LETTERS OF CREDIT

LETTERS OF CREDIT Incidents in the life of a Letter of Credit (SAIS-ERR)

DEFINITION AND NATURE OF LETTER OF CREDIT 1. Contract of Sale between the buyer and seller
2. Application for L/C by the buyer with the bank
Letter of Credit (L/C) 3. Issuance of L/C by the bank
4. Shipping of goods by the seller
It is any arrangement, however named or described, 5. Execution of draft and tender of documents by
whereby a bank (issuing bank), acting at the request the seller
and on the instructions of a customer (applicant) or 6. Redemption of draft (payment) and obtaining of
on its own behalf, binds itself to: (PAN) documents by the issuing bank
7. Reimbursement to the bank and obtaining of
1. Pay to the order of, or accept and pay drafts documents by the buyer
drawn by a third party (Beneficiary), or
2. Authorize another bank to pay or to accept Essential conditions of a Letter of Credit
and pay such drafts, or
3. Authorizes another bank to Negotiate, against 1. Issued in favor of a definite person.
stipulated documents 2. Limited to a fixed or specified amount, or to one
or more amounts, but with a maximum stated limit
Provided, the terms and conditions of the credit are (Art. 568, Ibid.).
complied with (Art. 2, Uniform Customs & Practice for
NOTE: If any of these essential conditions is not present,
Documentary Credits).
the instrument is merely considered as a letter of
recommendation.
Purpose of Letter of Credit
Q: Letters of Credit are financial devices in
The purpose of a letter of credit is to ensure certainty commercial transactions which will ensure that the
of payment. The bank makes the commitment to pay. seller of the goods is sure to be paid when he parts
This addresses problems arising from sellers refusal with the goods and the buyer of the goods gets
to part with his goods before being paid and the control of the goods upon payment. Which
buyers refusal to part with his money before statement is most accurate? (2012 Bar Question)
acquiring the goods, thus, facilitating commercial a. The use of the Letter of Credit serves to reduce
transactions. the risk of nonpayment of the purchase price in a
sale transaction.
Laws governing Letters of Credit b. The Letters of Credit can only be used
exclusively in a sales transaction.
Letter of credit is governed by the Uniform Customs c. The Letters of Credit are issued for the benefit
and Practice (UCP) for documentary Credits issued by of the seller only.
the International Chamber of Commerce d. (a), (b) and (c) are all correct
(Metropolitan Waterworks vs. Daway, G.R. No.
160723, July 21, 2004). A: A. The use of the Letter of Credit serves to reduce
the risk of nonpayment of the purchase price in a sale
NOTE: The law on contracts and damages shall also transaction
apply to provide remedies to the party aggrieved by
the breach of the main contract although such breach Kinds of Letter of Credit
will not affect the obligation of the bank to pay the
beneficiary or its right to obtain reimbursement from
COMMERCIAL L/C STANDBY L/C
the applicant of the letter of credit if the terms of the
Involves the payment of
letters of credit have been complied with. Involves non-sale
money under a contract
transactions.
of sale.
Duration of Letters of Credit
Payable upon the Payable upon
presentation by the certification by the
1. Upon the period fixed by the parties; or
seller-beneficiary of beneficiary of the
2. If none is fixed, one year from the date of
documents that show he applicants
issuance
has taken affirmative non-performance of the
steps to comply with the agreement. The
sales agreement documents that

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1 FACULTY OF CIVIL LAW
 MERCANTILE LAW
accompany the
beneficiary's draft must
show that the applicant
has not performed the
undertaking (Transfield
Phils., Inc. v. Luzon Hydro
Corp., G.R. No. 146717,
Nov. 22, 2004).
Irrevocable Letter of Credit v. Confirmed Letter of
Credit
IRREVOCABLE L/C CONFIRMED L/C
The correspondent bank
gives an absolute
assurance to the
The issuing bank may beneficiary that it will
not, without the consent undertake the issuing
of the beneficiary and banks obligation as its
the applicant, revoke its own according to the
undertaking under the terms and condition of
letter. the credit (Prudential
Bank and Trust Company
v. IAC, G.R. No. 74886,
Dec. 8, 1992).
Courts cannot order the release to the applicant of
the proceeds of an Irrevocable Letter of Credit
without the consent of the Beneficiary
Such order violates the irrevocable nature of the L/C.
The terms of an irrevocable letter of credit cannot be
changed without the consent of the parties,
particularly the beneficiary thereof (Phil. Virginia
Tobacco Administration v. De Los Angeles, G.R. No.
L-27829, Aug. 19, 1988).
Non-payment of the buyer of its obligation under
the Letter of Credit does not give the bank the right
to take possession of the goods covered by the
Letter of Credit
PARTIES TO A LETTER OF CREDIT
Parties to a Letter of Credit transaction
1. Applicant/Buyer/Importer/Account Party
procures the letter of credit, purchases the goods and
obliges himself to reimburse the issuing bank upon
receipt of the documents title. He has the right to
have the marginal deposit deducted from the
principal obligation under the l/c and to have the
interest computed only on the balance and not on
the face value thereof. Applicant has no obligation to
reimburse the issuing bank if the latter pays without
the stipulated documents or in case of discrepant
documents, unless the applicant waives the
discrepance.
2. Issuing Bank one which, whether a paying bank
or not, Issues the letter of credit and undertakes to
pay the seller upon receipt of the draft and proper
documents of title from the seller and to surrender
them to the buyer upon reimbursement. After due
payment, issuing bank is entitled to reimbursement
as a matter of right. Reimbursement includes debiting
the bank account of the applicant, if any.
3. Beneficiary/Seller/Exporter in whose favor the
instrument is executed. One who delivers the
documents of title and draft to the issuing bank to
recover payment. He has a prestation to do under the
main contract but his failure to fulfill his obligation
under the main contract does not negate his right to
payment from the issuing bank as long as he is able to
submit the required documents and comply with the
terms of the credit, without prejudice to his liability
against the account party under the law on contracts
and damages.
NOTE: The number of parties may be increased.
The following additional parties may be:
a. Advising/notifying bank the correspondent bank
(agent) of the issuing bank through which it advises
the beneficiary of the L/C.

The opening of a L/C does not vest ownership of the
goods in the bank in the absence of a trust receipt
agreement. A letter of credit is a mere financial
device developed by merchants as a convenient and
relatively safe mode of dealing with the sales of
goods to satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods before
he is paid, and a buyer, who wants to have control of
the goods before paying (Transfield Philippines, Inc. v.
Luzon Hydro Corporation, G.R. No. 146717, Nov. 22,
2004).
b. Confirming bank bank which, upon the request of
the beneficiary, confirms the L/C issued.
c. Paying bank bank on which the drafts are to be
drawn, which may be the issuing bank or another bank
not in the city of the beneficiary.
d. Negotiating bank bank in the city of the beneficiary
which buys or discounts the drafts contemplated by the
L/C, if such draft is to be drawn on the opening bank not
in the city of the beneficiary.

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2014 GOLDEN NOTES 2
 LETTERS OF CREDIT
RIGHTS AND OBLIGATIONS OF PARTIES
Three (3) distinct but intertwined contracts in a
Letter of Credit transaction
1. Between the applicant/buyer/importer/account
party and the beneficiary/seller/exporter - The
applicant is the one who procures the letter of credit
while the beneficiary is the one who in compliance
with the contract of sale ships the goods to the buyer
and delivers the documents of title and draft to the
issuing bank to recover payment for the goods.
2. Between the issuing bank and the
beneficiary/seller/exporter - The issuing bank is the
one that issues the letter of credit and undertakes to
pay the seller upon receipt of the draft and proper
documents of title. On the other hand, the
beneficiary surrenders document of title to the bank
in compliance with the terms of the L/C. Their
relationship is governed by the terms of the L/C.
3. Between the issuing bank and the
applicant/buyer/importer - The applicant obliges
himself to reimburse the issuing bank upon receipt of
the documents of title. Their relationship is governed
by the terms of the application for the issuance of the
L/C by the bank.
Different roles and liabilities of the banks involved in Letter of Credit transactions
KIND OF BANK ROLE
Notifying/ Serves as an agent of the issuing
Advising Bank bank;
Warrants the apparent (Appearance
to unaided senses) authenticity of
the L/C(Bank of America NT & SA v.
CA, G.R. No. 105395, Dec. 10,
1993).
Confirming Bank Lends credence to the L/C issued by
a lesser-known bank.
The confirming bank collects fees for
such engagement and obtains
reimbursement from the issuing
bank.
3 FACULTY OF CIVIL LAW
An Issuing Bank is not a guarantor
The concept of guarantee vis-a-vis the concept of
irrevocable L/C is inconsistent with each other. L/Cs
are primary obligations and not security contracts
and while they are security arrangements, they are
not converted thereby into contracts of guaranty
(MWSS v. Hon. Daway, G.R. No.160732, June 21,
2004).
NOTE: The liability of issuing bank is primary and
solidary. Neither is the issuing bank entitled to the
benefit of excussion.
Entitlement of a bank to reimbursement
Once the issuing bank shall have paid the beneficiary
after the latters compliance with the terms of the
L/C. Presentment for acceptance to the
customer/applicant is not a condition sine qua non
for reimbursement (Prudential Bank v. IAC, G.R. No.
74886, Dec. 8, 1992).
Consequence of payment upon an expired Letter of
Credit
An issuing bank which paid the beneficiary upon an
expired L/C can recover the payment from the
applicant which obtained the goods from the
beneficiary to prevent unjust enrichment (Rodzssen
Supply Co. v. Far East Bank and Trust Co, G.R. No.
109087, May 9, 2001).
LIABILITY
Does not incur any obligation more than just
notifying the seller/beneficiary of the opening of the
L/C after it has determined its apparent authority.
(Bank of America NT & SA v. CA, G.R. No. 105395,
Dec. 10, 1993)
It does not guarantee the genuineness or due
execution of the l/c. It is not liable for damages even
if the l/c turns out to be spurious provided the
spurious character is not apparent on the face of the
instrument.
Direct obligation, as if it is the one which issued the
L/C.
Its obligation is similar to the issuing banks. Thus,
beneficiary may tender documents to the confirming
bank and collect payment.
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 MERCANTILE LAW
Negotiating Buys the sellers draft and later on
Bank sells the draft to the issuing bank.
Paying Bank May either be the issuing bank or
any other bank in the place of the
issuing bank to facilitate payment to
the beneficiary.
BASIC PRINCIPLES OF LETTER OF CREDIT
Letters of Credit are not considered as Negotiable
Instruments
A L/C is not considered a negotiable instrument.
However, drafts issued in connection with L/Cs can
be considered negotiable instruments. The
presumption that the drafts drawn in connection with
the L/Cs have sufficient consideration applies (Lee v.
CA, G.R. No. 117913, Feb. 1, 2002).
Stay order issued by the rehabilitation court does
not preclude the beneficiary from collecting on the
Letter of Credit
The stay order issued by the rehabilitation court
enjoining the enforcement of claims against the
principal debtor, its guarantor, surety not liable
solidarily with the principal debtor does not preclude
the beneficiary from collecting on the letter of credit.
DOCTRINE OF INDEPENDENCE
Doctrine of Independence/ Independence Principle
The relationship of the buyer and the bank is
separate and distinct from the relationship of the
buyer and seller in the main contract; the bank is not
required to investigate if the contract underlying the
L/C has been fulfilled or not because in transactions
involving L/C, banks deal only with documents and
not goods (BPI v. De Reny Fabric Industries, Inc.,
L-2481, Oct. 16, 1970). In effect, the buyer has no
course of action against the issuing bank.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Depends on the stage of negotiation, thus:
1. Before negotiation No liability with respect to the
seller. Merely suggests its willingness to negotiate.
2. After negotiation A contractual relationship will
then arise, making the bank liable. As holder, it has
the right to payment from the bank primarily liable
on the draft (either the issuing or confirming bank). If
the party primarily liable on the l/c refuses to honor
the draft, the negotiating bank has the right to
proceed against the drawer thereof.
Direct obligation.
Two-Fold nature of the Independence Principle
1. Independence in toto where the credit is
independent from the justification aspect and is a
separate obligation from the underlying agreement.
This principle is illustrated by standby L/C; or
2. Independence only as to the justification aspect
which is identical with the same obligations under the
underlying agreement. This principle is illustrated by
a commercial L/C or repayment standby (Transfield v.
Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).
Effect of the buyers failure to procure a Letter of
Credit to the main contract
The L/C is independent from the contract of sale.
Failure of the buyer to open the L/C does not prevent
the birth of the contract of sale. The opening of the
LC is only a mode of payment. The LC is not an
essential requisite to the contract of sale (Reliance
Commodities, Inc. v. Daewoo Industrial Co. Ltd., G.R.
No. 100831, Dec. 17, 1993). He will be liable for fraud
of creditor.
Partial payments on the loan cannot be added in
computing the issuing banks liability under its own
Standby Letter of Credit
Although these payments could result in the
reduction of the actual amount, which could
ultimately be collected from the issuing bank, the
latters separate undertaking under its letters of
credit remain. The letter of credit is an absolute and
primary undertaking which is separate and distinct
from the contract underlying it (Insular Bank of Asia
& America v. IAC, Nov. 17, 1988).
In standby letter of credit securing a loan obligation,
any payment of the debtor to the creditor should not
be deducted from the total obligation of the issuing
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 LETTERS OF CREDIT
bank to the beneficiary. The issuing bank, after This principle refers to fraud in relation with the
payment of the full amount, is entitled to full independent purpose or character of the L/C and not
reimbursement from the debtor. But the debtor may only fraud in the performance of the obligation or
recover excess payment from the creditor to prevent contract supporting the letter of credit (Transfield v.
unjust enrichment. Luzon Hydro, G.R. No. 146717, Nov. 22, 2004).

Q: AAA Carmakers opened an irrevocable Letter of Remedy for fraudulent abuse

Credit with BBB Banking Corporation with CCC Cars
Corporation as beneficiary. The irrevocable Letter of Injunction against payment is the remedy; provided
Credit was opened to pay for the importation of ten the requisites enumerated immediately below this
(10) units of Mercedes Benz S class. Upon arrival of item are present.
the cars, AAA Carmakers found out that the cars
were all not in running condition and some parts Requisites in order to enjoin the Beneficiary from
were missing. As a consequence, AAA Carmakers drawing or collecting under the Letter of Credit on
instructed BBB Banking Corporation not to allow the basis of fraud (PAI)
drawdown on the Letter of Credit. Is this legally
possible? (2012 Bar Question) 1. Clear Proof of fraud;
a. No, because under the "Independence 2. Fraud constitutes fraudulent Abuse of the
Principle", conditions for the drawdown on the independent purpose of the letter of credit and
Letters of Credit are based only on documents, not only fraud under the main agreement; and
like shipping documents, and not with the 3. Irreparable Injury might follow if injunction is not
condition of the goods subject of the importation. granted or the recovery of damages would be
b. Yes, because the acceptance by the importer of seriously damaged (Ibid.)
the goods subject of importation is material for
the drawdown of the Letter of Credit. DOCTRINE OF STRICT COMPLIANCE
c. Yes, because under the "Independence
Principle", the seller or the beneficiary is always Doctrine of Strict Compliance
assured of prompt payment if there is no breach
in the contract between the seller and the buyer. The documents tendered by the seller/beneficiary
d. No, because what was opened was an must strictly conform to the terms of the L/C. The
irrevocable letter of credit and not a confirmed tender of documents must include all documents
letter of credit. required by the letter. It is not a question of whether
or not it is fair or equitable to require submission of
A: a. Under the "Independence Principle", conditions documents but whether or not the documents were
for the drawdown on the Letters of Credit are based agreed upon. Thus, a correspondent bank which
only on documents, like shipping documents, and not departs from what has been stipulated under the L/C
with the condition of the goods subject of the acts on its own risk and may not thereafter be able to
importation recover from the buyer or the issuing bank, as the
case may be, the money thus paid to the beneficiary
FRAUD EXCEPTION PRINCIPLE (Feati Bank and Trust Company v. CA, G.R. No.
940209, Apr. 30, 1991).
The Exception to the Independence Principle
Doctrine of Strict Compliance v. the Independence
The Fraud Exception Principle is the exception to Principle
the Independence Principle. It provides that the
untruthfulness of a certificate accompanying a Doctrine of Doctrine of
demand for payment under a standby letter of credit Strict Independence
may qualify as fraud sufficient to support an Compliance
injunction against payment. Principle Documents Relationship of
tendered by the the buyer and
Under the fraud exception principle, the beneficiary seller or the bank is
may be enjoined from collecting on the letter of beneficiary must separate and
credit if the beneficiary committed fraud by strictly conform distinct from the
substituting fraudulent documents even if on their to the terms of relationship of
face the documents complied with the requirements. the letter of the buyer and
credit. seller in the

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 MERCANTILE LAW
main contract. of the fund, has to be strictly complied with or else
Consequence of A correspondent The bank is not funds will not be released.
the Doctrine bank which required to
departs from investigate
what has been whether the TRUST RECEIPTS LAW
stipulated and contract
acts on its own underlying the
risk may not L/C has been DEFINITION/CONCEPT OF A TRUST RECEIPT
thereafter be fulfilled or not. TRANSACTION
able to recover.
Payment of the Beneficiary Fraud Exception Trust Receipt (TR) transaction
Beneficiary cannot draw on Principle can
the letter of enjoin It is any transaction between the entruster and
credit if he did beneficiary from entrustee:
not comply with drawing or 1. Whereby the entruster who owns or holds title or
its terms and collecting under security interests over certain specified goods,
conditions. the L/C if there documents or instrument (GDI), releases the same to
is fraud in the possession of entrustee upon the latters
relation with the execution of a TR agreement.
independent 2. Wherein the entrustee binds himself to hold the
purpose of the GDI in trust for the entruster and, in case of default,
L/C. a. to sell or otherwise dispose such GDI with the
obligation to turn over to the entruster the
Q: At the instance of CCC Corporation, AAA Bank proceeds to the extent of the amount owing to it
issued an irrevocable Letter of Credit in favor of BBB or
Corporation. The terms of the irrevocable Letter of b. to turn over the GDI itself if not sold or
Credit state that the beneficiary must present otherwise disposed of in accordance with the
certain documents including a copy of the Bill of terms and conditions specified in the TR.
Lading of the importation for the bank to release the
funds. BBB Corporation could not find the original Subjects of a Trust Receipt transaction (GDI)
copy of the Bill of Lading so it instead presented to
the bank a xerox copy of the Bill of Lading. Would 1. Goods shall include chattels and personal
you advise the bank to allow the drawdown on the property other than: money, things in action, or
Letter of Credit? (2012 Bar Question) things so affixed to land as to become a part thereof
a. No, because the rule of strict compliance in (Sec. 3 [d], PD 115.) Goods must be object of lawful
commercial transactions involving letters of commerce.
credit, requiring documents set as conditions for
the release of the fund, has to be strictly 2. Documents written or printed evidence of title to
complied with or else funds will not be released. goods (Sec. 3 [a], PD 115). E.g. are L/Cs.
b. Yes, because an irrevocable letter of credit 3. Instruments negotiable instruments; certificates
means that the issuing bank undertakes to of stock, or bond or debenture for the payment of
release the fund anytime when claimed by the money issued by a corporation, or certificates of
beneficiary, .regardless of the kind of document deposit, participation certificates or receipts, credit or
presented. investment instruments of a sort marketed in the
c. Yes, because the issuing bank can always justify ordinary course of business or finance (Sec. 3 [e], PD
to CCC Corporation that xerox copies are 115). E.g. are checks, drafts, promissory notes, bills of
considered as faithful reproduction of the original exchange.
copies.
d. Yes, because the issuing bank really has no Parties to a Trust Receipt transaction
discretion to determine whether the documents
presented by the beneficiary are sufficient or not. 1. Entruster - A lender, financer or creditor. Person
holding title over the GDI subject of a TR transaction;
A: No, because the rule of strict compliance in releases possession of the goods upon execution of
commercial transactions involving letters of credit, TR (Sec. 3[c], PD 115).
requiring documents set as conditions for the release
2. Entrustee - A borrower, buyer, importer or debtor.
He is the person to whom the goods are delivered for

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2014 GOLDEN NOTES 6
 TRUST RECEIPTS LAW
sale or processing in trust, with the obligation to
return the proceeds of sale of the goods or the goods
themselves to the entruster (Sec. 3[b], PD 115).
Transactions not considered as Trust Receipt
1. A sale by a person in the business of selling for
profit who retains general property rights in the
GDI.
2. Where the seller retains title or other interest as
security for the payment of the purchase price
(Sec. 4, P.D. 115).
NOTE: To be in the nature of trust receipt, the entruster
should have financed the acquisition or importation of the
goods. The funds should have been delivered before or
simultaneously with delivery of the goods. If the entrustee
is already the owner or in possession of the goods before
delivery of the loan and execution of the trust receipt
arrangement, the transaction shall be considered a simple
loan even though the parties may have denominated the
agreement as one of the trust receipt.
Two views regarding Trust Receipt
1. As a commercial document - the entrustee binds
himself to hold the designated GDI in trust for
the entruster and to sell or otherwise dispose of
GDI with the obligation to turn over to the
entruster the proceeds if they are unsold or not
otherwise disposed of, in accordance with the
terms and conditions specified in the TR (Sec. 4,
P.D. 115).
2. As a commercial transaction It is a separate and
independent security transaction intended to aid
in financing importers and retail dealers who do
not have sufficient funds (Nacu v. CA, G.R. No.
108638, Mar. 11, 1994).
Trust Receipt is not a negotiable instrument
Like L/Cs, TRs are not negotiable instruments. The
presumption of consideration under the negotiable
instrument law may not necessarily be applicable to
trust receipts (Lee v. CA, supra).
LOAN/SECURITY FEATURE
Two features of a Trust Receipt transaction
1. Loan feature - is brought about by the fact that
the entruster financed the importation or
purchase of the goods under TR (Sps. Vintola vs.
Insular Bank of Asia and America, G.R. No.
73271, May 29, 1987).
7 FACULTY OF CIVIL LAW
2. Security feature - property interest in the GDI to
secure performance of some obligation of the
entrustee or of some third persons to the
entruster (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, G.R. No.
137232, June 29, 2005).
Effects of the dual features of a Trust Receipt
1. The entrustee cannot absolutely be relieved of
the obligation to pay his loan just because he
surrendered the goods to the entruster if the
entruster refuses to accept and subsequently
deposited them in the custody of the court (Sps.
Vintola vs. Insular Bank of Asia and America,
ibid).
2. The entrustee cannot be relieved of his
obligation to pay the loan in favor of the
entruster bank in case of loss or destruction of
the GDI (Rosario Textile Mills Corp. v. Home
Bankers Savings and Trust Company, ibid).
3. Where the proceeds of the sale are insufficient to
satisfy the loan executed by the entrustee, the
entruster bank can institute an action to collect
the deficiency (Landl Co. v Metropolitan Bank
and Trust Co. G.R. No. 159622, July 30, 2004).
4. Repossession by the entruster of the GDI does
not amount to dacion en pago. The repossession
of the goods by the entrustee was merely to
secure the payment of its obligation to the
entrustor and not for the purpose of transferring
ownership in satisfaction of the obligation (PNB
vs. Pineda, G.R. No. L-46658 May 13, 1991).
OWNERSHIP OF THE GOODS, DOCUMENTS, AND
INSTRUMENTS UNDER A TRUST RECEIPT
Real owner of the articles subject of the Trust
Receipt transaction
The real owner of the articles subject of the Trust
Receipt is the entrustee who binds himself to hold the
designated GDI. The entruster merely holds a security
interest. If under the trust receipt, the bank is made
to appear as the owner, it was but an artificial
expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any
manner it wants, which it cannot do, just to give
consistency with purpose of the trust receipt of giving
a stronger security for the loan obtained by the
importer. To consider the bank as the true owner
from the inception of the transaction would be to
disregard the loan feature thereof (Rosario Textile
Mills Corp. v. Home Bankers Savings and Trust
Company, G.R. No. 137232. June 29, 2005).
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 MERCANTILE LAW
The entrustee, however, cannot mortgage the goods
because one of the requisites of a valid mortgage is
that the mortgagor must be the absolute owner of
the property mortgaged or must have free disposal
thereof. Entrustee is not the absolute owner of the
goods under trust receipt nor has free disposal
thereof.
The entrustee is not responsible as principal or
vendor under any sale or contract to sell made by the
entrustee.
RIGHTS OF THE ENTRUSTER
1. To be entitled to the Proceeds from the sale of
the GDI to the extent of the amount owing to
him.
2. To the Return of the GDI in case of non-sale and
enforcement of all other rights conferred to him
in the TR.
3. May Cancel the trust and take possession of the
goods, upon default or failure of the entrustee to
comply with any of the terms and conditions of
the TR (Sec. 7, P.D. 115).
4. To Sell the goods with at least five day notice to
the entrustee and apply the proceeds in payment
of the obligation. Entrustee liable to pay
deficiency, if any.
VALIDITY OF THE SECURITY INTEREST AS AGAINST
THE CREDITORS OF
THE ENTRUSTEE/ INNOCEENT PURCHASERS FOR
VALUE
Entruster has a better right over the goods than that
of the creditors of the entrustee
The entrusters security interest in goods, documents,
or instruments pursuant to the written terms of a TR
shall be valid as against all creditors of the entrustee
for the duration of the TR agreement (Sec. 12, P.D.
115).
The security interest of the entruster over the goods
under the trust receipt is superior than the monetary
claims of the laborers of the entrustee.
Purchaser in good faith can defeat the rights of the
entruster over the goods
A purchaser in good faith acquires the goods,
documents or instruments free from the entruster's
security interest (Sec. 11, P.D. 115).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
OBLIGATIONS AND LIABILITY OF THE ENTRUSTEE
Obligations and liabilitites of the Entrustee
(HR-IKRO)
1. To Hold GDI in trust for the entruster and to
dispose of them strictly in accordance with the
terms of TR;
2. To Receive the proceeds of the sale for the
entruster and to turn over the same to the
entruster to the extent of amount owing to the
latter;
3. To Insure GDI against loss from fire, theft,
pilferage or other casualties;
4. To Keep GDI or the proceeds thereof, whether in
money or whatever form, separate and capable
of identification as property of the entruster;
5. To Return GDI to the entruster in case they could
not be sold or upon demand of the entruster;
and
6. To Observe all other conditions of the TR (Sec. 9,
P.D. 115).
NOTE: Not all obligations of the entrustee are criminal in
nature. The gravamen of the criminal offense under the
trust receipts law is the failure of the entrustee to deliver
the proceeds of the sale to the entruster up to the extent of
the entrutee's obligations or the return of the same in case
of non-sale.
PAYMENT/DELIVERY OF PROCEEDS OF SALE OR
DISPOSITION OF GOODS, DOCUMENTS OR
INSTRUMENTS
Disposition of the proceeds of the sale of the goods,
documents or instruments
The proceeds of the sale of GDI shall be applied in the
following (SDP):
1. Expenses of the Sale;
2. Expenses Derived from re-taking, keeping and
storing the GDI; and
3. Principal obligation (Sec. 7, PD 115).
NOTE: Full payment of the loan or delivery of the sale
proceeds equivalent to the full amount of the obligation
extinguishes both criminal and civil liabilities of the
entrustee. In case of deficiency, the entrustee shall be liable
thereon. However, any excess shall belong to him.
8
 TRUST RECEIPTS LAW
RETURN OF GOODS, DOCUMENTS OR INSTRUMENTS
IN CASE OF NON-SALE
Obligation of the Entrustee in case the goods,
documents or instruments were not sold
The entrustee should return the GDI to the entruster
(Sec. 4, P.D. 115).
The return of the goods, documents or instruments in
case of non-sale extinguishes only the criminal
liability of the entrustee unless he pays in full his loan
obligation. The consequent acquittal of the entrustee
in the criminal case does not bar the filing of a
separate civil action to enforce the civil liability of the
entrustee.
The failure to turn over goods or proceeds realized from
the sale thereof is a criminal offense under Art. 315(l)(b) of
RPC (estafa) except if he disposed of the goods in
accordance with the terms.
LIABILITY FOR LOSS OF GOODS, DOCUMENTS OR
INSTRUMENTS
Entrustee shall bear the loss of the goods,
documents, or instruments which are the subject of
a Trust Receipt
Loss of the GDI which is the subject of a TR, pending
their disposition, irrespective of whether or not it was
due to the fault or negligence of the entrustee, shall
not extinguish his obligation to the entruster for the
value thereof (Sec. 10, P.D. 115).
Principle of Res Perit Domino is not a valid defense
against an Entrustee in cases of loss or destruction
of the goods, documents, or instruments secured by
a Trust Receipt
For the principle of res perit domino to apply the
entrustee must be the owner of the goods at the time
of the loss. A trust receipt is a security agreement,
pursuant to which a bank acquires a security
interest in the goods. It secures an indebtedness
and there can be no such thing as security interest
that secures no obligation. If under a trust receipt
transaction, the entruster is made to appear as the
owner, it was but an artificial expedient, more of legal
fiction than fact, for if it were really so, it could
dispose of the goods in any manner it wants. Thus,
the ownership of the goods remaining with the
entrustee, he cannot be relieved of the obligation to
pay his/her loan in case of loss or destruction
(Rosario Textile Mills vs. Home Bankers Association,
supra).
9 FACULTY OF CIVIL LAW
PENAL SANCTION IF OFFENDER IS A CORPORATION
Elements to be established in order to validly
prosecute the Entrustee for Estafa
In order that the entrustee may be validly prosecuted
for estafa under Art. 315, paragraph 1(b) of the
RPC, in relation with Sec. 13 of PD 115, the following
elements must be established (R-MAD):
1. The entrustee Received the subject goods in trust
or under the obligation to sell the same and to
remit the proceeds thereof to the entruster, or
to return the goods if not sold;
2. The entrustee Misappropriated or converted the
goods and/or the proceeds of the sale;
3. The entrustee performed such acts with Abuse of
confidence to the damage and prejudice of
entruster; and
4. A Demand was made on the entrustee by
entruster for the remittance of the proceeds or
the return of the unsold goods (Land Bank of the
Philippines vs. Perez, GR No. 166884, June 13,
2012).
NOTE: If proof as regards the delivery of GDI to the accused
(entrustee) is insufficient, estafa cannot lie (Ramos v. CA,
G.R. No. L-3992-25, Aug. 21, 1987).
Compliance with the obligation under the Trust
Receipt agreement vis-a-vis criminal liability
1. If compliance occurred before the criminal
charge- there is no criminal liability.
2. If compliance occurred after the charge even
before conviction- the criminal action will not be
extinguished.
P.D. 115 does not violate the prohibition in the
Constitution against imprisonment for non-payment
of a debt
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 or not. It does not seek to enforce
payment of the loan. Thus, there can be no violation
of a right against imprisonment for non-payment of a
debt (People v. Nitafan, G.R. No. 81559, Apr 6, 1992).
Q: Is lack of intent to defraud a bar to the
prosecution of these acts or omissions? (2006 Bar
Question)
A: No. The mere failure to account or return gives rise
to the crime which is malum prohibitum. There is no
requirement to prove intent to defraud (Ching v.
Secretary of Justice, G.R. No. 164317, Feb. 6, 2006).
UNIVERSITY OF SANTO TOMAS
 MERCANTILE LAW
Penal sanction is not available if the goods are not
intended for sale or resale
To be a TR transaction, the goods must be intended
for sale or resale.
In Ng v. People, the Supreme Court held that the trial
court erred in ruling that the agreement in the case
was a TR transaction because the goods involved
were intended to be used in the fabrication of steel
communication towers.
The Court further ruled that, [T]he true nature of a
trust receipt transaction can be found in the
whereas clause of PD 115 which states that a trust
receipt is to be utilized as a convenient business
device to assist importers and merchants solve their
financing problems. Obviously, the State, in enacting
the law, sought to find a way to assist importers and
merchants in their financing in order to encourage
commerce in the Philippines.
The principle is of course not limited in its application
to financing importations, since the principle is
equally applicable to domestic
transactions. Regardless of whether the transaction is
foreign or domestic, it is important to note that the
transactions discussed in relation to trust receipts
mainly involved sales (G.R. No. 173905, April 23,
2010).
In another case, Land Bank of the Philippines v. Perez,
it was held that when both parties enter into an
agreement knowing that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the entrustee, it is
not a trust receipt transaction penalized under
Section 13 of P.D. 115; the only obligation actually
agreed upon by the parties would be the return of
the proceeds of the sale transaction. The transaction
becomes a mere loan, where the borrower is
obligated to pay the bank the amount spent for the
purchase of the goods.
Penal sanction when the offender is a corporation
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.
If the crime is committed by a corporation or other
juridical entity, the directors, officers, employees or
other officers thereof responsible for the offense
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
rshall be charged and penalized for the crime,
precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested
and imprisoned; hence, cannot be penalized for a
crime punishable by imprisonment (Ching vs.
Secretary of Justice, GR No. 164317, Feb. 6, 2006).
Rationale behind the accountability of the officers of
the corporation
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 (ibid).
NOTE: An officer of a corporation who signed a TR cannot
hide behind the cloak of the separate corporate personality
of the corporation, where he is the actual, present and
efficient actor. Corporate officers or employees, through
whose act, default or omission the corporation commits a
crime, are themselves individually guilty of the crime. The
principle applies whether or not the crime requires the
consciousness of wrongdoing (Ching vs. Secretary of Justice,
supra).
REMEDIES AVAILABLE
Defenses available to negate CRIMINAL liability of
the Entrustee (CoCo CaCo No LP)
1. Compliance with the terms of the TR either by
payment, return of the proceeds or return of the
goods (Sec. 13, PD 115.)
2. Consignment.
3. Cancellation of the TR agreement and taking into
possession of the goods by the entruster.
NOTE: Repossession of the goods will extinguish only
the criminal liability.
4. Compromise by parties before filing of
information in court. Compromise of estafa case
arising from TR transaction, after the case has
been filed in court does not amount to novation
and does not erase the criminal liability of the
accused (Ong v. CA, 124 SCRA 578 [1983]).
5. Non-receipt of the goods by the entrustee or
where proof of delivery of goods to the accused
is insufficient. (Ramos v. CA, G.R. No. L-3992-25,
Aug. 21, 1987).
6. Loss of goods without fault of the entrustee.
7. The transaction does not fall under PD 115
(Colinares v. CA, G.R. No. 90828, Sept. 5, 2000,
Consolidated v. CA, G.R. No. 114286, Apr. 19,
2001).
10
 TRUST RECEIPTS LAW
NOTE: In these cases, the execution of a TR was made after the subsequent importation. Is there sufficient basis
the goods covered by it had been purchased, making the to sue for criminal action? (2012 Bar Question)
buyer the owner thereof. The transaction does not involve
a TR but a simple loan even though the parties denominate
a. Yes, because X's failure to turn over the
the transaction as one of a TR.
proceeds to the bank is a violation of the Trust
Receipt Law.
Failure of the entrustee to deliver the proceeds of
b. No, because the trust receipt was signed only
sale will give the entruster the right to file a civil
after the delivery of the goods. When the trust
action and a criminal action for estafa
receipt was signed, the ownership of the goods
was already with X.
The civil action may be instituted in the criminal
c. Yes, because violation of Trust Receipt Law is
action or separately filed independently of the
mala prohibita, intention is irrelevant.
criminal action. The criminal action is based on
d. No, because X has a valid reason not to deliver
ex-delictu for violation of the law while the civil action
the proceeds to BBB Banking Corporation.
is based on ex-contractu for violation of the trust
receipt arrangement.
A: B. When the trust receipt was signed, the
ownership of the goods was already with X.
Repossession of the goods by the Entruster cannot
be considered as payment
Q. Dennis failed to comply with his undertaking
under the TR he issued in favor of ABC bank. The
Payment would legally result only after the entruster
bank filed both criminal and civil cases against
has foreclosed on the securities, sold the same and
Dennis. The court proceeded with the civil case
applied the proceeds thereof to the entrustees
independently from the criminal case. Is the court
obligation. Since the TR is a mere security
correct in proceeding independently although a
arrangement, the repossession by the entruster
criminal case is also instituted?
cannot be considered payment of the loan/advances
given to the entrustee under the letter of credit/trust
A: Yes, the complaint against Dennis is based on the
receipt (PNB v. Pineda, G.R. No. 46658, May 13,
failure of the latter to comply with his obligation as
1991).
spelled out in the TR. This breach of obligation is
separate and distinct from any criminal liability for
In the event of default by the Entrustee on his
"misuse and/or misappropriation of goods or
obligation under the Trust Receipt agreement, it is
proceeds realized from the sale of goods, documents
NOT absolutely necessary for the Entruster to cancel
or instruments released under trust receipts",
the trust and take possession of the goods to be able
punishable under Sec. 13 of the PD 115. Being based
to enforce his right thereunder
on an obligation ex contractu and not ex delicto, the
civil action may proceed independently of the
The law uses the word "may" in granting to the
criminal proceedings instituted against petitioners
entruster the right to cancel the trust and take
regardless of the result of the latter (Sarmiento vs.
possession of the goods. Consequently, the entrustee
CA, G.R. No. 122502, Dec. 27, 2002).
has the discretion to avail of such right or seek any
alternative action, such as a third party claim or a
Effect of novation of a Trust Agreement
separate civil action which it deems best to protect its
right, at any time upon default or failure of the
Where the entruster and entrustee entered into an
entrustee to comply with any of the terms and
agreement which provides for conditions
conditions of the trust agreement (South City Homes,
incompatible with the TR agreement, the obligation
Inc. v. BA Finance Corporation, G.R. No. 135462, Dec.
under the trust receipt is extinguished. Hence, the
7, 2001).
breach in the subsequent agreement does not give
rise to a criminal liability under P.D. 115 but only civil
Q: BBB Banking Corporation issued a Letter of Credit
liability (Philippine Bank v. Ong, G.R. No. 133176, Aug.
in the amount of P5Million, for the purchase of five
8, 2002).
(5) tons of corn by X. Upon arrival of the goods, the
goods were delivered to the warehouse of X.
Thereafter he was asked to sign a Trust Receipt
covering the goods. When the goods were sold, X
did not deliver the proceeds to BBB Banking
Corporation, arguing that he will need the fund for

UNIVERSITY OF SANTO TOMAS

11 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Deposits in a savings account opened by the buyer
subsequent to the Trust Receipt transaction cannot
be automatically applied to outstanding obligations
under the Trust Receipt account
Warehouseman (WHM)
A person, natural or juridical, lawfully engaged in the
business of storing of goods for profit (Sec. 58, WRL).

The receipt of the bank of a sum of money without Warehouse (WH)

reference to the TR obligation does not obligate the
bank to apply the money received against the trust The building or place where goods are deposited and
receipt obligation. Neither does compensation arise stored for profit.
because compensation is not proper when one of the
debts consists in civil liability arising from criminal Persons who may issue a Warehouse Receipt
(Metropolitan Bank and Trust Co. v. Tonda, G.R. No.
134436, Aug. 16, 2000). 1. WHM, whether public or private, bonded or not
(Sec. 1, WHR Law).
Q: E received goods from T for display and sale in E's 2. A person authorized by a WHM.
store. E was to turn over to T the proceeds of any
sale and return the ones unsold. To document their Form and essential terms of a Warehouse Receipt
agreement, E executed a trust receipt in Ts favor
covering the goods. When E failed to turn over the It need not be in particular form but must embody
proceeds from his sale of the goods or return the within its written or printed terms (LCD-DSWD-LF):
ones unsold despite demand, he was charged in
court for estafa. E moved to dismiss on the ground 1. Location of the WH
that his liability is only civil. Is he correct? (2011 Bar 2. Consecutive number of the receipt
Question) 3. Date of the issue
4. A statement whether the goods received will be
A: No, since his breach of the trust receipt agreement Delivered to bearer, to a specified person or to a
subjects him to both civil and criminal liability for specified person or his order
estafa. 5. Signature of the WHM
6. If the receipt is issued for goods of which the
Warehouseman is the owner, either solely or
WAREHOUSE RECEIPTS (WHR) LAW jointly or in common with others, the fact of such
(ACT 2137, AS AMENDED) ownership; and
7. Description of the goods
8. A statement of the amount of advances made
Warehouse Receipt (WHR) and of liabilities incurred for which the
warehouseman claims a Lien.
It is a written acknowledgment by the warehouseman 9. Fees (Sec. 2, WH Law).
that he has received and holds certain goods therein
described in his warehouse for the person to whom Effects of omission of any of the essential terms
the document is issued. The warehouse receipt has (CIV-N)
two-fold functions, that is, it is a contract and a
receipt (Telengtan Bros. & Sons v. CA, G.R. No. 1. Conversion of the contract to ordinary deposit.
L-110581, Sept 21, 1994). 2. Injured person can hold WHM liable for all
damages caused by the omission
Warehouse receipt law v. Documents of title under 3. Validity of receipt not affected
the Civil Code 4. Negotiability of receipts not affected (Gonzales v.
Go Fiong & Luzon Surety Co., G.R. No. 91776,
WAREHOUSE DOCUMENTS OF TITLE Aug. 30, 1958).
RECEIPTS LAW UNDER CIVIL CODE
Prohibited terms in a Warehouse Receipt
Warehouse receipts Other receipts of
issued by warehouses, documents issued in
A warehouseman may insert in a receipt issued by
whether public or bailment contracts other
him, any other terms and conditions provided that
private, bonded or than warehouse receipts
such terms and conditions shall not be (C2-RMN):
not. (Art.1507-1520 NCC)
1. Contrary to the Warehouse Receipts Law
(Sec. 3).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 12
 WAREHOUSE RECEIPTS LAW
2. Contrary to law, morals, good customs, 1. The owner
public order or public policy. 2. Any person to whom the possession or custody of
3. Terms Reducing the required diligence of the the receipt has been entrusted by the owner, if, by
warehouseman (Ibid) the terms of the receipt, the goods are deliverable to
4. Those exempting the warehouseman from the order of the person to whom the possession or
liability for Misdelivery or for not giving custody of receipt has been entrusted or in such form
statutory notice in case of sale of goods. that it may be negotiated by delivery (Sec. 40, WHR
5. Those exempting the warehouseman from Law).
liability for Negligence.
Effect when a Negotiable Warehouse Receipt was
Effect when the goods deposited are incorrectly delivered without the necessary indorsement (AC -
described DC)

GR: Warehouseman shall be liable for damages for
non-existence or misdescription of goods at the time
of its issue.
XPN: When the goods are described based on:
1. Series or labels upon them
2. Statement that the goods are of certain kind.
Person to whom the goods should be delivered
(PDO)
1. To the person lawfully entitled to the Possession of
the goods, or his agent;
2. To the person entitled to Delivery under a
non-negotiable instrument or with written authority;
or
3. To the lawful Order of a negotiable receipt (person
in possession of a negotiable receipt) (Sec. 9, WHR
Law).
,
KINDS
Kinds of Warehouse Receipt
1. Negotiable warehouse receipt
2. Non-negotiable warehouse receipt
Negotiable WHR
It is a receipt in which it states that the goods
received will be delivered to the bearer or to the
order of any person named in such receipt (Sec. 5,
WHR Law). It is negotiated by delivery or
indorsement plus delivery.
1. The transferee ACquires title against the transferor
2. There is no Direct obligation of the WHM; and
3. The transferee can Compel the transferor to
complete the negotiation by indorsing the
instrument. Negotiation takes effect as of the time
when the indorsement is actually made.
Rights of the owner of the Negotiable Warehouse
Receipt in case the signature of an owner was forged
and the forger was able to withdraw the goods from
the Warehouseman
1. If under WHR, the goods are deliverable to the
depositor or to his order, the owner of the said
negotiable receipt may proceed against the WHM
and/or the holder.
2. Without the valid indorsement of the owner to the
holder or in blank, the WHM is liable to the owner for
conversion in the misdelivery.
3. If the goods are deliverable to bearer, the owner
may only proceed against the holder. The WHM is not
liable for conversion where the goods are delivered
to a person in possession of a bearer negotiable
instrument.
Duplicate receipts must be so marked in case one
negotiable receipt is issued for the same goods
A WHM shall be liable for all damages caused by his
failure to do so to anyone who purchased the
subsequent receipt for value supposing it to be an
original, even though the purchase be after the
delivery of the goods by the WHM to the holder of
the original receipt (Sec. 6, WHR Law).

NOTE: No provision shall be inserted in a negotiable receipt
that it is non-negotiable. Such provision, if inserted, shall be
void, and the receipt shall remain negotiable. A negotiable
warehouse receipt cannot be converted into
non-negotiable (Sec. 5, WHR Law).
NOTE: The word duplicate shall be plainly placed upon
the face of every such receipt, except the first one issued
(ibid.).
Non-Negotiable Warehouse Receipt

Person who may negotiate a Negotiable Warehouse It is a receipt in which it is stated that the goods
Receipt received will be delivered to the depositor or to any
other specified person (Sec. 4, WHR Law).

UNIVERSITY OF SANTO TOMAS

13 FACULTY OF CIVIL LAW
 MERCANTILE LAW
NOTE: To make it non-negotiable, it is needed to be DISTINCTION BETWEEN A NEGOTIABLE INSTRUMENT
indicated in the face of the WHR by the warehouseman AND A NEGOTIABLE WAREHOUSE RECEIPT
issuing it that the same is non-negotiable, or not
negotiable (Sec.7, WHR Law).
Negotiable Instrument v. Negotiable Warehouse
Receipt
Effect of failure to place an indication of
non-negotiability in the WHR
NEGOTIABLE
NEGOTIABLE WHR
INSTRUMENT
Failure to mark the WR as non-negotiable shall
Does not contain an
entitle the holder, who purchased it for value Contains an
unconditional promise to
supposing it to be negotiable, to treat such receipt unconditional promise
pay a sum certain in
negotiable (ibid). to pay a sum certain in
money. The obligation is to
money.
deliver goods.
Transfer of a Non-Negotiable Warehouse Receipt
The subject is
The subject is money.
merchandise.
A non-negotiable warehouse receipt may be
The negotiable
transferred by its delivery to the transferee The warehouse receipt is
instrument is the object
accompanied by a deed of assignment, donation or not the object of value.
of value.
other form of transfer.
Effect of indorsement of a Non-Negotiable Intermediate parties are
Warehouse Receipt Intermediate parties not liable for the
become secondarily warehouse mans failure
Even if the receipt is indorsed, the transferee liable. to deliver the goods.
acquires no additional right (Sec. 39, WHR Law).
Although endorsers or
Warranties on a Warehouse Receipt intermediate parties are
not liable for any failure on
A person who, for value, negotiates or transfers a the part of the
receipt by indorsement or delivery, including one warehouseman or
who assigns for value a claim secured by a receipt, previous endorsers of the
The general endorsers
unless a contrary intention appears warrants (GRIT) : receipt to fulfill their
warrant that the
1. Receipt is Genuine obligations they may be
instrument after due
2. Legal Right to negotiate or transfer it held liable for breach of
presentment shall be
3. No knowledge of defects that may Impair warranties such as: (1)
paid and in case of
the validity or worth of the receipt receipt is genuine and in
dishonor and notice of
4. That he has a right to Transfer title to the respect what it purports to
dishonor given, the
goods and that the goods are merchantable be (2) they have legal title
endorser shall pay the
or fit for a particular purpose whenever such to the instrument (3)
holder.
warranties would have been to transfer goods are fit for
without a receipt of goods represented consumption and
thereby (Sec. 44, WHR Law). merchantable (4) they are
not aware of any
NOTE: The indorsee does not guarantee that the WHM will information that will make
comply with his duties (Sec. 45, WHR Law). the instrument worthless

When no warranty implied Rights of a holder of a Negotiable Warehouse

Receipt v. the Rights of a transferee of a
A mortgagee, pledgee, or holder for security of a Non-Negotiable Warehouse Receipt
receipt who, in good faith, demands or receives
payment of the debt for which such receipt is NEGOTIABLE WAREHOUSE NON-NEGOTIABLE
security, whether from a party to a draft drawn for RECEIPT WAREHOUSE RECEIPT
such debt or from any other person, shall not, by so May be acquired through May be acquired through
doing, be deemed to represent or to warrant the negotiation transfer or assignment
genuineness of such receipt or the quantity or quality Rights of the holder of the Rights of transferee:
of the goods therein described. In short, a creditor receipt:
receiving the WHR given as collateral makes no 1. Acquires title to the
warranty (Sec. 46, WHR Law). 1. If indorsed: goods subject to the

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 14

a. Acquires title to the
goods as the person
negotiating (Sec. 41,
WHR Law).
b. Acquires the direct
obligation of the
warehouseman to hold
possession of the goods
for him as if the
warehouseman directly
contracted with him
(ibid).
2. If not indorsed:
He may compel
indorsement; other-wise,
he would acquire title as
that of an assignee (Sec.
43, WHR Law.).
Defeats the lien of the
seller of the goods covered
thereby (Sec. 49, WHR
Law).
Good covered cannot be
garnished, attached or
levied on execution by
unless:
1. Receipt is surrendered.
2. Its negotiation is
enjoined by the court.
3. The goods are
impounded by the court
(Sec. 25, WHR Law).
NOTE:
This shall not apply if the
person depositing is not
the owner of the goods or
one who has no right to
convey title to the goods
binding upon the owner.
Protects the purchaser in
good faith and for value.
Breach of duty on the part of the person making the
negotiation or fraud, mistake or duress on the
owner of the receipt to entrust possession or
custody DOES NOT impair the validity of negotiation
of a Warehouse Receipt
WAREHOUSE RECEIPTS LAW
terms of any agreement
with the transferor (Sec.
42, WHR Law).
2. Acquires the right to
notify the warehouseman
of the transfer and
thereby acquires the
direct obligation of the
warehouseman to hold
possession of the goods
for him (ibid).
NOTE: Prior to notice, the
title of the transferee may
be defeated by the levy of
an attachment or execution
upon the goods by a creditor
of the transferor or by a
notification to the
warehouseman by the
transferor or a subsequent
purchaser from the
transferor of a subsequent
sale of the goods by the
transferor. (ibid.)
Acquires the title as that of
his transferor.
Pending notification to
the warehouseman,
goods can be garnished,
attached or levied on
execution
Reason: Absent such
notice, both the
warehouseman and the
sheriff have a right to
assume that the goods
are still owned by the
person whose name
appears in the receipt.
The assignee only steps
into the shoes of the
assignor.
15
The same is true provided that the person to whom
the receipt was negotiated or a person to whom the
receipt was subsequently negotiated paid value
therefor, without notice of the breach of duty, or
fraud, mistake or duress (Sec. 47, WHR Law).
Q: Coco was issued by a Warehouseman a
negotiable receipt for safekeeping by the latter of
his goods. Can the judgment creditor of Coco levy by
execution the goods covered by the negotiable
receipt?
A: The goods cannot, while in the possession of the
WHM, be attached by garnishment or otherwise, or
be levied upon under an execution unless the receipt
be first surrendered to the WHM, or its negotiation
enjoined. The warehouseman cannot be compelled to
deliver the actual possession of the goods until the
receipt is surrendered to it or impounded by the
court.
Q: Assuming that prior to the levy, the receipt was
sold to Yoyo on the basis of which he filed a claim
with the sheriff. Would Yoyo have better rights to
the goods than the creditor? Explain your answer.
(1999 Bar Question)
A: Yes. Yoyo, as a holder for value of the receipt, has
a better right to the goods than the creditor. It is
Yoyo that can surrender the receipt which is in its
possession and can comply with the other
requirements which will oblige the warehouseman to
deliver the goods, namely, to sign a receipt for the
delivery of the goods, and to pay the
warehouseman's liens and fees and other charges.
Q: What is the proper recourse of the
warehouseman if he is uncertain as to who is
entitled to the goods? Explain. (2005 Bar Question)
A: Since there is a conflicting claim of ownership or
title, the warehouseman should file a complaint in
interpleader requiring the claimants to interplead.
The matter involves a judicial question as to whose
claim is valid.
Rule where a warehouse receipt is transferred to
secure payment of a loan by way of pledge or
mortgage
The pledgee or mortgagee does not automatically
become the owner of the goods but merely retains
the right to keep, and with the consent of the owner
to sell them so as to satisfy the obligation from the
proceeds for the simple reason that the transaction is
not a sale but only a mortgage or pledge. Likewise, if
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the property is lost without the fault or negligence of
the mortgagee or pledgee, then said goods are to be
regarded as lost on account of the real owner,
mortgagor or pledgor (PNB v. Sayo, Jr., G.R. No.
129198, July 9, 1998).
Non-payment by the original depositors of the
purchase price will NOT render the further
negotiation of the receipt invalid
The negotiation of the warehouse receipt by the
buyer of goods purchased from and deposited to the
warehouseman is valid even if the warehouseman
who issued the negotiable warehouse receipt was not
paid by the buyer. The validity of the negotiation
cannot be impaired by the fact that the
owner/warehouseman was deprived of the
possession of the same by fraud, mistake or
conversion (PNB v. Noahs Ark Sugar Refinery, G.R.
No. 107243, Sept. 1, 1993).
Q: T delivers two refrigerators to the warehouse of
W who then issues a negotiable receipt undertaking
the delivery of the refrigerators to T or bearer. T
entrusted the receipt to B for safekeeping only. B
negotiated it, however, to F who bought it in good
faith and for value. Who is entitled to the delivery of
the refrigerators? (2011 Bar Question)
A: F, since he is a purchaser in good faith and for
value.
Between the real owner of the goods and an
innocent purchaser for value acquiring the
Warehouse Receipt from a thief, the former prevails
If the goods were stolen from the owner and
deposited to the warehouseman who subsequently
issued a warehouse receipt which in turn was duly
negotiated to an innocent purchaser for value, the
owner has the better right than the holder of the
negotiable warehouse receipt. This is because a thief
transfers no title.
DUTIES OF A WAREHOUSEMAN
Obligations of a warehouseman (TD(sasusi) K)
1. Take care of the goods entrusted to his
safekeeping with the same care as a reasonably
careful owner of similar goods would exercise.
2. Deliver them to the holder of the
receipt or the depositor provided there is
demand by the depositor accompanied by either:
a. An offer to satisfy the warehousemans lien
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
b. An offer to surrender the receipt, if
negotiable with such indorsements as
would be necessary for the
negotiation of the receipts
c. A readiness and willingness to
sign, when the goods are delivered,
an acknowledgment that they have
been delivered, if such signature is
requested by the warehouseman (Sec. 8,
WHR Law).
3. Keep the goods separate from the goods of other
depositors, except if authorized by agreement or
by custom, fungible goods may be mingled with
other goods of the same kind and grade.
Instance when the need for a demand by the
depositor is not necessary
A demand by the depositor is not necessary when the
warehouseman has rendered it beyond his power to
deliver the goods.
Justified refusal to deliver by the warehouseman (Sa
S.B. Co(nfa) F(elvis))
1. If the warehousemans lien is not SAtisfied
by the claimants (Sec. 31, WHR Law).
2. Where the goods have already been Sold to
satisfy the warehousemans lien or because
of their perishable or hazardous nature (Sec.
34, WHR Law).
3. If the warehouse receipt is negotiated Back
to him.
4. When the holder does not satisfy the COnditions
prescribed in Sec. 8, WHR Law:
a. Non-satisfaction of warehousemans lien.
b. Failure to surrender warehouse receipt.
c. Refusal to sign the Acknowledgement receipt,
acknowledging the receipt of the goods from the
warehouse.
5. The failure was not due to any Fault on the part
of the warehouseman:
a. Upon request by or on behalf of the person
lawfully Entitled (Sec. 10, WHR Law).
b. If the goods are Lost, due to a fortuitous
event exclusively.
c. If the warehouseman needs reasonable
time to ascertain the Validity of the claim if
someone other than the depositor claims
title to the goods (Sec. 18, WHR Law).
d. If he had Information that the delivery
about to be made was to one not lawfully
entitled (Sec. 10, WHR Law)
e. If Several persons claim the goods (Sec. 17,
WHR Law.)
16
 WAREHOUSE RECEIPTS LAW
Q: The warehouseman, by issuing the warehouse
receipt, acknowledges that the goods are in his
possession, but he can refuse to deliver the goods to
the holder of the warehouse receipt covering the
goods if - (2012 Bar Question)
negotiated for value without notice of the proceedings or
of the delivery of the goods (ibid.).
Instances when the duty to insure the goods arise
(RIEL)

a. the warehouse receipt covering the goods is 1. Where the warehouse receipt contains a
not presented. Representation to that effect.
b. the lien of the warehouseman is not satisfied. 2. Where it was an Inducement for the depositor to
c. the said holder presents a materially altered enter into the contract;
warehouse receipt. 3. Established practice; or
d. All of the above. 4. Where the Law provides

A: D. A WHM is bound to deliver the goods upon a Conversion

demand made if such is accompanied with (1) an
offer to satisfy the WHMs lien; (2) offer to surrender It is an unauthorized assumption and exercise of the
the receipt if negotiable; and (3) readiness to sign an right of ownership over goods belonging to another
acknowledgment receipt when the goods are through the alteration of their condition or the
delivered (Sec. 8, WHR Law). exclusion of the owners right (Bouviers Law
Dictionary).
HOWEVER, Sec. 31 of the said Law expressly provides
that a WHM having a lien valid against the person Instances where a Warehouseman is liable for
demanding the goods may refuse to deliver the goods conversion
to him until the lien is satisfied.
1. Where the delivery is made to person other than
Further, Sec. 13 provided that the alteration of a those authorized
receipt shall not excuse the WHM who issued it from 2. Even if delivered to persons entitled, he may still
any liability if such alteration was: (1) immaterial, (2) be liable for conversion if prior to delivery:
authorized, or (3) made without fraudulent intent. a. He had been requested not to make such
delivery; or
Warehouseman has no cause of action for b. He had received notice of the adverse claim
repossession and damages on the basis of a falsified or title of a third person.
delivery permit
Effects of alteration of the receipt on the liability of
Warehouseman has no cause of action against the the warehouseman
person to whom it delivered deposited articles where
the real parties interested in the questioned articles 1. Alteration immaterial whether fraudulent or not,
have not yet sued the warehouseman for damages on whether authorized or not, the
account of wrongful delivery (Consolidated Terminals warehouseman is liable on the altered receipt
Inc. vs. Artex Development Co. Inc. G.R. No. L-25748 according to its original tenor
March 10, 1975). 2. Authorized material alteration the
warehouseman is liable according to the
Remedy if the Warehouse Receipt is lost or terms of the receipt as altered
destroyed
3. Material alteration innocently made the
A court of competent jurisdiction may order the warehouseman is liable on the altered receipt
delivery of the goods only: according to its original receipt
a. Upon satisfactory proof of the loss or 4. Material alteration fraudulently made
destruction of the receipt; and warehouseman is liable according to the
b. Upon the giving of a bond with sufficient original tenor of the receipt to a
sureties to be approved by the court (Sec. 14, WHR purchaser of the receipt for value without notice, and
Law). even to the alterer and subsequent
purchasers with notice except that as
NOTE: The delivery of the goods under an order of the regards to the last two, the
court shall NOT relieve the WHM from liability to a person warehousemans liability is limited only to delivery as
to whom the negotiable receipt has been or shall be he is excused from any liability

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17 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Instances where a Warehouse man is criminally Remedies available to a Warehouseman to enforce
liable for his acts (GF-DOOM-C) his Warehousemans lien (REC)

1. Issuance of warehouse receipts for Good not 1. By Refusing to deliver the goods until the lien is
received (Sec. 50, WHR Law). satisfied
2. Issuance of receipt containing False statement 2. By causing the Extrajudicial sale of the property
(Sec. 51, WHR Law). and applying the proceeds of the value of the lien
3. Issuance of Duplicate negotiable warehouse 3. By filing a civil action for Collection of the unpaid
receipt not marked as such (Sec. 52, WHR Law). charges or by way of counterclaim in an action to
4. Issuance of a negotiable warehouse receipt of recover the property from him or such other
which he is an Owner without stating such fact of remedies allowed by law for the enforcement of
ownership (Sec. 53, WHR Law). a lien against personal property or to a creditor
5. Delivery of goods without Obtaining negotiable against his debtor, for the collection from the
warehouse receipt (Sec. 54, WHR Law). depositor of all the charges which the depositor
6. Negotiation of receipt for Mortgaged goods (Sec. has bound himself to pay.
55, WHR Law).
7. Commingling of goods (Sec. 24, WHR Law). Lien over the goods does not preclude the WHM to
avail all other remedies
Other acts for which Warehouse Man is liable
(DuMP-SICC) Whether a warehouseman has or has not a lien upon
the goods, he is entitled to all remedies allowed by
1. Failure to stamp Duplicate on copies of law to a creditor against a debtor for the collection
negotiable receipt (Sec.6, WHR Law). from the depositor of all charges and advances which
2. Misdelivery of goods (Sec. 10, WHR Law). the depositor has expressly or impliedly contracted
3. Failure to Place non-negotiable or with the warehouseman to pay (Sec 32, WHR Law).
not-negotiable on a non-negotiable receipt
(Sec. 7, WHR Law). Enforcement of a Lien
4. Failure to give notice in case of Sale of goods to
satisfy lien (Sec. 33, WHR Law) or because the The lien may be enforced against the goods of the
goods are perishable or hazardous (Sec. 34, WHR following:
Law). 1. Goods belonging to the person who is liable as
5. Issuing receipt for non-existing goods or debtor; and
misdescribed goods (Sec.20, WHR Law). 2. Goods belonging to others which have been
6. Failure to take Care of the goods (Sec. 21, WHR deposited at any time by the debtor with
Law). authority to make a valid pledge (Sec. 28, WHR
7. Failure to effect Cancellation of a negotiable Law).
receipt upon delivery of the goods (Sec. 11, WHR
Law). Effect of sale made to satisfy a warehousemans lien
or in case when the goods are perishable or
WAREHOUSEMANS LIEN hazardous in nature

Charges covered by a Warehousemans lien (PMA) The WHM shall not thereafter be liable for failure to
deliver the goods to the depositor or owner of the
1. Charges for storage and Preservation of the goods or to a holder of the receipt given for the
goods (insurance and others may be included as goods when they were deposited, even if such receipt
long as it is stipulated) be negotiable (Sec. 36, WHR Law).
2. Money advanced, interest, insurance,
transportation, labor, weighing, coopering and Manner of conducting the execution sale to satisfy
other charges and expenses in relation to such the warehousemans lien
goods
3. Charges and expenses for notice, and 1. Notice of the sale
Advertisements of sale, and for sale of the goods a. published once a week for two consecutive
where default had been made in satisfying the weeks in a newspaper published in the place
WHMs lien (Sec. 27, WHR Law). where such sale is to be held; or
b. If there is no newspaper published in such
place, the advertisement shall be posted at

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 18
 WAREHOUSE RECEIPTS LAW
least ten days before such sale in not less National Bank, vs. Hon. Marcelino L. Sayo, JR., in his
than six conspicuous places therein. capacity as Presiding Judge of the Regional Trial Court
of Manila (Branch 45), et al., G.R. No. 129918, July 9,
NOTE : The notice shall indicate the following: 1998).
1. Description of the goods to be sold;
2. Name of the owner or person on whose
account the goods are held; and
3. Time and place of the sale

2. Sale shall be held not less than fifteen days from

the time of the first publication.
3. In the place where the lien was acquired.

NOTE: The balance, if any, of the proceeds of the execution

sale shall be held by the WHM and delivered on demand to
the person to whom he would have been bound to deliver
or justified in delivering goods (Sec.31, WHR Law).

Effect of the non-publication of the notice of sale

Where the sale was made without the publication

required and before the time provided by law, such
sale is void and the purchases of the goods acquires
no title to them.

A person claiming right over the property may stop

the execution sale of the goods

At any time before the goods are so sold, any person

claiming a right of property or possession therein may
pay the WHM the amount necessary to satisfy his lien
and to pay the reasonable expenses and liabilities
incurred in serving notices and advertising and
preparing for the sale up to the time of such payment
(Sec.33, WHR Law).

Instances when a warehouseman may lose his lien

1. By surrendering possession thereof, or

2. By refusing to deliver the goods when a demand
is made with which he is bound to comply (Sec.
29).

NOTE: Where a negotiable receipt is issued, with the

exception of the charges for the storage or
preservation of goods for which a negotiable
receipt has been issued, the lien exists only for
other charges expressly enumerated in the receipt
so far as they are written although the amount of
the said charge is not stated.

When Warehouseman fees and charges cease to

accrue

The warehouseman fees and charges cease to accrue

from the date of rejection by the warehouseman to
heed the lawful demand by the endorsee of the
quedan for the release of the goods (Philippine

UNIVERSITY OF SANTO TOMAS

19 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Incidents in the life of a negotiable instrument
NEGOTIABLE INSTRUMENTS LAW
1. Issue
Negotiable instrument 2. Negotiation
3. Presentment for acceptance (in certain kinds
It is a written contract for the payment of money BOEs)
which is intended as a substitute for money and 4. Acceptance
passes from one person to another as money, in such 5. Dishonor by non-acceptance
a manner as to give a holder in due course the right 6. Presentment for payment
to hold the instrument free from defenses available 7. Dishonor by non-payment
to prior parties. The instrument must comply with 8. Notice of dishonor
Sec. 1 of the Negotiable Instruments Law (NIL) 9. Protest in case of foreign bill
(Sundiang & Aquino, 2014). 10. Discharge

Negotiable instrument v. Non-negotiable instrument Negotiable instruments are not legal tender

NEGOTIABLE NON-NEGOTIA Negotiable instruments are neither money nor legal

INSTRUMENT BLE tender; they are mere substitutes for money (NCBA,
INSTRUMENT Sec. 60).
Governing NIL. The Civil Code
Law or pertinent GR: The delivery of a negotiable instrument does
special laws not by itself produce the effect of payment (Roman
should apply Catholic Bishop of Malolos vs. Intermediate Appellate
(GSIS v. CA, Court, 191 SCRA 411, 1990).
170 SCRA 533,
1989). XPNs: Negotiable instrument shall produce the effect
Manner of Can be Can be of payment when:
Transfer transferred by transferred 1. When they have been cashed, or when through
negotiation or only by the fault of the creditor they have been
by assignment. assignment. impaired (NCC, Art. 1249).
Status of The transferee The transferee 2. If a check representing demand deposit has
Transferee can be a can never be a been cleared and credited to the account of the
holder in due holder in due creditor, such shall be equivalent to delivery to
course if all course but the creditor of cash (NCBA, Sec. 60).
the remains to be
requirements an assignee. Q: Negotiable instruments are used as substitutes
of Section 52 for money, which means - (2012 Bar Question)
of the NIL are a.) That they can be considered legal tender.
complied with. b.) That when negotiated, they can be used to pay
Defenses All defenses indebtedness.
Available available to c.) That at all times the delivery of the instrument is
prior parties equivalent to delivery of the cash.
may be raised d.) That at all times negotiation of the instruments
against the requires proper indorsement.
last transferee.
(Sundiang, 2014) A: B. When negotiated, negotiable instruments can
be used to pay indebtedness.
Laws governing a negotiable instrument
Characteristics or features of a negotiable
1. NIL - For instruments which meet the requisites of instrument
negotiability.
2. New Civil Code (NCC) Applies suppletorily in 1. Negotiability The note may pass from hand
cases of assignment and demand for payment of to hand similar to money so as to give the
an NIL. holder in due course (HIDC) the right to hold
3. Code of Commerce Applies suppletorily to NIL in the instrument and collect the sum payable
cases of crossed checks. for himself free from any infirmity in the

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 20
 NEGOTIABLE INSTRUMENTS LAW
instrument or defect in the title of any of the
prior parties or defenses available to them
among themselves.
2. Accumulation of secondary contracts A
characteristic of a negotiable instrument
where additional parties become involved as
they are transferred from one person to
another. Once an instrument is issued,
additional parties can become involved (De
Leon, 2010).
FORMS AND INTERPRETATION
Form of negotiable instruments (Requisites of
negotiability)
An instrument to be negotiable must conform to the
following requirements: (SUn-DOrA)
1. It must be in writing and Signed by the maker or
drawer;
2. Must contain an Unconditional promise or order
to pay a sum certain in money;
3. Must be payable on Demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
5. Where the instrument is Addressed to a drawee,
he must be named or otherwise indicated therein
with reasonable certainty (NIL, Sec.1).
NOTE: A NI need not follow the exact language of NIL, as
long as the terms are sufficient which clearly indicate an
intention to conform to the requirements of the law (NIL,
Sec. 10).
The requirements stated in Sec. 1 must appear on the face
of the instrument otherwise the instrument would not be
negotiable.
Rules governing the use of phrases in the negotiable
instruments
1. As to promissory note
a. The word promise need not be used. Any
expression equivalent to a promise is sufficient.
b. Mere acknowledgment of a debt is not a
promissory note.
c. Language used must indicate a written
undertaking to pay
2. As to bill of exchange
a. It must contain an order for payment as
distinguished from a mere request.
b. The order is not invalidated because it contains
words of civility. Thus, insertion of polite words
like please does not alter the character of the
instrument; as long as the language expresses the
drawers will that the money be paid.
21
Q: A promissory note which does not have the
words "or order" or "or bearer" will render the
promissory note non-negotiable, and therefore -
(2012 Bar Question)
a.) It will render the maker not liable
b.) The note can still be assigned and the maker
made liable;
c.) The holder can become holder in due course;
d.) The promissory note can just be delivered and
the maker will still be liable
A: B. The note can still be assigned and the maker
made liable
Rules of construction in case of ambiguities in a
negotiable instrument
1. Words prevail over figures
2. If date from which interest is to run is
unspecified, interest runs from the date of the
instrument; if undated, from the issue thereof
3. If undated, instrument is considered dated as of
the time it was issued
4. Written provisions prevail over printed
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election
6. When not clear in what capacity it was signed,
deemed signed as an indorser
7. When two or more persons signed a negotiable
instrument stating "I promise to pay," in case of
liability, they shall be deemed to be jointly and
severally liable (NIL, Sec. 17).
REQUISITES OF NEGOTIABILITY
Factors to determine the negotiability (FRI)
1. Words that appear on the Face of negotiable
instrument
2. Requirements enumerated in Section 1 of NIL
3. Intention of the parties by considering the whole
of the instrument.
NOTE: In determining the negotiability of an instrument,
consider the instrument in its entirety and only what
appears on its face. It must comply with the requirements
under Section 1 of the NIL (Sundiang, 2014 citing Caltex
Phils. v. CA, 212 SCRA 448).
The instrument must be in writing
It must be reduced in writing or in tangible form. The
negotiability or non-negotiability of an instrument is
determined from the writing on the face of the
instrument itself (De Leon, 2010).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
The instrument must be signed by the maker or
drawer
It is placed at the lower right hand corner of the
instrument. Nonetheless, it may appear in any part of
the instrument whether at the top, middle or bottom
or at the margin (De Leon, 2010).
However, where a signature is so placed upon the
instrument that it is not clear in what capacity the
person making the same intended to sign, he is to be
deemed an indorser (NIL, Sec. 17 [f]).
NOTE: The signature is valid and binding as long as it
appears that a person intended to make the instrument his
own. The signature is prima facie evidence of a persons
intention to be bound as either maker or drawer.
Unconditional promise or order to pay
The word promise or order need not appear in
the instrument to satisfy the requirements of Section
1(b) of the NIL (Sundiang, 2014). The promise or
order to pay must not be subject to any condition or
contingency. An instrument payable upon a
contingency is not negotiable even if the condition
thereon has been fulfilled.
instrument payable out of a particular fund is
non-negotiable. In this latter case, the fund specified is the
direct source of payment; therefore, it is subject to the
availability of fund, hence conditional.
Certainty as to sum
A sum is certain within the contemplation of Section
1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it
requires mathematical computation (Sundiang,
2014).
The sum payable is a sum certain within the meaning
of this Act, although it is to be paid: (ISDEA)
1. With Interest; or
2. By Stated installments; or
3. By stated installments, with a provision upon
Default in payment of any installment or of
interest, the whole shall become due (
acceleration clause);
4. With Exchange, whether at a fixed rate or at the
current rate; or
5. With cost of collection or an Attorneys fees, in
case payment shall not be made at maturity
(NIL, Sec. 2).

An unqualified order or promise to pay is Payment with interest

unconditional though coupled with:
1. An indication of particular fund out of which
reimbursement is to be made or a particular
account to be debited with the amount; or
2. A statement of the transaction which gave rise to
the instrument. But an order or promise to pay
out of a particular fund is conditional (NIL, Sec 3).
Indication of particular fund for reimbursement v.
Indication of particular fund for payment
Interest at fixed rate or at increased or reduced rate
will not destroy negotiability because the presence of
such interest does not make uncertain the sum
payable.
In the absence of a date as to which interest is to run,
it shall be from the date of instrument, or in the
absence thereof, at the date of issue. In the absence
of interest rate, it shall be the legal rate.
Payment by installment

FUND FOR FUND FOR PAYMENT Payment by installment is certain if the dates of each
REIMBURSEMENT installment is fixed and the amount to be paid for
1. The drawee pays the There is only one act - each installment is stated (NIL, Sec. 2; Sundiang,
payee from his own the drawee pays 2009).
funds. directly from the
2. The drawee pays particular fund Payment with an acceleration clause
himself from the indicated.
particular fund Acceleration clause is a provision, that upon default
indicated. in payment of any installment or interest, the whole
Particular fund Particular fund shall become due (NIL, Sec.2[c]).
indicated is not the indicated is the direct 1. If the option to accelerate the maturity is on the
direct source of source of payment. maker, whether such option is absolute or
payment. conditional, it is negotiable.
(Sundiang, 2014). 2. Where acceleration is at the option of the holder
and can only be exercised upon the happening of
NOTE: An instrument which mentions a particular fund out the specified event, still negotiable.
of which reimbursement is to be made is negotiable. But an 3. But where the holders right to accelerate is

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 22
 NEGOTIABLE INSTRUMENTS LAW
unconditional, the time of payment is rendered
uncertain, the instrument would not be
negotiable.
Extension clause
Extension Clauses are provisions extending the time
of payment.
GR: An extension clause does not affect the
negotiability of the instrument.
XPN: Where a note with a fixed maturity provides
that the maker has the option to extend time of
payment until the happening of a contingency, the
date is uncertain and the instrument is
non-negotiable.
Sum to be paid with exchange
The exchange is the charge for the expense of
providing funds at the place where the instrument is
payable to cover such instrument which is issued at
another place. It may be at a fixed rate or at the
current rate. It is applicable only to foreign bills (De
Leon, 2010).
Inland bill of exchange v. Foreign bill of exchange
An inland BOE is one which is, or on its face purports
to be, both drawn and payable within the Philippines
and any other bill is a foreign bill.
NOTE: Unless the contrary appears on the face of the bill,
the holder may treat it as an inland bill (Sec. 109, NIL).
Sum to be paid with costs of collection and/or
attorneys fees
It does not affect the certainty of the amount payable
at maturity since the increase in the amount due,
even if uncertain, takes place after maturity when the
instrument ceases to be negotiable in the full
commercial sense (De Leon, 2010).
Payable in Philippine Peso
The money referred into may be our legal tender or
foreign currency. An instrument is still negotiable
although the amount to be paid is expressed in
currency that is not legal tender so long as it is
expressed in money (PNB v Zulueta, 101 Phil 1071).
NOTE: An agreement to pay in foreign currency is valid (RA
8183).
23
Effect if a bill or note is payable other than in money
GR: The note or bill must be payable in money. If
payable in goods, wares, or merchandise, or in
property, the same is not negotiable.
XPNs: Negotiability is not affected if the note
contains an additional provision which: (SECo Law)
1. Authorizes the sale of collateral Securities in
case the instrument be not paid at maturity;
or
2. Gives the holder an Election to require
something to be done in lieu of payment of
money; or
3. Authorizes a Confession of judgment if the
instrument be not paid at maturity; or
4. Waives the benefit of any Law intended for
the advantage or protection of the obligor
(NIL, Sec. 5).
Payable on demand or at a fixed or determinable
future time
1. Payable on demand The holder may call for
payment any time, likewise, the maker may also pay
any time and the refusal of the holder to accept
payment shall stop the running of interest should
there be any, but obligation to pay the note subsist.
An instrument is payable on demand:
a. When it is so expressed to be payable on
demand, or at sight, or on presentation; or
b. In which no time for payment is expressed (NIL,
Sec 7).
c. Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand (ibid).
2. At a fixed time A term or time instrument is
payable only upon the arrival of the time for
payment.
3. At a determinable future time - An instrument is
payable at a determinable future time which is
expressed to be payable:
a. At a fixed period after date or sight; or
b. On or before a fixed or determinable future
time specified therein; or
c. On or at a fixed period after the occurrence of a
specified event which is certain to happen, though
the time of happening be uncertain (NIL, Sec. 4).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Payable to order
The instrument is payable to order where it is drawn
payable to the order of a specified person or to him
or to his order. It may be drawn payable to the order
of: (PaDD JoinSH)
1. A Payee who is not a maker, drawer, or drawee;
2. The Drawer or maker; or
3. The Drawee; or
4. Two or more payees Jointly; or
5. One or some of Several payees; or
6. The Holder of an office for the time being (Sec.
8, NIL).
Payable to bearer (ENaF PaLa)
1. When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
2. When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
3. When it is payable to the order of a Fictitious
person or non-existing person, and such fact was
known to the person making it so payable; (e.g.
Pay to John Doe or order)
4. When the name of the Payee does not purport to
be the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
indorsement in blank (NIL, Sec 9).
Illustration
Back of NI (indorsement)
Pay to A Sgd. P
Pay to B Sgd. A
Sgd. B
Difference between having a check payable to a
fictitious payee and payable to a specified payee
If a check is payable to a specified payee, it is an
order instrument, which requires indorsement from
the payee or holder before it may be validly
negotiated; but it may nevertheless be considered as
a bearer instrument if it is payable to the order of a
fictitious or non-existing person, and such fact is
known to the person making it so payable. Thus,
checks issued to Prinsipe Abante or Si Malakas at
si Maganda, who are well-known characters in
Philippine mythology, are bearer instruments
because the named payees are fictitious and
non-existent (ibid., pg. 9-10).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Fictitious-Payee rule
A check is a bill of exchange (BOE) drawn on a bank
payable on demand. It is either an order or a bearer
instrument but when the payee is fictitious or not
intended to be the true recipient of the proceeds of
the check, the check is considered as a bearer
instrument and as such it does not require
indorsement to be validly negotiated. It is negotiable
by mere delivery (Divina, 2010, citing PNB v.
Rodriguez, 566 SCRA 513).
Application of the fictitious-payee rule
A fictitious payee is not limited to person having no
real existence. An actual, existing, and living payee
may also be fictitious if the maker of the check did
not intend for the payee to in fact receive the
proceeds of the check (Ibid., pg. 10, PNB case citing
Sec. 9[c], NIL).
Who bears the loss in a fictitious-payee situation
In a fictitious-payee situation, the drawee bank is
absolved from liability and the drawer bears the loss.
When faced with a check payable to a fictitious
payee, it is treated as a bearer instrument that can be
negotiated by delivery. The underlying theory is that
one cannot expect a fictitious payee to negotiate the
check by placing his indorsement thereon. And since
the maker knew this limitation, he must have
intended for the instrument to be negotiated by mere
delivery. Thus, in case of controversy, the drawer of
the check will bear the loss (Ibid).
Exception to the fictitious-payee rule
A showing of commercial bad faith on the part of the
drawee or any transferee of the check for that
matter, will work to strip it of this defense (Ibid).
When drawee must be named with reasonable
certainty
1. In a BOE, the drawee must be named or
otherwise designated with reasonable certainty
(NIL, Sec. 1).
2. A bill may be addressed to two or more drawees
jointly, but not to two or more drawees in the
alternative or in succession (NIL, Sec. 127). Eg.
An instrument may be addressed to A and B
but not to A or B.
3. An instrument payable to the order of the
bearer has been held to be an instrument
payable to order (10 C.J.S. 575-576).
24
 NEGOTIABLE INSTRUMENTS LAW
Provisions that do not affect the negotiability of an by the maker, engaging to pay on demand, or at
instrument (DVNo S. CurSECo Law) a fixed or determinable future time, a sum
certain in money to order or to bearer (NIL, Sec.
1. Omission of Date 184).
2. Non-specification of Value given or that any
value had been given 2. Bill of exchange (BOE) An unconditional order in
3. Non-specification of place where it is drawn or writing addressed by one person to another
payable signed by the person giving it, requiring the
4. Bears a Seal person to whom it is addressed to pay on
5. Designation of particular kind of Currency in demand or at a fixed or determinable future time
which payment is to be made. (Sec. 6, NIL.) a sum certain in money to order or to bearer
(Sec. 126, NIL).
Additional provisions which:
1. Authorizes the sale of collateral Securities on NOTE: A check is a bill of exchange drawn on a bank
default payable on demand (Sec 185, NIL).
2. Gives the holder an Election to require
something to be done in lieu of payment of Promissory note v. Bill of exchange
money.
3. Authorizes Confession of judgment on default PROMISSORY
BILL OF EXCHANGE
4. Waives the benefit of the Law intended for the NOTE
protection of the obligor (NIL, Sec. 5). Promise to
Undertaking Order to pay
pay
Q: B borrowed Php1 million from L and offered to As to number 3 parties (upon
him his BMW car worth Php 1 Million as collateral. B of original 2 parties acceptance of the
then executed a promissory note that reads: I, B, parties drawee)
promise to pay L or bearer the amount of Php1 Maker is
As to liability Drawer is
Million and to keep my BMW car (loan collateral) primarily
of parties secondarily liable
free from any other encumbrance. Signed, B. Is this liable
note negotiable? (2011 Bar Question) Only 1 2 presentments
As to number
presentment (for acceptance
of
A: No, since it contains a promise to do an act in (for and for payment)
presentments
addition to the payment of money. payment) is are generally
needed
needed needed
NOTE: What will not affect the negotiability of the
instrument is an additional provision which gives an A bill of exchange is not considered as an
election to require something to be done in lieu of payment assignment of funds in the hands of the drawee
of money.
A bill of exchange itself does not operate as an
Q: A writes a promissory note in favor of his
assignment of the funds in the hands of the drawee
creditor, B. It says: Subject to my option, I promise
available for the payment thereof, and the drawee is
to pay B Php1 Million or his order or give Php1
not liable on the bill unless and until he accepts the
Million worth of cement or to authorize him to sell
same (Sec. 127, NIL).
my house worth Php1 Million. Signed, A. Is the
note negotiable? (2011 Bar Question)
A bill of exchange may be addressed to more than
one drawee
A: No, because the exercise of the option to pay
lies with A, the maker and debtor.
A bill of exchange may be addressed to two or more
drawees jointly, whether partners or not; but not to
Note: In order not to affect the negotiability of the
instrument, the option must be with the holder/creditor. two or more drawees in the alternative or in
succession (Sec. 128, NIL).
KINDS OF NEGOTIABLE INSTRUMENTS
Instances when a bill of exchange may be treated as
promissory note
Kinds of negotiable instruments

1. Promissory notes (PN) An unconditional promise 1. Where in a bill the drawer and the drawee are the
in writing made by one person to another, signed same person (Sec. 130, NIL)

UNIVERSITY OF SANTO TOMAS

25 FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. The drawee is a fictitious person (Sec. 130, NIL) Acceptance of the bill of exchange by the drawee is
3. The drawee does not have the capacity to not an important requisite for the instruments
contract (Sec. 130, NIL) negotiability
4. Where the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder The acceptance of a bill of exchange is not important
may treat it as either at his election (NIL, Sec. in the determination of its negotiability. The nature of
17[e]) acceptance is important only in the determination of
the kind of liabilities of the parties involved (PBCOM v
Parties to a negotiable instrument and their Aruego, 102 SCRA 530).
liabilities
Drawer v. Maker
PARTIES FUNCTION LIABILITY
Drawer The person who Secondarily DRAWER MAKER
issues and draws liable, except Kind of NI
Issues a BOE Issues a PN
the bill. when involved
drawee Only
Primarily
BOE refused to Liability secondarily
liable
accept liable
Drawee The party upon Not liable Can limit his
whom the bill is until he liability by
Limitation of Cannot limit
drawn. becomes putting
Liability liability
acceptor without
recourse
Payee The party to whom The party to
payment is whom COMPLETION AND DELIVERY
originally payable. payment is
originally Steps in the issuance of a negotiable instrument
payable.
Acceptor The acceptor is the Primarily 1. The mechanical act of writing the instrument
drawee who liable completely and in accordance with Sec. 1 of NIL.
accepts the bill 2. Delivery of the complete instrument by the maker
or the drawer to the payee or holder with the
PARTIES FUNCTION LIABILITY intention of giving effect to it.
Maker One who makes Primarily
PN the promise and liable Delivery
signs the
instrument. It refers to the transfer of possession, actual or
Payee The party to constructive, from one person to another (NIL, Sec.
whom 191), with the intent to transfer title to payee and
payment is recognize him as holder thereof.
originally
payable. Incomplete instrument

Referee in case of need An instrument is incomplete when it is wanting in any

material particular (NIL, Sec. 14).
Referee in case of need is the person named by the
drawer or indorser in the NI as the one to whom the Various situations involving negotiable instruments
holder may resort in case the BOE is dishonored by
non-acceptance or non-payment. 1. Incomplete instrument
a. Delivered
NOTE: It is the option of the holder to refer to the referee i. With forgery and alteration
in case of need or not as he may see fit (Sec. 131, NIL.) ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 26
 NEGOTIABLE INSTRUMENTS LAW
2. Complete instrument
a. Delivered
i. With forgery and alteration
ii. Without forgery and alteration
b. Not delivered
i. With forgery and alteration
ii. Without forgery and alteration
Rule when an instrument is complete and delivered
If an instrument is complete and delivered without
forgery and alteration, all parties are bound.
INSERTION OF DATE
Necessity of a date in order to make an instrument
negotiable
GR: The date is not essential to the negotiability of
the instrument (not one of the requirements under
sec. 1).
NOTE: If the negotiable instrument is dated, such date is
deemed a prima facie proof that it is the true date of the
making, drawing, acceptance or indorsement of the
instrument (NIL, Sec. 11).
XPNs: Date is important to determine maturity:
1. Where the instrument is payable within a specified
period after date, or after sight.
2. When the instrument is payable on demand, date
is necessary to determine whether the instrument
was presented within a reasonable time from issue,
or from the last negotiation.
3. When the instrument is an interest-bearing one, to
determine when the interest starts to run.
Instance when a holder may insert the date in an
instrument
1. Where an instrument expressed to be payable at a
fixed period after date is issued undated, or
2. Where the acceptance of an instrument payable at
a fixed period after sight is undated (NIL, Sec. 13).
Effect of insertion of a wrong date
The insertion of a wrong date does not avoid the
instrument in the hands of a subsequent holder in
due course, but as to a HIDC, the date so inserted is
to be regarded as the true date (ibid.).
NOTE: With respect to the person who inserted the wrong
date, however, the instrument is avoided (Bank of Houston
v. Day, 145 Mo. Appl. 410, 122 SW 756).
27
Effect of ante-dating or post-dating an instrument
If the instrument is ante-dated or post-dated, the
instrument is not invalid by that fact alone, provided
it is not done for illegal or fraudulent purpose (Sec.
12, NIL).
COMPLETION OF BLANKS
Meaning of a material particular
It is any particular proper to be inserted in a
negotiable instrument to make it complete.
Prima facie authority to fill up the blanks
A signature on a blank paper delivered by the person
making the signature in order that the paper may be
converted into a negotiable instrument operates as a
prima facie authority to fill it up as such for any
amount (ibid).
NOTE: In order, however, that any such instrument when
completed may be enforced against any person who
became a party thereto prior to its completion, it must be
filled up strictly in accordance with the authority given and
within a reasonable time (ibid).
Effect if a completed instrument was negotiated to a
holder in due course
After completion, the completed instrument which
was subsequently negotiated to a HIDC, is valid and
effectual for all purposes in his hands, and he may
enforce it as if it had been filled up strictly in
accordance with the authority given and within a
reasonable time (ibid).
NOTE: Hence, the defense that the blanks were filled up
beyond the authority given and/ or beyond the reasonable
time, is not available as against a HIDC. This defense is
merely a personal one.
INCOMPLETE BUT DELIVERED INSTRUMENTS
(Sec. 14)
Person authorized to fill up the blanks in an
incomplete but undelivered instrument
The holder has a prima facie authority to complete it
(NIL, Sec. 14).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Distinctions among Sec. 14, 15, and 16 out about the transaction, he directed the drawee
bank to dishonor the check. When Evelyn encashed
SEC 14 SEC 15 SEC 16 the check, it was dishonored. Is Lorenzo liable to
Incomplete Incomplete Complete Evelyn? (2006 Bar Question)
instrument and instrument but
which has been undelivered undelivered. A: Yes. This covers the delivery of an incomplete
delivered by the instrument. instrument, under Section 14 of the Negotiable
maker or the Instruments Law, which provides that there was
drawer to the prima facie authority on the part of Nicky to fill-up
payee or holder. any of the material particulars thereof. Having done
1. Where Instrument 1. If instrument so, and when it is first completed before it is
instrument is will not be a is not in negotiated to a holder in due course like Evelyn, it is
wanting in any valid possession of valid for all purposes, and she may enforce it within a
material contract in party who reasonable time, as if it had been filled up strictly in
particular, the the hands of signed, a valid accordance with the authority given.
person in any holder, if and intentional
possession has completed delivery by him INCOMPLETE AND UNDELIVERED INSTRUMENTS
prima facie and is prima facie (Sec. 15)
authority to negotiated presumed.
complete it by without Rule when an instrument is incomplete and
filing up blanks authority. 2. If holder is undelivered
therein. HIDC, valid
delivery by all Where an incomplete instrument has not been
2. When the parties prior to delivered, the holder, whether HIDC or not, cannot
instrument is him so as to validly enforce such instrument against the party
merely a make them whose signature was placed before delivery (NIL, Sec.
signature on liable to him is 15).
blank paper conclusively
delivered by presumed. NOTE: Non-delivery of an incomplete instrument is a real
person making defense (ibid.)
the signature in
order that the Enforcement of the instrument against the party
paper may be whose signature was placed after delivery
converted into a
NI, the person in The instrument can be validly enforced against the
possession has party whose signature was placed after delivery like
prima facie an indorser because the indorser warrants the
authority to fill instrument to be genuine and in all respect what it
up as such for purports to be.
any amount.
NOTE: An HIDC cannot hold liable a maker for instruments
NOTE: The holder which are incomplete and undelivered even supposing that
must only act in the note was stolen, filled-up, and was subsequently
accordance with negotiated. The law is specific that the instrument is not a
the authority valid contract in the hands of any holder. The phrase any
granted him, holder includes a HIDC.
otherwise it may
be used as a COMPLETE BUT UNDELIVERED (Sec. 16)
defense against
him. Effect if an instrument is undelivered

It is incomplete and revocable until delivery of the

Q: Lorenzo signed several blank checks instructing
instrument for the purpose of giving it effect (NIL,
Nicky, his secretary, to fill them as payment for his
Sec. 16). Delivery is essential to the validity of any
obligations. Nicky filled one check with her name as
negotiable instrument (Sundjang, 2009).
payee, placed P30,000.00 thereon, endorsed and
delivered it to Evelyn as payment for goods the
latter delivered to the former. When Lorenzo found

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 28
 NEGOTIABLE INSTRUMENTS LAW
Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor
and a third party was able to collect the proceeds of
the checks by forging the endorsement of the
creditor as payee, the creditor has no cause of action
against anyone on the basis of the checks, since the
payee acquires no interest in the check until its
delivery to him (Development Bank of Rizal v. Sim
Wei, 219 SCRA 736).
However, in another case, the Court held that the
payee of a check can sue a collecting bank to whom
the check was deposited with a forged endorsement
even if the check was never delivered to the payee, to
avoid a circuity of suits (Westmont Bank v. Ong, 375
SCRA 212).
NOTE: The defense of want of delivery of a complete
instrument is only a personal defense which means that it is
only available against a holder NOT in due course.
Issuance of an instrument
The instrument is deemed issued upon the first
delivery of the instrument, complete in form, to a
person who takes it as holder (NIL, Sec. 191).
Conditional delivery or delivery for a special purpose
The delivery is made conditional or for a special
purpose if it was made not for the purpose of
transferring the property (title) to the instrument. In
such case, if the instrument lands in the hands of a
HIDC (one who does not know of the conditional
delivery or of its special purpose), the instrument is
treated as if there is no condition.
if such delivery was made to a holder not in due
course, prior parties are not bound by the instrument
(NIL, Sec. 16).
NOTE: The law contemplates that the condition is orally or
verbally conveyed to the holder upon delivery, because of
the rule that the negotiability is determined only upon the
face of the instrument.
Presumption as to delivery
If the instrument is in the possession of a HIDC, valid
delivery is conclusively presumed.
If the instrument is in the possession of a party other
than a HIDC, possession of such party constitutes only
prima facie presumption of delivery.
29
Immediate parties
Immediate parties are persons having knowledge of
the conditions or limitations placed upon the delivery
of an instrument. It means privity, and not proximity.
Remote parties
Persons without knowledge as to the conditions or
limitations placed upon the delivery of an instrument,
even if he is the next party physically.
SIGNATURE
Validity of signature in a negotiable instrument
A party may use his full name, surname, initials or
even any mark in signing a negotiable instrument to
indicate his intention to bind himself.
NOTE: A signature maybe made in any manner as long as
the person signing has the intention to be bound.
Persons liable on an instrument
GR: Only persons whose signatures appear on an
instrument are liable thereon (NIL, Sec. 18).
XPNs: Notwithstanding the absence of their
signatures in their own names, the following persons
are deemed liable: (TraP FAP)
1. Person who signs in Trade or assumed name (Sec.
18, NIL.) Party who signed must have intended to
be bound by his signature.
2. Principal who signs through a duly authorized
agent and such agent discloses the name of his
principal and adding words to show he is merely
signing in a representative capacity (NIL, Sec. 19, 20).
3. Forger (NIL, Sec. 23)
4. Acceptor, who makes his acceptance of a bill on
a separate paper (NIL, Sec. 134)
5. Person, who makes a written Promise to accept the
bill before it is drawn (NIL, Sec. 135)
NOTE: Where a signature is so placed upon the instrument
that it is not clear in what capacity the person signed, he is
deemed to be an indorser (NIL, Sec. 17[f]), not a maker or
drawer.
Q: Juan borrowed P10,000 from Joe as evidenced by
a promissory note. All other requisites of
negotiability are present except that Juan did not
affix his usual signature thereon as he was ailing at
that time and was only able to put X in the blank
space meant for the signature of the maker. Is the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
requisite that the instrument must be signed by the
maker complied with?
A: Yes. The letter X is sufficient to comply with the
requirement. It appears from the problem that such
letter was adopted by Juan with the intent to
authenticate the instrument. It is not necessary that
the signature is the usual signature of the maker.
SIGNING IN TRADE NAME
As a general rule, only persons whose signatures
appear on an instrument are liable thereon. But one
who signs in a trade or assumed name is liable as if he
signed his own name (NIL, Sec. 18). It is necessary,
however, that the party who signed intended to be
bound by his signature.
SIGNATURE OF AGENT
Requisites for an agent to be exempt from liability
1. He is duly authorized
2. He adds words to his signature indicating that he
signs as an agent/representative and
3. He discloses the name of his principal (NIL, Sec.
20).
Legal effects of an agents signature
Provided that the above requisites are complied with,
the legal effects of an agents signature in a
negotiable instrument are:
1. His signature will bind his principal; and
2. He will be exempt from personal liability.
Procuration
It is the act by which a principal gives power to
another to act in his place as he could himself (Fink v.
Scott, 143 S.E. 305)
Effect of a signature by procuration
It operates as notice or a warning that the agent has
but a limited authority to sign and the principal is
bound only in case the agent in so signing acted
within the actual limits of his authority (NIL, Sec. 21).
INDORSEMENT BY MINOR OR CORPORATION
Effects of indorsement made by an infant or a
corporation
1. Minor A contract entered into by a minor is
voidable, at the option of the minor. It is a real
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
defense that can be invoked by a minor. However, it
is not a defense which may be setup by parties other
than a minor.
2. Incapacitated person An incapacitated person
may also use as a real defense his incapacity to enter
into a contract. Contract entered into by the
incapacitated are voidable. Incapacitated persons
include: a) insane or demented persons and b) deaf
and blind who does not know how to write.
3. Corporation - Issuance or indorsement of an
instrument by a corporation acting beyond its powers
is a REAL defense.
Transfer of instrument by a minor
While a minor is not bound by his indorsement for
lack of capacity, he is however not incapacitated to
transfer his rights.
Minor can be bound by his representation that he is
of legal age
Where he committed actual fraud by specifically
stating that he is of legal age, a minor can be bound
by his signature in an instrument (PNB v. CA, G.R. No.
L-34404, June 25, 1980).
Q: A executed a promissory note in favor of M which
reads:
I promise to pay P (16 years old) or order
P10,000.
Sgd. M
P indorsed it to A.
1. May A collect from M notwithstanding that P, the
indorser is a minor?
2. In case that A cannot collect from M, can he
collect from P?
A:
1. Yes. A can collect from M. Notwithstanding the
fact that A is a minor, the indorsement of P (the
minor) passes title to A (the holder). M cannot
invoke the defense of minority because such
defense would only be available to P.
2. No. A cannot collect from P, as he has a real
defense of minority on his part.
30
 NEGOTIABLE INSTRUMENTS LAW
FORGERY
Forgery
It is the counterfeit making or fraudulent alteration of
any writing. It happens when a signature is affixed by
one who does not claim to act as an agent and who
has no authority to bind the person whose signature
he has forged (NIL, Sec. 23).
Burden of proof in proving forgery
Forgery, as any other mechanism of fraud must be
proven clearly and convincingly, and the burden of
proof lies on the party alleging forgery (Chiang Yia
Min v. CA, G.R. No. 137932, Mar. 28, 2001).
Extent and effects of forgery
1. Only the signature forged or made without
authority is the one inoperative, the instrument
itself and the genuine signatures are valid.
2. An instrument indorsed which on its face is
payable to bearer may be enforced by the holder
to whose title over the instrument the forged
signature is not necessary.
3. The instrument can be enforced against those
who are precluded from setting up forgery.
Illustration
Pay to P or order P10,000 30 days after sight.
(Sgd)D, (forged by P)
To X
P presented the instrument for acceptance. X
accepted the instrument without detecting the
forgery. P then indorses the bill to A, A to B, B to C,
the present holder. In this case, if after 30 days the
holder presented the instrument to X for payment
the latter is liable despite the forgery, because by
preclusion, the acceptor admits the genuineness of
the drawers signature (See Sec. 62, NIL)
A payee may sue the collecting bank for the amount
of the checks it paid under a forged indorsement
even when the instrument has not been delivered to
him
The collecting bank is liable to the payee and must
bear the loss because it is its legal duty to ascertain
that the payees indorsement (signature), its
customer, was genuine before cashing the check.
That there was no delivery yet and therefore he
never became the owner of the check is immaterial
31
since the payee merely used one action to reach, by
desirable shortcut, the person who ought in any
event to be ultimately liable as among the innocent
persons. The payee is allowed to directly recover
from the collecting bank to simplify proceedings
(Westmont Bank v. Ong, G.R. No. 132560, Jan. 30,
2002).
Effects of forgery
GR: It does not avoid the instrument but only the
forged signature. The signature is wholly inoperative.
In other words, rights may still exist and be enforced
by virtue of such instrument as to those signatures
thereto are found to be genuine.
However, a forged indorsement prevents any
subsequent parties from acquiring any right against
any party prior to the forgery. Such forged
indorsement cuts off the rights against prior parties
to the forger (Cut-off rule).
XPNs:
1. If the party against whom it is sought to enforce
such right is precluded from setting up forgery or
want of authority (NIL, Sec. 23).
2. Where the forged signature is not necessary to the
holders title, in which case, the forgery may be
disregarded (NIL, Sec. 48).
Persons precluded from setting up the defense of
forgery
1. Those who admit/warrant the genuineness of
the signature such as indorsers, persons
negotiating by delivery and acceptor; (NIL, Sec
56).
2. Those who by their acts, silence, or negligence,
are estopped from claiming forgery;
3. A holder of a bearer instrument who
subsequently negotiates such instrument with a
prior forged indorsement (forged indorsement is
not necessary to his title it being a bearer
instrument).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Liabilities of the parties to a negotiable instrument
where an indorsement is forged
ORDER INSTRUMENTS
ORDER PROMISSORY ORDER BILL OF
NOTE EXCHANGE
Prior parties are not Prior parties are not
bound. Forged signature bound. Forged signature
is wholly inoperative is wholly inoperative
unless estoppel sets in unless estoppel sets in
with regard prior parties with regard prior parties
(cut-off rule). (cut-off rule).
Subsequent parties to Subsequent parties to
the forgery are bound the forgery are bound
NOTE: A drawers account
cannot be charged by the
drawee.
The drawer is not liable to
the collecting bank, since
the duty of the latter is
only to the payee.
Collecting bank bears the
loss.
The payee can recover
from either the drawer or
collecting bank, but not
from the drawee unless he
accepts the bill.
BEARER INSTRUMENTS
BEARER PROMISSORY BEARER BILL OF
NOTE EXCHANGE
Prior parties liable. Prior parties liable
However, the forged However, the forged
signatory is not liable to signatory is not liable to
a party who is not a a party who is not a
holder in due course. holder in due course.
Illustration
a. If the instrument is payable to order and the
indorsement of one of the indorsers is forged. C can
enforce the note against X and B but not against M, P
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES 32
or A, because were it not for the forgery of X the
instrument will not reach the possession of C.
b. If the instrument is payable to bearer, the
indorsement of X is not necessary to vest title to C
because negotiation on bearer instrument requires
only delivery.
Legal consequences when a bank honors a forged
check
1. When drawer's signature is forged
Drawee-bank by accepting the check cannot set up
the defense of forgery, because by accepting the
instrument, the drawee bank admits the genuineness
of signature of drawer (BPI Family Bank v.
Buenaventura, G.R. No. 148196, Sept. 30, 2005; NIL,
Sec. 23).
Unless a forgery is attributable to the fault or
negligence of the drawer himself, the remedy of the
drawee-bank is against the party responsible for the
forgery. Otherwise, drawee-bank bears the loss. A
drawee-bank paying on a forged check must be
considered as paying out of its funds and cannot
charge the amount to the drawer (Samsung
Construction Co. Phils, v. Far East Bank, G.R. No.
129015, Aug. 13, 2004). If the drawee-bank has
charged drawer's account, the latter can recover such
amount from the drawee-bank (Associated Bank v.
CA, G.R. No. 107382, Jan. 31, 1996; BPI v. Case
Montessori Internationale, G.R. No. 149454, May 28,
2004).
However, the drawer may be precluded or estopped
from setting up the defense of forgery as against the
drawee-bank, when it is shown that the drawer
himself had been guilty of gross negligence as to have
facilitated the forgery (Metropolitan Waterworks v.
CA, G.R. No. L62943, July 14, 1986).
2. Drawee bank versus collecting bank When the
signature of the drawer is forged, as between the
drawee-bank and collecting bank, the drawee-bank
sustains the loss, since the collecting bank does not
guarantee the signature of the drawer. The payment
of the check by the drawee bank constitutes the
proximate negligence since it has the duty to know
the signature of its client-drawer. (Philippine National
Bank v. CA, G.R. No. L-26001, Oct. 29, 1968).
3. Forged payee's signature When drawee-bank
pays the 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. In such case,
the bank becomes liable since its primary duty is to
verify the authenticity of the payee's signature
 NEGOTIABLE INSTRUMENTS LAW
(Traders Royal Bank v. Radio Philippines Network,
G.R. No. 138510, Oct. 10, 2002; Westmont Bank v.
Ong, G.R. No. 132560, Jan. 30, 2002).
4. Forged indorsement Drawer's account cannot
be charged, and if charged, he can recover from the
drawee-bank (Associated Bank v. CA, G.R. No.
107382, Jan. 31,1996).
a. The Drawer has no cause of action against
collecting bank, since the duty of collecting bank
is only to the payee (Manila Lighter
Transportation, Inc. v. CA,G.R. No. L-50373 Feb.
15, 1990).
b. Drawee-bank can recover from the
collecting bank because even if the indorsement
on the check deposited by the bank's client is
forged, collecting bank is bound by its
warranties as an indorser and cannot set up
defense of forgery as against drawee bank
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996, Great Eastern Life Ins. Co. v. Hongkong &
Shanghai Bank, G.R. No. 18657, Aug. 23, 1922).
Q: X fraudulently obtained possession of the check
and forged Ps signature and then indorsed and
deposited the check with XYZ bank which honored
the check and placed the amount thereof to his
credit. Thereafter, XYZ Bank indorsed the check to
the drawee bank-ABC bank which paid it and
charged the account of the drawer. lllustrate the
liability of a drawer and a drawee-bank in an 1)
instrument payable to order and in an 2) instrument
payable to bearer in case of a forgery on payees
signature.
Pay to P or order P10,000.
(Sgd)D
To: ABC Bank
A:
1.If the instrument is payable to order,
a. The drawee bank is liable to the drawer for the
amount of the check and his account cannot be
charged because the indorsement of the payee is a
forgery. Hence, it is wholly inoperative and
therefore, ABC Bank has no right to ask the drawer
for its payment.
b. XYZ Bank is however, liable to the drawee bank
because of his warranty as an indorser. (See
Sec.66)
c. D, the drawer, is not liable on the check because
its order is to pay P or his order and not to any
other person.
33
2. If the instrument is payable to bearer:
a. ABC Bank, the drawee-bank, may charge the
amount thereof to the account of the drawer.
Because the forged indorsement did not prevent
the transfer of title. The remedy of the drawer is
against the forger.
b. Drawer has no cause of action against collecting
bank, since the duty of collecting bank is only to
the payee (Manila Lighter Transportation, Inc. v.
CA,G.R. No. L-50373 Feb. 15, 1990). Drawee-bank
can recover from the collecting bank because even
if the indorsement on the check deposited by the
bank's client is forged, collecting bank is bound by
its warranties as an indorser and cannot set up
defense of forgery as against drawee bank
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996).
Q: P sold to M 10 grams of shabu worth
Php5,000.00. As he had no money at the time of the
sale, M wrote a promissory note promising to pay P
or his order Php5,000. P then indorsed the note to X
(who did not know about the shabu), and X to Y.
Unable to collect from P, Y then sued X on the note.
X set up the defense of illegality of consideration. Is
he correct? (2011 Bar Question)
A: No, since X, a general indorser, warrants that the
note is valid and subsisting.
Remedy of the drawee bank in case of a forged
indorsement
The drawee bank may not debit the account of the
drawer but may generally pass liability back through
the collection chain to the party who took from the
forger and, of course, to the forger himself, if
available. If the forgery is that of the payee's or
holder's indorsement, the collecting bank is held
liable, without prejudice to the latter proceeding
against the forger.
Since a forged indorsement is inoperative, the
collecting bank had no right to be paid by the drawee
bank. The former must necessarily return the money
paid by the latter because it was paid wrongfully
(Associated Bank v. CA, G.R. No. 107382, Jan. 31,
1996).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Liability of the drawee bank and the drawer for the CONSIDERATION
amount paid on checks with forged indorsements, if
the same was due to the negligence of both the Consideration
drawee bank and the drawer
It is an inducement to a contract that is the cause,
The loss occasioned by such negligence should be price or impelling influence, which induces a party to
divided equally between the drawer/depositor and enter into a contract.
the drawee.
NOTE: Every negotiable instrument is deemed prima facie
Q: X entrusted his check books, credit cards, to have been issued for a valuable consideration (NIL, Sec.
passbooks, bank statements and cancelled checks to 24).
his secretary. He also introduced the secretary to
the bank for purposes of reconciliation of his Holder for value
accounts. Subsequently, Xs secretary forged his
signature on the checks and was able to withdraw A holder for value is one who has given a valuable
his money. Is the drawee bank liable for the consideration for the instrument. A holder for value is
amounts withdrawn by the secretary? deemed as such not only as regards the party to
whom the value has been given to by him but also in
A: No, he is precluded from setting up the forgery respect to all those who became parties prior to the
due to his own negligence in entrusting to his time when value was given.
secretary his credit cards and check book including
NOTE: Where the holder has a lien on the instrument
the verification of his statements of account (Ilusorio
arising either from contract or by implication of law, he is
v. CA, G.R. No. 139130, Nov. 27, 2002).
deemed a holder for value to the extent of his lien (NIL, Sec.
27).
Q: The drawers signature was forged. There is,
however, a provision in the monthly bank statement Value
that if the drawers signature was forged, the
drawer should report it within 10 days from receipt It is any consideration sufficient to support a simple
of the statement to the drawee. The drawer, contract.
however failed to do so. What will be its effect
insofar as the drawers right is concerned? NOTE: An antecedent or pre-existing debt constitutes value
A: The failure of the drawer to report the forgery and is deemed such whether the instrument is payable on
within ten days from receipt of the monthly bank demand or at a future time (NIL, Sec. 25).
statement from the drawee bank does not preclude
the drawer from questioning the mistake of the Want or absence of consideration v. Failure of
drawee bank despite the provision (BPI v. CASA consideration
Montessor, G.R. No. 149454, May 28, 2004).
WANT OR ABSENCE OF FAILURE OF
Q: If forgery was committed by an employee of the CONSIDERATION CONSIDERATION
drawer whose signature was forged, does the Total lack of any valid Failure or refusal of one
relationship amount to estoppel such that the consideration for the of the parties to do,
drawer is precluded in recovering from the drawee contract perform or comply with
bank? the consideration
agreed upon
A: The bare fact that the forgery was committed by
an employee of the party whose signature was forged Effect of want of consideration
can not necessarily imply that such partys negligence
was the cause of the forgery in the absence of some It becomes a matter of defense as against any
circumstances raising estoppel against the drawer person not a holder in due course, thus, a PERSONAL
(Samsung Construction Co. v. Far East Bank and Trust defense (NIL, Sec. 28).
Company, G.R. No. 129015, Aug. 13, 2004).
Effect of partial failure of consideration

Partial failure of consideration is a defense pro tanto,

whether the failure is an ascertained and liquidated
amount or otherwise (ibid.).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 34
 NEGOTIABLE INSTRUMENTS LAW
Inadequacy of consideration
GR: Inadequacy of consideration does not invalidate
the instrument.
XPN: There has been fraud, mistake or undue
influence (NCC, Art. 1355).
NOTE: However, knowledge of inadequacy of consideration
would render the holder not HIDC liable (NIL, Sec. 53).
Q: X borrowed money from Y in the
amount of Php 1 Million and as payment,
issued a check. Y then indorsed the check to his
sister Z for no consideration. When Z deposited the
check to her account, the check was dishonored for
insufficiency of funds. Is Z a holder in due course?
Explain your answer (2012 Bar Question)
A: No, Z is not a HIDC. Under Sec. 52 (c), NIL, it is
expressly provided that the instrument must be
acquired in good faith and for value to consider him a
HIDC.
ACCOMMODATION PARTY
Accommodation party
An accommodation party is one who has signed the
instrument as maker, drawer, acceptor, or indorser,
without receiving value therefor, and for the purpose
of lending his name to some other person (NIL, Sec.
29).
Requisites to be an accommodation party
1. Accommodation party must sign as maker, drawer,
acceptor or indorser
2. No value is received by the accommodation party
from the accommodated party; and
3. The purpose is to lend the name.
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received
some consideration for the use of his name. The phrase
without receiving value therefor only means that no
value has been received for the instrument and not for
lending his name.
Accommodation party v. Regular party
ACCOMMODATION PARTY REGULAR PARTY
Signs an instrument Signs the instrument
without receiving value for value (NIL, Sec.
therefor (NIL, Sec. 29) 24)
Purpose of signing is to
lend his name to Not for that purpose
another person (NIL,
35
Sec. 29)
May always show, by Cannot disclaim
parol evidence, that he personal liability by
is only such parol evidence
Cannot avail of the
defense of
absence/failure of May avail
consideration against a
holder not in due course
May sue reimbursement
after paying the
May not sue
holder/subsequent
party
Extent of liability of an accommodation party
1. Right to revoke accommodation before the
instrument has been negotiated for value.
2. Right to reimbursement from the accommodated
party the accommodated party is the real debtor.
Hence, the cause of action is not on the instrument
but on an implied contract of reimbursement.
3. Right to contribution from other solidary
accommodation maker (Sadaya v. Sevilla, G.R. No.
L-17845, Apr. 27, 1967).
Accommodation party cannot raise the defense of
absence or want of consideration
An accommodation party who lends his name to
enable the accommodated party to obtain credit or
raise money is liable on the instrument to a holder for
value even if he receives no part of the consideration.
He assumes the obligation to the other party and
binds himself to pay the note on its due date. By
signing the note, the accommodation party thus
became liable for the debt even if he had no direct
personal interest in the obligation or did not receive
any benefit therefrom (Dela Rama v. Admiral United
Savings Bank, G.R. No. 154740, Apr. 16, 2008).
Holder for value may recover from an
accommodation party notwithstanding his
knowledge of such fact
This is so because an accommodation party is 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. The accommodation party is
liable to a holder for value as if the contract was not
for accommodation. It is not a valid defense that the
accommodation party did not receive any valuable
consideration when he executed the instrument. Nor
is it correct to say that the holder for value is not a
holder in due course merely because at the time he
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
acquired the instrument, he knew that the indorser indorsers liable if the payment against
was only an accommodation party (Ang Tiong v. Ting, party primarily liable immediate parties.
G.R. No. L-26767, Feb. 22, 1968). does not pay.

Accomodation made by a corporation MODES OF NEGOTIATION

The issue or indorsement of a negotiable paper by a Modes of negotiation

corporation without consideration and for the
accommodation of another is ultra vires. Hence, one 1. If payable to bearer- it is negotiated by mere
who has taken the instrument with knowledge of the delivery
accommodation nature thereof cannot recover 2. If payable to order- it is negotiated by the
against a corporation where it is only an indorsement of the holder completed by delivery
accommodation party (Crisologo-Jose v. CA, G.R. No. (NIL, Sec. 30).
80599, Sept. 15, 1989).
Delivery of negotiable instrument
NEGOTIATION
Delivery means transfer of possession, actual or
Negotiation constructive, from one person or another (NIL, Sec.
191).
Negotiation is the transfer of an instrument from one
person to another so as to constitute the transferee NOTE: Where the instrument is no longer in the possession
the holder thereof (Sec. 30). of the party whose signature appears thereon, there is a
prima facie presumption of a valid and intentional delivery
NOTE: A holder is the payee or indorsee of a bill or note, by him (NIL, Sec. 16).
who is in possession of it, or the bearer thereof (NIL, Sec.
191). Effect if a bearer instrument is negotiated by
indorsement and delivery
Methods of transferring an instrument
A bearer instrument, even when indorsed specially,
1. Issuance first delivery of the instrument may nevertheless be further negotiated by delivery,
complete in form to a person who takes it as a but the person indorsing specially shall be liable as
holder. indorser to only such holders as make title through
2. Negotiation his indorsement (once a bearer instrument, always a
3. Assignment transfer of the title to the bearer instrument) (NIL, Sec. 40).
instrument, with the assignee generally taking
only such title as his assignor has, subject to all NOTE: This rule applies only to instruments originally
defenses available against the assignor. payable to bearer. It does not apply to instruments
originally payable to order converted to bearer because the
only or last indorsement is in blank.
DISTINGUISHED FROM ASSIGNMENT
Q: A makes a promissory note payable to bearer and
Negotiation v. Assignment
delivers the same to B. B, however, endorses it to C
in this manner:
NEGOTIATION ASSIGNMENT
Non-negotiable
"Payable to C. Signed: B."
instrument may be
Only a negotiable
assigned absent any
instrument may be Later, C, without indorsing the promissory note,
prohibition against
negotiated. transfers and delivers the same to D. The note is
assignment written on
its face. subsequently dishonored by A. May D proceed
The transferee can against A for the note? (1998 Bar Question)
The transferee, if he is
have no better right
a HIDC may acquire A: Yes. D may collect from A. The note made by A is a
than his transferor; he
better rights than his bearer instrument. Where an instrument, payable to
merely steps into the
transferor. bearer, is indorsed, it may nevertheless be further
shoes of the assignor
negotiated by delivery. Despite the special
The holder can hold The transferee has no
indorsement made by B, the note remained a bearer
the drawer and the right of recourse for
instrument and can be negotiated by mere delivery.

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 36
 NEGOTIABLE INSTRUMENTS LAW
When C delivered and transferred the note to D, the
latter became a holder thereof. As such, D can
proceed against A.
Q: X executed a promissory note with a face value of
Php50,000.00, payable to the order of Y. Y indorsed
the note to Z, to whom Y owed Php30,000.00. If X
has no defense at all against Y, for how much may Z
collect from X? (2011 Bar Question)
A: Php 50,000.00, but with the obligation to hold
Php20,000.00 for Y's benefit.
Effect of assignment of a negotiable instrument
The transferee does not become a holder and he
merely steps into the shoes of the transferor. Any
defense available against the transferor is available
against the transferee (Salas v. CA, G.R. No. 76788
Jan. 22, 1990).
Effect of the delivery of an order instrument without
indorsement
The transfer operates as an ordinary assignment (NIL,
Sec. 49). The transfer vests in the transferee such title
as the transferor had therein and the transferee
acquires in addition the right to have the
indorsement of the transfereror.
NOTE: For the purpose of determining whether the
transferee is a HIDC, the negotiation takes effect at the
time when the indorsement is actually made.
KINDS OF INDORSEMENTS
Indorsement
It is the signing of the name of the indorser on the
instrument with the intent to transfer title to the
same.
Where the indorsement should be placed
1. On the instrument itself; or
2. On a separate piece of paper attached to the
instrument called allonge (NIL, Sec. 31)
Rules on indorsement
GR: Indorsement must be of the entire instrument
(NIL, Sec. 32).
XPN: When the instrument has been paid in part.
NOTE: Indorsement to two or more indorsees severally
does NOT operate as a negotiation of the instrument.
37
Different kinds of indorsement
1. Special (NIL, Sec. 34) Specifies the person to
whom or to whose order the instrument is to be
payable. Also known as specific indorsement or
indorsement in full.
NOTE: An instrument payable to bearer indorsed
specially may nevertheless be negotiated by delivery
(once a bearer always a bearer) (NIL, Sec. 40).
2. Blank (NIL, Sec. 34) Specifies no indorsee.
a. Instrument is payable to bearer and may be
negotiated by delivery;
b. May be converted to special indorsement by
writing over the signature of the indorser in
blank any contract consistent with the character
of indorsement (NIL, Sec. 35).
3. Restrictive (NIL, Sec. 36) When the instrument:
a. Prohibits further negotiation of the
instrument (it destroys the negotiability of the
instrument);
b. Constitutes the indorsee the agent of the
indorser; (NIL, Sec. 36)
c. Vests the title in the indorsee in trust for or
to the use of some persons.
NOTE: But mere absence of words implying power to
negotiate does not make an instrument restrictive.
4. Qualified (NIL, Sec. 38) Constitutes the indorser
a mere assignor of the title to the instrument
made by adding to the indorsers signature
words like, without recourse, sans recourse or at
the indorsees own risk (this serves as an
ordinary equitable assignment) (NIL, Sec. 38).
5. Absolute The indorser binds himself to pay:
a. Upon no other condition than failure of prior
parties to do so
b. Upon due notice to him of such failure
6. Conditional Right of the indorsee is made to
depend on the happening of a contingent event.
Party required to pay may disregard the
conditions (NIL, Sec. 39).
NOTE: The condition refers to the indorsement not on
the instrument itself.
7. Joint Indorsement made payable to 2 or more
persons who are not partners (NIL, Sec. 41).
NOTE: All of them must indorse unless the one
indorsing has authority to indorse for the others.
1. Irregular (NIL, Sec. 64) A person who,
not otherwise a party to an instrument,
places thereon his signature in blank
before delivery.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Facultative Indorser waives
presentment and notice of dishonor,
enlarging his liability and his indorsement.
10. Successive Indorsement to two persons or
more in succession.
NOTE: Any of them can indorse to effect negotiation of the
instrument.
Rights of an indorsee in a restrictive indorsement
1. To receive payment of the instrument;
2. To bring any action thereon that the indorser
could bring; and
3. To transfer his rights as such indorsee, where the
form of the indorsement authorizes him to do so
(Sec. 37, NIL).
NOTE: All subsequent indorsees acquire only the title of the
1st indorsee under the restrictive indorsement (Sec. 37,
NIL).
Effect of a qualified indorsement
A qualified indorsement does NOT destroy the
negotiability of the instrument. It only means that the
qualified indorser is NOT liable when the maker is
insolvent. A qualified indorser is liable only if the
instrument is dishonored by non-acceptance or
non-payment due to:
1. Forgery;
2. Lack of good title on the part of the indorser;
3. Lack of capacity to indorse on the part of the
prior parties; or
4. The fact that at the time of the indorsement,
the instrument was valueless or not valid at the
time of the indorsement which fact was known to
him.
Instances when the indorsement is considered only
as equitable assignment
1. Indorsement of only a part of the amount of the
instrument (NIL, Sec. 32)
2. In cases of qualified indorsement (NIL, Sec. 38)
3. Transfer of an instrument payable to order by
mere delivery (NIL, Sec. 49).
Joint indorsement
GR: All must indorse in order for the transaction to
operate as a negotiation (NIL, Sec. 41).
XPN: Only one of them may indorse in case the
1. Payees or indorsees are partners; and
2. Payee or indorsee indorsing has authority to
indorse for the others.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Effect of indorsing an instrument to a person as
cashier or other officers of a corporation
The negotiable instrument is deemed prima facie
payable to the corporation of which said person is
such an officer. It may be negotiated further by either
indorsement of the corporation or indorsement of
the officer (Sec. 42).
Date of indorsement
GR: Every negotiation is deemed prima facie to have
been effected before the instrument was overdue.
XPN: Except where an indorsement bears date after
the maturity of the instrument (Sec. 45).
Continuation of negotiable character
GR: An instrument negotiable in origin is always
negotiable until paid, which is still true even if the NI
was dishonored or is already overdue.
XPNs:
1. When the instrument has been restrictively
indorsed;
2. When discharged by payment or otherwise
(NIL, Sec. 47)
Striking out of an indorsement
The holder may, at any time, strike out any
indorsement which is not necessary to his title.
Indorser whose indorsement is struck out, and all
indorsers subsequent to him, are relieved from
liability on the instrument (Sec. 48).
Negotiation by a prior party
Where an instrument is negotiated back to a prior
party, such party may reissue and further negotiate
the same. But, he is not entitled to enforce payment
thereof against any intervening party to whom he
was personally liable (NIL, Sec. 50). However, he may
strike out the intervening indorsements because they
are not necessary for his title and he is liable to them
because of his initial indorsement (Sec. 48, NIL).
EX. A payee indorsed the instrument to B, then B
indorsed it to C, C to D, then D to B. B can further
negotiate the instrument. He may also strike out the
indorsement of C and D (Sundiang, 2014).
38
 NEGOTIABLE INSTRUMENTS LAW
Limitations on re-negotiation
In the following cases, a prior party cannot further
negotiate the instrument:
1. Where it is payable to the order of a third
person, and it has been paid by the drawer
(NIL, Sec. 121[a]).
2. Where it was made or accepted for
accommodation and has been paid by the
party accommodated (NIL, Sec. 121[b]).
3. In other cases, where the instrument is
discharged when acquired by a prior party
(NIL, Sec. 119[e])
. A holder is presumed to be a holder in due course
RIGHTS OF THE HOLDER
Holder
The payee or indorsee of a bill or note who is in
possession of it or the bearer thereof (NIL, Sec. 191).
Classes of holders
1. Holders in general (Simple Holders) (NIL, Sec. 51).
2. Holders for value (NIL, Sec. 26).
3. Holders in due course (NIL, Secs. 52, 57).
Rights of a holder in general
1. Right to sue
2. Right to receive payment (NIL, Sec. 51).
NOTE: If the payment is in due course, the instrument is
discharged.
HOLDER IN DUE COURSE (HIDC)
To be considered as a HIDC, the requisites under Sec.
52 of the NIL must be complied with. A HIDC takes a
NI under the following conditions: (COFI)
1. That is Complete and regular upon its face;
NOTE: Absence of the required documentary stamp
will not make the instrument incomplete (It is not a
requisite of negotiability under Sec. 1, NIL and it is not
a material particular under Sec. 125, NIL).
2. Became the holder before it was Overdue, and
without notice that it has been previously
dishonored, if such was the fact;
NOTE: If the instrument is payable on demand, the
date of maturity is determined by the date of
presentment, which must be made within a
reasonable time after its issue, if it is a note, or after
the last negotiation thereof, if it is a bill of exchange
(NIL, Secs. 71 and 143[a]).
39
Where the transferee receives notice of any infirmity in the
instrument or defect in the title of the person negotiating
the same before he had paid the full amount agreed to be
paid, he will be deemed a holder in due course only to the
extent of the amount paid by him (NIL, Sec. 54).
3. Took it in good Faith and for value;
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or defect in
the title of the person negotiating it. (Sec. 52, NIL)
NOTE: Knowledge of the agent is constructive knowledge to
the principal.
GR: Every holder is deemed prima facie to be a HIDC.
XPN: When it is shown that the title of any person
who has negotiated the instrument was defective. But
this is only as regards a party who became such after
the acquisition of the defective title (NIL, Sec.59).
Payment in due course
In order for payment to constitute payment in due
course, it must be made:
1. At or after the maturity of the instrument
2. To the holder thereof, in good faith and without
notice that his title is defective (NIL, Sec. 88).
Availability of rights to a party who derives his title
from a holder in due course
A holder who derives his title through a HIDC, and
who is not himself a party to any fraud or illegality
affecting the instrument has all the rights of such
former holder in respect to all parties prior to the
latter (NIL, Sec. 58).
Specifically, a holder is entitled to the following
rights:
1. Hold the instrument free from defenses available
to parties among themselves;
2. Hold the instrument free from any defect of title
of prior parties;
3. Receive payment;
4. Enforce payment of the instrument for the full
amount thereof against all parties liable; and
5. Sue
Shelter principle
Under the "shelter principle," the HIDC, by
negotiating the instrument, to a party not a HIDC,
transfers all his rights as such holder to the latter and
acquires the right to enforce the instrument as if he
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
was a holder in due course. The principle applies to a At the time it was negotiated to him, he had no
"sheltered" holder who is not a party to any fraud or notice of any infirmity in the instrument or defect in
illegality impairing the validity of the instrument. the title of the person negotiating it

That it is complete and regular upon its face INFIRMITY DEFECT

Refers to those that Refers to how he
An instrument is complete when it is not wanting in vitiate the instrument obtained the
any material particular and regular when there is no itself instrument or the
alteration apparent on the face of the instrument. signature thereto, as by
fraud, duress, or force
That he became the holder before it was overdue and fear, or other
unlawful means, or for
An overdue instrument is still negotiable, and an illegal consideration
although it is subject to defenses existing at the time or when he negotiates
of transfer. A negotiable instrument in circulation it in breach of faith, or
past its maturity date carries strong indication that it under any other
has been dishonored. An overdue instrument puts circumstances as
all person on notice that it might not have been paid amount to a fraud. (NIL,
because of a valid defense to such payment (De Leon, Sec. 55)
2010).
Instances when the title of a person (transferor) is
Without notice that it has been previously defective
dishonored, if such was the fact
1. In its acquisition When he obtained the
An instrument may be dishonored either by: instrument, or any signature thereto, by fraud,
1. Non-acceptance (refers to a bill of exchange) or duress, or force and fear, or other unlawful means, or
2. Non-payment for an illegal consideration.
2. In the negotiation When he negotiates it in
An overdue or dishonored instrument may still be breach of faith, or under such circumstances as
negotiated either by indorsement or by delivery to amount to a fraud (NIL, Sec. 55)
the same extent as before maturity. However, in case
of negotiation of an overdue instrument, the holder Notice of defect on the transferee
cannot be a holder in due course while in case of
negotiation of a dishonored instrument, the holder The person to whom it is negotiated must have had
without notice can be a holder in due course (De actual knowledge of such facts or knowledge of other
Leon, 2010). facts that his action in taking the instrument
amounted to bad faith (NIL, Sec. 56).
That he took it in good faith and for value
Effect of notice before the full amount is paid
Good faith is the holders well founded or honest
belief that the person from whom he received the Where the transferee receives notice of any
instrument was the owner thereof, with the right to infirmity in the instrument or defect in the title of the
transfer it (Duran v IAC, 138 SCRA 489). person negotiating the same before he has paid the
full amount agreed to be paid therefor, he will be
Value may be some right, interest, profit or benefit to deemed a holder in due course only to the extent of
the party who makes the contract or some the amount therefore paid by him (Sec. 54, NIL).
forbearance, detriment, loan, responsibility, etc. to
the other (BPI v. Roxas, G.R. No. 157833, October 15, Q: A drawer issued a check for the payment of a car,
2007). which check was delivered to the agent of the owner
of the car for safekeeping. The check was then used
by the agent to pay the medical bills of his wife in a
clinic. The projected purchase did not materialize. Is
the clinic considered a holder in due course?

A: No, the rule that a possessor of the instrument is

prima facie a HIDC does not apply to the clinic

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2014 GOLDEN NOTES 40
 NEGOTIABLE INSTRUMENTS LAW
because he cannot be said to have acquired the
negotiable instrument in good faith for there was a
defect in the title of the holder (agent), since the
instrument was not payable to the agent or to
bearer; also the drawer had no account with the
clinic, the agent did not show or tell the payee why
he had the check in his possession and why he was
using it for the payment of his own account.
As holders title was defective or suspicious, it cannot
be stated that the payee acquired the check without
knowledge of said defect in holders title, the
presumption that the clinic is a HIDC does not exist
(De Ocampo & Co. v. Gatchalian, G.R. No.
L-15126, Nov. 30, 1961).
Possession of a negotiable instrument after
presentment and dishonor
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 or
indorsers (STELCO Marketing Corp. vs. CA, G.R. No.
96160, June 17, 1992).
Q: Is a corporation to which four crossed checks
were indorsed by the payee corporation a holder in
due course and hence entitled to recover the
amount of the checks when the same had been
dishonored for the reason of payment stopped?
A: The checks were crossed checks and specifically
indorsed for deposit to payees account only. From
the beginning, the corporation was aware of the fact
that the checks were all for deposit only to payees
account. Clearly then, it could not be considered a
HIDC (Atrium Management Corp. v. CA, G.R. No.
109491, Feb. 28, 2001).
NOTE: Presence or absence of defect or infirmity must be
determined at the time the instrument was negotiated to
the holder.
Payee as holder in due course
There can be no doubt that a proper interpretation of
NIL as a whole leads to the conclusion that a payee
may be a holder in due course under the
circumstances in which he meets the requirements of
Sec. 52 (De Ocampo v. Gatchalian, supra).
Drawee as holder in due course
A drawee does not become a HIDC by simply paying a
bill. A holder refers to one who has taken the
instrument as it passes along in the course of
negotiation; whereas a drawee, upon acceptance and
41
payment, strips the instrument of negotiability and
reduces it to a mere voucher or proof of payment.
Instances when a person is deemed not a holder in
due course
1. A holder who acquires the instrument after its
date of maturity.
2. Where an instrument payable on demand is
negotiated for an unreasonable length of time
after its issue (Sec. 53, NIL).
NOTE: A note payable on demand is due when
payment is demanded. A check becomes overdue
when it is not presented for payment within a
reasonable time, usually 6 months from date the
thereof, afterwards, it becomes a stale check.
3. Where the instrument contains an acceleration
clause, knowledge of the holder at the time of
acquisition thereof that one installment or
interest, or both, is unpaid is a notice that it is
overdue.
NOTE: Where indorsement is not dated, it is deemed
prima facie to have been negotiated before the
instrument was overdue (NIL, Sec. 45). An overdue
instrument is still negotiable but it is subject to the
defenses existing at the time of the transfer.
Rights of a holder who is not a holder in due course
The rights of a holder not a HIDC are similar to an
assignee. The other rights are:
1. He may receive payment and if the payment is in
due course, the instrument is discharged
2. He is entitled to the instrument but holds it
subject to the same defenses as if it were
non-negotiable
3. He may sue on the instrument in his own name
(Sec. 51, NIL).
DEFENSES AGAINST THE HOLDER
Defenses against the holder
The defenses available against the holder are
classified as follows:
1. Real or Absolute Defenses those that are
attached to the instrument itself and are available
against all parties, both immediate and remote,
including holders in due course.
2. Personal or Equitable Defenses defenses which
are only available against a holder not in due course.
Those which grow out of the agreement or conduct
of a particular person which renders it inequitable for
him, though holding the legal title, to enforce it
against the party sought to be made liable.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Real defenses available against a holder (IM In Ultra. presentment, F learned that T is only 15 years old. F
AFForD PODIF) wants to recover from U but the latter insists that a
notice of dishonor must first be made, the
1. Incomplete and undelivered instrument instrument being a bill of exchange. Is he correct?
2. Minority (available only to the minor) (2011 Bar Question)
3. Incapacity as far as incapacitated persons are
concerned A: No, since F can treat U as maker due to the
4. Ultra vires acts of a corporation minority of T, the drawee.
5. Want of Authority, apparent and real
6. Fraudulent alteration NOTE: Where the drawee does not have the capacity to
7. Forgery contract, the holder may treat the bill as a PN (Sec. 130,
8. Duress amounting to Forgery NIL).
9. Prescription
10. Other infirmities appearing on the face of the LIABILITIES OF PARTIES
instrument
11. Discharge in insolvency Party primarily liable v. Party secondarily liable
12. Illegal Contract under the Negotiable Instruments Law
13. Fraud in Factum or Esse Contractus
PRIMARILY LIABLE SECONDARILY LIABLE
Personal defenses available against a holder Unconditionally
Conditionally bound
(InnocentS2 ADD FUn In Fraud) bound
Undertakes to pay only
1. Innocent alteration or spoliation after the ff. conditions
2. Discharge of party Secondarily liable by discharge have been fulfilled:
of prior party. 1. Due presentment for
3. Set-off between immediate parties payment or acceptance
Absolutely required
4. Filling up of blanks not in accordance with the to primary party
to pay the instrument
Authority given (Sec.143, NIL);
upon maturity
5. Acquisition of instrument by Duress or force and 2. Dishonor by such party
fear; unlawful means or for an illegal (Sec.70, NIL);
consideration 3. Taking of proceedings
6. Discharge by payment or renunciation or release required by law (Sec.152,
before maturity NIL)
7. Failure or absence of consideration.
8. Undelivered complete instrument Parties primarily liable
9. Insertion of a wrong date
10. Fraud in inducement or simple fraud 1. Maker of a promissory note;
2. Acceptor of a bill of exchange; and
NOTE: Fraud in factum exists in those cases in which a 3. Certifier of a check
person, without negligence, has signed an instrument, but
was deceived as to the character of the instrument and Parties secondarily liable
without knowledge of it, as where a note was signed by one
under the belief that he was signing as a witness to a deed.
This kind of fraud is a real defense because there is no 1. Drawer of a bill; and
contract since the person did not know what he was 2. Indorser of a note or a bill
signing. Fraud in inducement relates to the quality,
quantity, value or character of the consideration of the Person to whom the negotiable instrument should
instrument. Here, deceit is not in the character of the
be presented
instrument but in its amount or terms. This exists when a
person is induced to sign a note for the price of a worthless
stock which was fraudulently represented by the payee as NI should be presented for payment to the party
to its value. Such type of fraud is only a personal defense primarily liable (Sec. 72[d], NIL.):
because it does not prevent a contract (De Leon, The 1. Promissory note maker
Philippine Negotiable Instruments Law, Annotated, 2010 2. Bill of exchange drawee/acceptor
ed.).

Q: A bill of exchange has T for its drawee, U as

drawer, and F as holder. When F went to T for

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 NEGOTIABLE INSTRUMENTS LAW
The drawee is not liable for payment of a bill of dishonor be duly taken,
exchange he will pay the holder.
(Sec. 66, NIL.)
The mere issuance of a bill does not operate as an Irregular indorser
assignment of the funds in the hands of a drawee. a. In an order instrument,
The drawee must accept the instrument (thus, liable to the payee and all
becomes an acceptor) in order that he may be subsequent parties
primarily liable for the payment of a BOE. b. If bearer instrument or
payable to order of maker
Warranties and liabilities of parties who are or drawer, liable to all
secondarily liable parties subsequent to the
maker or drawer
ABSOLUTE LIABILITY LIMITED LIABILITY c. If he signs for
Drawer of a BOE Qualified Indorser accommodation of the
Warrants: Warrants that the: payee, liable to all parties
a. The existence of a. Instrument is subsequent to payee.
payee and his then genuine; (Sec. 64, NIL.)
capacity to indorse b. he has good title to
b. That the instrument it; MAKER
will be accepted or paid c. capacity to contract
upon due presentment of all prior parties; Maker
by the party primarily and
liable according to its d. no knowledge of The maker of a negotiable instrument, by making
tenor; and any fact which would such instrument:
c. That if dishonored, he impair the validity of 1. Engages that he will pay it according to its tenor,
will pay the party the instrument. and
entitled to be paid. (Sec. (Sec.65, NIL.) 2. Admits the existence of the payee and his then
61, NIL.) capacity to indorse (Sec. 60, NIL).
NOTE: He is liable to all
parties who derive their NOTE: The maker is liable the moment he makes the NI. His
title through his liability is primary and unconditional.
indorsement.
Q: On the right bottom margin of a PN appeared the
General indorser Person negotiating by signature of the corporations president and
delivery treasurer above their printed names with the phrase
a. Warrants that: Same warranties as a and in his personal capacity. The corporation
i. Instrument is qualified indorser. But failed to pay its obligation. Are the officers liable?
genuine unlike a qualified A: Yes, persons who sign their names on the face of
ii. He had good title indorser, a person promissory notes are makers and liable as such. The
to it negotiating by mere officers are co-makers and as such, they cannot
iii. All prior parties delivery is liable only to escape liability arising therefrom (Republic Planters
had capacity to his immediate Bank v. CA, G.R. No. 93073, Dec. 21, 1992).
contract transferee. (par. 2, Sec.
iv. Instrument, at 65, NIL.) DRAWER
the time of
indorsement, NOTE: Person negotiating Drawer
was valid and by mere delivery and a
subsisting; qualified indorsers
The drawer, by drawing the instrument:
secondary liability is
1. Admits the existence of the payee and his then
limited, namely, to their
b. On due presentment, it capacity to indorse; and
warranties
shall be accepted or paid, 2. Engages that on due presentment the instrument
or both according to its will be accepted or dishonored; and
tenor 3. That if the necessary proceedings on dishonor be
c. If the instrument is duly taken, he will pay the amount thereof to the
dishonored and the holder, or to any subsequent indorser who may be
necessary proceedings on compelled to pay it (Sec. 61, NIL).

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43 FACULTY OF CIVIL LAW
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Secondary liability of the drawer
The drawer is secondarily liable to the following:
1. The holder or
2. To any subsequent indorser who may be
compelled to pay it (ibid.).
The drawer may limit his liability to the holder
The drawer may insert in the NI an express stipulation
negativing or limiting his own liability to the holder
(ibid.).
Q: D draws a bill of exchange that states: One
month from date, pay to B or his order
Php100,000.00. Signed, D. The drawee named in
the bill is E. B negotiated the bill to M, M to N, N to
O, and O to P. Due to non-acceptance and after
proceedings for dishonor were made, P asked O to
pay, which O did. From whom may O recover?(2011
Bar Question)
A: D, being the drawer.
ACCEPTOR
Acceptor
The acceptor, by accepting the instrument:
1. Engages that he will pay the NI according to the
tenor of his acceptance; and
2. Admits the existence of the drawer, the
genuineness of his signature and his capacity and
authority to draw the instrument
3. Admits the existence of the payee and his then
capacity to indorse (Sec. 62, NIL).
Party who can accept the bill of exchange
maker engages to pay the negotiable instrument
according to the tenor of the bill itself.
Q: X draws a check against his current account with
Bonifacio Bank in favor of B. Although X does not
have sufficient funds, the bank honors the check
when it is presented for payment. Apparently, X has
conspired with the bank's bookkeeper so that his
ledger card would show that he still has sufficient
funds. The bank files an action for recovery of the
amount paid to B because the check presented has
no sufficient funds. Decide the case (1998 Bar
Question).
A: The bank cannot recover the amount paid to B for
the check. When the bank honored the check, it
became an acceptor. As acceptor, the bank became
primarily and directly liable to the payee/holder B.
The recourse of the bank should be against X and its
bookkeeper who conspired to make X's ledger show
that he has sufficient funds.
INDORSER
Indorser
A person placing his signature upon an instrument
otherwise than as maker or acceptor is deemed to be
an indorser, unless he clearly indicates by appropriate
words his intention to be bound in some other
capacity (Sec. 63, NIL).
NOTE: A person who places his indorsement on an bearer
instrument incurs all liabilities of an indorser (Sec. 67, NIL).
General indorser v. Irregular indorser (2005 Bar
Question)

GR: Only the drawee may accept. A stranger or General Indorser Irregular Indorser
volunteer is not bound by acceptance. Makes either a blank or Always makes a blank
special indorsement indorsement
XPN: In case of a bill which is accepted for honor
supra protest (Sec. 161, NIL). Indorses the Indorses before its
instrument after its delivery to the payee
NOTE: Drawee does not become liable until he accepts the delivery to the payee
instrument in which case he becomes an acceptor. An
acceptor engages to pay according to the tenor of his Liable only to parties Liable to the payee and
acceptance, which may not be the same as the tenor of the
subsequent to him subsequent parties
bill itself because the acceptance may be qualified.
unless he signs for the
accommodation of the
Difference between the liability of an acceptor or
payee in which case he
drawee-acceptor and a maker
is liable only to all
parties subsequent to
While both are primarily liable, the acceptor engages
the payee (Sec. 64, 66,
to pay the negotiable instrument according to the
NIL; De Leon, supra)
tenor of his acceptance. On the other hand, the

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 NEGOTIABLE INSTRUMENTS LAW
NOTE: The holder or subsequent indorser who tries to claim
under the instrument which had been dishonored for
"irregular indorsement" must not be the irregular indorser
himself who gave cause for the dishonor. (Gonzales v. Rizal
Commercial Banking Corporation, 508 SCRA 459)
Qualified indorser
A qualified indorser is a person who indorses without
recourse (Sec. 65, NIL).
Drawer v. Indorser
Drawer Indorser
Party only to a bill Party either a bill or
note
Makes admission as to No such admission
the existence of the
payee and his capacity
to indorse
Makes no warranties, Has warranties
but engages to pay
after certain conditions
are complied with
Order of liability among the indorsers
1. Among themselves Liable prima facie in the
order in which they indorse (Sec. 68)
2. To the holder In any order
NOTE: Every indorser is liable prima facie to all indorsers
subsequent to him, but not those indorsers prior to him
(Sec. 68, NIL)
Liability of an agent or broker who negotiates an
instrument without indorsement
He incurs all the liabilities prescribed to a general
indorser unless he discloses the name of his principal
and the fact that he is acting only as an agent (Sec.
69, NIL)
NOTE: Parol evidence is NOT admissible to relieve an agent
or broker whose endorsement brings him within the above
liability.
Q: Can a collecting bank debit the account of the
depositor when the checks indorsed to it (bank)
were forged?
A: Yes, because the depositor of a check as indorser
warrants that it is genuine and in all respect what it
purports to be. Thus, when the checks deposited had
forged indorsements and the collecting bank, as a
consequence of such forgery, was made to pay the
drawee bank, the collecting bank can debit the
account of the depositor for his breach of warranty
(Jai-Alai Corporation Of The Philippines v. BPI, G.R.
No. L-29432, Aug. 6, 1975).
Q: Phebean, the drawer issued a check to James.
James, subsequently indorsed it to Trude. When
Trude is about to encash the check, the drawee
Union Bank refused to encash it due to insufficiency
of funds. Trude sued James for payment of money.
James alleged that the suit should be dismissed
because Phebean is an indispensable party. Does
James argument hold water?
A: No, there is no privity between the drawer and the
holder. The drawer is merely secondarily liable. As
indorser, the buyer warranted that upon due
presentment, the checks were to be accepted or paid,
or both, according to their tenor, and that in case
they were dishonored, she would pay the
corresponding amount. 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 (Tuazon v. Heirs of Bartolome
Ramos, G.R. No. 156262, July 14, 2005).
Q: X is the holder of an instrument payable to him
(X) or his order, with Y as maker. X then indorsed it
as follows: Subject to no recourse, pay to Z. Signed,
X. When Z went to collect from Y, it turned out that
Y's signature was forged. Z now sues X for collection.
Will it prosper? (2011 Bar Question)
A: Yes, because X, as a qualified indorser, warrants
that the note is genuine.
WARRANTIES
The following are the warranties a person provides in
negotiating an instrument:
1. That the instrument is genuine and in all
respects what it purports to be
2. That he has good title to it
3. That all prior parties had capacity to contract
4. That he has no knowledge of any fact which
would impair the validity of the instrument or
render it useless.
NOTE: Indorsers liability as warrantor is distinct from his
liability to pay the instrument. Even a qualified indorser
may incur liability for breach of implied warranties. As
warrantor, his liability is unconditional.

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PRESENTMENT FOR PAYMENT 3. When dispensed with under Sec. 82, NIL such as:
a. Where, after the exercise of reasonable
Presentment for payment diligence, presentment cannot be made
b. Where the drawee is a fictitious person
It is the presentation of an instrument to the person c. By waiver of presentment, express or
primarily liable for the purpose of demanding and implied
receiving payment.
Rule if the instrument is, by its terms, payable at a
Manner of presentment special place

If the instrument is, by its terms, payable at a special

GR: Instrument must be exhibited to the person from
place, and the person primarily liable is able and
whom payment is demanded; when paid, it must be
willing to pay it there at maturity, such ability and
delivered to the person paying it (Sec. 74, NIL).
willingness are equivalent to a tender of payment
upon his part (Sec. 70, NIL).
XPNs: When exhibition is excused:
1. Debtor does not demand to see the instrument Requisites for a sufficient presentment for payment
and refuses payment on some other grounds; or
2. Instrument is lost or destroyed. Presentment for payment, to be sufficient, must be
made:
Liability of a bank paying a certificate of deposit 1. By the holder, or his agent authorized to receive
payable to bearer without requiring its surrender payment on his behalf;
2. At a reasonable hour on a business day;
The bank remains liable to the holder if it paid the 3. At a proper place;
certificate of deposit payable to bearer without 4. To the person primarily liable, or if he is absent or
requiring its surrender (Far East Bank & Trust inaccessible, to any person found at the place
Company v. Querimit, G.R. No. 148582, Jan. 16, where the presentment is made (Sec. 72, NIL).
2002). Time for presentment for payment
Payee cannot claim payment for a promissory note INSTRUMENT TIME FOR PRESENTMENT
which was stolen and as such is not in his possession GR: On the day it falls due (Sec.
85, NIL)
To make presentment for payment, it is necessary to
exhibit the instrument, which he cannot do because XPN: If the due date falls on a
Payable at a
he is not in possession thereof. Saturday, presentment must be
fixed or
determinable made on the next Monday.
NECESSITY OF PRESENTMENT FOR PAYMENT
future time
NOTE: If presentment for payment is
Instance when presentment for payment is made before maturity, it will not
necessary result to a discharge of the
instrument (Sec. 50, NIL).
Presentment for payment is only necessary to charge Promissory
Within a reasonable time after
persons secondarily liabledrawer and indorsers note payable
its issue.
(Sec. 70, NIL). on demand
Within a reasonable time after
NOTE: Presentment for payment is not necessary in order the last negotiation thereof (Sec.
to charge the person primarily liable on the instrument. 71, NIL).

Instance when presentment for payment is not NOTE: Last negotiation means the
necessary to charge persons secondarily liable Bill of last transfer for value. Subsequent
exchange transfers between banks for
1. As to drawer, where he has no right to expect or payable on purposes of collection are not
negotiations within Sec. 71.
require that the drawee or acceptor will pay the demand
instrument (Sec. 79, NIL). Reasonable time means not more
2. As to indorser where the instrument was made or than 6 months from the date of
accepted for his accommodation and he has no issue. Beyond said period, the check
reason to expect that the instrument will be paid becomes stale and valueless and
if presented (Sec. 80, NIL). thus, should not be paid.

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 NEGOTIABLE INSTRUMENTS LAW
NOTE: Every NI is payable at the time fixed therein without 5. At his Last known place of business or residence
grace. (Sec. 73, NIL).

Rules on presentment for payment when maturity Time of presentment where the instrument is
date is fixed payable at a bank

TIME OF MATURITY WHEN TO PRESENT Presentment must be made during banking hours,
OF INSTRUMENT FOR PAYMENT unless the person to make payment has no funds
On a Sunday or On the next there to meet it at any time during the day, in which
holiday succeeding business case presentment at any hour before the bank is
day closed on that day is sufficient (Sec. 75, NIL.)
On a Saturday On the next
succeeding business Requisites of payment in due course
day
If instrument which Before 12:00 noon on Payment is made in due course when (MHG)
falls due on a Saturday Saturday, or on 1. It is made at or after the date of Maturity;
is payable on demand Monday, at the option 2. To the Holder thereof;
of the holder 3. In Good faith and without notice that holders
title is defective (Sec. 88, NIL).
Instances when delay in making presentment is
excused NOTE: The term in good faith refers to the maker or
acceptor and not to the holder.
1. When caused by circumstances beyond the
control of the holder; and PARTIES TO WHOM PRESENTMENT FOR PAYMENT
2. Not imputable to his default, misconduct, or SHOULD BE MADE
negligence (Sec. 81, NIL).
Parties to whom presentment for payment should
NOTE: Only the delay in presentment is excused and not be made
the presentment itself. Hence, as soon as the cause of delay
ceases to operate, presentment must be made with GR: Presentment for payment must be made to the
reasonable diligence (ibid.). primary party; to the:
1. The maker in case of a promissory note, or
Q: Is the bank liable to the payee for depositing and 2. The acceptor in case of an accepted bill. If the
encashing the crossed checks to an unauthorized bill of exchange or check is payable on demand,
person? the presentment must be made to the drawee
although he is not automatically liable on the
A: Yes, the effects of crossing a check relate to the bill.
mode of its presentment for payment. Under Sec. 72
of the NIL, presentment for payment, to be sufficient, XPNs: Where the person/s primarily liable is/are:
must be made by the holder or by some person 1. Dead payment must be made to his personal
authorized to receive on his behalf. The checks here representative (Sec. 76, NIL).
had been crossed and issued for payees account 2. Liable as partners and no place of payment
only. This only signifies that the drawer had specified payment may be made to any of them
intended the same for deposit only by the person though there has been a dissolution of the firm (Sec.
indicated (Associated Bank v. CA, G.R. No. 89802, 77, NIL).
May 7, 1992). 3. Several persons, not partners, and no place of
payment is specified payment must be made to all
Order of preference with regard to the place of of them (Sec. 78, NIL).
presentment 4. If the person primarily liable is absent or
inaccessible, then presentment must be made to any
1. Specified place in the instrument person of sufficient discretion at the proper place of
2. Address of the person to make the payment if presentment (Sec. 72[d], NIL).
given in the instrument
3. Usual place of business or residence of the
person to make the payment
4. Wherever he can be found; or

UNIVERSITY OF SANTO TOMAS

47 FACULTY OF CIVIL LAW
 MERCANTILE LAW
DISPENSATION WITH PRESENTMENT OF PAYMENT NOTICE OF DISHONOR

Effect when presentment is not made Notice of dishonor

GR: Drawer and the indorsers are discharged from It is a notice given by the holder to the parties
their secondary liability. secondarily liable, drawer and each indorser, that the
instrument was dishonored by non-payment or
XPNs: non-acceptance by the drawee/maker.
1. Presentment for payment is not required to charge
drawer and indorser when: NOTE: Persons primarily liable need not be given notice of
a. Drawer- when he has no right to expect or dishonor because they are the ones who dishonored the
instrument.
require that the drawee or acceptor will pay the
instrument (Sec. 79, NIL).
b. Indorser When the NI was made or accepted Purposes for requiring notice of dishonor
for his accommodation and he has no reason to
1. To inform parties secondarily liable that the
expect that the instrument will be paid if
presented (Sec. 80, NIL). maker or acceptor has failed to meet his
engagement.
2. To advise them that they are required to make
2. When presentment for payment is dispensed with
payment.
under Sec. 82, NIL
3. When the BOE has been dishonored by
non-acceptance, since no PP for is necessary (Sec. Q: Notice of dishonor is not required to be made in
all cases. One instance where such notice is not
151, NIL).
necessary is when the indorser is the one to whom
the instrument is supposed to be presented for
Instances when presentment for payment may be
payment. The rationale here is that the indorser
dispensed with
(2011 Bar Question)
1. Where, after the exercise of reasonable
A: Already knows of the dishonor and it makes no
diligence, presentment cannot be made;
sense to notify him of it.
2. Where the drawee is a fictitious person; or
3. By waiver of presentment, express or implied
Time and place of giving the notice of dishonor
(Sec. 82, NIL).
1. GR: As soon as instrument was dishonored (Sec.
DISHONOR BY NON-PAYMENT
102, NIL.)Party is allowed one entire day for the
purpose of giving notice.
Instances when an instrument is dishonored by
non-payment
XPN: Delay is excused (Sec. 113, NIL).
NON-PAYMENT UPON NON-PAYMENT
NOTE: An instrument cannot be dishonored by
DUE PRESENTATION W/OUT non-payment until after the maturity.
PRESENTATION
The instrument is duly Presentment is 2. Parties reside in the same place
presented for excused and the a. Place of business Before close of business
payment to party instrument is overdue hours on the day following
primarily liable and it and unpaid (Sec. 83, b. Residence Before the usual hours of rest on
is either refused or NIL). the day following
cannot be obtained c. By mail Deposited in the post office in time
to reach him in the usual course on the day
Effect of dishonor by non-payment following (Sec. 103, NIL)

Subject to the provisions of the law, when the
instrument is dishonored by non-payment, an
immediate right of recourse to all parties secondarily
liable thereon accrues to the holder (Sec. 84, NIL).
3. Parties reside in different places
a. By mail Deposited in the post office in time
to go by mail (actual departure in the course of
mail from the post office in which the notice was
deposited) the day following the day of
dishonor.

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 48
 NEGOTIABLE INSTRUMENTS LAW
b. If no mail At a convenient hour (of the
sender) on that day, by the next mail thereafter
c. Other than by post office (e.g. personal
messenger) Within the time that notice would
have been received in due course of mail, if it
has been deposited in the post office within the
time specified in (a) (Sec. 104, NIL).
4. Time of notice to antecedent parties Same time
for giving notice that the holder has after the
dishonor (Sec. 107, NIL).
NOTE: Actual receipt of the party within the time specified
by law is sufficient though not sent in the places specified
above (Sec. 108, NIL).
Instances when a negotiable instrument is
considered dishonored
A. For BOE,
1. If not accepted when presented for
acceptance; or
2. If presentment for acceptance is excused and
the bill is not accepted (Sec. 149, NIL).
B. For PN,
1. Not paid (that is, payment is refused or not
obtained) when presented for payment at
maturity; or
2. Where presentment is excused or waived and
the instrument is overdue and unpaid (Sec. 83,
NIL).
Liability of a person secondarily liable when the
instrument is dishonored
After the necessary proceedings for dishonor had
been duly taken, an immediate right of recourse to all
parties secondarily liable thereon accrues to the
holder (Sec. 84).
PARTIES TO BE NOTIFIED
Parties to whom notice must be given
Notice of dishonor should be given to:
1. The drawer; or
2. Indorser; or
3. His agent (Sec. 97, NIL)
4. Where party is dead to a personal
representative or sent to the last residence or
last place of business of the deceased (Sec. 98,
NIL)
5. When the parties to be notified are partners
notice to any one partner though there has been
a dissolution (Sec. 99, NIL)
49
6. Notice to joint parties who are not partners
must be given to each of them (Sec. 100, NIL)
7. Where a party has been adjudged a bankrupt
to the party himself or to his trustee or assignee
(Sec. 101, NIL)
Parties to whom the notice of dishonor should be
given in case the instrument was dishonored in the
hands of the agent
1. To the parties secondarily liable Within the
time fixed by Secs. 102-104, and 107, otherwise, they
are discharged
2. To his principal The principal must give notice
to parties secondarily liable as if his agent were an
independent holder (Sec. 94, NIL).
NOTE: A party who receives notice of dishonor is entitled to
give notice of such dishonor to prior parties within the
same period of time that the holder has after the dishonor,
as if he were the said holder (Sec. 107, NIL).
PARTIES WHO MAY GIVE NOTICE OF DISHONOR
1. Holder
2. Another in behalf of the holder
3. Any party to the instrument, who may be
compelled to pay and who, upon taking it up,
would have a right to reimbursement from the
party to whom notice is given (Sec. 90, NIL)
EFFECT OF NOTICE
Effect of notice of dishonor if given by or on behalf
of the holder
Notice of dishonor inures to the benefit of:
1. All holders subsequent to the holder who has
given notice; and
2. All parties prior to the holder but subsequent to
the party to whom notice has been given and
against whom they may have a right of recourse
(Sec. 92, NIL)
Effect of notice of dishonor if given by party entitled
thereto
Notice of dishonor inures to the benefit of:
1. The holder; and
2. All parties subsequent to the party to whom
notice is given (Sec. 93, NIL).
Effect of failure to give notice of dishonor
Any drawer or indorser to whom such notice is not
given is discharged (Sec. 89, NIL)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NOTE: Holder is not required to notify all indorsers, he may
select to hold only one or more indorsers. Indorsers who
are discharged from liability by reason that no notice of
dishonor was given to them is still liable for breach of
warranties as to the NI.
FORM OF NOTICE
Form and contents of a notice of dishonor
1. Oral; or
2. In writing
3. It may be given by personal delivery, or by mail
(Sec. 96, NIL)
4. Must contain the following:
a. Description of the instrument;
b. Statement that it has been presented for
payment or for acceptance and that it has
been dishonored (If protest is necessary,
notice must also contain a statement that it
has been protested).
c. Statement that the party giving the
notice intends to look for the party
addressed for payment.
NOTE: A written notice need not be signed, and an
insufficient notice may be supplemented or validated by
verbal communication. A misdescription of the instrument
does not vitiate the notice unless the party to whom the
notice is given is in fact misled thereby (Sec. 95, NIL).
WAIVER
Waiver of notice
It is the willingness on the part of the drawer or
indorser to be bound as such even without due notice
of dishonor.
Time when a waiver of notice may be given
1. Before the time of giving notice has arrived; or
2. After the omission to give due notice (Sec.
109,NIL).
Ways to give a waiver of notice
It can either be:
1. Express; or
2. Implied (e.g. Payment by an indorser after he
learns of the default of the maker; admission of
liability after dishonor) (Sec. 109, NIL).
Parties affected by the waiver of notice
1. All parties (if embodied on the face of the
instrument); or
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
2. Particular indorser (if written above the
signature of such indorser) (Sec. 110, NIL).
Waiver of protest
It is the waiver of the formal instrument executed
usually by a notary public certifying that the legal
steps necessary to fix the liability of the drawee and
the indorsers have been taken. Thus, it is deemed to
be a waiver not only of a formal protest but also of
presentment and notice of dishonor (Sec. 111, NIL).
DISPENSATION WITH NOTICE
Instances when notice of dishonor is not necessary
1. Waiver of notice (Sec. 109, NIL)
2. Waiver of protest (Sec. 111, NIL)
3. When notice is dispensed with when after
exercise of reasonable diligence, notice cannot be
given or does not reach the parties sought to be
charged (Sec. 112, NIL)
4. Drawer in cases under Sec. 114, NIL.
5. Indorser in cases under Sec. 115, NIL.; and
6. Where due notice of dishonor by non-acceptance
has been given (notice of dishonor by
non-payment not necessary). (Sec. 116, NIL.)
Instances when a notice of dishonor to the drawer
may be dispensed with
1. When drawer and drawee is the same person
2. Drawee is fictitious or does not have the capacity
to contract
3. Drawer is the person to whom the instrument is
presented for payment (he is the one who
dishonored the instrument)
4. Drawer has no right to expect or require that the
drawee or acceptor will honor the instrument.
5. Drawer has countermanded the payment (e.g.
stop payment order) (Sec. 114, NIL.)
NOTE: The holder of two checks which were dishonored
because the drawer withdrew her funds from the bank can
hold the drawer liable even if no notice of dishonor was
given to the drawer, since the drawer had no right to
expect that the drawee bank would honor the checks.
(State Investment House, Inc. vs. Court of Appeals, 217
SCRA 32)
Q: P authorized A to sign a negotiable instrument in
his (Ps) name. It reads: Pay to B or order the sum
of Php1 million. Signed, A (for and in behalf of P).
The instrument shows that it was drawn on P. B
then indorsed to C, C to D, and D to E. E then treated
it as a bill of exchange. Is presentment for
50
 NEGOTIABLE INSTRUMENTS LAW
acceptance necessary in this case? (2011 Bar
Question)
A: No, since the drawer and drawee are the same
person.
Q: Juben issued to Y two post-dated checks as
security for pieces of jewelry to be sold. Y
negotiated the check to S. When Juben failed to sell
the jewelry, he withdrew all his funds from the
drawee bank. After dishonor, Juben contends that
the holder failed to give him a notice of dishonor. Is
notice of dishonor necessary?
A: No, Juben was responsible for the dishonor of his
checks, hence, there was no need to serve him notice
of dishonor (State Investment House, Inc. v. CA, G.R.
No. 101163, Jan. 11, 1993).
Instances when it is not necessary to give a notice of
dishonor to the indorser
1. Drawee is fictitious or has no capacity to
contract, and indorser was aware of these facts
at the time he indorsed the instrument;
2. Indorser is person to whom the instrument is
presented for payment; or
3. Instrument was made or accepted for his
accommodation (Sec. 115, NIL).
EFFECT OF FAILURE TO GIVE NOTICE
Effect of the omission of a previous holder to give
notice of dishonor by non-acceptance
It does not prejudice the rights of a holder in due
course subsequent to the omission to present the
instrument to the drawee for acceptance and notify
the drawer and indorsers if acceptance is refused
(Sec. 117, NIL).
Effect of failure to give notice of dishonor
GR: Any person to whom such notice is not given is
discharged, but he will still be liable for breach of
warranties pertaining to the instrument.
XPNs:
1. Waiver (Sec. 109, NIL)
2. Notice is dispensed with (Sec. 112, NIL)
3. Not necessary to drawer (Sec. 114, NIL)
4. Not necessary to indorser (Sec. 115, NIL)
51
Effect of lack of notice of dishonor on the
instrument which is payable in installments
1. No acceleration clause Failure to give notice of
dishonor on a previous installment does not
discharge drawers and indorsers as to succeeding
installments.
2. With acceleration clause It depends upon
whether the clause is automatic or optional.
a. Automatic failure to give notice of dishonor as
to a previous installment will discharge the
persons secondarily liable as to the succeeding
installments;
b. Optional if not exercised, the rule would be
the same as if there is no acceleration clause. If
exercised, the rule would be the same as if the
installment contains an automatic acceleration
clause (Town Savings Bank v. CA, G.R. No. 106011,
June 17, 1993).
DISCHARGE OF NEGOTIABLE INSTRUMENT
It is the release of all parties, whether primary or
secondary, from the obligations arising thereunder. It
renders the instrument without force and effect, and
consequently, it can no longer be negotiated.
DISCHARGE OF NEGOTIABLE INSTRUMENT
Methods for discharge of instrument
1. Payment by principal debtor:
a. By or on behalf of principal debtor
b. At or after its maturity
c. To the holder thereof
d. In good faith and without notice that the
holders title is defective
2. Payment by accommodated party
3. Intentional cancellation of instrument by the
holder (by expressly stating it in the instrument
or when the instrument is torn up, burned or
destroyed)
4. Any act which discharges a simple contract for
the payment of money under Art. 1231 of the
NCC specifically remission, novation, and merger.
NOTE: Loss of the negotiable instrument will not extinguish
liability; compensation is not available so long as an
obligation is evidenced by a negotiable instrument
(Commercial Law Review, Villanueva, 2009 Edition).
5. Reacquisition by principal debtor in his own right.
Reacquisition must be:
a. By the principal debtor
b. In his own right
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
c. At or after date of maturity (instrument is
discharged; if made before, it may be
renegotiated) (Sec. 119, NIL).
DISCHARGE OF PARTIES SECONDARILY LIABLE
Methods of discharge of secondary parties (ACS
TReE)
1. Any Act which discharges the instrument;
2. Intentional Cancellation of his signature by the
holder
3. Discharge of prior party which may be made
when signature is Stricken out
4. Valid Tender of payment by a prior party;
5. Release of the principal debtor, unless holder
expressly reserves his right of recourse against
the said subsequent parties
6. Extension of time of payment, unless:
a. Extension is consented to by such party
b. Holder expressly reserves his right of
recourse against such party (Sec. 120, NIL)
Q: The rule is that the intentional cancellation of a
person secondarily liable results in the discharge of
the latter. With respect to an indorser, the holder's
right to cancel his signature is: (2011 Bar Question)
A: Limited to the case where the indorsement is not
necessary to his title.
Effects of payment by persons secondarily liable
1. Instrument is not discharged
2. It only cancels his own liability and that of the
parties subsequent to him
3. GR: Instrument may be renegotiated
XPNs:
a. Where it is payable to the order of a third person,
and has been paid by the drawer; and
b. Where it is paid by the accommodated party
NOTE: (a) and (b) has the same effect as payment by
the party primarily liable.
4. Person paying is remitted to his former rights (as
regards prior parties) and he may strike out his own
and all subsequent indorsements (Sec. 121, NIL).
RIGHTS OF A PARTY WHO DISCHARGED THE
INSTRUMENT
GR: The party so discharging the instrument is
remitted to his former rights as regards all prior
parties, and he may strike out his own and all
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
subsequent indorsements, and again negotiate the
instrument.
XPNs:
1. Where it is payable to the order of a third
person, and has been paid by the drawee; and
2. It was made or accepted for accommodation,
and has been paid by the party accommodated.
RENUNCIATION BY HOLDER
Renunciation
It is the act of surrendering a claim or right with or
without recompense (a PERSONAL defense).
Manner of making renunciation by the holder
1. Must be written
2. If oral, the instrument must be surrendered to
the person primarily liable (Sec. 122, NIL).
Effects of renunciation
1. Made in favor of principal debtor made at or
after the maturity (made absolutely and
unconditionally) of the instrument discharges the
instrument (Sec. 122, NIL).
2. Made in favor of a secondary party may be made
by the holder before, at or after maturity discharges
only the secondary parties and all subsequent to him
(Sec. 122, NIL).
3. Renunciation does not affect the rights of a
holder in due course without notice (Sec. 120, NIL)
Rule regarding the cancellation of an instrument
It is presumed intentional. It is inoperative if
unintentional, or under a mistake or without the
authority of the holder. But where an instrument or
any signature appears to have been cancelled, the
burden of proof lies on the party alleging that the
cancellation was made unintentionally, or under a
mistake or without authority (Sec. 123, NIL).
52
 NEGOTIABLE INSTRUMENTS LAW
MATERIAL ALTERATION
CONCEPT
Material alteration
It is any change in the instrument which affects or
changes the liability of the parties in any way.
Instances that constitute material alteration
Any alteration which changes:
1. Date
2. Sum payable, either for principal or interest
3. The time or place of payment
4. Number or the relations of the parties
5. Currency in which payment is to be made
6. Adds a place of payment where no place is
specified
7. Any other change or addition which alters the
effect of the instrument (Sec. 125, NIL.)
NOTE: The change in the date of indorsement is not
material where the date is not necessary to fix the maturity
of the instrument.
Spoliation
It refers to material alteration of an instrument done
by a stranger. It has the same effect as alteration.
EFFECT OF MATERIAL ALTERATION
Effect of material alteration of a negotiable
instrument without the assent of all parties liable
thereon
1. Avoids the instrument except against:
a. A party who has made the alteration;
b. A party who authorized or assented to the
alteration; or
c. The indorsers who indorsed subsequent to
the alteration (because of their warranties).
2. If negotiated to a HIDC, he may enforce the
payment thereof according to its original tenor
against the person not a party to the alteration. He
may also enforce payment thereof against the party
responsible for the alteration for the altered amount.
3. If negotiated to a holder not a HIDC, he cannot
enforce payment against the person not a party prior
to the alteration. He may, however enforce payment
according to the altered tenor from the person who
caused the alteration and from the indorsers (Sec.
124 NIL)
53
Q: Can a drawee who accepts a materially altered
check recover from the holder and the drawer?
(2011 Bar Question)
A: No, he cannot recover from either of them.
There is no material alteration when the serial
number of a check had been altered
An alteration is said to be material if it alters the
effect of the instrument. It means an unauthorized
change in an instrument that purports to modify in
any respect the obligation of a party or an
unauthorized addition of words or numbers or other
change to an incomplete instrument relating to the
obligation of a party. The alteration of the serial
number of a check did not change the relations
between the parties nor the effect of the instrument.
Hence, the alteration on the serial number of a check
is not a material alteration (International Corporate
Bank vs. CA, G.R. No. 141968, Feb. 12, 2001).
Q: A material alteration of an instrument without
the assent of all parties liable thereon results in its
avoidance, except against: (2011 Bar Question)
A: A party who has made, authorized or assented to
the alteration and subsequent indorser.
ACCEPTANCE
DEFINITION
Acceptance of a bill
It is a signification by the drawee of his assent to the
order of the drawer (Sec. 132, NIL).
Requisites for acceptance
1. In writing, except constructive acceptance and to a
foreign bill payable in another state (unless the other
state requires for written acceptance);
2. Signed by the drawee (without it, he is not liable);
3. Must express a promise to pay money (not goods);
4. Delivered to the holder (before delivery or
notification, acceptor may revoke or cancel his
acceptance).
Effect of acceptance
Upon acceptance, the bill, in effect becomes a note.
The drawee who thereby becomes an acceptor
assumes the liability of the maker (who has primary
liability) and the drawer, that of the first indorser.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: A bill of exchange states on its face: One (1)
month after sight, pay to the order of Mr. R the
amount of Php50,000.00, chargeable to the account
of Mr. S. Signed, Mr. T. Mr. S, the drawee, accepted
the bill upon presentment by writing on it the words
I shall pay Php30,000.00 three (3) months after
sight. May he accept under such terms, which
varies the command in the bill of exchange? (2011
Bar Question)
A: Yes, since a drawee is allowed to effect a qualified
acceptance in which case he shall be liable according
to the tenor of his acceptance.
Q: X, drawee of a bill of exchange, wrote the words:
Accepted, with promise to make payment within
two days. Signed, X. The drawer questioned the
acceptance as invalid. Is the acceptance valid?
A: Yes, because the acceptance is in reality a clear
assent to the order of the drawer to pay. Qualified
acceptance as to time is allowed (Sec. 141 [d], NIL).
MANNER
Manner of making an acceptance
Acceptance may be made
1. On the bill itself,
2. On a separate paper; and if on a separate paper
a. It may be acceptance as to an existing bill; or
b. it may be acceptance as to a non-existing bill.
If the bill is non-existent, the acceptance on a
separate paper must comply with following
requirements:
1. The contemplated drawee shall describe the bill to
be drawn and promise to accept it.
2. Bill shall be drawn within a reasonable time after
such promise is written; and
3. The holder shall take the bill upon the credit of the
promise.
Kinds of acceptance
1. General Acceptance - It assents without
qualification to the order of the drawer (Sec. 139,
NIL).
2. Qualified Acceptance - An acceptance which in
express terms varies the effect of the bill as drawn
(ibid.).
NOTE: A holder may refuse to accept a qualified acceptance
and if he does not obtain an unqualified acceptance, he
may treat the bill as dishonored by non-acceptance (Sec.
142, NIL).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Kinds of qualified acceptance
1. Conditional makes payment by the acceptor
dependent on the fulfillment of a condition therein
stated.
2. Partial an acceptance to pay part only of the
amount for which the bill is drawn.
3. Local an acceptance to pay only at a particular
place.
4. Qualified as to time a bill is accepted to be paid on
or after a specified date.
5. As to drawee - acceptance of some one or more of
the drawees but not of all (Sec. 141, NIL).
Other kinds of acceptance
1. Constructive/implied (Sec. 137, NIL).
a. Drawee to whom the bill is delivered for
acceptance destroys it; or
b. Drawee refuses, within 24 hours after such
delivery, or within such time as is given him, to
return the bill accepted or non-accepted
2. Extrinsic the acceptance is written on a paper
other than the bill itself. To be binding upon the
acceptor:
a. Acceptance must be shown to the person to
whom the instrument is negotiated; and
b. Such person must take the bill for value on the
faith of such acceptance (Sec. 134, NIL).
3. Virtual
a. Unconditional promise in writing to accept a bill
b. Promise made before it is drawn
c. Any person who, upon faith thereof, receives
the bill for value (Sec. 135, NIL).
TIME FOR ACCEPTANCE
The drawer has 24 hours after presentment to decide
whether or not he will accept the bill. The
acceptance, if given, dates as of the day of
presentation (Sec. 136, NIL).
NOTE: Drawee bank is not entitled to 24 hours to decide
whether or not to pay a check since a check is presented for
payment, not acceptance.
RULES GOVERNING ACCEPTANCE
Effect of accepting an instrument with a qualified
acceptance
GR: When the holder takes a qualified acceptance the
drawer and indorsers are discharged from liability on
the bill.
NOTE: The holder may refuse to take a qualified acceptance
and if he does not obtain an unqualified acceptance, he
54
 NEGOTIABLE INSTRUMENTS LAW
may treat the bill as dishonored by non-acceptance
(Sudiang, 2014).
XPNs:
1. When they have expressly or impliedly authorized
the holder to take a qualified acceptance, or
2. Subsequently assent thereto
3. Implied assent (when they did not express their
dissent to the holder within a reasonable time when
they received a notice of qualified acceptance) (Sec.
142, NIL)
3. Where the bill is drawn payable elsewhere than
at the residence or place of business of the drawee
(par. 1, Sec. 143, NIL).
NOTE: The holder must either present it for acceptance or
negotiate it within a reasonable time, otherwise, the
drawer and all indorsers are discharged (Sec. 144, NIL).
TIME/PLACE/MANNER OF PRESENTMENT
Proper presentment for acceptance

NOTE: When the drawer or indorser receives notice of a It must be made:

qualified acceptance, he must, within a reasonable time, 1. By or on behalf of the holder
express his dissent to the holder or he will be deemed to 2. At a reasonable hour on a business day
have assented thereto (Sundiang, 2014).
3. Before the bill is overdue; and
4. To the drawee or some person authorized to
Acceptance of an incomplete bill accept or refuse to accept on his behalf (Sec. 145,
NIL).
Acceptance may be made before the bill has been
signed by the drawer or while otherwise incomplete,
WHEN PRESENTMENT MUST BE
or after it is overdue, or even after it has been
MADE TO
dishonored by non-acceptance or non-payment (Sec.
Bill addressed to All of them unless one has
138, NIL)
2 or more authority to accept or refuse
drawees who acceptance for all, in which
Effect of the certification by the drawee bank
are not partners case presentment may be
made to him only (Sec. 145,
Certification implies that the check is drawn upon
[a], NIL).
sufficient funds in the hands of the drawee, that they
Drawee is dead Drawee's personal
have been set apart for its satisfaction and that they
representative (Sec. 145, [b],
shall be so applied whenever the check is presented
NIL).
for payment. Where a check is certified by the bank
on which it is drawn, the certification is equivalent to NOTE: Presentment is merely
acceptance (Secs. 187, 189, NIL; New Pacific Timber v. permissive since it is excused by
Seneris, G.R. No. L-41764, Dec. 19, 1980). (Sec.148a).
Drawee is To drawee or his
PRESENTMENT FOR ACCEPTANCE adjudged a trustee/assignee (Sec 145,
bankrupt or [c], NIL).
Presentment for acceptance insolvent or has
made an
It is the production or exhibition of a bill of exchange assignment for
to the drawee for his acceptance or payment (also the benefit of
includes presentment for payment). creditors

Necessity of presentment for acceptance EFFECT OF FAILURE TO MAKE PRESENTMENT

GR: It is not necessary to render any party to the Effect of failure to make presentment for payment
bill liable (par. 2, Sec. 143, NIL). of a check within a reasonable time

XPNs: Failure to make such presentment will discharge the

1. Where bill is payable after sight, or when it is
necessary in order to fix the maturity of the
instrument
2. When bill expressly stipulates that it shall be
presented for acceptance; or
drawer from liability or to the extent of the loss
caused by the delay (Sec. 186, NIL; Republic of the
Philippines vs. PNB, G.R. No. L-16106, December 30,
1961).

UNIVERSITY OF SANTO TOMAS

55 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Instance when delay in presentment may be
excused
Where the holder of a bill drawn payable elsewhere
than at the place of business or the residence of the
drawee has no time with the exercise of reasonable
diligence, to present the bill for acceptance before
presenting it for payment on the day that it falls due
(Sec. 147, NIL).
Instances when presentment is excused
1. Where the drawee is dead, or has absconded, or is
a fictitious person not having capacity to contract by
bill;
2. Where, after exercise of reasonable diligence,
presentment cannot be made; or
3. Where, although presentment has been irregular,
acceptance has been refused on some other ground
(Sec. 148, NIL).
DISHONOR BY NON-ACCEPTENCE
Instances when a bill is dishonored by
non-acceptance
1. When it is duly presented for acceptance and such
an acceptance is refused or cannot be obtained; or
2. When presentment for acceptance is excused, and
the bill is not accepted (Sec. 149, NIL).
NOTE: It is not sufficient that presentment for acceptance is
excused, it is also necessary that the bill remains not
accepted.
Duty of the holder where bill is not accepted
If within 24 hours after due presentment, the bill is
not accepted, the person presenting it must treat the
bill as dishonored by non-acceptance otherwise he
will lose the right of recourse against the drawer and
indorsers (Sec. 150, NIL).
Rules when a bill is dishonored by non-acceptance
1. Right of recourse against all secondary party
accrues to the holder.
2. No presentment for payment is necessary since
dishonor of the instrument by non-payment is to be
expected.
3. If the instrument is accepted after it has been
dishonored by non-acceptance, presentment for
payment is necessary upon maturity.
4. In case of non-payment, holder must give the
corresponding notice of dishonor; otherwise,
secondary parties are discharged.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Rights of a holder when bill is not accepted
When a bill is dishonored by non-acceptance, an
immediate right of recourse against the drawer and
indorsers accrues to the holder, and no presentment
for payment is necessary (Sec. 151, NIL).
Acceptance for honor
It is an undertaking by a stranger to a bill after protest
for the benefit of any party liable thereon or for the
honor of the person for whose account the bill is
drawn which acceptance inures to the benefit of all
parties subsequent to the person for whose honor it
is accepted, and conditioned to pay the bill when it
becomes due if the original drawee does not pay it
(Sec. 161, NIL).
Requisites of acceptance for honor (WIS)
1. Must be in Writing
2. Must Indicate that it is an acceptance for honor
3. Must be Signed by the acceptor for honor (Sec.
162, NIL)
PROMISSORY NOTES
Promissory note
An unconditional promise in writing made by one
person to another, signed by the maker, engaging to
pay on demand, or at a fixed or determinable future
time, a sum certain in money to order or to bearer
(Sec. 184, NIL).
Special types of promissory notes
1. Certificate of deposit a written
acknowledgment by a bank of the receipt of money
on deposit on which the bank promises to pay to the
depositor or to him or his order or to some other
person or to him or his order, or to a specified person
or bearer, on demand or on a fixed date, often with
interest.
2. Bonds an evidence of indebtedness issued by a
public or private corporation which constitutes a
promise, under seal, to pay money. It runs for a
longer period of time than a PN.
3. Registered bond one payable only to the
person whose name appears on the face of the
certificate.
4. Coupon bond one to which are attached
coupons which entitle the holder to interest when
due.
5. Bank Note instrument issued by a bank for
circulation as money payable to bearer on demand.
56
 NEGOTIABLE INSTRUMENTS LAW
6. Due Bill - PN which shows on its face that one Check v. Bill of exchange
person acknowledges his indebtedness to another.
The word due is commonly used. Checks BOE
7. Mortgage Note an instrument secured by Drawee Always drawn May or may not
either a real (REM) or personal property (Chattel). on a bank or be drawn on a
8. Title-retaining Note an instrument used to banker against bank and need
secure the purchase price of goods. It ordinarily a previous not be drawn
provides that title to the goods shall remain in deposit of against a deposit
payees name until the note is paid in full. funds
9. Collateral Note it is used when the maker Payability Always payable Either payable on
pledges securities to the payee to secure the on demand demand or at a
payment of the amount of the note fixed or
10. Judgment Note this is a note to which a determinable
power of attorney is added enabling the payee to future time
take judgment against the maker without the (Sec.4)
formality of a trial if the note is not paid on its due Function Ordinarily Intended for
date (De Leon, supra). intended for circulation as
immediate instrument of
Instances when a bill of exchange may be treated as payment credit
a promissory note Present- Must be Must be
ment for presented for presented for
1. The drawer and the drawee are the same person; Payment payment payment within a
2. The drawee is a fictitious person; within a reasonable time
3. The drawee has no capacity to contract; reasonable after its last
4. The instrument is so ambiguous that there is time after its negotiation
doubt whether it is a bill or a note (Sundiang 2014, issue(Sec.186, (Sec. 171, NIL)
citing Secs. 17[e] and 130, NIL). NIL)
Discharge When a check They remain
CHECKS of Liability is accepted or liable despite
certified, the acceptance
DEFINITION drawer & (Sec. 84, NIL)
indorsers are
discharged
Check from liability
thereon (Sec.
It is a bill of exchange drawn on a bank and payable 188, NIL)
on demand (Sec. 185, NIL). Effect of Death of the Death of the
the Death drawer of a drawer of an
NOTE: A check must be presented for payment within a of the check with the ordinary bill does
reasonable time after its issue or the drawer will be Drawer knowledge of not revoke the
discharged from liability thereon to the extent of the loss the bank authority of the
caused by the delay. revokes the drawee to pay.
authority of
Essential characteristics of checks the bank to
pay.
There are 2 essential distinct characteristics of Present- Need not be Must be
checks: ment for presented for presented for
1. They are drawn on a bank; and Accep- acceptance acceptance in
2. Payable instantly on demand. tance (Sec. 185, NIL.) certain cases (Sec.
143, NIL.)

Q: A check was dishonored due to material

alteration. The creditor then filed an action against
drawee bank for the amount. Will the action
prosper?

UNIVERSITY OF SANTO TOMAS

57 FACULTY OF CIVIL LAW
 MERCANTILE LAW
A: No. If a bank refuses to pay a check
(notwithstanding the sufficiency of funds), the
payee-holder cannot, as provided under Sections 185
and 189 of the NIL, sue the bank. The payee should
instead sue the drawer who might in turn sue the
bank. This is so because no privity of contract exists
between the drawee-bank and the payee (Villanueva
v. Nite, G.R. No. 148211, July 25, 2006).
NOTE: A check of itself does not operate as an assignment
of any part of the funds to the credit of the drawer with the
bank, and the bank is not liable to the holder, unless and
until it accepts or certifies the check (Sec. 189, NIL).
Stopping payment
The drawer has the right to order the drawee to stop
payment of a check and this right flows from the rule
that the issuance of a check by itself is not an
assignment of funds by the drawee. If a bank pays a
check after it has been notified to stop payment, it
pays in its own responsibility and will not be
permitted to charge the account. The drawer may
countermand payment if he has a valid defense
against the holder of the check. Thus,
countermanding of a check is proper where the
payee failed to deliver the goods that he was
supposed to deliver (Sundiang 2014, citing Bataan
Cigar and Cigarette Factory v. CA).
KINDS
Special types of checks
1. Cashiers Check a BOE drawn by the bank upon
itself and is accepted at its issuance. It is usually
signed by the cashier of the bank.
2. Managers Check a BOE drawn by the bank
upon itself and is accepted at its issuance and signed
by a manager on behalf of a bank.
3. Certified Check Drawn by a depositor upon
funds to his credit in a bank which an officer of a bank
certifies will be paid on presentation.
4. Crossed Check Done by writing 2 parallel lines
on the left top portion of the check. The marking
signifies that the bank should pay only with the
intervention of the company only.
5. Memorandum Check A check with
Memorandum written on its face. The writing
signifies that the drawer engages to pay the bona fide
holder absolutely, without any condition concerning
its presentment
6. Travelers Checks Instruments purchased from
banks or express companies which can be used like
cash upon the second signature by the purchaser (De
Leon, supra, pg. 380-385).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Q: What is a crossed check? What are the effects of
crossing a check? Explain. (2005 Bar Question)
A: A crossed check is a check with two (2) parallel
lines, written diagonally on the upper right corner
thereof. It is a warning to the drawee bank that
payment must be made to the right party; otherwise
the bank has no authority to use the drawer's funds
deposited with the bank.
To be assured that it will avoid any mistake in paying
to the wrong party, banks adopted the policy that
crossed checks must be deposited in the payee's
account. When withdrawal is made, the banks can be
sure that they are paying to the right party. The
crossing becomes a warning also to whoever deals
with the said instrument to inquire as to the purpose
of its issuance. Otherwise, if something wrong
happens to the payment thereof, that person cannot
claim to be a holder in due course. Hence, he is
subject to the personal defense on the part of the
drawer that there is breach of trust committed by the
payee in not complying with the drawer's instruction.
Hence, 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;
3. That the act of crossing the check serves as a
warning to the holder that the check has been issued
for definite purpose so that he must inquire if he has
received the check pursuant to the purpose.
Otherwise, he is not a HIDC (State Investment House
v. IAC, 175 SCRA 310).
Purpose of crossing a check
The purpose is to insure payment to the payee. It
can only be deposited but may not be converted into
cash by the drawer. Crossing a check does not
destroy its negotiability but the check may be
negotiated only once to one who has an account
with the bank (De Ocampo v. Gatchalian, 3 SCRA
596).
Stale check
A check which has not been presented for payment
within a reasonable time after its issue. It is valueless
and thus, should not be paid. A check becomes stale
6 months from date of issue.
58
 NEGOTIABLE INSTRUMENTS LAW
When drawer of check discharged from liability

(a) The check is not presented within a reasonable

time after its issue;
(b) The drawer suffers loss; and
(c) The loss suffered by the drawer is attributable to
the delay (De Leon, 2010 p. 406)

Memorandum check

A memorandum check is an evidence of debt against

the drawer and although may not be intended to be
presented, has the same effect as an ordinary check
and if passed on to a third person, will be valid in his
hands like any other check (People v. Nitafan, G.R.
No. 75954, Oct. 22, 1992).

PRESENTMENT FOR PAYMENT

TIME

Time

A check must be presented for payment within a

reasonable time after its issue (Sec. 186, NIL).

EFFECTS OF DELAY

Effects of delay

1. The drawer will be discharged from liability

thereon to the extent of the loss caused by the delay.
(ibid.)
2. The indorser shall be discharged from liability (PNB
vs. Seeto, G.R. No. L-4388, August 13, 1952).

NOTE: PP is not dispensed with by Sec. 186 of the NIL.

Hence, if there is no PP, the drawer cannot be held
irrespective of the loss or injury suffered by the payee (Pio
Barretto Realty Corp. v. CA, G.R. No. 132362, June 28,
2001).

Q: When will the delivery of a check produce the

effect of payment even if the same had not been
encashed?

A: If the debtor was prejudiced by the creditor's

unreasonable delay in presentment. Acceptance of a
check implies an undertaking of due diligence in
presenting it for payment. If no such presentment
was made, the drawer cannot be held liable
irrespective of loss or injury sustained by the payee.
Payment will be deemed effected and the obligation
for which the check was given as conditional payment
will be discharged (Pio Barretto Realty Corp. v. CA,
supra).

UNIVERSITY OF SANTO TOMAS

59 FACULTY OF CIVIL LAW
 MERCANTILE LAW
INSURANCE LAW
Laws governing contracts of insurance in the
Philippines
1. R.A. 10607
2. New Civil Code
3. Special Laws
CONCEPT OF INSURANCE
Contract of insurance
It is an agreement whereby one undertakes for a
consideration to indemnify another against the loss,
damage or liability arising from an unknown or
contingent event (Sec. 2[a], Insurance Code).
NOTE: A contract of insurance, to be binding from the date
of application, must have been a completed contract (Perez
vs. CA, GR No. 112329, January 28, 2000). Thus, it must
have all the essential elements of a valid contract as
enumerated in Art. 1318 of the New Civil Code:
1. Subject matter in which the insured has an insurable
interest;
2. Consideration, which is the premium paid by the insured,
for the insurers promise to indemnify the former upon the
happening of the event or peril insured against;
3. Meeting of minds of the parties.
Doing an insurance business or transacting an
insurance business
The term doing an insurance business or
transacting an insurance business means: (ISRA)
1. Making or proposing to make, as Insurer, any
insurance contract;
2. Making or proposing to make, as Surety, any
contract of suretyship as a vocation and not as
merely incidental to any other legitimate business
or activity of the surety;
3. Doing any kind of business, including a
reinsurance business, specifically Recognized as
constituting the doing of an insurance business.
4. Doing or proposing to do any business in
substance equivalent to Any of the foregoing in a
manner designed to evade the provisions of the
Insurance Code.(Sec. 2[b], ibid).
NOTE: In the application of the provisions of the Insurance
Code, the fact that no profit is derived from the making of
the insurance contracts, agreements or transactions or that
no separate or direct consideration is received therefor,
shall NOT be deemed conclusive to show that the making
thereof does not constitute the doing or transacting of an
insurance business (Ibid).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Insurance as a uberrimae Fidei contract
The contract of insurance is one of perfect good faith
(uberrimae fidei) not for the insured alone, but
equally so for the insurer; in fact, it is more so for the
latter, since its dominant bargaining position carries
with it stricter responsibility (Qua Chee Gan vs. Law
Union and Rock Insurance, Co. Ltd., GR No. L-4611,
December 17, 1955). It requires the parties to the
contract to communicate that which a party knows
and ought to communicate, that is, the duty to
disclose in good faith all facts material to the
contract. This doctrine is essential on account of the
fact that the full circumstances of the subject matter
of insurance are, as a rule, known to the insured only
and the insurer, in deciding whether or not to accept
a risk, must rely primarily upon the information
supplied to him by the applicant (Sundiang, 2014).
Insurance as contracts of adhesion (Fine Print Rule)
While generally, stipulations in a contract come about
after deliberate drafting by the parties thereto, there
are certain contracts almost all the provisions of
which have been drafted only by one party, usually a
corporation. Such contracts are called contracts of
adhesion, because the only participation of the other
party is the signing of his signature or his 'adhesion'
thereto. Insurance contracts fall into this category
(Sweet Lines, Inc. vs. Teves, GR No. L-37750, May 19,
1978). An illustration of a contract of adhesion is
when the insurer used fine print letters in
conditions stated in a contract of insurance (Ibid).
Rules in the construction or interpretation of
insurance contracts
By reason of the exclusive control of the insurance
company over the terms and phraseology of the
contract, the ambiguity must be held strictly against
the insurer and liberally in favor of the insured (Qua
Chee Gan v Law Union and Rock Insurance, supra).
However, if the terms, which the parties themselves
have used, are clear and unambiguous, they must be
taken and understood in their plain, ordinary and
popular sense (Sun Life Office, Ltd. vs. CA, 195 SCRA
193).
Parties to the contract of insurance
1. Insurer party who assumes or accepts the risk of
loss and undertakes for a consideration to indemnify
the insured on the happening of a specified
contingency or event.
60
 INSURANCE CODE
2. Insured person in whose favor the contract is
operative and is indemnified.
NOTE: The insured is not always the person to whom the
proceeds are paid.
3. Assured/Beneficiary- a person designated by the
terms of the policy to receive the proceeds of the
insurance. He may be the insured or a third party in
the contract for whose benefit the policy is issued
and to whom the loss is payable.
Insurer
Every corporation, partnership, or association duly
authorized (by the Insurance Commission) to transact
insurance business may be an insurer (Sec. 6,
Insurance Code, as amended by RA 10607).
NOTE: The term insurer no longer includes individuals
under RA 10607. Hence, an individual natural person is no
longer allowed to be an insurer. However, it includes the
following:
1. Professional reinsurer as any person, partnership,
association or corporation that transacts solely and
exclusively reinsurance business in the Philippines.
2. Mutual Insurance Companies are also included. The
law also provides for the procedure for mutualization of
domestic stock life insurance companies. A new provision
on RA 10607 is on demutualization or conversion of mutual
insurance companies into stock corporations (Sec. 280,
Insurance Code, as amended).
3. Cooperatives are now expressly included in the term
insurer or insurance company. However, the
cooperative must:
a. Have a sufficient capital and asset required under
the Insurance Code and the pertinent regulations
issued by the Commission (Sec. 192, Insurance Code,
as amended).
b. Have a certificate of authority to operate issued by
the Commission which should be renewed every year
(Sec. 193, Insurance Code, as amended) (Sundiang,
2014).
Q: Philippine Health Care Providers, Inc. is engaged
in operating a prepaid group practice health care
delivery system or a health maintenance
organization (HMO) to take care of the sick and
disabled persons enrolled in the health care plan.
Individuals enrolled in its health care programs pay
an annual membership fee and are entitled to
various medical services provided by its duly
licensed physicians, specialists and other
professional technical staff participating in the
group practice health delivery system at a hospital
or clinic operated or accredited by it. Is Philippine
Health Care Providers, Inc. a health maintenance
organization or an insurance company?
61
A: HMOs are not insurance business. One test that
they have applied 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.
Philippine Health Care Providers appears to provide
insurance-type benefits to its members (with respect
to its curative medical services), but these are
incidental to the principal activity of providing them
medical care. The "insurance-like" aspect of
Philippine Health Care Providers business is
miniscule compared to its noninsurance activities.
Therefore, since it substantially provides health care
services rather than insurance services, it cannot be
considered as being in the insurance business
(Philippine Health Care Providers, Inc., v.
Commissioner Of Internal Revenue, G.R. No. 167330,
September 18, 2009).
Persons who may be insured
Anyone except a public enemy may be insured (Sec.
7, Insurance Code).
NOTE: A public enemy is a nation at war with the
Philippines and every citizen or subject of such nation. It
does not include mobs, thieves or robbers (Bouviers Law
Dictionary).
NOTE: If majority of the stockholders of the respondent
corporation were German subjects who became an enemy
corporation upon the outbreak of the war between the
United States and Germany, it stands to reason that an
insurance policy ceases to be allowable as soon as an
insured becomes a public enemy. The respondent having
become an enemy corporation on December 10, 1941, the
insurance policy issued in its favor on October 1, 1941, by a
Philippine corporation had ceased to be valid and
enforceable, and since the insured goods were burned after
December 10, 1941, and during the war, the respondent
was not entitled to any indemnity under said policy from
the petitioner. However, elementary rules of justice (in the
absence of specific provision in the Insurance Law) require
that the premium paid by the respondent for the period
covered by its policy from December 11, 1941, should be
returned by the petitioner (Filipinas Compaa de Seguros v.
Christern, Huenfeld and Co., Inc., G.R. No. L-2294 May 25,
1951).
Subject matter of a contract of insurance
Anything having an appreciable pecuniary value,
which is subject to loss or deterioration or of which
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
one may be deprived so that his pecuniary interest is
or may be prejudiced.
Event or peril insured against
It is any contingent or unknown event, whether past
or future, which may damnify a person having an
insurable interest, or create a liability against him
subject to the provisions of Chapter I of the Insurance
Code (Sec. 3, Insurance Code).
Consent of spouse not necessary
The consent of the spouse is not necessary for the
validity of an insurance policy taken out by a married
person on his or her life or that of his or her children
(Sec. 3, Insurance Code).
NOTE: Prior to the effectivity of the Insurance Code of
2013, the term used was husband instead of spouse
(Sec. 3, Insurance Code).
Effect of death of policys original owner
All rights, title and interest in the policy of insurance
taken out by an original owner on the life or health of
the person insured shall automatically vest in the
latter upon the death of the original owner, unless
otherwise provided for in the policy (Sec. 3, Insurance
Code).
NOTE: Prior to the effectivity of the Insurance Code of
2013, the term used was minor instead of the person
insured. A minor cannot enter into any contract of
insurance with any insurance company.
Games of chances cannot be insured
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in a
lottery drawing a prize is not authorized (Sec. 4,
Insurance Code).
ELEMENTS OF CONTRACT OF INSURANCE
Elements of contract of insurance (SPEAR)
1. Scheme to distribute losses Such assumption of
risk is part of a general scheme to distribute
actual losses among a large group or substantial
number of persons bearing a similar risk.
2. Payment of premium As consideration for the
insurers promise, the insured makes a ratable
contribution called premium, to a general
insurance fund.
3. Existence of insurable interest The insured
possesses an interest of some kind susceptible of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
pecuniary estimation, known as insurable
interest.
NOTE: In general (except in life insurance policies), a
person is deemed to have an insurable interest in the
subject matter insured where he has a relation or
connection with or concern in it that he will derive
pecuniary benefit or advantage from its preservation
and will suffer pecuniary loss from its destruction or
injury by the happening of the event insured against.
A life insurance policy may be taken by the creditor on
the life of the debtor to the extent of the debt owed
by the debtor.
On the other hand, no contract of policy of insurance
on property shall be enforceable except for the
benefit of some person having an insurable interest in
the property insured. The lessor cannot be validly a
beneficiary of an insurance policy taken by a lessee
over his merchandise, and the provision in the lease
contract for such automatic assignment is void for
being contrary to law and/or public policy the insurer
cannot be compelled to pay the proceeds of the policy
to a person who has no insurable interest in the
property insured (Cha v. Court of Appeals, 277 SCRA
690 [1997]).
4. Assumption of Risk The insurer assumes that
risk of loss for a consideration.
5. Risk of loss The insured is subject to a risk of
loss through the destruction or impairment of that
interest by the happening of designated peril.
NOTE: The inherent uncertainty of events is normally
described in terms of risk. A contract possessing only the
last three elements enumerated above is a risk-shifting
device, but NOT a contract of insurance which is a
risk-distributing device (De Leon, 2006).
Consequently, however, the existence of insurance could
have the perverse effect of increasing the probability of
loss. This is when the insured, having in mind the
indemnification for loss or damage caused by the
happening of the event insured against, would have
reduced incentive to take steps to protect himself or his
property, subject of insurance. This phenomenon is called
moral hazard (ibid, pg. 28.).
CHARACTERSITICS AND NATURE OF AN INSURANCE
CONTRACT
Characteristics of an insurance contract
1. Consensual It is perfected by the meeting of the
minds of the parties as to the object, cause and
consideration of the insurance contract. There should
be acceptance of the application for insurance.
62
 INSURANCE CODE
2. Voluntary The parties may incorporate such
terms and conditions as they may deem convenient:
Provided they do not contravene any provision of law
and are not opposed to public policy, law, morals,
good customs, or public order.
GR: The taking out of an insurance contract is not
compulsory.
XPN: Liability insurance may be required by law
in certain instances (E.g. compulsory motor
vehicle liability insurance, or employees under
Labor Code, or as a condition to granting a
license to conduct a business or calling affecting
the public safety or welfare).
3. Aleatory The liability of the insurer depends
upon some contingent event.
NOTE: An aleatory contract is a contract where one or
both of the parties reciprocally bind themselves to give
or do something upon the happening of an event
which is uncertain, or which is to occur at an
indeterminate time (Art. 2010, NCC).
4. Unilateral It imposes legal duties only on the
insurer who promises to indemnify in case of loss.
NOTE: It is executed as to the insured after the
payment of the premium, and executory on the part of
the insurer in the sense that it is not executed until
payment for a loss.
5. Conditional It is subject to conditions, the
principal one of which is the happening of the event
insured against.
6. Contract of indemnity Recovery is commensurate
with the amount of the loss suffered.
GR: The insurer promises to make good only the
loss of the insured.
XPN: The principle is not applicable to life and
accident insurance where the result is death
because life is not capable of pecuniary
estimation. The only situation where the
principle of indemnity is applicable to life
insurance is when the interest of a person
insured is capable of exact pecuniary
measurement. An example would be in a case
where a creditor insures the life of his
debtor to the extent of the latters
debt to the former.
6. Personal Each party having in view the
character, credit and conduct of the other. The law
63
presumes that the insurer considered the personal
qualifications of the insured in approving the
insurance application (Sundiang, 2014).
7. Property Since insurance is a contract, it is
property in legal contemplation.
9. Risk-distributing device Insurance serves to
distribute the risk of economic loss among as many as
possible of those who are subject to the same kind of
loss. By paying a pre-determined amount into a
general fund out of which payment will be made for
an economic loss of a defined type, each member
contributes to a small degree toward compensation
for losses suffered by any member of the group. This
broad sharing of economic risk is the principle of
risk-distribution (Sundiang, 2014).
10. Onerous There is a valuable consideration
called the premium.
CLASSES OF INSURANCE
1. Life insurance
a. Individual life
b. Group life
c. Industrial life
2. Non-Life Insurance
a. Marine
b. Fire
c. Casualty
3. Contracts of suretyship or bonding (De Leon,
supra).
4. Compulsory Motor Vehicle Liability Insurance
5. Microinsurance
MARINE INSURANCE
Marine insurance
Traditionally, marine insurance includes policies that
covers risk connected with navigation to which a ship,
cargo, freightage, profits or other insurable interest in
movable property may be exposed during a certain
voyage or a fixed period of time. However, under the
present laws, it also covers inland marine insurance
(Sundiang, 2014). Marine insurance includes:
a. Insurance against loss or damage to:
(1) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, instruments of debts, valuable
papers, bottomry, and respondentia interests
and all other kinds of property and interests
therein, in respect to, appertaining to or in
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
connection with any and all risks or perils of
navigation, transit or transportation, or while
being assembled, packed, crated, baled,
compressed or similarly prepared for shipment
or while awaiting shipment, or during any delays,
storage, transshipment, or reshipment incident
thereto, including war risks, marine builders
risks, and all personal property floater risks;
(2) Person or property in connection with or
appertaining to a marine, inland marine, transit
or transportation insurance, including liability for
loss of or damage arising out of or in connection
with the construction, repair, operation,
maintenance or use of the subject matter of such
insurance (but not including life insurance or
surety bonds nor insurance against loss by
reason of bodily injury to any person arising out
of ownership, maintenance, or use of
automobiles);
(3) Precious stones, jewels, jewelry, precious
metals, whether in course of transportation or
otherwise; and
(4) Bridges, tunnels and other instrumentalities
of transportation and communication (excluding
buildings, their furniture and furnishings, fixed
contents and supplies held in storage); piers,
wharves, docks and slips, and other aids to
navigation and transportation, including dry
docks and marine railways, dams and
appurtenant facilities for the control of
waterways.
b. Marine protection and indemnity insurance (Sec.
101, Insurance Code).
NOTE: From the foregoing enumeration, marine
insurance now includes, not only risks connected with
marine navigation, but which are otherwise connected
therewith such as insurance of aircraft, goods while
being packed or assembled, injury to passengers,
precious stones, jewels, jewelry whether in the course
of transportation or not. (Perez, Quizzer and Reviewer
on Commercial Laws, Vol. 1, 2010 ed.).
Cargo can be the subject of marine insurance, and
once it is entered into, the implied warranty of
seaworthiness immediately attaches to whoever is
insuring the cargo, whether he be the ship owner or
not (Roque v. IAC, GR No. L-66935, Nov. 11, 1985).
Marine protection and indemnity insurance
It is an insurance against, or against legal liability of
the insured for loss, damage, or expense incident to
ownership, operation, chartering, maintenance, use,
repair, or construction of any vessel, craft or
instrumentality in use of ocean or inland waterways,
including liability of the insured for personal injury,
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
illness or death or for loss of or damage to the
property of another person (Sec. 101, [b], Insurance
Code).
Major divisions of marine insurance
1. Ocean marine insurance covers primarily sea
perils of ships and cargoes. Scope: (GELS)
a. Goods or cargoes
b. Earnings such as freight, passage money
c. Liability incurred by reason of maritime perils
d. Ships or hulls
NOTE: The insurer is liable only for such losses or
damages proximately caused by the perils insured
against (De Leon, supra, pg. 312.).
2. Inland marine insurance Covers primarily the land
or over the land transportation perils of property
shipped by railroads, motor trucks, airplanes, and
other means of transportation. It also covers risks of
lake, river, or the other inland waterway
transportation and other waterborne perils outside of
those risks that fall definitely within the ocean marine
category. Classes: (Pit-BaFF)
a. Property In Transit Provides protection to
the property frequently exposed to loss while it is
being transported from one location to another.
b. Bailee liability Provides protection to
persons who have temporary custody of the goods
or personal property of others, such as carriers,
laundrymen, warehousemen, and garagekeepers.
c. Fixed transportation property Covers
bridges, tunnels and other instrumentalities of
transportation and communication, although as a
matter of fact they are fixed property. They are so
insured because they are held to be an essential
part of transportation system.
d. Floater Provides insurance to follow the
insured property wherever it may be located
subject always to the territorial limits of the
contract (De Leon, 2010).
Risk insured against in marine insurance
GR: In the usual form of a marine policy, the risks
insured against are only perils of the sea.
NOTE: The insured is bound to prove that the cause of
the loss is a peril of the sea.
XPN: When the insurance is an all risk policy and
thus covers even perils of the ship.
XPN to XPN: When the risks are expressly excepted by
the all risk policy.
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 INSURANCE CODE
NOTE: The burden rests on the insurer to prove that the
loss is caused by a risk that is excluded (Sundiang, supra.
Pg. 136, citing Go Tiaco Y Hermanos vs. Union Insurance
Society of Canton, 40 Phil. 40;Filipino Merchants Ins. Co. vs.
CA, 179 SCRA 638; and Choa Tiek Seng vs. CA, 183 SCRA 223
[1990]).
Perils of the sea or perils of navigation
It includes only those casualties due to the (WiN):
1. Unusual violence or extraordinary action of
WInd and wave, or
2. Other extraordinary causes connected with
Navigation (De Leon, 2010).
Perils of the ship
It is a loss which, in the ordinary course of events,
results from the (NON):
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship;
3. Negligent failure of the ships owner to
provide the vessel with proper equipment
to convey the cargo under ordinary
conditions.
Q: Remington Industrial Sales Corporation
(Remington) shipped on board a vessel seamless
steel pipes from Japan to the Philippines and insured
the shipment with Cathay Insurance Co. (Cathay).
Upon receipt of said shipment, losses and damages
were discovered. Upon demand under the insurance
contract, it was denied by Cathay. Remington
contends that the rust on the seamless still pipes is
not an inherent vice of the shipment, thus the same
is considered as a peril of the sea. Cathay, on the
other hand claims that the loss was occasioned by
an inherent defect or vice in the insured article. Is
the rusting of the seamless steel pipes considered
as a peril of the sea?
A: Yes. 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. Moreover,
it is a cardinal rule in the interpretation of contracts
that any ambiguity therein should be construed
against the maker/issuer/drafter thereof, namely, the
insurer. Besides the precise purpose of insuring cargo
during a voyage would be rendered fruitless (Cathay
Insurance Co., v. CA, et al., G.R. No. L-76145, June 30,
1987).
Q: A marine insurance policy on a cargo states that
the insurer shall be liable for losses incident to
perils of the sea. During the voyage, seawater
entered the compartment where the cargo was
65
stored due to the defective drainpipe of the ship.
The insured filed an action on the policy for recovery
of the damages caused to the cargo. May the
insured recover damages? (1998 Bar Question)
A: No. The proximate cause of the damage to the
cargo insured was the defective drainpipe of the ship.
This is peril of the ship, and not peril of the sea. The
defect in the drainpipe was the result of the ordinary
use of the ship. To recover under a marine insurance
policy, the proximate cause of the loss or damage
must be peril of the sea.
All risks marine insurance policy
GR: It is that which insures against all causes of
conceivable loss or damage.
XPNs:
1. As otherwise excluded in the policy; or
2. Due to fraud or intentional misconduct on the
part of the insured (Choa Tiek Seng v. CA, G.R. No.
84507 March 15, 1990).
NOTE: An all risks policy grants greater protection than
that afforded by the perils clause (De Leon, supra, pg.
313). The insured under an "all risks insurance policy" has
the initial burden of proving that the cargo was in good
condition when the policy attached and that the cargo was
damaged when unloaded from the vessel; thereafter, the
burden then shifts to the insurer to show the exception to
the coverage (Filipino Merchants Insurance Co. vs. CA, 179
SCRA 638).
Extent of the insurable interest
1. Ship owner
a. Over the value of the vessel, even when it has
been chartered by one who covenants to pay him
its value in case of loss. In such a case, the insurer
shall be liable for only that part of the loss which
the insured cannot recover from the charterer
(Sec. 102, Insurance Code).
b. If hypothecated by a bottomry loan, the
insurable interest is only the excess of the value of
the vessel over the amount secured by bottomry
(Sec. 103, Insurance Code).
c. He also has an insurable interest on expected
freightage (Sec. 104, Insurance Code).
2. Cargo owner over the cargo and expected profits
(Sec. 107, Insurance Code).
3. Charterer
a. Over the vessel, to the extent of the amount he
is liable to the shipowner, if the ship is lost or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
dameged during the voyage (Sec. 108, Insurance
Code).
b. Over his expected profits or freightage if he
accepts cargoes from other persons for a fee
(Sundiang, 2014).
c. Over his own cargo or his clients cargo
(Sundiang, 2014).
4. Creditor/lender over the amount of the loan.
Loan on bottomry or respondentia
A loan in which under any condition whatever, the
repayment of the sum loaned, and of the premium
stipulated, depends upon the safe arrival in port of
the goods on which it is made or of the price they
may receive in case of accident (Art. 719, Code of
Commerce).
Loan on bottomry v. Loan on respondentia
They are basically the same. The only distinction is, a
loan on bottomry involves a vessel as a security, while
a respondentia has cargo as its security (Perez, supra,
pg. 153).
Freightage
It signifies all the benefits derived by the owner,
either from the chartering of the ship or its
employment for the carriage of his own goods or
those of others (Sec. 104, Insurance Code).
Insurable interest in expected freightage in a charter
party
Insurable interest in expected freightage in a charter
party exists from the time the vessel has broken
ground on the chartered voyage (Sec. 106, Insurance
Code).
Insurable interest in expected freightage if there is
no charter party
If a price is to be paid for the carriage of goods,
insurable interest in expected freightage exists when
they are actually on board, or there is some contract
for putting them on board, and both ship and goods
are ready for the specified voyage (ibid).
Instances when there is no insurable interest in
freight
1. When there is no contract and no part of the
goods expected to be carried are on board,
although there are goods ready for shipment or
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
the master is provided with funds for the purpose
of purchasing a cargo.
2. Where the vessel is a mere seeking ship, the
owner has no insurable interest in freight to be
earned on goods not loaded.
NOTE: A seeking ship is a vessel looking for cargo to be
transported (De Leon, supra, pg. 323).
Insurable interest in expected profits
Insurable interest in expected profits exists:
1. When the interest in the thing involved is based
on a legal right.
2. When the interest in thing involved is based on
valuable consideration.
Special marine insurance contracts and clauses
1. All-risks policy
2. Barratry clause a clause which provides that there
can be no recovery on the policy in case of any willful
misconduct on the part of the master or crew in
pursuance of some unlawful or fraudulent purpose
without the consent of the owner and to the
prejudice of owners interest. It requires an
intentional and willful act in its commission. No
honest error or judgment or mere negligence, unless
criminally gross, can be barratry (Roque v. IAC, G.R.
No. L- 66935, Nov. 11, 1985).
3. Inchmaree clause a clause which makes the
insurer liable for loss or damage to the hull or
machinery arising from the:
a. Negligence of the captain, engineers, etc.
b. Explosion, breakage of shafts; and
c. Latent defect of machinery or hull (Thames and
Mersey Marine Insurance Co v. Hamilton Fraser
and Co [1887] 12 AC 484).
4. Sue and labor clause a clause which makes the
insurer liable for
a. all the expenses attendant upon a loss which
forces the ship into port to be repaired; and
b. expenses incurred, where it is stipulated in the
policy that the insured shall labor for the recovery
of the property (Sec. 165, Insurance Code).
NOTE: Insurer is liable for such expense, in either case,
being in addition to a total loss, if that afterwards occurs
(ibid).
Concealment in marine insurance
It is the failure to disclose any material fact or
circumstance which in fact or law is within, or which
ought to be within the knowledge of one party and of
which the other has no actual or presumptive
knowledge (De Leon, 2010).
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 INSURANCE CODE

NOTE: Information of the belief or expectation of a third
person, in reference to a material fact, is material (Sec. 110,
Insurance Code).
Presumption of knowledge of prior loss in marine
insurance
A person insured by a contract of marine insurance is
presumed to have knowledge, at the time of insuring,
of a prior loss, if the information might possibly have
reached him in the usual mode of transmission and at
the usual rate of communication (Sec. 111, Insurance
Code). The presumption, however, is rebuttable.
Concealment in respect to any of the following
matters does not vitiate the entire contract but
merely exonerates the insurer from a loss resulting
from the risk concealed
1. National character of the insured;
2. The liability of the thing insured to capture and
detention;
3. The liability to seizure from breach of foreign
laws of trade;
4. The want of necessary documents; and
5. The use of false and simulated papers (Sec. 112,
Insurance Code).
Effect of falsity of a representation by the insured
1. Promissory Representation - If a representation
by the insured is intentionally false in any material
respect or in respect of any fact on which the
character and nature of the risk depends, the insurer
may rescind the entire contract (Sec. 113, Insurance
Code).
2. Representation of Expectation - The eventual
falsity of a representation as to expectation does not,
in the absence of fraud, avoid a contract of marine
insurance (Sec. 114, Insurance Code).
Implied warranties in marine insurance (SINAI)
1. Seaworthiness (Sec. 115 to 121, Insurance Code).
2. Non-engagement from Illegal venture.
3. Warranty of Neutrality The ship will carry the
requisite documents too show the nationality or
neutrality of the ship or its cargo and will not
carry any documents that cast reasonable
suspicion on it if the nationality or neutrality of
the ship or its cargo is expressly warranted (Sec.
122, Insurance Code).
4. Non-deviation from the Agreed voyage (Secs.
125, 126, 127, Insurance Code).
5. Presence of Insurable interest.

NOTE: Ordinarily, the matters concealed need not be the Seaworthiness

cause of the loss. In marine insurance, the
above-mentioned matters, although concealed, will not
vitiate the contract except when they caused the loss.
Concealment in marine insurance v. Concealment in
other property insurance
A ship is seaworthy when reasonably fit to perform
the service and to encounter the ordinary perils of
the voyage contemplated by the parties to the policy
(Sec. 116, Insurance Code).

OTHER PROPERTY Scope of the seaworthiness of a vessel

MARINE INSURANCE
The information or the
belief or expectation of 3rd
persons in reference to a
material fact is material
and must be
communicated.
The concealment of any
fact in relation to any of
the matters stated in Sec.
112 does not vitiate the
entire contract but merely
exonerates the insurer
from a risk resulting from
the fact concealed.
INSURANCE
A warranty of seaworthiness extends not only to the
The information or belief
of a 3rd party is not condition of the structure of the ship itself, but
material and need not be requires that it be properly laden, and provided with
communicated, unless it a competent master, a sufficient number of
competent officers and seamen, and the requisite
proceeds from an agent
of the insured whose appurtenances and equipment, such as ballasts,
duty is to give cables and anchors, cordage and sails, food, water,
fuel and lights, and other necessary or proper stores
information.
and implements for the voyage (Sec. 118, Insurance
Code).
Concealment of any
material fact will vitiate
the entire contract,
whether or not the loss
results from the risk
concealed.

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Compliance with the warranty of seaworthiness
GR: It is complied with if the ship is seaworthy at the
time of the commencement of the risk (Sec. 117,
Insurance Code).
XPNs:
1. In the case of time policy - the ship must be
seaworthy at the commencement of every
voyage it undertakes during that time (Sec. 117,
[a], Insurance Code).
2. In the case of cargo policy - each vessel upon
which cargo is shipped or transshipped must be
seaworthy at the commencement of each
particular voyage (Sec. 117, [b], Insurance Code).
3. In the case of voyage policy contemplating a
voyage in different stages- the ship must be
seaworthy at the commencement of each
portion of the voyage (Sec. 119, Insurance Code).
Admission of seaworthiness by the insurer
Seaworthiness is admitted by the insurer when:
1. The warranty of seaworthiness is to be taken as
fulfilled; or
2. The risk of unseaworthiness is assumed by the
insurer (ibid).
Effect of the admission of seaworthiness by the
insurer
If the policy provides that the seaworthiness of the
vessel as between insured and insurer is admitted,
the issue of seaworthiness cannot be raised by the
insurer without showing concealment or
misrepresentation by the insured (Phil. American
General Insurance Co. v. CA, G.R. No. 116940, June 11,
1997).
Effect if unseaworthiness is unknown to the owner
of the cargo
It is immaterial in ordinary marine insurance and may
not be used by him as a defense in order to recover
on the marine insurance policy. It becomes the
obligation of a cargo owner to look for a reliable
common carrier, which keeps its vessels in seaworthy
conditions. The shipper may have no control over the
vessel but he has control in the choice of the
common carrier that will transport his goods (Roque
v. IAC, G.R. No. L- 66935, Nov. 11, 1985).
Effect of payment made by the insurer to the
insured for the latters lost cargo in case the ship is
unseaworthy
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Payment made by the insurer to the insured for the
latters lost cargo operates as waiver of the insurers
right to enforce the implied warranty of
seaworthiness. However, this waiver extends only in
favor of the insured. There is no waiver in favor of the
carrier that transported the cargo. The insurer can
still claim payment against the carrier for breach of
contract based on the insurers right of subrogation
(Sundiang, 2014 citing Delsan Transport Lines, Inc. v.
CA, G.R. No. 127897, Nov. 15, 2001).
Effect when the ship becomes unseaworthy during
the voyage
An unreasonable delay in repairing the defect
exonerates the insurer on ship or shipowner's
interest from liability from any loss arising therefrom
(Sec. 120, Insurance Code).
Express warranty as to nationality and neutrality
1. As to nationality imports that the vessel
belongs to the subject of a particular country.
2. As to neutrality imports that the property
insured is neutral in fact, that is it belongs to
neutrals and that no act of insured or his agent
shall be done which can legally compromise its
neutrality.
Rule regarding voyage in marine insurance
When the voyage contemplated by a marine
insurance policy is described by the places of
beginning and ending, the voyage insured is one
which conforms to the course of sailing fixed by
mercantile usage between those places (Sec. 123,
Insurance Code).
NOTE: If the course of sailing is not fixed by mercantile
usage, the voyage insured is that way between the places
specified, which to a master of ordinary skill and discretion,
would mean the most natural, direct and advantageous
(Sec. 124, Insurance Code).
Deviation
It is a departure from the course of the voyage
insured, mentioned in Sec. 123 and Sec. 124, or an
unreasonable delay in pursuing the voyage or the
commencement of an entirely different voyage (Sec.
125, Insurance Code).
Instances when deviation is proper
1. When caused by circumstances over which
neither the master nor the owner of the ship has
any control;
68
 INSURANCE CODE
2. When necessary to comply with a warranty, or to destination, of the thing insured (Sec. 132,
avoid a peril, whether or not peril is insured Insurance Code).
against;
3. When made in good faith, and upon reasonable NOTE: Complete physical destruction is not essential to
grounds of belief in its necessity to avoid a peril; constitute actual total loss.
or
4. When made in good faith, for the purpose of An insurance confined in terms to an actual loss does not
cover a constructive total loss, but covers any loss, which
saving human life or relieving another vessel in
necessarily results in depriving the insured of the
distress (Sec. 126, Insurance Code). possession, at the port of destination, of the entire thing
insured (Sec. 139, Insurance Code).
Improper deviation
Constructive total loss
Every deviation not specified under Sec. 126 is
improper (Sec. 127, Insurance Code). There is constructive total loss when:
1. More than thereof in value is actually lost, or
NOTE: In improper deviation, an insurer is not liable for any would have to be expended to recover it from
loss happening to the thing insured subsequent to an
the peril;
improper deviation (Sec. 128, Insurance Code).
2. The thing insured is injured to such extent as to
reduce its value more than ;
Kinds of losses
3. The thing insured is a ship, and the contemplated
voyage cannot be lawfully performed without
1. Total, which may be:
incurring either an expense to the insured of
a. Actual total loss
more than the value of the thing abandoned or
b. Constructive total loss
a risk which a prudent man would not take under
2. Partial
the circumstances; or
4. The thing insured, being cargo or freightage, and
Actual v. Constructive loss
the voyage cannot be performed, nor another
ship procured by the master, within a reasonable
CONSTRUCTIVE TOTAL
ACTUAL TOTAL LOSS time and with reasonable diligence, to forward
LOSS
the cargo, without incurring the like expense or
It exists when the It is one which the loss, risk mentioned in no. (3). But freightage cannot
subject matter of the although not actually total, in any case be abandoned (and thus declared
insurance is wholly is of such a character that constructively lost) unless the ship is also
destroyed or lost or the insured is entitled, if he abandoned (Sec. 141, Insurance Code).
when it is so damaged thinks fit, to treat it as total
as no longer to exist in by abandonment (Sec. 133, Presumption of actual loss
its original character. Insurance Code).
Abandonment by the Actual loss may be presumed from the continued
The insured has the
insured is necessary in absence of a ship without being heard of. The length
right to claim the whole
order to recover for a total of time which is sufficient to raise his presumption
insurance without
loss (Sec. 141, Insurance depends on the circumstances of the case (Sec. 134,
notice of abandonment
Code) in the absence of any Insurance Code).
(Sec. 137, Insurance
provision to the contrary in
Code).
the policy. Liability of the insurer as regards the cargo in case of
reshipment
Actual total loss
When a ship is prevented, at an intermediate port,
The following constitutes actual total loss: from completing the voyage, by the perils insured
1. A total destruction of the thing insured; against, the liability of a marine insurer on the cargo
2. The irretrievable loss of the thing by sinking, or continues after they are thus reshipped. The insurer
by being broken up; may, however, require additional premium if the
3. Any damage to the thing which renders it hazard be increased by his extension of liability (Sec.
valueless to the owner for the purpose for which 135, Insurance Code).
he held it; or
4. Any other event which effectively deprives the
owner of the possession, at the port of

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69 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Additional liabilities of the insurer of goods referred benefit and profit of all the persons interested in
to in the reshipment of cargo the vessel and her cargo (Art. 809, ibid).

The marine insurer is bound for: NOTE: This kind of average is suffered by and borne
1. Damages; alone by the owner of the cargo or of the vessel, as
the case may be (De Leon, 2010).
2. Expenses of discharging;
3. Storage;
Liability of the insurer as to averages
4. Reshipment;
5. Extra freightage; and
6. All other expenses incurred in saving cargo GR: The marine insurer is liable both for general
reshipped, up to the amount insured (Sec. 136, average and particular average loss.
Insurance Code).
XPN: When there is Free From Particular Average
NOTE: Nothing in Sec. 136 and Sec. 135 shall render a Clause in the policy making the insurer liable only for
marine insurer liable for any amount in excess of the general average.
insured value or, if there be none, of the insurable value.
NOTE: Free From Particular Average Clause (FFPA Clause) -
Average A clause agreed upon in a policy of marine insurance in
which it is stated that the insurer shall not be liable for a
particular average.
It is any extraordinary or accidental expense incurred
during the voyage for the preservation of the vessel,
XPN to XPN: When particular average loss has the
cargo, or both and all damages to the vessel and
effect of depriving the insured of the possession at
cargo from the time it is loaded and the voyage
the port of destination of the whole of the thing
commenced until it ends and the cargo unloaded (Art.
insured (Sec. 138, Insurance Code).
806, Code of Commerce).
Abandonment
Kinds of average
It is the act of the insured by which, after a
1. Gross or general averages damages or expenses
constructive total loss he declared the relinquishment
which are deliberately caused by the master of
to the insurer of his interest in the thing insured (Sec.
the vessel or upon his authority, in order to save
140, ibid).
the vessel, her cargo or both at the same time
from a real and known risk (Art. 811, ibid).
Effect of a valid abandonment
Requisites to the right to claim general average
It is equivalent to a transfer by the insured of his
contribution
interest, to the insurer, with all the chances of
recovery and indemnity (Sec. 148, ibid).
a. There must be a common danger to the vessel
or cargo;
Requisites of valid abandonment
b. Part of the vessel or cargo was sacrificed
deliberately;
1. There must be an actual relinquishment by the
c. The sacrifice must be for the common safety
person insured of his interest in the thing insured
or for the benefit of all;
(Sec. 140, ibid).
d. It must be made by the master or upon his
2. There must be a constructive total loss (Sec. 141,
authority;
ibid).
e. It must be successful, i.e. Resulted in the
3. The abandonment must neither be partial nor
saving of the vessel or cargo; and
f. It must be necessary (Sundiang, 2014). conditional (Sec. 142, ibid).
4. It must be made within a reasonable time after
NOTE: This kind of average must be borne equally by receipt of reliable information of the loss (Sec.
all of the interests concerned in the venture (De Leon, 143, ibid).
2010). 5. It must be factual (Sec. 144, ibid).
6. It must be made by giving notice thereof to the
2. Simple or particular averages they include all insurer which may be done orally or in writing;
damages and expenses caused to the vessel or to Provided, that if the notice be done orally, a
her cargo which have not inured to the common written notice of such abandonment shall be

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2014 GOLDEN NOTES 70
 INSURANCE CODE
submitted within 7 days from such oral notice
(Sec. 145, ibid).
7. The notice of abandonment must be explicit and
must specify the particular cause of
abandonment (Sec. 146, ibid).
NOTE: Such notice must state only enough to show that
there is probable cause for abandonment, but need not be
accompanied with proof of interest or of loss.
Person who may make notice of abandonment
The abandonment need not necessarily be made by
the insured but may be made by an authorized agent,
and an agent having an authority to insure has prima
facie an authority to abandon (De Leon, 2010).
Person to whom notice of abandonment may be
made
To the insurer or his authorized agent or the broker
who is the agent for both parties (ibid).
Forms of acceptance of abandonment
1. Express
2. Implied from the conduct of the insurer
NOTE: Mere silence of the insurer for unreasonable length
of time after notice shall be construed as an acceptance
(Sec. 152, Insurance Code).
Effects of acceptance of abandonment
1. The insurer becomes at once liable for the whole
amount of the insurance and also becomes
entitled to all rights which insured possessed in
the thing insured (Sec. 148, ibid).
2. GR: It fixes the rights of the parties; whether
express or implied, it is conclusive upon them,
(Sec. 153, ibid.) and irrevocable (Sec. 154, ibid).
XPN: Where the ground upon which it was made
proves to be unfounded (Sec. 154, ibid). Under
Sec. 147, abandonment can be sustained only
upon the ground specified in the notice thereof.
3. It stops the insurer to rely on any insufficiency in
the form, time, or right, of abandonment (Sec.
145, 143, 141, ibid). Whether the insured has a
right to abandon is immaterial where the
abandonment is accepted and there is no fraud
(New Orleans Ins. Co. vs. Piaggio, 16 Wall. [US]
378).
4. On accepted abandonment of a ship, freightage
earned previous to the loss belongs to the
71
insurer of said freightage; but freightage
subsequently earned belongs to the insurer of
the ship (Sec. 155, ibid).
Effect of the insurers refusal to accept a valid
abandonment
If the insurer refuses to accept a valid abandonment,
he is liable as upon an actual total loss, deducting
from the amount any proceeds of the thing insured
which may have come to the hands of the insured
(Sec. 156, ibid).
NOTE: However, if the abandonment was improper, the
insured may nevertheless recover to the extent of the
damage proved (De Leon, 2010).
Effect of insureds failure to make abandonment
The insured has an election to abandon or not, and
cannot be compelled to abandon although
abandonment is proper. If the insured fails to
abandon, he may nevertheless recover his actual loss
(Sec. 157, Insurance Code).
Measure of indemnity
1. Valued policy the parties are bound by the
valuation, if the insured had some interest at risk and
there is no fraud (Sec. 158, ibid).
NOTE: Overvaluation of property by the insured may
take place either at the time of making the contract or
at the time of submission of the proof of loss. In either
event, such overvaluation, if fraudulent, entirely
avoids the insurance. However, such fraudulent intent
must be alleged and clearly proven by the insurer
(Perez, 2006).
2. Open policy the following rules shall apply in
estimating a loss:
a. Value of the ship value at the beginning of
the risk.
b. Value of the cargo actual cost to the
insured, when laden on board, or where that cost
cannot be ascertained, its market value at the
time and place of lading, adding the charges
incurred in purchasing and placing it on board,
but without reference to any loss incurred in
raising money for its purchase, or to any
drawback on its exportation, or to the fluctuation
of the market at the port of destination, or to
expenses incurred on the way or on arrival.
c. Value of freightage gross freightage
exclusive of primage, which is a small
compensation paid by a shipper to the master of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the vessel for his care and trouble bestowed on Co-insurance in marine insurance v. Co-insurance in
the shippers goods and which the master is fire insurance
entitled to retain in the absence of an agreement
to the contrary with the owners of the vessels. CO-INSURANCE IN CO-INSURANCE IN FIRE
d. Cost of insurance the cost of insurance is MARINE INSURANCE INSURANCE
always added in calculating the value of the ship, There is co-insurance by There has to be an
cargo, or freightage or other subject matter in an virtue of Section 159 of express stipulation to
open policy (De Leon, supra, pg. 372-373). the Insurance Code, as that effect.
long as the
Drawback above-enumerated
requisites are present.
It is an allowance made by the government upon the
duties due on imported merchandise when the Formula to determine the amount recoverable in
importer, instead of selling there, re-exports it; or the co-insurance
refunding of such duties if already paid (Perez, 2006).
(Partial) Loss X Amount of Insurance = Amount of recovery
Primage
(Insurers Liability)
Value of thing
It is a small allowance or compensation payable to Insured
the master or owner of the vessel for the use of his
cables and ropes to discharge the goods, and to the Illustration
mariners for lading and unlading in any port (Perez,
2006). If a vessel valued at P1M is insured for only P800, 000
and is damaged to the extent of P400, 000, the
NOTE: Drawback and primage are not included in
insurer will be required to pay only 80% of the loss
determining the loss in a marine open policy.
suffered, or P320,000; the other 20% or P80,000
Co-insurance
being borne by the insured himself.
Co-insurance is a form of insurance in which the
P400,000 or 2/5 X P800,000 = P320, 000
person who insures his property for less than the
P1M
entire value is understood to be his own insurer for
the difference which exists between the true value of
The insured is considered a co-insurer as to the
the property and the amount of insurance.
uninsured portion of P200,000. (1M 800,000).
NOTE: If the loss is total, the insurer is liable for the full
In such a case, a marine insurer is liable upon a partial amount of P800,000. On the other hand, if the property is
loss only for such proportion of the amount insured insured to its full value, the insured is entitled to recover
by him as the loss bears to the value of the whole the full amount of the partial loss of P400,000.
interest of the insured in the property insured (Sec.
159, Insurance Code). Amount the insured is entitled to recover in case of
loss if profits to be realized are separately insured
Requisites for co-insurance
Where profits are separately insured in a contract of
There is co-insurance when the following requisites marine insurance, the insured is entitled to recover,
concur: in case of loss, a proportion of such profits equivalent
1. The loss is partial; and to the proportion which the value of the property lost
2. The amount of insurance is less than the value of bears to the value of the whole (Sec. 160, Insurance
the property insured (Sundiang, 2014). Code).

Conclusive presumption of loss of profits

When profits are valued and insured by a contract of

marine insurance, a loss of them is conclusively
presumed from a loss of the property out of which
they were expected to arise, and the valuation fixes
their amount (Sec. 162, Insurance Code).

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2014 GOLDEN NOTES 72
 INSURANCE CODE
Port of refuge expenses Ocean marine policies v. Fire policies

These are the additional expenses incurred in OCEAN MARINE FIRE INSURANCE
repairing the damages suffered by a vessel because of A policy of insurance on Where the hazard is fire
the perils insured against as well as those incurred for a vessel engaged in alone and the subject is
saving the vessel from such perils, such as the navigation is a contract an unfinished vessel,
expense of launching or raising the vessel or of of marine insurance never afloat for a voyage,
towing or navigating it into port for her safety. These although it insures the contract to insure is a
are items to be borne by the insurer in addition to a against fire risks only. fire risk, especially in the
total loss if that afterwards takes place (Sec. 165, absence of an express
Insurance Code). agreement that it shall
have the incidents of
FIRE INSURANCE marine policy, or where it
insures materials in a
Fire insurance shipyard for use in
constructing vessels.
It is a contract of indemnity by which the insurer, for
a consideration, agrees to indemnify the insured Also where a policy
against loss of or damage by fire, lightning, insures against fire, a
windstorm, tornado or earthquake and other allied vessel while moored and
risks, when such risks are covered by extension to fire in use as a hospital.
insurance policies or under separate policies (Sec. (De Leon, supra, pg. 380).
169, ibid).
Distinction between marine and fire insurance
NOTE: The liability of an insurer is to pay for direct loss
only. The insurer may be liable to pay for consequential or 1. In marine insurance, the rules on constructive
indirect losses if covered by extension to such fire policies
total loss (Secs. 133, 141, Insurance Code) and
or insured under separate policy (De Leon, 2010).
abandonment (Sec. 140, ibid) apply but not in fire
insurance;
Indirect losses
2. In case of partial loss of a thing insured for less
than its actual value, the insured in a marine
The following are indirect losses:
policy is a co-insurer of the uninsured portion
1. Physical damage caused to other property.
(Sec. 159, ibid), while the insured may only
2. Loss of earnings due to the interruption of
become a co-insurer in fire insurance if expressly
business by damage to the insureds property.
agreed upon by the parties (Sec. 174, ibid) (De
3. Additional expenses incurred by the insurer
Leon, 2010).
following the damage to the property or
contents by an insured peril (De Leon, 2010).
Requisites in order that the insurer may rescind a
fire insurance policy on the ground of alteration
Friendly fire v. Hostile fire
made in the use or condition of the thing insured
FRIENDLY FIRE HOSTILE FIRE
1. The use or condition of the thing is specially
Fire that burns in a place Fire that escapes and limited or stipulated in the policy;
where it is supposed to burns in a place where it 2. Such use or condition is altered;
burn. is not supposed to be. It 3. The alteration is made without the consent of
E.g. Gas stove, fire place may also refer to fire that the insurer;
started out as a friendly 4. The alteration is made by means within the
fire but escapes from its control of the insured; and
original place or it 5. The alteration increases the risk (Sec. 170,
becomes too strong as it Insurance Code).
becomes out of control 6. There must be a violation of a material policy
(Sundiang, 2014). provision (Sundiang,2014).

NOTE: A contract of fire insurance is not affected by any act

of the insured subsequent to the execution of the policy,
which does not violate its provisions even though it

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73 FACULTY OF CIVIL LAW
 MERCANTILE LAW
increases the risk and is the cause of the loss (Sec. 172,
Insurance Code).
Q: United Merchants Corporation (UMC)s General
Manager Alfredo Tan insured UMCs stocks in trade
of Christmas lights against fire with Country Bankers
Insurance Corporation (CBIC). Unfortunately, a fire
gutted the warehouse rented by UMC. When UMC
demanded for payment under the insurance policy,
CBIC rejected its claim due to breach of Condition
No. 15 of the policy which states that if the claim be
in any respect fraudulent, or if any false declaration
be made or used in support thereof, all the benefits
under the policy shall be forfeited. CBIC contends
that because arson and fraud attended the claim,
UMC is not entitled to recover under Condition No.
15 of the insurance policy. Is UMC is entitled to
claim from CBIC the full coverage of its fire insurance
policy?
A: No. 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 v. Country Bankers Insurance
Corporation, G.R. No. 198588, July 11, 2012).
Effect when the insured has no control or knowledge
of the alteration
GR: The insurer is not relieved from liability if the acts
or circumstances by which the risk is increased are
occasioned by accident, or a cause over which the
insured has no control.
XPNs:
1. Actually known to the insured or
2. Insured is presumed to know of the alteration
when the acts or circumstances permanently and
substantially affects the conditions of the property so
as to constitute an increase in risk (De Leon, supra,
pg. 383-384).
Measure of indemnity in open and valued policies in
fire insurance
OPEN POLICIES VALUED POLICIES
The expense it would be to the The parties are
insured at the time of the bound by the
commencement of the fire to valuation, in the
replace the thing lost or injured absence of fraud.
in the condition in which it was
at the time of the injury.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
In an open policy, the actual
loss, as determined, will
represent the total indemnity
due the insured except only
that the total indemnity shall
not exceed the total value of
the policy (Sundiang 2014,
citing Development Insurance
Corporation v. IAC, 143 SCRA
62).
Co-insurance clause in fire policies
The co-insurance clause is a clause requiring the
insured to maintain insurance to an amount equal to
the value or specified percentage of the value of the
insured property under penalty of becoming
co-insurer to the extent of such deficiency. This is to
prevent the property owners from taking out such
small amount of insurance, and thereby reducing the
premium payments and thereby increasing the rates
of premium for all (De Leon, 2010).
NOTE: A co-insurance cannot exist in fire insurance if there
is no stipulation to that effect.
Option to rebuild clause
It gives the insurer the option to rebuild the
destroyed property instead of paying the amount of
the loss or damage, notwithstanding a fixed valuation
in the policy (Sec. 174, Insurance Code). This clause
serves to protect the insurer against unfairness in the
appraisal and award rendered by a packed board of
arbitrators, or in the proof of loss.
NOTE: The insurer must exercise his option to rebuild
within the time stipulated in the policy, or in the absence of
stipulation, within a reasonable time. The choice by the
insurer shall produce no effect except from the time it has
been communicated to the insured (Article 1201, NCC).
Unless the policy has limited the cost of rebuilding to the
amount of the insurance, the insurer, after electing to
rebuild, can be compelled to perform his undertaking, even
though the cost may exceed the original amount of
insurance (De Leon, 2010).
Insured can pledge, hypothecate or transfer a fire
insurance policy or rights thereunder
He may do so after a loss has occurred and even
without the consent of, or notice to, the insurer. In
such a case, it is not the personal contract which is
being assigned, but a claim under or a right of action
on the policy against the insurer (De Leon, 2010).
74
 INSURANCE CODE
Limitation to the right of the insured in pledging,
hypothecating or transferring his right under a fire
insurance policy
Section 175 of the Insurance Code prohibits the
exercise of this right in the case where the pledging,
hypothecating, or transferring is made to any person,
firm or company who acts as agent for or otherwise
represents the insurer.
NOTE: Any such pledge, etc. shall be void and of no effect
insofar as it may affect other creditors of the insured (ibid).
CASUALTY INSURANCE
Casualty insurance
7. Health insurance an indemnity to persons for
expense and loss of time occasioned by disease.
8. Other substantially similar kinds of insurance
(Perez, 2006).
Two divisions of casualty insurance
1. Accident or health insurance Insurance against
specified perils which may affect the person
and/or property of the insured. (E.g. personal
accident, robbery/theft insurance)
2. Third party liability insurance (TPL) Insurance
against specified perils which may give rise to
liability on the part of the insured of claims for
injuries or damage to property of others (De
Leon, 2010).

It is an insurance covering loss or liability arising from Accidental v. Intentional as used in insurance
accident or mishap, excluding certain types of loss
which by law or custom are considered as falling ACCIDENTAL INTENTIONAL
exclusively within the scope of other types of
The terms accident and Intentional as used in an
insurance such as fire or marine (Sec. 176, Insurance
accidental have been accident policy excepting
Code).
taken to mean that which intentional injuries
happens by chance or inflicted by the insured or
Coverage of casualty insurance
fortuitously, without any other person, implies
intention or design, which the exercise of the
1. Employer's liability and workmens insurance
is unexpected, unusual or reasoning faculties,
the risk insured against is the liability of the
unforeseen. The term consciousness, and
assured to make compensation or pay damages
does not, without volition. Where a
for an accident, injury, or death, occurring to a
qualification, exclude provision of the policy
servant or other employee, in the course of his
events resulting in excludes intentional
employment under statutes imposing such
damage or loss due to injury, it is the intention of
liability on employers.
fault, recklessness or the person inflicting the
2. Public utility insurance indemnifies against
negligence of third parties injury that is controlling. If
liability on account of injuries to the person or
(Sundiang, 2014 citing Pan the injuries suffered by
property of another. It may extend to
Malayan Insurance Corp. the insured clearly
automobiles, elevators, fly wheels, libel,
V. CA, 184 SCRA 54). resulted from the
theaters, and vessels.
intentional act of a third
3. Motor vehicle liability insurance is a contract of
person, the insurer is
insurance against passenger and third-party
relieved from liability as
liability for death or bodily injuries and damage
stipulated (Sundiang,
to property arising from, motor vehicle accidents.
2014 citing Biagtan v. The
4. Plate glass insurance an insurance against loss
Insular Life Assurance Co.
from accidental breaking of plate-glass windows,
Ltd, 44 SCRA 58 [1972]).
doors, showcases, etc.
5. Burglary and theft insurance an insurance Rules on Third party liability insurance
against loss of property by the depredations of
1. Insurable interest is based on the interest of the
burglars and thieves.
insured in the safety of the persons, and their
6. Personal accident insurance a form of insurance
property, who may maintain an action against him in
which undertakes to indemnify the assured
case of their injury or destruction respectively (De
against the expense, loss of time, and suffering
Leon, 2010).
resulting from accidents causing him physical
injury, usually by payment at a fixed rate per 2. In a TPL insurance contract, the insurer assumes
week while the consequent disability lasts, and the obligation by paying the injured third party to
sometimes including the payment of a fixed sum whom the insured is liable. Prior payment by the
to his heirs in case of his death by accident within insured to the injured third person is not necessary in
the term of the policy. order that the obligation of the insurer may arise. The

UNIVERSITY OF SANTO TOMAS

75 FACULTY OF CIVIL LAW
 MERCANTILE LAW
moment the insured becomes liable to third persons,
the insured acquires an interest in the insurance
contract which may be garnished like any other credit
(Perla Compania de Seguros, Inc. vs. Ramolete, 203
SCRA 487 [1991]).
3. In burglary, robbery and theft insurance, the
opportunity to defraud the insurer (moral hazard) is
so great that insurer have found it necessary to fill up
the policies with many restrictions designed to
reduce the hazard. The purpose of the exception is to
guard against liability should theft be committed by
one having unrestricted access to the property
(Fortune Insurance & Surety Co. vs. CA, 244 SCRA 308
[1995]).
4. The right of the person injured to sue the insurer of
the party at fault (insured), depends on whether the
contract of insurance is intended to benefit third
persons also or only the insured (Eulogio vs. Del
Monte, GR No. L-22042, August 17, 1967). If the
contract provides for:
a. Indemnity against third party liability The
third persons to whom the insured is liable, can
sue directly the insurer upon the occurrence of
the injury or event upon which the liability
depends. The purpose is to protect the injured
person against the insolvency of the insured who
causes such injury and to give him a certain
beneficial interest in the proceeds of the policy.
It is as if the injured person were especially
named in the policy (Shafer vs. RTC Judge, 167
SCRA 386 [1986]).
b. Indemnity against actual loss or payment
The third persons cannot proceed against the
insurer, the contract being solely to reimburse
the insured for liability actually discharged by
him through payment to third persons, said third
persons recourse being thus limited to the
insured alone (Guingon vs. Del Monte, 20 SCRA
1043 [1967]). Prior payment by the insured is
necessary to give rise to the obligation of the
insurer.
Source of liability of a Third party liability insurance
The insurers liability is based on contract; that of the
insured is based on tort (Malayan Insurance Co. vs.
CA, 165 SCRA 136 [1988]).
Q: Lawrence, a boxer, is a holder of an accident
insurance policy. In a boxing match, he died after
being knocked out by the opponent. Can his father
who is a beneficiary under said insurance policy
successfully claim indemnity from the insurance
company? (1990 Bar Question)
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
A: Yes. Clearly, the proximate cause of death was the
boxing contest. Death sustained in a boxing contest is
an accident (De la Cruz v. Capital Insurance & Surety
Co.,G.R. No. L-21574, June 30, 1966).
Liability of the insurer v. Liability of the insured
INSURER INSURED
The liability is direct but Liability is direct and can
the insurer cannot be be held liable with all the
held solidarily liable with parties at fault.
the insured and other
parties at fault.
Liability is based on Liability is based on tort.
contract
The third-party liability is The liability extends to
only up to the extent of the amount of actual and
the insurance policy and other damages. (Heirs Poe
that required by law v. Malayan Insurance,
G.R. No. 156302, Apr. 7,
2009)
Q: While driving his car along EDSA, Cesar
sideswiped Roberto, causing injuries to the latter,
Roberto sued Cesar and the third party liability
insurer for damages and/or insurance proceeds. The
insurance company moved to dismiss the complaint,
contending that the liability of Cesar has not yet
been determined with finality. Is the contention of
the insurer correct? (1996 Bar Question)
A: No, the contention of the insurer is not correct.
There is no need to wait for the decision of the court
determining Cesars liability with finality before the
third party liability insurer could be sued. The
occurrence of the injury to Roberto immediately gave
rise to the liability of the insurer under its policy.
Where an insurance policy insures directly against
liability, the insurers liability accrues immediately
upon the occurrence of the injury or event upon
which the liability depends (Shafer vs. RTC Judge,
supra).
Liability of insurer if the insured was committing a
felony
Liabilities arising out of acts of negligence, which are
also criminal, are also insurable on the ground that
such acts are accidental. Thus, a motor insurance
policy covering the insureds liability for accidental
injury caused by his negligence, even though gross
and attended by criminal consequences such as
homicide through reckless imprudence, will not be
void as against public policy. But liability
consequences of deliberate criminal acts are not
insurable (Sundiang, 2014).
76
 INSURANCE CODE
No action clause 3. Contractual It is determined strictly by the
terms of the contract of suretyship in relation to
It is a requirement in a policy of liability insurance the principal contract between the obligor and
which provides that suit and final judgment be first the obligee (Sec. 178, ibid).
obtained against the insured, that only thereafter can
the person injured recover on the policy. It expressly Suretyship v. Property insurance
disallows suing the insurer as co-defendant (Guingon
v. Del Monte, G.R. No. L-21806, Aug. 17, 1967). SURETYSHIP PROPERTY
INSURANCE
NOTE: A no action clause must yield to the provisions of It is an accessory contract. The principal contract
the Rules of Court regarding multiplicity of suits (Shafer v. itself.
RTC Judge, supra.).
There are three parties: the There are only two
surety, obligor/debtor, and parties: insurer and
Rules in accident insurance
the obligee/creditor. insured
More of a credit Generally a contract of
1. For death or injury to be covered by the policy,
accommodation with the indemnity
such should not be the natural or probable result
surety assuming primary
of the insureds voluntary act, or if something
liability
unforeseen occurs in the doing of the act which
Surety is entitled to No right of recovery
produces the injury, which may result to death
reimbursement from the for the loss the insurer
(Dela Cruz vs. Capitol Insurance & Surety Co.,
principal and his guarantors may sustain except
supra).
for the loss it may suffer when the insurer is
2. Suicide and willful exposure to needless peril are
under the contract. entitled to
in pari matere because they both signify a
subrogation.
disregard for ones life. Voluntary exposure to a
known danger is generally held to negate the A bond may be canceled by May be canceled
accidental character of whatever followed from or with the consent of the unilaterally either by
the known danger (De Leon, 2010). obligee or by the the insured or by the
3. The insureds beneficiary has the burden of proof commissioner or by the insurer on grounds
in demonstrating that the cause of death is due court. provided by law.
to the covered peril. Once that fact is Requires acceptance of the Does not need
established, the burden shifts to the insurer to obligee before it becomes acceptance of any
show any excepted peril that may have been valid and enforceable. third party.
stipulated by the parties (Vda. De Gabriel vs. CA, A risk-shifting device, the A risk-distributing
264 SCRA 137 [1996]). premium paid being in the device, the premium
nature of a service fee. paid being considered
SURETYSHIP a ratable contribution
to a common fund. (De
Contract of suretyship Leon, 2010).

It is an agreement whereby a party called the Rules of payment of premiums in suretyship

surety guarantees the performance by another
party called the principal or obligor of an obligation
or undertaking in favor of a third party called the
obligee. It includes official recognizances,
stipulations bonds or undertakings issued by any
company by virtue and under the provisions of Act
No. 536, as amended by Act No. 2206 (Sec. 177,
Insurance Code).
Nature of liability of surety
The liability of the surety or sureties shall be:
1. Solidary Joint and several with the obligor and
2. Limited or fixed Limited to the amount of the
bond (It cannot be extended by implication).
1. The premium becomes a debt as soon as the
contract of suretyship or bond is perfected and
delivered to the obligor (Sec. 77, ibid);
2. The contract of suretyship or bonding shall not
be valid and binding unless and until the
premium therefor has been paid;
3. Where the obligee has accepted the bond, it shall
be valid and enforceable notwithstanding that
the premium has not been paid (Philippine Pryce
Assurance Corp. v. CA, G.R.No. 107062, February
21, 1994);
4. If the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety
shall collect only a reasonable amount;

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77 FACULTY OF CIVIL LAW
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5. If the non-acceptance of the bond be due to the
fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by
the surety; and
6. In the case of continuing bond (for a term longer
than one year or with no fixed expiration date),
the obligor shall pay the subsequent annual
premium as it falls due until the contract is
canceled (Sec. 179, Insurance Code) (De Leon,
2010).
Types of surety bonds
1. Contract bonds These are connected with
construction and supply contracts. They are for
the protection of the owner against a possible
default by the contractor or his possible failure to
pay materials, men, laborers and
sub-contractors. The position of surety,
therefore, is to answer for a failure of the
principal to perform in accordance with the
terms and specifications of the contract. There
may be two bonds:
a. Performance bond One covering the
faithful performance of the contract; and
b. Payment bond One covering the payment
of laborers and material men.
2. Fidelity bonds They pay an employer for loss
growing out of a dishonest act of his employee.
For the purposes of underwriting, they are
classified as:
a. Industrial bond One required by private
employers to cover loss through dishonesty of
employees; and
b. Public official bond One required of public
officers for the faithful performances of their
duties and as a condition of entering upon the
duties of their offices.
3. Judicial bonds They are those which are required
in connection with judicial proceedings (ibid).
Q: Fumitechniks Corporation, represented by Ma.
Lourdes Apostol, had applied for and was issued a
surety bond by First Lepanto-Taisho Insurance
Corporation (First Lepanto-Taisho) for the amount of
P15,700,000.00. As stated in the attached rider, the
bond was in compliance with the requirement for
the grant of a credit line with the Chevron
Philippines, Inc. (Chevron) to guarantee payment of
the cost of fuel products withdrawn within the
stipulated time in accordance with the terms and
conditions of agreement between Chevron and
Fumitechniks. When Fumitechniks defaulted on its
obligation, Chevron notified First Lepanto-Taisho of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Fumitechniks unpaid purchases. First
Lepanto-Taisho thereafter demanded to
Fumitechniks the submission of a copy of the
agreement secured by the bond, together with
copies of documents such as delivery receipts.
Fumitechniks, however, denied that it executed such
an agreement with Chevron, thus no copy of such
agreement could be submitted. Because of this,
Chevron Philippines, Inc. sued First Lepanto-Taisho
for the payment of unpaid oil and petroleum
purchases made by Fumitechniks. Is the surety liable
to the creditor in absence of a written contract with
the principal?
A: No. Section 176 of the Insurance Code is clear that
a surety contract should be read and interpreted
together with the contract entered into between the
creditor and the principal. 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.
Having accepted the bond, Chevron as creditor must
be held 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 Chevron impacts not on the
validity or legality of the surety contract but on the
creditors right to demand performance (First
Lepanto-Taisho Insurance v. Chevron Philippines, Inc.,
G.R. No. 177839, January 18, 2012).
LIFE INSURANCE
Life insurance
It is insurance on human lives and insurance
appertaining thereto or connected therewith (Sec.
181, Insurance Code). It is made payable on the death
of the person, or on his surviving a specified period,
or otherwise contingently on the continuance or
cessation of life (Sec. 182, ibid).
NOTE: Every contract or undertaking for the payment of
annuities including contracts for the payment of lump sums
under a retirement program where a life insurance
company manages or acts as a trustee for such retirement
program shall be considered a life insurance contract for
purposes of the Insurance Code (Sec. 181, Insurance Code).
Every contract or pledge for the payment of endowments
or annuities shall also be considered a life insurance
contract under the Insurance Code (Sec. 182, Insurance
Code).
78
 INSURANCE CODE
Who may exercise any right under the policy
In the absence of a judicial guardian, the father, or in
the latters absence or incapacity, the mother, of any
minor, who is an insured or a beneficiary under a
contract of life, health, or accident insurance, may
exercise, in behalf of said minor, any right under the
policy, without necessity of court authority or the
giving of a bond, where the interest of the minor in
the particular act involved does not exceed Five
hundred thousand pesos (P500,000.00) or in such
reasonable amount as may be determined by the
Commissioner. Such right may include, but shall not
be limited to, obtaining a policy loan, surrendering
the policy, receiving the proceeds of the Policy, and
giving the minors consent to any transaction on the
minors consent to any transaction on the policy.
In the absence or in case of the incapacity of the
father or mother, the grandparent, the eldest
brother or sister at least eighteen (18) years of age,
or any relative who has actual custody of the minor
insured or beneficiary, shall act as a guardian
without need of a court order or judicial
appointment as such guardian, as long as such
person is not otherwise disqualified or
incapacitated. Payment made by the insurer
pursuant to this section shall relieve such insurer of
any liability under the contract (Sec. 182, Insurance
Code).
Life insurance is also a contract of indemnity
This is because of the following reasons:
1. The liability in life insurance is absolutely certain
2. Amount of life insurance generally is without
limit
3. The policy is a valued policy
4. There is no direct pecuniary loss required (De
Leon, 2010).
Kinds of life insurance policies
1. Ordinary life, general life or old line policy Insured
pays a premium every year until he dies. Cash
surrender value after 3 years.
2. Limited payment Insured pays premium for a
limited period. If he dies within the period, his
beneficiary is paid; if he outlives the period, he
does not get anything.
3. Endowment insured pays premium for specified
period. If he outlives the period, the face value of
the policy is paid to him; if not, his beneficiaries
receive the benefit.
4. Term insurance insured pays premium only once,
and he is insured for a specified period. If he dies
79
within the period, his beneficiaries benefit. If he
outlives the period, no person benefits from the
insurance.
5. Industrial life entitles the insured to pay
premiums weekly, or where premiums are
payable monthly or oftener (Sundiang, 2014).
Contract of life annuity
It is a contract to pay the insured, or a named person
or persons, a sum or sums periodically during life or
certain period (Perez, 2006).
Measure of indemnity under a policy of insurance
upon life or health
GR: The measure of indemnity under a policy of
insurance upon life or health is the sum fixed in the
policy.
XPN: The interest of a person insured is susceptible of
exact pecuniary measurement (Sec. 186, Insurance
Code).
Liability of the insurer in case of suicide
The insurer shall be liable in case of suicide by the
insured if:
1. The suicide is committed after the policy has
been in force for a period of 2 years from the
date of its issue or of its last reinstatement.
2. The suicide is committed within a shorter period
as provided in the policy.
3. The suicide is committed in the state of insanity
regardless of the date of commission (Sec. 183,
ibid.)
Q: Sun Insurance Co. issued to Tan a life policy
having this provision: the company shall not be
liable in respect of bodily injury consequent upon
the insured person who willfully exposes himself to
needless peril except in an attempt to save human
life". Tan designated his wife, Beverly as beneficiary.
One evening, Tan, while playing with his hand gun,
suddenly stood in front of his secretary and pointed
the gun at her. Startled, she pushed the gun aside
and said that it may be loaded. Thus, Tan, to assure
her that it was not loaded, pointed it at his temple.
The next moment, there was an explosion and Tan
slumped to the floor lifeless.
Beverly, then claimed the proceeds from Sun
Insurance, but the latter rejected her claim on the
ground that the death of Tan was not accidental.
Beverly sued the insurer. Will Beverlys claim
prosper?
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A: Beverly can recover the proceeds of the policy or when loss occurs. also when the loss occurs.
from the insurer. The death of the insured was not
due to suicide or willful exposure to needless peril
which are excepted risks. The insureds act was purely Insurable interest need not Insurable interest must
an act of negligence which is covered by the policy have any legal basis. have a legal basis.
and for which the insured got the insurance for his Contingency that is
protection. In fact, he removed the magazine from contemplated is a certain The contingency insured
the gun and when he pointed the gun to his temple event, the only uncertainty against may or may not
he did so because he thought that it was safe for him being the time when it will occur.
to do so. He did so to assure his sister that the gun take place.
was harmless. There is none in the policy that would The liability of the insurer
Liability is uncertain
relieve the insurer of liability for the death of the to make payment is
because the happening of
insured since the death was an accident (Sun certain, the only uncertain
the peril insured against is
Insurance v CA, G.R. Nos. 79937-38, February 13, element being when such
uncertain.
1989). payment must be made.
May be terminated by the
Q: X, in January 30, 2009, or two (2) years before insured but cannot be May be cancelled by
reaching the age of 65, insured his life for cancelled by the insurer either party and is usually
Php20Million. For reason unknown to his family, he and is usually a long term for a term of one year
took his own life two (2) days after his 65th contract.
birthday. The policy contains no excepted risk. The loss to the
Which statement is most accurate? (2012 Bar beneficiary caused by the The reverse is generally
Question) death of the insured can true of the loss of
a. The insurer will be liable. seldom be measured property, i.e., it is capable
b. The insurer will not be liable. accurately in terms of cash of pecuniary estimation.
c. The state of sanity of the insured is relevant in value.
cases of suicide in order to hold the insurer liable. The beneficiary is under no
The insured is required to
d. The state of sanity of the insured is irrelevant in obligation to prove actual
submit proof of his actual
cases of suicide in order to hold the insurer liable. financial loss as a result of
pecuniary loss as a
the death of the insured in
condition precedent to
A: A. The insurer will be liable under Sec. 183 of the order to collect the
collecting the insurance.
Insurance Code. The suicide is committed after the insurance.
policy has been in force for a period of 2 years from
the date of its issue. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
Life insurance v. Fire /marine insurance
Motor vehicle liability insurance
LIFE INSURANCE FIRE/MARINE INSURANCE
It is a contract of It is a protection coverage that will answer for legal
It is a contract of
investment not contract of liability for losses and damages for bodily injuries or
indemnity.
indemnity. property damage that may be sustained by another
Always regarded as valued arising from the use and operation of a motor vehicle
May be open or valued. by its owner (Compulsory Motor Vehicle Liability
policy.
May be transferred or The transferee or assignee Insurance, pg.3, prepared and distributed by the
assigned to any person must have an insurable Insurance Commission).
even if he has no insurable interest in the thing
interest. insured. The Insurance Code makes it unlawful for any land
The consent of the insurer transportation operator or owner of a motor vehicle
Consent, in the absence of to operate the same in public highways unless there
is not essential to the
waiver by the insurer, is is an insurance or guaranty to indemnify the death or
validity of the assignment
essential in the bodily injury of a third party or passenger arising from
of a life policy unless
assignment of the policy. the use thereof (Sec. 387, Insurance Code).
expressly required.
Insurable interest in the life Insurable interest in the Registration of any vehicle will not be made or
or health of the person property insured must renewed without complying with the requirement
insured need not exist after exist not only when the (Sec. 389, Insurance Code).
the insurance takes effect insurance takes effect but

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 80
 INSURANCE CODE
Purpose of motor vehicle liability insurance
To give immediate financial assistance to victims of
motor vehicle accidents and/or their dependents,
especially if they are poor regardless of financial
capability of motor vehicle owners or operators
responsible for the accident sustained (First
Integrated Bonding Insurance Co., Inc. v. Hernando,
G.R. No. L-51221, July 31, 1991).
NOTE: The insurers liability accrues immediately upon the
occurrence of the injury or event upon which the liability
depends, and does not depend on the recovery of
judgment by the injured party against the insured (Shafer v.
Judge, RTC, 167 SCRA 386).
Definitions
1. Motor vehicle
Any vehicle propelled by any power other than
muscular power using the public highways, but
excepting road rollers, trolleys cars, street sweepers,
sprinklers, lawn mowers, bulldozers, graders, forklifts,
amphibian trucks, and cranes if not used in public
highways, vehicles which run only on rails or tracks,
and tractors, trailers and traction engines of all kinds
used exclusively for agricultural purposes (Sec. 3[a] of
RA 4136).
NOTE: Trailers having any number of wheels, when
propelled or intended to be propelled by attachment to a
motor vehicle shall be classified as separate motor vehicle
with no power rating (ibid).
2. Passenger
Any fare-paying person being transported and
conveyed in and by a motor vehicle for transportation
of passengers for compensation, including persons
expressly authorized by law or by the vehicles
operator or his agents to ride without fare (Sec. 386,
[b], Insurance Code).
3. Third-party
Any person other than a passenger as defined in this
section (ibid.) and shall also exclude a member of the
household, or a member of the family within the
second degree of consanguinity or affinity, of a motor
vehicle owner or land transportation operator, as
likewise defined herein, or his employee in respect of
death, bodily injury, or damage to property arising
out of and in the course of employment (Sec. 386, [c],
ibid).
81
4. Owner or Motor vehicle owner (MVO)
Actual legal owner of a motor vehicle, whose name
such vehicle is duly registered with the Land
Transportation Office (Sec. 386, [d], ibid).
5. Land transportation operator (LTO)
The owner or owners of motor vehicles for
transportation of passengers for compensation,
including school buses (Sec. 386, [e], ibid).
Persons required to maintain a compulsory motor
vehicle liability insurance (CMVLI) policy to operate
motor vehicle/s in public highways
1. Motor vehicle owner (MVO)
2. Land transportation operator (LTO) (Sec. 387,
ibid).
Scope of coverage required for compulsory motor
vehicle liability insurance
1. For MVOs, the coverage must be comprehensive
against third party liability for death or bodily
injuries. If the private motor vehicle is being used
to transport passengers for compensation, the
coverage shall include passenger liability.
2. For LTOs, coverage must be comprehensive
against both passenger and third-party liabilities
for death or bodily injuries (Ins. Memo. Cir. No.
3-81).
Substitutes for a compulsory motor vehicle liability
insurance policy
Instead of a CMVLI policy, MVOs or LTOs may either:
1. Post a surety bond with the Insurance
Commissioner who shall be made the obligee or
creditor in the bond in such amount or amounts
required as limits of indemnity to answer for the
same losses sought to be covered by a CMLVI
policy; or
2. Make a cash deposit with the Insurance
Commission in such amount or amounts required
as limits of indemnity for the same purpose (Sec.
390, ibid).
NOTE: After the cash deposit or surety bond has been
proceeded against by the Insurance Commissioner, such
cash deposit shall be replenished or such surety bond shall
be restored by the MVO or LTO in the right amount/s
required as limit of liability within 60 days after impairment
or expiry, otherwise, he shall secure a CMLVI required
(ibid).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Duties of motor vehicle owner or land
transportation operator in contemplation of the
cancellation of the policy
Contemplating the cancellation of the policy, the
MVO or LTO shall:
1. Give to the insurance or surety company
concerned a written notice of his intention to
cancel;
2. Secure, before the insurance policy or surety
bond ceases to be effective, another similar
policy or bond to replace that one canceled;
3. Without making any replacement, make a cash
deposit in sufficient amount with the Insurance
Commissioner and secure a certification from the
Insurance Commissioner regarding the deposit
made for presentation to and filing with the Land
Transportation Office (CMVLI, supra pg. 12) (Sec.
393-394, Insurance Code).
Effects of the cancellation of the policy
GR: Upon receipt of the notice of such cancellation,
the Land Transportation Office shall order the
immediate confiscation of the plates of the motor
vehicle concerned.
XPNs: No confiscation will be ordered if said Office
receives any of the following:
1. An evidence or proof of a new and valid CMVLI
cover which may be either an insurance policy or
guaranty in cash or surety bond;
2. A signed duplicate of an endorsement or
addendum issued by the insurance company
concerned showing revival or continuance of the
CMVLI cover; or
3. A certification issued by the Insurance
Commissioner to the effect that a cash deposit in the
amount required as limit of indemnity has been made
with him by the MVO or LTO (CMVLI, supra, p. 12,
Sec. 393, Insurance Code).
Own damage coverage
It simply meant that the insurer had assumed to
reimburse the costs for repairing the damage to the
insured vehicle, as opposed to damage to third party
vehicle/property. The phrase own damage does not
mean damage to the insured car caused by the
assured itself, instead, of third parties (Pan Malayan
Insurance Corporation v. Court of Appeals, 184 SCRA
54 [1990]).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
No fault indemnity clause (1994 Bar Question)
It is a clause where the insurer is required to pay a
third party injured or killed in an accident without the
necessity of proving fault or negligence on the part of
the insured. There is a stipulated maximum amount
to be recovered.
Rules under the no fault indemnity clause
1. The total indemnity in respect of any one person
shall not exceed P15,000 for all motor vehicles
(Ins. Memo. Circ. No. 4-2006).
2. Proof of loss:
a. Police report of accident
b. Death certificate and evidence sufficient
to establish proper payee
c. Medical report and evidence of medical
or hospital disbursement (Sec. 391 [3],
Insurance Code).
3. Claim may be made against one motor vehicle
only (Sec. 391 [c], ibid).
4. In case injury of an occupant of a vehicle, the
claim shall lie against the insurer of the vehicle in
which the occupant is riding, mounting or
dismounting from (ibid).
5. In any other case (not an occupant), claim shall
lie against the insurer of the directly offending
vehicle (ibid).
6. In all cases, the right of the party paying the
claim to recover against the owner of the vehicle
responsible for the accident shall be maintained
(ibid).
NOTE: The claimant is not free to choose from which
insurer he will claim the "no fault indemnity," as the law, by
using the word "shall, makes it mandatory that the claim
be made against the insurer of the vehicle in which the
occupant is riding, mounting or dismounting from. That said
vehicle might not be the one that caused the accident is of
no moment since the law itself provides that the party
paying may recover against the owner of the vehicle
responsible for the accident (Perla Compania de Seguros,
Inc. v. Ancheta, G.R. No. L-49599, Aug. 8, 1988).
This no-fault claim does NOT apply to property damage. If
the total indemnity claim exceeds P15, 000 and there is
controversy in respect thereto, the finding of fault may be
availed of by the insurer only as to the excess. The first P15,
000 shall be paid without regard to the fault (CMVLI, supra,
pg.13).
Q: X is a passenger of a jeepney for hire being driven
by Y. The jeepney collided with another passenger
jeepney being driven by Z who was driving
recklessly. As a result of the collision, X suffered
injuries. Both passenger jeepneys are covered by
Comprehensive Motor Vehicular Insurance
82
 INSURANCE CODE
Coverage. If X wants to claim under the "no fault
indemnity clause", his claim will lie (2012 Bar
Question)
A: Against the insurer of the passenger jeepney
driven by Y because X was his passenger. The
Insurance Code states that in the case of an occupant
of a vehicle, the claim shall lie against the insurer of
the vehicle in which the occupant is riding, mounting
or dismounting from.
Authorized driver clause
It indemnifies the insured owner against loss or
damage to the car but limits the use of the insured
vehicle to:
1. The insured himself; or
NOTE: The insured need not prove that he has a
drivers license at the time of the accident if he was
the driver (Sundiang, 2014).
2. Any person who drives on his order or with his
permission; provided, that the person driving is
permitted to drive the motor vehicle in accordance
with the law, and is not disqualified (Villacorta v.
Insurance Commissioner, G.R. No. 54171, October 28,
1980).
NOTE: The main purpose of this clause is to require a
person other than the insured, who drives the car on
the insureds order or with his permission, to be duly
licensed drivers and have no disqualification to drive a
motor vehicle (Villacorta v. Insurance Commission, G.R.
No. L-54171, Oct. 28, 1980).
An Irish citizen whose 90-day tourist visa had expired,
cannot recover on his car insurance policy, not being
authorized to drive a motor vehicle without a
Philippine drivers license (Stokes v. Malayan Insurance
Co., Inc. 127 SCRA 766 [1984]).
A driver with an expired Traffic Violation Receipt or
expired Temporary Operators permit is not
considered an authorized driver within the meaning of
the insurance policy. The Traffic Violation Receipt is
coterminous with a confiscated license under the
Motor Vehicle Law (Gutierrez v. Capital Insurance &
Surety Co., Inc., G.R. No. L-26287 [1984]).
Theft clause
It is that which includes theft as among the risks
insured against. Where a car is unlawfully and
wrongfully taken without the knowledge and consent
of the owner, such taking constitutes theft and it is
the theft clause, not the authorized driver clause
which should apply (Perla Compania de Seguros, Inc.
v. CA, 208 SCRA 487 [1992]).
83
Theft
There is theft if the vehicle is taken with intent to gain
without the consent of the insured-owner. Thus,
there is theft even if:
1. The vehicle is returned;
2. The vehicle was stolen by the driver of the
insured (Alpha Insurance and Surety Company v.
Castor, G.R. 198174, September 2, 2013).
3. The vehicle was taken to the owner of a repair
shop for the purpose of repair and in order to
attach accessories (Paramount Insurance v.
Spouses Remondeulaz, G.R. No. 173773,
November 28, 2012) (Sundiang, 2014).
Limitations with respect to compulsory motor
vehicle liability insurance over solicitation
1. No government office or agency having the duty
of implementing the provisions of the Insurance
Code on CMVLI shall act as agent in procuring the
insurance policy or surety bond required;
2. No official or employee of such office or agency
shall similarly act as such agent; and
3. The commission of an agent procuring the
corresponding insurance policy or surety bond
shall in no case exceed 10% of the amount of
premiums therefore (Sec. 400, Insurance Code).
Q: When a passenger jeepney, insured but with an
authorized drivers clause and was driven by a driver
who only holds a Traffic Violation Report (TVR)
because his license was confiscated, met an
accident, may the owner of the jeepney claim from
the insurance company? (2003 Bar Question)
A: Yes. The fact that the driver was merely holding a
TVR does not violate the condition that the driver
should have a valid and existing drivers license.
Besides, such a condition should be disregarded
because what is involved is a passenger jeepney, and
what is involved here is not own damage insurance
but third party liability where the injured party is a
third party not privy to the contract of insurance.
MICROINSURANCE
Microinsurance
It is a financial product or service that meets the risk
protection needs of the poor where:
a. The amount of contributions, premiums, fees or
charges, computed on a daily basis, does not exceed
seven and a half percent (7.5%) of the current daily
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
minimum wage rate for nonagricultural workers in Insurable interest in life insurance v. Insurable
Metro Manila; and interest in property insurance
b. The maximum sum of guaranteed benefits is not
more than one thousand (1000) times of current daily INSURABLE INSURABLE
minimum wage rate for nonagricultural workers in INTEREST IN INTEREST IN
Metro Manila (Sec. 187, Insurance Code). LIFE PROPERTY
As to extent GR: Every Limited to the
NOTE: No insurance company or mutual benefit association person has an actual value of the
shall engage in the business of microinsurance unless it unlimited property
possesses all the requirements as may be prescribed by the
insurable
Commissioner. The Commissioner shall issue such rules and
interest in his
regulations governing microinsurance (Sec. 188, Insurance
Code). own life (De
Leon, 2010).
INSURABLE INTEREST
XPN: Where life
Insurable interest insurance is
taken out by a
An insurable interest is that interest which a person is creditor on the
deemed to have in the subject matter insured, where life of the
he has a relation or connection with or concern in it, debtor,
such that the person will derive pecuniary benefit or insurable
advantage from the preservation of the subject interest is
matter insured and will suffer pecuniary loss or limited to the
damage from its destruction, termination, or injury by amount of debt
the happening of the event insured against (Violeta R. When must Must exist at the GR: Must exist
Lalican vs. The Insular Life Assurance Company insurable time the policy both at the time
Limited, G.R. No. 183526, August 25, 2009). interest exist takes effect and the policy takes
need not exist effect and the time
NOTE: The existence of insurable interest is a matter of thereafter (Sec. of loss, but need
public policy and is not susceptible to the principle of 19, Insurance not exist in the
estoppel. The existence of an insurable interest gives a Code). period in between
person the legal right to insure the subject matter of the (Sec. 19, ibid).
policy of insurance (ibid).
XPN: Secs. 21-24;
When does a person has insurable interest 25, ibid.
As to the The beneficiary The beneficiary
GR: A person is deemed to have an insurable interest beneficiarys need not have must have
in the subject matter insured where he has a relation interest insurable insurable interest
or connection with or concern in it that he will derive interest over the over the thing
pecuniary benefit or advantage from its preservation life of the insured (Sundiang,
and will suffer pecuniary loss from its destruction or insured if the 2014).
injury by the happening of the event insured against. insured himself
secured the
XPN: To have an insurable interest in the life of a policy. However,
person, the expectation of benefit from the if the life
continued life of that person need not necessarily be insurance was
of pecuniary nature (De Leon, 2010). obtained by the
beneficiary, the
latter must have
insurable
interest over the
life of the
insured
(Sundiang,
2014).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 84
 INSURANCE CODE
Existence of insurable interest in life and property
insurance
For both life and property insurance, the insurable
interest is required to exist at the time of perfection
of the policy. For property insurance, the insurable
interest must also exist at the time of loss, however,
in case of life insurance, the insurable interest need
to exist only at the time of perfection and not
thereafter (Sec. 19, ibid).
Q: X owned a house and lot. X insured the house.
The house got burned. Then he sold the partially
burnt house and the lot to Y. Which statement is
most accurate? (2012 Bar Question)
a. X is not anymore entitled to the proceeds of the
insurance policy because he already sold the
partially burnt house and lot.
b. X is still entitled to the proceeds of the insurance
policy because what is material is that at the time of
the loss, X is the owner of the house and lot.
c. No one is entitled to the proceeds because
ownership over the house and lot was already
transferred.
d. Y will be the one entitled to the proceeds because
he now owns the partially burnt house and lot.
A: B. X is still entitled to the proceeds of the
insurance policy because what is material is that at
the time of the loss, X is the owner of the house and
lot. After the loss occurs, the right of the insured
under the policy becomes fixed and a subsequent
conveyance by the insured cannot affect the insurers
liability (Perez, supra, pg. 43, citing Florea vs. Iowa
State Ins. Co., 32 SW 2d 11, 225 Mo. App. 49).
Mere hope or expectancy is not insurable
A mere contingent or expectant interest in any thing,
not founded on an actual right to the thing, nor upon
any valid contract for it, is not insurable (Sec. 16,
ibid).
Right of the insured to change the beneficiary he
designated
GR: The insured shall have the right to change the
beneficiary he designated in the policy
XPN: If the insured expressly waived this right in the
said policy.
NOTE: Under Sec. 64 of the Family Code, the innocent
spouse is allowed to revoke the designation of the other
spouse as irrevocable beneficiary after legal separation.
85
Effect of the irrevocable designation of the
beneficiary to the assignment of the policy
The insured cannot assign the policy if the
designation of the beneficiary is irrevocable. The
irrevocable beneficiary has a vested right (Sundiang,
2014).
When designation of beneficiary is deemed
irrevocable
The insured shall have the right to change the
beneficiary he designated in the policy, unless he has
expressly waived this right in said policy.
Notwithstanding the foregoing, in the event the
insured does not change the beneficiary during his
lifetime, the designation shall be deemed irrevocable
(Sec. 11, Insurance Code).
NOTE: The foregoing provision is an amendment
incorporated in the Insurance Code of 2013.
Void stipulations in an insurance contract
Every stipulation in an insurance contract:
1. For the payment of loss whether the person
insured has or does not have any insurable
interest in the subject-matter of insurance, or
2. That the policy shall be received as proof of
such interest, and
3. Every policy executed by way of gaming or
wagering is VOID (Sec. 25, ibid).
IN LIFE/ HEALTH
Two general classes of life policies
1. Insurance upon ones life are those taken out
by the insured upon his own life (Section 10[a],
Insurance Code) for the benefit of himself, or of his
estate, in case it matures only at his death, for the
benefit of third person who may be designated as
beneficiary.
The question of insurable interest is immaterial
where the policy is procured by the person whose life
is insured. A person who insures his own life can
designate any person as his beneficiary, whether or
not the beneficiary has an insurable interest in the
life of the insured subject to the limits under Articles
739 and 2012 of the New Civil Code (De Leon, 2010).
2. Insurance upon life of another are those taken
out by the insured upon the life of another. Where a
person names himself beneficiary in a policy he takes
on the life of another, he must have insurable
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
interest in the life of the latter (De Leon,2010). This
class includes the following:
a. His spouse and of his children.
b. Any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest.
c. Of any person under a legal obligation to
him for the payment of money, or
respecting property or services, of which
death or illness might delay or prevent the
performance.
d. Of any person upon whose life any estate
or interest vested in him depends (Sec. 10,
Insurance Code).
NOTE: In paragraph (a) of Section 10 of the Insurance Code,
mere relationship is sufficient while the rest (pars. b, c, and
d) requires pecuniary interest. Thus, the interest of the
creditor over the life of the debtor ceases upon full
payment (Sundiang, 2009).
Persons prohibited from being designated as
beneficiaries
Under the Article 739 of the New Civil Code, the
following are prohibited designation of beneficiaries:
1. Those made between persons who were guilty
(finding of guilt in a civil case is sufficient) of
adultery or concubinage at the time of donation
2. Those made between persons found guilty of
the same criminal offense, in consideration
thereof
3. Those made to a public officer or his wife,
descendants or ascendants by reason of his
office.
NOTE: The designation of the above-enumerated persons is
void but the policy is binding. The estate will get the
proceeds (Sundiang, 2009).
Q: Can a common-law wife named as beneficiary in
the life insurance policy of a legally married man
claim the proceeds thereof in case of death of the
latter?
A: No. Under Article 2012 of the New Civil Code, any
person who is forbidden from receiving any donation
under Article 739 cannot be named beneficiary of a
life insurance policy by the person who cannot make
a donation to him. Common-law spouses are,
definitely, barred from receiving donations from each
other. In essence, a life insurance policy is no
different from a civil donation insofar as the
beneficiary is concerned. 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
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
beneficiary will receive the proceeds or profits of said
insurance (The Insular Life Assurance Company, Ltd.,
v. Carponia T. Ebrado and Pascuala Vda. De Ebrado,
G.R. No. L-44059, [1977]).
Extent of the creditors recovery from the insurance
he procured upon the life of the debtor, if the latter
dies
It is limited only to the extent of the amount of the
debt at the time of debtors death and the cost of
carrying the insurance on the debtors life.
Consent of the person insured is not essential to the
validity of the policy
So long as it could be proved that the insured has an
insurable interest at the inception of the policy, the
insurance is valid even without such consent (Sec. 10,
Insurance Code).
Effect if the beneficiary willfully brought about the
death of the insured
GR: The interest of a beneficiary in a life insurance
policy shall be forfeited when the beneficiary is the
principal, accomplice, or accessory in willfully
bringing about the death of the insured. In such a
case, the share forfeited shall pass on to the other
beneficiaries, unless otherwise disqualified. In the
absence of other beneficiaries, the proceeds shall be
paid in accordance with the policy contract. If the
policy contract is silent, the proceeds shall be paid to
the estate of the insured (Sec. 12, ibid).
NOTE: The rule provided was an amendment stated in the
Insurance Code of 2013.
XPNs:
1. The beneficiary acted in self-defense;
2. The insureds death was not intentionally caused
(e.g., thru accident);
3. Insanity of the beneficiary at the time he killed
the insured.
Q: X is the common law wife of Y. Y loves X so much
that he took out a life insurance on his own life and
made her the sole beneficiary. Y did this to ensure
that X will be financially comfortable when he is
gone. Upon the death of Y, -
a) X as sole beneficiary under the life
insurance policy on the life of Y will be
entitled to the proceeds of the life
insurance.
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 INSURANCE CODE
b) despite the designation of X as the sole
beneficiary, the proceeds of the life
insurance will go to the estate of Y.
c) the proceeds of the life insurance will go to
the compulsory heirs of Y.
d) the proceeds of the life insurance will be
divided equally amongst X and the
compulsory heirs of Y.
(2012 Bar Question)
A: B. Despite the designation of X as the sole
beneficiary, the proceeds of the life insurance will go
to the estate of Y.
Common-law spouses are definitely barred from
receiving donations from each other. In essence, a life
insurance policy is no different from a civil donation
insofar as the beneficiary is concerned. 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 mandate of Article 2012 cannot be laid aside: any
person who cannot receive a donation cannot be
named as beneficiary in the life insurance policy of
the person who cannot make the donation (Insular
Life Assurance, Co. vs. Ebrado, GR No. L-44059,
October 28, 1977).
IN PROPERTY
Insurable interest in property
Every interest in property, whether real or personal,
or any relation thereto, or liability in respect thereof,
of such nature that contemplated peril might directly
damnify the insured, is insurable interest (Sec. 13,
Insurance Code).
Insurable interest in property may consist of the
following:
1. An existing interest The existing interest in the
property may be legal or equitable title.
Examples of insurable interest arising from legal title:
a. Trustee, as in the case of the seller of property
not yet delivered;
b. Mortgagor of the property mortgaged;
c. Lessor of the property leased (De Leon, supra,
pg. 107-108).
87
Examples of insurable interest arising from equitable
title:
a. Purchaser of property before delivery or before
he has performed the conditions of the sale
b. Mortgagee of property mortgaged;
c. Mortgagor, after foreclosure but before the
expiration of the period within which redemption
is allowed (De Leon, 2010).
2. An inchoate interest founded on an existing
interest or
Example: A stockholder has an inchoate interest in
the property of the corporation of which he is a
stockholder, which is founded on an existing interest
arising from his ownership of shares in the
corporation (De Leon, 2014).
3. An expectancy coupled with an existing interest in
that out of which the expectancy arises.
NOTE: Existence of insurable interest is a matter of public
policy. Hence, the principle of estoppel cannot be invoked
(Sundiang, 2014).
Measure of insurable interest in property
The extent to which the insured might be damnified
by loss or injury thereof (Sec. 17). Insurable interest in
property does not necessarily imply a property
interest in, or lien upon, or possession of, the subject
matter of the insurance, and neither title nor a
beneficial interest is requisite to the existence
thereof. It is sufficient that the insured is so situated
with reference to the property that he would be
liable to loss should it be injured or destroyed by the
peril against which it is insured. Anyone has an
insurable interest in property who derives a benefit
from its existence or would suffer loss from its
destruction (Gaisano Cagayan, Inc. v. Insurance
Company of North America, G.R. No. 147839, June 8,
2006).
Extent of insurable interest of a common carrier or
depository in a thing held by him
To the extent of his liability but not to exceed the
value thereof (Sec. 15, Insurance Code) because the
loss of the thing by the carrier or depository may
cause liability against him to the extent of its value.
Effect of change of interest in any part of a thing
insured unaccompanied by a corresponding change
of interest in the insurance
GR: A change of interest in any part of a thing insured
unaccompanied by a corresponding change in
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
interest in the insurance suspends the insurance to an Requisites of double insurance (STRIP)
equivalent extent, until the interest in the thing and
the interest in the insurance are vested in the same 1. Subject matter is the same
person (Sec. 20; Sec.58, ibid). 2. Two or more insurers insuring separately
3. Risk or peril insured against is the same
NOTE: Change of interest contemplated by law is an 4. Interest insured is the same
absolute transfer of the insureds entire interest in the 5. Person insured is the same
property insured to one not previously interested or
insured (Perez, 2006).
Double insurance is not prohibited by law
When there is an express prohibition against alienation in
the policy, in case of alienation, the contract of insurance is It is not contrary to law and hence, in case of double
not merely suspended but avoided (Sundiang, 2014 citing insurance, the insurers may still be made liable up to
Article 1306, NCC). the extent of the value of the thing insured but not to
exceed the amount of the policies issued (Perez,
XPNs: 2006).
1. When there is a prohibition against alienation or
change of interest without the consent of the NOTE: A provision in the policy that prohibits double
insurer in which case the policy is not merely insurance is valid. However, in the absence of such
suspended but avoided (ibid., citing Curtis vs. prohibition, double insurance is allowed (ibid).
Girard Fire and Marine Ins., 11 SE 3, 190 Ga.
954). Nature of the liability of the several insurers in
2. In life, accident, and health insurance (Sec. 20, double insurance (2005 Bar Question)
Insurance Code).
3. A change of interest in a thing insured, after the In double insurance, the insurers are considered as
occurrence of an injury which results in a loss co-insurers. Each one is bound to contribute ratably
does NOT affect the right of the insured to to the loss in proportion to the amount for which he
indemnity for loss (Sec. 21, ibid). is liable under his contract. This is known as the
4. A change of interest in one or more distinct principle of contribution or contribution clause
things, separately insured by one policy does (Sec. 96 [e], ibid).
NOT avoid the insurance as to the others (Sec.
22, ibid). Over insurance
5. A change of interest by will or succession, on the
death of the insured, does NOT avoid an There is over insurance whenever the insured obtains
insurance; and his interest in the insurance a policy in an amount exceeding the value of his
passes to the person taking his interest in the insurable interest (Perez, 2006).
thing insured (Sec. 23, ibid).
6. A transfer of interest by one of several partners, Double insurance v. Over insurance
joint owners, or owners in common, who are
jointly insured, to the others does NOT avoid an DOUBLE INSURANCE OVER INSURANCE
insurance even though it has been agreed that There may be no over
When the amount of
the insurance shall cease upon an alienation of insurance as when the sum
the insurance is beyond
the thing insured (Sec. 24, ibid). total of the amounts of the
the value of the
7. When the policy is so framed that it will inure to policies issued does not
insureds insurable
the benefit of whomsoever, during the exceed the insurable
interest.
continuance of the risk, may become the owner interest of the insured.
of the interest insured (Sec. 57, ibid). There may be only one
insurer, with whom the
DOUBLE INSURANCE AND OVER INSURANCE Two or more insurers. insured takes insurance
beyond the value of his
Double insurance insurable interest.

Double insurance exists where the same person is
insured by several insurers separately, in respect to
the same subject and interest (Sec. 95, ibid).
Rules when the insured in a policy other than life is
over insured by double insurance
1. The insured, unless the policy otherwise
provides, may claim payment from the insurers

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 88
 INSURANCE CODE
in such order as he may select, up to the amount
which the insurers are severally liable under their
respective contracts;
2. Where the policy under which the insured claims
is a valued policy, any sum received by him under
any other policy shall be deducted from the value
of the policy without regard to the actual value
of the subject matter insured;
3. Where the policy under which the insured claims
is an unvalued policy, any sum received by him
under any policy shall be deducted against the
full insurable value, for any sum received by him
under any policy;
4. Where the insured receives any sum in excess of
the valuation in the case of valued policies, or of
the insurable value in the case of unvalued
policies, he must hold such sum in trust for the
insurers, according to their right of contribution
among themselves.
5. Each insurer and the other insurers, to contribute
ratably to the loss in proportion to the amount
for which he is liable under his contract (Sec. 96,
ibid).
Additional or other insurance clause
A clause in the policy that provides that the policy
shall be void if the insured procures additional
insurance without the consent of the insurer (Pioneer
Insurance and Surety Corp vs. Yap, 61 SCRA 426).
Q: Wyeth Philippines, Inc. (Wyeth) procured a
marine policy from Philippines First Insurance Co.,
Inc. (Philippines First) to secure its interest over its
own products while the same were being
transported or shipped in the Philippines.
Thereafter, Wyeth executed its annual contract of
carriage with Reputable Forwarder Services, Inc.
(Reputable). Under the contract, Reputable
undertook to answer for all risks with respect to the
goods and shall be liable to Wyeth, for the loss,
destruction, or damage of the goods/products due
to any and all causes whatsoever, including theft,
robbery, flood, storm, earthquakes, lightning, and
other force majeure while the goods/products are in
transit and until actual delivery to the customers,
salesmen, and dealers. The contract also required
Reputable to secure an insurance policy on Wyeths
goods. Thus, Reputable signed a Special Risk
Insurance Policy (SR Policy) with Malayan Insurance
Co., Inc., (Malayan) for the amount of
P1,000,000.00. Is there is double insurance (as
prohibited in Section 5 of the SR policy between
Malayan and Reputable) so as to preclude Philippine
First from claiming indemnity from Malayan?
89
A: No. The interest of Wyeth over the property
subject matter of both insurance contracts is
different and distinct from that of Reputables. The
policy issued by Philippines First was in consideration
of the legal and/or equitable interest of Wyeth over
its own goods. On the other hand, what was issued by
Malayan to Reputable was over the latters insurable
interest over the safety of the goods, which may
become the basis of the latters liability in case of loss
or damage to the property and falls within the
contemplation of Section 15 of the Insurance Code.
Therefore, even though the two concerned 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., v. Philippine First
Insurance Co., Inc. And Reputable Forwarder Services,
Inc., G.R. No. 184300, July 11, 2012).
An insurer may provide that the insured may not
procure additional insurance
The insurer may insert an other insurance clause
which will prohibit double insurance. The rationale is
to prevent the danger that the insured will over
insure his property and thus avert the possibility of
perpetration of fraud (ibid). It is lawful and
specifically allowed under Sec. 75 of the Insurance
Code which provides that a policy may declare that a
violation or a specified provision thereof shall avoid
it, otherwise the breach of an immaterial provision
does not avoid it.
Absence of notice of existence of other insurance
constitutes fraud
When the insurance policy specifically requires that
notice should be given by the insured of the existence
of other insurance policies upon the same property,
the total absence of such notice nullifies the policy.
Such failure to give notice of the existence of other
insurance on the same property when required to do
so constitutes deception and it could be inferred that
had the insurer known that there were many other
insurance policies on the same property, it could have
hesitated or plainly desisted from entering into such
contract (Perez, 2006).
Cancellation of policy of insurance by reason of over
insurance
Sec. 64 of the Insurance Code of 2013 provides that
upon discovery of other insurance coverage that
makes the total insurance in excess of the value of
the property insured, the insurer may cancel such
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
policy of insurance; provided there is prior notice and
such circumstance occurred after the effective date
of the policy.
Waiver of violation
When the insurer, with the knowledge of the
existence of other insurances, which the insurer
deemed a violation of the contract, preferred to
continue the policy, its action amounted to a waiver
of annulment of the contract (Perez, 2006 citing
Gonzales Lao v. Yek Tong Lin Fire & Marine Ins. Co.,
55 Phil. 386).
MULTIPLE OR SEVERAL INTERESTS ON SAME
PROPERTY
Instances where more than one insurable interest
may exist in the same property
1. In trust, both trustor and trustee have insurable
interest over the property in trust.
2. In a corporation, both the corporation and its
stockholders have insurable interest over the assets.
3. In partnership both the firm and partners have
insurable interest over its assets.
4. In assignment both the assignor and assignee have
insurable interest over the property assigned.
5. In lease, the lessor, lessee and sub-lessees have
insurable interest over the property in lease.
6. In mortgage, both the mortgagor and mortgagee
have insurable interest over the property mortgaged.
Insurable interest of mortgagor and mortgagee in
case of a mortgaged property are NOT the same
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in
his name only and in his favor alone does not inure to
the benefit of the other. The same is not open to
objection that there is double insurance (RCBC vs. CA,
289 SCRA 292 [1989], Sec. 8, Insurance Code).
Extent of insurable interest of mortgagor and
mortgagee
1. Mortgagor The mortgagor of property, as owner,
has an insurable interest to the extent of its
value even though the mortgage debt equals
such value.
2. Mortgagee The mortgagee as such has an
insurable interest in the mortgaged property to
the extent of the debt secured; such interest
continues until the mortgage debt is extinguished
(Sundiang, 2014).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
NOTE: In case of an insurance taken by the mortgagee
alone and for his benefit, the mortgagee, after recovery
from the insurer, is not allowed to retain his claim against
the mortgagor but it passes by subrogation to the insurer to
the extent of the insurance money paid (De Leon,2010).
The mortgagee as a beneficial payee
The mortgagee may be made a beneficial payee
through any of the following:
1. He may become the assignee of the policy with
the consent of the insurer
2. He may be the mere pledgee without such
consent
3. A rider making the policy payable to the
mortgagee as his interest may appear may be
attached
4. A standard mortgage clause containing a
collateral independent contract between the
mortgagee and the insurer may be attached
5. The policy, though, by its terms payable
absolutely to the mortgagor; may have been
procured by a mortgagor under a contract duty
to insure for the mortgagees benefit, in which
the mortgagee acquires an equitable lien upon
the proceeds (ibid., pg. 75).
Insurance procured by mortgagor for benefit of
mortgagee, or policy assigned to mortgagee
1. The contract is deemed to be upon the interest
of the mortgagor; hence he does not cease to be
party to the contract;
2. Any act of the mortgagor prior to the loss, which
would otherwise avoid the insurance affects the
mortgagee even if the property is in the hands of
the mortgagee;
3. Any act which under the contract of insurance is
to be performed by the mortgagor may be
performed by the mortgagee with the same
effect;
4. In case of loss, the mortgagee is entitled to the
proceeds to the extent of his credit at the time of
loss and
5. Upon recovery by the mortgagee to the extent of
his credit, the debt is extinguished (ibid., pg. 76,
citing Sec. 8, Insurance Code).
NOTE: The rule on subrogation by the insurer to the right of
the mortgagee does not apply in this case.
Assignment of policy to mortgagee is not a payment
The assignment is merely to afford the mortgagee a
greater security for the settlement of the mortgagors
obligation and should not be construed as payment in
just the same way that delivery of negotiable
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 INSURANCE CODE
instruments does not constitute payment until the
proceeds are realized or collected (Perez, 2006).
Effects of mortgage redemption insurance
procured by the mortgagor
A mortgage redemption insurance is simply a kind
of life insurance procured by the mortgagor with the
mortgagee as beneficiary up to the extent of the
mortgage indebtedness. Its rationale is to give
protection to both the mortgagee and the mortgagor.
In case the mortgagor-insured dies, the proceeds of
such insurance will be applied to the payment of the
mortgage debt to the mortgagee, thereby relieving
the heirs of the mortgagor of the burden of paying
the debt (Perez, 2006 citing Great Pacific Assur. Corp.
v. Court of Appeals, et. al., G.R. No. 113899, October
13, 1999).
Standard or union mortgage clause
It is a clause that states that the acts of the
mortgagor do not affect the mortgagee. The purpose
of the clause is to make a separate and distinct
contract of insurance on the interest of the
mortgagee (De Leon, supra, pg. 77).
Open or loss-payable mortgage clause
It is a clause which provides for the payment of loss, if
any, to the mortgagee as his interest may appear and
under it, the acts of the mortgagor affect the
mortgagee (ibid).
In a policy obtained by the mortgagor with loss
payable clause in favor of the mortgagee as his
interest may appear, the mortgagee is only a
beneficiary under the contract, and recognized as
such by the insurer but not made a party to the
contract itself. This kind of policy covers only such
interest as the mortgagee has at the issuance of the
policy (Sundiang, 2014, Geagonia v. CA, supra).
PERFECTION OF A CONTRACT
Policy of insurance
It is the written instrument in which the contract of
insurance is set forth (Sec. 49, Insurance Code.). It is
the written document embodying the terms and
stipulations of the contract of insurance between the
insured and insurer.
NOTE: The policy is not necessary for the perfection of the
contract (Sundiang, 2014).
91
Form of an insurance contract
1. The policy shall be in printed form which may
contain blank spaces to be filled in;
2. Any rider, clause, warranty or endorsement
purporting to be part of the contract of insurance
and which is pasted or attached to said policy is
not binding on the insured, unless the descriptive
title or name of the rider, clause, warranty or
endorsement is also mentioned and written on
the blank spaces provided in the policy.
3. Unless applied for by the insured or owner, any
rider, clause, warranty or endorsement issued
after the original policy shall be countersigned by
the insured or owner.
NOTE: Notwithstanding the foregoing, the policy may be in
electronic form subject to the pertinent provisions of
Republic Act No. 8792, otherwise known as the Electronic
Commerce Act and to such rules and regulations as may be
prescribed by the Commissioner (Sec. 50, Insurance Code).
Types of policy of insurance
1. Open one in which the value of the thing
insured is not agreed upon, and the amount of
the insurance merely represents the insurers
maximum liability. The value of such thing
insured shall be ascertained at the time of the
loss (Sec. 60, Insurance Code).
2. Valued is one which expresses on its face an
agreement that the thing insured shall be valued
at a specific sum (Sec. 61, Insurance Code).
3. Running one which contemplates successive
insurances, and which provides that the object of
the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements (Sec. 62,
Insurance Code).
Basic contents of a policy
1. Parties;
2. Amount of insurance, except in open or running
policies;
3. Rate of premium;
4. Property or life insured;
5. Interest of the insured in the property if he is not
the absolute owner;
6. Risk insured against; and
7. The period during which the insurance is to
continue (Sec. 51, ibid).
Rider
An attachment to an insurance policy that modifies
the conditions of the policy by expanding or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
restricting its benefits or excluding certain conditions
from the coverage (Blacks Law Dictionary).
Riders are not binding on the insured unless the
descriptive title or name thereof is mentioned and
written on the blank spaces provided in the policy
(Sec. 50, ibid). It should be countersigned by the
insured or owner unless he was the one who applied
for the same (Sec. 50, ibid).
Cover notes
Persons who wish to be insured may get protection
before the perfection of the insurance contract by
securing a cover note. The cover note issued by the
insurer shall be deemed an insurance contract as
contemplated under Section 1(1) of the Insurance
Code subject to the following rules:
1. The cover note shall be issued or renewed
only upon prior approval of the Insurance
Commission;
2. The cover note shall be valid and binding for
not more than sixty (60) days from the date
of its issuance;
3. No separate premium (separate from the
policy or main contract) is required for the
cover note;
4. The cover note may be canceled by either
party upon prior notice to the other of at
least seven (7) days;
5. The policy should be issued within sixty (60)
days after the issuance of the cover note;
6. The sixty (60)-day period may be extended
upon written approval of the Insurance
Commission; and
7. The written approval of the Insurance
Commission is dispensed with upon the
certification of the president, vice-president
or general manager of the insurer that the
risk involved, the values of such risks and
premium therefor, have not as yet been
determined or established and the extension
or renewal is not contrary to or is not for the
purpose of violating the Insurance Code or
any rule (Sundiang, 2014).
OFFER AND ACCEPTANCE/CONSENSUAL
Perfection of an insurance contract
The contract of insurance is perfected when the
assent or consent is manifested by the meeting of the
offer and the acceptance upon the thing and the
cause which are to constitute the contract. Mere
offer or proposal is not contemplated (De Lim v. Sun
Life Assurance Co., G.R. No. L-15774, Nov. 29, 1920).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
NOTE: Mere submission of the application without the
corresponding approval of the policy does not result in the
perfection of the contract of insurance.
Insurance contracts through correspondence follow the
cognition theory wherein an acceptance made by letter
shall not bind the person making the offer except from the
time it came to his knowledge (Enriquez v. Sun Life
Assurance Co. of Canada, GR No. L-15774, Nov. 29, 1920).
Q: On June 1, 2011, X mailed to Y Insurance Co. his
application for life insurance. On July 21, 2011, the
insurance company accepted the application and
mailed, on the same day, its acceptance plus the
cover note. It reached X's residence on August 11.
On August 4, 2011, X figured in a car accident. He
died a day later. May X's heirs recover on the
insurance policy? (2011 Bar Question)
A: No, since X had no knowledge of the insurer's
acceptance of his application before he died. What is
being followed in insurance contracts is what is
known as the cognition theory.
NOTE: Where the applicant died before he received notice
of the acceptance of his application for the insurance, there
is no perfected contract (Perez v. Court of Appeals, 323
SCRA 613).
Offer in property and liability insurance
It is the insured who makes an offer to the insurer,
who accepts the offer, rejects it, or makes a
counter-offer. The offer is usually accepted by an
insurance agent on behalf of the insurer (De Leon,
2010).
Offer in life and health insurance
It depends upon whether the insured pays the
premium at the time he applies for insurance.
1. If he does not pay the premium, his application is
considered an invitation to the insurer to make an
offer, which he must then accept before the contract
goes into effect.
2. If he pays the premium with his application, his
application will be considered an offer (De Leon,
2010).
DELAY IN ACCEPTANCE
Kind of acceptance that must be given
The acceptance of an insurance policy must be
unconditional, but it need not be by a formal act (De
Leon, 2010).
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 INSURANCE CODE
Effect of delay PREMIUM PAYMENT

Unreasonable delay in returning the premium raises Premium

the presumption of acceptance of the insurance
application (Gloria v. Philippine American Life Ins. Co., It is an agreed price for assuming and carrying the risk
CA 73 O.G. [No.37] 8660). that is, the consideration paid an insurer for
undertaking to indemnify the insured against a
Mere delay in acceptance of the insurance specified peril (De Leon, 2010).
application will not result in a binding contract. Court
cannot impose upon the parties a contract if they did Premium v. Assessment
not consent. However, in proper cases, the insurer
may be liable for tort (Sundiang, 2014). PREMIUM ASSESSMENT

DELIVERY OF POLICY Levied and paid to meet Collected to meet

Delivery is not necessary in the formation of the
contract of insurance
Since the contract of insurance is consensual, delivery
of the policy is not necessary for its perfection
(Sundiang, 2014).
The mere delivery of an insurance policy to someone
does not give rise to the formation of a contract in
the absence of proof that he had agreed to be
insured.
Two types of delivery
1. Actual delivery to the person of the insured.
2. Constructive
a. By mail If policy was mailed already and
premium was paid and nothing is left to be
done by the insured, the policy is considered
constructively delivered if insured died before
receiving the policy.
b. By agent If delivered to the agent of the
insurer, whose duty is ministerial, or delivered
to the agent of the insured, the policy is
considered constructively delivered (De Leon,
2010).
anticipated losses actual losses
Premium is not a debt Assessment when
properly levied, unless
otherwise expressly
agreed, is a debt.
Instances when payment of premium becomes a
debt or obligation
1. In fire, casualty and marine insurance, the
premium payable becomes a debt as soon as the risk
attaches.
2. In life insurance, the premium becomes a debt only
when, in the case of the first premium, the contract
has become binding, and in the case of subsequent
premiums, when the insurer has continued the
insurance after maturity of the premium, in
consideration of the insureds express or implied
promise to pay (De Leon, 2010).
Payments in addition to regular premium
An insurer may contract and accept payments, in
addition to regular premium, for the purpose of
paying future premiums on the policy or to increase
the benefits thereof (Sec. 84, Insurance Code).

Importance of delivery
1. It becomes the evidence of the making of a
contract and of its terms;
2. It is considered as communication of the
insurers acceptance of the insureds offer;
3. It becomes the determination of policy period;
4. It marks the end of insurers opportunity to
decline coverage (De Leon, 2010).
NOTE: This is a new provision under the Insurance Code of
2013.
Non-payment of balance of premiums does not
cancel the policy
A contrary rule would place exclusively in the hands
of the insured the right to decide whether the
contract should stand or not (Philippine Phoenix
Surety & Insurance, Co., Inc., v. Woodworks, Inc., G.R.
No. L-22684, Aug. 31, 1967).

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Effects of non-payment of premiums
Non-payment of the first premium unless waived,
prevents the contract from becoming binding
notwithstanding the acceptance of the application or
the issuance of the policy. But nonpayment of the
balance of the premium due does not produce the
cancellation of the contract.
Non-payment of the subsequent premiums does not
affect the validity of the contracts unless, by express
stipulation, it is provided that the policy shall in that
event be suspended or shall lapse (De Leon, 2010).
NOTE: In case of individual life or endowment insurance
and group life insurance, the policyholder is entitled to a
grace period of either 30 days or 1 month within which the
payment of any premium after the first may be made (Secs.
233[a], 234[a], Insurance Code).
In case of industrial life insurance, the grace period is 4
weeks, where premiums are payable monthly, either 30
days or 1 month (Sec. 236 [a], Insurance Code).
Q: If the applicant failed to pay premium and
instead executed a promissory note in favor of the
insurer payable within 30 days which was accepted
by the latter, is the insurer liable in case of loss?
A: Yes, the insurer is liable because there has been a
perfected insurance contract. The insurer accepted
the promise of the applicant to pay the insurance
premium within thirty 30 days from the effective date
of policy. By so doing, it has implicitly agreed to
modify the tenor of the insurance policy and in effect,
waived any provision therein that it would only pay
for the loss or damage in case the same occurs after
the payment of the premium.
Considering that the insurance policy is silent as to
the mode of payment, insurer is deemed to have
accepted the promissory note in payment of the
premium. This rendered the policy immediately
operative on the date it was delivered (Capital
Insurance & Surety Co. Inc. v. Plastic Era Co., Inc. G.R.
No. L-22375, July 18, 1975).
Rule on non-payment of premiums by reason of
fortuitous event
GR: 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 (De Leon, 2010).
XPN:
1. The insurer has become insolvent and has
suspended business, or has refused without
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
justification a valid tender of premiums
(Gonzales v. Asia Life Ins. Co., G.R. No. L-5188,
Oct. 29, 1952).
2. Failure to pay was due to the wrongful conduct
of the insurer.
3. The insurer has waived his right to demand
payment (De Leon, 2010).
NOTE: But the insurer will not be deemed to have waived
his privilege of forfeiture by mere inaction or silence if the
ground be default in the payment of premiums, going as it
does to the whole consideration inducing the insurer to
enter into the contract (De Leon, 2010).
While the insured has the privilege of continuing the policy
in force by making premium payments, the insurer cannot
ordinarily force the insured to make these payments (De
Leon, 2010).
Effect of acceptance of premium
Acceptance of premium within the stipulated period
for payment thereof, including the agreed grace
period, merely assures continued effectivity of the
insurance policy in accordance with its terms (Stoke v.
Malayan Insurance Co., Inc., G.R. No. L-34768, Feb.
28, 1984).
Payment of the premium to agent of the insurance
company is binding on it (Malayan Insurance v.
Arnalo 154 SCRA 672 and areola v. CA 236 SCRA 643).
If an insurance company delivers a policy to an
insurance broker, it is deemed to have authorized
him to receive the payment of the premium (Sec. 306,
South Sea v. CA 244 SCRA 744; American Home
Assurance v. Chua 309 SCRA 250).
An acknowledgment in a policy of the receipt of the
premium is conclusive evidence of its payment for
the purpose of making the policy binding despite a
stipulation that it will not be binding until the
premium is actually paid (Sec. 78; American Home v.
Chua, supra).
Effect of payment of premium by post-dated check
Delivery of a promissory note or a check will not be
sufficient to make the policy binding until the said
note or check has been converted into cash. This is
consistent with Article 1249 of the New Civil Code.
NOTE: Payment by means of a check or note, accepted by
the insurer, bearing a date prior to the loss, assuming
availability of the funds thereof, would be sufficient even if
it remains unencashed at the time of the loss. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the creditor.
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 INSURANCE CODE
Non-payment of the premium will not entitle the
insurer to recover the premium from the insured
The continuance of the insurers obligation is
conditioned upon the payment of the premium, so
that no recovery can be had upon a lapsed policy, the
contractual relation between the parties having
ceased. If the peril insured against had occurred, the
insurer would have had a valid defense against
recovery under the policy.
Q: Is the insurance company liable when a car,
bought on installment basis, met an accident but the
car is not yet fully paid? (2006 Bar Question)
A: Yes, when insured and insurer have agreed to the
payment of premium by installments and partial
payment has been made at the time of loss, then the
insurer becomes liable. When the car loss happened
on the 5th month, the six months agreed period of
payment had not yet elapsed. The owner may
recover from Peninsula Insurance Company, but the
latter has the right to deduct the amount of unpaid
premium from the insurance proceeds.
Cash and carry rule (2003 Bar Question)
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and
until the premium thereof has been paid. Any
agreement to the contrary is void.
XPN: A policy is valid and binding even when there is
non-payment of premium:
1. In case of life or industrial life policy whenever the
grace period provision applies, or whenever under
the broker and agency agreements with duly licensed
intermediaries, a ninety (90)-day credit extension is
given. No credit extension to a duly licensed
intermediary should exceed ninety (90) days from
date of issuance of the policy (Sec. 77, Insurance
Code).
2. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding until
the premium is actually paid. This is without prejudice
however to right of insurer to collect corresponding
premium (Sec. 77, ibid).
3. When there is an agreement allowing the insured
to pay the premium in installments and partial
payment has been made at the time of loss (Makati
Tuscany Condominium Corp. v. CA, G.R. No. 95546,
Nov. 6, 1992).
4. When there is an agreement to grant the insured
credit extension for the payment of the premium.
95
(Art. 1306, NCC), and loss occurs before the
expiration of the credit term (UCPB General Insurance
v. Masagana Telemart, G.R. No. 137172, Apr. 4,
2001).
5. When estoppel bars the insurer to invoke
non-recovery on the policy.
6. When the public interest so requires, as
determined by the Insurance Commissioner
EX: In compulsory motor vehicle insurance, if the policy was
issued without payment of premium by the vehicle owner,
the insurer will still be held liable. To rule otherwise would
prejudice the 3rd party victim.
NOTE: Under Section 77 as amended by RA 10607, a ninety
(90)-day credit extension may be given whenever credit
extension is given under the broker and agency agreements
with duly licensed intermediaries. The requisites are as
follows:
1. The credit extension must be provided for under the
broker and agency agreements;
2. The credit extension to a duly licensed intermediary
should not exceed ninety (90) days from date of issuance of
the policy (Sundiang, 2014).
-Employees of the Republic of the Philippines, including its
political subdivisions and instrumentalities, and
government-owned or -controlled corporations, may pay
their insurance premiums and loan obligations through
salary deduction: Provided, That the treasurer, cashier,
paymaster or official of the entity employing the
government employee is authorized, notwithstanding the
provisions of any existing law, rules and regulations to the
contrary, to make deductions from the salary, wage or
income of the latter pursuant to the agreement between
the insurer and the government employee and to remit
such deductions to the insurer concerned, and collect such
reasonable fee for its services (Sec. 78, Insurance Code).
This is a new provision.
Effect of acknowledgment of receipt of premium in
policy
Conclusive evidence of its payment, in so far as to
make the policy binding, notwithstanding any
stipulation therein that it shall not be binding until
the premium is actually paid (Sec. 79, Insurance
Code).
When the policy contains such written
acknowledgment, it is presumed that the insurer has
waived the condition of prepayment. It hereby
creates a legal fiction of payment. The presumption is
however, extended only to the question of the
binding effect of the policy.
As far as the payment of the premium itself is
concerned, the acknowledgment is only a prima facie
evidence of the fact of such payment. The insurer
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
may still dispute its acknowledgment but only for the
purpose of recovering the premium due and unpaid.
Whether payment was indeed made is a question of
fact.
NON-DEFAULT OPTIONS IN LIFE INSURANCE
Devices used to prevent the forfeiture of a life
insurance after the payment of the first premium
1. Grace period After the payment of the first
premium, the insured is entitled to a grace
period of 30 days within which to pay the
succeeding premiums (Sec. 233 [a], ibid).
2. Cash surrender value The amount the insurer
agrees to pay to the holder of the policy if he
surrenders it and releases his claim upon it
(Cyclopedia Law Dictionary, 3rd ed., pg. 1077).
3. Extended insurance It is where the insured is
given a right, upon default, after payment of at
least three full annual premiums (see Sec. 233 [f],
Insurance Code) to have the policy continued in
force from the date of default for a time either
stated or equal to the amount as the net value of
the policy taken as a single premium, will
purchase (De Leon, 2010).
4. Paid up Insurance The insured is given a right,
upon default, after the payment of at least three
annual premiums to have the policy continued in
force from the date of default for the whole
period of the insurance without further payment
of premiums (ibid). It results to a reduction of the
original amount of insurance, but for the same
period originally stipulated (6 Couch 2d., 355; 37
C.J.S. 364).
5. Automatic Loan Clause A stipulation in the policy
providing that upon default in payment of
premium, the same shall be paid from the loan
value of the policy until that value is consumed.
In such a case, the policy is continued in force as
fully and effectively as though the premiums had
been paid by the insured from funds derived
from other sources (6 Couch 2d., 383).
6. Reinstatement Provision that the holder of the
policy shall be entitled to reinstatement of the
contract at anytime within 3 years from the date
of default in the payment of premium, unless the
cash surrender value has been paid, or the
extension period expired, upon production of
evidence of insurability satisfactory to the
company and the payment of all overdue
premiums and any indebtedness to the company
upon said policy (Sec. 233 [j], Insurance Code).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
REINSTATEMENT OF A LAPSED POLICY OF LIFE
INSURANCE
Purpose of the reinstatement provision
The purpose of the provision is to clarify the
requirements for restoring a policy to
premium-paying status after it has been permitted
to lapsed.
Period within which the holder of the policy is
entitled to reinstatement of the contract
The law requires that the policy owner be permitted
to reinstate the policy, subject to the violations
specified, any time within three (3) years from the
date of default of premium payment. A longer
period, being more favorable to the insured, may be
used.
Reinstatement of a lapsed policy is not an absolute
right of the insured
Reinstatement is not an absolute right of the
insured, but discretionary on the part of the insurer,
which has the right to deny reinstatement if it were
not satisfied as to the insurability of the insured, and
if the latter did not pay all overdue premiums and
other indebtedness to the insurer (McGuire vs.
Manufacturers Life Ins. Co., 87 Phil. 370).
Evidence of insurability
Evidence of Insurability is broader phrase than
Evidence of Good Health and includes such other
factors as the insureds occupation, habits, financial
condition, and other risk selection factors.
Q: A life insurance policy lapsed. The insured
applied for reinstatement of the policy and paid
only a part of the overdue premiums. Subsequently,
the insured died. Was the insurer liable?
A. The insurer is not liable as the policy was not
reinstated. The failure to pay the balance of the
overdue premiums prevented reinstatement and
recovery of the face value of the policy (Andres vs.
Crown Life Ins. Co., 55 O.G. 3483).
Q: Eulogio took out a life insurance policy which
contained a provision which allows for
reinstatement any time within three years after it
lapsed. Eulogio paid the premiums due on the first
two months. However, he failed to pay subsequent
premiums. One month after the policy lapsed, he
filed an application for the reinstatement of his
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 INSURANCE CODE
policy. He deposited the overdue premiums and
signed a reinstatement policy stating that the
payment deposit only and shall not bind the
Company until this application is finally approved.
Hours later, Eulogio died of electrocution. The
insurance company denied the claim of his
beneficiaries stating that the policy was never
approved. Is the contention of the insurance
company valid?
A: Yes. The stipulation in a life insurance policy giving
the insured the privilege to reinstate it upon written
application does not give the insured absolute right
to such reinstatement by the mere filing of an
application. The insurer has the right to deny the
reinstatement if it is not satisfied as to the
insurability of the insured and if the latter does not
pay all overdue premium and all other indebtedness
to the insurer. 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.
Eulogios death, just hours after filing his Application
for Reinstatement and depositing his payment for
overdue premiums and interests does not constitute
a special circumstance that can persuade to consider
the policy reinstated. Said circumstance cannot
override the clear and express provisions of the
Policy Contract and Application for Reinstatement,
and operate to remove the prerogative of Insular Life
thereunder to approve or disapprove the Application
for Reinstatement (Violeta R. Lalican vs. The Insular
Life Assurance Company Limited, supra).
REFUND OF PREMIUMS
Instances when the insured entitled to recover
premiums already paid or a portion thereof
1. Whole:
a. When no part of the thing insured has been
exposed to any of the perils insured against (Sec.
80).
b. When the contract is voidable because of the
fraud or misrepresentations of the insurer of his
agent (Sec. 82, Insurance Code).
c. When the insurance is voidable because of the
existence of facts of which the insured was
ignorant without his fault (Sec. 82, ibid).
d. When the insurer never incurred any liability
under the policy because of the default of the
insured other than actual fraud (Sec. 82, ibid).
97
e. When rescission is granted due to insurers
breach of contract (Sec. 74, ibid).
NOTE: When the contract is voidable, a person insured is
entitled to a return of the premium when such contract
is subsequently annulled under the provisions of the New
Civil Code.
A person insured is not entitled to a return of premium if
the policy is annulled, rescinded or if a claim is denied by
reason of fraud (Sec. 82, Insurance Code).
2. Pro rata:
a. When the insurance is for a definite period and
the insured surrenders his policy before the
termination thereof; (Sec. 80 [b], ibid); except:
i. Policy not made for a definite period of
time;
ii. Short period rate is agreed upon;
iii. Life insurance policy.
b. When there is over-insurance. The premiums to
be returned shall be proportioned to the amount
by which the aggregate sum insured in all the
policies exceeds the insurable value of the thing at
risk (Sec. 83).
i. In case of over-insurance by double
insurance, the insurer is not liable for the
total amount of the insurance taken, his
liability being limited to the property
insured. Hence, the insurer is not entitled to
that portion of the premium corresponding
to the excess of the insurance over the
insurable interest of the insured.
ii. In case of over-insurance by several
insurers, the insured is entitled to a ratable
return of the premium, proportioned to the
amount by which the aggregate sum insured
in all the policies exceeds the insurable value
of the thing insured (Sec. 83, ibid).
Illustration
Where there is a total over insurance of P500,000.00
in an aggregate P2,000,000.00 policy (P1,500,000.00
is only the insurable value), 25% (proportion of P500k
to P2M) of the premiums paid to the several insurers
should be returned.
Instances when the insured is not entitled to return
of premiums paid
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (Sec. 81, Insurance
Code);
2. In life insurance policies (Sec. 80 [b], ibid);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. If the policy is annulled, rescinded or if a claim is
denied by reason of fraud (Sec. 82, ibid);
4. If contract is illegal and the parties are in pari
delicto.
Q: Teodoro Cortez, applied for a 20-year
endowment policy with Great Pacific Insurance
Corporation (Great Pacific). His application, with the
requisite medical examination, was accepted and
approved by the Great Pacific and in due course, an
endowment policy was issued in his name.
Thereafter, Great Pacific advised Cortez that the
policy was not in force. To make it enforceable and
operative, Cortez was asked to remit the balance to
complete his initial annual premium and to see Dr.
Felipe V. Remollo for another full medical
examination at his own expense. Because of this,
Cortez informed that it that he was cancelling the
policy and he demanded the return of his premium
plus damages. Great Pacific ignored his demand. Is
Cortez is entitled to a refund of his premium?
A: Yes. 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. 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 v. CA, et al., G.R. No. L-57308, April 23,
1990).
RESCISSION OF INSURANCE CONTRACTS
Instances wherein a contract of insurance may be
rescinded
1. Concealment
2. Misrepresentation/ omission
3. Breach of warranties
Instances wherein a contract of insurance may be
canceled by the insurer
1. Nonpayment of premium;
2. Conviction of a crime arising out of acts increasing
the hazard insured against;
3. Discovery of fraud or material misrepresentation;
4. Discovery of willful or reckless acts or omissions
increasing the hazard insured against;
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
5. Physical changes in the property insured which
result in the property becoming uninsurable;
6. Discovery of other insurance coverage that makes
the total insurance in excess of the value of the
property insured; or
7. A determination by the Commissioner that the
continuation of the policy would violate or would
place the insurer in violation of the Insurance
Code (Sec. 64, Insurance Code).
NOTE: No policy of insurance other than life shall be
canceled by the insurer except upon prior notice thereof to
the insured, and no notice of cancellation shall be effective
unless it is based on the occurrence, after the effective date
of the policy, of one or more of the abovementioned
instances (Sec. 64, ibid).
Notice of cancellation of the contract
All notices of cancellation shall be in writing, mailed
or delivered to the named insured at the address
shown in the policy, or to his broker provided the
broker is authorized in writing by the policy owner to
receive the notice of cancellation on his behalf, and
shall state:
1. Which of the grounds set forth in Section 64
is relied upon; and
2. That, upon written request of the named
insured, the insurer will furnish the facts on
which the cancellation is based (Sec. 65, ibid).
CONCEALMENT
Concealment
Concealment is a neglect to communicate that which
a party knows and ought to communicate (Sec. 26,
ibid).
Requisites
1. A party knows a fact which he neglects to
communicate or disclose to the other party
2. Such party concealing is duty bound to disclose
such fact to the other
3. Such party concealing makes no warranty as to
the fact concealed
4. The other party has no means of ascertaining the
fact concealed
5. The fact must be material
Test of materiality
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon
the party to whom the communication is due, in
forming his estimate of the disadvantages of the
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 INSURANCE CODE
proposed contract, or in making his inquiries (Sec. 31,
ibid).
NOTE: As long as the facts concealed are material,
concealment, whether intentional or not, entitles the
injured party to rescind (Sec.27, ibid).
Concealment in marine insurance
Rules on concealment are stricter since the insurer
would have to depend almost entirely on the matters
communicated by the insured. Thus, in addition to
material facts, each party must disclose all the
information he possesses which are material or the
information of the belief or expectation of a third
person, in reference to a material fact. But
concealment in a marine insurance in any of the
following matters enumerated under Section 112
Insurance Code does not vitiate the entire contract,
but merely exonerates the insurer from a loss
resulting from the risk concealed.
Test in ascertaining the existence of concealment
If the applicant is aware of the existence of some
circumstances which he knows would probably
influence the insurer in acting upon his application,
good faith requires him to disclose that circumstance,
though unasked.
Matters that need not be disclosed
GR: The parties are not bound to communicate
information of the following matters:
1. Those which the other knows
2. Those which, in the exercise of ordinary care,
the other ought to know and of which, the
former has no reason to suppose him ignorant
3. Those of which the other waives
communication
4. Those which prove or tend to prove the
existence of a risk excluded by a warranty, and
which are not otherwise material
5. Those which relate to a risk excepted from the
policy and which are not otherwise material;
6. The nature or amount of the interest of one
insured (except if he is not the owner of the
property insured, Sec. 34, ibid).
XPN: In answer to inquiries of the other (Sec. 30,
ibid).
NOTE: Neither party is bound to communicate, even upon
inquiry, information of his own judgment, because such
would add nothing to the appraisal of the application (Sec.
35, ibid).
99
The parties are bound to know all the general causes which
are open to his inquiry, equally with the other, and all
general usages of trade (Sec. 32, ibid).
Matters that must be disclosed even in the absence
of inquiry
1. Those material to the contract
2. Those which the other has no means of
ascertaining
3. Those as to which the party with the duty to
communicate makes no warranty
NOTE: Matters relating to the health of the insured are
material and relevant to the approval of the issuance of the
life insurance policy as these definitely affect the insurers
action to the application. It is well-settled that the insured
need not die of the disease he had failed to disclose to the
insurer, as it is sufficient that his non-disclosure misled the
insurer in forming his estimates of the risks of the proposed
insurance policy or in making inquiries (Sunlife Assurance
Company of Canada v. CA, G.R. No. 105135, June 22, 1995).
Information as to the nature of interest need not be
disclosed except In property insurance, if the insured is not
the owner. If somebody is insuring properties of which he is
not the owner, he must disclose why he has insurable
interest that would entitle him to ensure it, and the extent
thereof (Secs. 34 & 51 [e], Insurance Code).
Q: Ngo Hing filed an application with the Great
Pacific Life Assurance Company (Pacific Life) for a
twenty-year endownment policy on the life of his
one-year old daughter Helen Go. Ngo Hing supplied
the essential data and filed the application to
Mondragon, the branch manager. After sometime,
Helen Go died of influenza with complication of
bronchopneumonia. Thereupon, Ngo Hing sought
the payment of the proceeds of the insurance, but
having failed in his effort, he filed the action for the
recovery of the same. Did Ngo Hing concealed the
state of health and physical condition of Helen Go,
which rendered void the binding receipt?
A: Ngo Hing intentionally concealed the state of
health of his daughter Helen Go. He was fully aware
that his child was a typical mongoloid child upon
filling out the application form. It is evident that he
withheld a fact material to the risk to be assumed by
the insurance company had the plan be approved.
The contract of insurance is one of perfect good faith,
uberrima fides, absolute and perfect candor; the
absence of any concealment or demotion.
Concealment is a neglect to communicate that which
needs to be communicated whether intentional or
unintentional. In case of concealment, the insurer is
entitled to rescind the contract of insurance. In the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
case at bar, the respondent is guilty of such
concealment. Ultimately, there was no perfected
contract of insurance since the conditions in the
binding receipt were not complied with by the
applicant (Great Pacific Life Assurance Company v.
CA, G.R. No. L-31845, April 30, 1979).
Right to information of material facts may be
waived
Right to information of material facts may be waived:
1. By the terms of the contract
2. By the failure to make an inquiry as to such facts,
where they are distinctly implied in other facts
from which information is communicated (Sec.
33, Insurance Code).
Rules on concealment
1. If there is concealment under Section 27, the
remedy of the insurer is rescission since
concealment vitiates the contract of insurance.
2. The party claiming the existence of concealment
must prove that there was knowledge of the fact
concealed on the part of the party charged with
concealment.
3. Good faith is not a defense in concealment.
Concealment, whether intentional or
unintentional entitles the injured party to rescind
the contract of insurance (Sec. 27, ibid).
4. The matter concealed need not be the cause of
loss (Sec. 31, ibid).
5. To be guilty of concealment, a party must have
knowledge of the fact concealed at the time of
the effectivity of the policy.
In order for concealment to produce the effect of
avoiding the policy, it should take place at the time
the contract is entered into
Concealment should take place at the time the
contract is entered into and not afterwards in order
that the policy may be avoided. The duty of
disclosure ends with the completion of the contract.
Waiver of medical examination in a non-medical
insurance contract renders even more material the
information required of the applicant concerning
previous condition of health and diseases suffered,
for such information necessarily constitutes an
important factor which the insurer takes into
consideration in deciding whether to issue the policy
or not. Failure to communicate information acquired
after the effectivity of the policy will not be a ground
to rescind the contract.
NOTE: The reason for this is that if concealment should take
place after the contract is entered into, the information
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
concealed is no longer material as it will no longer influence
the other party to enter into such contract.
Q: Joanna applied for a non-medical life insurance.
Joanna did not inform the insurer that one week
prior to her application for insurance, she was
examined and confined at St. Lukes Hospital where
she was diagnosed for lung cancer. The insured soon
thereafter died in a plane crash. Is the insurer liable
considering that the fact concealed had no bearing
with the cause of death of the insured? Why? (2001
Bar Question)
A: No. The concealed fact is material to the approval
and issuance of the insurance policy. It is well settled
that the insured need not die of the disease she failed
to disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his
estimate of the risks of the proposed insurance policy
or in making inquiries (Sun Life v. CA, supra).
Instances whereby concealment made by an agent
procuring the insurance binds the principal
1. Where it was the duty of the agent to acquire and
communicate information of the facts in question;
2. Where it was possible for the agent, in the exercise
of reasonable diligence to have made such
communication before the making of the insurance
contract.
NOTE: Failure on the part of the insured to disclose such
facts known to his agent, or wholly due to the fault of the
agent, will avoid the policy, despite the good faith of the
insured.
MISREPRESENTATION/OMMISSIONS
Representation
An oral or written statement of a fact or condition
affecting the risk made by the insured to the
insurance company, tending to induce the insurer to
assume the risk.
NOTE: Representation should be made, altered or
withdrawn at the time of or before the issuance of the
policy. (Sec. 37, Insurance Code). It may be altered or
withdrawn before the insurance is effected, but not
afterwards (Sec.41, ibid).
Kinds of representation
1. Oral or written (Sec. 36, ibid);
2. Affirmative (Sec. 42, ibid); or
3. Promissory (Sec. 39, ibid).
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 INSURANCE CODE
Affirmative representation
Any allegation as to the existence or non-existence of
a fact when the contract begins (e.g. the statement of
the insured that the house to be insured is used only
for residential purposes is an affirmative
representation).
Promissory representation
Any promise to be fulfilled after the contract has
come into existence or any statement concerning
what is to happen during the existence of the
insurance.
Misrepresentation
Misrepresentation is an affirmative defense. To avoid
liability, the insurer has the duty to establish such a
defense by satisfactory and convincing evidence (Ng
Gan Zee v. Asian Crusader Life Assn. Corp., G.R. No. L-
30685, May 30, 1983). [See also Sec. 44 (when the
facts fail to correspond to the assertions or
stipulations), Insurance Code].
NOTE: In the absence of evidence that the insured has
sufficient medical knowledge to enable him to distinguish
between peptic ulcer and tumor, the statement of
deceased that said tumor was associated with ulcer of the
stomach should be considered an expression in good faith.
Fraudulent intent of insured must be established to entitle
insurer to rescind the insurance contract.
Misrepresentation, as a defense of insurer, is an affirmative
defense which must be proved (Ng Gan Zee v. Asian
Crusader Life Assn. Corp., G.R. No. L- 30685, May 30, 1983).
Requisites of misrepresentation
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to be
true and which has a tendency to mislead;
3. Such fact in either case is material to the risk.
NOTE: A representation cannot qualify an express provision
in a contract of insurance but it may qualify an implied
warranty (Sec. 40, Insurance Code).
Representation as to a future undertaking
A representation as to the future is to be deemed a
promise unless it appears that it was merely a
statement of belief or an expectation that is
susceptible to present, actual knowledge (Sec. 39,
ibid).
101
An erroneous opinion or belief will not avoid the
insurance policy
The statement of an erroneous opinion, belief or
information, or of an unfulfilled intention, per se, will
not avoid the contract of insurance, unless
fraudulent.
Test of materiality
It is to be determined not by the event, but solely by
the probable and reasonable influence of the facts
upon the party to whom the representation is made,
in forming his estimates of the disadvantages of the
proposed contract or in making his inquiries (similar
with concealment) (Sec. 46, ibid).
Effects of misrepresentation
1. It renders the insurance contract voidable at the
option of the insurer, although the policy is not
thereby rendered void ab initio. The injured party
entitled to rescind from the time when the
representation becomes false;
2. When the insurer accepted the payment of
premium with the knowledge of the ground for
rescission, there is waiver of such right;
3. There is no waiver of the right of rescission if the
insurer had no knowledge of the ground therefor at
the time of acceptance of premium payment.
Effect of collusion between the insurers agent and
the insured
It vitiates the policy even though the agent is acting
within the apparent scope of his authority. The agent
ceases to represent his principal. He, thus, represents
himself; so the insurer is not estopped from avoiding
the policy.
Characteristics of representation
1. Not a part of the contract but merely a collateral
inducement to it
2. Oral or written
3. Made at the time of, or before issuing the policy
and not after
4. Altered or withdrawn before the insurance is
effected but not afterwards
5. Must be presumed to refer to the date the
contract goes into effect (Sec. 42, ibid).
Similarities of concealment and representation
1. Both refer to the same subject matter and both
take place before the contract is entered.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Concealment or representation prior to loss or the lifetime of the insured for a period of two (2)
death gives rise to the same remedy; that is years from the date of its issue or its last
rescission or cancellation. reinstatement, the insurer cannot prove that the
3. The test of materiality is the same (Secs. 31, 46, policy is void ab initio or is rescindible by reason of
ibid). the fraudulent concealment or misrepresentation of
4. The rules of concealment and representation are the insured or his agent (Sundiang, 2014 citing Sec.
the same with life and non-life insurance. 48, Insurance Code; Florendo v. Philam Plans, G.R. No.
5. Whether intentional or not, the injured party is 186983, February 22, 2012).
entitled to rescind a contract of insurance on
ground of concealment or false representation. Defenses that are not barred by incontestability
6. Since the contract of insurance is said to be one clause
of utmost good faith on the part of both parties
to the agreement, the rules on concealment and The following defenses are not barred by the
representation apply likewise to the insurer. incontestability clause:
1. That the person taking the insurance lacked
Concealment v. Misrepresentation insurable interest as required by law;
2. That the cause of the death of the insured is an
CONCEALMENT MISREPRESENTATION excepted risk;
The insured withholds the The insured makes 3. That the premiums have not been paid (Secs. 77,
information of material erroneous statements of 233[b], 236[b], Insurance Code);
facts from the insurer facts with the intent of 4. That the conditions of the policy relating to
inducing the insurer to military or naval service have been violated (Secs.
enter into the insurance 233[b], 234[b], ibid);
contract 5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of
Application of concealment and misrepresentation death or to comply with any condition imposed
in case of loss or death by the policy after the loss has happened; or
7. That the action was not brought within the time
GR: If the concealment or misrepresentation is specified (Sundiang, 2014).
discovered before loss or death, the insurer can
cancel the policy. If the discovery is after loss or Remedy of the injured party in case of
death, the insurer can refuse to pay. misrepresentation

XPN: The incontestability clause under paragraph 2 of
Section 48.
XPN to XPN: (i.e., when the contract may be
rescinded even beyond the incontestability period)
If there is misrepresentation, the injured party is
entitled to rescind from the time when the
representation becomes false.
Exercise of the right to rescind the contract

1. Non-payment of premiums. The right to rescind must be exercised previous to the

2. Violation of condition (Secs. 233 [b], 234 [b],
ibid).
3. No insurable interest
4. Cause of death was excepted or not covered
5. Fraud of a vicious type
6. Proof of death was not given (Sec. 248, ibid).
7. That the conditions of the policy relating to
military or naval service (Secs. 233 [b], 234 [b],
ibid).
8. That the action was not brought within the time
specified (Sec. 63, ibid).
commencement of an action on the contract (the
action referred to is that to collect a claim on the
contract) (Sec.48, par.1, Insurance Code).
Omission
The failure to communicate information of matters
proving or tending to prove the falsity of warranty. In
case of omission, the aggrieved party may rescind the
contract of insurance.

Incontestability clause

After the policy of life insurance made payable on the

death of the insured shall have been in force during

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 102
 INSURANCE CODE
BREACH OF WARRANTIES Warranty v. Representation

Warranties WARRANTY REPRESENTATION

Considered parts of Collateral inducement to the
Statements or promises by the insured set forth in the contract. contract.
the policy itself or incorporated in it by proper Always written on the
reference, the untruth or non-fulfillment of which in May be written in a totally
face of the policy,
any respect, and without reference to whether the disconnected paper or may
actually or by
insurer was in fact prejudiced by such untruth or be oral.
reference.
non-fulfillment render the policy voidable by the Must be strictly Only substantial proof is
insurer. complied with. required.
Its falsity or
Purpose of warranties non-fulfillment Its falsity renders the policy
operates as a breach void on the ground of fraud.
To eliminate potentially increasing moral or physical of contract.
hazards which may either be due to the acts of the Insurer must show its
insured or to the change of the condition of the Presumed material.
materiality in order to defeat
property. an action on the policy.

Basis of warranties Effects of breach of warranty

The insurer took into consideration the condition of 1. Material

the property at the time of effectivity of the policy.
GR: Violation of material warranty or of material
provision of a policy will entitle the other party to
Kinds of warranties
rescind the contract.
1. Affirmative warranty one which relates to
XPN:(with regard to promissory warranties)
matters which exist at or before the issuance of
1. Loss occurs before the time of performance of
the policy.
the warranty;
2. Promissory warranty one in which the insured
2. The performance becomes unlawful at the place
undertakes that something shall be done or
of the contract; and
omitted after the policy takes effect and during
3. Performance becomes impossible (Sec. 73, ibid).
its continuance.
3. Express warranty a statement in a policy, of a 2. Immaterial
matter relating to the person or thing insured, or
to the risk, as a fact. GR: It will not avoid the policy.
4. Implied warranty an agreement or stipulation not
expressed in the policy but the existence of XPN: When the policy expressly provides or declares
which is admitted or presumed from the fact that that a violation thereof will avoid it.
the contract of insurance has been executed.
For instance, an Other Insurance Clause which is a
Peculiar only to marine insurance, and therefore is condition in the policy requiring the insured to inform
deemed included in the contract, although not the insurer of any other insurance coverage of the
expressly mentioned: property. A violation of the clause by the insured will
a. That the ship will not deviate from the not constitute a breach unless there is an additional
agreed voyage unless deviation is proper provision stating that the violation thereof will avoid
b. That the ship will not engage in illegal the policy (Sec. 75, ibid).
venture
Effect of a breach of warranty without fraud
c. Warranty of neutrality, that the ship will
carry the requisite documents of nationality
The policy is avoided only from the time of breach
or neutrality where such nationality or
(Sec. 76, ibid) and the insured is entitled:
neutrality is warranted
1. To the return of the premium paid at a pro rata
d. Presence of insurable interest
from the time of breach or if it occurs after the
e. That the ship is seaworthy at the time of the
inception of the contract; or
commencement of the insurance contract.
2. To all premiums if it is broken during the
inception of the contract.

UNIVERSITY OF SANTO TOMAS

103 FACULTY OF CIVIL LAW
 MERCANTILE LAW
CLAIMS SETTLEMENT AND SUBROGATION
NOTICE AND PROOF OF LOSS
Loss in insurance
The injury, damage or liability sustained by the
insured in consequence of the happening of one or
more of the perils against which the insurer, in
consideration of the premium, has undertaken to
indemnify the insured. It may be total, partial, or
constructive in marine insurance.
Conditions before the insured may recover on the
policy after the loss
Instances when the defects in the notice or proof of
loss are considered waived (MaJoR-DeW)
When the insurer:
1. Writes to the insured that he considers the policy
null and void as the furnishing of notice or proof of
loss would be useless;
2. Recognizes his liability to pay the claim;
3. Denies all liability under the policy
4. Joins in the proceedings for determining the
amount of the loss by arbitration, making no
objections on account of notice and preliminary
proof; or
5. Makes Objection on any ground other than the
formal defect in the preliminary proof.

1. The insured or some person entitled to the benefit Instances when delay in the presentation of notice
of the insurance, without unnecessary delay, must or proof of loss deemed waived
give written notice to the insurer (Sec. 90, ibid);
2. When required by the policy, insured must present If caused by:
a preliminary proof loss which is the best evidence he 1. Any act of the insurer; and
has in his power at the time (Sec. 91, ibid). 2. By failure to take objection promptly and
specifically upon that ground (Sec. 93, ibid).
NOTE: For other non-life insurance, the Commissioner may
specify the period for the submission of the notice of loss Proof of loss
(Sec. 90, Insurance Code).
It is the more or less formal evidence given the
Notice of loss company by the insured or claimant under a policy of
the occurrence of the loss, the particulars thereof and
It is the more or less formal notice given the insurer the data necessary to enable the company to
by the insured or claimant under a policy of the determine its liability and the amount thereof.
occurrence of the loss insured against.
Time for payment of claims
Purposes of notice of loss LIFE POLICIES NON-LIFE POLICIES
1. Maturing upon the
1. To give insurer information by which he may expiration of the term
determine the extent of his liability; the proceeds are
2. To afford the insurer a means of detecting any immediately payable to
fraud that may have been practiced upon him; and the insured, except if
3. To operate as a check upon extravagant claims. proceeds are payable The proceeds shall be paid
in installments or within 30 days after the
Effect of failure to give notice of loss annuities which shall receipt by the insurer of
be paid as they become proof of loss and
FIRE INSURANCE OTHER TYPES OF INSURANCE due. ascertainment of the loss or
Failure to give notice will not damage by agreement of
Failure to give 2. Maturing at the the parties or by arbitration
exonerate the insurer, unless
notice defeats the death of the insured, but not later than 90 days
there is a stipulation in the
right of the insured occurring prior to the from such receipt of proof of
policy requiring the insured to
to recover. expiration of the term loss, whether or not
do so.
stipulated the ascertainment is had or
proceeds are payable made (Sec. 249, Insurance
to the beneficiaries Code).
within 60 days after
presentation of claim
and filing of proof of
death (Sec. 248,
Insurance Code).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 104
 INSURANCE CODE
GUIDELINES ON CLAIMS SETTLEMENT
Claim Settlement
Claim settlement is the indemnification of the
suffered by the insured. The claimant may be the
insured or reinsured, the insurer who is entitled to
subrogation, or a third party who has a claim against
the insured.
Purpose of the rule
To eliminate unfair claim settlement practices.
Rules in claim settlement
1. No insurance company doing business in the
Philippines shall refuse, without justifiable cause,
to pay or settle claims arising under coverages
provided by its policies, nor shall any such
company engage in unfair claim settlement
practices.
2. Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioners complaint experience with other
insurance companies writing similar lines of
insurance shall be admissible in evidence in an
administrative or judicial proceeding brought
under this section (Sec. 247 (b), ibid).
Claims settlement in life insurance
1. The proceeds shall be paid immediately upon the
maturity of the policy if there is such a maturity
date.
2. If the policy matures by the death of the insured,
within sixty (60) days after presentation of the
claim and filing of the proof of the death of the
insured (Sundiang, 2014; Section 248, ibid).
Claims settlement in property insurance
1. Proceeds shall be paid within thirty (30) days
after proof of loss is received by the insurer and
ascertainment of the loss or damage is made
either by agreement or by arbitration.
2. If no ascertainment is made within sixty (60) days
after receipt of proof of loss, the shall be paid
within ninety (90) days after such receipt
(Sundiang, 2014; Sec. 249, ibid).
105
UNFAIR CLAIMS SETTLEMENT; SANCTIONS
Unfair settlement practices (MAI-GL)
The following constitutes unfair settlement practices:
1. Knowingly misrepresenting to claimants
pertinent facts or policy provisions relating to
coverage at issue;
2. Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
3. Failing to adopt and implement reasonable
standards for the prompt investigation of claims
arising under its policies;
4. Not attempting in good faith to effectuate
prompt, fair and equitable settlement of claims
submitted in which liability has become
reasonably clear; or
5. Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason substantially
less than the amounts ultimately recovered in
suits brought by them.
Sanction for the insurance companies which
engaged to unfair settlement practices
The suspension or revocation of an insurance
companys certificate of authority (Sec 247).
Effect of refusal or failure to pay the claim within
the time prescribed
The insurer shall be liable to pay interest twice the
ceiling prescribed by the Monetary Board on the
proceeds of the insurance from the date following
the time prescribed under the Insurance Code, until
the claim is fully satisfied (Prudential Guarantee and
Assurance, Inc. v. Trans-Asia Shipping Lines, Inc. G. R.
No. 151890, June 20, 2006).
NOTE: Refusal or failure to pay the loss or damage will
entitle the assured to collect interest UNLESS such refusal
or failure to pay is based on the ground that the claim is
fraudulent.
Where the mortgagor and the mortgagee were both
claiming the proceeds of a fire insurance policy and the
creditors of the mortgagor also attached the proceeds, the
insurance company cannot be held liable for damages for
withholding payment since the delay was not malevolent
(Rizal Commercial Bank Corporation v. Court of Appeals,
289 SCRA 293).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
PRESCRIPTION OF ACTIONS
Rules on the prescriptive period for filing an
insurance claim
1. The parties to a contract of insurance may
validly agree that an action on the policy should be
brought within a limited period of time, provided
such period is not less than 1 year from the time the
cause of action accrues. If the period agreed upon is
less than 1 year from the time the cause of action
accrues, such agreement is void (Sec. 63, Insurance
Code).
a. The stipulated prescriptive period shall begin to
run from the date of the insurers rejection of the
claim filed by the insured or beneficiary and not
from the time of loss.
b. In case the claim was denied by the insurer but
the insured filed a petition for reconsideration, the
prescriptive period should be counted from the
date the claim was denied at the first instance and
not from the denial of the reconsideration (Sun
Life Office, Ltd. vs. CA, GR. No. 89741, Mar 13,
1991).
2. If there is no stipulation or the stipulation is
void, the insured may bring the action within 10 years
in case the contract is written.
3. In a comprehensive motor vehicle liability
insurance (CMVLI), the written notice of claim must
be filed within 6 months from the date of the
accident; otherwise, the claim is deemed waived even
if the same is brought within 1 year from its rejection
(Vda. De Gabriel vs. CA, GR No. 103883, Nov 14,
1996).
4. The suit for damages, either with the proper
court or with the Insurance Commissioner, should be
filed within 1 year from the date of the denial of the
claim by the insurer, otherwise, claimants right of
action shall prescribe (Sec. 397, Insurance Code).
Q. From what time shall the period of prescription
be computed in case the insured asked for
reconsideration of the denial of claim? (1996 Bar
Question)
A: In case the claim was denied by the insurer but the
insured file a petition for reconsideration, the
prescriptive period should be counted from the date
the claim was denied at the first instance and not
from the denial of the reconsideration. To rule
otherwise would give the insured a scheme or devise
to waste time until any evidence which may be
considered against him is destroyed (Sun life Office,
Ltd. vs. CA, 195 SCRA 193).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Prescriptive period in motor vehicle insurance
It is one year from denial of the claim and not from
the date of the accident.
SUBROGATION
Principle of Subrogation
If the plaintiffs property has been insured, and he
has received indemnity from the insurance company
for the injury or loss arising out of wrong or breach of
contract complained of, the insurance company shall
be subrogated to the rights of the insured against the
wrongdoer or the person who has violated the
contract (Art. 2207, NCC).
NOTE: The principle of subrogation inures to the insurer
without any formal assignment or any express stipulation
to that effect in the policy. Said right is not dependent upon
nor does it grow out of any private contract. Payment to
the insured makes the insurer a subrogee in equity
(Malayan Insurance Co., Inc. v. CA, G.R. No. L-36413, Sept.
26, 1988).
Incapacity of the insured will not affect the capacity of the
subrogee because capacity is personal to the holder
(Lorenzo Shipping v. Chub and Sons, Inc., G.R. No. 147724,
June 8, 2004).
Purposes of subrogation
1. To make the person who caused the loss legally
responsible for it.
2. To prevent the insured from receiving double
recovery from the wrongdoer and the insurer.
3. To prevent the tortfeasors from being free from
liability and is thus founded on consideration of
public policy.
Rules on subrogation
1. Applicable only to property insurance the value
of human life is regarded as unlimited and
therefore, no recovery from a third party can be
deemed adequate to compensate the insureds
beneficiary.
2. The right of insurer against a third party is limited
to the amount recoverable from latter by the
insured.
Rules on indemnity
1. Applies only to property insurance except when
the creditor insures the life of his debtor.
2. Insurance contracts are not wagering contracts or
gambling contracts.
106
 INSURANCE CODE
When amount paid by the insurance company does
not fully cover the injury or loss
The aggrieved party shall be entitled to recover the
deficiency from the person causing the loss or injury
(Art. 2207, NCC).
Instances where the right of subrogation does not
apply
1. Where the insured by his own act releases the
wrongdoer or third party liable for loss or
damage from liability
2. The insurer loses his rights against the
wrongdoer since the insurer can only be
subrogated to only such rights as the insured
may have
3. Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insured claim for loss
4. Where the insurer pays the insured for a loss or
risk not covered by the policy
5. Life insurance
6. For recovery of loss in excess of insurance
coverage
NOTE: 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
latter. 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 v.
Court of Appeals, 154 SCRA 650, citing Campos and
Campos, NOTES AND SELECTED CASES ON INSURANCE LAW
492 (1960)).
107
Q: Malayan Insurance Company issued a car
insurance policy in favor of First Malayan Leasing
and Finance Corporation (the assured), insuring a
Mitsubishi Galant against third party liability, own
damage and theft, among others. Unfortunately,
Mitsubishi Galant encountered a vehicular accident
at the corner of EDSA and Ayala Avenue, Makati.
The accident involves a Nissan Bus operated by
Aladdin Transit, an Isuzu Tanker, and a Fuzo Cargo
Truck. Because of this, Malayan Insurance was
constrained to pay the assured of the damages
sustained by it. Maintaining that it has been
subrogated to the rights and interests of the
assured, Malayan Insurance sent several demand
letters to Rodelio Alberto (Alberto) and Enrico
Alberto Reyes (Reyes), the registered owner and the
driver, respectively, of the Fuzo Cargo Truck,
requiring them to pay the amount it had paid to the
assured. No settlement of liability was made, thus,
Malayan Insurance filed a complaint for damages for
gross negligence against Alberto, et al., Is Malayan
Insurance entitled to the right of subrogation?
A: Yes. The payment by the insurer to the insured
operates as an equitable assignment to the insurer of
all the remedies that the insured may have against
the third party whose negligence or wrongful act
caused the loss. The right of subrogation is not
dependent upon, nor does it grow out of, any privity
of contract. It accrues simply upon payment by the
insurance company of the insurance claim (Malayan
Insurance Co., Inc., v. Rodelio Alberto, et al., G.R. No.
194320, February 1, 2012).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
TRANSPORTATION LAW
Laws that govern contracts of transportation
Contracts of transportation, whether by land, sea or
air, if within the Philippines or if the transportation of
goods be from a foreign country to the Philippines
shall be governed by the following laws, arranged by
order of application:
1. Provisions of the New Civil Code on
Common Carriers;
2. Code of Commerce; and
3. Special laws such as Carriage of Goods by
the Sea (COGSA); Salvage Law; Public
Service Act; Land Transportation and
Traffic Code; Tariff and Customs Code; and
Civil Aeronautics Act (NCC, Art. 1735 and
1766; American President Lines, Ltd. vs.
Klepper, GR No. L-15671, November 29,
1960).
NOTE: In the case of international carriage in Air
Transportation, Warsaw Convention applies (ibid).
If the goods are to be transported from Philippines to
foreign country, the law of the latter country shall govern
the transportation contract (ibid).
COMMON CARRIERS
Requisites for an entity to be classified as a common
carrier (PBL-FP)
1. Must be a Person, corporation, firm or association
2. Must be engaged in the Business of carrying or
transporting passengers or goods or both
3. The carriage or transport must either be by Land,
water or air
4. The service is for a Fee
5. The service is offered to the Public (Art. 1732,
NCC).
NOTE: A pipeline operator who carries oil and other
petroleum products through pipes/ pipelines is a common
carrier. The law does not distinguish as to the means by
which transportation is carried out, as long as it is by land,
water or air. Neither does the law require that
transportation be through a motor vehicle (J. Dimaampao,
supra, pg. 125, citing First Phil. Industrial Pipeline, supra).
The operator of a school bus is a common carrier because
he holds himself out indiscriminately as ready to transport
students of a particular school living within or near the area
where he operates the service and for a fee (J. Dimaampao,
ibid., pg. 126, citing Perena case, supra).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Test for determining whether or not one is a
common carrier (1996 Bar Exam Question)
The test for determining whether or not one is a
common carrier is whether the person or entity, for
some business purpose and with general or limited
clientele, offers the service of carrying or transporting
passengers or goods or both for compensation.
It is not required that the carriers principal activity
is carriage of persons or goods in order to be a
common carrier
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). Article 1732 also carefully avoids
making any distinction between a person or
enterprise offering transportation service on a regular
or scheduled basis and one offering such services on
a an occasional, episodic or unscheduled
basis. Neither does Article 1732 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. Article
1733 deliberately refrained from making such
distinctions (Perez, 2009 ed., citing Caltex [Phils.] vs.
CA, GR No. 131166, September 30, 1999).
Q: AM Trucking, a small company, operates two
trucks for hire on selective basis. It caters only to a
few customers, and its trucks do not make regular
or scheduled trips. It does not even have a
certificate of public convenience. On one occasion,
Reynaldo contracted AM to transport for a fee, 100
sacks of rice from Manila to Tarlac. However, AM
failed to deliver the cargo, because its truck was
hijacked when the driver stopped in Bulacan to visit
his girlfriend.
a. May Reynaldo hold AM liable as a common
carrier?
b. May AM set up the hijacking as a defense
to defeat Reynaldos claim?
A:
a) Reynaldo may hold AM Trucking liable as a
common carrier. The facts that AM Trucking
operates only two trucks for hire on a selective
basis, caters only to a few customers, does not
make regular or scheduled trips, and does not have a
certificate of public convenience are of no moment
as:
1. The law does not distinguish between one whose
principal business activity is the carrying of persons
108
 TRANSPORTATION LAWS
or goods or both and anyone who does such carrying
only as an ancillary activity,
2. the law 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, and
3. the law refrains from making a distinction between
a carrier offering its services to the general public
and one who offers services or solicits business only
from a narrow segment of the general population
(Pedro de Guzman v CA L-47822 Dec 22,88 168s612)
b) AM Trucking may not set up the hijacking as a
defense to defeat Reynaldos claim as the facts given
do not indicate that the same was attended by the
use of grave or irresistible threat, violence, or force.
It would appear that the truck was left unattended
by its driver and was taken while he was visiting his
girlfriend (Pedro de Guzman v CA L-47822 Dec 22,88
168 scra 612).
Q: Alejandor Camaling of Alegria, Cebu, is engaged
in buying copra, charcoal, firewood, and used
bottles and in reselling them in Cebu City. He uses
2 big Isuzu trucks for the purpose; however, he has
no certificate of public convenience or franchise to
do business as a common carrier. On the
return trips to Alegria, he loads his trucks with
various merchandise of other merchants in
Alegria and the neighboring municipalities of
Badian and Ginatilan. He charges them freight
rates much lower than the regular rates. In one of
the return trips, which left Cebu City at 8:30 p.m.
1 cargo truck was loaded with several boxes of
sardines, valued at P100th, belonging to one of his
customers, Pedro Rabor. While passing the
zigzag road between Carcar and Barili, Cebu, which
is midway between Cebu City and Alegria, the
truck was hijacked by 3 armed men who took all
the boxes of sardines and kidnapped the driver
and his helper, releasing them in Cebu City only 2
days later.
Pedro Rabor sought to recover from Alejandro the
value of the sardines. The latter contends that he is
Common carrier v. Private carrier
109
not liable therefore because he is not a common
carrier under the Civil Code and, even granting for
the sake of argument that he is, he is not liable for
the occurrence of the loss as it was due to a cause
beyond his control. If you were the judge, would
you sustain the contention of Alejandro?
A: If I were the Judge, I would hold Alejandro as
having engaged as a common carrier. A person who
offers his services to carry passengers or
goods for a fee is a common carrier
regardless of whether he has a certificate of public
convenience or not, whether it is his main business
or incidental to such business, whether it is
scheduled or unscheduled service, and whether he
offers his services to the general public or to a
limited few (De Guzman v CA GR 47822, 27 Dec
1988).
I will however, sustain the contention of Alejandro
that he is not liable for the loss of the goods. A
common carrier is not an insurer of the cargo. If it
can be established that the loss, despite the exercise
of extraordinary diligence, could not have been
avoided, liability does not ensue against the carrier.
The hijacking by 3 armed men of the truck used by
Alejandro is one of such cases (De Guzman v CA GR
47822 27Dec1988).
Private carrier
A carrier which does not qualify under the requisites
of a common carrier is deemed a private carrier
(National Steel Corporation v CA, G.R. No. 112287,
December 12, 1997).
A private carrier is one who, without making the
activity a vocation, or without holding himself or itself
out to the public as ready to act for all who may
desire his or its services, undertakes, by special
agreement in a particular instance only, to transport
goods or persons from one place to another either
gratuitously or for hire (Spouses Perena vs. Spouses
Zarate, GR No. 157917, August 29, 2012).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
COMMON CARRIER PRIVATE CARRIER
To whom does Undertakes to carry passengers or goods for the Carriage is generally undertaken by special
the carrier public (First Philippine Industrial Pipeline vs. CA, agreement and it does not hold itself out to
cater its 300 SCRA 661). carry goods for the general public
service (Loadmasters Customs Services, Inc. vs.
Glodel Brokerage G.R. No. 179446, January
10, 2011).
Governing Civil Provisions on Common Carriers, Public Service Civil Code provisions on ordinary contracts
laws Act, and other special laws relating to (ibid).
transportation (Spouses Perena vs. Spouses Zarate,
supra).
Degree of Extraordinary diligence (Art. 1733, NCC). Ordinary diligence or diligence of a good
Diligence father of the family (Spouses Perena v.
required Spouses Zarate, supra).
Presumption 1. If the goods are lost, destroyed or No presumption as to negligence (Planters
of Negligence deteriorated. Products vs. CA, GR No. 101503, Sept. 15,
2. In case of death of or injuries to passengers 1993).
(Art. 1735 and 1756, NCC).
Whether Subject to regulation by a regulatory agency NOT subject to regulation by a regulatory
subject to agency
regulation
or not
Exemption A common carrier cannot stipulate that it is A private carrier may validly enter into such
from liability exempt from liability for negligence of its agents stipulation (Sundiang, 2014).
or employees. Such stipulation is void as it is
against public policy (Sundiang, 2014).

Name two (2) characteristics which differentiate
a common carrier from a private carrier (2002
Bar Exam Question)
Two (2) characteristics that differentiate a
common carrier from a private carrier are:
1. A common carrier offers its service to the
public; a private carrier does not.
2. A common carrier is required to observe
extraordinary diligence; a private carrier is not
so required.
Public utility
A business or service engaged in supplying the public
with some commodity or service of public
consequence, or essential to the general public
(Perez, 2006, citing Albano vs. Reyes, 175 SCRA 264;
KMU Labor Center vs. Garcia, 239 SCRA 386).
Public service
business purposes, any common carrier, with or
without fixed route and whatever may be its
classification, engaged in the transportation of
passengers or freight or both, canal, irrigation system,
gas, electric light, heat and power, water supply
power, petroleum, sewerage system, wire or wireless
communication systems, wire or wireless
broadcasting stations and stations and other similar
public services (Public Service Act [PSA], Sec. 13 [b]).
A casual or incidental service devoid of public
character and interest is not brought within the
category. The question depends on such factors as
the extent of services, whether such person or
company has held himself or itself out as ready to
serve the public or a portion of the public generally
(Luzon Stevedoring v. PSC, G.R. L-5458, September 16
1953).
NOTE: The terms public utility and public service are
used interchangeably (Perez, 2006).

Every person that may own, operate, manage, control Certificate of public convenience (CPC)
in the Philippines, for hire/compensation, with
general/limited clientele whether permanent, It is an authorization issued for the operation of
occasional or accidental, and done for general public services for which no franchise, either

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2014 GOLDEN NOTES 110
 TRANSPORTATION LAWS
municipal or legislative, is required by law, such as a
common carrier.
Certificate of public convenience is not necessary
before a carrier can be considered a common carrier
A person or entity is a common carrier even if he did
not secure CPC. Its liability as a common carrier arises
as soon as it acted as a common carrier, without
regard as to whether or not such carrier has complied
with the requirements of the applicable regulatory
statute and implementing regulations and has been
granted a certificate of public convenience or other
franchise (De Guzman v CA. 168 SCRA 612 [1988]).
Certificate of public convenience (CPC) v. Certificate
of public convenience and necessity (CPCN)
2. Applicant must prove the Operation of proposed
public service will promote public interest in a
proper and suitable manner.
3. Applicant must prove Public necessity.
4. Applicant must have Sufficient financial
capability to undertake proposed services and
meeting responsibilities incidental to its
operation (KMU Labor Center vs. Garcia, supra).
Grounds that oppositors may raise to the
application for a certificate of public convenience
1. The area has already a well-established operator
Prior operator rule (Mandbusco, Inc. vs. Francisco,
32 SCRA 405).
Prior Operator or Old Operator Rule

CPC CPCN The rule allows an existing franchised operator

Issued whenever the Issued upon approval of to invoke a preferential right within the
Public Service any franchise or privilege authorized territory as long as he renders
Commission granted by any political satisfactory and economical service (Martin,
(Commission) finds that subdivision of the 1989 Ed.). The prior operator must first be given
the operation of the Philippines when in the the opportunity to extend its service in order to
proposed public service judgment of the political meet public needs in the matter of
will promote the public subdivision of the transportation (ibid).
interests in a proper and Philippines when in the
suitable manner, for judgment of the Third Operator Rule
which a municipal or Commission such
legislative franchise is franchise or privilege will On the other hand, under the Third Operator
NOT necessary (Sec. 16 properly conserve the Rule, where two operators are more than
[a], PSA). public interest (Sec. 16 serving the public there is no reason to permit a
[b], PSA). third operator to engage in competition with
them. The fact that it is only one trip and of
Instances where a certificate of public convenience little consequence is not sufficient reason to
is not necessary (WAR-PIPA) grant the application (Yangco v. Esteban, G.R.
No. 38586, Aug. 18, 1933).
1. Warehouses
2. Animal-drawn vehicles or banca powered by oar 2. Where there are various applicants for a public
or by sail; tug boats and lighters utility over the same territory, all conditions being
3. Radio companies, except as to fixing of rates equal, priority in the filing of the application for CPC
4. Public market becomes a factor Prior applicant rule.
5. Ice plants
7. Public utilities operated by the national Prior Applicant Rule
government or Political subdivision except as to
rates. It presupposes a situation when two interested
8. Airships except as to fixing rates persons apply for a certificate to operate a public
utility in the same community over which no
Requirements for the grant of certificate of public person has as yet granted any certificate (Martin,
convenience (COPS) 1989, Ed.).

1. Applicant must be a Citizen of the Philippines. If
the applicant is a Corporation, 60% of its capital
must be owned by Filipinos.
3. Interpose an objection stating that the grant of
the application would result to a ruinous competition
(Halili vs. Ice and Cold Storage Industries, Inc., 77 Phil.
823). One of the purposes of PSA is to protect and
conserve the investments which have already been

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111 FACULTY OF CIVIL LAW
 MERCANTILE LAW
made for that purpose by public service operators
Protection of investment rule (Batangas Trans. Co. vs.
Orlanes, 52 Phil. 455).
NOTE: Mere possibility of reduction in the income of
an existing operator holding a public service permit
does not, of itself, establish that issuing a permit to
another to operate within the same territory will result
in ruinous competition. To prove the latter, it should
be shown that the oppositor will not obtain sufficient
profits to pay a dividend or reasonable interest upon
invested capital (Halili vs. Ice and Cold Storage
Industries, Inc., supra).
4. Attack the citizenship of the applicant (Sec. 11,
Art. XII of the 1987 Constitution prohibits the granting
of franchise or certificate for the operation of public
utility in favor of non-Filipino citizens); or
5. The applicant does not have the necessary
financial capacity (KMU Labor Center vs. Garcia,
supra).
Exceptions to the application of Prior operator rule
or Protection of investment rule
1. Where public interest would be better served by
the new operator (Intestate Estate of Teofilo
Tiongson vs. Commission, 36 SCRA 241).
2. Where the old operator has failed to make an
offer to meet the increase in traffic (Manila
Yellow Taxicab Co., Inc. vs. Castelo, GR No.
L-131910, May 30, 1960).
3. Where the certificate of public convenience
granted to the new operator is a maiden
certificate, which does not overlap with the
entire route of the old operator but only a short
portion thereof as a convergence point
(Mandbusco, Co. vs. Francisco, supra).
4. If the application of the rule will be conducive to
monopoly of the service, and contrary to the
principle that promotes healthy competition
(Villa Rey Transit, Inc. vs. Pangasinan Trans. Inc.,
5 SCRA 234).
5. If the old operator unjustifiably abandoned his
service for two or three years by not registering
the necessary equipment forfeits his right to said
equipment and the service authorized to him
(Farias vs. Estate of Florencio Buan, GR No.
12306-7, November 29, 1961).
6. The service of the prior operator is inefficient.
7. The prior operator denies that there is a need to
expand his service.
8. The prior operator has abandoned his service.
9. The prior operation is operating less units than
he was authorized.
10. The prior operator was given the opportunity to
expand his service and failed to do so.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Q: Bayan Bus Lines had been operating satisfactorily
a bus service over the route Manila to Tarlac and
vice versa via the McArthur Highway. With the
upgrading of the new North Expressway, Bayan Bus
Lines service became inadequate despite its efforts
of improving the same. Pasok Transportation, Inc.
now applies for the issuance to it by the Land
Transportation Franchising and Regulatory Board of
a certificate of public convenience for the same
Manila-Tarlac-Manila route. Could Bayan Bus Lines,
Inc. invoke the prior operator rule against Pasok
Transportation, Inc.? Why? (2003 Bar Question)
A: No, Bayan Bus Lines Inc. cannot invoke the prior
operator rule. As a general principle, public utility
operators must be protected from ruinous
competition, such that before permitting a new
operator to serve in a territory already served by
another operatior, the latter should first be given an
opportunity to improve his equipment and service.
This principle, however, is subject to justifiable
exceptions. The primary consideration in the grant of
a certificate of public convenience must always be
public convenience. (Fortunato F. Halili v. Ruperto
Cruz, G.R. No. L-21061) In this case, Bayan Bus Lines
had been given an opportunity to improve its service
but despite its efforts, its services still proved
inadequate which rendered the need to avail of the
services of Pasok Transportation, Inc. as the addition
would better serve public convenience, which is the
paramount consideration in the granting of a
certificate of public convenience.
100% foreign corporation may own facilities and
equipment of a public utility such as EDSA LRT III
While the Constitution requires that a franchise is
needed for the operation of public utility and that no
franchise shall be granted to corporation without at
least 60% of its capital owned by Filipinos, it does not
require however, a franchise before one can own the
facilities needed to a public utility. The right to
operate a public utility may exist independently and
separately from the ownership of the facilities
thereof. One can own facilities without operating
them as a public utility, or conversely one may
operate a public utility without owning the facilities
(Tatad et al. v Sec. Garcia and EDSA LRT Corp Ltd.,
April 16, 1995).
Certificate of public convenience does not confer
upon the holder any proprietary right or interest in
the route covered thereby
A CPC does not confer upon the holder any
proprietary right in the route covered thereby (Luque
112
 TRANSPORTATION LAWS
v. Villegas, G.R. No. L-22545, November 28, 1969).
However, with respect to other persons and other
public utilities, a CPC as property, which represents
the right and authority to operate its facilities for
public service, cannot be taken or interfered with
without due process of law. Appropriate actions may
be maintained in courts by the holder of the
certificate against those who have not been
authorized to operate in competition with the former
and those who invade the rights which the former
has pursuant to the authority granted by the
Commission (A.L. Animen Transportation Co. v.
Golingco, G.R. No. 17151, April 6, 1922).
Under the PSA, a CPC can be sold by the holder
thereof because it has considerable material value
and is considered a valuable asset (Raymundo v.
Luneta Motor Co., G.R. No. 39902, November 29,
1933). It is a property and and it can be the subject
of sale or attachment (Cogeo-Cubao Operators and
Drivers Association v. CA, 207 SCRA 3433, Raymundo
v. Luneta Motor Co.).
Approval by the Commission of the sale,
encumbrance or lease of property is not a condition
precedent to the validity of a contract
While in the old law, the sale without the approval of
the Public Utility Commission was declared null and
void, under PSA, the new law, the sale may not only
be negotiated but completed before said approval. In
other words, the approval by the Commission is not a
condition precedent to the validity of the contract.
The approval is only necessary to protect public
interest (Darang vs. Belizar, G.R. No. L-19487, January
31, 1967).
However, in case the registered owner leased to
another a vehicle being used for public service, the
former will still be liable to a customer whose goods
were misappropriated by the latter if there was no
approval of the PSC since the lease is not binding
upon the parties (Galisan v. Alday, 154 SCRA 388).
Liability of a holder of Certificate of Public
Convenience
GR: The holder of the CPC (registered owner) is
primarily and vicariously liable for the negligent
operation of the vehicle (ibid., pg. 138; Art. 2176, in
relation to Art. 2180, NCC; Filcar Transport vs.
Espinas, [2012]).
XPNs: The registered owner is not liable if:
1. The vehicle was taken or stolen from his garage;
113
2. The vehicle was driven without his knowledge or
consent (ibid., pg. 138, citing Duavit vs. CA, [1989]
and Duquillo vs. Bayot, [1939]).
Note: The registered owner cannot exculpate himself from
vicarious liability by proving who the supposed transferee
or owner is (ibid., pg. 139, citing Orix Metro Leasing vs.
Mangalinao, [2012]).
DILIGENCE REQUIRED
Diligence required of common carriers
The diligence required of common carriers is
extraordinary diligence (Art. 1733, NCC). The nature
of the business of common carriers and the
exigencies of public policy demand that they observe
extraordinary diligence (Martin, 1989 Ed.).
It is that extreme measure of care and caution which
persons of unusual prudence and circumspection use
for securing and preserving their own property or
rights. The law requires common carriers to render
service with the greatest skill and utmost foresight
(Loadmasters Services vs. Glodel Brokerage, supra.).
Reason for the requirement of extra-ordinary
diligence
1. Nature of the business of common carrier which
is public service;
2. Public policy, the common carriers are supposed
to serve the public interest and therefore, they
have to exercise extra-ordinary diligence (Martin,
1989 Ed.).
Q: Why is the defense of due diligence in the
selection and supervision of an employee not
available to a common carrier? (2002 Bar Exam
Question)
A: The defense of due diligence in the selection and
supervision of an employee is not available to a
common carrier because the degree of diligence
required of a common carrier is not the diligence of
a good father of a family but extraordinary
diligence, i.e., diligence of the greatest skill and
utmost foresight.
Duration for the exercise of extraordinary diligence
by the common carrier in connection to the transfer
of goods
It lasts from the time the goods are unconditionally
placed in the possession of, and received by the
carrier for transportation until the same are
delivered, actually or constructively, by the carrier to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the consignee, or to the person who has a right to or to the person who has the vessel owners dock
receive them (Art. 1736, NCC). a right to receive them. or premises (Aboitiz,
(Art. 1736, NCC) supra).
NOTE: Thus, this duty remains in full force and effect even
when they are temporarily unloaded or stored in transit, Note: This duty remains in
unless the shipper or owner had made use of the right or full force and effect even
stoppage in transit (Art. 1737, NCC). when they are temporarily
unloaded or stored in transit,
However, this extraordinary liability continues to be unless the shipper or owner
operative even during the time the goods are stored in a had made use of the right or
warehouse of the carrier at the place of destination, until stoppage in transit (Art.
the consignee has been advised of the arrival of the goods 1737, NCC).
and has been reasonable opportunity thereafter to remove
them or otherwise dispose of them (Art. 1738, NCC). Hence, It also continues even during
where the consignee failed to claim a machinery after its the time the goods are
arrival and the carrier deposited it in a warehouse, the stored in a warehouse of the
carrier is not liable for the damages sustained by the carrier at the place of
machinery after its delivery to the warehouse (Sea-Land destination until the
Service, Inc. v.CA, 223 SCRA 316). consignee has been advised
of the arrival of the goods
Duration for the exercise of extraordinary diligence and has been given a
by the common carrier in connection to reasonable opportunity
transportation of passengers thereafter to remove them
or otherwise dispose of
them (Art. 1738, NCC)
The duty of the common carrier commence from the
moment the person who purchases the ticket from GR: There is a There is a presumption
the carrier presents himself at the proper place and in presumption of of negligence if there is
a proper manner to be transported. The relation of negligence if the goods death or injuries to
carrier and passenger continues until the passenger are lost, destroyed or passengers (Art. 1756,
has been landed at the port of destination and has deteriorated (Art. 1735, NCC)
left the vessel owner's dock or premises. Once NCC)
created, the relationship will not ordinarily terminate
until the passenger has, after reaching his XPNs: 1. Natural disaster
destination, safely alighted from the carrier's or calamity which is the
conveyance or had a reasonable opportunity to leave proximate cause of the
the carrier's premises (Aboitiz Shipping Corp. v. CA, loss (flood, storm,
G.R. No. 84458, Nov. 6, 1989). earthquake, lightning)
2. Acts of public enemy in
Exercise of extraordinary diligence in the carriage of war, whether
goods v. Exercise of extraordinary diligence in the international or civil;
transport of passengers 3. Act of omission of the
shipper or passenger;
EXTRAORDINARY DILIGENCE in 4. Character of the goods
or defects in the packing
Carriage of Goods Transport of Passengers
or container;
Commences from the Commences from the
5. Order or act of
time the goods are moment the person who
competent public
unconditionally placed in purchases the ticket
authority;
the possession of, and from the carrier
6. Exercise of
received by the carrier for presents himself at the
extraordinary diligence.
transportation (Art. 1736, proper place and in a
The carrier and shipper Cannot be dispensed
NCC). proper manner to be
may agree on the with or lessened by
transported (Aboitiz
observance of diligence to stipulation.
Shipping Corp. vs. CA
a degree less than
[1989]).
extraordinary (but not
Continues until the goods Continues until the
total exemption),
are delivered, actually or passenger has been
provided the stipulation
constructively, by the landed at the port of
is:
carrier to the consignee, destination and has left

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2014 GOLDEN NOTES 114
 TRANSPORTATION LAWS
(1) In writing; convicted and it turns out
(2) Supported by a that he is insolvent, the
valuable consideration heirs/ passengers may run
after the employer of the
other than service
driver, pursuant to the
rendered by the carrier;
employers subsidiary liability
and under Article 103, in relation
(3) Reasonable, just and to Arts. 100 and 102, RPC.
not contrary to public Against the carrier and Tort
policy (J. Dimaampao, driver operating the
supra, pg. 137) other vehicle at fault

Q: X, while driving his Toyota Altis, tried to cross the Against the common Subsidiary liability
railway tract of Philippine (xxx line 2 unread text carrier at fault
xxx) approached Blumentritt Avenida Ext., applied
its horn as a warning to all the vehicles that might Note: The liability of the
be crossing the railway tract, but there was really common carrier and his
nobody manning the crossing. X was listening to his driver as well as the operator
lpod touch, hence, he did not hear the sound of the of the other vehicle and his
horn of the train and so his car was hit by the train. driver is joint and several (J.
Dimaampao, citing Tiu vs.
As a result of the accident, X suffered some injuries
Arriesgado [2004]).
and his car was totally destroyed as a result of the
impact. Is PNR liable? (2012 Bar Question)
LIABILITIES OF COMMON CARRIER
A: PNR is liable because Railroad companies owe to
Presumption of negligence in the carriage of goods
the public a duty of exercising a reasonable degree of
care to avoid injury to person and property at railroad
In all cases other than those mentioned in Nos. 1, 2,
crossings which means a flagman or a watchman
3, 4, and 5 of Article 1734 of the NCC, if the goods are
should have been posted to warn the public at all
lost, destroyed or deteriorated, common carriers are
times.
presumed to have been at fault or to have acted
negligently (Art. 1735, NCC).
Causes of action for failure to observe diligence
required
Presumption of negligence in the transportation of
passengers
PERSON WHO HAS BASIS OF CAUSE OF ACTION
CAUSE OF ACTION AGAINST THE COMMON
In case of death of or injuries to passengers, common
CARRIER
carriers are presumed to have been at fault or to
Third person who Tort (extra-contractual have acted negligently (Art. 1756, NCC).
suffered damages negligence)
Shipper of the goods Breach of the contract of Presumption of negligence is rebuttable
damaged carriage (Culpa Contractual)
Heir/s of the Breach of the contract of Both articles 1735 and 1756 of the NCC provides that
deceased passengers carriage (Culpa Contractual) such presumption may be refuted by proving
or the passenger observance of extraordinary diligence as prescribed
himself for the by article 1733 of the NCC.
injuries sustained by
him Q: Peter so hailed a taxicab owned and operated
by Jimmy Cheng and driven by Hermie Cortez.
Peter asked Cortez to take him to his office in
CAUSE OF ACTION OF Malate. On the way to Malate, the taxicab
THE INJURED BASIS OF CAUSE OF collided with a passenger jeepney, as a result of
PASSENGER OR HIS ACTION which Peter was injured, i.e., he fractured his left
HEIRS, IF THE leg. Peter sued Jimmy for damages, based upon a
PASSENGER DIES: contract of carriage, and Peter won. Jimmy
Against the negligent Culpa criminal wanted to challenge the decision before the SC on
driver the ground that the trial court erred in not making
Note: If the driver is an express finding as to whether or not Jimmy was

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115 FACULTY OF CIVIL LAW
 MERCANTILE LAW
responsible for the collision and, hence, civilly
liable to Peter. He went to see you for advice.
What will you tell him? Explain. (1990 Bar Exam
Question)
A: I will counsel Jimmy to desist from challenging
the decision. The action of Peter being based on
culpa contractual, the carriers negligence is presumed
upon the breach of contract. The burden of proof
instead would lie on Jimmy to establish that despite
an exercise of utmost diligence the collision could
not have been avoided.
Q: In a court case involving claims for damages
arising from death and injury of bus passengers,
counsel for the bus operator files a demurrer to
evidence arguing that the complaint should be
dismissed because the plaintiffs did not submit any
evidence that the operator or its employees were
negligent. If you were the judge, would you dismiss
the complaint? (1997 Bar Exam Question)
A: No. In the carriage of passengers, the failure of
the common carrier to bring the passengers safely
to their destination immediately raises the
presumption that such failure is attributable to the
carriers fault or negligence. In the case at bar, the
fact of death and injury of the bus passengers raises
the presumption of fault or negligence on the part
of the carrier. The carrier must rebut such
presumption. Otherwise, the conclusion can be
properly made that the carrier failed to exercise
extraordinary diligence as required by law.
Moral damages in case of breach of contract of
transportation
GR: Moral damages are not recoverable in breach of
contract of transportation because such contract
cannot be considered included in the analogous
cases used in Article 2219 of the NCC. This is likewise
to consider that Art. 2176 of the NCC expressly
excludes the cases where there is a pre-existing
contractual relation between the parties (Versoza vs.
Baytan, et al., 107 Phil. 1010).
XPNs: Moral damages may be recovered even in case
of breach of contract of transportation in the
following cases:
1. Where the mishap results in the death of the
passenger (M. Ruiz Highway Transit, Inc. vs. CA,
11 SCRA 98).
2. Where it is proved that the carrier was guilty of
fraud or bad faith, even if death does not result
(Rex Taxicab Co. vs. Bautista, GR No. L-15392,
September 30, 1960).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
NOTE: Although the relation of passenger and carrier is
"contractual both in origin and nature" nevertheless the
act that breaks the contract may be also a tort" when said
act is done with gross negligence or with bad faith (Air
France v Carrascoso, G.R. No. L-21438, September 28,
1966).
Q: Vivian Martin was booked by PAL,
which acted as a ticketing agent of Far East
Airlines, for a round trip flight on the latters
aircraft, from Manila-Hongkong-Manila. The
ticket was cut by an employee of PAL. The ticket
showed that Vivian was scheduled to leave Manila
at 5:30 p.m. on 05 January 2002 aboard Far Easts
Flight F007. Vivian arrived at the Ninoy Aquino
International Airport an hour before the time
scheduled in her ticket, but was told that Far Easts
Flight F007 had left at 12:10 p.m. It turned out that
the ticket was inadvertently cut and wrongly
worded. PAL employees manning the airports
ground services nevertheless scheduled her to fly
two hours later aboard their plane. She agreed and
arrived in Hongkong safely. The aircraft used by Far
East Airlines developed engine trouble, and did not
make it to Hongkong but returned to Manila.
Vivian sued both airlines, PAL and Far East, for
damages because of her having unable to take the
Far East flight. Could either or both airlines be held
liable to Vivian? Why? (2003 Bar Exam Question)
A: Vivian can hold neither liable. PAL acted merely as
a ticketing agent, consequently, there was no breach
of contract on its part for which Vivian can hold it
liable. At best, the act of PALs employees in
inadvertently detaching the ticket and the tickets
erroneous wordings were acts of negligence. Also,
PAL sought to accommodate Vivian immediately by
scheduling her to fly two hours later. As to Far East
Airlines, Vivian cannot hold it liable because as held in
Japan Airlines v. Court of Appeals, et al. (G.R. No.
118664), airline passengers must take such risks
incident to the mode of travel and that common
carriers are not insurers of all risks. Due to the
technical makeup of an airplane, engine troubles may
be considered as some of the perils involved in air
travel.
Boundary system
Under this system the driver is engaged to drive the
owner/operators unit and pays the latter a fee
commonly called boundary for the use of the unit.
Whatever he earned in excess of that amount is his
income (Paguio Transport Corp. v. NLRC, G.R. No.
119500, August 28, 1998). The gasoline consumed by
the jeep is for the account of the driver (National
116
 TRANSPORTATION LAWS
Labor Union v. Dinglasan, G.R. No. L-14183, Nov. 4,
1993).
Relationship between the owner of the vehicle and
the driver under a boundary system arrangement
The relationship between jeepney owners/ operators
on one hand and jeepney drivers on the other under
the boundary system is that of employer-employee
and not of lessor-lessee (Martinez v. NLRC, G.R. No.
117495, May 29, 1997).
The owner of the public vehicle operating under the
boundary system is not exempt from liability in a
case of injury to or death of passengers
To exempt from liability the owner of a public vehicle
who operates it under the boundary system on the
ground that he is a mere lessor would be not only to
abet flagrant violations of the PSA, but also to place
the riding public at the mercy of reckless and
irresponsible drivers. Moreover, due care in the
selection of employees is called for by Article 2180 of
the Civil Code. Failing on this, the owner of the
vehicle, who is likewise the employer, shall not be
exempt from liability (Hernandez vs. Dolor, 435 SCRA
668, July 30, 2004).
Q: Baldo is a driver of Yellow Cab Company under
the boundary system. While cruising along the
South Expressway, Baldos cab figured in a collision,
killing his passenger, Pietro. The heirs of Pietro
sued Yellow Cab Company for damages, but the
latter refused to pay the heirs, insisting that it is
not liable because Baldo is not its employee.
Resolve with reasons. (2005 Bar Exam Question)
A: Yellow Cab Company shall be liable with Baldo,
on a solidary basis, for the death of passenger
Pietro. Baldo is an employee of Yellow Cab under
the boundary system. As such, the death of
passenger Pietro is breach of contract of carriage,
making both the common carrier Yellow Cab and
its employee, Baldo, solidarily liable (Hernandez v.
Dolor, G.R, No. 160286, July 30, 2004).
Q: X owns a fleet of taxicabs. He operates it through
what is known as boundary system. Y drives one of
such taxicabs and pays X a fixed amount of Php1
,000 daily under the boundary system. This means
that anything above Php1 ,000 would be the
earnings of Y. Y, driving recklessly, hit an old lady
crossing the street. Which statement is most
accurate? (2012 Bar Question)
117
a. X as the owner is exempt from liability because he
was not the one driving.
b. X as the owner is exempt from liability because
precisely the arrangement is one under the
"boundary system."
c. X will not be exempt from liability because he
remains to be the registered owner and the
boundary system will not allow the circumvention of
the law to avoid liability.
d. Y is the only one liable because he drove
recklessly.
A: C. X will not be exempt from liability because he
remains to be the registered owner and the boundary
system will not allow the circumvention of the law to
avoid liability.
Kabit system
The kabit system is an arrangement whereby a
person who has been granted a CPC allows other
persons who own motor vehicles to operate them
under his license, sometimes for a fee or percentage
of the earnings (Lim v CA, G.R. No. 125817, January
16, 2002).
NOTE: 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 Art. 1409 of the New Civil Code. It is a fundamental
principle that the court will not aid either party to enforce
an illegal contract, but will leave them both where it finds
them (Lita Enterprises, Inc. v. IAC, G.R. No. 64693, April 27,
1984).
The registered owner of the vehicle may not be
allowed to prove that there is already a transfer of
ownership to another person under the kabit system
One of the primary factors considered in the granting
of a CPC for the business of public transportation is
the financial capacity of the holder of the license, so
that liabilities arising from accidents may be duly
compensated. The kabit system renders illusory such
purpose and, worse, may still be availed of by the
grantee to escape civil liability caused by a negligent
use of a vehicle owned by another and operated
under his license.
If a registered owner is allowed to escape liability by
proving who the supposed owner of the vehicle is, it
would be easy for him to transfer the subject vehicle
to another who possesses no property with which to
respond financially for the damage done (Lim v. CA,
supra).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Can the grantee of CPC engaged in a kabit
system be held liable for damages arising from the
crime of reckless imprudence resulting to the death
and injuries to third persons, to which the driver
was convicted?
A: Yes. The driver, the operator, and the real owner
of the vehicle are jointly and severally liable for
damages. However, the registered owner or operator
has the right to be indemnified by the real or actual
of the amount that he may be required to pay as
damage for the injury caused. Recovery by the
registered owner or operator may be made in any
formeither by a cross-claim, third party complaint,
or an independent action, and the result is the same
(Perez, 2009, citing Jereos vs. CA, 117 SCRA 395l
Zamboanga Trans. Co. vs. CA, 30 SCRA 718).
Q: Johnny owns a Sarao jeepney. He asked his
neighbor Van if he could operate the said jeepney
under Vans certificate of public convenience. Van
agreed and, accordingly, Johnny registered his
jeepney under Van name. On June 10, 1990, one of
the passenger jeepneys operated by Van bumped
Tomas. Tomas was injured and in due time, he filed a
complaint for damages against Van and his driver for
the injuries he suffered. The court rendered
judgment in favor of Tomas and ordered Van and his
driver, jointly and severally, to pay Tomas actual and
moral damages, attorneys fees, and costs.
The Sheriff levied on the jeepney belonging to
Johnny but registered in the name of Van. Johnny
filed a 3rd party claim with the Sheriff alleging
ownership of the jeepney levied upon and stating
that the jeepney was registered in the name of Van
merely to enable Johnny to make use of Vans
certificate of public convenience. May the Sheriff
proceed with the public auction of Johnnys jeepney.
Discuss with reasons. (1990 Bar Exam Question)
A: Yes, the Sheriff may proceed with the auction sale
of Johnnys jeepney. In contemplation of law as
regards the public and third persons, the vehicle is
considered the property of the registered operator
(Santos v Sibug 104 S 520).
Q: Procopio purchased an Isuzu passenger jeepney
from Enteng, a holder of a certificate of public
convenience for the operation of public utility
vehicle plying the Calamba-Los Baos route. While
Procopio continued offering the jeepney for public
transport services, he did not have the registration
of the vehicle transferred in his name. Neither did
he secure for himself a certificate of public
convenience for its operation. Thus, per the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
records of the Land Transportation Franchising and
Regulatory Board, Enteng remained its registered
owner and operator. One day, while the jeepney
was traveling southbound, it collided with a
ten-wheeler truck owned by Emmanuel. The
driver of the truck admitted responsibility for
the accident, explaining that the truck lost its
brakes.
Procopio sued Emmanuel for damages, but the
latter moved to dismiss the case on the ground that
Procopio is not the real party in interest since he is
not the registered owner of the jeepney. Resolve
the motion with reasons. (2005 Bar Exam Question)
A: The motion to dismiss should be denied because
Procopio, as the real owner of the jeepney, is the real
party in interest. Procopio falls under the Kabit
system. However, the legal restriction as regards the
Kabit system does not apply in this case because the
public at large is not deceived nor involved (Lim v.
Court of Appeals, G.R. No. 125817, January 16, 2002,
citing Baliwag Transit v. Court of Appeals, G.R. No.
57493, January 7, 1987).
In any event, Procoprio is deemed to be "the agent"
of the registered owner. (First Malayan Leasing v.
Court of Appeals, G.R. No. 91378, June 9,1992; and
"F" Transit Co., Inc. v. NLRC, G.R. Nos, 88195-96,
January 27, 1994)
Q: X owns a passenger jeepney covered by
Certificate of Public Convenience. He allowed Y to
use its Certificate of Convenience for a
consideration. Y therefore was operating the
passenger jeepney under the same Certificate of
Public Convenience (Kabit System) under the name
of X. The passenger jeepney met an accident. Who
will be liable? (2012 Bar)
A: X and Y will be jointly and severally liable.
VIGILANCE OVER GOODS
EXEMPTING CAUSES
Presumption on the loss, destruction, or
deterioration of goods
GR: The common carrier is presumed to have been at
fault or to have acted negligently when the goods
transported are lost, destroyed or deteriorated (Art.
1735, NCC).
XPNs: When the same is due to any of the following
causes only: (FA2 C O)
118
 TRANSPORTATION LAWS
1. Fortuitous events (Flood, storm, earthquake,
lightning or other natural disaster or calamity).
Provided, the following conditions are present:
a. Natural disaster was the proximate and only
cause;
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the
occurrence of the natural disaster; and
c. The common carrier has not negligently incurred
delay in transporting the goods (NCC, Art.
1739-1740).
d. The common carrier exercised due diligence to
prevent or minimize the loss before, during or
after its occurrence.
2. Act of the public enemy in war, whether
international or civil, provided:
a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
minimize loss before, during and after the act
(NCC, Art. 1739-1740).
3. Act or omission of the shipper or owner of the
goods, provided:
a. If proximate and only cause exempting
b. If contributory negligence mitigating
4. The Character of the goods or defects in the
packing or in the containers; provided, carrier
exercised due diligence to forestall or prevent loss
(Art 1742).
NOTE: If the fact of improper packing is known to the
carrier or its servants, or apparent upon ordinary
observation, but it accepts the goods notwithstanding such
condition, it is not relieved from responsibility for loss or
injury resulting therefrom (Southern Lines Inc., v. CA, GR
No. L-16629, January 31, 1962).
5. Order or act of competent authority; provided, the
authority is with power to issue the order (Art. 1743).
If the officer acts without legal process, the common
carrier will be held liable (Ganzon vs. CA, GR No.
L-48757, May 30, 1988).
NOTE: In all cases other than those enumerated above,
there is presumption of negligence even if there is an
agreement limiting the liability of the common carrier in
the vigilance over the goods.
REQUIREMENT OF ABSENCE OF NEGLIGENCE
Requisites of a fortuitous event (FEU-I)
1. The debtor must be Free from any participation
in or aggravation of the injury to the creditor.
2. The Event must be such as to render it
impossible for the debtor to fulfill his obligation
in a normal manner.
3. The event must be Unforeseen or unavoidable.
119
4. The cause of the breach of obligation must be
Independent of the will of the debtor (Real vs.
Belo, GR No. 146224, January 26, 2007).
Mechanical defects are not considered fortuitous
events
Mechanical defects in the carrier are NOT considered
a caso fortuito that exempts the carrier from
responsibility (Sweet Lines, Inc. v. CA, GR No. L-46340,
Apr. 29, 1983). Other SC decisions on the matter are:
1. Tire blowout of a jeep is not a fortuitous event
where there exists a specific act of negligence by the
carrier consisting of the fact that the jeepney was
overloaded and speeding at the time of the incident
(Juntilla v. Fontanar, GR No. L-45637, May 31, 1985).
2. Defective brakes cannot be considered fortuitous
in character (Vergara v. CA, G.R. No. 77679,
September 30, 1987).
Occurrence of a typhoon as a fortuitous event
GR: If all the elements of a natural disaster or
calamity concur and there was no contributory
negligence or delay, the occurrence of a typhoon as a
fortuitous event. This holds true especially if the
vessel was seaworthy at the time it undertook that
fateful voyage and that it was confirmed with the
Coast Guard that the weather condition would permit
safe travel of the vessel to its destination (Philippine
American General Insurance Co., Inc. v. MGG Marine
Services, Inc., G.R. No. 135645, March 8, 2002).
The loss of cargoes due to the sinking of a seaworthy
tugboat which was suddenly tossed by waves of
extraordinary height is due to a force majeure
(Philippine American Gloeneral Insurance Company v.
PKS Shipping Company, 401 SCRA 222).
XPN: If a vessel sank due to a typhoon, and there was
failure to ascertain the direction of the storm and the
weather condition of the path they would be
traversing, it constitutes lack of foresight and
minimum vigilance over its cargoes taking into
account the surrounding circumstances of the case.
Thus, the common carrier will still be liable (Arada v.
CA, G.R. No. 98243, July 1, 1992).
However, where a vessel encountered stormy
weather and the coils of wire it was transporting
became rusty because rain entered the hatch of the
vessel, the damage was not due to a fortuitous event,
because heavy rains are foreseeable and rain would
not have entered the hatch if it was closed properly
(Eastern Shipping Lines v. CA, 196 SCRA 570).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Fire is not considered a natural disaster bean meal from Manila Port Area to Calamba,
Laguna. To carry out faithfully its obligation Dizon
This must be so as it arises almost invariably from subcontracted with Enrico Reyes the delivery of
some act of man or by human means. It does not fall 400 sacks of the Soya bean meal. Aside from the
within the category of an act of God UNLESS caused driver, three male employees of Reyes rode on the
by lightning or by other natural disaster or calamity. It truck with the cargo. While the truck was on its
may even be caused by the actual fault or privity of way to Laguna two strangers suddenly stopped the
the carrier (Eastern Shipping Lines v. IAC, GR No. truck and hijacked the cargo. Investigation by the
L-69044, May 29, 1987). police disclosed that one of the hijackers was
armed with a bladed weapon while the other was
But if the outbreak of fire is due to a crack in the unarmed. For failure to deliver the 400 sacks,
auxiliary engine fuel oil service truck, which resulted Fairgoods sued Dizon for damages. Dizon in turn
in the loss of cargoes, that is not due to a force set up a 3rd party complaint against Reyes which
majeure but to negligence (Edgar Cokaliong Shipping the latter registered on the ground that the loss
Lines, Inc. v. UCPB General Insurance Company, Inc., was due to force majeure. Did the hijacking
404 SCRA 706). constitute force majeure to exculpate Reyes from
any liability to Dizon? Discuss fully. (1995 Bar Exam
NOTE: In case that the goods have been already deposited Question)
in the warehouse of Bureau of Customs then the goods was
destroyed by fire, the carrier is not anymore liable A: No. The hijacking in this case cannot be
(Servando vs. Philippine Steam Navigation, GR No.
considered force majeure. Only one of the two
L-36481-2, October 23, 1982).
hijackers was armed with a bladed weapon. As
against the 4 male employees of Reyes, 2 hijackers,
Common carriers liability for the acts of strangers or
with only one of them being armed with a bladed
criminals
weapon, cannot be considered force majeure. The
hijackers did not act with grave or irresistible threat,
GR: A common carrier is liable even for acts of
violence or force.
strangers like thieves or robbers.
ABSENCE OF DELAY
XPN: Where such thieves or robbers acted "with
grave or irresistible threat, violence or force." The
Rules regarding the time of delivery of goods and
common carrier is not liable for the value of the
delay
undelivered merchandise which was lost because of
an event that is beyond his control (De Guzman v. CA,
1. If there is an agreement as to time of delivery
supra).
delivery must be within the time stipulated in the
contract or bill of lading.
When an airline company was not authorized to
2. If there is no agreement delivery must be within a
search passengers for firearms, the loss of the jewelry
reasonable time (Saludo, Jr. v. CA, G.R. No.
and cash of a passenger because of an armed robbery
95536, March 23, 1992).
committed by other passengers is a force majeure,
for which the airline company is not liable
Liability of the carrier if there is delay in the delivery
(Quisumbing v. CA, 190 SCRA 605).
of goods
A bus operator is not liable for the injury suffered by
The carrier shall be liable for damages immediately
a passenger when a bystander stoned the bus,
and proximately resulting from such neglect of duty
because a common carrier is not liable for the injury
(ibid.; NCC, Art. 1170).
of passengers caused by strangers over whom it had
no control and the bus operator is only responsible if
However, where the delay in the transportation of
the bus operator could have prevented such injury by
the remains of a deceased persons was due to the
the exercise of the diligence of a good father of a
fault of the mortuary service, who erroneously
family, for the bus operator is not an isurer of the
switched the casket with that of another deceased
absolutely safety of passengers (Pilapil v. CA, 180
person, the airline company cannot be held liable for
SCRA 548).
damages because of the delay (Saludo v. CA, 207
SCRA 498).
Q: M. Dizon Trucking entered into a hauling
contract with Fairgoods Co whereby the former
bound itself to haul the latters 2000 sacks of Soya

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 120
 TRANSPORTATION LAWS
Although the delivery of the suitcase of a passenger
was delayed by eleven days, an airline company
cannot be held liable for moral damages, exemplary
damages, and attorneys fees, where the airline
company was not guilty of bad faith and exerted
efforts in tracing the suitcase (Philippine Air Lines v.
Mano, 242 SCRA 235).
Effect to the limited liability in case of an unjust
delay in the transportation of goods or a deviation
from stipulated or usual route
If the common carrier, without just cause, delays the
transportation of the goods or changes the stipulated
or usual route, the contract limiting the common
carriers liability cannot be availed of in case of the
loss, destruction, or deterioration of the goods (Art.
1747, NCC).
A stipulation limiting the common carriers liability
for delay on account of riots is valid
An agreement limiting the common carriers liability
for delay on account of strikes or riots is valid (Art.
1748, NCC).
DUE DILIGENCE TO PREVENT LOSS
Duty of the common carrier before, during and after
a natural disaster or acts of a public enemy as
contemplated under Article 1734 of the NCC
The common carrier must exercise due diligence to
prevent or minimize loss before, during and after the
occurrence of flood, storm or other natural disaster
or an act of a public enemy in order that the common
carrier may be exempted from liability for the loss,
destruction or deterioration of the goods (Art. 1739,
NCC).
NOTE: This exemption from liability also requires that the
common carrier must prove that the natural disaster or the
act of the public enemy is the proximate and only cause of
the loss (ibid.). Further, if the common carrier negligently
incurs delay in transporting the goods, a natural disaster
shall not free such carrier from responsibility (Art. 1740,
NCC).
Duty of the common carrier if the loss, destruction,
or deterioration of the goods was caused by the
character of the goods, or the faulty nature of the
packing or the containers
If the loss, destruction, or deterioration of the goods
was caused by the character of the goods, or the
faulty nature of the packing or the containers, The
121
common carrier must exercise due diligence to
forestall or lessen the loss.
CONTRIBUTORY NEGLIGENCE
Contributory negligence
Contributory negligence is the failure of a person who
has been exposed to injury by the fault or negligence
of another, to use such degree of care for his safety
and protection an ordinarily prudent man would use
under the circumstances (Martin, 1989, citing Rakes
vs. Atlantic Gulf Co., 7 Phil. 359).
Contributory negligence on the part of the passenger
does not justify the common carriers exemption
from liability (Martin, 1989, Ed.).
Rule if there is contributory negligence on the part
of the shipper
If the shipper or owner merely contributed to the
loss, destruction or deterioration of the goods, the
proximate cause thereof being the negligence of the
common carrier, the latter shall be liable for
damages, which however, shall be equitably reduced
(Art. 1741, NCC).
DURATION OF LIABILITY
DELIVERY OF GOODS TO A COMMON CARRIER
Duration of the extraordinary responsibility of the
common carrier
It lasts from the time the goods are unconditionally
placed in the possession of, and received by the
carrier for transportation until the same are
delivered, actually or constructively, by the carrier to
the consignee or to the person who has a right to
receive them (NCC, Art. 1736).
Meaning of the phrasse Unconditionally placed in
the possession of, and received by the carrier for
transportation
It is the delivery of the goods to the carrier for
immediate transportation, that is, as soon as the
delivery is complete so as to place on the carrier the
exclusive duty of seeing after their safety (Perez, 2006
citing Charles J. Webb & Sons vs. Central R. Co. of NJ,
36 F. 2d 702).
NOTE: When the goods are 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. The fact that part of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
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 (Ganzon vs. CA, supra).
Liability governed by Philippine law even if cargo
was transhipped
The liability of a shipping company for damage to
cargo it shipped to Davao City is governed by
Philippine law even if the cargo was transshipped to
the United States, because as against the first
shipping company, Davao City was the destination
(Lorenzo Shipping Corporation v. Chubb and Sons,
Inc., 431 SCRA 266).
The execution of a receipt or bill of lading is not
required for the commencement of the
responsibility to observe extraordinary diligence
The requirement to observe extraordinary diligence
begins with the actual delivery of the goods for
transportation, and not merely with the formal
execution of a receipt or bill of lading; the issuance of
a bill of lading is not necessary to complete delivery
and acceptance by the carrier (Compania Maritima v.
Insurance Co. of North America, G.R. No. L-18965,
October 30, 1964).
ACTUAL OR CONSTRUCTIVE DELIVERY
Party to whom delivery should be made
It must be delivered, actually or constructively, to the
consignee or to the person who has a right to receive
them (Art.1736, NCC).
NOTE: Delivery of the cargo to the customs authorities is
not delivery to the consignee, or to the person who has a
right to receive them (Lu Do & Lu Ym Corp. v. Binamira, GR
No. L-9840, April 22, 1957).
Constructive delivery
There is constructive delivery when delivery is
effected not by actually transferring the possession of
thing to the vendee (in this case, the other party,
either the carrier or the consignee) but by legal
formalities or by symbolic tradition (Pineda, 2010).
Party liable for the misdelivery by a carrier who was
chosen by the buyer
Misdelivery of the goods is attributable to the carrier
and not to the seller. And, since the carrier was
chosen and authorized to make the delivery by the
buyer itself, the seller cannot be held responsible for
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
such misdelivery (Smith, Bell & Co. [Phils.] vs.
Gimenez, 8 SCRA 407 [1963]).
TEMPORARY UNLOADING OR STORAGE
Right of stoppage in transitu
It is the right exercised by the seller by stopping the
delivery of the goods to a certain buyer or consignee
(because of insolvency) when such goods are already
in transit (Art. 1530, NCC).
NOTE: The seller may exercise this right either by obtaining
actual possession of the goods or by giving notice of his
claim to the carrier or other bailee in whose possession the
goods are. Such notice may be given either to the person in
actual possession of the goods or to his principal. In the
latter case, the notice, to be effectual, must be given at
such time and under such circumstances that the principal,
by the exercise of reasonable diligence, may prevent a
delivery to the buyer (Art. 1532, NCC).
Rule as to unloading, storage and stoppage in
transitu
GR: The common carriers duty to observe
extraordinary diligence in the vigilance over the
goods remains in full force and effect even when they
are temporarily unloaded or stored in transit.
XPN: When the shipper or owner has made use of the
right of stoppage in transitu (Art. 1737, NCC).
Diligence required to be exercised by the carrier if
the right of stoppage in transitu was exercised
The diligence required is ordinary diligence because
of the following:
a. It is holding the goods in the capacity of an
ordinary bailee or warehouseman and not as a carrier
b. There is a change of contract from a contract of
carriage to a contract of deposit (Art. 1737, NCC).
Obligation required of the common carrier in case of
stoppage in transitu
When notice of stoppage in transitu is given by the
seller to the carrier, he must redeliver the goods to,
or according to the directions of, the seller. The
expenses of such delivery must be borne by the seller
(Art. 1532, NCC).
NOTE: If the seller instructs to deliver it somewhere else, a
new contract of carriage is formed and the carrier must be
paid accordingly.
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 TRANSPORTATION LAWS
STIPULATION FOR LIMITATION OF LIABILITY
Valid stipulations that a common carrier of goods
may indicate in a contract in order to escape liability
1. A stipulation limiting the liability of the common
carrier for the loss, destruction, or deterioration of
the goods to a degree less than extraordinary
diligence, provided it be:
a. In writing, signed by the shipper or owner;
b. Supported by a valuable consideration other
than the service rendered by the common carrier,
and
c. Reasonable, just and not contrary to public
policy.
2. An agreement limiting the common carrier's
liability for delay on account of strikes or riots (Art.
1748, NCC).
3. A stipulation that the common carrier's liability
is limited to the value of the goods appearing in the
bill of lading, unless the shipper or owner declares a
greater value (Art. 1749, NCC).
4. A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction, or
deterioration of the goods (Art. 1750, NCC).
NOTE: Notwithstanding these valid stipulations, a common
carrier can be held liable for the loss, or destruction or
deterioration of the goods If the common carrier, without
just cause, delays the transportation of the goods or
changes the stipulated or usual route, the contract limiting
the common carrier's liability cannot be availed of in case of
the loss, destruction, or deterioration of the goods (Art.
1747, NCC).
Q: X took a plane from Manila bound for Davao via
Cebu where there was a change of planes. X arrived
in Davao safely but to his dismay, his two suitcases
were left behind in Cebu. The airline company
assured X that the suitcases would come in the next
flight but they never did. X claimed P2,000 for the
loss of both suitcases, but the airline was willing to
pay only P500 because the airline ticket stipulated
that unless a higher value was declared, any claim
for loss cannot exceed P250 for each piece of
luggage. X reasoned out that he did not sign the
stipulation and in fact had not even read it. X did
not declare a greater value despite the fact that the
clerk had called his attention to the stipulation in
the ticket. Decide the case. (1998 Bar Exam
Question)
A: Even if he did not sign the ticket, X is bound by
the stipulation that any claim for loss cannot exceed
P250 for each luggage. He did not declare a higher
value. X is entitled to P500 for the two luggages
lost.
123
Q: Suppose A was riding on an airplane of a
common carrier when the accident happened and
A suffered serious injuries. In an action by A
against the common carrier, the latter claimed that
1) there was a stipulation in the ticket issued to A
absolutely exempting the carrier from liability
from the passengers death or injuries ad notices
were posted by the common carrier dispensing
with the extraordinary diligence of the carrier, and
2) A was given a discount on his plane fare thereby
reducing the liability of the common carrier with
respect to A in particular. a) Are those valid
defenses? (1%) b) What are the defenses available
to any common carrier to limit or exempt it from
liability? (4%) (2001 Bar Exam Question)
A:
a) No. These are not valid defenses because they are
contrary to law as they are in violation of the
extraordinary diligence required of common carriers.
(Article 1757, 1758 New Civil Code)
b) The defenses available to any common carrier to
limit or exempt it from liability are:
1. observance of extraordinary diligence,
2. or the proximate cause of the incident is
a fortuitous event or force majeure,
3. act or omission of the shipper or owner of
the goods,
4. the character of the goods or defects in
the packing or in the containers, and
5. order or act of competent public authority,
without the common carrier being guilty of
even simple negligence (Article 1734, NCC).
Annulment of a stipulation limiting the common
carriers liability by the shipper or owner
A stipulation limiting the common carriers liability
may be annulled by the shipper or owner if the
common carrier refused to carry the goods unless the
shipper or owner agreed to such stipulation (Art.
1746, NCC). However, under this provision,
annulment of the agreement limiting the carriers
liability is still necessary (Martin, 1989).
Effect of the stipulation to limit liability to the
presumption of negligence of the carrier
Even if there is an agreement limiting the liability of
the common carrier in the vigilance over the goods,
the common carrier is still disputably presumed to
have been negligent in case of its loss, destruction or
deterioration (Art. 1752, NCC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
VOID STIPULATIONS
Void stipulations in a contract of carriage of goods
(CR2UELED)
1. That the common carrier need not observe any
diligence in the Custody of the goods
2. That the goods are transported at the Risk of the
owner or shipper
3. That the common carriers liability for acts
committed by thieves, or of Robbers who do not
act with grave or irresistible threat, violence or
force, is dispensed with or diminished
4. Any similar stipulation that is Unreasonable,
unjust and contrary to public policy
5. That the common carrier shall Exercise a degree
of diligence less than that of a good father of a
family, or a man of ordinary prudence in the
vigilance over the movables transported
6. That the common carrier will not be liable for any
Loss, destruction, or deterioration of the goods
7. That the common carrier shall not be responsible
for the acts or omissions of his or its Employees
8. That the common carrier is not responsible for
the loss, destruction or deterioration of goods on
account of the Defective condition of the car,
vehicle, ship, airplane or other equipment used
in the contract of carriage (Art. 1745, NCC).
Discuss whether or not the following stipulations in a
contract of carriage of a common carrier are valid:
1. A stipulation limiting the sum that may be
recovered by the shipper or owner to 90% of the
value of the goods in case of loss due to theft.
2. A stipulation that in the event of loss,
destruction or deterioration of goods on account
of the defective condition of the vehicle used in
the contract of carriage, the carriers liability is
limited to the value of the goods appearing in
the bill of lading unless the shipper or owner
declares a higher value. (2002 Bar Exam
Question)
A:
1. The stipulation is considered unreasonable,
unjust and contrary to public policy under
Article 1745 of the Civil Code.
2. The stipulation limiting the carriers liability to the
value of the goods appearing in the bill of lading
unless the shipper or owner declares a higher
value, is expressly recognized in Article 1749 of
the Civil Code.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
LIMITATION OF LIABILITY TO FIXED AMOUNT
Requirements in order that a stipulation which
limits the liability of common carriers in the carriage
of goods be valid
A contract fixing the sum that may be recovered for
the loss, destruction, and deterioration of goods is
binding provided that it is:
1. Just and reasonable under the circumstances and
2. It has been fairly and freely agreed upon (Art.
1750, NCC).
LIMITATION OF LIABILITY IN ABSENCE OF
DECLARATION OF GREATER VALUE
Extent of the liability of the common carrier in case
there is a stipulation fixing specified amount
GR: The liability of the common carrier shall not
exceed the stipulation in a contract of carriage even if
the loss or damage results from3 the carrier's
negligence (Eastern and Australian Shipping Co. v
Great American Insurance Co., GR No. L-37604,
October 23, 1981).
XPN: Where the shipper or owner of the goods
declares a greater value and pays corresponding
freight (NCC, Art. 1749).
The liability of an airline company for lost baggage is
limited to the amount stated in the ticket unless the
passenger declared a higher valuation and paid
additional fare (Pan American World Airways, Inc. v.
Appellate Court, 164 SCRA 268).
But when the goods being shipped are packed in
cartons placed in containers supplied by the carrier
and the number of cartons is disclosed in the shipping
documents, it is the number of cartons and not of the
containers that should be used in computing the
liability of the carrier for the loss of the goods, as it is
the cartons that constitute the packages (Eastern
Shipping Lines, Inc. v. Intermediate Appellate Court,
150 SCRA 464).
Requirements in order that a common carriers
extent of liability may be increased
The common carriers liability may be extended
beyond the specified amount mentioned if;
1. The shipper or owner of the goods declares a
greater value and
2. Pays corresponding freight (Art. 1749, NCC).
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 TRANSPORTATION LAWS
LIABILITY FOR BAGGAGE OF PASSENGERS
CHECKED-IN BAGGAGE
Rule on checked-in baggage of passengers
The provisions of Articles 1733 to 1753 of the NCC
shall apply (NCC, Art. 1754).
An airline company is liable for moral damages where
it left behind the luggage of a passenger and its
employees did not assist the passenger in locating his
luggage but instead treated him boorishly (Pan
American World Airways v. Intermediate Appellate
Court, 186 SCRA 687).
BAGGAGE IN POSSESSION OF PASSENGERS
Rules applicable when the baggage is in the personal
custody of the passengers
The rules in articles 1998 and 2000 to 2003
concerning the responsibility of hotel-keepers for
necessary deposit shall be applicable (ibid):
1. The common carrier shall be responsible for
shippers baggage as depositaries, provided that
notice was given to them, or to their employees, of
the effects brought by the guests and that, on the
part of the shipper, they take the precautions which
said common carriers or their substitutes advised
relative to the care and vigilance of their effects (Art.
1998, NCC).
2. The responsibility shall include the loss of, or injury
to the personal property of the shipper caused by the
employees of the common carrier as well as
strangers; but not that which may proceed from any
force majeure (Art. 2000, NCC).
3. The act of a thief or robber, who has entered the
carrier is not deemed force majeure, unless it is done
with the use of arms or through an irresistible force
(Art. 2001, NCC).
4. The common carrier is not liable for compensation
if the loss is due to the acts of the shipper, his family,
or servants, or if the loss arises from the character of
the things brought into the carrier (Art. 2002, NCC).
5. The common carrier cannot free himself from
responsibility by posting notices to the effect that he
is not liable for the articles brought by the passenger.
Any stipulation between the common carrier and the
shipper whereby the responsibility of the former as
set forth in Articles 1998 to 2001 is suppressed or
diminished shall be void (Art. 2003, NCC).
A common carrier can be held liable for the loss of a
valuable item stolen by other passenger when the
125
victim told the driver that he has valuable item
(1997 Bar Question)
Ordinarily, the common carrier is not liable for acts of
other passengers. But the common carrier cannot
relieve itself from liability if the common carriers
employees could have prevented the act or omission
by exercising due diligence. In this case, the
passenger asked the driver to keep an eye on the bag
which was placed beside the drivers seat. If the
driver exercised due diligence, he could have
prevented the loss of the bag.
Q: A shipped thirteen pieces of luggage through LG
Airlines from Teheran to Manila as evidenced by LG
Air Waybill which disclosed that the actual gross
weight of the luggage was 180 kg. Z did not declare
an inventory of the contents or the value of the 13
pieces of luggage. After the said pieces of luggage
arrived in Manila, the consignee was able to claim
from the cargo broker only 12 pieces, with a total
weight of 174 kg. X advised the airline of the loss of
one of the 13 pieces of luggage and of
the contents thereof. Efforts of the airline to
trace the missing luggage were fruitless. Since the
airline failed to comply with the demand of X to
produce the missing luggage, X filed an action for
breach of contract with damages against LG
Airlines. In its answer, LG Airlines alleged that the
Warsaw Convention which limits the liability of the
carrier, if any, with respect to cargo to a sum of
$20 per kilo or $9.07 per pound, unless a higher
value is declared in advance and additional charges
are paid by the passenger and the conditions of the
contract as set forth in the air waybill, expressly
subject the contract of the carriage of
cargo to the Warsaw Convention. May
the allegation of LG Airlines be
sustained? Explain. (1993 Bar Exam Question).
A: Yes. Unless the contents of a cargo are declared
or the contents of a lost luggage are proved by the
satisfactory evidence other than the self-serving
declaration of one party, the contract should be
enforced as it is the only reasonable basis to arrive
at a just award. The passenger or shipper is bound
by the terms of the passenger ticket or the waybill
(Panama v Rapadas 209 s 67).
Q: Marino was a passenger on a train. Another
passenger, Juancho, had taken a gallon of gasoline
placed in a plastic bag into the same coach where
Marino was riding. The gasoline ignited and
exploded causing injury to Marino who filed a civil
suit for damages against the railway company
claiming that Juancho should have been subjected to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
inspection by its conductor. The railway company
disclaimed liability resulting from the explosion
contending that it was unaware of the contents of
the plastic bag and invoking the right of Juancho to
privacy. a) Should the railway company be held liable
for damages? b) If it were an airline company
involved, would your answer be the same? Explain
briefly. (1992 Bar Exam Question)
A:
a) No. The railway company is not liable for damages.
In overland transportation, the common carrier is not
bound nor empowered to make an examination on
the contents of packages or bags, particularly those
handcarried by passengers.
b) If it were an airline company, the common carrier
should be made liable. In case of air carriers, it is not
lawful to carry flammable materials in passenger
aircrafts, and airline companies may open and
investigate suspicious packages and cargoes (RA 6235)
SAFETY OF PASSENGERS
Extent of the extraordinary diligence of common
carrier to passengers
A common carrier is bound to carry the passengers
safely as far as human care and foresight can provide,
using the utmost diligence of very cautious persons,
with a due regard for all the circumstances (Art 1755,
NCC).
Who are not considered passengers (WAMU)
1. One who has boarded a Wrong vehicle, has been
properly informed of such fact, and on alighting,
is injured by the carrier.
2. Invited guests and Accommodation passengers.
3. One who attempts to board a Moving vehicle,
although he has a ticket, unless the attempt be
with the knowledge and consent of the carrier.
4. One who remains on a carrier for an
Unreasonable length of time after he has been
afforded every safe opportunity to alight.
NOTE: The carrier is thus NOT obliged to exercise
extraordinary diligence but only ordinary diligence in these
instances.
VOID STIPULATIONS
Stipulations limiting the liability of common carrier
in case of injury or death
GR: The responsibility of a common carrier for the
safety of passengers cannot be dispensed with or
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
lessened by stipulation, by posting of notices, by
statements on tickets, or otherwise (Art. 1757, NCC).
XPN: When a passenger is carried gratuitously, a
stipulation limiting the common carriers liability for
negligence is valid (Art. 1758, NCC).
NOTE: The passenger must be carried gratuitously. If it is
only a reduction of fare, then any limitation of the common
carriers liability is not justified (ibid).
XPN to the XPN: Notwithstanding the exception,
common carriers will be liable nevertheless for willful
acts or gross negligence (ibid).
Assumption of risk on the part of passengers
Passengers must take such risks incident to the mode
of travel. The passenger must observe the diligence
of a good father of a family to avoid injury to himself
(Art. 1761, NCC).
NOTE: Carriers are not insurers of any and all risks to
passengers and goods. It merely undertakes to perform
certain duties to the public as the law imposes, and holds
itself liable for any breach thereof (Pilapil v. CA, G.R. No.
52159, Dec. 22, 1989).
DURATION OF LIABILITY
Commencement of the duty to observe
extraordinary diligence over passengers
The duty exists from the moment the person offers to
be transported places himself in the care and control
of the common carrier who accepts him as such
passenger. The duty continues until the passenger
has, after reaching his destination, safely alighted
from the carriers conveyance or has had a
reasonable opportunity to leave the carriers
premises and to look after his baggage and prepare
for his departure (La Mallorca vs. CA, GR No. L-20761,
July 27, 1966; Aboitiz Shipping, supra).
WAITING FOR CARRIER OR BOARDING OF CARRIER
Duty of the common carriers in boarding of
passengers
It is the duty of common carriers of passengers,
including common carriers by railroad train, streetcar,
or motorbus, to stop their conveyances a reasonable
length of time in order to afford passengers an
opportunity to board and enter, and they are liable
for injuries suffered by boarding passengers resulting
from the sudden starting up or jerking of their
126
 TRANSPORTATION LAWS
conveyances while they are doing so (Dangwa vs.
CA,G.R. No. 95582, October 7, 1991).
When a Public Utility Vehicle is not in motion, it is
not necessary for a person who wants to ride the
same to signal his intention to board
When the bus is not in motion there is no necessity
for a person who wants to ride the same to signal his
intention to board. 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 (ibid).
Q: A bus of GL Transit on its way to Davao stopped
to enable a passenger to alight. At that moment,
Santiago, who had been waiting for a ride, boarded
the bus. However, the bus driver failed to notice
Santiago who was still standing on the bus
platform, and stepped on the accelerator. Because
of the sudden motion, Santiago slipped and fell
down suffering serious injuries. May Santiago hold
GL Transit liable for breach of contract of carriage?
Explain.
A: Santiago may hold GL Transit liable for breach of
contract of carriage. It was the duty of the driver,
when he stopped the bus, to do no act that would
have the effect of increasing the peril to a passenger
such as Santiago while he was attempting to board
the same. When a bus is not in motion there is no
necessity for a person who wants to ride the same to
signal his intention to board. A public utility bus,
once it stops, is in effect making a continuous offer
to bus riders. It is the duty of common carriers of
passengers to stop their conveyances for a
reasonable length of time in order to afford
passengers an opportunity to board and enter, and
they are liable for injuries suffered by boarding
passengers resulting from the sudden starting up or
jerking of their conveyances while they are doing so.
Santiago, by stepping and standing on the platform
of the bus, is already considered a passenger and is
entitled to all the rights and protection pertaining to
a contract of carriage.
Common carrier may be held liable to a passenger
who died while trying to board their vehicle
It is the duty of common carriers of passengers to
afford passengers an opportunity to board and enter,
and they are liable for injuries suffered by boarding
127
passengers resulting from the sudden starting up or
jerking of their conveyances while they are doing so.
The victim, 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 (ibid).
A person who is merely stepping on the platform of
a bus is already considered a passenger
A person, 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 owes to its patrons
extends to persons boarding cars as well as to those
alighting therefrom (Dangwa vs. CA,G.R. No. 95582,
October 7, 1991).
The passenger is not considered negligent if the bus
started moving slowly when the passenger is
boarding the same
Further, even assuming that the bus had "just
started" and "was still in slow motion" at the point
where the victim had boarded and was on its
platform, the victim cannot be considered negligent
under the said circumstances (Dangwa vs. CA, G.R.
No. 95582, October 7, 1991).
Q: P, a sales girl in a flower shop at the Ayala Station
of the Metro Rail Transit (MRT) bought two tokens
or tickets, one for her ride to work and another for
her ride home. She got to her flower shop where she
usually worked from 8 a.m. to 5 p.m. At about 3
p.m., while P was attending to her duties at the
flower shop, two crews of the MRT got into a fight
near the flower shop, causing injuries to P in the
process. Can P sue the MRT for contractual breach
as she was within the MRT premises where she
would shortly take her ride home? (2011 Bar
Question)(
A: No, since P had no intention to board an MRT train
coach when the incident occurred.
ARRIVAL AT DESTINATION
Liability for death or injury to passengers upon
arrival at destination
Once created, the relationship will not ordinarily
terminate until the passenger has, after reaching his
destination, safely alighted from the carrier's
conveyance or had a reasonable opportunity to leave
the carrier's premises. All persons who remain on the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
premises a reasonable time after leaving the
conveyance are to be deemed passengers, and what
is a reasonable time or a reasonable delay within this
rule is to be determined from all the circumstances,
and includes a reasonable time to see after his
baggage and prepare for his departure (La Mallorca v
CA,G.R. No. L-21486, May 14, 1966).
The victims presence in a vessel after 1 hour from
his disembarkation is not enough in order to absolve
the carrier from liability in his death
Carrier-passenger relationship continues until the
passenger has been landed at the port of destination
and has left the vessel-owners premises (Aboitiz
Shipping Corporation vs. CA, GR No. 84458, November
6, 1989).
Q: Robert De Alban and his family rode a bus owned
by Joeben Bus Company. Upon reaching their
desired destination, they alighted from the bus but
Robert returned to get their baggage. However, his
youngest daughter followed him without his
knowledge. When he stepped into the bus again, the
bus accelerated that resulting to Roberts daughter
death. The bus ran over her. Is the bus company
liable?
A: Yes. The relation of carrier and passenger does not
cease at the moment the passenger alights from the
carriers vehicle at a place selected by the carrier at
the point of destination, but continues until the
passenger has had a reasonable time or reasonable
opportunity to leave the current premises (La
Mallorca vs. CA,GR L-20761, 27 July 1966).
LIABILITY FOR ACTS OF OTHERS
EMPLOYEES
Common carriers are liable for the acts of their
employees
Common carriers are liable for the death of or injuries
to passengers through the negligence or willful acts
of the formers employees, although such employees
may have acted beyond the scope of their authority
or in violation of the orders of the common carriers.
The liability of the common carriers does not cease
upon proof that they exercised all the diligence of a
good father of a family in the selection and
supervision of their employees (Art. 1759, NCC).
NOTE: The liability of the common carrier to the personal
violence of its employees or agents upon its passengers
extends only to those acts which the carrier could foresee
or avoid through the exercise of the diligence required.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Liability of the common carrier as regards to the acts
of employees may not be limited by stipulation
The common carriers responsibility cannot be
eliminated or limited by stipulation, by the posting of
notices, by statements on the tickets or otherwise
(Art. 1760, NCC).
Rationale behind the carriers liability
The basis of the carrier's liability for assaults on
passengers committed by its drivers rests on the
principle that it is the carrier's implied duty to
transport the passenger safely. 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
(Maranan v. Perez, GR No. L-22272, June 26, 1967).
Q: The AAA Bus Company picks up passengers along
EDSA. X, the conductor, while on board the bus,
drew his gun and randomly shot the passengers
inside. As a result, Y, a passenger, was shot and died
instantly. Is AAA Bus Company liable? (2012 Bar
Question)
A: Yes. The bus company is liable because common
carriers are liable for the negligence or willful act of
its employees even though they acted beyond the
scope of their responsibility.
OTHER PASSENGERS AND STRANGERS
Extent of liability of common carriers for acts of
co-passengers or strangers
A common carrier is responsible for injuries suffered
by a passenger on account of the willful acts or
negligence of other passengers or of strangers, if the
carriers employees through the exercise of the
diligence of a good father of a family would have
prevented or stopped the act or omission (Art. 1763,
NCC).
Q: P rode a Sentinel Liner bus going to Baguio from
Manila. At a stop-over in Tarlac, the bus driver, the
conductor, and the passengers disembarked for
lunch. P decided, however, to remain in the bus, the
door of which was not locked. At this point, V, a
vendor, sneaked into the bus and offered P some
refreshments. When P rudely declined, V attacked
him, resulting in P suffering from bruises and
contusions. Does he have cause to sue Sentinel
Liner? (2011 Bar Question)
128
 TRANSPORTATION LAWS
A: Yes, since the carrier's crew did nothing to protect
a passenger who remained in the bus during the
stop-over.
Q: In a jeepney, Angela, a passenger, was injured
because of the flammable material brought by
Antonette, another passenger. Antonette denied her
baggage to be inspected invoking her right to
privacy. Should the jeepney operator be held liable
for damages?
A: No. The operator is not liable for damages. In
overland transportation, the common carrier is not
bound nor empowered to make an examination on
the contents of packages or bags, particularly those
handcarried by passengers (Nocum v. Laguna
Tayabas Bus Company, G.R. No. L-23733, October 31,
1969).
Q: In the question above, if it were an airline
company involved, would your answer be the same?
(1992 Bar Question)
A: No. The common carrier should be made liable. In
case of air carriers, it is unlawful to carry flammable
materials in passenger aircrafts, and airline
companies may open and investigate suspicious
packages and cargoes pursuant to RA 6235.
Q: A passenger was injured because a bystander
outside the bus hurled a stone. Is the bus company
liable? (1994 Bar Question)
A: No. There is no showing that any such incident
previously happened so as to impose an obligation on
the part of the personnel of the bus company to warn
the passengers and to take the necessary precaution.
Such hurling of a stone constitutes fortuitous event in
this case. The bus company is not an insurer of the
absolute safety of its passengers (Pilapil v. CA, G.R.
No. 52159, Dec. 22, 1989).
The registered owner of the vehicle may be held
liable for damages suffered by a third person in the
course of the operation of the vehicle
The registered owner of a public service vehicle is
responsible for damages that may arise from
consequences incident to its operation or that may
be caused to any of the passengers therein (Gelisan v.
Alday, G.R. No. L-30212, Sept 30, 1987).
Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious
acts of the driver is primary, direct, and joint and
129
several or solidary with the driver (Philtranco Service
Enterprises, Inc. v. CA, G.R. No. 120553).June
Q: Marites, a paying bus passenger, was hit above
her left eye by a stone hurled at the bus by an
unidentified bystander as the bus was speeding
through the National Highway. The bus owners
personnel lost no time in bringing Marites to the
provincial hospital where she was confined and
treated. Marites wants to sue the bus company for
damages and seeks your advice whether she can
legally hold the bus company liable. What will you
advise her? (1994 Bar Exam Questions)
A: I will advise her that the bus company cannot be
held liable. There is no showing that any such incident
previously happened so as to impose an obligation on
the part of the personnel of the bus company to warn
the passengers and to take the necessary precaution.
Such hurling of a stone constitutes fortuitous event in
this case. The bus company is not an insurer of the
absolute safety of its passengers (Pilapil v. CA, G.R.
No. 52159, Dec. 22, 1989).
The registered owner of the vehicle may be held
liable for damages suffered by a third person in the
course of the operation of the vehicle. The registered
owner of a public service vehicle is responsible for
damages that may arise from consequences incident
to its operation or that may be caused to any of the
passengers therein (Gelisan v. Alday, G.R. No.
L-30212, Sept 30, 1987).
Also, the liability of the registered owner of a public
service vehicle for damages arising from the tortious
acts of the driver is primary, direct, and joint and
several or solidary with the driver (Philtranco Service
Enterprises, Inc. v. CA, G.R. No. 120553).
EXTENT OF LIABILITY FOR DAMAGES
Kinds of damages that may be recovered in case of
death of a passenger (DEMEx-AIH)
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. Attorney's fees and expenses of litigation
6. Interest in proper cases (Brias v. People,G.R. No.
L-30309, Nov. 25, 1983).
7. Hospital and funeral expenses
NOTE: Carrier is not liable for exemplary damages where
there is no proof that it acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Jurisprudential indemnity of a common carrier in The diligence of the passenger may be considered in
case of death of a passenger determining liability in case of injury
The passenger must observe the diligence of a good
In case of death of a passenger, the common carrier father of a family or ordinary diligence to avoid injury
is liable to pay 50,000 pesos as indemnity for the life to himself (NCC, Art. 1761). This means that if the
of a passenger (Victory Liner v Gammad, G.R. No. proximate cause of the passengers injury is his
159636, November 25, 2004). negligence, the common carrier is not liable.
Formula for computing the indemnity for lost Options available to recover damages in case of
earnings in case of death of a victim death or injuries to persons, which resulted from a
collision
The formula for the computation of unearned income
is: BASIS OF DEFENDANT OF THE
1. Net Earning Capacity = Life Expectancy x (Gross CIVIL CASE
annual income - Reasonable and necessary LIABILITY
living expenses). (Damages)
2. Life expectancy is determined in accordance with 1. Culpa Contract of Filed against the
the formula: 2 /3 x (80 age of deceased at the contractual carriage common carrier
time of death) (Heirs of Ochoa v VS.G & S wherein he is a
Transport Corporation, G.R. No. 170071, March passenger. (Art. 1733,
09, 2011 ). 1755-1764, NCC.)
2. Culpa Quasi-delic May be filed by third
NOTE: When there is no showing that the living expenses aquiliana t persons or the
constituted the smaller percentage of the gross income, the passenger against the
Court fixes the living expenses at half of the gross income. drivers (may also be the
owners) of both
Liability with regard to moral damages vehicles and the owners
thereof.
GR: Moral damages are not recoverable for breach of
contract of carriage in view of Art. 2219-20 of the If the owner is an
Civil Code. employer of the driver,
still the former has a
XPN: primary liability for an
1. Where the mishap results in the death of the action brought on the
passenger ground of quasi delict
2. Where it is proved that the common carrier was under Art. 2180, NCC.
guilty of fraud or bad faith, even if death does not (Carpio vs. Doroja, GR
result. No. 84516, December 5,
1989.)
Jurisprudential amount of moral damages to which 3. Culpa Crime May be filed by the
the heirs of a deceased passenger are entitled to criminal third persons or the
recover passengers against the
driver (may also be the
The current jurisprudential award for the loss of life owner) at fault if his act
of a passenger is 100,0000 pesos by way of moral amounts to a crime.
damages (Victory Liner v Gammad, Ibid, Heirs of
Ochoa v VS.G & S Transport Corporation, Ibid). If the owner is an
employer of the driver,
Defenses available in culpa contractual (FEC) then the former has a
subsidiary liability (Art.
1. Exercise of extraordinary due diligence 103, Revised Penal Code
2. Fortuitous event [RPC].) for an action
3. Contributory negligence of passengers it does brought on the ground
not bar recovery of damages for death or injury if of civil liability arising
the proximate cause is the negligence of the from crime under Art.
common carrier but the amount of damages shall 100 of the RPC. (Carpio
be equitably reduced (Art. 1762). vs. Doroja, supra.)

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 TRANSPORTATION LAWS
Action to enforce liability of the employer of the Two types of bill of lading
negligent driver under Art. 103 of the RPC v. Action
based on quasi-delict 1. Negotiable If issued to the bearer or to the order
of any person named in such bill.
ART. 103, RPC ART. 2180, NCC 2. Non-negotiable If issued to a specific person
(QUASI-DELICT) named in such bill.
Employer is only Liability is primary and
Q: X is a trader of school supplies in Calapan,
subsidiarily liable. direct.
Oriental Mindoro. To bring the school supplies to
There must be a Action may proceed Calapan, it has to be transported by a vessel.
judgment of conviction independently from the Because there were so many passengers, the two (2)
against the negligent criminal action. boxes of school supplies were loaded but the
driver otherwise the shipping company was not able to issue the Bill of
action against the Lading. So, on board, the Ship Captain issued instead
employer would be a "shipping receipt" to X indicating the two (2) boxes
premature. of school supplies being part of the cargo of the
The defense of due The defense of due vessel. Which phrase therefore, is the most
diligence in selection and diligence in selection accurate? (2012 Bar Question)
supervision of employees and supervision of
cannot be invoked. employees may be a. the owner of the vessel is not liable because no
invoked. bill of lading was issued to X hence, no contract of
carriage was perfected.
BILL OF LADING b. it is possible to have a contract of carriage of
cargo even without a bill of lading, and the "shipping
It is a written acknowledgment of receipt of goods receipt" would be sufficient.
and agreement to transport them to a specific place c. the only acceptable document of title is a Bill of
and to a named person or to his order (Unsworth Lading.
Transport International [Phils] v. CA, G.R. No. 166520, d. None of the above.
26 July 2010).
A: B. Although Article 359 of the Code of Commerce
THREE-FOLD CHARACTER OF A BILL OF LADING provides that the shipper as well as the carrier of
merchandise or goods may mutually demand that a
Three-fold character of a bill of lading bill of lading be made, still, said bill of lading is not
indispensable. For as long as there is a meeting of the
It is a receipt for the goods shipped and a contract to minds of the parties, a contract of carriage exists
transport and deliver the same as therein stipulated. even in the absence of a bill of lading (Perez, supra,
pg. 112, citing Robles vs. Santos, 44 OG 2268;
1. As a receipt, it recites the date and place of Compania Maritima vs. Insurance Co. of NA, 12 SCRA
shipment, describes the goods as to quantity, 213).
weight, dimensions, identification marks and
condition, quality, and value. Technical jargons
2. As a contract, it names the contracting parties,
which include the consignee, fixes the route, 1. On Board States that the goods have been
destination, and freight rate or charges, and received on board the vessel which is to carry the
stipulates the rights and obligations assumed by goods and is issued when goods have been
the parties (Phoenix Assurance Co., Ltd. v. United placed aboard a ship with every reasonable
States Lines, G.R. No. L-24033, Feb. 22, 1968). expectation that the shipment is as good as on its
3. As a document of title it regulates the relations way.
between a carrier and a holder of the same. 2. Received for Shipment Bill States that the goods
have been received for shipment with or without
NOTE: In the absence of a bill of lading, their respective specifying the vessel by which the goods are to
claims may be determined by legal proofs which each of be shipped and are issued whenever conditions
the contracting parties may present in conformity with law.
are not normal and that there is insufficiency of
shipping space.
3. Clean Does not contain any notation indicating
defect in the goods

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4. Foul Contains a notation indicating a defect in
the goods
5. Spent If the goods were already delivered but the
bill of lading was not returned
6. Through - Issued by a carrier who is obliged to use
the facilities of other carriers as well as his own
facilities for the purpose of transporting the
goods from the city of the seller to the city of the
buyer, which bill of lading is honored by the
second and other interested carriers who do not
issue their own lading.
7. Custody The goods are already received by the
carrier but the vessel indicated has not yet
arrived in the port
8. Port - The vessel indicated in the bill of lading that
will transport the goods is already in the port
Q: A bill of lading indicated that the contract of
carriage was under a "said to weigh" clause. What
are the responsibilities of the shipper and the
carrier?
A: This means that the shipper was solely responsible
for the loading of the container, while the carrier was
oblivious to the contents of the shipment . The
arrastre operator was, like any ordinary depositary,
duty-bound to take good care of the goods received
from the vessel and to turn the same over to the
party entitled to their possession, subject to such
qualifications as may have validly been imposed in
the contract between the parties. The arrastre
operator was not required to verify the contents of
the container received and to compare them with
those declared by the shipper because, as earlier
stated, the cargo was at the shippers load and count
(Asian Terminals Inc. v. Simon Enterprises, Inc., G.R.
No. 177116, February 27, 2013).
DELIVERY OF GOODS
The surrender of the bill of lading is necessary upon
delivery of the goods
If the carrier fails to require such surrender:
1. If non-negotiable Action against the carrier
does not lie.
2. If negotiable Action by the shipper may lie
against the carrier
However, where the seller instructed the shipping
company to deliver the cargoes to the buyer without
requiring the presentation of the bill of lading, the
shipping company is not liable for releasing the
cargoes to the buyer (Macam v. CA, 313 SCRA 77).
NOTE: The surrender of the original bill of lading is not a
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
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 (National Trucking and
Forwarding Corporation v. Lorenzo Shipping Corporation,
G.R. No. 153563, February 27, 2005).
Period of delivery of goods
If a period has been fixed for the delivery of the
goods, it must be made within such time, and, for
failure to do so, the carrier shall pay the indemnity
stipulated in the bill of lading, neither the shipper nor
the consignee being entitled to anything else (Code of
Commerce, Art. 370).
Duty of the carrier if there is no period of time fixed
for the delivery of goods
The carrier shall be under the obligation to forward
them with the first shipment of the same or similar
merchandise he may make to the point where he
must deliver them, and should he not do so, the
damages occasioned by the delay shall be suffered by
him (Code of Commerce, Art. 358).
Determination of indemnity if the same is not
stipulated
If no indemnity has been stipulated and the delay
exceeds the time fixed in the bill of lading, the carrier
shall be liable for the damages which the delay may
have caused (Art. 370, Code of Commerce).
Grounds for the refusal of a consignee to take
delivery of the goods (PLD2)
1. When a Part of the goods transported are
delivered and the consignee is able to prove that
he cannot make use of the part without the
others; (Code of Commerce, Art. 365)
2. If the cargo consists of Liquids and they have
leaked out, nothing remaining in the containers
but one-fourth () of their contents, on account
of inherent defect of cargo; (Code of Commerce,
Art. 687)
3. If the goods are Damaged and such damage
renders the goods useless for the particular
purpose for which there are to be used; (Code of
Commerce, Art. 365)
4. When there is Delay on account of the fault of
the carrier; (Code of Commerce, Art. 371)
NOTE: In all cases, the shipper may exercise the right of
abandonment by notifying the carrier. Ownership over
damaged goods passes to the carrier and carrier must pay
shipper the market value of the goods at point of
destination.
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 TRANSPORTATION LAWS
PERIOD FOR FILING CLAIMS
Period for filing claims
1. Immediately after delivery if the damage is
apparent; or
2. Within 24 hours from delivery If the damage is
not apparent (Art. 366, Code of Commerce)
Applicability of Article 366 of the Code of Commerce
It applies in case of domestic transportation
(inter-island) where there is damage to the goods
transported.
Requisites before claim for damages under Art. 366
may be demanded
1. Consignment of goods through a common
carrier, by a consignor in one place to a
consignee in another place; and
2. The delivery of the merchandise by the carrier to
the consignee at the place of destination (New
Zealand Ins. Co., Ltd. v. Choa Joy, G.R. No. L-7311,
Sept. 30, 1955).
Effect of paying the transportation charges in the
filing of an action on account of damages to goods
1. If paid before checking the goods The right to
file a claim is not waived.
2. If paid after the goods were checked The right
to file a claim is alreadywaived (Southern Lines,
Inc. v. CA, G.R. No. L-16629, Jan. 31, 1962).
NOTE: The filing of claim is a condition precedent for
recovery of damages.
Doctrine of combined or connecting services
The carrier which delivered the goods to the
consignee shall assume the obligations, rights and
actions of those who preceded him in the conveyance
of the goods.
The shipper or consignee should proceed against the
one who executed the contract or against the others
who received the goods without reservation. But
even if there is reservation, they are not exempted
from liabilities that they may have incurred by reason
of their own acts (Code of Commerce, Art. 373).
The carrier may then file a third-party complaint
against the one who is really responsible. The carrier
is an indispensable party. But the shipper or
consignee may sue all of them as alternative
defendants.
133
Commencement of action if delivery was made to
arrastre operator
Commencement of action should be computed from
the time of delivery to the arrastre operator. 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 carriers
custody and those occurring while in the arrastre
operators possession (Martin, 1989, Ed.).
A claim against the arrastre operator must be filed
within fifteen days from the delivery of goods
(International Container Terminal Services, Inc. v.
Prudential Guarantee and Assurance Company, Inc.
320 SCRA 244).
The filing of a provisional claim is substantial
compliance with the provision in the management
contract of the arrastre operator that a formal claim
for the loss of goods must be filed within thirty days
from the filing of the entry (Metro Port Service Inc. v.
Intermediate Appellate Court, 213 SCRA 103).
NOTE: The 1 year period of prescription is not applicable to
misdelivery or conversion of goods.
PERIOD FOR FILING ACTIONS
Period for filing actions
For coastwise or carriage within the Philippines,
Within 6 years if no bill of lading has been issued or
within 10 years if a bill of has been issued. For
international carriage from foreign port to the
Philippines within 1 year from delivery of goods or
the date when the goods have been delivered.
NOTE: The compliance with a requirement in the bill of
lading that the consignee must file a claim for loss or
damage to the goods shipped within thirty days from
delivery is a condition precedent to the accrual of a right of
action against the carrier (Philippine American General
Insurance Co. v. Sweet Lines, Inc., 212 SCRA 194).
Q: Akiro of Tokyo, Japan sent various goods to his
friend Juan in Cebu City, Philippines, through one of
the vessels of Worth Well Shippers, Inc., an
American corporation. En route to Cebu City, the
vessel had two stops, first in Hong Kong, and
second, in Manila. While travelling from Tokyo to
Hong Kong, the goods were damaged. What law will
govern? (2013 Bar Question)
a. Japanese law
b. Hong Kong law
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
c. Chinese law
d. Philippine law
e. American law
A: D. Philippine Law
Q: Assuming Philippine law to be applicable and
Juan fails to file a claim with the carrier, may he still
commence an action to recover damages with the
court? (2013 Bar Question)
a. No, the failure to file a claim with the
carrier is a condition precedent for
recovery.
b. Yes, provided he files the complaint within
10 years from delivery.
c. Yes, provided he files the complaint within
10 years from discovery of the damage.
d. Yes, provided he files the complaint within
1 year from delivery.
e. Yes, provided he files the complaint within
1 year from discovery of the damage.
A: B. Yes, provided he files the complaint within 10
years from delivery.
MARITIME COMMERCE
Agents of maritime commerce
1. Ship-owners and ship agents
2. Captains and masters of the vessel
3. Officers and Crews of the vessel
4. Supercargoes (Sundiang, 2011)
Supercargoes
Persons especially employed by the owner of a cargo
to take charge of and sell to the best advantage
merchandise which has been shipped, and to
purchase returning cargoes and to receive freight, as
he may be authorized.
CHARTER PARTIES
Charter party contract
A contract whereby the whole or part of the ship is
let by the owner to a merchant or other person for a
specified time or use for the conveyance of goods, in
consideration of the payment of freight (Caltex v.
Sulpicio Lines, G.R. No. 131166, Sept. 30, 1999).
Classes of charter party
1. Bareboat or demise the ship owner gives
possession of the entire vessel to the charterer. In
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2014 GOLDEN NOTES
turn, the charterer supplies, equips, and mans the
vessel. The charterer is the owner pro hac vice.
As owner pro hac vice of the vessel, the charterer
assumes the rights and liabilities of the owner to third
parties who deal with the vessel, it is the charterer
and its agent who are liable for the wages of seamen
hired by the master of the vessel, as the master of
the vessel is acting in behalf of the charterer (Litonjua
Shipping Co., Inc. v. National Seamen Board, 176
SCRA 189).
Owner pro hac vice
The charterer is considered the owner of the
vessel for the voyage or service stipulated. The
charterer and not the owner of the vessel is
liable for vessels expenses, including seamans
wages.
2. Contract of affreightment the owner of the
vessel leases a part or all of its space to haul goods
for others. It can either be:
a. Time charter Vessel is chartered for a
particular time or duration. While the ship
owner still retains possession and control of the
vessel, the charterer has the right to use all
vessels facilities. The charterer may likewise
designate vessels destination.
Since in a time charter the shipowner retains
possession and control of the ship, the ship
remains a common carrier. (Planters Products,
Inc. v. CA, 226 SCRA 476)
b. Voyage charter Vessel is chartered for a
carriage of goods from one or more ports of
loading to one or more ports of unloading.
Voyage charter
A voyage charter is a contract wherein the ship was
leased for a single voyage for the conveyance of
goods, in consideration of the payment of freight. The
shipowner retains the possession, command and
navigation of the ship, the charterer merely having
use of the space in the vessel in return for his
payment of freight.
An owner who retains possession of the ship remains
liable as carrier and must answer for loss or
non-delivery of the goods received for transportation
(Cebu Salvage Corp. vs. Philippine Home Assurance
Corp., G.R. No. 150403, Jan. 25, 2007).
NOTE: The same concept applies to a time charter.
134
 TRANSPORTATION LAWS
Bareboat or demise charter party v. Contracts of e. Arrival at port for Repairs - if repairs take less
affreightment than 30 days, pay full freightage; if more than,
freightage in proportion to the distance covered.
BAREBOAT/DEMISE CONTRACT OF
CHARTER CONTRACT AFFREIGHTMENT 2. At the request of the ship owner: (Sa-Te)
Ship owner remains a. If extra lay days TErminate without the cargo
Negligence of the being placed alongside vessel; and
liable and carrier must
charterer gives rise to its b. SAle by the owner of the vessel before loading
answer for any breach of
liability to others. by the charterer.
duty.
Charterer is not
Charterer is regarded as 3. Due to fortuitous event: (WEB-Pro-N)
regarded as owner. Ship
owner pro hac vice. Ship a. War There is a governmental prohibition of
owner retains ownership
owner temporarily commercial intercourse, intended to bring about
over the vessel.
relinquishes possession an entire cessation for the time being of all trade
(Coastwise Lighterage v.
and ownership of the whatever.
CA, G.R. No. 114167, July
vessel. b. Embargo A proclamation or order of State,
12, 1995)
usually issued in times of war or threatened
hostilities, prohibiting the departure of ships or
A written contract of affreightment may be amended
goods from some or all the ports of such State
by oral agreement and since in such a case the terms
until further order; or
of the contract shall be those embodied in the bill of
c. Blockade A sort of circumvallation around a
lading, no demurrage charges can be collected where
place by which all foreign connection and
this was not stipulated in the bill of lading (Market
correspondence is, as far as human power can
Developers, Inc. v. Intermediate Appellate Court, 177
effect it, to be cut off.
SCRA 393).
d. PROhibition to receive cargo at port of
destination.
Q: For the transportation of its cargo from the Port
e. Inability of the vessel to Navigate (Art. 640).
of Manila to the Port of Kobe, Japan, Osawa & Co.,
c hartered bareboat M/V Ilog of Karagatan
LIABILITY OF SHIPOWNERS AND SHIPPING AGENTS
Corporation. M/V Ilog met a sea accident resulting
in the loss of the cargo and the death of some of
Three-fold character of the captain (GVG)
the seamen manning the vessel. Who should bear
the loss of the cargo and the death of the seamen?
1. General agent of the ship owner
Why?
2. Vessels technical director
3. Government representative of the flag he
A: Osawa & Co. should bear the loss because it
navigates under
chartered bareboat M/V Ilog which in effect gave it
exclusive control over the vessel. In a demise, in
Inherent powers of the ship captain (A2-C3-O)
contrast to other charters, the charterer is
considered the owner pro hac vice. The charterer is
1. To Appoint or make contracts with the crew in the
accordingly liable in personam for all liabilities
ship agents absence, and to propose said crew,
arising out of the operation of the vessel; he is
should said agent be present; but the ship agent may
responsible for the actions of the master and crew
not employ any member against the captain's express
(Litonjua Shipping Company, Inc. v. National Seamen
refusal
Board and Gregorio P. Candongo, G.R. No. 51910).
2. To Command the crew and direct the vessel to the
port of its destination, in accordance with the
Instances when a charter party may be rescinded
instructions he may have received from the ship
agent
1. At the request of the charterer by: (FARER)
3. To impose Correctional punishment:
a. Failure to place vessel at charterers disposal
a. Upon those who fail to comply with orders; or
b. Abandoning the charter and paying half the
b. Those wanting in discipline
price
4. To make Contracts for the charter of the vessel in
c. Return the vessel due to pirates, enemies, and
the absence of the ship agent or of its consignee
bad weather
5. To Adopt all proper measures to keep the vessel
d. Error in tonnage or flag
well supplied and equipped, purchasing all that may

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135 FACULTY OF CIVIL LAW
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be necessary for the purpose, provided there is no
time to request instruction from the ship agent
6. To Order, in similar urgent cases while on a voyage,
the repairs on the hull and engines of the vessel and
in its rigging and equipment, which are absolutely
necessary to enable it to continue and finish its
voyage (Art. 610).
Obligations of the captain
1. Inventory of equipment
2. Keep a copy of Code of Commerce on board
3. Have a log Book, freight book, accounting book
4. Conduct a marine survey of vessel before loading
5. Remain on board while loading
6. Demand pilot on departure and on arrival at each
port
7. Be on deck when sighting land
8. Arrivals under stress: to file marine protest in 24
hours
9. Record bottomry loan with Bureau of Customs
10. Keep papers and properties of crew members
who might die
11. Conduct himself according to the instuctions of
the ship agent
12. Report to ship agent on arrival
13. Observe rules on the situation of lights and
maneuvers to prevent collisions
14. Remain on board until the last hope to save the
vessel is lost and to abide by the decision of the
majority whether to abandon or not
15. In case of shipwreck: file marine protest, within
24 hours
16. Comply with rules and regulation on navigation
(Code of Commerce, Art. 612).
LIABILITY FOR ACTS OF THE CAPTAIN
Cases where the ship owner/agent shall be liable to
the damages caused by the captain
1. Damages suffered by the vessel and its cargo by
reason of want of skill or negligence on his part
2. Thefts committed by the crew, reserving his right
of action against the guilty parties;
3. Losses, fines, and confiscations imposed an
account of violation of customs, police, health,
and navigation laws and regulations;
4. Losses and damages caused by mutinies on
board the vessel or by reason of faults
committed by the crew in the service and
defense of the same, if he does not prove that he
made timely use of all his authority to prevent or
avoid them;
5. Those caused by the Misuse of the powers;
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
6. For those arising by reason of his going out of his
course or taking a course which he should not
have taken without Sufficient cause, in the
opinion of the officers of the vessel, at a meeting
with the shippers or supercargoes who may be
on board. No exceptions whatsoever shall
exempt him from this obligation;
7. For those arising by reason of his Voluntarily
entering a port other than that of his destination,
outside of the cases or without the formalities
referred to in Article 612; and
8. For those arising by reason of non-observance of
the Provisions contained in the regulations on
situation of lights and manoeuvres for the
purpose of preventing collisions (Code of
Commerce, Art. 618).
NOTE: Ship owner/agent is not liable for the obligations
contracted by the captain if the latter exceeds his powers
and privileges inherent in his position of those which may
have been conferred upon him by the former. However, if
the amount claimed were used for the benefit of the vessel,
the ship owner or ship agent is liable.
EXCEPTIONS TO THE RULE
Exemption from liability of the captain for loss or
injury to persons or cargo
The captain shall not be liable for the loss or injury to
persons or cargo if the loss or the injury is based on
the following causes:
1. Force majeure
2. Obligations contracted for the vessels benefit,
except when the captain expressly agrees to be liable.
A captain may not have himself substituted by
another
A captain may not have himself substituted n the
absence of consent from the ship agent, and should
he do so he shall be liable for all the acts of the
substitute. (Art. 615, Code of Commerce)
Q: T, the captain of MV Don Alan, while asleep in his
cabin, dreamt of an Intensity 8.0 earthquake along
the path of his ship. On waking up, he immediately
ordered the ship to return to port. True enough, the
earthquake and tsunami struck three days later and
his ship was saved. Was the deviation proper? (2011
Bar Bar Question)
A: No, because no reasonable ground for avoiding a
peril existed at the time of the deviation.
136
 TRANSPORTATION LAWS
Instances when may the captain and crew members
rescind their contractual employment
In case of: (WOND)
1. War
2. Outbreak of disease
3. New owner of vessel
4. Change of Destination (Art. 647).
Shipowner of a vessel
The person in possession, management, control over
the vessel, and the right to direct her navigation.
While in their possession, the ship owners also
receive freight earned and paid.
Ship agent
The person entrusted with provisioning or
representing the vessel in the port in which it may be
found. Hence, whether acting as agent of the owner
of the vessel or as agent of the charterer, he will be
considered as the ship agent and may be held liable
as such, as long as he is the one that provisions or
represents the vessel (Macondray & Co., Inc. v.
Provident Insurance Corp, G.R. No. 154305, Dec. 9,
2004).
Civil liabilities of ship owners and agents
1. Damages suffered by a 3rd person for tort
committed by the captain;
2. Contracts entered for provisioning and repair of
vessel;
3. Indemnities in favor of 3rd persons arising from the
conduct of the captain from the care of goods; and
4. Damages in case of collision due to fault or
negligence or want of skill of the captain.
5. Damages for the acts of the captain.
Powers, functions, and liabilities of ship agents (ID)
1. Indemnity for expenses incurred for ships benefit.
2. Discharge of captain and/or crew members.
The following are the rules observed by the ship
agent:
a. Captain and/or crew members contract not for a
definite period or voyage:
i. Before vessel sets out to sea: Ship agent at his
discretion may discharge the captain and
members of the crew. Ship agent must pay
captain and/or crew members salaries earned
according to their contracts, and without any
indemnity whatsoever, unless there is an
expressed agreement;
137
ii. During voyage: Captain and/or crew member
shall receive salary until return to the port
where contract was made. Article 637 of the
Code of Commerce enumerates the just causes
for discharge.
b. Where captain and members of the crews
contracts with ship agent be for a definite period or
voyage:
i. Captain and/or crew members may not be
discharged until after the fulfillment of their
contracts, except by reason of insubordination
in serious matters, robbery, theft, habitual
drunkenness, or damage caused to the vessel
or to its cargo through malice or manifest or
proven negligence (Code of Commerce, Art.
605)
Ii. If the captain should be the vessels co-owner,
he may not be discharged unless ship agent
returns his amount of interest therein. In the
absence of agreement between the parties,
interest shall be appraised by experts
appointed in the manner established by civil
procedure.
Doctrine of inscrutable fault (1997 Bar Question)
Under this doctrine, where fault is established but it
cannot be determined which of the two vessels were
at fault, both shall be deemed to have been at fault.
Doctrine of limited liability (1997 Bar Question)
Also called the no vessel, no liability doctrine, it
provides that liability of ship owner is limited to ship
owners interest over the vessel. Consequently, in
case of loss, the ship owners liability is also
extinguished. Limited liability likewise extends to
ships appurtenances, equipment, freightage, and
insurance proceeds. The ship owners or agents
liability is merely co-extensive with his interest in the
vessel, such that a total loss of the vessel results in
the liabilitys extinction. The vessels total destruction
extinguishes maritime liens because there is no
longer any res to which they can attach (Monarch
Insurance v. CA, G.R. No. 92735, June 8, 200).
Rationale of the doctrine
To offset against innumerable hazards and perils in
sea voyage and to encourage ship building and
maritime commerce. By abandonment, the ship
owner and ship agent exempt themselves from
liability, thus avoiding the possibility of risking his
whole fortune in the business (Real and hypothecary
nature of Maritime Law)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Person who can invoke the limited liability rule A: No, since X Shipping neither incurred a total loss
nor abandoned its ship.
The only persons who could avail of this are the
shipowner and the shipping agent. He is the very ACCIDENTS AND DAMAGES IN MARITIME
person whom the Limited Liability Rule has been COMMERCE
conceived to protect. The petitioners cannot invoke
this as a defense (Philippine Trigon Shipyard Accidents in maritime commerce (CASA)
Corporation, et al. v. Crisostomo G. Concepcion, et al.,
G.R. No. 160088, July 13, 2011). 1. Collision
2. Averages
Cases in which the doctrine of limited liability is 3. Shipwreck
allowed (SOLE) 4. Arrival under stress

1. Civil liability of the Ship agent or shipowner for the GENERAL AVERAGE
indemnities in favor of third persons; (Art. 587, Code
of Commerce) Averages
2. Civil liability of the co-Owners of the vessel for the
results of the acts of the captain; (Art. 590, Code of All extraordinary or accidental expenses which may
Commerce) be incurred during the voyage for the preservation of
3. If the vessel and her cargo be totally Lost, by the vessel or cargo or both.
reason of capture or shipwreck, all the rights shall be
extinguished, both as regards the right of the crew to Kinds of averages
demand wages and the right of the ship agent to
recover the advances made; (Code of Commerce, Art. 1. General average Damages or expenses
643) or deliberately caused in order to save the vessel, its
4. Extinction of civil liability incurred by the cargo or both from real and known risk.
shipowner or agent in cases of maritime collisions 2. Particular average Damages or expenses caused
(Code of Commerce, Art. 837). to the vessel or cargo that did not inure to the
common benefit, and borne by respective owners.
Exceptions to the doctrine of limited liability
General average v. Particular average
1. Repairs and provisioning of the vessel before the
loss of the vessel; (Art. 586) GENERAL AVERAGE PARTICULAR AVERAGE
2. Insurance proceeds. If the vessel is insured, the
proceeds will go to the persons entitled to claim from Both the ship and cargo No common danger to
the shipowner; (Vasquez v. CA, G.R. No. L-42926, are subject to the same both the vessel and the
Sept. 13, 1985) danger cargo
3. When the shipowner is guilty of fault or negligence; There is a deliberate Expenses and damages
NOTE: But if the captain is the one who is guilty,
sacrifice of part of the are not deliberately made
doctrine may still be invoked, hence, abandonment is vessel, cargo, or both
still an option. Damage or expenses Did not inure to common
incurred to the vessel, its benefit and profit of all
4. Private carrier; or cargo, or both, persons interested in the
5. Voyage is not maritime in character. redounded to the vessel and her cargo.
benefit of the respective
Q: A cargo ship of X Shipping, Co. ran aground off owners.
the coast of Cebu during a storm and lost all its All those who have Only the owner of the
cargo amounting to Php50 Million. The ship itself benefited shall satisfy goods benefiting from the
suffered damages estimated at Php80 Million. the average. damage shall bear the
expense of average.
The cargo owners filed a suit against X Shipping but
it invoked the doctrine of limited liability since its Requisites of general average (CD-PS)
vessel suffered an Php80 Million damage, more than
the collective value of all lost cargo. Is X Shipping 1. Common danger present;
correct? (2011 Bar Question) 2. Deliberate sacrifice of part of the vessel or cargo;
3. Successful saving of vessel and/or cargo; and

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2014 GOLDEN NOTES 138
 TRANSPORTATION LAWS
4. Proper procedure and legal steps.
Persons liable for the amount of the general
averages
All persons having an interest in the vessel and cargo
therein at the time of the occurrence of the average
shall contribute (Code of Commerce, Art. 812).
Person who shall be liable for the amount of the
particular averages
2. In case of interisland trade, the York-Antwerp
Rules allow deck cargo. If the cargo loaded on
deck is jettisoned as a result of which the vessel
was saved, the cargo owner is entitled to
reimbursement. If the cargo is saved, the cargo
owner must contribute to the general average.
Reason: In interisland trade, voyages are usually short and
there are intervening islands and the seas are generally not
rough. In overseas trade, the vessel is exposed for many
days to the peril of the sea making deck cargo is dangerous
to navigation.

The owner of the things which gave rise to the

COLLISIONS
expenses or suffered the damage shall bear the
simple or particular averages (Code of Commerce, Art.
Collision
810).
It is the impact of two moving vessels.
Goods not covered by general average even if not
sacrificed
Allision
1. Goods not recorded in the books or records of the
It is the impact between a moving vessel and a
vessel (Art. 855[2], Code of Commerce)
stationary one.
2. Fuel for the vessel if there is more than sufficient
fuel for the voyage (Rule IX, York-Antwerp Rule)
Error in extremis
Jettison
The sudden movement made by a faultless vessel
during the third zone of collision with another vessel
Act of throwing overboard part of a vessels cargo or
which is at fault under the second zone. Even if
hull in hopes of saving a ship from sinking.
sudden movement is wrong, no responsibility will fall
Goods jettisoned for the common safety, shall not
on the faultless vessel.
pay freight; but its latter amount (freight lost) shall be
considered as general average, computing the same
Rules governing liabilities of parties in case of
in proportion to the distance covered when they
collision
were jettisoned (CC, Art. 660).
1. One vessel at fault The ship owner of such vessel
Order of goods to be cast overboard in case of
shall be liable for all resulting damages.
jettison
2. Both vessels at fault Each vessel shall suffer their
respective losses but as regards the owners of the
1. Those on deck, preferring the bigger bulk with least
cargoes, both vessels shall be jointly and severally
value.
liable.
2. Those below upper deck, beginning with the
3. Vessel at fault not known Each vessel shall suffer
heaviest with least utility.
its own losses and both shall be solidarily liable for
loses or damages on the cargo. (Doctrine of
Q: Distinguish between overseas and inter-island
Inscrutable Fault).
trade regarding reimbursement and payment of
4. Fortuitous event Each shall bear its own damage.
general averages on jettisoned deck cargo.
5. Third vessel at fault The third vessel shall be
liable for losses and damages sustained.
A:
1. In case of overseas trade, the York-Antwerp
Zones of time in the collision of vessel
Rules prohibit the loading of cargo on deck. In
case such cargo is jettisoned, the owner will not
1. First zone all time up to the moment when risk of
be entitled to reimbursement in view of the
collision begins.
violation. If the cargo were saved, the owner
must contribute to general average. NOTE: One vessel is a privileged vessel and the other
is a vessel required to take action to avoid collision.

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139 FACULTY OF CIVIL LAW
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2. Second zone time between moment when risk of
collision begins and moment it becomes practically a
certainty.
NOTE: In this zone, the conduct of the vessels are
primordial. It is in this zone that vessels must observe
nautical rules, unless a departure therefrom becomes
necessary to avoid imminent danger. The vessel
which does not make such strict observance is liable.
3. Third Zone time when collision is certain and up
to the time of impact.
NOTE: An error at this point no longer bears any
consequence.
Even if a collision which resulted in the damage to the
cargoes of a vessel was due to the fault of the other
vessel, the shipowner is still liable where the vessel
did not exercise due diligence to avoid collision
(Maritime Company of the Philippines v. CA, 171 SCRA
61).
A vessel is guilty of negligence even if it correctly
navigated to the right to avoid the collision where it
did not make such maneuver at an early stage and
allowed the two vessels to come to close quarters
(Mecenas v. CA, 180 SCRA 83).
Role of a protest with respect to collisions
The action for recovery of damages arising from
collisions cannot be admitted if a protest or
declaration is not presented within twenty-four hours
before the competent authority of the point where
the collision took place, or that of the first port of
arrival of the vessel, if in Philippine territory, and to
the Filipino consul if it occurred in a foreign country
(Art. 835).
NOTE: Failure to make a protest is not an impediment to
the maintenance of a civil action based on quasi-delict.
Instances when a protest is required
1. Arrival under stress; (Code of Commerce, Art. 612
[8])
2. Shipwreck; (Code of Commerce, Arts. 601 [15],
843)
3. If the vessel has gone through a hurricane or
where the captain believes that the cargo has
suffered damages or averages; (Code of
Commerce, Art. 642) and
4. Maritime collision (Code of Commerce, Art. 835).
Persons who can file a maritime protest
1. In case of maritime collision, the passenger or
other persons interested who may be on board the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
vessel or who were in a condition who can make
known their wishes (Arts. 835-836) or the captain
himself (Verzosa and Ruiz v. Lim, G.R. No. 20145, Nov.
15, 1923).
2. The captain in cases of:
a. Arrival under stress
b. Shipwreck; or
c. If the vessel has gone through a hurricane or
where the captain believes that the cargo has
suffered damages or averages.
Q: Two vessels figured in a collision resulting in
considerable loss of cargo. The damaged vessels
were safely conducted to a port. Kim, a passenger
and Ruby, a shipper who suffered damage to his
cargo, did not file maritime protest. Can Kim and
Ruby successfully maintain an action to recover
losses and damages arising from the collision? (2007
Bar Question)
A: Ruby, the shipper can successfully maintain an
action to recover losses and damages arising from the
collision notwithstanding his failure to file a maritime
protest since the filing thereof is required only on the
part of Kim, who, being a passenger of the vessel at
the time of the collision, was expected to know the
circumstances of the collision. Kim's failure to file a
maritime protest will therefore prevent him from
successfully maintaining an action to recover his
losses and damages (Code of Commerce, Art 836).
Shipwreck
The loss of the vessel at sea as a consequence of its
grounding, or running against an object in sea or on
the coast. If the wreck was due to malice, negligence,
or lack of skill of the captain, the owner of the vessel
may demand indemnity from said captain.
Person who shall bear the losses in shipwreck
GR: The loss of a ship and her cargo shall fall upon
their respective owners (Code of Commerce, Art. 840)
XPN: If the wreck was due to malice, negligence, or
lack of skill of the captain, or because the vessel put
to sea was insufficiently repaired and equipped, the
ship agent or the shippers may demand indemnity
from the captain for the damage caused to the vessel
or to the cargo by the accident (Code of Commerce,
Art. 841)
Arrival under stress
It is the arrival of a vessel at the nearest and most
convenient port, if during the voyage the vessel
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 TRANSPORTATION LAWS
cannot continue the trip to the port of destination on
account of the lack of provisions, well-founded fear of
seizure, privateers or pirates, or by reason of any
accident of the sea disabling it to navigate (Art. 819,
Code of Commerce).
NOTE: In arrival under stress, the captain must file a Protest
which is merely a disclaimer for the shipowner not to be
liable.
Instances when arrival under stress is unlawful
(LR-DM)
1. Lack of provisions is due to negligence to carry
according to usage and customs
2. Risk of enemy not well known of manifest
3. Defect of vessel is due to improper repair; or
4. Malice, negligence, lack of foresight or skill of
captain (Art. 820).
CARRIAGE OF GOODS BY SEA ACT (COGSA)
Application of COGSA
It will only be applied in terms of loss or damage of
goods transported to and from Philippine ports in
foreign trade. It may also apply to domestic trade
when there is a paramount clause in the contract.
Paramount Clause it is a stipulation or clause either
on the bill of lading or charter party stipulating the
laws that the parties agreed to be used of that
particular transport. In the event that there will be a
breach, the parties shall follow the law stipulated in
the paramount clause (Martin, 1989, Ed.).
The Carriage of Goods by Sea Act applies up to the
final port of destination even if the transhipment was
made on an inter-island vessel (Sea Land Service Inc.
V. Intermediate Appellate Court, 153 SCRA 552).
Cases covered under the COGSA
It applies only in case of non-delivery or damage, and
not to misdelivery or conversion of goods (Ang v.
American Steamship Agencies, Inc., G.R. No. L-22491,
Jan. 27, 1967).
Also, the deterioration of goods due to delay in their
transportation is not covered by Sec. 6 of COGSA
(Mitsui O.S.K. Lines Ltd. v. CA, G.R. No. 119571, Mar.
11, 1998).
141
Notice is not required to be filed in case of damage
to goods under the COGSA
There is no consequence on the right to bring suit if
no notice is filed unlike under the Code of Commerce.
It only gives rise to a presumption that the goods are
delivered in the same condition as they are shipped.
Failure to file notice of loss does not bar an action
against the carrier if the action was filed within one
year (Belgian Overseas Chartering & Shipping N.V. v.
Philippine First Insurance Company, Inc, 383 SCRA 23).
There is also no consequence if the transportation
charges and expenses are paid unlike under the Code
of Commerce.
Time when suits for loss or damage of cargo should
be brought
The suit should be brought within one year from:
1. Delivery of the goods, in case of damage; or
2. The date when the goods should have been
delivered, in case of loss.
NOTE: The parties may agree to extend the one-year period
to file a case under the Carriage of Goods by Sea (Universal
Shipping Lines, Inc. v. Intermediate Appellate Court, 188
SCRA 170).
Q: To whom should such delivery be made as basis
of the computation of the one-year period?
A: The one-year period is computed from the delivery
of goods to the operator and not to the consignee.
Instances when the one-year period apply (AFLS)
1. Amendment of pleadings for suing the wrong
party
2. Filing of third party complaint
3. Loss or damage to cargo, excluding delay or
misdelivery
4. Subrogation (NCC, Art 2207).
Time when the one year period in the COGSA is
interrupted
1. When an action is filed in court; or
2. When there is an agreement between the parties
to extend it.
Art. 1155 of the Civil Code (providing that the
prescription of actions is interrupted by the making
of an extrajudicial written demand by the creditor)
is not applicable to actions brought under the
COGSA
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Written claims do not toll the running of the one-year
prescriptive period under the COGSA since matters
affecting the transportation of goods by sea must be
decided as soon as possible (Dole Philippines, Inc. v.
Maritime Company of the Philippines, G.R. No.
L-61352, Feb. 27, 1987).
Persons who can give notice to, and bring suit
against the carrier (SCA)
1. The Shipper
2. The Consignee; or
3. Any legal holder of the bill of lading like the
indorsee, subrogee, or the insurer of the goods
(Kuy v. Everett Steamship Corporation, G.R. No.
L-5554, May 27, 1953).
The one-year prescriptive period within which to file
a case against the carrier also applies to a claim filed
by an insurer who stands as a subrogee to the
insured
The one-year prescriptive period within which to file
a case against the carrier also applies to a claim filed
by an insurer who stands as a subrogee to the
insured. Also, whether the insurer files a third party
complaint or maintains an independent action is of
no moment (Filipino Merchants Insurance Co., Inc. v.
Alejandro, G.R. No. L-54140,Oct. 14, 1986).
Where an insurer was sued by the consignee of imported
goods filed a third-party complaint against the carrying
vessel more than a year after the delivery of the goods, the
third party complaint is barred by the one-year prescriptive
period under the Carriage of Goods by Sea Act, as
otherwise the prescriptive period can be avoided by the
consignee by filing a claim against the insurer (Filipino
Merchant Insurance Co., Inc. v. Alejandro, 145 SCRA 42).
NOTE: The ruling in the above-cited case should apply only
to suits against the carrier filed either by the shipper, the
consignee or the insurer, not to suits by the insured against
the insurer. The basis of the insurers liability is the
insurance contract and such claim prescribes in 10 years, in
accordance with Art. 1144 of the Civil Code (Mayer Steel
Pipe Corporation v. CA, G.R. No. 124050, June 19, 1997).
Prescriptive period in case of misdelivery and
conversion of goods
In case of misdelivery or conversion, the proper
periods are:
1. If there is a written contract 10 years (Civil
Code, Art. 1144)
2. Oral contract 6 years (Art. 1145)
3. For quasi-delict 4 years (Art. 1146)
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
NOTE: The prescriptive period for an action against a broker
is ten years and not one year under the COGSA, since the
broker is not a carrier, charterer or holder of the bill of
lading (Reyma Brokerage Inc. v. Philippine Home Assurance
Corporation, 202 SCRA 564).
Amount of the carriers liability under the COGSA
1. The liability limit is set at $500 per package or
customary freight unless the nature and value of
such goods is declared by the shipper.
2. Shipper and carrier may agree on another
maximum amount, but not more than amount of
damage actually sustained.
NOTE: When the packages are shipped in a container
supplied by carrier and the number of such units is stated in
the bill of lading, each unit and not the container constitute
the package.
Instances where there is no liability under COGSA
(FDUD)
1. If the nature or value of goods knowingly and
Fraudulently misstated by shipper
2. If damage resulted from Dangerous nature of
shipment loaded without consent of carrier
3. If Unseaworthiness not due to negligence
4. If Deviation was to save life or property at sea.
Q: Clause 18 of the bill of lading provides that the
owner should not be liable for loss or damage of
cargo unless written notice thereof was given to the
carrier within 30 days after receipt of the goods.
However, Section 3 of the COGSA provides that even
if a notice of loss or damage is not given, "that fact
shall not affect or prejudice the right of the shipper
to bring suit within one year after the delivery of the
goods." Which of these two provisions should
prevail?
A: Section 3 will prevail. Any clause, Sec. 3 of the
COGSA provides that any covenant, or agreement in a
contract of carriage relieving the carrier or the ship
from liability for loss or damage to or in connection
with the goods or lessening such liability otherwise
than as provided, shall be null and void and of no
effect." (E. E. Elser, Inc. v. CA, G.R. No. L-6517, Nov.
29, 1954).
THE WARSAW CONVENTION
Warsaw Convention (WC) for Unification of Certain
Rules Relating to International Carriage by Air
provides for rules applicable to international
transportation by air. The Philippines is one of the
signatories to WC (Santos III vs. Northwest Orient
142
 TRANSPORTATION LAWS
Airlines, 210 SCRA 256). Hence, this has the force and
effect of a law in the Philippines (Cathay Pacific
Airways, Ltd. Vs. CA, 219 SCRA 520).
APPLICABILITY
Applicability of the Warsaw convention
This Convention applies to all international carriage of
persons, luggage or goods performed by aircraft for
reward. It applies equally to gratuitous carriage by
aircraft performed by an air transport undertaking
(Art. 1[1], Warsaw Convention).
International carriage
Any carriage in which, according to the contract made
by the parties, the place of departure and the place of
destination, whether or not there be a break in the
carriage or a transshipment, are situated either:
1. Within the territories of two High Contracting
Parties; or
2. Within the territory of a single High Contracting
Party, if there is an agreed stopping place
within a territory subject to the sovereignty,
suzerainty, mandate or authority of another
Power, even though that Power is not a party
to the Convention (WC, Art. 1[2])
NOTE: High Contracting Parties are the signatories to the
WC and those which subsequently adhered to it. (Mapa vs.
CA, 275 SCRA 286.)
Q: How should carriage performed by several
successive air carriers be treated under Warsaw
Convention?
A: A carriage to be performed by several successive
air carriers is deemed, for the purposes of WC to be
one undivided carriage, if it has been regarded by the
parties as a single operation, whether it had been
agreed upon under the form of a single contract or of
a series of contracts (WC, Art. 1 [3]).
NOTE: Such carriage does not lose its international
character merely because one contract or a series of
contracts is to be performed entirely within a territory
subject to the sovereignty, suzerainty, mandate or
authority of same High Contracting Party (Ibid).
Documents of carriage issued under WC
The following are the documents of carriage:
1. Passenger Ticket
2. Luggage Ticket
3. Air Consignment NOTE
143
Function of the air consignment note
It is prima facie evidence of:
1. The conclusion of the contract
2. Receipt of the goods
3. Conditions of carriage (WC, Art. 11 [1]).
Exercise of the consignor of its right to dispose of
the goods
The consignor may exercise its right to dispose of the
goods by:
1. Withdrawing them at the aerodrome of departure
or destination, or
2. Stopping them in the course of the journey on any
landing, or
3. Calling for them to be delivered at the place of
destination or in the course of the journey to a
person other than the consignee named in the air
consignment NOTE, or
4. Requiring them to be returned to the aerodrome of
departure (WC, Art. 12).
NOTE: In the exercise of this right, the carrier or other
consignors must not be prejudiced. For the carrier to obey
the orders for disposition, the carrier must require the
production of the part of the air consignment NOTE
delivered to the consignor (ibid).
Time when the right to disposition ceases to
continue
It ceases as soon as the consignee, on arrival of the
goods at the place of destination, require the carrier
to hand over to him the air consignment note and to
deliver the goods to him, on payment of charge due
and on complying with the conditions of carriage set
out in the air consignment note (Art. 13, WC)
Where the supervisor of the consignee signed the
delivery receipt for the goods shipped, the consignee
cannot sue the shipping company for non-delivery of
the goods (Republic v. Lorenzo Shipping Corporation,
450 SCRA 550).
LIABILITIES UNDER THE CONVENTION:
1. Damage sustained in the event of the death or
wounding of a passenger taking place on board the
aircraft or in the course of any of the operations of
embarking or disembarking;
2. Loss or damage to any check baggage or goods
sustained during the transport by air;
3. Delay in the transport by air of passengers,
baggage or goods.
NOTE: The list is not exclusive.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Venue in the filing of an action for violation of a
contract of international carriage
An action for damage must be brought at the option
of the plaintiff, in the territory of one of the High
Contracting Parties, either before the court:
1. of the domicile of the carrier or
2. of his principal place of business, or
3. where the ticket was purchased, or
4. at the place of destination (WC, Art. 28 [1]).
LIMITATION OF LIABILITY
Limitations to the liability of air carriers
1. In the carriage of persons 250,000 francs for each
passenger. Nevertheless, by special contract, the
carrier and the passenger may agree to a higher limit
of liability.
2. In the carriage of registered baggage and of cargo
Two hundred and fifty (250) francs per kilogramme,
unless the passenger or consignor has made, at the
time when the package was handed over to the
carrier, a special declaration of interest in delivery at
destination and has paid a supplementary sum if the
case so requires.
3. As regards objects of which the passenger takes
charge himself Five thousand (5,000) francs per
passenger (WC, Art. 22).
NOTE: Carrier is not entitled to the foregoing limit if the
damage is caused by willful misconduct or default on its
part (WC, Art. 25). Where the loss of the baggage of a
passenger was due to the fault or recklessness of an airline
company, the limitation on the liability of airline companies
under the Warsaw Convention is not applicable (Alitalia v.
IAC, 192 SCRA 9).
Stipulation relieving the carrier from or limiting its
liability is not valid
Any provision tending to relieve the carrier of liability
or to fix a lower limit than that which is laid down in
this Convention shall be null and void but the nullity
of such provision does not involve the nullity of the
whole contract (Art. 23[1]).
Exceptions to these limitations (WD-PG)
1. Willful misconduct
2. Default amounting to willful misconduct
3. Accepting passengers without ticket
4. Accepting goods without airway bill or baggage
without baggage check
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Time when the right to damages will be
extinguished
The right to damages shall be extinguished if an
action is not brought within two years, reckoned
from the date of arrival at the destination, or from
the date on which the aircraft ought to have arrived,
or from the date on which the carriage stopped.
NOTE: Despite the express mandate that an action for
damages should be filed within 2 years from the arrival at
the place of destination, such rule shall not be applied
where delaying tactics were employed by airline itself in a
case where a passenger wishes to settle his complaint
out-of-court but the airline gave him the runaround,
answering the passengers letters but not giving in to his
demands, hence, giving the passenger no time to institute
the complaint within the reglementary period (United
Airlines v. Uy, G.R. No. 127768, Nov. 19, 1999).
A person cannot recover a claim covered by Warsaw
Convention after the lapse two years
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 (PAL. v.
Savillo, 557 SCRA 66).
However, the action filed by a passenger of an airline
company for loss of his luggage is not barred by the
two-year prescriptive period under the Warsaw
Convention, where the passenger immediately made
a demand upon the airline company and the action
was delayed because of the evasion of the airline
company (United Air Lines, Inc. v. Court of Appeals,
318 SCRA 576).
Where an airline company failed to deliver the
baggage of a passenger on time, a passenger may
maintain an action for damages under the Civil Code
even if he did not file a claim with the airline
company within fourteen days as required by the
Warsaw Convention, for he may still sue under the
Civil Code (Luna v. CA, 216 SCRA 107).
144
 TRANSPORTATION LAWS
WILLFULL MISCONDUCT

Willful misconduct

The definition of "willful misconduct" depends in

some measure on which court is deciding the issue.
Some common factors that courts will consider are:
1. Knowledge that an action will probably result
in injury or damage
2. Reckless disregard of the consequences of an
action, or
3. Deliberately failing to discharge a duty related
to safety.

Courts may also consider other factors.

The failure of the carrier to deliver the passengers

luggage at the designated time and place does not
ipso facto constitutes willful misconduct

There must be a showing that the acts complained of

were impelled by an intention to violate the law, or
were in persistent disregard of one's rights. It must
be evidenced by a flagrantly or shamefully wrong or
improper conduct (Luna vs. CA, GR No. 100374-75,
November 27, 1992).

The act of the carrier in guessing which luggage

contained the firearm constitutes willful misconduct

The guessing of which luggage contained the

firearms amounted to willful misconduct under
Section 25(1) of the Warsaw Convention (Northwest
Airlines vs. CA, GR No. 120334, January 20, 1998).

The allegation of willful misconduct resulting in a

tort is insufficient to exclude the case from the
realm of Warsaw Convention

A cause of action based on tort did not bring the case

outside the sphere of the Warsaw Convention
(Lhuiller vs. British Airways, GR No. 171092, March
15, 2010).

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145 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Congress cannot create a private corporation by
THE CORPORATION CODE (CC) enactment of a special law

CORPORATION Congress shall not, except by general law, provide for

the formation, organization, or regulation of private
DEFINITION corporations (Sec. 16, Art. XII, Constitution).

A corporation is an artificial being created by Franchise

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,
CC).
ATTRIBUTES OF A CORPORATION
Attributes
A franchise includes any special privilege or right
affected with public interest, conferred by the State
on corporations or persons and which does not
belong to the citizens of the country, generally as a
matter of common right (De Leon, 2010, citing JRS
Business Corp. vs. Imperial Insurance, Inc., 11 SCRA
634).

The attributes of a corporation are the following: Kinds of franchise

(ALS PAPI)
1. It is an Artificial being The kinds of franchise are the following:
2. It is created by operation of Law 1. Primary/ Corporate/ General Franchise the right
3. It enjoys the right of Succession to exist as a corporation.
4. It has the Powers, Attributes and Properties 2. Secondary/ Special Franchise the franchise to
expressly authorized by law or Incident to its exercise powers and privileges granted to such
existence. corporation to the business for which it was
created, including those conferred for purposes of
Rules for the creation of a corporation public benefit such as the power of eminent
domain and other powers and privileges enjoyed
GR: A legislative grant or authority is necessary for by public utilities (De Leon, 2010).
the creation of a corporation.
Primary v. Secondary franchise
XPN: For corporations by prescription, such authority
is not necessary (De Leon, 2010). PRIMARY FRANCHISE SECONDARY FRANCHISE
Special authority given
NOTE: A corporation by prescription is one which has to a corporation to
exercised powers for an indefinite period without engage in a specialized
interference on the part of the sovereign power and which business (e.g. banks,
by fiction of law, is given the status of a corporation (De insurance companies,
Leon, 2010). right to use the streets
of a municipality to lay
The creation of a corporation is by operation of law pipes of tracks, erect
The franchise or
poles, or string wires).
No corporation can exist without the consent or grant authority to exist as a
of the sovereign, and that the power to create corporation
Certain rights and
corporations is one of the attributes of sovereignty. privileges conferred
Corporations cannot come into existence by mere upon existing
agreement of the parties (De Leon, 2010). corporations
(J.R.S.Business Corp. v.
NOTE: The Philippine jurisprudence adopted the Concession Imperial Insurance,
or fiat theory, which states that a corporation is conceived
supra).
as an artificial person owing existence through creation by a
foreign power. Further, a corporation has without any GR: Granted by the
existence until it has received the imprimatur of the State Corporation Code,
Granted by a
acting according to law, through the SEC (Tayag v. Benguet XPN: In GOCCs with a
Government Agency, or
Consolidated, Inc., GR No. L-23145, Nov. 29, 1968). special charter, a
a Municipal Corporation
special law grants the
franchise

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2014 GOLDEN NOTES 146
 CORPORATION CODE
Secondary franchises of
a corporation may
ordinarily be conveyed
or mortgaged under a
general power granted
to a corporation to
dispose of its property
(i.e. Through board
Cannot be transferred resolution or approval of
without the approval of stockholders) (Villarey
Congress (Sundiang, vs. Ferrer G.R. No.
2011). L-23893, October 29,
1968).
A secondary franchise
can be subject to levy
and sale on execution
together with corporate
property (Sundiang,
2011)
Right to succession
Rule on whether a defective incorporation result
into a partnership
The answer depends on whether or not there is a
clear intent to participate in the management of the
business affairs on the part of the investor.
Parties who intends to participate or has actually
participated in the business affairs of the proposed
corporation would be considered as partners under a
de facto partnership.
On the other hand, parties who took no part
notwithstanding their subscriptions do not become
partners with other subscribers (Pioneer Insurance vs.
CA, GR No. 84197, July 28, 1989).
Engagement into a contract of partnership or a joint
venture
GR: Corporations have no power to enter into
partnership.

A corporation has a capacity of continuous existence XPN: The SEC allowed corporations to enter into
irrespective of the death, withdrawal, insolvency, or partnerships with other corporations and
incapacity of the individual stockholders or members individuals provided:
and regardless of the transfer of their interest or 1. The authority to enter into partnership relation is
shares of stock (De Leon, 2010). A corporation may expressly conferred by the Charter or the Articles of
exist up to the period stated in the articles of Incorporation (AOI) and the nature of the business
incorporation as long as not exceeding 50 years from venture to be undertaken by the partnership is in line
the date of incorporation, unless sooner dissolved or with the business authorized by the charter or the
unless said period is extended (Sec. 11, CC). AOI (SEC Opinions, Feb. 29, 1980, Dec. 1, 1993, and
Feb. 23, 1994).
Powers that a corporation can exercise 2. The partnership must be a limited partnership and
the corporation must be a limited partner
The powers that a corporation can exercise are only 3. If it is a foreign corporation, it must obtain a license
those which are granted by the law of its creation. All to transact business in the country.
powers which may be implied from those expressly Joint Account v. Partnership
provided by law and those which are incidental or
essential to the corporations existence may also be JOINT ACCOUNT PARTNERSHIP
exercised (Sec. 36, CC). Has no firm name and is Has a firm name.
conducted In the name
The power to institute expropriation proceedings is of the ostensible
not granted to all corporations partner.
Has no juridical Has juridical personality
Only quasi-public corporations or those affected with personality and can sue and may sue or be sued
public interest are given the power to institute or be sued only in the under its firm name
condemnation proceedings against owners of private name of the ostensible
property. To grant the right of eminent domain to partner.
purely private entities exercising functions, which are Has no common fund. Has a common fund.
not public in nature, would be using the right to take The ostensible partner All general partners have
property for private use (De Leon, 2010 citing SEC manages its business the right of
Opinion, Oct. 28, 1968). operations. management.
Liquidation thereof can Liquidation may, by
only be done by the agreement, be entrusted
ostensible partner. to a partner or partners.

UNIVERSITY OF SANTO TOMAS

147 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Corporation v. Partnership

BASIS PARTNERSHIP CORPORATION

Created by mere agreement of the parties Created by operation of law and governed by the
As to creation and and governed by the Civil Code Corporation Code
governing law

From the moment of meeting of /minds of Existence of the corporation commences from the
the partners date of issuance of the Certificate of
Incorporation by the Securities and Exchange
Commission (SEC).
Commencement of
The term of a partnership may be
juridical
established for any period of time stipulated Existence can NOT be for a term in excess of 50
personality and
by the partners years. The term of a corporation may be extended
term of existence
to not more than 50 years at any single instance.

May be organized by at least 2 persons
Number of
incorporators
GR: May exercise any power authorized by
the partners.
Powers
XPN: Acts which are contrary to law, morals,
good customs, public order, public policy
When management is not agreed upon,
every partner is an agent of the partnership
GR: Requires at least 5 incorporators but not
more than 15.
XPN: Corporation sole
May exercise only such powers as may be granted
by law and its articles of incorporation, implied
therefrom or incidental thereto.
GR: Power to do business and manage its affairs is
vested in the Board of Directors (BOD) / Board of
Trustees (BOT).

XPNs:
Management 1) Executive Committee (Sec. 35, CC)
2) Management Contract (Sec. 44, CC)
3) The AOI of a close corporation may provide
that the business of the corporation shall be
managed by the stockholders of the corporation
rather than by a board of directors (Sec. 97, CC).
A partner as such can sue a co-partner who The suit against a member of the BOD or BOT
Effect of
mismanages. who mismanages must be brought in the name of
mismanagement
the corporation (Derivative suit).
GR: Partners are liable personally and Stockholders are liable only to the extent of the
subsidiarily(sometimes solidarily) for shares subscribed by them whether paid or not.
Extent of liability
partnership debts to third persons
to third persons
XPN: Limited partner
Right of Succession No right of succession Has right of succession
Partner cannot transfer his interest in the Stockholder has the right to transfer his shares
Transferability of
partnership without the consent of all the without prior consent of the other stockholders
Share Holders
other existing partners. unless the right of first refusal is embodied in the
interest
articles of incorporation.
May be dissolved any time by the will of any Can only be dissolved with the consent of the
or all of the partners. State.
Dissolution
Death, civil interdiction and insolvency of a Death or insolvency of shareholders cant dissolve
partner dissolve the partnership. the corporation.

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 148
 CORPORATION CODE
CLASSES OF CORPORATION
Classes of corporation
The following are the classes of corporation:
1. As to whether their membership is represented
by shares of stock or not:
a. Stock one which have capital stock divided
into shares and are authorized to distribute
to the holders of such shares dividends or
allotments or the surplus profits on the basis
of the shares held (Sec. 3, CC).
b. Non-Stock is one which do not issue shares
and are created not for profit but for public
good and welfare and where no part of its
income is distributable as dividends to its
members, trustees, or officers (Sec. 87, CC).
2. As to the number of persons who compose them:
a. Corporation aggregate corporation
consisting of more than one member or
corporator. The CC requires that these
corporations must be formed by not less
than 5 persons (Sec. 10, CC).
b. Corporation Sole religious corporation
which consists of one member or corporator
only and his successor.
3. As to whether they are for religious purpose or
not:
a. Ecclesiastical corporation one organized for
religious purpose.
b. Lay corporation one organized for a purpose
other than for religion.
4. As to whether they are for charitable purpose or
not:
a. Eleemosynary one established for religious
purposes.
b. Civil one established for business or profit.
5. As to state or country under or by whose laws
they have been created:
a. Domestic one incorporated under the laws
of the Philippines
b. Foreign one formed, organized, or existing
under any laws other than those of the
Philippines and whose laws allow Filipino
citizens and corporations to do business in
its own country or state (Sec. 123, CC).
6. As to their legal right to corporate existence:
a. De jure one existing both in fact and in law
b. De facto one existing in fact but not in law
7. As to whether they are open to the public or not:
a. Close one which is limited to selected
persons or members of the family (Sec. 96
105, CC).
b. Open one which is open to any person who
may wish to become a stockholder or
member thereto.
149
8. As to their relation to another corporation:
a. Parent or Holding one which is related to
another corporation that it has the power
either, directly or indirectly to, elect the
majority of the director of such other
corporation
b. Subsidiary one which is so related to
another corporation that the majority of its
directors can be elected either, directly or
indirectly, by such other corporation
9. As to whether they are corporations in a true
sense or only in a limited sense:
a. True one which exists by statutory authority
b. Quasi one which exist without formal
legislative grant.
i. Corporation by prescription one which has
exercised corporate powers for an
indefinite period without interference on
the part of the sovereign power and
which by fiction of law, is given the status
of a corporation;
ii. Corporation by estoppel one which in
reality is not a corporation, either de jure
or de facto, because it is so defectively
formed, but is considered a corporation
in relation to those only who, by reason
of theirs acts or admissions, are
precluded from asserting that it is not a
corporation (Sec. 21, CC).
10. As to whether they are for public (government)
or private purpose:
a. Public one formed or organized for the
government of a portion of the State.
b. Private- one formed for some private
purpose, benefit or end.
Requisites for the formation of a stock corporation
For a stock corporation to exist, two requisites must
be complied with, to wit:
1. A capital stock divided into shares and
2. An authority to distribute to the holders of such
shares, dividends or allotments of the surplus
profits on the basis of the shares held (Sec. 3, CC;
Collector of Internal Revenue vs Club Filipino de
Cebu 5 SCRA 321).
Requisites of a de facto corporation (LAP)
1. Organized under a valid Law.
2. Attempt in good faith to form a corporation
according to the requirements of the law.
NOTE: Issuance of Certificate of Incorporation by SEC is a
minimum requirement for the formation of the
Corporation in good faith (Sundiang, 2009).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Use of corporate Powers - The corporation must account of a technical defect in the formation of the
have performed the acts which are peculiar to a corporation.
corporation like entering into a subscription
agreement, adopting by-laws, and electing On the other hand, where an attempt to organize a
directors. corporation fails by omission of some substantial step
or proceeding required by the law, its members or
Q: University Publishing Company (UPC), through its stockholders are liable as partners (De Leon, 2010).
president, entered into a contract with Albert to
publish the commentaries on the Revised Penal The existence of a de facto corporation cannot be
Code. UPC published the commentaries but it did collaterally attacked
not remit the amount due to Albert. This prompted
Albert to file a collection suit. The RTC decided GR: The existence of a de facto corporation shall not
against UPC. When the Sheriff were about to be inquired into collaterally in any private suit to
implement the writ of execution against the which such corporation may be a party. Such inquiry
company, he discovered that UPC is not registered may be made by the Solicitor General in a quo
corporation. Consequently, the president of UPC warranto proceeding (Sec. 20, CC).
was substituted in the writ of execution. The
president invoked the separate legal personality of XPN: Collateral attack will be permitted, however,
the corporation as his defense. 1) Is UPC a de facto when the lack of right or the wrong doing of the
corporation? 2) Can the defense that UPC is a corporation is in issue because it is in violation of
corporation by estoppel be invoked by the public policy or of express or implied statutory
president? 3) Who is liable for the debts of the requirement, such as denial of its right to enforce
corporation? contracts entered into without compliance with
prohibitions of express or implied statutory or public
A: policy.
1. No. UPC cannot be a considered a de facto
corporation because it was not registered with the Thus, the defendant may question the personality of
SEC a foreign corporation transacting business in the
2. No. One who has induced another to act upon his Philippines to maintain a suit on the ground that it is
willful misrepresentation that a corporation was duly not duly licensed to do business in our country (De
organized and existing under the law, cannot Leon, 2010, citing 18 Am. Jur. 2d 606 and Sec. 133 of
thereafter set up against his victim the principle of the CC).
corporation by estoppel.
3. The president, who negotiated with Albert is liable. De facto corporation v. De jure corporation
A person acting or purporting to act on behalf of a
corporation which has no valid existence assumes DE FACTO DE JURE
such privileges and obligations and becomes One which actually One created in strict or
personally liable for contracts entered into or for exists for all practical substantial conformity
other acts performed as such agent (Albert v purposes as a with the mandatory
University Publishing Co. G.R. No. L-19118, January corporation but which statutory requirements
30, 1965). has no legal right to for incorporation.
corporate existence as
Liabilities of officers and directors/ trustees of a de against the State.
facto corporation There is a colorable There is substantial
compliance with the compliance with the
The liabilities and penalties attending to officers and requirements of the law requirements of the law
directors/ trustees of a de jure corporation shall be creating the corporation. creating the corporation.
the same as those of a de facto corporation. This Can be attacked directly Its right to exist as a
includes the liability under the criminal law. but not collaterally. corporation cannot be
successfully attacked or
Members of a de facto corporation cannot be held questioned by any party
liable as partners by third persons even in direct
proceeding for that
The members of a de facto corporation cannot be purpose by the State (De
held liable as partners by third persons who deal with Leon, 2010).
them in their supposed corporate capacity, merely on

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 150
 CORPORATION CODE
Rules governing a corporation by estoppel estoppel, those acting on behalf of a corporation and
those benefited by it, knowing it to be without valid
1. All persons who assume to act as a corporation existence, are held liable as general partners.
knowing it to be without authority to do so shall Technically, it is true that Lim did not directly act on
be liable as general partners for all debts, behalf of the corporation. However, having reaped
liabilities and damages incurred or arising as a the benefits of the contract entered into by persons
result. with whom he previously had an existing relationship,
2. When any such ostensible corporation is sued he is deemed to be part of said association and is
on any transaction entered by it as a covered by the scope of the doctrine of corporation
corporation or on any tort committed by it as by estoppel (Lim Tong Lim v. Philippine Fishing Gear
such, it shall not be allowed to use as a defense Industries, Inc., G.R. No. 136448, November 3, 1999).
its lack of corporate personality.
3. One who assumes an obligation to an ostensible De facto corporation v. Corporation by estoppel
corporation as such, cannot resist performance
thereof on the ground that there was in fact no DE FACTO CORPORATION BY
corporation (Sec. 21, CC). CORPORATION ESTOPPEL
There is no existence in
NOTE: Where there is no third person involved and the There is existence in law
law
conflict arises only among those assuming the form of a The dealings among the The dealings among the
corporation who know that the corporation has not been
parties on a corporate parties on a corporate
registered, there is NO corporation by estoppel (Lozano v
Judge Delos Santos G. R. No. 125221).
basis is not required basis is required
The State reserves the
Quo warranto
Q: On behalf of Ocean Quest Fishing Corporation, right to question its
proceeding is not
Antonio Chua and Peter Yao entered into a contract existence through a quo
applicable
for the purchase of fishing nets of various sizes from warranto proceeding
the Philippine Fishing Gear Industries, Inc. They Stockholders in a de
Stockholders are liable
claimed that they were engaged in a business facto corporation are
as general partners for
venture with Petitioner Lim Tong Lim, who however liable as a de jure
all debts, liabilities and
was not a signatory to the agreement. The buyers corporation
damages incurred
failed to pay for the fishing nets and the floats;
hence, Philippine Fishing Gear filed a collection suit
against Chua, Yao and Lim Tong Lim. The suit was A religious group is not required to be registered as
brought against the three in their capacities as a corporation
general partners, on the allegation that Ocean Quest
Fishing Corporation was a nonexistent corporation. The Corporation Code does not require any religious
The trial court ruled in favor of Philippine Fishing groups to be registered as a corporation but if it
Gear and that Chua, Yao and Lim are liable as wants to acquire legal personality, its members
general partners. Lim contends that the doctrine of should incorporate under the Code.
corporation by estoppel applies only to Yao and
Chua. Lim insists that only those who dealt in the Organization of a corporation sole
name of the ostensible corporation should be held
liable. Since his name does not appear on any of the A corporation sole is organized by the mere filing of a
contracts and since he never directly transacted with verified articles of incorporation by the head of any
the Ocean Quest Fishing Corporation, ergo, he religious denomination, sect or church with the SEC
cannot be held liable. Is Lim jointly liable with Chua without the need of an issuance of a certificate of
and Yao? incorporation. Once filed, a separate juridical
character is acquired which is separate and distinct
A: Yes. Lim should be held liable jointly with Chua and from his natural character.
Yao. Unquestionably, Lim benefited from the use of
the nets found inside F/B Lourdes, the boat which has NOTE: A corporation sole is not required to file by-laws, it is
governed by the rules, regulations and discipline of its
earlier been proven to be an asset of the
religious denomination, sect or church.
partnership. Lim, Chua and Yao decided to form a
corporation. Although it was never legally formed for
unknown reasons, this fact alone does not preclude
the liabilities of the three as contracting parties in
representation of it. Clearly, under the law on

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151 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Nationality of a corporation sole
A corporation sole does not have any nationality but
for purposes of applying nationalization laws,
nationality is determined not by the nationality of its
presiding elder but by the nationality of its members,
constituting the sect in the Philippines. Thus, the
Roman Catholic Church can acquire lands in the
Philippines even if it is headed by the Pope (Roman
Catholic Apostolic Church v. Land Registration
Commission, G.R. No. L-8451, Dec. 20, 1957).
Acquisition of property by a corporation sole
A corporation sole may acquire property even
without court intervention by purchase, donation and
other lawful means (ibid).
Q: Father X, an American priest who came from New
York, registered the Diocese of Bacolod of the
Roman Catholic Church which was incorporated as a
corporation sole. There were years when the head
of the Diocese was a Filipino, but there were more
years when the heads were foreigners. Today, the
head is an American again. Y donated a piece of land
located in Bacolod City for use as a school. Which
statement is most accurate? (2012 Bar Question)
a. The Register of Deeds of Bacolod City can refuse
to register and transfer the title because the
present head of the corporation sole is not a
Filipino.
b. The nationality of a corporation sole depends
upon the nationality of the head at any given
time.
c. A corporation sole, regardless of the nationality
of the head, can acquire real property either by
sale or donation.
d. A corporation sole is not legally allowed to own
real property.
A: C. Any corporation sole may purchase and hold
real estate and personal property for its church,
charitable, benevolent or educational purposes, and
may receive bequests or gifts for such purposes (Sec.
113, CC).
Being a mere administrator of the temporalities or
properties titled in his name, constitutional provisions
requiring 60 (or 100) per centum Filipino ownership
are not applicable to the corporation sole. The
ownership thereof devolves upon the church or
congregation acquiring the same. To own the
property, compliance with the constitutionally
required 60 (or 100) per centum Filipino capital is
determined by the nationality of the constituents of
the diocese (church or congregation), and not the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
nationality of the actual incumbent of the parish (the
Corporation Sole or the head of the church or
congregation) (De Leon, 2010, citing SEC Opinions,
Nov. 6, 1990 and Sept. 21, 1993).
Alienation of properties by a corporation sole
A corporation sole may alienate properties by:
1. Obtaining an order from the RTC of the province
where the property is situated after notice of the
application for leave to sell or mortgage has been
given by publication or otherwise and by showing
that it is for the interest of the corporation that
leave to sell or mortgage should be granted.
2. In cases where the rules, regulations and
discipline of the religious denomination, sect or
church, religious society or order concerned
represented by such corporation sole regulate
the method of acquiring, holding, selling and
mortgaging real estate and personal property,
such rules, regulations and discipline shall
control, and the intervention of the courts shall
not be necessary (Sec. 113, CC).
Dissolution of a corporation sole is not necessary for
it to become a corporation aggregate
There is no point in dissolving the corporation sole of
one member to enable the corporation aggregate to
emerge from it. The Corporation Code provides no
specific mechanism for amending the articles of
incorporation of a corporation sole but Section 109 of
the Corporation Code allows the application to
religious corporations of the general provisions
governing non-stock corporations.
In non-stock corporations, the amendment needs the
concurrence of at least two-thirds of its membership.
If such approval mechanism is made to operate in a
corporation sole, its one member in whom all the
powers of the corporation technically belongs, needs
to get the concurrence of two-thirds of its
membership (Iglesia Evangelica Metodista v. Bishop
Lazaro. GR. 184088 July 6, 2010).
Q: A Special Audit Team from COA audited the
accounts of Leyte Metropolitan Water District
(LMWD). Subsequently, LMWD received a a request
for payment of auditing fees from COA. As General
Manager of LMWD, Engr. Feliciano sent a reply
informing COA that the water district could not pay
the auditing fees. Feliciano cited as basis for his
action Presidential Decree 198 (PD 198) as well as
Republic Act No. 6758 (RA 6758). Thereafter,
Feliciano asked COA for refund of all auditing fees
LMWD previously paid to COA. The COA Chairman
152
 CORPORATION CODE
denied LMWDs request. Feliciano maintains that
LWDs are not GOCCs with original charters. He
argues that LWDs are private corporations, and thus
LWDs are not subject to COAs jurisdiction. Is a Local
Water District created under PD 198, as amended, a
government-owned or controlled corporation
subject to the audit jurisdiction of COA?
A: Yes. LWDs are GOCCs subject to the audit
jurisdiction of COA. The Constitution and existing
laws mandate COA to audit all government agencies,
including GOCCs with original charters. An LWD is a
GOCC with an original charter. The Constitution
recognizes two classes of corporations. The first
refers to private corporations created under a general
law. The second refers to GOCCs created by special
charters. Congress cannot enact a law creating a
private corporation with a special charter. Such
legislation would be unconstitutional. Private
corporations may exist only under a general law. The
Constitution authorizes Congress to create GOCCs
through special charters. Since private corporations
cannot have special charters, it follows that Congress
can create corporations with special charters only if
such corporations are government-owned or
controlled. Obviously, LWDs are not private
corporations because they are not created under the
Corporation Code (Engr. Ranulfo C. Feliciano, et al., v.
COA, G.R. No. 147402, January 14, 2004).
Q: In the July 15 2009 Decision the Court held that
Richard Gordon did not forfeit his seat in the
Senate when he accepted the chairmanship of the
PNRC Board of Governors, as the office of the PNRC
Chairman is not a government office or an office in a
government-owned or controlled corporation for
purposes of the prohibition in Section 13, Article VI
of the 1987 Constitution. The Decision, however,
further declared void the PNRC Charter insofar as it
creates the PNRC as a private corporation and
consequently ruled that the PNRC should
incorporate under the Corporation Code and register
with the SEC if it wants to be a private
corporation. Philippine National Red Cross (PNRC)
then filed a Motion for Partial Reconsideration
praying that the Court sustain the constitutionality
of its Charter. Is PNRC a private corporation?
A: No. PNRC is not a private corporation. Although
the PNRC was created by a special charter, it cannot
be considered as a GOCC in absence of the essential
elements of ownership and control by the
government. It does not have government assets and
does not receive any appropriation from the
Philippine Congress. It is a non-profit, donor-funded,
voluntary organization, whose mission is to bring
153
timely, effective and compassionate humanitarian
assistance for the most vulnerable without
consideration of nationality, race, religion, gender,
social status or political affiliation. This does not
mean however that the charter of PNRC is
unconstitutional. PNRC has a sui generis status.
Although it is neither a subdivision, agency or
instrumentality of the government nor a GOCC or a
subsidiary thereof, so much so that Gordon was
correctly allowed to hold his position as Chairman
thereof concurrently while he served as a Senator,
such a conclusion does not ipso facto imply that the
PNRC is a private corporation within the
contemplation of the provision of the Constitution,
that must be organized under the Corporation Code.
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, et al., v. Richard J.
Gordon, G. R. No. 175352, January 18, 2011).
Q: Benedicto was a stockholder of RPN, a private
corporation duly registered with SEC. The
Government ordered the sequestration of RPNs
properties, assets, and business. Thereafter, PCGG
entered into a compromise agreement with
Benedicto, whereby he ceded to the Government,
all his shares of stock in RPN. Consequently, upon
motion of the PCGG, the Sandiganbayan directed
the president and corporate secretary of RPN to
transfer to the PCGG Benedictos shares
representing 72.4% of the total issued and
outstanding capital stock of RPN. However,
Benedicto moved for a reconsideration, contending
that his RPN shares ceded to the Government,
through the PCGG, represented only 32.4% of RPNs
outstanding capital stock, not 72.4%. Benedictos
motion for reconsideration has remained
unresolved. Carandang assumed office as general
manager and chief operating officer of RPN.
Subsequently, Carandang and other RPN officials
were charged with grave misconduct before the
Ombudsman. The charge alleged that Carandang
had entered into a contract with AF Broadcasting
Incorporated despite his being an incorporator,
director, and stockholder of that corporation and
that he had thus held financial and material interest
in a contract that had required the approval of his
office. Carandang argues that the Ombudsman had
no jurisdiction over him because RPN was is not a
GOCC. Is RPN a GOCC?
A: No. RPN is not a GOCC. A GOCC is a stock or a
non-stock corporation, whether performing
governmental or proprietary functions, which is
directly chartered by a special law or if organized
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
under the general corporation law is owned or
controlled by the government directly, or indirectly
through a parent corporation or subsidiary
corporation, to the extent of at least a majority of its
outstanding capital stock or of its outstanding voting
capital stock. It is vested with functions relating to
public needs whether governmental or proprietary in
nature, and owned by the government directly or
indirectly through its instrumentalities either wholly,
or where applicable as in the case of stock
corporations to the extent of at least 51% of its
capital stock. Although it is true that the
Sandiganbayan ordered the transfer to the PCGG of
Benedictos shares that represented 72.4% of the
total issued and outstanding capital stock of RPN,
such quantification of Benedictos shareholding
cannot be controlling in view of Benedictos timely
filing of a motion for reconsideration whereby
he clarified and insisted that the shares ceded to the
PCGG had accounted for only 32.4%, not 72.4%, of
RPNs outstanding capital stock. With the extent of
Benedictos holdings in RPN remaining unresolved
with finality, concluding that the Government held
the majority of RPNs capital stock as to make RPN a
GOCC would be bereft of any factual and legal basis
(Antonio M. Carandang v. Aniano A. Desierto, et al.,
G.R. No. 148076, January 12, 2011).
NATIONALITY OF CORPORATIONS
Tests in determining the nationality of corporations
1. Place of Incorporation test
2. Control test
3. Grandfather rule Nationality is attributed to the
percentage of equity in the corporation used in
nationalized or partly nationalized area. This test
is an exception to the Control Test and was
applied by the SEC in several cases.
4. Domiciliary test Determined by the principal
place of business of the corporation.
PLACE OF INCORPORATION TEST
Place of incorporation test
In using the Place of Incorporation test, the
nationality of a corporation is determined by the
state of incorporation, regardless of the nationality of
the stockholders.
XPN: A corporation organized/incorporated abroad
and registered as doing business in the Philippines
under the Corporation Code, of which 100% of the
capital stock outstanding and entitled to vote is
wholly owned by Filipinos, may be considered a
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Philippine National under the Foreign Investments
Act of 1991. This is the only exception to the place of
incorporation test (SEC Opinion No. 04-14, March 3,
2004; De Leon, 2010).
CONTROL TEST
Control test
In determining the nationality of a corporation, the
control test uses the nationality of the controlling
stockholders or members of the corporation.
This test was adopted by the Foreign Investment Act
of 1991 (RA 7042) as a general guideline in
determining the nationality of corporations engaged
in a nationalized activity (Sec Opinion No. 07-20, Nov
20, 2007).
Requisites of the control test (CFC)
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 such that the
corporate entity as to this transaction had at that
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 or unjust act in
contravention of plaintiffs legal right; and
3. The control and breach of duty must proximately
Cause the injury or unjust loss complained of
(Velarde v. Lopez, Inc., G.R. No. 153886, Jan. 14,
2004; Heirs of Ramon Durano, Sr. v. Uy, G.R. No.
136456, Oct. 24, 2000).
Who are considered as Philippine Nationals
Under RA 7042 (Foreign Investment Act of 1991), the
following are considered Philippine Nationals:
1. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino citizens.
NOTE: RA 7042 provides that where a corporation and its
non-Filipino stockholders own stocks in a SEC-registered
enterprise, at least 60% of the capital stock outstanding and
entitled to vote of both corporations and at least 60% of
the members of the board of directors of both corporations
must be Filipino citizens (DOUBLE 60% RULE).
2. Corporations organized abroad and registered as
doing business in the Philippines under the
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 CORPORATION CODE
Corporation Code of which 100% of the capital stock
entitled to vote belong to Filipinos.
Q: What is the nationality of a corporation organized
and incorporated under the laws of a foreign
country, but owned 100% by Filipinos? (1998 Bar
Question)
A: Under the control test of corporate nationality, a
corporation organized and incorporated under the
laws of a foreign country, but owned 100% by
Filipinos is classified as a Philippine National. Where
the grounds for piercing the veil of corporate entity
are present, the corporation will follow the
nationality of the controlling members or
stockholders, since the corporation will then be
considered as one and the same.
GRANDFATHER RULE
Application of the Grandfather Rule in determining
the nationality of a corporation
To ensure compliance with the constitutional
limitation(s) of corporations engaging in nationalized
activities, the nationality of a corporation must be
determined by ascertaining if 60% of the investing
corporations outstanding capital stock is owned by
Filipino citizens, or as interpreted, by natural or
individual Filipino citizens. If such investing
corporation is in turn owned to some extent by
another investing corporation, the same process
must be observed (Redmont Consolidated Mines
Corporation vs. McArthur Mining Corporation, SEC
En Banc Case No. 09-09-177, March 25, 2010).
Reason: One must not stop until the citizenships of
the individual or natural stockholders of layer after
layer of investing corporations have been established,
for this is the very essence of the Grandfather Rule
(ibid).
Rules governing the application of the Grandfather
Rule
1. The grandfather rule should be used in
determining the nationality of a corporation
engaged in a partly nationalized activity
(SEC-OGC Opinion No. 10-31, December 9, 2010).
This applies in cases where the stocks of a
corporation are owned by another corporation
with foreign stockholders exceeding 40% of the
capital stock of the corporation.
2. The Grandfather Rule will not apply in cases
where the 60-40 Filipino-alien equity ownership
in a particular natural resource corporation is not
155
in doubt (DOJ Opinion No. 19, s. 1989). If the
stockholder corporation is 60% or more owned
by Filipinos, all the stock held by the stockholder
corporation is deemed to be held by Filipinos.
3. When there is doubt as to the actual extent of
Filipino equity in the investee corporation, the
SEC is not precluded from using the Grandfather
Rule (SEC-OGC Opinion No. 22-07 dated
December 7, 2007).
Q: Several American doctors wanted to set up a
group clinic in the Philippines so they could render
modern medical services. If the clinic is to be
incorporated under our laws, what is the required
foreign equity participation in such a corporation?
(2011 Bar Question)
A: 0%
NATIONALIZED ACTIVITIES RESERVED FOR FILIPINOS
UNDER THE CONSTITUTION AND SPECIAL LAW
100% Filipino Owned
(Zero percent (0%) foreign equity)
(Code: CoFi AMMaN Co. ProMiSe- US$2.5M)
1. COoperatives (Art. 26, Ch. III, R.A. 6938);
2. Manufacture of FIrecrackers and other
pyrotechnic devices (Sec. 5, R.A. 7183).
3. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and Anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines).
4. Mass media except recording
5. Utilization of MArine resources (Sec. 2, Art.
XII, Constitution);
6. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons (Sec. 8, Art.
II, Constitution);
7. COckpits (Sec. 5, P.D. 449);
8. Practice of all PROfessions
1. Law
2. Medicine and allied professions
3. Accountancy, etc.
9. Small-scale MIning (Sec. 3, R.A. 7076);
10. Private SEcurity agencies (Sec. 4, R.A. 5487);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
11. Retail trade enterprises with paid-up capital 60 % Filipino Owned
of less than US$2.5 M (Sec. 5, R.A. 8762); (Up to twenty percent (40%) foreign equity)
(Code: Go LEARN CUPIDCo)
80 % Filipino Owned
(Up to twenty percent (20%) foreign equity) 1. Contracts for the supply of materials, goods
(Code: Prc) and commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183);
1. Private Radio Communications network (R.A. 2. Ownership of private Lands (Sec. 7, Art. XII,
3846).
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A.
9182);
75 % Filipino Owned
3. Ownership/establishment and administration
(Up to twenty percent (25%) foreign equity)
of Educational institutions (Sec. 4, Art. XIV,
(Code: LoRD F)
Constitution);
4. Adjustment Companies (Sec. 323, P.D. 613);
1. Contracts for the construction and repair of
5. Culture, production, milling, processing,
LOcally-funded public works (Sec. 1, CA 541, LOI
trading excepting retailing, of rice and corn and
630) except:
acquiring, by barter, purchase or otherwise, Rice
1. infrastructure/development projects
and corn and the by-products thereof (Sec. 5,
covered in R.A. 7718; and
P.D. 194);
2. projects which are foreign funded
6. Exploration, development and utilization of
or assisted and required to undergo
Natural resources (Sec. 2, Art. XII, Constitution);
international competitive bidding
7. Ownership of Condominium units where the
(Sec. 2[a], R.A. 7718);
common areas in the condominium project are
2. Private Recruitment, whether for local or
co-owned by the owners of the separate units or
overseas employment (Art. 27, P.D. 442);
owned by a corporation (Sec. 5, R.A. 4726).
3. Contracts for the construction of
8. Operation and management of public Utilities
Defense-related structures (Sec. 1, CA 541).
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146);
4. Under the Flag Law, in the purchase of articles
9. Project Proponent and Facility Operator of a
for the Government, preference shall be given
BOT project requiring a public utilities franchise
to materials and supplies produced, made, or
(Sec. 11, Art. XII, Constitution; Sec. 2a, R.A.
manufactured in the Philippines, and to
7718);
domestic entites. Domestic entites means any
10. Manufacture, repair, storage and/ or
citizen of the Philippines or commercial
distribution of products/ Ingredients requiring
company at least 75% of the capital of which is
PNP clearance (R.A. 7042 as amended by R.A.
owned by citizens of the Philippines (Sec. 1, CA
8179);
138)
11. Operation of Deep sea commercial fishing
vessel (Sec. 27, R.A. 8550);
70 % Filipino Owned
12. Corporations engaged in Coastwise shipping
(Up to twenty percent (30%) foreign equity)
(Sec. 806, P.D. 1464)
(Code: AdPawn)

1. Advertising (Art. XVI, Constitution) 40 % Filipino Owned

2. Corporations engaged in pawnshop business (Up to twenty percent (60%) foreign equity)
(Sec. 8, P.D. 114)
(Code: FI [SEC] )

1. Financing companies regulated by the SEC (Sec. 6,

R.A. 5980 as amended by R.A. 8556);
2. Investment houses regulated by the SEC (Sec. 5,
P.D. 129 as amended by R.A. 8366).

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2014 GOLDEN NOTES 156
 CORPORATION CODE
CORPORATE JURIDICAL PERSONALITY
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY
Doctrine of corporate juridical personality
The doctrine of corporate juridical personality states
that a corporation is a juridical entity with legal
personality separate and distinct from those acting
for and in its behalf and, in general, from the people
comprising it (Francisco v Mallen Jr. G.R. No. 173169,
September 22, 2010).
Significance of the doctrine of separate personality
1. Liability for acts or contracts As a general rule,
the obligation of the corporation is not the
liability of the stockholders, officers or directors
(Remo vs. IAC, G.R. No. L-67626, April 18, 1989).
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be
connected, and vice versa (Cease vs. CA, G.R. No.
L-33172, Oct. 18, 1979).
2. Right to bring actions may bring civil and
criminal actions in its own name in the same
manner as natural persons (Art. 46, Civil Code).
3. Right to acquire and possess property property
conveyed to or acquired by the corporation is in
law the property of the corporation itself as a
distinct legal entity and not that of the
stockholders or members (Art. 44[3], Civil Code).
4. Acquisition of jurisdiction service of summons
may be made on the president, general manager,
corporate secretary, treasurer or in-house
counsel (Sec. 11, Rule 14, Rules of Court).
5. Changes in individual membership corporation
remains unchanged and unaffected in its identity
by changes in its individual membership or
ownership of its stocks.
Stockholders are not entitled to possess the
property of the corporation
The interest of the shareholder in the properties of
the corporation is inchoate only. The interest of the
shareholder on a particular property becomes actual,
direct and existing only upon the liquidation of the
assets of the corporation and the provided that the
same property is assigned to the shareholder
concerned.
157
Q: Rufina Lim is the surviving spouse of the late
Pastor Lim whose estate is the subject of probate
proceedings in another case. In the inventory of the
estate of Pastor Lim, the properties registered in the
names of Auto Truck Corporation, et al., were
included. Auto Truck Corporation, et al., thereafter
filed a motion for exclusion of certain properties
from the estate of Pastor Lim. The Probate Court
granted the same. Subsequently, Rufina Lim filed
an amended petition which averred that Auto Truck
Corporation, et al.,s capital, assets and equity were
personally owned by Pastor Lim and that the alleged
stockholders and officers appearing in the AOI of
Auto Truck Corporation, et al., were mere dummies
of Pastor Y. Lim, and they were listed therein only
for purposes of registration with the SEC. Because of
this, the Probate Court reversed its earlier order and
held that the subject properties should be included
in the estate of Pastor Lim. The Probate court held
that the corporations were mere alter egos or
instrumentalities of Pastor Lim and that the issue
involves the piercing of the corporate veil. Are the
subject properties registered in the name of Auto
Truck Corporation should be included in the estate
of Pastor Lim?
A: No. The real properties included in the inventory
of the estate of the late Pastor Y. Lim are in the
possession of and are registered in the name of Auto
Truck Corporation, which under the law possesses a
personality separate and distinct from its
stockholders, and in the absence of any cogency to
shred the veil of corporate fiction, the presumption of
conclusiveness of said titles in favor of Auto Truck
Corporation should stand undisturbed. A corporation
is invested by law with a personality distinct and
separate from its stockholders or members. In the
same vein, a corporation by legal fiction and
convenience is an entity shielded by a protective
mantle and imbued by law with a character alien to
the persons comprising it. Furthermore, 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 a sufficient reason for
disregarding the fiction of separate corporate
personalities (Rufina Luy Lim v. CA, G.R. No. 124715,
January 24, 2000).
Q: Indophil Union is a legitimate labor organization
and the exclusive bargaining agent of all the
rank-and-file employees of Indophil Textile. Indophil
Union and Indophil Textile executed a CBA. After
some time, Indophil Acrylic was formed. Acrylic
became operational and hired workers according to
its own criteria and standards. Subsequently, the
workers of Acrylic unionized and a duly certified CBA
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
was executed. A year after, Indophil Union claimed
that the plant facilities built and set up by Acrylic
should be considered as an extension or expansion
of the facilities of Indophil Textile and in other
words, Acrylic is part of Indophil Textile bargaining
unit. On the other hand, Indophil Textile submits
that it is a juridical entity separate and distinct from
Acrylic and hence Acrylic is not part of its bargaining
unit. Are the rank-and-file employees working at
Indophil Acrylic a part of, and/or within the scope of
the bargaining unit of Indophil Textile?
A: No. The rank-and-file employees of Acrylic is not
within the scope of the bargaining unit of Indophil
Textile. The fact that the businesses of Indophil
Textile and Acrylic are related, that some of the
employees of Indophil Textile are the same persons
manning and providing for auxiliary services to the
units of Acrylic, and that the physical plants, offices
and facilities are situated in the same compound, are
of no moment. These facts are not sufficient to justify
the piercing of the corporate veil of Acrylic. It must be
emphasized that the legal corporate entity is
disregarded only if it is sought to hold the officers and
stockholders directly liable for a corporate debt or
obligation. In the instant case, Indophil Union does
not seek to impose a claim against the members of
the Acrylic (Indophil Textile Mill Workers
Union-PTGWO, v. Voluntary Arbitrator Teodorico P.
Calica, G.R. No. 96490, February 3, 1992).
Entitlement of corporations to Constitutional rights
Corporations are entitled to the following rights
under the constitution;
1. Right to Due Process (Sec. 1, Art. III, Constitution).
2. Right against unreasonable searches and seizures
(Sec. 2, ibid).
However, the corporation is not entitled to the right
against self-incrimination, being a mere creature of
law. (Bataan Shipyard & Engineering v. PCGG , G.R.
No. 75885, May 27, 1987).
LIABILITY FOR TORTS AND CRIMES
A corporation may be held liable for torts
The corporation is liable for every tort which it
expressly directs or authorizes (PNB v. CA, G.R. No.
L-27155, May 18, 1978).
Reason for liability in cases of torts
A corporation is civilly liable in the same manner as
natural persons for torts, because generally speaking,
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
the rules governing the liability of a principal or
master for a tort committed by an agent or servant
are the same, whether the servant or agent be a
natural or artificial person (ibid).
Liability of a corporation in cases of crimes
GR: A corporation is not liable in cases of crimes.
Since a corporation is a mere creation of legal fiction,
it cannot be held liable for a crime committed by its
officers, since it does not have the essential element
of malice; in such case the responsible officers would
be criminally liable (People v. Tan Boon Kong, G.R. No.
L-32066. Mar. 15, 1930).
XPN: If the penalty of the crime is only fine or
forfeiture of license or franchise (Ching v Secretary of
Justice, G. R. No. 164317, Feb. 6, 2006).
RECOVERY OF MORAL DAMAGES
Recovery of moral damages
GR: A corporation is not entitled to moral damages
because it has no feelings, no emotions, no senses
(ABS-CBN Broadcasting Corporation v. CA, G.R. No.
128690 Jan 21, 1999 and Phillip Brothers Oceanic, Inc,
G.R. No. 126204, Nov. 20, 2001).
XPNs:
1. The corporation may recover moral damages under
item 7 of Article 2219 of the New Civil Code because
said provision 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 injured
party is a natural or juridical person. Therefore, a
corporation, as a juridical person, can validly
complain for libel or any other form of defamation
and claim for moral damages (Filipinas Broadcasting
Network, Inc. v. AMEC-BCCM, G.R. No. 141994, Jan
17, 2005).
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm (Manila Electric Company v. T.E.A.M.
Electronics Corporation, et. al., G.R. No. 131723, Dec.
13, 2007).
Q: "Expos" is a radio documentary program hosted
by Rima and Alegre. It is aired every morning over
DZRC-AM which is owned by FBNI. One morning,
Rima and Alegre exposed various alleged complaints
from students, teachers and parents against AMEC
and its administrators. Claiming that the broadcasts
158
 CORPORATION CODE
were defamatory, AMEC and Ago, as Dean of
AMECs College of Medicine, filed a complaint for
damages against FBNI, Rima and Alegre. The trial
court ruled in favor of AMEC and Ago. The CA
affirmed. Among others, FBNI claims that AMEC is
not entitled to moral damages because it is a
corporation. Is AMEC is entitled to moral damages?
A: Yes. AMEC is entitled to moral damages. 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.
This provision 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., v. AMEC-BCCM, G.R. No.
141994, January 17, 2005).
. reason/s.
Q: Meralco and TEC were parties to two separate
contracts for the sale of electric energy. Meralco
undertook to supply TECs building known as DCIM
with electric power. One day, Meralco conducted a
surprise inspection of the electric meters installed at
the DCIM building. Two meters were found to be
allegedly tampered with and did not register the
actual power consumption in the building. Meralco
informed TEC of the results of the inspection and
demanded from the latter the payment of its
unregistered consumption. TEC failed to pay the
same. For failure to pay Meralco disconnected the
electricity supply to the DCIM building. TEC
demanded from Meralco the reconnection of
electrical service, claiming that it had nothing to do
with the alleged tampering but the latter refused to
heed the demand. The ERB immediately ordered the
reconnection of the service but Meralco did not
immediately complied. After this, a second and third
inspection was conducted by Meralco, and the same
yielded to same result as the first inspection. Thus,
Meralco demanded payment with a warning of
disconnection if TEC will refuse to pay. TEC filed a
complaint for damages against Meralco before the
RT. The RTC ruled in favor of TEC and it awarded,
among others, moral damages. Is TEC entitled to
moral damages
A: No. TEC is not entitled to moral damages. TECs
claim was premised allegedly on the damage to its
goodwill and reputation. As a rule, a corporation is
159
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
imperative for the claimant to present proof to justify
the award. It is essential to prove the existence of
the factual basis of the damage and its causal relation
to Meralcos acts. In the present case, the records are
bereft of any evidence that the name or reputation of
TEC/TPC has been debased as a result of Meralcos
acts (Manila Electric Company v. T.E.A.M. Electronics
Corporation, et al., G.R. No. 131723, December 13,
2007).
DOCTRINE OF PIERCING THE CORPORATE VEIL
Doctrine of piercing the corporate veil
The doctrine of piercing the corporate veil is the
doctrine that allows the State to disregard the notion
of separate personality of a corporation for justifiable
NOTE: This is an exception to the Doctrine of Separate
Corporate Entity.
Requirement to justify the piercing of the corporate
veil
In order to justify the piercing of the corporate veil,
allegation or proof of fraud or other public policy
considerations is needed (Hacienda Luisita
Incorporated vs. Presidential Agrarian Reform Council,
G.R. No. 171101, November 22, 2011).
Effect of piercing the corporate veil
Courts will look at the corporation as an aggregation
of persons undertaking the business as a group or
two corporations will be treated as identical.
NOTE: When the veil of corporate fiction is pierced in
proper cases, the corporate character is not necessarily
abrogated. It continues for legitimate objectives (Reynoso
IV vs. CA, G.R. Nos. 11612425, Nov 22, 2000).
GROUNDS FOR APPLICATION OF DOCTRINE
Grounds for the application of the doctrine of
piercing the corporate veil
When the veil of corporate fiction is used as a shield:
1. To perpetuate fraud,
2. To defeat public convenience,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Justify wrong or
4. Defend crime or
5. For ends subversive of the policy and purpose
behind its creation, especially where the
corporation is a closed family corporation,
on equity considerations, this fiction will be
disregarded and the individuals composing it or
two corporations will be treated as identical
(Sundiang, 2009, citing Cruz vs. Dalisay, AM No.
R-181-P, July 31, 1987; De Leon, 2010, citing
Yutivo Sons Hardware Co. vs. CTA, 1 SCRA 160
[1961], Emiliano Cano Enterp., Inc. vs. CIR, 13
SCRA 290 [1965].).
Circumstances which do not warrant the piercing of
the corporate veil
The mere fact that:
1. A corporation owns 50% of the capital stock of
another corporation, or the majority ownership
of the stocks of a corporation is not per se a
cause for piercing the veil.
2. Two corporations have common directors or
same or single stockholder who has all or nearly
all of the capital stock of both corporations is not
in itself sufficient ground to disregard separate
corporate entities.
3. There is a substantial identity of the
incorporators of the 2 corporations does not
necessarily imply fraud and does not warrant
piercing the corporate veil.
Q: Land Bank of the Philippines (LBP) extended a
series of credit accommodations to ECO using the
trust funds of PVTA. The proceeds of the credit
accommodations were received on behalf of ECO by
Emmanuel Oate. Upon maturity of the loans, ECO
failed to pay the same. Despite demands, ECO was
unable to pay. ECO then submitted a Plan of
Payment to LBP, however, the latter rejected the
same. LBP filed a complaint for collection of sum of
money against ECO and Oate. The RTC rendered
judgment against ECO and absolved Oate from
personal liability. The CA affirmed. LBP contends
that the personalities of Oate and of ECO should be
treated as one, for the particular purpose of holding
Oate liable for the loans incurred by ECO from Land
Bank. Is Oate jointly and severally liable with ECO
for the loans incurred from LBP?
A: No. Oate should not be held jointly and severally
liable with ECO. A corporation, upon coming into
existence, is invested by law with a personality
separate and distinct from those persons composing
it as well as from any other legal entity to which it
may be related. By this attribute, a stockholder may
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
not, generally, be made to answer for acts or
liabilities of the said corporation, and vice versa. The
mere fact that Oate owned the majority of the
shares of ECO is not a ground to conclude that Oate
and ECO is one and the same. Mere ownership by a
single stockholder of all or nearly all of the capital
stock of a corporation is not by itself sufficient reason
for disregarding the fiction of separate corporate
personalities. Neither is the fact that the name ECO
represents the first three letters of Oates name
sufficient reason to pierce the veil. Even if it did, it
does not mean that the said corporation is merely a
dummy of Oate. A corporation may assume any
name provided it is lawful. There is nothing illegal in a
corporation acquiring the name or as in this case, the
initials of one of its shareholders (Land Bank of the
Philippines v. CA, et al., G.R. No. 127181, September
4, 2011).
Q: X owns 99% of the capital stock of SSS
Corporation. X also owns 99% of TTT Corporation.
SSS Corporation obtained a loan from VW Bank. On
due date, SSS Corporation defaulted. TTT
Corporation is financially healthy. Which statement
is most accurate? (2012 Bar Question)
a. X being a controlling owner of SSS Corporation
can automatically be held personally liable for
the loan of SSS Corporation.
b. TTT Corporation, owned 99% by X, can
automatically be held liable.
c. SSS Corporation and TTT Corporation, although
both are owned by X, are two (2) distinct
corporations with separate juridical
personalities hence, the TTT Corporation cannot
automatically be held liable for the loan of SSS
Corporation.
d. The principle of piercing the veil of corporate
fiction can be applied in this case.
A: C. Mere ownership by a single stockholder of all or
nearly all of the capital stock of a corporation is not
by itself sufficient reason for disregarding the fiction
of separate corporate personalities (Land Bank of the
Philippines, GR No. 127181, Sept. 4, 2001). Thus, the
fact that X owns majority of the shares in both
corporations does not automatically arise to one and
the same personality or an intertwined ownership of
said corporations.
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 CORPORATION CODE
TEST IN DETERMINING APPLICABILITY
Test in determining applicability of the doctrine of
piercing the corporate veil
The following are the tests in determining the
applicability of the doctrine of piercing the corporate
veil: (ECAO)
1. When the corporation is used to defeat of public
convenience as when the corporate fiction is
used as a vehicle for the evasion of an existing
obligation; (Equity Cases)
2. In fraud cases or when the corporate entity is
used to justify a wrong, protect fraud, or defend
a crime; (Control Test)
3. In 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 (Timoteo H. Sarona vs.
National Labor Relations Commission, Royale
Security Agency, et al., G.R. No. 185280, January
18, 2012).
4. The Objective test where the end result in
piercing the veil of corporate fiction is to make
the stockholders liable for debts and obligations
of the Corporation not to make the Corporation
liable for the debts and obligations of the
stockholders (Umali v CA, G.R. No. 89561, Sept.
13, 1990).
Piercing the veil of corporate fiction on the basis of
equity
Equity cases applying the piercing doctrine are what
are termed the "dumping ground", where no fraud or
alter ego circumstances can be culled by the Court to
warrant piercing.
The main feature of equity cases is the need to
render justice in the situation at hand or to brush
aside merely technical defenses. Often, equity cases
of piercing appear in combination with other types of
piercing (Villanueva, Corporation Law, 2010).
Specifically, the equity test can be applied when:
1. The corporate personality would be inconsistent
with the business purpose of the legal fiction, or
2. The piercing the corporate fiction is necessary to
achieve justice or equity for those who deal in
good faith with the corporation,
3. When the use of the separate juridical
personality is used to confuse legitimate issues.
161
Indications that a subsidiary corporation is a mere
instrumentality of its parent corporation
1. The parent corporation owns all or most of the
capital stock of the subsidiary.
2. The parent and subsidiary corporations have
common directors or officers.
3. The parent corporation finances the subsidiary.
4. The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
5. The subsidiary has grossly inadequate capital.
6. The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
7. The subsidiary has substantially no business
except with the parent corporation or no assets
except those conveyed to or by the parent
corporation.
8. In the papers of the parent corporation or in the
statements of its officers, the subsidiary is
described as a department or division of the
parent corporation, or its business or financial
responsibility is referred to as the parent
corporation's own.
9. The parent corporation uses the property of the
subsidiary as its own.
10. The directors or executives of the subsidiary do
not act independently in the interest of the
subsidiary but take their orders from the parent
corporation.
11. The formal legal requirements of the subsidiary
are not observed (PNB vs. Ritratto Group G.R. No.
142616, July 31, 2001).
Q: PNB-IFL a subsidiary company of PNB, organized
and doing business in Hong Kong, extended a letter
of credit in favor of Ritratto Group Inc., et al., in the
amount of US$300,000.00. However, as their
outstanding obligations stood at US$1,497,274.70,
and the same remains unpaid, PNB-IFL, through its
attorney-in-fact PNB, notified the Ritratto Group
Inc., et al., of the foreclosure of all the real estate
mortgages and that the properties subject thereof
were to be sold at a public auction. Ritratto Group
Inc., et al., filed a complaint for injunction against
PNB for the latter to be restrained from foreclosing
and eventually selling its property. The RTC granted
the injunction. It applied the doctrine of Piercing the
Veil of Corporate Identity by stating that PNB is
merely an alter ego or a business conduit of PNB-IFL.
Is PNB is merely an alter ego or business conduit of
PNB-IFL?
A: No. PNB is not an alter ego or business conduit of
PNB-IFL. Aside from the fact that PNB-IFL is a wholly
owned subsidiary of petitioner PNB, there is no
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
showing of the indicative factors that the former
corporation is a mere instrumentality of the latter are
present. Neither is there a demonstration that any of
the evils sought to be prevented by the doctrine of
piercing the corporate veil exists. Inescapably,
therefore, the doctrine of piercing the corporate veil
based on the alter ego or instrumentality doctrine
finds no application in the case at bar. In any case,
the parent-subsidiary relationship between PNB and
PNB-IFL is not the significant legal relationship
involved in this case since PNB was not sued because
it is the parent company of PNB-IFL. Rather, PNB was
sued because it acted as an attorney-in-fact of
PNB-IFL in initiating the foreclosure proceedings. A
suit against an agent cannot without compelling
reasons be considered a suit against the principal.
Under the Rules of Court, every action must be
prosecuted or defended in the name of the real
party-in-interest, unless otherwise authorized by law
or these Rules (PNB v. Ritratto Group Inc., et al., G.R.
No. 142616, July 31, 2001).
Q: Plaintiffs filed a collection action against X
Corporation. Upon execution of the court's decision,
X Corporation was found to be without assets.
Thereafter, plaintiffs filed an action against its
present and past stockholder Y Corporation which
owned substantially all of the stocks of X
corporation. The two corporations have the same
board of directors and Y Corporation financed the
operations of X corporation. May Y Corporation be
held liable for the debts of X Corporation? Why?
(2001 Bar Question)
A: Yes. Y Corporation may be held liable for the debts
of X Corporation. The doctrine of piercing the veil of
corporation fiction applies to this case. The two
corporations have the same board of directors and Y
Corporation owned substantially all of the stocks of X
Corporation, which facts justify the conclusion that
the latter is merely an extension of the personality of
the former, and that the former controls the policies
of the latter. Added to this is the fact that Y
Corporation controls the finances of X Corporation
which is merely an adjunct, business conduit or alter
ego of Y Corporation (CIR v. Norton & Harrison
Company, G.R. No. L17618, Aug. 31, 1964).
Q: X Corp. operates a call center that received
orders for pizzas on behalf of Y Corp. which operates
a chain of pizza restaurants. The two companies
have the same set of corporate officers. After 2
years, X Corp. dismissed its call agents for no
apparent reason. The agents filed a collective suit
for illegal dismissal against both X Corp. and Y Corp.
based on the doctrine of piercing the veil of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
corporate fiction. The latter set up the defense that
the agents are in the employ of X Corp. which is a
separate juridical entity. Is this defense appropriate?
(2011 Bar Question)
A: Yes, it is not shown that one company completely
dominates the finances, policies, and business
practices of the other.
INCORPORATION AND ORGANIZATION
Incorporation
It is the performance of conditions, acts, deeds, and
writings by incorporators, and the official acts,
certification or records, which give the corporation its
existence.
Steps in the creation of a corporation
1. Promotion
2. Incorporation (Sec. 10, CC)
3. Formal organization and commencement of
business operations (Sec. 22, CC)
Components of a corporation (DUMP-ISCO)
1. Corporators Those who compose a corporation,
whether as stockholders or members
2. Incorporators They are those mentioned in the
Articles of Incorporation as originally forming and
composing the corporation and who are
signatories thereof.
3. Directors and trustees The Board of Directors is
the governing body in a stock corporation while
the Board of Trustees is the governing body in a
non-stock corporation.
4. Corporate Officers Officers who are identified as
such in the Corporation Code, the Articles of
Incorporation, or the By-laws of the corporation.
5. Stockholders Owners of shares of stock in a stock
corporation.
6. Members Corporators of a corporation which has
no capital stock. They are not owners of shares of
stocks, and their membership depends on terms
provided in the articles of incorporation or
by-laws (Sec. 91,CC).
7. Promoter A person who, acting alone or with
others, takes initiative in founding and organizing
the business or enterprise of the issuer and
receives consideration therefor. (Sec. 3.10, R.A.
No. 8799, SRC)
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 CORPORATION CODE
8. Subscriber persons who have agreed to take and Promoter v. Promotee
pay for original, unissued shares of a corporation
formed or to be formed. PROMOTER PROMOTEE
9. Underwriter a person who guarantees on a firm Those who merely
commitment and/or declared best effort basis Involved in the initial
subscribe to the shares
the distribution and sale of securities of any kind steps that finally led to
of stock of a corporation
by another. the incorporation
to be formed

Kinds of underwriting agreement Promoters organize a

corporation and are
Merely passive investors
1. English the underwriter sells what the active participants in its
corporation cannot sell formation
2. Firm Commitment the underwriter purchases A mere promotee should
outright the securities and then resells the same Promoter(s) have joint not be held liable for a
3. Best Efforts the underwriter merely sells for personal liability for a promoters liability in a
commission. corporation which was corporation which was
not formed not formed
PROMOTER

Promoter Relation of the promoter to the corporation

A promoter is a person who, acting alone or with
others, takes initiative in founding and organizing the
business or enterprise of the issuer and receives
consideration therefor (Sec.3.10, SRC).
Specifically, a promoter is a person who brings about
or cause to bring about the formation and
organization of a corporation by:
1. Bringing together the incorporators or the
persons interested in the enterprise,
2. Procuring subscriptions or capital for the
corporation and
3. Setting in motion the machinery which leads
to the incorporation of the corporation itself.
Promotional activities
Promotional activities includes: (DIA)
1. Discovery consists of finding a business
opportunity to be developed.
2. Investigation entails an analysis of the proposed
business to determine whether or not it is
economically feasible.
3. Assembly Includes the bringing together of the
necessary personnel, property or money to set
the business in motion as well as secondary
details of setting up the corporation itself (De
Leon, supra, pg. 122).
The promoter occupies a fiduciary or quasi-trust
relation toward the corporation when it comes into
existence and towards the subscribers prior to its
organization, as long as they are acting as promoters
(ibid., pg. 122-123). This fiduciary relation imposes
upon the promoter to act in good faith in all dealings
in behalf of the corporation to protect the
corporation from dishonest promoters (ibid).
Promoter is not an agent of the corporation
The promoters are not in any sense agents of the
corporation before it comes into existence for there
cannot be an agency unless there is a principal. But,
they may become the agents of the corporation after
it has been formed provided there is assent, express
or implied, on the part of the corporation (ibid).
Promoter as agent of an incorporator/ corporator/
subscriber before the commencement of the
corporate existence
Before the corporation is formed, the promoters are
considered agents of the subscribers, the
incorporators or corporators.
NOTE: The subscribers for stock in a proposed corporation
do not, without agreement to such effect, become partners
with the promoters of it (ibid).

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163 FACULTY OF CIVIL LAW
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Promoter v. Corporation by estoppel
CORPORATION BY
PROMOTER
ESTOPPEL
Persons assume to act as
No misrepresentation
a corporation knowing it
that the corporation
to be without authority
does not yet exist
to do so
LIABILITY OF PROMOTER
Rules governing the liability of promoters in
pre-incorporation agreements
1. If Corporation was never formed - The promoter is
liable for his pre-incorporation acts and assumes the
risk that he may not be reimbursed or relieved of
liability in the event that the corporation is not
formed (Wells v. Fay & Egan Co., 143 Ga. 732). If the
promoter contracts as an agent, when in fact he has
no principal, he will be personally liable (Ibid).
Thus,
GR: The promoter is liable to return the money paid
by the subscribers for shares in a projected
corporation, which failed to organize. This
notwithstanding that the money has been already
applied in payment of preliminary expenses or
otherwise.
NOTE: It must be shown by the subscriber that the person
receiving the money sought to be recovered was authorized
to receive it and the fact that the said person actually
received it.
XPN: Where the subscriber agrees that the amount
paid on his subscription may be applied on certain
promotional or development expenses and it is so
applied, the promoters are not personally liable for
the amount paid on the subscription (De Leon, 2010).
2. If Corporation was formed;
GR: If the contract is partly to be performed before
incorporation, the promoters solely are liable even if
the promoter signed "on behalf of corporation to be
formed, who will be obligor" (Stanley J. How & Assoc.,
Inc. v. Boss, 222 F. Supp. 936,1963 U.S. Dist. 1963).
XPN: The promoter may be absolved from liability by
the adoption of the corporation of the contract. The
adoption must be expressed in a novation or
agreement to the effect:
1. That the creditor agreed to look solely to the new
corporation for payment; or
2. That the promoter did not have any duty toward
the creditor to form the corporation and give the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
corporation the opportunity to assume and pay the
liability (ibid).
LIABILITY OF CORPORATION FOR PROMOTERS
CONTRACT
Liability of corporation for promoters contract
GR: Since a corporation cannot, before its
organization, have agents contract for itself, or be
contracted with, it is not liable upon any contract
which a promoter attempts to make for it prior to its
organization.
XPNs:
1. The contract is expressly or impliedly adopted or
ratified by the corporation after its organization is
completed or
2. Liability is imposed by statute.
NOTE: Until such assumption of liability is made by the
corporation, the better rule is that the contracts entered
into by promoters should at most be deemed suspended,
and enforceable only after the incorporation and
organization of the corporation (Ibid).
Liability of corporation for promotion fees
GR: The corporation is not liable to its promoters for
their service fees incurred before incorporation.
XPNs:
1. The corporation expressly agrees to make such
payment or;
2. From other facts the court can infer a new
contract to reimburse (Ibid) or
3. If the same is provided for in the registration
statement of securities filed with the SEC (Sec.
8[34], Revised Securities Act).
Stockholders of the corporation cannot be held
personally liable for compensation claimed by
promoters
Stockholders cannot be held personally liable for the
compensation for services performed by promoters in
the organization of the corporation in the absence of
any showing that said stockholders contracted such
services. The fact that they benefited from such
services is no justification to hold them personally
liable therefore (Ibid., citing Caram, Jr. vs. CA, 151
SCRA 372 [1987]).
164
 CORPORATION CODE
NUMBER AND QUALIFICATIONS OF nationalized where
INCORPORATORS majority must be
citizens.
Number and the qualifications of incorporators in a
stock corporation (N5L - R1) NOTE: Non-residents may be incorporators because the law
only requires that the majority of incorporators be
1. GR: Natural person residents of the Philippines.
XPN: Under the Rural Banks Act of 1992,
incorporated cooperatives are allowed to Q: X is a Filipino immigrant residing in Sacramento,
be incorporators of rural banks. California. Y is a Filipino residing in Quezon City,
Philippines. Z is a resident alien residing in Makati
2. GR: Incorporators must not be less than 5 but City. GGG Corporation is a domestic corporation
not more than 15 40% owned by foreigners and 60% owned by
XPN: Corporation sole Filipinos, with T as authorized representative. CCC
3. An incorporator must be of Legal age Corporation is a foreign corporation registered with
4. Majority of the incorporators must be Residents the Philippine Securities and Exchange Commission.
of the Philippines. KKK Corporation is a domestic corporation (100%)
5. Each must own or subscribe to at least 1 share Filipino owned. S is a Filipino, 16 years of age, and
(Sec.10, CC). the daughter of Y.

Corporator v. Incorporator a.) Who can be incorporators? Who can be

INCORPORATOR CORPORATOR
Those stockholders or
members mentioned in
Those who compose a
the AOI as originally
corporation, whether as
forming and composing
stockholders or as
the corporation and
members.
who are signatories
thereof.
May or may not be
A signatory of the AOI
signatory of the AOI
Ceases to be a share.
corporator by sale of his
shares in case of stock
Does not cease to be an corporation.
incorporator upon sale
of his shares In case of non-stock
corporation, when the
corporator ceases to be
a member.
GR: 5 to 15 natural
persons
subscribers?
b.) What are the differences between an
incorporator and a subscriber, if there are any?
(2012 Bar Question)
A:
a.) X, Y, and Z can be incorporators. Sec. 10 of the CC
merely requires majority of the incorporators to be
residents (not necessarily citizens) of the Philippines.
Further, said incorporators must be natural persons,
of legal age and must own or subscribe to at least 1
Meanwhile, X, Y, Z, GGG, CCC, KKK can be subscribers.
Residency requirement is immaterial in subscription
contracts. However, the citizenship requirement is
material in subscription contracts if the corporation is
engaged in nationalized activities requiring at least
majority Filipino citizenship as a requirement.
b.) The following are the differences between an
incorporator and a subscriber:

XPNs: INCORPORATORS SUBSCRIBER

GR: No limit Those stockholders or They are persons who
1. In case of rural banks,
XPN: Close corporations members mentioned have agreed to take
registered cooperatives
may be incorporators. in the AOI as and pay for original,
2. corporation sole originally forming and unissued shares of a
only 1 incorporator composing the corporation formed
GR: Filipino citizenship corporation. or to be formed.
is not a requirement. May or may not be
A signatory of the AOI
signatory of the AOI
Same rule applies GR: 5 to 15 natural GR: No limit
XPN: When engaged in
a business which is persons
partly or wholly XPN: Close

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165 FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPNs: corporations not coined or unique unless the board of directors of
1. In case of rural more than a specified the subject corporation gives its consent to the
banks, registered number of persons, applied name (De Leon, 2010, citing SEC Memo,
cooperatives may be usually not exceeding Cir. No. 5, Series of 2008).
incorporators. 20 (Sec. 96, CC) 5. The corporate name shall contain the word
Corporation or its abbreviation Corp. or
2. corporation sole Incorporated, or Inc. The corporate name of
only 1 incorporator a foundation shall use the word Foundation
GR: Filipino (SEC Memo. Circ. No. 5, Series of 2008).
citizenship is not a 6. A persons full name or surname may be used in
requirement. a corporate name:
a. If he is a stockholder of the corporation
XPN: When engaged and has consented to such use;
Same rule applies
in a business which is b. If the person is already deceased, the
partly or wholly consent shall be given by his estate;
nationalized where c. The Commission may require a registrant
majority must be to explain to its satisfaction the reason for
citizens. the use of a persons name;
Majority of the d. The meaning of initials used in a name
Residency shall be stated by the registration the
incorporators must
requirement is not articles of incorporation in a separate
be residents of the
applicable. document signed by an incorporator or
Philippines.
director (SEC Memo. Circ. No. 5, Series of
CORPORATE NAME LIMITATIONS ON USE OF 2008).
CORPORATE NAME 7. The name of a dissolved firm shall not be allowed
to be used by other firms within 3 years after the
Q: What is required to be used as a part of the approval of the dissolution of the corporation by
corporate name? SEC, unless allowed by the last stockholders
representing at least majority of the outstanding
A: The word, corporation or incorporated or an capital stock of the dissolved firm (SEC Memo.
abbreviation of either of them is required to be used Circ. 14, Series of 2000).
as a part of the corporate name. This is to distinguish 8. For as long as a corporation is existing regardless
the corporation from a partnership and other of whether or not it is in operation, its corporate
business organizations (SEC Memo. Circ. No. 5, Series name cannot be used by any other group or
of 2008). corporation (SEC Opinion, Sept. 2, 1993).

Limitations on the use of corporate name
1. No corporate name may be allowed by the SEC if
the proposed name is identical or deceptively or
confusingly similar to that of any existing
corporation (Sec. 18, CC).
2. No corporate name may be allowed by the SEC if
the proposed name is identical or deceptively or
confusingly similar to any other name already
protected by law (Sec. 18, CC).
3. The proposed name is patently deceptive,
confusing or contrary to existing laws (Sec. 18,
CC).
4. If the name applied for is similar to the name of a
registered firm, the applicant shall at least
contain one or more distinctive words to the
proposed name to remove the similarity or
differentiate it from the registered name.
However, the addition of these distinctive words
shall not be allowed if the registered name is
NOTE: Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
infringement. Further, to determine whether a given
corporate name is identical or confusingly or deceptively
similar with another entitys corporate name, the
corporate names must be evaluated in their entirety
(Lyceum of the Philippines vs. CA, 219 SCRA 610 [1993]).
Q: Refractories Corporation of the Philippines (RCP)
is a corporation for the purpose of engaging in the
business of manufacturing, producing, selling,
exporting and otherwise dealing in any and all
refractory bricks, its by-products and derivatives. On
June 22, 1977, it registered its corporate and
business name with the Bureau of Domestic Trade.
Industrial Refractories Corporation of the Philippines
(IRCP) on the other hand, was incorporated
originally under the name Synclaire Manufacturing
Corporation. It amended its AOI on August 23, 1985
to change its corporate name to Industrial
Refractories Corp. of the Philippines. It is engaged in

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2014 GOLDEN NOTES 166
 CORPORATION CODE
the business of manufacturing all kinds of ceramics mind of the general public (or at least that portion of
and other products, except paints and zincs. Both the general public to do with the corporations
companies are the only local suppliers of monolithic market) (Lyceum of the Philippines vs. CA, supra).
gunning mix. Discovering that IRCP was using such
corporate name, RCP filed with SEC a petition to NOTE: The application of this trademark law doctrine has
compel IRCP to change its corporate name on the been extended to corporate names since the right to use a
corporate name to the exclusion of others is based upon
ground that its corporate name is confusingly similar
the same principle which underlies the right to use a
with that of RCPs such that the public may be
particular trademark or trade name (De Leon,2010).
confused or deceived into believing that they are
one and the same corporation. Is Industrial A corporation that changes its corporate name is not
Refractories Corporation of the Philippines considered as a new corporation
confusingly similar with Refractories Corporation of
the Philippines? A corporation that changes its corporate name is not
considered as a new corporation. It is the same
A: Yes. To fall within the prohibition of the law, two corporation with a different name, and its character
requisites must be proven, to wit: (1) that the is in no respect changed (Republic Planters Bank v.
complainant corporation acquired a prior right over CA, G.R. No. 93073, Dec 21, 1992).
the use of such corporate name; and (2) the proposed
name is either: (a) identical, or (b) deceptively or
Q: P.C. Javier and Sons Services, Inc., (PC) applied
confusingly similar to that of any existing corporation
with First Summa Savings and Mortgage Bank, later
or to any other name already protected by law; or (c)
on renamed as PAIC Savings and Mortgage Bank
patently deceptive, confusing or contrary to existing
(The Bank) for a loan accommodation under the
law. In this case, RCP was incorporated on October
Industrial Guarantee Loan Fund (IGLF). Upon
13, 1976 and since then has been using the corporate
maturity, PC failed to pay, hence, the Bank initiated
name Refractories Corp. of the
an extrajudicial foreclosure of the real estate
Philippines. Meanwhile, IRCP was incorporated on
mortgage. The instant complaint was filed to
August 23, 1979 originally under the name Synclaire
forestall the extrajudicial foreclosure sale of a piece
Manufacturing Corporation. It only started using the
of land mortgaged by PC in favor of PAIC Savings and
name Industrial Refractories Corp. of the
Mortgage Bank, Inc. PC argues that they are legally
Philippines when it amended its Articles of
justified to withhold their amortized payments to
Incorporation on August 23, 1985, or nine (9) years
the bank until such time they would have been
after respondent RCP started using its name. Thus,
properly notified of the change in the corporate
being the prior registrant, respondent RCP has
name. They claim that they have never received any
acquired the right to use the word Refractories as
formal notice of the alleged change of corporate
part of its corporate name (Industrial Refractories
name of First Summa Savings and Mortgage Bank to
Corporation of the Philippines v. CA, et al., G.R. No.
PAIC Savings & Mortgage Bank, Inc. Is the Bank
122174, October 3, 2002).
required to notify PC Javier & Sons, Inc., of the
change in its corporate name?
Doctrine of Secondary Meaning
A: No. The bank is not required to notify PC of its
It is the doctrine which states that a word or phrase
change of name. After going over the Corporation
originally incapable of exclusive appropriation with
Code and Banking Laws, as well as the regulations
reference to an article on the market, because
and circulars of both the SEC and the Bangko Sentral
geographically or otherwise descriptive, might
ng Pilipinas (BSP), the Supreme Court found that
nevertheless have been used so long and so
there is no such requirement. This being the case, the
exclusively by one producer with reference to his
Court cannot impose on a bank that changes its
article that, in that trade and to that branch of the
corporate name to notify a debtor of such change
purchasing public, the word or phrase has come to
absent any law, circular or regulation requiring
mean that the article was his product (Philippine Nut
it. Such act would be judicial legislation. The formal
Industry, Inc. vs. Standard Brands. Inc. 6 SCRA 575
notification is, therefore, discretionary on the
[1975]).
bank. Unless there is a law, regulation or circular from
the SEC or BSP requiring the formal notification of all
The doctrine of secondary meaning requires that the
debtors of banks of any change in corporate name,
word or phrase used in the corporate name has been
such notification remains to be a mere internal policy
for such length of time with such exclusivity as to
that banks may or may not adopt. A change in the
have associated or identified the corporation in the
corporate name does not make a new corporation,

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167 FACULTY OF CIVIL LAW
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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.
The corporation, upon such change in its name, is in
no sense a new corporation, nor the successor of the
original corporation. It is the same corporation with a
different name, and its character is in no respect
changed (P.C. Javier & Sons, Inc., v. CA et al., G.R. No.
129552, June 29, 2005).
CORPORATE TERM
Term of corporate existence
GR: The period stated in the AOI which in no case
shall exceed 50 years.
XPN: Unless sooner dissolved or unless said period is
extended (Sec. 11, CC).
NOTE: Extension may be made for periods not exceeding 50
years in any single instance by an amendment of the
articles of incorporation. However, extension must be made
within 5 years before the expiry date of the corporate term,
unless there are justifiable reasons for an earlier extension
as may be determined by the SEC (Sec. 11, CC).
Extension must also comply with procedural requirements
for amendment of AOI.
Doctrine of Relation or Relating Back Doctrine
GR: The filing and recording of a certificate of
extension after the term cannot relate back to the
date of the passage of the resolution of the
stockholders to extend the life of the corporation.
XPNs: The doctrine of relation applies if the failure to
file the application for extension within the term of
the corporation is due to:
1. The neglect of the SEC officer with whom the
certificate is required to be filed; or
2. A wrongful refusal on his part to receive it (Aquino,
Philippine Corporate Law Compendium, 2006).
Q: The term GGG Corporation in accordance with its
Articles of Incorporation ended last January 30,
2012. The term was not extended. What will happen
to the corporation? (2012 Bar)
a. The corporation is dissolved ipso facto.
b. There is a need to pass a board resolution to
formally dissolve the corporation.
c. The Board of Directors must pass a resolution
for the corporation to formally go into
liquidation.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
d. The stockholders must pass a resolution to
dissolve the corporation.
A: A. The corporation ceases to exist and is dissolved
ipso facto upon the expiration of the period fixed in
the original AOI, in the absence of compliance with
the legal requisites of extension of period (PNB vs. CFI
of Rizal, 209 SCRA 294 [1992]).
MINIMUM CAPITAL STOCK AND SUBSCRIPTION
REQUIREMENTS
Capital stock requirements
GR: There is no minimum authorized capital stock as
long as the paid-up capital is not less than P5,000.00.
XPN: As provided by special law.
Minimum stock subscription and paid-up capital
requirements
At least 25% of the authorized capital stock as stated
in the AOI must be subscribed at the time of
incorporation, and at least 25% of the total
subscription must be paid upon subscription (Sec 13,
CC).
Each subscriber is not required to pay 25% of each
subscribed share
It is not required that each subscriber pay 25% of
each subscribed share. It is only required that at least
25% of the total subscribed capital must be paid.
Paid-up capital
Paid-up capital forms part of the authorized capital
stock of the corporation, subscribed and then actually
paid for. The assets transferred and the loans
extended to a corporation should not be considered
in computing the paid-up capital of the corporation
(MISCI-NACUSIP Local Chapter v. National Wages and
Productivity Commission 269 SCRA 173).
Time when the unpaid subscription is payable
The balance or the unpaid subscription shall be
payable:
1. On a date or dates fixed in the contract of
subscription without need of call;, or
2. In the absence of a fixed date or dates, upon
call for payment by the BOD (Sec. 13, CC).
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 CORPORATION CODE
ARTICLES OF INCORPORATION (AOI)
NATURE AND FUNCTION OF ARTICLES
Articles of Incorporation
The Articles of Incorporation (AOI) is one that defines
the charter of the corporation and the contractual
relationships between the State and the corporation,
the stockholders and the State, and between the
corporation and its stockholders (Government of the
Philippine Islands vs. Manila Railroad Co., 52 Phil. 699
[1929]).
Three-fold nature of AOI
An AOI, which stands as the corporate charter is a
contract of three-fold nature because it is a contract
between:
1. The State and the corporation;
2. The corporation and the stockholders; and
3. The stockholders inter se.
CONTENTS
Contents of AOI
All corporations organized under the Code shall file
with the SEC an AOI in any of the official languages
duly signed and acknowledged by all of the
incorporators, containing substantially the following
matters, except as otherwise prescribed by the Code
or by special law: (NaP- PlaTINum-ASONO)
1. NAme of corporation
2. Purpose/s, indicating the primary and secondary
purposes (Purpose Clause)
3. PLAce of principal office
4. Term of existence
5. Names, nationalities and residences of
Incorporators
6. NUMber of directors or trustees, which shall not
be less than 5 nor more than 15, except for
corporation sole
7. Names, nationalities, and residences of the
persons who shall Act as directors or trustees
until the first regular ones are elected and
qualified
8. If a Stock corporation, the amount of its
authorized capital stock, number of shares and in
case the shares are par value shares, the par
value of each share;
9. Names, nationalities, number of shares, and the
amounts subscribed and paid by each of the
Original subscribers which shall not be less than
25% of authorized capital stock;
169
10. If Non-stock, the amount of capital, the names,
residences, and amount paid by each
contributor, which shall not be less than 25% of
total subscription; name of treasurer elected by
subscribers; and
11. Other matters as are not inconsistent with law
and which the incorporators may deem
necessary and convenient (Sec. 14, CC).
Incorporator may delegate the signing of the AOI
An incorporator may delegate to an attorney-in-fact
the signing of the AOI in a special power of attorney
to such effect. However, the acknowledgment
required under Sec. 15 of the CC must reflect this fact
(De Leon, 2010, citing SEC Opinion, Dec. 26, 1972).
Reason for the statement of the purpose clause in
the AOI
The purpose clause determines whether the acts
performed by the corporation are authorized or
beyond its powers. Acts beyond the corporations
powers are called ultra vires acts.
Rules in the statement of the purpose clause
1. If there is more than one stated purpose, specify
which is the main or primary purpose and which is or
are the secondary or subsidiary purpose/s (Sec. 14[2],
CC).
NOTE: This specification is important in the
application of the prohibition under Sec. 42 of the CC
which states that the corporation is prohibited from
investing corporate funds for any purpose other than
the primary purpose for which it was organized
unless such investment is approved by both majority
of the BOD or BOT and ratified by the stockholders
representing at least 2/3 of the outstanding capital
stock or by at least 2/3 of the members in the case of
a non-stock corporation.
2. The purposes must be capable of being lawfully
combined.
3. A non-stock corporation may not include a purpose
which would change or contradict its nature as such
(ibid).
Requirements of the SEC as regards the address
specification of the corporation in the AOI
SEC requires that the applicant corporation must
state in its AOI the
1. Specific address of their principal office, which shall
include, if feasible, the street name, barangay, city or
municipality; and
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2. Specific residence address of each incorporator,
stockholder, director, trustee, or partner.
NOTE: SEC likewise prohibits the use of Metro Manila as
address of the principal office.
Residence of the corporation
The corporation is in a metaphysical sense a resident
of the place where its principal office is located as
stated in the AOI (Golden Arches Devt Corp. vs. St.
Francis Square Holdings, Inc., GR 183843, January 19,
2011). This ruling regarding the residence of the
corporation holds true even though the corporation
has closed its office therein and relocated to another
place (Hyatt Elevators and Escalators Corp. vs.
Goldstar Elevators Phils., Inc., GR 161026, Oct. 24,
2005).
Duty of the SEC to file the AOI and to issue a
certificate of incorporation
GR: The duty of the SEC to file the AOI and to issue a
certificate of incorporation is ministerial provided
that the AOI substantially comply with the statute.
The SECs discretion can only be exercised on matters
of form and does not extend to the merits of an
application for incorporation (Asuncion vs. De Yriarte,
GR No. 9321, Sept. 24, 1914).
NOTE: If the SEC refuses to file the AOI, which substantially
complied with the statute, the remedy of the applicant is to
file a petition for mandamus (ibid).
XPN: However, SEC has authority to pass upon the
lawfulness of the object or purpose of the
corporation as expressed in the AOI. Such
determination is an exercise of judgment, that is,
judicial function on a question of law (ibid).
NOTE: If the SEC errs in the determination of the lawfulness
of the purpose of the corporation stated in the AOI and
refuses to file the said AOI, its decision is subject to review
and correction by the court (ibid).
AMENDMENT
Limitations in the amendment of AOI
1. The amendment must be for legitimate purposes
and must not be contrary to other provisions of the
CC and special laws;
2. Approved by majority of BOD/BOT;
3. Vote or written assent of stockholders representing
2/3 of the outstanding capital stock or 2/3 of
members;
4. The original and amended articles together shall
contain all provisions required by law to be set out
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
in the AOI. Such articles, as amended, shall be
indicated by underscoring the change/s made;
5. Certification under oath by corporate secretary and
a majority of the BOD/BOT stating the fact that said
amendment/s have been duly approved by the
required vote of the stockholders or members,
shall be submitted to the SEC;
6. Must be approved by SEC (Sec. 16, CC);
7. Must be accompanied by a favorable
recommendation of the appropriate government
agency in cases of:
a. Banks
b. Banking and quasi-banking institutions
c. Building and loan associations
d. Trust companies and other financial
intermediaries
e. Insurance companies
f. Public utilities
g. Educational institutions
h. Other corporations governed by special laws
(Sec. 17 [2], CC)
Time when the amendment of the AOI takes effect
The amendment of the AOI takes effect either:
1. Upon approval by the SEC, that is, upon issuance of
amended certificate of incorporation or
2. From the date of filing with the SEC:
a. If not acted upon within 6 months from the
date of filing; and
b. For a cause not attributable to the
corporation.
NOTE: The provision on automatic approval in Sec. 16 does
not apply to the dissolution of the corporations in the light
of Sec. 120, CC (SEC Opinion, Mar. 30, 1982).
NON-AMENDABLE ITEMS
Non-amendable items in the AOI
Those matters referring to accomplished facts, except
to correct mistakes.
E.g.
1. Names of incorporators
2. Names of original subscribers to the capital stock of
the corporation and their subscribed and paid up
capital
3. Names of the original directors
4. Treasurer elected by the original subscribers
5. Members who contributed to the initial capital of
the nonstock corporation
6. Witnesses to and acknowledgment with AOI
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 CORPORATION CODE
Grounds for the rejection or disapproval of the AOI
or amendment thereto
1. If such is not substantially in accordance with the
form prescribed by the CC;
2. The purpose/s of the corporation are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations;
3. The treasurers affidavit concerning the amount
of capital stock subscribed and/or paid is false;
4. The required percentage of ownership of the
capital stock to be owned by Filipino citizens has
not been complied with (Sec. 17, CC).
NOTE: The above grounds are not exclusive. The grounds
according to PD No. 902A are:
1. Fraud in procuring its certificate of incorporation;
2. Serious misrepresentation as to what the
corporation can do or its doing to the great
prejudice of, or damage to, the general public;
3. Refusal to comply with, or defiance or a lawful
order of the SEC restraining the commission of
acts which would amount to a grave violation of
its franchise;
4. Continuous inoperation for a period of at least
five (5) years after commencing the transaction of
its business (Sec. 22, CC.);
5. Failure to file the bylaws within the required
period;
6. Failure to file required reports.
No automatic rejection of the AOI or any
amendment thereto
There is no automatic rejection of the AOI or any
amendment thereto. The SEC shall give the
incorporators a reasonable time within which to
correct or modify the objectionable portions of the
AOI or amendment (Sec. 17[1], CC).
Effect of non-use of corporate charter and
continuous inoperation of a corporation
1. Failure to organize and commence business within
2 years from incorporation its corporate
powers ceases and the corporation shall be
deemed dissolved.
2. Continuous inoperation for at least 5 years
ground for the suspension or revocation of
corporate franchise or certificate of
incorporation (Sec. 22, CC).
NOTE: The above shall not be applicable if it is due to
causes beyond the control of the corporation as
determined by SEC.
171
Suspension or revocation of the certificate of
registration due to failure to operate or continuous
inoperation is not automatic
Under PD No. 902-A, SEC should afford due process
or proper notice and hearing before the suspension
or revocation of certificate of registration. The
suspension or revocation of the certificate of
registration due to failure to operate or continuous
inoperation is not automatic.
REGISTRATION AND ISSUANCE OF CERTIFICATE OF
INCORPORATION
Basic requirements for the registration and issuance
of a certificate of incorporation of a stock
corporation
1. Name verification slip;
2. AOI and by-laws;
3. Treasurers affidavit;
NOTE: Content of a treasurers affidavit
That at least 25% of the authorized capital stock of the
corporation has been subscribed, and at least 25% of the
total subscription has been fully paid in actual cash and/or
property; such paid-up capital being not less than P5,000
(Sec. 14, 15, CC).
4. Registration data sheet;
5. Proof of payment of subscription like Bank
Certificate of Deposit if the paid-up capital is in cash;
6. Favorable endorsement from proper government
agency in case of special corporations; and
7. Undertaking of incorporators or directors to
change corporate name.
Doctrine of corporate entity
GR: A corporation comes into existence upon the
issuance of the certificate of incorporation. Then and
only then will it acquire a juridical personality.
XPN: In case of a corporation sole, the corporation
sole commences existence upon the filing of the
articles of incorporation.
ADOPTION OF BY-LAWS
By-laws
By-laws are rules and regulations or private laws
enacted by the corporation to regulate, govern and
control its own actions, affairs and concerns and of its
stockholders or members and directors and officers in
UNIVERSITY OF SANTO TOMAS
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 MERCANTILE LAW
relation thereto and among themselves in their
relation to it (Valley Golf & Country Club, Inc. vs. Vda.
De Caram, GR 158805, April 16, 2009).
NATURE AND FUNCTIONS OF BY-LAWS
Nature and functions of by-laws
The corporate power to adopt by-laws is inherent in
every corporation. However, to give emphasis to such
necessary corporate incident, said power is expressed
in Sec. 36(5) and Sec. 46 of the CC.
The by-laws supplement the AOI. The function of
by-laws is to define the rights and duties of corporate
officers and directors or trustees, and of stockholders
or members towards the corporation and among
themselves with reference to the management of
corporate affairs and to regulate transaction of the
business of the corporation in a particular way (De
Leon, 2010).
A corporation sole is not governed by by-laws
A corporation sole is not govered by by-laws. It is
instead governed by Rules, Regulations and Discipline
of its religious denomination which already contain
the provisions embodied in the by-laws of ordinary
corporations.
REQUISITES OF VALID BY-LAWS
Requisite of valid by-laws
The following are the requisites for the validity of
by-laws: (CoMorO-RAG)
1. Must be consistent with the COrporation Code,
other pertinent laws and regulations
2. Must not be contrary to MORals and public
policy
3. Must not impair Obligations and contracts or
property rights of stockholders
4. Must be Reasonable
5. Must be consistent with the charter or AOI
6. Must be of General application and not directed
against a particular individual.
Rule in case of conflict between the by-laws and the
AOI
In case of conflict between the by-laws and the AOI,
the AOI prevails because the by-laws are intended
merely to supplement the former.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
BINDING EFFECTS
Contents of by-laws
1. Time, place and manner of calling and
conducting regular or special meetings of
directors or trustees
2. Time and manner of calling and conducting
regular or special meetings of the stockholder or
members
3. The required quorum in meeting of stockholders
or members and the manner of voting therein
4. The form for proxies of stockholders and
members and the manner of voting them
5. The qualification, duties and compensation of
directors or trustees, officers and employees
6. Time for holding the annual election of directors
or trustees and the mode or manner of giving
notice thereof
7. Manner of election or appointment and the term
of office of all officers other than directors or
trustees
8. Penalties for violation of the by-laws
9. In case of stock corporations, the manner of
issuing certificates
10. Such other matters as may be necessary for the
proper or convenient transaction of its corporate
business and affairs (Sec. 47, CC).
Procedures in adopting by-laws
The by-laws may be adopted before or after
incorporation. In all cases, the By-laws shall be
effective only upon the issuance by the SEC of a
certification that the by-laws are not inconsistent
with the AOI.
1. Pre - incorporation It shall be approved and
signed by all the incorporators and submitted to the
SEC, together with AOI.
2. Post incorporation
a. Vote of the majority of the stockholders
representing the outstanding capital stock or
members;
b. By-laws shall be signed by the stockholders
or members voting for them
c. It shall be kept in the principal office of the
corporation and subject to the inspection of the
stockholders ore members during office hours
d. Copy thereof, duly certified by the BOD or
BOT countersigned by the secretary of the
corporation, shall be filed with the SEC and shall
be attached with the original AOI (Sec. 46, CC).
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 CORPORATION CODE
Binding effects of by-laws Effect of non-filing of the by-laws within the
required period
The following are the binding effects of by-laws:
1. As to members/ stockholders, officers, trustees/ Failure to submit the by-laws within 30 days from
directors and corporation They are bound by incorporation does not automatically dissolve the
and must comply them. They are presumed to corporation. It is merely a ground for suspension or
know the provisions of the by-laws. revocation of its charter after proper notice and
2. As to third persons 3rd persons are not bound hearing. The corporation is, at the very least, a de
unless they have knowledge of by-laws. (PMI facto corporation whose existence may not be
College vs. NLRC, 277 SCRA 462, [1997]). collaterally attacked (Sawadjaan v. CA, G.R. No.
142284, June 8, 2005).
NOTE: By-laws have no extra-corporate force and are not in
the nature of legislative enactments so far as third persons Articles of incorporation v. By-laws
are concerned.
AOI BY-LAWS
Q: PMI Colleges (PMI) an educational institution Condition subsequent; its
offering courses on basic seamans training and Condition precedent in absence merely furnishes
other marine-related courses, hired Alejandro the acquisition of a ground for the
Galvan as contractual instructor. Pursuant to this corporate existence revocation of the
engagement, Galvan then organized classes in franchise
marine engineering. Initially, Galvan and other
Essentially a contract
instructors were compensated for services rendered For the internal
between the
during the first three periods of the government artiof the
corporation and the
abovementioned contract. However, for reasons corporation but has the
stockholders/
unknown, Galvan stopped receiving payment for the force of a contract
members; between the
succeeding rendition of services. Despite repeated between the corporation
stockholders/ member
demands, PMI failed to pay and hence, Galvan filed and the stockholders/
inter se, and between
a complaint seeking payment for salaries earned. In members, and between
the corporation and
the proceedings, PMI manifested that Mr. Tomas G. the stockholders and
the State;
Cloma, Jr., a member of the PMIs Board of Trustees members;
wrote a letter to the Chairman of the Board
May be executed after
clarifying the case of Galvan and stating
incorporation. Sec. 46
therein, inter alia, that under PMIs by-laws only the
Executed before allows the filing of the
Chairman is authorized to sign any contract. Hence,
incorporation by-laws simultaneously
according to PMI, the employment contract which
with the Articles of
was not signed by the Chairman is not binding upon
Incorporation
PMI. Is the employment contract is invalid because
Amended by a majority
it violated PMIs by-laws stating that the Chairman
of the directors/ May be amended by a
of the BOD should be the signatory thereon?
trustees and majority vote of the BOD
stockholders and majority vote of
A: No. The employment contract is not invalidated by
representing 2/3 of the outstanding capital stock
the failure of the Chairman to sign such. Since by-laws
outstanding capital or a majority of the
operate merely as internal rules among the
stock, or 2/3 of the member in non-stock
stockholders, they cannot affect or prejudice third
members in case of corporation
persons who deal with the corporation, unless they
non-stock corporations
have knowledge of the same. No proof appears on
record that Galvan ever knew anything about the
AMENDMENT OR REVISION
provisions of said by-laws. In fact, PMI itself merely
asserts the same without even bothering to attach a
Ways of amending, repealing or adopting new
copy or excerpt thereof to show that there is such a
by-laws
provision (PMI Colleges v. NLRC, et al., G.R. No.
121466, August 15, 1997).
1. Amendment may be made by stockholders together
with the Board by majority vote of directors and
owners of at least a majority of the outstanding
capital stock/members; or

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173 FACULTY OF CIVIL LAW
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2. By the board only after due delegation by the
stockholders owning 2/3 of the outstanding capital
stock/members. Provided, that such power delegated
to the board shall be considered as revoked
whenever stockholders owning at least majority of
the outstanding capital stock or members, shall vote
at a regular or special meeting (Sec. 48, CC).
CORPORATE POWERS
Powers of corporation
1. Express powers granted by law, Corporation
Code, and its Articles of Incorporation or Charter,
and administrative regulations;
2. Inherent/incidental powers not expressly stated
but are deemed to be within the capacity of
corporate entities;
3. Implied/necessary powers exists as a necessary
consequence of the exercise of the express
powers of the corporation or the pursuit of its
purposes as provided for in the Charter
Q: Sea Lion International Port Terminal Services, Inc.
Filed a complaint for prohibition and mandamus
against NPC and Philippine Ports Authority (PPA),
wherein Sea Lion alleged that NPC had acted in bad
faith and with grave abuse of discretion in not
renewing its contract for stevedoring services for
coal-handling operations at NPC's plant, and in
taking over its stevedoring services. The RTC ruled in
favor of Sea Lion. National Power Corporation (NPC),
seeks to annul the order of the RTC in issuing a writ
of preliminary injunction which enjoined NPC from
further undertaking stevedoring and arrastre
services in its pier and directing it either to enter
into a contract for stevedoring and arrastre services
or to conduct a public bidding therefor. Does NPC
have the power to undertake stevedoring and
arrastre services in its pier?
A: Yes. NPC has the power to undertake stevedoring
and arrastre services. To carry out the national policy
of total electrification of the country, the NPC was
created and empowered not only to construct,
operate and maintain power plants, reservoirs,
transmission lines, and other works, but also to
exercise such powers and do such things as may be
reasonably necessary to carry out the business and
purposes for which it was organized, or which, from
time to time, may be declared by the Board to be
necessary, useful, incidental or auxiliary to
accomplish said purpose. If that act is one which is
lawful in itself and not otherwise prohibited, and is
done for the purpose of serving corporate ends, and
reasonably contributes to the promotion of those
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
ends in a substantial and not in a remote and fanciful
sense, it may be fairly considered within the
corporation's charter powers. The rule is that 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.
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 (National Power Corporation, v. Honorable
Abraham P. Vera, et al., G.R. No. 83558, February 17,
1989).
Exercise of corporate powers
The Corporation Code of the Philippines vests in the
board of directors the exercise of the corporate
powers of the corporation, save in those instances
where the Code requires stockholders approval for
certain specific acts (Great Asian Sales Center
Corporation v CA, G.R. No. 105774, April 25, 2002).
Q: Eliodoro C. Cruz was the former president of
Filport. During the general stockholders meeting, he
wrote a letter to the corporations Board of
Directors questioning the boards creation of certain
positions with their corresponding monthly
renumeration. Because his letter was not heeded
favorably, Cruz, purportedly in representation of
Filport and its stockholders, among which is
Mindanao Terminal and Brokerage Services, Inc.
(Minterbro), filed with SEC a petition which he
describes as a derivative suit against the the
incumbent members of Filports Board of Directors,
for alleged acts of mismanagement detrimental to
the interest of the corporation and its shareholders
at large. Did Filports Board of Directors act within
its powers in creating the executive committee and
the positions of AVPs for Corporate Planning,
Operations, Finance and Administration, and those
of the Special Assistants to the President and the
Board Chairman, each with corresponding
remuneration?
A: Yes. The governing body of a corporation is its
board of directors. Section 23 of the Corporation
Code explicitly provides that unless otherwise
provided therein, the corporate powers of all
corporations formed under the Code shall be
exercised, all business conducted and all property of
the corporation shall be controlled and held by a
board of directors. Thus, with the exception only of
some powers expressly granted by law to
stockholders (or members, in case of non-stock
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 CORPORATION CODE
corporations), the board of directors (or trustees, in
case of non-stock corporations) has the sole authority
to determine policies, enter into contracts, and
conduct the ordinary business of the corporation
within the scope of its charter, i.e., its articles of
incorporation, by-laws and relevant provisions of law.
Verily, the authority of the board of directors is
restricted to the management of the regular business
affairs of the corporation, unless more extensive
power is expressly conferred. In the present case, the
boards creation of the subject positions was in
accordance with the regular business operations of
Filport as it is authorized to do so by the
corporations by-laws, pursuant to the Corporation
Code. (Filipinas Port Services, Inc., v. Victoriano S. Go,
et al., G.R. No. 161886, March 16, 2007).
Three levels of control in the corporate hierarchy
1. The board of directors, which is responsible for
corporate policies and the general management
of the business affairs of the corporation;
2. The officers of the corporation, who in theory
execute the policies laid down by the board, but
in practice often have wide latitude in
determining the course of business operations;
3. The stockholders who have the residual power over
fundamental corporate changes, like
amendments of the articles of incorporation
(City Bank NA vs. Chua, G.R. No. 102300, March
17, 1993).
GENERAL POWERS, THEORY OF GENERAL CAPACITY
Theory of General Capacity
The general powers of a corporation also called
Theory of General Capacity are the following:
(SuSuCo-ABS-PEDRO)
1. To SUe and be sued
2. Of Succession
3. To adopt and use of COrporate seal
4. To amend its Articles of Incorporation
5. To adopt its By-laws
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members
7. To Purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and deal with real and
personal property, securities and bonds;
8. To Enter into merger or consolidation
9. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or similar
purposes, provided that no donation is given to any
a. Political party,
175
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other plans
for the benefit of its directors, trustees, officers and
employees basis of which is the Labor code
11. To exercise Other powers essential or necessary
to carry out its purposes.
Commencement of the power to sue and be sued
The power to sue and be sued commences upon
issuance by SEC of Certificate of Incorporation.
Limitations of the corporation in dealing with
property
1. In dealing with any kind of property, it must be in
the furtherance of the purpose for which the
corporation was organized.
2. Constitutional limitations cannot acquire public
lands except by lease.
With regard to private land, 60% of the corporation
must be owned by the Filipinos, same with the
acquisition of a condominium unit.
NOTE: No law disqualifies a person from purchasing shares
in a landholding corporation even if the latter will exceed
the allowed foreign equity, what the law disqualifies is the
corporation from owning land (JG Summit Holdings, Inc. vs.
CA, G.R. No. 124293, Jan. 31, 2005).
3. Special law subject to the provisions of the Bulk
Sales Law and law against monopoly, illegal
combination or restraint of trade.
Requisites for a valid donation (RPAI)
1. Donation must be Reasonable
2. Must be for valid Purposes including public
welfare, hospital, charitable, cultural, scientific, civic
or similar purposes
3. Must not be an Aid in any
a. Political party,
b. Candidate and
c. Partisan political activity
4. Donation must bear a reasonable relation to the
corporations Interest and not be so remote and
fanciful.
Corporation as surety or guarantor
GR: A corporation cannot act as a surety or
guarantor. Acting as a surety or guarantor will be
contrary to the primary purpose for which the
corporation was created.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: Such guaranty may be given in the
accomplishment of any object for which the
corporation was created, or when the particular
transaction is reasonably necessary or proper in the
conduct of its business.
SPECIFIC POWERS, THEORY OF SPECIFIC CAPACITY
Theory of Specific Capacity
The specific powers of a corporation also called
Theory of Specific Capacity are the following:
(ESB-PA-SIDE-A)
1. Power to Extend or shorten corporate term (Sec.
37, CC).
2. Increase or decrease corporate Stock (Sec. 38, CC).
3. Incur, create, or increase Bonded indebtedness
(Sec. 38, CC).
4. Deny Pre-emptive right (Sec. 39, CC).
5. Sell, dispose, lease, encumber all or substantially
all of corporate Assets (Sec. 40, CC).
6. Purchase or acquire Shares (Sec. 41, CC).
7. Invest corporate funds in another corporation or
business for other purpose other than primary
purpose (Sec. 42, CC).
8. Declare Dividends out of unrestricted retained
earnings (Sec. 43, CC).
9. Enter into management contract with another
corporation (not with an individual or a
partnership within general powers) whereby
one corporation undertakes to manage all or
substantially all of the business of the other
corporation for a period not longer than five (5)
years for any one term (Sec. 44, CC).
10. Amend Articles of Incorporation (Sec. 16, CC).
Corporate powers which are exercised by the BOD
and stockholders jointly (ASIA-IDEA- MC)
1. Amendments to by-laws
2. Extending or Shortening the corporate term
3. Increase or decrease of capital stock
4. The sale or other disposition of All or substantially
all of the corporate assets
5. Investment of corporate funds in another
corporation or business or for any other purpose
6. Issuance of stock Dividends
7. Entering into management contract
8. Amendment to Articles of incorporation
9. Merger or consolidation
10. Grant of Compensation to directors
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
POWER TO EXTEND OR SHORTEN CORPORATE
TERM
Procedural requirements in extending/shortening
corporate term
1. Majority vote of the BOD or BOT;
2. Ratification by 2/3 of the SH representing
outstanding capital stock or by at least 2/3 of the
members in case of non-stock corporation;
3. Written notice of the proposed action and of the
time and place of the meeting shall be addressed to
each stockholder or member at his place of residence
as shown on the books of the corporation and
deposited to the addressee in the post office with
postage prepaid, or served personally;
4. Copy of the amended AOI shall be submitted to
the SEC for its approval; and
5. In case of special corporation, a favorable
recommendation of appropriate government agency
(Sec. 37, CC).
6. The extension must be done during the lifetime
of the corporation not earlier than 5 years prior to
the expiry date unless exempted. The extension must
not exceed 50 years (Sec 16, CC).
NOTE: After the term had expired without extension, the
corporation is deemed ipso facto dissolved. The remedy of
the stockholders is reincorporation. Any dissenting
stockholder may exercise his appraisal right in case of
shortening or extending corporate term (Sec. 37, CC).
Q: T Corp. has a corporate term of 20 years under its
Articles of Incorporation or from June 1, 1980 to
June 1, 2000. On June 1, 1991 it amended its Articles
of Incorporation to extend its life by 15 years from
June 1, 1980 to June 1, 2015. On June 1, 2011,
however, T Corp decided to shorten its term by 1
year or until June 1, 2014. Both the 1991 and 2011
amendments were approved by majority vote of its
Board of Directors and ratified in a special meeting
by its stockholders representing at least 2/3 of its
outstanding capital stock. The SEC, however,
disapproved the 2011 amendment on the ground
that it cannot be made earlier than 5 years prior to
the expiration date of the corporate term, which is
June 1, 2014. Is this SEC disapproval correct? (2011
Bar Question)
A: No, since the 5-year rule on amendment of
corporate term applies only to extension, not to
shortening, of term.
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 CORPORATION CODE
POWER TO INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE BONDED
INDEBTEDNESS
Procedural requirements in increasing or decreasing
capital stock
1. Majority vote of the BOD;
2. Ratification by stockholders representing 2/3 of
the outstanding capital stock;
3. Written notice of the proposed increase or
diminution of the capital stock and of the time and
place of the stockholders meeting at which the
proposed increase or diminution of the capital stock
must be addressed to each stockholder at his place of
residence as shown on the books of the corporation
and deposited to the addressee in the post office
with postage prepaid, or served personally;
4. A certificate in duplicate must be signed by a
majority vote of the directors of the corporation and
countersigned by the chairman and the secretary of
the stockholders meeting, setting forth:
a. That the foregoing requirements have been
complied with;
b. The amount of increase or diminution of the
capital stock;
c. If an increase of the capital stock, the amount
of capital stock or number of shares of no par
stock actually subscribed, the names,
nationalities and residences of the persons
subscribing, the amount of capital stock or
number of no par stock subscribed by each, and
the amount paid by each on his subscription in
cash or property, or the amount of capital stock
or number of shares of no par stock allotted to
each stockholder if such increase is for the
purpose of making effective stock dividend
authorized;
d. The amount of stock represented at the
meeting; and
e. The vote authorizing the increase or
diminution of the capital stock, or the incurring,
creating or increasing of any bonded
indebtedness.
NOTE: The increase or decrease in the capital stock or the
incurring, creating or increasing bonded indebtedness shall
require prior approval of the SEC.
Additional requirement with respect to increase of
capital stock
The application to be filed with the SEC shall be
accompanied by the sworn statement of the
treasurer of the corporation, showing that at least
25% of the increase in the capital stock was
subscribed and 25% of the said amount has been paid
177
either in actual cash to the corporation or that there
has been transferred to the corporation property the
valuation of which is equal to 25% of the subscription.
NOTE: A corporation is not prohibited from increasing its
authorized capital stock even if the same has not yet been
fully subscribed. Once an increase in authorized capital
stock is effected, it may be necessarily accompanied by an
actual increase in the assets and additional subscriptions in
order to comply with the 25% subscription requirement.
However, if such increase is for the purpose of effecting a
stock dividend previously authorized, then additional
subscriptions are NOT urgent.
Reason: The actual capital is increased by accumulated
profits and such profits are distributed to the stockholders
in the form of stock dividends, the capital stock is
increased, for the profits are reinvested in the corporation
by transferring the same from surplus account to a capital
account. The amount corresponding to the stock dividends
declared may be used to cover the required 25%
subscription to increase the authorized capital stock and, if
sufficient, will obviate the necessity of taking in new
subscription (De Leon, supra, pg. 350).
Basis of the required 25% subscription
The 25% subscription shall be based on the additional
amount by which the capital stock increased and not
on the total capital stock as increased.
NOTE: Treasurers affidavit is required in increasing capital
stock, NOT in decreasing capital stock.
Additional requirement with respect to the decrease
of capital stock
In case of decrease in capital stock, the same must
not prejudice the right of the creditors.
Ways of increasing or decreasing the capital stock
By increasing or decreasing the:
1. Number of shares and retaining the par
value;
2. Par value of existing shares and retaining the
number of shares;
3. Number of shares and increasing or
decreasing the par value.
NOTE: In decreasing the capital stock, resorting to
reduction of number of shares may also be done through:
1. Redeeming redeemable shares (Sec. 8,CC); or
2. purchasing of own shares(Sec. 41,CC); or
3. Cancelling or retiring the shares, including the
treasury shares (Sec. 9,CC); or
4. The corporation may accept a surrender of shares
and give the holders in exchange therefor a
proportionate amount of its assets, provided no rights
of creditors are involved; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
5. Issue bonds for that purpose or
6. Exchange another class of stock for that retired; or
7. Exchange the corporations outstanding shares for a
smaller number of shares; or
8. Cancelling shares which have not yet been issued
(De Leon, supra, pg. 355-356).
Q: Can there be a distribution of surplus on
reduction?
A: It depends whether there is an impairment of
capital.
1. If there is no impairment of capital, the
surplus may be equitably distributed by the
directors or so much thereof as may not be
required in carrying on the business for the
best interests of the stockholders: Provided
the rights of creditors will not be affected nor
the capital impaired.
2. If there is reduction to meet an impairment
there will be no distribution.
NOTE: The distribution stated above is not mandatory,
notwithstanding the authority granted by the CC for the
same under Sec. 122, last par (ibid., pg. 357-358).
Over-issue of shares is not allowed
An issue of stock by a corporation in excess of the
amount prescribed or limited by its AOI is ultra vires
and the stock so issued is void even in the hands of a
bona fide purchaser for value (ibid., pg. 351).
NOTE: An over-issued stock is a spurious stock (ibid).
Over-issue of stock does not avoid the original issue
There is no avoidance of the original issue (ibid).
NOTE: There is no over-issue in the case of shares, which
were surrendered and new shares issued in their stead. The
new issue in such case merely takes the place of the shares
surrendered (ibid).
Effects of an attempted unauthorized increase of
capital stock
An attempted unauthorized increase of capital stock
amounts to an over-issue and such stock is, therefore,
absolutely void and cannot be validated by
application of the doctrine of estoppel.
Thus, the following are the effects of such
unauthorized increase:
1. Subscriptions for such stock are likewise void both
on the ground of illegality and for want of
consideration;
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
2. Subscribers for or purchasers of such stock acquire
none of the rights of stockholders;
3. Subscribers for or purchasers of such shares do not
become liable to creditors of the corporation or on
a winding up as stockholders for unpaid
subscriptions, and are not subject to a statutory
liability to creditors imposed upon stockholders;
and
4. Subscribers for or purchasers of such shares from
the corporation may recover from it money paid
to it under their subscription or purchase as upon a
failure of consideration, or breach of warranty fo
the existence of the thing sold, unless they are
precluded from such relief as parties in pari delicto
(ibid, pg. 351-352).
Q: The stockholders of People Power, Inc. (PPI)
approved two resolutions in a special stockholders'
meeting:
1. Resolution increasing the authorized capital stock
of PPI; and
2. Resolution authorizing the Board of Directors to
issue, for cash payment, the new shares from the
proposed capital stock increase in favor of outside
investors who are nonstockholders.
The foregoing resolutions were approved by
stockholders representing 99% of the total
outstanding capital stock. The sole dissenter was
Jimmy Morato who owned 1% of the stock. Are the
resolutions binding on the corporation and its
stockholders including Jimmy Morato, the dissenting
stockholder? (1998 Bar Question)
A: No. The resolutions are not binding on the
corporation and its stockholders including Jimmy
Morato. While these resolutions were approved by
the stockholders, the directors' approval, which is
required by law in such case, does not exist.
Q: What remedies, if any, are available to Morato?
(1998 Bar Question)
A: Jimmy Morato can petition the Securities and
Exchange Commission to declare the two (2)
resolutions, as well as any and all actions taken by the
Board of Directors thereunder, null and void.
Evidence of the corporations indebtedness
When a corporation borrows money, its indebtedness
may be evidenced by notes or bonds as its primary
security (De Leon, 2010).
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 CORPORATION CODE
Difference between a note and a bond
1. If the amount borrowed is small and it is
borrowed in a single sum, or from a few persons, or
for a short time notes are usually given.
2. If, however, the amount is large and obtained
from a number of people and extends over a period
of years, the corporate obligation is preferably and
usually evidenced by bonds (ibid).
Bonded indebtedness
It is a long-term indebtedness secured by real or
personal property (corporate assets).
NOTE: The requirements for the power to incur, create or
increase bonded indebtedness is also the same with the
power to increase or decrease capital stock.
Registration of the bonds issued by the corporation
Bonds issued by a corporation shall be registered with
the SEC which shall have the authority to determine
the sufficiency of the terms thereof (Sec. 38, CC).
Stockholders approval is not required for all
borrowings of the corporation
Not all borrowings of the corporation need
stockholders approval. Only bonded indebtedness
requires such approval.
POWER TO DENY PRE-EMPTIVE RIGHTS
Pre-emptive right
It is the preferential right of shareholders to subscribe
to all issues or disposition of shares of any class in
proportion to their present shareholdings (Sec. 39,
CC).
NOTE: The stockholder must exercise his pre-emptive right
within the time fixed in the resolution authorizing the
increase of capital stock.
Purpose of pre-emptive right
The purpose of pre-emptive right is to enable the
shareholder to retain his proportionate control in the
corporation and to retain his equity in the surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised within the
period stated in the AOI or the By-Laws. When the
AOI and the By-Laws are silent, the Board may fix a
reasonable time within which the stockholders may
exercise the right.
179
NOTE: Pre-emptive right can only be exercised to the same
class of shares issued or disposed with that owned by the
stockholder (Share-a-like basis).
Pre-emptive right is available on the re-issuance of
treasury shares
When a corporation reacquires its own shares which
thereby become treasury shares, all shareholders are
entitled to pre-emptive right when the corporation
reissues or sells these treasury shares. The
re-issuance of treasury shares is not among the
exception provided by Sec. 39 when pre-emptive
right does not exist.
Pre-emptive right may be waived
Pre-emptive right may be waived either expressly or
impliedly as when the stockholder fails to exercise his
pre-emptive right after being notified and given an
opportunity to avail of such right.
Transferability of pre-emptive right of a stockholder
The pre-emptive right of a stockholder is transferable
unless there is an express restriction in the AOI.
Q: Suppose that X Corporation has already issued
the 1000 originally authorized shares of the
corporation so that its Board of Directors and
stockholders wish to increase X's authorized capital
stock. After complying with the requirements of the
law on increase of capital stock, X issued an
additional 1000 shares of the same value. Assume
that stockholder A presently holds 200 out of the
1000 original shares. Would A have a preemptive
right to 200 of the new issue of 1000 shares? Why?
A: Yes, A would have a preemptive right to 200 of
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. According
to the Corporation Code, each stockholder has the
preemptive right to all issues of shares made by the
corporation in proportion to the number of shares he
holds on record in the corporation.
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares, may the stockholder invoke his appraisal
rights and demand payment for his shareholdings?
(1999 Bar Question)
A: No, the stockholder may not exercise appraisal
right because the matter that he dissented from is
not one of those where right of appraisal is available
under the Corporation Code.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Denial by the corporation of pre-emptive right POWER TO SELL OR DISPOSE OF CORPORATE ASSETS
(SLEMPAD)
The corporation can deny pre-emptive right if the AOI
or any amendment thereto denies such right (Sec. 39, Substantially all of corporate assets
CC).
There is a sale, lease, exchange, mortgage, pledge,
NOTE: A stockholder whose pre-emptive right is violated and any other disposition (SLEMPAD) of substantially
may maintain an action to compel the corporation to give all of corporate asset if in the SLEMPAD thereof, the
him that right. If the denial is by amendment to the AOI, he corporation would be rendered:
may exercise his appraisal right under Sec. 81(1).
1. Incapable of continuing the business, or
2. Incapable of accomplishing the purpose for
Instances when pre-emptive right is not available
which it was incorporated (Sec 40, CC).
1. Shares to be issued to comply with laws requiring
Procedural requirements for SLEMPAD of all or
stock offering or minimum stock ownership by
substantially all of corporate assets
the public;
2. Shares issued in good faith with the approval of
1. Majority vote of the BOD or BOT;
the stockholders representing 2/3 of the
2. Ratification by stockholders representing at least
outstanding capital stock in exchange for
2/3 of the outstanding capital stock or by at least
property needed for corporate purposes;
2/3 of the members in case of non-stock
3. Shares issued in payment of previously
corporation;
contracted debts;
3. Written notice of the proposed action and of the
4. In case the right is denied in the AOI;
time and place of the meeting addressed to each
5. Waiver of the right by the stockholder.
stockholder or member at his place of residence as
shown on the books of the corporation and
Pre-emptive right v. Right of first refusal
deposited to the addressee in the post office with
postage prepaid, or served personally (Sec. 40, CC).
RIGHT OF FIRST
PRE-EMPTIVE RIGHT
REFUSAL NOTE: The sale of the assets shall be subject to the
Right to subscribe to all provisions of existing laws on illegal combinations and
issuance or dispositions of Right to purchase monopolies (ibid).
shares of the corporation shares of a stockholder.
even to the subsequent Further, in case of non-stock corporations, where there are
sale of treasury stocks. no members with voting rights, the vote of at least a
majority of the trustees in office will be sufficient
Right exercised against the Right exercised against
authorization for the corporation to enter into any
corporation. a co-stockholder.
transaction authorized by this section (ibid).
Can only be exercised
May be exercised even
when so provided in Instances when the corporation may forego the
when there is no express
the AOI, by-laws and ratification by stockholders / members
provision in the AOI or
printed in the stock
amendment thereto.
certificate. 1. If sale is necessary in the usual and regular course
Pertains to unsubscribed Pertains to the sale of of business;
portion of the authorized the stocks by another 2. If the proceeds of the sale or other disposition of
capital stock. stockholder such property and assets are to be appropriated
Does not include for the conduct of the remaining business;
It includes treasury shares.
treasury shares 3. If the transaction does not cover all or
substantially all of the assets.

Remedy of a stockholder who disagrees with the

plan of SLEMPAD of all or substantially all of
corporate assets

Any dissenting stockholder shall have the option to

exercise his appraisal right.

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 180
 CORPORATION CODE
Abandonment of the plan for SLEMPAD even after
the vote of the stockholders or members
The BOD, in its discretion, may abandon the plan for
SLEMPAD even after such authorization or approval
by the stockholders, subject to the rights of third
parties under any contract relating thereto, without
further action or approval by the stockholders or
members (ibid).
Effect of sale of all or substantially all of assets of
one corporation to another corporation
GR: The corporation who acquired all or substantially
all of the assets of the selling corporation shall not be
liable for the debts of the latter.
XPNs:
1. Express or implied assumption of liabilities;
2. Merger or consolidation;
3. If the purchase was in fraud of creditors;
4. If the purchaser becomes a continuation of the
seller;
5. If there is violation of the Bulk Sales Law.
POWER TO ACQUIRE OWN SHARES
Instances when a corporation may acquire its own
shares
1. To eliminate fractional shares out of stock
dividends (Sec. 41,CC);
2. To collect or compromise an indebtedness to the
corporation, arising out of unpaid subscription, in
a delinquency sale and to purchase delinquent
shares sold during said sale (ibid.);
3. To pay dissenting or withdrawing stockholders (in
the exercise of the stockholders appraisal right)
(ibid.);
4. To acquire treasury shares (Sec. 9, CC);
5. Redeemable shares regardless of existence of
retained earnings (Sec 8, CC);
6. To effect a decrease of capital stock(Sec. 38,CC);
7. In close corporations, when there is a deadlock in
the management of the business, the SEC may
order the purchase at their fair value of the
shares of any stockholder by a corporation
regardless of the availability of unrestricted
retained earnings (UREs) in its books (par. 1 [4],
Sec. 104, CC).
NOTE: Where a corporation reacquires its own shares, it
does not thereby become a subscriber thereof.
181
Rule in order that a corporation may acquire its own
shares
GR: The corporation may only acquire its own stocks
in the presence of unrestricted retained earnings
(URE)
XPNs: (RDC)
1. Redeemable shares may be acquired even
without surplus profit for as long as it will not
result to the insolvency of the Corporation
2. In cases that the corporation conveys its stocks in
payment of a Debt
3. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
as long as it will not result to the insolvency of
the corporation.
Unrestricted retained earnings (URE)
It represents the surplus profits of the corporation. It
is determined by subtracting the liabilities (L), the
Capital Stock (CS) and the Restricted Retained
Earnings (RRE) from the assets (A) of the corporation
(URE = A (L + CS+ RRE)).
Unrestricted Retained Earnings shall include
accumulated profits and gains realized out of the
normal and continuous operations of the company
after deducting therefrom distributions of
stockholders and transfers to capital stock or other
accounts. It does NOT include:
1. Funds appropriated by its BOD for corporate
expansion projects or programs;
2. Funds covered by a restriction for dividend
declaration under a loan agreement;
3. Funds required to be retained under special
circumstances obtaining in the corporation such
as when there is a need for a special reserve for
probable circumstances.
Guidelines for the acquisition of its own shares
1. The capital of the corporation must not be
impaired. There shall be UREs to purchase the
shares;
2. Legitimate or proper corporate objective is
advanced;
3. Condition of the corporate affairs warrants it;
4. Transaction is designed and carried out in good
faith;
5. Interest of creditors is not impaired, that is, the
same is not violative of the trust fund doctrine
(Sec. 41, SEC Opinions, Oct. 12, 1992, Sept. 11,
1985, and April 11, 1994).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
POWER TO INVEST CORPORATE FUNDS IN ANOTHER
CORPORATION OR BUSINESS
The corporation is not allowed to engage in a
business different from those enumerated in its AOI
The corporation is not allowed to engage in a
business different from those enumerated in its AOI
unless the purpose will be amended to include the
desired business activity among its secondary
purpose.
NOTE: However, in the case of pawnshops organized as
corporations and partnerships, they may be allowed to
engage in ancillary activity of directly purchasing or selling
goods or articles. The Pawnshop Regulation Act contains no
prohibition to engage in ancillary activities. Hence, by
implication, their scope may be extended to other
unrelated business unless clearly prohibited by the said Act.
The only requirement is that the person or entity engaged
at the same time in other business not directly related or
not incidental to pawnshop business, shall keep such
business distinct and separate from his pawnshop
operations (De Leon, 2010 citing SEC Opinion, March 28,
1985).
NOTE: Investment of a corporation in a business which is in
line with its primary purpose requires only the approval of
the board. Any dissenting stockholder shall have appraisal
right.
POWER TO DECLARE DIVIDENDS
Requirements for the declaration of dividends
1. Existence of UREs;
2. Resolution of the board; and
3. Additional Requirements for stock dividends:
a. A vote representing 2/3 of outstanding capital.
(Sec. 43, CC)
b. A corporation must have also a sufficient
number of authorized unissued shares for
distribution to stockholders.
Forms of dividends
1. Cash
NOTE: Cash dividends due on delinquent stock shall first be
applied to the unpaid balance on the subscription plus cost
and expenses (Sec. 43, CC).

Rule in case a corporation wants to invest in an 2. Stock

undertaking
NOTE: Stock dividends are withheld from the delinquent
stockholder until his unpaid subscription is fully paid (ibid).
GR: Investment of a corporation in a business which
is in line with its primary purpose requires only the 3. Property
approval of the board.
NOTE: Stockholders are entitled to dividends PRORATA
XPN: Where the corporation undertakes to invest in based on the total number of shares and not on the
another corporation or business or for any purpose amount paid on shares.
other than a primary purpose, it has to comply with
the statutory requirements before it can do so (Sec. Cash dividends v. Stock dividends
42, CC).
CASH DIVIDENDS STOCK DIVIDENDS
Statutory requirements that the corporation needs Part of general fund Part of capital
to comply with to invest in another corporation or Results in cash outlay No cash outlay
business or for any purpose other than a primary Once issued, can be levied
purpose Not subject to levy by by corporate creditors
corporate creditors because theyre part of
1. Approval by the majority vote of the BOD or BOT corporate capital
2. Ratification by stockholders representing at least Declared only by the
2/3 of the outstanding capital stock or by at least Declared by the board with
board of directors at its
2/3 of the members in case of non-stock the concurrence of the
discretion
corporation stockholders representing
(majority of the
3. Ratification must be made at a meeting duly at least 2/3 of the
quorum only, not
called for the purposes, and outstanding capital stock at
majority of all the
4. Prior written notice of the proposed investment a regular/special meeting
board)
and the time and place of the meeting shall be Does not increase the Corporate capital is
made addressed to each stockholder or member corporate capital increased
by mail or by personal service. Its declaration creates No debt is created by its
a debt from the declaration

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 182
 CORPORATION CODE
corporation to each of XPN: It can be used in the declaration of dividends
its stockholders provided the following conditions exist:
If received by 1. The corporation has sufficient income from
individual: subject to operations from which the depreciation on the
Not subject to tax either appraisal increase was charged;
tax;
received by individual or a
If received by 2. It has no deficit at the time the depreciation on the
corporation
corporation: not appraisal increase was charged to operations;
subject to tax and
Can be revoked despite
Cannot be revoked 3. Such depreciation on appraisal increase previously
announcement but before
after announcement charged to operations has not been erased or
issuance
impaired bysubsequent losses; otherwise, only
Applied to the unpaid Can be withheld until that portion not impaired by subsequent losses is
balance of delinquent payment of unpaid balance available for dividend (SEC Opinions, Oct. 2, 1981
shares of delinquent shares and March 19, 1992).

Scrip dividend 4. Reduction surplus the surplus arises from the

A scrip dividend is dividend issued by the corporation
when the obligation to pay becomes absolute. Thus,
it becomes a debt absolutely due to the stockholders
although payment is postponed to a future date (De
Leon, supra, pg. 431).
Stock split
It is merely a dividing up of the outstanding shares of
a corporation into a greater number of units, without
disturbing the stockholders original proportional
participating interest in the corporation.
Stock split is different from stock dividend. Stock
dividend is a capitalization of earnings or profits,
together with a distribution of the added shares
which evidence the assets transferred to capital. The
stock split, on the other hand, is a mere increase in
the number of shares which evidence ownership
without altering the amount of the capital, surplus, or
segregated earnings (ibid., pg. 435).
Sources of retained earnings
1. Paid-in surplus It is the difference between the
par value and the issued value or selling price of
the shares. It cannot be declared as cash
dividend but can be declared only as stock
dividends
2. Operational Income - The amount of profit realized
from a business's operations after taking out
operating expenses. It is available for both cash
and stock dividends
3. Revaluation surplus Increase in the value of a
fixed asset as a result of its appreciation. They
are by nature subject to fluctuations.
GR: It cannot be declared as dividends because there
is no actual gain.
reduction of the par value of the issued shares of
stocks. It cannot be declared as cash dividend but
can be declared only as stock dividends.
5. Gain from Sale of Real Property - Available as
dividends
6. Treasury Shares Gain realized from reissuance of
treasury shares. It Cannot be declared as stock or
cash dividends but it may be declared as
property dividend
Prohibition imposed by law on URE's of a stock
corporation
GR: Stock corporations are prohibited from retaining
surplus profits in excess of one hundred (100%)
percent of their paid-in capital stock.
XPNs:
1. When justified by definite corporate expansion
projects or programs approved by the board of
directors;
2. When the corporation is prohibited under any loan
agreement with any financial institution or
creditor, whether local or foreign, from declaring
dividends without its/his consent, and such
consent has not yet been secured;
3. When it can be clearly shown that such retention is
necessary under special circumstances obtaining
in the corporation, such as when there is need
for special reserve for probable contingencies
(Sec. 43, CC).
Penalty in case of unjustifiable retention of surplus
profits
The penalty in case a corporation unjustifiably retains
surplus profits in excess of one hundred (100%)
percent of the paid in accumulated capital is the
payment of Improperly Earnings Tax equal to 10% of

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183 FACULTY OF CIVIL LAW
 MERCANTILE LAW
the improperly accumulated taxable income (NIRC OF
1997, Sec. 29 [A]).
Q: During the annual stockholders meeting, Cheryl, a
majority stockholder, proposed that a part of the
corporations URE's be capitalized and stock
dividends be distributed to the stockholders. Can
she compel the corporation to declare stock
dividends? (2001 Bar Question)
A: No. Stock dividends should initially be taken by the
BOD and thereafter to be concurred in by a 2/3 vote
of the stockholders. A stockholder cannot compel the
corporation to declare neither cash nor stock
dividends as it rests with the sound discretion of the
board.
Sources of dividends
GR: Dividends can only be declared out of actual and
bona fide unrestricted retained earnings
XPN: Dividends can be declared out of capital in the
following instances:
1. Dividends from investments wasting assets
corporation;
2. Liquidating dividends
Wrongful or illegal declaration of dividends
In case of wrongful or illegal declaration of dividends,
the Board of Directors is liable. The stockholders
should return the dividends to the corporation
(solutio indebiti).
Persons entitled to receive dividends
Dividends are payable to the stockholders of record
as of the date of the declaration of dividends or
holders of record (Cojuanco and Prime Holdings, Inc.,
v. Sandiganbayan G.R. No. 183278, April 24, 2009).
Rule on the receipt of dividends in case of
mortgaged or pledged shares
GR: The mortgagor or the pledgor has the right to
receive the dividends.
XPN: When the mortgagor or pledgor defaults and
the mortgagee or pledgee acquires the pledged
stocks and the transfer is recorded in the books of the
corporation, the mortgagee or pledgee is entitled to
receive the dividends.
Q: May stock dividends be issued to a person who is
not a stockholder in payment of services rendered?
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
A: No. Only stockholders are entitled to payment of
stock dividends (Nielson & Co., Inc. v. Lepanto
Consolidated Mining Co., G.R. No. 21763, Dec. 17,
1966).
POWER TO ENTER INTO MANAGEMENT CONTRACT
Management contract
It is any contract whereby a corporation undertakes
to manage or operate all or substantially all of the
business of another corporation, whether such
contracts are called service contracts, operating
agreements or otherwise (Sec. 44, CC).
NOTE: Sec. 44 refers only to a management contract with
another corporation. Hence, it does not apply to
management contracts entered into by a corporation with
natural persons (ibid).
Requirements for a management contract to be
valid
1. Contract must be approved by the majority of the
BOD or BOT of both managing and managed
corporation;
2. Ratified by the stockholders owning at least the
majority of the outstanding capital stock, or members
in case of a non-stock corporation, of both the
managing and the managed corporation, at a meeting
duly called for the purpose
3. Contract must be approved by the stockholders of
the managed corporation owning at least 2/3 of the
outstanding capital stock entitled to vote or 2/3 of
the members when:
a. Stockholders representing the same interest in
both of the managing and the managed corporation
own or control more than 1/3 of the total
outstanding capital stock entitled to vote of the
managing corporation (interlocking stockholders);
b. Majority of the members of the BOD of the
managing corporation also constitute a majority of
the BOD of the managed corporation. (interlocking
directors) (Sec. 44, CC).
A corporation can enter into a management contract
with a natural person without complying with the
requisites of Sec. 44
Sec 44 refers only to a management contract with
another corporation. Hence, it does not apply to
management contracts entered into by a corporation
with natural persons.
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 CORPORATION CODE
Period for every management contract entered into Doctrine of apparent authority
by the corporation
If a corporation knowingly permits one of its officers,
GR: Management contract shall be entered into for a or any other agent, to act within the scope of an
period not longer than 5 years for any one term. apparent authority, it holds him out to the public
possessing the power to do those acts; and thus, the
XPN: In cases of service contracts or operating corporation will, as against anyone who has in good
agreements which relate to the exploitation, faith dealt with it through such agent, be estopped
development, exploration or utilization of natural from denying the agents authority.
resources, it may be entered for such periods as may Instance when the corporation is estopped to deny
be provided by the pertinent laws or regulations. ratification of contracts or acts entered by its
officers or agents
ULTRA VIRES ACTS
Generally, when the corporation has knowledge that
Ultra vires act its officers or agents exceed their power, it must
promptly disaffirm the contract or act, and allow the
An ultra vires act refers to an act outside or beyond other party or third person to act in the belief that it
express, implied and incidental corporate powers. was authorized or has been ratified. Otherwise, if it
The concept also includes those acts that may acquiesces, with knowledge of the facts, or if it fails
ostensibly be within such powers but are, by general to disaffirm, ratification will be implied (Premiere
or special laws, either proscribed or declared illegal Development Bank vs. CA, G.R. No. 159352, Apr. 14,
(Rural Bank of Milaor v Ocefemia, G.R. No. 137686, 2004).
February 8, 2000).
Q: Five (5) parcels of land subject of this case were
Types of UVA originally owned by Juanita Arellano Ocfemia and
Felicisimo Ocfemia. During their lifetime,the said
1. Acts done beyond the powers of the five (5) parcels of land and two (2) others were
corporation (through BOD) mortgaged to Rural Bank of Milaor (RBM). The
2. Ultra vires acts by corporate officers spouses Felicisimo and Juanita were not able to
3. Acts or contracts which are per se illegal as redeem the mortgaged properties and so the
being contrary to law. mortgage was foreclosed and thereafter ownership
thereof was transferred to RBM. Out of the seven
Applicability of ultra vires doctrine (7) parcels that were foreclosed, five (5) of them are
in the possession of the the grandchildren of the
Ultra vires acts by reason of lack of authority v. Ultra spouses Felicisimo and Juanita because these five (5)
vires acts by reason of illegality (illegal acts) parcels of land were sold by RBM bank to the
children of the spoues. The five (5) parcels of land
have not been, however transferred in the name of
BASIS ULTRA VIRES ACT ILLEGAL ACTS the children of the spouses after they were sold
Not necessarily Unlawful; against because according to the Assessor's Office the five
unlawful, but outside law, morals, public (5) parcels of land, subject of the sale, cannot be
Lawfulness
the powers of the policy, and public transferred in the name of the buyers as there is a
corporation order need to have the document of sale registered with
Ratification Can be ratified Cannot be ratified the Register of Deeds (RD). In view of the foregoing,
Can bind the parties Marife, the grandchild of the spouses went to the
Binding Cannot bind the
if wholly or partly RD with the Deed of Sale in order to have the same
effect parties
executed registered. The RD however, informed her that the
document of sale cannot be registered without a
Instances when the act of the officers bind the board resolution of RBM. Marife went to the bank
corporation and requested the for a board resolution so that the
property can be transferred to the name of Renato
1. If it is provided in the by-laws Ocfemia. RBM refused her request for a board
2. If authorized by the board resolution and made many alibis. After some time,
3. Under the doctrine of apparent authority she was told that the resolution of the board would
4. When the act was ratified not be released because the RBM had no records
from the old manager. May the board of directors of

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185 FACULTY OF CIVIL LAW
 MERCANTILE LAW
a rural banking corporation be compelled to confirm
a deed of absolute sale of real property owned by
the corporation which deed of sale was executed by
the bank manager without prior authority of the
board of directors of the rural banking corporation?
A: Yes. The corporation may be compelled. A bank is
liable to innocent third persons where representation
is made in the course of its normal business by an
agent like the bank manager, even though such agent
is abusing her authority. Clearly, persons dealing with
her could not be blamed for believing that she was
authorized to transact business for and on behalf of
the bank. The bank is estopped from questioning the
authority of the bank manager to enter into the
contract of sale. If a corporation knowingly permits
one of its officers or any other agent to act within the
scope of an apparent authority, it holds the agent out
to the public as possessing the power to do those
acts; thus, the corporation will, as against anyone
who has in good faith dealt with it through such
agent, be estopped from denying the agent's
authority. Unquestionably, the bank has authorized
its manager to enter into the Deed of Sale.
Accordingly, it has a clear legal duty to issue the
board resolution sought by respondent's. Having
authorized her to sell the property, it behooves the
bank to confirm the Deed of Sale so that the buyers
may enjoy its full use (Rural Bank of Milaor
(Camarines Sur) v. Francisca Ocfemia, et al., G.R. No.
137686, February 8, 2000).
Q: The spouses Vaca executed REM in favor of
Associated Bank over their parcel of residential land
and the house constructed thereon. For failure of
the spouses Vaca to pay their obligation, the subject
property was sold at public auction with Associated
Bank as the highest bidder. The Transfer Certificate
of Title in the name of spouses Vaca, was cancelled
and a new one was issued in the name of the
Associated Bank. The spouses Vaca, however,
commenced an action for the nullification of the real
estate mortgage and the foreclosure
sale. Associated Bank, on the other hand, filed a
petition for the issuance of a writ of possession
which was denied by the RTC. Associated Bank,
thereafter, obtained a favorable judgment when the
CA granted its petition but the spouses Vaca
questioned the CA decision. During the pendency of
the cases, Associated Bank advertised the property
for sale to interested buyers. Rafael and Monaliza
Pronstroller bought the same. In view of the
pendency of the case between the spouses Vaca and
Associated Bank involving the property, Spouses
Pronstroller requested that the balance of the
purchase price be made payable only upon service
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
on them of a final decision or resolution of this
Court affirming Associated Banks right to possess
the property. After they made the request and after
the payment deadline had lapsed, Spouses
Pronstroller and Atty. Soluta, acting for the
Associated Bank, executed another
Letter-Agreement allowing the former to pay the
balance of the purchase price upon receipt of a final
order from this Court (in the Vaca case) and/or the
delivery of the property to them free from
occupants. Is the Associated Bank bound by
the Letter-Agreement signed by Atty. Soluta under
the doctrine of apparent authority?
A: Yes. The authority of a corporate officer or agent
in dealing with third persons may be actual or
apparent. 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. 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, Associated Bank 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 v. Spouses Rafael and
Monaliza Pronstroller, G.R. No. 148444, July 14,
2008).
Spouses Maglasang obtained a loan from PCRB. To
secure the payment of the subject loan, a REM was
executed. Before the subject loan became due, the
spouses Maglasang asked PCRBs permission to sell
the subject properties. They likewise requested that
the subject properties be released from the
mortgage since the two other loans were
adequately secured by other mortgages. The
spouses Maglasang claimed that the PCRB, acting
through its Branch Manager, Pancrasio Mondigo,
verbally agreed to their request, hence, spouses
Maglasang sold to Violeta Banate the subject
properties. The spouses Magsalangused the amount
to pay the subject loan with PCRB. After settling the
subject loan, PCRB gave the owners duplicate
186
 CORPORATION CODE
certificate of title to Banate, who was able to secure
a new title in her name. The title, however, carried
the mortgage lien in favor of PCRB, prompting the
Banate to request from PCRB a Deed of Release of
Mortgage. As PCRB refused to comply with the
Banates request, Banate instituted an action for
specific performance to compel PCRB to execute the
release deed. Since the subject loan had been fully
paid, the RTC considered the petitioners as rightfully
entitled to a deed of release of mortgage, pursuant
to the verbal agreement that Banate made with
PCRBs branch manager, Mondigo. The CA reversed.
It ruled that Mondigo cannot orally amend the
mortgage contract between PCRB, and the spouses
Maglasang therefore, the claimed commitment
allowing the release of the mortgage on the subject
properties cannot bind PCRB. Did the purported
agreement between Banate and Mondigo novate
the mortgage contract over the subject properties
and is thus binding upon PCRB?
A: No. The Court would be unduly stretching the
doctrine of apparent authority if the Court would
consider the power to undo or nullify solemn
agreements validly entered into as within the
doctrines ambit. 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 Mondigo
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; PCRBs 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. To put it simply, the burden
of proving the authority of Mondigo to alter or
novate the mortgage contract has not been
established (Violeta Tudtud Banate, et al., v.
Philippine Countryside Rural Bank, Inc., et al., G.R.
No. 163825, July 13, 2010).
Q: PPI, a fertilizer manufacturer, entered into an
arrangement with Janet Layson for the delivery of
fertilizers to her, payable from the proceeds of the
loan that UCPB extended to her. Layson executed a
document called pagares, written on the dorsal
side of a UCPB promissory note. The pagares stated
that Layson had an approved loan with UCPB-Iloilo
187
Branch. The second portion of the pagares, signed
by that branchs manager Gregory Grey, stated that
the assignment has been duly accepted and
payment duly guaranteed within 60 days from PPIs
Invoice. But contrary to her undertakings, Layson
withdrew with branch manager Greys connivance,
the loan that UCPB granted her. On the strength of
the three documents, PPI delivered quantities of
fertilizers to Layson. When PPI presented the
documents of the financed transactions to UCPB for
collection, the bank denied the claim on the ground
that it neither authorized the transactions nor the
execution of the documents which were not part of
its usual banking transactions. UCPB claimed that
branch manager Grey exceeded his authority in
guaranteeing payment of Laysons purchases on
credit. UCPB contends that the pagares were illegal
and void since banking laws prohibit bank officers
from guaranteeing loans of bank clients. Is UCPB
bound by Greys undertaking on its behalf to deliver
to PPI the proceeds of the banks loan in payment of
the fertilizers Layson bought?
A: No. UCPB is not bound. A corporation like UCPB is
liable to innocent third persons where it knowingly
permits its officer, or any other agent, to perform
acts within the scope of his general or apparent
authority, holding him out to the public as possessing
power to do those acts. But, here, it is plain from the
guarantee Grey executed that he was acting for
himself, not in representation of UCPB. UCPB cannot
be bound by Greys above undertaking since he
appears to have made it in his personal capacity. He
signed it under his own name, not in UCPBs name or
as its branch manager. Indeed, the wordings of the
undertaking do not at all make any allusion to UCPB
(United Coconut Planters Bank v. Planters Products,
Inc., et al., G.R. No. 179015, June 13, 2012).
Consequences of ultra vires acts
Effects of an ultra vires act
Ultra vires acts entered into by the board of directors
binds the corporation and the courts will not
interfere unless terms are oppressive and
unconscionable (Gamboa vs. Victoriano, G.R. No.
L-43324. May 5, 1979).
These are the effects for the specific acts:
1. Executed contract courts will not set aside or
interfere with such contracts;
2. Executory contracts no enforcement even at the
suit of either party (void and unenforceable);
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Partly executed and partly executory principle of
no unjust enrichment at expense of another
shall apply;
4. Executory contracts apparently authorized but ultra
vires the principle of estoppel shall apply.
Remedies in case of ultra vires act
1. State
a. Obtain a judgment of forfeiture; or
b. The SEC may suspend or revoke the certificate of
registration
2. Stockholders
a. Injunction; or
b. Derivative suit
3. Creditors - Nullification of contract in fraud of
creditors.
Q: X Corp., whose business purpose is to
manufacture and sell vehicles, invested its funds in Y
Corp., an investment firm, through a resolution of its
Board of Directors. The investment grew
tremendously on account of Y Corp.'s excellent
business judgment. But a minority stockholder in X
Corp. assails the investment as ultra vires. Is he right
and, if so, what is the status of the investment?
(2011 Bar Question)
A: Yes, it is an ultra vires act of its Board of Directors
but voidable only, subject to stockholders
ratification.
POWERS HOW EXERCISED
BY THE SHAREHOLDERS
The shareholders participate in controlling the affairs
of the corporation by exercising their right to vote.
They can elect the directors who will actually govern
the corporation and they can also vote on important
matters that are still reserved to them by the
Corporation Code (Aquino, 2006).
BY THE BOARD OF DIRECTORS
The Board of Directors is primarily responsible for the
governance of the corporation. Their primary duty is
to set the policies for the accomplishment of the
corporate objectives (Revised Code of Corporate
Governance, Art. 3). They elect the officers who carry
out the policies that they have established.
Q: Sheryl Oabel was initially hired by Maranaw
Hotel as an extra beverage attendant. Oabel worked
in Century Park Hotel, an establishment owned by
the Maranaw Hotels. Maranaw Hotels contracted
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
with Manila Resource Development Corporation
(MANRED). Subsequently, Oabel was transferred to
MANRED, with the latter deporting itself as her
employer. After sometime, Oabel filed before the
Labor Arbiter a petition for regularization of
employment against the Maranaw Hotels. However,
Oabel was dismissed from employment. Oabel
converted her petition for regularization into a
complaint for illegal dismissal. The NLRC found that
Oabel was illegally dismissed. Maranaw Hotels
subsequently appealed before the CA. The CA
dismissed the petition on account of the failure of
the Maranaw Hotels to append the board resolution
authorizing the counsel for Maranaw Hotels to file
the petition before the Court of Appeals. Maranaw
Hotels invokes substantial justice as justification for
a reversal of the resolution of the Court of Appeals.
It contends that the filing of a motion for
reconsideration with the certificate of non-forum
shopping attached constitutes substantial
compliance with the requirement. Did the petition
before the CA comply with the procedural
requirements under the law and the rules?
A: No. Well-settled is the rule that the certificate of
non-forum shopping is a mandatory requirement.
Substantial compliance applies only with respect to
the contents of the certificate but not as to its
presence in the pleading wherein it is required.
Furthermore, the lawyer acting for the corporation
must be specifically authorized to sign pleadings for
the corporation. Specific authorization, the Court
held, could only come in the form of a board
resolution issued by the Board of Directors that
specifically authorizes the counsel to institute the
petition and execute the certification, to make his
actions binding on his principal,i.e., the corporation.
The SC has not wavered in stressing the need for
strict adherence to procedural requirements. The
rules of procedure exist to ensure the orderly
administration of justice. They are not to be trifled
with lightly (Maranaw Hotels and Resort Corporation
v. CA, et al., G.R. No. 149660, January 20, 2009).
Q: MLDC is the registered owner of a piece of land.
MLDC represented by its Chairman and President,
Ronaldo Salonga, and ECRM Enterprises,
represented by its proprietor, Mario P. Tablante,
executed an agreement whereby the former would
lease to the latter an area to be used as the staging
area for the Home and Garden Exhibition Fair. On
the date of the expiration of the Lease Agreement,
Tablante assigned all his rights and interests under
the said agreement to Rockland Co. under a Deed of
Assignment of the same date. MLDC eventually
learned that Tablante had executed a contract
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 CORPORATION CODE
of lease with MC Home Depot, Inc. over the same BY THE OFFICERS
parcel of land. Thereafter, MC Home Depot, Inc.
constructed improvements on the land and After the election of directors, the latter must
subdivided the area into fifty-nine (59) commercial formally organize by electing the corporate officers
stalls, which it leased to various entities. Upon the (Sec. 25, CC). The corporate officers are tasked to
expiration of the lease, MLDC demanded that carry out the policies laid down by the Board, the AOI
Tablante, MC Home Depot, and Rockland vacate the and the by-laws.
land. MLDC filed a case for unlawful detainer against
Tablante, MC Home Depot, and Rockland. The MTC Corporate officers position
held that it has no jurisdiction over the case. The
RTC affirmed. The CA dismissed the petition on the 1. An office that is created by the charter of the
ground that the verification and certification against corporation and
non-forum shopping was signed by a certain Antonio 2. The officer is elected by the directors or
A. Merelos as General Manager of MLDC without stockholders (Easycall Communications Phils.,
attaching therewith a Corporate Secretarys Inc. vs. Edward King, G.R. No.145901, Dec. 15,
certificate or board resolution that he is authorized 2005).
to sign for and on behalf of the MLDC. Does the
failure to attach the verification and certification Limitations on the holding of a corporate officers
against forum shopping in petition justify the position
dismissal of the case?
Any two or more positions may be held concurrently
A: No. It must be borne in mind that Sec. 23, in by the same person, except that no one shall act as
relation to Sec. 25 of the Corporation Code, clearly president and secretary or as president and treasurer
enunciates that all corporate powers are exercised, at the same time (Sec. 25, CC).
all business conducted, and all properties controlled
by the board of directors. Thus, it is clear that an Positions of corporate officers to be filled up by the
individual corporate officer cannot solely exercise any Directors
corporate power pertaining to the corporation
without authority from the board of CORP. MEMBERSHIP CITIZEN-
directors. However, the Court has recognized the RESIDENCY
OFFICER REQUIREMENT SHIP
authority of some corporate officers to sign the 1. Must be a
verification and certification against forum director at the
shopping. In sum, the following officials or employees time he
of the company can sign the verification and assumes office Need Need NOT
certification without need of a board resolution: (1) NOT be a be a
the Chairperson of the Board of Directors, (2) the 1.President
2. must be the Filipino Philippine
President of a corporation, (3) the General Manager stockholder on Citizen Resident
or Acting General Manager, (4) Personnel Officer, and record of at
(5) an Employment Specialist in a labor case. The least 1 share of
rationale applied in the foregoing cases is to justify stock
the authority of corporate officers or representatives May or may not
of the corporation to sign the verification or Must be Must be a
be a director,
certificate against forum shopping, being in a position a Filipino Philippine
2.Secretary unless required
to verify the truthfulness and correctness of the Citizen Resident
by the by-laws
allegations in the petition. From the foregoing, it is Need
thus clear that the failure to attach the Secretarys Must be a
May or may not NOT be a
Certificate, attesting to General Manager Antonio 3.Treasurer Philippine
be a director Filipino
Mereloss authority to sign the Verification and Resident
Citizen
Certification of Non-Forum Shopping, should not be 4. Such Qualifications may be provided for in the
considered fatal to the filing of the petition other by-laws
(Mid-Pasig Land Development Corporation v. Mario officers as
Tablante, doing business under the name and style may be
ECRM Enterprises, G.R. No. 162924, February 4, provided in
2010). the
by-laws

UNIVERSITY OF SANTO TOMAS

189 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Corporate officer v. Corporate employee
CORPORATE OFFICER CORPORATE EMPLOYEE
Position is provided for Employed by the action
in the by-laws or under of the managing officer
the Corporation Code. of the corporation.
RTC acting as a special
commercial court has Labor Arbiter has
jurisdiction over jurisdiction in case of
intra-corporate labor disputes.
controversies.
Power to amend or
Power to amend/repeal repeal by-laws or adopt
articles cannot be new by-laws may be
delegated by the delegated by the 2/3 of
stockholders/ members the outstanding capital
to the board of stock or 2/3 of the
directors/ trustees members in the case of
non-stock corporation
Q: Ricardo Coros was dismissed by Matling Industrial
and Commercial Corporation (Matling) as its Vice
President for Finance and Administration. Because
of this, Coros filed a complaint for illegal suspension
and illegal dismissal against Matling and some of its
corporate officers with the NLRC. Matling, et al.,
moved to dismiss the complaint, raising the ground,
among others, that the complaint pertained to the
jurisdiction of the SEC due to the controversy being
intra-corporate inasmuch as Coros was a member of
Matlings Board of Directors aside from being its
Vice-President for Finance and Administration prior
to his termination. It further argues that the power
to create corporate offices and to appoint the
individuals to assume the offices was delegated by
Matlings Board of Directors to its President through
its By-Laws; and that any office the President
created, like the position of the Coros, was as valid
and effective a creation as that made by the Board
of Directors, making the office a corporate office. Is
Coros a corporate officer of Matling?
A: No. Pursuant to Section 25 of the Corporation
Code, whoever are the corporate officers
enumerated in the by-laws are the exclusive officers
of the corporation and the Board has no power to
create other offices without amending first the
corporate By-laws. However, the Board may create
appointive positions other than the positions of
corporate officers, but the persons occupying such
positions are not considered as corporate officers
within the meaning of Section 25 of the Corporation
Code and are not empowered to exercise the
functions of the corporate officers, except those
functions lawfully delegated to them. Their functions
and duties are to be determined by the Board of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Directors/Trustees. Moreover, 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 is a discretionary power that the law
exclusively vested in the Board of Directors, and
could not be delegated to subordinate officers or
agents. The office of Vice President for Finance and
Administration created by Matlings President
pursuant to the By-Law was an ordinary, not a
corporate, office (Matling Industrial and Commercial
Corporation, et al., v. Ricardo R. Coros, G.R. No.
157802, October 10, 2010).
TRUST FUND DOCTRINE
Trust fund doctrine
The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to look
up to satisfy their credits, and which the corporation
may not dissipate. The creditors may sue the
stockholders directly for the latters unpaid
subscription.
Effects of the trust fund doctrine
1. Dividends must never impair the subscribed capital
stock and must only be declared out of UREs
2. Subscription commitments cannot be condoned or
remitted
3. GR: The corporation cannot buy its own shares
using the subscribed capital as the consideration
therefore (NTC v. Court of Appeals, G.R. No.
127937. July 28, 1999).
XPN: (RDC)
a. Redeemable shares may be acquired even
without 0o]surplus profit for as long as it will not
result to the insolvency of the Corporation
b. In cases that the corporation conveys its stocks in
payment of a Debt
c. In a Close corporation, a stockholder may
demand the payment of the fair value of shares
regardless of existence of retained earnings for
as long as it will not result to the insolvency of
the corporation
4. Rescission of a subscription agreement is not
allowed since it will effectively result in the
unauthorized distribution of the capital assets
and property of the corporation (Ong v Tiu, ibid).
190
 CORPORATION CODE
Exceptions to the trust fund doctrine
The Code allows distribution of corporate capital only
in these instances:
1. Amendment of the AOI to reduce authorized
capital stock;
2. Purchase of redeemable shares by the corporation
regardless of existence of unrestricted retained
earnings;
3. Dissolution and eventual liquidation of the
corporation.
BOARD OF DIRECTORS AND TRUSTEES
DOCTRINE OF CENTRALIZED MANAGEMENT
Doctrine of Centralized Management
The Doctrine of Centralized Management states that
all corporate powers are exercised by the BOD or BOT
(Sec. 23, CC). However, this doctrine is not applicable
to the following instances:
1. In case of delegation to the Executive Committee
duly authorized in the by-laws;
2. Authorization pursuant to a contracted manager
which may be an individual, a partnership, or another
corporation.
3. In case of close corporations, the stockholders may
manage the business of the corporation instead by a
board of directors, if the articles of incorporation so
provide.
Independent director
For this purpose, an independent director shall
mean a person other than an officer or employee of
the corporation, its parent or subsidiaries, or any
other individual having a relationship with the
corporation, which would interfere with the exercise
of independent judgment in carrying out the
responsibilities of a director.
Cases where independent directors are required
At least two (2) independent directors are required in
the following companies;
1. Any corporation with a class of equity securities
listed for trading on an Exchange (Publicly traded
companies);
2. Banks;
3. Corporations with secondary franchise.
Required number of independent directors for the
corporations covered by the Revised Code of
Corporate Governance (RCCG)
191
At least 2 or such number of independent directors
that constitute 20% of the members of the board
whichever is lesser, but in no case less than 2 (Art. 3
[A], RCCG).
BUSINESS JUDGMENT RULE
Business Judgment Rule
GR: Contracts intra vires entered into by the board of
directors are binding upon the corporation beyond
the interference of courts. The courts are barred from
intruding into business judgments of corporations,
when the same are made in good faith (Ong v Tiu,
G.R. No. 144476. April 8, 2003).
XPNs: Courts can inquire unto contracts which are:
1. Unconscionable and oppressive as to amount to
wanton destruction to the rights of the minority (Ong
v Tiu, ibid).
2. Bad faith or gross negligence by the directors
(Republic Communications Inc v CA, G.R. No. 135074,
January 29, 1999).
Consequences of Business Judgment Rule
1. Resolutions and transactions entered into by the
Board within the powers of the corporation
cannot be reversed by the courts not even on the
behest of the stockholders.
2. Directors and officers acting within such business
judgment cannot be held personally liable for
such acts.
3. If the cause of the losses is merely error in
business judgment, not amounting to bad faith
or negligence, directors and/or officers are not
liable (Filipinas Port Services v Go, G.R. No.
161886, March 16, 2007).
4. The Board of Directors has the power to create
positions not provided for in the corporation's
bylaws since the board is the corporations
governing body, clearly upholding the power of
its board to exercise its prerogatives in managing
the business affairs of the corporation (Filipinas
Port Services v Go, ibid).
5. Directors and officers who purport to act for the
corporation, keep within the lawful scope of their
authority and act in good faith, do not become
liable, whether civilly or otherwise, for the
consequences of their acts, which are properly
attributed to the corporation alone (Benguet
Electric Cooperative, Inc. v. NLRC,GR 89070,
May 18, 1992).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: PALI sought to offer its shares to the public in
order to raise funds for development of properties
and pay its loans with several banks. To facilitate the
trading of its shares, PALI applied for a listing in the
Philippine Stock Exchange Inc. (PSE), a non-profit
corporation. Subsequently, PSE received a letter
from the Heirs of Marcos, requesting PSE to defer
PALIs registration, contending that certain
properties of PALI are owned by Marcos.
Consequently, PSE rejected PALIs application. The
SEC reversed the ruling of the PSE. Is the SEC
correct?
A: No. In applying the business judgment rule, the
SEC and the courts are barred from intruding into
business judgments of corporations, when the same
are made in good faith. The said rule precludes the
reversal of the decision of the PSE to deny PALI's
listing application, absent a showing of bad faith on
the part of the PSE.
Under the listing rules of the PSE, to which PALI had
previously agreed to comply, the PSE retains the
discretion to accept or reject applications for listing
(PSE v CA, G.R. No. 125469, October 27, 1997).
TENURE, QUALIFICATIONS AND DISQUALIFICATIONS
OF DIRECTORS OR TRUSTEES
Term of office of BOD/BOT
GR: The regular director shall hold office for 1 year.
XPN: If no election is held, the directors and officers
will continue to occupy position even after the lapse
of 1 year under a hold-over capacity until their
successors are elected and qualified.
NOTE: This is applicable to a going concern where there is
no break in the exercise of the duties of the officers and
directors (SEC Opinion, Dec. 15, 1989).
Common qualifications of a director and trustee
1. Majority of the directors/trustees must be
residents of the Philippines (Sec. 23, CC).
2. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for period exceeding 6 years or a
violation of the Corporation Code, committed
within 5 years prior to the date of his election
(Sec. 27, CC).
3. He must be of legal age
4. Other qualifications as may be prescribed in
special laws or regulations or in the by-laws of
the corporation
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
A director cannot be elected without owning any
stock in the corporation
A person who does not own a stock at the time of his
election or appointment does not disqualify him as
director if he becomes a shareholder before assuming
the duties of his office (SEC Opinions, Nov. 9, 1987 &
Apr. 5, 1990).
Q: Grace Christian High School is an educational
institution at the Grace Village in Quezon City. Grace
Village Association, Inc., on the other hand, is an
organization of lot and/or building owners, lessees
and residents at Grace Village. A committee of the
board of directors of the Association prepared a
draft of an amendment to the by-laws. The draft
was never presented to the general membership for
approval. Nevertheless, from 1975, after it was
presumably submitted to the board, up to 1990,
Grace Christian High School was given a permanent
seat in the board of directors of the
association. After some time, the associations
committee on election informed James Tan,
principal of the school, that all directors should be
elected by members of the association. For this
reason, Tan was told that the proposal to make the
Grace Christian High School representative as a
permanent director of the association, although
previously tolerated in the past elections should be
reexamined. Grace Christian High School argues that
it had acquired a vested right to a permanent seat in
the board of directors. Did Grace Christian High
School acquire vested right to a permanent seat in
the board of directors?
A: No. The board of directors of corporations must be
elected from among the stockholders or
members. Section 28 of the Old Corporation Code
provides that unless otherwise provided, the
corporate powers of all corporations formed under
this Act shall be exercised, all business conducted and
all property of such corporations controlled and held
by a board of not less than five nor more than eleven
directors to be elected from among the holders of
stock or, where there is no stock, from the members
of the corporation. Section 29 also states that
directors of the corporation shall be elected annually
by the stockholders if it be a stock corporation or by
the members if it be a nonstock corporation, and if
no provision is made in the by-laws for the time of
election the same shall be held on the first Tuesday
after the first Monday in January. Moreover, the term
of the board of directors or trustee is embodied in
Section 23 stating that a member of the board of
director should be elected from among the holders of
stocks, or where there is no stock, from among the
192
 CORPORATION CODE
members of the corporation, who shall hold office for
one (1) year and until their successors are elected and
qualified. Since the provision in question is 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. Neither can it attain validity through
acquiescence 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 School v.
CA, et al., G.R. No. 108905, October 23, 1997).
Additional qualifications provided by the Revised
Code of Corporate Governance
A director should have the following:
1. College education or equivalent academic degree
2. Practical understanding of the business of the
corporation
3. Membership in good standing in relevant
industry, business or professional organizations
4. Previous business experience (Art. 3 [D], RCCG)
Grounds for disqualification of a director
1. Conviction by final judgment of an offense
punishable by imprisonment exceeding 6 years;
2. Violation of the Corporation Code committed
within 5 years prior to his election or
appointment (Sec. 27, CC).
NOTE: Disqualification by reason of violation of the
Corporation Code does not require conviction for the
reason that the decision of the SEC is final and executory
unless appealed in CA and a TRO is obtained.
Q: John Gokongwei Jr., as stockholder of San Miguel
Corporation, filed with SEC a petition for declaration
of nullity of amended by-laws against the majority
of the members of the Board of Directors and San
Miguel Corporation. Among others, it was claimed
that prior to the questioned amendment,
Gokongwei had all the qualifications to be a director
of the corporation, being a substantial stockholder
thereof, that as a stockholder, Gokongwei had
acquired rights inherent in stock ownership, such as
the rights to vote and to be voted upon in the
election of directors, and that in amending the
by-laws, Soriano, et. al. purposely provided for
Gokongwei's disqualification and deprived him of his
vested right as afore-mentioned, hence the
amended by-laws are null and void. Is a provision on
the by-law disqualifying a person for a position in
the board of directors on the ground that he is
engaged in a business which competes with that of
the Corporation valid?
193
A: Yes. A corporation is authorized to prescribe the
qualifications of its directors. 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 compete with that of the Corporation is valid;
provided, however, that before such nominee is
disqualified, he should be given due process to show
that he is not covered by the disqualification. A
director stands in fiduciary relation to the corporation
and its stockholders. The disqualification of a
competitor from being elected to the board of
directors is a reasonable exercise of corporate
authority. Sound principles of corporate management
counsel against sharing sensitive information with a
director whose fiduciary duty to loyalty may well
require that he discloses this information to a
competitive rival (John Gokongwei, Jr. v. SEC, et al.,
G.R. No. L-45911, April 11, 1979).
Foreigners are not disqualified from being elected/
appointed as members of the BOD
While foreigners are disqualified from being elected/
appointed as corporate officers in wholly or partially
nationalized business activities, they are allowed
representation in the BOD or governing body of said
entities in proportion to their shareholding
(Anti-Dummy Law, Sec. 2-A; Constitution, Sec. 11, Art.
XII).
Reason: The BOD/ governing body performs specific duties
as a body. Unlike corporate officers, each member of the
BOD/ governing body has no individual power or authority
to perform management functions (De Leon, supra, pg.
319).
ELECTIONS
Requirements for the election of directors in a stock
corporation
1. Stockholders, representing a majority of the
outstanding capital stock of the corporation must
be present, either in person or by a
representative authorized to act by written
proxy,
2. The election must be by ballot, if requested by
any voting stockholder or member.
3. The total number of votes cast by him must not
exceed the number of shares owned by him as
shown in the books of the corporation multiplied
by the whole number of directors to be elected:
4. No delinquent stock shall vote or be voted for.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Limitations on the election of directors/ trustees directors to be elected multiplied by the number of
his shares shall equal.
1. At a meeting of stockholders or members called
for the election of directors or trustees, there 3. Cumulative voting by distribution a stockholder
must be present either in person or by may cumulate his shares by multiplying the number
representative authorized to act by written of his shares by the number of directors to be elected
proxy, the owners of the majority of the and distribute the same among as many candidates
outstanding capital stock or majority of the as he shall see fit.
members entitled to vote.
2. The election must be by ballot if requested; NOTE: Cumulative voting in case of non-stock corporations
3. A stockholder cannot be deprived in the articles only if it is provided in the AOI. The members of non-stock
of incorporation or in the by-laws of his statutory corporations may cast as many votes as there are trustees
to be elected but may cast not more than one vote for one
right to use any of the methods of voting in the
candidate.
election of directors;
4. No delinquent stock shall be voted;
5. The candidates receiving the highest number of
QUORUM
votes shall be declared elected (Sec. 24, CC).
Quorum required in a stock or non-stock
Permanent representation is not allowed in the BOD
corporation
The board of directors of corporations must be
Unless otherwise provided for in the by-laws, a
elected from among the stockholders or
quorum shall consist of the stockholders representing
members directors every year. Estoppel does not set
a majority of the outstanding capital stock entitled to
in to legitimize what is wrongful (Grace Christian High
vote or a majority of the members in the case of
School v. CA, G.R. No. 108905, Oct. 23, 1997).
non-stock corporations (Sec. 52,CC).
Jurisdiction over election contests in stock and
REMOVAL
non-stock corporations
Power to remove directors or trustees
As amended by R.A. 8799 (The Securities Regulation
Code), the jurisdiction of the SEC under Sec. 5 P.D.
The power to remove belongs to the stockholders
No. 902A (SEC Reorganization Act) is now transferred
exclusively (Sec. 28, CC).
to Courts of General Jurisdiction (Regional Trial
Court). Thus, RTC now has jurisdiction over election
GR: Removal may be with or without cause
contest.
XPN: If the director was elected by the minority,
Q: In case where there are 2 lists of BOD submitted
there must be cause for removal because the
to SEC, which one is controlling?
minority may not be deprived of the right to
representation to which they may be entitled under
A: It is the list of directors in the latest general
Sec. 24 of the Code (Sec. 28, CC).
information sheet as filed with the SEC which is
controlling (Premium Marble Resources, Inc. v. CA,
Requisites for removal of directors or trustees
G.R. No. 96551, Nov. 4, 1996).
1. It must take place either at a regular meeting or
CUMULATIVE VOTING/ STRAIGHT VOTING
special meeting of the stockholders or members
called for the purpose;
Different methods of voting
2. Previous notice to the stockholders or members
of the intention to remove a director;
1. Straight voting every stockholder may vote such
3. A vote of the stockholders representing 2/3 of
number of shares for as many persons as there are
outstanding capital stock or 2/3 of members.
directors to be elected.
Q: In 1999, Corporation A passed a board resolution
3. Cumulative voting for one candidate a
removing X from his position as manager of said
stockholder is allowed to concentrate his votes and
corporation. The bylaws of A corporation provide
give one candidate, as many votes as the number of
that the officers are the president, vicepresident,
treasurer and secretary. Upon complaint filed with

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 194
 CORPORATION CODE
the SEC, it held that a manager could be removed by
mere resolution of the board of directors. On
motion for reconsideration, X alleged that he could
only be removed by the affirmative vote of the
stockholders representing 2/3 of the outstanding
capital stock. Is X's contention legally tenable. Why?
(2001 Bar Question)
A: No. Stockholders' approval is necessary only for
the removal of the members of the Board. For the
removal of a corporate officer or employee, the vote
of the Board of Directors is sufficient for the purpose.
FILLING OF VACANCIES
Ways of filling up the vacancies in the board
1. Vacancies filled up by stockholders or members:
(ERORI)
a. Expiration of term;
b. Removal;
c. Grounds Other than removal or expiration of
term, where the remaining directors do not
constitute a quorum for the purpose of filling the
vacancy;
d. If the vacancy may be filled by the remaining
directors or trustees but the board Refers the
matter to stockholders or members; or
e. Increase in the number of directors results to
vacancy.
2. Vacancies filled up by members of the board -If still
constituting a quorum, at least a majority of the
members are empowered to fill any vacancy
occurring in the board other than by removal by the
stockholders or members or by expiration of term
(Sec. 29, CC).
NOTE: The phrase may be filled in Sec. 29 indicates that
the filling of vacancies in the board by the remaining
directors constituting a quorum is merely permissive.
Corporations may choose how vacancies in their boards
may be filled up, either by the remaining directors or
trustees constituting a quorum or by all stockholders or
members.
However, if the by-laws prescribe the specific mode of
filling up existing vacancies, the provisions of the by-laws
should be followed (De Leon, supra, pg. 296).
Duration of the term of a replacement director
A director elected to fill vacancy shall serve the
unexpired term of the director he replaced (Sec. 29,
CC).
195
Filling-up a vacancy caused by resignation of a
director in a hold-over position
The vacancy caused by resignation of a director in a
hold-over position can only be filled up by the
stockholders or members, for the cause of vacancy is
not resignation but by expiration of term because the
hold-over period is not a part of the directors original
term of office, nor is it a new term (De Leon, supra,
pg. 295-296).
Q: During the Annual Stockholders Meeting of Valle
Verde Country Club, Inc. (VVCC), Jaime Dinglasan, et
al., were elected as new members of the board of
directors. In the succeeding years however, the
requisite quorum for the holding of the
stockholders meeting could not be
obtained. Consequently, Dinglasan, et al., continued
to serve in the VVCC Board in a hold-over capacity.
Subsequently, Dinglasan resigned from his position
as member of the VVCC Board. In a meeting, the
remaining directors, still constituting a quorum of
VVCCs nine-member board, elected Eric Roxas to fill
in the vacancy created by the resignation of
Dinglasan. A year later, Eduardo Makalintal also
resigned as member of the VVCC Board. He was
replaced by Jose Ramirez, who was elected by the
remaining members of the VVCC Board. Victor
Africa, a member of VVCC, questioned the election
of Roxas and Ramirez as members of the VVCC
Board with the SEC and the RTC. May the remaining
directors of the corporations Board, still
constituting a quorum, elect another director to fill
in a vacancy caused by the resignation of a hold-over
director?
A: No. The remaining directors of the corporations
Board, even if still constituting a quorum, cannot
elect another director to fill in a vacancy caused by
the resignation of a hold-over director. The Section
23 of the Corporation Code means that the term of
the members of the board of directors shall be only
for one year; their term expires one year after
election to the office. The holdover period that
time from the lapse of one year from a members
election to the Board and until his successors
election and qualification is not part of the
directors original term of office, nor is it a new term;
the holdover period, however, constitutes part of
his tenure. Corollary, 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. With the expiration of
Makalintals term of office, a vacancy resulted which,
by the terms of Section 29 of the Corporation Code,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
must be filled by the stockholders of VVCC in a
regular or special meeting called for the purpose. His
resignation as a holdover director did not change the
nature of the vacancy; the vacancy due to the
expiration of Makalintals term had been created long
before his resignation (Valle Verde Country Club, Inc.,
et al., v. Victor Africa, G.R. No. 151969, September 4,
2009).
COMPENSATION
Compensation of directors
GR: Directors, in their capacity as such, are not
entitled to receive any compensation except for
reasonable per diems.
XPNs:
1. When their compensation is fixed in the by-laws.
2. When granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or special
meeting
3. If they perform services other than as directors
of the corporation (i.e. where directors are also
corporate officers or employees of the
corporation) (Sec. 30, CC).
BOD is not prohibited from securing an insurance
policy for the life of its members and making the
directors the beneficiaries instead of the corporation
The Insurance Code does not contain any prohibition
as to such. However, the premium paid thereon is
analogous to a continuing bonus and gift and thus
falls within the context of additional compensation. A
corporation may not be used by its officers or
stockholders as a means of diverting profits or
proceeds to the payment of premium on insurance
policies to the enrichment of its beneficiaries at the
expense of, or to the detriment of, its creditors (SEC
Opinion, Dec. 8, 1987).
Limitation on the amount of compensation to be
received by the directors
In no case shall the total yearly compensation of
directors, as such directors exceed 10% of the net
income before income tax of the corporation during
the preceding year (Sec. 30, CC).
Remedy of the stockholders if there was no proper
authorization for the grant of compensation to the
directors
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Compensation to the directors of a corporation
without proper authorization in the by-laws or by the
vote of the stockholders may be recovered in a
stockholders suit (De Leon, supra, pg. 298).
Q: Is the general rule that directors are not entitled
to compensation applicable to corporate officers,
who are not directors?
A: No. Such officers, not being directors and having
no control over the funds and property of the
corporation, even though they may be stockholders,
do not occupy the relation of trustees to the
corporation (Ibid., pg. 301, citing Cheeney vs.
Lafayette, BOR Co., 61 III. 570).
Q: Ricardo T. Salas, et al., are the majority and
controlling members of the Board of Trustees of
Western Institute of Technology, Inc. (WIT), a stock
corporation engaged in the operation of an
educational institution. According to Homero
Villasis, et al., the minority stockholders of WIT, a
special board meeting was held whereby the the
Board of Trustees passed resolution granting
monthly compensation to Salas, et al., as corporate
officers. Villasis, et al., filed an affidavit-complaint
against Salas, et al., for falsification of a public
document and estafa. After trial,, Salas, et al., were
acquitted. Villasis, et al., would like to hold Salas, et
al., civilly liable despite their acquittal in the criminal
cases. They base their claim on the alleged illegal
issuance by Salas, et al., of the resolution ordering
the disbursement of corporate funds representing
the retroactive compensation in favor of the board
members of WIT. They maintain that this grant of
compensation is proscribed under Section 30 of the
Corporation Code. Is the resolution granting Salas, et
al., compensation for services rendered as officers of
WIT valid?
A: Yes. The resolution is valid. There is no argument
that directors or trustees, as the case may be, are not
entitled to salary or other compensation when they
perform nothing more than the usual and ordinary
duties of their office. This rule is founded upon a
presumption that directors /trustees render service
gratuitously and that the return upon their shares
adequately furnishes the motives for service, without
compensation. Under Section 30, there are only two
(2) ways by which members of the board can be
granted compensation apart from reasonable per
diems: (1) when there is a provision in the by-laws
fixing their compensation; and (2) when the
stockholders representing a majority of the
outstanding capital stock at a regular or special
stockholders meeting agree to give it to them. This
196
 CORPORATION CODE
proscription, however, against granting
compensation to directors/trustees of a corporation
is not a sweeping rule. Section 30 which states that
the directors shall not receive any compensation, as
such directors. The phrase as such directors is not
without significance for it delimits the scope of the
prohibition to compensation given to them for
services performed purely in their capacity as
directors or trustees. 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. In the case
at bench, the resolution granted monthly
compensation to Salas, et al., not in their capacity as
members of the board, but rather as officers of the
corporation, more particularly as Chairman,
Vice-Chairman, Treasurer and Secretary of Western
Institute of Technology (Western Institute of
Technology, Inc., v. Ricardo T. Salas, et al., G.R. No.
113032, August 21, 1997).
FIDUCIARY DUTIES AND LIABILITY RULES
Nature of the obligation of the directors to the
corporation
The directors character is that of a fiduciary insofar
as the corporation and the stockholders as a body are
concerned. As agents entrusted with the
management of the corporation for the collective
benefit of the stockholders, they occupy a fiduciary
relation, and in this sense the relation is one of trust.
The ordinary trust relationship of directors of a
corporation and stockholders springs from the fact
that directors have the control and guidance of
corporate affairs and property and hence of the
property interests of the stockholders. Equity
recognizes that stockholders are the proprietors of
the corporate interests and are ultimately the only
beneficiaries thereof (Gokongwei vs. SEC, supra).
Majority Rule Doctrine in the dealings of directors
with stockholders
The majority rule, states that a director has a
fiduciary duty with respect to the corporation as an
entity, and not to the stockholders as individuals.
Consequently, he is subject to the duty to disclose all
material facts only to the corporation and not to the
stockholders (American T. Co. v. California etc. Ins.
Co. , 15 Cal.2d 42, 1940).
197
Special Fact Doctrine
The special fact doctrine is an exception to the
majority rule doctrine. It states that where special
circumstances or facts are present which make it
inequitable for the director to withhold information
from the stockholder, the duty to disclose arises, and
concealment is fraud (ibid).
Instances where the Special Fact Doctrine has been
applied
In foreign US jurisprudence, the special fact doctrine
was applied in the following cases:
1. Where a director actively participation in the
negotiations for a transfer of the corporate
property (Strong v. Repide, 213 U.S. 419, 29 S.Ct.
521, 53 L.Ed. 853).
2. Where a director undertakes to speak or become
active in inducing the sale, he must speak fully,
frankly, and honestly, and conceal nothing to the
disadvantage of the selling stockholder (Poole v.
Camden, 79 W. Va. 310).
3. Where a director personally seeks a stockholder
for the purpose of buying his shares without
making disclosure of material facts within his
peculiar knowledge and not within reach of the
stockholders, the transaction will be closely
scrutinized and relief may be granted in
appropriate instances (Strong v. Repide, Ibid).
Liability of the directors/ trustees or officers of a
corporation for their official acts
GR: The officers of a corporation are not personally
liable for their official acts.
XPNs: If it is shown that they exceeded their
authority. In the following instances, the directors/
trustees may be held personally liable for damages:
1. They willfully and knowingly vote for or assent to
patently unlawful acts of the corporation; or
2. They are guilty of gross negligence or bad faith in
directing the affairs of the corporation; or
NOTE: Bad faith or negligence is a question of
fact. Bad faith does not simply mean bad
judgment or negligence. It imparts a dishonest
purpose or some moral obliquity and conscious
doing of wrong. It means breach of a known
duty through some motive or interest or ill-will;
it partakes of the nature of fraud (Ford Phils.,
Inc., et al. vs. CA, GR 99039, Feb. 3, 1997).
3. They acquire any personal or pecuniary interest
in conflict with their duty as such directors or
trustees (Sec. 31, CC); or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. When they consent to the issuance of watered A: No. Basic is the rule that a corporation has a
stocks or who, having knowledge thereof, does separate and distinct personality apart from its
not forthwith file with the corporate secretary directors, officers, or owners. In exceptional cases,
his written objection thereto (Sec. 65, CC); or courts find it proper to breach this corporate
5. When they are made, by a specific provision of personality in order to make directors, officers, or
law, to personally answer for their corporate owners solidarily liable for the companies
action (Sec. 144, CC; Sec.13, PD 115; Uichico vs. acts. Section 31 of the Corporation Code provides for
NLRC, GR 121434, June 2, 1997); or the basis of the liability of directors, trustees or
6. When they agree to hold themselves personally officers. Article 212(e) of the Labor Code, by itself,
and solidarily liable with the corporation (Tramat does not make a corporate officer personally liable
Mercantile, Inc. vs. CA 238 SCRA 14 [1994]). for the debts of the corporation. The governing law
on personal liability of directors for debts of the
NOTE: When the officers of the corporation exceeded their corporation is still Section 31 of the Corporation
authority, their actions are not binding upon the Code. In the present case, there is no evidence to
corporation unless ratified by the corporation or is indicate that Manuel D. Dasig, as president and
estopped from disclaiming them (Reyes v. RCPI Credit
general manager of Alert Security, is using the veil of
Employees Union, G.R. No. 146535, Aug. 18, 2006).
corporate fiction to defeat public convenience, justify
wrong, protect fraud, or defend crime (Alert Security
Liability of a director for termination of employees
and Investigation Agency, Inc., et al., Saidali
Pasawilan, G.R. No. 182397, September 14, 2011)
Without any evidence of bad faith or malice, directors
may not be held personally liable. Only when the
Liability of directors for the issuance of watered
termination is done with malice or in bad faith on the
stocks
part of the director may the director be held solidarily
liable with the corporation (Equitable Banking
Any director or officer of a corporation consenting to
Corporation vs. NLRC, GR No. 02467, June 13, 1997).
the issuance of stocks for a consideration less than its
par or issued value or for a consideration in any form
Q: Saidali Pasawilan, et al., were all employed by
other than cash, valued in excess of its fair value, or
petitioner Alert Security as security guards. They
who, having knowledge thereof, does not forthwith
were assigned at DOST pursuant to a security service
express his objection in writing and file the same with
contract between the DOST and Alert
the corporate secretary, shall be solidarily, liable with
Security. Pasawilan, et al., aver that because they
the stockholder concerned to the corporation and its
were underpaid, they filed a complaint for money
creditors for the difference between the fair value
claims against Alert Security and its president and
received at the time of issuance of the stock and the
general manager, Manuel D. Dasig. As a result of
par or issued value of the same (Sec. 65, CC).
their complaint, they were relieved from their posts
in the DOST and were not given new assignments
Liability of the director, trustee or officer who
despite the lapse of six months. Thus, they filed a
attempts to acquire or acquires any interest adverse
joint complaint for illegal dismissal against
to the corporation in respect of any matter which
petitioners. Alert Security and Dasig on the other
has been reposed in him in confidence
hand, deny that they dismissed Pasawilan, et al.
They claimed that from the DOST, Pasawilan, et al.,
When a director, trustee, or officer attempts to
were merely detailed at the Metro Rail Transit, Inc.
acquire or acquires, in violation of his duty, any
at Light Rail Transit Authority (LRTA) Compound in
interest adverse to the corporation in respect of any
Aurora Blvd. Pasawilan, et al., however, failed to
matter which has been reposed in him in confidence,
report at the LRTA and instead kept loitering at the
as to which equity imposes a disability upon him to
DOST and tried to convince other security guards to
deal in his own behalf, he shall be liable as a trustee
file complaints against Alert Security. The NLRC
for the corporation and must account for the profits
ruled that there was no sufficient basis to rule that
which otherwise would have accrued to the
Pasawilan, et al., were terminated from their
corporation (Sec. 31, CC).
employment. The CA reversed and ruled that
Pasawilan, et al., should be paid their monetary
NOTE: Private or secret profits obtained must be accounted
awards in solidum by Alert Security and Manuel D. for, even though the transaction on which they are made is
Dasig, its President and General Manager. Is Manuel advantageous or is not harmful to the corporation, or even
Dasig, the president and general manager of Alert though the director/ trustee or officer acted without intent
Security solidarily liable with Alert Security for the to injure the corporation.
payment of the money awards in Pasawilan, et al.?

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 CORPORATION CODE
Q: Is the above rule changed by the fact that the
agreement whereby the director/ trustee or officer
is to receive a secret profit is made prior to the time
he becomes as such director/ trustee or officer?
A: No. Even though the agreement to receive a secret
profit is made prior to the time the recipient becomes
a director/ trustee or officer, he is still liable under
the above rule (De Leon, supra, pg. 307).
Q: Is the above rule changed by the fact that the
secret profits were obtained from ultra vires
transactions?
A: No. Notwithstanding the fact that the profits were
derived from transaction ultra vires, the director/
trustee or officer is still liable (ibid).
Doctrine of Corporate Opportunity
Where a director, by virtue of his office, acquires for
himself a business opportunity which should belong
to the corporation, thereby obtaining profits to the
prejudice of such corporation (Sec. 34, CC).
A director shall refund to the corporation all the
profits he realizes on a business opportunity which:
1. The corporation is financially able to undertake;
2. From its nature, is in line with corporations
business and is of practical advantage to it; and
3. The corporation has an interest or a reasonable
expectancy (ibid).
NOTE: The rule shall be applied notwithstanding the fact
that the director risked his own funds in the venture (ibid).
However, if such act is ratified by a vote of the stockholders
representing at least 2/3 of the outstanding capital stock,
the director is excused from remitting the profit realized
(ibid).
Non-applicability of the Doctrine of Corporate
Opportunity
The doctrine is not applicable to the following
instances:
1. When a director engages in a distinct enterprise
of the same general class of business as that
which his corporation is engaged in, so long as he
acts in good faith.
2. The opportunity is one which is not essential to
the corporations business, or employment of
companys resources, or where the director or
officer embracing opportunity personally is not
brought into direct competition with the
corporation.
199
3. When the property or business opportunity has
ceased to be a corporate opportunity and has
transformed into a personal opportunity. In
such a case the corporation is definitely no
longer able to avail itself of the opportunity,
which may arise from financial insolvency, or
from legal restrictions, or from any other factor
which prevents it from acting upon the
opportunity for its own advantage (SEC Opinion,
March 4, 1982).
Q: Malyn, Schiera and Jaz are the directors of Patio
Investments, a close corporation formed to run the
Patio Cafe, an al fresco coffee shop in Makati City. In
2000, Patio Cafe began experiencing financial
reverses, consequently, some of the checks it issued
to its beverage distributors and employees bounced.
In October 2003, Schiera informed Malyn that she
found a location for a second cafe in Taguig City.
Malyn objected because of the dire financial
condition of the corporation.
Sometime in April 2004, Malyn learned about Fort
Patio Cafe located in Taguig City and that its
development was undertaken by a new corporation
known as Fort Patio, Inc., whereboth Schiera and Jaz
are directors. Malyn also found that Schiera and Jaz,
on behalf of Patio Investments, had obtained a loan
of P500, 000.00, from PBCom Bank, for the purpose
of opening Fort Patio Cafe. This loan was secured by
the assets of Patio Investments and personally
guaranteed by Schiera and Jaz.
Malyn then filed a corporate derivative action
before the Regional Trial Court of Makati City
against Schiera and Jaz, alleging that the two
directors had breached their fiduciary duties by
misappropriating money and assets of Patio
Investments in the operation of Fort Patio Cafe.
Did Schiera and Jaz violate the principle of corporate
opportunity? Explain. (2005 Bar Question)
A: Yes, Shciera and Jaz violated the Principle of
Corporate Opportunity, because they used Patio
Investments to obtain a loan, mortgaged its assets
and used the proceeds of the loan to acquire a coffee
shop through a corporation they formed (Sec. 34, CC).
RESPONSIBILITY FOR CRIMES
Where a law requires a corporation to do a particular
act, failure of which on the part of the responsible
officer to do so constitutes an offense, the
responsible officer is criminally liable therefore. The
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
reason is that a corporation can act through its
officers and agents and where the business itself
involves a violation of law all who participate in it are
liable. While the corporation may be fined for such
criminal offense if the law so provides, only the
responsible corporate officer can be imprisoned
(People vs. Tan Boon Kong, GR L-35262, March 15,
1930).
However, a director or officer can be held liable for a
criminal offense only when there is a specific
provision of law making a particular officer liable
because being a corporate officer by itself is not
enough to hold him criminally liable.
INSIDE INFORMATION
Inside Information
Any material non-public information about the issuer
of the securities (corporation) or the security
obtained by being an insider, which includes:
(ID-ReGoL)
1. The Issuer;
2. A Director or officer (or any person
performing similar functions) of, or a person
controlling the issuer;
3. A person whose RElationship or former
relationship to the issuer gives or gave him
access to material information about the
issuer or the security that is not generally
available to the public;
4. A GOvernment employee, director, or officer
of an exchange, clearing agency and/or
self-regulatory organization who has access
to material information about an issuer or a
security that is not generally available to the
public; or
5. A person who Learns such information by a
communication from any forgoing insiders
(Sec. 3.8 SRC).
CONTRACTS
BY SELF-DEALING DIRECTORS WITH THE
CORPORATION
Dealings of directors, trustees or officers with the
corporation
A contract of the corporation with one or more of its
directors or trustees or officers is voidable, at the
option of the corporation, unless all the following
conditions are present:
1. That the presence of such director or trustee in
the board meeting in which the contract was
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
approved was not necessary to constitute a
quorum for such meeting;
2. That the vote of such director or trustee was not
necessary for the approval of the contract;
3. That the contract is fair and reasonable under the
circumstances; and
4. That in the case of an officer, the contract with the
officer has been previously authorized by the
board of directors (par. 1, Sec. 32,CC).
Contract entered with a director or trustee may be
ratified by the vote of stockholders
A contract of the corporation with one or more of its
directors or trustees or officers may be ratified by the
vote of the stockholders representing at least 2/3 of
the outstanding capital stock or 2/3 of the members
in a meeting called for the purpose. However, the
following should be concur:
1. Any of the first 2 conditions set forth in the 1st
paragraph of Sec. 32, CC is absent;
2. Contract is with a director or trustee;
NOTE: If the contract is with an officer of the
corporation, there must be a prior board resolution
authorizing the same.
3. Full disclosure of the adverse interest of the
directors or trustees involved is made at the
stockholders meeting called for the purpose;
4. The contract is fair and reasonable under the
circumstances (par. 2, Sec. 32, CC).
NOTE: Hence, in all such instances, the element that the
contract is fair and reasonable cannot be dispensed with for
the transaction is to be valid and enforceable.
Q: Suppose that the by-laws of X Corporation, a
mining firm, provides that "The directors shall be
relieved from all liability for any contract entered
into by the corporation with any firm in which the
directors may be interested." Thus, director A
acquired claims which overlapped with X's claims
and were necessary for the development and
operation of X's mining properties. Is the by-law
provision valid? Why? (2001 Bar Question)
A: No. It is in violation of Sec. 32 of the Corporation
Code.
Q: What happens if director "A" is able to
consummate his mining claims over and above that
of the corporation's claims? (2001 Bar Question)
A: "A" should account to the corporation for the
profits which he realized from the transaction. He
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 CORPORATION CODE
grabbed the business opportunity from
corporation (Sec. 34, CC).
BETWEEN CORPORATIONS WITH INTERLOCKING
DIRECTORS
Contracts between corporations with interlocking
directors
A contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal (not
exceeding 20% of the outstanding capital stock),
he shall be subject to the provisions of Sec. 32
insofar as the latter corporation or corporations
are concerned (Sec. 33, CC).
Substantial interest
Stockholdings exceeding 20% of the outstanding
capital stock shall be considered substantial for
purposes of interlocking directors (ibid).
MANAGEMENT CONTRACTS
Management contract
A management contract is any contract whereby a
corporation undertakes to manage or operate all or
substantially all of the business of another
corporation, whether such contracts are called
service contracts, operating agreements or
otherwise. A corporation under management is
bound by the acts of the managing corporation and is
estopped to deny its authority (National Bank vs.
Producers Warehouse Association, 42 Phil. 609).
EXECUTIVE COMMITTEE
Executive Committee
An executive committee is a body created by the
by-laws and composed of not less than three
members of the board which, subject to the statutory
limitations, has all the authority of the board to the
extent provided in the board resolution or by-laws.
The committee may act by a majority vote of all of its
members (Sec. 35, CC).
NOTE: An executive committee can only be created by
virtue of a provision in the by-laws and that in the absence
the of such by-law provision, the board of directors cannot
simply create or appoint an executive committee to
perform some of its functions (SEC Opinion, Sept. 27, 1993).
In such a case where there was an unauthorized creation of
executive committee by the board, the principle of de facto
officers may be applied insofar as third persons are
concerned. However, insofar as the corporation is
concerned, the unauthorized act of appointment of an
executive committee may be subject to Sec. 144, which
provides for penalties in violation of the Code (ibid).
Non-members of the board may be appointed as
members of the executive committee
Non-members of the board may be appointed as
members of the executive committee provided that
there are at least 3 members of the board who are
members of the committee (SEC Opinion, Sept. 16,
1986). A person not a director can be a member of
the executive committee but only in a
recommendatory or advisory capacity.
A foreigner is allowed to be a member of the
executive committee
A foreigner can be allowed representation in the
executive committee since he can be allowed in the
BOD. An Executive Committee is a governing body
which functions as the board itself. Thus,
membership therein shall be governed by the same
law/ rules applicable to the BOD as provided in Sec.
35 (SEC Opinion, June 3, 1998).
Executive committees provided in the Revised Code
of Corporate Governance
1. Audit Committee
2. Nomination Committee
3. Compensation and Remuneration Committee
Limitations on the powers of the executive
committee
The executive committee cannot act on the following:
1. Matters needing stockholder approval
2. Filling up of board vacancies
3. Amendment, repeal or adoption of by-laws
4. Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable
5. Cash dividend declaration (Sec. 35, CC).
Quorum required of the executive committee
The quorum requirement for executive committee is
the same as that of the BOD.
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Decisions of the executive committee are not scheduled
subject to appeal to the board meeting.

Decisions of the executive committee are not subject A director or trustee may
to appeal to the board. However, if the resolution of waive this requirement,
the Executive Committee is invalid, i.e. not one of the either expressly or
powers conferred to it, it may be ratified by the board impliedly.
(SEC Opinion, July 29, 1995).
Meeting held in the absence of some of the directors
MEETINGS and without any notice given to them is illegal

REGULAR OR SPECIAL It is illegal, and the action at such meeting although

by a majority of the directors, is invalid unless:
Meetings of BOD/BOT 1. Subsequently ratified or waived, expressly or
impliedly, by the absent directors or
i. DATE AND PLACE OF ii. REQUIRED WRITTEN 2. Rights have been acquired by innocent third
MEETING /VERBAL NOTICE persons, as against whom the corporation must
Regular Meeting be held estopped to set up the failure to
Notice must: observe formalities (De Leon, supra, pg. 495).
1. State the date,
time and place of Directors or trustees cannot attend or vote by proxy
1. The date fixed in at board meetings
the meeting
the by-laws; or
2. Be sent to every
2. If there is no date Directors or trustees cannot attend or vote by proxy
director or trustee
in the by-laws at board meetings (Sec .25, CC). The members of the
a. Within the
shall be held BOD are required to exercise their judgment and
period provided
monthly discretion in running the affairs of the corporation
in the by-laws
b. In the absence and they cannot be substituted by others (SEC
Venue: Opinion, May 27, 1970).
of provision in
1. Venue fixed by
the by-laws, at
the by-laws; or Requisites for a valid tele/ videoconferencing
least 1 day prior
2. If venue is not
to the
provided by the R.A. 8792, as implemented by SEC Memo. Circular
scheduled
by-laws, No. 15, Nov 30, 2001, provides that:
meeting.
anywhere in or 1. Directors must express their intent on
outside of the teleconferencing;
A director or trustee may
Philippines. 2. Proper identification of those attending;
waive this requirement,
either expressly or 3. The corporate secretary must safeguard the
impliedly. integrity of the meeting by recording it. There is
Special Meeting no violation of the Anti-Wire Tapping Act (R.A.
4200) because all the parties to the board
Notice must:
1. Any time upon meeting are aware that all the communications
1. State the date,
the call of the are recorded.
time and place of
president; or
the meeting
2. As provided in the NOTE: The basic types of teleconferencing are:
2. Be sent to every 1. Video conferencing;
by-laws
director or 2. Computer conferencing;
trustee 3. Audio conferencing.
Venue:
a. Within the
1. Venue fixed by
period Contents of the notice, which should be sent to
the by-laws; or
provided in the every director in case of a tele/videoconferencing
2. If venue is not
by-laws
provided by the
b. In the absence The Corporate Secretary shall send out the notices of
by-laws,
of provision in the meeting to all directors in accordance with the
anywhere in or
the by-laws, at manner of giving notice as stated in the corporate
outside of the
least 1 day by-laws.
Philippines.
prior to the

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2014 GOLDEN NOTES 202
 CORPORATION CODE
The notice shall include the following:
1. Inquiry on whether the director will attend
physically or through tele/videoconferencing;
2. Contact number/s of the Secretary and office staff
whom the director may call to notify and state
whether he shall be physically present or attend
through tele/videoconferencing;
3. Agenda of the meeting;
4. All documents to be discussed in the meeting,
including attachments, shall be numbered and duly
marked by the Secretary in such a way that all the
directors, physically or electronically present, can
easily follow, refer to the documents and participate
in the meeting (SEC Memo Circ. No. 15, Series of
2001).
NOTE: If the director chooses tele/videoconferencing, he
shall give notice of at least five days prior to the scheduled
meeting to the Secretary. The latter shall be informed of his
contact number/s. In the same way, the Secretary shall
inform the director concerned of the contact number/s he
will call to join the meeting. The Secretary shall keep the
records of the details, and on the date of the scheduled
meeting, confirm and NOTE such details as part of the
minutes of the meeting (ibid).
In the absence of an arrangement, it is presumed that the
director will physically attend the Board meeting (ibid).
WHO PRESIDES
The president shall preside at all meetings of the
directors or trustees as well as of stockholders or
members unless the by-laws provide otherwise (Sec.
54,CC).
QUORUM
Quorum in board meetings
GR: Majority of the number of directors or trustees.
XPN: If AOI or the by-laws provide for a greater
number (Sec. 25, CC).
NOTE: The quorum is the same even if there is vacancy in
the board.
Rule as to the decision of the quorum
GR: Every decision of at least a majority of the
directors or trustees present at a meeting at which
there is quorum shall be valid as a corporate act
(ibid).
XPNs:
1. The election of officers which shall require the vote
of a majority of all the members of the board (ibid).
203
2. No board approval is necessary where there is
custom, usage and practice in the corporation not
requiring prior board approval or where subsequent
approval is sufficient (Board of Liquidators v. Kalaw,
G.R. No. L18805, Aug. 14, 1967).
RULE ON ABSTENTION
Effect of Abstention
No inference can be drawn in a vote of abstention.
When a director or trustee abstains, it cannot be said
that he intended to acquiesce in the action taken by
those who voted affirmatively. Neither, for that
matter, can such inference be drawn from the
abstention that he was abstaining because he was
not then ready to make a decision (Lopez v Ercita,
G.R. No. L-32991, June 29, 1972).
Instances when a director is required to abstain in
voting
Whenever a director believes he/she has a conflict of
interest, the director should abstain from voting on
the issue and make sure his/her abstention is noted
in the minutes (Robert's Rules, 10th ed., p 394). The
other reason a director might abstain is that he/she
believes there was insufficient information for making
a decision. Otherwise, directors should cast votes on
all issues put before them. Failure to do so could be
deemed a breach of their fiduciary duties.
Example where a director needs to abstain
To avoid Insider Trading, Insiders are obligated to
abstain from trading the shares of his
corporation. This duty to abstain is based on two
factors:
1. The existence of a relationship giving access,
directly or indirectly, to information intended to be
available only for a corporate purpose and not for the
personal benefit of anyone;
2. The inherent unfairness involved when a party
takes advantage of such information knowing it is
unavailable to those with whom he is dealing (SEC vs.
Interport Resources Corporation, G.R. No. 135808,
October 6, 2008).
STOCKHOLDERS AND MEMBERS
A person becomes a shareholder the moment he:
1. Enters into a subscription contract with an existing
corporation (he is a stockholder upon acceptance of
the corporation of his offer to subscribe whether the
consideration is fully paid or not);
2. Purchase treasury shares from the corporation; or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Acquires shares from existing shareholders by
sale or any other contract, or acquires shares by
operation of law like succession (Sundiang, supra,
2009, pg. 227).
RIGHTS OF A STOCKHOLDER AND MEMBER
1. Management Right
a. To attend and vote in person or by proxy at a
stockholders meetings (Secs. 50, 58).
b. To elect and remove directors (Secs. 24, 28).
c. To approve certain corporate acts (Sec. 58)
d. To adopt and amend or repeal the by-laws of
adopt new by-laws (Secs. 46, 48).
e.To compel the calling of the meetings(Sec. 50).
f. To enter into a voting trust agreement (Sec.
59).
g. To have the corporation voluntarily dissolved
(Secs. 118, 119, CC).
2. Proprietary rights
a. To transfer stock in the corporate book (Sec.
63).
b. To receive dividends when declared (Sec. 43).
c. To the issuance of certificate of stock or other
evidence of stock ownership (Sec. 64).
d. To participate in the distribution of corporate
assets upon dissolution (Sec. 118, 119).
e. To pre-emption in the issue of shares (Sec. 39,
CC).
3. Remedial rights
a. To inspect corporate books (Sec. 74, CC).
b. To recover stock unlawfully sold for delinquent
payment of subscription (Sec. 69, CC).
c. To be furnished with most recent financial
statements or reports of the corporations
operation (Sec. 74, 75, CC).
d. To bring suits (derivative suit, individual suit,
and representative suit).
e. To demand payment in the exercise of
appraisal right (Secs. 41, 81, CC)
DOCTRINE OF EQUALITY OF SHARES
Where the articles of incorporation do not provide
for any distinction of the shares of stock, all shares
issued by the corporation are presumed to be equal
and enjoy the same rights and privileges and are also
subject to the same liabilities (Sec. 6, CC).
PARTICIPATION IN MANAGEMENT
Under the Corporation Code, stockholders or
members periodically elect the board of directors or
trustees, who are charged with the management of
the corporation. The board, in turn, periodically
elects officers to carry out management functions on
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
a day-to-day basis. As owners, though, the
stockholders or members have residual powers over
fundamental and major corporate changes.
While stockholders and members (in some instances)
are entitled to receive profits, the management and
direction of the corporation are lodged with their
representatives and agents -- the board of directors
or trustees. In other words, acts of management
pertain to the board; and those of ownership, to the
stockholders or members. In the latter case, the
board cannot act alone, but must seek approval of
the stockholders or members (Tan vs. Sycip, August
17, 2006, GR 153468).
PROXY
Proxy
The term proxy designates the formal written
authority given by the owner or holder of the stock,
who has a right to vote it, or by a member, as
principal, to another person, as agent, to exercise the
voting rights of the former.
It is also used to apply to the holder of the authority
or person authorized by an absent stockholder or
member to vote for him at a stockholders or
members meeting.
It also refers to the instrument which evidences the
authority of the agent (De Leon, supra, pgs. 505-506).
NOTE: A proxy is a special form of agency. A proxy holder is
an agent and as such a fiduciary (ibid., pg. 506). Since a
proxy acts for another, he may act as such although he
himself is disqualified to vote his shares. A
proxy-stockholder disqualified to vote because his stock has
been declared delinquent may vote the stocks of his
principal which is not delinquent.
Purposes of proxies
The purposes and use of proxies are as follows:
1. Assures the presence of a quorum in meetings of
stockholders of large corporations;
2. Enables those who do not wish to attend a
stockholders/ members meeting to protect
their interest by exercising their right to vote
through a representative; and
3. One of the devices in securing voting control or
management control in the corporation. (ibid.)
Who may be a proxy
Any person whom the stockholder or member sees fit
to represent him.
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 CORPORATION CODE
NOTE: By-laws restricting the stockholders or members
right in this respect are void (De Leon, supra, pg. 507).
Further, same person may act as proxy for one or several
stockholders or members.
Duration of proxy
1. Specific proxy authority granted to the proxy
holder to vote only for a particular meeting on a
specific date.
2. Continuing proxy grants authority to a proxy to
appear and vote for and in behalf of a
shareholder for a continuing period which should
not be more than 5 years at any one time.
By-laws may provide for a shorter duration of a
continuing proxy.
Extent of authority of a proxy
1. General proxy A general discretionary power to
attend and vote at an annual meeting, with all the
powers the undersigned would possess if personally
present, to vote for directors and all ordinary matters
that may properly come before a regular meeting.
NOTE: A holder of a general proxy has no authority to
vote for a fundamental change in the corporate
charter or other unusual transactions such as merger
or consolidation.
2. Limited proxy Restrict the authority to vote to
specified matters only and may direct the manner in
which the vote shall be cast (ibid., pg. 510-511).
Requirements of a valid proxy
1. Proxies shall be in writing and shall be signed by
the stockholder or member concerned;
NOTE: Oral proxies are NOT valid.
2. The proxy shall be filed before the scheduled
meeting with the corporate secretary;
3. Unless otherwise provided (continuing in nature) in
the proxy, it shall be valid only for the meeting for
which it is intended; and
NOTE: The authority may be general or limited.
4. No proxy shall be valid and effective for a period
longer than 5 years at any one time. (Sec.58, B.P.
68 as amended by Sec. 20, SRC)
Instances when the right to vote by proxy may be
exercised
1. Election of the BOD/BOT (Sec. 24, CC)
2. Voting in case of joint ownership of stock (Sec.
56,CC)
3. Voting by trustee under VTA (Sec. 59, last par.)
205
4. Voting by members in non-stock corps (par. 2,
Sec. 89, CC)
NOTE: In non-stock corporations the right to vote by
proxy, or even the right to vote itself may be denied
to members in the articles of incorporation or the
by-laws as long as the denial is not discriminatory.
5. In considering other matters:
1. Pledge or mortgage of shares (par. 2, Sec.
55, CC).
2. In all other matters as may be provided in
the by-laws (Sec. 47[4], CC).
3. In all meetings of stockholders or members
(Sec. 58, CC).
Power to appoint a proxy is a personal right
The right to vote is inseparable from the right of
ownership of stock. The appointment of proxy is,
therefore, purely personal and to be valid, a proxy to
vote stock must have been given by the person who
is the legal owner of the stock entitled to vote the
same at the time it is be voted (SEC Opinion, Dec. 3,
1993, citing 5 Fletcher, Sec. 2053).
Unless the stockholder or member who executed a
proxy gives his consent in writing, a designated proxy
may not further re-designate another under the same
proxy. An alternate proxy can only act as proxy in
case of non-attendance of the other designated proxy
(De Leon, supra, pg. 508).
Revocation of proxy
A proxy may be revoked in writing, orally or by
conduct.
GR: One who has given a proxy the right to vote may
revoke the same at anytime.
XPN: Said proxy is coupled with interest, even if it
may appear by its terms to be revocable (De Leon,
supra, pg. 513).
NOTE: Last proxy given revokes all previous proxies. (SEC
Opinion, Oct. 14, 1991).
SEC may pass upon the validity of the issuance and
use of proxies
PD 902-A empowers the SEC, among others, to pass
upon the validity of the issuance and use of proxies
and voting trust agreements for absent stockholders
or members (Sec. 6[g]).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
VOTING TRUST
Voting trust agreement
A voting trust agreement (VTA) is an agreement
whereby one or more stockholders transfer their
shares of stocks to a trustee, who thereby acquires
for a period of time the voting rights (and/or any
other specific rights) over such shares; and in return,
trust certificates are given to the stockholder/s,
which are transferable like stock certificates, subject,
to the trust agreement.
Purposes of a VTA
The following are the purposes of a VTA:
1. VTA makes possible a unified control of the
affairs of the corporation and a consistent policy
by binding stockholders to vote as a unit;
2. To assure continuity of policy and management
especially of a new corporation desirous of
attracting investors;
3. To enable the owners of the majority of the stock
of the corporation to control the corporation;
4. To vest and retain the management of the
corporation in the persons originally promoting
it;
5. To prevent a rival concern from acquiring control
of the corporation;
6. To carry out a proposed sale of the corporations
assets and to facilitate its dissolution;
7. To enable two holding companies to operate
jointly a corporation controlled by them;
8. To effect a plan for reorganization of a
corporation in financial difficulty or in bankruptcy
proceedings; and
9. To aid a financially embarrassed corporation to
obtain a loan and protect its creditors (De Leon,
supra, pg. 521-522).
Procedural requirements and limitations imposed on
VTAs
1. The agreement must be in writing and notarized
and specify the terms and conditions thereof.
2. A certified copy of such agreement shall be filed
with the corporation and with the SEC,
otherwise, it is ineffective and unenforceable.
3. The certificate/s of stock covered by the VTA
shall be canceled.
4. A new certificate shall be issued in the name of
the trustee/s stating that they are issued
pursuant to the VTA.
5. The transfer shall be Noted in the books of the
corporation, that it is made pursuant to said VTA.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
6. The trustee/s shall execute and deliver to the
transferors voting trust certificates, which shall
be transferable in the same manner and with the
same effect as certificates of stock.
7. No VTA shall be entered into for a period
exceeding 5 years at any one time (i.e., for every
voting trust) except in the case of a voting trust
specifically requiring a longer period as a
condition in a loan agreement, in which case, the
period may exceed 5 years but shall
automatically expire upon full payment of the
loan.
8. No VTA shall be entered into for the purpose of
circumventing the law against monopolies and
illegal combinations in restraint of trade.
9. The agreement must not be used for purposes of
fraud (Sec. 59, CC).
Duration of a VTA
Unless expressly renewed, all rights granted in a
voting trust agreement shall automatically expire at
the end of the agreed period, and the voting trust
certificates as well as the certificates of stock in the
name of the trustee or trustees shall thereby be
deemed canceled and new certificates of stock shall
be reissued in the name of the transferors (Sec. 59,
CC).
Effect of a voting trust agreement with respect to
the rights of the trustor and the trustee
It is the trustee of the shares who acquires legal title
to the shares under the voting trust agreement and
thus entitled to the right to vote and the right to be
elected in the board of directors while the
trustor-stockholder has the beneficial title which
includes the right to receive dividends (Lee vs. CA,
205 SCRA 752, [1992]).
Voting trust agreement v. Proxy
VOTING TRUST PROXY
If validly executed, VTA is A proxy, unless
intended to be irrevocable coupled with interest,
for a definite and limited is revocable at
period of time. anytime.
Trustee acquires legal title to Proxy has no legal title
the shares of the transferring to the shares of the
stockholder principal
Right to vote as well as other
rights may be given except
Only right to vote is
the right to receive
given. The proxy must
dividends. The trustee may
vote in person.
vote in person or by proxy
unless the agreement
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 CORPORATION CODE
provides otherwise Validity of pooling agreements
The agreement must be Proxy need not be
notarized notarized Pooling agreements are valid as long as they do not
Proxy can only act at a limit the discretion of the BOD in the management of
Trustee is not limited to act specified stockholders corporate affairs or work any fraud against
at any particular meeting meeting (if not stockholders not party to the contract.
continuing)
The stock certificate shall be Pooling agreement v. Voting Trust Agreement
cancelled and a new one in No cancellation of the
the name of the trustee shall certificate shall be In Pooling Agreement, the stockholders themselves
be issued stating that they made exercise their right to vote. On the other hand, the
are issued pursuant to a VTA. trustees are the ones who exercise the right to vote
A trustee can vote and under the Voting Trust Agreement.
A proxy can only vote
exercise all the rights of the
in the absence of the Q: A distressed corporation executed a VTA for a
stockholder even when the
owner of the stocks period of three years over 60% of its outstanding
latter is present.
A proxy is usually of paid up shares in favor of a bank to whom it was
An agreement must not indebted, with the Bank named as trustee.
shorter duration
exceed 5 years at any one Additionally, the Company mortgaged all its
although under Sec. 58
time except when the same properties to the Bank. Because of the insolvency of
it cannot exceed 5
is made a condition of a loan. the Company, the Bank foreclosed the mortgaged
years at any one time
Governed by the law properties, and as the highest bidder, acquired said
Governed by the law on trust properties and assets of the Company.
on agency
A proxy does not have
A trustee has the right to The three-year period prescribed in the Voting Trust
a right of inspection of
inspect corporate books. Agreement having expired, the company demanded
corporate books.
the turn-over and transfer of all its assets and
Pooling agreement properties, including the management and
operation of the Company, claiming that under the
This is an agreement, also known as voting Voting Trust Agreement, the Bank was constituted
agreement, entered into by and between 2 or more as trustee of the management and operations of the
stockholders to make their shares as one unit (ex: Company. (1992 Bar Question)
Shareholders, A,B,C,D,E, holds 50% of the outstanding
capital stock, entered into a pooling agreement to A: The demand of the company does not tally with
vote for F as a member of the board of director). This the concept of a VTA. The VTA merely conveys to the
usually relates to election of directors where parties trustee the right to vote the shares of grantor/s. The
often provide for arbitration in case of disagreement. consequence of foreclosure of the mortgaged
This does not involve a transfer of stocks but is properties would be alien to the VTA and its effects.
merely a private agreement (Sec. 100, CC).

UNIVERSITY OF SANTO TOMAS

207 FACULTY OF CIVIL LAW

CASES WHEN STOCKHOLDERS ACTION IS REQUIRED
Corporate powers exercised jointly by the BOD and stockholders
CORPORATE ACT
1. Amendments, repeal, or
adoption of new by-laws
2. Entering into management contr
act
3. Issuance of stock dividends
4. Amendment to articles of
incorporation
5. Grant of compensation to
directors
6.Extending or shortening the
corporate term
7. Increase or decrease of capital
stock
8. To incur, create, or increase
bonded indebtedness
9. Investment of corporate funds in
another corporation or business or
for any other purpose other than
the primary purpose
10. The sale or other disposition of
all or substantially all of the
corporate assets
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
MERCANTILE LAW
VOTE REQUIREMENT
BOARD OF DIRECTORS
Majority vote of the BOD
Majority of the quorum of
the BOD
Majority of the quorum of
the BOD
Majority vote of the BOD
Approval of the Board
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Majority vote of the BOD
Approval of the board
208
STOCKHOLDERS
GR: Majority vote of the outstanding
capital stock
XPN: If delegated by the stockholders to
the board
GR: Vote of the majority of the
outstanding shares of stock or members
of both the managing and the managed
corporation.
XPN: The vote required for the
managed corporation is not merely
majority but 2/3 of the outstanding
capital stock in cases where:
1. A stockholder or stockholders
representing the same interest of
both the managing and the
managed corporations own or
control more than one-third (1/3)
of the total outstanding capital
stock entitled to vote of the
managing corporation; or
2. Majority of the members of the
board of directors of the managing
corporation also constitute a
majority of the members of the
board of directors of the managed
corporation.
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
Majority vote of the outstanding capital
stock
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
 CORPORATION CODE
11. Merger or consolidation Majority vote of the BOD
12. Voluntary dissolution Majority vote of the BOD
13. To adopt a plan of distribution Majority vote of the Trustees
of assets of a non-stock
corporation
Corporate powers exercised solely by the stockholders
CORPORATE ACT
1. Election of directors or trustees; filling up of vacancies
by the stockholders due to the expiration of term,
removal from office or increase in the number of board
seats
2. To elect officers of the corporation
3. Fixing the issued price of no-par value shares
4. Declaration of cash and other dividends other than
stock dividends
5. To adopt by laws
6. To revoke the power delegated to the BOD to amend
or repeal the by-laws or adopt new by laws
7. To call a special meeting to remove directors or
trustees
8. Removal of directors
9. Delegation of the power to amend by-laws to the
board of directors
10. Ratification of corporate contract with a director
11. To delegate to the BOD the power to amend or
repeal the by-laws or adopt new by laws
PROPRIETARY RIGHTS
The following are the proprietary rights of the
stockholders:
1. Right to Dividend
2. Right of First Refusal
3. Preemptive Right
RIGHT TO DIVIDENDS
Right to dividend of a stockholder
It is the right of the stockholder to demand payment
of dividends after board declaration. Stockholders are
entitled to dividends pro rata based on the total
number of shares that they own and not on the
amount paid for the shares (SEC Opinion, October 10,
1992 and July 16, 1996).
209
Vote representing 2/3 of the
outstanding capital stock
Vote representing 2/3 of the
outstanding capital stock
2/3 of the members having voting rights
APPROVAL OF STOCKHOLDERS
Candidates receiving the highest number of votes from the
outstanding capital stock or members entitled to vote
(plurality, NOT majority)
Plurality vote of the BOD listed in the AOI, not merely those
present constituting a quorum
Majority of the quorum of the BOD if authorized by the AOI
or in the absence of such authority, by a majority of the
outstanding capital stock
Majority of the quorum of the board
Majority of the outstanding capital stock or of the members
Majority of the outstanding capital stock or of the members
Majority of the outstanding capital stock or of the members
entitled to vote
Vote representing 2/3 of the outstanding capital stock or of
members entitled to vote
Vote representing 2/3 of the outstanding capital stock
Vote representing 2/3 of the outstanding capital stock
2/3 of the outstanding capital stock or of the members
Entitlement to receive dividends
GR: Those stockholders at the time of declaration are
entitled to dividends (Sundiang, supra, 2009, pg. 211
citing SEC Opinion, July 15, 1994).
NOTE: Dividends declared before the transfer of shares
belong to the transferor and those declared after the
transfer belong to the transferee (ibid).
XPNs:
1. In case a record date is provided for.
NOTE: A record date is the date fixed in the resolution
declaring dividends, when the dividend shall be payable to
those who are stockholders of record on a specified future
date or as of the date of the meeting declaring said
dividend (De Leon, supra, pg. 419, footnote no. 50.)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
2. Holders of shares not fully paid which are not
delinquent shall have all the rights of a stock holder.
Rule in applying dividends in delinquent shares
Cash Cash dividends due on delinquent
stock shall first be applied to the
unpaid balance on the subscription
plus cost and expenses.
Stock Stock dividends are withheld from the
delinquent stockholder until his
unpaid subscription is fully paid.
RIGHT TO APPRAISAL
Appraisal right
Appraisal right refers to the right of the stockholder
to demand payment of the fair value of his shares,
after dissenting from a proposed corporate action
involving a fundamental change in the corporation in
the cases provided by law (De Leon, supra, pg. 675).
Instances where a stockholder may exercise his
appraisal right
Any stockholder of a corporation shall have the right
to dissent and demand payment of the fair value of
his shares in the following instances:
1. In case any amendment to the articles of
incorporation has the effect of changing or
restricting the rights of any stockholder or class
of shares, or of authorizing preferences in any
respect superior to those of outstanding shares
of any class, or of extending or shortening the
term of corporate existence.
2. In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code.
3. In case of merger or consolidation (Sec. 81, CC).
This appraisal right is likewise available to a
dissenting stockholder in case the corporation
decides to invest its funds in another corporation or
business for any purpose other than its primary
purpose as provided in Sec. 42 of the CC.
Under Sec. 105, any stockholder of a close
corporation may, for any reason, compel said
corporation to purchase his shares at their fair value,
which shall not be less than their par or issued value,
when the corporation has sufficient assets in its
books to cover its debts and liabilities exclusive of
capital stock.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Limitations on the exercise of appraisal right
1. Any of the instances provided by law for the
exercise of the right by a dissenting stockholder must
be present (Secs. 81, 42, CC);
2. The dissenting stockholder must have voted
against the proposed corporate action (Sec. 82, CC);
NOTE: The right is not available to a stockholder who
was either absent at the meeting where the corporate
action was approved, or was present at such meeting
but abstained from casting his vote;
3. A written demand on the corporation for payment
of his shares must be made by him within 30 days
after the date the vote was taken. (ibid.);
NOTE: Failure to make the demand within such period
shall be deemed a waiver of the appraisal right.
4. The price must be based on the fair value of the
shares as of the day prior to the date on which the
vote was take (ibid.);
NOTE: If the proposed corporate action is
implemented or effected, the payment shall be made
upon surrender of the certificate(s) of stock
representing his shares.
5. Such fair value must be determined as provided in
Sec. 82 (ibid);
NOTE: The fair value shall exclude any appreciation or
depreciation in anticipation of such corporate action.
6. Payment of the shares must be made only out of
the unrestricted earnings of the corporation (ibid);
and
7. Upon such payment, the stockholder must transfer
his shares to the corporation. (ibid.)
Q: Assuming a stockholder disagrees with the
issuance of new shares and the pricing for the
shares, may the stockholder invoke his appraisal
rights and demand payment for his shareholdings?
(1999 Bar Question)
A: No, the stockholder may not exercise appraisal
right because the matter that he dissented from is
not one of those where right of appraisal is available
under the Corporation Code.
Q: Philip Turner, et al., held 1,010,000 shares of
stock of Lorenzo Co. Lorenzo Co. decided to amend
its articles of incorporation to remove the
stockholders pre-emptive rights to newly issued
shares of stock. Turner, et al., voted against the
amendment and demanded payment of their
shares. The appraisal committee reported its
210
 CORPORATION CODE
valuation of P2.54/share. Turner, et al., demanded
payment based on the valuation of the appraisal
committee, plus 2%/month penalty from the date of
their original demand for payment, as well as the
reimbursement of the amounts advanced as
professional fees to the appraisers. Lorenzo Co.
refused Turner, et al.s demand, explaining that
pursuant to the Corporation Code, the dissenting
stockholders exercising their appraisal rights could
be paid only when the corporation had unrestricted
retained earnings to cover the fair value of the
shares, but that it had no retained earnings at the
time of the Turner, et al.s demand. Is Lorenzo Co.
obliged to pay the value of the shares of a dissenting
stockholder even if at the time of demand, the
corporation has no unrestricted retained earnings?
A: No. The corporation need not pay the value of the
shares of a dissenting stockholder if at the time of the
demand, the corporation has no unrestricted
retained earnings. No payment shall be made to any
dissenting stockholder unless the corporation has
unrestricted retained earnings in its books to cover
the payment. The trust fund doctrine backstops the
requirement of unrestricted retained earnings to fund
the payment of the shares of stocks of the
withdrawing stockholders. In this case Lorenzo Co.
had indisputably no unrestricted retained earnings in
its books at the time Turner, et al., commenced the
complaint. This proved that Lorenzo Co.s legal
obligation to pay the value of Turner, et al.s shares
did not yet arise. 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 (Philip Turner, et al., v. Lorenzo Shipping
Corporation, G.R. No. 157479, November 24, 2010).
Effects of the exercise of the right of appraisal
1. Once the dissenting stockholder demands
payment of the fair value of his shares:
a. All rights accruing to such shares
including voting and dividend rights shall be
suspended; and
b. He shall be entitled to receive payment
of the fair value of his shares as agreed upon
between him and the corporation or as
determined by the appraisers chosen by him;
c. GR: He is not allowed to withdraw his
demand for payment of his shares
XPN: Unless the corporation consents thereto.
2. If the dissenting stockholder was not paid the
value of his shares within 30 days after the
211
award, his voting and dividend rights shall be
immediately restored until payment of his shares
(Sec. 83, CC).
NOTE: Even if his rights as stockholder are suspended
after his demand in writing is made, he cannot be
considered as an ordinary creditor of the corporation
(SEC Opinion, Jan. 11, 1982).
3. But, upon payment of the stockholders shares, all
his rights as stockholders are terminated, not merely
suspended (Sec. 82, CC).
4. If before the stockholder is paid the proposed
corporate action is abandoned is abandoned, his
rights and status as a stockholder shall thereupon be
permanently restored (Sec. 84, CC).
Rule if there is a disagreement between the
withdrawing stockholder and the corporation as to
the fair value of the shares
If within a period of 60 days from the date the
corporate action was approved by the stockholders,
the withdrawing stockholder and the corporation
cannot agree on the fair value of the shares, it shall
be determined and appraised by three (3)
disinterested persons, one of whom shall be named
by the stockholder, another by the corporation, and
the third by the two thus chosen.
The findings of the majority of the appraisers shall be
final, and their award shall be paid by the corporation
within 30 days after such award is made (Sec. 82, CC).
Cost of appraisal
The costs and expenses of appraisal shall be borne as
follows:
1. By the corporation
a. Where the price which the corporation offered
to pay the dissenting stockholder is lower than
the fair value as determined by the appraisers
named by them;
b. Where an action is filed by the dissenting
stockholder to recover such fair value and the
refusal of the stockholder to receive payment is
found by the court to be justified.
2. By the dissenting stockholder
a. Where the price offered by the
corporation is approximately the same as the
fair value ascertained by the appraisers;
b. Where the same action is filed by the
dissenting stockholder and his refusal to accept
payment is found by the court to be unjustified
(De Leon, supra, pg. 682, citing Sec. 85, CC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: In case of disagreement between the corporation
and a withdrawing stockholder who exercises his
appraisal right regarding the fair value of his shares,
a three-member group shall by majority vote resolve
the issue with finality. May the wife of the
withdrawing stockholder be named to the three
member group? (2011 Bar Question)
A: No, the wife of the withdrawing shareholder is not
a disinterested person.
Q: When does the right to payment cease?
A: The right of the dissenting stockholder to be paid
the fair value of his shares shall cease, his status as a
stockholder shall thereupon be restored, and all
dividend distributions which would have accrued on
his shares shall be paid to him if:
1. Demand for payment is withdrawn with the
consent of the corporation or
2. The proposed corporate action is abandoned by
the corporation or
3. The proposed corporate action is rescinded by
the corporation or
4. The proposed corporate action is disapproved by
the SEC where such approval is necessary or
5. The SEC determines that the dissenting
stockholder is not entitled to the appraisal right
(Sec. 84, CC).
RIGHT TO INSPECT
Books and records required to be kept by the
corporation
The following are the books and records required to
be kept by private corporations:
1. A record of all business transactions;
2. Minutes of all meetings of stockholders or
members;
3. Minutes of all meetings of directors or trustees;
and
4. Stock and transfer book, in case of stock
corporations (Sec. 74, CC).
NOTE: The duty to keep these books is imperative and
mandatory. The stockholder can likewise inspect the
financial statements of the corporation (Sec. 75, CC).
Place where the books and records shall be kept
GR: All the above books and records must be kept at
the principal office of the corporation (ibid).
XPN: The stock and transfer book may be kept in the
principal office of the corporation or in the office of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
its stock transfer agent, if one has been appointed by
the corporation (ibid).
Requirement in order for the minutes of the board
meetings be given probative value
The minutes of board meetings should be signed by
the corporate secretary. Without such signature,
neither probative value nor credibility could be
accorded such minutes (Union of Supervisors [RB]-
NATU vs. Sec. of Labor, 109 SCRA 139 [1981]).
Right to inspect
The right to inspect is the right of a stockholder to
inspect the books of the corporation is subject to the
following limitations:
1. The right must be exercised during reasonable
hours on business days
2. The person demanding the right has not improperly
used any information obtained through any
previous examination of the books and records of
the corporation
3. The demand is made in good faith or for legitimate
purpose germane to his interest as a stockholder
(Sec. 74, CC).
4. It should follow the formalities that may be
required in the by-laws
5. The right does not extend to trade secrets
6. It is subject to limitations under special laws, e.g.
Secrecy of Bank Deposits and FCDA or the Foreign
Currency Deposits Act.
NOTE: The right extends, in compliance with equity, good
faith, and fair dealing, to a foreign subsidiary wholly-owned
by the corporation.
However, this right does not apply where the corporation is
not organized under the Philippine law as in such a case,
the right of the stockholder is governed by the inspection
requirements in the jurisdiction in which the corporation
was organized (De Leon, supra, pg. 643).
Rationale behind the right of inspection of a
corporation
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 (Republic v Sandiganbayan,
G.R. No. 88809, July 10, 1991).
Persons entitled to inspect corporate books
The following are entitled to inspect the corporate
books:
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 CORPORATION CODE
1. Any director, trustee, or stockholder or member
of the corporation at reasonable hours on
business day (Sec. 74, CC).
2. Voting trust certificate holder- The term
stockholder, as used in Sec. 74 means not only
a stockholder of record; it includes a voting trust
certificate holder who has become merely an
equitable owner of the shares transferred (Sec.
59, par. 3).
3. Stockholder of a sequestered company (Republic
vs. Sandiganbayan, supra).
4. Beneficial owner of shares- pledgee, judgment
debtor, buyer from record owner. This is
provided that his interest is clearly established by
evidence.
Q: Carlos L. Puno, who died was an incorporator of
respondent Puno Enterprises, Inc. (Puno, Inc).
Joselito Musni Puno, claiming to be an heir of Carlos
L. Puno, initiated a complaint for specific
performance against Puno, Inc. Joselito averred that
he is the son of the deceased with the latters
common-law wife, Amelia Puno. As surviving heir,
he claimed entitlement to the rights and privileges
of his late father as stockholder of Puno. Inc. The
complaint thus prayed that Joselito be allowed to
inspect its corporate book, and be given an
accounting and all the profits pertaining to the
shares of Puno. Puno, Inc. filed a motion to dismiss
on the ground that Joselito did not have the legal
personality to sue because his birth certificate
names him as Joselito Musni Muno. Apropos,
there was yet a need for a judicial declaration that
Joselito Musni Puno and Joselito Musni Muno
were one and the same. May an heir of a
stockholder can automatically exercise the rights
(inspection, accounting, dividends) pertaining to the
deceased?
A: No. The stockholders right of inspection of the
corporations books and records is based upon his
ownership of shares in the corporation and the
necessity for self-protection. After all, a shareholder
has the right to be intelligently informed about
corporate affairs. Such right rests upon the
stockholders underlying ownership of the
corporations assets and property. Similarly, only
stockholders of record are entitled to receive
dividends declared by the corporation, a right
inherent in the ownership of the shares. 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
213
the books of the corporation. During such interim
period, the heirs stand as the equitable owners of the
stocks, the executor or administrator duly appointed
by the court being vested with the legal title to the
stock (Joselito Musni Puno v. Puno Enterprises, Inc.,
G.R. No. 177066, September 11, 2009).
Remedies for enforcement of right to inspect
1. Action for mandamus or damages
2. Civil and criminal liability
Liability of a corporate officer or agent in case he
violates the stockholders right to inspection
Any officer or agent of the corporation who shall
refuse to allow any director, trustees, stockholder or
member of the corporation to examine and copy
excerpts from its records or minutes, shall be liable to
such director, trustee, stockholder or member for
damages, and in addition, shall be liable for by a fine
of not less than one thousand (P1,000.00) pesos but
not more than ten thousand (P10,000.00) pesos or by
imprisonment for not less than thirty (30) days but
not more than five (5) years, or both, in the discretion
of the court (Sec 75 and Sec 144, CC).
Requisites for existence of probable cause to file a
criminal case of violation of a stockholders right to
inspect corporate books
1. A director, etc. has made a prior demand in writing
for a copy or excerpts from the corporations records
or minutes;
2. Any officer or agent of the concerned corporation
shall refuse to allow the said director, etc., to
examine and copy said excerpts;
3. If such refusal is made pursuant to a resolution or
order of the BODs the liability for such action shall be
imposed upon the directors or trustees who voted
such refusal; and
4. Where the officer or agent of the corporation sets
up the defense that the person demanding to
examine and copy excerpts from the records and
minutes has improperly used any information
secured through any prior examination of the same
or was not acting in good faith or for a legitimate
purpose in making his demand, the contrary must be
shown or proved (De Leon, supra, pg. 643, citing
Ang-Abaya vs. Ang, 573 SCRA 129 [2008]).
PRE-EMPTIVE RIGHT
Pre-emptive right
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
It is the preferential right of shareholders to subscribe
to all issues or disposition of shares of any class in
proportion to their present shareholdings (Sec. 39,
CC).
Purpose of pre-emptive right
To enable the shareholder to retain his proportionate
control in the corporation and to retain his equity in
the surplus.
Exercise of pre-emptive right
Pre-emptive right must be exercised in accordance
with the Articles of Incorporation or the By-Laws.
When the Articles of Incorporation and the By-Laws
are silent, the Board may fix a reasonable time within
which the stockholders may exercise the right.
Pre-emptive right on the re-issuance of treasury
shares
When a corporation reacquires its own shares which
thereby become treasury shares, all shareholders are
entitled to pre-emptive right when the corporation
reissues or sells these treasury shares. The
re-issuance of treasury shares is not among the
exception provided by Sec. 39 when pre-emptive
right does not exist.
Transferability of pre-emptive right
Pre-emptive right is transferable unless there is an
express restriction in the AOI.
Waiver of pre-emptive right by the stockholder
The stockholder may waive his pre-emptive right
either expressly or impliedly as when the stockholder
fails to exercise his pre-emptive right after being
notified and given an opportunity to avail of such
right.
Q: Suppose that X Corporation has already issued
the 1000 originally authorized shares of the
corporation so that its Board of Directors and
stockholders wish to increase X's authorized capital
stock. After complying with the requirements of the
law on increase of capital stock, X issued an
additional 1000 shares of the same value. Assume
that stockholder A presently holds 200 out of the
1000 original shares. Would A have a pre-emptive
right to 200 of the new issue of 1000 shares? Why?
A: Yes, A would have a pre-emptive right to 200 of
the new issue of 1000 shares. A is a stockholder of
record holding 200 shares in X Corporation. According
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
to the Corporation Code, each stockholder has the
pre-emptive right to all issues of shares made by the
corporation in proportion to the number of shares he
holds on record in the corporation.
Denial by the corporation deny pre-emptive right
The corporation can deny pre-emptive right if the
articles of incorporation or amendment thereto
denies such right.
Instances when pre-emptive right is not available
1. Shares to be issued to comply with laws requiring
stock offering or minimum stock ownership by the
public;
2. Shares issued in good faith with the approval of the
stockholders representing 2/3 of the outstanding
capital stock in exchange for property needed for
corporate purposes;
3. Shares issued in payment of previously contracted
debts;
4. In case the right is denied in the Articles of
Incorporation; (Sec. 39, CC)
5. Waiver of the right by the stockholder.
Q: A special meeting of the Board of Directors of
LIMPAN approved a resolution making a partial
payment for the legal services of Gilda C. Lim in the
handling of various cases on behalf of, or involving
the corporation to be paid in equivalent value in
shares of stock of the corporation. Patricia Lim Yu, a
sister of the Lim filed a complaint against the
members of the Board of Directors of LIMPAN who
approved the resolution. In their answer, the Board
of Directors and Lim asserted that Yu had no legal
capacity to sue and that the issuance of the shares in
LIMs favor was bona fide and valid pursuant to law
and LIMPANs By-Laws. In support of their ground
that Yu had no legal capacity to sue, the Lim pointed
out that she had previously filed a petition for
guardianship praying for the issuance of letters of
guardianship over Yu. The judge issued an order,
enjoining Yu from entering into, or signing, contracts
or documents on her behalf or on behalf of others. Is
Yu capacitated to file the complaint before the SEC?
A: Yes. Yu has the legal capacity. Simply put, the TRO
allows Respondent Patricia Lim-Yu to act for herself
and to enter into any contract on her own
behalf. However, she cannot transact in
representation of or for the benefit of her parents,
brothers or sisters, or the Limpan Investment
Corporation. Contrary to what Lim suggest, all that is
prohibited is any action that will bind them. In short,
she can act only on and in her own behalf, not that of
petitioners or the Corporation. There appears to be a
confusion on the nature of the suit initiated before
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 CORPORATION CODE
the SEC. Lim describe it as a derivative suit, which
has been defined as an action brought by minority
shareholders in the name of the corporation to
redress wrongs committed against it, for which the
directors refuse to sue. If the suit filed by Yu was
indeed derivative in character, then Yu may not have
the capacity to sue. The reason is that she would be
acting in representation of the corporation, an act
which the TRO enjoins her from doing. However, that
the suit of Yu cannot be
characterized as derivative, because she was
complaining only of the violation of her preemptive
right under Section 39 of the Corporation Code. She
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. She was
therefore not acting for the benefit of the
corporation. Quite the contrary, she was suing on her
own behalf, out of a desire to protect and preserve
her preemptive rights. Unquestionably, the TRO did
not prevent her from pursuing that action (Gilda C.
Lim, et al., v. Patricia Lim-Yu, in her capacity as a
minority stockholder of Limpan Investment
Corporation, G.R. No. 138343, February 19, 2001).
RIGHT TO VOTE
Exercise the right to vote
The stockholders can exercise their right to vote
through the election, replacement and removal of
Board of Directors or Trustees and on other corporate
acts which require stockholders approval.
Conditions for the issuance of non-voting shares
The issuance of non- voting shares is subject to the
following conditions under Section 6 of the
Corporation Code:
1. Only preferred or redeemable shares may be
made non-voting shares;
2. There must remain other shares with full voting
rights
Instances when non-voting shares are entitled to
vote
The non-voting shares may still vote in the following
matters:
1. Amendment of the articles of incorporation
2. Adoption and amendment of by-laws
3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
corporate property.
4. Incurring, creating or increasing bonded
indebtedness
215
5. Increase or decrease of capital stock
6. Merger or consolidation of the corporation with
another corporation or other corporations
7. Investment of corporate funds in another
corporation or business in accordance with the
corporation code
8. Dissolution of the corporation (Sec 6, CC).
Treasury shares are not entitled to vote
Treasury shares shall have no voting right as long as
such shares remain in treasury.
Rule in case of joint ownership of stock
GR: In case of shares of stock owned jointly by two or
more persons, in order to vote the same, the consent
of all the co-owners shall be necessary.
XPN: If there is a written proxy, signed by all the
co-owners, authorizing one or some of them or any
other person to vote such share or shares. Provided,
That when the shares are owned in an "and/or"
capacity by the holders thereof, any one of the joint
owners can vote said shares or appoint a proxy
therefor (Sec. 56, CC).
Rule in case of pledged or mortgaged shares
GR: The pledgor or mortgagor shall have the right to
attend and vote at meetings of stockholders even
though their shares are pledged or mortgaged
XPN: The pledgee or mortgagee has the right to vote
and attend meetings if he is expressly given by the
pledgor or mortgagor such right in writing which is
recorded on the appropriate corporate books (Sec.
55, CC).
RIGHT OF FIRST REFUSAL
Right of first refusal
A right that grants to the corporation or another
stockholder the right to buy the shares of stock of
another stockholder at a fixed price and only valid if
made on reasonable terms and consideration.
Right of first refusal is not a substantive right under
the Corporation Code
GR: The right of first refusal can only arise by means
of a contractual stipulation, or when it is provided for
in the AOI
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
XPN: In the case of a close corporation where the When the injury is suffered directly by an individual
right of first refusal is required to be a feature to be shareholder as to affect his proprietary rights, as
found in the AOI. when his right to vote is unlawfully withheld or his
right to inspect corporate books arbitrarily denied, an
NOTE: When only the by-laws provide a right of first refusal action may be brought by the injured stockholder in
without the corresponding provision in the AOI and not his own name and for his own benefit against the
printed in the stock certificate, it is null and void. There is corporation (Salonga, Private Corporations).
no authority to create property restrictions in by-laws
provisions (Hodges v. Lezama, 62 O.G. 6823).
REPRESENTATIVE SUIT
AOI may validly grant a right of first refusal in favor
Representative suit
of other stockholders
A representative suit is one filed by the shareholder
The SEC, as a matter of policy, allows restrictions on
individually, or on behalf of a class of shareholders to
transfer of shares in the AOI if the same is necessary
which he or she belongs, for injury to his or her
and convenient to the attainment of the objective for
interest as a shareholder (Cua vs. Tan, GR 182008,
which the company was incorporated, unless
Dec. 4, 2009).
palpably unreasonable under the circumstances (SEC
Opinion, Feb. 20, 1995).
It is proper where the wrong is done to a group of
stockholders, as where preferred stockholders rights
Pre-emptive right v. Right of first refusal.
are violated, a class or representative suit will be
proper for the protection of all stockholders
RIGHT OF FIRST
PRE-EMPTIVE RIGHT belonging to the same group (ibid).
REFUSAL
Arises only by virtue of
Representative suit v. Derivative suit
May be exercised even contractual stipulations
when there is no express but is also granted
REPRESENTATIVE SUIT DERIVATIVE SUIT
provision of law under the provisions on
Initiated by the stockholder Initiated by the
close corporation
under his own name or on stockholder on behalf of
Pertains to unsubscribed
behalf of other the corporation
portion of the authorized Exercisable against
stockholders
capital stock. A right that another stockholder of
Seeks vindication for injury Seeks to recover for the
may be claimed against the corporation of his
to his or her interest as a benefit of the
the corporation. It includes shares of stock
shareholder corporation and its
treasury shares.
whole body of
shareholders when
injury is caused to the
REMEDIAL RIGHTS
corporation that may
not otherwise be
Actions that the stockholders or members can bring
redressed because of
failure of the
1. Derivative suit one brought by one or more
corporation to act
stockholders or members in the name and on
Deals with individual Deals with corporate
behalf of the corporation to redress wrongs
stockholders or a class of rights (ibid.)
committed against it or to protect or vindicate
stockholders rights
corporate rights, whenever the officials of the
corporation refuse to sue or are the ones to be
Remedies of representative suit and derivative suit
sued or hold control of the corporation.
are mutually exclusive
2. Individual suit an action brought by a stockholder
against the corporation for direct violation of his
The two actions are mutually exclusive: i.e., the right
contractual rights.
of action and recovery belongs to either the
3. Representative suit one brought by a person in
shareholders (direct action) or the corporation
his own behalf and on behalf of all similarly
(derivative action) (ibid.)
situated.

INDIVIDUAL SUIT

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 216
 CORPORATION CODE
DERIVATIVE SUIT
Requisites for the existence of a derivative suit
(SExAN)
1. He was a Stockholder or member at the time the
acts or transactions subject of the action
occurred and at the time the action was filed;
2. He 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
(Rule 8 of the Interim Rules of Procedure
Governing Intra-Corporate Controversies, Cited in
Anthony S. Yu, et al., vs. Joseph S. Yukayguan, et
al., G.R. No. 177549, June 18, 2009).
Rationale for a derivative suit
Under the Corporation Code, where a corporation is
an injured party, its power to sue is lodged with its
board of directors or trustees. But an individual
stockholder may be permitted to institute a
derivative suit on behalf of the corporation in order
to protect or vindicate corporate rights whenever the
officials of the corporation refuse to sue, or are the
ones to be sued, or hold control of the corporation
(Hi-Yield Realty vs. CA, G.R. No. 168863, June 23,
2009).
Stockholder is not a real party in interest in a
derivative suit
The corporation is the real party-in-interest while the
suing stockholder, on behalf of the corporation, is
only a nominal party (Ibid).
Time when a person must be a stockholder for him
to be justified in filing a derivative suit
He must be a stockholder at the time the cause of
action accrued. If the cause of action is general and
continuing, said person must be a stockholder at the
time of filing of the suit and at the time the cause of
action accrued.
217
Allegation of tort can coexist with a derivative suit in
the same petition
A personal injury suffered by a stockholder cannot
disqualify him 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 (Goachan v Young, G.R. No. 131889, March
12, 2001).
Jurisdiction over a derivative suit
A derivative suit is an intra-corporate controversy
hence under the jurisdiction of the RTC acting special
commercial court.
Q: AA, a minority stockholder, filed a suit against BB,
CC, DD, and EE, the holders of majority shares of
MOP Corporation, for alleged misappropriation of
corporate funds. The complaint averred, inter alia,
that MOP Corporation is the corporation in whose
behalf and for whose benefit the derivative suit is
brought. In their capacity as members of the Board
of Directors, the majority stockholders adopted a
resolution authorizing MOP Corporation to
withdraw the suit. Pursuant to said resolution, the
corporate counsel filed a Motion to Dismiss in the
name of the MOP Corporation. Should the motion
be granted or denied? Reason briefly.
A: It should not be denied. The requisites for a valid
derivative suit exist in this case. First, AA was exempt
from exhausting his remedies within the corporation
and did not have a demand on the Board of Directors
for the latter to sue. Here, such a demand would be
futile, since the directors who comprise the majority
(namely BB, CC, DD and EE are the ones guilty of the
wrong complained of. Second, AA appears to be a
stockholder at the time of the alleged
misappropriation of corporate funds. Third, the suit is
brought on behalf and for the benefit of MOP
Corporation. In this connection, it was held in
Commart (Phils.) Inc. v. SEC, G.R. No. 85318, June 3,
1991, that to grant to the corporation concerned the
right of withdrawing or dismissing the suit, at the
instance of the majority stockholders and directors
who themselves are the persons alleged to have
committed the breach of trust against the interests of
the corporation would be to emasculate the right of
the minority stockholders to seek redress for the
corporation. Filing such action as a derivative suit
even by a lone stockholder is one of the protections
extended by law to minority stockholders against
abuses of the majority.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Oscar and Rodrigo C. Reyes are two of the four
children of the spouses Pedro and Anastacia Reyes.
Pedro, Anastacia, Oscar, and Rodrigo each owned
shares of stock of Zenith Insurance Corporation
(Zenith), a domestic corporation established by their
family. Pedro and Anastacia died. Pedros estate was
judicially partitioned among his heirs, however, no
similar settlement and partition appear to have
been made with Anastacias estate, which included
her shareholdings in Zenith. Zenith and Rodrigo filed
a complaint with the SEC against Oscar. The
complaint stated that it is a derivative suit initiated
and filed by the complainant Rodrigo to obtain an
accounting of the funds and assets of Zenith which
are now or formerly in the control, custody, and/or
possession of Oscar and to determine the shares of
stock of deceased spouses Pedro and Anastacia
Reyes that were arbitrarily and fraudulently
appropriated by Oscar. Oscar denied the charge.
Furthermore, Oscar claimed that the suit is not
a bona fide derivative suit because the requisites
therefor have not been complied with. Is the
complaint filed by Rodrigo is a derivative suit?
A: No. The complaint filed by Rodrigo does not
qualify as a derivative suit. First, Rodrigo is not a
shareholder with respect to the shareholdings
originally belonging to Anastacia; he only stands as a
transferee-heir whose rights to the share are
inchoate and unrecorded. Second, in order that a
stockholder may show a right to sue on behalf of the
corporation, he must allege with some particularity in
his complaint that he has exhausted his
remedies within the corporation by making a
sufficient demand upon the directors or other officers
for appropriate relief with the expressed intent to sue
if relief is denied. Lastly, the Court finds no injury,
actual or threatened, alleged to have been done to
the corporation due to Oscars acts. If indeed he
illegally and fraudulently transferred Anastacias
shares in his own name, then the damage is not to
the corporation but to his co-heirs; the wrongful
transfer did not affect the capital stock or the assets
of Zenith (Oscar C. Reyes v. RTC of Makati, Branch
142, et al., G.R. No. 165744 , August 11, 2008).
Q: Pursuant to the by-laws of Legaspi Towers 300,
Inc. (Legaspi), petitioners Lilia Marquinez Palanca, et
al., the incumbent Board of Directors, fixed the
annual meeting of the members of the
condominium corporation and the election of the
new Board of Directors. Out of a total number of
5,723 members who were entitled to vote, 1,358
were supposed to vote through their respective
proxies and their votes were critical in determining
the existence of a quorum. The Committee on
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Elections of Legaspi, however, found most of the
proxy votes, at its face value, irregular, thus,
questionable; and for lack of time to authenticate
the same, Palanca, et al., adjourned the meeting for
lack of quorum. Despite Palanca et al.'s insistence
that no quorum was obtained during the annual
meeting, Muer, et al., pushed through with the
scheduled election and were elected as the new
Board of Directors and officers of Legaspi.
Subsequently, they submitted a General Information
Sheet to the Securities and Exchange Commission
(SEC) with the new set of officers. Palanca, et al.,
filed a complaint for the declaration of nullity of
elections against Muer, et al., in a form of a
derivative suit. Is the derivative suit proper?
A: No. The derivative suit is not proper. The
complaint for nullification of the election is a direct
action by Palanca, et al., who were the members of
the Board of Directors of the corporation before the
election, against Muer, et al., who are the
newly-elected Board of Directors. The cause of action
devolves on Palanca, et al., not the condominium
corporation, which did not have the right to vote.
Hence the same is improper for derivative suit
(Legaspi Towers 300, Inc., et al., v. Amelia P. Muer, et
al., G.R. No. 170783, June 18, 2012).
OBLIGATIONS OF A STOCKHOLDER
The following are the obligations of the stockholder:
1. Liability to the corporation for unpaid
subscription (Sec. 67-70)
2. Liability to the corporation for interest on unpaid
subscription if so required by the by laws (Sec.
66)
3. Liability to the creditors of the corporation for
unpaid subscription (Sec. 60)
4. Liability for watered stock (Sec. 65)
5. Liability for dividends unlawfully paid (Sec. 43)
6. Liability for failure to create corporation (Sec. 10)
(Sundiang, 2014).
MEETINGS
REGULAR OR SPECIAL
Meeting of stockholders/members
i. DATE AND PLACE OF ii. REQUIRED WRITTEN
MEETING NOTICE
Regular meeting
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 CORPORATION CODE
The notice of meetings cause there is no person authorized to call a
shall be in writing, and meeting
1. Annually on date fixed the time and place 4. The special meeting for the removal of directors
in the by-laws; or thereof stated therein. or trustees may be called by the secretary or by
stockholder or member.
2. If there is no date in the The notice shall be sent a. There must be a previous notice
by-laws any date in April as to the stockholder: b. There must be a quorum
determined by the board. 1. W
within the period
Venue: In the city or provided in the by-laws Rules on meeting or voting which are applicable to
municipality where the 2. certain
i kinds of shares
principal office is located, in the absence of
and if practicable in the provision in the by-laws 1. Delinquent shares shall not be entitled to vote.
principal office of the at least 2 weeks prior 2. Treasury shares have no voting rights while they
corporation: Provided, that to the meeting. remain in the treasury (Sec. 57, CC).
Metro Manila shall be 3. Fractional shares shall not be entitled to vote.
considered a city or Notice may be waived, 4. Escrow shares shall not be entitled to vote before
municipality. expressly or impliedly, by the fulfillment of the condition imposed thereon.
any stockholder or 5. Unpaid shares, if not delinquent, are entitled to all
member. the rights of a stockholder including the right to vote.
Special meeting
The notice of meetings 6. Sequestered shares-
shall be in writing, and
1. Any time deemed the time and place GR: The registered owner of the shares of a
necessary; or thereof stated therein. corporation, even if they are sequestered by the
2. As provided in the by-laws government through the PCGG, exercises the
The notice shall be sent right and the privilege of voting on them.
Venue: In the city or to the stockholder:
municipality where the 1. Within the period The PCGG as a mere conservator cannot, as a
principal office is located, provided in the by-laws rule, exercise acts of dominion by voting these
and if practicable in the 2. If no provision in the shares.
principal office of the by-laws at least 1 week
corporation: Provided, that prior to the meeting XPN: Two-tiered test: The registered owner of
Metro Manila shall be sequestered shares may only be deprived of
considered a city or Notice may be waived, these voting rights, and the PCGG authorized to
municipality. expressly or impliedly, by exercise the same, only if it is able to establish
any stockholder or that:
member. 1. There is prima facie evidence showing
that the said shares are ill-gotten and thus
belong to the State; and
Requirements for a valid meeting whether
2. there is an imminent danger of
stockholders/members or the board
dissipation, thus necessitating the
continued sequestration of the shares and
1. It must be held in the proper place;
authority to vote thereupon by the PCGG
2. It must be held at the stated date and at the
while the main issue is pending before
appointed time or at a reasonable time
the Sandiganbayan (Trans Middle East
thereafter;
[Phils.] vs. Sandiganbayan, GR 172556,
3. It must be called by the proper person:
June 9, 2006).
a. The person or persons designated in the
by-laws have authority to call stockholders
XPN to the XPN: The two-tiered test does not
or members meeting
apply in cases involving funds of public character
b. In the absence of such provision in the
(public character exception). In such cases, the
by-laws it may be called by a director or
government is granted the authority to vote said
trustee or by an officer entrusted with the
shares, namely:
management of the corporation
1. Where the government shares are taken
c. A stockholder or member may make the
over by private persons or entities who or
call on order of the SEC whenever for any

UNIVERSITY OF SANTO TOMAS

219 FACULTY OF CIVIL LAW
 MERCANTILE LAW
which registered them in their own names;
and
2. Where the capitalization of shares that
were acquired with public funds somehow
landed in private hands (Republic vs.
Sandiganbayan, G.R. No. 107789, Apr. 30,
2003).
7. Pledgor, mortgagor, or administrator shares (Sec.
55, CC)- pledgor or mortgagor has the right to attend
and vote at meetings unless pledge or mortgagee is
expressly given such right in writing, as recorded on
the books.
Executor, administrators, receivers, and other legal
representatives may attend and vote in behalf of the
stockholder or members without need of any written
proxy. In Gochan v. Young, G.R. No. 131889, Mar. 12,
2001, it was held that heirs are not prohibited from
representing the deceased with regard to shares of
stock registered in the name of the latter, especially
when no administrator has been appointed.
8. Shares jointly owned (Sec. 56, CC.) consent of all
the co-owners is necessary, unless there is a written
proxy signed by all the co-owners. If shares are
owned in an and/or capacity by the holders
thereof, any one of the joint owners can vote or
appoint a proxy thereof.
WHO CALLS THE MEETING
The call for a meeting is exercised by the person
who has the power to call the meeting.
The following persons may exercise the power to
call for a meeting:
1. The person or persons designated in the by-laws to
have the authority to call stockholders/ members
meeting;
2. In the absence of such provision in the by-laws, the
director/trustee or officer entrusted with the
management of the corporation unless otherwise
provided by law;
3. A stockholder/ member may make the call on
order of the SEC whenever for any cause, there is no
person authorized to call a meeting (Sec. 50, last par.,
CC) or the officers authorized fail or refuse to call a
meeting.
NOTE: SEC may compel the officers of any corporation
registered by it to call meetings of stockholders/members
thereof under its supervision (Sec. 6[f] A, PD No. 902-A).
4. Corporate Secretary or a stockholder/member for a
special meeting intended for the removal of directors
or trustees (Sec. 28, CC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
QUORUM
GR: Shall consist of the stockholders representing
majority of the outstanding capital stock or a majority
of the actual and living members with voting rights, in
the case of non-stock corporation (Tan v. Sycip, G.R.
No. 153468, Aug. 17, 2006).
XPNs:
1. A different quorum may be provided for in the
by-laws;
2. The corporation code provides for certain
resolutions that must be approved by at least 2/3 of
the outstanding capital stock, in which case, majority
of the outstanding capital stock is insufficient to
constitute a quorum, presence of the stockholders
representing 2/3 of the outstanding capital stock is
necessary for such purpose.
MINUTES OF THE MEETINGS
The minutes are a brief statement not only of what
transpired at a meeting, usually of stockholders/
members or directors/ trustees, but also at meeting
of an executive committee.
The minutes are usually kept in a book especially
designed for that purpose, but they may also be kept
in the form of memoranda or in any other manner in
which they can be identified as minutes of a meeting
(People vs. Dumlao, GR 168918, March 2, 2009).
To have probative value and credibility, the minutes
must be signed by the corporate secretary,
notwithstanding that the one taking the minutes was
a mere clerk (Union of Supervisors [RB]-NATU vs. Sec.
of Labor, 109 SCRA 139 [1981]).
CAPITAL STRUCTURE
SUBSCRIPTION AGREEMENTS
Subscription contract
It is a contract for the acquisition of unissued stock in
an existing corporation or a corporation still to be
formed. It is considered as such notwithstanding the
fact that the parties refer to it as purchase or some
other contract (Sec. 60, CC).
Nature of a subscription contract
A subscription contract is indivisible. Consequently,
where stocks were subscribed and part of the
subscription contract price was not paid, the whole
subscription shall be considered delinquent and not
220

only the shares which correspond to the amount not
paid.
NOTE: This is called the Doctrine of Individuality
(Indivisibility) of Subscription. A subscription is one entire
and indivisible whole contract. It cannot be divided into
portions (Sec. 64, CC).
Subscription v. Purchase
SUBSCRIPTION
May be made before or
after incorporation
Subscriber becomes a
stockholder even if he
has not fully paid the
subscription
Cannot be released
from his subscription
unless all stockholders
agree thereto and no
creditor is thereby
prejudiced
Corporate creditors may
proceed against the
subscriber for his unpaid
subscription in case the
assets of the
corporation are not
sufficient to pay their
claims
Not covered by the
Statute of Frauds
Subscription price are
considered assets of the
corporation, hence,
creditors may go after
them
Stock option v. Warrant
STOCK OPTION
A privilege granted to a
party to subscribe to a
certain portion of the
unissued capital stock of
a corporation within a
certain period and under
the terms and conditions
of the grant exercisable
by the grantee at
anytime within the
CORPORATION CODE
PURCHASE
May be made only after
incorporation
Buyer does not become a
stockholder until the
fulfillment of the terms of
the sale and registration
thereof in the books of
the corporation
The corporation may
rescind or cancel the
contract for
non-fulfillment of the
contract by the buyer
Creditors may not
proceed against the buyer
for the unpaid price as
there is no privity of
contract between them
In purchase amounting to
more than 500 pesos, the
Statute of Frauds shall
apply
Purchase price does not
become assets of the
corporation unless fully
paid
WARRANT
A type of security which
entitles the holder the
right to subscribe to a
pre-determined number
of unissued capital stock
of a corporation
(subscription warrant), or
to purchase a
pre-determined number
of issued or existing
221
period granted (SEC Rule shares in the future
BED No. 902-A-3, Sec.1; (covered warrant).
De Leon, The Corporation
Code Annotated, 2010
ed.).
NOTE: A warrant is
detachable if it may be sold,
transferred or assigned to
any person by the warrant
holder separate from and
independent of the
corresponding beneficiary
securities, or shares of stock
or other securities of the
issuer which form the basis
of the entitlement in a
warrant. It is
non-detachable if it may not
be sold etc. (SEC Rules, Sept.
15, 1993; De Leon, The
Corporation Code
Annotated, 2010 ed.)
Kinds of subscription contracts
1. Pre-incorporation subscription entered into
before incorporation (Sec. 61, CC).
2. Post-incorporation subscriptionentered into after
incorporation (Sundiang, supra, 2009, pg. 227).
Rules governing pre-incorporation subscription
contracts
GR: A pre-incorporation subscription agreement is
irrevocable for a period of six (6) months from the
date of subscription.
XPNs:
1. If all of the other subscribers consent to the
revocation,
2. If the incorporation of said corporation fails to
materialize within said period or within a longer
period as may be stipulated in the contract of
subscription.
XPN to XPN: No pre-incorporation subscription may
be revoked after the submission of the AOI to the
Securities and Exchange Commission (Sec. 61, CC).
Payment of a subscription contract cannot be
condoned by a corporation
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 (PNB v Bitulok Sawmill
Inc, G.R. Nos. L-24177-85, June 29, 1968).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Stockholder is entitled to the rights pertaining to
shares of stock subscribed although not fully paid
As long as the shares are not considered delinquent,
stockholders are entitled to all rights granted to it
whether or not the subscribed capital stocks are fully
paid.
Q: FLADC, which was owned by the Tius,
encountered dire financial difficulties. It was heavily
indebted to PNB for P190 million. Thus, the
construction of the Masagana Citimall was
threatened with stoppage and incompletion. To
prevent foreclosure of the mortgage on the two lots
where the mall was being built, the Tius invited the
Ongs to invest in FLADC. Under the Pre-Subscription
Agreement they entered into, the Ongs and the Tius
agreed to maintain equal shareholdings in FLADC.
Accordingly, the Ongs paid P100 million in cash for
their subscription to 1,000,000 shares of stock while
the Tius committed to contribute to FLADC a
four-storey building and two parcels of land
respectively to cover their additional 549,800 stock
subscription therein. The business harmony
between the Ongs and the Tius in FLADC, however,
was short-lived because the Tius, rescinded the
Pre-Subscription Agreement. The Tius accused the
Ongs of violation of the terms of their agreement.
Because of this, the Tius filed a case at SEC, seeking
confirmation of their rescission of the
Pre-Subscription Agreement. The SEC granted the
same. Could the Tius could legally rescind the
Pre-Subscription Agreement?
A: No. When a subscriber assigned properties and
infused capital to the corporation upon invitation of a
majority stockholder and in exchange for shares of
stocks under a pre-subscription agreement, the
agreement cannot be rescinded since the subject
matter of the contract was the unissued shares of the
Corporation allocated to the subscriber. Since these
were unissued shares, the Pre-Subscription
Agreement was in fact a subscription contract as
defined under Section 60, Title VII of the Corporation
Code: Any contract for the acquisition of unissued
stock in an existing corporation or a corporation still
to be formed shall be deemed a subscription within
the meaning of this Title, notwithstanding the fact
the parties refer to it as a purchase or some other
contract. 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. Thus,
the subscription contract was one between the
subscriber and the corporation and not between the
stockholders. The trust fund doctrine provides that
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
subscriptions to the capital stock of a corporation
constitute a fund to which the creditors have a right
to look for the satisfaction of the claims. This doctrine
is the underlying principle in the procedure for the
distribution of corporate capital only in three
instances: 1) amendment of the articles of
incorporation to reduce the authorized capital stock;
2.) purchase of redeemable shares by the corporation
regardless od the existence of unrestricted retained
earnings; and 3.) dissolution and eventual liquidation
of the corporation. Furthermore, the doctrine is
articulated in Section 41 of the Corporation Code on
the power of the corporation to acquire its own
shares and in Section 122 on the prohibition against
the distribution of corporate assets and property
unless the stringent requirements are complied with.
CONSIDERATION FOR STOCKS
Valid considerations in a subscription agreement
1. Actual cash paid to the corporation;
2. Property, tangible or intangible (i.e. patents or
copyrights), the requisites are as follows:
a. The property is actually received by the
corporation
b. The property is necessary or convenient for its
use and lawful purposes
c. It must be subject to a fair valuation equal to
the par or issued value of the stock issued
d. The valuation thereof shall initially be
determined by the incorporators; and
e. The valuation is subject to the approval by the
SEC.
3. Labor or services actually rendered to the
corporation
4. Prior corporate obligations or indebtedness
5. Amounts transferred from unrestricted retained
earnings to stated capital (in case of declaration of
stock dividends)
6. Outstanding shares in exchange for stocks in the
event of reclassification or conversion (Sec. 6, CC).
NOTE: Promissory notes or future services are not valid
considerations (ibid.)
Persons required to pay in full their subscription
upon incorporation
The following are required to pay their subscription in
full upon incorporation:
1. Nonresident foreign subscribers upon
incorporation must pay in full their subscriptions
unless their unpaid subscriptions are guaranteed by a
surety bond or by an assumption by a resident
stockholder through an affidavit of liability.
222
 CORPORATION CODE
2. In case of nopar value shares, they are deemed
fully paid and nonassessable (Sec. 6, CC).
NOTE: The issued price of no-par value shares may be fixed
in the AOI or by the BOD pursuant to authority conferred
upon it by the AOI or the by-laws, or in the absence
thereof, by the stockholders representing at least a
majority of the outstanding capital stock at a meeting duly
called for the purpose (Sec. 62,CC).
SHARES OF STOCK
Shares of stock
Stock or share of stock is one of the units into which
the capital stock is divided. It represents the interest
or right which the owner has
1. In the management of the corporation in which he
takes part through his right to vote (if voting rights
are permitted for that class of stock by the AOI);
2. In a portion of the corporate earnings, if and when
segregated in the form of dividends; and
3. Upon its dissolution land winding up, in the
property and assets of the corporation remaining
after the payment of corporate debts and liabilities to
creditors (De Leon, supra, pg. 79, citing 11 Fletcher,
pg. 18 [1971 ed.]).
Q: In order to comply with the 60% capital
requirement for ownership by Filipinos of certain
corporations, what does the term capital refer to?
A. The term capital refers to shares with voting
rights, as well as with full beneficial ownership, which
must be owned and held by citizens of the Philippines
(Gamboa v. Teves G.R. No. 176579, October 9, 2012).
NOTE: This is precisely because the right to vote in the
election of directors, coupled with full beneficial ownership
of stocks, translates to effective control of a corporation
(Gamboa v. Teves G.R. No. 176579, October 9, 2012).
Legal title without beneficial title of stocks is not
sufficient to meet the ownership requirement
Mere legal title is insufficient to meet the 60%
Filipino-owned capital required in the Constitution.
Full beneficial ownership of 60% of the outstanding
capital stock, coupled with 60% of the voting rights, is
required. The legal and beneficial ownership of 60%
of the outstanding capital stock must rest in the
hands of Filipino nationals in accordance with the
constitutional mandate. Otherwise, the corporation is
considered as non-Philippine nationals. Full
beneficial ownership of the stocks, coupled with
appropriate voting rights, is essential (Gamboa v.
Teves G.R. No. 176579, October 9, 2012).
223
NOTE: 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 apply uniformly and across the
board to all classes of shares, regardless of nomenclature
and category, comprising the capital of a corporation.
Under the Corporation Code, capital stock consists of all
classes of shares issued to stockholders, that is, common
shares as well as preferred shares, which may have
different rights, privileges or restrictions as stated in the
articles of incorporation. The Corporation Code allows
denial of the right to vote to preferred and redeemable
shares, but disallows denial of the right to vote in specific
corporate matters. Thus, common shares have the right to
vote in the election of directors, while preferred shares may
be denied such right. Nonetheless, preferred shares, even if
denied the right to vote in the election of directors, are
entitled to vote on certain corporate matters.
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 (This is
because when only preferred shares without voting rights
are issued, the requirement of full beneficial ownership will
be used as the standard). Preferred shares, denied the right
to vote in the election of directors are anyway still entitled
to vote on the eight specific corporate matters under Sec,
6. Thus, if a corporation, engaged in a partially nationalized
industry, issues a mixture of common and preferred
non-voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred non-voting
shares must be owned by Filipinos. Of course, if a
corporation issues only a single class of shares, at least 60
percent of such shares must necessarily be owned by
Filipinos. In short, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately to each class
of shares, whether common, preferred non-voting,
preferred voting or any other class of shares. This uniform
application of the 60-40 ownership requirement in favor of
Filipino citizens clearly breathes life to the constitutional
command that the ownership and operation of public
utilities shall be reserved exclusively to corporations at
least 60 percent of whose capital is Filipino-owned.
Applying uniformly the 60-40 ownership requirement in
favor of Filipino citizens to each class of shares, regardless
of differences in voting rights, privileges and
restrictions, guarantees effective Filipino control of public
utilities, as mandated by the Constitution. Moreover, such
uniform application to each class of shares insures that the
controlling interest in public utilities always lies in the
hands of Filipino citizens. This addresses and extinguishes
Pangilinans worry that foreigners, owning most of the
non-voting shares, will exercise greater control over
fundamental corporate matters requiring two-thirds or
majority vote of all shareholders (Gamboa v. Teves G.R. No.
176579, October 9, 2012).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
NATURE OF STOCK
Nature of stock
The ownership of share of stock confers no
immediate legal right or title to any of the property of
the corporation. Each share merely represents a
distinct undivided share or interest in the common
property of the corporation (De Leon, ibid., pg. 80,
citing 18 Am. Jur. 2d 737).
The interest over the share is purely inchoate, or a
mere expectancy of a right in the management of the
corporation and to share in the profits thereof and in
the properties and assets thereof on dissolution, after
payment of the corporate debts and obligations
(ibid., citing Saw vs. CA, 195 SCRA 740 [1991]).
Further, the stockholders interest in the corporate
property is merely equitable or beneficial in nature;
hence he cannot be said to be a co-owner of the
corporate property (ibid., citing Stockholders of F.
Guanzon & Sons , Inc. vs. Register of Deeds).
Shares of stocks are personal property
Shares of stock are personal property. They are
incorporeal in nature (Art. 417 and 2095 of the Civil
Code).
Share of stock does not constitute an indebtedness
of the corporation to the shareholder
They are in the nature of choses in action but are not
in a strict sense. They do not constitute an
indebtedness of the corporation to the shareholder
and are therefore, not credits as to make the
stockholder a creditor of the corporation (De Leon,
supra, pg. 81).
SUBSCRIPTION AGREEMENTS
*Please refer to page 197 for the extensive discussion
of this topic.
CONSIDERATION FOR SHARES OF STOCK
*Please refer to the previously discussed topic on
Consideration for Stocks found on the previous page.
WATERED STOCK
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
DEFINITION
Watered stock
A watered stock is a stock issued in exchange for
cash, property, share, stock dividends, or services
lesser than its par value or issued value (Sec. 65, CC).
Watered Stocks include stocks:
1. Issued without consideration (bonus share)
2. Issued for a consideration other than cash, the fair
valuation of which is less than its par or issued value;
3. Issued as stock dividend when there are no
sufficient retained earnings to justify it; and
4. Issued as fully paid when the corporation has
received a lesser sum of money than its par or issued
value (discount share) (De Leon, supra, pg. 605-606).
NOTE: Both par and no par value shares can be watered
stocks.
Reason behind the prohibition on the issuance of
watered stocks
It is to protect persons who may acquire stock and
the creditors of the corporation particularly those
who may become such on the faith of its outstanding
capital stock being fully paid. The prohibition secures
equality among subscribers and prevents
discriminations against those who have paid in full
the par or issued value of their shares (ibid., pg. 606).
Not all exchanges of stocks worth less than their
value are considered watered stock
The watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such stocks
by the corporation, for then it would no longer be an
issue but a sale thereof (De Leon, supra, pg. 607,
citing Rochelle Roofing Co. vs. Burley, 115 NE 478).
Treasury shares are not subject to the prohibition on
the issuance of watered stocks
Treasury shares are not original issuances. They are
shares of stocks which have been issued and fully
paid for, but subsequently reacquired by the issuing
corporation by purchase, redemption, donation, or
through some other lawful means (Sec. 9, CC). Since
they do not lose their status as issued shares, they
cannot be treated as new issues when disposed of or
reissued.
Limitation on the re-disposal of treasury shares
Treasury shares may again be disposed of for a
reasonable price fixed by the BOD. Since they are not
224
 CORPORATION CODE
subject to the prohibition on the issuance of watered
stock, they may be sold for less than their par or
issued value as long as the price for re-disposal is
reasonable.
The issuance of watered stock cannot be ratified by
the stockholders
It is not merely ultra vires, but is illegal per se as it is a
violation of Sec. 62, CC.
LIABILITY OF DIRECTORS FOR WATERED STOCKS
Liability of directors for watered stocks
Any director or officer of a corporation shall be
solidarily liable with stockholder concerned to the
corporation and its creditors for difference between
the fair value received at the time of the issuance of
the stock and the par or issued value of the same, if:
1. He consents to the issuance of stocks for
consideration less than its par or issued value; or
2. He consents to the issuance of stocks for a
consideration in any form other than cash, valued
in excess of its fair value; or
3. Who, having knowledge thereof, does not
forthwith express his objection in writing and file
the same with the corporate secretary (Sec. 65,
CC).
Basis for the solidary liability of directors consenting
to the issuance of watered stock
The solidary liability of the directors emanates from
the fiduciary character of the position of director or
corporate officer.
Defenses that can be invoked in order that a director
or an officer can escape liability for the issuance of
watered stocks
1. The director or officer did not consent and did not
have knowledge in the issuance of the watered stock.
2. The director or officer objected to its issuance
a. Objection must be directed to the issuance of
the watered stocks
b. In writing
c. File the same with the corporate secretary
d. Such objection must be done before the sale
of stocks (Sec. 65, CC).
225
TRUST FUND DOCTRINE FOR LIABILITY FOR
WATERED STOCK
Trust fund doctrine
The subscribed capital stock of the corporation is a
trust fund for the payment of debts of the
corporation which the creditors have the right to look
up to satisfy their credits, and which the corporation
may not dissipate. The creditors may sue the
stockholders directly for the latters unpaid
subscription.
There is a violation of the trust fund doctrine when
stocks of the corporation are issued less than the
par value
GR: The trust fund doctrine is violated where stocks
are issued by the corporation for a consideration
which is less than its par value.
XPN: Trust fund doctrine is not violated in case
treasury shares are reacquired and subsequently
re-issued for a lesser consideration by the
corporation. The only limitation for the reissuance of
treasury shares is that their price must be reasonable.
SITUS OF SHARES OF STOCK
Situs of shares of stock
Generally, the situs of shares of stock is the country
where the corporation is domiciled (Wells Fargo Bank
v CIR, G.R. No. L-46720, June 28, 1940).
Domicile of the corporation
The residence of the corporation is the place where
the principal office of the corporation is located as
stated in its AOI even though the corporation has
closed its office therein and relocated to another
place (Hyatt Elevators and Escalators Corp. vs.
Goldstar Elevator Phils., Inc., supra.).
Exception to the situs of shares
The exception is when the case involves property
taxation. For that purpose, the situs of intangible
property, such as shares of stocks, is at the domicile
or residence of the owner. However, this exception
admits of its own exceptions, i.e.
1. When a nonresident alien has shares of stock in a
domestic corporation, then the situs will be in the
Philippines.
2. For purposes of the estate tax, the gross estate of a
resident decedent, whether citizen or alien, or a
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
citizen decedent, whether resident or nonresident,
includes his intangible personal property wherever Limitations on no par value shares (5DP - B2tip - AP)
situated (De Leon, supra, pg. 82-83).
1. Shares which are no par value, cannot have an
CLASSES OF SHARES OF STOCK issued price of less than P5.00;
2. The entire consideration for its issuance
Kinds or classifications of shares constitutes capital so that no part of it should be
Distributed as dividends;
1. Par value shares 3. They cannot be issued as Preferred stocks;
2. No par value shares 4. They cannot be issued by Banks, Building and
3. Common shares loan association, Trust companies, Insurance
4. Preferred shares companies, and Public utilities;
5. Redeemable shares 5. The Articles of incorporation must state the fact
6. Treasury shares that it issued no par value shares as well as the
7. Founders share number of said shares;
8. Voting shares 6. Once issued, they are deemed fully Paid and
9. Non-voting shares non-assessable (Sec. 6, CC).
10. Convertible shares
11. Watered stock Common shares
12. Fractional share
13. Shares in escrow These are ordinarily and usually issued stocks without
14. Over-issued stock extraordinary rights and privileges, and entitle the
15. Street certificate shareholder to a pro rata division of profits. It
16. Promotion share represents the residual ownership interest in the
corporation. The holders of this kind of share have
Who may classify shares complete voting rights and they cannot be deprived
of the said rights except as provided by law.
1. Incorporators - the classes and number of shares
which a corporation shall issue are first Preferred shares
determined by the incorporators as stated in the
articles of incorporation filed with the SEC. These entitle the shareholder to some priority on
2. Board of directors and stockholders - after the distribution of dividends and assets over those
corporation comes into existence, classification holders of common shares. Preferred shares may be
of shares may be altered by the board of issued only with a stated par value (Sec. 6, CC).
directors and the stockholders by amending the
articles of incorporation pursuant to Sec. 16. Kinds of preferred shares

Par value shares 1. Preferred shares as to assets Shares which gives

Shares with a value fixed in the articles of
incorporation and the certificates of stock. The par
value fixes the minimum issue price of the shares
(Sec. 62, CC).
Rule on the issuance of shares less than its par value
GR: A corporation cannot issue shares at less than its
par value.
XPN: The prohibition applies only to original issuance
of shares and not to the subsequent sale of treasury
shares and sale of shares made by stockholders.
No par value shares
These are shares having no stated value in AOI.
the holder preference in the distribution of the
assets of the corporation in case of liquidation.
2. Participating preferred shares Entitled to
participate with the common shares in excess
distribution
3. Non-participating preferred shares Not entitled
to participate with the common shares in excess
distribution.
4. Preferred shares as to dividends Shares which are
entitled to receive dividends on said share to the
extent agreed upon before any dividends at all
are paid to the holders of common stock.
5. Cumulative preferred shares If a dividend is
omitted in any year, it must be made up in a later
year before any dividend may be paid on the
common shares in the later year.
6. Non-cumulative preferred shares There is no
need to make up for undeclared dividends

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2014 GOLDEN NOTES 226
 CORPORATION CODE
Holders of preferred shares are not creditors
Holders of preferred shares cannot compel the
corporation to give them dividends. The preference
only applies once dividends are declared.
Preferred cumulative participating share of stock
This is a kind of share which gives the holder
preference in the payment of dividends ahead of
common stockholders and to be paid the dividends
due for prior years and to participate further with
common stockholders in dividend declaration.
Redeemable shares
These are shares of stocks issued by a corporation
which said corporation can purchase or take up from
their holders upon expiry of the period stated in
certificates of stock representing said shares (Sec. 8,
CC).
Kinds of redeemable shares
1. Compulsory - the corporation is required to
redeem the shares.
2. Optional - the corporation is not mandated to
redeem the shares.
Limitations on redeemable shares (ATVI)
1. Issuance of redeemable shares must be expressly
provided in the Articles of incorporation;
2. The Terms and conditions affecting said shares
must be stated both in the articles of
incorporation and in the certificates of stock;
3. Redeemable shares may be deprived of Voting
rights in the articles of incorporation, unless
otherwise provided in the Code (par. 6, Sec. 6,
CC)
4. Redemption cannot be made if it will cause
Insolvency of the corporation.
Reissuance of redeemed shares
Redeemable shares, once redeemed are retired
unless reissuance is expressly allowed in the AOI.
Q: Planters Bank issued preferred redeemable
shares with a feature that entitles them to be
preferred in the payment of dividends.
Subsequently, the bank experienced liquidity
problems. The Central Bank ruled that the bank has
a reserve deficiency. Despite of the condition, one of
the stockholders holding the preferred shares filed
an action against the corporation to redeem his
227
shares and pay the dividends due. Will the suit
prosper?
A: No. While redeemable shares may be redeemed
regardless of the existence of unrestricted retained
earnings, this is subject to the condition that the
corporation has, after such redemption, assets in its
books to cover debts and liabilities inclusive of capital
stock. Redemption, therefore, may not be made
where the corporation is insolvent or if such
redemption will cause insolvency or inability of the
corporation to meet its debts as they mature.
Furthermore, the declaration of dividends is
dependent upon the availability of surplus profit or
unrestricted retained earnings, as the case may be.
Shareholders, both common and preferred, are
considered risk takers who invest capital in the
business and who can look only to what is left after
corporate debts and liabilities are fully paid. (Republic
Planters Bank v Judge Agana, G.R. No. 51765. March
3, 1997)
Treasury shares
Shares that have been earlier issued as fully paid and
have thereafter been acquired by the corporation by
purchase, donation, and redemption or through some
lawful means (Sec. 9, CC).
Rights that can be denied to treasury shares
1. Voting Rights
2. Right to dividends
NOTE: Treasury shares are not retired shares. They do not
revert to the unissued shares of the corporation but are
regarded as property acquired by the corporation which
may be reissued or resold at a price to be fixed by the
Board of Directors (SEC Rules Governing Redeemable and
Treasury Shares, CCP No. 1-1982).
Other means in which a corporation may acquire its
own shares
1. To collect or compromise unpaid indebtedness to
the corporation;
2. To eliminate fractional shares;
3. To pay dissenting or withdrawing stockholders
entitled to payment for their shares;
4. Redemption; and
5. Close corporation.
Limitations on treasury shares
1. They may be re-issued or sold again as long as it
is for a reasonable price fixed by the BOD.
2. Cannot participate in dividends.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. It cannot be represented during stockholders always be a class or series of shares which have
meetings. complete voting rights (Sec. 6, CC).
4. The amount of URE equivalent to the cost of
treasury shares being held shall be restricted Instances when holders of non-voting shares are
from being declared and issued as dividends. allowed to vote

NOTE: When treasury shares are sold below its par or These redeemable and preferred shares, when such
issued value, there can be no watering of stock because voting rights are denied, shall nevertheless be
such watering of stock contemplates an original issuance of entitled to vote on the following fundamental
shares.
matters:
1. Amendment of articles of incorporation
2. Adoption and amendment of by-laws
Treasury shares v. Redeemable shares 3. Sale, lease, exchange, mortgage, pledge or other
disposition of all or substantially all of the
TREASURY SHARES REDEEMABLE SHARES corporate property
Shares so acquired by 4. Incurring, creating or increasing bonded
Issued by the
the corporation indebtedness
corporation when
through purchase, 5. Increase or decrease of capital stock
expressly so provided
donation, redemption 6. Merger or consolidation of the corporation with
in the articles of
or any other lawful another corporation or other corporations
incorporation.
means 7. Investment of corporate funds in another
Redeemable shares corporation or business in accordance with this
may be acquired even Code
Can only be acquired without unrestricted 8. Dissolution of the corporation (par. 6, Sec. 6, CC).
in the presence of retained earnings for
Unrestricted retained as long as it will not Convertible shares
earnings result to the
insolvency of the A share that is changeable by the stockholder from
Corporation. one class to another at a certain price and within a
Must comply with the Is an exception to the certain period.
trust fund doctrine trust fund doctrine
GR: Stockholder may demand conversion at his
Founders' shares pleasure.

Shares classified as such in the articles of
incorporation which may be given special preference
in voting rights and dividend payments.
Limitations in the issuance of founders' shares
The exclusive right to vote and be voted for as
director is granted, this privilege is subject to
approval by the SEC, and cannot exceed 5 years from
the date of approval (Sec. 7, CC).
Voting shares
Shares with a right to vote. If the stock is originally
issued as voting stock, it may not thereafter be
deprived of the right to vote without the consent of
the holder.
XPN: Otherwise restricted by the articles of
incorporation.
Fractional share
A fractional share is a share of equity that is less than
one full share.
Shares in escrow
Subject to an agreement by virtue of which the share
is deposited by the grantor or his agent with a third
person to be kept by the depositary until the
performance of certain condition or the happening of
a certain event contained in the agreement.
Over-issued stock

Non-voting shares It is a stock issued in excess of the authorized capital

stock. Stocks which are issued in this manner are null
Shares without right to vote. The law only authorizes and void.
the denial of voting rights in the case of redeemable
shares and preferred shares, provided that there shall

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 228
 CORPORATION CODE
Street certificate
It is a stock certificate endorsed by the registered
holder in blank and the transferee can command its
transfer to his name from issuing corporation.
Promotional share
This is a share issued to promoters or those in some
way interested in the company, for incorporating the
company, or for services rendered in launching or
promoting the welfare of the company.
Watered stock
Shares issued below its par value or issued value.
NOTE: Watered stocks pertain only to original issuance of
shares.
A corporation can designate other classes of stocks
There can be other classifications as long as they are
indicated in the AOI, stock certificate and not
contrary to law.
PAYMENT OF BALANCE OF SUBSCRIPTION
Time when the balance of the subscription should
be paid
1. On the date specified in the subscription contract,
without need of demand or call, or
2. If no date of payment has been specified, on the
date specified on the call made by the BOD; (Sec. 67,
CC)
3. If no date of payment has been specified on the
call made, within 30 days from the date of call;
4. When insolvency supervenes upon a corporation
and the court assumes jurisdiction to wind it up, all
unpaid subscriptions become payable on demand,
and are at once recoverable, without necessity of any
prior call.
Accrual of interest on unpaid balance
Unpaid balance will accrue interest if so required by
the bylaws and at the rate of interest fixed in the
bylaws. If no rate of interest is fixed in the bylaws,
such rate shall be deemed to be the legal rate (Sec.
66, CC).
The above interest is different from the interest
contemplated by Sec. 67, the unpaid balance involved
in which, will only accrue interest, by way of penalty,
on the date specified in the contract of subscription
or on the date stated in the call made by the board.
229
NOTE: Interest contemplated in Sec. 66 pertains to
moratory interest which is the interest on account of
subscription in an installment basis, while Sec. 67 speaks of
compensatory interest which is the interest on account of
delay.
Moratory v. Compensatory interest
1. Compensatory interest (under Sec. 67, CC)
Interest which accrues by way of penalty, on the
date specified in the contract of subscription or
on the date stated in the call made by the board.
The stockholder liable for interest at the legal
rate on such balance, unless a different rate of
interest is provided in the by-laws, computed
from such date until full payment.
2. Moratory Interest (under Sec. 66, CC) Interest on
unpaid subscription by reason of amortization/
installments. It can be collected only if stipulated
and for the rate specified in the contract and
fixed by the by-laws. If the rate is silent the legal
rate shall be followed.
Effect of failure to pay the subscription on the date
it is due
It shall render the entire balance due and payable
and shall make the shareholder liable for
compensatory interest at the legal rate on such
balance, unless a different rate of interest is provided
in the bylaws.
Remedies of corporations to enforce payment of
stocks
1. Extra-judicial sale at public auction (Sec. 67, CC)
2. Judicial action (Sec. 70, CC)
CALL BY BOARD OF DIRECTORS
Call for the payment by the board of directors for
unpaid subscription
A call is made in a form of board resolution that
unpaid subscription to the capital stock are due and
payable and the same or such percentage thereof
shall be collected, together with all accrued interest,
on a specified date and that if no payment is made
within 30 days from said date, all stocks covered by
said subscription shall thereupon become delinquent
and shall be subject to public auction sale.
Unpaid claim
It refers to any unpaid subscription, and not to any
indebtedness which a subscriber or stockholder may
owe the corporation arising from any other
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
transaction (Sundiang, supra, 2009, pg. 245, citing
China Bank vs. CA, March 26, 1997).
Requisites for a valid call
SEC opined on July 21, 1976 that the following are the
requisites for a valid call:
1. It must be made in the manner prescribed by law;
2. It must be made by the BOD; and
3. It must operate uniformly upon all the
shareholders.
The call of the board of directors is not always
necessary to collect payment for unpaid subscription
The necessity for calls depends upon the provisions of
the contract of subscription. When no time is fixed
for payment, the subscription is payable only upon
call by the BOD which may be made at any time the
board may decide (De Leon, supra, pg. 616).
However, a call is not necessary where:
1. The subscription contract specifies the date of
payment; or
2. The corporation becomes insolvent (Sundiang,
supra, 2009, pg. 245)
3. The subscriber becomes insolvent (De Leon, supra,
pg. 616)
NOTICE REQUIREMENT
The notice of the call has to be served on the
stockholders concerned in the manner prescribed in
the call, which may either be by registered mail
and/or personal delivery and publication.
Notice of call is necessary to bind the stockholders
(ibid., citing Baltazar vs. Lingayen Gulf Electric Power,
14 SCRA 522).
SALE OF DELINQUENT SHARES
If within 30 days from expiry of the date of payment
or from the date stated in the call made by the board,
and no payment is made, all stocks covered by said
subscription shall thereupon become delinquent and
shall be subject to delinquency sale unless the BOD
orders otherwise (Sec. 67, CC).
EFFECT OF DELINQUENCY
Effects of stock delinquency
1. Upon the stockholder
a. Accelerates the entire amount of the unpaid
subscription;
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
b. Subjects the shares to interest expenses and
costs;
c. Disenfranchises the shares from any right that
inheres to a stockholder, except the right to
dividends (Sec. 71, CC) (but which shall be
applied to any amount due on said shares, or, in
the case of stock dividends, to be withheld by
the corporation until full payment of the
delinquent shares (Sec. 43, CC).
2. Upon the director owning delinquent shares
a. If the delinquent stockholder is a director, the
director shall continue to be a director but he
cannot run for re-election (Sundiang,
supra, 2009, pg. 247.)
b. A delinquent stockholder seeking to be
elected as director may not be a candidate for,
not be duly elected to, the board.
Status of the stockholder from delinquency date
before auction sale
All the rights of the stockholder are suspended except
the right to dividends. With respect to dividends,
Section 43 states that cash dividends should be
applied against unpaid subscription while stock
dividends should be withheld until full payment of
the subscription.
CALL BY RESOLUTION OF THE BOARD OF DIRECTORS
Stocks become delinquent when the unpaid
subscription and accrued interests thereon are not
paid within 30 days from their due date as specified
in the subscription contract or in the call by the board
of directors.
The delinquency is automatic after said 30 day period
and does not need a declaration by the board making
the stock delinquent.
NOTICE OF SALE
The notice of sale and copy of the board resolution
ordering the sale shall be:
1. Sent to every delinquent stockholder either
personally or by registered mail or;
2. Published once a week for 2 consecutive weeks
in a newspaper of general circulation in the province
or city where the principal office of the corporation is
located (Sec. 68, CC)
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 CORPORATION CODE
AUCTION SALE AND THE HIGHEST BIDDER
Procedure for the sale of delinquent stocks
1. Resolution the board shall issue resolution
ordering the sale of delinquent stock
2. Notice notice of said sale, with a copy of the
resolution, shall be sent to every delinquent
stockholder either personally or by registered
mail
3. Publication the notice shall furthermore be
published once a week for two consecutive
weeks in a newspaper of general circulation in
the province or city where the principal office of
the corporation is located
4. Sale the delinquent stock shall be sold at the
public auction to be held not less than 30 days
nor more than 60 days from the date stocks
become delinquent;
5. Transfer the stock so purchased shall be
transferred to such purchaser in the books of the
corporation and a certificate for such stock shall
be issued in his favor; and
6. Credit remainder the remaining shares, if any,
shall be credited in favor of the delinquent
stockholder who shall likewise be entitled to the
issuance of a certificate of stock covering the
same (Sec. 68, CC; Aquino, Philippine Corporate
Law Compendium, 2006).
the offer to purchase, which the corporation is free to
accept or reject (ibid., pg. 621).
Q: What happens to the remaining shares, if any,
were not sold?
A: The remaining shares, if any, shall be credited in
favor of the delinquent stockholder who shall likewise
be entitled to the issuance of a certificate of stock
covering such shares (Sec. 68, CC).
Rule on questioning the sale of delinquent share in
public auction
GR: The sale at public auction of delinquent share is
absolute and not subject to redemption.
XPN: An action may be filed to question the sale, the
requisites for which are:
1. There should be allegation and proof of irregularity
or defect in the notice of sale or in the sale itself.
2. The party filing the action must first pay the party
holding the stock the sum for which the stock was
sold with legal interest from the date of sale.
3. The action is filed within 6 months from the date of
sale (Sec. 69, CC).
Prescription period of the action to question a
delinquency sale

Discontinuance or cancellation of delinquency sale
Delinquency sale may be discontinued or canceled if
the delinquent stockholder pays the unpaid balance
plus interest, costs and expenses on or before the
date specified for the sale or when the BOD orders
otherwise (Sec. 68, CC).
For stock corporations, the action prescribes 6
months from such sale. However, in case of non-stock
corporations, the applicable period is 4 years under
the Civil Code.
CERTIFICATE OF STOCK
Certificate of stock

Winning bidder in a delinquency sale It is a written evidence of the shares of stock but it is
not the share itself (Sundiang, supra, 2009, pg. 235,
1. The person participating in the delinquency sale citing Lincoln Phils. Life vs. CA, 293 SCRA 92).
who offers to pay the full amount of the balance of
the subscription together with the accrued interest, Shares of stock v. Certificates of stock
costs of advertisement and expenses of sale, for the SHARE OF STOCK CERTIFICATE OF STOCK
smallest number of shares;
Evidence of the holders
2. If there is no bidder as mentioned above, the
ownership of the stock
corporation, subject to the provisions of Sec. 68, CC, Unit of interest in a
and of his right as a
may bid for the same, and the total amount due shall corporation
shareholder and of his
be credited as paid in full in the books of the
extent specified therein.
corporation. The purchase by the corporation must
It is an incorporeal or It is concrete and
be made out of net earnings in view of the trust fund
intangible property tangible
doctrine. Thereafter, the reacquired shares shall be
It may be recognized
considered as treasury shares (Sec. 41; De Leon,
by the corporation It may be issued only if
supra, pg. 622).
even if the the subscription is fully
subscription is not paid.
NOTE: The board is not bound to accept the highest bid
unless the contrary appears. The bidder is the one making fully paid.

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231 FACULTY OF CIVIL LAW
 MERCANTILE LAW
NATURE OF THE CERTICIATE
A certificate of stock is a prima facie evidence of
ownership and evidence can be presented to
determine the real owner of the shares (Bitong vs.
CA, supra).
It is not essential to the existence of a share of stock
or the creation of the relation of the shareholder with
the corporation (Tan vs. SEC, 206 SCRA 740 [1992]).
UNCERTIFICATED SHARES
Uncertificated share
An uncertificated share is a subscription duly
recorded in the corporate books but has no
corresponding certificate of stock yet issued.
Stockholder may alienate his shares even if there is
no certificate of stock issued by the corporation
The absence of a certificate of stock does not
preclude the stock holder from alienating or
transferring his shares of stock.
Transfers of fully paid subscription but the
corporations has not yet issued a certificate of stock
In case of a fully paid subscription, without the
corporation having issued a certificate of stock, the
transfer may be effected by the subscriber or
stockholder executing a contract of sale of deed of
assignment covering the number of shares sold and
submitting said contract or deed to the corporate
secretary for recording.
Transfers of subscription not fully paid
In case of subscription not fully paid, the corporation
may record such transfer, provided that the transfer
is approved by the board of directors and the
transferee executes a verified assumption of
obligation to pay the unpaid balance of the
subscription.
NEGOTIABLITY
Stock certificate is not negotiable
Although a stock certificate is sometimes regarded as
quasi-negotiable, in the sense that it may be
transferred b delivery, it is well-settled that the
instrument is NON-NEGOTIABLE, because the holder
thereof takes it without prejudice to such rights or
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
defenses as the registered owner or creditor may
have under the law, except insofar as such rights or
defenses are subject to the limitations imposed by
the principles governing estoppel (Republic v.s
Sandiganbayan, 403 SCRA 84 [2003]).
Q: A is the registered owner of Stock Certificate No.
000011. He entrusted the possession of said
certificate to his best friend B who borrowed the
said endorsed certificate to support B's application
for passport (or for a purpose other than transfer).
But B sold the certificate to X, a bona fide purchaser
who relied on the endorsed certificates and believed
him to be the owner thereof. Can A claim the shares
of stocks from X? Explain. (2001 Bar Question)
A: No. Since the shares were already transferred to
"B", "A" cannot claim the shares of stock from "X".
The certificate of stock covering said shares have
been duly endorsed by "A" and entrusted by him to
"B". By his said acts, "A" is now estopped from
claiming said shares from "X", a bona fide purchaser
who relied on the endorsement by A of the
certificate of stock.
REQUIREMENTS FOR VALID TRANSFER OF STOCK
Requirements for valid transfer of stocks
The following are the requirements for valid transfer
of stocks:
1. If represented by a certificate, the following must
be strictly complied with:
a. Indorsement by the owner and his agent
b. Delivery of the certificate
c. To be valid to third parties and to the
corporation, the transfer must be recorded in the
books of the corporation (Rural Bank of Lipa v. CA,
G.R. No. 124535, Sept 28, 2001).
2. If NOT represented by a certificate (such as when
the certificate has not yet been issued or where for
some reason is not in the possession of the
stockholder):
` a. By means of deed of assignment; and
b. Such is duly recorded in the books of the
corporation (Sundiang, supra, 2009, pg. 236).
Effect of the non-payment of Documentary Stamp
Tax
No sale, exchange, transfer or similar transaction
intended to convey ownership of, or title to any share
of stock shall be registered in the books of the
corporation unless the receipts of payment of the tax
herein imposed is filed with and recorded by the
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 CORPORATION CODE
stock transfer agent or secretary of the corporation
(Section 11 of Revenue Regulations No. 6-2008).

Stockholder may bring suit to compel the corporate

secretary to register valid transfer of stocks

It is the corporate secretarys ministerial duty and

obligation to register transfers of stocks provided all
the requirements for a valid transfer had been
complied with.

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Remedies where corporation refuses to transfer
certificate of stocks
1. Petition for mandamus
2. Suit for specific performance of an express or
implied contract
3. May sue for damages where specific
performance cannot be granted
NOTE: There must be a special power of attorney executed
by the registered owner of the share authorizing transferor
to demand transfer in the stock and transfer book (Ponce
vs. Arsons Cement, G.R. No. 139802, Dec. 10, 2002).
The law does not prescribe a period within which the
registration of the transfer of shares should be effected.
Hence, the action to enforce the right does not accrue until
there has been a demand and a refusal concerning the
transfer.
Valid refusal by the corporation to register the
transfer of shares
The corporation may refuse to register the transfer of
shares if it has an existing unpaid claim over the
shares to be transferred. The unpaid claim refers to
the unpaid subscription on the shares transferred and
not to any other indebtedness that the transferor
may have to the corporation (Sec. 63, CC).
NOTE: If the contract of subscription is still not fully paid,
the consent of the corporation must be obtained first since
there would be a change of debtor. Hence, the consent of
the creditor (corporation) is necessary.
Kind of transfer that requires registration in the
books of the corporation
Only absolute transfers are required to be registered
in the books of the corporation. Hence, registration in
the stock and transfer book is not necessary if the
conveyance is by way of chattel mortgage. However,
registration must be had with the Register of Deeds
(Chua Guan vs. Samahan, supra.).
Validity of a transfer that is not recorded
If the transfer is not recorded, t is valid but only
insofar as the parties to the transfer are concerned.
To bind the corporation, the deed affecting the
transfer must be duly recorded in the corporate
books (Sec. 63, CC).
Q: Enrique Razon organized the E. Razon, Inc. for the
purpose of bidding for the arrastre services in South
Harbor, Manila. Stock certificate No. 003 for 1,500
shares of stock of E. Razon was issued in the name
of Juan T. Chuidian. From the time the certificate of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
stock was issued Razon had not questioned the
ownership by Juan of the shares of stock in question
and had not brought any action to have the
certificate of stock over the said shares cancelled.
However, the certificate of stock was in the
possession of Razon who refused to deliver said
shares to Juan, until the same was surrendered by
Razon and deposited in a safety box in Philippine
Bank of Commerce. The CFI declared that Razon is
the owner of the said shares of stock. The then IAC,
however, reversed the trial court's decision and
ruled that Juan T. Chuidian, the deceased father of
Vicente B. Chuidian is the owner of the shares of
stock. Who is the owner of the subject shares of
stock?
A: Juan is the owner. In the instant case, there is no
dispute that the questioned 1,500 shares of stock of
E. Razon, Inc. are in the name of the late Juan
Chuidian in the books of the corporation. Moreover,
the records show that during his lifetime Chuidian
was elected member of the Board of Directors of the
corporation which clearly shows that he was a
stockholder of the corporation. From the point of
view of the corporation, therefore, Chuidian was the
owner of the 1,500 shares of stock. In such a case,
Razon who claims ownership over the questioned
shares of stock must show that the same were
transferred to him by proving that all the
requirements for the effective transfer of shares of
stock in accordance with the corporation's by laws, if
any, were followed. 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 Razon, the
inevitable conclusion is that the questioned shares of
stock belong to Chuidian. The Razons asseveration
that he did not require an indorsement of the
certificate of stock in view of his intimate friendship
with the late Juan Chuidian can not overcome the
failure to follow the procedure required by law or the
proper conduct of business even among friends
(Enrique Razon v. IAC, et al., G.R. No. 74306, March
16, 1992).
Q: Nemesio Garcia filed an action for injunction
against spouses Jose and Sally Atinon and Nicolas
Jomouad, ex-officio sheriff. Said action stemmed
from an earlier case for collection of sum of money,
filed by the spouses Atinon against Jaime Dico. In
that case the trial court rendered judgment ordering
Dico to pay the spouses Atinon. After said judgment
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 CORPORATION CODE
became final and executory, the sheriff proceeded
with its execution. In the course thereof, the
Proprietary Ownership Certificate (POC) in the Cebu
Country Club, which was in the name of Dico, was
levied on and scheduled for public auction. Claiming
ownership over the subject certificate, Garcia filed
the action for injunction to enjoin the spouses
Antinon from proceeding with the auction. The trial
court dismissed the complaint. The CA affirmed.
Garcia contends that the subject stock of certificate,
albeit in the name of Dico, cannot be levied upon
the execution to satisfy his judgment debt because
even prior to the institution of the case for
collection of sum of money against him, the spouses
Atinon had knowledge that Dico already conveyed
back the ownership of the subject certificate to
Garcia and that Dico executed a deed of transfer
covering the subject certificate in favor of Garcia. Is
a bona fide transfer of the shares of a corporation,
not registered or noted in the books of the
corporation, valid as against a subsequent lawful
attachment of said shares, regardless of whether the
attaching creditor had actual notice of said transfer
or not?
A: No. A transfer of shares not registered in the books
of the corporation is not valid as against subsequent
attachment of the shares. All transfers of shares not
so entered in the books of the corporation are invalid
as to attaching or execution creditors of the
assignors, as well as to the corporation and to
subsequent purchasers in good faith, and, indeed, as
to all persons interested, except the parties to such
transfers. Hence, the transfer of the subject
certificate made by Dico to Garcia 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 v. Nicolas Jomouad, et al., G.R. No. 133969,
January 26, 2000).
Q: Fausto G. Gaid was an incorporator of Victory
Cement Corporation (VCC), having subscribed to and
fully paid 239,500 shares of said corporation.Vicente
Ponce and Fausto Gaid executed a deed of
undertaking and Indorsement whereby the latter
acknowledges that the former is the owner of said
shares and he was therefore assigning/endorsing
the same to Ponce. From the time of incorporation
of VCC up to the present, no certificates of stock
corresponding to the 239,500 subscribed and fully
paid shares of Gaid were issued in the name of Gaid
and/or Ponce. Despite repeated demands, VCC,
which was later renamed as Alsons Cement
Corporationcertificates (ACC) refused and continue
to refuse without any justifiable reason to issue to
235
Ponce the of stocks. Because of this, Ponce filed a
case and prayed that judgment be rendered
ordering ACC to issue in his name certificates of
stocks covering the 239,500 shares of stocks. Ponce
contends that when a corporate secretary is
presented with a document of transfer of fully paid
shares, it is his duty to record the transfer in the
stock and transfer book of the corporation, issue a
new stock certificate in the name of the transferee,
and cancel the old one. Ergo, the failure to record
the transfer does not mean that the transferee
cannot ask for the issuance of stock certificates.
ACC, on the other hand maintains that the transfer
of shares of stock not recorded in the stock and
transfer book of the corporation is non-existent
insofar as the corporation is concerned and no
certificate of stock can be issued in the name of the
transferee. May the corporate secretary be
compelled to register transfer of shares on the basis
merely of an indorsement of stock certificates?
A: No. Under Section 63 of the Corporation Code, a
transfer of shares of stock not recorded in the stock
and transfer book of the corporation is non-existent
as far as the corporation is concerned. 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. It is only when
the transfer has been recorded in the stock and
transfer book that a corporation may rightfully regard
the transferee as one of its stockholders. From this
time, the consequent obligation on the part of the
corporation to recognize such rights as it is mandated
by law to recognize arises. Hence, 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 Ponce 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 v. Alsons
Cement Corporation, et al., G.R. NO. 139802,
December 10, 2002).
ISSUANCE
Issuance of certificate of stock
It may only be issued until the full amount of the
stockholders subscription together with the interest
and expenses (in case of delinquent shares) if due has
been paid (Sec. 64, CC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Requisites for the issuance of the certificate of stock
1. The certificate must be signed by the president
or vice-president, countersigned by the corporate
secretary or assistant secretary (Bitong vs. CA, 292
SCRA 503 [1998]);
. Stock.
NOTE: Unless it complies with the foregoing, it is not
deemed issued.
2. The certificate must be sealed with the seal of
the corporation;
3. The certificate shall be issued in accordance with
the by-laws;
4. The certificate must be delivered;
5. The par value as to par value shares, or full
subscription as to no par value shares must be fully
paid, the basis of which is the doctrine of indivisibility
of subscription
6. The original certificate must be surrendered
where the person requesting the issuance of a
certificate is a transferee from the stockholder (ibid.;
Sec. 64.).
Rules on right to issuance
A corporation may now, in the absence of provisions
in their by-laws to the contrary, apply payments
made by subscribers-stockholders, either as:
1. Full payment for the corresponding number of
shares of stock, the par value of each of which is
covered by such payment; OR
2. Payment pro-rata to each and all the entire
number of shares subscribed for (Baltazar v. Lingayen
Gulf Electric Power Co., Inc, G.R. No. L-16236-38, June
30, 1965).
LOST OR DESTROYED CERTIFICATES
Procedure for the issuance of a new stock certificate
in lieu of those which have been lost, stolen or
destroyed
1. The registered owner of a certificate of stock in a
corporation or his legal representative shall file with
the corporation an affidavit in triplicate setting forth:
a. If possible, the circumstances as to how the
certificate was lost, stolen or destroyed,
b. The number of shares represented by such
certificate,
c. The serial number of the certificate and the
name of the corporation which issued the same.
NOTE: He shall also submit such other information and
evidence which he may deem necessary.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
2. After verifying the affidavit and other
information and evidence with the books of the
corporation, the latter shall publish a notice in a
newspaper of general circulation published in the
place where the corporation has its principal office,
once a week for three (3) consecutive weeks at the
expense of the registered owner of the Certificate of
NOTE: Contents of notice:
a. Name of the corporation
b. Name of the registered owner
c. Serial number of the certificate of stock.
d. Number of share represented by the certificate of stock.
3. After the expiration of one (1) year from the date
of the last publication, if no contest has been
presented to said corporation regarding said
certificate of stock, the corporation shall cancel in its
books the certificate of stock which has been lost,
stolen or destroyed and issue in lieu thereof new
certificate of stock.
NOTE: After the expiration of the 1 year period to
contest, such right shall be barred unless the
registered owner files a bond or other security in lieu
thereof as may be required, effective for a period of 1
year, for such amount and in such form and with such
sureties as may be satisfactory to the BOD, in which
case, a new certificate may be issued even before the
expiration of the 1 year period provided herein.
4. Provided that if a contest has been presented to
said corporation or if an action is pending in court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed, the issuance
of the new certificate of stock in lieu thereof shall be
suspended until the final decision by the court
regarding the ownership of said certificate of stock
which has been lost, stolen or destroyed (Sec. 73, CC).
Oppositions on the issuance of new certificates
If there are oppositions on the issuance of new
certificates, the corporation may file an interpleader
proceeding to compel the parties to litigate among
themselves.
Liability of the corporation for the issuance of new
certificates of stock in case of lost or destroyed
certificate
GR: No action may be brought against any
corporation which shall have issued certificate of
stock in lieu of those lost, stolen or destroyed
pursuant to the procedure above-described.
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XPN: Where there is fraud, bad faith, or negligence
on the part of the corporation and its officers (ibid).
Q: A stockholder claimed that his stock certificate
was lost. After going through with the procedure for
the issuance of lost certificate, and no contest was
presented within 1 year from the last publication,
the corporation issued a new certificate of stock in
lieu of the supposed lost certificate. The stockholder
immediately sold his shares and endorsed the
replacement certificate to a buyer. It turned out that
the original certificate was not lost, but sold and
endorsed to another person.
1. May the corporation be made liable by the
aggrieved party?
2. Who will have a better right over the shares, the
endorsee of the original certificate or the endorsee
of the replacement certificate?
A:
1. No, the corporation cannot be made liable. Except
in cases of fraud, bad faith, or negligence on the part
of the corporation and its officers, no action may be
brought against any corporation which has issued
certificates of stock in lieu of those lost, stolen, or
destroyed pursuant to the procedure prescribed by
law.
2. The endorsee of the replacement certificate has a
better right to the shares. After expiration of 1 year
from the date of the last publication, and no contest
has been presented to said corporation regarding
said certificate, the right to make such contest has
been barred and said corporation already canceled in
its books the certificate which have been lost, stolen,
or destroyed and issued in lieu thereof new
certificate.
STOCK AND TRANSFER BOOK
CONTENTS
1. All stocks in the name of the stockholders
alphabetically arranged
2. Amount paid and unpaid on all stocks and the
date of payment of any installment
3. Alienation, sale or transfer of stocks
4. Other entries as the by-laws may prescribe
(Sundiang, supra, 2009, pg. 247-248).
237
WHO MAY MAKE VALID ENTRIES
Entries in stock and transfer books
The obligation and duty to make proper entries in
stock and transfer books falls on the corporate
secretary. If the corporate secretary refuses to
comply, the stockholder may rightfully bring suit to
compel performance. The stockholder cannot take
the law on to his hands; otherwise such entry shall be
void (Torres, Jr. v. CA, G.R. No. 120138, Sept. 5, 1997).
Q: Judge Torres was the majority stockholder of
Tormil Realty & Development Corporation (Tormil)
while Antonio Torres, et al., who are the children of
Judge Torres deceased brother constituted the
minority stockholders. During the 1987 annual
stockholders meeting and election of directors of
Tormil, Judge Torres assigned from his own shares,
one (1) share each to Tobias, et al. These assigned
shares were in the nature of qualifying shares, for
the sole purpose of meeting the legal requirement
to be able to elect them to the Board of Directors as
Torres nominees. The nominees were thereafter
elected. Consequently, Antonio, et al., instituted a
complaint with the SEC praying that the election of
the nominees to the Board of Directors be annulled.
They alleged that the petitioners-nominees were not
legitimate stockholders of Tormil because the
assignment of shares to them violated the minority
stockholders right of pre-emption as provided in the
corporations articles and by-laws. Among others,
the nominees insist that the assignment of
qualifying shares to them of the late Judge Torres
(herein petitioners) does not partake of the real
nature of a transfer or conveyance of shares of stock
as would call for the imposition of stringent
requirements of recording of the transfer of said
shares. Anyway, the nominees add, there was
substantial compliance with the above-stated
requirement since said assignments were entered by
the late Judge Torres himself in the corporations
stock and transfer book prior to the annual
stockholders meeting. Are the entries made by
Judge Torres in the stock and transfer book valid?
A: No. The entries are not valid. In the absence of any
provision to the contrary, the corporate secretary is
the custodian of corporate records. Corollarily, he
keeps the stock and transfer book and makes proper
and necessary entries therein. Contrary to the
generally accepted corporate practice, the stock and
transfer book of TORMIL was not kept by Ms. Maria
Cristina T. Carlos, the corporate secretary but by
respondent Torres, the President and Chairman of
the Board of Directors of TORMIL. In contravention
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Section 74, the stock and transfer book was not kept
at the principal office of the corporation either but at
the place of Torres. Any entries made in the stock and
transfer book on March 8, 1987 by Torres of an
alleged transfer of nominal shares to Pabalan and Co.
cannot therefore be given any valid effect (Manuel A.
Torres, Jr., et al., v. CA, et al., G.R. No. 120138,
September 5, 1997).
Probative value of the stock and transfer book
The stock and transfer book is the best evidence of
the transactions that must be entered or stated
therein. However, the entries are considered prima
facie evidence only and may be subject to proof to
the contrary (Bitong vs. CA, supra.).
DISPOSITION AND ENCUMBRANCE OF SHARES
Registration by the corporation of the transfer of
shares in case of alienation
As between the parties to the contract of sale,
registration of the transfer of shares is not required.
However, until the shares are fully paid, such transfer
cannot be recorded in the books of the corporation.
Consequently, the transferee will not be considered
as a stockholder.
Reasons for the recording of the alienation of shares
1. To enable the corporation to know at all times
their actual stock holders;
2. To afford the corporation the opportunity to object
or refuse its consent to the transfer in case it has any
claim against the stock; and
3. To avoid fictitious and fraudulent transfer.
ALLOWABLE RESTRICTIONS ON THE SALE OF SHARES
Requisites for a restriction to be valid
1. Restrictions are provided in the articles of
incorporation and
2. It must be printed at the back of the certificate of
stock.
3. Must not be more onerous than the right of first
refusal
Corporation can provide regulations to the
sale/transfer of the shares of stockholders
Corporation can provide regulations to the
sale/transfer of the shares of stockholders but the
authority granted to a corporation to regulate the
transfer of its stock does not empower it to restrict
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
the right of a stockholder to transfer his shares, but
merely authorizes the adoption of regulations as to
the formalities and procedure to be followed in
effecting transfer (Thomson vs. CA, G.R. No. 116631,
October 28, 1998).
SALE OF PARTIALLY PAID SHARES
A stockholder can transfer his shares without being
fully paid
The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of
stock. However, the transfer shall be valid only
between the parties.
A transferee of the partially paid shares cannot
compel the corporation to record the transfer of
shares in its books, even though he has no
knowledge that they are not fully paid
Shares of stock against which the corporation holds
any unpaid claim shall not be transferable in the
books of the corporation. Hence, a transferee of the
partially paid shares cannot compel the corporation
to record the transfer of shares in its books, even
though he has no knowledge that they are not fully
paid (Sec. 63, CC).
SALE OF A PORTION OF SHARES NOT FULLY PAID
Stockholder cannot sell a portion of the shares not
fully paid
A stockholder who has not paid the full amount of his
subscription cannot transfer a portion of his
subscription in view of the indivisible nature of the
subscription contract (Villanueva, Phil. Corporation
Law, pg. 240).
Liability of the transferee for the balance of the
purchase price in case the stockholder on record
fails to pay the same
In case the stockholder on record fails to pay the pay
the balance of the purchase price, he is still liable for
the balance of the purchase price. Unless the transfer
of the shares are recorded, the stockholder is still the
owners of the shares as far as the corporation is
concerned.
Reason: The subscriber is as much bound to pay his
subscription as he would be to pay any other debt. (Nava v
Peers Marketing Corporaiton, G.R. No. L-28120 November
25, 1976)
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 CORPORATION CODE
Q: Po subscribed to 80 shares of Peers Marketing
Corporation at one hundred pesos a share with a
total value of 8,000 pesos. Po initially paid 2,000
pesos (25% of the amount of subscription). Without
paying the full subscription price, Po sold to Nava 20
of his 80 shares. Nava requested the officers of the
corporation to register the sale in the books of the
corporation. The request was denied because Po has
not paid fully the amount of his subscription. Can
Nava compel the corporation to register the sale?
A: No. The corporation has a claim on the said shares
for the unpaid balance of Po's subscription. A stock
subscription is a subsisting liability from the time the
subscription is made. The subscriber is as much
bound to pay his subscription as he would be to pay
any other debt (Ibid).
SALE OF ALL SHARES NOT FULLY PAID
The incomplete payment of the subscription does not
preclude the subscriber from alienating his shares of
stock. However, the transfer shall be valid only
between the parties. The corporation has the right to
refuse from recording the sale in its books.
SALE OF FULLY PAID SHARES
Sale of fully paid shares
Sale of fully paid shares is allowed even without the
consent of the corporation as long as the requisites
for the valid transfer of shares are complied.
Q: Four months before his death, PX assigned 100
shares of stock registered in his name in favor of his
wife and his children. They then brought the deed of
assignment to the proper corporate officers for
registration with the request for the transfer in the
corporation's stock and transfer books of the
assigned shares, the cancellation of the stock
certificates in PX's name, and the issuance of new
stock certificates in the names of his wife and his
children as the new owners. The officers of the
Corporation denied the request on the ground that
another heir is contesting the validity of the deed of
assignment. May the Corporation be compelled by
mandamus to register the shares of stock in the
names of the assignees? (2004 Bar Question)
A: Yes. The corporation may be compelled by
mandamus to register the shares of stock in the name
of the assignee. The only legal limitation imposed by
Section 63 of the Corporation Code is when the
Corporation holds any unpaid claim against the
shares intended to be transferred. The alleged claim
239
of another heir of PX is not sufficient to deny the
issuance of new certificates of stock to his wife and
children. It would be otherwise if the transferee's title
to the shares has no prima facie validity or is
uncertain.
Recoding of a deed of assignment with the SEC
without the transfer of shares does not bind the
corporation and 3rd persons
The recording of a deed of assignment does not give
rise to any legal benefit to the corporation or any
person (Sec Memo Circular No. 17, Series of 2004).
REQUISITES OF A VALID TRANSFER
*Please refer to page 232 for the extensive discussion
regarding this topic.
INVOLUNTARY DEALINGS WITH SHARES
Involuntary dealing
It refers to such writ, order or process issued by a
court of record affecting shares of stocks which by
law should be registered to be effective, and also to
such instruments which are not the willful acts of the
registered owner and which may have been executed
even without his knowledge or against his consent.
Examples of involuntary dealings of a share
1. Attachment
2. Sale on execution of judgment or sales for taxes
3. Adverse claims
4. Foreclosure of mortgage of stocks
Involuntary dealings must be registered
It is the act of registration which creates a
constructive notice to the whole world of such
instrument or court writ or process and is the
operative act that conveys ownership (Aquino,
Corporation Law, p. 185, 2007).
DISSOLUTION AND LIQUIDATION
Dissolution
It is the extinguishment of the franchise of a
corporation and the termination of its corporate
existence (Sundiang, supra, 2009).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Effects of the dissolution of a corporation
1. Corporation ceases as a body corporate to
continue the business for which it was
established (Sec. 122, CC).
2. The assets of the corporation will then be
Liquidated and legal title to the remaining
corporate properties are transferred to the
stockholders who become co-owners thereof
3. The Corporation continues as a body corporate
for 3 years only for the purpose of winding up or
liquidation.
4. A dissolved corporation cannot be revived.
However, those interested may reincorporate by
refilling a new AOI and by-laws (Rebollido vs. CA,
170 SCRA 800 [1989).
Procedure for dissolution of a corporation sole
In case of a corporation sole, by submitting to the SEC
for approval, a verified declaration of dissolution
which will set forth the following:
1. The name of the corporation;
2. The reason for dissolution and winding up;
3. The authorization for the dissolution of the
corporation by the particular religious denomination,
sect or church;
4. The names and addresses of the persons who are
to supervise the winding up of the affairs of the
corporation.
Upon approval of such declaration of dissolution by
the Securities and Exchange Commission, the
corporation shall cease to carry on its operations
except for the purpose of winding up its affairs (Sec.
115, CC).
Dissolution by merger or consolidation
Upon issuance of SEC of a Certificate of Merger or
Consolidation, the corporate existence of the
absorbed corporation and the constituent
corporations in case of consolidation shall
automatically cease. No liquidation proceedings will
thereafter be conducted (Sec. 80, CC).
MODES OF DISSOLUTION
Modes of dissolution
The following are the modes of dissolution of the
corporation:
1. Voluntary
a. By the vote of the BOD/ BOT and the
stockholders/ members where no creditors are
affected (Sec. 118, CC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
b. By the judgment of the SEC after hearing of
petition for voluntary dissolution, where
creditors are affected (Sec. 119, CC).
c. By amending the AOI to shorten the corporate
term (Sec. 120, CC).
d. In case of a corporation sole, by submitting to
the SEC a verified declaration of the dissolution
for approval (Sec. 115, CC).
e. Merger or consolidation
2. Involuntary
a. By expiration of corporate term provided for in
the AOI (Sec. 11, CC).
b. By legislative enactment
c. By failure to formally organize and commence
the transaction of its business within 2 years
from the date of incorporation (Sec. 22, CC).
d. By order of the SEC on grounds under existing
laws (Sec. 121, CC).
e. Judicial decree on Quo Warranto Proceeding
(Sec. 20, CC).
NOTE: Methods effecting dissolution as prescribed by
statute are exclusive, and a corporation cannot be dissolved
except in the manner prescribed by law (De Leon, 2010).
The requirements for dissolution mandated by the CC
should be strictly complied with (Vesaga vs. CA, 371 SCRA
508, [2001]).
VOLUNTARY
WHERE NO CREDITORS ARE AFFECTED
Procedure of dissolution of a corporation where no
creditors are affected (Meet-NAC-PA)
1. A MEETing must be held on the call of directors or
trustees;
2. Notice of the meeting
a. Given to each stockholder or member either by
registered mail or by personal delivery at least
thirty (30) days prior to the said meeting and
b. Published for three (3) consecutive weeks in a
newspaper published in the place where the
principal office of said corporation is located and if
no newspaper is published in such place, then in a
newspaper of general circulation in the Philippines
3. Resolution to dissolve must be Approved by
majority vote of the board of directors or trustees
and adopted by the affirmative vote of stockholders
representing at least 2/3 of the outstanding capital
stock or 2/3 of members.
4. Copy of the resolution is then certified by the
majority of Board of directors or trustees and
countersigned by the secretary of the Corporation.
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 CORPORATION CODE
5. Petition for dissolution together with the signed
and countersigned copy of the resolution is then filed
with the SEC.
6. Approval of SEC of the petition and issuance of
certificate of dissolution (Sec. 118, CC).
WHERE CREDITORS ARE AFFECTED
Procedure of dissolution of a corporation where
creditors are affected (APSIVECSO CPUPOOJ)
1. Approval of the stockholders representing at least
2/3 of the outstanding capital stock or by at least
two-thirds (2/3) of the members at a meeting of its
stockholders or members called for that purpose.
2. Filing of Petition for dissolution with SEC, petition
must be (SiVeCS)
a. SIgned by a majority of its board of directors
or trustees or other officers having the management
of its affairs;
b. VErified by its president or secretary or one
of its directors or trustees
c. Set forth all Claims and demands against it
d. State that its dissolution was approved by
the required votes of Stockholders or
members.
3. SEC shall issue an Order reciting the purpose of the
petition and fix a date when objections thereto may
be filed by any person. Said date must not be less
than thirty (30) days nor more than sixty (60) days
after the entry of the order.
4. Copy of the order shall be:
a. PUblished at least once a week for three (3)
consecutive weeks in a newspaper of general
circulation published in the municipality or city
where the principal office of the corporation is
situated, or if there be no such newspaper,
then in a newspaper of general circulation in
the Philippines, and
b. POsted for three (3) consecutive weeks in
three (3) public places in such municipality or
city.
5. After expiration of the time to file objections and
upon prior 5-day notice to hear the objections, SEC
shall proceed to hear the petition and try any issue
made by the Objections file.
6. If no objection is sufficient and the material
allegations of the petition are true, it shall render
Judgment dissolving the corporation and directing
such disposition of its assets as justice requires, and
may appoint a receiver to collect such assets and pay
the debts of the corporation.
Creditors consent is not necessary for dissolution
Consents of creditors are not necessary to approve
dissolution for the reason that liquidation
241
proceedings will be conducted to protect their
interest.
BY SHORTENING THE CORPORATE TERM
Procedure for dissolving the corporation by
shortening of the corporate term (ASAF)
1. Amending the Articles of Incorporation pursuant to
Sec. 16
a. Approved by majority vote of the board of
directors or trustees
b. Ratified at a meeting by the stockholders
representing at least 2/3 of the outstanding capital
stock or by at least two-thirds (2/3) of the members
in case of non-stock corporations).
2. Copy of the amended AOI shall be submitted with
the SEC.
3. Approval of SEC of the amended AOI.
4. As an additional requirement, the SEC requires to
submit the final audited Financial statement not older
than 60 days before the application for shortening
the corporate term.(Sec. 120, CC in relation to Sec. 16
thereof.)
Q: The Securities and Exchange Commission
approved the amendment of the articles of
incorporation of GHQ Corporation shortening its
corporate life to only 25 years in accordance with
Sec. 120 of the Corporation Code. As shortened, the
corporation continued its business operations until
May 30, 1997, the last day of its corporate existence.
Prior to said date, there were a number of pending
civil actions, of varying nature but mostly money
claims filed by creditors, none of which was
expected to be completed or resolved within five
years from May 30, 1997. If the creditors had sought
your professional help at that time about whether
or not their cases could be pursued beyond May 30,
1997, what would have been your advice? (2000 Bar
Question)
A: The cases can be pursued even beyond May 30,
1997, the last day of the corporate existence of GHQ
Corporation. The corporation is not actually dissolved
upon the expiration of its corporate term. There is
still the period for liquidation or winding up.
Q: X Corporation shortened its corporate life by
amending its articles of incorporation. It has no
debts but owns a prime property located in Quezon
City. How would the said property be liquidated
among the five stockholders of said corporation?
Discuss two methods of liquidation. (2001 Bar
Question)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
A: The prime property of X Corporation can be
liquidated among the five stockholders after the
property has been conveyed by the corporation to
the five stockholders, by dividing or partitioning it
among themselves in any two of the following ways:
1. By physical division or partition based on the
proportion of the values of their stockholdings; or
2. By selling the property to a third person and
dividing the proceeds among the five stockholders in
proportion to their stockholdings; or
3. After the determination of the value of the
property, by assigning or transferring the property to
one stockholder with the obligation on the part of
said stockholder to pay the other four stockholders
the amount/s in proportion to the value of the
stockholding of each.
INVOLUNTARY
EXPIRATION OF CORPORATE TERM
Expiration of the corporate term
The corporation shall exist within the period stated in
the AOI not exceeding 50 years unless sooner legally
dissolved (Secs. 19, 22, 117-122, 144, 145, CC) or
unless its registration is revoked upon any of the
grounds provided by law (Sec. 6, PD 902-A & Sec. 22,
CC). In the absence of any express stipulation, it shall
exist for a period not exceeding fifty (50) years from
the date of incorporation. After the term had expired
without extension, the corporation is dissolved.
Q: XYZ Corporation entered into a contract of lease
with ABC, Inc., over a piece of real estate for a term
of 20 years, renewable for another 20 years,
provided that XYZ's corporate term is extended in
accordance with law. Four years after the term of
XYZ Corporation expired, but still within the period
allowed by the lease contract for the extension of
the lease period, XYZ Corp. notified ABC, Inc., that it
is exercising the option to extend the lease. ABC,
Inc., objected to the proposed extension, arguing
that since the corporate life of XYZ Corp. had
expired, it could no longer opt to renew the lease.
XYZ Corp. countered that withstanding the lapse of
its corporate term it still has the right to renew the
lease because no quo warranto proceedings for
involuntary dissolution of XYZ Corp. has been
instituted by the Office of the Solicitor General. Is
the contention of XYZ Corp. meritorious? Explain
briefly (2004 Bar Question).
A: No, XYZ Corporations contention is not
meritorious XYZ Corp. was dissolved ipso facto upon
the expiration of its original term. It ceased to be a
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2014 GOLDEN NOTES
body corporate for the purpose of continuing the
business for which it was organized, except only for
purposes connected with its winding up or
liquidation. Extending the lease is not an act to wind
up or litigate XYZs affairs. It is contrary to the idea of
winding up the affairs of the corporation (PNB v. CFI
of Rizal, May 27, 1992).
Remedy in case the stockholders want to still
continue the business of the corporation after its
term expired
The remedy of the stockholders is reincorporation.
Amending the articles of the incorporation to extend
the corporate term is not an available remedy as the
corporation has ceased to exist.
There is nothing to prevent the stockholders from
conveying their shareholdings toward the creation of
a new corporation to continue the business of the
old. Winding up is the sole activity of a dissolved
corporation that does not intend to incorporate
anew.
It is not unlawful for the old board of directors to
negotiate and transfer the assets of the dissolved
corporation to the new corporation intended to be
created as long as the stockholders have given their
consent (Chung Ka Bio v Intermediate Appellate
Court, 1988).
FAILURE TO ORGANIZE AND COMMENCE BUSINESS
WITHIN 2 YEARS FROM INCORPORATION
Meaning of formally organize
Organize as used in reference to corporations means;
1. Election of officers, providing for the subscription
and
2. Payment of the capital stock, and
3. Adoption of by-laws, and
4. Such other similar steps as are necessary to endow
the legal entity with the capacity to transact the
legitimate business for which it was created (Benguet
Consolidated Mining Co. v Pineda, G.R. No. L-7231,
March 28, 1956).
Effect of failure of a corporation to formally organize
If a corporation does not formally organize and
commence the transaction of its business or the
construction of its works within two (2) years from
the date of its incorporation, its corporate powers
cease and the corporation shall be deemed dissolved
(Sec 22, CC).
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 CORPORATION CODE
LEGISLATIVE DISSOLUTION
A corporation created by special law can be dissolved
by an enactment of special law or expiration of its
charter.
DISSOLUTION BY THE SEC ON GROUNDS UNDER
EXISTING LAWS
Dissolution by SEC
A corporation may be dissolved by the Securities and
Exchange Commission upon filing of a verified
complaint and after proper notice and hearing on the
grounds provided by existing laws, rules and
regulations (Sec. 121, CC).
The following are some of the grounds, which may
result to the issuance of a dissolution order by the
SEC after conduct of appropriate proceedings:
1. Violations of the Corporation committed by the
corporation. Such violations are generally penalized
by Sec. 144 as the Code did not specifically penalized
the same.
2. Deadlocks in a close corporation (Sec. 104, CC)
3. Mismanagement of a close corporation (Sec. 105,
CC)
4. On any of the following grounds, wherein the SEC
retains its power to suspend or revoke, after proper
notice and hearing, the franchise or certificate of
registration of the corporations, partnerships or
associations: (FMI-DBR)
a. Fraud or misrepresentation in procuring its
Certificate of Registration;
b. Serious Misrepresentation as to what the
corporation can do or is doing to the great
prejudice of or damage to the general public;
c. Continuous Inoperation for a period of at least
5 years (Sec. 22, CC);
d. Refusal to comply or Defiance with any lawful
order, rules or regulations of SEC restraining
commission of acts which would amount to a
grave violation of its franchise;
e. Failure to file By-laws within the required
period. However, SEC must give the corporation
the opportunity to explain such failure;
f. Failure within the prescribed period to submit
required Reports in appropriate forms as
determined by the SEC (e.g. General Information
Sheet, Financial Statements) (De Leon, 2010).
NOTE: All actions filed with the SEC must be prosecuted
and defended in the name of the real party-in-interest (Rule
III, Sec. 2, SEC Rules of Procedure).
243
METHODS OF LIQUIDATION
Liquidation
Process by which all the assets of the corporation are
converted into liquid assets (cash) in order to
facilitate the payment of obligations to creditors and
the remaining balance if any is to be distributed to
the stockholders (Sundiang, 2014).
Method of liquidation
1. By the corporation itself or its board of directors or
trustees; (par.1,Sec. 122, CC)
2. By a trustee to whom the assets of the corporation
had been conveyed. (par. 2, Sec. 122, CC); (Board of
Liquidators v. Kalaw, G.R. No. L18805, Aug. 14, 1967)
3. By a management committee or rehabilitation
receiver appointed by SEC; (last par., Sec. 119, CC.)
Approval of the SEC is not required in order to
liquidate and distribute the assets of a dissolved
corporation
The liquidation and distribution of the assets of a
dissolved corporation is a matter of internal concern
of the corporation and falls within the power of the
directors and stockholders or duly appointed
liquidation trustee (SEC Opinion, July 23, 1996)
Period of Liquidation
The period of liquidation is three (3) years.
Corporation in the process of liquidation does not
have legal authority to engage in any new business
A corporation in the process of liquidation has no
legal authority to engage in any new business, even if
the same is in accordance with the primary purpose
stated in its article of incorporation.
Suits brought against the corporation within the
3-year period but remained pending beyond said
period
Pending actions against the corporation are not
extinguished. They may still be prosecuted against
the corporation even beyond said period.
The creditors of the corporation who were not paid
within the 3-year period may follow the property of
the corporation that may have passed to its
stockholders unless barred by prescription or laches
or disposition of said property in favor of a purchaser
in good faith.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Suits not brought against the corporation within the
3-year period
Suits not brought against the corporation within the
3-year period may still be prosecuted against the
corporation, since there is nothing in Sec. 122, par. 1
which bars action for the recovery of the debts of the
corporation against the liquidator thereof after the
lapse of the winding up period of 3 years (Republic of
the Philippines vs. Marsman Dev. Co., 44 SCRA 418
[1972]).
Right of the corporation to appeal a judgment is not
extinguished by the expiration of the 3-year period
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. v A.C.
Ordonez Corp, 2008).
Liquidation is not necessary in case a corporation is
dissolved by merger and consolidation
In case of merger or consolidation, the surviving or
the consolidated corporation shall thereupon and
thereafter possess all the rights, privileges,
immunities and franchises of each of the constituent
corporations; and all property, real or personal, and
all receivables due on whatever account, including
subscriptions to shares and other choses in action,
and all and every other interest of, or belonging to, or
due to each constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or deed
(Sec 80, CC).
Distribution of the corporations assets prior to
dissolution
GR: A corporation cannot distribute its assets prior to
dissolution. This will violate the trust fund doctrine. A
corporation is allowed to distribute its assets or
property only upon lawful dissolution and after
payment of all its debts and liabilities (Sec. 122, CC).
XPNs:
1. Decrease of Capital Stock (Sec. 38, CC)
2. Redemption of Redeemable Shares (Sec. 8, CC)
4. Reacquisition of shares which are considered as
treasury shares (Sec. 9, CC)
5. Acquisition of own shares (Sec. 41, CC)
6. Declaration of dividends (Sec. 43, CC)
7. Purchase of shares of any stockholder in case of
deadlocks in a close corporation (par 1[4], Sec.
10, CC)
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
8. Withdrawal of a stockholder in a close
corporation (Sec 105, CC)
9. Upon lawful dissolution and after payment of all
debts and liabilities (Sec. 122, CC)
Order of distribution of assets in case of liquidation
(CreSt-PreComE)
1. Payment of claims of CREditors who are not
stockholders (based on preference or concurrence of
credits)
2. Payment of claims of STockholders who are
creditors of the corporation, as to the amount of their
claim as creditors.
3. Residual Balance shall be distributed
proportionately:
a. Holders of PREferred stock, if any; then to the
b. Holders of COMmon stock
4. If the creditor or stockholder cannot be found,
their claims or shares shall be Escheated in favor of
the city or municipality where the asset is located.
BY THE CORPORATION ITSELF
Liquidation by the corporation itself
Every corporation whose charter expires by its own
limitation or is annulled by forfeiture or otherwise, or
whose corporate existence for other purposes is
terminated in any other manner:
1. Shall nevertheless be continued as a body
corporate for 3 years after the time when it would
have been so dissolved,
2. For the purpose of
a. Prosecuting and defending suits by or against
it;
b. Enabling it to settle and close its affairs;
c. To dispose of and convey its property; and
d. to distribute its assets
3. But NOT for the purpose of continuing the business
for which it was established (par.1, Sec. 122, CC).
CONVEYANCE TO A TRUSTEE WITHIN A 3-YEAR
PERIOD
Conveyance to a trustee within a 3 year-period
At anytime during the 3-year period for liquidation,
said corporation is authorized and empowered to
convey all of its property to trustees for the benefit of
its stockholders, members, creditors and other
persons in interest.
From and after any such conveyance by the
corporation of its property in trust for the benefit of
its stockholders, members, creditors and others in
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 CORPORATION CODE
interest, all interest which the corporation had in the
property terminates, the legal interest vests in the
trustees, and the beneficial interest in the
stockholders, members, creditors or other persons in
interest ( par. [2], Sec. 122, CC).
Period of existence of the trusteeship
Where no time limit has been fixed with respect to
the existence of the trusteeship, the trustee has
authority to close the affairs of the corporation even
after the expiration of the statutory 3-year period and
claims not barred by the statute of limitations can
be presented and allowed until the liquidation is
terminated (National Abaca & Other Fibers Corp. vs.
Pore, 2 SCRA 989 [1961]).
Suits brought by the corporation within the 3-year
period but remained pending beyond said period
A corporation that has a pending action and which
cannot be terminated within the 3 year period after
its dissolution is authorized under Sec. 122 of the CC
to convey all its property to a trustee to enable it to
prosecute and defend suits by or against the
corporation beyond the 3-year period. The trustee
may commence a suit which can proceed to final
judgment even beyond the 3-year period. The
director may be permitted to continue as trustees to
complete the liquidation (Clemente vs. CA, 242 SCRA
717 [1995]).
Suits brought by the corporation beyond the 3-year
period are not barred
The trustee of a dissolved corporation may
commence a suit which can proceed to final
judgment even beyond the 3-year period. The
expiration of 3 years after the dissolution of a
corporation does not affect its right to enforce a
favorable judgment, because under Sec. 145 of the
CC, no right or remedy in favor or against any
corporation shall be removed or impaired either by
subsequent dissolution of said corporation or by any
subsequent amendment or repeal of the CC or any
part thereof (Knecht vs. United Cigarette Corp., 384
SCRA 48 [2002]).
BY MANAGEMENT COMMITTEE OR REHABILITATION
RECEIVER
Liquidation by a receiver
In the case of a dissolution order where creditors are
affected, the SEC may appoint a receiver to take
245
charge of the liquidation of the corporation (last par,
Sec. 119, CC).
NOTE: Thus, the appointment of receiver is addressed to
the sound discretion of the court or the SEC.
Appointment of receiver for a going corporation
The appointment of a receiver for a going corporation
is a last resort remedy, and should not be employed
when another remedy is available. Relief by
receivership is an extraordinary remedy and is never
exercised if there is an adequate remedy at law or if
the harm can be prevented by an injunction or a
restraining order. Bad judgment by directors, or even
unauthorized use and misapplication of the
companys funds, will not justify the appointment of a
receiver for the corporation if appropriate relief can
otherwise be had (Rev. Ao-As vs. CA, GR 128464, June
20, 2006).
The corporation, through its president cannot
condone penalties and charges after it had been
placed under receivership
The appointment of a receiver operates to suspend
the authority of a corporation and of its directors and
officers over its property and effects, such authority
being reposed in the receiver (Yam v. CA, G.R. No.
104726 Feb 11, 1999).
.
LIQUIDATION AFTER 3 YEARS
If the 3-year extended life has expired without a
receiver or trustee having been expressly designated
by the corporation within that period:
1. The BOT/BOT itself may be permitted to so
continue as trustees by legal implication to
complete the liquidation.
2. Still, in the absence of BOD/BOT, those having a
pecuniary interest in the corporate assets,
including not only the stockholders but likewise
the creditors of the corporation, acting for and in
its behalf, may make proper representations with
the SEC which has primary and sufficiently broad
jurisdiction in matters of this nature, for working
out a final settlement of the corporate concerns.
3. The only surviving stockholder or director of a
corporation whose term of existence has expired
may act as trustee-in-liquidation after the 3-year
period to liquidate has expired without the
appointment of a trustee-in-liquidation.
4. The counsel who prosecuted and defended the
interest of the corporation and who, in fact,
appeared in behalf of the corporation, may be
considered a trustee of the corporation at least
with respect to the matter in litigation only (De
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Leon, supra, pgs. 768-769, citing: Sec. 145, CC;
Clemente vs. CA, supra; SEC Opinion No. 10-96,
Jan. 29, 2010, Reburiano vs. CA, 301 SCRA 342
[1999]).
OTHER CORPORATIONS
CLOSE CORPORATION
Close corporation
A close corporation is one whose AOI provide that:
1. All of the corporations issued stock of all
classes, exclusive of treasury shares, shall be held
of record by not more than a specified number of
persons, not exceeding 20;
2. All of the issued stock of all classes shall be
subject to one or more specified restrictions on
transfer permitted by the provisions on close
corporations; and
3. The corporation shall not list in any stock
exchange or make any public offering of any of
its stock of any class.
Notwithstanding the foregoing, a corporation shall be
deemed NOT a close corporation when at least 2/3 of
its voting stock or voting rights is owned or controlled
by another corporation which is not a close
corporation within the meaning of this Code.
Any corporation may be incorporated as a close
corporation, EXCEPT: (MOSBI-PEP)
1. Mining or Oil companies,
2. Stock exchanges,
3. Banks,
4. Insurance companies,
5. Public utilities,
6. Educational institutions and
7. Corporations declared to be vested with Public
interest in accordance with the provisions of the
Corporation Code (Sec. 96, CC).
Not all corporations with 20 or less stockholders are
close corporations
The Corporation is not a close corporation even if the
shares belong to only twenty or less stockholders if
not all the requisites (under Sec. 96) are present (San
Juan Structural and Steel Fabricators, Inc. v. CA, G.R.
No. 129459, Sept. 29, 1998).
Q: San Juan Structural and Steel Fabricators, Inc.s
(San Juan) entered into an agreement with Motorich
Sales Corporation (Motorich) for the transfer to it of
a parcel of land which was still in the name of ACL
Development Corporation. Motorich despite
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
repeated demands refused to execute the Transfer
of Rights/Deed of Assignment which is necessary to
transfer the certificate of title. Later on, ACL
Development Corporation and Motorich entered
into a sale whereby the former transferred to the
latter the subject property. Because of this, San Juan
filed a case for damage against Motorich and Nenita
Lee Gruenberg. Among others, San Juan, Inc. argues
that the veil of corporate fiction of Motorich should
be pierced, because the latter is a close
corporation. Since the spouses Reynaldo L.
Gruenberg and Nenita R. Gruenberg owned all or
almost all or 99.866% to be accurate, of the
subscribed capital stock of Motorich, the spouses
needed no authorization from the board to enter
into the subject contract. It adds that, being solely
owned by the Spouses Gruenberg, the company can
be treated as a close corporation which can be
bound by the acts of its principal stockholder who
needs no specific authority. Is Motorich a close
corporation?
A: No. The articles of incorporation of Motorich Sales
Corporation does not contain any provision stating
that (1) the number of stockholders shall not exceed
20, or (2) a preemption of shares is restricted in favor
of any stockholder or of the corporation, or (3) listing
its stocks in any stock exchange or making a public
offering of such stocks is prohibited. From its articles,
it is clear that Motorich is not a close corporation.
Motorich does not become one either, just because
Spouses Reynaldo and Nenita Gruenberg owned
99.866% of its subscribed capital stock. The 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 personalities. So
too, a narrow distribution of ownership does not, by
itself, make a close corporation (San Juan Structural
and Steel Fabricators, Inc., v. CA, G.R. No. 129459,
September 29, 1998).
CHARACTERISTICS OF A CLOSE CORPORATION
Nature of a close corporation
A close corporation is essentially an incorporated
partnership in which the stockholders consider each
other as partners but which the law treats as a
corporation. Thus, stockholders in a close corporation
are very much like members in a partnership. They
owe to one another the same duty of utmost good
faith and diligence that partners owe one another.
This strict duty applies particularly to controlling
stockholders (De Leon, 2010).
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 CORPORATION CODE
Peculiar characteristic of a close corporation
What is outstandingly peculiar with a close
corporation is the fact that all the outstanding stock is
owned by the persons who are active in the
management and conduct of the business (De Leon,
2010).
Other characteristics of a close corporation
The following are the other characteristics of a close
corporation:
1. Where the AOI provide that the business of
the corporation shall be managed by the
stockholders themselves rather than by a
BOD, then the stockholders shall be deemed
to be the directors with all the liabilities
imposed by the Code on directors (Sec. 97,
CC). The stockholders shall likewise be
personally liable for corporate torts unless
the corporation has obtained reasonably
adequate liability insurance (Sec. 100, CC).
2. Quorum may be greater than mere majority
(ibid).
3. Restrictions on transfer of shares can be
validly imposed. Right of first refusal can be
exercised (Sec. 98, CC).
4. Any action by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if any of the
circumstances on Sec. 101, CC is present.
5. Pre-emptive right extends to all stock
issuances, including treasury shares (Sec.
102, CC).
6. Deadlock in the board is settled by the SEC,
on the written petition by any stockholder
(Sec. 104, CC).
7. A stockholder may withdraw and avail of his
right of appraisal (Sec. 105, CC).
8. The rules primarily governing close
corporations are set forth under Title XII of
the Corporation Code. Other titles of the
Code apply suppletorily.
Q: CFTI held a concessionaire's contract with AAFES
for the operation of taxi services within Clark Air
Base. Sergio Naguiat was CFTI's president, while
Antolin T. Naguiat was its vice-president. CFTI was a
family-owned corporation. Individual respondents
were previously employed by CFTI as taxicab
drivers. Due to the phase-out of the US military
bases in the Philippines, from which Clark Air Base
was not spared, the AAFES was dissolved, and the
services of individual respondents were officially
terminated. The AAFES Taxi Drivers Association
247
(drivers' union) and CFTI held negotiations as
regards separation benefits that should be awarded
in favor of the drivers. They arrived at an
agreement. However, individual respondents herein
refused to accept theirs. Instead, after disaffiliating
themselves from the drivers' union, individual
respondents filed a complaint for payment of
separation pay due to termination/phase-out. Said
complaint was later amended to include CFTI with
Antolin T. Naguiat as vice president and general
manager, as party respondent. Is Antolin Naguiat
liable for payment of separation benefits of
employees terminated for authorized causes?
A: Yes. Section 100 of the Corporation Code states
that 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. Nothing in the records show
whether CFTI obtained reasonably adequate liability
insurance, thus, what remains is to determine
whether there was corporate tort. In the present
case, Sergio Naguiat is held solidarily liable for
corporate tort because he had actively engaged in the
management and operation of CFTI, a close
corporation (Sergio Naguiat v. NLRC, G.R. No. 116123,
March 13, 1997).
Close corporation v. Closely-held corporation.
CLOSE CLOSELY HELD
CORPORATION CORPORATION
A close corporation is A closely-held
that defined in Sec. 96. It corporation focuses
emphasizes a more on the number of
determination on the shareholders in the
part of the participants in corporation at that
the enterprise to keep particular time,
outsiders from acquiring indicating that they are
any interest in the few in number.
business.
VALIDITY ON RESTRICTIONS ON TRANSFER OF
SHARES
Rationale for stock transfer restrictions in close
corporations
The reason for the stock transfer restriction in close
corporation is that the stockholders seek to maintain
delectus personae. The close corporation is essentially
an incorporated partnership, wherein one of the
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
major objectives of the shareholders is to remain
close and be able to prevent changes in the control of
the corporation which might otherwise result from
the transfer of voting shares (De Leon, 2010).
Conditions for validity of restrictions on transfer of
shares
1. Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in the
certificate of stock, otherwise they shall not be
binding on any purchaser thereof in good faith; and
2. They shall not be more onerous than granting the
existing stockholders or the corporation the option to
purchase the shares of the transferring stockholders
with such reasonable terms, conditions, or period
stated therein (Sec. 98, CC).
NOTE: Any transfer made should not result in exceeding the
number of stockholders as allowed by the Code.
Exercise of right of first refusal exercised in Sec. 98
The corporation or the stockholders have the right of
first refusal, that is, the stockholder who wants to sell
his shares to any third person must first offer it either
to the corporation or to the other existing
stockholders usually under the same terms and
conditions. The right pertains to shares already issued
to stockholders. If the existing stockholders or the
corporation fails to exercise the option to purchase
within the period stated, the transferring stockholder
may sell his shares to any third person.
Option period to exercise the right of first refusal
The option period to exercise the right of first refusal
is that period stated in the AOI, By-laws and
Certificate of Stock. The SEC likewise limits the period
to 1 month which is deemed sufficient for the
stockholders or for the corporation to signify their
desire to buy the shares of stock being offered for
sale by any stockholder (SEC Opinion, Oct. 13, 1964).
AOI cannot provide that the consent of the
corporation shall be obtained in case the
stockholder sells his shares
The AOI cannot provide that the consent of the
corporation shall be obtained in case the stockholder
sells his shares because such restriction is more
onerous than the right of first refusal.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
ISSUANCE OR TRANSFER OF STOCK IN BREACH OF
QUALIFYING CONDITION
Transfer
The term transfer as used in Sec. 99, is not limited
to a transfer for value. This therefore include
donations (Sec. 99[6], CC).
Refusal to register the transfer of stock by a close
corporation
A close corporation may, at its option, refuse to
register the transfer of stock in the name of the
transferee if the person is not qualified to be a
stockholder and has notice thereof.
Any person to whom stock of a close corporation has
been issued or transferred has, or is conclusively
presumed to have notice:
a. That he is a person not eligible to be a holder of
stock of the corporation,
b. The transfer of stock to him would cause the stock
of the corporation to be held by more than the
number of persons permitted by its articles of
incorporation to hold stock of the corporation,
c. The transfer of stock is in violation of a restriction
on transfer of stock (Sec. 99 [4], CC).
Conclusive presumption of knowledge of restrictions
There is a conclusive presumption of knowledge of
restrictions when the stock certificate issued or
transferred conspicuously shows the qualifications of
persons entitled to be holders of record; number of
persons, not exceeding 20 allowed to be
stockholders; and other restrictions as provided in
the AOI of the close corporation (Sec. 99 [1],[2],[3],
CC).
Stock transfers in violation of the restrictions can
still be registered in the books of the Corporation
Stock transfers in violation of the restrictions can still
be registered in the books of the Corporation in the
following cases:
1. If all the stockholders consent;
2. If the AOI of the close corporation was duly
amended (Sec. 99 [5], CC).
NOTE: In both the above cases, the corporation will no
longer be a close corporation if the conditions under Sec.
96 will no longer be present, as in the case where the
transfer results in the presence of more than 20
stockholders.
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 CORPORATION CODE
Breach of any of these restrictions does not bar
rescission by the transferee of the transaction
The breach in any of the restrictions shall not in any
way impair any right of a transferee regarding any
right to rescind the transaction or to recover under
any applicable warranty, express or implied (Sec.
99[7], CC).
WHEN BOARD MEETING IS UNNECESSARY OR
IMPROPERLY HELD
Effect of unnecessary or improperly held board
meeting
Unless the by-laws of the close corporation otherwise
provides, any action by the directors of a close
corporation without a meeting shall be valid if:
(CKAO)
1. Before or after such action is taken, written
Consent is signed by all the directors
2. All the stockholders have actual or implied
Knowledge of the action and make no prompt
objection
3. The directors are Accustomed to take informal
action with the express or implied acquiescence of all
the stockholders
4. All the directors have express or implied
knowledge of the action in question and make no
prompt Objection thereto.
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed to
attend, unless he promptly files his written objection
with the secretary of the corporation after having
knowledge thereof (Sec. 101, CC).
SEC can interfere with the management of a close
corporation in case of disagreement of the
stockholders or directors
In case of deadlock in the management of the
corporation, the SEC may intervene and can do
certain acts which would have not been allowed to do
in open corporations.
PRE-EMPTIVE RIGHT
Pre-emptive right in an ordinary corporation v.
Pre-emptive right in a close corporation
As compared to ordinary corporations, in close
corporations, pre-emptive right can be exercised
even as to stocks issued for corporate purposes or for
payment of a previously contracted debt.
249
AMENDMENT OF THE ARTICLES OF INCORPORATION
Requirements to be complied with for the
amendment of the AOI to delete or remove any
provision required for close corporations or to
reduce a quorum or voting requirement stated in
the AOI
Any amendment to the articles of incorporation
which seeks to delete or remove any provision
required for close corporations or to reduce a
quorum or voting requirement stated in the articles
of incorporation must be:
1. Approved by the affirmative vote of at least
two-thirds (2/3) of the outstanding capital stock,
a. Whether with or without voting rights, or
b. A greater proportion of shares as may be
specifically provided in the articles of incorporation
2. In a meeting duly called for the purpose.
Q: Corporation A, a close corporation, amended its
articles of incorporation and removed the provision
that all shares of stock, exclusive of treasury stock,
shall be held by a specified number of shareholders
not exceeding 20. What is the effect of such
amendment to Corporation A?
A: It is a special feature of a close corporation that its
shares of stock exclusive of treasury shares shall be
held by not more that 20 stock holders. The deletion
of such special feature would render Corporation A,
no longer a close corporation.
DEADLOCKS
Deadlock in a close corporation
It is when the directors or stockholders are so divided
respecting the management of the business and
affairs of the corporation that the votes required for
any corporate action cannot be obtained and as a
result, business and affairs can no longer be
conducted to the advantage of the stockholders
generally (Sec. 104, CC).
NOTE: Dissolution of the corporation is one of the possible
consequences of deadlock (Sec. 104, CC).
Remedy in case of deadlocks in a close corporation
The SEC may be asked, upon written petition by any
stockholder, to intervene. And SEC shall have the
authority to do the following:
1. To arbitrate the dispute
2. Cancel or alter any provision contained in the
articles of incorporation, by-laws, or any
stockholder's agreement;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
3. Cancel, alter or enjoin any resolution or act of
the corporation or its board of directors, Provisional director
stockholders, or officers;
4. Direct or prohibit any act of the corporation or its A provisional director is an impartial person who is
board of directors, stockholders, officers, or neither a stockholder nor a creditor of the
other persons party to the action; corporation or of any subsidiary or affiliate of the
5. Require the purchase at their fair value of shares corporation. A provisional director has all the rights
of any stockholder, either by the corporation and powers of a director of the corporation, including
regardless of the availability of unrestricted the right to notice of and to vote at meetings of
retained earnings in its books, or by the other directors, until such time as he shall be removed by
stockholders; order of the Commission or by all the stockholders.
6. Appoint a provisional director;
7. Dissolve the corporation; or NOTE: A provisional director is not considered as a receiver
8. Grant such other relief as the circumstances may of the corporation. He does not have the title and powers
warrant. (ibid.) of a custodian or receiver.

Widely held v. Close corporation

WIDELY HELD CLOSE CORPORATION

CORPORATION
Number of No limit Not exceeding 20(Sec. 96, CC)
Stockholders
Public Offering/ Allowed Not Allowed (Sec. 96, CC.)
Listing of Shares in
the Stock Exchange
Corporate powers are exercised, all The articles of incorporation of a close
business conducted and all property of such corporation may provide that the business
Who may exercise
corporations controlled and held by the of the corporation shall be managed by the
corporate Powers
board of directors or trustees (Sec. 23, CC) stockholders of the corporation rather than
by a board of directors. (Sec. 97, CC)
Qualification of Qualifications of stockholders are not Specific qualifications are usually provided
Stockholders normally prescribed for. ( Sec. 97, CC)
Restriction on A restriction need not be provided for There must be a restriction on the transfer
transfers of shares of shares (Sec. 96, CC)
All stockholders of a stock corporation The pre-emptive right of stockholders in
shall enjoy pre-emptive right to subscribe to close corporations shall extend to all stock
all issues or disposition of shares of any to be issued, including reissuance of
class, in proportion to their respective treasury shares, whether for money or for
shareholdings, unless such right is denied property or personal services, or in
by the AOI or amendment thereto: payment of corporate debts, unless the AOI
Provided, that such pre-emptive right provide otherwise. (Sec. 102, CC)
shall not extend to shares to be issued in
Pre-emptive Right
compliance with laws requiring stock
offerings or minimum stock ownership by
the public; or to shares to be issued in good
faith with the approval of the stockholders
representing 2/3 of the outstanding capital
stock, in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt. (Sec. 39, CC)
Only to those cases provided by law under Can be exercised with or without reason
Sec. 42 and 81. and regardless of whether the corporation
has unrestricted retained earnings.(Sec.
Appraisal Right
Required that the Corporation has 105, CC)
unrestricted retained earnings at the time
of demand.(Sec. 82, CC)

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 250
 CORPORATION CODE
Interference of SEC as Not allowed. Based on the Business
to the management Judgment Rule
of the Corporations
business.
For voluntary dissolutions, approval of
majority of the Board of Directors or
Trustees and of stockholders representing
2/ 3 of the outstanding capital stock or 2/3
of the members in case of non-stock
Dissolution
corporations is necessary. (Sec. 118 and
119, CC.)
Requires vote or written assent of
stockholders representing at least 2/3 of
Amendment of AOI
the outstanding capital stock (Sec. 16, CC)
Oral objection is sufficient to preserve the
Objection in a
right of the director to question the validity
meeting without
of an action taken in a meeting held
proper notice
without proper notice. (Sec. 53, CC)
NON-STOCK CORPORATION Characteristics of a non-stock corporation
DEFINITION 1.
2.
Non-stock corporation
3.
It is one where no part of its income is distributable
as dividends to its members, trustees or officers. Any
profit which it may obtain as an incident to its
operations shall whenever necessary or proper, be
used in furtherance of the purpose or purposes for
4.
which it was organized (Sec. 87, CC).
5.
Foundation
A foundation is a non-stock, non-profit corporations
6.
with funds established to maintain or aid charitable,
religious, educational, athletic, cultural, literary,
scientific, social welfare or similar activities primarily
through extending grants or endowments. A
7.
foundation, as distinguished from an ordinary
non-stock corporation requires a minimum capital of
1 million Pesos (SEC Memo. Circular No. 1 Series of
2004).
8.
251
Allowed in case of deadlocks. (Sec. 104, CC)
Dissolution may be effected by any
stockholder upon petition to the SEC
whenever any of acts of the directors,
officers or those in control of the
corporation is illegal, or fraudulent, or
dishonest, or oppressive or unfairly
prejudicial to the corporation or any
stockholder, or whenever corporate assets
are being misapplied or wasted. (Sec. 105,
CC.)
Amendment as to the matters stated in Sec.
103 requires affirmative vote of at least 2/3
of the outstanding capital stock. (Sec. 103,
CC)
Written objection is required. (Sec. 101,
CC.)
It does not have capital stock divided into shares;
No part of its income during its existence is
distributable as dividends to its members,
trustees, or officers;
As a general rule, it is not empowered to engage
in business with the object of making income or
profits directly or indirectly. However, it is not
prohibited to make income or profits as an
incident to its operation. (Sec. 87, CC)
There is non-transferability of membership (Sec.
90, CC)
The right to vote of members may be limited,
broadened, or even denied in the AOI or the
by-laws (Sec. 89, CC).
Non-stock corporations may, through their
articles of incorporation or their by-laws
designate their governing boards by any name
other than as BOT (Sec. 138,CC).
By-laws may provide that the members may hold
their meetings at any place even outside the
place where the principal office of the
corporation is located, provided that such place
is within the Philippines (Sec. 93, CC). A non-stock
corporation is not allowed to distribute any of its
assets or any incidental income or profit made by
the corporation during its existence.
Non-availability of conversion into stock
corporation (SEC Opinion, February 24, 1989).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Stock corporation v. Non-stock corporation
STOCK- CORPORATION
Existence of Has capital stock divided into shares.
Capital Stock (Sec. 3, CC)
Purpose Organized for profit.
Distribution of Profits are distributed to the
Profit stockholders through dividends(Sec. 3,
CC)
Number of Not less than 5 but not more than 15.
Directors or
Trustees Except corporation sole and banks (in
case of merger or consolidation) which
can have a maximum of 21 directors
Term of Office of Term of one year until their successors
Directors are elected and qualified, subject to the
provisions of AOI and By-laws
Election of Officers are elected by the BOD and not
Officers by the stockholders
Place of meeting Stockholders meeting shall be held in city
or municipality where the principal office
of the corporation is located or at the
principal office of the corporation. (Sec.
51, CC).
Right to vote Stockholders can resort to cumulative
voting.
Only preferred and redeemable shares
can be denied the right to vote except
those matters in Sec. 6.
Voting of directors may be made only
through general voting. Regional or
district voting of directors is not allowed.
Transferability of Shares may be transferred by the
Shares/ stockholder with or without the consent
Membership of the corporation.
Right to expel Stockholders may be expelled only for
members grounds provided by law.
Distribution of Assets of stock corporation shall be
Assets in case of distributed in the following order:
dissolution
1.Payment of claims of creditors who are
not stockholders (based on preference of
credit)
2.Payment of claims of stockholders as
creditors
3.Residual balance is distributed
proportionately to preferred shares, if
any, then to common stock.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES 252
NON-STOCK CORPORATION
No capital stock.
Non-stock corporations has capital is in the
form of contributions or donations.
Not organized for profit.
Profits are not distributed to members.
Any profit earned by the non-stock
corporation is used for the furtherance of
the purpose or purposes for which it is
organized. (Sec. 87, CC)
Not less than 5 and may be more than 15
except Non-stock educational institutions
(maximum of 15 trustees).
Subject to the provision in AOI and By-laws,
3 years on a staggered basis.
Members may directly elect officers. (Sec.
92, CC)
May be held at any place outside the
principal place of business of the
corporation provided it shall be within the
Philippines.(Sec. 93,CC)
No cumulative voting unless allowed by
AOI.
Right to vote may be limited, broadened or
denied by the AOI and by-laws (Sec. 89, CC).
Regional or district voting of trustees is
allowed.
Membership is personal in character and is
not transferable unless allowed by the AOI
or by-laws (Sec. 90, CC).
Membership shall be terminated in the
manner and for the causes provided in the
articles of incorporation or the by-laws
(Sec. 91, CC).
Assets of non-stock corporation shall be
distributed as follows:
1. Payment of claims of creditors
2. Assets held on condition of return
or subject to limitation of use shall be
returned, transferred or conveyed.
3. Distribution to member based on
distributive rights stated in AOI or
by-law.
4. In case of default, distribution
pursuant to Plan of Distribution of
Assets.
 CORPORATION CODE
Conversion
1. A non-stock corporation cannot be converted into
a stock corporation through mere amendment of its
AOI. This would violate Section 87 which prohibits
distribution of income as dividends to members.
Giving the members shares is tantamount to
distribution of its assets or income (Sundiang, 2014
citing SEC Opinion, March 1995).
2. A non-stock corporation can be converted into a
stock corporation only if the members dissolve it first
and then organize a stock corporation. However,
there is a resulting new corporation (Sundiang, 2014
citing SEC Opinion, May 13, 1992).
3. A stock corporation may be converted into a
non-stock corporation by mere amendment provided
all the requirements are complied with. Its rights and
liabilities will remain (Sundiang, 2014).
Termination of Membership
The power to admit members pertains to the Board
in the absence of any contrary provisions on the AOI
and by-laws. Consistently, it is also the Board who has
the power to terminate membership.
1. Standards - A non-stock corporation is authorized
to terminate the membership in accordance with
the standards fixed in the AIO or the by-laws
(Sec. 91).
2. When property rights are involved - Membership
may involve property rights. Example:
Membership in a golf club where the purchase of
the share is a sine qua non (Valley Golf & Country
Club Inc. v. Caram, G.R. No. 158805, April 16,
2009).
3. Lien -Non payment of dues may be a ground for
termination or suspension of membership. The
AOI or the by-laws of a non-stock corporation
may provide that unpaid dues shall constitute a
lien on the members share. However, Section 68
of the Corporation Code does not apply if the
membership shares are sold under the provisions
that provide for the constitution of lien
(Calatagan Golf & Country Club Inc. V. Caram,
G.R. No. 165443, April 16, 2009).
4. Notice - For the termination of membership to be
valid, there should be reasonable notice to the
member concerned and he must be given a fair
opportunity to be heard in his defense.
5. Effect of death of a member - Membership in and
all rights arising from a non-stock corporation are
personal and non-transferable, unless the AOI or
the by-laws of the corporation provide
otherwise. Deceased members who are dropped
from the membership roster in the manner and
253
for the cause provided for in the by-laws are not
to be counted in determining the requisite vote
in corporate matters or the requisite quorum for
the annual members meeting (Tan v. Sycip, G.R.
No. 153468, Aug. 17, 2006).
PURPOSES
Purposes for which a non-stock corporation may be
organized
Non-stock corporations may be formed or organized
for: (CREP-CFLSS)
2. Charitable,
3. Religious,
4. Educational,
5. Professional,
6. Cultural,
7. Fraternal,
8. Literary,
9. Scientific,
10. Social,
11. Civic service, or
12. Similar purposes, like trade, industry, agriculture
and like chambers, or any combination thereof (Sec.
88, CC).
NOTE: A non-stock corporation organized to promote
educational objectives may not be an educational
corporation as contemplated in Secs. 106 to 108, CC.
The formation of a non-stock corporation for
political purpose is not allowed
Political purpose is not included on the purposes for
which a non-stock corporation may be established.
SEC may reject the AOI if the purpose of the
corporation is to engage in election campaign or
partisan political activity (SEC Opinion, April 10,
1985).
TREATMENT OF PROFITS
Nonstock corporation may earn profit
Mere intangible or pecuniary benefit to the members
does not change the nature of the corporation. The
fact that a nonstock corporation earns a profit does
not make it a profitmaking corporation where such
profit or income is used for purposes set forth in its
articles of incorporation and is not distributed to its
incorporators, members or officers.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
DISTRIBUTION OF ASSETS UPON DISSOLUTION NOTE: Due to the enactment of RA 7042, the control test is
now used in the determination of nationality of the
Order of distribution of assets on dissolution of corporation in case of nationalized or partly nationalized
activities. However, this does not preclude the use of other
non-stock corporations
tests in determining the nationality of the corporation. In
fact, as per SEC Opinion on Nov. 28, 2009, the SEC opined
1. All liabilities of the corporation shall be paid or that the grandfather rule can be useful when a
adequate provision thereof shall be made; corporations economic activity is strictly limited by law to
2. Assets held upon a condition requiring return, Filipino citizens, such as certain types of retail trading and
transfer or conveyance upon, and which condition mass media. Further, according to the commission, the
occurs by reason of the dissolution, shall be returned, control test, which is more liberal, is applied for
transferred or conveyed; corporations intending to engage in commerce where
3. Assets received and held by the corporation 60%-40% equity ratio is allowed by law.
subject to limitations permitting their use only for
charitable, religious, benevolent, educational or 2. Principle of reciprocity - It allows Filipino citizens
to do business in the foreign state or country.
similar purposes shall be transferred or conveyed to
This is merely prescribed as a requirement to
one or more corporations, societies or organizations
engaged in activities in the Philippines substantially secure a license and not an essential element of
similar to those of the dissolving corporation. being a foreign corporation (De Leon, 2010).
4. All other assets shall be distributed to the
members as provided by the articles of incorporation Jurisdiction over a foreign corporation
or the by-laws.
5. In the absence of provision in the AOI or by-laws, IF THE FOREIGN IF THE FOREIGN
distribution may be made in accordance to a plan of CORPORATION IS THE CORPORATION IS THE
distribution adopted by the board of trustees by PLAINTIFF DEFENDANT
majority vote and by at least 2/3 of the members 1. GR: Voluntary
(Sec. 94, CC). appearance of the
corporation by
A non-stock corporation cannot offset unused interposing a defense
contributions of members against the balance of 1. Voluntary appearance
receivables from the same members XPN: A special
before the local courts by
appearance to file a
the filing of an action by
The unused contributions of members cannot be motion to dismiss
a licensed corporation
offset against the balance of receivables because this based on lack of
would amount to distribution of the capital of the 2. If the foreign jurisdiction
corporation. Members of non-stock corporation are corporation is a
not entitled to distribution of capital. They are only co-plaintiff with a 2. Service of summons to
entitled to distribution of capital upon dissolution domestic corporation a foreign corporation
when it is provided for in the articles of incorporation and latter filed a suit which has transacted
or by-laws (SEC Opinion, Nov. 27, 1985). here in the Philippines. business in the
Philippines whether
FOREIGN CORPORATIONS licensed or registered

Foreign corporation 3. Service of summons to

its resident agent in an
A foreign corporation is done, formed, organized or isolated transaction.
existing under any laws other than those of the
Philippines and whose laws allow Filipino citizens and
BASES OF AUTHORITY OVER FOREIGN
corporations to do business in its own country or
CORPORATION
State (Sec. 123, CC).
Bases of authority or jurisdiction
Features that make a foreign corporation within the
coverage of the law
The following are the two bases of authority
(jurisdiction) over foreign corporations:
1. Place of incorporation - The corporation must be
1. A corporation may give actual consent to judicial
formed, organized, or existing under foreign law.
jurisdiction manifested normally by compliance
with the States foreign corporation qualification

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 254
 CORPORATION CODE
requirements (licensing requirements and other
requisites to lawfully transact business in the
Philippines); and
2. A corporation, even though not qualified (not
licensed), by engaging in sufficient activity (doing
business) within the State, established judicial
jurisdiction over the foreign corporation.
(http://www.repository.law.indiana.edu/cgi/view
content.cgi?article=2888&context=ilj: Foreign
Corporations: The Interrelation of Jurisdiction and
Qualification, Indiana Law Journal, Article 4, Vol.
33, Issue 3, retrieved on April 29, 2013.)
CONSENT
Through compliance with the Philippines legal
requirements to lawfully engage in business within
the countrys territory, the foreign corporation gives
its actual consent to be subjected to the jurisdiction
of the Philippines (ibid).
By securing a license, which is a legal requirement to
lawfully engage in business in the Philippines, the
foreign entity would be giving assurance that it will
abide by the decisions of our courts, even if adverse
to it (Eriks PTE, Ltd. vs. CA, GR 118843, Feb. 6, 1997).
Under Sec. 123, CC, foreign corporations shall not be
permitted to transact or do business in the
Philippines until they have secured a license for that
purpose from the SEC and certificate of authority
from the appropriate government agency.
DOCTRINE OF DOING BUSINESS
Doing business in the Philippines
To be doing or transacting business in the
Philippines for purposes of Section 133 of the
Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is,
perform specific business transactions within the
Philippine territory on a continuing basis in its own
name and for its own account (Cargill Inc. v Intra
Strata Assurance Corporation, G.R. No. 168266,
March 15, 2010).
Jurisdictional tests of doing or transacting
business in the Philippines for foreign corporations
1. Twin Characterization Test
a. Continuity Test Doing business implies a
continuity of commercial dealings and arrangements,
and contemplates to some extent the performance
of acts or works or the exercise of some functions
255
normally incident to and in progressive prosecution
of, the purpose and object of its organization.
b. Subsequent Test a foreign corporation is
doing business in the country if it is continuing the
body or substance of the enterprise of business for
which it was organized (Sundiang, supra, 2009, pg.
256).
2. Contract Test - Whether the contracts entered into
by the foreign corporation, or by an agent acting
under the control and direction of the foreign
corporation, are consummated in the Philippines.
To be doing or transacting business in the
Philippines for the purposes of Sec. 133 of the
Corporation Code, the foreign corporation must
actually transact business in the Philippines, that is,
perform specific business transactions within the
Philippine territory on a continuing basis, in its own
name or for its own account.
NOTE: Actual transaction of business within the Philippine
territory is an essential requisite for the Philippines to
acquire jurisdiction over a foreign corporation and thus
require the foreign corporation to secure a Philippine
business license (B. Van Zuiden Bros., Ltd. v. GTVL
Manufacturing Industries, Inc., G.R. No. 147905, May 28,
2007).
Acts which are considered as doing or transacting
business in the Philippines for foreign corporations
1. Soliciting orders, entering into service contracts,
and opening offices, whether called liason
offices or branches.
2. Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more.
3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
corporation in the Philippines.
4. Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions
normally incident to and in progressive
prosecution of, the purpose and object of its
organization (Sec. 3[d], RA 7042).
Acts which are not considered doing business under
the Foreign Investment Act
1. Mere investment as a shareholder by a foreign
entity in a foreign corporation duly registered to
do business.
2. The exercise of rights as a stock investor and
3. Having a nominee director or officer to represent
its interest in such corporation
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. Appointing a representative or distributor
domiciled in the Philippines which transacts
business in its own name and for its own
account.
5. Publication of general advertisement through
any print or broadcast media
6. Maintaining a stock of goods in the Philippines
solely for the purpose of having the same
processed by another entity in the Philippines.
7. Consignment by a foreign entity of equipment
with a local company to be used in the
processing of products for export and
8. Performing services auxiliary to an existing
isolated contract of sale which are not on a
continuing basis, such as installing in the
Philippines machinery it has manufactured or
exported to the Philippines, servicing the same,
training domestic workers to operate it and
similar incidental services (ibid).
Q: Steelcase is a foreign corporation existing under
the laws of Michigan, USA, and engaged in the
manufacture of office furniture with dealers
worldwide. DISI is a corporation existing under
Philippine Laws and engaged in the furniture
business, including the distribution of furniture.
Steelcase and DISI orally entered into a dealership
agreement whereby Steelcase granted DISI the right
to market, sell, distribute, install, and service its
products to end-user customers within
the Philippines. The business relationship continued
smoothly until it was terminated after the
agreement was breached with neither party
admitting any fault. Steelcase filed a complaint for
sum of money against DISI alleging, among others,
that DISI had an unpaid account of
US$600,000.00. DISI alleged that the complaint
failed to state a cause of action and to contain the
required allegations on Steelcases capacity to sue in
the Philippines despite the fact that Steelcase was
doing business in the Philippines without the
required license to do so. Consequently, it posited
that the complaint should be dismissed because of
Steelcases lack of legal capacity to sue in Philippine
courts. Is Steelcase doing business in the Philippines
without the required license?
A: No. 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. It should be kept in mind that the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
determination of whether a foreign corporation is
doing business in the Philippines must be judged in
light of the attendant circumstances. In this case, it is
undisputed that DISI was founded in 1979 and is
independently owned and managed by the spouses
Leandro and Josephine Bantug. In addition to
Steelcase products, DISI also distributed products of
other companies including carpet tiles, relocatable
walls and theater settings. The dealership agreement
between Steelcase and DISI had been described by
the owner himself a buy and sell arrangement. This
clearly belies DISIs assertion that it was a mere
conduit through which Steelcase conducted its
business in the country. From the preceding facts, the
only reasonable conclusion that can be reached is
that DISI was an independent contractor, distributing
various products of Steelcase and of other
companies, acting in its own name and for its own
account (Steelcase, Inc., v. Design International
Selections, Inc., G.R. No. 171995, April 18 2012).
NECESSITY OF A LICENSE TO DO BUSINESS
Necessity of a license to do business
The purpose of the law in requiring that a foreign
corporation doing business in the Philippines be
licensed to do so is to subject such corporation to the
jurisdiction of the courts. The object is not to prevent
foreign corporation from performing single acts but
to prevent it from acquiring a domicile for the
purpose of business without taking steps necessary to
render it amenable to suits in local courts
(Marshall-Wells Co. vs. Elser & Co., 46 Phil. 71 [1924]).
Further, the following are considered objectives of
the statutory provisions prescribing regulation of
foreign corporations:
1. To place the foreign corporations under the
jurisdiction of the court;
2. To place them in the same footing as domestic
corporation;
3. To protect the public in dealing with the said
corporation.
A corporation engaged in exporting goods to the
Philippines is not required to obtain a license
If a foreign corporation does not transact such kind of
business in the Philippines, even if it exports its
products to the Philippines, the Philippines has no
jurisdiction to require such foreign corporation to
secure a Philippine business license. Actual
transaction of business within the Philippine territory
is an essential requisite for the Philippines to acquire
jurisdiction over a foreign corporation and thus
256
 CORPORATION CODE
require the foreign corporation to secure a Philippine
business license (B. Van Zuiden Bros., Ltd. v. GTVL
Manufacturing Industries, Inc., G.R. No. 147905, May
28, 2007).
Q: Cargill is a corporation organized and existing
under the laws of the State of Delaware, United
States of America. Cargill and Northern Mindanao
Corporation (NMC) executed a contract whereby
NMC agreed to sell to Cargill molasses provided that
Cargill would open a Letter of Credit with the BPI.
The amended contract required NMC to put up a
performance bond which represents the value of
10,500 metric tons of molasses. The performance
bond was intended to
guarantee NMCs performance to deliver the
molasses during the prescribed shipment periods
according to the terms of the amended contract. In
compliance with the terms of the third amendment
of the contract, respondent Intra Strata Assurance
Corporation (Intra Strata) issued a performance
bond to guarantee NMCs delivery of the 10,500
tons of molasses, and a surety bond. NMC was only
able to deliver 219.551 metric tons of molasses out
of the agreed 10,500 metric tons. Thus, Cargill sent
demand letters to NMC claiming payment under the
performance and surety bonds. When NMC refused
to pay, Cargill filed a complaint for sum of money
against NMC and Intra Strata. Does Cargill, an
unlicensed foreign corporation, has legal capacity to
sue before Philippine courts?
A: Yes, it has the capacity to sue. In this case, Cargill
and NMC amended their contract three times to give
a chance to NMC to deliver to Cargill the molasses,
considering that NMC already received the minimum
price of the contract. There is no showing that the
transactions between Cargill and NMC signify the
intent of Cargill to establish a continuous business or
extend its operations in the Philippines. An exporter
in one country may export its products to many
foreign importing countries without performing in the
importing countries specific commercial acts that
would constitute doing business in the importing
countries. The mere act of exporting from ones own
country, without doing any specific commercial act
within the territory of the importing country, cannot
be deemed as doing business in the importing
country. The importing country does not require
jurisdiction over the foreign exporter who has not yet
performed any specific commercial act within the
territory of the importing country. Without
jurisdiction over the foreign exporter, the importing
country cannot compel the foreign exporter to secure
a license to do business in the importing country
257
(Cargill, Inc., v. Intra Strata Assurance Corporation,
G.R. No. 168266, March 15, 2010).
REQUISITES FOR ISSUANCE OF LICENSE
Requisites for the issuance of license to a foreign
corporation
The foreign corporation will submit to SEC the
following:
1. Copy of its articles of incorporation and by-laws,
certified in accordance with law and their translation
to an official language of the Philippines, if necessary.
2. The application, which shall be under oath.
3. Attached to the application for license shall be a
duly executed certificate under oath by the
authorized official or officials of the jurisdiction of its
incorporation, attesting to the fact that:
a. The laws of the country or state of the
applicant allow Filipino citizens and corporations to
do business therein
NOTE: This oath of reciprocity is one of the
requirements to secure a license under Sec. 123, CC,
which defines a foreign corporation.
b. The applicant is an existing corporation in
good standing.
c. If such certificate is in a foreign language, a
translation thereof in English under oath of the
translator shall be attached thereto.
4. Statement under oath by the President or other
person authorized by the Corporation showing to the
satisfaction of the SEC and other governmental
agency in the proper cases that the
a. applicant is solvent and in sound financial
condition
b. the assets and liabilities of the corporation as
of the date not exceeding one (1) year immediately
prior to the filing of the application.
5. An agreement or stipulation stating the designated
resident agent who will receive summons and other
legal processes for the corporation together with a
Special Power of Attorney.
6. An agreement that if it ceases to transact business
or if there is no more resident agent, summons shall
then be served through SEC; and
7. Deposit securities for the benefit of present and
future creditors, within 60 days after the issuance of
license.
NOTE: Foreign banking, financial and insurance
corporations shall, in addition to the above requirements,
comply with the provisions of existing laws applicable to
them.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
AOI and by-laws of a licensed and registered foreign
corporation is valid despite the fact that said AOI
and by-laws are not approved by SEC
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. This, in effect, is an approval of the
foreign corporations by-laws (Citibank v Chua, G.R.
no. 102300, March 17, 1993).
RESIDENT AGENT
Resident agent
1. An individual, who must be of good moral
character and of sound financial standing, residing in
the Philippines; or
2. A domestic corporation lawfully transacting
business in the Philippines (Sec. 127, CC).
Purpose of appointing a resident agent
The appointment of a resident agent is required for
the purpose of accepting and receiving, on behalf of
the foreign corporation:
1. Notice affecting the corporation pending the
establishment of its local office and
2. Summons and other legal processes in all
proceedings for or against the corporation.
Effect of service of summons and notices to the
resident agent
Service upon any agent of a foreign corporation,
whether or not engaged in business in the
Philippines, constitutes personal service upon the
corporation (Sec. 128, CC; Facilities Management
Corp. vs. Dela Rosa 89 SCRA 131 [1979]).
Resident agent cannot sign the certificate of
non-forum shopping
While a resident agent may be aware of the actions
filed against the principal, he may not be aware of the
actions initiated by the principal, therefore he cannot
sign the certificate of non-forum shopping that is a
requirement for filing of an initiatory pleading in
court (Expert Travel & Tours Inc. v. CA, G.R. No.
152392, May 26, 2005).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Replacement of a resident agent
SEC requires the submission of
1. A duly authenticated copy of board resolution or a
certification from the authorized officer of the
company formally revoking his appointment as a
resident agent of the corporation,
2. Accompanied by a duly authenticated written
power of attorney designating the substitute or the
new resident agent (SEC Opinion, Sept. 4, 1990).
NOTE: The appointment of a resident agent of a foreign
corporation is revocable at any time at the instance of the
corporation (ibid).
Duty of the resident agent in case it changes its
address
It shall be his or its duty to immediately notify in
writing the SEC of the new address (Sec. 128, CC).
Instances when service of summons or other legal
processes made upon the SEC instead of a resident
agent
1. If a foreign corporation, previously granted a
license, ceases to transact business in the
Philippines, or
2. Shall be without any resident agent in the
Philippines on whom any summons or other legal
processes may be served,
then in any action or proceeding arising out of any
business or transaction which occurred in the
Philippines, service of any summons or other legal
process may be made upon the SEC (ibid.)
Effect of service made upon the SEC
Such service made upon the SEC shall have the same
force and effect as if made upon the duly authorized
officers of the corporation at its home office (ibid).
Whenever such service shall be made upon the SEC, it
must, within 10 days thereafter, transmit by mail a
copy of such summons or other legal process to the
corporation at its home or principal office. The
sending of such copy by the Commission shall be a
necessary part of and shall complete such service.
PERSONALITY TO SUE
Personality to sue by foreign corporations
GR: Only foreign corporations that have been issued a
license to operate a business in the Philippines have
the personality to sue (Sec.133, CC).
258
 CORPORATION CODE
XPN: Under the rule on estoppel, a party is estopped
to challenge the personality of a foreign corporation
to sue, even if it has no license, after having
acknowledged the same by entering to a contract
with it.
One who has dealt with a corporation of foreign
origin as a corporate entity is estopped to deny its
corporate existence.
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is transacting
or doing business in the country will a license be
necessary before it can institute suits. It may,
however, bring suits on isolated business
transactions, which is not prohibited under Philippine
law. Thus, a foreign insurance company may sue in
Philippine courts upon the marine insurance policies
issued by it abroad to cover international-bound
cargoes shipped by a Philippine carrier, even if it has
no license to do business in this country. It is the act
of engaging in business without the prescribed
license which bars a foreign corporation from access
to our courts (Divina, supra, pg. 120, citing Aboitiz
Shipping Corp. vs. Insurance Co. of North America,
561 SCRA 262).
SUABILITY OF FOREIGN CORPORATIONS
A foreign corporation, which was granted a license
to transact business in the Philippines, is suable
before local courts or administrative agencies
It is suable since any foreign corporation lawfully
doing business in the Philippines shall be bound by all
laws, rules and regulations applicable to domestic
corporations of the same class, save and except:
1. Such only as provide for the creation, formation,
organization or dissolution of the corporations or
2. Such as fix the relations, liabilities, responsibilities,
or duties of stockholders, members or officers of
corporations to each other or to the corporation (Sec.
129, CC).
NOTE: Matters relating to the organization or internal
affairs of the corporation are governed by the laws of the
home or incorporating State unless they offend any public
policy of the Philippines.
A foreign corporation without any license, engaged
in doing business in the Philippines, may be sued in
the country
259
While an unlicensed foreign corporation doing
business in the country cannot maintain any action,
said corporation can be sued in the country, under
the doctrine of quasi-estoppel by acceptance of
benefits. It shall not be allowed to invoke its lack of
license to impugn the jurisdiction of the courts
(Marubeni Nedeland BV vs. Tensuan, 190 SCRA 105
[1990]; SEC Opinion, Jan. 10, 1995).
INSTANCES WHERE AN UNLICENSED FOREIGN
CORPORATION BE ALLOWED TO SUE
Instances when unlicensed foreign corporations can
sue
1. Isolated transactions;
2. A license subsequently granted enables the foreign
corporation to sue on contracts executed before the
grant of the license;
3. In an action for infringement of patent or other
intellectual property rights, provided that the country
of the foreign corporation is a party to the Paris
Convention.
4. If the foreign corporation is co-plaintiff with a
domestic corporation and the domestic corporation is
the one who instituted the suit in the Philippines; and
5. By reason of the doctrine of estoppel.
Isolated transaction
The Court has not construed the term isolated
transaction to literally mean one or a mere single
act. The phrase isolated transaction has a definite
and fixed meaning, i.e., a transaction or series of
transaction set apart from the common business of a
foreign enterprise in the sense that there is no
intention to engage in progressive pursuit of the
purpose and object of the business organization
(Lorenzo Shipping Corp., vs. Chubb and Sons, 431
SCRA 266 [2004]).
Q: May a foreign corporation not engaged in
business in the Philippines and a national of a
country which is a party to any convention, treaty,
or agreement relating to intellectual property rights
or the repression of unfair competition, to which the
Philippines is also a party or extend reciprocal rights
sue in trademark or service mark enforcement
action?
A: Yes, the foreign corporation mentioned above may
sue in trademark or service mark enforcement action.
This is in accordance with Section 160, in relation to
Section 3 of R.A. No. 8393, The Intellectual Property
Code (Sehwani Inc. v. InnOut Burger, G.R. No.
171053, Oct. 15, 2007).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Surecomp, a foreign corporation duly organized
and existing under the laws of the Netherlands,
entered into a software license agreement with ABC,
a domestic corporation, for the use of its IMEX
Software System (System) in the banks computer
system for a period of twenty (20) years. ABC
merged with Global Business Holdings, Inc.
(Global), with Global as the surviving corporation.
When Global took over the operations of ABC, it
found the System unworkable for its operations, and
informed Surecomp of its decision to discontinue
with the agreement and to stop further payments
thereon. Consequently, for failure of Global to pay
its obligations under the agreement despite
demands, Surecomp filed a complaint for breach of
contract with damages before the RTC. In its
complaint, Surecomp alleged that it is a foreign
corporation not doing business in
the Philippines and is suing on an isolated
transaction. Pursuant to the agreement, it installed
the System in ABCs computers for a consideration
of US$298,000.00 as license fee. Global filed a
motion to dismiss on the ground that Surecomp had
no capacity to sue because it was doing business in
the Philippines without a license. Is Global is
estopped from questioning Surecomps capacity to
sue?
A: Yes, Global is estopped. As a rule, unlicensed
foreign non-resident corporations doing business in
the Philippines cannot file suits in the Philippines.
This is mandated under Section 133 of the
Corporation Code. A corporation has a legal status
only within the state or territory in which it was
organized. For this reason, a corporation organized in
another country has no personality to file suits in
the Philippines. In order to subject a foreign
corporation doing business in the country to the
jurisdiction of our courts, it must acquire a license
from the Securities and Exchange Commission and
appoint an agent for service of process. Without such
license, it cannot institute a suit in
the Philippines. The exception to this rule is the
doctrine of estoppel. Global is estopped from
challenging Surecomps capacity to sue. A foreign
corporation doing business in the Philippines without
license may sue in Philippine courts a Filipino citizen
or a Philippine entity that had contracted with and
benefited from it. 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
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Holdings, Inc., v. Surecomp Software, B.V., G.R. No.
173463, October 13, 2010).
GROUNDS FOR REVOCATION OF LICENSE
Grounds for revocation of license of a foreign
corporation
Without prejudice to other grounds provided by
special laws, the license of a foreign corporation to
transact business in the Philippines may be revoked
or suspended by the SEC upon any of the following
grounds:
1. Failure to file its annual report or pay any fees as
required by the Code;
2. Failure to appoint and maintain a resident agent in
the Philippines;
3. Failure, after change of its resident agent or of his
address, to submit to the Securities and
Exchange Commission a statement of such
change;
4. Failure to submit to the SEC an authenticated
copy of any amendment to its articles of
incorporation or by-laws or of any articles of
merger or consolidation within the time
prescribed by the Corporation Code;
5. A misrepresentation of any material matter in any
application, report, affidavit or other document
submitted by such corporation pursuant to this
Title;
6. Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due to
the Philippine Government or any of its agencies
or political subdivisions;
7. Transacting business in the Philippines outside of
the purpose or purposes for which such
corporation is authorized under its license;
8. Transacting business in the Philippines as agent of
or acting for and in behalf of any foreign
corporation or entity not duly licensed to do
business in the Philippines; or
9. Any other ground as would render it unfit to
transact business in the Philippines (Sec 134, CC).
Revocation of the license to transact business in the
Philippines
A certificate of revocation shall be issued by the SEC.
A copy thereof shall be furnished to the appropriate
government agency in the proper cases. The SEC shall
also mail to the corporation at tits registered office in
the Philippines a notice of such revocation
accompanied by a copy of the certificate of
revocation. (Sec. 135, CC.)
260
 CORPORATION CODE
Effects of revocation of license of a foreign corporation for which the lessor merely receives
corporation rental paid by the lessee. This is similar to the
sale of assets, except that under a lease, nothing
The following are the effects of such revocation: passes, except the right to use the property
1. The revocation cannot affect the validity of leased.
contracts entered into by it before the revocation nor 3. Sale of stock The purpose of a holding
its right to maintain an action to enforce them corporation is to acquire a sufficient amount of
(Billmeyer Lumber Co. vs. Merchants Coal Co., 69 SE the stock of another corporation for the purpose
1073). of acquiring control. The acquiring corporation is
2. The revocation shall not affect the validity of called the parent/ holding company. The
contracts entered into by a foreign corporation after corporation whose stocks were acquired is the
revocation. The only effect of the revocation is that subsidiary.
the foreign corporation cannot seek redress from the 4. Merger One where a corporation absorbs
courts to enforce such contracts. It simply removes its another corporation and remains in existence
legal standing to sue (SEC Opinion No. 10-07, Feb. 5, while others are dissolved.
2010). 5. Consolidation - One where a new corporation is
3. Innocent parties can enforce such contracts created and consolidating corporations are
whether the same are considered valid or not. extinguished (ibid., 656-661).
However, the foreign corporation can no longer
transact business in the Philippines, and it cannot Merger
maintain any suit or action in any court or
administrative agency (Sec. 133, CC). Two or more corporations unite, one corporation
which retains its corporate existence absorbing or
Withdrawal by foreign corporation licensed to merging in itself the other which disappears as a
transact business in the Philippines from said license separate corporation. It is the absorption of one
corporation by another which survives (De Leon,
A foreign corporation licensed to transact business in 2010).
the Philippines may be allowed to withdraw from the
Philippines by filing a petition for withdrawal of Consolidation
license. However, no certificate of withdrawal shall
be issued by the SEC unless all the following Two or more corporations unite, giving rise to a new
requirements are met: corporate body and dissolving the constituent
1. All claims which have accrued in the Philippines corporations which cease to exist as separate
have been paid, compromised or settled; corporations (De Leon, 2010).
2. All taxes, imposts, assessments, and penalties, if
any, lawfully due to the Philippine Government or any Merger v. Consolidation
of its agencies or political subdivisions have been
paid; and MERGER CONSOLIDATION
3. The petition for withdrawal of license has been One where a
published once a week for three (3) consecutive corporation One where a
weeks in a newspaper of general circulation in the absorbs another new corporation
Philippines (Sec. 136, CC) corporation and is created and
Definition remains in consolidating
MERGERS AND CONSOLIDATIONS existence while corporations are
others are extinguished.
DEFINITION AND CONCEPT dissolved (Sec. (Sec. 76, CC)
76, CC).
Common forms of corporate combinations All of the
Consequent All consolidated
constituent
1. Sale of assets One corporation sells all or dissolution of corporations are
corporations
substantially all of its assets to another. Such a corporation dissolved
involved are
sale, usually, though not necessarily made in the or without
dissolved except
course of the dissolution of the vendor corporations exception
one
corporation. Consequent No new A new
2. Lease of assets A corporation, without being creation of a corporation is corporation
dissolved, leases its property to another new created emerges

UNIVERSITY OF SANTO TOMAS

261 FACULTY OF CIVIL LAW
 MERCANTILE LAW
corporation single corporation called consolidated corporation
All assets, (BPI vs. BPI-Employees Union-Davao Chapter
The surviving
liabilities, and Federation of Unions in BPI Unibank, GR 164301, Aug.
corporation
Acquisition of capital stock of 10, 2010, J. Brion, dissenting).
acquires all the
Assets, all consolidated
assets, liabilities,
Liabilities, corporations are PLAN OF MERGER OR CONSOLIDATION
and capital stock
Capital Stock transferred to
of all constituent
the new Plan of merger or consolidation
corporations
corporation
The plan of merger or consolidation is a plan created
A partnership cannot merge or to consolidate with a by the representatives of the constituent
corporation corporations, providing for the details of such
merger.
Only corporations can merge or consolidate into a
single corporation. Hence, a partnership may NOT be Contents of a plan of merger or consolidation
allowed to merge with a corporation but the
partnership may transfer all its assets and liabilities to The BOD/ BOT of each corporation party to the
the corporation which will issue its shares of stock to merger or consolidation must set forth the following
be distributed to the partners in proportion to their in their plan of merger or consolidation:
respective interest in the partnership, provided the 1. The names of the corporations proposing to merge
partnership shall be dissolved in accordance with the or consolidate, hereinafter referred to as the
Civil Code (De Leon, supra, pg. 656, citing SEC constituent corporations;
Opinion, Jan 3, 1984). 2. The terms of the merger or consolidation and the
mode of carrying the same into effect;
Q: Where one corporation sells or otherwise 3. A statement of the changes, if any, in the AOI of
transfers all of its assets to another corporation, is the surviving corporation in case of a merger;
the latter liable for the debts and liabilities of the and, with respect to the consolidated
transferor? corporation in case of consolidation, all the
statements required to be set forth in the AOI for
A: GR: No. corporations organized under the CC; and
4. Such other provisions with respect to the proposed
XPNs: merger or consolidation as are deemed
1. Where the purchaser expressly or impliedly agrees necessary or desirable (Sec. 76, CC).
to assume such debts;
2. Where the transaction amounts to a consolidation Approvals required for an effective plan of merger
or merger of the corporations; or consolidation
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and The plan of merger or consolidation must be
4. Where the transaction is entered into to approved by majority vote of each of the BOD/ BOT
fraudulently to escape liability for such debts of the constituent corporation. Thereafter, it shall be
(Edward J. Nell Co. vs. Pacific Farms, Inc., 15 SCRA submitted for approval by the stockholders or
415 [1965]). members of each of such corporations at separate
corporate meetings duly called for the purpose. The
CONSTITUENT v. CONSOLIDATED CORPORATION affirmative vote of the stockholders representing at
least 2/3 of the outstanding capital stock of each
Constituent corporation corporation in the case of stock corporations or at
least 2/3 of the members in the case of non-stock
The parties to a merger or consolidation are corporations, shall be necessary for the approval of
constituent corporations (McLeod vs. NLRC, 512 SCRA such plan (Sec. 77, CC).
222, [2007]).
Amendment of a plan of merger or consolidation
Consolidated corporation
Any amendment may be made, provided such
Sec. 76 of the CC authorizes two or more amendment is approved by majority vote of the
corporations to merge under one of the participating respective BOD / BOT of all the constituent
constituent corporations, or to consolidate into a new corporations and ratified by the affirmative vote of

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 262
 CORPORATION CODE
stockholders representing at least 2/3 of the
outstanding capital stock or 2/3 of the members of
each of the constituent corporations (ibid).
NOTE: Such plan, together with any amendment, shall be
considered as the agreement of merger or consolidation.
Appraisal right is available to a dissenting
stockholder to a plan of merger or consolidation
Any dissenting stockholder in stock corporations may
exercise his appraisal right in accordance with this
Code: Provided, that if after the approval by the
stockholders of such plan, the BOD should decide to
abandon the plan, the appraisal right shall be
extinguished. (ibid.)
ARTICLES OF MERGER OR CONSOLIDATION
After approval of the plan of merger or consolidation,
an article of merger or consolidation is executed by
each of the constituent corporations to be signed by
the president or vice-president of the each
corporation and signed by their secretary or assistant
secretary setting forth:
1. The plan of the merger or the plan of consolidation
2. As to stock corporations, the number of shares
outstanding, or in the case of non-stock corporations,
the number of members
3. As to each corporation, the number of shares or
members voting for and against such plan,
respectively (Sec. 78, CC).
PROCEDURE
1. Board of each corporation shall draw up a plan of
merger or consolidation.
2. Plan of merger or consolidation shall be approved
by majority vote of each board of the concerned
corporations at separate meetings.
3. The plan of merger or consolidation shall be
submitted for approval by the stockholders or
members of each such corporation at separate
corporate meetings duly called for the purpose.
Notice should be given to all stockholders or
members at least two (2) weeks prior to date of
meeting, either personally or by registered mail.
4. Affirmative vote of 2/3 of the outstanding capital
stock in case of stock corporations, or 2/3 of the
members of a non-stock corporation shall be
required.
5. Dissenting stockholders may exercise the right of
appraisal. But if Board abandons the plan to merge or
consolidate, such right is extinguished.
6. The plan may still be amended before the same is
filled with the SEC; however, any amendment to the
plan must be approved by the same votes of the
263
board members of trustees and stockholders or
members required for the original plan.
7. After such approval, Articles of Merger or Articles
of Consolidation shall be executed by each of the
constituent corporations, signed by president or VP
and certified by secretary or assistant secretary,
setting forth:
a. Plan of merger or consolidation;
b. In stock corporation, the number of shares
outstanding; in non-stock, the number of members;
and
c. As to each corporation, number of shares or
members voting for and against such plan,
respectively.
8. Four copies of the Articles of Merger or
Consolidation shall be submitted to the SEC for
approval. Special corporations like banks, insurance
companies, building and loan associations, etc., need
the prior approval of the respective government
agency concerned.
9. If SEC is satisfied that the merger or consolidation
is not inconsistent with the provisions of the
Corporation Code and existing laws, it shall issue the
Certificate of Merger or the Certificate of
Incorporation, as the case may be.
10. If, upon investigation, the SEC has reason to
believe that the proposed merger or consolidation is
contrary to or inconsistent with the Corporation Code
or other existing laws, it shall set a hearing to give the
corporations the opportunity to be heard and written
notice of said hearing shall be given to each
constituent corporation at least two weeks prior to
the said hearing (Secs. 76-79, CC).
EFFECTIVITY
Effectivity of merger or consolidation
The merger or consolidation shall become effective
upon issuance by the SEC of the certificate of merger
and consolidation (Sec. 79, CC).
In the case of merger or consolidation of banks or
banking institutions, building and loan associations,
trust companies, insurance companies, public
utilities, educational institutions and other special
corporations governed by special laws, the favorable
recommendation of the appropriate government
agency shall first be obtained (ibid).
Q: FISLAI and DSLAI entered into a merger, with
DSLAI as the surviving corporation. The articles of
merger were not registered with the SEC due to
incomplete documentation. DSLAI changed its
corporate name to MSLAI. The business of MSLAI,
however, failed. Prior to the closure of MSLAI,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Remedios Uy filed an action for collection of sum of
money against FISLAI. The RTC ruled in favor of Uy
and hence, six (6) parcels of land owned by FISLAI
were sold to Willkom, the highest bidder. MSLAI
filed a complaint for annulment of sheriffs sale.
Willkom, et al., averred that MSLAI had no cause of
action against them or the right to recover the
subject properties because MSLAI is a separate and
distinct entity from FISLAI. They further contended
that the unofficial merger between FISLAI and
DSLAI (now MSLAI) did not take effect considering
that the merging companies did not comply with the
formalities and procedure for merger or
consolidation as prescribed by the Corporation Code
of the Philippines. Was the merger between FISLAI
and DSLAI (now MSLAI) valid and effective?
A: No. The merger was not valid. Merger, does not
become effective upon the mere agreement of the
constituent corporations. Since a merger or
consolidation involves fundamental changes in the
corporation, as well as in the rights of stockholders
and creditors, there must be an express provision of
law authorizing them. The merger shall only be
effective upon the issuance of a certificate of merger
by the SEC, subject to its prior determination that the
merger is not inconsistent with the Corporation Code
or existing laws. In this case, it is undisputed that the
articles of merger between FISLAI and DSLAI were not
registered with the SEC due to incomplete
documentation. Consequently, the SEC did not issue
the required certificate of merger. Even if it is true
that the Monetary Board of the Central Bank of
the Philippines recognized such merger, the fact
remains that no certificate was issued by the SEC.
Such merger is still incomplete without
the certification. 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., et al., v. Edward Willkom, et al., G.R.
No. 178618, October 11, 2010).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
LIMITATIONS
Limitations with regard to merger or consolidation
of corporations
Subject to the limitations provided by the
Constitution, the merger or consolidation should not
create illegal combinations nor create monopolies
and it should not eliminate free and healthy
competition.
Monopoly
A "monopoly" embraces any combination the
tendency of which is to prevent competition in the
broad and general sense, or to control prices to the
detriment of the public (Gokongwei v SEC, G.R. No.
L-45911 April 11, 1979).
EFFECTS
Effects of a merger or consolidation
The effects of merger or consolidation are:
1. The constituent corporations shall become a single
corporation which:
2. In case of merger, shall be the surviving
corporation designated in the plan of merger
3. In case of consolidation, shall be the consolidated
corporation designated in the plan of consolidation
4. The separate existence of the constituent
corporations shall cease, except that of the surviving
or the consolidated corporation
5. The surviving or the consolidated corporation shall
possess all the rights, privileges, immunities and
powers and shall be subject to all the duties and
liabilities of a corporation organized under this Code
6. The surviving or the consolidated corporation shall
thereupon and thereafter possess:
7. All the rights, privileges, immunities and franchises
of each of the constituent corporations
8. All property, real or personal, and all receivables
due on whatever account, including subscriptions to
shares and other choses in action, and all and every
other interest of, or belonging to, or due to each
constituent corporation
9. These shall be deemed transferred to and vested in
such surviving or consolidated corporation without
further act or deed
10. The surviving or consolidated corporation shall:
a. Be responsible and liable for all the liabilities
and obligations of each of the constituent
corporations in the same manner as if such surviving
or consolidated corporation had itself incurred such
liabilities or obligations
264
 CORPORATION CODE
b. Any pending claim, action or proceeding
brought by or against any of such constituent
corporations may be prosecuted by or against
the surviving or consolidated corporation
c. The rights of creditors or liens upon the
property of any of such constituent corporations shall
not be impaired by such merger or consolidation
(CC, Sec. 80; BPI vs. Lee, GR 190144, Aug. 1, 2012).

Q: Associated Banking Corporation and Citizens

Bank and Trust Company (CBTC) merged to form just
one banking corporation known as Associated
Citizens Bank, the surviving bank. The Associated
Citizens Bank changed its corporate name to
Associated Bank by virtue of the Amended Articles
of Incorporation. Lorenzo Sarmiento executed in
favor of CBTC a promissory note. Upon maturity and
despite repeated demands Sarmiento failed to pay
the amount due. Associated Bank file a collection
suit against Sarmiento. Sarmiento contends that
Associated Bank is not the proper party in interest
because the promissory note was executed in favor
of Associated Citizens Bank. The trial court ordered
Sarmiento to pay. The CA however, held that the
Associated Bank had no cause of action against
Lorenzo Sarmiento Jr., since said bank was not privy
to the promissory note executed by Sarmiento in
favor of Citizens Bank and Trust Company
(CBTC). The court ruled that the earlier merger
between the two banks could not have vested
Associated Bank with any interest arising from the
promissory note executed in favor of
CBTC after such merger. May Associated Bank, the
surviving corporation, enforce the promissory note
made by Sarmiento in favor of CBTC, the absorbed
company, after the merger agreement had been
signed

A: Yes. Associated Bank may enforce the promissory

note. Ordinarily, 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. 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. All contracts of the absorbed corporations,
regardless of the date of execution shall pertain to
the surviving corporation.

UNIVERSITY OF SANTO TOMAS

265 FACULTY OF CIVIL LAW
 MERCANTILE LAW
SECURITIES REGULATION CODE
STATE POLICY, PURPOSE
Nature of the Securities Regulation Code (SRC)
The SRC is the law that regulates securities (its
issuance, distribution and sale) and the person who
deals with such securities. It is enacted to protect the
public from unscrupulous promoters, who stake
business or venture claims which have really no basis,
and sell shares or interests therein to investors. The
SRC also serves to protect investors, promote
investor confidence, and stabilize the financial
markets.
The law does not guarantee that a person who invest
in securities will make money. The law only ensures
that there will be a fair and full disclosure of
information regarding securities so that the investor
could make an informed judgment (Dean Divinas
Lecture, 2014).
State policy with regard to the SRC
1. Establish a socially-conscious free market that
regulates itself
2. Encourage widest participation of ownership in
enterprises
3. Enhance democratization of wealth
4. Promote development of the capital market
5. Protect investors
6. Ensure full and fair disclosure about securities
7. Minimize, if not totally eliminate, insider trading
and other fraudulent or manipulative devices and
practices which creates distortion in the free
market.
SECURITIES REQUIRED TO BE REGISTERED
Securities (1996 Bar Question)
Securities are shares, participation or interests in a
corporation or in a commercial enterprise or
profit-making venture and evidenced by a certificate,
contract, instrument, whether written or electronic in
character. It includes: (DO DIET)
1. Debt instruments bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
NOTE: Asset-backed securities (ABS) - These are financial
securities the value of which depends on the assets
underlying it. For investors, ABS are alternative to investing
in corporate debt. An ABS is essentially the same thing as a
mortgage-backed security, except that the securities
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
backing it are assets such as loans, leases, credit card debt,
a companys receivables, royalty and so on, and not
mortgage-based securities, hence, the risk involved in ABS
is greater.
2. Other instruments as may in the future be
determined by the SEC.
3. Derivatives options and warrants
NOTE: Options - are contracts that give the buyer the right,
but not the obligation, to buy or sell an underlying security
at a predetermined price called the exercise or strike price,
on or before a predetermined date, called the expiry date,
which can only be extended in accordance with Exchange
rules (Sundiang, 2014).
Kinds of Options
a. Call option - option to buy
b. Put option - option to sell
c. Straddle - combination of both call and put option
Warrants - are rights to subscribe or purchase new shares
or existing shares in a company, on or before a
predetermined date called the expiry date, which can only
be extended in accordance with Exchange rules. Warrants
generally have a longer exercise period than options.
4. Investments instruments Investment contracts,
fractional undivided interests in oil, gas, or other
mineral rights
NOTE: Investment contract - An investment contract is a
contract, transaction or scheme whereby a person invests
his money in a common enterprise and is led to expect
profits primarily from the efforts of others.
Howey Test
For an investment contract to exist, the following elements
must concur:
a. A contract, transaction or scheme;
b. An investment of money;
c. Investment is made in a common enterprise;
d. Expectation of profits
e. Profits arissing primarily from the effort of others
Network marketing, a scheme adopted by companies for
getting people to buy their products outside the usual retail
system where products are brought from the stores shelf
and where the buyer can become a down-line seller,
earning commissions from purchases made by new buyers
whom he refers to the person who sold the product to him,
is not an investment contract. The commissions are
incentives to down-line sellers to bring in other customers.
These can hardly be regarded as profits from investment of
money under the Howey Test (SEC v. Prosperity.Com, Inc.,
664 SCRA 28, 2012).
5. Equity instruments Shares of stock, certificates of
interest or participation in a profit sharing
266
 SECURITIES REGULATION CODE
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations
6. Trust instruments Certificates of assignments,
certificates of participation, trust certificates, voting
trust certificates or similar instruments (Sec. 3, SRC).
Q: Betty Go Gabionza and other investors lent,
invested or deposited money with ASBHI. For this,
ASBHI issued two (2) postdated checks to its lenders,
one representing the principal amount and the other
covering the interest thereon. On the maturity of
the checks, the individual lenders renewed the
loans, either collecting only the interest earnings or
rolling over the same with the principal amounts.
After sometime, DBS Bank refused to pay for the
checks by virtue of stop payment orders from
ASBHI. The series of events led to the filing of the
complaints by Gabionza, et al., for estafa under
Article 315(2)(a) and (2)(d) of the Revised Penal
Code, estafa under Presidential Decree No. 1689,
violation of the Revised Securities Act and violation
of the General Banking Act. The DOJ concluded that
ASHBHI, et al., are liable for violating such
prohibition against the sale of unregistered
securities. However, the CA reversed the DOJ
holding that the postdated checks issued by ASBHI
did not constitute a security under the Revised
Securities Act. Are the checks issued by ASHBHI
securities?
A: Yes. The checks issued constitutes securities,
hence, the non-registration thereof is a violation of
the Revised Securities 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. The Revised Securities Act was geared
towards maintaining the stability of the national
investment market against activities such as those
apparently engaged in by ASBHI. ASBHI adopted this
scheme in an attempt to circumvent the Revised
Securities Act, which requires a prior license to sell or
deal in securities.
It bears pointing out that the definition of securities
set forth in Section 2 of the Revised Securities Act
includes commercial papers evidencing
indebtedness of any person, financial or non-financial
entity, irrespective of maturity, issued, endorsed,
sold, transferred or in any manner conveyed to
another. A check is a commercial paper evidencing
indebtedness of any person, financial or non-financial
267
entity. Since the checks in this case were generally
rolled over to augment the creditors existing
investment with ASBHI, they most definitely take on
the attributes of traditional stocks. A different rule
would open the floodgates for a similar scheme, by
companies without prior license or authority from the
SEC. This cannot be countenanced (Gabionza v. CA,
G.R. No. 161057, September 12, 2008).
Test on determining whether or not it is a security
The test is: Does it represent a share, participation, or
interest interest in a commercial enterprise or any
profit making venture? If yes, then, it is a security. If it
is a security, then, it cannot be sold, or offered for
sale or distribution within the Philippines without a
registration statement duly filed with and approved
by the SEC (Dean Divinas Lecture, 2014).
Requirement before securities are sold or offered
for sale or distribution within the Philippines
They are required to be registered with and approved
by the SEC. Registration also includes the disclosure
to SEC of all material and relevant information about
the issuer of the security. Prior to the sale, the
information on the securities, in such form and with
such substance as the SEC may prescribe, shall be
made available to each prospective purchaser (Sec. 8,
SRC).
Reason for registration requirement
The reason for the registration requirement is to
protect the public from fraud.
Exceptions to the registration requirement
The following need not be registered:
1. Exempt securities
2. Securities sold in exempt transactions.
However, as an exception to the above exceptions,
SRC provides that the resale of securities previously
sold in an exempt transaction must be registered.
Effect of non-registration
The issuer would be penalized. Issuers of securities
not registered shall be subjected to criminal, civil and
administrative charges.
Q: Timeshare Corp. sold to Spouses Cortez, one
timeshare of Laguna de Boracay. After sometime,
the SEC issued a resolution to the effect that
Timeshare Corp. was without authority to sell
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
securities, like timeshares. It held therefore that the
purchaser may exercise the option to unilaterally
rescind the purchase agreement and receive the
refund of money paid applies to all purchase
agreements entered into by Timeshare Corp. prior
to the effectivity of the Registration Statement.
Hence, Spouses Cortez demanded their right to
cancel their contract, as it appears that Laguna de
Boracay is selling said shares without license or
authority from the SEC. Despite repeated demands,
Timeshare Corp. failed and refused to refund the
same. Timeshare Corp. contends that its mere
registration as a corporation already authorizes it to
deal with unregistered timeshares. Does the
registration of Timeshare Corp. as a corporation
authorize it to deal with unregistered timeshares?
A: No. Mere registration as a corporation does not
authorize it to deal with unregistered timeshares.
Corporate registration is just one of several
requirements before it may deal with timeshares.
Prior to fulfillment of all the other requirements of
Section 8, Timeshare Corp. is absolutely proscribed
from dealing with unregistered timeshares No
securities, except of a class exempt under the SRC or
unless sold in any transaction exempt under the
same, shall be sold or offered for sale or distribution
to the public within the Philippines unless such
securities shall have been registered and permitted to
be sold as provided by the SRC (Timeshare Realty
Corporation v. Cesar Lao, G.R. No. 158941, February
11, 2008).
Validity of the sale of shares acquired 12 months
after the approval of the Registration Statement
If the person who acquired the security did so after
the issuer has made generally available to its security
holders an income statement covering a period of at
least twelve months beginning from the effective
date of the registration statement the right of
recovery shall be conditioned on proof that the
person who acquired the security relying upon such
untrue statement in the registration statement or
relying upon the registration statement and not
knowing of such income statement, but such reliance
may be established without proof of the reading of
the registration statement by such person (Sec. 56,
SRC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Securities market professionals (persons who deal
with securities)
They are the broker, dealer, associated person of a
broker or dealer, and a salesman.
1. Broker - A person engaged in the business of
buying and selling securities for the account of
others (Sec.3.3, SRC).
2. Dealer - Any person who buys and sells securities
for his/her own account in the ordinary course of
business (Sec. 3.4, SRC).
3. Associated person of a broker or dealer - He is an
employee of a broker or dealer who directly
exercises control of supervisory authority but
does not include a salesman, or an agent, or a
person, whose functions are solely clerical or
ministerial (Sec. 3.5, SRC).
4. Salesman - He is a natural person, employed as
such, or as an agent, by a dealer, issuer or broker
to buy and sell securities; but for the purpose of
registration, shall not include any employee of an
issuer whose compensation is not determined
directly or indirectly on sales of securities of the
issuer.
Obligation of the broker to his client
The primary obligation of the broker is to ensure his
accounts compliance with the law (Abacus Securities
Corp. v. Ampil, G.R. No. 160922, Feb. 27, 2006).
NOTE: Since a brokerage relationship is essentially a
contract for the employments of an agent, the law on
contracts govern the broker-principal relationship.
Registration of security market professionals
Security market professionals are required to be
registered. No broker shall sell any securities unless
he is registered with the SEC (Sec. 19, Revised
Securities Act) (Nicolas vs. CA, et al.,G.R. No. 12285,
Mar. 27, 1998)
Q: Can a stock broker without license from the SEC,
recover management fees allegedly earned from
handling the securities transactions of a client?
A: No. An unlicensed person may not recover
compensation for services as a broker where a
statute or ordinance is applicable and such is of a
regulatory nature.
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 SECURITIES REGULATION CODE
EXEMPT SECURITIES
Exempt securities (PC-RIBO)
1. Any security issued or guaranteed by the
Government of the Philippines, or by any political
subdivision or agency thereof, or by any person
controlled or supervised by, and acting as an
instrumentality of said government.
2. Any security issued or guaranteed by the
government of any Country with which the
Philippines maintains diplomatic relations, or by any
state, province or political subdivision thereof on the
basis of reciprocity. Provided, that the SEC may
require compliance with the form and content of
disclosures the Commission may prescribe.
3. Certificates issued by a Receiver or by a trustee in
bankruptcy duly approved by the proper adjudicatory
body.
4. Any security or its derivatives the sale or transfer of
which, by law, is under the supervision and regulation
of the Office of Insurance Commission, Housing and
Land Use Regulatory Board, or the Bureau of Internal
Revenue.
5. Any security issued by a Bank except its own shares
of stock (which serves to promote the sale of
securities issued by heavily regulated banks).
6. Other securities as determined by the SEC by rule
or regulation, after public hearing.(Sec. 9, SRC)
Note: Being an issuer of an exempt security does NOT
exempt such issuer from the requirement of submission of
reports under the regime of full and fair disclosure.
Rationale for the exemption of securities from
registration
The reason for the exemption of these enumerated
securities from registration is that they are either
guaranteed by the government or they are already
regulated by another government agency or body
other than the SEC.
EXEMPT TRANSACTIONS
Exempt transactions (JuDe ISCaRIOTS Ex-20-QBs)
1. Any JUdicial sale, or sale by an executor,
administrator, guardian, receiver or trustee in
insolvency or bankruptcy
2. Those sold by a pledge holder, mortgagee, or any
other similar lien holder, to liquidate a bona fide debt
a security pledged in good faith as security for such
DEbt
3. Those sold or offered for sale in an Isolated
transaction for the owners account and the owner
not being an underwriter
269
4. Distribution by the corporation of Securities to its
stock holders or other security holders as stock
dividends or distribution out of surplus
5. Sale of CApital stock of a corporation to its own
stockholders exclusively wherein no commission or
remuneration is paid or given directly or indirectly in
connection with the sale of such capital stock
NOTE: Also, this sale must not involve an underwriter or
financial advisor
6. Bonds or notes secured by a mortgage upon Real
estate or tangible personal property, where the
entire mortgage together with all the bonds or notes
secured thereby are sold to a single purchaser at a
single sale
7. Issue and delivery of any security in exchange for
any other security of the same Issuer pursuant to the
right of conversion entitling the holder of the security
surrendered in exchange to make such conversion.
8. Brokers transactions executed upon customers
Orders, on any registered Exchange or other Trading
market
9. Share Subscriptions in capital stock prior to
incorporation or in pursuance of an increase in its
authorized capital stock under the Corporation Code
when no expense is incurred, or no commission,
compensation or renumeration is paid or given in
connection with the sale or disposition of such
securities, and only when the purpose for soliciting,
giving or taking of such subscriptions is to comply
with the requirements of such law as to the
percentage of the capital stock of a corporation which
should be subscribed before it can be registered and
duly incorporated, or its authorized capital increased.
10. EXchange of securities by the issuer with its
existing security holders exclusively, when no
commission or other remuneration is paid or given
directly or indirectly for soliciting such exchange
11. Sale by issuer to fewer than 20persons in the
Philippines during any 12 month period, otherwise
known as private placement transactions
12. Sale of securities to any number of the following
Qualified Buyers:
a. banks,
b. registered investment houses,
c. insurance companies,
d. pension funds or retirement plans maintained
by the Government of the Philippines or any political
subdivision thereof or managed by a bank or
other persons authorized by the Bangko Sentral to
engage in trust functions, investment companies,
and
e. other persons or entities ruled qualified by the
SEC on the basis of such factors such as financial
sophistication, net worth, knowledge, and
experience in financial and business matters, or
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
amount of assets under management (Sec. 10.1,
SRC).
Rationale behind exempt transactions
Although the securities themselves must still be
registered, the sale or issue need not be registered
because the investors involved herein are considered
as highly sophisticated investors or specialized
investors and as such, have a greater risk tolerance or
do not need strict protection from the Commission.
List of exempt transactions under SRC is not
exclusive
The list of exempt transaction under the SRC is not
exclusive because under Section 10.2 of Republic Act
8799, the Commission may exempt other
transactions, if it finds that the requirements of
registration under the Code is not necessary in the
public interest or for the protection of the investors
such as by reason of the small amount involved or the
limited character of the public offering.
PROCEDURE FOR REGISTRATION OF SECURITIES
Purpose for registration of securities
Registration of securities allows the subsequent
release of these securities to the investing public and
serves to protect investors.
Procedure for registration of securities (A- POSE-
CsFP- RulE)
1. Application All securities required to be
registered shall be registered through the filing by
issuer with SEC, of a sworn registration statement
with respect to such securities in such form and
containing such information or documents as the
Commission shall prescribe.
2. Prospectus The registration statement shall
include any prospectus required or permitted to be
delivered;
3. Other information The information required for
the registration of any kind and all securities shall
include, among others, the effect of the securities
issue on ownership, on the mix of ownership,
especially foreign and local ownership;
4. Signatories to registration statement The
registration statement shall be signed by the issuers:
a. Executive officer
b. Principal operating officer
c. Principal financial officer
d. Comptroller
e. Principal accounting officer
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
f. Corporate secretary or persons performing
similar functions
NOTE: It shall be accompanied by a duly verified resolution
of the Board of Directors of the issuer corporation.
5. Written consent of Expert The written consent of
the expert named as having certified any part of the
registration statement or any document used in
connection therewith shall also be filed
6. Certification by Selling stockholders Where the
registration statement includes shares to be sold by
the selling shareholders, a written certification by
such selling shareholders as to the accuracy of any
part of the registration statement contributed by
such selling shareholders shall also be filed
7. Fees Upon filing of the registration statement,
the issuer shall pay to the SEC a fee of not more than
one tenth of one percent (1/10 of 1%) of the
maximum aggregate price at which such securities
are proposed to be offered; the SEC shall prescribe by
rule, diminishing the fees in inverse proportion, the
value of the aggregate price of the offering
NOTE: This fee paid to the SEC is called a diminishing fee.
8. Notice and Publication Notice of the filing of the
registration statement shall be immediately
published by the issuer, at its own expense, in two
newspapers of general circulation in the Philippines;
once a week for two consecutive weeks, or in such
other manner as the Commission by rule shall
prescribe, reciting that:
a. A registration statement for the sale of such
security has been filed, and
b. The aforesaid registration statement as well
as the papers attached thereto is open to
inspection at the Commission during
business hours.
c. Copies thereof, photo static or otherwise,
shall be furnished to interested parties at such
reasonable charges as the Commission may
prescribe.
9. RULing Within 45 days after the date of the filing
of the registration statement, or by such later date to
which the issuer has consented, the SEC shall declare
the registration statement effective or rejected,
unless the applicant is allowed to amend the
registration statement. The Commission shall enter
an order declaring the registration statement to be
effective if it finds that the registration statement
together with all the other papers and documents
attached thereto is on its face complete and that the
requirements have been complied with. The
Commission may also impose such terms and
conditions as may be necessary or appropriate for the
protection of the investors.
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 SECURITIES REGULATION CODE
10. Effectivity Upon effectivity of the registration
statement, the issuer shall state under oath in every
prospectus that all registration requirements have
been met and that all information are true and
correct as represented by the issuer or the one
making the statement.
NOTE: Any untrue statement or fact of omission to state a
material fact required to be stated therein or necessary to
make the statement therein not misleading shall constitute
fraud.
Grounds for rejection of a registration statement
and revocation of the effectivity of a registration
statement and the registration of a security (I(irefco)
ICE)
After due notice and hearing by issuing an order to
such effect, the Commission may reject the
registration statement or revoke the registration of a
security based on the following grounds:
1. The Issuer:
a. Has been judicially declared Insolvent
b. Has violated any of the provisions of the
Code, the Rules promulgated pursuant
thereto, or any order of the SEC of which the
issuer has notice in connection with the
offering for which a registration statement
has been filed
c. Has been or is Engaged or is about to engage
in fraudulent transactions
d. Has made any False or misleading
representation of material facts in any
prospectus concerning the issuer or its
securities; or
e. Has failed to comply with any requirement
that the COmmission may impose as a
condition for registration of the security for
which registration statement has been filed.
2. The registration statement is on its face
Incomplete or inaccurate in any material respect
or includes any untrue statement of a material
fact or omits to state a material fact required to
be stated therein or necessary to make the
statements therein not misleading.
3. The issuer, any officer, director or Controlling
person of the issuer, or any person performing
similar functions, or any underwriter has been
convicted by a competent judicial or
administrative body, upon plea of guilty, or
otherwise, of an offense involving moral
turpitude and/or fraud or is enjoined or
restrained by the SEC or other competent judicial
or administrative body for violations of
securities, commodities and other related laws.
271
4. Any issuer who refuses to permit the
Examination to be made by the Commission.
NOTE: The Commission may compel the production of all
the books and papers of the issuer, and may administer
oaths to, and examine the officers of such issuer or any
other person connected therewith as to its business and
affairs.
Grounds for suspension of registration (I-FIRE)
1. If any time, the Information contained in the
registration statement filed is or has become
misleading, incorrect, inadequate or incomplete in
any material respect; or
2. The sale or offering for sale of the security
registered thereunder may work or tend to work a
Fraud;
3. Pending Investigation of the security registered, if
the Commission deems it necessary, to ascertain
whether the registration of such security should be
revoked on any ground specified the SRC;
4. REfusal to furnish information required by the
Commission (Sec. 15, SRC).
Grounds for suspension or cancellation of certificate
of registration (ROSe Co BRO)
1. Fraud in procuring Registration
2. Serious misrepresentation as to Objectives of
corporation
3. Refusal to comply with lawful order of SEC
4. COntinuous non-operation for at least 5 years
5. Failure to file By-laws within required period
6. Failure to file Reports
7. Other similar grounds (Sec. 6 [L], SRC).
Order of suspension by the SEC requires a
subsequent hearing
An order of suspension must be followed by a hearing
to be conducted by the Commission. If the
Commission determines that the sale of any security
should be revoked, it shall issue an order prohibiting
the sale of such security. Until the issuance of a final
order, the suspension of the right to sell, though
binding upon the persons notified thereof, shall be
deemed confidential, and shall not be published,
unless it shall appear that the order of suspension has
been violated after notice.
However, if the Commission finds that the sale of the
security will neither be fraudulent nor result in fraud,
it shall forthwith issue an order revoking the order of
suspension, and such security shall be restored to its
status as a registered security as of the date of such
order of suspension.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
PROHIBITIONS ON FRAUD, MANIPULATIONS AND
INSIDER TRADING
MANIPULATION OF SECURITY PRICES
Acts which are considered manipulation of security
prices
The price of securities should be dictated by market
forces. It cannot be pegged or stabilized. The
following acts are considered as manipulation of
security prices and are therefore prohibited:
1. Transactions intended to create a false or
misleading appearance of active trading in any listed
security traded in an Exchange or any other trading
market:
a. Wash Sale is a transaction in which there
is no genuine change in the beneficial (or
actual) ownership of a security
b. Matched Sale is a change of ownership
in the securities by entering an order for the
purchase or sale of a security with the
knowledge that a simultaneous order of
substantially the same size, time, and
price, for the sale or purchase of any such
security, has or will be entered by or for the
same or different parties.
c. Similar transactions where there is no
change of beneficial ownership.
2. Effecting a series of transactions that will raise or
depress the price of securities to induce the purchase
or sale of securities respectively, or creating active
trading to induce transactions through manipulative
devices:
a. Marking the close buying and selling of
securities at the close of the market in an
effort to alter the closing price of these
securities.
b. Painting the tape engaging in a series
of transactions effected by brokers in
securities that are reported publicly to
give the impression or illusion of activity or
price movement in a security, which
may trick investors into trading in these
securities because of the alleged trading
volume or indications of interest.
c. Squeezing the float refers to taking
advantage of a shortage of securities in the
market by controlling the demand side
and exploiting market congestion during
such shortages in a way to create
artificial prices. This prevents the actual
market from determining the price of these
securities.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
d. Hype and dump engaging in buying
activity at increasingly higher prices and
then selling securities in the market at
the higher prices.
e. Boiler room operations refers to
activities that involve the use of high
pressure sale tactics such as direct mail
offers or telephone follow-ups to investors
to promote purchase and sale of securities
wherein there is misrepresentation in
these securities. This is a fraudulent
transaction that tricks investors
into trading in a fake market.
f. Daisy chain refers to a series of
purchase and sales of the same issue at
successively higher prices by the same
group of people with the purpose of
manipulating prices are drawing
unsuspecting investors into the market
leaving them defrauded of their money and
securities.
g. Front-Running is the prohibited
practice of a broker-dealer executing its
proprietary order before the customers
order for the same security. This violates
the fiduciary responsibility by the
broker-dealer to its customer accounts as
well as placing the customers order first.
h. Churning involves the excessive trading
of securities by a broker-dealer in a
customers discretionary account in
order to generate commissions, without
regard to the customers investment
objective.
3. Circulating or disseminating information that the
price of any security listed in an Exchange will or is
likely to rise or fall because of manipulative market
operations of any one or more persons conducted for
the purpose of raising or depressing the price of that
security for the purpose of inducing the purchase or
sale of such security.
4. To make false or misleading statement with
respect to any material fact, which he knew or had
reasonable ground to believe was so false or
misleading, for the purpose of inducing the purchase
or sale of any security listed or traded in an Exchange.
5. To effect, either alone or with others, any series of
transactions for the purchase and/or sale of any
security traded in an exchange for the purpose of
pegging, fixing or stabilizing the price of such security,
unless otherwise allowed by the Code or by rules of
the Commission.
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 SECURITIES REGULATION CODE
SHORT SALES
Short sale
It is the selling of shares which the seller does not
actually own or possess and therefore he cannot,
himself, supply the delivery. Short selling leads to
speculation of price of securities.
Short swing transaction
It is a transaction by the director, issuer or any person
controlling the issuer (stockholder owning 10% of the
stocks), whereby such person buys and sells securities
within six (6) months.
FRAUDULENT TRANSACTIONS
Fraudulent transactions
The following are considered as fraudulent
transactions:
1. Employment of any device, scheme or artifice
to defraud investors.
2. Obtaining money or property by means of
any untrue statement of a material fact or any
omission to state a material fact necessary in
order to make the statement made not misleading.
3. Engaging in any act, transaction, practice or
course of business, which operates as a fraud or
deceit upon any person.
INSIDER TRADING
Insider trading
A purchase or sale made by an insider, or such
insiders spouse or his relative by affinity or
consanguinity within the second degree, legitimate or
common-law, shall be presumed to be effected while
in possession of material non-public information if
transacted after such information came into
existence but prior to the public dissemination of
such information, and lapse of reasonable time for
the market to absorb such information.
Insider
A person in possession of corporate material
information not generally available to the public.
Who may be an insider (1995 Bar Question)
1. The issuer
2. A director or officer (or person performing similar
functions) of, or a person controlling the issuer
273
3. A person whose relationship or former relationship
to the issuer gives or gave him access to material
information about the issuer or the security that is
not generally available to the public
4. A government employee, or director , or officer of
an exchange, clearing agency and/or self-regulatory
organization who has access to material information
about an issuer or a security that is not generally
available to the public; or
5. Constructive Insider A person who learns such
information by a communication from any of the
foregoing insiders (Sec. 3.8, SRC).
Other prohibited acts in an insider trading
1. For an insider to communicate material
non-public information about the issuer or the
security to any person who by virtue of the
communication thereby becomes an insider, where
the original insider communicating the information
knows or has reason to believe that such person will
likely buy or sell a security of the issuer while in
possession of such information
2. When a tender offer has commenced or is about
to commence, it is unlawful for any person, other
than the tender offeror, who is in possession of
material non-public information relating to such
tender offer to buy or sell the securities of the issuer
that are sought or to be sought by such tender offer,
if such person knows or has reason to believe that the
information is non-public and has been acquired
directly or indirectly from the tender offer, or those
acting on its behalf, the issuer of the securities sought
or to be sought by such tender offer, or any insider of
such issuer
3. When a tender offer has commenced or is about
to commence, it is also unlawful for any tender
offeror, or those acting on its behalf, the issuer of
securities covered by such tender offer, and any
insider, to communicate material non-public
information to any person relating to the tender offer
which would likely result in violation of prohibition of
the insider from trading.
Material non-public information (1995 Bar Question)
1. Information about the issuer or the security has
not been generally disclosed to the public and would
likely affect the market price of the security after
being disseminated to the public and the lapse of a
reasonable time for the market to absorb the
information; or
2. Would be considered by a reasonable person
important under the circumstances in determining his
course of action whether to buy, sell or hold a
security (Sec. 27.2, SRC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Possible defenses against insider trading
1. That the information was acquired not on account
of his relationship with the issuer; or
2. That he disclosed the information to the other
party who knew or had the reason to believe he knew
the material information;
3. That the purchaser or seller was not aware of the
material, non-public information at the time of the
purchase or the sale.
PROTECTION OF INVESTORS
Provisions in the SRC intended to protect the
investors
1. Tender Offer Rule
2. Rules on Proxy Solicitation
3. Disclosure Rule
TENDER OFFER RULE
Tender offer
It is the publicly declared intention by a person alone
or in concert with others to buy securities of a public
corporation. It is an invitation by the acquirer of
shares of a company for other stockholders to tender
their shares to the acquirer so that they may sell their
shares in the same price and conditions as the
previously acquired shares.
It is given to all stockholders by:
1. Filing with the SEC a declaration to that effect, and
paying the filing fee.
2. Furnishing the issuer a statement containing the
information required of the issuers as SEC may
prescribe, including subsequent or additional
materials.
3. Publishing all requests or invitations for tender, or
materials making a tender offer or requesting or
inviting letters of such security.
Purpose of tender offer
Tender offer is in place to protect the interest of
minority stockholders of a target company against
any scheme that dilutes the share value of their
investments. It affords such minority shareholders
the opportunity to withdraw or exit from the
company under reasonable terms or a chance to sell
their shares at the same price as those of the majority
stockholders.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Public company
The following are considerer as public company:
1. Those listed on an exchange; or
2. Those with assets of at least PHP 50M and having
200 shareholders owning at least 100 shares each.
3. Those companies that have an effective
registration statement under Section 12 of the SRC.
Mandatory tender offer
Tender offer is required to be made in the following
instances:
1. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
equity shares in a public company shall disclose such
intention and contemporaneously make a tender
offer for the percent sought to all shareholders of
such class.
NOTE: In the event that the tender offer is oversubscribed,
the aggregate amount of securities to be acquired at the
close of such tender offer shall be proportionately
distributed across both selling shareholder with whom the
acquirer may have been in private negotiations and the
minority shareholders.
2. Any person or group of persons acting in concert
who intends to acquire 35% or more of any class of
equity shares of a public company (corporation with
assets of at least P 50,000,000.00 and having 200 or
more stockholders with at least 100 shares for each
stock holder) pursuant to an agreement made
between or among the person or group of persons
and one or more sellers.
3. Any person or group of persons acting in concert
intends to acquire 35% or more of equity shares of a
public company in one or more transactions within a
period of 12 months shall be required to make a
tender offer to all holders of such class for the
number of shares so acquired within the same period.
4. If any acquisition of even less than 35% would
result in ownership of over 51% of the total
outstanding equity securities of a public company,
the acquirer shall be required to make a tender offer
under this Rule for all the outstanding equity
securities to all remaining stockholders of the said
company at a price supported by a fairness opinion
provided by an independent financial advisor or
equivalent third party. The acquirer in such tender
offer shall be required to accept any and all securities
thus tendered.
5. In any transaction covered by this Rule, the sale of
shares pursuant to the private transaction shall not
be completed prior to the closing and completion of
the tender offer. Transactions with any of the seller/s
of significant block of shares with whom the acquirers
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 SECURITIES REGULATION CODE
may have been in private negotiation shall close at
the same time and upon the same terms as the
tender offer made to the public under this Rule. For
paragraph (2)(B), the last sale meeting the threshold
shall not be consummated until the closing and
completion of the tender offer.
Coverage of the application of tender offer
The mandatory tender offer rule covers not only
direct acquisition but also indirect acquisition or any
type of acquisition. The legislative intent of Section
19 of the Code is to regulate activities relating to
acquisition of control of the listed company and for
the purpose of protecting the minority stockholders
of a listed corporation. Whatever may be the method
by which control of a public company is obtained,
either through the direct purchase of its stocks or
through an indirect means, mandatory tender offer
applies. What is decisive is the determination of the
power of control. The legislative intent behind the
tender offer rule makes clear that the type of activity
intended to be regulated is the acquisition of control
of the listed company through the purchase of
shares. Control may be effected through a direct and
indirect acquisition of stock, and when this takes
place, irrespective of the means, a tender offer must
occur (Cemco Holdings v. National Life Insurance
Company, G.R. No. 171815, August 7, 2007).
Illustration of the application of tender offer in direct
acquisition:
The shares of stock of X company are owned by A
(19%), B (16%), C (20%), D (14%), E (31%). If Aljon
buys the shares of A (19%), the transaction is not
subject to mandatory tender offer. However, if Aljon
buys the shares of A (19%) and the shares of B (16%),
then tender offer must be made because the total
shares bought by Aljon is 35%.
Illustration of the application of tender offer in
indirect acquisition:
The shares of stock of X company are owned by A
(16%), B (19%), C (15%), D (18%), and Corporation E
(32%) respectively. The shares of Corporation E are
owned by Kenneth (50%), King (25%) and Jacq (25%).
If Aljon acquires the shares of B (19%), the
transaction is not subject to mandatory tender offer
because it did not reach the 35% threshold limit
required by law. However, if Aljon acquires the shares
of B (19%) and the shares of Kenneth in Corporation E
(50% of 32 is 16%), then, tender offer must be made
because the total shares bought by Aljon directly and
indirectly is 35%.
275
Obligations of person making a tender offer
1. Make an announcement of his intention in a
newspaper of general circulation, prior to the
commencement of the offer;
2. At least (2) business days prior to the date of the
commencement of the tender offer:
a. File with the SEC a required form for tender
offer including all exhibits thereto (and any
amendments thereto), with the prescribed filing
fees; and
b. Hand deliver a copy of such form including all
exhibits (and amendments thereto) to the target
company and its principal executive office and
to each Exchange where such class of target
companys securities are listed for trading.
3. Report the results of the tender offer by filing with
the SEC, not later than ten (10) calendar days after
the termination of the tender offer, copies of the final
amendments to the form (Sundiang, 2014).
Unlawful and prohibited acts relating to tender
offers
It shall be unlawful for any person to:
1. Make any untrue statement of a material fact or
omit to state any material fact necessary in order to
make statements made, in the light of the
circumstances under which they are made, not
misleading, or
2. Engage in any fraudulent, deceptive, or
manipulative acts or practices, in connection with any
tender offer or request or invitation for tenders, or
any solicitation of security holders in opposition to or
in favor of any such offer, request, or invitation.
Margin trading
A kind of trading that allows a broker to advance for
the customer/investor part of the purchase price of
the security and to keep the same security as
collateral for such advance.
Margin allowance standard
GR: The credit extended must be for an amount not
greater than, whichever is higher of:
1. 65% of the current market price of the security; or
2. 100% of the lowest market price during the
preceding 36 calendar months, but not more than
75% of the current market price.
XPN: The Monetary Board may increase or decrease
the above percentages, in order to achieve the
objectives of the Government with due regard for
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
promotion of the economy and prevention of the use
of excessive credit.
Purposes of the margin requirements
They are primarily intended to achieve a
macroeconomic purpose the protection of the
overall economy from excessive speculation in
securities. Their recognized secondary purpose is to
protect small investors.
Burden of compliance with margin requirements
The brokers and dealers have the burden of
compliance with margin requirements.
Note: In securities trading, the brokers are essentially the
counterparties to the stock transactions at the Exchange.
Since the principals of the broker are generally undisclosed,
the broker is personally liable for the contracts thus made.
Brokers have a right to be reimbursed for sums advanced
by them with the express or implied authorization of the
principal (Abacus Securities Corporation v. Ampil, G.R. No.
160016, Feb. 27, 2006).
RULES ON PROXY SOLICITATION
Requisite for valid proxy solicitation
1. It must be in writing
2. It must be signed by the stockholder or his duly
authorized representative
3. It must be filed before the scheduled meeting with
the corporate secretary (Sec. 20, SRC).
NOTE: For public companies, the period to submit proxy
solicitation should not be later than five (5) days before the
meeting unless the by-laws provides for a longer period.
Unless otherwise provided in the proxy, the proxy shall be
valid only for the meeting for which it is intended. No proxy
shall be valid and effective for a period longer than 5 years
at one time.
Rules on proxy solicitation with regard to broker or
dealer
1. No broker or dealer shall give any proxy, consent or
authorization, in respect of any security carried for
the account of a customer, to a person other than the
customer, without the express written authorization
of such customer.
2. A broker or dealer who holds or acquires the proxy
for at least 10% or such percentage as the
Commission may prescribe of the outstanding share
of the issuer, shall submit a report identifying the
beneficial owner within 10 days after such
acquisition, for its own account or customer, to the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
issuer of the security, to the Exchange where the
security is traded and to the Commission. (Sec. 20,
SRC)
DISCLOSURE RULE
Beginning of disclosure requirement
It begins at registration and continues periodically
through the regular filing of periodic report.
Suspension of disclosure
It may be suspended for any fiscal year after the year
such registration became effective if such issuer as of
the first day of any such fiscal year, has less than 100
shareholders of such class of securities and it notifies
the Commission of such (Rule 17.1, SRC IRR).
End of disclosure requirement
GR: Disclosure does not end because once an issuer
becomes a reporting company, it remains as such
even when the registration of securities has been
revoked (Rule 13 SCR IRR).
XPN: If the primary license is revoked.
XPN to the XPN: In the case of hospitals and
educational institutions if the primary license is
revoked, the disclosure requirement still continues
because of public interest.
Reportorial requirements
1. Issuers:
a. Shall file with the Commission within
135 days, after the end of the issuers fiscal
year, or such other time as the Commission
may prescribe, an annual report which shall
include among others, a balance sheet, profit
and loss statement and statement of cash flows,
for such last fiscal year, certified by an
independent certified public accountant, and a
management discussion and analysis of
results of operations; and
b. Such other periodical reports for interim
fiscal periods and current reports on significant
developments of the issuer as the
Commission may prescribe as necessary to keep
current information on the operation of the
business and financial condition of the issuer
(Sec. 17, SRC).
2. Types of issuers required to file reports
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 SECURITIES REGULATION CODE
a. An issuer which has sold a class of its
securities pursuant to a registration statement
under Section 12 of the SRC;
b. An issuer with a class of securities listed for
trading in an Exchange;
c. An issuer with assets of at least PHP 50M
and having 200 or more holders each holding
at least 100 shares
3. Persons acquiring securities - If the issuer is one
that has to make a report, any person who acquires
directly or indirectly the beneficial ownership of more
than 5% of such class, or in excess of such lesser per
centum as the Commission by rule may prescribe,
shall, within 10 days after such acquisition or such
reasonable time as fixed by the Commission, submit
to the issuer of the security, to the Exchange where
the security is traded, and to the Commission a sworn
statement containing:
a. His personal circumstances
b. The nature of such beneficial ownership
c. If the purpose was to acquire control of the
business, any plans the recipient may have
affecting a major change in the business
d. The number of shares beneficially owned,
and the number of shares for which there is a
right to acquire
e. granted to such person or his associates
f. Information as to any agreement with a third
person regarding the securities (Sec. 18, SRC).
4. Persons that has beneficial ownership of 10% or
more - Every person who is directly or indirectly the
beneficial owner of more than 10% of any class of any
equity security, or who is director or an officer of
the issuer of such security, shall file:
a. Statement with the SEC and, if such
security is listed for trading on an Exchange,
also with the Exchange, of the amount of
all equity securities of such issuer of which he
is the beneficial owner,
. Within 10 days after the close of each
calendar month, if there is a change in
ownership during such month, a registration statement
statement indicating his ownership at the
close of the calendar month and such changes
in his ownership as have occurred during such
calendar month (Sec. 23, SRC).
Q: Union Bank, through its General Counsel and
Corporate Secretary, sought the opinion of the SEC
as to the applicability and coverage of the Full
Material Disclosure Rule on banks, contending that
said rules, in effect, amend Section 5 (a) (3) of the
Revised Securities Act which exempts securities
issued or guaranteed by banking institutions from
the registration requirement. The SEC, in reply,
informed Union Bank that while the requirements of
277
registration do not apply to securities of banks
which are exempt under Section 5(a) (3) of the
Revised Securities Act, however, banks with a class
of securities listed for trading on the Philippine
Stock Exchange, Inc. are covered by certain Revised
Securities Act Rules governing the filing of various
reports with SEC. The CA affirmed the SEC. Is Union
Bank required to comply with SECs full disclosure
rules?
A: Yes, Union Bank is required to comply with SECs
full disclosure rule. The exemption from the
registration requirement enjoyed by Union Bank does
not necessarily connote that it is exempted from the
other reportorial requirements. Having confined the
exemption enjoyed by Union Bank merely to the
initial requirement of registration of securities for
public offering, and not to the subsequent filing of
various periodic reports, the SEC, as the regulatory
agency, is able to exercise its power of supervision
and control over corporations and over the securities
market as a whole. Otherwise, the objectives of the
`Full Material Disclosure policy would be defeated
since Union Bank and its dealings would be totally
beyond the reach of respondent Commission and the
investing public (Union Bank of the Philippines v. SEC,
G.R. No. 138949, June 6, 2001).
CIVIL LIABILITY
Grounds for civil liability to arise
1. False Registration Statement (Sec. 56, SRC)
2. Fraud with connection to prospectus,
communications and reports (Sec. 57, SRC)
3. Fraud in connection with security transactions (Sec.
58, SRC)
4. Manipulation of security prices (Sec. 60, SRC)
5. Insider trading (Sec. 61, SRC)
Persons that may be liable in case of false
1. The issuer and every person who signed the
registration statement
2. Every person who was a director of, or any other
person performing similar functions, or a partner in,
the issuer at the time of the filing of the registration
statement or any part, supplement or amendment
thereof with respect to which his liability is asserted
3. Every person who is named in the registration
statement as being or about to become a director of,
or a person performing similar functions, or a partner
in, the issuer and whose written consent thereto is
filed with the registration statement
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
4. Every auditor or auditing firm named as having
certified any financial statements used in connection
with the registration statement or prospectus
5. Every person who, with his written consent, which
shall be filed with the registration statement, has
been named as having prepared or certified any part
of the registration statement, or as having prepared
or certified any report or valuation which is used in
connection with the registration statement, with
respect to the statement, report, or valuation, which
purports to have been prepared or certified by him
6. Every selling shareholder who contributed to and
certified as to the accuracy of a portion of the
registration statement, with respect to that portion of
the registration statement which purports to have
been contributed by him
7. Every underwriter with respect to such security
Persons liable with regard to fraud with connection
to prospectus, communications and reports
Any person who offers to sells or sells
1. In violation any provisions on registration of
securities; and
2. By the use of any means or instruments of
transportation or communication, by means of a
prospectus or other written or oral communication.
Persons liable with regard to fraud in connection
with security transactions
Any person who engages in any act or transaction in
violation of Sections 19.2, 20 or 26 of SRC.
Persons liable for the manipulation of security prices
Any person who willfully participates in any act or
transaction in violation of Section 24 shall be liable to
any person who shall purchase or sell any security at
a price which was affected by such act or transaction.
Persons liable with regard to insider trading
Any person in case of legal tender who:
1. Purchases or sells a security while in possession of
material information not generally available to the
public.
2. Communicates material non-public information.
NOTE: The liability of the persons enumerated shall be
jointly and severally.
Prescriptive period for filing of action
Two years after the discovery of the facts constituting
the cause of action and within five years after such
cause of action accrued
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Jurisdiction over civil liabilities
The court which has jurisdiction over cases involving
civil liabilities is the Regional Trial Court.
Limitation for awarding damages
1. The court can award not exceeding triple
the amount of the transaction plus actual damage
2. The court is also authorized to award attorneys
fees not exceeding 30% of the award
Award exemplary damages
The court may award exemplary damages in cases of:
1. Bad Faith
2. Fraud
3. Malevolence or
4. Wantonness in the violation of SRC or the Rules
and Regulations promulgated by the Commission
INDEPENDENT DIRECTORS
Requirement of independent director
The Securities Regulations Code requires an
independent director when any corporation with a
class of equity securities listed for trading on an
exchange or with assets in excess of Fifty Million
Pesos and having two hundred or more holders, at
least 200 of which are holding at least one hundred
shares of a class of its equity securities or which has
sold a class of equity securities to the public pursuant
to sec. 12 must have at least two independent
directors or such directors must constitute at least
twenty percent of the board, whichever is less.
Q: Section 38 of The Securities Regulation Code
defines an independent director as a person who
must not have a relation with the corporation which
would interfere with his exercise of independent
judgment in carrying out the responsibilities of a
director. To ensure independence therefore, he
must be (2012 Bar Question)
a. Nominated and elected by the entire
shareholders;
b. Nominated and elected by the minority
shareholders;
c. Nominated and elected by the majority
shareholders;
d. Appointed by the Board
A: B. He must be nominated and elected by the
minority shareholders
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 SECURITIES REGULATION CODE
THE NEW CENTRAL BANK ACT
(NCBA)
R.A. 7653
Bangko Sentral ng Pilipinas (BSP)
It is the states central monetary authority. It 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 bank and non-bank
financial institutions performing quasi-banking
functions, including savings and loan associations
(Busuego vs. CA, G.R. No. L-48955, June 30, 1987).
Bangko Sentral ng Pilipinas as an institution
The BSP is a government-owned corporation which
enjoys fiscal and administrative autonomy.
STATE POLICIES
Policy of the state with respect to the creation of the
Bangko Sentral ng Pilipinas
The State shall maintain a central monetary authority
that shall function and operate as an independent
and accountable body corporate in the discharge of
its mandated responsibilities concerning money,
banking and credit (Sec 2, New Central Bank Act
[NCBA]). While it is a government owned corporation
it enjoys fiscal and administrative autonomy.
CREATION OF THE BANGKO SENTRAL NG PILIPINAS
(BSP)
Salient considerations on the creation of Bangko
Sentral ng Pilipinas
1. It is established as an independent central
monetary authority.
2. Its capital shall be P50,000,000,000, to be fully
subscribed by the Philippine Government.
3. The P10,000,000,000 of the capital shall be fully
paid for by the Government upon the effectivity
of NCBA and the balance to be paid for within a
period of 2 years from the effectivity of NCBA
in such manner and form as the Government,
through the Secretary of Finance and the
Secretary of Budget and Management, may
thereafter determine (ibid).
279
RESPONSIBILITY AND PRIMARY OBJECTIVE
Responsibilities of Bangko Sentral ng Pilipinas (PSR)
1. To provide policy directions in the areas of money,
banking, and credit
2. To supervise bank operations
3. To regulate the operations of finance companies
and non-bank financial institutions performing
quasi-banking functions, and similar institutions (Sec.
3, NCBA).
Primary objectives of Bangko Sentral ng Pilipinas
1. To maintain price stability conducive to a balanced
and sustainable growth of the economy; and
2. To promote and maintain monetary stability and
the convertibility of the peso (Sec. 3, NCBA).
Functions of Bangko Sentral ng Pilipinas
(BRAGS-CHB)
1. Banker of the government the BSP shall be the
official depository of the Government and shall
represent it in all monetary fund dealings (Secs.
110- 116, NCBA).
2. Custodian of Reserves (Secs. 64-66, 94, 103,
NCBA)
3. Financial Advisor of the government (Secs.
123-124) Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract or
guarantee foreign loans but with the prior
concurrence of the Monetary Board.
4. Government agent (Secs. 117-122, NCBA)
5. Source of credit (Secs. 61-63, 81-89, 109, NCBA)
6. Issuer of Currency (Sec. 49-60, NCBA)
7. Clearing channel or House; especially where the
PCHC does not operate (Sec. 102, NCBA)
8. Supervisor of the Banking system (Sec. 25, NCBA)
shall include the power to:
a. Examine, which power extends to
enterprises wholly or majority-owned or
controlled by the bank (Sec. 7, General
Banking Law [GBL]); this power may not be
restrained by a writ of injunction unless
there is convincing proof that the action of
the BSP is plainly arbitrary (Sec. 25, NCBA)
b. Place a bank under receivership or
liquidation (Sec. 30, NCBA)
c. Initiate criminal prosecution of erring
officers of banks
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
POWERS AND FUNCTIONS OF THE MONETARY
BOARD
Monetary Board
It is the body through which the powers and
functions of the BSP are exercised (Sec 6, NCBA).
Powers and functions of the Monetary Board
(RASBI)
1. Issue Rules and regulations it considers necessary
for the effective discharge of the responsibilities and
exercise of its powers.
2. Direct the management, operations, and
Administration of the BSP, reorganize its personnel,
and issue such rules and regulations as it may deem
necessary or convenient for this purpose.
3. Establish a human resource management System.
4. Adopt an annual Budget for and authorize such
expenditures by the BSP as are in the interest of the
effective administration and operations of the BSP in
accordance with applicable laws and regulations.
5. Indemnify its members and other officials of the
BSP, including personnel of the departments
performing supervision and examination functions
against all costs and expenses reasonably incurred by
such persons in connection with any civil or criminal
action (Sec 15, NCBA).
NOTE: In the event of a settlement or compromise,
indemnification shall be provided only in connection with
such matters covered by the settlement as to which the BSP
is advised by external counsel that the person to be
indemnified did not commit any negligence or misconduct.
The costs and expenses incurred in defending the
aforementioned action, suit or proceeding may be paid by
the BSP in advance of the final disposition of such action,
suit or proceeding upon receipt of an undertaking by or on
behalf of the member, officer, or employee to repay the
amount advanced should it ultimately be determined by
the Monetary Board that he is not entitled to be
indemnified as provided in this subsection (ibid.).
Liabilities of the members of the Monetary board
Members of the Monetary Board, officials,
examiners, and employees of the BSP who:
1. Willfully violate RA 7653
2. Who are guilty of negligence, abuses or acts of
malfeasance or misfeasance or
3. Fail to exercise extraordinary diligence in the
performance of his duties
Shall be held liable for any loss or injury suffered by
the BSP or other banking institutions as a result of
such violation, negligence, abuse, malfeasance,
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
misfeasance or failure to exercise extraordinary
diligence (Sec 16 NCBA).
HOW BSP HANDLES BANKS IN DISTRESS
In case of a distressed bank, the BSP appoints a
conservator or receiver or closure of the bank.
CONSERVATORSHIP
Conservator
One appointed if the bank is in the state of illiquidity
or the bank fails or refuses to maintain a state of
liquidity adequate to protect its depositors and
creditors. The bank still has more assets than its
liabilities but its assets are not liquid or not in cash
thus it cannot pay its obligation when it falls due. The
bank, not the BSP, pays for fees.
Powers of a conservator (CARe BEAr)
1. Collect all monies and debts due to the said bank
2. To take charge of the Assets, liabilities, and the
management thereof
3. REorganize, the management thereof
4. And such other powers as the monetary Board
deems necessary
5. Exercise all powers necessary to restore its
viability, with the power to overrule or revoke the
actions of the previous management and board of
directors of the bank or quasi-bank
6. To bring court actions to Assail or Repudiate
contracts entered into by the bank. (First Philippine
International Bank vs. CA, G.R. No. 115849, Jan. 24,
1996).
Power of a conservator does not extend to the
revocation of valid and perfected contracts
The powers of a conservator cannot extend to post
facto repudiation of valid and perfected transactions.
Thus, the law merely gives the conservator power to
revoke contracts that are deemed to be defective-
void, voidable, unenforceable or rescissible. Hence,
the conservator merely takes the place of the banks
board.
Termination of conservatorship
Conservatorship is terminated when the Monetary
Board is satisfied that the bank can operate on its
own.
NOTE: When the Monetary Board, on the basis of the
report of the conservator or of its own findings, determine
that the continuance in business of the institution would
280
 BANKING LAWS
involve probable losses to its depositors or creditors, the Nature of order of receivership
bank will go under liquidation.
While resolutions of the Monetary Board forbidding a
RECEIVERSHIP bank to do business on account of a condition of
insolvency and appointing a receiver to take charge of
Receiver the banks assets or determining whether the bank
may be rehabilitated or should be liquidated are by
One appointed if the bank is already insolvent which law final and executory. However, they can be set
means that its liabilities are greater than its assets. aside by the court on one specific ground - if the
The Court has no authority to appoint a receiver for a action is plainly arbitrary and made in bad faith. Such
bank if the latter will function as such under BSP law. contention can be asserted as an affirmative defense
The power to appoint belongs to BSP. or a counterclaim in the proceeding for assistance in
liquidation (Salud v. Central Bank, G.R. No. L-17630,
NOTE: For banks, the receiver would be the Philippine Aug. 19, 1986).
Deposit Insurance Corporation; for quasi-banks, it could be
any person of recognized competence in banking or finance
(Sec. 30, NCBA).
CLOSURE
Duties of a receiver
Grounds for closure of a bank or a quasi bank
1. The receiver shall immediately gather and take
1. Cash Flow test - Inability to pay liabilities as they
charge of all the assets and liabilities of the
become due in the ordinary course of business (Sec.
institution.
30 [a] NCBA).
2. Administer the same for the benefit of the
2. Balance sheet test Insufficiency of realizable
creditors, and exercise the general powers of a
assets to meet its liabilities (Sec 30 [b] NCBA).
receiver under the Revised Rules of Court
3. Inability to continue business without involving
3. Shall not, with the exception of administrative
probable losses to its depositors and creditors (Sec 30
expenditures, pay or commit any act that will involve
[c] NCBA).
the transfer or disposition of any asset of the
4. Willful violation of a cease and desist order under
institution: Provided that the receiver may deposit or
Section 37 that has become final, involving acts or
place the funds of the institution in non-speculative
transactions which amount to fraud or a dissipation
investments.
of the assets (Sec 30 [d] NCBA).
4. Within 90 days from the take-over, the receiver
5. Notification to the BSP or public announcement of
shall determine whether the institution may be
a bank holiday (Sec 53, GBL).
rehabilitated or otherwise placed in such a condition
6. Suspension of payment of its deposit liabilities
that it may be permitted to resume business with
continuously for more than 30 days (Sec 53, GBL).
safety to its depositors and creditors and the general
7. Persisting in conducting its business in an unsafe or
public
unsound manner (Sec 56, GBL).
5. If the receiver determines that the institution
cannot be rehabilitated or permitted to resume
Close now-hear later doctrine
business, then the Monetary Board shall notify in
writing the board of directors of the institution of its
It is to prevent unwarranted dissipation of the banks
findings and direct the receiver to proceed with
assets and as a valid exercise of police power to
liquidation of the institution (Sec 30, NCBA).
protect the depositors, creditors, stockholders and
the general public. The law does not contemplate
The receiver is not authorized to transact business in
prior notice and hearing before the bank may be
connection with the banks assets and property
directed to stop operations and placed under
receivership (Central Bank of the Philippines v. CA,
A receiver can only perform acts of administration
G.R. No. 76118 Mar. 30, 1993).
and not acts of dominion. The receiver cannot
approve an option to purchase real property. He has
No prior hearing is necessary in appointing a receiver
only the authority to administer the same for the
and in closing the bank. It is enough that subsequent
benefit of its creditors (Abacus Real Estate
judicial review is provided for. Indeed, to require such
Development Center, Inc. v. Manila Banking Corp,
previous hearings would not only be impractical but
G.R. No. 162270, Apr. 6, 2005).
would tend to defeat the very purpose of the law
(Rural Bank of Lucena v. Arca, G.R. No. L-21146,
September 20, 1965).
UNIVERSITY OF SANTO TOMAS
281 FACULTY OF CIVIL LAW
 MERCANTILE LAW
BSP may order the closure of the bank even without
prior hearing. BSP may rely on the report of either
the conservator, receiver or the head of the
supervising and examining department. It is not
required to conduct a thorough audit of the bank
before ordering its closure. The "close now, hear
later doctrine justifies BSP in ordering bank closures
even without prior hearing. Thus, injunction does not
lie against BSP in the exercise of the power and
function. A contrary rule may lead to dissipation of
assets and trigger bank run. Judicial review comes
only after action of the Monetary Board if the same
was attended with bad faith and grave abuse of
discretion (Bangko Sentral ng Pilipinas v. Valenzuela,
G.R. No. 184778, October 2, 2009).
The closure and liquidation of a bank, which is
considered an exercise of police power may be the
subject of judicial inquiry
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 or due process and equal protection
clauses of the Constitution (Central Bank v. CA, G.R.
No. L-50031-32, July 27, 1981).
The order of closure (receivership or conservatorship)
may be assailed: a) by the stockholders representing
at least majority of the outstanding capital stock; b)
within ten days from receipt by the board of directors
of the order; c) thru a petition for certiorari on the
ground that the action taken by the BSP was in excess
of jurisdiction or with grave abuse of discretion as to
amount to lack of jurisdiction.
Q: Upon maturity of the time deposit, the bank
failed to remit. By reason of punitive action taken by
Central Bank, the bank has been prevented from
performing banking operations. Is the bank still
obligated to pay the time deposits despite the fact
that its operations were suspended by the Central
Bank?
A: Yes, the suspension of operations of a bank cannot
excuse non-compliance with the obligation to remit
the time deposits of depositors which matured
before the banks closure (Overseas Bank of Manila v.
CA, G.R. No. 45886, Apr. 19, 1989).
Bank not liable to pay interest when closed
As a general rule, the bank is not liable to pay interest
on DEPOSIT once it is closed and ceased operations.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
LIQUIDATION
Liquidation of a bank
Acts of liquidation are those which constitute the
conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the s
to creditors and other parties for the purpose of
paying debts of such institution (Banco Filipino v.
Central Bank, G.R. No. 70054, Dec. 11, 1991).
Liquidator of a distressed bank can prosecute and
defend suits against the bank
Prosecution of suits, collection and the foreclosure of
mortgages against debtors of the bank by the
liquidator are among the usual and ordinary
transactions pertaining to the administration of a
bank (Banco Filipino v. Central Bank, G.R. No. 70054,
Dec. 11, 1991).
A liquidator may foreclose mortgages due to a bank
while the issue of receivership is pending
A liquidator can foreclose mortgages for and in behalf
of the bank even if the issue on receivership and
liquidation is still pending (Supra).
Q: An intra-corporate case was filed before RTC. On
the other hand, another complaint was filed before
BSP to compel a bank to disclose its stockholdings
invoking the supervisory power of the latter. Is there
a forum shopping?
A: None. The two proceedings are of different nature
praying for different relief. The complaint filed with
the BSP was an invocation of its supervisory powers
over banking operations which does not amount to a
judicial proceeding (Suan v. Monetary Board, A.C. No.
6377, Mar. 12, 2007).
Commencement of liquidation proceedings bar the
filing of a separate action or petition to assail the
order of closure
Once liquidation proceedings have been initiated, the
majority stockholders of the bank can no longer file a
separate action or petition to assail the order of
closure. Instead, issues on validity of closure should
be raised as affirmative defenses in the liquidation
proceeding. This is necessary to prevent multiplicity
of suits or conflicting resolutions ( Salud vs. Central
Bank of the Philippines, G.R. No. L-17620 August 19,
1986).
282
 BANKING LAWS
Liquidation proceedings may be carried out with or bank is insolvent (Miranda vs. PDIC, G.R. No. 169334
without tax clearance September 8, 2006).

Unlike in a voluntary dissolution of a corporation Rule of promissory estoppel

under the Corporation Code, BSP can liquidate the
bank with or without tax clearance. This is based on
the General Banking Law.
Filing of the claims against the insolvent bank
GR: All claims against the insolvent bank should be
filed in the liquidation proceeding. It is not necessary
that a claim be initially disputed in a court or agency
before it is filed with the liquidation court (Ong v. CA,
G.R. No. 112830, Feb. 1, 1996).
XPN: Where it is the bank that files a claim against
another person or legal entity, the claim should be
filed in the regular courts.
Reason: The judicial liquidation is intended to provide
an orderly mode for payment of all claims. In addition
such petition is not in the nature of a disputed claim
against the bank.
Bank deposits as a rule not preferred credits
The exception is when the deposits are covered by a
cashier's check purchased from the bank when the
bank officers knew or ought to have known that the
The BSP may not thereafter renege on its
representation and liquidate the bank after majority
stockholders of the bank complied with the
conditions and parted with value to the profit of CB,
which thus acquired additional security for its own
advances, to the detriment of the banks
stockholders, depositors and other creditors (Ramos
v. Central Bank of the Philippines, G.R. No. L-29352,
Oct. 4, 1971).
A final and executory judgment against an insolvent
bank may be stayed
After the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the
assets of the insolvent bank are held in trust for the
equal benefit of all creditors. One cannot obtain an
advantage or preference over another by
attachment, execution or otherwise. The final
judgment against the bank should be stayed as to
execute the judgment would unduly deplete the
assets of the banks to the obvious prejudice of other
depositors and creditors (Lipana v. Development Bank
of Rizal, G.R. No. L-73884, Sept. 24, 1987).

Conservatorship v. Receivership v. Liquidation

CONSERVATORSHIP RECEIVERSHIP LIQUIDATION

Grounds 1.Continuing inability 1. Inability to pay liabilities as 1. Insolvency

2.Unwilling-ness to maintain
condition of liquidity
they fall due e.g: bank run, 2. Bank cannot be
rumors, etc. rehabilitated
2. Assets are less than its
liabilities
3. Cannot continue business
without causing damage;
4. Violation of a cease and
desist order
5. Bank holiday for more
than 30 days (Sec. 30).

Effects 1.Juridical personality is retained. 1. Juridical personality is Same with

2.Perfected transactions cannot be
repudiated
retained conservator-ship
2. Suspension of operation
/stoppage of business
3. Assets deemed in custodia
legis (Domingo v. NLRC, G.R.
156761, Oct 17, 2006).

UNIVERSITY OF SANTO TOMAS

283 FACULTY OF CIVIL LAW
 MERCANTILE LAW
HOW BSP HANDLES EXCHANGE CRISIS
Legal Tender
All notes and coins issued by the BSP are fully
guaranteed by the Republic and shall be legal tender
in the Philippines for all debts, both public and
private (Sec. 52).
Legal tender power of coins
1. 1-Peso, 5-Peso and 10-Peso coins: In amounts not
exceeding P1,000.00
2. 25 centavo coin or less: In amounts not exceeding
P100.00 (Circular No. 537, 2006).
NOTE: Notes, regardless of denomination, are legal tender
for any amount.
Rules on the authority of the Bangko Sentral ng
Pilipinas to replace legal tender
1. Notes and coins called in for replacement shall
remain legal tender for a period of one year from the
date of call.
2. After that period, they shall cease to be legal
tender during the following year or for such longer
period as MB may determine.
3. After the expiration of this latter period, the notes
and coins which have not been exchanged shall cease
to be a liability of BSP and shall be demonetized (Sec.
57, NCBA).
NOTE: Checks representing demand deposits do not have
legal tender power and their acceptance in the payment of
debts, both public and private, is at the option of the
creditor. However, a check which has been cleared and
credited to the account of the creditor shall be equivalent
to a delivery to the creditor of cash in an amount equal to
the amount credited to his account (Sec. 60, NCBA).
Period of replacement
1. Notes for any series or denomination More than
5 years old
2. Coins More than 10 years old
NOTE: Coins which show signs of filing, clipping or
perforation and notes which have lost more than 2/5s of
their surface or all of the signatures inscribed therein shall
be withdrawn from the circulation and demonitized
without compensation to the bearer.
Exercise of the power to determine rates of
exchange
1. The Monetary Board shall determine the rates at
which the BSP shall buy and sell spot exchange,
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
and shall establish deviation limits from the
effective exchange rate or rates as it may deem
proper.
2. The Monetary Board shall similarly determine
the rates for other types of foreign exchange
transactions by the BSP, including purchases and
sales of foreign notes and coins, but the margins
between the effective exchange rates and the
rates thus established may not exceed the
corresponding margins for spot exchange
transactions by more than the additional costs or
expenses involved in each type of transactions
(Sec. 74, NCBA).
Instances where the Banko Sentral may exercise its
exchange regulating powers
1. The international reserve of the BSP falls to a
level which the Monetary Board considers
inadequate to meet the prospective demands
2. Whenever the international reserve appears to
be in imminent danger of falling to such a level
3. Whenever the international reserve is falling as a
result of payments or remittances abroad which,
in the opinion of the Monetary Board are
contrary to the national welfare (Sec 67, NCBA).
Actions taken by the Bangko Sentral when
international stability of Peso is threatened
1. Take such remedial measures as are appropriate
and within the powers granted to the Monetary
Board, and the BSP.
2. Submit to the President of the Philippines and
the Congress, and make public a detailed report
which shall include, as a minimum, a description
and analysis of:
a. The nature and causes of the existing or
imminent decline;
b. The remedial measures already taken or to
be taken by the Monetary Board
c. The monetary, fiscal or administrative
measures further proposed
d. The character and extent of the cooperation
required from other government agencies
for the successful execution of the policies
of the Monetary Board (Sec. 67, NCBA).
Emergency restrictions on the foreign exchange
operations
1. Temporarily suspending and restricting sales of
foreign exchange by the BSP;
2. Subjecting all transactions in gold and foreign
exchange to license by the BSP;
284
 BANKING LAWS
3. Requiring that any foreign exchange thereafter
obtained by any person residing or entity operating in
the Philippines be delivered to the BSP or to any bank
or agent designated by the BSP for said purpose, at
the effective exchange rate or rates (Sec. 72, NCBA).
NOTE: To ensure sufficiency of foreign exchange
resources, convertibility of the peso, and promotion
of domestic investment of bank resource, the
Monetary Board may require the banks to sell to the
BSP or to other banks all or part of their surplus
holdings of foreign exchange. (Sec. 76, NCBA)
Q: X maintains a savings deposit in the amount of
Php1 Million with ABC Bank Corporation. X also has
obtained a loan from ABC Bank Corporation in the
amount of Php1 Million. In case of default - (2012
Bar Question)
a. ABC Bank can set-off the loan from the savings
account being maintained by X with ABC Bank.
b. Set-off is not possible because legal
compensation is not allowed in banking
transaction.
c. Deposit accounts are usually earmarked for
specific purpose hence offsetting is not legally
possible.
d. Off -setting is not possible because the
obligation of X is a "simple loan".
A: A. The relationship between a bank and its
depositor is that of creditor and debtor. For this
reason, a bank has the right to set-off the deposits in
its hands for the payment of a depositors
indebtedness (Equitable PCI Bank vs. Ng Sheung
Ngor, et al., 171545, Dec. 19, 2007).
LAW ON SECRECY OF BANK
DEPOSITS
(R.A. 1405)
PURPOSE
The purposes of RA 1405 are:
1. Encourage deposit in banking institutions; and
2. Discourage private hoarding so that banks may
lend such funds and assist in the economic
development of the country.
PROHIBITED ACTS
The following are the prohibited acts in RA 1405:
1. Examination/inquiry/looking into all deposits of
whatever nature with banks or banking
institutions in the Philippines (including
investment in bonds issued by the government)
285
by any person, government official or office (Sec.
2, RA 1405).
2. Disclosure by any official or employee of any
banking institution to any unauthorized person
of any information concerning said deposit (Sec.
3, RA 1405).
ACTS NOT COVERED BY THE PROHIBITION
Non-bank official or employee is not covered by the
prohibition. Neither is disclosure by a bank official or
employee of information about bank deposit in favor
of a co-employee in the course of the performance of
his duties is not covered by the prohibition.
DEPOSITS COVERED
Deposits covered by RA 1405
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines; or
2. Investments in bonds issued by the Philippine
government, its branches, and institutions.(Sec. 2,
R.A. 1405)
3. Trust accounts are included in the scope of the law.
Meaning of the phrase "of whatever nature and
kind"
RA 1405 is no longer limited to deposits governed by
the law on loans giving rise to creditor-debtor
relationship but it covers fund of whatever nature so
long as the bank may use and utilize it in authorized
loans.
Trust funds covered by the term deposit
The money deposited under the trust agreement
(Trust account) is intended not merely to remain
with the bank but to be invested by it elsewhere. To
hold that this type of account is not protected by R.A.
1405 would encourage private hoarding of funds that
could otherwise be invested by banks in other
ventures, contrary to the policy behind the law
(Ejercito vs. Sandiganbayan, 509 SCRA 590,G.R. No.
157294-95, Nov. 30, 2006).
NOTE: Despite such pronouncement that trust funds are
considered deposits, trust funds remain not covered by
PDIC.
Confidentiality granted by RA 1405 does NOT extend
to Letters of Credit and Trust Receipts
The confidentiality granted by the law does NOT
extend to other documents and records like L/Cs,
TRs, bank drafts and promissory notes (Opinion of
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
the Secretary of Justice No. 5, Series of 1982; Opinion
of the Secretary of Justice No. 126, Series of 1989).
EXCEPTIONS
Instances where examination or disclosure of
information about deposits can be allowed
1. Upon written consent of the depositor (Sec. 2, RA
1405)
2. In cases of impeachment (ibid)
3. Upon order of competent court in cases of bribery
or dereliction of duty of public officials (ibid)
4. In cases where the money deposited or invested is
the subject matter of the litigation (ibid)
5. Upon order of the Commissioner of Internal
Revenue in respect of the bank deposits of a
decedent for the purpose of determining such
decedents gross estate (Sec. 6[F][1], NIRC)
6. Upon the order of the Commissioner of Internal
Revenue in respect of bank deposits of a
taxpayer who has filed an application for
compromise of his tax liability by reason of
financial incapacity to pay his tax liability (ibid)
7. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of a
specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party (ibid)
8. In case of dormant accounts/deposits for at least
10 years under the Unclaimed Balances Act (Sec.
2, Act No. 3936)
9. The prohibition against examination of bank
deposit does not preclude its garnishment to
satisfy a judgment against the depositor (Oate
vs. Abrogar, 230 SCRA 181)
10. Presidential Commission on Good Government
may require the production of bank records
material to its investigation (Opinion of the
Secretary of Justice, Feb. 27, 1987)
11. The Anti-Money Laundering Council (AMLC) may
inquire into any deposit with any bank in case of
violation of the RA 9160 or the AMLA if there is
probable cause that it is related to an unlawful
activity (Sec. 11, RA 9160, as amended by RA
9194, 10167, and 10365)
12. The PDIC and the BSP may examine deposit
accounts and all information related to them in
case of a finding of unsafe or unsound banking
practices (Sec. 8, RA 3591, as amended)
13. With court order:
a. In cases of unexplained wealth under
Sec. 8 of the Anti-Graft and Corrupt
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Practices Act (PNB v. Gancayco, L-18343,
Sept. 30, 1965)
b. In cases filed by the Ombudsman and
upon the latters authority to examine
and have access to bank accounts and
records (Marquez v. Desierto, GR
138569, Sept. 11, 2003)
14. Without court order: If the AMLC determines
that a particular deposit or investment with any
banking institution is related to the following
(HK-MADS):
a. Hijacking,
b. Kidnapping,
c. Murder,
d. Destructive Arson, and
e. Violation of the Dangerous Drugs Act.
f. Acts of Terrorism or in violation of
Human Security Act.
15. In case the law is repealed, superseded or
modified by any law to the contrary.
Q: The Bank Secrecy Law (RA 1405) prohibits
disclosing any information about deposit records of
an individual without court order except - (2012 Bar
Question)
a. in an examination to determine gross
estate of a decedent.
b. in an investigation for violation of
Anti-Graft and Corrupt Practices.
c. in an investigation by the Ombudsman.
d. in an impeachment proceeding
A: C. In order that the Ombudsman may inspect a
bank deposit:
1. there must be a case pending in court,
2. the account must be clearly identified,
3. the inspection must be limited to the subject
matter of the pending case,
4. the inspection may cover only the account
identified, and
5. the bank personnel and the account holder must
be notified to be present during the inspection
(Marquez vs. Desierto, 359 SCRA 772; Office of
the Ombudsman vs. Ibay, 364 SCRA 281).
Foreign currency deposits
Foreign currency deposits are covered by R.A. 6426
otherwise known as the Foreign Currency Act.
Secrecy of foreign currency deposits
GR: Foreign currency deposits cannot be inquired or
look into. All foreign currency deposits are absolutely
confidential (Sec. 8, RA 6426).
286
 BANKING LAWS
XPNs:
1. The depositor has given his written permission
(ibid.)
2. Where the funds deposited in a joint foreign
currency savings account belonged exclusively to
one of the depositors and were held in trust for
him by the other depositor and the other
depositor unilaterally closed the joint account
and transferred the funds to her personal
account, the latter cannot invoke the exemption
from court processes under RA 6426 because she
is not the owner of the deposit in the account.
Consequently, the depositor who owned the
funds can have her enjoined from making
withdrawals from her personal account (Van
Twest vs. CA, 230 SCRA 42 [1994]).
3. A father who sued his daughter for illegally
withdrawing funds from his foreign currency
deposit and transferring to another bank in the
name of her sister, can inquire into the deposit of
the sister, because the money deposited belongs
to him (China Banking Corp. vs. CA, 511 SCRA
110).
4. The exemption from court process of foreign
currency deposits under RA 6426 cannot be
invoked by a foreign transient who raped a
minor, escaped and was held liable for damages
to the victim. The garnishment of his foreign
currency deposit should be allowed to prevent an
injustice and for equitable grounds. The law was
enacted to encourage foreign currency deposit
and not to benefit a wrongdoer (Salvacion vs.
Central Bank of the Philippines, 278 SCRA 27
[1997]).
5. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the
following:
a. A decedent to determine his estate; and
b. Any taxpayer who has filed for an application
for compromise of his tax liability
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (Sec. 6 [f], NIRC.)
6. AMLC may inquire into any deposit with a bank
or financial institution in case of violation of RA
9160 if there is probable cause that it is related
to an unlawful activity (Sec. 11, RA 9160).
7. Upon ex parte application by a law enforcer
authorized by the Anti-Terrorism Council, the
justices of the CA designated as special court to
handle anti-terrorism cases may authorize the
examination of deposits in a financial institution
upon finding probable cause of the commission
287
of terrorism or conspiracy to commit terrorism
(Sec. 27, 28, RA 9372).
8. PDIC and BSP may examine deposit accounts and
all information related to them in case of a
finding of unsafe or unsound banking practices
(Sec. 8, RA 3591, as amended).
9. AMLC can investigate (a) any property of funds
related to financing terrorism; (b) property or
funds of any person if there is probable cause to
believe he is committing or attempting or
conspiring to commit terrorism or financing
terrorism (Sec. 10, RA 10168).
Q: A, an individual, secured a loan from XYZ
Company. C, a surety company, issued a bond to
further secure the obligation. A has dollar deposits
with ABC Bank. Can C inquire to ABC Bank about the
foreign currency deposits of A to determine whether
or not the loan proceeds were used for the purpose
specified in their surety agreement?
A: No. The surety which issued the bond cannot
inquire into the foreign currency deposits. It cannot
be examined without the consent of the depositor
except in certain situations like violation of
anti-money laundering law (GSIS v. CA, G.R. No.
189206, June 8, 2011).
Q: X, a private individual, maintains a dollar deposit
with ABC Bank. X is suspected to be the leader of a
Kidnap for Ransom Gang and he is suspected of
depositing all ransom money in said deposit account
which are all in US Dollars. The police want to open
said account to know if there are really deposits in
big amounts. Which statement is most accurate?
(2012 Bar Question)
a. The same rules under Secrecy of Bank Deposit
Act will apply.
b. An approval from the Monetary Board is
necessary to open the account.
c. Because the deposit is in US Dollars, it is
covered by the Foreign Currency Deposit Act
which allows disclosure only upon the written
permission of the depositor.
d. Approval from the Court is necessary to order
disclosure of the account.(2012 Bar)
A: C. The deposit being in US Dollars, is covered by
the Foreign Currency Deposit Act which allows
disclosure only upon the written permission of the
depositor.
A bank can be compelled to disclose the records of
the accounts of a depositor under the investigation
for unexplained wealth
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Since cases of unexplained wealth are similar to cases
of bribery and dereliction of duty, no reason is seen
why it cannot be excepted from the rule making bank
deposits confidential. In this connection, inquiry into
illegally acquired property in anti-graft cases extends
to cases where such property is concealed by being
held or recorded in the name of other persons. This is
also because the Anti-Graft and Corrupt Practices Act,
bank deposits shall be taken into consideration in
determining whether or not a public officer has
acquired property manifestly out of proportion with
his lawful income (PNB v. Gancayco, G.R. No.
L-18343, Sept. 30, 1965).
In an action filed by the bank to recover the money
transmitted by mistake, the bank is allowed to
present the accounts which it believed were
responsible for the acquisition of the money
R.A. 1405 allows the disclosure of bank deposits in
cases where the money deposited is the subject
matter of litigation. In an action filed by the bank to
recover the money transmitted by mistake,
necessarily, an inquiry into the whereabouts of the
amount extends to whatever is concealed by being
held or recorded in the name of the persons other
than the one responsible for the illegal acquisition.
GARNISHMENT OF DEPOSITS, INCLUDING FOREIGN
DEPOSITS
Garnishment of a bank deposit does not violate the
law
The prohibition against examination or inquiry does
not preclude its being garnished for satisfaction of
judgment. 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 judgment creditor (PCIB v. CA, G.R. No. 84526, Jan.
28, 1991).
Garnishment of foreign currency deposits
GR: Foreign currency deposits shall be exempt from
attachment, garnishment, or any other order or
process of any court, legislative body, government
agency or any administrative body whatsoever (Sec 8.
R.A. 6426).
XPN:The application of Section 8 of R.A. 6426
depends on the extent of its justice. The garnishment
of a foreign currency deposit should be allowed to
prevent injustice and for equitable grounds,
otherwise, it would negate Article 10 of the New Civil
Code which provides that in case of doubt in the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
interpretation or application of laws, it is presumed
that the lawmaking body intended right and justice to
prevail (Salvacion vs. Central Bank of the Philippines,
G.R. 94723, August 21, 1997).
The foreign currency deposit of a transient foreigner
who illegally detained and raped a minor Filipina can
be garnished to satisfy the award for damages to the
victim
The exemption from garnishment of foreign currency
deposits under R.A. 6426 cannot be invoked to
escape liability for the damages to the victim. The
garnishment of the transient foreigners foreign
currency deposit should be allowed to prevent
injustice and for equitable grounds. The law was
enacted to encourage foreign currency deposit and
not to benefit a wrongdoer (Salvacion vs. Central
Bank of the Philippines, G.R. 94723, August 21, 1997).
Penalties for violation of R.A. 1405
1. Imprisonment of not more than five (5) years
2. Fine of not more than P20,000.00
3. Both, in the discretion of the court (Sec. 5, RA
1405).
GENERAL BANKING LAW OF 2000
(R.A. 8791)
Policy of the state behind the General Banking Act
(RA 8791)
The State recognizes the vital role of banks in
providing an environment conducive to the sustained
development of the national economy and the
fiduciary nature of banking that requires high
standards of integrity and performance. In
furtherance thereof, the State shall promote and
maintain a stable and efficient banking and financial
system that is globally competitive, dynamic and
responsive to the demands of a developing economy
(Sec 2, RA 8791).
DEFINITION AND CLASSIFICATION OF BANKS
Bank
A bank is an entity engaged in the lending of funds
obtained from the public in the form of deposits.
Elements for an entity to be considered doing
business as a bank
1. The entity is engaged in the lending of funds
288
 BANKING LAWS
2. Funds obtained from the public with at least 20 3. Thrift banks These are a) Savings and mortgage
depositors banks; b) Stock savings and loan associations; and c)
3. Funds are in the form of deposits Private development banks, which are primarily
governed by the Thrift Banks Act (R.A. 7906).
NOTE: A transaction involving not a loan but purchase of 4. Rural banks these are mandated to make needed
receivables at a discount within the purview of credit available and readily accessible in the rural
investing, areas on reasonable terms and which are primarily
reinvesting, or trading in securities which an investment governed by the Rural Banks Act of 1992 (RA 7353).
company may perform is not banking.
5. Cooperative banks banks whose majority shares
are owned and controlled by cooperatives primarily
Extent of ownership of foreign individuals and
to provide financial and credit services to
non-bank corporations in a bank
cooperatives. It shall include cooperative rural
banks. They are governed primarily by the
Foreign individuals may own or control up to forty
Cooperative Code (RA 6938).
percent (40%) of the voting stock of a domestic bank
6. Islamic banks Banks whose business dealings and
(Sec 2, GBL).
activities are subject to the basic principles and
rulings of Islamic Shari a, such as the Al Amanah
Extent of ownership of a non-banking corporations
Islamic Investment Bank of the Philippines which was
in a bank
created by RA 6848.
7. Other classification of banks as determined by the
GR: A corporation may only own 40% of the bank
Monetary Board of the Bangko Sentral ng Pilipinas.
XPNs:
1. A universal bank can own up to 100% of a thrift
bank
2. A corporation whose shares are listed in the stock
exchange can own up to 60% of the bank. This
privilege can be exercised only once.
3. If the corporation is in existence for 10 years it can
own up to 60% of the bank. This privilege can only
exercised once.
4. Under Foreign Bank Liberalization Law (RA 7721),
the Monetary Board may authorize foreign banks to
operate in the Philippines.

Ownership of foreign individuals in a bank

The percentage of foreign-owned voting stocks in a

bank shall be determined by the citizenship of the
individual stockholders in that bank. The citizenship
of the corporation which is a stockholder in a bank
shall follow the citizenship of the controlling
stockholders of the corporation, irrespective of the
place of incorporation (Sec 2).

Different classifications of banks

1. Universal banks - Primarily governed by the

General Banking Law (GBL). They can exercise the
powers of an investment house and invest in
non-allied enterprises and have the highest
capitalization requirement.
2. Commercial banks - Ordinary banks governed by
the GBL which have a lower capitalization
requirement than universal banks and can neither
exercise the powers of an investment house nor
invest in non-allied enterprises.

UNIVERSITY OF SANTO TOMAS

289 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Universal banks v. Commercial banks v. Thrift banks
UNIVERSAL BANKS
Governing Laws General Banking Law
(GBL)
Powers 1. Has the authority to
exercise the powers of a
commercial bank.
2. To act as an investment
house a corporation that
sells and guarantees sale
of securities and shares of
stocks. i.e. Petron will tap
an investment house in
order to sell its stocks.
3. To engage in a
non-allied undertaking
which is not related at all
to banking. e.g. Realty
Capitalization 4.95 Billion
Equity Investment Can be a stock holder in
both allied and non-allied
undertaking
Non- Allied Transaction Can invest but shall not
exceed 25% of the
investee (receiving)
corporation.
Total Amount of Not to exceed 50% of the
Investment Equity banks net worth.
Single Equity Investment Not to exceed 25% of banks net worth
DISTINCTION OF BANKS FROM QUASI-BANKS AND
TRUST ENTITIES
Quasi-bank
These are entities engaged in the borrowing of funds
through the issuance, endorsement or assignment
with recourse or acceptance of deposit substitutes for
purposes of re-lending or purchasing of receivables
and other obligations (Sec 4). Unlike banks,
quasi-banks do not accept deposits. Neither are funds
obtained insured with the PDIC.
Trust entities
These are entities engaged in trust business that act
as a trustee or administer any trust or hold property
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES 290
COMMERCIAL BANKS THRIFT BANKS
GBL Thrift Banks Act (R.A.
7906)
To engage in allied All the powers of a
undertakings and, in commercial bank, except:
addition to the general
powers incident to a 1. To issue imported LC
corporation, may exercise 2. To accept or open
all such powers as may be checking account except
necessary to carry on the with prior approval by the
business of commercial Monetary Board (MB
banking. requires at least a net
asset worth of 28M)
NOTE: Allied undertakings
are those activities or entities
which enhance or
complement banking.
2.4 Billion 1. Metro Manila 1 Billion
2. Cebu and Davao 500
Million
3. Elsewhere 250 Million
(BSP Circular No. 0715,
Apr 2011)
Only allied undertaking Only allied undertaking
Cannot invest Cannot invest
Not to exceed 35% of Not to exceed 35% of
banks net worth. banks net worth.
in trust or on deposit for the use, benefit, or behalf of
others (Sec. 79). A bank does not act as a trustee.
Financial intermediaries
Persons or entities whose principal functions include
the lending, investing, or placement of funds on
pieces of evidence 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.
Deposit substitutes
It is an alternative form of obtaining funds from the
public, other than deposits, through the issuance,
endorsement, or acceptance of debt instruments, for
the borrower's own account, for the purpose of
 BANKING LAWS
relending or purchasing of receivables and other
obligations. These instruments may include, but need
not be limited to, bankers acceptances, promissory
notes, participations, certificates of assignment and
similar instruments with recourse, and repurchase
agreements.
Q: XYZ Corporation is engaged in lending funds to
small vendors in various public markets. To fund the
lending, XYZ Corporation raised funds through
borrowings from friends and investors. Which
statement is most accurate? (2012 Bar Question)
a. XYZ Corporation is a bank.
b. XYZ Corporation is a quasi-bank.
c. XYZ Corporation is an Investment Company.
d. XYZ is none of the above.
A: B. XYZ Corporation is a quasi bank
BANK POWERS AND LIABILITIES
CORPORATE POWERS
1. All powers provided by the corporation code, like
issuance of stocks and entering into merger or
consolidation with other corporation or banks.
2. It can only acquire real property when it is needed
for business, in settlement of debt incurred in the
course of the business, property as may be
mortgaged to it to secure a debt in good faith and
property it may acquire during execution sale to
satisfy judgment. Banks cannot acquire real property
in settlement of a civil liability arising from crime.
3. A universal and commercial bank can both invest in
equity but only universal bank is allowed to invest in
equity of non-allied enterprises.
BANKING AND INCIDENTAL POWERS
Certificate of Authority to Register
This is a requirement before a bank may register or
amend their articles of incorporation with SEC. It is
issued by the Monetary Board. (sec. 14, GBL) The
following must be proven by the bank to satisfy the
Monetary Board and in order for the latter to grant
such certificate:
1. All requirements of existing laws and regulations to
engage in the business for which the applicant is
proposed to be incorporated have been complied
with
2. That the public interest and economic conditions,
both general and local, justify the authorization
3. The amount of capital, the financing, organization,
direction and administration, as well as the integrity
291
and responsibility of the organizers and
administrators reasonably assure the safety of
deposits and the public interest. (ibid).
General powers and functions of a bank
1. Accepting drafts and issuing letters of credit
2. Discounting and negotiating promissory notes,
drafts, bills of exchange and other instrument
evidencing debt
3. Accepting or creating demand deposits,
receiving other types of deposit and deposit
substitutes
4. Buying and selling FOREX and gold or silver
bullion
5. Acquiring marketable bonds and other debt
securities
6. Extending credit
7. Determination of bonds and other debt
securities eligible for investment including maturities
and aggregate amount of such investment, subject to
such rules as the Monetary Board may promulgate.
8. And all other powers as may be necessary to
carry on the business of a bank (Sec. 29, GBL).
Rules regarding the issuance of stocks by a bank
1. The Monetary Board may prescribe rules and
regulations on the types of stock a bank may issue.
2. Banks shall issue par value stocks only (Sec. 9, GBL).
3. GR: No bank shall purchase or acquire shares of its
own capital stock or accept its own shares as a
security for a loan.
XPN: When authorized by the Monetary Board.
NOTE: That in every case the stock so purchased or
acquired shall, within six months from the time of its
purchase or acquisition, be sold or disposed of at a public or
private sale. (Sec 10, GBL)
4. Foreign individuals and non-bank corporations may
own or control up to 40% of the voting stock of a
domestic bank. This rule shall apply to Filipinos and
domestic non-bank corporations.
NOTE: The percentage of foreign-owned voting stocks in a
bank shall be determined by the citizenship of the
individual stockholders in that bank. The citizenship of the
corporation which is a stockholder in a bank shall follow the
citizenship of the controlling stockholders of the
corporation, irrespective of the place of incorporation. (Sec
11, GBL)
5. Stockholdings of individuals related to each other
within the fourth degree of consanguinity or affinity,
legitimate or common-law, shall be considered family
groups or related interests and must be fully disclosed
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
in all transactions by such corporations or related
groups of persons with the bank. (Sec 12, GBL)
6. Two or more corporations owned or controlled by
the same family group or same group of persons
(Corporate Stockholdings)shall be considered related
interests and must be fully disclosed in all
transactions by such corporations or related group of
persons with the bank. (Sec 13, GBL)
Instances when a bank is prohibited from declaring
dividends
1. Its clearing account with the Bangko Sentral is
overdrawn; or
2. It is deficient in the required liquidity floor for
government deposits for five or more consecutive
days, or
3. It does not comply with the liquidity
standards/ratios prescribed by the Bangko Sentral for
purposes of determining funds available for dividend
declaration; or
4. It has committed a major violation as may be
determined by the Bangko Sentral (Sec. 57, GBL).
Independent directors in banks
Section 16 of the GBL provides for two (2).
Effect of merger or consolidation of banks to the
number of directors allowed
The number of directors may be more than 15 but
should not exceed 21 (Sec. 17, GBL).
Q: XXX Bank Corporation and ZZZ Corporation were
merged into XX ZZ Bank Corporation. So as not to
create any unnecessary conflict, all the former
directors of both banks wanted to be appointed
/elected as members of the Board of Directors of the
merged bank. Each bank used to have eleven (11)
members of the board. The maximum number of
directors of the merged bank is - (2012 Bar
Question)
a. 15;
b. 22;
c. 21;
d. 11.
A: C. In case of a merged bank, the maximum number
of directors is 21.
Limitation on the grant of compensation to the
directors by the Monetary Board
The Monetary Board may limit the grant of
compensation to the directors of a bank only in
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
exceptional cases and when the circumstances
warrant, such as but not limited to the following:
1. When a bank is under comptrollership or
conservatorship
2. When a bank is found by the Monetary Board to
be conducting business in an unsafe or unsound
manner
3. When a bank is found by the Monetary Board to
be in an unsatisfactory financial condition (Sec. 18,
GBL).
DILIGENCE REQUIRED BY BANKS
Degree of diligence required of banks in handling
deposits
Banks are expected to exercise extraordinary
diligence in its dealings with depositors.
Consequently, the diligence required of banks is more
than that of a Roman pater familias or a good father
of a family (PCI Bank v Balcameda G.R. No. 158143,
September 21, 2011).
Degree of diligence required of banks with its other
dealings
The diligence more than that of a Roman pater
familias only applies only to cases where banks act
under their fiduciary capacity, that is, as depositary of
the deposits of their depositors. The same degree of
diligence is not expected to be exerted by banks in
commercial transactions (Reyes v CA G.R. No. 118492.
August 15, 2001).
Effect when the teller gave the passbook to a wrong
person
Banks must exercise a high degree of diligence in
insuring that they return the passbook only to the
depositor of his authorized representative. For failing
to return the passbook to authorized representative
of the depositor, the bank presumptively failed to
observe such high degree of diligence in safeguarding
the passbook and insuring its return to the party
authorized to receive the same.
However, a banks liability may be mitigated by the
depositors contributory negligence such as allowing
a withdrawal slip signed by authorized signatories to
fall into the hands of an impostor (Consolidated Bank
and Trust Corporation vs. CA, GR No, 138569,
September 11, 2003).
Bank is liable when an employee encashed a check
without the required indorsement
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 BANKING LAWS
The fiduciary nature of the relationship between the
bank and the depositors must always be of
paramount concern (Philippine Savings Bank vs.
Chowking, G.R. No. 177526, July 04, 2008).
NATURE OF BANK FUNDS AND BANK DEPOSITS
Deposit function of banks
The function of the bank to receive a thing, primarily
money, from depositors with the obligation of safely
keeping it and returning the same.
Kinds of deposits between a bank and its depositors
1. As debtor-creditor:
2. Special Kinds of Deposits
a. Demand deposits all those liabilities of
banks which are denominated in the
Philippine currency and are subject to
payment in legal tender upon demand
by representation of checks.
b. Savings deposits the most common
type of deposit and is usually evidenced
by a passbook.
NOTE: The requirement of presentation of passbooks is
required by the Manual of Regulations for Banks. A bank
is negligent if it allows the withdrawal without requiring
the presentation of passbook (BPI v. CA, GR No. 112392,
Feb. 29, 2000).
c. Negotiable order of withdrawal account
(NOWA) Interest-bearing deposit
accounts that combine the payable on
demand feature of checks and
investment feature of saving accounts.
d. Time deposit an account with fixed
term; payment of which cannot be
legally required within such a specified
number of days.
3. As trustee-trustor:
NOTE: Trust account a savings account, established under
a trust agreement containing funds administered by the
bank for the benefit of the trustor or another person or
persons.
4. As agent-principal:
a. Deposit of checks for collection
b. Deposit for specific purpose
c. Deposit for safekeeping
Types of deposit accounts
1. Savings
293
2. Current
3. Time
NOTE: Deposit accounts may also be classified as:
1. Individual; or
2. Joint:
a. And account the signature of both
co-depositors are required for withdrawals.
b. And/or account either one of the
co-depositors may deposit and withdraw from
the account without the knowledge consent
and signature of the other.
Joint accounts may be subject of a survivorship agreement
whereby the co-depositors agree to permit either of them
to withdraw the whole deposit during their lifetime and
transferring the balance to the survivor upon the death of
one of them (Vitug v. CA, G.R. No. 82027, March 29, 1990).
Anonymous account
GR: Anonymous accounts or those under fictitious
names are prohibited (R.A. 9160 as amended by by
R.A. 9194; BSP Circular No. 251, July 21, 2000).
XPN: In case where numbered accounts is allowed
such as in foreign currency deposits. However,
banks/non-bank financial institutions should ensure
that the client is identified in an official or other
identifying documents (Sec. 8, R.A. 6426 as amended,
FCDA).
Nature of a bank deposit
All kinds of bank deposits are loan. The bank can
make use as its own the money deposited. Said
amount is not being held in trust for the depositor
nor is it being kept for safekeeping (Tang Tiong Tick v.
American Apothecaries, G.R. No. 43682, Mar. 31,
1938).
Mandamus will not lie in the enforcement of
obligations concerning deposit
All kinds of deposit are loans. Thus, the relationship
being contractual in nature, mandamus cannot be
availed of because mandamus will not lie to enforce
the performance of contractual obligations (Lucman
v. Alimatar Malawi, G.R. No. 159794, Dec. 19, 2006).
Contract between banks and depositors is not a
trust agreement
The fiduciary nature of the bank-depositor
relationship does not convert the contract between
banks and depositors to a trust agreement. Thus,
failure by the bank to pay the depositor is failure to
pay simple loan, and not a breach of trust
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
(Consolidated Bank and Trust Corp. v. CA, G.R. No.
138569, Sept. 11, 2003).
Nature of safety deposit box
The contract for the use of a safety deposit box
should be governed by the law on lease.
In the case of Sia vs. CA and Security Bank and Trust
Company and under the old banking law, a safety
deposit box is a special deposit. However, the new
General Banking Law, while retaining the renting of
safe deposit box as one of the services that the bank
may render, deleted reference to depository function
(Divina, Handbook on Philippine Commercial Law).
Q: After procuring a checking account, the depositor
issued several checks. He was surprised to learn
later that they had been dishonored for insufficient
funds. Investigation disclosed that deposits made by
the depositor were not credited to its account. Is the
bank liable for damages?
A: Yes, the depositor expects the bank to treat his
account with utmost fidelity, whether such account
consist only of a few hundred pesos or of millions.
The bank must record every single transaction
accurately, down to the last centavo, and as promptly
as possible. This has to be done if the account is to
reflect at any given time the amount of money the
depositor can dispose of as he sees fit, confident that
the bank will deliver it as and to whomever he
directs. A blunder on the part of the bank, such as the
dishonor of the check without good reason, can cause
the depositor not a little embarrassment if not also
financial loss and perhaps even civil and criminal
litigation (Simex Intl. v. CA, G.R. No. 88013, Mar. 19,
1990).
STIPULATION ON INTERESTS
Rules on stipulation of interests
Old rule
1. Central Bank Circular 416 12% per annum in
cases of:
a. Loans
b. Forbearance of money, goods and credits
c. Judgment involving such loan or forbearance, in the
absence of express agreement as to such rate of
interest
2. Interest accruing from unpaid interest interest
due shall earn interest from the time it is judicially
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
demanded although the obligation may be silent
upon this point.
New rule
Through Circular No. 799, the Monetary Board
declared that effective July 1, 2013 the rate of
interest for the loan or forbearance of any money,
goods or credits and the rate allowed in judgments, in
the absence of an express contract as to such rate of
interest, shall be 6 percent per annum (Section 1,
Circular 799, Seies of 2013 amending Section 2 of
Circular No. 905, Series of 1982).
This means that if the parties fail to state in writing
the interest payable on any of the transactions
mentioned, or on account of a court judgment
involving a related money claim, the imposable
interest is 6 percent every year.
A bank was forbidden by Central Bank to do
business is NOT obligated to pay interest on deposit
A bank lends money, engages in international
transactions, acquires foreclosed mortgaged
properties or their proceeds and generally engages in
other banking and financing activities in order that it
can derive income therefrom. Therefore, unless a
bank can engage in those activities from which it can
derive income, it is inconceivable how it can carry on
as a depository obligated to pay interest on money
deposited with it (Fidelity & Savings and Mortgage
Bank v. Cenzon, G.R. No. L-46208, Apr. 5, 1990).
GRANT OF LOANS AND SECURITY REQUIREMENTS
RATIO OF NET WORTH TO TOTAL RISK ASSETS
Net worth
The total of the unimpaired paid-in surplus, retained
earnings and undivided profit, net of valuation
reserves and other adjustments as may be required
by the BSP (Sec. 24.2).
Risked based capital
The minimum ratio prescribed by the Monetary
Board which the net worth of a bank must bear to its
total risk assets which may include contingent
accounts.
NOTE: The Monetary Board may require or suspend
compliance with such ratio whenever necessary for a
maximum period of one year and that such ratio shall be
applied uniformly to banks of the same category (Sec. 34).
294
 BANKING LAWS
Effect of non-compliance with the ratio
1. Distribution of net profits may be limited or
prohibited and MB may require that part or all of the
net profits be used to increase the capital accounts of
the bank until the minimum requirement has been
met; or
2. GR: Acquisition of major assets and making of new
investments may be restricted.
XPN: Purchases of evidence of indebtedness
guaranteed by the Government can be exempted
from restrictions (Sec. 34).
SINGLE BORROWERS LIMIT
Limitations imposed upon banks with respect to its
loan function
1. GR: Single borrowers limit The total amount of
loans, credit accommodations and guarantees that
the bank could grant should at no time exceed 25% of
the banks net worth (Sec 35.1, GBL).
XPN:
a. As the Monetary Board may otherwise prescribe
for reasons of national interest
b. Deposits of rural banks with government-owned
or controlled financial institutions like LBP, DBP,
and PNB.
2. The total amount of loans, credit accommodations
and guarantees prescribed in (a) may be increased by
an additional 10% of the net worth of such bank
provided that additional liabilities are adequately
secured by trust receipt, shipping documents,
warehouse receipts and other similar documents
which must be fully covered by an insurance (Sec.
35.2, GBL).
3. Loans and other credit accommodations secured by
REM shall not exceed 75% of the appraised value of
the real estate security plus 60% of the appraised
value of the insured improvements (Sec. 37, GBL)
CM/intangible property such as patents, trademarks,
etc. shall not exceed 75% of the appraised value of
the security (Sec. 38, GBL).
4. Loans being contractual, the period of payment
may be subject to stipulation by the parties. In the
case of amortization, the amortization schedule has
no fixed period as it depends on the project to be
financed such that if it was capable of raising
revenues, it should be at least once a year with a
grace period of 3 years if the project to be financed is
not that profitable which could be deferred up to 5
years if the project was not capable of raising
revenues (Sec. 44, GBL).
5. Loans granted to DOSRI:
a. Director
295
b. Officer
c. Stockholder, having at least 1% ownership over
the bank
d. Related Interests, such as DOSs spouses, their
relatives within the first degree whether by
consanguinity or affinity, partnership whereby
DOS is a partner or a corporation where DOS owns
at least 20%.
Exclusions from the aforesaid loan limitations
Non-risk loans, such as:
1. Loans secured by obligations of the Bangko Sentral
ng Pilipinas or the Philippine Government
2. Loans fully guaranteed by the Government
3. Loans covered by assignment of deposits
maintained in the lending bank and held in the
Philippines
4. Loans, credit accommodations and acceptances
under letters of credit to the extent covered by
margin deposits
5. Other loans or credit accommodations which the
MB may specify as non-risk items.
Joint and solidary signature (JSS) practice
It is a common banking practice requiring as an
additional security for a loan granted to a corporation
the joint and solidary signature of a major
stockholder or corporate officer of the borrowing
corporation (Security Bank v. Cuenca, G.R. No.
138544, Oct. 3, 2000).
RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND THEIR
RELATED INTERESTS)
Requirements that must be complied with in case of
DOSRI accounts
1. Procedural requirement - Loan must be approved
by the majority of all the directors not including the
director concerned. CB approval is not necessary;
however, there is a need to inform them prior to the
transaction. Loan must be entered in the books of the
corporation (Sec. 36).
2. Substantive requirement - Loan must not exceed
the paid in contribution and unencumbered deposits.
(Not to exceed 15% of the portfolio or 100% of the
net worth, whichever is lower) (Sec. 36 [4]).
In the case of Go v. BSP (October 23, 2009) it was
held that the requirements are: (1) Approval
requirement which means that the DOSRI transaction
must be approved by at least majority of the directors
excluding the director concerned. (2) Reportorial
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
requirement means that the transaction must be
recorder in the books of the bank and reported to the
BSP. (3) Ceiling requirement which means that the
amount of the loan shall not exceed the book valued
of the paid-in contribution and the amount of the
unencumbered deposits. Three different offenses are
committed by those who fail to observe the board
approval, reporting and ceiling requirements.

Effect of non-compliance with the foregoing

requirement

Violation of DOSRI is a crime and carries with it penal

sanction.

It does not make the transaction void but only

renders the responsible officers and directors
criminally liable. (Republic v. Sandiganbayan, 648
SCRA 58).

Transactions covered by the DOSRI regulation

The transactions covered are loan and credit

accommodation. Not being a loan, the ceiling will not
apply to lease and sale. However, it should still
comply with the procedural requirement.

Arms-length rule

It provides that any dealings of a bank with any of its

DOSRI shall be upon terms not less favorable to the
bank than those offered to others [Sec. 36 (2)].

The bank may terminate the loan and demand

immediate payment if the borrower used the funds
for purposes other than that agreed upon

If the bank finds that the borrower has not employed

the funds borrowed for the purpose agreed upon
between the bank and the borrower, the bank may
terminate the loan and demand immediate payment
(Banco de Oro v. Bayuga, G.R. No. L-49568, Oct. 17,
1979).

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2014 GOLDEN NOTES 296
 INTELLECTUAL PROPERTY LAWS
Intellectual Property Laws
INTELLECTUAL PROPERTY RIGHTS IN GENERAL
INTELLECTUAL PROPERTY RIGHTS
Coverage of intellectual property rights (CTG- IPLP)
1. Copyright and Related Rights;
2. Trademarks and Service Marks;
3. Geographic indications;
4. Industrial designs;
5. Patents;
6. Layout designs (Topographies) of Integrated
Circuits;
7. Protection of Undisclosed Information (TRIPS).
DIFFERENCES BETWEEN COPYRIGHTS, TRADEMARKS,
AND PATENT
Trademark v. Patent v. Copyright
INTELLECTUAL
DEFINITION
PROPERTIES
Any visible sign capable
of distinguishing the
goods (trademark) or
services (service mark) of
Trademark
an enterprise and shall
include a stamped or
marked container of
goods.
The name or designation
identifying or
Tradename
distinguishing an
enterprise.
Literary and artistic
works which are original
intellectual creations in
Copyright the literary and artistic
domain protected from
the moment of their
creation.
Any technical solution of
a problem in any field of
human activity which is
Patentable Inventions
new, involves an
inventive step and is
industrially applicable.
(Kho v. CA, G.R. No. 115758, Mar. 19, 2002)
297
TECHNOLOGY TRANSFER ARRANGEMENTS
Technology transfer arrangement
Contracts or agreements involving the transfer of
systematic knowledge for the manufacture of a
product, the application of the process, or rendering
of a service including management contracts; and the
transfer, assignment or licensing of all forms of
intellectual property rights, including licensing of
computer software except computer software
developed for mass market (Sec. 4.2, IPC).
Nature of technology transfer arrangement
Technology transfer arrangement is in the nature of a
Voluntary License Contract. It is a contract between
an intellectual property right owner (licensor) and a
second party (licensee), authorizing the latter to
commercially exploit the same intellectual property
right under specified terms and conditions (Salao,
2012 p. 34).
Undisclosed information
It is an information which:
1. Is a secret in the sense that it is not, as a body or in
precise configuration and assembly of components,
generally known among, or readily accessible to
persons within the circles that normally deal with the
kind of information in question.
2. Has commercial value because it is a secret
3. Has been subjected to reasonable steps under the
circumstances, by the person lawfully in control of
the information, to keep it a secret (Article 39, TRIPS
Agreement).
Nature of undisclosed information or trade secret
Those trade secrets are of a privileged nature. The
protection of industrial property encourages
investments in new ideas and inventions and
stimulates creative efforts for the satisfaction of
human needs. It speeds up transfer of technology
and industrialization, and theresby bring about social
and economic progress.
Verily, the protection of industrial secrets is
inextricably linked to the advancement of our
economy and fosters healthy competition in trade
(Air Philippines Corporation v. Pennswell, Inc., G.R.
No. 172835, Dec. 13, 2007).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
PATENTS
A set of exclusive rights conferred by the State to an
inventor or his legal successor, for a limited period of
time to exclude others from making, using, selling or
importing the invention within the territory of the
country that grants the patent, in exchange for the
disclosure of the invention to the public.
PATENTABLE INVENTIONS
Patentable inventions
Any technical solution of a problem in any field of
human activity which is new, involves an inventive
step and is industrially applicable. It may be, or may
relate to, a product, or process, or an improvement of
any of the foregoing (Sec. 21, IPC).
Product patent v. Process patent
PRODUCT PATENT PROCESS PATENT
The right to make, use, The right to restrain,
sell and import the prevent or prohibit any
product. unauthorized person or
entity from using the
process, and from
manufacturing, dealing in,
using, selling or offering for
sale, or importing any
product obtained directly
or indirectly from such
process. (Sec. 71, IPC)
Conditions for patentability (NIA)
1. Novelty An invention shall not be considered new
if it forms part of a prior art (Sec. 23, IPC).
2. Inventive step if, having regard to prior art, it is
not obvious to a person skilled in the art at the time of
the filing date or priority date of the application
claiming the invention.
3. Industrially Applicable An invention that can be
produced and used in any industry (Sec. 27, IPC).
Prior art
1. Everything which has been made available to the
public anywhere in the world, before the filing date
or the priority date of the application claiming the
invention
2. The whole contents of a published application,
filed or effective in the Philippines, with a filing or
priority date that is earlier than the filing or priority
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
date of the application. Provided, that the application
which has validly claimed the filing date of an earlier
application under Section 31 of the IPC, there shall be
a prior art with effect as of the filing date of such
earlier application: Provided further, that the
applicant or the inventor identified in both
applications are not one and the same (Sec. 24, IPC).
Coverage of patents
1. Invention creation of an object which does not
exist in nature; it requires novelty, inventive step and
industrial application for patentability.
2. Utility Model - any technical solution of 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. It is sometimes referred to as a device or
useful object.
3. Industrial Design the utility value or
ornamental/aesthetic aspect of a useful article
(Vicente Amador, Intellectual Property Fundamentals,
2007).
Rules on public disclosure
GR: When a work has already been made available to
the public, it shall be non-patentable for absence of
novelty.
XPNs: Non-prejudicial disclosure the disclosure of
information contained in the application during the
12-month period before the filing date or the priority
date of the application if such disclosure was made
by:
1. The inventor;
2. A patent office and the information was contained:
a. In another application filed by the inventor and
should have not have been disclosed by the office,
or
b. In an application filed without the knowledge or
consent of the inventor by a third party which
obtained the information directly or indirectly
from the inventor;
3. A third party which obtained the information
directly or indirectly from the inventor (Sec. 25, IPC).
Burden of proving want of novelty of an invention
The burden of proving want of novelty is on him who
avers it and the burden is a heavy one which is met
only by clear and satisfactory proof which overcomes
every reasonable doubt (Manzano v. CA, G.R. No.
113388, Sept. 5, 1997).
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 INTELLECTUAL PROPERTY LAWS
Inventive step
GR: An invention involves an inventive step if, having
regard to prior art, it is not obvious to a person skilled
in the art at the time of the filing date or priority date
of the application claiming the invention (Sec. 26,
IPC).
XPN: In the case of drugs and medicines, there is no
inventive step if the invention results from the mere
discovery of a new form or new property of a known
substance which does not result in the enhancement
of the known efficacy of that substance (Sec. 26.2, as
amended by R.A. 9502)
Test of non-obviousness
If any person possessing ordinary skill in the art was
able to draw the inferences and he constructs that
the supposed inventor drew from prior art, then the
latter did not really invent.
Person of ordinary skill
A person of ordinary skill is one who is presumed to:
1. Be an ordinary practitioner aware of what was
common general knowledge in the art at the
relevant date.
2. Have knowledge of all references that are
sufficiently related to one another and to the
pertinent art and to have knowledge of all arts
reasonably pertinent to the particular problems
with which the inventor was involved.
3. Have had at his disposal the normal means and
capacity for routine work and experimentation
(Rule 207 Rules and Regulations on Inventions).
Other forms of patentable inventions
1. Industrial design Any composition of lines or
colors or any three-dimensional form, whether or not
associated with lines or colors. Provided that such
composition or form gives a special appearance to
and can serve as pattern for an industrial product or
handicraft (Sec. 112, IPC).
NOTE: Generally speaking, an industrial design is the
ornamental or aesthetic aspect of a useful article (Amador ,
2007).
2. Integrated circuit A product, in its final form, or
an intermediate form, in which the elements, at least
one of which is an active elements and some of all of
the interconnections are integrally formed in and or
on a piece of material, and in which is intended to
perform an electronic function.
299
3. Layout design/topography The three dimensional
disposition, however expressed, of the elements, at
least one of which is an active element, and of some
or all of the interconnections of an integrated circuit,
or such a three-dimensional disposition prepared for
an integrated circuit intended for manufacture.
Registration is valid for 10 years without renewal
counted from date of commencement of protection.
4. Utility model A name given to inventions in the
mechanical field
Requisites for an invention to be considered as a
utility model
If it is new and industrially applicable. A model of
implement or tools of any industrial product even if
not possessed of the quality of invention but which is
of practical utility (Sec. 109.1, IPC).
Term of a utility model
7 years from date of filing of the application (Sec.
109.3, IPC).
NON-PATENTABLE INVENTIONS
Non-patentable inventions (PAD-SCAD)
1. Plant varieties or animal breeds or essentially
biological process for the production of plants or
animals. This provision shall not apply to
micro-organisms and non-biological and
microbiological processes
2. Aesthetic creations
3. Discoveries, scientific theories and mathematical
methods
4. Schemes, rules and methods of performing mental
acts, playing games or doing business, and programs
for computers
5. Anything which is Contrary to public order or
morality (Sec. 22, IPC as amended by R.A. 9502).
6. Methods for treatment of the human or Animal
body
7. In the case of Drugs and medicines, mere discovery
of a new form or new property of a known substance
which does not result in the enhancement of the
efficacy of that substance
Patentability of computer programs
GR: Computer programs are not patentable but are
copyrightable.
XPN: They can be patentable if they are part of a
process (e.g. business process with a step involving
the use of a computer program).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Q: Supposing Albert Einstein were alive today and
he filed with the Intellectual Property Office (IPO) an
application for patent for his theory of relativity
expressed in the formula E=mc2. The IPO
disapproved Einstein's application on the ground
that his theory of relativity is not patentable. Is the
IPO's action correct? (2006 Bar Question)
A: Yes, the IPO is correct because under the
Intellectual Property Code, discoveries, scientific
theories and mathematical methods, are classified to
be as "nonpatentable inventions". Einstein's theory
of relativity falls within the category of being a
non-patentable "scientific theory".
OWNERSHIP OF A PATENT RIGHT TO A PATENT
Persons entitled to a patent
1. Inventor, his heirs, or assigns (Sec 28, IPC).
2. Joint invention Jointly by the inventors (Sec. 28,
IPC).
3. Two or more persons invented separately and
independently of each other To the person who filed
an application ;
4. Two or more applications are filed the applicant
who has the earliest filing date or, the earliest priority
date. First to file rule (Sec. 29, IPC).
5. Inventions created pursuant to a commission
Person who commissions the work, unless otherwise
provided in the contract (Sec. 30.1, IPC).
6. Employee made the invention in the course of his
employment contract:
a. The employee, if the inventive activity is not a
part of his regular duties even if the employee
uses the time, facilities and materials of the
employer.
b. The employer, if the invention is the result of
the performance of his regularly-assigned duties,
unless there is an agreement, express or implied,
to the contrary (Sec. 30.2, IPC).
FIRST-TO-FILE RULE
First-to-file rule
The First-to-File rule states that:
1. If two (2) or more persons have made the
invention separately and independently of each
other, the right to the patent shall belong to the
person who filed an application for such invention, or
2. Where two or more applications are filed for the
same invention, to the applicant which has the
earliest filing date. (Sec. 29, IPC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Person who may apply for a patent
Any person who is a national or who is domiciled or
has a real and effective industrial establishment in a
country which is a party to any convention, treaty or
agreement relating to intellectual property rights or
the repression of unfair competition, to which the
Philippines is also a party, or extends reciprocal rights
to nationals of the Philippines by law ( Sec. 3, IPC).
Steps in the registration of a patent
The procedure for the grant of patent may be
summarized as follows: (FAFCS PuSGraPI)
1. Filing of the application
2. Accordance of the filing date
3. Formality examination
4. Classification and Search
5. Publication of application
6. Substantive examination
7. Grant of Patent
8. Publication upon grant
9. Issuance of certificate (Salao, 2008).
Manner of making disclosure
The application shall disclose the invention in a
manner sufficiently clear and complete for it to be
carried out by a person skilled in the art.
Claim
Defines the matter for which protection is sought.
Each claim shall be clear and concise, and shall be
supported by the description.
Abstract
A concise summary of the disclosure of the invention
as contained in the description, claims and merely
serves as technical information.
Unity of invention
The application shall relate to one invention only or
to a group of inventions forming a single general
inventive concept (Sec. 38.1). If several independent
inventions which do not form a single general
inventive concept are claimed in one application, the
application must be restricted to a single invention
(Sec. 38.2, IPC).
Concept of divisional applications
Divisional applications come into play when two or
more inventions are claimed in a single application
300
 INTELLECTUAL PROPERTY LAWS
but are of such a nature that a single patent may not
be issued for them. The applicant, is thus required to
divide, that is, to limit the claims to whichever
invention he may elect, whereas those inventions not
elected may be made the subject of separate
applications which are called divisional applications
(Smith-Kline Beckman Corp. v. CA, GR No. 126627,
Aug. 14, 2003).
INVENTIONS CREATED PURSUANT TO A
COMMISSION
Pursuant to a commission
The person who commissions the work shall own the
patent, unless otherwise provided in the contract.
Pursuant to employment
In case the employee made the invention in the
course of his employment contract, the patent shall
belong to:
(a) The employee, if the inventive activity is not
a part of his regular duties even if the
employee uses the time, facilities and
materials of the employer;
(b) The employer, if the inventive activity is the
result of the performance of his
regularly-assigned duties, unless there is an
agreement, express or implied, to the
contrary (Sec. 30, IPC).
Q. X works as a research computer engineer with
the Institute of Computer Technology, a government
agency. When not busy with his work, but during
office hours, he developed a software program for
law firms that will allow efficient monitoring of the
cases, which software is not at all related to his
work. Assuming the program is patentable, who has
the right over the patent? (2012 MCQ Bar Question
No.82)
A. X. In case the employee made the invention in the
course of his employment contract, the patent
belongs to the employee, if the inventive activity is
not part of his regular duties even if the employee
uses the time, facilities and materials of the
employer.
301
RIGHT OF PRIORITY
Priority date
An application for patent filed by any person who has
previously applied for the same invention in another
country which by treaty, convention, or law affords
similar privileges to Filipino citizens, shall be
considered as filed as of the date of filing the foreign
application (Sec. 31, IPC).
Note: Filing Date is accorded only when all the
requirements provided under Section 40 are present.
Priority Date comes into play when there is an application
for patent for the same invention that was filed in another
country (Salao, 2012).
Conditions in availing of priority date
1. The local application expressly claims priority;
2. It is filed within 12 months from the date the
earliest foreign application was filed; and
3. A certified copy of the foreign application together
with an English translation is filed within 6 months
from the date of filing in the Philippines (Sec. 31,
IPC).
Q: Leonard and Marvin applied for Letters Patent
claiming the right of priority granted to foreign
applicants. Receipt of petitioners application was
acknowledged by respondent Director on March 6,
1954. Their Application for Letters Patent in the US
for the same invention indicated that the
application in the US was filed on March 16, 1953.
They were advised that the "Specification" they had
submitted was "incomplete" and that responsive
action should be filed with them four months from
date of mailing, which was August 5, 1959. On July 3,
1962, petitioners submitted two complete copies of
the Specification. Director of patents held that
petitioners' application may not be treated as filed.
Is the director correct?
A: Yes, it is imperative that the application be
complete in order that it may be accepted. It is
essential to the validity of Letters Patent that the
specifications be full, definite, and specific. The
purpose of requiring a definite and accurate
description of the process is to apprise the public of
what the patentee claims as his invention, to inform
the Courts as to what they are called upon to
construe, and to convey to competing manufacturers
and dealers information of exactly what they are
bound to avoid. To be entitled to the filing date of the
patent application, an invention disclosed in a
previously filed application must be described within
the instant application in such a manner as to enable
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
one skilled in the art to use the same for a legally periods of five (5)
adequate utility (Boothe v. Director of Patents, G.R. years each. (Sec.
No. L-24919, Jan. 28, 1980). 118.2, IPC)

Rights conferred by a patent application after the

GROUNDS FOR CANCELLATION OF A PATENT
first publication
Grounds for cancellation of patents
The applicant shall have all the rights of a patentee
against any person who, without his authorization,
Any interested party may petition to cancel any
exercised any of the rights conferred under Section
patent or any claim or parts of a claim any of the
71 in relation to the invention claimed in the
following grounds: (NDCIS)
published patent application, as if a patent had been
granted for that invention, provided that the said
1. The invention is Not new or patentable;
person had:
2. The patent does not Disclose the invention in a
manner sufficiently clear and complete for it to be
1. Actual knowledge that the invention that he was
carried out by any person skilled in the art; or
using was the subject matter of a published
3. Contrary to public order or morality (IPC, Sec. 61.1).
application; or
4. Patent is found Invalid in an action for
2. Received written notice that the invention was the
infringement (IPC, Sec. 82)
subject matter of a published application being
5. The patent includes matters outside the Scope of
identified in the said notice by its serial number
the disclosure contained in the application (IPC, Sec
NOTE: That the action may not be filed until after the grant
21, Regulations on Inter Partes Proceeding, Sec.1).
of a patent on the published application and within four (4)
years from the commission of the acts complained of (Sec. Ground/s for cancellation that relate to some of the
46, IPC). claims or parts of the claim only

Effectivity of a patent Cancellation may be effected to such extent only.

(Sec. 61.2, IPC)
A patent shall take effect on the date of the
publication of the grant of the patent in the IPO Grounds for cancellation of a utility model (QCNO)
Gazette (Sec. 50.3, IPC).
1. The invention does not Qualify for registration as a
Duration of protection of an invention, utility model utility model
and industrial design 2. That the description and the claims do not Comply
with the prescribed requirements
FORM TERM OF 3. Any drawing which is Necessary for the
PROTECTION understanding of the invention has not been
furnished
INVENTION Letters 20 years from
4. That the Owner of the utility model registration is
patent date of filing of
not the inventor or his successor in title (IPC, Sec.
application 109.4).
without renewal.
(Sec. 54, IPC) Grounds for cancellation of an industrial design
UTILITY Utility 7 years from the
MODEL Model filing date of the 1. The subject matter of the industrial design is not
application registrable;
Registration
without renewal. 2. The subject matter is not new; or
(Sec. 109.3, IPC) 3. The subject matter of the industrial design extends
beyond the content of the application as originally
filed (IPC, Sec. 120).
INDUSTRIAL Certificate of 5 years from the
DESIGN registration filing date of the
application,
renewable for not
more than two (2)
consecutive

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2014 GOLDEN NOTES 302
 INTELLECTUAL PROPERTY LAWS
REMEDY OF THE TRUE AND ACTUAL INVENTOR
Remedies of persons not having the right to a patent
If a person other than the applicant is declared by
final court order or decision as having the right to a
patent, he may within 3 months after such decision
has become final:
1. Prosecute the application as his own
2. File a new patent application
3. Request the application to be refused; or
4. Seek cancellation of the patent (Sec.67.1, IPC).
Remedies of the true and actual inventor
If a person, who was deprived of the patent without
his consent or through fraud is declared by final court
order or decision to be the true and actual inventor,
the court shall order for his substitution as patentee,
or at the option of the true inventor, cancel the
patent, and award actual damages in his favor if
warranted by the circumstances (Sec. 68, IPC).
Publication of the court order
In the two circumstances aforementioned, the court
shall furnish the Office a copy of the order or decision
which shall be published in the IPO Gazette within
three (3) months from the date such order or
decision became final and executor, and shall be
recorded in the register of the Office (Sec. 69, IPC).
Time to file action in court
The actions indicated in Sections 67 and 68 shall be
filed within one (1) year from the date of publication
made in accordance with Sections 44 and 51,
respectively (Sec. 70, IPC).
Q: Cezar works in a car manufacturing company
owned by Joab. Cezar is quite innovative and loves
to tinker with things. With the materials and parts of
the car, he was able to invent a gas-saving device
that will enable cars to consume less gas. Francis, a
co-worker, saw how Cezar created the device and
likewise, came up with a similar gadget, also using
scrap materials and spare parts of the company.
Thereafter, Francis filed an application for
registration of his device with the Bureau of Patents.
Eighteen months later, Cezar filed his application for
the registration of his device with the Bureau of
Patents.
a. Is the gas-saving device patentable? Explain.
303
b. Assuming that it is patentable, who is entitled to
the patent? What, if any, is the remedy of the losing
party? (2005 Bar Question)
A:
a. Yes because it is new, it involves an inventive step
and it is industrially applicable.
b. Francis is entitled to the patent, because he had
the earlier filing date. The remedy of Cezar is to file a
petition in court for the cancellation of the patent of
Francis on the ground that he is the true and actual
inventor, and ask for his substitution as patentee.
RIGHTS CONFERRED BY A PATENT
Rights conferred by a patent
1. Subject matter is a product Right to restrain,
prohibit and prevent any unauthorized person or
entity from making, using, offering for sale, selling or
importing the product.
2. Subject matter is a process Right to restrain
prohibit and prevent any unauthorized person or
entity from manufacturing, dealing in, using, offering
for sale, selling or importing any product obtained
directly or indirectly from such process (Sec. 71, IPC).
3. Right to assign the patent, to transfer by
succession, and to conclude licensing contracts (Sec.
71.2, IPC).
Effectivity of the rights conferred by a patent
The rights conferred by a patent application take
effect after publication in the Official Gazette (Sec 46,
IPC).
LIMITATIONS OF PATENT RIGHTS
Limitations
1. In general
a. GR: If put on the market in the Philippines by the
owner of the product, or with his express
consent.
XPN: Drugs and medicines - introduced in the
Philippines or anywhere else in the world by the
patent owner, or by any party authorized to use
the invention (Sec. 72.1, as amended by R.A.
9502)
b. Where the act is done privately and on a
non-commercial scale or for a non-commercial
purpose. (Sec. 72.2, IPC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
c. Exclusively for experimental use of the invention
for scientific purposes or educational purposes
(experimental use provision). (Sec. 72.3, IPC)
d. Bolar Provision - In the case of drugs and
medicines, where the act includes testing, using,
making or selling the invention including any data
related thereto, solely for purposes reasonably
related to the development and submission of
information and issuance of approvals by
government regulatory agencies required under
any law of the Philippines or of another country
that regulates the manufacture, construction,
use or sale of any product. (Sec. 72.4, IPC)
e. Where the act consists of the preparation for
individual cases, in a pharmacy or by a medical
professional, of a medicine in accordance with a
medical prescription. (Sec. 72.5, IPC)
f. Where the invention is used in any ship, vessel,
aircraft, or land vehicle of any other country
entering the territory of the Philippines
temporarily or accidentally. (Sec. 72.5, IPC)
2. Prior user Person other than the applicant, who in
good faith, started using the invention in the
Philippines, or undertaken serious preparations to
use the same, before the filing date or priority date
of the application shall have the right to continue
the use thereof, but this right shall only be
transferred or assigned further with his enterprise
or business. (Sec. 73, IPC)
3. Use by Government A government agency or third
person authorized by the government may exploit
invention even without agreement of a patent
owner where:
a. Public interest, as determined by the appropriate
agency of the government, so requires; or
b. A judicial or administrative body has determined
that the manner of exploitation by owner of
patent is anti-competitive. (Sec. 74, IPC)
4. Reverse reciprocity of foreign law Any condition,
restriction, limitation, diminution, requirement,
penalty or any similar burden imposed by the law
of a foreign country on a Philippine national
seeking protection of intellectual property rights in
that country, shall reciprocally be enforceable upon
nationals of said country, within Philippine
jurisdiction. (Sec. 231, IPC)
Q: X invented a device which, through the use of
noise, can recharge a cellphone battery. He applied
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
for and was granted a patent on his device, effective
within the Philippines. As it turns out, a year before
the grant of X's patent, Y, also an inventor, invented
a similar device which he used in his cellphone
business in Manila. But X files an injunctive suit
against Y to stop him from using the device on the
ground of patent infringement. Will the suit
prosper? (2011 Bar Question)
A: No, since Y is a prior user in good faith.
Parallel importer
One which imports, distributes, and sells genuine
products in the market, independently of an exclusive
distributorship or agency agreement with the
manufacturer.
Doctrine of exhaustion
Also known as the doctrine of first sale, it provides
that the patent holder has control of the first sale of
his invention. He has the opportunity to receive the
full consideration for his invention from his sale.
Hence, he exhausts his rights in the future control of
his invention.
It espouses that the patentee who has already sold
his invention and has received all the royalty and
consideration for the same will be deemed to have
released the invention from his monopoly. The
invention thus becomes open to the use of the
purchaser without further restriction. (Adams v.
Burke, 84 U.S. 17, 1873)
Application of the doctrine of exhaustion in the
Philippine jurisdiction
GR: Patent rights are exhausted by first sale in the
Philippines (Domestic exhaustion).
XPN: On drugs and medicines: first sale in any
jurisdiction exhausts the rights of the owner thereof
(International exhaustion) (R.A. 9502).
PATENT INFRINGEMENT
Acts which constitute infringement of patent
1. Making, using, offering for sale, selling or importing
a patented product or a product obtained directly or
indirectly from a patented process; or
2. Use of a patented process without authorization of
the owner of the patent (Sec. 76, IPC).
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 INTELLECTUAL PROPERTY LAWS
THE TEST IN PATENT INFRINGEMENT
Test in patent infringement
1. Literal infringement Test Resort must be had, in
the first instance, to words of the claim. If the
accused matter clearly falls within the claim,
infringement is committed.
Minor modifications are sufficient to put the item
beyond literal infringement (Godines v. CA, G.R. No.
L-97343, Sept. 13, 1993).
2. Doctrine of Equivalents There is infringement
where a device appropriates a prior invention by
incorporating its innovative concept and, although
with some modification and change, performs
substantially the same function in substantially the
same way to achieve substantially the same result
(Ibid.).
3. Economic interest testwhen the
process-discoverers economic interest are
compromised, i.e., when others can import the
products that result from the process, such an act is
said to be prohibited.
Q: Does the use of a patented process by a third
person constitute an infringement when the alleged
infringer has substituted, in lieu of some unessential
part of the patented process, a well-known
mechanical equivalent?
A: Yes, under the doctrine of mechanical equivalents,
the patentee is protected from colorable invasions of
his patent under the guise of substitution of some
part of his invention by some well-known mechanical
equivalent. It is an infringement of the patent, if the
substitute performs the same function and was well
known at the date of the patent as a proper
substitute for the omitted ingredient (Gsell v.
Yap-Jue, G.R. No. L-4720, Jan. 19, 1909).
Meaning of equivalent device
It is such as a mechanic of ordinary skill in
construction of similar machinery, having the forms,
specifications and machine before him, could
substitute in the place of the mechanism described
without the exercise of the inventive faculty.
Doctrine of file wrapper estoppel
This doctrine balances the doctrine of equivalents.
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection, and
305
he may omit any additions that he was compelled to
add by patent office regulations.
Doctrine of contributory infringement
Aside from the infringer, anyone who actively induces
the infringement of a patent or provides the infringer
with a component of a patented product or of a
product produced because of a patented process
knowing it to be especially adapted for infringing the
patented invention and not suitable for substantial
non-infringing use is liable jointly and severally with
the infringer as a contributory infringer. It must be
proven that the product can only be used for
infringement purposes. If it can be used for legitimate
purposes, the action shall not prosper.
Remedies of the owner of the patent against
infringers
1. Civil action for infringement The owner may bring
a civil action with the appropriate Regional Trial
Court to recover from infringer the damages
sustained by the former, plus attorneys fees and
other litigation expenses, and to secure an
injunction for the protection of his rights. (Sec 76.2,
IPC) If the damages are inadequate or cannot be
reasonably ascertained with reasonable certainty,
the court may award by way of damages a sum
equivalent to reasonable royalty (Sec 76.3, IPC).
2. Criminal action for infringement If the
infringement is repeated, the infringer shall be
criminally liable and upon conviction, shall suffer
imprisonment of not less than six (6) months but
not more than three (3) years and/or a fine not less
than P100,000.00 but not more than P300,000.00
3. Administrative remedy Where the amount of
damages claimed is not less than P200,000.00, the
patentee may choose to file an administrative
action against the infringer with the Bureau of
Legal Affairs (BLA). The BLA can issue injunctions,
direct infringer to pay patentee damages, but
unlike regular courts, the BLA may not issue search
and seizure warrants or warrants of arrest.
4. Destruction of Infringing material- The court may,
in its discretion, order that the infringing goods,
materials and implements predominantly used in
the infringement be disposed of outside the
channels of commerce of destroyed, without
compensation (Sec.76.5, IPC).
Limitations to the civil/criminal action
1. No damages can be recovered for acts of
infringement committed more than four (4) years
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
before the filing of the action for infringement (Sec.
79, IPC).
2. The criminal action prescribes in three (3) years
from the commission of the crime (Sec. 84, IPC).
Persons who can file an action for infringement
1. The patentee or his successors-in-interest may file
an action for infringement (Creser Precision
Systems, Inc. v. CA, G.R. No. 118708, Feb. 2, 1998).
2. Any foreign national or juridical entity who meets
the requirements of Sec. 3 and not engaged in
business in the Philippines, to which a patent has
been granted or assigned, whether or not it is
licensed to do business in the Philippines (Sec. 77,
IPC).
DEFENSES IN ACTION FOR INFRINGEMENT
Defenses in action for infringement (IGNDC)
1. Invalidity of the patent (Sec. 81, IPC);
2. Any of the Grounds for cancellation of patents:
a. That what is claimed as the invention is not
New or patentable
b. That the patent does not Disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any person
skilled in the art; or
c. That the patent is Contrary to public order or
morality (Sec. 61, IPC).
3. Prescription
LICENSING
Modes of obtaining license to exploit patent rights
1. Voluntary licensing (Sec. 85, IPC) and
2. Compulsory licensing (Sec. 93, IPC).
VOLUNTARY LICENSING
Voluntary licensing
The grant by the patent owner to a third person of
the right to exploit a patented invention.
Rights of a licensor in voluntary licensing
In the absence of any provision to the contrary in the
technology transfer arrangement, the grant of a
license shall not prevent the licensor from granting
further licenses to third person nor from exploiting
the subject matter of the technology transfer
arrangement himself (Sec. 89, IPC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Prohibited clauses
1. Those which impose upon the licensee the
obligation to acquire from a specific source capital
goods, intermediate products, raw materials, and
other technologies, or of permanently employing
personnel indicated by the licensor;
2. Those pursuant to which the licensor reserves
the right to fix the sale or resale prices of the
products manufactured on the basis of the license;
3. Those that contain restrictions regarding the
volume and structure of production;
4. Those that prohibit the use of competitive
technologies in a non-exclusive technology transfer
agreement;
5. Those that establish a full or partial purchase
option in favor of the licensor;
6. Those that obligate the licensee to transfer for free
to the licensor the inventions or improvements that
may be obtained through the use of the licensed
technology;
7. Those that require payment of royalties to the
owners of patents for patents which are not used;
8. Those that prohibit the licensee to export the
licensed product unless justified for the protection of
the legitimate interest of the licensor such as exports
to countries where exclusive licenses to manufacture
and/or distribute the licensed product(s) have already
been granted;
9. Those which restrict the use of the technology
supplied after the expiration of the technology
transfer arrangement, except in cases of early
termination of the technology transfer arrangement
due to reason(s) attributable to the licensee;
10. Those which require payments for patents and
other industrial property rights after their expiration,
termination arrangement;
11. Those which require that the technology
recipient shall not contest the validity of any of the
patents of the technology supplier;
12. Those which restrict the research and
development activities of the licensee designed to
absorb and adapt the transferred technology to local
conditions or to initiate research and development
programs in connection with new products, processes
or equipment;
13. Those which prevent the licensee from adapting
the imported technology to local conditions, or
introducing innovation to it, as long as it does not
impair the quality standards prescribed by the
licensor;
14. Those which exempt the licensor for liability for
non-fulfilment of his responsibilities under the
technology transfer arrangement and/or liability
arising from third party suits brought about by the
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 INTELLECTUAL PROPERTY LAWS
use of the licensed product or the licensed
technology; and
15. Other clauses with equivalent effects (Sec. 87,
IPC).
Exception on prohibited clauses
In exceptional or meritorious cases where substantial
benefits will accrue to the economy, such as high
technology content, increase in foreign exchange
earnings, employment generation, regional dispersal
of industries and/or substitution with or use of local
raw materials, or in the case of Board of Investments,
registered companies with pioneer status, exemption
from any of the above requirements may be allowed
by the Documentation, Information and Technology
Transfer Bureau after evaluation thereof on a case by
case basis (Sec. 91, IPC).
Mandatory provisions
1. That the laws of the Philippines shall govern the
interpretation of the same and in the event of
litigation, the venue shall be the proper court in
the place where the licensee has its principal
office;
2. Continued access to improvements in techniques
and processes related to the technology shall be
made available during the period of the
technology transfer arrangement;
3. In the event the technology transfer
arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration Law
of the Philippines or the Arbitration Rules of the
United Nations Commission on International
Trade Law (UNCITRAL) or the Rules of
Conciliation and Arbitration of the International
Chamber of Commerce (ICC) shall apply and the
venue of arbitration shall be the Philippines or
any neutral country; and
4. The Philippine taxes on all payments relating to
the technology transfer arrangement shall be
borne by the licensor (Sec. 88, IPC).
Effect of non-conformance with the prohibited
clauses and mandatory provisions
GR: Non-conformance shall automatically render the
technology transfer arrangement unenforceable.
XPN: Unless said technology transfer arrangement is
approved and registered with the Documentation,
Information and Technology Transfer Bureau under
the provisions of Section 91 on exceptional cases
(Sec. 92, IPC).
307
COMPULSORY LICENSING
Jurisdiction
1. The Director of Legal Affairs may grant a license
to exploit a patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit
the invention (Sec. 93, IPC).
2. R.A. 9502 (Universally Accessible Cheaper and
Quality Medicines Act of 2008) however
amended Sec. 93 so that it is the Director
General of the IPO who may grant a license to
exploit patented invention under the grounds
enumerated therein.
NOTE: Clarification either by legislation of judicial
interpretation as to who has jurisdiction should be made to
avoid confusion (Salao, 2012).
Grounds for compulsory licensing and the period for
filing a petition
1. National emergency or other circumstances of
extreme urgency
2. Where the public interest, in particular, national
security, nutrition, health or the development of
other vital sectors of the national economy as
determined by the appropriate agency of the
Government, so requires; at any time after the
grant of the patent
3. Where a judicial or administrative body has
determined that the manner of exploitation by
the owner of the patent or his licensee is
anti-competitive at any time after the grant of
the patent
4. In case of public non-commercial use of the
patent by the patentee, without satisfactory
reason at any time after the grant of the patent
5. If the patented invention is not being worked in
the Philippines on a commercial scale, although
capable of being worked, without satisfactory
reason after the expiration of 4 years from the
date of filing of the application or 3 years from
the date of the patent whichever is later (Sec. 93
in relation to Sec. 94)
6. Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as determined
by the Secretary of the Department of Health
(Sec. 10, RA 9502).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
When requirement to obtain a license on reasonable
commercial terms not applicable
1. Where the petition for compulsory license seeks to
remedy a practice determined after judicial or
administrative process to be anti-competitive;
2. In situations of national emergency or other
circumstances of extreme urgency;
3. In cases of public non-commercial use; and
4. In cases where the demand for the patented drugs
and medicines in the Philippines is not being met
to an adequate extent and on reasonable terms,
as determined by the Secretary of the
Department of Health (R.A. 8293, Sec. 95 as
amended by R.A. 9502).
Terms and condition of a compulsory license
1. The scope and duration of such license shall be
limited to the purpose for which it was
authorized;
2. The license shall be non-exclusive;
3. The license shall be non-assignable, except with
that part of the enterprise or business with which
the invention is being exploited;
4. Use of the subject matter of the license shall be
devoted predominantly for the supply of the
Philippine market: Provided, That this limitation
shall not apply where the grant of the license is
based on the ground that the patentee's manner
of exploiting the patent is determined by judicial
or administrative process, to be anti-competitive.
5. The license may be terminated upon proper
showing that circumstances which led to its grant
have ceased to exist and are unlikely to recur:
Provided, That adequate protection shall be
afforded to the legitimate interest of the
licensee; and
6. The patentee shall be paid adequate
remuneration taking into account the economic
value of the grant or authorization, except that in
cases where the license was granted to remedy a
practice which was determined after judicial or
administrative process, to be anti-competitive,
the need to correct the anti-competitive practice
may be taken into account in fixing the amount
of remuneration.
NOTE: The patent owner receive royalties in losing his
property rights because of the compulsory licensing.
Amendment of compulsory license
Upon the request of the patentee or the
licensee, the Director of Legal Affairs may
amend the decision granting the compulsory
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
license, upon proper showing of new facts or
circumstances justifying such amendment.
Cancellation of complusory license
Upon the request of the patentee, the
Director may cancel the compulsory license:
(a) If the ground for the grant of the
compulsory license no longer exists and is
unlikely to recur;
(b) If the licensee has neither begun to
supply the domestic market nor made
serious preparation therefor;
(c) If the licensee has not complied with the
prescribed terms of the license;
Surrender of compulsory license
The licensee may surrender the license by a
written declaration submitted to the Office.
NOTE: The said Director shall cause the
amendment, surrender, or cancellation in the
Register, notify the patentee, and/or the licensee,
and cause notice thereof to be published in the
IPO Gazette.
Licensees exemption from liability
Any person who works a patented product,
substance and/or process under a license
granted under this Chapter, shall be free
from any liability for infringement: Provided
however, That in the case of voluntary
licensing, no collusion with the licensor is
proven. This is without prejudice to the right
of the rightful owner of the patent to
recover from the licensor whatever he may
have received as royalties under the license
(Sec. 102, IPC).
.
ASSIGNMENT AND TRANSMISSION OF RIGHTS
Forms of assignment
1. Total assignment of entire right, title or interest
in and to the patent and the invention covered
thereby.
2. Partial
a. Separate rights assignment of a specific right
(ex: right to sell)
b. Pro Indiviso assignment of an aliquot part
which results in co-ownership
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 INTELLECTUAL PROPERTY LAWS
Manner of effecting transfer of rights
Trademark v. Tradename
1. By inheritance or bequest
2. License contract TRADEMARK TRADE NAME
A natural or artificial
Effect of an assignment of a patent Goods or services offered
person who does
by a proprietor or
business and produces or
The assignment works as an estoppel by deed, enterprise are
performs the goods or
preventing the assignor from denying the novelty and designated by trademark
services designated by
utility of the patented invention when sued by the (goods) or service marks
trademark or service
assignee for infringement. (services).
mark.
Refers to business and its
Form of an assignment Refers to the goods.
goodwill.
Acquired only by
1. In writing Need not be registered.
registration.
2. Acknowledged and certified before a notary public
or other officer authorized to perform notarial Collective mark and collective trade-name
acts
3. Recorded in the IPO A "collective mark" is any visible sign designated as
such in the application for registration and capable of
Effect if the assignment was not recorded in the IPO distinguishing the origin or any other common
characteristic, including the quality of goods or
A deed of assignment affecting title shall be void as services of different enterprises (Sec. 121.2, RA
against any subsequent purchaser or mortgagee for 8293).
valuable consideration and without notice unless, it is
so recorded in the Office, within three (3) months An application for registration of a collective mark
from the date of said instrument, or prior to the shall designate the mark as a collective mark and shall
subsequent purchase or mortgage. However, even be accompanied by a copy of the agreement, if any,
without recording, the instruments are binding upon governing the use of the collective mark. (Sec.
the parties. 167.2[a])

Maintenance of a suit for infringement by a licensee Functions of trademark

GR: A licensee may NOT maintain a suit for
infringement. Only the patentees, his heirs, assignee,
grantee or personal representatives may bring an
action for infringement.
XPN: If the licensing agreement provides that the
licensee may bring an action for infringement or if he
was authorized to do so by the patentee through a
special power of attorney.
TRADEMARKS
DEFINITION OF MARKS, COLLECTIVE MARKS, TRADE
NAMES
Trademark
Any visible sign capable of distinguishing the goods
(trademark) or services (service mark) of an
enterprise (Sec 121.1, IPC). A trade name is a name or
designation identifying or distinguishing an
enterprise.
1. To point out distinctly the origin or ownership of
the articles to which it is affixed.
2. To secure to him who has been instrumental in
bringing into market a superior article or
merchandise the fruit of his industry and skill
3. To prevent fraud and imposition (Etepha v. Director
of Patents, G.R. No. L-20635, Mar. 31, 1966).
Salient features of the Paris convention for the
protection of industrial property
1. National Treatment Principle foreign nationals are
to be given the same treatment in each of the
member countries as that country makes
available in its own citizens.
2. Right of Priority any person who has duly filed
registration for trademark shall enjoy a right of
priority of 6 months (Rule 203, Trademark Rules)
3. Protection against Unfair Competition
4. Protection of Tradenames protected in all
countries without obligation of filing or
registration.
5. Protection of Well-Known Marks

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309 FACULTY OF CIVIL LAW
 MERCANTILE LAW
6. Most favored nation treatment - any advantage,
favour, privilege or immunity granted by a
Member to the nationals of any other country
shall be accorded immediately and
unconditionally to the nationals of all other
Members.
ACQUISITION OF OWNERSHIP OF MARK
Acquisition of marks
Marks are acquired solely through registration (Sec.
122, IPC).
NOTE: Registration, without more, does not confer upon
the registrant an absolute right to the registered mark. The
certificate of registration is merely a prima facie proof that
the registrant is the owner of the registered mark or trade
name. Evidence of prior and continuous use of the mark or
trade name by another can overcome the presumptive
ownership of the registrant and may very well entitle the
former to be declared owner in an appropriate case.
Marks which may be registered
Any word, name, symbol, emblem, device, figure,
sign, phrase, or any combination thereof except those
enumerated under Section 123, IPC.
Requirements for a mark to be registered
1. A visible sign (not sounds or scents); and
2. Capable of distinguishing ones goods and services
from another.
Division of application
Any application referring to several goods or services,
hereafter referred to as the "initial application," may
be divided by the applicant into two (2) or more
applications, hereafter referred to as the "divisional
applications," by distributing among the latter the
goods or services referred to in the initial application.
The divisional applications shall preserve the filing
date of the initial application or the benefit of the
right of priority (Sec. 129, IPC).
Priority right
An application for registration of a mark filed in the
Philippines by a person referred to in Section 3, and
who previously duly filed an application for
registration of the same mark in one of those
countries, shall be considered as filed as of the day
the application was first filed in the foreign country.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
No registration of a mark in the Philippines by a
person described in Section 131 shall be granted until
such mark has been registered in the country of
origin of the applicant.
Nothing in the said section shall entitle the owner of
a registration granted under this section to sue for
acts committed prior to the date on which his mark
was registered in this country: Provided, That,
notwithstanding the foregoing, the owner of a
well-known mark as defined in Section 123.1(e) of
this Act, that is not registered in the Philippines, may,
against an identical or confusingly similar mark,
oppose its registration, or petition the cancellation of
its registration or sue for unfair competition, without
prejudice to availing himself of other remedies
provided for under the law.
In like manner and subject to the same conditions
and requirements, the right provided in this section
may be based upon a subsequent regularly filed
application in the same foreign country: Provided,
That any foreign application filed prior to such
subsequent application has been withdrawn,
abandoned, or otherwise disposed of, without having
been laid open to public inspection and without
leaving any rights outstanding, and has not served,
nor thereafter shall serve, as a basis for claiming a
right of priority.
Doctrine of secondary meaning
This doctrine is to the effect that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because it is
geographical or otherwise descriptive, may
nevertheless be used exclusively by one producer
with reference to his article so long as in that trade
and to that branch of the purchasing public, the word
or phrase has come to mean that the article was his
product (G. and C. Merriam Co. v. Saalfield, 198 F.
369, 373, cited in Ang v. Teodoro, G.R. No. L-48226,
Dec. 14, 1942).
Q: Is there an infringement of trademark when two
similar goods use the same words, PALE PILSEN?
A: None, because pale pilsen are generic words
descriptive of the color (pale) and of a type of beer
(pilsen), which is a light bohemian beer with strong
hops flavor that originated in the City of Pilsen in
Czechoslovakia. Pilsen is a primarily geographically
descriptive word, hence, non-registrable and not
appropriable by any beer manufacturer(Asia Brewery,
Inc. v. CA, G.R. No. 103543, July 5, 1993).
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 INTELLECTUAL PROPERTY LAWS
Person who may file an opposition to trademark
registration and grounds for filing the same
Any person who believes that he would be damaged
by the registration of a mark may, upon payment of
the required fee and within thirty (30) days after the
publication referred to in Subsection 133.2, file with
the Office an opposition to the application (Sec. 134,
IPC).
ACQUISITION AND OWNERSHIP OF TRADE NAME
Acquisition of trade names
Trade names or business names are acquired through
adoption and use. Registration is not required (IPC,
Sec. 165). It is the actual use in commerce or business
is a pre-requisite to the acquisition of the right of
ownership (Shangri-la Hotel Management Ltd. v
Developers Group of companies, May 10, 2006 G.R.
No. 159938).
Q: Can a previously used trade name of a business in
a foreign country bar its appropriation by another in
the Philippines?
A: Yes. The IPC does not require that the actual use of
a trademark must be within the Philippines. For a
person to have ownership of a mark, the mark must
not have been already appropriated (i.e., used) by
someone else. The Intellectual Property Code (IPC)
embodies the firm resolve of the Philippines to
observe and follow the Paris Convention (Shangri-la
Hotel Management Ltd. v Developers Group of
companies, supra).
NON-REGISTRABLE MARKS
Non-registrable marks (IFNIIIM-GCDS)
1. Consists of Immoral, deceptive or scandalous
matter or falsely suggest a connection with
persons, institutions, beliefs, or national symbols
2. Consists of the Flag or coat of arms or other
insignia of the Philippines or any of its political
subdivisions, or of any foreign nation
3. Consists of a Name, portrait or signature
identifying a particular living individual except by
his written consent, or the name, signature, or
portrait of a deceased President of the
Philippines, during the life of his widow except by
written consent of the widow
4. Identical with a registered mark belonging to a
different proprietor or a mark with an earlier
filing or priority date, in respect of:
\a. The same goods or services, or
311
b. Closely related goods or services, or
c. If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
5. Is Identical with an internationally well-known
mark, whether or not it is registered here, used
for identical or similar goods or services
6. Is Identical with an internationally well-known
mark which is registered in the Philippines with
respect to non-similar goods or services.
Provided, that the interests of the owner of the
registered mark are likely to be damaged by such
use
7. Is likely to Mislead the public as to the nature,
quality, characteristics or geographical origin of
the goods or services
8. Consists exclusively of signs that are Generic for
the goods or services that they seek to identify
9. Consists exclusively of signs that have become
Customary or usual to designate the goods or
services in everyday language and established
trade practice
10. Consists exclusively that may serve in trade to
Designate the kind, quality, quantity, intended
purpose, value, geographical origin, time or
production of the goods or rendering of the
services, or other characteristics of the goods or
services
11. Consists of Shapes that may be necessitated by
technical factors or by the nature of the goods
themselves or factors that affect their intrinsic
value
12. Consists of Color alone, unless defined by a given
form; or
13. Is Contrary to public order or morality (Sec. 123,
IPC).
Q: Laberge, Inc., manufactures and markets
after-shave lotion, shaving cream, and deodorants
using the trademark PRUT, which is registered
with the Intellectual Property Office. Laberge does
not manufacture briefs and underwear and these
items are not specified in the certificate of
registration. JG who manufactures briefs and
underwear, wants to know whether, under our laws,
he can use and register the trademark PRUTE for
his merchandise. Can JG register the trademark?
A: Yes. The trademark registered in the name of
Laberge, Inc covers only after-shave lotion, shaving
cream, deodorant, talcum powder and toilet soap. It
does not cover briefs and underwear. The limit of the
trademark is stated in the certificate issued to
Laberge Inc. It does not include briefs and underwear
which are different products protected by Larberges
trademark. JG can register the trademark PRUTE to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
cover its briefs and underwear (Faberge Inc v IAC,
G.R. No. 71189, November 4, 1992)
PRIOR USE OF MARK AS A REQUIREMENT
Prior use of the mark is NOT a requirement for
registration
Actual prior use in commerce in the Philippines has
been abolished as a condition for the registration of a
trademark (RA 8293).
Instances when non-use is excused
1. If caused by circumstances arising independently
of the will of the owner. Lack of funds is not an
excuse.
2. A use which does not alter its distinctive character
though the use is different from the form in which
it is registered.
3. Use of mark in connection with one or more of the
goods/services belonging to the class in which the
mark is registered.
4. The use of a mark by a company related to the
applicant/registrant.
5. The use of a mark by a person controlled by the
registrant (Section 152, IPC).
TEST TO DETERMINE CONFUSING SIMILARITY
BETWEEN MARKS
Test to determine confusing similarity between
marks
The tests in determining trademark infringement are
the following:
1. Dominancy and
2. Holistic Test
Dominancy Test
Dominancy test
Focuses on the similarity of the prevalent features of
the competing marks. If the competing trademark
contains the main or essential or dominant features
of another, and confusion is likely to result,
infringement takes place (Asia Brewery v. CA, G.R. No.
103543, 5 July 1993).
Duplication or imitation is not necessary; nor is it
necessary that the infringing label should suggest an
effort to imitate. The question is whether the use of
marks involved is likely to cause of confusion or
mistake in the mind of the public or deceive
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
purchasers (Sundiang & Aquino 2014 citing Societe
Des Produit Nestle S.A v. CA, 356 SCRA 207, 217)
Totality or Holistic test
Totality or holistic test
Confusing similarity is to be determined on the basis
of visual, aural, connotative comparisons and
overall impressions engendered by the marks in
controversy as they are encountered in the
marketplace.
NOTE: The dominancy test only relies on visual
comparisons between two trademarks whereas the totality
or holistic test relies not only on the visual but also on the
aural and connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl,
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
Q: N Corporation manufactures rubber shoes under
the trademark Jordann which hit the Philippine
market in 1985, and registered its trademark with
the Bureau of Patents, Trademarks and Technology
in 1990. PK Company also manufactures rubber
shoes with the trademark Javorski which it
registered with BPTTT in 1978. In 1992, PK Co
adopted and copied the design of N Corporations
Jordann rubber shoes, both as to shape and color,
but retained the trademark Javorski on its
products. May PK Company be held liable to N Co?
Explain. (1996 Bar Question)
A: PK Co may be liable for unfairly competing against
N Co. By copying the design, shape and color of N
Corporations Jordann rubber shoes and using the
same in its rubber shoes trademarked Javorski, PK
is obviously trying to pass off its shoes for those of N.
It is of no moment that the trademark Javorski was
registered ahead of the trademark Jordann.
Priority in registration is not material in an action for
unfair competition as distinguished from an action for
infringement of trademark. The basis of an action for
unfair competition is confusing and misleading
similarity in general appearance, not similarity of
trademarks. (Converse Rubber Co. v. Jacinto Rubber &
Plastics Co., G.R. Nos. 27425, 30505, Apr. 28, 1980)
Q: The Test of Dominancy in the Law on
Trademarks, is a way to determine whether there
exist an infringement of a trademark by --- (2012
MCQ Bar Question)
A: Focusing on the similarity of the prevalent features
of the competing trademarks that might cause
confusion (Amador, 2007)
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 INTELLECTUAL PROPERTY LAWS
Principle of related goods
Goods are related when they:
1. Belong to the same class or have the same
descriptive properties; or
2. When they possess the same physical attributes or
essential characteristics with reference to their
form, composition, texture or quality.
Rule of idem sonans
Two names are said to be "idem sonantes" if the
attentive ear finds difficulty in distinguishing them
when pronounced (Martin v. State, 541 S.W. 2d 605).
Applicability of idem sonans rule
Similarity of sound is sufficient to rule that the two
marks are confusingly similar when applied to
merchandise of the same descriptive properties
(Marvex Commercial v. Director of Patent, G.R. No.
L-19297, Dec. 22, 1966).
Types of confusion that arise from the use of similar
or colorable imitation marks
1. Confusion of goods/product confusion - there is
confusion of goods when the products are competing
2. Confusion of business/source or origin confusion -
the products are non-competing but related enough
to produce confusion of affiliation (McDonalds Corp.
v. L.C. Big Mak Burger, Inc., G.R. No. 143993, Aug.
18, 2004).
Colorable imitation
Such a close or ingenious imitation as to be calculated
to deceive ordinary persons, or such a resemblance
to the original as to deceive an ordinary purchaser
giving such attention as a purchaser usually gives, as
to cause him to purchase the one supposing it to be
the other (Societe des Produits Nestl, S.A. v. CA, G.R.
No. 112012, Apr. 4, 2001).
WELL-KNOWN MARKS
Internationally well-known mark
The following constitutes internationally
well-known mark
1. Considered by the competent authority of the
Philippines to be well-known internationally and in
the Philippines as the mark of a person other than the
applicant or registrant
313
2. Need not be used or registered in the Philippines
3. Need not be known by the public at large but only
by relevant sector of the public.
Rules regarding internationally-well known marks
GR: Prohibition on subsequent registration does not
include services and goods of different nature or kind.
XPNs:
1. If the internationally well-known mark is not
registered in the Philippines, the application for
registration of a subsequent or similar mark can be
rejected only if the goods or services specified in the
application are similar to those of the internationally
well-known mark.
2. If the internationally well-known mark is registered
in the Philippines, the application for registration of a
psubsequent or similar mark can be refused even if
the goods or services specified in the application are
not identical or similar to those of the internationally
well-known mark.
Criteria for well-known brands
1. The duration, extent and geographical area of any
use of the mark, in particular, the duration, extent
and geographical area of any promotion of the mark,
including advertising or publicity and the
presentation, at fairs or exhibitions, of the goods
and/or services to which the mark applies.
2. The market share, in the Philippines and in other
countries, of the goods and/or services to which the
mark applies
3. The degree of the inherent or acquired distinction
of the mark
4. The quality-image or reputation acquired by the
mark
5. The extent to which the mark has been registered
in the world
6. The exclusivity of use attained by the mark in the
world
7. The commercial value attributed to the mark in the
world
8. The record of successful protection of the rights in
the mark
9. The outcome of litigations dealing with the issue of
whether the mark is a well-known mark
10. The presence of absence of identical or similar
marks validly registered for or used on identical or
similar goods or services and owned by persons other
than the person claiming that his mark is well-known
mark.
Provided further, that the mark is well-known
both internationally and in the Philippines (A.M. No.
10-3-10-SC)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
RIGHTS CONFERRED BY REGISTRATION
Certificate of registration prima facie evidence of
validity
A certificate of registration of a mark shall be prima
facie evidence of the validity of the registration, the
registrants ownership of the mark, and of the
registrants exclusive right to use the same in
connection with the goods or services and those that
are related thereto specified in the certificate (Sec.
138, IPC).
Issuance and publication of certificate
The certificate of registration shall be issued when
the period for filing the opposition has expired, or
when the Director of Legal Affairs shall have denied
the opposition, and upon payment of the required
fee (Sec. 136, IPC).
The registered mark shall be published, in the form
and within the period fixed by the Regulations. Marks
registered at the Office may be inspected free of
charge and any person may obtain copies thereof at
his own expense. This provision shall also be
applicable to transactions recorded in respect of any
registered mark (Sec. 138, IPC).
Duration of a certificate of trademark registration
A certificate of registration shall remain in force for
ten (10) years: Provided, That the registrant shall file
a declaration of actual use and evidence to that
effect, or shall show valid reasons based on the
existence of obstacles to such use, as prescribed by
the Regulations, within one (1) year from the fifth
anniversary of the date of the registration of the
mark. Otherwise, the mark shall be removed from the
Register by the Office (Sec, 145, IPC).
NOTE: The applicant or the registrant shall file a declaration
of actual use of the mark with evidence to that effect, as
prescribed by the Regulations within three (3) years from
the filing date of the application. Otherwise, the application
shall be refused or the mark shall be removed from the
Register by the Director (Sec. 124.2, IPC).
Renewal of registration
A certificate of registration may be renewed for
periods of ten (10) years at its expiration. Each
request for renewal of registration must be made
within 6 months before the expiration of the
registration or within 6 months after such expiration
on payment of the additional fee prescribed (Sec.
146, IPC).
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Rights of a registered mark owner
1. Protection against reproduction, or imitation or
unauthorized use of the mark (infringement of mark)
2. To stop entry of imported merchandise into the
country containing a mark identical or similar to the
registered mark
3. To transfer or license out the mark.
USE BY THIRD PARTIES OF NAMES, ETC. SIMILAR TO
REGISTERED MARK
Effect of use of indications by third parties for
purposes other than those for which the mark is
used
Registration of the mark shall not confer on the
registered owner the right to preclude third parties
from using bona fide their names, addresses,
pseudonyms, a geographical name, or exact
indications concerning the kind, quality, quantity,
destination, value, place of origin, or time of
production or of supply, of their goods or services.
INFRINGEMENT AND REMEDIES
Trademark infringement
Use without consent of the trademark owner of any
reproduction, counterfeit, copy or colorable
limitation of any registered mark or trade name. Such
use is likely to cause confusion or mistake or to
deceive purchasers or others as to the source or
origin of such goods or services, or Identity of such
business (Esso Standard Eastern v. CA, G.R. No.
L-29971, Aug. 31, 1982)
Elements to be established in trademark
infringement
1. That it is duly registered in the Intellectual Property
Office
2. The validity of the mark
3. The plaintiffs ownership of the mark
4. The use of the mark or its colorable imitation by
the alleged infringer results in likelihood of
confusion (McDonalds Corp v. L.C. Big Mak Burger,
Inc., G.R. No. 143993, Aug 18, 2004)
5. Used without the consent of the owner (Prosource
International Inc.v. Horphag Research Management
SA 605 SCRA 523)
Non-competing goods
Those which, though they are not in actual
competition, are so related to each other that it
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 INTELLECTUAL PROPERTY LAWS
might reasonably be assumed that they originate
from one manufacturer. Non-competing goods may
also be those which, being entirely unrelated,
could not reasonably be assumed to have a common
source. In the case of related goods, confusion of
business could arise out of the use of similar marks; in
the latter case of non-related goods, it could
not (Esso Standard Eastern, Inc. v. CA, G.R. No.
L-29971, Aug. 31, 1982).
In a later case, in defining trademark infringement,
Section 22 of RA 166 deleted the requirement in
question and expanded its scope to include such use
of the mark or its colorable imitation that is likely to
result in confusion on "the source or origin of such
goods or services, or identity of such business." Thus,
while there is confusion of goods when the products
are competing, confusion of business exists when the
products are non-competing but related enough to
produce confusion of affiliation.
Modern law recognizes that the protection to which
the owner of a trademark is entitled is not limited to
guarding his goods or business from actual market
competition with identical or similar products of the
parties, but extends to all cases in which the use by a
junior appropriator of a trade-mark or trade-name is
likely to lead to a confusion of source, as where
prospective purchasers would be misled into thinking
that the complaining party has extended his business
into the field or is in any way connected with the
activities of the infringer; or when it forestalls the
normal potential expansion of his business
(Mcdonalds Corporation v. L & C Big Mak Burger, Inc.
August 18, 2004).
Remedies of the owner of the trademark against
infringers
1. Civil filed with the Regional Trial Courts. The
owner of the registered mark may ask the court
to issue a preliminary injunction to quickly
prevent infringer from causing damage to his
business. Furthermore, the court will require
infringer to pay damages to the owner of the
mark provided defendant is shown to have had
notice of the registration of the mark (which is
presumed if a letter R within a circle is appended)
and stop him permanently from using the mark.
2. Criminal the owner of the trademark may ask the
court to issue a search warrant and in
appropriate cases, remedies available shall also
include the seizure, forfeiture and destruction of
the infringing goods and of any materials and
implements the predominant use of which has
been in the commission of the offense.
315
3. Administrativesame as in patent infringement
cases. If the amount of damages claimed is not
less than P200,000.00, the registrant may
choose to seek redress against the infringer by
filing an administrative action against the
infringer with the Bureau of Legal Affairs.
Ascertainment of the amount of damages in a civil
action for infringement
The owner of a trademark which has been infringed is
entitled to actual damages:
1. The reasonable profit which the complaining
party would have made, had the defendant not
infringed his said rights; or
2. The profit which the defendant actually made
out of infringement; or
3. The court may award as damages a reasonable
percentage based upon the amount of gross
sales of the defendant or the value of the
services in connection with which the mark or
trade name was issued.
NOTE: In cases where actual intent to mislead the public or
to defraud the complainant is shown, in the discretion of
the court, the damages may be doubled (Sec. 156.3, IPC).
Court which has jurisdiction over violations of
intellectual property rights
It is properly lodged with the Regional Trial Court
even if the penalty therefore is imprisonment of less
than six years, or from 2 to 5 years and a fine ranging
from P50,000 to P200,000.
NOTE: R.A. 8293 and R.A. 166 are special laws conferring
jurisdiction over violations of intellectual property rights to
the Regional Trial Court. They should therefore prevail over
R.A. No. 7691, which is a general law (Samson v. Daway,
G.R. No. 160054-55, July 21, 2004).
Limitations on the actions for infringement
1. Right of prior user registered mark shall be
without affect against any person who, in good
faith, before filing or priority date, was using
the mark for purposes of his business (Sec
159.1, IPC).
2. Relief against publisher injunction against future
printing against an innocent infringer who is
engaged solely in the business of printing the
mark (Sec. 159.2, IPC).
3. Relief against newspaper injunction against the
presentation of advertising matter in future
issues of the newspaper, magazine or in
electronic communications in case the
infringement complained of is contained in or
is part of paid advertisement in such materials
(Sec. 159.3, IPC).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
UNFAIR COMPETITION
Definition
Employing deception or any other means contrary to
good faith by which a person passes off his goods or
business or services for those of one who has already
established goodwill thereto (Sec. 168.2, IPC)
Infringement of trademark v. Unfair competition
INFRINGEMENT OF UNFAIR
TRADEMARK COMPETITION
The passing off of ones
Unauthorized use of a
goods as those of
trademark.
another.
Fraudulent intent is Fraudulent intent is
unnecessary. essential.
GR: Prior registration
of the trademark is a Registration is not
prerequisite to the necessary. (Del Monte
action. Corp. v. CA, G.R. No.
XPN: Well-known
78325, Jan. 23, 1990)
marks
Right protected under unfair competition
A person who has identified in the mind of the public
the goods he manufactures or deals in, his business
or services from those of others, whether or not a
registered mark is employed, has a property right in
the goodwill of the said goods, business or services so
identified, which will be protected in the same
manner as other property rights (Sec. 168.1, IPC).
Persons guilty of unfair competition
1. Any person, who is selling his goods and gives them
the general appearance of goods of another
manufacturer or dealer, either as to the goods
themselves or in the wrapping of the packages in
which they are contained, or the devices or words
thereon, or in any other feature of their appearance,
which would be likely to influence purchasers to
believe that the goods offered are those of a
manufacturer or dealer, other than the actual
manufacturer or dealer, or who otherwise clothes the
goods with such appearance as shall deceive the
public and defraud another of his legitimate trade, or
any subsequent vendor of such goods or any agent of
any vendor engaged in selling such goods with a like
purpose;
2. Any person who by any artifice, or device, or who
employs any other means calculated to induce the
false belief that such person is offering the services of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
another who has identified such services in the mind
of the public;
3. Any person who shall make any false statement in
the course of trade or who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of
another.(Sec. 168.3, IPC)
The law on unfair competition is broader than the
law on trademark infringement
Trademark infringement is more limited but it
recognizes a more exclusive right derived from the
trademark adoption and registration by the person
whose goods or business is first associated with it.
Hence, even if one fails to establish his exclusive
property right to a trademark, he may still obtain
relief on the ground of his competitors unfairness or
fraud. Conduct constitutes unfair competition if the
effect is to pass off on the public the goods of one
man as the goods of another (Mighty Corporation v.
E. & J. Gallo Winery, G.R. No. 154342, July 14, 2004).
Elements of an action for unfair competition
1. Confusing similarity in the general appearance of
the goods; and
NOTE: 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.
2. Intent to deceive the public and defraud a
competitor.
NOTE: The intent to deceive and defraud may be inferred
from the similarity in appearance of the goods as offered
for sale to the public (McDonalds Corporation v. L.C. Big
Mak Burger, Inc., et al., G.R. No. 143993, Aug. 18, 2004).
The element of passing off
In order to prove a case of unfair competition, it is
sufficient to show that such deception will be the
natural and probable cause of defendants acts.
Q: The NBI found that SG Inc. is engaged in the
reproduction and distribution of counterfeit
"playstation games" and thus applied with the
Manila RTC warrants to search respondent's
premises in Cavite. RTC granted such warrants and
thus, the NBI served the search warrants on the
subject premises. SG Inc. questioned the validity of
the warrants due to wrong venue since the RTC of
Manila had no jurisdiction to issue a search warrant
enforceable in Cavite. Is the contention of SG Inc.
correct?
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 INTELLECTUAL PROPERTY LAWS
A: No, unfair competition is a transitory or continuing
offense under Section 168 of Republic Act No. 8293.
As such, petitioner may apply for a search warrant in
any court where any element of the alleged offense
was committed, including any of the courts within
Metro Manila and may be validly enforced in Cavite
(Sony Computer Entertainment Inc. v. Supergreen Inc.
G.R. No. 161823, Mar. 22, 2007).
TRADE NAMES OR BUSINESS NAMES
Trade name or business name
Any individual name or surname, firm name, device
nor word used by manufacturers, industrialists,
merchants, and others to identify their businesses,
vocations or occupants (Converse Rubber Corp. vs.
Universal Rubber Products, GR No. L-27425, L-30505,
April 28, 1980).
Limitations on use of trade name or business name
A person may not:
1. Use a name if the word is generic ( Lyceum of the
Philippines v. CA, 219 SCRA 610).
2. Use any name indicating a geographical locations (
Ang Si Heng vs. Wellington Department Store 92
Phil. 448).
3. Use any name or designation contrary to public
order or morals
4. Use a name if it is liable to deceive trade circles or
the public as to the nature of the enterprise
identified by that name ( Sec. 165.1, IPC).
5. Subsequently use a trade name likely to mislead
the public as a third party (Sec. 165.2, b, IPC).
6. Copy or simulate the name of any domestic
product (for imported products).
7. Copy or simulate a mark registered in accordance
with the provisions of IPC (for imported products).
8. Use mark or trade name calculated to induce the
public to believe that the article is manufactured in
the Philippines, or that it is manufactured in any
foreign country or locality other than the country
or locality where it is in fact manufactured.
NOTE: Items 4, 5 and 6 only applies to imported products
and those imported articles shall not be admitted to entry
at any customhouse of the Philippines (Sec. 166, IPC).
Change in the ownership of a trade name
The change in the ownership of a trade name is made
with the transfer of the enterprise or part thereof
identified by that name (Sec. 165.4, IPC).
317
COLLECTIVE MARKS
Collective mark
A "collective mark" or collective trade-name" is a
mark or trade-name used by the members of a
cooperative, an association or other collective group
or organization ( Sec. 40, RA 166).
Contents of an application for registration of a
collective mark
1. The application shall designate the mark as a
collective mark
2. Accompanied by a copy of the agreement, if any,
governing the use of the collective mark (Sec. 167.2,
IPC)
Grounds for the cancellation of collective marks
1. The Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves that only the registered owner
uses the mark,
2. Or that he uses or permits its use in contravention
of the agreements referred to in Subsection 166.2,
3. Or that he uses or permits its use in a manner liable
to deceive trade circles or the public as to the origin
or any other common characteristics of the goods or
services concerned (Sec 167.3, IPC).
NOTE: The registration of a collective mark, or an
application therefor shall not be the subject of a license
contract.
Criminal penalties under the Intellectual Property
Code for unfair competition, infringement, false
designation of origin and false representations
A criminal penalty of imprisonment from two (2)
years to five (5) years and a fine ranging from Fifty
thousand pesos (P50,000) to Two hundred thousand
pesos (P200,000), shall be imposed on any person
who is found guilty of committing any of the acts. The
penalty shall be independent of the civil and
administrative sanctions imposed by law (Sec 170,
IPC).
Cancellation of trademark registration
A: A trademark registration may be cancelled by any
person who believes that he will be damaged by the
registration of the mark:
1. Within 5 years, from the date of the registration
of the mark; or
2. At any time;
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
a. If the registered mark becomes the generic
name for the goods or services, or a portion
thereof, for which it is registered;
b. If the mark has been abandoned;
c. If its registration was obtained fraudulently or
contrary to the provisions of the IPC;
d. If the registered mark is being used by, or with
the permission of, the registrant so as to
misrepresent the source of the goods or
services on or in connection with which the
mark is used;
e. Non-use of the mark within the Philippines,
without legitimate reason, for an uninterrupted
period of 3 years.
NOTE: If in a petition for cancellation of a trademark, it was
established that the petitioner was not its owner, prior
registration can be cancelled without need of filing a
separate petition (E.Y. Industrial Sales, Inc. V Shen Dar
Electricity and Machinery Co. Ltd. 634 SCRA 363).
Transliteration v. Translation of mark
Transliteration is an act, process or instances of
representing or spelling of words, letters or
characters of one language in the letters and
characters of another language or alphabet
Translation is an act, process or instance of
translating as rendering from one language or
representational system into another.
COPYRIGHTS
Copyright
A right over literary and artistic works which are
original intellectual creations in the literary and
artistic domain protected from the moment of
creation (Sec. 171.1, IPC).
BASIC PRINCIPLES
Elements of copyright-ability
1. Originality Must have been created by the
authors own skill, labor, and judgment without
directly copying or evasively imitating the work of
another (Ching Kian Chuan v. CA, G.R. No. 130360,
Aug. 15, 2001).
2. Expression Must be embodied in a medium
sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a period
more than a transitory duration.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Elements of originality
1. It is independently created by the author, and
2. It possesses some minimal degree of creativity
Time when copyright vests
Works are protected from the time of their creation,
irrespective of their mode or form of expression, as
well as of their content, quality and purpose.
COPYRIGHTABLE WORKS
Copyrightable works
1. Literary and Artistic Works
(BOLD-MAN-GAS-PAP-CO)
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic works
m. Pictorial illustrations and advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic
works (Sec. 172.1, IPC).
2. Derivative Works
a. Dramatizations, translations, adaptations,
abridgements, arrangements, and other alterations of
literary or artistic works;
b. Collections of literary, scholarly, or artistic works
and compilations of data and other materials which
are original by reason of the selection or coordination
or arrangement of their contents (Sec. 173, IPC).
NOTE: Derivative works shall be protected as new works,
provided that such new work shall not affect the force of
any subsisting copyright upon the original works employed
or any part thereof, or be construed to imply any right to
such use of the original works, or to secure or extend
copyright in such original works (Sec. 173.2, IPC).
Q: P&D was granted a copyright on the technical
drawings of light boxes as "advertising display
318
 INTELLECTUAL PROPERTY LAWS
units". SMI, however, manufactured similar or
identical to the light box illustrated in the technical
drawings copyrighted by P&D for leasing out to
different advertisers. Was this an infringement of
P&Ds copyright over the technical drawings?
A: No, P&Ds copyright protection extended only to
the technical drawings and not to the light box itself.
The light box was not a literary or artistic piece which
could be copyrighted under the copyright law. If SMI
reprinted P&Ds technical drawings for sale to the
public without license from P&D, then no doubt they
would have been guilty of copyright infringement.
Only the expression of an idea is protected by
copyright, not the idea itself. If what P&D sought was
exclusivity over the light boxes, it should have instead
procured a patent over the light boxes itself (Pearl
and Dean Inc. v. Shoe Mart Inc., GR No. 148222, Aug.
15, 2003).
Q: Juan Xavier wrote and published a story similar to
an unpublished copyrighted story of Manoling
Santiago. It was, however, conclusively proven that
Juan Xavier was not aware that the story of
Manoling Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for
infringement of copyright. Is Juan Xavier liable?
(1998 Bar Question)
A: Yes. Juan Xavier isliable for infringement of
copyright. It is not necessary that Juan Xavier is aware
that the story of Manoling Santiago was protected by
copyright. The work of Manoling Santiago is
protected from the time of its creation (Habana v.
Robles, 310 SCRA 511).
NOTE: There will still be originality sufficient to warrant
copyright protection if the author, through his skill and
effort, has contributed a distinguishable variation from the
older works. In such a case, of course, only those parts
which are new are protected by the new copyright. Hence,
in such a case, there is no case of infringement. Juan Xavier
is no less an author because others have preceded him.
NON-COPYRIGHTABLE WORKS
Non-copyrightable works (INOD-PGTSS)
1. Idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such
2. News of the day and other items of press
information
3. Any Official text of a legislative, administrative or
legal nature, as well as any official translation thereof
4. Pleadings
5. Decisions of courts and tribunals this refers to
original decisions and not to annotated decisions
319
such as the SCRA or SCAD as these already fall under
the classification of derivative works, hence
copyrightable
6. Any work of the Government of the Philippines
GR: Conditions imposed prior the approval of the
government agency or office wherein the work is
created shall be necessary for exploitation of such
work for profit. Such agency or office, may, among
other things, impose as condition the payment of
royalties.
XPN: No prior approval or conditions shall be
required for the use of any purpose of statutes, rules
and regulations, and speeches, lectures, sermons,
addresses, and dissertations, pronounced, read, or
rendered in courts of justice, before administration
agencies, in deliberative assemblies and in meetings
of public character (Section 176, IPC).
7. TV programs, format of TV programs (Joaquin v.
Drilon, G.R. No. 108946, Jan. 28, 1999)
8. Systems of bookkeeping; and
9. Statutes.
Q: BJ Productions, Inc. (BJPI) is the holder/grantee of
a copyright of Rhoda and Me, a dating game show
aired from 1970 to 1977. Subsequently, however,
RPN aired the game show Its a Date, which was
produced by IXL Productions, Inc. (IXL). As such, an
information for copyright infringement was filed
against RPN. The DOJ Secretary directed the
prosecutor to dismiss the case for lack of probable
cause. Was the decision of the DOJ Secretary
correct?
A: Yes, the format of a show is not copyrightable. The
copyright law enumerates the classes of work entitled
to copyright protection. The format or mechanics of a
television show is not included in the list of protected
works. For this reason, the protection afforded by the
law cannot be extended to cover them. Copyright, in
the strict sense of the term, is purely a statutory
right. It is a new or independent right granted by the
statute, and not simply a pre-existing right
regulated by the statute. Being a statutory grant,
the rights are only such as the statute confers, and
may be obtained and enjoyed only with respect to
the subjects and by the persons, and on terms and
conditions specified in the statute (Joaquin v. Drilon,
G.R. No. 108946, Jan. 28, 1999).
Q: Rural is a certified public utility providing
telephone service to several communities in Manila.
It obtains data for the directory from subscribers,
who must provide their names and addresses to
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
obtain telephone service. Feist Publications, Inc., is a
publishing company that specializes in area-wide
telephone directories covering a much larger
geographic range than directories such as Rural's.
Feist extracted the listings it needed from Ruralss
directory without its consent. Are directories
copyrightable?
A: No, directories are not copyrightable and
therefore the use of them does not constitute
infringement. The Intellectual Property Code
mandates originality as a prerequisite for copyright
protection. This requirement necessitates
independent creation plus a modicum of creativity.
Since facts do not owe their origin to an act of
authorship, they are not original, and thus are not
copyrightable. A compilation is not copyrightable per
se, but is copyrightable only if its facts have been
"selected, coordinated, or arranged in such a way
that the resulting work as a whole constitutes an
original work of authorship." Thus, the statute
envisions that some ways of selecting, coordinating,
and arranging data are not sufficiently original to
trigger copyright protection. Even a compilation that
is copyrightable receives only limited protection, for
the copyright does not extend to facts contained in
the compilation (Feist Publications, Inc. v. Rural
Telephone Service Co., 499 U.S. 340).
RIGHTS OF A COPYRIGHT OWNER
Presumption of authorship
The natural person whose name is indicated on a
work in the usual manner as the author shall, in the
absence of proof to the contrary, presumed to be the
author of the work. This is applicable even if the
name is a pseudonym, where the pseudonym leaves
no doubt as to identity of the author (Sec. 219.1, IPC).
The person or body corporate, whose name appears
on the audio-visual work in the usual manner shall, in
the absence of proof to the contrary, be presumed to
be the maker of said work ( Sec. 219.2, IPC).
Note: Copyright protection commences from the time of
creation.
Rights of an author
1. Economic rights The right to carry out, authorize
or prevent the following acts:
a. Reproduction of the work or substantial portion
thereof
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
b. Carry-out derivative work (dramatization,
translation, adaptation, abridgement, arrangement or
other transformation of the work)
c. First distribution of the original and each copy of
the work by sale or other forms of transfer of
ownership
d. Rental right
e. Public display
f. Public performance
g. Other communications to the public.
2. Moral rights For reasons of professionalism and
propriety, the author has the right:
a. To require that the authorship of the works be
attributed to him (attribution right)
b. To make any alterations of his work prior to, or to
withhold it from publication
c. Right to preserve integrity of work, object to any
distortion, mutilation or other modification which
would be prejudicial to his honor or reputation; and
d. To restrain the use of his name with respect to any
work not of his own creation or in a distorted version
of his work (Sec.193, IPC).
3. Droit de suite (Right to proceeds in subsequent
transfers or follow up rights) This is an inalienable
right of the author or his heirs to receive to the
extent of 5% of the gross proceeds of the sale or
lease of a work of painting or sculpture or of the
original manuscript of a writer or composer,
subsequent to its first disposition by the author.
Rights which are not covered under a Droit de suite
(PEEWS)
1. Prints
2. Etchings
3. Engravings
4. Works of applied art
5. Similar works wherein the author primarily derives
gain from the proceeds of reproductions (Sec. 201,
IPC).
Q: ABC is the owner of certain musical compositions
among which are the songs entitled: "Dahil Sa Iyo",
"Sapagkat Ikaw Ay Akin," "Sapagkat Kami Ay Tao
Lamang" and "The Nearness Of You. Soda Fountain
Restaurant hired a combo with professional singers
to play and sing musical compositions to entertain
and amuse customers. They performed the
above-mentioned compositions without any license
or permission from ABC to play or sing the same.
Accordingly, ABC demanded from Soda Fountain
payment of the necessary license fee for the playing
and singing of aforesaid compositions but the
320
 INTELLECTUAL PROPERTY LAWS
demand was ignored. ABC filed an infringement case
against Soda Fountain. Does the playing and singing
of musical compositions inside an establishment
constitute public performance for profit?
A: Yes. The patrons of the Soda Fountain pay only for
the food and drinks and apparently not for listening
to the music, but the music provided is for the
purpose of entertaining and amusing the customers
in order to make the establishment more attractive
and desirable. For the playing and singing the musical
compositions involved, the combo was paid as
independent contractors by Soda Fountain. It is
therefore obvious that the expenses entailed thereby
are added to the overhead of the restaurant which
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
(FILSCAP v. Tan, G.R., No. L-36402, Mar. 16, 1987).
An author cannot be compelled to perform his
contract
An author cannot be compelled to perform his
contract to create a work or for the publication of his
work already in existence. However, he may be held
liable for damages for breach of such contract (Sec.
195, IPC).
Q: X, an amateur astronomer, stumbled upon what
appeared to be a massive volcanic eruption in
Jupiter while peering at the planet through his
telescope. The following week, X, without notes,
presented a lecture on his findings before the
Association of Astronomers of the Philippines. To his
dismay, he later read an article in a science journal
written by Y, a professional astronomer, repeating
exactly what X discovered without any attribution to
him. Has Y infringed on X's copyright, if any? (2011
Bar Question)
A: No, since no protection extends to any discovery,
even if expressed, explained, illustrated, or embodied
in a work.
Nature of moral rights
These are personal rights independent from the
economic rights. Being a personal right, it can only be
given to a natural person. Hence, even if he has
licensed or assigned his economic rights, he continues
321
to enjoy the above-mentioned moral rights (Amador,
2007).
Term of moral rights
The right of an author under Section 193.1. shall last
during the lifetime of the author and in perpetuity
after his death while the rights under Sections 193.2.
193.3. and 193.4. shall be coterminous with the
economic rights, the moral rights shall not be
assignable or subject to license (Sec. 193, IPC as
amended by R.A. No. 10372).
NOTE: The person or persons to be charged with the
posthumous enforcement of these rights shall be named in
a written instrument which shall be filed with the National
Library. In default of such person or persons, such
enforcement shall devolve upon either the authors heirs,
and in default of the heirs, the Director of the National
Library.
Exceptions to moral rights
1. Absent any special contract at the time creator
licenses/permits another to use his work, the
following are deemed not to contravene creators
moral rights, provided they are done in accordance
with reasonable customary standards or requisites of
the medium:
a. Editing
b. Arranging
c. Adaptation
d. Dramatization
e. Mechanical and electric reproduction
2. Complete destruction of work unconditionally
transferred by creators (Sec. 197, IPC).
Waiver of moral rights
GR: Moral rights can be waived in writing, expressly
so stating such waiver.
XPN: Even in writing, waiver is not valid if:
1. Use the name of the author, title of his work, or his
reputation with respect to any version/adaptation of
his work, which because of alterations, substantially
tend to injure literary/artistic reputation of another
author
2. Use name of author in a work that he did not
create
Neighboring rights
These are the rights of performers, producers of
sound recording and broadcasting organizations.
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
Scope of a performers rights
Performers shall enjoy the following exclusive rights:
1. As regards their performances, the right of
authorizing:
a. The broadcasting and other communication to
the public of their performance; and
b. The fixation of their unfixed performance.
2. The right of authorizing the direct or indirect
reproduction of their performances fixed in sound
recordings or audiovisual works or fixations in any
manner or form;
3. The right of authorizing the first public distribution
of the original and copies of their performance fixed
in sound recordings or audiovisual works or fixations
through sale or rental of other forms of transfer of
ownership;
4. The right of authorizing the commercial rental to
the public of the original and copies of their
performances fixed in sound recordings or
audiovisual works or fixations, even after distribution
of them by, or pursuant to the authorization by the
performer; and
5. The right of authorizing the making available to the
public of their performances fixed in sound
recordings or audiovisual works or fixations, by wire
or wireless means, in such a way that members of the
public may access them from a place and time
individually chosen by them. (Sec. 203, IPC as
amended by R.A. No. 10372).
Moral rights of performers
The performer, shall, as regards his live aural
performances or performances fixed in sound
recordings, have the right to claim to be identified as
the performer of his performances, except where the
omission is dictated by the manner of the use of the
performance, and to object to any distortion,
mutilation or other modification of his performances
that would be prejudicial to his reputation.
Loss of performers rights
Once a performer has authorized broadcasting or
fixation of his performance (Sec 205, IPC).
NOTE: Fair use and limitations to copyrights shall apply
mutatis mutandis to performers (Ibid.).
Additional remuneration for subsequent
communications or broadcasts
The performer shall be entitled to an additional
remuneration equivalent to at least 5% of the original
compensation he received for the first
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
communication or broadcast in every communication
to the public or broadcast of a performance
subsequent to the first communication or broadcast,
unless otherwise provided in the contract (Sec. 206,
IPC).
Scope of the rights of producers on sound recordings
Producers of sound recordings shall enjoy the
following exclusive rights:
1. The right to authorize the direct or indirect
reproduction of their sound recordings, in any
manner or form; the placing of these reproductions in
the market and the right of rental or lending
2. The right to authorize the first public distribution of
the original and copies of their sound recordings
through sale or rental or other forms of transferring
ownership;
3. The right to authorize the commercial rental to the
public of the original and copies of their sound
recordings, even after distribution by them by or
pursuant to authorization by the producer; and
4. The right to authorize the making available to the
public of their sound recordings in such a way that
members of the public may access the sound
recording from a place and at a time individually
chosen or selected by them, as well as other
transmissions of a sound recording with like effect
(Sec. 208, IPC, as amended by R.A. No. 10372).
NOTE: Fair use and limitations to copyrights shall apply
mutatis mutandis to performers (Sec. 210, IPC).
Scope of the rights of broadcasting organizations
Broadcasting organizations shall enjoy the exclusive
right to carry out, authorize or prevent any of the
following acts:
1. The rebroadcasting of their broadcasts
2. The recording in any manner, including the making
of films or the use of video tape, of their broadcasts
for the purpose of communication to the public of
television broadcasts of the same
3. The use of such records for fresh transmissions or
for fresh recording (Sec. 211, IPC).
Applicability of rights
The provisions of Chapter VIII shall apply mutatis
mutandis to the rights of performers, producers of
sound recordings and broadcasting organizations:
1. Exclusive use of a natural person for own personal
purposes
2. Short excerpts for reporting current events
3. Sole use for the purpose of teaching or for
scientific research
322
 INTELLECTUAL PROPERTY LAWS
4. Fair use of the broadcast (Sec. 212, IPC, as b. Sound recordings that were first published in
amended by R.A. No. 10372). the Philippines (Sec. 223, IPC).

Term of protection given to performers, producers 4. For broadcast

and broadcasting organizations
1. For performances not incorporated in recordings,
50 years from the end of the year in which the
performance took place; and
2. For sound or image and sound recordings and for
performances incorporated therein, 50 years from
the end of the year in which the recording took
place.
3. In case of broadcasts, the term shall be 20 years
from the date the broadcast took place. The
extended term shall be applied only to old works with
subsisting protection under the prior law (Sec. 215,
IPC).
a. Broadcasts of broadcasting organizations the
headquarters of which are situated in the
Philippines; and
b. Broadcasts transmitted from transmitters
situated in the Philippines (Sec. 224, IPC)
NOTE: The provisions of IPC shall also apply to works,
performers, producers of sound recordings and
broadcasting organizations that are to be protected by
virtue of and in accordance with any international
convention or other international agreement to which the
Philippines is a party (Sec. 221.2 and 224.2, IPC).

Persons whom the rights are granted (copyrightable

works applicable)

A:
1. For literary and artistic works and derivative works
a. Works of authors who are nationals of, or have
their habitual residence in, the Philippines;
b. Audio-visual works the producer of which has
his headquarters or habitual residence in the
Philippines;
c. Works of architecture erected in the
Philippines or other artistic works incorporated
in a building or other structure located in the
Philippines;
d. Works first published in the Philippines; and
e. Works first published in another country but
also published in the Philippines within thirty
days, irrespective of the nationality or
residence of the authors (Sec. 221, IPC).

2. For performers
a. Performers who are nationals of the
Philippines;
b. Performers who are not nationals of the
Philippines but whose performances:
i. Take place in the Philippines; or
ii. Are incorporated in sound recordings that
are protected under IPC; or
iii. Which has not been fixed in sound
recording but are carried by broadcast
qualifying for protection under IPC (Sec. 222,
IPC)

3. Of sound recordings
a. Sound recordings the producers of which are
nationals of the Philippines; and

UNIVERSITY OF SANTO TOMAS

323 FACULTY OF CIVIL LAW
 MERCANTILE LAW

RULES ON OWNERSHIP OF COPYRIGHT

Rules on copyright ownership

TYPE OF WORK OWNER

ORIGINAL LITERARY AND Author (Sec. 178.1, IPC)
ARTISTIC WORKS
JOINT AUTHORSHIP Co-authors in case of works of joint authorship; in the absence of
agreement, their rights shall be governed by the rules on co-ownership.

NOTE: If work of joint authorship consists of parts that can be used separately, then
the author of each part shall be the original owner of the copyright in the part that
he has created (Sec. 178.2, IPC).

AUDIOVISUAL WORK GR: Producer, the author of the scenario, the composer of the music, the
film director, and the author of the work so adapted
XPN:The producers shall exercise the copyright to an extent required for
the exhibition of the work in any manner (Sec. 178.5, IPC).

ANONYMOUS AND GR: Publishers deemed representatives of the author in case of

PSEUDONYMOUS WORKS anonymous and pseudonymous works.
XPN: When the contrary appears or where the pseudonym or adopted
name leaves no doubt as to the authors identity; or author discloses his
identity.

COMMISSIONED WORK The person who commissioned the work shall own the work but the
copyright thereto shall remain with the creator, unless there is a written
stipulation to the contrary (Sec. 178.4, IPC).

COLLECTIVE WORKS Contributor is deemed to have waived his right unless he expressly reserves
it (Sec. 196, IPC).

IN THE COURSE OF GR: The employee, if not a part of his regular duties even if the employee
EMPLOYMENT uses the time, facilities and materials of the employer (Sec. 178.3, IPC).

XPN: The employer, if the work is the result of the performance of his
regularly-assigned duties, unless there is an agreement, express or implied,
to the contrary.

LETTERS Writer provisions of Article 723, Civil Code govern [ownership shall pertain
to the person to whom they are addressed and delivered] (Sec. 178.6, IPC).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 324
 INTELLECTUAL PROPERTY LAWS
Collective work v. Joint work. 2. The Making of quotations from a published work if
they are compatible with fair use and only to the
COLLECTIVE WORK JOINT WORK extent justified for the purpose.
3. Communication to the public by mass media of
Elements remain Separate elements
articles on current political, social, economic,
unintegrated and merge into a unified scientific or religious topic, lectures, addresses and
disparate. whole. other works of the same nature
Work created by 2 or more 4. As Part of reports of current events (e.g. music
persons at the initiative played or tunes on the occasion of a sporting event
Work prepared by 2 or and such tunes were picked up during a new
and under the direction of
more authors with the coverage of the event).
another with the
intention that their 5. For Teaching purposes, provided that the source
understanding that it will and of the name of the author, if appearing in the
contributions be merged
be disclosed by the latter work, are mentioned.
into inseparable or
under his own name and 6. Recording made in Educational institutions of a
independent parts of the
that of the contributions of work included in a broadcast for the use of such
unitary whole. educational institutions, provided that such recording
natural persons will NOT
must be deleted within a reasonable period after they
be identified
were first broadcast.
Joint authors shall be 7. The making of Ephemeral recordings by a
Each author shall enjoy
co-owners. broadcasting organization by means of its own
copyright to his own
Co-ownership shall facilities and for use in its own broadcast.
contribution
apply. 8. The Use made of a work by or under the direction
The work will be attributed or control of the government, by the National Library
to the person under whose Joint authors shall be or by educational, scientific or professional
institutions where such use is in the public interest
initiative and direction it both entitled to the
and is compatible with fair use.
was created unless the acknowledgment as 9. The Public performance of a work, in a place where
contributor expressly authors of the work. no admission fee is charged.
reserves his right. 10. Public Display of the original or a copy of the work
not made by means of a film, slide, television image
Q: T, an associate attorney in XYZ Law Office, wrote or otherwise on screen or by means of any other
a newspaper publisher a letter disputing a device or process (e.g. Public display using posters
columnists claim about an incident in the attorneys mounted on walls and display boards.
family. T used the law firms letterhead and its 11. Any use made of a work for the purpose of any
computer in preparing the letter. T also requested Judicial proceedings or for the giving of professional
the firms messenger to deliver the letter to the advice by a legal practitioner.
publisher. Who owns the copyright to the letter?
(2011 Bar Question) NOTE: R.A. No. 10372 amended R.A. No. 8293, Sec. 184.1
(1), which now states: the reproduction or distribution of
published articles or materials in a specialized format
A: T, since he is the original creator of the contents of
exclusively for the use of the blind, visually- and
the letter. reading-impaired persons: Provided, That such copies and
distribution shall be made on a nonprofit basis and shall
LIMITATIONS ON COPYRIGHT indicate the copyright owner and the date of the original
publication.
General limitations on copyright
Principle of automatic protection
The following acts shall not constitute infringement
of copyright: (PeMaCoP-TEEUP-DJ) Works are protected by the sole fact of their creation
irrespective of their content, quality or purpose. Such
1. Performance of a work, once it has been lawfully rights are conferred from the moment of creation.
made accessible to the public, if done privately and
free of charge or for a charitable or religious
institution or society.

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325 FACULTY OF CIVIL LAW
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Decompilation may be considered fair use
Decompilation, which is the reproduction of the code
and translation of the forms of the computer
program to achieve the inter-operability of an
independently created computer program with other
programs, may also constitute fair use
Other limitations on copyright
1. The fair use of a copyrighted work for criticism,
comment, news reporting, teaching including limited
number of copies for classroom use, scholarship,
research, and similar purposes is not an infringement
of copyright. Decompilation, which is understood
here to be the reproduction of the code and
translation of the forms of a computer program to
achieve the interoperability of an independently
created computer program with other programs may
also constitute fair use under the criteria established
by this section, to the extent that such decompilation
is done for the purpose of obtaining the information
necessary to achieve such interoperability. (Sec. 185,
IPC, as amended by R.A. No. 10372).
2. Copyright in a work of architecture shall include
the right to control the erection of any building which
reproduces the whole or a substantial part of the
work either in its original form or in any form
recognizably derived from the original, provided, that
the copyright in any such work shall not include the
right to control the reconstruction or rehabilitation in
the same style as the original of a building to which
that copyright relates (Sec. 186, IPC).
3. The private reproduction of a published work in a
single copy, where the reproduction is made by a
natural person exclusively for research and private
study, shall be permitted, without the authorization
of the owner of copyright in the work but shall not
extend to the reproduction of:
a. A work of architecture in the form of building or
other construction;
b. An entire book, or a substantial part thereof, or
of a musical work in graphic form by
reprographic means;
c. A compilation of data and other materials;
d. A computer program except as provided in
Section 189; and
e. Any work in cases where reproduction would
unreasonably conflict with a normal exploitation
of the work or would otherwise unreasonably
prejudice the legitimate interests of the author
(Sec. 187, IPC).
4. Any library or archive whose activities are not for
profit may, without the authorization of the author or
copyright owner, make a limited number of copies of
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
the work, as may be necessary for such institutions to
fulfill their mandate, by reprographic reproduction:
a. Where the work by reason of its fragile
character or rarity cannot be lent to user in its
original form;
b. Where the works are isolated articles
contained in composite works or brief portions
of other published works and the reproduction
is necessary to supply them, when this is
considered expedient, to persons requesting
their loan for purposes of research or study
instead of lending the volumes or booklets
which contain them; and
c. Where the making of such limited copies is in
order to preserve and, if necessary in the event
that it is lost, destroyed or rendered unusable,
replace a copy, or to replace, in the permanent
collection of another similar library or archive, a
copy which has been lost, destroyed or rendered
unusable and copies are not available with the
publisher.
But it shall not be permissible to produce a volume
of a work published in several volumes or to
produce missing tomes or pages of magazines or
similar works, unless the volume, tome or part is
out of stock (Sec. 188, IPC, as amended by R.A. No.
10372).
5. The reproduction in one back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the author of,
or other owner of copyright in, a computer program,
by the lawful owner of that computer program,
provided, the copy or adaptation is necessary for:
a. The use of the computer program in conjunction
with a computer for the purpose, and to the
extent, for which the computer program has
been obtained; and
b. Archival purposes, and, for the replacement of
the lawfully owned copy of the computer
program in the event that the lawfully obtained
copy of the computer program is lost, destroyed
or rendered unusable (Sec. 187, IPC).
**R.A. No. 10372 deleted in entirety No. 6.
326
 INTELLECTUAL PROPERTY LAWS
Term of protection of copyright
DOCTRINE OF FAIR USE
TYPE OF WORK DURATION
Doctrine of fair use
Lifetime of the creator and in
Single creation Fair use permits a secondary use that serves the
perpetuity after his death
copyright objective of stimulating productive thought
Lifetime of the last surviving
and public instruction without excessively diminishing
Joint creation co-creator and in perpetuity the incentives for creativity.
after his death
50 years after the date of their Factors that should be considered in order to
first publication; except where determine fair use
before the expiration of said
1. The purpose and character of the use, including
Anonymous or period, the authors identity is
whether such use is of a commercial nature or is for
pseudonymous revealed or is no longer in non-profit educational purpose;
work doubt, the 1st two mentioned 2. The nature of the copyrighted work;
rules shall apply; or if 3. The amount and substantiality of the portion used
unpublished, 50 years from in relation to the copyrighted work as a whole; and
their making. 4. The effect of the use upon the potential market for
or value of the copyrighted work.
Work of an applied
art of an artistic NOTE: The fact that a work is unpublished shall not by itself
creation with bar a finding of fair use if such finding is made upon
utilitarian consideration of all the above factors (Sec. 182.2, IPC). If
you copy to the extent that you reduce the marketability of
functions or
the book, it is no longer fair use. (Lecture- Robeniol)
incorporated in a
useful article 25 years from the time of the Must carry rule
whether made by making.
hand or produced Must-carry rule is another limitation on copyright. It
on an industrial obligates operators to carry the signals of local
channels within their respective systems. This is to
scale
give the people wider access to more sources of
Audio-visual works news, information, education, sports event and
including those entertainment programs other than those provided
produced by for by mass media and afforded television programs
process analogous to attain a well informed, well-versed and culturally
50 years from date of
to photography or refined citizenry and enhance their socio-economic
publication and, if growth (ABS-CBN Broadcasting Corporation v.
any process for
unpublished, from the date of Philippine Multimedia System, G.R. No. 175769-70,
making
making Jan. 19, 2009).
audio-visual
recordings Published works
Lifetime of the author and in
Newspaper Article perpetuity after his death. Those works which, with the consent of the authors,
(Sec. 213, IPC) are made available to the public by wire or wireless
means in such a way that members of the public may
NOTE: The term of protection shall be counted from the 1st access these works from a place and time individually
day of January of the year following the last publication chosen by them: provided, that availability of such
(Sec. 214, IPC). copies has been such, as to satisfy the reasonable
requirement of the public, having regard to the
nature of the work. (Sec. 171.7, IPC)

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327 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Public performance v. Communication to the public
of a performance NOTE: If two or more persons jointly own a copyright or
any part thereof, neither of the owners shall be entitled to
COMMUNICATIONS TO grant licenses without the prior written consent of the
PUBLIC other owner or owners (Ibid.).
THE PUBLIC OF A
PERFORMANCE
PERFORMANCE COPYRIGHT INFRINGEMENT
Performance at a place
The transmission to the
or at places where Copyright infringement
public, by any medium,
persons outside the
otherwise than by It is the doing by any person, without the consent of
normal circle of a
broadcasting, of sounds of a the owner of the copyright, of anything the sole right
family and that
performance or the to do which is conferred by statute on the owner of
familys closest social
representations of sounds the copyright. The act of lifting from anothers book
acquaintances are or
fixed in a sound recording. substantial portions of discussions and examples and
can be present.
The communication can be the failure to acknowledge the same is an
It is performed at a infringement of copyright (Habana v. Robles, G.R.
accessed through wired or
specific time and No. 131522, July 19, 1999).
wireless means at a time
place. (e.g. The
and place convenient to the
Pacquiao-Clottey Infringement
viewer (e.g. The
Match in Dallas Texas
Pacquiao-Clottey Match
Stadium) A person infringes a right protected under this Act
watched via YouTube)
when one:
Transfer or assignment of copyright (a) Directly commits an infringement;
(b) Benefits from the infringing activity of
The copyright may be assigned or licensed in whole another person who commits an
or in part. Within the scope of the assignment or infringement if the person benefiting has
license, the assignee or licensee is entitled to all the been given notice of the infringing activity
rights and remedies which the assignor or licensor and has the right and ability to control the
had with respect to the copyright (Sec. 180.1, IPC, as activities of the other person;
amended by R.A. No. 10372). (c) With knowledge of infringing activity,
induces, causes or materially contributes to
Requisites for a transfer of copyright to take effect the infringing conduct of another (Sec. 216,
IPC, as amended by R.A. No. 10372).
1. If inter vivos, there must be a written indication of
such intention; and Meaning of substantial reproduction
2. Filed in National Library upon payment of
prescribed fees (Sec. 182, IPC). It is not necessarily required that the entire
copyrighted work, or even a large portion of it, be
The filing of the assignment or license of copyright is copied. If so much is taken that the value of the
NOT a mandatory requirement original work is substantially diminished, there is an
infringement of copyright and to an injurious extent,
Section 182 uses the permissive word may in the work is appropriated. It is no defense that the
reference to the filing of the deed of assignment or pirate did not know whether or not he was infringing
transfer of copyright, this filing should not be any copyright; he at least knew that what he was
understood as mandatory for validity and copying was not his, and he copied at his peril. In
enforceability. The filing is entirely optional for the cases of infringement, copying alone is not what is
parties and may be useful only for evidentiary and prohibited. The copying must produce an injurious
notification purposes (Amador, 2007). effect (Habana v. Robles, G.R. No. 131522, July 19,
1999).
Limitation regarding submission of a literary,
photographic or artistic work to a newspaper, Plagiarism
magazine or periodical for publication
It is the practice of claiming or implying original
Unless a greater right is expressly granted, such authorship of (or incorporating material from)
submission shall constitute only a license to make a someone elses written or creative work, in whole or
single publication (Sec. 180.3, IPC).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 328
 INTELLECTUAL PROPERTY LAWS
in part, into ones own without adequate 3. Impounding during the pendency of the action
acknowledgment. sales invoices and other documents evidencing
sales
Copyright infringement v. Plagiarism 4. Destruction without any compensation all
infringing copies
COPYRIGHT 5. Moral and Exemplary damages (Sec. 216.1); or
PLAGIARISM 6. Seizure and impounding of any article, which may
INFRINGEMENT
The unauthorized use serve as evidence in the court proceedings. (Sec.
of copyrighted 216.2, IPC)
material in a manner
The use of anothers Double damages
that violates one of
information,
the copyright owners
language, or writing, The amount of damages to be awarded shall be
exclusive rights, such
when done without doubled against any person who:
as the right to
proper (i) Circumvents effective technological measures; or
reproduce or perform
acknowledgment of (ii) Having reasonable grounds to know that it will
the copyrighted work,
the original source. induce, enable, facilitate or conceal the infringement,
or to make derivative
works that build upon remove or alter any electronic rights management
it. information from a copy of a work, sound recording,
or fixation of a performance, or distribute, import for
Copyright
distribution, broadcast, or communicate to the public
infringement is a very
works or copies of works without authority, knowing
broad term that
that electronic rights management information has
describes a variety of
been removed or altered without authority (Sec.
acts. It may be
Plagiarism is specific 216.1, IPC, as amended by R.A. No. 10372).
duplication of a work,
as it refers only to
rewriting a piece, NOTE: The copyright owner may elect, at any time before
using someone elses
performing a written final judgment is rendered, to recover instead of actual
work without proper
work or doing damages and profits, an award of statutory damages for all
acknowledgement.
anything that is infringements involved in an action in a sum equivalent to
normally considered the filing fee of the infringement action but not less than
to be the exclusive Fifty thousand pesos (Php50,000.00). (Sec. 216.1, IPC, as
right of the copyright amended by R.A. No. 10372)
holder.
Factors to be considered by the court in awarding
Public documents can
There is no copyright statutory damages
be plagiarized so long
infringement on public
as it is not (1) the nature and purpose of the infringing act;
documents.
acknowledged. (2) the flagrancy of the infringement;
In copyright (3) Whether the defendant acted in bad faith;
In plagiarism the
infringement, the (4) the need for deterrence;
copying need not be
copying must be (5) Any loss that the plaintiff has suffered or is likely
substantial
substantial to suffer by reason of the infringement; and
In copyright (6) Any benefit shown to have accrued to the
Plagiarism, may exist
infringement, the defendant by reason of the infringement
even if none of the
copying must refer to
same words are used
the expression of an Copying is demonstrated by:
to express an idea.
idea.
1. Direct Evidence
2. By circumstantial evidence of access and
Remedies in case of copyright infringement substantial inquiry (most common test) (Amador,
(IDID-MS) 2007)

1. Injunction NOTE: ACCESS- having reasonable opportunity to view or

2. Damages, including legal costs and other hear the plaintiffs work. THRESHOLD INQUIRY: whether
expenses, as he may have incurred due to the there is reasonable opportunity to copy
infringement as well as the profits the infringer
may have made due to such infringement

UNIVERSITY OF SANTO TOMAS

329 FACULTY OF CIVIL LAW
 MERCANTILE LAW
Criminal penalties in case of copyright infringement
1. Imprisonment of one (1) year to three (3) years
plus a fine ranging from Fifty thousand pesos
(P50,000) to One hundred fifty thousand pesos
(P150,000) for the first offense.
2. Imprisonment of three (3) years and one (1) day to
six (6) years plus a fine ranging from One hundred
fifty thousand pesos to Five hundred thousand
(P500,000) for the second offense.
3. Imprisonment of six (6) years and one day to nine
(9) years plus a fine ranging from Five hundred
thousand pesos (P500,000) to P1,500,000 for the
third offense.
4. In all cases, subsidiary imprisonment in cases of
insolvency.
Determination of penalty
In determining the number of years of imprisonment
and the amount of fine, the court shall consider the
value of the infringing materials that the defendant
has produced or manufactured and the damage that
the copyright owner has suffered by reason of the
infringement: Provided, That the respective maximum
penalty stated in Section 217.1. (a), (b) and (c) herein
for the first, second, third and subsequent offense,
shall be imposed when the infringement is committed
by:
(a) the circumvention of effective
technological measures;
(b) the removal or alteration of any
electronic rights management information
from a copy of a work, sound recording, or
fixation of a performance, by a person,
knowingly and without authority; or
(c) the distribution, importation for
distribution, broadcast, or communication to
the public of works or copies of works, by a
person without authority, knowing that
electronic rights management information
has been removed or altered without
authority. (Sec. 217.2, IPC, as amended by
R.A. No. 10372).
Affidavit evidence
An affidavit made before the notary public in actions
for infringement, reciting the facts required to be
stated under the IPC (Sec. 216.1).
NOTE: As a prima facie proof, the affidavit shifts the burden
of proof to the defendant, to prove the ownership of the
copyrighted work.
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
Q: Due to the amendment of the IP Code under RA
10372 APPROVED ON FEBRUARY 28, 2013, deleting
the provision entitling importation in the Philippines
of up to three (3) copies of copyrighted works in a
personal baggage, can one still be allowed to import
books, DVDs, and CDs from abroad?
A: Yes. In fact, the amendments to the Intellectual
Property Code have removed the original limitation
of three copies when bringing legitimately acquired
copies of copyrighted material into the country. Only
the importation of pirated or infringed material is
illegal. As long as they were legally purchased, you
can bring as many copies you want, subject to
Customs regulations (pcdspo.gov.ph).
Reproduction of copyrighted material for personal
purposes is not punishable by RA 10372
Infringement in this context refers to the economic
rights of the copyright owner. Transferring music
from a lawfully acquired CD into a computer, then
downloading it to a portable device for personal use,
is not infringement. But if, multiple copies of the CD
were reproduced for sale, then infringement occurs
(Ibid).
Possession of a music file procured through an
infringing activity is a violation of the law
The possession of a music file procured through an
infringing activity is a violation of the law only if it can
be proven that the person benefitting from the music
file has knowledge of the infringement, and the
power and ability to control the person committing
the infringement (Ibid).
Jailbreaking or rooting a phone or device
Jailbreaking or rooting by themselves are not illegal.
However, downloading pirated material, or
committing infringement with a jailbroken phone
increases the penalty and damages imposed on the
person found guilty of infringement (Ibid).
NOTE: Jailbreaking (for iOS) and rooting (for Android) are
examples of decompilation, the process of removing the
vendor-imposed limitations of tablets, mobile devices and
other electronic gadgets. Though not illegal, decompilation
may be in violation of your operating systems terms of use,
and therefore may void your warranty (Ibid).
Liability of mall owners for the infringement
activities of their tenants
Mall owners are not automatically penalized for the
infringing acts of their tenants. When a mall owner or
330
 INTELLECTUAL PROPERTY LAWS
lessor finds out about an infringement activity, he or
she must give notice to the tenant, then he or she will
be afforded time to act upon this knowledge. The law
requires that one must have both proven knowledge
of the infringement, and the ability to control the
activities of the infringing person, to be held liable.
The mall owner must also have benefitted from the
infringement (Ibid).
Other beneficial provisions brought by RA 10372
1. Grant of enforcement powers to IPOPHL (Sec. 2)
The law grants visitorial powers to IPOPHL and allows
it to undertake enforcement functions with the
support of concerned agencies such as PNP, NBI,
BOC, OMB and LGUs. IPOPHL itself will not be
conducting raids or seizures but will be coordinating
with the said agencies. However, as IP rights remain
to be private rights, there must be a complaint from
the IP right owner. So, if an author sees pirated
copies of his book in a certain store, he may notify
IPOPHL. IPOPHL can now initiate together with any of
the said agencies to address the problem.
2. Establishment of the Bureau of Copyright and
other related rights (Secs. 1 and 3)
At present there is no entity performing the more
substantial function of policy formulation, rule
making, adjudication, research and education, which
is envisioned to be handled by the Bureau of
Copyright. Although a Copyright Division exists in the
National Library, the function of such office is merely
to accept deposits of copyrighted works. The
Copyright Bureau is dedicated to serving the needs of
the copyright-based industries and stakeholders
could give more focus and rally more resources and
support for the creative industry, which is very
important for protection of works by Filipinos both
here and abroad.
3. Accreditation of collective management
organizations or CMOs (Sec. 10)
CMOs are organizations that enforce the copyright of
the copyright holders. Through this mandate, IPOPHL
will be able to monitor and promote good corporate
governance among CMOs, benefitting not only the
rights holders themselves but also the users of
copyrighted works. Members of the Philippine
Retailers Association (PRA), mall owners, restaurants,
and other heavy users of music in their
establishments will greatly benefit from this
provision, as they are ensured that only legitimate
collecting agencies can collect royalties from them on
behalf of copyright owners.
331
4. Clarification of the concept of copyright
infringement, including secondary liability (Secs. 22
and 23)
The provisions on copyright infringement have been
refined to include contributory infringement
(secondary liability), circumvention of technological
measures and rights management information as
aggravating circumstances, and the option to collect
statutory damages instead of actual damages.
However, under Sec. 22 of the amendments, to be
secondarily liable, a landlord or mall must: (1) benefit
from the infringing activity; (2) must have been given
notice of the infringing activity and a grace period to
act on the same; and (3) has the right and ability to
control the activities of the person who is doing the
infringement. The complainant has the burden of
proof to provide evidence that all 3 elements are
present. If a landlord or mall owner is not aware of
the infringement, he cannot be liable for
infringement, even if he benefits from it (from rental
payments) or has control over the premises.
5. Fair use for the blind, visually- and
reading-impaired (Sec. 11)
This provision would give a special fair use exemption
for the non-commercial reproduction of works for
use by visually-impaired persons. Before this
amendment, hundreds of thousands of blind Filipinos
could not buy Braille works at cheap prices because
copyright protection operates. Now with this
amendment, blind and visually impaired Filipinos can
have easier access to copyrighted works in Braille.
6. Formulation of IP Policies within universities and
colleges (Sec. 27)
This will ensure that the rights of the academic
community (professors, researchers, students) over
their literary, scholarly and artistic works are clearly
delineated and respected. With an IP Policy in
existence, these sectors within the academe will have
a clear delineation of their respective rights and
benefits, thus, avoiding disputes and costly litigation
within their ranks which would be detrimental to
education, research and development.
(http://www.ipophil.gov.ph/index.php/20-what-s-ne
w/135-fact-sheet-on-ip-code-amendments)
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW

RULES OF PROCEDURE FOR INTELLECTUAL

PROPERTY RIGHTS CASES (A.M. No. 10-3-10-SC)

In what courts applicable

Regional Trial Courts designated by the Supreme

Court as Special Commercial Courts

Effect of registration and deposit

Registration and deposit of a work with the National

Library or the Intellectual Property Office shall not
carry with it the presumption of ownership of the
copyright by the registrant or depositor, nor shall it
be considered a condition sine qua non to a claim of
copyright infringement

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 332
 INTELLECTUAL PROPERTY LAWS

SPECIAL LAWS

ANTI-MONEY LAUNDERING ACT OF 2001

(R.A. 9160 ,AS AMENDED BY RA 9194, 10167,
10365)

POLICY OF THE LAW

Policy of the State

1. To protect and preserve the integrity and

confidentiality of bank accounts and to ensure that
the Philippines shall not be used as a money
laundering site for the proceeds of any unlawful
activity.

2. To pursue the States foreign policy to extend

cooperation in transnational investigation and
prosecutions of persons involved in money
laundering activities wherever committed. (Sec. 1, RA
9160.)

OVERVIEW OF THE RECENT AMENDMENTS AS INTRODUCED BY RA 10365 TO AMLA OF 2001 (RA 9160)

CATEGORY RA 9160, as amended by RA 9194 and

(Based on 10167
Bar 2014 Syllabus)
COVERED Covered institution refers to:
INSTITUTION
(1) banks, non-banks, quasi-banks, trust
entities, and all other institutions and
their subsidiaries and affiliates
supervised or regulated by the Bangko
Sentral ng Pilipinas (BSP);
(2) Insurance companies and all other
institutions supervised or regulated by
the Insurance Commission; and
(3) (i) securities dealers, brokers,
salesmen, investment houses and
other similar entities managing
securities or rendering services as
investment agent, advisor, or
consultant,
(ii) mutual funds, close and
investment companies, common trust
funds, pre-need companies and other
similar entities,
(iii) foreign exchange corporations,
money changers, money payment,
remittance, and transfer companies
and other similar entities, and
(iv) other entities administering or
RA 10365, amending RA 9160
(Amendments and New Provisions)
NOTE: Covered Institutions was changed to
Covered Persons
Covered persons, natural or juridical, refer
to:
(1) banks, non-banks, quasi-banks, trust
entities, foreign exchange dealers,
pawnshops, money changers,
remittance and transfer companies and
other similar entities and all other
persons and their subsidiaries and
affiliates supervised or regulated by the
Bangko Sentral ng Pilipinas (BSP);
(2) insurance companies, pre-need
companies and all other persons
supervised or regulated by the
Insurance Commission (IC);
(3) (i) securities dealers, brokers, salesmen,
investment houses and other similar
persons managing securities or
rendering services as investment agent,
advisor, or consultant,
(ii) mutual funds, close-end investment
companies, common trust funds, and

UNIVERSITY OF SANTO TOMAS

333 FACULTY OF CIVIL LAW
 MERCANTILE LAW
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar
monetary instruments or property
supervised or regulated by Securities
and Exchange Commission.
other similar persons, and
(iii) other entities administering or
otherwise dealing in currency,
commodities or financial derivatives
based thereon, valuable objects, cash
substitutes and other similar monetary
instruments or property supervised or
regulated by the Securities and
Exchange Commission (SEC);

(4) jewelry dealers in precious metals,

who, as a business, trade in precious
metals, for transactions in excess of
One million pesos (P1,000,000.00);

(5) jewelry dealers in precious stones, who,

as a business, trade in precious stones,
for transactions in excess of One
million pesos (P1,000,000.00);

(6) company service providers which, as a

business, provide any of the following
services to third parties:

(i) acting as a formation agent of

juridical persons;
(ii) acting as (or arranging for another
person to act as) a director or
corporate secretary of a company, a
partner of a partnership, or a similar
position in relation to other juridical
persons;
(iii) providing a registered office,
business address or accommodation,
correspondence or administrative
address for a company, a partnership
or any other legal person or
arrangement; and
(iv) acting as (or arranging for another
person to act as) a nominee
shareholder for another person; and

(7) persons who provide any of the

following services:
(i) managing of client money,
securities or other assets;
(ii) management of bank, savings or
securities accounts;
(iii) organization of contributions for
the creation, operation or management
of companies; and
(iv) creation, operation or
management of juridical persons or
arrangements, and buying and selling
business entities.

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 334
 SPECIAL LAWS
OBLIGATIONS OF a. Customer Identification - Covered
COVERED institutions shall establish and record the
INSTITUTIONS true identity of its clients based on official
documents. They shall maintain a system
of verifying the true identity of their
clients and, in case of corporate clients,
require a system of verifying their legal
existence and organizational structure, as
well as the authority and identification of
all persons purporting to act on their
behalf.
The provisions of existing laws to the
contrary notwithstanding, anonymous
accounts, accounts under fictitious names,
and all other similar accounts shall be
absolutely prohibited. Peso and foreign
currency non-checking numbered
accounts shall be allowed. The BSP may
conduct annual testing solely limited to
the determination of the existence and
true identity of the owners of such
accounts.
b) Record Keeping - All records of all
transactions of covered institutions shall
be maintained and safely stored for five
(5) years from the date of transactions.
With respect to closed accounts, the
records on customer identification,
account files and business
correspondence, shall be preserved and
safety stored for at least five (5) years
from the dates when they were closed.
c) Reporting of Covered and Suspicious
Transactions - Covered institutions shall
335
Exclusions: The term covered persons shall
exclude lawyers and accountants
Requisites for exclusion
1. Acting as independent legal professionals
2. In relation to information concerning their
clients or
3. Where disclosure of information would
compromise client confidences or the
attorney-client relationship. (Sec. 1, RA
10365, amending Sec. 3[a] of RA 9160).
a. (same; not amended)
b. (same; not amended)
c. Reporting of Covered and Suspicious
Transactions. Covered persons shall report
to the AMLC all covered transactions and
suspicious transactions within five (5)
working days from occurrence thereof,
unless the AMLC prescribes a different
period not exceeding fifteen (15) working
days.
Lawyers and accountants acting as
independent legal professionals are not
required to report covered and suspicious
transactions if the relevant information was
obtained in circumstances where they are
subject to professional secrecy or legal
professional privilege.
x x x
x x x
When reporting covered or suspicious
transactions to the AMLC, covered persons
and their officers and employees are
prohibited from communicating, directly or
indirectly, in any manner or by any means, to
any person or entity, the media, the fact that
a covered or suspicious transaction has been
reported or is about to be reported, the
contents of the report, or any other
information in relation thereto. Neither may
such reporting be published or aired in any
manner or form by the mass media,
electronic mail, or other similar devices. In
case of violation thereof, the concerned
officer and employee of the covered person
and media shall be held criminally
liable.(Sec. 7, RA 10365 amending Sec. 9, RA
9160).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
report to the AMLC all covered
transactions and suspicious transactions
within five(5) working days from
occurrences thereof, unless the
Supervising Authority prescribes a longer
period not exceeding ten (10) working
days.

"Should a transaction be determined to be

both a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.

When reporting covered or suspicious

transactions to the AMLC, covered
institutions and their officers and employees
shall not be deemed to have violated
Republic Act No. 1405, as amended,
Republic Act No. 6426, as amended,
Republic Act No. 8791 and other similar
laws, but are prohibited from
communicating, directly or indirectly, in any
manner or by an means, to any person, the
fact that a covered or suspicious transaction
report was made, the contents thereof, or
any other information in relation thereto. In
case of violation thereof, the concerned
officer and employee of the covered
institution shall be criminally liable.
However, no administrative, criminal or civil
proceedings, shall lie against any person for
having made a covered or suspicious
transaction report in the regular
performance of his duties in good faith,
whether or not such reporting results in any
criminal prosecution under this Act of any
other law.

"When reporting covered or suspicious

transactions to the AMLC, covered
instituting and their officers and employees
are prohibited from communicating directly
or indirectly, in any manner or by any
means, to any person or entity, the media,
the fact that a covered or suspicious
transaction report was made, the contents
thereof, or any other information in relation
thereto. Neither may such reporting be
published or aired in any manner or form by
the mass media, electronic mail, or other
similar devices. In case of violation thereof,
the concerned officer and employee of the
covered institution and media shall be held
criminally liable (Sec. 9, RA 9160 as amended
by RA 9194).

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 336
 SPECIAL LAWS
COVERED 'Covered transaction' is a transaction in cash
TRANSACTIONS or other equivalent monetary instrument
involving a total amount in excess of Five
Same; not amended
hundred thousand pesos (PhP 500,000.00)
within one (1) banking day.(Sec. 3 [b], RA
9160).
SUSPICIOUS 'Suspicious transaction' are transactions
TRANSACTIONS with covered institutions, regardless of the
amounts involved, where any of the
following circumstances exist:

1. There is no underlying legal or trade

obligation, purpose or economic
justification;
2. The client is not properly identified;
3. The amount involved is not
commensurate with the business or financial
capacity of the client;
4. Taking into account all known
circumstances, it may be perceived that the
client's transaction is structured in order to
Same; not amended
avoid being the subject of reporting
requirements under the Act;
5. Any circumstances relating to the
transaction which is observed to deviate
from the profile of the client and/or the
client's past transactions with the covered
institution;
6. The transactions is in a way related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
7. Any transactions that is similar or
analogous to any of the foregoing." (Sec.
3[b-1], RA 9160).

WHEN IS MONEY Money laundering is a crime whereby the
LAUNDERING proceeds of an unlawful activity as herein
COMMITTED defined are transacted, thereby making
(DEFINITION OF them appear to have originated from
MONEY legitimate sources. It is committed by the
LAUNDERING) following:
(a) Any person knowing that any monetary
instrument or property represents, involves,
or relates to, the proceeds of any unlawful
activity, transacts or attempts to transacts
said monetary instrument or property.
Money laundering is committed by any
person who, knowing that any monetary
instrument or property represents, involves,
or relates to the proceeds of any unlawful
activity:
(a) transacts said monetary instrument or
property;
(b) converts, transfers, disposes of, moves,
acquires, possesses or uses said monetary
instrument or property;

(b) Any person knowing that any monetary
instrument or property involves the
proceeds of any unlawful activity, performs
or fails to perform any act as a result of
which he falicitates the offense of money
laundering referred to in paragraph (a)
(c) conceals or disguises the true nature,
source, location, disposition, movement or
ownership of or rights with respect to said
monetary instrument or property;
(d) attempts or conspires to commit money
laundering offenses referred to in

UNIVERSITY OF SANTO TOMAS

337 FACULTY OF CIVIL LAW
 MERCANTILE LAW
above.
(c) Any person knowing that any monetary
instrument or property is required under
this Act to be disclosed and filed with the
Anti-Money Laundering Council (AMLC), fails
to do so."(Sec. 4, RA 9160, as amended by
RA 9194).
UNLAWFUL 'Unlawful activity' refers to any act or
ACTIVITIES OR omission or series or combination thereof
PREDICATE CRIMES involving or having direct relation to
following:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15,
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous Act
of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
under the Revised Penal Code, as amended
and Presidential Decree No. 532;
(8) Qualified theft under Article 310 of the
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES 338
paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a), (b) or
(c) above; and
(f) performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in paragraphs
(a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered
or suspicious transaction is required under
this Act to be reported to the Anti-Money
Laundering Council (AMLC), fails to do so.
(Sec. 4, RA 10365, amending Sec. 4, RA
9160).
Unlawful activity refers to any act or
omission or series or combination thereof
involving or having direct relation to the
following:
(1) Kidnapping for ransom under Article 267
of Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 11, 12, 13, 14, 15
and 16 of Republic Act No. 9165, otherwise
known as the Comprehensive Dangerous
Drugs Act of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended,
otherwise known as the Anti-Graft and
Corrupt Practices Act;
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles
294, 295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
 SPECIAL LAWS
Revised penal Code, as amended;
(9) Swindling under Article 315 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations under Republic Act No. 8792,
otherwise known as the Electrinic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson
and murder, as defined under the Revised
Penal Code, as amended, including those
perpetrated by terrorists against
non-combatant persons and similar targets;
(13) Fraudulent practices and other
violations under Republic Act No. 8799,
otherwise known as the Securities
Regulation Code of 2000;
(14) Felonies or offenses of a similar nature
that are punishable under the penal laws of
other countries."
339
(9) Swindling under Article 315 and Other
Forms of Swindling under Article 316 of the
Revised Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations of Republic Act No. 8792,
otherwise known as the Electronic
Commerce Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal
Code, as amended;
(13) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372;
(14) Financing of terrorism under Section 4
and offenses punishable under Sections 5, 6,
7 and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing
Prevention and Suppression Act of 2012:
(15) Bribery under Articles 210, 211 and
211-A of the Revised Penal Code, as
amended, and Corruption of Public Officers
under Article 212 of the Revised Penal Code,
as amended;
(16) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as
amended;
(17) Malversation of Public Funds and
Property under Articles 217 and 222 of the
Revised Penal Code, as amended;
(18) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176 of
the Revised Penal Code, as amended;
(19) Violations of Sections 4 to 6 of Republic
Act No. 9208, otherwise known as the
Anti-Trafficking in Persons Act of 2003;
(20) Violations of Sections 78 to 79 of
Chapter IV, of Presidential Decree No. 705,
otherwise known as the Revised Forestry
Code of the Philippines, as amended;
(21) Violations of Sections 86 to 106 of
Chapter VI, of Republic Act No. 8550,
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
otherwise known as the Philippine Fisheries
Code of 1998;

(22) Violations of Sections 101 to 107, and

110 of Republic Act No. 7942, otherwise
known as the Philippine Mining Act of 1995;

(23) Violations of Section 27(c), (e), (f), (g)

and (i), of Republic Act No. 9147, otherwise
known as the Wildlife Resources
Conservation and Protection Act;

(24) Violation of Section 7(b) of Republic Act

No. 9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;

(25) Violation of Republic Act No. 6539,

otherwise known as the Anti-Carnapping Act
of 2002, as amended;

(26) Violations of Sections 1, 3 and 5 of

Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;

(27) Violation of Presidential Decree No.

1612, otherwise known as the Anti-Fencing
Law;

(28) Violation of Section 6 of Republic Act

No. 8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995,
as amended by Republic Act No. 10022;

(29) Violation of Republic Act No. 8293,

otherwise known as the Intellectual Property
Code of the Philippines;

(30) Violation of Section 4 of Republic Act

No. 9995, otherwise known as the
Anti-Photo and Video Voyeurism Act of
2009;

(31) Violation of Section 4 of Republic Act

No. 9775, otherwise known as the Anti-Child
Pornography Act of 2009;

(32) Violations of Sections 5, 7, 8, 9, 10(c),

(d) and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination;

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2014 GOLDEN NOTES 340
 SPECIAL LAWS

(33) Fraudulent practices and other

violations under Republic Act No. 8799,
otherwise known as the Securities
Regulation Code of 2000; and

(34) Felonies or offenses of a similar nature

that are punishable under the penal laws of
other countries.
ANTI-MONEY The Anti-Money Laundering Council is
LAUNDERING hereby created and shall be composed of
COUNCIL (AMLC) 1. The Governor of the Bangko Sentral ng
Pilipinas as Chairman,
2. The Commissioner of the Insurance Same; not amended
Commission and
3. The Chairman of the Securities and
Exchange Commission as members. (Sec. 7,
RA 9160, as amended by RA 9194).
FUNCTIONS The AMLC shall shall act unanimously in the The AMLC shall act unanimously in the
discharge of its functions as defined discharge of its functions as defined
hereunder: hereunder:

(1) to require and receive covered or (1) (Same; not amended.)

suspicious transaction reports from covered
institutions; (2) (Same; not amended.)

(2) to issue orders addressed to the (3) (Same; not amended.)

appropriate Supervising Authority or the
covered institutions to determine the true (4) (Same; not amended.)
identity of the owner of any monetary
instrument or preperty subject of a covered (5) (Same; not amended.)
transaction or suspicious transaction report
or request for assistance from a foreign (6) to apply before the Court of Appeals, ex
State, or believed by the Council, on the parte, for the freezing of any monetary
basis fo substantial evidence, to be, in whole instrument or property alleged to be
or in part, wherever located, representing, laundered, proceeds from, or
involving, or related to directly or indirectly, instrumentalities used in or intended for use
in any manner or by any means, the in any unlawful activity as defined in Section
proceeds of an unlawful activity. 3(i) hereof;

(7) (Same; not amended.)

(3) to institute civil forfeiture proceedings
and all other remedial proceedings through
(8) (Same; not amended.)
the Office of the Solicitor General;
(9) (Same; not amended.)
(4) to cause the filing of complaints with the
Department of Justice or the Ombudsman
(10) (Same; not amended.)
for the prosecution of money laundering
offenses;
(11) (Same; not amended.)

(5) to investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by AMLC, money
laundering activities and other violations of
this Act;
(12) to require the Land Registration
Authority and all its Registries of Deeds to
submit to the AMLC, reports on all real
estate transactions involving an amount in
excess of Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from

UNIVERSITY OF SANTO TOMAS

341 FACULTY OF CIVIL LAW
 MERCANTILE LAW
(6) to apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be the
proceeds of any unlawful activity as defined
in Section 3(i) hereof;
(7) to implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
the date of registration of the transaction, in
a form to be prescribed by the AMLC. The
AMLC may also require the Land Registration
Authority and all its Registries of Deeds to
submit copies of relevant documents of all
real estate transactions (Sec. 6, RA 10365
amending Sec. 7, RA 9160).

(8) to receive and take action in respect of,

any request from foreign states for
assistance in their own anti-money
laundering operations provided in this Act;

(9) to develop educational programs on the

pernicious effects of money laundering, the
methods and techniques used in the money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;

(10) to enlist the assistance of any branch,

department, bureau, office, agency, or
instrumentality of the government, including
government-owned and -controlled
corporations, in undertaking any and all
anti-money laundering operations, which
may include the use of its personnel,
facilities and resources for the more resolute
prevention, detection, and investigation of
money laundering offenses and prosecution
of offenders; and

(11) to impose administrative sanctions for

the violation of laws, rules, regulations, and
orders and resolutions issued pursuant
thereto. (Sec. 7, RA 9160 as amended by RA
9194.)
FREEZING OF Upon verified ex parte petition by the AMLC
MONEY and after determination that probable cause
INSTRUMENT OR exists that any monetary instrument or
PROPERTY property is in any way related to an unlawful
activity as defined in Section 3(i) hereof, the
Court of Appeals may issue a freeze order,
which shall be effective immediately. The
freeze order shall be for a period of twenty
(20) days unless extended by the court. In
any case, the court should act on the
petition to freeze within twenty-four (24)
hours from filing of the petition. If the
application is filed a day before a
nonworking day, the computation of the
twenty-four (24)-hour period shall exclude
Upon a verified ex parte petition by the
AMLC and after determination that probable
cause exists that any monetary instrument
or property is in any way related to an
unlawful activity as defined in Section 3(i)
hereof, the Court of Appeals may issue a
freeze order which shall be effective
immediately, and which shall not exceed six
(6) months depending upon the
circumstances of the case: Provided, That if
there is no case filed against a person whose
account has been frozen within the period
determined by the court, the freeze order
shall be deemed ipso facto lifted: Provided,
further, That this new rule shall not apply to
pending cases in the courts. In any case, the
court should act on the petition to freeze

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 342
 SPECIAL LAWS
the nonworking days."
"A person whose account has been frozen
may file a motion to lift the freeze order and
the court must resolve this motion before
the expiration of the twenty (20)-day
original freeze order."
"No court shall issue a temporary restraining
order or a writ of injunction against any
freeze order, except the Supreme Court.
(Sec. 10, RA 9160 as amended by RA 10167.)
AUTHORITY TO Notwithstanding the provisions of Republic
INQUIRE INTO Act No. 1405, as amended; Republic Act No.
BANK DEPOSITS 6426, as amended; Republic Act No. 8791;
and other laws, the AMLC may inquire into
or examine any particular deposit or
investment, including related accounts, with
any banking institution or non-bank financial
institution upon order of any competent
court based on an ex parte application in
cases of violations of this Act, when it has
been established that there is probable
cause that the deposits or investments,
including related accounts involved, are
related to an unlawful activity as defined in
Section 3(i) hereof or a money laundering
offense under Section 4 hereof; except that
no court order shall be required in cases
involving activities defined in Section 3(i)(1),
(2), and (12) hereof, and felonies or offenses
of a nature similar to those mentioned in
Section 3(i)(1), (2), and (12), which are
Punishable under the penal laws of other
countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
under Republic Act No. 9372.
within twenty-four (24) hours from filing of
the petition. If the application is filed a day
before a nonworking day, the computation
of the twenty-four (24)-hour period shall
exclude the nonworking days.
A person whose account has been frozen
may file a motion to lift the freeze order and
the court must resolve this motion before
the expiration of the freeze order.
No court shall issue a temporary restraining
order or a writ of injunction against any
freeze order, except the Supreme Court.
(Sec. 8, RA 10365, amending RA 9160.)
Same; but the following new provisions were
inserted:
Nothing contained in this Act nor in related
antecedent laws or existing agreements shall
be construed to allow the AMLC to
participate in any manner in the operations
of the BIR. (Sec. 20, RA 10365, amending RA
9160.)
The authority to inquire into or examine the
main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution,
which are hereby incorporated by reference.
Likewise, the constitutional injunction
against ex post factolaws and bills of
attainder shall be respected in the
implementation of this Act.(Sec. 21, RA
10365 amending RA 9160.)

The Court of Appeals shall act on the

application to inquire into or examine any
deposit or investment with any banking
institution or non-bank financial institution
within twenty-four (24) hours from filing of
the application.

To ensure compliance with this Act, the

Bangko Sentral ng Pilipinas may, in the
course of a periodic or special examination,
check the compliance of a Covered
institution with the requirements of the
AMLA and its implementing rules and
regulations.

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343 FACULTY OF CIVIL LAW
 MERCANTILE LAW
For purposes of this section, related
accounts shall refer to accounts, the funds
and sources of which originated from and/or
are materially linked to the monetary
instrument(s) or property(ies) subject of the
freeze order(s).

A court order ex parte must first be obtained

before the AMLC can inquire into these
related Accounts: Provided, That the
procedure for the ex parte application of
the ex parte court order for the principal
account shall be the same with that of the
related accounts.

"The authority to inquire into or examine

the main account and the related accounts
shall comply with the requirements of
Article III, Sections 2 and 3 of the 1987
Constitution, which are hereby incorporated
by reference (Sec. 11, RA 9160, as amended
by RA 10167).

Safe Harbor Provision when the proceeds of an "unlawful activity," like

No administrative, criminal or civil proceedings, shall
lie against any person for having made a COVERED
transaction report or a SUSPICIOUS transaction report
in the regular performance of his duties and in good
faith, whether or not such reporting results in any
criminal prosecution under this Act or any other
Philippine law.
jueteng operations, are made to appear as having
originated from legitimate sources. Money laundering
crime is separate from the unlawful activity of being a
jueteng operator, and requires no previous conviction
for the unlawful activity (Sec. 4, RA 9160, as amended
by RA 10365).
Jurisdiction for violations of AMLA

The report to AMLC will not violate the law on
Secrecy of Bank Deposits, Foreign Currency Deposit
Act and General Banking Law
The report to AMLC will not violate the law on
Secrecy of Bank Deposits, Foreign Currency Deposit
Act and General Banking Law but it cannot otherwise
communicate to any person or media, fact of report
of covered transaction or contents of the said report
nor can the fact of reporting be published or aired in
mass media, electronic mail or similar devices (Sec.
11, RA 9160 as amended by RA 10167).
Q: Alvin is jobless but is reputed to be a jueteng
operator. He has never been charged or convicted of
any crime. He maintains several bank accounts
amounting to P100 Million. AMLC charged Alvin
with violation of the Anti-Money Laundering Law.
Can Alvin move to dismiss the case on the ground
that he has no criminal record?
A: No. The contention of Alvin is not tenable because
under AMLA, "money laundering crime" committed
1. RTC all cases on money laundering
2. Sandiganbayan Those committed by public
officers and private persons in conspiracy with them.
(Sec. 5 R.A. 9160, as amended)
Party entitled to file freeze order
The AMLC, through the OSG, may file an ex-parte
verified petition for freeze order on any monetary
instrument, property or proceeds relating to or
involving an unlawful activity.
Jurisdiction to issue a freeze order
It is solely the CA which has the authority to issue a
freeze order upon application ex parte by the AMLC
and after determination that probable cause exists.
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 v. Cabrini Green & Ramos, G.R.
No. 154522, May 5, 2006)

UNIVERSITY OF SANTO TOMAS

2014 GOLDEN NOTES 344
 SPECIAL LAWS
Probable cause under AMLA

Probable cause includes such facts and circumstances

which would lead a reasonably discreet, prudent or
cautious man to believe that an unlawful activity
and/or a money laundering offense is about to be, is
being or has been committed and that the account or
any monetary instrument or property subject thereof
sought to be frozen is in any way related to said
unlawful activity and/or money laundering offense.
(Rule 10.2 of R.A. 9194 as amended)

Period of effectivity of freeze orders

Freeze orders shall be effective for period not

exceeding 6 months depending upon the
circumstances (Sec. 10, RA 9160 as amended by RA
10365).

Related accounts

Those accounts, the funds and sources of which

originated from and/or are materially linked to the
monetary instrument or property subject of the
freeze order.

Instances when the Anti-Money Laundering Council

(AMLC) may inquire into bank deposits

GR: Only upon order of any competent court in cases

of violation of R.A. 9160, as amended.

XPNs: No need of court order in cases of (KHDAM)

1. Kidnapping,
2. Hijacking,
3. Drugs- violation of Dangerous Drugs Act,
4. Arson,
5. Murder. (Sec. 11 R.A. 9160, as amended)

UNIVERSITY OF SANTO TOMAS

345 FACULTY OF CIVIL LAW
 MERCANTILE LAW
FOREIGN INVESTMENTS ACT
POLICY OF THE LAW
State policy of the law (NOSE Part)
1. It is the policy of the State to attract, promote and
welcome productive investments in activities which
significantly contribute to National industrialization
and socio-economic development to the extent that
foreign investment is allowed in such activity by the
Constitution and relevant laws from:
a. Foreign individuals;
b. Partnerships;
c. Corporations;
d. Governments, including their political
subdivisions.
2. Foreign investments shall be encouraged in the
enterprises that significantly expand livelihood and
employment Opportunities for Filipinos by:
a. Enhancing economic value of farm products;
b. Promoting the welfare of Filipino consumers;
c. Expanding the scope, quality and volume of
exports and their access to foreign markets;
d. And/or transferring relevant technologies in
agriculture, industry and support services.
3. Foreign investments shall be welcome as a
Supplement to Filipino capital and technology in
those enterprises serving mainly the domestic
market.
4. GR: There are no restrictions on extent of foreign
ownership of Export enterprises. In domestic market
enterprises, foreigners can invest as much as 100%
equity
XPN: In areas included in the negative list.
5. Foreign-owned firms catering mainly to the
domestic market shall be encouraged to undertake
measures that will gradually increase Filipino
PARTicipation in their businesses by
a. Taking in Filipino partners;
b. Electing Filipinos to the board of director;
c. Implementing transfer of technology to
Filipinos;
d. Generating more employment for the economy;
and
e. Enhancing skills of Filipino workers (Sec. 2, RA
7042).
DEFINITION OF TERMS
Foreign Investment
It is an equity investment made by non-Philippine
national in the form of foreign exchange and/or other
assets actually transferred to the Philippines and duly
registered with the Central Bank which shall assess
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
and appraise the value of such assets other than
foreign exchange.
Doing Business in the Philippines
Doing Business in the Philippines
Foreign corporations are considered doing or
transacting business in the Philippines if they are:
1. Soliciting orders, service contracts, and opening
offices whether called liason offices of branches;
2. Appointing representatives, distributors domiciled
in the Philippines or who stay for a period or
periods totaling 180 days or more;
3. Participating in the management, supervision or
control of any domestic business, firm, entity, or
corporation in the Philippines;
4. Doing any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance of
acts or works or the exercise of some functions
normally incident to and in progressive prosecution
of, the purpose and object of its organization.(Sec 3
[d], R.A. 7042.)
Instances that are considered as not doing or
transacting business in the Philippines for foreign
corporations
1. Mere investment as shareholder and exercise of
rights as investor;
2. Having a nominee director or officer to represent
its interest in the corporation;
3. Appointing a representative or distributor which
transacts business in its own name and for its own
account;
4. Publication of a general advertisement through any
print or broadcast media;
5. Maintaining a stock of goods in the Philippines
solely for the purpose of having the same processed
by another entity in the Philippines;
6. Consignment by the foreign corporation of
equipment with a local company to be used in the
processing of products for export;
7. Collecting information in the Philippines;
Performing services auxiliary to an existing isolated
contract of sale which are not on a continuing basis
(Sec 3 [d], RA 7042).
346
 SPECIAL LAWS
Export Enterprise
It is an enterprise wherein a manufacturer, processor
or service [including tourism] enterprise exports sixty
percent (60%) or more of its output, or wherein a
trader purchases products domestically and exports
sixty per cent (60%) or more of such purchases (Sec 3
[e], RA 7042).
Domestic Market Enterprise
It is an enterprise which produces goods for sale, or
renders services to the domestic market entirely or if
exporting a portion of its output fails to consistency
export at least 60% thereof (Sec 3 [f], R.A. 7042).
REGISTRATION OF INVESTMENTS OF
NON-PHILIPPINE NATIONALS
Philippine nationals
1. A citizen of the Philippines;
2. A domestic partnership or association wholly
owned by citizens of the Philippines;
3. Corporations organized under Philippine laws of
which 60% of the capital stock outstanding and
entitled to vote is owned and held by Filipino
citizens;
4. Corporations organized abroad and registered as
doing business in the Philippines under the
Corporation Code of which 100% of the capital
stock entitled to vote belong to Filipinos; and
5. Trustee of funds for pension or other employee
retirement or separation benefits, where the
trustee is a Philippine national and at least sixty
(60%) of the fund will accrue to the benefit of the
Philippine nationals.
Non-Philippine nationals
Those who do not belong to the definition of a
Philippine national.
A non-Philippine national may own fully a domestic
market enterprise
A non-Philippine national may own up to 100% of a
domestic market enterprise (Sec. 7, RA 7042).
Requirements for a non-Philippine national to own
up to 100% of a domestic market enterprise
1. A non-Philippine national must register with the
SEC or with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of DTI in the case of
347
single proprietorship for it to do business or invest in
a domestic enterprise up to 100% of its capital.
2. The participation of non-Philippine national in the
enterprise is must not be prohibited or limited to a
smaller percentage by existing law and/ or under
Foreign Investment Negative list (Sec. 5, RA 7042).
Imposition of additional limitation on the extent of
foreign ownership in an enterprise other than those
provided for under RA 7042 by the SEC or BTRCP
GR: The SEC or BTRCP, as the case may be, shall not
impose any limitations on the extent of foreign
ownership in an enterprise additional to those
provided in R.A. 7042.
XPNs:
1. That any enterprise seeking to avail of incentives
under the Omnibus Investment Code of 1987 must
apply for registration with the Board of Investments
(BOI), which shall process such application for
registration in accordance with the criteria for
evaluation prescribed in said Code;
2. That a non-Philippine national intending to engage
in the same line of business as an existing joint
venture, in which he or his majority shareholder is a
substantial partner, must disclose the fact and the
names and addresses of the partners in the existing
joint venture in his application for registration with
the SEC.
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
Rules regarding foreign registration in export
enterprises
1. Foreign investment in export enterprises whose
products and services do not fall within Lists A and B
of the Foreign Investment Negative List is allowed up
to 100% ownership.
2. Export enterprises which are non-Philippine
nationals shall register with BOI and submit the
reports that may be required to ensure continuing
compliance of the export enterprise with its export
requirement.
3. BOI shall advise SEC or BTRCP, as the case may be,
of any export enterprise that fails to meet the export
ratio requirement.
4. The SEC or BTRCP shall thereupon order the
non-complying export enterprise to reduce its sales
to the domestic market to not more than 40% of its
total production; failure to comply with such SEC or
BTRCP order, without justifiable reason, shall subject
the enterprise to cancellation of SEC or BTRCP
registration, and/or the penalties provided in this law
(Sec 6, R.A. 7042).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
FOREIGN INVESTMENT IN EXPORT ENTERPRISES
Rules regarding foreign registration in export
enterprises
5. Foreign investment in export enterprises whose
products and services do not fall within Lists A and B
of the Foreign Investment Negative List is allowed up
to 100% ownership.
6. Export enterprises which are non-Philippine
nationals shall register with BOI and submit the
reports that may be required to ensure continuing
compliance of the export enterprise with its export
requirement.
7. BOI shall advise SEC or BTRCP, as the case may be,
of any export enterprise that fails to meet the export
ratio requirement.
8. The SEC or BTRCP shall thereupon order the
non-complying export enterprise to reduce its sales
to the domestic market to not more than 40% of its
total production; failure to comply with such SEC or
BTRCP order, without justifiable reason, shall subject
the enterprise to cancellation of SEC or BTRCP
registration, and/or the penalties provided in this law
(Sec 6, R.A. 7042).
FOREIGN INVESTMENT DOMESTIC MARKET
ENTERPRISES
A domestic market enterprise may change its status
to export enterprise if the Domestic market
enterprise consistently exports in each year thereof
sixty per cent (60%) or more of its output over a three
(3) year period (Sec. 7, RA 7042).
FOREIGN INVESTMENT NEGATIVE LIST
Foreign Investment Negative List
It is a list of areas of economic activity whose foreign
ownership is limited to a maximum of 40% of the
equity capital of the enterprises engaged therein (Sec.
3 [g], RA 7042).
List A of the Foreign Investment Negative List
Filipino Ownership must be: (CODES are as follows)
1. 100% - CoFi AMMaN Co.- ProMiSe -US$2.5M
2. 80% - Prc
3. 75% - LoRD
4. 70% - Ad
5. 60% - Go LEARN CUPID
6. 40% - FI (SEC)
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
100% Filipino Owned
(Zero percent (0%) foreign equity)
(Code: CoFi AMMaN Co. ProMiSe- US$2.5M)
9. COoperatives (Art. 26, Ch. III, R.A. 6938);
10. Manufacture of FIrecrackers and other
pyrotechnic devices (Sec. 5, R.A. 7183).
11. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and Anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines).
12. Mass media except recording
13. Utilization of MArine resources (Sec. 2, Art.
XII, Constitution);
14. Manufacture, repair, stockpiling and/or
distribution of Nuclear weapons (Sec. 8, Art.
II, Constitution);
15. COckpits (Sec. 5, P.D. 449);
16. Practice of all PROfessions
1. Law
2. Medicine and allied professions
3. Accountancy, etc.
17. Small-scale MIning (Sec. 3, R.A. 7076);
18. Private SEcurity agencies (Sec. 4, R.A. 5487);
19. Retail trade enterprises with paid-up capital
of less than US$2.5 M (Sec. 5, R.A. 8762);
80 % Filipino Owned
(Up to twenty percent (20%) foreign equity)
(Code: Prc)
1. Private Radio Communications network (R.A.
3846).
75 % Filipino Owned
(Up to twenty percent (25%) foreign equity)
(Code: LoRD F)
1. Contracts for the construction and repair of
LOcally-funded public works (Sec. 1, CA 541, LOI
630) except:
3. infrastructure/development projects
covered in R.A. 7718; and
4. projects which are foreign funded
or assisted and required to undergo
international competitive bidding
(Sec. 2[a], R.A. 7718);
348
 SPECIAL LAWS
2. Private Recruitment, whether for local or
overseas employment (Art. 27, P.D. 442);
3. Contracts for the construction of
Defense-related structures (Sec. 1, CA 541).
4. Under the Flag Law, in the purchase of articles
for the Government, preference shall be given
to materials and supplies produced, made, or
manufactured in the Philippines, and to
domestic entites. Domestic entites means any
citizen of the Philippines or commercial
company at least 75% of the capital of which is
owned by citizens of the Philippines (Sec. 1, CA
138)
70 % Filipino Owned
(Up to twenty percent (30%) foreign equity)
(Code: AdPawn)
1. Advertising (Art. XVI, Constitution)
2. Corporations engaged in pawnshop business
(Sec. 8, P.D. 114)
60 % Filipino Owned
(Up to twenty percent (40%) foreign equity)
(Code: Go LEARN CUPIDCo)
1. Contracts for the supply of materials, goods
and commodities to GOCC, agency or municipal
corporation (Sec. 1, R.A. 5183);
2. Ownership of private Lands (Sec. 7, Art. XII,
Constitution; Sec. 22, Ch. 5, CA 141; Sec. 4, R.A.
9182);
3. Ownership/establishment and administration
of Educational institutions (Sec. 4, Art. XIV,
Constitution);
4. Adjustment Companies (Sec. 323, P.D. 613);
349
5. Culture, production, milling, processing,
trading excepting retailing, of rice and corn and
acquiring, by barter, purchase or otherwise, Rice
and corn and the by-products thereof (Sec. 5,
P.D. 194);
6. Exploration, development and utilization of
Natural resources (Sec. 2, Art. XII, Constitution);
7. Ownership of Condominium units where the
common areas in the condominium project are
co-owned by the owners of the separate units or
owned by a corporation (Sec. 5, R.A. 4726).
8. Operation and management of public Utilities
(Sec. 11, Art. XII, Constitution; Sec. 16, CA 146);
9. Project Proponent and Facility Operator of a
BOT project requiring a public utilities franchise
(Sec. 11, Art. XII, Constitution; Sec. 2a, R.A.
7718);
10. Manufacture, repair, storage and/ or
distribution of products/ Ingredients requiring
PNP clearance (R.A. 7042 as amended by R.A.
8179);
11. Operation of Deep sea commercial fishing
vessel (Sec. 27, R.A. 8550);
12. Corporations engaged in Coastwise shipping
(Sec. 806, P.D. 1464)
40 % Filipino Owned
(Up to twenty percent (60%) foreign equity)
(Code: FI [SEC] )
1. Financing companies regulated by the SEC (Sec. 6,
R.A. 5980 as amended by R.A. 8556);
2. Investment houses regulated by the SEC (Sec. 5,
P.D. 129 as amended by R.A. 8366).
UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW
 MERCANTILE LAW
List B of the Foreign Investment Negative List
1. GR: Defense-related activities, requiring prior
clearance and authorization from the Department of
National Defense to engage in such activity, such as
the :
a. Manufacture
b. Repair
c. Storage
d. Distribution of, firearms, ammunition, lethal
weapons, military ordnance, explosives,
pyrotechnics, similar materials
XPN: Such manufacturing or repair activity is
specifically authorized, with a substantial export
component, to a non-Philippine national by the
Secretary of National Defense; or
2. Those that have implications on public health and
morals, such as the manufacture and distribution of:
a. Dangerous drugs
b. All forms of gambling
c. Nightclubs
d. Bars
e. Beer houses
f. Dance halls
g. Sauna and steam bathhouses
h. Massage clinics. (Sec. 8, RA 7042.)
NOTE: There is no significant difference between List A and
List B.
Rule regarding small and medium-sized domestic
market enterprises
GR: Small and medium-sized domestic market
enterprises with paid-in equity capital less than the
equivalent of US$200,000.00, are reserved to
Philippine nationals.
XPNs:
1. They involve advanced technology as determined
by the DOST;
2. They employ at 50 direct employees, then a
minimum paid-in capital of US$100,000.00 (Sec. 8, RA
7042)
List C of the Foreign Investment Negative List
List C shall contain the areas of investment in which
existing enterprises already serve adequately the
needs of the economy and the consumer and do not
require further foreign investments, as determined
by NEDA and approved by the President and
promulgated in a Presidential Proclamation.
Q: The main feature of the Foreign Investment Act
of 1991 is to introduce the concept of "Negative
Lists". Under the said law, what is a "Negative List"?
(2012 Bar Question)
UNIVERSITY OF SANTO TOMAS
2014 GOLDEN NOTES
a. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified to
engage in.
b. It is a list of business activities or enterprises in
the Philippines that foreigners are qualified to
engage in.
c. It is a list of business activities or enterprises that
are open to foreign investments provided it is with
the approval of the Board of Investment.
d. It is a list of business activities or enterprises that
are open to foreign investments provided it is with
the approval of the Securities and Exchange
Commission.
A: A. It is a list of business activities or enterprises in
the Philippines that foreigners are disqualified to
engage in.
Strategic industries
Industries that are characterized by all of the
following:
a. Crucial to the accelerated industrialization of the
country.
b. Require massive capital investments to achieve
economies of scale for efficient operations.
c. Require highly specialized or advanced technology
which necessitates technology transfer and
proven production techniques in operations;
d. Characterized by strong backward and forward
linkages with most industries existing in the
country, and
e. Generate substantial foreign exchange savings
through import substitution and collateral
foreign exchange earnings through export of part
of the output that will result with the
establishment, expansion or development of the
industry.
Penalties provided under R.A. 7042
1. A person who violates any provision of R.A. 7042 or
of the terms and conditions of registration or of the
rules and regulations issued pursuant thereto, or aids
or abets in any manner any violation shall be subject
to a fine not exceeding P100,000.
2. If the offense is committed by a juridical entity, it
shall be subject to a fine in an amount not exceeding
1/2 of 1% of total paid-in capital but not more than
P5,000,000.00 The president and/or officials
responsible therefor shall also be subject to a fine not
exceeding P200,000.00
3. In addition to the foregoing, any person, firm or
juridical entity involved shall be subject to forfeiture
of all benefits granted underR.A. 7042 (Sec 14, RA
7042).
350
 BIBLIOGRAPHY
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UNIVERSITY OF SANTO TOMAS
FACULTY OF CIVIL LAW