.
Purpose of classification:
1. To specify and define the rights and privileges of the
stockholders.
2. For regulation and control of the issuance of sale of
corporate securities for the protection of purchasers and
stockholders.
3. As a management control device.
4. To comply with statutory requirements.
5. To better insure return on investment.
6. For flexibility in price.
Except as otherwise provided in the articles of incorporation and stated in
the certificate of stock, each share shall be equal in all respects to every
other share.
Common and preferred shares

Common stock a stock which entitles its owner to an equal pro-rata

division of profits, if there be any, but without any preference or advantage
in that respect over any other stockholder or class of stockholders.
Preferred stock a stock that gives the holder a preference over the
holder of common stocks with respect to the payment of dividends and/or
with respect to distribution of capital upon liquidation.
Limitations on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of
incorporation and in the certificate of stock, otherwise, each
share shall be, in all respect, equal to every other share.
The guarantee to preference as to dividends does not create a relation of
debtor and creditor between the corporation and the holders of such stock.
The board has the discretion to determine whether or not to declare
dividends.
Preferred shares are presumed to be non-participating.
Participating preferred shares the holders thereof are still given the
right to participate with the common stockholders in dividends beyond their
stated preference.
Cumulative preferred share those that entitle the owner thereof to
payment not only of current dividends but also back dividends not previously
paid whether or not, during the past years, dividends were declared or paid.
In absence of express stipulation, preferred shares are presumed to be
non-cumulative.
Non-cumulative preferred shares those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.
Types of non-cumulative preferred shares:
1. Discretionary dividend type gives the holder of such shares
the right to have dividends paid thereon in a particular year
depending on the judgment or discretion of the board of
directors.

2. Mandatory if earned type impose a positive duty on

directors to declare dividends every year when profits are
earned.
3. Earned cumulative or dividend credit gives the holder
thereof the right to arrears in dividends if there were profits
earned during the previous years but dividends were not
declared.
Unless the right to vote is clearly withheld, a preferred stockholder has
the right to vote.
Preference upon liquidation must be clearly indicated otherwise they shall
be placed on equal footing with other shares.
Par and no par value shares
Par value shares those whose value are fixed in the articles of
incorporation.
Par value shares cannot be issued nor sold by the corporation at less than
par.
No par value shares those whose issued price are not stated in the
certificate of stock but which may be fixed in the articles of incorporation, or
by the board of directors when so authorized by the said articles or by the bylaws, or in the absence thereof, by the stockholders themselves.
Limitations of no par value shares:
1. Such shares, once issued, are deemed fully paid and thus, non
assessable;
2. The consideration for its issuance should not be less than
P5.00;
3. The entire consideration for its issuance constitutes capital,
hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
companies, public utilities and building and loan associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder
thereof for unpaid subscription.

Voting and non-voting shares

Voting shares gives the holder thereof the right to vote and participate
in the management of the corporation through the exercise of such right,
either at the election of the board of directors, or in any manner requiring the
stockholders approval.
Non-voting shares do not grant the holder thereof the right to vote
except under the penultimate paragraph of Sec. 6.
Only preferred and redeemable shares may be denied the right to vote.
There must always be a class or series of shares which have complete
voting rights.
Non-voting shares shall nevertheless be entitled to vote on the following
matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;
6. Merger or consolidation of the corporation with another
corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the penultimate paragraph of Sec. 6, the vote
necessary to approve a particular corporate act as provided in this Code shall
be deemed to refer only to stocks with voting rights.
Founders shares
Sec. 7. Founders shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years subject to the approval of
the Securities and Exchange Commission. The five-year period shall

commence from the date of the aforesaid approval by the Securities and
Exchange Commission.
Redeemable shares
Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation.
They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock representing
said shares.
Treasury shares
Treasury shares are shares of stock which have been issued and fully
paid for, but subsequently reacquired by the issuing corporation by purchase,
redemption, donation or through some other lawful means. Such shares may
again be disposed of for a reasonable price fixed by the board of directors.
Treasury shares may again be issued for a price less than par.
Treasury shares have no voting and dividend rights. Such rights are only
granted to outstanding shares of stock. (CIR vs. Manning)

OTHER MATTERS
Classes of shares, as well as the preferences or restrictions on any such
class (6)
Denial or restriction of pre-emptive right (39)
Prohibition against transfer of stock which would reduce stock ownership to
less than the required minimum in the case of a nationalized business or
activity (15(11))
c. Amendment

Amendments to the Articles of Incorporation

Sec. 16 Amendment of Articles of Incorporation Unless otherwise

prescribed by this Code or by special law and for legitimate purposes, any
provision or matter stated in the articles of incorporation may be amended
by a majority vote of the board of directors or trustees and the vote or
written assent of the stockholders representing at least 2/3 of the
outstanding capital stock, without prejudice to the appraisal right of
dissenting stockholders in accordance with the provisions of this Code, or
the vote or written assent of at least 2/3 of the members if it be a non-stock
corporation.
The original and amended articles together shall contain all provisions
required by law to set out in the articles of incorporation. Such articles, as
amended shall be indicated by underscoring the change or changes made,
and a copy thereof duly certified under oath by the corporate secretary and
a majority of the directors or trustees stating the fact that said amendment
or amendments have been duly approved by the required vote of the
stockholders or members shall be submitted to the SEC. The amendments
shall take effect upon their approval by the SEC or from the date of the
filing with the said Commission if not acted upon within six (6) months from
the date of filing for a cause not attributable to the corporation.
NOTES: The matter to be amended, even if it does not concern the Board,
must always be concurred with by the Board. More importantly, the
impetus to amend must always come from the Board. The stockholders
merely ratify such amendment. Such is the case because he Board
constitutes the centralized management. The impetus of the Board
comprises the obligatory force of the contracts entered into.
2/3 votes are needed in AI while a majority is needed in amending by laws
-> Such is the case to make it easier to amend by-laws
d. Non-Amenable Items

Information about the original incorporators

o

Names of incorporators listed in original Articles of Incorporation

Citizenship and residences of the Incorporators

Names, citizenship and original subscription of the incorporators

Names and contribution of each member. If you want to change

names and contribution of each member, you can update it in
your General Information Sheet (GIS).

Name of the designated Treasurer. If you want to change your

corporations treasurer, you can update it in the General Information
Sheet (GIS).

7. Registration and Issuance of Certificate of Incorporation

FILING OF ARTICLES AND PAYMENT OF FEES
Corporations governed by special laws have to submit a recommendation from
the appropriate government agency to the effect that such articles are in
accordance with law
a) banks, banking and quasi-banking institutions,
b) building and loan associations,
c) trust companies and other financial intermediaries,
d) insurance companies,
e) public utilities,
f) educational institutions, and
g) other corporations governed by special laws (17)
Non-stock corporations that intend to solicit gifts, donations, and contributions
from the public at large for the benefit of an indefinite number of persons must
secure a Certificate of Registration from the Insurance Commissioner.

Failure to file AOI will prevent due incorporation of the proposed corporation and
will not give rise to its juridical personality (19). It will not even be a defacto
corporation (20)
1. Unless the certificate of incorporation has been issued, there can be no
d facto corporation (Hall vs. Piccio, 1950)

2. Camposthis statement should not be taken as an absolute principle,

but in the light of the circumstances before the court.
EXAMINATION OF ARTICLES BY SEC; APPROVAL OR REJECTION

The SEC may reject any AOI thereto if the same is not in compliance with the
requirements of this Code (17)

The SEC shall give the incorporators a reasonable time within which to correct
or modify the objectionable portions of the articles or amendment. ( 17)

GROUNDS FOR DISAPPROVINF ARTICLES OF INCORPORATION

a) AOI does not substantially the form prescribed
b) Purpose is patently unconstitutional, illegal, immoral, contrary to government
rules and regulations
c) Treasurers Affidavit concerning the amount of capital subscribed and or paid
is false
d) Percentage requirement of ownership of Filipino citizens as required by the
Constitution not complied with.

After consulting with BOI, NEDA, appropriate government agency, SEC

may deny registration of any corporation if its establishment will not be
consistent with declared national policies

Certificate of authority required of the following:

a) Insurance Companies- Insurance Commission
b) Banks, Building and Loan Associations, Finance CompaniesMonetary Board
c) Educational Institutions- Secretary of Education
d) Public Utilities- Board of Power, Board of Transportation, National
telecommunication Commission, etc..

Remedy in case of rejection of AOI: by petition for review in accordance

with the Rules of Court (6, last par., PD 902-A)

ISSUANCE OF CERTIFICATE OF INCORPORATION

A private corporation formed or organized under this Code commences to have
corporate existence and juridical personality and is deemed incorporated from
the date the Securities and Exchange Commission issues a certificate
of incorporation under its official seal (19)
Thereupon the incorporators, stockholders/members and their successors shall
constitute a body politic and corporate under the name stated in the articles
of incorporation for the period of time mentioned therein, unless said period is
extended or the corporation is sooner dissolved in accordance with law. (Ibid)
If incorporators are found guilty of fraud in procuring Certificate of Incorporation,
SEC may revoke the same after proper notice and hearing (6(I), PD 902-A)
8. Adoption of By-Laws
a. Nature and Functions of By-Laws
By-laws are rules and ordinances made by a corporation for its own
government; to regulate the conduct and define the duties of the stockholders or
members towards the corporation and among themselves. They are rules and
regulations or private laws enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and its stockholders or member and
directors and officers with relation thereto and among themselves in their
relation to it.
Q. Distinguish by-laws from AoI

A. The AoI is not an internal document that binds the parties to a corporate
setting. It is also a document that binds the State. The BL is an intramural
document, its supposed to bind the inner workings of a corp.
Q. Are the AoI and BL public documents?
A. Yes, both are public documents because they are not valid and binding
without the approval of the SEC
Q. Does the BL have to be approved by the SEC?
A. Yes, prior to the approval of the SEC, the by-laws are not binding since the
code expressly requires the approval of the SEC to be binding upon the SHs
and members. Absent the codal provision, it is binding because of a corp.s
inherent power to adopt its own by-laws.
Q. Do BL bind the public?
A. As a general rule, BL provisions do not bind the public, except if the third
person has knowledge of the BL provision.
Gokongwei v. SEC, 89 SCRA 337 [1979];
FACTS: In 1972, Universal Robina Corp acquired 622,987 share in San
Miguel Corp. In 1972 also, Consolidated Foods Corp. acquired SMC shares
amounting to P543,959. John Gokongwei, the president and controlling
stockholder of URC & CFC purchased 5,000 SMC shares. Gokongwei tried to
get a seat in the SMC BoD but was rejected by the SHs n the grounds that he
was engaged in a competitive business and his securing a seat in the BoD
would subject SMC to great disadvantages. On September 18, 1976
respondent SHs amended the by-laws of SMC, Gokongwei contends that:
1. the BoD acted without authority & in usurpation of the power of the
SHs since the computation of 2/3 vote was based on the authorized
capital stock as of 1961 & not as of 1976
2. The authority granted in 1961 was also extended in 1962 & 1963 when
said authority was supposed to cease to exist
3. Prior to said amendment, petitioner had all the qualifications as Director
& that as a substitute SH he has the right to vote & be voted as director &

that in amending the by-laws, the corp. purposely provided for

Gokongweis disqualification& deprived him of his vested right.
4. Gokongwei further alleges that the corp. has no inherent power to
disqualify a SH & that provision allowing the BoD to consider such factors
as business & family relations is unreasonable & oppressive, thus void.
Gokongwei prays that the amended by laws be declared null & void. He also
wanted to inspect and get a copy of certain documents pertaining to the corp.
The SEC allowed him to see the minutes of the meeting only. So he filed an
MR & a petition with the SC due to the alleged deliberate inability of the SCE
to action on his petition. The SEC had earlier ruled in denying the MR, allowing
Gokongwei to run as director but he should not sit as such if elected until there
is a decision on the validity of the by-laws. The SMC answered by saying that
he is engaged in a business antagonistic to SMC & that in allowing him to sit in
the BoD, he would have access to SMC trade secrets and plans. It says that
the amended by laws were adopted to preserve & protect SMC from danger
which was based in its right for self-preservation.
ISSUE: Whether or not the amended by-laws of SMC disqualifying a
competitor from nomination or election to the BoD of SMC are valid and
reasonable?
HELD:
1.Every corp. has the inherent right to adopt by-laws for its internal
government & to regulate the conduct & prescribe the rights and duties of its
members towards itself &among themselves in reference to the management
of its affairs. This is expressly recognized by Sec. 21 of the Corp. Code & has
been enunciated in Govt vs. El Hogar.
2.Any person who buys stocks in a corp. does so with the knowledge that its
affairs are dominated by a majority of the stockholders & that he impliedly
contracts that the will of the majority shall govern in all matters within the limits
of the AoI & By-laws. A stockholder is said to have parted with his right to

regulate the disposition of his property which he invested in the corporation.

Thus, no contract between the SHs and corp. wasinfringed.
3.Pursuant to Sec. 18 of the Corp. Law, any corp. may amend its AoI by a vote
or written assent of the Shs representing at least t 2/3 of the subscribed capital
stock. If it changes, diminishes or restricts the rights of SHs, the dissenting
minority has only the right to object in writing & demand payment of their
share. Petitioner has no vested right to be elected director.
4.A director stands in a fiduciary relation to the corp. & its SHs. He has control
& guidance of corporate affairs & property & hence, of the property interests of
SHs. Equity recognizes that SHs are properties of corporate interest & are
ultimately the only beneficiaries thereof. Thus, he cannot serve 2 adverse
masters without detriment to one of them He cannot utilize his inside
information & strategic position to his own preferment.
5.An amendment to the by-laws which renders a SH ineligible to be a director,
if he be also director in a competitor corp. has been sustained valid. This is
based on the principle that where the director is employed in the service of a
rival corp. he cannot serve both but must betray one or the other. Such an
enactment merely advances the benefit of the corp. & for its own good.
Corporate officers are not permitted to use their position of trust &confidence to
further their private interests.
6.DOCTRINE OF CORPORATE OPORTUNITY rests on the unfairness of an
officer or director taking advantage of an opportunity for his own personal profit
where the interest of the corporation calls for protection. Here BoD members
have access to marketing strategies, pricing structure, budget for expansion,
R&D sources of funding, availability of personnel, mergers & tie-ups, etc. The
questioned amendment of the by-laws was done to prevent the creation or an
oppositor for an officer or director of SMC, also an officer of a competing corp.
from taking advantage of the information which he as director to promote his

individual corporate interests to the detriment of SMC, it would be hard to

avoid any possibility of Gokongweis taking advantage of his position as SMC
director.
7.The SC grants the petition regarding Gokongweis petition to examine the
book and records of SMC
8.However, it sustained the validity of the amendment to the by-laws without
prejudice to the question of actual disqualification of Gokongwei to run if
elected to sit as SMC director being decided, after proper hearing by the SMC
BoD, whose decisions shall be appealable to the SEC & to the SC, unless
disqualified, the prohibition in the said by-laws will not apply to Gokongwei.
Pea v. CA, 193 SCRA 717 (1991)

FACTS: PAMBUSCO original owners of the lots in question, mortgaged the

same to DBP inconsideration of P935,000. This mortgage was foreclosed and
said properties were awarded to Rosita Pea as highest bidder in the
foreclosure sale. The Board of PAMBUSCO, through three of itsmembers
resolved to assign its to one of its members, Atty. Joaquin Briones, to execute
and sign a deed of assignment for and in behalf of PAMBUSCO in favor of any
interested party. Thus, Briones executed a deed of Assignment of
PAMBUSCOs redemption right over the subject lots in favor of Marelino
Enriquez. The latter then redeemed the said properties and a certificate of
redemption dated Aug. 15, 1975 was issued. Enriquez executed a deed of
absolute sale of the subject properties in favor of plaintiff-appellants, the
spouses Rising T. Yap and Catalina Lugue. Pea wrote the sheriff notifying him
that the redemption was not valid as it was made under avoid deed of
assignment. She then requested the recall of the said redemption and a
restraint on any registration or transaction regarding the lots. Defendant Pea
through counsel wrote the sheriff asking for execution of a deed of final sale in
her favor on the ground that the one year period of redemption has long

elapsed without any valid redemption having been exercised. Plaintiff Yap
wrote defendant Pea asking for payment for back rentals in the amount of
P42,750.00 for the use and occupancy of the land and house. Later, the
spouses Yap were prompted to file the instant caseon the ground that being
registered owners, they have the right to enforce their right to possession
against defendant who has been allegedly in unlawful possession thereof. It
was contended that plaintiffs could not have acquired ownership over the
subject properties under a deed of absolute sale executed in their favor by one
Marcelino Enriquez who likewise could not have become the owner of the
properties in question by redeeming the same under a void deed of
assignment. The defense was that since the deed of assignment executed by
PAMBUSCO in favor of Enriquez was void ab initio for being an ultra vires act
of its board of directors and for being without any valuable consideration, it
could not have had any legal effect. TC found for petitioner.CA reversed.
HELD: In order that the SEC can take cognizance of a case, the controversy
must pertain to any of the following relationships:
a. between corp., partnership or assoc. and the public
b. between the corp. and its SH, members, officers
c. between corp. and the state in so far as its franchise, permit or license
to operate is concerned
d. among the stockholders, partners or associates themselves. Neither
petitioner nor respondents Yap spouses are stockholders or officers of
PAMBUSCO. Consequently, the issue of the validity of the series of
transactions may be resolved only byte regular courts. The by-laws of
a corporation are its own private laws which substantially have the
same effect as the laws of the corporation. They are in effect written
into the charter. In this sense, they become art of the fundamental law
of the corporation which the corporation and its directors and officers
must comply with. Only three out of five directors of PAMBUSCO
convened on November 19, 1974 by virtue of a prior notice of a
special meeting. There was no quorum to validly transact business
since, under Section 4 of the amended by-laws hereinabove

reproduced; at least 4 members must be present to constitute a

quorum in a special meeting of the BoD. The AoI or by-laws of the
corp. may fix a greater number than the majority than the majority of
the number of board members to constitute the quorum necessary for
the valid transaction f business. Being a dormant corp. for several
years, it was highly irregular, if not anomalous, for a group of three
individuals representing themselves to be the directors of respondent
PAMBUSCO to pass a resolution disposing of the only remaining
asset of the corporation in favor of a former corporate officer. The
latest list of SH of respondent PAMBUSCO on file with the SEC does
not show that the said alleged directors were among the SHs of
respondent PAMBUSCO. Since the disposition of said redemption
right of PAMBUSCO by virtue of the questions ed resolution was not
approved by the required number of SHs under the law, the said
resolution, as well as the subsequent assignment executed assigning
to respondent Enriquez the said right of redemption should be struck
down as null and void.
As the rules and regulations or private laws enacted by the
corporation to regulate, govern and control its own actions, affairs and
concerns and its stockholders or members and directors and officers
with relation thereto and among themselves in their relation to it, bylaws are indispensable to corporations. These may not be essential to
corporate birth but certainly, these are required by law for an orderly
governance and management of corporations. Loyola Grand Villas
Homeowners v. CA,276 SCRA 681 (1997)
b. Requisites of Valid ByLaws
Requirements and procedure for adoption of by-laws:
1. The by laws must not be inconsistent with the Code;
2. If adopted prior to incorporation:
a. Approved and signed by all the incorporators;

b. Submitted together with the articles of incorporation to the SEC;

3. If adopted subsequent to incorporation:
a. Adopted within one (1) month after receipt of official notice of the
issuance of its certificate of incorporation by the SEC;
b. Affirmative vote of the stockholders representing at least a
majority of the outstanding capital stock, or of at least a majority of
the members in case of non-stock corporations,
c. Signed by the stockholders or members voting for them
d. Kept in the principal office of the corporation, subject to the
inspection of the stockholders or members during office hours.
e. A copy thereof, duly certified to by a majority of the directors or
trustees countersigned by the secretary of the corporation, must be
filed with the SEC which shall be attached to the original articles of
incorporation.
4. Certification of the appropriate government agency concerned to the
effect that such by-laws or amendments are in accordance with law.
5. Issuance by the Securities and Exchange Commission of a certification
that the by-laws are not inconsistent with this Code.
Contents of by-laws:
1. The time, place and manner of calling and conducting regular or special
meetings of the directors or trustees;
2. The time and manner of calling and conducting regular or special
meetings of the stockholders or members;
3. The required quorum in meetings of stockholders or members and the
manner of voting therein;
4. The form for proxies of stockholders and members and the manner of
voting them;
5. The qualifications, duties and compensation of directors or trustees,
officers and employees;
6. The time for holding the annual election of directors of trustees and the
mode or manner of giving notice thereof;

7. The manner of election or appointment and the term of office of all

officers other than directors or trustees;
8. The penalties for violation of the by-laws;
9. In the case of stock corporations, the manner of issuing stock
certificates; and
10. Such other matters as may be necessary for the proper or convenient
transaction of its corporate business and affairs.
By-laws are subordinate to the articles of incorporation, the Corporation Code
and other statutes which form part of the corporate charter.
By-laws become effective only upon the approval of the SEC

Time of filing:
1. Prior to incorporation must be signed by all the incorporators, must be
filed together with the articles of incorporation
2. After incorporation approval of at least a majority of the outstanding
capital stock
I.

Failure to file by-laws may result to suspension or revocation of

corporate franchise after proper notice and hearing

II.

Failure to file by-laws does not result in automatic dissolution.

(LGVHA vs. CA)

III.

By-laws are internal rules an cannot bind, effect or prejudice third

persons without knowledge. (Fleisher vs. Botica Nolasco)

Elements of a valid by laws:

1. It must not be contrary to law, public policy or morals.
2. It must not be inconsistent with the articles of incorporate.
3. It must be general and uniform in its effect or applicable to all alike or
those similarly situated.
4. It must not impair obligations and contracts or vested rights.
5. It must be reasonable.

c. Binding Effects

China Banking Corp. v. Court of Appeals, 270 SCRA 503(1997).

FACTS: Calapatia, a stockholder of PR Valley Golf and Country Club
pledged his Stock Certificate to petitioner China Banking. Petitioner
wrote VGCCI requesting that the aforementioned pledge agreement be
recorded in its books. Later, Calapatia obtained a loan of P20,000 from
petitioner, payment of which was secured by the aforestated pledge
agreement still existing between Calapatia and petitioner. Due to
Calapatias failure to pay his obligation, petitioner filed a petition for
extra-judicial foreclosure. Petitioner informed VGCCI of the abovementioned foreclosure proceedings and requested that the pledged
stock be transferred to its name. However, VGCCI wrote petitioner
expressing its inability to accede to petitioners request due to
Calapatias unsettled accounts with the club.
Despite the foregoing, Notary Public de Vera held a public auction and
petitioner emerged as the highest bidder, VGCCI sent Calapatia a notice
demanding full payment of his overdue account in the amount of
P18,783.24. VGCCI caused to be published in the newspaper Daily
Express a notice of auction sale by VGCCI of its subject share of stock
and thereafter filed a case with the RTC of Makati for the nullification.
The RTC dismissed the case for lack of jurisdiction over the subject
matter on the theory that it involves an intra-corporate dispute.
Petitioner filed a complaint with the SEC. The Commission en banc
believed that appellant-petitioner had a prior right over the pledged
share and because of pledgors failure to pay the principal debt upon
maturity, appellant-petitioner could proceed with the foreclosure sale of
the pledged share. The auction sale conducted by appellee-respondent
Club was declared null and void. The CA rendered its decision nullifying

and setting aside the orders of the SEC and its hearing officers on the
ground of lack of jurisdiction over the subject. The CA declared that the
controversy between CBC and VGCCI is not intra-corporate.
HELD: VGCCI claims a prior right over the subject share anchored
mainly on Sec. 3, Art. VIII of its by-laws which provides that after a
member shall have been posted as delinquent, the Board may order
his/her/its share sold to satisfy the claims of the club. It is pursuant to
this provision that VGCCI also sold the subject share at public auction,
of which it was the highest bidder. VGCCI caps its argument by
asserting that its corporate by-laws could prevail. The SEC therefore
took proper cognizance of the instant case.
Moreover, VGCCI completely disregarded petitioners right as pledgee. It
even failed to give petitioner notice of said auction sale. Such actuations
of VGCCI thus belie its claim of good faith. In defending its actions,
VGCCI likewise maintains that petitioner is bound by its by-laws. It
argues that the G.R. is that third persons are not bound by the by-laws
of a corporation since they are not privy to thereto. The exception to this
is when 3rd persons have actual or constructive knowledge of the same.
In the case at bar, petitioner had actual knowledge of the by-laws of
private respondent when petitioner foreclosed the pledge made by
Calapatia and when petitioner purchased the share foreclosed. Thus,
the petitioner purchased the said share subject to the right of the PR to
sell the said shares for reasons of delinquency and the right of PR to
have a first lien on said shares as these rights are provided for in the bylaws very clearly.
In order to be bound, the 3rd party must have acquired knowledge of the
pertinent by-laws at the time the transaction or agreement between said
3rd

party and the shareholder was entered into, in this case, at the time the
pledge agreement was executed. Petitioners belated notice of said bylaws at the time of the foreclosure will not suffice. By-laws signify the
rules and regulations of private laws enacted by the corporation to
regulate, govern and control its own actions, affairs and concerns and its
stockholders or members and directors and officers with relation thereto
and among themselves in their relation to it. The purpose of a by-law is
to regulate the conduct and define the duties of the members towards
the corporation and among themselves.
Note: Knowledge of the by-laws must be present at the time of the
perfection of the contract. Such is not the case here, knowledge of the
by-laws was had only during the proceedings, as such, it cannot bind
China Bank. However, one may argue in the same way in Land Titles,
where banks are required to go beyond the face of the title as they are
institutions endowed with public interest; in this case China Bank should
have inquired into such by-laws before entering into the transactions
mentioned.
Neither can we concede that such contract would be invalid just
because the signatory thereon was not the Chairman of the Board which
allegedly violated the corporations by-laws. Since by-laws operate
merely as internal rules among the stockholders, they cannot affect or
prejudice third persons who deal with the corporation, unless they have
knowledge of the same.

PMI Colleges v. NLRC, 277SCRA 462 (1997)

FACTS: PMI is an educational institution offering courses on basic
seaman training and other marine-related courses hired private
respondent as contractual instructor with an agreement that the latter

shall be paid at an hourly rte of P30 t P50. PR then organized classes in

marine engineering. PR another instructors were compensated for
services rendered during the first three periods of the above-mentioned
contract. However, for reasons unknown to PR, he stopped receiving
payment for the succeeding rendition of services. Repeated demands
having likewise failed, PR was soon constrained to file a complaint
seeking payment for salaries earned. PMI contended that classes in the
courses offered which complainant claimed to have remained unpaid
were not held in the school premises of PMI. Only PR knew whether
classes were indeed conducted. Later in the proceedings, petitioner
manifested that Mr. Tomas Cloma Jr., a member of the petitioners BoD
wrote a letter to the Chairman of the Board clarifying the case of PR and
stating therein that under PMIs by-laws, only the Chairman is authorized
to sign any employment contract. A decision was rendered by the Labor
Arbiter finding for PR. The NLRC affirmed.
HELD: The contract would be invalid just because the signatory was not
the chairman which allegedly violated PMI by-laws but since by-laws
operate merely as internal rules among the stockholders, they cannot
affect or prejudice 3rd persons who deal with the corporation in good faith
unless they have knowledge of the same. No proof appears on record
that PR ever knew anything about the provisions of said by-laws.
Petitioner itself merely asserts the same without even bothering to attach
a copy or excerpt thereof to show that there is such a provision. That this
allegation has never been denied by PR does not necessarily signify
admission

d. Amendment or Revision
Two modes of amending or repealing by laws or adopting a new one:

1. By a majority vote of the directors or trustees and the majority vote of

the outstanding capital stock or members, at a regular or special meeting
called for that purpose; or
2. By the board of directors alone when delegated by 2/3 of the
outstanding capital stock or members

Delegated power to amend, repeal or adopt by-laws may be revoked

Incorporation of an invalid by-law provision is not a misdemeanor. It

does not justify the dissolution of the corporation. (Govt. vs. El Hogar)

The by-laws may disqualify a stockholder from being elected into office
if he has a substantial interest in a competitor corporation to avoid any
possible adverse effects of conflicting interest of a director. (Gokongwei,
Jr. vs. SEC)

F. Corporate Powers
1. General Powers, Theory of General Capacity
2. Specific Powers, Theory of Specific Capacity
a. Power to Extend or Shorten Corporate Term
b. Power to Increase or Decrease Capital Stock or Incur, Create,
Increase
Bonded Indebtedness
c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets
e. Power to Acquire Own Shares
f. Power to Invest Corporate Funds in Another Corporation or
Business
g. Power to Declare Dividends
h. Power to Enter Into Management Contract
i. Ultra Vires Acts
i. Applicability of Ultra ViresDoctrine
ii. Consequences of Ultra Vires Acts
3. How Exercised
a. By the Shareholders

b. By the Board of Directors

c. By the Officers
4. Trust Fund Doctrine
G. Board of Directors and Trustees
Composition & Qualification of Directors.
- the board of directors of a corporation organized in accordance with Philippine
must be composed of not less than five (5) but not more than fifteen (15)
directors.
Qualifications:
1.) he must be a natural person;
2.) he must be capacitated to enter into contracts;
3.) he must have at least one (1) share of stock which shall stand as his own
name in the books of the corporation.
The director need not have both the legal and beneficial interests of the
shares registered in his name. The legal title to the one (1) share is sufficient
to qualify him as a director, provided he is the registered owner of such share
in the stock and transfer book of the corporation.
4.) Majority of the directors must be residents of the Philippines;
5.) A director must not be convicted of any offense punishable by imprisonment
of more than six (6) years, or a violation of the corporation code within five (5)
years prior to his election.
PRINCIPAL FUNCTIONS OF THE BOARD OF DIRECTORS
The principal functions of board of directors:
1.) It is governing body of the corporation. The board, unless restricted by its
charter or by-laws, shall have full control and management of the corporate
business property. The shareholders may, however, override the decision of
the board by unanimous vote. (not only majority)
2.) It is the custodian of all corporate properties; and,
3.) It formulates all corporate policies and controls management.

1. Doctrine of Centralized Management

Management of corporation business is vested in the board of directors which is
the governing and controlling body of the corporation. Stockholders are not
required to participate directly in the management of the corporation.
2. Business Judgment Rule
or Doctrine of Business opportunity
This doctrine refers to the case when a director or officer of the corporation is
presented with a business venture which can very well be handled profitably by
the corporation, he must give that business opportunity to the corporation and not
to appropriate it for himself. If he fails to turn it over to the corporation, he shall
be held liable to refund to the corporation whatever profits and benefits he may
have derived from such business opportunity.
3. Tenure, Qualifications and Disqualifications of Directors or Trustees
No person convicted by final judgment of an offense punishable by
imprisonment for a period exceeding six (6) years, or a violation of this code,
committed within five (5) years prior to the date of his election or appointment,
shall qualify as a director, trustee or officer of any corporation.
4. Elections
a. Cumulative Voting/Straight Voting
The manner of voting may be straight or cumulative. However, present
corporations are resorting to the cumulative voting in order to insure the
election of more directors to represent their interests in the board.
Stockholders align themselves as the majority or minority group and they
apply the cumulative system so that they can get elected as many
directors as they can possibly get with their pooled or accumulated votes
to represent each groups interest in the Board of Directors.
The term of office of the directors is only for one (1) year, but they are
entitled to run for reelection if they so desire.

b. Quorum
The quorum in a Board of Directors meeting shall be constituted by a
majority of directors, and every decision of at least a majority of the
directors present in the meeting shall be considered a valid corporate act.
All things taken up in a meeting without a quorum shall be null and void.
5. Removal
Directors may be removed with or without cause by the prescribed vote of
2/3 of the outstanding capital stock of a stock corporation, or by vote of
members of a non-stock corporation either at a regular meeting or at a
special meeting called for the purpose. However, this section prohibits
removal without cause of any director representing the minority
stockholders.
SEC jurisdiction over removal it is the SEC and not the NLRC which has
original and exclusive jurisdiction over cases involving the removal from
employment of corporate officers.
A corporate officers dismissal is always a corporate act and/or an intracorporate controversy. In intra-corporate matters, such as those affecting
the corporate matters, such as those affecting the corporation, its directors,
trustees, officers and shareholders, the issue of consequential damages
may be resolved and adjudicated by the SEC.
6. Filling of Vacancies
Vacancies in the board of directors due to causes other than removal, such
as expiration of the term or death, are filled up by a majority vote of the
remaining directors if they still constitute a quorum, or by the stockholders
in a regular meeting called for that purpose. The director elected to fill a
vacancy shall serve only for the unexpired term of his predecessor in
office.

Cases when vacancies in the board of directors may be filled up by

stockholders only:
i.
ii.
iii.

In case of removal of a director;

If the remaining directors do not constitute a quorum;
If there is to be an increase in the number of directors.

7. Compensation
As a rule, directors are not paid any compensation for performing their duties and
functions as members of the Board. They receive per diem only for every
meeting they attend.
However, by the vote of stockholders representing at least a majority of the
outstanding capital stock at a regular or special stockholders meeting, the
directors may be granted extra compensation in addition to regular per diems. Or
as long may be provided in the by-laws.
Instances when directors may be additional granted compensation:
1.) When there is an express provision in the by-laws fixing their
composition;
2.) When approved by at least
a majority of the outstanding capital stock at a regular or special meeting;
3.) In no case shall the total yearly compensation of directors exceed 10%
of the net income before income tax of the corporation during the
preceding year.
8. Fiduciaries Duties and Liability Rules
Directors are fiduciary officers and occupy as a board the position of
trusteeship in relation to the stockholders from whom they derive their power to
control and direct the affairs of the corporation, and therefore shall exercise not
only care and diligence but utmost good faith in the management of corporate
affairs. Thus, directors shall be solitarily liable for damages suffered by the
corporation, its stockholders or members and other persons due to:

a.) their willful vote or assent to unlawful acts of the corporation;

b.) their gross negligence or bad faith in directing the affairs of the
corporation;
c.) for acquiring any personal or pecuniary interest in conflict with their
duties as directors and officers of the corporation.
A director, trustee or officer of the corporation shall also be liable as trustee
for the corporation:
a.) he acquires personal and adverse interest In the corporate matters;
b.) he fails to turn over to the corporation all profits which otherwise would
have accrued to the corporation.
9. Responsibility for Crimes
A corporation, being a juridical entity may act only through its directors, officers
and employees. Obligations incurred in them, acting as such corporate agents,
are not theirs but the direct accountabilities of the corporation they represent.
10. Inside Information
According to the Securities Regulations Code, insider means (a) the
issuer; (b) a director or officer (or person performing similar functions) of, or a
person controlling the issuer; (c) a person whose relationship or former
relationship to the issuer gives or gave him access to material information about
the issuer or the security that is not generally available tote public; (d) a
government employee, or director, or officer of an exchange, clearing agency
and/or self-regulatory organization or who has access to material information
about an issuer or a security that is not generally available to the public; (e) a
person who learns such information by a communication from any of the
foregoing insiders.
11. Contracts
a. By Self-Dealing Directors with the Corporation
A director or trustee may validly enter into a contract with hold own
corporation if:

(1.)

his presence in the board is not required to constitute a

quorum in the board meeting for the approval of his contract;

(2.)
his vote is not necessary for the approval of the contract;
(3.)
the contract is fair and reasonable; and,
(4.)
if it is an officer who is dealing with the corporation he has
the authorization given by the board of directors.
b. Between Corporations with Interlocking Directors
An interlocking director is one who serves as a director in two or
more corporations. Such contract is subject to following conditions:
(a) that the contract is fair and reasonable;
(b) that there is no fraud;
(c) that the interlocking directors presence is not necessary to
constitute a quorum in both corporations;
(d) that his vote is not necessary for the approval of the contract.
c. Management Contracts
Management contracts are agreements whereby as corporation,
subject to some legal requirements, delegates the power of its
management to another person or to another corporation for a certain
period as stipulated in the agreement, but not exceeding five (5) years for
any one term.
12. Executive Committee
It is a committee created by the BOD as authorized in the by-laws
and is composed of three (3) directors. Its principal function is to assist the
Board in the governance of the corporation, the execution of its
management policies, and in the performance of such other matters as
may be delegated it in the by-laws or by a majority vote of the Board.
However, the Executive Committee cannot perform any of the
following:
1.) approval of any action for which shareholders approval is
also required;
2.) the filling of vacancies in the board;

3.) the amendment or repeal of by-laws or the adoption of new

by-laws;
4.) the amendment or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable;
5.) a distribution of cash dividends tot the shareholders.
13. Meetings
Meetings of directors, trustees, stockholders, or members may be regular
or special.
a. Regular or Special
i. When and Where
In case of regular meetings, in case of stockholders may be held
annually on the date fixed in the by-laws or on any date in April each year
as determined by the BOD. In the case of the directors, regular meetings
may be held monthly or as provided in the by-laws.
These are held at the principal place of business of the corporation
but for the BOD may be held also at any specified place.
On the other hand, in the case of special meetings of either the BOD
or the stockholders may be provided in the by-laws or from time to time as
deemed necessary.
ii. Notice
Written notice of the meeting must be sent two (2) weeks prior to the
scheduled meeting to all stockholders of record. In special meetings, it is
sent one (1) week prior to the meeting.
b. Who Presides
When there is no person authorized to call a meeting, a stockholder
or member may petition the SEC to authorize the calling of a meeting.
Upon showing of good cause therefore, the SEC may issue an order to the
petitioning stockholder or member authorizing him to call a meeting of the

corporation after first giving the proper notice to the stockholders required
by this Code or the by-laws.
c. Quorum
Quorum is a majority of the members or officers of an organization
or body that, when duly assembled, is a requisite number to do business. It
shall consist of the stockholders representing a majority of the outstanding
capital stock or majority of the members in a non-stock corporation.
d. Rule on Abstention - Considered as not counted.
H. Stockholders and Members
1. Rights of a Stockholder and Members
a. Doctrine of Equality of Shares
2. Participation in Management
a. Proxy
b. Voting Trust
c. Cases When Stockholders Action is Required
i. By a Majority Vote
ii. By a Two-Thirds Vote
iii. By Cumulative Voting
3. Proprietary Rights
a. Right to Dividends
b. Right of Appraisal
c. Right to Inspect
d. Pre-Emptive Right
e. Right to Vote
f. Right to Dividends
g. Right of First Refusal
4. Remedial Rights
a. Individual Suit
b. Representative Suit

c. Derivative Suit
5. Obligation of a Stockholder
6. Meetings
a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum
d. Minutes of the Meetings

I. Capital Structure
1. Subscription Agreements
Q: What is a subscription contract?
A: It is a contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed. It is considered as such
notwithstanding the fact that the parties refer to it as purchase or some
other contract. (Sec. 60)
Q: What are the kinds of subscription contracts?
A:
1.

GR: Preincorporation subscription entered into before the incorporation and irrevocable for a
period of six (6) months from the date of subscription unless all other subscribers consent or if the
corporation failed to materialize. It cannot also be revoked after filing the Articles of Incorporation
with the SEC (Sec. 61)
XPN: When creditors will be prejudiced thereby.

2.

Postincorporation subscription entered into after incorporation.

Transfer for consideration of treasury shares is a sale by the corporation (not

subscription). A transfer of fully paid shares by a stockholder to a third person
is a sale. But it seems that assignment by a subscriber of his unpaid

subscription would require that the requisites for valid release from
subscription must be complied with
Shareholders are not creditors of the corporation with respect to their
shareholdings thereto and the principle of compensation or set-off has no
application
Not necessarily required to be in writing
Once subscription contract is perfected, SH becomes the debtor of the
corporation. He is liable to pay any unpaid portion of the subscription. He can
also be made personally liable to the creditors of the corporation to the extent
of his unpaid subscription
General Rule: SH is not liable to pay interest on his unpaid subscription.
Exception: if required by the by-laws (66)
2. Consideration for Stocks
Stocks shall not be issued for a consideration less than the par or issued price

thereof.
Consideration for the issuance of stock may be any or a combination of any two
or more of the following:
a) Actual cash paid to the corporation;
b) Property, tangible or intangible, actually received by the corporation and
necessary or convenient for its use and lawful purposes at a fair valuation
equal to the par or issued value of the stock issued
o Valuation of consideration other than actual cash, or consists
of intangible property such as patents of copyrights initially be
determined by the incorporators or the board of directors,
subject to approval by the SEC.
o Note: Property should not be encumbered. Otherwise, it would
impair the consideration
c) Labor performed for or services actually rendered to the corporation (must
be capable of being valuated);
d) Previously incurred indebtedness of the corporation;
e) Amounts transferred from unrestricted retained earnings to stated capital
(declaration of stock dividends); andOL LAW
f) Outstanding shares exchanged for stocks in the event of reclassification or
conversion.

 Prohibited consideration: Shares of stock shall not be issued in exchange for

promissory notes or future service (because realization is uncertain)

Future service may be used as consideration provided that certificates of stock
will be issued only after the performance of such services.
Same consideration applies for the issuance of bonds by the corporation.

Fixing of issued price of no-par value shares:

The issued price of no-par value shares may be fixed:

a) in the AOI or
b) by the BOD pursuant to authority conferred upon it by the AOI or the
by-laws, or
c) in the absence thereof, by the SHs representing at least a majority
of the outstanding capital stock at a meeting duly called for the
purpose.

The value of the consideration received must be equal to the issue price of the
shares of stocks which in no case shall be less than par

3. Shares of Stock
a. Nature of Stock
b. Subscription Agreements
It is a contract for the acquisition of unissued stock in an existing
corporation or a corporation still to be formed. It is considered as
such notwithstanding the fact that the parties refer to it as purchase
or some other contract. (Sec. 60)
c. Consideration for Shares of Stock
Consideration for the issuance of stock may be any or a combination of
any two or more of the ff:
1. Actual cash paid to the corporation;
2. Property, tangible or intangible, actually received by the corporation
and necessary or convenient for its use and lawful purposes at a fair
valuation equal to the par or issued value of the stock issued;

3. Labor performed or services actually rendered to the corporation;

4. Previously incurred indebtedness by the corporation;
5. Amounts transferred from unrestricted retained earnings to stated
capital; and
6. Outstanding shares in exchange for stocks in the event of
reclassification or conversion.

Stocks shall not be issued in exchange of promissory notes or

future services.

d. Watered Stock
i. Definition
Q: What is a watered stock?
A: A stock issued in exchange for cash, property, share, stock
dividends, or services lesser than its par value.
Watered Stocks include stocks:
1. Issued without consideration (bonus share)
2. Issued for a consideration other than cash, the fair
valuation of which is less than its par or issued value
(discount share)
3. Issued as stock dividend when there are no sufficient
retained earnings to justify it
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or
issued value
Note: Water in the stock represents the difference between
the fair market value at the time of the issuance of the stock
and the par or issued value of said stock. Both par and no par
stocks can thus be watered stocks.
Watered stocks refer only to original issue of stocks but not to
a subsequent transfer of such stocks by the corporation.

ii. Liability of Directors for Watered Stocks

Q: What is the extent of the liability of directors who
consented to the issuance of a watered stock?
A: Directors who consent to the issuance of a watered stock
are personally liable. Although the general rule is that
directors, trustees or officers are not solidarily liable with the
corporation, consenting to the issuance of a watered stock is
one of the exceptions.
Note: Pursuant to Sec. 65 of the Corporation Code, a director
or officer who consents to the issuance of a watered stock or
having knowledge thereof does not forthwith express his
written objection with the corporate secretary is liable jointly
and severally with the stockholder concerned for the water in
the stock in favor of the corporation and its creditors.
iii. Trust Fund Doctrine for Liability for Watered Stocks
Q: What is the trust fund doctrine?
A: The subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which the
creditors have the right to look up to satisfy their credits, and
which the corporation may not dissipate.
Q:

Where

does

the

solidary

liability

of

directors

consenting to the issuance of watered stock emanates?

A: The solidary liability of the directors emanates from the
fiduciary character of the position of director or corporate
officer.

e. Situs of the Shares of Stock

Q: Where is the situs of shares of stock?
A: The situs of shares of stock is the country where the
corporation is domiciled.
Note: For purposes of execution, attachment, garnishment or
auction sale, it is not the domicile or the residence of the
owner of the shares but the domicile or residence of the
corporation, which is the place of its principal business, which
determines the situs of the shares of stock.
f. Classes of Shares of Stock

Common stock a stock which entitles its owner to an equal pro-rata

division of profits, if there be any, but without any preference or advantage in
that respect over any other stockholder or class of stockholders.
Preferred stock a stock that gives the holder a preference over the holder
of common stocks with respect to the payment of dividends and/or with
respect to distribution of capital upon liquidation.
Limitations on preferred stock:
1. Must be issued with a stated par value; and
2. The preferences must be stated in the articles of incorporation
and in the certificate of stock, otherwise, each share shall be, in
all respect, equal to every other share.
The guarantee to preference as to dividends does not create a
relation of debtor and creditor between the corporation and the holders
of such stock. The board has the discretion to determine whether or
not to declare dividends.
Preferred shares are presumed to be non-participating.
Participating preferred shares the holders thereof are still given the
right to participate with the common stockholders in dividends beyond their
stated preference.

Cumulative preferred share those that entitle the owner thereof to

payment not only of current dividends but also back dividends not previously
paid whether or not, during the past years, dividends were declared or paid.
In absence of express stipulation, preferred shares are presumed
to be non-cumulative.
Non-cumulative preferred shares those which grant the holders of such
shares only to the payment of current dividends but not back dividends, when
and if dividends are paid, to the extent agreed upon before any other
stockholders are paid the same.
Types of non-cumulative preferred shares:
1. Discretionary dividend type gives the holder of such shares
the right to have dividends paid thereon in a particular year
depending on the judgment or discretion of the board of
directors.
2. Mandatory if earned type impose a positive duty on
directors to declare dividends every year when profits are
earned.
3. Earned cumulative or dividend credit gives the holder
thereof the right to arrears in dividends if there were profits
earned during the previous years but dividends were not
declared.
Unless the right to vote is clearly withheld, a preferred stockholder
has the right to vote.
Preference upon liquidation must be clearly indicated otherwise
they shall be placed on equal footing with other shares.
Par and no par value shares
Par value shares those whose value are fixed in the articles of
incorporation.
Par value shares cannot be issued nor sold by the corporation at
less than par.
No par value shares those whose issued price are not stated in
the certificate of stock but which may be fixed in the articles of
incorporation, or by the board of directors when so authorized by the
said articles or by the by-laws, or in the absence thereof, by the
stockholders themselves.
Limitations of no par value shares:

1. Such shares, once issued, are deemed fully paid and thus, non
assessable;
2. The consideration for its issuance should not be less than
P5.00;
3. The entire consideration for its issuance constitutes capital,
hence, not available for dividend declaration;
4. They cannot be issued as preferred stock; and
5. They cannot be issued by banks, trust companies, insurance
companies, public utilities and building and loan associations.
Advantages to the issuance of no par value shares:
1. Flexibility in price;
2. Evasion of the danger of liability upon watered stock; and
3. Disappearance of personal liability on the part of the holder
thereof for unpaid subscription.
Voting and non-voting shares
Voting shares gives the holder thereof the right to vote and
participate in the management of the corporation through the exercise
of such right, either at the election of the board of directors, or in any
manner requiring the stockholders approval.
Non-voting shares do not grant the holder thereof the right to
vote except under the penultimate paragraph of Sec. 6.
Only preferred and redeemable shares may be denied the right to
vote.
There must always be a class or series of shares which have
complete voting rights.
Non-voting shares shall nevertheless be entitled to vote on the
following matters:
1. Amendment of the articles of incorporation;
2. Adoption and amendment of by-laws;
3. Sale, lease, exchange, mortgage, pledge or other disposition
of all or substantially all of the corporate property;
4. Incurring, creating or increasing bonded indebtedness;
5. Increase or decrease of capital stock;

6. Merger or consolidation of the corporation with another

corporation or other corporations;
7. Investment of corporate funds in another corporation or
business in accordance with this Code; and
8. Dissolution of the corporation.
Except as provided in the penultimate paragraph of Sec. 6, the
vote necessary to approve a particular corporate act as provided in this
Code shall be deemed to refer only to stocks with voting rights.
Founders shares
Sec. 7. Founders shares. - Founders' shares classified as such in the
articles of incorporation may be given certain rights and privileges not
enjoyed by the owners of other stocks, provided that where the exclusive
right to vote and be voted for in the election of directors is granted, it must
be for a limited period not to exceed five (5) years subject to the approval of
the Securities and Exchange Commission. The five-year period shall
commence from the date of the aforesaid approval by the Securities and
Exchange Commission.
Redeemable shares
Redeemable shares may be issued by the corporation when expressly so
provided in the articles of incorporation.
They may be purchased or taken up by the corporation upon the
expiration of a fixed period, regardless of the existence of unrestricted
retained earnings in the books of the corporation, and upon such other terms
and conditions as may be stated in the articles of incorporation, which terms
and conditions must also be stated in the certificate of stock representing
said shares.
Treasury shares
Treasury shares are shares of stock which have been issued and
fully paid for, but subsequently reacquired by the issuing corporation
by purchase, redemption, donation or through some other lawful
means. Such shares may again be disposed of for a reasonable price
fixed by the board of directors.
Treasury shares may again be issued for a price less than par.

Treasury shares have no voting and dividend rights. Such rights

are only granted to outstanding shares of stock. (CIR vs. Manning)

4. Payment of Balance of Subscription

a. Call by Board of Directors
Q: How does the board of directors call for the payment of unpaid
subscription?
A: A call is made in a form of board resolution that unpaid subscription to
the capital stock are due and payable and the same or such percentage
thereof shall be collected, together with all accrued interest, on a specified
date and that if no payment is made within 30 days from said date, all
stocks covered by said subscription shall thereupon become delinquent
and shall be subject to public auction sale.
Q: Is the call of the board of directors always necessary to collect
payment for unpaid subscription?
A: No. A call is not necessary where the subscription contract specifies the
date of payment.
b. Notice Requirement
Q: What is the notice requirement in case there is a call of the board
of directors for payment of subscription?
A: The notice of the call has to be served on the stockholders concerned in
the manner prescribed in the call, which may either be by registered mail
and/or personal delivery and publication.
c. Sale of Delinquent Shares
i. Effect of Delinquency

Q: What are the effects of stock delinquency?

A:
1. Upon the stockholder
a. Accelerates the entire amount of the unpaid subscription;
b. Subjects the shares to interest expenses and costs;
c. Disenfranchises the shares from any right that inheres to the to a stockholder,
except the right to dividends (but which shall be applied to any amount due
on said shares, or, in the case of stock dividends, to be withheld by the
corporation until full payment of the delinquent shares. (Sec. 43)
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director, the director shall continue to be a
director but he cannot run for reelection ( Sundiang and Aquino, Reviewer
in Commercial Law, 2006)
b. A delinquent stockholder seeking to be elected as director may not be a
candidate for, not be duly elected to, the board.

ii. Call by Resolution of the Board of Directors

Q: Does a call of the board of directors required to declare a stock delinquent?
A: No. Stocks become delinquent when the unpaid subscription and accrued interests
thereon are not paid within 30 days from their due date as specified in the subscription
contract or in the call by the board of directors.
The delinquency is automatic after said 30 day period and does not need a declaration by
the board making the stock delinquent.

iii. Notice of Sale

Q: What is the notice requirement in case of sale of delinquent stock?
A: The notice of sale and copy of the board resolution ordering the sale shall be:
1.

Sent to every delinquent stockholder either personally or by registered mail or;

2.

Published once a week for 2 consecutive weeks in a newspaper of general circulation

in the province or city where the principal office of the corporation, as specified in its
articles of incorporation, is located.

iv. Auction Sale and the Highest Bidder

Q: What is the procedure for the auction sale of a delinquent share?
A: The procedure is as follows:

1.

The board of directors shall pass a board resolution ordering the sale of delinquent
stock.

2.

A notice of sale and copy of the board resolution ordering the sale shall be sent to
every delinquent stockholder either personally or by registered mail or; published
once a week for 2 consecutive weeks in a newspaper of general circulation in the
province or city where the principal office of the corporation, as specified in its
articles of incorporation, is located.

3.

The minimum bid shall be the full amount of the balance on the subscription plus the
accrued interest, cost of advertisement and expenses of sale for the smallest number
of shares.

4.

The sale will be awarded to the highest bidder who will be given a certificate of sale
and the same will be registered in the books of the corporation.

5.

Should there be no bidder, the corporation may bid for the same if it

has

unrestricted earnings to cover the amount.

5. Certificate of Stock
a. Nature of the Certificate
A certificate of stock is the best evidence of the rights and status of a
SH (although not a condition precedent to the acquisition of such
rights), and is convenient for the purposes of transfer (Campos).
Contents of a certificate:
- certifies that the person named is a holder
or owner of a stated number of shares
- kind of shares issued
- date of issuance
- par value, if par value shares
- signed by the proper officer of the corp.
(usually the pres., and the sec.)
- bears the corporate seal
A certificate of stock is a prima facie proof that the stock
described therein is valid and genuine in the absence of an
evidence to the contrary
b. Uncertificated Shares

Q: What is an uncertificated share?

A: An uncertificated share is a subscription duly recorded in the corporate
books but has no corresponding certificate of stock yet issued.
Q: May a stockholder alienate his shares even if there is no certificate
of stock issued by the corporation?
A: Yes. The absence of a certificate of stock does not preclude the stock
holder from alienating or transferring his shares of stock.
Q: In case of a fully paid subscription but the corporations has not
yet issued a certificate of stock, how can the transfer be effected?
A: In case of a fully paid subscription, without the corporation having
issued a certificate of stock, the transfer may be effected by the subscriber
or stockholder executing a contract of sale of deed of assignment covering
the number of shares sold and submitting said contract or deed to the
corporate secretary for recordal.
Q: How are transfers of subscription not fully paid done?
A: In case of subscription not fully paid, the corporation may record such
transfer, provided that the transfer is approved by the board of directors
and the transferee executes a verified assumption of obligation to pay the
unpaid balance of the subscription.
c. Negotiability
i. Requirements for Valid Transfer of Stocks
Q: Is a stock certificate negotiable?
A: No. It is regarded as quasinegotiable in the sense that it may be
transferred by endorsement coupled with delivery.
Q: Why is a stock certificate not negotiable?
A: Because the holder thereof takes it without prejudice to such
rights or defenses as the registered owners or transferors creditor
may have under the law, except insofar as such rights or defenses
are subject to the limitations imposed by the principles governing

estoppel. (De los Santos v. Republic, G.R. No. L4818, Feb. 28,
1955)
Q: What are the requirements for a valid transfer of stock?
A:
1.

The certificate of stock must be duly endorsed by the transferor or his legal representative.

2.

There must be delivery of the stock certificate.

3.

To be valid against third parties, the transfer must be recorded in the books of the corporation. (G.R.
No. 124535, September 28, 2001)

d. Issuance
i. Full Payment
A corporation may now, in the absence of provisions in their by
laws to the contrary, apply payments made by subscribers
stockholders, either as:
Full payment for the corresponding number of shares of
stock, the par value of each of which is covered by such
payment; or
ii. Payment Pro-Rata
Payment prorata to each and all the entire number of shares
subscribed for. (Baltazar v. Lingayen Gulf Electric Power Co.,
Inc, G.R. No. L1623638, June 30, 1965)
Q: What is the Doctrine of Individuality of Subscription?
A: A subscription is one entire and indivisible whole contract. It
cannot be divided into portions. (Sec. 64)
e. Lost or Destroyed Certificates

Requirements and procedure for issuance of new certificates of stock in

lieu of those lost, stolen or destroyed:
1. The registered owner of a certificate of stock in a corporation or his
legal representative shall file with the corporation an affidavit in
triplicate setting forth:
a. The circumstances as to how the certificate was lost, stolen or
destroyed;
b. The number of shares represented by such certificate;
c. The serial number of the certificate; and
d. The name of the corporation which issued the same.
2. He shall also submit such other information and evidence which he
may deem necessary.
3. Publication of a notice in a newspaper of general circulation
published in the place where the corporation has its principal office,
once a week for 3 consecutive weeks at the expense of the registered
owner of such certificate of stock.
4. If no contest has been presented within 1 year from the date of the
last publication, the right to make such contest shall be barred and
said corporation shall cancel in its books the certificate of stock which
has been lost, stolen or destroyed and issue in lieu thereof new
certificate of stock. However, the registered owner may file a bond or
other security, effective for a period of 1 year, for such amount and in
such form and with such sureties as may be satisfactory to the board
of directors, in which case a new certificate may be issued even before
the expiration of the one 1 year period.
5. If a contest has been presented to said corporation or if an action is
pending in court regarding the ownership of said certificate of stock,
the issuance of the new certificate of stock shall be suspended until
the final decision by the court regarding the ownership of said
certificate of stock.
Except in case of fraud, bad faith, or negligence on the part of the
corporation and its officers, no action may be brought against any
corporation which shall have issued certificate of stock in lieu of those
lost, stolen or destroyed pursuant to the procedure above-described.

6. Stock and Transfer Book

a. Contents
Q: What are the contents of a stock and transfer book?
A:
1.
2.

All stocks in the name of the stockholders alphabetically arranged

Amount paid and unpaid on all stocks and the date of payment of any installment

3. Alienation, sale or transfer of stocks

4. Other entries as the bylaws may prescribe

b. Who May Make Valid Entries

Q: Who may make proper entries in stock and transfer books?
A: The obligation and duty falls on the corporate secretary. If the
corporate secretary refuses to comply, the stockholder may rightfully
bring suit to compel performance. The stockholder cannot take the
law on to his hands; otherwise such entry shall be void. (Torres, Jr.
v. CA, G.R. No. 120138, Sept. 5, 1997)
7. Disposition and Encumbrance of Shares
a. Allowable Restrictions on the Sale of Shares
Q: Can a stockholder dispose of his shares without any
restriction?
A: Shares of stock are regarded as personal property of the
stockholder and as a general rule, he may dispose of them as he
sees fit unless the corporation has been dissolved, or unless the
right to do so has been restricted in the articles of incorporation and
in the stock certificate or the owners right of disposing his shares
has been hampered by his own actions.
Q: Can the corporation provide regulations to the sale/transfer
of the shares of stockholders?

A: Yes, but the authority granted to a corporation to regulate the

transfer of its stock does not empower it to restrict the right of a
stockholder to transfer his shares, but merely authorizes the
adoption of regulations as to the formalities and procedure to be
followed in effecting transfer (Thomson vs. CA, G.R. No. 116631,
October 28, 1998).
Q: What are the requisites for a restriction to be valid?
A: To be valid, restrictions on the sale/transfer of shares must be:
1. Provided in the articles of incorporation and
2. it must be printed at the back of the certificate of stock.
Note: The latter requirement is needed to bind third persons who
may buy or deal with the shares of stock.

b. Sale of Partially Paid Shares

Q: May a shareholder sell his shares if the payment of his
subscription is incomplete?
A: Yes. The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of stock. Since in
this case, there is still no stock certificates that can be issued (See
Sec. 64), the transfer may thru a Share Purchase Agreement
Contract.

c. Sale of a Portion of Shares Not Fully Paid

Q: Is the sale of a portion of shares not fully paid allowed?
A: Yes, in case of delinquent shares.
d. Sale of All of Shares Not Fully Paid
Q: Is the sale of shares of not fully paid subscription allowed?

A: Yes but to bind the corporation, consent of the corporation shall

be obtained unless not allowed by AOI.
e. Sale of Fully Paid Shares
Q: Is the sale of fully paid shares allowed?
A: Yes, even without the consent of the corporation as long as the
requisites for the valid transfer of shares are complied.
f. Requisites of a Valid Transfer
Q: What are the requirements for a valid transfer of stock
already fully paid and covered by stock certificates?
A:
1.

There must be a delivery of the stock certificate.

2.

The certificate of stock must be duly endorsed by the transferor or his legal representative.

3.

To be valid against third parties, the transfer must be recorded in the books of the corporation (Rural
Bank of Lipa vs. CA, G.R. No. 124535, September 28, 2001).

g. Involuntary Dealings with Shares

Q: What is involuntary dealing?
A: It refers to such writ, order or process issued by a court of record
affecting shares of stocks which by law should be registered to be
effective, and also to such instruments which are not the willful acts
of the registered owner and which may have been executed even
without his knowledge or against his consent.
J. Dissolution and Liquidation
1. Modes of Dissolution
a. Voluntary
i. Where No Creditors Are Affected
ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term
b. Involuntary
i. By Expiration of Corporate Term

ii. Failure to Organize and Commence Business Within 2 Years

from Incorporation
iii. Legislative Dissolution
iv. Dissolution by the SEC on Grounds under Existing Laws
2. Methods of Liquidation
a. By the Corporation Itself
b. Conveyance to a Trustee within a Three-Year Period
c. By Management Committee or Rehabilitation Receiver
d. Liquidation after Three Years
K. Other Corporations
1. Close Corporations
Requirements to be a Close Corporation:
a.) all of the corporations stocks issued of all classes shall be held or
owned by not more than twenty (20) persons;
b.) all stocks issued shall be subject to one or more restrictions on transfer
permitted by this title;
c.) the corporation shall not list in any stock exchange or make any public
offering of any of its stocks of any class.
A corporation is not a close corporation when at least two-thirds (2/3) of its
voting stock or voting rights are owned or controlled by another
corporation.
Any corporation may be incorporated as a close corporation except the
following which vested with public interest:
i.)
ii.)
iii.)
iv.)

mining or oil companies;

stock exchanges;
banks and insurance companies;
public utilities, educational, and other corporations vested with
public interest.

a. Characteristics of a Close Corporation

Management of corporate business is by the stockholders and not by
the board of directors, in which case:

i.)
ii.)
iii.)

stockholders do not need to meet to elect directors;

stockholders shall be deemed to be the directors;
stockholders shall be subject to liabilities pertaining to
directors.

b. Validity of Restrictions on Transfer of Shares

All charter restrictions on the transfer of shares must appear in:
1.) the articles of incorporation;
2.) the by-laws;
3.) the certificate of stock;
Otherwise, such restrictions will not be binding on any purchaser
in good faith. The most common restriction is similar to the right
of pre-emption of stockholders in an open stock corporation.
c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
Stock of a close corporation is not transferrable when issued for
transferred to:
1.) a person not entitled to be a holder under the articles of
incorporation;
2.) to a person not qualified as per the certificate of stock;
3.) to persons exceeding the required twenty (20);
4.) in violation of the restrictions specified in the certificate;
5.) to a person who has notice that
a. he is not eligible;
b. that the issue to him would exceed the required twenty
stockholders permitted to hold stock; or,
c. the transfer to him is in violation of the restriction or
transfer of stock.
d. When Board Meeting is Unnecessary or Improperly Held
When Unnecessary:
(1.) Before or after such action is taken written consent thereto
is signed by all the directors;
(2.) All the stockholders have actual or implied knowledge of
the action and make no prompt objection thereto in writing;
(3.) The directors are accustomed to take informal action with
the

express

stockholders;

or

implied

acquiescence

of

all

the

(4.) All the directors have express or implied knowledge of the

action in question and none of them makes prompt
objection thereto in writing.
When Improperly Held
If a directors meeting is held without proper call or notice, an
action taken therein within corporate powers is deemed ratified by a
director who failed to attend, unless he promptly files his written
objection with the secretary of the corporation after having
knowledge thereof.
e. Pre-Emptive Right
The pre-emptive right of stockholders in close corporation
shall extend to all stock to be issued, including reissuance of
treasury shares, whether for money, property or personal services,
or in payment of corporate debts, unless the articles of incorporation
provide otherwise.
f. Amendment of Articles of Incorporation
Any amendment to the articles of Incorporation to:
1.) Delete or remove any provision in the articles of
incorporation; or
2.) Reduce a quorum or voting requirement in the Articles
requires the affirmative vote of at least two-thirds (2/3) of
the outstanding capital stock, whether with or without
voting rights, or of such greater proportion of shares as
provided in the Articles of Incorporation.
g. Deadlocks
Deadlock means stagnation in the management of the
corporations business and affairs due to the split and divided action
of directors or stockholders such that the required vote for the
approval of any corporate act cannot be obtained.

2. Non-Stock Corporations
a. Definition
A non-stock corporation is one where no part of its income is
distributable as dividends to its members, trustees, or officers,
subject to the provisions of the Code on dissolution.
b. Purposes
Non-stock corporations may be formed or organized for
charitable, religious, educational, professional, cultural, fraternal,
literary, scientific, social, civic, service, or similar purposes, like
trade, industry, agricultural and like chambers, or any combination
thereof, subject to the special provisions of this title governing
particular classes of non-stock corporations.
c. Treatment of Profits
The provisions governing stock corporations, when pertinent,
shall be applicable to non-stock corporations, except as may be
covered by specific provisions of this title.

d. Distribution of Assets upon Dissolution

Rules for Distribution:
1.) All liabilities and obligations of the corporation shall be
made therefor;
2.) Assets held by the corporation upon a condition requiring
return, transfer, or conveyance, and which condition occurs
by reason of this dissolution, shall be returned, transferred,
or conveyed in accordance with the requirements;
3.) Assets received and held by the corporation subject to
limitations permitting their use only for charitable, religious,
benevolent, educational, or similar purposes;

4.) Assets other than those mentioned in the preceding

paragraphs, if any, shall be distributed in accordance with
the provisions of the articles of incorporation or the bylaws;
5.) In any other case, assets may be distributed such people,
societies, organizations or corporations, whether or not
organized for profit.

3. Religious Corporations
Religious corporations may be incorporated by one or more persons,
such corporation may be classified into corporation sole and religious
societies.
4. Foreign Corporations
Foreign Corporation is one which is organized or chartered under
the laws of an outside state or country.
a. Bases of Authority over Foreign Corporations
i. Consent
Obtaining of license, which is tantamount to consent, is
required to subject the foreign corporation doing business in the
Philippines to the jurisdiction of the courts.
ii. Doctrine of Doing Business (related to definition under the
Foreign Investments Act, R.A. No. 7042)
Under R.A. 5455, doing business in the Philippines means
soliciting of orders, purchases, service contracts, opening offices
management, has supervision or control of any domestic subsidiary,
or performing any other act which implies a continuity of commercial
dealings or arrangements.

b. Necessity of a License to Do Business

i. Requisites for Issuance of a License
Foreign Corporations are required to get a license by the Bureau
of Investments if:
(a) It owns more than 40% of the voting stocks of a domestic
corporation; or,
(b) It owns more than 30% of the authorized capital stock of a
domestic corporation.
ii. Resident Agent
A resident agent maybe either an individual residing in the
Philippines or a domestic corporation lawfully transacting business I
the Philippines; provided, that in the case of an individual, he must
be of good moral character and of sound financial standing.
c. Personality to Sue
No foreign corporation transacting business in the Philippines
without a license, or its successor or assigns, shall be permitted to
maintain or intervene in any action, suit or proceeding in any court or
administrative agency of the Philippines. Such corporation maybe sued, or
proceeded against, before the Philippine courts or administrative tribunals
on any valid cause of action recognized under the Philippine laws.
d. Suability of Foreign Corporations/ e. Instances When Unlicensed
Foreign Corporations May Be Allowed to Sue Isolated Transactions
The basis of suability is that any foreign corporation lawfully doing
business in the Philippines shall be bound by all laws, rules and
regulations applicable to domestic corporations of the same class, save
and except such as only provided for the creation, formation, organization
or dissolution of corporations or such as fix the relations, liabilities,
responsibilities or duties of stockholders, members, or officers, of
corporations to each other or to other corporation.

f. Grounds for Revocation of License

Among other others, they are, as follows:
1.) Failure to file its annual report or pay any fees as required
by this code;
2.) Failure to appoint and maintain a resident agent in the
Philippines as required by this title;
3.) Failure, after change of its resident agent or of his address,
to submit to submit to the SEC a statement of such change
as required by this title;
4.) Failure to submit to the SEC an authenticated copy of any
amendment to its articles of incorporation or by-laws or of
any articles of merger or consolidation within the time
prescribed by this title;
A misrepresentation of any material matter in any application, report, affidavit or other
document submitted such corporation pursuant to this title.
VII. Securities Regulation Code
(R.A. No. 8799)
A. State Policy, Purpose
The establishment of a socially conscious, free market that:
(1) Regulates itself;
(2)Encourage the widest participation of ownership in enterprises;
(3) Enhance the democratization of wealth;
(4) Promote the development of the capital market;
(5) Protect investors;
(6) Ensure full and fair disclosure about securities;
(7) Minimize if not totally eliminate insider trading and other fraudulent or
manipulative devices and practices which create distortions in the free
market (Sec. 2).
B. Securities Required to Be Registered
General rule: Securities shall not be sold or offered for sale or distribution to
the public within the Philippines, without a registration statement duly filed
with and approved by the Commission (Sec. 8.1) [N.B. The Securities
Regulation Code (SRC) regulates public offering within the Philippines.]
1. Exempt Securities
1. Any security issued or guaranteed by the Government of the
Philippines/ its political subdivision or agency/its instrumentality/ or

any person controlled or supervised thereby; [N.B. Rationale for the

exception: The public does not need protection from the government
itself. The government will always be solvent to pay its obligations
because of its ability to raise revenues through taxation.]
2. Any security issued or guaranteed by the government of any country
with which the Philippines maintains diplomatic relations, or by any
state, province or political subdivision thereof on the basis of
reciprocity: Provided, that the Commission may require compliance
with the form and content for disclosures the Commission may
prescribe; [Rationale for the exception: This is rooted in comity
among nations.]
3. Certificates issued by a receiver or by a trustee in bankruptcy duly
approved by the proper adjudicatory body; [Rationale: This is not a
public offering. Besides, protection is already afforded by that
proper adjudicatory body and additional SEC protection is not
necessary.]
4. Any security or its derivatives the sale or transfer of which, by law, is
under the supervision and regulation of the Office of the Insurance
Commission, Housing and Land Use Rule Regulatory Board, or the
Bureau

of

Internal

Revenue.

[Rationale:

The

issuers

are

governmental agencies covered by exception (a) above. SEC

protection would be a duplication.]
5. Any security issued by a bank except its own shares of stock (Sec.
9.1) [Rationale: Banks are under the supervision of the Bangko
Sentral. SEC protection is a duplication.]
6. Any class of security with respect to which the SEC finds that
registration is not necessary in the public interest and for the
protection of investors (Sec. 9.2)
2. Exempt Transactions
1. Any judicial sale, or sale by an executor, administrator, guardian,
receiver or trustee in insolvency or bankruptcy.
2. Those sold by a pledge, mortgagee, or any other similar lien holder,
to liquidate a bona fide debt (a security pledged in good faith as
security for such debt

3. Those sold or offered for sale in an isolated transaction, the owner

not being an underwriter
4. Distribution by the corporation of securities to its stockholders as
dividends;
5. Sale of capital stock of a corporation to its own stockholders
exclusively
6. Bonds or notes secured by a mortgage are sold to a single
purchaser at a single sale
7. Delivery of security in exchange for any other security pursuant to
the right of conversion
8. Brokers transactions executed upon the customers orders
9. Share subscriptions prior to incorporation or in pursuance of an
increase in its authorized capital stock
10. Exchange of securities by the issuer with its existing security
holders exclusively
11.Sale by issuer to fewer than 20 persons in the Philippines during
any 12 month period
12. Sale to banks, investment houses, insurance companies and any
entities ruled qualified by the SEC
C. Procedure for Registration of Securities
1. Application All securities required to be registered shall be registered
through the filing by issuer with SEC, of a sworn registration statement.
2. Prospectus The registration statement shall include any prospectus
required or permitted to be delivered;
3. Other information The information required for the registration of any
kind and all securities shall include, among others, the effect of the
securities issue on ownership, on the mix of ownership, especially
foreign and local ownership;
4. Signatories to registration statement The registration statement shall
be signed by the issuers:
1. Executive officer
2. Principal operating officer
3. Comptroller
4. Principal accounting officer
5. Corporate secretary or persons performing similar functions
Note: it shall be accompanied by a duly verified resolution of the BoD of
the issuer

5. Written consent of expert The written consent of the expert named as

having certified any part of the registration statement or any document
used in connection therewith shall also be filed
6. Certification by selling stockholders Where the registration statement
includes:
1. Shares to be sold by the selling shareholders
2. A written certification by such selling shareholders as to the
accuracy of any part of the registration statement contributed by
such selling shareholders shall also be filed
7. Fees The issuer shall pay to the SEC; the SEC shall prescribe by rule,
diminishing the fees in inverse proportion, the value of the aggregate
price of the offering
8. Notice and publication Notice of the filing of the registration statement
shall be immediately published by the issuer in two newspapers of
general circulation in the Philippines; once a week for two consecutive
weeks, reciting that:
1. A registration statement has been filed, and
2. The aforesaid registration statement and papers attached thereto
are open to inspection at the SEC during business hours.
Note: copies shall be furnished to interested parties at a reasonable
charge.
9. SEC Power for production of books The SEC may:
1. Compel the production of all the books and papers of such issuer
2. Administer oaths
10. Examine the officers of such issuer, or any other person connected
therewith as to its business and affairs
11. Ruling Within 45 days after the date of the filing of the registration
statement, or by such later date to which the issuer has consented, the
SEC shall declare the registration statement effective or rejected,
unless the applicant is allowed to amend the registration statement.
D. Prohibitions on Fraud, Manipulation and Insider Trading
1. Manipulation of Security Prices
1. Transactions intended to create active trading:
a. Wash Sale engaging in transaction in which there is no
genuine change in the actual ownership of a security
b. Matched Sale There is a change of ownership in the
securities by entering an order for the purchase/sale of

security with the knowledge that a simultaneous order of

substantially the same size, time, and price, for the sale or
purchase of any such security, has or will be entered by or
for the same or different parties.
c. Similar transactions where there is no change of beneficial
ownership.
2. Engaging in transactions which induce price to increase or
decrease:
a. Marking the close buying and selling securities at the
close of the market to alter the closing price of the security.
b. Painting the tape engaging in a series of transactions in
securities that are reported publicly to give the impression
of activity or price movement in a security.
c. Squeezing the float refers to taking advantage of a
shortage of securities in the market by controlling the
demand side and exploiting market congestion during such
shortages in a way to create artificial prices.
d. Hype and dump engaging in buying activity at
increasingly higher prices and then selling securities in the
market at the higher prices.
e. Boiler room operations the use of high pressure sale
tactics to promote purchase and sale of securities
f. Daisy chain it refers to a series of purchase and sales of
the same issue at successively higher prices by the same
group of people with
2. Short Sales
It is the selling of shares which the seller does not actually own or
possess and therefore he cannot, himself, supply the delivery.
3. Fraudulent Transactions
1. Obtaining money or property by means of any untrue statement
of a material fact
2. Engaging in any act, transaction, practice or course of business,
which operates as a fraud or deceit upon any person.
4. Insider Trading

A purchase or sale made by an insider or his relative within the second

degree shall be presumed to be effected while in possession of material
nonpublic information if transacted after such information came into
existence but prior to the public dissemination of such information, and
lapse of reasonable time for the market to absorb such information.
An insider is a person in possession of corporate information not
generally available to the public.
E. Protection of Investors
1. Tender Offer Rule
Publicly declared intention to buy securities of public companies given
to all stockholders by:
1. Filing with the SEC a declaration to that effect, and paying the
filing fee.
2. Furnishing the issuer a statement containing the information
required of the issuers as SEC may prescribe, including
subsequent or additional materials.
3. Publishing all requests or invitations for tender, or materials
making a tender offer or requesting or inviting letters of such
security.
Tender offer is in place to protect the interest of minority
stockholders of a target company against any scheme that dilutes
the share value of the investments. It affords such minority
shareholders the opportunity to withdraw or exit from the company
under reasonable terms, a chance to sell their shares at the same
price as those of the majority stockholders.
2. Rules on Proxy Solicitation
Requisite for valid proxy solicitation:
1. It must be in writing
2. It must be signed by the stockholder or his duly authorized
representative
3. It must be filed before the scheduled meeting with the corporate
secretary (Sec. 20)

Note: The proxy shall be valid only for the meeting for which it is
intended. No proxy shall be valid and effective for a period longer than 5
years at one time.
3. Disclosure Rule
It begins at registration and continues periodically thru periodic report.
May be suspended when on the first day of the fiscal year if it has less
than 100 shareholders (Rule 17.1, SRC IRR).
General rule: Disclosure does not end because once a reporting
company, it remains as such even when registration of securities has
been revoked (Rule 13 SCR IRR).
Exception: If the primary license is revoked.
Exception to the exception: In case of hospitals and educational
institutions if the primary license is revoked, disclosure requirement still
continues because of public interest.
F. Civil Liability
Grounds for civil liability to arise:
1. False Registration Statement. (Sec. 56)
2. Fraud with connection to prospectus, communications and reports. (Sec.
57)
3. Fraud in connection with security transactions. (Sec. 58)
4. Manipulation of security prices. (Sec. 60)
5. Insider trading. (Sec. 61)
Prescriptive period for filing of action: 2 years after the discovery of the facts
constituting the cause of action and within 5 years after such cause of action
accrued.
VIII. Banking Laws
A. The New Central Bank Act (R.A. No. 7653)
1. State Policies

The State shall maintain a central monetary authority that shall function and
operate as an independent and accountable body corporate in the discharge of its
mandated responsibilities concerning money, banking and credit. (Sec. 1)
2. Creation of the Bangko Sentral ng Pilipinas (BSP)
Nature of the BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
(3) A government-owned corporation but enjoys fiscal and administrative
autonomy. (Secs. 1 & 2, NCBA)
The BSP shall have a capitalization of P50B to be fully subscribed by the
Government. (Sec. 2)
3. Responsibility and Primary Objective
Primary Objectives
(1) To maintain price stability conducive to a balanced and sustainable growth of
the economy.
(2) To promote and maintain monetary stability and the convertibility of the peso.
Other Responsibilities
(1) To provide policy directions in the areas of money, banking, and credit
(2) To supervise operations of banks (Sec. 3, NCBA)
All powers, duties and functions vested by law in the Central Bank of the
Philippines not inconsistent with the NCBA shall be deemed transferred to the
BSP. All references to the Central Bank of the Philippines in any law or special
charters shall be deemed to refer to the BSP. (Sec. 136, NCBA)
4. Monetary BoardPowers and Functions
Monetary Board
The body through which the powers and functions of the Bangko Sentral is
exercised (Sec 6, NCBA)
Powers and Functions
(1) Issue rules and regulations it considers necessary for the effective discharge
of the responsibilities and exercise of the powers vested in it;

(2) Direct the management, operations, and administration of Bangko Sentral,

organize its personnel and issue such rules and regulations as it may deem
necessary or desirable for this purpose;
(3) Establish a human resource management system which governs the
selection, hiring, appointment, transfer, promotion, or dismissal of all personnel;
(4) Adopt an annual budget for and authorize such expenditures by Bangko
Sentral as are in the interest of the effective administration and operations of
Bangko Sentral in accordance with applicable laws and regulations; and
(5) Indemnify its members and other officials of Bangko Sentral, including
personnel of the departments performing supervision and examination functions,
against all costs and expenses reasonably incurred by such persons in
connection with any civil or criminal action, suit or proceeding, to which any of
them may be made a party by reason of the performance of his functions or
duties, unless such members or other officials is found to be liable for negligence
or misconduct. (Sec. 15, NCBA)
5. How the BSP Handles Banks in Distress
Liquidity Ability of an asset to be converted into cash. An entity is liquid when it
is able to pay its liabilities when they fall due.
Solvency When current assets are more than current liabilities, providing the
ability to pay debts. An entity is solvent when it is able to meet its long term
obligations/liabilities.
Insolvency When the actual market value of assets are insufficient to pay its
liabilities, not considering capital stock and surplus which are not liabilities for
such purpose. An entity is insolvent when it is unable to meet current and longterm obligations.
a. Conservatorship
Applicability
(1) When a bank or a quasi-bank is in a state of continuing inability or
unwillingness to maintain a condition of liquidity deemed adequate to protect
the interest of depositors and creditors (Sec. 29)
(2) Determination is to be made by the MB on the basis of a report submitted
by the appropriate supervising or examining department (Sec. 29)

Period and termination

(1) Period: shall not exceed 1 year (Sec. 29)
(2) The expenses attendant to the conservatorship shall be borne by the bank
or quasi-bank concerned (Sec. 29)
(3) Grounds for termination of conservatorship by MB:
(a) When it is satisfied that the institution can continue to operate on its own
and the conservatorship is no longer necessary
(b) When, on the basis of the report of the conservator or of its own findings,
the MB determines that the continuance in business of the institution would
involve probable loss to its depositors or creditors (the bank or quasi-bank
would then be placed under receivership) (Sec. 29)
Effects of conservatorship
(1) Bank/Quasi-bank retains juridical personality
(2) Not a precondition to the designation of a receiver, and;
(3) Perfected transactions cannot be repudiated
b. Closure
Close now, hear later scheme Sec. 29 of the Central Bank Act does NOT
contemplate prior notice and hearing before a bank may be directed to stop
operations and placed under receivership. It is enough that such action is
made subject of a subsequent judicial review. When the law provides for the
filing of a case within 10 days after the receiver takes charge of the assets of
the bank, it is unmistakable that the assailed actions should precede the filing
of the case. The legislature could not have intended to authorize no prior
notice and hearing in the banks closure and at the same time allow a suit to
annul it on the basis of absence thereof (Central Bank vs. Cam GR No.
76118, March 30, 1993)
c. Receivership
Grounds
Whenever the MB finds that a bank or quasi-bank:
(1) Is unable to pay its liabilities as they become due in the ordinary course of
business: Provided, That this shall not include inability to pay caused by
extraordinary demands induced by financial panic in the banking community;

(2) Has insufficient realizable assets, as determined by the BSP, to meet its
liabilities; or
(3) Cannot continue in business without involving probable losses to its
depositors or creditors; or
(4) Has willfully violated a cease-and-desist order under Sec. 37 that has
become final, involving acts or transactions which amount to fraud or a
dissipation of the assets of the institution
Receiver
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized competence in banking or
finance
The appointment of a receiver shall be vested exclusively in the MB. And the
designation of a conservator is not a precondition to the designation of a
receiver.
Powers and duties of a receiver
(1) Immediately gather and take charge of all the assets and liabilities of the
institution
(2) Administer the assets for the benefit of the creditors
(3) Exercise the general powers of a receiver under the Revised Rules of
Court
(4) Not to pay or commit any act that will involve the transfer or disposition of
any asset of the institution, except:
(a) Administrative expenditures
(b) Receiver may deposit or place funds in non-speculative investments
(5) Subject to prior approval of the MB, determine, as soon as possible, but
not later than 90 days from take-over, whether the institution may be
rehabilitated or otherwise placed in such a condition so that it may be
permitted to resume business with safety to its depositors and creditors and
the general public.
The assets of the institution under receivership and liquidation shall be
deemed in custodia legis and shall be exempt from any order of garnishment,
levy, attachment, or execution.

d. Liquidation
Should the determination be that the institution cannot be rehabilitated or
permitted to resume business, the MB shall notify in writing the board of
directors of the institution of its findings and direct the receiver to proceed with
the liquidation of the institution.
Procedure
(1) The receiver shall file ex parte with the proper RTC, and without
requirement of prior notice or any other action, a petition for assistance in the
liquidation of the institution pursuant to the liquidation plan adopted by the
PDIC (if quasi-bank, liquidation plan adopted by the MB)
(2) Upon acquiring jurisdiction, the court shall, upon motion by the receiver
after due notice,
(a) Adjudicate disputed claims against the institution,
(b) Assist the enforcement of individual liabilities of the stockholders,
directors, and officers, and
(c) Decide on other issues as may be material to implement the liquidation
plan
(3) The receiver shall convert the assets of the institutions to money, dispose
of the same to creditors and other parties, for the purpose of paying the debts
of such institution in accordance with the rules on concurrence and
preference of credit under the Civil Code.
The assets of the institution under receivership and liquidation shall be
deemed in custodia legis and shall be exempt from any order of garnishment,
levy, attachment, or execution.
Dispositions
In case of a liquidation of a bank or quasi-bank, after payment of the cost of
proceedings, including reasonable expenses and fees of the receiver to be
allowed by the court, the receiver shall pay the debts of such institution, under
order of the court, in accordance with the rules on concurrence and
preference of credit in the Civil Code. (Sec. 31, NCBA)
All revenues and earnings realized by the receiver in winding up the affairs
and administering the assets of any bank or quasi-bank shall be used to pay

the costs of proceedings, salaries of such personnel whose employment is

rendered necessary in the discharge of the liquidation together with other
additional expenses caused thereby.
The balance of revenues and earnings, after the payment of all said
expenses, shall form part of the assets available to creditors. (Sec. 32,
NCBA)
Effects of Appointment of Receiver/Liquidation
(1) Retention of juridical personality
(2) Suspension of operations/ Stoppage of business
(3) Assets are deemed in custodial legis, i.e., exempt from garnishment, levy
or execution
(4) Stay of execution of judgment to prevent depletion of bank assets
(5) Bank is not liable to pay interest on deposits which accrued during the
period of suspension of operation
(6) Restriction of banks capacity to do new business (new loans, deposits)
but with obligation to collect preexisting debts
6. How the BSP Handles Exchange Crisis
a. Legal Tender Power
All notes and coins issued by the BSP shall be fully guaranteed by the
Government of the Republic of the Philippines and shall be legal tender in the
Philippines for all debts, both public and private.
Limitation: Coins shall be legal tender in amounts not exceeding P50 for
denominations of 25 centavos and above, and in amounts not exceeding P20
for denominations of 10 centavos or less unless otherwise fixed by the MB.
The maximum amount of coins to be considered as legal tender is: [BSP
Circular 537 (2006) ]
1. P1,000.00 for denominations of 1-Piso, 5-Piso and 10-Piso coins; and
2. P100.00 for denominations of 1-sentimo, 5-sentimo, 10-sentimo, and 25sentimo coins. (Sec. 52)
b. Rate of Exchange
The MB shall:
(1) Determine the exchange rate policy of the country;

(2) Determine the rates at which the Bangko Sentral shall buy and sell spot
exchange;
(3) Establish deviation limits from the effective exchange rate or rates as it
may deem proper.
(4) Determine the rates for other types of foreign exchange transactions by
the BSP, including purchases and sales of foreign notes and coins.
Limitation: The margins between the effective exchange rates and the rates
established by the MB may not exceed the corresponding margins for spot
exchange transactions by more than the additional costs or expenses
involved in each type of transactions. (Sec. 74)
B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)
1. Purpose
(1) To give encouragement to the people to deposit their money in banking
institutions and to discourage private hoarding; and
(2) So that the peoples money may be properly utilized by banks in
authorized loans to assist in the economic development of the country. (Sec.
1)
The absolute confidentiality rule in R.A. No. 1405 actually aims at protection
from unwarranted inquiry or investigation if the purpose of such inquiry or
investigation is merely to determine the existence and nature, as well as the
amount of the deposit in any given bank account. (China Banking Corp. v.
Ortega, 1973)
2. Prohibited Acts
(1) No person, government official, bureau or office may examine, inquire into
or look into such deposits; and
(2) No official or employee of any banking institution may disclose to any
unauthorized person any information concerning said deposits. (Sec. 3)
3. Deposits Covered
All peso-denominated deposits of whatever nature with banks or banking
institutions in the Philippines are hereby considered as of an absolutely
confidential nature and may not be examined. [N.B. The confidentiality of
foreigncurrency deposits is governed by the Foreign Currency Deposit Act.]

Includes investments in bonds issued by the Philippine Government, its

political subdivisions and its instrumentalities, regardless of the currency of
denomination. (Sec. 2)
Under the RA 1405, bank deposits are statutorily protected or recognized
zones of privacy. (People v. Estrada, G.R. No. 164368, April 2, 2009; Marquez
v. Desierto, G.R. No. 135882, June 27, 2001, 359 SCRA 772; Ople v. Torres,
G.R. No. 107737. October 1, 1999, 316 SCRA 43)
The term deposits as used in RA 1405 is to be understood broadly and not
limited only to accounts which give rise to a creditor-debtor relationship
between the depositor and the bank.
If the money deposited under an account may be used by banks for
authorized loans to third persons, then such account, regardless of whether it
creates a creditor-debtor relationship between the depositor and the bank,
falls under the category of accounts which the law precisely seeks to protect
for the purpose of boosting the economic development of the country.
Considering the use of the phrase of whatever nature RA 1405 applies not
only to money which is deposited but also to those which are invested. Thus,
the protection afforded by RA 1405 extends to trust accounts. (Ejercito v.
Sandiganbayan (Special Division), 2006)
4. Exceptions
(1) Upon written permission of the depositor;
(2) In cases of impeachment;
(3) Upon order of a competent court in cases of:
(a) Bribery;
(b) Dereliction of duty of public officials; or
(4) Where the money deposited or invested is the subject matter of the
litigation. (Sec. 2)
By the phrase "subject matter of the action" is meant "the physical facts, the
things real or personal, the money, lands, chattels, and the like, in relation to
which the suit is prosecuted, and not the delict or wrong committed by the
defendant. (Mathay v. Consolidated Bank and Trust Company, 1974).

We note with approval the difference between the "subject of the action" from
the "cause of action." We also find petitioner's definition of the phrase "subject
matter of the action" is consistent with the term "subject matter of the
litigation," as the latter is used in the Bank Deposits Secrecy Act.
Where the plaintiff is fishing for information so it can determine the culpability
of private respondent and the amount of damages it can recover from the
latter. It does not seek recovery of the very money contained in the deposit.
The subject matter of the dispute may be the amount of P999,000.00 that
petitioner seeks from private respondent as a result of the latter's alleged
failure to inform the former of the discrepancy; but it is not the P999,000.00
deposited in the drawer's account. By the terms of R.A. No. 1405, the "money
deposited" itself should be the subject matter of the litigation. (Union Bank v.
Court of Appeals, 1999)
The exception applies to cases of concealment of illegally acquired property
in anti-graft cases. The inquiry into illegally acquired property or property
NOT "legitimately acquired" extends to cases where such property is
concealed by being held by or recorded in the name of other persons. (Banco
Filipino v. Purisima, 1988)
The exception even extends to cases of concealment of illegally acquired
property not involving anti-graft cases as long as money deposited was the
subject matter of litigation. (Mellon Bank, N.A. v. Magsino, 1990)
Other Exceptions
(1) Upon order of a competent court in cases of unexplained wealth under
Sec. 8 of RA 3019 or the Anti- Graft and Corrupt Practices Act (PNB v.
Gancayco, 1965; Banco Filipino v. Purisima, 1988; Marquez v. Desierto,
2001)
(2) When inquiry is conducted under the authority of the Commissioner of
Internal Revenue into the bank accounts of the following:
(a) A decedent in order to determine his gross estate
(b) Any taxpayer who has filed an application for compromise of his tax
liability, which application shall include a written waiver of his privilege under
RA 1405 or under other general or special laws Note: Information obtained

from banks and financial institutions may be furnished to a foreign tax

authority pursuant to an existing convention or agreement. (Sec. 6(F), NIRC,
as amended by RA 10021)
(3) Upon order of a competent court in cases under the Anti-Money
Laundering Act of 2001 (RA 9160, hereinafter AMLA), when there is
probable cause that the deposits or investments involved are in any way
related to an unlawful activity or a money laundering offense, except that no
court order required if:
(a) Funds or property involved consists of investments; or
(b) Said investments are related to:
(i) Kidnapping for ransom
(ii) Unlawful activities under Comprehensive Drugs Act of 2002 (RA 9165);
(iii) Hijacking and other violations under RA 6235; and
(iv) Destructive arson and murder, including those perpetrated by terrorists
against non-combatants and similar targets.
(4) BSP inquiry or examination in the course of its periodic or special
examination of the bank (Sec. 11, AMLA).
(5) Disclosure of certain information about bank deposits which have been
dormant for at least 10 years, to the Treasurer of the Philippine in a sworn
statement, a copy of which is posted in the bank premises. (Sec. 2,
Unclaimed Balances Law [Act No. 3926, as amended])
(6) The PDIC and/or the BSP can inquire into or examine deposit accounts
and all information related thereto in case there is a finding of unsafe and
unsound banking practice (Sec. 8, paragraph 8, R.A. 3591, as amended by
R.A. 9576).
5. Garnishment of Deposits, including Foreign Deposits
General rule: The prohibition against examination of or inquiry into a bank
deposit under Republic Act 1405 does not preclude its being garnished to
insure satisfaction of a judgment (China Banking Corporation v. Ortega, 1973;
Philippine Commercial and Industrial Bank v. Court of Appeals, 1991)
the prohibition against examination of or inquiry into a bank deposit under
Republic Act 1405 does not preclude its being garnished to insure satisfaction

of a judgment. Indeed there is no real inquiry in such a case, and if the

existence of the deposit is disclosed the disclosure is purely incidental to the
execution process. It is hard to conceive that it was ever within the intention of
Congress to enable debtors to evade payment of their just debts, even if
ordered by the Court, through the expedient of converting their assets into
cash and depositing the same in a bank. (China Banking Corporation v.
Ortega, 1973)
Exception: Foreign Currency Deposits The foreign currency deposits shall
be exempt from attachment, garnishment, or any other order or process of
any court, legislative body, government agency or any administrative body
whatsoever. (Sec. 8, Foreign Currency Deposit Act)
General rule: Foreign currency deposits are confidential.
Exceptions:
(1) Upon written permission of the depositor (Sec. 8, Foreign Currency
Deposit Act ; Intengan vs CA ; 2002)
(2) Upon order of a competent court in cases of violation of the Anti-Money
Laundering Act of 2001 [as in the case of peso deposits, supra]
(3) During Bangko Sentrals periodic or special examinations [as in the case
of peso deposits, supra], and
(4) Disclosure of the Treasurer of the Philippines when the unclaimed
balances law applies (Act 3936, as amended by PD 679)
(5) BSP/PDIC inquiry if there is a finding of unsafe and unsound banking
practice (as in the case of peso deposits, supra)
(6) In Salvacion vs. CB (1997), where a Filipino child was raped by a
foreigner, the SC allowed, pro hac vice, garnishment of foreign currency
deposits stating: If we rule that the questioned Section 113 of CB Circular No.
960 which exempts from attachment, garnishment, or any other order or
process of any court, legislative body, government agency or any
administrative body whatsoever, is applicable to a foreign transient, injustice
would result especially to a citizen aggrieved by a foreign guest.
C. General Banking Law of 2000 (R.A. No. 8791)
1. Definition and Classification of Banks

Banks shall refer to entities engaged in the lending of funds obtained in the
form of deposits. (Sec. 3.1, GBL)
Core banking Functions:
(1) Taking of deposits from the public
(2) Lending out these funds (Morales, The Philippine GBL Annotation).
Classification of Banks:
(1) Universal Banks (UB) These used to be called expanded commercial
banks and their operations are primarily governed by the GBL. They can
exercise the powers of an investment house and invest in non-allied
enterprises. They have the highest capitalization requirement.
(2) Commercial Banks (KB) These are ordinary or regular commercial
banks, as distinguished from a universal bank. They have a lower
capitalization requirement than a UB and cannot exercise the powers of an
investment house and invest in non-allied enterprises.
(3) Thrift Banks These are:
(a) Savings and mortgage banks;
(b) Stock savings and loan associations; and
(c) Private development banks (Sec. 3.2)
Note: The term thrift banks also refers to any banking corporation organized
for the following purposes:
(i) Accumulating the savings of depositors and investing them, together with
capital loans secured by bonds, mortgages in real estate and insured
improvements thereon, chattel mortgage, bonds and other forms of security
or in loans for personal or household finance, whether secured or unsecured,
or in financing for homebuilding and home development; in readily marketable
and debt securities; in commercial papers and accounts receivables, drafts,
bills of exchange, acceptances or notes arising out of commercial
transactions; and in such other investments and loans which the Monetary
Board may determine as necessary in the furtherance of national economic
objectives;
(ii) Providing short-term working capital, medium- and long-term financing, to
businesses engaged in agriculture, services, industry and housing; and

(iii) Providing diversified financial and allied services for its chosen market
and constituencies especially for small and medium enterprises and
individuals. (Sec.3(a), R.A. 7906)
(4) Cooperative Banks These are banks organized primarily to make
financial and credit services available to cooperatives and their members. It
may perform any or all of the services offered by a rural bank, including the
operation of an FCDU subject to certain conditions. (Morales, The Philippine
GBL Annotation)
Note: A cooperative bank is one organized for the primary purpose of
providing a wide range of financial services to cooperatives and their
members. (Art. 23(i), R.A. 9520)
(5) Islamic Banks These are banks the business dealings and activities of
which are subject to the basic principles and rulings of Islamic Sharia. The Al
Amanah Islamic Investment Bank of the Philippines, which was created by RA
6848, is the only Islamic bank in the country at this time.
Note: Islamic Bank refers to the Al-Amanah Islamic Investment Bank of the
Philippines, created under R.A. 6848. (See Sec. 44(1) and Sec. 2, R.A. 6848)
(6) Rural Banks Mandated to make needed credit available and readily
accessible in the rural areas on reasonable terms and which are primarily
governed by the Rural Banks Act of 1992 (RA 7353)
(7) Other Classifications of Banks As determined by the Monetary Board,
i.e., Philippine Veterans Bank (RA 3518), Landbank of the Philippines (RA
3844), Development Bank of the Philippines (RA 85)
2. Distinction of Banks from Quasi-Banks and Trust Entities
As Opposed to Quasi-banks
Quasi-banks (QB) refer to entities engaged in the borrowing of funds through
the issuance, endorsement or assignment with recourse or acceptance of
deposit-substitute instruments, for purposes of relending the funds so
borrowed or using them to purchase receivables and other obligations. (last
paragraph of Sec. 4)
The term deposit substitutes is defined as funds obtained from the public,
other than deposits, through the issuance, endorsement, or acceptance of

deposit-substitute instruments for the borrower's own account, for the

purposeof relending or purchasing of receivables and other obligations. It
includes bankers acceptances, promissory notes, participations, certificates of
assignment and similar instruments with recourse, and repurchase
agreements. (Sec. 95, New Central Bank Act, hereinafter NCBA)
As Opposed to Trust Entities
A Trust Entity is a stock corporation or a person duly authorized by the
Monetary Board to engage in trust business. (Sec. 79, GBL)
A Trust Business is any activity resulting from trusteeship involving the
appointment of a trustee by a trustor for the administration, holding,
management of funds and/or properties of the trustor by the trustee for the
use, benefit or advantage of the trustor or of beneficiaries.
3. Bank Powers and Liabilities
a. Corporate Powers
General powers incident to corporations
(1) To sue and be sued in its corporate name;
(2) Succession by its corporate name for the period stated in the AOI and the
certificate of incorporation
(3) To adopt and use a corporate seal
(4) To amend its AOI
(5) To adopt by-laws, not contrary to law, morals, or public policy, and to
amend or repeal them
(6) To issue or sell stocks to subscribers and to sell treasury stocks.
(7) To purchase, receive, take or grant, hold, convey, sell, lease, pledge,
mortgage and otherwise deal with such real and personal property, including
securities and bonds of other corporations, as the transaction of the lawful
business of the corporation may reasonably and necessarily require, subject
to the limitations prescribed by law and the Constitution
(8) To enter into merger or consolidation
(9) To make reasonable donations, including those for the public welfare or for
hospital, charitable, cultural, scientific, civic, or similar purposes: provided that

no corporation, domestic or foreign, shall give donations in aid of any political

party or candidate or for purposes of partisan political activity
(10) To establish pension, retirement, and other plans for the benefit of its
directors, trustees, officers and employees
(11) To exercise such other powers as may be essential or necessary to carry
out its purposes as stated in the AOI. (Sec. 36, Corporation Code)
b. Banking and Incidental Powers
All such powers as may be necessary to carry on the business of commercial
banking (Sec. 29)
(1) Accepting drafts By accepting a draft, a bank creates a bankers
acceptance, which is a negotiable time draft or bill of exchange drawn on and
accepted by a commercial bank. This is different from trade acceptance,
which is accepted by the buyer. (Morales, The Philippine GBL Annotation)
(2) Issuing letters of credit (3) Discounting and negotiating promissory notes,
drafts, bills of exchange, and other evidence of debt
(4) Accepting or creating demand deposits Deposit function
General rule: Only a Universal Bank (UB) Commercial Bank (KB) can accept
or create demand deposits.
Exception: Banks other than a UB or KB with prior approval of, and subject to
such conditions and rules as may be prescribed by the Monetary Board (Sec.
33, GBL)
4. Diligence Required of Banks Relevant Jurisprudence
Banks should observe diligence that is higher than that expected from a good
father of a family. Notwithstanding the degree of diligence required, a bank is
not expected to be infallible (Prudential Bank vs. CA, 2000).
Fiduciary Nature of Banks
(1) Failure on the part of the bank to satisfy the degree of diligence required
of banks may warrant the award of damages.
(2) Under Sec. 2, the degree of diligence is high standards of integrity and
performance and no longer highest degree of diligence as was decided
prior to the effectivity of the General Banking Law of 2000 but also
(mistakenly) even thereafter. In numerous cases, the Supreme Court has held

that the highest degree of diligence and care is expected from banks (Simex
International v. CA [1990]; Philippine Bank of Commerce
v. CA [1997]; Westmont Bank v. Ong [2002]; Solidbank v. Spouses Tan
[2003]; Samsung Construction v. FEBTC [2004]; Citibank, N.A. v. Spouses
Cabamongan [2006]; Philippine Savings Bank v. Chowking Food Corporation
[2008]; Bank of America NT &SA v. Philippine Racing Club [2009].
5. Nature of Bank Funds and Bank Deposits
As a business affected with public interest and because of the nature of its
functions, the bank is under obligation to treat the accounts of its depositors
with meticulous care, always having in mind the fiduciary nature of their
relationship.
In every case, the depositor expects the bank to treat his account with the
utmost fidelity, whether such account consists only of a few hundred pesos or
of millions. The bank must record every single transaction accurately, down to
the last centavo, and as promptly as possible. This has to be done if the
account is to reflect at any given time the amount of money the depositor can
dispose as he sees fit, confident that the bank will deliver it as and to
whomever he directs. A blunder on the part of the bank, such as the failure to
duly credit him his deposits as soon as they are made, can cause the
depositor not a little embarrassment if not financial loss and perhaps even
civil and criminal litigation (Simex International v. CA, 1990).
Banks are expected to exercise the highest degree of diligence in the
selection and supervision of their employees (PCI Bank v. CA, 2001).
It cannot be over emphasized that the banking business is impressed with
public interest. Of paramount importance is the trust and confidence of the
public in general in the banking industry. Consequently, the diligence required
of banks is more than that of a Roman pater familias or a good father of a
family. The highest degree of diligence is expected (Phil. Savings Bank v.
Chowking Food Corporation,
2008).
The banking business is so impressed with public interest where the trust and
confidence of the public in general is of paramount importance such that the

appropriate standard of diligence must be a high degree of diligence, if not

the utmost diligence (Bank of America NT&SA v. Phil. Racing Club, 2009).
Under the doctrine of last clear chance, a bank may be held liable for loss
despite the negligence of a depositor.
Examples of these cases are the following:
(1) For disbursing funds to a dishonest employee despite the employees
failure to strictly abide with the banks internal procedure. (PBC v. CA, 1997)
(2) Allowing the execution of a mortgage on parcels of land as security for a
loan not owned by the prospective borrower. (Canlas v. Court of Appeals,
2000)
(3) Crediting the deposit in favor of another depositor, a check where the
signature of the drawer was forged. (Westmont Bank v. Ong, 2002)
(4) Encashing pre-signed checks of the depositor which were stolen by its
employee. (Bank of America NT & SA v. Philippine Racing Club, 2009)
A bank is liable to a depositor when it honored and paid on a forged check
against the depositors account even if the bank followed its internal
procedure in preventing a faulty discharge. (Samsung Construction v. FEBTC,
2004)
In Gempesaw v. Court of Appeals (1993), a bank was held liable for damages
for failing to follow its internal procedures in paying on a forged check despite
the gross negligence on the part of the depositor.
6. Stipulation on Interests
The Monetary Board may prescribe the maturities, as well as related terms
and conditions for various types of bank loans and other credit
accommodations.
Any change by the Board in the maximum maturities shall apply only to loans
and other credit accommodations made after the date of such action.
The Monetary Board shall regulate the interest imposed on micro finance
borrowers by lending investors and similar lenders such as, but not limited to,
the unconscionable rates of interest collected on salary loans and similar
credit accommodations (Sec. 43, GBL)
7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets

The minimum ratio which the net worth of a bank must bear to its total risk
assets which may include contingent accounts [i.e. net worth: total risk
assets] (Sec. 34, GBL)
General rule: A bank must conform to the risk-based capital ratio prescribed
by the MB
Exceptions: The MB may alter or suspend compliance with such ratio
whenever necessary for a maximum period of 1 year.
(1) In case of a bank merger or consolidation; OR
(2) When a bank is under rehabilitation under a program approved by the
BSP; (Sec. 34, GBL)
Purpose
A bank must not be allowed to expand the volume of its loans and
investments in a manner that is disproportionate to its net worth. (MORALES,
Phil. Gen. Banking Law)
Effect of non-compliance
(1) The MB may limit or prohibit the distribution of net profits by such bank
and may require that part or all of the net profits be used to increase the
capital accounts of the bank until the minimum requirement has been met.
(2) The MB may restrict or prohibit the acquisition of major assets and the
making of new investments by the bank, with the exception of purchases of
readily marketable evidences of indebtedness of the RP and the BSP and any
other evidences of indebtedness or obligations the servicing and repayment
of which are fully guaranteed by the RP, until the minimum required capital
ratio has been restored. (Sec. 34, GBL)
b. Single Borrowers Limit
General rule: The total loans, credit accommodations and guarantees that
may be extended by a bank to any person, partnership, association, or
corporation or other entity shall at no time exceed 20% of the net worth of
such bank. (Sec. 35.1,GBL)
Exceptions:

(1) The Monetary Board otherwise prescribes for reasons of national interest.
(Sec. 35.1, GBL) Now, the single borrowers limit is 25% of the net worth of
the lending bank.
(2) Wholesale lending activities of government banks to participating
institutions for relending to end-userborrowers: separate limit of 35% net
worth. (BSP Circular No. 425 dated March 25, 2004)
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and their
Related Interests)
General rule: No director or officer of any bank:
(1) Shall, directly or indirectly, for himself or as the representative or agent of
others, borrow from such bank, nor
(2) Shall he become a guarantor, endorser or surety for loans from such bank
to others, or in any manner be an obligor or incur any contractual liability to
the bank
Exceptions:
(1) Valid insider lending (Sec. 36, GBL)
(2) Loans, credit accommodations and guarantees extended by a cooperative
bank to its cooperative shareholders (Sec. 36, GBL)
Requirements for valid insider lending
(1) In the regular course of business;
(2) Upon terms not less favorable to the bank than those offered to others;
(3) There is a written approval of the majority of all the directors of the bank,
excluding the director concerned;
(Except: granted to officers under a fringe benefit plan approved by the BSP;
(4) The required approval shall be entered upon the record of the bank and a
copy of such entry shall be transmitted forthwith to the appropriate
supervising and examining department of the BSP;
(5) Limited to an amount equivalent to the DOSRI borrowers unencumbered
deposits and book value of his paid-in capital contribution in the bank (Sec.
36, GBL)
Exceptions:
(1) Non-risk items; and

(2) Loans in the form of fringe benefits.

A DOSRI borrower is required to waive the secrecy of his deposits of
whatever nature in all banks in the Philippines. (Sec. 26, NCBA)
Purpose
The general policy behind DOSRI rules is to level the lending field between
the insiders and the outsiders.
The objective is to prevent the bank from becoming a captive source of
finance for DOSRI. (Morales, The Philippine General Banking Law, Opinion)
Loan-Loss Provisioning
The following are subject to regulation by the Monetary Board:
(1) The amount of reserves for bad debts or doubtful accounts or other
contingencies; and
(2) The writing off of loans, other credit accommodations, advances and other
assets. (Sec. 49, GBL)
Purpose
For effective banking supervision. There is a problem of mismatch when a
loan becomes non-performing. The bank is paying interest on the money it
borrowed from the depositors or other placers of funds, but is not recouping
that interest from the loan it made. Eventually, the bank may have to write off
loan losses against profits. To cushion this eventuality, the bank is required to
set aside reserved for bad debts and other doubtful accounts or
contingencies. (Morales, The Philippine General Banking Law, Opinion)
To address the non-performing asset problem, RA 9182 Special Purpose
Vehicle Act was passed. The Monetary Board approved certain accounting
guidelines on the sale by banks and other financial institutions for housing
under the said Act. (MORALES, The Philippine GBL Annotation) [N.B. RA
9182 is no longer in effect.]
IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)
A. Intellectual Property Rights in General
1. Intellectual Property Rights

 Those property rights which result from the physical manifestation of original
thought.
Refers to the totality of all rights which the law recognizes in favor of the author,
composer, painter, artist, scientist, or any other person with respect to the
creations or product of his intellect, and consists of principally, in his right to
authorize or refuse the publication or production of such creations or products.
Coverage: (Sec. 4, IPC)
1. Copyright
2. Related rights or neighboring rights of copyright
3. Patents
4. Mark
5. Geographical indications
6. Industrial designs
7. Layout designs (topographies) of integrated circuits
8. Protection of undisclosed information
2. Differences between Copyrights, Trademarks and Patent
COPYRIGHT confined to literary or artistic works which are original creations in
the literary or artistic domain protected from the moment of their creation.
PATENT INVENTIONS any technical solution of a problem in any field of
human activity which is new, involves an inventive step and is industrially
applicable (Sec. 21, IPC)
TRADEMARK any visible sign capable of distinguishing the goods or services
of an enterprise and shall include a stamped or marked container of goods (Sec.
121.1, IPC)
3. Technology Transfer Arrangements
Technology Transfer Arrangements are contracts or agreements involving the
transfer of systematic knowledge for the manufacture of a product, the application of a
process, or rendering of a service including management contracts; and the transfer,
assignment or licensing of all forms of intellectual property rights, including licensing of
computer software except computer software developed for mass market. (Sec. 4.2,
IPC)
B. Patents

 A patent is a statutory monopoly which protects against unlicensed use of the

patented device or process even by one who discovers it properly through
independent research.
Purposes:
1. The Patent Law seeks to foster and reward invention;
2. It prompts disclosures of inventions to stimulate further innovation and to
permit the public to practice the invention once the patent expires;
3. The stringent requirements for patent protection seek to ensure that ideas in
the public domain remain there for the free use of the public.
Principles:
1. Test of Non-Obviousness If any person possessing ordinary skill in the art
was able to draw the inferences and the constructs that the supposed inventor
drew from prior art, then the latter did not really invent.
2. Unity of invention The application shall relate to one invention only or to a
group of inventions forming a single general inventive step. (Sec. 38.1, IPC)
REQUISITES OF PATENTABILITY:
1. Any technical solution of a problem in any field of human activity.
2. Novelty an invention shall be considered new if it does not form part of a
prior art.
3. Inventiveness an invention involves inventive step if, having regard to prior
art, it is not obvious to a person skilled in the art at the time of the filing date or
priority date of the application claiming the invention. (Sec. 26, IPC)
4. Industrial applicability an invention that can be produced and used in any
industry (Sec. 27, IPC)
PRIOR ART shall consist of:
1. Everything which has been made available to the public anywhere in the world, before the
filing date or the priority date of the application claiming the invention; and
2. The whole contents of an application for a patent, utility model, or industrial design
registration, published in accordance with this Act, filed or effective in the Philippines, with a
filing or priority date that is earlier than the filing or priority date of the application: Provided,
That the application which has validly claimed the filing date of an earlier application under
Section 31 of this Act, shall be prior art with effect as of the filing date of such earlier

application: Provided further, That the applicant or the inventor identified in both applications
are not one and the same.

1. Patentable Inventions
1. Useful machine
2. Product
3. Process
4. Improvement of any of items 1, 2 and 3
5. Micro-organism
6. Non-biological and microbiological process
2. Non-Patentable Inventions (Sec. 22, IPC)
1. Discoveries, scientific theories and mathematical methods;
2. Schemes, rules and methods of performing mental acts, playing games or doing business, and
programs for computers;
3. Methods for treatment of the human or animal body by surgery or therapy and diagnostic
methods practiced on the human or animal body. This provision shall not apply to products and
composition for use in any of these methods;
4. Plant varieties or animal breeds or essentially biological process for the production of plants or
animals. This provision shall not apply to micro-organisms and non-biological and
microbiological processes.
Provisions under this subsection shall not preclude Congress to consider the enactment of a law
providing sui generis protection of plant varieties and animal breeds and a system of community
intellectual rights protection.
5. Aesthetic creations; and
6. Anything which is contrary to public order or morality.

3. Ownership of a Patent
a. Right to a Patent

The right granted to an inventor by the State, or by the regional office acting for
several States, which allows the inventor to exclude anyone else from
commercially exploiting his invention for a limited period.

The right to a patent belongs to the inventor, his heirs, or assigns. When two (2) or
more persons have jointly made an invention, the right to a patent shall belong to
them jointly. (Sec. 28, IPC)
b. First-to-File Rule

 If two (2) or more persons have made the invention separately and independently
of each other, the right to the patent shall belong to the person who filed an
application for such invention, or where two or more applications are filed for the
same invention, to the applicant who has the earliest filing date or, the earliest
priority date. (Sec. 29, IPC)
c. Inventions Created Pursuant to a Commission (Sec. 30, IPC)

1. The person who commissions the work for inventions created pursuant to a
commission, unless otherwise provided in the contract.
2. If the employee made the invention in the course of his employment contract:
The employee, if the inventive activity is not part of his regular duties
even if the employee uses the time, facilities and materials of the
employer.
The employer, if the invention is the result of the performance of his
regularly assigned duties, unless there is an agreement, express or
implied, to the contrary.
d. Right of Priority (Sec. 31, IPC)
An application for patent filed by any person who has previously applied for the
same invention in another country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be considered as filed as of the date of
filing the foreign application: Provided, That:
(a) the local application expressly claims priority;
(b) it is filed within twelve (12) months from the date the earliest foreign
application was filed; and
(c) a certified copy of the foreign application together with an English translation is
filed within six (6) months from the date of filing in the Philippines.
4. Grounds for Cancellation of a Patents
Cancellation of Patents - Any interested person may, upon payment of the
required fee, petition to cancel the patent or any claim thereof, or parts of the
claim, on any of the following grounds:
(a) That what is claimed as the invention is not new or Patentable;
(b) That the patent does not disclose the invention in a manner sufficiently clear
and complete for it to be carried out by any person skilled in the art; or
(c) That the patent is contrary to public order or morality.
Where the grounds for cancellation relate to some of the claims or parts of the
claim, cancellation may be effected to such extent only.
5. Remedy of the True and Actual Inventor

 If a person, who was deprived of the patent without his consent or through fraud
is declared by final court order or decision to be the true and actual inventor, the
court shall order for his substitution as patentee, or at the option of the true
inventor, cancel the patent, and award actual and other damages in his favor if
warranted by the circumstances. (Sec. 68, IPC)
6. Rights Conferred by a Patent
A patent shall confer on its owner the following exclusive rights:
(a) Where the subject matter of a patent is a product, to restrain, prohibit and
prevent any unauthorized person or entity from making, using, offering for
sale, selling or importing that product;
(b) Where the subject matter of a patent is a process, to restrain, prevent or
prohibit any unauthorized person or entity from using the process, and from
manufacturing, dealing in, using, selling or offering for sale, or importing any
product obtained directly or indirectly from such process.
Patent owners shall also have the right to assign, or transfer by succession the
patent, and to conclude licensing contracts for the same. (Sec. 71, IPC)
7. Limitations of Patent Rights (Sec. 72, IPC)

The owner of a patent has no right to prevent third parties from performing, without his
authorization, the acts referred to in Section 71 in the following circumstances:
1. Using a patented product which has been put on the market in the Philippines by the owner
of the product, or with his express consent, insofar as such use is performed after that
product has been so put on the said market;
2. Where the act is done privately and on a non-commercial scale or for a non-commercial
purpose: Provided, That it does not significantly prejudice the economic interests of the
owner of the patent;
3. Where the act consists of making or using exclusively for the purpose of experiments that
relate to the subject matter of the patented invention;
4. Where the act consists of the preparation for individual cases, in a pharmacy or by a medical
professional, of a medicine in accordance with a medical prescription or acts concerning the
medicine so prepared;
5. Where the invention is used in any ship, vessel, aircraft, or land vehicle of any other country
entering the territory of the Philippines temporarily or accidentally: Provided, That such
invention is used exclusively for the needs of the ship, vessel, aircraft, or land vehicle and
not used for the manufacturing of anything to be sold within the Philippines.

a. Prior User (Sec. 73, IPC)

Any prior user, who, in good faith was using the invention or has undertaken
serious preparations to use the invention in his enterprise or business, before the
filing date or priority date of the application on which a patent is granted, shall
have the right to continue the use thereof as envisaged in such preparations
within the territory where the patent produces its effect.

The right of the prior user may only be transferred or assigned together with his enterprise or
business, or with that part of his enterprise or business in which the use or preparations for use
have been made.
b. Use by the Government (Sec. 74, IPC)
A Government agency or third person authorized by the Government may exploit
the invention even without agreement of the patent owner where:
(a) The public interest, in particular, national security, nutrition, health or the
development of other sectors, as determined by the appropriate agency of the
government, so requires; or
(b) A judicial or administrative body has determined that the manner of
exploitation, by the owner of the patent or his licensee is anti-competitive.
8. Patent Infringement
It constitutes:
1. The making, using, offering for sale, selling, or importing a patented product
or a product obtained directly or indirectly from a patented process, or
2. the use of a patented process without the authorization of the patentee.

Remedies:
1. Civil action - Any patentee, or anyone possessing any right, title or interest in and to the
patented invention, whose rights have been infringed, may bring a civil action before a
court of competent jurisdiction, to recover from the infringer such damages sustained
thereby, plus attorney's fees and other expenses of litigation, and to secure an injunction
for the protection of his rights.

If the damages are inadequate or cannot be readily ascertained with reasonable

certainty, the court may award by way of damages a sum equivalent to reasonable
royalty.

The court may, according to the circumstances of the case, award damages in a
sum above the amount found as actual damages sustained: Provided, That the
award does not exceed three (3) times the amount of such actual damages.

The court may, in its discretion, order that the infringing goods, materials and
implements predominantly used in the infringement be disposed of outside the
channels of commerce or destroyed, without compensation.

Anyone who actively induces the infringement of a patent or provides the infringer
with a component of a patented product or of a product produced because of a
patented process knowing it to be especially adopted for infringing the patented
invention and not suitable for substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally liable with the infringer.
(Sec. 76, IPC)

2. Criminal action - If infringement is repeated by the infringer or by anyone in connivance

with him after finality of the judgment of the court against the infringer, the offenders
shall, without prejudice to the institution of a civil action for damages, be criminally liable
therefor and, upon conviction, shall suffer imprisonment for the period of not less than six
(6) months but not more than three (3) years and/or a fine of not less than One hundred
thousand pesos (P100,000) but not more than Three hundred thousand pesos (P300,000),
at the discretion of the court. The criminal action herein provided shall prescribe in three
(3) years from date of the commission of the crime. (Sec. 84, IPC)
a. Tests in Patent Infringement
i. Literal Infringement
Resort must be had, in the first instance, to words of the claim. If the
accused matter clearly falls within the claim, infringement is committed.
Minor modifications are sufficient to put the item beyond literal infringement.
ii. Doctrine of Equivalents
There is infringement where a device appropriates a prior invention by
incorporating its innovative concept and, although with some modification
and change, performs substantially the same function in substantially the
same way to achieve substantially the same result.
b. Defenses in Action for Infringement

In an action for infringement, the defendant, in addition to other defenses available to

him, may show the invalidity of the patent, or any claim thereof, on any of the grounds on
which a petition of cancellation can be brought.
9. Licensing
Modes:

a. Voluntary the grant by the patent owner to a third person of the right to
exploit a patented invention.
Rights of a licensor - In the absence of any provision to the contrary in the
technology transfer arrangement, the grant of a license shall not prevent the
licensor from granting further licenses to third person nor from exploiting the
subject matter of the technology transfer arrangement himself.

b. Compulsory - The Director of Legal Affairs may grant a license to exploit a patented
invention, even without the agreement of the patent owner, in favor of any person who has
shown his capability to exploit the invention, under any of the following circumstances:
1. National emergency or other circumstances of extreme urgency;
2. Where the public interest, in particular, national security, nutrition, health or the
development of other vital sectors of the national economy as determined by the
appropriate agency of the Government, so requires; or
3. Where a judicial or administrative body has determined that the manner of exploitation
by the owner of the patent or his licensee is anti-competitive; or
4. In case of public non-commercial use of the patent by the patentee, without satisfactory
reason;
5. If the patented invention is not being worked in the Philippines on a commercial scale,
although capable of being worked, without satisfactory reason: Provided, That the
importation of the patented article shall constitute working or using the patent.
10. Assignment and Transmission of Rights
Transmission of Rights - Patents or applications for patents and invention to
which they relate, shall be protected in the same way as the rights of other
property under the Civil Code. Inventions and any right, title or interest in and to
patents and inventions covered thereby, may be assigned or transmitted:
1. by inheritance or bequest, or
2. may be the subject of a license contract.
Assignment of Inventions - An assignment may be:
1. of the entire right, title or interest in and to the patent and the invention
covered thereby, or
2. of an undivided share of the entire patent and invention, in which event the
parties become joint owners thereof.
An assignment may be limited to a specified territory.
Form of Assignment - The assignment must be:
1. in writing,
2. acknowledged before a notary public or other officer authorized to
administer oath or perform notarial acts, and

3. certified under the hand and official seal of the notary or such other
officer.
4. Recorded in the IPO - Such instruments shall be void as against any
subsequent purchaser or mortgagee for valuable consideration and
without notice, unless, it is so recorded in the Office, within three (3)
months from the date of said instrument, or prior to the subsequent
purchase or mortgage

C. Trademarks
1. Definition of Marks, Collective Marks, Trade Names

"Mark" - means any visible sign capable of distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include a stamped or marked container of goods.
"Collective mark"- means any visible sign designated as such in the application for registration
and capable of distinguishing the origin or any other common characteristic, including the
quality of goods or services of different enterprises which use the sign under the control of the
registered owner of the collective mark.
"Trade name" - means the name or designation identifying or distinguishing an enterprise.
2. Acquisition of Ownership of Mark
The rights in a mark shall be acquired through valid registration. (Sec. 122, IPC)

1. Acquisition of Ownership of Trade Name

Trade names and business names are acquired through adoption and use.
Registration is not required.
4. Non- Registrable Marks:
A mark cannot be registered if it:
(a) Consists of immoral, deceptive or scandalous matter, or matter which may disparage or
falsely suggest a connection with persons, living or dead, institutions, beliefs, or national
symbols, or bring them into contempt or disrepute;
(b) Consists of the flag or coat of arms or other insignia of the Philippines or any of its political
subdivisions, or of any foreign nation, or any simulation thereof;
(c) Consists of a name, portrait or signature identifying a particular living individual except by
his written consent, or the name, signature, or portrait of a deceased President of the
Philippines, during the life of his widow, if any, except by written consent of the widow;

(d) Is identical with a registered mark belonging to a different proprietor or a mark with an
earlier filing or priority date, in respect of:
(i) The same goods or services, or
(ii) Closely related goods or services, or
(iii) If it nearly resembles such a mark as to be likely to deceive or cause confusion;
(e) Is identical with, or confusingly similar to, or constitutes a translation of a mark which is
considered by the competent authority of the Philippines to be well-known internationally
and in the Philippines, whether or not it is registered here, as being already the mark of a
person other than the applicant for registration, and used for identical or similar goods or
services: Provided, That in determining whether a mark is well-known, account shall be
taken of the knowledge of the relevant sector of the public, rather than of the public at large,
including knowledge in the Philippines which has been obtained as a result of the promotion
of the mark;
(f) Is identical with, or confusingly similar to, or constitutes a translation of a mark considered
well-known in accordance with the preceding paragraph, which is registered in the
Philippines with respect to goods or services which are not similar to those with respect to
which registration is applied for: Provided, That use of the mark in relation to those goods or
services would indicate a connection between those goods or services, and the owner of the
registered mark: Provided further, That the interests of the owner of the registered mark are
likely to be damaged by such use;
(g) Is likely to mislead the public, particularly as to the nature, quality, characteristics or
geographical origin of the goods or services;
(h) Consists exclusively of signs that are generic for the goods or services that they seek to
identify;
(i)

Consists exclusively of signs or of indications that have become customary or usual to

designate the goods or services in everyday language or in bona fide and established trade
practice;

(j) Consists exclusively of signs or of indications that may serve in trade to designate the kind,
quality, quantity, intended purpose, value, geographical origin, time or production of the
goods or rendering of the services, or other characteristics of the goods or services;
(k) Consists of shapes that may be necessitated by technical factors or by the nature of the goods
themselves or factors that affect their intrinsic value;
(l) Consists of color alone, unless defined by a given form; or
(m)Is contrary to public order or morality.

 As regards signs or devices mentioned in paragraphs (j), (k), and (l), nothing shall prevent the
registration of any such sign or device which has become distinctive in relation to the goods for
which registration is requested as a result of the use that have been made of it in commerce in the
Philippines. The Office may accept as prima facie evidence that the mark has become distinctive,
as used in connection with the applicant's goods or services in commerce, proof of substantially
exclusive and continuous use thereof by the applicant in commerce in the Philippines for five (5)
years before the date on which the claim of distinctiveness is made.
The nature of the goods to which the mark is applied will not constitute an obstacle to
registration
5. Prior Use of Mark as a Requirement
Actual prior use in Commerce in the Philippines has been abolished as a condition for
the registration of a trademark. (RA 8293)

Non-use of a Mark When Excused - Non-use of a mark may be excused:

1.

if caused by circumstances arising independently of the will of the trademark owner. Lack of
funds shall not excuse non-use of a mark.

2. The use of the mark in a form different from the form in which it is registered, which does not
alter its distinctive character, shall not be ground for cancellation or removal of the mark and
shall not diminish the protection granted to the mark.
3. The use of a mark in connection with one or more of the goods or services belonging to the
class in respect of which the mark is registered shall prevent its cancellation or removal in
respect of all other goods or services of the same class.
4. The use of a mark by a company related with the registrant or applicant shall inure to the
latter's benefit, and such use shall not affect the validity of such mark or of its registration:
Provided, That such mark is not used in such manner as to deceive the public. If use of a mark
by a person is controlled by the registrant or applicant with respect to the nature and quality of
the goods or services, such use shall inure to the benefit of the registrant or applicant.

6. Tests to Determine Confusing Similarity between Marks

a. Dominancy Test
Focuses on the similarity of the prevalent features of the competing marks. If the
competing trademark contains the main or essential dominant features of
another, and confusion is likely to result, infringement takes place.
b. Holistic Test

 Confusing similarity is to be determined on the basis of visual, aural, connotative

comparisons and overall impressions engendered by the marks in controversy as
they are encountered in the marketplace.
7. Well-Known Marks
A mark which a competent authority of the Philippines has designated to be wellknown internationally and in the Philippines.
8. Rights Conferred by Registration
1. The owner of a registered mark shall have the exclusive right to prevent all third parties not
having the owner's consent from using in the course of trade identical or similar signs or
containers for goods or services which are identical or similar to those in respect of which the
trademark is registered where such use would result in a likelihood of confusion. In case of
the use of an identical sign for identical goods or services, a likelihood of confusion shall be
presumed.
2. The exclusive right of the owner of a well-known mark which is registered in the Philippines,
shall extend to goods and services which are not similar to those in respect of which the mark
is registered: Provided, That use of that mark in relation to those goods or services would
indicate a connection between those goods or services and the owner of the registered mark:
Provided further, That the interests of the owner of the registered mark are likely to be
damaged by such use. (Sec. 147, IPC)

9. Use by Third Parties of Names, etc. Similar to Registered Mark

Registration of the mark shall not confer on the registered owner the right to
preclude third parties from using bona fide their names, addresses, pseudonyms,
a geographical name, or exact indications concerning the kind, quality, origin, or
time of production or of supply, of their goods or services.
10. Infringement and Remedies
a. Trademark Infringement
Any person who shall, without the consent of the owner of the registered mark:
1. Use in commerce any reproduction, counterfeit, copy, or colorable imitation of a
registered mark or the same container or a dominant feature thereof in
connection with the sale, offering for sale, distribution, advertising of any goods
or services including other preparatory steps necessary to carry out the sale of
any goods or services on or in connection with which such use is likely to cause
confusion, or to cause mistake, or to deceive; or

2. Reproduce, counterfeit, copy or colorably imitate a registered mark or a

dominant feature thereof and apply such reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints, packages, wrappers, receptacles or
advertisements intended to be used in commerce upon or in connection with the
sale, offering for sale, distribution, or advertising of goods or services on or in
connection with which such use is likely to cause confusion, or to cause mistake,
or to deceive, shall be liable in a civil action for infringement by the registrant for
the remedies hereinafter set forth: Provided, That the infringement takes place
at the moment any of the acts stated in Subsection 155.1 or this subsection are
committed regardless of whether there is actual sale of goods or services using
the infringing material.

b. Damages
In any suit for infringement, the owner of the registered mark shall not be entitled
to recover profits or damages unless the acts have been committed with knowledge
that such imitation is likely to cause confusion, or to cause mistake, or to deceive.
c. Requirement of Notice
Such knowledge is presumed if the registrant gives notice that his mark is
registered by displaying with the mark the words '"Registered Mark" or the letter R
within a circle or if the defendant had otherwise actual notice of the registration.

11. Unfair Competition - Unfair Competition, Rights, Regulation and Remedies. Rights: A person who has identified in the mind of the public the goods he manufactures or deals
in, his business or services from those of others, whether or not a registered mark is employed,
has a property right in the goodwill of the said goods, business or services so identified, which
will be protected in the same manner as other property rights.
Unfair competition: Any person who shall employ deception or any other means contrary to
good faith by which he shall pass off the goods manufactured by him or in which he deals, or his
business, or services for those of the one having established such goodwill, or who shall commit
any acts calculated to produce said result, shall be guilty of unfair competition, and shall be
subject to an action therefor.
In particular, and without in any way limiting the scope of protection against unfair
competition, the following shall be deemed guilty of unfair competition:
(a) Any person, who is selling his goods and gives them the general appearance of goods of
another manufacturer or dealer, either as to the goods themselves or in the wrapping of the
packages in which they are contained, or the devices or words thereon, or in any other feature

of their appearance, which would be likely to influence purchasers to believe that the goods
offered are those of a manufacturer or dealer, other than the actual manufacturer or dealer, or
who otherwise clothes the goods with such appearance as shall deceive the public and
defraud another of his legitimate trade, or any subsequent vendor of such goods or any agent
of any vendor engaged in selling such goods with a like purpose;
(b) Any person who by any artifice, or device, or who employs any other means calculated to
induce the false belief that such person is offering the services of another who has identified
such services in the mind of the public; or
(c) Any person who shall make any false statement in the course of trade or who shall commit
any other act contrary to good faith of a nature calculated to discredit the goods, business or
services of another.
Remedies: Civil, criminal and administrative remedies as provided by Sections 156, 157 and 161
of the IPC.

12. Trade Names or Business Names

A name or designation may not be used as a trade name if by its nature or the use
to which such name or designation may be put, it is contrary to public order or
morals and if, in particular, it is liable to deceive trade circles or the public as to the
nature of the enterprise identified by that name.

(a) Notwithstanding any laws or regulations providing for any obligation to register trade names,
such names shall be protected, even prior to or without registration, against any unlawful act
committed by third parties.
(b) In particular, any subsequent use of the trade name by a third party, whether as a trade name
or a mark or collective mark, or any such use of a similar trade name or mark, likely to mislead
the public, shall be deemed unlawful.

13. Collective Marks

Collective Marks is a mark used by the members of a cooperative, an association or other
collective group or an organization.
Application for registration of a collective mark - shall designate the mark as a collective mark
and shall be accompanied by a copy of the agreement, if any, governing the use of the collective
mark.
Grounds for cancellation of the registration of a collective mark
1. if the person requesting the cancellation proves that only the registered owner uses the mark,
or
2.

if he uses or permits its use in contravention of the agreements

3. or that he uses or permits its use in a manner liable to deceive trade circles or the public as to
the origin or any other common characteristics of the goods or
The registration of a collective mark, or an application therefor shall not be the subject of a
license contract. (Sec. 167, IPC)
D. Copyrights
1. Basic Principles, Sections 172.2, 175 and 181
What is a copyright?
Copyright is the legal protection extended to the owner of the rights in an original work.
Original work refers to every production in the literary, scientific and artistic domain. Among the
literary and artistic works enumerated in the IP Code includes books and other writings, musical works,
films, paintings and other works, and computer programs.
Works are protected by the sole fact of their creation, irrespective of their mode or form of expression,
as well as their content, quality and purpose. Thus, it does not matter if, in the eyes of some critics, a
certain work has little artistic value. So long as it has been independently created and has a minimum of
creativity,

the

same

enjoys

copyright

protection.

(http://www.ipophil.gov.ph/index.php/services/copyright/ownership-and-rights)

Who is entitled to a copyright?

A person to be entitled to a copyright must be the original creator of the work. He must
have created it by his own skill, labor and judgment without directly copying or
evasively imitating the work of another. (Chuan vs CA, G.R. No. 130360. August 15,
2001)
What is the scope of a copyright?
the scope of a copyright is confined to literary and artistic works which are original

intellectual creations in the literary and artistic domain protected from the moment of
their creation. (Kho vs CA, G.R. No. 115758. March 19, 2002)
The copyright does not extend to an idea, procedure, process, system, method of operation, concept,
principle, or discovery, regardless of the form in which it is described, explained, illustrated, or
embodied in such work. (Joaquin Jr vs Drilon, G.R. No. 108946. January 28, 1999)

When is copyright vested?

Literary and artistic works "works", are original intellectual creations in the literary and
artistic domain protected from the moment of their creation (Sec. 172.1). These works

are protected by the sole fact of their creation, irrespective of their mode or form of
expression, as well as their content, quality and purpose. (Sec. 172.2)
Is copyright the same as the covered material object?
Section 181. Copyright and Material Object. - The copyright is distinct from the
property in the material object subject to it. Consequently, the transfer or assignment of
the copyright shall not itself constitute a transfer of the material object. Nor shall a
transfer or assignment of the sole copy or of one or several copies of the work imply
transfer or assignment of the copyright.
2. Copyrightable Works

Copyright, in the strict sense of the term, is purely a statutory right. It is a new or
independent right granted by the statute, and not simply a pre-existing right
regulated by the statute. Being a statutory grant, the rights are only such as the statute
confers, and may be obtained and enjoyed only with respect to the subjects and by the
persons, and on terms and conditions specified in the statute.
Since . . . copyright in published works is purely a statutory creation, a copyright may
be obtained only for a work falling within the statutory enumeration or description.
(Joaquin Jr vs Drilon, G.R. No. 108946. January 28, 1999)
a. Original Works

What are original works?

SECTION 172. Literary and Artistic Works.
172.1. Literary and artistic works, hereinafter referred to as "works", are original
intellectual creations in the literary and artistic domain protected from the moment of
their creation and shall include in particular:
1. Books, pamphlets, articles and other writings;
2. Periodicals and newspapers;
3. Lectures, sermons, addresses, dissertations prepared for oral delivery,
whether or not reduced in writing or other material form;
4. Letters;
5. Dramatic or dramatico-musical compositions; choreographic works or
entertainment in dumb shows;
6. Musical compositions, with or without words;

7. Works of drawing, painting, architecture, sculpture, engraving, lithography or

other works of art; models or designs for works of art;
8. Original ornamental designs or models for articles of manufacture, whether or
not registrable as an industrial design, and other works of applied art;
9. Illustrations, maps, plans, sketches, charts and three-dimensional works
relative to geography, topography, architecture or science;
10. Drawings or plastic works of a scientific or technical character;
11. Photographic works including works produced by a process analogous to
photography; lantern slides;
12. Audiovisual works and cinematographic works and works produced by a
process analogous to cinematography or any process for making audio-visual
recordings;
13. Pictorial illustrations and advertisements;
14. Computer programs; and
15. Other literary, scholarly, scientific and artistic works.
172.2. Works are protected by the sole fact of their creation, irrespective of their
mode or form of expression, as well as of their content, quality and purpose.
b. Derivative Works
What are derivative works?
Derivative works are creations that are based on an existing work. Thus, the series of film Harry
Potter is a derivative work based on the novel of the same title. (Essentials of Intellectual Property
Law, E. Salao, 2nd edition, 2012)

SECTION 173. Derivative Works.

173.1. The following derivative works shall also be protected by copyright:
a. Dramatizations, translations, adaptations, abridgments, arrangements, and
other alterations of literary or artistic works; and
b. Collections of literary, scholarly or artistic works, and compilations of data and
other materials which are original by reason of the selection or coordination or
arrangement of their contents.
173.2. The works referred to in paragraphs (a) and (b) of Subsection 173.1 shall be
protected as new works: Provided however, That such new work shall not affect the
force of any subsisting copyright upon the original works employed or any part

thereof, or be construed to imply any right to such use of the original works, or to
secure or extend copyright in such original works.
Who is a publisher?
A publisher is someone who makes public something. This word has evolved to
mean as someone who is engaged in the business of publishing reading materials
such as books, newspapers and magazines. Publishers of songs are usually called
record producer. In the film industry, it is usually called movie producer. (Essentials of
Intellectual Property Law, E. Salao, 2nd edition, 2012)

What does rights does a publisher have?

Sec. 174 provides;
a. the right to publish granted by the author, his heirs, or assigns
b. the publisher shall have a copyright consisting merely of the right of reproduction
of the typographical arrangement of the published edition of the work. (n)
3. Non-Copyrightable Works
What are non-copyrightable works?

. The following are unprotected subject matter (Sec. 175):

a. any idea, procedure, system, method or operation, concept, principle, discovery
or mere data as such, even if they are expressed, explained, illustrated or
embodied in a work;
b. to news of the day and other miscellaneous facts having the character of mere
items of press information; and
c. or any official text of a legislative, administrative or legal nature, as well as any
official translation thereof.
In addition Sec. 176.1 states:
No copyright shall subsist in any work of the Government of the Philippines.
When is it considered a work of the Government of the Philippines?
a. The work was created by an officer or employee of the Philippine Government or
any of its subdivisions and instrumentalities, including GOCCs; and
b. The work was done as part of his regularly prescribed official duties.
General rule: Prior approval of the government agency or office wherein the work
is created shall be necessary for exploitation of such work for profit. Such agency
or office may, among other things, impose as a condition the payment of royalties.
(Sec. 176.1)

Exception:

The author of speeches, lectures, sermons, addresses, and

dissertations mentioned in the preceding paragraphs shall have the exclusive

right of making a collection of his works.
Can the government be a copyright owner?
Yes. Sec. 176.3 provides that the Government is not precluded from receiving and holding

copyrights transferred to it by assignment, bequest or otherwise; nor shall publication or

republication by the Government in a public document of any work in which copyright is
subsisting be taken to cause any abridgment or annulment of the copyright or to
authorize any use or appropriation of such work without the consent of the copyright
owner.
4. Rights of Copyright Owner
WHAT ARE THE TWO TYPES OF RIGHTS UNDER COPYRIGHT?
There are two types of rights under copyright:
(1)

economic

rights,

so-called

because

they

enable

the

creator

to

obtain

remuneration from the exploitation of his works by third parties, and

(2) moral rights, which makes it possible for the creator to undertake measures to
maintain and protect the personal connection between himself and the work.

Economic rights include (Sec. 177):

1)

Reproduction

2)

Transformation

3)

First public distribution

4)

Rental

5)

Public display

6)

Public performance

7)

Other communication to the public of the work.

Moral rights include:

1)

Right of Attribution

2)

Right of Alteration

3)

Right of Integrity (object to any prejudicial distortion)

4)

Right to restrain use of his name.

Exception to the moral rights

When an author contributes to a collective work, his right to have his

contribution attributed to him is deemed waived unless he expressly reserves it.

A collective work is a work which has been created by two (2) or more natural
persons at the initiative and under the direction of another with the
understanding that it will be disclosed by the latter under his own name and
that contributing natural persons will not be identified.

In the absence of a contrary stipulation at the time an author licenses or

permits another to use his work, the necessary editing, arranging or adaptation
of such work, for publication, broadcast, use in a motion picture, dramatization,
or mechanical or electrical reproduction in accordance with the reasonable and
customary standards or requirements of the medium in which the work is to be
used, shall not be deemed to contravene the author's rights secured by this
chapter. Nor shall complete destruction of a work unconditionally transferred by
the author be deemed to violate such rights.

Resale right: In every sale or lease of an original work of painting or sculpture or of the

original manuscript of a writer or composer, subsequent to the first disposition thereof

by the author, the author or his heirs shall have an inalienable right to participate in the
gross proceeds of the sale or lease to the extent of five percent (5%). This right shall
exist during the lifetime of the author and for fifty (50) years after his death.
Related rights

Authors create works to disseminate them to as large an audience as possible.

Obviously, they cannot do the dissemination by themselves. They need the help of
persons or entities who contribute substantial creative, technical or organizational
skill in the process of making the works available to the public and whose interests
ought to be protected to encourage them to continue with their work. Hence, their
rights are referred to as related rights or neighboring rights since they are related
to or are neighboring on the authors copyright.

Thus, we have the related rights of: (a) performers; (b) producers of sound recordings;
and (c) broadcasting organizations.

(Source:http://www.ipophil.gov.ph/index.php/services/copyright/ownership-and-rights)
5. Rules on Ownership of Copyright (Sec. 178)
Creator
Single Creator

To Whom It Belongs
Author of the work, his heirs or assigns
If work consists of UNIDENTIFIABLE parts, co-

Joint Creator

authors jointly as co-owners, unless there is an

agreement to the contrary.

If work consists of IDENTIFIABLE parts, author of

each part own the that he has created.
If the creation is PART of his regular duties:
Employees Creation

Commissioned Work

employer, unless there is agreement to the contrary.

If it is NOT: employee
Work itself: person commissioning
Copyright: creator, unless there is a written

Cinematographic Works

stipulation to the contrary.

For exhibition purposes: producer
For all other purposes: producer, author of the
scenario, composer, film director, author of the work.
Publishers are deemed representative of the author,
unless:

Anonymous and Pseudonymous Works

1. The contrary appears;

2. Pseudonyms or adopted name leaves no doubt as
to the authors identity; or author discloses his
identity.(Sec. 179)
Contributor is deemed to have waived his right unless

Collective Works

he expressly reserves it. (Sec. 195)

Writer.
However, the court may authorize their publication or

Letters

dissemination if the public good or the interest of

justice so requires. (Art. 223, New Civil Code)

(Table from San Beda 2009 Commercial Law Reviewer)
What is the duration of the protection granted various categories of works?
Category of Work
Duration of Protection
Provision of Law
Books, writings, articles, musical Liefe-time of author PLUS fifty Section 213.1, et seq
compositions,

dramatico-musical years thereafter

works, etc.
Works of applied art

Twenty-five years from the time of Section 213.4

Photographic works

making
Fifty year from publication, if Section 213.5
published or from making, if

Audio-visual

works,

unpublished
including Fifty years from date of making if Section 213.6

recordings on optical or magnetic unpublished and from publication if

media

published.

(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by
Fr. Ranhilio Callangan Aquino)
What other protection is afforded under Part IV of the Intellectual Property Code?
Category
Performances

of

Scope of Protection
Provision of Law
actos, 1. Broadcasting or telecasting of their Section 203.1 et seq.

singers, musicians, dancers

and other in similar positions.

performance;
2. Fixation

of

their

unfixed

performance;
3. Authorizing the direct or indirect
reproductions of their performance
in any form;
4. Authorizing

the

first

public

distribution of the original and

copies of the fixed forms of their
performance;
5. Authorizing commercial rental of
the original and copies of the fixed
forms of their performance;
6. Authorizing communication to the
public of their performance by such
means as television.

Section 205

Important:
These rights cease the moment the
performer authorizes broadcast/telecast
or fixation of her performance
Section 206
She is entitled though to additional
remuneration

per

broadcast

or

communication to the public to at least

5% of original compensation.

Procedures

of

sound

recording

1. Right to reproduce

Section 208

2. Right to distribute: either through

sale or rental
3. Right to authorized commercial
rental
4. Right

to

remuneration

single

equitable

when

recording Section 209

directly used for broadcasting or

Broadcasting

organizations

(Broadcast = Telecast)

communication to the public.

1. Right to prevent rebroadcasting of Section 211
broadcasts;
2. Recording of their broadcasts for
the

purpose

to

the

of

communication to the public;

3. The use of such recording for fresh
transmission or recording.
Note though:
There is no prohibition of the private
recording of any broadcast or telecast,
as long as this is for private education,
etc. use.
It is however a legal possibility for a 1961 Rome Convention
foreign broadcasting organization to Article 13.b
which we have access in the Philippines
to prohibit altogether the fixation of
their broadcasts.

(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by
Fr. Ranhilio Callangan Aquino)
6. Limitations on Copyright
What are the limitations on copyright? (GF-PARRI)
1) General limitations (Sec. 184);
2) Fair use (Sec. 185);
3) In case of a work of architecture, the right to control the reconstruction or rehabilitation in the same
style as the original of the building (Sec. 186);
4) Private reproduction of a published work in a single copy by a natural person for research and
private study (Sec. 187);
5) Repographic reproduction in a single copy by non-profit libraries, under certain circumstances (Sec
188);
6) Reproduction, under certain circumstances, of a computer program in one back-up copy by the
lawful owner of this program (Sec. 189);
7) Importation for personal purposes under certain conditions (Sec. 190).
(from San Beda 2009 Commercial Law Reviewer)

What are the general limitations on copyright?

The following acts shall not constitute infringement of copyright:

1)

Performance of a work, once it has been lawfully made accessible to the

public, if done privately and free of charge or for a charitable or religious
institution or society.

2)

The making of quotations from a published work if they are compatible with
fair use and only to the extent justified for the purpose.

3)

Communication to the public by mass media of articles on current political,

social, economic, scientific or religious topic, lectures, addresses and other
works of the same nature

4)

As part of reports of current events (e.g. music played or tunes on the

occasion of a sporting event and such tunes were picked up during a new
coverage of the event).

5)

For teaching purposes, provided that the source and of the name of the
author, if appearing in the work, are mentioned.

6)

Recording made in educational institutions of a work included in a broadcast

for the use of such educational institutions, provided that such recording must
be deleted within a reasonable period after they were first broadcast.

7)

The making of ephemeral recordings by a broadcasting organization by

means of its own facilities and for use in its own broadcast.

8)

The use made of a work by or under the direction or control of the

government, by the National Library or by educational, scientific or
professional institutions where such use is in the public interest and is
compatible with fair use.

9)

The public performance of a work, in a place where no admission fee is

charged.

10)

Public display of the original or a copy of the work not made by means of a
film, slide, television image or otherwise on screen or by means of any other
device or process (e.g. Public display using posters mounted on walls and
display boards).

11) Any use made of a work for the purpose of any judicial proceedings or for the

giving of professional advice by a legal practitioner.

(from UST Golden Notes 2011)

a. Doctrine of Fair Use

What Is Fair Use?

In its most general sense, a fair use is any copying of copyrighted material done for a
limited and transformative purpose, such as to comment upon, criticize, or parody a
copyrighted work. Such uses can be done without permission from the copyright owner.
In other words, fair use is a defense against a claim of copyright infringement.
(http://fairuse.stanford.edu/overview/fair-use/what-is-fair-use/)
Fair use is a legal doctrine that permits limited use of copyrighted material without
acquiring permission from the rights holders. It is one type of limitation and exception to
the exclusive

rights copyright law

grants

to

the

author

of

creative

work.

(https://en.wikipedia.org/wiki/Fair_use)
Section 185. Fair Use of a Copyrighted Work. - 185.1. The fair use of a copyrighted
work for criticism, comment, news reporting, teaching including multiple copies for
classroom use, scholarship, research, and similar purposes is not an infringement of
copyright. Decompilation, which is understood here to be the reproduction of the code
and translation of the forms of the computer program to achieve the inter-operability of
an independently created computer program with other programs may also constitute
fair use.
Sec. 185 also includes the criteria to determine fair use as follows:
(a) The purpose and character of the use, including whether such use is of a
commercial nature or is for non-profit educational purposes;
(b) The nature of the copyrighted work;
(c) The amount and substantiality of the portion used in relation to the copyrighted
work as a whole; and
(d) The effect of the use upon the potential market for or value of the copyrighted
work.
185.2. The fact that a work is unpublished shall not by itself bar a finding of fair use if
such finding is made upon consideration of all the above factors.
b. Copyright Infringement
What is copyright infringement?
Infringement of a copyright is a trespass on a private domain owned and occupied by the owner of the
copyright, and, therefore, protected by law, and infringement of copyright, or piracy, which is a
synonymous term in this connection, consists in the doing by any person, without the consent of the

owner of the copyright, of anything the sole right to do which is conferred by statute on the owner of the
copyright. (Columbia Pictures, Inc. v. CA)
What ris the difference between copyright infringement and plagiarism?
Copyright Infringement
Plagiarism
The unauthorized use of copyrighted material in The use of anothers information, language, or
a manner that violates one of the copyright writing,

when

done

without

proper

owners exclusive rights, such as the right to acknowledgment of the original source.
reproduce or perform the copyrighted work, or
to make derivative works that build upon it.
Copyright infringement is a very broad term that Plagiarism is specific as it refers only to using
describes a variety of acts. It may be duplication someone

elses

work

without

proper

of work, rewriting a piece, performing a written acknowledgment.

work or doing anything that is normally
considered to be the exclusive right of the
copyright holder.
There is no copyright infringement on public Public documents can be plagiarized so long as it is
documents.

not acknowledged.

(from UST Golden Notes 2011)

Statutorily protected material

1.

Books and other writings;

Examples of works:
Acts of Infringement
Published or unpublished Reproducing
articles;

2.

Periodicals

and

Adapting;

all

forms

of

transformation

newspapers;

Selling

or

ownership

transferring

of

the

object

unless one is already the

lawful owner thereof
Music or movie files on the
Internet.

Importation of the work

(Applies to all material objects

protected by copyright) (Section
177)

Electronic

or

books.

e-Books

are

Web-site

publications are covered

as

are

web-pages,

Unauthorized

copying,

reproduction, dissemination,
distribution,
alteration,
modification,

use,

removal,

substitution,
storage,

including

sound

movie

3.

and

uploading,

downloading,

communication,

recordings

available on the Internet

available

(Electronic

Commerce

broadcasting.

(Electronic

Act, R.A. 8792, Section

Commerce

Act,

33,b)

8792, Section 33,b)

Lectures

and

oral Lectures delivered by a

to

making
the

public,

R.A.

Unauthorized compilation (by

presentations, whether or reviewer for the Bar Exams

recording or tranascription) of

whether in writing or not;

the orally delivered pieces

homilies delivered by a

Section 176.2

reduced to writing or not;

priest, whether he has notes

or not.

4.
5.

Letters;

Besides the I.P. Code provisions,

Dramatic or dramatico- Operas, operettas, musicals;

see Art. 723, Civil Code

Public performance or other

compositions; Note: Popular dance steps

forms of communication to

musical

ballroom dancing not

choreography

included.

6.
7.

Musical compositions
Drawings,
paintings, Architectural plans
architecture,

the public.
Section 177.6
-ditto Constructing the building that

sculpture, Painting of Joya;

reproduces the whole or a

other works of art and Clay models of sculptural

substantial

works

models thereof

architectural work
Section 186

8.

Works of applied art;

Decorative prints of shirts

or blouses or skirts;
Creatively devised formats
of blank forms or even
receipts;

9.

Illustrations, maps, plans,

10.

sketches, charts
Drawings or

plastic Acetate

part

transparencies

works of a scientific or found in medical books

illustrating body parts;

of

the

technical character

Plastic models of molecular

structures
11. Photographic and similar Photographs

whether

on

traditional film or digital

products

format.

12. Audiovisual

works

and

Piracy of optical & magnetic

media
R.A.9293, Section 19

cinematographic works
13. Pictorial illustrations and
advertisements;
14. Computer programs;

Software,

including

databases (excluding mere

data)

15. Other literary, scholarly,

scientific

and

artistic

works.
Section 172
(Table from a paper entitled INTELLECTUAL PROPERTY RIGHTS: Protecting Economic Interests by
Fr. Ranhilio Callangan Aquino)
What are the available remedies in case of copyright infringement?
1.
2.

Injunction
Damages, including legal costs and other expenses, as he may have incurred due to
the infringement as well as the profits the infringer may have made due to such
infringement

3.

Impounding during the pendency of the action sales invoices and other documents
evidencing sales

4.

Destruction without any compensation all infringing copies

5.

Moral and exemplary damages (Sec. 216.1); or

6.

Seizure and impounding of any article, which may serve as evidence in the court
proceedings. (Sec. 216.2)

What are the criminal penalties in case of copyright infringement?

1. Imprisonment of one (1) year to three (3) years plus a fine ranging from Fifty thousand
pesos (P50,000) to One hundred fifty thousand pesos (P150,000) for the first offense.
2. Imprisonment of three (3) years and one (1) day to six (6) years plus a fine ranging from
One hundred fifty thousand pesos to Five hundred thousand (P500,000) for the second
offense.
3. Imprisonment of six (6) years and one day to nine (9) years plus a fine ranging from Five
hundred thousand pesos (P500,000) to P1,500,000 for the third offense.
4. In all cases, subsidiary imprisonment in cases of insolvency.
What is affidavit evidence?
An affidavit made before the notary public in actions for infringement, reciting the facts
required to be stated under the IPC. (Sec. 216.1)

Note: As a prima facie proof, the affidavit shifts the burden of proof to the defendant, to prove the
ownership of the copyrighted work.
(All three Q & A above from UST Golden Notes 2011)
E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)

`
What courts shall observe the Rules of Procedure for Intellectual Property Rights
Cases?
SEC. 2. In what courts applicable. These Rules shall be observed by the Regional
Trial Courts designated by the Supreme Court as Special Commercial Courts.
Will the regular rules apply?
SEC. 3. Applicability of the regular rules. When the court determines that the civil or
criminal action involves complex issues, it shall issue a special order that the regular
procedure prescribed in the Rules of Court shall apply, stating the reason therefor.
Where applicable, the Rules of Court shall apply suppletorily to proceedings under
these Rules.
Are orders issued by the court executor?

SEC. 4. Executory nature of orders. Any order issued by the court under these Rules
is immediately executory unless restrained by a superior court.
Is there a need for verification of documents filed with the court?
SEC. 5. Verification and supporting documents. Any pleading, motion, opposition,
defense or claim filed by any interested party shall be supported by verified statements
that the affiant has read the same and that the factual allegations therein are true and
correct of his personal knowledge or based on authentic records, and shall contain as
annexes such documents as may be deemed by the party submitting the same as
supportive of the allegations in the affidavits.
What is the duty of the clerk of court?
SEC. 6. Duty of the clerk of court. It shall be the duty of the branch clerk of court to
notify in writing the Director-General of the intellectual Property Office (IPO) of any
action, suit or roceeding involving a copyright, trademark, service mark, patent,
industrial design, utility model, undisclosed information and technology transfer
agreement. Such notice shall set forth: the names and addresses of the litigants and
the copyright, trademark, service mark, patent or design registrations involved and,
where applicable, the numbers of their certificates of registration. The notice shall be
submitted within one (1) month after the filing thereof.
What rules of procedure must be observed for violation of intellectual property
rights in civil actions and criminal actions?
Civil Actions
RULE 2. NATURE OF PROCEEDINGS

Criminal Actions
Rule
10
NATURE

OF

PROCEEDINGS
SEC 1. Scope. Rules 2 to 9 shall apply to
all civil actions for violations of intellectual

SEC 1. Scope. Rules 10 to 15

property rights provided for in Republic Act shall apply to all criminal actions for
8293 or the Intellectual Property Code, as violations
amended,

including

civil

actions

of

intellectual

property

for rights provided for in Republic Act

infringement of Patent (Section 76), Utility 8293 or the Intellectual Property

Model (Section 108) and Industrial Design Code,
(Section

119),

Trademark

as

amended,

including

Infringement Repetition of Infringement of Patent

(Section 155 in relation to Section 163), (Section 84), Utility Model (Section
Unfair Competition (Section 168 in relation to 108) and Industrial Design (Section
Section 163), actions concerning trademark 119),

Trademark

Infringement

license contracts (Section 150 in relation to (Section 155 in relation to Section

Section 163), actions concerning imported 170), Unfair Competition (Section 168
merchandise or goods bearing infringing in relation to Section 170), False
marks or trade names (Section 166 in relation Designations

of

to Section 163), actions for cancellation of the Description

Origin;

or

False

Representation

registration of a collective mark (Section 167 (Section 169.1 in relation to Section

in

relation

to

Section

163),

False 170), infringement of copyright, moral

Designations of Origin; False Description or rights, performers' rights, producers'

Representation (Section 169 in relation to rights,

and

broadcasting

rights

Section 163), Breach of Contract (Section (Section 177, 193, 203, 208 and 211
194),

civil

actions

for

infringement

of in relation to Section 217), and other

copyright, moral rights, performers' rights, violations

of

intellectual

property

producers' rights, and broadcasting rights rights as may be defined by law.

(Sections 177, 193, 203, 208, 211, and 216),
and other violations of intellectual property SEC. 2. Special Commercial Courts
rights as may be defined by law.

in the National Capital Judicial Region

with

authority

SEC. 2. Special Commercial Courts in the warrants

National Capital Judicial Region with authority Special
to

issue

enforceable

writs

of

search

nationwide.

to

issue

enforceable
Commercial

search

nationwide.
Courts

in

and

seizure Quezon City, Manila, Makati, and

Special Pasig shall have authority to act on

Commercial Courts in Quezon City, Manila, applications

for

the

issuance

of

Makati, and Pasig shall have authority to act search warrants involving violations of

on applications for the issuance of writs of the Intellectual Property Code, which
search and seizure in civil actions for search warrants shall be enforceable
violations of the Intellectual Property Code, nationwide. Within their respective
which writs shall be enforceable nationwide. territorial jurisdictions, the Special
The issuance of these writs shall be governed Commercial Courts in the judicial
by the rules prescribed in Re: Proposed Rule regions

where

the

violation

of

on Search and Seizure in Civil Actions for intellectual property rights occurred
Infringement of Intellectual Property Rights shall have concurrent jurisdiction to
(A.M. No. 02-1-06-SC, which took effect on issue search warrants.
February 15, 2002). Within their respective
territorial

jurisdictions,

the

Special Accordingly, the Executive Judges

Commercial Courts in the judicial regions are hereby relieved of the duty to
where the violation of intellectual property issue
rights

occurred

shall

have

search

warrants

involving

concurrent violations of the Intellectual Property

jurisdiction to issue writs of search and Code in criminal cases as stated in

seizure.

Sec. 12, Chapter V of A.M. No. 03-802-SC (Guidelines on the Selection

and Appointment of Executive Judges
and

Defining

their

Powers,

Prerogatives and Duties).

Rule
3 COMMENCEMENT
ACTION
SECTION
1. Pleadings.OF
The only Rule 11 COMMENCEMENT
pleadings allowed to be filed are the ACTION

OF

complaints, compulsory counterclaims and

cross-claims pleaded in the answer, and the SECTION 1. How commenced.
answers thereto. All pleadings shall he The filing of criminal cases falling
verified.
SEC. 2. Who may file an action under these
Rules. Any intellectual property right
owner, or anyone possessing any right, title or

within the scope of this Rule shall be

by information after a prior verified
complaint is filed under Rule 12 on
Preliminary Investigation.

interest under claim of ownership in any

intellectual property right, whose right may
have been violated, may file an action under

When the information is filed, the

verified complaint and the affidavits of

these Rules.

witnesses

together

with

other

evidence, in such number of copies

Any person who is a national or who is as there are accused plus two (2)
domiciled or has a real and effective industrial copies for the court's files, shall be
establishment in a country which is a party to attached thereto.
any convention, treaty or agreement relating
to intellectual property rights or the repression In case of failure to attach the
of unfair competition, to which the Philippines complaint, affidavit and evidence, the
is also a party, or extends reciprocal rights to court shall order the investigating
nationals of the Philippines by law, shall be prosecutor,
entitled to file an action under these Rules.

through

the

court's

designated prosecutor, to submit the

said requirements before the pre-trial.

Any foreign national or juridical person who

meets the requirements of the immediately SEC. 2. Where to file. The
preceding paragraph, and does not engage in information,

together

with

business in the Philippines, may also file an attachments, shall be filed with the
action under these Rules.

court referred to in Section 2 of Rule

1, which has jurisdiction over the

SEC. 3. Form and contents of the complaint. territory where any of the elements of
The complaint shall be verified and shall the offense occurred.
state the full names of the parties to the case.
Facts showing the capacity of a party to sue SEC. 3. When warrant of arrest may
or be sued, or the authority of a party to sue issue. Within ten (10) days from
or be sued in a representative capacity, or the the filing of the information, the judge
legal existence of an organized association of shall

personally

persons that is made a party, must be information

evaluate

together

with

the
the

averred. In case of juridical persons, proof of resolution of the prosecutor and its
capacity to sue must be attached to the supporting documents. The judge
complaint.

may immediately dismiss the case if

the evidence on record clearly fails to

The

complaint

shall

contain

concise establish probable cause, if he finds

statement of the ultimate facts constituting the probable cause, he shall issue a

complainant's cause or causes of action. It warrant of arrest, or a commitment

shall specify the relief(s) sought, but it may order if the accused has already been
add a general prayer for such further or other arrested. In case of doubt on the
relief(s) as may be deemed just or equitable.

existence of probable cause, the

judge may order the prosecutor to

The affidavits in question-and-answer format present additional evidence within five

referred to in Sec. 5 hereof and the relevant (5) days from notice and the issue
evidence shall be made part of the complaint.

must be resolved by the court within

fifteen

(15)

The complaint shall include a certification that presentation

days
of

from

the

the

additional

the party commencing the action has not filed evidence.

any other action or proceeding involving the
same issue or issues before any tribunal or SEC. 4. Disposition of goods seized
agency nor is such action or proceeding pursuant to search warrant. If a
pending

in

other

quasi-judicial

bodies; criminal action has been instituted,

Provided, however, that if any such action is only the trial court shall rule on a
pending, the status of the same must be motion to quash a search warrant or
stated, and should knowledge thereof be to

suppress

evidence

obtained

acquired after the filing of the complaint, the thereby or to release seized goods.
party concerned shall undertake to notify the
court

within

five

(5)

days

from

such It shall be the duty of the applicant or

knowledge.

private complainant to file a motion

for the immediate transfer of the

When the party-litigant is a corporation, the seized goods to the trial court, which
verification/certification

of

non-forum motion shall be immediately acted

shopping required should be executed by a upon by the issuing court.

natural

person

duly

authorized

by

the

corporation, through a special power of If

no

criminal

action

has

been

attorney or a board resolution for the purpose, instituted, the motion to quash a
attached to the complaint.

search

warrant

or

to

suppress

evidence obtained thereby or to

The complaint shall further be accompanied release seized goods may be filed in

by proof of payment of docket and other and resolved by the issuing court. If
lawful fees. Failure to comply with the pending resolution of the motion, a
foregoing requirements shall not be remedied criminal case is meanwhile filed in
by mere amendment of the complaint. The another court, the incident shall be
court, motu proprio, shall dismiss the case transferred to and resolved by the
without prejudice.

latter court.

The submission of a false certification or non- Upon motion of the party whose
compliance with any of the undertakings goods have been seized, with notice
therein shall constitute indirect contempt, to the applicant, the issuing court may
without

prejudice

to

the

corresponding quash the search warrant and order

administrative, civil and criminal liabilities. If the return of the seized goods if no
the acts of a party or his counsel clearly criminal complaint is filed within sixty
constitute

willful

and

deliberate

forum (60) days from the issuance of the

shopping, the same shall be a ground for search warrant.

summary dismissal with prejudice and shall
constitute direct contempt

If no criminal action is filed before the

office of the prosecutor and no motion

SEC.

4.

Prohibited

pleadings.

The for the return of the seized goods is

following pleadings are prohibited:

filed within sixty (60) days from the

a) Motion to dismiss;

issuance of the search warrant, the

b) Motion for a bill of particulars;

issuing court shall require the parties,

c) Motion for reconsideration of a final including the private complainant, if

order or judgment, except with regard to any, to show cause why the search
an order of destruction issued under Rule warrant should not be quashed.
20 hereof;
d) Reply;

SEC. 5. Prohibited motions. The

e) Petition for relief from judgment;

following

motions

shall

not

be

f) Motion for extension of time to file allowed:

pleadings or other written submissions,

a) Motion to quash the information,

except for the answer for meritorious

except on the ground of lack of

reasons;

jurisdiction;

g) Motion for postponement intended for

b) Motion for extension of time to

delay;

file affidavits or any other papers;

h) Third-party complaint;

and

i) Intervention;

c)

j) Motion to hear affirmative defenses; and

intended for delay.

k) Any pleading or motion which is similar

to or of like effect as any of the foregoing.
SEC. 5. Affidavits. The affidavits required
to be submitted with the complaint shall be in
questionand-answer

format

numbered

consecutively, and shall state only facts of

direct personal knowledge of the affiants
which are admissible in evidence. The
affidavits shall also show the competence of
the affiants to testify to the matters stated
therein.
A violation of this requirement may subject
the party or the counsel who submits the
same to disciplinary action, and shall be a
ground for the court to order that the
inadmissible affidavit or portion thereof be
expunged from the records.
SEC. 6. Failure to file complaint where a writ
of search and seizure is issued. Upon
motion of the party whose goods have been
seized, with notice to the applicant, the
issuing court may lift its writ and order the
return of the seized goods if no case is filed
with the appropriate court and/or appropriate

Motion

for

postponement

quasi-judicial

agency,

including

the

Intellectual Property Office of the Philippines,

within thirty-one (31) calendar days from the
date of issuance of the writ.
If no motion for the return of the seized goods
is filed within sixty (60) days from the
issuance of the writ under the preceding
paragraph, the court shall order the disposal
of the goods, as may be warranted, after
hearing with notice to the parties.
Rule 4 ANSWER
Rule
12
SEC 1. Summons. The summons and the
INVESTIGATION
SEC. 2. Service of summons, orders and
other court processes. Summons, orders
and other court processes may be served by
the sheriff, his deputy or other proper court
officer or for justifiable reasons, by the
counsel or representative of the plaintiff or
any suitable person authorized by the court
issuing the summons.
Any private person who is authorized by the
court to serve summons, orders and other
court processes shall, for that purpose, be
considered an officer of the court.
When the defendant is a foreign private
juridical entity, service may be made on its
resident agent designated in accordance with
law for that purpose, or, if there be no such
agent, on the government official designated
by law to that effect, or on any of its officers or

PRELIMINARY

SEC 1. Complaint. The complaint

shall be filed with the Department of
Justice or the office of the prosecutor
that has jurisdiction over the offense
charged:
a) The complaint shall state the full
name of the complainant and the
facts

showing

the

capacity

or

authority of the complaining witness

to institute a criminal action in a
representative capacity, and the
legal existence of an organized
association

of

persons

that

is

instituting the criminal action. In

case of juridical persons, proof of
capacity to sue must be attached to
the

complaint.

Where

the

complainant is a juridical person

agents within the Philippines.

not registered in the Philippines,

documents

proving

its

legal

If the foreign private juridical entity is not

existence and/or its capacity to sue,

registered in the Philippines or has no

such as a certificate of registration

resident agent, service may, with leave of

or

court, be effected out of the Philippines

commercial registries or offices

through any of the following means:

having

extracts

from

jurisdiction

relevant
over

said

a) By personal service coursed through the

entities, shall be accepted if these

appropriate court in the foreign country with

are originals or in case of public

the assistance of the Department of

documents, certified true copies

Foreign Affairs;

thereof executed by the proper

b) By publication once in a newspaper of

officer of such registries or offices.

general circulation in the country where the

Where the complainant is a foreign

defendant may be found and by serving a

national or is domiciled or has a

copy of the summons and the court order

real

by registered mail at the last known

establishment in a country which is

address of the defendant;

a party to any convention, treaty or

c) By facsimile or any recognized electronic

agreement relating to intellectual

means that could generate proof of service;

property rights or the repression of

or

unfair competition to which the

d) By such other means as the court may,

Philippines is also a party, or

in its discretion, direct. Should either

extends reciprocal rights to national

personal

fail,

of the Philippines by law, the

summons by publication shall be allowed.

verified complaint must contain

In the case of juridical entities, summons

such facts showing entitlement to

by publication shall be done by indicating

file the action.

or

substituted

service

and

effective

industrial

the names of the officers or their duly

authorized representative.

b) The complaint shall state the

address of the respondent and

SEC. 3. Answer. Within fifteen (15) days

shall be in such number of copies

from service of summons, the defendant shall

as there are respondents, plus two

file his answer to the complaint and serve a

(2) copies for the investigating

copy thereof on the plaintiff. Affirmative and

prosecutor. The complaint shall be

negative defenses not pleaded in the answer

subscribed and sworn to before any

shall be deemed waived, except when the

prosecutor or government official

court has no jurisdiction over the subject

authorized to administer oath, or, in

matter, when there is another action pending

their

between the same parties for the same

before

cause, or when the action is barred by a prior

administering officer must certify

judgment or by the statute of limitations.

that he personally examined the

Cross-claims and compulsory counterclaims

complainant and that he is satisfied

not

asserted

considered

in

the

barred.

answer
The

absence
a

or

unavailability,

notary

public.

The

shall

be

that the complainant voluntarily

answer

to

executed

counterclaims or cross-claims shall be filed

and

understood

the

complaint.

and served within ten (10) days from service

of the answer in which they are pleaded.

c)

The

complaint

shall

be

accompanied by the affidavits of

SEC. 4. Effect of failure to answer. Should

the complainant and his witnesses,

the defendant fail to answer the complaint

as

within the period stated above, the court,

documents to establish probable

motu proprio or on motion of the plaintiff, shall

cause.

render judgment as may be warranted by the

witnesses shall be allowed and

allegations of the complaint, as well as the

admitted as part of the complaint,

affidavits and other evidence on record,

provided that affidavits executed by

unless the court in its discretion requires the

non-residents of the Philippines

plaintiff to submit additional evidence. Such

shall be duly authenticated by the

reception of additional evidence may be

concerned Philippine consular or

delegated to the clerk of court. In no case

diplomatic office.

well

as

other

Notarized

supporting

affidavits

of

shall the court award a relief beyond or

different from that prayed for; Provided, that

d) In instances where multiple

the court may, in its discretion, reduce the

complaints are filed by the same

amount of damages and attorney's fees

complainant,

claimed for being excessive or otherwise

supporting

unconscionable.

admitted after they are compared

copies
documents

of

the

shall

be

with and shown to be faithful

SEC. 5. Affidavits. The affidavits required

reproductions of the originals or

to be submitted with the answer shall be in

certified documents referred to in

questionand-answer

subparagraphs (a) and (c) above.

format

numbered

consecutively, and shall state only facts of

direct personal knowledge of the affiants SEC.

2.

which are admissible in evidence. The preliminary

Procedure.

investigation

shall

The
be

affidavits shall also show the competence of conducted as follows:

the affiants to testify to the matters stated

a) Within ten (10) days after the

therein.

filing

of

the

complaint,

the

investigating prosecutor, on the

A violation of this requirement may subject

basis of the complaint and the

the party or the counsel who submits the

affidavits

same to disciplinary action, and shall be

accompanying

ground for the court to order that the

dismiss the case outright for being

inadmissible affidavit or portion thereof be

patently without basis or merit and

expunged from the records.

order the release of the accused if

and

other
the

evidence

same,

may

in custody, and/or seized articles in

custody, if any.
b) When the complaint is not
dismissed

pursuant

to

the

immediately proceeding paragraph,

the investigating prosecutor, within
ten (10) days from the filing of the
complaint, shall issue an order to
the respondent attaching thereto a
copy of the complaint and its
supporting
documents,

affidavits
and

require

and
the

respondent to submit his counteraffidavit and the affidavits of his

witnesses and other documentary

evidence in the format required
under Section 1 hereof, wherever
applicable, serving copies thereof
on the complainant not later than
ten (10) days from receipt of said
order. The counter-affidavits shall
be subscribed and sworn to and
certified as provided in paragraphs
(b) and (c) of Section 1 hereof. The
respondent shall not be allowed to
file a motion to dismiss in lieu of a
counter-affidavit.
c) If the respondent cannot be
served

with

investigating

the

order

prosecutor,

of
or

the
if

served, does not submit counteraffidavits within the ten (10) day
period, the investigating prosecutor
shall resolve the complaint based
on the evidence presented by the
complainant.
d) The investigating prosecutor may
set a hearing if there are facts and
issues to be clarified from a party or
a witness. The parties can be
present at the hearing but without
the right to examine or crossexamine.
submit

They
to

the

may,

however,

investigating

prosecutor questions which may be

asked to the party or witness
concerned. Within ten (10) days
from the last written submission by
the parties or the expiration of the
period for such submission, the
investigating

prosecutor

shall

determine whether or not there is

sufficient

ground

to

hold

the

respondent for trial.

SEC.

3.

When

accused

lawfully

arrested without warrant. When a

person is lawfully arrested without a
warrant, the information may be filed
by a prosecutor without need of such
investigation provided an inquest had
been conducted in accordance with
existing Rules.
Before the information is filed, the
person arrested may ask for a
preliminary

investigation

in

accordance with this Rule, but he

must sign a waiver of the provisions
of Article 125 of the Revised Penal
Code, as amended, in the presence
of his counsel. Notwithstanding the
waiver, he may apply for bail and the
investigation

must

be

terminated

within fifteen (15) days from its

inception.

After the filing of the information in

court

without

preliminary

investigation, the accused may, within

five (5) days from the time he learns
of its filing, ask for a preliminary
investigation with the same right to
adduce evidence in his defense as
provided in this Rule.
Rule 5 MODES OF DISCOVERY
SEC 1. In general. A party can avail of any
of the modes of discovery not later than thirty
(30) days from the joinder of issues.
SEC.

2.

Objections.

Any

mode

of

discovery, such as interrogatories, request for

admission,

production

or

inspection

of

documents or things, may be objected to

within ten (10) days from receipt of the
request for discovery and only on the ground
that the matter requested is manifestly
incompetent, immaterial, or irrelevant or is
undisclosed

information

or

privileged

in

nature, or the request is for harassment. The

requesting party may comment in writing
within three (3) days from receipt of the
objection. Thereafter, the court shall rule on
the objection not later than ten (10) days from
receipt of the comment or the expiration of
the three-day period.

SEC. 3. Compliance. Compliance with any

mode of discovery shall be made within ten
(10) days from receipt of the request for
discovery, or if there are objections, from
notice of the ruling of the court.
SEC.

4.

Sanctions.

The

sanctions

prescribed by the Rules of Court in relation to

the modes of discovery shall apply.
Rule 6 PRE-TRIAL
Rule 13 ARRAIGNMENT AND PRESEC 1. Pre-trial; mandatory nature. Within
TRIAL
five (5) days after the period for availing of, or
compliance with, any of the modes of
discovery prescribed in Rule 5 hereof,
whichever comes later, the handling court
shall immediately set the case for pre-trial
and

direct

the

parties

to

submit

their

respective pre-trial briefs.

each other copies of their respective pre-trial

briefs in such manner as to ensure receipt by
the court, and the other party at least five (5)
days before the date set for the pre-trial. The
parties shall set forth in their pre-trial briefs,
among other matters, the following:
a) Brief statement of the nature of the case,
shall

summarize

1.

Arraignment.

The

arraignment shall be conducted in

accordance with Rule 116 of the
Rules of Court. If the accused is in
custody for the crime charged, he
shall be immediately arraigned. If the

The parties shall file with the court and furnish

which

SEC

the

theory

or

theories of the party in clear and concise

language;
b) Allegations expressly admitted by either
or both parties;
c) Allegations deemed admitted by either or

accused enters a plea of guilty, he

shall forthwith be sentenced. After
arraignment,

the

court

shall

immediately schedule the case for

pre-trial.
SEC. 2. Referral to mediation.
Before conducting the trial, the court
shall call the parties to a pretrial.
Upon appearance of the parties
during pre-trial, the judge shall order
the parties to appear before the
Philippine Mediation Center for courtannexed mediation on the civil aspect

both parties;

of the criminal action. The pre-trial

d) Documents not specifically denied under judge

shall

oath by either or both parties;

proceedings

e) Amendments to the pleadings;

undergoing

suspend
while

the

the

court

case

mediation.

f) Statement of the issues, which shall termination

of

the

is

Upon
mediation

separately summarize the factual and legal proceedings, the court shall continue
issues involved in the case;

with the pre-trial.

g) Names, addresses and contact numbers

of

affiants

and

their

judicial

affidavits SEC. 3. Pre-trial. During the pre-

supporting the parties' respective positions trial, a stipulation of facts may be

on each of the issues; h) All other pieces of entered into, or the propriety of
evidence,

whether

documentary

or allowing the accused to enter a plea

otherwise, and their respective purposes;

i) Specific proposals

for an

of guilty to a lesser offense may be

amicable considered, or such other matters as

settlement;

may be taken up to clarify the issues

j) Possibility of referral to mediation or other and to ensure a speedy disposition of

alternative modes of dispute resolution;

the case. However, no admission by

k) Requests for closed door hearings in the accused shall be used against
cases involving trade secrets, undisclosed him unless reduced to writing and
information and patents; and

signed by the accused and his

l) Such other matters as may aid in the just counsel.

A refusal

or

and speedy disposition of the case.

shall

prejudice

stipulate

not

failure

to
the

accused.
SEC. 2. Nature and purpose of pre-trial.
Upon appearance of the parties during the The pre-trial shall be terminated not
pre-trial, the court shall order the parties to later than thirty (30) days from the
appear

before

the

Philippine

Mediation date of its commencement, excluding

Center in accordance with mediation rules of the period for mediation and JDR.
the Supreme Court.

Should a party desire to present

additional

Should the parties fail to settle the case after affidavits

affidavits
as

part

or
of

his

counter
direct

mediation, the pairing court shall conduct evidence, he shall so manifest during

judicial dispute resolution (JDR) conferences the pre-trial, stating the purpose
upon request of the court handling the case in thereof. If allowed by the court, the
accordance

with

the

guidelines

of

the additional affidavits of the prosecution

Supreme Court.

or

the

counter-affidavits

of

the

defense shall be submitted to the

Pending mediation before the Philippine court and served on the adverse party
Mediation Center and JDR with the pairing not later than three (3) days after the
court, the court handling the case shall termination of the pre-trial. If the
suspend the proceedings. If either mediation additional affidavits are presented by
or JDR fails, the case shall be returned to the the prosecution, the accused may file
court with dispatch for the pre-trial.

his counter-affidavits and serve the

same on the prosecution within three

Before the pre-trial, the court may require the (3) days from such service.
marking of documentary or object evidence
by the branch clerk of court or any authorized Before the pre-trial, the court may
court personnel.

require the marking of documentary

or object evidence by the branch clerk

During the pre-trial, the court shall, with its of court or any authorized court
active participation, ensure that the parties personnel.
consider in detail all of the following:
a)

The

possibility

of

an

amicable SEC. 4. Non-appearance at the pre-

settlement;

trial. If the counsel for the accused

b) Facts that need not be proven, either or the prosecutor does not appear at
because they are matters of judicial notice, the pre-trial and does not offer an
or expressly or deemed admitted;
c)

Permissible

amendments

acceptable excuse for his lack of

to

the cooperation, the court may impose

pleadings;

proper sanctions or penalties.

d) The possibility of obtaining stipulations

and admissions of facts and documents;
e)

Objections

testimonial,
evidence;

to

the

admissibility

documentary

and

SEC. 5. Record of pre-trial Within

of five (5) days after the termination of

other the pre-trial, the court shall issue an

order stating the matters taken up

f) Submission of judicial affidavits of therein, including but not limited to:

witnesses and objections to the form or

a) Plea bargaining;

substance of any affidavit, or part thereof;

b) The stipulations or admissions

g) Simplification of the issues; and

entered into by the parties;

h) Such other matters as may aid in the

c) Whether, on the basis of the

speedy and summary disposition of the

stipulations and admissions made

case.

by the parties, judgment may be

rendered

without

the

need

of

SEC. 3. Effect of failure to appear. The

further proceedings, in which event

failure of the plaintiff to submit a pre-trial brief

judgment shall be rendered within

within the specified period or to appear in the

thirty (30) days from issuance of

pre-trial shall be a cause for the dismissal of

the order;

the complaint with prejudice, unless otherwise

d) A clear specification of material

ordered by the court. The defendant who

facts which remain controverted;

submits a pre-trial brief and who appears

e) Trial dates of each party;

during the pre-trial shall be entitled to a

f) Such other matters intended to

judgment on the counterclaim unless the

expedite the disposition of the

court requires evidence ex parte for a

case.

judgment.

Any

cross-claim

shall

be

dismissed.
The failure of the defendant to submit a pretrial brief within the specified period or to
appear in the pre-trial shall be a cause for the
dismissal of the counterclaim. The plaintiff
who submits a pre-trial brief and who appears
during the pre-trial shall be entitled to a
judgment on the complaint unless the court
requires evidence ex parte for a judgment.
SEC. 4. Termination. The pre-trial shall be
terminated not later than thirty (30) working

days after its commencement, excluding the

period for mediation and judicial dispute
resolution (JDR).
SEC.

5.

Record

of

pre-trial.

The

proceedings in the pre-trial shall be recorded,

excluding mediation and JDR. Within ten (10)
days after the termination of the pre-trial, the
court shall issue an order which shall recite in
detail the matters taken up in the pre-trial, the
actions

taken

on

such

matters,

the

amendments allowed in the pleadings, and

the agreements or admissions made by the
parties as to any of the matters considered.
The court shall rule on all objections to or
comments

on

the

admissibility

of

any

documentary or other evidence, including any

affidavit or any part thereof. The court shall
indicate whether the case shall be submitted
for decision immediately after pre-trial, or on
the

basis

of

position

papers,

or

after

clarificatory hearing, or after trial.

SEC. 6. Submission of position papers. If
the case is to be submitted for decision on the
basis of position papers, the court, in the PreTrial Order, shall direct the parties to file
simultaneously

their

respective

position

papers, setting forth the law and the facts

relied upon by them and attaching thereto
affidavits of their witnesses in question-andanswer format numbered consecutively, and

other evidence on the factual issues defined

in the order, together with their respective
draft decisions, if so desired, within a nonextendible period of thirty (30) days from
receipt of the order. No reply or rejoinder shall
be allowed.
SEC. 7. Clarificatory hearing or hearings
following pre-trial. If there are matters to be
clarified, the court shall include in the PreTrial Order the schedule of clarificatory
hearing or hearings, which must commence
within thirty (30) days from the termination of
the pre-trial, and be completed not later than
fifteen (15) days thereafter. At least three (3)
days

before

the

scheduled

clarificatory

hearing, the parties may submit clarificatory

questions which the court, in its discretion,
may propound.
SEC. 8. Schedule of trial. If the court
deems it necessary to hold trial, the court
shall include in the Pre-Trial Order the
schedule

of

hearings

to

be

conducted

expeditiously and completed not later than

sixty (60) days from the date of the initial trial
which must commence within thirty (30) days
from the termination of the pre-trial.
Rule7 CLARIFICATORY HEARING

AND Rule 14 TRIAL

TRIAL
SEC 1. Affidavits and other evidence
SEC. 1. Clarificatory hearings. During at the trial. The Court shall hear

clarificatory hearing or hearings, the parties the evidence of the parties on the trial
must have representatives and their counsels dates agreed upon by them during
ready for questioning by the court.

the pre-trial. The affidavits of the

witnesses of the parties which form

Immediately

after

termination

of

such part of the record of the case, such as

clarificatory hearing or hearings, the court those submitted:

shall order the parties to simultaneously file, (a)

during

the

preliminary

within ten (10) days from such date, their investigation; and/or
respective position papers as required under (b) during the pre-trial, shall constitute
Section 6, Rule 6, above.

the

direct

testimonies

of

the

witnesses who executed them. Such

SEC. 2. Clarificatory hearing or hearings witnesses may be subjected to cross
following submission of position papers. examination by the adverse party.
Upon submission of the parties' position
papers immediately after the pre-trial as SEC. 2. Conduct of trial. The court
required under Sec. 6 of the preceding Rule, shall conduct hearings expeditiously
and the court deems it necessary to hold so as to ensure speedy trial. Each
clarificatory hearing or hearings on any matter party shall have a maximum period of
before rendering judgment, it shall set the sixty
case for such purpose.

(60)

days

to

present

his

evidence-in-chief on the trial dates

agreed upon during the pre-trial.

The order setting the case for clarificatory

hearing must be issued not later than fifteen

SEC. 3. Submission of memoranda.

(15) days after receipt of the last position Upon termination of trial, the court
papers or the expiration of the period for filing may order the parties to submit within
the same and the clarificatory hearing must a non-extendible period of thirty (30)
be scheduled within fifteen (15) days from the days their memoranda setting forth
issuance of such order and completed not the law and the facts relied upon by
later than fifteen (15) days.

them.

During said clarificatory hearing or hearings, SEC. 4. Judgment. The court shall
the parties must have representatives and promulgate the judgment not later

their counsels ready for questioning by the than sixty (60) days from the time the
court.

case is submitted for decision, with or

without the memoranda. A copy of the

SEC. 3. Judicial affidavits. The judicial judgment shall be furnished the IPO.
affidavits shall serve as the direct testimonies
of the witnesses during trial, subject to crossexamination by the adverse party.
SEC. 4. Period of trial. A period not exceeding
thirty (30) days shall be allotted to the plaintiff
and a similar period to the defendant in the
manner prescribed in the Pre-Trial Order. The
failure of a party to present a witness on a
scheduled trial date shall be deemed a waiver
of such trial date. However, a party may
present such witness or witnesses within the
party's remaining allotted trial dates. No
extension shall be allowed by the judge
except for justifiable reasons.
SEC. 5. Offer of and ruling on exhibits.
Evidence presented during the trial and not
otherwise admitted by the parties or ruled
upon by the court during the pre-trial shall be
offered

orally

immediately

after

the

completion of the presentation of evidence of

the party concerned. The opposing party shall
immediately raise the objections on the offer
of exhibits and thereafter, the court shall at
once rule on the offer and objections in open
court.

In case the court requires the submission of

written formal offer of exhibits, the same shall
be submitted to the court within five (5) days
from completion of the presentation of the
evidence of the party, furnishing copies
thereof on the other party, who may submit
comments or objections to the formal offer
within five (5) days from receipt. The court
shall make its ruling on the offer within five (5)
days from the expiration of the period to file
comments or objections.
SEC. 6. Mandatory submission of draft
decisions. Immediately after an oral ruling
on the last offer of evidence, the court shall
order the parties to simultaneously submit
their respective draft decisions, within a nonextendible period of thirty (30) days. In case
the ruling is in writing, the court shall order
the parties to simultaneously submit their
respective

draft

decisions

within

nonextendible period of thirty (30) days from

receipt of the order.
Rule 8 JUDGMENT
SEC 1. Judgment immediately after pre-trial.
Where the case is submitted for decision
immediately after pre-trial in accordance with
SEC. 2. Judgment after submission of
position papers. Within forty-five (45) days
after receipt of the last position paper,
affidavits, documentary and real evidence, or
the expiration of the period for filing the same

under Sec. 6 of Rule 6 and Sec. 1 of Rule 7,

the court shall render judgment on the basis
of the parties' position papers, affidavits,
documentary and real evidence.
SEC. 3. Judgment after clarificatory hearing.
Within forty-five (45) days after termination
of clarificatory hearing or hearings under Sec.
7 of Rule 6 and Sec. 2 of Rule 7, the court
shall render judgment.
SEC. 4. Judgment after trial. Within sixty
(60) days after receipt of the draft decision of
the parties under Sec. 6 of Rule 7, the court
shall render judgment.
SEC.

5.

Judgments

executory

pending

appeal. Unless restrained by a higher

court, the judgment of the court shall be
executory even pending appeal under such
terms and conditions as the court may
prescribe.
Rule 9 APPEAL
The petition for review shall be taken within
fifteen (15) days from notice of the decision or
final order of the Regional Trial Court
designated by the Supreme Court as Special
Commercial Courts. Upon proper motion and
the payment of the full amount of the legal fee
prescribed in Rule 141, as amended, and
before the expiration of the reglementary
period, the Court of Appeals may grant an

Rule 15 APPEAL
SEC 1. Who may appeal. Any
party may appeal from a judgment or
final order, unless the accused will be
placed in double jeopardy.
SEC. 2. How appeal taken. The
appeal shall be taken in the manner
provided under Rule 122 of the Rules

additional period of fifteen (15) days within of Court.

which to file the petition for review. No further
extension shall be granted except for the
most compelling reasons and in no case to
exceed fifteen (15) days.

What are the common rules on admissibility and weight of evidence?

Under Rule 16, these are:
SECTION 1. Evidence of good faith. In cases of patent infringement, trademark
infringement, and copyright infringement, fraudulent intent on the part of the defendant
or the accused need not be established. Good faith is not a defense unless the
defendant or the accused claims to be a prior user under Sections 73 and 159 of the
Intellectual Property Code or when damages may be recovered under Sections 76,
156, and 216 of the Code.
SEC. 2. Foreign official documents. All official records kept in a foreign country,
including certificates of registration, shall be admissible if authenticated by the proper
consular office of the Philippines having jurisdiction over the country where such
records and/or certificates are kept. However, such authentication of foreign official
documents may be the subject of the agreement of the parties.
SEC. 3. Deposition of foreign witness. The deposition of any witness abroad shall be
taken within six (6) months from the date of the order allowing the deposition, unless
the failure to take the deposition within the period is caused by a fortuitous event, fraud,
accident, mistake or excusable negligence.
SEC. 4. Presumptions in the Intellectual Property Code. The presumptions in the
Intellectual Property Code on patents, trademarks and copyright shall apply to these
Rules.

SEC. 5. Suppletory application of the rules on discovery and evidence. Unless

inconsistent with these Rules, the rules on discovery and evidence under the Rules of
Court shall apply.
What evidence would be needed in patents cases?
Rule 17
EVIDENCE IN PATENT CASES
SECTION 1. Burden of proof in patent infringement; presumption regarding process
patents.
a) The burden of proof to substantiate a charge for patent infringement rests on the
party alleging the same, subject, however, to sub-Section b) below, and other
applicable laws.
b) If the subject matter of a patent is a process for obtaining a product, any identical
product is presumed to have been obtained through the use of the patented process
if; (i) the product is new; or (ii) there is substantial likelihood that the identical
product
was made by the process and the owner of the patent has been unable, despite
reasonable efforts, to determine the process actually used. In such cases, the court
shall then order the defendant or alleged infringer to prove that the process to obtain
the identical product is different from the patented process, subject to the court's
adoption of measures to protect, as far as practicable, said defendant or alleged
infringer's manufacturing and business secrets.
SEC. 2. Patents issued presumed valid.
a) In all cases, a letters patent issued by the Intellectual Property Office - Bureau of
Patents, or its predecessor or successor-agencies, is prima facie evidence of its
existence and validity during the term specified therein against all persons, unless
the same has already been cancelled or voided by a final and executory judgment or
order.
b) Moreover, letters patents issued by the Intellectual Property Office Bureau of

Patents, or its predecessor or successor-agencies, are presumed to have been

validly issued by said government agency in accordance with applicable laws,
unless
otherwise contradicted or overcome by other admissible evidence showing that the
same was irregularly issued.
SEC. 3. Presumption regarding knowledge of existing patent rights. For purposes of
awarding damages in patent infringement cases, it is presumed that the defendant or
alleged infringer knew of the existence of a patent over a protected invention or
process, if: (a) on the patented invention or product manufactured using the patented
process; (b) on the container or package in which said article is supplied to the public;
or (c) on the advertising material relating to the patented product or
process, are placed the words "Philippine Patent" with the number of the patent.
SEC. 4. Request for technical advice. In patent infringement cases, the court, motu
proprio or upon motion by a party, may order the creation of a committee of three (3)
experts to provide advice on the technical aspects of the patent in dispute. Within thirty
(30) days from receipt of the order creating the committee, each side shall nominate an
expert, who shall then both be appointed by the court. The court shall appoint the third
expert from a list submitted by the experts of each side. All fees and expenses relating
to the appointment of a committee shall be initially equally shouldered by
the parties but may later on be adjudicated by the court in favor of the prevailing party.
To assist in the trial involving highly-technical evidence or matters, the court may also
request the IPO to provide equipment, technical facilities, and personnel.
SEC. 5. Application to utility models and industrial designs. The above rules shall
likewise be applicable to infringement cases involving utility models and industrial
designs.
What evtidence is required in trademark infringement and unfair competition
cases?

Rule 18 provides:
SECTION 1. Certificate of registration. A certificate of registration of a mark shall be
prima facie evidence of:
a) the validity of the registration;
b) the registrant's ownership of the mark; and
c) the registrant's exclusive right to use the same in connection with the goods or
services and those that are related thereto specified in the certificate.
SEC. 2. Well-known mark. In determining whether a mark is well-known, account
shall be taken of the knowledge of the relevant sector of the public, rather than of the
public at large, including knowledge in the Philippines which has been obtained as a
result of the promotion of the mark. The following criteria or any combination thereof
may be taken into account in determining whether a mark is well-known:
a) the duration, extent and geographical area of any use of the mark; in particular,
the
duration, extent and geographical area of any promotion of the mark, including
advertising or publicity and the presentation, at fairs or exhibitions, of the goods
and/or services to which the mark applies;
b) the market share, in the Philippines and in other countries, of the goods and/or
services to which the mark applies;
c) the degree of the inherent or acquired distinction of the mark;
d) the quality-image or reputation acquired by the mark;
e) the extent to which the mark has been registered in the world;
f) the exclusivity of registration attained by the mark in the world;
g) the extent to which the mark has been used in the world;
h) the exclusivity of use attained by the mark in the world;
i) the commercial value attributed to the mark in the world;
j) the record of successful protection of the rights in the mark;
k) the outcome of litigations dealing with the issue of whether the mark is a wellknown mark; and

l) the presence or absence of identical or similar marks validly registered for or used
on identical or similar goods or services and owned by persons other than the
person claiming that his mark is a well-known mark.
Provided, further, that the mark is well-known both internationally and in the Philippines.
SEC. 3. Presumption of likelihood of confusion. Likelihood of confusion shall be
presumed in case an identical sign or mark is used for identical goods or services.
SEC. 4. Likelihood of confusion in other cases. In determining whether one
trademark is confusingly similar to or is a colorable imitation of another, the court must
consider the general impression of the ordinary purchaser, buying under the normally
prevalent conditions in trade and giving the attention such purchasers usually give in
buying that class of goods. Visual, aural, connotative comparisons and overall
impressions engendered by the marks in controversy as they are encountered in the
realities of the marketplace must be taken into account. Where there are both
similarities and differences in the marks, these must be weighed against one another to
see which predominates.
In determining likelihood of confusion between marks used on non-identical goods or
services, several factors may be taken into account, such as, but not limited to:
a) the strength of plaintiffs mark;
b) the degree of similarity between the plaintiffs and the defendant's marks;
c) the proximity of the products or services;
d) the likelihood that the plaintiff will bridge the gap;
e) evidence of actual confusion;
f) the defendant's good faith in adopting the mark;
g) the quality of defendant's product or service; and/or
h) the sophistication of the buyers.
"Colorable imitation" denotes such a close or ingenious imitation as to be calculated to
deceive

ordinary persons, or such a resemblance to the original as to deceive an ordinary

purchaser giving such attention as a purchaser usually gives, as to cause him to
purchase the one supposing it to be the other.
SEC. 5. Determination of similar and dissimilar goods or services. Goods or services
may not be considered as being similar or dissimilar to each other on the ground that,
in any registration or publication by the Office, they appear in different classes of the
Nice Classification.
SEC. 6. Intent to defraud or deceive. In an action for unfair competition, the intent to
defraud ordeceive the public shall be presumed:
a) when the defendant passes off a product as his by using imitative devices, signs
or
marks on the general appearance of the goods, which misleads prospective
purchasers into buying his merchandise under the impression that they are buying
that of his competitors;
b) when the defendant makes any false statement in the course of trade to discredit
the goods and business of another; or
c) where the similarity in the appearance of the goods as packed and offered for sale
is so striking.
SEC. 7. Generic marks. A registered mark shall not be deemed to be the generic
name of goods or services solely because such mark is also used as a name of or to
identify a unique product or service.
The test for determining whether the mark is or has become the generic name of goods
or services on or in connection with which it has been used shall be the primary
significance of the mark to the relevant public rather than purchaser motivation.
What evidence is required in copyright cases?
Rule 19 states:

SEC 1. When copyright presumed to subsist. In copyright infringement cases,

copyright shall be presumed to subsist in the work or other subject matter to which the
action relates, and ownership thereof shall be presumed to belong to complainant if he
so claims through affidavit evidence under Section 218 of the Intellectual Property
Code, as amended, unless defendant disputes it and shows or attaches proof to the
contrary in his answer to the complaint. A mere denial of the subsistence of copyright
and/or ownership of copyright based on lack of knowledge shall not be sufficient to
rebut the presumption.
SEC. 2. Effect of registration and deposit. Registration and deposit of a work with the
National Library or the Intellectual Property Office shall not carry with it the presumption
of ownership of the copyright by the registrant or depositor, nor shall it be considered a
condition sine qua non to a claim of copyright infringement.
SEC. 3. Presumption of authorship. The natural person whose name is indicated on
a work in the usual manner as the author shall, in the absence of proof to the contrary,
be presumed to be the author of the work. This presumption applies even if the name is
a pseudonym, provided the pseudonym leaves no doubt as to the identity of the author.
The person or body corporate whose name appears on an audiovisual work in the
usual manner
shall, in the absence of proof to the contrary, be presumed to be the maker of said
work.
SEC. 4. International registration of works. A statement concerning a work, recorded
in an international register in accordance with an international treaty to which the
Philippines is or may become a party, shall be construed as true until the contrary is
proved, except:
a) Where the statement cannot be valid under Republic Act No. 8293, as amended,
or any other law concerning intellectual property; or
b) Where the statement is contradicted by another statement recorded in the
international register.
What is the order of destruction?

Rule 20, Sec. 1 provides:

At any time after the filing of the complaint or information, the court, upon motion and
after due notice and hearing where the violation of the intellectual property rights of the
owner is established, may order the destruction of the seized infringing goods, objects
and devices, including but not limited to, sales invoices, other documents evidencing
sales, labels, signs,prints, packages, wrappers, receptacles, and advertisements and
the like used in the infringing act.Such hearing shall be summary in nature with notice
of hearing to the defendant or accused to his last known address to afford the
defendant or accused the opportunity to oppose the motion.
What are the conditions for a valid Order of Destruction?
Under Rule 20, Sec. 2, the conditions are:
a) An inventory and photographs of the seized infringing goods have been taken
before
destruction at the place where the seized infringing goods are stored;
b) The taking of the inventory and photographs must be witnessed and attested to by:
(1) the accused or counsel or agent, or in their absence, an officer of the barangay
where the seized infringing goods are stored;
(2) the complainant, his representative or counsel;
(3) the public officer who seized the items or a representative of his office; and
(4) a court officer authorized by the court to supervise the destruction of the seized
infringing goods;
c) Representative samples of the seized infringing goods have been retained in a
number and nature as to suffice for evidentiary purposes;
d) An inventory of the representative samples has been made by the persons
enumerated under (b) above;
e) The court officer authorized to supervise the destruction has submitted a report
thereon, within five (5) days from the date of destruction, to which is attached (i) the
inventory and photographs of the seized infringing goods and (ii) the inventory of the
representative samples; and

f) The applicant has posted a bond in an amount fixed by the court

Are representative samples admissible?
Rule 20, SEC. 3. Admissibility of representative samples. Representative samples of
the goods, objects and devices referred to in this Rule, together with the inventory and
photographs of the same, shall be admissible in lieu of the actual items.
What are the reportorial requirements?
In Rule 21, Sec. 1: Within thirty (30) days from the issuance of the decision or final
order, the court shall furnish the IPO a copy of the decision or final order.
X. SPECIAL LAWS
ANTI-MONEY LAUNDERING ACT (R.A. No. 9160, as amended by R.A. No. 9194)
Policy of the Law
1. To protect and preserve the integrity and confidentiality of bank accounts and
to ensure that the Philippines shall not be used as a money laundering site for
the proceeds of any unlawful activity.
2. To pursue the States foreign policy to extend cooperation in transnational
investigation and prosecutions of persons involved in money laundering
activities wherever committed.
Covered Institutions/Covered Persons
- Natural or juridical refer to
(a) Banks, non-banks, quasi-banks, trust, entities, foreign exchange dealers,
pawnshops, money changers. Remittance, and transfer companies and other
similar entities and all other persons and their subsidiaries and affiliates
supervised or regulated by the Bangko Sentral ng Pilipinas (BSP)
(b) Insurance companies, pre-need companies and all other persons supervised or
regulated by the Insurance Commission (IC)
(c) Securities dealers, brokers, salesmen, investment houses and other similar
persons managing securities or rendering services as investment, agent, advisor,
or consultant

(c.1) mutual funds, close,-end investment companies, common trust funds,

and other similar persons
(c.1.2) other entities administering or otherwise dealing in currency,
commodities or financial derivatives based thereon, valuable objects, cash
substitutes and other similar monetary instruments or property supervised
or regulated by the Securities and Exchange Commission (SEC)
(d) Jewelry dealers in precious metals, who as a business, trade in precious
metals, for transactions in excess of One million pesos (PhP1,000,000.00)
(e) Jewelry dealers in precious stones, who as a business, trade in precious
stones, for transactions in excess of One million pesos (PhP 1,000,000.00)
(f) Company service providers which, as a business, provide any of the following
services to third parties.
(1) acting as a formation agent of juridical persons
(2) acting as (or arranging for another person to act as) a director or corporate
secretary of a company, a partner of a partnership or a similar position in relation
to other juridical persons
(3) providing a registered office, business address or accommodation,
correspondence, or administrative address for a company, a partnership or a
similar position in relation to other juridical persons
(4) acting as (or arranging for another person to act as) a nominee shareholder
for another person.
(g) persons who provide any of the following services:
(1) managing of client money, securities or other assets
(2) management of bank, savings or securities accounts
(3) organization of contributions for the creation, operation or management of
companies; and
(4) creation, operation or management of juridical persons or arrangements and
buying and selling business entities.
Exclusions: The term covered persons shall exclude lawyers and accountants
Requisites for Exclusion:
(a) Acting as independent legal professionals
(b) In relation to information concerning their clients or

(c) Where disclosure of information would compromise client confidences or the

attorney-client relationship
Obligations of Covered Institutions
Customer Identification
Covered institutions shall establish and record the true identity of its clients
based on official documents. They shall maintain a system of verifying the rue identity
of their clients and in case of corporate clients, require a system of verifying their legal
existence and organizational structure, as well as the authority and identification of all
persons purporting to act on their behalf.
The provisions of existing laws to the contrary notwithstanding, anonymous
accounts, accounts under fictitious names, and all other similar accounts shall be
absolutely prohibited. Peso and foreign currency non-checking numbered accounts
shall be allowed. The BSP may conduct annual testing solely limited to the
determination of the existence and true identity of the owners of such accounts.
Record Keeping
All records of all transactions of covered institutions shall be maintained and safely
stored for five (5) years from the date of translations. With respect to closed accounts,
the records on customer identification, account files and business correspondence shall
be preserved and safely stored for at least five (5) years from the dates when they were
closed.
Reporting of Covered and Suspicious Transactions
Covered persons shall report to the AMLC all covered transactions and suspicious
transactions within five (5) working days from occurrence thereof, unless the AMLC
prescribes a different period not exceeding fifteen (15) working days.
Lawyers and accountants acting as independent legal professionals are not
required to report covered and suspicious transactions if the relevant information was
obtained in circumstances where they are subject to professional secrecy or legal
professional privilege.
Should a transaction be determined to be both a covered transaction and a
suspicious transaction, the covered institution shall be required to report the same as a
suspicious transaction.

When reporting covered or suspicious transactions and a suspicious transactions to

the AMLC, covered persons and their officers and employees are prohibited from
communicating, directly, or indirectly in any manner or by any means, to any person or
entity, the media, the fact that a covered or suspicious transaction has been reported or
is about to be reported, the contents of the report or any other information in relation
thereto. Neither may such reporting be published or aired in any manner of form by the
mass media, electronic mail or other similar devices. In case of violation thereof, the
concerned officer and employee of the covered person and media shall be held
criminally liable.
Covered Transactions
Is a transaction in cash or other equivalent monetary instrument involving a total
amount in excess of five hundred thousand pesos (PhP 500,000.00) within one (1)
banking day.
Suspicious Transactions
Are transactions with covered institutions, regardless of the amounts involved,
where any of the following circumstances exist:
1. There is no underlying legal or trade obligation, purpose or economic
justification
2. The client is not properly identified
3. The amount involved is not commensurate with the business or financial
capacity of the client
4. Taking into account all known circumstances , it may be perceived that the
cleints transaction is structured in order to avoid being the subject of reporting
requirements under the Act
5. Any circumstances relating to the transaction which is observed to deviate
from the profile of the client and/or the clients past transactions with the
covered institution
6. The transactions is in a way related to an unlawful activity or offense under
this Act that is about to be, is being or has been committed
7. Any transactions that is similar or analogous to any of the foregoing.
When is Money Laundering Committed
Money laundering is committed by any person who, knowing that any monetary
instrument or property represents, involves or related to the proceeds of any unlawful
activity:

(a) Transacts said monetary instrument or property

(b) Converts, transfers, disposes of, moves, acquires, possesses or uses said
monetary instrument or property
(c) Conceals or disguises the true nature, source, location, disposition, movement,
or ownership of or rights with respect to said monetary instrument or property
(d) Attempts or conspires to commit money laundering offenses referred to in
paragraphs (a), (b), or (c)
(e) Aids, abets assists in or counsels the commission of the money laundering
offenses referred to in paragraphs (a), (b) or (c) above and
(f) Performs or fails to perform any act as a result of which he facilities the offense
of money laundering referred to in paragraphs (a), (b) or (c) above
Money laundering is also committed by any covered person who, knowing that a
covered or suspicious transactions is required under this Act to ve reported to the AntiMoney Laundering Council (AMLC) fails to do so.
Unlawful Activities or Predicate Crimes
Refers to any act or omission or series or combination thereof involving or having
direct relation to the following:
(a) Kidnapping for ransom under Article 267 of Act No. 3815 otherwise known as
the Revised Penal Code as amended
(b) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15 and 16 of Republic Act No. 9165
otherwise known as the Comprehensive Dangerous Drugs Act of 2002;
(c) Section 3 paragraphs B, C, E, G, H and I of Republic Act. No. 3019, as
amended otherwise known as the Anti-Graft and Corrupt Practices Act;
(d) Plunder under Republic Act No. 7080 as amended
(e) Robbery and extortion under Articles 294, 295, 296, 299, 300, 301 and 302 of
the Revised Penal Code, as amended
(f) Jueteng and Masiao punished as illegal gambling under Presidential Decree
No. 1602
(g) Piracy on the high seas under the Revised Penal Code, as amended and
Presidential Decree No. 532
(h) Qualified theft under Article 310 of the Revised Penal Code, as amended
(i) Swindling under Article 315 and other forms of Swindling under Article 316 of
the Revised Penal Code as amended
(j) Smuggling under Republic Act Nos. 455 and 1937
(k) Violations of Republic Act No. 8792, otherwise known as the Electronic
Commerce Act of 2000

(l) Hijacking and other violations under Republic Act No. 6235, destructive arson
and murder as defined under the Revised Penal Code, as amended
(m) Terrorism and conspiracy to commit terrorism as defined and penalized
under Sections 3 and 4 or Republic Act No. 9372
(n) Financing of Terrorism under Section 4 and offenses punishable under
Sections 5, 6 and 7 and 8 of Republic Act No. 10168, otherwise known as
Terrorism Financing Prevention and Suppression Act No. 2012
(o) Bribery under Articles 210, 211 and 211-A of the Revised Penal Code as
amended and Corruption of Public Officers unbder Article 212 of the Revised
Penal Code, as amended
(p) Frauds and Illegal Exactions and Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as amended
(q) Malversation of Public Funds an Property under Articles 217 and 222 of the
Revised Penal Code, as amended
(r) Forgeries and Counterfeiting under Articles 163, 166, 167, 168, 169, and 176
of the Revised Penal Code, as amended
(s) Violations of Sections 4 to 6 of Republic Act No. 9208, otherwise known as
the Anti-Trafficking in Persons Act of 2003
(t) Violations of Sections 101 to 107 and 110 of Republic Act No. 7942 otherwise
known as the Philippine Fisheries Code of 1998
(u) Violations of Sections 78 to 79 of Chapter IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry Code of the Philippines, as
amended
(v) Violations of Section 27 (c), (e), (f), (g) and (i) of Republic Act No. 9147
otherwise known as the Wildlife Resources Conservation ande Protection Act
(w) Violation of Section 7(b) of the Republic Act No. 9072 otherwise known as
the National Caves and Cave Resources Management Protection Act
(x) Violation of Republic Act No. 6539 otherwise known as the Anti-Carnapping
Act of 2002, as amended
(y) Violations of Sections 1, 3 and 5 of Presidential Decree No. 1866, as
amended otherwise known as the decree Codifying the Laws on
Illegal/Unlawful

Possession,

Manufacture,

Dealing

In,

acquisition

or

Disposition of Firearms, Ammunition or Explosives

(z) Violation of Presidential Decree No. 1612 otherwise known as the AntiFencing Law;
Anti-Money Laundering Council (AMLC)
The Anti-Money Laundering Council is hereby created and shall be composed of:

1. The Governor of the Bangko Sentral ng Pilipinas as Chairman

2. The Commissioner of the Insurance Commission and the
3. Chairman of the Securities of Exchange Commission as members
Functions
The AMLC shall act unanimously in the discharge of its functions as defined hereunder:
(1) To require and receive covered or suspicious tyransaction reports from covered
institutions
(2) To issue orders addressed to the appropriate Supervising, Authority or the
covered institutions to determine the true identity of the owner of any monetary
instrument or property subject of a covered transaction or suspicious transaction
or suspicious transaction report or request for assistance from a foreign State, or
believed by the Council, on the basis for substantial evidence to be in whole or in
part, wherever located, representing, involving or related to directly or indirectly,
in any manner or by any means, the proceeds of an unlawful activity
(3) To institute civil forfeiture proceedings and all other remedial proceedings through
the Office of the Solicitor General
(4) To cause the filing of complaints with the Department of Justice or the
Ombudsman for the prosecution of money laundering offenses
(5) To investigate suspicious transactions and covered transactions deemed
suspicious after an investigation by the AMLC, money laundering activities and
other violations of this Act
(6) To apply before the Court of Appeals ex parte for the freezing of any monetary
instrument

or

property

alleged

to

be

laundered,

proceeds

from

or

instrumentalities used in or intended for use in any unlawful activity as defined in

Section 3(1) hereof
(7) To implement such measures as may be necessary and justified under this Act to
the counteract money laundering
(8) To receive and take action in respect of, any request from foreign states for
assistance in their own anti-money laundering operations provided in this Act
(9) To develop education programs on the pernicious effects of money laundering,
the methods and techniques used in the money laundering, the viable means of
preventing money laundering, the viable means of preventing money laundering
and the effective ways of prosecuting and punishing offenders.
(10)To enlist the assistance of any branch, department, bureau,office, agency, or
instrumentality of the government including government-owned and controlled
corporations, in undertaking any and all anti-money laundering operations, which

may include the use of its personnel, facilities and resources for the more
resolute prevention, detection, and investigation of money laundering offenses
and prosecution of offenders and
(11) To impose administrative sanctions for the violation of laws,rules and regulations
and orders and resolutions issued pursuant thereto.
(12)To require the Land Registration Authority and all its Registries of Deeds to
submit to the AMLC, reports on all real estate transactions involving an amount in
excess of Five Hundred Thousand Pesos (PhP500,000.00). within fifteen (15)
days from the date of registration of the transaction, in a form to be prescribed by
the AMLC. The AMLC may also require the Land Registration Authority and all its
Registries of Deeds to submit copies of relevant documents of all real estate
transactions.
FREEZING OF MONEY INSTRUMENT OR PROPERTY
Upon a verified ex parte petition by the AMLC and after determination that
probable cause exists that any monetary instrument or property is in any way related
to an unlawful activity as defined in Section 3(i) hereof, the Court of Appeals may
issue a freeze order which shall not exceed six (6) months depending upon the
circumstances of the case. Provided that if there is no case filed against a person
whose account has been frozen within the period determined by the court, the
freeze order shall be deemed ipso facto lifted; provided further that this new rule
shall not apply to pending cases in the courts. In any case, the court should act on
the petition to freeze within 24 hours from filing of the petition. If the application is
filed a day before a non-working day, the computation of the twenty-four(24) hour
period shall exclude the non-working days.
A person whose account has been frozen may file a motion to lift the freeze order
and the court must resolve this motion before the expiration of the freeze order.
No court shall issue a temporary restraining order or a writ of injunction against any
freeze order except the Supreme Court.
AUTHORITY TO INQUIRE INTO BANK DEPOSITS
Notwithstanding the provisions of Republic Act No.1405 as amended, Republic Act
No. 8791 and other laws, the AMLC may inquire into or examine any particular
deposit or investment, including related accounts, with any banking institution or

non0bank financial institution upon order of any competent court based on ex parte
application in cases of violations of this Act, when it has been established that there
is probable cause that the deposits or investments, including related accounts
involved, are related to an unlawful activity as defined in Section 3(1) hereof or a
money laundering offense under Section 4 hereof; except that no court order shall
be required in cases involving activities defined in Section 3(i)(1),(2), and (12)hereof
and felonies or offenses of a nature similar to those mentioned in Section 3(i)(1),(2)
and (12) which are punishable under the penal laws of other countries, and terrorism
and conspiracy to commit terrorism as defined and penalized under Republic Act
No. 9372.
The Court of Appeals shall act on the application to inquire into or examine any
deposit or investment with any banking institution or non-bank financial institution
within twenty-four (24) hours from filing of the application.
Nothing contained in this Act nor in related antecedent laws or existing agreements
shall be construed to allow the AMLC to participate in any manner in the operations
of the BIR. (Section 20, RA10365, amending RA 9160)
The authority to inquire into or examine the main account and the related accounts
shall comply with the requirements of Article III, Sections 2 and 3 of the 1987
Constitution,

which

are

hereby

incorporated

by

reference.

Likewise,

the

constitutional injunction against ex post facto laws and bills of attainder shall be
respected in the implementation of this Act.
To ensure the compliance with this Act, the Bangko Sentral nang Pilipinas may in
the course of a periodic or special examination, check the compliance of a covered
institution with the requirements of the AMLA and its implementing rules and
regulations.
For purposes of this section, related accounts, the funds and resources of which
originated from and/or are materially linked to the monetary instrument(s) or
property(ies) subject of the freeze order.
Acourt order exparte must first be obtained before the AMLC can inquire into
these related accounts. Provided that the procedure for the ex parte application of
the ex parte court order for the principal account shall be the same with that of the
related accounts.

The authority to inquire into or examine the main account and the related
accounts shall comply with the requirements of Article III, Sections 2 and 3 of the
1987 Constitution, which are hereby incorporated by reference (RA 9160,as
amended by RA 10167)
FOREIGN INVESTMENT ACT (R.A.No. 7042)
Policy of the Law
It is the policy of the State to attract, promote and welcome productive investments
in activities which significantly contribute to National industrialization and socioeconomic development to the extent that foreign investment is allowed in such activity
by the Constitution and relevant laws from
(a) Foreign individuals
(b) Partnerships
(c)Corporations
(d) Governments, including their political subdivisions
Foreign investments shall be encouraged in the enterprises that significantly
expand livelihood and employment opportunities for Filipinos by:
(a) Enhancing economic value of farm products
(b) Promoting the welfare of Filipino consumers
(c) Expanding the scope, quality, and volume of exports and their access to
foreign markets
(d) And/or transferring relevant technologies in agriculture, industry and support
services
Foreign investment shall be welcome as a supplement to Filipino capital and
technology in those enterprises serving mainly the domestic market
General Rule:
There are no restrictions on extent of foreign ownership or Export Enterprises. In
domestic market enterprises, foreigners can invests as much as 100% equity
Exception:
In the areas included in the negative list.
Foreign-owned firms catering mainly to the domestic market shall be encouraged to
undertake measures that will gradually increase Filipino participation in their
businesses by
(a) Taking in Filipino partners
(b) Electing Filipinos to the board of director
(c) Implementing transfer of technology to Filipinos

(d) Generating more employment for the economy; and

(e) Enhancing skills of Filipino workers
DEFINITION OF TERMS
Foreign Investment
It is an equity investment made by non-Philippine national in the form of foreign
exchange and/or other assets actually transferred to the Philippines and duly registered
with the Central Bank which shall assess and appraise the value of such assets other
than foreign exchange.
Doing Business in the Philippines
Foreign corporations are considered doing or transacting business in the
Philippines if they are:
1. Soliciting orders, service contracts and opening offices whether called liason
offices of branches
2. Appointing representatives, distributors, domiciled in the Philippines or who stay
for a period or periods totaling 180 days or more
3. Participating in the management, supervision or control of any domestic
business, firm, entity or corporation in the Philippines
4. Doing any act or acts that imply a continuity of commercial dealings or
arrangements and contemplate to some extent the performance of acts or works
or the exercise of some functions normally incident to and in progressive
prosecution of, the purpose and object of its organization.
Instances that are considered as not doing or transacting business in the
Philippines for foreign corporations:
1. Mere investment as shareholder and exercise of rights as investor
2. Having a nominee director or officer to represent its interest in the corporation
3. Appointing a representative or distributor which transacts business in its own
name and for its own account
4. Publication of a general advertisement through any print or broadcast media;
5. Maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by another entity in the Philippines
6. Consignment by the foreign corporation of equipment with a local company to be
used in the processing of products of export
7. Collecting information in the Philippines;
8. Performing services auxiliary to an existing isolated contract of sale which are not
on a continuing basis (R.A. 7042, Sec. 3(d) ).

Export Enterprise
It is a enterprise wherein a manufacturer, processor or service (including tourism)
enterprise exports sixty percent (60%) or more of its output or wherein a trader
purchases products domestically and exports sixty percent (60%) or more of such
purchases. (Section 3(e) RA 7042)
Domestic Market Enterprise
It is an enterprise which produces goods for sale or renders services to the
domestic market entirely or if exporting a portion of its output fails to consistency export
at least 60% thereof (R.A. 7042,Section 3 (f))
REGISTRATION OF INVESTMENTS OF NON-PHILIPPINE NATIONALS
Philippine Nationals
1. A citizen of the Philippines
2. A domestic partnership or association wholly owned by citizens of the Philippines
3. Corporations organized under Philippine laws of which 60% of the capital stock
outstanding and entitled to vote owned and held by Filipino citizens
4. Corporations organized abroad and registered as doing business in the
Philippines under the Corporation Code of which 100% of the capital stock
entitled to vote belong to Filipinos; and
5. Trustee of funds for pension or other employee retirement or separation benefits,
where the trustee is a Philippine national and at least sixty (60%) percent of the
fund will accrue to the benefit of the Philippine nationals.
Non-Philippine Nationals
1. Those who do not belong to the definition of the Philippine National
2. A non-Philippine national may own fully a domestic market enterprise.
3. A non-Philippine national may own up to 100% of a domestic market enterprise.
(RA 7042 Sec.7)
Requirements for a non-Philippine national to own up to 100% of a domestic
market enterprise
1. A non-Philippine national must register with the SEC or with the Bureau of Trade
Regulation and Consumer Protection (BTRCP) of DTI in the case of single
proprietorship for it to do business or invest in a domestic enterprise up to 100%
of its capital

2. The participation of non-Philippine national in the enterprise must not be

prohibited orlimited to a smaller percentage by existing law and/or under Foreign
Investment Negative List (RA 7042,Sec.5)
Imposition of additional limitation on the extent of foreign ownership in an
enterprise other than those provided for under RA 7042 by the SEC or BTRCP
General Rule:
The SEC or BTRCP, as the case may be, shall not impose any limitations on the
extent of foreign ownership in an enterprise additional to those provided in RA 7042.
Exceptions:
1. That any enterprise seeking to avail of incentive under the Omnibus Investment
Code of 1987 must apply for registration with the Board of Investment Code of
1987 must apply for registration with the Board of Investments (BOI),which shall
process such application for registration in accordance with the criteria for
evaluation prescribed in said Code
2. That anon-Philippine national intending to engage in the same line of business as
an existing joint venture, in which he or his majority shareholder is a substantial
partner, must disclose the fact and the names and addresses of the partners in
the existing joint venture in his application for registration with the SEC
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
Rules:
1. Foreign investment in export enterprises whose products and services do not fall
within lists A and B of the Foreign Investment Negative List is allowed up to 100%
ownership
2. Export enterprises which are non-Philippine nationals shall register with BOI and
submit the reports that may be required to ensure continuing compliance of the
export enterprise with its export requirement
3. BOI shall advise SEC or BTRCP as the case may be of any export enterprise
that fails to meet the export ratio requirement
4. The SEC or BTRCP shall thereupon order the non-complying export enterprise to
reduce its sales to the domestic market to not more than 40% of its total
production, failure to comply with such SEC or BTRCP order, without justifiable

reason shall subject the enterprise to cancellation of SEC or BTRCP registration,

and/or the penalties provided in this law. (RA 7042 Sec.6)
FOREIGN INVESTMENT DOMESTIC MARKET ENTERPRISE
A domestic enterprise may change its status to export enterprise the Domestic
market enterprise consistently exports in each year thereof sixty percent (60%) or
more of its output over a three (3) year period (RA 7042, Sec.7)
FOREIGN INVESTMENT NEGATIVE LIST
It is a list of areas of economic activity whose foreign ownership is limited to a
maximum of 40% of the equity capital of the enterprises engaged therein.
List A of the Foreign Investment Negative List
Filipino Ownership must be (100% Filipino Owned, Zero Percent (0%) foreign
equity
1. Cooperatives
2. Manufacture of Firecrackers and other pyrotechnic devices
3. Manufacture, repair, stockpiling and/or distribution of biological, chemical, and
radiological weapons and anti-personnel mines(Various treaties to which the
Philippines is a signatory and conventions supported by the Philippines)
4. Mass media except recording
5. Utilization of marine resources
6. Manufacture, repair, stockpiling and/or distribution of nuclear weapons
7. Cockpits
8. Small-scale mining
9. Private security agencies
10. Retail trade enterprises with paid-up capital of less than US$ 2.5M
80% Filipino Owned (up to 25% foreign equity)
1. Contracts for the construction and repair of locally funded public works except:
a. Infrastructure/development projects covered in RA 7718
b. Projects which are foreign funded or assisted and required to undergo
international competitive bidding
2. Private recruitment whether for local or overseas employment
3. Contracts for the construction of defense-related structures
4. Under the flag law, in the purchase of articles for the government preference
shall be given to materials and supplies produced, made or manufactured in the
Philippines and to domestic entities. Domestic entities mean any citizen of the

Philippines or commercial company at least 75% of the capital of which is owned

by citizens of the Philippines.
70% Filipino Owned (Up to thirty percent (30%) foreign equity)
1. Advertising
2. Corporations engaged in pawnshop business
60% Filipino Owned (up to forty percent (40%) foreign equity
1. Contracts for the supply of materials, goods, and commodities to GOCC, agency
2.
3.
4.
5.

or municipal corporation
Ownership of private lands
Ownership/establishment and administration of educational institutions
Adjustment Companies
Culture, production, milling, processing, trading, excepting, retailing of rice and
corn and acquiring by barter, purchase or otherwise rice and corns and the by-

products thereof
6. Exploration, development, and utilization of natural resources
7. Ownership of condominium units where the common areas in the condominium
project are co-owned by the owners of the separate units or owned by a
corporation
8. Operation and management of public utilities
9. Project proponent and Facility Operator of a BOT project requiring a public
utilities franchise
10. Manufacture, repair, storage, and/or distribution of products/ingredients
requiring PNP clearance
11.Operation of deep sea commercial fishing vessel
12. Corporations engaged in Coastwise shipping
40% Filipino Owned (up to sixty percent (60%) foreign equity
1. Financing companies regulated by the SEC
2. Investment houses regulated by the SEC
LIST B OF THE FOREIGN INVESTMENT NEGATIVE LIST
General Rule:
Defense-related activities, requiring prior clearance and authorization from the
Department of National Defense to engage in such activity such as the:
a. Manufacture
b. Repair
c. Storage

d. Distribution of firearms, ammunition, lethal weapons, military ordinance,

explosives, pyrotechnics, similar materials
Exception:
a. Such manufacturing or repair activity is specifically authorized with a substantial
export component to a non-Philippine national by the Secretary of National
Defense, or
b. Those that have implications on public health and morals, such as the
manufacture and distribution of all dangerous drugs, all forms of gambling,
nightclubs, bars beer houses, dance halls, sauna and steam bathhouses,
massage clinics
LIST C OF THE FOREIGN INVESTMENT NEGATIVE LIST
List C shall contain the areas of investment in which existing enterprises already serve
adequately the needs of the economy and the consumer and do not require further
foreign investments as determined by NEDA and approved by the President and
promulgated in a Presidential Proclamation