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CASE OUTLINE IN MERCANTILE LAW

Dean Nilo T. Divina



I. Letters of Credit

A. Definition and Nature of Letter of Credit

Usage and customs apply in commercial transactions in the absence of any particular
provision in the Code of Commerce, as provided in Article 2 of the same Code. Hence,
the rule that all parties concerned in documentary credit operations deal in documents
and not in goods bind the parties in a letter of credit transaction. (Bank of the
Philippine Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

An order of the court releasing the proceeds of an irrevocable letter of credit to the
applicant, which was issued to pay for tobacco purchased from the beneficiary of the
letter of credit, violates the irrevocable nature of the letter of credit. An irrevocable
letter of credit cannot, during its lifetime, be cancelled or modified without the
express permission of the beneficiary. (Philippine Virginia Tobacco Administration vs.
De Los Angeles, 164 SCRA 543 (1988))

The primary purpose of the letter of credit is to substitute for and therefore support,
the agreement of the buyer/importer to pay money under a contract or other
arrangement. Hence, the failure of a buyer/importer to open a letter of credit as
stipulated amounts to a breach of contract which would entitle the seller/exporter to
claim damages for such breach. (Reliance Commodities, Inc. Vs. Daewoo Industrial Co.,
Ltd., 228 SCRA 545 (1993))

In a letter of credit transaction, there are three separate and distinct relationships: a)
between the account party (buyer/importer) and the beneficiary (seller/exporter),
which may be a contract of sale or non-sale; b) between the account party and the
issuing bank, where the former applies to the latter for a specified L/C and agrees to
reimburse the bank for amounts paid by it pursuant to the L/C; and c) between the
issuing bank and the beneficiary where the former, upon presentation of stipulated
documents, pays the latter the amount under the L/C. Such relationships are
interrelated but independent of one another. (Rodzssen Supply Company, Inc. vs. Far
East Bank and Trust Company, 357 SCRA 618 (2001))

Commercial letters of credit involve the payment of money under a contract of sale
wherein the seller-beneficiary presents to the issuing bank documents that would
show that he has taken affirmative steps to comply with the sales agreement. On the
other hand, standby letters of credit are used in non-sale setting where the beneficiary
presents documents that would show that the obligor has not complied with his
obligation. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

The stay order issued by the rehabilitation court pursuant to the Interim Rules of
Corporate Rehabilitation does not apply to the beneficiary of the letter of credit
against the banks that issued it because the prohibition on the enforcement of claims
against the debtor, guarantors or sureties of the debtors does not extend to the claims
against the issuing bank in a letter of credit. Letters of credit are primary obligations
and not accessory contracts and while they are security arrangements, they are not
thereby converted into contracts of guaranty. (MWSS vs. Hon. Daway, 432 SCRA 559
(2004))

B. Parties to a Letter of Credit

1. Rights and Obligations of Parties

A buyer who applied for a letter of credit to pay for imported dyestuffs must
reimburse the issuing bank which paid the beneficiary, even if the shipment contained
colored chalks. Banks are not required to investigate if the contract underlying the
letter of credit has been fulfilled or not because in a transaction involving letter of
credit, banks deal only with documents and not with goods. (Bank of the Philippine
Islands vs. De Reny Fabric Industries, Inc. 35 SCRA 253 (1970))

The issuing banks (IBAA) obligation under an Irrevocable Standby Letter of Credit
executed to secure a contract of loan cannot be reduced by the direct payments made
by the principal debtors to the creditor. Although a letter of credit is a security
arrangement, it is not converted thereby into a contract of guaranty; the obligation of
the bank under the letter of credit is original and primary. (Insular Bank of Asia &
America vs. Intermediate Appellate Court, 167 SCRA 450 (1988))

The mere fact that a letter of credit is irrevocable does not necessarily imply that the
correspondent bank, in accepting the instructions of the issuing bank, has also
confirmed the letter of credit. The petitioner, as a notifying bank, assumes no liability
except to notify the beneficiary of the existence of the letter of credit; it does not give
an absolute assurance to the beneficiary that it will undertake the issuing banks
obligation as its own according to the terms and conditions of the credit. (Feati Bank &
Trust Company vs. Court of Appeals, 196 SCRA 576 (1991))

Drafts drawn by the beneficiary need not be presented to the applicant for acceptance
before the issuing bank can seek reimbursement. Once the issuing bank has paid the
beneficiary after the latters compliance with the terms of the letter of credit, the
issuing bank becomes entitled to reimbursement. (Prudential Bank & Trust Company
vs. IAC, 216 SCRA 257 (1992))

When the notifying bank entered into a discounting arrangement with the beneficiary,
it acts independently as a negotiating bank. As such, the negotiating bank has a right
to recourse against the issuer bank and until reimbursement is obtained, the
beneficiary, as the drawer of the draft, continues to assume a contingent liability
thereon. (Bank of America vs. Court of Appeals, 228 SCRA 357 (1993))

A notifying or advising bank does not incur any liability arising from a fraudulent letter
of credit as its obligation is limited only to informing the beneficiary of the existence
of the letter of credit. Such notifying bank does not warrant the genuineness of the
letter of credit but is bound only to check its apparent authenticity. (Bank of America
vs. Court of Appeals, 228 SCRA 357 (1993))

While a marginal deposit, a collateral security, earns no interest in favor of the
applicant, the bank is not only able to use the same for its own purposes, interest-free,
but it is also able to earn interest on the money loaned to the applicant. The
buyer/importer's marginal deposit should then be set off against his debt, for it would
be onerous to compute interest and other charges on the face value of the letter of
credit which the bank issued, without first crediting or setting off the marginal deposit
which the importer paid to the bank. (Abad vs. Court of Appeals, 181 SCRA 191 (1990);
Consolidated Bank & Trust Corporation vs. Court of Appeals, 356 SCRA 671 (2001))

An issuing bank which paid the beneficiary of an expired letter of credit can recover
payment from the applicant which obtained the goods from the beneficiary to prevent
unjust enrichment. (Rodzssen Supply Company, Inc. vs. Far East Bank and Trust
Company, 357 SCRA 618 (2001))

C. Basic Principles of Letter of Credit

1. Doctrine of Independence

Where the applicant entered into a contract, the performance of which is secured by a
standby letter of credit, the resort to arbitration by the applicant/contractor, in the
absence of a stipulation that any dispute must first be settled through arbitration
before the beneficiay can draw on the letter of credit, does not preclude the
beneficiary to draw on the letter of credit upon its issuance of a certificate of default.
The claim of fraud will not be sufficient to support an injunction against payment by
reason of the independence principle which assures 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.
(Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443 SCRA 307 (2004))

The issuing bank is not liable for damages even if the shipment did not conform to the
specifications of the applicant. Under the independence principle, the obligation of
the issuing bank to pay the beneficiary arises once the latter is able to submit the
stipulated documents under the letter of credit. Hence, the bank is not liable for
damages even if the shipment did not conform to the specifications of the applicant.
(Land Bank of the Philippines vs. Monets Export and Manufacturing Corp., 453 SCRA
173 (2005))

Where the trial court rendered a decision finding the buyer solely liable to pay the
seller and omitted by inadvertence to insert in its decision the phrase without
prejudice to the decision that will be made against the issuing bank , the bank can
not evade responsibility based on this ground. The seller who is entitled to draw on
the credit line of the buyer from a bank against the presentation of sales invoices and
official receipts of the purchases and who obtained a court judgment solely against the
buyer even though the suit is against the bank and the buyer may still enforce the
liability of the same bank under a letter of credit issued to secure the credit line. The
so-called "independence principle" in a letter of credit 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. Philippine National Bank vs. San Miguel Corporation. No.
186063, January 15, 2014.


2. Fraud Exception Principle

The untruthfulness of a certificate accomplanying a demand for payment under a
standy letter of credit may qualify as fraud sufficient to support injunction against
payment. However, under the fraud exception principle, this must constitute fraud
in relation to the independent purpose or character of the letter of credit and not only
fraud under the main agreement; moreover, irreparable injury will be suffered if
injunction will not be granted. (Transfield Philippines, Inc. vs. Luzon Hydro Corp. 443
SCRA 307 (2004))

3. Doctrine of Strict Compliance

When the letter of credit required the submission of a certification that the
applicant/buyer has approved the goods prior to shipment, the unjust refusal of the
applicant/buyer to issue said certification is not sufficient to compel the bank to pay
the beneficiary thereof. Under the doctrine of strict compliance, the documents
tendered must strictly conform to the terms of the letter of credit, otherwise, the bank
which accepts a faulty tender, acts on its own risks and may not be able to recover from
the applicant/buyer. (Feati Bank & Trust Company vs. Court of Appeals, 196 SCRA 576
(1991))

I. Trust Receipts Law

A. Definition/Concept of a Trust Receipt Transaction

1. Loan/Security Feature

The Trust Receipts Law punishes the dishonesty and abuse of confidence in the
handling of money or goods to the prejudice of another regardless of whether the
latter is the owner or not. The law does not seek to enforce payment of the loan, thus,
there is no violation of the constitutional provision against imprisonment for non-
payment of debt. (People vs. Hon. Nitafan and Betty Sia Ang, 207 SCRA 726 (1992))

Compensation shall not be proper when one of the debts consists in civil liability
arising from a penal offense; moreover, any compromise relating to the civil liability
does not automatically extinguish the criminal liability of the accused. The mere failure
of the entrustee to deliver the proceeds of the sale or the goods if not sold, constitutes
a criminal offense that causes prejudice not only to another, but more to the public
interest. (Metropolitan Bank & Trust Company vs. Tonda, 338 SCRA 254 (2000))

A trust receipt is a security transaction intended to aid in financing importers and retail
dealers who do not have sufficient funds or resources to finance the importation or
purchase of merchandise, and who may not be able to acquire credit except through
utilization, as collateral of the merchandise imported or purchased. Under a letter of
credit-trust receipt arrangement, a bank extends a loan covered by a letter of credit,
with the trust receipt as a security for the loan; hence, the transaction involves a loan
feature represented by a letter of credit, and a security feature which is in the covering
trust receipt which secures an indebtedness. (Lee vs. Court of Appeals, 375 SCRA 579
(2002))

2. Ownership of the Goods, Documents and Instruments under a Trust Receipt

The transaction is a simple loan when the goods subject of the agreement had been
purchased and delivered to the supposed entrustee prior to the execution of the trust
receipt agreement. The acquisition of ownership over the goods before the execution
of the trust receipt agreement makes the contract a simple loan, regardless of the
denomination of the contract. (Colinares vs. Court of Appeals, 339 SCRA 609 (2000))

Respondent Corporation is not an importer which acquired the bunker fuel oil for re-
sale; it needed the oil for its own operations. More importantly, at no time did title
over the oil pass to petitioner bank, but directly to respondent Corporation to which
the oil was directly delivered long before the trust receipt was executed; thus, the
contract executed by the parties is a simple loan and not a trust receipt
agreement. (Consolidated Bank & Trust Corp. vs. Court of Appeals, 356 SCRA 671
(2001))

In a trust receipt transaction, the entrustee has neither absolute ownership, free
disposal nor the authority to freely dispose of the articles subject of the agreement.
Since the goods could not have been subjected to a valid mortgage, there can also be
no valid foreclosure especially when the mortgagee who subsequently foreclosed and
purchased the said goods were in bad faith, having knowledge of the inclusion of such
articles in a trust receipt agreement. (DBP vs. Prudential Bank, 475 SCRA 623 (2005))

B. Rights of the Entruster

1. Validity of the Security Interest as Against the Creditors of the Entrustee/Innocent
Purchaser for Value

The security interest of the entruster 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, including among others, the laborers of the entrustee. The only
exception to the rule is when the properties are in the hands of an innocent purchaser
for value and in good faith. (Prudential Bank vs. National Labor Relations Commission,
251 SCRA 412 (1995))

C. Obligation and Liability of the Entrustee

Commercial invoices attached to the applications for letters of credit and of trust
receipts, which only provide for the list of items sought to be purchased and their
prices will not prove delivery of the goods to the entrustee. Hence, criminal liability
will not attach and the accused should be acquitted in the estafa cases. (Ramos vs.
Court of Appeals, 153 SCRA 276 (1987))

While the presumption found under the Negotiable Instruments Law may not
necessarily be applicable to trust receipts and letters of credit, the presumption of
consideration applies on the drafts drawn in connection with the letters of credit.
Hence, the drafts signed by the beneficiary/suppliers in connection with the
corresponding letters of credit proved that said suppliers were paid by the bank
(entruster) for the account of the entrustee. (Lee vs. Court of Appeals, 375 SCRA 579
(2002))

When there is a violation of the Trust Receipts Law, what is being punished is the
dishonesty and abuse of confidence in the handling of money or goods to the
prejudice of another regardless of whether the latter is the owner. However, failure to
comply with the obligations due to serious liquidity problems and after the entrustee
was placed under rehabilitation does not amount to dishonesty and abuse of
confidence, thus, the entrustee cannot be said to have violated the law. (Pilipinas Bank
vs. Ong, 387 SCRA 37 (2002))

1. Payment/Delivery of Proceeds of Sale or Disposition of Goods, Documents or
Instruments

When the goods subject of the transaction, such as chemicals and metal plates, were
not intended for sale or resale but for use in the fabrication of steel communication
towers, the agreement cannot be considered a trust receipt transaction but a simple
loan. P.D. No. 115 punishes the entrustee for his failure to deliver the price of the sale,
or if the goods are not sold, to return them to the entruster, which, in the present case,
is absent and could not have been complied with; therefore, the liability of the
entrustee is only civil in nature. (Anthony L. Ng vs. People of the Philippines, G.R. No.
173905, April 23, 2010)

Under the Trust Receipts Law, intent to defraud is presumed when (1) the entrustee
fails to turn over the proceeds of the sale of goods covered by the trust receipt to the
entruster; or (2) when the entrustee fails to return the goods under trust, if they are not
disposed of in accordance with the terms of the trust receipts. When both parties
know that the entrustee could not have complied with the obligations under the trust
receipt without his fault, as when the goods subject of the agreement were not
intended for sale or resale, the transaction cannot be considered a trust receipt but a
simple loan, where the liability is limited to the payment of the purchase price. (Land
Bank of the Philippines vs. Perez, G.R. No. 166884, June 13, 2012)

When both parties entered into an agreement knowing fully well that the return of the
goods subject of the trust receipt is not possible even without any fault on the part of
the trustee, it is not a trust receipt transaction penalized under Sec. 13 of PD 115 in
relation to Art. 315, par. 1(b) of the RPC, as the only obligation actually agreed upon
by the parties would be the return of the proceeds of the sale transaction. This
transaction becomes a mere loan, where the borrower is obligated to pay the bank the
amount spent for the purchase of the goods. (Hur Tin Yang vs. People of the
Philippines, G.R. No. 195117, August 14, 2013)

2. Return of Goods, Documents or Instruments in Case of Non-Sale

A trust receipt transaction is a security agreement, pursuant to which the entruster
acquires a security interest in the goods, which are released to the possession of the
entrustee who binds himself to hold the goods in trust for the entruster and to sell or
otherwise dispose of the goods or to return them in case of non-sale. The return of the
goods to the entruster however, does not relieve the entrustee of the obligation to pay
the loan because the entruster is not the factual owner of the goods and merely holds
them as owner in the artificial concept for the purpose of giving stronger security for
the loan. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

3. Liability for Loss of Goods, Documents or Instruments

Under the Trust Receipts Law, the loss of the goods subject of the trust receipt
regardless of the cause and period or time it occurred, does not extinguish the civil
obligation of the entrustee. Hence, the fact that the entrustee attempted to make a
tender of goods to the bank and as a consequence of the latters refusal, the goods
were stored in the entrustees warehouse and thereafter gutted by fire, the liability of
the entrustee still subsists; the principle of res perit domino will not apply to the bank
which holds only a security of interest over the goods. (Rosario Textile Mills Corp. vs.
Home Bankers Savings and Trust Company, 462 SCRA 88 (2005))

4. Penal Sanctions if Offender is a Corporation

Recognizing the impossibility of imposing the penalty of imprisonment on a
corporation, it was provided that if the entrustee is a corporation, the penalty shall be
imposed upon the directors, officers, employees or other officials or persons
responsible for the offense. However, the person signing the trust receipt for the
corporation is not solidarily liable with the entrustee-corporation for the civil liability
arising from the criminal offense unless he personally bound himself under a separate
contract of surety or guaranty. (Ong vs. Court of Appeals, 401 SCRA 649 (2003))

When the entrustee is a corporation, the director, officer, employee, or any person
responsible for the violation of the Trust Receipts Law is held criminally liable without
prejudice to the civil liability, which is imposed upon the entrustee-corporation. The
fact that the officer signed in his official capacity means that the corporation is the one
civilly liable; however, when such officer also signed a trust receipt in his personal
capacity, he will also be held civilly liable together with the corporation, with the
scope of liability depending on whether he signed as a surety or as a guarantor. (Tupaz
IV vs. Court of Appeals, 475 SCRA 398 (2005))

The fact that the officer who signed the trust receipt on behalf of the entrustee-
corporation signed in his official capacity without receiving the goods as he had never
taken possession of such nor committing dishonesty and abuse of confidence in
transacting with the entrustor, is immaterial. The law specifically makes the director,
officer, employee or any person responsible criminally liable precisely for the reason
that a corporation, being a juridical entity, cannot be the subject of the penalty of
imprisonment. (Alfredo Ching vs. Secretary of Justice, 481 SCRA 609 (2006))

D. Remedies Available

After the infomation is filed in court, compromise of the estafa case arising from
violation of the Trust Receipts Law will not amount to novation and will not extinguish
the criminal liability of the accused. (Ong vs. Court of Appeals, 124 SCRA 578 (1983))

Although the surrender of the goods to the entruster results in the acquittal of the
accused in the estafa case, it is not a bar to the institution of a civil action for collection
because of the loan feature (civil in nature) of the trust receipt transaction, which is
entirely distinct from its security feature (criminal in nature). Accordingly, Article 31 of
the New Civil Code provided that when the civil action is based on an obligation not
arising from the act or omission complained of as a felony, such civil action may
proceed independently of the criminal proceedings and regardless of the result of the
latter. (Vintola vs. Insular Bank of Asia and America, 150 SCRA 140 (1987))

The entrusters repossession of the subject machinery and equipment, not for the
purpose of transferring ownership to the entruster but only to serve as security to the
loan, cannot be considered payment of the loan under the trust receipt and letter of
credit. Payment would legally result only after PNB had foreclosed on said securities,
sold the same and applied the proceeds thereof to TCC's loan obligation. (Philippine
National Bank vs. Pineda, 197 SCRA 1 (1991))

When the entrustee defaults on his obligation, the entruster has the discretion to avail
of remedies which it deems best to protect its right. The law uses the word may in
granting to the entruster the right to cancel the trust and take possession of the goods;
hence, the option is given to the entruster. (South City Homes, Inc. vs. BA Finance
Corporation, 371 SCRA 603 (2001))

A civil case filed by the entruster against the entrustees based on the failure of the
latter to comply with their obligation under the Trust Receipt agreement is proper
because this breach of obligation is separate and distinct from any criminal liability for
misuse and/or misappropriation of goods or proceeds realized from the sale of goods
released under the trust receipts. Being based on an obligation ex contractu and not
ex delicto, the civil action may proceed independently of the criminal proceedings
instituted against the entrustees regardless of the result of the latter. (Sarmiento vs.
Court of Appeals, 394 SCRA 315 (2002))

Novation may take place either by express and unequivocal terms or when the old and
new obligations cannot stand together and are incompatible on every point. The
execution of the Memorandum of Agreement, which provided for principal conditions
incompatible with the trust agreement, extinguished the obligation under the trust
receipts without prejudice to the debtors civil liability. (Pilipinas Bank vs. Ong, 387
SCRA 37 (2002))

As provided under Section 7, P.D. No. 115, in the event of default of the entrustee, the
entruster may cancel the trust and take possession of the goods subject of the trust or
of the proceeds realized therefrom at any time; the entruster may, not less than five
days after serving or sending of notice of intention to sell, proceed with the sale of the
goods at public or private sale where the entrustee shall receive any surplus but shall
be liable to the entruster for any deficiency. This is by reason of the fact that the initial
repossession by the bank of the goods subject of the trust receipt did not result in the
full satisfaction of the entrustees loan obligation. (Landl & Company vs. Metropolitan
Bank, 435 SCRA 639 (2004))

E. Warehousemans Lien

Notwithstanding the right of PNB over the stocks of sugar as the endorsee of the
quedans, delivery to it shall be effected only upon payment of the storage fees. The
warehouseman may demand payment of his lien prior to the delivery of the stocks of
sugar because under Section 29 of the Warehouse Receipts Law, the warehouseman
loses his lien upon the goods by surrendering possession thereof. (Philippine National
Bank vs. Se, Jr., 256 SCRA 380 (1996))

A warehouseman may enforce his lien under the following instances: 1) he may refuse
to deliver the goods until his lien is satisfied; 2) he may sell the goods and apply the
proceeds thereof to the value of the lien; and 3) by other means allowed by law to a
creditor against his debtor, for the collection from the depositor of all charges and
advances which the depositor expressly or impliedly contracted with the
warehouseman; or such remedies allowed by law for the enforcement of a lien against
personal property. (Philippine National Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

The refusal of the warehouseman to deliver the sugar to the endorsee of the quedans
on the ground that it has claimed ownership over the sugar by reason of non-payment
of its buyer, not being one of the remedies available to the warehouseman to enforce
his lien, caused the loss of the warehousemans lien. Nevertheless, the loss did not
extinguish the obligation to pay the warehousemans fees but merely caused the fees
and charges to cease to accrue from the date of the rejection by the warehouseman to
heed the previous lawful demand for the release of the goods. (Philippine National
Bank vs. Sayo, Jr., 292 SCRA 202 (1998))

III. Negotiable Instruments Law

A. Forms and Interpretation

1. Requisites of Negotiability

A check which reads Pay to the EQUITABLE BANKING CORPORATION Order of A/C
OF CASVILLE ENTERPRISES, INC. is not negotiable because the payee ceased to be
indicated with reasonable certainty in contravention of Section 8 of the Negotiable
Instruments Law. As worded, it could be accepted as deposit to the account of the
party named after the symbols "A/C," or payable to the Bank as trustee, or as an agent,
for Casville Enterprises, Inc., with the latter being the ultimate beneficiary. (Equitable
Banking Corporation vs. the Honorable Intermediate Appellate Court and The Edward
J. Nell Co., G.R. No. 74451 May 25, 1988)

Without the words "or order or "to the order of", the instrument is payable only to the
person designated therein and is therefore non-negotiable. Any subsequent purchaser
thereof will not enjoy the advantages of being a holder of a negotiable instrument, but
will merely "step into the shoes" of the person designated in the instrument and will
thus be open to all defenses available against the latter. (Juanita Salas vs. Hon. Court
of Appeals and First Finance & Leasing Corporation, G.R. No. 76788 January 22, 1990)

The indication of Fund 501 as the source of the payment to be made on the treasury
warrants makes the order or promise to pay "not unconditional" and the warrants
themselves non-negotiable. (Metropolitan Bank & Trust Company vs. Court Of
Appeals, Golden Savings & Loan Association, Inc., Lucia Castillo, Magno Castillo and
Gloria Castillo, G.R. No. 88866 February 18, 1991)

When the documents provide that the amounts deposited shall be repayable to the
depositor, such instrument is negotiable because it is payable to the "bearer." The
documents do not say that the depositor is Angel de la Cruz and that the amounts
deposited are repayable specifically to him, but the amounts are to be repayable to
the bearer of the documents or, for that matter, whosoever may be the bearer at the
time of presentment. [Caltex (Philippines), Inc. vs. Court of Appeals and Security Bank
and Trust Company, G.R. No. 97753, August 10, 1992]

The language of negotiability which characterizes a negotiable paper as a credit
instrument is its freedom to circulate as a substitute for money. This freedom in
negotiability is totally absent in a certificate indebtedness as it merely to pay a sum of
money to a specified person or entity for a period of time. (Traders Royal Bank vs.
Court of Appeals, Filriters Guaranty Assurance Corporation and Central Bank of the
Philippines, G.R. No. 93397, March 3, 1997)

Under the fictitious payee rule, a check made expressly payable to a non-fictitious and
existing person is not necessarily an order instrument if the payee is not the intended
recipient of the proceeds of the check. There is, however, a commercial bad faith
exception to this rule which provides that a showing of commercial bad faith on the
part of the drawee bank, or any transferee of the check for that matter, will work to
strip it of this defense. (Philippine National Bank vs. Erlando T. Rodriguez and Norma
Rodriguez, G.R. No. 170325, September 26, 2008)

Under the Negotiable Instruments Law, a check made payable to cash is payable to the
bearer and could be negotiated by mere delivery without the need of an indorsement.
However, the drawer of the post-dated check can not be liable for estafa to the person
who did not acquire the instrument directly from drawer but through negotiation of
another by mere delivery. This is because the drawer did not use the check to defraud
the holder/private complainant. PEOPLE OF THE PHILIPPINES VS. GILBERT REYES
WAGAS. G.R. No. 157943, September 4, 2013

2. Kinds of Negotiable Instruments

Postal money orders are not negotiable instruments, the reason being that in
establishing and operating a postal money order system, the government is not
engaged in the commercial transactions but merely exercises a governmental power
for the public benefit. Some of the restrictions imposed upon money orders by postal
laws and regulations are inconsistent with the character of negotiable instruments. For
instance, such laws and regulations usually provide for not more than one
endorsement; payment of money orders may be withheld under a variety of
circumstances. (Philippine Education Co., inc. vs. Mauricio A. Soriano, et al., G.R. No. L-
22405, June 30, 1971)

Bank withdrawal slips are non-negotiable and the giving of immediate notice of
dishonor of negotiable instruments does not apply in this case. Since the withdrawal
slips deposited with petitioners current account with Citibank were not checks,
Citibank was not bound to accept the withdrawal slips as a valid mode of deposit, but
having erroneously accepted them as such, Citibank and petitioner as account-
holder must bear the risks attendant to the acceptance of these instruments.
(Firestone Tire & Rubber Company of the Philippines vs. Court of Appeals and Luzon
Development Bank, G.R. No. 113236, March 5, 2001)

A check is a bill of exchange drawn on a bank payable on demand which may either
be an order or a bearer instrument. Under Section 9(c) of the NIL, a check payable to a
specified payee may nevertheless be considered as a bearer instrument if it is payable
to the order of a fictitious or non-existing person like checks issued to Prinsipe
Abante or Si Malakas at si Maganda, who are well-known characters in Philippine
mythology. (Philippine National Bank vs. Erlando T. Rodriguez and Norma Rodriguez,
G.R. No. 170325, September 26, 2008)

A certificate of deposit is defined as a written acknowledgement by a bank of the receipt
of a sum of money on deposit which the bank promise to pay to the depositor or the order
of the depositor or to some other person or his order whereby the relation of debtor and
creditor between the bank and the depositor is created. A document to be considered a
certificate of deposit need not be in a specific form. Thus, a passbook of an interest-
earning deposit account issued by a bank is a certificate of deposit drawing interest
because it is considered a written acknowledgment by a bank that it has accepted a
deposit of a sum of money from a depositor. Thus, it is subject to documentary stamp tax.
Prudential Bank v. Commissioner of Internal Revenue (CIR) G.R. No. 180390, July 27, 2011

B. Completion and Delivery

The 17 original checks, completed and delivered to petitioner, are sufficient by
themselves to prove the existence of the loan obligation of the respondents to
petitioner. Sec. 16 of the NIL provides that when an instrument is no longer in the
possession of the person who signed it and it is complete in its terms "a valid and
intentional delivery by him is presumed until the contrary is proved. (Ting Ting Pua vs.
Spouses Benito Lo Bun Tiong and Caroline Siok Ching Teng, G.R. No. 198660, October
23, 2013)

1. Insertion of Date

2. Completion of Blanks

In any case, it is no defense that the promissory notes were signed in blank as Section
14 of the Negotiable Instruments Law concedes the prima facie authority of the
person in possession of negotiable instruments to fill in the blanks. (Quirino Gonzales
Logging Concessionaire, Quirino Gonzales and Eufemia Gonzales vs. the Court of
Appeals (CA) and Republic Planters Bank, G. R. No. 126568, April 30, 2003)

3. Incomplete and Undelivered Instruments

4. Complete but Undelivered Instruments

As Assistant City Fiscal, the source of the salary of the payee is public funds which he
receives in the form of checks from the Department of Justice. Since the payee of a
negotiable interest acquires no interest with respect thereto until it is delivered, such
checks, as a necessary consequence of being public fund, may not be garnished
because such funds do not belong to him. (Loreto D. de la Victoria, as City Fiscal of
Mandaue City and in his personal capacity as garnishee vs. Hon. Jose P. Burgos,
Presiding Judge, RTC, Br. XVII, Cebu City, and Raul H. Sesbreo, G.R. No. 111190, June
27, 1995)

If the post-dated check was given to the payee in payment of an obligation, the
purpose of giving effect to the instrument is evident, thus title or ownership the check
was transferred to the payee. However, if the PDC was not given as payment, then
there was no intent to give effect to the instrument and ownership was not transferred.
The evidence proves that the check was accepted, not as payment, but in accordance
with the policy of the payee to cover the transaction ( purchase of beer products ) and
in the meantime the drawer was to pay for the transaction by some other means other
than the check. This being so, title to the check did not transfer to the payee; it
remained with the drawer. The second element of the felony of theft was therefore not
established. Hence, there is no probable cause for theft.- San Miguel Corporation vs.
Puzon, Jr. G.R. No. 167567, 22 September 2010

The fact that a person, other than the named payee of the crossed check, was
presenting it for deposit should have put the bank on guard. It should have verified if
the payee authorized the holder to present the same in its behalf or indorsed it to him.
The banks reliance on the holders assurance that he had good title to the three
checks constitutes gross negligence even though the holder was related to the
majority stockholder of the payee. While the check was not delivered to the payee, the
suit may still prosper because the payee did not assert a right based on the undelivered
check but on quasi-delict. Equitable Banking Corporation vs Special Steel Products,
June 13, 2012


C. Signature

1. Signing in Trade Name

2. Signature of Agent

Under Section 20 of the Negotiable Instruments Law, where the instrument contains
or a person adds to his signature words indicating that he signs for or on behalf of a
principal or in a representative capacity, he is not liable on the instrument if he was
duly authorized; but the mere addition of words describing him as an agent or as filing
a representative character, without disclosing his principal, does not exempt him from
personal liability. In the instant case, an inspection of the drafts accepted by the
defendant shows that nowhere has he disclosed that he was signing as a representative
of the Philippine Education Foundation Company and such failure to disclose his
principal makes him personally liable for the drafts he accepted. (The Philippine Bank
of Commerce vs. Jose M. Aruego, G.R. Nos. L-25836-37, January 31, 1981)

3. Indorsement by Minor or Corporation

4. Forgery

As a general rule, a bank or corporation who has obtained possession of a check upon
an unauthorized or forged indorsement of the payees signature and who collects the
amount of the check from the drawee, is liable for the proceeds thereof to the payee
or other owner, notwithstanding that the amount has been paid to the person from
whom the check was obtained. The theory of the rule is that the possession of the
check on the forged or unauthorized indorsement is wrongful and when the money
had been collected on the check, the proceeds are held for the rightful owners who
may recover them. The payee ought to be allowed to recover directly from the
collecting bank, regardless of whether the check was delivered to the payee or not.
(Westmont Bank (formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No.
132560, January 30, 2002)

The possession of a check on a forged or unauthorized indorsement is wrongful, and
when the money is collected on the check, the bank can be held for moneys had and
received. The proceeds are held for the rightful owner of the payment and may be
recovered by him. The position of the bank taking the check on the forged or
unauthorized indorsement is the same as if it had taken the check and collected
without indorsement at all. The act of the bank amounts to conversion of the check.
(Associated Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes,
doing business under the name and style "Melissas RTW," G.R. No. 89802, May 7,
1992)

It is a rule that when a signature is forged or made without the authority of the person
whose signature it purports to be, the check is wholly inoperative and no right to retain
the instrument, or to give a discharge therefor, or to enforce payment thereof against
any party, can be acquired through or under such signature. However, the rule does
provide for an exception, namely: "unless the party against whom it is sought to
enforce such right is precluded from setting up the forgery or want of authority." In the
instant case, it is the exception that applies as the petitioner is precluded from setting
up the forgery, assuming there is forgery, due to his own negligence in entrusting to
his secretary his credit cards and checkbook including the verification of his
statements of account. (Ramon K. Ilusorio vs. Hon. Court of Appeals, G.R. No. 139130,
November 27, 2002)

A forged signature is a real or absolute defense, and a person whose signature on a
negotiable instrument is forged is deemed to have never become a party thereto and
to have never consented to the contract that allegedly gave rise to it. The
counterfeiting of any writing, consisting in the signing of anothers name with intent to
defraud, is forgery. (Bank of the Philippine Islands vs. Casa Montessori Internationale
and Leonardo T. Yabut, G.R. No. 149454, May 28, 2004)

Even if the bank performed with utmost diligence, the drawer whose signature was
forged may still recover from the bank as long as he or she is not precluded from
setting up the defense of forgery. After all, Section 23 of the Negotiable Instruments
Law plainly states that no right to enforce the payment of a check can arise out of a
forged signature. Since the drawer is not precluded by negligence from setting up the
forgery, the general rule should apply. (Samsung Construction Company Philippines,
Inc. vs. Far East Bank and Trust Company and Court Of Appeals, G.R. NO. 129015,
August 13, 2004)

As between a bank and its depositor, where the banks negligence is the proximate
cause of the loss and the depositor is guilty of contributory negligence, the greater
proportion of the loss shall be borne by the bank. The bank was negligent because it
did not properly verify the genuineness of the signatures in the applications for
managers checks while the depositor was negligent because it clothed its
accountant/bookkeeper with apparent authority to transact business with the Bank
and it did not examine its monthly statement of account and report the discrepancy to
the Bank. the court allocated the damages between the bank and the depositor on a
60-40 ratio.Philippine National Bank vs. FF Cruz and Company, G.R. No. 173259, July
25, 2011

While its manager forged the signature of the authorized signatories of clients in the
application for managers checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks
in the case at bar. It allowed its manager to encash the Managers checks that were
plainly crossed checks. A crossed check is one where two parallel lines are drawn
across its face or across its corner. Based on jurisprudence, the crossing of a check has
the following effects: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once to the one who has an account
with the bank; and (c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose and he must inquire if he
received the check pursuant to this purpose; otherwise, he is not a holder in due
course. In other words, the crossing of a check is a warning that the check should be
deposited only in the account of the payee. When a check is crossed,it is the duty of
the collecting bank to ascertain that the check is only deposited to the payees
account. Philippine Commercial International Bank vs. Balmaceda,G.R. No. 158143,
September 21, 2011


D. Consideration

A check which is regular on its face is deemed prima facie to have been issued for a
valuable consideration and every person whose signature appears thereon is deemed
to have become a party thereto for value. Thus, the mere introduction of the
instrument sued on in evidence prima facie entitles the plaintiff to recovery. Further,
the rule is quite settled that a negotiable instrument is presumed to have been given
or indorsed for a sufficient consideration unless otherwise contradicted and overcome
by other competent evidence. (Travel-On, Inc. vs. Court of Appeals and Arturo S.
Miranda, G.R. No. L-56169, June 26, 1992)

In actions based upon a negotiable instrument, it is unnecessary to aver or prove
consideration, for consideration is imported and presumed from the fact that it is a
negotiable instrument. The presumption exists whether the words "value received"
appear on the instrument or not. (Remigio S. Ong vs. People of the Philippines and
Court of Appeals, G.R. No. 139006, November 27, 2000)

Letters of credit and trust receipts are not negotiable instruments, but drafts issued in
connection with letters of credit are negotiable instruments. While the presumption
found under the Negotiable Instruments 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. (Charles
Lee, Chua Siok Suy, Mariano Sio, Alfonso Yap, Richard Velasco and Alfonso Co vs.
Court of Appeals and Philippine Bank of Communications, G.R. NO. 117913, February
1, 2002)

When promissory notes appear to be negotiable as they meet the requirements of
Section 1 of the Negotiable Instruments Law, they are prima facie deemed to have
been issued for consideration unless sufficient evidence was adduced to show
otherwise. (Quirino Gonzales Logging Concessionaire, Quirino Gonzales and Eufemia
Gonzales vs. the Court of Appeals (CA) and Republic Planters Bank, G. R. No. 126568,
April 30, 2003)

Upon issuance of a negotiable check, in the absence of evidence to the contrary, it is
presumed that the same was issued for valuable consideration which may consist either
in some right, interest, profit or benefit accruing to the party who makes the contract,
or some forbearance, detriment, loss or some responsibility, to act, or labor, or service
given, suffered or undertaken by the other side. Under the Negotiable Instruments
Law, it is presumed that every party to an instrument acquires the same for a
consideration or for value. As petitioner alleged that there was no consideration for
the issuance of the subject checks, it devolved upon him to present convincing
evidence to overthrow the presumption and prove that the checks were in fact issued
without valuable consideration. Petitioner, however, has not presented any credible
evidence to rebut the presumption, as well as North Stars assertion, that the checks
were issued as payment for the US$85,000 petitioner owed to the corporation and not
to the manager who facilitate the fund transfer. - Cayanan v. North Star International
Travel Inc.,G.R. No. 172954, October 5, 2011


E. Accommodation Party

Section 29 of the Negotiable Instruments Law by clear mandate makes the
accomodation party "liable on the instrument to a holder for value, notwithstanding
that such holder at the time of taking the instrument knew him to be only an
accommodation party." It is not a valid defense that the accommodation party did not
receive any valuable consideration when he executed the instrument. It is not correct
to say that the holder for value is not a holder in due course merely because at the time
he acquired the instrument, he knew that the indorser was only an accommodation
party. (Ang Tiong vs. Lorenzo Ting, doing business under the name & style of Prunes
Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)

When a promissory note which is payable to GSIS is not payable to bearer or order,
such instrument is non-negotiable. As such, third party mortgagor who mortgaged his
property to secure the obligation of another is not liable as an accommodation party
but liable under Article 2085 of the Civil Code to the effect that third persons who are
not parties to the principal obligation may secure the latter by pledging or mortgaging
their own property. (GSIS vs. Court of Appeals, G.R. No. L-40824, February 23, 1989)

When the checks are dishonored for lack of funds, the party who indorsed those
checks as accommodation endorser is liable for the payment of the checks. (People vs.
Maniego, 148 SCRA 30, 1987)

When a married couple signed a promissory note in favor of a bank to enable the sister
of the husband to obtain a loan, they are considered as accommodation parties who
are liable for the payment of said loan. (Town Saving and Loan Bank, Inc. vs. Court of
Appeals, 223 SCRA 459, 1993)

While a maker who signed a promissory note for the benefit of his co-maker ( who
received the loan proceeds ) is considered an accommodation party, he is,
nevertheless, entitled to a written notice on the default and the outstanding obligation
of the party accommodated. There being no such written notice, the Bank is grossly
negligent in terminating the credit line of the accommodation party for the unpaid
interest dues from the loans of the party accommodated and in dishonoring a check
drawn against the such credit line. Gonzales vs Phillippine Commercial and
International Bank, GR No. 180257, February 23, 2011

F. Negotiation

1. Distinguished from Assignment

If an assigned promissory note had already been extinguished because its maker is
similarly indebted to the assignor, then the defense of set-off or legal compensation
could also be invoked against the assignee of the note. The debtors consent is not
needed to effectuate assignment of credit and negotiation. (Sesbreno vs. Court of
Appeals, 222 SCRA 466, 1993)

2. Modes of Negotiation

Where a check is made payable to the order of cash, the word cashdoes not purport
to be the name of any person, and hence the instrument is payable to bearer. The
drawee bank need not obtain any indorsement of the check, but may pay it to the
person presenting it without any indorsement. (Ang Tek Lian vs. the Court of Appeals,
G.R. No. L-2516, September 25, 1950)

Under the Negotiable Instruments Law, 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, and a holder may be the payee or indorsee of a bill or
note, who is in possession of it, or the bearer thereof. In case of a bearer instrument,
mere delivery would suffice. [Caltex (Philippines), Inc. vs. Court of Appeals and
Security Bank and Trust Company, G.R. No. 97753, August 10, 1992]

3. Kinds of Indorsements

G. Rights of the Holder

1. Holder in Due Course

Where the payee acquired the check under circumstances that should have put it to
inquiry as to the title of the holder who negotiated the check to him, the payee has the
duty to present evidence that he acquired the check in good faith. As holder's title was
defective or suspicious, it cannot be stated that the payee acquired the check without
knowledge of said defect in holder's title, and for this reason the presumption that it is
a holder in due course or that it acquired the instrument in good faith does not exist.
(Vicente R. De Ocampo & Co. vs. Anita Gatchalian, et al., G.R. No. L-15126, November
30, 1961)

A holder in due course holds the instrument free from any defect of title of prior
parties, and free from defenses available to prior parties among themselves, and may
enforce payment of the instrument for the full amount thereof. This being so,
petitioner cannot set up against respondent the defense of nullity of the contract of
sale between her and VMS. (Juanita Salas vs. Hon. Court of Appeals and First Finance &
Leasing Corporation, G.R. No. 76788 January 22, 1990)

Possession of a negotiable instrument after presentment and dishonor, or payment, is
utterly inconsequential; it does not make the possessor a holder for value within the
meaning of the law. It gives rise to no liability on the part of the maker or drawer and
indorsers. (Stelco Marketing Corporation vs. Hon. Court of Appeals and Steelweld
Corporation of the Philippines, Inc., G.R. No. 96160 June 17, 1992)

It is then settled that crossing of checks should put the holder on inquiry and upon him
devolves the duty to ascertain the indorsers title to the check or the nature of his
possession. Failing in this respect, the holder is declared guilty of gross negligence
amounting to legal absence of good faith, contrary to Sec. 52(c) of the Negotiable
Instruments Law, and as such the consensus of authority is to the effect that the holder
of the check is not a holder in due course. (Bataan Cigar and Cigarette Factory, Inc. vs.
the Court of Appeals and State Investment House, Inc., G.R. No. 93048, March 3,
1994)

The disadvantage of not being a holder in due course is that the negotiable instrument
is subject to defenses as if it were non-negotiable. One such defense is absence or
failure of consideration. (Atrium Management Corporation vs. Court of Appeals, et al.,
G.R. No. 109491, February 28, 2001)

The weight of authority sustains the view that a payee may be a holder in due course.
Hence, the presumption that he is a prima facie holder in due course applies in his
favor. However, said presumption may be rebutted and vital to the resolution of this
issue is the concurrence of all the requisites provided for in Section 52 of the
Negotiable Instruments Law. (Cely Yang vs. Hon. Court of Appeals, Philippine
Commercial International Bank, Far East Bank & Trust Co., Equitable Banking
Corporation, Prem Chandiramani and Fernando David, G.R. No. 138074, August 15,
2003)

2. Defenses Against the Holder

H. Liabilities of Parties

1. Maker

Under the Negotiable Instruments Law, persons who write their names on the face of
promissory notes are makers and liable as such. (Republic Planters Bank vs. Court of
Appeals, 216 SCRA 730, 1992)

2. Drawer

The acceptance of a check implies an undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains loss by want of such diligence, it
will be held to operate as actual payment of the debt or obligation for which it was
given. If no presentment is made at all, the drawer cannot be held liable irrespective of
loss or injury unless presentment is otherwise excused. (Myron C. Papa vs. A.U.
Valencia & Co., Inc., et al. G.R. No. 105188. January 23, 1998)

In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does
not expose the drawer to possible prosecution for estafa and violation of BP 22, while
DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands
vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

3. Acceptor

To simplify proceedings, the payee of the illegally encashed checks should be allowed
to recover directly from the bank responsible for such encashment regardless of
whether or not the checks were actually delivered to the payee. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the
name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)

As a general rule, a bank or corporation who has obtained possession of a check upon
an unauthorized or forged indorsement of the payees signature and who collects the
amount of the check from the drawee, is liable for the proceeds thereof to the payee
or other owner, notwithstanding that the amount has been paid to the person from
whom the check was obtained. The theory of the rule is that the possession of the
check on the forged or unauthorized indorsement is wrongful and when the money
had been collected on the check, the proceeds are held for the rightful owners who
may recover them. The payee ought to be allowed to recover directly from the
collecting bank, regardless of whether the check was delivered to the payee or not.
[Westmont Bank (formerly Associated Banking Corp.) vs. Eugene Ong, G.R. No.
132560, January 30, 2002]

If a bank pays a forged check, it must be considered as paying out of its funds and
cannot charge the amount so paid to the account of the depositor. A bank is liable,
irrespective of its good faith, in paying a forged check. (Samsung Construction
Company Philippines, Inc. vs. Far East Bank and Trust Company and Court Of Appeals,
G.R. NO. 129015, August 13, 2004)

4. Indorser

Section 63 of the Negotiable Instruments Law makes "a person placing his signature
upon an instrument otherwise than as maker, drawer or acceptor" a general indorser
"unless he clearly indicates by appropriate words his intention to be bound in some
other capacity." (Ang Tiong vs. Lorenzo Ting, doing business under the name & style of
Prunes Preserves MFG., & Felipe Ang, G.R. No. L-26767, February 22, 1968)

After an instrument is dishonored by non-payment, indorsers cease to be merely
secondarily liable; they become principal debtors whose liability becomes identical to
that of the original obligor.The holder of the negotiable instrument need not even
proceed against the drawer before suing the indorser. (Maria Tuazon vs. Heirs of
Bartolome Ramos, 463 SCRA 408, 2005)

The collecting bank which accepted a post-dated check for deposit and sent it for
clearing and the drawee bank which cleared and honored the check are both liable to
the drawer for the entire face value of the check. Allied Banking Corporation vs. Bank
of the Philippine Islands, GR. 188363, February 27, 2013

5. Warranties

The subject checks were accepted for deposit by the Bank for the account of Sayson
although they were crossed checks and the payee was not Sayson but Melissas RTW.
The Bank stamped thereon its guarantee that "all prior endorsements and/or lack of
endorsements (were) guaranteed." By such deliberate and positive act, the Bank had
for all legal intents and purposes treated the said checks as negotiable instruments
and, accordingly, assumed the warranty of the endorser. (Associated Bank and
Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the
name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)

I. Presentment for Payment

The effects of crossing a check relate to the mode of its presentment for payment.
Under Section 72 of the Negotiable Instruments Law, presentment for payment must
be made by the holder or by some person authorized to receive payment on his behalf.
Who the holder or authorized person depends on the face of the check. (Associated
Bank and Conrado Cruz, vs. Hon. Court of Appeals, and Merle V. Reyes, doing business
under the name and style "Melissas RTW," G.R. No. 89802, May 7, 1992)

1. Necessity of Presentment for Payment

Under the Negotiable Instruments Law, an instrument not payable on demand must be
presented for payment on the day it falls due. When the instrument is payable on
demand, presentment must be made within a reasonable time after its issue. In the
case of a bill of exchange, presentment is sufficient if made within a reasonable time
after the last negotiation thereof. (International Corporate Bank vs. Gueco, 351 SCRA
516, 2001)

2. Parties to Whom Presentment for Payment Should Be Made

3. Dispensation with Presentment for Payment

4. Dishonor by Non-Payment

J. Notice of Dishonor

The term "notice of dishonor" denotes that a check has been presented for payment
and was subsequently dishonored by the drawee bank. This means that the check must
necessarily be due and demandable because only a check that has become due can be
presented for payment and subsequently be dishonored. A postdated check cannot be
dishonored if presented for payment before its due date. (Jaime Dico vs. Hon. Court of
Appeals and People of the Philippines, G.R. NO. 141669, February 28, 2005)

1. Parties to Be Notified

Notice of dishonor to the corporation, which has a personality distinct and separate
from the officer of the corporation, does not constitute notice to the latter. The
absence of notice of dishonor necessarily deprives an accused an opportunity to
preclude a criminal prosecution. (Lao vs. Court of Appeals, G.R. No. 119178, June 20,
1997)

If the drawer or maker is an officer of a corporation, the notice of dishonor to the said
corporation is not notice to the employee or officer who drew or issued the check for
and in its behalf. (Ofelia Marigomen vs. People of the Philippines, G.R. No. 153451,
May 26, 2005)

Under the Negotiable Instruments Law, notice of dishonor is not required if the drawer
has no right to expect or require the bank to honor the check, or if the drawer has
countermanded payment. In the instant case, all the checks were dishonored for any of
the following reasons: "account closed", "account under garnishment", insufficiency of
funds", or "payment stopped." In the first three instances, the drawers had no right to
expect or require the bank to honor the checks, and in the last instance, the drawers
had countermanded payment. (Great Asian Sales Center Corporation and Tan Chong
Lin vs. the Court of Appeals and Bancasia Finance and Investment Corporation, G.R.
No. 105774, April 25, 2002)

2. Parties Who May Give Notice and Dishonor

When what was stamped on the check was Payment Stopped Funded and DAUD
which means drawn against uncollected deposits, the check was not issued without
sufficient funds and was not dishonored due to insufficiency of funds. Even with
uncollected deposits, the bank may honor the check at its discretion in favor of
favored clients, in which case there would be no violation of B. P. 22. (Eliza T. Tan vs.
People of the Philippines, G.R. No. 141466, January 19, 2001)

3. Effect of Notice

In the case of DAUD, the depositor has, on its face, sufficient funds in his account,
although it is not available yet at the time the check was drawn, whereas in DAIF, the
depositor lacks sufficient funds in his account to pay the check. Moreover, DAUD does
not expose the drawer to possible prosecution for estafa and violation of BP 22, while
DAIF subjects the depositor to liability for such offenses. (Bank of the Philippine Islands
vs. Reynald R. Suarez, G.R. No. 167750, March 15, 2010)

The failure of the prosecution to prove the existence and receipt by petitioner of the
requisite written notice of dishonor and that he was given at least five banking days
within which to settle his account constitutes sufficient ground for his acquittal in a
case for violation of BP 22. (James Svendsen vs. People of the Philippines, G.R. NO.
175381, February 26, 2008)

4. Form of Notice

A notice of dishonor received by the maker or drawer of the check is thus
indispensable before a conviction for violation of BP 22 can ensue. The notice of
dishonor may be sent by the offended party or the drawee bank, and it must be in
writing. A mere oral notice to pay a dishonored check will not suffice. The lack of a
written notice is fatal for the prosecution. (Jaime Dico vs. Hon. Court of Appeals and
People of the Philippines, G.R. NO. 141669, February 28, 2005)

5. Waiver

6. Dispensation with Notice

7. Effect of Failure to Give Notice

K. Discharge of Negotiable Instrument

1. Discharge of Negotiable Instrument

In depositing the check in his name, the depositor did not become the out-right owner
of the amount stated therein. By depositing the check with the bank, depositor was, in
a way, merely designating the bank as the collecting bank. This is in consonance with
the rule that a negotiable instrument, such as a check, whether a managers check or
ordinary check, is not legal tender. As such, after receiving the deposit, under its own
rules, the bank shall credit the amount to the depositors account or infuse value
thereon only after the drawee bank shall have paid the amount of the check or the
check has been cleared for deposit. The depositors contention that after the lapse of
the 35-day period the amount of a deposited check could be withdrawn even in the
absence of a clearance thereon, otherwise it could take a long time before a depositor
could make a withdrawal is untenable. Said practice amounts to a disregard of the
clearance requirement of the banking system. Bank of the Philippine Islands vs. Court
of Appeals, 326 SCRA 641 (2000)

Mere delivery of a check does not discharge the obligation. The obligation is not
extinguished and remains suspended until the payment by commercial document is
actually realized. Thus, although the value of a check was deducted from the funds of
the drawer but the funds were never delivered to the payee because the drawee bank
set off the amount against the losses it incurred from the forgery of the drawers check,
the drawers obligation to the payee remains unpaid. Cebu International Finance
Corporation vs. Court of Appeals, 316 SCRA 488 (1999)

While Section 119 of the Negotiable Instrument Law in relation to Article 1231 of the
Civil Code provides that one of the modes of discharging a negotiable instrument is by
any other act which will discharge a simple contract for the payment of money, such as
novation, the acceptance by the holder of another check which replaced the
dishonored bank check did not result to novation. There are only two ways which
indicate the presence of novation and thereby produce the effect of extinguishing an
obligation by another which substitutes the same. First, novation must be explicitly
stated and declared in unequivocal terms as novation is never presumed. Secondly, the
old and the new obligations must be incompatible on every point. In the instant case,
there was no express agreement that the holders acceptance of the replacement
check will discharge the drawer and endorser from liability. Neither is there
incompatibility because both checks were given precisely to terminate a single
obligation arising from the same transaction. Anamer Salazar vs. JY Brothers Marketing
Corporation, GR no. 171998, October 20, 2010

2. Discharge of Parties Secondarily Liable

3. Right of Party Who Discharged Instrument

4. Renunciation by Holder

L. Material Alteration

1. Concept

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. In other words, a
material alteration is one which changes the items which are required to be stated
under Section 1 of the Negotiable Instruments Law. (Philippine National Bank vs.
Court of Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)

The serial number is not an essential requisite for negotiability under Section 1 of the
Negotiable Instrument Law and an alteration of which is not material. The alteration of
the serial number does not change the relations between the parties. (Philippine
National Bank vs. Court of Appeals, Capitol City Development Bank, Philippine Bank of
Communications, and F. Abante Marketing, G.R. No. 107508, April 25, 1996)

Alterations of the serial numbers do not constitute material alterations on the checks.
Since there were no material alterations on the checks, respondent as drawee bank has
no right to dishonor them and return them to petitioner, the collecting bank. (The
International Corporate Bank, Inc. vs. Court of Appeals and Philippine National Bank,
G.R. NO. 129910, September 5, 2006)

2. Effect of Material Alteration

Payment made under materially altered instrument is not payment done in accordance
with the instruction of the drawer. When the drawee bank pays a materially altered
check, it violates the terms of the check, as well as its duty to charge its client's account
only for bona fide disbursements he had made. Since the drawee bank, in the instant
case, did not pay according to the original tenor of the instrument, as directed by the
drawer, then it has no right to claim reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made from the drawer's account which it was
expected to treat with utmost fidelity. (Metropolitan Bank and Trust Company vs.
Renato D. Cabilzo, G.R. No. 154469, December 6, 2006)

M. Acceptance

1. Definition

The acceptance of a bill is the signification by the drawee of his assent to the order of
the drawer. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine
Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

Indeed, "acceptance" and "payment" are, within the purview of the law, essentially
different things, for the former is "a promise to perform an act," whereas the latter is
the "actual performance" thereof. In the words of the Law, "the acceptance of a bill is
the signification by the drawee of his assent to the order of the drawer," which, in the
case of checks, is the payment, on demand, of a given sum of money. (Philippine
National Bank vs. the Court of Appeals and Philippine Commercial and Industrial Bank,
G.R. No. L-26001, October 29, 1968)

2. Manner

When a check had been certified by the drawee bank, such certification is equivalent
to acceptance because it enables the holder to use it as money. Also, where a holder
procures a check to be certified, the check operates as an assignment of a part of the
funds to the creditor. (New Pacific Timber vs. Seneris, 101 SCRA 686, 1980)

Acceptance may be done in writing by the drawee in the bill itself, or in a separate
instrument. (Prudential Bank, Petitioner, v. Intermediate Appellate Court, Philippine
Rayon Mills Inc. and Anacleto R. Chi, G.R. No. 74886, December 8, 1992)

3. Time for Acceptance

4. Rules Governing Acceptance

N. Presentment for Acceptance

1. Time/Place/Manner of Presentment

Presentment for acceptance is defined as the production of a bill of exchange to a
drawee for acceptance. Presentment for acceptance is necessary only where the bill is
payable after sight or in any other case, where presentment for acceptance is
necessary in order to fix the maturity of the instrument, or where the bill expressly
stipulates that it shall be presented for acceptance, or where the bill is drawn payable
elsewhere than at the residence or place of business of the drawee. (Prudential Bank
vs. Intermediate Appellate Court, Philippine Rayon Mills Inc. and Anacleto R. Chi, G.R.
No. 74886, December 8, 1992)

2. Effect of Failure to Make Presentment

While it is true that the delivery of a check produces the effect of payment only when
it is encashed, pursuant to Art. 1249 of the Civil Code, the rule is otherwise if the
debtor is prejudiced by the creditors unreasonable delay in presentment. After more
than ten (10) years from the payment in part by cash and in part by check, the
presumption is that the check had been encashed, and the failure to encash for more
than ten (10) years undoubtedly resulted in the impairment of the check through
unreasonable and unexplained delay on the part of the payee. (Myron C. Papa vs. A.U.
Valencia & Co., Inc., et al. G.R. No. 105188. January 23, 1998)

3. Dishonor by Non-Acceptance

O. Promissory Notes

Where an instrument containing the words I promise to pay is signed by two or more
persons, they are deemed to be jointly and severally liable thereon. Under Section 17
(g) of the Negotiable Instrument Law and Art. 1216 of the Civil Code, where the
promissory note was executed jointly and severally by two or more persons, the payee
of the promissory note had the right to hold any one or any two of the signers of the
promissory note responsible for the payment of the amount of the note. (Philippine
National Bank vs. Concepcion Mining Company, Inc., et al., G.R. No. L-16968. July 31,
1962.)

The buyer of a car shall be liable to pay the unpaid balance on the promissory note and
not just the installments due and payable before the said automobile was carnapped.
Being the principal contract, the promissory note is unaffected by whatever befalls the
subject matter of the accessory contract. (Perla Compania De Seguros, Inc. vs. the
Court of Appeals, Herminio Lim And Evelyn Lim, G.R. No. 96452, May 7, 1992)

When a promissory note expresses "no time for payment," it is deemed "payable on
demand. (Jose L. Ponce de leon vs. Rehabilitation Finance Corporation, G.R. No. L-
24571, December 18, 1970)

When there is a discrepancy between the amount in words and the amount in figures
in the check, the rule in the Negotiable Instruments Law is that it would be the amount
in words that would prevail. (People of the Philippines vs. Martin L. Romero and
Ernesto C. Rodriguez, G.R. No. 112985, April 21, 1999)

An instrument which begins with I, We, or Either of us promise to pay, when signed by
two or more persons, makes them solidarily liable. Also, the phrase joint and several
binds the makers jointly and individually to the payee so that all may be sued together
for its enforcement, or the creditor may select one or more as the object of the suit.
(Astro Electronics Corp. and Peter Roxas vs. Philippine Export and Foreign Loan
Guarantee Corporation, G.R. No. 136729, September 23, 2003)

P. Checks

1. Definition

Settled is the doctrine that a check is the only a substitute for money and not money;
hence, the delivery of such an instrument does not, by itself, operate as payment. This
is especially true in case of post-dated check. Thus, the issuance of a post-dated check
was not effective payment. It did not comply with the cardholders obligation to pay
his past due credit card charges. Consequently, the card company was justified in
suspending his credit card. BPI Card Corporation vs. Court of Appeals, 296 SCRA 260
(1998)

2. Kinds

Under accepted banking practice, crossing a check is done by writing two parallel lines
diagonally on the left top portion of the checks. The crossing is special where the name
of a bank or a business institution is written between the two parallel lines, which
means that the drawee should pay only with the intervention of that company. The
crossing is general where the words written between the two parallel lines are "and
Co." or "for payees account only," which means that the drawee bank should not
encash the check but merely accept it for deposit. (Associated Bank and Conrado Cruz,
vs. Hon. Court of Appeals, and Merle V. Reyes, doing business under the name and
style "Melissas RTW," G.R. No. 89802, May 7, 1992)

The effects of crossing a check are: (1) that the check may not be encashed but only
deposited in the bank; (2) that the check may be negotiated only once to one who
has an account with a bank; and (3) that the act of crossing the check serves as a
warning to the holder that the check has been issued for a definite purpose so that he
must inquire if he has received the check pursuant to that purpose. (State Investment
House vs. IAC, 175 SCRA 310, 1989)

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 vs. Nitafan,
G.R. No. 75954, October 22, 1992)

A cashiers check is a primary obligation of the issuing bank and accepted in advance
by its mere issuance. By its very nature, a cashiers check is the banks order to pay
drawn upon itself, committing in effect its total resources, integrity and honor behind
the check. A cashiers check by its peculiar character and general use in the
commercial world is regarded substantially to be as good as the money which it
represents. (Tan vs. Court of Appeals, G.R. No. 108555, December 20, 1994)

Payment in check by the debtor may be acceptable as valid, if no prompt objection to
said payment is made. Consequently, the debtors tender of payment in the form of
managers check is valid. Thus, where the seller of real property tendered the return of
the reservation fee in the form of managers check because the sale agreement was
not fully consummated owing to the failure of the buyer to pay the balance of the
purchase price within the stipulated period, the tender of the managers check was
considered a valid tender of payment. When the buyer refused to accept the check,
the consignation of the check with the court was sufficient to satisfy the obligation.
(Teddy G. Pabugais vs. Dave Sahijiwani, G.R. No. 156846, February 23, 2004)

While its manager forged the signature of the authorized signatories of clients in the
application for managers checks and forged the signatures of the payees thereof, the
drawee bank also failed to exercise the highest degree of diligence required of banks
in the case at bar. It allowed its manager to encash the Managers checks that were
plainly crossed checks. A crossed check is one where two parallel lines are drawn
across its face or across its corner. Based on jurisprudence, the crossing of a check has
the following effects: (a) the check may not be encashed but only deposited in the
bank; (b) the check may be negotiated only once to the one who has an account
with the bank; and (c) the act of crossing the check serves as a warning to the holder
that the check has been issued for a definite purpose and he must inquire if he
received the check pursuant to this purpose; otherwise, he is not a holder in due
course. In other words, the crossing of a check is a warning that the check should be
deposited only in the account of the payee. When a check is crossed,it is the duty of
the collecting bank to ascertain that the check is only deposited to the payees
account. Philippine Commercial International Bank vs. Balmaceda,G.R. No. 158143,
September 21, 2011

3. Presentment for Payment

A judgment creditor cannot validly refuse acceptance of the payment of the judgment
obligation tendered in the form of a cashiers check. A cashiers check issued by a bank
of good standing is deemed as cash. (New Pacific Timber vs. Seneris, G.R. No. 41764,
December 19, 1980)

The obligation of the judgment debtor subsists when the check issued by a judgment
debtor was made payable to the sheriff who encashed the same but failed to deliver its
proceeds to the judgment creditor. This is because a check does not produce the
effect of payment until encashed. (Philippine Airlines vs. Court of Appeals, G.R. No.
49188, January 30, 1990)

Tendering a check on the last day of the grace period to pay the purchase price is not
valid and a seller has a right to cancel the contract. A check, be it a managers check or
ordinary check, is not legal tender, and an offer of a check in payment of a debt is not
a valid tender of payment and may be refused by the creditor. (Bishop of Malolos vs.
Intermediate Appellate Court, G.R. No. 72110, November 16, 1990)

A check may be used for the exercise of the right of redemption, the same being a
right and not an obligation. (Fortunado vs. Court of Appeals, 196 SCRA 26, 1991)

The judgment creditor may validly refuse the tender of payment partly in check and
partly in cash. A cashiers check tendered by the judgment debtor to satisfy the
judgment debt is not a legal tender. (Tibajia, Jr. vs. Court of Appeals, G.R. No. 100290,
June 4, 1993)

A check does not constitute legal tender, but once the creditor accepted a fully
funded check to settle an obligation, he is estopped from later on denouncing the
efficacy of such tender of payment. By accepting the tendered check and converting it
into money, the creditor is presumed to have accepted it as payment and to hold
otherwise would be inequitable and unfair to the obligor. (Far East Bank & Trust
Company vs. Diaz Realty, Inc., G.R. No. 138588, August 23, 2001)

A stale check is one which has not been presented for payment within a reasonable
time after its issue. It is valueless and, therefore, should not be paid. (International
Corporate Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968,
February 12, 2001)

Where a managers check made payable to cash and appearing regular on its face,
was presented to another bank that immediately honors it no faulty may be
attributed to such bank in relying upon the integrity of the check, even if payment
thereon was later ordered stopped by the drawer-bank because the one who encashed
the check was actually not the intended payee. In other words, as between the bank
that honored the managers check and the drawer-bank, it is the latter that should
bear the loss. (Security Bank and Trust Company vs. Rizal Commercial Banking
Corporation, G.R. No. 170984, 30 January 2009)

a. Time

A check must be presented for payment within a reasonable time after its issue, and in
determining what is a reasonable time, regard is to be had to the nature of the
instrument, the usage of trade or business with respect to such instruments and the
facts of the particular case. The test is whether the payee employed such diligence as a
prudent man exercise in his own affairs. This is because the nature and theory behind
the use of a check points to its immediate use and payability. (International Corporate
Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12,
2001)

b. Effect of Delay

Failure to present for payment within a reasonable time will result to the discharge of
the drawer only to the extent of the loss caused by the delay. Failure to present on
time, thus, does not totally wipe out all liability. In fact, the legal situation amounts to
an acknowledgment of liability in the sum stated in the check. In this case, the debtors
have not alleged, much less shown that they or the bank which issued the managers
check has suffered damage or loss caused by the delay or non-presentment. Definitely,
the original obligation to pay certainly has not been erased. (International Corporate
Bank vs. Sps. Francis S. Gueco and Ma. Luz E. Gueco, G.R. No. 141968, February 12,
2001)

IV. Insurance Code

A. Concept of Insurance

One test in order to determine whether one is engaged in insurance business is
whether the assumption of risk and indemnification of loss (which are elements of an
insurance business) are the principal object and purpose of the organization or
whether they are merely incidental to its business. If these are the principal objectives,
the business is that of insurance. But if they are merely incidental and service is the
principal purpose, then the business is not insurance. In this case, Health Maintenance
Organizations (HMOs) are not insurance business. (Philippine Health Care Providers,
Inc., vs. Commissioner of Internal Revenue, G.R. No. 167330, September 18, 2009)

The contract of insurance is one of perfect good faith (uferrimal fidei) not for the
insured alone, but equally so for the insurer; in fact, it is mere so for the latter, since its
dominant bargaining position carries with it stricter responsibility. (Qua Chee Gan v.
Law Union, 98 Phil 85, 1955)

Being a contract of adhesion, terms of a policy are to be construed strictly against the
party which prepared the contract - the insurer. By reason of exclusive control of
insurance contract, ambiguity must be strictly interpreted against the insurer and
liberally in favor of the insured, especially to avoid forfeiture. (Philamcare Health
System vs. Court of Appeals, 379 SCRA 356, 2002)

The cardinal principle in Insurance Law is that a policy or contract of insurance is to be
construed liberally in favor of the insured and strictly as against the insurance
company, yet, contracts of insurance, like other contracts, are to be construed
according to the sense and meaning of the terms, which the parties themselves have
used. (Lalican vs. Insular Life Assurance Company, Ltd. 597 SCRA 159, 2009)

Contracts of insurance, like other contracts, are to be construed according to the sense
and meaning of the terms which the parties themselves have used. If such terms are
clear and unambiguous, they must be taken and understood in their plain, ordinary
and popular sense. Accordingly, in interpreting the exclusions in an insurance contract,
the terms used specifying the excluded classes therein are to be given their meaning as
understood in common speech. A contract of insurance is a contract of adhesion. So,
when the terms of the insurance contract contain limitations on liability, courts should
construe them in such a way as to preclude the insurer from non-compliance with his
obligation. Alpha Insurance and Surety Co. vs. Castor, GR No. 198174, September 2,
2013

B. Elements of an Insurance Contract

Under Sec. 2(a) of the Insurance Code, an insurance contract is an agreement whereby
one undertakes for a consideration to indemnify another against loss, damage or
liability arising from an unknown or contingent event, and with the following elements:
1.) Insured has an insurable interest; 2.) Insured is subject to a risk of loss by the
happening of the designated peril; 3.) Insurer assumes risk; 4.) Such assumption of risk
is part of a general scheme to distribute actual losses among a large group of persons
bearing a similar risk; and 5.) In consideration of the insurers promise, the insured pays
a premium. (Philamcare Health System vs. Court of Appeals, 379 SCRA 432, 1997)

For purposes of determining the liability of a health care provider to its members, a health
care agreement is in the nature of non-life insurance, which is primarily a contract of
indemnity. Once the member incurs hospital, medical or any other expense arising from
sickness, injury or other stipulated contingent, the health care provider must pay for the
same to the extent agreed upon under the contract. Limitations as to liability must be
distinctly specified and clearly reflected in the extent of coverage which the company
voluntary assume, otherwise, any ambiguity arising therein shall be construed in favor of
the member. Being a contract of adhesion, the terms of an insurance contract are to be
construed strictly against the party which prepared the contract - the insurer. This is
equally applicable to Health Care Agreements. The phraseology used in medical or
hospital service contracts, such as standard charges , must be liberally construed in
favor of the subscriber, and if doubtful or reasonably susceptible of two interpretations the
construction conferring coverage is to be adopted, and exclusionary clauses of doubtful
import should be strictly construed against the provider. Thus, if the member, while on
vacation, underwent a procedure in the USA, the standard charges referred to in the
contract should mean standard charges in USA and not the cost had the procedure been
conducted in the Philippines. Fortune Medicare Inc. vs Amorin. G.R. No. 195872, March
12, 2014.




C. Characteristics/Nature of Insurance Contracts

The only persons entitled to claim the insurance proceeds are either the insured, if still
alive; or the beneficiary, if the insured is already deceased, upon the maturation of the
policy. The exception to this rule is a situation where the insurance contract was
intended to benefit third persons who are not parties to the same in the form of
favorable stipulations or indemnity. In such a case, third parties may directly sue and
claim from the insurer. Because no legal proscription exists in naming as beneficiaries
the children of illicit relationships by the insured, the shares of Eva in the insurance
proceeds, whether forfeited by the court in view of the prohibition on donations under
Article 739 of the Civil Code or by the insurers themselves for reasons based on the
insurance contracts, must be awarded to the said illegitimate children, the designated
beneficiaries, to the exclusion of heirs. (Heirs Of Loreto c. Maramag vs. Eva Verna De
Guzman Maramag, et al., G.R. No. 181132, June 5, 2009)

The insurance contract is primarily a risk-distributing device, a mechanism by which all
members of a group exposed to a particular risk contribute premiums to an insurer.
From these contributory funds are paid whatever losses occur due to exposure to the
peril insured against. Each party therefore takes a risk: the insurer being compelled
upon the happening of the contingency to pay the entire sum agreed upon; and the
insured of a parting with the amount required as premium, without receiving anything
therefore in case the contingency does not happen. (Tibay vs. Court of Appeals, 257
SCRA 126, 1996)

D. Classes

1. Marine

The evidence shows that the loss of the cargo was due to the perils of the ship; that the
sinking of the barge was due to improper loading of the logs on one side so that the
barge was tilting on one side and for that it did not navigate on even keel; that it was
no longer seaworthy that was why it developed leak. A loss which, in the ordinary
course of events, results from the natural and inevitable action of the sea, from the
ordinary wear and tear of the ship, or from the negligent failure of the ship's owner to
provide the vessel with proper equipment to convey the cargo under ordinary
conditions, is not a peril of the sea but such a loss is rather due to what has been aptly
called the 'peril of the ship.' The insurer undertakes to insure against perils of the sea
and similar perils, not against perils of the ship. (Isabela Roque, doing business under
the name and style of Isabela Roque Timber Enterprises, et al., vs. The Intermediate
Appellate Court, et al., G.R. No. L-66935, November 11, 1985)

The rusting of steel pipes in the course of a voyage is a peril of the sea in view of the
toll on the cargo of wind, water, and salt conditions. (Cathay Insurance Co., vs. The
Court of Appeals, et al., G.R. No. L-76145, June 30, 1987)

Fire may not be considered a natural disaster or calamity since it almost always arises
from some act of man or by human means. It cannot be an act of God unless caused by
lightning or a natural disaster or casualty not attributable to human agency. In the case
at bar, it is not disputed that a small flame was detected on the acetylene cylinder and
that by reason thereof, the same exploded despite efforts to extinguish the fire. Verily,
the cause of the fire was the fault or negligence of ESLI. (Philippine Home Assurance
Corporation vs. Court of Appeals, G.R. No. 106999, June 20, 1996)

A marine insurance policy providing that the insurance was to be against all risks
must be construed as creating a special insurance and extending to other risks than are
usually contemplated, and covers all losses except such as arise from the fraud of the
insured. The burden of the insured, therefore, is to prove merely that the goods he
transported have been lost, destroyed or deteriorated and thereafter, the burden is
shifted to the insurer to prove that the loss was due to excepted perils. In the present
case, there being no showing that the loss was caused by any of the excepted perils,
the insurer is liable under the policy. (Filipino Merchants Insurance Co., Inc., vs. Court
Of Appeals, et al., G.R. No. 85141, November 28, 1989)

An all risks provision of a marine policy creates a special type of insurance which
extends coverage to risks not usually contemplated and avoids putting upon the
insured the burden of establishing that the loss was due to peril falling within the
policys coverage. The insurer can avoid coverage upon demonstrating that a specific
provision expressly excludes the loss from coverage but in this case, the damage
caused to the cargo has not been attributed to any of the exceptions provided for nor
is there any pretension to this effect. (Choa Tiek Seng, doing business under the name
and style of Sengs Commercial Enterprises vs. The Court of Appeals, et al., G.R. No.
84507, March 15, 1990)

2. Fire

As defined by Section 60 of the Insurance Code, an open policy is one in which the
value of the thing insured is not agreed upon but is left to be ascertained in case of
loss. This means that the actual loss, as determined, will represent the total indemnity
due the insured from the insurer except only that the total indemnity shall not exceed
the face value of the policy. Where the actual loss in an open policy has been
ascertained, the factual determination should be respected in the absence of proof
that it was arrived at arbitrarily. (Development Insurance Corporation vs. Intermediate
Appellate Court, et al., G.R. No. L-71360, July 16, 1986)

3. Casualty

It should be noted that the insurance policy entered into by the parties is a theft or
robbery insurance policy which is a form of casualty insurance. Except with respect to
compulsory motor vehicle liability insurance, the Insurance Code contains no other
provisions applicable to casualty insurance or to robbery insurance in particular. These
contracts are, therefore, governed by the general provisions applicable to all types of
insurance. Outside of these, the rights and obligations of the parties must be
determined by the terms of their contract, taking into consideration its purpose and
always in accordance with the general principles of insurance law. (Fortune Insurance
and Surety Co., Inc. vs. Court of Appeals and Producers Bank of the Philippines, G.R.
No. 115278, May 23, 1995)

It has been aptly observed that in burglary, robbery, and theft insurance, the
opportunity to defraud the insurerthe moral hazardis so great that insurers have
found it necessary to fill up their policies with countless restrictions, many designed to
reduce this hazard. Seldom does the insurer assume the risk of all losses due to the
hazards insured against. Persons frequently excluded under such provisions are those
in the insureds service and employment. The purpose of the exception is to guard
against liability should the theft be committed by one having unrestricted access to
the property. (Fortune Insurance and Surety Co., Inc. vs. Court of Appeals and
Producers Bank of the Philippines, G.R. No. 115278, May 23, 1995)

4. Suretyship

A surety contract is merely a collateral one, its basis is the principal contract or
undertaking which it secures. Necessarily, the stipulations in such principal agreement
must at least be communicated or made known to the surety. (First Lepanto-Taisho
Insurance Corporation vs. Chevron Philippines, Inc., G.R. No. 177839, January 18,
2012)

The surety bond must be read in its entirety and together with the contract between
NPC and the contractors. The provisions must be construed together to arrive at their
true meaning. Certain stipulations cannot be segregated and then made to control. In
the case at bar, it cannot be denied that the breach of contract in this case, that is, the
abandonment of the unfinished work of the transmission line of the NPC by the
contractor FEEI was within the effective date of the contract and the surety bond. Such
abandonment gave rise to the continuing liability of the bond as provided for in the
contract which is deemed incorporated in the surety bond executed for its completion.
(National Power Corporation vs. Court of Appeals, et al., G.R. No. L-43706, November
14, 1986)

Under Section 176 of the Insurance Code, as amended, the liability of a surety in a
surety bond is joint and several with the principal obligor. Finman's bond was posted by
Pan Pacific in compliance with the requirements of Article 31 of the Labor Code in
order to guarantee compliance with prescribed recruitment procedures, rules and
regulations, and terms and, conditions of employment as appropriate. While Finman
has refrained from attaching a copy of the bond it had issued to its Petition for
Certiorari, there can be no question that the conditions of the surety bond include the
POEA Rules and Regulation. It is settled doctrine that the conditions of a bond
specified and required in the provisions of the statute or regulation providing for the
submission of the bond, are incorporated or built into all bonds tendered under that
statute or regulation, even though not there set out in printer's ink. (Finman General
Assurance Corporation vs. William Inocencio, et al., G.R. No. 90273-75, November 15,
1989)

Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to
the obligor. No contract of suretyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and enforceable irrespective of whether
or not the premium has been paid by the obligor to the surety. A continuing bond, as in
this case where there is no fixed expiration date, may be canceled only by the obligee,
which is the NFA, by the Insurance Commissioner, and by the court. By law and by the
specific contract involved in this case, the effectivity of the bond required for the
obtention of a license to engage in the business of receiving rice for storage is
determined not alone by the payment of premiums but principally by the
Administrator of the NFA. (Country Bankers Insurance Corporation vs. Antonio
Lagman, G.R. No. 165487, July 13, 2011)

The extent of the suretys liability is determined by the language of the suretyship contract
or bond itself. It can not be extended by implications beyond the terms of the contract.
Having accepted the bond, the creditor is bound by the recital in the surety bond that the
terms and conditions of its distributorship contract be reduced in writing or at the very
least communicated in writing to the surety. Such non-compliance by the creditor impacts
not on the validity or legality of the surety contract but on the creditors right to demand
performance. First Lepanto-Taisho Insurance Corporation vs Chevron Philippines, GR No.
177839, January 18, 2012



5. Life

Where a GSIS member failed to state his beneficiary or beneficiaries in his application
for membership, the proceeds of the retirement benefits shall accrue to his estate and
will be distributed among his legal heirs in accordance with the law on intestate
succession. (Re: Claims for Benefits of the Heirs of the Late Mario vs. Chanliongco,
Adm. Matter No. I90-RET., October 18, 1977)

A life insurance policy is no different from a civil donation insofar as the beneficiary is
concerned for both are founded upon the same consideration: liberality. A beneficiary
is like a donee, because from the premiums of the policy which the insured pays, out of
liberality, the beneficiary will receive the proceeds or profits of said insurance. As a
consequence, the proscription in Article 739 of the new Civil Code should equally
operate in life insurance contracts. The conviction for adultery or concubinage is not
necessary before the disabilities mentioned in Article 739 may effectuate. It would be
sufficient if evidence preponderates upon the guilt of the consort for the offense
indicated. (The Insular Life Assurance Company, Ltd., vs. Carponia t. Ebrado And
Pascuala Vda. De Ebrado, G.R. No. l-44059, October 28, 1977)

There is nothing in the policy that relieves the insurer of the responsibility to pay the
indemnity agreed upon if the insured is shown to have contributed to his own accident.
Indeed, most accidents are caused by negligence. Lim was unquestionably negligent
and that negligence cost him his own life. But it should not prevent his widow from
recovering from the insurance policy he obtained precisely against accident. (Sun
Insurance Office, Ltd., vs. The Court of Appeals, G.R. No. 92383, July 17, 1992)

The legitimate heirs of the insured who were not designated as beneficiaries in the life
insurance policies are considered third parties to the insurance contracts and, thus are not
entitled to the proceeds thereof. The insurance companies have no legal obligation to turn
over the insurance proceeds to them. The revocation of the common law spouse of the
insured as a beneficiary in one policy and her disqualification as such in another are of no
moment considering that the designation of the illegitimate children as beneficiaries in
the Insurance Policies remains valid. Because no legal proscription exists in naming as
beneficiaries children of illicit relationships by the insured, the shares of the common-law
spouse in the insurance proceeds, whether forfeited by the Court in view of the
prohibition on donation under Article 739 of the Civil Code or by the insurers themselves
for reasons based on the insurance contracts, must be awarded to the said illegitimate
children, the designated beneficiaries, to the exclusion of the legitimate heirs. It is only in
cases where the insured has not designated any beneficiary, or when the designated
beneficiary is disqualified by law to receive the proceeds, that the insurance policy
proceeds shall redound to the benefit of the estate of the insured. Heirs of Loreto C.
Maramag vs. Maramag, GR No. 181132, June 5, 2009



6. Compulsory Motor Vehicle Liability Insurance

Insurers liability under Third Party Liability coverage accrues immediately upon
occurrence of injury or event upon which the liability depends and does not depend on
the recovery of judgment by the injured party against the insured. Therefore, insurer
can be sued and held directly liable by the injured party to the extent of the coverage
(Vda. De Maglana vs. Hon. Cosolacion, 212 SCRA 268, 1992)

The liability of the insured carrier or vehicle owner is based on tort, in accordance with
the provisions of the Civil Code; while that of the insurer arises from contract,
particularly, the insurance policy. The third-party liability of the insurer is only up to
the extent of the insurance policy and that required by law; and it cannot be held
solidarily liable for anything beyond that amount. (The Heirs of George Y. Poe vs.
Malayan Insurance Company, Inc., G.R. No. 156302, April 7, 2009 14, 1996)

The main purpose of the authorized driver clause is that a person other than the
insured owner, 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 must be duly licensed drivers and have no disqualification to
drive a motor vehicle. The mere happenstance that the employee(s) of the shop owner
diverts the use of the car to his own illicit or unauthorized purpose in violation of the
trust reposed in the shop by the insured car owner does not mean that the authorized
driver clause has been violated such as to bar recovery, provided that such employee
is duly qualified to drive under a valid drivers license. It is the theft clause, not the
authorized driver clause, that applies. (Jewel Villacorta vs. The Insurance
Commission, et al., G.R. No. 54171. October 28, 1980)

Under the authorized driver clause, an authorized driver must not only be permitted
to drive by the insured but it is also essential that he is permitted under the law and
regulations to drive the motor vehicle and is not disqualified from so doing under any
enactment or regulation. At the time of the accident, Stokes had been in the
Philippines for more than 90 days and under the law, he could not drive a motor
vehicle without a Philippine drivers license. He was therefore not an authorized
driver under the terms of the insurance policy in question, and MALAYAN was right in
denying the claim of the insured. (James Stokes, as Attorney-in-Fact of Daniel Stephen
Adolfson vs. Malayan Insurance Co., Inc., G.R. No. L-34768. February 24, 1984)

The requirement under the authorized driver clause that the driver be permitted in
accordance with the licensing or other laws or regulations to drive the Motor Vehicle
and is not disqualified from driving such motor vehicle by order of a Court of Law or by
reason of any enactment or regulation in that behalf, applies only when the driver is
driving on the insureds order or with his permission. It does not apply when the
person driving is the insured himself. (Andrew Palermo vs. Pyramid Insurance Co., Inc.,
G.R. No. L-36480. May 31, 1988)

Where the drivers temporary operators permit had expired, and the insurance policy
states that a driver with an expired Traffic Violation Receipt or expired Temporary
Operators permit is not considered an authorized driver within the meaning of the
policy, the expiration of the same bars recovery under the policy. In liability insurance,
the parties are bound by the terms of the policy and the right of insured to recover is
governed thereby. (Agapito Gutierrez vs. Capital Insurance & Surety Co., Inc., G.R. No.
L-26827, June 29, 1984)

From a reading Section 378, the following rules on claims under the no fault
indemnity provision, where proof of fault or negligence is not necessary for payment
of any claim for death or injury to a passenger or a third party, are established: 1.) A
claim may be made against one motor vehicle only. 2.) If the victim is an occupant of a
vehicle, the claim shall lie against the insurer of the vehicle in which he is riding,
mounting or dismounting from. 3.) In any other case (i.e. if the victim is not an
occupant of a vehicle), the claim shall lie against the insurer of the directly offending
vehicle. 4.) 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. (Perla Compania
De Seguros, Inc., vs. Hon. Constante A. Ancheta, Presiding Judge of the Court of First
Instance of Camarines Norte, Branch III, et al., G.R. No. L-49699, August 8, 1988)

E. Insurable Interest

1. In Life/Health

Every person has an insurable interest in the life and health of: 1.) Himself, or his
spouse and of his children; 2.) Any person: (a) on whom he depends wholly or in part
for education or support, or in whom he has a pecuniary interest; (b) under legal
obligation to him for the payment of money, respecting property or service, of which
death or illness might delay or prevent the performance; and (c) upon whom whose life
any estate or interest vested in him depends. (Philamcare Health System vs. Court of
Appeals, 379 SCRA 356, 2002)

The existence of an insurance interest gives a person the legal right to insure the
subject matter of the policy of insurance. Section 19 of the Insurance Code states that
an interest in the life or health of a person insured must exist when the insurance takes
effect, but need not exist thereafter or when the loss occurs. (Lalican vs. Insular Life
Assurance Company Ltd, 597 SCRA 159, 2009)

An employer corporation has an insurable interest on its manager where the death of
the manager will be detrimental to the corporations operations. (El Oriente Fabrica de
Tabacos vs. Posada, 56 Phil 147, 1931)

2. In Property

A non-life insurance policy such as the fire insurance policy taken by spouses Cha over
their merchandise is primarily a contract of indemnity. Insurable interest in the
property insured must exist at the time the insurance takes effect and at the time the
loss occurs. The basis of such requirement of insurable interest in property insured is
based on sound public policy: to prevent a person from taking out an insurance policy
on property upon which he has no insurable interest and collecting the proceeds of
said policy in case of loss of the property. In such a case, the contract of insurance is a
mere wager which is void under Section 25 of the Insurance Code. (Spouses Nilo Cha
and Stella Uy Cha vs. Court of Appeals, G.R. No. 124520. August 18, 1997)

With the transfer of the location of the subject properties, without notice and without the
insurers consent, after the renewal of the policy, the insured clearly committed
concealment, misrepresentation and a breach of a material warranty. Section 26 of the
Insurance Code provides that a neglect to communicate that which a party knows and
ought to communicate, is called a concealment.
Under Section 27 of the Insurance Code, a concealment entitles the injured party to
rescind a contract of insurance. Moreover, under Section 168 of the Insurance Code, the
insurer is entitled to rescind the insurance contract in case of an alteration in the use or
condition of the thing insured. Section 168 of the Insurance Code provides, as follows: An
alteration in the use or condition of a thing insured from that to which it is limited by the
policy made without the consent of the insurer, by means within the control of the insured,
and increasing the risks, entitles an insurer to rescind a contract of fire insurance. Malayan
Insurance Company vs. PAP Co. (PHIL. BRANCH). G.R. No. 200784, August 07, 2013.


3. Double Insurance and Over Insurance

A double insurance exists where the same person is insured by several insurers
separately in respect of the same subject and interest. Since, the insurable interests of
a mortgagor and a mortgagee on the mortgaged property are distinct and separate,
the two policies of the PFIC do not cover the same interest as that covered by the
policy of the private respondent, no double insurance exists. (Armando Geagonia vs.
Court of Appeals, et al., G.R. No. 114427, February 6, 1995)

By the express provision of Section 93 of the Insurance Code, double insurance exists
where the same person is insured by several insurers separately in respect to the same
subject and interest. The requisites in order for double insurance to arise are as follows:
1.) The person insured is the same; 2.) Two or more insurers insuring separately; 3.)
There is identity of subject matter; 4.) There is identity of interest insured; and 5.)
There is identity of the risk or peril insured against. In the present case, even though
the two insurance policies were issued over the same goods and cover the same risk,
there arises no double insurance since they were issued to two different
persons/entities having distinct insurable interests. Necessarily, over insurance by
double insurance cannot likewise exist. (Malayan Insurance Co., Inc., vs. Philippine First
Insurance Co., Inc. and Reputable Forwarder Services, Inc., G.R. No. 184300, July 11,
2012)

4. Multiple or Several Interests on Same Property

As to a mortgaged property, the mortgagor and the mortgagee have each an
independent insurable interest therein and both interests may be covered by one
policy, or each may take out a separate policy covering his interest, either at the same
or at separate times. The mortgagor's insurable interest covers the full value of the
mortgaged property, even though the mortgage debt is equivalent to the full value of
the property. The mortgagee's insurable interest is to the extent of the debt, since the
property is relied upon as security thereof, and in insuring he is not insuring the
property but his interest or lien thereon. (Armando Geagonia vs. Court of Appeals, et
al., G.R. No. 114427, February 6, 1995)

Where a mortgagor pays insurance premium under group insurance policy (Mortgage
Redemption Insurance), making loss payable to mortgagee, the insurance is on
mortgagors interest, and mortgagor continues to be a party to the contract. In this
type of policy insurance, mortgagee is simply an appointee of the insurance fund, such
loss-payable clause does not make mortgagee a party to the contract (Great Pacific
Life vs. Court of Appeals, 316 SCRA 677, 1999)

F. Perfection of the Contract of Insurance

1. Offer and Acceptance/Consensual

It needs not much emphasis to say that an application form does not prove that
insurance was secured. Anybody can get an application form for insurance, fill it up at
home before filing it with the insurance company. In fact, the very first sentence of the
form states that it merely forms the basis of a contract between you and NZILife.
There was no contract yet. Furthermore, there is no proof that the insurance company
approved the proposal, no proof that any premium payments were made, and no proof
from the record of exhibits as to the date it was accomplished. It appearing that no
insurance was issued to Lam Po Chun with accused-appellant as the beneficiary, the
motive capitalized upon by the trial court vanishes. (People of the Philippines vs. Yip
Wai Ming, G.R. No. 120959, November 14, 1996)

Where the provisions in the binding deposit receipt shows that it is intended to be
merely a provisional or temporary insurance contract and the same is merely an
acknowledgment, on behalf of the company, that the latter's branch office had
received from the applicant the insurance premium and had accepted the application
subject for processing by the insurance company, the acceptance thereof is merely
conditional and is subordinated to the act of the company in approving or rejecting
the application. Since Pacific Life disapproved the insurance application, the binding
deposit receipt in question never become in force at anytime since in life insurance, a
"binding slip" or "binding receipt" does not insure by itself. (Great Pacific Life
Assurance Company vs. Honorable Court of Appeals, G.R. No. L-31845. April 30, 1979)

For a valid cancellation of the policy,the following requisites must concur: 1.) There
must be prior notice of cancellation to the insured; 2.) The notice must be based on the
occurrence, after the effective date of the policy, of one or more of the grounds
mentioned; 3.) The notice must be (a) in writing, (b) mailed, or delivered to the named
insured, (c) at the address shown in the policy; 4. It must state (a) which of the grounds
mentioned in Section 64 is relied upon and (b) that upon written request of the
insured, the insurer will furnish the facts on which the cancellation is based. MICO
claims it canceled the policy in question for non-payment of premium. However, there
is no proof that the notice, assuming it complied with the other requisites, was actually
mailed to and received by Pinca. (Malayan Insurance Co., Inc. vs. Gregoria Cruz
Arnaldo, in her capacity as the Insurance Commissioner, et al., G.R. No. L-67835,
October 12, 1987)

a. Delay in Acceptance
b. Delivery of Policy

2. Premium Payment

By accepting the promise of Plastic Era to to pay the insurance premium within thirty
(30) days from the effective date of policy, Capital Insurance has implicitly agreed to
modify the tenor of the insurance policy and in effect, waived the 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, Capital Insurance 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. By accepting its promise to pay, Capital Insurance had in effect
extended credit to Plastic Era. Therefore, Capital Insurance did not have the right to
cancel the policy for nonpayment of the premium except by putting Plastic Era in
default and giving it personal notice to that effect. (Capital Insurance & Surety Co.,
Inc., vs. Plastic Era Co., Inc., et al., G.R. No. L-22375, July 18, 1975)

It is explicit in the policy that PSIC's agreement to indemnify Woodwork for loss by fire
only arises "after payment of premium,". Compliance by the insured with the terms of
the contract is a condition precedent to the right of recovery. Since the premium had
not been paid, the policy must be deemed to have lapsed. The non-payment 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. (Philippine Phoenix
Surety & Insurance Company vs. Woodwork, Inc., G.R. No. L-25317, August 6, 1979)

The non-payment of premium on the cover note is no cause for Pacific to lose what is
due it as if there had been payment of premium, for non-payment by it was not
chargeable against its fault. Had all the logs been lost during the loading operations,
but after the issuance of the cover note, liability on the note would have already arisen
even before payment of premium. This is how the cover note as a "binder" should
legally operate otherwise, it would serve no practical purpose in the realm of
commerce, and is supported by the doctrine that where a policy is delivered without
requiring payment of the premium, the presumption is that a credit was intended and
policy is valid. (Pacific Timber Export Corporation vs. Court of Appeals, et al., G.R. No.
L-38613, February 25, 1982)

It is obvious from both the Insurance Act and the stipulation of the parties that time is
of the essence in respect of the payment of the insurance premium so that if it is not
paid the contract does not take effect unless there is still another stipulation to the
contrary. In the instant case, Arce was given a grace period to pay the premium but the
period having expired with no payment made, he cannot insist that Capital is
nonetheless obligated to him. (Pedro Arce vs. Capital Insurance & Surety Co., Inc., G.R.
No. L-28501, September 30, 1982)

Under Section 77 of the Insurance Code, the remedy for the non-payment of
premiums is to put an end to and render the insurance policy not binding. The non-
payment of premium does not merely suspend but puts an end to an insurance
contract since the time of the payment is peculiarly of the essence of the contract.
Unless premium is paid, an insurance contract does not take effect. Since admittedly
the premiums have not been paid, the policies issued have lapsed. The insurance
coverage did not go into effect or did not continue and the obligation of Philamgen as
insurer ceased. (Arturo Valenzuela, et al. vs. Court Of Appeals, et al., G.R. No. 83122,
October 19, 1990)

Section 177 of the Insurance Code states that the surety is entitled to payment of the
premium as soon as the contract of suretyship or bond is perfected and delivered to
the obligor. No contract of suretyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where the obligee has accepted the
bond, in which case the bond becomes valid and enforceable irrespective of whether
or not the premium has been paid by the obligor to the surety. (Philippine Pryce
Assurance Corporation vs. Court Of Appeals, et al., G.R. No. 107062, February 21,
1994)

Section 78 of the Insurance Code explicitly provides that an acknowledgment in a
policy or contract of insurance of the receipt of premium is conclusive evidence of its
payment, so far as to make the policy binding, notwithstanding any stipulation therein
that it shall not be binding until the premium is actually paid. This Section establishes a
legal fiction of payment and should be interpreted as an exception to Section 77.
(American Homes Assurance vs. Antonio Chua, G.R. 130421, June 28, 1999)

Section 77 of the Insurance Code of 1978 provides that an insurer is entitled to
payment of the premium as soon as the thing insured is exposed to the peril insured
against. The first exception is provided by Section 77 itself, and that is, in case of a life
or industrial life policy whenever the grace period provision applies. The second is that
covered by Section 78 of the Insurance Code, which provides that any
acknowledgment in a policy or contract of insurance of the receipt of premium is
conclusive evidence of its payment, so far as to make the policy binding,
notwithstanding any stipulation therein that it shall not be binding until premium is
actually paid. A third exception was laid down in Makati Tuscany Condominium
Corporation vs. Court of Appeals, wherein the Court ruled that Section 77 may not
apply if the parties have agreed to the payment in installments of the premium and
partial payment has been made at the time of loss. Tuscany has also provided a fourth
exception, namely, that the insurer may grant credit extension for the payment of the
premium. This simply means that if the insurer has granted the insured a credit term for
the payment of the premium and loss occurs before the expiration of the term,
recovery on the policy should be allowed even though the premium is paid after the
loss but within the credit term. Moreover, as a fifth exception, estoppel bars it from
taking refuge under said Section, since Masagana relied in good faith on such practice.
(Ucpb General Insurance Co. Inc., vs. Masagana Telemart, Inc., G.R. No. 137172, April
4, 2001)

FEBTC is estopped from claiming that the insurance premium has been unpaid. FEBTC
induced Maxilite and Marques to believe that the insurance premium has in fact been
debited from Maxilites account. However, FEBTC failed to do so. FEBTCs conduct
clearly constitutes gross negligence in handling Maxilites and Marques accounts. As a
consequence, FEBTC must be held liable for damages pursuant to Article 2176 of the
Civil Code. (Jose Marques and Maxilite Technologies, Inc., vs. Far East Bank And Trust
Company, et al., G.R. No. 171379, January 10, 2011)

In life insurance, even though insured may have obtained an endowment policy,
payment of premiums is not a debt or obligation, but an exercise of a right on the part
of the insured. If insured wants to keep policy alive, he may pay premium. But the
insurer may not compel him to pay the premium if insured desires to let the policy
lapse. (Constantino vs. Asia Life, 87 Phil 248, 1950)

The age of the insured was not concealed to the insurance company for her
application for insurance coverage which was on a printed form furnished by Manila
Bankers and which contained very few items of information clearly indicated her age
of the time of filing the same to be almost 65 years of age. Despite such information
which could hardly be overlooked in the application form, Manila Bankers received her
payment of premium and issued the corresponding certificate of insurance without
question. As there was sufficient time (45 days) for the Manila Bankers to process the
application and issue notice that the applicant was over 60 years of age and thereby
cancel the policy on that ground if it was minded to do so, Manila Bankers failure to
act, is therefore either attributable to its willingness to waive such disqualification; or,
through the negligence or to the incompetence of its employees for which it has only
itself to blame. (Regina Edillon vs. Manila Bankers Life Insurance, et al., G.R. No. L-
34200, September 30, 1982)

3. Non-Default Options in Life Insurance

4. Reinstatement of a Lapsed Policy of Life Insurance

The stipulation in a life insurance policy giving the insured the privilege to reinstate it
upon written application within three years from the date it lapses and upon of
evidence of insurability satisfactory to the insurance company and the payment of all
overdue premiums and any other indebtedness to the company, does not give the
insured absolute right to such reinstatement by the mere filing of an application
therefor. The company has the right to deny the reinstatement if it is not satisfied as to
the insurability of the insured and of the latter does not pay all overdue premiums and
all other indebtedness to the company. After the death of the insured the insurance
company cannot be compelled to entertain an application for reinstatement of the
policy because the conditions precedent to reinstatement can no longer be
determined and satisfied. (James McGuire v. The Manufacturers Life Insurance Co.,
G.R. No. L-3581. September 21, 1950)

Where a life insurance policy lapsed, and as compliance with the conditions for
reinstatement of the policy, the insured paid only part of the overdue premium, the
failure to pay the balance of the overdue premium prevented the reinstatement said
policy and thereafter the recovery therefrom. (Andres vs. Crown Life Ins. Co., G.R. No.
L-10875, January 28, 1958)

5. Refund of Premiums

Great Pacific should have informed Cortez of the deadline for paying the first premium
before or at least upon delivery of the policy to him, so he could have complied with
what was needful and would not have been misled into believing that his life and his
family were protected by the policy, when actually they were not. And, if the premium
paid by Cortez was unacceptable for being late, it was the company's duty to return it.
By accepting his premiums without giving him the corresponding protection, Great
Pacific acted in bad faith and since his policy was in fact inoperative or ineffectual
from the beginning, the company was never at risk, hence, it is not entitled to keep the
premium. (Great Pacific Life Insurance Corporation vs. Court of Appeals, et al., G.R.
No. L-57308, April 23, 1990)

G. Rescission of Insurance Contracts

a. Concealment

Where the applicant, in apparent bad faith, withheld the fact material to the risk to be
assumed by the insurance company, the latter is entitled to rescind the contract of
insurance. The contract of insurance is one of perfect good faith, not for the insured
alone but equally so for the insurer. Where there is concealment or a neglect to
communicate that which a party knows and ought to communicate, whether
intentional or unintentional, rescission is available as a remedy to the insurer. (Great
Pacific Life Assurance Company vs. Honorable Court of Appeals, G.R. No. L-31845.
April 30, 1979)

Concealment exists where the assured had knowledge of a fact material to the risk,
and honesty, good faith, and fair dealing requires that he should communicate it to the
assurer, but he designedly and intentionally withholds the same. In the absence of
evidence that the insured had sufficient medical knowledge as to enable him to
distinguish between "peptic ulcer" and "a tumor", his statement that said tumor was
"associated with ulcer of the stomach, " should be construed as an expression made in
good faith of his belief as to the nature of his ailment and operation. (Ng Gan Zee vs.
Asian Crusader Life Assurance Corporation, G.R. No. L-30685, May 30, 1983)

Where the insured is specifically required to disclose to the insurer any other insurance
and its particulars which he may have effected on the same subject matter, the
knowledge of such insurance by the insurer's agents, even assuming the acquisition
thereof by the former, is not the "notice" that would estop the insurers from denying
the claim. Obligations arising from contracts have the force of law between the
contracting parties and should be complied with in good faith. (New Life Enterprises
and Julian Sy vs. Court of Appeals, et al., G.R. No. 94071, March 31, 1992)

Where the insured is specifically required to disclose to the insurer matters relating to
his health, the insured's failure to disclose the fact that he was hospitalized for two
weeks prior to filing his application for insurance, raises grave doubts about his bona
fides. Materiality is to be determined not by the event, but solely by the probable and
reasonable influence of the facts upon the party to whom communication is due, in
forming his estimate of the disadvantages of the proposed contract or in making his
inquiries. (Sunlife Assurance Company of Canada vs. The Court of Appeals, et al., G.R.
No. 105135, June 22, 1995)

In group insurance, there is no medical examination required. But if in group insurance
an application form requires an answer to previous sickness, and that is falsely denied,
then there is concealment. (Saturnino v. Phil-Am Life, 7 SCRA 316, 1963)

One who solicits insurance is an underwriter and not an agent of the insurance
company. If insurer appoints a general agent, then such agent can bind the company
by virtue of the written appointment. On the other hand, an underwriter who fills up a
policy with false answers and later insured signs the policy, the false answers become
the insureds own answer because he signed the policy. (Soliman v. U.S. Life, 104 Phil.
1046, 1958)

b. Misrepresentation/Omissions

When the insured signed the pension plan application, he adopted as his own the
written representations and declarations embodied in it. It is clear from these
representations that he concealed his chronic heart ailment and diabetes. He cannot
sign the application and disown the responsibility for having it filled up. Thus, the
insurance company had every right to act on the faith of that certification. (Ma.
Lourdes s. Florendo vs. Philam Plans, Inc., et al., G.R. No. 186983, February 22, 2012)

By virtue of the incontestability clause, the insurer has two years from the date of
issuance of the insurance contract or of its last reinstatement within which to contest
the policy, whether or not, the insured still lives within such period. After two years, the
defenses of concealment or misrepresentation, no matter how patent or well founded,
no longer lie. Considering that the insured died before the two-year period had
lapsed, Phil-Am Insurance is not, therefore, barred from proving that the policy is void
ab initio by reason of the insureds fraudulent concealment or misrepresentation.
(Emilio Tan vs. The Court of Appeals, G.R. No. 48049. June 29, 1989)

The "Incontestability Clause" under Section 48 of the Insurance Code provides that an
insurer is given two years from the effectivity of a life insurance contract and while
the insured is alive to discover or prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or misrepresentation of the
insured or his agent. After the two-year period lapses, or when the insured dies within
the period, the insurer must make good on the policy, even though the policy was
obtained by fraud, concealment, or misrepresentation. (Manila Bankers Life Insurance
Corporation vs. Cresencia p. Aban, G.R. No. 175666, July 29, 2013)

The incontestability clause precludes the insurer from disowning liability under the policy
it issued on the ground of concealment or misrepresentation regarding the health of the
insured after a year of its issuance. Since insured died on the 11
th
month following the
issuance of his plan, the incontestability period has not yet set in. Consequently, the
insurer was not barred from questioning the beneficiarys entitlement to the benefits of
the pension plan. Florendo vs. Philam Plans, GR. No 186983, February 22, 2012



c. Breach of Warranties

The insurance company is barred by waiver (or rather estoppel) to claim violation of
the so-called fire hydrants warranty, for the reason that knowing fully all that the
number of hydrants demanded therein never existed from the very beginning, the
insurance company nevertheless issued the policies in question subject to such
warranty, and received the corresponding premiums. It would be perilously close to
conniving at fraud upon the insured to allow insurance company to claim now as void
ab initio the policies that it had issued to the plaintiff without warning of their fatal
defect, of which it was informed, and after it had misled the defendant into believing
that the policies were effective. (Qua Chee Gan v. Law Union, 98 Phil 85, 1955)

An alteration in the use or condition of a thing insured from that to which it is limited
by the policy made without the consent of the insurer, by means within the control of
the insured, and increasing the risks, entitles an insurer to rescind a contract of fire
insurance. (Malayan Insurance Company, Inc. vs. Pap Co., Ltd., G.R. No. 200784,
August 7, 2013)

H. Claims Settlement and Subrogation

Where the insurance policy clearly and categorically placed PCSI's liability for all
damages arising out of death or bodily injury sustained by one person as a result of any
one accident at P12,000.00 and under the law prevailing, P.D. 612, the minimum
liability is P12,000 per passenger, the stipulation regarding PCSIs liability under the
insurance contract not being less than P12,000.00, and therefore not contrary to law,
morals, good customs, public order or public policy, must be upheld as effective, valid
and binding as between the parties. (Perla Compania De Seguros, Inc. vs. Court of
Appeals, G.R. No. 78860, May 28, 1990)

The right of subrogation accrues simply upon payment by the insurance company of
the insurance claim. When it is not disputed that the insurance company indeed paid,
then there is valid subrogation in its favor. Malayan Insurance Co vs Alberto, GR No.
194320, February 1, 2012


1. Notice and Proof of Loss

The Insurance Code provides that a policy may declare that a violation of specified
provisions thereof shall avoid it. Thus, in fire insurance policies, which contain
provisions such as Condition No. 15 of the insurance policy, a fraudulent discrepancy
between the actual loss and that claimed in the proof of loss voids the insurance policy.
Mere filing of such a claim will exonerate the insurer. (United Merchants Corporation
vs. Country Bankers Insurance Corporation, G.R. No. 198588, July 11, 2012)

A perusal of the records shows that Usiphil Incorporated, after the occurrence of the
fire, immediately notified Finman Gen. Assurance thereof. Thereafter, Usiphil
Incorporated submitted the following documents: (1) Sworn Statement of Loss and
Formal Claim and; (2) Proof of Loss. The submission of these documents, constitutes
substantial compliance. Indeed, as regards the submission of documents to prove loss,
substantial, not strict as urged by Finman Gen. Assurance, compliance with the
requirements will always be deemed sufficient. (Finman Gen. Assurance vs. Court of
Appeals, 361 SCRA 214, 2001)

Plaintiff's verified claim totalled P31,860.85, of which, in accordance with the terms of
the policy, three-fourths was asked, or P23,895.64. Dependant's inventory of the
goods found after the fire came to P13,113. The difference between plaintiff's claim
and defendant's estimate of the loss, which was confirmed in the trial court, was
P18,747.85. In connection with these figures plaintiff suggests too low a valuation by
the representatives of the defendant. Computed at plaintiff's valuation, the goods
inventoried by the defendant's committee would amount to P19,346.30. There would,
however, still remain a considerable void between the two amounts, of P12.514.55. In
this case, the difference under one hypothesis is about 50 per cent, and under another
hypothesis, about 25 per cent. Still that constitutes a serious discrepancy between the
true value of the property and that sworn to in the proofs of loss, and is an outstanding
fact to be considered as bearing upon the presence of fraud. It is more than an honest
misstatement, more than inadvertence or mistake, more than a mere error in opinion,
more than a slight exaggeration, and in connection with all the surrounding
circumstances, discloses a material overvaluation made intentionally and willfully. The
insured cannot therefore recover. (Tan It v. Sun Insurance, 51 Phil. 212, 1927)

2. Guidelines on Claims Settlement

a. Unfair Claims Settlement; Sanctions
b. Prescription of Action

There is absolutely nothing in the law which mandates that the two periods prescribed
in Section 384 of the Insurance Codethat is, the six-month period for filing the
notice of claim and the one-year period for bringing an action or suit must always
concur. On the contrary, it is very clear that the one-year period is only required in
proper cases. The one-year period should instead be counted from the date of
rejection by the insurer as this is the time when the cause of action accrues. Since in
the case at hand, there has yet been no accrual of cause of action, prescription has not
yet set in. This is because, before such final rejection, there was no real necessity for
bringing suit. (Summit Guaranty And Insurance Company, Inc. vs. Hon. Jose C. De
Guzman, in his capacity as Presiding Judge of Branch III, CFI of Tarlac, et al., G.R. No. L-
50997, June 30, 1987)

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 by the insurance company and not from the denial of
the reconsideration (Sun Life Office, Ltd. vs. Court of Appeals, GR. No. 89741, Mar 13,
1991)

Where the delay in bringing the suit against the insurance company was not caused by
the insured or its subrogee but by the insurance company itself, it is unfair to penalize
the insured or its subrogee by dismissing its action against the insurance company on
the ground of prescription. To prevent the insurance company from evading its
responsibility to the insured through this clever scheme, and to protect the insuring
public against similar acts by other insurance companies, the one-year period under
Section 384 should be counted not from the date of the accident but from the date of
the rejection of the claim by the insurer. It is only from the rejection of the claim by the
insurer that the insureds cause of action accrued since a cause of action does not
accrue until the party obligated refuse, expressly or impliedly, to comply with its duty.
(Country Bankers Insurance Corp., vs. The Travellers Insurance and Surety Corp., et al.,
G.R. No. 82509, August 16, 1989)

c. Subrogation

Payment by the insurer to the assured operates as an equitable assignment to the
former of all remedies which the latter may have against the third party whose
negligence or wrongful act caused the loss. There are a few recognized exceptions to
this rule. For instance, if the assured by his own act releases the wrongdoer or third
party liable for the loss or damage, from liability, the insurers right of subrogation is
defeated. Similarly, where the insurer pays the assured the value of the lost goods
without notifying the carrier who has in good faith settled the assureds claim for loss,
the settlement is binding on both the assured and the insurer, and the latter cannot
bring an action against the carrier on his right of subrogation . And where the insurer
pays the assured for a loss which is not a risk covered by the policy, thereby effecting
voluntary payment, the former has no right of subrogation against the third party
liable for the loss. (Pan Malayan Insurance Corporation vs. Court Of Appeals, et al.,
G.R. No. 81026, April 3, 1990)

The payment by the insurer to the assured operates as an equitable assignment of all
remedies the assured may have against the third party who caused the damage.
Subrogation is not dependent upon, nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues simply upon payment of the insurance
claim by the insurer. (Aboitiz Shipping Corporation v. Insurance Company Of North
America, G.R. No. 168402, August 6, 2008; Malayan Insurance Co., Inc., vs. Rodelio
Alberto, et al., G.R. No. 194320, February 1, 2012)

The proximate cause of the sinking of the vessel was her condition of unseaworthiness
arising from her having been top-heavy when she departed from the Port of
Zamboanga. Since the vessel was unseaworthy with reference to the cargo, there was
therefore a breach of warranty of seaworthiness that rendered the assured not entitled
to the payment of its claim under the policy. Hence, when PhilAmGen paid the claim
of the bottling firm there was in effect a voluntary payment and no right of
subrogation accrued in its favor. In other words, when PhilAmGen paid it did so at its
own risk. (The Philippine American General Insurance Company, Inc., vs. Court of
Appeals, et al., G.R. No. 116940, June 11, 199)

As the insurer, Fireman's Fund is entitled to go after the person or entity that violated
its contractual commitment to answer for the loss insured against.. Upon payment of
the loss, the insurer is entitled to be subrogated pro tanto to any right of action which
the insured may have against the third person whose negligence or wrongful act
caused the loss. When the insurance company pays for the loss, such payment operates
as an equitable assignment to the insurer of the property and all remedies which the
insured may have for the recovery thereof. (Firemans Fund Insurance Copany vs.
Jamila & Company, Inc., G.R. No. L-27427, April 7, 1976)

St. Paul, as insurer, after paying the claim of the insured for damages under the
insurance, is subrogated merely to the rights of the assured. As subrogee, it can
recover only the amount that is recoverable by the latter. Since the right of the
assured, in case of loss or damage to the goods, is limited or restricted by the
provisions in the bill of lading, a suit by the insurer as subrogee necessarily is subject to
like limitations and restrictions. (St. Paul Fire & Marine Insurance Co. vs. Macondray &
Co., Inc., et al., G.R. No. L-27796, March 25, 1976)

When Manila Mahogany executed a release claim discharging San Miguel Corporation
from all actions, claims, demands and rights of action arising out of or as a
consequence of the accident after the insurer had paid the proceeds of the policy, the
insurer is entitled to recover from the insured the amount of insurance money paid.
Since the insurer can be subrogated to only such rights as the insured may have, should
the insured, after receiving payment from the insurer, release the wrongdoer who
caused the loss, the insurer loses his rights against the wrongdoer. But in such a case,
the insurer will be entitled to recover from the insured whatever it has paid to the
latter, unless the release was made with the consent of the insurer. (Manila Mahogany
Manufacturing Corporation vs. Court of Appeals, G.R. No. L-52756, October 12, 1987)

The presentation in evidence of the marine insurance policy is not indispensable
before the insurer may recover from the common carrier the insured value of the lost
cargo in the exercise of its subrogatory right. The subrogation receipt, by itself, is
sufficient to establish not only the relationship of American Home as insurer and
Caltex, as the assured shipper of the lost cargo of industrial fuel oil, but also the
amount paid to settle the insurance claim. The right of subrogation accrues simply
upon payment by the insurance company of the insurance claim. (Delsan Transport
Lines, Inc. vs. Court of Appeals, et al., G.R. No. 127897, November 15, 2001)

The insurer, upon happening of the risk "insured" against and after payment to the
insured, is subrogated to the rights and cause of action of the latter. As such, the
insurer has the right to seek reimbursement for all the expenses paid. However, in a
contract of carriage involving the shipment of knock-down auto parts of Nissan motor
vehicles which were allegedly lost and destroyed, the insurer was not properly
subrogated because of the non-presentation of any marine insurance policy. The
submission of a marine risk note instead of the insurance policy doesn't satisfy the
requirement for subrogation. The marine risk note is not an insurance policy. It is only
an acknowledgment or declaration of the insurer confirming the specific shipment
covered by its marine open policy, the evaluation of the cargo and the chargeable
premium. (Eastern Shipping Lines, Inc. vs. Prudential Guarantee and Assurance, Inc.,
G.R. No. 174116, September 11, 2009)

V. Transportation Laws

I. Transportation Laws

A. Common Carriers

There is no doubt that FPIC is a common carrier. It is engaged in the business of
transporting or carrying goods, i.e. petroleum products, for hire as a public
employment. It undertakes to carry for all persons indifferently, that is, to all persons
who choose to employ its services, and transports the goods by land and for
compensation. The fact that FPIC has a limited clientele does not exclude it from the
definition of a common carrier. (First Philippine Industrial Corporation vs. Court of
Appeals, G.R. No. 125948, 29 December 1989)

Article 1732 makes no distinction between one whose principal business activity is the
carrying of persons or goods or both, and one who does such carrying only as
an ancillary activity (in local Idiom as "a sideline"). It also carefully avoids making any
distinction between a person or enterprise offering transportation service on a regular or
scheduled basis and one offering such service on an occasional, episodic or unscheduled
basis. Neither does it distinguish between a carrier offering its services to the "general
public," i.e., the general community or population, and one who offers services or solicits
business only from a narrow segment of the general population. (Pedro De Guzman vs.
Court of Appeals, G. R. No. L-47822, 22 December 1988).

Article 1732 does not distinguish between one whose principal business activity is the
carrying of goods and one who does such carrying only as an ancillary activity. The
contention of Sanchez Brokerage that it is not a common carrier but a customs broker
whose principal function is to prepare the correct customs declaration and proper
shipping documents as required by law is bereft of merit. It suffices that Sanchez
Brokerage undertakes to deliver the goods for pecuniary consideration. (A.F. Sanchez
Brokerage Inc. vs. The Hon. Court of Appeals, G.R. No. 147079, 21 December 2004)

There is no dispute that Cebu Salvage was a common carrier. At the time of the loss of
the cargo, it was engaged in the business of carrying and transporting goods by water,
for compensation, and offered its services to the public. Cebu Salvage was the one which
contracted with MCCII for the transport of the cargo. It had control over what vessel it
would use. All throughout its dealings with MCCII, it represented itself as a common
carrier. The fact that it did not own the vessel it decided to use to consummate the
contract of carriage did not negate its character and duties as a common carrier. The
MCCII (respondents subrogor) could not be reasonably expected to inquire about the
ownership of the vessels which petitioner carrier offered to utilize. As a practical matter,
it is very difficult and often impossible for the general public to enforce its rights of
action under a contract of carriage if it should be required to know who the actual owner
of the vessel is. In fact, in this case, the voyage charter itself denominated Cebu Salvage
as the "owner/operator" of the vessel. (Cebu Salvage Corporation vs. Philippine Home
Assurance Corporation, G.R. No. 150403, January 25, 2007)

Much of the distinction between a common or public carrier and a private or special
carrier lies in the character of the business, such that if the undertaking is an isolated
transaction, not a part of the business or occupation, and the carrier does not hold itself
out to carry the goods for the general public or to a limited clientele, although involving
the carriage of goods for a fee, the person or corporation providing such service could
very well be just a private carrier. (Philippine American General Insurance Company vs.
Pks Shipping Company, G.R. No. 149038, 9 April 2003)

In a contract of private carriage, the parties may validly stipulate that responsibility for
the cargo rests solely on the charterer, exempting the shipowner from liability for loss of
or damage to the cargo caused even by the negligence of the ship captain. Pursuant to
Article 1306 of the Civil Code, such stipulation is valid because it is freely entered into by
the parties and the same is not contrary to law, morals, good customs, public order, or
public policy. Unlike in a contract involving a common carrier, private carriage does not
involve the general public. Hence, the stringent provisions of the Civil Code on common
carriers protecting the general public cannot justifiably be applied to a ship transporting
commercial goods as a private carrier. (Valenzuela Hardwood And Industrial Supply, Inc.
vs. Court of Appeals, G.R. No. 102316, 30 June 1997)

A freight forwarders liability is limited to damages arising from its own negligence,
including negligence in choosing the carrier; however, where the forwarder contracts to
deliver goods to their destination instead of merely arranging for their transportation, it
becomes liable as a common carrier for loss or damage to goods. A freight forwarder
assumes the responsibility of a carrier, which actually executes the transport, even though
the forwarder does not carry the merchandise itself.Unsworth Transport International (
Phils. vs. Court of Appeals ,G.R. No. 166250, 26 July 2010

A customs broker whose services were engaged for the release and withdrawal of the
cargoes from the pier and their subsequent delivery to the consignees warehouse and the
owner of the delivery truck whom the customs broker contracted to transport the cargoes
to the warehouse are both common carriers. The latter is considered a common carrier in
the absence of indication that it solely and exclusively rendered services to the customs
broker. Thus, when the truck failed to deliver one of the cargoes, both the broker and
owner of the truck are liable. Being both common carriers, they are mandated from the
nature of their business and for reasons of public policy, to observe the extraordinary
diligence in the vigilance over the goods transported by them according to all the
circumstances of such case. Thus, in case of loss of the goods, the common carrier is
presumed to have been at fault or to have acted negligently. Loadmasters Customs
Services, Inc. vs. Glodel Brokerage Corporation, GR No. 179446, January 10, 2011

Persons engaged in the business of transporting students from their respective residences
to their school and back are considered common carrier. Despite catering to a limited
clientele, they operated as a common carrier because they held themselves out as a ready
transportation indiscriminately to the students of a particular school living within or near
where they operated the service and for a fee. Spouses Perena vs Spouses Nicolas, GR No.
157917, August 29, 2012


1. Diligence Required of Common Carriers

Under Article 1733 of the Civil Code, common carriers from the nature of their business
and for reasons of public policy are bound to observe extraordinary diligence in the
vigilance over the goods and for the safety of passengers transported by them according
to all circumstances of each case. Thus, under Article 1735 of the same Code, in all cases
other than those mentioned in Article 1734 thereof, the common carrier shall be
presumed to have been at fault or to have acted negligently, unless it proves that it has
observed the extraordinary diligence required by law. More importantly, common
carriers cannot limit their liability for injury or loss of goods where such injury or loss was
caused by its own negligence. Otherwise stated, the law on averages under the Code of
Commerce cannot be applied in determining liability where there is negligence.
(American Home Assurance Company vs. The Court of Appeals, G.R. No. 94149, 5 May
1992)

Article 1736 of the Civil Code imposes upon common carriers the duty to observe
extraordinary diligence from the moment the goods are unconditionally placed in their
possession "until the same are delivered, actually or constructively, by the carrier to the
consignee or to the person who has a right to receive them. However, in the bills of
lading issued for the cargoes in question, the parties agreed to limit the responsibility of
the carrier for the loss or damage by inserting a stipulation stating that the carrier shall
not be responsible for loss or damage to shipments billed 'owner's risk' unless such loss or
damage is due to negligence of carrier. Since such stipulation is valid, and there is
nothing therein that is contrary to law, morals or public policy, the absence of
negligence on the part of its employees exempt the carrier from liability for loss of goods
due to fire. (Amparo C. Servando, Clara Uy Bico vs. Philippine Steam Navigation Co., G.R.
No. L-36481-2, 23 October 1982)

A common carrier is presumed at fault in the absence of a satisfactory explanation on
how the airplane crash occured. (Vda. De Abeto vs. Philippine Air Lines, Inc. 115 SCRA
489, 1982)

When a bus hit a tree and house due to the fast and reckless driving of the bus driver
resulting in injury to one of its passengers, the bus owner is liable and such liability does
not cease even upon proof that he exercised all the diligence of a good father of family in
the selection and supervision of its employees. R Transport Corporation vs. Pante, GR No.
162104, September 15, 2009

Though it is true that common carriers are presumed to have been at fault or to have acted
negligently if the goods transported by them are lost, destroyed, or deteriorated, and that
the common carrier must prove that it exercised extraordinary diligence in order to
overcome the presumption, the plaintiff must still, before the burden is shifted to the
defendant, prove that the subject shipment suffered actual shortage. This can only be
done if the weight of the shipment at the port of origin and its subsequent weight at the
port of arrival have been proven by a preponderance of evidence, and it can be seen that
the former weight is considerably greater than the latter weight, taking into consideration
the exceptions provided in Article 1734 of the Civil Code. Asian Terminals, Inc vs. Simon
Enterprises, Inc. GR No. 177116, February 27, 2013



2. Liabilities of Common Carriers

If a railroad company maintains a signaling device at a crossing to give warning of the
approach of a train, the failure of the device to operate is generally held to be evidence
of negligence, which may be considered with all the circumstances of the case in
determining whether the railroad company was negligent as a matter of fact. (Victorino
Cusi and Pilar Pobre vs. Philippine National Railways, G.R. No. L-29889, 31 May 1979).

For a vessel to be seaworthy, it must be adequately equipped for the voyage and manned
with a sufficient number of competent officers and crew. The failure of a common
carrier to maintain in seaworthy condition its vessel involved in a contract of carriage is a
clear breach of its duty prescribed in Article 1755 of the Civil Code. (Loadstar Shipping
Co., Inc. vs. Court of Appeals, G.R. No. 131621, September 28, 1999)

The foundation of LRTAs liability is the contract of carriage and its obligation to
indemnify the victim arises from the breach of that contract by reason of its failure to
exercise the high diligence required of the common carrier. In the discharge of its
commitment to ensure the safety of passengers, a carrier may choose to hire its own
employees or avail itself of the services of an outsider or an independent firm to
undertake the task. In either case, the common carrier is not relieved of its
responsibilities under the contract of carriage. (Light Rail Transit Authority & Rodolfo
Roman vs. Marjorie Navidad, G.R. No. 145804, 6 February 2003)

The "kabit system" is an arrangement whereby a person who has been granted a
certificate of convenience allows another person who owns motors vehicles to operate
under such franchise for a fee. A certificate of public convenience is a special privilege
conferred by the government. Although not outrightly penalized as a criminal offense,
the "kabit system" is invariably recognized as being contrary to public policy and,
therefore, void and inexistent under Article 1409 of the Civil Code. (Lita Enterprises, Inc.
vs. Intermediate Appellate Court, G.R. No. L-64693, 27 April 1984)

It is settled in our jurisprudence that only the registered owner of a public service vehicle
is responsible for damages that may arise from consequences incident to its operation, or
maybe caused to any of the passengers therein. (Victor Juaniza vs. Eugenio Jose, G.R.
No.L-50127-28, 30 March 1979)

In dealing with vehicles registered under the Public Service Law, the public has the right
to assume that the registered owner is the actual or lawful owner thereof. It would be
very difficult and often impossible as a practical matter, for members of the general
public to enforce the rights of action that they may have for injuries inflicted by the
vehicles being negligently operated if they should be required to prove who the actual
owner is. (Ma. Luisa Benedicto vs. Hon. Intermediate Appellate Court, G.R. No. 70876,
19 July 1990)

While the registered owner or operator of a passenger vehicle is jointly and severally
liable with the driver of the said vehicle for damages incurred by passengers or third
persons as a consequence of injuries or death sustained in the operation of the said
vehicle, the registered owner or operator has the right to be indemnified by the real or
actual owner of the amount that he may be required to pay as damage for the injury
caused. The right to be indemnified being recognized, recovery by the registered owner
or operator may be made in any form-either by a cross-claim, third-party complaint, or
an independent action. (Angel Jereos vs. Hon. Court of Appeals, G.R. No. L-48747, 30
September 1982)

In an action based on quasi delict, the registered owner of a motor vehicle is solidarily
liable for the injuries and damages caused by the negligence of the driver, in spite of the
fact that the vehicle may have already been the subject of an unregistered Deed of Sale
in favor of another person. Unless registered with the Land Transportation Office, the
sale -- while valid and binding between the parties -- does not affect third parties,
especially the victims of accidents involving the said transport equipment. (Equitable
Leasing Corporation vs. Lucita Suyom et al., G.R. No. 143360, 5 September 2002)

The principle of last clear chance only applies in a suit between the owners and drivers of
two colliding vehicles. It does not arise where a passenger demands responsibility from
the carrier to enforce its contractual obligations, for it would be inequitable to exempt
the negligent driver and its owner on the ground that the other driver was likewise guilty
of negligence. (William Tiu, doing business under the name and style of D Rough
Riders, vs. Pedro A. Arriesgado, G.R. No. 138060, 1 September 2004)

When an airline issues a ticket to a passenger confirmed on a particular flight, on a
certain date, a contract of carriage arises, and the passenger has every right to expect
that he would fly on that flight and on that date. If he does not, then the carrier opens
itself to a suit for breach of contract of carriage. Where an airline had deliberately
overbooked, it took the risk of having to deprive some passengers of their seats in case
all of them would show up for the check in. For the indignity and inconvenience of being
refused a confirmed seat on the last minute, said passenger is entitled to an award of
moral damages. (Spouses Cesar & Suthira Zalamea vs. Court of Appeals, G.R. No. 104235
November 18, 1993)

In an action for breach of contract of carriage, the aggrieved party does not have to
prove that the common carrier was at fault or was negligent. All that is necessary to
prove is the existence of the contract and the fact of its non-performance by the carrier.
(Singapore Airlines Limited vs. Fernandez, G.R. No. 142305, December 10, 2003)

It is PALs duty to provide assistance to Spouses Miranda and, for that matter, any other
passenger similarly inconvenienced due to delay in the completion of the transport and
the receipt of their baggage. Therefore, its unilateral and voluntary act of providing cash
assistance is deemed part of its obligation as an air carrier, and is hardly anything to rave
about. (Philippine Airlines, Inc., vs. Court of Appeals, G.R. No. 119641, May 17, 1996)

Assuming arguendo that the airline passengers have no vested right to these amenities in
case a flight is cancelled due to force majeure, what makes PAL liable for damages in this
particular case and under the facts obtaining herein is its blatant refusal to accord the
so-called amenities equally to all its stranded passengers who were bound for Surigao
City. No compelling or justifying reason was advanced for such discriminatory and
prejudicial conduct. The refund of hotel expenses was surreptitiously and
discriminatorily made by PAL since the same was not made known to everyone, except
through word of mouth to a handful of passengers. This is a sad commentary on the
quality of service and professionalism of an airline company, which is the countrys flag
carrier at that. The discriminatory act of PAL against Pantejo ineludibly makes the former
liable for moral damages under Article 21 in relation to Article 2219 (10) of the Civil
Code. (Philippine Airlines, Inc. vs. Court of Appeals, G.R. No. 120262, July 17, 1997)

Cathays contention that there was no contract of carriage that was breached because
Singsons ticket was open-dated is untenable. To begin with, the round trip ticket issued
by the carrier to the passenger was in itself a complete written contract by and between
the carrier and the passenger. It had all the elements of a complete written contract, to
wit: (a) the consent of the contracting parties manifested by the fact that the passenger
agreed to be transported by the carrier to and from Los Angeles via San Francisco and
Hongkong back to the Philippines, and the carriers acceptance to bring him to his
destination and then back home; (b) cause or consideration, which was the fare paid by
the passenger as stated in his ticket; and, (c) object, which was the transportation of the
passenger from the place of departure to the place of destination and back, which are
also stated in his ticket. Clearly therefore Singson was not a mere "chance passenger
with no superior right to be boarded on a specific flight," as erroneously claimed by
Cathay and sustained by the Court of Appeals. (Carlos Singson vs. Court of Appeals, G.R.
No. 119995, November 18, 1997)

Spouses Vazquez had every right to decline the upgrade and insist on the Business Class
accommodation they had booked for and which was designated in their boarding
passes. They clearly waived their priority or preference when they asked that other
passengers be given the upgrade. It should not have been imposed on them over their
vehement objection. By insisting on the upgrade, Cathay breached its contract of
carriage with Spouses Vazquez. (Cathay Pacific Airways, Ltd., vs. Spouses Daniel Vazquez
And Maria Luisa Madrigal Vazquez, G.R. No. 150843, March 14, 2003)

When an airline issues a ticket to a passenger, confirmed for a particular flight on a
certain date, a contract of carriage arises. The passenger has every right to expect that
he be transported on that flight and on that date, and it becomes the airlines obligation
to carry him and his luggage safely to the agreed destination without delay. If the
passenger is not so transported or if in the process of transporting, he dies or is injured,
the carrier may be held liable for a breach of contract of carriage. (Philippine Airlines
Inc. vs. Court of Appeals, G.R. No. 123238, September 22, 2008)

It was established that the primary cause of the death of the passenger of the jeepney was
the negligence of the driver of the truck which collided with the passenger jeepney. Thus,
the truck owner is liable for this failure to rebut the presumption of negligence in hiring
and supervision of his employee. Whenever an employees negligence causes damage or
injury to another, there instantly arises a presumption juris tantum that the employer failed
to exercise diligentissimi patris families in the selection or supervision of his employee.
Thus, in the selection of prospective employees, employers are required to examine them
as to their qualification, experience and service record. With respect to the supervision of
employees, employers must formulate standard operating procedures, monitor their
implementation, and impose disciplinary measures for breaches thereof. These facts must
be shown by concrete proof. The Heirs of the late Ruben Reinoso, Sr. vs. Court of Appeals,
GR No. 116121, July 18, 2011

In a contract of carriage, it is presumed that the common carrier is at fault or is negligent
when a passenger dies or is injured. In fact, there is even no need for the court to make an
express finding of fault or negligence on the part of the common carrier. This statutory
presumption may only be overcome by evidence that the carrier exercised extraordinary
diligence. Unfortunately, the common carrier miserably failed to overcome this
presumption as the accident which led to the passengers death was due to the reckless
driving and gross negligence of its driver. Heirs of Josemaria Ochoa vs. G&S Transport
Corporation, March 19, as affirmed in the July 16, 2012 decision


B. Vigilance over Goods

1. Exempting Causes

a. Requirement of Absence of Negligence

It is a well known physical fact that cars may skid on greasy or slippery roads, as in the
instant case, without fault on account of the manner of handling the car. Skidding means
partial or complete loss of control of the car under circumstances not necessarily
implying negligence. It may occur without fault. (Saturnino Bayasen vs. Court of Appeals,
G.R. No.L-25785, 26 February 1981)

A fortuitous event is possessed of the following characteristics: (a) the cause of the
unforeseen and unexpected occurrence, or the failure of the debtor to comply with his
obligations, must be independent of human will; (b) it must be impossible to foresee the
event which constitutes the caso fortuito, or if it can be foreseen, it must be impossible
to avoid; (c) the occurrence must be such as to render it impossible for the debtor to
fulfill his obligation in a normal manner; and (d) the obligor must be free from any
participation in the aggravation of the injury resulting to the creditor.

Under the
circumstances of this case, the explosion of the new tire may not be considered a
fortuitous event. There are human factors involved in the situation. The fact that the tire
was new did not imply that it was entirely free from manufacturing defects or that it was
properly mounted on the vehicle. Neither may the fact that the tire bought and used in
the vehicle is of a brand name noted for quality, resulting in the conclusion that it could
not explode within five days use. (Alberta Yobido vs. Court of Appeals, G.R. No. 113003,
17 October 1997)

In order that a common carrier may be absolved from liability in case of force majeure, it
is not enough that the accident was caused by force majeure. The common carrier must
still prove that it was not negligent in causing the injuries resulting from such accident.
Considering that the bus driver did not immediately stop the bus at the height of the
commotion; the bus was speeding from a full stop; the victims fell from the bus door
when it was opened or gave way while the bus was still running; the conductor panicked
and blew his whistle after people had already fallen off the bus; and the bus was not
properly equipped with doors in accordance with law - it is clear that Bachelor and
Rivera have failed to overcome the presumption of fault and negligence found in the law
governing common carriers. (Bachelor Express, Incorporated vs. The Honorable Court of
Appeals (Sixth Division), G.R. No. 85691, 31 July 1990)

Mechanical defects in the carrier are not considered a caso fortuito that exempts the
carrier from responsibility. Even granting arguendo that the engine failure was a
fortuitous event, when the vessel finally left the port of Cebu, there was no longer any
force majeure that justified by-passing a port of call. The "interruption" was caused by
the captain upon instruction of management, hence, the owner of the vessel and the ship
agent shall be civilly liable for the acts of the captain. (Sweet Lines, Inc. vs. The
Honorable Court of Appeals, Micaela b. Quintos, et al., G.R. No. L-43640, 28 April 1983)

A mishap caused by defective brakes can not be consideration as fortuitous in character.
Certainly, the defects were curable and the accident preventable. (Vicente Vergara vs.
The Court of Appeals, G.R. No. 77679, 30 September 1987)

The intervention of the municipal officials was not In any case, of a character that would
render impossible the fulfillment by the carrier of its obligation. Ganzon was not duty
bound to obey the illegal order to dump into the sea the scrap iron. Moreover, there is
absence of sufficient proof that the issuance of the same order was attended with such
force or intimidation as to completely overpower the will of the petitioner's employees.
The mere difficulty in the fulfillment of the obligation is not considered force majeure.
(Mauro Ganzon vs. Court of Appeals, G.R. no. L-48757, 30 May 1988)

Despite the report of Philippine Constabulary agent Generalao that the Maranaos were
going to attack its buses, Fortune took no steps to safeguard the lives and properties of
its passengers. The seizure of the bus of the Fortune was foreseeable and, therefore, was
not a fortuitous event which would exempt petitioner from liability. (Fortune Express,
Inc. vs. Court of Appeals, G.R. No. 119756, 18 March 1999)

Indeed, the typhoon was an inevitable occurrence, yet, having been kept posted on the
course of the typhoon by weather bulletins at intervals of six hours, the captain and crew
were well aware of the risk they were taking as they hopped from island to island. In so
doing, they failed to observe that extraordinary diligence required of them explicitly by
law. (Pedro Vasquez, et al., vs. The Court of Appeals, G.R. No. L-42926, 13 September
1985)

Loadstar was at fault or negligent in not maintaining a seaworthy vessel and in having
allowed its vessel to sail despite knowledge of an approaching typhoon. In any event, it
did not sink because of any storm that may be deemed as force majeure, inasmuch as the
wind condition in the area where it sank was determined to be moderate. Since it was
remiss in the performance of its duties, Loadstar cannot hide behind the limited
liability doctrine to escape responsibility for the loss of the vessel and its cargo.
(Loadstar Shipping Co., Inc. vs. Court of Appeals, G.R. No. 131621, 28 September 1999)

Negligence is conduct that creates undue risk of harm to another. It is the failure to
observe that degree of care, precaution and vigilance that the circumstances justly
demand, whereby that other person suffers injury. Petitioners vessel was carrying
chemical cargoalkyl benzene and methyl methacrylate monomer. While knowing that
their vessel was carrying dangerous inflammable chemicals, its officers and crew failed to
take all the necessary precautions to prevent an accident. Petitioner was, therefore,
negligent. (Smith Bell Dodwell Shipping Agency Corporation vs. Catalino Borja, G.R. No.
143008. June 10, 2002)

b. Absence of Delay


The oft-repeated rule regarding a carrier's liability for delay is that in the absence of a
special contract, a carrier is not an insurer against delay in transportation of goods.
When a common carrier undertakes to convey goods, the law implies a contract that
they shall be delivered at destination within a reasonable time, in the absence, of any
agreement as to the time of delivery. But where a carrier has made an express contract to
transport and deliver property within a specified time, it is bound to fulfill its contract
and is liable for any delay, no matter from what cause it may have arisen. This result
logically follows from the well-settled rule that where the law creates a duty or charge,
and the party is disabled from performing it without any default in himself, and has no
remedy over, then the law will excuse him, but where the party by his own contract
creates a duty or charge upon himself, he is bound to make it good notwithstanding any
accident or delay by inevitable necessity because he might have provided against it by
contract. Whether or not there has been such an undertaking on the part of the carrier
to be determined from the circumstances surrounding the case and by application of the
ordinary rules for the interpretation of contracts. (Aniceto Saludo, Jr. vs. Hon. Court of
Appeals, G.R. No. 95536, March 23, 1992).

Petitioner's late delivery of the baggage for eleven (11) days was not motivated by ill will
or bad faith. In fact, it immediately coordinated with its Central Baggage Services to
trace private respondent's suitcase and succeeded in finding it. Under the circumstances,
considering that petitioner's actuation was not attendant with bad faith, the award of
moral damages is unfair. (Philippine Air Lines vs. Florante Miano, G.R. No. 106664,
March 8, 1995).

c. Due Diligence to Prevent or Lessen the Loss

The rule is that if the improper packing or, in this case, the defect/s in the container,
is/are known to the carrier or his employees or apparent upon ordinary observation, but
he nevertheless accepts the same without protest or exception notwithstanding such
condition, he is not relieved of liability for damage resulting therefrom. In this case,
Calvo accepted the cargo without exception despite the apparent defects in some of the
container vans. Hence, for failure of Calvo to prove that she exercised extraordinary
diligence in the carriage of goods in this case or that she is exempt from liability, the
presumption of negligence as provided under Art. 1735 holds. (Virgines Calvo doing
business under the name and style Transorient Container Terminal Services, Inc. vs. Ucpb
General Insurance Co., Inc., G.R. No. 148496, 19 March 2002)

While it may be true that the tire that blew-up was still good because the grooves of the
tire were still visible, this fact alone does not make the explosion of the tire a fortuitous
event. No evidence was presented to show that the accident was due to adverse road
conditions or that precautions were taken by the Camoro to compensate for any
conditions liable to cause accidents. The sudden blowing-up, therefore, could have been
caused by too much air pressure injected into the tire coupled by the fact that the
jeepney was overloaded and speeding at the time of the accident. (Roberto Juntilla vs.
Clemente Fontanar, G.R. No. L-45637, 31 May 1985)

Immediately before the collision, Llamoso was actually violating the following traffic
rules and regulations. Thus, a legal presumption arose that Llamoso was negligent, a
presumption KBL was unable to overthrow. (Kapalaran Bus Line vs. Angel Coronado, G.R.
No. 85331, 25 August 1989)

Even if the weather encountered by the ship is to be deemed a natural disaster under
Article 1739 of the Civil Code, Central Shipping failed to show that such natural disaster
or calamity was the proximate and only cause of the loss. Human agency must be
entirely excluded from the cause of injury or loss. In other words, the damaging effects
blamed on the event or phenomenon must not have been caused, contributed to, or
worsened by the presence of human participation. Hence, if a common carrier fails to
exercise due diligence - or that ordinary care that the circumstances of the particular
case demand, to prevent or minimize the loss before, during and after the occurrence of
the natural disaster, the carrier shall be deemed to have been negligent. (Central
Shipping Company, Inc., vs. Insurance Company of North America, G.R. No. 150751,
September 20, 2004)

2. Contributory Negligence

Where he contributes to the principal occurrence, as one of its determining factors, he
can not recover. Where, in conjunction with the occurrence, he contributes only to his
own injury, he may recover the amount that the defendant responsible for the event
should pay for such injury, less a sum deemed a suitable equivalent for his own
imprudence. (M. H. Rakes vs. The Atlantic Gulf and Pacific Company, G.R. No. 1719,
January 23, 1907).

3. Duration of Liability

a. Delivery of Goods to Common Carrier

By the said act of delivery, the scraps were unconditionally placed in the possession and
control of the common carrier, and upon their receipt by the carrier for transportation,
the contract of carriage was deemed perfected. Consequently, the petitioner-carrier's
extraordinary responsibility for the loss, destruction or deterioration of the goods
commenced. Pursuant to Art. 1736, such extraordinary responsibility would cease only
upon the delivery, actual or constructive, by the carrier to the consignee, or to the
person who has a right to receive them. The fact that part of the shipment had not been
loaded on board the lighter did not impair the said contract of transportation as the
goods remained in the custody and control of the carrier, albeit still unloaded. (Mauro
Ganzon vs. Court of Appeals, G.R. No. L-48757, May 30, 1988)

b. Actual or Constructive Delivery

Delivery to the customs authorities is not the delivery contemplated by Article 1736,
supra, in connection with second paragraph of Article 1498, supra, because, in such a
case, the goods are then still in the hands of the Government and their owner could not
exercise dominion whatever over them until the duties are paid. (Lu Do & Lu YM
Corporation v. I.V. Binamira, G.R. No. L-9840, April 22, 1957)

The receipt of goods by the carrier has been said to lie at the foundation of the contract
to carry and deliver, and if actually no goods are received there can be no such contract.
The liability and responsibility of the carrier under a contract for the carriage of goods
commence on their actual delivery to, or receipt by, the carrier or an authorized agent
and delivery to a lighter in charge of a vessel for shipment on the vessel, where it is the
custom to deliver in that way, is a good delivery and binds the vessel receiving the
freight, the liability commencing at the time of delivery to the lighter and, similarly,
where there is a contract to carry goods from one port to another, and they cannot be
loaded directly on the vessel and lighters are sent by the vessel to bring the goods to it,
the lighters are for the time its substitutes, so that the bill of landing is applicable to the
goods as soon as they are placed on the lighters. (Compaia Maritima vs. Insurance
Company of North America, G.R. No. L-18965, October 30, 1964)

The liability of a common carrier does not cease by mere transfer of custody of the cargo
to the arrastre operator. Like the duty of seaworthiness, the duty of care of the cargo is
non-delegable and the carrier is accordingly responsible for the acts of the master, the
crew, the stevedore and his other agents. The fact that a consignee is required to furnish
persons to assist in unloading a shipment may not relieve the carrier of its duty as to such
unloading. It is settled in maritime law jurisprudence that cargoes while being unloaded
generally remain under the custody of the carrier. Since the damage to the cargo was
incurred during the discharge of the shipment and while under the supervision of the
carrier, the latter is liable for the damage caused to the cargo.
The arrastre operator is likewise liable. The functions of an arrastre operator involve the
handling of cargo deposited on the wharf or between the establishment of the consignee
or shipper and the ships tackle. Being the custodian of the goods discharged from a vessel,
an arrastre operators duty is to take good care of the goods and to turn them over to the
party entitled to their possession. While it is true that an arrastre operator and a carrier
may not be held solidarily liable at all times, the facts of these cases show that apart from
the stevedores of the arrastre operator being directly in charge of the physical unloading
of the cargo, its foreman picked the cable sling that was used to hoist the packages for
transfer to the dock. Moreover, the fact that the packages were unloaded with the same
sling unharmed is telling of the inadequate care with which the stevedore handled and
discharged the cargo.Westwind Shipping Corporation vs. UCPB General Insurance Co., GR
no. 2002289, November 25, 2013

c. Temporary Unloading or Storage

4. Stipulation for Limitation of Liability

a. Void Stipulations

Condition No. 14 printed at the back of the passage tickets should be held as void and
unenforceable for first, it is not just and fair to bind passengers to the terms of the
conditions printed at the back of the passage tickets, and second, Condition No. 14
subverts the public policy on transfer of venue of proceedings of this nature, since the
same will prejudice rights and interests of innumerable passengers in different parts of
the country who, under Condition No. 14, will have to file suits against Sweet Lines only
in the City of Cebu. (Sweet Lines, Inc. vs. Hon. Bernardo Teves, Presiding Judge, CFI of
Misamis Oriental, Branch VII, G.R. No. L-37750, 19 May 1978)

b. Limitation of Liability to Fixed Amount

c. Limitation of Liability in Absence of Declaration of Greater Value

The stipulation in the bill of lading limiting the common carrier's liability to the value of
the goods appearing in the bill, unless the shipper or owner declares a greater value, is
valid and binding. This limitation of the carrier's liability is sanctioned by the freedom of
the contracting parties to establish such stipulations, clauses, terms, or conditions as they
may deem convenient, provided they are not contrary to law, morals, good customs and
public policy. A stipulation fixing or limiting the sum that may be recovered from the
carrier on the loss or deterioration of the goods is valid, provided it is (a) reasonable and
just under the circumstances, and (b) has been fairly and freely agreed upon. In the case
at bar, the shipper and consignee are, therefore, bound by such stipulations. (St. Paul Fire
& Marine Insurance Co., vs. Macondray & Co, Inc., et al., G.R. No. L-27796, 25 March
1976)

A stipulation in a contract of carriage that the carrier will not be liable beyond a
specified amount unless the shipper declares the goods to have a greater value is
generally deemed to be valid and will operate to limit the carrier's liability, even if the
loss or damage results from the carrier's negligence. Pursuant to such provision, where
the shipper is silent as to the value of his goods, the carrier's liability for loss or damage
thereto is limited to the amount specified in the contract of carriage and where the
shipper states the value of his goods, the carrier's liability for loss or damage thereto is
limited to that amount. Under a stipulation such as this, it is the duty of the shipper to
disclose, rather than the carrier's to demand the true value of the goods and silence on
the part of the shipper will be sufficient to limit recovery in case of loss to the amount
stated in the contract of carriage. (Eastern and Australian Steamship Co., Ltd. vs. Great
American Insurance Co., G.R. No. L-37604 October 23, 1981)

5. Liability for Baggage of Passengers

a. Checked-In Baggage

Where airline passengers luggage was left at airlines fault in Manila and passenger was
not adequately or properly given assistance in Hawaii to locate his luggage an award of
moral damages is proper (Pan American World Airways, Inc. vs. Intermediate Appellate
Court, G.R. No. 68988. June 21, 1990)

b. Baggage in Possession of Passengers

C. Safety of Passengers

A common carrier is bound to carry its passengers safely as far as human care and
foresight can provide, using the utmost diligence of very cautious persons, with due
regard to all the circumstances. In a contract of carriage, it is presumed that the common
carrier was at fault or was negligent when a passenger dies or is injured. Unless the
presumption is rebutted, the court need not even make an express finding of fault or
negligence on the part of the common carrier. This statutory presumption may only be
overcome by evidence that the carrier exercised extraordinary diligence. (Victory Liner,
Inc. vs. Rosalito Gammad, G.R. No. 159636, November 25, 2004)

The petitioner has the obligation to transport its passengers to their destinations and to
observe extraordinary diligence in doing so. Death or any injury suffered by any of its
passengers gives rise to the presumption that it was negligent in the performance of its
obligation under the contract of carriage. (Philippine National Railways vs. The
Honorable Court of Appeals, G.R. No. L-55347. October 4, 1985)

But while petitioner failed to exercise extraordinary diligence as required by law, it
appears that the deceased was chargeable with contributory negligence. Since he opted
to sit on the open platform between the coaches of the train, he should have held tightly
and tenaciously on the upright metal bar found at the side of said platform to avoid
falling off from the speeding train. Such contributory negligence, while not exempting
the PNR from liability, nevertheless justified the deletion of the amount adjudicated as
moral damages. (Philippine National Railways vs. The Honorable Court of Appeals, G.R.
No. L-55347. October 4, 1985)

It is a matter of common knowledge and experience about common carriers like trains
and buses that before reaching a station or flagstop they slow down and the conductor
announces the name of the place. It is also a matter of common experience that as the
train or bus slackens its speed, some passengers usually stand and proceed to the nearest
exit, ready to disembark as the train or bus comes to a full stop. This is especially true of a
train because passengers feel that if the train resumes its run before they are able to
disembark, there is no way to stop it as a bus may be stopped. It was negligence on the
conductors part to announce the next flag stop when said stop was still a full three
minutes ahead. That the announcement was premature and erroneous is shown by the
fact that immediately after the train slowed down, it unexpectedly accelerated to full
speed. The negligence of petitioner-appellant in prematurely and erroneously
announcing the next flag stop was the proximate cause of the deaths of Martina Bool
and Emelita Gesmundo. Any negligence of the victims was at most contributory and does
not exculpate the accused from criminal liability. (Clemente Brias vs. The People of the
Philippines, G.R. No. L-30309. November 25, 1983)

1. Void Stipulations

2. Duration of Liability

a. Waiting for Carrier or Boarding of Carrier

A public utility bus, once it stops, is in effect making a continuous offer to bus riders.
Hence, it becomes the duty of the driver and the conductor, every time the bus stops, to
do no act that would have the effect of increasing the peril to a passenger while he was
attempting to board the same. The premature acceleration of the bus in this case was a
breach of such duty. Pedrito, by stepping and standing on the platform of the bus, is
already considered a passenger and is entitled all the rights and protection pertaining to
such a contractual relation. Hence, it has been held that the duty which the carrier
passengers owes to its patrons extends to persons boarding cars as well as to those
alighting therefrom. (Dangwa Transportation Co., Inc. vs. Court of Appeals, G.R. No.
95582, 7 October 1991)

b. Arrival at Destination

Anacleto Viana was still a passenger at the time of the incident. When the accident
occurred, the victim was in the act of unloading his cargoes, which he had every right to
do, from Aboitiz's vessel. A carrier is duty bound not only to bring its passengers safely to
their destination but also to afford them a reasonable time to claim their baggage.
(Aboitiz Shipping Corporation vs. Hon. Court of Appeals, Eleventh Division, G.R. No.
884458, 6 November 1989)

It has been recognized as a rule that the relation of carrier and passenger does not cease
at the moment the passenger alights from the carrier's vehicle at a place selected by the
carrier at the point of destination, but continues until the passenger has had a
reasonable time or a reasonable opportunity to leave the carrier's premises. And, what is
a reasonable time or a reasonable delay within this rule is to be determined from all the
circumstances. In the present case, the father returned to the bus to get one of his
baggages which was not unloaded when they alighted from the bus. Raquel, the child
that she was, must have followed the father. However, although the father was still on
the running board of the bus awaiting for the conductor to hand him the bag or bayong,
the bus started to run, so that even he (the father) had to jump down from the moving
vehicle. It was at this instance that the child, who must be near the bus, was run over and
killed. In the circumstances, it cannot be claimed that the carrier's agent had exercised
the "utmost diligence" of a "very cautions person" required by Article 1755 of the Civil
Code to be observed by a common carrier in the discharge of its obligation to transport
safely its passengers. (La Mallorca vs. Honorable Court of Appeals, G.R. No. L-20761, July
27, 1966)

3. Liability for Acts of Others

a. Employees

The misconduct on the part of the carriers employees toward a passenger gives the
latter an action for damages against the carrier. (Sabena Belgian World Airlines vs.
Honorable Court of Appeals G.R. No. 82068. March 31, 1989)

The negligence of the employee gives rise to the presumption of negligence on the part
of the employer. This is the presumed negligence in the selection and supervision of the
employee. The theory of presumed negligence, in contrast with the American doctrine
of respondent superior, where the negligence of the employee is conclusively presumed
to be the negligence of the employer, is clearly deducible from the last paragraph of
Article 2180 of the Civil Code which provides that the responsibility therein mentioned
shall cease if the employers prove that they observed all the diligence of a good father of
a family to prevent damages. (Leopoldo Poblete vs. Donato Fabros, G.R. No. L-29803, 14
September 1979)

It must be emphasized that a contract to transport passengers is quite different in kind
and degree from any other contractual relations, and this is because of the relation,
which an air carrier sustains with the public. Its business is mainly with the travelling
public. It invites people to avail [themselves] of the comforts and advantages it offers.
The contract of air carriage, therefore, generates a relation attended with a public duty.
Neglect or malfeasance of the carriers employees naturally could give ground for an
action for damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21,
2001)

The basis of the carrier's liability for assaults on passengers committed by its drivers rests
either on (1) the doctrine of respondeat superior or (2) the principle that it is the carrier's
implied duty to transport the passenger safely. Under the first, which is the minority
view, the carrier is liable only when the act of the employee is within the scope of his
authority and duty. It is not sufficient that the act be within the course of employment
only. Under the second view, upheld by the majority and also by the later cases, it is
enough that the assault happens within the course of the employee's duty. It is no
defense for the carrier that the act was done in excess of authority or in disobedience of
the carrier's orders.The carrier's liability here is absolute in the sense that it practically
secures the passengers from assaults committed by its own employees. As can be
gleaned from Art. 1759, the Civil Code of the Philippines evidently follows the rule based
on the second view. At least three very cogent reasons underlie this rule: (1) the special
undertaking of the carrier requires that it furnish its passenger that full measure of
protection afforded by the exercise of the high degree of care prescribed by the law,
inter alia from violence and insults at the hands of strangers and other passengers, but
above all, from the acts of the carrier's own servants charged with the passenger's safety;
(2) said liability of the carrier for the servant's violation of duty to passengers, is the result
of the formers confiding in the servant's hands the performance of his contract to safely
transport the passenger, delegating therewith the duty of protecting the passenger with
the utmost care prescribed by law; and (3) as between the carrier and the passenger, the
former must bear the risk of wrongful acts or negligence of the carrier's employees
against passengers, since it, and not the passengers, has power to select and remove
them. (Antonia Maranan vs. Pascual Perez, et al, G.R. No. L-22272, June 26, 1967)

b. Other Passengers and Strangers

A tort committed by a stranger which causes injury to a passenger does not accord the
latter a cause of action against the carrier. The negligence for which a common carrier is
held responsible is the negligent omission by the carrier's employees to prevent the tort
from being committed when the same could have been foreseen and prevented by them.
(Jose Pilapil vs. Hon. Court of Appeals, G.R. No. 52159, 22 December 1989)

4. Extent of Liability for Damages

It is well-settled that when death occurs as a result of the commission of a crime (reckless
imprudence), the following items of damages may be recovered: (1) an indemnity for the
death of the victim; (2) an indemnity for loss of earning capacity of the deceased; (3)
moral damages; (4) exemplary damages; (5) attorneys fees and expenses of litigation,
and (6) interest in proper cases. (Clemente Brias vs. The People of the Philippines, G.R.
No. L-30309. November 25, 1983)

Article 1764 in relation to Article 2206 of the Civil Code, holds the common carrier in
breach of its contract of carriage that results in the death of a passenger liable to pay the
following: (1) indemnity for death, (2) indemnity for loss of earning capacity, and (3)
moral damages. (Victory Liner, Inc. vs. Rosalito Gammad, G.R. No. 159636, November
25, 2004)

The Civil Code, in Article 1764 thereof, expressly makes Article 2206 applicable "to the
death of a passenger caused by the breach of contract by a common carrier."
Accordingly, a common carrier is liable for actual or compensatory damages under
Article 2206 in relation to Article 1764 of the Civil Code for deaths of its passengers
caused by the breach of the contract of transportation. (Sulpicio Lines, Inc. vs. The
Honorable Court of Appeals, G.R. No. 113578, 14 July 1995)

Under Article 1764 and Article 2206 (1) of the Civil Code, the award of damages for
death is computed on the basis of the life expectancy of the deceased, not of his
beneficiary. (Philippine Airlines, Inc. vs. Hon. Court of Appeals, G.R. No. 54470. May 8,
1990)

Article 2220 of the Civil Code says that moral damages may be awarded in breaches of
contract where the defendant acted fraudulently or in bad faith. So, proof of
infringement of an agreement by a party, standing alone, will not justify an award of
moral damages. There must, in addition, as the law points out, be competent evidence of
fraud of bad faith by that party. If the plaintiff, for instance, fails to take the witness stand
and testify as to his social humiliation, wounded feelings, anxiety, etc., moral damages
cannot be recovered. The rules applies, of course, to common carriers. (Pan American
World Airways, Inc. vs. Intermediate Appellate Court, G.R. No. 68988. June 21, 1990)

In awarding moral damages for breach of contract of carriage, the breach must be
wanton and deliberately injurious or the one responsible acted fraudulently or with
malice or bad faith. Where in breaching the contract of carriage the defendant airline is
not shown to have acted fraudulently or in bad faith, liability for damages is limited to
the natural and probable consequences of the breach of obligation which the parties had
foreseen or could have reasonably foreseen. In that case, such liability does not include
moral and exemplary damages. Moral damages are generally not recoverable in culpa
contractual except when bad faith had been proven. However, the same damages may
be recovered when breach of contract of carriage results in the death of a passenger.
The award of exemplary damages has likewise no factual basis. It is a requisite that the
act must be accompanied by bad faith or done in wanton, fraudulent or malevolent
mannercircumstances which are absent in this case. In addition, exemplary damages
cannot be awarded as the requisite element of compensatory damages was not present.
(Collin A. Morris vs. Court of Appeals, G.R. No. 127957. February 21, 2001)

The rule is that moral damages are recoverable in a damage suit predicated upon a
breach of contract of carriage only where (a) the mishap results in the death of a
passenger and (b) it is proved that the carrier was guilty of fraud and bad faith even if
death does not result. For having arrived at the airport after the closure of the flight
manifest, respondents employee could not be faulted for not entertaining petitioners
tickets and travel documents for processing, as the checking in of passengers for SAS
Flight SK 893 was finished. There was no fraud or bad faith as would justify the courts
award of moral damages. (Collin A. Morris vs. Court of Appeals, G.R. No. 127957.
February 21, 2001)

The law distinguishes a contractual breach effected in good faith from one attended by
bad faith. Where in breaching the contract, the defendant is not shown to have acted
fraudulently or in bad faith, liability for damages is limited to the natural and probable
consequences of the breach of the obligation and which the parties had foreseen or
could reasonably have foreseen; and in that case, such liability would not include liability
for moral and exemplary damages. Under Article 2232 of the Civil Code, in a contractual
or quasi-contractual relationship, exemplary damages may be awarded only if the
defendant had acted in a wanton, fraudulent, reckless, oppressive or malevolent
manner. (China Airlines Limited vs. Court of Appeals, 211 SCRA 897, 1992)

Exemplary damages may be allowed only in cases where the defendant acted in a
wanton, fraudulent, reckless, oppressive or malevolent manner, There being no evidence
of fraud, malice or bad faith on the part of petitioner, the grant of exemplary damages
should be discarded. (Philippine National Railways vs. The Honorable Court of Appeals,
G.R. No. L-55347. October 4, 1985)

D. Bill of Lading

A bill of lading is a written acknowledgment of the receipt of goods and an agreement to
transport and to deliver them at a specified place to a person named or on his or her
order. It operates both as a receipt and as a contract. It is a receipt for the goods shipped
and a contract to transport and deliver the same as therein stipulated. As a receipt, it
recites the date and place of shipment, describes the goods as to quantity, weight,
dimensions, identification marks, condition, quality, and value. As a contract, it names
the contracting parties, which include the consignee; fixes the route, destination, and
freight rate or charges; and stipulates the rights and obligations assumed by the parties.
(Unsworth Transport International Phils., Inc. vs. Court of Appeals, G.R. No. 166250, July
26, 2010)

The bill of lading defines the rights and liabilities of the parties in reference to the
contract of carriage. Stipulations therein are valid and binding in the absence of any
showing that the same are contrary to law, morals, customs, public order and public
policy. Where the terms of the contract are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of the stipulations shall control. In light of
the foregoing, there can be no question about the validity and enforceability of
Stipulation No. 7 in the bill of lading. The twenty-four hour requirement under the said
stipulation is, by agreement of the contracting parties, a sine qua non for the accrual of
the right of action to recover damages against the carrier. (Provident Insurance Corp.,
vs. Court of Appeals, G.R. No. 118030, January 15, 2004)

The holding in most jurisdictions has been that a shipper who receives a bill of lading
without objection after an opportunity to inspect it, and permits the carrier to act on it
by proceeding with the shipment is presumed to have accepted it as correctly stating the
contract and to have assented to its terms. In other words, the acceptance of the bill
without dissent raises the presumption that all the terms therein were brought to the
knowledge of the shipper and agreed to by him and, in the absence of fraud or mistake,
he is estopped from thereafter denying that he assented to such terms. This rule applies
with particular force where a shipper accepts a bill of lading with full knowledge of its
contents and acceptance under such circumstances makes it a binding
contract. (Magellan Manufacturing Marketing Corporation vs. Court of Appeals, G.R.
No. 95529, August 22, 1991)

1. Three-Fold Character

A bill of lading serves two functions: First, it is a receipt for the goods shipped; Second, it
is a contract by which three parties, namely, the shipper, the carrier, and the consignee
undertake specific responsibilities and assume stipulated obligations. A bill of lading
delivered and accepted constitutes the contract of carriage even though not signed,
because the acceptance of a paper containing the terms of a proposed contract
generally constitutes an acceptance of the contract and of all its terms and conditions of
which the acceptor has actual or constructive notice (Keng Hua Paper Products Co., Inc.
vs. Court of Appeals, 286 SCRA 257, 1998).

A bill of lading, aside from being a contract and a receipt, is also a symbol of the goods
covered by it. A bill of lading which has no notation of any defect or damage in the
goods is called a clean bill of lading. A clean bill of lading constitutes prima facie
evidence of the receipt by the carrier of the goods as therein described. (Lorenzo
Shipping Corp. vs. Chubb and Sons, Inc., G.R. No. 147724, June 8, 2004)

2. Delivery of Goods

a. Period of Delivery

b. Delivery Without Surrender of Bill of Lading

The surrender of the original bill of lading is not a condition precedent for a common
carrier to be discharged of its contractual obligation. If surrender of the original bill of
lading is not possible, acknowledgment of the delivery by signing the delivery receipt
suffices. This is what respondent did. (National Trucking and Forwarding Corporation vs.
Lorenzo Shipping Corporation, G.R. No. 153563, February 07, 2005)

c. Refusal of Consignee to Take Delivery

3. Period for Filing Claims

The twenty-four-hour period prescribed by Art. 366 of the Code of Commerce within
which claims must be presented does not begin to run until the consignee has received
such possession of the merchandise that he may exercise over it the ordinary control
pertinent to ownership. In other words, there must be delivery of the cargo by the carrier
to the consignee at the place of destination. (Lorenzo Shipping Corp. vs. Chubb and
Sons, Inc., G.R. No. 147724, June 8, 2004)

In order that the condition therein provided in Article 366 of the Code of Commerce
may be demanded there should be a consignment of goods, through a common carrier,
by a consignor in one place to a consignee in another place. And said article provides
that the claim for damages must be made "within twenty-four hours following the
receipt of the merchandise" by the consignee from the carrier. In other words, there
must be delivery of the merchandise by the carrier to the consignee at the place of
destination. In the instant case, the consignor is the branch office of Lee Teh & Co., Inc.,
at Catarman, Samar, which placed the cargo on board the ship Jupiter, and the
consignee, its main office at Manila. The cargo never reached Manila, its destination, nor
was it ever delivered to the consignee, the office of the shipper in Manila, because the
ship ran aground upon entering Laoang Bay, Samar on the same day of the shipment.
Such being the case, it follows that the aforesaid article 366 does not have application
because the cargo was never received by the consignee. (New Zealand Insurance Co.,
Ltd., vs. Adriano Choa Joy, Etc., G.R. No. L-7311, September 30, 1955)

Under the Code of Commerce, the notice of claim must be made within twenty four (24)
hours from receipt of the cargo if the damage is not apparent from the outside of the
package. For damages that are visible from the outside of the package, the claim must
be made immediately. Provisions specifying a time to give notice of damage to common
carriers are ordinarily to be given a reasonable and practical, rather than a strict
construction. Understandably, when the goods were delivered, the necessary clearance
had to be made before the package was opened. Upon opening and discovery of the
damaged condition of the goods, a report to this effect had to pass through the proper
channels before it could be finalized and endorsed by the institution to the claims
department of the shipping company. The call to Aboitiz was made two days from
delivery, a reasonable period considering that the goods could not have corroded
instantly overnight such that it could only have sustained the damage during
transit. Moreover, Aboitiz was able to immediately inspect the damage while the matter
was still fresh. In so doing, the main objective of the prescribed time period was
fulfilled. Thus, there was substantial compliance with the notice requirement in this
case. (Aboitiz Shipping Corporation vs. Insurance Company of North America, G.R. No.
168402, August 6, 2008)

4. Period for Filing Actions

In this jurisdiction, the filing of a claim with the carrier within the time limitation therefor
actually constitutes a condition precedent to the accrual of a right of action against a
carrier for loss of or damage to the goods. The shipper or consignee must allege and
prove the fulfillment of the condition. If it fails to do so, no right of action against the
carrier can accrue in favor of the former. The aforementioned requirement is a
reasonable condition precedent; it does not constitute a limitation of action. The
requirement of giving notice of loss of or injury to the goods is not an empty
formalism. The fundamental reasons for such a stipulation are (1) to inform the carrier
that the cargo has been damaged, and that it is being charged with liability therefor; and
(2) to give it an opportunity to examine the nature and extent of the injury. This protects
the carrier by affording it an opportunity to make an investigation of a claim while the
matter is fresh and easily investigated so as to safeguard itself from false and fraudulent
claims. (Federal Express Corporation vs. American Home Assurance Company, G.R. No.
150094, August 18, 2004)

The Court has construed the 24-hour claim requirement as a condition precedent to the
accrual of a right of action against a carrier for loss of, or damage to, the goods. The
shipper or consignee must allege and prove the fulfillment of the condition. Otherwise,
no right of action against the carrier can accrue in favor of the shipper or consignee.
(Ucpb General Insurance Co., Inc., vs. Aboitiz Shipping Corporation, et. Al., G.R. No.
168433, February 10, 2009)

The bills of lading unequivocally prescribes a time frame of thirty (30) days for filing a
claim with the carrier in case of loss of or damage to the cargo and sixty (60) days from
accrual of the right of action for instituting an action in court, which periods must
concur. As the requirements in Article 366, restated with a slight modification in the
assailed paragraph 5 of the bills of lading, are reasonable conditions precedent, they are
not limitations of action. Being conditions precedent, their performance must precede a
suit for enforcement and the vesting of the right to file spit does not take place until the
happening of these conditions. (Philippine American General Insurance Co., Inc. and
Tagum Plastics, Inc., vs. Sweet Lines, Inc., G.R. No. 87434 August 5, 1992)

E. Maritime Commerce

1. Charter Parties

a. Bareboat/Demise Charter

b. Time Charter

Where the agreement executed by the parties was a time charter where the possession and
control of the barge was retained by the owner, the latter is, therefore, a common carrier legally
charged with extraordinary diligence in the vigilance over the goods transported by him. The
sinking of the vessel created a presumption of negligence and/or unseaworthiness which the
barge owner failed to overcome and gave rise to his liability for the charterer lost cargo despite
the latters failure to insure the same. Oceaneering Contractrors (Phils), Inc. v. Nestor Barreto,
doing business as NNB Lighterage , GR No. 184215, February 9, 2011


c. Voyage/Trip Charter

It bears stressing that subject Letter of Agreement is considered a Charter Party. A
charter party is classified into (1) bareboat or demise charter and (2) contract of
affreightment. Subject contract is one of affreightment, whereby the owner of the vessel
leases part or all of its space to haul goods for others. It is a contract for special service
to be rendered by the owner of the vessel. Under such contract the ship owner retains
the possession, command and navigation of the ship, the charterer or freighter merely
having use of the space in the vessel in return for his payment of the charter hire.
(National Food Authority vs. Court of Appeals, G.R. No. 96453, August 4, 1999)

A charter party is a contract by which an entire ship, or some principal part thereof, is let
by the owner to another person for a specified time or use; a contract of affreightment is
one by which the owner of a ship or other vessel lets the whole or part of her to a
merchant or other person for the conveyance of goods, on a particular voyage, in
consideration of the payment of freight. A contract of affreightment may be either time
charter, wherein the leased vessel is leased to the charterer for a fixed period of time,
or voyage charter, wherein the ship is leased for a single voyage. In both cases, the
charter-party provides for the hire of the vessel only, either for a determinate period of
time or for a single or consecutive voyage, the ship owner to supply the ships store, pay
for the wages of the master of the crew, and defray the expenses for the maintenance of
the ship. Under a demise or bareboat charter on the other hand, the charterer mans the
vessel with his own people and becomes, in effect, the owner for the voyage or service
stipulated, subject to liability for damages caused by negligence. If the charter is a
contract of affreightment, which leaves the general owner in possession of the ship as
owner for the voyage, the rights and the responsibilities of ownership rest on the
owner. The charterer is free from liability to third persons in respect of the ship. It is only
when the charter includes both the vessel and its crew, as in a bareboat or demise that a
common carrier becomes private, at least insofar as the particular voyage covering the
charter-party is concerned. (Caltex Philippines, Inc. vs. Sulpicio Lines, Inc., et. al., G.R.
No. 131166, September 30, 1999)

A bareboat or demise charter is where the ship owner turns over possession of his vessel
to the charterer, with the latter undertaking to provide the crew, victuals, supplies, and
fuel during the term of the charter. In a time charter, the ship owner retains possession
and control of his vessel through the master and crew who remain in his employ. A
voyage charter is simply a contract of affreightment where the master and crew remain
in the employ of the ship owner. In a demise or bareboat charter, the charterer who is
treated ass owner pro hac vice, and not the general owner, is liable for expenses of the
voyage including wages of seamen. (Lintonjua Shipping Company, Inc. vs. National
Seamen Board, 176 SCRA 189)

Cebu Salvage and MCCII entered into a "voyage charter," also known as a contract of
affreightment wherein the ship was leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. Under a voyage charter, the
shipowner retains the possession, command and navigation of the ship, the charterer or
freighter merely having use of the space in the vessel in return for his payment of freight.
An owner who retains possession of the ship remains liable as carrier and must answer for
loss or non-delivery of the goods received for transportation. (Cebu Salvage Corporation
vs. Philippine Home Assurance Corporation, G.R. No. 150403, January 25, 2007)

2. Liability of Ship Owners and Shipping Agents

The real and hypothecary nature of maritime law simply means that the liability of the
carrier in connection with losses related to maritime contract is confined to the vessel,
which is hypothecated for such obligations or which stands as the guaranty for their
settlement. The only time the Limited Liability Rule does not apply is when there is an
actual finding of negligence on the part of the vessel owner or agent. (Aboitiz Shipping
Corporation vs. General Accident Fire and Life Assurance Corporation Ltd., 217 SCRA
359, 1993)

In case of collision of vessels, in order to avail of the benefits of Article 837 of the Code
of Commerce the shipowner or agent must abandon the vessel. In such case the civil
liability shall be limited to the value of the vessel with all the appurtenances and freight
earned during the voyage. However, where the injury or average is due to the ship-
owner's fault as in this case, the shipowner may not avail of his right to limited liability by
abandoning the vessel. (Luzon Stevedoring Corporation vs. Court of Appeals, G.R. No. L-
58897, 3 December 1987)

The term "ship agent" as used in the foregoing provision is broad enough to include the
ship owner. Pursuant to said provision, therefore, both the ship owner and ship agent are
civilly and directly liable for the indemnities in favor of third persons, which may arise
from the conduct of the captain in the care of goods transported, as well as for the safety
of passengers transported. However, under the same Article, this direct liability is
moderated and limited by the ship agent's or ship owner's right of abandonment of the
vessel and earned freight. The most fundamental effect of abandonment is the cessation
of the responsibility of the ship agent/owner. The ship owner's or agent's liability is
merely co-extensive with his interest in the vessel such that a total loss thereof results in
its extinction. "No vessel, no liability" expresses in a nutshell the limited liability rule. The
total destruction of the vessel extinguishes maritime liens as there is no longer any res to
which it can attach. (Chua Yek Hong vs. Intermediate Appellate Court, G.R. No. 74811,
30 September 1988)

The LIMITED LIABILITY RULE cannot be availed of by the charterers/sub-charterer in
order to escape from their liability. The Code of Commerce is clear on which indemnities
may be confined or restricted to the value of the vessel and these are the indemnities
in favor of third persons which may arise from the conduct of the captain in the care of
the goods which he loaded on the vessel. Thus, what is contemplated is the liability to
third persons who may have dealt with the SHIPOWNER, the AGENT or even the
CHARTERER in case of demise or bareboat charter.

The Charterer cannot use the said Rule because the it does not completely and absolutely
step into the shoes of the shipowner or even the ship agent because there remains
conflicting rights between the former and the real shipowner as derived from their charter
agreement. Therefore, even if the contract is for a bareboat or demise charter where
possession, free administration and even navigation are temporarily surrendered to the
charterer, dominion over the vessel remains with the shipowner. Ergo, the charterer or the
sub-charterer, whose rights cannot rise above that of the former, can never set up the
Limited Liability Rule against the very owner of the vessel. Dela Torre vs. Court of Appeals,
GR No. 160088, July 13, 2011



a. Liability for Acts of Captain

b. Exceptions to Limited Liability

The limited liability rule, however, is not without exceptions, namely: (1) where the injury
or death to a passenger is due either to the fault of the ship owner, or to the concurring
negligence of the ship owner and the captain (Manila Steamship Co., Inc. vs.
Abdulhaman supra); (2) where the vessel is insured; and (3) in workmen's compensation
claims (Abueg vs. San Diego, supra). In this case, there is nothing in the records to show
that the loss of the cargo was due to the fault of the private respondent as shipowners, or
to their concurrent negligence with the captain of the vessel. (Chua Yek Hong vs.
Intermediate Appellate Court, G.R. No. 74811, 30 September 1988)

The international rule is not to the effect that the right of abandonment of vessels, as a
legal limitation of a ship owners liability, does not apply to cases where injury or average
was occasioned by the shipowners fault. Where the ship owner is likewise to be blamed,
Article 587 of the Code of Commerce will not apply, and such situation will be governed
by the provision of the Civil Code on common carriers (Philippine American General
Insurance Co. vs. Court of Appeals, 273 SCRA 262, 1997).

3. Accidents and Damages in Maritime Commerce

a. General Average

b. Collisions

In American jurisprudence that there is a presumption of fault against a moving vessel
that strikes a stationary object such as a dock or navigational aid. In admiralty, this
presumption does more than merely require the ship to go forward and produce some
evidence on the presumptive matter. The moving vessel must show that it was without
fault or that the collision was occasioned by the fault of the stationary object or was the
result of inevitable accident. It has been held that such vessel must exhaust every
reasonable possibility which the circumstances admit and show that in each, they did all
that reasonable care required. In the absence of sufficient proof in rebuttal, the
presumption of fault attaches to a moving vessel which collides with a fixed object and
makes a prima facie case of fault against the vessel. (Far Eastern Shipping Company vs.
Court of Appeals, G.R. No. 130068, October 1, 1998)

4. Carriage of Goods by Sea Act

a. Application

The law of the country to which the goods are to be transported governs the liability of
the common carrier in case of their loss, destruction or deterioration" (Article 1753, Civil
Code). Thus, the rule was specifically laid down that for cargoes transported from Japan
to the Philippines, the liability of the carrier is governed primarily by the Civil Code and
in all matters not regulated by said Code, the rights and obligations of common carrier
shall be governed by the Code of commerce and by laws (Article 1766, Civil Code).
Hence, the Carriage of Goods by Sea Act, a special law, is merely suppletory to the
provision of the Civil Code. (National Development Company vs. The Court of Appeals,
G.R. No. L-49469, August 19, 1988)

Inasmuch as neither the Civil Code nor the Code of Commerce states a specific
prescriptive period on the matter, the Carriage of Goods by Sea Act (COGSA) which
provides for a one-year period of limitation on claims for loss of, or damage to, cargoes
sustained during transit may be applied suppletorily to the case at bar. This one-year
prescriptive period also applies to the insurer of the goods. (Loadstar Shipping Co., Inc.,
vs. Court of Appeals, G.R. No. 131621 September 28, 1999)

It is to be noted that the Civil Code does not of itself limit the liability of the common
carrier to a fixed amount per package although the Code expressly permits a stipulation
limiting such liability. Thus, the COGSA which is suppletory to the provisions of the Civil
Code, steps in and supplements the Code by establishing a statutory provision limiting
the carrier's liability in the absence of a declaration of a higher value of the goods by the
shipper in the bill of lading. The provisions of the Carriage of Goods by.Sea Act on
limited liability are as much a part of a bill of lading as though physically in it and as
much a part thereof as though placed therein by agreement of the parties. (Eastern
Shipping Lines, Inc., vs. Intermediate Appellate Court, G.R. No. L-69044 May 29, 1987)

It is settled in maritime law jurisprudence that cargoes while being unloaded generally
remain under the custody of the carrier. In the instant case, the damage or losses were
incurred during the discharge of the shipment while under the supervision of the carrier.
Consequently, the carrier is liable for the damage or losses caused to the shipment.
Section 2 of the COGSA provides that under every contract of carriage of goods by sea,
the carrier in relation to the loading, handling, stowage, carriage, custody, care, and
discharge of such goods, shall be subject to the responsibilities and liabilities and
entitled to the rights and immunities set forth in the Act. Section 3 (2) thereof which
states that among the carriers responsibilities are to properly and carefully load, handle,
stow, carry, keep, care for, and discharge the goods carried. (Philippine First Insurance
Co. Inc., vs. Wallem Phils. Shipping, Inc., G.R. No. 165647, 26 March 2009)

Carriage of Goods by Sea Act is applicable up to the final port of destination and that the
fact that transshipment was made on an interisland vessel did not remove the contract of
carriage of goods from the operation of said Act. (Sea-Land Service, Inc.,vs. Intermediate
Appellate Court, G.R. No. 75118 August 31, 1987)

As defined in the Civil Code and as applied to Section 3 (6) paragraph 4 of the Carriage
of Goods by Sea Act, "loss" contemplates merely a situation where no delivery at all was
made by the shipper of the goods because the same had perished, gone out of
commerce, or disappeared that their existence is unknown or they cannot be recovered.
It does not include a situation where there was indeed delivery but delivery to the
wrong person, or a misdelivery, as alleged in the complaint in this case. (Domingo Ang vs.
American Steamship Agencies, Inc., G.R. No. L-22491, January 27, 1967)

Loss refers to the deterioration or disappearance of goods. Conformably with this
concept of what constitutes loss or damage,the deterioration of goods due to delay
in their transportation constitutes loss or damage within the meaning of 3(6) of the
Carriage of Goods by the Sea Act, so that as suit was not brought within one year the
action was barred. (Mitsui O.S.K. Lines Ltd. vs. Court of Appeals, G.R. No. 119571, March
11, 1998)

b. Notice of Loss or Damage

COGSA provides that the notice of claim need not be given if the state of the goods, at
the time of their receipt, has been the subject of a joint inspection or survey. As stated
earlier, prior to unloading the cargo, an Inspection Report as to the condition of the
goods was prepared and signed by representatives of both parties. Moreover, failure to
file a notice of claim within three days will not bar recovery if it is nonetheless filed
within one year. This one-year prescriptive period also applies to the shipper, the
consignee, the insurer of the goods or any legal holder of the bill of lading. (Belgian
Overseas Chartering and Shipping N.V. vs. Philippine First Insurance Co., Inc., G.R. No.
143133, June 5, 2002)

Under Section 3 (6) of the COGSA, notice of loss or damages must be filed within three
days of delivery. Under the same provision, however, a failure to file a notice of claim
within three days will not bar recovery if a suit is nonetheless filed within one year from
delivery of the goods or from the date when the goods should have been delivered. The
filing of an amended pleading does not retroact to the date of the filing of the original. It
is true that, as an exception, an amendment which merely supplements and amplifies facts
originally alleged in the complaint relates back to the commencement of the action and is
not barred by the statute of limitations which expired after the service of the original
complaint. The exception, however, would not apply to the party impleaded for the first
time after the service of the amended complaint. In this case, petitioner was not
impleaded as a defendant in the original complaint filed on March 11, 1993. It was only on
June 7, 1993 that the Amended Complaint, impleading petitioner as defendant, was filed.
Considering this circumstances, clearly, the suit against the petitioner was filed beyond the
prescriptive period of the filing of claims as provided in the COGSA. Wallem Philippines
Shipping vs SR Farms, GR No. 161849, July 9, 2010
In any event the carrier and the ship shall be discharged from all liability in respect of loss or
damage unless suit is brought within one year after delivery of the goods or the date when
the goods should have been delivered: Provided, That if a notice of loss or damage, either
apparent or concealed, is not given as provided for in this section, that fact shall not affect or
prejudice the right of the shipper to bring suit within one year after the delivery of the goods
or the date when the goods should have been delivered. Asian Terminals Inc., v. Philam
Insurance Co. G.R. NO. 181262 , July 24, 2013

c. Period of Prescription

The one-year period of limitation is designed to meet the exigencies of maritime
hazards. In a case where the goods shipped were neither lost nor damaged in transit but
were, on the contrary, delivered in port to someone who claimed to be entitled thereto,
the situation is different, and the special need for the short period of limitation in cases
of loss or damage caused by maritime perils does not obtain. (Mitsui O.S.K. Lines Ltd.,
represented by Magsaysay Agencies, Inc. vs. Court of Appeals, G.R. No. 119571, March
11, 1998)

The one-year period within which the consignee should sue the carrier is computed from
"the delivery of the goods or the date when the goods should have been delivered". The
sensible and practical interpretation is that delivery within the meaning of section 3(6) of
the Carriage of Goods by Sea Law means delivery to the arrastre operator. That delivery
is evidenced by tally sheets which show whether the goods were landed in good order or
in bad order, a fact which the consignee or shipper can easily ascertain through the
customs broker. To use as basis for computing the one-year period the delivery to the
consignee would be unrealistic and might generate confusion between the loss or
damage sustained by the goods while in the carrier's custody and the loss or damage
caused to the goods while in the arrastre operator's possession. (Union Carbide
Philippines, Inc. vs. Manila Railroad Co., G.R. No. L-27798, June 15, 1977)

An action based on misdelivery of the cargo which should be distinguished
from loss thereof. The one-year period provided for in section 3 (6) of the Carriage of
Goods by Sea Act refers to loss of the cargo. What is applicable in case of misdelivery of
the cargo is the four-year period of prescription for quasi-delicts prescribed in article
1146 (2) of the Civil Code or ten years for violation of a written contract as provided for
in article 1144 (1) of the same Code. As Ang filed the action less than three years from
the date of the alleged misdelivery of the cargo, it has not yet prescribed. Ang, as
indorsee of the bill of lading, is a real party in interest with a cause of action for
damages. (Domingo Ang vs. Compania Maritima, Maritime Company of the Philippines)

The one-year prescription period under the COGSA applies to the insurer of the goods.
Otherwise, what the Act intends to prohibit after the lapse of the one-year prescriptive
period can be done indirectly by the shipper or owner of the goods by simply filing a
claim against the insurer even after the lapse of one year. This could not have been the
intention of the law which has also for its purpose the protection of the carrier and the
ship from fraudulent claims by having "matters affecting transportation of goods by sea
be decided in as short a time as possible" and by avoiding incidents which would
"unnecessarily extend the period and permit delays in the settlement of questions
affecting the transportation. (Filipino Merchants Insurance Company, Inc. vs. Honorable
Jose Alejandro, Presiding Judge of Branch XXVI of the Court of First Instance of Manila,
G.R. No. L-54140, October 14, 1986)

Section 3(6) of the Carriage of Goods by Sea Act states that the carrier and the ship shall
be discharged from all liability for loss or damage to the goods if no suit is filed within
one year after delivery of the goods or the date when they should have been delivered.
Under this provision, only the carrier's liability is extinguished if no suit is brought within
one year. But the liability of the insurer is not extinguished because the insurer's liability
is based not on the contract of carriage but on the contract of insurance. A close reading
of the law reveals that the Carriage of Goods by Sea Act governs the relationship
between the carrier on the one hand and the shipper, the consignee and/or the insurer
on the other hand. It defines the obligations of the carrier under the contract of carriage.
It does not, however, affect the relationship between the shipper and the insurer. The
latter case is governed by the Insurance Code. The Filipino Merchants case is different
from the case at bar. In Filipino Merchants, it was the insurer which filed a claim against
the carrier for reimbursement of the amount it paid to the shipper. In the case at bar, it
was the shipper which filed a claim against the insurer. The basis of the shipper's claim is
the "all risks" insurance policies issued by private respondents to petitioner Mayer. The
ruling in Filipino Merchants should apply only to suits against the carrier filed either by
the shipper, the consignee or the insurer. When the court said in Filipino Merchants that
Section 3(6) of the Carriage of Goods by Sea Act applies to the insurer, it meant that the
insurer, like the shipper, may no longer file a claim against the carrier beyond the one-
year period provided in the law. But it does not mean that the shipper may no longer file
a claim against the insurer because the basis of the insurer's liability is the insurance
contract. An insurance contract is a contract whereby one party, for a consideration
known as the premium, agrees to indemnify another for loss or damage which he may
suffer from a specified peril. (Mayer Steel Pipe Corporation vs. Court of Appeals, G.R.
No. 124050 June 19, 1997)

The general provisions of the new Civil Code (Art. 1155 providing for the interruption of
the prescriptive period) cannot be made to apply in a case under COGSA, as such
application would have the effect of extending the one-year period of prescription fixed
in the law. It is desirable that matters affecting transportation of goods by sea be
decided in as short a time as possible; the application of the provisions of Article 1155 of
the new Civil Code would unnecessarily extend the period and permit delays in the
settlement of questions affecting transportation, contrary to the clear intent and
purpose of the law. (Dole Philippines, Inc. vs. Maritime Company of the Philippines, G.R.
No. L-61352 February 27, 1987)

Notwithstanding the fact that the case was filed beyond the one-year prescriptive period
provided under the COGSA, the suit ( against the insurer ) will not be dismissed of the
delay was not due the claimants fault. Had the insurer processed and examined the claim
promptly, the claimant or the insurer itself, as subrogee, could have taken the judicial
action on time. By making an unreasonable demand for an itemized list of damages which
caused delay, the insurer should bear the loss with interest, New World International
Development Corporation vs NYK-FilJapan Shipping Corporation, GR No. 171468, August
24, 2011

The term carriage of goods covers the period from the time when the goods are loaded to
the time when they are discharged from the ship; thus, it can be inferred that the period of
time when the goods have been discharged from the ship and given to the custody of the
arrastre operator is not covered by the COGSA. Under the COGSA, the carrier and the ship
may put up the defense of prescription if the action for damages is not brought within one
year after delivery of the goods or the date when the goods should have been delivered.
However, the COGSA does not mention than an arrastre operator may invoke the
prescriptive period; hence, it does not cover the arrastre operator. The arrastre operators
responsibility and liability for losses and damages are set forth in the contract for cargo
handling services executed between the Philippine Ports Authority and Marina Port Services.
Insurance Company of North America vs. Asian Terminals, Inc. GR No. 180784, February 15,
2012



d. Limitation of Liability

Lastly, as to the liability of the carrier, it was reduced to to US$500 per package as
provided in the Bill of Lading and by Section 4(5) of COGSA. Stipulation in the bill of
lading limiting to a certain sum the common carrier's liability for loss or destruction of a
cargo -- unless the shipper or owner declares a greater value -- is sanctioned by
law. There are, however, two conditions to be satisfied: (1) the contract is reasonable and
just under the circumstances, and (2) it has been fairly and freely agreed upon by the
parties.The rationale for this rule is to bind the shippers by their agreement to the value
(maximum valuation) of their goods. (Belgian Overseas Chartering and Shipping N.V. vs.
Philippine First Insurance Co., Inc., G.R. No. 143133, June 5, 2002)

F. The Warsaw Convention

1. Applicability

2. Limitation of Liability

The Warsaw Convention however denies to the carrier availment "of the provisions
which exclude or limit his liability, if the damage is caused by his willful misconduct or by
such default on his part as, in accordance with the law of the court seized of the case, is
considered to be equivalent to willful misconduct," or "if the damage is (similarly) caused
by any agent of the carrier acting within the scope of his employment." The Hague
Protocol amended the Warsaw Convention by removing the provision that if the airline
took all necessary steps to avoid the damage, it could exculpate itself completely, and
declaring the stated limits of liability not applicable "if it is proved that the damage
resulted from an act or omission of the carrier, its servants or agents, done with intent to
cause damage or recklessly and with knowledge that damage would probably result."
The same deletion was effected by the Montreal Agreement of 1966, with the result that
a passenger could recover unlimited damages upon proof of willful misconduct. (Alitalia
vs. Intermediate Appellate Court, G.R. No. 71929, December 4, 1990)

Under Article 28 ( 1 ) of the Warsaw Convention, the plaintiff may bring the action for
damages before: 1) the court where carrier is domiciled; 2 ) the court where the carrier
has its principal place of business; 3 ) the court where the carrier has an establishment by
which the contract has been made; or 4 ) the court of the place of destination. In this
case, it is not disputed that respondent is a British corporation domiciled in London,
United Kingdom with London as its principal place of business. Hence, under the first
and second jurisdictional rules, the petitioner may bring her case before the courts of
London in the United Kingdom. In the passenger ticket and baggage check presented by
both the petitioner and respondent, it appears that the ticket was issued in Rome, Italy.
Consequently, under the third jurisdictional rule, the petitioner has the option to bring
her case before the courts of Rome in Italy. Finally, both the petitioner and respondent
aver that the place of destination is Rome, Italy, which is properly designated given the
routing presented in the said passenger ticket and baggage check. Accordingly,
petitioner may bring her action before the courts of Rome, Italy. Thus, the RTC of Makati
correctly ruled that it does not have jurisdiction over the case filed by the petitioner even
though it was based on tort and not on breach of contract. Lhuillier vs British Airways,
G.R. No. 171092, March 15, 2010.



a. Liability to Passengers

In its ordinary sense, "delay" means to prolong the time of or before; to stop, detain or
hinder for a time, or cause someone or something to be behind in schedule or usual rate
of movement in progress. "Bumping-off," which is the refusal to transport passengers
with confirmed reservation to their planned and contracted destinations, totally
forecloses said passengers' right to be transported, whereas delay merely postpones for a
time being the enforcement of such right. Consequently, Section 2, Article 30 of the
Warsaw Convention which does not contemplate the instance of "bumping-off" but
merely of simple delay, cannot provide a handy excuse for Lufthansa as to exculpate it
from any liability to Antiporda. (Lufthansa German Airlines vs. Court of Appeals, G.R. No.
83612, November 24, 1994)

b. Liability for Checked Baggage

While the Warsaw Convention has the force and effect of law in the Philippines, being a
treaty commitment by the government and as a signatory thereto, the same does not
operate as an exclusive enumeration of the instances when a carrier shall be liable for
breach of contract or as an absolute limit of the extent of liability, nor does it preclude
the operation of the Civil Code or other pertinent laws. The acceptance in due course by
PAL of Mejias cargo as packed and its advice against the need for declaration of its
actual value operated as an assurance to Mejia that in fact there was no need for such a
declaration. Mejia can hardly be faulted for relying on the representations of PALs own
personnel. In other words, Mejia could and would have complied with the conditions
stated in the air waybill, i.e., declaration of a higher value and payment of supplemental
transportation charges, entitling her to recovery of damages beyond the stipulated limit
of US$20 per kilogram of cargo in the event of loss or damage, had she not been
effectively prevented from doing so upon the advice of PALs personnel for reasons best
known to themselves. Even if the claim for damages was conditioned on the timely filing
of a formal claim, under Article 1186 of the Civil Code that condition was deemed
fulfilled, considering that the collective action of PALs personnel in tossing around the
claim and leaving it unresolved for an indefinite period of time was tantamount to
voluntarily preventing its fulfillment. On grounds of equity, the filing of the baggage
freight claim, which sufficiently informed PAL of the damage sustained by private
respondents cargo, constituted substantial compliance with the requirement in the
contract for the filing of a formal claim. (Philippine Airlines Inc. vs. Court of Appeals, G.R.
No. 119706, March 14, 1996)

The nature of an airlines contract of carriage partakes of two types, namely: a contract
to deliver a cargo or merchandise to its destination and a contract to transport
passengers to their destination. A business intended to serve the travelling public
primarily, it is imbued with public interest, hence, the law governing common carriers
imposes an exacting standard. Neglect or malfeasance by the carriers employees could
predictably furnish bases for an action for damages. American jurisprudence provides
that an air carrier is not liable for the loss of baggage in an amount in excess of the limits
specified in the tariff which was filed with the proper authorities, such tariff being
binding on the passenger regardless of the passengers lack of knowledge thereof or
assent thereto. This doctrine is recognized in this jurisdiction. (British Airways vs. Court of
Appeals, G.R. No. 121824, January 29, 1998)

Article 19 of the Warsaw Convention provides for liability on the part of a carrier for
damages occasioned by delay in the transportation by air of passengers, baggage or
goods. Article 24 excludes other remedies by further providing that (1) in the cases
covered by articles 18 and 19, any action for damages, however founded, can only be
brought subject to the conditions and limits set out in this convention. Therefore, a
claim covered by the Warsaw Convention can no longer be recovered under local law, if
the statute of limitations of two years has already lapsed. Nevertheless, the Court notes
that jurisprudence in the Philippines and the United States also recognizes that the
Warsaw Convention does not exclusively regulate the relationship between passenger
and carrier on an international flight. The Court finds that the present case is
substantially similar to cases in which the damages sought were considered to be outside
the coverage of the Warsaw Convention. (Philippine Airlines Inc. vs. Hon. Adriano
Savillo, et. al., G.R. No. 149547, July 4, 2008)

In United Airlines v. Uy, the Court distinguished between the (1) damage to the
passengers baggage and (2) humiliation he suffered at the hands of the airlines
employees. The first cause of action was covered by the Warsaw Convention which
prescribes in two years, while the second was covered by the provisions of the Civil Code
on torts, which prescribes in four years. Had the present case merely consisted of claims
incidental to the airlines delay in transporting their passengers, Grios Complaint would
have been time-barred under Article 29 of the Warsaw Convention. (Philippine Airlines
Inc. vs. Hon. Adriano Savillo, et. al., G.R. No. 149547, July 4, 2008)

c. Liability for Handcarried Baggage

3. Willful Misconduct

The Warsaw Convention however denies to the carrier availment of the provisions which
exclude or limit his liability, if the damage is caused by his willful misconduct or by such
default on his part as, in accordance with the law of the court seized of the case, is
considered to be equivalent to willful misconduct, or if the damage is similarly caused
by any agent of the carrier acting within the scope of his employment. Under domestic
law and jurisprudence (the Philippines being the country of destination), the attendance
of gross negligence (given the equivalent of fraud or bad faith) holds the common carrier
liable for all damages which can be reasonably attributed, although unforeseen, to the
non-performance of the obligation, including moral and exemplary damages. (Sabena
World Airlines vs. Court of Appeals, G.R. No. 104685, March 14, 1996)

VI. The Corporation Code

A. Corporation

1. Definition

A corporation is an artificial being created by operation of law, having the right of
succession and the powers, attributes and properties expressly authorized by law or
incident to its existence. (Sec. 2, B.P. 68)

2. Attributes of the Corporation

When the corporation ( BB Sportswear, Inc. ) which the plaintiff erroneously
impleaded in a collection case was not the party to the actionable agreement and
turned out to be not registered with the Securities and Exchange Commission, the
judgment may still be enforced against the corporation ( BB Footwear, Inc. ) which
filed the answer and participated in the proceedings, as well as its controlling
shareholder who signed the actionable agreement in his personal capacity and as a
single proprietorship doing business under the trade name and style of BB Sportswear
Enterprises. Benny Hung vs BPI Finance Corporation . G.R. No. 182398, 20 July 2010

If the title over the land where the Hidden Valley Springs Resort is located is
registered in the name of the corporation, the heirs of a stockholder who occupy
houses built at the expense of the corporation cannot claim ownership over said
properties. A stockholder is not the owner of any part of the capital of the corporation
and is not entitled to the possession of any definite portion of its property or assets.
(Rebecca Boyer-Roxas and Guillermo Roxas vs. Hon. Court of Appeals and Heirs of
Eugenia V. Roxas, Inc., G.R. No. 100866, July 14, 1992)

When negotiations ensued in light of a planned takeover of company and the counsel
of the buyer advised the stockholder through a letter that he may take the machineries
he brought to the corporation out with him for his own use and sale, the stockholder
cannot recover said machineries and equipment because these properties remained
part of the capital property of the corporation. It is settled that the property of a
corporation is not the property of its stockholders or members. (Ryuichi Yamamoto vs.
Nishino Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)

B. Classes of Corporations

By its failure to submit its by-laws on time, the AIIBP may be considered a de facto
corporation whose right to exercise corporate powers may not be inquired into
collaterally in any private suit to which such corporation may be a party. A corporation
which has failed to file its by-laws within the prescribed period does not ipso facto lose
its powers as such. The SEC Rules on Suspension/Revocation of the Certificate of
Registration of Corporations, details the procedures and remedies that may be availed
of before an order of revocation can be issued. There is no showing that such a
procedure has been initiated in this case. (Sappari K. Sawadjaanvs. the Honorable
Court of Appeals, the Civil Service Commission and Al-amanah Investment Bank of the
Philippines, G.R. No. 141735, June 8, 2005)

Where persons associate themselves together under articles to purchase property to
carry on a business, and their organization is so defective as to come short of creating a
corporation within the statute, they become in legal effect partners inter se, and their
rights as members of the company to the property acquired by the company will be
recognized. However, such a relation does not necessarily exist, for ordinarily persons
cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist, and it should be implied only when necessary
to do justice between the parties; thus, one who takes no part except to subscribe for
stock in a proposed corporation which is never legally formed does not become a
partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the
alleged partnership and contribution. (Pioneer Insurance & Surety Corporation vs. the
Hon. Court of Appeals, Border Machinery & Heavy Equipment, Inc., (BORMAHECO),
Constancio M. Maglana and Jacob S. Lim, G.R. No. 84197, July 28, 1989)

The plan of the parties to consolidate their respective jeepney drivers' and operators'
associations into a single common association, if not yet approved by the SEC, neither
had its officers and members submitted their articles of consolidation in accordance
with Sections 78 and 79 of the Corporation Code, is a mere proposal to form a unified
association. Any dispute arising out of the election of officers of said unified
association is therefore not an intra-corporate dispute. (Reynaldo M. Lozano vs. Hon.
Eliezer R. De los Santos, Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda,
G.R. No. 125221, June 19, 1997)

Where there is no third person involved and the conflict arises only among those
assuming the form of a corporation, who therefore know that it has not been
registered, there is no corporation by estoppel. (Reynaldo M. Lozano vs. Hon. Eliezer R.
De los Santos, Presiding Judge, RTC, Br. 58, Angeles City; and Antonio Anda, G.R. No.
125221, June 19, 1997)

Under the law on estoppel, those acting on behalf of a corporation and those
benefited by it, knowing it to be without valid existence, are held liable as general
partners. Technically, it is true that petitioner did not directly act on behalf of the
corporation. However, having reaped the benefits of the contract entered into by
persons with whom he previously had an existing relationship, he is deemed to be part
of said association and is covered by the scope of the doctrine of corporation by
estoppel. (Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., G.R. No. 136448, 3
November 1999)

When the petitioner is not trying to escape liability from the contract but rather the
one claiming from the contract, the doctrine of corporation by estoppel is not
applicable. This doctrine applies to a third party only when he tries to escape liability
on a contract from which he has benefited on the irrelevant ground of defective
incorporation. (International Express Travel & Tour Services, Inc. vs. Hon. Court of
Appeals, Henri Kahn, Philippine Football Federation, G.R. No. 119002, October 19,
2000)

The persons who illegally recruited workers for overseas employment by representing
themselves to be officers of a corporation which they knew had not been incorporated
are liable as general partners for all debts, liabilities and damages incurred or arising
as a result thereof. (People of the Philippines vs. Engr. Carlos Garcia y Pineda, Patricio
Botero y Vales, Luisa Miraples (at large) & Patricio Botero y Vales, G.R. No. 117010, 18
April 1997)

A Local Water District is a GOCC with an original charter and is not a private
corporation because it is not created under the Corporation Code. A law enacted by
Congress creating a private corporation with a special charter is unconstitutional
because private corporations may exist only under a general law. (Engr. Ranulfo C.
Feliciano, in his capacity as General Manager of the Leyte Metropolitan Water District
(LMWD), Tacloban City vs. Commission on Audit, Chairman CELSO D. GANGAN,
Commissioners Raul C. Flores and Emmanuel M. Dalman, and Regional Director of
COA Region VIII, G.R. No. 147402, 14 January 2004)

The Philippine National Red Cross (PNRC) can neither be classified as an
instrumentality of the State, so as not to lose its character of neutrality as well as its
independence, nor strictly as a private corporation since it is regulated by international
humanitarian law and is treated as an auxiliary of the State. The PNRC enjoys a special
status as an important ally and auxiliary of the government in the humanitarian field in
accordance with its commitments under international law. (Dante V. Liban, Reynaldo
M. Bernardo and Salvador M. Viari vs. Richard J. Gordon, G. R. No. 175352, January 18,
2011)

It is clear that a corporation is considered a government-owned or -controlled
corporation only when the Government directly or indirectly owns or controls at least a
majority or 51% share of the capital stock. Consequently, RPN was neither a
government-owned nor a controlled corporation because of the Governments total
share in RPNs capital stock being only 32.4%. (Antonio M. Carandang vs. Honorable
Aniano A. Desierto, Office of the Ombudsman, G.R. No. 153161, January 12, 2011)

Corporation by estoppel results when a corporation represented itself to the public as
such despite its not being incorporated. A corporation by estoppel may be impleaded as a
party defendant considering that it possesses attributes of a juridical person, otherwise, it
can not be held liable for damages and injuries it may inflict to other persons. Macasaet
vs. Francisco, GR No. 156759, June 5, 2013


C. Nationality of Corporations

1. Place of Incorporation Test

In times of war, the nationality of a private corporation is determined by the character
or citizenship of its controlling stockholders. The corporation was considered an
enemy because majority of its stockholders were German nationals. (Filipinas
Compaia De Segurosvs. Christern, Huenefeld and Co., Inc.,G.R. No. L-2294, May 25,
1951)

2. Control Test

A corporation organized under the laws of the Philippines of which at least 60% of the
capital stock outstanding and entitled to vote is owned and held by citizens of the
Philippines, is considered a Philippine National. As such, the corporation may acquire
disposable lands in the Philippines. (Marissa R. Unchuan vs. Antonio J.P. Lozada, Anita
Lozada and the Register of Deeds of Cebu City, G.R. No. 172671, April 16, 2009)

The fact that the religious organization has no capital stock does not suffice to escape
the Constitutional inhibition, since it is admitted that its members are of foreign
nationality. The purpose of the sixty per centum requirement is obviously to ensure
that corporations or associations allowed to acquire agricultural land or to exploit
natural resources shall be controlled by Filipinos; and the spirit of the Constitution
demands that in the absence of capital stock, the controlling membership should be
composed of Filipino citizens. (Register of Deeds vs. Ung Sui Si Temple, G.R. No. L-
6776, May 21, 1955)

3. Grandfather Rule

D. Corporate Juridical Personality

1. Doctrine of Separate Juridical Personality

FBCIs acquisition of the substantial and controlling shares of stocks of Esses and Tri-
Star does not create a substantial change in the rights or relations of the parties that
would entitle FBCI to possession of the Calatagan Property, a corporate property of
Esses and Tri-Star. Esses and Tri-Star, just like FBCI, are corporations. A corporation has
a personality distinct from that of its stockholders. Properties registered in the name of
the corporation are owned by it as an entity separate and distinct from its members.
(Ricardo S. Silverio, jr., Esses Development Corporation, and Tri-Star Farms, Inc. vs.
Filipino Business Consultants, Inc., G.R. No. 143312, August 12, 2005)

The personality of a corporation is distinct and separate from the personalities of its
stockholders. Hence, its stockholders are not themselves the real parties in interest to
claim and recover compensation for the damages arising from the wrongful
attachment of its assets. Only the corporation is the real party in interest for that
purpose. (Stronghold Insurance Company, Inc. vs. Tomas Cuenca, et. al., G.R. No.
173297, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have
exceeded their authority, corporate officers are not personally liable for their official
acts. Corporate directors and officers may be held solidarily liable with the corporation
for the termination of employment only if done with malice or in bad faith.(Rolando
DS. Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)

In order for the Court to hold the officer of the corporation personally liable alone for the
debts of the corporation and thus pierce the veil of corporate fiction, the Court has
required that the bad faith of the officer must first be established clearly and convincingly.
Petitioner, however, has failed to include any submission pertaining to any wrongdoing of
the general manager. Necessarily, it would be unjust to hold the latter personally liable.
Moreso, if the general manager was never impleaded as a party to the case. Mercy Vda. de
Roxas, represented by Arlene C. Roxas-Cruz, in her capacity as substitute appellant-
petitioner v. Our Lady's Foundation, Inc. G.R. No. 182378, March 6, 2013.

Where two banks foreclosed mortgages on certain properties of a mining company and
resumed business operations thereof by organizing a different company to which the
banks transferred the foreclosed assets, the banks are not liable to a contractor which was
engaged by the re-organized mining company even though the latter is wholly-owned by
the two banks and they have interlocking directors, officers and stockholders. While
ownership by one corporation of all or a great majority of stocks of another corporation
and their interlocking directorates may serve as indicia of control, by themselves and
without more, however, these circumstances are insufficient to establish an alter ego
relationship or connection between the two banks and the new mining company on the
other hand, that will justify the puncturing of the latters corporate cover. Mere ownership
by a single stockholder or by another corporation of all or nearly all of the capital stock of
a corporation is not of itself sufficient ground for disregarding the separate corporate
personality. Likewise, the existence of interlocking directors, corporate officers and
shareholders is not enough justification to pierce the veil of corporate fiction in the
absence of fraud or other public policy considerations. Development Bank of the
Philippines vs. Hydro Resources Contractors Corporation, GR. No. 167603, March 13, 2013

The fact that an employee of the corporation was made to resign and not allowed to enter
the workplace does not necessarily indicate bad faith on the part of the employer
corporation if a sufficient ground existed for the latter to actually proceed with the
termination. ABBOT LABORATORIES VS. ALCARAZ, G.R. No. 192571, July 23, 2013

Other than mere ownership of capital stock, circumstances showing that the corporation is
being used to commit fraud or proof of existence of absolute control over the corporation
has to be proven. In short, before the corporate fiction can be disregarded, alter-ego
elements must first be sufficiently established. The mere fact that the same controlling
stockholder/officer signed the loan document on behalf of the corporation does not prove
that he exercised control over the finances of the corporation. Neither is the absence of a
board resolution authorizing him to contract the loan nor the Corporations failure to
object thereto support this conclusion. While he is the signatory of the loan and the
money was delivered to him, the proceeds of the loan were intended for the business plan
of the corporation. That the business plan did not materialize is also not a sufficient proof
to justify a piercing, in the absence of proof that the business plan was a fraudulent
scheme geared to secure funds from the lender. NUCCIO SAVERIOS VS. PUYAT, G.R. No.
186433, November 27, 2013

a. Liability for Torts and Crimes

A corporation is civilly liable in the same manner as natural persons for torts, because
the rules governing the liability of a principal or master for a tort committed by an
agent or servant are the same whether the principal or master be a natural person or a
corporation, and whether the servant or agent be a natural or artificial person. A
corporation is liable, therefore, whenever a tortious act is committed by an officer or
agent under express direction or authority from the stockholders or members acting as
a body, or, generally, from the directors as the governing body. (Philippine National
Bank vs. Court of Appeals, et al., G.R. No. L-27155, May 18, 1978)

To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. (Sergio F. Naguiat, doing business under the
name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations Commission (Third Division), National Organization Of Workingmen and its
members, Leonardo T. Galang, et al., G.R. No. 116123, March 13, 1997)

The powers to increase capitalization and to offer or give collateral to secure
indebtedness are lodged with the corporations board of directors. However, this does
not mean that the officers of the corporation other than the board of directors cannot
be made criminally liable for their criminal acts if it can be proven that they
participated therein. (Gregorio Singian, Jr. vs. the Honorable Sandiganbayan and the
Presidential Commission on Good Government, G.R. Nos. 160577-94, December 16,
2005)

An employee of a company or corporation engaged in illegal recruitment may be held
liable as principal, together with his employer, if it is shown that he actively and
consciously participated in illegal recruitment, because the existence of the corporate
entity does not shield from prosecution the corporate agent who knowingly and
intentionally causes the corporation to commit a crime. The corporation obviously
acts, and can act, only by and through its human agents, and it is their conduct which
the law must deter. (The Executive Secretary, et al. vs. Court of Appeals, et al., G.R. No.
131719, May 25, 2004)

The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the directors, officers or employees or other persons responsible for the offense liable
to suffer the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and
the People of the Philippines, G.R. No. 119858, April 29, 2003)
Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the law.
(Alfredo Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)
b. Recovery of Moral Damages

A corporation whose checks were dishonored by the drawee bank despite availability
of funds and because of the negligence of the bank employees can recover moral
damages for besmirched reputation. The standing of the corporation was reduced in
the business community because of the banks negligence.(Simex International,
Incorporated vs. Court of Appeals, G.R. No. 88013 March 19, 1990)

Moral damages may be awarded to a corporation whose reputation has been
besmirched. In the instant case, FEMSCO has sufficiently shown that its reputation was
tarnished after it immediately ordered equipment from its suppliers on account of the
urgency of the project, only to be canceled later by the counterparty in the contract.
(Jardine Davies, Inc. vs. Court of Appeals and Far East Mills Supply Corporation, G.R.
No. 128066, June 19, 2000)

A juridical person is generally not entitled to moral damages because, unlike a natural
person, it cannot experience physical suffering or such sentiments as wounded
feelings, serious anxiety, mental anguish or moral shock. Nevertheless, AMECs claim
for moral damages falls under item 7 of Article 2219 of the Civil Code which expressly
authorizes the recovery of moral damages in cases of libel, slander or any other form of
defamation. Article 2219(7) does not qualify whether the plaintiff is a natural or
juridical person. Therefore, a juridical person such as a corporation can validly
complain for libel or any other form of defamation and claim for moral damages.
[Filipinas Broadcasting Network, Inc. vs. AGO Medical And Educational Center-Bicol
Christian College of Medicine, (AMEC-BCCM) and Angelita F. Ago, G.R. No. 141994,
January 17, 2005]

As a rule, a corporation is not entitled to moral damages because, not being a natural
person, it cannot experience physical suffering or sentiments like wounded feelings,
serious anxiety, mental anguish and moral shock. The only exception to this rule is
when the corporation has a reputation that is debased, resulting in its humiliation in
the business realm. But in such a case, it is essential to prove the existence of the
factual basis of the damage and its causal relation to petitioner's acts. Thus, where the
records are bereft of evidence that the name or reputation of the corporation has
been debased as a result of Meralcos act ( which in this case is the disconnection
without written notice of the disconnection of the electricity supply to the building of
the corporation due to alleged meter tampering ), the corporation is not entitled to
moral damages. (Manila Electric Company vs. T.E.A.M. Electronics Corporation,
Technology Electronics Assembly and Management Pacific Corporation; and Ultra
Electronics Instruments, Inc., G.R. No. 131723, December 13, 2007)

While the Court may allow the grant of moral damages to corporations, it is not
automatically granted; there must still be proof of the existence of the factual basis of
the damage and its causal relation to the defendants acts. This is so because moral
damages, though incapable of pecuniary estimation, are in the category of an award
designed to compensate the claimant for actual injury suffered and not to impose a
penalty on the wrongdoer. In this case, there being no wrongful or unjust act on the
part of BPI in demanding payment from the spouses and in seeking the foreclosure of
the chattel and real estate mortgages, there is no lawful basis for award of damages in
favor of the spouses. (Herman C. Crystal, et al. vs. Bank of the Philippine Islands, G.R.
No. 172428, November 28, 2008)

2. Doctrine of Piercing the Corporate Veil

The court must first acquire jurisdiction over the corporation or corporations involved
before its or their separate personalities are disregarded; and the doctrine of piercing the
veil of corporate entity can only be raised during a full-blown trial over a cause of action
duly commenced involving parties duly brought under the authority of the court by way of
service of summons or what passes as such service. Kukan International Corporation vs.
Hon. Judge Amor Reyes, G.R. No. 182729, 29 September 2010

However, in another case involving an action for breach of contract of carriage resulting
to the death of one of the passengers , Supreme Court ruled that if the RTC had sufficient
factual basis to conclude that the two corporations are one and the same entity as when
they have the same President and controlling shareholder and it is generally known in the
place where they do business that both transportation companies are one, the third party
claim filed by the other corporation was set aside and the levy on its property held valid
even though the latter was not made a party to the case . The judgment may be enforced
against the other corporation to prevent multiplicity of suits and save the parties
unnecessary expenses and delay. Gold Line Tours vs. Heirs of Maria Concepcion Lacsa, GR
No. 159108, 18 June 2012

The doctrine of piercing the veil of corporate fiction is applicable not only to corporations
but also to a single proprietorship as when the corporation transferred its employees to
the company owned by the controlling stockholder of the corporation and yet despite the
transfer, the employees daily time records, reports, daily income remittances and
schedule of work were all made, performed, filed and kept in the corporation. The
corporation is clearly hiding behind the supposed separate and distinct personality of the
company. As such, the corporation and the company should be solidarily liable for the
claims of the illegally dismissed employees. Prince Transport, Inc. vs. Garcia, GR No.
167291, January 12, 2011

Although the corporate veil between two corporations can not be pierced for lack of legal
basis, it does not necessarily mean that the corporate officers of such corporations are
exempt from liability. Section 31 of the Corporation Code makes a director or officer
personally liable if he is guilty of bad faith or gross negligence in directing the affairs of
the corporation. In this case, the officers of the corporation who maliciously terminated
the employment of certain employees without any valid ground and in order to suppress
their right to self-organization, having acted in bad faith in directing the affairs of the
corporation, are solidarily liable with the corporation for the unlawful dismissal. Park
Hotel vs. Soriano, GR No. 171118, September 10, 2012

Where the court rendered judgment against a stock brokerage firm directing the latter to
return shares of stock which it sold without authority, but the writ of execution was
returned unsatisfied, an alias writ of execution could not be enforced against its parent
company because the court has not acquired jurisdiction over the latter and while the
parent company owns and controls the brokerage firm, there is no showing that the
control was used to violate the rights of the plaintiff. Pacific Rehouse Corporation vs. Court
of Appeals, GR. No. 199687, March 24, 2014

a. Grounds for Application of Doctrine

When an operator of a bus transportation sold his two certificates of public
convenience to another corporation with the condition, among others, that he shall
not for a period of 10 years from the date of the sale, apply for any TPU service
identical or competing with the buyer, the organization of a corporation barely 3
months after the sale with the wife of operator and his brother and sister-in-law as the
incorporators is a clear violation of the condition. A seller or promisor may not make
use of a corporate entity as a means of evading the obligation of his covenant. Where
the Corporation is substantially the alter ego of the covenantor to the restrictive
agreement, it can be enjoined from competing with the covenantee. (Villa Rey Transit,
Inc. vs. Eusebio E. Ferrer, Pangasinan Transportation Co., Inc. and Public Service
Commission, G.R. No. L-23893, October 29, 1968)

Aggravating RANSOM's clear evasion of payment of its financial obligations is the
organization of a "run-away corporation," ROSARIO, in 1969 at the time the unfair
labor practice case was pending before the CIR by the same persons who were the
officers and stockholders of RANSOM, engaged in the same line of business as
RANSOM, producing the same line of products, occupying the same compound, using
the same machineries, buildings, laboratory, bodega and sales and accounts
departments used by RANSOM, and which is still in existence. This is another instance
where the fiction of separate and distinct corporate entities should be disregarded as
the second corporation seeks the protective shield of a corporate fiction whose veil in
the present case could, and should, be pierced as it was deliberately and maliciously
designed to evade its financial obligation to its employees. (A.C. Ransom Labor Union-
CCLU vs. National Labor Relations Commission, et al., G.R. No. L-69494, May 29, 1987)

The fact that the businesses of private respondent and Acrylic are related, that some of
the employees of the private respondent are the same persons manning and providing
for auxilliary services to the units of Acrylic, and that the physical plants, offices and
facilities are situated in the same compound, it is the Courts considered opinion that
these facts are not sufficient to justify the piercing of the corporate veil of Acrylic.
Hence, the Acrylic not being an extension or expansion of private respondent, the
rank-and-file employees working at Acrylic should not be recognized as part of,
and/or within the scope of the petitioner, as the bargaining representative of private
respondent. (Indophil Textile Mill Workers Union-PTGWO vs. Voluntary Arbitrator
Teodorico P. Calica and Indophil Textile Mills, Inc., G.R. No. 96490, February 3, 1992)

The defense of separateness will be disregarded where the business affairs of a
subsidiary corporation are so controlled by the mother corporation to the extent that it
becomes an instrument or agent of its parent. But even when there is dominance over
the affairs of the subsidiary, the doctrine of piercing the veil of corporate fiction
applies only when such fiction is used to defeat public convenience, justify wrong,
protect fraud or defend crime. (Bibiano O. Reynoso, IV vs. Hon. Court of Appeals and
General Credit Corporation, G.R. Nos. 116124-25, November 22, 2000)

The sale of Times franchise as well as most of its bus units to a company owned by
Rondaris daughter and family members, right in the middle of a labor dispute, is highly
suspicious. It is evident that the transaction was made in order to remove Times
remaining assets from the reach of any judgment that may be rendered in the unfair
labor practice cases filed against it. (Times Transportation Company, Inc. vs. Santos
Sotelo, et al., G.R. No. 163786, February 16, 2005)

Piercing the veil of corporate fiction is warranted when a corporation ceased to exist
only in name as it re-emerged in the person of another corporation, for the purpose of
evading its unfulfilled financial obligation under a compromise agreement. Thus, if the
judgment for money claim could not be enforced against the employer corporation, an
alias writ may be obtained against the other corporation considering the indubitable
link between the closure of the first corporation and incorporation of the other.
Livesey vs. Binswanger Philippines, GR No. 177493, March 19, 2014

b. Test in Determining Applicability

The test in determining the applicability of the doctrine of piercing the veil of
corporate fiction is as follows: 1.) Control, not mere majority or complete stock
control, but complete domination, not only of finances but of policy and business
practice in respect to the transaction attacked so that the corporate entity as to this
transaction had at the time no separate mind, will or existence of its own; 2.) Such
control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and
unjust act in contravention of plaintiffs legal rights; and 3.) The aforesaid control and
breach of duty must proximately cause the injury or unjust loss complained of.
(Concept Builders, Inc. vs. the National Labor Relations Commission, et al., G.R. No.
108734, May 29, 1996)

Concept Builders ceased its business operations in order to evade the payment to
private respondents of backwages and to bar their reinstatement to their former
positions. It is very obvious that the second corporation seeks the protective shield of a
corporate fiction whose veil in the present case could, and should, be pierced as it was
deliberately and maliciously designed to evade its financial obligation to its
employees. (Ibid.)

Under a variation of the doctrine of piercing the veil of corporate fiction, when two
business enterprises are owned, conducted and controlled by the same parties, both
law and equity will, when necessary to protect the rights of third parties, disregard the
legal fiction that two corporations are distinct entities and treat them as identical or
one and the same. While the conditions for the disregard of the juridical entity may
vary, the following are some probative factors of identity that will justify the
application of the doctrine of piercing the corporate veil, as laid down in Concept
Builders, Inc. v NLRC: (1) Stock ownership by one or common ownership of both
corporations; (2) Identity of directors and officers; (3) The manner of keeping
corporate books and records, and (4) Methods of conducting the business. (Heirs of Fe
Tan Uy, represented by her heir, Mauling Uy Lim vs. International Exchange Bank, G.R.
No. 166282 & 83, February 13, 2013)

The doctrine of piercing the corporate veil applies only in three (3) basic areas,
namely: 1) defeat of public convenience as when the corporate fiction is used as a
vehicle for the evasion of an existing obligation; 2) fraud cases or when the corporate
entity is used to justify a wrong, protect fraud, or defend a crime; or 3) alter ego cases,
where a corporation is merely a farce since it is a mere alter ego or business conduit of
a person, or where the corporation is so organized and controlled and its affairs are so
conducted as to make it merely an instrumentality, agency, conduit or adjunct of
another corporation.

In this connection, case law lays down a three-pronged test to determine the
application of the alter ego theory, which is also known as the instrumentality theory,
namely:

1. Control, not mere majority or complete stock control, but complete domination, not only
of finances but of policy and business practice in respect to the transaction attacked so
that the corporate entity as to this transaction had at the time no separate mind, will or
existence of its own
2. Such control must have been used by the defendant to commit fraud or wrong, to
perpetuate the violation of a statutory or other positive legal duty, or dishonest and unjust
act in contravention of plaintiffs legal right; and
3. The aforesaid control and breach of duty must have proximately caused the injury or
unjust loss complained of.

The first prong is the "instrumentality" or "control" test. This test requires that the
subsidiary be completely under the control and domination of the parent. It inquires
whether a subsidiary corporation is so organized and controlled and its affairs are so
conducted as to make it a mere instrumentality or agent of the parent corporation such
that its separate existence as a distinct corporate entity will be ignored. In addition, the
control must be shown to have been exercised at the time the acts complained of took
place.

The second prong is the "fraud" test. This test requires that the parent corporations
conduct in using the subsidiary corporation be unjust, fraudulent or wrongful. It examines
the relationship of the plaintiff to the corporation. It recognizes that piercing is
appropriate only if the parent corporation uses the subsidiary in a way that harms the
plaintiff creditor. As such, it requires a showing of "an element of injustice or fundamental
unfairness."

The third prong is the "harm" test. This test requires the plaintiff to show that the
defendants control, exerted in a fraudulent, illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection between the fraudulent conduct
committed through the instrumentality of the subsidiary and the injury suffered or the
damage incurred by the plaintiff should be established. The plaintiff must prove that,
unless the corporate veil is pierced, it will have been treated unjustly by the defendants
exercise of control and improper use of the corporate form and, thereby, suffer damages.
Development Bank of the Philippines vs. Hydro Resources Contractors Corporation, GR.
No. 167603, March 13, 2013

E. Incorporation and Organization

When the President of a non-existent principal entered into a contract and failed to
pay its obligation, he shall be the one liable to the aggrieved party. A person acting as
a representative of a non-existent principal is the real party to the contract sued upon,
being the one who reaped the benefits resulting from it.(Mariano A. Albert vs.
University Publishing Co., Inc., G.R. No. L-19118, January 30, 1965)

Where a national sports association which is not created by a special law or a general
enabling act, through its president, secured airline tickets for the trips of its athletes
and officials to the South East Asian Games and later on failed to pay the obligation,
the president shall be personally liable. It is a settled principle in corporation law that
any person acting or purporting to act on behalf of a corporation which has no valid
existence assumes such privileges and becomes personally liable for contract entered
into or for other acts performed as such agent.(International Express Travel & Tour
Services, Inc. vs. Hon. Court of Appeals, Henri Kahn, Philippine Football Federation,
G.R. No. 119002, October 19, 2000)

A corporation created and organized for the purpose of conducting the business of
selling optical lenses or eyeglasses is not engaged in the practice of optometry
because the determination of the proper lenses to sell to private respondent's clients
entails the employment of optometrists who have been precisely trained for that
purpose. Private respondent's business, rather, is the buying and importing of
eyeglasses and lenses and other similar or allied instruments from suppliers thereof
and selling the same to consumers. (Samahanng Optometrists saPilipinas, Ilocos Sur-
Abra Chapter, et al. vs. Acebedo International Corporation and the Hon. Court of
Appeals, G.R. No. 117097, 21 March 1997)

1. Promoter

a. Liability of Promoter
b. Liability of Corporation for Promoters Contracts

As a general rule, a corporation should have a full and complete organization and
existence as an entity before it can enter into any kind of a contract or transact any
business. This is subject to the exception that a contract made by the promoters of a
corporation on its behalf may be adopted, accepted or ratified by the corporation
when organized. (Rizal Light & Ice Co., Inc. vs.the Municipality of Morong, Rizal and
the Public Service Commission,G.R. No. L-20993, September 28, 1968)

2. Number and Qualifications of Incorporators

It is possible for a business to be wholly owned by one individual because the validity
of its incorporation is not affected when such individual gives nominal ownership of
only one share of stock to each of the other four incorporators. As between the
corporation on the one hand, and its shareholders and third persons on the other, the
corporation looks only to its books for the purpose of determining who its
shareholders are. (Nautica Canning Corporation, et al. vs. Roberto C. Yumul,G.R. No.
164588, October 19, 2005)

3. Corporate Name Limitations on Use of Corporate Name

A change in the name of the corporation does not make it a new corporation and does
not affect its properties, right and liabilities. It is the same corporation with a different
name, and its character is in no respect changed. (Republic Planters Bank vs. Court of
Appeals, G.R. No. 93073, December 21, 1992)

The Court cannot impose on a bank that changes its corporate name the obligation to
notify a debtor of such change absent any law, circular or regulation requiring it as
such act would be judicial legislation. Unless there is a law, regulation or circular from
the SEC or BSP requiring the formal notification of all debtors of banks of any change
in corporate name, such notification remains to be a mere internal policy that banks
may or may not adopt. (P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank,
Inc., et al., G.R. No. 129552, June 29, 2005)

To fall within the prohibition under Section 18 of the Corporation Code, two requisites
must be proven, to wit: 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. Petitioners corporate name which is Industrial Refractories Corp. of the
Phils. and respondents corporate name which is Refractories Corp. of the Phils.
obviously contain the identical words Refractories, Corporation and Philippines;
hence, petitioners corporate name clearly falls within the prohibition. (Industrial
Refractories Corporation of the Philippines vs. Court of Appeals, Securities and
Exchange Commission and Refractories Corporation of the Philippines, G.R. No.
122174, October 3, 2002)

It is the SECs duty to prevent confusion in the use of corporate names not only for the
protection of the corporations involved but more so for the protection of the public,
and it has authority to de-register at all times and under all circumstances corporate
names which in its estimation are likely to generate confusion. Clearly therefore, the
present case falls within the ambit of the SECs regulatory powers.(Ibid.)

A change in the corporate name does not make a new corporation, whether effected
by a special act or under a general law. It has no effect on the identity of the
corporation, or on its property, rights, or liabilities because the corporation upon such
change in its name, is in no sense a new corporation, nor the successor of the original
corporation.(P.C. Javier & Sons, Inc., et al. vs.Paic Savings & Mortgage Bank, Inc., et al.,
G.R. No. 129552, June 29, 2005)

The mere change in the corporate name is not considered under the law as the
creation of a new corporation; hence, the renamed corporation remains liable for the
illegal dismissal of its employee separated under that guise. Verily, the amendments of
the articles of incorporation of Zeta to change the corporate name to Zuellig Freight
and Cargo Systems, Inc. did not produce the dissolution of the former as a corporation.
(Zuellig Freight and Cargo Systemsvs. National Labor Relations Commission, et al., G.R.
No. 157900, July 22, 2013)

4. Corporate Term

When the period of corporate life expires, the corporation ceases to be a body
corporate for the purpose of continuing the business for which it was organized, but it
shall nevertheless be continued as a body corporate for three years after the time
when it would have been so dissolved, for the purpose of prosecuting and defending
suits by or against it and enabling it gradually to settle and close its affairs, to dispose
of and convey its property and to divide its assets. There is no need for the institution
of a proceeding for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in the articles of
incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig,
et al.,G.R. No. 63201, May 27, 1992)

5. Minimum Capital Stock and Subscription Requirements

The submission of the Board that the value of the assets of Asturias Sugar Central, Inc.
transferred to MSCI, as well as the loans or advances made by MTII to MSCI should
have been taken into consideration in computing the paid-up capital of MSCI is
unmeritorious, at best, and betrays the Board's sheer lack of grasp of a basic concept in
Corporation Law, at worst. Not all funds or assets received by the corporation can be
considered paid-up capital, for this term has a technical signification in Corporation
Law which is the portion of the authorized capital stock of the corporation, subscribed
and then actually paid up. (MSCI-NACUSIP Local Chapter vs. National Wages and
Productivity Commission and Monomer Sugar Central, Inc., G.R. No. 125198, March 3,
1997)

In short, the term capital in Section 11, Article XII of the Constitution refers only to
shares of stock that can vote in the election of directors. To construe broadly the term
capital as the total outstanding capital stock, including both common and non-
voting preferred shares, grossly contravenes the intent and letter of the Constitution
that the State shall develop a self-reliant and independent national economy
effectively controlled by Filipinos. A broad definition unjustifiably disregards who
owns the all-important voting stock, which necessarily equates to control of the public
utility. (Wilson P. Gamboa vs. Finance Secretary Margarito B. Teves, et al., G.R. No.
176579, June 28, 2011)

Since the constitutional requirement of at least 60 percent Filipino ownership applies
not only to voting control of the corporation but also to the beneficial ownership of
the corporation, it is therefore imperative that such requirement applies uniformly and
across the board to all classes of shares, regardless of nomenclature and category,
comprising the capital of a corporation. Since a specific class of shares may have rights
and privileges or restrictions different from the rest of the shares in a corporation, the
60-40 ownership requirement in favor of Filipino citizens in Section 11, Article XII of
the Constitution must apply not only to shares with voting rights but also to shares
without voting rights. (Heirs of Wilson P. Gamboa vs. Finance Secretary Margarito B.
Teves, et al., G.R. No. 176579, October 9, 2012)

6. Articles of Incorporation

a. Nature and Function of Articles

The best proof of the purpose of a corporation is its articles of incorporation and by-
laws, and in the case at bar, a perusal of the Articles of Incorporation of Ellice and
Margo shows no sign of the allegedly illegal purposes that petitioners are complaining
of. It is well to note that, if a corporations purpose, as stated in the Articles of
Incorporation, is lawful, then the SEC has no authority to inquire whether the
corporation has purposes other than those stated, and mandamus will lie to compel it
to issue the certificate of incorporation.(Alicia E. Gala, et al.vs. Ellice Agro-Industrial
Corporation, et al., G.R. No. 156819, December 11, 2003)

b. Contents

The fact that it maintains branch offices in some parts of the country does not mean
that it can be sued in any of these places because to allow an action to be instituted in
any place where a corporate entity has its branch offices would create confusion and
inconvenience to the corporation. The residence of a corporation is the place where its
principal office is established. (Clavecillia Radio System vs. Hon. Agustin Antillon, as
City Judge of the Municipal Court of Cagayan de Oro City and New Cagayan Grocery,
G.R. No. L-22238, February 18, 1967)

The venue in this case was improperly laid because the principal office of Hyatt as
stated in the Articles of Incorporation is in Makati but the case was filed in
Mandaluyong where Hyatt transferred its operations. Since the principal place of
business of a corporation determines its residence or domicile, then the place
indicated in petitioners articles of incorporation becomes controlling in determining
the venue for the filing of a case. (Hyatt Elevators and Escalators Corporation vs.
Goldstar Elevators Phils., Inc., G.R. No. 161026, October 24, 2005)

c. Amendment

The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall
be valid except between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." 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.
(Marsh Thomson vs. Court of Appeals and the American Champer of Commerce of the
Philippines, Inc,, G.R. No. 116631, October 28, 1998)

d. Non-Amendable Items

7. Registration and Issuance of Certificate of Incorporation

8. Adoption of By-Laws

a. Nature and Functions of By-Laws

Every corporation has the inherent power to adopt by-laws 'for its internal
government, and to regulate the conduct and prescribe the rights and duties of its
members towards itself and among themselves in reference to the management of its
affairs. Under section 21 of the Corporation Law, a corporation may prescribe in its by-
laws the qualifications, duties and compensation of directors, officers and employees.
(John Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911,
April 11, 1979)

Corporate powers may be directly conferred upon corporate officers or agents by
statute, the articles of incorporation, the by-laws or by resolution or other act of the
board of directors. Since the by-laws are a source of authority for corporate officers
and agents of the corporation, a resolution of the Board of Directors of Citibank
appointing an attorney in fact to represent and bind it during the pre-trial conference
of the case at bar is not necessary because its by-laws allow its officers, the Executing
Officer and the Secretary Pro-Tem - to execute a power of attorney to a designated
bank officer, William W. Ferguson in this case, clothing him with authority to direct
and manage corporate affairs. (Citibank, N.A. vs. Hon. Segundino G. Chua, et al., G.R.
No. 102300, March 17, 1993)

Since the SEC will grant a license only when the foreign corporation has complied with
all the requirements of law, it follows that when it decides to issue such license, it is
satisfied that the applicant's by-laws, among the other documents, meet the legal
requirements. Therefore, petitioner bank's by-laws, though originating from a foreign
jurisdiction, are valid and effective in the Philippines. (Citibank, N.A. vs. Hon.
Segundino G. Chua, et al., G.R. No. 102300, March 17, 1993)

Non-filing of the by-laws will not result in automatic dissolution of the corporation.
Under Section 6(I) of PD 902-A, the SEC is empowered to suspend or revoke, after
proper notice and hearing, the franchise or certificate of registration of a corporation
on the ground inter alia of failure to file by-laws within the required period. (Loyola
Grand Villas Homeowners (South) Association, Inc. vs. Hon. Court of Appeals, Home
Insurance And Guaranty Corporation, Emden Encarnacion and Horatio Aycardo, G.R.
No. 117188, August 7, 1997)

Conformably with Section 25 of the Corporation Code, a position must be expressly
mentioned in the By-Laws in order to be considered as a corporate office. Thus, the
creation of an office pursuant to or under a By-Law enabling provision is not enough to
make a position a corporate office. (Matling Industrial and Commercial Corporation,
et al. vs. Ricardo R. Coros, G.R. No. 157802, October 13, 2010)

b. Requisites of Valid By-Laws

A provision in the by-laws of the corporation stating that of the 15 members of its
Board of Directors, only 14 members would be elected while the remaining member
would be the representative of an educational institution located in the village of the
homeowners, is invalid for being contrary to law. The fact that for fifteen years it has
not been questioned or challenged but, on the contrary, appears to have been
implemented by the members of the association cannot forestall a later challenge to
its validity because, if it is contrary to law, it is beyond the power of the members of the
association to waive its invalidity(Grace Christian High Schoolvs.the Court Of Appeals,
Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R. No.
108905, 23 October 1997)

The Corporation does not necessarily prohibit the transfer of proprietary shares by its
members when its amended Articles of Incorporation provides that: "No transfer shall
be valid except between the parties, and shall be registered in the Membership Book
unless made in accordance with these Articles and the By-Laws." 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 by means of by-laws provisions, but merely
authorizes the adoption of regulations as to the formalities and procedure to be
followed in effecting transfer. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)

c. Binding Effects

CBC is not bound by the provision in the by-laws of the VGCCI granting the VGCCI a
preferred lien over the share of stock of a member for unpaid dues. The by-law
restricting the transfer of shares cannot have any effect on the transferee of the shares
in question as he had no knowledge of such by-law when the shares were assigned to
him. (China Banking Corporation vs. Court of Appeals, and Valley Golf and Country
Club, Inc., G.R. No. 117604, March 26, 1997)

PMI College alleged that the employment contract entered into between the school
and Galvan is invalid because the signatory thereon was not the Chairman of the Board
as required by its by-laws. However, 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 vs. the
National Labor Relations Commission and Alejandro Galvan, G.R. No. 121466, 15
August 1997)

d. Amendment or Revision
When an amendment to a provision in the Amended By-Laws requiring the unanimous
vote of the directors present at a special or regular meeting was not printed on the
application form for proprietory membership, and what was printed thereon was the
original provision which was silent on the required number of votes needed for
admission of an applicant as a proprietary member, the Board of Directors committed
fraud and evident bad faith in disapproving respondents application under Article 31
of the Corporation Code. The explanation given by the petitioner that the amendment
was not printed on the application form due to economic reasons is flimsy and
unconvincing because such amendment, aside from being extremely significant, was
introduced way back in 1978 or almost twenty (20) years before respondent filed his
application. (Cebu Country Club, Inc., et al. vs. Ricardo F. Elizagaque, G.R. No. 160273,
January 18, 2008)
F. Corporate Powers

1. General Powers, Theory of General Capacity

The stevedoring services which involve the unloading of the coal shipments into the
NPC pier for its eventual conveyance to the power plant are incidental and
indispensable to the operation of the plant. A corporation is not restricted to the
exercise of powers expressly conferred upon it by its charter, but has the power to do
what is reasonably necessary or proper to promote the interest or welfare of the
corporation. (National Power Corporation vs. Honorable Abraham P. Vera, Presiding
Judge, Regional Trial Court, National Capital Judicial Region, Branch 90, Quezon City
and Sea Lion International Port Terminal Services, Inc., G.R. No. 83558, February 27,
1989)

It would seem that under Philippine law, a joint venture is a form of partnership and
should thus be governed by the law of partnerships. The Supreme Court has however
recognized a distinction between these two business forms, and has held that although
a corporation cannot enter into a partnership contract, it may however engage in a
joint venture with others. (WolrgangAurbach, John Griffin, David P. Whittinghamand
Charles Chamsay vs. Sanitary Wares Manufacturing Corporatoin, Ernesto V. Lagdameo,
Ernesto R. Lagdameo, Jr., Enrique R. Lagdameo, George F. Lee, Raul A. Boncan, Baldwin
Young and Avelino V. Cruz, G.R. No. 75875, December 15, 1989)

Providing gratuity pay is one of the express powers of the corporation under the
Corporation Code and therefore, resolutions passed by the board approving the grant
of gratuity pay to the employees of the corporation during a meeting where one of the
directors was not notified thereof are not ultra vires. The grant of gratuity pay does not
require shareholders approval as it is not tantamount to the sale, lease, exchange or
disposition of all or substantially all of the corporation's assets.(Lopez Realty, Inc., and
Asuncion Lopez Gonzales vs. FlorentinaFontecha, et al., and the National Labor
Relations Commission, G.R. No. 76801 August 11, 1995)

Lideco Corporation had no personality to intervene since it had not been duly
registered as a corporation. If petitioner Laureano Investment & Development
Corporation legally and truly wanted to intervene, it should have used its corporate
name as the law requires and not another name which it had not registered.(Laureano
Investment & Development Corporation vs. the Honorable Court of Appeals and
BORMAHECO, Inc., G.R. No. 100468, May 6, 1997)

The power of a corporation to sue and be sued is exercised by the board of directors.
The physical acts of the corporation, like the signing of documents, can be performed
only by natural persons duly authorized for the purpose by corporate bylaws or by a
specific act of the board. Absent the said board resolution, a petition may not be given
due course.(LigayaEsguerra, et al. vs. Holcim Philippines, Inc., G.R. No. 182571,
September 2, 2013)

The lawyer who signed the pleading, verification and certification against non-forum
shopping must be specifically authorized by the Board of Directors of the Corporation to
make his actions binding on his principal. Maranaw Hotels and Resort Corporation v.
Court of Appeals, 576 SCRA 463 (2009)

If the real party in interest is a corporate body, an officer of the corporation can sign the
certification against forum shopping so long as he has been duly authorized by a resolution
of its board of directors. The court did not commit grave abuse of discretion in dismissing
the petition for lack of authority of authority of the officer who signed the certification of
non-forum shopping in representation of petitioner corporation. San Miguel Bukid
Homeowners Association, Inc. vs City of Mandaluyong, et al, GR no.153653, October 2,
2009; Republic of the Philippines vs. Coalbrine International Philippines, et al GR No.
161838, April 7, 2010

The following officers may sign the verification and certification against non-forum
shopping on behalf of the corporation even in the absence of board resolution,

a)Chairperson of the Board of Directors;
b)President,
c)General Manager,
d) Personnel Officer,
e) Employment Specialist in labor case.

These officers are in the position to verify the truthfulness and correctness of the
allegations in the petition. Mid Pasig Land and Development Corporation v. Tablante, G.R.
No. 162924, February 4, 2010; PNCC Skyway Traffic Management and Security Division
Workers Organization vs PNCC Skyway Corporation, GR No. 171231, February 17, 2010

The general rule is that a corporation can only exercise its powers and transact its business
through its board of directors and through its officers and agents when authorized by a
board resolution or its bylaws. The power of a corporation to sue and be sued is exercised
by the board of directors. The physical acts of the corporation, like the signing of
documents, can be performed only by natural persons duly authorized for the purpose by
corporate bylaws or by a specific act of the board. Absent the said board resolution, a
petition may not be given due course. Esguerra vs. Holcim Philippines G.R. No. 182571,
September 2, 2013

In a complaint for nullification of mortgage and foreclosure with damages against the
mortgagee-bank, the plaintiff can not compel the officers of the bank to appear and
testify as plaintiffs initial witnesses unless written interrogatories are first served upon the
bank officers. This is in line with the Rules of Court provision that calling the adverse party
to the witness stand is not allowed unless written interrogatories are first served upon the
latter. This is because the officers of a corporation are considered adverse parties as well in
a case against the corporation itself based on the principle that corporations act only
through their officers and duly authorized agents. Spouses Afulugencia vs. Metropolitan
Bank and Trust Co. G.R. No. 185145, February 05, 2014

2. Specific Powers, Theory of Specific Capacity

a. Power to Extend or Shorten Corporate Term

Section 11 of Corporation Code provides that 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. Upon the expiration of the period fixed in the articles
of incorporation in the absence of compliance with the legal requisites for the
extension of the period, the corporation ceases to exist and is dissolved ipso
facto.(Philippine National Bank vs. the Court of First Instance of Rizal, Pasig, et al.,G.R.
No. 63201, May 27, 1992)

b. Power to Increase or Decrease Capital Stock or Incur, Create, Increase Bonded
Indebtedness

Prior to the approval by the Securities and Exchange Commission of the increase in the
authorized capital stock, such payments cannot as yet be deemed part of a
corporations paid-up capital, technically speaking, because its capital stock has not
yet been legally increased. Such payments constitute deposits on future subscriptions,
money which the corporation will hold in trust for the subscribers until it files a
petition to increase its capitalization and a certificate of filing of increase of capital
stock is approved and issued by the SEC. (Central Textile Mills, Inc.vs. National Wages
and Productivity Commission, et al., G.R. No. 104102, August 7, 1996)

c. Power to Deny Pre-Emptive Rights
d. Power to Sell or Dispose of Corporate Assets

The sale or disposition of all or substantially all properties of the corporation requires,
in addition to a proper board resolution, the affirmative votes of the stockholders
holding at least two-thirds (2/3) of the voting power in the corporation in a meeting
duly called for that purpose. No doubt, the questioned resolution was not confirmed at
a subsequent stockholders meeting duly called for the purpose by the affirmative votes
of the stockholders holding at least two-thirds (2/3) of the voting power in the
corporation. (Rosita Pea vs. the Court of Appeals, Spouses Rising T. Yap and Catalina
Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador Bernardez,
Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7, 1991)

Where an asset constitutes the only property of the corporation, its sale to a third-
party is a sale or disposition of all the corporate property and assets of said corporation
falling squarely within the contemplation of Section 40 of the Corporation Code.
Hence, for the sale to be valid, the majority vote of the legitimate Board of Trustees,
concurred in by the vote of at least 2/3 of the bona fide members of the corporation
should have been obtained.(Islamic Directorate of the Philippines, Manuel F. Perea
and Securities & Exchange Commission,vs. Court of Appeals And Iglesia Ni Cristo, G.R.
No. 117897, May 14, 1997)

e. Power to Acquire Own Shares

The requirement of unrestricted retained earnings to cover the shares is based on the
trust fund doctrine which means that the capital stock, property and other assets of a
corporation are regarded as equity in trust for the payment of corporate creditors. The
reason is that creditors of a corporation are preferred over the stockholders in the
distribution of corporate assets. (Boman Environmental Development Corporation vs.
Hon. Court of Appeals and Nilcar Y. Fajilan, G.R. No. 77860, November 22, 1988)

f. Power to Invest Corporate Funds in Another Corporation or Business

A corporation, under the Corporation Code, has only such powers as are expressly
granted to it by law and by its articles of incorporation, those which may be incidental
to such conferred powers, those reasonably necessary to accomplish its purposes and
those which may be incident to its existence. In the case at bar, a company engaged in
the practice of lending money is categorically prohibited from engaging in
pawnbroking as defined under PD 114.(Pilipinas Loan Company, Inc. vs. Hon.
Securites and Exchange Commission and Filipinas Pawnshop, Inc., G.R. No. 104720,
April 4, 2001)

A mining corporation cannot engage in the highly speculative business of urban real
estate development, and could not have validly acquired real estate property. ((Heirs
of Antonio Pael and Andrea Alcantara and CrisantoPael vs. Court of Appeals, Jorge H.
Chin and Renato B. Mallari, G.R. No. 133547, February 10, 2000)

g. Power to Declare Dividends

The dividends received by a corporation from corporate investments in other
companies are corporate earnings. As such shareholder, the dividends paid to it were
its own money, which may then be available for wage increments. (Madrigal &
Company, Inc. vs. Hon. Ronaldo B. Zamora, et al., G.R. NO. L-48237, June 30, 1987)

Dividends cannot be declared for preferred shares which were guaranteed a quarterly
dividend if there are no unrestricted retained earnings. "Interest bearing stocks", on
which the corporation agrees absolutely to pay interest before dividends are paid to
common stockholders, is legal only when construed as requiring payment of interest as
dividends from net earnings or surplus only. (Republic Planters Bank vs. Hon. Enrique
A. Agana, Sr., as Presiding Judge, Court of First Instance of Rizal, Branch XXVIII, Pasay
City, Robes-Francisco Realty & Development Corporation and Adalia F. Robes, G.R.
No. 51765, March 3, 1997)

h. Power to Enter Into Management Contract
i. Ultra Vires Acts

i. Applicability of Ultra Vires Doctrine
ii. Consequences of Ultra Vires Acts

While as a rule an ultra vires act is one committed outside the object for which a
corporation is created as defined by the law of its organization and therefore beyond
the powers conferred upon it by law, there are however certain corporate acts that
may be performed outside of the scope of the powers expressly conferred if they are
necessary to promote the interest or welfare of the corporation such as the
establishment of the local post office which is a vital improvement in the living
condition of the employees and laborers who came to settle in a mining camp which is
far removed from the postal facilities. The term ultra vires should be distinguished
from an illegal act for the former is merely voidable which may be enforced by
performance, ratification, or estoppel, while the latter is void and cannot be validated.
(Republic of the Philippines vs. Acoje Mining Company, Inc., G.R. No. L-18062,
February 28, 1963)

The act of issuing the checks was well within the ambit of a valid corporate act, for it
was for securing a loan to finance the activities of the corporation, hence, not an ultra
vires act. (Atrium Management Corporation vs. Court of Appeals, et al., G.R. No.
109491, February 28, 2001)

Unlike illegal acts which contemplate the doing of an act that is contrary to law,
morals, or public policy or public duty, and are void, ultra vires acts are those which are
not illegal but are merely not within the scope of the articles of incorporation and by-
laws. They are merely voidable and may become binding and enforceable when
ratified by the stockholders. (Maria Clara Pirovana, et al.vs.the De La Rama Steamship
Co., G.R. No. L-5377, December 29, 1954)

3. How Exercised

a. By the Shareholders
b. By the Board of Directors

The general rule is that a corporation, through its board of directors, should act in the
manner and within the formalities, if any, prescribed by its charter or by the general
law. Directors must act as a body in a meeting called pursuant to the law or the
corporation's by-laws, otherwise, any action taken therein may be questioned by any
objecting director or shareholder; but an action of the board of directors during a
meeting, which was illegal for lack of notice, may be ratified either expressly, by the
action of the directors in subsequent legal meeting, or impliedly, by the corporation's
subsequent course of conduct.(Lopez Realty, Inc., and Asuncion Lopez Gonzales vs.
FlorentinaFontecha, et al., and the National Labor Relations Commission, G.R. No.
76801 August 11, 1995)

By the express mandate of the Corporation Code (Section 26), all corporations duly
organized pursuant thereto are required to submit within the period therein stated (30
days) to the Securities and Exchange Commission the names, nationalities and
residences of the directors, trustees and officers elected. In determining whether the
filing of a suit was authorized by the board of directors, the list of directors in the latest
general information sheet filed with the Securities and Exchange Commission is
controlling.(Premium Marble Resources, Inc.vs. the Court of Appeals, G.R. No. 96551.
November 4, 1996)

Under Section 36 of the Corporation Code, read in relation to Section 23,it is clear
that where a corporation is an injured party, its power to sue is lodged with its board of
directors or trustees. In this case, the petitioner failed to show any proof that he was
authorized or deputized or granted specific powers by the corporations board of
director to sue Victor AngSiong for and on behalf of the firm, and therefore he had no
such power or authority to sue on Concords behalf.(Tam Wing Takvs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001)

c. By the Officers

When the practice of the corporation has been to allow its general manager to
negotiate and execute contracts in its copra trading activities for and in behalf of the
corporation without prior board approval, the board itself, by its acts and through
acquiescence, practically laid aside the by-law requirement of prior approval. Settled
jurisprudence has it that where similar acts have been approved by the directors as a
matter of general practice, custom, and policy, the general manager may bind the
company without formal authorization of the board of directors. (The Board of
Liquidators, representing the Government of the Republic of the Philippines vs.Heirs
of Maximo M. Kalaw, Juan Bocar, Estate of the deceased Casimiro Garcia, and Leonor
Moll,G.R. No. L-18805, August 14, 1967)

When a bank, by its acts and failure to act, has clearly clothed its manager with
apparent authority to sell an acquired asset in the normal course of business, it is
legally obliged to confirm the transaction by issuing a board resolution to enable the
buyers to register the property in their names. It has a duty to perform necessary and
lawful acts to enable the other parties to enjoy all benefits of the contract which it had
authorized. (Rural Bank Of Milaor (Camarines Sur) vs. Francisca Ocfemia, Rowena
Barrogo, Marife O. Nio, FelicisimoOcfemia, Renato Ocfemia Jr., and Winston
Ocfemia, G.R. No. 137686, February 8, 2000)

If a corporation consciously lets one of its officers, or any other agent, to act within the
scope of an apparent authority, it will be estopped from denying such officers
authority. Since the records show that Calo, who was an Account Officer, was the one
assigned to transact on petitioners behalf respecting the loan transactions and
arrangements of Inland as well as those of Hanil-Gonzales and Abrantes, it is presumed
that he had authority to sign for the bank in the Deed of Assignment.(Westmont Bank
(formerly Associated Citizens Bank and now United Overseas Bank, Phils.) And The
Provincial Sheriff of Rizal vs. Inland Construction and Development Corp., G.R. No.
123650, March 23, 2009)

Accordingly, the authority to act for and to bind a corporation may be presumed from
acts of recognition in other instances, wherein the power was exercised without any
objection from its board or shareholders. Undoubtedly, petitioner had previously
allowed Atty. Soluta to enter into the first agreement without a board resolution
expressly authorizing him; thus, it had clothed him with apparent authority to modify
the same via the second letter-agreement. It is not the quantity of similar acts which
establishes apparent authority, but the vesting of a corporate officer with the power to
bind the corporation. (Associated Bank vs. Spouses Rafael and MonalizaPronstroller,
G.R. No. 148444, 14 July 2008)


Although a branch manager, within his field and as to third persons, is the general
agent and is in general charge of the corporation, with apparent authority
commensurate with the ordinary business entrusted him and the usual course and
conduct thereof, yet the power to modify or nullify corporate contracts remains
generally in the board of directors. Being a mere branch manager alone is insufficient
to support the conclusion that he has been clothed with apparent authority to
verbally alter terms of written contracts, especially when viewed against the telling
circumstances of this case: the unequivocal provision in the mortgage contract; the
corporations vigorous denial that any agreement to release the mortgage was ever
entered into by it; and, the fact that the purported agreement was not even reduced
into writing considering its legal effects on the parties interests. Banate vs. Philippine
Countryside Rural Bank (Liloan, Cebu), Inc., G.R. No. 163825, July 13, 2010

A corporation can not deny the authority of lawyer when they clothed him with
apparent authority to act in their behalf such as when he entered his appearance
accompanied by the corporations general manager and the corporation never
questioned his acts and even took time and effort to forward all the court documents
to him. The lawyer may not have been armed with a board resolution but the doctrine
of apparent authority imposes liability not as a result of contractual relationship but
rather because of the actions of the principal or an employer in somehow misleading
the public that the relationship or the authority exists. Megan Sugar Corporation vs.
RTC of Ilo-ilo Br. 68, GR no. 170352, June 1, 2011

The doctrine of apparent authority provides that a corporation will be estopped from
denying the agents authority if it knowingly permits one of its officers or any other
agent to act within the scope of an apparent authority, and it holds him out to the
public as possessing the power to do those acts.

Apparent authority is derived not merely from practice. Its existence may be
ascertained through (1) the general manner in which the corporation holds out an
officer or agent as having the power to act or, in other words the apparent authority to
act in general, with which it clothes him; or (2) the acquiescence in his acts of a
particular nature, with actual or constructive knowledge thereof, within or beyond the
scope of his ordinary powers. It is not the quantity of similar acts which establishes
apparent authority, but the vesting of a corporate officer with the power to bind the
corporation. When the sole management of the corporation was entrusted to two of
its officers/incorporators with the other officers never had dealings with the
corporation for 14 years and that the board and the stockholders never had its
meeting, the corporation is now estopped from denying the officers authority to
obtain loan from the lender on behalf of the corporation under the doctrine of
apparent authority. Advance Paper Corporation vs Arma Traders Corporation , G.R.
No 176897, December 11, 2013.

4. Trust Fund Doctrine

In the instant case, the rescission of the Pre-Subscription Agreement will effectively
result in the unauthorized distribution of the capital assets and property of the
corporation, thereby violating the Trust Fund Doctrine and the Corporation Code,
since rescission of a subscription agreement is not one of the instances when
distribution of capital assets and property of the corporation is allowed. The Trust Fund
Doctrine provides that subscriptions to the capital stock of a corporation constitute a
fund to which the creditors have a right to look for the satisfaction of their claims.(Ong
Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 & G.R. No. 144629, 8 April 2003)

When negotiations ensued in light of a planned takeover of company and the counsel
of the buyer advised the stockholder through a letter that he may take the machineries
he brought to the corporation out with him for his own use and sale, the previous
stockholder cannot recover said machineries and equipment because these properties
remained part of the capital property of the corporation. Under the trust fund
doctrine, the capital stock, property, and other assets of a corporation are regarded as
equity in trust for the payment of corporate creditors which are preferred over the
stockholders in the distribution of corporate assets. (Ryuichi Yamamoto vs. Nishino
Leather Industries, Inc. and Ikuo Nishino, G.R. No. 150283, April 16, 2008)

G. Board of Directors and Trustees

1. Doctrine of Centralized Management

2. Business Judgment Rule

The determination of the necessity for additional offices and/or positions in a
corporation is a management prerogative which courts are not wont to review in the
absence of any proof that such prerogative was exercised in bad faith or with
malice.Indeed, it would be an improper judicial intrusion into the internal affairs of
Filport for the Court to determine the propriety or impropriety of the creation of
offices therein and the grant of salary increases to officers thereof. (Filipinas Port
Services, Inc., represented by stockholders, Eliodoro C. Cruz and Mindanao Terminal
and Brokerage Services, Inc. vs. Victoriano S. Go, et al., G.R. No. 161886, March 16,
2007)

The Board of Directors of Matling could not validly delegate the power to create a
corporate office to the President, in light of Section 25 of the Corporation Code
requiring the Board of Directors itself to elect the corporate officers. Verily, the power
to elect the corporate officers was a discretionary power that the law exclusively
vested in the Board of Directors, and could not be delegated to subordinate officers or
agents. (Matling Industrial and Commercial Corporation, et al. vs. RICARDO R. COROS,
G.R. No. 157802, October 13, 2010)

Under section 21 of the Corporation Law, a corporation may prescribe in its by-laws
the qualifications, duties and compensation of directors, officers and employees. A
provision in the by-laws of the corporation that no person shall qualify or be eligible
for nomination for elections to the board of directors if he is engaged in any business
which competes with that of the Corporation is valid, as long as due process is
observed. (John Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R.
No. L-45911, April 11, 1979)

3. Tenure, Qualifications and Disqualifications of Directors or Trustees

The board of directors of corporations must be elected from among the stockholders
or members. Thus, a provision in the by-laws of the corporation stating that of the
fifteen members of its Board of Directors, only 14 members would be elected while the
remaining member would be the representative of an educational institution located
in the village of the homeowners, is invalid for being contrary to law as it violates the
one-year term limit of the directors. (Grace Christian High Schoolvs.the Court Of
Appeals, Grace Village Association, Inc., Alejandro G. Beltran, and Ernesto L. Go, G.R.
No. 108905, 23 October 1997)

Both under the old and the new Corporation Codes there is no dispute as to the most
immediate effect of a voting trust agreement on the status of a stockholder who is a
party to its execution from legal titleholder or owner of the shares subject of the
voting trust agreement, he becomes the equitable or beneficial owner. Any director
who executes a voting trust agreement over all his shares ceases to be a stockholder of
record in the books of the corporation and therefore ceases to be a director.(Ramon C.
Lee and Antonio DM. Lacdao vs. the Hon. Court of Appeals, Sacoba Manufacturing
Corp., Pablo Gonzales, Jr. and Thomas Gonzales, G.R. No. 93695, 4 February 1992)

4. Elections

a. Cumulative Voting/Straight Voting
b. Quorum

5. Removal

6. Filling of Vacancies

When an incumbent member of the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which has expired, and the
incumbent is holding the succeeding term. A vacancy resulting from the resignation of
an officer in a hold-over capacity, by the terms of Section 29 of the Corporation Code,
must be filled by the stockholders in a regular or special meeting called for the
purpose.(Valle Verde Country Club, Inc., et al. vs. Victor Africa, G.R. No. 151969, 4
September 2009)

7. Compensation

The proscription against granting compensation to directors/trustees of a corporation
is not a sweeping rule as worthy of note is the clear phraseology of Section 30 which
states: xxx [T]he directors shall not receive any compensation, as such directors, xxx.
The unambiguous implication is that members of the board may receive
compensation, in addition to reasonable per diems, when they render services to the
corporation in a capacity other than as directors/trustees. (Western Institute of
Technology, Inc., et al. vs.Ricardo T. Salas, et al., G.R. No. 113032, 21 August 1997)

8. Fiduciary Duties and Liability Rules

Before a director or officer of a corporation can be held personally liable for corporate
obligations, the following requisites must concur: (1) the complainant must allege in
the complaint that the director or officer assented to patently unlawful acts of the
corporation, or that the officer was guilty of gross negligence or bad faith; and (2) the
complainant must clearly and convincingly prove such unlawful acts, negligence or bad
faith. In this case, petitioners are correct to argue that it was not alleged, much less
proven, that Uy committed an act as an officer of Hammer that would permit the
piercing of the corporate veil as what the complaint simply stated is that she, together
with her errant husband Chua, acted as surety of Hammer, as evidenced by her
signature on the Surety Agreement which was later found by the RTC to have been
forged.(Heirs of Fe Tan Uy, represented by her heir, Mauling Uy Lim vs. International
Exchange Bank, G.R. No. 166282 & 83, February 13, 2013)

Article 212(e) of the Labor Code, by itself, does not make a corporate officer
personally liable for the debts of the corporation. The governing law on personal
liability of directors for debts of the corporation is still Section 31 of the Corporation
Code.(Alert Security and Investigation Agency, Inc. and/or Manuel D. Dasig vs.
SaidaliPasawilan, WilfredoVercelesand MelchorBulusan, G.R. No. 182397, September
14, 2011)

The rule is still that the doctrine of piercing the corporate veil applies only when the
corporate fiction is used to defeat public convenience, justify wrong, protect fraud, or
defend crime. Neither Article 212[e] nor Article 273 (now 272) of the Labor Code
expressly makes any corporate officer personally liable for the debts of the
corporation.(Antonio C. Carag vs. National Labor Relations Commission, et al., G.R.
No. 147590, April 2, 2007)


The execution of a document by a bank manager called pagares which guaranteed
purchases on credit by a client is contrary to the General Banking law which prohibits
bank officers from guaranteeing loans of bank clients. In this case, it is plain from the
guarantee Grey executed that he was acting for himself, not in representation of
UCPB; hence, UCPB cannot be bound by Greys above undertaking since he appears to
have made it in his personal capacity. (United Coconut Planters Bank vs. Planters
Products, Inc., Janet Layson and Gregory Grey, G.R. No. 179015, June 13, 2012)

To hold the general manager personally liable alone for the debts of the corporation
and thus pierce the veil of corporate fiction, it is required that the bad faith of the
officer be established clearly and convincingly. Petitioner, however, has failed to
include any submission pertaining to any wrongdoing of the general manager.
Necessarily, it would be unjust to hold the latter personally liable. (Mercy Vda. de
Roxas vs. Our Lady's Foundation, Inc., G.R. No. 182378, March 6, 2013)

A corporation has its own legal personality separate and distinct from those of its
stockholders, directors or officers. Hence, absent any evidence that they have
exceeded their authority, corporate officers are not personally liable for their official
acts. Corporate directors and officers may be held solidarily liable with the corporation
for the termination of employment only if done with malice or in bad faith.(Rolando
DS. Torres v. Rural Bank of San Juan, Inc. et al., G.R. No. 184520, March 13, 2013)

Obligations incurred as a result of the directors and officers acts as corporate agents, are
not their personal liability but the direct responsibility of the corporation they represent.
As a rule, they are only solidarily liable with the corporation for the illegal termination of
services of employees if they acted with malice or bad faith.

To hold a director or officer personally liable for corporate obligations, two requisites
must concur: (1) it must be alleged in the complaint that the director or officer assented to
patently unlawful acts of the corporation or that the officer was guilty of gross negligence
or bad faith; and (2) there must be proof that the officer acted in bad faith. The fact that
the corporation ceased its operations the day after the promulgation of the SC resolution
finding the corporation liable does not prove bad faith on the part of the incorporator of
the corporation. Polymer Rubber Corporation vs. Ang, G.R. No. 185160. July 24, 2013

Although joint and solidary liability for money claims and damages against a
corporation attaches to its corporate directors and officers under R.A. 8042, it is not
automatic. To make them jointly and solidarily liable, there must be a finding that they
were remiss in directing the affairs of the corporation, resulting in the conduct of
illegal activities. Absent any findings regarding the same, the corporate directors and
officers cannot be held liable for the obligation of the corporation against the
judgment debtor.(Elizabeth M. Gaguivs. Simeon Dejeroand TeodoroPermejo, G.R. No.
196036, October 23, 2013)

9. Responsibility for Crimes

The Trust Receipts Law recognizes the impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the entrustee is a corporation, the law makes
the officers or employees or other persons responsible for the offense liable to suffer
the penalty of imprisonment. (Edward C. Ong, vs. the Court of Appeals and the People
of the Philippines, G.R. No. 119858, April 29, 2003)

Though the entrustee is a corporation, nevertheless, the law specifically makes the
officers, employees or other officers or persons responsible for the offense, without
prejudice to the civil liabilities of such corporation and/or board of directors, officers,
or other officials or employees responsible for the offense. The rationale is that such
officers or employees are vested with the authority and responsibility to devise means
necessary to ensure compliance with the law and, if they fail to do so, are held
criminally accountable; thus, they have a responsible share in the violations of the law.
(Alfredo Ching vs. the Secretary of Justice, et al., G. R. No. 164317, February 6, 2006)

10. Inside Information

11. Contracts

a. By Self-Dealing Directors with the Corporation
b. Between Corporations with Interlocking Directors

When a mortgagee bank foreclosed the mortgage on the real and personal property
of the debtor and thereafter assigned the properties to a corporation it formed to
manage the foreclosed assets, the unpaid seller of the debtor cannot complain that the
assignment is invalid simply because the mortgagee and the assignee have
interlocking directors.There is no bad faith on the part of DBP by its creation of Nonoc
Mining, Maricalum and Island Cement as the creation of these three corporations was
necessary to manage and operate the assets acquired in the foreclosure sale lest they
deteriorate from non-use and lose their value.(Development Bank of the Philippines
vs. Honorable Court of Appeals and Remington Industrial Sales Corporation , G.R. No.
126200, August 16, 2001)

c. Management Contracts

12. Executive Committee

13. Meetings

The non-signing by the majority of the members of the GSIS Board of Trustees of the
minutes of the meeting does not necessarily mean that the supposed resolution was
not approved by the board. The signing of the minutes by all the members of the board
is not required because it is the signature of the corporate secretary gives the minutes
of the meeting probative value and credibility.(People of the Philippines vs.
Hermenegildo Dumlao y Castiliano and Emilio La'o y Gonzales, G.R. No. 168918,
March 2, 2009)

a. Regular or Special
i. When and Where
ii. Notice
b. Who Presides
c. Quorum

Under Section 25 of the Corporation Code of the Philippines, the articles of
incorporation or by-laws of the corporation may fix a greater number than the majority
of the number of board members to constitute the quorum necessary for the valid
transaction of business. When only three (3) out of five (5) members of the board of
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 four (4) members
must be present to constitute a quorum in a special meeting of the board of directors
of PAMBUSCO.(Rosita Pea vs. the Court of Appeals, Spouses Rising T. Yap and
Catalina Yap, Pampanga Bus Co., Inc., Jesus Domingo, Joaquin Briones, Salvador
Bernardez, Marcelino Enriquez and Edgardo A. Zabat, G.R. No. 91478, February 7,
1991)

d. Rule on Abstention

H. Stockholders and Members

1. Rights of a Stockholder and Members

a. Doctrine of Equality of Shares

2. Participation in Management

a. Proxy

When proxies are solicited in relation to the election of corporate directors, the
resulting controversy, even if it ostensibly raised the violation of the SEC rules on proxy
solicitation, should be properly seen as an election controversy within the original and
exclusive jurisdiction of the trial courts by virtue of Section 5.2 of the SRC in relation to
Section 5(c) of Presidential Decree No. 902-A. From the language of Section 5(c) of
Presidential Decree No. 902-A, it is indubitable that controversies as to the
qualification of voting shares, or the validity of votes cast in favor of a candidate for
election to the board of directors are properly cognizable and adjudicable by the
regular courts exercising original and exclusive jurisdiction over election cases.
(Government Service Insurance System vs. the Hon. Court of Appeals, G.R. No.
183905, April 16, 2009)

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


In order to give rise to any obligation to pay on the part of the corporation, the dissenting
stockholder should first make a valid demand that the corporation refused to pay despite
having unrestricted retained earnings. Otherwise, the corporation could not be said to be
guilty of any actionable omission that could sustain the action to collect. The collection
suit filed by the dissenting stockholder to enforce payment of the fair value of his shares is
premature if at the time of demand for payment, the corporation had no surplus profit.
The fact that the Corporation subsequent to the demand for payment and during the
pendency of the collection case posted surplus profit did not cure the prematurity of the
cause of action. Turner vs. Lorenzo Shipping Corporation, G.R. No. 157479, November 24,
2010


c. Right to Inspect

Considering that the foreign subsidiary is wholly owned by the corporation and,
therefore, under its control, it would be more in accord with equity, good faith and fair
dealing to construe the statutory right of a stockholder to inspect the books and
records of the corporation as extending to books and records of such wholly subsidiary
which are in the corporation's possession and control.(John Gokongwei, Jr. vs.
Securities and Exchange Commission, et al., G.R. No. L-45911, April 11, 1979)

The stockholder's right of inspection of the corporation's books and records is based
upon their ownership of the assets and property of the corporation. It is, therefore, an
incident of ownership of the corporate property, whether this ownership or interest be
termed an equitable ownership, a beneficial ownership, or a ownership.(John
Gokongwei, Jr. vs. Securities and Exchange Commission, et al., G.R. No. L-45911, April
11, 1979)

The only express limitation on the right of inspection, according to the Court, is that
(1) the right of inspection should be exercised at reasonable hours on business days; (2)
the person demanding the right to examine and copy excerpts from the corporate
records and minutes has not improperly used any information secured through any
previous examination of the records of such corporation; and (3) the demand is made
in good faith or for a legitimate purpose. (Victor Africa vs. Presidential Commission on
Good Government, et al., G.R. No. 83831, January 9, 1992)

d. Pre-Emptive Right

Even if pre-emptive right does not exist either because the issue comes within the
exceptions in Section 39 of the Corporation Code or because it is denied in the articles
of incorporation, an issue of shares may still be objectionable if the directors acted in
breach of trust and their primary purpose is to perpetuate or shift control of the
corporation or to freeze out the minority interest. The issuance of unissued shares
out of the original authorized capital stock pursuant to a rehabilitation plan the
propriety and validity of which was on question by the minority stockholders and
subsequently disapproved by the court amounts to unlawful dilution of the minority
shareholdings. Majority of Stockholders of Ruby Industrial Corporation vs Lim, GR No.
165887, June 6, 2011

e. Right to Vote
f. Right to Dividends

Stock dividends cannot be issued to one who is not a stockholder of a corporation for
payment of services rendered.(Nielson & Company, Inc. vs.Lepanto Consolidated
Mining Company, G.R. No. L-21601, December 17, 1966)

Dividends are distributed to stockholders pursuant to their right to share in corporate
profits. When a dividend is declared, it belongs to the person who is the substantial
and beneficial owner of the stock at the time regardless of when the distribution profit
was earned. (Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553, July 13, 1998)

g. Right of First Refusal

A joint venture agreement giving to the shareholders the right to purchase the shares
of their co-shareholders before they are offered to a third party does not violate the
provision of the Constitution limiting land ownership to Filipinos and Filipino
corporations. If the corporation still owns the land, the right of first refusal can be
validly assigned to a qualified Filipino entity in order to maintain the 60% - 40%
ratio.(J.G. Summit Holdings, Inc. vs. Court of Appeals, et al. G.R. No. 124293, January
31, 2005)

4. Remedial Rights

a. Individual Suit
b. Representative Suit
c. Derivative Suit

A suit to enforce pre-emptive right in a corporation is not a derivative suit because it
was not filed for the benefit of the coporation. The petitioner was suing on her own
behalf, and was merely praying that she be allowed to subscribe to the additional
issuances of stocks in proportion to her shareholdings to enable her to preserve her
percentage of ownership in the corporation. (Gilda C. Lim, Wilhelmina V. Joven and
Ditas A. Lerios, vs. Patricia Lim-Yu, in her capacity as a minority stockholder of Limpan
Investment Corporation, G.R. No. 138343, February 19, 2001)

The personal injury suffered by the spouses cannot disqualify them from filing a
derivative suit on behalf of the corporation. It merely gives rise to an additional cause
of action for damages against the erring directors.(Virginia O. Gochan, et al. vs.
Richard G. Young, et al., G.R. No. 131889, March 12, 2001)

For a derivative suit to prosper, it is required that the minority stockholder suing for
and on behalf of the corporation must allege in his complaint that he is suing on a
derivative cause of action on behalf of the corporation and all other stockholders
similarly situated who may wish to join him in the suit. A public prosecutor, by the
nature of his office, is under no compulsion to file a criminal information where no
clear legal justification has been shown, and no sufficient evidence of guilt nor prima
facie case has been presented by the petitioner. (Tam Wing Tak vs. Hon. Ramon P.
Makasiar, G.R. No. 122452, January 29, 2001)

The bare claim that the complaint is a derivative suit will not suffice to confer
jurisdiction on the RTC (as a special commercial court) if he cannot comply with the
requisites for the existence of a derivative suit. These requisites are: a.) the party
bringing suit should be a shareholder during the time of the act or transaction
complained of, the number of shares not being material; b.) the party has tried to
exhaust intra-corporate remedies, i.e., has made a demand on the board of directors
for the appropriate relief, but the latter has failed or refused to heed his plea; andc.)
the cause of action actually devolves on the corporation; the wrongdoing or harm
having been or being caused to the corporation and not to the particular stockholder
bringing the suit.(Oscar C. Reyes vs. Hon. Regional Trial Court of Makati, Branch 142,
Zenith Insurance Corporation, and Rodrigo C. Reyes, G.R. No. 165744, 11 August
2008)

The stockholder filing a derivative suit should have exerted all reasonable efforts to
exhaust all remedies available under the articles of incorporation, by-laws, laws or rules
governing the corporation to obtain the relief he desires and to allege such fact with
particularity in the complaint. The allegation that the suing stockholder talked to the
other stockholder regarding the dispute hardly constitutes all reasonable efforts to
exhaust all remedies available . The complaint should also allege the fact that there was
no appraisal right available under for the acts complained of and that the suit was not a
nuisance or harassment suit. The fact that the corporation involved is a family corporation
should not in any way exempt the suing stockholder from the requirements and formalities
for filing a derivative suit. Yu vs. Yukayguan, 588 SCRA 589 ( 2009 )

Petitioners seek the nullification of the election of the Board of Directors composed
of herein respondents, who pushed through with the election even if petitioners had
adjourned the meeting allegedly due to lack of quorum. Petitioners are the injured party,
whose rights to vote and to be voted upon were directly affected by the election of the
new set of board of directors. The party-in-interest are the petitioners as stockholders,
who wield such right to vote. The cause of action devolves on petitioners, not the
condominium corporation, which did not have the right to vote. Hence, the complaint for
nullification of the election is a direct action by petitioners, who were the members of the
Board of Directors of the corporation before the election, against respondents, who are
the newly-elected Board of Directors. Under the circumstances, the derivative suit filed by
petitioners in behalf of the condominium corporation is improper. Legaspi Towers 300,
Inc., vs. Muer G.R. No. 170783, June 18, 2012.

A derivative suit is an action brought by a stockholder on behalf of the corporation to
enforce corporate rights against the corporations directors, officers or other insiders.
Under Sections 23 and 36 of the Corporation Code, the directors or officers, as provided
under the by-laws, have the right to decide whether or not a corporation should sue. Since
these directors or officers will never be willing to sue themselves or impugn their wrongful
and fraudulent decisions, stockholders are permitted by law to bring an action in the name
of the corporation to hold these directors and officers accountable. In derivative suits, the
real party in interest is the corporation while the stockholder is only a nominal party.

Section 1, Rule 8 of the Interim Rules imposes the following requirements for derivative
suits:
(1) The person filing the suit must be a stockholder or member at the time the acts or
transactions subject of the action occurred and the time the action was filed;
(2) He must have exerted all reasonable efforts, and alleges the same with particularity in
the complaint, to exhaust all remedies available under the articles of incorporation, by-
laws, laws or rules governing the corporation or partnership to obtain the relief he desires;
(3) No appraisal rights are available for the act or acts complained of; and
(4) The suit is not a nuisance or harassment suit.
The complaint filed by a stockholder to compel another stockholder to settle his share of the loan
because this will affect the financial viability of the corporation can not be considered as a
derivative suit because the loan was not a corporate obligation but a personal debt of the
stockholders. The fact that the stockholders attempted to constitute a mortgage over their
share in a corporate asset can not affect the corporation where the wordings of the mortgage
agreement reveal that it was signed by the stockholders in their personal capacity as the owners of
the pro-indiviso share in the corporate property and not on behalf of the corporation. ANG, FOR
AND IN BEHALF OF SUNRISE MARKETING (BACOLOD), INC. V. SPS. ANG.G.R. No. 201675, June 19, 2013



5. Obligation of a Stockholder

6. Meetings

a. Regular or Special
i. When and Where
ii. Notice
b. Who Calls the Meetings
c. Quorum

Quorum is based on the totality of the shares which have been subscribed and issued,
whether it be founders shares or common shares. There is no gainsaying that the
contents of the articles of incorporation are binding, not only on the corporation, but
also on its shareholders. (Jesus V. Lanuza, et al.vs. Court of Appeals, et al., G.R. No.
131394, March 28, 2005)

d. Minutes of the Meetings

I. Capital Structure

1. Subscription Agreements

A subscription contract necessarily involves the corporation as one of the contracting
parties since the subject matter of the transaction is property owned by the
corporation its shares of stock. Hence, a stockholder cannot, by himself, rescind a
pre-subscription contract. (Ong Yong, et al. vs. David S. Tiu, et al., G.R. No. 144476 &
G.R. No. 144629, April 8, 2003)

2. Consideration for Stocks

3. Shares of Stock

a. Nature of Stock

Upon the death of a shareholder, the heirs do not automatically become stockholders
of the corporation and acquire the rights and privileges of the deceased as
shareholder of the corporation. The stocks must be distributed first to the heirs in
estate proceedings, and the transfer of the stocks must be recorded in the books of the
corporation.(JoselitoMusni Puno vs. Puno Enterprises, Inc., represented by Jesusa
Puno, G.R. No. 177066, September 11, 2009)

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. (Marsh Thomson vs. Court of Appeals and the American
Champer of Commerce of the Philippines, Inc,, G.R. No. 116631, October 28, 1998)

The registered owner of the shares of a corporation, even if they are sequestered by
the government through the PCGG, exercises the right and the privilege of voting on
them. The PCGG as a mere conservator cannot, as a rule, exercise acts of dominion by
voting these shares. The registered owner of sequestered shares may only be deprived
of these voting rights, and the PCGG authorized to exercise the same, only if it is able
to establish that (1) there is prima facie evidence showing that the said shares are ill-
gotten and thus belong to the State; and (2) there is an imminent danger of
dissipation, thus necessitating the continued sequestration of the shares and authority
to vote thereupon by the PCGG while the main issue is pending before the
Sandiganbayan. (Trans Middle East (Phils.) vs.Sandiganbayan, G.R. No. 172556, June 9,
2006)

The arrangement provided for in the by-laws of the Corporation whereby a lien is
constituted on the membership share to answer for dues, assessments and subsequent
obligations to the corporation cannot be upheld unless coupled by a corresponding pledge
or chattel mortgage agreement . Valley Golf and Country Club, Inc. v. Vda. De Caram, 585
SCRA 218 (2009)

A stock corporation is expressly granted the power to issue or sell stocks. The power to
issue stocks is lodged with the Board of Directors and no stockholders meeting is required
to consider it because additional issuances of stock ( unlike increase in capital stock ) does
not need approval of the stockholders. What is only required is the board resolution
approving the additional issuance of shares. The corporation shall also file the necessary
application with the SEC to exempt these from the registration requirements under the
SRC. Majority of Stockholders of Ruby Industrial Corporation vs Lim, GR No. 165887, June
6, 2011


Under the two-tiered test, the government, thru PCGG, may vote sequestered shares if
there is a prima facie evidence that the shares are ill-gotten and there is imminent danger
of dissipation of assets while the case is pending. However, the two- tiered test
contemplates a situation where the registered stockholders were in control and had been
dissipating company assets and the PCGG wanted to vote the sequestered shares to save
the company. It does not apply when the PCGG had voted the shares and is in control of
the sequestered corporation . Africa vs. Hon. Sandiganbayan , G.R. Nos. 172222/G.R. No.
174493/ G.R. No. 184636, November 11, 2013

Since the law does not prescribe a period for registration of shares in the books of the
corporation, the action to enforce the right to have it done does not begin until a demand
for it had been made and was refused. Africa vs. Hon. Sandiganbayan, ibid.


b. Subscription Agreements

A corporation has no power to release an original subscriber to its capital stock from
the obligation of paying for his shares, without a valuable consideration for such
release; and as against creditors a reduction of the capital stock can take place only in
the manner and under the conditions prescribed by the statute or the charter or the
articles of incorporation. Subscriptions to the capital of a corporation constitute a fund
to which creditors have a right to look for satisfaction of their claims and that the
assignee in insolvency can maintain an action upon any unpaid stock subscription in
order to realize assets for the payment of its debt. (Philippine National Bank vs.Bitulok
Sawmill, Inc., et al., G.R. Nos. L-24177-85, June 29, 1968)


c. Consideration for Shares of Stock
d. Watered Stock

i. Definition
ii. Liability of Directors for Watered Stocks
iii. Trust Fund Doctrine for Liability for Watered Stocks

e. Situs of the Shares of Stock
f. Classes of Shares of Stock

"Interest bearing stocks", on which the corporation agrees absolutely to pay interest
before dividends are paid to common stockholders, is legal only when construed as
requiring payment of interest as dividends from net earnings or surplus only. Clearly,
the respondent judge, in compelling the petitioner to redeem the shares in question
and to pay the corresponding dividends, committed grave abuse of discretion
amounting to lack or excess of jurisdiction in ignoring both the terms and conditions
specified in the stock certificate, as well as the clear mandate of the law.(Republic
Planters Bank vs. Hon. Enrique A. Agana, Sr., as Presiding Judge, Court of First Instance
of Rizal, Branch XXVIII, Pasay City, Robes-Francisco Realty & Development
Corporation and Adalia F. Robes, G.R. No. 51765, March 3, 1997)

4. Payment of Balance of Subscription

a. Call by Board of Directors
b. Notice Requirement
c. Sale of Delinquent Shares
i. Effect of Delinquency

At the root of the sale of delinquent stock is the non-payment of the subscription price
for the share of stock itself. The stockholder or subscriber has yet to fully pay for the
value of the share or shares subscribed. In this case, Clemente had already fully paid
for the share in Calatagan and no longer had any outstanding obligation to deprive
him of full title to his share. (Calatagan Golf Club, Inc. vs. Sixto Clemente, Jr., G.R. No.
165443, April 16, 2009)

ii. Call by Resolution of the Board of Directors
iii. Notice of Sale
iv. Auction Sale and the Highest Bidder

5. Certificate of Stock

a. Nature of the Certificate

While shares of stock constitute personal property, they do not represent property of
the corporation. A share of stock only typifies an aliquot part of the corporation's
property, or the right to share in its proceeds to that extent when distributed
according to law and equity, but its holder is not the owner of any part of the capital of
the corporation.(Stockholders of F. Guanzon and Sons, Inc. vs.Register of Deeds of
Manila, G.R. No. L-18216, October 30, 1962)

A certificate of stock is the paper representative or tangible evidence of the stock
itself and of the various interests therein. The certificate is not stock in the corporation
but is merely evidence of the holder's interest and status in the corporation, his
ownership of the share represented thereby, but is not in law the equivalent of such
ownership. It expresses the contract between the corporation and the stockholder, but
is not essential to the existence of a share in stock or the nation of the relation of
shareholder to the corporation. (Alfonso S. Tan vs. Securities And Exchange
Commission, G.R. No. 95696 March 3, 1992)

The certificate of stock itself once issued is a continuing affirmation or representation
that the stock described therein is valid and genuine and is at least prima facie
evidence that it was legally issued in the absence of evidence to the contrary. A mere
typewritten statement advising a stockholder of the extent of his ownership in a
corporation without qualification and/or authentication cannot be considered as a
formal certificate of stock.(Nora A. Bitongvs. Court of Appeals, et al., G.R. No. 123553,
July 13, 1998)

b. Uncertificated Shares
c. Negotiability
i. Requirements for Valid Transfer of Stocks

The law is clear that in order for a transfer of stock certificate to be effective, the
certificate must be properly indorsed and that title to such certificate of stock is vested
in the transferee by the delivery of the duly indorsed certificate of stock. Since the
certificate of stock covering the questioned 1,500 shares of stock registered in the
name of the late Juan Chuidian was never indorsed to the petitioner, the inevitable
conclusion is that the questioned shares of stock belong to Chuidian. (Enrique Razon
vs. Intermediate Appellate Court and Vicente B. Chuidian, in his capacity as
Administrator of the Estate of the Deceased Juan T. Chuidian, G.R. No. 74306, 16
March 1992)

Where a stockholder executed a Special Power of Attorney in favor of his wife who, by
virtue of said SPA, sold the shares, the corporation cannot refuse to register the shares
in favor of the assignee on the ground that upon the death of the stockholder, the
shares of stock became the property of his estate which should be settled and
liquidated first before any distribution could be made. For the petitioner Rural Bank of
Salinas to refuse registration of the transferred shares in its stock and transfer book,
which duty is ministerial on its part, is to render nugatory and ineffectual the spirit and
intent of Section 63 of the Corporation Code. (Rural Bank of Salinas, Inc. vs. Securities
and Exchange Commission, et al., G.R. No. 96674, June 26, 1992)

Section 63 of the Corporation Code which provides that "no shares of stock against
which the corporation holds any unpaid claim shall be transferable in the books of the
corporation" does not include monthly dues. The term "unpaid claim" refers to "any
unpaid claim arising from unpaid subscription, and not to any indebtedness which a
subscriber or stockholder may owe the corporation arising from any other
transaction."(China Banking Corporation vs. Court of Appeals, and Valley Golf and
Country Club, Inc., G.R. No. 117604, March 26, 1997)

Section 63 of the Corporation Code strictly requires the recording of the transfer in
the books of the corporation, and not elsewhere, to be valid as against third parties.
Thus, the transfer of the subject certificate made by Dico to petitioner was not valid as
to the spouses Atinon, the judgment creditors, as the same still stood in the name of
Dico, the judgment debtor, at the time of the levy on execution. (Nemesio Garcia vs.
Nicolas Jomouad, Ex-Officio Provincial Sheriff of Cebu, and Spouses Jose Atinon&
Sally Atinon, G.R. No. 133969, 26 January 2000)

For a valid transfer of stocks, there must be strict compliance with the mode of transfer
prescribed by law. The requirements are: (a) There must be delivery of the stock
certificate; (b) The certificate must be endorsed by the owner or his attorney-in-fact or
other persons legally authorized to make the transfer; and (c) To be valid against third
parties, the transfer must be recorded in the books of the corporation. A deed of
assignment of shares without endorsement and delivery is binding only on the parties
and does not necessarily make the transfer effective as against the corporation.(The
Rural Bank of Lipa City, Inc., et al.vs. Honorable Court of Appeals, G.R. No. 124535,
September 28, 2001)

Without such recording, the transferee may not be regarded by the corporation as one
among its stockholders and the corporation may legally refuse the issuance of stock
certificates in the name of the transferee even when there has been compliance with
the requirements of Section 64 of the Corporation Code. The situation would be
different if the petitioner was himself the registered owner of the stock which he
sought to transfer to a third party, for then he would be entitled to the remedy of
mandamus.(Vicente C. Ponce vs. Alsons Cement Corporation, and Francisco M. Giron,
Jr., G.R. No. 139802, December 10, 2002)

Section 63 of the Corporation Code provides that shares of stock so issued are
personal property and may be transferred by delivery of the certificate or certificates
indorsed by the owner or his attorney-in-fact or other person legally authorized to
make the transfer. The failure of the stockholder to deliver the stock certificate to the
buyer within a reasonable time the shares covered by the stock certificate should have
been delivered is a substantial breach that entitles the buyer to rescind the sale under
Article 1191 of the Corporation Code . It is not entirely correct to say the sale had
already been consummated as the buyer already enjoyed the rights a shareholder can
exercise. The enjoyment of these rights will not suffice where the law, by its express
terms, requires a specific form to transfer ownership. Fil-Estate Golf and Development
vs. Vertex Sales and Trading Inc., G.R. No. 202079, June 10, 2013
The Corporation whose shares of stock are the subject of a transfer transaction (through
sale, assignment, donation, or any other mode of conveyance) need not be a party to the
transaction, as may be inferred from the terms of Section 63 of the Corporation Code.
However, to bind the corporation as well as third parties, it is necessary that the transfer
is recorded in the books of the corporation. In a share purchase transaction, the parties
are the seller and buyer of the shares. Not being a party to the sale, the Corporation is in
no position to appeal the ruling rescinding the sale of the shares. If the Seller of the
shares filed no appeal against the court decision declaring the rescission of the sale, then
the rescission is deemed final despite any appeal by the corporation whose shares of
stock are the subject of the transfer transaction. Forest Hills Golf & Country Club vs.
Vertex Sales and Trading Inc.G.R. No. 202205, March 6, 2013.
d. Issuance

i. Full Payment

When a stockholder in a stock corporation subscribes to a certain number of shares
but does not pay the full amount for such shares, a certificate of stock shall still be
issued to him and he shall be entitled to vote the shares even though they are not fully
paid. (Irineo S. Baltazar vs. Lingayen Gulf Electric Power, Co., Inc., G.R. No. L-16236,
June 30, 1965)

ii. Payment Pro-Rata

e. Lost or Destroyed Certificates

6. Stock and Transfer Book

a. Contents

A stock and transfer book is necessary as a measure of precaution, expediency and
convenience since it provides the only certain and accurate method of establishing the
various corporate acts and transactions and of showing the ownership of stock and like
matters. However, a stock and transfer book, like other corporate books and records, is
not in any sense a public record, and thus is not exclusive evidence of the matters and
things which ordinarily are or should be written therein. (Jesus V. Lanuza, et al.vs. Court
of Appeals, et al., G.R. No. 131394, March 28, 2005)

b. Who May Make Valid Entries

In the absence of any provision to the contrary, the corporate secretary is the
custodian of corporate records. The transferor, even though he may be the controlling
stockholder cannot take the law into his hands and cause himself the recording of the
transfers of the qualifying shares to his nominee-directors in the stock and transfer
book of the corporation.(Manuel A. Torres, Jr., (Deceased), et al. vs. Court of Appeals,
et al., G.R. No. 120138, September 5, 1997)

7. Disposition and Encumbrance of Shares

a. Allowable Restrictions on the Sale of Shares
b. Sale of Partially Paid Shares
c. Sale of a Portion of Shares Not Fully Paid
d. Sale of All of Shares Not Fully Paid
e. Sale of Fully Paid Shares
f. Requisites of a Valid Transfer
g. Involuntary Dealings with Shares

J. Dissolution and Liquidation

An action to correct entries in the General Information Sheet of the Corporation; to be
recognized as a stockholder and to inspect corporate documents is an intra-corporate dispute
which does not constitute a continuation of corporate business. As such, pursuant to Section
145 of the Corporation Code, this action is not affected by the subsequent dissolution of the
corporation. The dissolution of the corporation simply prohibits it from continuing its business.
However, despite such dissolution, the parties involved in the litigation are still corporate
actors. The dissolution does not automatically convert the parties into total strangers or
change their intra-corporate relationships. Neither does it change or terminate existing
causes of action, which arose because of the corporate ties between the parties. Thus, a cause
of action involving an intra-corporate controversy remains and must be filed as an intra-
corporate dispute despite the subsequent dissolution of the corporation. Aguirre vs. FQB +7,
Inc, GR No. 170770, January 9 2013.

1. Modes of Dissolution

a. Voluntary

i. Where No Creditors Are Affected

A resolution approved by the Board of Directors is not sufficient to dissolve a
corporation. The Corporation Code establishes the procedure and other formal
requirements a corporation needs to follow in case it elects to dissolve and terminate
its structure voluntarily and where no rights of creditors may possibly be prejudiced
under Section 118 which should have been strictly complied with by the members of
the club. (Teodoro B. Vesagas and Wilfred D. Asis vs. the Honorable Court of Appeals
and DelfinoRaniel and HelendaRaniel, G.R. No. 142924, December 5, 2001)

ii. Where Creditors Are Affected
iii. By Shortening of Corporate Term

b. Involuntary

i. By Expiration of Corporate Term

Upon the expiration of the period fixed in the articles of incorporation in the absence
of compliance with the legal requisites for the extension of the period, the corporation
ceases to exist and is dissolved ipso facto. There is no need for the institution of a
proceeding for quo warranto to determine the time or date of the dissolution of a
corporation because the period of corporate existence is provided in the articles of
incorporation. (Philippine National Bank vs.the Court of First Instance of Rizal, Pasig,
et al.,G.R. No. 63201, May 27, 1992)

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

The word "trustee" as used in the corporation statute must be understood in its general
concept which could include the counsel to whom was entrusted in the instant case,
the prosecution of the suit filed by the corporation. The purpose in the transfer of the
assets of the corporation to a trustee upon its dissolution is more for the protection of
its creditor and stockholders. (Carlos Gelano and Guillermina Mendoza De Gelano vs.
the Honorable Court of Appeals and Insular Sawmill, Inc., G.R. No. L-39050 February
24, 1981)

The trustee (of a dissolved corporation) may commence a suit which can proceed to
final judgment even beyond the three-year period of liquidation. No reason can be
conceived why a suit already commenced by the corporation itself during its existence,
not by a mere trustee who, by fiction, merely continues the legal personality of the
dissolved corporation, should not be accorded similar treatment to proceed to final
judgment and execution thereof. Indeed, the rights of a corporation that has been
dissolved pending litigation are accorded protection by Section 145 of the
Corporation Code which provides no right or remedy in favor of or against any
corporation, its stockholders, members, directors, trustees, or officers, nor any liability
incurred by any such corporation, stockholders, members, directors, trustees, or
officers, shall be removed or impaired either by the subsequent dissolution of said
corporation or by any subsequent amendment or repeal of this Code or of any part
thereof. (Rene Knecht and Knecht, Inc. vs. United Cigarette Corp., represented by
Encarnacion Gonzales Wong, and Eduardo Bolima, Sheriff, Regional Trial Court,
Branch 151, Pasig City, G.R. No. 139370, July 4, 2002)

c. By Management Committee or Rehabilitation Receiver

During rehabilitation receivership, the assets are held in trust for the equal benefit of
all creditors to preclude one from obtaining an advantage or preference over another
by the expediency of an attachment, execution or otherwise. For what would prevent
an alert creditor, upon learning of the receivership, from rushing posthaste to the
courts to secure judgments for the satisfaction of its claims to the prejudice of the less
alert creditors. (Alemar'sSibal& Sons, Inc. vs. Honorable Jesus M. Elbinias, in his
capacity as the Presiding Judge of Regional Trial Court, National Capital Region,
Branch CXLI (141), Makati, and G.A. Yupangco& Co., Inc., G.R. No. 75414 June 4,
1990)

The appointment of a receiver operates to suspend the authority of a corporation and
its directors and officers over its property and effects, such authority being reposed in
the receiver. Thus, a corporate officer had no authority to condone a debt. (Victor Yam
&Yek Sun Lent, doing business under the name and style of Philippine Printing Works
vs. the Court of Appeals and Manphil Investment Corporation, G.R. No. 104726,
February 11, 1999)

d. Liquidation after Three Years

Although the cancellation of a corporations certificate of registration puts an end to
its juridical personality, Sec. 122 of the Corporation Code, however provides that a
corporation whose corporate existence is terminated in any manner continues to be a
body corporate for three years after its dissolution for purposes of prosecuting and
defending suits by and against it and to enable it to settle and close its affairs. Thus,
corporations whose certificate of registration was revoked by the SEC may still
maintain actions in court for the protection of its rights which includes the right to
appeal. (Paramount Insurance Corp. vs. A.C. Ordoez Corporation and Franklin
Suspine, G.R. No. 175109, August 6, 2008)

To allow a creditors case to proceed independently of the liquidation case, a
possibility of favorable judgment and execution thereof against the assets of the
distressed corporation would not only prejudice the other creditors and depositors but
would defeat the very purpose for which a liquidation court was constituted as well.
The requirement that all claims against the bank be pursued in the liquidation
proceedings filed by the Central Bank is intended to prevent multiplicity of actions
against the insolvent bank and designed to establish due process and orderliness in the
liquidation of the bank, to obviate the proliferation of litigations and to avoid injustice
and arbitrariness. (Lucia Barramedavda. de Ballesteros vs. Rural Bank of Canaman,
Inc., represented by its liquidator, the Philippine Deposit Insurance Corporation, G.R.
No. 176260, November 24, 2010)

The executed releases, waivers and quitclaims are valid and binding upon the parties
notwithstanding the fact that these documents were signed six years after the
Corporations revocation of the Certificate of Incorporation. These documents are
thus proof that the employees had received their claims from their employer-
corporation in whose favor the release and quitclaim were issued. The revocation of
the corporation does not mean the termination of its liabilities to these employees.
Section 122 of the Corporation Code provides for a three-year winding up period for a
corporation whose charter is annulled by forfeiture or otherwise to continue as a body
corporate for the purpose, among others, of settling and closing its affairs As such,
these liabilities are obligations of the dissolved corporation and not of the corporation
who contracted the services of the dissolved corporation. Vigilla vs. Philippine College
of Criminology, GR No. 200094, June 10, 2013

K. Other Corporations

1. Close Corporations

a. Characteristics of a Close Corporation

A corporation does not become a close corporation just because a man and his wife
own 98.86% of its subscribed capital stock; So too, a narrow distribution of ownership
does not, by itself, make a close corporation. The features of a close corporation under
the Corporation Code must be embodied in the Articles of Incorporation.(San Juan
Structural and Steel Fabricators, Inc. vs. Court of Appeals, Motorich Sales Corporation,
Nenita Lee Gruenberg, ACL Development Corp. and JNM Realty and Development
Corp., G.R. No. 129459, September 29, 1998)

To the extent that the stockholders are actively engaged in the management or
operation of the business and affairs of a close corporation, the stockholders shall be
held to strict fiduciary duties to each other and among themselves. Said stockholders
shall be personally liable for corporate torts unless the corporation has obtained
reasonably adequate liability insurance. (Sergio F. Naguiat, doing business under the
name and style Sergio F. NaguiatEnt., Inc., & Clark Field Taxi, Inc. vs. National Labor
Relations Commission (Third Division), National Organization Of Workingmen and its
members, Leonardo T. Galang, et al., G.R. No. 116123, 13 March 1997)

b. Validity of Restrictions on Transfer of Shares
c. Issuance or Transfer of Stock in Breach of Qualifying Conditions
d. When Board Meeting is Unnecessary or Improperly Held

When a corporation is classified as a close corporation, a board resolution authorizing
the sale or mortgage of the subject property is not necessary to bind the corporation
for the action of its president. At any rate, corporate action taken at a board meeting
without proper call or notice in a close corporation is deemed ratified by the absent
director unless the latter promptly files his written objection with the secretary of the
corporation after having knowledge of the meeting which, in this case, petitioner
failed to do. (Manuel R.Dulay Enterprises, Inc., VirgilioE. Dulay
AndNepomucenoRedovanvs. the Honorable Court of Appeals, G.R. No. 91889 August
27, 1993)

e. Pre-Emptive Right
f. Amendment of Articles of Incorporation
g. Deadlocks

2. Non-Stock Corporations

a. Definition
b. Purposes
c. Treatment of Profits
d. Distribution of Assets upon Dissolution

The second paragraph of Section 108 of the Corporation Code, although setting the
term of the members of the Board of Trustees at five years, contains a proviso expressly
subjecting the duration to what is otherwise provided in the articles of incorporation
or by-laws of the educational corporation. In AUPs case, its amended By-Laws
provided that members of the Board of Trustees were to serve a term of office of only
two years; and the officers, who included the President, were to be elected from
among the members of the Board of Trustees during their organizational meeting,
which was held during the election of the Board of Trustees every two years. Naturally,
the officers, including the President, were to exercise the powers vested by Section 2
of the amended By-Laws for a term of only two years, not five years. (PetroniloJ.
Barayuga vs. Adventist University of the Philippines, through its Board of Trustees,
represented by its Chairman, Nestor D. Dayson, G.R. No. 168008, August 17, 2011)

Section 89 of the Corporation Code pertaining to non-stock corporations which
provides that "the right of the members of any class or classes (of a non-stock
corporation) to vote may be limited, broadened or denied to the extent specified in
the articles of incorporation or the by-laws," is an exception to Section 6 of the same
code where it is provided that "no share may be deprived of voting rights except those
classified and issued as preferred or redeemable shares, unless otherwise provided in
this Code." The stipulation in the By-Laws providing for the election of the Board of
Directors by districts is a form of limitation on the voting rights of the members of a
non-stock corporation as recognized under the aforesaid Section 89. (Rev. Luis Ao-as,
et al. vs. Hon. Court of Appeals, G.R. No. 128464, June 20, 2006)

3. Religious Corporations - Exclude

4. Foreign Corporations

a. Bases of Authority over Foreign Corporations
i. Consent
ii. Doctrine of Doing Business (related to definition under the Foreign
Investments Act, R.A. No. 7042)

A foreign company that merely imports goods from a Philippine exporter, without
opening an office or appointing an agent in the Philippines, is not doing business in
the Philippines. Since the contract between petitioner and NMC involved the purchase
of molasses by petitioner from NMC, it was NMC, the domestic corporation, which
derived income from the transaction and not petitioner. To constitute doing
business, the activity undertaken in the Philippines should involve profit-
making.(Cargill, Inc. vs. Intra Strata Assurance Corporation, G.R. No. 168266, March
15, 2010)

Participating in the bidding process constitutes doing business because it shows the
foreign corporations intention to engage in business in the Philippines. The bidding
for the concession contract is but an exercise of the corporations reason for creation
or existence. (Hutchison Ports Philippines Limitedvs.Subic Bay Metropolitan Authority,
International Container Terminal Services Inc., Royal Port Services, Inc. and the
Executive Secretary, G.R. No. 131367, August 31, 2000)

A contract entered into by a foreign corporation not licensed to do business in the
Philippines is not void even as against the erring foreign corporation. The lack of
capacity at the time of the execution of the contracts was cured by the subsequent
registration. (The Home Insurance Company vs.Eastern Shipping Lines, G.R. No. L-
34382 July 20, 1983)

The appointment of a distributor in the Philippines is not sufficient to constitute
doing business unless it is under the full control of the foreign corporation. If the
distributor is an independent entity which buys and distributes products, other than
those of the foreign corporation, for its own name and its own account, the latter
cannot be considered to be doing business in the Philippines. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April 18, 2012)


b. Necessity of a License to Do Business

The primary purpose of the license requirement is to compel a foreign corporation
desiring to do business within the Philippines to submit itself to the jurisdiction of the
courts of the state and to enable the government to exercise jurisdiction over them for
the regulation of their activities in this country. If a foreign corporation operates a
business in the Philippines without a license, and thus does not submit itself to
Philippine laws, it is only just that said foreign corporation be not allowed to invoke
them in our courts when the need arises. (Ibid.)

i. Requisites for Issuance of a License
ii. Resident Agent

c. Personality to Sue

The following principles governing a foreign corporations right to sue in local courts
have long been settled, to wit: a) if a foreign corporation does business in the
Philippines without a license, it cannot sue before the Philippine courts; b) if a foreign
corporation is not doing business in the Philippines, it needs no license to sue before
Philippine courts on an isolated transaction or on a cause of action entirely
independent of any business transaction; and c) if a foreign corporation does business
in the Philippines with the required license, it can sue before Philippine courts on any
transaction. Apparently, it is not the absence of the prescribed license but the doing
(of) business in the Philippines without such license which debars the foreign
corporation from access to our courts. (MR Holdings, Ltd.vs. Sheriff Carlos P. Bajar,
Sheriff Ferdinand M. Jandusay, Solidbank Corporation, and Marcopper Mining
Corporation, G.R. No. 138104, April 11, 2002)

A party is estopped from challenging the personality of a corporation after having
acknowledged the same by entering into a contract with it. The principle is applied to
prevent a person contracting with a foreign corporation from later taking advantage
of its noncompliance with the statutes, chiefly in cases where such person has received
the benefits of the contract. (Global Business Holdings, Inc. vs. Surecomp Software,
B.V., G.R. No. 173463, October 13, 2010)

d. Suability of Foreign Corporations
e. Instances When Unlicensed Foreign Corporations May Be Allowed to Sue Isolated
Transactions

A foreign corporation doing business in the Philippines may sue in Philippine Courts
although not authorized to do business in the Philippines against a Philippine citizen or
entity who had contracted with and benefited by said corporation. (Steelcase, Inc. vs.
Design International Selections, Inc., G.R. No. 171995, April 18, 2012)

f. Grounds for Revocation of License

L. Mergers and Consolidations

1. Definition and Concept

In the merger of two or more existing corporations, one of the combining corporations
survives and continues the combined business, while the rest are dissolved and all their
rights, properties and liabilities are acquired by the surviving corporation. (Associated
Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr., G.R. No. 123793, June 29, 1998)

There are two types of corporate acquisitions: asset sales and stock sales. In asset sales, the
corporate entity sells all or substantially all of its assets to another entity. In stock sales, the
individual or corporate shareholders sell a controlling block of stock to new or existing
shareholders.

In asset sales, the rule is that the seller in good faith is authorized to dismiss the affected
employees, but is liable for the payment of separation pay under the law. The buyer in
good faith, on the other hand, is not obliged to absorb the employees affected by the sale,
nor is it liable for the payment of their claims. The most that it may do, for reasons of
public policy and social justice, is to give preference to the qualified separated personnel
of the selling firm.

In contrast with asset sales, in which the assets of the selling corporation are transferred to
another entity, the transaction in stock sales takes place at the shareholder level. Because
the corporation possesses a personality separate and distinct from that of its shareholders,
a shift in the composition of its shareholders will not affect its existence and continuity.

Thus, notwithstanding the stock sale, the corporation continues to be the employer of its
people and continues to be liable for the payment of their just claims. Furthermore, the
corporation or its new majority shareholders are not entitled to lawfully dismiss corporate
employees absent a just or authorized cause.

The fact that there was a change in the composition of its shareholders did not affect the
employer-employee relationship between the employees and the corporation, because an
equity transfer affects neither the existence nor the liabilities of a corporation. Thus, the
corporation continued to be the employer of the corporations employees
notwithstanding the equity change in the corporation. This outcome is in line with the rule
that a corporation has a personality separate and distinct from that of its individual
shareholders or members, such that a change in the composition of its shareholders or
members would not affect its corporate liabilities.

In this case, the corporate officers and directors who induced the employees to resign with
the assurance that they would be rehired by the new management are personally liable to
the employees who were not actually rehired. However, the officer who did not
participate in the termination of employment and persons who participated in the
unlawful termination of employment but are not directors and officers of the corporation
are not personally liable. SME BANK INC, vs. GASPAR, G.R. No. 186641, October 8, 2013

Where the purchase and sale of identified assets between two companies under a
Purchase and Sale Agreement does not constitute a merger, the seller and the purchaser
are considered entities different from one another. Thus, the purchaser company can not
be held liable for the payment of deficiency documentary stamp tax against the seller
company. Commission of Internal Revenue vs, Bank of Commerce, GR No. 180529,
November 25, 2013

2. Constituent vs. Consolidated Corporation

In consolidation, all the constituents are dissolved and absorbed by the new
consolidated enterprise, while in merger, all constituents, except the surviving
corporation, are dissolved. The surviving or consolidated corporation assumes
automatically the liabilities of the dissolved corporations, regardless of whether the
creditors have consented or not to such merger or consolidation. (John F. McLeod
vs.National Labor Relations Commission (First Division), et al., G.R. No. 146667,
January 23, 2007)

3. Plan of Merger or Consolidation

4. Articles of Merger or Consolidation

5. Procedure

6. Effectivity

A merger is not effective unless it has been approved by the Securities and Exchange
Commission. (Philippine National Bank & National Sugar Development Corporation
vs. Andrada Electric & Engineering Company, G.R. No. 142936, April 17, 2002)

The issuance of the certificate of merger is crucial because not only does it bear out
SECs approval but it also marks the moment when the consequences of a merger take
place. By operation of law, upon the effectivity of the merger, the absorbed
corporation ceases to exist but its rights and properties, as well as liabilities, shall be
taken and deemed transferred to and vested in the surviving corporation.(Mindanao
Savings and Loan Association, Inc., represented by its Liquidator, the Philippine
Deposit Insurance Corporation vs. Edward Willkom; Gilda Go; RemediosUy;
MalayoBantuas, in his capacity as the Deputy Sheriff of Regional Trial Court, Branch 3,
Iligan City; and the Register of Deeds of Cagayan de Oro City, G.R. No. 178618,
October 11, 2010)

7. Limitations

8. Effects

Although there is a dissolution of the absorbed corporations, there is no winding up of
their affairs or liquidation of their assets, because the surviving corporation
automatically acquires all their rights, privileges and powers, as well as their liabilities.
The fact that the promissory note was executed after the effectivity date of the merger
does not militate against petitioner because the agreement itself clearly provides that
all contracts -- irrespective of the date of execution -- entered into in the name of the
absorbed corporation shall be understood as pertaining to the surviving bank, herein
petitioner. (Associated Bank vs. Court of Appeals and Lorenzo Sarmiento, Jr.,G.R. No.
123793, June 29, 1998)

It is more in keeping with the dictates of social justice and the State policy of
according full protection to labor to deem employment contracts as automatically
assumed by the surviving corporation in a merger, even in the absence of an express
stipulation in the articles of merger or the merger plan. By upholding the automatic
assumption of the non-surviving corporations existing employment contracts by the
surviving corporation in a merger, the Court strengthens judicial protection of the
right to security of tenure of employees affected by a merger and avoids confusion
regarding the status of their various benefits which were among the chief objections of
our dissenting colleagues. (Bank of the Philippine Islands vs. BPI Employees Union-
Davao Chapter-Federation Of Unions In Bpi Unibank, G.R. No. 164301, October 19,
2011)

Citytrust, therefore, upon service of the notice of garnishment and its
acknowledgment that it was in possession of defendants' deposit accounts became a
"virtual party" to or a "forced intervenor" in the civil case. As such, it became bound by
the orders and processes issued by the trial court despite not having been properly
impleaded therein. Consequently, by virtue of its merger with BPI , the latter, as the
surviving corporation, effectively became the garnishee, thus the "virtual party" to the
civil case. Bank of Philippine Islands v. Lee, G.R. No. 190144, August 1, 2012

VII. Securities Regulation Code (R.A. No. 8799)

A. State Policy, Purpose

The rise and fall of stock market indices reflect to a considerable degree the state of
the economy. Securities transactions are impressed with public interest, and are thus
subject to public regulation; in particular, the laws and regulations requiring payment
of traded shares within specified periods are meant to protect the economy from
excessive stock market speculations, and are thus mandatory. (Abacus Securities
Corporation vs. Ruben Ampil, G.R. No. 160016, February 27, 2006)

B. Securities Required to be Registered

The issuance of checks for the purpose of securing a loan to finance the activities of
the corporation is well within the ambit of a valid corporate act. It is one thing for a
corporation to issue checks to satisfy isolated individual obligations, and another for a
corporation to execute an elaborate scheme where it would comport itself to the
public as a pseudo-investment house and issue postdated checks instead of stocks or
traditional securities to evidence the investments of its patrons. (Betty Gabionza and
Isabelita Tan vs. Court of Appeals, G.R. No. 161057, September 12, 2008)

Corporate registration is just one of the several requirements before a corporation
may deal with timeshares. Prior to fulfillment of all the other requirements under the
Securities Regulation Code, a corporation is absolutely proscribed from dealing with
unregistered timeshares. (Timeshare Realty vs. Cesar Lao, G.R. No. 158941, February
11, 2008)

For an investment contract to exist, the following elements, referred to as the Howey
test must concur: (1)a contract, transaction, or scheme; (2)an investment of money;
(3)investment is made in a common enterprise; (4) expectation of profits; and
(5)profits arising primarily from the efforts of others. Network marketing, a scheme
adopted by companies for getting people to buy their products where the buyer can
become a down-line seller, who earns commissions from purchases made by new
buyers whom he refers to the person who sold the product to him, is not an investment
contract. (Securities and Exchange Commission vs. Prosperity.Com, Inc., G.R. No.
164197, January 25, 2012)

A person is liable for violation of Section 28 of the SRC where, acting as a broker,
dealer or salesman is in the employ of a corporation which sold or offered for sale
unregistered securities in the Philippines. The transaction initiated by the investment
consultant of a corporation is an investment contract or participation in a profit
sharing agreement that falls within the definition of lawan investment in a common
venture premised on a reasonable expectation of profits to be derived from the
entrepreneurial or managerial efforts of others. (Securities and Exchange Commission
vs. Oudine Santos, G.R. No. 195542, March 19, 2014)

1. Exempt Securities

The exemption from registration of the securities issued by banking or financial
institutions provided under the law does not imply that petitioner as a listed
corporation, is also exempt from complying with the reportorial requirements. (Union
Bank of the Philippines vs. Securities and Exchange Commission, G.R. No. 138949, June
6, 2001)

2. Exempt Transactions

Under the ruling issued by the SEC, an issuance of previously authorized but still
unissued capital stock may, in a particular instance, be held to be an exempt
transaction by the SEC under Section 6(b) so long as the SEC finds that the
requirements of registration under the Revised Securities Act are "not necessary in the
public interest and for the protection of the investors" by reason, inter alia, of the small
amount of stock that is proposed to be issued or because the potential buyers are very
limited in number and are in a position to protect themselves. (Nestle Philippines, Inc.
vs. Court of Appeals, G.R. No. 86738, November 13, 1991)

C. Procedure for Registration of Securities

D. Prohibitions of Fraud, Manipulation and Insider Trading

The trading contract signed by the parties is a contract for the sale of products for
future delivery, in which either seller or buyer may elect to make or demand delivery of
goods agreed to be bought and sold, but where no such delivery is actually made. The
written trading contract in question is not illegal but the transaction between the
parties purportedly to implement the contract is in the nature of a gambling
agreement; it is not buying and selling and is illegal as against public policy. (Onapal
Philippines Commodities, Inc. vs. Court of Appeals, G.R. No. 90707, February 1, 1993)

1. Manipulation of Security Prices

2. Short Sales

3. Fraudulent Transactions

4. Insider Trading

The term insiders now includes persons whose relationship or former relationship to
the issuer gives or gave them access to a fact of special significance about the issuer or
the security that is not generally available, and one who learns such a fact from an
insider knowing that the person from whom he learns the fact is such an insider.
Insiders have the duty to disclose material facts which are known to them by virtue of
their position but which are not known to persons with whom they deal and which, if
known, would affect their investment judgment. (Securities and Exchange Commission
vs. Interport Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)

E. Protection of Investors

A public company, as contemplated by the SRC is not limited to a company whose
shares of stock are publicly listed; even companies whose shares are offered only to a
specific group of people, are considered a public company, provided they fall under
Subsec. 17.2 of the SRC, which provides: any corporation with a class of equity
securities listed on an Exchange or with assets of atleast Fifty Million Pesos
(P50,000,000.00) and having two hundred (200) or more holders, at least two hundred
(200) of which are holding at least one hundred (100) shares of a class of its equity
securities. Philippine Veterans Bank meets the requirements and as such, is subject to
the reportorial requirements for the benefit of its shareholders. (Philippine Veterans
Bank v. Callangan, in her capacity Director of the Corporation Finance Department of
the Securities and Exchange Commission and/or the Securities and Ex-change
Commission, G.R. No. 191995, August 3, 2011)

1. Tender Offer Rule

A tender offer is an offer by the acquiring person to stockholders of a public company
for them to tender their shares; it gives the minority shareholders the chance to exit
the company under reasonable terms, giving them the opportunity to sell their shares
at the same price as those of the majority shareholders. The mandatory tender offer is
still applicable even if the acquisition, direct or indirect, is less than 35% when the
purchase would result in ownership of over 51% of the total outstanding equity
securities of the public company. (Cemco Holdings, Inc. vs. National Life Insurance
Company of the Philippines, G.R. No. 171815, August 7, 2007)

2. Rules on Proxy Solicitation

The right of stockholder to vote by proxy is generally established by the
Corporation Code, but it is the SRC which specifically regulates the form and use of
proxies, more particularly proxy solicitation, a procedure that antecedes proxy
validation. When proxies are solicited in relation to the election of corporate
directors, the resulting controversy, even if it ostensibly raised the violation of the SEC
rules on proxy solicitation, should be properly seen as an election controversy within
the original and exclusive jurisdiction of the trial courts. (GSIS vs. Court of Appeals,
G.R. No. 183905, April 16, 2009)

3. Disclosure Rule

Section 27 (SRC) penalizes an insiders misuse of material and non-public information
about the issuer, for the purpose of protecting public investors; Section 26 widens the
coverage of punishable acts, which intend to defraud public investors through various
devices, misinformation and omissions. Section 23 imposes upon (1) a beneficial owner
of more than ten percent of any class of any equity security or (2) a director or any
officer of the issuer of such security, the obligation to submit a statement indicating his
or her ownership of the issuers securities and such changes in his or her ownership
thereof. (Securities and Exchange Commission vs. Interport Resources Corporation, et.
al., G.R. No. 135808, October 6, 2008)

Under the law, what is required to be disclosed is a fact of special significance which
may be (a) a material fact which would be likely, on being made generally available, to
affect the market price of a security to a significant extent, or (b) one which a
reasonable person would consider especially important in determining his course of
action with regard to the shares of stock. (Securities and Exchange Commission vs.
Interport Resources Corporation, et. al., G.R. No. 135808, October 6, 2008)

F. Civil Liability

Under Section 62 of the SRC, no action shall be maintained to enforce any liability
created under Section 56 of the SRC ( False registration statement ) and Section 57 (
sale of unregistered security and liabilities arising in connection with prospectus,
communication and other reports ) unless brought within two ( 2 ) years after discovery
of the untrue statement or omission or after the viola-tion upon which it is based but
not more than five ( 5 ) years after the security was bona fide offered to the public or
more than 5 years after the sale, respectively. The prescriptive periods under the
mentioned sections pertain only to the civil liability in cases of violations of the SRC
and not to criminal liability under the same violations. (Citibank N.A. vs. Tanco-
Gabaldon, et al. G.R. No. 198444, September 4, 2013)

Civil suits falling under the SRC (like liability for selling unregistered securities ) are
under the exclusive original jurisdiction of the RTC and hence, need not be first filed
before the SEC, unlike criminal cases wherein the latter body exercises primary
jurisdiction. (Jose U. Pua vs. Citibank, N. A. G.R. No. 180064, September 16, 2013)

VIII. Banking Laws

A. The New Central Bank Act (R.A. No. 7653)

1. State Policies

2. Creation of the Bangko Sentral ng Pilipinas (BSP)

3. Responsibility and Primary Objective

The BSP, through the Monetary Board, is the government agency charged with the
responsibility of administering the monetary, banking and credit system of the country
and is granted the power of supervision and examination over banks and non-bank
financial institutions performing quasi-banking functions, including savings and loan
associations. It is empowered to conduct investigations and examine the records of
savings and loan associations where, upon discovery of any irregularity, the Monetary
Board may impose appropriate sanctions. (Romeo Busuego vs. Court of Appeals, G.R.
No. 95326, March 11, 1999)

The Bangko Sentral shall have supervision over, and conduct periodic or special
examinations of, banking institutions and quasi-banks, including their subsidiaries and
affiliates engaged in allied activities. When the complaint filed by a stockholder of the
bank pertains to the banks alleged engaging in unsafe, unsound, and fraudulent
banking practices, more particularly, acts that violate the prohibition on self-dealing, it
is clear that the acts complained of pertain to the conduct of banking business, hence,
jurisdiction lies with the BSP (Monetary Board). (Ana Maria Koruga vs. Teodoro
Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June 19, 2009)

4. Monetary BoardPowers and Functions

The Monetary Board, is vested with exclusive authority to assess, evaluate and
determine the condition of any bank, and finding such condition to be one of
insolvency, or that its continuance in business would involve a probable loss to its
depositors or creditors, forbid bank or non-bank financial institution to do business in
the Philippines; and shall designate an official of the BSP or other competent person as
receiver to immediately take charge of its assets and liabilities. When the complaint
filed by a stockholder of the bank pertains to the alleged unsafe and unsound banking
practices, the authority to determine the existence of such is with the Monetary Board.
(Ana Maria Koruga vs. Teodoro Arcenas, Jr., G.R. No. 168332/ G.R. No. 169053, June
19, 2009)

The actions of the Monetary Board under Sec. 29 and 30 of RA 7653, which pertain to
the power to appoint a conservator or a receiver for a bank, may not be restrained or
set aside by the court except on petition for certiorari on the ground that the action
taken was in excess of jurisdiction or with such grave abuse of discretion as to amount
to lack or excess of jurisdiction. Hence, the issuance by the RTC of writs of preliminary
injunction is an unwarranted interference with the powers of the Monetary Board. (BSP
Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)

5. How the BSP handles Banks in Distress

a. Conservatorship

The Monetary Board, upon finding that the bank failed to put up the required capital
to restore its solvency, prohibited a bank from doing business and instructed the
Acting Superintendent of Banks to take charge of the assets of the bank. When by
reason of this prohibition, only a portion of the loan approved by the bank was
released to its debtor, it also follows that the bank, in exercising its right to foreclose
the real estate mortgage, can only foreclose up to the extent of the amount it
released. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-45710
October 3, 1985)

The following requisites must be present before the order of conservatorship may be
set aside by a court: 1) The appropriate pleading must be filed by the stockholders of
record representing the majority of the capital stock of the bank in the proper court; 2)
Said pleading must be filed within ten (10) days from receipt of notice by said majority
stockholders of the order placing the bank under conservatorship; and 3) There must
be convincing proof, after hearing, that the action is plainly arbitrary and made in bad
faith. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. 88353, May 8,
1992)

The authority of the conservator under the Central Bank Law is limited to acts of
administration; the conservator merely takes the place of the banks board of directors
and as such, the former cannot perform acts the latter cannot do. Hence, the
conservator cannot revoke a contract of sale of a property acquired by the bank
entered into by a bank officer even though the price agreed upon is no longer
reflective of the fair market value of the property by reason of its appreciation of value
over time. (First Philippine International Bank vs. Court of Appeals, G.R. No. 115849,
January 24, 1996)

b. Closure

The express representations made by the Central Bank that it would support the bank
and avoid its liquidation if the latters stockholders would execute a voting trust
agreement turning over the management of the bank to the CB and mortgage or
assign their properties to CB should not be disregarded. Under the rule of promissory
estoppel, the Central Bank cannot thereafter refuse to comply with its representations
after the undertaking has been complied with by the bank. (Emerito Ramos vs. Central
Bank of the Philippines, G.R. No. L-29352, October 4, 1971)

The closure and liquidation of a bank may be considered an exercise of police power.
Nonetheless, the validity of such exercise of police power is subject to judicial inquiry
and could be set aside if it is either capricious, discriminatory, whimsical, arbitrary,
unjust, or a denial of due process and equal protection clauses of the Constitution.
(Central Bank vs. Court of Appeals, G.R. L-50031-32, July 27, 1981)

The claim that the Central Bank, by suspending the banking operations, had made it
impossible for the bank to pay its debts, or the further claim that it had fallen into a
"distressed financial situation," cannot in any sense excuse it from its obligation to
remit the time deposits of its depositors which matured before the banks closure.
(Overseas Bank of Manila vs. Court of Appeals, G.R. No. L-45866, April 19, 1989)

The Central Bank Act vests authority upon the Central Bank and Monetary Board to
take charge and administer the monetary and banking system of the country and this
authority includes the power to examine and determine the financial condition of
banks for purposes provided for by law, such as for the purpose of closure on the
ground of insolvency stated in Section 29 of the Central Bank Act. Nonetheless, the
authority given must not be exercised arbitrarily such as to prematurely conclude that
a bank is insolvent if the basis for such conclusion is lacking and insufficient. (Banco
Filipino Savings and Mortgage Bank vs. Central Bank, G.R. No. 70054, December 11,
1991)

Under R.A. No. 265, an examination is required to be made before the Monetary Board
could issue a closure order; however, under R.A. No. 7653, prior notice and hearing are
no longer required and a report made by the head of the supervising and examining
department suffices for a bank to be closed and placed under receivership. The
purpose of the law is to make the closure of the bank summary and expeditious for the
protection of the public interest. (Rural Bank of San Miguel vs. Monetary Board, G.R.
No. 150886, February 16, 2007)

Under the close now, hear later principle, the BSP can impose the sanction of closure
upon a bank even without prior notice and hearing, which is grounded on practical and
legal considerations to prevent unwarranted dissipation of the banks assets and as a
valid exercise of police power to protect the depositors, creditors, stockholders, and
the general public. The remedy of the closed bank is a subsequent one, which will
determine whether the closure of the bank was attended by grave abuse of discretion.
(BSP Monetary Board vs. Hon. Antonio-Valenzuela, G.R. No. 184778, October 2, 2009)

c. Receivership

The Monetary Board, upon finding that the bank failed to put up the required capital
to restore its solvency, prohibited a bank from doing business and instructed the
Acting Superintendent of Banks to take charge of the assets of the bank. When by
reason of this prohibition, only a portion of the loan approved by the bank was
released to its debtor, it also follows that the bank, in exercising its right to foreclose
the real estate mortgage, can only foreclose up to the extent of the amount it
released. (Central Bank of the Philippines vs. Court of Appeals, G.R. No. L-45710,
October 3, 1985)

As a rule, the execution of a judgment cannot be stayed. However, in the present case,
the respondent bank was placed under receivership and to execute the judgment
would unduly deplete the assets of respondent bank; moreover, the assets of the
insolvent banking institution are held in trust for the equal benefit of all creditors, and
after its insolvency, one cannot obtain an advantage or a preference over another by
an attachment, execution or otherwise. (Spouses Romeo Lipana and Milagros Lipana
vs. Development Bank of Rizal, G.R. No. 73884, September 24, 1987)

When a bank is placed under receivership, the appointed receiver is tasked to take
charge of the banks assets and properties and the scope of the receivers power is
limited to acts of administration. The receivers act of approving the exclusive option
to purchase granted by the banks president is beyond the authority of the former and
as such, it cannot be considered a valid approval. (Abacus Real Estate Development
Center, Inc. vs. Manila Banking Corp., G.R. No. 162270, April 06, 2005)

The Monetary Board may forbid a bank from doing business and place it under
receivership without prior notice and hearing it the MB finds that a bank: (a) is unable
to pay its liabilities as they become due in the ordinary course of business; (b) has
insufficient realizable assets to meet liabilities; (c) cannot continue in business without
involving probable losses to its depositors and creditors; and (d) has willfully violated a
cease and desist order of the Monetary Board for acts or transactions which are
considered unsafe and unsound banking practices and other acts or transactions
constituting fraud or dissipation of the assets of the institution. (Alfeo D. Vivas, vs.
Monetary Board and PDIC, G.R. No. 191424, August 7, 2013)

d. Liquidation

Resolutions of the Monetary Board with regard to handling banks in distress such as
appointing a receiver to take charge of the bank's assets and liabilities; or determining
whether the banking institutions may be rehabilitated, or should be liquidated and
appointing a liquidator towards this end are by law final and executory. Nonetheless,
the same may be set aside by the court upon proof that the action is plainly arbitrary
and made in bad faith, which may be asserted as an affirmative defense or a
counterclaim in the proceeding for assistance in liquidation. (Apollo M. Salud vs.
Central Bank of the Philippines, G.R. No. L-17620, August 19, 1986)

The pendency of the case questioning the validity of foreclosure did not diminish
thepowers and authority of the designated liquidator to effectuate and carry on the
administration of the bank. As such, the liquidator has the authority to resist or defend
suits instituted against the bank by its debtors and creditors; it likewise has the
authority to bring actions for foreclosure of mortgages executed by debtors in favor of
the bank. (Banco Filipino Savings and Mortgage Bank vs. Central Bank, G.R. No. 70054,
December 11, 1991)

The court shall have jurisdiction in the same proceedings to adjudicate disputed claims
against the bank and enforce individual liabilities of the stockholders and do all that is
necessary to preserve the assets of such institution and to implement the liquidation
plan approved by the Monetary Board. Hence, all claims against the insolvent bank
should be filed in the liquidation proceeding and it is not necessary that a claim be
initially disputed in a court or agency before it is filed with the liquidation court. (Jerry
Ong vs. Court of Appeals, G.R. No. 112830, February 1, 1996)

The rule that all claims against a bank must be filed in the liquidation proceedings
does not apply to actions filed by the bank itself for the preservation of its assets and
protection of its property, such as a petition for the issuance of a Writ of Possession
instituted by the bank itself. Moreover, a bank ordered closed by the Monetary Board
retains its personality which can sue and be sued through its liquidator. (Domingo
Manalo vs. Court of Appeals, G.R. No. 141297, October 8, 2001)

A bank, which is previously declared in default for failing to file an answer in a case
filed by another bank cannot rely on the rule that a bank placed under receivership is
not liable to pay interest and penalty on its loan accounts with another bank. By not
bothering to file a motion for reconsideration, the bank is now precluded from relying
on the rule with regard to payment of interests when a bank has been placed under
receivership because to do so would render nugatory the order of default issued by the
court. (Rural Bank of Sta. Catalina vs. Land Bank of the Philippines, G.R. No. 148019,
July 26, 2004)

As a rule, bank deposits are not preferred credits. However, when the deposits
covered by a cashiers check were purchased from a bank at the time when it was
already insolvent, the purchase is entitled to preference in the assets of the bank upon
its liquidation by reason of the fraud in the transaction. (Leticia G. Miranda vs.
Philippine Deposit Insurance Corporation, G.R. No. 169334, September 8, 2006)

6. How the BSP Handles Exchange Crisis

a. Legal Tender Power
b. Rate of Exchange

B. Law on Secrecy of Bank Deposits (R.A. No. 1405, as amended)

1. Purpose

R.A. No. 1405 hopes to discourage private hoarding and at the same time encourages
the people to deposit their money in banking institutions, so that it may be utilized by
way of authorized loans and thereby assist in economic development. The absolute
confidentiality rule in R.A. No. 1405 actually aims to give 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. (BSB Group, Inc. vs. Sally Go, G.R. No. 168644, February 16, 2010)

2. Prohibited Acts

In a case where the money paid by an insurance company for treasury bills was
deposited in a bank account, the examination of the said bank account is prohibited
under R.A. No. 1405 by reason of the fact that the subject matter of the action filed by
the insurance company against the seller of the treasury bills is the failure to deliver
the treasury bills, not the money deposited. (Oate vs. Abrogar, G.R. No. 107303,
February 23, 1995)

When a collecting bank sued the drawee bank because the latter had erroneously
undercoded the amount of the check it presented for clearing, the collecting bank
cannot be allowed to examine the account of the drawer of the check absent any
showing that the money in the said account is the subject matter of litigation. The
action filed by the collecting bank is not for the recovery of the money contained in
the deposit but for the recovery of the money from the drawee bank as a result of the
latters alleged failure to inform the former of the discrepancy. (Union Bank of the
Philippines vs. Court of Appeals, G.R. No. 134699, December 23, 1999)

3. Deposits Covered

When the account subject of the complaint is in the foreign currency, such complaint
filed for violation of R.A. No. 1405 did not toll the running of the prescriptive period to
file the appropriate complaint for violation of R.A. No. 6426. The Law on Secrecy of
Bank Deposits (R.A. No. 1405) covers deposits under the Philippine Currency; a
separate and distinct law governs deposits under the foreign currency (R.A. No. 6426).
(Intengan vs. Court of Appeals, G.R. No. 128996, February 15, 2002)

The deposits covered by the law on secrecy of bank deposits should not be limited to
those creating a creditor-debtor relationship; the law must be broad enough to
include deposits of whatever nature which banks may use for authorized loans to
third persons. R.A. No. 1405 extends to funds invested such as those placed in a trust
account which the bank may use for loans and similar transactions. (Ejercito vs.
Sandiganbayan, G.R. Nos. 157294-95, November 30, 2006)

4. Exceptions

When pursuant to a court order garnishing the depositors funds, a bank complied by
delivering in check the amount garnished to the sheriff, the bank cannot be held liable
to its depositor. There is no violation of the law on secrecy of bank deposits when the
bank had no choice but to comply with the court order for delivery of the garnished
amount. (RCBC vs. De Castro, G.R. No. L-34548, November 29, 1988)

One of the exceptions under R.A. No. 1405 is when a court order is issued for the
disclosure of bank deposits in a case where the money deposited is the subject matter
of litigation. When the subject matter is the money the bank transmitted by mistake,
an inquiry to the whereabouts of the amount extends to whatever concealed by being
held or recorded in the name of the persons other than the one responsible for the
illegal acquisition. (Mellon Bank, N.A. vs. Magsino, G.R. No. 71479, October 18, 1990)

The law on secrecy of bank deposits cannot be used to preclude the bank deposits
from being garnished for the satisfaction of a judgment. There is no violation of R.A.
No. 1405 because the disclosure is purely incidental to the execution process and it
was not the intention of the legislature to place bank deposits beyond the reach of the
judgment creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)

In a case for violation of the Anti-Graft and Corrupt Practices Act, the Ombudsman can
only examine bank accounts upon compliance with the following requisites: there is a
pending case before a court of competent jurisdiction; the account must be clearly
identified, and the inspection must be limited to the subject matter of the pending
case; the bank personnel and the account holder must be informed of the examination;
and such examination must be limited to the account identified in the pending case. If
there is no pending case yet but only an investigation by the Ombudsman, any order
for the examination of the bank account is premature. (Marquez vs. Desierto, G.R. No.
135882, June 27, 2001; Office of the Ombudsman vs. Ibay, G. R. No. 137538,
September 3, 2001)

One of the exceptions under R.A. 1405 is when the inquiry into the bank deposits is
premised on the fact that the money deposited in the account is itself the subject of
the action. Such is not the case when the respondent was charged with qualified theft
and when the attempt of inquiry serves no other purpose but to establish the existence
of such account, its nature and the amount kept in it. (BSB Group, Inc. vs. Sally Go, G.R.
No. 168644, February 16, 2010)

In case the bank complies with the provisions of the law and the unclaimed balances
are eventually escheated to the Republic, the bank shall not thereafter be liable to any
person for the same. However, when the managers check was never negotiated or
presented for payment to the bank, the procurer of the check retained ownership of
the funds; hence, proper notice should have been given to the latter for compliance
with the law. (Rizal Commercial Banking Corporation vs. Hi-Tri Development
Corporation, 672 SCRA 514 (2012))

5. Garnishment of Deposits, Including Foreign Deposits

The law on secrecy of bank deposits cannot be used to preclude the bank deposits
from being garnished for the satisfaction of a judgment. There is no violation of R.A.
No. 1405 because the disclosure is purely incidental to the execution process and it
was not the intention of the legislature to place bank deposits beyond the reach of the
judgment creditor. (PCIB vs. Court of Appeals, G.R. No. 84526, January 28, 1991)

A foreign transient who raped a minor, escaped and was made liable for damages to
the victim cannot invoke the exemption from court process of foreign currency
deposits under R.A. No. 6426. The garnishment of his foreign currency deposit should
be allowed by reason of equity and to prevent injustice; moreover, the purpose of the
law is to encourage foreign currency deposits and not to benefit a wrongdoer.
(Salvacion vs. Central Bank of the Philippines, G.R. No. 94723, August 21, 1997)

C. General Banking Law of 2000 (R.A. No. 8791)

1. Definition and Classification of Banks

When a corporation loans out the money obtained from almost 60,000 savings
account deposits opened by the public with the said corporation, it is clear that these
transactions partake the nature of banking, as defined by the law. Accordingly, the
corporation has violated the law by engaging in banking without securing the
administrative authority required in R.A. No. 337. (Republic of the Philippines vs.
Security Credit and Acceptance Corporation, G.R. No. L-20583, January 23, 1967)

2. Distinction of Banks from Quasi-Banks and Trust Entities

Transactions involving purchase of receivables at a discount, well within the purview of
investing, reinvesting or trading in securities, which as investment company is
authorized to perform, does not constitute a violation of the General Banking Act. In
this case, the funds supposedly lent have not been shown to have been obtained from
the public by way of deposits, hence, it cannot be said that the investment company
was engaged in banking. (Teodoro Baas vs. Asia Pacific Finance Corporation, G.R. No.
128703, October 18, 2000)

R.A. No. 8791 or the General Banking Law of 2000 provided that banks shall refer to entities
engaged in the lending of funds obtained in the form of deposits. Financial intermediaries, on
the other hand, are defined as persons or entities whose principal functions include the lending,
investing or placement of funds or evidences of indebtedness or equity deposited with them,
acquired by them, or otherwise coursed through them, either for their own account or for the
account of others; pawnshops fall under this category. (First Planters Pawnshop, Inc. vs.
Commissioner of Internal Revenue, G.R. No. 174134, July 30, 2008)

3. Bank Powers and Liabilities

a. Corporate Powers

An alien-owned commercial bank is allowed to purchase and hold real estate
conveyed to it in satisfaction of debts previously contracted in the course of its
dealings such as loans and other similar transactions. The civil liability arising from the
criminal offense committed by the banks former employee is not a debt contracted in
the course of a banks dealings and thus, the transfer made by the employee is not
allowed. (Register of Deeds of Manila vs. China Banking Corporation, 4 SCRA 1145
(1962))

Banks are entities engaged in the lending of funds obtained through deposits from the
public and it is for this reason that their viability depends largely on their ability to
return those deposits on demand. In this case, when the borrower is proven to have
committed fraud by altering and falsifying its financial statements in order to obtain its
credit facilities, the bank has the right to annul any credit accommodation or loan, and
demand the immediate payment thereof. (Banco de Oro-EPCI, Inc. vs. JAPRL
Development Corporation, G.R. No. 179901, April 14, 2008)

b. Banking and Incidental Powers

An investment management agreement, which created a principal-agent relationship
between petitioners as principals and respondent as agent for investment purposes, is
not a trust or an ordinary bank deposit; hence, no trustor-trustee-beneficiary or even
borrower-lender relationship existed. Banks may legally exercise investment
management activities but the Monetary Board may regulate such operations to insure
that said operations do not endanger the interests of the depositors and other
creditors of the banks. (Spouses Raul and Amalia Panlilio vs. Citibank, N.A., G.R. No.
156335, November 28, 2007)

4. Diligence Required of BanksRelevant Jurisprudence

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. When the banks negligence caused the dishonor of the checks
issued by its client, which eventually resulted to the latters embarrassment and
financial loss, the bank should be held liable for damages. (Simex International
(Manila) Inc. vs. Court of Appeals, 183 SCRA 360 (1990))

In the absence of any stipulation, the depositarys responsibility for the safekeeping of
the objects deposited would require the diligence of a good father of a family; hence,
any stipulation exempting the depositary from any liability arising from the loss of the
things deposited on account of fraud, negligence or delay would be void for being
contrary to law and public policy. The banks negligence in failing to notify the
depositor aggravated the injury or damage to the stamp collection which was
inundated by floodwaters, thus, the bank should be held liable. (Luzan Sia vs. Court of
Appeals, G.R. No. 102970, May 13, 1993)

The degree of diligence required of banks, which should be more than that of a good
father of a family is grounded on the fiduciary nature of the relationship between the
bank and its depositors on account of the banks obligation as a depositary of its
clients deposits. Nevertheless, in a sale and issuance of foreign exchange demand
draft, the same degree of diligence is not required because the nature of the
transaction does not involve the banks fiduciary relationship with its depositors.
(Gregorio Reyes vs. Court of Appeals, G.R. No. 118492, August 15, 2001)

When the bank teller has failed to return the passbook to its owner or to the
authorized representative of the depositor, the bank is presumed to have failed to
exercise and observe a higher degree of diligence required of it, which makes it liable
for the damage done to the depositor. However, the banks liability can be mitigated
by the depositors contributory negligence when the latter allowed a signed
withdrawal slip to fall into the hands of an unauthorized person. (Consolidated Bank
and Trust Corporation vs. Court of Appeals, G.R. No. 138569, September 11, 2003)

Allowing the pretermination of the account despite noticing discrepancies in the
signature and photograph of the person claiming to be the depositor, accompanied by
the failure to surrender the original certificate of time deposit, amounted to
negligence on the part of the bank. A bank that fails to exercise the degree of
diligence required of it becomes liable for damages. (Citibank, N.A. vs. Spouses Luis &
Carmelita Cabamongan, G.R. No. 146918, May 2, 2006)

No less than the highest degree of diligence is required of banks by reason of the fact
that the banking business is impressed with public interest. Banks are expected to
treat the accounts of its depositors with meticulous care, hence, when checks are
encashed by the employees of the bank without the necessary documents, any loss
resulting from the transactions should be borne by the bank by reason of its
negligence. (Philippine Savings Bank vs. Chowking Food Corporation, G.R. No.
177526, July 4, 2008)

A bank that regularly processes checks that are neither payable to the customer nor
duly indorsed by the payee is apparently grossly negligent in its operations. The
degree of responsibility, care and trustworthiness expected of the banks employees
and officials is far greater than those of ordinary clerks and employees; thus, the banks
are expected to exercise the highest degree of diligence in the selection and
supervision of their employees. (Philippine National Bank vs. Erlando T. Rodriguez, et.
al., G.R. No. 170325, September 26, 2008)

The fiduciary relationship between the bank and the depositor means that the banks
obligation to observe high standards of integrity and performance is deemed written
into every deposit agreement between a bank and its depositor. When the bank failed
to perform a routine verification of the signature affixed in the cash transfer slip, the
bank should be held liable for a withdrawal made by an unauthorized agent of the
depositor. (Central Bank of the Philippines vs. Citytrust Banking Corporation, G.R. No.
141835, February 4, 2009)

When the drawee bank pays a person other than the payee named on the check, it
does not comply with the terms of the check and violates its duty to charge the
drawers accounts only for properly payable items. In disregarding established banking
rules and regulations, the bank was clearly negligent, thus, should be made liable.
(Bank of America, NT and SA vs. Associated Citizens Bank, G.R. No. 141018, May 21,
2009)

The premature debiting of the postdated check by the bank which resulted to
insufficiency of funds that brought about the dishonor of two checks, which caused the
electric supply to be cut-off and affected business operations, indicates the
negligence of the bank. For its failure to exercise extra-ordinary diligence, which is
required of banks, it should be made liable. (Equitable PCI Bank vs. Arcelito B. Tan, G.R.
No. 165339, August 23, 2010)

A banking institution serving as an originating bank for the Unified Home Lending
Program (UHLP) of the Government owes a duty to observe the highest degree of
diligence and a high standard of integrity and performance in all its transactions with
its clients because its business is imbued with public interest. (Comsavings Bank vs.
Spouses Danilo and Estrella Capistrano, G.R. No. 170942, August 28, 2013)

As a business affected with public interest and by reason 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. A bank that
mismanages the trust accounts of its client cannot benefit from the inaccuracies of the
reports resulting therefrom; it cannot impute the consequence of its negligence to the
client which resulted to miscrediting of funds. (Land Bank of the Philippines vs.
Emmanuel Oate, G.R. No. 192371, January 15, 2014)

The mortgagee, as a banking institution, owed it to Guaria Corporation to exercise
the highest degree of diligence, as well as to observe the high standards of integrity
and performance in all its transactions because its business was imbued with public
interest. The bank failed in its duty by prematurely foreclosing the mortgages and
unwarrantedly causing the foreclosure sale of the mortgaged properties despite the
mortgagor not being yet in default. (Development Bank of the Philippines vs. Guaria
Agricultural and Realty Development Corporation, G.R. No. 160758, January 15, 2014)

5. Nature of Bank Funds and Bank Deposits

The fiduciary nature of a bank-depositor relationship does not convert the contract
between the bank and its depositors from a simple loan to a trust agreement, whether
express or implied; hence, failure by the bank to pay the depositor is failure to pay a
simple loan, and not a breach of trust. The law simply imposes on the bank a higher
standard of integrity and performance in complying with its obligations under the
contract of simple loan, beyond those required of non-bank debtors under a similar
contract of simple loan. (Consolidated Bank and Trust Corporation vs. Court of
Appeals, G.R. No. 138569, September 11, 2003)

6. Stipulation on Interests

A banking institution which has been declared insolvent and subsequently ordered
closed by the Central Bank of the Philippines cannot be held liable to pay interest on
bank deposits which accrued during the period when the bank is actually closed and
non-operational. However, the bank is still liable for the interest on bank deposits
which accrued up to the date of its closure. (Fidelity Savings and Mortgage Bank vs.
Hon. Pedro Cenzon, G.R. No. L-46208, April 5, 1990)

When the stipulation on the interest rate is void, it is as if there was no express
contract thereon; hence, courts may reduce the interest rate as reason and equity
demand, which would depend on the circumstances of each case. In the present case,
the fact that petitioner made partial payments makes the stipulated penalty charge of
3% per month or 36% per annum, in addition to regular interests, iniquitous and
unconscionable. (Ileana Macalinao vs. Bank of the Philippine Islands, G.R. No. 175490,
September 17, 2009)

Section 78 of the General Banking Act requires payment of the amount fixed by the
court in the order of execution, with interest thereon at the rate specified in the
mortgage contract, which shall be applied for the one-year period reckoned from the
date of registration of the certificate of sale. Nonetheless, when the period to exercise
the right of redemption was effectively extended beyond one year, it is only fair and
just to require the payment of 12% interest per annum beyond the one-year period up
to the date of consignment of the redemption price with the RTC. (Heirs of Estelita
Burgos-Lipat namely: Alan B. Lipat and Alfredo B. Lipat, Jr. vs. Heirs of Eugenio D.
Trinidad namely: Asuncion R. Trinidad, et. al., G.R. No. 185644, March 2, 2010)

The General Banking Act applies insofar as the redemption price is concerned, when
the mortgagee is a bank and the latter cannot dictate or alter the terms of redemption
by imposing additional charges and including other loans. The foreclosure and sale of
the mortgaged property extinguishes the mortgage indebtedness; hence, the bank can
no longer invoke its provisions or even refer to the 18% annual interest charged in the
promissory note, an obligation allegedly covered by the terms of the Contract. (Asia
Trust Development Bank vs. Carmelo H. Tuble, G.R. No. 183987, July 25, 2012)

The CB Circular No. 905 merely suspended the effectivity of the Usury Law, thereby
allowing the parties to freely stipulate on the rate of interest. Nonetheless, the lifting
of the ceilings for interest rates does not authorize stipulations charging excessive,
unconscionable, and iniquitous interest. (Advocates for Truth in Lending vs. BSP, G.R.
No. 192986, January 15, 2013)

7. Grant of Loans and Security Requirements

a. Ratio of Net Worth to Total Risk Assets
b. Single Borrowers Limit
c. Restrictions on Bank Exposure to DOSRI (Directors, Officers, Stockholders and
their Related Interests

Under the law on DOSRI transactions, the following elements must be present to
constitute a violation: 1) the offender is a director or officer of any banking institution;
2) the offender, either directly or indirectly, for himself or as representative or agent of
another, borrows from the bank, becomes a guarantor, indorser, or surety or becomes
in any manner an obligor for money borrowed from bank or loaned by it; 3) the
offender has performed any of such acts without the written approval of the majority
of the directors of the bank, excluding the offender, as the director concerned. The
language of the law is broad enough to encompass either the act of borrowing or
guaranteeing, or both. (Jose C. Go vs. BSP, G.R. No. 178429, October 23, 2009)

The law on DOSRI transactions imposes three restrictions: a) the approval requirement,
which refers to the written approval of the majority of the banks board of directors,
excluding the director concerned; b) the reportorial requirement, which mandates that
the approval should be entered upon the records of the corporation, and a copy of the
entry be transmitted to the appropriate supervising department; and c) the ceiling
requirement, which limits the amount of credit accommodations to an amount
equivalent to the respective outstanding deposits and book value of the paid-in capital
contribution in the bank. Failure to observe the three requirements constitutes
commission of three separate and different offenses. (Jose C. Go vs. BSP, G.R. No.
178429, October 23, 2009)

The rule on DOSRI transactions covers loans by a bank director or officer which are
made either: (1) directly, (2) indirectly, (3) for himself, (4) or as the representative or
agent of others. The bank officers act of indirectly securing a fraudulent loan
application by using the name of an unsuspecting person and without prior
compliance with the requirements of the law would make the officer liable not only for
violation of the law on DOSRI transactions but also for estafa through falsification of
commercial documents. (Hilario P. Soriano vs. People of the Philippines, et. al., G.R.
No. 162336, February 1, 2010)

There must be competent evidence to establish that the loans granted were in the
nature of DOSRI or were issued in violation of the Single Borrowers Limit; nonetheless,
even assuming that they were of such nature, the loans would not be void for that
reason. Instead, the bank or the officers responsible for the approval and grant of the
DOSRI loan would be subject to sanctions under the law. (Republic of the Philippines
vs. Sandiganbayan, et. al., G.R. No. 166859/G.R. No. 169203/G.R. No. 180702, April
12, 2011)

IX. Intellectual Property Code (Exclude Implementing Rules & Regulations)

A. Intellectual Property Rights in General

1. Intellectual Property Rights

2. Differences between Copyrights, Trademarks and Patent

A trademark is any visible sign capable of distinguishing the goods (trademark) or
services (service mark) of an enterprise and shall include a stamped or marked
container of goods; a trade name refers to the name or designation identifying or
distinguishing an enterprise. 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. On the other hand, patentable inventions refer to any
technical solution of a problem in any field of human activity which is new, involves an
inventive step and is industrially applicable. (Pearl & Dean (Phil.), Inc. vs. Shoemart,
Inc., G.R. No. 148222, August 15, 2003)

3. Technology Transfer Arrangements

B. Patents

1. Patentable Inventions

A utility model is a technical solution to a problem in any field of human activity which
is new and industrially applicable; it may be, or may relate to, a product, or process, or
an improvement of any of the aforesaid. Being plain automotive spare parts that must
conform to the original structural design of the components they seek to replace, the
Leaf Spring Eye Bushing and Vehicle Bearing Cushion are not ornamental; they lack the
decorative quality or value that must characterize authentic works of applied art and in
actuality, they are utility models, useful articles, albeit with no artistic design or value.
(Jessie Ching vs. William Salinas, et. al., G.R. No. 161295, June 29, 2005)

2. Non-Patentable Inventions

3. Ownership of a Patent

a. Right to a Patent

When petitioner never secured a patent for the light boxes, it therefore acquired no
patent rights which could have protected its invention. The ultimate goal of a patent
system is to bring new designs and technologies into the public through disclosure;
hence, ideas, once disclosed to the public without protection of a valid patent, are
subject to appropriation without significant restraint. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15, 2003)

b. First-to-File Rule
c. Inventions Created Pursuant to a Commission
d. Right of Priority

4. Grounds for Cancellation of a Patent

5. Remedy of the True and Actual Inventor

6. Rights Conferred by a Patent

The tiles produced from respondents process are suitable for construction and
ornamentation, which previously had not been achieved by tiles made out of the old
process of tile making; therefore, the said invention having brought about a new and
useful kind of tile, the patent is legally issued. With this, the act of making, using and
selling tiles embodying said patented invention constitute infringement. (Domiciano
Aguas vs. Conrado De Leon, G.R. No. L-32160, January 30, 1982)

The validity of the patent issued by the Philippine Patent Office and the question over
the inventiveness, novelty and usefulness of the improved model of the LPG burner are
matters which are better determined by the Patent Office. There is a presumption that
the Philippine Patent Office has correctly determined the patentability of the model
and such action must not be interfered with in the absence of competent evidence to
the contrary. (Manzano vs. Court of Appeals, G.R. No. 113388, September 5, 1997)

There can be no infringement of a patent until a patent has been issued, since
whatever right one has to the invention covered by the patent arises alone from the
grant of patent. A patent gives the inventor the right to exclude all others from
making, using or selling his invention. (Creser Precision Systems, Inc. vs. Court of
Appeals, G.R. No. 118708, February 2, 1998)

When the language of its claims is clear and distinct, the patentee is bound thereby
and may not claim anything beyond them. the language of Letter Patent No. 14561
fails to yield anything at all regarding Albendazole and no extrinsic evidence had been
adduced to prove that Albendazole inheres in petitioners patent in spite of its
omission therefrom or that the meaning of the claims of the patent embraces the
same. (Smith Kline Beckman Corporation vs. Court of Appeals, G.R. No. 126627,
August 14, 2003)

The patent law has a three-fold purpose: first, it seeks to foster and reward invention;
second, it promotes disclosure of inventions to stimulate further innovation and to
permit the public to practice the invention once the patent expires; and third, the
stringent requirements for patent protection seek to ensure that ideas in the public
domain remain there for the free use of the public and it is only after an exhaustive
examination by the patent office that patent is issued. Not having gone through the
arduous examination for patents, petitioner cannot exclude others from the
manufacture, sale or commercial use of the light boxes on the sole basis of its
copyright certificate over the technical drawings. (Pearl & Dean (Phil.), Inc. vs.
Shoemart, Inc., G.R. No. 148222, August 15, 2003)

A patentee shall have the exclusive right to make, use and sell the patented machine,
article or product, and to use the patented process for the purpose of industry or
commerce, throughout the territory of the Philippines for the term of the patent; and
such making, using, or selling by any person without the authorization of the patentee
constitutes infringement of the patent. The patentees exclusive rights exist only
during the term of the patent, hence, after the cut-off date, the exclusive rights no
longer exist and the temporary restraining order can no longer be issued in its favor.
(Phil. Pharmawealth, Inc. vs. Pfizer, Inc., G.R. No. 167715, November 17, 2010)

7. Limitations of Patent Rights

a. Prior User
b. Use by the Government

8. Patent Infringement

a. Tests in Patent Infringement

i. Literal Infringement

To determine whether the particular item falls within the literal meaning of the patent
claims, the court must juxtapose the claims of the patent and the accused product
within the overall context of the claims and specifications, to determine whether there
is exact identity of all material elements. Viewed from any perspective or angle, the
power tiller of the defendant is identical and similar to that of the turtle power tiller of
plaintiff in form, configuration, design, appearance, and even in the manner of
operation. (Pascual Godines vs. Court of Appeals, G.R. No. 97343, September 13,
1993)

ii. Doctrine of Equivalents

Under the doctrine of equivalents, there is infringement if two devices do the same
work in substantially the same way, and accomplish substantially the same result, even
though they differ in name, form, or shape. The reason for the doctrine of equivalents
is that to permit the imitation of a patented invention which does not copy any literal
detail would be to convert the protection of the patent grant into a hollow and useless
thing. (Pascual Godines vs. Court of Appeals, G.R. No. 97343, September 13, 1993)

The doctrine of equivalents provides that an infringement takes place when a device
appropriates a prior invention by incorporating its innovative concept and, although
with some modification and change, performs substantially the same function in
substantially the same way to achieve substantially the same result; it requires
satisfaction of the function-means-and-result test. In this case, while both compounds
have the effect of neutralizing parasites in animals, identity of result does not amount
to infringement of patent unless Albendazole operates in substantially the same way or
by substantially the same means as the patented compound, even though it performs
the same function and achieves the same result. (Smith Kline Beckman Corporation vs.
Court of Appeals, G.R. No. 126627, August 14, 2003)

b. Defenses in Action for Infringement

An invention must possess the essential elements of novelty, originality and
precedence and for the patentee to be entitled to protection, the invention must be
new to the world. When a patent is sought to be enforced, the questions of invention,
novelty or prior use, and each of them, are open to judicial examination; in cases of
infringement of patent no preliminary injunction will be granted unless the patent is
valid and infringed beyond question and the record conclusively proves the defense is
sham. (Rosario Maguan vs. Court of Appeals, G.R. L-45101, November 28, 1986)

9. Licensing

a. Voluntary
b. Compulsory

10. Assignment and Transmission of Rights

C. Trademarks

A "trademark" is any word, name, symbol, emblem, sign or device or any combination
thereof adopted and used by a manufacturer or merchant to identify his goods and
distinguish them from those manufactured, sold or dealt in by others; it is any visible
sign capable of distinguishing goods. The trademark is not merely a symbol of origin
and goodwill; it is often the most effective agent for the actual creation and protection
of goodwill. (Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19,
1999)

1. Definition of Marks, Collective Marks, Trade Names

2. Acquisition of Ownership of Mark

The name and container of a beauty cream product are proper subjects of a trademark
inasmuch as the same falls squarely within its definition. In order to be entitled to
exclusively use the same in the sale of the beauty cream product, the user must
sufficiently prove that she registered or used it before anybody else did. The
petitioners copyright and patent registration of the name and container would not
guarantee her the right to the exclusive use of the same for the reason that they are
not appropriate subjects of the said intellectual rights. (Elidad C. Kho, doing business
under the name and style of KEC Cosmetics Laboratory vs. Court of Appeals, et. al.,
G.R. No. 115758, March 19, 2002)

Even if the registration of a mark is prevented with the filing of an earlier application
for registration, this must not, however, be interpreted to mean that ownership should
be based upon an earlier filing date. While RA 8293 removed the previous
requirement of proof of actual use prior to the filing of an application for registration
of a mark, proof of prior and continuous use is necessary to establish ownership of a
mark, which constitutes sufficient evidence to oppose the registration of a mark. (E.Y.
Industrial Sales vs. Shien Dar Electricity and Machinery Co. , G.R. No. 184850, 20
October 2010)

The cancellation of registration of a trademark has the effect of depriving the
registrant of protection from infringement from the moment the judgment or order of
cancellation has become final. Accordingly, a distributor has no right to the
registration of the disputed trademarks since the right to register a trademark is based
on ownership. An exclusive distributor who employs the trademark of the
manufacturer does not acquire proprietary rights of the manufacturer, and a
registration of the trademark by the distributor as such belongs to the manufacturer,
provided the fiduciary relationship does not terminate before application for
registration is filed. (Superior Commercial Enterprises, Inc. vs. Kunnan Enterprises Ltd.
and Sports Concept & Distributor, Inc., G.R. No. 169974, April 20, 2010)

It is not the application or registration of a trademark that vests ownership thereof, but
it is the ownership of a trademark that confers the right to register the same.
Registration merely creates a prima facie presumption of the validity of the
registration, of the registrants ownership of the trademark, and of the exclusive right
to the use thereof; it is rebuttable, thus, it must give way to evidence to the contrary.
(Birkenstock Orthopaedie Gmbh and Co. Kg vs. Philippine Shoe Expo Marketing
Corporation, G.R. No. 194307, November 20, 2013)

3. Acquisition of Ownership of Trade Name

4. Non-Registrable Marks

5. Prior Use of Mark as a Requirement

6. Tests to Determine Confusing Similarity between Marks

Both Berris (D-10 80 WP) and Abyadangs mark (NS D-10 PLUS) have D-10 as a
common component, which also happened to be the dominant feature of Berris mark.
In applying both the dominancy test and holistic test, the likelihood of confusion is
present considering the fact that both marks pertain to the same type of goods; both
products use the same type of material for the packaging and have identical color
schemes. Considering these striking similarities, the buyers of both products, mainly
farmers, may be misled into thinking that NS D-10 PLUS could be an upgraded
formulation of the D-10 80 WP; hence, Berris properly opposed Abyadangs
application for registration. (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No.
183404, October 13, 2010)

A resort to either the Dominancy Test or the Holistic Test shows that colorable
imitation exists between respondent's "Gold Toe" and petitioner's "Gold Top." An
examination of the products in question shows that their dominant features are gold
checkered lines against a predominantly black background and a representation of a
sock with a magnifying glass; in addition, both products use the same type of lettering;
both also include a representation of a man's foot wearing a sock and the word
"linenized" with arrows printed on the label; lastly, the names of the brands are similar
-- "Gold Top" and "Gold Toe." (Amigo Manufacturing, Inc. vs. Cluett Peabody Co., Inc.,
G.R. No. 139300, March 14, 2001)

a. Dominancy Test

The word MASTER, the dominant feature of the opposers mark, is neither generic nor
descriptive and as such, it cannot be invalidated as a trademark. When the term
MASTER has acquired a certain connotation to mean the coffee products MASTER
ROAST and MASTER BLEND produced by Nestle, the use by the CFC of the term
MASTER in the trademark for its coffee product FLAVOR MASTER is likely to cause
confusion or mistake or even deception of the ordinary purchasers. (Societe Des
Produits Nestle, S.A. vs. Court of Appeals and CFC Corporation, G.R. No. 112012, April
4, 2001)

Respondents have adopted in "Big Mak" not only the dominant but also almost all the
features of "Big Mac." Applied to the same food product of hamburgers, with both
marks aurally and visually the same, it will likely result in confusion in the public mind.
(McDonalds Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18,
2004)

With the predominance of the letter "M," and prefixes "Mac/Mc" found in both marks,
the inevitable conclusion is there is confusing similarity between the trademarks Mc
Donalds marks and "MACJOY AND DEVICE" especially considering the fact that both
marks are being used on almost the same products falling under Classes 29 and 30 of
the International Classification of Goods i.e. Food and ingredients of food. In this case,
the common awareness or perception of customers that the trademarks McDonalds
mark and MACJOY & DEVICE are one and the same, or an affiliate, or under the
sponsorship of the other is not far-fetched. (McDonalds Corporation vs. Macjoy
Fastfood Corporation, G.R. No. 166115, February 2, 2007)

Both the words PYCNOGENOL and PCO-GENOLS have the same suffix GENOL
which appears to be merely descriptive and furnish no indication of the origin of the
article and hence, open for trademark registration by the plaintiff thru combination
with another word or phrase such as PYCNOGENOL. Although there were
dissimilarities in the trademark due to the type of letters used as well as the size, color
and design employed on their individual packages/bottles, still the close relationship
of the competing products name in sounds as they were pronounced, clearly indicates
that purchasers could be misled into believing that they are the same and/or originates
from a common source and manufacturer. (Prosource International, Inc. vs. Horphag
Research Management SA, G.R. No. 180073, November 25, 2009)

In applying the dominancy test, both confusion of goods and confusion of business
were apparent in both trademarks as the mark Dermaline Dermaline, Inc. is
confusingly similar with the registered trademark Dermalin. Dermalines stance that
its product belongs to a separate and different classification from Myras products with
the registered trademark does not eradicate the possibility of mistake on the part of
the purchasing public to associate the former with the latter, especially considering
that both classifications pertain to treatments for the skin. (Dermaline, Inc. Vs. Myra
Phamaceuticals, Inc., G.R. No. 190065, August 1, 2010)

NANNY is confusingly similar to NAN, the prevalent feature of Nestles line of
infant powdered milk products which is is written in bold letters and used in all
products. The first three letters of NANNY are exactly the same as the letters of
NAN and when NAN and NANNY are pronounced, the aural effect is confusingly
similar. (Soceite Des Produits Nestle, S.A. vs. Dy, Jr., G.R. No. 172276, August 8, 2010)

The Dominancy Test focuses on the similarity of the prevalent or dominant features of
the competing trademarks that might cause confusion, mistake, and deception in the
mind of the purchasing public. Respondents use of the stylized S in its Strong rubber
shoes infringes on the mark of the petitioner as it is the dominant feature of the latters
trademark; the likelihood of confusion is present as purchasers may associate the
respondents product as connected with petitioners business. (Sketchers USA vs. Inter
Pacific Industrial Trading Corporation, GR No. 164321, March 28, 2011)

b. Holistic Test

The similarities of the competing trademarks in this case are completely lost in the
substantial differences in the design and general appearance of their respective hang
tags. The trademarks FRUIT OF THE LOOM and FRUIT FOR EVE do not resemble each
other as to confuse or deceive an ordinary purchaser, who must be thought of as
having, and credited with, at least a modicum of intelligence to be able to see the
obvious differences between the two trademarks in question. (Fruit of the Loom, Inc.
vs. Court of Appeals, G.R. No. L-32747, November 29, 1984)

In applying the holistic test, petitioners trademark, STYLISTIC MR. LEE, which
pertains to jeans, should be considered as a whole. The test of fraudulent simulation is
to be found in the likelihood of the deception of some persons in some measure
acquainted with an established design and desirous of purchasing the commodity with
which that design has been associated. When the casual buyer is predisposed to be
more cautious in his purchase, as in this case where the products concerned are not
inexpensive, the likelihood of confusion is absent. (Emerald Garment Manufacturing
Corporation vs. Court of Appeals, G.R. No. 100098, December 29, 1995)

The application of the holistic test entails a consideration of the entirety of the marks
as applied to the products, including the labels and packaging, in determining
confusing similarity. Although the perceived offending word MARK is itself
prominent in petitioners trademarks MARK VII and MARK TEN, the entire marking
system should be considered as a whole and not dissected, because a discerning eye
would focus not only on the predominant word but also on the other features
appearing in the labels; only then would such discerning observer draw his conclusion
whether one mark would be confusingly similar to the other and whether or not
sufficient differences existed between the marks. (Philip Morris, Inc. vs. Fortune
Tobacco Corporation, G.R. No. 158589, June 27, 2006)

The gravamen of the offense of infringement of a registered trademark is the
likelihood of confusion. In applying the Holistic Test, confusion was remote because
the jeans made and sold by Levis Philippines were not only very popular but also quite
expensive, as opposed to Diazs tailored jeans which were acquired on a made-to-
order basis; moreover, since the jeans are expensive, the casual buyer is predisposed
to be more cautious and discriminating in and would prefer to mull over his purchase.
(Victorio Diaz vs. People of the Philippines, G.R. No. 180677, February 18, 2013)

7. Well-Known Marks

Respondents BARBIZON as well as its BARBIZON and Bee Design and BARBIZON and
Representation of a Woman trademarks qualify as well-known trademarks entitled to
protection. Hence, Barbizon cannot be registered as a trademark for ladies
underwear. (Pribhdas J. Mirpuri vs. Court of Appeals, G.R. No. 114508, November 19,
1999)

The Paris Convention for the Protection of Industrial Property does not automatically
exclude all countries of the world which have signed it from using a tradename which
happens to be used in one country. GALLO cannot be considered a well-known
mark within the contemplation and protection of the Paris Convention in this case
since GALLO wines and GALLO cigarettes are neither the same, identical, similar nor
related goods. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J.
Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)

The scope of protection under Article 6
bis
of the Paris Convention, wherein both the
United States and the Philippines are signatories, extends to a well-known mark, which
should be protected in a country even if the mark is neither registered nor used in that
country. Respondent, the owner of a well-known mark, has the legal capacity to sue
petitioners for the latters use of the IN-N-OUT Burger trademark for the name of
their restaurant and for the identical or confusingly similar mark for their hamburger
wrappers and french-fries receptacles, which effectively misrepresent the source of
the goods and services. (Sehwani, Inc. vs. In-N-Out Burger, Inc., G.R. No. 171053,
October 15, 2007)

The essential requirement under the Paris Convention (and the Intellectual Property
Code) is that the trademark to be protected must be well-known in the country
where protection is sought and the power to determine whether a trademark is well-
known lies in the competent authority of the country of registration or use. Harvard
is a well-known name and mark not only in the United States but also internationally,
including the Philippines; as such, even before Harvard University applied for
registration of the mark Harvard in the Philippines, the mark was already protected
under the Paris Convention. (Fredco Manufacturing Corporation vs. President and
Fellows of Harvard College, GR No. 185917, June 1, 2011)

8. Rights Conferred by Registration

Emphasis should be on the similarity of the products involved and not on the arbitrary
classification or general description of their properties or characteristics. The mere
fact that one person has adopted and used a trademark on his goods does not prevent
the adoption and use of the same trademark by others on unrelated articles of a
different kind. (Hickok Manufacturing, Co., Inc. vs. Court of Appeals, G.R. No. L-44707,
August 31, 1982)

The adoption and use of a trademark on ones goods does not prevent the adoption
and use of the same trademark by others for products which are of different
description. The registered owner of the trademark Brut for toilet articles such as
after shave lotion and deodorant cannot oppose the registration of the trademark
Brute for briefs, since the two products are unrelated, notwithstanding the formers
pending application for registration. (Faberge, Inc. vs. Intermediate Appellate Court,
G.R. No. 71189, November 4, 1992)

One who has adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others for products which are of a
different description. The GALLO trademark registration certificates in the Philippines
and in other countries expressly state that they cover wines only, without any evidence
or indication that registrant Gallo Winery expanded or intended to expand its business
to cigarettes. (Mighty Corporation and La Campana Fabrica De Tabaco, Inc. vs. E. & J.
Gallo Winery and the Andresons Group, Inc., G.R. No. 154342, July 14, 2004)

Section 147 of R.A. No. 8293 provides for the exclusive right of the owner of a
registered mark to prevent third parties not having the owners 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. Berris, as a prior user and prior
registrant, is the owner of the mark D-10 80 WP; hence, it has acquired the rights
conferred under the law. (Berris Agricultural Co., Inc. vs. Norvy Abyadang, G.R. No.
183404, October 13, 2010)

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

10. Infringement and Remedies

In upholding the right of the petitioner to maintain a suit for unfair competition or
infringement of trademarks of a foreign corporation before the Philippine courts, the
duties and rights of foreign states under the Paris Convention for the Protection of
Industrial Property to which the Philippines and France are parties are upheld.
(Melbarose R. Sasot and Allandale R. Sasot vs. People of the Philippines, G.R. No.
143193, June 29, 2005)

It is not evident whether the single registration of the trademark Dockers and Design
confers on the owner the right to prevent the use of a fraction thereof in the course of
trade and it is also unclear whether the use without the owners consent of a portion of
a trademark registered in its entirety constitutes material or substantial invasion of the
owners right. Injunction will not lie when the petitioners right to injunctive relief has
not been clearly and unmistakably demonstrated and when the right has yet to be
determined. (Levi Strauss & Co., Levi Strauss (Phils.), Inc. vs. Clinton Apparelle, Inc.,
G.R. No. 138900, September 20, 2005)

San Miguel claims that it has invested hundreds of millions over a period of 170 years
to establish goodwill and reputation now being enjoyed by the Ginebra San Miguel
mark such that the full extent of the damage cannot be measured with reasonable
accuracy. Nonetheless, a writ of preliminary injunction cannot be issued in favor of
San Miguel when it failed to prove the probability of irreparable injury which it will
stand to suffer if the sale of Ginebra Kapitan is not enjoined. Moreover, the right to
the exclusive use of the word Ginebra has yet to be determined in the main case.
(Tanduay Distillers, Inc. vs. Ginebra San Miguel, Inc., G.R. No. 164324, August 14,
2009)

a. Trademark Infringement

The question is not whether the two articles are distinguishable by their label when set
side by side but whether the general confusion made by the article upon the eye of the
casual purchaser who is unsuspicious and off his guard, is such as to likely result in his
confounding it with the original. It is not difficult to see that the Sunshine label is a
colorable imitation of the Del Monte trademark; the predominant colors used in the
Del Monte label are green and red-orange, the same with Sunshine; the word "catsup"
in both bottles is printed in white and the style of the print/letter is the same; and
although the logo of Sunshine is not a tomato, the figure nevertheless approximates
that of a tomato. (Del Monte Corporation and Philippine Packing Corporation vs.
Court of Appeals, G.R. No. L-78325, January 25, 1990)

The fact that the words pale pilsen are part of ABI's trademark does not constitute an
infringement of SMC's trademark: SAN MIGUEL PALE PILSEN, for "pale pilsen" are
generic words descriptive of the color ("pale"), of a type of beer ("pilsen"), which is a
light bohemian beer with a strong hops flavor that originated in the City of Pilsen in
Czechoslovakia and became famous in the Middle Ages. Moreover, ABIs use of the
steinie bottle, similar but not identical to the SAN MIGUEL PALE PILSEN bottle, is not
unlawful as SMC did not invent but merely borrowed the steinie bottle from abroad
and it has not claimed neither patent nor trademark protection for that bottle shape
and design. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel Corporation, G.R.
No. 103543, July 5, 1993)

One who has adopted and used a trademark on his goods does not prevent the
adoption and use of the same trademark by others for products which are of a
different description. Assuming arguendo that "Poster Ads" could validly qualify as a
trademark, the failure of Pearl & Dean to secure a trademark registration for specific
use on the light boxes meant that there could not have been any trademark
infringement since registration was an essential element thereof. (Pearl & Dean (Phil.),
Inc. vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

When a trademark is used by a party for a product in which the other party does not
deal, the use of the same trademark on the latters product cannot be validly objected
to. There is no infringement when the trademark CANON is used by the petitioner
for paints, chemical products, toner and dyestuff while it is used by the private
respondent for footwear (sandals). (Canon Kabushiki Kaisha vs. Court of Appeals, G.R.
No. 120900, July 20, 2004)

Mere unauthorized use of a container bearing a registered trademark in connection
with the sale, distribution or advertising of goods or services which is likely to cause
confusion, mistake or deception among the buyers/consumers can be considered as
trademark infringement. The petitioners, as directors/officers of MASAGANA, are
utilizing the latter in violating the intellectual property rights of Petron and Pilipinas
Shell; thus, petitioners collectively and MASAGANA should be considered as one and
the same person for liability purposes. (William C. Yao, Sr., et. al. vs. People of the
Philippines, G.R No. 168306, June 19, 2007)

The trademark Marlboro is not only valid for being neither generic nor descriptive,
it was also exclusively owned by PMPI, as evidenced by the certificate of registration
issued by the Intellectual Property Office. Infringement of trademark clearly lies since
the counterfeit cigarettes not only bore PMPIs trademark, but they were also
packaged almost exactly as PMPIs products. (Ong vs. People of the Philippines, GR
No. 169440, November 23, 2011)

The mere unauthorized use of a container bearing a registered trademark in
connection with the sale, distribution or advertising of goods or services which is likely
to cause confusion among the buyers or consumers can be considered as trademark
infringement. Petitioners act of refilling, without the respondents consent, the LPG
containers bearing the registered marks of the respondents will inevitably confuse the
consuming public, who may also be led to believe that the petitioners were authorized
refillers and distributors of respondents LPG products. (Republic Gas Corporation
(REGASCO), et. al. vs. Petron Corporation, et. al., G.R. No. 194062, June 17, 2013)

The Rules on the Issuance of the Search and Seizure in Civil Actions for Infringement of
Intellectual Property Rights are not applicable in a case where the search warrants
were applied in anticipation of criminal actions for violation of intellectual property
rights under RA 8293. Rule 126 of the Revised Rules of Court would apply and a
warrant shall be validly issued upon finding the existence of probable cause. (Century
Chinese Medicine Co., et. al. vs. People of the Philippines, G.R. No. 188526, November
11, 2013)

b. Damages
c. Requirement of Notice

11. Unfair Competition

Mere similarity in the shape and size of the container and label does not constitute
unfair competition. SMC cannot claim unfair competition arising from the fact that
ABI's BEER PALE PILSEN is sold, like SMC's SAN MIGUEL PALE PILSEN in amber steinie
bottles absent any showing that the BEER PALE PILSEN is being passed off as SAN
MIGUEL PALE PILSEN. (Asia Brewery, Inc. vs. Court of Appeals and San Miguel
Corporation, G.R. No. 103543, July 5, 1993)

The essential elements of an action for unfair competition are (1) confusing similarity
in the general appearance of the goods, and (2) intent to deceive the public and
defraud a competitor. The confusing similarity may or may not result from similarity in
the marks, but may result from other external factors in the packaging or presentation
of the goods. In this case, the intent to deceive and defraud may be inferred from the
fact that there was actually no notice (on their plastic wrappers) to the public that the
Big Mak hamburgers are products of L.C. Big Mak Burger, Inc.(McDonalds
Corporation vs. L.C. Big Mak Burger, Inc., G.R. No. 143993, August 18, 2004)

Hoarding does not relate to any patent, trademark, trade name or service mark that
the respondents have invaded, intruded into or used without proper authority from the
petitioner nor are the respondents alleged to be fraudulently passing off their
products or services as those of the petitioner. The respondents are not also alleged to
be undertaking any representation or misrepresentation that would confuse or tend to
confuse the goods of the petitioner with those of the respondents, or vice versa. What
in fact the petitioner alleges is an act foreign to the Code, to the concepts it embodies
and to the acts it regulates; as alleged, hoarding inflicts unfairness by seeking to limit
the oppositions sales by depriving it of the bottles it can use for these sales. (Coca-
Cola Bottlers Philippines, Inc. (CCBPI), Naga Plant vs. Quintin Gomez, et, al., G.R. No.
154491, November 14, 2008)

Unfair competition has been defined as the passing off (or palming off) or attempting
to pass off upon the public of the goods or business of one person as the goods or
business of another with the end and probable effect of deceiving the public. The
mere use of the LPG cylinders for refilling and reselling, which bear the trademarks
"GASUL" and "SHELLANE" will give the LPGs sold by REGASCO the general
appearance of the products of the petitioners. (Republic Gas Corporation (REGASCO),
et. al. vs. Petron Corporation, et. al., G.R. No. 194062, June 17, 2013)

12. Trade Names or Business Names

The ownership of a trademark or tradename is a property right which the owner is
entitled to protect since there is damage to him from confusion or reputation or
goodwill in the mind of the public as well as from confusion of goods. By appropriating
the word "CONVERSE," respondent's products are likely to be mistaken as having been
produced by petitioner. The risk of damage is not limited to a possible confusion of
goods but also includes confusion of reputation if the public could reasonably assume
that the goods of the parties originated from the same source. (Converse Rubber
Corporation vs. Universal Rubber Products, Inc., G.R. No. L-27906, January 8, 1987)

A trade name previously used in trade or commerce in the Philippines need not be
registered with the IPO before an infringement suit may be filed by its owner against
the owner of an infringing trademark. Nonetheless, respondent does not have the
right to the exclusive use of the geographic word San Francisco or the generic word
coffee. It is only the combination of the words SAN FRANCISCO COFFEE, which is
respondents trade name in its coffee business, that is protected against infringement
on matters related to the coffee business to avoid confusing or deceiving the public.
(Coffee Partners vs. San Francisco Coffee and Roastery, Inc., G.R. No. 169504, 3 March
2010)

The Philippines is obligated to assure nationals of countries of the Paris Convention
that they are afforded an effective protection against violation of their intellectual
property rights in the Philippines in the same way that their own countries are
obligated to accord similar protection to Philippine nationals. Thus, under Philippine
law, a trade name of a national of a State that is a party to the Paris Convention,
whether or not the trade name forms part of a trademark, is protected without the
obligation of filing or registration. (Fredco Manufacturing Corporation vs. President
and Fellows of Harvard College, GR No. 185917, June 1, 2011)

Under the Paris Convention to which the Philippines is a signatory, a trade name of a
national of a State that is a party to the Paris Convention, whether or not the trade
name forms part of a trademark, is protected without the obligation of filing or
registration. It follows then that the applicant for registration of trademark is not the
lawful owner thereof and is not entitled to registration if the trademark has been in
prior use by a national of a country which is a signatory to the Paris Convention. (Ecole
De Cuisine Manille (Cordon Bleu of the Philippines), Inc. vs. Renaus Cointreau & Cie
and Le Cordon Bleu Intl, B.V., G.R. No. 185830, June 5, 2013)

13. Collective Marks

D. Copyrights

At most, the certificates of registration and deposit issued by the National Library and
the Supreme Court Library serve merely as a notice of recording and registration of the
work but do not confer any right or title upon the registered copyright owner or
automatically put his work under the protective mantle of the copyright law; it is not a
conclusive proof of copyright ownership. Hence, when there is sufficient proof that the
copyrighted products are not original creations but are readily available in the market
under various brands, as in this case, validity and originality will not be presumed.
(Manly Sportwear Manufacturing, Inc. vs. Dadodette Enterprises and/or Hermes
Sports Center, G.R. No. 165306, September 20, 2005)

1. Basic Principles, Sections 172.2, 175 and 181

2. Copyrightable Works

a. Original Works
b. Derivative Works

3. Non-Copyrightable Works

The format or mechanics of a television show is not included in the list of protected
works in Sec. 2 of P.D. No. 49, which is substantially the same as Sec. 172 of the
Intellectual Property Code (R.A. No, 8293). For this reason, the protection afforded by
the law cannot be extended to cover them. (Francisco Joaquin, Jr. vs. Franklin Drilon,
et. al., G.R. No. 108946, January 28, 1999)

Pearl & Deans copyright protection extended only to the technical drawings and not
to the light box itself as the latter does not fall under the category of prints, pictorial
illustrations, advertising copies, labels, tags and box wraps. The light box was not a
literary or artistic piece which could be copyrighted under the copyright law; and no
less clearly, neither could the lack of statutory authority to make the light box
copyrightable be remedied by the simplistic act of entitling the copyright certificate
issued by the National Library as "Advertising Display Units. (Pearl & Dean (Phil.), Inc.
vs. Shoemart, Inc., G.R. No. 148222, August 15, 2003)

4. Rights of Copyright Owner

5. Rules on Ownership of Copyright

6. Limitations on Copyright

Under Sec. 184.1 (h), the use made of a work by or under the direction or
control of the Government, by the National Library or by educational, scientific
or professional institutions where such use is in the public interest and is
compatible with fair use will not constitute copyright infringement. The
carriage of ABS-CBNs signals by virtue of the must-carry rule is under the
direction and control of the government through the NTC. The imposition of
the must-carry rule is within the NTCs power to promulgate rules and
regulations, as public safety and interest may require, to encourage a larger
and more effective use of communications, radio and television broadcasting
facilities, and to maintain effective competition among private entities in these
activities whenever the Commission finds it reasonably feasible. (ABS-CBN
Broadcasting Corporation vs. Philippine Multi-Media System, Inc., G.R. Nos.
175769-70, January 19, 2009)

PMSI cannot be said to be infringing upon the exclusive broadcasting rights of ABS-
CBN under the IP Code for PMSI does not perform the functions of a broadcasting
organization, thus, it cannot be said that it is engaged in rebroadcasting Channels 2
and 23. PMSI is not the origin nor does it claim to be the origin of the programs
broadcasted by the ABS-CBN; the former did not make and transmit on its own but
merely carried the existing signals of the latter and when PMSIs subscribers view ABS-
CBNs programs in Channels 2 and 23, they know that the origin thereof was the latter.
ibid

a. Doctrine of Fair Use
b. Copyright Infringement

For the playing and singing the musical compositions involved, the combo was paid as
independent contractors; it is therefore obvious that the expenses entailed thereby are
either eventually charged in the price of the food and drinks or to the overall total of
additional income produced by the bigger volume of business which the
entertainment was programmed to attract. Consequently, it is beyond question that
the playing and singing of the combo in defendant-appellee's restaurant constituted
performance for profit contemplated by the Copyright Law. (Filipino Society of
Composers, Authors and Publishers, Inc. vs. Benjamin Tan, G.R. No. L-36402, March 16,
1987)

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.
Failure to comply with registration and deposit does not deprive the copyright owner
of the right to sue for infringement but merely limits the remedies available to him
because the copyright for a work is granted from the moment of creation. (Columbia
Pictures, Inc., et. al. vs. Court of Appeals, G.R. No. 110318, August 28, 1996)

To constitute infringement, it is not necessary that the whole or even a large portion of
the work shall have been copied; if so much is taken that the value of the original is
sensibly diminished, or the labors of the original author are substantially and to an
injurious extent appropriated by another, that is sufficient in point of law to constitute
piracy. The injury is sustained when respondent lifted from petitioners book materials
that were the result of the latters research work and compilation and misrepresented
them as her own, even circulating the book DEP for commercial use without
acknowledging petitioners as her source. (Pacita Habana, et. al. vs. Felicidad Robles
and Goodwill Trading Co., Inc., G.R. No. 131522, July 19, 1999)

The gravamen of copyright infringement is not merely the unauthorized
manufacturing of intellectual works but rather the unauthorized performance of any
of the rights exclusively granted to the copyright owner. Hence, any person who
performs any of such acts without obtaining the copyright owners prior consent
renders himself civilly and criminally liable for copyright infringement. (NBI-Microsoft
Corporation vs. Judy Hwang, et. al., G.R. No. 147043, June 21, 2005)

E. Rules of Procedure for Intellectual Property Rights Cases (A.M. No. 10-3-10-SC)

X. Special Laws

A. The Chattel Mortgage Law and Real Estate Mortgage Law (Excluded and made a part of
Civil Law coverage)

B. Anti-Money Laundering Act (R.A. No. 9160, as amended by R.A. No. 9194)

1. Policy of the Law

2. Covered Institutions

3. Obligations of Covered Institutions

4. Covered Transactions

5. Suspicious Transactions

6. When is Money Laundering Committed

7. Unlawful Activities or Predicate Crimes

Since the account of Glasgow in CSBI was (1) covered by several suspicious transaction
reports and (2) placed under the control of the trial court upon the issuance of the writ
of preliminary injunction, the conditions provided in Section 12(a) of RA 9160, as
amended, were satisfied. A criminal conviction for an unlawful activity is not a
prerequisite for the institution of a civil forfeiture proceeding. A finding of guilt for an
unlawful activity is not an essential element of civil forfeiture. (Republic of the
Philippines vs. Glasgow Credit and Collection Services, Inc., G.R. No. 170281, January
18, 2008)

Section 11 allows the AMLC to inquire into bank accounts without having to obtain a
judicial order in cases where there is probable cause that the deposits or investments
are related to kidnapping for ransom, certain violations of the Comprehensive
Dangerous Drugs Act of 2002, hijacking and other violations under R.A. No. 6235,
destructive arson and murder. Absent any of the mentioned predicate crimes, a court
order is necessary to inquire into bank deposits. (Republic of the Philippines vs. Hon.
Antonio Eugenio, G.R. No. 174629, February 14, 2008)

NOTE: By virtue of R.A. No. 10168, Anti-Financing of Terrorism is now included as one
of the predicate crimes where a court order is not necessary to examine or inquire into
bank deposits.

8. Anti-Money Laundering Council

9. Functions

10. Freezing of Monetary Instrument or Property

The amendment by RA 9194 of RA 9160 erased any doubt on the jurisdiction of the
Court of Appeals over the extension of freeze orders. It is solely the CA which has the
authority to issue a freeze order as well as to extend its effectivity; it also has the
exclusive jurisdiction to extend existing freeze orders previously issued by the AMLC
vis--vis accounts and deposits related to money-laundering activities. (Republic of the
Philippines vs. Cabrini Green & Ross, Inc., G.R. No. 154522, May 5, 2006)

The primary objective of a freeze order is to temporarily preserve monetary
instruments or property that are in any way related to an unlawful activity or money
laundering, by preventing the owner from utilizing them during the duration of the
freeze order. The effectivity of the freeze order was limited to a period not exceeding
six months, which may be extended by the CA should it become completely necessary.
Nonetheless, when the Republic has not offered any explanation why it took six years
before a civil forfeiture case was filed in court, it can only be concluded that the
continued extension of the freeze order beyond the six-month period violated the
partys right to due process. (Ret. Lt. Gen. Jacinto Ligot, et. al. vs. Republic of the
Philippines, G.R. No. 176944, March 6, 2013)

11. Authority to Inquire Into Bank Deposits


C. Foreign Investments Act (R.A. No. 7042)

1. Policy of the Law

2. Definition of Terms

a. Foreign Investment
b. Doing Business in the Philippines

Under Sec 3 (d) of the Foreign Investments Act of 1991, the phrase "doing business"
shall include appointing representatives or distributors domiciled in the Philippines or
who in any calendar year stay in the country for a period or periods totalling one
hundred eighty (180) days or more. Thus, the phrase includes "appointing
representatives or distributors in the Philippines" but not when the representative or
distributor independently transacts business in its name and for its own account.
(Alfred Hahn vs. Court of Appeals, G.R. No. 113074, January 22, 1997)

Whether a foreign corporation is "doing business" does not necessarily depend upon
the frequency of its transactions, but more upon the nature and character of the
transactions. Doing business covers any other act or acts that imply a continuity of
commercial dealings or arrangements, and contemplate to that extent the
performance of acts or works, or the exercise of some of the functions normally
incident to, and in progressive prosecution of, commercial gain or of the purpose and
object of the business organization. (Eriks Pte. Ltd. vs. Court of Appeals, G.R. No.
118843, February 6, 1997)

To constitute "doing business", the activity to be undertaken in the Philippines is one
that is for profit-making. When the activities of the foreign corporation were confined
to (1) maintaining a stock of goods in the Philippines solely for the purpose of having
the same processed by the respondent domestic corporation; and (2) consignment of
equipment with the respondent to be used in the processing of products for export,
the foreign corporation cannot be deemed to be "doing business" in the Philippines.
(Agilent Technologies Singapore (Pte.) Ltd. vs. Integrated Silicon Technology
Philippines Corporation, G.R. No. 154618, April 14, 2004)

The appointment of a distributor in the Philippines is not sufficient to constitute
doing business unless it is under the full control of the foreign corporation. In the
present case, the distributor is an independent entity which buys and distributes
products, other than those of the foreign corporation, for its own name and its own
account; hence, the latter cannot be considered to be doing business in the
Philippines. (Steelcase, Inc. vs. Design International Selections, Inc., G.R. No. 171995,
April 18, 2012)

c. Export Enterprise
d. Domestic Market Enterprise

3. Registration of Investments on Non-Philippine Nationals

4. Foreign investments in Domestic Market Enterprise

5. Foreign Investment Negative List

The Foreign Investments Act is the basic law governing foreign investments in the
Philippines, irrespective of the nature of business and area of investment. The concept
of a negative list or the Foreign Investments Negative List provides for two
components: List A, which enumerates the areas of activities reserved to Philippine
nationals by mandate of the Constitution and specific laws; and List B, which
enumerates the areas of activities and enterprises regulated pursuant to law. (Heirs of
Wilson Gamboa vs. Finance Secretary Margarito Teves, G.R. No. 176579, October 9,
2012)