TABLE OF CONTENTS

LETTERS OF CREDIT III. KINDS OF NEGOTIABLE INSTRUMENTS ...... 17

A. PROMISSORY NOTE........................................ 17
AND TRUST RECEIPTS B. BILL OF EXCHANGE ........................................ 18

LAW IV. COMPLETION AND DELIVERY ................... 19

A. TWO STEPS INVOLVED IN THE EXECUTION OF
I. LETTERS OF CREDIT (L/C) .................. 2 NEGOTIABLE INSTRUMENTS ............................. 19

A. DEFINITION AND NATURE OF LETTER OF B. INSERTION OF DATE ....................................... 19

CREDIT ................................................................... 2 C. EFFECT OF ANTE-DATING AND POST-DATING
B. PARTIES TO A LETTER OF CREDIT .................. 3 .............................................................................. 19

C. BASIC PRINCIPLES OF LETTER OF CREDIT .... 4 D. COMPLETION OF BLANKS.............................. 19

E. INCOMPLETE AND UNDELIVERED
II. TRUST RECEIPTS LAW [PD 115 (1973)] .......... 5
INSTRUMENTS.................................................... 20
A. DEFINITION/CONCEPT OF A TRUST RECEIPT
F. COMPLETE AND UNDELIVERED
TRANSACTION ...................................................... 5
INSTRUMENTS.................................................... 20
B. RIGHTS OF THE ENTRUSTER .......................... 6
G. INCOMPLETE AND DELIVERED
C. OBLIGATION AND LIABILITY OF THE INSTRUMENTS..................................................... 21
ENTRUSTEE............................................................7
H. COMPLETE AND DELIVERED INSTRUMENTS
D. REMEDIES AVAILABLE..................................... 8 .............................................................................. 21
E. WAREHOUSEMANS LIEN ................................ 8 V. SIGNATURE .......................................... 21
A. SIGNING IN TRADE NAME .............................. 21

NEGOTIABLE B. SIGNATURE OF AGENT ................................... 21

C. SIGNATURE PER PROCURATION .................. 21
INSTRUMENTS LAW D. LIABILITY OF AN AGENT ................................ 22
E. INDORSEMENT BY MINOR OR CORPORATION
I. DEFINITION ............................................ 11 ............................................................................. 22

A. DEFINITION AND PURPOSE ............................ 11 F. FORGERY ........................................................ 22

II. FORMS AND INTERPRETATION.................. 11 G. ACCEPTANCE AND PAYMENT UNDER

MISTAKE .............................................................. 23
A. REQUISITES OF NEGOTIABILITY ..................... 11
VI. CONSIDERATION ................................. 25
B. REQUISITES OF A PROMISSORY NOTE ......... 12
A. WHO IS A HOLDER FOR VALUE (HFV)? ........ 26
C. REQUISITES OF A BILL OF EXCHANGE .......... 12
B. BURDEN OF PROOF - PRESUMPTION OF
D. FIRST REQUIREMENT: IN WRITING AND
CONSIDERATION ................................................ 26
SIGNED BY THE MAKER OR DRAWER ............... 12
VII. ACCOMMODATION PARTY ..................... 26
E. SECOND REQUIREMENT: CONTAINING AN
UNCONDITIONAL PROMISE TO PAY OR ORDER A. LIABILITY OF AN ACCOMMODATION PARTY 26
TO PAY A SUM CERTAIN IN MONEY ................... 13
B. ACCOMMODATION PARTY AS SURETY ........ 27
F. PAYABLE ON DEMAND, OR AT A FIXED OR
VIII. NEGOTIATION .................................... 27
DETERMINABLE FUTURE TIME .......................... 14
G. PAYABLE TO ORDER OR TO BEARER............ 15 A. NEGOTIATION DISTINGUISHED FROM
ASSIGNMENT ....................................................... 27

i
 TABLE OF CONTENTS
B. MODES OF NEGOTIATION ............................. 27
C. AS TO MANNER OF FUTURE METHOD OF
NEGOTIATION ..................................................... 29
D. AS TO TITLE TRANSFERRED ......................... 30
E. RIGHTS OF RESTRICTIVE INDORSEE ............ 30
F. AS TO KIND OF LIABILITY ASSUMED BY
INDORSER ........................................................... 30
G. AS TO PRESENCE/ABSENCE OF EXPRESS
LIMITATIONS ........................................................ 31
H. OTHER KINDS OF INDORSEMENT ................. 31
IX. RIGHTS OF THE HOLDER ........................ 31
A. DEFINITION OF A HOLDER ............................. 31
B. HOLDER IN DUE COURSE (HDC) ................... 32
C. DEFENSES AGAINST THE HOLDER ............... 36
X. LIABILITIES OF PARTIES ..........................36
A. PARTIES PRIMARILY LIABLE (SEC. 60 AND 62)
.............................................................................. 36
B. PARTIES SECONDARILY LIABLE ....................37
XI. WARRANTIES ..................................... 38
XII. PRESENTMENT FOR PAYMENT ...............39
A. PRESENTMENT MEANS ................................. 39
B. DATE AND TIME OF PRESENTMENT............. 39
C. NECESSITY OF PRESENTMENT FOR PAYMENT
.............................................................................. 39
D. PARTIES TO WHOM PRESENTMENT FOR
PAYMENT ............................................................ 39
SHOULD BE MADE .............................................. 39
E. DISPENSATION WITH PRESENTMENT FOR
PAYMENT ............................................................ 39
F. DISHONOR BY NON-PAYMENT ..................... 40
XIII. NOTICE OF DISHONOR ........................ 40
A. PARTIES TO BE NOTIFIED .............................. 40
B. WHEN GIVEN ................................................... 40
C. WHEN NOT NECESSARY TO GIVE TO DRAWER
.............................................................................. 40
D. WHEN NOT NECESSARY TO GIVE TO
INDORSER ........................................................... 40
E. WHO WILL BENEFIT ........................................ 40
ii
F. PARTIES WHO MAY GIVE NOTICE OF
DISHONOR ........................................................... 41
G. EFFECT OF NOTICE ......................................... 41
H. FORM OF NOTICE (SEC. 96) ........................... 41
I. WAIVER.............................................................. 41
J. DISPENSATION WITH NOTICE ........................ 41
K. EFFECT OF FAILURE TO GIVE NOTICE ........... 41
XIV. DISCHARGE OF NEGOTIABLE INSTRUMENT
............................................................. 41
A. DISCHARGE OF NEGOTIABLE INSTRUMENT 41
B. BY PAYMENT IN DUE COURSE (ASKED IN
2000) ................................................................... 42
C. BY WHOM MADE: ........................................... 42
D. BY INTENTIONAL CANCELLATION ............... 42
E. BY OTHER ACTS THAT DISCHARGE A SIMPLE
CONTRACT .......................................................... 42
F. BY REACQUISITION OF PRINCIPAL DEBTOR IN
HIS OWN RIGHT .................................................. 42
G. BY MATERIAL ALTERATION .......................... 42
H. DISCHARGE OF PARTIES SECONDARILY
LIABLE ................................................................. 42
I. RIGHT OF PARTY WHO DISCHARGED
INSTRUMENT ...................................................... 43
J. RENUNCIATION BY HOLDER (SEC. 122) ........ 43
XV. MATERIAL ALTERATION ....................... 43
A. CONCEPT ........................................................ 43
B. CHANGES IN THE FOLLOWING CONSTITUTE
MATERIAL ALTERATIONS (SEC. 125): ............... 44
C. EFFECT OF MATERIAL ALTERATION ............ 44
XVI. ACCEPTANCE .................................... 44
A. DEFINITION ..................................................... 44
B. REQUISITES (SEC. 132): .................................. 44
C. KINDS OF ACCEPTANCE: ............................... 44
D. PROOF OF ACCEPTANCE (SUNDIANG AND
AQUINO): ............................................................. 44
E. MANNER ......................................................... 44
F. TIME FOR ACCEPTANCE (SEC. 136) ............... 45
G. RULES GOVERNING ACCEPTANCE .............. 45
 TABLE OF CONTENTS
XVII. PRESENTMENT FOR ACCEPTANCE ........ 45
A. REQUISITES: ................................................... 45
B. WHEN PRESENTMENT FOR ACCEPTANCE
NECESSARY: ....................................................... 45
C. WHEN PRESENTMENT FOR ACCEPTANCE
EXCUSED: ............................................................ 46
D. TIME/PLACE/MANNER OF PRESENTMENT 46
E. WHAT CONSTITUTES SUFFICIENT
PRESENTMENT? ................................................. 46
F. HOW MADE (SEC. 145) .................................... 46
G. EFFECT OF FAILURE TO MAKE
PRESENTMENT ................................................... 47
(SEC. 144) ............................................................. 47
H. DISHONOR BY NON-ACCEPTANCE .............. 47
XVIII. PROMISSORY NOTES .........................47
XIX. CHECKS ............................................47
A. DEFINITION ..................................................... 47
B. KINDS .............................................................. 47
C. EFFECTS .......................................................... 48
D. PRESENTMENT FOR PAYMENT .................... 48
F. EFFECT OF DELAY .......................................... 48
INSURANCE CODE
I. CONCEPT OF INSURANCE ........................ 50
A. CONTRACT OF INSURANCE .......................... 50
B. DOING OR TRANSACTING INSURANCE
BUSINESS ............................................................. 51
C. GOVERNING LAW ............................................ 51
D. BANCASSURANCE .......................................... 51
E. PRE-NEED PLANS .......................................... 52
II. ELEMENTS OF AN INSURANCE CONTRACT . 52
A. IN GENERAL .................................................... 52
B. SUBJECT MATTER .......................................... 52
C. CAUSE AND RISK OF LOSS OR DAMAGE ..... 52
D. CONSIDERATION ........................................... 53
iii
E. RISK-DISTRIBUTING SCHEME ....................... 53
F. MEETING OF THE MINDS ............................... 53
III. CHARACTERISTICS OF AN INSURANCE
CONTRACT ............................................. 53
A. IN GENERAL.................................................... 53
B. CONSENSUAL ................................................. 53
C. VOLUNTARY ................................................... 53
D. ALEATORY ...................................................... 54
E. EXECUTORY AND UNILATERAL BUT
SYNALLAGMATIC ............................................... 54
F. CONDITIONAL ................................................. 54
G. CONTRACT OF INDEMNITY (FOR NON-LIFE
INSURANCE) ....................................................... 54
H. CONTRACT OF ADHESION (FINE PRINT RULE)
............................................................................. 54
I. PERSONAL CONTRACT ................................... 54
J. PROPERTY (FOR LIFE INSURANCE) .............. 55
K. UBERRIMAE FIDES CONTRACT .................... 55
IV. CLASSES ............................................ 55
A. MARINE INSURANCE ..................................... 55
B. FIRE INSURANCE ........................................... 59
C. CASUALTY INSURANCE .................................. 61
D. SURETYSHIP ................................................... 62
E. LIFE INSURANCE ............................................ 63
E.2. TYPES ........................................................... 63
F. COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE ........................................................ 66
IV. INSURABLE INTEREST ........................... 67
A. IN GENERAL.....................................................67
B. IN LIFE/HEALTH INSURANCE ....................... 68
C. IN PROPERTY INSURANCE ............................ 70
D. DOUBLE AND OVER INSURANCE;
REINSURANCE..................................................... 72
E. MULTIPLE OR SEVERAL INTERESTS ON SAME
PROPERTY ...........................................................74
V. PERFECTION OF THE INSURANCE CONTRACT
............................................................ 75
A. OFFER AND ACCEPTANCE/CONSENSUAL ...75
 TABLE OF CONTENTS
B. PREMIUM PAYMENT ...................................... 76
C. NON-DEFAULT OPTIONS IN LIFE INSURANCE
............................................................................... 77
D. REINSTATEMENT OF A LAPSED LIFE
INSURANCE POLICY ........................................... 78
E. REFUND OF PREMIUMS................................. 78
VI. RESCISSION OF INSURANCE CONTRACTS .. 79
B. MISREPRESENTATION/OMISSIONS .............. 81
C. BREACH OF WARRANTIES ............................ 83
VII. CLAIMS SETTLEMENT AND SUBROGATION
............................................................ 84
A. CONCEPT OF LOSS......................................... 84
B. NOTICE AND PROOF OF LOSS ...................... 85
C. GUIDELINES ON CLAIMS SETTLEMENT ....... 86
VIII. INSURANCE COMMISSIONER ................ 89
A. JURISDICTION AND ADJUDICATORY POWERS
.............................................................................. 89
B. REVOCATION OF CERTIFICATE OF
AUTHORITY ......................................................... 90
C. LIQUIDATION OF INSURANCE COMPANY .... 90
TRANSPORTATION
LAWS
I. COMMON CARRIERS .............................. 92
A. CONCEPT ........................................................ 92
B. DILIGENCE REQUIRED ................................... 94
C. LIABILITIES ...................................................... 94
II. VIGILANCE OVER GOODS ........................ 95
A. LIABILITY, IN GENERAL .................................. 95
B. EXEMPTING CAUSES ...................................... 95
C. CONTRIBUTORY NEGLIGENCE...................... 97
D. DURATION OF LIABILITY FOR GOODS ......... 97
E. STIPULATION FOR LIMITATION OF LIABILITY
.............................................................................. 99
iv
F. LIABILITY FOR BAGGAGE OF PASSENGERS
............................................................................100
III. SAFETY OF PASSENGERS ...................... 101
A. LIABILITY, IN GENERAL .................................101
B. VOID STIPULATIONS ......................................101
C. DURATION OF LIABILITY .............................. 102
D. LIABILITY FOR ACTS OF OTHERS ................ 103
E. CONTRIBUTORY NEGLIGENCE .................... 104
F. EXTENT OF LIABILITY FOR DAMAGES ......... 105
IV. BILL OF LADING ..................................106
A. DEFINITION .................................................... 106
B. THREE-FOLD CHARACTER ........................... 107
C. DELIVERY OF GOODS ................................... 107
D. PERIOD FOR FILING CLAIMS........................108
E. PERIOD FOR FILING ACTIONS......................108
V. MARITIME COMMERCE ..........................109
A. CHARTER PARTIES ....................................... 109
B. LIABILITY OF SHIP OWNERS AND SHIPPING
AGENTS ...............................................................110
C. ACCIDENTS AND DAMAGES IN MARITIME
COMMERCE......................................................... 112
D. CARRIAGE OF GOODS BY SEA ACT (COGSA)
............................................................................. 116
VI. THE WARSAW CONVENTION................... 117
A. APPLICABILITY ............................................... 117
B. LIMITATION OF LIABILITY .............................. 117
C. WILLFUL MISCONDUCT ................................. 118
CORPORATION CODE
I. CORPORATION ..................................... 120
A. DEFINITION .................................................... 120
B. ATTRIBUTES OF THE CORPORATION ......... 120
II. CLASSES OF CORPORATIONS ................. 121
A. STOCK CORPORATION .................................. 121
B. NON-STOCK CORPORATION ........................ 121
 TABLE OF CONTENTS

C. OTHER CORPORATIONS................................121 E. REMOVAL ....................................................... 149

III. NATIONALITY OF CORPORATIONS .......... 124 F. FILLING OF VACANCIES ................................ 150

A. PLACE OF INCORPORATION TEST ............... 124 G. COMPENSATION [SEC. 30] ........................... 150

B. CONTROL TEST ............................................. 124 H. FIDUCIARY DUTIES AND LIABILITY RULES .. 151

C. GRANDFATHER RULE ................................... 125 I. RESPONSIBILITY FOR CRIMES ...................... 153

IV. CORPORATE JURIDICAL PERSONALITY ... 126 J. INSIDE INFORMATION ................................... 153
K. CONTRACTS .................................................. 154
A. DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY .................................................... 126 L. EXECUTIVE COMMITTEE ............................... 155
B. DOCTRINE OF PIERCING THE CORPORATE M. MEETINGS ..................................................... 155
VEIL ..................................................................... 127
VIII. STOCKHOLDERS AND MEMBERS .......... 157
V. INCORPORATION AND ORGANIZATION .... 128
A. RIGHTS OF A STOCKHOLDER AND MEMBERS
A. PROMOTER .................................................... 129 ............................................................................ 157
B. NUMBER AND QUALIFICATIONS OF B. PARTICIPATION IN MANAGEMENT ............. 158
INCORPORATORS ............................................. 129 C. PROPRIETARY RIGHTS ................................. 163
C. CORPORATE NAMELIMITATIONS ON USE D. REMEDIAL RIGHTS ....................................... 167
OF CORPORATE NAME ..................................... 129
E. OBLIGATION OF A STOCKHOLDER .............. 169
D. CORPORATE TERM .......................................130
F. MEETINGS ....................................................... 171
E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS .....................130 XIV. CAPITAL STRUCTURE ......................... 173
F. ARTICLES OF INCORPORATION ...................130 A. SUBSCRIPTION AGREEMENTS .................... 173
G. REGISTRATION AND ISSUANCE OF B. CONSIDERATION FOR STOCKS ................... 174
CERTIFICATE OF INCORPORATION ................. 134 C. SHARES OF STOCK ....................................... 174
H. ADOPTION OF BY-LAWS .............................. 135 D. PAYMENT OF BALANCE OF SUBSCRIPTION
VI. CORPORATE POWERS ......................... 136 (SEC. 66 AND 67) ................................................ 179

A. GENERAL POWERS, THEORY OF GENERAL E. CERTIFICATE OF STOCK ................................ 181

CAPACITY [SEC. 36] ........................................... 136 F. STOCK AND TRANSFER BOOK ..................... 184
B. SPECIFIC POWERS, THEORY OF SPECIFIC G. DISPOSITION AND ENCUMBRANCE OF
CAPACITY [SECS. 37-44] .................................... 136 SHARES .............................................................. 184
C. HOW (CORPORATE POWERS) EXERCISED . 141 XV. DISSOLUTION AND LIQUIDATION .......... 186
D. TRUST FUND DOCTRINE ..............................144 A. MODES OF DISSOLUTION ............................ 186
VII. BOARD OF DIRECTORS AND TRUSTEES .. 145 B. METHODS OF LIQUIDATION ........................ 189
A. DOCTRINE OF CENTRALIZED MANAGEMENT XVI. OTHER CORPORATIONS ..................... 191
.............................................................................145
A. CLOSE CORPORATIONS ................................ 191
B. BUSINESS JUDGMENT RULE ........................ 147
B. NON-STOCK CORPORATIONS ..................... 199
C. TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS OR C. RELIGIOUS CORPORATIONS ....................... 200
TRUSTEES ..........................................................148 D. FOREIGN CORPORATIONS .......................... 201
D. ELECTIONS ....................................................149 XVII. MERGERS AND CONSOLIDATIONS ...... 204

v
 TABLE OF CONTENTS

A. DEFINITION AND CONCEPT ........................ 204 C. CIVIL LIABILITY OF FRAUD IN CONNECTION

B. CONSTITUENT VS. CONSOLIDATED WITH SECURITIES TRANSACTIONS (SEC. 58) 223
CORPORATION ................................................. 205 D. CIVIL LIABILITY FOR MANIPULATION OF
SECURITY PRICES (SEC. 59) ............................ 223
C. PLAN OF MERGER OR CONSOLIDATION [SEC.
76] ...................................................................... 205 E. CIVIL LIABILITY WITH RESPECT TO
COMMODITY FUTURES CONTRACTS AND PRE-
D. ARTICLES OF MERGER OR CONSOLIDATION
NEED PLANS (SEC. 60) .................................... 223
............................................................................ 205
E. PROCEDURE ................................................. 205 F. CIVIL LIABILITY ON ACCOUNT OF INSIDER
TRADING ........................................................... 223
F. EFFECTIVITY .................................................. 206
G. LIABILITIES OF CONTROLLING PERSONS,
G. LIMITATIONS ................................................ 206 AIDER AND ABETTOR AND OTHER SECONDARY
H. EFFECTS (SEC. 80) ....................................... 206 LIABILITY ........................................................... 224

SECURITIES BANKING LAW

REGULATIONS CODE I. THE NEW CENTRAL BANK ACT ................ 233
A. STATE POLICIES ........................................... 233
I. STATE POLICY ..................................... 209
B. SALIENT FEATURES ..................................... 233
II. SECURITIES REQUIRED TO BE REGISTERED
C. CREATION OF THE BANGKO SENTRAL NG
.......................................................... 209
PILIPINAS (BSP) ................................................ 233
III.PROCEDURE FOR REGISTRATION OF
D. RESPONSIBILITY AND PRIMARY OBJECTIVE
SECURITIES ........................................... 213 ........................................................................... 233
IV.PROHIBITIONS ON FRAUD, MANIPULATION E. MONETARY BOARD ..................................... 234
AND INSIDER TRADING ............................ 214
F. HOW THE BSP HANDLES BANKS IN DISTRESS
A. MANIPULATION OF SECURITY PRICES ... 214 ........................................................................... 235
B. SHORT SALES............................................ 215 G. HOW THE BSP HANDLES EXCHANGE CRISIS
C. FRAUDULENT TRANSACTIONS ............... 215 ........................................................................... 239

D. INSIDER TRADING .................................... 216 II. LAW ON SECRECY OF BANK DEPOSITS .... 239
V.PROTECTION OF INVESTORS A. POLICY .......................................................... 239
........................................................... 217 B. PURPOSE ...................................................... 239
A. TENDER OFFER RULE .............................. 217 C. PROHIBITED ACTS ....................................... 240
B. RULES ON PROXY SOLICITATION ........... 218 D. DEPOSITS COVERED ................................... 240
C. DISCLOSURE RULE ................................... 218 E. EXCEPTIONS ................................................. 240
VI. CIVIL LIABILITY ................................... 221 F. GARNISHMENT OF DEPOSITS ..................... 242

A. CIVIL LIABILITIES ON ACCOUNT OF FALSE III. GENERAL BANKING LAW OF 2000 ......... 243
REGISTRATION STATEMENT (SEC. 56) ............ 221
A. POLICY .......................................................... 243
B. CIVIL LIABILITIES ARISING IN CONNECTION
B. DEFINITION AND CLASSIFICATION OF BANKS
WITH PROSPECTUS, COMMUNICATIONS AND
........................................................................... 243
REPORTS (SEC. 57) ........................................... 222

vi
 TABLE OF CONTENTS
C. DISTINCTION OF BANKS FROM QUASI-BANKS
AND TRUST ENTITIES ....................................... 244
D. BANK POWERS AND LIABILITIES ................ 245
E. DILIGENCE REQUIRED OF BANKS .............. 248
F. NATURE OF BANK FUNDS AND BANK
DEPOSITS .......................................................... 250
G. STIPULATION ON INTERESTS ..................... 250
H. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL MEASURES). 250
I. PENALTIES FOR VIOLATION ......................... 255
IV. PHILIPPINE DEPOSIT INSURANCE
CORPORATION ACT ................................ 256
A. PURPOSE OF THE PDIC ............................... 256
B. POWERS OF THE PDIC ................................. 256
C. FUNCTIONS OF THE PDIC ............................ 257
D. BANK EXAMINATION ................................... 259
E. FINANCIAL ASSISTANCE .............................. 259
F. RECEIVERSHIP OF CLOSED BANKS ............ 259
G. LIQUIDATION OF CLOSED BANKS .............. 259
V. FOREIGN CURRENCY DEPOSIT ACT ........ 260
A. CONCEPT ...................................................... 260
B. SECRECY OF FOREIGN CURRENCY DEPOSITS
............................................................................ 260
PRIVILEGES ....................................................... 260
INTELLECTUAL
PROPERTY LAW
I. INTELLECTUAL PROPERTY RIGHTS IN
GENERAL ..............................................262
A. STATE POLICIES ........................................... 262
B. INTERNATIONAL CONVENTIONS GOVERNING
INTELLECTUAL PROPERTY RIGHTS ................ 262
C. INTELLECTUAL PROPERTY RIGHTS ........... 262
D. DIFFERENCES BETWEEN COPYRIGHTS,
TRADEMARKS AND PATENT ........................... 262
vii
E. TECHNOLOGY TRANSFER ARRANGEMENTS
........................................................................... 264
II. PATENTS ........................................... 264
A. PATENTABLE INVENTIONS ......................... 264
A.1. INVENTION PATENT .................................. 264
B. NON-PATENTABLE INVENTIONS ................ 266
C. OWNERSHIP OF A PATENT ......................... 266
D. GROUNDS FOR CANCELLATION OF A PATENT
........................................................................... 267
E. REMEDY OF THE TRUE AND ACTUAL
INVENTOR ......................................................... 268
F. RIGHTS CONFERRED BY A PATENT............ 268
G. LIMITATIONS OF PATENT RIGHTS ............. 268
H. PATENT INFRINGEMENT ............................. 270
I. LICENSING....................................................... 271
J. ASSIGNMENT AND TRANSMISSION OF
RIGHTS .............................................................. 274
III. TRADEMARKS ................................... 275
A. DEFINITION OF MARKS, COLLECTIVE MARKS,
TRADE NAMES .................................................. 275
B. ACQUISITION OF OWNERSHIP OF MARK . 276
C. ACQUISITION OF OWNERSHIP OF TRADE
NAME ................................................................. 276
D. NON-REGISTRABLE MARKS ....................... 276
E. PRIOR USE OF MARK AS A REQUIREMENT 277
F. TESTS TO DETERMINE CONFUSING
SIMILARITY BETWEEN MARKS ........................ 278
G. WELL-KNOWN MARKS ................................ 278
H. RIGHTS CONFERRED BY REGISTRATION .. 280
I. USE BY THIRD PARTIES OF NAMES, ETC.
SIMILAR TO REGISTERED MARK ..................... 281
J. INFRINGEMENT AND REMEDIES .................. 281
K. UNFAIR COMPETITION ................................ 284
L. TRADE NAMES OR BUSINESS NAMES ....... 286
M. COLLECTIVE MARKS .................................. 286
IV. COPYRIGHTS ..................................... 287
A. DEFINITION ................................................... 287
 TABLE OF CONTENTS

B. BASIC PRINCIPLES, SECTIONS 172.2, 175 AND
181 ....................................................................... 287
C. COPYRIGHTABLE WORKS............................ 287
D. NON-COPYRIGHTABLE WORKS.................. 289
E. RIGHTS OF COPYRIGHT OWNER ................. 290
F. RULES ON OWNERSHIP OF COPYRIGHT .... 295
G. LIMITATIONS ON COPYRIGHT ..................... 297
IV. RULES OF PROCEDURE FOR INTELLECTUAL
PROPERTY RIGHTS CASES (A.M. NO. 10-3-10 SC)
........................................................... 301
F. WHEN IS MONEY LAUNDERING COMMITTED
............................................................................ 310
G. UNLAWFUL ACTIVITIES OR PREDICATE
CRIMES ................................................................ 311
H. ANTI-MONEY LAUNDERING COUNCIL ........ 312
I. FREEZING OF MONETARY INSTRUMENT OR
PROPERTY ......................................................... 313
J. AUTHORITY TO INQUIRE INTO BANK
DEPOSITS ........................................................... 314
III. FOREIGN INVESTMENTS ACT (R.A. 7042) .. 315

A. IN WHAT COURTS APPLICABLE ...................301 A. POLICY OF THE LAW ..................................... 315

B. APPLICABILITY OF REGULAR RULES ..........301
C. COMMENCEMENT OF CIVIL ACTION ............301
D. MODES OF DISCOVERY ............................... 302
E. PRE-TRIAL ..................................................... 303
F. CLARIFICATORY HEARINGS AND TRIAL..... 303
G. COMMENCEMENT OF CRIMINAL ACTION .. 303
B. DEFINITION OF TERMS ................................. 316
C. REGISTRATION OF INVESTMENTS ON NON-
PHILIPPINE NATIONALS ................................... 316
D. FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE ...................................................... 317
E. FOREIGN INVESTMENT IN DOMESTIC
MARKET ENTERPRISE ...................................... 318

H. COMMON RULES ON ADMISSIBILITY OF F. FOREIGN INVESTMENT NEGATIVE LIST ...... 318

EVIDENCE .......................................................... 303
I. EVIDENCE IN PATENT CASES ....................... 303
J. EVIDENCE IN TRADEMARK INFRINGEMENT
AND UNFAIR COMPETITION CASES ............... 304
K. EVIDENCE IN COPYRIGHT CASES ............... 304
L. ORDER OF DESTRUCTION ........................... 305

SPECIAL LAWS
I. THE CHATTEL MORTGAGE LAW AND REAL
ESTATE MORTGAGE LAW ......................... 307

II. ANTI-MONEY LAUNDERING ACT ............. 307

A. POLICY OF THE LAW .................................... 307
B. COVERED INSTITUTIONS ............................. 307
C. OBLIGATIONS OF COVERED INSTITUTIONS
............................................................................ 308
D. COVERED TRANSACTIONS ......................... 309
E. USPICIOUS TRANSACTIONS ........................ 309

viii
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW MERCANTILE LAW

MERCANTILE LAW
LETTERS OF CREDIT AND
TRUST RECEIPTS LAW

1
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
I. Letters of Credit (L/C)
A. DEFINITION AND NATURE OF
LETTER OF CREDIT
Definition
Letters of credit are those issued by one
merchant to another, or for the purpose of
attending to a commercial transaction. (Art. 567,
Code of Commerce)
A written instrument whereby the writer
requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee (Transfield Philippines
v. Luzon Hydro, 2004).
An engagement by a bank or other person
made at the request of a customer that the
issuer shall honor drafts or other demands of
payment upon compliance with the conditions
specified in the credit (Prudential Bank v.
Intermediate Appellate Court, 1992).
Purpose
Its purpose is to substitute for, and support, the
agreement of the buyer-importer to pay money
under a contract or other arrangement, but
does not necessarily constitute as a condition
for the perfection of such arrangement (Reliance
Commodities, Inc. v. Daewoo Industrial Co., Ltd.,
1993)
Essential Requisites of Letters of Credit:
(1) Issued in favor of a definite person and not
to order.
(2) Limited to a fixed and specified amount, or
to one or more undetermined amounts, but
within a maximum the limits of which has
to be stated exactly.
2
MERCANTILE LAW
Those which do not have one of these
conditions shall be mere letters of
recommendation. (Art. 568, Code of Commerce)
Nature
(1) Financial device L/Cs are developed by
merchants as a convenient and relatively
safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his
goods before he is paid, and a buyer, who
wants to have control of the goods before
paying (Bank of America, NT&SA v. Court of
Appeals, 1993).
A letter of credit is one of the modes of
payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign
Exchange Rules and Regulations," dated 13
April 1993, by which commercial banks sell
foreign exchange to service payments for,
e.g., commodity imports (Reliance
Commodities v. Daewoo, 1993).
(2) Composite of three distinct contracts An
L/C transaction involves three distinct but
intertwined relationships:
(a) First Contract between the party
applying for the L/C
(buyer/importer/account party) and
the party for whose benefit the L/C is
issued (seller/exporter/beneficiary).
(b) Second Contract between the buyer
and the issuing bank. This contract is
sometimes called the "Application
and Agreement" or the
"Reimbursement Agreement."
(c) Third Contract between the issuing
bank and the seller, in order to
support the contract, under (a) above
(Reliance Commodities v. Daewoo,
1993).
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW MERCANTILE LAW

Duration of Letters of Credit (a) Unconfirmed L/C - One which

(1) Period stipulated by the parties; or continues to be the obligation of the
(2) If no period is fixed; issuing bank
(a) 6 months from date if used in (b) Confirmed L/C - One which is
the Philippines supported by the absolute
(b) 12 months if abroad assurance to the beneficiary that
the confirming bank will undertake
Types of letters of credit the issuing bank's obligation as its
own according to the terms and
(1) As to the type of the main contract conditions of the credit (Feati Bank
and Trust Co. v. CA, 1991)
Commercial Standby
Letter of Credit Letter of Credit B. PARTIES TO A LETTER OF CREDIT
Method of payment in Used to guarantee or
a contract of sale secure an obligation in Rights and Obligations of the Parties
a non-sale transaction There would be at least three parties to a letter
Reduce the risk of Reduce the risk of of credit:
non-payment of non-performance of a
purchase price under a contractual obligation (1) Buyer/Exporter/Account Party one who
contract of sale procures the letter of credit and obliges
The seller can obtain The credit is payable himself to reimburse the issuing bank upon
payment from the upon certification of a receipt of documents of title.
issuer of L/C upon the partys
presentation of nonperformance of (2) Issuing Bank the bank which undertakes:
documents that show the agreement (1) to pay the seller upon receipt of the
he has taken draft and proper documents of title; and
affirmative steps to (2) to surrender the documents to the
comply with the sale buyer upon reimbursement.
agreement
Beneficiary must Beneficiary must The obligation of the issuing bank to pay
demonstrate that he certify that his obligor the seller is direct, primary, absolute,
has performed the has not performed the definite and solidary with the buyer, in the
contract contract absence of stipulation in the letter of credit
(Metropolitan Waterworks and Sewerage
(2) As to revocability System v. Daway, 2004)
(a) Revocable L/C - One which can be
revoked by the issuing bank without (3) Seller/Importer/Beneficiary one who
the consent of the buyer and seller ships the goods to the buyer in compliance
(b) Irrevocable L/C - One which the with a contract of sale and delivers the
issuing bank cannot revoke without documents of title and draft to the issuing
the consent of the buyer and seller bank to recover payment.
(Feati Bank and Trust Co. v. CA, 1991)
Depending on the transaction, the number of
(3) As to the obligation assumed by parties to the letter of credit may be increased.
correspondent bank

3
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
Thus, the different types of correspondent
banks:
(4) Advising/Notifying Bank the bank which
conveys to the seller the existence of the
credit.
The bank assumes no liability except to
notify and/or transmit to the seller the
existence of the letter of credit. A notifying
bank is not a privy to the contract of sale
between the buyer and the seller, its
relationship is only with that of the issuing
bank and not with the beneficiary to whom
he assumes no liability.
The bank may suggest to the seller its
willingness to negotiate, but this fact alone
does not imply that the notifying bank
promises to accept the draft drawn under
the documentary credit (Feati Bank and
Trust Co. v. CA, 1991).
(5) Confirming Bank the bank which lends
credence to the letter of credit issued by a
lesser known issuing bank.
The bank assumes a direct obligation to
the seller and its liability is a primary one
as if the bank itself had issued the letter of
credit (Feati Bank and Trust Co. v. CA, 1991).
(6) Negotiating Bank the bank which
discounts the draft presented by the seller.
The bank buys or discounts a draft under
the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
negotiation, it has no liability with respect
to the seller but after negotiation, a
contractual relationship will then prevail
between the negotiating bank and the
seller (Feati Bank and Trust Co. v. CA, 1991).
4
MERCANTILE LAW
(7) Paying Bank the bank which undertakes
to encash the drafts drawn by the seller.
C. BASIC PRINCIPLES OF LETTER OF
CREDIT
Doctrine of Independence
The principle of independence assures the seller
or the beneficiary of prompt payment
independent of any breach of the main contract
and precludes the issuing bank from
determining whether the main contract is
actually accomplished or not.
Under this principle, banks assume no liability
or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal
effect of any documents, or for the general
and/or particular conditions stipulated in the
documents or superimposed thereon, nor do
they assume any liability or responsibility for the
description, quantity, weight, quality, condition,
packing, delivery, value or existence of the
goods represented by any documents, or for the
good faith or acts and/or omissions, solvency,
performance or standing of the consignor, the
carriers, or the insurers of the goods, or any
other person whomsoever (Transfield Philippines
v. Luzon Hydro, 2004; Bank of America, NT&SA v.
Court of Appeals, 1993).
The independent nature of the letter of credit
may be
(a) Independent in toto - the credit is
independent from the justification aspect
and is a separate obligation from the
underlying agreement;
(b) Only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying agreement.
(Transfield Philippines v. Luzon Hydro, 2004;
Bank of America, NT&SA v. Court of Appeals,
1993).
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
Fraud Exception Principle
The principle that limits the application of the
independence principle only to instances where
it would serve the commercial function of the
credit and not when fraud attends the
transaction.
In the case of Transfield Philippines v. Luzon
Hydro, 2004, the petitioner alleged
misrepresentation as constituting fraud. The
Court, however, made no ruling as to whether
the same indeed constitutes fraud.
Petitioner asserts that the "fraud exception"
exists when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to
the confirming bank, documents that contain,
expressly or by implication, material
representations of fact that to his knowledge
are untrue. In such a situation, petitioner insists,
injunction is recognized as a remedy available
to it.
Citing Dolan's treatise on letters of credit,
petitioner argues that the independence
principle is not without limits and it is important
to fashion those limits in light of the principle's
purpose, which is to serve the commercial
function of the credit. If it does not serve those
functions, application of the principle is not
warranted, and the common law principles of
contract should apply (Transfield Philippines v.
Luzon Hydro, 2004).
The untruthfulness of a certificate
accompanying a demand for payment under a
standby credit may qualify as fraud sufficient to
support an injunction against payment. The
remedy of injunction is available when the
following are present:
(1) Clear proof fraud;
(2) Fraudulent abuse of the independent
purpose of the letter of credit and only fraud
under the main agreement and
5
MERCANTILE LAW
(3) Irreparable injury might follow if injunction
is not granted or the recovery of damages
would be seriously damaged
Doctrine of Strict Compliance
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must strictly
conform to the terms of the letter of credit.
Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform its
undertaking under the contract.
The tender of documents by the beneficiary
(seller) must include all documents required by
the letter. A correspondent bank which departs
from what has been stipulated under the letter
of credit, as when it accepts a faulty tender, acts
on its own risks and it may not thereafter be
able to recover from the buyer or the issuing
bank, as the case may be, the money thus paid
to the beneficiary. (Feati v. Court of Appeals,
1991)
II. Trust Receipts Law
[PD 115 (1973)]
A. DEFINITION/CONCEPT OF A TRUST
RECEIPT TRANSACTION
A trust receipt is a written or printed document
whereby the entrustee binds himself:
(1) to hold the designated goods,
documents or instruments in trust for
the entruster, and
(2) to sell or otherwise dispose of the
goods, documents or instruments with
the obligation to turn over to the
entruster the proceeds thereof to the
extent of the amount owing to the
entruster or as appears in the trust
receipt or the goods, documents or
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
instruments themselves if they are
unsold or not otherwise disposed of, in
accordance with the terms and
conditions specified in the trust receipt.
(PD 115, Sec. 4)
A trust receipt transaction is any transaction by
and between an entruster and the entrustee,
whereby the entruster (who owns or holds
absolute title or security interests over certain
specified goods, documents or instruments)
releases the same to the possession of the
entrustee upon the latter's execution and
delivery to the entruster of a signed document
called a trust receipt. (PD 115, Sec. 4)
A. 1. LOAN/SECURITY FEATURE
In a letter of credit-trust receipt arrangement, a
bank extends a loan covered by the letter of
credit, and the trust receipt acts as the security
for the loan. In other words, the transaction
involves a loan feature represented by the letter
of credit, and a security feature which is in the
covering trust receipt (Vintola v. Insular Bank of
Asia and America, 1987).
A. 2. OWNERSHIP OF THE GOODS,
DOCUMENTS AND INSTRUMENTS
UNDER A TRUST RECEIPT
To secure that the banker (entrustee) shall be
repaid at the critical point that is, when the
imported goods finally reach the hands of the
intended vendee the banker takes the full
title to the goods at the very beginning, and he
continues to hold that title as his indispensable
security until the goods are sold.
The importer (entruster) becomes absolute
owner of the imported merchandise as soon as
he has paid its price. The ownership of the
merchandise continues to be vested in the
owner thereof or in the person who has
advanced payment (entrustee), until he has
6
MERCANTILE LAW
been paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the importer or
by his representative or successor in interest.
(Prudential Bank v. National Labor Relations
Commission, 1995)
B. RIGHTS OF THE ENTRUSTER
The entruster shall have the following rights:
(1) In case of sale: Right to the proceeds from
the sale of the goods, documents or
instruments released under a trust receipt
to the entrustee to the extent of the amount
owing to the entruster or as appears in the
trust receipt
(2) In case of non-sale: Right to the return of
the goods, documents or instruments
(3) Right to the enforcement of all other rights
conferred on him in the trust receipt (which
are not contrary to the provisions of PD 115)
(4) Right to cancel the trust and take possession
of the goods, documents or instruments
subject of the trust or of the proceeds
realized therefrom at any time upon default
or failure of the entrustee to comply with
any of the terms and conditions of the trust
receipt or any other agreement between the
entruster and the entrustee
(5) Right to sell the goods, documents or
instruments at public or private sale, not
less than five days after serving or sending
of notice to the entrustee of the intention to
sell
(6) Right to purchase at a public sale the goods,
documents, or instruments
(7) Right to recover deficiency from the
entrustee should the proceeds be
insufficient (PD 115, Sec. 7)
The entruster holding a security interest shall
not, merely by virtue of such interest or having
given the entrustee liberty of sale or other
disposition of the goods, documents or
instruments under the terms of the trust receipt
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
transaction be responsible as principal or as
vendor under any sale or contract to sell made
by the entrustee. (PD 115, Sec. 8)
B. 1. VALIDITY OF THE SECURITY
INTEREST AS AGAINST THE CREDITORS
OF THE ENTRUSTEE/INNOCENT
PURCHASERS FOR VALUE
The entruster's security interest in goods,
documents, or instruments pursuant to the
terms of a trust receipt shall be valid as against
all creditors of the entrustee for the duration of
the trust receipt agreement. (PD 115, Sec. 12)
A purchaser of goods from an entrustee with
right to sell, or of documents or instruments
through their customary form of transfer, who
buys the goods, documents, or instruments for
value and in good faith from the entrustee,
acquires said goods, documents or instruments
free from the entruster's security interest. (PD
115, Sec. 11)
C. OBLIGATION AND LIABILITY OF
THE ENTRUSTEE
The entrustee shall have the following
obligations:
(1) Hold the goods, documents or instruments
in trust for the entruster and shall dispose of
them strictly in accordance with the terms
and conditions of the trust receipt;
(2) Receive the proceeds in trust for the
entruster and turn over the same to the
entruster to the extent of the amount owing
to the entruster or as appears on the trust
receipt;
(3) Insure the goods for their total value against
loss from fire, theft, pilferage or other
casualties;
(4) Keep said goods or proceeds thereof
whether in money or whatever form,
separate and capable of identification as
property of the entruster;
7
MERCANTILE LAW
(5) Return the goods, documents or
instruments in the event of non-sale or
upon demand of the entruster; and
(6) Observe terms and conditions of the trust
receipt not contrary to PD 115. (PD 115, Sec.
9)
C. 1. PAYMENT/DELIVERY OF PROCEEDS
OF SALE OR DISPOSITION OF GOODS,
DOCUMENTS OR INSTRUMENTS
The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the
extent of the amount owing to the entruster or
as appears in the trust receipt shall constitute
the crime of estafa, punishable under RPC 315,
par. 1 (b). (PD 115, Sec. 13)
C. 2. RETURN OF GOODS, DOCUMENTS
OR INSTRUMENTS IN CASE OF NON-
SALE
The failure to return the goods, documents or
instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt
shall constitute estafa, punishable under RPC
315, par. 1 (b). (PD 115, Sec. 13)
C. 3. LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR INSTRUMENTS
The risk of loss shall be borne by the entrustee.
Loss of goods, documents or instruments which
are the subject of a trust receipt, 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. (PD 115, Sec. 10)
C. 4. PENAL SANCTION IF OFFENDER IS A
CORPORATION
If the violation or offense is committed by a
corporation, partnership, association or other
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
juridical entities, the penalty shall be imposed
upon the directors, officers, employees or other
officials or persons therein responsible for the
offense, without prejudice to the civil liabilities
arising from the criminal offense. (PD 115, Sec.
13)
D. REMEDIES AVAILABLE
Upon default or failure of the entrustee to comply
with the terms and conditions
(a) The entruster may cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom.
(b) The entruster may sell the goods,
documents or instruments not less than five
days after serving or sending of the requisite
notice, and the entruster may become a
purchaser at a public sale.
(c) The proceeds shall be applied (a) to the
payment of the expenses thereof; (b) to the
payment of the expenses of re-taking,
keeping and storing the goods, documents
or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster.
(PD 115, Sec. 7)
In case of failure to turn over the proceeds of the
sale, or failure to return in case of non-sale
File a criminal case for estafa under RPC 315,
par. 1 (b). (PD 115, Sec. 13)
E. WAREHOUSEMANS LIEN
The warehousemans lien under the Warehouse
Receipts Law is the warehousemans legal right
or interest in the depositors property. It is
similar to the depositarys right of retention,
which is a means or device by which the
depositary is able to obtain payment of what
may be due because of the deposit (Gomez-
Somera).
8
MERCANTILE LAW
Claims included in the warehousemans lien
A warehouseman shall have a lien on the goods
deposited or the proceeds thereof in his hands:
(1) All lawful charges for storage and
preservation of the goods
(2) All lawful claims for money advanced,
interest, insurance, transportation, labor,
weighing, coopering, and other charges and
expenses in relation to other goods
(3) All reasonable charges and expenses for
notice and advertisements of sale
(4) Sale of the goods where default had been
made in satisfying the warehousemans lien
(Act No. 2137, Sec. 27)
However, if a negotiable receipt is issued for the
goods, the warehouseman shall have no lien
thereon except for charges for storage of goods
subsequent to the date of the receipt unless the
receipt expressly enumerated other charges for
which a lien is claimed. In such case, there shall
be a lien for the charges enumerated so far as
they are within Sec. 27 although the amount of
the charges is not stated in the receipt. (Act No.
2137, Sec. 30)
Against what property the lien may be enforced
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
debtor for the claims in regard to which the
lien is asserted, and
(b) Against all goods belonging to others which
have been deposited at any time by the
person who is liable as debtor for the claims
in regard to which the lien is asserted if such
person had been so entrusted with the
possession of goods that a pledge of the
same by him at the time of the deposit to
one who took the goods in good faith for
value would have been valid. (Act No. 2137,
Sec. 28)
Satisfaction of lien by sale
A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
UP LAW BOC LETTERS OF CREDIT AND TRUST RECEIPTS LAW
(1) An itemized statement of the
warehouseman's claim, showing the sum
due at the time of the notice and the date or
dates when it becomes due,
(2) A brief description of the goods against
which the lien exists,
(3) A demand that the amount of the claim as
stated in the notice of such further claim as
shall accrue, shall be paid on or before a
day mentioned, not less than ten days from
the delivery of the notice if it is personally
delivered, or from the time when the notice
shall reach its destination, according to the
due course of post, if the notice is sent by
mail,
(4) A statement that unless the claim is paid
within the time specified, the goods will be
advertised for sale and sold by auction at a
specified time and place. (Act No. 2137, Sec.
33)
In accordance with the terms of a notice so
given, a sale of the goods by auction may be
had to satisfy any valid claim of the
warehouseman for which he has a lien on the
goods. (Act No. 2137, Sec. 33)
From the proceeds of such sale, the
warehouseman shall satisfy his lien including
the reasonable charges of notice, advertisement
and sale. The balance, if any, shall be held by
the warehouseman and delivered on demand to
the person to whom he would have been bound
to deliver or justified in delivering goods. (Act
No. 2137, Sec. 33)
At any time before the goods are so sold
General rule: The warehouseman shall retain
the possession of the goods according to the
terms of the original contract of deposit
9
MERCANTILE LAW
Exception: Any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to satisfy
his lien and to pay the reasonable expenses and
liabilities incurred. The warehouseman shall
deliver the goods to the person making
payment. (Act No. 2137, Sec. 33)
Effect of sale
The warehouseman shall not be liable for
failure to deliver the goods to the depositor or
owner of the goods or to a holder of the receipt
given for the goods when they were deposited,
even if such receipt be negotiable. (Act No. 2137,
Sec. 36)
Other methods of enforcing lien
Other remedies allowed by law for the
enforcement of a lien against personal property
are not precluded. The right to recover so much
of the warehouseman's claim as shall not be
paid by the proceeds of the sale is not barred as
well. (Act No. 2137, Sec. 35)
How lien may be lost
(1) By surrendering possession of the goods
(2) By refusing to deliver the goods when a
demand is made with which he is bound
to comply (Act No. 2137, Sec. 29)
Lien does not preclude other remedies
Whether or not a warehouseman has a lien
upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor for
the collection of all charges and advances which
the depositor has contracted to pay. (Act No.
2137, Sec. 32)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

MERCANTILE LAW
NEGOTIABLE
INSTRUMENTS LAW

10
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
I. Definition
A. DEFINITION AND PURPOSE
Written contract for the payment of money,
by its form and on its face, intended as
substitute for money and intended to pass
from hand to hand to give the holder in
due course (HDC) the right to hold the
same and collect the sum due.
Instruments are negotiable when they
conform to all the requirements prescribed
by the Negotiable Instruments Law (NIL;
Act 2031, 03 February 1911).
However, the fact that an instrument does
not meet the foregoing requisites will not
affect its validity, the only consequence
being that it will be governed not by the
NIL but by the general law on contracts
(Campos).
Negotiable Instruments Not Legal tender
Art. 1249, Civil Code. The payment of debts in
money shall be made in the currency
stipulated, and if it is not possible to deliver
such currency, then in the currency which is
legal tender in the Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of
payment only when they have been cashed, or
when through the fault of the creditor they
have been impaired.
In the meantime, the action derived from the
original obligation shall be held in the
abeyance. (1170)
Section 52, New Central Bank Act. Legal
Tender Power. - All notes and coins issued by
the Bangko Sentral shall be fully guaranteed
by the Government of the Republic of the
Philippines and shall be legal tender in the
Philippines for all debts, both public and
11
MERCANTILE LAW
private: Provided, however, That, unless
otherwise fixed by the Monetary Board, coins
shall be legal tender in amounts not exceeding
Fifty pesos (P50.00) for denominations of
Twenty-five centavos and above, and in
amounts not exceeding Twenty pesos
(P20.00) for denominations of Ten centavos or
less.
Although considered as medium for
payment of obligations, negotiable
instruments are not legal tender.
Negotiable instruments shall produce the
effect of payment only when they have
been encashed or when through the fault
of the creditor they have been impaired.
(Art. 1249, Civil Code)
BUT 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.
Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
valid tender of payment. Since a
negotiable instrument is only a substitute
for money and not money, the delivery of
such an instrument does not, by itself,
operate as payment. Mere delivery of
checks does not discharge the obligation
under a judgment. The obligation is not
extinguished and remains suspended until
the payment by commercial document is
actually realized. (BPI vs. Royeca, 2008)
II. Forms and
Interpretation
A. REQUISITES OF NEGOTIABILITY
Section 1, Negotiable Instruments Law (NIL).
Form of negotiable instruments. - An
instrument to be negotiable must conform to
the following requirements:
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional
promise or order to pay a sum certain
in money; Must be payable on
demand, or at a fixed or determinable
future time; Must be payable to order
or to bearer; and
(e) Where the instrument is addressed
to a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
B. REQUISITES OF A PROMISSORY
NOTE
Section 184, NIL. Promissory note, defined. - A
negotiable promissory note within the
meaning of this Act is an unconditional
promise in writing made by one person to
another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable
future time, a sum certain in money to order or
to bearer. Where a note is drawn to the
maker's own order, it is not complete until
indorsed by him.
C. REQUISITES OF A BILL OF
EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A
bill of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer.
Section 184 (defining a promissory note) and
Section 126 (defining a bill of exchange) of the
NIL contain the same requisites as in Section 1.
12
MERCANTILE LAW
D. FIRST REQUIREMENT: IN
WRITING AND SIGNED BY THE
MAKER OR DRAWER
Section 18, NIL. Liability of person signing in
trade or assumed name. - No person is liable on
the instrument whose signature does not
appear thereon, except as herein otherwise
expressly provided. But one who signs in a
trade or assumed name will be liable to the
same extent as if he had signed in his own
name.
D.1. IN WRITING
What is considered "In writing" - includes print;
written or typed. Section 191 of the NIL
provides that the word written includes
printed, and writing includes print.
Rationale for requirement: Since an instrument
is a document, there must be something in
written form that can be transferred from
person to person. (Abad)
D.2. SIGNED
General Rule: No person is liable on the
instrument whose signature does not appear
thereon.
Notes:
One who signs in a trade or assumed name
will be liable to the same extent as if he
had signed in his own name
Signature of any party may be made by
duly authorized agent; no particular form
of appointment necessary (Sec. 19, NIL)
Signature is binding and may be in ones
handwriting, printed, engraved,
lithographed or photographed so long as it
is intended or adopted as the signature of
the signer or made with his authority
(Campos).
Signature may appear on any part of the
instrument. However, if the signature is so
placed upon the instrument that it is not
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

clear in what capacity the person intended

to sign, he is deemed an indorser. (Sec. 17[f],
NIL)
E. SECOND REQUIREMENT:
CONTAINING AN UNCONDITIONAL
PROMISE TO PAY OR ORDER TO PAY
A SUM CERTAIN IN MONEY
Section 3, NIL. When promise is unconditional. -
An unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of
which reimbursement is to be made or a
particular account to be debited with the
amount; or
(b) A statement of the transaction which gives
rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
E.1. UNCONDITIONAL
The promise or order to pay, to be
unconditional, must be unqualified
(Campos).
Must not be dependent upon a contingent
event that is not certain to happen. (Abad)
The fact that the condition appearing on
the instrument has been fulfilled will not
convert it into a negotiable one (see Sec. 4,
NIL)
Indicating a Particular
Fund
Fund
for Reimbursement
(non-negotiable)
Particular fund Particular fund
indicated is not the indicated is the direct
direct source of source of payment.
payment. (Sundiang and
Aquino)
When conditional: A negotiable instrument is
conditional when reference to the fund clearly
indicates an intention that such fund alone
should be the source of payment. (Metropolitan
Bank vs. CA, 1991)
E.2. ORDER OR PROMISE TO PAY
As to promissory note: Promise to pay
should be express on the face of the
instrument (Campos).
The word "promise" is not absolutely
necessary. Any expression equivalent to a
promise is sufficient (Campos).
Mere acknowledgment of a debt is
insufficient (Campos).
As to bill of exchange: Order command
made by the drawer addressed to the
drawee ordering the latter to pay the payee
or the holder a sum certain in money; the
instrument is, by its nature, demanding a
right.
Words which are equivalent to an order are
sufficient.
A mere request or authority to pay does not
constitute an order. Although the mere use
of polite words like "please" does not of
itself deprive the instrument of its
characteristics as an order, its language
must clearly indicate a demand upon the
drawee to pay.

The drawee pays the There is only one act E.3. SUM PAYABLE MUST BE
payee from his own the drawee pays CERTAIN
funds afterwards. directly from the
Section 2, NIL. What constitutes certainty as to
The drawee pays particular fund
sum. - The sum payable is a sum certain within
himself from the indicated.
the meaning of this Act, although it is to be
particular fund
paid:
indicated.

13
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(a) with interest; or
(b) by stated installments; or
(c) by stated installments, with a provision
that, upon default in payment of any
installment or of interest, the whole shall
become due; or
(d) with exchange, whether at a fixed rate or at
the current rate; or
(e) with costs of collection or an attorney's fee,
in case payment shall not be made at
maturity.
Note: A sum is certain if from the face of the
instrument it can be determined even if it
requires mathematical computation.
(Sundiang and Aquino)
E.4. PAYABLE IN MONEY
The instrument must be capable of being
transformed into money, since negotiable
instruments are intended to be substitutes
for money
Money as used in the law is not
necessarily limited to legal tender as
defined by law but includes any particular
kind of current money. (see, Sec. 6(e), NIL
and PNB v. Zulueta)
An agreement to pay in foreign currency is
valid. (RA 8183)
E.5. NON-NEGOTIABLE
An instrument which contains an order or
promise to do an act in addition to the
payment of money (with the exception of
certain acts enumerated in Sec. 5 of the
NIL)
Payable in personal property like
merchandise, shares of stock or gold.
Maker or the person primarily liable has
the option to require something to be done
in lieu of payment of money. (Campos)
But it is negotiable if the option to require
something to be done in lieu of payment of
money is with the holder
14
MERCANTILE LAW
F. PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE
TIME
Rationale: to inform the holder of the
instrument of the date when he may enforce
payment thereof.
F.1. ON DEMAND
Section 7, NIL. When payable on demand. - 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.
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.
Note: The holder may call for payment any
time; and the maker has an option to pay at
any time The refusal of the holder to accept
payment will terminate the running of interest,
if any, but the obligation to pay the note
remains.
F.2. AT A FIXED TIME
Only on the stipulated date, and not before,
may the holder demand its payment.
Should he fail to demand payment, the
instrument becomes overdue but remains
valid and negotiable. It is merely converted
to a demand instrument with respect to
the person who issued, accepted, or
indorsed it when overdue. (Sec. 7, NIL)
F.3. AT A DETERMINABLE FUTURE TIME
Section 4, NIL. Determinable future time; what
constitutes. - An instrument is payable at a
determinable future time, within the meaning
of this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(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.
An instrument payable upon a contingency is
not negotiable, and the happening of the event
does not cure the defect.
Note: It is required that the maturity of the
instrument can be absolutely determined with
certainty. (Abad)
Examples:
At a fixed period after date or sight, e.g.,
30 days after date.
On or before a fixed or determinable future
time specified therein, e.g., payable on or
before December 1, 2000
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, e.g., payable within 60 days
after the death of Jose
F.4. EFFECT OF ACCELERATION
PROVISIONS
If option (absolute or conditional) to
accelerate maturity is on the maker, the
instrument is still NEGOTIABLE (Campos).
If option to accelerate is on the holder and
can be exercised only after the happening
of a specified event/act over which he has
no control (conditional), the instrument is
still NEGOTIABLE (Campos).
Note: If option on the part of the holder is
absolute, the instrument is non-negotiable.
F.5. INSECURITY CLAUSES
Provisions in the contract which allow the
holder to accelerate payment if he deems
himself insecure. The instrument is rendered
non-negotiable. (Sundiang and Aquino)
15
MERCANTILE LAW
F.6. PROVISIONS EXTENDING TIME OF
PAYMENT
General rule: Negotiability not affected. Effect
is similar with that of an acceleration clause at
the option of the maker (Campos).
Exception: Where a note with a fixed maturity
provides that the maker has the option to
extend time of payment until the happening of
contingency, the instrument is NOT negotiable.
The time for payment may never come at all.
G. PAYABLE TO ORDER OR TO
BEARER
G.1 INSTRUMENT MUST CONTAIN
WORDS OF NEGOTIABILITY
For example:
(1) Pay to the order of Juan Cruz, or I
promise to pay to the order of Juan Cruz
(2) Pay to Juan Cruz or bearer, or I promise
to pay Juan Cruz or bearer
Note: Instrument need not follow the language
of the law, but any term which clearly indicates
an intention to conform to the legal
requirements is sufficient.
G.2. NEGOTIABILITY DETERMINED
FROM THE FACE OF THE INSTRUMENT
The negotiability or non-negotiability of an
instrument is determined from the face of the
instrument itself. Where words "or bearer"
printed on a check are cancelled by the drawer,
instrument becomes not negotiable. (Caltex vs.
CA, 1992)
G.3. PAYABLE TO BEARER
Section 9, NIL. When payable to bearer. - The
instrument is payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named
therein or bearer; or
(c) When it is payable to the order of a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
fictitious or non-existing person, and such
fact was known to the person making it so
payable; or
(d) When the name of the payee does not
purport to be the name of any person; or
(e) When the only or last indorsement is an
indorsement in blank.
Examples:
(1) Expressed to be so payable - "I promise to
pay the bearer the sum"
(2) Payable to a person named therein or
bearer -"Pay to A or bearer"
(3) Payable to the order of a fictitious person
or non-existing person, and such fact was
known to the person making it so payable -
Pay to John Doe or order"
(4) Name of payee does not purport to be the
name of any person "Pay to cash"; "Pay
to sundries."
(5) Only or last indorsement is an indorsement
in blank.
G.4. FICTITIOUS PAYEE RULE
It is not necessary that the person referred to in
the instrument is really non-existent or
fictitious to make the instrument payable to
bearer. The person to whose order the
instrument is made payable may in fact be
existing but he is still fictitious or non-existent
under Sec. 9(c) of the NIL if the person making
it so payable does not intend to pay the
specified persons. (PNB v. Rodriguez, 2008)
A check drawn payable to the order of "CASH"
is a check payable to bearer, and the bank may
pay it to the person presenting it for payment
without the drawer's indorsement. (Ang Tek
Lian vs. CA, 1950)
G.5. PAYABLE TO ORDER
Section 8, NIL. When payable to order. - The
instrument is payable to order where it is
drawn payable to the order of a specified
16
MERCANTILE LAW
person or to him or his order. It may be drawn
payable to the order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
(c) The drawee; or (d) Two or more payees
jointly; or
(d) One or some of several payees; or
(e) (f) The holder of an office for the time
being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Notes: Without the words "to order" or "to the
order of" the instrument is payable only to the
person designated therein and is therefore
non-negotiable. (Consolidated Plywood
Industries vs. IFC Leasing, 1987)
G.6. WHERE THE MAKER IS THE PAYEE
(1) In effect making himself liable to himself.
Thus, the instrument produces no legal
effect.
(2) Will produce legal effects only once the
payee-maker indorses the instrument to
another person because such indorsement
will then give rise to rights and obligations.
(Abad)
G.7. IF BILL OF EXCHANGE, DRAWEE
MUST BE NAMED OR DESIGNATED WITH
REASONABLE CERTAINTY
(1) Applies only to a bill of exchange
(2) A bill may be addressed to 2 or more
drawees jointly whether they are partners
or not, but not to 2 or more drawees in the
alternative or in succession (Sec. 128, NIL).
Examples:
(1) To Juan Cruz and Jose Reyes negotiable
(2) To Juan Cruz or Jose Reyes not
negotiable; no certainty as to drawee
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

G.8. DETERMINATION OF attorney to sign judgment and issue

NEGOTIABILITY execution for the value of the instrument,
In determining the negotiability of an costs, and attorney's fees. This is also
instrument, the instrument in its entirety called a judgment cognivit actionem. If
and by what appears on its face must be accompanied by withdrawal of plea, it is
considered. It must comply with the called judgment relicta verificatione.
requirements of Sec. 1 of the Negotiable A confession of judgment is not recognized
Instruments Law. (Caltex Phils. v. CA, 1992) in our country, as it is against public policy.
The acceptance of a bill of exchange is not It denies due process, and deprives the
important in the determination of its right of appeal. (PNB v. Manila Oil Refining)
negotiability. The nature of acceptance is
important only on the determination of the III. Kinds of Negotiable
kind of liabilities of the parties involved.
(PBCOM vs. Aruego, 1993) Instruments
Omissions and Additional Provisions
Provisions That Do Not That Do Not Affect A. PROMISSORY NOTE
Affect Negotiability Negotiability
Section 184, NIL. Promissory note, defined. - A
(1) Non-dating of the (1) Authorizes the sale negotiable promissory note within the
instrument of collateral meaning of this Act is an unconditional
(2) Non-specification of securities on promise in writing made by one person to
value given, or that default; another, signed by the maker, engaging to pay
any value had been (2) Authorizes on demand, or at a fixed or determinable
given confession of future time, a sum certain in money to order or
(3) Non-specification of judgment on to bearer. Where a note is drawn to the
place where it is default; maker's own order, it is not complete until
drawn or place (3) Waives the benefit indorsed by him.
where it is payable of law intended to
(4) Bears a seal protect the debtor; A.1. KINDS OF PROMISSORY NOTES
(5) Designation of or (1) Certificate of deposit a form of promissory
particular kind of (4) Allows the creditor note which is a written acknowledgment of
currency in which the option to a bank of its receipt of a certain sum with a
payment is to be require something promise to repay the same.
made. (Sec. 6) in lieu of money. (2) Bonds a certificate or evidence of a debt
(Sec. 5) on which the issuing company or
governmental body promises to pay the
Note: Negotiability is bondholders a specified amount of interest
affected when for a specified length of time, and to repay
instrument contains a the loan on the expiration date.
promise or order to do (3) Debenture a promissory note or bond
any act in addition to backed by the general credit of a
the payment of money. corporation and usually not secured by a
Notes: mortgage or lien on any specific property.
A confession of judgment is provision given (Sundiang and Aquino)
by the maker authorizing the plaintiff's

17
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B. BILL OF EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A Section 17, NIL. Construction where instrument
bill of exchange is an unconditional order in is ambiguous. - Where the language of the
writing addressed by one person to another, instrument is ambiguous or there are
signed by the person giving it, requiring the omissions therein, the following rules of
person to whom it is addressed to pay on construction apply:
demand or at a fixed or determinable future x---x
time a sum certain in money to order or to
bearer. (Sec. 126) (e) Where the instrument is so ambiguous that
there is doubt whether it is a bill or note,
the holder may treat it as either at his
B.1. KINDS OF BILLS OF EXCHANGE
election;
(1) Draft used synonymously with bill of
exchange although it normally refers to a x---x
bill of exchange used in documentary
exchange like letters of credit transactions. (1) The drawer and the drawee are the same
(2) Inland and foreign bill an Inland bill is a person;
bill which is, or on its face purports to be, (2) Drawee is a fictitious person;
both drawn and payable within the (3) Drawee does NOT have the capacity to
Philippines. Any other bill is a foreign bill. contract (Sec. 130, NIL)
(3) Time draft draft that is payable at a fixed (4) Where the bill is drawn on a person who is
date. legally absent;
(4) Sight or demand draft payable when the (5) Where the instrument is so ambiguous that
holder presents it for payment. there is doubt whether it is a bill or note,
(5) Trade acceptance used in contracts of sale the holder may treat it as either at his
where the seller as drawer orders the buyer election (Sec. 17[e], NIL)
(as drawee) to pay a sum certain to the
same seller (payee). Promissory Note Bill of Exchange
(6) Bankers acceptance a time draft across
Unconditional promise Unconditional order
the face which the drawee has written the
word accepted. (Sundiang and Aquino) Involves 2 parties Involves 3 parties
(7) Check - A bill of exchange drawn on a bank Maker is primarily Drawer is only
payable on demand (Sec. 185). It is the most liable secondarily liable
common form of bill of exchange.
Only one presentment: Two presentments: for
for payment acceptance and for
B.2. INSTANCES WHEN A BILL OF payment
EXCHANGE MAY BE TREATED AS A
PROMISSORY NOTE:
Section 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer
and drawee are the same person or where the
drawee is a fictitious person or a person not
having capacity to contract, the holder may
treat the instrument at his option either as a
bill of exchange or as a promissory note.

18
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

Bill of Exchange Check considered as complete though it in fact may

have blanks as to non-essentials... (Campos)
Not necessarily It is necessary that a
drawn on a deposit. check be drawn on a
B. INSERTION OF DATE
The drawee need not bank deposit.
be a bank Otherwise, there Section 13, NIL. When date may be inserted. -
would be fraud. Where an instrument expressed to be payable
at a fixed period after date is issued undated,
Death of a drawer of a Death of the drawer of or where the acceptance of an instrument
BOE, with the a check, with the payable at a fixed period after sight is
knowledge of the knowledge of the undated, any holder may insert therein the
bank, does not revoke bank, revokes the true date of issue or acceptance, and the
the authority of the authority of the banker instrument shall be payable accordingly. The
drawee to pay. to pay. insertion of a wrong date does not avoid the
instrument in the hands of a subsequent
May be presented for Must be presented for holder in due course; but as to him, the date so
payment within payment within a inserted is to be regarded as the true date.
reasonable time after reasonable time after
its last negotiation. its issue. Any holder may insert the true date of issue or
May be payable on Always payable on acceptance of an instrument where:
demand or at a fixed demand (1) The instrument is expressed to be payable
or determinable future at a fixed period after date is issued
time undated; or
(2) The acceptance of an instrument payable at
a fixed period after sight is undated.

IV. Completion and C. EFFECT OF ANTE-DATING AND

Delivery
A. TWO STEPS INVOLVED IN THE
EXECUTION OF NEGOTIABLE
INSTRUMENTS
(1) Writing of the instrument completely in
accordance with the requisites of
negotiability under Sec. 1.
(2) Delivery of the instrument by the maker or
the drawer to the payee in order to give
legal effect thereto. (Abad)
Note: It may sometimes be difficult to locate
the boundary line between a complete and an
incomplete instrument... It would seem that if
an instrument contains all the requisites for
making it a negotiable one, it should be
POST-DATING
Section 12, NIL. Ante-dated and post-dated.-
The instrument is not invalid for the reason
only that it is ante-dated or post-dated,
provided this is not done for an illegal or
fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the
title thereto as of the date of delivery.
D. COMPLETION OF BLANKS
Section 14, NIL. Blanks; when may be filled. -
Where the instrument is wanting in any
material particular, the person in possession
thereof has a prima facie authority to complete
it by filling up the blanks therein. And a
signature on a blank paper delivered by the
person making the signature in order that the

19
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
paper may be converted into a negotiable
instrument operates as a prima facie authority
to fill it up as such for any amount. 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. But if any such instrument,
after completion, is negotiated to a holder in
due course, it 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
. of transferring the property in the instrument.
E. INCOMPLETE AND UNDELIVERED
INSTRUMENTS
Section 15, NIL. Incomplete instrument not
delivered. - Where an incomplete instrument
has not been delivered, it will not, if completed
and negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed
thereon before delivery.
In this case a real defense exists and not even a
holder in due course can recover on the
instrument, for the law is specific that it is not a
valid contract in the hands of any holder
(Campos).
There is no chance for it to become a
negotiable instrument.
Note: A drawee bank whose negligent custody
of the checks, after partial execution,
contributed to its escape, is stopped from
raising the real defense under Sec. 15 of the
NIL (Campos).
20
MERCANTILE LAW
F. COMPLETE AND UNDELIVERED
INSTRUMENTS
Section 16, NIL. Delivery; when effectual; when
presumed. - Every contract on a negotiable
instrument is incomplete and revocable until
delivery of the instrument for the purpose of
giving effect thereto. As between immediate
parties and as regards a remote party other
than a holder in due course, the delivery, in
order to be effectual, must be made either by
or under the authority of the party making,
drawing, accepting, or indorsing, as the case
may be; and, in such case, the delivery may be
shown to have been conditional, or for a
special purpose only, and not for the purpose
But where the instrument is in the hands of a
holder in due course, a valid delivery thereof by
all parties prior to him so as to make them
liable to him is conclusively presumed. And
where the instrument is no longer in the
possession of a party whose signature appears
thereon, a valid and intentional delivery by him
is presumed until the contrary is proved.
Non-delivery of a complete instrument is a
personal defense (Campos)
The maker or drawer of the instrument may
withhold release.
Delivery of an instrument is a prerequisite for
liability. If the instrument is complete in all
its particulars, but is not delivered, there is
no contract. However if the instrument is no
longer in the possession of a party who has
signed it, a delivery is presumed until the
contrary is proved (Campos).
If the holder of the instrument is a holder in
due course, the instrument is not merely
prima facie deemed delivered, but this fact is
conclusively presumed (Campos).
Until the same is delivered, the instrument
remains revocable.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
G. INCOMPLETE AND DELIVERED
INSTRUMENTS (Sec. 14, NIL)
(1) Holder has prima facie authority to fill up
the instrument, but he must first prove that
he has the authority to fill up. For such
presumption to apply, issuance is necessary.
(2) The instrument must be filled up strictly in
accordance with the authority given and
within reasonable time
(3) HDC may enforce the instrument as if filled
up according to (2) above.
This provision merely raises a personal defense
(Campos)
H. COMPLETE AND DELIVERED
INSTRUMENTS
In a complete and delivered instrument, rights
and liabilities under the negotiable
instruments law attach.
V. Signature
Sec. 18. Liability of person signing in trade or
assumed name. - No person is liable on the
instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same
extent as if he had signed in his own name.
General rule: One whose signature does not
appear on the instrument shall not be liable
thereon.
Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate instrument
(allonge) OR where an acceptance is written
on a separate paper
(4) One who signs his assumed or trade name
21
MERCANTILE LAW
(5) A person negotiating by delivery (as in the
case of a bearer instrument) is liable only to
his immediate indorsee.
A. SIGNING IN TRADE NAME
One who signs in a trade or assumed name will
be liable to the same extent as if he had signed
in his own name (Sec. 18, NIL)
B. SIGNATURE OF AGENT
Sec. 19. Signature by agent; authority; how
shown. - The signature of any party may be
made by a duly authorized agent. No particular
form of appointment is necessary for this
purpose; and the authority of the agent may be
established as in other cases of agency.
Sec. 20. Liability of person signing as agent, and
so forth. - Where the instrument contains or a
person adds to his signature words indicating
that he signs for or on behalf of a principal or
in a representative capacity, he is not liable on
the instrument if he was duly authorized; but
the mere addition of words describing him as
an agent, or as filling a representative
character, without disclosing his principal,
does not exempt him from personal liability.
Signature of any party may be made by duly
authorized agent, established as in ordinary
agency.
C. SIGNATURE PER PROCURATION
A signature per procuration operates as
notice to the holder that the agent has 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
(Sec. 21, NIL)
According to the majority rule, the words
per proc or procuration must appear on
the note for this rule in Section 21 to be
applicable (Campos)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
D. LIABILITY OF AN AGENT
General rule: Where a person adds to his
signature words indicating that he signs on
behalf of a principal, then he is not liable if he
was duly authorized.
Exceptions:
(1) Mere addition of words describing him as an
agent WITHOUT disclosing his principal
(Sec. 20, NIL)
(2) Where a broker or agent negotiates an
instrument without indorsement, he incurs
all liabilities in Sec. 65 of the NIL, unless he
discloses name of principal and the fact that
he is only acting as an agent. (Sec. 69, NIL)
Requisites to negative personal liablity of
agent:
(1) He must be duly authorized;
(2) He must act within the scope of his
authority
(3) He must indicate in the instrument that he
is signing merely as agent; and
(4) He must disclose his principal.
E. INDORSEMENT BY MINOR OR
CORPORATION
The indorsement or assignment of the
instrument by a corporation or by an infant
(minor) passes the property therein,
notwithstanding that from want of capacity,
the corporation or infant may incur no
liability thereon (Sec. 22, NIL).
The above provision does not change the rule
in civil law on minor's contracts, which
provides that a contract enetered into by a
minor is voidable, and the minor cannot be
held liable thereon unless he ratifies it upon
reaching majority.
However, under Section 22 of the NIL, should
the minor indorse a negotiable instrument,
although he cannot be held liable on his
contract of indorsement, title to the
instrument passes to his indorsee and the
22
MERCANTILE LAW
latter can rightfully recover from the maker,
free from the defense of minority (Campos).
REAL defense but available only to the
incapacitated party (i.e. the minor or the
corporation).
F. FORGERY
Sec. 23. Forged signature; effect of. - When a
signature is forged or made without the
authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
the forgery or want of authority.
Counterfeit making or fraudulent alteration of
any writing, which may consist of:
(1) Signing of anothers name with intent to
defraud; or
(2) Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.
General rule: When a signature is forged or
made without the authority of the person, only
the forged signature (not the instrument itself
and the other genuine signatures) is wholly
inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof against
any party thereto can be acquired through
or under such signature
Exception: The party against whom it is sought
to be enforced is precluded from setting up the
forgery or want of authority as a defense (Sec.
23, NIL).
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
F.1 PERSONS PRECLUDED FROM
SETTING UP DEFENSE OF FORGERY
(CAMPOS)
(1) Those who warrant or admit the
genuineness of the signature in question.
This includes indorsers, persons negotiating
by delivery and acceptors.
(2) Those who, by their acts, silence, or
negligence, are estopped from setting up
the defense of forgery.
F.2 RULES ON FORGERY
F.2.A. PROMISSORY NOTE
Makers signature forged
(1) Maker is not liable because he never
became a party to the instrument.
(2) Indorsers subsequent to forgery are liable
because of their warranties.
(3) Party who made the forgery is liable.
Payees signature forged
(1) Payee is not liable.
(2) Maker is still liable. (REASON: Indorsement
is not necessary to title and the maker
engages to pay holder)
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable.
Indorsers signature forged
(1) Maker, payee, indorser whose signature/s
was/were forged, and all indorsers
preceding the forgery are not liable.
(2) Indorsers subsequent to forgery are liable.
(3) Party who made the forgery is liable.
F.2.B. BILL OF EXCHANGE
Drawers signature forged
(1) Drawer is not liable because he was never a
party to the instrument.
(2) Drawee is liable if it paid or accepted the
instrument (no recourse to drawer) because
he admitted the genuineness of the
drawers signature (Sec. 62, NIL; Price v.
23
MERCANTILE LAW
Neal). Drawee cannot recover from the
collecting bank because there is no privity
between the collecting bank and the drawer.
The collecting bank does not give any
warranty re: the drawers signature.
(Associated Bank vs. CA)
(3) Indorsers subsequent to forgery are liable
(such as collecting bank or last endorser)
(4) Party who made the forgery is liable
Payees signature forged
(1) Payee is not liable
(2) Drawer is still secondarily liable
(3) Drawee is liable if it paid or accepted the
instrument (Sec. 62, NIL; Price v. Neal), but it
may pass liability back through the
collection chain
(4) Indorsers subsequent to forgery are liable
(such as collecting bank)
(5) Party who made the forgery is liable
Indorsers signature forged
(1) Drawer, payee, indorser whose signature/s
was/were forged and all indorsers
preceding the forgery are not liable.
(2) Drawee is liable if it paid or accepted the
instrument (Sec. 62, NIL; Price v. Neal).
(3) Indorsers subsequent to forgery are liable.
(such as collecting bank)
(4) Party who made the forgery is liable.
G. ACCEPTANCE AND PAYMENT
UNDER MISTAKE
Sec. 62. Liability of acceptor. - The acceptor, by
accepting the instrument, engages that he will
pay it according to the tenor of his acceptance
and admits:
(a) The existence of the drawer, the
genuineness of his signature, and his
capacity and authority to draw the
instrument; and
(b) The existence of the payee and his then
capacity to indorse.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(1) When the drawee accepts or pays a forged
instrument
Price v. Neal doctrine: As between equally
innocent persons, the drawee who pays
money on, or accepts, a check or draft the
signature on which was forged CANNOT
recover the money from the one who
received it. The drawee is bound to know
the signature of its depositor.
A bank is bound to know the signatures of
its depositors. If a bank pays a forged
check it must be considered as making
the payment out of its own funds and
cannot charge the account of the
depositor whose signature was forged.
(PNB vs. Quimpo, 1988)
A bank is liable, irrespective of its good
faith, in paying a forged check. (Samsung
vs. Far East Bank, 2004)
(2) Extensions of Price v. Neal doctrine
Notes: The bar to recovery on the part of a
drawee who pays money on, or accepts, a
check or draft, is extended to overdrafts
and stop payment orders.
(a) Overdraft occurs when a check is issued
for an amount more than what the
drawer has in deposit with the drawee
bank. Rule: The drawee who pays the
holder of the bill cannot recover from the
holder what he paid under mistake
(Campos)
(b) Stop Payment Order is one issued by the
drawer of a check countermanding his
first order to the drawee bank to pay the
check. Rule: The drawee bank is bound to
follow the order, provided it is received
prior to its certification or payment of the
check (Campos).
(3) Effects of Negligence of Depositor
If such negligence of the depositor was
the proximate cause of the loss, the
drawee-bank would NOT be liable
24
MERCANTILE LAW
The negligence of the depositor/drawer
would consist of the failure to to carefully
examine bank statements, cancelled
checks, his check stubs, and other
pertinent records within a reasonable
time and to report any errors without
unreasonable delay to the drawee bank.
If a drawer/depositors negligence and
delay should cause a bank to honor a
forged check, the drawer cannot later
complain should bank refuse to recredit
his account (Campos).
(4) Effect of Payment under Forged
Indorsements
In the case of a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged, the drawee
can recover the amount paid out by him.
RATIONALE: The drawee makes no warranty
as to the genuineness of any indorsement
(Campos).
(5) Effect of negligence of drawee in informing
recipient of forgery
The rule is that a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged is not a
bar to his right to recover the amount paid
out by him; however, there is an exception
to this rule.
If it is shown that the drawee on learning
of the forgery did not give prompt notice
of it to the holder and that damage
resulted to said holder, recovery by the
drawee is barred (Clearfield Trust Co. v. US,
1943)
(6) Effect of negligence of drawer in case of
forged indorsement on checks
The drawer, as soon as he comes to know of a
forged indorsement should promptly notify the
drawee bank. Otherwise, should his negligent
delay be the proximate cause of any
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

subsequent loss to the bank, the latter may the degree of negligence of each will be
properly charge it to the drawer's account. weighed in considering the amount of loss
(7) Comparing the liability of a collecting bank which each should bear (BPI v CA, 1992)
and a drawee bank
A collecting bank is only liable for forged
indorsements and not forgeries of the drawer
VI. Consideration
or makers signature (PNB v CA, 1968).
Section 25, NIL. Value, what constitutes.
Value is any consideration sufficient to support
Rationale: In presenting the checks for clearing,
a simple contract. An antecedent or pre-
the collecting agent made an express
existing debt constitutes value; and is deemed
guarantee on the validity of all the prior
such whether the instrument is payable on
endorsements.
demand or at a future time.
The collecting bank or last indorser generally
Section 191, NIL. Definition and meaning of
suffers the loss because it has the duty to
terms. - In this Act, unless the contract
ascertain the genuineness of all prior
otherwise requires:
indorsements considering that the act of
x---x
presenting the check for payment to the
"Value" means valuable consideration;
drawee is an assertion that the party making
x---x
the presentment had done its duty to
ascertain the genuineness of the
indorsements (BPI v CA, 1992). Value and consideration are generally
convertible terms. However, they may have
A drawee bank is not liable for forged
indorsements. different implications. When the payee of a
noet sues the maker, or the payee of a bill
Rationale: The drawee bank is not similarly sues the drawer, or an indorsee sues his
immediate indorser, the word
situated as the collecting bank because the
former makes no warranty as to the consideration is the more proper term to
use. But where a holder sues any party to the
genuineness of any indorsement. The drawee
banks duty is but to verify the genuineness of instrument with whom he himself has not
the drawers signature and not of the dealt, the term value is more appropriate.
indorsement because only the drawer is its An antecedent or pre-existing debt
client. constitutes value; and is deemed such
whether the instrument is payable on
Note: demand or at a future time. (Sec. 25, NIL)
However, it should be noted that as an Value need not be full and a holder will be
exception to the rule that a drawee bank is one for value even if he gave less than the
not liable for a forged indorsement, when the face value of the instrument, provided the
negligence of the drawee bank is the intention of the transferor is to transfer the
proximate cause of the collecting banks full amount represented by the instrument.
payment of a check with a forged
indorsement, the drawee bank may be held
liable to the collecting bank.
Furthermore, when both the collecting bank
and the drawee bank are guilty of negligence,

25
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
A. WHO IS A HOLDER FOR VALUE
(HFV)?
(1) A holder of an instrument for which value,
which need not be in full, has been given at
any given time but only with respect to all
parties who have become parties to the
instrument prior to the time at which value
has been given. (Sec 26, NIL)
(2) A holder who has a lien on the instrument
but only to the extent of his lien. (Sec 27,
NIL)
B. BURDEN OF PROOF - accommodation party.
PRESUMPTION OF CONSIDERATION
Section 24, NIL. Presumption of consideration. -
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
C. EFFECT OF WANT OF
CONSIDERATION
Section 28, NIL. Effect of want of consideration.
- Absence or failure of consideration is a matter
of defense as against any person not a holder in
due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or
otherwise.
Absence or failure of consideration is a
matter of defense as against any person not
a holder in due course, hence, it is a personal
defense
Partial failure of consideration is a defense
pro tanto, meaning a defense to the extent of
the failure (Abad).
26
MERCANTILE LAW
VII. Accommodation
Party
Section 29, NIL. Liability of 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. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
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.
A. LIABILITY OF AN
ACCOMMODATION PARTY
Section 28 of the NIL states that the holder
for value to whom the instrument thus
executed is subsequently negotiated has a
right of recourse against the accommodation
party in spite of the formers knowledge that
no consideration passed between the
accommodation and accommodated parties.
Does this mean that the accommodation
party is liable to a holder even if he is not a
holder in due course, provided he is a holder
for value? The Supreme Court has ruled that
an accommodation party is liable ONLY to a
HOLDER IN DUE COURSE. However, the
mere fact that the holder knew of the
accommodation does not prevent him from
being a holder in due course in order to
recover from the accommodation party.
(Stelco Marketing Corp. v. CA, 1992)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

B. ACCOMMODATION PARTY AS Transfer is a broader term than negotiation. If

SURETY an instrument is transferred without
negotiation, the transfer is a mere assignment
An accommodation Party is generally
which constitutes the transferee as a mere
regarded as a surety for the party
assignee, not a holder, subject to all defenses
accommodated
existing among prior parties. Transfer thus
When the accomodation party makes
includes both an ordinary assignment and a
payment to holder of the note, he has the
negotiation (Campos).
right to sue the accommodated party for
reimbursement. (Agro Conglomerates, Inc. v.
CA, YEAR)
B. MODES OF NEGOTIATION
Note: A corporation cannot act as an
accommodation party. The issue or B.1. BY DELIVERY IF PAYABLE TO
endorsement of negotiable instruments by a BEARER (SEC. 30)
corporation without consideration and for Section 191, NIL. Definition and meaning of
the accommodation of another is ultra vires terms. - In this Act, unless the contract
(Crisologo v. CA, YEAR) otherwise requires:
x---x
"Delivery" means transfer of possession, actual
VIII. Negotiation or constructive, from one person to another;
x---x
Section 30, NIL. What constitutes negotiation. -
"Issue" means the first delivery of the
An instrument is negotiated when it is
instrument, complete in form, to a person who
transferred from one person to another in such
takes it as a holder;
manner as to constitute the transferee the
x---x
holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder Delivery means transfer of possession of
and completed by delivery. instrument by the maker or drawer, with
intent to transfer title to the payee and
recognize him as holder thereof
A. NEGOTIATION DISTINGUISHED
Issuance is the FIRST delivery of the
FROM ASSIGNMENT instrument complete in form to a person who
Negotiation Assignment takes it as a holder.
The transfer of the The transferee does
instrument from one not become a holder, Requisites
person to another so nor can he become a (1) Mechanical act of writing the instrument
as to constitute the holder in due course; completely and in accordance with the
transferee the holder and he merely steps requirements of Section 1 of the NIL; and
thereof (Sec.30, NIL). into the shoes of the (2) The delivery of the complete instrument by
transferor. As such, the maker or drawer, with the intention of
any defense available giving effect to it, to the payee or holder..
against the transferor
is available against the Presumption of delivery
transferee. (1) Where the instrument is no longer in the
possession of a party whose signature

27
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
appears thereon, a valid and intentional
delivery by him is presumed until the
contrary is proved (Sec. 16, NIL)
(2) If it is in the hands of a holder in due course,
the presumption of a valid delivery is
conclusive (Sec. 16, NIL)
Presumption as to date
(1) Date is not an essential element of
negotiability; it is not included in the
requirements for an instrument to be
negotiable under Sec. 1 of the NIL.
(2) An undated instrument is considered to be
dated as of the time it was issued (Sec. 17 (c),
NIL)
B.2. BY INDORSEMENT COMPLETED BY
DELIVERY IF PAYABLE TO ORDER
(SEC. 30)
Section 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Indorsement" means an indorsement
completed by delivery;
x---x
B.2.A. INDORSEMENT; HOW DONE
Section 31, NIL. Indorsement; how made. - The
indorsement must be written on the
instrument itself or upon a paper attached
thereto. The signature of the indorser, without
additional words, is a sufficient indorsement.
(1) Where placed The indorsement must be
written (Sec. 31, NIL):
(a) On the instrument itself (Sec. 31, NIL) , or
(b) On a separate piece of paper attached to
the instrument called allonge(Sec. 31,
NIL)
(2) Signature of the indorser, without additional
words, is a sufficient indorsement (Sec. 31,
NIL)
28
MERCANTILE LAW
(3) Must be of the ENTIRE instrument
Section 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an
indorsement of the entire instrument. An
indorsement which purports to transfer to the
indorsee a part only of the amount payable, or
which purports to transfer the instrument to
two or more indorsees severally, does not
operate as a negotiation of the instrument. But
where the instrument has been paid in part, it
may be indorsed as to the residue.
(a) CANNOT indorse a part only of the
amount payable; BUT if the instrument
has been paid in part, then the instrument
may be indorsed as to the residue (Sec.
32,) NIL
(b) CANNOT transfer the instrument to two
or more indorsees severally (Sec. 32, NIL)
(c) If not an indorsement of the entire
instrument, the transfer remains valid,
but as a mere assignment which subjects
the holder to all defenses on the
instrument (Campos)
(4) If name misspelled in indorsement,
indorsement will be prima facie deemed not
valid.
Section 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of a
payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
proper signature.
(a) The indorsement should be made by the
holder in the manner he was designated,
otherwise the signature will prima facie
not be a valid indorsement of the
instrument (Sec 43, NIL)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(5) Indorsement where there are joint payees
(a)Where the instrument is payable or
indorsed to A and B, they are joint
payees and an indorsement by either A
or B only will not constitute a valid
negotiation, UNLESS the one indorsing is
authorized by the other (Campos).
(b) But where the instrument is payable to
A or B, they payees are merely in the
alternative, and either one may valdily
negotiate the same (Campos).
B.2.B. KINDS OF INDORSEMENT
Section 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;
and it may also be either restrictive or qualified
or conditional.
There are four bases of classification of
indorsements under the NIL:
(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional
All of the four bases of classification coexist
with each other; thus, an indorsement may be
special and qualified at the same time. It may
also be special and unqualified, special and
restrictive, special, unrestrictive and
unqualified and so on (Campos).
C. AS TO MANNER OF FUTURE
METHOD OF NEGOTIATION
Section 34, NIL. Special indorsement;
indorsement in blank. - A special indorsement
specifies the person to whom, or to whose
order, the instrument is to be payable, and the
indorsement of such indorsee is necessary to
the further negotiation of the instrument. An
indorsement in blank specifies no indorsee,
and an instrument so indorsed is payable to
bearer, and may be negotiated by delivery.
29
MERCANTILE LAW
Section 40, NIL. Indorsement of instrument
payable to bearer. - Where an instrument,
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as
indorser to only such holders as make title
through his indorsement.
Section 35, NIL. Blank indorsement; how
changed to special indorsement. - The holder
may convert a blank indorsement into a special
indorsement by writing over the signature of
the indorser in blank any contract consistent
with the character of the indorsement.
(1) Special
(a) Specifies the person to whom/to whose
order the instrument is to be payable;
indorsement of such indorsee is
necessary to further negotiation.
(b) A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable
only to those who take title through his
indorsement (Sec. 40, NIL).
(c) An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. (Sec 40,
NIL)
Originally bearer instrument always
remains a bearer instrument (Sundiang
and Aquino)
(2) Blank
(a) Specifies no indorsee, instrument so
indorsed is payable to bearer, and may
be negotiated by delivery
(b) The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of the indorsement.
(Sec 35, NIL)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(c) An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by
a subsequent special indorsement
D. AS TO TITLE TRANSFERRED
Section 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
instrument; or
(b) Constitutes the indorsee the agent of the
indorser; or
(c) Vests the title in the indorsee in trust for or
to the use of some other persons.
But the mere absence of words implying power
to negotiate does not make an indorsement
restrictive.
Section 37, NIL. Effect of restrictive indorsement;
rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
(b) to bring any action thereon that the
indorser could bring;
(c) to transfer his rights as such indorsee,
where the form of the indorsement
authorizes him to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
(1) Restrictive Such indorsement either:
(a) Prohibits further negotiation of
instrument
(b) Constitutes indorsee as agent of indorser
(c) Vests title in indorsee in trust for another
(Sec 36, NIL)
E. RIGHTS OF RESTRICTIVE
INDORSEE
(a) Receive payment
(b) Bring any action thereon that the
indorser could bring.
30
MERCANTILE LAW
(c) Transfer his rights as such indorsee, but
all subsequent indorsees acquire only
the title of first indorsee under restrictive
indorsement. (Sec 37, NIL)
(2) Non-restrictive
F. AS TO KIND OF LIABILITY
ASSUMED BY INDORSER
Section 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser
a mere assignor of the title to the instrument. It
may be made by adding to the indorser's
signature the words "without recourse" or any
words of similar import. Such an indorsement
does not impair the negotiable character of the
instrument.
(1) Qualified
(a) Constitutes indorser as mere assignor of
title
(b) Made by adding the words without
recourse (Sec. 38, NIL).
(c) But this does not mean that the
transferee only has the rights of an
assignee; transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
(d) Effects:
(i) Relieves the qualified indorser of his
liability to pay the instrument should
the maker be unable to pay
(ii) The qualified indorser does not
guarantee the solvency of the maker,
but merely his legal title to the
instrument
(iii) The instrument may still be
further negotiated; no effect on its
negotiability
(2) Non-qualified
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
G. AS TO PRESENCE/ABSENCE OF
EXPRESS LIMITATIONS
Section 39, NIL. Conditional indorsement. -
Where an indorsement is conditional, the
party required to pay the instrument may
disregard the condition and make payment to
the indorsee or his transferee whether the
condition has been fulfilled or not. But any
person to whom an instrument so indorsed is
negotiated will hold the same, or the proceeds
thereof, subject to the rights of the person
indorsing conditionally.
(1) Conditional
(a) Additional condition annexed to
indorsers liability; such condition must
be expressed
(b) Where an indorsement is conditional, a
party required to pay the instrument may
disregard the condition, and make
payment to the indorsee or his transferee,
whether condition has been fulfilled or
not.
(c) But any person to whom an instrument
so indorsed is negotiated, will hold the
same, or the proceeds thereof, subject to
the rights of the person indorsing
conditionally. (Sec. 39, NIL)
(2) Unconditional
H. OTHER KINDS OF INDORSEMENT
(1) Absolute One by which the indorser binds
himself to pay, upon no other condition
than the failure of prior parties to do so, and
of due notice to him of such failure
(2) Joint Where instrument payable to the
order of two or more payees or indorsees
not partners, all must indorse, unless the
one indorsing has authority to endorse for
the others (Sec. 41, NIL)
(3) Irregular Where a person, not otherwise a
party to the instrument, places thereon his
signature in blank before delivery, he is
liable as indorser
31
MERCANTILE LAW
IX. Rights of the Holder
A. DEFINITION OF A HOLDER
Section 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;
A holder is a payee or indorsee of a bill or note
who is in possession of it, or the bearer thereof
(Sec. 191, NIL). He has the following rights (Sec.
51, NIL):
(1) To sue on the instrument in his own name
Unindorsed intruments: Section. 49, NIL.
Transfer without indorsement; effect of.
Where the holder of an instrument
payable to his order transfers it for value
without indorsing it, 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 transferor. But for the
purpose of determining whether the
transferee is a holder in due course, the
negotiation takes effect as of the time
when the indorsement is actually made.
Note: This section applies only to an
instrument payable to the order of the
transferor. This cannot apply to bearer
instruments.
Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
may at any time strike out any
indorsement which is not necessary to his
title. The indorser whose indorsement is
struck out, and all indorsers subsequent
to him, are thereby relieved from liability
on the instrument.
Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
person adds to his signature words
indicating that he signs for or on behalf of
a principal or in a representative capacity,
he is not liable on the instrument if he was
duly authorized; but the mere addition of
words describing him as an agent, or as
filling a representative character, without
disclosing his principal, does not exempt
him from personal liability.
(2) Payment in due course to the holder
discharges instrument
B. HOLDER IN DUE COURSE (HDC)
Section 52, NIL. What constitutes a holder in due
course. - A holder in due course is a holder who
has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before it
was overdue, and without notice that it has
been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That 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.
Section 58, NIL. When subject to original
defense. - In the hands of any holder other than
a holder in due course, a negotiable
instrument is subject to the same defenses as if
it were non-negotiable. But a holder who
derives his title through a holder in due course,
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 of all
parties prior to the latter.
Section 59, NIL. Who is deemed holder in due
course. - Every holder is deemed prima facie to
be a holder in due course; but when it is shown
that the title of any person who has negotiated
32
MERCANTILE LAW
the instrument was defective, the burden is on
the holder to prove that he or some person
under whom he claims acquired the title as
holder in due course. But the last-mentioned
rule does not apply in favor of a party who
became bound on the instrument prior to the
acquisition of such defective title.
B.1. WHO ARE HDCS:
(1) Holder in due course (HDC) under Sec. 52,
NIL
(2) HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument through a
HDC has all the rights of the latter even
though he himself satisfies none of the
requirements of due course holding
HDC under Sec. 59, NIL (presumption):
Every holder is deemed prima facie to be a
holder in due course
Sec. 191 of the NIL defines holder as the payee
or indorsee of a bill or note, who is in
possession of it, or the bearer thereof. The
word holder in the first clause of Sec. 52 and
in the second subsection thereof may be
replaced by the definition in Sec. 191 so as to
read a holder in due course as a payee or an
indorsee in possession, etc. (De Ocampo v.
Gatchalian, 1961)
B.2. THE SIGNIFICANCE OF DUE COURSE
HOLDING
A holder in due course can acquire a better
title than his predecessors because he takes
the instrument free from any defect of title of
prior parties. He is furthermore free from
defenses available to prior parties among
themselves (Campos).
A holder not in due course, on the other hand,
takes the instrument subject to all defenses
because he is treated as a transferee of a
non-negotiable paper. Real defenses,
however, which attach to the instrument
itself would be available even against a
holder in due course (Campos).
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
When is the question of whether a holder is a
holder in due course relevant. It should be
kept in mind that the question of whether a
holder is a holder in due course or not is
signifant only when there is an existing
defense between prior parties (Campos).
B.3. RIGHTS OF A HOLDER IN DUE
COURSE
Section 51, NIL. Right of holder to sue;
payment. - The holder of a negotiable
instrument may to sue thereon in his own
name; and payment to him in due course
discharges the instrument.
Section 57, NIL. Rights of holder in due course. -
A holder in due course holds the instrument
free from any defect of title of prior parties, and
free from defenses available to prior parties
among themselves, and may enforce payment
of the instrument for the full amount thereof
against all parties liable thereon.
Section 58, NIL. When subject to original
defense. - In the hands of any holder other than
a holder in due course, a negotiable
instrument is subject to the same defenses as if
it were non-negotiable. But a holder who
derives his title through a holder in due course,
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 of all
parties prior to the latter.
(1) To sue on the instrument in his own name
(Sec. 51, NIL)
(2) To receive payment on the instrument (Sec.
51, NIL)
(3) Holds instrument free of any defect of title
of prior parties (Sec. 57, NIL)
(4) Free from defenses available to prior
parties among themselves (Sec. 57, NIL)
(5) May enforce payment of instrument for full
amount, against all parties liable (Sec. 57,
NIL)
33
MERCANTILE LAW
B.4. REQUISITES OF A HOLDER IN DUE
COURSE (SEC. 52, NIL)
Sec. 52, NIL. What constitutes a holder in due
course. A holder in due course is a holder who
has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before it
was overdue, and without notice that it has
been previously dishonored, if such was the
fact;
(c) That he took it in good faith and for value;
(d) That 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.
That the instrument is complete and regular
upon its face
(1) It is incomplete when it is wanting in any
material particular or particular proper to be
inserted in a negotiable instrument without
which the same will not be complete.
B.4.A. MATERIAL PARTICULARS
Section 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(a) Date
(b) Sum payable, either for principal or interest
(c) Time or place of payment
(d) Number or relations of the parties
(e) Medium or currency in which payment is to
be made
(f) Or which adds a place of payment where no
place of payment is specified
(g) Or any other change or addition which
alters the effect of the instrument in any
respect
The items enumerated under Sec. 125 of the
NIL are material particulars.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2) That he became the holder of it before it was
overdue and without notice that it had been
previously dishonored, if such was the fact
Section 53, NIL. When person not deemed holder
in due course. - Where an instrument payable
on demand is negotiated on an unreasonable
length of time after its issue, the holder is not
deemed a holder in due course.
OVERDUE THE FOLLOWING CANNOT BE
HDCS:
(a) A holder who became such after the date of
maturity of the instrument (instrument is
overdue; Sec. 53, NIL);
(b) In case of demand instruments: a holder
who negotiates it after an unreasonable
length of time after its issue (Sec. 53, NIL)
(c) Instruments with fixed maturity but subject
to acceleration: ultimate date of maturity is
the date of maturity for the purpose of
determining whether a purchaser is a HDC
(d) Undated instruments: Prima facie
presumption that it was negotiated before it
was overdue (Sec. 45, NIL)
Notes:
(1) An overdue instrument is still negotiable,
but it is subject to the defenses (real and
personal) existing at the time of the transfer.
(2) As to what constitutes a reasonable time,
regard is to be had to the nature of the
instrument, the usage of trade or business
with respect to such instrument, and the
facts of the particular case. (Sec. 193, NIL)
(3) An instrument is not invalid for the reason
only that it is ANTE-DATED OR
POSTDATED provided it is not done for an
illegal or fraudulent purpose. The person to
whom an instrument so dated is delivered
acquires the title thereto as of the date of
delivery (Sec. 12, NIL).
B.4.B. THAT HE TOOK IT IN GOOD FAITH
AND FOR VALUE
34
MERCANTILE LAW
Value
(1) Any consideration sufficient to support a
simple contract (Sec. 25, NIL).
(2) An antecedent or pre-existing debt
constitutes value, whether the instrument is
payable on demand or at a future time (Sec.
25, NIL)
Holder for value
(1) Where value has at any time been given for
the instrument, the holder is deemed a
holder for value in respect to all parties
who become such prior to that time (Sec. 26,
NIL); and
(2) Where the holder has a lien on the
instrument, he is deemed a HFV to the
extent of his lien (Sec .27, NIL).
(3) The holder is a holder for value only to the
extent that the consideration agreed upon
has been paid, delivered, or performed.
(Sundiang and Aquino)
Presumption: Every negotiable instrument is
deemed prima facie issued for valuable
consideration; and every person whose
signature appears thereon is deemed to have
become a party thereto for value (Sec. 24, NIL).
Such presumption cannot be overcome by the
petitioners bare denial of receipt of the
consideration. (Bayani vs. People, 2004)
Good faith
Holder must have taken the instrument in
good faith and that 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.
Actual knowledge
What constitutes notice of defect. To constitute
notice of an infirmity in the instrument or
defect in the title of the person negotiating the
same, the person to whom it is negotiated
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
must have had actual knowledge of the infirmity
or defect, or knowledge of such facts that his
action in taking the instrument amounted to
bad faith. (Sec. 56, NIL)
That 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
Section 55, NIL. When title defective. - The title
of a person who negotiates an instrument is
defective within the meaning of this Act when
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration, or when he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud.
Section 56, NIL. What constitutes notice of
defect. - To constitutes notice of an infirmity in
the instrument or defect in the title of the
person negotiating the same, the person to
whom it is negotiated must have had actual
knowledge of the infirmity or defect, or
knowledge of such facts that his action in
taking the instrument amounted to bad faith.
B.4.C. WHAT CONSTITUTES NOTICE OF
DEFECT OR BAD FAITH
Under Section 56, in order to constitute notice,
the holder must:
(a) have ACTUAL and not merely
constructive knowledge of the defect; OR
(b) have acted in bad faith (Campos)
Gross negligence IN ITSELF would not
constitute notice since it is not the equivalent
of actual knowledge nor of bad faith (Campos).
The question of good faith or bad faith is a
question of fact which must be determined in
35
MERCANTILE LAW
accordance with the particular circumstances
of each case (Campos).
Suspicious circumstances
General rule: A purchaser of an instrument is
not required to investigate every suspicious
circumstance; failure to investigate such
circumstances does not constitute him as
being in bad faith or having a notice of defect
(Campos).
Rationale: The general principle that a
purchaser who has knowledge of certain facts
is put on inquiry does not operate to its full
extent in the law of negotiable instruments.
Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require investigation
of every suspicious circumstance would
hamper their function of facilitating exchange;
thus negligence in tracking down a suspicious
circumstance which would put a prudent man
on inquiry is not of itself sufficient to prevent
recovery (Campos).
Exceptions:
(a) Suspicious circumstances TOGETHER WITH
other circumstances, may be admitted as
evidence of bad faith.
(b) Where the suspicious circumstances are so
cogent and obvious
A check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should put
the payee on inquiry and upon him devolves the
duty to ascertain the holders title to the check
or the nature of his possession. Failing in this
respect, the payee is declared guilty of gross
negligence amounting to legal absence of good
faith and as such the consensus of authority is
to the effect that the holder of the check is not
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
a holder in good faith. (State Investment House
vs. IAC, 1989)
Defective title
Title is NOT defective when at the time it was
negotiated to him, he had NO notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Title is DEFECTIVE when (Sec. 55, NIL)
(1) instrument/signature obtained by fraud,
duress, force or fear or other unlawful
means OR for an illegal consideration; or
(2) instrument is negotiated in breach of faith,
or fraudulent circumstances
NOTICE of infirmity or defect actual
knowledge of the infirmity or defect OR
knowledge of such facts that his action in
taking the instrument amounted to bad faith
(Sec.56, NIL)
RIGHT of a transferee who receives NOTICE of
any infirmity or defect BEFORE he has PAID
THE FULL amount for the instrument. He will
be deemed a HDC only to the extent of the
amount therefore paid by him (Sec.54, NIL)
C. DEFENSES AGAINST THE
HOLDER
C.1. PRESUMPTION IN FAVOR OF DUE
COURSE HOLDING
Every holder is deemed prima facie to be a
holder in due course (Sec. 59, NIL).
(1) BURDEN SHIFTS when it is shown that the
title of any person who has negotiated the
instrument was defective. Holder MUST
then PROVE that he or some person under
whom he claims acquired the title as a
holder in due course.
36
MERCANTILE LAW
(2) But the last mentioned rule does not apply
in favor of a party who became bound on
the instrument prior to the acquisition of
such defective title. (Sec. 59, NIL)
C.2. HOLDER NOT IN DUE COURSE
(1) One who became a holder of an instrument
without any, some or all of the requisites
under Sec. 52 of the NIL
(2) With respect to demand instruments, if it is
negotiated an unreasonable length of time
after its issue, the holder is deemed not a
holder in due course. (Sec. 53, NIL)
(3) Rights of a holder not in due course (Sec. 51,
NIL):
(a) To sue on the instrument under in his own
name
(b) To enforce the instrument
The only disadvantage of a holder who is not a
holder in due course is that the negotiable
instrument is subject to defenses as if it were
non-negotiable. [Chan Wan vs. Tan Kim (1960)]
X. Liabilities of Parties
Primary liability: The unconditional promise
attaches the moment the maker makes the
instrument while the acceptors assent to the
unconditional order attaches the moment he
accepts the instrument. No further act is
necessary in order for the liability to accrue.
Presentment for payment is all that is
necessary.
A. PARTIES PRIMARILY LIABLE
(Sec. 60 and 62)
Persons who by the terms of the instrument
are absolutely required to pay the same
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
A.1. MAKER (SEC. 60)
Promises to pay according to the tenor of the
instrument (promissory note)
A.2. ACCEPTOR (SEC. 62)
Upon acceptance of the bill of exchange,
engages to pay the bill according to the tenor
of the acceptance.
Unconditionally liable; he is duty-bound to pay
the holder at date of maturity, WON holder
demands payment from him, and he is not
relieved from liability even if the instrument
should become overdue due to failure of holder
to make such demand.
Note: Until he accepts the bill of exchange, the
drawee assumes no liability to pay the
instrument.
B. PARTIES SECONDARILY LIABLE
Secondary liability: A party secondarily liable is
not bound to pay unless the following have
been fulfilled:
(1) Due presentment or demand to the primary
party
(2) Dishonor by such party
(3) Notice of dishonor to secondary party, and,
in cases of foreign bills of exchange, protest
of the bill
B.1. drawer (sec. 61)
(1) Engages that the instrument will be
accepted or paid, or both, according to its
tenor on due presentment;
(2) Engages that he will pay the amount of the
instrument to the holder or to any
subsequent indorser who may be compelled
to pay the same if the instrument be
dishonored upon due presentment and
proceedings on dishonor be taken,
Limiting liability: Drawer may insert in the
instrument an express stipulation
37
MERCANTILE LAW
negativing/limiting his own liability to the
holder.
B.2. INDORSERS
The following indorsers assume the liability to
pay the instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
B.2.A. GENERAL OR UNQUALIFIED
INDORSER (SEC. 66)
Engages that he will pay the amount of the
instrument to the holder or to any subsequent
indorser who may be compelled to pay the
same if the instrument be dishonored upon
due presentment and proceedings on dishonor
be taken.
Who is a General or Unqualified Indorser? Every
person who indorses WITHOUT qualification
(Sec. 66)
A person placing his signature upon an
instrument other than as a maker, drawer, or
acceptor unless he indicates by appropriate
words his intention to be bound in some other
capacity (Sec. 63).
A person, who places his signature on an
instrument negotiable by delivery, incurs all
the liabilities of an indorser (Sec. 67).
Note: A qualified indorser does not assume the
liability to pay the instrument since he is
merely an assignor of the title to the
instrument. However, he becomes liable once
he breaches a warranty.
Who is a qualified indorser? One who is
constituted as a mere assignor of the title to
the instrument by adding to his signature the
words "without recourse" or any words of
similar import.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
B.2.B. IRREGULAR INDORSER
When a person not otherwise a party to an
instrument, places thereon his signature in
blank before delivery, he is liable as an
indorser, in accordance with these rules:
(1) Instrument payable to order of 3rd person:
liable to payee and to all subsequent parties
(2) Instrument payable to the order of
maker/drawer, or payable to bearer: liable
to all parties subsequent to maker/drawer
(3) Signs for accommodation of payee: liable
to all parties subsequent to payee (Sec. 64)
B.2.C. ORDER OF LIABILITY AMONG
INDORSERS (SEC. 68)
(1) Among themselves: liable prima facie in the
order they indorse, but proof of another
agreement admissible
(2) As to the Holder: Holder may sue any of the
indorsers, regardless of order of
indorsement
(3) Joint payees/indorsees deemed to indorse
solidarily
XI. Warranties
The primary or secondary liability of the parties
should be distinguished from their warranties.
(1) Primary or secondary liability of the parties
makes them liable to pay the sum certain
in money stated in the instrument.
(2) Warranties are affirmations of the fact on
the part of the parties that impose no
direct obligation to pay in the absence of
breach thereof. (Aquino)
In case of breach of warranties, the person who
breached the same may either be liable or he
may be barred from asserting a particular
defense.
MAKERS WARRANTIES
(1) The maker admits the existence of the
payee AND
38
MERCANTILE LAW
(2) His then capacity to indorse (Sec. 60)
DRAWERS WARRANTIES
(1) The drawer admits the existence of the
payee AND
(2) His then capacity to endorse
ACCEPTORS WARRANTIES
(1) As to the drawer, the acceptor admits:
(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse (Sec. 62)
The acceptor is precluded from setting up
certain defenses by reason of his warranties
like the defense that the drawer is a minor or
the signature of the drawer is forged. (Aquino)
GENERAL INDORSERS WARRANTIES
(1) That the instrument is genuine in and in all
respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to
contract
(4) That the instrument is, at the time of his
indorsement, valid and subsisting (Sec. 66)
These warranties are in favor of all subsequent
holders in due course. (Ang Tiong v. Ting,
1968)
QUALIFIED INDORSERS WARRANTIES
(1) That the instrument is genuine in and in all
respects what it purports to be
(2) That he has a 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 valueless. (Sec. 68)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
XII. Presentment for
Payment
A. PRESENTMENT MEANS
(1) The production of a Bill of Exchange to the
drawer or acceptor for payment; or
(2) The production of a Promissory Note to the
party liable for payment.
B. DATE AND TIME OF
PRESENTMENT
(1) Bearing fixed maturity/not payable on
demand on the day it falls due if day of
maturity falls on Sunday or a holiday, the
instruments falling due or becoming
payable on Saturday are to be presented for
payment on the next succeeding business
day (Sec. 85)
(2) Payable on demand within a reasonable
time after its issue, iv at the option of the
holder, may be presented for payment
before twelve o'clock noon on Saturday
when that entire day is not a holiday (Sec.
85)
(3) Demand bill of exchange within a
reasonable time after the last negotiation.
(Sec. 71)
Note: Although presentment was made within
a reasonable time from last negotiation, it may
have been made within an unreasonable time
from issuance. Thus holder may still not be a
holder in due course under Sec. 71.
C. NECESSITY OF PRESENTMENT
FOR PAYMENT
When necessary: In order to charge the drawer
and indorsers (Sec. 70)
39
MERCANTILE LAW
When NOT necessary:
(1) To charge the person primarily liable on
the instrument (Sec. 70)
(2) To charge the drawer where he has no
right to expect or require that the drawee
or acceptor will pay the instrument. (Sec.
79)
(3) To charge an indorser where the
instrument was made or accepted for his
accommodation and he has no reason to
expect that the instrument will be paid if
presented. (Sec. 80)
(4) When the bill of exchange has previously
been dishonored by non-acceptance and
has not been subsequently accepted
D. PARTIES TO WHOM
PRESENTMENT FOR PAYMENT
SHOULD BE MADE
General rule: Presentment for payment must
be made to the person primarily liable on the
instrument or if he is absent or inaccessible, to
any person found at the place where the
presentment is made.
Exceptions: Where the person primarily liable
is/are:
(1) Dead presentment for payment must be
made to his personal representative
(2) Partners presentment for payment may be
made to any one of them, even though there
has been a dissolution of the firm
(3) Several persons, not partners (joint debtors)
presentment for payment must be made
to them all
E. DISPENSATION WITH
PRESENTMENT FOR PAYMENT
When Excused:
(1) Where, after the exercise of reasonable
diligence, presentment cannot be made;
(2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or
implied. (Sec. 82)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
F. DISHONOR BY NON-PAYMENT
The instrument is dishonored by non-payment
when:
(1) It is duly presented for payment and
payment is refused or cannot be obtained;
or
(2) Presentment is excused and the instrument
is overdue and unpaid (Sec. 83).
In case of waiver of protest, whether in the case
of a foreign bill of exchange or other NI
deemed to be a waiver not only of a formal
protest but also of presentment and notice of
dishonor (Sec. 111)
XIII. Notice of Dishonor
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by:
(1) Non-acceptance by the drawee of a bill; or
(2) Non-payment by the acceptor of a bill; or
(3) Non-payment by the maker of a note (Sec.
89)
Requisites:
(1) Given by holder or his agent, or by any party
who may be compelled by the holder to pay
(Sec. 90)
(2) Given to secondary party or his agent (Sec.
97)
(3) Given within the periods provided by law
(Sec. 102)
(4) Given at the proper place (Secs. 103 and 104)
A. PARTIES TO BE NOTIFIED
(1) Non-acceptance (bill) to persons
secondarily liable, namely, the drawer and
indorsers as the case may be
(2) Non-payment (both bill and note) to
indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties are
40
MERCANTILE LAW
discharged. Notice may be given to the party
himself or to his agent.
B. WHEN GIVEN
Notice may be given as soon as the instrument
is dishonored (Sec. 102)
C. WHEN NOT NECESSARY TO GIVE
TO DRAWER
Notice of dishonor is not required to be given
to the drawer in any of the following cases:
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having
the capacity to contract;
(3) Drawer is the person to whom the
instrument is presented for payment;
(4) The drawer has no right to expect or require
that the drawee or acceptor swill honor the
instrument;
(5) Where the drawer has countermanded
payment (Sec. 114)
D. WHEN NOT NECESSARY TO GIVE
TO INDORSER
Notice of dishonor is not required to be given
to an indorser in the following cases:
(1) Drawee is a fictitious person or does not
have the capacity to contract, and indorser
was aware of that fact at the time he
indorsed the instrument;
(2) Indorser is the person to whom the
instrument is presented for payment;
(3) Instrument was made or accepted for his
accommodation. (Sec. 115)
E. WHO WILL BENEFIT
If given by or on behalf of the holder (Sec. 92):
(1) All subsequent holders
(2) All prior parties (as to holder) who have a
right of recourse against the party to whom
it is given.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
If given by the indorser (Sec. 93):
(1) Holder
(2) All parties subsequent to the party to whom
notice is given.
F. PARTIES WHO MAY GIVE NOTICE
OF DISHONOR
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it
to the holder, and who, upon taking it up,
would have a right to reimbursement from the
party to whom the notice is given. (Sec. 90)
F.1. WHO SHOULD GIVE (SEC. 90)
(1) Holder
(2) Agent or representative of holder.
(3) Any party who may be compelled to pay like
indorsers.
(4) Agent of any party who may be compelled.
G. EFFECT OF NOTICE
Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises.
It is as if the indorser becomes primarily
liable in the sense that the holder need not
claim payment from the person primarily
liable (Sundiang and Aquino).
H. FORM OF NOTICE (SEC. 96)
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument; and
(2) Indicate that it has been dishonored by
non-acceptance or non-payment
It may in all cases be given by delivering it
personally or through the mails
41
MERCANTILE LAW
I. WAIVER
Notice of dishonor may be waived either
before the time of giving notice has arrived or
after the omission to give due notice, and the
waiver may be expressed or implied. (Sec. 109)
Where the waiver is embodied in the
instrument itself, it is binding upon all
parties; but, where it is written above the
signature of an indorser, it binds him only.
(Sec. 110)
J. DISPENSATION WITH NOTICE
(1) When party to be notified knows about the
dishonor, actually or constructively (Secs.
114-117)
(2) If waived (Sec. 109)
(3) When after due diligence, it cannot be given
(Sec. 112).
K. EFFECT OF FAILURE TO GIVE
NOTICE
Failure to give notice to parties secondarily
liable discharges such parties
An omission to give notice of dishonor by
non-acceptance does not prejudice the rights
of a holder in due course subsequent to the
omission (Sec. 117)
XIV. Discharge of
Negotiable Instrument
Discharge: The release of all parties, whether
primary or secondary, from the obligation on
the instrument. It renders the instrument
without force and effect and, consequently,
non-negotiable (De Leon)
A. DISCHARGE OF NEGOTIABLE
INSTRUMENT
A negotiable instrument is discharged:
(1) By payment in due course by or on behalf of
the principal debtor;
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
(2) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his accommodation;
(3) By the intentional cancellation thereof by
the holder;
(4) By any other act which will discharge a
simple contract for the payment of money;
(5) When the principal debtor becomes the
holder of the instrument at or after maturity
in his own right. (Sec. 119)
B. BY PAYMENT IN DUE COURSE
(ASKED IN 2000)
Payment is made in due course when it is
made at or after the maturity of the payment to
the holder thereof in good faith and without
notice that his title is defective. (Sec. 88)
Requisites:
(1) Payment must be made at or after maturity.
(2) Payment must be made to the holder.
(3) Payment must be made in good faith and
without notice that holders title is defective.
If payment is made before maturity and the
note is negotiated to a HDC, the latter may
recover on the instrument.
Payment to one of several payees or
indorsees in the alternative discharges the
instrument, but payment to one of several
joint payees or joint indorsers is not a
discharge. The party receiving payment must
have been authorized by others to receive
payment.
C. BY WHOM MADE:
(1) payment in due course by or on behalf of
principal debtor
(2) payment in due course by party
accommodated where party is made/
accepted for accommodation
42
MERCANTILE LAW
D. BY INTENTIONAL CANCELLATION
A cancellation made unintentionally or under
a mistake or without the authority of the
holder, is inoperative.
But where an instrument or any signature
thereon appears to have been cancelled, the
burden of proof lies on the party who alleges
that the cancellation was made
unintentionally or under a mistake or without
authority. (Sec. 123)
E. BY OTHER ACTS THAT DISCHARGE
A SIMPLE CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple
contract for payment of money (Art. 1231 of the
Civil Code), ex. issuance of a renewal note
(novation).
F. BY REACQUISITION OF PRINCIPAL
DEBTOR IN HIS OWN RIGHT
Principal debtor becomes holder of instrument
at or after maturity in his own right
G. BY MATERIAL ALTERATION
Material alteration without assent of all parties
liable avoids instrument except as against
party to alteration and subsequent indorsers
(Sec. 124)
H. DISCHARGE OF PARTIES
SECONDARILY LIABLE
GROUNDS UNDER SEC. 120
A person secondarily liable on the instrument
is discharged:
(1) By any act which discharges the instrument;
(2) By the intentional cancellation of his
signature by the holder;
(3) By the discharge of a prior party;
(4) By a valid tender or payment made by a
prior party;
(5) By a release of the principal debtor unless
the holder's right of recourse against the
party secondarily liable is expressly
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW MERCANTILE LAW

reserved; (1) Where it is payable to the order of a third

(6) By any agreement binding upon the holder person, and has been paid by the drawer;
to extend the time of payment or to (2) Where it was made or accepted for
postpone the holder's right to enforce the accommodation, and has been paid by the
instrument unless made with the assent of party accommodated. (Sec. 121)
the party secondarily liable or unless the
right of recourse against such party is J. RENUNCIATION BY HOLDER (SEC.
expressly reserved. (Sec. 120) 122)
The holder may expressly renounce his rights
against any party to the instrument before,
at, or after its maturity. An absolute and
OTHER GROUNDS
unconditional renunciation of his rights
(1) Failure to make due presentment (Secs. 70,
against the principal debtor made at or after
144)
the maturity of the instrument discharges
(2) Failure to give notice of dishonor
the instrument.
(3) Certification of check at instance of holder
Renunciation must be in writing unless the
(4) Reacquisition by prior party
instrument is delivered up to the person
(5) Where instrument negotiated back to a
primarily liable thereon
prior party, such party may reissue and
further negotiate, but not entitled to enforce Renunciation does not affect the rights of an
HDC without notice
payment against any intervening party to
whom he was personally liable
(6) Where instrument is paid by party XV. Material Alteration
secondarily liable, it is not discharged, but
(a) the party so paying it is remitted to his A. CONCEPT
former rights as regard to all prior Any change in the instrument which affects
parties or changes the liability of the parties in any
(b) and he may strike out his own and all way.
subsequent indorsements, and again
Any alteration which changes the date, sum
negotiate instrument, except: where it is
payable, time or place of payment, number
payable to order of 3rd party and has
of relation of the parties, or medium of
been paid by drawer or where its
currency of payment where none is specified
made/accepted for accommodation and
or which alters the effect of the instrument in
has been paid by party accommodated
any respect (PNB v. CA, GR No. L-26001, Oct.
(7) By taking a qualified acceptance
21, 1968)
An alteration is said to be material if it alters
I. RIGHT OF PARTY WHO the effect of the instrument. In other words, a
DISCHARGED INSTRUMENT material alteration is one which changes the
Where the instrument is paid by a party items which are required to be stated under
secondarily liable thereon, it is not discharged; Sec. 1 of the NIL (ibid.)
but the party so paying it is remitted to his
former rights as regards to all prior parties,
and he may strike out his own and all
subsequent indorsements, and again negotiate
the instrument, except:

43
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
B. CHANGES IN THE FOLLOWING
CONSTITUTE MATERIAL
ALTERATIONS (SEC. 125):
(1) Date
(2) Sum payable, either for principal or interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is to
be made
(6) That which adds a place of payment where
no place of payment is specified
(7) Any other change or addition which alters
the effect of the instrument in any respect.
C. EFFECT OF MATERIAL
ALTERATION
(1) Alteration by a party Avoids the instrument
except as against the party who made,
authorized, or assented to the alteration
and subsequent indorsers. However, if an
altered instrument is negotiated to a HDC,
he may enforce payment thereof according
to its original tenor regardless of whether
the alteration was innocent or fraudulent.
(2) the
effect is the same as where the alteration
was made by a party wherein a HDC can
recover on the original tenor of the
instrument (Sec. 124).
XVI. Acceptance
A. DEFINITION
The signification by the drawee of his assent to
the order of the drawer (Sec. 132)
B. REQUISITES (SEC. 132):
(1) Must be in writing
(2) Signed by the drawee
(3) Must not express that the drawee will
perform his promise by and other means
than the payment of money
44
MERCANTILE LAW
C. KINDS OF ACCEPTANCE:
(1) General assents without qualification to
the order of the drawer
(2) Qualified which in express terms varies
the effect of the bill as drawn:
(a) Conditional makes payment by the
acceptor dependent on the fulfillment of
a condition therein stated
(b) Partial an acceptance to pay part only
of the amount for which the bill is drawn.
(c) Local an acceptance to pay only at a
particular place.
(d) Qualified as to time
(e) The acceptance of some one or more of
the drawees but not of all. (Sec. 141)
D. PROOF OF ACCEPTANCE
(SUNDIANG AND AQUINO):
The written acceptance may be in the
instrument itself or in a separate instrument.
However, under Sec. 133, the holder of a bill
presenting the same for acceptance may
require the acceptance be written on the bill,
and, if such request is refused, may treat the
bill as dishonored
Effects: When an acceptance is written on a
paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom it
is shown and who, on the faith thereof,
receives the bill for value.
E. MANNER
E.1. EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee
and must not express that the drawee will
perform his promise by any other means than
the payment of money. (Sec. 132) If request for
a written acceptance is refused, the holder may
treat the bill as dishonored (Sec. 133)
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
E.2. IMPLIED ACCEPTANCE
(1) If the drawee refuses to return the
instrument within 24 hours after it was
delivered for acceptance.
(2) If the drawee destroys the same.
(3) If the drawee makes an unconditional
promise in writing before the instrument is
drawn, with respect to every person who,
upon the faith thereof, receives the bill for
value.
F. TIME FOR ACCEPTANCE (SEC. 136)
The drawee is allowed twenty-four hours
after presentment in which to decide
whether or not he will accept the bill.
The acceptance, if given, dates as of the day
of presentation.
G. RULES GOVERNING ACCEPTANCE
Q: What is the implication of payment without
acceptance by a drawee?
A: Act No. 2031, or the Negotiable Instruments
Law (NIL), explicitly provides that the
acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance. This provision
applies with equal force in case the drawee
pays a bill without having previously
accepted it. His actual payment of the
amount in the check implies not only his
assent to the order of the drawer and a
recognition of his corresponding obligation
to pay the aforementioned sum, but also,
his clear compliance with that obligation.
Actual payment by the drawee is greater
than his acceptance, which is merely a
promise in writing to pay. The payment of a
check includes its acceptance. (FEBTC vs.
Gold Palace Jewellery Co,, Nachura, 2008)
Right to unqualified acceptance: The holder
may refuse to take a qualified acceptance and
if he does not obtain an unqualified
45
MERCANTILE LAW
acceptance, he may treat the bill as dishonored
by non-acceptance.
Where a qualified acceptance is taken, the
drawers and indorsers are discharged from
liability on the bill unless they have expressly
or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent
thereto.
When the drawer or indorser receives notice of
a qualified acceptance, he must, within a
reasonable time, express his dissent to the
holder or he will be deemed to have assented
thereto.
However, acceptance is presumed to be
unqualified or absolute. (Sundiang and
Aquino)
XVII. Presentment for
Acceptance
A. REQUISITES:
(1) By the holder, or by some person authorized
to receive payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
General rule: Presentment for acceptance is
not necessary in order to render any party to
the bill liable. (Sec. 143, last par.)
B. WHEN PRESENTMENT FOR
ACCEPTANCE NECESSARY:
Presentment for acceptance must be made:
(1) Where the bill is payable after sight, or in
any other case, where presentment for
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
acceptance is necessary in order to fix the
maturity of the instrument; or
(2) Where the bill expressly stipulates that it
shall be presented for acceptance; or
(3) Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee.(Sec. 143)
Note: It is not necessary to present a check for
acceptance because it is not one of those
required under Sec. 143.
C. WHEN PRESENTMENT FOR
ACCEPTANCE EXCUSED:
Presentment for acceptance is excused and a
bill may be treated as dishonored by non-
acceptance in either of the following cases:
(1) Where the drawee is dead, or has
absconded, or is a fictitious person or a
person not having capacity to contract by
bill.
(2) Where, after the exercise of reasonable
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on
some other ground. (Sec. 148)
D. TIME/PLACE/MANNER OF
PRESENTMENT
D.1. WHEN MADE
A bill may be presented for acceptance on any
day on which negotiable instruments may be
presented for payment under the provisions of
Sections 72 and 85 of this Act. When Saturday
is not otherwise a holiday, presentment for
acceptance may be made before twelve o'clock
noon on that day. (Sec. 146)
E. WHAT CONSTITUTES SUFFICIENT
PRESENTMENT?
Presentment for payment, to be sufficient,
must be made:
46
MERCANTILE LAW
(1) By the holder, or by some person authorized
to receive payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined (see
Sec. 73);
(4) To the person primarily liable on the
instrument or if he is absent or inaccessible,
to any person found at the place where the
presentment is made. (Sec. 72)
Time of maturity: Every negotiable instrument
is payable at the time fixed therein without
grace. When they day of maturity falls upon
Sunday, or a holiday, the instrument is payable
on the next succeeding business day.
Instruments falling due or becoming payable
on Saturday are to be presented for payment
on the next succeeding business day, except
that instrument payable on demand may, at
the option of the holder be presented for
payment before twelve oclock noon on Saturday
when that entire day is not a holiday. (Sec. 85)
F. HOW MADE (SEC. 145)
In general:
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
(4) Before the bill is overdue
(5) To the drawee or his agent
Where a bill is addressed to 2 or more drawees
who are not partners presentment must be
made to them all XPT. One has authority to
accept/refuse for all
Where the drawee is dead presentment may
be made to his personal representative
Where the drawee has been adjudged a
bankrupt or insolvent or has made an
assignment for the benefit of creditors
presentment may be made to him or to his
trustee or assignee.
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
G. EFFECT OF FAILURE TO MAKE
PRESENTMENT
(SEC. 144)
Failure to make presentment discharges the
drawer and all indorsers (Sec. 144).
H. DISHONOR BY NON-ACCEPTANCE
When dishonored by non-acceptance: A bill is
dishonored by non-acceptance:
(1) When it is duly presented for acceptance
and such an acceptance as is prescribed by
this Act is refused or cannot be obtained; or
(2) When presentment for acceptance is
excused and the bill is not accepted. (Sec.
149)
Duty of holder: Where a bill is duly presented
for acceptance and is not accepted within the
prescribed time, the person presenting it must
treat the bill as dishonored by non-acceptance
or he loses the right of recourse against the
drawer and indorsers. (Sec. 150)
Effect: 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)
XVIII. Promissory Notes
A promissory note is:
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
(4) Engaging to pay on demand, or at a fixed or
determinable future time
(5) A sum certain in money to order or to bearer
(6) Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him. (Sec. 184)
47
MERCANTILE LAW
There are originally 2 parties in a promissory
note:
(1) Maker party who executes the written
promise to pay.
(2) Payee party in whose favor the promissory
note is made payable.
XIX. Checks
A. DEFINITION
A check is a bill of exchange drawn on a bank
payable on demand. Except as herein
otherwise provided, the provisions of this Act
applicable to a bill of exchange payable on
demand apply to a check. (Sec. 185)
B. KINDS
(1) Cashiers Check One drawn by the cashier
of a bank, in the name of the bank against
the bank itself payable to a third person. It
is a primary obligation of the issuing bank
and accepted in advance upon issuance
(Tan vs. CA 1994).
(2) Managers Check A check drawn by the
manager of a bank in the name of the bank
itself payable to a third person. It is similar
to the cashiers check as to the effect and
use.
In issuing a managers check, the bank
assumed the liabilities of the acceptor
under Sec. 62, NIL (Equitable PCI Bank v.
Ong (2006)
(3) Memorandum Check A check given by a
borrower to a lender for the amount of a
short loan, with the understanding that it is
not to be presented at the bank, but will be
redeemed by the maker himself when the
loan falls due and which understanding is
evidenced by writing the word
memorandum, memo or mem on the
check.
(4) Certified Check An agreement whereby
the bank against whom a check is drawn
UP LAW BOC NEGOTIABLE INSTRUMENTS LAW
undertakes to pay it at any future time when
presented for payment (Sec. 187)
(a) Certification is equivalent to acceptance.
(Sec. 187)
(b) Where the holder of a check procures it
to be accepted or certified, the drawer
and all indorsers are discharged from
liability. (Sec. 188)
(c) 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)
(5) Crossed Check The NIL is silent with
respect to crossed checks, although the
Code of Commerce makes reference to such
instruments.
Article 541 of the Code of Commerce states:
The maker or any legal holder of a check shall
be entitled to indicate therein that it be paid to
a certain banker or institution, which he shall
do by writing across the face the name of said
banker or institution, or only the words and
company.
Under usual practice, crossing a check is done
by placing two parallel lines diagonally on the
left top portion of the check (State Investment
House vs. IAC, 1989).
TYPES: SPECIAL AND GENERAL
The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case
the drawee should pay only with the
intervention of that bank or company, or
crossing may be general wherein between two
parallel diagonal lines are written the words
"and Co." or none at all as in the case at bar, in
which case the drawee should not encash the
same but merely accept the same for deposit
(supra).
48
MERCANTILE LAW
C. EFFECTS
(1) The check may not be encashed; it may only
be deposited with the bank;
(2) The check may be negotiated only once to a
person who has an account with the bank;
and
(3) It serves as a warning to a holder that the
check has been issued for a definite
purpose. (Bataan Cigar vs. CA, 1994)
D. PRESENTMENT FOR PAYMENT
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. The bank is
not liable to the holder, unless and until it
accepts or certifies the check. (Sec. 189)
D.1. TIME
When to present? A check must be presented
for payment within reasonable time after its
issue.
F. EFFECT OF DELAY
The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay. (Sec. 186)
Certification of checks: An agreement whereby
the bank against whom a check is drawn,
undertakes to pay it at any future time when
presented for payment
Effects:
(1) Equivalent to acceptance (Sec. 187) and is
the operative act that makes banks liable
(2) Assignment of the funds of the drawer in
the hands of the drawee (Sec. 189)
(3) If obtained by the holder, discharges the
persons secondarily liable thereon (Sec. 188)
Refusal of drawee bank to certify: The holder
has no action against the bank but he has a
right of action against the drawer. The drawer
in turn has right of action against the bank
based on the original contact of deposit
between them.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

MERCANTILE LAW
INSURANCE CODE

49
UP LAW BOC INSURANCE CODE
I. CONCEPT OF
INSURANCE
On August 15, 2013, RA 10607 was signed into
law. It is a restatement of the Insurance Code
(PD 612), with amendments.
While RA 10607 restated the whole law, most
of the amendments touch only the
administrative portion of the Code, and very
little on the substantive portion.
The section numbers pertain to RA 10607.
A. CONTRACT OF INSURANCE
Sec. 2(a). A contract of insurance is an
agreement whereby one undertakes for a
consideration to indemnify another against
loss, damage or liability arising from an
unknown or contingent event.
A contract of suretyship shall be deemed to be
an insurance contract only if made by a surety
who or which, as such, is doing an insurance
business.
A contract of insurance involves public interest.
Thus, the business is regulated by the state
through the requirement of license or
certificate of authority (White Gold Marine
Services v. Pioneer (2005)).
A.1. DEFINITION
Thus, a contract of insurance is:
(1) A contract of indemnity;
(2) Wherein one undertakes for a
consideration;
(3) To indemnify another against loss, damage,
or liability;
(4) Arising from an unknown or contingent
event.
50
MERCANTILE LAW
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its
happening is not known. A past event may be a
designated event only in cases where it has
happened already but the parties do not know
about it, e.g., prior loss of a ship at sea
(applicable only to marine insurance).
A.2. FORM
A policy of insurance is different from the
contract of insurance. The policy is the formal
written instrument evidencing the contract of
insurance entered into between the insured
and the insurer. On the other hand, there is no
particular form required for a contract of
insurance.
Sec. 232. No policy, certificate or contract of
insurance shall be issued or delivered within
the Philippines unless in the form previously
approved by the Commissioner.
No application form shall be used with, and no
rider, clause, warranty or endorsement shall be
attached to, printed or stamped upon such
policy, certificate or contract unless the form of
such application, rider, clause, warranty or
endorsement has been approved by the
Commissioner.
A.3. INSURANCE AND GAMBLING
DISTINGUISHED
A contract of insurance is a contract of
indemnity and is not a wagering or gambling
contract. It is based on contingency, but it is
not a contract of chance for profit.
In a wagering contract, the parties
contemplate gain through mere chance; in a
contract of insurance, the parties seek to
distribute possible loss by reason of mischance
[Carale, The Philippine Insurance Law (2014)]
UP LAW BOC INSURANCE CODE
B. DOING OR TRANSACTING
INSURANCE BUSINESS
Sec. 2(b). The term doing an insurance
business or transacting an insurance business
includes:
(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 within the meaning of
the Insurance Code;
(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.
In the application of the provisions of this
Code, the fact that no profit is derived from the
making of 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
General rule: An insurance business consists in
undertaking, for a consideration, to indemnify
another against loss, damage or liability
arising from an unknown or contingent event.
Exception: Those not formally designated as
insurance businesses but are deemed doing
or transacting an insurance business as listed
in Sec. 2(b).
Philippine Health Care Providers Inc. v. CIR
(2009) has stated that:
(1) Contracts of law firm with clients whereby
in consideration of periodical payments,
51
MERCANTILE LAW
the law firm promises to represent such
clients in all suits for or against them are
not insurance contracts;
(2) A contract by which a corporation, in
consideration of a stipulated amount,
agrees at its own expense to defend a
physician against all suits for damages for
malpractice is one of insurance, and the
corporation will be deemed as engaged in
the business of insurance.
C. GOVERNING LAW
The Insurance Code primarily governs
insurance contracts, unless there is a special
law which specifically govern (e.g., insurance
contract under the RA 1161 or Social Security
Act), in which case, the Insurance Code governs
subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are regulated
by the Civil Code.
D. BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
Sec. 375. The term bancassurance shall mean
the presentation and sale to bank customers
by an insurance company of its insurance
products within the premises of the head office
of such bank duly licensed by the Bangko
Sentral ng Pilipinas or any of its branches
under such rules and regulations which the
Commissioner and the Bangko Sentral ng
Pilipinas may promulgate.
To engage in bancassurance arrangement, a
bank is not required to have equity ownership
of the insurance company. No insurance
company shall enter into a bancassurance
arrangement unless it possesses all the
requirements as may be prescribed by the
Commissioner and the Bangko Sentral ng
Pilipinas.
UP LAW BOC INSURANCE CODE
No insurance product, whether life or non-life,
shall be issued or delivered pursuant to a
Bancassurance arrangement, unless in the
form previously approved by the
Commissioner.
Sec. 376. Personnel tasked to present and sell
insurance products within the bank premises
shall be duly licensed by the Commissioner
and shall be subject to the rules and
regulations of this Act.
E. PRE-NEED PLANS
RA 9829 (Pre- Need Code), Sec. 4(B). Pre-need
plans are contracts, agreements, deeds or
plans for the benefit of the planholders which
provide for the performance of future
services, payment of monetary considerations
or delivery of other benefits at the time of
actual need or agreed maturity date, as
specified therein, in exchange for cash or
installment amounts with or without interest
or insurance coverage and includes life,
pension, education, interment and other
plans, instruments, contracts or deeds.
Pre-need plans are governed by the Pre-Need
Code. They are not considered as insurance
contracts because 1) Pre-need plans can have
insurance coverage, implying that they are
separate contracts 2) Pre-need plans do not
involve unknown or contingent events but
events certain to happen at a certain time.
However, all Pre-need plans are under the
primary and exclusive power supervision and
regulation of the Insurance Commission [Sec. 5,
RA 982]. In addition, the Insurance
Commissioner shall have the primary and
exclusive power to adjudicate any and all
claims involving pre-need plans. If the amount
of benefits does not exceed P100,000, which
decision shall be final and executory (Sec. 58(a),
Pre-Need Code).
52
MERCANTILE LAW
II. ELEMENTS OF AN
INSURANCE
CONTRACT
A. IN GENERAL
(1) Subject matter what the insured has an
insurable interest in;
(2) Cause event or peril insured against;
(3) Risk of loss or damage being assured by
the Insurer
(4) Consideration premium payments paid
by the insured
(5) Risk-Distributing Scheme distribute and
transfer by the insurer of risk of loss,
damage or liability among persons having
similar risks;
(6) A Meeting of Minds of the parties upon all
the foregoing essentials.
B. SUBJECT MATTER
The insured must have an insurable interest in
the subject matter of the insurance contract or
else, it shall be void [Sec. 25]
Insurable interest is the interest which the law
requires the owner of an insurance policy to
have in the person or thing insured.
C. CAUSE AND RISK OF LOSS OR
DAMAGE
Cause refers to an event or peril insured
against.
Peril is the contingent or unknown event which
may cause a loss. Its existence creates a risk
and its occurrence results in loss.
The event or peril insured against must be such
that its happening will:
(1) Damnify or cause loss to a person having
insurable interest; or
(2) Create liability against him.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

D. CONSIDERATION The insured or the person in whose favor the

An insurance premium is the agreed price for contract is operative and whose loss is the
assuming and carrying the risk. It is the occasion for the payment of the insurance
consideration paid to the insurer for proceeds by the insurer
undertaking to indemnify the insured against a
designated peril. It is based on probability of The insured is not always the person whom the
loss and extent of liability. proceeds are paid. Such person is the
Premiums are difference from assessments. An beneficiary.
assessment, in insurance law, is a sum
specifically levied by mutual insurance
companies or associations, upon a fixed and III. CHARACTERISTICS
definite plan, to pay losses and expenses.
While premiums are levied and paid to meet OF AN INSURANCE
anticipated loss, assessments are collected to
meet actual loss. CONTRACT
E. RISK-DISTRIBUTING SCHEME A. IN GENERAL
Insurance contracts serve to distribute the risk An insurance contract is:
of economic loss, damage or liability among as (1) Consensual;
many as possible of those who are subject to (2) Voluntary;
the same kind of risk. The payment of (3) Aleatory;
premiums by all will inure to a general fund, (4) Executory and unilateral, but
out of which payment will be made for any one synallagmatic;
who has suffered an economic loss. Hence, (5) Conditional;
each member contributes to a small degree (6) Contract of indemnity;
toward compensation for losses suffered by (7) Contract of adhesion;
any member of the group. (8) Personal contract;
(9) Property;
The unknown event may be past or future. (10) Uberrimae fides contract (utmost good
Even if the proximate cause of the loss is a faith).
fortuitous event, the insurer may still be liable
if it is the event or peril insured against [De B. CONSENSUAL
Leon, The Insurance Code of the Philippines It is perfected by the meeting of the minds of
Annotated (2010)] the parties. There must be concurrence of offer
and acceptance. Unless otherwise stipulated,
F. MEETING OF THE MINDS the policy is not essential to the existence of
The two parties to a contract of insurance the contract. It merely evidences the terms and
whose minds need to meet regarding the conditions thereof [Campos, Insurance (1983)]
essential elements are:
C. VOLUNTARY
The insurer or the party who assumes or General rule: It is voluntary in the sense that it
accepts the risk of loss and undertakes for is not compulsory and the parties are free to
consideration to indemnify the insured or to incorporate such terms and conditions they
pay a certain lump sum on the happening of may deem convenient provided they are not
the event or peril insured against, and

53
UP LAW BOC INSURANCE CODE
contrary to law, morals, good customs, public
order, or public policy.
Exceptions: Insurance contracts particularly
liability insurance, may be required by law in
certain instances:
For motor vehicles (Compulsory Motor Vehicle
Liability Insurance, Sections 386-402);
For employees (Compulsory Coverage in State
Insurance Fund, Articles 168-184, Labor Code);
As a condition to granting a license to conduct
business or calling affecting the public safety
or welfare (De Leon (2010)).
Social Insurance for members of the
Government Service Insurance System (GSIS)
and for the employees of the private sector
covered by the Social Security System (SSS).
D. ALEATORY
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to
occur at an indeterminate time (Article 2010,
Civil Code).
E. EXECUTORY AND UNILATERAL
BUT SYNALLAGMATIC
Once the insured pays the premium, the
contract already takes effect. After the
payment of premiums, the insurance imposes
a unilateral obligation on the insurer who
promise to indemnify in case of loss.
It is also synallagmatic and reciprocal such that
even if the contingent event or designated peril
does not occur, the insurer has still provided
protection against the risk for the period
covered by the insurance contract.
F. CONDITIONAL
It is conditional because it is subject to
conditions, primarily the happening of the
event insured against, before the insurer
54
MERCANTILE LAW
becomes liable to pay the insured. However,
many other conditions are usually required
(such as payments of premium or performance
of other act) as precedent to the right of the
insured to claim benefit under the insurance.
G. CONTRACT OF INDEMNITY (FOR
NON-LIFE INSURANCE)
The insured who has insurable interest over the
property is only entitled to recover the amount
of actual loss sustained. The burden is upon
him to establish the amount of such loss.
General rule: This applies only to property
insurance. An insurance contingent on the life
of a person is not an indemnity contract
because the value of a life is immeasurable.
Exception: However, where the basis of the
insurable interest of the policy owner on the
life of the insured is a commercial relationship
(e.g., creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then
such contract is an indemnity contract.
H. CONTRACT OF ADHESION (FINE
PRINT RULE)
Insurance contracts are already presented to
the insured in its printed form on a take it or
leave it basis. What is needed only is the
adhesion of the insured for the contract to be
made. Such contracts of adhesion are valid.
However, ambiguity in them shall be
interpreted liberally in favor of the insured and
strictly against the insurer who prepared the
same.
I. PERSONAL CONTRACT
The contract of insurance is basically between
the insurer and the insured.
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent of
the insurer (Sections 20, 58, and 83).
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Property insurance is personal in the sense

appertaining to or in connection with
that it is the damage to the personal interest
any and all risks or perils of navigation,
not the property that is being reimbursed.
transit or transportation, or while being
assembled, packed, crated, baled,
J. PROPERTY (FOR LIFE INSURANCE) compressed or similarly prepared for
Life insurance policies, unlike property shipment or while awaiting shipment,
insurance, are generally assignable or or during any delays, storage,
transferrable (Section 81) as they are in the transhipment, or reshipment incident
nature of property. thereto, including war risks, marine
builders risks, and all personal
K. UBERRIMAE FIDES CONTRACT property floater risks;
Each party is required to deal with each other (b) Person or property in connection with
in utmost good faith and disclose conditions or appertaining to a marine, inland
affecting the risk, of which he is aware, or any marine, transit or transportation
material fact which the applicant knows and insurance, including liability for loss of
those which he ought to know. Violation of this or damage arising out of or in
duty gives the aggrieved party the right to connection with the construction,
rescind the contract. Where the aggrieved repair, operation, maintenance or use
party is the insured, the bad faith of the insurer of the subject matter of such insurance
will preclude it from denying liability on the (but not including life insurance or
policy based on breach of warranty (Campos surety bonds nor insurance against loss
(1983)). by reason of bodily injury to any person
arising out of ownership, maintenance,
or use of automobiles);
IV. CLASSES (c) Precious stones, jewels, jewelry,
precious metals, whether in course of
transportation or otherwise; and
A. MARINE INSURANCE (d) Bridges, tunnels and other
A.1. DEFINITION instrumentalities of transportation and
Marine insurance is a type of transportation communication (excluding buildings,
insurance which is concerned with the perils of their furniture and furnishings, fixed
property in, or incidental to, transit as opposed contents and supplies held in storage);
to property perils at a generally fixed location. piers, wharves, docks and slips, and
other aids to navigation and
transportation, including dry docks and
Sec. 101. Marine insurance includes:
marine railways, dams and
(1) Insurance against loss of or damage to:
appurtenant facilities for the control of
(a) Vessels, craft, aircraft, vehicles, goods,
waterways.
freights, cargoes, merchandise, effects,
(2) Marine protection and indemnity insurance,
disbursements, profits, moneys,
meaning insurance against, or against
securities, choses in action,
legal liability of the insured for loss,
instruments of debts, valuable papers,
damage, or expense incident to ownership,
bottomry, and respondentia interests
operation, chartering, maintenance, use,
and all other kinds of property and
repair, or construction of any vessel, craft
interests therein, in respect to,

55
UP LAW BOC INSURANCE CODE
or instrumentality in use of ocean or inland
waterways, including liability of the insured
for personal injury, illness or death or for
loss of or damage to the property of
another person
A.2. DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against
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. Its scope includes:
(a) Ships or hulls;
(b) Goods or cargoes;
(c) Earnings such as freight, passage
money, commissions, or profits; and
(d) Liability (protection and indemnity
insurance).
(2) Inland marine insurance covers the land or
over the land transportation perils of
property shipped by railroads, motor trucks,
airplanes, and other means of
transportation. It also covers risks of lake,
river or other inland waterway
transportation and other waterborne perils
outside those covered by ocean marine
insurance.
A.3. BOTTOMRY AND RESPONDENTIA
DISTINGUISHED
Bottomry loan is a loan that is obtained for the
value of the vessel on a voyage and the lender is
repaid only if the vessel subject of the loan
arrives safely at its destination. The insurable
interest of a ship owner on its bottomed boat is
the difference between the amount of the loan
and the value of the boat. Thus, if the amount
of the loan does not cover the total value of the
boat, the owner can still insured the boat.
Respondentia loan is a loan that is obtained as
security for the value of the cargo to be
56
MERCANTILE LAW
transported and the lender is repaid only if the
cargo arrives safely at its destination.
A.4. RISKS
A.4.A. PERILS OF THE SEA
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard perils of the sea or perils of
navigation which includes casualties arising
from the violent action of the elements and
does not cover ordinary wear and tear or other
damage usually incident to the voyage. The
mere fact that an injury is due to violence of
some marine force does not necessarily bring it
within the protection of the policy if such
violence was not unusual or unexpected.
Perils of the sea or perils of navigation include
only those casualties due to the unusual
violence or extraordinary causes connected
with navigation. It has been said to include
only such losses as are of extraordinary nature
or arise from some overwhelming power which
cannot be guarded against by the ordinary
exertion of human skill or prudence, as
distinguished from the ordinary wear and tear
of the voyage and from injuries suffered by the
vessel in consequence of her not being
unseaworthy [Roque v. IAC ((1985)), Sundiang
and Aquino, Reviewer on Commercial Law
(2013)]
The exception to a perils of the sea condition
for insurer liability is when there is an all-risk
policy [Malayan Insurance Corp v. CA (1997)]
The phrase also extends to barratry which
refers to the willful and intentional act on the
part of the master or the crew, in pursuance of
some unlawful or fraudulent purpose, without
the consent of the owner, and to the prejudice
of his interest (e.g., burning the ship,
unlawfully selling the cargo).
UP LAW BOC INSURANCE CODE
No honest error of judgment or mere
negligence, unless criminally gross, can be
barratry [Roque v. IAC (1985)]
A.4.B. PERILS OF THE SHIP
Perils of the ship are those which cause a loss
which in the ordinary course of events, results:
(1) From the ordinary, natural and inevitable
action of the sea;
(2) From ordinary wear and tear of the ship;
and
(3) From the negligent failure of the ships
owner to provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions.
In the absence of stipulation, the risks insured
against are only perils of the sea [Go Tiaco y
Hermanos v. Union Ins. Society of Canton (1919)]
However, in an all risk policy, all risks are
covered unless expressly excepted. The burden
rests on the insurer to prove that the loss is
caused by a risk that is excluded [Filipino
Merchants Ins. Co. v. CA (1989)]
A.5. LOSS
Loss may be total or partial. Total loss may be
actual or constructive.
Sec. 132. An actual total loss is caused by:
(a) A total destruction of the thing insured;
(b) The irretrievable loss of the thing by
sinking, or by being broken up;
(c) Any damage to the thing which renders it
valueless to the owner for the purpose for
which he held it;
(d) Any other event which effectively deprives
the owner of the possession, at the port of
destination of the thing insured.
Sec. 134. An actual loss may be presumed from
the continued absence of a ship without being
57
MERCANTILE LAW
heard of. The length of time which is sufficient
to raise this presumption depends on the
circumstances of the case.
Sec. 133. A constructive total loss is one which
gives to a person insured a right to abandon,
under Sec. 141.
Sec. 141. A person insured by a contract of
marine insurance may abandon the thing
insured, or any particular portion thereof
separately valued by the policy, or otherwise
separately insured, and recover for a total loss
thereof, when the cause of the loss is a peril
insured against:
(1) If more than three-fourths thereof in value
is actually lost, or would have to be
expended to recover it from the peril;
(2) If it is injured to such an extent as to reduce
its value more than three-fourths;
(3) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an
expense to the insured of more than three-
fourths the value of the thing abandoned
or a risk which a prudent man would not
take under the circumstances; or
(4) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured by
the master, within a reasonable time and
with reasonable diligence, to forward the
cargo, without incurring either an expense
to the insured of more than three-fourths
the value of the thin abandoned or a risk
which a prudent man would not take under
the circumstances. But freightage cannot
in any case be abandoned unless the ship
is also abandoned.
Actual total loss is the irretrievable loss of the
thing or any damage which renders the thing
valueless to the owner for the purpose for
which he held it.
UP LAW BOC INSURANCE CODE
Constructive total loss or technical total loss
is one in which the loss, although not actually
total, is of such character that the insured is
entitled, if he thinks fit, to treat it as total by
abandonment.
As to when a constructive total loss exists,
three rules exist:
(1) English rule, which states that there is
constructive total loss when the subject
matter of the insurance, while still existent
in specie, is so damaged as not to be worth,
when repaired, the cost of the repairs;
(2) American rule, which states that there is
constructive total loss when it is so
damaged that the costs of repairs would
exceed one-half of the value of the thing as
acquired; also known as the fifty percent
rule;
(3) Philippine rule, which states that the
insured may not abandon the thing insured
unless the loss or damage is more than
three-fourths of its value.
A.6. ABANDONMENT
A.6.A. DEFINITION
Sec. 140. Abandonment, in marine insurance, is
the act of the insured by which, after a
constructive total loss, he declares the
relinquishment to the insurer of his interest in
the thing insured.
A.6.B. CONDITIONS
Aside from the requirement under Section 141
already mentioned:
(1) An abandonment must be neither partial
nor conditional [Section 142];
(2) An abandonment must be made within a
reasonable time after receipt of reliable
information of the loss, but where the
information is of a doubtful character, the
insured is entitled to a reasonable time to
make inquiry [Section 142];
58
MERCANTILE LAW
(3) Abandonment is made by giving notice
thereof to the insurer, which may be done
orally, or in writing: Provided, That if the
notice be done orally, a written notice of
such abandonment shall be submitted
within seven days from such oral notice
[Section 145];
(4) Abandonment must be absolute and total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves incorrect,
or the thing insured was so far restored when
the abandonment was made that there was in
fact no total loss, the abandonment becomes
ineffectual.
A.6.C. CHARACTERISTICS
Thus, a valid abandonment has the following
characteristics:
(1) There must be an actual relinquishment by
the person insured of his interest in the
thing insured;
(2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
conditional;
(4) It must be made within a reasonable time
after receipt of reliable information of the
loss;
(5) It must be factual;
(6) It must be made by giving notice thereof to
the insurer which may be done orally or in
writing; and
(7) The notice of abandonment must be
explicit and must specify the particular
cause of the abandonment.
A.6.D. EFFECTS
(1) An abandonment is equivalent to a
transfer by the insured of his interest to the
insurer, with all the chances of recovery
and indemnity [Section 148];
UP LAW BOC INSURANCE CODE
(2) If a marine insurer pays for a loss as if it
were an actual total loss, he is entitled to
whatever may remain of the thing insured,
or its proceeds or salvage, as if there had
been a formal abandonment (Section 149);
(3) Upon an abandonment, acts done in good
faith by those who were agents of the
insured in respect to the thing insured,
subsequent to the loss, are at the risk of
the insurer, and for his benefit (Section
150).
A.7. AVERAGE
Average is defined as the extraordinary or
accidental expense incurred during the voyage
for the preservation of the vessel, cargo or both
and all the damages to the vessel and cargo
from the time it is loaded and the voyage
commenced until it ends and the cargo is
unloaded.
There are two kinds of averages:
(1) Gross or general averages; and
(2) Simple or particular averages.
Gross averages include damages and expenses
which are deliberately caused by the master of
the vessel or upon his authority, in order to
save the vessel, her cargo, or both at the same
time from a real and known risk. This must be
borne equally by all of the interests concerned
in the venture.
To claim general average contributions, the
requisites are:
(1) There must be a common danger to the
vessel or cargo;
(2) Part of the vessel or cargo was sacrificed
deliberately;
(3) The sacrifice must be for the common
safety or for the benefit of all;
(4) It must be made by the master or upon his
authority;
(5) It must not be caused by any fault of the
party asking contribution;
59
MERCANTILE LAW
(6) It must be successful (i.e., resulted in the
saving of the vessel and/or cargo)
(7) It must be necessary.
Particular averages include damages and
expenses caused to the vessel or her cargo,
which have not inured to the common benefit
and profit of all the persons interested in the
vessel and her cargo. A particular average loss
is suffered by and borne alone by the owner of
the cargo or of the vessel, as the case must be.
B. FIRE INSURANCE
B.1. DEFINITION
Sec. 169. Fire insurance includes insurance
against loss by fire, lightning, windstorm,
tornado or earthquake and other allied risks,
when such risks are covered by extension to fire
insurance policies or under separate policies.
A fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss of,
or damage to, a property caused by hostile fire.
Fire or other so-called allied risks
enumerated above must be the proximate
cause of the damage or loss.
Fire is oxidation which is so rapid as to produce
either a flame or a glow. Spontaneous
combustion is usually rapid oxidation. Fire is
always caused by combustion, but combustion
does not always cause fire.
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
Fire cannot be considered a natural disaster or
calamity since it almost always arises from
some acts of man or by human means. It
cannot be an act of God unless caused by
UP LAW BOC INSURANCE CODE
lightning or a natural disaster or casualty not
attributable to human agency [Phil. Home
Assurance Corp. v. CA (1996)]
B.2. RISKS
Hostile fire is one that escapes from the place
where it was intended to burn and ought to be,
or one which remains completely within its
proper place but because of the unsuitable
materials used to light it, it becomes inherently
dangerous and uncontrollable. This kind of fire
will make the insurer liable.
Friendly fire is one that burns in a place where
it is intended to burn and ought to be like fire
burning in a stove or a lamp.
The risk assumed by the insurer is the loss and
damage caused by hostile fire and not friendly
fire.
Fire may not be considered a natural calamity
as it almost always arises from some act of
man. It cannot be considered an act of God
unless it is caused by lighting or a natural
disaster not attributable to human agency.
(Phil. Home Assurance v. CA (1996)).
B.3. ALTERATIONS IN USE OR
CONDITION
Sec. 170. An alteration in the use or condition of
a thing insured from that to which it is limited
by the policy made without the consent of the
insurer, by means within the control of the
insured, and increasing the risks, entitles an
insurer to rescind a contract of fire insurance
Sec. 171. An alteration in the use or condition of
a thing insured from that to which it is limited
by the policy, which does not increase the risk,
does not affect a contract of fire insurance.
Sec. 172. A contract of fire insurance is no
affected by any act of the insured subsequent
to the execution of the policy, which does not
60
MERCANTILE LAW
violate its provisions, even though it increases
the risk and is the cause of the loss.
Thus, in order that the insurer may rescind a
contract of fire insurance for any alteration
made in the use or condition of the thing
insured, the following requisites must be
present:
(1) The use or condition of the thing is
specifically limited or stipulated in the
policy;
(2) Such use or condition as limited by the
policy is altered;
(3) The alteration is made without the consent
of the insurer;
(4) The alteration is made by means within the
control of the insured; and
(5) The alteration increased the risk.
Every contract of insurance is made with
reference to the conditions surrounding the
subject matter of the risk. Thus, there is an
implied promise or undertaking on the part of
the insured that he will not change the
premises or the character of the business
carried there so as to increase the risk of loss
by fire.
The rule on alteration was strictly applied in
the case of Malayan Insurance Co, Ltd v. Pap Co,
Ltd (2013): The court held that transferring
machinery to another location, despite a
provision stating that the machine cannot be
transferred without the consent of the insurer
is considered an alteration in the condition and
location of the thing insured. Hence, Malayan
was not liable to Pap.
B.4. MEASURE OF INDEMNITY
(1) In an open policy, only the expense
necessary to replace the thing lost or
injured in the condition it was at the time of
the injury will be paid;
UP LAW BOC INSURANCE CODE
(2) In a valued policy, the parties are bound by
the valuation, in the absence of fraud or
mistake, similar to marine insurance.
If there is a valuation, the effect shall be similar
to a marine insurance policy wherein the
valuation is conclusive between the parties in
adjusting the loss [Sec. 158]
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained
and the burden of proof is upon him to
establish the amount of such loss by
preponderance of evidence.
Where the face value of the policy is less than
the agreed valuation, then even in case of total
loss, the insured can only recover up to the
policys face value, which is always the
maximum limit of the insurers liability [Tan
Chuco v. Yorkshire Fire & Life Ins. Co. (1909)]
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 [Devt. Ins. Corp. v. IAC (1986)]
C. CASUALTY INSURANCE
C.1. DEFINITION
Sec. 176. Casualty insurance is insurance
covering loss or liability arising from accident
or mishap, excluding certain types of loss
which by law or custom are considered as
falling exclusively within the scope of other
types of insurance such as fire or marine. It
includes, but is not limited to, employers
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and
theft insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar
kinds of insurance.
61
MERCANTILE LAW
Casualty insurance includes all forms of
insurance against loss or liability arising from
accident or mishap excluding certain types of
loss or liability which are not within the scope
of other types of insurance such as fire, marine,
suretyship and life. It includes, but is not
limited to, employers liability insurance,
workmens compensation insurance, public
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and
theft insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar
kinds of insurance (e.g., robbery and theft
insurance).
It is governed by the general provisions
applicable to all types of insurance plus
stipulations in the insurance contract (Fortune
Insurance & Surety Co v. CA (1995))
C.2. INTENTIONAL AND ACCIDENTAL
INJURY DISTINGUISHED
Intentional implies the exercise of the
reasoning faculties, consciousness and volition.
Where a provision of the policy excludes
intentional injury, it is the intention of the
person inflicting the injury that is controlling. If
the injuries suffered by the insured clearly
resulted from the intentional act of the third
person, the insurer is relieved from liability as
stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual and
unforeseen. The terms do not, without
qualification, exclude events resulting in
damage due to fault, recklessness or
negligence of third parties. The concept is not
necessarily synonymous with no fault. It may
be utilized simply to distinguish intentional or
malicious acts from negligent or careless acts
of man.
UP LAW BOC INSURANCE CODE
C.3. DIVISIONS
Casualty insurance has two general divisions:
liability and indemnity insurance.
C.3.A. LIABILITY INSURANCE
Under policies of this type, the insurer assumes
the obligation to pay the third party in whose
favor the liability of the insured arises. The
liability of the insurer attaches as soon as the
liability of the insured to the third party is
established. It covers liability incurred from
quasi-delict or criminal negligence but cannot
cover deliberate criminal acts.
C.3.B. INDEMNITY INSURANCE
Under this kind of insurance, no action will lie
against the insurer unless brought by the
insured for loss actually sustained and paid by
him. Liability of the insurer attaches only after
the insured has paid his liability to the third
party.
C.4. NO ACTION CLAUSE
A no action clause is a requirement in a policy
of liability insurance which provides that suit
and final judgment be first obtained against
the insured; that only thereafter can the person
injured recover on the policy [Guingon v. Del
Monte (1967)]
But, the no-action clause cannot prevail over
the Rules of Court provisions which are aimed
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as
defendants in a case commenced by the third
party claiming under a liability insurance, as
the right to relief in respect to the same
transactions is alleged to exist [See Section 5,
Rule 2 and Section 6, Rule 3]
62
MERCANTILE LAW
D. SURETYSHIP
Sec. 177. A contract of suretyship is an
agreement whereby a party called the 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 of and under the
provisions of Act. No 536, as amended by
2206.
It is an agreement whereby a surety
guarantees the performance or undertakes to
answer, under specified terms and conditions,
for the debt, default or miscarriage of the
principal or obligor, such as failure to perform,
or breach of trust, negligence and the like, in
favor of a third party.
It shall be deemed as insurance contract if the
suretys main business is that of suretyship,
and not where the contract is merely incidental
to any other legitimate business or activity of
the surety.
The contract of a surety is evidenced by a
writing called surety bond which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor of
the insurer.
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
The liability of the surety or sureties under a
bond is joint and several, or solidary (Sec. 178).
This means that upon the default of the
principal obligor, the surety becomes primarily
liable. Unlike a guarantor, a surety is not
entitled to the benefit of exhaustion of the
UP LAW BOC INSURANCE CODE
principal obligors assets and assumes a
regular party to the undertaking.
It is limited or fixed to the amount of the bond.
What is unique to a contract of suretyship is
that when the obligee accepts the bond, the
bond becomes valid and enforceable whether
or not the premium has been paid by the
obligor unlike in an insurance contract where
payment of premium is necessary for the
contract to be valid. If the obligee has not yet
accepted, then payment of premium is still
necessary for the contract of suretyship to be
valid.
E. LIFE INSURANCE
E.1. DEFINITION
Sec. 181. Life insurance is insurance on human
lives and insurance appertaining thereto or
connected therewith.
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. 182. An insurance upon life may be 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.
Every contract or pledge for the payment of
endowments or annuities shall be considered a
life insurance contract for purposes of the
Insurance Code.
63
MERCANTILE LAW
E.2. TYPES
E.2.A. INDIVIDUAL LIFE
It is an insurance on human lives and insurance
appertaining thereto or connected therewith. It
may be made payable on the death of the
person, or on his surviving a specified period,
or otherwise contingently on the continuation
or cessation of life.
Life insurance is normally considered payment
upon termination of life, while pure
endowment or annuity is payment upon
surviving a specified time/period.
E.2.B. GROUP LIFE
It is a blanket policy covering a number of
individuals who are usually a cohesive group
(e.g., employees of a company) and subjected
to a common risk. No medical examination is
usually required of each person insured (in
contrast to individual life insurance).
Group insurance is a single insurance contract
that provides coverage for many individuals.
The employer-policy holder is the agent of the
insurer in collecting the premium. [Pineda v.
CA (1993)]
Typically, the policy owner is an employer and
the policy covers the employees or members of
the group, with one master contract kept by
the employer. Where the employee is required
to pay a portion of the premium, the
arrangement is called a contributory plan,
wherein his share is deducted from his wages
[Carale, 2014]
E.2.C. INDUSTRIAL LIFE
Sec. 235. The term Industrial life insurance as
used in this code shall mean that form of life
insurance under which the premiums are
payable either monthly or oftener, if the face
amount of insurance provided in any policy is
UP LAW BOC INSURANCE CODE
not more than 500 times that of the current
statutory minimum daily wage in the City of
Manila, and if the words industrial policy are
printed upon the policy as part of the
descriptive matter.
Industrial life insurance refers to an insurance
which provides insurance coverage to
industrial workers or people who are unable to
afford insurance for bigger amounts.
Unlike an ordinary life insurance, this kind of
insurance shall not lapse after non-payment of
premiums in 3 months after the expiration of
the grace period, if such non-payment is due to
the failure of the company to send its
representatives to the insured to collect
premium. (Sec. 235 & Carale, 2014)
E.2.D. MICROINSURANCE
Sec. 187. Microinsurance is a financial product
or service that meets the risk protection needs
of the poor, where:
The amount of contributions, premiums, fees
or charges, computed on a daily basis, does
not exceed 7.5% of the current daily minimum
wage rate for nonagricultural workers in Metro
Manila; and
The maximum sum of guaranteed benefits is
not more than 1,000 times of the said current
daily minimum wage rate.
Sec. 188. No insurance company or mutual
benefit association shall engage in the
business of Microinsurance unless it possesses
all the requirements as may be prescribed by
the Commissioner, who shall issue such rules
and regulations governing microinsurance.
64
MERCANTILE LAW
E.3. EXAMPLES OF LIFE INSURANCE
POLICIES
(1) Ordinary or whole life policy, where the
insurer agrees to pay the face value of the
policy upon the death of the insured;
Distinct variations of Whole Life Policy:
(A) Ordinary Life Insurance Premiums
are paid throughout the lifetime of the
person insured or until the person
reaches a predetermined specified age
at which point the coverage continues
without the payment of additional
premiums.
(B) Limited Payment Life Insurance
Premiums are paid only during a
specified number of years or until a
specified event occurs.
(C) Single Premium Life Insurance the
coverage is acquired by the payment of
a single premium.
(D) Joint Life Insurance coverage is
payable upon the first death among
two or more insured (normally
purchased by business partners or
spouse) and paid to the survivor.
(E) Universal Life Insurance emphasizes
the separation of the portion of the
premium that is used to cover the
insurance protection from the portion
of the premium allocated to an
investment.
(F) Variable Life Insurance some amount
of death benefit provided by a variable
life insurance policy is guaranteed by
the insurer, but the total death benefit
and the cash value of the insurance
before death depend on the
investment performance of that
portion of the premium which is
allocated to a separate fund.
(G) Pure endowment policy where the
insurer pays the insured if the insured
survives a specified period. If the
insured dies within the period, the
insurer is released from liability and
UP LAW BOC INSURANCE CODE
unless the contract otherwise provides,
need not reimburse any part of the
premiums paid;
(H) Endowment policy where the insured
is paid the face value of the policy if he
outlives the designated period. If he
dies within said period, the insurer
pays the proceeds to the beneficiary.
This is a combination of term policy
and pure endowment policy.
(2) Term Life Insurance, which provides for the
payment of a specified amount if death
occurs within the time period designated in
the policy, usually for periods of one to five
years.
(3) Modified Life Insurance, which is a policy
that combines terms and whole life
insurance into a single insurance policy.
Premiums paid by the insured are
substantially less during the first few years
then later on increases during the
remaining term of the policy.
(4) Group Life Insurance, which is a type of life
insurance in which a single contract covers
an entire group of people.
[Carale, 2014]
E.4. RISKS
E.4.A. DEATH OR SURVIVAL
It may be made payable on the death of the
person, or on his surviving a specified period,
or otherwise contingently on the continuation
or cessation of life [Campos (1983)]
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
E.4.B. SUICIDE
Insurer is liable in the following cases:
(1) If committed after two years from the date
of the policys issue or its last
reinstatement. Any stipulation extending
the 2-year period is void;
65
MERCANTILE LAW
(2) If committed in a state of insanity
regardless of the date of the commission
unless suicide is an excepted peril;
(3) If committed after a shorter period
provided in the policy.
[Sec. 183]
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer who seeks to avoid liability under a life
policy excepting it from coverage [Campos
(1983)]
E.4.C. DEATH AT THE HANDS OF THE LAW
Death at the hands of the law (e.g., legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance on
Insurance (1951)]
E.4.D. KILLING BY THE BENEFICIARY
General rule: The interest of a beneficiary in a
life insurance policy shall be forfeited when the
beneficiary is the principal accomplice or
accessory in willfully bringing about the death
of the insured. In such event, the other
beneficiaries so named shall receive their share
and divide among them the forfeited share of
the guilty beneficiary. In the absence of other
beneficiaries, proceeds shall be paid according
to the policy contract, and if silent, it shall be
paid to the estate of the insured [Section 12]
Exceptions:
(1) Accidental killing;
(2) Self-defense;
(3) Insanity of the beneficiary at the time he
killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is necessary
before his interest in the insurance policy is
forfeited in favor of the others indicated in
Section 12.
UP LAW BOC INSURANCE CODE
F. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
Sec. 387. It shall be unlawful for any land
transportation operator or owner of a motor
vehicle to operate the same in the public
highways unless there is in force in relation
thereto a policy of insurance or guaranty in
cash or surety bond issued in accordance with
the provisions of this chapter to indemnity the
death, bodily injury and/or damage to property
of a third-party or passenger, as the case my
be, arising from the use thereof.
Compulsory motor vehicle liability insurance is
a policy of insurance or guaranty in cash or
surety bond to indemnify the death, bodily
injury, and/or damage to property of a third-
party or passenger arising from the use of a
motor vehicle.
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Section 390].
It is the only compulsory insurance under the
Insurance Code.
It is a species of compulsory insurance that
provides for protection coverage that will
answer for legal liability for losses and
damages for bodily injuries or property
damage that may be sustained by another
arising from the use and operation of motor
vehicle by its owner. It applies to all vehicles
whether public or private vehicles.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
insurance contract cannot have any effect
[Campos (1983)]
The insurers liability is direct and primary so
the insurer need not wait for final judgment in
66
MERCANTILE LAW
the criminal case to be liable. Its purpose is to
give immediate financial assistance to victims
of motor vehicle accidents and/or their
dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for the
accident sustained [Shafer v. Judge, RTC
(1988)]
The claimants/victims may be a passenger or a
third party. The insured may be the party at
fault as against claims of third parties (third
party liability) or the victim of the contingent
event.
The following clauses are relevant to
compulsory motor vehicle liability insurance:
(1) Authorized driver clause is a stipulation in a
motor vehicle insurance which provides
that the driver, other than the insured
owner, must be duly licensed to drive the
motor vehicle, otherwise the insurer is
excused from liability;
(2) Theft clause is a stipulation including theft
as one of the risks insured against. If there
is such a provision and the vehicle was
unlawfully taken, the insurer is liable under
the theft clause and the authorized driver
clause does not apply. The insured can
recover even if the thief has no drivers
license.
(3) No Fault Clause is a provision required in
every compulsory motor vehicle liability
insurance regarding claims for death or
injury to a passenger or third party on a
liability insurance policy covering the
vehicle.
Any claim for death or injury to any passenger
or third party shall be paid without the
necessity of proving fault or negligence of any
kind, provided the total indemnity in respect of
any person shall not exceed P15,000.
UP LAW BOC INSURANCE CODE
The claim shall be made against only one
motor vehicle. It shall lie against the insurer of
the vehicle in which the occupant is riding, and
no other. The claimant is not free to choose
from which insurer he will claim the no fault
indemnity. [Perla Compania de Seguros v.
Ancheta (1988)]
IV. INSURABLE
INTEREST
A. IN GENERAL
In general, an insurable interest is that interest
which a person is deemed to have in the
subject matter insured, where he has a relation
or connection with or concern in it, such that
the person will derive pecuniary benefit or
advantage from the preservation of the subject
matter insured and will suffer pecuniary loss or
damage from its destruction, termination, or
injury by the happening of the event insured
against. The existence of an insurable interest
gives a person the legal right to insure the
subject matter of the policy of insurance
[Lalican v. Insular Life Ins. (2009)]
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. As such, it may NOT be waived by
stipulation. Absence of insurable interest
renders the insurance contract void.
The insurable interest need not always be
pecuniary in nature (such as by insuring the life
of a person).
Rationale:
(1) As a deterrence to the insured. A policy
issued to a person without interest is a
mere wager policy or contract and is void
for illegality. A wager policy is obviously
contrary to public interest.
67
MERCANTILE LAW
There is a moral hazard in removing
insurable interest as a requirement for the
validity of an insurance policy It allows
the insured to have an interest in the
destruction of the subject matter rather
than in its preservation. [Myer v. Grand
Lodge]
(2) As a measure of limit of recovery. The
insurable interest is the measure of the
upper limit of his provable loss under the
contract. Sound public policy requires that
insurance should not provide the insured
means of making a net profit from the
happening of the event insured against.
A.1. WHEN INSURABLE INTEREST
SHOULD EXIST
Policy Insurable interest required
Effectivity
Intervening Occurrence
of
period of loss
insurance
Life or
health
Property
Insurable interest over life/health may be lost
after the insurance takes effect as long as it
exists at the time the insurance takes effect.
On the other hand, insurable interest property
need not exist during the intervening period or
from the time between when the policy takes
effect and the loss occurs. The alienation of
insured property will not defeat a recovery if
the insured has subsequently reacquired the
property and possesses an insurable interest at
the time of loss [Womble v. Dubuque Fire
&Marine Ins. Co.]
UP LAW BOC INSURANCE CODE MERCANTILE LAW

A.2. CHANGE OF INTEREST during the circumstance of the risk [Sec.

Change of interest means the absolute transfer 57]. It is an exception to the general rule
of the property insured. that upon maturity, the proceeds of a
policy shall be given exclusively to the
General rule: A change of interest in the thing proper interest if the person in whose
insured does not transfer the policy, but name or for whose benefit it is made.
suspends the insurance to an equivalent extent (7) An express prohibition against alienation
until the interest in the thing and the interest in the policy [Article 1306, Civil Code], in
in the insurance policy are vested in the same which case alienation will not merely
person. Thus, the contract is not rendered void suspend the contract but avoid it entirely.
but is merely suspended [Sec. 20]
B. IN LIFE/HEALTH INSURANCE
Exceptions:
(1) Life, health, and accident insurance;
Sec. 10. Every person has an insurable interest
(2) A change of interest in the thing insured
in the life and health:
after the occurrence of an injury which
(1) Of himself, of his spouse and of his
results in a loss does not affect the policy
children;
[Sec. 21];
(2) Of any person on whom he depends
(3) A change in the interest in one or more of
wholly or in part for education or
several things, separately insured by one
support, or in whom he has a pecuniary
policy, such as a conveyance of one or
interest;
more things, does not affect the policy with
(3) Of any person under a legal obligation
respect to the others not so conveyed (Sec.
to him for the payment of money, or
22);
respecting property or services, of
(4) A change of interest by will or succession
which death or illness might delay or
on the death of the insured. The death of
prevent the performance; and
the insured does not avoid insurance policy.
(4) Of any person upon whose life any
It does not affect the policy except his
estate or interest vested in him
interest passes to his heir or legal
depends.
representative who may continue the
insurance policy on the property by
continuing paying premiums [Sec. 23]; Unless the interest of a person insured is
(5) A transfer of interest by one of several susceptible of exact pecuniary measurement,
partners, joint owners, or owners in the measure of indemnity under a policy of
common, who are jointly insured, to the insurance upon life or health is the sum fixed in
others. This does not avoid the insurance. the policy.
It will avoid the policy only as to the selling
partners or co-owners but not as to others. Life insurance policies may be divided into two
The rule applies even though it has been general classes:
agreed that the insurance cease upon (1) Insurance upon ones life;
alienation of the thing [Sec. 24]; (2) Insurance upon life of another.
(6) Automatic transfers of interest in cases in
which the policy is so framed that it will
inure to the benefit of whosoever may
become the owner of the interest insured

68
UP LAW BOC INSURANCE CODE
B.1. IN LIFE INSURANCE
B.1.A. INTEREST IN ONES OWN LIFE
Cestui que vie is the insured himself. The
insured can designate anyone to be the
beneficiary of the policy.
Each has unlimited interest in his own life,
whether the insurance is for the benefit of
himself or another.
The beneficiary designated need not have any
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and
names himself as the beneficiary, he must have
insurable interest therein.
B.1.B. INTEREST IN LIFE OF ANOTHER
In life insurance, unless based on commercial
relationship, the policy owner does not
necessarily have pecuniary interest on the
life of the cestui que vie. Mere relationship is a
sufficient interest to be insured.
The insurable interest must be based on moral
and legal grounds. Such interest exists
whenever the insured has a responsible
expectation of deriving benefit from the
continuation of the life of the other person or of
suffering detriment through its termination.
There is no insurable interest in the life of an
illegitimate spouse.
A creditor may take out insurance on the life of
his debtor but his insurable interest is only up
to the amount of the debt and only when the
debt is unsecured. [Carale, 2014]
An assignee of the insurance contract is not
required to have insurable interest in the life of
the insured, for to require such interest in him
is to diminish the investment value of the
contract to the owner.
69
MERCANTILE LAW
Note: An assignment is different from a change
in the designated beneficiary.
When the beneficiary is the principal,
accomplice or accessory in willfully bringing
about the death of the insured, interest of
beneficiary in life insurance policy is forfeited
[Sec. 12]
B.1.C. BENEFICIARY
A beneficiary is the person who is named or
designated in a contract of life, health, or
accident insurance as the one who is to receive
the proceeds or benefits which become
payable, according to the terms of the contract,
if the insured risk occurs.
General rule: A person may designate a
beneficiary, irrespective of the beneficiarys
lack of insurable interest, provided he acts in
good faith and without intent to make the
transaction merely a cover for a forbidden
wagering contract [De Leon (2010)]
Exceptions: Any person who is forbidden from
receiving any donation under Article 739, Civil
Code cannot be named beneficiary of a life
insurance policy by the person who cannot
make any donation to him. [Article 2012, Civil
Code]
Sec. 739, Civil Code: The following donations
are void:
(1) Those made between persons who were
guilty of adultery or concubinage at the
time of the 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 and ascendants, by reason of
his office.
UP LAW BOC INSURANCE CODE
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
(irrevocable beneficiary).
In general, the policy owner can change the
beneficiary without the consent of such
beneficiary. However, when this right to
change is expressly waived, the consent of the
beneficiary is necessary. This means that
despite the waiver, he can still change the
beneficiary, provided he obtained the
beneficiarys consent.
B.2. INTEREST IN HEALTH INSURANCE
General rule: Interest in the life or health of a
person must exist when the insurance takes
effect (at inception), but need not exist
thereafter or when the loss occurs.
Exceptions:
(1) In the case of a creditors insurance taken
on the life of the debtor, insurable interest
disappears once the debt has been paid. At
this point, the creditor/insured can no
longer recover on the policy;
(2) In the case of a companys insurance taken
on the life of an employee, insurable
interest disappears once the employee
leaves the company, in which case, the
company can no longer recover on the
policy.
B.3. TRANSFER OF POLICY
Interest can be transferred even without the
notice to the insurer of such transfer or
bequest, unless there is a stipulation to the
contrary.
There is no right of subrogation in life
insurance, because it is not a contract of
indemnity.
70
MERCANTILE LAW
C. IN PROPERTY INSURANCE
Sec. 13. Every interest in property, whether real
or personal, or any relation thereto, or liability
in respect thereof, of such nature that a
contemplated peril might directly damnify the
insured, is an insurable interest.
Sec. 14. An insurable interest in property may
consist in:
(1) An existing interest;
(2) An inchoate interest founded on an
existing interest; or
(3) An expectancy, coupled with an
existing interest in that out of which
the expectancy arises.
The insurable interest may be in the property
itself (e.g., ownership), or any relation thereto
(e.g., interest of a trustee or a commission
agent), or liability in respect thereof (e.g.,
interest of a carrier or depository of goods).
(1) An existing interest - may be a legal title or
equitable title. Examples of those having
existing interest are owners as regards
their properties, trustees in the case of the
seller of property not yet delivered,
mortgagors over the property mortgaged,
and lessor, lessee and sub-lessee over the
property leased.
(2) An inchoate interest must be founded on
existing interests. It exists but is
incomplete or unripe until the happening
of an event. Examples of inchoate interests
are the interest of stockholders with
respect to dividends in case of profits and
shares in the assets, and the interest of a
partner in the properties belonging to the
partnership.
(3) An expectancy must be coupled with an
existing interest out of which the
expectancy arises. For example, a farmer
UP LAW BOC INSURANCE CODE
who planted crops has insurable interest
over his harvest which can be expected.
A mere contingent or expectant interest in
anything, not founded on an actual right to the
thing, nor upon any valid contract for it, is not
insurable. [German Insurance v. Hyman]
A son has no insurable interest over the
property of his father because such is just a
mere expectancy and has no legal basis before
he inherits such property.
Insurable interest in property may be based on
a perfected contract of sale, vesting an
equitable title even before delivery of the
goods. [Filipino Merchants Ins. Co. v. CA (1989)]
When the seller retains ownership only to
insure that the buyer will pay its debt, the risk
of loss is borne by the buyer. Insurable interest
in property does not imply a property interest
in, or a lien upon, or possession of the subject
matter of the insurance, and neither ownership
nor a beneficial interest is requisite to the
existence of such an interest. Anyone has an
insurable interest in property who derives a
benefit from its existence or would suffer loss
from its destruction [Gaisano Cagayan Ins. v.
Ins. Co. of North America, (2006)]
C. 1. TIME OF EXISTENCE
General rule: Interest in property insured must
exist both at inception and at time of loss, but
not in the intervening period.
Exceptions:
(1) A change in interest over the thing insured
after the loss contemplated. The insured
may sell the remains without prejudice to
his right to recover [Sec. 21];
(2) A change of interest in one or more several
distinct things, separately insured by one
policy. This does not avoid the insurance as
to the others [Sec. 22];
71
MERCANTILE LAW
(3) A change in interest by will or succession
upon the death of the insured [Sec. 23]
(4) A transfer of interest by one of several
partners, joint owners, or owners in
common who are jointly insured. The
acquiring co-owner has the same interest;
his interest merely increases upon
acquiring other co-owners interest (Sec.
24).
C.2. TRANSFER OF POLICY
Interest cannot be transferred without the
insurers consent, because the insurer has
approved the policy based on the personal
qualifications and insurable interest of the
insured.
When there is an express prohibition against
alienation in the policy, and there is alienation,
the contract of insurance is not merely
suspended but avoided.
C.3. MEASURE OF INDEMNITY
Being a contract of indemnity, the measure of
insurable interest in property is the extent to
which the insured might be damnified by the
loss of injury thereof. The insured cannot
recover a greater value than that of his actual
loss because it would be a wagering policy
contrary to public policy and void.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

C.4. INTEREST IN PROPERTY AND LIFE D. DOUBLE AND OVER INSURANCE;

DISTINGUISHED REINSURANCE
Property Life D.1. DOUBLE INSURANCE
Extent Sec. 95. Double insurance exists where the
Limited to actual Unlimited (save in same person is insured by several insurers
value of the interest life insurance separately in respect to the same subject and
thereon effected by a interest.
creditor on the life
of the debtor Requisites:
amount of debt (1) The same person is insured;
only) (2) Two or more insurers insuring
Existence separately;
Must exist when the Must exist at the (3) The same subject matter;
insurance takes time the insurance (4) The same interest insured; and
effect and when the takes effect, BUT (5) The same risk or peril insured against
loss occurs, BUT need not exist
need not exist in the thereafter Double insurance is not prohibited under the
meantime law, unless the policy contains a stipulation to
the contrary. Usually, insurance policy contains
Expectation of benefit to be derived other insurance clause which requires
Must have legal Need not have legal disclosure of other existing insurance policy. In
basis basis such case, non-disclosure will avoid the policy.
Interest of beneficiary Such clause is intended to prevent over
insurance and thus avert the perpetration of
Must have insurable Need not have fraud.
interest over the insurable interest
thing insured over the life of the If there is double insurance and loss occurs,
insured if the each of the insurers will be liable only up to the
insured himself face value of their respective policies and the
secured the policy. insured has the option of choosing the order by
But if the insurance which he will claim from the insurers.
was obtained by the
beneficiary, the If there is over-insurance and loss occurs, then
latter must have the insurers will pay pro-rata (or in the order as
insurable interest stated in contract or excess clause) in case of
over the life of the loss.
insured [Sundiang
and Aquino (2013)] Nonetheless, under Section 64(f), an insurer
may cancel an insurance policy, other than life,
based on a discovery of other insurance
coverage that makes the total insurance in
excess of the value of the property insured
subject to the requirement of prior notice.

72
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Also, under Section 83, in case of an over Reinsurance has been referred to as an
insurance by several insurers other than life, insurance of an insurance.
the insured is entitled to a ratable return of the
premium, proportioned to the amount by D.4.A. ORIGINAL INSURANCE
which the aggregate sum insured in all the CONTRACT AND REINSURANCE
policies exceeds the insurable value of the CONTRACT DISTINGUISHED
thing at risk. The original insurance contract is separate and
distinct from the reinsurance contract.
D.2. RULES FOR PAYMENT Insurance contract is independent from the
Section 96 enunciates the principle of reinsurance contract. Insurance contract covers
contribution which requires each insurer to indemnity against damages. Reinsurance
contribute RATABLY to the loss or damage covers indemnity against liability.
considering that the several insurances cover
the same subject matter and interest against D.4.B. REINSURANCE TREATY AND
the same peril. If the loss is greater than the POLICY DISTINGUISHED
sum total of all the policies issued, each A reinsurance treaty is an agreement between
insurer is liable for the amount of his policy. two insurance companies whereby one agrees
to cede and the other to accept reinsurance
D.3. DOUBLE AND OVER INSURANCE business pursuant to provisions specified in the
DISTINGUISHED treaty. [De Leon (2010)]
Double insurance Over insurance
A reinsurance policy is a contract of indemnity
Amount of insurance Amount of insurance
may or may not exceed exceeds the value of
one insurer makes with another to protect the
the value of the the insureds first insurer from a risk it has already assumed.
insureds insurable insurable interest
interest Reinsurance treaties and reinsurance policies
There are always There may be one or are not synonymous. Treaties are contracts for
several insurers more insurers insurance; policies are contracts of insurance.
[Philamlife v. Auditor General (1958)]
D.4. REINSURANCE
D.5. DOUBLE INSURANCE AND
REINSURANCE DISTINGUISHED
Sec. 97. A contract of reinsurance is one by Double insurance Reinsurance
which an insurer procures a third person to
insure him against loss or liability by reason of Same interest Different interest
such original insurance. Insurer remains as Insurer becomes the
the insurer insured in relation
Sec. 99. A reinsurance is presumed to be a to the reinsurer
contract of indemnity against liability, and not
Insured is a party in The original insured
merely against damage.
interest in the is not a party in the
insurance contracts reinsurance contract
Sec. 100. The original insured has no interest in
a contract of reinsurance. Property is the The original
subject matter insurer's risk is the
subject matter

73
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Insured has to give Insureds consent is proceeds by virtue of the mortgage. A

his consent not necessary mortgagor can make the proceeds payable to
or assigned to the mortgagee.

E.1. OPEN LOSS PAYABLE MORTGAGE

E. MULTIPLE OR SEVERAL
CLAUSE
INTERESTS ON SAME PROPERTY
An open loss payable clause simply states that
The Insurance Code recognizes that both the
the proceeds of the insurance contract is
mortgagor and mortgagee have each separate
payable to the mortgagee as beneficiary.
and distinct insurable interest in the
mortgaged property and that they may take
The contract, however, is procured by the
out separate policies with the same or different
mortgagor for his interest in the property. He is
insurance companies. Consequently, insurance
the party to the contract, not the mortgagee.
taken by one on his own name only does not
inure to the benefit of the other.
The acts of the mortgagor prior to the loss,
which would otherwise avoid the insurance,
Thus, a mortgagor has an insurable interest
affects the mortgagee, even if the property is in
equal to the value of the mortgaged property
the hands of said mortgagee.
and a mortgagee, only to the extent of the debt
secured by the mortgage. [Geagonia v. CA
E.2. UNION MORTGAGE OR STANDARD
(1995)]
MORTGAGE CLAUSE
When a mortgagee insures his own interest in This clause is similar to an open loss payable
the mortgaged property without reference to clause, except that it is stipulated that the acts
the right of the mortgagor, mortgagee is of the mortgagor cannot invalidate the
entitled to the proceeds of the policy in case of insurance, provided that if the mortgagor fails
loss to the extent of his credit. to pay the premiums due, the mortgagee shall,
on demand, pay said premiums.
If the proceeds are more than the total amount
of credit, then mortgagee has no right to the When a mortgagee insured his own interest
balance. If the proceeds are equal to the credit, and a loss occurs, he is entitled to recover on
then insurer is subrogated to the mortgagees the insurance. However, he may no longer
rights and mortgagee can no longer recover claim against the mortgagor, for his claim is
the mortgagors indebtedness. discharged up to the amount the insurer has
paid him. [Palileo v. Cosio (1955)]
If the proceeds are less than the credit, then
the mortgagee may recover from the
mortgagor the deficiency. Upon payment, the
insurer is subrogated to the rights of the
mortgagee against the mortgagor to the
extent of the amount paid.

When a mortgagor takes out an insurance for

his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the

74
UP LAW BOC INSURANCE CODE
V. PERFECTION OF THE
INSURANCE
CONTRACT
A. OFFER AND
ACCEPTANCE/CONSENSUAL
An insurance contract is consensual. It is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application. The
insurance contract becomes effective upon
payment of first premium, provided there has
been an approval of the application.
A contract of insurance must be assented to by
both parties, either in person or through their
agents and so long as an application for
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to
make a contract. [Perez v. CA (2000)]
Also, according to Enriquez v. Sun Life
Assurance Co. (1920):
(1) Submission of application, even with
premium payment is a mere offer on the
part of the applicant, and does not bind
the insurer;
(2) An insurance contract is also not perfected
where the applicant dies before the
approval of his application or it does not
appear that the acceptance of the
application ever came to the knowledge of
the applicant;
(3) An acceptance made by letter shall not
bind the person making the offer except
from the time it came to his knowledge.
75
MERCANTILE LAW
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
in the application that contract shall not
become binding until the policy is delivered
and the first premium is paid [De Leon (2010)]
A.1. DELAY IN ACCEPTANCE
Delay in acting on the application does not
constitute acceptance even though the insured
has forwarded his first premium with his
application. [Perez v. CA (2000)]
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant dies,
the contract is not perfected. In this case, the
insurer can be liable for damages in
accordance with the tort theory. The
insurance business is imbued with public
interest, thus it is the duty of the insurer to act
with reasonable promptness in acting on
applications submitted to it [Wallace v.
Hartford Fire Insurance Co(1918)]
The measure of damage is the face value of the
policy. In life insurance, the proceeds will inure
to the insureds estate and not to the
beneficiary.
A.2. DELIVERY OF POLICY
Delivery is the act of putting the insurance
policy (the physical document) into the
possession of the insured. The delivery can be
a proof of the acceptance of the insurer of the
offer of the insured. It is not, however, a pre-
requisite of a valid contract of insurance.
Actual manual delivery is not necessary for the
validity of the contract. Constructive delivery
may be sufficient.
Actual delivery to the insured is not essential to
give the policy binding effect as long as the
insured has complied with every condition
UP LAW BOC INSURANCE CODE
required of him. [New York Life Ins. Co. v.
Babcock (1898)]
There are conflicting views as to whether
delivery to the agent of the insurance company
can be considered delivery to the insured.
In Bradley v. New York Life Ins. (1921), the agent
of the insurance company is not the agent of
the insured. Thus delivery to the agent cannot
be considered delivery to the insured.
B. PREMIUM PAYMENT
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the
consideration paid an insurer for undertaking
to indemnify the insured against the specified
peril.
General rule: No insurance policy issued or
renewal is valid and binding until actual
payment of the premium (Section 77). Any
agreement to the contrary is void.
Sec. 77. Notwithstanding any agreement to the
contrary, no policy or contract of insurance
issued by an insurance company is valid and
binding unless and until the premium thereof
has ben paid, except in the case of a life or an
industrial life policy whenever the grace period
provision applies or whenever under the broker
and agency agreements with duly licensed
intermediaries, a 90 day credit extension is
given. No credit extension to a duly licensed
intermediary should exceed 90 days from the
date of issuance of the policy.
Sec. 79. An acknowledgment in a policy or
contract of insurance or the receipt of premium
is conclusive evidence of its payment, so far as
to make the policy binding, notwithstanding
nay stipulation therein that it shall not be
binding until the premium is actually paid.
76
MERCANTILE LAW
Note: Sec. 77 was amended by RA 10607. Prior
to amendment, there were 5 exceptions to Sec.
77:
(1) Life and industrial life policy [Sec. 77]
(2) Acknowledgement in the contract that
premium has been paid [Sec. 78]
(3) Agreement to grant credit extension for
payment of premium [UCPB v Masagana]
(4) Agreement to grant payment of premium
in installment basis and partial payment
has been made [Makati Tuscany v. CA]
(5) When parties are barred by Estoppel
[UCPB v. Masagana]
However, because of RA 10607, the exceptions
were limited to 3:
(1) Life and industrial life policy [Sec. 77]
(2) 90 day credit extensions covered by broker
or agency agreements with licensed
intermediaries [Sec. 77]
(3) Acknowledgment in the contract that
premium has been paid [Sec. 79)]
[Carale, 2014]
B.1. AUTHORITY OF AGENT TO RECEIVE
PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium in its behalf.
The insurer is bound by its agents
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua (1999)]
B.2. PAYMENT BY POST-DATED CHECK
The payment of premium by a postdated check
at a stated maturity subsequent to the loss is
insufficient to put the insurance into effect.
But payment by a check bearing a date prior to
the loss, assuming availability of funds, would
be sufficient, even if it remains unencashed at
the time of the loss. The subsequent effects of
UP LAW BOC INSURANCE CODE
encashment would retroact to the date of the
instrument and its acceptance by the creditor
[Vitug, Commercial Laws and Jurisprudence
(2006)]
B.3. NON-PAYMENT OF PREMIUM
Non-payment of first premium, unless waived,
prevents the contract from becoming binding
notwithstanding the acceptance of the
application nor the issuance of the policy.
Non-payment of 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. In case of individual life insurance, the
policy holder is entitled a grace period of either
30 days or one month within which payment of
any premium after the first may be made. In
cases of industrial life insurance, the grace
period is four weeks, and where premiums are
paid monthly, either 30 days or one month.
B.4. EXCUSES FOR NON-PAYMENT
(1) Fortuitous events which render payment by
the insured wholly impossible will not
prevent forfeiture of the policy when the
premium remains unpaid. In other words, it
is not an excuse.
(2) Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It
would be unjust to allow the insurer to
retain the reserve value of the policy, which
is the excess of the premiums paid over the
actual risk carried during the years when
the policy had been in force in time of war
[Constantino v. Asia Life Ins. Co. (1950)]
C. NON-DEFAULT OPTIONS IN LIFE
INSURANCE
Sec. 227 (f) The law requires that in case of
life or endowment insurance, the policy shall
contain a provision specifying the options to
which the policy holder is entitled in the event
77
MERCANTILE LAW
of default in a premium payment after three
full annual premiums shall have been paid:
(1) Receive the cash surrender value
(2) Apply such value as the premium for
an extended insurance
(3) Apply such value as the premium for a
paid-up insurance
(4) Secure from such value an automatic
premium loan before the expiration of
the grace period.
C.1. CASH SURRENDER VALUE (CSV)
It is the amount that the insured is entitled to
receive if he surrenders the policy and releases
his claims upon it. The right to CSV accrues
only after three full annual premium payments.
The insured is given the right to claim the
amount less than the reserve, reduced by
surrender charge.
The cash value or cash surrender value is an
amount which the insurance company holds in
trust for the insured to be delivered to him
upon demand. When the companys credit for
advances is paid out of the cash value or cash
surrender value, that value and the companys
liability is diminished. [Manufacturers Life Ins. v.
Meer (1951)]
Rationale: The premium is uniform throughout
a lifetime, but the risk is varied (i.e., higher risk
when older, lower when young). Thus, the cost
of protection is more expensive during the
early years of the policy.
C.2. ALTERNATIVE TO CSV
(1) Extended insurance/term insurance - where
the insured, after having paid three full
annual premiums, is given the right to have
the policy continued in force from date of
default for a time either stated or equal to
the amount of the CSV, taken as a single
premium. The face value of the policy
remains the same but only within the term.
It is also called term insurance where CSV
UP LAW BOC INSURANCE CODE
is taken as a single premium (no further
payments) to extend the policy for a fixed
period of time. If death occurs during this
period, the beneficiary can recover the face
value of the policy, but if the insured
survives, the beneficiary gets nothing.
Reinstatement is allowed if made within
the term purchased; no reinstatement after
the lapse of the term purchased.
(2) Paid-up insurance - where, after the
insurance is paid-up, the insured who
has paid three full annual premiums is
given the right, upon default, to have the
policy continued from the date of default
for the whole period of insurance without
further payment of premiums. It is also
called reduced paid-up because in effect
the policy, terms and conditions are the
same but the face value is reduced to the
paid-up value. The terms and conditions
of the original policy remain the same,
however, the amount will be less than the
original face value.
(3) Automatic premium loan (APL) - where,
upon default, the insurer lends/advances
to the insured without any need of
application on his part, amount necessary
to pay overdue premium, but not to exceed
the CSV of the policy. It only applies if
requested in writing by the insured either
in the application or at any time before
expiration of the grace period. In effect, the
insurance policy continues in force for a
period covered by the payment. After the
period, if insured still does not resume
paying his premiums, policy lapses, unless
CSV still remains. If there is still CSV, APL
continues until CSV is exhausted. This is
beneficial for the insured because it
continues the contract and all its features
with full force and effect.
78
MERCANTILE LAW
D. REINSTATEMENT OF A LAPSED
LIFE INSURANCE POLICY
Reinstatement of a lapsed life insurance policy
is not a non-default option. It does not create a
new contract, but merely revives the original
policy so insurer cannot require a higher
premium than the amount stipulated in the
contract. It does not apply to group/industrial
life insurance.
Requisites: [Sec. 233(j)]
(1) It must be exercised within three years
from date of default;
(2) The insured must present evidence of
insurability satisfactory to the insurer;
(3) He must pay all back premiums and all
indebtedness to the insurer (with interest)
(4) The CSV must not have been duly paid to
the insured nor the extension period
expired;
(5) The application must be filed during the
insureds lifetime. [Andres v. Crown Life Ins.
(1958)]
E. REFUND OF PREMIUMS
Return of premiums can be made in the
following cases:
(1) If the thing insured was never exposed to
the risks insured against, the whole
premium should be refunded [Sec. 80(a)];
(2) When the contract is voidable due to the
fraud or misrepresentation of insurer or his
agent, the whole premium should be
refunded [Sec. 82]
(3) When by any default of the insured other
than actual fraud, the insurer never
incurred any liability under the policy, the
whole premium should be refunded [Sec.
82];
(4) When the contract is voidable because of
the existence of facts of which the insured
was ignorant without his fault, the whole
premium should be refunded [Sec. 82];
(5) Where the insurance is for a definite period
and the insured surrenders his policy, the
UP LAW BOC INSURANCE CODE
portion of the premium that corresponds to
the unexpired time at a pro rata rate,
unless a short period rate has been agreed
upon and appears on the face of the policy
should be return [Sec. 80(b)];
(6) When there is over-insurance by several
insurers, the return premiums should 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];
(7) When rescission is granted due to the
insurers breach of contract.
VI. RESCISSION OF
INSURANCE CONTRACTS
Sec. 26. A neglect to communicate that which
a party knows and ought to communicate, is
called a concealment.
Sec. 27. A concealment whether intentional or
unintentional entitles the injured party to
rescind a contract of insurance.
Requisites:
(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty
of the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. (1955); Fieldmens Ins. Co.
v. Vda. de Songco (1968)]
79
MERCANTILE LAW
A.1. PROOF OF FRAUD IN
CONCEALMENT
General rule: Fraud need not be proven in
order to prove concealment. Good faith is not a
defense.
Exception: When the concealment is made by
the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded [Sec. 29]
A.2. TEST OF MATERIALITY
Sec. 31. Materiality relates rather to the
probable and reasonable influence of the facts
upon the party to whom the communication
should have been made, in assessing the risk
involved in making or omitting to make further
inquiries and in accepting the application for
insurance.
The test is the effect which the knowledge of
the fact in question would have on the contract.
It is sufficient if the knowledge of it would
influence the party in making the contract. [De
Leon (2010)]
The test of materiality is whether the insurer
would have agreed to issue the policy had it
known of the facts concealed or impose
additional terms or require higher premium
[Carale, 2014]
A.3. EFFECTS
General rule: Concealment vitiates the contract
and entitles the insurer to rescind, even if the
death or loss is due to a cause not related to
the concealed matter.
Exceptions:
(1) Incontestability clause, which clause
stipulates that the policy shall be
incontestable after a stated period. The
incontestability clause is a mandatory
UP LAW BOC INSURANCE CODE MERCANTILE LAW

provision in life and endowment policies. merely exonerate

The policy must be payable on the death of the insurer from
the insured and has been in force during losses resulting
the lifetime of the insured for at least two from the risk
years from its date of issue or of its last concealed.
reinstatement [Sec. 233 (b) and Sec. 48];
(2) Concealment after the contract has
A.5. CONCEALMENT IN NON-MEDICAL
become effective, because concealment
INSURANCE
must take place at the time the contract is
The waiver of medical examination in a non-
entered into in order that the policy may be
medical insurance contract renders even more
avoided. Information obtained after the
material the information required of the
perfection of the contract is no longer
applicant concerning the previous conditions
necessary to be disclosed by the insured,
of health and diseases suffered. The cause of
even if the policy has not been issued.
death is not important because it is well settled
(3) Waiver or estoppel;
that the insured need not die of the disease he
(4) Marine insurance, where concealment of
had failed to disclose to the insurer. It is
the following matters does not vitiate the
sufficient that his nondisclosure misled the
entire contract, but merely exonerates the
insurer in forming his estimates of the risks of
insurer from a loss resulting from the risk
the proposed policy or in making inquiries.
concealed:
[Sunlife v. Sps. Bacani (1995]
(a) The national character of the insured;
(b) The liability of the thing insured to
Where matters of opinion or judgment are
capture and detention;
called for, answers made in good faith and
(c) The liability to seizure from breach of
without intent to deceive will not avoid the
foreign laws of trade;
policy even though they are untrue. Reason:
(d) The want of necessary documents; and
The insurer cannot simply rely on those
(e) The use of false and simulated papers
statements. He must make further inquiry
(Section 112).
[Philamcare Health Systems v. CA (2002)]
A.4. CONCEALMENT IN MARINE AND
A.6. MATTERS WHICH MUST BE
ORDINARY PRIVATE INSURANCE
DISCLOSED EVEN IN THE ABSENCE OF
DISTINGUISHED
INQUIRY
Marine Ordinary
insurance insurance
Sec. 28. Each party to a contract of insurance
Required disclosure
must communicate to the other, in good faith,
Exact and whole Substantial truth all facts within his knowledge which are
truth material to the contract and as to which he
Effect of concealment makes no warranty, and which the other has
not the means of ascertaining.
Concealment of the Any kind of
matters specified in concealment will
Sec. 112 will not make the insurer Note: If the applicant is aware of the existence
entirely avoid the not liable. of some circumstance which he knows would
contract but will influence the insurer in acting upon his

80
UP LAW BOC INSURANCE CODE
application, good faith requires him to disclose
that circumstance, though unasked. [Vance
(1951)]
The fact of being a mongoloid is a material
fact that needs to be disclosed (Great Pacific
Life v. CA (1979)).
Mere possibility of previous hypertension is not
enough to establish concealment (Great Pacific
Life (1999)).
A.7. MATTERS WHICH NEED NOT BE
DISCLOSED
(1) Matters already known to the insurer
[Section 30(a)];
(2) Matters which each party are bound to
know [Section 30(b) and Section 32];
(3) Matters of which the insurer waives
communication [Section 30(c) and Section
33];
(4) Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material
[Section 30(d)];
(5) Matters which relate to a risk excepted in
the policy, and which are not otherwise
material [Section 30(e)];
(6) Information of the nature or amount of the
interest of one insured unless if inquired
upon by the insurer, except if required by
Section 51 [Section 34]
(7) Matters of opinion [Section 35]
Sec. 32. Each party to a contract of insurance is
bound to know all the general causes which
are open to his inquiry, equally with that of the
other, and which may affect the political or
material perils contemplated; and all general
usages of trade.
81
MERCANTILE LAW
B. MISREPRESENTATION/OMISSIONS
Sec. 41. A representation may be altered or
withdrawn before the insurance is effected but
not afterwards.
Sec. 42. A representation must be presumed to
refer to the date on which the contract goes
into effect.
Sec. 44. A representation is to be deemed false
when the facts fail to correspond with its
assertions or stipulations.
Sec. 45. If a representation is false in a
material point, whether affirmative or
promissory, the injured party is entitled to
rescind the contract from the time when the
representation becomes false.
Representations are factual statements made
by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter into the
insurance contract.
There is false representation if the matter is
true at the time it was made/represented but
false at the time the contract takes effect
(Section 44). Corollarily, there is no false
representation if the matter is true at the time
the contract takes effect although false at the
time it was made/represented.
B.1. KINDS OF REPRESENTATIONS
(1) Affirmative, which refers to any allegation
as to the existence or non-existence of a
fact when the contract begins.
(2) Promissory, which is 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 [Section 39]. A promissory
UP LAW BOC INSURANCE CODE
representation is substantially a condition
or warranty [De Leon (2010)].
(3) Oral or written [Section 36].
Requisites:
(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.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on the
ground of misrepresentation [Section 45].
B.2. TEST OF MATERIALITY
Sec. 46. The materiality of a representation is
determined by the same rules as the
materiality of a concealment.
B.3. EFFECTS
General rule: The injured party is entitled to
rescind from the time when the representation
becomes false [Section 45].
Exceptions:
(1) Incontestability clause;
(2) Misrepresentation after contract takes
effect;
(3) Waiver, made by acceptance of insurer of
premium payments despite knowledge of
the ground for rescission [Section 45];
(4) A representation of the expectation, belief,
opinion, or judgment of the insured,
although false, and even if material to the
risk [Philamcare Health Systems, Inc. v. CA
(2002)];
(5) Representation by insured based on
information obtained from third persons
(not his agent), provided the insured:
82
MERCANTILE LAW
(a) Has no personal knowledge of the
facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does so
on the information of others.
(6) A misrepresentation as to age does not
constitute a ground for rescission. If the
age of the insured was considered in
determining the premium and the benefits
under the policy and the age is misstated,
the amount payable for the policy shall be
as if the policy was purchased at the
correct age [Carale, 2014].
A representation cannot qualify an express
provision or an express warranty of insurance
(Section 40) because a representation is not
part of the contract but only a collateral
inducement to it. However, it may qualify as an
implied warranty.
It is sufficient that the representation is
substantially or materially true, and in case of
promissory representation, it is sufficient that it
is substantially complied with [Carale, 2014].
There is fraud and misrepresentation when
another person takes the place of the insured
in the medical examination (Eguaras v. Great
Eastern (1916)).
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on
the policy leads to the conclusion that the
insured is beyond the age covered and yet
insurer continued to accept payment and had
issued the policy. Insurer is deemed estopped
(Edillon v. Manila Bankers Life (1982)).
Despite not answering the questions and
keeping blank certain questions in the
application regarding ailments he has suffered,
when the insured signed the pension plan
application, he adopted it as his ownt he
written representations and declarations
UP LAW BOC INSURANCE CODE MERCANTILE LAW

embodied in it. Therefore, it is clear from these contained in the contract or properly
representations that he concealed his chronic incorporated constitute warranties [Carale,
heart ailment and diabetes. [Florendo v. Philam 2014].
Plans (2012)].
A warranty may also be made by the insurer.
Concealment Misrepresentation
Who may commit Sec. 68. A warranty may relate to the past, the
present, the future, or to all of these.
May be committed Committed only by
by either insured or insured.
insurer Sec. 69. No particular form of words is
necessary to create a warranty.
Act involved
Passive form Active form
C.1. KINDS OF WARRANTIES
Insured withholds Insured makes (1) Express warranty, which is an agreement
information of erroneous contained in the policy or clearly
material facts from statements of facts incorporated therein as part thereof
the insurer; he with the intent of relating to the person or thing insured or to
maintains silence inducing the insurer the risk as a fact [Sec. 71];
when he ought to to enter into the (2) Implied warranty, which is deemed
speak insurance contract included in the contract although not
Materiality expressly mentioned (e.g., implied
warranty of seaworthiness of the vessel in
Determined by the same rules
marine insurance and implied warranty not
Effect to alter the circumstances of the thing
Same effects on the part of the insured; insured);
insurer has right to rescind (3) Affirmative warranty, which asserts the
existence of a fact or condition at the time
Injured party is entitled to rescind a
it is made;
contract of insurance on ground of
(4) Promissory warranty or executory warranty,
concealment or false representation,
which is one where the insured stipulates
whether intentional or not.
that certain facts or conditions pertaining
to the risk shall exist or that certain things
C. BREACH OF WARRANTIES with reference thereto shall be done or
Warranty is a statement or promise by the omitted. It is in the nature of a condition
insured set forth in the policy itself or subsequent [Sections 72 and 73].
incorporated in it by proper reference, the
untruth or nonfulfillment of which in any C.2. EFFECT
respect and without reference to whether the
insurer was in fact prejudiced by such untruth C.2.A. MATERIAL WARRANTY
or non-fulfillment, renders the policy voidable
Sec. 74. The violation of a material warranty, or
by the insurer [Vance (1951)].
other material provision of the policy, on the
part of either the insured or insurer, entitles the
Statements or promises agreed upon by both
other to rescind.
parties to the insurance contract which are

83
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Breach of a material warranty may either be: Warranty Representation

(1) Without fraud, in which case, the insurer
Nature
will be exonerated from the time it occurs.
If made during the inception, it will prevent Part of the contract Mere collateral
the policy from taking effect [Section 76]. inducement
(2) With fraud, in which case, the policy is Form
avoided ab initio.
Written on the May be written in
policy, actually or by the policy or may be
Exceptions:
reference oral
(1) Loss occurs before the time of performance
of the warranty [Section 73]; Materiality
(2) The performance becomes unlawful Presumed material Must be proved to
[Section 73]; be material
(3) The performance becomes impossible
Compliance
[Section 73];
(4) Waiver or estoppel. Must be strictly Requires only
complied with substantial truth
and compliance
C.2.B. IMMATERIAL WARRANTY Applicability of incontestability clause
General rule: Breach of an immaterial provision
Does not apply Applies
does not avoid the policy [Section 75].

Exception: Breach of an immaterial provision

avoids the policy when the parties stipulate
that violation of a particular provision, though
VII. CLAIMS SETTLEMENT
immaterial, shall avoid the policy. In effect, the AND SUBROGATION
parties converted the immaterial provision into
a material one [Sundiang and Aquino (2013)]. A. CONCEPT OF LOSS
Loss in insurance law embraces injury or
A condition in the policy which requires insured
damage [Bonifacio Bros. v. Mora (1967)]
to disclose to the insurer of any insurance that,
if violated by the insured, would ipso facto
Requisites: Recovery upon a loss requires that:
avoid the contract [Pioneer v. Yap (1974)].
(1) The insured must have insurable interest in
the subject matter;
Insurer is barred by waiver (or estoppel) to
(2) The interest is covered by the policy;
claim violation of the so-called hydrants
(3) There be a loss; and
warranty when, despite knowing fully that only
(4) The loss must be one for which the insurer
2 fire hydrants existed (out of the 11 hydrants
is liable;
required), it still issued the insurance policies
(5) Notice and proof of loss must be given if
and received the premiums [Qua Chee Gan v.
policy is fire insurance or when the same is
Law Union (1955)].
stipulated in the policy.

84
UP LAW BOC INSURANCE CODE MERCANTILE LAW

A.1. CAUSES OF LOSS which permanently

(1) Remote cause is an event preceding deprives the insured
another in a causal chain, but separated of its possession in
from it by other events; whole or in part
(2) Proximate cause is that cause, which, in (Section 87)
natural and continuous sequence,
unbroken by any efficient intervening cause,
B. NOTICE AND PROOF OF LOSS
produces the injury, and without which the
result would not have occurred [Vda. De
B.1. NOTICE OF LOSS
Bataclan v. Medina (1957)].
This refers to the formal notice given the
(3) Immediate cause is the cause, not the
insurer by the insured or claimant under a
proximate cause, which immediately
policy of the occurrence of the loss insured
precedes the loss.
against.
A.2. LIABILITY FOR LOSS B.1.A. PURPOSE
Its purpose is to apprise the insurance
Loss for which the Loss for which the company so that it may make proper
insurer is liable insurer is not liable investigation and take such action as may be
Loss the proximate Loss by insureds necessary to protect its interest.
cause of which is the willful act In fire insurance, an insurer is exonerated, if
peril insured against notice thereof be not given to him by an
[Section 86] insured, or some person entitled to the benefit
of the insurance, without unnecessary delay
Loss the immediate Loss due to
[Section 90].
cause of which is the connivance of the
peril insured against insured [Section 89]
In other types of insurance, failure to give
except where the
notice will not exonerate the insurer, unless
proximate cause is
there is a stipulation in the policy requiring the
an excepted peril
insured to do so.
Loss through Loss where the
negligence of excepted peril is the However, it has been held that formal notice of
insured except proximate cause loss is not necessary if insurer has actual notice
where there was of loss.
gross negligence
amounting to willful B.1.B. FORM
acts In the absence of any stipulation in the policy,
Loss caused by notice may be given orally or in writing.
efforts to rescue the
thing from peril The notice of loss may be in the form of an
insured against if, informal or provisional claim containing a
during the course of minimum of information as distinguished from
the rescue, the thing a formal claim which contains the full details of
is exposed to a peril the loss, computations of the amounts claimed,
not insured against, and supporting evidence, together with a

85
UP LAW BOC INSURANCE CODE
demand or request for payment [De Leon
(2010)].
B.2. PROOF OF LOSS
It is the formal evidence given to the insurance
company by the insured or claimant, under a
policy, of: the occurrence of the loss, the
particulars thereof, and the data necessary to
enable the company to determine its liability
and the amount.
B.2.A. PURPOSE
Its purpose is to give the insurer information by
which he may determine the extent of his
liability but also; to afford him a means of
detecting any fraud that may have been
practiced upon him, and to operate as a check
upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
orally or in writing.
The insured is not bound to give such proof as
would be necessary in a court of justice; but it
is sufficient for him to give the best evidence
which he has in his power at the time [Section
91].
B.2.B. RULES FOR RECOVERY
General rule: Timely compliance with the
notice and proof of loss is a condition precedent
to the right to recover if the policy is fire
86
MERCANTILE LAW
insurance, or when the same is stipulated in
the policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may
be waived when such defects, which
the insured might remedy, are not
specified, without unnecessary delay,
to him as ground of objection by the
insurer [Section 92];
(b) Delay in presentation to an insurer of
notice or proof of loss is waived if
caused by any act of his, or if he omits
to take objection promptly and
specifically upon that ground;
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice of
loss.
C. GUIDELINES ON CLAIMS
SETTLEMENT
Claims settlement is the indemnification of the
loss 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
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the
interest of the insured.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Claims Life insurance Non-life insurance

Maturity Either: (1) Upon happening of event insured
(a) Upon death of the person insured; against; and
(b) Upon his surviving a specific (2) Event must occur within the
period; or period specified in policy,
(c) Otherwise contingently on the otherwise insurer has no liability
continuance or cessation of life
[Section 180]
Delivery General rule: The proceeds should be (1) Within 30 days after:
of proceeds delivered immediately upon maturity (a) Proof of loss is received by
of policy. insurer; and
(b) Ascertainment of loss or
Exceptions: damage is made either by
1. If payable in installments or as an agreement between the
annuity, when such installments insured and insurer or by
or annuities become due; arbitration
2. If maturity is upon death, within 60 (2) If ascertainment is not made
days after presentation of claim within 60 days after such receipt
and filing of proof of death of by insurer of proof of loss, then
insured. loss or damage shall be paid
within 90 days after such receipt.
Effect of refusal 1. This entitles the beneficiary to collect interest on the proceeds of policy for
or failure to pay the duration of the delay at rate of twice the ceiling prescribed by the
claim within monetary board (unless refusal to pay is based on ground that claim is
time prescribed fraudulent)
2. In case damages are awarded, this includes attorneys fees and other
expenses incurred due to delay (plus the interest)

In case of litigation, it is the duty of the

policies, nor shall any such company engage in
Commissioner or the Court to determine
unfair claim settlement practices.
whether the claim has been unreasonably
Any of the following acts by an insurance
denied or withheld.
company, if committed without just cause and
Failure to pay any such claim within the time
performed with such frequency as to indicate a
prescribed shall be considered prima facie
general business practice, shall constitute
evidence of unreasonable delay in payment.
unfair claim settlement practices:
Knowingly misrepresenting to claimants
C.1. UNFAIR CLAIMS SETTLEMENT; pertinent facts or policy provisions relating to
SANCTIONS coverage at issue;
Failing to acknowledge with reasonable
Sec. 247. No insurance company doing promptness pertinent communications with
business in the Philippines shall refuse, respect to claims arising under its policies;
without just cause, to pay or settle claims Failing to adopt and implement reasonable
arising under coverages provided by its standards for the prompt investigation of

87
UP LAW BOC INSURANCE CODE MERCANTILE LAW

In motor vehicle insurance, action prescribes in

claims arising under its policies;
one year.
Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
The cause of action accrues from the rejection of
claims submitted in which liability has become
the claim of the insured and not from the time of
reasonably clear; or
loss. A stipulation stating that the prescriptive
Compelling policyholders to institute suits to
period for filing an action is one year from the
recover amounts due under its policies by
happening of loss is void. In such cases, since
offering without justifiable reason substantially
the stipulation is void and it is upon a written
less than the amounts ultimately recovered in
contract, the time limit is ten years from the
suits brought by them.
time the cause of action accrues.
Evidence as to numbers and types of valid and
Prescription is essential for the prompt
justifiable complaints to the Commissioner
settlement of claims as it demands for suits to
against an insurance company, and the
be brought while the evidence as to the origin
Commissioners complaint experience with
and cause of the loss or destruction has not yet
other insurance companies writing similar lines
disappeared.
of insurance shall be admissible in evidence in
an administrative or judicial proceeding for the
purpose of determining whether unfair claim
C.3. SUBROGATION
settlement practices have been committed.
Subrogation is a process of legal substitution.
If it is found, after notice and an opportunity to
The insurer, after paying the amount covered by
be heard, that an insurance company has
the insurance policy, steps into the shoes of the
violated this section, each instance of
insured and avails himself of the latter's rights
noncompliance may be treated as a separate
that exist against the wrongdoer at the time of
violation and shall be considered sufficient
loss.
cause for the suspension or revocation of the
companys certificate of authority
The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
The following grounds are sufficient cause for have paid to the insured.
the suspension or revocation of the insurers
certificate of authority [Sec. 247(c)]. The Right of Subrogation stems from Art. 2207
of the Civil Code.
C.2. PRESCRIPTION OF ACTION
In the absence of an express stipulation in the Note: Subrogation applies only to property
policy, it being based on a written contract, the insurance and non-life insurance.
action prescribes in ten years [Article 1144, Civil
Code].
C.3.A. RIGHTS TRANSFERRED
However, the parties may validly agree on a The subrogee-insurer cannot acquire any claim,
shorter period provided it is not less than one security, or remedy the subrogor did not have
year from the time the cause of action accrues (or a greater claim than the original insured). In
[Section 63]. other words, a subrogee cannot succeed to a
right not possessed by the subrogor. A
subrogee can recover only if the insured likewise

88
UP LAW BOC INSURANCE CODE
could have recovered. [Sulpicio Lines, Inc. v. First
Lepanto-Taisho Ins. Corp. (2005); Lorenzo
Shipping Corp. v. Chubb and Sons, Inc. (2004)]
The insured can no longer recover from the
offended party what was paid to him by the
insurer but he can recover any deficiency if the
damages suffered are more than what was paid.
The deficiency is not covered by the right of
subrogation.
The insurer must present the policy as evidence
to determine the extent of its coverage. [Wallen
Phil. Shipping v. Prudential Guarantee (2003)]
C.3.B. WHEN THERE IS NO RIGHT OF
SUBROGATION
(1) Where the insured by his own act releases
the wrongdoer or third party liable for the
loss or damage;
(2) Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insureds claim for loss;
(3) Where the insurer pays the insured for a loss
or risk not covered by the policy [Pan
Malayan Ins. Co. v. CA (1997)];
(4) In life insurance;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2010)].
The right of subrogation is not dependent upon,
nor does it grow out of, any privity of contract or
upon written assignment of claim. It accrues
simply upon payment of the insurance claim by
the insurer [Pan Malayan Ins. Co v. CA (1990)].
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 v. CA (1987)].
89
MERCANTILE LAW
VIII. INSURANCE
COMMISSIONER
A. JURISDICTION AND
ADJUDICATORY POWERS
The Insurance Commissioner has the power to
adjudicate disputes relating to an insurance
companys liability to an insured under a policy.
A complaint or claim filed with such official is
considered an action or suit the filing of
which would have the effect of tolling the
suspending the running of the prescriptive
period.
(1) Concurrent jurisdiction (with regular civil
courts) over cases where any single claim
does not exceed P5,000,000 involving
liability arising from:
(a) Insurance contract;
(b) Contract of suretyship;
(c) Reinsurance contract;
(d) Membership certificate issued by
members of mutual benefit association
[Section 439];
(2) Primary and exclusive jurisdiction over
claims for benefits involving pre-need plans
where the amount of benefits does not
exceed P100,000 [Sec. 55, Pre-Need Code].
For the purpose of proceeding under its
adjudicatory powers under the Insurance Code,
the Commissioner or any officer thereof
designated by him, is empowered to administer
oaths and affirmation, subpoena witnesses,
compel their attendance, take evidence and
require the production of any books, papers,
documents or contracts or other records which
are relevant or material to the inquiry [Section
439].
Note: However, the Insurance Commission has
no jurisdiction to decide the legality of a
contract of agency entered into between an
UP LAW BOC INSURANCE CODE
insurance company and its agent. The same is
not covered by the term doing or transacting
insurance business under Section 2, neither is it
covered by Section 439, which grants the
Commissioner adjudicatory powers [Sundiang
and Aquino (2013)].
B. REVOCATION OF CERTIFICATE OF
AUTHORITY
The Certificate of Authority issued to the
domestic or foreign company by the
Commission may be revoked or suspended by
the Insurance Commissioner for any of the
following grounds:
(1) The company is in an unsound condition;
(2) That it has failed to comply with the
provisions of law or regulations obligatory
upon it;
(3) That its condition or method of business is
such as to render its proceedings hazardous
to the public or its policyholders;
(4) That its paid-up capital stock, in the case of
a domestic stock corporation, or its
available cash assets, in the case of a
domestic mutual company, or its security
deposits, in the case of a foreign company,
is impaired or deficient;
(5) That the margin of solvency required of
such company is deficient.
[Section 254]
The Commissioner is authorized to suspend or
revoke all certificates of authority granted to
90
MERCANTILE LAW
such insurance company, its officers and agents,
and no new business shall thereafter be done by
such company or for such company by its
agents in the Philippines while such suspension,
revocation, or disability continues or until its
authority to do business is restored by the
Commissioner.
Before restoring such authority, the
Commissioner shall require the company
concerned to submit to him a business plan
showing the companys estimated receipts and
disbursements, as well as the basis therefor, for
the next succeeding three years.
C. LIQUIDATION OF INSURANCE
COMPANY
If the company is determined by the
Commissioner to be insolvent or cannot resume
business, he shall, if public interest requires,
order its liquidation [Section 256].
This should be distinguished from a situation
where a conservator is appointed when the
Commissioner finds that a company is in a state
of continuing inability or unwillingness to
maintain a condition of solvency or liquidity
adequate to protect the policyholders and
creditors. The conservator will take charge of
the management of the insurance company
[Section 255].
UP LAW BOC TRANSPORTATION LAWS MERCANTILE LAW

MERCANTILE LAW
TRANSPORTATION LAWS

91
UP LAW BOC TRANSPORATION LAWS
I. Common Carriers
A. CONCEPT
Common carriers are:
(1) Persons, corporations, firms or associations;
(2) Engaged in the business of carrying or
transporting;
(3) Passengers or goods or both;
(4) By land, water, or air;
(5) For compensation;
(6) Offering their services to the public [Art.
1732].
Carriers are persons or corporations who
undertake to transport or convey goods,
property or persons, from one place to another,
gratuitously or for hire, and are classified as:
(1) Private or special carriers, who transport or
undertake to transport in a particular
instance for hire or reward [Agbayani,
Commercial Laws of the Philippines (1987)];
and
(2) Common or public carriers, defined in Art.
1732.
Art. 1732 makes no distinction:
(1) 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 [Fabre v. CA
(1996)];
(2) 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 [Loadstar Shipping Co.,
Inc. v. CA (1999)];
(3) 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 [De Guzman v. CA (1988)].
92
MERCANTILE LAW
One engaged in the business of transporting
petroleum products from refineries via pipeline
is a common carrier. It is engaged in the
business of transporting or carrying goods, i.e.,
petroleum products, for hire as a public
employment. It undertakes to carry for all
persons indifferently, that is, to all persons who
choose to employ its services, and transports
the goods by land and for compensation. The
fact that it has a limited clientele does not
exclude it from the definition of a common
carrier [First Phil. Industrial v. CA (1998)].
The true test for a common carrier is not the
quantity or extent of the business actually
transacted, or the number and character of the
conveyances used in the activity, but whether
the undertaking is a part of the activity engaged
in by the carrier that he has held out to the
general public as his business or occupation. If
the undertaking is a single transaction, not a
part of the general business or occupation
engaged in, as advertised and held out to the
general public, the individual or the entity
rendering such service is a private, not a
common, carrier. The question must be
determined by the character of the business
actually carried on by the carrier, not by any
secret intention or mental reservation it may
entertain or assert when charged with the
duties and obligations that the law imposes
[Teodoro v. Nicolas (2012)].
A common carrier need not have fixed and
publicly known routes. Neither does it have to
maintain terminals or issue tickets [Asia
Lighterage and Shipping v. CA (2003)].
UP LAW BOC TRANSPORATION LAWS MERCANTILE LAW

Common carrier Private carrier It is not necessary that the carrier be issued a
certificate of public convenience [Loadstar
Availability
Shipping Co., Inc. v. CA (1999)].
Holds himself out in Agrees in some With respect to the issuance of a certificate of
common, that is, to special case with public convenience, the issue of kabit system
all persons who some private arises. It is an arrangement whereby a person
choose to employ individual to carry who has been granted a certificate of
him, as ready to for hire convenience allows another person who owns
carry for hire motor vehicles to operate under such franchise
Binding effect for a fee [Lita Enterprises, Inc. v. IAC (1984)].
The kabit system is invariably recognized as
Bound to carry all Not bound to carry
being contrary to public policy and therefore
who offer and for any reason, such
void and inexistent under Art. 1409. Thus, for
tender reasonable goods as it is
the safety of passengers and the public, the
compensation for accustomed to
registered owner of the vehicle is not allowed to
carrying them carry, unless it
prove that another person has become the
enters into a special
owner so that he may be thereby relieved of
agreement to do so
responsibility [Lim v. CA (2002)].
Diligence required
Extraordinary Ordinary diligence Ratio: One of the primary factors considered in
diligence the granting of a certificate of public
convenience for the business of public
Governing law
transportation is the financial capacity of the
Civil Code; Code of Law on obligations holder of the license, so that liabilities arising
Commerce and and contracts from accidents may be duly compensated. The
special laws, if not kabit system renders illusory such purpose and,
regulated by the worse, may still be availed of by the grantee to
Civil Code (Art. escape civil liability caused by a negligent use of
1766); law of the a vehicle owned by another and operated under
country to which the his license. If a registered owner is allowed to
goods are to be escape liability by proving who the supposed
transported, if owner of the vehicle is, it would be easy for him
regarding liability to transfer the subject vehicle to another who
for loss, destruction, possesses no property with which to respond
or deterioration of financially for the damage done [Dizon v.
goods Octavio (1955)].
Regulation
However, one who has availed of the kabit
A public service, Not subject to
system is not precluded from filing for damages
therefore subject to regulation as a
against another who caused the injury, as the
provisions common carrier
policy against the kabit system will not be
governing common
defeated by giving such person standing to sue.
carriers and public
[Lim v CA (2002))]
utilities.

93
UP LAW BOC TRANSPORATION LAWS
B. DILIGENCE REQUIRED
B.1. STANDARD OF DILIGENCE
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence,
according to all the circumstances of each case:
(1) In the vigilance over the goods; and
(2) For the safety of the passengers transported
by them [Art. 1733].
Extraordinary diligence in the vigilance over the
goods is expressed in Art.s 1734, 1735, and 1745,
Nos. 5, 6, and 7, while the extraordinary
diligence for the safety of the passengers is
further set forth in Art.s 1755 and 1756.
Ratio: As stated in Art. 1733, extraordinary
diligence is required because of the nature of
the business of common carriers and for
reasons of public policy.
Extraordinary diligence:
(1) Requires rendering service with the greatest
skill and utmost foresight [Agbayani (1987)];
(2) Requires carrying 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];
(3) Does not require common carriers to
exercise all the care, skill, and diligence of
which the human mind can conceive, nor
such as will free the transportation of
passengers from all possible perils.
Note: A common carrier is not an insurer of the
safety of its passengers and is not bound
absolutely and at all events to carry them safely
and without injury [Yobido v. CA (1997)].
B.2. PRESUMPTION OF NEGLIGENCE
The mere proof of delivery of goods in good
order to a carrier, and of their arrival at the
place of destination in bad order, makes out
94
MERCANTILE LAW
a prima facie case against the carrier, so that if
no explanation is given as to how the injury
occurred, the carrier must be held responsible.
It is incumbent upon the carrier to prove that
the loss was due to accident or some other
circumstance inconsistent with its
liability [Ynchausti Steamship v. Dexter and
Unson (1920)].
In case of death of or injuries to passengers,
common carriers are presumed to have been at
fault or to have acted negligently, unless they
prove that they observed extraordinary
diligence as prescribed in Arts 1733 and 1755
(Art. 1756).
C. LIABILITIES
The obligation of the common carrier consists in
the transportation of passengers or goods or
both [Art. 1732].
The liabilities of a common carrier arises from a
contract of carriage. Thus, the cause of action,
when there is failure on its part to exert
extraordinary diligence according to all
circumstances, is for breach of contract [Isaac v.
A.L. Ammen (1957)].
In what follows, these liabilities in case of
breach, both with respect to vigilance over the
goods and safety of the passengers transported,
will be discussed.
UP LAW BOC TRANSPORATION LAWS
II. Vigilance over Goods
A. LIABILITY, IN GENERAL
The law of the country to which the goods are to
be transported shall govern the liability of the
common carrier for their loss, destruction or
deterioration [Art. 1753].
Under Philippine law, the liability of the
common carrier with respect to vigilance over
goods, in general, are as follows:
(1) Common carriers are responsible for the
loss, destruction, or deterioration of the
goods [Art. 1734]. In fact, they are liable
even in those cases where the cause of the
loss or damage is unknown [Agbayani
(1987)].
(2) Moreover, if the goods are lost, destroyed,
or deteriorated, common carriers are
presumed to have been at fault or to have
acted negligently [Art. 1735].
B. EXEMPTING CAUSES
Common carriers are not responsible for the
loss, destruction, or deterioration of the goods if
the same is due to any of the following causes
only:
(1) Flood, storm, earthquake, lightning, or
other natural disaster or calamity;
(2) Act of the public enemy in war, whether
international or civil;
(3) Act of omission of the shipper or owner of
the goods;
(4) The character of the goods or defects in the
packing or in the containers;
(5) Order or act of competent public authority
[Art. 1734].
In all other cases of loss, destruction, or
deterioration, the common carrier is presumed
to have been at fault or to have acted
negligently, unless they prove that they
observed extraordinary diligence [Art. 1735].
The analysis, therefore, is two-pronged:
95
MERCANTILE LAW
(1) Whether or not the cause of the loss,
destruction, or deterioration is included
under Art. 1734;
(2) If not, whether or not the common carrier
exercised extraordinary diligence.
Thus, in De Guzman v. CA (1988), it was held
that hijacking, not being included in Art. 1734,
must be dealt with under the provisions of Art.
1735, and thus, the common carrier is presumed
to have been at fault or negligent.
B.1. NATURAL DISASTER OR CALAMITY
Requisites:
(1) The natural disaster must have been the
proximate and only cause of the loss;
(2) The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the occurrence of
the flood, storm or natural disaster [Art.
1739];
(3) The common carrier must not have
negligently incurred delay [Art. 1740];
In order that a common carrier may be absolved
from liability where the loss, destruction or
deterioration of the goods is due to a natural
disaster or calamity, it must be shown that such
natural disaster or calamity was the proximate
and only cause of the loss; there must be an
entire exclusion of human agency from the
cause of the injury of the loss [Philippine
American General Insurance Co., Inc. v. MGG
Marine Services, Inc. (2002)].
Moreover, even in cases where a natural
disaster is the proximate and only cause of the
loss, a common carrier is still required to
exercise due diligence to prevent or minimize
loss before, during and after the occurrence of
the natural disaster, for it to be exempt from
liability under the law for the loss of the goods
[Art. 1739].
Fire may not be considered a natural disaster or
calamity. This must be so as it arises almost
invariably from some act of man or by human
UP LAW BOC TRANSPORATION LAWS
means. It does not fall within the category of an
act of God unless caused by lightning or by
other natural disaster or calamity. It may even
be caused by the actual fault or privity of the
carrier [Eastern Shipping Lines v. IAC (1987)].
B.2. ACT OF PUBLIC ENEMY
Requisites:
(1) The act of the public enemy was committed
either in an international or civil war [Art.
1734];
(2) The act of the public enemy must have been
the proximate and only cause;
(3) The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the act of the public
enemy causing the loss, destruction or
deterioration of the goods [Art. 1739].
B.3. ACT OR OMISSION OF SHIPPER OR
OWNER
The act or omission of the shipper must have
been the proximate and only cause of the loss,
destruction, or deterioration of the goods.
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause being the
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Art. 1741].
B.4. CHARACTER OF THE GOODS
Requisites:
(1) The loss, destruction, or deterioration of the
goods is due to the character of the goods
or defects in the packing or in the containers
[Art. 1739];
(2) The common carrier must exercise due
diligence to forestall or lessen the loss [Art.
1741].
If the fact of improper packing is known to the
carrier or its servants or apparent upon ordinary
observation, but it accepts the goods
96
MERCANTILE LAW
notwithstanding such condition, it is not
relieved of liability for loss or injury resulting
therefrom [Southern Lines v. CA (1962)].
B.5. ORDER OF COMPETENT AUTHORITY
Requisites:
(1) There must be an order or act of competent
public authority through which the goods
are seized or destroyed [Art. 1734];
(2) The said public authority must have had the
power to issue the order [Art. 1743].
The intervention of the municipal officials was
not of a character that would render impossible
the fulfillment by the carrier of the obligation. A
carrier is not duty bound to obey an illegal order
(of a mayor) to dump into the sea the scrap iron.
There is absence of sufficient proof that the
issuance of the order was attended with such
force or intimidation as to completely
overpower the will of the carriers employees
[Ganzon v. CA (1988)).
B.6. FORCE MAJEURE
Force majeure in general, has also been
invoked as an exempting cause based on Art.
1174, which states that no person shall be
responsible for a fortuitous event which could
not be foreseen, or which, though foreseen, was
inevitable.
A fortuitous event has the following
characteristics:
(1) The cause of the unforeseen and
unexpected occurrence, or the failure of the
debtor to comply with his obligations, must
be independent of human will;
(2) It must be impossible to foresee the event
which constitutes the caso fortuito, or if it
can be foreseen, it must be impossible to
avoid;
(3) The occurrence must be such as to render it
impossible for the debtor to fulfill his
obligation in a normal manner; and
UP LAW BOC TRANSPORATION LAWS
(4) The obligor must be free from any
participation in the aggravation of the injury
resulting to the creditor.
There must be an entire exclusion of human
agency from the cause of injury or loss.
Moreover, a common carrier may not be
absolved from liability in case of force majeure
or fortuitous event alone. The common carrier
must still prove that it was not negligent in
causing the death or injury resulting from an
accident [Yobido v. CA (1997)].
Loss of a ship and of its cargo, in a wreck due to
accident or force majeure must, as a general
rule, fall upon their respective owners, except in
cases where the wrecking or stranding of the
vessel occurred through the malice,
carelessness, or lack of skill on the part of the
captain or because the vessel put to sea is
insufficiently repaired and prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the merchandise
was due to accident and force majeure and not
to fraud, fault, or negligence on the part of the
captain or owner of the ship [Tan Chiong Sian v.
Inchausti (1912)].
C. CONTRIBUTORY NEGLIGENCE
The liability of the common carrier shall be
equitably reduced when the loss, destruction, or
deterioration of the goods when:
(1) The negligence of the common carrier was
the proximate cause thereof; and
(2) The shipper or owner merely contributed to
such loss, destruction, or deterioration [Art.
1741].
97
MERCANTILE LAW
D. DURATION OF LIABILITY FOR
GOODS
A contract of transportation is consensual in
nature; therefore it is perfected upon the
meeting of the minds of the parties [Art. 1305].
However, the responsibility to exercise
extraordinary diligence begins from the time the
goods are unconditionally placed in the
possession of and received by the carrier for
transportation [Art. 1736].
The carriers responsibility terminates in any of
the following cases:
(1) When the goods are delivered actually or
constructively by the carrier to the
consignee or to the person who has a right
to receive them [Art. 1736];
(2) When the goods are temporarily unloaded
or stored in transit by reason of the exercise
of the shipper or owner of his right of
stoppage in transitu;
(3) When the consignee has been advised of
the arrival of the goods at the place of
destination and has had reasonable
opportunity to remove them or dispose of
them from the warehouse of the carrier at
the place of destination [Art. 1738].
D.1. DELIVERY OF GOODS TO COMMON
CARRIERS
Under Art. 1736, delivery means unconditionally
placing the goods in the possession of the
carrier and the carrier receiving them for
transportation.
Thus, if the common carrier received the
goods not for transportation but only for
safekeeping, then the duty of extraordinary
diligence has not yet started.
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common carrier
at will.
UP LAW BOC TRANSPORATION LAWS
The liability of the carrier as common carrier
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. Even where
it is provided by statute that liability
commences with the issuance of the bill of
lading actual delivery and acceptance are
sufficient to bind the carrier [Cia. Maritima v. Ins.
Co. of North America (1964)].
D.2. ACTUAL OR CONSTRUCTIVE
DELIVERY
The extraordinary responsibility of the common
carrier ends when, subject to Art. 1738, the
goods are delivered actually or constructively by
the carrier to:
(1) The consignee; or
(2) The person who has a right to receive them
(Art. 1736), such as agents, brokers, and the
like.
Art. 1738 provides that the extraordinary liability
of the common carrier continues to be operative
even during the time the goods are stored in a
warehouse of the carrier at the place of
destination, until the consignee has:
(1) Been advised of the arrival of the goods;
and
(2) Had reasonable opportunity thereafter to
remove them or otherwise dispose of them.
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 as
contemplated in Art. 1736 because in such case
the goods are still in the hands of the
government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier
considering that the goods still have to go
through the inspection of the customs
authorities before they are actually turned over
to the consignee. This is a situation where it
98
MERCANTILE LAW
may be said that the carrier loses control of the
goods because of a custom regulation and it is
unfair that it be made responsible for what may
happen during the interregnum [Lu Do v.
Binamira (1957)].
D.3. TEMPORARY UNLOADING OR
STORAGE
The common carriers duty to observe
extraordinary diligence over the goods remains
in full force and effect even when they are
temporarily unloaded or stored in transit, unless
the shipper or owner has made use of the right
of stoppage in transitu [Art. 1737].
General rule: Extraordinary diligence over the
goods remains even when the goods are
temporarily unloaded or stored in transit.
Exception: The duty to observe such diligence
ceases when shipper or owner made use of the
right of stoppage in transitu.
Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
and resumes possession of them constructively
while they are in the course of transit from him
to the purchaser, and not yet actually delivered
to the latter [Agbayani (1987)].
Basis: Under Art. 1530, when the buyer of the
goods becomes insolvent, the unpaid seller who
has parted with the possession of the goods at
any time while they are in transit, may resume
the possession of the goods as he would have
had if he had never parted with the possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence, only
ordinary diligence is required [Agbayani (1987)].
UP LAW BOC TRANSPORATION LAWS
E. STIPULATION FOR LIMITATION OF
LIABILITY
There are two possible stipulations limiting the
liability of the common carrier:
(1) Stipulation limiting the common carriers
liability as to the diligence required; and
(2) Stipulation limiting the common carriers
liability as to the amount of liability.
An agreement limiting the common carriers
liability for delay on account of strikes or riots is
also valid [Art. 1748].
E.1. AS TO DILIGENCE REQUIRED
A stipulation between the common carrier and
the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration
of the goods to a degree less than extraordinary
diligence shall be valid, provided it be:
1. In writing, signed by the shipper or
owner;
2. Supported by a valuable consideration
other than the service rendered by the
common carrier; and
3. Reasonable, just and not contrary to
public policy [Art. 1744].
E.2. AS TO AMOUNT OF LIABILITY
A stipulation that the common carriers liability
is limited to the value of the goods appearing in
the bill of lading, unless the shipper or owner
declares a greater value, is binding [Art. 1749].
A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction
or deterioration of the goods is valid if:
(1) It is reasonable and just under the
circumstances; and
(2) It has been fairly and freely agreed upon
[Art. 1750].
The fact that the conditions are printed at the
back of the ticket stub in letters so small that
they are hard to read would not warrant the
presumption that the [shipper] was aware of
99
MERCANTILE LAW
those conditions such that he had fairly and
freely agreed to those conditions [Shewaram v.
PAL (1966)].
While a passenger may not have signed the
plane ticket, he is nevertheless bound by the
provision thereof; such provisions have been
held to be part of the contract of carriage and
valid and binding upon the passenger
regardless of the latters lack of knowledge or
assent to the regulation. It is what is known as a
contract of adhesion wherein one party imposes
a ready-made form of contract on the other. The
one who adheres to the contract is in reality free
to reject it entirely. A contract limiting liability
upon an agreed valuation does not offend
against the policy of the law forbidding one
from contracting against his own negligence
[Ong Yiu v. CA (1979)].
E.3. EFFECT OF STIPULATIONS
The effect of these stipulations is subject to the
following provisions:
(1) An agreement limiting the common carriers
liability may be annulled by the shipper or
owner if the common carrier refused to carry
the goods unless the former agreed to such
stipulation [Art. 1746].
(2) 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]. The limitation may be
availed of if the delay or change of route
was due to a just cause.
(3) The fact that the common carrier has no
competitor along the line or route, or a part
thereof, to which the contract refers shall be
taken into consideration on the question of
whether or not a stipulation limiting the
common carriers liability is reasonable, just
and in consonance with public policy [Art.
1751].
UP LAW BOC TRANSPORATION LAWS
(4) Even when there is an agreement limiting
the liability of the common carrier in the
vigilance over the goods, the common
carrier is disputably presumed to have been
negligent in case of their loss, destruction or
deterioration [Art. 1752].
E.4. VOID STIPULATIONS
Any of the following or similar stipulations shall
be considered unreasonable, unjust and
contrary to public policy:
(1) That the goods are transported at the risk of
the owner or shipper;
(2) That the common carrier will not be liable
for any loss, destruction, or deterioration of
the goods;
(3) That the common carrier need not observe
any diligence in the custody of the goods;
(4) That the common carrier shall exercise a
degree of diligence less than that of a good
father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
(5) That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
(6) 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;
(7) 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].
The following stipulations are also void:
(1) Stipulation exempting the common carrier
from any and all liability for loss or damage
occasioned by its own negligence;
(2) Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray (1921)].
100
MERCANTILE LAW
F. LIABILITY FOR BAGGAGE OF
PASSENGERS
Baggage are things that a passenger will bring
with him consistent with a temporary absence
from where he lives. Passengers baggage must
have a direct relationship with the passenger
who is traveling.
For instance, a balikbayan box or suitcase is
passengers baggage. However, 10,000 cans of
corned beef is not considered as passenger
baggage. They are considered as goods. They
are not part of the contract of carriage [of
passenger]. A separate contract of carriage [or
bill of lading] must be entered into in order to
transport them. These goods will then be
transported whether or not a person is
physically traveling with them [Agbayani (1987)].
There are two kinds of passengers baggage,
which are governed differently:
(1) Passenger baggage in the custody of the
passenger (or carry-on luggage); and
(2) Passenger baggage not in the custody of the
passenger (or checked-in luggage).
The liability is greater for baggage that is in the
custody of the carrier, or checked-in baggage,
as compared to those in the possession of the
passenger.
F.1. CHECKED-IN BAGGAGE
The provisions of Art.s 1733-1753 shall apply to
passengers baggage which is not in his
personal custody or in that of his employee [Art.
1754].
In other words, the rules governing the
responsibility of a common carrier in the
transportation of goods just discussed apply.
Thus, extraordinary diligence is required.
UP LAW BOC TRANSPORATION LAWS
F.2. BAGGAGE IN POSSESSION OF
PASSENGERS
As to baggage other than checked-in baggage,
they are governed by Arts 1998, and 2000-2003,
concerning the responsibility of hotel-keepers
[Art. 1754].
Art. 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
that of their employees, while being transported,
are regarded as necessary deposits. The
common carriers are responsible as depositaries,
provided that:
(1) Notice was given to them, or to their
employees, of the effects brought by the
passengers; and
(2) The passengers take the precautions which
the common carrier advised relative to the
care and vigilance of their baggage.
In case of loss or injury to the baggage of
passengers in their personal custody, or in that
of their employees, while being transported, the
carrier is liable if the loss or injury is caused by:
(1) His servants;
(2) His employees;
(3) Strangers [Art. 2000]; or
(4) A thief or robber done without the use of
arms or irresistible force [Art. 2001].
The carrier is not liable if loss or injury is caused
by:
(1) Force majeure [Art. 2000);
(2) Theft or robbery with the use of arms or
irresistible force [Art. 2001);
(3) The acts of the passenger, his family,
servants, or visitors;
(4) The character of the baggage [Art. 2002).
The following provisions also figure in
determining the liability of the common carrier:
(1) The fact that passengers are constrained to
rely on the vigilance of the common carrier
shall be considered in determining the
degree of care required of him [Art. 2000).
101
MERCANTILE LAW
(2) 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.
(3) Any stipulation whereby the responsibility
of the common carrier as set forth in Articles
1998-2001 is suppressed or diminished
shall be void [Art. 2003].
III. Safety of Passengers
A. LIABILITY, IN GENERAL
Under Philippine law, the liability of the
common carrier with respect to the safety of
passengers, in general, are as follows:
(1) 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].
(2) In case of death of or injuries to passengers,
common carriers are presumed to have
been at fault or to have acted negligently,
unless they prove that they observed
extraordinary diligence [Art. 1756].
B. VOID STIPULATIONS
General rule: The responsibility of a common
carrier for the safety of passengers cannot be
dispensed with or lessened by stipulation by the
posting of notices, by statements on tickets, or
otherwise [Art. 1757].
Exception: When a passenger is carried
gratuitously, a stipulation limiting the common
carriers liability for negligence is valid.
Exception to the exception: Even when a
passenger is carried gratuitously, a stipulation
limiting the common carriers liability for willful
acts or gross negligence is invalid.
UP LAW BOC TRANSPORATION LAWS
The reduction of fare does not justify any
limitation of the common carriers liability [Art.
1758].
C. DURATION OF LIABILITY
As in the contract of carriage for goods, the
perfection of the contract of carriage of
passengers does not necessarily coincide with
the commencement of the duty of extraordinary
diligence. It may occur at the same time or later.
Based on jurisprudence, the duty that the
carrier of passengers owes to its patrons
extends to persons boarding the cars as well as
those alighting therefrom [Del Prado v. Manila
Railroad (1929)].
This is also reflected in Art. 17, Warsaw
Convention, which applies to international air
carriage. It provides that the liability of a
common carrier for injury to the passenger lasts
from embarkation to disembarkation, including
the period when the passenger is on board the
aircraft.
In maritime commerce, Art. 698, Code of
Commerce relates to the period of the voyage:
(1) In case a voyage already begun should be
interrupted:
(a) The passengers shall be obliged to pay
the fare in proportion to the distance
covered; and
(b) If the interruption is due to a fortuitous
event, without right to recover for losses
and damages; if caused by the captain
exclusively, with a right to indemnity.
(2) If the interruption should be caused by the
disability of the vessel, and a passenger
should agree to await the repairs:
(a) He may not be required to pay any
increased price of passage; but
(b) His living expenses during the stay shall
be for his own account.
(3) In case of delay in the departure of the
vessel, the passengers have:
102
MERCANTILE LAW
(a) The right to remain on board;
(b) If the delay is not due to a fortuitous
event or force majeure, with the right to
be furnished with food for the account
of the vessel;
(c) If the delay should exceed ten days:
(i) Passengers requesting the same
shall be entitled to the return of the
fare; and
(ii) If it is due exclusively to the fault of
the captain or ship agent, they may
also demand indemnity for losses
and damages.
A vessel exclusively devoted to the
transportation of passengers must take them
directly to the port or ports of destination, no
matter what the number of passengers may be,
making all the stops indicated in its itinerary.
C.1. WAITING FOR CARRIER OR
BOARDING OF CARRIER
As to the commencement of the duty of the
common carrier, in Del Prado v. Manila Railroad
(1929), it was held that the duty extends to
persons boarding the cars as well as those
alighting therefrom.
Thus, it is the duty of common carriers of
passengers to stop their conveyances at 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 [Dangwa Transportation v. CA
(1991)).
In this connection, however, a person
boarding a moving car must be taken to assume
the risk of injury from boarding the car under
the conditions open to his view, but he cannot
fairly be held to assume the risk that the
motorman, having the situation in view, will
increase the peril by accelerating the speed of
the car before he is planted safely on the
platform [Del Prado v. Manila Railroad (1929)].
UP LAW BOC TRANSPORATION LAWS
C.2. ARRIVAL AT DESTINATION
As to the termination of the duty of the
common carrier, it has been held that 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 a reasonable opportunity to leave the
carriers premises. What is a reasonable time or
a reasonable delay within this rule is to be
determined from all the circumstances:
(1) A person who, after alighting from a train,
walks along the station platform is
considered still a passenger;
(2) A passenger, who has alighted at his
destination and is proceeding by the usual
way to leave the companys premises, but
before actually doing so is halted by the
report that his brother, a fellow passenger,
has been shot, and he in good faith and
without intent of engaging in the difficulty,
returns to relieve his brother, is deemed
reasonably and necessarily delayed and
thus continues to be a passenger entitled as
such to the protection of the railroad and
company and its agents [La Mallorca v. CA
(1966)].
The reasonableness of time should be made to
depend on the attending circumstances of the
case, such as the kind of common carrier, the
nature of its business, the customs of the place,
and so forth, and therefore precludes a
consideration of the time element per se
without taking into account such other factors.
The primary factor to be considered is the
existence of a reasonable cause as will justify
the presence of the victim on or near the
petitioners vessel.
In the case of a shipper, the passengers of
vessels are allotted a longer period of time to
disembark from the ship than other common
carriers such as a passenger bus, since such
103
MERCANTILE LAW
vessels are capable of accommodating a bigger
volume of both passenger and baggage as
compared to the capacity of a regular
commuter bus. Consequently, a ship passenger
will need at least an hour as is the usual
practice, to disembark from the vessel and
claim his baggage whereas a bus passenger can
easily get off the bus and retrieve his luggage in
a very short period of time [Aboitiz Shipping v.
CA (1989)].
The relation of carrier and passenger continues
until the latter has been landed at the port of
destination and has left the carriers
premises. Hence, the carrier necessarily would
still have to exercise extraordinary diligence in
safeguarding the comfort, convenience and
safety of its stranded passengers until they have
reached their final destination [PAL v. CA
(1993)].
D. LIABILITY FOR ACTS OF OTHERS
D.1. 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.
This liability does not cease even 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].
Also, this liability cannot be eliminated or
limited by stipulation, by the posting of notices,
by statements on the tickets or otherwise [Art.
1760].
Ratio: The servant is clothed with delegated
authority and charged with the duty to execute
the carriers undertaking to carry the passenger
safely [Agbayani (1987)]. Also, the defense of
diligence in the selection and supervision of
employees does not obtain because the liability
UP LAW BOC TRANSPORATION LAWS
is not based on quasi-delict, but on culpa
contractual. However, there must be a
reasonable connection between the act and the
contract of carriage.
Note: The employee must be on duty at the time
of the act.
It is enough that the assault happens within the
course of the employees duty. It is no defense
for the carrier that the act was done in excess of
authority or in disobedience of the carriers
orders. The carriers liability here is absolute in
the sense that it practically secures the
passengers from assaults committed by its own
employees.
Accordingly, it is the carriers strict obligation to
select its drivers and similar employees with
due regard not only to their technical
competence and physical ability, but also, no
less important, to their total personality,
including their patterns of behavior, moral
fibers, and social attitude [Maranan v. Perez
(1967)].
D.2. OTHER PASSENGERS AND
STRANGERS
A common carrier is responsible for injuries
suffered by a passenger on account of the
willful acts or negligence of other passengers or
of strangers, if the common carriers employees
through the exercise of the diligence of a good
father of a family could have prevented or
stopped the act or omission [Art. 1763].
Note: The law speaks of injuries suffered by the
passenger but not death. However, there
appears to be no reason why the common
carrier should not be held liable under such
circumstances. The word injuries should be
interpreted to include death [Agbayani (1987)].
Under Art. 1763, a tort committed by a stranger
which causes injury to a passenger does not
104
MERCANTILE LAW
accord the latter a cause of action against the
carrier. The negligence for which a common
carrier is held responsible is the negligent
omission by the carriers employees to prevent
the tort from being committed when the same
could have been foreseen and prevented by
them. Further, when the violation of the
contract is due to the willful acts of strangers,
as in the instant case, the degree of care
essential to be exercised by the common carrier
for the protection of its passenger is only that of
a good father of a family [Pilapil v. CA (1989)].
D.3. MANUFACTURERS OF EQUIPMENT
While the carrier is not an insurer of the safety
of the passengers, it should nevertheless be
held answerable for the flaws of its equipment,
if such flaws were discoverable. The rationale
for the common carriers liability for
manufacturing defects is the fact that the
passenger has neither choice nor control over
the carrier in the selection and use of the
equipment and appliances in use by the carrier.
Having no privity whatever with the
manufacturer or vendor of the defective
equipment, the passenger has no remedy
against him [Necesito v. Paras (1958)].
E. CONTRIBUTORY NEGLIGENCE
The passenger must observe the diligence of a
good father of a family to avoid injury to himself
[Art. 1762].
The contributory negligence of the passenger
does not bar recovery of damages for his death
or injuries, if the proximate cause thereof is the
negligence of the common carrier, but the
amount of damages shall be equitably reduced
[Art. 1762].
It is negligence per se for a passenger on a
railroad to voluntarily or inadvertently protrude
his arm, hand, elbow, or any other part of his
body through the window of a moving car
beyond the outer edge of the window or outer
UP LAW BOC TRANSPORATION LAWS
surface of the car, so as to come in contact with
objects or obstacles near the track; no recovery
can be had for an injury which but for such
negligence would not have been sustained
[Isaac v. A. L. Ammen Transportation (1975)]. In
this case, the negligence of the passenger was
not contributory, but was the proximate cause
of the injury.
F. EXTENT OF LIABILITY FOR
DAMAGES
Damages recoverable from common carriers,
both in cases of carriage of passengers and
goods, shall be awarded in accordance with
Title XVIII concerning Damages.
Art. 2206, on liability, in case of death, for loss
of earning capacity, support, and moral
damages for mental anguish, shall also apply to
the death of a passenger caused by the breach
of contract by a common carrier [Art. 1764].
Thus, the damages recoverable are:
(1) Actual or compensatory damages;
(2) Moral damages;
(3) Exemplary damages;
(4) Nominal, temperate, and liquidated
damages;
(5) Attorneys fees.
F.1. ACTUAL OR COMPENSATORY
DAMAGES
Actual or compensatory damages refer to
adequate compensation for such pecuniary loss
suffered as duly proved (Art. 2199].
Actual damages are recoverable, including, in
case of death, liability for:
(1) Loss of earning capacity; and
(2) Support for a period not exceeding five
years [Art. 2206].
Under Art. 2201, the liability for damages
include:
105
MERCANTILE LAW
(1) In case the common carrier acted in good
faith:
(a) The natural and probable consequence
of the breach of the obligation; and
(b) Those which the parties have foreseen
or could have reasonably foreseen at
the time the obligation was constituted;
(2) In case of fraud, bad faith, malice or wanton
attitude, all damages which may be
reasonably attributed to the non-
performance of the obligation.
In the absence of a showing that common
carriers attention was called to the special
circumstances requiring prompt delivery of a
passengers luggage, the common carrier
cannot be held liable for the cancellation of
passengers contracts [for exhibition of films] as
it could not have foreseen such an eventuality
when it accepted the luggage for transit [Pan-
Am World Airways v. IAC (1988)].
F.2. MORAL DAMAGES
Moral damages, though incapable of pecuniary
computation, if they are the proximate result of
the common carriers wrongful act or omission,
may be recovered [Art. 2217].
In cases of breach of contract of carriage, moral
damages may be recovered where:
(1) The common carrier acted fraudulently;
(2) The common carrier acted in bad faith [Art.
2220];
(3) Death of a passenger resulted [Art. 2206].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
with some motive of self-interest or will or for
ulterior purpose [Air France v. Carrascoso
(1966)].
When it comes to contracts of common carriage,
inattention and lack of care on the part of the
carrier resulting in the failure of the passenger
to be accommodated in the class contracted for
UP LAW BOC TRANSPORATION LAWS
amounts to bad faith or fraud which entitles the
passenger to the award of moral damages in
accordance with Art. 2220 [Ortigas v. Lufthansa
(1975)].
Willful and deliberate overbooking on the part
of the airline carrier constitutes bad faith. Under
Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
does not exceed ten percent, is not considered
as deliberate and therefore does not amount to
bad faith [United Airlines v. CA (2001)].
F.3. EXEMPLARY DAMAGES
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted in
wanton, fraudulent, reckless, oppressive, or
malevolent manner [Art. 2232].
F.4. NOMINAL, TEMPERATE, AND
LIQUIDATED DAMAGES
Nominal damages are adjudicated in order that
a right of the plaintiff, which has been violated
by the defendant, may be vindicated or
recognized, not for the purpose of indemnifying
the plaintiff for any loss suffered by him [Art.
2221]. It may be awarded in case of breach of
contract of carriage and in every case where any
property right has been invaded [Art. 2222].
Temperate or moderate damages, which are
more than nominal but less than compensatory
damages, may be recovered when some
pecuniary loss has been suffered but its amount
cannot, from the nature of the case, be proved
with certainty [Art. 2224].
Liquidated damages are those damages agreed
upon by the parties to a contract, to be paid in
case of breach thereof [Art. 2226].
F.5. ATTORNEYS FEES
Under Art. 2208, as applicable to a contract of
carriage, attorneys fees and expenses of
106
MERCANTILE LAW
litigation may be recovered in the following
cases:
(1) When exemplary damages are awarded;
(2) When the common carriers act or omission
has compelled the plaintiff to litigate with
third persons or to incur expenses to protect
his interest;
(3) Where the common carrier acted in gross
and evident bad faith in refusing to satisfy
the plaintiffs valid, just and demandable
claim;
(4) In any other case where the court deems it
just and equitable that attorneys fees and
expenses of litigation should be recovered.
IV. Bill of Lading
A. DEFINITION
Bill of lading a written acknowledgement,
signed by the master of a vessel or other
authorized agent of the carrier, that he has
received the described goods from the shipper,
to be transported on the expressed terms to the
described place of destination, and to be
delivered there to the designated consignee or
parties [70 Am. Jur. 2d 924].
It is not, however, indispensable for the creation
of a contract of carriage. [Cia. Maritima v. Ins.
Co. of North America (1964)].
In the absence of a bill of lading, disputes shall
be determined by the legal proofs which the
parties may present in support of their
respective claims, according to the general
provisions established in the Code of Commerce
for commercial contracts [Art. 354, Code of
Commerce].
The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino, Essentials of Transportation &
Public Utilities Law (2011)].
UP LAW BOC TRANSPORATION LAWS
In the absence of fraud, concealment, or
improper conduct, it is presumed that the
stipulations of the bill are known to the shipper,
and he is generally bound by his acceptance
whether he reads the bill or not [Magellan Mfg.
Marketing Corp. v. CA (1991)].
B. THREE-FOLD CHARACTER
(1) Receipt as to the quantity and description of
the goods shipped;
(2) Contract to transport and deliver the goods
to the consignee or other person therein
designated, on the terms specified in such
instrument; and
(3) Document of title, which makes it a symbol
of the goods.
C. DELIVERY OF GOODS
The goods should be delivered to the consignee
or any other person to whom the bill of lading
was validly transferred or negotiated.
C.1. PERIOD OF DELIVERY
Delivery should be made within the period fixed
for the delivery of the goods as stipulated in the
bill of lading [Art. 370, Code of Commerce].
In case of failure to deliver, the carrier shall pay
the indemnity agreed upon in the bill of lading,
neither the shipper nor consignee being entitled
to anything else.
Should there be no period previously fixed, the
carrier is bound to forward the goods in the first
shipment of the same or similar merchandise
which he may make to the point of delivery.
Should he not do so, he shall be liable for
damages cause by the delay [Art. 358, Code of
Commerce].
If no indemnity is fixed and there is delay, the
carrier shall be liable for the damages which
may have been caused by the delay [Art. 370,
Code of Commerce].
107
MERCANTILE LAW
C.2. DELIVERY WITHOUT SURRENDER OF
BILL OF LADING
After the contract has been complied with, the
bill of lading which the carrier has issued shall
be returned to him, and by virtue of the
exchange of this title with the thing transported,
the respective obligations and actions shall be
considered cancelled, unless in the same act
the claim which the parties may wish to reserve
be reduced to writing, exception being made of
the provisions of Art. 366, on period for filing
claims [Art. 353, 2nd par., Code of Commerce].
If, in case of loss or for any other reason
whatsoever, the consignee cannot return, upon
receiving the merchandise, the bill of lading
subscribed by the carrier, he shall give said
carrier a receipt for the goods delivered. This
receipt produces the same effects as the return
of the bill of lading [Art. 353, 3rd par., Code of
Commerce].
C.3. REFUSAL OF CONSIGNEE TO TAKE
DELIVERY
The consignee may refuse to take delivery in the
following cases:
(1) If only part of the goods transported should
be delivered, when he proves that he cannot
make use thereof without the others [Art.
363, Code of Commerce];
(2) When the goods are rendered useless for
purposes of sale or consumption in the use
for which they are properly destined, in
which case the consignee may demand
payment of the goods at current market
prices [Art. 365, Code of Commerce];
(3) In case part of the goods is in good
condition and separation is possible, the
consignee may refuse to receive only the
damaged goods [Art. 365, Code of
Commerce];
(4) Where the delay is through the fault of the
carrier [Art. 371, Code of Commerce].
UP LAW BOC TRANSPORATION LAWS
In case of dispute as to the condition of the
goods, the same shall be examined by experts
appointed by the parties, and the third one, in
case of disagreement, appointed by the judicial
authority.
If the persons interested should not agree with
the report, said judicial authority shall order the
deposits of the merchandise in a safe
warehouse, and the parties interested shall
make use of their rights in the proper manner.
[Art. 367, Code of Commerce].
D. PERIOD FOR FILING CLAIMS
Pursuant to Art. 366, Code of Commerce, a
claim, on account of damage found upon
opening the packages, must be made against
the carrier:
(1) Within 24 hours, if the indications of the
damage cannot be ascertained from the
exterior of the packages (i.e., latent
damage); or
(2) At the time of receipt, if the indications
damage can be so ascertained (i.e., patent
damage).
But the Court in Aboitiz v Insurance Company of
North America [GR No. 168402, 6 Aug 2008]
made a pro hac vice ruling, in that even if the
notice was given more than 24 hrs after the
receipt of the goods, the notice requirement
was held nevertheless to have been complied
with, due to the peculiar circumstances:
Provisions specifying a time to give notice of
damage to common carriers are ordinarily to be
given a reasonable and practical, rather than a
strict construction. We give due consideration to
the fact that the final destination of the
damaged cargo was a school institution where
authorities are bound by rules and regulations
governing their actions. Understandably, when
the goods were delivered, the necessary
clearance had to be made before the package
was opened. Upon opening and discovery of the
damaged condition of the goods, a report to
this effect had to pass through the proper
108
MERCANTILE LAW
channels before it could be finalized and
endorsed by the institution to the claims
department of the shipping company.
No claim whatsoever shall be admitted against
the carrier with regard to the condition in which
the goods transported were delivered:
(1) After the periods mentioned have elapsed;
or
(2) After the transportation charges have been
paid.
The periods mentioned commence upon
delivery of cargo to the consignee at the place
of destination.
Thus, Art. 366 is limited to cases of claims for
damage to goods actually turned over by the
carrier and received by the consignee. It does
not apply to misdelivery of goods.
Failure to file a claim bars recovery (Aquino
(2011)].
Ratio: The rule protects the carrier by affording
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily
investigated so as to safeguard itself from false
and fraudulent claims [UCPB General Ins. Co.,
Inc. v. Aboitiz Shipping (2009)].
However, the periods prescribed may be subject
to modification by agreement of the parties.
[PHILAMGEN v. Sweet Lines, Inc. (1992)].
E. PERIOD FOR FILING ACTIONS
E.1. OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING
The general rules under the Civil Code on
extinctive prescription apply. Thus, action for
damages must be filed in court:
(1) Within 6 years, if a bill of lading was not
issued [Art. 1145, Civil Code].
(2) Within 10 years, if a bill of lading was issued
[Art. 1146, Civil Code].
UP LAW BOC TRANSPORATION LAWS
E.2. INTERNATIONAL CARRIAGE OF
GOODS BY SEA
Suit must be brought within one year:
(1) After delivery of the goods; or
(2) From the date when the goods should have
been delivered.
Otherwise, the carrier and the ship shall be
discharged from all liability in respect of loss or
damage.
The absence of notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or
the date when the goods should have been
delivered [Section 3(6), Carriage of Goods by
Sea Act].
The period for filing the claim is one year, in
accordance with the Carriage of Goods by Sea
Act. The Carriage of Goods by Sea Act, as
adopted and embodied in Commonwealth Act
No. 65, applies because it is a special law, and,
as such, prevails over the general provisions of
the Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA
(YEAR)].
V. Maritime Commerce
A. CHARTER PARTIES
Charter party a contract by virtue of which the
owner or agent of a vessel binds himself to
transport merchandise or persons for a fixed
price.
It is a contract by which the owner or agent of
the vessel leases for a certain price the whole or
portion of a vessel for the transportation of the
goods or persons from one port to another.
It is 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
109
MERCANTILE LAW
conveyance of goods, in consideration of the
payment of freight [Caltex v. Sulpicio Lines
(1999)].
Towage is not a charter party. It is a contract for
the hire of services by which a vessel is engaged
to tow another vessel from one port to another
for consideration.
In modern maritime law and usage, there are
three distinguishable types of charter parties:
(1) Bareboat or demise charter;
(2) Time charter; and
(3) Voyage or trip charter [Litonjua Shipping,
Inc. v. National Seamen Board (1989)].
Note: Both time and voyage charters are said to
be contracts of affreightment, where a common
or public carrier is not converted into a private
carrier.
Contract of affreightment one in which the
owner of the vessel leases part or all of its space
to haul goods for others. It is a contract for
special service to be rendered by the owner of
the vessel and under such contract the general
owner retains the possession, command and
navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in
return for his payment of the charter hire
[Puromines, Inc. v. CA (1993)].
A.1. BAREBOAT OR DEMISE CHARTER
In a bareboat or demise charter, the ship owner
leases to the charterer the whole vessel,
transferring to the latter the entire command,
possession and consequent control over the
vessels navigation, including the master and
the crew, who thereby become the charterers
servants [Aquino (2011)].
To create a demise, the owner of a vessel must
completely and exclusively relinquish
possession, command and navigation thereof to
the charterer, anything short of such a complete
UP LAW BOC TRANSPORATION LAWS
transfer is a contract of affreightment (time or
voyage charter party) or not a charter party at
all.
Although a charter party may transform a
common carrier into a private one, the same,
however, is not true in a contract of
affreightment on account of the distinctions
between a contract of affreightment and a
demise or bareboat charter [Puromines, Inc. v.
CA (1993)].
Note: In a bareboat or demise charter, the
common carrier is converted to private carrier.
The charterer, to whom the owner of the vessel
relinquishes, completely and exclusively, the
possession, command and navigation of the
vessel, by virtue of a demise charter, is
considered the owner pro hac vice. He mans
and equips the vessel and assumes all
responsibility for navigation, management and
operation. He thus acts as the owner of the
vessel in all important aspects during the
duration of the charter [Puromines, Inc. v. CA
(1993)].
A.2. TIME CHARTER
Time charter a contract for the use of a vessel
for a specified period of time or for the duration
of one or more specified voyages.
In this case, the owner of a time-chartered
vessel retains possession and control through
the master and crew, who remain his employees.
What the time charterer acquires is the right to
utilize the carrying capacity and facilities of the
vessel and to designate her destinations during
the term of the charter [Litonjua Shipping Co.,
Inc. v. National Seamen Board (1989)].
A.3. VOYAGE OR TRIP CHARTER
In a voyage charter, the vessel is leased for a
single or particular voyage. The master and
crew remain the employ of the owner of the
110
MERCANTILE LAW
vessel [Litonjua Shipping Co., Inc. v. National
Seamen Board (1989)].
B. LIABILITY OF SHIP OWNERS AND
SHIPPING AGENTS
The ship owner has possession, control and
management of the vessel and the consequent
right to direct her navigation and receive freight
earned and paid, while his possession
continues; he is the person who is primarily
liable for damages sustained in the operation of
the vessel, based on the provisions of the Code
of Commerce.
A ship agent is the person entrusted with the
provisioning of a vessel, or who represents her
in the port in which she happens to be [Art. 595,
Code of Commerce].
The ship agent, even though he is not the owner,
is liable in every way to the creditor for losses
and damages, without prejudice to his right
against the owner, the vessel and its equipment
and freight [Aquino (2011)].
B.1. LIABILITY FOR ACTS OF CAPTAIN
(1) The owner of a vessel and the agent shall be
civilly liable for the acts of the captain and
for the obligations contracted by the latter
to repair, equip, and provision the vessel
[Art. 586, Code of Commerce].
(2) The captain shall be liable to the agent, and
the latter to third persons:
(a) For all the damages suffered by the
vessel and his cargo by reason of want
of skill or negligence on his part;
(b) For all the thefts committed by the crew,
reserving his right of action against the
guilty parties;
(c) For the losses, fines, and confiscations
imposed on account of violation of the
laws and regulations of customs, police,
health, and navigation;
(d) For the losses and damages caused by
mutinies on board the vessel, or by
UP LAW BOC TRANSPORATION LAWS
reason of faults committed by the crew
in the service and defense of the same,
if he does not prove that he made full
use of his authority to prevent or avoid
them;
(e) For those arising by reason of an undue
use of powers and non-fulfillment of the
obligations which are his;
(f) 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;
(g) For those arising by reason of his
voluntarily entering a port other than
that of his destination;
(h) For those arising by reason of non-
observance of the provisions contained
in the regulations on situation of lights
and maneuvers for the purpose of
preventing collisions [Art. 618].
(3) The agent shall also be civilly liable for the
indemnities in favor of third persons which
arise from the conduct of the captain in the
care of the goods which the vessel carried;
but he may exempt himself therefrom by
abandoning the vessel with all her
equipment and the freight he may have
earned during the voyage [Art. 587, Code of
Commerce].
Note: The owner or agent shall not be liable for
the obligations contracted by the captain if the
latter exceeds his powers and privileges.
However, if the amounts claimed were made
use of for the benefit of the vessel, the owner or
agent shall be liable [Art. 588, Code of
Commerce].
111
MERCANTILE LAW
B.2. DOCTRINE OF LIMITED LIABILITY
(HYPOTHECARY RULE)
STATEMENT OF THE RULE
The real and hypothecary nature of maritime
law simply means that the liability of the carrier
in connection with losses related to maritime
contracts is confined to the vessel, which is
hypothecated for such obligations or which
stands as the guaranty for their settlement.
It has its origin by reason of the conditions and
risks attending maritime trade in its earliest
years when such trade was replete with
innumerable and unknown hazards since
vessels had to go through largely uncharted
waters to ply their trade. It was designed to
offset such adverse conditions and to encourage
people and entities to venture into maritime
commerce despite the risks and the prohibitive
cost of shipbuilding.
Thus, the liability of the vessel owner and agent
arising from the operation of such vessel were
confined to the vessel itself, its equipment,
freight, and insurance, if any, which limitation
served to induce capitalists into effectively
wagering their resources against the
consideration of the large profits attainable in
the trade [Aboitiz Shipping Corp. v. General
Accident Fire and Life Assurance Corp. (1993)].
Thus, under the doctrine of abandonment:
(1) The agent shall be civilly liable for the
indemnities in favor of third persons which
arise from the conduct of the captain in the
care of the goods which the vessel carried,
but he may exempt himself therefrom by
abandoning the vessel with all her
equipment and the freight he may have
earned during the voyage [Art. 587, Code of
Commerce];
(2) The owners of a vessel shall be civilly liable
in the proportion of their contribution to the
common fund, for the results of the acts of
the captain, referred to in Art. 587. Each
UP LAW BOC TRANSPORATION LAWS MERCANTILE LAW

part owner may exempt himself from this C. ACCIDENTS AND DAMAGES IN
liability by the abandonment before a MARITIME COMMERCE
notary of the part of the vessel belonging to
C.1. AVERAGES
him [Art. 590, Code of Commerce].
The following shall be considered averages:
(3) In case of collision, the liability of the ship
(1) All extraordinary or accidental expenses
owner shall be understood as limited to the
incurred during the navigation for the
value of the vessel with all her
preservation of the vessel or cargo, or both;
appurtenances and all the freight earned
(2) All damages or deterioration the vessel may
during the voyage [Art. 837, Code of
suffer from the time she puts to sea from
Commerce].
the port of departure until she casts anchor
(4) If the vessel and her freight should be
in the port of destination, and those
totally lost, by reason of capture or wreck,
suffered by the merchandise from the time
all rights of the crew to demand any wages
it is loaded in the port of shipment until it is
whatsoever shall be extinguished, as well as
unloaded in the port of consignment [Art.
the agent for the recovery of the advances
806, Code of Commerce].
made [Art. 643, Code of Commerce].
There are two kinds of averages:
If the ship owner or agent may in any way be
(1) Particular or simple average; and
held civilly liable at all for injury to or death of
(2) Gross or general average.
passengers arising from the negligence of the
captain in cases of collisions or shipwrecks, his
I. SIMPLE AVERAGE
liability is merely co-extensive with his interest
Particular or simple averages shall include all
in the vessel such that a total loss thereof
damages and expenses caused to the vessel or
results in its extinction. This is based on the
cargo that did not inure to the common benefit
exclusively real and hypothecary nature of
and profit of all persons interested in the vessel
maritime law, which operates to limit such
and her cargo [Art. 809, Code of Commerce].
liability to the value of the vessel, or to the
insurance thereon, if any. [Yangco v. Laserna
The owner of the goods which gave rise to the
(1941)]
expense or suffered the damage shall bear this
average [Art. 810, Code of Commerce].
Exceptions:
(1) Claims under the Workmens Compensation
Act [Abueg v. San Diego];
II. GENERAL AVERAGE
(2) Expenses for repairing, provisioning and General or gross averages shall include all the
equipping the vessel; damages and expenses which are deliberately
(3) There is an actual finding of negligence on caused in order to save the vessel, her cargo, or
the part of the vessel owner or agent both at the same time, from a real and known
[Aboitiz Shipping v. General Accident Fire risk [Art. 811, Code of Commerce].
and Life Assurance Corp. (1993)];
(4) Vessel is insured, to the extent of the 1. REQUISITES
insurance proceeds [Vasquez v. CA (1985)]; (1) There must be a common danger. This
(5) There was no total loss; means, that both the ship and the cargo,
(6) Collision between two negligent vessels. after it has been loaded, are subject to the
same danger, whether during the voyage, or
in the port of loading or unloading, that the

112
UP LAW BOC TRANSPORATION LAWS
danger arises from the accidents of the sea,
dispositions of the authority, or faults of
men, provided that the circumstances
producing the peril should be ascertained
and imminent or may rationally be said to
be certain and imminent. This last
requirement excludes measures undertaken
against a distant peril;
(2) That for the common safety, part of the
vessel or of the cargo or both is sacrificed
deliberately;
(3) That from the expenses or damages caused
follows the successful saving of the vessel
and cargo;
(4) That the expenses or damages should have
been incurred or inflicted after taking
proper legal steps and authority
[Magsaysay, Inc. v. Agan [1955]].
The gross or general average shall be borne by
those who benefited from the sacrifice. These
include the ship owner and the owners of the
cargoes that were saved. Contribution may also
be imposed on the insurers of the vessel or
cargoes that were saved, as well as lenders on
bottomry or respondentia.
2. CASES OF GENERAL AVERAGE
(1) The goods or cash invested in the
redemption of the vessel or cargo captured
by enemies, privateers, or pirates, and the
provisions, wages, and expenses of the
vessel detained during the time the
arrangement or redemption is taking place;
(2) The goods jettisoned to lighten the vessel,
whether they belong to the vessel, to the
cargo, or to the crew, and the damage
suffered through said act by the goods kept;
(3) The cables and masts which are cut or
rendered useless, the anchors and the
chains which are abandoned in order to
save the cargo, the vessel, or both;
(4) The expenses of removing or transferring a
portion of the cargo in order to lighten the
vessel and place her in condition to enter a
113
MERCANTILE LAW
port or roadstead, and the damage
resulting therefrom to the goods removed
or transferred;
(5) The damage suffered by the goods of the
cargo through the opening made in the
vessel in order to drain her and prevent her
sinking;
(6) The expenses caused through floating a
vessel intentionally stranded for the
purpose of saving her;
(7) The damage caused to the vessel which it is
necessary to break open, scuttle, or smash
in order to save the cargo;
(8) The expenses of curing and maintaining the
members of the crew who may have been
wounded or crippled in defending or saving
the vessel;
(9) The wages of any member of the crew
detained as hostage by enemies, privateers,
or pirates, and the necessary expenses
which he may incur in his imprisonment,
until he is returned to the vessel or to his
domicile, should he prefer it;
(10) The wages and victuals of the crew of a
vessel chartered by the month during the
time it should be embargoed or detained by
force majeure or by order of the
Government, or in order to repair the
damage caused for the common good;
(11) The loss suffered in the value of the goods
sold at arrivals under stress in order to
repair the vessel because of gross average;
(12) The expenses of the liquidation of the
average [Art. 811, Code of Commerce];
(13) If in lightening a vessel on account of a
storm, in order to facilitate her entry into a
port or roadstead, part of her cargo should
be transferred to lighters or barges and be
lost, the owner of said part shall be entitled
to indemnity, as if the loss has originated
from a gross average [Art. 817, Code of
Commerce];
(14) If, as a necessary measure to extinguish a
fire in a port; roadstead; creek, or bay, it
should be decided to sink any vessel, this
UP LAW BOC TRANSPORATION LAWS
loss shall be considered gross average, to
which the vessels saved shall contribute.
3. PROCEDURE FOR RECOVERY
(1) Assembly and deliberation with the sailing
mate and other officers;
(2) Resolution of the captain adopted;
(3) Hearing of the persons interested. In case
an interested person should not be heard,
he shall not contribute to the gross average
[Art. 813, Code of Commerce];
(4) Resolution to be entered in the log book,
stating the motives and reasons therefore
as well as the votes and reason for
disagreement [Art. 814, Code of
Commerce];
(5) Minutes to be signed by all the persons
present or in urgent cases, the captain;
(6) Captain shall deliver one copy of the
minutes to the maritime judicial authority of
the first port he may make within 24 hours
[Art. 814, Code of Commerce];
(7) Captain shall ratify the minutes under oath
[Art. 814, Code of Commerce].
C.2. COLLISIONS
Collision an impact or sudden contact
between two moving vessels [Aquino (2011)].
Allision the striking of a moving vessel against
one that is stationary.
I. ZONES OF COLLISION
In all collisions between vessels at sea, there
exist three divisions or zones of time:
(1) The first division covers all the time up to
the moment when the risk of collision may
be said to have begun;
(2) The second division covers the time between
the moment when the risk of collision
begins and the moment when it has
become practically certain;
(3) The third zone covers the time between the
moment when the collision has become a
practical certainty and the moment of
114
MERCANTILE LAW
actual contact [A. Urrutia & Co. v. Baco
River Plantation Co. (1913)].
The steamers greater facility of maneuvering
over a sail vessel means it has the greater ability
to avoid collisions; so as a general rule, when
meeting a sailing vessel, whether close hauled
or with the wind free, the sail vessel has a right
to keep her course, and it is the duty of the
steamer to adopt precautions as will avoid the
sail vessel Subject to the general rules of
evidence in collision cases as to the burden of
proof, in the case of a collision between a steam
vessel and a sail vessel, the presumption is
against the steam vessel, and she must show
that she took the proper measures to avoid a
collision. [A. Urrutia & Co. v. Baco River
Plantation Co. [1913)].
When 2 power-driven vessels are meeting head
on, or nearly head on, so as to involve risk of
collision, each shall alter her course to
starboard (right side), so that each may pass on
the port (left) side of the other. [Smith Bell and
Co. v. CA (1991)].
Note: Liability in collision cases is negligence-
based. The person who caused the injury is both
civilly and criminally liable [Aquino (2011)].
II. SPECIFIC RULES
(1) When only one vessel is at fault, the owner
of the vessel at fault shall indemnify the
losses and damages suffered, after an
expert appraisal [Art. 826, Code of
Commerce];
(2) When both vessels are at fault, each shall
suffer its own damages, and both shall be
solidarily responsible for the losses and
damages occasioned to their cargoes [Art.
826, Code of Commerce];
(3) In case of inscrutable fault, that is, if it
cannot be decided which of the two vessels
was the cause of the collision, each shall
bear his own damage and both shall be
UP LAW BOC TRANSPORATION LAWS
jointly responsible for the losses and
damages suffered by their cargoes [Art. 828,
Code of Commerce];
(4) When it is due to a fortuitous event, each
vessel and its cargo shall bear its own
damages [Art. 830, Code of Commerce];
(5) When, by reason of fortuitous event, a vessel
properly anchored and moored collides with
another, the injury occasioned shall be
looked upon as particular average to the
vessel run into [Art. 832, Code of
Commerce];
(6) When a third vessel at fault, the owner of
the third vessel shall indemnify the losses
and damages caused, the captain thereof
being civilly liable to said owner [Art. 831,
Code of Commerce].
C.3. ARRIVAL UNDER STRESS
Arrival under stress is the arrival of a vessel at
the nearest and most convenient port instead of
the port of destination, if during the voyage the
vessel cannot continue the trip to the port of
destination.
It is lawful when the inability to continue voyage
is due to lack of provisions, well-founded fear of
seizure, privateers, pirates, or accidents of the
sea disabling it to navigate [Art. 819, Code of
Commerce].
It is unlawful when:
(1) The lack of provisions should arise from the
failure to take the necessary provisions for
the voyage, according to usage and custom,
or if they should have been rendered useless
or lost through bad stowage or negligence
in their care;
(2) The risk of enemies, privateers, or pirates
should not have been well known or
manifest, and based on positive and
justifiable facts;
(3) The injury to the vessel should have been
caused by reason of her not being repaired,
rigged, equipped, and arranged in a
115
MERCANTILE LAW
convenient manner for the voyage, or by
reason of some erroneous order of the
captain; or
(4) Malice, negligence, want of foresight, or
lack of skill on the part of the captain is the
reason for the act causing the damage [Art.
820, Code of Commerce].
C.4. SHIPWRECKS
Shipwreck denotes loss or wreck of a vessel at
sea as a consequence of running against
another vessel or thing at sea or on coast where
the vessel is rendered incapable of navigation.
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. [Art. 841, Code of Commerce].
C.5. SALVAGE
Salvage is defined as the service which one
person renders to the owner of a ship or goods,
by his own labor, preserving the goods or the
ship which the owner or those entrusted with
the care of them have either abandoned in
distress at sea, or are unable to protect and
secure.
It is founded on equity and is compensation for
actual services rendered.
Three elements are necessary to a valid salvage
claim:
(a) A marine peril;
(b) Service voluntarily rendered when not
required as an existing duty or from a
special contract;
(c) Success, in whole or in part, or that the
service rendered contributed to such
success [Erlanger & Galinger v. Swedish
East Asiatic Co. Ltd (1916)].
UP LAW BOC TRANSPORATION LAWS
D. CARRIAGE OF GOODS BY SEA ACT
(COGSA)
D.1. APPLICATION
COGSA [Commonwealth Act No. 65] is a special
law that governs all contracts of carriage of
goods by sea between or to and from the
Philippine ports.
Its application is according to the following
scheme:
(1) If the common carrier is coming to the
Philippines:
(a) First: Civil Code;
(b) Second: COGSA (in foreign trade);
(c) Third: Code of Commerce;
(2) If the private carrier is coming to the
Philippines:
(a) First: COGSA;
(b) Second: Code of Commerce;
(c) Third: Civil Code (excluding rules on
common carriers);
(3) If the private or common carrier is from the
Philippines to a foreign country, the law of
the foreign country applies [Art. 1753]
unless the parties make COGSA applicable.
Under Art. 1766, in all matters not regulated by
the Civil Code, the rights and obligations of
common carriers shall be governed by the Code
of Commerce and special laws. Thus, although
a special law, COGSA only applies when the
Civil Code has no provision dealing with the
matter.
D.2. NOTICE OF LOSS OR DAMAGES
Notice of claim and the general nature of the
loss or damage must be given in writing to the
carrier or his agent at the port of discharge
before or at the time of the removal of the
goods [Section 3(6), COGSA].
If damage is not patent or cannot be
ascertained from the package, the shipper
116
MERCANTILE LAW
should file the claim with the carrier within
three days from delivery.
Under Section 3(6), COGSA, a failure to file a
notice of claim within three days will not bar
recovery if it is nonetheless filed within one year.
This one-year prescriptive period also applies to
the shipper, the consignee, the insurer of the
goods or any legal holder of the bill of lading.
Inasmuch as the neither the Civil Code nor the
Code of Commerce states a specific prescriptive
period on the matter, the COGSA may be
applied [Belgian Overseas Chartering and
Shipping v. Philippine First Ins. Co. (2002)].
D.3. PERIOD OF PRESCRIPTION
The carrier and the ship shall be discharged
from all liability in respect of loss or damage
unless suit is brought within one year after
delivery of the goods or the date when the
goods should have been delivered.
The absence of a notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or
the date when the goods should have been
delivered [Section 3 (6)].
COGSA, as a special law, prevails over the
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA (1990)].
D.4. LIMITATION OF LIABILITY
Under Section 4(5], COGSA, the limit is set at a
maximum of $500 per package or customary
freight unit.
This is deemed incorporated in the bill of
lading even if not mention therein [Eastern
Shipping v. IAC (1987)].
The declaration made by the shipper stating an
amount bigger than $500 per package will
make the carrier liable for such bigger amount,
UP LAW BOC TRANSPORATION LAWS
but only if the amount so declared is the real
value of goods [Aquino (2011)].
The Civil Code does not limit the liability of the
common carrier to a fixed amount per package.
In all matters not regulated by the Civil Code,
the right and the obligations of common
carriers shall be governed by the Code of
Commerce and special laws. Thus, the COGSA,
which is suppletory to the provisions of the Civil
Code, supplements the latter by establishing a
statutory provision limiting the carriers liability
in the absence of a shippers declaration of a
higher value in the bill of lading. [Belgian
Overseas v. Philippine First Ins. Co. (2002)].
VI. The Warsaw Convention
A. APPLICABILITY
The Warsaw Convention applies to:
(1) All international carriage of persons,
baggage, or cargo performed by aircraft for
reward;
(2) Gratuitous carriage by aircraft performed by
an air transport undertaking [Art. 1(1),
Warsaw Convention].
International air carriage or international air
transport means transportation by air between
points of contact of two high contracting parties,
or those countries that have acceded to the
Warsaw Convention, wherein the place of
departure and the place of destination are
situated:
(1) Within the territories of two high
contracting parties, regardless of whether
or not there be a break in the transportation
or a transshipment; 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, mandate or authority of
another power, even though the power is
not a party to the Convention [Art. 1(2),
Warsaw Convention].
117
MERCANTILE LAW
A carriage to be performed by several successive
air carriers is deemed, for the purposes of the
Convention, 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 [Art. 1(3), Warsaw Convention].
The carrier is liable for damages for:
(1) Death or injury of a passenger if the
accident causing it took place:
(a) On board the aircraft;
(b) In the course of the operations of
embarking or disembarking; or
(c) When there was delay [Art. 17 and 19,
Warsaw Convention];
(2) Destruction, loss, or damage to any
baggage or goods that are checked in, if
damage occurred:
(a) During the transportation by air; or
(b) When there was delay [Section 18 and
19, Warsaw Convention];
(3) Delay in the transport by air of passengers,
baggage or goods.
The carriage by air contemplated comprises the
period in which the baggage or goods are in
charge of the carrier, whether in an airport or on
board an aircraft, or, in the case of a landing
outside an airport, in any place whatsoever [Art.
18, Warsaw Convention].
B. LIMITATION OF LIABILITY
With respect to the following limitations of
liability, Art. 23, Warsaw Convention provides
that any provision tending to relieve the carrier
of liability or to fix a lower limit than that which
is laid down shall be null and void, but the
nullity of any such provision does not involve the
nullity of the whole contract.
Also, under Art. 25, Warsaw Convention:
(1) The carrier shall not be entitled to avail
himself of the provisions which exclude or
limit his liability, if the damage is caused by
UP LAW BOC TRANSPORATION LAWS
his willful misconduct or by such default on
his part as is considered to be equivalent to
willful misconduct;
(2) Similarly the carrier shall not be entitled to
avail himself of the said provisions, if the
damage is caused as aforesaid by any agent
of the carrier acting within the scope of his
employment.
Under Art. 29, Warsaw Convention, the right to
damages under the WC is extinguished after
two years 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. The method of
calculating the period of limitation shall be
determined by the law of the court seized of the
case.
B.1. LIABILITY TO PASSENGERS
General rule: In the carriage of passengers, the
liability of the carrier for each passenger is
limited to 250,000 francs passenger.
Exception: By special contract, the carrier and
the passenger may agree to a higher limit [Art.
22(1), Warsaw Convention].
B.2. LIABILITY FOR CHECKED BAGGAGE
General rule: In the carriage of baggage and
goods, the liability of the carrier is limited to
250 francs per kilogram.
Exception: The limit does not apply when the
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires. In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless he proves that that sum is greater than
the actual value to the consignor at delivery [Art.
22(2), Warsaw Convention].
118
MERCANTILE LAW
B.3. LIABILITY FOR HAND-CARRIED
BAGGAGE
As regards hand-carried baggage, the liability
of the carrier is limited to 5,000 francs per
passenger [Art. 22(3), Warsaw Convention].
The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and to $1,000
for baggage. However, the Supreme Court
noted in Santos III v. Northwest Orient Airlines
(1992), that the Guatemala Protocol is still
ineffective [Sundiang and Aquino (2013)].
The Warsaw Convention should be deemed a
limit of liability only in those cases where the
cause of death or injury to person, or
destruction, loss or damage to property or delay
in its transport is not attributable to or attended
by any willful misconduct, bad faith,
recklessness, or otherwise improper conduct on
the part of any official or employee for which the
carrier is responsible; and there is otherwise no
special or extraordinary form of resulting injury
[Alitalia Airways v. CA (1990)].
C. WILLFUL MISCONDUCT
A common carrier may not avail of the
limitation in the following cases:
(1) Willful misconduct;
(2) Default amounting to willful misconduct
[Art. 25, Warsaw Convention];
(3) Accepting passengers without ticket [Art.
3(2), Warsaw Convention];
(4) Accepting goods without airway bill or
baggage without baggage check.
Receipt by the person entitled to the delivery of
baggage or cargo without complaint is prima
facie evidence that the same have been
delivered in good condition and in accordance
with the document of carriage [Art. 26, Warsaw
Convention].
UP LAW BOC CORPORATION CODE MERCANTILE LAW

MERCANTILE LAW
CORPORATION CODE

119
UP LAW BOC CORPORATION CODE
I. Corporation
A. DEFINITION
Corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes, and properties
expressly authorized by law or incident to its
existence [Sec. 2, unless otherwise indicated, all
sections cited herein are from B.P. 68, or the
Corporation Code].
B. ATTRIBUTES OF THE
CORPORATION
B.1. AN ARTIFICIAL BEING
A corporation exists by fiction of law. Hence, it
can act only through its directors, officers and
employees.
Shipside, Inc. v. CA (2001): Being only a juridical
entity, the physical acts of the corporation, like
the signing of documents, can be performed
only by natural persons duly authorized for the
purpose by corporate by-laws or by a special
act of the Board of Directors (BOD).
I. MORAL DAMAGES
NAPOCOR v. Philipp Brothers Oceanic (2001):
Moral damages cannot be awarded in favor of
corporations because they do not have feelings
and mental state. They may not even claim
moral damages for besmirched reputation.
Pilipinas Broadcasting Network v. Ago Medical
and Educational Center (2005): However, a
corporation can recover moral damages under
Art 2219 (7) if it was the victim of defamation.
II. CRIMINAL LIABILITY
West Coast Life Ins. Co. v. Hurd (1914); Time Inc. v.
Reyes (1971): Since a corporation as a person is
a mere legal fiction, it cannot be proceeded
against criminally because it cannot commit a
crime in which personal violence or malicious
intent is required. Criminal action is limited to
120
MERCANTILE LAW
the corporate agents guilty of an act
amounting to a crime and never against the
corporation itself.
III. DOCTRINE OF SEPARATE
PERSONALITY
Yutivo Sons Hardware v. CTA (1961): 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.
B.2. CREATED BY OPERATION OF LAW
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law [in
case of government corporations] or a general
law (i.e., Corporation Code in case of private
corporations).
A corporation comes into existence upon the
issuance of the certificate of incorporation.
Then and only then will it acquire juridical
personality to sue and be sued, enter into
contracts, hold or convey property or perform
any legal act in its own name.
B.3. HAS THE RIGHT OF SUCCESSION
Its continued existence during its stated term
cannot be affected by any change in the
members or stockholders or by any transfer of
shares by a stockholder to a 3rd person.
B.4. HAS THE POWERS, ATTRIBUTES
AND PROPERTIES EXPRESSLY
AUTHORIZED BY LAW OR INCIDENT TO
ITS EXISTENCE
Monfort Hermanos Agricultural Dev. Corp. v.
Monfort III (2004): A corporation has no power
except those expressly conferred on it by the
Corporation Code and by its articles of
incorporation, those which may be incidental
to such conferred powers, those that are
UP LAW BOC CORPORATION CODE
implied from its existence, and those
reasonably necessary to accomplish its
purposes. In turn, a corporation exercises said
powers through its BOD and/or its duly
authorized officers and agents.
II. Classes of
Corporations
A. STOCK CORPORATION
Stock corporations corporations which have
capital stock divided into shares AND are
authorized to distribute to the holders of such
shares dividends or allotments of the surplus
profits on the basis of shares held [Sec. 3]. It is
organized for profit.
The governing body of a stock corporation is
usually the BOD (except in certain instances,
e.g. close corporations).
Note: A corporation is deemed to have the
power to declare dividends. Thus, so long as
the corporation has capital stock and there is
no prohibition in its Articles of Incorporation or
in its by-laws for it to declare dividends, such
corporation is a stock corporation [Sec. 43].
B. NON-STOCK CORPORATION
All other corporations are non-stock
corporations [Sec. 3].
Non-stock corporation One where no part of
the income is distributable as dividends to its
members, trustees, or officers, subject to the
provisions of the Code on dissolution [Sec. 87].
Not organized for profit.
Its governing body is usually the Board of
Trustees (BOT). However, non-stock
corporations may, through their articles of
incorporation or their by-laws, designate their
121
MERCANTILE LAW
governing boards by any name other than as
board of trustees [Sec. 138].
C. OTHER CORPORATIONS
C.1. PUBLIC CORPORATION
Public corporation one formed or organized
for the government of a portion of the state. Its
purpose is for the general good and welfare
[Sec. 3, Act 1456].
Polytechnic University of the Phils. v. CA (2001):
Beyond cavil, a GOCC has a personality of its
own, distinct and separate from that of the
government, and the intervention in a
transaction of the Office of the President
through the Executive Secretary does not
change the independent existence of a
government entity as it deals with another
government entity.
Boy Scouts of the Philippines v. COA (2011): Not
all corporations which are not GOCC are ipso
facto to be considered private corporations as
there exists another distinct class of
corporations or chartered institutions which
are otherwise known as public corporations.
These corporations are treated by law as
agencies or instrumentalities of the
government which are not subject to the tests
of ownership or control and economic viability
but to different criteria relating to their public
purposes/interests or constitutional policies
and objectives and their administrative
relationship to the government or any of its
Departments or Offices.
C.2. PRIVATE CORPORATION
Private corporation One formed for some
private purpose, benefit, aim or end [Sec. 3, Act
1456]; it may be either stock or non-stock,
government-owned or controlled or quasi-
public.
UP LAW BOC CORPORATION CODE
Baluyot v. Holganza (2000): The test to
determine whether GOCC or private
corporation: if a corporation is created by its
own charter for the exercise of a public
function, then GOCC; if by incorporation under
the general corporation law, then private
corporation.
C.3. CLOSE CORPORATION
Close corporation - One whose articles of
incorporation provide that:
(1) All issued stock, exclusive of treasury
shares, shall be held by persons not
exceeding 20;
(2) All issued stock shall be subject to one or
more specified restrictions on transfer; 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 not be deemed 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. [Sec. 96]
C.4. EDUCATIONAL CORPORATION
Educational corporation One organized for
educational purposes [Sec. 106].
C.5. RELIGIOUS CORPORATIONS
I. CORPORATION SOLE
Corporation sole is one formed for the
purpose of administering and managing, as
trustee, the affairs, property and temporalities
of any religious denomination, sect, or church,
by the chief archbishop, bishop, priest, rabbi,
or other presiding elder of such religious
denomination, sect or church [Sec.110].
Roman Catholic Apostolic, etc v. Register of
Deeds of Davao City (1957): A corporation sole
has no nationality but for the purpose of
applying nationalization laws, nationality is
determined not by the nationality of its
122
MERCANTILE LAW
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.
II. CORPORATION AGGREGATE
Corporation aggregate is a religious
corporation incorporated by more than one
person.
C.6. ELEEMOSYNARY CORPORATION
Eleemosynary corporation One organized for
a charitable purpose.
C.7. DOMESTIC CORPORATION
Domestic corporation One formed, organized,
or existing under the laws of the Philippines.
C.8. FOREIGN CORPORATION
Foreign corporation One formed, organized
or existing under any laws other than those of
the Philippines and whose law allows Filipino
citizens and corporations to do business in its
own country and state [Sec. 123].
C.9. CORPORATION CREATED BY
SPECIAL LAWS OR CHARTER
Corporation created by special laws or charter -
Corporations which are governed primarily by
the provisions of the special law or charter
creating them. Corporation Code has
suppletory application [Sec. 4].
C.10. SUBSIDIARY CORPORATION
Subsidiary corporation One in which control,
in the form of ownership of majority of its
shares, is in another corporation [the parent
corporation].
C.11. PARENT CORPORATION
Parent corporation Its control lies in its power,
directly or indirectly, to elect the subsidiarys
UP LAW BOC CORPORATION CODE
directors thus controlling its management
policies.
Holding company a parent company which
has no other business aside from the holding
of the shares of its subsidiaries, which it
controls.
Investment company a parent company
which holds shares in other corporations not
for the purpose of controlling them but merely
to invest therein.
C.12 CORPORATION DE JURE
Corporation de jure A corporation organized
in accordance with the requirements of the law.
C.13. DE FACTO CORPORATION
De facto corporation A corporation where
there exists a flaw in its incorporation.
I. RULE ON DE FACTO CORPORATIONS
The due incorporation of any corporation
claiming in good faith to be a corporation
under this Code, and its right to exercise
corporate powers, shall not be inquired into
collaterally in any private suit to which such
corporation may be a party. Such inquiry may
be made by the Solicitor General in a quo
warranto proceeding [Sec. 20].
Grant of juridical personality is an exercise of
State power and not a matter of private affair.
Consequently, under the de facto corporation
doctrine, the defect in the juridical personality
of a corporation cannot be inquired into by
private individuals, much less used as a
defense to avoid claims, except in quo warranto
proceedings brought on behalf of the State
where the main action is to question the
validity or existence of such juridical
personality [Villanueva].
II. REQUISITES OF DE FACTO
CORPORATION:
123
MERCANTILE LAW
(1) There is an apparently valid statute under
which the corporation may be formed;
(2) There has been colorable compliance with
the legal requirements in good faith; and
(3) There has been user of corporate powers,
i.e. the transaction of business as if it were
a corporation [Campos].
Hall v. Piccio (1950): An association of
persons cannot claim to be a corporation if
it has not been issued a certificate of
incorporation since it cannot claim good
faith compliance with the requirements of
the law.
C.14 CORPORATION BY ESTOPPEL
Corporation by estoppel Where a group of
persons misrepresent themselves as a
corporation, they are subsequently estopped
from claiming lack of corporate life in order to
avoid liability; also, a 3rd party who had dealt
with an unincorporated association as a
corporation is precluded from denying its
corporate existence on a suit brought by the
alleged corporation on the contract.
I. EFFECTS
As to liability
All persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result thereof [Sec. 21].
As to the defense of lack of corporate
personality
When such ostensible corporation is sued, it is
precluded from raising the defense of lack of
corporate personality [Sec. 21].
International Express Travel v. CA (2000): The
doctrine of estoppel applies to a 3rd party only
when he tries to escape liability on a contract
from which he has benefited on the ground of
defective incorporation. It does not apply to a
UP LAW BOC CORPORATION CODE
3rd party who is not trying to escape liability
from the contract, but rather is the one
claiming from the contract.
II. DE FACTO CORPORATION VS.
CORPORATION BY ESTOPPEL
Where all the requisites of ad de facto
corporation are present, the defectively formed
corporation will have the status of a De jure
corporation in all cases brought by or against it,
except only as to the State in a direct
proceeding.
If any of the requisites is absent, then the
estoppel doctrine can apply only if under the
circumstances, either:
(1) the defendant association is estopped from
defending on the ground of its lack of
capacity to be sued, or
(2) the defendant 3rd party had dealt with the
plaintiff as a corporation and is deemed to
have admitted its existence.
III. Nationality of
Corporations
A. PLACE OF INCORPORATION TEST
The corporation is a national of the country
under whose laws it is organized or
incorporated [Sec. 123].
Domestic corporations organized and
governed under and by Philippine laws
Foreign corporations organized under laws
other than those of the Philippines and can
operate only in the territory of the state under
whose laws it was formed. However, they may
be licensed to do business here [Campos].
124
MERCANTILE LAW
B. CONTROL TEST
A corporation shall be considered a Filipino
corporation if the Filipino ownership of its
capital stock is at least 60%, and where the
60-40 Filipino-alien equity ownership is NOT
in doubt [SEC Opinion dated 6 November 1989;
DOJ Opinion No. 18, s. 1989].
Therefore, its shareholdings in another
corporation shall be considered to be of
Filipino nationality when computing the
percentage of Filipino equity of that second
corporation [SEC Opinion dated 23 November
1993].
Control test is applied in the following:
Exploitation of natural resources - Only
Filipino citizens or corporations whose
capital stock are at least 60% owned by
Filipinos can qualify to exploit natural
resources. [Sec. 2, Art. XII, Const.]
Public Utilities - no franchise, certificate
or any other form of authorization for the
operation of a public utility shall be granted
except to citizens of the Philippines or to
corporations or associations organized
under the laws of the Philippines at least
60% of whose capital is owned by such
citizens. [Sec. 11, Art. XII, Const.]
Gamboa v. Teves (2011): The term "capital" in
Sec. 11, Article XII of the 1987 Constitution
refers only to shares of stock entitled to vote in
the election of directors, and thus in the
present case only to common shares, and not
to the total outstanding capital stock [common
and non-voting preferred shares].
Compliance with the required Filipino
ownership of a corporation shall be
determined on the basis of outstanding capital
stock whether fully paid or not, but only such
stocks which are generally entitled to vote are
considered.
UP LAW BOC CORPORATION CODE
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of
which have been assigned or transferred to
aliens cannot be considered held by Philippine
citizens or Philippine nationals.
Gamboa v. Teves, (2012): [SC reversed its 2011
ruling]
The term capital is not limited to voting
shares since the constitutional requirement of
at least 60 % 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.
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. of the Corporation Code.
Thus, 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.
SEC Memorandum Circular No. 8 dated 20 May
2013
Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or
enterprises specifically reserved, wholly or
partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws,
amendments thereto and IRRs of said laws
except as may otherwise be provided therein.
125
MERCANTILE LAW
Sec. 2. All covered corporations shall, at all
times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the
required percentage of Filipino ownership shall
be applied to both
(1) the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
(2) the total number of outstanding shares of
stock, whether or not entitled to vote in the
election of directors.
C. GRANDFATHER RULE
Method used when a domestic corporation has
both domestic and foreign stockholders to
determine whether or not said corporation is
qualified to engage in a partially nationalized
business [Campos].
SEC Opinion re: Silahis Intl Hotel (1987): It
involves the computation of Filipino ownership
of a corporation in which another corporation
of partly Filipino and partly foreign equity owns
capital stock. The percentage of shares held
by the second corporation in the first is
multiplied by the latters own Filipino equity,
and the product of these percentages is
determined to be the ultimate Filipino
ownership of the subsidiary corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity
or business.
Redmont Consolidated Mines, Corp v. McArthur
Mining, Inc., et al. (2010): Compliance with the
constitutional limitation[s] on engaging in
nationalized activities 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
UP LAW BOC CORPORATION CODE
investing corporation is in turn owned to some
extent by another investing corporation, the
same process must be observed. One must not
stop until the citizenships of the individual or
natural stockholders of layer after layer of
investing corporations have been established,
the very essence of the Grandfather Rule.
Narra Nickel Mining and Dev. Corp v. Redmont
Consolidated Mines Corp. (2014): The
Grandfather Rule applies only when the 60-40
Filipino-foreign equity ownership is in doubt
[i.e. in cases where the joint venture
corporation with Filipino and foreign
stockholders with less than 60% Filipino
stockholdings (or 59%) invests in another joint
venture corporation which is either 60-40%
Filipino-alien or 59% less Filipino. Stated
differently, where the 60-40 Filipino-foreign
equity ownership is not in doubt, the
Grandfather Rule will not apply.
Note:
Fully/ Partially Nationalized Areas
Retail Trade, Rural Banks, Mass Media
100% Filipino ownership
Interisland shipping industry
75% Filipino ownership
Banks [except Rural Banks]
70% voting stock Filipino ownership
[but may be reduced to 60%]
Public utilities, corporations engaged in
exploration, exploitation and utilization of
natural resources, educational institutions
60% capital stock Filipino ownership
126
MERCANTILE LAW
IV. Corporate Juridical
Personality
It begins from the date the SEC issues a
certificate of incorporation under its official
seal [Sec. 19].
A. DOCTRINE OF SEPARATE
JURIDICAL PERSONALITY
CONCEPT
A corporation has a personality separate and
distinct from that of its stockholders and
members and is not affected by the personal
rights, obligations, and transactions of the
latter.
Merely a legal fiction for purposes of
convenience and to sub-serve the ends of
justice
Land Bank of the Philippines v. CA (2001): A
corporation, upon coming into existence, is
invested by law with a personality separate
and distinct from the persons comprising it as
well as from any other legal entity to which it
may be related. By this attribute, a stockholder
may not, generally, be made to answer for acts
or liabilities of said corporation, and vice versa.
PROPERTY
Wise and Co. v. Man Sun Lung (1940):
Stockholders have no claim on corporate
property as owners, but mere expectancy or
inchoate right to the same upon dissolution of
the corporation after all corporate creditors
have been paid. Such right is limited only to
their equity interest (doctrine of limited liability).
Although a stockholders interest in the
corporation may be attached by his personal
creditor, corporate property cannot be used to
satisfy his claim.
A.1. LIABILITY FOR TORTS AND CRIMES
UP LAW BOC CORPORATION CODE
PNB v. CA (1978): As a separate juridical
personality, a corporation can be held liable for
torts committed by its officers for corporate
purpose.
A.2. RECOVERY OF MORAL DAMAGES
General rule: A corporation has the power to
sue in its corporate name. [Sec. 36]
Exception: NAPOCOR v. Philipp Brothers
Oceanic (2001): moral damages cannot be
awarded in favor of corporations because they
do not have feelings and mental state. They
may not even claim moral damages for
besmirched reputation.
Pilipinas Broadcasting Network v. Ago Medical
and Educational Center (2005): however, a
corporation can recover moral damages under
Art 2219 [7] if it was the victim of defamation.
CONSTITUTIONAL RIGHTS
Bataan Shipyard and Engg Co. v. PCGG (1987):
Corporate entities are entitled to due process,
equal protection, and protection against
unreasonable searches and seizures. However,
a corporation is not entitled to the privilege
against self-incrimination.
B. DOCTRINE OF PIERCING THE
CORPORATE VEIL
Koppel Phil v. Yatco (1946): Piercing the veil of
corporate entity is merely an equitable remedy,
and may be granted only in cases when the
corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or
defend crime [Yutivo Sons v. CTA, 1961] or
where the corporation is a mere alter ego or
business conduit of a person.
Land Bank of the Philippines v. CA (2001): In
order to disregard the separate juridical
personality of a corporation, the wrongdoing
must be clearly and convincingly established.
In the absence of any malice or bad faith, a
127
MERCANTILE LAW
stockholder or an officer of a corporation
cannot be made personally liable for corporate
liabilities. The mere fact that a stockholder
owns majority of the stock of a corporation is
not a ground to conclude that said stockholder
and corporation are one and the same.
Suldao v. Cimech System Construction, Inc.
(2006): The veil of corporate fiction treats as
separate and distinct the affairs of a
corporation and its officers and
stockholders. As a general rule, a corporation
will be looked upon as a legal entity, unless
and until sufficient reason to the contrary
appears. When the notion of legal entity is
used to defeat public convenience, justify
wrong, protect fraud, or defend crime, the law
will regard the corporation as an association of
persons. Also, the corporate entity may be
disregarded in the interest of justice in such
cases as fraud that may work inequities among
members of the corporation internally,
involving no rights of the public or third
persons. In both instances, there must have
been fraud and proof of it.
B.1. GROUNDS FOR APPLICATION OF
DOCTRINE
The corporate fiction may be pierced if used:
(1) to defraud the government of taxes due it;
(2) to evade payment of civil liability;
(3) by a corporation which is merely a conduit
or alter ego of another corporation;
(4) to evade compliance with contractual
obligations; or
(5) to evade financial obligation to its
employees.
PNB v. Andrada Electric and Engineering Co.
(2002): Only in these and similar instances
may the veil be pierced and disregarded: to
ward off a judgment credit, to avoid inclusion
of corporate assets as part of the estate of the
decedent, to escape liability arising from a
debt, or to perpetuate fraud and/or confuse
UP LAW BOC CORPORATION CODE
legitimate issues either to promote or to shield
unfair objectives to cover up an otherwise
blatant violation of the prohibition against
forum shopping.
Seaoil vs Autocorp Group (2008):
IIs a corporation liable for the individual acts of
its stockholders or members? Is there an
exception to the general rule?
It is settled that a corporation has a personality
separate and distinct from its individual
stockholders or members, and is not affected
by the personal rights, obligations and
transactions of the latter. The corporation may
not be held liable for the obligations of the
persons composing it, and neither can its
stockholders be held liable for its obligation.
Of course, this Court has recognized
instances when the corporations separate
personality may be disregarded. However, we
have also held that the same may only be done
in cases where the corporate vehicle is being
used to defeat public convenience, justify
wrong, protect fraud, or defend crime.
Moreover, the wrongdoing must be clearly and
convincingly established. It cannot be
presumed.
B.2. TEST IN DETERMINING
APPLICABILITY
General rule: the mere fact that a corporation
owns all or substantially all of the stocks of
another corporation is not sufficient to justify
their being treated as one entity.
Exception: the subsidiary is a mere
instrumentality of the parent corporation.
PNB v. Ritratto Group (2001):
Circumstances rendering subsidiary an
instrumentality:
(1) the parent corporation owns all or most of
the subsidiarys capital stock;
128
MERCANTILE LAW
(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 corporations
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 in the latters
interest; and
(11) the formal ledger requirements of the
subsidiary are not observed.
UP LAW BOC CORPORATION CODE
V. Incorporation and
Organization
A. PROMOTER
Promoters are persons who, acting alone or
with others, take initiative in founding and
organizing the business or enterprise of the
issuer and receives consideration therefor [RA
8799, The Securities Regulation Code].
A.1. LIABILITY OF PROMOTER
General rule: the promoter binds himself
personally and assumes the responsibility of
looking to the proposed corporation for
reimbursement.
Exceptions:
(1) Express or implied agreement to the
contrary
(2) Novation, not merely adoption or
ratification of the contract
A.2. LIABILITY OF CORPORATION FOR
PROMOTERS CONTRACTS
General rule: Cagayan Fishing Development Co.,
Inc. v. Sandiko (1937): A corporation is NOT
bound by the contract. A corporation, until
organized, has no life and no legal existence. It
could not have had an agent [the promoter]
who could legally bind it.
Exceptions: A corporation may be bound by the
contract if it makes the contract its own by:
(1) Adoption or ratification of the ENTIRE
contract after incorporation.
Note:
Builders Duntile Co. v. Dunn Mfg. Co.
(1929): A corporations power to adopt a
contract [by its promoters] must be
understood to be limited to such
contracts as the corporation itself, after
its organization, would be authorized to
make.
129
MERCANTILE LAW
Novation or the intent to novate the
original contract is required to adopt or
ratify the pre-incorporation contract.
[Campos]
Rizal Light v. PSC and Morong Electric
(1968): The Courts ruling in Cagayan
Fishing v. Teodoro Sandiko, that a
corporation should have a full and
complete organization and existence as
an entity before it can enter into any
kind of a contract or transact any
business, is not absolute. One of the
exceptions recognized by American
courts is that a contract made by the
promoters of a corporation on its behalf
may be adopted, accepted or ratified by
the corporation when organized.
(2) Acceptance of benefits under the contract
with knowledge of the terms thereof.
(3) Performance of its obligation under the
contract
B. NUMBER AND QUALIFICATIONS
OF INCORPORATORS
[Sec. 20]
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a
subscriber to at least 1 share of the capital
stock of the corporation
C. CORPORATE NAMELIMITATIONS
ON USE OF CORPORATE NAME
Corporate name [Sec. 18]
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws
Required by law to include the word
Corporation or Inc. [Campos]
UP LAW BOC CORPORATION CODE
Change of corporate name requires the
amendment of the Articles of Incorporation:
majority vote of the board and the vote or
written assent of stockholders holding 2/3 of
the outstanding capital stock [Sec. 16].
Republic Planters Bank v. CA (1992):
Amendment of a corporations Articles of
Incorporation changing its corporate name
does not extinguish the personality of the
original corporation. It is the same corporation
with a different name, and its character is not
changed. Consequently, the new corporation
is still liable for the debts and obligations of
the old corporation.
D. CORPORATE TERM
[Sec. 11]
General rule: A corporation shall exist for a
period not exceeding 50 years from the date of
incorporation
Exceptions:
(4) Sooner dissolved
(5) Period extended
For periods not exceeding 50 years in
any single instance by an amendment of
the Articles of Incorporation
Extensions may not be made earlier
than 5 years prior to the original or
subsequent expiry date[s]
Except: If the SEC determines that there are
justifiable reasons for an earlier extension
Rationale: Benguet Consolidated Mining Co. v.
Pineda (1956): Corporations are creatures of
the law through the State legislature. The
State is therefore concerned that this privilege
be enjoyed by corporations only under the
conditions and not beyond the period that it
sees fit to grant; and particularly, that it not be
abused in fraud and to the detriment of other
parties; and for this reason, it has been ruled
130
MERCANTILE LAW
that the limitation to a definite period is an
exercise of control in the interest of the public.
E. MINIMUM CAPITAL STOCK AND
SUBSCRIPTION REQUIREMENTS
[Sec 12]
Non-stock corporations incorporated under the
Corporation Code shall not be required to have
a minimum authorized capital stock
Except as provided for by special law and
subject to the provisions of Sec. 13
Amount of Capital Stock to be Subscribed and
Paid for the Purposes of Incorporation [Sec. 13]
(1) At the time of incorporation, at least 25%
of the authorized capital stock stated in
the Articles of Incorporation should be
subscribed;
(2) At least 25% of the total subscription must
be paid upon subscription;
(3) The balance to be payable on
Dates fixed in the subscription contract
or
Upon call by the BOD in the absence of
fixed dates
(4) The paid-up capital can in no case be lower
than P5,000.00
F. ARTICLES OF INCORPORATION
F.1. NATURE AND FUNCTION OF
ARTICLES
Constitutes the charter of the corporation
and sets forth the rules and conditions upon
which the association or corporation is
founded
Defines the contractual relationships
between the State and the corporation, the
stockholders and the State, and the
corporation and the stockholders
The Articles must be filed with the SEC for the
issuance of the Certificate of Incorporation.
UP LAW BOC CORPORATION CODE
F.2. CONTENTS
I. CORPORATE NAME
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
(2) Not patently deceptive, confusing or
contrary to existing laws
Lyceum of the Philippines v. CA (1993): The
policy underlying the prohibition against the
registration of a corporate name which is
identical or deceptively or confusingly similar
to that of any existing corporation or which is
patently deceptive or patently confusing or
contrary to existing laws is:
(1) The avoidance of fraud upon the public
which would have occasion to deal with the
entity concerned;
(2) The prevention of evasion of
legal obligations and duties, and
(3) The reduction of difficulties of
administration and supervision over
corporations.
To determine whether a given corporate name
is "identical" or "confusingly or deceptively
similar" with another entity's corporate name,
one must evaluate corporate names in their
entirety.
SEC Memo Circ. No.5, s.2008: The corporate
name shall contain the word Corporation or
Incorporated, or the abbreviations Corp. or
Inc. respectively.
SEC Memo Circ. No. 12, s. 2008: Business or
trade name which is different from the
corporate name shall be indicated in the
articles of incorporation. A company may have
more than one business or trade name.
Change of corporate name requires the
amendment of the Articles of Incorporation:
majority vote of the board and the vote or
131
MERCANTILE LAW
written assent of stockholders holding 2/3 of
the outstanding capital stock [Sec. 16].
Republic Planters Bank v. CA (1992):
Amendment of a corporations Articles of
Incorporation changing its corporate name
does not extinguish the personality of the
original corporation. It is the same corporation
with a different name, and its character is not
changed. Consequently, the new
corporation is still liable for the debts and
obligations of the old corporation.
II. PURPOSE CLAUSE
Must indicate the PRIMARY and
SECONDARY purposes if there is more than
one purpose, which should not contradict or
change the nature of the corporation [Sec.
14(2)]
Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules
and regulations [Sec. 17 (2)].
People v. United Medical Service, 200 N.E. 157,
cited in Campos: Must not be for the purpose
of practicing a profession.
Ulep v. The Legal Clinic (1993): Under the
present state of our law and jurisprudence, a
corporation cannot be organized for or
engage in the practice of law in this country.
This interdiction, just like the rule against
unethical advertising, cannot be subverted
by employing some so-called paralegals
supposedly rendering the alleged support
services. The remedy for the apparent breach
of this prohibition is the concern and
province of the Solicitor General who can
institute the corresponding quo
warranto action, after due ascertainment of
the factual background and basis for the
grant of the corporate charter, in light of the
putative misuse thereof.
III. PRINCIPAL OFFICE
Must be within the Philippines [Sec. 14 (3)]
UP LAW BOC CORPORATION CODE MERCANTILE LAW

Articles of Incorporation must specify both Non-stock corporations: trustees

province or city or town where it is located
SEC Circular No. 3-2006: A specific address is
now required; Metro Manila is no longer
allowed.
Chua Gan vs. Samahang Magsasaka (1935):
Important for [1] determining venue in an
action by or against the corporation, and [2]
determining the province where a chattel
mortgage of shares should be registered.
Hyatt Elevators v. Goldstar Elevators (2005):
The residence of a corporation is the place
where its principal office is located, as stated in
its Articles of Incorporation. To insist that the
proper venue is the actual principal office and
not that stated in its Articles of Incorporation
would indeed create confusion and work
untold inconvenience. Enterprising litigants
may, out of some ulterior motives, easily
circumvent the rules on venue by the simple
expedient of closing old offices and opening
new ones in another place that they may find
well to suit their needs.
IV. CORPORATE TERM
Maximum life of 50 years.
Extendible for a period not exceeding 50
years at any one instance. No extension,
however, can be made earlier than 5 years
before the end of the term. [Sec. 11]
General rule: Not less than 5 but not more than
15 directors/trustees
Exception: Non-stock corporations whose
articles or by-laws may provide for more than
15 trustees [Sec. 92]
Educational non-stock corporations:
trustees may not be less than 5 nor exceed 15
number of trustees shall be in multiples of 5
[Sec. 108]
NATIONALIZED OR PARTIALLY-
NATIONALIZED INDUSTRIES:
Aliens may be directors but only in such
number as may be proportional to their
allowable ownership of shares
If STOCK corporation:
authorized capital stock in lawful money of
the Philippines
the number of shares into which the ACS is
divided
If with par value shares, the par value of each
share [Sec. 14[8], Sec. 15[7]].
names, citizenship, residences of original
subscribers
amount subscribed and paid on each
subscription
fact that some or all shares are w/o par value

Extension requires an amendment of the

Articles of Incorporation subject to the exercise
If NON-STOCK:
of appraisal right by the dissenting stockholder
amount of capital
[Sec. 37].
names, nationalities and residences of
contributors
V. NAMES, CITIZENSHIP AND amount contributed by each
RESIDENCES OF INCORPORATORS
VII. AMOUNT PAID BY EACH
VI. NUMBER, NAMES, CITIZENSHIP AND SUBSCRIBER ON THEIR SUBSCRIPTION,
RESIDENCES OF DIRECTORS/TRUSTEES. WHICH SHALL NOT BE LESS THAN 25%
Stock corporations: directors

132
UP LAW BOC CORPORATION CODE
OF SUBSCRIBED CAPITAL AND SHALL
NOT BE LESS THAN P5,000
[Sec 15 (8,9)]
VIII. NAME OF TREASURER ELECTED BY
THE SUBSCRIBERS
[Sec 15(10)]
IX. OTHER MATTERS
(1) Classes of shares, as well
as preferences or restrictions on any such
class [Sec. 6].
(2) Denial or restriction of pre-
emptive right [Sec.39].
(3) Prohibition against transfer
of stock which would reduce stock ownership
to less than the required minimum in the
case of a nationalized business or activity
[Sec. 15(11)].
No transfer clause
J.G. Summit Holdings, Inc. v. CA (2005): If the
foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is
adversely affected but the capacity of the
corporation to own land that is, the
corporation becomes disqualified to own
land. 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.
F.3. AMENDMENT
Amendment of the Articles of Incorporation
[Sec. 16]
(1) By a majority vote of the BOD or trustees
(2) And the vote or written assent of
2/3 of the outstanding capital stock,
without prejudice to the appraisal right
of dissenting stockholders in accordance
with the provisions of this Code,
133
MERCANTILE LAW
2/3 of the members if it be a non-stock
corporation.
I. LIMITATIONS
(1) Requirements imposed by the Code or by
special laws
(2) Must be for a legitimate purpose
(3) Must be approved by the directors/trustees
and the stockholders/members through
the vote requirement
(4) Appraisal Right
(5) Both the original and the amended articles
together must contain all the provisions
required by law to be set out in the articles
(6) If the corporation is governed by a special
law, the amended articles must be
accompanied by a favorable
recommendation of the appropriate
government agency to the effect that such
amendment is in accordance with law
[Lopez]
(7) Will take effect only
Upon their approval by the SEC by the
issuance of a certificate of amended
articles
Or from the date of filing with the SEC if
not acted upon within 6 months from the
date of filing for a cause not attributable
to the corporation
II. PROCEDURE
(1) The original and amended articles
together shall contain all provisions
required by law to be set out in the articles
of incorporation
(2) The articles, as amended shall be indicated
by underscoring the change or changes
made
(3) A copy shall be submitted to the SEC
Duly certified under oath by the
corporate secretary and a majority of the
directors or trustees
Stating the fact that the amendment or
amendments have been duly approved
UP LAW BOC CORPORATION CODE
by the required vote of the stockholders
or members
The following items are amendable under Sec.
16:
(1) Change of name of the Corporation
(2) Adding to or changing the purpose/s
(3) Change of principal office
(4) Change in the number of directors or
trustees
(5) Increase or decrease in authorized capital
stock [subject to Sec. 38]
F.4. NON-AMENDABLE ITEMS
The following items state accomplished facts,
therefore, cannot be amended:
(1) The names, nationalities and residences of
the incorporators.
Otherwise, an amendment would go
against the definition of incorporators in
Sec. 5
(2) Treasurer-in-trust
(3) First set of directors or trustees
(4) Original stock subscriptions and paid-in
capital
(5) Place and date of execution
(6) Witnesses [De Leon]
Note: Articles of Incorporation must be
accompanied by Treasurers sworn statement
of compliance with Sec. 13 on amount of capital
to be subscribed and paid for the purposes of
incorporation; otherwise, SEC shall not accept
the Articles of Incorporation [Sec. 14].
G. REGISTRATION AND ISSUANCE
OF CERTIFICATE OF
INCORPORATION
G.1. REGISTRATION OF THE ARTICLES
OF INCORPORATION
DOCUMENTS TO BE FILED WITH SEC:
(1) Articles of Incorporation
(2) Treasurers Affidavit certifying that 25% of
the total authorized capital stock has been
134
MERCANTILE LAW
subscribed and at least 25% of such has
been fully paid in cash or property
(3) Bank certificate covering the paid-up
capital
(4) [Note: Current SEC rules no longer require
this if payment for shares is made in cash]
(5) Letter authority authorizing the SEC to
examine the bank deposit and other
corporate books and records to determine
the existence of paid-up capital
(6) Undertaking to change the corporate name
in case there is another person or entity
with same or similar name that was
previously registered
(7) Certificate of authority from proper
government agency whenever appropriate
like BSP for banks and Insurance
Commission for insurance corporations.
[Sundiang and Aquino]
G.2. ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence
and juridical personality [Sec. 19]
Revocation of certificate of incorporation: If
incorporators are found guilty of fraud in
procuring the same after due notice and
hearing [Sec. 6(i), PD 902-A]
G.3. GROUNDS FOR DISAPPROVING THE
ARTICLES OF INCORPORATION:
Does not substantially comply with form
prescribed
Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
Treasurers Affidavit concerning the amount
of capital subscribed and or paid is false
Required percentage of ownership of Filipino
citizens has not been complied with. [Sec. 17]
UP LAW BOC CORPORATION CODE
REMEDY in case of rejection - petition for
review in accordance with the Rules of Court
[Sec. 6, last par., PD 902-A]
SEC shall give the incorporators reasonable
time to correct or modify objectionable
portions of the articles or amendment [Sec. 17].
H. ADOPTION OF BY-LAWS
By-laws has traditionally been defined as
regulations, ordinances, rules or laws adopted
by an association or corporation for its internal
governance, including rules for routine matters
such as calling meetings [SMC v. Mandaue
(2005)].
ADOPTION OF BY-LAWS
[Sec. 46]
May be done either:
(1) Prior to incorporation - approved and
signed by all the incorporators and
submitted to SEC together with Articles of
Incorporation; or
(2) After incorporation - within 1 month after
receipt of official notice of the issuance of
its certificate of incorporation by the SEC.
EFFECT OF FAILURE TO FILE THE BY-
LAWS WITHIN THE PERIOD
Loyola Grand Villas Homeowners Association v.
CA (1997): Does not imply the "demise" of the
corporation. By-laws may be required by law
for an orderly governance and management of
corporations but they are not essential to
corporate birth. Nonetheless, failure to file
them within the period required by law by no
means tolls the automatic dissolution of a
corporation.
Note: Sec. 22 on the effect of failure to formally
organize within 2 years from incorporation, the
corporations corporate powers cease and the
corporation is deemed dissolved. Organization
includes: the filing and approval of by-laws
135
MERCANTILE LAW
with the SEC and the election of directors and
officers [Campos].
H.1. NATURE AND FUNCTIONS OF BY-
LAWS
Nature: It is a product of agreement of the
stockholders or members [Campos].
Function: It establishes the rules for internal
government of the corporation [Campos].
It also regulates the affairs and relationship
between and among stockholders, BOD and
corporation [Lopez].
H.2. REQUISITES OF VALID BY-LAWS
Approval requirement: Must be approved by
the affirmative vote of the stockholders
representing MAJORITY of the outstanding
capital stock or majority of members
If filed pre-incorporation: must be approved
and signed by all incorporators
Record-Keeping: Must be kept in the principal
office of the corporation, subject to inspection
of stockholders or members during office hours
[Sec. 74]
Grace Christian High School v. CA (1997): No
provision of the by-laws can be adopted if it is
contrary to law.
H.3. BINDING EFFECTS
When Binding: ONLY from date of issuance of
SEC of certification that by-laws are not
inconsistent with the Code
Pending approval, they cannot bind
stockholders or corporation
Effect to 3rd parties: Mere internal rules among
stockholders and cannot affect or prejudice 3rd
persons who deal with the corporation unless
they have knowledge of the same [China
Banking Corp v CA (1997)].
UP LAW BOC CORPORATION CODE
H.4. AMENDMENT OR REVISION
Effected by: majority vote of the members of
the board and majority vote of owners of the
Outstanding Capital Stock or members, in a
meeting duly called for the purpose
I. DELEGATION TO THE BOD OF POWER
TO AMEND OR REPEAL BY-LAWS:
By vote of stockholders representing 2/3 of the
Outstanding Capital Stock or 2/3 of the
members
II. HOW DELEGATION REVOKED:
Any power delegated to the BOD or trustees to
amend or repeal any by-laws or adopt new by-
laws shall be considered as revoked whenever
stockholders owning or representing a majority
of the outstanding capital stock or a majority of
the members in non-stock corporations, shall
so vote at a regular or special meeting.
VI. Corporate Powers
A. GENERAL POWERS, THEORY OF
GENERAL CAPACITY [SEC. 36]
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell stocks
to subscribers and sell treasury stocks; for
non-stock corporation - admit members to
the corporation;
(7) Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, pursuant to its lawful business;
(8) Enter into merger or consolidation with
other corporations as provided in the Code;
(9) Make reasonable donations, including
those for the public welfare or for hospital,
136
MERCANTILE LAW
charitable, cultural, scientific, civic, or
similar purposes: Provided, no corporation,
domestic or foreign, shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity;
(10) Establish pension, retirement, and other
plans for the benefit of its directors,
trustees, officers and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its
purposes
NOTE:
The Corporation has implied powers which are
deemed to exist because of the following
provisions:
(1) Except such as are necessary or incidental
to the exercise of the powers so conferred
[Sec. 45]
(2) Such powers as are essential or necessary
to carry out its purpose or purposes as
stated in the Articles of Incorporation
catch-all phrase [Sec. 36(11)].
B. SPECIFIC POWERS, THEORY OF
SPECIFIC CAPACITY [SECS. 37-44]
(1) Power to Extend or Shorten Corporate
Term
(2) Power to Increase or Decrease Capital
Stock or Incur, Create, Increase Bonded
Indebtedness
(3) Power to Deny Pre-Emptive Rights
(4) Power to Sell or Dispose of Corporate
Assets
(5) Power to Acquire Own Shares
(6) Power to Invest Corporate Funds in
Another Corporation or Business
(7) Power to Declare Dividends
(8) Power to Enter Into Management Contract
B.1. EXTEND OR SHORTEN THE
CORPORATE TERM [SEC. 37]
(1) Must be approved by majority vote of the
BOD/ BOT
UP LAW BOC CORPORATION CODE
(2) Ratified at a meeting by shareholders
representing 2/3 of the outstanding
capital stock/ 2/3 of members of non-stock
corporations
(3) Written notice of meeting (includes
proposed action, time and place of
meeting) shall be addressed to each
shareholders/member at his place of
residence and deposited to the addressee
in the post office, or served personally
(4) Appraisal right may be exercised by the
dissenting stockholder for BOTH extension
and shortening of corporate term [See also
Sec. 81]
B.2. INCREASE OR DECREASE CAPITAL
STOCK OR INCUR, CREATE, INCREASE
BONDED INDEBTEDNESS [SEC. 38]
(1) Same requirements above from 1-3
(2) A certificate in duplicate must be signed by
a majority of the directors of the
corporation (countersigned by the
chairman and the secretary of the
shareholders meeting), setting forth:
(a) That requirements of this section have
been complied with
(b) The amount of the increase or
diminution of the capital stock
(c) In case of increase,
(i) the amount of capital stock or
number of shares of no-par stock
actually subscribed
(ii) names, nationalities and
residences of the persons
subscribing
(iii) the amount of no-par stock
subscribed by each
(iv) the amount paid by each on his
subscription, 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
137
MERCANTILE LAW
(d) any bonded indebtedness to be
incurred, created or increased
(e) the actual indebtedness of the
corporation on the day of the meeting
(f) the amount of stock represented at the
meeting
(g) the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness
(3) prior approval of SEC is required
(4) duplicate certificates shall be kept on file
in the office of the corporation and the
other shall be filed with the SEC, attached
in the original articles of incorporation.
(a) From and after approval of the SEC of
its certificate of filing, the capital stock
shall stand increased or decreased and
the incurring, creating or increasing of
any bonded indebtedness authorized
(b) SEC shall not accept for filing any
certificate of increase unless
accompanied by the sworn statement
of the treasurer of the corporation
showing:
(i) That at least 25% of such
increased capital stock have been
subscribed and
(ii) that at least 25% of the amount
subscribed has been paid or that
there has been transferred to the
corporation property the value of
which is equivalent to 25% of the
subscription
(c) SEC shall not approve any decrease in
the capital stock if its effect shall
prejudice the rights of corporate
creditors
(5) Bonds issued by a corporation shall be
registered with the SEC
B.3. DENY PREEMPTIVE RIGHT [SEC. 39]
General Rule: All shareholders of a stock
corporation have preemptive right to subscribe
UP LAW BOC CORPORATION CODE
to all issues or disposition of shares of any
class, in proportion to their respective
shareholdings
Exception: If such right is denied by the Articles
of Incorporation or an amendment thereto
Pre-emptive right shall not extend to:
(1) shares to be issued in compliance with
laws requiring stock offerings or
minimum stock ownership by the
public
(2) shares to be issued in good faith with
the approval of 2/3 of the stockholders
representing outstanding capital stock,
in exchange for property needed for
corporate purposes or in payment of a
previously contracted debt
B.4. SELL OR DISPOSE OF
SUBSTANTIALLY ALL ITS ASSETS [SEC.
40]
(1) Same requirements from 1-3 as Sec. 37
above
(2) Any dissenting shareholders may exercise
his appraisal right
(3) Deemed to cover substantially all the
corporate property and assets
(4) After authorization by the
shareholders/members, the BOD/BOT
may abandon such sale, lease, exchange,
mortgage, pledge or other disposition,
subject to the rights of third parties under
any contract relating thereto, without
further action or approval by the
shareholders/ members
(5) Corporation is not restricted in its power to
sell or dispose of its assets without the
authorization of shareholders or members:
(a) if the same is necessary in the usual
and regular course of business of the
corporation or
(b) if the proceeds of the sale will be
appropriated for the conduct of its
remaining business
138
MERCANTILE LAW
Caltex (Phils.) Inc. v. PNOC Shipping and
Transport Corp. (2006):
While the Corporation Code allows the transfer
of all or substantially all the properties and
assets of a corporation, the transfer should not
prejudice the creditors of the assignor. The
only way the transfer can proceed without
prejudice to the creditors is to hold the
assignee liable for the obligations of the
assignor. The acquisition by the assignee of all
or substantially all of the assets of the assignor
necessarily includes the assumption of the
assignors liabilities, unless the creditors who
did not consent to the transfer choose to
rescind the transfer on the ground of fraud. To
allow an assignor to transfer all its business,
properties and assets without the consent of its
creditors and without requiring the assignee to
assume the assignors obligations will defraud
the creditors. The assignment will place the
assignors assets beyond the reach of its
creditors.
B.5. ACQUIRE ITS OWN SHARES [SEC. 41]
(1) For a legitimate corporate purpose/s,
including but not limited to the following:
(a) To eliminate fractional shares arising
out of stock dividends
(b) 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; and
(c) To pay dissenting or withdrawing
stockholders
(2) Provided there are unrestricted retained
earnings in the corporate books to cover
the shares purchased or acquired
B.6. INVEST IN ANOTHER
CORPORATION OR BUSINESS [SEC. 42]
(1) Same requirements from 1-3 as Sec. 37
above
UP LAW BOC CORPORATION CODE
(2) Any dissenting shareholders shall have
appraisal right
(3) Where the investment is reasonably
necessary to accomplish the corporations
primary purpose, the approval of the
shareholders/ members is not necessary
NOTES:
If it is for the same purpose, or incidental, or
related to its PRIMARY purpose, the board can
invest the corporate fund WITHOUT the
consent of the stockholders. No appraisal right.
If the investment is in another corporation of
different business or purpose BUT in
pursuance of the SECONDARY purpose, the
affirmative vote of majority of the board
consented by stockholders/ members is
required.
If the investment is OUTSIDE the purpose/s for
which the corporation was organized, Articles
of Incorporation must be amended first,
otherwise it will be an Ultra Vires act.
De La Rama v. Ma-ao Sugar Central Co. (1969):
A private corporation, in order to accomplish
its purpose as stated in its articles of
incorporation, and subject to the limitations
imposed by the Corporation Law, has the
power to acquire, hold, mortgage, pledge or
dispose of shares, bonds, securities, and other
evidences of indebtedness of any domestic or
foreign corporation. Such an act, if done in
pursuance of the corporate purpose, does not
need the approval of the stockholders; but
when the purchase of shares of another
corporation is done solely for investment and
not to accomplish the purpose of its
incorporation, the vote of approval of the
stockholders is necessary.
B.7. DECLARE DIVIDENDS [SEC. 43]
(1) Out of unrestricted retained earnings
139
MERCANTILE LAW
(2) Payable in cash, in property, or in stock to
all shareholders on the basis of
outstanding stock held by them
(3) Any cash dividend due on delinquent stock
shall first be applied to the unpaid balance
on the subscription plus costs and
expenses
(4) Stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid
(5) Should be approved by 2/3 of shareholders
representing the outstanding capital stock
at a regular/special meeting called for that
purpose
(6) Stock corporations- prohibited from
retaining surplus profits in excess of 100%
of their paid-in capital stock, except:
(a) When justified by definite corporate
expansion projects or programs
approved by the BOD
(b) When the corporation is prohibited
under any loan agreement with any
financial institution or creditor from
declaring dividends without its consent,
and such consent has not yet been
secured
(c) When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation
Nielson and Co. v. Lepanto Consolidated
Mining (1968):
Stock dividends cannot be issued to a person
who is not a stockholder in payment of services
rendered.
A corporation may legally issue shares of
stock in consideration of services rendered to it
by a person not a stockholder, or in payment of
its indebtedness. A share of stock issued to pay
for services rendered is equivalent to a stock
issued in exchange of property, because
services is equivalent to property. It is the
shares of stock that are originally issued by the
corporation and forming part of the capital
UP LAW BOC CORPORATION CODE
that can be exchanged for cash or services
rendered, or property. A share of stock coming
from stock dividends declared cannot be
issued to one who is not a stockholder of a
corporation.
B.8. ENTER INTO MANAGEMENT
CONTRACTS [SEC. 44]
(1) Should be approved by the BOD and by
shareholders owning at least the majority
of the outstanding capital stock or at least
a majority of the members of both the
managing and the managed corporation at
a meeting duly called for that purpose
(2) Should be approved by the 2/3 of
stockholders owning outstanding capital
stock/members of the managed
corporation when:
(1) A stockholder or stockholders representing
the same interest of both the managing
and managed corporations own more than
1/3 of the total outstanding capital stock
entitled to vote of the managing
corporation; or
(2) A majority of the members of the BOD of
the managing corporation also constitute a
majority of the BOD of the managed
corporation
(3) No management contract shall be entered
into for a period longer than 5 years for any
one term
(4) 1-3 above applies to any contract whereby
a corporation undertakes to manage or
operate all or substantially all of the
business of another corporation, whether
such are called service contracts, operating
agreements or otherwise
(5) Service contracts or operating agreements
which relate to exploration, development,
exploitation or utilization of natural
resources may be entered into for such
periods as may be provided in the pertinent
laws and regulations
140
MERCANTILE LAW
NOTES
2 general restrictions on the power of the
corporation to acquire and hold properties:
(1) property must be reasonably and
necessarily required by the business
(2) that the power shall be subject to the
limitations prescribed by other special laws
and the Constitution (corporation may not
acquire more than 30% of voting stocks of
a bank; corporations are restricted from
acquiring public lands except by lease of
not more than 1000 hectares)
B.9. ULTRA VIRES ACTS
Definition
Ultra Vires acts are those acts which a
corporation is not empowered to do or perform
because they are not conferred by its Articles of
Incorporation or by the Corporation Code, or
not necessary or incidental to the exercise of
the powers so conferred [Sec. 45].
Types of Ultra Vires Acts
(1) Acts done beyond the powers of the
corporation as provided in the law or its
articles of incorporation;
(2) Acts or contracts entered into in behalf of a
corporation by persons who have no
corporate authority (Note: This is
technically Ultra Vires acts of officers and
not of the corporation);
(3) Acts or contracts, which are per se illegal
as being contrary to law. [Villanueva]
i. APPLICABILITY OF ULTRA VIRES
DOCTRINE
Montelibano v. Bacolod-Murcia Milling Co., Inc.:
It is a question, therefore, in each case of the
logical relation of the act to the corporate
purpose expressed in the charter. If that act is
one which is lawful in itself, and not otherwise
prohibited, is done for the purpose of serving
corporate ends, and is reasonably tributary to
the promotion of those ends, in a substantial,
and not in a remote and fanciful sense, it may
UP LAW BOC CORPORATION CODE MERCANTILE LAW

fairly be considered within the charter powers.
The test to be applied is whether the act in
question is in direct and immediate
furtherance of the corporations business, fairly
incident to the express powers and reasonably
necessary to their exercise. If so, the
corporation has the power to do it; otherwise,
not.
ii. CONSEQUENCES OF ULTRA VIRES
ACTS
(1) Executed contract courts will not set
aside or interfere with such contracts;
(2) Executory contracts no enforcement even
at the suit of either party (void and
unenforceable);
(3) Partly executed and partly executory
principle of no unjust enrichment at
expense of another shall apply;
(4) Executory contracts apparently authorized
but Ultra Vires the principle of estoppel
shall apply.
Ultra Vires Acts Illegal Acts
Not necessarily Unlawful; against
unlawful, but outside law, morals, public
the powers of the policy, and public
corporation order
Can be ratified Cannot be ratified
Can bind the parties if Cannot bind the
wholly or partly parties
executed
Seaoil vs. Autocorp Group (2008, Nachura):
An Ultra Vires act is distinguished from illegal
act, the former being voidable which may be
enforced by performance, ratification, or
estoppel, while the latter is void and cannot be
validated.
Pirovano v. De La Rama Steamship Co. (1954):
A distinction should be made between
corporate acts or contracts which are illegal
and those which are merely Ultra Vires. The
former contemplates the doing of an act which
is contrary to law, morals, or public policy or
public duty, and are, like similar transactions
between the individuals void. They cannot
serve as basis of a court action, nor require
validity. Ultra Vires acts on the other hand, or
those which are not illegal and void ab initio,
but are not merely within the scope of the
articles of incorporation, are merely voidable
and may become binding and enforceable
when ratified by the stockholders.
Remedies in Case of Ultra Vires Acts
(1) State
(a) Dissolution of the corporation thru a
quo warranto proceeding
(b) Injunction
(c) Suspension or revocation of the
certificate of registration by the SEC
(2) Stockholders
(a) Injunction
(b) Derivative suit
(c) Ratification (except when a 3rd party is
prejudiced or the act is illegal)
(3) Creditors
(a) Nullification of contract in fraud of
creditors
C. HOW (CORPORATE POWERS)
EXERCISED
C.1. BY THE SHAREHOLDERS
i. CORPORATE ACTS REQUIRING
APPROVAL OF STOCKHOLDERS OR
MEMBERS (VOTING AND NON-VOTING
SHARES)
General Rule: Vote necessary to approve a
particular corporate act as provided in this
Code shall be deemed to refer only to stocks
with voting rights [Sec. 6]
Exceptions [Sec. 6]
Voting and non-voting shares shall be entitled
to vote in the following cases:

141
UP LAW BOC CORPORATION CODE
(1) Amendment of Articles of Incorporation
(2) Adoption, Amendment and Repeal of By-
Laws [Sec. 48]
(3) Sale, Lease, Mortgage or Other Disposition
of Substantially all corporate assets [Sec.
40]
(4) Incurring, Creating or Increasing Bonded
Indebtedness [Sec. 38]
(5) Increase or Decrease of Capital Stock [Sec.
38]
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another corporation
or business or for any purpose other than
the primary purpose for which it was
organized [Sec. 42]
Requisites [Sec. 42] (Asked in 95):
(a) Approval of majority of the BOD or
trustees
(b) Ratification by the stockholders
representing at least 2/3 of the
Outstanding Capital Stock or the
members at a meeting duly called for
the purpose
(c) Written notice addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation
(d) Appraisal right available to dissenting
stockholders or members
(8) Dissolution of the Corporation [Sec. 118-
121]
ii. CORPORATE ACTS REQUIRING
APPROVAL OF STOCKHOLDERS OR
MEMBERS (VOTING SHARES ONLY)
(1) Declaration of Stock Dividends [Sec. 43]
(2) Management Contracts [Sec. 44]
(3) Fixing the Consideration of No-Par shares
[Sec. 62]
(4) Fixing the Compensation of Directors [Sec.
30]
142
MERCANTILE LAW
C.2. BY THE BOD
BOARD AS REPOSITORY OF
CORPORATE POWERS
General Rule (Doctrine Of Centralized
Management): The corporate powers of the
corporation shall be exercised, all business
conducted, and all property of controlled and
held by the BOD or trustees. [Sec. 23]
Exceptions:
(1) Executive Committee duly authorized in
the by-laws [Sec. 35];
(2) A contracted manager which may be an
individual, a partnership, or another
corporation.
NOTE:
In case the contracted manager is another
corporation, the special rule in Sec. 44
applies.
(3) In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
Spouses Constantine Firme v. Bukal Enterprises
and Development Corporation (2003):
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction.
Requisites of a VALID Corporate Act by the BOD
[Sec. 25]:
(a) The Board must act as a BODY in a
meeting. (Note: Current SEC regulations
allow BOD meetings by teleconferencing
or videoconferencing)
(b) There must be a VALIDLY constituted
meeting.
UP LAW BOC CORPORATION CODE MERCANTILE LAW

(c) Their act must be supported by a considered as a corporate office. Thus, the
MAJORITY OF THE QUORUM duly creation of an office pursuant to or under a by-
assembled (Exception: Election of officers Law enabling provision is not enough to make
requires a vote of majority of ALL the a position a corporate office. Guerrea v.
members of the board) Lezama (1958), the first ruling on the matter,
(d) The act must be within the powers held that the only officers of a corporation were
conferred to the Board. those given that character either by
the Corporation Code or by the By-Laws; the
C.3. BY THE OFFICERS rest of the corporate officers could be
considered only as employees or subordinate
Corporate Officer Corporate Employee officials.
Position is provided Employed through the A different interpretation can easily leave
for in the by-laws or action of the managing the way open for the BOD to circumvent the
under the officer of the constitutionally guaranteed security of tenure
Corporation Code corporation of the employee by the expedient inclusion in
RTC has jurisdiction NLRC has jurisdiction the By-Laws of an enabling clause on the
in case of labor in case of labor creation of just any corporate officer position.
dispute disputes

i. WHO ARE CORPORATE OFFICERS [SEC. Real v. Sangu Philippines (2011):

An office is created by the charter of the
25]
corporation and the officer is elected (or
(1) President must be a director;
appointed) by the directors or stockholders
(2) Treasurer may or may not be a director;
(Easycall Communications Phils., Inc. v. King,
as a matter of sound corporate practice,
2005).
must be a resident and citizen of the Phil
Corporate officers in the context of PD No.
(SEC opinion)
902-A are those officers of the corporation who
(3) Secretary need not be a director unless
are given that character by the Corporation
required by the by-laws; must be a resident
Code or by the corporations by-laws. There
and citizen of the Philippines; and
are three specific officers whom a corporation
(4) Other officers as may be provided in the
must have under Sec. 25 of the Corporation
by-laws.
Code. These are the president, secretary and
the treasurer. The number of officers is not
NOTE
limited to these three. A corporation may have
Any 2 or more positions may be held
such other officers as may be provided for by
concurrently by the same person, EXCEPT that
its by-laws like, but not limited to, the vice-
no one shall act as president and secretary or
president, cashier, auditor or general
as president and treasurer at the same time.
manager. The number of corporate officers is
thus limited by law and by the corporations
Additional qualifications of officers may be
by-laws (Garcia v. Eastern
provided for in the by-laws [Sec. 47(5)]
Telecommunications Philippines, Inc., 2009).
Matling Industrial and Commercial Corp. v.
Coros (2010): Conformably with Sec. 25 of the ii. DISQUALIFICATIONS [SEC. 27]
Corporation Code, a position must be expressly
mentioned in the by-Laws in order to be

143
UP LAW BOC CORPORATION CODE
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years
(2) Convicted by final judgment of a violation
of the Corporation Code committed within
5 years prior to the date of his election or
appointment. This includes violations of
rules and regulations issued by the SEC to
implement the provisions of the
Corporation Code.
III. AUTHORITY OF CORPORATE
OFFICERS
A person dealing with a corporate officer is put
on inquiry as to the scope of the latters
authority but an innocent person cannot be
prejudiced if he had the right to presume under
the circumstances the authority of the acting
officers.
Associated Bank v. Pronstroller (2008,
Nachura):
Q: What is the Doctrine of Apparent Authority?
A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the
scope of an apparent authority, it holds him
out to the public as possessing the power to do
those acts; the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agents authority.
D. TRUST FUND DOCTRINE
Philippine Trust Co. v. Rivera (1923):
Under Sec. 43 of Code, the corporation can
declare dividends only out of "unrestricted
retained earnings;" and that under Sec. 122, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and
after payment of all its debts and liabilities.
These provisions in essence provide for the
"trust fund doctrine" where the "subscription
to the capital of a corporation constitute a fund
144
MERCANTILE LAW
to which creditors have a right to look for
satisfaction of their claims."
Ong Yong v. Tiu (2003):
"The Trust Fund Doctrine, first enunciated by
this Court in the 1923 case of Philippine Trust
Co. v. Rivera' provides that subscriptions to the
capital stock of a corporation constitute a fund
to which the creditors have a right to look for
the satisfaction of their claims.
This doctrine is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
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 of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the
corporation.
Furthermore, the doctrine is articulated in Sec.
41 on the power of a corporation to acquire its
own shares and in Sec. 122 on the prohibition
against the distribution of corporate assets and
property unless the stringent requirements
therefore are complied with.
Boman Environmental Development
Corporation v. CA (1988):
Trust Fund Doctrine means that the capital
stock, properties and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors. Stated
simply, the trust fund doctrine states that all
funds received by the corporation in payment
of the shares of stock shall be held in trust for
the corporate creditors and other stockholders
of the corporation. Under such doctrine no
fund shall be used to buy back the issued
shares of stock except only in instances
specifically allowed by the Corporation Code.
UP LAW BOC CORPORATION CODE
Steinberg v. Velasco (1929):
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the BOD will not use corporate
assets to purchase its own shares of stock or to
declare dividends to its stockholders when the
corporation is insolvent.
NTC v. CA (1999):
The subscribed capital is the same amount
that can loosely be termed as the trust fund
of the corporation. The Trust Fund doctrine
considers this subscribed capital as a trust
fund for the payment of the debts of the
corporation, to which the creditors may look for
satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital
may be returned or released to the stockholder
(except in the redemption of redeemable
shares) without violating this principle. Thus,
dividends must never impair the subscribed
capital; subscription commitments cannot be
condoned or remitted; nor can the corporation
buy its own shares using the subscribed capital
as the consideration therefor.
Donnina Halley v. Printwell, Inc. (2011):
The trust fund doctrine is not limited to
reaching the stockholders unpaid
subscriptions. The scope of the doctrine when
the corporation is insolvent encompasses not
only the capital stock, but also other property
and assets generally regarded in equity as a
trust fund for the payment of corporate debts.
All assets and property belonging to the
corporation held in trust for the benefit of
creditors that were distributed or in the
possession of the stockholders, regardless of
full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
Also, under the trust fund doctrine, a
corporation has no legal capacity to release an
original subscriber to its capital stock from the
145
MERCANTILE LAW
obligation of paying for his shares, in whole or
in part, without a valuable consideration, or
fraudulently, to the prejudice of creditors. The
creditor is allowed to maintain an action upon
any unpaid subscriptions and thereby steps
into the shoes of the corporation for the
satisfaction of its debt.
To make out a prima facie case in a suit
against stockholders of an insolvent
corporation to compel them to contribute to
the payment of its debts by making good
unpaid balances upon their subscriptions, it is
only necessary to establish that the
stockholders have not in good faith paid the
par value of the stocks of the corporation.
VII. BOARD OF
DIRECTORS AND
TRUSTEES
A. DOCTRINE OF CENTRALIZED
MANAGEMENT
A.1. BOARD IS SEAT OF CORPORATE
POWERS
General Rule: Unless otherwise provided in this
Code, the corporate powers of all corporations
formed under this Code shall be exercised, all
business conducted and all property of such
corporations controlled and held by the BOD or
trustees to be elected from among the holders
of stocks, or where there is no stock, from
among the members of the corporation, who
shall hold office for 1 year until their successors
are elected and qualified. [Sec. 23]
Exceptions:
(1) In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
UP LAW BOC CORPORATION CODE
(2) In case of a contracted manager which may
be an individual, a partnership, or another
corporation
Note: In case the contracted manager is
another corporation, the special rule in Sec.
44 applies.
(3) In case of close corporations, the
stockholders may manage the business of
the corporation rather than by a BOD, if
the Articles of Incorporation so provide
[Sec. 97]
Spouses Constantine Firme v. Bukal Enterprises
and Development Corporation (2003):
The power to purchase real property is vested
in the BOD or trustees. While a corporation
may appoint agents to negotiate for the
purchase of real property needed by the
corporation, the final say will have to be with
the board, whose approval will finalize the
transaction.
Great Asian Sales Center Corp v. CA, (2002):
The Corporation Code of the Philippines vests
in the BOD the exercise of the corporate
powers of the corporation, save in those
instances where the Code requires
stockholders approval for certain specific acts.
Gamboa v. Teves, (2011):
Indisputably, one of the rights of a stockholder
is the right to participate in the control or
management of the corporation. This is
exercised through his vote in the election of
directors because it is the BOD that controls or
manages the corporation.
Banate v. Philippine Countryside Rural Bank,
(2010):
Sec. 23 of the Corporation Code expressly
provides that the corporate powers of all
corporations shall be exercised by the BOD.
The power and the responsibility to decide
whether the corporation should enter into a
contract that will bind the corporation are
146
MERCANTILE LAW
lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions
of law. In the absence of authority from the
BOD, no person, not even its officers, can
validly bind a corporation.
However, just as a natural person may
authorize another to do certain acts for and on
his behalf, the BOD may validly delegate some
of its functions and powers to its officers,
committees or agents. The authority of these
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business.
i. REQUISITES OF A VALID CORPORATE
ACT BY THE BOD
(a) The Board must act as a BODY in a
meeting.
(b) There must be a VALIDLY constituted
meeting.
(c) There act must be supported by a
MAJORITY OF THE QUORUM duly
assembled (Exception: Election of officers
requires a vote of majority of ALL the
members of the board)
(d) The act must be within the powers
conferred to the Board.
ii. LIMITATIONS ON POWERS OF
BOD/TRUSTEES
(1) Limitations imposed by the Constitution,
statutes, articles of incorporation or by-
laws;
(2) Certain acts of the corporation that require
joint action of the stockholders and BOD:
(a) Removal of director [Sec. 28]
(b) Amendments of Articles of
Incorporation [Sec. 16]
(c) Fundamental changes [Sec. 6]
(d) Declaration of stock dividends [Sec. 43]
(e) Entering into management contracts
[Sec. 44]
UP LAW BOC CORPORATION CODE
(f) Fixing of consideration of non-par
shares [Sec. 62]
(g) Fixing of compensation of directors
[Sec. 30]
(3) Cannot exercise powers not possessed by
the corporation.
A.2. PRINCIPLE ON DELEGATION OF
BOARD POWER
Peoples Aircargo v. CA, (1998):
Under Sec 23, the power and the responsibility
to decide whether the corporation should enter
into a contract that will bind the corporation is
lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions
of law. However, just as a natural person may
authorize another to do certain acts for and on
his behalf, the BOD may validly delegate some
of its functions and powers to officers,
committees or agents. The authority of such
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly
or impliedly by habit, custom or acquiescence
in the general course of business,.
B. BUSINESS JUDGMENT RULE
General Rule: Directors cannot be held liable
for mistakes or errors in the exercise of their
business judgment as long as they acted in
good faith, with due care and prudence.
Contracts entered into by the BOD are binding
upon the corporation and courts will not
interfere.
Exceptions:
(1) If the contracts are so unconscionable and
oppressive as to amount to a wanton
destruction of the rights of the minority;
(2) if they violate their duties under Sec. 31
(director willfully and knowingly assents to
patently unlawful acts of the corporation,
147
MERCANTILE LAW
or are guilty of gross negligence or bad
faith); and
(3) if they violate Sec. 34 (disloyalty of a
director who acquires for himself a
business opportunity that should have
belonged to the corporation, unless his act
is ratified by a 2/3 vote of stockholders).
Consequences of the Business Judgment Rule:
Sec. 23 embodies the essence of the Business
Judgment Rule, that unless otherwise
provided in the Code, all corporate powers and
prerogatives are vested directly in the BOD.
Consequently:
(1) The resolution, contracts and transactions
of the board cannot be overturned or set
aside by the stockholders or members and
not even by the courts under the principle
that the business of the corporation has
been left to the hands of the board
(2) Directors and duly authorized officers
cannot be held personally liable for acts or
contracts done with the exercise of their
business judgment.
Exceptions:
(1) When the Corporation Code expressly
provides otherwise
(2) When the Directors or officers acted with
fraud, gross negligence or in bad faith (Sec.
31).
(3) When Directors or officers act against the
corporation in conflict of interest situation
(Villanueva).
Remedies in case of Mismanagement
(1) Removal of directors pursuant to Sec. 28
(2) Derivative suit or complaint filed with the
SEC (now the RTC) (PD 902-A)
(3) Receivership
(4) Injunction if the act has not yet been done
(5) Dissolution if abuse amounts to a ground
for quo warranto but Solicitor General
Refuses to act
UP LAW BOC CORPORATION CODE
NOTE:
Dean Villanueva opined that a derivative suit
may be an exception to such Rule: this occurs
when it is apparent that the Board is not in a
position to validly exercise its business
judgment for the protection of the corporation,
e.g., when the Board itself has committed an
act causing damage to the corporation or when
the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use
such business discretion to file such suit for the
best interest of the corporation.
C. TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF DIRECTORS
OR TRUSTEES
C.1. TENURE
Directors shall hold office for 1 year until their
successors are elected and qualified [Sec. 23]
Term: 1 year
Tenure: The period within which the director
actually holds office, including the holdover
period after the end of his term.
Valle Verde Country Club v. Africa, 2009:
In several cases, we have defined "term" as the
time during which the officer may claim to hold
the office as of right, and fixes the interval after
which the several incumbents shall succeed
one another. The term of office is not affected
by the holdover. The term is fixed by statute
and it does not change simply because the
office may have become vacant, nor because
the incumbent holds over in office beyond the
end of the term due to the fact that a successor
has not been elected and has failed to qualify.
Term is distinguished from tenure in that an
officers "tenure" represents the term during
which the incumbent actually holds office. The
tenure may be shorter (or, in case of holdover,
148
MERCANTILE LAW
longer) than the term for reasons within or
beyond the power of the incumbent.
Based on the above discussion, when Sec.
23 of the Corporation Code declares that "the
BODshall hold office for 1 year until their
successors are elected and qualified," we
construe the provision to mean that the term of
the members of the BOD 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.
C.2. QUALIFICATIONS
(1) If STOCK, director must own at least 1
share of the capital stock, which stock shall
stand in his own name [Sec. 23]
Exception: Trustee in a voting trust may be
elected director/trustee.
(2) If NON-STOCK, trustee must be a member.
Qualifications:
(1) Majority of the directors/trustees must be
residents of the Philippines.
(2) Natural person
(3) Of Legal Age
(4) Other qualifications as may be prescribed
in the by-laws of the corporation.
Lee v. CA (1992):
With the omission of the phrase "in his own
right" the election of trustees and other
persons who in fact are not beneficial owners
of the shares registered in their names on the
books of the corporation becomes formally
legalized. Hence, this is a clear indication that
in order to be eligible as a director, what is
material is the legal title to, not beneficial
ownership of, the stock as appearing on the
books of the corporation.
UP LAW BOC CORPORATION CODE
C.3. DISQUALIFICATIONS [SEC. 27]
(1) Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
(2) A violation of the Corporation Code,
committed within 5 years prior to the date
of his election. This includes violations of
rules and regulations issued by the SEC to
implement the provisions of the
Corporation Code.
Gokongwei, Jr. v. SEC (1979):
An amendment to the corporations by-laws
which renders a stockholder ineligible to be a
director, if he be also a director in a corporation
whose business is in competition with that of
the other corporation, has been sustained as
valid. This is based upon the principle that
where the director is so employed in the service
of a rival company, he cannot serve both, but
must betray one or the other. Such an
amendment "advances the benefit of the
corporation and is good."
D. ELECTIONS
D.1. CUMULATIVE VOTING
i. CUMULATIVE VOTING FOR ONE
CANDIDATE
A stockholder is allowed to concentrate his
votes and give one candidate as many votes as
the number of directors to be elected
multiplied by the number of his shares shall
equal.
ILLUSTRATION
If there are 5 directors to be elected and Pedro,
as shareholder, has 100 shares, Pedro can give
500 (5 x 100 shares) votes to just one
candidate.
149
MERCANTILE LAW
ii. CUMULATIVE VOTING BY
DISTRIBUTION
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and
distribute the same among as many
candidates as he shall see fit.
ILLUSTRATION
In the illustration above, Pedro instead may
choose to give 100 votes to candidate 1, 100
votes to candidate 2, 100 votes to candidate 3,
150 votes to candidate 4, and 50 votes to
candidate 5.
iii. STRAIGHT VOTING
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected.
D.2. QUORUM
There must be present, in person or by
representative authorized to act by written
proxy, the owners of majority of the
Outstanding Capital Stock or majority of the
members entitled to vote in the meeting.
Election must be by ballot if requested.
A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of his
statutory right to use any of the methods of
voting in the election of directors.
No delinquent stock shall be voted.
The candidates receiving the highest number
of votes shall be declared elected.
E. REMOVAL
General Rule: Any Director or Trustee of a
corporation may be removed from office, with
or without cause. [Sec. 28]
UP LAW BOC CORPORATION CODE
Exception: Directors who have been elected by
minority stockholders exercising cumulative
voting can only be removed for cause. Removal
without cause may not be used to deprive
minority stockholders or members of the right
of representation to which they may be entitled
under Sec. 24.
Other requisites:
(1) by a vote of the stockholders holding or
representing 2/3 of the outstanding capital
stock, or if the corporation be a non-stock
corporation, by a vote of 2/3 of the
members entitled to vote
(2) At a regular or special meeting after proper
notice is given
F. FILLING OF VACANCIES
F.1. VACANCY (1) BY REMOVAL; OR (2) BY
EXPIRATION OF TERM; OR (3) WHEN
THE REMAINING DIRECTORS DO NOT
CONSTITUTE A QUORUM
Vacancy/ies must be filled by the stockholders
in a regular or special meeting called for that
purpose.
A director or trustee elected to fill a vacancy
shall be elected only for the unexpired term of
his predecessor in office.
F.2. VACANCY BY REASON OF INCREASE
IN THE NUMBER OF THE
DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
(1) in a regular or special meeting called for
that purpose; or
(2) in the same meeting authorizing the
increase of directors or trustees if so stated
in the notice of the meeting.
F.3. VACANCY BY OTHER CAUSES
150
MERCANTILE LAW
Vacancy/ies may be filled by the vote of at
least a majority of the remaining directors or
trustees, if still constituting a quorum.
G. COMPENSATION [SEC. 30]
General Rule: Directors are only entitled to
reasonable per diems. They are not entitled to
compensation as directors.
Exceptions:
(1) When Articles of Incorporation, by-laws, or
an advance contract provides for
compensation.
(2) Compensation other than per diems may
also be granted to directors by the vote of
the stockholders representing at least a
majority of the Outstanding Capital Stock
at a regular or special stockholders
meeting.
The total yearly compensation of directors
shall not exceed 10% of the net income before
income tax of the corporation during the
preceding year.
COMPENSATION OF DIRECTORS AS
CORPORATE OFFICERS
Western Institute of Technology v. Salas (1997):
The position of being chairman and Vice-
Chairman, like that of treasurer and secretary,
are not considered directorship positions but
officership positions that would entitle the
occupants to compensation. Likewise, the
limitation placed under Sec. 30 of the
Corporation Code that directors cannot receive
compensation exceeding 10% of the net
income of the corporation would not apply to
the compensation given to such positions since
it is being given in their capacity as officers of
the corporation and not as board members.
UP LAW BOC CORPORATION CODE MERCANTILE LAW

H. FIDUCIARY DUTIES AND LIABILITY foundations to be first laid out in appropriate

RULES judicial proceedings. Hence, concluding that a
person breached fiduciary duties as an officer
and member of the BOD of a
H.1. DUTIES
corporation without competent evidence
thereon would be unwarranted and
Strategic Alliance Development Corp v.
unreasonable.
Radstock Securities Ltd. (2009):
In this jurisdiction, the members of the BOD
Duty of Loyalty
have a three-fold duty: duty of obedience, duty
Directors and trustees should not acquire any
of diligence, and duty of loyalty. Accordingly,
personal or pecuniary interest in conflict with
the members of the BOD (1) Duty of Obedience
their duty as such directors or trustees,
- shall direct the affairs of the corporation only
otherwise they shall be held liable jointly and
in accordance with the purposes for which it
severally for all damages resulting therefrom
was organized; (2) Duty of Diligence - shall not
suffered by the corporation, its stockholders or
willfully and knowingly vote for or assent to
members and other persons. [Sec. 31]
patently unlawful acts of the corporation or act
Where a director, by virtue of his office,
in bad faith or with gross negligence in
acquires for himself a business opportunity
directing the affairs of the corporation; and
which should belong to the corporation,
(3)Duty of Loyalty - shall not acquire any
thereby obtaining profits to the prejudice of
personal or pecuniary interest in conflict with
such corporation, he must account to the latter
their duty as such directors or trustees.
for all such profits by refunding the same,
unless his act has been ratified by a vote of the
Duty of Obedience
stockholders owning or representing at least
The Directors or Trustees and Officers to be
2/3 of the outstanding capital stock [Sec. 34]
elected shall perform the duties enjoined on
them by law and by the by-laws of the
Doctrine of Corporate Opportunity
corporation [Sec. 25]
Unless his act is ratified, a director shall refund
to the corporation all the profits he realizes on
Duty of Diligence
a business opportunity which:
Directors or trustees who (i) willfully and
(1) corporation is financially able to
knowingly vote for or assent to patently
undertake
unlawful acts of the corporation or (ii) who are
(2) from its nature, is in line with
guilty of gross negligence or bad faith in
corporations business and is of practical
directing the affairs of the corporation or (iii)
advantage to it; and
acquire any personal or pecuniary interest in
(3) one in which the corporation has an
conflict with their duty as such directors or
interest or a reasonable expectancy.
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by
The rule shall be applied notwithstanding the
the corporation, its stockholders or members
fact that the director risked his own funds in
and other persons. [Sec 31]
the venture. [Sec. 34]
Republic of the Philippines v. Sandiganbayan
By embracing the opportunity, the self-interest
(First Division) et al. (2011):
of the officer or director will be brought into
The conditions for the application of Sec. 31 of
conflict with that of his corporation. Hence,
the Corporation Code require factual

151
UP LAW BOC CORPORATION CODE MERCANTILE LAW

the law does not permit him to seize the who, having knowledge thereof, does not
opportunity even if he will use his own funds in forthwith express his objection in writing and
the venture. [Sundiang and Aquino] file the same with the corporate secretary shall
be solidarily liable with the stockholder
NOTE: concerned to the corporation and its creditors
Differences between Sec. 31 and Sec. 34: for the difference in value [Sec. 65]
(1) First, while both involve the same subject
matter (business opportunity) they concern iii. PERSONAL LIABILITIES
different personalities; Sec. 34 is
applicable only to directors and not to GENERAL RULE
officers, whereas Sec. 31 applies to
directors, trustees and officers. Price v. Innodata Phils., Inc. (2008):
(2) Second, Sec. 34 allows a ratification of a Members of the Board, who purport to act in
transaction by a self-dealing director by good faith for and in behalf of the corporation
vote of stockholders representing at least within the lawful scope of their authority, are
2/3 of the outstanding capital stock. not liable for the consequences of their acts.
[Villanueva] When the acts are of such nature and done
under those circumstances, they are attributed
H.2. LIABILITIES to the corporation alone and no personal
liability is incurred.
i. SOLIDARY LIABILITY FOR DAMAGES The provisions on seizing corporate
opportunity and disloyalty [Secs. 31 and 34]
(1) Willfully and knowingly voting for and shall also apply to corporate officers.
assenting to patently unlawful acts of the
corporation; [Sec. 31] NOTE:
(2) Gross negligence or bad faith in directing Members of the BOD who are also officers are
the affairs of the corporation; [Sec. 31] held to a more stringent liability because they
(3) Acquiring any personal or pecuniary are in-charge of day-to-day activities [Campos]
interest in conflict of duty; [Sec. 31]
(4) Consenting to the issuance of watered Doctrine Of Limited Doctrine Of Immunity
stocks, or, having knowledge thereof, Liability
failing to file objections with secretary; [Sec. Shields the corporators Protects a person
65] from corporate liability acting for and in
(5) Agreeing or stipulating in a contract to beyond their agreed behalf of the
hold himself liable with the corporation; or contribution to the corporation from
(6) By virtue of a specific provision of law capital or shareholding being himself
in the corporation. personally liable for
ii. LIABILITY FOR WATERED STOCKS his authorized
Watered Stocks stocks issued for a actions
consideration less than its par or issued value
or for a consideration in any form other than Tramat Mercantile, Inc. vs. CA, (1994),
cash, valued in excess of its fair value. reiterated in Atrium Management Corp. v. CA,
(2001): Liability of Director, Trustee or Officer
Any director or officer of a corporation (Asked in 96 and 97)
consenting to the issuance of watered stocks or

152
UP LAW BOC CORPORATION CODE
Personal liability of a corporate director,
trustee or officer along (although not
necessarily) with the corporation may so validly
attach, as a rule, only when:
(1) He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to
the corporation, its stockholders or other
persons;
(2) He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
(3) He agrees to hold himself personally and
solidarily liable with the corporation; or
(4) He is made, by a specific provision of law,
to personally answer for his corporate
action
iv. Special Facts Doctrine
Strong v. Repide (1909):
Even though a director may not be under the
obligation of a fiduciary nature to disclose to a
shareholder his knowledge affecting the value
of the shares, that duty may exist in special
cases.
General Rule:
Majority view: Directors only owe its duty to the
corporation. They owe no fiduciary duty to
stockholders but they may deal with each other
at fair and reasonable terms, as if they were
unrelated. No duty to disclose facts known to
the director or officer. [Taylor v. Wright, 1945]
NOTE: Minority View (Realistic View) recognizes
the directors obligation to the stockholders
individually as well as collectively, and refuses
to permit him to profit at the latters expense
by the use of information obtained as a result
of official position and duties.
Exception:
153
MERCANTILE LAW
Special Facts Doctrine: Conceding the absence
of a fiduciary relationship in the ordinary case,
courts nevertheless hold 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.
[Strong v. Repide, 1909]
I. RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required.
West Coast Life Ins. Co. v. Hurd (1914); Time Inc.
v. Reyes (1971):
Criminal action is limited to the corporate
agents guilty of an act amounting to a crime
and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the
corporation, the directors may be held
criminally liable.
Ong v. CA (2003):
The Trust Receipts Law recognizes the
impossibility of imposing the penalty of
imprisonment on a corporation. Hence, if the
entrustee is a corporation, the law makes the
officers or employees or other persons
responsible for the offense liable to suffer the
penalty of imprisonment. The reason is
obvious: corporations, partnerships,
associations and other juridical entities cannot
be put to jail. Hence, the criminal liability falls
on the human agent responsible for the
violation of the Trust Receipts Law.
J. INSIDE INFORMATION
UP LAW BOC CORPORATION CODE
The fiduciary position of insiders 1 , directors,
and officers prohibits them from using
confidential information relating to the
business of the corporation to benefit
themselves or any competitor corporation in
which they may have a mere substantial
interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation
K. CONTRACTS
K.1. BY SELF-DEALING DIRECTORS WITH
THE CORPORATION
General Rule: A contract of the corporation
with one or more of its directors or trustees is
VOIDABLE, at the option of such corporation.
[Sec. 32]
Exceptions:
Such contract is VALID if all of the following
conditions are present:
(a) That the presence of such director or
trustee in the board meeting in which the
contract was approved was not necessary
to constitute a quorum for such meeting;
1 Insider means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling the issuer;
(c) a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer
or the security that is not generally available to the public; (d) 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 (e) a person who learns
such information by a communication from any of the foregoing
insiders (3.8, Sec Regulations Code)
154
MERCANTILE LAW
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract;
(c) That the contract is fair and reasonable
under the circumstances; and
(d) That in case of an officer, the contract has
been previously authorized by the BOD.
Ratification
In case of absence of the first two conditions
above, contract may be ratified if:
(a) Stockholders representing at least 2/3 of
the outstanding capital stock or at least
2/3 of the members in a meeting called for
the purpose voted to ratify the contract.
(b) Full disclosure of the adverse interest of
the directors or trustees involved is made
at such meeting.
(c) Contract is fair and reasonable under the
circumstances
K.2. BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
If the interests of the interlocking director in the
corporations are both substantial
(stockholdings exceed 20% of outstanding
capital stock).
General Rule: A contract between two or more
corporations having interlocking directors shall
not be invalidated on that ground alone. [Sec.
32]
Exception: If contract is fraudulent or not fair
and reasonable under the circumstances
If the interest of the interlocking director in one
of the corporations is nominal (stockholdings
20% or less) while substantial in the other, the
contract shall be VALID, if the following
conditions are met:
(a) The presence of such director or trustee in
the board meeting in which the contract
UP LAW BOC CORPORATION CODE
was approved was NOT necessary to
constitute a quorum for such meeting
(b) That the vote of such director or trustee
was not necessary for the approval of the
contract
(c) That the contract is fair and reasonable
under the circumstances.
Where (a) and (b) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in
a meeting called for the purpose voted to ratify
the contract, provided that:
(a) Full disclosure of the adverse interest of
the directors/trustees involved is made on
such meeting;
(b) The contract is fair and reasonable under
the circumstances.
K.3. MANAGEMENT CONTRACTS [SEC
44]
See: Corporate Powers (2)(h) above
L. EXECUTIVE COMMITTEE
L.1. CREATION
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board.
Said committee may act, by majority vote of all
its members, on such specific matters within
the competence of the board, as may be
delegated to it in the by-laws or on a majority
vote of the board [Sec. 35]
L.2. LIMITATION ON ITS POWERS
CANNOT act on the following:
(1) Matters needing stockholder approval [Sec.
35];
155
MERCANTILE LAW
(2) Filling up of board vacancies;
(3) Amendment, repeal or adoption of by-laws
[Sec. 35];
(4) Amendment or repeal of any resolution of
the Board which by its express terms is not
amendable or repealable [Sec. 35];
(5) Cash dividend distribution [Sec. 35]; and
(6) Acts which would render the BOD
powerless and free from all responsibilities
imposed on it by law [Campos]
Filipinas Port Services Inc. v. Go (2007):
Under Sec. 35 of the Corporation Code, the
creation of an executive committee must be
provided for in the by-laws of the corporation.
Unfortunately, the by-laws of the corporation
in this case are silent as to the creation by its
BOD of an executive committee.
(1) Notwithstanding the silence of the by-laws
on the matter, the SC did not rule that the
BODs creation of the executive committee
is illegal or unlawful.
(2) One reason is the absence of a showing as
to the true nature and functions of said
executive committee considering that the
"executive committee," referred to in Sec.
35 of the Corporation Code which is as
powerful as the BOD and in effect acting
for the board itself, should be
distinguished from other committees
which are within the competency of the
board to create at anytime and whose
actions require ratification and
confirmation by the board.
(3) Another reason is that the BOD has the
power to create positions not provided for
in the by-laws since the board is the
corporations governing body.
M. MEETINGS
M.1. REGULAR OR SPECIAL
Who May Attend?
UP LAW BOC CORPORATION CODE
The members of the Board themselves;
directors in Board meetings cannot be
represented or voted by proxies.
Expertravel and Tours, Inc. v. CA, (May 26,
2005):
In the Philippines, teleconferencing and
videoconferencing of members of BOD of
private corporations is a reality, in light of
Republic Act No. 8792. The Securities and
Exchange Commission issued SEC
Memorandum Circular No. 15, on November
30, 2001, providing the guidelines to be
complied with in relation to such conferences.
i. WHEN AND WHERE
When? [Sec.53]
(1) Regular meetings of directors or trustees
shall be held monthly, unless the by-laws
provide otherwise.
(2) Special meetings of the BOD or trustees
may be held at any time upon the call of
the president or as provided in the by-laws.
Where? [Sec. 53]
Meetings of directors or trustees of
corporations may be held anywhere in or
outside of the Philippines, unless the by-laws
provide otherwise.
ii. NOTICE
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least 1
day prior to the scheduled meeting, unless
otherwise provided by the by-laws.
A director or trustee may waive this
requirement, either expressly or impliedly
M.2. WHO PRESIDES
The president presides, unless the by-laws
provide otherwise. [Sec. 54]
156
MERCANTILE LAW
M.3. QUORUM
General Rule: Majority of the number of
directors or trustees as fixed in the articles of
incorporation. [Sec. 25]
Exceptions:
(1) Unless the articles of incorporation or the
by-laws provide for a GREATER majority,
or
(2) In case of election of officers where a vote
of a majority of all the members of the
board is needed.
Tan v. Sycip (2006):
Whether or not "dead members" are entitled to
exercise their voting rights (through their
executor or administrator), depends on the
articles of incorporation or by-laws.
The quorum in a members meeting is to be
reckoned as the actual number of members of
the corporation. What happens in the event of
the death of one of them?
(1) In stock corporations, shareholders may
generally transfer their shares. Thus, on
the death of a shareholder, the executor or
administrator duly appointed by the Court
is vested with the legal title to the stock
and entitled to vote it. Until a settlement
and division of the estate is effected, the
stocks of the decedent are held by the
administrator or executor.
(2) On the other hand, membership in and all
rights arising from a non-stock corporation
are personal and non-transferable, unless
the articles of incorporation or the bylaws
of the corporation provide otherwise. In
other words, the determination of whether
or not dead members are entitled to
exercise their voting rights (through their
executor or administrator), depends on the
Articles of Incorporation or by-laws.
M.4. RULE ON ABSTENTION
UP LAW BOC CORPORATION CODE
A vote of abstention is considered to be a vote
in itself. Abstentions will not be counted
towards the affirmative and such refusal to
vote does not indicate acquiescence in the
action of those who vote.
VIII. Stockholders and
Members
A. RIGHTS OF A STOCKHOLDER AND
MEMBERS
(1) Direct or indirect participation in
management (Sec. 6)
(2) Voting rights (Sec. 6)
(3) Right to remove directors (Sec. 28)
(4) Proprietary rights
(a) Right to dividends (Secs. 43 and 71)
(b) Appraisal right (Sec. 81)
(c) Right to issuance of stock
certificate for fully paid shares (Sec.
64)
(d) Proportionate participation in the
distribution of assets in liquidation
(Sec. 122)
(e) Right to transfer of stocks in
corporate books (Sec. 63)
(f) Pre-emptive right (Sec. 39)
(5) Right to inspect books and records (Sec.
74)
(6) Right to be furnished with the most recent
financial statements/reports (Sec. 75)
(7) Right to recover stocks unlawfully sold for
delinquent payment of subscription (Sec.
69)
(8) Right to file individual suit, representative
suit and derivative suits
A.1. DOCTRINE OF EQUALITY OF SHARES
All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
157
MERCANTILE LAW
Incorporation is silent on such differences. [CIR
v. CA, CTA, and A. Soriano Corporation (1999)]
Doctrine of Equality of Shares provides that
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. [Sundiang and Aquino]
The default rule is that all stockholders have
equal right and obligations, expressed in the
last paragraph of Sec. 6 of the Corporation
Code which provides, each share shall be
equal in all respects to every other share.
[Villanueva]
Note:
However, when preferences or restrictions are
made to apply to a class of shares, then such
preferences on restrictions shall exist and be
valid only when provided in the articles of
incorporation and stated in the certificate of
stock. [Villanueva]
Sec. 6 of the Corporation Code also contains a
Board-enabling clause that although the
default rule is that all shareholders have equal
rights and obligations, nevertheless, when
authorized by the articles of incorporation, the
BOD, may fix the terms and conditions of
preferred shares of stock or any series thereof,
or to classify its shares for the purpose of
insuring compliance with constitutional or
legal requirements; but such terms and
conditions shall be effective upon filing of a
certificate thereof with the SEC. Thus, a
preference or restriction on shares may be valid
and effective only if the same has formally
been registered with the SEC and thereby
becomes public records binding on the public.
[Villanueva]
Nature of the Rights of Members
UP LAW BOC CORPORATION CODE
The eleemosynary nature of every non-stock
corporation defines the characteristic of
membership therein as being essentially
personal in character and therefore essentially
non-transferable in nature.
Sec. 89 of the Corporation Code specifically
provides that in a non-stock corporation, the
right of members of any class or classes to vote
may be limited, broadened or denied to the
extent specified in the articles of incorporation
or the by-laws.
The SEC has opined that the rule in Sec. 6
allowing non-voting shares to vote on specified
fundamental matters does not apply to non-
voting members of a non-stock corporation;
that insofar as members of a non-stock
corporation, the applicable provision is Sec. 89,
which specifically provides that members may
be denied entirely their voting rights in the
articles of incorporation or by-laws of the
corporation. [SEC Opinion, 4 September 1995]
B. PARTICIPATION IN MANAGEMENT
B.1. PROXY
Stockholders and members may vote in person
or by proxy in all meetings of stockholders or
members (Sec. 58).
The right to issue a proxy is vested with public
interest when it comes to stock corporations;
although it may be regulated under the by-
laws, it cannot be denied, since it is an aspect
of ownership interest of stockholders.
However, the right of members to vote by proxy
may be denied under the articles of
incorporation or by-laws of a non-stock
corporation (Sec. 89)
Requisites for a Valid and Enforceable Proxy:
(1) It must be in writing
158
MERCANTILE LAW
(2) Signed by the stockholder or member of
record; and
(3) Filed with the corporation before the
scheduled meeting with the Corporate
Secretary
Procedural Matters Relating to Proxies:
(1) Proxy solicitation involves the securing
and submission of proxies, while proxy
validation concerns the validation of such
secured and submitted proxies;
(2) The SECs power to pass upon the validity
of proxies in relation to election
controversies has effectively been
withdrawn, tied as it is to its abrogated
quasi-judicial powers, and has been
transferred to the RTC Special Commercial
Courts pursuant to the terms of Sec. 5.2 of
the Securities Regulation Code;
(3) Nevertheless, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporations violations of SEC rules and
regulations, but that motive alone should
not be sufficient to deprive the SEC of its
investigatory and regulatory powers,
especially so since such powers are
exercisable on a motu proprio basis.
The fact that the jurisdiction of the RTC Special
Commercial Courts is confined to the voting on
election of officers, and not all matter which
may be voted upon by stockholders, elucidates
that the power of the SEC to regulate proxies
remains extant and could very well be
exercised when stockholders vote on matters
other than the election of directors. [GSIS v. CA
(2009):]
B.2. VOTING TRUST
An arrangement created by one or more
stockholders for the purpose of conferring
upon a trustee or trustees the right to vote and
other rights pertaining to the shares for a
UP LAW BOC CORPORATION CODE MERCANTILE LAW

period not exceeding 5 years at any time (Sec. PROXY TRUSTEE

59). Revocable at will in Irrevocable, as long as
any manner, no misconduct or fraud.
Under a voting trust arrangement, a EXCEPT if coupled
stockholder of a stock corporation parts with with an interest.
the naked or legal title, including the power to Max of 5 yrs at a Max of 5 yrs at a time
vote, of the shares and only retains the time (unless the voting trust
beneficial ownership of the stock. A voting is specifically required
trustee is a share owner vested with colorable as a condition in a loan
and naked title of the shares covered for the agreement)
primary purpose of voting upon stocks that he SEC can pass on validity
does not own.
B.3. CASES WHEN STOCKHOLDERS
A voting trust agreement shall be ineffective ACTION IS REQUIRED
and unreasonable unless:
(1) It is in writing and notarized; Under Sec. 6 of the Corporation Code, each
(2) Specify the terms and conditions thereof; share of stock is entitled to vote, unless
and otherwise provided in the articles of
(3) A certified copy of such agreement shall be incorporation or declared delinquent under Sec.
67 of the Code. [Tan v. Sycip (2006)]
filed with the corporation and with the SEC.
In non-stock corporations, the voting rights
PROXY TRUSTEE
attach to membership. Members vote as
Principalagent Trustee-beneficiary
persons, in accordance with the law and the
Proxy cannot exceed The only limit to
by-laws of the corporation. Each member shall
delegated authority. authority is that the act
be entitled to one vote unless so limited,
must be for the benefit
broadened, or denied in the articles of
of trustee. (fiduciary
incorporation or by-laws. When the principle
obligation)
for determining the quorum for stock
Must be in writing Must be in writing and
corporations is applied by analogy to non-
notarized
stock corporations, only those who
Copy must be filed Copy must be filed with
are actual members with voting rights should
with the SEC and the
be counted.
corporation. corporation.
No transfer. Transfer of legal title to i. By a Majority Vote
trustee. 1. Power to enter into management contracts
Proxy exercises Trustee exercises (Sec. 44)
voting rights only for absolute voting rights
a specific meeting continuously, subject General Rule
(unless otherwise only to fiduciary duty. Requires approval by majority of the BOD/BOT
provided) and approval by stockholders owning at least
Proxy cannot be Trustee can be director the majority of the outstanding capital
director because he holds legal stock/majority of members of both the
title over the shares managing and the managed corporation

Exceptions

159
UP LAW BOC CORPORATION CODE
(1) Where a stockholder/s 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) Where a majority of the members of the
managing corporations BOD also
constitute a majority of the managed
corporations BOD
Requires at least 2/3 votes of the outstanding
capital stock/membership of the managed
corporation.
BUT only majority vote is required for the
managing corporation.
2. Amendments to by-laws (Sec. 48)
Requires approval by majority of the BOD/BOT
and approval by stockholders owning at least
the majority of the outstanding capital
stock/majority of members
Includes all stockholders with or without voting
rights
3. Revocation of delegation to the BOD of the
power to amend or repeal or adopt by-laws (Sec.
48)
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members
4. Calling a meeting to remove directors (Sec.
28)
Meeting for the removal of directors or trustees,
or any of them, must be called by the secretary
on order of the president or on the written
demand of the stockholders representing or
holding at least a majority of the outstanding
capital stock/majority of members
160
MERCANTILE LAW
5. Granting compensation other than per diems
to directors (Sec. 30)
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority of
the outstanding capital stock
6. Consideration for no-par shares (Sec. 62)
When the Articles of Incorporation or the BOD
does not provide for the value of no-par shares,
the value of such shares shall be determined
by the stockholders representing at least a
majority of the outstanding capital stock
ii. By a Two-Thirds Vote
1. Amendment of Articles of Incorporation (Sec.
16)
Amendment of the Articles of Incorporation
may be made by a majority vote of the
BOD/BOT and the vote or written assent of the
stockholders representing at least two-thirds
2/3 of the outstanding capital stock, without
prejudice to the appraisal right of dissenting
stockholders.
Includes all stockholders with or without voting
rights
Amendment of Articles of Incorporation of close
corporations (Sec 103)
Amendment to the Articles of Incorporation
which seeks to delete or remove any provision
required to be contained in the Articles of
Incorporation of Close Corporations or to
reduce a quorum or voting requirement stated
in said Articles of Incorporation requires the
affirmative vote of at least 2/3 of the
outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
UP LAW BOC CORPORATION CODE
provided in the Articles of Incorporation at a
meeting duly called.
2. Delegating the power to amend or repeal by-
laws or adopt new by-laws (Sec. 48)
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-laws
requires approval by at least 2/3 of the
outstanding capital stock/membership.
Revocation of the delegation requires only
majority vote of the outstanding capital
stock/membership.
3. Extending/shortening corporate term (Sec.
37)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without voting
rights
4. Increasing/decreasing capital stock (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without voting
rights
5. Incurring, creating, increasing bonded
indebtedness (Sec. 38)
Requires approval by a majority vote of the
BOD and approval by at least 2/3 of the
outstanding capital stock.
Includes all stockholders with or without voting
rights
6. Issuance of shares not subject to pre-emptive
right (Sec. 39)
161
MERCANTILE LAW
Shares issued in good faith in exchange for
property or previously incurred indebtedness
with the approval of the stockholders
representing 2/3 of the outstanding capital
stock are not subject to pre-emptive rights.
7. Sale/disposition of all or substantially all of
corporate assets(Sec. 40)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without voting
rights
Note:
In non-stock corporations where there are NO
members with voting rights, the vote of at least
the majority of the BOT will be sufficient
authorization for any sale or disposition of all
or substantially all of corporate assets. (Sec.
40)
8. Investment of funds in another business (Sec.
42)
Requires approval by a majority vote of the
BOD/BOT and approval by at least 2/3 of the
outstanding capital stock/membership.
Includes all stockholders with or without voting
rights
9. Dividend declaration (Sec. 43)
No stock dividend shall be issued without the
approval of stockholders representing not less
than 2/3 of the outstanding capital stock.
10. Power to enter into management contracts
(Sec. 44)
Please see discussion under By a Majority Vote
UP LAW BOC CORPORATION CODE
11. Removal of directors or trustees (Sec. 28)
Any director or trustee may be removed from
office by a vote of the stockholders holding or
representing at least 2/3 of the outstanding
capital stock/membership.
12. Ratifying contracts with respect to dealings
with directors/ trustees (Sec. 32)
A contract of the corporation with one or more
of its directors is voidable, at the option of such
corporation, unless all the following conditions
are present:
(1) The directors presence in the BOD
meeting in which the contract was
approved was not necessary to constitute a
quorum
(2) The vote of such director was not necessary
for the approval of the contract
(3) The contract is fair and reasonable under
the circumstances
(4) In case of an officer, the contract has been
previously authorized by the BOD.
Where any of the first two conditions is absent,
in the case of a contract with a director, such
contract may be ratified by the vote of the
stockholders representing at least 2/3 of the
outstanding capital stock provided that the
contract is fair and reasonable under the
circumstances.
13. Ratifying acts of disloyalty of a director (Sec.
34)
General Rule
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits, he must account to
the corporation for all such profits by refunding
it.
Exception
162
MERCANTILE LAW
His act may be ratified by a vote of the
stockholders owning or representing at least
2/3 of the outstanding capital stock.
14. Stockholders approval of the plan of merger
or consolidation (Sec. 77)
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
approval by at least 2/3 of the outstanding
capital stock/membership of each corporation
at separate corporate meetings duly called.
Amendments to the plan of merger or
consolidation also requires approval by
majority vote of each of the BOD and 2/3 vote
of the outstanding capital stock/membership
of each corporation voting separately.
Includes all stockholders with or without voting
rights
15. Distribution of assets in non-stock
corporations (Sec. 95)
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least 2/3 of the
members with voting rights.
16. Incorporation of a religious society (Sec. 116)
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church, unless
forbidden by the constitution, rules,
regulations, or discipline of the religious
denomination, sect or church of which it is a
part, or by competent authority, may, upon
written consent and/or by an affirmative vote
at a meeting called for the purpose of at least
2/3 of its membership, incorporate for the
administration of its temporalities or for the
UP LAW BOC CORPORATION CODE
management of its affairs, properties and
estate.
17. Voluntary dissolution of a corporation (Sec.
118-119)
Requires a resolution adopted by a majority
vote of the BOD/BOT, and by a resolution duly
adopted by the affirmative vote of the
stockholders owning at least 2/3 of the
outstanding capital stock/membership at a
meeting to be held upon call for such purpose.
iii. By Cumulative Voting
Election of Directors or Trustees (Sec. 24) - A
stockholder may vote such number of shares
for as many persons as there are directors to
be elected or he may cumulate said shares and
give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal, or he may
distribute them on the same principle among
as many candidates as he shall see fit:
Provided, That the total number of votes cast
by him shall 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.
C. PROPRIETARY RIGHTS
C.1. RIGHT TO DIVIDENDS
General Rule
The right to dividends vests upon lawful
declaration by the BOD. From that time,
dividends become a debt owing to the
shareholders. No revocation can be made.
Exceptions
(1) Dividends are revocable if NOT yet
announced or communicated to the
stockholders.
163
MERCANTILE LAW
(2) Stock dividends, even if already declared,
may be revoked prior to actual issuance
since these are not distributions but merely
representations of changes in the capital
structure.
Note:
Right to dividends vests upon declaration so
whoever owns the stock at such time also owns
the dividends. Subsequent transfer of stock
would not carry with it right to dividends
UNLESS agreed upon by the parties.
C.2. RIGHT OF APPRAISAL
Right to withdraw from the corporation and
demand payment of the fair value of the shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure (Sec. 81). The amount paid to the
stockholder is the fair value of his shares as of
the day prior to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of the corporate
action (Sec. 82).
i. Instances of appraisal right
(1) Extension or reduction or corporate term
(Sec. 81)
(2) Amendment to Articles of Incorporation
which involves change in the rights of
stockholders, authorize preferences
superior to those stockholders, or restrict
the right of any stockholder (Sec. 81)
(3) Investment of corporate funds in another
business or purpose (Sec. 42)
(4) Sale or disposal of all or substantially all
assets of the corporation (Sec. 81)
(5) Merger or consolidation (Sec. 81)
ii. Requirements for exercise of appraisal right
(Secs. 82, 86)
(1) Stockholder must have voted against the
corporate act.
(2) Stockholder must make a written demand
on the corporation within 30 days after the
UP LAW BOC CORPORATION CODE
vote was taken for payment of the fair
value of his shares (failure to make
demand within such period shall be
deemed waiver of the appraisal right).
(3) Stockholder must submit his certificates of
stock to the corporation for notation within
10 days after demand for payment.
Otherwise, right to appraisal may be
terminated at the option of corporation.
iii. Effect of demand (Sec. 83)
ALL rights accruing to such shares, including
voting and dividend rights, shall be suspended
EXCEPT the right of such stockholder to
receive payment of the fair value thereof
Immediate RESTORATION of voting and
dividend rights if the dissenting stockholder is
not paid the value of his shares within 30 days
after the award.
iv. Extinguishment of appraisal right (Sec. 84)
(1) Withdrawal of demand by the stockholder
WITH CONSENT of the corporation
(2) Abandonment of the proposed action
(3) Disapproval by SEC of the proposed action
C.3. RIGHT TO INSPECT
i. Basis of Right
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
A stockholders right of inspection is based on
his ownership of the assets and property of the
corporation. Therefore, it is an incident of
ownership of the corporate property, whether
this ownership or interest is termed an
equitable ownership, a beneficial ownership, or
quasi-ownership. Such right is predicated upon
the necessity of self-protection. [Gokongwei Jr.
v. SEC (1979)]
164
MERCANTILE LAW
ii. Records/Books to be Kept (Sec. 74)
(1) Books that record all business transactions
of the corporation which shall include
contract, memoranda, journals, ledgers,
etc;
(2) Minute book for meetings of the
stockholders/members;
(3) Minute book for meetings of the
board/trustees;
(4) Stock and transfer book
Stock transfer agent - One engaged principally
in the business of registering transfers of
stocks in behalf of a stock corporation (licensed
by the SEC).
The corporate secretary is the one duly
authorized to make entries in the stock and
transfer book.
It is the corporate secretary's duty and
obligation to register valid transfers of stocks
and if said corporate officer refuses to comply,
the transferor-stockholder may rightfully bring
suit to compel performance. [Torres et al v. CA
(1997)]
iii. Financial Statements (Sec. 75)
Within 10 days from written request, the
corporation shall furnish its most recent
financial statement (balance sheet and profit
or loss statement as of last taxable year)
At a regular meeting, the Board shall present a
financial report of the operations of the
corporation for the preceding year, which shall
include financial statements duly signed and
certified by an independent CPA.
Exception
If the paid-up capital is less than P50,000
the financial statements may be certified under
oath by the treasurer or any responsible officer
of the corporation (instead of an independent
CPA).
UP LAW BOC CORPORATION CODE
iv. Requirements for the exercise of the right of
inspection (Sec. 74)
(1) It must be exercised at reasonable hours
on business days and in the place where
the corporation keeps all its records (i.e.,
principal office).
(2) The stockholder has not improperly used
any information he secured through any
previous examination.
(3) Demand is made in good faith or for a
legitimate purpose. If the corporation or
its officers contest such purpose or contend
that there is evil motive behind the
inspection, the burden of proof is with the
corporation or such officer to show the
same.
TEST to determine whether the purpose is
legitimate A legitimate purpose is one which
is germane to the interests of the stockholder
as such and not contrary to the interests of the
corporation. [Gokongwei v. SEC (1979)]
Among the changes introduced in the new
Code with respect to the right of inspection
granted to a stockholder are the following:
(1) The records must be kept at the
principal office of the corporation;
(2) The inspection must be made on
business days;
(3) The stockholder may demand a copy of
the excerpts of the records or minutes;
(4) The refusal to allow such inspection
shall subject the erring officer or agent
of the corporation to civil and criminal
liabilities.
However, while seemingly enlarging the right
of inspection, the new Code has prescribed
limitations to the same. It is now expressly
required as a condition for such examination
that the one requesting it must not have been
guilty of using improperly any information
through a prior examination, and that the
person asking for such examination must be
"acting in good faith and for a legitimate
165
MERCANTILE LAW
purpose in making his demand." [Gonzales v.
PNB (1983)]
Directors of a corporation have the unqualified
right to inspect the books and records of the
corporation at all reasonable times. The right
of inspection is not to be denied on the ground
that the director or shareholder is on unfriendly
terms with the officers of the corporation
whose records are sought to be inspected. A
director or stockholder can make copies,
abstracts, and memoranda of documents,
books, and papers as an incident to the right of
inspection, but cannot, without an order of a
court, be permitted to take books from the
office of the corporation. However, a director or
stockholder does not have any absolute right
to secure certified copies of the minutes of the
corporation until these minutes have been
written up and approved by the directors.
[Veraguth v. Isabela Sugar (1932)]
A stockholder of a sequestered company has
the right to inspect and/or examine the records
of the corporation pursuant to Sec. 74 of the
Corporation Code. [Africa v. PCGG (1992)]
v. Remedies when inspection is refused
(1) Mandamus
(2) Injunction
(3) Action for damages
(4) File an action under Sec. 144 to impose
a penal offense by fine and/or
imprisonment
Refusal to allow inspection is a criminal
offense. Such refusal, when done in violation of
Sec 74(4) of the Corporation Code, properly
falls within the purview of Sec. 144 of the same
code and thus may be penalized as an offense.
[Yujuico and Sumbilla v Quiambao and Pilapil
(2014)]
Because the obligations provided for in Sec. 74
fall on the corporation, violation of the same is
UP LAW BOC CORPORATION CODE
done by the corporation; thus criminal action
based on such violation can only be
maintained against corporate officers or other
such persons acting on behalf of the
corporations.
C.4. PRE-EMPTIVE RIGHT
i. Definition and Distinguished from Right of
First Refusal
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same can
be disposed of in favor of others; this right
includes all issues and disposition of shares of
any class. It is a common law right and may be
exercised by stockholders even without legal
provision. On the other hand, a right of first
refusal arises only by virtue of contract
stipulations, by which the right is strictly
construed against the right of person to
dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS, in
proportion to their respective shareholdings.
The purpose is to enable the shareholder to
retain his proportionate control in the
corporation and to retain his equity in the
surplus.
Note:
The broad phrase all issues or disposition of
shares of any class is construed to include not
only new shares issued in pursuance of an
increase in capital stock or from the unissued
shares which form part of the ACS, but also
covers treasury shares. Treasury shares
would come under the term disposition.
Likewise considering that it is not included
among the exceptions enumerated therein,
where pre-emptive right shall not extend, the
166
MERCANTILE LAW
intention is to include it in its application. (SEC
Opinion, 14 January 1993).
A pre-emptive right is a right claimed against
the corporation on unissued shares of its
capital stock, and likewise on treasury shares
held by the corporation; while the right of first
refusal is a right exercisable against another
stockholder on his shares of stock. [Villanueva]
Basis of Preemptive Right: to preserve the
existing proportional rights of the stockholders
[Campos]
ii. Limitations to exercise of pre-emptive right
(Sec. 39)
Such pre-emptive right shall NOT extend
to shares to be issued in compliance with
laws requiring stock offerings or minimum
stock ownership by the public;
It shall also NOT extend 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
It shall not take effect if denied in the
Articles of Incorporation or an amendment
thereto.
If one shareholder does not want to
exercise his pre-emptive right, the other
shareholders are not entitled to purchase
the corresponding shares of the
shareholder who declined. But if nobody
purchased the same and later on the board
re-issued the shares, the pre-emptive right
applies. [Sundiang and Aquino]
iii. Remedies in case of unwarranted denial
Injunction
Mandamus
The suit should be individual and not
derivative because the wrong done is to the
stockholders individually
UP LAW BOC CORPORATION CODE
SEC can cancel shares if the 3rd party is
not innocent
iv. Waiver/ Denial of Preemptive Right
Allowed by the Code provided that it is
made in the Articles of Incorporation
o Waiver made through Articles of
Incorporation would bind present
and subsequent shareholders
o 2/3 vote of the outstanding capital
stock is necessary before waiver is
binding
o Result of Non-placement of waiver
clause in Articles of Incorporation:
waiver shall not bind future
stockholders but only those who
agreed to it
The shareholders must be given
reasonable time within which to exercise
their pre-emptive rights. Upon expiration
of such period, any shareholders who did
not exercise such will be deemed to have
waived it. This is necessary so as to not
hinder future financing plans of the
corporation. Some new investors may be
willing to invest only if all the new shares
will be issued to them [Campos].
C.5. Right to Vote
Non-voting shares are not entitled to vote
except as provided for in the last
paragraph of Sec. 6.
Preferred or redeemable shares may be
deprived of the right to vote
Fractional shares of stock cannot be voted
Treasury shares have no voting rights as
long as they remain in the treasury.
No delinquent stock shall be voted (Sec. 71)
A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
C.6. RIGHT OF FIRST REFUSAL
167
MERCANTILE LAW
The right of first refusal provides that a
stockholder who may wish to sell or assign his
shares must first offer the shares to the
corporation or to the other existing
stockholders under terms and conditions which
are reasonable; and that only when the
corporation or the other stockholders do not or
fail to exercise their option, is the offering
stockholder at liberty to dispose of his shares
to third parties.
An agreement entered into between the two
majority stockholders of a corporation whereby
they mutually agreed not to sell, transfer, or
otherwise dispose of any part of their
shareholdings till after one year from the date
of the agreement. [Lambert v. Fox (1914)]
The right of first refusal is primarily an
attribute of ownership, and consequently can
be effected only through a contractual
commitment by the owner of the shares;
consequently, the waiver of a right of first
refusal when duly constituted can be effected
only by the registered owner. [PCGG v. SEC,
unreported (1988)]
D. REMEDIAL RIGHTS
D.1. INDIVIDUAL SUIT
A suit brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
D.2. REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against a
group of stockholders.
D.3. DERIVATIVE SUIT
A suit is brought by a stockholder for wrongful
acts committed by directors/trustees of the
corporation, when the stockholder finds that
UP LAW BOC CORPORATION CODE
he has no redress because the
directors/trustees are the ones vested by law
to decide whether or not to sue.
Derivative Suit as defined in jurisprudence
It is a suit by a shareholder to enforce a
corporate cause of action. The corporation is a
necessary party to the suit, and the relief which
is granted is a judgment against a third person
in favor of the corporation. [Chua v. CA (2004)]
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
[Sundiang and Aquino]
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons.
Requisites of Derivative Actions
(1) That the person instituting the action be a
stockholder or member at the time the acts
or transactions subject of the action
occurred and the time the action was filed;
(2) That the stockholder or member 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) That there is no appraisal right available
for the act(s) complained of;
(4) That the benefit recovered by the
stockholder/member in such suit is
accounted for the corporation; and
(5) That the suit is not a nuisance or
harassment suit. (Rule 8, Interim Rules of
Procedure for Intra-Corporate Controversies)
168
MERCANTILE LAW
Requisites of a Derivative Suit according to
Jurisprudence [SMC v. Kahn, 1989]
(1) the party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
(2) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
BOD for the appropriate relief but the
latter has failed or refused to heed his
plea; and
(3) the cause of action actually devolves on
the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit. [Lisam
Enterprises, Inc., represented by Lolita A.
Soriano and Lolita A. Soriano v. Banco de
Oro Unibank, Inc., et al., 2012]
NOTE: The wrong contemplated in a
derivative suit is one in which the injury alleged
be indirect as far as the stockholders are
concerned and direct only insofar as the
corporation is concerned. [De Leon]
Corporation should be made a party to the suit,
either as plaintiff or defendant, for res judicata
to apply.
BUT the personal injury suffered by the
stockholder cannot disqualify him from filing a
derivative suit in behalf of the corporation. It
merely gives rise to an additional cause of
action for damages against the erring
corporate officers. [Gochan v. Young (2001)]
Requisites based on jurisprudence
Evangelista vs. Santos (1950); SMC v. Kahn
(1989): The cause of action actually devolves
on the corporation, the wrong or harm having
been, or being caused to it and not the
shareholder filing the suit.
Symaco Trading Corp. v. Santos (2005): The
reliefs sought pertain to the corporation.
UP LAW BOC CORPORATION CODE
Recent rulings on the matter
Status of heirs as co-owners of shares
before partition of estate does not make
them shareholders until there is
compliance with Sec. 63 on the manner of
transferring shares, thus the heirs are not
automatically registered shareholders of
the corporation. [Reyes v. RTC of Makati
(2008)]
Stockholder may commence a derivative
suit for mismanagement, waste or
dissipation of corporate assets because of
a special injury to him for which he is
otherwise without redress. In effect, the
suit is an action for specific performance of
an obligation owed by the corporation to
the stockholders to assist its right of action
when the corporation is put on default by
the wrongful refusal of the directors or
management to make suitable measures
for its protection. [Yu v. Yukayguan
(2009)]
The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in
the BOD that exercises its corporate powers
and not in the president or officer thereof. But
where corporate directors are guilty of a breach
of trust, not of mere error of judgment or abuse
of discretion, and intra-corporate remedy is
futile or useless, a shareholders may institute a
derivative suit in behalf of himself and other
stockholders and for the benefit of the
corporation, to bring about a redress of the
wrong inflicted directly upon the corporation
and indirectly upon the stockholders. [Bitong v.
CA (1998)]
Jurisdiction over derivative suits lies with the
RTC (Sec. 5.2, Securities Regulation Code)
E. OBLIGATION OF A STOCKHOLDER
E.1. LIABILITY TO THE CORPORATION
FOR UNPAID SUBSCRIPTION (SEC. 67)
169
MERCANTILE LAW
A subscription contract is unconditional (i.e.,
obligation to pay is not be subject to any
contingency) and indivisible (as to the amount
and transferability [Fua Cun v. Summers,
(1923)]. Hence, if the subscriber paid 20% of
his subscription, he is not entitled to the
issuance of certificates corresponding to 20%
of the shares.
Unpaid claim refers to any unpaid subscription
and not to any indebtedness which a
subscriber may owe the corporation rising from
any other transaction. [China Banking Corp. v.
CA (1997)]
E.2. LIABILITY TO THE CORPORATION
FOR INTEREST ON UNPAID
SUBSCRIPTION IF SO REQUIRED BY THE
BY-LAWS (SEC. 66)
General Rule: Subscribers for stock are NOT
liable to pay interest on his unpaid
subscription
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in
the by-laws, such rate shall be deemed to be
the legal rate (Sec. 66)
Notes:
Transfer for consideration of treasury shares is
a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
shares by a stockholder to a third person is a
sale (or disposition). Transfer of unissued
shares is subscription.
Shareholders are not creditors of the
corporation with respect to their shareholdings
thereto and the principle of compensation or
set-off has no application.
Subscription contract is NOT required to be in
writing.
UP LAW BOC CORPORATION CODE
E.3. LIABILITY FOR WATERED STOCKS
(SEC. 65)
i. Definition
These are shares issued as fully paid when in
truth no consideration is paid, or the
consideration received is known to be less than
the par value or issued value of the shares. (Sec.
65)
These include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation
has received less sum of money than its
par or issued value (discounted share)
Issued for consideration other than actual
cash (i.e., property or services), the fair
valuation of which is less than its par or
issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus
profit to justify it.
Note:
Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks. Subsequent
increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
determined at the time of issuance of the stock.
ii. Liability of directors or officers
Any director or officer of a corporation
consenting to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith express his objection in writing and
file the same with the corporate secretary shall
be SOLIDARILY liable with the stockholder
concerned to the corporation and its creditors
for the difference in value (Sec. 65).
170
MERCANTILE LAW
On the issue of the solidary obligation of the
corporate officers impleaded vis--vis the
corporation for Mapuas illegal dismissal, "[i]t
is hornbook principle that personal liability of
corporate directors, trustees or officers
attaches only when: (a) they assent to a
patently unlawful act of the corporation, or
when they are guilty of bad faith or gross
negligence in directing its affairs, or when
there is a conflict of interest resulting in
damages to the corporation, its stockholders or
other persons; (b) they consent to the issuance
of watered down stocks or when, having
knowledge of such issuance, do not forthwith
file with the corporate secretary their written
objection; (c) they agree to hold themselves
personally and solidarily liable with the
corporation; or (d) they are made by specific
provision of law personally answerable for their
corporate action. [SPI Technologies Inc. v
Mapua (2014)]
E.4. LIABILITY FOR DIVIDENDS
UNLAWFULLY PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf,
he shall be liable as a trustee for the
corporation and must account for the profits
which otherwise would have accrued to the
corporation (Sec. 31).
Violations of any of the provisions of the
Corporation Code not otherwise specifically
penalized therein shall be punished 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 5 years, or
both, in the discretion of the court (Sec. 144).
UP LAW BOC CORPORATION CODE
E.5. LIABILITY FOR ASSUMING TO ACT
AS A CORPORATION KNOWING IT TO BE
WITHOUT AUTHORITY
All persons who assume to act as a corporation
knowing it to be without authority to do so
shall be liable as general partners for all debts,
liabilities and damages incurred or arising as a
result thereof.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not be
allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
was in fact no corporation (Sec. 21).
F. MEETINGS
General Rule: Stockholders or members
approval is expressed in a meeting duly called
and held for the purpose.
Exception: In case of amendment of Articles of
Incorporation, approval may be expressed by
referendum or written assent of the
stockholders or members (Sec. 16)
Who May Attend and Vote?
Stockholders, either in person or by proxy
Pledgors or mortgagors (Sec. 55)
Pledgee or mortgagee, IF expressly given
such right by the pledgor or mortgagor in
writing which is recorded on the corporate
books(Sec. 55)
Executors, administrators, receivers, and
other legal representatives duly appointed
by the court, without need of any written
proxy(Sec. 55)
ALL joint owners of stocks, or any one of
them with the consent of ALL the co-
171
MERCANTILE LAW
owners, unless there is a written proxy,
signed by all the co-owners(Sec. 56)
Any one of the joint owners of shares
owned in an "and/or" capacity or a proxy
thereof(Sec. 56)
F.1. REGULAR OR SPECIAL
i. When and Where
When? (Sec. 50)
Regular meetings of stockholders or members
shall be held annually on a date fixed in the
by-laws, or if not so fixed, on any date in April
of every year as determined by the BOD or
trustees.
Where?
Stock: City or municipality where the
principal office of the corporation is
located, or, if practicable, in the principal
office of the corporation: Provided, Metro
Manila shall be considered a city or
municipality. (Sec. 51)
Non-stock: Any place even outside the
place where the principal office is located,
within the Philippines (Sec. 93)
ii. Notice
Notice (Sec. 50)
Regular Meetingwritten notice sent to all
shareholders or members at least 2 weeks
prior to the meeting, unless a different
period is required by the by-laws
Special Meetingwritten notice sent at
least 1 week prior to the meeting, unless
otherwise provided in the by-laws.
Subject to waiver, expressly or impliedly
(i.e., attendance despite no notice)
Effect of Failure to Give Notice: Failure to give
notice would render a meeting VOIDABLE at
the instance of an absent stockholder, who was
not notified of the meeting (Board v. Tan, 1959).
F.2. WHO CALLS THE MEETINGS
UP LAW BOC CORPORATION CODE
Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. (Sec. 50)
F.3. WHO PRESIDES AT THE MEETINGS
The president, unless the by-laws provide
otherwise.(Sec. 54)
The petitioning stockholder or member (when
there is no person authorized to call a meeting)
shall preside thereat until at least a majority of
the stockholders or members present have
chosen one of them as presiding officer.(Sec.
50)
F.4. QUORUM
General Rule: Stockholders representing
majority of the Outstanding Capital Stock or
majority of the members
Exception: The Code or the by-laws provide
otherwise
Where quorum is present at the start of a
lawful meeting, stockholders present cannot
without justifiable cause break the quorum by
walking out from said meeting so as to defeat
the validity of any act proposed and approved
by the majority. (However, stockholders can
break the quorum for justifiable causes.)
(Johnston vs. Johnston, 1965 CA decision)
F.5. MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of
stockholders or members, or of the BOD or
trustees shall be kept and preserved at the
principal office of every corporation.
Contents:
time and place of holding the meeting;
172
MERCANTILE LAW
how the meeting was authorized;
the notice given;
whether the meeting was regular or special,
if special its object;
those present and absent; and
every act done or ordered done at the
meeting.
Upon demand by any director/trustee or
shareholders/member, the following shall also
be noted in the minutes:
the time when any director, trustee,
stockholder or member entered or left the
meeting;
the yeas and nays on any motion or
proposition;
the protest of any director/trustee or
stockholder/member on any action or
proposed action.
Notes:
The minutes of any meetings shall be open to
inspection by any director/trustee or
stockholder/member at reasonable hours on
business days.
The director/trustee or stockholder/member
may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
Any officer or agent of the corporation refusing
to allow the examination and copying of the
minutes shall be:
(1) liable to the director/trustee or
stockholder/ member; and
(2) guilty of an offense punishable under Sec.
144 (Sec. 74)
However, the officer of agent may use as a
defense that:
(1) the person demanding examination or
copy thereof made improper use of any
information secured through any prior
examination of the records or minutes of
UP LAW BOC CORPORATION CODE
such corporation or of any other
corporation thereby;
(2) the person demanding examination or
copy acts in bad faith or has no legitimate
purpose in making his demand.
XIV. Capital Structure
A. SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued
stock in an existing corporation or a
corporation still to be formed shall be deemed
a subscription contract (Sec. 60).
A. 1. CHARACTERISTICS
A subscription is a contract for the acquisition
of unissued stock of a corporation whether
existing or still to be formed, and is in effect
the contribution or promised contribution of a
person to the capital of a corporation [Campos].
There can be a subscription only with reference
to unissued shares of the Authorized Capital
Stock (ACS), in the following cases:
(1) The original issuance of the ACS at the
time of incorporation.
(2) The opening, during the life of the
corporation, of the portion of the original
ACS previously unissued; or
(3) The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC.
[Villanueva]
A. 2. STATUS AS SHAREHOLDER
One may become a shareholder in a
corporation in either of two ways:
(1) By entering into a SUBSCRIPTION
CONTRACT with an existing or still to
be formed corporation (he becomes a
stockholder upon acceptance of the
corporation of his offer to subscribe
173
MERCANTILE LAW
whether the consideration is fully paid
or not).
Once a subscription contract is
perfected, the stockholder becomes a
debtor to the corporation and may be
liable to pay any unpaid portion
thereof upon call by the BOD.
(2) By acquisition of already issued shares
through:
(a) purchase of TREASURY SHARES
from the corporation
(b) acquisition of shares from existing
shareholders by SALE OR ANY
OTHER CONTRACT [Sundiang and
Aquino]
NOTES
Transfer of unissued shares = SUBSCRIPTION
Transfer of already issued shares = NOT
SUBSCRIPTION; can either be:
SALE/DISPOSITION BY CORPORATION of
treasury shares
SALE/DISPOSITION BY STOCKHOLDER
TO A THIRD PERSON
A. 3. TYPES OF SUBSCRIPTION
CONTRACTS
I. PRE-INCORPORATION SUBSCRIPTION
(SEC. 61)
It is a subscription for shares of stock of a
corporation still to be formed.
When pre-incorporation subscription is
IRREVOCABLE:
(1) For a period of at least 6 months from the
date of subscription, UNLESS (a) all of the
other subscribers consent to the revocation,
or (b) the incorporation fails to materialize
within 6 months or within a longer period
as may be stipulated in the contract of
subscription; or
UP LAW BOC CORPORATION CODE MERCANTILE LAW

(2) After the submission of the Articles of Labor performed for or services actually
Incorporation to the SEC. rendered to the corporation;
Amounts transferred from unrestricted
II. POST-INCORPORATION retained earnings to stated capital
SUBSCRIPTION (declaration of stock dividends); and
It is entered into after incorporation. Outstanding shares exchanged for stocks
in the event of reclassification or
A. 4. INTEREST ON UNPAID conversion;
SUBSCRIPTION Previously incurred indebtedness of the
General Rule corporation;
Stockholder is NOT liable to pay interest on his
unpaid subscription. B. 2. LIMITATIONS ON CONSIDERATION
Stocks shall NOT be issued:
Exception for a consideration less than the par or
If so required by the by-laws issued price thereof
in exchange for promissory notes or future
RATE: that fixed in the by-laws, otherwise, the service
legal rate (Sec. 66)
NOTES
NOTES Promissory notes and future service may be
Shareholders are NOT creditors of the used as consideration provided that certificates
corporation with respect to their shareholdings of stock will be issued ONLY AFTER actual
thereto and the principle of compensation or encashment of promissory note or
set-off has no application. performance of such services.

Subscription contract is NOT required to be in C. SHARES OF STOCK

writing.
B. CONSIDERATION FOR STOCKS
B. 1. FORMS OF CONSIDERATION (SEC.
62)
Actual cash
Property, tangible or intangible, actually
received by the corporation and necessary
or convenient for its use and lawful
purposes at a fair valuation equal to the
par or issued value of the stock issued
- Property should NOT be
encumbered. Otherwise, it would
impair the consideration.
- Valuation is initially determined by
the incorporators or the BOD,
subject to approval by the SEC.
C. 1. NATURE OF STOCK
Shares of stock are units into which the capital
stock is divided. A share of stock represents
interest of the holder thereof to participate in
the management of the corporation, to share
proportionally in the profits of the business
and, upon liquidation, to obtain an aliquot part
of corporate assets after all corporate debts
have been paid. [Campos]
A stockholder may own the share even if he is
not holding a certificate of stock.
Share of Stock Certificate of Stock
Evidence of the holders
Unit of interest in a
ownership of the stock
corporation
and of his right as a

174
UP LAW BOC CORPORATION CODE MERCANTILE LAW

shareholder and up to money than its par or issued value

the extent specified (discounted share)
therein. Issued for consideration other than
An incorporeal or actual cash (i.e., property or services),
Concrete and tangible the fair valuation of which is less than
intangible property
May be issued by its par or issued value
the corporation Issue stock dividend when there are no
May be issued only if the sufficient retained earnings or surplus
even if the
subscription is fully paid profit to justify it.
subscription is not
fully paid
NOTE
Stockholders of F. Guanzon and Sons, Inc. v Subsequent increase in the value of the
Register of Deeds of Manila (1962): A share of property used in paying the stock does not do
stock only typifies an aliquot part of the away with the watered stocks. Subsequent
corporation's property, or the right to share in increase in the value of the property used in
its proceeds to that extent when distributed paying the stock does not cure the defect in
according to law and equity, but its holder is issuance. The existence of watered stocks is
not the owner of any part of the capital of the determined at the time of issuance of the stock.
corporation. Nor is the shareholder entitled to
the possession of any definite portion of its II. LIABILITY OF DIRECTORS FOR
property or assets. The stockholder is not a co- WATERED STOCKS
owner or tenant in common of the corporate Any director or officer of a corporation
property. consenting to the issuance of watered stocks or
who, having knowledge thereof, does not
C. 2. SUBSCRIPTION AGREEMENTS (SEE forthwith express his objection in writing and
ABOVE) file the same with the corporate secretary shall
be solidarily liable with the stockholder
C. 3. CONSIDERATION FOR SHARES OF concerned to the corporation and its creditors
for the difference in value (Sec. 65).
STOCK (SEE ABOVE)
III. TRUST FUND DOCTRINE FOR
C. 4. WATERED STOCK
LIABILITY FOR WATERED STOCKS
Where the corporation issues watered stock
I. DEFINITION
and thereby assumes an ostensible
These are shares issued as fully paid when in
capitalization in excess of its real assets, the
truth no consideration is paid in any form, or
transaction necessarily involves the misleading
the consideration received is known to be less
of subsequent creditors, and whether done
than the par value or issued value of the shares.
with that purpose actually in mind or not, is at
(Sec. 65)
least a constructive fraud upon creditors.
Hence, it is held that recovery may be had by a
These include the following:
creditor in such case, even though the
Issued without consideration (bonus
corporation itself has no cause of action
share)
against the stockholders. Some of the earlier
Issued as fully paid when the
decisions put the right of recovery in such a
corporation has received less sum of
case upon the so-called trust fund doctrine.

175
UP LAW BOC CORPORATION CODE MERCANTILE LAW

In any view of the matter, however, the privileges or restrictions, as stated in the
creditors right of action to compel the making Articles of Incorporation.
good of the representation as to the
corporations capital is based on fraud, and the Classification of shares:
trust fund doctrine is only another way of (1) Common shares
expressing the same underlying idea. [De Leon] (2) Preferred shares
(a) Preference as to dividends
Despite the view of foreign authors that the (i) Participating and non-
fraud theory is the prevailing view, it would participating
seem that in the Philippine jurisdiction, the (ii) Cumulative and non-
trust fund doctrine on watered stock prevails. cumulative
(3) Par value shares
Philippine Trust Corp. v. Rivera (1923): It is (4) No-par value shares
established doctrine that subscription to the (5) Founders shares
capital of a corporation constitute a fund to (6) Redeemable shares
which creditors have a right to look for (7) Treasury shares
satisfaction of their claims and that the (8) Convertible shares
assignee in insolvency can maintain an action (9) Non-voting shares
upon any unpaid stock subscription in order to
realize assets for the payment of its debts General Rule
(citing Velasco v. Poizat, 1918). A corporation No share may be deprived of voting rights (Sec.
has no power to release an original subscriber 6)
to its capital stock from the obligation of
paying for his shares, without a valuable Exceptions
consideration for such release; and as against Preferred or
creditors a reduction of the capital stock can Redeemable shares,
take place only in the manner and under the Provided by the Code (e.g., Treasury
conditions prescribed by the statute or the shares)
charter or the articles of incorporation.
Moreover, strict compliance with the statutory There shall always be a class/series of shares
regulations is necessary. which have COMPLETE VOTING RIGHTS (Sec.
6)
C. 5. SITUS OF THE SHARES OF STOCK
Chua Guan v. Samahang Magsasaka, Inc. (1935): Doctrine of Equality of Shares
It is a general rule that for purposes of Each share shall be EQUAL in ALL respects to
execution, attachment and garnishment, it is every other share, except as otherwise
not the domicile of the owner of a certificate provided in the Articles of Incorporation and
but the domicile of the corporation which is stated in the certificate of stock (Sec. 6)
decisive.

C. 6. CLASSES OF SHARES OF STOCK

Shares of stock of stock corporations may be I. COMMON SHARES
divided into classes or series of shares or both. The most common type of shares, which enjoy
Each class or series of shares may have rights, no preference but the owners thereof are
entitled to management (via exclusive right to

176
UP LAW BOC CORPORATION CODE
vote) of the corporation and to equal pro-rata
division of profits after preference. It
represents a residual ownership interest in the
corporation.
II. PREFERRED SHARES
Stocks which are given preference by the
issuing corporation in dividends, or in the
distribution of assets of the corporation in case
of liquidation, or both, or such other
preferences as may be stated in the Articles of
Incorporation which do not violate the
Corporation Code.
Unless the right to vote is clearly withheld, a
preferred stockholder would have such right as
it is an incident to stock ownership.
Limitations:
Preferred shares can only be issued with
par value.
Preferred shares must be stated in the
Articles of Incorporation and in the
certificate of stock.
The BOD may fix the terms and conditions
only when so authorized by the Articles of
Incorporation and such terms and
conditions shall be effective upon filing a
certificate thereof with the SEC.
Preference as to dividends:
(1) Participating and Non-participating
(a) Participating - those which, after
getting their fixed dividend preference,
share with common stocks the rest of
the dividends.
(b) Non-participating - those which, after
getting their fixed dividend preference,
have no more right to share in the
remaining dividends with the common
stocks.
(c) Unless otherwise provided, preferred
stocks are non-participating.
(2) Cumulative and Non-cumulative
177
MERCANTILE LAW
(a) Cumulative - regardless of lack of
profits in any given year, and lack of
declaration of dividends, the arrears for
such year have to be paid to the
preferred stocks in a subsequent year
(once profits are made) before any
dividends can be paid to the common
stocks.
(b) Non-Cumulative entitlement to
receipt of dividends essentially
depends on declaration of such; types:
(i) Discretionary right to dividends in
a particular year depends on the
discretion of the board, even if the
corporation has profits.
(ii) Mandatory a positive duty is
imposed to declare preferred
dividends every year that profits
are earned.
(iii) Earned cumulative or dividend credit
board with discretion not to
declare dividends even if there
were profits in a certain year;
however, once the board decides
that dividends will be declared, the
preferred stockholders have a right
to arrears in dividends for the years
when there were profits but no
dividend was declared.
(c) In the absence of any express
stipulation, preferred stocks are
deemed cumulative.
III. PAR VALUE SHARES
These are shares with a stated value set out in
the Articles of Incorporation. This remains the
same regardless of the profitability of the
corporation. This gives rise to financial
stability and is the reason why banks, trust
corporations, insurance companies and
building and loan associations must always be
organized with par value shares.
UP LAW BOC CORPORATION CODE
Par value is minimum issue price of such share
in the Articles of Incorporation which must be
stated in the certificate.
IV. NO-PAR VALUE SHARES
These are shares without a stated value.
A no par share does not purport to represent
any stated proportionate interest in the capital
stock measured by value, but only an aliquot
part of the whole number of such shares of the
issuing corporation (Agbayani)
Limitations:
Cannot have an issue price of less than
P5.00 per share (Sec. 6)
Once issued, they shall be deemed
fully paid and non-assessable and the
holders of such shares shall not be
liable to the corporation or to its
creditors in respect thereto (Sec. 6)
Entire consideration received by the
corporation shall be treated as capital
and shall not be available for
distribution as dividends (Sec. 6)
Articles of Incorporation must state the
fact that the corporation issues no-par
shares and the number of shares
Cannot be issued as preferred stocks
(Sec. 6)
Cannot be issued by banks, insurance
companies, trust companies, building
and loan associations, and public
utilities (Sec. 6)
Issued price may be fixed in the Articles
of Incorporation, or by the BOD
pursuant to authority conferred upon it
by the Articles of Incorporation, or, in
the absence thereof, by majority vote of
the outstanding shares in a meeting
called for the purpose (Sec. 62).
178
MERCANTILE LAW
V. FOUNDERS SHARES (SEC. 7)
These are shares, classified as such in the
Articles of Incorporation, which are given
certain rights and privileges not enjoyed by the
owners of other stocks.
Where exclusive right to vote and be voted for
in the election of directors is granted, such
right must be for a limited period not to exceed
5 years subject to approval by SEC. The 5 year
period shall commence from date of approval
by SEC.
VI. REDEEMABLE SHARES (SEC. 8)
These are shares which permit the issuing
corporation to redeem or purchase its shares.
Limitations:
Redeemable shares may be issued only
when expressly provided for in the
Articles of Incorporation (Sec. 8).
The terms and conditions affecting
said shares must be stated both in the
Articles of Incorporation and in the
certificate of stock (Sec. 8).
Redeemable shares may be deprived of
voting rights in the Articles of
Incorporation.
The corporation is required to maintain
a sinking fund to answer for
redemption price if the corporation is
required to redeem.
The redeemable shares are deemed
retired upon redemption unless
otherwise provided in the Articles of
Incorporation (i.e., if the Articles of
Incorporation allows for reissuance of
such shares).
Republic Planters Banks v. Agana (1997):
unrestricted retained earnings is NOT
necessary before shares can be
redeemed but there must be sufficient
assets to pay the creditors and to
answer for operations.
UP LAW BOC CORPORATION CODE
Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations (SEC Opinion, 24 Aug 1987).
NOTE
Redeemable shares reacquired shall be
considered retired and no longer issuable,
unless otherwise provided in the Articles of the
redeeming corporation (SEC Rules Governing
Redeemable and Treasury Shares, 26 April 1982).
VII. TREASURY SHARES (SEC. 9)
These are shares which have been issued and
fully paid for, but subsequently re-acquired by
the issuing corporation by purchase,
redemption, donation or through some other
lawful means. Such shares may again be
disposed of for a reasonable price fixed by the
BOD.
CIR v. Manning (1975) cited in San Miguel
Corporation v. Sandiganbayan (2000): Treasury
shares are issued shares, but being in the
treasury, do not have the status of outstanding
shares. Consequently, although a treasury
share, not retired by reacquisition, may be re-
issued or resold, such share, as long as it is
held by the corporation as a treasury share,
participates neither in the dividends, because
dividends cannot be declared by the
corporation to itself nor in the meetings of the
corporation as voting stock, for otherwise
equal distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetuate their
control of the corporation, though it still
represents a paid for interest in the property of
the corporation.
NOTE
Delinquent stocks, which are stocks that have
not been fully paid, may become treasury
stocks upon bid of the corporation in absence
of other bidders (Sec.68).
179
MERCANTILE LAW
VIII. CONVERTIBLE SHARES
A type of preferred stock that the holder can
exchange for a predetermined number of
common shares at a specified time
IX. NON-VOTING SHARES (SEC. 6)
General Rule
Non-Voting Shares are not entitled to vote.
Exceptions
Amendment of the Articles of
Incorporation
Adoption and amendment of by-laws
Sale, lease, exchange, other
disposition of all or substantially all of
the corporate property
Incurring, creating or increasing
bonded indebtedness
Increase or decrease of capital stock
Merger and consolidation
Investment of corporate funds in
another corporation or business
Dissolution of the corporation
D. PAYMENT OF BALANCE OF
SUBSCRIPTION (SEC. 66 AND 67)
D. 1. CALL BY BOD
The BOD of any stock corporation may at any
time declare due and payable to the
corporation unpaid subscriptions to the capital
stock and may collect the same or such
percentage thereof, in either case with accrued
interest, if any, as it may deem necessary.
Payment shall be made on the date specified
in the contract of subscription or on the date
stated in the call. Failure to pay on such date
shall render the entire balance due and
payable and shall make the stockholder liable
for interest at the legal rate on such balance,
unless a different rate of interest is provided for
in the by-laws. If within 30 days from said date
UP LAW BOC CORPORATION CODE
no payment is made, all stocks covered by said
subscription shall become delinquent and
subject to sale under Sec. 68 unless the BOD
orders otherwise.
There are 2 instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
(1) When, under the terms of the
subscription contract, subscription is
payable, not upon call, but
immediately, or on a specified day, or
when it is payable in installments at
specified times; and
(2) If the corporation becomes insolvent,
which makes the liability on the unpaid
subscription due and demandable,
regardless of any stipulation to the
contrary in the subscription agreement
[Villanueva]
D. 2. NOTICE REQUIREMENT
Where call is necessary, notice must be given
to the stockholder concerned. A call without
notice to the subscriber is practically no call at
all.
Lingayen Gulf Electric Power Co., Inc. v. Baltazar
(1965): The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain
an action for the call.
- The right to notice of call, however, may
be waived by the subscriber. [De Leon]
D. 3. SALE OF DELINQUENT SHARES(SEC.
68)
Delinquent Shares - These are shares for which
the corresponding subscription or balance
remains unpaid after a grace period of 30 days
from the date specified in the contract of
subscription or from the date stated in the call
made by the BOD. (Sec. 67)
180
MERCANTILE LAW
I. EFFECT OF DELINQUENCY(SEC. 71)
No delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholders meeting
The holder thereof shall NOT be entitled to any
of the rights of a stockholder except the right
to dividends. But the dividends it will receive
will be subject to Sec. 43, that is, cash
dividends shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, and stock dividends shall be
withheld until the unpaid subscription is fully
paid.
Such shares shall be subject to delinquency
sale.
II. CALL BY RESOLUTION OF THE BOD
(SEC. 68)
The BOD may, by resolution, order the sale of
delinquent stock and shall specifically state
the amount due on each subscription plus all
accrued interest, and the date, time and place
of the sale which shall not be less than 30 days
nor more than 60 days from the date the
stocks became delinquent, which is 30 days
after the date specified in the contract of
subscription or on the date stated in the call.
III. NOTICE OF SALE
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the
resolution shall be sent to every
delinquent stockholder either
personally or by registered mail.
(2) Notice of sale shall furthermore be
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.
UP LAW BOC CORPORATION CODE
IV. AUCTION SALE AND THE HIGHEST
BIDDER
Procedure for delinquency sale (Sec. 68)
Call for payment made by the BOD.
Notice of call served on each
stockholder.
Notice of delinquency issued by the
BOD upon failure of the stockholder to
pay within 30 days from date specified.
Service of notice of delinquency on the
non-paying subscriber, PLUS
publication in a newspaper of general
circulation in the province or city where
the principal office of the corporation is
located, once a week for 2 consecutive
weeks.
NOTE
Requirements on notice and publication are
mandatory. Lacking such requirements, the
stockholder may question the sale as provided
under Sec. 69.
Public auction - the highest bidder is
one who is willing to pay the balance of
the subscription for the least number
of shares. If there are no bidders, the
corporation must bid for the whole
number of shares regardless of how
much the shareholders has paid. Such
stocks will pertain to the corporation as
fully paid treasury stocks.
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
181
MERCANTILE LAW
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the smallest
number of shares or fraction of a share. The
stock so purchased shall be transferred to such
purchases in the books of the corporation and
a certificate of such stock shall be issued in his
favor. 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.
Irregularities in the delinquency sale (Sec. 69)
Action to recover delinquent stock
must be on the ground of irregularity
or defect in the notice of sale.
Party seeking to recover must first pay
or tender to the party holding the stock
the sum for which the same was sold,
with interest from the date of sale at
the legal rate.
The action must be commenced within
6 months from the date of sale.
E. CERTIFICATE OF STOCK
E. 1. NATURE OF THE CERTIFICATE
A certificate of stock is an instrument formally
issued by the corporation with the intention
that the same constitute the best evidence of
the rights and status of a shareholders (not a
condition precedent to the acquisition of such
rights).
Makati Sports Club v. Cheng (2010): A certificate
of stock is the paper representative or tangible
evidence of the stock itself and of the various
interests therein. The certificate is not a stock
in the corporation but is merely evidence of the
holders interest and status in the corporation,
his ownership of the share represented
thereby. It is not in law the equivalent of such
ownership. It expresses the contract between
the corporation and the stockholder, but is not
essential to the existence of a share of stock or
UP LAW BOC CORPORATION CODE
the nature of the relation of shareholder to the
corporation.
E. 2. UNCERTIFICATED SHARES
Uncertificated Shares/Securities
Security evidenced by electronic or similar
records (Sec. 3.14, Securities Regulation Code)
Notwithstanding Sec. 63 of the Corporation
Code (certificate of stock and transfer of shares),
a corporation whose securities are registered
pursuant to the SRC or listed on securities
exchange may:
If so resolved by the BOD and agreed by
a shareholder, investor or securities
intermediary, issue shares to, or record
the transfer of some or all its shares
into the name of such shareholders,
investors or, securities intermediary in
the form of uncertified securities
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary
subsequently to require the corporation to
issue a certificate in respect of any shares
recorded in its name; and
If so provided in its articles of
incorporation and by-laws, issue all of
the shares of a particular class in the
form of uncertificated securities and
subject to a condition that investors
may not require the corporation to
issue a certificate in respect of any
shares recorded in their name.
Transfers of uncertificated securities, how made
Valid as between parties - validly made
and consummated by appropriate
book-entries in the securities
intermediaries, or in the stock and
transfer book held by the corporation
or the stock transfer agent.
182
MERCANTILE LAW
A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer
form or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.
Valid as to corporation when the
transfer is recorded in the books of the
corporation so as to show the names of
the parties to the transfer and the
number of shares transferred (Sec. 43,
Securities Regulation Code).
E. 3. NEGOTIABILITY
Theory of Quasi-Negotiability
A stock certificate is regarded as quasi-
negotiable only in the sense that it may be
transferred by endorsement, coupled with
delivery.
De los Santos v. Republic (1955): This
notwithstanding, it is well-known that the
instrument is non-negotiable, because the
holder thereof takes it without prejudice to such
rights or 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. Certificates of stock are
not negotiable instruments. Consequently, a
transferee under a forged assignment acquires
no title which can be asserted against the true
owner, unless the latters negligence has been
such as to create an estoppel against him. If
the owner of the certificate has endorsed it in
blank, and it is stolen from him, no title is
acquired by on innocent purchaser for value.
I. REQUIREMENTS FOR VALID
TRANSFER OF STOCKS
For a valid transfer of stocks, the requirements
are as follows:
UP LAW BOC CORPORATION CODE
(1) There must be delivery of the stock
certificate;
(2) The certificate must be endorsed by
the owner or his attorney-in-fact or
other persons legally authorized to
make the transfer; and
(3) Bitong v. CA (1998): To be valid against
third parties, the transfer must be
recorded in the books of the
corporation.
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
(Sec. 63).
Republic v. Estate of Hans Menzi (2005): The
Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of
transfer is valid between the parties. In order
to bind third persons, however, the transfer
must be recorded in the books of the
corporation. Clearly then, the absence of a
deed of assignment is not a fatal flaw which
renders the transfer invalid.
- Requisites for a valid transfer per Sec. 63:
(1) Between the parties:
(a) Delivery
(b) Indorsement
(2) To be valid as to third persons:
(a) Recorded in the books of the
corporation
Rural Bank of Lipa City v. CA (2001): The
execution of a deed of sale does not necessarily
make the transfer effective. The delivery of the
stock certificate duly indorsed by the owner is
the operative act that transfers the shares. The
absence of delivery is a fatal defect which is
not cured by mere execution of a deed of
assignment.
183
MERCANTILE LAW
Ponce v. Alsons Cement Corp. (2002): The stock
and transfer book is the basis for ascertaining
the persons entitled to the rights and subject
to the liabilities of a stockholder. Where a
transferee is not yet recognized as a
stockholder, the corporation is under no
specific legal duty to issue stock certificates in
the transferees name.
- Citing Hager v. Bryan (1911): A mandamus
should not issue to compel the secretary
of a corporation to make a transfer of the
stock on the books of the company,
unless it affirmatively appears that he has
failed or refused so to do, upon the
demand either of the person in whose
name the stock is registered, or of some
person holding a power of attorney for
that purpose from the registered owner of
the stock.
Batangas Laguna Tayabas Bus Co. v. Bitangas
(2001): A transfer of shares is not valid unless
recorded in the books of the corporation. The
purpose of registration is two-fold: (a) to
enable the transferee to exercise all the rights
of a stockholder, including the right to vote
and to be voted for, and (b) to inform the
corporation of any change in share ownership
so that it can ascertain the persons entitled to
the rights and subject to the liabilities of a
stockholder.
- Until challenged in a proper proceeding,
a stockholder of record has a right to
participate in any meeting; his vote can
be properly counted to determine
whether a stockholders resolution was
approved, despite the claim of the alleged
transferee. On the other hand, a person
who has purchased stock, and who
desires to be recognized as a stockholder
for the purpose of voting, must secure
such a standing by having the transfer
recorded on the corporate books. Until
the transfer is registered, the transferee is
not a stockholder but an outsider.
UP LAW BOC CORPORATION CODE
E. 4. ISSUANCE
I. FULL PAYMENT
General Rule
No certificate of stock shall be issued to a
subscriber until the full amount of his
subscription together with interest and
expenses (in case of delinquent shares), if any
is due, has been paid (Sec. 64)
Exception
Baltazar v. Lingayen Gulf Electric Power
Company (1965): Where it was the practice of
the corporation since its inception to issue
certificates of stock to its individual SHs for
unpaid shares of stock and to give full voting
power to shares fully paid.
II. PAYMENT PRO-RATA
Nava Peers Mktg. Corp. and Fua Cun v. Summers
(1923):
The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed.
E. 5. LOST OR DESTROYED
CERTIFICATES
Procedure for re-issuance in case of loss, stolen
or destroyed certificates:
(1) Registered owner to file an affidavit of
loss with the corporation.
(2) Publication of notice of loss in a
newspaper of general circulation
published in the place where the
corporation has its principal office,
once a week for 3 consecutive weeks at
the expense of the owner of the
certificate of stock
(3) Cancellation of the certificate in the
books of the corporation and issuance
of new certificates, after the expiration
of 1 year from the date of the last
184
MERCANTILE LAW
publication and there is no contest.
The right to make such contest shall be
barred after the expiration of the one-
year period.
(4) Issuance of new certificates before 1
year period if the registered owner files
a bond and there is no pending contest
regarding the ownership of said
certificates.
NOTE
Except in cases of fraud, bad faith, or
negligence on the part of the corporation and
its officers, no action may be brought against
the corporation which shall have issued
certificates of stock in lieu of those lost, stolen
or destroyed pursuant to the above procedure.
F. STOCK AND TRANSFER BOOK
F. 1. CONTENTS
a record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all
stock for which subscription has been
made, and the date of payment of any
installment;
a statement of every alienation, sale or
transfer of stock made, the date thereof,
and by and to whom made; and
such other entries as the by-laws may
prescribe.
F. 2. WHO MAY MAKE VALID ENTRIES
(1) An SEC-licensed stock transfer agent; or
(2) The Corporate Secretary of the stock
corporation provided all rules and
regulations imposed on stock transfer
agents shall be applicable, except
payment of license fee.
G. DISPOSITION AND
ENCUMBRANCE OF SHARES
UP LAW BOC CORPORATION CODE
G. 1. ALLOWABLE RESTRICTIONS ON
THE SALE OF SHARES
General Rule
Shares of stock so issued are personal property
and may be transferred (Sec. 63). (FREE
TRANSFERABILITY OF SHARES)
Exception
In CLOSE corporations, restrictions on the right
to transfer shares may be provided in the
Articles of Incorporation, by-laws and
certificates (Sec. 98).
G. 2. SALE OF PARTIALLY PAID SHARES
Under Sec. 63 of the Corporation Code, no
shares of stock against which the corporation
holds any unpaid claim shall be transferable in
the books of the corporation. Therefore, a
corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid, and may continue to hold
the original subscriber liable on the payment of
the subscription.
However, in China Banking Corp. v. CA (1997),
the court said that the above principle in
section 63 cannot be utilized by the
corporation to refuse to recognize ownership
over pledged shares purchased at public
auction. The term unpaid claims refers to
any unpaid claims arising from unpaid
subscription, and not to any indebtedness
which a subscriber or stockholder may owe the
corporation arising from any other transactions.
Obligations arising from unpaid monthly dues
do not fall within the coverage of Sec. 63.
G. 3. SALE OF A PORTION OF SHARES
NOT FULLY PAID
The SEC has opined on several occasions that
a stockholder who has not paid the full amount
of his subscription cannot transfer part of his
subscription in view of the indivisible nature of
a subscription contract. The reason behind the
principle of disallowing transfer of not fully
185
MERCANTILE LAW
paid subscription to several transferee is that it
would be difficult to determine whether or not
the partial payments made should be applied
as full payment for the corresponding number
of shares which can only be covered by such
payment or as proportional payment to each
and all of the entire number of subscribed
shares, and it would be difficult to determine
the unpaid balance to be assumed by each
transferee. [Villanueva]
G. 4. SALE OF ALL OF SHARES NOT
FULLY PAID
On the other hand, the SEC has opined that
the entire subscription, although not yet fully
paid, may be transferred to a single transferee,
who as a result of the transfer must assume the
unpaid balance. It is necessary, however, to
secure the consent of the corporation since the
transfer of subscription rights and obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent if the creditor.
[Villanueva]
G. 5. SALE OF FULLY PAID SHARES
Shares of stock so issued are personal property
and may be transferred by delivery of the
certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer
however shall be valid except as between the
parties until the transfer is recorded in the
books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred (Sec. 63)
G. .6. REQUISITES OF A VALID
TRANSFER
Same as requirements for valid transfer of
stocks
UP LAW BOC CORPORATION CODE MERCANTILE LAW

G. 7. INVOLUNTARY DEALINGS WITH

SHARES
The right of a stockholder to pledge, mortgage
or otherwise encumber his shares is recognized
under Sec. 55 of the Corporation Code, which
regulates the manner of voting on pledged or
mortgaged shares.
If the restriction on the right to pledge or
mortgage shares of stock absolutely prohibits
the stockholders from pledging or mortgaging
their shares without the consent of the BOD, it
would be violative of the statutory right of the
stockholders to encumber shares of stock as
allowed in Sec. 55. However, when the
restriction merely allows the corporation or
existing stockholders to accept the offer within
the option period, and thereafter, if no one
accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any
3rd party, such provision is reasonable, valid
and binding.
By the strict application of Sec. 63 of the
Corporation Code to cover only the sale,
assignment or absolute disposition of shares of
stock, the SC has placed a bias against
voluntary sales, assignments or dispositions of
shares of stock vis--vis pledges, mortgages,
attachment or levy thereof. To be valid and
binding on third parties, the voluntary sale,
assignment or disposition of shares requires
the essential element of registration in the
stock and transfer book; otherwise the sale,
assignment or disposition is considered void as
to third parties, even when they have actual
notice. Whereas, when it comes to pledge,
mortgage, encumbrance, attachment or levy of
shares, registration thereof in the stock and
transfer book is not essential either for validity
or as a species of notifying third parties.
[Villanueva].
XV. Dissolution and
Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or
business purpose. However, for the purpose
only of winding up its affairs and liquidating its
assets, its corporate existence continues for a
period of 3 years from such dissolution [Sec.
122].
Upon dissolution, the corporation ceases to be
a juridical person and consequently can no
longer continue transacting its business
[Campos].
Note: If no dissolution papers are filed with the
SEC by a corporation claiming dissolution
voluntarily, such corporation is still deemed
legally existing, notwithstanding the fact that
it has ceased to operate. [De Leon]
A. MODES OF DISSOLUTION
Based on jurisprudence, the methods of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be
dissolved except in the manner prescribed by
law. [De Leon]
A.1. VOLUNTARY
A.1.A. WHERE NO CREDITORS ARE
AFFECTED [SEC. 118]
Notice of the meeting should be given to
the stockholders or members by personal
delivery or registered mail at least 30 days
prior to the meeting.
The notice of meeting should also be
published for 3 consecutive weeks in a
newspaper published in the place where
the principal office of said corporation is
located. If no newspaper is published in

186
UP LAW BOC CORPORATION CODE
such place, then in a newspaper of general
circulation in the Philippines.
The resolution to dissolve must be
approved by the majority of the BOD/BOT
and approved by the stockholders
representing at least 2/3 of the
Outstanding Capital Stock or 2/3 of
members.
o Non-voting shares are entitled to
vote in this matter [Sec. 6. Par 6(8)]
A copy of the resolution shall be certified
by the majority of the BOD/BOT and
countersigned by the secretary.
The signed and countersigned copy will be
filed with the SEC and the latter will issue
the certificate of dissolution.
Note:
Daguhoy Enterprises v. Ponce (1954): Thus,
except for the expiration of its term, no
dissolution can be effective without some act
of the State.
A.1.B. WHERE CREDITORS ARE
AFFECTED [SEC. 119]
A petition shall be filed with the SEC
containing the following:
o signature by a majority of its BOD
or BOT or other officers having
management of its affairs;
o verified by its president, or
secretary or one of its director or
trustees;
o all claims and demands against
the corporation; and
o resolved upon by affirmative vote
of the stockholders representing at
least 2/3 of the Outstanding
Capital Stock or 2/3 of members;
If the petition is sufficient in form and
substance, the SEC shall issue an order
fixing the date on or before which
objections to the petition may be filed.
Such date shall not be less than 30 days
187
MERCANTILE LAW
nor more than 60 days after the entry of
the order.
A copy of the order shall be published at
least once a week for 3 consecutive weeks
in a newspaper of general circulation, or if
there is no newspaper in the city or
municipality of the principal office, posting
for 3 consecutive weeks in 3 public places
is sufficient.
A hearing shall be conducted 5 days after
the lapse of the expiration of the time to
file objections.
If the objections are insufficient or the
material facts in the petition are true,
judgment shall be rendered dissolving the
corporation and directing the disposition of
assets. The judgment may include
appointment of a receiver.
o As long as 2/3 vote is obtained, no
member/ stockholder can prevent
such dissolution unless the
majority stockholders acted in bad
faith. The latter may be held liable
for damages [Campos].
o Even where there are creditors of
the corporation who may be
prejudiced by the dissolution, it is
still possible for the corporation to
terminate its existence prior to the
expiration of its term, provided said
creditors are given the opportunity
to present their claims and
objections so that their interests
may be protected [Campos].
A.1.C. BY SHORTENING OF CORPORATE
TERM
A voluntary dissolution may be effected by
amending the Articles of Incorporation to
shorten the corporate term; and upon approval
of the expired shortened term, the corporation
shall be deemed dissolved without any further
proceedings.
UP LAW BOC CORPORATION CODE
A publication of notice of dissolution is
required and cannot be dispensed with by
alleging that it was not required in Sec. 120
and that no creditors will be prejudiced by its
dissolution. [SEC Opinion, August 30, 1988]
SEC Opinion No. 06-20, March 13, 2006:
If the shortened term expires before the
SEC approval the corporation will be
dissolved upon the SEC approval
If the shortened term expires after the SEC
approval the corporation will be
dissolved upon the expiration of the
shortened term
If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
after the 6-month period the
corporation will be dissolved upon the
expiration of the shortened term.
If SEC fails to act within 6 months from
filing of the amended Articles of
Incorporation and shortened term expires
before the 6-month period the
corporation will be dissolved at the end of
the 6-month period. [Campos]
A.2. INVOLUNTARY
A.2.A. BY EXPIRATION OF CORPORATE
TERM
Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be
considered a de facto corporation.
A.2.B. FAILURE TO ORGANIZE AND
COMMENCE BUSINESS WITHIN 2 YEARS
FROM INCORPORATION
Failure to formally organize and commence
the transaction of its business or construction
of its works within 2 years - its corporate
powers shall cease and the corporation shall
be deemed dissolved [Sec. 22]
188
MERCANTILE LAW
Dissolution in this case is
automatic [Campos].
Contrary view: Since there is a
defense available to the
corporation, that is, if its failure to
organize and commence its
business is due to causes beyond
the control of the corporation as
may be determined by the SEC,
therefore, the dissolution is not
automatic.
Mentholatum v. Mangaliman (1946):
Transacting business implies a continuity of
acts or dealings in the accomplishment of the
purpose for which the corporation was formed.
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will
administer the affairs of the corporation and
exercise its powers
By-laws should be adopted within one
month of receipt of official notice of the
issuance of the certificate of
incorporation, otherwise the certificate
may be suspended or revoked [PD 902-
A, Sec. 6 (i)(5)]
Failure to operate for at least 5 consecutive
years after commencement of business -
ground for suspension or revocation of its
corporate franchise or certificate of
incorporation.
Note:
Dissolution in this case is not automatic.
[Campos]
The corporation may show that the failure to
commence its business or to continuously
operate is due to causes beyond its control [Sec.
22]
A.2.C. LEGISLATIVE DISSOLUTION
UP LAW BOC CORPORATION CODE
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may
be effected through the amendment or repeal
of the Corporation Code. [implied from Sec. 145,
De Leon]
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
(1) Under the Constitution, the amendment,
alteration, or repeal of the corporate
franchise of a public utility shall be made
only when the common good so requires;
(2) Under Sec. 145 of the Code, it is provided
that: No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers,
nor any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said corporation
or by any subsequent amendment or
repeal of this Code or of any part thereof;
(3) While Congress may provide for the
dissolution of a corporation, it cannot
impair the obligation of existing contracts
between the corporation and third persons,
or take away the vested rights of its
creditors. [De Leon]
A.2.D. DISSOLUTION BY THE SEC ON
GROUNDS UNDER EXISTING LAWS
A corporation may be dissolved by the SEC,
upon a verified complaint and after proper
notice and hearing, on the following grounds
[Sec. 6, par. i, PD 902-A]:
(1) Fraud in procuring its certificate of
registration
(2) Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general
public
189
MERCANTILE LAW
(3) Refusal to comply or defiance of any lawful
order of the Commission restraining
commission of acts which would amount to
a grave violation of its franchise
(4) Continuous inoperation for a period of at
least five years
(5) Failure to file by-laws within the required
period
(6) Failure to file required reports in
appropriate forms as determined by the
Commission within the prescribed period
(7) Other grounds
Other grounds:
(a) Violation by the corporation of any
provision of the Corporation Code [Sec. 144
BP 68]
(b) In case of a deadlock in a close corporation,
and the SEC deems it proper to order the
dissolution of the corporation as the only
practical solution to the dispute (Sec. 104
BP 68)
B. METHODS OF LIQUIDATION
Liquidation is the 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. It is a proceeding in rem.
B.1. BY THE CORPORATION ITSELF
Under Sec. 122 of the Corporation Code, a
corporation whose corporate existence is
terminated in any manner continues to be a
body corporate for 3 years after its dissolution
for purposes of prosecuting and defending
suits by and against it and to enable it to settle
and close its affairs, culminating in the
disposition and distribution of its remaining
assets. It may, during the 3-year term, appoint
a trustee or a receiver who may act beyond that
period.
UP LAW BOC CORPORATION CODE
Pepsi-Cola Products Philippines, Inc. v. CA
(2004): The termination of the life of a
corporate entity does not by itself cause the
extinction or diminution of the rights and
liabilities of such entity. If the 3-year extended
life has expired without a trustee or receiver
having been expressly designated by the
corporation, within that period, the BOD (or
trustees) itself, may be permitted to so
continue as "trustees" by legal implication to
complete the corporate liquidation.
Alhambra Cigar and Cigarette Mfg. v. SEC
(1968): A corporation under liquidation may not
amend its articles of incorporation to extend its
lifespan. When a corporation is liquidating
pursuant to the statutory period of 3 years to
liquidate, it is only allowed to continue for the
purpose of final closure of its business and no
other purposes. In fact, within that period, the
corporation is enjoined from continuing the
business for which it was established.
B.2. CONVEYANCE TO A TRUSTEE
WITHIN A 3-YEAR PERIOD
In this method, the 3-year limitation does not
apply, provided that the designation of the
trustees is made within the period.
General rule
There is no time limit within which the trustee
must finish the liquidation, and he may sue
and be sued as such even beyond the 3-year
period.
Exception
The trusteeship is limited in its duration by the
deed of trust.
National Abaca v. Pore (1961): Trustees to whom
the corporate assets have been conveyed
pursuant to liquidation may sue and be sued
as such in all matters connected with the
liquidation.
190
MERCANTILE LAW
Reburiano v. CA (1999): The trustee of a
dissolved corporation may commence a suit
which can proceed to final judgment even
beyond the 3-year period of liquidation. No
reason can be conceived why a suit already
commenced by the corporation itself during its
existence, not by a mere trustee who, by fiction,
merely continues the legal personality of the
dissolved corporation, should not be accorded
similar treatment to proceed to final
judgment and execution thereof.
Board of Liquidators v Kalaw (1967): Unless the
trusteeship is limited in its duration by the
deed of trust, there is no time limit within
which the trustee must finish liquidation.
B.3. BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
In SECs judgment dissolving the corporation
and directing disposition of its assets as justice
requires, it may appoint a receiver to collect
such assets and pay the debts of the
corporation [Sec. 119].
Leyte Asphalt and Mineral Oil Co. Ltd., v. Block
Johnston and Breenbrawn (1928): The mere
appointment of a receiver, without anything
more, does not result in the dissolution of the
corporation nor bar it from the exercise of its
corporate rights.
D.4. LIQUIDATION AFTER THREE YEARS
Phil. Veterans Bank v. Employees Union (2001):
Q: What is the difference between Liquidation
and Rehabilitation?
A: Liquidation is the winding up of a
corporation so that assets are distributed to
those entitled to receive them. It is the process
of reducing assets to cash, discharging
liabilities and dividing surplus or loss. On the
other hand, rehabilitation contemplates a
continuance of corporate life and activities in
an effort to restore and reinstate the
corporation to its former position of successful
UP LAW BOC CORPORATION CODE
operation and solvency. Both cannot be
undertaken at the same time.
Reburiano v CA (1999): If full liquidation can
only be effected after the 3-year period and
there is no trustee, the directors may be
permitted to complete the liquidation by
continuing as trustees by legal implication.
Aguirre vs. FQB+, Inc. (2013): A corporations
BOD is not rendered functus officio by its
dissolution. Since Sec. 122 allows a corporation
to continue its existence for a limited purpose,
necessarily there must be a board that will
continue acting for and on behalf of the
dissolved corporation for that purpose.
Alabang Development Corporation v. Alabang
Hills Village Association and Rafael Tinio (2014):
The trustee of a corporation may continue to
prosecute a case commenced by the
corporation within 3 years from its dissolution
until rendition of the final judgment, even if
such judgment is rendered beyond the 3-year
period allowed by Sec. 122 of the Corporation
Code. However, an already defunct corporation
is barred from initiating a suit after the lapse of
the said 3-year period. If a petition is filed after
the corporate existence, the effect is that
petitioner lacks the capacity to sue as a
corporation. To allow such petition to prosper,
on the ground that it is for the sole purpose of
liquidating the corporations assets, would be
to circumvent the provisions of Sec. 122 of the
Corporation Code.
XVI. Other Corporations
A. CLOSE CORPORATIONS
General concept:
Most characteristic feature is the identity of
stock ownership and active management, i.e.,
all or most of the stockholders are active in the
191
MERCANTILE LAW
corporate business either as directors, officers
or other key men in management [Campos]
Statutory definition: [Sec. 96]
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's 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 the issued stock of all classes shall be
subject to one or more specified
restrictions on transfer permitted by this
Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of
any of its stock of any class.
General Rule: Any corporation may incorporate
as a close corporation
Exceptions: mining or oil companies, stock
exchanges, banks, insurance companies,
public utilities, educational institutions and
corporations declared to be vested with public
interest
Notes:
Under Sec. 96, the 3 provisions MUST appear
in the Articles of Incorporation, otherwise, a
corporation is not considered as a close
corporation. [San Juan Structural and Steel
Fabricators v CA (1998)]
However, do note that in the earlier case of
Dulay v CA (1993), the court did not look at Sec.
96 in concluding that the corporation involved
was a close corporation.
Also note that, even after satisfying the 3
mandatory provisions, a corporation shall not
be deemed a close corporation when at least
2/3 of its voting stock or voting rights is owned
or controlled by another corporation which is
UP LAW BOC CORPORATION CODE
not a close corporation within the meaning of
this Code.
San Juan Structural and Steel Fabricators v. CA
(1998): A narrow distribution of ownership does
not, by itself, make a close corporation.
When a corporations Articles of Incorporation
does not contain the provisions enumerated
under Sec. 96 of the Code, such corporation is
not a close corporation. It does not become
one either, just because only a few individuals
owned 99.866% of its subscribed capital stock.
General Rule:
Free transferability of shares - Shares of stock
so issued are personal property and may be
transferred
Exception:
In close corporations:
Restriction on transfer provided in Articles of
Incorporation
Limit: Restriction on the transfer must NOT be
more onerous than granting the existing
shareholders or corporation the option to
purchase the shares (Right of First Refusal).
Rationale: Considering the special
circumstances attending a close corporation
(e.g. formed by persons who know each other
well, thus they would want to choose the
persons who will be allowed in their group), it
is justifiable and even imperative for its
stockholders to protect themselves from future
conflicts by placing restrictions on the right of
each one of them to transfer his shares to an
outsider.
The stocks cannot be listed in the stock
exchange nor be publicly offered.
A.1. CHARACTERISTICS OF A CLOSE
CORPORATION
Direct management by stockholders (Sec. 97):
192
MERCANTILE LAW
The stockholders themselves can directly
manage the corporation and perform the
functions of directors without need of election:
(1) When they manage, stockholders are liable
as directors;
(2) There is no need to call a meeting to elect
directors;
(3) The stockholders active in the
management of the close corporation are
personally liable for corporate torts unless
the corporation has obtained reasonably
adequate liability insurance [Sec. 100(5)]
Identity and number of stockholders (Sec. 96):
(1) Stockholders of record not more than 20
(2) Stocks not publicly listed
(3) Restricted transfer of ownership
A.2. VALIDITY OF RESTRICTIONS ON
TRANSFER OF SHARES
Validity of Restrictions (Sec. 98)
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof
in good faith.
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. After expiration of said period and
upon failure of the existing stockholders or the
corporation to purchase said shares, the
transferring stockholder may sell his shares to
any third person.
A.3. ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING
CONDITIONS
If stock of a close corporation is issued or
transferred to any person who is not entitled
under any provision of the articles of
incorporation to be a holder of record of its
UP LAW BOC CORPORATION CODE MERCANTILE LAW

stock, and if the certificate for such stock
conspicuously shows the qualifications of the
persons entitled to be holders of record thereof,
such person is conclusively presumed to have
notice of the fact of his ineligibility to be a
stockholder.
consented to by all the stockholders of the
close corporation, or if the close corporation
has amended its articles of incorporation in
accordance with this Title.
The term "transfer", as used in this section, is
not limited to a transfer for value.

If the articles of incorporation of a close The provisions of this section shall not impair
corporation states the number of persons, not any right which the transferee may have to
exceeding 20, who are entitled to be holders of rescind the transfer or to recover under any
record of its stock, and if the certificate for such applicable warranty, express or implied [Sec.
stock conspicuously states such number, and if 99]
the issuance or transfer of stock to any person
would cause the stock to be held by more than Summary:
such number of persons, the person to whom CONCLUSIVE PRESUMPTION OF
such stock is issued or transferred is NOTICE: Restriction conspicuously shown
conclusively presumed to have notice of this in stock certificate
fact. o that he is a person not eligible to be
a holder of stock of the corporation
If a stock certificate of any close corporation o that transfer of stock to him would
conspicuously shows a restriction on transfer of cause the stock of the corporation to
stock of the corporation, the transferee of the be held by more than the number of
stock is conclusively presumed to have notice of persons permitted by its articles of
the fact that he has acquired stock in violation incorporation to hold stock of the
of the restriction, if such acquisition violates the corporation
restriction. o that the transfer of stock is in
violation of a restriction on transfer
Whenever any person to whom stock of a close of stock
corporation has been issued or transferred has, EFFECTS OF CONCLUSIVE
or is conclusively presumed under this section PRESUMPTION:
to have, notice either (a) that he is a person not o GR: Corporation may, at its option,
eligible to be a holder of stock of the refuse to register the transfer of stock
corporation, or (b) that transfer of stock to him in the name of the transferee
would cause the stock of the corporation to be o Exceptions: Corporation may not
held by more than the number of persons refuse if
permitted by its articles of incorporation to Transfer is consented to by all
hold stock of the corporation, or (c) that the the stockholders
transfer of stock is in violation of a restriction Articles of Incorporation has
on transfer of stock, the corporation may, at its been amended to remove the
option, refuse to register the transfer of stock in restrictions
the name of the transferee.
A.4. WHEN BOARD MEETING IS
The provisions of subsection (4) shall not be
UNNECESSARY OR IMPROPERLY HELD
applicable if the transfer of stock, though
When Unnecessary
contrary to subsections (1), (2) of (3), has been

193
UP LAW BOC CORPORATION CODE
Any action by the directors of a close
corporation without a meeting shall
nevertheless be deemed valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the
directors; or
(2) All the stockholders have actual or implied
knowledge of the action and make no
prompt objection thereto in writing; or
(3) The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
thereto in writing [Sec. 101]
Manuel R. Dulay Enterprises v. CA (1993): In a
close corporation, a board resolution
authorizing the sale or mortgage of the subject
property is not necessary to bind the
corporation for the action of its president. At
any rate, corporate action taken at a board
meeting without proper call or notice in a close
corporation is deemed ratified by the absent
director unless the latter promptly files his
written objection with the secretary of the
corporation after having knowledge of the
meeting.
When Improperly Held
When a directors 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]
A.5. PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services,
194
MERCANTILE LAW
or in payment of corporate debts, UNLESS the
articles of incorporation provide otherwise [Sec.
102].
A.6. AMENDMENT OF ARTICLES OF
INCORPORATION
Amendment to the Articles of Incorporation
which seeks to:
(1) delete or remove any provision
required to be contained in the Articles
of Incorporation of Close Corporations
(under the Title on Close Corporations);
or
(2) to reduce a quorum or voting
requirement stated in said Articles of
Incorporation
Requires the affirmative vote of at least 2/3 of
the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the Articles of Incorporation at a
meeting duly called.
A.7. DEADLOCKS
Requisites:
(1) The directors or stockholders are so divided
respecting the management of the
corporation's business and affairs
(2) The votes required for any corporate action
cannot be obtained that the business and
affairs of the corporation can no longer be
conducted to the advantage of the
stockholders generally
Powers of the SEC in case of Deadlock in Close
Corporations
(1) Cancel or alter any provision in the articles
of incorporation or by-laws
(2) Cancel, alter or enjoin any resolution of the
corporation
(3) Direct or prohibit any act of the corporation
(4) Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation
regardless of the availability of
unrestricted retained earnings.
(5) Appoint a provisional director
UP LAW BOC CORPORATION CODE MERCANTILE LAW

(6) Dissolve the corporation

(7) Granting such other relief as the
circumstances may warrant.

195
UP LAW BOC CORPORATION CODE MERCANTILE LAW
CLOSE CORPORATIONS REGULAR CORPORATIONS
1. Management / Board Authority
There can be classification of directors into one
or more classes, each of whom may be voted for There are no classification of BOD
and elected solely by a particular class of stock;
and
The articles of incorporation 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 Corporate Powers devolved upon BOD whose
BOD. So long as this provision continues in powers are executed by officers. Cannot provide
effect: that it be managed by stockholders

No meeting of stockholders need be called to BOD must be elected in a stockholders meeting

elect directors.

Unless the context clearly requires otherwise, Stockholders of a corporation are separate and
the stockholders of the corporation shall be distinct from directors
deemed to be directors for the purpose of
applying the provisions of this Code.

The stockholders of the corporation shall be

subject to all liabilities of directors.
The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be elected
or appointed by the stockholders, instead of by
the BOD.
2. Meetings
Unless the by-laws provide otherwise, any action
by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the directors;
or
(2) All the stockholders have actual or implied
knowledge of the action and make no
prompt objection thereto in writing; or
(3) The directors are accustomed to take
informal action with the express or implied
acquiescence of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and
none of them makes prompt objection
Officers must be elected by the BOD
The directors or trustees shall not act individually
nor separately but as a body in a lawful meeting.
They will act only after discussion and deliberation
of matters before them. Contracts entered into
without a formal board resolution does not bind
the corporation except when ratified or when
majority of the board has knowledge of the
contract and the contract benefited the
corporation.
Absence of a prompt objection in writing does not
ratify acts done by directors without a valid
meeting. There must be express or implied
ratification.

196
UP LAW BOC CORPORATION CODE MERCANTILE LAW
thereto in writing. Express ratification may consist of a Board
Resolution to that effect
If a director's meeting is held without proper call
or notice, an action taken therein within the Implied ratification may consist of acceptance of
corporate powers is deemed ratified by a benefits from said unauthorized act while having
director who failed to attend, unless he promptly knowledge of said act
files his written objection with the secretary of
the corporation after having knowledge thereof. Failure to give notice would render a meeting
voidable.

Attendance to a meeting despite want of notice

will be deemed implied waiver

All proceedings had and any business transacted

at any meeting of the stockholders or members, if
within the powers or authority of the corporation,
shall be valid even if the meeting be improperly
held or called, provided all the stockholders or
members of the corporation are present or duly
represented at the meeting. (Sec. 51)

197
UP LAW BOC CORPORATION CODE MERCANTILE LAW
3. Voting / Quorum
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code
The Articles of Incorporation may provide for a
classification of directors into one or more There shall always be a class/series of shares
classes, each of which may be voted for and which have COMPLETE VOTING RIGHTS
elected solely by a particular class of stock.
EACH SHARE SHALL BE EQUAL IN ALL
RESPECTS TO EVERY OTHER SHARE, except as
otherwise provided in the Articles of Incorporation
For BOD, the by-laws or Articles of Incorporation
The Articles of Incorporation may provide for a can provide for a greater majority in quorum
greater quorum or voting requirements in
meetings of stockholders or directors than those For stockholders, the Articles of Incorporation can
provided in this Code. provide for a different percentage in quorum
4. Pre-emptive Right
Limitations on the exercise of pre-emptive right:
Such pre-emptive right shall not extend to shares
to be issued in compliance with laws requiring
The pre-emptive right of stockholders in close stock offerings or minimum stock ownership by the
corporations shall extend to all stock to be public;
issued, including reissuance of treasury shares, Not extend to shares to be issued in good faith
whether for money, property or personal with the approval of the stockholders representing
services, or in payment of corporate debts, 2/3 of the outstanding capital stock, in exchange
unless the articles of incorporation provide for property needed for corporate purposes or in
otherwise. payment of a previously contracted debt
Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
5. Transferability
Restrictions on the right to transfer shares must
appear in the Articles of Incorporation and in the
by-laws as well as in the certificate of stock Restrictions on the right to transfer not allowed
otherwise the same shall not be binding on any
purchaser thereof in good faith
6. Appraisal Right
Any stockholder of a close corporation may, for Stockholders may require the corporation to buy-
any reason, compel the said corporation to back their shares at fair value when the
purchase his shares at their fair value, which Corporation has Unrestricted Retained Earnings:
shall not be less than their par or issued value, (a) In case of any amendment to the articles of
when the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive (i) changing or restricting the rights of
of capital stock any stockholder or class of shares, or
(ii) authorizing preferences in any respect

198
UP LAW BOC CORPORATION CODE MERCANTILE LAW
Any stockholder of a close corporation may, by superior to those of outstanding shares
written petition to the SEC, compel the of any class, or
dissolution of such corporation whenever: (iii) extending or shortening the term of
(a) Any of acts of the directors, officers or corporate existence
those in control of the corporation is (b) In case of sale, lease, exchange, transfer,
illegal, or fraudulent, or dishonest, or mortgage, pledge or other disposition of all or
oppressive or unfairly prejudicial to the substantially all of the corporate property and
corporation or any stockholder, or assets as provided in the Code; and
(b) Corporate assets are being misapplied (c) In case of merger or consolidation
or wasted. (d) Investment of corporate funds in another
corporation or business
(e) Diversion of funds of corporation from primary
purpose to secondary purpose (Sec. 41)

The corporation may buy-back shares of

stockholders subject to the following limitations
(Treasury shares):
There must be unrestricted retained earnings
Must be for a legitimate purpose

B.3. TREATMENT OF PROFITS

B. NON-STOCK CORPORATIONS
B.1. DEFINITION
One where no part of its income is distributable
as dividends to its members, trustees, or officers,
subject to the provisions of this Code on
dissolution. [Sec.87]
Any profit which a non-stock corporation may
obtain as an incident to its operations shall,
whenever necessary or proper, be used for the
furtherance of the purpose or purposes for
which the corporation was organized. [Sec.
87,2nd sentence]

B.2. PURPOSES B.4. DISTRIBUTION OF ASSETS UPON

Charitable DISSOLUTION
Religious Order of distribution of assets upon dissolution
Educational of non-stock corporation
(1) All its creditors shall be paid.
Professional
(2) Assets held subject to return on dissolution
Cultural
shall be delivered back to the givers.
Fraternal
(3) Assets held for charitable, religious
Literary purposes, etc., without a condition for their
Scientific return on dissolution, shall be conveyed to
Social one or more organizations engaged in
Civic services similar activities as dissolved corporation
Similar purposes, such trade, industry (4) All other assets shall be distributed to
or agriculture and like chambers, or members, as provided in the Articles of
combinations thereof Incorporation or by-laws [Sec. 94]

199
UP LAW BOC CORPORATION CODE
Procedure for the Plan for Distribution
BOT, by majority vote in a resolution, shall
adopt a plan for distribution of the assets of the
corporation
Written notice for a meeting must be sent to all
members entitled to vote, stating the time and
place of such meeting and the purpose thereof
At such meeting, the plan must be approved by
2/3 votes of the members having the right to
vote, who are present or represented by proxy
[Villanueva]
C. RELIGIOUS CORPORATIONS
CORPORATION SOLE (SEC. 110)
A special form of corporation, usually
associated with clergy and consists of one
person only and his successors, who are
incorporated by law to give some legal
capacities and advantages.
A registered corporation sole can acquire land if
its members constitute at least 60% Filipinos
[SEC Opinion, 8 August 1994].
NATIONALITY
Roman Catholic Apostolic Church v. Land
Registration Commission (1957): A corporation
sole does not have any nationality but for
purposes of applying our nationalization laws,
nationality is determined by the nationality of
the members.
RELIGIOUS SOCIETIES
Non-stock corporation formed by a religious
society, group, diocese, synod, or district of any
religious denomination, sect, or church after
getting the approval of 2/3 of its members.
Iglesia Evangelica Metodista En Las Filipinas
(Corporation Sole) Inc., et al v. Bishop Nathanael
Lazaro, et al (2010): The Corporation Code
provides no specific mechanism for amending
200
MERCANTILE LAW
the articles of incorporation of a corporation
sole. But Sec. 109 allows the application to
religious corporations of the general provisions
governing non-stock corporations.
For non-stock corporations, the power
to amend its Articles of Incorporation
lies in its members. The code requires
two-thirds of their votes for the approval
of such an amendment. So how will this
requirement apply to a corporation sole
that has technically but one member (the
head of the religious organization) who
holds in his hands its broad corporate
powers over the properties, rights, and
interests of his religious organization?
Although a non-stock corporation has a
personality that is distinct from those of
its members who established it, its
Articles of Incorporation cannot be
amended solely through the action of its
BOT. 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. The one member is but a
trustee of its membership.
There is no point to dissolving the
corporation sole of one member to
enable the corporation aggregate to
emerge from it. The one member, with
the concurrence of two-thirds of the
membership of the organization for
whom he acts as trustee, can self-will
the amendment. He can, with
membership concurrence, increase the
technical number of the members of the
corporation from sole or one to the
greater number authorized by its
amended articles.
UP LAW BOC CORPORATION CODE
D. FOREIGN CORPORATIONS
Foreign Corporation are those 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]
D.1. BASES OF AUTHORITY OVER
FOREIGN CORPORATIONS
CONSENT
As a rule, a foreign corporation can have no
legal existence or status beyond the bounds of
the State or sovereignty by which it is created or
incorporated and organized. It exists only in
contemplation of law and by force of the law
and where that law ceases to operate, the
corporation can have no existence. This
principle, however, does not prevent a
corporation from acting in another State or
country with the latters express or implied
consent. This is the consent doctrine which is
provided in Sections 125 and 126. But every
power which a corporation exercises as such in
another State depends for its validity upon the
laws of the sovereignty in which it is exercised. A
corporation can exercise none of the functions
and privileges conferred by its charter in
another State or country except by the comity
and consent of such State or country. [De Leon]
DOCTRINE OF DOING BUSINESS
(RELATE TO DEFINITION UNDER THE
FOREIGN INVESTMENTS ACT, R.A. NO.
7042)
JURISPRUDENTIAL TESTS OF DOING
BUSINESS IN THE PHILIPPINES
(Asked in 98 and 02)
Mentholatum v. Mangaliman (1941)
Twin Characterization Test
Under the Continuity Test, doing
business implies a continuity of
commercial dealings and arrangements,
201
MERCANTILE LAW
or performance of acts normally
incidental to the purpose and object of
the organization.
Under the Substance 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
Contract test
Pacific Vegetable Oil v. Singson (1955): A foreign
corporation is doing business in the Philippines
if 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.
STATUTORY DEFINITION OF DOING
BUSINESS: FOREIGN INVESTMENT ACT OF
1991 [SEC. 3(D), RA 7042]
(Asked in 98 and 02)
DOING BUSINESS
Soliciting orders, service contracts, or
opening offices;
Appointing representatives, distributors
domiciled in the Philippines or who stay for
a period or periods totaling 180 days or
more;
Participating in the management,
supervision, or control of any domestic
business, firm, entity, or corporation in the
Philippines;
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.
Cargill v. Intra-Strata Assurance Corporation
(2010): It relates to business activities not
only casual, but so systematic and regular as to
manifest continuity and permanence of activity
UP LAW BOC CORPORATION CODE
to constitute doing business here To
constitute doing business in the Philippines, the
activity should involve profit-making.
European Resources and Technologies Inc. v.
Ingenieuburo Birkhanh + Nolte (2004): It is the
performance by a foreign corporation of the acts
for which it was created, regardless of volume of
business, that determines whether a foreign
corporation needs a license or not.
NOT DOING BUSINESS
A. Statutory: Sec. 3(d) FIA and Sec. 1 FIA IRR
Mere investment as shareholder and
exercise of rights as investor;
Having a nominee director or officer to
represent its interest in the corporation;
Appointing a representative or distributor
which transacts business in its own name
and for its own account;
The publication of a general advertisement
through any print or broadcast media
Maintaining a stock of goods in the PH
solely for the purpose of having the same
processed by another entity in the PH
Consignment by a foreign entity of
equipment with a local company to be used
in the processing of products for export
Collecting information in the Philippines
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
B. Jurisprudential
Agilent v Integrated Silicon (2004): Agilents
activities were confined to maintaining a
stock of goods in the PH and consignment
of equipmen.t
Steelcase v Design Intl (2010): The
imposition of minimum standards
202
MERCANTILE LAW
concerning sales, marketing, finance and
operations is nothing more than an exercise
of sound business practice to increase sales
and maximize profits. For as long as these
requirements do not impinge on a
distributors independence, then there is
nothing wrong with placing reasonable
expectations
Antam Consolidated v CA (1986): Multiple
transactions are still considered a single
transaction where there are constantly
failed attempts in complying with the
contract by one of the contracting parties
Le Chemise Lacoste v Fernandez (1984): A
foreign firm which does business through
middlemen acting on their own names shall
not be deemed doing business in the
Philippines.
D.2. NECESSITY OF A LICENSE TO DO
BUSINESS
REQUISITES FOR ISSUANCE OF A
LICENSE
The foreign corporation should file a copy of its
articles of incorporation and by-laws, and a
verified application (See Sec. 125) accompanied
by the following:
(1) Name and address of its designated
resident agent who will receive summons
and notices for the corporation; a special
power of attorney should also be submitted
for such purpose
(2) An agreement that if it ceases to transact
business or if there is no more resident
agent, summons shall then be served
through the SEC
(3) Oath of Reciprocity stating that the foreign
corporations country allows Filipino citizens
and corporations to do business in said
country
Within 60 days from issuance of license, the
corporation should deposit at least P100,000
(cash, property, bond) for the benefit of
UP LAW BOC CORPORATION CODE MERCANTILE LAW

creditors subject to further deposit every six

months [See Sec. 126] D.4. SUABILITY OF FOREIGN
CORPORATIONS
Rationale for the license requirement: A foreign corporation whether or not doing
Acquisition of jurisdiction business in the Philippines may be sued for acts
The purpose of the law in requiring that foreign done against persons in the Philippines.
corporations doing business in the country be
licensed to do so, is to subject the foreign Facilities Management Corporation v. De La Osa
corporations doing business in the Philippines (1979): Indeed if a foreign corporation, not
to the jurisdiction of the courts, otherwise, a engaged in business in the Philippines, is not
foreign corporation illegally doing business here barred from seeking redress from courts in the
because of its refusal or neglect to obtain the Philippines, a fortiori, that same corporation
required license and authority to do business cannot claim exemption from being sued in
may successfully though unfairly plead such Philippine courts for acts done against a person
neglect or illegal act so as to avoid service and or persons in the Philippines
thereby impugn the jurisdiction of the local
courts. D.5. INSTANCES WHEN UNLICENSED
FOREIGN CORPORATIONS MAY BE
The same danger does not exist among foreign
ALLOWED TO SUE
corporations that are indubitably not doing
When the corporation is considered not
business in the Philippines. Indeed, if a foreign
doing business in the PH
corporation does not do business here, there
would be no reason for it to be subject to the When the Philippine citizen or entity is
States regulation [Avon Insurance PLC v. CA estopped from challenging the foreign
(1997)]. corporations personality to sue (Merrill
Lynch Futures v. Court of Appeals (1992)
RESIDENT AGENT
Summary of Rules on Capacity to Sue [Agilent
Resident Agent is an individual, who must be of
Technologies Singapore v. Integrated Silicon
good moral character and of sound financial
Technologies (2004)]:
standing, residing in the Philippines, or a
domestic corporation lawfully transacting
Status Consequence
business in the Philippines, designated in a
Doing Business in the Can sue and be sued
written power of attorney by a foreign
PH, WITH a license
corporation authorized to do business in the Doing Business in the GR: Cannot sue, but
Philippines, on whom any summons and other PH, WITHOUT a may be sued in the PH
legal processes may be served in all actions or license Exception: Capacity to
other legal proceedings against the foreign sue may not be
corporation [Sec. 127-128] questioned if the
other party is
estopped
D.3. PERSONALITY TO SUE
NOT doing business May sue;
A foreign corporation transacting business in in the PH, on isolated may be sued
the Philippines is required to secure a license to transactions
have the personality to sue before, or intervene
in, any court or administrative proceeding. D.6. GROUNDS FOR REVOCATION OF
[Campos; Sec. 133] LICENSE

203
UP LAW BOC CORPORATION CODE
D.6.A. UNDER THE CORPORATION CODE
Failure to file its annual report or pay any
fees as required by this Code;
Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
Failure, after change of its resident agent or
of his address, to submit to the Securities
and Exchange Commission a statement of
such change as required by this Title;
Failure to submit to the Securities and
Exchange Commission an authenticated
copy of any amendment to its articles of
incorporation or by laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
A misrepresentation of any material matter
in any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
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;
Transacting business in the Philippines
outside of the purpose or purposes for
which such corporation is authorized under
its license;
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
Any other ground as would render it unfit to
transact business in the Philippines (Sec.
134)
D.6.B. UNDER SPECIAL LAWS
INSURANCE CODE
The Insurance Commissioner is authorized to
suspend or revoke all certificates of authority
granted to an insurance company, whether
domestic or foreign, when:
(1) it is in unsound condition; or
204
MERCANTILE LAW
(2) it has failed to comply with the provisions of
law or regulations obligatory upon it; or
(3) its condition or method of business is such
as to render its proceedings hazardous to
the public or to its policyholders; or
(4) its paid-up capital stock, in the case of a
foreign company, is impaired or deficient, or
that the margin of solvency required of such
company is deficient [Sec. 247, Insurance
Code]
GENERAL BANKING ACT
The Monetary Board may revoke the license to
transact business in the Philippines of any
foreign bank, if it finds that:
(1) the foreign bank is insolvent; or
(2) in imminent danger thereof; or
(3) its continuance in business will involve
probable loss to those transacting business
with it.
XVII. Mergers and
Consolidations
A. DEFINITION AND CONCEPT
Merger a corporation absorbs the other and
remains in existence while the others are
dissolved. [Sec.76]
One of the constituent corporations remains as
an existing juridical person, whereas the other
corporation shall cease to exist. Merger is the
disappearance of one of the corporations
[generally by amending the articles of
incorporation and shortening its term of
existence (Sec.40)] with the other corporation
acquiring all the assets, rights of action, and
assuming all the liabilities of the disappearing
corporation.
Consolidation a new corporation is created,
and consolidating corporations are
extinguished [Sec.76]
UP LAW BOC CORPORATION CODE
If there is consolidation, there will be
disappearance of all constituent corporations
with the emergence of a new corporate entity
which shall obtain all the assets of the
disappearing corporations, and likewise shall
assume all their liabilities.
B. CONSTITUENT VS. CONSOLIDATED
CORPORATION
Constituent Corporations the parties to a
merger or consolidation
Consolidated Corporation - The new single
corporation created through consolidation.
Surviving Corporation one of the constituent
corporations which remain in existence after the
merger
C. PLAN OF MERGER OR
CONSOLIDATION [SEC. 76]
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which
shall set forth:
(1) Names of the corporation involved;
(2) Terms and mode of carrying it;
(3) Statement of changes, if any, in the present
articles of the surviving corporation to be
formed in the case of merger; and with
respect to the consolidated corporation in
case of consolidation
D. ARTICLES OF MERGER OR
CONSOLIDATION
Each of the constituent corporation shall
execute Articles of Merger or Consolidation
signed by the president/vice-president, and
certified by the secretary/assistant secretary
setting forth:
(1) Plan of merger or consolidation;
(2) For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
205
MERCANTILE LAW
(3) As to each corporation, number of shares or
members voting for and against such plan
respectively.
The Articles of Merger or Consolidation:
(1) take the place of the Articles of
Incorporation of the consolidated
corporation; or
(2) amend the Articles of Incorporation of the
surviving corporation.
E. PROCEDURE
E.1. APPROVAL OF PLAN OF MERGER OR
CONSOLIDATION BY BOD AND
STOCKHOLDERS OF CONSTITUENT
CORPORATIONS
Approval by majority vote of each of the board
of directors or trustees of the constituent
corporations of the plan of merger or
consolidation.
Approval by the stockholders or members of
each of such corporations. The affirmative vote
of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock of each
corporation in the case of stock corporations or
at least two-thirds (2/3) of the members in the
case of non-stock corporations shall be
necessary for the approval of such plan.
Holders of non-voting shares are entitled to
vote on the plan. (Sec. 6, par. 6(6))
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least 2 weeks prior to the date
of the meeting, either personally or by
registered mail. Said notice shall state the
purpose of the meeting and shall include a copy
or a summary of the plan of merger or
consolidation.
Any dissenting stockholder in stock
corporations may exercise his appraisal right in
UP LAW BOC CORPORATION CODE
accordance with the Code. Provided, that if after
the approval by the stockholders of such plan,
the board of directors decides to abandon the
plan, the appraisal right shall be extinguished.
Amendment to the plan of merger or
consolidation may be made by approval of the
majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative vote
of stockholders representing at least two-thirds
(2/3) of the outstanding capital stock or of two-
thirds (2/3) of the members of each of the
constituent corporations. Such plan, together
with any amendment, shall be considered as
the agreement of merger or consolidation.
E.2. EXECUTION OF ARTICLES OF
MERGER OR CONSOLIDATION
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
E.3. SUBMISSION TO SEC OF ARTICLES
Submission of Four (4) copies of the Articles of
Merger or Articles of Consolidation to the SEC
for approval.
Mergers and consolidations of
corporations governed by special laws
requires a recommendation from the
appropriate government agency (Sec.
79 (1))
E.4. ACTION BY SEC
Conduct hearing or issue certificate If necessary,
the SEC shall set a hearing, notifying all
corporations concerned at least 2 weeks before.
Issuance of certificate of merger or
consolidation.
F. EFFECTIVITY
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation
shall become effective [Sec. 79].
206
MERCANTILE LAW
PNB v. Andrada Electric and Engr. Co., Inc.
(2002): Merger or consolidation does not
become effective by mere agreement of the
constituent corporations. The approval of the
SEC is required.
Notwithstanding Sec. 79, parties may stipulate
a specific effective date of merger (or
consolidation) where no 3rd party will be
prejudiced [SEC Opinion No. 09-13, July 1, 2009]
G. LIMITATIONS
Consent of appropriate government agency:
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 [Sec.
79]
H. EFFECTS (SEC. 80)
AS TO THE CONSTITUENT CORPORATIONS:
Corporate existence
The constituent corporations shall become a
single corporation.
The separate existence of the constituents shall
cease, except that of the surviving or the
consolidated corporation.
The absorbed or constituent corporations are
ipso facto dissolved by operation of law [SEC
Opinion, July 16, 1981]
Assets and liabilities
There is no liquidation of the assets of the
dissolved corporations [Campos].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
UP LAW BOC CORPORATION CODE
immunities, powers, and franchises of each
constituent corporation and the properties shall
be deemed transferred to and vested in the
surviving or consolidated corporation without
further act or deed
The surviving or the consolidated corporation
shall be subject to all the duties and liabilities of
the dissolving corporation(s).
207
MERCANTILE LAW
AS TO CREDITORS
Any claim, action or proceeding pending by or
against any of the constituent corporations may
be prosecuted by or against the surviving or
consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent corporation
shall not be impaired by such merger or
consolidation.
UP LAW BOC SECURITIES REGULATIONS CODE MERCANTILE LAW

MERCANTILE LAW
SECURITIES
REGULATIONS CODE

208
UP LAW BOC SECURITIES REGULATION CODE
I. State Policy
Section 2. Declaration of State Policy
The State shall
(1) Establish a socially conscious, free
market that regulates itself;
(2) Encourage the widest participation of
ownership in enterprises;
(3) Enhance the democratization of
wealth;
(4) Promote the development of the
capital market;
(5) Protect investors;
(6) Ensure full and fair disclosure about
securities;
(7) Minimize if not totally eliminate insider
trading and other fraudulent or
manipulative devices and practices
which create distortions in the free
market
II. Securities Required to
be Registered
General Rule: Securities shall not be sold or
offered for sale or distribution to the public
within the Philippines, without a registration
statement duly filed with and approved by the
Commission (Sec. 8.1)
- The Securities Regulation Code (SRC)
regulates public offering within the
Philippines.
Exceptions:
(1) Exempt securities (Sec. 9)
(a) Any security issued or guaranteed by
the Government of the Philippines/ its
political subdivision or agency/its
instrumentality/ or any person
controlled or supervised thereby;
Rationale for the exception: The
public does not need protection
209
MERCANTILE LAW
from the government itself. The
government will always be solvent
to pay its obligations because of its
ability to raise revenues through
taxation.
(b) Any security issued or guaranteed by
the government of any country with
which the Philippines maintains
diplomatic relations, or by any state,
province or political subdivision thereof
on the basis of reciprocity: Provided,
That the Commission may require
compliance with the form and content
for disclosures the Commission may
prescribe;
Rationale: This is rooted in comity
among nations.
(c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by
the proper adjudicatory body;
Rationale: This is not a public
offering. Besides, protection is
already afforded by that proper
adjudicatory body and additional
SEC protection is not necessary.
(d) Any security or its derivatives the sale
or transfer of which, by law, is under
the supervision and regulation of the
Office of the Insurance Commission,
Housing and Land Use Rule
Regulatory Board, or the Bureau of
Internal Revenue.
Rationale: The issuers are
governmental agencies covered by
exception (a) above. SEC protection
would be a duplication.
(e) Any security issued by a bank except its
own shares of stock (Sec. 9.1)
Rationale: Banks are under the
supervision of the Bangko Sentral.
SEC protection is a duplication.
(f) Any class of security with respect to
which the SEC finds that registration is
not necessary in the public interest and
for the protection of investors (Sec. 9.2)
UP LAW BOC SECURITIES REGULATION CODE
NOTE: The exemption of securities
by the SEC must be made through
the issuance of a rule or regulation
(Sec. 9.2)
(2) Exempt transactions
(a) At any judicial sale, or sale by an
executor, administrator, guardian or
receiver or trustee in insolvency or
bankruptcy.
- Rationale for exclusion: A court
will presumably not order the sale
if the public will be prejudiced
thereby.
(b) By or for the account of a pledge
holder, or mortgagee or any of a
pledge lien holder selling or offering
for sale or delivery in the ordinary
course of business and not for the
purpose of avoiding the provision of
this Code, to liquidate a bona fide debt,
a security pledged in good faith as
security for such debt.
- Rationale: This is not a voluntary
sale contemplated by the SRC.
(c) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owners account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transaction of a like
character by such owner, or on his
account by such representative and
such owner or representative not being
the underwriter of such security.
- Rationale: Isolated and not meant
to be an ongoing public offering.
(d) The distribution by a corporation
actively engaged in the business
authorized by its articles of
incorporation, of securities to its
stockholders or other security holders
210
MERCANTILE LAW
as a stock dividend or other
distribution out of surplus.
- Rationale: The offerees are not the
public but shareholders already
familiar with their company.
(e) The sale of capital stock of a
corporation to its own stockholders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly in connection with
the sale of such capital stock.
- Rationale: Same as (d) above.
(f) The issuance of bonds or notes secured
by mortgage upon real estate or
tangible personal property, when the
entire mortgage together with all the
bonds or notes secured thereby are
sold to a single purchaser at a single
sale.
- Rationale: This is not a public sale.
(g) The issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to
make such conversion: Provided, That
the security so surrendered has been
registered under this Code or was,
when sold, exempt from the provision
of this Code, and that the security
issued and delivered in exchange, if
sold at the conversion price, would at
the time of such conversion fall within
the class of securities entitled to
registration under this Code. Upon
such conversion the par value of the
security surrendered in such exchange
shall be deemed the price at which the
securities issued and delivered in such
exchange are sold.
- Rationale: The SEC has already
registered the convertible security
and presumably also passed upon
the security to be issued upon
conversion.
UP LAW BOC SECURITIES REGULATION CODE
(h) Brokers transaction, executed upon
customers orders, on any registered
Exchange or other trading market.
- Rationale: If brokers transactions
are registered each time, the
transactions on the exchange will be
unduly hampered. Besides, the
brokers are subject to a code of
conduct protective of the interest of
the investors.
(i) Subscriptions for shares of the capitals
stocks of a corporation prior to the
incorporation thereof or in pursuance
of an increase in its authorized capital
stocks under the Corporation Code,
when no expense is incurred, or no
commission, compensation or
remuneration 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 subscription 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.
- Rationale: This is not a public
offering. Besides, the SEC is involved
in the subscription process, as a
regulator.
(j) The exchange of securities by the
issuer with the existing security holders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly for soliciting such
exchange.
- Rationale: This is not a public
offering.
(k) The sale of securities by an issuer to
fewer than twenty (20) persons in the
Philippines during any twelve-month
period.
211
MERCANTILE LAW
- Rationale: This is not a public
offering but a private placement.
(l) The sale of securities to any number of
the following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement
plan 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;
(v) Investment company or;
(vi) Such other person as the
Commission may by rule
determine as qualified buyers,
on the basis of such factors as
financial sophistication, net
worth, knowledge, and
experience in financial and
business matters, or amount of
assets under management.
(Sec. 10.1)
- Rationale: These are sophisticated
investors that could fend for
themselves.
(m) Any transaction with respect to which
the SEC finds that registration is not
necessary in the public interest and
protection of investors such as by the
reason of the small amount involved or
the limited character of the public
offering (Sec. 10.2)
NOTE: Application for exemption under
Section 10 must be accompanied by:
(1) A notice identifying the exemption
relied upon;
(2) Payment of fee equivalent to 1/10 of 1%
of the maximum value aggregate price
or issued value of the securities.
UP LAW BOC SECURITIES REGULATION CODE
SEC v. PROSPERITY.COM, INC. (2012):
[This case involves the application of
the Howey test in order to determine if a
particular transaction is an investment
contract.] The sole issue is whether or not
Prosperity.com Inc.s (PCI) scheme constitutes
an investment contract that requires
registration under the SRC.
The SRC treats investment contracts as
securities that have to be registered with the
SEC before they can be distributed and
sold. An investment contract is a contract,
transaction, or scheme where a person invests
his money in a common enterprise and is led to
expect profits primarily from the efforts of
others.
Apart from the definition which the IRR
provides, Philippine jurisprudence has so far
not done more to add to the same. Of course,
the United States Supreme Court, grappling
with the problem, has on several occasions
discussed the nature of investment
contracts. That courts rulings, while not
binding in the Philippines, enjoy some degree
of persuasiveness insofar as they are logical
and consistent with the countrys best
interests.
The US SC held in Securities and Exchange
Commission v. W.J. Howey Co. (1946) that, for
an investment contract to exist, the following
elements, referred to as the HOWEY TEST must
concur:
(1) a contract, transaction, or scheme;
(2) an investment of money;
(3) investment is made in a common
enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of
others.
Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must
have all these elements.
212
MERCANTILE LAW
POWER HOMES UNLIMITED CORPORATION v.
SEC and MANERO (2008):
An investment contract is defined in the
Amended IRR of R.A. No. 8799 (SRC) as a
contract, transaction or scheme (collectively
contract) whereby a person invests his money
in a common enterprise and is led to expect
profits primarily from the efforts of others.
Although the proponents must establish all
four elements, the US Supreme Court stressed
that the Howey Test embodies a flexible
rather than a static principle, one that is
capable of adaptation to meet the countless
and variable schemes devised by those who
seek the use of the money of others on the
promise of profits.
After Howey came the 1973 US case of SEC v.
Glenn W. Turner Enterprises, Inc. et al. In this
case, the 9th Circuit of the US Court of Appeals
ruled that the element that profits must come
solely from the efforts of others should not
be given a strict interpretation. It held that a
literal reading of the
requirement solely would lead to unrealistic
results. It reasoned out that its flexible reading
is in accord with the statutory policy of
affording broad protection to the public. Our
RA 8799 (SRC) appears to follow this flexible
concept for it defines an investment contract
as a contract, transaction or scheme whereby a
person invests his money in a common
enterprise and is led to expect profits not
solely but primarily from the efforts of others.
Thus, to be a security subject to regulation by
the SEC, an investment contract in our
jurisdiction must be proved to be: (1) an
investment of money, (2) in a common
enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.
UP LAW BOC SECURITIES REGULATION CODE
III. Procedure for
Registration of
Securities
(1) Filing of a sworn registration statement
with the SEC (Sec. 12.1)
Shall include any prospectus required or
permitted to be delivered under
Subsections 8.2, 8.3, and 8.4 (Sec. 12.1)
Chapter III, Section 8. Requirement of
Registration of Securities
x x x
8.2 The Commission may conditionally approve
the registration statement under such terms as
it may deem necessary.
8.3 The Commission may specify the terms and
conditions under which any written
communication, including any summary
prospectus, shall be deemed not to constitute
an offer for sale under this Section.
8.4. A record of the registration of securities
shall be kept in Register of Securities in which
shall be recorded orders entered by the
Commission with respect to such securities.
Such register and all documents or information
with respect to the securities registered therein
shall be open to public inspection at
reasonable hours on business days.
Shall include the effect of the securities
issue on ownership, on the mix of
ownership, especially foreign and local
ownership (Sec. 12.3)
Shall be signed by the issuers executive
officer, its principal operating officer, its
principal financial officer, its comptroller,
its principal accounting officer, its
corporate secretary, or persons
performing similar functions
213
MERCANTILE LAW
accompanied by a duly verified
resolution of the board of directors of
the issuer corporation (Sec. 12.4)
Shall be accompanied by:
(a) Written consent of the expert
named as having certified any
part of the registration
statement or any document
used in connection therewith;
and
(b) Where the registration
statement includes shares to
be sold by selling shareholders
- a written certification by such
selling shareholders as to the
accuracy of any part of the
registration statement
contributed to by such selling
shareholders (Sec. 12.4).
(2) Payment to the SEC of a fee of not more
than one-tenth (1/10) of one per centum
(1%) of the maximum aggregate price
at which such securities are proposed to
be offered (Sec. 12.5a)
(3) Publication of the notice of the filing of
registration statement. (Sec. 12.5b)
The publication must be in two (2)
newspapers of general circulation
in the Philippines, once a week for
two (2) consecutive weeks, or in
such other manner as the
Commission by the rule shall
prescribe (Sec. 12.5b)
(4) Declaration by the SEC whether the
registration statement is effective or
rejected.
Declaration is made within 45 days
from filing of the registration
statement or on such later date to
which the issuer has consented
unless applicant has been allowed
UP LAW BOC SECURITIES REGULATION CODE
to amend the registration
statement under Sec. 14 (Sec. 12.6).
NOTE: Grounds for: (1) rejection/revocation
of registration statement and (2) refusal of
registration/revocation of securities
thereunder:
(a) The issuer:
(i) Has been judicially declared
insolvent;
(ii) Has violated any of the provision of
this Code, the rules promulgated
pursuant thereto, or any order of
the Commission of which the issuer
has notice in connection with the
offering for which a registration
statement has been filed
(iii) Has been or is engaged or is about
to engage in fraudulent
transactions;
(iv) Has made any false or misleading
representation of material facts in
any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any
requirements that the Commission
may impose as a condition for
registration of the security for
which the registration statement
has been filed; or
(b) The registration statement is on its
face incomplete or inaccurate in any
material respect or includes any untrue
statements of a material fact required
to be stated therein or necessary to
make the statement therein not
misleading; or
(c) The issuer, any officer, director or
controlling person performing similar
functions, or any under writer 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
214
MERCANTILE LAW
Commission or other competent or
administrative body for violations of
securities, commodities, and other
related laws (Sec. 13.1)
(d) If any issuer shall refuse to permit an
examination to be made by the
Commission (Sec. 13.3)
NOTE: A registration statement may be
withdrawn by the issuer only with the
consent of the Commission (Sec. 13.6).
(5) Statement under oath by the issuer in
all prospectus that:
(a) registration requirements have
been met and
(b) all information are true and
correct as represented by the
issuer or the one making the
statement.
Statement under oath must be
made upon effectivity of the
registration statement. (Sec. 12.7)
IV. Prohibitions on
Fraud, Manipulation
and Insider Trading
A. MANIPULATION OF SECURITY
PRICES
It shall be unlawful for any person acting for
himself or through a dealer or broker, directly
or indirectly:
(a) To create a false or misleading appearance
of active trading in any listed security
traded in an Exchange of any other trading
market ("Exchange"):
(i) By effecting any transaction in such
security which involves no change in
the beneficial ownership thereof;
UP LAW BOC SECURITIES REGULATION CODE
(ii) By entering an order or orders for the
purchase or sale of such security with
the knowledge that a simultaneous
order or orders of substantially the
same size, time and price, for the sale
or purchase of any such security, has or
will be entered by or for the same or
different parties; or
(iii) By performing similar act where there
is no change in beneficial ownership.
(b) To affect, alone or with others, securities or
transactions in securities that:
(i) Raises their price to induce the
purchase of a security, whether of the
same or a different class of the same
issuer or of controlling, controlled, or
commonly controlled company by
others; or
(ii) Creates active trading to induce such a
purchase or sale through manipulative
devices such as marking the close,
painting the tape, squeezing the float,
hype and dump, boiler room
operations and such other similar
devices.
(c) To circulate or disseminate 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 the security for the
purpose of inducing the purchase or sale of
such security.
(d) 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.
215
MERCANTILE LAW
(e) To effect, either alone or 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 this Code or by rules
of the Commission (Sec. 24.1)
B. SHORT SALES
The SEC is regulating transactions wherein
the seller does not yet own or have the
securities he is selling. He is required to
show that he has made arrangements to
effect delivery of such securities on
settlement date; otherwise, the sale will
not be allowed.
(a) No person shall use or employ, in
connection with the purchase or sale of
any security any manipulative or
deceptive device or contrivance.
(b) No short sale shall be effected nor any
stop-loss order be executed in
connection with the purchase or sale of
any security except if allowed by the
SEC (Sec. 24.2)
NOTE: The SEC may allow certain acts or
transactions under Sec. 24 (on
Manipulation of Security Prices and Short
Sales), for public interest and protection of
investors (Sec. 24.3)
C. FRAUDULENT TRANSACTIONS
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or
sale of any securities to:
(a) Employ any device, scheme, or artifice
to defraud; (Sec. 26.1)
(b) Obtain money or property by means of
any untrue statement of a material fact
UP LAW BOC SECURITIES REGULATION CODE
of any omission to state a material fact
necessary in order to make the
statements made, in the light of the
circumstances under which they were
made, not misleading (Sec. 26.2)
(c) Engage in any act, transaction,
practice or course of business which
operates or would operate as a fraud or
deceit upon any person (Sec. 26.3)
D. INSIDER TRADING
What is sought to be addressed here is
the asymmetry in information about a
public company (such as a company
listed on the Philippine Stock Exchange)
between insiders and outsiders.
Insiders could have material
information not yet known to the public
about the company, and they might use
this information to benefit themselves
at the expense of the outsiders or the
public. Therefore, they must not trade in
the shares of the company pending the
disclosure of such information to the
public.
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or a person
controlling the issuer; gives or gave him access
to material information about the issuer or the
security that is not generally available to the
public;
(c) 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
(d) A person who learns such information by a
communication from any foregoing insiders
(Sec. 3.8)
216
MERCANTILE LAW
Material non-public information means:
(a) It 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
(b) 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)
It shall be unlawful for an insider:
(a) To sell or buy a security of the issuer,
while in possession of material
information with respect to the issuer or
the security that is not generally
available to the public, unless:
(1) The insider proves that the
information was not gained from
such relationship; or
(2) If the other party selling to or
buying from the insider (or his
agent) is identified, the insider
proves:
(i) That he disclosed the
information to the other party,
or
(ii) That he had reason to believe
that the other party otherwise
is also in possession of the
information (Sec. 27.1)
NOTE: Presumption that purchase or sale
is effected while in possession of material
non-public information arises:
(1) If the purchase or sale is
transacted after such information
came into existence but prior to
dissemination of such information
to the public; and
(2) The lapse of a reasonable time for
market to absorb such information.
UP LAW BOC SECURITIES REGULATION CODE
Presumption may be rebutted by
showing of purchasers or sellers
awareness of the material non-public
information at the time of purchase or
sale (Sec. 27.1)
(b) To communicate material nonpublic
information about the issuer or the security
to any person who, by virtue of the
communication, becomes an insider where
the 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 (Sec. 27.3)
V. Protection of
Investors
A. TENDER OFFER RULE
This protects the minority shareholders.
If a person or a group of persons (acting in
concert) intends and is in discussion with
certain shareholders of a public company
(normally, the controlling shareholders)
to acquire a substantial stake in such
company (now, the threshold is 35% of
the outstanding class of shares in a public
company), the acquirer must make an
offer to all the shareholders of the
company to tender their shares at the
price being offered to the controlling
shareholders.
Before, the minority
shareholders are left out; so,
the acquirer only dealt with the
controlling shareholders and
disregarded the minority.
When a tender offer has commenced or is
about to commence, It shall be unlawful for:
(a) Any person (except the tender
offeror) who is in possession of
217
MERCANTILE LAW
material nonpublic 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:
(i) Such person knows or has
reason to believe that the
information is nonpublic and
has been acquired directly or
indirectly from the tender
offeror, 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
(b) Any tender offeror, those
acting on its behalf, the issuer of the
securities sought or to be sought by
such tender offer, and any insider of
such issuer to communicate material
nonpublic information relating to the
tender offer to any other person where
such communication is likely to result
in a violation of (a) (Sec. 27.4).
CEMCO HOLDINGS, INC. v. NATIONAL LIFE
INSURANCE COMPANY OF THE PHILIPPINES,
INC. (2007):
Tender offer is a publicly announced intention
by a person acting alone or in concert with
other persons to acquire equity securities of a
public company. Stated differently, a tender
offer is an offer by the acquiring person to
stockholders of a public company for them to
tender their shares therein on the terms
specified in the offer. Tender offer is in place to
protect minority shareholders against any
scheme that dilutes the share value of their
investments. It gives the minority shareholders
the chance to exit the company under
reasonable terms, giving them the opportunity
to sell their shares at the same price as those
of the majority shareholders.
UP LAW BOC SECURITIES REGULATION CODE
The coverage of the mandatory tender offer
rule covers not only direct acquisition but also
indirect acquisition or any type of
acquisition.
[Case at bar: The indirect acquisition by
CEMCO Holdings of 36% of UCC shares
through the acquisition of the non-listed UCHC
shares is covered by the mandatory tender
offer rule.]
The legislative intent of Section 19 of the
Securities Regulation 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. The bottom line of the law is to give the
shareholder of the listed company the
opportunity to decide whether or not to sell in
connection with a transfer of control.
B. RULES ON PROXY
SOLICITATION
Proxies shall be:
(a) Issued in accordance with SEC rules
and regulations; Proxy solicitations
shall also be made in accordance with
the said rules and regulations (Sec.
20.1)
218
MERCANTILE LAW
(b) In writing (Sec. 20.2)
(c) Signed by the stockholder or his duly
authorized representatives (Sec. 20.2)
(d) Filed before the scheduled meeting
with the corporate secretary (Sec. 20.2)
(e) Valid only for the meeting for which it
is intended unless otherwise provided
in the proxy (Sec. 20.3)
NOTE: No proxy shall be valid and
effective for a period longer than five
(5) years at one time (Sec. 20.3)
A broker or dealer shall:
(a) Not give any proxy, consent or any
authorization, in respect of any security
carried for the account of the customer, to
a person other than the customer, without
written authorization of such customer
(Sec. 20.4)
(b) If he holds or acquires the proxy for at least
ten percent (10%) or such percentage as
the Commission may prescribe of the
outstanding share of such issuer, submit a
report identifying the beneficial owner
within ten days after such acquisition, for
its own account or customer, to the issuer
of security, to the exchange where the
security is traded and to the Commission
(Sec. 20.5)
C. DISCLOSURE RULE
Issuers, equity holders, and insiders are
required to disclose certain information to the
SEC.
C. 1. DISCLOSURE BY THE ISSUER
(1) To the SEC
Every issuer shall file with the
Commission:
(a) Annual Report within one hundred
thirty-five (135) days, after the end
of the issuers fiscal year, or such
other time as the Commission may
prescribe
UP LAW BOC SECURITIES REGULATION CODE
(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. 17.1)
NOTE: Under this Section, issuer
includes:
(a) An issuer which has sold a class of
its securities pursuant to a
registration under section 12
hereof.
BUT the requirement shall 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 one
hundred (100) holder of such
class of securities or such other
number as the Commission
shall prescribe and it notifies
the Commission of such;
(b) An issuer with a class of securities
listed for trading on an Exchange;
and
(c) An issuer with assets of at least
Fifty million pesos
(50,000,000.00) or such other
amount as the Commission shall
prescribe, and having two hundred
(200) or more holders each
holding at least one hundred (100)
share of a class of its equity
securities.
The obligation of such issuer to
file report shall be terminated
ninety (90) days after
notification to the Commission
by the issuer that the number
of its holders holding at least
219
MERCANTILE LAW
one hundred (100) shares is
reduced to less than one
hundred (100) (Sec. 17.2)
PHILIPPINE VETERANS BANK v. CALLANGAN
(2011):
The ISSUE in this case is whether the Phil.
Veterans Bank qualifies as a public company
under Section 17.2 of the Securities Regulation
Code (SRC) in relation with Rule 3(1)(m) of the
Amended Implementing Rules and
Regulations of the SRC, required to comply
with the reportorial requirements set forth in
Section 17.1 of the SRC.
Under Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the
SRC, a public company is defined as any
corporation with a class of equity securities
listed on an Exchange or with assets in excess
of P50,000,000.00 and having 200 or more
holders, at least 200 of which are holding at
least 100 shares of a class of its equity
securities.
It is clear that a public company, as
contemplated by the SRC, is not limited to a
company whose shares of stock are publicly
listed; even companies like the Bank, whose
shares are offered ONLY to a specific group of
people, are considered a public company,
PROVIDED they meet the requirements
enumerated [under Sections 17.1 and 17.2 of
the SRC and/or under the Amended IRR of the
SRC].
(2) To the equity holders
An annual report shall be furnished
by every issuer which has a class of
equity securities satisfying any of
the requirements in Subsection
17.2 to each holder of such equity
security (Sec. 17.5)
C. 2. DISCLOSURE BY EQUITY HOLDERS
UP LAW BOC SECURITIES REGULATION CODE
Any person who acquires directly
or indirectly the beneficial
ownership of more than five of per
centum (5%) of such class or in
excess of such lesser per centum as
the Commission by rule may
prescribe, shall, within ten (10)
days after such acquisition or such
reasonable time as fixed by the
Commission, submit to: (1) the
issuer of the securities; (2) to the
Exchange where the security is
traded; and (3) to the Commission,
the following information:
(a) The personal background,
identity, residence, and
citizenship of, and the nature
of such beneficial ownership by,
such person and all other
persons by whom or on whose
behalf the purchases are
effected; in the event the
beneficial owner is a juridical
person, the line of business of
the beneficial owner shall also
be reported;
(b) If the purpose of the purchases
or prospective purchases is to
acquire control of the business
of the issuer of the securities,
any plans or proposals which
such persons may have that
will effect a major change in its
business or corporate
structure;
(c) The number of shares of such
security which are beneficially
owned, and the number of
shares concerning which there
is a right to acquire, directly or
indirectly, by; (i) such person,
and (ii) each associate of such
220
MERCANTILE LAW
person, giving the background,
identity, residence, and
citizenship of each such
associate; and
(d) Information as to any contracts,
arrangements, or
understanding with any person
with respect to any securities of
the issuer including but not
limited to transfer, joint
ventures, loan or option
arrangements, puts or call
guarantees or division of losses
or profits, or proxies naming
the persons with whom such
contracts, arrangements, or
understanding have been
entered into, and giving the
details thereof.
NOTE: If it appears to the SEC that
securities were acquired by person in
the ordinary course of his business and
were not acquired for the purpose of
and do not have the effect of changing
or influencing the control of the issuer
nor in connection with any transaction
having such purpose or effect it may
permit any person to file in lieu of the
statement required by subsection 17.1
hereof, a notice stating:
(1) The name of such person;
(2) The shares of any equity
securities subject to Subsection
17.1 which are owned by him;
(3) The date of their acquisition;
and
(4) Such other information as the
commission may specify (Sec.
18.3)
C. 3. DISCLOSURE BY INSIDER
An insider has the duty to disclose
material information with respect
UP LAW BOC SECURITIES REGULATION CODE
to the issuer or the security that is
not generally available to the
public (Sec. 27.1)
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or
a person controlling the issuer;
gives or gave him access to
material information about the
issuer or the security that is not
generally available to the public;
(c) 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
(d) A person who learns such
information by a communication
from any foregoing insiders (Sec.
3.8)
Material non-public information
means:
(a) It 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
(b) 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)
A beneficial owner of 10% of a
public company becomes a
principal shareholder required to
disclose his interest to the SEC, the
221
MERCANTILE LAW
company, and the Philippine Stock
Exchange (if the company is listed
there).
VI. Civil Liability
A. CIVIL LIABILITIES ON
ACCOUNT OF FALSE REGISTRATION
STATEMENT (SEC. 56)
Civil liabilities arise when the registration
statement or any part thereof contains on
its effectivity:
(1) An untrue statement of a material
fact; or
(2) Omission to state a material fact
required to be stated therein or
necessary to make such
statements not misleading
Who may be liable?
(a) Issuer and every person who signed
the registration statement;
(b) Director of/partner in the issuer at
the time of the filing of the
registration statement or any part,
supplement or amendment thereof;
(c) One who is named in the
registration statement as being or
about to become and whose written
consent thereto is filed with the
registration statement;
(d) Auditor/auditing firm named as
having certified any financial
statements used in connection with
the registration statement or
prospectus;
(e) One who, with his written consent
filed with the registration statement,
has been named as having prepared
or certified any part of the
registration statement/any report or
valuation which is used in
UP LAW BOC SECURITIES REGULATION CODE
connection with the registration
statement;
(f) Selling shareholder who contributed
to and certified as to the accuracy of
a portion of the registration
statement;
(g) Underwriter with respect to such
security (Sec. 56.1)
Who may sue?
Any person who acquires the
security AND who suffers damage
o UNLESS it is proved that at the
time of such acquisition he
knew of such untrue statement
or omission (Sec. 56.1)
NOTE: When the security is acquired
AFTER the issuer has made generally
available to its security holders an INCOME
STATEMENT covering a period of at least
twelve (12) months beginning from the
effective date of the registration statement,
the right of recovery under Section 56 shall
be conditioned on proof that such person
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 (Sec. 56.2).
B. CIVIL LIABILITIES ARISING IN
CONNECTION WITH PROSPECTUS,
COMMUNICATIONS AND REPORTS
(SEC. 57)
B. 1. LIABILITY OF SELLERS/OFFERORS
Who may be liable?
(a) Offeror or seller of a security in
violation of Chapter on Registration of
Securities;
(b) Offeror or seller of a security, whether
or not exempted by the provisions of
222
MERCANTILE LAW
this Code, by means of a prospectus or
other written or oral communication
which includes an:
untrue statement of a material fact
OR
omits to state a material fact
necessary in order to make the
statements, in the light of the
circumstances under which they
were made, not misleading (the
purchaser not knowing of such
untruth or omission)
DEFENSE: No knowledge of untruth or
omission, despite the exercise of
reasonable care (Sec. 57.1).
Who may sue?
Purchaser of the security may sue
to recover:
(1) Consideration paid for such
security with interest thereon,
LESS the amount of any income
received thereon, upon the tender
of such security; or
(2) For damages if he no longer owns
the security (Sec. 57.1).
B. 2. LIABILITY OF MAKERS OF FALSE
MISLEADING STATEMENTS
Who may be liable?
Any person who shall make or
cause to be made any statement in
any report, or document filed
pursuant to this Code or any rule or
regulation thereunder, which
statement as at the time and in the
light of the circumstances under
which it was made false or
misleading with respect to any
material fact
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

DEFENSE: Good faith and lack of D. CIVIL LIABILITY FOR

knowledge of the false and misleading MANIPULATION OF SECURITY
statement (Sec. 57.2).
PRICES (SEC. 59)
Who may sue?
Who may be liable?
Purchaser or seller of security who
Any person who WILLFULLY
purchased or sold at a price which
participates in any act or
was affected by such statement,
transaction in Section 24
NOT KNOWING that such
(Manipulation of Security Prices).
statement was false or misleading,
and RELYING UPON such
Who may sue?
statement
Any person who shall purchase or
SUE FOR: Damages caused by
sell any security at a price which
such reliance (Sec. 57.2)
was affected by such act or
transaction
C. CIVIL LIABILITY OF FRAUD IN
SUE FOR: Damages as a result of
CONNECTION WITH SECURITIES the act or transaction.
TRANSACTIONS (SEC. 58)
E. CIVIL LIABILITY WITH RESPECT
Who may be liable? TO COMMODITY FUTURES
Any person who engages in any act
CONTRACTS AND PRE-NEED PLANS
or transaction in violation of
Sections 19.2 (fraudulent,
(SEC. 60)
deceptive, or manipulative acts or
practices in connection with tender Who may be liable?
offers), 20 (Proxy Solicitations) or Any person who engages in any act
26 (Fraudulent Transactions), or or transactions in WILLFUL
any rule or regulation of the violation of any rule or regulation
Commission thereunder. promulgated by the Commission
under Section 11 (on Commodity
Who may sue? Future Contracts) or 16 (on Pre-
Need Plans) (Sec. 60.1)
Any person who purchases or sells
any security, grants or refuses to
grant any proxy, consent or Who may sue?
authorization, or accepts or Any person sustaining damages as
declines an invitation for tender of a result of such act or transaction
a security (Sec. 60.1)
SUE FOR: Damages as a result of
the act or transaction. F. CIVIL LIABILITY ON ACCOUNT
OF INSIDER TRADING

F. 1. LIABILITY FOR NON-DISCLOSURE

Who may be liable?

223
UP LAW BOC SECURITIES REGULATION CODE
(1) Any insider who violates
Subsection 27.1 (on Insiders Duty
to Disclose When Trading); and
(2) Any person in the case of a
tender offer who violates
Subsection 27.4 (a)(I), or any rule
or regulation thereunder, by
purchasing or selling a security
while in possession of material
information not generally
available to the public (Sec. 61.1)
Who may sue?
Any investor who,
contemporaneously with the
purchase or sale of securities that
is the subject of the violation,
purchased or sold securities of the
same class
o UNLESS such insider, or such
person in the case of a tender
offer, proves that such investor
KNEW the information or
would have purchased or sold
at the same price
REGARDLESS of disclosure of
the information to him (Sec.
61.1)
F. 2. LIABILITY FOR COMMUNICATING
NON-PUBLIC INFORMATION ABOUT
ISSUER
Who may be liable?
(1) An insider who violates Subsection
27.3;
(2) Any person in the case of a tender
offer who violates Subsection 27.4
(a), or any rule or regulation
thereunder communicating
material nonpublic information
shall be jointly and severally liable
under Subsection 61.1 with, and to
the same extent as, the insider, or
person in the case of a tender offer,
224
MERCANTILE LAW
to whom the communication was
directed and who is liable under
Subsection 61.1 by reason of his
purchase or sale of a security (Sec.
61.2).
G. LIABILITIES OF CONTROLLING
PERSONS, AIDER AND ABETTOR
AND OTHER SECONDARY LIABILITY
G. 1. LIABILITY OF CONTROLLING
PERSONS
Who may be liable?
Every person who controls any
person liable under this Code or
the rules or regulations of the
Commission thereunder, shall
ALSO be liable jointly and severally
with and to the same extent as such
controlled persons to any person to
whom such controlled person is
liable (Sec. 51.1)
NOTE: CONTROL may be:
(a) By or through stock ownership,
agency, or otherwise, or
(b) In connection with an agreement
or understanding with one or more
other persons (Sec. 51.1)
DEFENSE: Lack of knowledge of the
existence of facts by reason of which
the liability of the controlled person is
alleged to exist (Sec. 51.1)
G. 2. LIABILITY OF DIRECTOR/OFFICER
FOR DELAY IN THE FILING OF REQUIRED
DOCUMENTS
Who may be liable?
Any director or officer of, or any
owner of any securities issued by,
any issuer required to file any
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

document, report or other to do ANY act or thing which it

information under this Code or any would be unlawful for such person
rule or regulation of the to do under the provisions of this
Commission thereunder, who, Code or any rule or regulation
without just cause, hinders, delays thereunder (Sec. 51.2)
or obstructs the making or filing of
any such document, report, or
information (Sec. 51.3)

G. 3. LIABILITY OF AIDER/ABETTOR

Who may be liable?

Any person who aids, abets,
counsels, commands, induces or
procures any violation of this Code,
or any rule, regulation or order of
the Commission thereunder (Sec.
51.4)
Every person who substantially
assists the act or omission of any
person primarily liable under
Sections 57, 58, 59 and 60 of this
Code, with knowledge or in reckless
disregard that such act or omission
is wrongful
o Jointly and severally liable as
an aider and abettor for
damages resulting from the
conduct of the person primarily
liable (Sec. 51.5)
o NOTE: An aider and abettor
shall be LIABLE ONLY:
To the extent of his relative
contribution in causing
such damages in
comparison to that of the
person primarily liable, or
To the extent to which the
aider and abettor was
unjustly enriched thereby
whichever is GREATER (Sec.
51.5)

NOTE: It shall be unlawful for any

person, DIRECTLY or INDIRECTLY,

225
UP LAW BOC
Civil Liability Arising
When the registration
statement or any part
thereof contains on its
effectivity:
o An untrue statement of a
material fact; or
o Omission to state a
material fact required to
be stated therein or
necessary to make such
statements not
misleading
SECURITIES REGULATION CODE
Who may be liable?
(a) Issuer and every person
who signed the registration
statement;
(b) Director of/partner in the
issuer at the time of the
filing of the registration
statement or any part,
supplement or amendment
thereof;
(c) One who is named in the
registration statement as
being or about to become
(b);
(d) Auditor/auditing firm
named as having certified
any financial statements
used in connection with the
registration statement or
prospectus;
(e) One who, with his written
consent filed with the
registration statement, has
been named as having
prepared or certified any
part of the registration
statement/any report or
valuation which is used in
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with respect to
such security (Sec. 56.1)
226
MERCANTILE LAW
Who may Sue?
Any person who acquires the
security and who suffers
damage unless it is proved that
at the time of such acquisition
he knew of such untrue
statement or omission (Sec.
56.1)
NOTE: When the security is
acquired after the issuer has
made generally available to its
security holders an income
statement covering a period of
at least twelve (12) months
beginning from the effective
date of the registration
statement, the right of recovery
under this subsection shall be
conditioned on proof that such
person 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 (Sec. 56.2)
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

Civil Liability Arising Who may be liable? Who may Sue?

In Connection With Prospectus, (a) Offeror or seller of a Purchaser of the security may
Communications and security in violation of sue to recover:
Reports (Sec. 57) Chapter on Registration of (1) consideration paid for such
Securities; security with interest
A. Liability of Sellers/Offerors (b) Offeror or seller of a thereon, less the amount of
security, whether or not any income received
exempted by the provisions thereon, upon the tender of
of this Code, by means of a such security; or
prospectus or other written (2) for damages if he no longer
or oral communication owns the security (Sec. 57.1).
which includes an untrue
statement of a material
fact or omits to state a
material fact necessary in
order to make the
statements, in the light of
the circumstances under
which they were made, not
misleading (the purchaser
not knowing of such
untruth or omission).

Defense: No knowledge of
untruth or omission,
despite the exercise of
reasonable care (Sec. 57.1).

In Connection With Prospectus,
Communications and
Reports (Sec. 57)
B. Liability of Makers of False
Misleading Statements
Any person who shall make or
cause to be made any
statement in any report, or
document filed pursuant to this
Code or any rule or regulation
thereunder, which statement
as at the time and in the light
of the circumstances under
which it was made false or
misleading with respect to any
material fact
Purchaser or seller of security
who purchased or sold at a
price which was affected by
such statement knowing that
such statement was false or
misleading, and relying upon
such statement may sue for
damages caused by such
reliance (Sec. 57.2).

Defense: Good faith and lack of

knowledge of the false and
misleading statement (Sec.
57.2).

227
UP LAW BOC SECURITIES REGULATION CODE
Civil Liability Arising Who may be liable?
Fraud in Connection with Any person who engages in any
Securities Transactions act or transaction in violation of
(Sec. 58) Sections 19.2, 20 or 26, or any
rule or regulation of the
Commission thereunder
Manipulation of Security Prices Any person who willfully
(Sec. 59) participates in any act or
transaction in Section 24
(Manipulation of Security
Prices).
With Respect to Commodity Any person who engages in any
Futures Contracts and Pre- act or transactions in willful
need Plans (Sec. 60) violation of any rule or
regulation promulgated by the
Commission under Section 11
(on Commodity Future
Contracts) or 16 (on Pre-Need
Plans) (Sec. 60.1)
On Account of Insider Trading (a) Any insider who violates
Subsection 27.1;
A. Liability for non-disclosure (b) and any person in the case
of a tender offer who violates
Subsection 27.4 (a)(I), or any
rule or regulation thereunder,
by purchasing or selling a
security while in possession of
material information not
generally available to the
public (Sec. 61.1)
228
MERCANTILE LAW
Who may Sue?
Any other person who
purchases or sells any security,
grants or refuses to grant any
proxy, consent or authorization,
or accepts or declines an
invitation for tender of a
security who sustained
damages as a result of the
transaction.
Any person who shall purchase
or sell any security at a price
which was affected by such act
or transaction
Any person sustaining damages
as a result of such act or
transaction (Sec. 60.1)
Any investor who,
contemporaneously with the
purchase or sale of securities
that is the subject of the
violation, purchased or sold
securities of the same class
unless such insider, or such
person in the case of a tender
offer, proves that such investor
knew the information or would
have purchased or sold at the
same price regardless of
disclosure of the information to
him (Sec. 61.1)
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

Civil Liability Arising Who may be liable? Who may Sue?

On Account of Insider Trading (a) An insider who violates
B. Liability for communicating Subsection 27.3;
non-public information OR
about issuer (b) any person in the case of a
tender offer who violates
Subsection 27.4 (a), or any rule
or regulation thereunder
communicating material
nonpublic information shall be
jointly and severally liable
under Subsection 61.1 with, and
to the same extent as, the
insider, or person in the case of
a tender offer, to whom the
communication was directed
and who is liable under
Subsection 61.1 by reason of his
purchase or sale of a security
(Sec. 61.2).

229
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

Civil Liability Arising Who may be liable? Who may Sue?

7. Liabilities of Controlling Every person who controls any
Persons, Aider and Abettor person liable under this Code
and Other Secondaryor the rules or regulations of
Liability the Commission thereunder,
shall also be liable jointly and
A. Liability of Controlling severally with and to the same
Persons extent as such controlled
persons to any person to whom
such controlled person is liable
(Sec. 51.1)

NOTE: Control may be by or

through stock ownership,
agency, or otherwise, or in
connection with an agreement
or understanding with one or
more other persons (Sec. 51.1)

Defense: Lack of knowledge of

the existence of facts by reason
of which the liability of the
controlled person is alleged to
exist (Sec. 51.1)

7. Liabilities of Controlling It shall be unlawful for any

Persons, Aider and Abettor director or officer of, or any
and Other Secondary owner of any securities issued
Liability by, any issuer required to file
any document, report or other
B. Liability of Director/Officer information under this Code or
for Delay in the Filing of any rule or regulation of the
Required Documents Commission thereunder,
without just cause, to hinder,
delay or obstruct the making or
filing of any such document,
report, or information (Sec.
51.2)

230
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

Civil Liability Arising Who may be liable? Who may Sue?

7. Liabilities of Controlling It shall be unlawful for any
Persons, Aider and Abettor person to aid, abet, counsel,
and Other Secondarycommand, induce or procure
Liability any violation of this Code, or
any rule, regulation or order of
C. Liability of the Commission thereunder
Aider/Abettor (Sec. 51.3)

Every person who substantially

assists the act or omission of
any person primarily liable
under Sections 57, 58, 59 and
60 of this Code, with
knowledge or in reckless
disregard that such act or
omission is wrongful, shall be
jointly and severally liable as an
aider and abettor for damages
resulting from the conduct of
the person primarily liable (Sec.
51.4)

BUT an aider and abettor shall

be liable only to the extent of
his relative contribution in
causing such damages in
comparison to that of the
person primarily liable, or the
extent to which the aider and
abettor was unjustly enriched
thereby, whichever is greater
(Sec. 51.4)

NOTE: It shall be unlawful for

any person, directly, or
indirectly, to do any act or thing
which it would be unlawful for
such person to do under the
provisions of this Code or any
rule or regulation thereunder
(Sec. 51.2)

231
UP LAW BOC BANKING LAWS MERCANTILE LAW

MERCANTILE LAW
BANKING LAWS

232
UP LAW BOC BANKING LAWS
a) The New Central Bank Act [RA 7653]
b) Law on Secrecy of Bank Deposits [RA 1405]
c) General Banking Law of 2000 [RA 8791]
d) Philippine Deposit Insurance Corporation
Act* [RA 3591, as amended]
e) Foreign Currency Deposit Act* [RA 6426]
*Not in 2015 SC Bar Syllabus
I. The New Central Bank Act
[RA 7653]
A. STATE POLICIES
The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
concerning money, banking and credit. [Sec. 1]
B. SALIENT FEATURES
(1) Assurance of BSP independence by
providing for the majority of the members of
the Monetary Board to come from the
private sector. [Sec. 6, NCBA]
(2) The BSP may now concentrate on monetary
policy, and will phase out its fiscal agency
functions and its responsibilities in respect
of finance companies without quasi-
banking functions, which in the past, had
distracted it from its primary function. The
latter has been assumed by the Securities
and Exchange Commission. [Secs. 3, 129, &
130, NCBA]
(3) Provides safeguards to ensure that unlike
the old Central Bank which sustained huge
losses, the BSP would have a positive net
income position by the following provisions:
(a) Capitalization of P50B; [Sec.2, NCBA]
(b) Maintenance of positive net foreign
asset position; [Sec.71, NCBA]
(c) Charging interests on all loans and
advances to banks; [Sec. 85, NCBA]
(d) Authority to collect interests on loans
and advances to closed financial
institutions; [Sec. 85, NCBA] and
233
MERCANTILE LAW
(e) BSP can't acquire shares, including by
collateral, nor participate in neither
ownership nor management of
enterprises, nor engage in development
banking or financing [Sec. 128, NCBA]
C. CREATION OF THE BANGKO
SENTRAL NG PILIPINAS (BSP)
There is hereby established an independent
central monetary authority, which shall be a
body corporate known as the Bangko Sentral ng
Pilipinas [Sec. 2, NCBA].
C.1. NATURE OF THE BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
(3) A government-owned corporation but
enjoys fiscal and administrative autonomy.
[Secs. 1 & 2, NCBA]
C.2. CAPITALIZATION
The BSP shall have a capitalization of P50B to
be fully subscribed by the Government. [Sec. 2,
NCBA]
D. RESPONSIBILITY AND PRIMARY
OBJECTIVE
D.1. PRIMARY OBJECTIVES
(1) To maintain price stability conducive to
balanced and sustainable economic growth.
(2) To promote and maintain monetary stability
and the convertibility of the peso.
D.2. OTHER RESPONSIBILITIES
(1) To provide policy directions in the areas of
money, banking, and credit
(2) To supervise operations of banks
(3) Regulates finance companies and non-bank
financial institutions performing quasi-
banking functions [Sec. 3, NCBA]
UP LAW BOC BANKING LAWS
D.3. BSP AS TRANSFEREE OF PHILIPPINE
CENTRAL BANK POWERS
All powers, duties and functions vested by law
in the Central Bank of the Philippines not
inconsistent with the NCBA shall be deemed
transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
special charters shall be deemed to refer to the
BSP. [Sec. 136, NCBA]
E. MONETARY BOARD
The body through which the powers and
functions of the Bangko Sentral are exercised
[Sec 6, NCBA]
E.1. POWERS AND FUNCTIONS
(1) Issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers
vested in it;
(2) Direct the management, operations, and
administration of the BSP, reorganize its
personnel and issue such rules and
regulations as it may deem necessary or
desirable for this purpose;
(3) Establish a human resource management
system which governs the selection, hiring,
appointment, transfer, promotion, or
dismissal of all personnel;
(4) Adopt an annual budget for and authorize
such expenditures by BSP as are in the
interest of the effective administration and
operations of Bangko Sentral in accordance
with applicable laws and regulations; and
(5) Indemnify its members and other officials of
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, suit or proceeding, to which
any of them may be made a party by reason
of the performance of his functions or
duties, unless such members or other
234
MERCANTILE LAW
officials is found to be liable for negligence
or misconduct. [Sec. 15, NCBA]
E.2. COMPOSITION
The MB shall be composed of 7 members
appointed by the President with a 6-year term.
[Sec. 6, NCBA]
MEMBERS
(1) The BSP Governor or his designated
alternate (a deputy governor);
(2) A Cabinet member to be designated by the
President or his designated alternate (an
Undersecretary in his department); and
(3) 5 members from the private sector [Sec. 6,
NCBA]
E.3. REAPPOINTMENT
No member of the MB may be reappointed
more than once. [Sec. 6, NCBA]
E.4. QUALIFICATIONS
(1) Citizenship Natural-born citizens of the
Philippines;
(2) Age
General Rule: At least 35 years old
Exception: Governor must be at least 40
years old;
(3) Of good moral character;
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and
(6) With recognized competence in social and
economic disciplines. [Sec. 8, NCBA]
E.5. DISQUALIFICATIONS
In addition to the disqualifications under the
Code of Conduct and Ethical Standards for
Public Officials and Employees [RA 6713], a
member of the Monetary Board is disqualified
by:
(1) Direct connection with any multilateral
banking or financial institution; or
(2) Substantial interest in any private bank in
the Philippines, within 1 year prior to his
appointment [Sec. 9, NCBA]
UP LAW BOC BANKING LAWS
E.6. PROHIBITION ON MEMBERS OF THE MB
(1) Being a director, officer, employee,
consultant, lawyer, agent or stockholder of
any bank, quasi-bank, or any other
institution which is subject to supervision or
examination by the BSP (remedy: resign and
divest interests before assuming office];
(2) Holding any other public office or public
employment during their tenure; and
(3) Being employed in any multilateral banking
or financial institution within 2 years after
the expiration of his term. Exception: When
he serves as an official representative of the
government to such institution. [Sec. 9,
NCBA]
E.7. GROUNDS FOR REMOVAL OF ANY
MEMBER OF THE MB
(1) If the member is subsequently disqualified
under Sec. 8;
(2) If he is physically or mentally incapacitated
that he cannot properly discharge his duties
and responsibilities and such incapacity has
lasted for more than 6 months;
(3) If he is guilty of acts or operations which are
of fraudulent or illegal character or which
are manifestly opposed to the aims and
interests of the BSP; and
(4) If he no longer possesses the qualifications
under Sec. 8. [Sec. 10, NCBA]
E.8. VACANCIES, HOW FILLED
Causes:
(1) Death;
(2) Resignation; or
(3) Removal.
Effect: A new member will be appointed to
complete the unexpired period of the term of
the member concerned. [Sec. 7, NCBA]
235
MERCANTILE LAW
E.9. CIVIL LIABILITY OF MEMBERS OF THE
MB
Members of the MB, officials, examiners, and
employees of the BSP are liable when they:
(1) Willfully violate the provisions of the NCBA;
(2) Are guilty of negligence, abuses or acts of
malfeasance or misfeasance; or
(3) Fail to exercise extraordinary diligence in
the performance of his duties;
(4) Disclose confidential information, or
information relating to MB discussions or
resolutions, or about the BSPs confidential
operations
Exceptions:
(a) Disclosure is in connection with the
performance of official functions with
the BSP;
(b) MB or BSP Governors prior
authorization; or
(5) Use confidential information for their
personal gain or to the detriment of the
Government, BSP, or 3rd Parties [Sec. 16,
NCBA]
F. HOW THE BSP HANDLES BANKS IN
DISTRESS
Liquidity Ability of an asset to be converted
into cash. An entity is liquid when it is able to
pay its liabilities when they fall due.
Solvency When current assets are more than
current liabilities, providing the ability to pay
debts. An entity is solvent when it is able to
meet its long term obligations/liabilities.
Insolvency When the actual market value of
assets are insufficient to pay its liabilities, not
considering capital stock and surplus which are
not liabilities for such purpose. An entity is
insolvent when it is unable to meet current and
long-term obligations.
UP LAW BOC BANKING LAWS
F.1. CONSERVATORSHIP
I. GROUNDS FOR APPOINTMENT OF A
CONSERVATOR
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the MB finds that a bank or quasi-
bank is:
(1) In a state of continuing inability; or
(2) Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors [Sec. 29,
NCBA]
II. PERIOD
Shall not exceed 1 year [Sec. 29, NCBA]
III. EXPENSES
The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank
concerned [Sec. 29, NCBA]
IV. GROUNDS FOR TERMINATION OF
CONSERVATORSHIP BY MB
(1) When MB is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary; or
(2) When, on the basis of the report of the
conservator or of its own findings, the MB
determines that the continuance in business
of the institution would involve probable
loss to its depositors or creditors (effect: the
bank or quasi-bank would then be placed
under receivership) [Sec. 29, NCBA]
V. EFFECTS OF CONSERVATORSHIP
(1) Bank/Quasi-bank retains juridical
personality
(2) Not a precondition to the designation of a
receiver [Sec. 30, NCBA], and;
(3) Perfected transactions cannot be
repudiated [First Philippine International
Bank v. CA, 1996]
236
MERCANTILE LAW
VI. QUALIFICATIONS OF A
CONSERVATOR
The conservator should be competent and
knowledgeable in bank operations and
management. [Sec. 29, NCBA]
The appointment of a conservator shall be
vested exclusively in the MB. [Sec. 30, NCBA]
VII. POWERS AND DUTIES OF A
CONSERVATOR
(1) To take charge of the assets, liabilities, and
the management thereof;
(2) To reorganize the management;
(3) To collect all monies and debts due said
institution;
(4) To exercise all powers necessary to restore
its viability;
(5) To report and be responsible to the MB;
(6) To overrule or revoke the actions of the
previous management and board of
directors of the bank or quasi-bank. [Sec.
29, NCBA]
VIII. THE CONSERVATOR CANNOT
REPUDIATE PERFECTED CONTRACTS
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the preservation
of the assets of the bank, the reorganization of
the management and the restoration of
viability. Such powers cannot extend to the
post-facto repudiation of perfected
transactions, otherwise they would infringe
against the non-impairment clause of the
Constitution. [First Philippine International Bank
v. CA, 1996]
IX. REMUNERATION
General Rule: The conservator shall receive
remuneration in an amount not to exceed 2/3 of
the salary of the president of the institution in 1
year, payable in 12 equal monthly payments.
UP LAW BOC BANKING LAWS
Exception: A conservator connected with the
BSP, in which case said conservator shall not be
entitled to receive any remuneration or
emolument. [Sec. 29, NCBA]
F.2. CLOSURE
I. CONCEPT
The MB may summarily and without need for
prior hearing close a banking institution and
place it under receivership
II. GROUNDS
When a banking institution:
(1) Notifies the BSP or publicly announces a
bank holiday; or
(2) Suspends the payment of its deposit
liabilities continuously for more than 30
days in any manner [Sec. 53, GBL]
F.3. RECEIVERSHIP
I. GROUNDS
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they
become due in the ordinary course of
business. Exception: This shall not include
inability to pay caused by extraordinary
demands induced by financial panic in the
banking community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its
liabilities; or
(3) Cannot continue in business without
involving probable losses to its depositors
or creditors; or
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets of the
institution. Special rule: in this situation, the
MB may act summarily and without hearing
[Sec. 30, NCBA]
237
MERCANTILE LAW
II. WHO ACTS AS RECEIVER
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized
competence in banking or finance [Sec. 30,
NCBA]
III. WHO APPOINTS RECEIVERS
The appointment of a receiver shall be vested
exclusively in the MB. [Sec. 30, NCBA]
IV. CONSERVATORSHIP VIS--VIS
RECEIVERSHIP
The designation of a conservator is not a
precondition to the designation of a receiver.
[Sec. 30, NCBA]
V. POWERS AND DUTIES OF A RECEIVER
(1) Immediately gather and take charge of all
the assets and liabilities of the institution
(2) Administer the assets for the benefit of the
creditors
(3) Exercise the general powers of a receiver
under the Revised Rules of Court
(4) Not to pay or commit any act that will
involve the transfer or disposition of any
asset of the institution.
Exceptions:
(1) Administrative expenditures;
(2) Receiver may deposit or place funds in
non-speculative investments.
(5) Subject to prior approval of the MB,
determine, as soon as possible, but not later
than 90 days from take-over, whether the
institution may be rehabilitated or
otherwise placed in such a condition so that
it may be permitted to resume business with
safety to its depositors and creditors and
the general public. [Sec. 30, NCBA]
The assets of the institution under receivership
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of
garnishment, levy, attachment, or execution.
[Sec. 30, NCBA]
UP LAW BOC BANKING LAWS
VI. CLOSE NOW, HEAR LATER SCHEME
Sec. 29 of the Central Bank Act does not
contemplate prior notice and hearing before a
bank may be directed to stop operations and
placed under receivership. It is enough that
such action is made subject of a subsequent
judicial review. When the law provides for the
filing of a case within 10 days after the receiver
takes charge of the assets of the bank, it is
unmistakable that the assailed actions should
precede the filing of the case. The legislature
could not have intended to authorize no prior
notice and hearing in the banks closure and at
the same time allow a suit to annul it on the
basis of absence thereof [Central Bank vs. CA
and Triumph Savings Bank, GR No. 76118, March
30, 1993]
F.4. LIQUIDATION
I. NOTICE
Should the determination be that the institution
cannot be rehabilitated or permitted to resume
business, the MB shall notify in writing the
board of directors of the institution of its
findings and direct the receiver to proceed with
the liquidation of the institution. [Sec. 30,
NCBA]
II. PROCEDURE
(1) The receiver shall file ex parte with the
proper RTC, and without requirement of
prior notice or any other action, a petition
for assistance in the liquidation of the
institution pursuant to the liquidation plan
adopted by the PDIC. Special rule: if quasi-
bank, liquidation plan adopted by the MB;
(2) Upon acquiring jurisdiction, the court shall,
upon motion by the receiver after due
notice:
(a) Adjudicate disputed claims against the
institution;
(b) Assist the enforcement of individual
liabilities of the stockholders, directors,
and officers; and
238
MERCANTILE LAW
(c) Decide on other issues as may be
material to implement the liquidation
plan
(3) The receiver shall convert the assets of the
institutions to money, dispose of the same
to creditors and other parties, for the
purpose of paying the debts of such
institution in accordance with the rules on
concurrence and preference of credit under
the Civil Code. [Sec. 30, NCBA]
III. SUITS BY RECEIVER
The receiver may institute actions to collect and
recover assets or defend actions against the
institution, with the assistance of counsel as he
may retain. [Sec. 30, NCBA]
IV. ASSETS ARE UNDER CUSTODIA LEGIS
The assets of the institution under receivership
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of
garnishment, levy, attachment, or execution.
[Sec. 30, NCBA]
V. DISPOSITIONS
After payment of the cost of proceedings,
including reasonable expenses and fees of the
receiver to be allowed by the court, the receiver
shall pay the debts of such institution, under
order of the court, in accordance with the rules
on concurrence and preference of credit in the
Civil Code. [Sec. 31, NCBA]
All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or quasi-
bank shall be used to pay the costs of
proceedings, salaries of such personnel whose
employment is rendered necessary in the
discharge of the liquidation together with other
additional expenses caused thereby. The
balance of revenues and earnings, after the
payment of all said expenses, shall form part of
the assets available to creditors. [Sec. 32. NCBA]
UP LAW BOC BANKING LAWS
VI. EFFECTS OF APPOINTMENT OF
RECEIVER/LIQUIDATION
(1) Retention of juridical personality;
(2) Suspension of operations / Stoppage of
business;
(3) Assets are deemed in custodia legis, i.e.,
exempt from garnishment, levy or
execution;
(4) Stay of execution of judgment to prevent
depletion of bank assets;
(5) Bank is not liable to pay interest on deposits
which accrued during the period of
suspension of operation;
(6) Restriction of banks capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts.
G. HOW THE BSP HANDLES
EXCHANGE CRISIS
G.1. LEGAL TENDER POWER
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the
Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both
public and private. [Sec. 52, NCBA]
Limitation: Coins shall be legal tender in
amounts not exceeding P50 for denominations
of 25 centavos and above, and in amounts not
exceeding P20 for denominations of 10
centavos or less.
Exception to Limitation: MB may fix otherwise.
[Sec. 52, NCBA]
The maximum amount of coins to be considered
as legal tender is: [BSP Circular 537 (2006)]
(1) P1,000.00 for denominations of 1-Piso, 5-
Piso and 10-Piso coins; and
(2) P100.00 for denominations of 1-sentimo, 5-
sentimo, 10-sentimo, and 25-sentimo coins.
239
MERCANTILE LAW
G.2. RATE OF EXCHANGE
The MB shall:
(1) Determine the exchange rate policy of the
country;
(2) Determine the rates at which the BSP shall
buy and sell spot exchange;
(3) Establish deviation limits from the effective
exchange rate or rates as it may deem
proper.
(4) Determine the rates for other types of
foreign exchange transactions by the BSP,
including purchases and sales of foreign
notes and coins. [Sec. 74, NCBA]
Limitation: The margins between the effective
exchange rates and the rates established by the
MB may not exceed the corresponding margins
for spot exchange transactions by more than
the additional costs or expenses involved in
each type of transactions. [Sec. 74, NCBA]
II. Law on Secrecy of
Bank Deposits
[RA No. 1405, as amended]
A. POLICY
1. To give encouragement to the people to
deposit their money in banking
institutions; and
2. To discourage private hoarding. [Sec. 1]
B. PURPOSE
That money may be properly utilized by banks
in authorized loans to assist in the economic
development of the country. [Sec. 1]
The absolute confidentiality rule in R.A. No.
1405 actually aims at protection from
unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is
merely to determine the existence and nature,
as well as the amount of the deposit in any
UP LAW BOC BANKING LAWS
given bank account. [China Banking Corporation
v. Ortega, 1973]
C. PROHIBITED ACTS
(1) Examination, inquiry, or looking into
deposits by persons, government officials,
bureaus, or offices; [Sec. 2, RA 1405]
(2) Disclosure by banking institutions' officials
or employees to unauthorized persons
regarding information about covered
accounts. [Sec. 3, RA 1405]
D. DEPOSITS COVERED
General rule: All deposits of whatever nature
with banks or banking institutions in the
Philippines are considered as of an absolutely
confidential nature. [Sec. 2, RA 1405]
Investment in bonds issued by the Government
of the Philippines, its political subdivisions and
its instrumentalities, are included. [Sec. 2]
Special rule: The confidentiality of foreign-
currency deposits is governed by the Foreign
Currency Deposit Act.
Exclusions:
Money-market placement is not covered by RA
1405 because it is not deposited in the bank.
Of Whatever Nature
Based on this phrase, the term "deposits" is to
be understood broadly and not limited to
accounts giving rise to creditor-debtor relations
between the bank and depositor. The deposit of
money which may be used by banks for
authorized loans to 3rd persons also falls under
RA 1405. Therefore, trust accounts are also
covered. [Ejercito v. SB Special Division, 2006]
By force of statute, all bank deposits are
absolutely confidential, and that nature is
unaltered even by the legislated exceptions.
There is disfavor towards construing these
exceptions in such a manner that would
authorize unlimited discretion on the part of the
240
MERCANTILE LAW
government or of any party seeking to enforce
those exceptions and inquire into bank deposits.
If there are doubts in upholding the absolutely
confidential nature of bank deposits against
affirming the authority to inquire into such
accounts, then such doubts must be resolved in
favor of confidentiality. [Republic v. Eugenio,
2008]
Zones of Privacy
Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. [People v. Estrada, G.R. No. 164368,
April 2, 2009; Marquez v. Desierto, G.R. No.
135882, June 27, 2001, 359 SCRA 772; Ople v.
Torres, G.R. No. 107737. October 1, 1999, 316
SCRA 43]
It is conceded that while the fundamental law
has not bothered with the triviality of
specifically addressing privacy rights relative to
banking accounts, there, nevertheless, exists in
our jurisdiction a legitimate expectation of
privacy governing such accounts. The source of
this right of expectation is statutory, and it is
found in R.A. No. 1405, otherwise known as the
Bank Secrecy Act of 1955. [BSB Group, Inc., v.
Go, 2010]
E. EXCEPTIONS
[Sec. 2]
(1) Upon written permission of the depositor
(2) In cases of impeachment
(3) Upon order of competent court in the
following cases:
(a) Bribery [Sec. 2]
(b) Dereliction of duty of public officials
[Sec. 2]
(c) Unexplained wealth under Sec. 8 of the
Anti-Graft and Corrupt Practices Act
[RA 3019]. [PNB v. Gancayco, 1965;
Banco Filipino v. Purisima, 1988;
Marquez v. Desierto, 2001]
The exception applies to cases of
concealment of illegally acquired
UP LAW BOC BANKING LAWS
property in anti-graft cases. The inquiry
into illegally acquired property or
property not "legitimately acquired"
extends to cases where such property is
concealed by being held by or recorded
in the name of other persons. [Banco
Filipino v. Purisima, 1988]
(d) Those under the AMLA [RA 9160, the
Anti-Money Laundering Act of 2001]
when there is probable cause that the
deposits or investments involved are in
any way related to an unlawful activity
or a money laundering offense. [Sec. 11,
AMLA as amended]
Exceptions to the court requirement:
cases involving:
(i) Kidnapping for Ransom [RPC]
(ii) Dangerous Drugs [2002
Comprehensive Dangerous Drugs
Act]
(iii) Hijacking and other violations of RA
6235,
(iv) Destructive arson and murder
(4) In cases where the money deposited or
invested is the subject matter of litigation
The phrase "subject matter of the action"
means the physical facts, real or personal
things, money, land, chattels, etc., in
relation to which the suit is prosecuted. It
does not mean the defendant's delict or
wrong. [Mathay v. Consolidated Bank and
Trust Company, 1974]
We note with approval the difference
between the subject of the action from the
cause of action. We also find petitioner's
definition of the phrase subject matter of
the action is consistent with the term
subject matter of the litigation, as the
latter is used in the Bank Deposits Secrecy
Act.
241
MERCANTILE LAW
Where the plaintiff is fishing for information
so it can determine the culpability of private
respondent and the amount of damages it
can recover from the latter. It does not seek
recovery of the very money contained in the
deposit. The subject matter of the dispute
may be the amount of P999,000.00 that
petitioner seeks from private respondent as
a result of the latter's alleged failure to
inform the former of the discrepancy; but it
is not the P999,000.00 deposited in the
drawer's account. By the terms of RA 1405,
the money deposited itself should be the
subject matter of the litigation. [Union Bank
v. Court of Appeals, 1999]
A civil case by Mellon Bank for the recovery
of amounts converted by the Javiers after a
bank erroneously transferred $1M instead of
$1k necessarily involved inquiring into the
whereabouts of the illegally-acquired
amount extends to whatever is concealed by
being held or recorded in the name of
persons other than the perpetrators.
Therefore, this falls under the exceptions to
bank secrecy under RA 1405. [Mellon Bank,
N.A. v. Magsino, 1990]
OTHER EXCEPTIONS:
(1) When inquiry is conducted under the
authority of the Commissioner of Internal
Revenue into the bank accounts of the
following:
(a) A decedent in order to determine his
gross estate
(b) Any taxpayer who has filed an
application for compromise of his tax
liability, which application shall include
a written waiver of his privilege under
RA 1405 or under other general or
special laws
Information obtained from banks and
financial institutions may be furnished to a
foreign tax authority pursuant to an existing
UP LAW BOC BANKING LAWS
convention or agreement. [Sec. 6(F), NIRC,
as amended by RA 10021]
(2) BSP inquiry or examination in the course of
its periodic or special examination of the
bank. [Sec. 11, AMLA]
(3) Disclosure of certain information about
bank deposits which have been dormant for
at least 10 years, to the Treasurer of the
Philippine in a sworn statement, a copy of
which is posted in the bank premises. [Sec.
2, Unclaimed Balances Law, Act No. 3926, as
amended by PD 679]
(4) The PDIC and/or the BSP can inquire into or
examine deposit accounts and all
information related thereto in case there is
a finding of unsafe and unsound banking
practice [Sec. 8, paragraph 8, R.A. 3591, as
amended by R.A. 9576].
(5) The Secretary of Justice in his Opinion No.
13 s. 1987 concluded that the PCGG
(Presidential Commission on Good
Government) can compel banks to disclose
or produce bank records without violating
the bank secrecy laws. [Morales, The
Philippine General Banking Law]
Not an exception: Power of the Ombudsman to
examine and have access to bank accounts
and records under Sec. 15[8] of RA 6770
[Morales, The Philippine General Banking Law]
The SC in Marquez v. Desierto [G.R. No.135882,
June 27, 2001] and Ombudsman v. Ibay [G.R. No.
137538, September 3, 2001] restricted the
Ombudsmans power in this manner:
[B]efore an in camera inspection may be
allowed, there must be a pending case before a
court of competent jurisdiction. Further, the
account must be clearly identified, the
inspection limited to the subject matter of the
pending case before the court of competent
242
MERCANTILE LAW
jurisdiction. The bank personnel and the
account holder must be notified to be present
during the inspection, and such inspection may
cover only the account identified in the pending
case.
F. GARNISHMENT OF DEPOSITS
General rule: The prohibition against
examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude its
being garnished to insure satisfaction of a
judgment. [China Banking Corporation v. Ortega,
1973; Philippine Commercial and Industrial Bank
v. Court of Appeals, 1991]
[T]he prohibition against examination of or
inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to
insure satisfaction of a judgment. Indeed there
is no real inquiry in such a case, and if the
existence of the deposit is disclosed the
disclosure is purely incidental to the execution
process. It is hard to conceive that it was ever
within the intention of Congress to enable
debtors to evade payment of their just debts,
even if ordered by the Court, through the
expedient of converting their assets into cash
and depositing the same in a bank.[China
Banking Corporation v. Ortega, 1973]
Exception: Foreign Currency Deposits
The foreign currency deposits shall be exempt
from attachment, garnishment, or any other
order or process of any court, legislative body,
government agency or any administrative body
whatsoever. [Sec. 8, FCDA Foreign Currency
Deposit Act]
Exception to the exception: In a case where a
Filipino child was raped by a foreigner, the SC
allowed, pro hac vice, garnishment of foreign
currency deposits stating: If we rule that the
questioned Section 113 of CB Circular No. 960
which exempts from attachment, garnishment,
or any other order or process of any court,
UP LAW BOC BANKING LAWS MERCANTILE LAW

legislative body, government agency or any B. DEFINITION AND CLASSIFICATION

administrative body whatsoever, is applicable to OF BANKS
a foreign transient, injustice would result Bank Entities engaged in the lending of funds
especially to a citizen aggrieved by a foreign obtained in the form of deposits [Sec. 3.1, GBL]
guest. [Salvacion v. CA, 1997]
B.1. CORE BANKING FUNCTIONS:
I. CONFIDENTIALITY OF FOREIGN (1) Taking of deposits from the public
CURRENCY DEPOSITS (2) Lending out these funds [Morales, The
General rule: Foreign currency deposits are Philippine General Banking Law]
confidential.
B.2. CLASSIFICATION OF BANKS
Exceptions: [Sec 3.2]
(1) Upon written permission of the depositor (1) Universal Banks (UB)
[Sec. 8, Foreign Currency Deposit Act ; (2) Commercial Banks (KB)
Intengan vs CA ; 2002] (3) Thrift Banks
(2) Upon order of a competent court in cases of (a) Savings and mortgage banks
violation of the AMLA [Sec. 11, AMLA] (b) Stock savings and loan associations
(3) During BSPs periodic or special (c) Private development banks
examinations, and (4) Rural Banks
(4) Disclosure of the Treasurer of the (5) Cooperative Banks
Philippines when the unclaimed balances (6) Islamic Banks
law applies [Act 3936, as amended by PD (7) Other classification of banks as may be
679] determined by the Monetary Board of the
(5) BSP/PDIC inquiry if there is a finding of BSP
unsafe and unsound banking practice
(1) Universal Banks
II. PENALTIES (2) Commercial Banks
(1) Imprisonment of not more than 5 years; or (3) Thrift Banks
(2) Fine of not more than P20,000; or The term thrift banks also refers to any
(3) Both, in the discretion of the court [Sec. 5, banking corporation organized for the
RA 1405] following purposes:
(a) Accumulating the savings of depositors
III. General Banking Law and investing them, together with
capital loans secured by bonds,
of 2000 mortgages in real estate and insured
[RA 8791] improvements thereon, chattel
mortgage, bonds and other forms of
security or in loans for personal or
A. POLICY
household finance, whether secured or
To promote and maintain a stable and efficient
unsecured, or in financing for
banking and financial system that is globally
homebuilding and home development;
competitive, dynamic and responsive to the
in readily marketable and debt
demands of a developing economy. [Sec. 2,
securities; in commercial papers and
GBL]
accounts receivables, drafts, bills of
exchange, acceptances or notes arising

243
UP LAW BOC BANKING LAWS
out of commercial transactions; and in
such other investments and loans which
the Monetary Board may determine as
necessary in the furtherance of national
economic objectives;
(b) Providing short-term working capital,
medium- and long-term financing, to
businesses engaged in agriculture,
services, industry and housing; and
(c) Providing diversified financial and allied
services for its chosen market and
constituencies especially for small and
medium enterprises and individuals.
[Sec.3[a], Thrift Banks Act]
(4) Rural Banks
These banks are mandated to make needed
credit available and readily accessible in the
rural areas on reasonable terms and which are
primarily governed by the Rural Banks Act of
1992 [RA 7353].
(5) Cooperative Banks
A cooperative bank is one organized for the
primary purpose of providing a wide range of
financial services to cooperatives and their
members. [Art. 23(i), Philippine Cooperative
Code as Amended, RA 6938]
It may perform any or all of the services offered
by a rural bank, including the operation of an
FCDU subject to certain conditions. [Morales,
The Philippine General Banking Law]
(6) Islamic Banks
These are banks the business dealings and
activities of which are subject to the basic
principles and rulings of Islamic Sharia. The Al
Amanah Islamic Investment Bank of the
Philippines, created by RA 6848, is the only
Islamic bank in the country at this time.
244
MERCANTILE LAW
(7) Other classification of banks as may be
determined by the Monetary Board of the BSP
Examples: Philippine Veterans Bank [RA 3518],
Landbank of the Philippines [RA 3844],
Development Bank of the Philippines [RA 85]
C. DISTINCTION OF BANKS FROM
QUASI-BANKS AND TRUST ENTITIES
Quasi-banks entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes
of relending or purchasing receivables and
other obligations. [Sec. 4, GBL]
Deposit substitutes funds obtained from the
public, other than deposits, through the
issuance, endorsement, or acceptance of
deposit-substitute instruments for the
borrower's own account, for the purpose of
relending or purchasing of receivables and
other obligations. It includes bankers
acceptances, promissory notes, participations,
certificates of assignment and similar
instruments with recourse, and repurchase
agreements. [Sec. 95, NCBA]
Trust Entities a stock corporation or a person
duly authorized by the Monetary Board to
engage in trust business. [Sec. 79, GBL]
A Trust Business is any activity resulting from
trusteeship involving the appointment of a
trustee by a trustor for the administration,
holding, management of funds and/or
properties of the trustor by the trustee for the
use, benefit or advantage of the trustor or of
beneficiaries.
UP LAW BOC BANKING LAWS MERCANTILE LAW

D. BANK POWERS AND LIABILITIES candidate or for purposes of partisan

UB KB political activity
Powers (10) To establish pension, retirement, and other
1. Corporate Powers 1. Corporate Powers plans for the benefit of its directors,
2. Banking and 2. Banking and trustees, officers and employees
Incidental Powers Incidental Powers (11) To exercise such other powers as may be
3. Powers of an [Sec. 29] essential or necessary to carry out its
investment house 3. Power to invest in purposes as stated in the AOI.
4. Power to invest in allied enterprises [Sec.
non-allied enterprises 30] D.2. BANKING AND INCIDENTAL POWERS
[Sec. 23] All such powers as may be necessary to carry on
5. Power to invest in the business of commercial banking [Sec. 29,
allied enterprises [Sec. GBL]
24] (1) Accepting drafts
(2) Issuing letters of credit
D.1. CORPORATE POWERS (3) Discounting and negotiating promissory
[Sec. 36, Corporation Code] notes, drafts, bills of exchange, and other
(1) To sue and be sued in its corporate name; evidence of debt
(2) Succession by its corporate name for the (4) Accepting or creating demand deposits
period stated in the AOI and the certificate (5) Receiving other types of deposits and
of incorporation deposit substitutes
(3) To adopt and use a corporate seal (6) Buying and selling foreign exchange and
(4) To amend its AOI gold or silver bullion
(5) To adopt by-laws, not contrary to law, (7) Acquiring marketable bonds and other debt
morals, or public policy, and to amend or securities
repeal them (8) Extending credit
(6) To issue or sell stocks to subscribers and to
sell treasury stocks. (1) Accepting drafts
(7) To purchase, receive, take or grant, hold, By accepting a draft, a bank creates a bankers
convey, sell, lease, pledge, mortgage and acceptance, which is a negotiable time draft or
otherwise deal with such real and personal bill of exchange drawn on and accepted by a
property, including securities and bonds of commercial bank. This is different from trade
other corporations, as the transaction of the acceptance, which is accepted by the buyer.
lawful business of the corporation may [Morales, The Philippine General Banking Law]
reasonably and necessarily require, subject
to the limitations prescribed by law and the (2) Issuing letters of credit
Constitution
(8) To enter into merger or consolidation (3) Discounting and negotiating promissory
(9) To make reasonable donations, including notes, drafts, bills of exchange, and other
those for the public welfare or for hospital, evidence of debt
charitable, cultural, scientific, civic, or
similar purposes: provided that no
corporation, domestic or foreign, shall give
donations in aid of any political party or

245
UP LAW BOC BANKING LAWS
(4) Accepting or creating demand deposits
General rule: Only a UB KB can accept or create
demand deposits [Sec. 33, GBL]
Exception: Banks other than a UB or KB with
prior approval of, and subject to such conditions
and rules as may be prescribed by the Monetary
Board [Sec. 33, GBL]
Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed
by the provisions concerning simple loan. [Art.
1980, NCC]
Presumption of ownership of deposits
It is presumed that money deposited in a bank
account belongs to the person in whose name
the deposit account is opened.
A depositor is presumed to be the owner of
funds standing in his name in a bank deposit;
and where a bank is not chargeable with notice
that the money deposited in such account is the
property of some other person than the
depositor, the bank is justified in paying out the
money to the depositor or upon his order, and
cannot be liable to any other person as the true
owner. [Fultron Iron Works Co. v. China Banking
Corporation, 1930]
No duty to set-off
A bank is under no duty or obligation to make
an application or set-off against the deposit
accounts of a borrower. To apply the deposit to
the payment of a loan is a privilege, a right of
set-off which the bank has the option [but not
the obligation] to exercise. [BPI v. CA and
Eastern Plywood, 1994]
Safety deposit boxes
The rent of safety deposit boxes is a special kind
of deposit and cannot be characterized as an
ordinary contract of lease because the full and
absolute possession and control of the deposit
246
MERCANTILE LAW
box is not given to the renters. The prevailing
rule is that the relation between the bank
renting out and the renter is that of bailor and
bailee the bailment being for hire and mutual
benefit. [CA Agro-industrial Dev. Corp. v. CA,
1983]
(5) Receiving other types of deposits and deposit
substitutes
Types of Deposits:
1. Time Deposit - Interest rate stipulated
depending on the number of days. During
this period, the money deposited may not
be withdrawn without incurring penalty.
High interest rates.
2. Savings Deposit - Bank pays an interest
rate, but not as high as time deposits.
3. Demand Deposits/Current Accounts - No
interest is paid by the bank because the
depositor can take out his funds any time. It
is called demand deposit because the
depositor can withdraw the money he
deposited on the very same day when he
deposited it or at any time thereafter.
[VILLANUEVA, Commercial Law Review]
4. Negotiable Order of Withdrawal Accounts
Interest-bearing deposit accounts that
combine the payable on demand feature of
checks and investment feature of savings
accounts [Sec. X223, Manual of Regulations
for Banks]
(6) Buying and selling foreign exchange and gold
or silver bullion
(7) Acquiring marketable bonds and other debt
securities
(8) Extending credit
Know your customer rule
Before granting a loan or other credit
accommodation, a bank must ascertain that the
debtor is capable of fulfilling its commitments
to the bank. [Sec. 40, GBL]
UP LAW BOC BANKING LAWS MERCANTILE LAW

The bank may demand from its credit General rule: Shall not exceed
On security
applicants a statement of their assets and 75% of the appraised value of
of chattels
liabilities and of their income and expenditure the security, and such loans
and
and such information as may be prescribed by and other credit
intangible
law or by rules and regulations of MB to enable accommodations may be made
properties
the bank to properly evaluate the credit to the title-holder of the
(patents,
application which includes the corresponding chattels and intangible
trademarks,
financial statements submitted for taxation properties or his assignees
trade
purposes to the BIR. [Sec. 40, GBL] Exception: The Monetary Board
names, and
otherwise prescribes [Sec. 38,
copyrights)
Credit enhancement GBL]
If the borrower is less than creditworthy, third
persons may enhance his credit by providing Grant of loans
guarantees and other security devices in favor of (1) Only in amounts and for the periods of time
the bank. [Morales, The Philippine General essential for the effective completion of the
Banking Law, opinion] operations to be financed; and
(2) Consistent with safe and sound banking
A bank cannot lend pesos to a non-resident practices. [Sec. 39, GBL]
[BSP Circular No. 22; Sec. 22, Manual of
Regulations on Foreign Exchange Transactions]. Purpose of loans
[Morales, The Philippine General Banking Law] The purpose shall be stated in the application
and in the contract between the bank and the
Material misrepresentation borrower. [Sec. 39, GBL]
If there is material misrepresentation, bank
(1) May terminate any loan or other credit Effect of usage of loan proceeds for purposes
accommodation granted on the basis of other than those agreed upon with the bank
said statements; and The bank shall have the right to terminate the
(2) Shall have the right to demand immediate loan or other credit accommodation and
repayment or liquidation of the obligation demand immediate repayment of the
[Sec. 40, GBL] obligation. [Sec. 39, GBL]

Limit on loans, credit accommodations and
guarantees
General rule: Shall not exceed
75% of the appraised value of
the respective real estate
security, plus 60% of the
appraised value of the insured
Against improvements, and such loans
Real estate may be made to the owner of
the real estate or to his
assignees
Exception: Where the Monetary
Board otherwise prescribes
[Sec. 37, GBL]
Amortization on loans and other credit
accommodations
(1) Loans and other credit accommodations
with maturities of more than 5 years
Requirement: Provisions must be made for
periodic amortization payments, but such
payments must be made at least annually.
Special rule: That when the borrowed funds
are to be used for purposes which do not
initially produce revenues adequate for
regular amortization payments therefrom,
the bank may permit the initial amortization
payment to be deferred until such time as
said revenues are sufficient for such

247
UP LAW BOC BANKING LAWS
purpose. Exception to the special rule: In no
case shall the initial amortization date be
later than 5 years from the date on which
the loan or other credit accommodation is
granted.
(2) In case of loans and other credit
accommodations to microfinance sectors
The schedule of loan amortization shall
take into consideration the projected cash
flow of the borrower and adopt this into the
terms and conditions formulated by banks.
[Sec. 44, GBL]
All are subject to such rules as the Monetary
Board may promulgate. [Sec. 29, GBL]
E. DILIGENCE REQUIRED OF BANKS
The banking industry is impressed with public
interest. As such, the highest degree of
diligence is expected, and high standards of
integrity and performance are even required.
Banks must treat depositors accounts with
meticulous care and always to have in mind the
fiduciary nature of its relationship with them.
[Metrobank v. Rosales, 2014; Comsavings Bank v.
Sps. Capistrano, 2013; Equitable Banking v.
Special Steel Products, 2012]
The Rural Bank of Cabadbaran should not have
simply relied on the face of SPAs since its
undertaking to lend P200k as a banking
institution requires a greater degree of
diligence. [RBCI v. Melecio-Yap, 2014]
The fiduciary nature of banking requires banks
to assume a degree of diligence higher than
that of a good father of a family. [People v. Go,
2014; Metrobank v. Centro Development, 2012]
Banks are required to observe a higher standard
of diligence. [Land Bank v. Poblete, 2013]
The banking business is so impressed with
public interest where the trust and confidence
of the public in general is of paramount
248
MERCANTILE LAW
importance such that the appropriate standard
of diligence must be very high, if not the highest
degree of diligence. [Far East Bank and Trust
Company v. Tentmakers, 2012]
The degree of diligence required of banks is
more than that of a good father of a family
where the fiduciary nature of their relationship
with their depositors is concerned. [PNB v. Tria,
2012]
Banks assume a degree of diligence higher than
that of a good father of a family. Its fiduciary
duty imposes upon it a higher level of
accountability than that expected of a
depositor.[Philippine Banking Corporation vs.
CA, G.R. No. 127469, January 15, 2004]
The General Banking Law of 2000 requires of
banks the highest standards of integrity and
performance. The banking business is
impressed with public interest. Of paramount
importance is the trust and confidence of the
public in general in the banking industry.
Consequently, the diligence required of banks is
more than that of a Roman pater familias or a
good father of a family. The highest degree of
diligence is expected. [Philippine Commercial
Bank vs. Balmaceda, G.R. No. 158143, September
21, 2011]
Notwithstanding the degree of diligence
required, a bank is not expected to be infallible
[Prudential Bank vs. CA, 2000].
FIDUCIARY DUTY
(1) Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
(2) Under Sec. 2, the degree of diligence is
high standards of integrity and
performance and no longer highest
degree of diligence as was decided prior to
the effectivity of the General Banking Law of
2000 but also [mistakenly] even thereafter.
UP LAW BOC BANKING LAWS
In numerous cases, the Supreme Court has
held that the highest degree of diligence
and care is expected from banks [Simex
International v. CA [1990]; Philippine Bank of
Commerce v. CA [1997]; Westmont Bank v.
Ong [2002]; Solidbank v. Spouses Tan
[2003]; Samsung Construction v. FEBTC
[2004]; Citibank, N.A. v. Spouses
Cabamongan [2006]; Philippine Savings
Bank v. Chowking Food Corporation [2008];
Bank of America NT &SA v. Philippine Racing
Club [2009].
The fiduciary nature of banking requires banks
to assume a degree of diligence higher than
that of a good father of a family. [People v. Go,
2014; Metrobank v. Centro Development, 2012]
The degree of diligence required of banks is
more than that of a good father of a family
where the fiduciary nature of their relationship
with their depositors is concerned. [PNB v. Tria,
2012]
The laws policy recognizes the fiduciary nature
of banking. [Sps. Serfino v. FEBTC, 2012]
As a business affected with public interest and
because of the nature of its functions, the bank
is under obligation to treat the accounts of its
depositors with meticulous care, always having
in mind the fiduciary nature of their
relationship.
In every case, the depositor expects the bank to
treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately, down
to the last centavo, and as promptly as possible.
This has to be done if the account is to reflect at
any given time the amount of money the
depositor can dispose as he sees fit, confident
that the bank will deliver it as and to whomever
he directs. A blunder on the part of the bank,
249
MERCANTILE LAW
such as the failure to duly credit him his
deposits as soon as they are made, can cause
the depositor not a little embarrassment if not
financial loss and perhaps even civil and
criminal litigation [Simex International v. CA,
1990].
This fiduciary relationship means that the
banks obligation to observe high standards of
integrity and performance is deemed written
into every deposit agreement between a bank
and its depositor [Philippine Banking
Corporation vs. CA, G.R. No. 127469, January 15,
2004].
Banks are expected to exercise the highest
degree of diligence in the selection and
supervision of their employees [PCI Bank v. CA,
2001].
It cannot be over emphasized that the banking
business is impressed with public interest. Of
paramount importance is the trust and
confidence of the public in general in the
banking industry. Consequently, the diligence
required of banks is more than that of a Roman
pater familias or a good father of a family. The
highest degree of diligence is expected [Phil.
Savings Bank v. Chowking Food Corporation,
2008].
The banking business is so impressed with
public interest where the trust and confidence
of the public in general is of paramount
importance such that the appropriate standard
of diligence must be a high degree of diligence,
if not the utmost diligence [Bank of America
NT&SA v. Phil. Racing Club, 2009].
Under the doctrine of last clear chance, a bank
may be held liable for loss despite the
negligence of a depositor. Examples of these
cases are the following:
UP LAW BOC BANKING LAWS
(1) For disbursing funds to a dishonest
employee despite the employees failure to
strictly abide with the banks internal
procedure. [PBC v. CA, 1997]
(2) Allowing the execution of a mortgage on
parcels of land as security for a loan not
owned by the prospective borrower. [Canlas
v. Court of Appeals, 2000]
(3) Crediting the deposit in favor of another
depositor, a check where the signature of
the drawer was forged. [Westmont Bank v.
Ong, 2002]
F. NATURE OF BANK FUNDS AND
BANK DEPOSITS
The relationship between a depositor and a
bank is that of a creditor and debtor in relation
to the banks deposit functions [Gullas vs. PNB,
G.R. No. L-43191, November 13, 1935] and not
that of depositor and depositary.
The contract between the bank and its
depositor is governed by the provisions of the
NCC on simple loan [Consolidated Bank and
Trust Corporation vs. CA, G.R. No. 138569,
September 11, 2003].
Bank deposits are in the nature of irregular
deposits [Serrano vs. Central Bank, G.R. No. L-
30511, February 14, 1980]. Therefore, Art. 1287 of
the Civil Code, which prohibits compensation
when one of the debts arises from depositum,
does not apply.
Current and savings deposits are loans to a
bank because the bank can use the same and
they earn interest [BPI vs. CA, G.R. No. 104612,
May 10, 1994].
The relationship being contractual in nature,
mandamus is therefore not an available remedy
since mandamus does not lie to enforce the
performance of contractual obligations
[Maclaring Lucman vs. Alimatar Malawi, G.R. No.
159794, December 19, 2006]
250
MERCANTILE LAW
Money deposited is commingled with other
money constituting a common fund.
G. STIPULATION ON INTERESTS
The Monetary Board may prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations.
Any change by the Board in the maximum
maturities shall apply only to loans and other
credit accommodations made after the date of
such action.
The Monetary Board shall regulate the interest
imposed on micro finance borrowers by lending
investors and similar lenders such as, but not
limited to, the unconscionable rates of interest
collected on salary loans and similar credit
accommodations [Sec. 43, GBL]
H. GRANT OF LOANS AND SECURITY
REQUIREMENTS (PRUDENTIAL
MEASURES)
H.1. RATIO OF NET WORTH TO TOTAL
RISK ASSETS
Concept: The minimum ratio which the net
worth of a bank must bear to its total risk assets
which may include contingent accounts [i.e. net
worth: total risk assets] [Sec. 34, GBL]
General rule: A bank must conform to the risk-
based capital ratio prescribed by the MB
Excpetions: The MB may alter or suspend
compliance with such ratio whenever necessary
for a maximum period of 1 year.
(1) In case of a bank merger or consolidation;
OR
(2) When a bank is under rehabilitation under a
program approved by the BSP; [Sec. 34]
UP LAW BOC BANKING LAWS
I. PURPOSE
A bank must not be allowed to expand the
volume of its loans and investments in a
manner that is disproportionate to its net worth.
[Morales, The Philippine General Banking Law]
II. EFFECT OF NON-COMPLIANCE
(1) The MB may limit or prohibit the
distribution of net profits by such bank and
may require that part or all of the net profits
be used to increase the capital accounts of
the bank until the minimum requirement
has been met.
(2) The MB may restrict or prohibit the
acquisition of major assets and the making
of new investments by the bank, with the
exception of purchases of readily
marketable evidences of indebtedness of
the RP and the BSP and any other
evidences of indebtedness or obligations
the servicing and repayment of which are
fully guaranteed by the RP, until the
minimum required capital ratio has been
restored. [Sec. 34, GBL]
H.2. SINGLE BORROWERS LIMIT
General rule: The total loans, credit
accommodations and guarantees that may be
extended by a bank to any person, partnership,
association, or corporation or other entity shall
at no time exceed 20% of the net worth of such
bank. [Sec. 35.1, GBL]
Exceptions:
(1) The Monetary Board otherwise prescribes
for reasons of national interest. [Sec. 35.1]
Now, the single borrowers limit is 25% of
the net worth of the lending bank.
(2) Wholesale lending activities of government
banks to participating institutions for
relending to end-user borrowers: separate
limit of 35% net worth. [BSP Circular No.
425 dated March 25, 2004]
251
MERCANTILE LAW
I. INCREASE OF LIMIT
The Monetary Board may increase the limit
prescribed by an additional 10% of the net
worth, when:
(1) The additional liabilities of any borrower are
adequately secured by trust receipts,
shipping documents, warehouse receipts or
other similar documents transferring or
securing title;
(2) Covering readily marketable, non-
perishable goods; and
(3) Which must be fully covered by insurance
[Sec. 35.2]
II. PURPOSE
To prevent the bank from making excessive
loans and other credit accommodations to a
single borrower or corporate group, including
guarantees for the account of such borrower or
group. The bank is prohibited from placing
many eggs in the basket of one client. [It] is a
damage-control mechanism [and] a device for
risk amelioration. [Morales, The Philippine
General Banking Law]
III. BASIS FOR DETERMINING
COMPLIANCE
The basis for determining compliance with the
SBL is the total credit commitment of the bank
to the borrower. [Sec. 35.1, GBL]
IV. INCLUSIONS IN THE CEILING
(1) The direct liability of the maker or acceptor
of paper discounted with or sold to such
bank and the liability of a general indorser,
drawer or guarantor who obtains a loan or
other credit accommodation from or
discounts paper with or sells papers to such
bank;
(2) In the case of an individual who owns or
controls a majority interest in a corporation,
partnership, association or any other entity,
the liabilities of said entities to such bank;
(3) In the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
UP LAW BOC BANKING LAWS
corporation owns or controls a majority
interest; and
(4) In the case of a partnership, association or
other entity, the liabilities of the members
thereof to such bank. [Sec. 35.3, GBL]
V. GUIDELINES ON THE WHOLESALE
LENDING OF GOVERNMENT BANKS
(1) It shall apply only to loans granted by
participating financial institutions [PFIs] on
a wholesale basis for on-lending to end-
user borrowers;
(2) It shall apply only to loan programs funded
by multilateral, international, or local
development agencies, organizations, or
institutions, especially designed for
wholesale lending activities of government
banks;
(3) The end-user borrowers of the PFIs shall be
subject to the 25% SBL, not the increased
ceiling of 35%; and
(4) Government banks shall observe
appropriate criteria for accrediting PFIs and
for the grant/renewal of credit lines to
accredited PFIs. [BSP Circular No. 425 dated
March 25, 2004]
VI. EXCLUSIONS FROM THE CEILING
(NON-RISK LOANS)
Loans and other credit accommodations
(1) Secured by obligations of the BSP or of the
Philippine Government;
(2) Fully guaranteed by the government as to
the payment of principal and interest;
(3) Covered by assignment of deposits
maintained in the lending bank and held in
the Philippines;
(4) Under letters of credits to the extent
covered by margin deposits; and
(5) Specified by the Monetary Board as non-risk
items [Sec. 35.5, GBL]
252
MERCANTILE LAW
VII. COMBINATION OF LIABILITIES
The MB may prescribe the combination of the
liabilities of subsidiary corporations or members
of the partnership, association, entity or such
individual under certain circumstances,
including but not limited to any of the following
situations:
(1) The parent-corporation, partnership,
association, entity or individual guarantees
the repayment of the liabilities;
(2) The liabilities were incurred for the
accommodation of the parent corporation
or another subsidiary or of the partnership
or association or entity or such individual; or
(3) The subsidiaries though separate entities
operate merely as departments or divisions
of a single entity. [Sec. 35.4, GBL]
Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by a bank to any other bank or non-bank entity,
whether locally or abroad, shall be subject to
the prescribed limits. [Sec. 35.6, GBL]
H.3. RESTRICTIONS ON BANK EXPOSURE
TO DOSRI (DIRECTORS, OFFICERS,
STOCKHOLDERS, AND THEIR RELATED
INTERESTS)
General rule [Sec. 36, GBL]: No director or officer
of any bank
(1) Shall, directly or indirectly, for himself or as
the representative or agent of others,
borrow from such bank, nor
(2) Shall he become a guarantor, endorser or
surety for loans from such bank to others, or
in any manner be an obligor or incur any
contractual liability to the bank
Exceptions [SEC. 36, GBL]:
(1) Valid insider lending;
(2) Loans, credit accommodations and
guarantees extended by a cooperative
bank to its cooperative shareholders.
UP LAW BOC BANKING LAWS
I. REQUIREMENTS FOR VALID INSIDER
LENDING
(1) In the regular course of business;
(2) Upon terms not less favorable to the bank
than those offered to others;
(3) There is a written approval of the majority of
all the directors of the bank, excluding the
director concerned.
Exception: Not required where granted to
officers under a fringe benefit plan
approved by the BSP;
(4) The required approval shall be entered
upon the record of the bank and a copy of
such entry shall be transmitted forthwith to
the appropriate supervising and examining
department of the BSP;
(5) Limited to an amount equivalent to the
DOSRI borrowers unencumbered deposits
and book value of his paid-in capital
contribution in the bank [Sec. 36]
II. EXCEPTIONS
[Sec. 36, GBL]:
(1) Non-risk items; and
(2) Loans in the form of fringe benefits.
III. WAIVER OF BANK SECRECY
A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in all
banks in the Philippines. [Sec. 26, NCBA]
IV. PURPOSE
The general policy behind DOSRI rules is to
level the lending field between the insiders
and the outsiders. The objective is to prevent
the bank from becoming a captive source of
finance for DOSRI. [Morales, The Philippine
General Banking Law]
253
MERCANTILE LAW
H.4. LOAN-LOSS PROVISIONING
The following are subject to regulation by the
Monetary Board:
(1) The amount of reserves for bad debts or
doubtful accounts or other contingencies;
and
(2) The writing off of loans, other credit
accommodations, advances and other
assets. [Sec. 49, GBL]
PURPOSE
For effective banking supervision. There is a
problem of mismatch when a loan becomes
non-performing. The bank is paying interest on
the money it borrowed from the depositors or
other placers of funds, but is not recouping that
interest from the loan it made. Eventually, the
bank may have to write off loan losses against
profits. To cushion this eventuality, the bank is
required to set aside reserved for bad debts and
other doubtful accounts or contingencies.
[Morales, The Philippine General Banking Law]
To address the non-performing asset problem,
RA 9182 Special Purpose Vehicle Act was
passed. The Monetary Board approved certain
accounting guidelines on the sale by banks and
other financial institutions for housing under
the said Act. [Morales, The Philippine General
Banking Law] [N.B. RA 9182 is no longer in
effect.]
H.5. RESERVES
I. PURPOSES
(1) To control the volume of money created by
the credit operations of the banking system,
the BSP requires all banks to maintain
reserves against their deposit and deposit-
substitute liabilities.
(2) As a ready source of funds that will respond
to unusually large number of withdrawals
or preterminations of deposits or deposit-
substitutes, taking in the shape of a bank
run. [Morales, The Philippine General
Banking Law]
UP LAW BOC BANKING LAWS MERCANTILE LAW

II. UNIFIED RESERVE III. COVERAGE

(1) Statutory or legal and liquidity reserve [N.B. PDIC only insures deposit [not deposit
The two reserves have been combined or substitute] liabilities of a bank or banking
unified: 18% for deposits and deposit institution [Sec. 5, RA 3591, as amended]
substitutes] [BSP Circular No. 753 dated
March 29, 2012] IV. PURPOSE
(a) For deposit-substitutes evidenced by Full insurance might encourage risky banking
repurchase agreements covering activities. A limited insurance of bank deposits
government securities: 2% [BSP Circular serves to limit moral hazard.
No. 444 dated August 18, 2004]
(b) For foreign currency deposit units: 100% H.7. EQUITY INVESTMENT LIMITS (ALLIED
[BSP Circular No. 1389 dated April 13, VS. NON-ALLIED)
1993, as amended]; 30% of this cover This is a prudential measure by limiting the
must be in the form of liquid assets exposure of banks in different businesses for the
[BSP Circular-Letter dated June 6, 1997, purpose of control, affiliation or other
as cited in Morales] continuing business advantage.
(2) Reserve: The required reserves are to be
kept in the form of deposits placed in the General Rule UB [Sec. 24] KB [Sec. 30]
banks Demand Deposit Account with the [Allied &
BSP [BSP Circular No. 753 dated March 29, [of Allied
Non-Allied
2012] enterprises]
enterprises]
Total Not
Not
III. INTEREST ON RESERVES investment in exceeding
exceeding
[Sec. 94, NCBA] equities: 35% of the
50% of the
General rule: The BSP shall not pay interest on net worth of
net worth of
the reserves maintained with it. the bank
the bank
[Allied/Non-
Exception: Unless the Monetary Board decides [Allied]
Allied]
otherwise as warranted by circumstances. The equity Not
Not
investment in exceeding
exceeding
H.6. PDIC INSURANCE any one 25% of the
25% of the
enterprise: net worth of
I. CONCEPT net worth of
the bank
Banks are required to insure their deposit the bank
liabilities with the PDIC [Philippine Deposit
Insurance Corporation]. Net Worth The total of the unimpaired
paid-in capital including paid-in surplus,
II. PARTIAL INSURANCE retained earnings and undivided profit,
Each depositor is a beneficiary of the insurance net of valuation reserves and other
for a maximum amount of P500,000, or its adjustments. [Sec. 24, GBL]
foreign currency equivalent in the case of an
FCDU deposit. [Act Amending PDIC Charter, The acquisition of such equity is subject to the
2009, RA 9576] prior approval of the MB. [Sec. 24, GBL]

254
UP LAW BOC BANKING LAWS
The equity investment of a Universal Bank in
(1) Financial Allied Enterprises Up to 100% of
the equity in a thrift bank, rural bank, or
financial allied enterprise. A publicly-listed
UB or KN may own up to 100% of the voting
stock of only one other UB or KB. [Sec. 25,
GBL]
(2) Non-Financial Allied Enterprises Up to
100% of the equity of that enterprise [Sec.
26, GBL]
(3) Non-Allied Enterprises Not exceeding
35% of the total equity in a single non-allied
enterprise not shall it exceed 35% of the
voting stock in that enterprise. This extends
to investments by the UBs wholly or
majority-owned subsidiaries. [Sec 27 GBL]
(4) Quasi-banks 40% of the equity of quasi-
banks [Sec. 28, GBL]
The equity investment of Commercial Banks in
(1) Financial Allied enterprises Up to 100% of
the equity of a thrift or rural bank. [Sec 31
GBL]. Special rule: Where the equity
investment of a KB is in other financial
allied enterprises, including other KBs, such
investment shall remain a minority holding
in that enterprise. [Sec. 31, GBL]
(2) Non-Financial Allied enterprises Up to
100% of the equity of said enterprises. [Sec.
32, GBL]
(3) Quasi-banks 40% of the equity of quasi-
banks. [Sec. 28, GBL]
I. PENALTIES FOR VIOLATION
I.1. GOVERNING LAWS
Violation of any of the provisions of the GBL
shall be subject to Sections 34, 35, 36 and 37 of
the New Central Bank Act, unless otherwise
provided under therein.
I.2. CRIMINAL SANCTIONS
(1) Refusal by an institution subject to
examination and supervision by the
Monetary Board to file the required report
255
MERCANTILE LAW
or permit any lawful examination into its
affairs [Sec. 34, NCBA]
(a) Fine: Not less than Fifty thousand pesos
nor more than One hundred thousand
pesos; or
(b) Imprisonment: Not less than one year
nor more than five years; or
(c) Both fine and imprisonment: in the
discretion of the Court.
(2) Willful making of a false or misleading
statement on a material fact to the
Monetary Board or to the BSP examiners
[Sec. 35, NCBA]
(a) Fine: Not less than One hundred
thousand pesos [P100,000] nor more
than One hundred thousand pesos; or
(b) Imprisonment: Not more than five years;
or
(c) Both fine and imprisonment, in the
discretion of the Court.
(3) Willful violation of the NCBA and other
pertinent banking laws [including the GBL]
being enforced or implemented by the BSP
or any order, instruction, rule or regulation
issued by the MB [Sec. 36, NCBA]
(a) Fine: Not less than Fifty thousand pesos
nor more than One hundred thousand
pesos; or
(b) Imprisonment: Not less than two years
nor more than ten years; or
(c) Both fine and imprisonment, in the
discretion of the Court.
I.3. ADMINISTRATIVE SANCTIONS
[Sec 37, NCBA]
(1) Willful violation of its charter or by-laws;
willful delay in the submission of reports or
publications thereof as required by law,
rules and regulations; Criminal Acts in Nos.
1 to 3 above; and/or conducting business in
an unsafe or unsound manner as may be
determined by the Monetary Board
UP LAW BOC BANKING LAWS
(a) Fine not exceeding Thirty thousand
pesos a day for each violation, taking
into consideration the attendant
circumstances, such as the nature and
gravity of the violation or irregularity
and the size of the bank or quasi-bank;
or
(b) Suspension of rediscounting privileges
or access to BSP credit facilities;
(c) Suspension of lending or foreign
exchange operations or authority to
accept new deposits or make new
investments;
(d) Suspension of interbank clearing
privileges; and/or
(e) Revocation of quasi-banking license.
(2) Suspension or Removal of Director
(a) If the offender is a director or officer of a
bank, quasi-bank or trust entity, the MB
may also suspend or remove such
director or officer. [Sec. 66, GBL]
(b) Resignation or termination from office
shall not exempt such director or officer
from administrative or criminal
sanctions. [Sec. 37, NCBA]
(3) Dissolution of Bank
(a) If the violation is committed by a
corporation, such corporation may be
dissolved by quo warranto proceedings
instituted by the Solicitor General [Sec.
66, GBL]
(b) Whenever a bank or quasi-bank persists
in carrying on its business in an
unlawful or unsafe manner, the
Monetary Board may commence
proceedings in liquidation. [Sec. 36,
NCBA in relation to Sec. 30, NCBA]
256
MERCANTILE LAW
IV. Philippine Deposit
Insurance Corporation Act
[R.A. 3951, as amended]
A. PURPOSE OF THE PDIC
(1) To insure the deposits of all banks which are
entitled to the benefits of insurance under
this Act
(2) To promote and safeguard the interests of
the depositing public by way of providing
permanent and continuing insurance
coverage on all insured deposits [Sec. 1,
Amended PDIC Charter]
B. POWERS OF THE PDIC
(1) To adopt and use a corporate seal
(2) To have succession until dissolved by Act
of Congress
(3) To make contracts
(4) To sue and be sued; no attachment or
execution shall be issued against it before
final judgment
(5) To appoint officers and employees not
provided in this Act, define their duties, fix
their compensation, dismiss them
(6) Prescribe by-laws regulating the manner in
which their general business may be
conducted
(7) To exercise express and incidental powers
(8) To conduct examination of banks with prior
approval of the MB
(9) To act as receiver
(10) To prescribe rules and regulations
(11) To establish its own provident fund which
shall consist of contributions made both by
PDIC and by its officers and employees to a
common fund for the payment of benefits
to such officers or employees or their heirs
(12) To compromise, condone or release, in
whole or in part, any claim or settled
liability to PDIC [Sec. 8, Amended PDIC
Charter]
UP LAW BOC BANKING LAWS
C. FUNCTIONS OF THE PDIC
Insurance
The deposit liabilities of any bank or banking
institution, which is engaged in the business of
receiving deposits on the effective date of this
Act, or which thereafter may engage in the
business of receiving deposits, shall be insured
with the PDIC [Sec. 5, Amended PDIC Charter]
Relevant Definitions
Bank and banking institution shall include
banks, commercial banks, savings bank,
mortgage banks, rural banks, development
banks, cooperative banks, stock savings and
loan associations and branches and agencies in
the Philippines of foreign banks and all other
corporations authorized to perform banking
functions in the Philippines [Sec. 4(b), Amended
PDIC Charter]
Deposit means the unpaid balance of money
or its equivalent received by a bank in the usual
course of business and for which it has given or
is obliged to give credit to a commercial,
checking, savings, time or thrift account, or
issued in accordance with BSP rules and
regulations and other applicable laws, together
with such other obligations of a bank, which,
consistent with banking usage and practices,
the Board of Directors shall determine and
prescribe by regulations to be deposit liabilities
of the bank. Exclusion: Any obligation of a bank
which is payable at the office of the bank
located outside of the Philippines. [Sec. 4[f],
Amended PDIC Charter]
Insured deposit means the amount due to any
bona fide depositor for legitimate deposits in an
insured bank net of any obligation of the
depositor to the insured bank as of the date of
closure, but not to exceed P500,000 or its
equivalent in foreign currency [Sec. 4[g],
Amended PDIC Charter]
257
MERCANTILE LAW
C.1. EXCLUSIONS
The PDIC shall not pay deposit insurance for the
following accounts or transactions, whether
denominated, documented, recorded or booked
as deposit by the bank:
(1) Investment products such as bonds and
securities, trust accounts, and other similar
instruments;
(2) Unfunded, fictitious or fraudulent deposit
accounts or transactions;
(3) Deposits accounts or transactions
constituting, and/or emanating from,
unsafe and unsound banking practice/s, as
determined by the PDIC, in consultation
with the BSP, after due notice and hearing,
and publication of a cease and desist order
issued by the PDIC against such deposit
accounts or transactions; and
(4) Deposits that are determined to be the
proceeds of an unlawful activity as defined
under Republic Act 9160, as amended [Sec.
4(f), Amended PDIC Charter]
C.2. EXTENT OF LIABILITY
The liability of the Corporation is to the extent
of the insured deposit. [Sec. 14, Amended PDIC
Charter]
C.3. FORM OF PAYMENT
Whenever an insured bank shall have been
closed by the Monetary Board pursuant to
Section 30 of R.A. 7653, payment of the insured
deposits on such closed bank shall be made by
the PDIC as soon as possible either [1] by cash
or [2] by making available to each depositor a
transferred deposit in another insured bank in
an amount equal to insured deposit of such
depositor. [Sec. 14, Amended PDIC Charter]
C.4. LIMITATION OF LIABILITY
Insured deposit shall not exceed P500,000.
[Sec. 4(g), Amended PDIC Charter]
UP LAW BOC BANKING LAWS
C.5. DETERMINATION OF INSURED
DEPOSITS
The determination of insured deposits shall
commence upon the PDICs actual takeover of
the closed bank. [Sec. 16(a), Amended PDIC
Charter]
The amount of the insured deposit shall be
determined according to such regulations as
the Board of Directors may prescribe, In
determining such amount due to any depositor,
there shall be added together all deposits in the
bank maintained in the same right and capacity
for his benefits either in his own name or in the
name of others. [Sec. 4(g), Amended PDIC
Charter]
Note: The PDIC may require proof of claims to
be filed before paying the insured deposits, and
that in any case where the PDIC is not satisfied
as to the viability of a claim for an insured
deposit, it may require final determination of a
court of competent jurisdiction before paying
such claim. [Sec. 14, Amended PDIC Charter]
C.6. PER DEPOSITOR, PER CAPACITY
RULE
In determining the amount due to any
depositor, there shall be added together all
deposits in the bank maintained in the same
right and capacity for his benefits either in his
own name or in the name of others [Sec. 4(g),
Amended PDIC Charter]
C.7. JOINT ACCOUNTS
A joint account regardless of whether the
conjunction 'and,' 'or,' 'and/or' is used, shall be
insured separately from any individually-owned
deposit account [Sec. 4(g), Amended PDIC
Charter]
258
MERCANTILE LAW
C.8. IF THE ACCOUNT IS HELD BY TWO
OR MORE NATURAL PERSONS OR TWO
OR MORE JURIDICAL PERSONS
General rule: The maximum insured deposit
shall be divided into as many equal shares as
there are individuals or juridical persons. [Sec.
4(g), Amended PDIC Charter]
Exception: Unless a different sharing is
stipulated in the document of deposit. [Sec.
4(g), Amended PDIC Charter]
C.9. IF THE ACCOUNT IS HELD BY A
JURIDICAL PERSON OR ENTITY JOINTLY
WITH ONE OR MORE NATURAL PERSONS
The maximum insured deposits shall be
presumed to belong entirely to such juridical
person or entity. [Sec. 4(g), Amended PDIC
Charter]
Note: The aggregate of the interest of each co-
owner over several joint accounts, whether
owned by the same or different combinations of
individuals, juridical persons or entities, shall
likewise be subject to the maximum insured
deposit of P500,000. [Sec. 4(g), Amended PDIC
Charter]
C.10.MODE OF PAYMENT
Payment of the insured deposits on such closed
bank shall be made by the PDIC as soon as
possible either:
(1) by cash;
(2) by making available to each depositor a
transferred deposit in another insured bank
in an amount equal to insured deposit of
such depositor [Sec. 14, Amended PDIC
Charter]
Note: Transfer Deposit means a deposit in an
insured bank made available to a depositor by
the PDIC as payment of insured deposit of such
depositor in a closed bank and assumed by
another insured bank [Sec. 4(h), Amended PDIC
Charter].
UP LAW BOC BANKING LAWS
C.11. EFFECT OF PAYMENT
(1) The PDIC shall be discharged from liability
to the depositor [Sec. 16[b], Amended PDIC
Charter]
(2) The PDIC, upon payment of any depositor
as provided for in Section 14 shall be
subrogated to all rights of the depositor
against the closed bank to the extent of
such payment [Sec. 15, Amended PDIC
Charter]
(3) Payments by the PDIC of insured deposits in
closed banks partake of the nature of public
funds, and as such, must be considered a
preferred credit similar to taxes due to the
National Government in the order of
preference under Article 2244 of the New
Civil Code [Sec. 15, Amended PDIC Charter]
C.12. FAILURE TO SETTLE CLAIM OF
INSURED DEPOSITOR
General rule: Failure to settle the claim within
six months from the date of filing of claim for
insured deposit shall, upon conviction, subject
the directors, officers or employees of the PDIC
responsible for the delay to imprisonment from
six months to one year.
Requisite: The failure was due to the grave
abuse of discretion, gross negligence, bad faith,
or malice of the directors, officers or employees.
Exception: The validity of the claim requires the
resolution of issues of facts and or law by
another office, body or agency including the
case mentioned in the first proviso or by PDIC
together with such other office, body or agency.
C.13. FAILURE OF DEPOSITOR TO CLAIM
INSURED DEPOSITS
[Sec. 16(e), Amended PDIC Charter]
General rule: All rights of the depositor against
the PDIC with respect to the insured deposit
shall be barred:
259
MERCANTILE LAW
(1) If he fails to claim the insured deposits
within two years from actual takeover of the
closed bank by the receiver; or
(2) If he does not enforce his claim filed with
the corporation within two years after the
two-year period to file a claim.
Exception: Waiver by PDIC.
But all rights of the depositor against the closed
bank and its shareholders or the receivership
estate to which the PDIC may have become
subrogated, shall thereupon revert to the
depositor.
D. BANK EXAMINATION
The PDIC may examine an insured bank with
prior approval of the MB if, in its opinion, such
bank or its directors or agents have violated, are
violating or about to violate any provision of the
PDIC Act or any order, rule or instruction issued
by the PDIC or any written condition imposed by
the PDIC in connection with any transaction
with or grant by it. [Sec. 8 in relation to Sec. 7,
Amended PDIC Charter]
E. FINANCIAL ASSISTANCE
The PDIC may grant financial assistance to
distressed banks if it is proven to be a less costly
alternative than closure. [Sec. 17(d), Amended
PDIC Charter]
F. RECEIVERSHIP OF CLOSED BANKS
[See HOW THE BSP HANDLES BANKS IN
DISTRESS]
G. LIQUIDATION OF CLOSED BANKS
[See HOW THE BSP HANDLES BANKS IN
DISTRESS]
UP LAW BOC BANKING LAWS
V. Foreign Currency
Deposit Act
[RA 6426]
A. CONCEPT
The FCDA allows any person to deposit, and
banks to accept deposit, any foreign currency
acceptable as part of the Philippines
international reserve. [Secs. 2 & 3, FCDA]
B. SECRECY OF FOREIGN CURRENCY
DEPOSITS
B.1. INQUIRY
General rule: All foreign currency deposits are
declared as and considered of an absolutely
confidential nature and shall not be examined,
inquired or looked into by any person,
government official, bureau or office, whether
judicial or administrative, or legislative or any
other entity whether public or private. [Sec. 8,
FCDA]
Exception: Upon the written permission of the
depositor. [Sec. 8, FCDA]
B.2. COURT PROCESS
General rule: The foreign currency deposits shall
be exempt from attachment, garnishment, or
any other order or process of any court,
legislative body, government agency or any
administrative body whatsoever. [Sec. 8, FCDA]
Exceptions:
(1) Upon written permission of the depositor
[Sec. 8; Intengan vs CA, 2002]
(2) Upon order of a competent court in cases of
violation of the Anti-Money Laundering Act
of 2001 (as in the case of peso deposits,
supra)
(3) During BSPs periodic or special
examinations (as in the case of peso
deposits, supra),
260
MERCANTILE LAW
(4) Disclosure of the Treasurer of the
Philippines when the unclaimed balances
law applies [Act 3936, as amended by PD
679]
(5) BSP/PDIC inquiry if there is a finding of
unsafe and unsound banking practice (as in
the case of peso deposits, supra)
(6) In Salvacion vs. CB [1997], where a Filipino
child was raped by a foreigner, the SC
allowed, pro hac vice, garnishment of
foreign currency deposits stating: If we rule
that the questioned Section 113 of CB
Circular No. 960 which exempts from
attachment, garnishment, or any other
order or process of any court, legislative
body, government agency or any
administrative body whatsoever, is
applicable to a foreign transient, injustice
would result especially to a citizen
aggrieved by a foreign guest.
PRIVILEGES
(1) Tax exemption the FCD, including
interests and all other income or earnings of
such deposits, are exempt from any and all
taxes whatsoever if these deposits are made
by non-residents and irrespective of
whether or not the non-residents are
engaged in trade or business in the
Philippines [Sec. 6 as amended]. Interests
on FCDs of residents are subject to 7.5%
withholding tax. [NIRC]
(2) Exemption from attachment, garnishment
or any other order or process of any court,
legislative or administrative body, or
government agency whatsoever [Sec. 8,
FCDA]
Exception: The CA, upon application ex parte by
the AMLC and after determination that a
probable cause exists that any monetary
instrument or property is in any way related to
an unlawful activity, the AMLC, may freeze
the account. [Sec. 10, AMLA]
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

MERCANTILE LAW
INTELLECTUAL
PROPERTY LAW

261
UP LAW BOC INTELLECTUAL PROPERTY CODE
I. Intellectual Property
Rights in General
A. STATE POLICIES
(1) To protect and secure the exclusive rights
of scientists, inventors, artists and other
gifted citizens to their intellectual property
and creations, particularly when beneficial
to the people, for such periods as provided
in this Act.
(2) To promote the diffusion of knowledge and
information for the promotion of national
development and progress and the
common good.
(3) To streamline administrative procedures of
registering patents, trademarks and
copyright, to liberalize the registration on
the transfer of technology, and to enhance
the enforcement of intellectual property
rights in the Philippines. [Sec. 2, RA 8293]
B. INTERNATIONAL CONVENTIONS
GOVERNING INTELLECTUAL
PROPERTY RIGHTS
(1) Berne Convention for the Protection of
Literary and Artistic Works as revised by
the Brussels Act (August 1, 1951)
(2) Paris Convention for the Protection of
Industrial Property Rights (September 27,
1965)
(3) International Convention for the Protection
of Performers, Producers of Phonograms
and Broadcasting Organizations (Rome
Convention, September 25, 2984)
(4) Convention Establishing the World
Intellectual Property Organization (July 14,
1980)
(5) Budapest Treaty on the International
Recognition of the Deposit of
Microorganisms for the Purposes of Patent
Procedure (October 21, 1981)
(6) Agreement on Trade Related Aspects of
Intellectual Property Including Trade in
Counterfeit Goods of General Agreement
on Tariffs and Trade.
262
MERCANTILE LAW
(7) Patent Cooperation Treaty (August 17,
2001)
(8) Madrid Protocol
C. INTELLECTUAL PROPERTY
RIGHTS
C.1. DEFINITION
Those property rights which result from the
physical manifestation of original thought.
[Ballantines Law Dictionary]
Note: There are no property rights protected by
law in mere ideas or mental conceptions.
When creations of mind are put in tangible
form, there is appropriate subject of property
that is protected by law. [63A Am Jur 3rd
Property, Section 5]
C.2. INTELLECTUAL PROPERTY RIGHTS
UNDER THE INTELLECTUAL PROPERTY
CODE
(1) Copyright;
(2) Related Rights of copyright;
(3) Trademarks and Service Marks;
(4) Geographic Indications;
(5) Industrial Designs;
(6) Patents;
(7) Layout-Designs (Topographies) of
Integrated Circuits; [Sec. 4, RA 8293]
(8) Protection of Undisclosed Information
(TRIPS Agreement).
D. DIFFERENCES BETWEEN
COPYRIGHTS, TRADEMARKS AND
PATENT
D.1. PATENTABLE INVENTIONS
Refer to any technical solution of a problem in
any field of human activity, which is new,
involves an inventive step and is industrially
applicable. It may be, or refer to, any product,
process, or an improvement of any of the
foregoing. [Sec. 21, RA 8293] It is vested from
the issuance of letters of patent.
UP LAW BOC INTELLECTUAL PROPERTY CODE
D.2. TRADEMARK
Any visible sign capable of distinguishing the
goods (trademark) or services (service mark) of
an enterprise and shall include a stamped or
marked container of goods. [Kho v. CA, et al.
(2002)] It is vested from registration.
D.3. TRADE NAME
The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA
8293]
D.4. COPYRIGHT
Right granted by statute to the author or
originator of literary, scholarly, scientific, or
artistic productions, including computer
programs. A copyright gives him the legal right
to determine how the work is used and to
obtain economic benefits from the work. For
example, the owner of a copyright for a book or
a piece of software has the exclusive rights to
use, copy, distribute, and sell copies of the
work, including later editions or versions of the
work. If another person improperly uses
material covered by a copyright, the copyright
owner can obtain legal relief. [Rule 2, Copyright
Safeguards and Regulations]
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work
(2) Dramatization, translation or adaptation,
abridgment, arrangement or other
transformation of the work.
(3) The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership.
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the ownership
263
MERCANTILE LAW
of the original or the copy which is the
subject of the rental.
(5) Public Display of the original or a copy of
the work.
(6) Public Performance of the Work;
(7) Other Communication to the public of the
work. [Sec. 177, IPC]
Copyright is confined to literary and artistic
works which are original intellectual creations
in the literary and artistic domain protected
from the moment of their creation. [Kho v. CA,
et al. (2002)] It is vested from the moment of
creation.
D.5. OTHER FORMS OF INTELLECTUAL
PROPERTY
i. Geographic Indication
One which identifies a good as originating in
the territory of a TRIPS member, or a region or
locality in that territory where a given quality,
reputation or other characteristic of a good is
essentially attributable to its geographical
origin [Art. 22, TRIPS Agreement]
ii. 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. 112.1, RA
8293)
iii. Layout Design (Topography) of an Integrated
Circuit
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 the
interconnections of an integrated circuit, or
such a three-dimensional disposition prepared
for an integrated circuit intended for
manufacture. (Sec. 112.3, RA 8293)
UP LAW BOC INTELLECTUAL PROPERTY CODE
iv. Integrated Circuit a product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the
interconnections are integrally formed and/or
on a piece of material, and which is intended to
perform an electronic function. (Sec. 112.2, RA
8293)
v. Undisclosed Information
Information which:
(1) Is a secret in a sense that it is not, as a
body or in the 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 a commercial value because it is
secret; and
(3) Has been subject to reasonable steps
under the circumstances, by the person
lawfully in control of the information, to
keep it secret [Art. 39, TRIPS]
E. TECHNOLOGY TRANSFER
ARRANGEMENTS
Refers to contracts or agreements involving:
(1) the transfer of systematic knowledge for
the manufacture of a product;
(2) the application of a process, or rendering
of a service including management
contracts;
(3) 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, RA 8293]
264
MERCANTILE LAW
II. Patents
A. PATENTABLE INVENTIONS
A patentable invention is any technical
solution of a problem in any field of human
activity which is new, involves an inventive step
and is industrially applicable shall be
Patentable. It may be, or may relate to, a
product, or process, or an improvement of any
of the foregoing. [Sec. 21, RA 8293]
A.1. INVENTION PATENT
i. Standards
Novelty An invention shall not be considered
new if it forms part of a prior art. [Sec. 23, RA
8293]
Prior art shall consist of:
(1) Everything which has been made available
to the public anywhere in the world, before
the filing date or the priority date of the
application claiming the invention; [Sec.
24.1, RA 8293]
(2) The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with
this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier
than the filing or priority date of the
application: Provided, That the application
which has validly claimed the filing date of
an earlier application under Section 31 of
this Act, shall be prior art with effect as of
the filing date of such earlier application:
Provided further, That the applicant or the
inventor identified in both applications are
not one and the same. [Sec. 24.2, RA
8293]
Non-Prejudicial Disclosures This is an
exception to the General Rule on Prior Art
under Sec. 24. It provides that the disclosure of
the information contained in the application
during the 12 months preceding the filing date
or the priority date of the application shall not
prejudice the applicant on the ground of lack
of novelty if such disclosure was made by:
(1) The inventor
UP LAW BOC INTELLECTUAL PROPERTY CODE
(2) A patent office and the information
contained (1) in another application filed by
the inventor and should not have been
disclosed by the office, or (2) 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, RA 8293]
(a) Inventive Step 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.
26.1, RA 8293, as amended by RA
9502]
Cheaper Medicines Act In 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 enhancement
of the known efficacy of that substance,
or the mere discovery of any new
property or new use of a known
substance or the mere use of a known
process unless such known process
results in a new product that employs
at least one reactant. [Sec. 26.2, RA
8293 as amended by RA 9502]
(b) Industrial Applicability An invention
that can be produced and used in any
industry shall be industrially applicable.
[Sec. 27, RA 8293]
ii. Utility
It is any technical solution of a problem in any
field of human activity which is new and
industrially applicable. Unlike an invention
patent, a utility model need not be inventive.
265
MERCANTILE LAW
The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293]
A utility model registration shall expire,
without any possibility of renewal, at the end of
the seventh year after the date of the filing of
the application. [Sec. 109.3, RA 8293]
Statutory Classes of Utility Models
A Utility Model may be, or may relate to:
(1) A useful machine;
(2) An implement or tool;
(3) A product or composition;
(4) A method or process; or
(5) An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on Utility
Models and Industrial Designs as
amended]
Grounds for Cancellation of Utility Models
(1) That the claimed invention does not qualify
for registration as a utility model and does
not meet the requirements of registrability;
(2) That the description and the claims do not
comply with the prescribed requirements;
(3) That any drawing which is necessary for
the understanding of the invention has not
been furnished;
(4) That the owner of the utility model
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]
Industrial Design
An industrial design is 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.
112.1, RA 8293 as amended by RA 9150]
Lay-out Designs (Topographies) of Integrated
Circuits
Integrated Circuitmeans a product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the
interconnections are integrally formed in
UP LAW BOC INTELLECTUAL PROPERTY CODE
and/or on a piece of material, and which is
intended to perform an electronic function.
[Sec. 112.2, RA 8293 as amended by RA 9150]
Layout-Design is synonymous with
'Topography' and means 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. [Sec. 112.3, RA 8293 as amended
by RA 9150]
B. NON-PATENTABLE INVENTIONS
The following shall be excluded from patent
protection:
(1) Discoveries, scientific theories and
mathematical methods, and in the case of
drugs and medicines, 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, or the mere discovery of any
new property or new use for a known
substance, or the mere use of a known
process unless such known process results
in a new product that employs at least one
new reactant.
Salts, esters, ethers, polymorphs, metabolites,
pure form, particle size, isomers, mixtures of
isomers, complexes, combinations, and other
derivatives of a known substance shall be
considered to be the same substance, unless
they differ significantly in properties with
regard to efficacy; [Sec. 22.1, RA 8293 as
amended by RA 9502]
(2) Schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers;
[Sec. 22.2, RA 8293]
(3) Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the
human or animal body. This provision shall
266
MERCANTILE LAW
not apply to products and composition for
use in any of these methods; [Sec. 22.3, RA
8293]
(4) Plant varieties or animal breeds or
essentially biological process for the
production of plants or animals. This
provision shall not apply to micro-
organisms and non-biological and
microbiological processes; [Sec. 22.4, RA
8293]
(5) Aesthetic creations; [Sec. 22.5, RA 8293]
(6) Anything which is contrary to public order
or morality. [Sec. 22.6, RA 8293]
Cheaper Medicines Act: In addition to
discoveries, scientific theories and
mathematical methods, the IP Code now
includes, in case of drugs and medicines:
(1) 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
(2) the mere discovery of any new property or
new use of a known substance
(3) the mere use of a known process unless
such known process results in a new
product that employs at least one reactant
(Sec. 26.2, RA 8293 as amended by RA
9502)
C. OWNERSHIP OF A PATENT
C.1. RIGHT TO A PATENT
General Rule: The right to patent belongs to
the inventor, his heirs, or assigns. When two (2)
or more persons have jointly made an
invention, the right to a patent shall belong to
them jointly. (Sec.28, RA 8293)
Exception: Inventions created pursuant to a
commission (Work for Hire Doctrine)
(1) The employer has the right to the patent if
the invention is the result of the
performance of the employees regularly
assigned duties [Sec. 30.2, RA 8293]
(2) In case of inventions created pursuant to a
commission, the person who commissions
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

the work shall own the patent [Sec. 30.1,
RA 8293]
C.2. FIRST-TO-FILE RULE
If two (2) or more persons have made the
invention separately and independently of
each other, the right to the patent shall belong
to the person who filed an application for such
invention, or where two or more applications
are filed for the same invention, to the
applicant who has the earliest filing date or,
the earliest priority date. [Sec. 29, RA 8293]
C.3. INVENTIONS CREATED PURSUANT
TO A COMMISSION
D. GROUNDS FOR CANCELLATION
OF A PATENT
Any interested person may, upon payment of
the required fee, petition to cancel the patent
or any claim thereof, or parts of the claim, on
any of the following grounds:
(1) That what is claimed as the invention is not
new or patentable;
(2) 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
(3) That the patent is contrary to public order
or morality. [Sec. 61.1, RA 8293]

Commission: Person who commissions the Where the grounds for cancellation relate to
work shall own the patent, unless otherwise some of the claims or parts of the claim,
provided in the contract [Sec. 30.1, RA 8293) cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
Employment Contract: Patent belongs to the
D.1. REQUIREMENT OF THE PETITION
employee if the inventive activity is not a part
The petition for cancellation shall be in writing,
of his regular duties even if the employee uses
verified by the petitioner or by any person in his
the time, facilities and materials of the
behalf who knows the facts, specify the
employer. [Sec. 30.2 (a), RA 8293]
grounds upon which it is based, include a
statement of the facts to be relied upon, and
Patent belongs to the employer if the invention
filed with the Office. Copies of printed
is the result of the performance of his
publications or of patents of other countries,
regularly-assigned duties, unless there is an
and other supporting documents mentioned in
agreement, express or implied, to the contrary.
the petition shall be attached thereto, together
[Sec. 30.2 (b), RA 8293]
with the translation thereof in English, if not in
C.4. RIGHT OF PRIORITY English language. [Sec. 62, RA 8293]
An application for patent filed by any person
D.2. NOTICE OF HEARING
who has previously applied for the same
Upon filing of a petition for cancellation, the
invention in another country which by treaty,
Director of Legal Affairs shall forthwith serve
convention, or law affords similar privileges to
notice of the filing thereof upon the patentee
Filipino citizens, shall be considered as filed as
and all persons having grants or licenses, or
of the date of filing the foreign application:
any other right, title or interest in and to the
Provided, That: (a) the local application
patent and the invention covered thereby, as
expressly claims priority; (b) it is filed within
appears of record in the Office, and of notice of
twelve (12) months from the date the earliest
the date of hearing thereon on such persons
foreign application was filed; and (c) a certified
and the petitioner. Notice of the filing of the
copy of the foreign application together with
petition shall be published in the IPO Gazette.
an English translation is filed within six (6)
[Sec. 63, RA 8293]
months from the date of filing in the
Philippines. [Sec. 31, RA 8293]

267
UP LAW BOC INTELLECTUAL PROPERTY CODE
D.3. EFFECT OF CANCELLATION OF
PATENT OR CLAIM
The rights conferred by the patent or any
specified claim or claims cancelled shall
terminate. Notice of the cancellation shall be
published in the IPO Gazette. Unless
restrained by the Director General, the decision
or order to cancel by Director of Legal Affairs
shall be immediately executory even pending
appeal. [Sec. 66, RA 8293]
E. REMEDY OF THE TRUE AND
ACTUAL INVENTOR
If a person, who was deprived of the patent
without his consent or through fraud is
declared by final court order or decision to be
the true and actual inventor, the court shall
order for his substitution as patentee, or at the
option of the true inventor, cancel the patent,
and award actual and other damages in his
favor if warranted by the circumstances. [Sec.
68, RA 8293]
E.1. TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year
from the date of publication made in
accordance with Sections 44 and 51,
respectively. (Sec. 70, RA 8293)
E.2. REMEDY 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 the patent, such person
may, within three (3) months after the decision
has become final:
(1) Prosecute the application as his own
application in place of the applicant;
(2) File a new patent application in respect of
the same invention;
(3) Request that the application be refused; or
(4) Seek cancellation of the patent, if one has
already been issued. [Sec. 67, RA 8293]
F. RIGHTS CONFERRED BY A PATENT
A patent shall confer on its owner the following
exclusive rights:
268
MERCANTILE LAW
(1) Where the subject matter of a patent is a
product, to restrain, prohibit and prevent
any unauthorized person or entity from
making, using, offering for sale, selling or
importing that product. [Sec. 71.1(a), RA
8293]
(2) Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any
unauthorized person or entity from using
the process, and from manufacturing,
dealing in, using, selling or offering for sale,
or importing any product obtained directly
or indirectly from such process. [Sec. 71.1(b),
RA 8293]
(3) Patent owners shall also have the right to
assign, or transfer by succession the patent,
and to conclude licensing contracts for the
same. [Sec. 71.2, RA 8293]
Pearl Dean, Inc. v. Shoemart, Inc. (2003)To be
able to effectively and legally preclude others
from copying and profiting from the invention,
a patent is a primordial requirement. No
patent, no protection. The ultimate goal of a
patent system is to bring new designs and
technologies into the public domain through
disclosure Ideas, once disclosed to the public
without the protection of a valid patent, are
subject to appropriation without significant
restraint.
G. LIMITATIONS OF PATENT RIGHTS
The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the acts referred to in Section 71
hereof in the following circumstances:
(1) Using a patented product which has been
put on the market in the Philippines by the
owner of the product, or with his express
consent, insofar as such use is performed
after that product has been so put on the
said market: Provided, That, with regard to
drugs and medicines, the limitation on
patent rights shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the world
UP LAW BOC INTELLECTUAL PROPERTY CODE
by the patent owner, or by any party
authorized to use the invention: Provided,
further, That the right to import the drugs
and medicines contemplated in this
section shall be available to any
government agency or any private third
party; [Sec. 72.1, RA 8293 as amended by
RA 9502]
(2) Where the act is done privately and on a
non-commercial scale or for a non-
commercial purpose: Provided, That it
does not significantly prejudice the
economic interests of the owner of the
patent; [Sec. 72.2, RA 8293 as amended by
RA 9502]
(3) Where the act consists of making or using
exclusively for experimental use of the
invention for scientific purposes or
educational purposes and such other
activities directly related to such scientific
or educational experimental use; [Sec. 72.3,
RA 8293 as amended by RA 9502]
(4) 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: Provided, That,
in order to protect the data submitted by
the original patent holder from unfair
commercial use provided in Article 39.3 of
the Agreement on Trade-Related Aspects
of Intellectual Property Rights (TRIPS
Agreement), the Intellectual Property Office,
in consultation with the appropriate
government agencies, shall issue the
appropriate rules and regulations
necessary therein not later than one
hundred twenty (120) days after the
269
MERCANTILE LAW
enactment of this law; (Sec. 72.4, RA 8293
as amended by RA 9502)
(5) 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 shall apply
after a drug or medicine has been
introduced in the Philippines or anywhere
else in the world by the patent owner, or by
any party authorized to use the invention:
Provided, further, That the right to import
the drugs and medicines contemplated in
this section shall be available to any
government agency or any private third
party; (Sec. 72.5, RA 8293 as amended by
RA 9502)
There shall be no infringement of trademarks
or tradenames of imported or sold drugs and
medicines allowed as well as imported or sold
off-patent drugs and medicines: Provided, That
said drugs and medicines bear the registered
marks that have not been tampered,
unlawfully modified, or infringed. (Sec.159.4
RA 8293 as amended by RA 9502)
G.1. PRIOR USER
Notwithstanding Section 72 hereof, any prior
user, who, in good faith was using the
invention or has undertaken serious
preparations to use the invention in his
enterprise or business, before the filing date or
priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in such
preparations within the territory where the
patent produces its effect. [Sec. 73.1, RA 8293]
The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which the use or
preparations for use have been made. [Sec.
73.2, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
G.2. USE BY THE GOVERNMENT
A Government agency or third person
authorized by the Government may exploit the
invention even without agreement of the
patent owner where:
(1) The public interest, in particular, national
security, nutrition, health or the
development of other sectors, as
determined by the appropriate agency of
the government, so requires; [Sec. 74.1(a),
RA 8293]
(2) A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent or
his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]
The use by the Government, or third person
authorized by the Government shall be subject,
mutatis mutandis, to the conditions set forth in
Sections 95 to 97 and 100 to 102 on compulsory
licensing. [Sec. 74.2, RA 8293]
All cases arising from the implementation of
this provision shall be cognizable by courts
with appropriate jurisdiction provided by law.
No court except the Supreme Court of the
Philippines, shall issue any temporary
restraining order or preliminary injunction or
such other provisional remedies that will
prevent its immediate execution. [Sec. 74.3, RA
8293 as amended by RA 9502]
H. PATENT INFRINGEMENT
It is the making, using, offering for sale, selling,
or importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process
without the authorization of the patentee. [Sec
76.1, RA 8293 as amended by RA 9502]
H.1. CONTRIBUTORY INFRINGER
One who actively induces the infringement of a
patent or provides the infringer with a
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted for
270
MERCANTILE LAW
infringing and not suitable for substantial non-
infringing. He is jointly and severally liable with
the infringer. [Sec. 76.6, RA 8293]
H.2. DOCTRINE OF PATENT
EXHAUSTION
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 use of the purchaser without further
restriction. [Adams v. Burke,in Notes on
Selected Commercial Laws, Catindig 2003 ed.]
H.3. TESTS IN PATENT INFRINGEMENT
i. Literal infringement
In using literal infringement as a test, resort
must be had in the first instance to the words
of the claim. To determine whether the
particular item falls within the literal meaning
of the patent claims, the court must juxtapose
the claims of the patent and the accused
product within the overall context of the claims
and specifications, to determine whether there
is exact identity of all material elements.
[Godinez v. CA (1993)]
ii. Doctrine of equivalents
Under the doctrine of equivalents, an
infringement also occurs when a device
appropriates a prior invention by incorporating
its innovative concept and, albeit with some
modification and change, performs
substantially the same function in
substantially the same way to achieve
substantially the same result. [Godinez v. CA
(1993)]
In order to infringe a patent, a machine or
device must perform the same function, or
accomplish the same result by identical or
substantially identical means and the principle
or mode of operation must be substantially the
same. [Del Rosario v. CA (1996)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by incorporating
its innovative concept and, although with some
modification and change, performs
substantially the same function in
substantially the same way to achieve
substantially the same result. The principle or
mode of operation must be the same or
substantially the same. The doctrine of
equivalents thus requires satisfaction of the
function-means-and-result test, the patentee
having the burden to show that all three
components of such equivalency test are met.
[Smith Klein Beckman Corp. v. CA (2003)]
H.4. DEFENSES IN ACTION FOR
INFRINGEMENT
In an action for infringement, the defendant, in
addition to other defenses available to him,
may show the invalidity of the patent, or any
claim thereof, on any of the grounds on which
a petition of cancellation can be brought under
Section 61. [Sec 81, RA 8293]
i. Patent found invalid may be cancelled:
In an action for infringement, if the court shall
find the patent or any claim to be invalid, it
shall cancel the same, and the Director of
Legal Affairs upon receipt of the final
judgment of cancellation by the court, shall
record that fact in the register of the Office and
shall publish a notice to that effect in the IPO
Gazette. [Sec 82, RA 8293]
ii. Doctrine of File Wrapper Estoppel
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 he may omit any additions he
was compelled to add by patent office
regulations. [Advance Transformer Co. v.
Levinson 837 F.2d 1081(1988)]
271
MERCANTILE LAW
I. LICENSING
I.1. VOLUNTARY
Voluntary Licensing is the grant by the patent
owner to a third person of the right to exploit
the patented invention. [Sec. 85, RA 8293]
i. Mandatory Provisions
The following provisions shall be included in
voluntary license contracts:
(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; [Sec. 88.1,
RA 8293]
(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; [Sec. 88.2, RA 8293]
(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; [Sec.
88.3, RA 8293]
(4) The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the licensor.
[Sec. 88.4, RA 8293]
ii. Prohibited clauses
The following provisions shall be deemed
prima facie to have an adverse effect on
competition and trade:
(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
UP LAW BOC INTELLECTUAL PROPERTY CODE
indicated by the licensor; [Sec. 87.1, RA
8293]
(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; [Sec. 87.2, RA 8293]
(3) Those that contain restrictions regarding
the volume and structure of production;
[Sec. 87.3, RA 8293]
(4) Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement; [Sec. 87.4, RA 8293]
(5) Those that establish a full or partial
purchase option in favor of the licensor;
(Sec. 87.5, RA 8293)
(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;
(Sec. 87.6, RA 8293)
(7) Those that require payment of royalties to
the owners of patents for patents which are
not used; (Sec. 87.7, RA 8293)
(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; (Sec. 87.8, RA 8293)
(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; (Sec.
87.9, RA 8293)
(10) Those which require payments for patents
and other industrial property rights after
their expiration, termination arrangement;
(Sec. 87.10, RA 8293)
(11) Those which require that the technology
recipient shall not contest the validity of
any of the patents of the technology
supplier; (Sec. 87.11, RA 8293)
272
MERCANTILE LAW
(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; (Sec. 87.12, RA
8293)
(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; (Sec.
87.13, RA 8293)
(14) Those which exempt the licensor for
liability for non-fulfillment of his
responsibilities under the technology
transfer arrangement and/or liability
arising from third party suits brought
about by the use of the licensed product or
the licensed technology; (Sec. 87.14, RA
8293)
(15) Other clauses with equivalent effects. (Sec.
87.15, RA 8293)
Effect of Non-compliance with any provisions of
Secs. 87 and 88
The technology transfer arrangement shall
automatically be rendered unenforceable,
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, RA
8293]
Right of Licensor. Unless otherwise provided
in the technology transfer agreement, the
licensor shall have the right to:
(1) Grant further licenses to third person
(2) Exploit the subject matter of the
technology transfer agreement [Sec. 89,
RA 8293]
Right of the Licensee. To exploit the subject
matter of the technology transfer agreement
UP LAW BOC INTELLECTUAL PROPERTY CODE
during the whole term of the agreement. [Sec.
90, RA 8293]
Exceptional cases
(1) 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
(2) The case of BOI-registered companies with
pioneer status [Sec. 91, RA 8293]
I.2. COMPULSORY
Compulsory Licensing is the grant of the
Director of Legal Affairs of 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, Ra 8293 as amended by
RA 9502)
i. Grounds
The Director General of the Intellectual
Property Office may grant a license to exploit a
patented invention, even without the
agreement of the patent owner, in favor of any
person who has shown his capability to exploit
the invention, under any of the following
circumstances:
(1) National emergency or other
circumstances of extreme urgency; [Sec.
93.1, RA 8293 as amended by RA 9502]
(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; [Sec. 93.2, RA 8293 as amended
by RA 9502]
(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; [Sec. 93.3,
RA 8293 as amended by RA 9502]
273
MERCANTILE LAW
(4) In case of public non-commercial use of
the patent by the patentee, without
satisfactory reason; [Sec. 93.4, RA 8293 as
amended by RA 9502]
(5) If the patented invention is not being
worked in the Philippines on a commercial
scale, although capable of being worked,
without satisfactory reason: Provided, That
the importation of the patented article
shall constitute working or using the
patent; [Sec. 93.5, RA 8293 as amended by
RA 9502]
(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. 93.6, RA 8293
as amended by RA 9502]
(7) If the invention protected by a patent,
hereafter referred to as the "second
patent," within the country cannot be
worked without infringing another patent,
hereafter referred to as the "first patent,"
granted on a prior application or benefiting
from an earlier priority, a compulsory
license may be granted to the owner of the
second patent to the extent necessary for
the working of his invention, subject to
certain conditions. [Sec. 97, RA 8293]
(8) Manufacture and export of drugs and
medicines to any country having
insufficient or no manufacturing capacity
in the pharmaceutical sector to address
public health problems: Provided, That, a
compulsory license has been granted by
such country or such country has, by
notification or otherwise, allowed
importation into its jurisdiction of the
patented drugs and medicines from the
Philippines in compliance with the TRIPS
Agreement. [Sec. 93-A.2, RA 8293 as
amended by RA 9502]
UP LAW BOC INTELLECTUAL PROPERTY CODE
ii. Period of filing a Petition for Compulsory
License
At any time after the grant of patent. However,
a compulsory license may not be applied for on
the ground stated in Sec. 93.5 before the
expiration of a period of four (4) years from the
date of filing of the application or three (3)
years from the date of the patent whichever
period expires last. [Sec. 94, RA 8293 as
amended by RA 9502]
iii. Requirement to Obtain a License on
Reasonable Commercial Terms
General Rule: The license will only be granted
after the petitioner has made efforts to obtain
authorization from the patent owner on
reasonable commercial terms and conditions
but such efforts have not been successful
within a reasonable period of time. [Sec. 95.1,
RA 8293 as amended by RA 9502]
Exceptions: The requirement of authorization
shall not apply in the following cases:
(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.
(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. [Sec. 95.2, RA 8293
as amended by RA 9502]
iv. Terms and Conditions of Compulsory License
(1) The scope and duration of such license
shall be limited to the purpose for which it
was authorized; [Sec. 100.1, RA 8293]
(2) The license shall be non-exclusive; [Sec.
100.2, RA 8293]
(3) The license shall be non-assignable,
except with that part of the enterprise or
business with which the invention is being
exploited; ; [Sec. 100.3, RA 8293]
274
MERCANTILE LAW
(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. ;[Sec. 100.4, RA 8293]
(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; ; [Sec.
100.5, RA 8293]
(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. [Sec. 100.6, RA 8293]
J. ASSIGNMENT AND TRANSMISSION
OF RIGHTS
J.1. ASSIGNMENT OF RIGHTS
The assignment may be of the entire patent or
a portion thereof, or be limited to a specified
territory. [Sec. 104, RA 8293]
J.2. TRANSMISSION OF RIGHTS
Patents or applications for patents and
invention to which they relate, shall be
protected in the same way as the rights of
other property under the Civil Code. [Sec. 103.1,
RA 8293]
Inventions and any right, title or interest in and
to patents and inventions covered thereby,
may be assigned or transmitted by inheritance
or bequest or may be the subject of a license
contract. (Sec. 103.2, RA 8293)
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

A. DEFINITION OF MARKS,
J.3. REQUIREMENTS FOR RECORDING
COLLECTIVE MARKS, TRADE NAMES
OF ASSIGNMENT
A.1. MARKS
(1) It must be in writing and accompanied by
Any visible sign capable of distinguishing the
an English translation, if it is in a language
goods (trademark) or services (service mark) of
other than English or Filipino
an enterprise and shall include a stamped or
(2) It must be notarized
marked container of goods (Sec. 121.1, RA 8293)
(3) It must be accompanied by an
appointment of a resident agent, if the
Trademark Service Mark
assignee is not residing in the Philippines
(4) It must identify the letters patent involved Any visible sign Any visible sign capable
by number and date and give the name of which is adopted and of distinguishing the
the owner of the patent and the title of the used to identify the services of an enterprise
invention. In the case of an application for source of origin of from the service of other
a patent, it should state the application goods, and which is enterprises.
number and the filing date of the capable of
application and give the name of the distinguishing them
applicant and the title of the invention. If from goods
the assignment was executed concurrently emanating from a
with or subsequent to the execution of the competitor.
application but before the application is
Protection
filed or before its application number is
ascertained, it should adequately identify Is not limited to similar marks but also products
the application by its date of execution, the that may case insidious damage.
name of the applicant, and the title of the
Collective Marks
invention.
Any visible sign designated as such in the
(5) It must be accompanied by the required
application for registration and capable of
fees. [Sec. 105; Rules and Regulations on
distinguishing the origin or any other common
Inventions, Rule 1200]
characteristic, including the quality of goods or
J.4. EFFECT OF NON-RECORDING OF services of different enterprises which use the
ASSIGNMENT WITH THE IPO sign under the control of the registered owner of
The non-recording will not affect the binding the collective mark. (Sec. 121.2, RA 8293)
agreement between the assignor and assignee.
Trade Name
However, such registration would be necessary
The name or designation identifying or
to bind third parties. An assignment would be
distinguishing an enterprise (Sec. 121.3, RA
void as against any subsequent purchaser or
8293).
mortgagee for valuable consideration and
without notice unless recorded in the IPO
Any individual name or surname, firm name,
within 3 months from the date of the
device or word used by manufacturers,
assignment or prior to the subsequent
industrialists, merchants, and others to identify
purchase or mortgage. (Sec. 106, RA 8293)
their businesses, vocations or occupations.
[Converse Rubber Corp. v. Universal Rubber
Products, Inc. (1980)]
III. Trademarks A.2. FUNCTIONS OF A TRADEMARK

275
UP LAW BOC INTELLECTUAL PROPERTY CODE
(1) To point out distinctly the origin or
ownership of the goods and to which it is
affixed;
(2) To secure him, who has been instrumental
in bringing into the market a superior
article of merchandise, the fruit of his
industry and skill;
(3) To assure the public that they are
producing the genuine article;
(4) To prevent fraud and imposition; and
(5) To protect the manufacturer against
substitution and sale of an inferior and
different article as its product [Mirpuri v.
CA (1998)]
B. ACQUISITION OF OWNERSHIP OF
MARK
The rights to a mark shall be acquired through
registration made validly in accordance with
law. [Sec. 122, RA 8293]
A certificate of registration shall remain in
force for 10 years (Sec. 145, RA 8293) and may
be renewed for periods of 10 years at its
expiration upon payment of the prescribed fee
and upon filing of a request. [Sec 146, RA 8293]
C. ACQUISITION OF OWNERSHIP OF
TRADE NAME
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even
prior to or without registration, against any
unlawful act committed by third parties. [Sec.
165.2 (a), RA 8293) The ownership of a trade
name is acquired through adoption and use.
A name or designation may not be used as a
trade name if by its nature or the use to which
such name or designation may be put, it is
contrary to public order or morals and if, in
particular, it is liable to deceive trade circles or
the public as to the nature of the enterprise
identified by that name. [Sec. 165.1, RA 8293]
Any change in the ownership of a trade name
shall be made with the transfer of the
276
MERCANTILE LAW
enterprise or part thereof identified by that
name. [Sec. 165.4, RA 8293]
D. NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(1) Consists of immoral, deceptive or
scandalous matter, or matter which may
disparage or falsely suggest a connection
with persons, living or dead, institutions,
beliefs, or national symbols, or bring them
into contempt or disrepute; [Sec 123.1(a),
RA 8293]
(2) Consists of flags, coat of arms or other
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]
(3) Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or of a
deceased President of the Philippines,
during the life of his widow, except by
written consent of the widow; [Sec 123.1(c),
RA 8293]
(4) Is identical with a registered mark of
another or a mark with an earlier filing or
priority date, in respect of:
(a) The same goods or services, or
(b) Closely related goods or services, or
(c) If it nearly resembles such a mark as to
be likely to deceive or cause confusion;
[Sec 123.1(d), RA 8293]
(5) Is identical with, or confusingly similar to,
or constitutes a translation of a well-
known mark, whether or not registered in
the Philippines, and used for identical or
similar goods or services; [Sec 123.1(e), RA
8293]
(6) Is identical with, or confusingly similar to,
or constitutes a translation of a well-
known mark which is registered in the
Philippines, and used for goods or services
which are not similar; [Sec 123.1(f), RA
8293]
(7) Likely to mislead the public, particularly as
to the nature, quality, characteristics or
geographical origin of the goods or
services; [Sec 123.1(g), RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(8) Consists exclusively of signs that are
generic for the goods or services that they
seek to identify; [Sec 123.1(h), RA 8293]
(9) Consists exclusively of signs or of
indications that have become customary or
usual to designate the goods or services in
everyday language or in a bona fide and
established trade practice; [Sec 123.1(i), RA
8293]
(10) Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
intended purpose, value, geographical
origin, time or production of the goods or
rendering of the services, or other
characteristics of the goods or services;
[Sec 123.1(j), RA 8293]
(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; [Sec 123.1(k),
RA 8293]
(12) Consists of color alone, unless defined by a
given form; [Sec 123.1(l), RA 8293]
(13) Is contrary to public order or morality. [Sec
123.1(m), RA 8293]
D.1. DOCTRINE OF SECONDARY
MEANING
When the marks referred to in nos. 10, 11 and 12
has become distinctive, because of its long,
continuous and exclusive use for 5 years, as
used in connection with the applicants goods
or services in commerce and in the mind of the
public indicates a single source to consumers,
it may be registered. The Office may accept as
prima facie evidence that the mark has become
distinctive, as used in connection with the
applicant's goods or services in commerce,
proof of substantially exclusive and continuous
use thereof by the applicant in commerce in
the Philippines for five (5) years before the date
on which the claim of distinctiveness is made.
[Sec 123.2, RA 8293]
277
MERCANTILE LAW
The nature of the goods to which the mark is
applied will not constitute an obstacle to
registration. [Sec 123.3, RA 8293]
E. PRIOR USE OF MARK AS A
REQUIREMENT
E.1. USE OF MARK AS A REQUIREMENT
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, RA 8293]
For the requirement of actual use in
commerce in the Philippines before one may
register a trademark, trade name and service
mark under the law pertains to the territorial
jurisdiction of the Philippines and is not only
confined to a certain region, province, city or
barangay. [McDonalds Corporation v. MacJoy
Fastfood (2007)]
Trademark is a creation of use and, therefore,
actual use is a pre-requisite to exclusive
ownership; registration is only an
administrative confirmation of the existence of
the right of ownership of the mark, but does
not perfect such right; actual use thereof is the
perfecting ingredient. [Shangri-La International
Hotel v. DCC (2006)]
E.2. NON-USE OF MARK WHEN
EXCUSED
(1) If caused by circumstances arising
independently of the will of the trademark
owner. Lack of funds shall not excuse non-
use of a mark; [Sec. 152.1, RA 8293]
(2) A use which does not alter its distinctive
character though the use is different from
the form in which it is registered. [Sec.
152.2, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(3) Use of a mark in connection with one or
more of the goods/services belonging to
the class in which the mark is registered.
[Sec. 152.3, RA 8293]
(4) The use of mark by a company related to
the applicant or registrant
(5) The use of mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]
The use of a mark by a company related with
the registrant or applicant shall inure to the
latter's benefit, and such use shall not affect
the validity of such mark or of its registration:
Provided, that such mark is not used in such
manner as to deceive the public. [Sec.152.4, Ra
8293]
F. TESTS TO DETERMINE
CONFUSING SIMILARITY BETWEEN
MARKS
F.1. DOMINANCY TEST
Infringement is determined by the test of
dominancy rather than by differences or
variations in the details of one trademark and
of another. Similarity in size, form and color,
while relevant is not conclusive. 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 and San Miguel
(1993)]
F.2. HOLISTIC TEST
To determine whether a trademark has been
infringed, we must consider the mark as a
whole and not as dissected. If the buyer is
deceived, it is attributable to the marks as a
totality, not usually to any part of it. The court
therefore should be guided by its first
impression, for the buyer acts quickly and is
governed by a casual glance, the value of
which may be dissipated as soon as the court
assumed to analyze carefully the respective
features of the mark. [Del Monte Corporation, et
al. v. CA (1990)]
278
MERCANTILE LAW
The dominancy test considers the dominant
features in the competing marks in
determining whether they are confusingly
similar. Under the dominancy test, courts give
greater weight to the similarity of the
appearance of the product arising from the
adoption of the dominant features of the
registered mark, disregarding minor
differences. Courts will consider more the
aural and visual impressions created by the
marks in the public mind, giving little weight to
factors like prices, quality, sales outlets and
market segments.[McDonalds Corporation v.
L.C. Big Mak Burger, Inc., et al. (2004)]
F.3. AS TO THE GOODS OR SERVICES IN
CONNECTION WITH WHICH THE MARKS
ARE USED (DOCTRINE OF RELATED
GOODS/SERVICES)
(1) Goods are related when they belong to the
same class or have the same descriptive
properties or physical attributes, or they
serve the same purpose or flow through
the same channel of trade.
(2) The use of identical marks on non-
competing but related goods may likely
cause confusion.
(3) Corollarily, the use of identical marks on
non-competing and unrelated goods is not
likely to cause confusion.
G. WELL-KNOWN MARKS
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines.
In determining whether a mark is well-known,
account shall be taken of the knowledge of the
relevant sector of the public, rather than the
public at large, including knowledge in the
Philippines which has been obtained as a
result of the promotion of the mark. (Sec
123.1(e), RA 8293)
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

G.1. DETERMINANTS (NEED NOT accordance with the Sec. 123.1 (e), which is
CONCUR) registered in the Philippines with respect to
(1) The duration, extent and geographical goods or services which are not similar to those
area of any use of the mark; with respect to which registration is applied for.
(2) The market share in the Philippines and [Sec 123.1(f), RA 8293]
other countries of the goods/services to
Priority Right
which the mark applies;
An application for registration of a mark filed
(3) The degree of the inherent or acquired
in the Philippines by a person referred to in
distinction of the mark;
Section 3, and who previously duly filed an
(4) The quality-image or reputation acquired
application for registration of the same mark in
by the mark;
one of those countries, shall be considered as
(5) The extent to which the mark has been
filed as of the day the application was first filed
registered in the world;
in the foreign country. [Sec. 131.1, RA 8293]
(6) The exclusivity of the registration attained
by the mark in the world;
No registration of a mark in the Philippines by
(7) The extent of use of the mark in the world;
a person described in this section shall be
(8) The exclusivity of use in the world;
granted until such mark has been registered in
(9) The commercial value attributed to the
the country of origin of the applicant. [Sec.
mark in the world;
131.2, RA 8293]
(10) The record of successful protection of the
rights in the mark;
Significance of Priority Right
(11) The outcome of litigations dealing with the
A Philippine application filed by another
issue of whether the mar is well-known;
applicant after the priority date but earlier
and
than the foreign applicants actual filing may
(12) The presence or absence of identical or
be refused registration if it is identical to the
similar test marks validly registered or
mark with a priority date. [The Law on
used on other similar goods [Rule 102, Rule
Trademark, Infringement and Unfair
on Trademarks]
Competition, Agpalo]
G.2. PROTECTION EXTENDED TO WELL-
G.3. RIGHTS CONFERRED BY A WELL-
KNOWN MARKS
KNOWN MARK
i. If not registered in the Philippines
(1) Right to be protected whether or not it is
A mark cannot be registered if it is identical
registered in the Philippines;
with or confusingly similar to, or constitutes a
(2) If registered under Sec 123.1(e), extension
translation of a mark which is considered by
of protection to goods and services which
the competent authority of the Philippines to
are not similar to those in respect of which
be well-known internationally and in the
the mark is registered, provided that:
Philippines, whether or not it is registered here,
(a) The use of the mark in relation to
as being already the mark of a person other
unrelated or dissimilar goods or
than the applicant for registration and used for
services would indicate a
identical goods or services. [(Sec 123.1(e), RA
connection between those goods
8293]
or services and the owner of the
mark; and
ii. If registered in the Philippines
(b) The interests of the owner of the
A mark cannot be registered if it is identical
registered mark are likely to be
with or confusingly similar to, or constitutes a
translation of a mark considered well-known in
279
UP LAW BOC INTELLECTUAL PROPERTY CODE
damaged by such use. [Sec. 147.2,
RA 8293]
H. RIGHTS CONFERRED BY
REGISTRATION
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this
Act and of off-patent drugs and medicines, the
owner of a registered mark shall have the
exclusive right to prevent all third parties not
having the owner's consent from using in the
course of trade identical or similar signs or
containers for goods or services which are
identical or similar to those in respect of which
the trademark is registered where such use
would result in a likelihood of confusion. In
case of the use of an identical sign for identical
goods or services, a likelihood of confusion
shall be presumed. [Sec. 147.1, RA 8293 as
amended by RA 9502]
H.1. LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the
registration of a trademark could be
renewed every 10 years, a trademark could
conceivably remain registered forever);
(2) Territorial (except well-known marks).
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: Provided, That such use
is confined to the purposes of mere
identification or information and cannot
mislead the public as to the source of the
goods or services. [Sec. 148, RA 8293]
H.2. ASSIGNMENT AND TRANSFER OF
APPLICATION AND REGISTRATION
(1) An application for registration of a mark, or
its registration, may be assigned or
transferred with or without the transfer of
280
MERCANTILE LAW
the business using the mark. [Sec. 149.1,
RA 8293]
(2) Such assignment or transfer shall, however,
be null and void if it is liable to mislead the
public, particularly as regards the nature,
source, manufacturing process,
characteristics, or suitability for their
purpose, of the goods or services to which
the mark is applied. [Sec. 149.2, RA 8293]
(3) The assignment of the application for
registration of a mark, or of its registration,
shall be in writing and require the
signatures of the contracting parties.
Transfers by mergers or other forms of
succession may be made by any document
supporting such transfer. [Sec. 149.3, RA
8293]
(4) Assignments and transfers of registrations
of marks shall be recorded at the Office on
payment of the prescribed fee; assignment
and transfers of applications for
registration shall, on payment of the same
fee, be provisionally recorded, and the
mark, when registered, shall be in the
name of the assignee or transferee. [Sec.
149.4, RA 8293]
(5) Assignments and transfers shall have no
effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA
8293]
Any license contract concerning the
registration of a mark, or an application
therefor, shall provide for effective control by
the licensor of the quality of the goods or
services of the licensee in connection with
which the mark is used. If the license contract
does not provide for such quality control, or if
such quality control is not effectively carried
out, the license contract shall not be valid. [Sec.
150.1, RA 8293]
H.3. PROTECTION LIMITED TO GOODS
SPECIFIED IN REGISTRATION
CERTIFICATE
The certificate of registration can confer upon
the petitioner the exclusive right to use its own
UP LAW BOC INTELLECTUAL PROPERTY CODE
symbol only to those goods specified in the
certificate, subject to any conditions a
limitations stated therein. One who has
adopted and used a trademark on his goods
does not prevent the adoption and use of the
same trademark by others for products which
are of a different description. [Faberge, Inc. v.
IAC and Co Beng Kay (1992)]
I. USE BY THIRD PARTIES OF NAMES,
ETC. SIMILAR TO REGISTERED MARK
The IPC deems unlawful any subsequent use of
the trade name by a third party, whether as a
trade name or a mark or collective mark, or any
such use of a similar trade name or mark, likely
to mislead the public. [Sec. 165.2 (b), RA 8293]
J. INFRINGEMENT AND REMEDIES
J.1. TRADEMARK INFRINGEMENT
Any person who shall, without the consent of
the owner of the registered mark:
(1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of
a registered mark or the same container or
a dominant feature thereof in connection
with the sale, offering for sale, distribution,
advertising of any goods or services
including other preparatory steps
necessary to carry out the sale of any
goods or services on or in connection with
which such use is likely to cause confusion,
or to cause mistake, or to deceive; [Sec.
155.1, RA 8293]
(2) Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such
reproduction, counterfeit, copy or colorable
imitation to labels, signs, prints, packages,
wrappers, receptacles or advertisements
intended to be used in commerce upon or
in connection with the sale, offering for
sale, distribution, or advertising of goods
or services on or in connection with which
such use is likely to cause confusion, or to
cause mistake, or to deceive. [Sec. 155.2,
RA 8293]
281
MERCANTILE LAW
A crucial issue in any trademark infringement
case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of the
goods or identity of the business as a
consequence of using a certain mark.
Likelihood of confusion is admittedly a relative
term, to be determined rigidly according to the
particular (and sometimes peculiar)
circumstances of each case. In determining
likelihood of confusion, the court must
consider: (a) the resemblance between the
trademarks; (b) the similarity of the goods to
which the trademarks are attached; (c) the
likely effect on the purchaser; and (d) the
registrants express or implied consent and
other fair and equitable considerations.
[Mighty Corporation v. E. & J. Gallo Winery
(2004)]
To establish trademark infringement, the
following elements must be shown: (1) the
validity of the mark; (2) the plaintiffs
ownership of the mark; and (3) the use of the
mark or its colorable imitation by the alleged
infringer results in likelihood of confusion. Of
these, it is the element of likelihood of
confusion that is the gravamen of trademark
infringement. Two types of confusion arise
from the use of similar or colorable imitation
marks, namely, confusion of goods (product
confusion) and confusion of business (source or
origin confusion). 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 or affiliation. [McDonalds
Corporation v. L.C. Big Mak Burger, Inc., et al.,
(2004)]
In order to bring a civil action for infringement,
it is not required that there is an actual sale of
the goods or services using the infringing
material. [Sec. 155.2, RA 8293] Infringement
takes place upon the mere use or reproduction
of the registered mark.
UP LAW BOC INTELLECTUAL PROPERTY CODE
No article of imported merchandise which shall
copy or simulate the name of any domestic
product, or manufacturer, or dealer, or which
shall copy or simulate a mark registered in
accordance with the provisions of this Act, or
shall bear a 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, shall be admitted to entry
at any customhouse of the Philippines. [Sec.
166, RA 8293]
A mere distributor and not the owner cannot
assert any protection from trademark
infringement as it had no right in the first place
to the registration of the disputed trademarks.
[Superior Commercial Enterprises v. Kunnan
Enterprises (2010)]
J.2. FALSE DESIGNATIONS OF ORIGIN;
FALSE DESCRIPTION OR
REPRESENTATION
Any person who, on or in connection with any
goods or services, or any container for goods,
uses in commerce any word, term, name,
symbol, or device, or any combination thereof,
or any false designation of origin, false or
misleading description of fact, or false or
misleading representation of fact, which:
(1) Is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation,
connection, or association of such person
with another person, or as to the origin,
sponsorship, or approval of his or her
goods, services, or commercial activities by
another person; [Sec. 169.1(a), RA 8293]
(2) In commercial advertising or promotion,
misrepresents the nature, characteristics,
qualities, or geographic origin of his or her
or another person's goods, services, or
commercial activities, shall be liable to a
civil action for damages and injunction [Sec.
169.1 (b), RA 8293]
282
MERCANTILE LAW
Any goods marked or labeled in contravention
of the provisions of this Section shall not be
imported into the Philippines or admitted entry
at any customhouse of the Philippines. The
owner, importer, or consignee of goods refused
entry at any customhouse under this section
may have any recourse under the customs
revenue laws or may have the remedy given by
this Act in cases involving goods refused entry
or seized. [Sec. 169.2, RA 8293]
J.3. INFRINGEMENT OF NAME AND
MARKS OF OWNERSHIP STAMP ON
CONTAINERS
General Rule: It is unlawful for any person,
without the consent of the manufacturer,
bottler or seller who has registered the mark of
ownership to fill such bottles, boxes, kegs,
barrels or other containers so marked and
stamped, for the purpose of sale, dispose of, or
wantonly destroy the same, whether filled or
not, to use the same for drinking vessels or
drain pipes, foundation pipes, for any other
purpose than that registered. [Sec. 2, RA 623
as amended by RA 5700]
The use of the same without apparent
permission from the trademark owners thereof
shall be prima facie presumption that such
possession or use is unlawful. [Sec. 3, RA 623
as amended by RA 5700]
Exceptions:
(1) Use of the bottles as containers for sisi,
bagoong, patis, and similar native
products [Sec. 6 RA 623 as amended by
RA 5700]
(2) Persons in whose favor the containers were
sold [Distelleria Washington v. LA Tondena
Distillers (1997)]
J.4. DAMAGES
The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either the reasonable profit
which the complaining party would have made,
UP LAW BOC INTELLECTUAL PROPERTY CODE
had the defendant not infringed his rights, or
the profit which the defendant actually made
out of the infringement, or in the event such
measure of damages cannot be readily
ascertained with reasonable certainty, then 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 used in the infringement of
the rights of the complaining party. [Sec. 156.1,
RA 8293]
The owner of the registered mark shall not be
entitled to recover profits or damages unless
the acts have been committed with knowledge
that such imitation is likely to cause confusion,
or to cause mistake, or to deceive. Such
knowledge is presumed if the registrant gives
notice that his mark is registered by displaying
with the mark the words '"Registered Mark" or
the letter R within a circle or if the defendant
had otherwise actual notice of the registration.
[Sec. 158, RA 8293]
Should damages be recoverable, the measure
of the damages suffered shall be either:
(1) The reasonable profit which the
complaining party would have made, had
the defendant not infringed his rights; or
(2) The profit which the defendant actually
made out of the infringement; or
(3) 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 used in
the infringement of the rights of the
complaining party if such measure of
damages cannot be readily ascertained
with reasonable certainty. [Sec. 156.1, RA
8293]
J.5. REQUIREMENT OF NOTICE
Notice of registration of trademark is necessary
for an owner of a trademark to recover
damages in an action for infringement since
knowledge that such imitation is likely to cause
283
MERCANTILE LAW
confusion, or to cause mistake, or to deceive is
an element of infringement. Requirement of
notice may be complied by displaying with the
mark the words '"Registered Mark" or the
letter R within a circle. [Sec. 158, RA 8293]
J.6. OTHER REMEDIES AVAILABLE:
(1) Injunction [Sec. 156.4];
(2) Impounding of sales invoices and other
documents [Sec. 156.2];
(3) Double damages in case of actual intent to
defraud or to mislead [Sec. 156.3];
(4) Court order for the disposal or destruction
of the infringing goods [Sec. 157];
(5) Criminal Action;
(6) Administration sanctions
Any foreign national, who qualifies under the
principle on reciprocity and does not engage in
business in the Philippines, whether or not it is
licensed to do business in the Philippines, may
bring civil or administrative action for:
(1) Opposition
(2) Cancellation
(3) Infringement
(4) Unfair Competition
(5) False designation of origin or false
description (Sec. 160. RA 8293)
J.7. LIMITATIONS TO ACTIONS FOR
INFRINGEMENT
The remedies given to the owner of a right
infringed shall be limited as follows:
(1) Registered mark shall have no effect
against any person who, in good faith,
before the filing date or the priority date,
was using the mark for the purposes of his
business or enterprise: Provided, That his
right may only be transferred or assigned
together with his enterprise or business or
with that part of his enterprise or business
in which the mark is used. [Sec. 159.1, RA
8293]
(2) Where an infringer who is engaged solely
in the business of printing the mark or
other infringing materials for others is an
UP LAW BOC INTELLECTUAL PROPERTY CODE
innocent infringer, the owner of the right
infringed shall be entitled as against such
infringer only to an injunction against
future printing. [Sec. 159.2, RA 8293]
(3) Where the infringement complained of is
contained in or is part of paid
advertisement in a newspaper, magazine,
or other similar periodical or in an
electronic communication, the remedies of
the owner of the right infringed as against
the publisher or distributor of such
newspaper, magazine, or other similar
periodical or electronic communication
shall be limited to an injunction against
the presentation of such advertising matter
in future issues of such newspapers,
magazines, or other similar periodicals or
in future transmissions of such electronic
communications.
The limitations shall apply only to innocent
infringers: Provided, That such injunctive
relief shall not be available to the owner of
the right infringed with respect to an issue
of a newspaper, magazine, or other similar
periodical or an electronic communication
containing infringing matter where
restraining the dissemination of such
infringing matter in any particular issue of
such periodical or in an electronic
communication would delay the delivery of
such issue or transmission of such
electronic communication is customarily
conducted in accordance with the sound
business practice, and not due to any
method or device adopted to evade this
section or to prevent or delay the issuance
of an injunction or restraining order with
respect to such infringing matter. [Sec.
159.3, RA 8293]
(4) There shall be no infringement of
trademarks or tradenames of imported or
sold drugs and medicines allowed under
Section 72.1 as well as imported or sold off-
patent drugs and medicines: Provided,
284
MERCANTILE LAW
That said drugs and medicines bear the
registered marks that have not been
tampered, unlawfully modified, or
infringed upon as defined under Section
155. [Sec. 159.4 RA 8293 as amended by RA
9502]
K. 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, RA 8293]
Any person who shall employ deception or any
other means contrary to good faith by which he
shall pass off the goods manufactured by him
or in which he deals, or his business, or services
for those of the one having established such
goodwill, or who shall commit any acts
calculated to produce said result, shall be
guilty of unfair competition, and shall be
subject to an action therefor. [Sec. 168.2, RA
8293]
The following shall be deemed 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
UP LAW BOC INTELLECTUAL PROPERTY CODE
vendor engaged in selling such goods with
a like purpose; [Sec. 168.3(a), RA 8293]
(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
another who has identified such services in
the mind of the public; [Sec. 168.3(b), RA
8293]
(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(c), RA 8293)
The elements of an action for unfair
competition are: (1) confusing similarity in the
general appearance of the goods, and (2)
intent to deceive the public and defraud a
competitor. The confusing similarity may or
may not result from similarity in the marks, but
may result from other external factors in the
packaging or presentation of the goods. The
intent to deceive and defraud may be inferred
from the similarity in appearance of the goods
as offered for sale to the public. Actual
fraudulent intent need not be shown.
[McDonalds Corporation v. L.G. Big Mak Burger,
Inc., et al. (2004)]
An action for unfair competition is based on
the proposition that no dealer in merchandise
should be allowed to dress his goods in
simulation of the goods of another dealer, so
that purchasers desiring to buy the goods of
the latter would be induced to buy the goods of
the former. The most usual devices employed
in committing this crime are the simulation of
labels and the reproduction of form, color and
general appearance of the package used by
the pioneer manufacturer or dealer. [Caterpillar,
Inc v. Samson (2006)]
Articles 168.1 and 168.2 provide the concept
and general rule on the definition of unfair
competition. The law does not thereby cover
285
MERCANTILE LAW
every unfair act committed in the course of
business; it covers only acts characterized by
deception or any other means contrary to
good faith in the passing off of goods and
services as those of another who has
established goodwill in relation with these
goods or services, or any other act calculated
to produce the same result.
What unfair competition is, is further
particularized under Section 168.3 when it
provides specifics of what unfair competition is
without in any way limiting the scope of
protection against unfair competition. Part of
these particulars is provided under Section
168.3(c) which provides the general catch-all
phrase that the petitioner cites. Under this
phrase, a person shall be guilty of unfair
competition who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of
another. [Coca-Cola v. Gomez (2008)]
From jurisprudence, unfair competition has
been defined as the passing off (or palming off)
or attempting to pass off upon the public the
goods or business of one person as the goods
or business of another with the end and
probable effect of deceiving the public. It
formulated the true test of unfair
competition: whether the acts of defendant are
such as are calculated to deceive the ordinary
buyer making his purchases under the ordinary
conditions which prevail in the particular trade
to which the controversy relates. One of the
essential requisites in an action to restrain
unfair competition is proof of fraud; the intent
to deceive must be shown before the right to
recover can exist. The advent of the IP Code
has not significantly changed these rulings as
they are fully in accord with what Section 168
of the Code in its entirety provides. Deception,
passing off and fraud upon the public are still
the key elements that must be present for
unfair competition to exist.
UP LAW BOC INTELLECTUAL PROPERTY CODE
Infringement of
Unfair Competition
Trademark
Unauthorized use of a Passing off of ones
trademark goods as those of
another
Fraudulent intent is Fraudulent intent is
unnecessary essential
Prior registration of Registration is not
the trademark is a necessary
prerequisite to the
action
[In and Out Burger vs Sehwani (2008)]
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement. The latter 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 (2004)]
L. TRADE NAMES OR BUSINESS
NAMES
It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA
8293]
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to identify
their businesses, vocations or occupations
[Converse Rubber Corp. v. Universal Rubber
Products, Inc. (1980)]
L.1. WHAT MAY NOT BE USED AS TRADE
NAME
(1) If by its nature or the use to which the
name or designation may be put, it is
contrary to public order or morals.
286
MERCANTILE LAW
(2) If it is liable to deceive trade circles or the
public as to the nature of the enterprise
identified by the name
(3) If the trade name is similar to a mark or a
trade name owned by another person and
its use would likely mislead the public.
[Sec.165.1, RA 8293]
Acquisition of ownership: Trade names are
protected even prior to or without registration.
The ownership of a trade name is acquired
through adoption and use.
Right of owner: The IPC deems unlawful any
subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar
trade name or mark, likely to mislead the
public. [Sec. 165.2 (b), RA 8293]
Trade names, unlike trademarks, need not be
registered with the IPO before an infringement
suit may be filed by its owner against the
owner of an infringing trademark. All that is
required is that the trade name is previously
used in trade or commerce in the Philippines.
[Prosource International v. Horphag Research
Management (2009)]
M. COLLECTIVE MARKS
A Collective mark is any visible sign designated
as such in the application for registration and
capable of distinguishing the origin or any
other common characteristic, including the
quality of goods or services of different
enterprises which use the sign under the
control of the registered owner of the collective
mark [Sec. 121.2, RA 8293]
An application for registration of a collective
mark shall designate the mark as a collective
mark and shall be accompanied by a copy of
the agreement, if any, governing the use of the
collective mark. [Sec. 167.2, Ra 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
M.1. GROUNDS FOR CANCELLATION
In addition to the grounds under Section 149,
the Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves:
(1) That only the registered owner uses the
mark; or
(2) That he uses or permits its use in
contravention of the agreements referred
to in Subsection 166.2; or
(3) 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, RA 8293]
The registration of a collective mark, or an
application therefor shall not be the subject of a
license contract. [Sec. 167.4, RA 8293]
IV. Copyrights
A. DEFINITION
Is that system of legal protection an author
enjoys of the form of expression of ideas.
[Aquino, Intellectual Property Law]
B. BASIC PRINCIPLES, SECTIONS
172.2, 175 AND 181
B.1. WORKS ARE PROTECTED BY THE
SOLE FACT OF THEIR CREATION
Principle of Automatic Protection: Copyright is
vested from the very moment of creation. [Sec.
172.2, RA 8293]
The enjoyment and exercise of copyright,
including moral rights, shall not be the subject
of any formality; such enjoyment and such
exercise shall be independent of the existence
of protection in the country of origin of the
work. [Article 5(2), Berne Convention for the
Protection of Literary and Artistic Works]
The Denicola Test in intellectual property law
states that if design elements of an article
reflect a merger of aesthetic and functional
287
MERCANTILE LAW
considerations, the artistic aspects of the work
cannot be conceptually separable from the
utilitarian aspects; thus, the article cannot be
copyrighted.
B.2. PROTECTION EXTENDS ONLY TO
THE EXPRESSION OF AN IDEA, NOT THE
IDEA ITSELF.
No protection shall extend, under this law, to
any idea, procedure, system method or
operation, concept, principle, discovery or mere
data as such, even if they are expressed,
explained, illustrated or embodied in a work.
[Sec 175, RA 8293]
B.3. THE COPYRIGHT IS DISTINCT FROM
THE PROPERTY IN THE MATERIAL
OBJECT SUBJECT TO IT. [SEC 181, RA
8293]
B.4. COPYRIGHT IS A STATUTORY
RIGHT.
Copyright, in the strict sense of the term is
purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute
confers. It may be obtained and enjoyed only
with respect to the subjects and by the persons,
and on terms and conditions specified in the
statute. Accordingly, it can cover only the
works falling within the statutory enumeration
or description. [Pearl and Dean vs. Shoemart
(2003)]
C. COPYRIGHTABLE WORKS
C.1. ORIGINAL LITERARY AND ARTISTIC
WORKS
UP LAW BOC INTELLECTUAL PROPERTY CODE
Sec. 172.1, RA 8293. Literary and artistic
works, hereinafter referred to as "works",
are original intellectual creations in the
literary and artistic domain protected from
the moment of their creation and shall
include in particular:
(a) Books, pamphlets, articles and other
writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses,
dissertations prepared for oral delivery,
whether or not reduced in writing or
other material form;
(d) Letters;
(e) Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows;
(f) Musical compositions, with or without
words;
(g) Works of drawing, painting,
architecture, sculpture, engraving,
lithography or other works of art;
models or designs for works of art;
(h) Original ornamental designs or models
for articles of manufacture, whether or
not registrable as an industrial design,
and other works of applied art;
(i) Illustrations, maps, plans, sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science;
(j) Drawings or plastic works of a scientific
or technical character;
(k) Photographic works including works
produced by a process analogous to
photography; lantern slides;
(l) Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any
process for making audio-visual
recordings;
(m) Pictorial illustrations and
advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and
artistic works
288
MERCANTILE LAW
When a work is considered original:
(1) The work is an independent creation of the
author; and
(2) It must not be copied from the work of
another.
A person to be entitled to a copyright must be
the original creator of the work. He must have
created it by his own skill, labor and judgment
without directly copying or evasively imitating
the work of another. [Ching Kian Chuan vs. CA
(2001)]
By originality is meant that the material was
not copied, and evidences at least minimal
creativity; that it was independently created by
the author and that it possesses at least some
minimal degree of creativity. Copying is shown
by proof of access to copyrighted material and
substantial similarity between the two works.
The applicant must thus demonstrate the
existence and validity of copyright because in
the absence of copyright protection, even the
original creation may be freely copied.[Ching v.
Salinas (2005)]
Originality is not determined by novelty,
aesthetic merit or ingenuity but that it is an
independent creation.
The requirement in US Law that the expression
should be fixed in a tangible medium is not
applicable here since our law expressly
provides that works are protected irrespective
of their mode or form of expression.[Sec. 172.2,
RA 8293]
C.2. DERIVATIVE WORKS
The following derivative works shall also be
protected by copyright:
(1) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
(2) Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of
UP LAW BOC INTELLECTUAL PROPERTY CODE
the selection or coordination or
arrangement of their contents. [Sec. 173.1,
RA 8293]
Derivative works are protected as new works
provided they shall not:
(a) Affect the force of any subsisting copyright
upon the original works employed or any
part thereof; or
(b) 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,
RA 8293]
The provisions of the intellectual property code
shall apply to works in which copyright
protection obtained prior to the effectivity of
the law is subsisting. Provided that the
application of the code shall not result in the
diminution of such protection. [Sec. 239.3 IPC]
A person entitled to copyright must be the
original creator of the work. He must have
created it by his own skill, labor, and judgment
without directly copying or evasively imitating
the work of another. [Ching Kian Chuan vs CA
363 SCRA 142 (2001) (Vermicelli Case)]
To be entitled to copyright, the thing being
copyrighted must be original, created by the
author through his own judgment without
directly copying or evasively imitating the work
of another. [Sambar vs Levi Strauss 378 SCRA
364 (2002]:
D. NON-COPYRIGHTABLE WORKS
D.1. UNPROTECTED SUBJECT MATTER
(1) Any idea, procedure, system method or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work;
(2) News of the day and other miscellaneous
facts having the character of mere items of
press information;
289
MERCANTILE LAW
(3) Any official text of a legislative,
administrative or legal nature, as well as
any official translation thereof;
(4) Pleadings;
(5) Original decisions of courts and tribunals
(This pertains to the original decisions not
the SCRA published volumes since these are
protected under derivative works under Sec
173.1) [Sec. 175, RA 8293]
The format or mechanics of a TV show is not
copyrightable as copyright does not extend to
ideas, procedures, processes, systems,
methods of operation, concepts, principles or
discoveries regardless of the form in which they
are described, explained, illustrated or
embodied. [Joaquin Jr. et al vs. Drilon, et al
(1999)]
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and report
a particular fact has not created the same; he
has merely discovered its existence. [Feist
Publication v Rural Telephone Services (1991)]
D.2. WORKS OF THE GOVERNMENT OF
THE PHILIPPINES
Work of the Government of the Philippines: Is a
work created by an officer or employee of the
Philippine Government or any of its
subdivisions and instrumentalities, including
government-owned or controlled corporations
as a part of his regularly prescribed official
duties. [Sec. 171.11, RA 8293]
General Rule: Government cannot own
copyright
Exceptions:
(1) When copyright is assigned or bequested
in favor of the government [Sec 176.3];
(2) Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of his
work.
UP LAW BOC INTELLECTUAL PROPERTY CODE
However, prior approval of the government
agency or the office wherein the work is
created shall be necessary for the exploitation
of such work for profit. [Sec. 176.1]
Notwithstanding the foregoing provisions, the
Government is not precluded from receiving
and holding copyrights transferred to it by
assignment, bequest or otherwise; nor shall
publication or republication by the
Government in a public document of any work
in which copyright is subsisting be taken to
cause any abridgment or annulment of the
copyright or to authorize any use or
appropriation of such work without the consent
of the copyright owner. [Sec. 176.3, RA 8293]
In writing judicial decisions, a judge should
make the proper attribution in copying
passages from any judicial decision, statute,
regulation, or other Works of the Government.
However, the failure to make such attribution
does not violate the Law on Copyright. The law
expressly provides that Works of the
Government are not subject to copyright. This
means that there is neither a legal right by
anyone to demand attribution, nor any legal
obligation from anyone to make an attribution,
when Works of the Government are copied.
The failure to make the proper attribution of a
Work of the Government is not actionable but
is merely a case of sloppy writing. Clearly,
there is no legal obligation, by a judge or by
any person, to make an attribution when
copying Works of the Government. However,
misquoting or twisting, with or without
attribution, any judicial decision, statute,
regulation or other Works of the Government in
judicial writing, if done to mislead the parties
or the public, is actionable. [J. Carpio
Dissenting Opinion, In The Matter Of the
Charges of Plagiarism, Etc., Against Assoc.
Justice Mariano Del Castillo, A.M. 10-7-17-SC
(2011)]
290
MERCANTILE LAW
D.3. WORKS OF THE PUBLIC DOMAIN
These include works whose term of copyright
has expired.
D.4. USEFUL ARTICLES
Useful Article Doctrine: Works whose sole
purpose is utilitarian have no separate artistic
value. This can be distinguished from a work of
applied art, which has utilitarian functions but
there is an identifiable artistic work or creation
incorporated thereto.
E. RIGHTS OF COPYRIGHT OWNER
E.1. COPYRIGHT OR ECONOMIC RIGHTS
Copyright or economic rights shall consist of
the exclusive right to carry out, authorize or
prevent the following acts:
(1) Reproduction of the work or substantial
portion of the work; [Sec. 177.1, RA 8293]
(2) Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work; [Sec. 177.2, RA
8293]
(3) The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership; [Sec. 177.3,
RA 8293]
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the ownership
of the original or the copy which is the
subject of the rental; [Sec. 177.4, RA 8293]
(5) Public display of the original or a copy of
the work; [Sec. 177.5, RA 8293]
(6) Public performance of the work; [Sec. 177.6,
RA 8293]
(7) Other communication to the public of the
work [Sec. 177.7, RA 8293]
Economic rights also give the author the right
to assign or license the copyright and/or the
material object in whole or in part, and they
allow the owner to derive financial reward from
UP LAW BOC INTELLECTUAL PROPERTY CODE
the use of his works by others. [Sec. 180.1, RA
8293 as amended by RA 10372]
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, RA 8293]
Communication to the Public of Copyrighted
Works: Includes point-to-point transmission of
a work, including video on demand, and
providing access to an electronic retrieval
system, such as computer databases, servers,
or similar electronic storage devices.
Broadcasting, rebroadcasting, retransmission
by cable, and broadcast and retransmission by
satellite are all acts of communication to the
public within the meaning of the IPC. [Rule 11,
Copyright Safeguards and Regulations]
First Public Distribution of Work: An exclusive
right of first distribution of work includes all
acts involving distribution, specifically
including the first importation of an original
and each copy of the work into the jurisdiction
of the Republic of the Philippines. [Rule 12,
Copyright Safeguards and Regulations]
Civil Code Provisions on Ownership of
Intellectual Creation:
Article 721. By intellectual creation, the
following persons acquire ownership:
(1) The author with regard to his literary,
dramatic, historical, legal, philosophical,
scientific or other work;
(2) The composer; as to his musical
composition;
(3) The painter, sculptor, or other artist, with
respect to the product of his art;
291
MERCANTILE LAW
(4) The scientist or technologist or any other
person with regard to his discovery or
invention.
Article 722. The author and the composer,
mentioned in Nos. 1 and 2 of the preceding
article, shall have the ownership of their
creations even before the publication of the
same. Once their works are published, their
rights are governed by the Copyright laws.
The painter, sculptor or other artist shall have
dominion over the product of his art even
before it is copyrighted. The scientist or
technologist has the ownership of his discovery
or invention even before it is patented.
Article 723. Letters and other private
communications in writing are owned by the
person to whom they are addressed and
delivered, but they cannot be published or
disseminated without the consent of the writer
or his heirs. However, the court may authorize
their publication or dissemination if the public
good or the interest of justice so requires.
E.2. MORAL RIGHTS [SEC. 193]
The author of a work shall, independently of
the economic rights in Section 177 or the grant
of an assignment or license with respect to
such right, have the right:
(1) To require that the authorship of the works
be attributed to him, in particular, the right
that his name, as far as practicable, be
indicated in a prominent way on the copies,
and in connection with the public use of his
work; [Sec. 193.1, RA 8293]
(2) To make any alterations of his work prior to,
or to withhold it from publication; [Sec.
193.2, RA 8293]
(3) To object to any distortion, mutilation or
other modification of, or other derogatory
action in relation to, his work which would
be prejudicial to his honor or reputation;
[Sec. 193.3, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(4) 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.
193.4, RA 8293]
In addition to the right to publish granted by
the author, his heirs, or assigns, the publisher
shall have a copyright consisting merely of the
right of reproduction of the typographical
arrangement of the published edition of the
work. [Sec.174, RA 8293]
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive
right of making a collection of his works. [Sec.
176.2, Ra 8293]
i. Waiver of Moral Rights
General Rule: Moral rights can be waived in
writing, expressly stating such waiver [Sec. 195,
RA 8293] or by contribution to a collective work
unless such is expressly reserved [Sec. 196, RA
8293].
Exceptions:
Even if made in writing, waiver is still not valid
if:
(1) Use of the name of the author, title of his
work, or his reputation with respect to any
version or adaptation of his work, which
because of alterations substantially tends
to injure the literary or artistic reputation of
another author; [Sec. 195.1, RA 8293]
(2) It uses the name of the author in a work
that he did not create. [Sec. 195.1, RA
8293]
Moral rights are not assignable or subject to
license. [Sec. 198, RA 8293]
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 [Sec. 198,
RA 8293 as amended by RA 10372]
292
MERCANTILE LAW
E.3. RIGHTS TO PROCEEDS IN
SUBSEQUENT TRANSFERS (DROIT DE
SUITE OR FOLLOW UP RIGHTS)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer,
subsequent to the first disposition thereof by
the author, the author or his heirs shall have an
inalienable right to participate in the gross
proceeds of the sale or lease to the extent of
five percent (5%). This right shall exist during
the lifetime of the author and for fifty (50)
years after his death. [Sec. 200, RA 8293]
Works not covered: Prints, etchings, engravings,
works of applied art, or works of similar kind
wherein the author primarily derives gain from
the proceeds of reproductions. (Sec. 201, RA
8293)
First Sale Doctrine: After the first sale of the
lawfully made copy of the copyrighted work,
anyone who is the owner of that copy can sell
or dispose of that copy in any way without any
liability for copyright infringement. The first
sale of an authorized copy of the work
exhausts the authors right to control
distribution of copies.
E.4. NEIGHBORING RIGHTS
E.5. PERFORMERS 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. [Sec. 203.1, RA 8293]
Such right shall be maintained and
exercised fifty (50) years after his death, by
his heirs, and in default of heirs, the
government, where protection is claimed.
[Sec. 204.2, RA 8293]
(2) The right of authorizing the direct or
indirect reproduction of their performances
UP LAW BOC INTELLECTUAL PROPERTY CODE
fixed in sound recordings, or audiovisual
works or fixations in any manner or form;
[Sec. 203.2, RA 8293, as amended by
10372]
(3) Subject to the provisions of Section 206,
the right of authorizing the first public
distribution of the original and copies of
their performance fixed in the sound
recording or audiovisual works or fixations
through sale or rental or other forms of
transfer of ownership; [Sec. 203.3, RA 8293,
as amended by RA 10372]
(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; [Sec. 203.4, RA 8293, as
amended by RA 10372]
(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. 203.5, RA 8293, as amended
by RA 10372]
(6) Independently of a performer's economic
rights, the performer, shall, as regards his
live aural performances or performances
fixed in sound recordings or audiovisual
works or fixations, 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. [Sec. 204.1,
RA 8293, as amended by RA 10372]
(7) Unless otherwise provided in the contract,
in every communication to the public or
broadcast of a performance subsequent to
the first communication or broadcast
293
MERCANTILE LAW
thereof by the broadcasting organization,
the performer shall be entitled to an
additional remuneration equivalent to at
least five percent (5%) of the original
compensation he or she received for the
first communication or broadcast. [Sec.
206, RA 8293]
E.6. RIGHTS OF PRODUCERS OF SOUND
RECORDING
(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; [Sec. 208.1, RA 8293]
(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; [Sec. 208.2, RA 8293]
(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. [Sec. 208.3,
RA 8293]
(4) If a sound recording published for
commercial purposes, or a reproduction of
such sound recording, is used directly for
broadcasting or for other communication
to the public, or is publicly performed with
the intention of making and enhancing
profit, a single equitable remuneration for
the performer or performers, and the
producer of the sound recording shall be
paid by the user to both the performers
and the producer, who, in the absence of
any agreement shall share equally. [Sec.
209, RA 8293]
E.7. RIGHTS OF BROADCASTING
ORGANIZATIONS
(1) The rebroadcasting of their broadcasts;
[Sec. 211.1, RA 8293]
(2) The recording in any manner, including the
making of films or the use of video tape, of
their broadcasts for the purpose of
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

communication to the public of television been held that the playing of music in dine and
broadcasts of the same; [Sec. 211.2, RA dance establishments which was paid for by
8293] the public in purchases of food and drink
(3) The use of such records for fresh constitute performance for public. The music
transmissions or for fresh recording. [Sec. provided for is for the purpose of entertaining
211.3, RA 8293] and amusing customers in order to make the
establishment more attractive and desirable.
Must-Carry Rule: Prevents cable television The expenses entailed thereby are added to
companies from excluding broadcasting the overhead of the restaurant which are either
organization especially in those places not eventually charged to the price of the food and
reached by signal. Also, the rule prevents cable drink or the overall total of additional income
television companies from depriving viewers in produced by the bigger volume of business
far-flung areas the enjoyment of programs which the entertainment was programmed to
available to city viewers. [ABS-CBN attract. Nevertheless, the there is no
Broadcasting vs. Philippine Multi-Media System infringement of copyright law as the composers
(2009)] in this case waived their right in favour of the
public when they allowed their intellectual
Limitations on Protection creations to become property of public domain.
Sections 203, 208 and 209 shall not apply [Filipino Society of Composers vs Benjamin Tan
where the acts referred to in those Sections are 148 SCRA 461 (1987)]
related to:
(1) The use by a natural person exclusively for Term of Protection
his own personal purposes; Works Term
(2) Using short excerpts for reporting current
events; For performances not Fifty (50) years from
(3) Use solely for the purpose of teaching or incorporated in the end of the year in
for scientific research; and recordings which the
(4) Fair use of the broadcast subject to certain performance took
conditions. (Sec. 212, RA 8293) place [Sec. 215.1(a),
RA 8293]
The issue in this case as WON the playing and For sound or image and Fifty (50) years from
signing of musical compositions which have sound recordings and for the end of the year in
been copyrighted under the provisions of the performances which the recording
copyright law inside the restaurant constitute a incorporated therein took place. [Sec.
performance for profit? The court ruled that 215.1(b), RA 8293]
the word perform as used in the ACT has
been applied to one who plays a musical
composition on a piano, thereby producing in Broadcasts Twenty (20) years
the air sound waves which are heard as a from the date the
music and if the instrument he plays on is a broadcast took place
piano plus a broadcasting apparatus, so that [Sec. 215.2, RA 8293]
the waves are thrown out, not only upon the air
but upon others, then he also performing a
musical composition. In relation thereto it has

294
 UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

F. RULES ON OWNERSHIP OF COPYRIGHT

F.1. OWNERSHIP OF COPYRIGHT
Work Ownership
Belongs to the author of the work [Sec. 178.1, RA
Single Creator of an Original Work
8293]
Belongs of the co-authors; in the absence of
agreement, their rights shall be governed by the rules
on co-ownership. However, if the work consists of
Works of Joint Authorship
parts that can be used separately and identified, the
author of each part owns the copyright of the part he
has created. [Sec. 178.2, RA 8293; Asked in 95, 04]
Belongs to the employee if the creation is not a part of
his regular duties, even if he used the time, facilities
and materials of the employer. However, belongs to
Work created during the course of employment the employer if the work is in the performance of the
employees regular duties unless there is an
agreement to the contrary. [Sec. 178.3, RA 8293;
Asked in 08]
The person who commissioned the work holds
Work commissioned by a person other than the ownership of the work per se, but copyright remains
employer with the creator unless there was a stipulation to the
contrary. [Sec. 178.4, RA 8293; Asked in 95, 04]
Belongs to the producer, author of the scenario,
composer of the music, film director, and author of
the adapted work. However, subject to stipulations,
the producers shall exercise the copyright as may be
Audio visual works
required for the exhibition of the work, except for the
right to collect license fees for the performance of
musical compositions in the work. [Sec. 178.5, RA
8293]
Belongs to the writer, but the court may authorize
their publication or dissemination of the public good
Letters
or interest of justice requires, pursuant to Art. 723,
New Civil Code. [Sec. 178.6, RA 8293]
Publishers are deemed to represent the authors,
unless the contrary appears, the pseudonyms or
Anonymous and pseudonymous works adopted names leave no doubt as to the authors
identity or if the author discloses his identity. [Sec.
179, RA 8293]
A contributor is deemed to have waived his right
Collective works
unless he expressly reserves it. [Sec. 196, RA 8293]
295
UP LAW BOC INTELLECTUAL PROPERTY CODE
F.2. DURATION OF COPYRIGHT
Works
Original Literary and Artistic Works including Lifetime of author and for fifty (50) years after his
Posthumous Works death [Sec 213.1, RA 8293]
Derivative Works including Posthumous Works
Joint Authorship
Anonymous or Pseudonymous Works
Applied Art
Published Photographic Works
Unpublished Photographic Works
Published Audio-visual Works
Unpublished Audio-visual Works
F.3. PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated on
a work in the usual manner as the author shall,
in the absence of proof to the contrary, be
presumed to be the author of the work. This
provision shall be applicable even if the name is
a pseudonym, where the pseudonym leaves no
doubt as to the identity of the author. The
person or body, corporate whose name appears
on an 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, RA 8293]
The term of protection subsequent to the death
of the author shall run from the date of his
death or of publication, but such terms shall
always be deemed to begin on the first day of
January of the year following the event which
gave rise to them. [Sec. 214, RA 8293]
296
MERCANTILE LAW
Term
Lifetime of author and for fifty (50) years after his
death [Sec 213.1, RA 8293]
Lifetime of the last surviving author and for fifty
(50) years after his death [Sec 213.2, RA 8293]
Fifty (50) years from date of first lawful
publication [Sec. 213.3, RA 8293]
Twenty-five (25) years from date of making [Sec.
213.4, RA 8293]
Fifty (50) years from publication [Sec. 213.5, RA
8293]
Fifty (50) years from the making [Sec. 213.5, RA
8293]
Fifty (50) years from publication [Sec. 213.6, RA
8293]
Fifty (50) years from the making [Sec. 213.6, RA
8293]
F.4. TRANSFER OR ASSIGNMENT OF
COPYRIGHT
The copyright may be assigned or licensed in
whole or in part. Within the scope of the
assignment or license, the assignee or licensee
is entitled to all the rights and remedies which
the assignor or licensor had with respect to the
copyright. [Sec. 180.1, RA 8293 as amended by
RA 10372]
The copyright is not deemed assigned or
licensed inter vivos in whole or in part unless
there is a written indication of such intention.
[Sec. 180.2, RA 8293 as amended by RA 10372]
The submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication shall constitute only a
license to make a single publication unless a
greater right is expressly granted. If two (2) or
UP LAW BOC INTELLECTUAL PROPERTY CODE
more persons jointly own a copyright or any part
thereof, neither of the owners shall be entitled
to grant licenses without the prior written
consent of the other owner or owners. [Sec.
180.3, RA 8293]
The copyright is distinct from the property in the
material object subject to it. Consequently, the
transfer, assignment or licensing of the
copyright shall not itself constitute a transfer of
the material object. Nor shall a transfer or
assignment of the sole copy or of one or several
copies of the work imply transfer, assignment or
licensing of the copyright. [Sec. 181, RA 8293 as
amended by RA 10372]
The owners of copyright and related rights or
their heirs may designate a society of artists,
writers, composers and other right-holders to
collectively manage their economic or moral
rights on their behalf. For the said societies to
enforce the rights of their members, they shall
first secure the necessary accreditation from the
Intellectual Property Office. [Sec. 183, RA 8293
as amended by RA 10372]
G. LIMITATIONS ON COPYRIGHT
G.1. DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and similar
purposes is not an infringement of copyright.
A privilege, in persons other than the owner of
the copyright, to use the copyrighted material in
a reasonable manner without his consent,
notwithstanding the monopoly granted to the
owner by the copyright. It is meant to balance
the monopolies enjoyed by the copyright owner
with the interests of the public and of society.
Decompilation - Refers to the reproduction of
the code and translation of the forms of the
computer program to achieve the inter-
operability of an independently created
297
MERCANTILE LAW
computer program with other programs. This
may also constitute fair use [Sec. 185.1, RA
8293].
The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is
made upon consideration of all the above
factors. [Sec 185.2, RA 8293]
Factors to consider in determining Fair Use
(1) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
(2) The nature of the copyrighted work;
(3) The amount and substantiality of the
portion used in relation to the copyrighted
work as a whole; and
(4) The effect of the use upon the potential
market for or value of the copyrighted work
[Sec. 185.1, RA 8293; (Harper & Row v.
Nation Enterprise, 471 US 539, 105 S.Ct. 2218,
85 L.Ed.2d 588]
The format of a show is not copyrightable.
[Joaquin vs Drilon 302 SCRA 225 (1999)]
A compilation is not copyrightable per se, but it
is copyrightable only if its facts have been
selected, coordinated, or arranged in such a
way that the resulting work as a while
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
Industrious Collection Test. [Feist Publications
Inc vs. Rural Tel Service 499 US 340 (1991)]
An exception is carved out for lawyers and
officers of the court against plagiarism when
writing judicial documents that will be part of
court record. [In the Matter of the Charges of
Plagiarism etc Against Associate Justice
Mariano C. Del Castillo AM No 10-7-17-SC
(2011)]
UP LAW BOC INTELLECTUAL PROPERTY CODE
G.2. COPYRIGHT INFRINGEMENT
Infringement of Copyright and Related Rights:
means any violation of the rights under the
Intellectual Property Code and/or the
applicable Intellectual Property Law, including
the act of any person who at the time when
copyright subsists in a work has in his
possession an article which he known, or ought
to know, to be an infringing copy of the work f or
the purpose of:
(1) Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
(2) Distributing the article for purpose of trade,
or for any other purpose to an extent that
will prejudice the rights of the copyright
owner in the work; or
(3) Trade exhibit of the article in public. [Sec.
1(l), Rule 1, Rules and Regulations on
Administrative Complaints for Violation of
Laws involving Intellectual Property Rights]
Infringement consists in the doing by any
person, without the consent of the owner of the
copyright, of anything the sole right to do which
is conferred by statute on the owner of the
copyright. For there to be substantial
reproduction of a book, it does not necessarily
require that the entire copyrighted work, or even
a large portion of it, be copied. If so much is
taken that the value of the original work is
substantially diminished, there is an
infringement of copyright and to an injurious
extent, the work appropriated. It is no defense
that the pirate did not know whether or not he
was infringing any copyright; he at least knew
that what he was copying was not his, and he
copied at his peril. In cases of infringement,
copying alone is not what is prohibited. The
copying must produce an injurious effect.
[Habana et al vs. Robles et al. (1999)]
Copyright infringement and unfair competition
are not limited to the act of selling counterfeit
goods. They cover a whole range of acts from
298
MERCANTILE LAW
copying, assembling, packaging to marketing,
including the mere offering for sale of
counterfeit goods. [Microsoft Corp vs. Maxicorp
Inc. (2004)]
A copy of a piracy is an infringement of the
original, and it is no defense that the pirate, in
such cases, did not know what works he was
indirectly copying, or did not know whether or
not he was infringing any copyright; he at least
knew that what he was copying was not his, and
he copied at his peril. In determining the
question of infringement, the amount of matter
copied from the copyrighted work is an
important consideration. To constitute
infringement, it is not necessary that the whole
or even a large portion of the work shall have
been copied. If so much is taken that the value
of the original is sensibly diminished, or the
labors of the original author are substantially
and to an injurious extent appropriated by
another, that is sufficient in point of law to
constitute a piracy. [Columbia Pictures v. CA
(1996)]
The following shall NOT constitute infringement
of copyright:
(1) Recitation or performance of a work once it
has been made accessible to the public if (1)
privately done AND free of charge OR (2)
strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]
(2) Making of quotations from a published
work: (i) compatible with fair use, (ii) extent
is justified by the purpose, (iii) source and
name of the author, appearing on work,
must be mentioned; [Sec. 184.1(b), RA 8293]
(3) Reproduction or communication to the
public by mass media of articles on current
political, social, economic, scientific or
religious topic, lectures, addresses and
other works, delivered in public: (i) for
information purposes, (ii) not expressly
reserved, and (iii) source is already
indicated; [Sec. 184.1(c), RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(4) Reproduction and communication to the
public of literary, scientific or artistic works
as part of reports of current events by
means of photography, cinematography or
broadcasting to the extent necessary for the
purpose; [Sec. 184.1(d), RA 8293]
(5) Inclusion of a work in a publication,
broadcast or other communication to the
public, sound recording or film if made by
way of illustration for teaching purposes
compatible with fair use and the source and
the name of the author appearing on work,
must be mentioned; [Sec. 184.1(e), RA 8293]
(6) Recording made in schools, universities, or
educational institutions of a work included
in a broadcast for the use of schools,
universities or educational institutions.
Such recording must be deleted within a
reasonable period; such recording may not
be made from audio-visual works which are
part of the general cinema, repertoire of
feature films except of brief excerpts of the
work; [Sec. 184.1(f), RA 8293]
(7) Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means of
its work or facilities, (iii) for use in its own
broadcast; [Sec. 184.1(g), RA 8293]
(8) Use made of a work by or under the
direction or control of the government for
public interest compatible with fair use; [Sec.
184.1(h), RA 8293]
(9) Public performance or the communication
to the public of a work in a place where no
admission fee is charged by a club on
institution for charitable or educational
purpose only and the aim is not profit-
making; [Sec. 184.1(i), RA 8293]
(10) Public display of the original or a copy of the
work not made by means of a film, slide,
television, image or otherwise on screen or
by means of any other device or process
either the work has been published, sold,
given away, or transferred to another
person by the author or his successor in
title; [Sec. 184.1(j), RA 8293]
299
MERCANTILE LAW
(11) Use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner.
[Sec. 184.1(k), RA 8293]
(12) The reproduction or distribution of
published articles or materials in a
specialized format exclusively for the use of
the blind, visually- and reading-impaired
persons: Provided, That such copies and
distribution shall be made on a nonprofit
basis and shall indicate the copyright owner
and the date of the original publication. [Sec.
184.1(l), RA 8293 as amended by RA 10372]
Reproduction of Published Work
General Rule: 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. [Sec. 187.1, RA
8293]
Exceptions: Such permission shall not extend to:
(1) A work of architecture in the form of
building or other construction;
(2) An entire book, or a substantial part thereof,
or of a musical work in graphic form by
reprographic means;
(3) A compilation of data and other materials;
(4) A computer program except as provided in
Section 189; and
(5) 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. [187.2, RA 8293]
Reprographic Reproduction by Libraries
Any library or archive whose activities are not
for profit may, without the authorization of the
author of copyright owner, make a single copy
of the work by reprographic reproduction:
(1) Where the work by reason of its fragile
character or rarity cannot be lent to user in
its original form;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(2) 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
(3) Where the making of such a copy 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.
[Sec. 188.1, RA 8293]
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: Provided, That every library
which, by law, is entitled to receive copies of a
printed work, shall be entitled, when special
reasons so require, to reproduce a copy of a
published work which is considered necessary
for the collection of the library but which is out
of stock. [Sec. 188.2, RA 8293)]
Reproduction of Computer Program
The reproduction in one (1) 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, That 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
300
MERCANTILE LAW
obtained copy of the computer program is
lost, destroyed or rendered unusable. [Sec.
189.1, RA 8293]
No copy or adaptation mentioned in this Section
shall be used for any purpose other than the
ones determined in this Section, and any such
copy or adaptation shall be destroyed in the
event that continued possession of the copy of
the computer program ceases to be lawful. [Sec.
189.2, RA 8293]
Importation for Personal Purposes
The importation of a copy of a work by an
individual for his personal purposes shall be
permitted without the authorization of the
author of, or other owner of copyright in, the
work under the following circumstances:
(1) When copies of the work are not available in
the Philippines and:
(a) Not more than one (1) copy at one
time is imported for strictly
individual use only; or
(b) The importation is by authority of
and for the use of the Philippine
Government; or
(c) The importation, consisting of not
more than three (3) such copies or
likenesses in any one invoice, is not
for sale but for the use only of any
religious, charitable, or educational
society or institution duly
incorporated or registered, or is for
the encouragement of the fine arts,
or for any state school, college,
university, or free public library in
the Philippines.
(2) When such copies form parts of libraries
and personal baggage belonging to persons
or families arriving from foreign countries
and are not intended for sale: Provided, that
such copies do not exceed three (3). [Sec.
190.1, RA 8293 is repealed by RA 10372]
Copies imported as allowed by this Section may
not lawfully be used in any way to violate the
UP LAW BOC INTELLECTUAL PROPERTY CODE
rights of owner the copyright or annul or limit
the protection secured by this Act, and such
unlawful use shall be deemed an infringement
and shall be punishable as such without
prejudice to the proprietor's right of action. [Sec.
190.2, RA 8293 is repealed by RA 10372]
Importation and Exportation of Infringing
Materials. Subject to the approval of the
Secretary of Finance, the Commissioner of
Customs is hereby empowered to make rules
and regulations for preventing the importation
or exportation of infringing articles prohibited
under Part IV of this Act and under relevant
treaties and conventions to which the
Philippines may be a party and for seizing and
condemning and disposing of the same in case
they are discovered after they have been
imported or before they are exported [Sec. 190,
RA 8293 as amended by RA 10372]
IV. Rules of Procedure
for Intellectual Property
Rights Cases (A.M. No.
10-3-10 SC)
A. IN WHAT COURTS APPLICABLE
These Rules shall be observed by Regional Trial
Courts designated by the Supreme Court as
Special Commercial Courts.
B. APPLICABILITY OF REGULAR
RULES
General Rule: The Rules of Court (RoC) shall
apply suppletorily to these Rules.
Exception: When the civil or criminal action
involves complex issues, the Court shall issue a
special order that the regular procedure
prescribed in the RoC.
301
MERCANTILE LAW
The following are specific rules applicable in
IPR Cases:
(a) Rules 2-9 of the RoC shall apply to all civil
actions for violation of intellectual property
rights under RA 8293 and other violations
of intellectual property rights as may be
defined by law.
(b) Special Commercial Courts in Quezon City,
Makati, Manila, and Pasig shall have
authority to act on applications for the
issuance of writs of search and seizure in
civil actions for violations of the Code,
enforceable nationwide. Special
Commercial Courts have concurrent
jurisdiction over applications enforceable
within their own jurisdiction for violations
within the judicial region.
(c) It shall be the duty of the Clerk of Court to
notify the Director-General of the
Intellectual Property Office of any action
involving a copyright, trademark, service
mark, patent, industrial design, utility
model, undisclosed information, and
technology transfer agreement.
C. COMMENCEMENT OF CIVIL ACTION
C.1. PLEADINGS:
The only pleadings allowed to be filed are the
complaints, compulsory counterclaims, and
cross-claims pleaded in the answer, and the
answers thereto. All of them shall be verified.
C.2. WHO MAY FILE:
(a) Any IPR owner, or anyone possessing any
right, title, or interest under claim of
ownership in any IPR, whose right may have
been violated;
(b) 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 IPR or the repression
of unfair competition, to which the
Philippines is also a party, or extends
reciprocal rights to Filipinos by law;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(c) Any foreign national or juridical person who
meets the requirements of the preceding
paragraph, and does not engage business
in the Philippines.
C.3. FORM AND CONTENTS OF THE
PETITION:
(1) Full names of parties to the case;
(2) Facts showing capacity of parties to sue or
be sued, or the authority of a party to sue or
be sued in a representative capacity, or the
legal existence of an organized association
of persons that is made a party;
(3) ultimate facts showing the cause of action
(4) reliefs sought;
(5) an affidavit in question-and-answer format
must be attached to the complaint. Such
affidavit shall state only the facts of direct
personal knowledge to the affiants which
are admissible in evidence, and shows the
competence of the affiants to testify.
(6) Certificate of non-forum shopping.
C.4. PROHIBITED PLEADINGS:
(a) Motion to dismiss
(b) Motion for bill of particulars
(c) Motion for reconsideration of a final order
judgment, except with regard to an order of
destruction
(d) Reply
(e) Petition for relief from judgment
(f) Motion for extention of time to submit
pleadings, except for meritorious reasons
(g) Motion for postponement intended for delay
(h) Third-party complaint
(i) Intervention
(j) Motion to hear affirmative defenses
(k) Any petition or motion with similar effect to
the foregoing.
C.5. FAILURE TO FILE COMPLAINT
WHERE A WRIT OF SEARCH AND
SEIZURE IS ISSUED:
302
MERCANTILE LAW
Applicant has 31 days from issuance of writ to
file a case before the appropriate court or quasi-
judicial agency.
For failure to file a case, the Court may, upon
motion of the owner of the seized goods, order
the return of such goods. Such motion must be
filed within 60 days from the expiration of the
period to file cases.
If the owner fails to file the motion, the Court
may dispose of the goods after notice and
hearing.
C.6. SUMMONS:
Summons shall be served no later than 5 days
from receipt of the complaint.
C.7. ANSWER:
Must be filed 15 days afer service of summons;
10 days if answer to compulsory counterclaim or
cross-claim.
Should the defendant fail to answer, the Court
may, motu proprio or upon motion of the
plaintiff, render judgment based on the
affidavits and the evidence on record unless it
requires the submission of additional evidence.
D. MODES OF DISCOVERY
A party may avail of the different modes of
discovery not later than 30 days from the
joinder of issues.
Any objection must be made within 10 days
from receipt of the request for discovery and
only on the ground that the matter requested is
manifestly incompetent, irrelevant, immaterial,
privileged in nature or for harassment.
A comment on the objection may be made in
writing within 3 days from receipt of the same.
The Court then has 10 days to decide on the
objection.
UP LAW BOC INTELLECTUAL PROPERTY CODE
Compliance with any mode of discovery shall be
made within 10 days from receipt of the request
for discovery, or from notice of the ruling of the
court.
Sanctions provided in the RoC in relation to the
modes of discovery shall apply.
E. PRE-TRIAL
The Court shall set the case for pre-trial 5 days
after the after the period for availing modes of
discovery or compliance whichever comes later.
The Court shall then direct the parties to appear
before the Philippine Mediation Center in
accordance with mediation rules. Should parties
fail to settle the case at mediation, the Court
shall conduct JDR conferences.
If either fails, the case shal be sent back to the
court for pre-trial.
F. CLARIFICATORY HEARINGS AND
TRIAL
Clarificatory hearings must be conducted within
30 days from pre-trial, to be completed not
later than 15 days thereafter.
Immediately after the termination of the
clarificatory hearings the parties must submit
their position papers within 10 days.
The judicial affidavits attached to the position
papers shall serve as the direct testimony of the
witnesses, subject to cross-examination.
The period of trial shall be 30 days allotted to
the plaintiff and defendant.
After an oral ruling on the last offer of evidence,
the Court shall direct the parties to submit their
respective draft decisions within a non-
extendible period of 30 days from receipt of
order.
303
MERCANTILE LAW
G. COMMENCEMENT OF CRIMINAL
ACTION
A criminal action is commenced by the filing of
an information after a prior verified complaint is
filed under Rule 112 of the RoC.
H. COMMON RULES ON
ADMISSIBILITY OF EVIDENCE
Good faith NOT a defense, unless the defendant
or accused claims to be a prior user.
All official records kept in a foreign country,
including certificates of registration, are
admissible in the Philippines if authenticated by
the consular office of the Philippines having
jurisdiction over the country where such records
are kept.
Authentication of documents may be subject of
agreement of the parties.
The deposition of foreign witnesses must be
made 6 months following the order of
deposition, unless failure to take the deposition
is caused by fortuitous event, fraud, accident,
mistake, or excusable negligence.
Presumptions in the Intellectual Property Code
shall apply to these Rules.
I. EVIDENCE IN PATENT CASES
Subject matter is a patent for process for
obtaining a product:
Any identical product is presumed to have been
obtained through the use of the patented
process if:
(1) The product is new;
(2) There is substantial likelihod that the
product was made by the process and that
the owner of the patent has been unable,
despite reasonable efforts, to determine the
process actually used.
UP LAW BOC INTELLECTUAL PROPERTY CODE
In such cases the Court shall order the
defendant/accused to show that the the
process he used to obtain the identical product
is different from the patented process.
Presumptions concerning patents:
(1) A letters patent issued by the IPO is prima
facie evidence of its existence and validity
during the term specified, unless cancelled
or voided by final judgment.
(2) Letters patent issued by the IPO are
presumed to have been validly issued
unless overcome by evidence of irregularity.
(3) It is presumed that the defendant/accused
is aware of the existence of the patent if the
words "Philippine patent" with the patent
number are written on:
(a) the patented invention or the product
manufactured using the patented
process
(b) on the container or the package in
which said article is supplied to the
public
(c) on the advertising material related to
the patented invention or process.
J. EVIDENCE IN TRADEMARK
INFRINGEMENT AND UNFAIR
COMPETITION CASES
A certificate of registration shall be prima facie
evidence of:
(1) The validity of the registration
(2) The registrant's ownership of the mark
(3) The registrant's right to exclusively use
the same
Determination of a well-known mark:
Knowledge of the relevant sector of the public,
rather than the knowledge of the general public,
shall be taken into account. (for the criteria in
determining a well-known mark, see
Determinants, supra.)
Likelihood of confusion:
304
MERCANTILE LAW
In determining likelihood of confusion, the
Court must consider the general impression of
the ordinary purchaser, buying under the
normally prevalent conditions of trade, and
giving such attention buyers normally give in
buying that class of goods.
The following factors are taken into account:
(1) Strength of the plaintiff's mark
(2) Degree of similarity between the
plaintiff's and the defendan's marks
(3) Proximity of the products or services.
(4) Likelihood that the plaintiff will bridge
the gap
(5) Evidence of actual confusion
(6) Defendant's good faith in adopting the
mark
(7) Quality of the defendant's service
(8) Sophistication of the buyers
"Colorable imitation" - denotes a close or
ingenious imitation as 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.
Intent to Defraud
There is a presumption of an intent to defraud:
(1) When the defendant passess of a
product as his by using imitative devices,
signs, or marks on the general
appearance of the goods, misleading
purchasers into buying his merchandise
under the impression that they are
buying that of his competitors.
(2) When the defendant makes a false
statement in the course of trade to
discredit the goods and business of
another.
(3) Where the similarity of the goods as
packed and offered for sale is so striking.
K. EVIDENCE IN COPYRIGHT CASES
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

Presumption of Copyright
Copyright is presumed to subsist and ownership
thereof shall be presumed to belong to the
complainant if he so claims through affidavit
evidence, unless defendant attaches proof to
the contrary in his answer to the complaint.
Mere denial of the subsistence of the copyright
based on lack of knowledge shall not be
sufficient to rebut the presumption.
Effect of registration and deposit
Registration and deposit of copyrighted work is
not a condition sine qua non to a claim of
copyright infringement.
Presumption of authorship (supra.)
International registration of works
A statement concerning a work, recorded in an
international register in accordance with an
international treaty to which the Philippines is
or may become a party, shall be construed as
true until the contrary is proved, except:
(a) Where the statement cannot be
valid under the Intellectual Property
Code or any other law concerning
intellectual property;
(b) Where the statement
contradicted by another statement
in the register.
The hearing shall be summary in nature with
notice of hearing addressed to defendant to
afford him opportunity to oppose the motion.
Conditions for the Order of Destruction
(a) Inventory and photographs of the seized
infringing goods taken before
destruction
(b) Taking and inventory must be witnessed
by the (i) accused, counsel or agent; (ii)
the complainant, his representative, or
counsel,
(c) A representative sample of the seized
goods must be retained for evidentiary
purposes
(d) An inventory of the samples must have
been made
(e) The officer authorized to supervise the
destruction has submitted a report
thereon within 5 days from the date of
the destruction
(f) Posting of a bond by the applicant
is

L. ORDER OF DESTRUCTION
At any time after the filing of the complaint or
information, the Court, upon motion and after
due notice and hearing where the violation of
the intellectual property rights of the owner is
established, may order the destruction of the
seized infringing goods, objects and devices,
including but not limited to, sales invoices,
other documents evidencing sales, labels, signs,
prints, packages, wrappers, receptacles, and
advertisements and the like used in the
infringing act.

305
UP LAW BOC SPECIAL LAWS MERCANTILE LAW

MERCANTILE LAW
SPECIAL LAWS

306
UP LAW BOC SPECIAL LAWS MERCANTILE LAW

I. The Chattel Mortgage managing securities or rendering services as

investment agent, advisor, or consultant,
Law and Real Estate (ii) mutual funds, close-end investment
Mortgage Law companies, common trust funds, pre-need
companies and other similar entities,
(Now part of Civil Law)
(iii) foreign exchange corporations, money
II. Anti-Money changers, money payment, remittance, and
transfer companies and other similar
Laundering Act entities, and
(R.A. 9160, as amended by R.A. 9194)
(iv) other entities administering or otherwise
Money laundering is a crime whereby the dealing in currency, commodities or
proceeds of an unlawful activity are transacted, financial derivatives based thereon,
thereby making them appear to have originated valuable objects, cash substitutes and other
from legitimate sources. (Sec. 4) similar monetary instruments or property
supervised or regulated by the Securities
and Exchange Commission (Sec. 3 [a])
A. POLICY OF THE LAW
RA 10365 (Amending RA 9160, approved
It is the policy of the State to protect and
February 15, 2013 and took effect on March 7,
preserve the integrity and confidentiality of
2013) referred to the foregoing as Covered
bank accounts and to ensure that the
Persons and added the following persons:
Philippines shall not be used as a money
laundering site for the proceeds of any unlawful
(4) jewelry dealers in precious metals, who, as a
activity. Consistent with its foreign policy, the
business, trade in precious metals, for
State shall extend cooperation in transnational
transactions in excess of One million pesos
investigations and prosecutions of persons
(P1,000,000.00);
involved in money laundering activities
(5) jewelry dealers in precious stones, who, as a
whenever committed. (Sec. 2)
business, trade in precious stones, for
transactions in excess of One million pesos
B. COVERED INSTITUTIONS (P1,000,000.00);
(6) company service providers which, as a
(1) Banks, non-banks, quasi-banks, trust business, provide any of the following
entities, and all other institutions and their services to third parties: (i) acting as a
subsidiaries and affiliates supervised or formation agent of juridical persons; (ii)
regulated by the Banko Sentral ng Pilipinas acting as (or arranging for another person
(BSP); to act as) a director or corporate secretary of
(2) Insurance companies and all other a company, a partner of a partnership, or a
institutions supervised or regulated by the similar position in relation to other juridical
Insurance Commission; persons; (iii) providing a registered office,
(3) (i) securities dealers, brokers, salesmen, business address or accommodation,
investment houses and other similar entities correspondence or administrative address
for a company, a partnership or any other

307
UP LAW BOC SPECIAL LAWS
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.
Notwithstanding the foregoing, the term
covered persons shall exclude lawyers and
accountants acting as independent legal
professionals in relation to information
concerning their clients or where disclosure of
information would compromise client
confidences or the attorney-client relationship:
Provided, That these lawyers and accountants
are authorized to practice in the Philippines and
shall continue to be subject to the provisions of
their respective codes of conduct and/or
professional responsibility or any of its
amendments. (Sec. 1, RA 10365)
C. OBLIGATIONS OF COVERED
INSTITUTIONS
(1) Customer Identification
(2) Record Keeping
(3) Reporting of Covered and Suspicious
Transactions (Sec. 9)
Customer Identification
Covered institutions shall establish and record
the true identity of its clients based on official
documents. They shall maintain a system of
verifying the true identity of their clients and, in
case of corporate clients, require a system of
308
MERCANTILE LAW
verifying their legal existence and
organizational structure, as well as the
authority and identification of all persons
purporting to act on their behalf.
The provisions of existing laws to the contrary
notwithstanding, anonymous accounts,
accounts under fictitious names, and all other
similar accounts shall be absolutely prohibited.
Peso and foreign currency non-checking
numbered accounts shall be allowed. The BSP
may conduct annual testing solely limited to the
determination of the existence and true identity
of the owners of such accounts.
Record Keeping
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the dates of
transactions.
With respect to closed accounts, the records on
customer identification, account files and
business correspondence, shall be preserved
and safely stored for at least five (5) years from
the dates when they were closed.
Reporting of Covered and Suspicious
Transactions
Covered institutions shall report to the AMLC all
covered transactions and suspicious
transactions within five (5) working days from
occurrence 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
UP LAW BOC SPECIAL LAWS
[,representatives, agents, advisors, consultants
or associates not included; repealed by RA
9194] 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 any 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 or any other law.
When reporting covered or suspicious
transactions to the AMLC, covered institutions
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. 7 of RA 10365 amended the foregoing to
read as follows:
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.
309
MERCANTILE LAW
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.
D. COVERED TRANSACTIONS
A transaction in cash or other equivalent
monetary instrument involving a total amount
in excess of five hundred thousand pesos
(P500,000.00) within one banking day. (Sec. 3
[b], as amended by Sec. 1 of RA 9194)
E. USPICIOUS 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;
UP LAW BOC SPECIAL LAWS
(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
clients transaction is structured in order to
avoid being the subject of reporting
requirements under the Act;
(5) Any circumstance relating to the
transaction which is observed to deviate
from the profile of the client and/or the
clients past transactions with the covered
institution;
(6) The transaction is in anyway related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
(7) Any transaction that is similar or analogous
to any of the foregoing (Sec. 3 [b-1], added
by Sec. 2 of RA 9194)
F. WHEN IS MONEY LAUNDERING
COMMITTED
Money laundering is a crime whereby the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources.
It is committed by the following:
(1) Any person knowing that any monetary
instrument or property represents, involves,
or relates to the proceeds of any unlawful
activity, transacts or attempts to transact
said monetary instrument or property.
(2) 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 facilitates the offense of money
laundering referred to in paragraph (a)
above.
310
MERCANTILE LAW
(3) 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)
Sec. 4 of RA 10365 amends this section as
follows:
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;
(c) conceals or disguises the true nature,
source, location, disposition, movement or
ownership of or rights with respect to said
monetary instrument or property;
(d) attempts or conspires to commit money
laundering offenses referred to in
paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a), (b) or
(c) above; and
(f) performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in paragraphs
(a), (b) or (c) above.
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.
UP LAW BOC SPECIAL LAWS
G. UNLAWFUL ACTIVITIES OR
PREDICATE CRIMES
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, 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;
(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 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, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
(13) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
311
MERCANTILE LAW
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. (Sec. 3 [i])
RA 10365 added the following:
(15) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372
(16) 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:
(17) 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;
(18) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215
and 216 of the Revised Penal Code, as
amended;
(19) Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised
Penal Code, as amended;
(20) Forgeries and Counterfeiting under
Articles 163, 166, 167, 168, 169 and 176 of the
Revised Penal Code, as amended;
(21) Violations of Sections 4 to 6 of Republic Act
No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(22) 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;
(23)Violations of Sections 86 to 106 of Chapter
VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of
1998;
(24) Violations of Sections 101 to 107, and 110
of Republic Act No. 7942, otherwise known
as the Philippine Mining Act of 1995;
(25) Violations of Section 27(c), (e), (f), (g)
and (i), of Republic Act No. 9147, otherwise
UP LAW BOC SPECIAL LAWS
known as the Wildlife Resources
Conservation and Protection Act;
(26) Violation of Section 7(b) of Republic Act
No. 9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;
(27) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping
Act of 2002, as amended;
(28) 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;
(29) Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
(30) 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;
(31) Violation of Republic Act No. 8293,
otherwise known as the Intellectual
Property Code of the Philippines;
(32)Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
(33)Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(34) 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;
H. ANTI-MONEY LAUNDERING
COUNCIL
The Anti-Money Laundering Council shall be
composed of the Governor of the Bangko
Sentral ng Pilipinas as chairman, the
Commissioner of the Insurance Commission and
312
MERCANTILE LAW
the Chairman of the Securities and Exchange
Commission as members. (Sec. 7)
H.1. FUNCTIONS
The AMLC shall act unanimously in the
discharge of its functions as defined hereunder:
(1) to require and receive covered or
suspicious transaction reports from
covered institutions;
(2) to issue orders addressed to the
appropriate Supervising Authority or the
covered institution to determine the true
identity of the owner of any monetary
instrument or property subject of a
covered transaction or suspicious
transaction report or request for
assistance from a foreign State, or
believed by the Council, on the basis of
substantial evidence, to be, in whole or in
part, wherever located, representing,
involving, or related to, directly or
indirectly, in any manner or by any means,
the proceeds of an unlawful activity.
(3) to institute civil forfeiture proceedings and
all other remedial proceedings through
the Office of the Solicitor General;
(4) to cause the filing of complaints with the
Department of Justice or the Ombudsman
for the prosecution of money laundering
offenses;
(5) to investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by AMLC, money
laundering activities, and other violations
of this Act;
(6) to apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be 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;
UP LAW BOC SPECIAL LAWS
(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
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)
Sec. 6 of RA 10365 added the following power
to the AMLC:
(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 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.
313
MERCANTILE LAW
I. FREEZING OF MONETARY
INSTRUMENT OR PROPERTY
The Court of Appeals, upon application ex parte
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, may issue a freeze order which shall be
effective immediately. The freeze order shall be
for a period not exceeding six (6) months
depending upon the circumstances of the case.
No court can issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court. (Sec. 10)
Sec. 8 of RA 10365 revised the freezing
mechanism to be as follows:
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 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.
UP LAW BOC SPECIAL LAWS
No court shall issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court.
J. AUTHORITY TO INQUIRE INTO
BANK DEPOSITS
Notwithstanding the provisions of Republic Act
No. 1405, as amended, Republic Act No. 6426,
as amended, Republic Act No. 8791, and other
laws, the AMLC may inquire into or examine any
particular deposit or investment with any
banking institution or non-bank financial
institution upon order of any competent court in
cases of violation of this Act when it has been
established that
(1) there is probable cause that the deposits
OR
(2) investments 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 unlawful activities defined in
Sections 3(i)(1), (2) and (12).
To ensure compliance with this Act, the Bangko
Sentral ng Pilipinas (BSP) may inquire into or
examine any deposit or investment with any
banking institution or non-bank financial
institution when the examination is made in the
course of a periodic or special examination, in
accordance with the rules of examination of the
BSP. (Sec.11)
Sec. 2 of RA 10167 amended Sec. 11 to read as
follows:
Notwithstanding the provisions of Republic Act
No. 1405, as amended; Republic Act No. 6426,
as amended; Republic Act No. 8791; and other
laws, the AMLC may inquire into or examine any
particular deposit or investment, including
314
MERCANTILE LAW
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."
"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."
"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."
UP LAW BOC SPECIAL LAWS
"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."
Amendments under RA 9194
(a) Lowers the threshold amount for single
covered transactions (cash or other
equivalent monetary instrument) from P4M
to P500,000.00 within one (1) banking day.
(b) Expands the reporting requirements to
include the reporting of suspicious
transactions regardless of the amount
involved
(c) Authorizes AMLC to inquire into or examine
any particular deposit or investment, with
any banking institution or non-bank
financial institution and their subsidiaries
and affiliates upon order of any competent
court in cases of violation of this Act, when
it has been established that there is
probable cause that the deposits or
investments are related to an unlawful
activity. However, no court order is required
in cases involving unlawful activities of
kidnapping for ransom, narcotics offenses
and hijacking, destructive arson and murder,
including those perpetrated by terrorists
against non-combatant persons and similar
targets.
(d) Authorizes the Bangko Sentral ng Pilipinas
to inquire into or examine any deposit or
investment with any banking institution or
non-bank financial institution and their
subsidiaries and affiliates when the
examination is made in the course of a
periodic or special examination, in
accordance with the rules of examination of
the BSP to ensure compliance with R.A. No.
9160, as amended.
315
MERCANTILE LAW
(e) Transfers the authority to freeze any
money/property from the AMLC to the
Court of Appeals.
III. Foreign Investments
Act (R.A. 7042)
A. POLICY OF THE LAW
It is the policy of the State to attract, promote
and welcome productive investments from
foreign individuals, partnerships, corporations,
and governments, including their political
subdivisions, 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. Foreign
investments shall be encouraged in enterprises
that significantly expand livelihood and
employment opportunities for Filipinos;
enhance economic value of farm products;
promote the welfare of Filipino consumers;
expand the scope, quality and volume of
exports and their access to foreign markets;
and/or transfer relevant technologies in
agriculture, industry and support services.
Foreign investments shall be welcome as a
supplement to Filipino capital and technology
in those enterprises serving mainly the domestic
market.
As a general rule, there are no restrictions on
extent of foreign ownership of export enterprises.
In domestic market enterprises, foreigners can
invest as much as one hundred percent (100%)
equity except in areas included in the negative
list. Foreign owned firms catering mainly to the
domestic market shall be encouraged to
undertake measures that will gradually increase
Filipino participation in their businesses by
taking in Filipino partners, electing Filipinos to
UP LAW BOC SPECIAL LAWS
the board of directors, implementing transfer of
technology to Filipinos, generating more
employment for the economy and enhancing
skills of Filipino workers. (Sec. 2)
B. DEFINITION OF TERMS
B.1. FOREIGN INVESTMENT
An equity investment made by a nonPhilippine
national in the form of foreign exchange and/or
other assets actually transferred to the
Philippines and duly registered with the Central
Bank which shall assess and appraise the value
of such assets other than foreign exchange. (Sec.
3[c])
B.2. DOING BUSINESS IN THE
PHILIPPINES
Includes:
(f) soliciting orders, service contracts, opening
offices, whether called liaison offices or
branches;
(g) appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a
period or periods totalling one hundred
eighty (180) days or more;
(h) participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that
imply a continuity of commercial dealings or
arrangements, and contemplate to that
extent the performance of acts or works, or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of, commercial gain or of the
purpose and object of the business
organization
Provided, however, That the phrase doing
business shall not be deemed to include mere
investment as a shareholder by a foreign entity
316
MERCANTILE LAW
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or
officer to represent its interests in such
corporation; nor appointing a representative or
distributor domiciled in the Philippines which
transacts business in its own name and for its
own account (Sec. 3 [d])
B.3. EXPORT ENTERPRISE
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 percent
(60%) or more of such purchases (Sec. 3 [e])
B.4. DOMESTIC MARKET ENTERPRISE
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
consistently export at least sixty percent (60%)
thereof (Sec. 3 [f])
C. REGISTRATION OF INVESTMENTS
ON NON-PHILIPPINE NATIONALS
Philippine National
(1) Citizen of the Philippines
(2) Domestic partnership or association wholly
owned by citizens of the Philippines
(3) Corporation organized under the laws of the
Philippines of which at least 60% of the
capital stock outstanding and entitled to
vote is owned and held by citizens of the
Philippines
(4) Corporation organized 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
UP LAW BOC SPECIAL LAWS
(5) A trustee of funds for pension or other
employee retirement, where the trustee is a
Philippine national and at least 60% of the
fund will accrue to the benefit of Philippine
nationals
Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities
and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of
each of both corporations must be owned and
held by citizens of the Philippines and at least
sixty percent (60%) of the members of the
Board of Directors of each of both corporations
must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine
national (Sec. 3[a])
Registration of Investments on Non-Philippine
Nationals
Without need of prior approval, a non-
Philippine national may, upon registration with
the Securities and Exchange Commission (SEC),
or with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of the
Department of Trade and Industry in the case of
single proprietorships, do business as defined in
Section 3 (d) of this Act or invest in a domestic
enterprise up to one hundred percent (100%) of
its capital, unless participation of non-
Philippine nationals in the enterprise is
prohibited or limited to a smaller percentage by
existing law and/or under the provisions of this
Act. 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 this Act: Provided, however,
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: Provided, finally, That a non-Philippine
317
MERCANTILE LAW
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 SEC. During the transitory period as
provided in Section 15 hereof, SEC shall
disallow registration of the applying non-
Philippine national if the existing joint venture
enterprise, particularly the Filipino partners
therein, can reasonably prove they are capable
to make the investment needed for the
domestic market activities to be undertaken by
the competing applicant. Upon effectivity of this
Act, SEC shall effect registration of any
enterprise applying under this Act within fifteen
(15) days upon submission of completed
requirements. (Sec. 5)
D. FOREIGN INVESTMENTS IN
EXPORT ENTERPRISE
Foreign investment in export enterprises whose
products and services do not fall within Lists A
and B of the Foreign Investment Negative List
provided under Section 8 hereof is allowed up
to one hundred percent (100%) ownership.
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. BOI shall advise
SEC or BTRCP, as the case may be, of any
export enterprise that fails to meet the export
ratio requirement. The SEC or BTRCP shall
thereupon order the non-complying export
enterprise to reduce its sales to the domestic
market to not more than forty percent (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 Section 14 hereof. (Sec. 6)
UP LAW BOC SPECIAL LAWS
E. FOREIGN INVESTMENT IN
DOMESTIC MARKET ENTERPRISE
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is
prohibited or limited by the Constitution
existing law or the Foreign Investment Negative
List under Section 8 hereof. (Sec. 7)
F. FOREIGN INVESTMENT NEGATIVE
LIST
The Foreign Investment Negative List shall have
two (2) components lists; A, and B.
(1) List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate
of the Constitution and specific laws.
(2) List B shall contain the areas of activities
and enterprises regulated pursuant to law:
a. which are defense-related activities,
requiring prior clearance and
authorization from Department of
National Defense (DND) to engage in
such activity, such as the manufacture,
repair, storage and/or distribution of
firearms, ammunition, lethal weapons,
military ordinance, explosives,
pyrotechnics and similar materials;
unless such manufacturing or repair
activity is specifically authorized, with a
substantial export component, to a non-
Philippine national by the Secretary of
National Defense; or
b. which have implications on public
health and morals, such as the
manufacture and distribution of
dangerous drugs; all forms of gambling;
nightclubs, bars, beerhouses, dance
halls; sauna and steam bathhouses and
massage clinics.
318
MERCANTILE LAW
Small and medium-sized domestic market
enterprises, with paid-in equity capital less than
the equivalent two hundred thousand US
dollars (US$200,000) are reserved to Philippine
nationals, Provided that if: (1) they involve
advanced technology as determined by the
Department of Science and Technology or (2)
they employ at least fifty (50) direct employees,
then a minimum paid-in capital of one hundred
thousand US dollars (US$100,000.00) shall be
allowed to non-Philippine nationals.
Amendments to List B may be made
upon recommendation of the Secretary of
National Defense, or the Secretary of Health, or
the Secretary of Education, Culture and Sports,
endorsed by the NEDA, approved by the
President, and promulgated by a Presidential
Proclamation.
Transitory Foreign Investment Negative List
established in Sec. 15 hereof shall be replaced
at the end of the transitory period by the first
Regular Negative List to be formulated and
recommended by NEDA, following the process
and criteria provided in Sections 8 of this Act.
The first Regular Negative List shall be
published not later than sixty (60) days before
the end of the transitory period provided in said
section, and shall become immediately effective
at the end of the transitory period. Subsequent
Foreign Investment Negative Lists shall become
effective fifteen (15) days after publication in a
newspaper of general circulation in the
Philippines: Provided, however, That each
Foreign Investment Negative List shall be
prospective in operation and shall in no way
affect foreign investment existing on the date of
its publication.
Amendments to List B after promulgation and
publication of the first Regular Foreign
Investment Negative List at the end of the
transitory period shall not be made more often
than once every two (2) years. (Sec. 8)