Far Eastern University

Institute of Law

CODE OF COMMERCE 4. Commercial Contracts of Overland

transportation (Arts. 349-379)
5. Letters of Credit(Arts. 567-572)
Commerce 6. Maritime Commerce (Atrs.573-869)
 It is that branch of human activity, the
purpose of which is to bring products to B. Special Laws
the consumer by means of exchanges or 1. Corporation Code
operations which tend to supply and 2. Negotiable Instruments Law
extend to him, habitually, with intent to 3. Insurance Code
gain at the proper time and place in 4. Insolvency Law
good quality and quantity. 5. Securities Registration Code
 “Commerce” and “trade” are used 6. Public Service Law
interchangeably although the former is 7. General Banking Law
more commonly used in international 8. Warehouse Receipts Law
dealings and the latter in domestic ones. 9. Chattel Mortgage Law
(Pandect of Commercial Law and 10. Others
jurisprudence, justice Jose Vitug, 1997
ed.) C. New Civil Code (repealed certain contracts in
the Code of Commerce)
Commercial Law 1. Sales
2. Partnership
 It is that branch of private law governing
3. Agency
acts of commerce (Business
4. Loan
intercourse) and/or the juridical relations
5. Deposit
arising from such commercial acts.
6. Guaranty
(Pandect of commercial law and
jurisprudence, justice Jose Vitug, 1997
Merchants
ed.)
A. Foreign Merchants
 Principal characteristics:
 Those engaged in business in the
1. uniform
Philippines
2. universal
1. As to capacity to contract
3. equitable
- governed by the laws of their country
4. customary
2. As to the creation of their
5. progressive
establishments, their mercantile
operations and the jurisdiction of our
Law Merchant/Lex Mercatoria
courts
 An old international law - governed by the Code of Commerce
of merchants and Note: The Corporation Code applies to
mariners growing out of corporations.
their customary
practices. It was a law B. Filipino Merchants
practiced and enforced 1. Natural Person
by businessman and  Qualifications:
ship owners in their own a. Legal capacity to engage in commerce
courts without (capacity)
professional judges or i. of legal age (18years)
lawyers. (Tristan ii. has free disposition of property
Catindig, Notes on b. habitually engaged in commerce (habituality)
Selected Commercial 2. Juridical person
Laws)  Qualifications:
a. industrial or commercial company
Commercial Laws in the Philippines b. organized in accordance with existing
A. Code of Commerce (Portions still in force) legislation
1. Merchants, Commercial registries, Book
of Merchants, General provisions on Habituality
Commercial Contracts (Arts. 1-63) 1. Series of acts:
2. Joint Accounts (Arts. 239-243)
 the repetition and continuation of
3. Transfers of non- negotiable credits
commercial acts in such manner that
(Arts. 347- 348)
they are related to each other by reason
of the commercial or end which they

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tend to have, which is, the exchange or Acts of Commerce (Commercial

circulation of products. Transactions)
2. Single acts: 1) Those acts contained in the Code of
 Act which manifests the intention to Commerce and 2) all others of analogous
engage habitually in commerce. character.
 Examples: Throwing open to the public a The Code of Commerce does not attempt
shop or establishment; public announce; anywhere to define what commercial
etc. transactions are. It only specifies two
 Presumption of habituality general classes.
Exists from the moment a person who  Moreover, an act need not be performed
intends to engage in commerce by the merchant in order that it may be
announces through circulars, considered an act of commerce. (Cia
newspapers, handbills, posters exhibited Agricola de Ultramar v. Reyes, 4 PHIL 2)
to the public, or in any other manner  Governing Law (in successive order): 1)
whatsoever, an establishment which has Code of Commerce; 2) commercial
for its object some commercial usage; and 3) Civil Code.
operations. (Art. 3 of code of commerce)
Commercial Registry
Disqualifications from Engaging in 1. A book where entries are made
Commerce of merchants and of documents
A. Absolute disqualifications: affecting their commercial
1. those serving the penalty of civil transactions; OR
interdiction; 2. An office established for the
2. those judicially declared insolvent; purpose of copying and
3. those who are absolutely disqualified recording verbatim certain
under special laws. classes of documents of
B. Relative Disqualifications: commercial nature.
1. Certain government officials, such as
judicial officers, prosecutors, department Nature of Registration
heads, collectors, and custodian of 1. By individual merchants – optional;
government funds 2. By corporations – compulsory, as it is
2. Money and commercial brokers the fact of registration which creates the
3. those who are under relative Corporation;
disqualification under special laws 3. Partnerships with a capital of P3,000 or
4. Members of Congress. more or where the contributions consist
5. President, Vice President, members of of real estate properties – Compulsory,
the Cabinet and their deputies or as provided by Art.1772 of the Civil
assistants. Code;
6. Members of the Constitutional 4. Philippine Vessels –
Commission. a. With more than 3 tons gross –
7. President, Vice President, Members of compulsory
the Cabinet , Congress, Supreme Court b. With gross tonnage of 3 tons or
and the Constitutional Commission, less – optional.
Ombudsman with respect to any loan,
guaranty, or other form of financial Effect of Failure to Register
accommodation for any business  An individual merchant who fails to
purpose by any government- owned or register cannot request the inscription of
controlled bank to them. any document in the mercantile registry,
nor take advantage of its effects (Art. 18,
ABSOLUTE RELATIVE Code of Commerce)
INCAPACITY INCAPACITY  Failure to register the articles of
Extends through out Extends only to the incorporation of a corporation will not
the Philippines territory where the create the corporation.
officer is exercising his  Failure to register a partnership does not
functions affect the existence of juridical
Effect of act is null and Effect is to subject the personality, whether or not it has P3,
void violator to disciplinary 000 or more or real estate properties on
action or punishment contributions by the partners.(Bar
Review Materials in Commercial Law, J.
Miravite, 2005 ed.)

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Required Books of Merchants
1. Under the Code of Commerce
a. Book of inventories and balances
b. Journal
c. ledger
d. Books for copies of letters and
telegrams.
2. Under special laws; e.g stock and transfer
book under the corporation Code
3. Under the National Internal Revenue Code.
Commercial Contracts
 Those entered into by, merchants in the
pursuit of their activities as such
merchants, those involving articles of
commerce, or those defined as such
contract by certain special commercials
laws.
 An agreement between two or more
merchants or non-merchants bonding
themselves to give or to do something in
commercial transactions. (Del Viso 88
cited in Miravite Bar Review Materials in
Commercial law.)
Governing Laws:
1. Code of Commerce- primary
2. Civil Code- suppletory (Art. 18, Civil Code)
 But in case of inconsistency. The lather
prevails except as to contracts explicitly
governed by the former such as
bottomry and respondentia.
Formalities:
General Rule: Need not be in any particular form
Exception:
1. Contracts required by the code or special laws
to be in writing or in a certain form.
2. Foreign contracts executed abroad, required
by foreign law to be in a particular form.
Perfection:
General Rule: Commercial contracts are
consensual as to perfection.
Exception: When the Code of commerce
requires specific forms such as charter parties
and loans on bottomry and respondentia.
Exact moment of perfection:
General Rule: All contracts, whether civil or
commercial, are perfected from the moment the
offeror has notice of the offeree’s acceptance.
(Cognition Theory; Art.1319, Civil Code)
Exception: Under Art.54 of the Code of
Commerce, commercial contracts entered into
by correspondence are perfected from the
moment an answer is made accepting the offer
or the condition by which the latter may be
modified. (Manifestation Theory)
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However, Justice Vitug believes that
Article 54 is applicable only to contracts still
specially governed by the Code of Commerce.
Joint Account (cuentas en participacion)
 A business arrangement of merchants
where other merchants agree to
contribute the amount of capital agreed
upon, and participating in the favorable
or unfavorable results thereof in the
proportion they may determine. (Art;239)
Distinctions between Joint Account and
Partnership (2000 Bar Exam)
JOINT ACCOUNT PARTNERSHIP
No firm name Has a firm name
No common fund Has common fund
No juridical personality Has juridical
personality
Only ostensible All general partners
partner manages liable to third persons
Liquidation done by All general partners
ostensible partner manage
Liquidation done by Liquidation entrusted
ostensible partner to any partners.
LETTER OF CREDIT ( LC)
(2000, 2002, 2005 Bar Exams)
 That issued by one merchant to another
for the purpose of attending to a
commercial transaction (Art. 567)
 An instrument issued by a bank on
behalf on one of its customers,
authorizing an individual or firm to draw
on the bank or one of its correspondents
for its account under certain conditions
of the credit. (Commercial Law Review,
C Villanueva, 2004 ed.)
 An engagement by a bank or other
person made at the request of a
customer that the issuer will honor drafts
or other demands for payment upon
compliance with the conditions specified
in the credit. (Prudential Banks vs. CA,
216 SCRA 257). Through it, the bank
merely substitutes its own promise to
pay for the promise to pay of one of its
customers who in return promises to pay
the bank the amount of funds mentioned
in the letter of credits or commitment
fees mutually agreed upon.
 Letters of credit are in effect absolute
undertakings to pay the money
advanced or the amount for which credit
is given on the faith of the instrument.
They are primary obligations and not
 Far Eastern University
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accessory contracts and while they are may be the opening bank or another
security arrangements, they are not bank not in the city of the beneficiary.
converted thereby into contracts of 7. Negotiating Bank –
guaranty. (Metropolitan vs. Daway) bank in the city of the beneficiary which
 A letter of credit is a commercial buys or discounts the drafts
transaction because it is one of the contemplated by the LC, if such draft is
contracts provided for by the Code of to be drawn on the opening bank or on
Commerce not repealed by the Civil another designated bank not in the city
Code. (Bar Review Materials in of the beneficiary.
Commercial Law, Miravite, 2005 ed.)  A mere
advertising or
Essential conditions: notifying bank is
1. Issued in favor of a definite person and not liable for a
not to order; breach of the
2. Amount fixed and specified. (Art. 568) letter of credit,
Note: If any of these essential conditions is not while a
present, the instrument is merely considered as confirming bank
a letter of recommendation. is liable in case
Duration: of breach
a. Upon the period fixed by the parties: or thereof. An
b. If none is fixed, 6 months from its date if advertising
used in the Philippines, or 12 months if used bank is bound
abroad. (Art. 572) only to check
Note: The LC becomes void if it is not used the apparent
within the period applicable. authenticity of
Perfection: LC are perfected from the moment the letter of
the correspondent bank makes payment to credit. (Bank of
persons in whose favor the LC has been America NT. &
opened. (Belman, Inc. vs. Central Bank, 104 SA vs. CA, G.R.
Phil. 887) No. 105395,
Parties December 10,
1. Applicant/buyer/importer – one who 1993)
purchases the goods, procures the LC, and Nature: The LC is the financial devise (mode of
obliges himself to reimburse the issuing bank payment) developed a s a convenient and
upon receipt of the documents of title. relatively safe mode of dealing with sales of
2. Issuing/opening bank – one which issues the goods to satisfy the seemingly irreconcilable
LC, and undertakes to pay the seller upon interests of a seller, who refuses to part with his
receipt of the draft and proper documents of title goods before he is paid, and a buyer, who wants
from the seller and to surrender them to the to have control of the goods before paying.
buyer upon reimbursement; and
3. Seller/exporter/beneficiary – one who sells the
goods to the buyer, and who delivers the draft
and documents to the issuing bank to recover Stages:
payment. 1. Contract of sale
 The number of parties may be between the buyer and seller
increased. Modern letters of credit are 2. Application for LC by
usually not made between natural the buyer with the bank
persons. They involve bank- to bank 3. Issuance of LC by the
transactions. bank
4. Advertising/ Notifying 4. shipping of goods by the
Bank - the correspondent bank (agent) seller
of the opening bank through which it 5. Execution of draft and
advises the beneficiary of the LC. tender of documents by the seller
5. Confirming Bank – bank 6. Redemption of draft
which, upon the request of the (payment)and obtaining of documents by the
beneficiary, confirms the LC issued. issuing bank
7. reimbursement to the
6. Paying Bank – bank on
bank and obtaining of documents by the
which the drafts are to be drawn, which
buyer

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 There are at least 3 distinct and and the

independent contracts involved in a LC: underta
1. Contract of sale kings of
between the buyer and the seller the
2. Contract of the buyer respecti
with the issuing bank ve
3. LC roper in which bank parties
promises to pay the seller pursuant to the in each
terms and conditions stated therein (with a are
pour autrui stipulation in favor of the seller). neither
subject
How their respective relationships are to
governed claims
and
a. Issuing bank and defense
applicant/buyer/importer – s nor
governed by the terms of the affected
application and agreement for by the
the issuance of the letter of the breach
credit by the bank. in the
b. Issuing bank and others.
Beneficiary/seller/exporter –  A direct
governed by the terms of the conseq
letter of the credit issued by the uence
bank. of the
c. Applicant and beneficiary – indepen
governed by the sales of dence
contract (Bar Review Materials principl
in Commercial Law, J. MIravite, e is the
2005 ed.) rule that
 The opening of the banks
letter of credit in favor deal
of a vendor is only a only
mode of payment; it is which
not among the docume
essential nts and
requirements of a not with
contract of sale goods,
enumerated in services or obligation to which they relate. By
arts.1305 and 1474 of this so-called independence principle, the bank
the Civil Code. determines compliance with the letter of credit
Therefore it does not only by examining the shipping documents
prevent the perfection presented; it is precluded from determining
of the contract whether the main contract is actually
between the parties. accomplished or not. (Bank of America, NT. &
(Johannes vs. CA, SA vs. CA, G.R. No. 105395, December 10,
227 SCRA 717) 1993)
Other contracts maybe involved especially
where additional parties are present. Rule of strict compliance
 It espouses that the documents
Independence Principle tendered by the seller/beneficiary must
strictly conform to terms of the LC.
 The 3 (Feati bank vs. CA 196 SCRA 576)
basic  Thus, a correspondent bank which
contract departs from what has been stipulated
s are under the letter of credit acts on its own
distinct risk and may not thereafter be able to
and recover from the buyer or the issuing
indepen bank the money thus paid to the
dent, beneficiary.(Feati Bank vs. CA)

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Kinds of LC
CONFIRMED LC IRREVOCABLE LC
A LC issued by one A definite
bank confirmed by undertaking on the
another , in which part of the issuing
case both banks are bank and constitutes
obligated to honor the engagement of
drafts drawn in the bank to the
compliance with the beneficiary and bona
credit fide holders of drafts
drawn and or
documents
presented
thereunder, that the
provisions for
payment,
acceptance and
negotiation
contained in the
credit will be fully
fulfilled, provided
that all the terms and
conditions of the
credit are complied
with.
The correspondent The issuing bank
bank gives an may not without the
absolute assurance consent of the
to the beneficiary beneficiary (seller)
that it will undertake and the applicant
the issuing bank’s ( buyer) revoke his
obligation as to its understanding under
own according to the the LC.
terms and conditions
of the credit.
beneficiary
have been
reimbursed
to the
opening
bank by the
buyer
Governing Law
1. Code of Commerce
2. Uniform Customs and Practice for
Documentary Credits
Note: the Uniform Commercial Practice for
Documentary Credits allow Letters of Credit to
be payable to order.
NEGOTIABLE INSTRUMENTS LAW
(Act No. 2031)
I. General Concepts
Negotiable Instrument (2005 Bar Exam) - a
written contract for the payment of money which
complies with the requirements of Sec. 1 of the
NIL, which by its form and on its face, is
intended as a substitute for money and passes
from hand to hand as money, so as to give the
holder in due course (HDC) the right to hold the
instrument free from defenses available to prior
parties. (Reviewer on Commercial Law,
Sundiang and Aquino)
Functions of Negotiable Instrument:
1. Substitute for money
2. Medium of exchange
3. Tool used in commercial
transaction.

Two Distinctive Features/Characteristics of

OTHER KINDS OF LC NI: (2005 Bar Exam)
1. Negotiability - it is that attribute or property
REVOLVING BACK-TO- STANDBY whereby a bill or note or check may pass
LC BACK LC LC from hand to hand similar to money, so as to
A credit that A credit with A security give the holder in due course the right to
provides for identical arrangement hold the instrument and to collect the sum
the renewed documentary for the payable for himself free from defenses.
credit to requirements performance
 Requisites of Negotiability: (1996
become and covering of certain
Bar Exam)
available as the same obligations. It
soon as the merchandise can be
a. It must be in writing and signed by the
opening as another drawn
maker or drawer;
bank has LC, except against only
advised the for a if another b. Must contain an unconditional promise
paying bank difference in business or order to pay a sum certain in money;
that the the price. transaction is c. Must be payable on demand, or at a
drafts permitted. fixed or determinable future time;
already d. Must be payable to order or to bearer;
drawn by the and

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e. Where the instrument is addressed to a • Manager’s / Cashier’s Check – drawn by

drawee, he must be named or otherwise a bank on itself and therefore, it is a
indicated therein with reasonable primary obligation of the bank.
certainty. o It is accepted in advance by the
act of its issuance and is not
2. Accumulation of Secondary Contracts - subject to countermand by the
secondary contracts are picked up and payor after indorsement.
carried along with Negotiable Instruments as o The bank’s manager signs
they are negotiated from one person to manager’s check while cashier’s
another; or in the course of negotiation of check is signed by the bank
negotiable instruments, a series of juridical cashier.
ties between the parties thereto arise either
by law or by privity. The indorsers become • Memorandum Check –
secondarily liable to the holder. it is like an ordinary check except that
the word “memorandum,” “mem” or
Distinctions between Negotiable Instruments “memo” is written upon the face of the
and Non-Negotiable Instruments check, signifying that the drawer
engages to pay the bona fide holder
NEGOTIABLE NON-NEGOTIABLE absolutely, and not upon a condition to
INSTRUMENTS INSTRUMENTS pay upon presentment at maturity and if
due notice of the presentment and non-
1. Must contain all 1. Does not contain all
payment should be given.
requisites of sec.1 requisites of sec.1
2. Transferable by 2. Transferable by • Certified Check – one
negotiation and assignment only drawn by a depositor upon funds to his
assignment. credit in a bank which a proper officer of
3. HDC can have 3. A transferee the bank certifies will be paid when duly
rights better than his acquires no better right presented for payment
transferor than his transferor • Traveler’s check – one
4. Prior parties warrant 4. Prior parties do not upon which the holder’s signature must
payment (secondary warrant payment but appear twice, one to be affixed by him at
liability). merely the legality of the time it is issued and the second o
his title. counter-signature, to be affixed by him in
5. Governed by NIL 5. NIL only applies by the presence of the payee before it is
analogy paid, otherwise it is incomplete
6. Transferee is a 6. Transferee is • Crossed check (1995,
holder in due assignee only. 1996, 2004, 2005 Bar Exams) – when 2
course. 7. All defenses parallel lines are drawn across its face
7. Defenses generally available against last or across a corner thereof. If the name
not available. transferee. of a bank appears between the parallel
lines, the check is said to be specially
Classes of Negotiable Instruments: (2002 Bar crossed, and payment should be made
Exam) only if presented by the named bank. If
1. Promissory Note (PN) - unconditional no name appears between the parallel
promise in writing by one person to another lines, the check is said to be generally
signed by the maker engaging to pay on crossed, and payment should be made
demand or at a fixed or determinable future only upon presentment by some bank.
time, a sum certain in money to order or to • Effects of crossing a
bearer. check:
2. Bill of Exchange (BE) -an unconditional a. That the check may not be
order in writing addressed by one person to encashed but only be deposited
another, signed by the person giving it, in the bank;
requiring the person to whom it is addressed b. That the check may be
to pay on demand or at a fixed or negotiated only once to one
determinable future time a sum certain in who has an account with a
money to order or to bearer. bank; and
3. Check- a bill of exchange drawn on a bank c. That the act of crossing the
payable on demand. check serves as a warning to
Kinds: the holder that the check has
been issued for a definite
purpose so that he must inquire

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if he has received the check 5. A holder, if HDC, 5. A holder can never

pursuant to that purpose. may acquire rights acquire rights to
• Stale check – one which has not been over the the document
presented for payment within a instrument better better than his
reasonable time after its issue than his predecessors
predecessors
Iron Clad Rule: Prohibits the countermanding of
payment of certified checks. (Republic of the
Philippines v. PNB. GR No. 16106. December 1, PROMISSORY BILL OF
1961) NOTE EXCHANGE
1.Unconditional 1.Unconditional
Bills in Set: one composed of several parts, promise order
each part numbered and containing a reference 2. Involves 2 parties 2.Involves 3 parties
to the other parts, the whole of the parts 3. Maker is primarily 3.Drawer is only
constituting but one bill. liable secondarily liable
• Rights of holders where parts are 4.Only one 4.Two presentments:
negotiated separately: presentment: for for acceptance
1. If both are HDC, payment and for payment
the holder whose title first accrues is
considered the true owner of the bill. Instances when BILL may be treated as a
2. But the person NOTE:
who accepts or pays in due course 1. Drawer and drawee are the same person.
shall not be prejudiced. 2. Drawee is a fictitious person.
• Obligations of holder who indorses 2 or 3. Drawee has no capacity to contract.
more parts of the Bill in Set: 4. When instrument is so ambiguous, the
1. The person shall be liable on holder may treat it either as a BILL or a
every such part. NOTE.
2. Every indorser subsequent to
him is liable on the part he has BILLOF EXCHANGE CHECK
himself indorsed, as if such parts 1.Not necessarily 1.It is necessary that
were separate bills. drawn on a deposit. a check is drawn on
The drawee need a bank deposit. The
Distinctions between a Negotiable not be a bank. drawee is always a
Instrument and a Negotiable Document of bank.
Title (2005 Bar Exam) 2.Death of a drawer 2.Death of the drawer
of a BOE, with the of a check, with the
NEGOTIABLE NEGOTIABLE knowledge of the knowledge of the
INSTRUMENT DOCUMENT OF bank, does not bank, revokes the
TITLE revoke the authority authority of the
1. The subject is 1. The subject is of the drawee to pay. banker to pay.
Money goods 3. May be presented 3. Must be presented
2. Is itself the 2. The document is a for payment within a for payment within a
property with mere evidence of reasonable time after reasonable time after
value title – the things of its last negotiation its issue.
value being the because it may be
goods mentioned further negotiated.
in the document 4.May be payable on 4. Always payable on
3. Has all the 3. Does not have demand or at a fixed demand
requisites of Sec 1 these requisites or determinable
of NIL future time
4. A holder of NI may 4. Intermediate
run after the parties are not Other Forms of Negotiable Instruments
secondary parties secondarily liable if 1. Certificate of deposit issued by banks,
for payment if the document is payable to the depositor or his order, or to
dishonored by the dishonored bearer
party primarily 2. Trade acceptance
liable 3. Bonds, which are in the nature of promissory
notes

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4. Drafts, which are bills of exchange drawn by
one bank upon another
 All of these must comply with Sec. 1, NIL
Note: Letters of credit are not negotiable.
Legal Tender
That kind of money that the law compels a
creditor to accept in payment of his debt when
tendered by the debtor in the right amount.
Note: A negotiable instrument although intended
to be a substitute for money, is generally not a
legal tender.
Incidents in “Life” of Negotiable Instrument
1. Issue
2. Delivery
3. Negotiation
4. Presentment for acceptance, in certain kinds
of bills of exchange
5. Acceptance
6. Dishonor by non-acceptance
7. Presentment for payment
8. Dishonor by non-payment
9. Notice of dishonor
10. Discharge
Issue - the first delivery of the instrument,
complete in form, to a person who takes it as a
holder.
Delivery - transfer of possession, actual or
constructive, from one person to another
Holder – refers to the:
a. The payee or indorsee of a bill or note
who is in possession of it, or
b. The bearer thereof (sec.191)
Bearer - the person in possession of a bill or
note which is payable to bearer.
Person - includes a body of persons, whether
incorporated or not.
1. Must be in writing, signed by the maker or
drawer;
- Otherwise it cannot be a substitute for money.
2. Must contain an unconditional promise or
order to pay a sum certain in money;
Certainty of sum payable.
The sum payable is a sum certain although it is
to be paid:
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. (sec. 2)
Acceleration clause - renders whole debt due
and demandable upon failure of obligor to
comply with certain conditions.
When promise is unconditional
An unqualified order or promise to pay is
unconditional 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.
 An order or promise to pay out of a particular
fund is not unconditional.

II. Negotiability

Requisites of Negotiability (Sec. 1, NIL) (1996 FUND FOR PARTICULAR

Bar Exam) REIMBURSEMENT FUND FOR
a. It must be in writing and signed by the PAYMENT
maker or drawer; 1. Drawee pays the 1. There is only
b. Must contain an unconditional promise payee from his own one act- the
or order to pay a sum certain in money; funds; afterwards, the drawee pays
c. Must be payable on demand, or at a drawee pays himself directly from
fixed or determinable future time; from the particular the particular
d. Must be payable to order or to bearer; fund indicated. fund indicated.
and Payment is
e. Where the instrument is addressed to a subject to the
drawee, he must be named or otherwise condition that
indicated therein with reasonable the fund is
certainty. sufficient.

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Institute of Law

2. Particular fund 2. Particular fund person so issuing, accepting, or indorsing it,

indicated is NOT the indicated is payable on demand.
direct source of the direct
payment but only the source of 4. Payable to order or to bearer
source of payment.
reimbursement. When payable to order
The instrument is drawn payable:
3. Indication in the 3. Indication in
a. To the order of a specified person or
instrument does not the instrument
b. To him or his order.
affect the makes the
unconditional nature of promise or  The payee must be named or otherwise
the promise or order. order indicated therein with reasonable certainty.
conditional.  It may be drawn payable to the order of:
a. A payee who is not maker, drawer, or
drawee; or
3. Payable on demand or at a fixed determinable b. The drawer or maker; or
future time; c. The drawee; or
Certainty of time of payment
d. Two or more payees jointly; or
An instrument is payable at a determinable e. One or some of several payees; or
future time which is expressed to be payable: f. The holder of an office for the time
a. At a fixed period after date or sight; or being.
b. On or before a fixed or determinable When payable to bearer.
future time specified therein; or
c. On or at a fixed period after the
a. When it is expressed to be so payable;
occurrence of a specified event which is or
certain to happen, though the time of b. When it is payable to a person named
happening be uncertain. therein or bearer; or
c. When it is payable to the order of a
 An instrument payable upon a contingency fictitious or non-existing person, and
is not negotiable, and the happening of the such fact was known to the person
event does not cure the defect. (sec. 4) making it so payable; or
 A promise to pay “when able,” “as soon as I d. When the name of the payee does not
can”, etc., without specification of an purport to be the name of any person; or
absolute date is not negotiable. However, e. When the only or last indorsement is an
there is a difference of opinion as to whether indorsement in blank. (Sec. 9)
it is a conditional promise or an absolute
promise to pay at un unreasonable time: 5. Identification of the drawee
a. Under the first view,  Where the instrument is addressed
negotiability is destroyed both by the to a drawee (meaning in a bill of
condition and by want of a fixed time exchange), he must be named or
for payment; otherwise indicated with reasonable
b. Under the second view, certainty. The holder must know to
by the general principle that a whom he should present it for
promise to pay within a reasonable acceptance and/or payment; otherwise,
time is not so certain as to render an the purpose of negotiable instrument as
instrument negotiable. a tool in commercial dealings will be
Aftersight Draft - payable only after the greatly hampered. (Reviewer on
expiration of the stipulated period from Commercial Law, Sundiang and Aquino)
acceptance (legal sight).
 A bill may be addressed to more
When payable on demand: than one drawee jointly, whether they
are partners or not; but not to two or
a. When it is so expressed to be payable more drawers in the alternative or in
on demand, or at sight, or on succession. (Sec. 128)
presentation; or
b. In which no time for payment is Test of Negotiability: presence of requirements
expressed. in Section 1 of NIL.
Note: Where an instrument is issued, accepted,
or indorsed when overdue, it is, as regards the Factors that Determine Negotiability:

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1. The whole instrument itself
2. Only what appears on the face of
the instrument
3. Provisions of the NIL, Sec.1
BAR QUESTION (Q): Which of the
following stipulations or features of a
promissory notes (PN) affect or do not
affect its negotiability, assuming that the
PN is otherwise negotiable? Indicate
your answer by writing the paragraph
number of the stipulation or feature of
the PN as shown below and your
corresponding answer, either ‘Affected”
or “Not affected.” Explain.
(a)The date of the PN is “February 30,
2002.”
(b)The PN bears interest payable on the
last day of each calendar quarter at a
rate equal to 5% above the then
prevailing 91-day Tbill rate as published
at the beginning of such calendar
quarter.
(c)The PN gives the maker the option to
make payment either in money or in
quantity of palay of equivalent value.
(d) The PN gives the holder the option
either to require payment in money or to
require the maker to serve as the
bodyguard or escort of the holder for 0
days.
SUGGESTED ANSWER (SA):
(a) NOT AFFECTED. The date is not
one of the requirements for negotiability.
(b) NOT AFFECTED. The interest is to
be computed at a particular time and is
determinable. It does not make the sum
uncertain or the promise conditional.
(c) AFFECTED. Giving the maker an
option renders the promise conditional.
(d) NOT AFFECTED. Giving the holder
an option does not make the promise
conditional.
Additional provisions not affecting
negotiability.
General Rule: the instrument is non-negotiable if
it contains a promise or order to do any act in
addition to the payment of money.
Exceptions:
a. authorizes the sale of collateral
securities in case the instrument be not
paid at maturity; or
b. authorizes a confession of judgment if
the instrument be not paid at maturity; or
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c. waives the benefit of any law intended
for the advantage or protection of the
obligor; or
d. gives the holder an election to require
something to be done in lieu of payment
of money.
 Confession of judgment – a written
statement signed by the defendant, setting
forth the basis of liability and authorizing the
entry of judgment thereon.
 Kinds of confession of judgment
a. cognivit actiomen – literally means “he
has confessed action”. It is a written
confession of action by the defendant
acknowledging is indebtedness to the
plaintiff after the action has been filed. It
is given after the action is brought to
save expenses.
b. relicta verificationem – literally means
“his pleadings being abandoned.” It is
confession of judgment by withdrawal of
the defense.
Note: However, warrants of attorney to confess
judgment, are not authorized nor contemplated
by our law. They are void as against public
policy because they enlarge the field for fraud,
because under these instruments, the
promissory bargains away his right to a day in
court. The NIL does not sanction nor validated
any provision otherwise illegal.
Omissions and Provisions that do not affect
Negotiability (Sec. 6)
The validity and negotiable character of an
instrument are not affected by the fact that:
a. it is not dated; or
b. does not specify the value given, or that
any value had been given therefore; or
c. does not specify the place where it is
drawn or the place where it is payable;
or
d. bears a seal; or
e. designates a particular kind of current
money in which payment is to be made.
 if it is not dated, the instrument will be
considered to be dated as of the time it was
issued.
 consideration for the instrument is
presumed. (art. 154 NCC & sec. 25 NIL)
 sec. 73 specifies where presentment for
payment should be made when the place of
payment is not specified
Rules of construction:
a. Where the sum payable is expressed in
words and also in figures and there is a
 Far Eastern University
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discrepancy between the two, the sum deemed a holder for value to the extent
denoted by the words is the sum of his lien.
payable; but if the words are ambiguous  Effect of want of consideration: a matter
or uncertain, reference may be had to of defense as against any person not a
the figures to fix the amount; holder in due course; and partial failure of
b. Where the instrument provides for the consideration is a defense pro tanto,
payment of interest, without specifying whether the failure is an ascertained and
the date from which interest is to run, the liquidated amount or otherwise.
interest runs from the date of the Absence of consideration – total lack of any
instrument, and if the instrument is valid consideration for the contract is only a
undated, from the issue thereof; personal defense.
c. Where the instrument is not dated, it will Failure of consideration – failure or refusal or
be considered to be dated as of the time one party to do, perform or comply with the
it was issued; consideration agreed upon is also only a
d. Where there is a conflict between the personal defense.
written and printed provisions of the
instrument, the written provisions III. Transfer and Negotiation
prevail;
Types of transfers:
e. Where the instrument is so ambiguous
that there is doubt whether it is a bill or 1. Assignment - transfer of title to the
note, the holder may treat it as either at instrument, with the assignee generally
his election; taking only such title as his assignor has,
subject to all defenses available against his
f. Where a signature is so placed upon the
assignor;
instrument that it is not clear in what
capacity the person making the same 2. Negotiation - transfer of a negotiable
intended to sign, he is to be deemed an instrument from one person to another made
indorser; in such a manner as to constitute the
transferee the holder thereof
g. Where an instrument containing the
word "I promise to pay" is signed by two 3. By Operation of Law – such as by
or more persons, they are deemed to be succession, by insolvency.
jointly and severally liable thereon. (sec.
17) Distinctions between Negotiation and
Assignment
Consideration
NEGOTIATION ASSIGNMENT
 Presumption of consideration. - every 1. Refers only to 1. Refers generally to
negotiable instrument is deemed prima facie
negotiable an ordinary
to have been issued for a valuable
instruments; contract;
consideration; and every person whose
2. The transferee is a 2. The transferee is an
signature appears thereon to have become
holder; assignee;
a party thereto for value.
3. A holder in due 3. An assignee is
 Value - any consideration sufficient to course is subject subject to both real
support a simple contract. An antecedent or only to real and personal
pre-existing debt constitutes value; and is defenses; defenses;
deemed such whether the instrument is 4. Generally, an
payable on demand or at a future time. 4. A holder in due assignee merely
 Holder for value – one who has given a course may acquire steps into the shoes
valuable consideration for the instrument a better right than of the assignor;
issued or negotiated to him. that of a prior party 5. An assignor does
• What constitutes holder for 5. A general indorser not warrant the
value: warrants the solvency of prior
where value has at any time been given solvency of prior parties unless
for the instrument, the holder is deemed parties; expressly stipulated
a holder for value in respect to all parties or the insolvency is
who become such prior to that time. known to him;
6. An assignor is liable
• where the holder has a lien on 6. An indorser is not even without notice
the instrument arising either from liable unless there of dishonor;
contract or by implication of law, he is be presentment and

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notice of dishonor; 7. Governed by Arts.
7. Negotiation is 1624 to 1635 (on
governed y the NIL. assignment of
credits) of the Civil
Code.
Methods of negotiation
1. Order Instrument –
Indorsement and Delivery.
2. Bearer Instrument –
Delivery only.
Indorsement - legal transaction effected by the
writing of one's own name at the:
a. back of the instrument or
b. upon a paper (allonge) attached thereto
with or without additional words
specifying the person to whom or to
whose order the instrument is to be
payable whereby one not only transfers
legal title to the paper transferred but
likewise enters into an implied guaranty
that the instrument will be duly paid.
 General Rule: indorsement must be
of the entire instrument.
Exception: where instrument has been paid
in part, it may be indorsed as to the residue.
 Kinds of indorsement:
a. Special - specifies the person to whom
or to whose order, the instrument is to
be payable (sec. 34)
b. Blank - specifies no indorsee:
• Instrument is payable to bearer
and may be negotiated by delivery
(sec. 34)
• May be converted to special
indorsement by writing over the
signature of indorser in blank any
contract consistent with character of
indorsement.
c. Restrictive - when the indorsement
either:
i. Prohibits further negotiation of
the instrument; or
ii. Constitutes the indorsee the
agent of the indorser; or
iii. Vests the title in the indorsee in
trust for or to the use of some
other persons. But mere
absence of words implying
power to negotiate does not
make an indorsement restrictive.
• A restrictive indorsement
confers upon the indorsee the right:
a. To receive payment of the
instrument;
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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. (sec. 37)
 Such indorsement destroys the
negotiability of the instrument and
bars further negotiation to a holder
in due course.
d. Qualified - constitutes the indorser a
mere assignor of the title to the
instrument. (sec. 38)
• made by adding to the
indorser's signature words like "sans
recourse,” “without recourse",
"indorser not holder", "at the
indorser's own risk", etc.
• The purpose of this kind of
indorsement is to transfer title
without guaranteeing payment by
the primary party.
• It does not mean, however, that
the qualified indorser incurs no
liability at all. The effect is merely to
limit his liability. He is secondarily
liable for breach of is warranties as
an indorser under Sec. 65. Thus, he
is liable if the instrument is
dishonored by NON-ACCEPTANCE
or NON-PAYMENT due to:
a. forgery;
b. lack of good title to
the instrument indorsed;
c. lack of capacity to
contract on the part of prior
parties; or
d. the fact that the
instrument was valueless or
not valid at the time of the
indorsement which fact was
known to him.
e. Conditional - right of the indorsee is
made to depend on the happening of a
contingent event
• Party required to pay may
disregard the conditions.
• This kind of indorsement has no
effect on the further negotiation of
the instrument. The party required to
pay, if he chooses, may make
payment, disregarding the condition
 Far Eastern University
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without incurring any liability
because he is expressly authorized
to do so under Sec. 39. But the
person who received payment will
hold the proceeds subject to the
right of the conditional indorser.
f. Absolute - one by which indorser binds
himself to pay:
i. upon no other condition than
failure of prior parties to do so;
and
ii. upon due notice to him of such
failure.
g. Joint - indorsement of instrument
payable to 2 or more persons; all must
indorse in order for the transaction to
operate as a negotiation.
• Exceptions to the
rule requiring joint indorsement:
a. Where the payees or
indorsees are partners; and
b. Where the payee or
indorsee indorsing has
authority to indorse for the
others.
h. Irregular - a person who, not otherwise a
party to an instrument, places thereon
his signature in blank before delivery.
 Rules on Indorsements:
• Effect of transfer without
indorsement:
a. transfer vests in the transferee such
title as the transferor had therein
(assignment), and
b. the right to have the indorsement of
the transferor.
 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.
 Applicable only to order instruments
• Indorsement of a bearer
instrument: 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.
Note: The rule only applies to originally
bearer instruments. If it is originally a
BEARER instrument, it will always be a
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BEARER instrument. As opposed to an
original order instrument becoming
payable to bearer, if the same is
indorsed specifically, it can NO
LONGER be negotiated further by mere
delivery, it has to be indorsed.
• Striking out indorsements: 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.
 If the instrument is payable to bearer on
its face, then whether or not there are
indorsements on the back of the
instrument would be immaterial to the
title of the bearer, who is presumptively
the owner and holder by his mere
possession of such instrument. None of
the indorsement would be necessary to
it’s title since mere delivery would have
been sufficient to transfer title from one
holder to another.
 Where the instrument is payable to
order on its face, the situation is
different. First, the indorsement of a
special indorsee is necessary for the
further negotiation of the instrument.
Second, the last indorsement controls
the method of further negotiation.
• When prior party (reacquirer) may negotiate:
where an instrument is negotiated back to a
prior party, such party may reissue and
further negotiate the same. But he is not
entitled to enforce payment thereof against
any intervening party to whom he was
personally liable.
 In the following cases, a prior party
cannot further negotiate the instrument:
1. Where it is payable to the order of
a third person, and has been paid
by the drawer;
2. Where it was made or accepted
for accommodation and has been
paid by the party accommodated;
3. In other cases, where the
instrument is discharged when
acquired by a prior party.
Holders
Classes of holders:
1. simple holder (sec. 51)
2. holder for value (sec. 26)
3. holder in due course (sec.52, 57)
 Far Eastern University
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Holder in Due Course (1996, 1998, 2000 Bar
Exams)
 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.
 When title defective - The title of a
person who negotiates an instrument is
defective when he obtained the instrument
or any signature thereto, by:
a. fraud,
b. duress, or force and fear,
c. other unlawful means,
d. illegal consideration,
e. negotiation in breach of faith,
f. circumstances amounting to fraud.
g.
 What constitutes notice of defect. -
The person to whom it is negotiated must
have:
a. actual knowledge of the infirmity
or defect, or
b. knowledge of such facts that his
action in taking the instrument
amounted to bad faith. (sec. 56)
 Notice before full amount is paid -
where the transferee receives notice of any
infirmity in the instrument or defect in the title
of the person negotiating the same before
he has paid the full amount agreed to be
paid, he will be deemed a holder in due
course only to the extent of the amount paid
by him.
 When person not deemed a 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.
• Reasonable time,
what constitutes. - regard is to be had to
the
a. nature of the instrument,
b. the usage of trade or
business with respect to such
instruments, and the
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c. facts of the particular
case.
• Effect: 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.
 General Rule: every holder is
deemed prima facie to be a holder in due
course
Exception: when it is shown that the title of
any person who has negotiated the
instrument was defective, the burden is on
the holder to prove that he or some person
under whom he claims acquired the title as
holder in due course (shifting of burden of
proof).
Limitation: 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)
 Rights of a holder in due
course:
a. he may sue on the instrument in his own
name;
b. he may receive payment and if payment
is in due course, the instrument is
discharged.
c. holds the instrument free from any
defect of title of prior parties,
d. holds the instrument free from defenses
available to prior parties among
themselves, and
e. may enforce payment of the instrument
for the full amount thereof against all
parties liable thereon.
• Payment in due
course is payment made:
at or after the maturity of the instrument
to the holder thereof
in good faith and without notice that his
title is defective.
 Shelter Rule:
a. derives his title through a holder in due
course, and
b. 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.
 Rights of a Holder NOT in
Due Course
1. He may sue on the
instrument in his own name;
2. He may receive
payment and if the payment is in
due course, the instrument is
discharged;
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3. He is entitled to the
instrument but holds it subject to the
same defenses as if it were non-
negotiable; and
4. He has all the rights of
the holder in due course from whom
he derived his title in respect of all
parties prior to such holder, provided
he is not himself a party to any fraud
or illegality affecting the instrument.
V. Liabilities of Parties
Persons primarily liable on instrument: the
person who, by the terms of the instrument, is
absolutely required to pay the same. All other
parties are "secondarily" liable.
Classification of parties according to liability
Persons liable: Maker
In a Promissory Note Indorser
3. Persons
negotiating by
delivery
In a Bill of Exchange: Drawer
Acceptor
Indorsers
4. Persons
negotiating by
delivery
1. Parties Primarily Liable
a. Maker (Sec. 60)
• engages to pay
according to the tenor of the
instrument; and
• admits the
existence of the payee and his then
capacity to indorse at the time of the
making of the note.
• A person placing his
name on the face of a note is prima
facie a maker and liable as such;
and he is presumed to have acted
with care and to have signed the
instrument with full knowledge of its
contents.
b. Acceptor or Drawee (Sec. 62)
• engages to pay
according to the tenor of his
acceptance;
• admits:
1. the existence of the drawer,
2. the genuineness of his
signature and
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3. his capacity and authority to
draw the instrument; and
4. the existence of the payee
and his then capacity to
indorse.
Note: the drawee is not liable until he
accepts the instrument
• Where a check is certified by a
bank, it is equivalent to an
acceptance. Since certification is
equivalent to acceptance, a bank
which has certified a check whether at
the request of the holder or of a
drawer, has the same liabilities and
makes the same warranties as an
acceptor. It cannot, after certification,
question the genuineness of the
drawer’s signature. If it discovers that
such signature is forged subsequent
to certification but prior to payment, it
cannot refuse to pay on the check. If
its discovery comes after it has paid
the check, it cannot recover back what
it paid on the ground of mistaken
payment unless the holder is guilty of
fraud or negligence.
• If a drawee-bank accepts or
pays a check despite a stop payment
order from the drawer, through
oversight or otherwise, it cannot
refuse to pay the holder or recover
what has been paid; neither may it
debit the drawer’s account unless the
acceptance nor payment was made
prior to the receipt of the order.
2. Parties Secondarily Liable
a. Drawer (Sec. 61)
• admits the existence of the
payee and his capacity to indorse;
• engages that the instrument will
be accepted or paid by the party
primarily liable; and
• engages that if the instrument is
dishonored and proper proceedings
are brought, he will pay to the party
entitled to be paid.
b. General Indorser (Sec. 66)
• Warrants:
1. genuineness of the
instrument;
2. his good title to it;
3. capacity to contract of prior
parties; and
4. instrument is valid and
subsisting.
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• engages that the instrument will 2. Indorses the delivery;

be accepted or paid by the party instrument after its 3. Liable to the payee
primarily liable; and delivery to the payee; and subsequent
• engages that if the instrument is and parties unless he signs
dishonored and proper proceedings 3. Liable only to for the accommodation
are taken, he will pay to the party parties subsequent to of the payee in which
entitled to be paid. him case he is liable only
c. Irregular Indorser – a person, not to all parties
otherwise a party to an instrument, subsequent to the
places his signature thereon in blank payee.
before delivery.
Rules: 3. Parties with Limited Liability (sec. 65;
• If instrument payable to the Metropol Financing v. Sambok, 120 SCRA
order of a 3rd person, he is liable to 864)
the payee and subsequent parties. a. Qualified Indorser - warrants
• If instrument payable to order of that:
maker or drawer, he is liable to all  instrument is genuine and in all
parties subsequent to the maker or respects what it purports to be;
drawer.  he has good title to it;
• If he signs for accommodation of  all prior parties had capacity to
the payee, he is liable to all parties contract;
subsequent to the payee.  he has no knowledge of any fact
which would impair the validity of the
Distinctions: instrument or render it valueless.
b. Persons Negotiating by
Primary Party Secondary Party Delivery
1. Unconditionally 1. Conditionally  warranties same as those of
Bound; bound; qualified indorsers; and
2.Absolutely required 2. Undertakes to pay
to pay upon the only after certain  warranties extend to immediate
maturity of the conditions have been transferee only.
instrument. fulfilled:
a. due presentment Liability Warranty
for payment or 1. To pay a sum 1. No obligation to
acceptance to primary certain. pay.
party; 2. Requires 2. Notice of Dishonor
b. dishonor by such Notice of is not a requirement.
party; and Dishonor. 3. Action may be
c. the taking of 3. Action can be brought anytime.
proceedings brought only
required by law on maturity of
after dishonor. instrument.

Indorser Drawer
1. A party to either a 1. A party only to a bill; Negotiating by Mere
note or a bill; 2. The drawer makes delivery or by Qualified General Indorser
2. Does not make any such admission; Indorsement
admission regarding 3. Makes no 1. No secondary liability; 1. With secondary
the existence of the warranties, but he liability;
payee and his capacity engages to pay after 2. Warrants that he has 2. Warrants that the
to indorse; and certain conditions are no knowledge of any instrument is, at
3. Has warranties. complied with. fact, which would the time of his
impair the validity of indorsement,
(2005 Bar Exam) the instrument or valid and
GENERAL IRREGULAR render it valueless. subsisting.
INDORSER INDORSER
1. Makes either a 1. Always makes a 4. Other parties who may be liable:
blank or special blank indorsement;
indorsement; 2. Indorses before its

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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 is
liable;
2. The forger is liable;
3. One who indorses in a separate instrument
(allonge) is liable;
4. One who signs his assumed or trade name
is liable; and
5. A person negotiating by delivery (as in the
case of a bearer instrument) is liable to his
immediate indorsee.
Requisites for an Agent to escape liability:
1. must be duly authorized;
2. add words to his signature indicating that he
signs as an agent, that is, for or on behalf of
a principal, or in a representative capacity;
and
3. disclose his principal.
 A signature by “procuration”
operates as notice that the agent has but a
limited authority to sign, and the principal is
bound only in case the agent in so signing
acted within the actual limits of his authority.
(sec. 21)
 Indorsement or assignment of the NI
by a corporation or by an infant passes the
property therein, notwithstanding that from
want of capacity, the corporation or infant
may incur no liability thereon. (sec. 22)
Accomodation Party (1996, 1998, 2005 Bar
Exams)
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
 Liability: 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 accommodation party.
 Effects:
1. accommodation party is
generally regarded as a surety for
the party accommodated;
2. When accommodation party
makes payment to holder of the
note, he has the right to sue the
accommodated party for
reimbursement.
 Rights of accommodation
parties as against each other: the other may
demand contribution from his co-
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accommodation party without first directing
his action against the principal debtor
provided:
1. he made the payment by virtue of
judicial demand; or
2. the principal debtor is insolvent.
Note: A corporation cannot act as an
accommodation party. The issuance or
indorsement of negotiable instrument by a
corporation without consideration and for the
accommodation of another is ultra vires.
(Crisologo v. CA, 117 SCRA 594).
Order of liability of indorsers:
1. among themselves – indorsers are liable
prima facie in the order in which they
indorse; but evidence is admissible to show
that, as between or among themselves, they
have agreed otherwise (sec. 68)
2. to the holder – indorsers are liable in any
order
Defenses (1996, 1998, 2004, 2005 Bar Exams)
Kinds:
1. Real/Absolute Defenses - those that attach
to the instrument itself and are available
against all holders, whether in due course or
not.
Examples:
1. Alteration;
2. Non-delivery of incomplete
instrument;
3. Duress amounting to forgery;
4. Fraud in factum or fraud in esse
contractus;
5. Minority;
6. Marriage in the case of a wife;
7. Insanity where the insane
person has a guardian appointed by the
court;
8. Ultra vires acts of a corporation,
where the corporation is absolutely
prohibited by its charter or statute from
issuing any commercial paper under any
circumstances;
9. Want of authority of agent;
10. Execution of instrument
between public enemies;
11. Illegality of contract where it is
the contract or instrument itself which is
expressly made illegal by statute; and
12. Forgery.
2. Personal/Equitable Defenses – those which
are available only against a person not a
holder in due course or a subsequent holder
who stands in privity with him.
Examples:
 Far Eastern University
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1. Absence or failure of contract. It implies that does not prevent a

consideration, partial or total; the person did not contract.
2. Want of delivery of complete know what he was
instrument; signing. But where the
3. Insertion of wrong date in an signer by the exercise
instrument, where it is payable at a fixed of reasonable
period after date and it is issued undated diligence could have
or where it is payable at a fixed period discovered the nature
after sight and the acceptance is of the instrument, the
undated; fraud cannot be
4. Filling up of blank contrary to considered a real
authority given or not within reasonable defense, as where a
time, where the instrument is delivered; person, who can read,
5. Fraud in inducement; signed a note but
6. Acquisition of instrument by failed to read it.
force, duress, or fear;
7. Acquisition of the instrument by  Effects of Defenses:
unlawful means; 1. Complete and undelivered instrument
8. Acquisition of the instrument for
• as between immediate parties and as
an illegal consideration;
regards a remote party other than a
9. Negotiation in breach of faith;
holder in due course, the delivery must
10. Negotiation under
be authorized in order to be effectual
circumstances that amount to fraud;
• where the instrument is in the hands of a
11. Mistake;
holder in due course, a valid delivery
12. Intoxication (according to better
thereof by all parties prior to him so as to
authority);
make them liable to him is conclusively
13. Ultra vires acts of corporations
presumed
where the corporation has the power to
issue negotiable paper but the issuance • where the instrument is no longer in the
was not authorized for the particular possession of a party whose signature
purpose for which it was issued; appears thereon, a valid and intentional
14. Want of authority of agent where delivery by him is presumed until the
he has contrary is proved
15. apparent authority;
16. Insanity where there is no notice 2. Incomplete but delivered instrument (1997,
of insanity on the part of the one 2004 Bar Exams)
contracting with the insane person; and • where the instrument is wanting in any
17. Illegality of contract where the material particular, the person in
form or consideration is illegal. possession thereof has a prima facie
authority to complete it by filling up the
Fraud in Factum Fraud in Inducement blanks therein.
1. It exists in those 1. It is that which • it must be filled up strictly in accordance
cases in which a related to the quality, with the authority given and within a
person, without quantity, value or reasonable time
negligence, has signed character of the • if any such instrument, after completion,
an instrument which consideration of the is negotiated to a holder in due course, it
was in fact a instrument. In this is valid and effectual for all purposes in
negotiable instrument, case, the signer is led his hands, and he may enforce it as if it
but was deceived as to by deception to had been filled up strictly in accordance
the character of the execute what he with the authority given and within a
instrument and without knows is a negotiable reasonable time.
knowledge of its, as instrument. It implies 3. Incomplete and undelivered instrument
where a not was that the signer knew • it will not, if completed and negotiated
signed by one under what he was signing without authority, be a valid contract in
the belief that he was but that he was the hands of any holder, as against any
signing as a witness to induced by fraud to person whose signature was placed
a deed. sign. thereon before delivery.
2. This kind of fraud is 2. Such type of fraud is • However, subsequent indorsers are
a real defense only a personal liable.
because there is no defense because it 4. Forgery (1995, 2006 Bar Exams)

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• counterfeit making or fraudulent c. Party

alteration of any writing, which may who made the forgery is liable.
consist of: Bearer Instrument
1. signing of another’s name with a.
intent to defraud; or Maker is not liable.
2. alteration of an instrument in the b.
name, amount, name of payee, etc.
Indorsers may be made liable to
with intent to defraud.
those persons who obtain title
• Effect: signature is wholly inoperative, through their indorsements.
and no right to retain the instrument, or c. Party
to give a discharge therefore, or to who made the forgery is liable.
enforce payment thereof against any 2. Payee’s signature forged
party thereto, can be acquired through
Order Instrument
or under such signature
a.
• Exception: unless the party against
Maker and payee not liable
whom it is sought to enforce such right is
precluded from setting up the forgery or
b.
want of authority. Indorsers subsequent to the
forgery is liable.
• Cut-Off Rule c.
General Rule: Parties prior to the forged
Party who made the forgery is
signature are cut-off from the parties
liable
after the forgery in the sense that prior
Bearer Instrument
parties cannot be held liable and can
raise the defense of forgery. The holder a. Maker is liable. Indorsement
can only enforce the instrument against is not necessary to title and the
parties who became such after the maker engages to pay holder.
forgery. b. Party who made the forgery
Exception: When the prior parties are is liable
precluded from setting up the defense of 3. Indorser’s signature forged
forgery. Order Instrument
Persons precluded from setting up the a. Maker, payee, and
defense of forgery are: indorser who signature was
1. Those who by their acts, forged is not liable.
silence, or negligence, are estopped b. Indorsers subsequent
from setting up the defense of to forgery are liable because of
forgery; their warranties.
2. Those who warrant or admit c. Party who made the
the genuineness of the signature in forgery is liable.
question. These include acts or Bearer Instrument
omissions that amount to ratification, a. Maker is liable. Indorsement is
express or implied.
not necessary to title and the
Note: Persons precluded from setting up
maker engages to pay holder.
the defense of forgery may still recover
damages under the NCC provisions on
b. Indorser whose signature was
quasi-delicts. forged is not liable
c. Party who made the forgery is
• Rules on Forgery:
liable.
A. Promissory Notes
B. Bill of Exchange
1. Maker’s signature forged
1. Drawer’s signature forged
Order Instrument
Order Instrument
a. Maker
a. Drawer is not liable.
is not liable because he never
became a party to the b. Drawee is liable if it
instrument. paid (nor recourse to drawer)
b. Indorse because he admitted the
genuineness of the drawer’s
rs subsequent to forgery are
signature. Drawee cannot
liable because of their
recover from the collecting bank
warranties.
because there is no privity

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between the collecting bank and c. Indorser whose signature was

the drawer. There is no warranty forged is liable because
as to the signature of the indorsement is not necessary to
drawer. (Associated Bank v. CA) pass title.
c. Indorsers subsequent d. Party who made the forgery is
to forgery are liable. liable.
d. Party who made the
forgery is liable 5. Alteration (1995, 1996, 1999 Bar Exams)
Bearer Instrument
• Effect: the instrument is avoided
a. Drawer is not liable
• Exceptions:
b. Drawee is liable if it 1. against a party who has himself
paid. Drawee cannot recover made, authorized, or assented to
from the collecting bank the alteration
because it is bound to known 2. subsequent indorsers
the drawer’s signature since the 3. holder in due course not a party to
latter is its depositor. the alteration - he may enforce
c. Party who made the payment according to its original
forgery is liable. tenor
2. Payee’s signature forged • Changes constituting material
Order Instrument alteration:
a. Drawer, drawee and a. date;
payee not liable. Cut-off rule b. sum payable, either for
applies. principal or interest;
b. Indorsers subsequent c. time or place of
to forgery are liable. payment;
c. Party who made the d. number or relations of
the parties;
forgery is liable
e. medium or currency in
Bearer Instrument
which payment is to be made;
a. Drawer is liable. His
f. that which adds a place
indorsement is not necessary to of payment where no place of
pass title. payment is specified; and
b. Drawee is liable. No g. any other change or
privity between drawer and addition which alters the effect
payee because indorsement of of the instrument in any respect.
payee is not necessary (Ang Note: a material alteration is one
Tek Lian case, 87 SCRA 383) that alters the effect of the
c. Payee is not liable instrument; one which changes the
d. Collecting bank is items required to be stated under
liable because of warranty. Sec. 1, NIL.
e. Party who made the • Spoliation – alteration made by a
forgery is liable. stranger.
3. Indorser’s signature forged • The general rule denies the drawee
Order Instrument bank’s right to charge against the
a. Drawer, payee and drawer’s account the amount of an
indorser whose signature was altered check. However, the latter’s
forged are not liable. negligence, before or after the alteration,
b. Drawee is liable if it may estop him from setting such
alteration as against an innocent drawee
paid.
bank who has paid the check.
c. Indorsers subsequent
to forgery are liable.
• In cases of altered checks and
checks with forged indorsements, the
d. Party who made the
drawee bank must notify and return
forgery is liable. them to the collecting bank before 4:00
Bearer Instrument p.m. of the next day of clearing, but the
a. Drawer is liable. Indorsement is drawee bank may still return them even
not necessary to pass title. after such time provided he does so
b. Drawee is liable. within 24 hours from its discovery of the

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alteration or forged instruments so that
recovery of the amount may be had.
BUT, in no event beyond the period
fixed or provided by law for filing of a
legal action by the returning bank
against the bank sending the same.
Note: Alteration is only a partial real
defense because a holder in due course
can still enforce it according to its
original tenor.
VI. Presentment for Payment
Presentment for payment – the presentation of
an instrument to the person primarily liable for
the purpose of demanding and receiving
payment.
General Rules:
• presentment for payment to charge
persons primarily liable is not necessary
• presentment for payment to charge
persons secondarily liable is necessary
Exceptions:
a. drawer - where he has no right to
expect or require that the drawee or
acceptor will pay the instrument (sec. 79)
b. 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.
c. when dispensed:
i. where, after the exercise of
reasonable diligence,
presentment as required cannot
be made;
ii. where the drawee is a fictitious
person;
iii. by waiver of presentment,
express or implied. (sec. 82)
d. when the instrument has been
dishonored by non-acceptance (sec. 151)
Sufficiency of presentment.
It must be:
1. made by the holder or any
person authorized to receive
payment on his behalf;
2. at a reasonable hour on a
business day;
3. at a proper place;
4. to the person primarily liable or if
he is absent or inaccessible, to any
person found at the place where the
presentment is made.
How made:
1. personal demand for payment at the
proper place; and
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2. readiness to exhibit the instrument if
required, and to receive payment and to
surrender the instrument if the debtor is
willing to pay.
• Purpose of exhibition:
To enable the debtor to:
1. determine the genuineness of the instrument
and the right of the holder to receive
payment; and
2. to enable him to reclaim possession upon
payment.
• When exhibition excused:
1. when debtor does not demand to see the
instrument but refuses payment on some
other grounds, and
2. when the instrument is lost or destroyed.
When made:
• where the instrument is payable at a
fixed or determinable future time,
presentment must be made on the day it
falls due
• where it is payable on demand:
a. promissory note: presentment must
be made within a reasonable time
after its issue
b. bill of exchange: presentment for
payment will be sufficient if made
within a reasonable time after the
last negotiation thereof
• a check must be presented for payment
within a reasonable time after its issue or the
drawer will be discharged from liability
thereon to the extent of the loss caused by
the delay.
Time of maturity:
• every negotiable instrument is payable
at the time fixed therein without grace
• when the day of maturity falls upon a
Sunday or a holiday, the instruments are to
be presented for payment on the next
succeeding business day
• when the day of maturity falls upon a
Saturday:
 Instrument is payable at a fixed
or determinable future time (time
instrument) - presented for payment is
on the next succeeding business day
 instruments is payable on
demand - at the option of the holder, be
presented for payment:
a. before 12:00 noon on
Saturday when that entire
day is not a holiday or
b. the next succeeding
business day.
How computed:
 excluding the day from which the time is
to begin to run, and by including the date
of payment
 Far Eastern University
Institute of Law
 applies to instruments which are
payable at a fixed period after date, after
sight, or after that happening of a
specified event.
Proper place for presentment:
a. Where a place of payment is
specified in the instrument and it is there
presented;
b. Where no place of payment is
specified but the address of the person
to make payment is given in the
instrument and it is there presented;
c. Where no place of payment is
specified and no address is given and
the instrument is presented at the usual
place of business or residence of the
person to make payment;
d. In any other case if presented to
the person to make payment wherever
he can be found, or if presented at his
last known place of business or
residence.
When delay in presentment excused – delay
is caused by circumstances beyond the control
of the holder and not imputable to his default,
misconduct, or negligence. When the cause of
delay ceases to operate, presentment must be
made with reasonable diligence.
VII. Presentment for Acceptance
Presentment for acceptance – the production
or exhibition of a bill of exchange to the drawee
for his acceptance or payment
General Rule: presentment for acceptance is not
necessary to render any party to the bill liable.
Exception: presentment for acceptance must be
made:
a. Where the bill is payable after sight, or
where presentment for acceptance is
necessary in order to fix the maturity of
the instrument; or
b. Where the bill expressly stipulates that it
shall be presented for acceptance; or
c. Where the bill is drawn payable
elsewhere, then at the residence or
place of business of the drawee. (sec.
143)
Note: in all the above cases, the holder must
either present the bill for acceptance or
negotiate it within a reasonable time; otherwise,
the drawer and all indorsers are discharged.
How made:
1. made by or on behalf of the holder;
2. at a reasonable hour;
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3. on a business day;
4. before the bill is overdue and within
reasonable time;
5. to the drawee or some person
authorized to accept or refuse
acceptance on his behalf.
Days presentment may be made. If date of
presentment is:
a. Sunday or a holiday – must be made on
the next succeeding business day
b. Saturday – before 12:00 noon on
Saturday provided that it is not a holiday.
When delay for presentment excused:
a. bill is drawn payable elsewhere than at
the place of business or the residence of
the drawee.
b. holder has no time, with the exercise of
reasonable diligence, to present the bill
for acceptance before presenting it for
payment on the day that it falls due.
Effect: does not discharge the drawers and
indorsers.
Where presentment is excused:
a. Where the drawee is dead, or has
absconded, or is a fictitious person or a
person not having capacity to contract
by bill.
b. Where presentment can not be made
after the exercise of reasonable
diligence
c. Where, although presentment has been
irregular, acceptance has been refused
on some other ground.
Note: bill may be treated as dishonored by
non-acceptance.
Duty of holder where bill not accepted. -
where a bill is duly presented for acceptance
and is not accepted within the prescribed time
(24 hours – sec. 136), 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.
VIII. Acceptance
Acceptance: the signification by the drawee of
his assent to the order of the drawer. It is the act
by which the drawee manifests his consent to
comply with the request contained in the bill of
exchange directed to him.
How made :
1) must be in writing
2) signed by the drawee
3) must not express that the drawee will
perform his promise by any other means
than the payment of money.
• the holder of the bill presenting the same for
acceptance may require that the acceptance
be written on the bill, and if such request is
refused, may treat the bill as dishonored.
 Far Eastern University
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• where an acceptance is written on a paper
other 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.
Period for drawee to accept - allowed 24 hours
after presentment in which to decide whether or
not he will accept the bill; if acceptance is given,
it dates as of the day of presentation.
Constructive/Implied acceptance: where a
drawee refuses within 24 hours after delivery or
within such other period as the holder may allow,
to return the bill accepted or non-accepted to the
holder, he will be deemed to have accepted the
same.
Note: same effect if the drawee destroys the
instrument.
Kinds:
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.
i. Local - an acceptance to pay
only at a particular place.
ii. Qualified as to time
iii. The acceptance of some one or
more of the drawees but not of
all.
3. Constructive
Rights of parties as to qualified acceptance.
• Holder: he may refuse to take a
qualified acceptance and if he does not
obtain an unqualified acceptance, he may
treat the bill as dishonored by non-
acceptance.
• Drawer or indorser: when he
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 (implied assent).
Effect of taking a qualified acceptance: the
drawer 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.
Other rules of acceptance:
• a bill may be accepted before it has
been signed by the drawer, or while
otherwise incomplete, or when it is overdue,
or after it has been dishonored by a previous
refusal to accept, or by non payment
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• when a bill payable after sight is
dishonored by non-acceptance and the
drawee subsequently accepts it, the holder,
in the absence of any different agreement, is
entitled to have the bill accepted as of the
date of the first presentment.
• an unconditional promise in writing
to accept a bill before it is drawn is
deemed an actual acceptance in favor of
every person who, upon the faith
thereof, receives the bill for value.
• where a check is certified by the
bank on which it is drawn, the
certification is equivalent to an
acceptance.
Effect: the drawer and all indorsers are
discharged from liability thereon.
Acceptance for Honor - an undertaking by a
stranger to a bill after protest for the benefit of
any party liable thereon or for the honor of the
person for whose account the bill is drawn which
acceptance inures also to the benefit of all
parties subsequent to the person for whose
honor it is accepted, and conditioned to pay the
bill when it becomes due if the original drawee
does not pay it.
 Requisites:
1. the bill must have been
protested for dishonor by non-
acceptance or for better security;
2. the acceptor for honor must be a
stranger and not a party already
liable on the instrument;
3. bill must not be overdue;
4. acceptance for honor must be
with the consent of the holder of the
instrument.
 Formalities:
1. must be in writing;
2. must indicate that it is an
acceptance for honor;
3. signed by the acceptor for
honor;
4. must contain an express or
implied promise to pay money;
5. the accepted bill for honor must
be delivered to the holder.
IX. Notice of Dishonor and Protest
Notice of Dishonor - notice given by the holder
or his agent to a party or parties secondarily
liable that the instrument was dishonored by
non-acceptance by the drawee of a bill, or by
non-payment by the acceptor of a bill or by non-
payment by a maker of a note.
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- If such notice is given by a notary public, it is
called PROTEST.
 Effect of failure to give notice:
parties secondarily liable are discharged
 Requisites:
1. Given by holder or his agent, or
by any party who may be compelled by
the holder to pay;
2. Given to secondary party or his
agent;
3. Given within the periods
provided by law;
4. Given at the proper place.
 When notice of dishonor dispensed with:
1. when party to be notified knows
about the dishonor, actually or
constructively;
2. if waived; and
3. when after due diligence, it
cannot be given.
 How given:
1. by bringing verbally or
2. by writing to the knowledge of the person
liable the fact that a specified instrument,
upon proper proceedings taken, has not
been accepted or has not been paid, and
that the party notified is expected to pay it.
 To whom given:
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) –
indorsers.
Note: Notice must be given to persons
secondarily liable. Otherwise, such
parties are discharged. Notice may be
given to the party himself or to his agent.
 By whom given:
1. the holder
2. another on behalf of the holder
3. any party to the instrument who may be
compelled to pay it to the holder, and who
would have a right of reimbursement from
the party to whom notice is given.
 Notice of dishonor given by or on behalf
of a holder inures to the benefit of:
a. all parties prior to the holder,
who have a right of recourse against
the party to whom the notice is
given; and
b. all holders subsequent to the
holder giving notice.
 Notice of dishonor given by or on behalf of a
party entitled to give notice inures to the
benefit of:
a. the holder; and
b. all parties subsequent to the
party to whom notice is given.
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 Where an instrument is dishonored in the
hands of an agent, he can do either of the
ff.:
a. directly give notice to persons
secondarily liable thereon; or
b. give notice to his principal. In
such case, he must give notice
within the time allowed by law as if
he were a holder.
 A party giving notice is deemed to have
given due notice where:
a. the notice of dishonor is duly
addressed, and
b. deposited in the post-office,
even when there is miscarriage of
mail.
 Where a party receives notice of dishonor,
he has, after the receipt of such notice, the
same time for giving notice to antecedent
parties that the holder has after the
dishonor.
 Notice may be waived either before the time
of giving notice, or after the omission to give
due notice. Waiver may be expressed or
implied.
 As to who are affected by an express waiver
depends on where the waiver is written:
a. if it appears in the body or on
the face of the instrument, it binds
all parties; but
b. if it is written above the
signature of an indorser, it binds him
only.
 Notice of dishonor is not required to be given
to the drawer in any of the ff. 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 will honor the instrument;
5. where the drawer has
countermanded payment.
 Notice of dishonor is not required to be given
to an indorser in the ff. 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.
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 If an instrument is not accepted by the
drawee, there is no sense presenting it
again for payment, and notice of dishonor
must at once be given. If there was
acceptance, presentment for payment is still
required and if payment is refused, there is a
need for notice of dishonor.
 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.
Dishonor by Non-Payment
When instrument dishonored by non-payment:
a. it is duly presented for payment
and payment is refused or cannot be
obtained; or
b. presentment is excused and the
instrument is overdue and unpaid.
Effect of dishonor: an immediate right of
recourse to all parties secondarily liable thereon
accrues to the holder.
Dishonor by Non-Acceptance
Instances:
a. When it is duly presented for
acceptance and such an acceptance is
refused or can not be obtained; or
b. When presentment for
acceptance is excused and the bill is not
accepted (sec. 149)
Effect: an immediate right of recourse
against the drawer and indorsers accrues to
the holder and no presentment for payment
is necessary.
Note: where a bill is duly presented for
acceptance and is not accepted within the
prescribed time (24 hours), the person
presenting it must treat the bill as
dishonored by non-acceptance.
When Instrument Considered to be Dishonored
a. If it is not accepted when
presented for acceptance; or
b. If it is not paid when presented
for payment at maturity; or
c. If presentment is excused or
waived and the instrument is past due
and unpaid.
Protest - the formal instrument executed usually
by a notary public certifying that the legal steps
necessary to fix the liability of the drawee and
the indorsers have been taken.
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 Effect of waiver: where protest is waived,
presentment and notice of dishonor are also
deemed waived. But where the notice of
dishonor is waived, presentment is not
waived.
 Applicability: protest is necessary only in
case of foreign bills of exchange which have
been dishonored by non-acceptance or non-
payment, as the case may be. If it is not so
protested, the drawer and indorsers are
discharged.
 Foreign Bill of Exchange:
1. Drawn in the Philippines but payable outside
the Philippines.
2. Payable in the Philippines but drawn outside
the Philippines.
 Protest may be made by::
1. a notary public; or
2. any respectable resident of the place where
the bill is dishonored, in the presence of 2 or
more credible witnesses.
Protest for better security is one made by the
holder of a bill after it has been accepted but
before it matures, against the drawer and
indorsers, where the acceptor has been
adjudged a bankrupt or an insolvent, or has
made an assignment for the benefit of the
creditors.
X. Discharge
Discharge of instrument - a release of all
parties, whether primary or secondary, from the
obligations arising thereunder. It renders the
instrument without force and effect and,
consequently, it can no longer be negotiated.
Instances:
1. By payment in due course by or on behalf of
the principal debtor;
2. Payment by accommodated party;
3. Intentional cancellation by the holder;
4. By any 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.
By any act which would discharge a simple
contract:
1. Payment or performance;
2. Loss of the thing due;
3. Condonation or remission;
4. Confusion or Merger;
5. Compensation;
6. Novation;
7. Annulment or Rescission;
8. Fulfillment of a resolutory condition;
9. Prescription.
When persons secondarily liable on the
instrument are discharged:
1. By any act which discharges the instrument;
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2. By the intentional cancellation of his
signature by the holder;
3. By the discharge of a prior party;
4. By a valid tender of payment made by a
prior party;
5. By the release of the principal debtor, unless
the holder’s right of recourse against the
party secondarily liable is expressly
reserved;
6. By any agreement binding upon the holder
to extend the time of payment or to postpone
the holder’s right to enforce the instrument.
 In the following cases, the agreement to
extend the time of payment does not
discharge a party secondarily liable:
a. where the extension of time is
consented to by such party;
b. where the holder expressly
reserves his right of recourse
against such party.
 Payment at or after maturity by a party
secondarily liable does not discharge the
instrument. It only cancels his own liability
and that of the parties subsequent to him.
Effects of Renunciation:
1. A renunciation in favor of a secondary party
may be made by the holder before, at or
after maturity of the instrument. Effect: only
such secondary party is discharged and all
parties subsequent to him but the instrument
itself remains in force.
2. A renunciation in favor of the principal debtor
may be effected at or after maturity. Effect:
the instrument is discharged and all parties
thereto provided the renunciation is made
unconditionally and absolutely.
Note: In either case, renunciation does not
affect the rights of a holder in due course without
notice.
 Cancellation of an instrument includes
tearing, erasure, obliteration, or burning. It
is not limited to writing of the word
‘cancelled”, or “paid”, or drawing of criss-
cross lines across the instrument.
Payment for Honor - payment made by a
person, whether a party to the bill or not, after it
has been protested for non-payment, for the
benefit of any party liable thereon or for the
benefit of the person for whose account it was
drawn.
 Requisites:
1. the bill has been dishonored by non-
payment;
2. it has been protested for non-payment;
3. payment supra protest (another term for
payment for honor because prior protest for
non-payment is required) is made by any
person, even by a party thereto;
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4. the payment is attested by a notarial act of
honor which must be appended to the
protest or form an extension of it;
5. the notarial act must be based on the
declaration made by the payor for honor or
his agent of his intention to pay the bill for
honor and for whose honor he pays.
Note: If the above formalities are not complied
with, payment will operate as a mere voluntary
payment and the payor will acquire no right to
full reimbursement against the party for whose
honor he pays.
 In payment for honor, the payee cannot
refuse payment. If he refuses, he cannot
recover from the parties who would have
been discharged had he accepted the same.
In acceptance for honor, the holder’s
consent is necessary.
 The payor for honor is given the right to
receive both the bill and the protest
obviously to enable him to enforce his rights
against the parties who are liable to him.
INSURANCE
(P.D. No. 1460)
I. INTRODUCTION
Laws governing Insurance:
a. Insurance Code of 1978;
b. Civil Code, Art. 2011 and other
articles;
c. Family Code (E.O 209);
d. Other Special laws.
General concepts
Contract of Insurance - an agreement whereby
one undertakes for a consideration to indemnify
another against loss, damage or liability arising
from an unknown or contingent event.
Contract of Suretyship – an agreement whereby
a party called the surety guarantees the
performance by another called the principal or
obligor of an obligation or undertaking in favor of
a third party called the obligee. It shall be
deemed to be an insurance contract if made by
a surety who or which, as such, is doing an
insurance business.
“Doing an insurance business or transacting an
insurance business”
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 a mere incident to any other
legitimate business of a surety
3. doing any insurance business, including
a reinsurance business
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4. doing or proposing to do any business in 8. Onerous - there is a valuable consideration

substance equivalent to any of the
foregoing
NOTE: Article 2011 of the Civil Code states that
the contract of insurance is governed by special
laws and that matters not expressly provided for
in the special laws shall be regulated by the Civil
Code. (Villanueva, Commercial Law Reviewer)
called the premium.
9. Conditional - subject to conditions such as the
happening of the event insured against, payment
of premium, etc.
10. Since insurance is a contract, as such, it is
property in legal contemplation

Types of Insurance Contracts Five Cardinal Principles in Insurance

1. LIFE INSURANCE 1. Insurable Interest
a. individual life (Secs. 179–183, 227) 2. Principle of Utmost Good Faith
b. group life (Secs. 50, last par., 228) 3. Contract of indemnity
c. industrial life (Secs. 229–231) 4. Contract of adhesion (Fine Print Rule)
2. NON-LIFE INSURANCE 5. Principle of Subrogation
a. Marine (Secs. 99–166)
b. Fire (Secs. 167–173)  Insurable Interest - that interest which
c. Casualty (Sec. 174) the law requires the owner of the insurance
3. CONTRACTS OF SURETYSHIP OR policy to have in the person or thing insured.
BONDING (Secs. 175–178)
Note:
 Principle of Utmost Good Faith - An
insurance contract requires utmost good
1. health and accident insurance are either
faith (uberrimae fidei) between the parties.
covered under life or casualty insurance
The applicant is enjoined to disclose any
2. marine, fire and the property aspect of
material fact which he knows or ought to
casualty insurance are also referred to as
know.
property insurance
 Contract of Indemnity - It is the basis of
Nature and Characteristics all property insurance. The insured who has
1. Risk distributing device – The device of insurable interest over a property is entitled
insurance serves to distribute the risk of to recover the amount of actual loss
economic loss among as many as possible of sustained and the burden is upon him to
those who are subject to the same kind of risk. establish the amount of such loss.
By paying a pre-determined amount into a • Rules:
general fund out of which payment will be made 1. applies only to property insurance
for an economic loss of a defined type, each except when the creditor insures the life
member contributes to a small degree toward of his debtor
compensation for losses suffered by any 2. life insurance is not a contract of
member of the group. indemnity
2. Consensual – it Is perfected by the meeting of 3. insurance contracts are neither wagering
the minds of the parties nor gambling contracts
3. Voluntary – the parties may incorporate such Reason: it is not a contract of chance and is not
terms and conditions as they may deem used for profit
convenient.
4. Aleatory – one of the parties or both WAGERING CONTRACT OF
reciprocally bind themselves to give or to do CONTRACT INSURANCE
something in consideration of what the other The parties The parties seek to
shall give or do upon the happening of an event contemplate gain distribute the
which is uncertain, or which is to occur at an through mere possible loss by
indeterminate time (Article 2010, NCC). chance reason of mischance
5. Contract of Indemnity – Except life and Gambler courts Insured seeks to
accident insurance, a contract of insurance is a misfortune avoid misfortune
contract of indemnity whereby the insurer Tends to increase Tends to equalize
promises to make good only the loss of the the inequality of fortune
insured. fortune
6. Personal Contract - insurer considers the Essence of gambling What one insured
personal qualifications of the insured in is that whatever one gains is not at the
approving the contract. wins from a wager is expense of another
7. Bilateral - both parties are bound to do lost by the other insured
something. wagering party
As soon as the party The purchase of

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makes a wager, he insurance does not
creates a risk of loss create a new and
to himself where no non – existing risk of
such risk previously loss to the purchase
existed
 Contract of Adhesion or Fine Print Rule -
most of the terms of the contract do not
result from mutual negotiations between the
parties as they are prescribed by the insurer
in printed form to which the insured “adhere”
if he chooses but which he cannot change.
Hence, in case of doubt, the contract shall
be interpreted strictly against the insurer and
liberally in favor of the insured (Rizal Surety
and Insurance Co. v. C.A.,336 SCRA 12
[2000].
 Principle of Subrogation - A process of
legal substitution where the insurer steps
into the shoes of the insured and he avails of
the latter’s rights against the wrongdoer at
the time of loss.
The principle of subrogation is a normal
incident of indemnity insurance as a legal
effect of payment; it inures to the insurer
without any formal assignment or any
express stipulation to that effect in the
policy. Said right is not dependent upon nor
dos it grow out of any private contract.
Payment to the insured makes the insurer a
subrogee in equity (Malayan Insurance Co.
Inc., v. CA, 165 SCRA 536)
• Purposes:
1. to make the person who caused the loss
responsible for it
2. to prevent the insured from receiving
double recovery from the wrongdoer and
the insurer
- it is a method of implementing
the principle of indemnity
3. to prevent tortfeasors from being free
from liability and is thus founded on
public policy.
• Rules:
1. Applicable only to property insurance.
Reason: the value of human life is
regarded as unlimited and therefore no
recovery from a third party can be
deemed adequate to compensate the
insured’s beneficiary
2. The insurer can only recover from the
third person what the insured could have
recovered.
• No subrogation in the following
instances:
1. Where the insured by his own act
releases the wrongdoer or third party
liable for the loss or damage
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2. Where the insurer pays the insured the
value of the loss without notifying the
carrier who has in good faith settled the
insured’s claim for loss
3. Where the insurer pays the insured for a
loss or risk not covered by the policy.
(Pan Malayan Insurance Company v.
CA, 184 SCRA 54)
4. in life insurance
5. for recovery of loss in excess of
insurance coverage
• Should the insured, after
receiving payment from the insurer,
release by his own act the wrongdoer or
third party responsible for the loss or
damage from liability, the insurer loses
his rights against the wrongdoer since
the insurer can only be subrogated to
only such rights as the insured may
have. (Manila Mahogany Mfg. Corp. v.
CA, 154 SRA 668)
• If the amount paid by the
insurance company does not fully cover
the injury or loss, it is the aggrieved
party, the insured, who is entitled to
recover the deficiency from the person
responsible for the loss or injury.
Requisites for Recovery Upon Insurance
1. the insured must have an insurable
interest in the subject matter;
2. the interest is covered by the policy;
3. there must be a loss;
4. the loss must be proximately caused by
the peril insured against.
Construction of Insurance Contracts
 The ambiguous terms are to be
construed strictly against the insurer, and
liberally in favor of the insured. However, if
the terms are clear, there is no room for
interpretation.
 The word “intentional” as used in an
accident policy excepting intentional injuries
inflicted by the insured or any other person
implies the reasoning faculties,
consciousness and volition. The exception
does not speak of the purpose of inflicting
the injury but the fact that the same were
intentionally inflicted (Biagtan v. Insular Life
Assurance Co., 44 SCRA 58)
Distinguishing Elements of an Insurance
Contract (GRAIP)
1. Existence of an insurable interest
susceptible of pecuniary estimation
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2. Risk of loss;
3. Insurer assumes the risk of loss;
4. Such assumption is part of the general
scheme to distribute actual losses among a
large group or substantial number of
persons bearing somewhat similar risks; and
5. Payment of premiums (Sec.77, ICP).
(Philamcare Health Systems, Inc. v. CA, No.
125678, March 18,2002).
Note: A contract possessing only the first 3
elements above is a risk-shifting device. If all the
elements, it is a risk-distributing device.
II. CONTRACT OF INSURANCE
Requisites of a contract of insurance:
1. A subject matter in which the insured
has an insurable interest;
2. Event or peril insured against which may
be any contingent or unknown event, past or
future, and a duration for the risk thereof;
3. A promise to pay or indemnify in a fixed
or ascertainable amount;
4. A consideration for the promise, known
as the premium
5. A meeting of minds of the parties upon
all the foregoing essentials
Perfection
 Consensual contract and therefore
perfected the moment there is meeting
of the minds with respect to the object
and the cause or consideration.
 Mere submission of the application
without the corresponding approval of
the policy does not result in the
perfection of the contract of insurance
(Great Pacific Life Assurance Corp. v.
CA, 89 SCRA 543)
 What is being followed in insurance
contracts is what is known as the
Cognition Theory. Thus, an
acceptance made by letter shall not bind
the person making the offer except from
the time it came to his knowledge.
(Enriquez v. Sun Life Assurance Co. of
Canada, 41 PHIL 269)
Parties to a contract of insurance
1. Insurer – the person who undertakes to
indemnify another.
 For a person to be called an insurance
agent, it is necessary that he should
perform the function for compensation
(Aisporna v. CA, 113 SCRA 459)
2. Insured – the party to be indemnified upon the
occurrence of the loss. He must have capacity to
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contract, must possess an insurable interest in
the subject of the insurance and must not be a
public enemy.
 Public enemy: a nation with whom the
Philippines is at war and it includes
every citizen or subject of such nation
(Section 7)
 A juridical person may only take out a
policy of insurance on property owned.
 The relationship between the insurer
and the insured is that of a continent
debtor and creditor.
3. Beneficiary – person designated to receive
the proceeds of the policy when the risk attaches
 Kinds of beneficiary:
a. insured himself
b. third person who paid the
consideration
c. third person though mere bounty of
the insured
In the second and third cases, the
beneficiary is not a party to the contract.
In all three cases, the proceeds of the
life insurance policy become the
exclusive property of the beneficiary
upon the death of the insured
Rule in the designation of the beneficiary:
(1997, 1998, 2001, 2005 Bar Exams)
A. Life Insurance
1. a person who insures his own life can
designate any person as his beneficiary,
whether or not the beneficiary has an insurable
interest in the life of the insured subject to the
limitations under Art. 739 and Art. 2012 of the
NCC.
 Reason: in essence, a life insurance
policy is no different from a civil donation
insofar as the beneficiary is concerned. Both
are founded on the same consideration or
liberality. (Insular Life v. Ebrado, 80 SCRA
181)
 When the court finds that a wagering
policy has been taken out by the insured on
his life at the behest of a third person who is
named as the beneficiary, the contract shall
be VOID entirely.
2. A person who insures the life of another
person and names himself as the beneficiary
must have an insurable interest in such life.
 When the owner of the policy insures the
life of another – the cestui que vie – and
designates a third party as the beneficiary,
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both the owner and beneficiary must have
an insurable interest in the life of cestui que
vie.
 As a general rule, the designation of a
beneficiary is revocable unless the insured
expressly waived the right to revoke the
policy.
 The interest of a beneficiary in a life
insurance policy shall be forfeited when the
beneficiary is the principal, accomplice or
accessory in willfully bringing about the
death of the insured in which event, the
nearest relative of the insured shall receive
the proceeds of said insurance if not
otherwise disqualified.
B. Property Insurance
The beneficiary of property insurance must have
an insurable interest in such property, which
must exist not only at the time the policy takes
effect but also when the loss occurs (Sections
13 and 18)
 Effects of irrevocable designation of
beneficiary:
Insured cannot:
1. assign the policy
2. take the cash surrender value of the
policy
3. allow his creditors to attach or execute
on the policy
4. add new beneficiary
5. change the irrevocable designation to
revocable, even though the change is
just and reasonable.
The insured does not even retain the
power to destroy the contract by refusing to
pay the premiums for the beneficiary can
protect his interest by paring such premiums
for he has an interest in the fulfillment of the
obligation.
 Limitations in the appointment of
beneficiary:
1. the person who takes out a policy acts in
good faith; and
2. there is no intent in making the policy
merely a cover for a forbidden contract
3. any person forbidden in Art. 739 NCC to
receive a donation cannot be named
beneficiary (Art. 2012, NCC)
Foreign Insurance Corporations - May be
authorized by the Commission to engage in
insurance business in the country.
Requirements:
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a. appointment of a resident
as a general agent
b. Paid-up unimpaired
assets or capital and reserves not less than
that required of Domestic Corporation.
c. Deposit for the benefit and
security of policyholders, securities
satisfactory to the Commission
d. Investments should not
exceed 20% of the net worth of the foreign
corporation or 20% of the capital of the
registered enterprise.
Subject matter of insurance
 Any contingent or unknown event,
whether past or future, which may damnify a
person having an insurable interest, or
create a liability against him, may be insured
against, subject to the provisions of this
chapter.
 An insurance for or against the drawing
of any lottery, or for or against any chance or
ticket in a lottery drawing a prize is not
authorized.
III. INSURABLE INTEREST (1997, 1999,
2000, 2001,2002 Bar Exams)
Concept of insurable interest in general
 A person has an insurable interest in the
subject matter if he is so connected, so
situated, so circumstanced, so related, that
by the preservation of the property he shall
derive pecuniary benefit, and by its
destruction he shall suffer pecuniary loss,
damage or prejudice.
 A policy issued to a person without the
requisite insurable interest in the subject
matter is a mere wager policy or contract,
hence it is VOID.
Insurable interest in life insurance
 Every person has an insurable interest
in the life and health:
a. Of himself, of his spouse and of his children;
b. Of any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest;
A risk of actual monetary loss is essential, it
is not necessary that the expectation of
pecuniary benefits have legal basis.
c. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or
illness might delay or prevent the
performance; and
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a. an existing interest
d. Of any person upon whose life any estate or
interest vested in him depends. An existing interest may be legal title or
equitable title.
 When it should exist: Insurable interest
in the life of another need exist only at the b. any inchoate interest founded on an
time of perfection of the contract and need existing interest; or
not exist thereafter or when the loss occurs
A stockholder has an inchoate interest in
 Amount: No limit in the amount the the property of the corporation of which
insured can insure his life except in a he is the stockholder which is founded
creditor-debtor relationship where the on an existing interest arising from his
creditor insures the life of his debtor, (the ownership of shares in the corporation.
limit of insurable interest is equal to the
amount of the debt) c. an expectancy coupled with an existing
 When insurance taken by the creditor on interest in that out of which the
the life of the debtor for the benefit of the expectancy arises.
creditor: An insuring creditor could only
recover such amounts as remain unpaid at The measure of insurable interest in
the time of the death of the debtor. If the property is the extent to which the
whole debt has already been paid, recovery insured might be damnified by loss or
on the policy by the creditor is no longer injury thereof.
possible. Neither can the debtor recover for  When it should exist: When the
he is not a privy to the contract of insurance insurance takes effect and when the loss
taken. occurs, but need not exist in the meantime
 When insurance taken by debtor n his  Amount: The measure of insurable
life for the benefit of the creditor: If at the interest in property is the extent to which the
time of the death of the debtor the whole insured might be damnified by loss or injury
debt has already been paid, the creditor can thereof (Section 17)
no longer recover on the policy because the Reason: this is because a contract of
principle of indemnity applies. Where the property insurance that gives the insured
debtor in good faith insures his life for the more than the indemnity of his actual loss
benefit of the creditor, full payment of the suffered by reason of the designated perils
debt does not invalidate the policy, in suh is a wagering policy contrary to public policy,
case, the proceeds shall go to the estate of hence, VOID.
the debtor.
 When the debt becomes legally
unenforceable, by reason of being barred b INSURABLE INSURABLE
the statute of limitations or of a debtor’s INTER INTEREST IN
discharge of insolvency, it does not cut off EST IN PROPERTY
the insurable interest of the creditor. LIFE
Reason: the moral or equitable obligation of Must exist only at the Must exist at time
a debtor to pay his debt is not destroyed by time the policy takes the policy takes
the discharge which affects only the legal effect and need not effect and when the
obligation to pay. exist at the time of loss loss occurs
 Consent of a person whose life is Insurable interest Insurable interest
insured is not essential to the validity of the unlimited except in life limited to actual
insurance taken by another, as long as the insurance effected by value of interest in
insured has a legal insurable interest at the creditor on life of debtor property insured
inception of the policy, the insurance
The expectation of An expectation of a
contract is VALID.
benefit to be derived benefit to be
from the continued derived from the
Insurable interest in property insurance
existence of life need continued existence
not have any legal of the property
 Every interest in property whether real or
basis whatever. A insured must have
personal, or any relation thereto, or liability
reasonable probability a legal basis.
in respect thereof, of such nature that the
is sufficient without
contemplated peril might directly damnify the
more.
insured (Sec. 13), which may consist in:

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The beneficiary need The beneficiary
not have an insurable must have
interest over the life of insurable interest
the insured if the over the thing
insured himself secured insured.
the policy. However, if
the life insurance was
obtained by the
beneficiary, the latter
must have an insurable
interest over the life of
the insured.
Insurable interest in case of a carrier or
depository
 A carrier or depository of any kind has
an insurable interest in a thing held by him
as such, to the extent of his liability but not
to exceed the value thereof (Section 15)
Reason: the loss of the thing by the carrier
or depositor may cause liability against them
to the extent of its value.
Insurable interest in case of mortgaged
property
 The mortgagor and the mortgagee each
have an insurable interest in the property
mortgaged and this interest is separate and
distinct from each other. Therefore,
insurance taken by one in his name and in
his favor alone, does not inure to the benefit
of the other.
a. Mortgagor: as the owner, has an insurable
interest to the extent of its value, even
though the mortgage debt equals such
value.
Reason: the loss or destruction of the
property insured will not extinguish the
mortgage debt
b. Mortgagee: his interest is only up to the
extent of the debt. Such interest continues
until the mortgage debt is extinguished.
Reason: property relied on as mortgaged is
only a security. In insuring the property, he is
not insuring the property itself but only his
interest or lien thereon.
 In case if an insurance taken by the
mortgagee alone and for his benefit, the
mortgagee, after recovery from the insurer,
is not allowed to retain his claim against the
mortgagor, but it passes by subrogation to
the insurer to the extent of the insurance
money paid. (Palileo v. Caltex, 97 PHIL 919)
 The lessor cannot be validly a
beneficiary of a fire insurance policy, taken
by a lessee over his merchandise, and the
provision in the lease contract providing for
such automatic assignment is void for being
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contrary to law and public policy. (Cha v.
CA, 227 SCRA 690)
STANDARD OR OPEN OR LOSS
UNION PAYABLE
MORTGAGE MORTGAGE CLAUSE
CLAUSE
the subsequent the mortgagor does not
acts of the cease to be a party to
mortgagor cannot the contract. Thus,
affect the rights of the acts of the
the assignee mortgagor affect the
mortgagee (Secs. 8
and 9)
Effects of Loss Payable Clause:
1. the contract is deemed to be upon the
interest of the mortgagor; hence, he does
not cease to be a party to the contract;
2. any act of the mortgagor prior to the loss
which would otherwise avoid the insurance
affects the mortgagee even is the property is
in the hands of the mortgagee.
3. any act, which under the contract of
insurance is to be performed by the
mortgagor, may be performed by the
mortgagee with the same effect
4. in case of loss, the mortgagee is entitled
to the proceeds t the extent of his credit
5. upon recovery of the mortgagee to the
extent of his credit, his debt is extinguished
 The rule on subrogation by the
insurer to the right of the mortgagee does
not apply in this case.
Reason: premium payment has been paid
by the mortgagor and not by the mortgagee.
Mortgage Redemption Insurance - a life
insurance taken pursuant to a group mortgage
redemption scheme by the lender of money on
the life of a mortgagor, who mortgages the
house constructed to the extent of the mortgage
indebtedness, such that if the mortgagor dies,
the proceeds of his life insurance will be used to
pay for his indebtedness and the deceased’s
heirs will thereby be relieved from paying the
unpaid balance of the loan. (Great Pacific Life
Assurance Corp. v. CA, 316 SCRA 677)
Transfer of Interest
1. Life Insurance - It can be transferred even
without the consent of the insurer except when
there is a stipulation requiring the consent of the
insurer before the transfer.
Reason: the policy does not represent a
personal agreement between the insured and
the insurer.
 Far Eastern University
Institute of Law
Is the consent of the beneficiary necessary to
the assignment of a life insurance policy?
It depends.
If the designation of the beneficiary is
irrevocable, the beneficiary’s consent if essential
because of his vested right.
If the designation is revocable, the policy
may be assigned without such consent because
the beneficiary only has a mere expectancy to
the proceeds.
2. Property Insurance - It cannot be transferred
without the consent of the insurer.
Reason: the insurer approved the policy based
on the personal qualifications and the insurable
interest of the insured.
3. Casualty Insurance - It cannot be transferred
without the consent of the insurer
Effect of change in interest in the thing
insured
General Rule: suspends the insurance until the
interests in the thing and the interest in the
insurance are vested in the same person. (Sec.
20)
Exceptions:
a. In life, health and accident insurance;
b. Change in interest in the thing insured after
occurrence of an injury which results in a loss;
Reason: after the loss has happened, the liability
of the insurer becomes fixed. Therefore, the
insured has the right to assign his claim against
the insurer as any other money claim.
c. Change in interest in one or more of several
distinct things separately insured by one policy;
Reason: contract is divisible
d. Change of interest, by will or succession, on
the death of the insured;
Reason: upon death, the contract f insurance
passes automatically to the heir, legatee or
devisee of the insured.
e. Transfer of interest by one of several partners,
joint owners, or owners in common, who are
jointly insured, to others;
Reason: no new party is brought to the
insurance contract. It is alienation to a stranger
that will avoid the policy.
f. When a policy is so framed that it will inure to
the benefit of whomsoever, during the
continuance of the risk, may become the owner
of the interest insured
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g. When there is an express prohibition against
alienation in the policy, in case of alienation, the
contract of insurance is not merely suspended
but avoided.
IV. POLICY OF INSURANCE
Definition and form
 Policy of insurance - the written
instrument in which a contract of insurance
is set forth.
 A policy of insurance is signed only by
the insurer or his duly authorized agent.
It need not be signed by the insured
except where express warranties are
contained in a separate instrument
forming part of the policy.
Contents of the policy (PARPIRD)
1. Parties – to determine who are privity to the
contract of insurance concerned
2. Amount of insurance, except in open or
running policies – to easily determine the
amount of indemnity to be paid the insured in
case of loss or damage especially if it is only
partial and not total. It serves as the maximum
limit on the insurer’s liability.
3. Rate of premium – represents the
consideration of the contract
4. Property or life insured
5. Interest of the insured in the property if he is
not the absolute owner thereof
6. Risk insured against – the insurer’s
undertaking is to indemnify the insured for the
loss, damage or liability caused or created
ONLY by the risk insured against
7. Duration of the insurance
Kinds of policy
1. Open - one in which the value of the thing
insured is not agreed upon, but is left to be
ascertained in case of loss.
 The actual loss, as determined,
will represent the total indemnity due the
insured from the insurer EXCEPT only
that the total indemnity shall not exceed
the face value of the policy
(Development Insurance Corp. c. IAC,
143 SCRA 62)
2. Valued - one which expresses on its face an
agreement that the thing insured shall be valued
at a specific sum.
 In the absence of fraud or
mistake, the agreed valuation will be
paid in case of total loss of the property,
unless the insurance is for a lower
amount.
 Far Eastern University
Institute of Law
3. Running - one which contemplates successive
insurances, and which provides that the object of
the policy may be from time to time defined,
especially as to the subjects of insurance, by
additional statements or indorsements.
Rider - printed stipulation usually attached to the
policy because they constitute additional
stipulations between the parties.
 General Rule: not binding
Exception: valid when the descriptive title or
name of the rider, clause, warranty or
endorsement is also mentioned and written
on the blank spaces provided in the policy.
 In case of conflict between the
provisions of a rider and the
printed stipulations in the policy,
the former shall prevail.
 As a general rule, where the
rider is physically attached to
the policy of insurance
contemporaneously with its
execution and delivered to the
insured, the fact that it is without
the signature of the insurer or
the insured will not prevent its
inclusion and construction as a
part of the insurance contract.
The same rule applies where
the rider was applied for by the
insured or owner.
Cover note - a concise and temporary written
contract issued to the insurer through its duly
authorized agent embodying the principal terms
of an expected policy of insurance.
 Purpose: It is intended to give temporary
insurance protection coverage to the
applicant pending the acceptance or
rejection of his application for a period of
not exceeding 60 days unless a longer
period is approved by Insurance
Commissioner
 Binding Receipt - merely an
acknowledgment on behalf of the company
that their branch office had received from the
applicant the insurance premium and had
accepted the application subject to
processing by the head office.
 Rules of cover notes:
1. Cover notes may be issued to afford
immediate protection to the insured until the
insurer can inspect or evaluate the risk in
question and issue the policy until the risk is
declined and notice thereof given.
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2. A cover note shall be deemed to be a
contract of insurance and no separate
premiums are required for their issuance
3. No cover note shall be issued or renewed
unless in the form previously approved by
the Commission
4. A cover note shall be valid and binding
for a period not exceeding 60 days from the
date of issuance, but such cover note may
be cancelled by the other party upon at least
7 days notice to the other party.
5. If the cover note is not so cancelled, a
policy of insurance shall, within 60 days after
the issuance of the cover note, be issued in
lieu thereof.
6. Insurance companies may impose on
cover notes a deposit premium equivalent t
at least 25% of the estimated premium of the
intended insurance coverage but in no case
less than P500.
Cancellation of policy
 Grounds(except life insurance) (FUD-
WNC)
1. Non-payment of premium;
2. Conviction of a crime out of acts
increasing the hazard insured against;
3. Discovery of fraud or material
misrepresentation;
4. Discovery of willful or reckless acts of
omissions increasing the hazard insured
against;
5. Physical changes in property making the
property uninsurable; and
6. Determination by the Insurance
Commissioner that the continuation of
the policy would violate the Insurance
Code.
Requirements for Cancellation of Policy:
1. prior notice of cancellation to the
insured;
2. notice must be based on the occurrence
after the effectivity date of the policy;
3. notice must be in writing, mailed or
delivered to the named insured at the
address shown in the policy
4. notice must state which of the grounds
set forth in Sec. 64 is relied upon and that
upon written request of the insured, the
insurer will furnish the facts on which the
cancellation is based.
Rule on renewal of policy:
 Far Eastern University
Institute of Law
 General Rule: entitled
renewal
Exceptions:
a. life insurance; or
b. the insurer does not intend to renew,
provided:
• the insurer at least 45 days in
advance of the end of the policy
period
• mails or delivers to the named
insured at the address shown in
the policy
• notice of its intention not to
renew the policy or to condition
its renewal upon reduction of
limits or elimination of coverage
V. RISK
Four primary concerns of the parties:
1. correct estimation of the risk;
2. precise delimitation of the risk;
3. control of the risk;
4. determining whether a loss occurred
and if so, the amount of such loss.
What may be insured against:
1. Future contingent event resulting in loss
or damage
2. Past unknown event resulting in loss or
damage
3. Contingent liability
VI. DEVICES FOR ASCERTAINING AND
CONTROLLING RISK AND LOSS
1. Concealment
2. Representation
3. Warranties
4. Conditions
5. Exceptions
Concealment (1996, 2001 Bar Exams ) -
neglect to communicate that which a party
knows and ought to communicate
 Requisites of concealment:
1. A party knows of a fact (a material fact)
which he neglects to communicate or
disclose to the other
2. Such party is duty bound to disclose
such fact to the other
3. Such party concealing makes no
warranty as to the fact concealed
4. The other party has not the means of
ascertaining the fact concealed
 Test of Materiality: determined
not by the event, but solely by the probable
and reasonable influence of the facts upon
the party to whom the communication is due,
Commercial Law Study Guide
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to in forming his estimate of the disadvantages
of the proposed contract, or in making his
inquiries. (Sec. 31)
Exceptions to Sec. 31:
1. incontestability clause - In life insurance,
after the policy has been in force for at
least 2 years, the insurer cannot rescind
the policy due to fraudulent concealment
or misrepresentation by the insured.
2. matters under Sec. 110 (marine
insurance)
 Effects: Rescission of the
contract by the insurer, whether the
concealment is intentional or unintentional.
Good faith therefore is not a defense. (Sec.
27)
 The following matters, though
concealed will not vitiate the contract except
when they caused the loss:
1. National character of the insured;
2. Liability of insured thing to capture or
detention;
3. Liability to seizure from breach of foreign
laws;
4. Want of necessary documents;
5. Use of false or simulated papers.
 The waiver of medical
examination in a non-medical insurance
contract renders even more material the
information required of the applicant
concerning the previous conditions of health
and diseases suffered (Sunlife v. Sps.
Bacani, 246 SCRA 268)
 The right to information of
material facts may be waived, either by the
terms of the insurance or by neglect to make
inquiries as to such facts where they are
distinctly implied in other facts of which
information is communicated.
 Where matters of opinion or
judgment are called for, matters made in
good faith and without intent to deceive will
not avoid the policy even though they are
untrue. Reason: the insurer cannot rely on
those statements. He must make further
inquiry (Philamcare Health Systems v. CA,
GR 125678, March 18, 2002)
 Matters that must be
communicated even if the absence of
inquiry (Sec. 28):
1. Those material to the contract (Secs.
31, 34, 35)
2. Those which the other has no means of
ascertaining the said facts (Secs. 30, 32,
33)
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3. Those as to which the party with the
duty to communicate makes no warranty
(Secs. 67-76)
General Rule: Matters made subject of
special inquiries under Sec. 30 must be
deemed material, even though otherwise
they might not be so regarded and the
insured is required to make full and true
disclosure to questions asked.
Exceptions: There is no duty to make a
disclosure on the following instances:
1. Those which the other knows;
2. Those which, in the exercise of ordinary
care, the other ought to know, and of
which the former has no reason to
suppose him ignorant;
3. Those of which the other waives
communication;
4. Those which prove or tend to prove the
existence of a risk excluded by a
warranty, and which are not otherwise
material; and
5. Those which relate to a risk excepted
from the policy and which are not
otherwise material. (Sec. 30)
6. Information on the nature or amount of
the interest of one need not be
communicated unless in an answer to
an inquiry, except as prescribed by Sec.
51. (Sec. 34)
Representations - factual statements made by
the insured at the time of, or prior to, the
issuance of the policy to give information to the
insurer and induce him to enter into the
insurance contract.
 Requisites of false representation
(misrepresentation):
1. The insured stated a fact which is untrue
2. Such fact was stated with knowledge
that it is untrue and with intent to
deceive or which he states positively as
true without knowing it to be true and
which has a tendency to mislead
3. Such fact in either case is material to the
risk
 A misrepresentation by the
insured renders the insurance contract
voidable at the option of the insurer.
 Effect: the injured party is
entitled to rescind from the time when the
representation becomes false
 Characteristics:
a. It is not a part of the contract but merely
a collateral inducement to it
b. It may be oral or written
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c. It is made at the same time of issuing
the policy or before but not after
d. It may be altered or withdrawn before
the insurance is effected but not
afterwards
e. It always refers to the date the contract
goes into effect
 Kinds:
1. Affirmative– affirmation of a fact when
the contract begins; and (Sec. 37)
2. Promissory – promise to be performed
after policy was issued. (Sec. 39)
 A representation may be made
at the time of, or before, issuance of the
policy.
 A representation as to the future
is to be deemed a promise, unless it
appears that it was merely a statement of
belief or expectation.
 Test of materiality: same as that
in concealment
 Where the insured merely
signed the application form and made the
agent of the insurer fill the same for him, it
was held that by doing so, the insured made
the agent of the insurer his own agent and
he was responsible for his acts for that
purpose. (Insular Life Assurance Co. v.
Feliciano, 74 PHIL 469)
Warranties- Statement or promise by the
insured set forth in the policy or by reference
incorporated therein, the untruth or non-
fulfillment of which in any respect, and without
reference to whether insurer was in fact
prejudiced by such untruth or non-fulfillment,
renders the policy voidable by the insurer.
 Purpose: to eliminate potentially
increasing hazards which may either be due
to the acts of the insured or to the change to
the condition of the property.
 Basis: the insurer took into consideration
the condition of the property at the time of
effectivity of the warranty.
Warranty Representation
part of the mere collateral
contract inducement
written on the may be written in
policy, actually or the policy or may
by reference be oral.
 Far Eastern University
Institute of Law

Falsity or non- Falsity renders the • Condition precedent – prevents the

compliance policy void on the accrual of cause of action
operates as a ground of fraud
breach of contract
• Condition subsequent – avoids the
policy or entitles the insurer to rescind
must be strictly requires only  The insurer may also protect himself
complied with substantial truth and against fraudulent claims of loss and this he
compliance. attempts to do by inserting in the policy
various conditions which take the form of
conditions precedent. For instance, there are
 Kinds:
conditions requiring the immediate notice of
a. Express - an agreement
loss or injury and detailed proofs of loss
expressed in a policy whereby the
within a limited period.
insured stipulates that certain facts
relating to the risk are or shall be true, or
Exceptions - provisions that may specify
certain acts relating to the same subject
excepted perils. It makes more definite the
have been or shall be done
coverage indicated by the general description of
b. Implied - it is deemed included
the risk by excluding certain specified risk that
in the contract although not expressly
otherwise would be included under the general
mentioned. Example: In marine
language describing the risks assumed
insurance, seaworthiness of the vessel.
c. Affirmative- asserts the
existence of the fact or condition at the  Effect: limit the coverage of the contract
time it is made.
d. Promissory- the insured  Breach of warranty or of condition may
stipulates that certain facts or conditions be waived without consideration BUT the
shall exist or thing shall be done or insurer does not become liable for an
omitted. (Sec. 67) excepted loss by waiver unless the waiver
amounts to a new contract on valuable
 Effects of breach: consideration.

a. Violation of material warranty RESCISSION

General Rule: Violation of material Grounds for rescission:

warranty or of a material provision of a a. Concealment
policy will entitle the other party to b. Misrepresentation
rescind the contract. c. Breach of material warranty
Exceptions: d. Breach of a condition subsequent
1. loss occurs before the time of e. Alteration of the thing insured
performance of the warranty
2. the performance becomes Waiver of right to rescind: The right to rescind is
unlawful at the place of the contract waived by the acceptance of premium payments
3. performance becomes despite the knowledge of the ground for
impossible rescission.

b. Violation of immaterial provision Limitations on the right of the insurer to rescind:

(example: “other insurance clause”)
General Rule: it will not avoid the policy
Exception: when the policy expressly
provides or declares that a violation
thereof will avoid it.
1. In non-life policy – such right must be
exercised prior to the commencement of an
action on the contract
2. In life insurance – such right must be availed
of during the first 2 years from the date of issue
of policy or its last reinstatement.

Condition– an event signifying in its broadest INCONTESTABILITY CLAUSE (1998 Bar

sense either an occurrence or a non-occurrence Exam)
that alters the previously existing legal relations Concept: Clause in life insurance policy that
of the parties to the contract. It may be a stipulates that the policy shall become
condition precedent or a condition subsequent. incontestable after a stated period.

 Effect of breach:

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Institute of Law

It creates a kind of contractual statute of

limitations on certain defenses that may be The basis of the right of the insurer to collect
raised by the insurer. premiums is the assumption of risk.

“Incontestability” – means that after the Effect of non-payment of premium;

requisites are shown to exist, the insurer shll be exceptions
estopped from contesting the policy or setting up
any defense, except as is allowed, on the General Rule: No policy issued by an insurance
ground of public policy. company is valid and binding until actual
payment of premium. Any agreement to the
Requisites: contrary is void. (Sec. 77)
a. The insurance is a life Exceptions to the requirement for pre-payment
insurance policy of premiums:
b. It is payable on the death of 1. in case of life or industrial life
the insured. insurance, when the grace periods applies;
c. It has been in force during 2. when the insurer makes a
the lifetime of the insured for at least two written acknowledgment of the receipt
years from its date of issue or of its last premium;
reinstatement. 3. when the parties have agreed to
the payment of the premium in installments
Note: the period of 2 years may be shortened and partial payment has been made at the
but it cannot be extended by stipulation. time of the loss (Makati Tuscany
Condominium Corp v. CA, 215 SCRA 462)
Effect when policy becomes incontestable: 4. when a credit term has been
agreed upon (UCPB v. Masagana Telemart,
a. Barred defenses of the insurer: 308 SCRA 259)
1. the policy is void ab initio 5. where the parties are barred by
2. it is rescissible by reason of the estoppel (UCPB v. Masagana Telemart, 356
fraudulent concealment or SCRA 307)
misrepresentation of the insured or his
agent Effect of non-payment: notwithstanding any
b. Defenses not barred agreement to the contrary, no policy or contract
1. That the person of insurance issued by an insurance company is
taking the insurance lacked insurable valid and binding unless and until the premium
interest as required by law; thereof has been paid. (Sec. 77)
2. hat the cause of
the death of the insured is an excepted  Section 77 merely precludes the parties
risk; from stipulating that the policy is valid even if
3. That the the premiums are not paid. (Makati
premiums have not been paid; Tuscanny Condominium Corp. v. CA, 215
4. That the SCRA 462)
conditions of the policy relating to
military or naval service have been Effect of acknowledgment of receipt of
violated; premium in policy: Conclusive evidence of its
5. That the fraud is payment, so far as to make the policy binding,
of a particularly vicious type; notwithstanding any stipulation therein that it
6. That the shall not be binding until the premium is actually
beneficiary failed to furnish proof of paid.
death or to comply with any condition Reason: when the policy contains such written
imposed by the policy after the loss has acknowledgment, it is presumed that the insurer
happened; or has waived the condition of the payment.
7. That the action Note: The conclusive presumption extends only
was not brought within the time to the question on the binding effect of the
specified. policy. As far as the payment of the premium
itself is concerned, the acknowledgment is only
VII. PREMIUM (2000, 2006 Bar Exams) a prima facie evidence of the fact of such
payment. The insurer may still dispute its
Concept: A consideration paid to an insurer for acknowledgment but only for the purpose of
undertaking to indemnify the insured against a receiving the premium due and paid.
specified peril.

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 Far Eastern University
Institute of Law
Effect of acceptance of the premium:
Acceptance of the premium within the stipulated
period for payment thereof, including the agreed
period of grace, merely assures continued
effectivity of the insurance policy in accordance
with its terms.
A. When insured entitled to the return of
premiums
Whole:
1. If thing insured was never exposed to
the risks insured against (Sec. 79);
2. Contract is voidable due to the fraud or
misrepresentation of insurer or his
agents; (Sec. 81)
3. Contract is voidable because of the
existence of facts of which the insured
was ignorant without his fault; (Sec. 81)
4. When by any default of the insured
other than actual fraud, the insurer never
incurred liability (Sec. 81);
5. When rescission is granted due to the
insurer’s breach of contract (Sec. 74);
Pro rata:
1. When the
insurance is for a definite period and the
insured surrenders his policy before the
termination thereof;
Exceptions:
a. policy not made for a
definite period of time
b. short period rate is agreed
upon
c. life insurance policy
2. When there is over-insurance;
In case of over insurance by double
insurance, the insurer is not liable for the
total amount of the insurance taken, his
liability being limited on the property
insured. Hence, the insurer is not
entitled to the portion of the premium
corresponding to the excess of the
insurance over the insurable interest of
the insured.
In case of over insurance by several
insurers, the insured is entitled to a
ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all policies
exceeds the insurable value of the thing
insured.
VIII. LOSS (1996, 2005 Bar Exams)
Loss - injury or damage sustained by the
insured in consequence of the happening of one
or more of the accidents or misfortune against
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which the insurer, in consideration of the
premium, has undertaken to indemnify the
insured. (Bonifacio Bros. Inc. v. Mora, 20 SCRA
261)
Proximate cause - an event which sets all other
events in motion without any intervening or
independent case, without which the injury or
loss would not have occurred.
A. Loss for which the insurer is liable:
1. loss the proximate cause of which is the
peril insured against;
2. loss the immediate cause of which is the
peril insured against except where
proximate cause is an excepted peril;
3. loss through negligence of insured
except where there was gross
negligence amounting to willful acts; and
4. loss caused by efforts to rescue the
thing from peril insured against;
5. if during the course of rescue, the thing
is exposed to a peril not insured against,
which permanently deprives the insured
of its possession, in whole or in part
B. Loss for which the insurer is not liable:
1. loss by insured’s willful act;
2. loss due to connivance of the insured;
and
3. loss where the excepted peril is the
proximate cause.
C. Notice and proof of loss
 Purposes:
1. to give the insurer information by which
he may determine the extent of his
liability
2. to afford the insurer a means of
detecting any fraud that may have been
practiced upon him
3. to operate as a check upon extravagant
claims
D. Effect of failure to give notice of loss:
In fire insurance - it will defeat the right of the
insured to recover;
In other types of insurance – it will not exonerate
the insurer unless there is a stipulation in the
policy to that effect.
IX. DOUBLE INSURANCE (1999, 2005 Bar
Exams)
Overinsurance results when the insured insures
the same property for an amount greater than
the value of the property with the same
insurance company.
 Far Eastern University
Institute of Law

e. Each insurer is bound, as between

Effect in case of loss:
a. the insurer is bound only to pay to the
extent of the real value of the property
lost;
b. the insured is entitled to recover the
amount of premium corresponding to the
excess in value of the property
Double Insurance: exists where the same
person is insured by several insurers separately
in respect to the same subject and interest.
himself and the other insurers, to
contribute ratably to the loss in
proportion to the amount for which he is
liable under his contract. (sec. 94)
Under the “Principle of Contribution” or
“Contribution clause” it is required that each
insurer contribute ratably to the loss or damage
considering insurances to cover the same
subject matter and interest against the same
peril.

 Requisites: Additional or Other Insurance Clause - a

1. The person insured is the same; condition in the policy requiring the insured to
2. Two or more insurers insuring inform the insurer of any other insurance
separately; coverage of the property insured is lawful and
3. The subject matter is the same; specifically allowed under Sec. 75 of the ICP
4. The interest insured is also the same; which provides that “a policy may declare that a
5. The risk or peril insured against is violation of a specified provision thereof shall
likewise the same. avoid it, otherwise the breach of an immaterial
provision does not avoid it.” It is a stipulation
Over-Insurance Double Insurance against double insurance.
1. One insurer is 1. Two or more insurers
sufficient Purposes:
2. Insurance taken must 2. Total amount of a. to prevent an increase in the moral hazard
be more than the policies taken need not b. to prevent over insurance and fraud
amount of insurable exceed the amount of
interest the insurable interest Note: to constitute a violation of the clause,
there must have been double insurance
 Effects: where double insurance X. REINSURANCE
is allowed, but over insurance results: (Sec.
94) Concept: a contract by which an insurer
procures a third person to insure him against
a. The insured, unless the policy loss or liability by reason of such original
otherwise provides, may claim payment insurance. Also known as Reinsurance Cession.
from the insurers in such order as he
may select, up to the amount for which In every reinsurance, the original contract of
the insurers are severally liable under insurance and the contract of reinsurance are
their respective contracts; covered by separate policies.
b. Where the policy under which the
insured claims is a valued policy, the Double Insurance
insured must give credit as against the Reinsurance
valuation for any sum received by him involves the same involves different
under any other policy without regard to interest interest
the actual value of the subject matter insurer remains in insurer becomes the
insured; such capacity insured in relation
c. Where the policy under which the to reinsurer
insured claims is an unvalued policy he insured is the party original insured has
must give credit, as against the full in interest in the no interest in the
insurable value, for any sum received by 2 contracts reinsurance
him under any policy; contract.
d. Where the insured receives any sum subject of subject of insurance
in excess of the valuation in the case of insurance is is the original
valued policies, or of the insurable value property insurer’s risk
in the case of unvalued policies, he must insured has to give insured’s consent not
hold such sum in trust for the insurers, his consent necessary
according to their right of contribution
among themselves; Duty of reinsured to disclose facts

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Where an insurer obtains reinsurance, except
under automatic reinsurance treaties, he must
communicate all the representations of the
original insured, and also all the knowledge and
information he possesses, whether previously or
subsequently acquired, which are material to the
risk.
Terms:
1. Reinsurance Treaty – merely an agreement
between two insurance companies whereby one
agrees to cede and the other to accept
reinsurance business pursuant to provisions
specified in the treaty
2. Automatic Reinsurance – the reinsured is
bound to cede and the reinsurer is obligated to
accept a fixed share of the risk which has to be
reinsured under the contract.
3. Facultative Reinsurance – there is no
obligation to cede or accept participation I the
risk each party having a free choice. But once
the share is accepted, the obligation is absolute
and the liability thereunder can be discharged
only by payment.
4. Retrocession – a transaction whereby the
reinsurer in turn, passes to another insurer a
portion of the risk reinsured. It is really the
reinsurance of reinsurance.
XI. TYPES OF INSURANCE
A. MARINE INSURANCE
(1998, 2000, 2005 Bar exams)
Definition: insurance against risks connected
with navigation, to which a ship, cargo,
freightage, profits or other insurable interest in
movable property, may be exposed during a
certain voyage or a fixed period of time. (Sec.
99)
Scope:
A. Insurance against loss or damage to:
1. vessels, goods, freight, cargo,
merchandise, profits, money,
valuable papers, bottomry and
respondentia, and interest in respect
to all risks or perils of navigation;
2. persons or property in connection
with marine insurance;
3. precious stones, jewels, jewelry and
precious metals whether in the
course of transportation or
otherwise; and
4. bridges, tunnels, piers, docks and
other aids to navigation and
transportation. (Sec. 99)
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 Cargo can be the subject of marine
insurance, and once it is entered
into, the implied warranty of
seaworthiness immediately attaches
to whoever is insuring the cargo,
whether he be the shipowner or not.
(Roque v. IAC, 139 SCRA 596)
B. Marine protection and indemnity insurance
Classes of inland marine insurance:
1. Property in transit – provides protection to
property frequently exposed to loss while it is
being transported from one location to another
2. Bailee liability – insurance for those who have
temporary custody of the goods
3. Fixed transportation property – they are so
insured because they are held to be an essential
part of the transportation system such as
bridges, tunnels, etc.
4. Floater – provides insurance to follow the
insured property wherever it may be located,
subject always to the territorial limits of the
contract
Risks or Losses Covered:
 Perils Of The Sea - includes only
those casualties due to the unusual violence
or extraordinary action of wind and wave or
to other extraordinary causes connected
with navigation.
 Perils Of The Ship - a loss which in
the ordinary course of events, results from
the:
1. natural and inevitable action of the sea
2. ordinary wear and tear of the ship or
3. negligent failure of the ship’s owner to
provide the vessel with proper
equipment to convey the cargo under
ordinary conditions.
Note: it is only perils of the sea which may be
insured against unless perils of the ship is
covered by an all-risk policy.
Special Contracts and Clauses
1. All Risks Policy - insurance against all causes
of conceivable loss or damage, except: (1) as
otherwise excluded in the policy or (2) due to
fraud or intentional misconduct on the part of the
insured.
The insured has the initial burden of
proving that the cargo was in good condition
when the policy attached and that the cargo was
damaged when unloaded from the vessel;
thereafter, the burden then shifts to the insurer
to show the exception to the coverage (Filipinas
Merchants Insurance v. C, 179 SCRA 638)
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2. Barratry Clause – A clause which provides Concealment in Marine Insurance

that there can be no recovery in case of any
willful misconduct on the part of the master or  Concept: failure to disclose any material
crew in pursuance of some unlawful or fact or circumstance which in fact or law is
fraudulent purpose without consent of owners, within, or which ought to be within the
and to the prejudice of the owner’s interest. knowledge of one party and of which the
3. Inchamaree Clause - covers loss or damage other has no actual or presumptive
to the hull or machinery through: knowledge.
1. negligence of the captain,  Matters although concealed will not
engineers, etc. vitiate the contract, except when they
2. explosions, breakage of shafts; and caused the loss:
3. latent defect of machinery or hull.
4. Sue and Labor Clause – a clause under which 1. national character of the insured;
the insurer may become liable to pay the 2. liability of the thing insured to capture
insured, in addition to the loss actually suffered, and detention;
such expenses as he may have incurred in his 3. liability to seizure from breach of foreign
efforts to protect the property against a peril for laws of trade;
which the insurer would have been liable (Sec. 4. want of necessary documents;
163) 5. use of false and simulated papers.
Insurable Interest in Marine Insurance Distinctions on Concealment
1. a. Shipowner MARINE OTHER PROPERTY
1. over the vessel t the extent of its value, INSURANCE INSURANCE
provided that if chartered, the recovery
The information of the The information of
is only up to the amount not recoverable
belief or expectation belief of a third party is
from the charterer
of third persons is not material and
2. he also has an insurable interest on
material and must be need not be
expected freightage
communicated communicated unless
3. no insurable interest if he will be
it proceeds from an
compensated by the charterer for the
agent of the insured
value of the vessel in case of loss.
whose duty it is to give
information
b. Charterer - to the extent that he is liable to
The concealment of Concealment of any
the shipowner, if the ship is lost or damaged
any fact in relation to material fact will vitiate
during the voyage.
any of the matters the entire contract,
stated in Section 110 whether or not the
c. Cargo Owner - over the cargo and the
does not vitiate the loss results from the
expected profits (Sec. 105)
entire contract but risk concealed
merely exonerates the
2. In loans on bottomry and respondetia
insurer from a risk
resulting from the fact
Repayment of the loan is subject to the
concealed
condition that the vessel or goods,
respectively, given as a security, shall arrive
safely at the port of destination. Representations in Marine Insurance

a. Owner/Debtor - difference between the  Effect of false representation by the

value of vessel or goods and the amount of
the loan
b. Creditor/Lender - amount of the loan
Note: if the vessel is hypothecated by bottomry,
only the excess is insurable, since a loan on
bottomry partakes of the nature of an insurance
coverage to the extent of the loan
accommodation. The same rule would apply to
the hypothecation of the cargo by respondentia.
insured
If a representation is intentionally false in
any material respect, or in respect of any
fact on which the character and nature of the
risk depends, the insurer may rescind the
entire contract.
 Effect of false representation as to
expectation
The eventual falsity of a representation as to
expectation does not, in the absence of
fraud, avoid a contract of marine insurance.

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Implied Warranties in Marine Insurance • It becomes the obligation of a cargo

a. that the ship is seaworthy at the owner to look for a reliable common
inception of the insurance (Sec. 113); carrier which keeps its vessels in
b. that the ship will not deviate from seaworthy conditions. The shipper may
agreed voyage unless deviation is have no control over the vessel but he
proper (Sec. 123, 124, 125); has control in the choice of the common
c. that the ship will not engage in an carrier that will transport his goods
illegal venture; (Roque v. IAC, 139 SCRA 596).
d. warranty of neutrality: that the ship
will carry the requisite documents of
nationality or neutrality of the ship or
 General Rule: An implied
warranty of seaworthiness is complied with if
cargo where such nationality or
the ship be seaworthy at the time of the of
neutrality is expressly warranted; (Sec.
commencement of the risk. Prior or
120)
subsequent unworthiness is not a breach of
e. presence of insurable interest.
the warranty nor is it material that the vessel
arrives in safety at the end of her voyage.
 While the payment by the insurer for the
Exceptions:
insured value of the lost cargo operates as a
a. in the case of a time policy, the ship must
waiver of the insurer’s right to enforce the
be seaworthy at the commencement of
term of the implied warranty against the
every voyage she may undertake
assured under the marine insurance policy,
the same cannot be validly interpreted as an
b. in case of cargo policy, each vessel upon
automatic admission of the vessel’s
which the cargo is shipped or transshipped
seaworthiness by the insurer as to foreclose
must be seaworthy at the commencement of
recourse against the common carrier for any
each particular voyage
liability under the contractual obligation as
such common carrier (Delsan Transportation
c. in the case of a voyage policy
Lines v. CA, 264 SCRA 24)
contemplating a voyage in different stages,
the ship must be seaworthy at the
Seaworthiness: A relative term, depending
commencement of each portion
upon the nature of the ship, voyage, service and
goods, denoting in general a ship’s fitness to
 Rule where ship becomes unseaworthy
perform the service and to encounter the
in the course of the voyage
ordinary perils of the voyage contemplated by
the parties to the policy. (Sec. 114)
When the ship becomes unseaworthy during
 What constitutes seaworthiness:
the voyage to which an insurance relates, an
A warranty of seaworthiness extends not
unreasonable delay in repairing the defect
only to the condition of the structure of the
exonerates the insurer on ship or
ship itself, but requires that it be:
shipowner's interest from liability from any
a. properly laden,
loss arising therefrom.
and
b. provided with a
Warranty that necessary documents are
competent master,
carried Where the nationality or neutrality of a
c. sufficient number
ship or cargo is expressly warranted, it is implied
of competent officers and seamen,
that the ship will carry the requisite documents to
and the
show such nationality or neutrality and that it will
d. requisite
not carry any documents which cast reasonable
appurtenances and equipment, such
suspicion thereon. (Sec. 120)
as ballasts, cables and anchors,
cordage and sails, food, water, fuel
Warranty against improper deviation
and lights, and
e. other necessary
Deviation: a departure from the course of the
or proper stores and implements for
voyage insured or an unreasonable delay in
the voyage. (Sec. 116)
pursuing the voyage or the commencement of
• A ship which is seaworthy for the an entirely different voyage.
purpose of an insurance upon the ship
may, nevertheless, by reason of being Instances of deviation:
unfitted to receive the cargo, be 1. deviation from the agreed voyage
unseaworthy for the purpose of the 2. departure of vessel from the course of
insurance upon the cargo. sailing fixed by mercantile usage

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3. departure of the vessel from the most a. actual loss of more than ¾ of
natural, direct and advantageous route the value of the thing insured
is not fixed by mercantile usage b. damage reducing value by more
4. unreasonable delay in pursuing voyage than ¾ of the value of the vessel
5. commencement of an entirely different and of cargo
voyage c. expense of transshipment
exceed ¾ of the value of the
Kinds of deviation: cargo

a. Proper In case of constructive total loss, insured

may:
i. When caused by a. abandon the goods or vessel to
circumstances over which neither the the insurer and claim for the
master nor the owner of the ship has whole insured value
any control; b. without abandoning vessel,
ii. When necessary to comply claim for partial actual loss
with a warranty, or to avoid a peril,
whether or not the peril is insured b. partial loss – that which is not total (Sec. 128)
against;
iii. When made in good faith,
and upon reasonable grounds of belief Co-Insurance
in its necessity to avoid a peril; or A marine insurer is liable upon a partial loss,
iv. When made in good faith, only for such proportion of the amount insured
for the purpose of saving human life or by him as the loss bears to the value of the
relieving another vessel in distress. whole interest of the insured in the property
(Sec. 124) insured.
When the property is insured for less than its
Effect of a proper deviation: in case of loss, the value, the insured is considered a co-insurer of
insurer is still liable. the difference between the amount of insurance
and the value of the property.
b. Improper - Every deviation not specified in
Section 124.  Requisites:
1. The loss is partial;
Effect of improper deviation: An insurer is not 2. The amount of insurance is less than the
liable for any loss happening to the thing insured value of the property insured (Sec 157).
subsequent to an improper deviation. (Sec. 126)  Rules:
1. co – insurance applies only to marine
Loss in Marine Insurance insurance
2. logically, there cannot be co-insurance
Kinds: in life insurance
3. co – insurance applies in fire insurance
a. total loss: when expressly provided for by the
1. actual loss - caused by: parties
a. A total destruction of the
thing insured; CO-INSURANCE REINSURANCE
b. The irretrievable loss by A percentage in the Situation where the
sinking, or by being broken up; value of the insured insurer procures a
c. Any damage to the thing property which the third party called the
which renders it valueless to the insured himself reinsurer to insure
owner for the purpose for which assumes to act as him against liability
he held it; or insurer to the extent by reason of the
d. Any other event which of the deficiency in original insurance.
effectively deprives the owner of the insurance of the Basically,
the possession, at the port of insured property in reinsurance is an
destination, of the thing insured. case of loss or insurance against
(Sec. 130) damage liability which the
Right to payment: Upon an actual total loss, a original insurer may
person insured is entitled to payment without incur in favor of the
notice of abandonment. (Sec. 135) original insured
2. constructive total loss –

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Abandonment the thing insured which may have come to the

The act of the insured by which, after a hands of the insured. (Sec. 154)
constructive total loss, he declared the
relinquishment to the insurer of his interest in the Average
thing insured (Sec. 138)
Definition: Any extraordinary or accidental
 Requisites for validity of abandonment: expense incurred during the voyage for the
1. There must be an actual preservation of the vessel, cargo, or both, and all
relinquishment by the person insured of damages to the vessel and cargo from the time it
his interest in the thing insured; is loaded and the voyage commenced until it
2. There must be a ends and the cargo unloaded.
constructive total loss ;
3. The abandonment be  Kinds:
neither partial nor conditional; 1. General Average Loss - includes damages
4. It must be made within a and expenses which are deliberately caused by
reasonable time after receipt of reliable the master of the vessel or upon his authority, in
information of the loss ; order to save the vessel, her cargo, or both at
5. It must be factual; the same time from real or known risk. It must
6. It must be made by giving be borne equally by all of the interests
notice thereof to the insurer which may concerned in the venture.
be 2. Particular Average Loss - includes all
done orally or in writing; and damages and expenses caused to the vessel or
7. The notice of abandonment to her cargo which have not inured to the
must be explicit and must specify the common benefit and profit of all persons
particular cause of the abandonment interested in the vessel and her cargo. It is borne
 Effects: alone by the owner of the cargo or the vessel, as
1. equivalent to a transfer by the insured of his the case may be.
interest to the insurer, with all the chances of
recovery and indemnity. GENERAL PARTICULAR
2. acts done in good faith by those who were Has inured to the Has not inured to the
agents of the insured in respect to the thing common benefit and common benefit and
insured, subsequent to the loss, are at the risk of profit of all persons profit of all persons
the insurer and for his benefit. interested in the vessel interested in the vessel
Acceptance of abandonment, whether and cargo and her cargo
express or implied, is conclusive upon the Must be borne equally To be borne alone by
parties, and admits the loss and the sufficiency by all of the interests the owner of the cargo
of the abandonment. concerned in the or the vessel, as the
Once made and accepted abandonment is venture case may be
irrevocable, unless the ground upon which it was Requisites for the
made proves to be unfounded. right:
 Rules:
1. If a marine insurer pays for a loss as if it were 1. common danger to
an actual total loss, he is entitled to whatever the vessel or cargo;
may remain of the thing insured, or its proceeds
or salvage, as if there had been a formal 2. Part of the vessel or
abandonment. cargo was sacrificed
2. The acceptance of an abandonment may be deliberately;
either express or implied from the conduct of the
insurer. The mere silence of the insurer for an 3. sacrifice must be for
unreasonable length of time after notice shall be the common safety or
construed as an acceptance. for the benefit of all;
3. On an accepted abandonment of a ship,
freightage earned previous to the loss belongs to 4. sacrifice must be
the insured of said freightage; but freightage made by the master or
subsequently earned belongs to the insurer of upon his authority;
the ship.
4. If an insurer refuses to accept a valid 5. It must be not be
abandonment, he is liable as upon actual total caused by any fault of
loss, deducting from the amount any proceeds of the party asking the
contribution;

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to such fire policies or insured under separate

6. It must be policy.
successful, i.e.
resulted in the saving Prerequisites to recovery
of the vessel or cargo; 1. Notice of loss – must be immediately given,
and unless delay is waived expressly or impliedly by
the insurer
7. It must be 2. Proof of loss – according to best evidence
necessary. obtainable. Delay may also be waived expressly
or impliedly by the insurer

 Right of the insured in case of General HOSTILE FIRE FRIENDLY FIRE

Average:
General Rule: The insured may either hold
the insurer directly liable for the whole of the
insured value of the property sacrificed for
the general benefit, subrogating him to his
own right of contribution or demand
contrinution from the other interested parties
as soon as the vessel arrives at her
destination.
Exceptions:
a. after the separation of
the interests liable to the contribution
b. when the insured has
neglected or waived his right to
contribution
 FPA Clause (Free From
Particular Average): A clause agreed upon
in a policy of marine insurance in which it is
stated that the insurer shall not be liable for
a particular average, such insurer shall be
free therefrom, but he shall continue to be
liable for his proportion of all general
average losses assessed upon the thing
insured (Sec. 136)
B. FIRE INSURANCE
Definition and scope of fire insurance
A contract by which the insurer for a
consideration agrees to indemnify the insured
against loss of, or damage to, property by fire,
but may include loss by lightning, windstorm,
tornado or earthquake and other allied risks,
when such risks are covered by extension to fire
insurance policies or under separate policies.
One that escapes One that burns in a
from the place where place where it was
it was intended to intended to burn and
burn and ought to be ought to be
Insurer is liable Insurer is not liable
Measure of indemnity
1. Open policy: only the expense necessary to
replace the thing lost or injured in the condition it
was at the time of the injury
2. Valued Policy: the parties are bound by the
valuation, in the absence of fraud or mistake
Note: It is very crucial to determine whether a
marine vessel is covered by a marine insurance
or fire insurance. The determination is important
for three reasons:
a. Rule on constructive total loss and
abandonment – applies only to marine insurance
b. Rule on co – insurance – applies primarily to
marine insurance
c. Rule on co – insurance applies to fire
insurance only if expressly agreed upon
Effect of alteration in the thing insured:
entitles an insurer to rescind a contract of fire
insurance
 Requisites:
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;

Risks or losses covered 5. The alteration increases the risk; and

1. direct losses
2. indirect or consequential losses
a. physical damage
b. loss of earnings
c. extra expense
Note: The liability of the insurer is to pay for
direct loss only. The insurer may be liable to pay
for consequential losses if covered by extension
6. There must be a violation of a policy
provision.
Fall-of-building Clause: a clause in a fire
insurance policy which provides that if the
building or any part thereof falls, except as a
result of fire, all insurance by the policy shall
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Option to Rebuild Clause: a clause giving the
insurer the option to reinstate or replace the
property damaged or destroyed or any part
thereof, instead of paying the amount of the loss
or the damage.
The insurer, after electing to rebuild, cannot be
compelled to perform this undertaking by
specific performance because this is an
obligation to do, not to give. Remedy: ‘the same
be executed at his cost’. (Art. 1167 Civil Code)
C. CASUALTY OR ACCIDENT INSURANCE
(2005 Bar Exam)
Concept
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.
Classifications:
1. Insurance against specified perils which
may affect the person and/or property of
the insured (Accident or health
insurance)
Ex: personal accident, robbery/theft
insurance
2. Insurance against specified perils which
may give rise to liability on the part of
the insured for claims for injuries to or
damage to the property of others (Third
party liability insurance)
Insurable interest is based on the
interest of the insured in the safety of
persons, and their property, who may
maintain an action against him in case of
their injury or destruction, respectively.
Ex: workmen’s compensation, motor
vehicle liability
In a third party liability (TPL) insurance
contract, the insurer assumes the
obligation by paying the injured third
party to whom the insured is liable. Prior
payment by the insured to the third
person is not necessary in order that the
obligation may arise. The moment the
insured becomes liable to third persons,
the insured acquires an interest in the
insurance contract which may be
garnished like any other credit (Perla
Compania de Seguro, Inc. v. Ramolete,
205 SCRA 487)
 Aside from compulsory motor vehicle
liability insurance, the Insurance Code
contains no other provisions applicable to
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casualty insurance. Therefore, such casualty
insurance are governed by the general
provisions applicable to all types of
insurance, and outside of such statutory
provisions, the rights and obligations of the
parties must be determined by their contract,
taking into consideration its purpose and
always in accordance with the general
principles of insurance law.
 In burglary, robbery and theft insurance,
the opportunity to defraud the insurer – the
moral hazard – is so great that insurers have
found it necessary to fill up the policies with
many restrictions designed to reduce the
hazard. Persons frequently excluded are
those in the insured’s service and
employment. The purpose of the exception
is to guard against liability should theft be
committed by one having unrestricted
access to the property (Fortune Insurance v.
CA, 244 SCRA 208)
Liability insurable
1. liability for quasi-delict or non-fulfillment of
contract
2. liability for criminal negligence
Liability of the insurer if insured was committing
a felony:
Liabilities arising out of acts of negligence, which
are also criminal, are also insurable on the
ground that such acts are accidental. But liability
consequences of deliberate criminal acts are not
insurable.
“Intentional” vs. “Accidental” as used in
insurance policies:
1. 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
(Biagtan v. the Insular Life Assurance Co. Ltd.,
44 SCRA 58, 1972)
2. Accidental - that which happens by chance or
fortuitously, without intention or design, which is
unexpected, unusual and unforeseen.
Right of a third party injured to sue the
insurer of party at fault
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Depends on whether the contract of insurance is A “no action clause” must yield to the provisions
intended to benefit third persons also or only the of the Rules of Court regarding multiplicity of
insured suits. (Shafer v. RTC, 167 SCRA 386)

 Test applied: D. SURETYSHIP

1. Indemnity against third party liability – a Definition An agreement whereby a surety

third party injured can directly sue the guarantees the performance by the principal or
insurer obligor of an obligation or undertaking in favor of
an obligee. (Sec. 175) It is essentially a credit
Purpose: to protect injured persons accommodation.
against the insolvency of the insured  It is considered an insurance contract if
who causes such injury it is executed by the surety as a
vocation, and not incidentally.
2. Indemnity against actual loss or  When the contract is primarily draws up
payment – A third party has no cause of by one party, the benefit of doubt goes
action against the insurer. The third to the other party (insured/oblige) in
person’s recourse is limited to the case of ambiguity following the rule in
insured alone (Bonifacio Bros. v. Mora, contracts of adhesion. Suretyship,
20 SCRA 261) especially in fidelity bonding, is thus
treated like non – life insurance in some
If the policy provides for “reimbursement respects.
after actual payment by the insured,” or
for the indemnity against loss, a third Kinds:
person has no cause of action against a. Fidelity Bond – contract of insurance against
the insurer. (Bonifacio Bros. v. Mora 20 loss from misconduct
SCRA 261) b. Fidelity Guaranty Insurance – a contract
whereby one, for a consideration, agrees to
The insurer is not solidarily liable with indemnify the assured against loss arising from
the insured. The insurer’s liability is want of integrity, fidelity or honesty of employees
based on contract; that of the insured is or other persons holding positions of trust
based on torts. Furthermore, the
insurer’s liability is limited by the amount Nature of liability of surety
of the insurance coverage. (Pan 1. Solidary;
Malayan Insurance Corp. v. CA, 184 2. Limited to the amount of the bond;
SCRA 54) 3. It is determined strictly by the terms of the
contract of suretyship in relation to the principal
While in a solidary obligation the creditor contract between the obligor and the obligee.
may enforce the entire obligation against (Sec. 176)
one of the solidary debtors, in an
insurance contract, the insurer SURETYSHIP PROPERTY
undertakes to indemnify the insured INSURANCE
against loss, damage or liability arising
from unknown or contingent event. To accessory contract principal contract
make the insurer solidarily liable with the parties: surety, parties: insurer and
latter’s entire obligation beyond the sum obligor and obligee insured
limited in the insurance contract would credit contract of indemnity
result in “evident breach of the concept accommodation
of solidary obligations.” (Vda. De surety can recover Insurer has no such
Maglana vs Consolacion, 212 SCRA from principal right; only right of
268) subrogation
bond can be may be cancelled
NO ACTION CLAUSE cancelled only with unilaterally either by
a requirement in a policy of liability which consent of obligee, insured or insurer on
provides that suit and final judgment be first Commissioner or grounds provided by
obtained against the insured’ that only thereafter court law
can the person injured recover on the policy requires acceptance no need of
(Guingon v. del Monte, 20 SCRA 1043) of obligee to be valid acceptance by any
third party
risk-shifting device, risk-distributing

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premium paid being device, premium paid
in the nature of a as a ratable
service fee contribution to a reinstatement;
common fund
E. LIFE INSURANCE (1995, 2000 Bar Exams)
Definition
Insurance on human lives and insurance
appertaining thereto or connected therewith
which includes every contract or pledge for the
payment of endowments or annuities.
Kinds of life insurance
1. Ordinary Life, General Life or Old
Line Policy - insured pays a fixed premium
every year until he dies. Surrender value
after 3 years.
2. Limited Payment Policy – insured
pays premium for a limited period. If he dies
within the period, his beneficiary is paid; if he
outlives the period, he does not get
anything.
3. Endowment Policy – pays premium
for specified period. If he outlives the
period, the face value of the policy is paid to
him; if not, his beneficiaries receive the
benefit.
4. Term Insurance – insurer pays once
only, and he is insured for a specified period.
If he dies within the period, his beneficiaries
benefits. If he outlives the period, no person
benefits from the insurance.
5. Industrial Life - life insurance
entitling the insured to pay premiums
weekly, or where premiums are payable
monthly or oftener;
6. Group Life – essentially a single
insurance contract that provides coverage
for many individuals. Examples: in favor of
employees, “mortgage redemption
insurance”
7. Variable Contract – Any policy or
contract on either a group or individual basis
issued by an insurance company providing
for benefits or other contractual payments
thereunder to vary so as to reflect
investment results of any segregated
portfolio of investment.
Liability of insurer in certain causes of death
of the insured
1. Suicide
Insurer is liable in the following cases:
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1. If committed after two years from the
date of the policy’s issue or its last
2. If committed after a shorter period
provided in the policy; and
3. If committed in a state of insanity
regardless of the date of the commission
unless suicide is an excepted peril. (Sec.
180-A)
Note: Any stipulation extending the 2-
year period is null and void.
2. At the hands of the law (e.g. by legal
execution)
It is one of the risks assumed by the
insurer under a life insurance policy in
the absence of a valid policy exception.
Note: Justice Vitug believes that death
by suicide (if the insured is sane) or at
the hands of the law obviates against
recovery as being more in consonance
with public policy and as being implicit
under Section 87, ICP. (Pandect of
Commercial Law and Jurisprudence)
3. 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 bring about the death of the
insured, in which event, the nearest relative of
the insured shall receive the proceeds of said
insurance if not otherwise disqualified (Sec. 12)
Exceptions:
a. accidental killing
b. self – defense
c. insanity of the beneficiary at the time he killed
the insured
 If the premiums paid came from
conjugal funds, the proceeds are considered
conjugal. If the beneficiary is other than the
insured’s estate, the source of premiums
would not be relevant (Del Val v. Del Val, 29
Phil 534).
Reason: a natural person cannot be placed
in the same footing as a juridical person
Right to assign life insurance policy
1. A policy of insurance upon life or health may
pass by transfer, will or succession to any
person, whether he has an insurable interest or
not, and such person may recover upon it
whatever the insured might have recovered.
(Sec. 181)
2. Notice to an insurer of a transfer or bequest
thereof is not necessary to preserve the validity
of a policy of insurance upon life or health,
unless thereby expressly required. (Sec. 182)
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Measure of indemnity
The measure of indemnity in life or health
insurance policy is the sum fixed in the policy
except when a creditor insures the life of his
debtor
Cash Surrender Value – as applied to a life
insurance policy, it is the amount the insured, in
case of default, after the payment of at least 3
full annual premiums, is entitled to receive if he
surrenders the policy and releases his claims
upon it.
XII. COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE (CMVLI)
A specie 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.
Definitions:
Motor Vehicle – any vehicle as defined in Sec.
3[a] of RA 4136, otherwise known as the “Land
Transportation and Traffic Code.”
Passenger – any fare – paying person being
transported and conveyed in and by a motor
vehicle for transportation of passengers for
compensation, including persons expressly
authorized by law or by the vehicle’s operator or
his agents to ride without fare.
Third Party – any person other than the
passenger, excluding a member of the
household or a member of the family within the
second degree of consanguinity or affinity, of a
motor vehicle owner or land transportation
operator, or his employee in respect of death or
bodily injury arising out of and in the course of
employment.
Owner or Motor Vehicle Owner – actual legal
owner of the motor vehicle, in whose name such
vehicle is duly registered with the Land
Transportation Commission
Land Transportation Operator – the owner or
owners of motor vehicles for transportation of
passengers for compensation, including school
buses.
Purpose: 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
injury sustained. (Shafer vs Judge, RTC 167
SCRA 386)
Method of coverage
1. insurance policy
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2. surety bond
3. cash deposit
Scope of coverage required
1. Private motorists – comprehensive against
third party liability for death or bodily injuries
2. Operators of land transportation –
comprehensive against both passenger and third
party liabilities for death or bodily injuries
No-fault indemnity claim (2000 Bar Exam)
No-fault Clause: a clause that gives the victim
(injured person or heirs of the deceased) an
option to file a claim for death or injury without
the necessity of proving fault or negligence.
Rules of recovery
1. Total indemnity: maximum of P5,000
2. Proof of loss:
a. police report of accident;
b. death certificate and evidence
sufficient to establish proper payee
c. medical report and evidence of
medical or hospital disbursement.
3. Claim may be made against one motor
vehicle only
4. Proper insurer from which to claim –
a. In the case of an occupant: claim shall
lie against the insurer of the vehicle in which
the occupant is riding, mounting or
dismounting from
b. in any other case: claim shall lie against
the insurer of the directly offending vehicle.
5. In all cases, the right of the party paying the
claim to recover against the owner of the vehicle
responsible for the accident shall be maintained.
The claimant is not free to choose from
which insurer he will claim the “no fault
indemnity.” As the law, makes it mandatory that
the claim shall lie against the insurer of the
vehicle in which the occupant is riding, mounting
or dismounting from. The said vehicle might not
be the one that caused the accident is of no
moment since the law itself provides that the
party paying may recover against the owner of
the vehicle responsible for the accident. (Perla
Compania de Seguros, Inc. v. Ancheta, 169
SCRA 144).
This no-fault claim does not apply to
property damage. If the total indemnity of the
claim exceeds P5,000 and there is controversy
in respect thereto, the finding of fault may be
availed of by the insurer only as to the excess.
The P5,000 shall be paid without regard to fault.
(de Leon, The Insurance Code of the
Philippines)
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extent of the claim and make payment within 5

The essence of the no-fault indemnity
insurance is to provide victims of vehicular
accidents or their heirs immediate compensation
although in limited amount, pending final
determination of who is responsible for the
accident and liable for the victim’s injuries or
death.
Special Clauses
1. Authorized Driver Clause
A clause which aims to indemnify the
insured owner against loss or damage to the car
but limits the use of the insured vehicle to the
insured himself or any person who drives on his
order or with his permission (Villacorta v.
Insurance Commissioner)
The requirement that the person driving
the insured vehicle is permitted in accordance
with the licensing laws or other laws or
regulations to drive the motor vehicle (licensed
driver) is applicable only if the person driving is
other than the insured.
2. Theft Clause
A clause which includes theft as among
the risks insured against.
working days after reaching an agreement.
If no agreement is reached, the insurance
company shall pay only the “no fault” indemnity,
without prejudice to the claimant from pursuing
his claim further, in which case, he shall not be
required or compelled by the insurance company
to execute any quit claim or document releasing
it from liability under the policy of insurance or
surety bond issued.
XIII. CLAIMS SETTLEMENT
The indemnification of the loss of the insured.
In case of an unreasonable delay in the
payment of the insured’s claim by the insurer,
the insured can recover:
1.) attorney’s fees;
2.) expenses incurred by reason of the
unreasonable withholding;
3.) interest at double the legal interest rate fixed
by the Monetary Board; and
4.) the amount of the claim (Zenith Insurance
Corp. v. CA, 185 SCRA 398)
Time for payment of claims

Where the car is unlawfully and LIFE POLICIES NON – LIFE

wrongfully taken without the owner’s consent or POLICIES
knowledge, such taking constitutes theft, and a. Maturing upon the Proceeds under the
thus, it is the “theft clause” and not the expiration of the term policy shall be paid
“authorized driver clause” that should apply – the proceeds are within 30 days after the
(Palermo v. Pyramids Ins., 161 SCRA 677). immediately payable receipt by the insurer
to the insured of proof of loss, and
3. Cooperation Clause b. Maturing at the ascertainment of the
A clause in an automobile insurance death of the insured loss or damage by
policy which provides in essence that the occurring prior to the agreement of the
insured shall give all such information and expiration of the term parties or by arbitration
assistance as the insurer may require, usually stipulated – The but not later than 90
requiring attendance at trials or hearings. proceeds are payable days from such receipt
to the beneficiaries of proof of loss
Time to file and Process claim under CTPL within 60 days after whether or not
presentation and ascertainment is had
Period to file notice – the written notice of claim filing of proof of death or made
(setting forth the nature, extent and duration of
the injuries as certified by a duly licensed
physician) must be presented within 6 months XIV. PRESCRIPTIVE PERIOD (Sections 63 &
from the date of the accident otherwise the claim 384) (1996 Bar Exam)
is deemed waived.
Rules:
Prescriptive Period – the action must be filed in 1. In the absence of an express stipulation in the
court or the Insurance Commission within one policy, it being based on a written contract, the
year from the denial of the claim. action prescribes in 10 years.
2. HOWEVER, the parties may validly agree on
If there is an agreement, the insurance company a shorter period provided it is not less than one
concerned shall forthwith ascertain the truth and year from the time the cause of action accrues.

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 A condition, stipulation, or is not covered by the term “doing or

agreement in any policy of insurance, transacting an insurance business” under
limiting the time for commencing an action Section 2, ICP, neither is it covered by
thereunder to a period of less than 1 year Section 416 of the same Code which grants
from the time when the cause of action the Commissioner adjudicatory powers.
accrues, is void. (Sec. 63) (Philippine American Life Insurance Co. v.
3. The cause of action accrues from the rejection Ansaldo, 234 SCRA 509)
of the claim of the insured and not from the time
of the loss. 2. Administrative/Regulatory functions
 Prescriptive period shall a. Enforcement of
commence from the initial denial of the insurance laws
claim, not from the resolution of the motion b. issuance, suspension or
for reconsideration filed by the insured, revocation of certificate of authority
otherwise, it can be used by the insured as a c. power to examine books
scheme or device to waste time until the and records, etc.
evidence which may be used against him is d. rule – making authority
destroyed. (Sun Insurance Office Ltd. vs. e. punitive
CA, 195 SCRA 193)
4. In CMVLI, the written notice of claim must be
filed within 6 months from the date of the TRANSPORTATION LAWS
accident; otherwise, the claim is deemed waived
even if the action is brought within one year from
its rejection (Vda. De Gabriel vs. CA, 264 SCRA GOVERNING LAWS
137).
5. The suit for damages either with the proper Land Transportation
court or with the Insurance Commissioner 1. Common Carriers
should be filed within 1 year from the date of the a. New Civil Code (NCC) – primary
denial of the claim by the insurer, otherwise, the b. Code of Commerce – suppletory
claimant’s right of action shall prescribe. 2. Private Carriers
a. Object is a merchandise
XV. INSURANCE COMMISSIONER 1. Code of Commerce – primary
2. NCC – suppletory
Functions: b. Object is non-commercial
a. Law on deposit – if object is property
1. Adjudicatory/Quasi - Judicial functions b. Law on contracts – if passenger

a. Exclusive Original Jurisdiction – Any dispute Transportation by Sea

in the enforcement of any policy issued pursuant 1. Coastwise
to Chapter VI (CMVLI) (Sec. 385[2]) a. NCC – primary
b. Concurrent Original Jurisdiction (with the b. Code of Commerce – suppletory
RTC) – where the maximum amount involved in c. Carriage of Goods by Sea Act
any single claim is P100,000 (Sec. 416), except (COGSA) does not apply even if
in case of maritime insurance which is within the the parties expressly provide for
exclusive jurisdiction of the RTC. (BP 129; it
admiralty & maritime jurisdiction) 2. Philippine port to foreign ports – law of the
 Where the amount exceeds country of destination
P100,000, the RTC has jurisdiction 3. Foreign ports to Philippine ports
 The filing of a complaint with the a. NCC – primary
Commissioner shall preclude civil courts b. Code of Commerce
from taking cognizance of the case (Sec. c. COGSA
416). d. Philippine laws still apply even if
 A decision which has become the collision actually takes place in
final may be the subject of a writ of foreign waters.
execution which may be served and
enforced by a sheriff (Sec. 416). Air Transportation
1. Domestic – NCC; Code of
 The Insurance Commissioner
Commerce
has no jurisdiction to decide the legality of a
2. International – Warsaw
contract of agency entered into between an
Convention
insurance company and its agent. The same

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 Far Eastern University
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COMMON CARRIERS publicly known route, maintains no

terminals, and issues no tickets (Asia
 A person, corporation, firm or Lighterage Shipping vs. CA GR No. 147246,
association, engaged in the business of August 19, 2003)
carrying or transporting passengers or  A common
goods or both, by land, water or air, for carrier shall remain as such, notwithstanding
compensation, offering their services to the the charter of the whole or portion of a
public (Art. 1732 NCC) vessel, provided the charter is limited to the
ship only, as in the case of a time or voyage
Tests: (1996, 2000 Bar Exams) charter.
1. He must be engaged in the It is only when the charter includes both the
business of carrying goods for vessel and its crew, as in a bareboat or
others as a public employment, and demise, that a common carrier becomes
must hold himself out as ready to private (Planters Products vs. CA, 226
engage in transportation of goods SCRA 476)
for persons generally as a business  A travel agency
and not as a casual occupation; is not a common carrier. Its services include
2. He must undertake to carry procuring tickets and facilitating travel
goods of a kind to which his permits or visas as well as booking
business is confined; customers for tours (Crisostomo vs. CA, GR
3. He must undertake to carry by No. 138334, Aug. 25, 2003)
the method by which his business is
conducted and over his established Distinctions between a Common Carrier and
roads; and a Private Carrier: (2002 Bar Exam)
4. The transportation must be for
hire (First Phil. Industrial vs. CA, COMMON CARRIER PRIVATE CARRIER
300 SCRA 661)
Holds himself out for Contracts with
Characteristics: all people particular individuals
 Art. 1732 makes no indiscriminately or groups only
distinction between one whose principal Extraordinary Only ordinary
business activity is the carrying of persons diligence is required diligence is required
or goods or both, and one who does such Subject to State Not subject to State
carrying only as an ancillary activity regulation regulation
(sideline). There is a No presumption of
It also avoids distinction between presumption of fault fault or negligence
offering transportation service on a or negligence
regular or scheduled basis, and on an Exempting Exempting
occasional, episodic or unscheduled circumstances are circumstance is
basis. proof of extraordinary fortuitous event
Neither does it distinguish between diligence and Art.
a carrier offering its services to the 1734 NCC
“general public” (general community or Parties may not Parties may even
population) and one who offers services agree on limiting the exempt carrier’s
only from a narrow segment of the carrier’s liability liability, provided it is
population. except when not contrary to law,
A person or entity is a common carrier provided by law morals, good
even if he did not secure a Certificate of customs, public order
Public Convenience (De Guzman vs. CA, or public policy
168 SCRA 612) Governed by law on Governed by law on
 It does not common carriers obligations and
provide that the transportation should be by contracts
motor vehicle.
Hence, a grantee of pipeline concession Registered Owner Rule
under the Petroleum Act is considered a  A registered owner of a vehicle (even if
common carrier (First Phil. Industrial vs. CA, not used for public service) is the lawful
supra) operator insofar as the public and third
 One is a persons are concerned; consequently, it is
common carrier even if he has no fixed and directly and primarily responsible for the
consequences of its operation.

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1. In contemplation of the
law, the owner/operator
of record is the
employer of the driver,
the actual operator and
employer being
considered as merely its
agent (Equitable
Leasing Corp. vs.
Suyom, GR No.
143360. Sept. 5, 2002)
2. The registered owner
cannot escape
responsibility by proving
that a third person is the
actual and real owner.
He is liable to the
injured party subject to
his right of recourse
against the transferee or
buyer.
a. The registered owner is liable
even
if the vehicle was leased to
another (BA
Finance Corp. vs. CA, 215
SCRA 715)
b. It would be absurd to hold liable
the owner of a stolen vehicle for
an accident caused by the
person who stole the vehicle
(Duavit vs. CA, 173 SCRA 490)
Kabit System (2005 Bar Exam)
 A system whereby a person who has been
granted a certificate of public convenience
allows other persons who own motor
vehicles to operate under such license, for a
fee or a percentage of such earnings. It is
void under Art. 1409 NCC.
 Effects:
1. The thrust of the law in
enjoining the kabit system is to identify
the person upon whom responsibility
may be fixed with the end in view of
protecting the riding public
2. The registered owner is
primarily liable for all the consequences
of the operations of the carrier.
3. The registered owner
cannot recover from the actual owner
and the latter cannot obtain transfer of
the vehicle to himself, both being in pari
delicto (Teja Marketing vs. IAC, 148
SCRA 347)
4. Both the registered
owner and the actual owner are
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solidarily liable with the driver
(Zamboanga Tranportation Co. vs. CA,
30 SCRA 717)
5. The transfer, sale, lease
or assignment of the privilege granted is
valid between the contracting parties but
not upon the public or third persons
(Gelisan vs. Alday, 152 SCRA 388)
Exceptions to kabit system:
 When neither of the parties to
the kabit system is being held liable for
damages.
 When the case arose from the
negligence of another vehicle in using the
public road to whom no representation or
misrepresntation as regards the ownership
and operation of passenger jeepney was
made.
 When the riding public was not bothered
or inconvenienced at the very least by the
illegal arrangement. (Lim vs. CA, 373 SCRA
394)
Boundary System (2005 Bar Exam)
 The driver pays for the gasoline consumed
and does not receive a fixed wage but gets
only the excess of the receipt of the fares
collected by him over the amount he has
agreed to pay to the owner of the vehicle
 The owner cannot escape liability:
1. The owner is subsidiarily liable as
employer in accordance with Art. 103
RPC
2. From the viewpoint of labor laws, he is
an employee, being entitled to all
privileges going along with the
employer-employee relationship
3. From the viewpoint of the NCC, the
driver is a lessee because he pays a
fixed amount of rental for his use of the
vehicle
4. From the viewpoint of the law on
common carriers, he is an employee of
the operator for purpose of the latter’s
liability to passengers
Arrastre Operator
 The legal relationship between the
consignee and the arrastre operator is akin
to that of a depositor and a warehouseman.
The relationship between the consignee and
the common carrier is similar to that of the
consignee and the arrastre operator. Hence,
the duty of the arrastre operator to take care
of the goods that are in its custody and to
deliver them in good condition to the
consignee also devolves upon the common
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carrier. Thus, the arrastre operator and the
common carrier are liable in solidum for the
proper delivery of the goods to the
consignee (Eastern Shipping Lines v. CA,
234 SCRA 78)
TOWAGE A vessel is hired to bring
another vessel to another
place
ARRASTRE A contract for unloading of
goods from a vessel.
Services are not maritime.
They are in fact no different
from those of a depositary
or warehouseman.
STEVEDORIN Loading and unloading of
G coastwise vessels calling
at the port
I. CARRIAGE OF GOODS
Extraordinary Diligence (1997, 2001, 2002 Bar
Exams)
 Common carriers, from the nature of their
business and for reasons of public policy,
are bound to observe extraordinary diligence
in the vigilance over the goods and for the
safety of passengers transported by them,
according to all circumstances of each case
(Art. 1733, NCC)
 Presumption of Negligence
1. If the goods are lost, destroyed or
deteriorated, common carriers are
presumed to have been at fault or to
have acted negligently (Art. 1735)
2. Mere proof of the delivery of goods in
good order to a common carrier and
their arrival in bad order at their
destination makes for a prima facie case
against the carrier (Coastwise
Lighterage Corp. vs. CA, 245 SCRA
796)
3. The court need not make an express
finding of fault or negligence, the law
imposes liability upon common carriers,
as long as it is shown that:
a. There is a contract between the
shipper and common carrier
b. Loss or deterioration took place
during the existence of contract
Duration of Liability
Commencement: from the time the goods are
unconditionally placed in the possession of, and
received by the carrier for transportation
Termination: actual or constructive delivery by
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the carrier to the consignee or to the person who
has the right to receive them (Art. 1736)
Liability remains:
a. Even when goods are temporarily unloaded
or stored in transit unless the shipper or
owner has made use of the right of stoppage
in transitu (Art. 1737)
b. And when goods are stored in the carrier’s
warehouse at the place of destination until
the consignee has been advised of the
arrival thereof and had reasonable
opportunity thereafter to remove or dispose
them (Art. 1738)
c. Delivery to the customs authorities is not
delivery to the consignee. However, the
parties may agree to limit the liability of
carrier (Lu Do vs. Binamira, 101 Phil. 120)
Defenses (1995, 1996, 1997, 2001, 2002 Bar
Exams)
 Flood, storm, earthquake, lighting, or other
natural disaster or calamity.(Caso
Fortuito/Force Majeure)
 Act of public enemy in war, whether
international or civil
 Act or omission of shipper or owner of goods
 Character of goods or defects in packing or
in containers.
 Order or act of competent authority (Art.
1734)
 Stipulation limiting liability of carrier (Arts.
1744, 1448, 1749, 1750)
Caso Fortuito/Force Majeure
a. Must be proximate and only cause of loss
b. Carrier must exercise due diligence to
prevent or minimize the loss before, during
or after the disaster (Art. 1739)
c. Carrier not in delay in transporting the goods
(Art. 1740)
 Fire may not be considered a natural
disaster (Eastern Shipping vs. IAC, 150
SCRA 463)
 “Very rough seas and stormy weather” were
not caso fortuito, but normal occurences that
an ocean-going vessel, particularly in the
month of September which, in our area, is a
month of rains and heavy seas would
encounter as a matter of routine (Eastern
Shipping vs, CA, 196 SCRA 570)
Acts of Public Enemy
a. Must be proximate and only cause
of loss
 Far Eastern University
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b. Carrier must exercise due diligence
to prevent or minimize loss before,
during or after the act causing loss,
of goods (Art. 1739)
Contributory Negligence
 If shipper or owner merely contributed to
the loss, the proximate cause thereof being
the negligence of carrier, the carrier shall still
be liable for damages, but such shall be
equitably reduced (Art. 1741)
Character of the Goods
1. Even if damage
caused by the inherent
defect/character of goods,
the common carrier must
exercise due diligence to
forestall or lessen loss (Art.
1742)
2. Carrier who, knowing
the fact of improper packing
of the goods upon ordinary
observation, still accepts the
goods notwithstanding such
condition is not relieved of
liability for loss resulting
therefrom (Southern Lines,
Inc. v. CA, 4 SCRA 258)
Order or Act of Public Authority
 Public authority must have power to
issue the order (Art. 1743). Where the officer
acts without legal process, the common
carrier will be held liable.
Stipulation Limiting Liability of Carrier (2002
Bar Exam)
 Common carrier and shipper may agree
on carrier’s observance of diligence to a
degree less than extraordinary, provided
it be:
1. In writing, signed by shipper or owner;
2. Supported by a valuable consideration other
than the service rendered by carriers; and
3. Reasonable, just and not contrary to public
policy. (Art. 1744)
Valid Stipulations:
a. Carrier's liability limited to the
value of goods appearing in the bill
of lading, unless the shipper or
owner declares a greater value.
(Art. 1749)
b. Fixing the sum to be recovered
by the owner or shipper, if it is
reasonable and just under the
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circumstances and has been fairly
and freely agreed upon. (Art. 1750)
c. Limiting carrier’s liability for
delay on account of strikes or riots.
(Art. 1748)
Invalid Stipulations: (RL²NTD²)
a. Goods are transported at the risk of the
owner or shipper;
b. Carrier will not be liable for any loss of
goods;
c. Carrier need not observe any diligence in
the custody of goods;
d. Carrier shall exercise a degree of diligence
less than that of a good father of a family;
e. Carrier shall not be responsible for the acts
or omissions of his or its employees;
f. Carrier’s liability for acts committed by
thieves or robbers who do not act with grave
or irresistible threat, violence or force is
dispensed with or diminished;
g. Carrier not responsible for the loss of goods
on account of defective condition of car,
vehicle, ship or other equipment used in the
contract of carriage. (Art. 1745)
Effect of Delay
 If, without just cause, (1) delays the
transportation of goods or (2) changes the
stipulated or usual route, the contract limiting
the common carrier's liability cannot be
availed of in case of loss of goods (Art.
1747)
Presumption despite stipulation
 Even when there is an agreement
limiting the liability, the common carrier is
disputably presumed to have been negligent
in case of their loss. (Art. 1752)
Grounds for valid refusal to accept goods:
(DUO-CIEDSF)
1. Dangerous objects or substances
including dynamites and other
explosives
2. Unfit for transportation
3. Acceptance would result in
overloading
4. Contrabands or illegal goods
5. Injurious to health
6. Goods will be exposed to untoward
danger like flood, capture by enemies
and the like
7. Goods like livestock will be exposed
to diseases
8. Strike
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9. Failure to tender goods in time
Duty to Deliver Goods
 Oft-Repeated Rule: In the absence of a
special contract, a carrier is not an insurer
against delay in transportation of goods
 Consequences of Delay:
a. A natural disaster shall not free carrier from
responsibility (Art. 1740)
b. Contract limiting carrier's liability cannot be
availed of in case of loss of goods (Art.
1747)
c. Excusable delays in carriage suspend, but
do not generally terminate, the contract of
carriage, and when the cause is removed,
the master must proceed with the voyage
and make delivery
d. During delay the vessel continues to be
liable as a common carrier, not as a
warehouseman, and remains duty bound to
exercise extraordinary diligence
e. Payment of indemnity:
i. Stipulated in bill of lading
ii. If no indemnity stipulated, then carrier
shall be liable for damages incurred
due to delay
f. Consignee may:
i. Leave goods transported in the hands
of carrier (Abandonment) advising
him thereof in writing before their
arrival at the point of destination. The
carrier shall pay the full value of goods
as if they had been lost or mislaid.
ii. If no abandonment was made
indemnification shall not exceed the
current price of goods at the time it
should have been delivered
II. CARRIAGE OF PASSENGERS
Not Passengers:
1. One who has boarded by fraud, stealth or
deceit
2. Rides any part of the vehicle unsuitable or
dangerous or which he knows is not
designated or intended for passengers
3. Remains on a carrier for an unreasonable
length of time after he has been afforded
every safe opportunity to alight
Utmost Diligence
 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)
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BAR QUESTION (Q): X, an 80-year old
epileptic, boarded the S/S Tamaraw in
Manila going to Mindoro. To disembark,
the passengers have to walk thru a gang
plank. While negotiating the gang plank, X
slipped and fell into the waters. X was
saved from drowning, brought to a
hospital but after a month, died from
pneumonia. Except for X, all the
passengers were able to walk thru the
gang plank. What is the liability of the
owner of S/S Tamaraw?
SUGGESTED ANSWER (SA): The owner
of S/S Tamaraw is liable for the death of X
in failing to exercise utmost diligence in
the safety of passengers. Evidently, the
carrier did not take the necessary
precautions in ensuring the safety of
passengers in the boarding of and
disembarking from the vessel. Unless
shown to the contrary, a common carrier
is presumed to have been negligen tin
cases of death or injury to its passengers
(Arts. 1755-1756, NCC). Since X has not
completely disembarked yet, the
obligation of the shipowner to exercise
utmost diligence still then subsisted and
he can still be held liable.
Duration of Liability
 Commencement: From the moment the
person who purchases the ticket (or token or
card) presents himself at the proper place
and in a proper manner to be transported
with a bona fide intent to ride the coach
(Vda. De Nunca vs. Manila Railroad Co., 13
SCRA 249)
Termination: Until the passenger has, after
reaching his destination, (1) safely alighted;
or (2) had a reasonable opportunity to leave
the carrier’s premises
Liability remains:
1. Not only during the course of the trip, but for
so long as the passengers are within its
premises and where they ought to be in
pursuance to the contract of carriage (LRTA
vs. Navidad)
2. Includes reasonable time to remain on the
premises to see after his baggage and
prepare for his departure (La Mallorca vs.
CA, 17 SCRA 739)
3. Extends to persons boarding the cars as
well as to those alighting therefrom. It is the
duty of common carriers to stop their
conveyances a reasonable length of time to
afford passengers an opportunity to enter
(Dangwa Trans Co. vs. CA, 202 SCRA 574)
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Presumption of Negligence
1. In case of death of or injury to passengers,
common carriers are presumed to have
been at fault or to have acted negligently
(Art. 1756 NCC). This provision applies the
doctrine of res ipsa loquitor for several
reasons:
i) The contract imposes on the
carrier the obligation to transport the
passengers safely, hence the burden of
explaining should fall on the carrier;
ii) The cause of accident is better
known to the carrier than the passenger;
and
iii) The accident could not have
happened if due care was exercised by
the carrier
2. The court need not make an express finding
of fault or negligence of the common carrier
to hold it liable
Liability for Acts of Employees
a. Common carriers are liable
for the death of or injuries to
passengers through the
negligence or willful acts of
the former’s employees,
although:
i. Such employees
may have acted
beyond the scope of
their authority or
ii. In violation of the orders of common
carriers (Art. 1759)
b. Not a defense:
i. Proof of exercise of diligence of a good
father of a family in the selection and
supervision of employees (Ibid)
ii. Cannot be eliminated or limited by
stipulation, posting of notices,
statements on the tickets or otherwise
(Art. 1760)
c. Liability of carrier for the
personal violence of its
employees or agents upon
its passengers extends only
to those acts that the carrier
could foresee or avoid
through the exercise of the
degree of diligence
required.
d. Diligence in the selection
and supervision of
employees under Art. 2180
NCC cannot be interposed
by the common carrier to
prevent damages because
the liability of the carriers
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arises from the breach of
the contract of carriage. The
defense under Art. 2180 is
applicable to negligence in
quasi-delicts (Del Prado v.
Manila Electric Co., 52 Phil
900)
Liability for Acts of Strangers or other
Passengers
a. 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 carrier’s 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)
b. The carrier is liable when its personnel
allowed a passenger to drive the vehicle
causing it to collide with another vehicle
resulting to the injuries suffered by the
other passengers (MRR v. Ballesteros,
16 SCRA 641)
Effect of Stipulation on Liability
 General Rule: Liability cannot be
dispensed with or lessened by stipulation,
posting of notices, statements on tickets or
otherwise (Art. 1757)
Exception: When a passenger is carried
gratuitously, a stipulation limiting the
common carrier’s liability for negligence is
valid
Exception to the exception: Willful acts or
gross negligence (Art. 1758)
Passenger’s Baggages
HAND-CARRIED CHECKED-IN
(In the custody of (In the custody of the
passengers or their common carrier)
employees)
Necessary deposit Considered as goods
Common carrier Requires extraordinary
exercises diligence of diligence
a depositary (ordinary
diligence)
Governed by Arts. Governed by Arts.
1998 and 2000-2003 1733-1753
III. ACTIONS
Causes of Action:
1. Culpa Contractual
a. The liability of the carrier is not
merely subsidiary or secondary but
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direct, immediate and primary. respective claims may be determined by

(Medina vs. Cresencia, 99 Phil. 506) legal proofs which each of the
b. Only the carrier is primarily liable contracting parties may present in
and not the driver, because there is conformity with law.
no privity between the driver and the
passenger. Obligations of the Carrier
c. No defense of due diligence in the a) Duty to Accept Goods – see
selection and supervision of notes on Common Carriers for ground for
employees. (Art. 1759) valid refusal to accept goods
b) Duty to Deliver Goods to (i)
2. Culpa Aquiliana person indicated in bill of lading; or (ii) any
a. The carrier and driver person to whom bill of lading was validly
are solidarily liable as joint transferred or negotiated
tortfeasors.
 see notes on Common Carriers
b. Defense of due
for effects of delay
diligence in the selection and
c) Duty to exercise extraordinary
supervision of employees is
diligence
available. Except: maritime tort
resulting in collision
Right of Consignee to Abandon the Goods
3. Culpa Delictual
a. The
1. Partial non-delivery, where
goods are useless with others (Art. 363
driver is primarily liable. The carrier
Code of Commerce)
is subsidiarily liable only if the driver
is convicted and declared insolvent 2. Goods rendered useless for sale
(Art. 100 RPC) or consumption for purposes for which
they are properly destined (Art. 365)
OVERLAND TRANSPORTATION 3. In case of delay through the
fault of carrier (Art. 371)
Scope:
1. Domestic land and water/maritime Notice of Damage
transportation  Condition precedent
2. Domestic air transportation  Damage apparent – immediately
upon delivery
Bill of lading (1998, 2005 Bar Exams)  Damage not apparent – within
 Written acknowledgment of receipt of goods 24 hours from delivery (Art. 366)
and agreement to transport them to a
specific place to a person named or to his Prescriptive Period
order. 1. Not provided by Art. 366, hence NCC
applies
Note: It is not indispensable for the creation of a 2. No bill of lading – within 6 years
contract of carriage. The contract itself arises 3. With bill of lading – 10 years
from the moment goods are delivered by the
shipper to the carrier and the carrier agrees to
carry them (Compania Maritima v. Insurance Art. 366 COGSA
Company of North America, 12 SCRA 213) Code of Commerce
Notice of damage is a Notice of damage not a
Functions: condition precedent condition precedent
1. A receipt for the goods shipped. 24-hour period for non- 3-day period for non-
2. A contract which the three parties apparent damage apparent damage
(shipper, carrier, consignees) undertake No prescriptive period 1-year period
specific responsibilities and assume provided. NCC applies
stipulated obligations.
Does not cover Also does not cover
3. A legal evidence of the contract between misdelivery or delay misdelivery or delay
the shipper and the carrier. Its contents Extrajudicial demand Extrajudicial demand
shall decide all disputes which may arise tolls prescriptive period does not toll
with regard to their execution and prescriptive period
fulfillment. (Magellan Manufacturing v. Parties can stipulate 1-year period cannot
CA, 201 SCRA 2021) shorter period be shortened
 In the absence of a bill of lading, their

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6. Voyage is not maritime but only in a

MARITIME LAW river or gulf

Characteristics:
1. Real
a) Similar
transactions over
real property with
respect to effectivity
against third
persons which is
done through
registration
b) Evidence of real
nature is shown by
(1) limitation
liability of agents to
actual value of the
vessel and freight
money; and (2) right
to retain cargo and
embargo and
detention of vessel
(Luzon Stevedoring
Corp v. CA, 156
SCRA 169)
2. Hypothecary
i) Liability of owner of vessel is
limited to the value of vessel
(Doctrine of Limited Liability)
I. DOCTRINE OF LIMITED LIABILITY (1997,
1999, 2000 Bar Exams)
“No vessel, no liability”
 The liability of ship owners is limited to
the amount of interest in said vessel such
that where vessel is entirely lost, the
obligation is extinguished (Luzon
Stevedoring v. Escano, 156 SCRA 169)
 Interest extends to:
a. Vessel itself
b. Equipments
c. Freightage
d. Insurance proceeds (Chua v. IAC, 166
SCRA 183)
Exceptions:
1. Where injury or damage is due to
ship owner’s fault
2. Vessel is insured
3. Claims under Workmen’s
Compensation
4. Expenses for repair on vessel
before loss
5. Vessel is not abandoned
Abandonment
1. Indispensable requirement before the
to shipowner or ship agent can enjoy the
benefits of the limited liability principle. The
only instance where such abandonment is
dispensed with is when the vessel was
entirely lost.
2. Only the ship owner and the ship agent can
make an abandonment
3. What may be abandoned – vessel
4. Instances:
1. Civil liability from indemnities to
of third persons (Art. 587 Code of
Commerce)
2. Leakage of at least ¾ of
contents of cargo containing liquids (Art.
687)
3. Constructive loss of vessel
(Sec. 138 Insurance Code)
 See notes on Overland Transportation
for right of consignee to abandon goods
5. No procedure to be followed
6. No prescriptive period provided not
estopped from invoking the same or do acts
inconsistent with abandonment
7. May be made to be exempted from the
following liabilities:
i. Civil liability to third persons arising from
the conduct of the captain in the
vigilance over the goods
ii. Proportionate contribution of co-owners
of the vessel to a common fund for the
results of the acts of the captain referred
to in Art. 587 Code of Commerce
iii. Civil liability incurred by the ship owner
in case of collision
Admiralty Jurisdiction
 all actions in admiralty and maritime
jurisdiction where the claim exceeds
P300,000 or in Metro Manila, exceeds
P400,000 the RTC has jurisdiction (Sec.
19(3) BP 129, as amended by RA 7691)
II. VESSELS
 Engaged in navigation, whether
coastwise or on the high seas, including
floating docks, pontoons, dredges, scows
and any other floating apparatus destined for
the services of the industry or maritime
commerce. Excluded are local and foreign
military vessels, bancas and other
watercrafts of less than 3 tons gross

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capacity and small watercrafts engaged in
river and bay traffic.
Ownership
1. Acquisition
a. Prescription – (1) acquisition must appear
in a written instrument, (2) which shall not
produce any effect to third persons if not
inscribed in the registry of vessels and (3)
shall be acquired by possession in good
faith, continued for 3 years, (4) with a just
title duly recorded. (5) In the absence of any
of these, continuous possession for 10 years
shall be necessary to acquire ownership.
b. Sale
 If made while it is on voyage – the
freightage which it earns from the time it
receives its last cargo shall pertain
entirely to the purchaser, and the
payment of the crew and other persons
who make up its complement shall be
for his account.
 If made after vessel arrived at port of its
destination – freightage shall pertain to
the vendor, and the payment of the crew
and other individuals who make up its
complement shall be for his account,
unless the contrary is stipulated in either
case.
2. Registration – through the Maritime
Industry Authority (MARINA)
Ship’s Manifest - Declaration of the entire
cargo. The object is to furnish customs officers
with a list to check against, to inform the revenue
officers what goods are brought into a port of the
country on a vessel. Hence, the requirement that
a vessel must carry a manifest is not complied
with even if a bill of lading can be presented
 A bill of lading is just a declaration of a
specific cargo rather than the entire cargo. It
is issued as a matter of convenience by
virtue of a contract.
III. PARTIES
1. Ship-owners and ship
agents
2. Captains and masters of the
vessel
3. Officers and crew of the
vessel
4. Supercargoes
Shipowners and Ship Agents
 Liabilities:
1. Acts of the captain (Art. 618)
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2. Contracts of the captain,
whether authorized or not, to repair, equip
and provision the vessel, provided that the
amount claimed was invested for the benefit
of the vessel (Art. 586)
3. Indemnities in favor of third
persons which may arise from the conduct of
the captain in the care of the goods which
the vessel carried, as well as for the safety
of the passengers transported
4. Damages to the goods
loaded on the vessel without prejudice to
their right to free themselves from liability by
abandoning the vessel to the creditors (Art.
587)
Notes:
 Liable jointly and severally
 Not liable for an obligation contracted by
the captain in excess of the latter’s powers
and privileges pertaining to him. However, if
the amount claimed were used for the
benefit of the vessel, the ship owner or ship
agent is liable
Captains and Masters of Vessels
 Nature of Position
1. General agent of the
ship-owner
2. Technical director of the
vessel
3. Representative of the
government of the country under whose
flag he navigates
 Qualifications:
1. Filipino citizen
2. Legal capacity to contract
3. must have passed the required physical and
mental examinations required for licensing
him as such (Art. 609)
 Supercargoes - Persons who discharge
administrative duties assigned to him by ship
agent or shippers, keeping an account and
record of transaction as required in the
accounting book of the captain (Art. 649)
IV. CHARTER PARTY
 Contract by which an entire ship, or
some principal part thereof is let by the
owner to another person for a specified time
or use for the conveyance of goods, in
consideration of the payment of freight
(Caltex Phils. vs. Sulpicio Lines, 315 SCRA
709)
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LEASE CHARTER PARTY Common carrier Common carrier

If for a definite Charterer may becomes private remains as such
period, lessee rescind charter party
cannot give up lease by paying half of Freight – Parties may fix the manner or form in
by paying a portion freightage agreed which the charter price shall be satisfied
of the amount upon
agreed upon Lay days – period when vessel will be delayed in
If the leased The new owner is the port for loading and unloading
property is sold to not compelled to
one who knows of respect the charter Primage – bonus to be paid to the captain after
the existence of the party so long as he the successful voyage
lease, the new can load the vessel
owner must respect with his own cargo Deadfreight – where the charterer failed to
the lease occupy the leased portion of the vessel, he may
thereby be made liable by the ship-owner
Classes:
1. Bareboat or Demise Charter Demurrage – sum due, by express contract, for
 Charterer provides crew, food and fuel. the detention of the vessel, in loading and
The charterer is liable as if he were the unloading, beyond the time allowed in the
owner, except when such arises from contract of affreightment, and to any other
the unworthiness of the vessel improper detention or delay beyond the time set
for loading
 Owner pro hac vice – a demise
charterer, in spite of the fact that
V. BOTTOMRY AND RESPONDENTIA
somebody else is the owner of the
vessel, is treated as the owner of the
Bottomry – loan made by ship-owner or ship
chartered vessel, just for that one
agent guaranteed by the vessel itself and
particular purpose only.
repayable upon arrival of vessel at destination
Effect: charterer assumes customary
(Art. 719)
rights and liabilities of the ship-owner to
third persons and is held liable for the
Respondentia – loan, taken on security of the
expense of the voyage and the wages of
cargo laden on a vessel, and repayable upon
the seamen
safe arrival of cargo at destination (Art. 719)
2. Contract of Affreightment
Common Requisites: (BDPS²R)
 Owner leases the boat or part of it for
the carriage of goods  Borrows money for use, equipment or
repair of vessel
1. Time charter – vessel is  For a definite term
chartered for a period of time or  With extraordinary interest called
duration of voyage premium
2. Voyage or trip charter –
contract for hire of vessel for one or  Secured by pledge of vessel or portion
series of voyages thereof (in bottomry) or goods
(respondentia)
BAREBOAT OR CONTRACT OF  Loan repayment depends or conditioned
DEMISE CHARTER AFFREIGHTMENT on the safe arrival of the vessel
Charterer becomes Owner remains liable (bottomry) or goods (respondentia)
liable to others caused as carrier and must  Obligation to repay extinguished if
by its negligence answer for any vessel is lost due to specific marine
breach of duty perils in the course or voyage within a
Charterer regarded as Charterer is not limited time, or if pledged goods are lost
owner pro hac vice for regarded as owner
the voyage Formal Requirements:
Owner of vessel Owner retains 1. By means of public instrument
relinquishes possession, 2. Policy signed by the contracting parties and
possession, command command and the broker taking part therein
and navigation to navigation of the ship 3. Private instrument
charterer

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Who may contract: not extinguish the loan extinguishes the same
 Bottomry – ship owner or ship agent.
Outside of the residence of the owners, the
captain. VI. ACCIDENTS
 Respondentia – only the owner of the cargo,
except: (i) on the portion of the vessel he 1. Averages
owns, provided no money has been 2. Collision
previously borrowed on the whole vessel, 3. Arrival Under Stress
nor exists any other kind of lien or obligation 4. Shipwreck
chargeable against her; (ii) when he is
permitted to do so, he must necessarily state Protest– written statement by the master of a
what interest he has in the vessel vessel or any authorized officer, attested by
proper officer or a notary, to the effect that
Exceptions to the Hypothecary Nature of damages has been suffered by the ship.
Bottomry and Respondentia:
1. Loss due to inherent defect Required in the following instances:
2. Loss due to the barratry on the part of 1. Vessel makes an arrival under stress
the captain 2. Vessel is shipwrecked
3. Loss due to the fault of malice of the 3. Vessel has gone through hurricane or
borrower the captain has suffered damages or
4. Vessel was engaged in contraband averages
5. Cargo loaded on the vessel be different 4. Maritime collisions
in form that agreed upon
Note: Should be made within 24 hours following
When Bottomry/Respondentia Regarded as the arrival of the vessel at the first port.
Simple Loan Upon arrival at the place of destination, the
1. Lender loaned an amount larger captain shall ratify the protest within 24
than the value of the object due to hours.
fraudulent means employed by borrower
(Art. 726) Averages
2. Full amount of the loan is not 1. An extra-ordinary or
accidental expense incurred during the
used for the cargo or given on the goods
voyage in order to preserve the cargo,
if all of them could not have been
vessel or both; and
loaded, the balance will be considered a
simple loan (Art. 727) 2. All damages or
3. If the effects on which the deterioration suffered by the vessel from
departure to the port of destination, and
money is taken is not subjected to any
to the cargo from the port of loading to
risk (Art. 729)
the port consignment (Art. 806)
BOTTOMRY/ ORDINARY LOAN
 Classes of Averages
RESPONDENTIA
1. Particular or Simple Average
May or may not have a Must have collateral
(i) Damage or expenses caused to the
collateral
vessel or cargo that did not inure to common
Collateral may be any Must be vessel or
benefit, and (ii) borne by respective owners
property cargo subject to
(Art. 809)
maritime risks
2. Gross or General Average
Absolutely repayable Depends upon the safe
arrival of the collateral a. Damage or expenses deliberately
at the port caused in order to save the vessel, its
Need not be in writing Must be in writing cargo or both from real and known risk
but interest shall not (Art. 811)
be due unless b. All the persons having an interest in the
expressly stipulated in vessel and the cargo therein at the time
writing of the occurrence of the average shall
Need not be registered Must be recorded in contribute to satisfy this average (Art.
to bind third persons the registry of vessels 812)
of the port of registry of c. Requisites:
the vessel 1. Common danger
Loss of collateral does Loss of collateral present

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2. Arising from accidents and time of impact

of sea, disposition of authority  Error in Extremis – sudden movement
3. Peril imminent and made by a faultless vessel during the third
ascertained zone of collision with another vessel which is
4. Part of vessel or cargo at fault during the second zone. Even if such
deliberately sacrificed sudden movement is wrong, no
5. Intended to save vessel responsibility will fall on said faultless vessel
or cargo or both (Urrutia and Co. v. Baco River Plantation, 26
6. Successful saving of Phil. 632)
vessel or cargo  Cases Covered:
7. Proper legal steps and
authority taken
1. One vessel at fault – such vessel is
liable for damage caused to
d. Procedure for recovery:
innocent vessel as well as damages
1. There must be an
suffered by the owners of cargo of
assembly of the sailing mate and other
both vessels
officers with the captain including
those with interests in the cargo 2. Both vessels at fault – each vessel
2. Resolution of the must bear its own loss, but the
captain shippers of both vessels may go
3. The resolution must be against the ship owners who will be
entered in the logbook, with reasons solidarily liable
and motives and the votes for and 3. Vessel at fault not known
against the resolution
4. The minutes shall be Doctrine of “Inscrutable Fault” (1997 Bar
signed by the parties Exam)
5. The captain shall deliver  In case of collision where it cannot be
a copy of the minutes to the maritime determined which between the two
judicial authority of the first port he vessels was at fault, both vessels bear
may make, within 24 hours after his their respective damage, but both should
arrival, and to ratify it immediately be solidarily liable for damage to the
under oath (Art. 813-814) cargo of both vessels.

York-Antwerp Rules on determining liability 4. Third vessel at fault – same rule as

for contribution on averages:
1. Deck cargo is permitted in coastwise
shipping but prohibited in overseas shipping
2. Overseas trade – must always contribute to
general average, but should the same be
jettisoned, it would not be entitled to
reimbursement because there is violation of
the Y-A Rules
3. Coastwise shipping – must always
contribute to general average and if
jettisoned would be entitled to
reimbursement
Collision – Impact of two vessels both of which
are moving
 Allision - Impact between a moving
vessel and a stationary one
 Zones of Time in the Collision of
vessels:
1. First zone - all time up to the moment when
risk of collision begins
2. Second zone - time between moment when
risk of collision begins and moment it
becomes a practical certainty;
3. Third zone - time when collision is certain
(1)
5. Fortuitous event – each bears its
own loss
 Procedure:
1. Protest should be made within
24 hours before the competent authority
at the point of collision or at the first port
of arrival, if in the Philippines and to the
Philippine consul, if the collision took
place abroad (Art. 835)
2. Injuries to persons and damage
to cargo of owners not on board on
collision time need not be protested (Art.
836)
Arrival under Stress
 Arrival of a vessel at a port of destination
on account of lack of provision, well-founded
fear of seizure, pirates, or accidents of sea
disabling navigation (Art. 819)
 When Not Lawful:
1. Lack of provisions due to negligence to carry
according to usage and customs
2. Risk of enemy not well known or manifest
3. Defect of vessel due to improper repair; and
4. Malice, negligence, lack of foresight or skill

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of captain (Art. 820) b. Exposed to

 Who Bears Expenses: marine peril
1. The ship-owner or ship agent except for c. Voluntary
damages caused by the shippers by reason salvage services
of a lawful arrival (Art. 821) d. Success in
2. The captain shall be liable for damages whole or in part, or that services
caused by his delay, if after the cause of the contributed to success
arrival under stress has ceased, he  Rules on Salvage Award
continues the voyage (Art. 825) (1) Fixed by RTC in the absence of
 Procedure: agreement or where the latter is excessive
1. Captain determines during the voyage if (Sec. 9)
there is well founded fear of seizure, (2) If sold (no claim being made
privateers and other valid grounds within 3 months from publication)
2. He shall then assemble the officers a. Proceeds, after deducting expenses and
3. He shall summon the persons interested the salvage claim, shall go to the owner
in the cargo who may be present and who b. If he does not claim it within 3 years,
may attempt but without right to vote 50% of the said proceeds shall go to the
4. The officers determine and agree if there salvors, and the other half to the
is well founded reason after examining the government (Secs. 11-12)
circumstances. The captain shall have the 3. If a vessel is the salvor, the reward shall be
deciding vote distributed as follows:
5. The agreement shall be drafted and the a. 50% to ship owner
proper minutes shall be signed and entered b. 25% to captain
in the log book
6. Objections and protests shall likewise
c. 25% to officers and crew in proportion to
entered in the minutes their salaries (Sec. 13)
 Persons Without Right to a Salvage
Shipwreck Reward:
 Denotes all types of loss/ wreck of a 1. Crew of the vessel saved
vessel at sea either by being swallowed up 2. Persons who commenced salvage in
by the waves, by running against another spite of opposition of the captain or his
vessel or thing at sea or on coast where the representative
vessel is rendered incapable of navigation 3. Person who fails to deliver a salvaged
vessel or cargo to the Collector of
Customs (Sec. 3)
SALVAGE LAW (Act 2616)
 Towage - contract whereby one vessel,
 Salvage - Compensation allowed to usually motorized, pulls another from one
persons by whose voluntary assistance a place to another, for compensation. It is a
ship at sea or her cargo or both have been contract for services rather than a contract of
saved in whole or in part from an impending carriage.
or actual peril, shipwrecks, derelicts or
recapture SALVAGE TOWAGE
- Services one person render to the Governed by special Governed by NCC
owner of a ship or goods, by his own labor, law (Act No. 2616) on contract of lease
preserving the goods or the ship which the Requires success, Success not required
owner or those entrusted with the care of otherwise no
them have either abandoned in distress at payment
sea, or are unable to protect or secure Must be done with Only the consent of
the consent of the the tugboat owner is
 Derelict – Ship or her cargo which is captain/crewmen needed
abandoned and deserted at sea by those Vessel must be Vessel need not be
who were in charge of it, without any hope of involved in an involved in an
recovering it, or without any intention of accident accident
returning to it Fees distributed Fees belong to the
 Requisites for Salvage Award: among crewmen tugboat owner
a. Valid object of Salvor takes Tower has no
salvage possession and may possessory lien; only
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until he is paid money
Court can reduce Court cannot change
amount of amount in towage
renumeration if even if
unconscionable unconscionable
CARRIAGE OF GOODS BY SEA ACT (CA 65)
(1995, 2000, 2004)
 Requisites:
1. Contracts for carriage of goods
2. By sea
3. To and from Philippine ports
4. In foreign trade
 Shipper guarantees at time of shipment
the accuracy of marks, number quantity and
weight as furnished by him. He shall
indemnify the carrier against all loss,
damages and expenses arising from
inaccuracies in such particulars
 To recover loss or damage to cargo,
notice and general nature thereof in writing
must be given by the shipper or consignee
to the carrier or his agent at the port of
discharge or at the time of removal of the
goods
• If loss/damage not apparent –
within 3 days from delivery
• May be endorsed upon receipt
for the goods given by the person taking
delivery thereof
• Need not be given if the state of
goods at the time of their receipt has
been the subject of joint inspection
 Prescriptive Periods:
1. To give notice if loss or damage is
apparent – notice in writing must be
given to carrier or agent at time of
removal of goods by persons entitled to
delivery.
2. To give notice if not apparent – within 3
days from delivery.
3. To bring suits – 1 year after delivery or
when goods should have been delivered
a suit must be filed (whether notice of
loss/damage is given), otherwise
prescribed.
a. Stipulation reducing the 1 year period is
null and void, but a written agreement to
suspend it is valid (Maritime Company
of the Philippines vs. CA, 164 SCRA
593)
b. An extra-judicial demand does not
suspend the period
c. An insurer who is exercising its right of
subrogation is also bound by the 1-year
period (Fil. Merchants vs. Alejandro 145
SCRA 42). It does not apply to a claim
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against the insurer for the insurance
proceeds. The claim against the insurer
is based on contract that expires in 10
years (Mayer Steel Pipe Corp. vs. CA
274 SCRA 432)
d. If there is no delivery in case of
undelivered or lost cargo the one-year
period starts to run from the day the
vessel left port
e. When interrupted
i. Action is filed in court
ii. Contrary agreement between parties
4. Delivery to the wrong person –
prescriptive period is (i) 10 years
because there is a breach of contract, or
(ii) 4 years for quasi-delict (Ang v.
American SS Agencies (19 SCRA 631)
 Delay or late delivery are not the
damage or loss contemplated under
the COGSA. The goods are not
actually lost or damaged. The
applicable period is 10 years (Mitsui
vs. CA 287 SCRA 366)
 Liability under COGSA:
1. Maximum of $500 per package or, if not
shipped in packages, per customary
freight unit (e.g. metric ton)
2. Nature and value of goods may be
declared by shipper and inserted in bill
of lading; declaration is prima facie
evidence and not conclusive on carrier
3. Shipper and carrier may agree on
another maximum amount, but not more
than the amount of damage actually
sustained
 No Liability under COGSA:
1. Nature or value of goods knowingly and
fraudulently misstated by shipper
2. Damage resulted from dangerous nature
of shipment loaded without consent of
carrier
3. Unseaworthiness not due to negligence
of carrier
4. Deviation was to save life or property at
sea
SHIP MORTGAGE DECREE
Purpose: To accelerate the growth and
development of the shipping industry in the
Philippines and to finance the acquisition,
construction, purchase or initial operation of
vessels
Salient Features: Recognizes the creation of
preferred mortgage that must be satisfied prior
to all other claims and it allows for the arrest of
the vessel which in effect treats the vessel itself
as the defendant in an action
 Far Eastern University
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 Preferred Mortgage Lien - One
constituted for the financing, acquisition,
purchase, construction and initial operation
of vessels under the provisions of PD 1521
• Requisites
a. Recorded in MARINA
b. Affidavit of good faith
c. Mortgage does not stipulate
the waiver of preferred
status of claim
d. Mortgage must be valid
e. Mortgage includes
whole vessel of domestic
ownership
• If Vessel is of Foreign Ownership
– it will be recognized if:
1. Mortgage, hypothecation or
similar charge has been duly and validly
executed in accordance with the laws of
the country under which the vessel is
documented
2. Same has been duly registered
in accordance with such laws in a public
register – either at the port of registry of
vessel or at a central office
 Claims Preferred Over a Preferred
Mortgage Lien:
1. Taxes
2. Judicial costs
3. Pilotage and tonnage charges and other
sea and port charges
4. Salaries of depositaries and keepers of
vessel
5. Captain and crew’s wages
6. General average
7. Salvage
8. Prior maritime liens
9. Damages arising out of tort
10. Prior preferred mortgage lien
WARSAW CONVENTION OF 1929
Scope
1. International transport by air
2. Transport of persons, baggage
or goods
Note: Warsaw Convention prevails over the Civil
Code, Rules of Court and all laws in the
Philippines since an international law prevails
over general law.
 International Transportation by Air –
any transportation in which the place of
departure and the place of destination are
situated either:
1. Within the territories of two High
Contracting Parties regardless of
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whether or not there be a break in the
transportation or transshipment
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
that power is not a party to the
Convention (“round trip”)
Note: Absence of agreement concerning
stopping place – transportation not deemed
international for purposes of the WC
the
 When Not Applicable:
1. If there is willful misconduct on the part
of the carrier’s employees (PAL v. CA,
257 SCRA 33).
2. When it contradicts public policy
3. If requirements under WC are not
complied with
 Liability of Air Carriers
1. Death or injury of a passenger if the accident
causing it took place on board the aircraft or
in the course of its operations (Art. 17)
2. Destruction, loss or damage to any luggage
or goods, if it took place during the carriage
(Art. 18)
3. Delay in the transportation of passengers,
luggage or goods (Art. 19)
Note: The Hague Protocol amended the
Warsaw Convention by removing the provision
that if the airline took all necessary steps to
avoid the damage, it could exculpate itself
completely (Art. 20(1)) (Alitalia v. IAC, 192
SCRA 9)
 Action for Damages
1. Condition precedent
a. Written complaint (protest) must me
made:
i. Damage to baggage – 3
days from receipt
ii. Damage to goods – 7 days
from receipt
iii. Delay – 14 days from
receipt
b. Otherwise the action is barred except in
case of fraud on the part of the carrier
(Art. 26)
2. Jurisdiction – governed by domestic law
3. Venue – at the option of the plaintiff:
a. Court of domicile of carrier
b. Its principal place of business
c. Where it has a place of business
through which the contract has been
made
d. Place of destination (Art. 28)
Note: The above enumeration cannot be
waived, but are jurisdictional in nature
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(Santos III vs. Northwest Orient Airlines 210
SCRA 256)
4. Prescriptive period – 2 years from:
1. Arrival at the destination
2. Expected arrival
3. Date on which the transportation
stopped (Art. 29)
5. Rule in case of various successive
carriers
1. In case of transportation of passengers
– action is filed only against the carrier in
which the accident or delay occurred unless
there is an agreement whereby the first
carrier assumed liability for the whole
journey.
2. Transportation of baggage or goods
i. Consignor can file an action
against the first carrier and
the carrier in which the
damage occurred
ii. Consignee can file an action
against the last carrier and
the carrier in which the
damage occurred
iii. These carriers are jointly
and severally liable (Art. 30)
 Limit of Liability
 Passengers – $10,000 to
$100,000
except: agreement to a higher limit
 Checked-in baggage – $20 / kg
except: consigner declared its value and
paid a supplementary sum, carrier liable to
not more than the declared sum unless it
proves the sum is greater than its actual
value
 Hand-carry baggage – $400 to
$1000 / passenger (Art. 22 as amended
by Guatemala Protocol, 1971; Alitalia v.
IAC, supra)
• An agreement relieving the carrier
from liability or fixing a lower limit is
null and void (Art. 23)
• Carrier not entitled to the foregoing
limit if the damage is caused by his
willful misconduct or default (Art. 25)
 Special Rules on
Liabilities of Airline Carriers:
1. In case of flight diversion due to bad
weather or other circumstances beyond
the pilot’s control, the relation between
carrier and passenger continues until
the latter has been landed at the port of
destination and has left the carrier’s
premises. The carrier should exercise
extraordinary diligence in safeguarding
the safety of its stranded passengers
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until they have reached their final
destination (Philippine Airlines v. CA,
226 SCRA 423)
2. Even where overbooking of passengers
is allowed as a commercial practice, the
airline company would still be guilty of
bad faith and still be liable for damages
if it did not properly inform passenger
that it could breach the contract of
carriage even if they were confirmed
passengers (Zalamea v. CA, 228 SCRA
23)
3. An open-dated ticket constitutes a
complete contract between the carrier
and passenger. Hence, the airline
company is liable if it refused to confirm
a passenger’s flight reservation
(Singson v. CA, 282 SCRA 149)
4. An airline company which issued a
confirmed ticket to a passenger covering
successive trips on different airlines can
be held liable for damages occasioned
by “bumping off” by one of the
successive airlines (Lufthansa German
Airlines v. CA, 238 SCRA 290)
5. An airline ticket providing that carriage
by successive air carriers is to be
regarded as a “single operation” is to
make the issuing carrier liable for the
tortuous conduct of the other carrier. A
printed provision in the ticket limiting
liability only to its own conduct is not
enough to rebut that liability (KLM Royal
Dutch Airlines v. CA, 65 SCRA 237)
PUBLIC SERVICE ACT
(CA 146, as amended)
(1995, 1998, 2000 Bar Exams)
“Public Service” - Includes any person
who may own, operate, manage, or
control in the Philippines for hire or
compensation, with general or limited
clientele, whether permanent, occasional
or accidental, and done for general
business purposes, any common carrier,
railroad, street railway, traction railway,
subway motor vehicle, steamboat, or
steamship line, ferries, and water craft,
shipyard, ice-plant, electric light, heat
and power or any public utility (Sec.
13(b) Commercial Act 146)
 A casual or incidental service devoid of
public character and interest is not brought
within the category (Luzon Stevedoring vs.
PSC, 156 SCRA 169)
Certificate of Public Convenience
 Far Eastern University
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No public service shall operate without 3. Where operator totally abandons the
having been issued a certificate of public service (Manzanal vs. Ausejo, 164
convenience (no franchise is required by SCRA 36)
law, e.g. common carriers) or a certificate of
public convenience and necessity (a prior NOTICE AND WHEN NOT
franchise is required by law, e.g. telephone HEARING REQUIRED REQUIRED
and other services) (Sec. 15 Comm. Act a. Issuance of 1. Investigation of
146) Certificate any matter
• Exceptions: b. Fixing of rates, concerning public
1. Warehouses tolls and charges service
2. Animal drawn vehicles and bancas c. Setting up of 2. Requiring
moved by oar or sail; tugboats standards and operators to
3. Airships, except for the fixing of classifications furnish safe,
maximum rates for fare and freight d. Establishment adequate and
4. Radio companies, except for rates fixing of rules to secure proper service
5. Public services owned or operated by accuracy of all 3. Requiring public
the government, except as to rates fixing meters and all services to pay
6. Ice plants measuring expenses of
7. Public markets appliances investigation
• The certificate constitutes neither a e. Issuance of 4. Valuation of
franchise nor a contract, confers no orders requiring properties of
property right, and is a mere license or establishment or public utilities
privilege. The holder of said certificate maintenance of 5. Examination and
does not acquire a property right in the extension facilities test of measuring
route covered thereby. Nor does it f. Revocation of appliances
confer any property right, interest or modification of 6. Grant of special
interest in the public highways. Certificate permits to make
Revocation of this certificate deprives g. Suspension of extra or special
him of no vested right. New and Certificate (except trips in territories
additional burdens, alteration of the when it is specified in
certificate, or even revocation or necessary to avoid certificate
annulment thereof is reserved to the serious and 7. Uniform
State (Luque vs. Villegas, 30 SCRA irreparable accounting
408) damage or system and
• It is a “property” and has a inconvenience to furnishing of
considerable value and can be the the public or annual reports
subject of sale or attachment (Coque- private interest, in 8. Compelling
Cubao Operators vs. CA, 207 SCRA which case, a compliance with
343) suspension not the laws and
more than 30 days regulations
 Requirements for granting may be ordered
certificate: prior to the
1. Citizen of the Philippines, or a corporation, hearing)
etc. constituted and organized under the
laws of the Philippines at least 60% of its
stock or paid-up capital must belong entirely CORPORATION CODE OF THE PHILIPPINES
to citizens of the Philippines (BP 68)
2. Financially capable of undertaking the
proposed service
3. Proof of public necessity, interest and GENERAL PROVISIONS
convenience (KMU vs. Garcia, Jr., 239
SCRA 386) Corporation is an artificial being created by
operation of law, having the right of succession
 Grounds for revocation of certificate: and the powers, attributes and properties
1. Where holder is a mere dummy expressly authorized by law or incident to its
2. Where operator ceased operation and existence. (Sec. 2)
placed his buses on storage
Attributes of a Corporation(CARP)
1. It is an artificial being.

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2. It is created by operation of law.
3. It enjoys the right of succession.
4. It has the powers, attribute and
properties expressly authorized by law
or incident to its existence.
Theories on the Formation of a Corporation:
1. Concession theory – a corporation is an
artificial creature without any existence until
it has received the imprimatur of the state
acting according to law, through the SEC.
2. Theory of corporate enterprise or economic
unit – the corporation is not merely an
artificial being, but more of an aggregation of
persons doing business, or an underlying
business unit.
3. Genossenschall theory – treats the
corporation as the reality of the group as a
social and legal entity independent of state
recognition and “concession.”
Doctrine of Separate Personality (1996, 1999,
2000 Bar Exams)
 A corporation has a juridical personality
separate and distinct from that of its
stockholders or members.
 Consequences:
1. Liability for acts or contracts-
obligations incurred by a
corporation, acting through its
authorized agents are sole its sole
liabilities (Creese vs CA, 93 SCRA
483)
2. Right to bring actions – may bring
civil and criminal actions in is own
name in the same manner as
natural persons.
3. Right to acquire and possess
property – property conveyed to or
acquired by the corporation is in law
the property of the corporation itself
as a distinct legal entity and not that
of the stockholders or members.
4. Acquisition of court of jurisdiction –
service of summons may be mad on
the president, general manager,
corporate secretary, treasure or in-
house counsel (Sec 11, Rule 14,
Rules of Court)
5. Changes in individual membership -
Remains unchanged and unaffected
in its identity by changes in its
individual membership
6. Entitlement to constitutional
guarantees:
• Due Process
• Equal protection of the law
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• Protection against
unreasonable searches and
seizures
Note: A corporation is not entitled to
invoke the right against self-
incrimination. (Bataan Shipyard vs
PCGG)
7. Liability for torts – a corporation is
liable whenever a tortuous act is
committed by an officer or agent
under the express direction or
authority of the stockholders or
members acting as a body or
generally, from the directors as the
governing body.
8. A corporation is not entitled to moral
damages because it has no feelings,
no emotions, no senses (ABS-CBN
vs CA)
9. Liability for crimes – since a
corporation is a mere legal fiction, it
cannot be held liable for a crime
committed by its officers, since it
does not have the essential element
of malice; in such case the
responsible officers would be
criminally liable (People vs Tan
Boon Kong, 54 Phil 607)
Doctrine of Piercing the Veil of Corporate
Entity (1998, 2001, 2004, 2006 Bar Exams)
 Requires the court to see through the
protective shroud which exempts its
stockholders from liabilities that they
ordinarily would be subject to, or
distinguishes a corporation from a seemingly
separate one, were it not for the existing
corporate fiction (Lim vs CA, 323 SCRA 102)
 Extent: The application of the doctrine to a
particular case does not deny the
corporation of legal personality for any and
all purposes, but only for the particular
transaction or instance for which the doctrine
was applied (Koppel v. Yatco 77 Phil. 496)
 Rules:
1. has only a res
judicata effect
2. to prevent wrong or
fraud and not available for other
purposes;
3. judicial prerogative
only;
4. must be with
necessary and factual basis
BAR QUESTION (Q): XYZ Corp. owns
a beach resort with several cottages. A,
the President of XYZ Corp. occupied
one of the cottages for residential
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purposes. After A’s term expired, XYZ 3. Such control and breach of duty must
wanted to recover possession of the proximately cause the injury to the
cottage. A refused to surrender the plaintiff. (proximate cause)
cottage, contending that as a
stockholder and former President, he Distinctions between Corporation and
has the right to enjoy the properties of Partnership
the corporation. Is A’s contention CORPORATION PARTNERSHIP
correct? Explain. 1. Creation
SUGGESTED ANSWER (SA): A’s Created by operation Created by agreement
contention is not correct. A may own of law; of the parties;
shares of stock of XYZ Corp. but such
ownership does not entitle him to the
possession of any specific property of 2. Numbers of incorporators
the corporation or a definite portion 2. Requires at least 5 2. Requires at least 2
thereof. Neither is he a co-owner of incorporators; partners;
corporate property. Properties
registered in the name of the
3. Commencement of juridical personality
corporation are owned by it as an entity
separate and distinct from that of its Acquires juridical Acquires juridical
stockholders. Stockholders like A can personality from the personality form the
only own shares of stock in the date of issuance of the moment of execution
corporation. Such shares of stock do not certificate of of the contract of
represent specific corporate property. incorporation by the partnership
(Rebecca Boyer-Roxas vs. CA, 211 Securities and
SCRA 470) Exchange Commission

3 Classes of Piercing: (FAE)

4. Powers
1. Fraud Cases – when a corporation is used
Corporation can Partnership may
as a cloak to cover fraud, or to do wrong.
exercise only the exercise any power
2. Alter Ego Cases – when the corporate entity powers expressly authorized by the
is merely a farce since the corporation is an granted by law or partners (provided it is
alter ego, business conduit or instrumentality implied from those not contrary to law,
of a person or another corporation granted or incident to morals, good customs,
3. Equity cases – when piercing the corporate its existence public order, public
fiction is necessary to achieve justice or policy)
equity.
Instrumentality / Alter Ego Rule 5. Management
 Where one corporation is so organized and The power to do the When management is
controlled and its affairs are conducted so business and manage not agreed upon, every
that it is, in fact, a mere instrumentality or its affairs is vested partner is an agent of
adjunct of the other, the fiction of the in the board of the partnership
corporate entity of the “instrumentality” may directors and trustees
be disregarded. 6. Effect of mismanagement
• Requisites: The suit against a A partner as such can
1. There must be control, not mere majority member of the board sue a co-partner who
or complete stock control, but complete of directors or trustees mismanages
domination, not only of finances, but of who mismanages must
policy, and business practice in respect be in the name of the
to the transaction attacked so that the corporation
corporate entity as to this transaction 7. Right of succession
had, at that time, no separate mind, will Has right of Has nor right of
or existence of its own (control); succession succession
2. Such control must have been used by
the defendant to commit fraud or wrong, 8. Extent of liability to third persons
to perpetrate the violation of a statutory
or other positive duty, or dishonest and
unjust act in contravention of plaintiff’s
legal rights (breach of duty); and

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Stockholders are liable Partners are liable PRIMARY

only to the extent of personally and SECONDARY
the shares subscribed subsidiarily 1. Refers to the 1. Refers to the
by them (sometimes solidarily) franchise of being exercise of rights.
for partnership debts or existing as a Example: right of
to third persons corporation eminent domain
2. Vested in the 2. Vested in the
9. Transferability of interests individuals who corporation after its
Stockholder has Partner cannot transfer compose the incorporation and not
generally the right to his interest in the corporation upon the individuals
transfer his shares partnership so as to who compose it
without prior consent make the transferee a 3. It cannot be sold 3. It may be sold or
of the other partner without the or transferred transferred; subject
stockholders because unanimous consent of because it is to sale on execution,
a corporation is not all existing partners inseparable from subject to levy
based on this principle because the the corporation
partnership is based itself.
on the principle of
delectus personarum Classes of Corporations:
1. AS TO ORGANIZERS:
10. Term of existence a. Public – by State only; and
May not be formed for May be established for b. Private – by private persons alone or
a term in excess of 50 any period of time with the State.
years extendible to no stipulated by the 2. AS TO FUNCTIONS:
more than 50 years in partners
any one instance
a. Public – government of a portion of the
territory; and
11. Firm name b. Private – usually for profit-making
May adopt any name Limited partnership is c. Quasi-public – those private corps.
provided it is not the required by law to add which have accepted from the state the
same as or similar to the word “Ltd” to its grant of a franchise or contact involving
any registered firm name the performance of public duties.
name 3. AS TO GOVERNING LAW:
12. Dissolution a. Public – Special Laws; and
Can only be dissolved May be dissolved at b. Private – Law on Private
with the consent of the any time by or all of Corporations
State the partners 4. AS TO LEGAL STATUS:
13. Governing Law a. De jure corporation – organized in
Governed by the Governed by the Civil accordance with the requirements of
Corporation Code Code law.
b. De facto corporation – organized with a
Franchises of Corporations: colorable compliance with the
1. Primary or corporate franchise requirements of a valid law. Its existence
 The right or privilege granted by the cannot be inquired collaterally. Such
State to individuals to exist and act as a inquiry may be made by the Solicitor
corporation after its incorporation. General in a quo warranto proceeding.
2. Secondary or special franchise  Requisites:
 The special right or privilege conferred 1. The existence of a valid
upon an existing corporation to the law under which it may be
business for which it was created. incorporated;
Example, use of the streets of a 2. A bona fide attempt in
municipality to lay pipes or tracks, or good faith to incorporate
operation of a messenger and express under such law;
delivery service. 3. Actual use or exercise in
good faith of corporate
powers; and
4. Issuance of certificate of
incorporation by the SEC

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as a minimum requirement  The board of directors of the parent

of continued good faith company determines its
Note: The only difference between a de representatives to attend and vote in
facto corporation and a de jure the stockholder’s meeting of its
corporation is that a de jure subsidiary.
corporation can successfully resist a suit  The stockholders of the parent
by a state brought to challenge its company demand representation in
existence; a de facto corporation cannot the board meetings of its subsidiary.
sustain its right to exist. 7. AS TO PLACE OF INCORPORATION:
c. Corporation by estoppel – group of a. Domestic corporation - a corporation
persons that assumes to act as a formed, organized, or existing under
corporation knowing it to be without Philippine laws.
authority to do so, and enters into a b. Foreign corporation – a corporation
transaction with a third person on the formed, organized, or existing under any
strength of such appearance. It cannot laws other than those of the Philippines.
be permitted to deny its existence in an
action under said transaction. It is Quasi-Corporation Public Corporation
neither de jure nor de facto.
1. Possesses only 1. A full corporation;
d. Corporation by prescription – one which some corporate
has exercised corporate powers for an powers, therefore, not
indefinite period without interference on a full corp.
the part of the sovereign power, e.g. 2. Organized for the
Roman Catholic Church. 2. Organized to aid the government of a
5. AS TO EXISTENCE OF SHARES OF state in some public or portion of the state.
STOCK: state work other than
a. Stock corporation – a corporation: the government of a
1. whose capital stock is portion thereof.
divided into shares and
2. which is authorized to Quasi-Corporation Quasi-Public
distribute to shareholders Corporation
dividends or allotments of 1. Not a full corp.; 1. A full corp.;
the surplus profits on the
basis of the shares held. 2. An instrumentality of 2. An instrumentality of
b. Non-stock Corporation – does not issue the state. private individuals.
stocks nor distribute dividends to their
members. De Facto Corporation by
6. AS TO RELATIONSHIP OF MANAGEMENT Corporation Estoppel
AND CONTROL: 1. Has a real 1. No real existence in
existence in law; law but it is a mere
a. Holding corporation - it is one which
fiction existing only for
controls another as a subsidiary by the
a particular case;
power to elect management.
b. Subsidiary corporation
2. Cannot exist unless
1. Majority-owned subsidiary – where
2. May exist even if there are dealings
one corporation owns 51% to 94%
there are no dealings between the parties on
of the capital stock of another
between the parties a corporate basis.
corporation.
on a corporate basis.
2. Wholly-owned subsidiary – where
(2004 Bar Exam)
one corporation holds 95% to 100%
of the capital stock of another
corporation. Concept of Going Public and Going Private
A corporation is deemed to be ‘going public’
c. Affiliates - company that is subject to
when it decides to list its shares in the stock
common control of a mother holding
exchange. These include corporations that will
company and operated as part of the
make initial public offering of its shares. A
system.
corporation is said to be ‘going private’ when it
d. Parent and Subsidiary Corporation - would restrict the shareholders to a certain
separate entities with power to contract group. In a sense, these also include closed and
with each other. closely held corporation. (Phil. Corporate Law
Compendium, T. Aquino, 2005 ed.)

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One Man Corporation the Articles and acknowledged the same before
A corporation wherein all or substantially all of a notary public. They have no powers beyond
the stocks is held directly or indirectly by those vested in them by the statute.
one person. However, it should still follow  Qualifications:
the formal requirements of a corporation 1. natural person;
(e.g. number of incorporators, board of 2. not less than 5 but not more
directors composed of stockholders owning than 15;
shares in a nominal capacity) in order to 3. of legal age;
validly enjoy the attributes of the 4. majority must be residents of the
corporation, so as to avoid the application Philippines; and
of the doctrine of piercing the veil of 5. each must own or subscribe to
corporate entity.
at least one share.
General Rule: Only natural persons can be
Tests to Determine Nationality of Corporation
incorporators.
1. INCORPORATION TEST – determined by
Exception: When otherwise allowed by law,
the state of incorporation, regardless of the
e.g., Rural Banks Act of 1992, where
nationality of the stockholders.
incorporated cooperatives are allowed to be
2. DOMICILE TEST – determined by the state
incorporators of rural banks.
where it is domiciled.
Note: However, it is undeniable that
 The domicile of a corporation is the place corporations can be corporators.
fixed by the law creating or recognizing it; in the c. Stockholders – owners of shares of stock in a
absence thereof, it shall be understood to be the stock corporation
place where its legal representation is d. Members – corporators of a corporation which
established or where it exercise its principal has no capital stock
functions.
3. CONTROL TEST – determined by the
INCORPORATORS CORPORATORS
nationality of the controlling stockholders or
signatory to the stockholder (stock
members. This test is applied in times of war.
Articles of corporation) or
Also known as the WARTIME TEST.
Incorporation member (non-
stock corporation)
“Philippine National” under the Foreign
fait accompli; they may cease to
Investment Act (R.A. No. 7042):
accomplished fact be such if they
1. A corporation organized under the laws of the
(the Articles of subsequently lose
Philippines of which at least 60% of the
Incorporation cannot their qualifications
outstanding capital stock entitled to vote is
be amended to
owned and held by Filipino citizens;
replace them)
2. A foreign corporation licensed as doing
business in the Philippines of which 100% of the number is limited to no restriction as to
outstanding capital stock entitled to vote is 5-15 number
wholly owned by Filipinos; and must have may be such
 However, it provides that where a corporation contractual capacity through a
and its non-Filipino stockholders own stocks in a guardian
SEC-registered enterprise, at least 60% of the
capital stock outstanding and entitled to vote of Other Components
both corporations and at least 60% of the a. Promoter - A person who, acting alone or with
members of the board of directors of both others, takes initiative in founding and organizing
corporations must be Filipino citizens (double the business or enterprise of the issuer and
60% rule). receives consideration therefor.
NOTE: The law applies the control test both with  He is an agent of the incorporators but not of
respect to the ownership of shares entitled to the corporation.
vote and the membership in the board of  Contracts by the promoter for and in behalf
directors. of a proposed corporation generally bind
only him, subject to and to the extent of his
Components of a Corporation representations, and not the corporation,
a. Corporators – those who compose a unless and until after these contracts are
corporation, whether as stockholders or ratified, expressly or impliedly, by its Board
members of Directors/Trustees.
b. Incorporators - They are those mentioned in b. Subscriber – persons who have agreed to
the Articles of Incorporation as originally forming take and pay for original, unissued shares of a
and composing the corporation, having signed corporation formed or to be formed.

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c. Underwriter – a person who guarantees on a
firm commitment and/ or declared best effort
basis the distribution and sale of securities of
any king by another company. (Sec. 3 R.A.
8799)
Classification of Shares
1. COMMON SHARES
 The basic class of stock ordinarily and
usually issued without extraordinary rights
and privileges, and the owners thereof are
entitled to a pro rata share in the profits of
the corporation and in its assets upon
dissolution and, likewise, in the management
of its affairs without preference or advantage
whatsoever.
2. PREFERRED SHARES
 Those issued with par value, and
preferences either with respect to (a) assets
after dissolution, (b) distribution of dividends,
or both, and other preferences.
 Limitations:
a. If deprived of voting rights, it shall still be
entitled to vote on matters enumerated in
Section 6 paragraph 6.
b. Preference must not be violative of the Code.
c. May be issued only with a stated par value.
d. The board of directors 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.
3. REDEEMABLE SHARES
 Those which permit the
issuing corporation to redeem or purchase
its own shares.
 Limitations:
a. Redeemable shares may be issued only
when expressly provided for in the articles of
incorporation;
b. The terms and conditions affecting said
shares must be stated both in the articles of
incorporation and in the certificates of stock
representing such shares;
c. Redeemable shares may be deprived of
voting rights in the articles of incorporation,
unless otherwise provided in the Code.
 Redeemable shares
may be redeemed, regardless of the
existence of unrestricted retained earnings
(Sec. 8), provided that the corporation has,
after such redemption, sufficient assets in its
books to cover debts and liabilities inclusive
of capital stock.
4. TREASURY SHARES
 Shares that have been
earlier issued as fully paid and have
thereafter been acquired by the corporation
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by purchase, donation, and redemption or
through some lawful means. (Sec. 9)
 If purchased from
stockholders: The transaction in effect is a
return to the stockholders of the value of
their investment in the company and a
reversion of the shares to the corporation.
The corporation must have surplus profits
with which to buy the shares so that the
transaction will not cause an impairment of
the capital.
 If acquired by donation
from the stockholders: The act would
amount to a surrender of their stock without
getting back their investments that are
instead, voluntarily given to the corporation.
 Treasury shares need
not be sold at par or issued value but may
be sold at the best price obtainable,
provided it is reasonable. When treasury
shares are sold below its par or issued
value, there can be no watering of stock
because such watering contemplates an
original issuance of shares.
 Treasury shares have
no voting rights as long as they remain in
treasury (uncalled and subject to reissue).
Reason: A corporation cannot in any proper
sense be a stockholder in itself and equal
distribution of voting rights will be effectively
lost.
 Neither are treasury
shares entitled to dividends or assets
because dividends cannot be declared by a
corporation to itself.
5. FOUNDERS' SHARE
 Shares issued to
organizers and promoters of a corporation in
consideration of some supposed right or
property.
 Shares classified as
such in the articles of incorporation which
may be given special preference in voting
rights and dividend payments. But if an
exclusive right to vote and be voted for as
director is granted, this privilege is subject to
approval by the SEC, and cannot exceed 5
years from the date of approval.
6. VOTING SHARES
- Shares with a right to vote.
7. NON-VOTING SHARES
 Shares without right to
vote.
 The law only authorizes
the denial of voting rights in the case of
redeemable shares and preferred shares,
provided that there shall always be a class
or series of shares which have complete
voting rights.
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 These redeemable and  Shares with a

preferred shares, when such voting rights value fixed in the certificates of stock and
are denied, shall nevertheless be entitled to the articles of incorporation.
vote on the following fundamental matters: 12. NO PAR VALUE SHARES
(A2 SI2 MID)  Shares having no
a. amendment of Articles of par value but have issued value stated in the
Incorporation certificate or articles of incorporation.
b. adoption and amendment of  Limitations:
by-laws; a. No par value shares cannot have an
c. sale or disposition of all or issued price of less than P5.00;
b. The entire consideration for its issuance
substantially all of corporate property;
constitutes capital so that no part of it should
d. incurring, creating or be distributed as dividends;
increasing bonded indebtedness; c. They cannot be issued as preferred
e. increase or decrease of stocks;
capital stock d. They cannot be issued by banks, trust
f. merger or consolidation of companies, insurance companies, public
capital stock utilities and building and loan association;
g. investments of corporate e. The articles of incorporation must state
funds in another corporation or the fact that it issued no par value shares as
another business purpose; and well as the number of said shares;
h. corporate dissolution f. Once issued, they are deemed fully paid
and non-assessable.
13. STREET CERTIFICATE
8. ESCROW STOCK
 Deposited with a
 A stock certificate
endorsed by the registered holder in blank
third person to be delivered to a stockholder
and transferee can command its transfer to
or his assign after complying with certain
his name from the issuing corporation.
conditions, usually payment of full
14. CONVERTIBLE SHARE
subscription price.
 A share that is
9. OVER-ISSUED STOCK changeable by the stockholder from one
 Stock issued in class to another at a certain price and within
excess of the authorized capital stock. It is a certain period.
also known as spurious stock. Its issuance is 15. FRACTIONAL SHARE
considered null and void.  A share with a
10. WATERED STOCK value of less than one full share.
 A stock issued not
in exchange for its equivalent either in cash, Doctrine of Equality of Shares
property, share, stock dividends, or services.  Where the articles
 “Water” in the of incorporation do not provide for any
stock represents the difference between the distinction of the shares of stock, all shares
fair market value at the time of the issuance issued by the corporation are presumed to
of the stock and the par or issued value of be equal and enjoy the same rights and
said stock. Both par and no par stocks can privileges and are also subject to the same
thus be watered stocks. liabilities.
 It includes Definition of Terms
stocks: 1. CAPITAL STOCK OR LEGAL STOCK OR
a. Issued without consideration. STATED CAPITAL - The amount fixed in the
b. Issued as fully paid when the corporation has corporate charter to be subscribed and paid in
received a lesser sum of money than its par or cash, kind or property at the organization of the
issued value. corporation or afterwards and upon which the
c. Issued for a consideration other than actual corporation is to conduct its operation.
cash, the fair valuation of which is less than its 2. CAPITAL – The value of the actual property or
par or issued value. estate of the corporation whether in money or
d. Issued as stock dividend when there are no property. Its net worth (or stockholder’s equity) is
sufficient retained earnings to justify it. its assets less liabilities.
11. PAR VALUE SHARES 3. AUTHORIZED CAPITAL STOCK - The capital
stock divided into shares with par values. Par
value stocks are required in the case of

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corporations issuing preferred shares, as well as
in the case of banks, trust companies, insurance
companies, building and loan associations, and
public utilities. It is the total amount in the
charter, which may be raised by the corporation
for its operations.
4. SUBSCRIBED CAPITAL STOCK - The total
amount of the capital stock subscribed whether
fully paid or not.
5. OUTSTANDING CAPITAL STOCK - The
portion of the capital stock issued to subscribers
except treasury stocks.
6. STATED CAPITAL – The capital stock divided
into no par value shares.
7. PAID-UP CAPITAL – The amount paid by the
stockholders on subscriptions from unissued
shares of the corporation.
INCORPORATION AND ORGANIZATION
(2002, 2006 Bar Exams)
Steps in the Creation of a Corporation
a. PROMOTION – a number of business
operations peculiar to the commercial world by
which a company is generally brought into
existence. (18 Am. Jur. 2d 647, cited in de Leon
p. 116)
b. INCORPORATION
 Steps:
1. Drafting and execution of Articles of
Incorporation by the incorporators and other
documents required for registration of the
corporation
2. Filing with the SEC of the articles of
incorporation
3. Payment of filing and publication fees
4. Issuance by the SEC of the certificate of
incorporation
c. FORMAL ORGANIZATION AND
COMMENCEMENT OF THE TRANSACTION
OF BUSINESS
 These are
conditions subsequent, which may be
satisfied by substantial compliance in order
that a corporation may legally continue as
such.
 Formal
organization:
1. Adoption of By-Laws and filing of the same
with the SEC;
2. Election of board of directors/trustees, and
officers;
3. Establishment of principal office;
4. Providing for subscription and payment of
capital stock.
Term of Existence
 Limitations:
a. The term shall not exceed 50 years in any one
instance.
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b. The amendment is effected before the
expiration of corporate term, for after dissolution
by expiration of the corporate term there is no
more corporate life to extend.
c. The extension cannot be made earlier than 5
years prior to the expiration date unless there
are justifiable reasons as determined by the
SEC.
Capital Stock Requirement
 General Rule: No
minimum authorized capital stock as long as
the paid-up capital is not less than
P5,000.00
Except:
a. as provided for by special law
1.  Domestic Insurance
Corporations - P500T capital stock; 50%
subscribed and the balance payable in
12 months.
2. Private Development Banks
- P4M for class A
- P2M for class B
- P1M for class C
3. Investment Companies – paid
up at least P500T
4. Savings and Loan Corporation –
to be fixed by the Monetary Board, but
not less than P100T
5. Financing Companies
Paid up: - P2M for Metro Manila
- P1M for Cities
- P500T for others
b. provided that at least 25% of the authorized
capital stock has been subscribed and at least
25% of the total subscription must be paid-up
Filipino Percentage Ownership Requirement
No Foreign Equity
1. Mass Media except recording (Art. XVI, Sec.
11 of the Constitution; Presidential
Memorandum dated 04 May 1994)
2. Practice of all professions
3. Retail trade enterprises with paid-up capital
of less than US$2,500,000(Sec. 5 of RA
8762)
4. Cooperatives (Ch. III, Art. 26 of RA 6938)
5. Private Security Agencies (Sec. 4 of RA
5487)
6. Small-scale Mining (Sec. 3 of RA 7076)
7. Utilization of Marine Resources in
archipelagic waters, territorial sea, and
exclusive economic zone as well as small-
scale utilization of natural resources in
rivers, lakes, bays, and lagoons (Art. XII,
Sec. 2 of the Constitution)
8. Ownership, operation and management of
cockpits (Sec. 5 of PD 449)
 Far Eastern University
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9. Manufacture, repair, stockpiling and/or
distribution of nuclear weapons (Art. II, Sec.
8 of the Constitution)
10. Manufacture, repair, stockpiling and/or
distribution of biological, chemical and
radiological weapons and anti-personnel
mines (Various treaties to which the
Philippines is a signatory and conventions
supported by the Philippines)
11. Manufacture of firecrackers and other
pyrotechnic devices (Sec. 5 of RA 7183)
Up to Twenty Percent (20%) Foreign Equity
12. Private radio communications network
(RA 3846)
Up to Twenty-Five Percent (25%) Foreign
Equity
13. Private recruitment, whether for local or
overseas employment (Art. 27 of PD 442)
14. Contracts for the construction and repair of
locally-funded public works (Sec. 1 of CA
541, LOI 630) except:
a) infrastructure/development projects
covered in RA 7718; and
b) projects which are foreign funded or
assisted and required to undergo
international competitive bidding (Sec.
2a of RA 7718)
15. Contracts for the construction of defense-
related structures (Sec. 1 of CA 541)
Up to Thirty Percent (30%) Foreign Equity
16. Advertising (Art. XVI, Sec. 11 of the
Constitution)
Up to Forty Percent (40%) Foreign Equity
17. Exploration, development and utilization of
natural resources (Art. XII, Sec. 2 of the
Constitution)
18. Ownership of private lands (Art. XII, Sec. 7
of the Constitution; Ch. 5, Sec. 22 of CA
141; Sec. 4 of RA 9182)
19. Operation and management of public
utilities (Art. XII, Sec. 11 of the Constitution;
Sec. 16 of CA 146)
20. Ownership/establishment and administration
of educational institutions (Art. XIV, Sec. 4 of
the Constitution)
21. Culture, production, milling, processing,
trading excepting retailing, of rice and corn
and acquiring, by barter, purchase or
otherwise, rice and corn and the by-products
thereof (Sec. 5 of PD 194;Sec. 15 of RA
8762
22. Contracts for the supply of materials,
goods and commodities to government-
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owned or controlled corporation, company,
agency or municipal corporation (Sec. 1 of
RA 5183)
23. Project Proponent and Facility Operator
of a BOT project requiring a public utilities
franchise (Art. XII, Sec. 11 of the
Constitution; Sec. 2a of RA 7718)
24. Operation of deep sea commercial
fishing vessels (Sec. 27 of RA 8550)
25. Adjustment Companies (Sec. 323 of PD
612 as amended by PD 1814)
26. Ownership of condominium units where
the common areas in the condominium
project are co-owned by the owners of the
separate units or owned by a corporation
(Sec. 5 of RA 4726)
Up to Sixty Percent (60%) Foreign Equity
27. Financing companies regulated by the
Securities and Exchange
Commission (Sec. 6 of RA 5980 as
amended by RA 8556)
28. Investment houses regulated by the SEC
(Sec. 5 of PD 129 as amended by RA 8366)
Articles of Incorporation (AI)
 The document
prepared by the persons establishing a
corporation and filed with the SEC
containing the matters required by the Code.
 Significance:
1. The issuance of a certificate of
incorporation signals the birth of the
corporation’s juridical personality;
2. It is an essential requirement for the
existence of a corporation, even a de facto
one.
 Contents:
1. name of corporation;
2. purpose/s, indicating the primary and
secondary purposes;
3. place of principal office;
4. term of existence;
5. names, citizenship and residences of
incorporators;
6. number, names, citizenship and residences
of directors or trustees;
7. names, nationalities, and residences of the
persons who shall act as directors or
trustees until the first regular ones are
elected and qualified;
8. if a stock corporation, the amount of its
authorized capital stock, number of shares
and in case the shares are par value shares,
the par value of each share;
9. names, residences, number of shares, and
the amounts subscribed and paid by each of
 Far Eastern University
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the original subscribers which shall not be
less than 25% of authorized capital stock;
10. if non-stock, the amount of capital, the
names, residences, and amount paid by
each contributor, which shall not be less
than 25% of total subscription;
11. name of treasurer elected by subscribers;
and
12. if the corporation engages in a nationalized
industry, a statement that no transfer of
stock will be allowed if it will reduce the
stock ownership of Filipinos to a percentage
below the required legal minimum.
Amendment of AI
 Limitations:
1. The amendment of any provision or matters
stated in the articles of incorporation is not
allowed when it will be contrary to the provisions
or requirement prescribed by the Code or by
special law or changes any provision in the
articles of incorporation stating an accomplished
fact
2. It must be for legitimate purposes
3. It must be approved by the required vote of
the board of directors or trustees and the
stockholders or members
4. The original articles and amended articles
together must contain all provisions required by
law to be set out in the articles of incorporation
5. Such articles, as amended, must be indicated
by underscoring the changes made, and a copy
thereof duly certified under oath by the corporate
secretary and a majority of the directors or
trustees stating that the amendments have been
duly approved by the required vote of the
stockholders or members must be submitted to
the SEC
6. The amendments shall take effect only upon
their approval by the SEC
7. If the corporation is governed by special law,
the amendments must be accompanied by a
favorable recommendation of the
appropriate government agency.
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators
Vote or written assent of 2/3 of OCS/ members
Non-Amendable Facts in the AI
 Those matters
referring to facts existing as of the date of
the incorporation such as:
1. Names of incorporators;
2. Names of original subscribers to
the capital stock of the corporation and
their subscribed and paid up capital;
3. Treasurer elected by the original
subscribers;
4. Members who contributed to the
initial capital of a non-stock corporation;
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5. Date and place of execution of
the articles of incorporation;
6. Witnesses to the signing and
acknowledgment of the articles.
Grounds for rejection of AI or amendments
thereto
1. The articles or its amendment is not
substantially in accordance with the form
prescribed
2. The purposes of the corporation are patently
unconstitutional, illegal, immoral, or contrary to
government rules and regulations
3. The Treasurer’s Affidavit concerning the
amount of capital stock subscribed and/or paid is
false
4. The required percentage of ownership of the
capital stock to be owned by Filipino citizens has
not been complied with
Grounds for Suspension or Revocation of
Certificate of Incorporation
1. Fraud in procuring its certificate of
incorporation
2. Serious misrepresentation as to what the
corporation can do or is doing to the great
prejudice of, or damage to, the general public
3. Refusal to comply with or defiance of a lawful
order of the SEC restraining the commission of
acts which would amount to a grave violation of
its franchise
4. Continuous inoperation for a period of at least
5 years
8. Failure to file the by-laws within the required
period
9. Failure to file required reports
BOARD OF DIRECTORS/TRUSTEES
Qualifications:
1. For a stock corporation, ownership of at least
1 share capital stock of the corporation in his
own name, and if he ceases to own at least one
share in his own name, he automatically ceases
to be a director. (Sec. 23) For a non-stock
corporation, only members of the corporation
can be elected to seat in the Board of Trustees.
 In order to be
eligible as a director, what is material is the
legal title to, not beneficial ownership of the
stocks appearing on the books of the
corporation
2. A majority of the directors/trustees must be
residents of the Philippines. (Sec. 23)
3. He must not have been convicted by final
judgment of an offense punishable by
imprisonment for a period exceeding 6 years or
a violation of the Corporation Code, committed
within five years from the date of his election.
(Sec. 27)
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4. Only natural persons can be elected its board of directors and through its officers
directors/trustees. and agents when authorized by a board
• In case of corporate stockholders or resolution or by its by-laws. (Spouses
members, their representation in the board Constantine Firme vs. Bukal Enterprises
can be achieved by making their individual and Development Corporation, G.R. No.
representatives trustees of the shares or 146608, October, 23, 2003)
membership to make them
stockholders/members of record. Limitations on Powers of BOD/BOT
5. Other qualifications as may be prescribed in 1. Limitations imposed by the Constitution,
the by-laws of the corporation. statutes, articles of incorporation or by-laws.
6. Must be of legal age 2. Cannot perform constituent or those involving
fundamental changes in the corporation
Corporate Officers requiring the approval of stockholders or
1. President – must be a director; members.
2. Treasurer – may or may not be a director; as 3. Cannot exercise powers not possessed by the
a matter of sound corporate practice, must corporation. (The Corporation Code of the
be a resident Philippines Annotated, Hector de Leon, 2002
3. Secretary – need not be a director unless ed.)
required by the by-laws; must be a resident Nature of Powers of BOD/BOT (The
and citizen of the Philippines; and Corporation Code of the Philippines Annotated,
4. Such other officers as may be provided in the Hector de Leon, 2002 ed.)
by-laws. a. Under the Theory of Original Power, the
CORPORATE CORPORATE powers of the board of directors or trustees are
OFFICER EMPLOYEE ORIGINAL and UNDELEGATED. The
Position is provided Employed by the stockholders or members do not confer, nor can
for in the by-laws or action of the they revoke those powers.
under the managing officer of b. They are DERIVATIVE only in the sense of
Corporation Code the corporation being received from the State in the act of
RTC has NLRC has incorporation.
jurisdiction in case jurisdiction in case
of labor dispute of labor disputes Business Judgment Rule
 A resolution or
BOD/BOT as Repositary of Powers transaction
General Rule: The corporate powers of the pursued within the
corporation shall be exercised, all business corporate powers
conducted and all property of such corporation and business
controlled and held by the board of directors or operations of the
trustees. (Sec. 23) corporation, and
Exceptions: passed in good
1. In case of an Executive Committee duly faith by the board
authorized in the by-laws; of directors, is
2. In case of a contracted manager which valid and binding,
may be an individual, a partnership, or and generally the
another corporation. Note: In case the courts have no
contracted manager is another corporation, authority to review
the special rule in Sec. 44 applies. the same and
3. In case of close corporations, the substitute their
stockholders may manage the business of own judgment,
the corporation instead by a board of even when the
directors, if the articles of incorporation so exercise of such
provide. power may cause
 The power to losses to the
purchase real property is vested in the board corporation or
of directors or trustees. While a corporation decrease the
may appoint agents to negotiate for the profits of a
purchase of real property needed by the department.
corporation, the final say will have to be with (Philippine
the board, whose approval will finalize the Corporate Law,
transaction. A corporation can only exercise Cesar Villanueva,
its powers and transact its business through 2001 ed.)

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Consequences:
a. Resolutions and transactions entered into by
the Board within the powers of the corporation
cannot be reversed by the courts not even on
the behest of the stockholders.
b. Directors and officers acting within such
business judgment cannot be held personally
liable for such acts. (Philippine Corporate Law,
Cesar Villanueva, 2001 ed.)
3-Fold Duties of Directors (Philippine
Corporate Law, Cesar Villanueva, 2001 ed.)
1. Duty of Obedience
 To direct the
affairs of the corporation only in accordance
with the purposes for which it was
organized.
 Legal Basis: The
directors or trustees and officers to be
elected shall perform the duties enjoined on
them by law and the by-laws (Sec. 25)
2. Duty of Diligence
 Legal Basis: Directors or trustees who
willfully and knowingly vote for or assent to
patently unlawful acts of the corporation or
who are guilty of gross negligence or bad
faith in directing the affairs of the corporation
shall be liable jointly and severally for all
damages resulting therefrom suffered by the
corporation, its stockholders or members
and other persons (Sec. 31)
3. Duty of Loyalty
 Legal Basis: Directors or trustees who
acquire any pecuniary or personal interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally
for all damages resulting therefrom. (Sec.
31)
 When a director or trustee 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 liability upon him to deal in
his own behalf, he shall be liable as trustee
for the corporation and must account for all
the profits which otherwise would have
accrued to the corporation (Sec. 31, 2nd
par.)
 Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits which should
belong to the corporation, he must account
to the latter for all such profits by refunding
the same (Sec. 34)
Elections of Directors/Trustees
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 Limitations:
a. At any meeting of stockholder or members
called for the election of directors or trustees,
there must be present either in person or by
representative authorized to act by written proxy,
the owners of the majority of the outstanding
capital stock or majority of the members entitled
to vote.
b. The election must be by ballot if requested by
any voting member or stockholder.
c. 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.
d. No delinquent stock shall be voted.
e. The candidates receiving the highest number
of votes shall be declared elected.
Methods of Voting
a. Straight Voting – every stockholder may vote
such number of shares for as many persons as
there are directors to be elected.
b. 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.
c. 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.
Limitations on the Stockholder’s Right to
Vote
1. Where the articles of incorporation
provides for classification of shares
pursuant to Sec. 6, non-voting shares
are not entitled to vote except as
provided for in the last paragraph of
Sec. 6.
2. Preferred or redeemable shares may
be deprived of the right to vote unless
otherwise provided in the Code.
3. Fractional shares of stock cannot be
voted.
4. Treasury shares have no voting
rights as long as they remain in the
treasury.
5. Holders of stock declared delinquent
by the board of directors for unpaid
subscription are not entitled to vote or
to a representation at any
stockholder’s meeting.
6. A transferee of stock cannot vote if
his transfer is not registered in the
stock and transfer book of the
corporation.
 Far Eastern University
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Removal of Directors/Trustees (1996, 2001 LIMITED LIABILITY IMMUNITY

Bar Exams)
 Limitations: Shields the Protects a person
a. Vote of the stockholders representing at least corporators from acting for and in
2/3 of the outstanding capital stock, or 2/3 of the corporate liability behalf of the
members entitled to vote beyond their agreed corporation from
b. At a regular or special meeting after proper contribution to the being himself
notice is given capital or personally liable
c. Removal may be with or without cause. shareholding in the for his authorized
d. A minority director elected through cumulative corporation. actions
voting cannot be removed without cause. (Sec.
28)
Remedies in case of Mismanagement
Extent of Powers or Authority of Corporate 1. Receivership;
Officers 2. Injunction, if the act has not yet been done;
1. The authority which he has by virtue of his 3. Dissolution if the abuse amounts to a ground
office; for quo warranto but the Solicitor General
2. The authority which is expressly conferred refuses to act; and
upon him or is incidental to the effectualness of 4. Derivative suit or complaint filed with SEC.
such express authority;
3. As to third persons dealing with him without Special Rules on Contracts Entered Into by
notice of any restriction thereof, the authority Directors, Trustees or Officers
which the corporation holds the officer out as 1. Doctrine of Corporate Opportunity (2001,
possessing or is estopped to deny. 2005 Bar Exams)
4. The nature of the corporate business must  Unless his act is ratified, a director shall
also be taken into consideration; and refund to the corporation all the profits he
5. The nature act of an officer though originally realizes on a business opportunity which:
unauthorized, may become upon the corporation 1. The corporation is financially able to
by a subsequent ratification. (The Corporation undertake;
Code of the Philippines Annotated, Hector de 2. From its nature, is in line with corporations
Leon, 2002 ed.) business and is of practical advantage to it;
Note: It is a familiar doctrine that if a corporation and
knowingly permits one of it officers, or any other 3. The corporation has an interest or a
agent, to act within the scope of an apparent reasonable expectancy.
authority, it holds him out to the public as  The rule shall be applied
possessing the power to do those acts; and notwithstanding the fact that the director
thus, the corporation will, as against anyone who risked his own funds in the venture.
has in good faith dealt with it through such 2. Contracts of self-dealing directors
agent, be estopped from denying the agent’s
authority. (2004, 2006 Bar Exams; LapuLapu  Contracts which are entered into by the
Foundation Inc., vs. Court of Appeals, et al., corporation with one or more of its own
G.R. No. 126006, January 29, 2004.) directors/trustees, or officers. (Sec. 32)
 They are voidable, unless:
a) The presence of such director/trustee in the
Personal Liability of Directors board meeting approving the contract was
1. Willfully and knowingly voting for and not necessary to constitute a quorum for
assenting to patently unlawful acts of the such meeting;
corporation; (Sec. 31) b) The vote of such director/trustee in the
2. Gross negligence or bad faith in directing the board meeting approving the contract was
affairs of the corporation; (Sec. 31) not necessary for the approval of the
3. Acquiring any personal or pecuniary interest contract;
in conflict of duty; (Sec. 31) c) The contract is fair and reasonable under
4. Consenting to the issuance of watered the circumstances;
stocks, or, having knowledge thereof, failing d) In the case of an officer, there was previous
to file objections with the secretary;(Sec. 65) authorization by the board of directors.
 Although not all said conditions
5. Agreeing or stipulating in a contract to hold are present, the corporation may elect not to
himself liable with the corporation; or
attack or question the validity of the contract,
6. By virtue of a specific provision of law
without prejudice, however, to the liability of
DOCTRINE OF DOCTRINE OF

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the director/trustee for damages under Sec.
31.
 Where any of the first two conditions is
absent, said contract must be ratified by the
vote of the stockholders representing at
least 2/3 of the outstanding capital stock or
2/3 of the members in a meeting called for
the purpose, provided that full disclosure of
the adverse interest of the director/ trustee
involved is made at such meeting.
3. Contracts of interlocking directors
 Contracts entered into between
corporations with interlocking directors
(interest of said directors is “substantial”, i.e.
exceeding 20% of the outstanding capital
stock).
 They are valid, provided that:
a. The contract is not fraudulent; and
b. The contract is fair and reasonable under
the circumstances.
 If the interlocking director’s interest in
one corporation or corporations is “nominal”
(not exceeding 20% of the outstanding
capital stock), then all the conditions
prescribed in Sec. 32 on self-dealing
directors must be present with respect to the
corporation in which he has nominal interest.
BAR Q: A, the President of XYZ Corp.,
wrote a letter to B, offering to sell to the
latter 5000 bags of cement at P100 per
bag. B signed his conformity to the letter
offer, and paid a down payment of
50000. A few days later, C the
Corporate Secretary of XYZ Corp.
informed B of the decision of the Board
of Directors not to ratify the letter offer.
However, since B had already paid the
down payment, XYZ Corp. delivered
500 bags of cement which B accepted.
XYZ Corp. made it clear that the
delivery should be considered as an
entirely new transaction. Thereafter, B
sought to enforce the letter-offer. Is
there a binding contract for the 5000
bags of cement?
SA: NO. There is no binding contract for
the 5000 bags of cement. First, the facts
do not indicate that A, the President ,
was authorized by the Board of
Directors to enter into the contract or
that he was empowered to do so under
some provision of the by-laws of XYZ
Corp. The facts do not indicate that A
has been clothed with the apparent
power to execute the contracts or
agreements similar to it. Second, XYZ
Corp. has specifically informed B that it
has not ratified and that the delivery to B
of the 500 bags, which A accepted, is
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an entirely new transaction (Yao Ka Sin
Trading vs. CA, 209 SCRA 763).
Compensation of Directors or Trustees
General Rule: They shall be entitled to
reasonable per diems only
Exception:
a. when their compensation is fixed in the by-
laws
b. when granted by the vote of stockholders
representing at least a majority of the
outstanding capital stock at a regular or special
meeting
c. when they are also officers of the corporation
Executive Committee
 A body created by the by-laws and
composed of some members of the board
which, subject to the statutory limitations,
has all the authority of the board to the
extent provided in the board resolution or by-
laws.
 Must be provided for in the by laws and
composed of not less than 3 members of the
board appointed by the board.
 May act by a majority vote of all of its
members.
Limitations on the Powers of the Executive
Committee
It cannot act on the following:
1. Matters needing stockholder approval;
2. Filling up of board vacancies;
3. Amendment, repeal or adoption of by-laws;
4. Amendment or repeal of any resolution of
the Board which by its express terms is not
amendable or repealable; and
5. Cash dividend declaration.
POWERS OF THE CORPORATION
1. Express Powers - granted by law,
Corporation Code, and its Articles of
Incorporation or Charter
2. Inherent/Incidental Powers – not
expressly stated but are deemed to be within
the capacity of corporate entities
3. Implied/Necessary Powers – exists as a
necessary consequence of the exercise of
the express powers of the corporation or the
pursuit of its purposes as provided for in the
Charter
Classification:
1. Acts in the usual course of business
2. Acts to protect debts owing to the corporation
3. Acts which involve embarking in a different
business usually to collect debts out of profits
4. Acts to protect or aid employees
5. Acts to increase business (The Corporation
Code of the Philippines Annotated, Hector de
Leon, 2002 ed.)
 Far Eastern University
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General Powers 1. Power to extend or shorten corporate term

1. To sue and be sued;  May be used as means to voluntarily
2. Of succession; dissolve a corporation
2. Power to increase or decrease capital stock
3. To adopt and use of corporate seal;
4. To amend its Articles of Incorporation; Ways of Increasing/Decreasing the Capital
5. To adopt its by-laws; Stock (1998, 2001 Bar Exams)
6. For stock corporations: issue and sell stocks a. By increasing/decreasing the number of
to subscribers and treasury stocks; for non- shares and retaining the par value;
stock corporations: admit members; b. By increasing/decreasing the par value of
7. To purchase, receive, take or grant, hold, existing shares without increasing/decreasing
convey, sell, lease, pledge, mortgage and the number of shares;
deal with real and personal property, c. By increasing/decreasing the number of
securities and bonds shares and increasing/decreasing the par value.
Number of Votes for BOD:
8. To enter into merger or consolidation; Majority vote
9. To make reasonable donations for public Number of Votes of Corporators:
welfare, hospital, charitable, cultural, 2/3 of OCS/ members
scientific, civic or similar purposes, provided
that no donation is given to any (i) political Tools Available to the Stockholder to
party, (ii) candidate and (iii) partisan political Replenish Capital (1999 Bar Exam)
activity. a. Additional subscription to shares of stock of
10. To establish pension, retirement, and other the corporation by stockholders or by investors;
plans for the benefit of its directors, trustees, b. Advances by the stockholders to the
officers and employees. corporation;
11. To exercise other powers essential or c. Payment of unpaid subscription by the
necessary to carry out its purposes. stockholders; and
d. Loans from third persons.
Special/Specific Powers
1. Power to extend or 3.Incur, create or increase bonded indebtedness
shorten corporate term; Corporate bond – an obligation to pay a definite
2. Increase or decrease sum of money at a future time at fixed rate of
corporate stock; interest
3. Incur, create, or
increase bonded indebtedness; BONDED DEBENTURE
4. Sell, dispose, lease, INDEBTEDNESS
encumber all or substantially all of corporate Secured by a Serial obligations or
assets; mortgage on notes issued on the
5. Purchase or acquire corporate property. basis of the general
own shares provided: credit of the
a.there is an unrestricted retained corporation. Hence,
earnings, and they are not
b. it is for a legitimate purpose. bonded
6. Invest corporate funds indebtedness
in another corporation or business for other
purpose other than primary purpose; Salient Points:
7. Power to declare • Meeting is required
dividends out of unrestricted retained • Non-voting shares can vote
earnings;
• No appraisal right
8. Enter into management • Notice is required
contract with another corporation (not with • Registration of bonds with the SEC is
an individual or a partnership-within general necessary
powers) whereby one corporation Number of Votes for BOD:
undertakes to manage all or substantially all Majority vote
of the business of the other corporation for a Number of Votes of Corporators:
period not longer than 5 years for any one 2/3 of OCS/ members
term.

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4. Sell, dispose, lease, encumber all or
substantially all of corporate assets;
No ratificatory vote needed:
a. If it is necessary in the usual and regular
course of business
b. if the proceeds of the sale or other disposition
of such property and assets be appropriated for
the conduct of the remaining business
Salient Points:
• Majority can vote
• Non-voting shares can vote
• Appraisal right is available
• Notice is required
• If sale is abandoned, director’s action is
sufficient, no need for ratification by
stockholders
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members
5. Power to acquire own shares
Instances:
a. To eliminate fractional shares 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
c. To pay dissenting stockholders
d. To acquire treasury shares
e. Redeemable shares regardless of existence
of retained earnings
f. To effect a decrease of capital stock
g. In close corporations, when there is a
deadlock in the management of the business
Note: In letters a-c, there must be unrestricted
retained earnings.
Number of Votes for BOD:
Director’s action
6. Invest corporate funds in another corporation
or business for other purpose other than primary
purpose
The other purposes for which the funds may be
invested must be among those enumerated as
secondary purposes and must further comply
with the requirements of Section 42.
Salient Points:
• Non-voting shares can vote
• Appraisal right available
• Notice is required
• Investment in the secondary purpose is
covered
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• Stockholder’s ratification is not
necessary if the investment is incidental to
primary purpose
Number of Votes for BOD:
Majority vote
Number of Votes of Corporators:
2/3 of OCS/ members
7. Power to declare dividends out of unrestricted
retained earnings
RETAINED EARNINGS = ASSETS –
LIABILITIES AND LEGAL CAPITAL
“Unrestricted” – if the retained earnings have not
been reserved or set aside by the board of
directors for some corporate purpose.
Number of Votes for BOD:
Majority of the quorum
Number of Votes of Corporators:
2/3 of OCS/ members
Dividends (2001, 2005 Bar Exams)
 Corporate profits set aside, declared,
and ordered to be paid by the directors for
distribution among shareholders at a fixed
time.
 Forms:
a. Cash
b. Property
c. Stock
 While cash
dividends due on delinquent shares can be
applied to the payment of the unpaid
balance, stock dividends cannot be applied
as payment for unpaid subscription.
The right to dividends is based on duly
recorded stockholdings; accordingly, the
corporation is prohibited from entitling
thereto anyone else.
 General Rule: Stock
corporations are prohibited from retaining
surplus profits in excess of 100% of their
paid-in capital stock
Exceptions:
a. When justified by definite corporate
expansion projects approved by the board of
directors
b. When the corporation is prohibited under
any loan agreement with any financial
institution or creditor from declaring
dividends without its/his consent and such
consent has not yet been secured
c. When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the corporation,
such as when there is a need for special
reserve for probable contingencies.
 Far Eastern University
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Sources of dividends: h. Corporate earnings which have not yet

General Rule: Dividends can only be been received even though they consist in
declared and paid out of actual and bona money which is due, cannot be included in
fide unrestricted retained earnings. the profits out of which dividends may be
Special Rules: paid.
a. Where a corporation sold its real property,
which is not being used for business, at a CASH DIVIDENDS STOCK DIVIDENDS
gain, the income derived therefrom may be
availed of for dividend distribution. 1. Involves a 1. Does not involve
b. Increase in the value of a fixed asset as a disbursement to the any disbursement
result of its revaluation is not retained stockholders of
earning. However, increase in the value of accumulated earnings
fixed assets as a result of revaluation
(“Revaluation surplus”) may be declared as 2. When declared and 2. Since it is still part
cash or stock dividends provided that the paid becomes the of corporate property,
company: absolute property of the may be reached by
(i) Has sufficient income from operations stockholder and cannot corporate creditors
from which the depreciation on the appraisal be reached by creditors
increase was charged of the corporation in the
(ii) Has no deficit at the time the absence of fraud
depreciation on the appraisal increase was
charged to operations; and
(iii) Such depreciation on appraisal increase
3. Declared only by the 3. Declared by the
previously charged to operations has not
board of directors at its board with the
been impaired by losses.
discretion concurrence of the
c. Dividends can be declared out of the
stockholders
amount received in excess of the par value
representing at least
of shares (“paid-in surplus”) when:
2/3 of the outstanding
(i) That they be declared only as stock
capital stock at a
dividends and not cash;
regular/special
(ii) No creditors are prejudiced; and
meeting
(iii) There is no impairment of capital.
Note: unlike par value shares, when no par
value shares are sold at a premium, the
entire consideration paid is considered 4. Does not increase the 4. Corporate capital
capital; hence the same cannot be declared corporate capital is increased
as dividends.
d. Reduction surplus can be a source of 5. Its declaration creates 5. No debt is created
dividends. Rule on paid-in surplus is a debt from the by its declaration
applicable. corporation to each of its
e. No dividends can be declared out of stockholders
capital except only in two instances: 1)
liquidating dividends; and 2) dividends from
investments in wasting asset corporation. Trust Fund Doctrine
Note: It permits corporations solely or  The subscribed
principally engaged in the exploitation of capital stock of the corporation is a trust fund
“wasting assets” to distribute the net for the payment of debts of the corporation
proceeds derived from exploitation of their which the creditors have the right to look up
holdings such as mines, oil wells, patents to satisfy their credits, and which the
and leaseholds, without allowance or corporation may not dissipate. The creditors
deduction for depletion. may sue the stockholders directly for the
f. Profits realized from sale of treasury latter’s unpaid subscription.
shares are part of capital and cannot be  Application of the
declared as cash or stock dividend as TFD:
purchase and sale of such shares are 1. Where the corporation has distributed its
regarded as contractions and expansions of capital among the stockholders without
paid-in capital. providing for the payment of creditors;
g. Money cannot be borrowed for the 2. Where it had released the subscribers to the
payment of dividends because indebtedness capital stock from their subscriptions;
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3. Where it has transferred the corporate
property in fraud of its creditors; and
4. Where the corporation is insolvent.
 Coverage of the TFD:
1. If the corporation is solvent, the TFD extends
to the capital stock represented by the
corporation’s legal capital.
2. If the corporation is insolvent, the TFD
extends to the capital stock of the corporation as
well as all of its property and assets.
 Exceptions to the TFD:
1. Redemption of redeemable shares (Sec. 8)
2. In close corporation, when there should be a
deadlock and the SEC orders the payment of the
appraised value of the stockholder’s share. (Sec.
104)
 An ultra vires act may be that of:
a. The corporation;
b. The Board of Directors; and
c. The corporate officers.
 Effects of ultra vires act on:
a. Executed contract – courts will not set
aside or interfere with such contracts;
b. Executory contracts – no enforcement
even at the suit of either party (void and
unenforceable);
c. Part executed and part executory –
principle of “no unjust enrichment at
expense of another” shall apply; and
d. Executory contracts apparently
authorized but ultra vires – the principle of
estoppel shall apply.

8. Power to enter into management contract Ultra Vires Acts and Illegal Acts
Ultra vires (“beyond powers”) refers only to an
EXECUTIVE MANAGEMENT act outside or beyond corporate powers,
COMMITTEE CONTRACT including those that may ostensibly be within
such powers but are, by general or special laws,
1. Its creation 1. Express power either prohibited or declared illegal. It is in this
must be provided of a corporation context that the Code has used the term.
for in the by-laws
Ultra Vires Acts Illegal Acts
2. A governing 2. Management Not necessarily Unlawful; against
body which company must unlawful, but law, morals, public
functions as the always be subject outside the powers policy, and public
board itself. to the superior of the corporation order
power of the board Can be ratified Cannot be ratified
to give specific Can bind the Cannot bind the
directions from parties if wholly or parties
time to time or to partly executed
recall the
delegation of
TEST whether or not a corporation may
managerial power.
perform an act: consider the logical and
necessary relation between the act questioned
and the corporate purpose expressed by law or
Ultra Vires (“beyond powers”) Act in the charter. If the act is lawful in itself and not
 An act which is beyond the conferred prohibited, and is done for the purpose of
powers of a corporation or the purposes or serving corporate ends, and reasonably
objects for which it is created as defined by contributes to the promotion of those ends in a
the law of its organization. substantial and not in a remote and fanciful
 An act done by a corporation outside of sense. (Montelibano vs. Bacolod-Murcia Milling
the express and implied powers vested in it Co., Inc., 5 SCRA 36)
by its charter and by the law.
 Types: (Philippine Corporate Law, Remedies in Case of Ultra Vires Acts
Cesar Villanueva, 2001 ed.) 1. State
1. Acts done beyond the powers of the a. Obtain a judgment of forfeiture; or
corporation as provided in the law or its b. The SEC may suspend or revoke the
articles of incorporation; certificate of registration
2. Acts or contracts entered into in behalf 2. Stockholders
of a corporation by persons who have no a. Injunction; or
corporate authority (Note: This is b. Derivative suit
technically ultra vires acts of officers and 3. Creditors
not of the corporation); and a. Nullification of contract in fraud of creditors
3. Acts or contracts, which are per se
illegal as being contrary to law. BY-LAWS

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(1998, 2000, 2001 Bar Exams) e. The qualification, duties and compensation of
 Rules of action adopted by a corporation directors or trustees, officers and employees
for its internal government and for the f. Time for holding the annual election of
regulation of conduct and prescribe the directors or trustees and the mode or manner of
rights and duties of its stockholders or giving notice thereof
members towards itself and among g. Manner of election or appointment and the
themselves in reference to the management term of office of all officers other than directors
of its affairs. or trustees
 Functions: h. Penalties for violation of the by-laws
a. Supplement the articles of incorporation i. In case of stock corporations, the manner of
b. Provide for details not important enough to be issuing certificates
stated in the articles of incorporation j. Such other matters as may be necessary for
c. Continuing rule for the government of the the proper or convenient transaction of its
corporation and the individuals composing it corporate business and affairs
d. Define the rights and duties of corporate
officers and directors/trustees and of Articles of By-Laws
stockholders/members towards the corporation Incorporation
and among themselves Condition precedent Condition
e. Source of authority for corporate officers and in the acquisition of subsequent; its
agents of the corporation corporate existence; absence merely
Requisites for validity: furnishes a ground
a. Must not be contrary to law nor with the for the revocation
Corporation Code of the franchise
b. Must not be contrary to morals and public Essentially a For the internal
policy; contract between the government of the
c. Must not impair obligations and contracts; corporation and the corporation but has
d. Must be general and uniform; stockholders/ the force of a
e. Must be consistent with the charter or members; between contract between
articles of incorporation; and the stockholders/ the corporation
f. Must be reasonable, not arbitrary or member inter se, and the
oppressive. and between the stockholders/
Binding effect: corporation and the members, and
a. As to members and corporation State; between the
They have the force of contract between the stockholders and
members themselves.They are binding only members;
upon the corporation and on its members Executed before May be executed
and those having direction, management incorporation after incorporation.
and control of its affairs. Sec. 46 allows the
b. As to third persons filing of the by-laws
They are not bound to know the by-laws simultaneously
which are merely provisions for the with the Articles of
government of a corporation and notice to Incorporation
them will not be presumed. Amended by a May be amended
Reason: By-laws have no extra-corporate majority of the by a majority vote
force and are not in the nature of legislative directors/ trustees of the BOD and
enactments so far as third persons are and stockholders majority vote of
concerned. representing 2/3 of outstanding
Contents of By-Laws the outstanding capital stock or a
a. Time, place and manner of calling and capital stock, or 2/3 majority of the
conducting regular or special meetings of of the members in member in non-
directors or trustees case of non-stock stock corporation
b. Time and manner of calling and conducting corporations
regular or special meetings of the stockholder or Power to Power to amend
members amend/repeal or repeal by-laws
c. The required quorum in meeting of articles cannot be or adopt new by-
stockholders or members and the manner of delegated by the laws may be
voting therein stockholders/ delegated by the
d. The form for proxies of stockholders and members to the 2/3 of the
members and the manner of voting them board of directors/ outstanding
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2/3 of the a. GENERAL PROXY – confers a general

members in the discretionary power to attend and vote at annual
case of non-stock meeting.
corporation b. LIMITED PROXY – restrict the authority to
vote to specified matters only and may direct the
MEETINGS manner in which the vote shall be cast
Stockholders/Members Meeting
WHEN: Voting Trust - An agreement whereby one or
1. REGULAR - held on the date fixed in the more stockholders transfer their shares of stocks
by-laws or if not fixed on any date in to a trustee, who thereby acquires for a period of
April;and time the voting rights (and/or any other rights)
2. SPECIAL - held at any time deemed over such shares; and in return, trust certificates
necessary or as so provided in the by-laws. are given to the stockholder/s, which are
WHERE: transferable like stock certificates, subject,
 In the city or municipality where the however, to the trust agreement.
principal office of the corporation is  Limitations:
located, and if practicable, in the a. Cannot be entered into for a period exceeding
principal office of the corporation. 5 years at any one time except when it is a
However, in the case of non-stock corporations, condition in a loan agreement or for the purpose
the by-laws may provide that meetings may of circumventing the law against monopolies and
be held at any place even outside the illegal combinations
principal place of the corporation. b. The agreement must not be used for
Board Meeting purposes of fraud
WHEN: c. It must be in writing and notarized and specify
1. REGULAR - held monthly, unless the terms and conditions thereof
otherwise provided in the by-laws; and d. A certified copy of the agreement must be
2. SPECIAL - held at any time upon the call filed with the corporation and with the SEC
of the president. e. The agreement shall be subject to
WHERE: examination by any stockholder of the
May be held anywhere in or outside of the corporation
Philippines. f. Unless expressly renewed, all rights granted in
the agreement shall automatically expire at the
Proxy end of the agreed period
 Limitations:
a. It must be in writing and signed by the VOTING TRUSTS PROXY
stockholder or member (as principal) and filed The trustee votes The proxy holder
before the scheduled meeting with the corporate as owner rather votes as agent
secretary, and given to another person (as than as mere agent
agent) authorizing such person to exercise the The trust may vote The proxy must
voting rights of the former. in person or by vote in person
b. Unless otherwise provided in the proxy, it proxy unless the
shall be valid only for the meeting for which it is agreement
intended. provides otherwise
c. No proxy shall be valid and effective for a Trustee acquires Proxy has no legal
longer period than five years at any one time. legal title to the title to the shares of
• The right to vote by proxy may be shares of the the principal
exercised in any of the following instances: transferring
1. Election of the board of directors or trustees; stockholder
2. Voting in case of joint ownership of stock; The agreement Proxy need not be
3. Voting by trustee under voting trust must be notarized notarized
agreement; The agreement is Revocable anytime
4. Pledge or mortgage of shares; irrevocable except one with
5. As provided for in its by-laws. interest
Note: Stockholders or members may attend and Trustee is not Proxy can only act
vote in their meetings by proxy (Sec. 58); limited to act at any at a specified
directors cannot do so. Directors must always particular meeting stockholder’s
act in person. (Sec. 25). meeting (if not
Extent of Authority continuing)
A trustee can vote A proxy can only
and exercise all the vote in the absence

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rights of the of the owners of which cannot be absolute.

stockholder even the stock sold.
when the latter is Underwriters are There is no
present given commission. commission.
An agreement must A proxy is usually The signer can He becomes a
not exceed 5 years of shorter duration refuse to become a stockholder of the
at any one time although under stockholder/ company and is
except when the Sec. 58 it cannot member of the liable to pay the
same is made a exceed 5 years at company. amount due on the
condition of a loan. any one time stock.
The voting right is The right to vote is Pre-Incorporation Subscription Agreements
divorced from the inherent in or (PISA) - Subscription of shares of
ownership of stocks inseparable from stock of a corporation still to be
the right to formed shall be irrevocable for a
ownership of stock period of at least 6 months from date
of subscription, unless:
1. All of the other subscribers
STOCKS AND STOCKHOLDERS consent to the revocation;
2. The incorporation of said
Subscription Contract - any contract for the corporation fails to materialize with said
acquisition of unissued stock in an existing period or within a longer period as may
corporation or a corporation still to be formed be stipulated in the contract of
shall be deemed a subscription. subscription; provided that no pre-
 The subscribed shares need not be paid incorporation subscription may be
in full in order that the subscription may be revoked after the submission of the
valid. The subscription contract is a articles of incorporation to the SEC.
consensual contract that is perfected upon (Sec. 61)
the meeting of the minds of the parties. The
name of the subscriber is recorded in the Modes of issuance of Shares
stock and transfer book, and from that time, a. By subscription before and after incorporation
such subscriber becomes a stockholder of to original, unissued stock
record entitled to all the rights of a b. By sale of treasury stock after incorporation
stockholder. Until the stocks are fully paid, it for money, property or service
continues to be a subsisting liability that is c. By subscription to new issues of stock in case
legally enforceable. of an increase in the capital stock
 In Ong Yong, et.al, vs. David Tiu, the d. By making a stock dividend
Court did not allow the rescission of the Pre-
Subscription agreement since the action was Valid Considerations in Subscription
filed by the Tius in their personal capacities. Agreement
It ruled that it was the corporation who had 1. Cash actually received;
the legal personality to file the suit, it being 2. Property, tangible or intangible, actually
the real party in interest. received AND necessary or convenient for
its use and lawful purposes;
Underwriting Agreement - an agreement Requisites;
between a corporation and a third person, a. Necessary or proper in carrying on
termed the “underwriter”, by which the latter the corporate business
agrees, for a certain compensation, to take a b. Ascertainable pecuniary value
stipulated amount of stocks or bonds, specified c. Capable of being transferred and
in the underwriting agreement, if such securities applied to payment of debts
are not taken by those to whom they are first 3. Labor or services actually rendered to the
offered. corporation;
4. Previously incurred corporate indebtedness;
Underwriting Stock
Agreement Subscription
5. Amounts transferred from unrestricted
Agreement retained earning to stated capital,
The signers The obligation of 6. Outstanding shares in exchange for stocks
obligate the signer to the in the event of reclassification or conversion.
themselves to take purchasers and to Note: Shares of stock shall not be issued in
the shares of stock the public is exchange for promissory notes or future
services. There is no prohibition on the use of

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checks, bills or notes in payment of the “cash” intangible property tangible

consideration.
Shares of Stock
Interest or right which owner has in the
management of the corporation, and its surplus
profits, and, on dissolution, in all of its assets
remaining after the payment of its debt.
Certificate of Stock (1996, 2001 Bar Exams)
 The document evidencing the ownership
of shares of stocks by a stockholder and the
full payment of its issue or subscription
price.
 It is not essential to the ownership
and/or existence of the share of stock.
 Where the certificate of stock reflects a
greater volume of shares than the actual
number of shares issued or to be issued, the
following rules may be considered:
1. To the extent that there is an overissue,
the excess issuance (over the authorized
capital stock or the stated capital) shall be
void as being ultra vires.
2. If there is no overissue, but no payment
has been made to cover the par or stated
value of the excess shares, the latter would
constitute “watered” stocks.
3. If there is no overissue and watering of
stocks, the corporation may be bound to
honor the certificate (if duly signed and
released by its authorized officers) in the
hands of a holder in good faith, reserving a
right of recourse that an aggrieved party may
pursue against the culpable or unjustly
enriched party.
May be issued by May be issued
the corporation only if the
even if the subscription is fully
subscription is not paid.
fully paid.
Requirements for Validity of Transfers of
Stocks
a. In case of shares covered by a certificate, the
indorsement of the owner or his agent coupled
with delivery is essential
b. Where no certificate has been issued or for
some reason it is not in the possession of the
stockholder, it may be transferred by means of a
deed of assignment duly recorded in the books
of the corporation
c. To be valid against the corporation and third
persons, the transfer must be recorded in the
stock and transfer book
d. The transferee must present the indorsed
certificate to the corporate secretary who shall
effect the transfer in the corporate books, issue
a new stock certificate in favor of the transferee
and cancel the former certificate.
Note: Only absolute transfers need be
registered. The pledge or mortgage itself need
not be recorded in the stock and transfer book,
but a chattel mortgage must comply with the
Chattel Mortgage Law, and a pledge would
require the shares to be placed in the
possession of the creditor/pledgee. The
agreement must appear in a public instrument to
take effect against third persons. (Chemphil vs.
CA, 251 SCRA 257)

Capital Stock Shares of Stock Effects of Unregistered Transfer of Stocks

Amount paid in or Interest or right a. It is valid and binding as between the
secured to be paid which the transferor and the transferee
in by the stockholder has in b. It is invalid as to the corporation except when
stockholders upon the management of notice is given to the corporation for purposes of
which the the corporation, registration
corporation is to and its surplus c. It is invalid as against corporate creditors and
conduct its profits, and upon a the transferor is still liable to the corporation
operation. It is the dissolution, in all of d. It is invalid as to the attaching or executing
property of the its assets creditors of the transferor, as well as subsequent
corporation itself remaining after purchasers in good faith without notice of the
(monetary value). payment of transfer.
corporate debts.
Issuance of Certificate of Stock
No certificate of stock shall be issued until the
SHARES OF CERTIFICATE OF
full amount of the subscription is paid. Basis:
STOCK STOCK
Doctrine of Individuality of Subscription that
Unit of interest in a Evidence of the
espouses that the subscription is one, entire,
corporation holder’s ownership
indivisible, and whole contract, which cannot be
of the stock and of
divided into portions.
his right as a
shareholder
Collection of Unpaid Subscription
Incorporeal or Concrete and
1. Voluntary payment

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a. Upon the date specified in the
subscription contract
b. Upon call by the Board of Directors
2. Involuntary payment
a. Extra-judicial
i. Delinquency sale
ii. Application of dividends
b. Judicial action
Note: The prescriptive period in case of
subscription of shares begins to run only from
the time the board of directors declares that the
balance are due and payable. It does not begin
to run from the date of the subscription. (Garcia
vs. Suarez, 67 Phil. 441)
DELINQUENCY
1. If the subscription contract fixes the date for
payment, failure to pay on such date shall
render the entire balance due and payable
with interest. Thirty days therefrom, if still
unpaid, the shares become delinquent, as of
the due date, and subject to sale, unless the
board declares otherwise.
2. If no date is fixed in the subscription
contract, the board of directors can make the
call for payment, and specify the due date.
The notice of call is mandatory. The failure
to pay on such date shall render the entire
balance due and payable with interest. Thirty
days therefrom, if still unpaid, the shares
become delinquent, as of the date of call,
and subject to sale, unless the board
declares otherwise.
Effect:
A. Upon the stockholder
1. Accelerates the entire
amount of the unpaid subscription;
2. Subjects the shares to
interest, expenses and costs;
3. Disenfranchises the
shares from any right that inheres to a
shareholder, except the right to
dividends (but which shall be applied to
any amount due on said shares or, in
the case of stock dividends, to be
withheld by the corporation until full
payment of the delinquent shares.
B. Upon the director owning delinquent shares
1. He can continue serving in that capacity
unless and until said shares are totally bidded
away, he continues to be the owner thereof and
in the interim he is not disqualified.
2. A delinquent stockholder seeking to be
elected as director may not be a candidate for,
nor be duly elected to, the board.
Note: No delinquency stock shall be voted for or
be entitled to vote or representation at any
stockholders meeting, nor shall the holder be
entitled to any of the rights of a stockholder
except the right to dividends in accordance with
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the provisions of this Code until and unless he
pays the amount due on his subscription with
accrued interest, and the cost and expenses of
advertisement, if any.
Procedure for the Sale of Delinquent Stocks
Call by resolution demanding payment of the
balance. However, if the contract of
subscription prescribes the date of payment,
no call is necessary.
Notice of the board resolution given to the
stockholders by the corporate secretary,
either personally or by registered mail.
Publication of notice of call is not required.
Failure of the stockholder to pay within a grace
period of 30 days from the date specified in
the contract of subscription or in the call, the
stocks shall be declared delinquent and shall
be subject to sale.
Notice of delinquency served on the subscribers
either personally or registered mail and
publication in a newspaper of general
circulation in the province or the city where
principal office is located for once a week for
2 consecutive weeks. Notice shall state the
amount due on each subscription plus
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 become delinquent.
Sale of the delinquent shares at public auction.
Highest Bidder in Delinquency Sale
a. The person participating in the delinquency
sale who offers to pay the full amount of the
balance of the subscription together with the
accrued interest, costs of advertisement and
expenses of sale, for the smallest number of
shares. In other words, the amount of the bid
does not vary but only the number of shares to
be bought changes and determines the highest
bidder.
b. If there is no bidder as mentioned above, the
corporation may bid for the same, and the total
amount due shall be credited as paid in full in
the books of the corporation. Such shares shall
be considered as treasury shares.
Procedure for Issuance of New Certificate of
Stock in lieu of Lost, Stolen or Destroyed
Ones
1. Filing with the corporation an affidavit in
triplicate by the registered owner setting forth the
circumstances as to how the certificate was lost,
stolen or destroyed, the number of shares, serial
number of the certificate and the name of the
corporation that issued the same.
2. Publication of notice of loss by the corporation
in a newspaper of general circulation in the
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place of the principal office, once a week for 3 authorized capital stock for subscription. If
consecutive weeks. subsequently, it offers the remaining
3. After the lapse of 1 year from the date of the unsubscribed portion, there would be
last publication, if no contest has been preemptive right as to the remaining portion
presented, the corporation shall cancel in its thus offered for subscription.
books the certificate of stock, which has been  When pre-emptive right not available:
lost, stolen or destroyed, and issue in lieu a. When denied by the article of incorporation
thereof a new certificate of stock. b. Shares requiring stock offering or minimum
However, if the registered owner files a bond stock ownership by the public
or other securities as may be necessary to the c. Shares to be issued in good faith with the
board, the new certificate of stock may be issued approval of the stockholders representing 2/3 of
even before the expiration of one (1) year the outstanding capital stock, in exchange for
period. property needed for corporate purposes or in
payment of a previously contracted debt
Rights of Stockholders
1. Managerial Rights PRE-EMPTIVE RIGHT OF FIRST
a. Voting rights; and RIGHT REFUSAL
b. Right to remove directors May be exercised Arises only by
2. Proprietary Rights even when there virtue of
a. Right to dividends; is no express contractual
b. Right to issuance of stock certificate for provision of law stipulations but is
fully paid shares; also granted under
c. Proportionate participation in the the provisions on
distribution of assets in liquidation; Close Corporation
d. Right to transfer of stocks in corporate Pertains to Exercisable
books; unsubscribed against another
e. Right to recover stocks unlawfully sold portion of the stockholder of the
for delinquent payment of subscription authorized capital corporation of his
f. Preemptive right stock. A right that shares of stock
may be claimed
Preemptive Right of Stockholders (1999, against the
2001, 2004 BAR EXAMS) corporation
 It is the shareholders’ preferential right
to subscribe to all issues or dispositions of 3. Remedial Rights
shares of any class in proportion to their a. Individual suit – a suit instituted by a
present stockholdings. shareholder for his own behalf against
the corporation;
 Purpose: to enable the shareholder to
retain his proportionate control in the b. Representative suit – a suit filed by a
corporation and to retain his equity in the shareholder in his behalf and in behalf
surplus. likewise of other stockholders similarly
 Extends to treasury shares in case of situated and with a common cause
their reissuance. against the corporation; and
 If the shares preferentially offered to a c. Derivative suit – a suit filed in behalf of
stockholder are not subscribed or purchased the corporation by its shareholders (not
by him, it does not follow that said shares creditors whose remedies are merely
shall again be re-offered on a pro rata basis subsidiary such as accion subrogatoria
to stockholders who already exercised their and accion pauliana) upon a cause of
preemptive rights. There is no preemptive action belonging to the corporation, but
right with respect to the share to be re- not duly pursued by it, against any
offered. person or against the directors, officers
 In case additional issues of originally and/or controlling shareholders of the
authorized shares: corporation.
 Requisites:
 General Rule: There is no preemptive (i) An existing cause of action in favor of
right. This is on the theory that when a
the corporation
corporation at its inception offers its first
(ii) The stockholder/member must first
shares, it is presumed to have offered all of
make a demand upon the corporation or
those which it is authorized to issue.
the management to sue unless such a
Exception: When a corporation at its
demand would be futile
inception offers only a specified portion of its

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(iii) The stockholder/member must be
such at the time of the objectionable
acts or transactions unless the
transactions are continuously injurious
(iv) The action must be brought in the
name of the corporation
 The number of shares of the stockholder
is immaterial since he is not suing in his
own behalf
Note: The mere trustee of shares
registered in his name cannot file a
derivative suit for he is not a stockholder
in his own right. (Bitong vs. CA, 292
SCRA 304)
Liabilities of Stockholders
a. Liability to the corporation for unpaid
subscription
b. Liability to the corporation for
interest on unpaid subscription
c. Liability to creditors of the
corporation on the unpaid subscription
d. Liability for watered stock
e. Liability for dividends unlawfully paid
f. Liability for failure to create
corporation
CORPORATE BOOKS AND RECORDS
Inspection Rights
Limitations:
a. The right must be exercised
during reasonable hours on business
days;
b. The person demanding the right
has not improperly used nay information
obtained through any previous
examination of the books and records of
the corporation; and
c. The demand is made in good
faith or for a legitimate purpose. (Sec.
74)
 The right extends, in consonance with
equity, good faith, and fair dealing, to a
foreign subsidiary wholly-owned by the
corporation.
 Books required to be kept by the
corporation:
1. Book of Minutes
a. minutes of stockholder or members
meetings; and
b. minutes of board meetings.
2. Book of all business transactions;
3. Stock and transfer book, in case
of stock corporations.
 Corporate records required by the SEC
to be kept and/or registered:
1. Books of Account;
2. List of Stockholders or Members; and
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3. Financial Records.
MERGER AND CONSOLIDATION
(1996, 1999 Bar Exams)
Merger
A union whereby one or more existing
corporations are absorbed by another
corporation which survives and continues the
combined business.
Consolidation
The union of two or more existing corporations
to form a new corporation called the
consolidated corporation.
Procedure:
a. The board of directors or trustees of each
corporation shall approve a plan of merger or
consolidation
b. The plan shall be submitted for approval by
the stockholders or members of each of such
corporation at separate corporate meetings duly
called for the purpose
c. The articles of merger or consolidation shall
be executed by each of the constituent
corporations
d. Submission to the SEC for approval
e. The SEC may or may not conduct a hearing
f. Issuance of certificate of merger or
consolidation by the SEC.
Effects of Merger and Consolidation
1. The constituent corporations shall become a
single corporation which, in case of merger shall
be the surviving corporation and, in the case of
consolidation, shall be the consolidated
corporation;
2. The separate existence of the constituent
corporation shall cease, except that of the
surviving corporation;
3. The surviving or consolidated corporation
shall possess all rights, privileges, immunities
and powers and subject to all the duties and
liabilities of a corporation;
4. The surviving or consolidated corporation
shall thereafter possess all the rights, privileges,
immunities and franchises of each of the
constituent corporations;
5. All property, real or personal, and all
receivables due to, and all other interest of each
constituent corporation, shall be deemed
transferred to and vested in such surviving or
consolidated corporation without further act or
deed;
6. The surviving or consolidated corporation
shall be responsible for all the liabilities and
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obligations of each of the constituent 4. Title to the 4. Transfer of

corporations; assets are title is by virtue
7. Any claim, action or proceeding pending by
or against any of the constituent corporations transferred by of contract
may be prosecuted by or against the surviving or operation of law
consolidated corporations; and 5. The 5. The selling
8. The rights of the creditors or lien upon the constituent corporation is
property of any of each constituent corporation
corporations are not dissolved by
shall not be impaired by such merger or
consolidation. automatically the mere
dissolved transfer of all its
General Rule: When one corporation buys all the property
shares of another corporation, this will not
operate to dissolve the other corporation and as Types of Acquisitions (Philippine Corporate
the two corporations still maintaining their Law, Cesar Villanueva, 2001 ed.)
separate corporate entities, one will not answer a. “ASSETS-ONLY” LEVEL
for the debts of the other. The purchaser is interested only in the raw
Exceptions as to Non-assumption of Liabilities: assets and properties of the business. He is not
1. If there is an express assumption of liabilities; interested in the entity of the corporate owner of
2. If there is a consolidation or merger; the assets nor of the goodwill and other factors
3. If the purchase was in fraud of creditors; and relating to the business itself.
4. If the purchaser is merely a continuation of The transferee would not be liable for the debts
the seller. and liabilities of his transferor since there is no
privity of contract over debt obligations between
De Facto Merger the transferee and the transferor’s creditors
One corporation acquiring all or substantially all b. “BUSINESS-ENTERPRISE” LEVEL
of the properties of another corporation in The transferee merely continues the same
exchange for shares of stock of the acquiring business of the transferor since he obtains the
corporation. The acquiring corporation would earning capability of the venture
end-up with the business enterprise of the The transferee is liable for the debts and
selling corporation whereas the latter would end liabilities of the transferor
up with basically its remaining assets being the c. “EQUITY” LEVEL
shares of stock of the acquiring corporation and The purchaser takes control and ownership of
may then distribute it as liquidating dividend to the business by purchasing the shareholdings of
its stockholders. (Philippine Corporate Law, the corporate owner. What the purchaser
Cesar Villanueva, 2001 ed.) actually purchased is the ability to elect the
members of the board of the corporation who
Merger and Sale of Assets run the business.
Consolidation
1. Sale of 1.merger/consol APPRAISAL RIGHT
assets is always idation is not
Appraisal Right
involved always involved
The right to withdraw from the corporation and
2. There is 2. Purchasing demand payment of the fair value of his shares
automatic corporation is after dissenting from certain corporate acts
assumption of not generally involving fundamental changes in corporate
liabilities liable for the structure, namely:
(ASIM)
debts and
1. An amendment to the articles
liabilities of the that has the effect of a) changing or
selling restricting the rights of shareholders or
corporation of authorizing preferences over those of
3. There is 3. The selling outstanding shares, or b) changing the
continuance of corporation term of corporate existence;
the enterprise ordinarily 2. Sale, encumbrance or other
dispositions of all or substantially all of
and of the contemplates a the corporate property or assets. (Sec.
stockholders liquidation of the 81)
enterprise 3. Merger or consolidations; and

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4. Investment of corporate funds in
another corporation or in a purpose
other than the primary purpose;
 Other instances when right available:
5. When a corporation invest its
funds in another corporation or business
for any purpose other than its primary
purpose
6. In a close corporation, a
stockholder for any reason compel the
corporation to purchase his shares when
the corporation has sufficient assets in
its books to cover its debts and liabilities
exclusive of capital stock
Procedure
a. The dissenting stockholder shall make a
written demand on the corporation within 30
days after the date on which the vote was taken
for the payment of the fair value of his shares.
Failure to do so, shall be deemed a waiver of his
a waiver of his appraisal right
b. If the proposed corporate action is
implemented or effected, the corporation shall
pay to such stockholder, upon surrender of the
corresponding certificate of stock within 10 days
after demanding payment of his shares
c. Upon payment of the agreed or awarded
price, the stockholder shall transfer his shares to
the corporation
Conditions on the Exercise of Appraisal
Rights
1. Any of the instances provided for by law for
the exercise of the right must be present.
2. The dissenting stockholder must have voted
against the proposed corporate action.
3. The stockholder must make a written demand
within 30 days from the date that the vote
was taken.
4. The price must be based on the fair value of
the shares as of the day prior to the date in
which the vote was taken.
5. Payment of the shares must be made only
out of the unrestricted retained earnings of
the corporation.
6. Upon payment, the stockholder must transfer
his shares to the corporation.
Effect of the Exercise of the Right:
a. All rights accruing to the such shares shall be
suspended
b. The dissenting stockholder shall be entitled to
receive payment of the fair value of his
shares as agreed upon between him and the
corporation or as determined by the
appraisers chosen by them.
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General Rule: A dissenting stockholder who
demands payment of his shares is no longer
allowed to withdraw from his decision
Exceptions:
1. The corporation consents to the withdrawal
2. The proposed corporate action is abandoned
or rescinded by the corporation
3. The proposed corporate action is
disapproved by the SEC where its approval is
necessary
4. The Commission determines that such
stockholder is not entitled to appraisal right.
NON-STOCK CORPORATION
Non-Stock Corporation –a corporation
organized for an eleemosynary purpose, and no
part of whose income is, during its existence,
distributable as dividends to its members,
trustees, or officers, subject to the provisions of
the Corporation Code on dissolution. (Sec. 87)
 Any profit which it 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 it was organized.
 Eleemosynary purposes: charitable,
religious, educational, professional, cultural,
recreational, fraternal, literary, scientific,
social, civic service, or similar purposes, like
trade, industry, agricultural. (Sec. 88)
 They are governed by the same rules
established for stock corporations, whenever
pertinent, subject, however, to a number of
special features.
Rules on Conversion (2001 Bar Exam)
1. Stock to non-stock corporation
Conversion may be made by mere
amendment of the articles of incorporation.
2. Non-stock to stock corporation
• The corporation must first be dissolved;
mere amendment of the articles of
incorporation would not suffice because
the conversion would change the
corporate nature from non-profit to
monetary gain.
• The conversion without dissolving it first
would be tantamount to distribution of its
assets or income to its members
inasmuch as after its conversion, the
asset of the non-stock corporation would
now be treated as payment to the
subscriptions of the members who will
now become stockholders of the
corporation.
Rights of Members
1. To be entitled to 1 vote unless otherwise
provided in the articles or by-laws
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2. To vote by proxy unless otherwise 1. Assets held by the corporation

provided in the articles or by-laws upon a condition requiring return, transfer or
3. To transfer membership if allowed by the conveyance, and which condition occurs by
articles or by-laws reason of dissolution, shall be returned,
4. To be elected as trustee transferred or conveyed in accordance with
such requirements
Distinctions between Stock Corp and Non- 2. Assets received and held by the
Stock Corp (2004 Bar Exam) corporation subject to limitations permitting
Stock Non-Stock their use only for charitable, religious,
Has capital stock • Does not have benevolent, educational or similar purposes
divided into shares shares and may not but not held upon a condition requiring
and with authority distribute profits to return, transfer or conveyance by reason of
to distribute its members dissolution, shall be transferred or conveyed
dividends to its to one or more corporations, societies or
stockholders organizations engaged in activities in the
Stockholders may • Members Philippines substantially similar to those of
transfer their cannot transfer the dissolving corporation pursuant to a plan
shares their membership of distribution
unless allowed by 3. Other assets, if any, shall be
the articles or by- distributed in accordance with the provisions
laws of the articles of incorporation or the by-laws
Cumulative voting • Cumulative 4. In any other case, assets may
is available in the voting not available be distributed to such persons, societies,
election of directors unless otherwise organizations or corporations, whether or not
provided in the organized for profit, as may be specified in a
articles or by-laws plan of distribution.
Note: The plan of distribution shall be approved
Directors cannot • Trustees may
exceed 15 in by a majority vote of the board of trustees
exceed 15 in
number and by 2/3 of the members having voting
number
rights at a meeting
The term of a • The term of a
CLOSE CORPORATION
director is 1 year trustee is 3 years;
1/3 of the Board Definition:
shall be elected A special kind of stock corporation:
annually 1. whose articles of incorporation should
Stockholders may • Members may provide that:
vote by proxy be deprived of the a.the number of stockholders shall not
right to vote by exceed 20;
proxy in the articles
b. issued stocks are subject to
or by-laws
transfer restrictions, with a right of
Officers are elected • Officers may be
preemption in favor of the stockholders
by the Board of directly elected by
or the corporation; and
Directors the members
unless otherwise
c. the corporation shall not be listed in
provided in the the stock exchange or its stocks should
articles or by-laws not be publicly offered; AND
2. whose at least 2/3 of the voting stocks or
Stockholders and • Members may
voting rights should not be owned or
directors must act be allowed by the
controlled by another corporation which is
in a meeting, by-laws to vote by
not a close corporation.
except where a mail or other similar
Characteristics:
mere written assent means
1. Stockholders may act as
is sufficient or a
directors without need of election and
formal meeting
therefore are liable as directors;
unnecessary
2. Stockholders who are involved
in the management of the corporation
Rules for Distribution of Assets in case of
are liable in the same manner as
Dissolution
directors are.
All liabilities and obligations of the corporation
3. Quorum may be greater than
shall be paid, satisfied and discharged or
mere majority;
adequate provision shall be made therefor

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4. Transfers of stocks to others, articles so provide,

which would increase the number of but they are liable
stockholders to more than the maximum as directors.
are invalid; The corporate Its articles may
5. Corporate actuations may be officers and provide that any or
binding even without a formal board employees are all of the corporate
meeting, if the stockholder had elected by a officers or
knowledge or ratified the informal action majority vote of all employees may be
of the others; the members of the elected or
6. Preemptive right extends to all board of directors. appointed by the
stock issues; stockholders.
7. Deadlocks in board are settled The pre-emptive The pre-emptive
by the SEC, on the written petition by right is subject to right is subject to no
any stockholder; and the exceptions exceptions unless
8. Stockholder may withdraw and found in Sec. 39. denied in the
avail of his right of appraisal. articles
Note: Special rules are provided for close The appraisal right The appraisal right
corporations because it is essentially an may be exercised may be exercised
incorporated partnership. (The Corporation by a stockholder and compelled
Code of the Philippines Annotated, Hector de only in the cases against the
Leon, 2002 ed.) provided in Secs. corporation by a
81 and 42 of the stockholder for any
The following cannot be a close corporation: Code. reason.
a. mining companies; Except as regards In case of an
b. oil companies; redeemable arbitration of an
c. stock exchanges; shares, the intra-corporate
d. banks; purchase by the deadlock by the
e. insurance companies; corporation of its SEC, the
f. public utilities; own stock must corporation may be
g. education institutions; always be made ordered to purchase
h. other corporations declared to be vested from the its own shares from
with public interest. unrestricted the stockholders
retained earnings. regardless of the
Ordinary Stock Close Corporation availability of
Corporation unrestricted
Its articles of Its articles must retained earnings.
incorporation need contain the special Arbitration of intra- Arbitration of intra-
only contain the matters prescribed corporate deadlock corporate deadlock
general matters by Sec. 97, aside by the SEC is not a by the SEC is an
enumerated in from the general remedy in case the available remedy in
Sec. 14 of the matters in Sec. 14. directors or case the directors
Code. Failure to do so stockholders are or stockholders are
precludes a de jure so divided so divided
close corporation respecting the respecting the
status. management of the management of the
Its status as an 2/3 of its voting corporation. corporation.
ordinary stock stock or voting
corporation is not rights must not be Powers of the SEC in case of DEADLOCK in
affected by the owned or controlled Close Corporations
ownership of its by another 1. Cancel or alter any provision in the articles
voting stock or corporation which is of incorporation or bylaws
voting rights. not a close 2. Cancel, alter or enjoin any resolution of the
corporation. corporation
Its articles cannot Its articles may 3. Direct or prohibit any act of the corporation
classify its classify its directors. 4. Require the purchase at their fair value of
directors. shares of any stockholder either by any
Business of the Business of the stockholder or by the corporation regardless
corporation is corporation may be of the availability of unrestricted retained
managed by the managed by the earnings.
board of directors. stockholders if the 5. Appoint a provisional director

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6. Dissolve the corporation incorporated by an aggregate of persons,

7. Granting such other relief as the e.g. religious order, diocese, synod, sect,
circumstances may warrant. etc.

SPECIAL CORPORATIONS
DISSOLUTION AND WINDING UP
1. Educational Corporation (LIQUIDATION)
 A stock or non-stock corporation Dissolution
organized to provide facilities for teaching or Extinguishment of the franchise of a corporation
instruction. and the termination of its corporate existence.
 A favorable recommendation of the Modes:
DECS is essential for the approval of its 1. Voluntary (2002 Bar Exam)
articles and by-laws. a) Application for dissolution with the SEC
 It is primarily governed by special laws i. Where no creditors are affected
and suppletorily by the provisions of the ii. Where creditors are affected
Code. b) Shortening of the corporate term by
amending the articles of incorporation.
NON-STOCK EDUCATIONAL 2. Involuntary
EDUCATIONAL CORPORATION a) Expiration of the corporate term;
CORPORATION b) Failure to organize and commence
A non-stock A special business within 2 years from the date of
corporation corporation which issuance of the certificate of incorporation
may a stock or non- c) Legislative dissolution;
stock d) Quo warranto suit against a de facto
Governed by the Governed by corporation;
provisions on non- special laws and by e) Minority stockholders’ suit for dissolution
stock corporations the general on justifiable grounds; or
and suppletorily by provisions of the f) SEC dissolution, upon complaint and after
the provisions on Corporation Code notice and hearing, on the following grounds:
stock corporations i. The corporation was illegally
The number of The number of the organized;
board of trustees board of trustees ii. Continuous inactivity (subsequent to
may be more than should not be less incorporation, organization and
15 than 5 but not more commencement of business) for at
than 15. least 5 years;
iii. Serious dissension in the corporation;
The term of office The term of office of
or
of the board of the board of
iv. Commission by the corporation of
trustees shall be 3 trustees shall be 5
illegal or ultra vires acts or violations
years years
of the Code.
Effects of Dissolution
2. Religious Corporation a. Transfer of legal title to corporate property to
 A corporation composed entirely of the stockholders who become co-owners thereof
spiritual persons and which is organized for b. Continuation of corporate business merely as
the furtherance of a religion or for an association without juridical personality
perpetuating the rights of the church or for c. Conveyance by the stockholders of their
the administration of church or religious work respective shareholdings toward the creation of
or property. It is different from an ordinary a new corporation to continue the business of
non-stock corporation organized for religious the old
purposes. d. Reincorporation of the dissolved corporation
 Kinds: by refilling new articles of incorporation and by-
A) CORPORATION SOLE laws
- A special form of corporation, usually e. The corporation continues as a body
associated with the clergy, consisting of one corporate for 3 years for purposes of winding up
person only and his successors, who is f. Cessation of corporate existence for all
incorporated by law to give some legal purposes upon the expiration of the winding up
capacities and advantages; and period of 3 years. (The Corporation Code of the
B) RELIGIOUS SOCIETIES Philippines Annotated, Hector de Leon, 2002 ed.
- A non-stock corporation governed by a
board but with religious purposes. It is

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Liquidation (1997, 2000, 2001 Bar Exams)
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 or members.
Methods:
1. By the corporation itself through its
board of directors/trustees;
2. By a trustee to whom the corporate
assets have been conveyed; and
3. By a management committee or
rehabilitation receiver appointed by the
SEC.
Note: The 3-year period of liquidation does not
apply to Methods 2 and 3 as long as the trustee
or the receiver is appointed within the said
period.
 The termination of the life of a juridical
entity does not by itself cause the extinction
or diminution of the rights and liabilities of
such entity nor those of its owners and
creditors alike (see Sec. 145).
 The word “trustee” as sued in the
corporation statute must be understood in its
general concept which could include the
counsel to whom was entrusted the
prosecution of the suit filed by the
corporation. (Spouses Gelano vs. CA 103
SCRA 90)
Liquidation Rehabilitation
Connotes a Connotes a
winding up or reopening or
settling with reorganization
creditors and
debtors
Winding up Contemplates a
process so that continuance of
assets may be corporate life in an
distributed to those effort to restore the
entitled corporation to its
former successful
operation
BAR Q: XYZ Corp. shortened its
corporate life by amending its articles of
incorporation. It has no debts but owns
several real estate properties in Metro
Manila. How would said property be
liquidated among the 5 stockholders of
said corporation. Discuss the two
methods of liquidation.
SA: The real estate properties of XYZ
Corp. can be liquidated among the five
stockholders after the property has been
conveyed by the corporation to the 5
stockholders, by dividing or partitioning
it among themselves in any of the
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following ways: (1) physical division or
partition based on the proportion of the
value of their stockholdings; or (2)
selling the property to a 3rd person and
dividing the proceeds among the 5
stockholder in proportion to their
stockholdings; or (3) after determination
of the value of the property, by
assigning or transferring the property to
one stockholder with the obligation on
the part of the said stockholder to pay
the other four stockholders the amount
in proportion to the value of the
stockholdings of each.
FOREIGN CORPORATION
(1995, 2002 Bar Exams)
Definition: A corporation formed, organized or
existing under any law 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)
 The definition espouses the
incorporation test and the reciprocity rule
and is significant for licensing purposes.
 It is not permitted to “transact or do
business in the Philippines” until it has
secured a license for that purpose from the
SEC and a certificate of authority from the
appropriate government agency.
Resident Agent
An individual, who must be of good moral
character and of sound financial standing,
residing in the Philippines, or a domestic
corporation lawfully transacting business in the
Philippines, designated in a written power of
attorney by a foreign corporation authorized to
do business in the Philippines, on whom any
summons and other legal processes may be
served in all actions or other legal proceedings
against the foreign corporation.
Grounds for Revocation of License
1. Failure to file annual reports required by the
Code;
2. Failure to appoint and maintain a resident
agent;
3. Failure to inform the SEC of the change of
residence of the resident agent;
4. Failure to submit copy of amended articles
or by-laws or articles of merger or
consolidation;
5. A misrepresentation in material matters in
reports;
6. Failure to pay taxes, imposts and
assessments;
7. Engage in business unauthorized by SEC;
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8. Acting as dummy of a foreign corporation;
and
9. Not licensed to do business in the
Philippines. (Sec. 134)
Test of “Doing or Transacting Business in
the Philippines” (1998, 2002 Bar Exams)
The Corporation Code does not define the
phrase “doing or transacting business.”
A. Jurisprudential Tests
1. Twin characterization test
a) Whether the foreign corporation is
maintaining or continuing in the Philippines
the body or substance of the business for
which it was organized or whether it has
substantially retired from it and turned it over
another (Substance Test); and
b) Whether there is continuity of commercial
dealings and arrangements, contemplating
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 (Continuity Test).
2. Contract Test
Whether the contracts entered into by the
foreign corporation, or by an agent acting
under the control and direction of the foreign
corporation, are consummated in the
Philippines.
B. Statutory Tests
1. Foreign Investment Act of 1991 (R.A. No.
7042)
Acts constituting “doing business”:
a) Soliciting orders, service contracts,
opening offices, whether called “liaison”
offices or branches;
b) Appointing representatives or
distributors domiciled in the Philippines
or who in any calendar year stay in the
country for a period or periods totaling
180 days or more;
c) Participating in the management,
supervision or control of any domestic
business, firm or entity or corporation in
the Philippines; and
d) 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 of the business organization.
2. Implementing Rules of R.A. No. 7042
Acts not constituting “doing business”:
a) Mere investment as a shareholder in a
domestic corporation and/or the exercise
of rights as such investor;
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b) Appointing a representative or distributor
domiciled in the Philippines which
transacts business in its own name and
for its own account;
c) Publication of a general advertisement
through any print or broadcast media;
d) Maintaining a stock of goods in the
Philippines solely for the purpose of
having the same processed by another
entity in the Philippines;
e) Consignment by the foreign corporation
of equipment with a local company to be
used in the processing of products for
export;
f) Collecting information in the Philippines;
and
g) Performing services auxiliary to an
existing isolated contract of sale which
are not on a continuing basis.
C. Jurisprudential Rules
1. Doctrine of Isolated Transactions
Foreign corporations, even unlicensed ones, can
sue or be sued on a transaction or series of
transactions set apart from their common
business in the sense that there is no intention
to engage in a progressive pursuit of the
purpose and object of business transaction.
(Eriks Pte.Ltd vs. CA, 267 SCRA 567)
2. In Pari Delicto Rule
In the case of Top-Weld Manufacturing vs.
ECED, S.A., the Court denied the relief prayed
for by petitioner when it ruled that the very
purpose of the law was circumvented and
evaded when the petitioner entered into the said
agreements despite the prohibition contained in
the questioned law. The parties were considered
as being in pari delicto because they equally
violated R.A. 5455
3. Estoppel Rule
 A party is estopped from questioning the
capacity of a foreign corporation to institute
an action in our courts where it had obtained
benefits from its dealings with such foreign
corporations and thereafter committed a
breach or sought to renege on its
obligations.
Effects of Lack of License
A. On suits
1. Foreign corporation doing business in the
Philippines:
a) may not sue or intervene in any action in
any court or administrative agency of the
Philippines; but
b) may be sued on any valid cause of action
recognized in the Philippines (under the
doctrine of quasi-estoppel by acceptance
of benefits). (Sec. 133)
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2. Foreign corporation not doing business in
the Philippines:
a) Generally, it may not sue and be sued in
any court or administrative agency of the
Philippines;
b) However, it may sue and be sued for
isolated transactions, as well as for those
which are casual or incidental thereto.
B. On contracts
The contracts contemplated are those that
satisfy the “contract test” or those that make a
foreign corporation as one “doing business in the
Philippines.”
General Rule: The contracts are unenforceable.
They are enforceable only upon securing a
license.
Exception: However, the contracts are null and
void if they are contrary to law, morals, good
customs, public order and public policy.
Instances when a Foreign Corp may sue in
the Philippines whether or not Licensed to
do Business thereat
1. To seek redress for an isolated business
transaction;
2. To protect its corporate reputation, name, and
goodwill;
3. To enforce a right not arising out of a
business transaction, e.g. tort that occurred in
the Philippines;
4. When the parties have contractually stipulated
that Philippines is the venue of actions; and
5. When the party sued is barred by the principle
of estoppel and/or principle of unjust enrichment
from questioning the capacity of the foreign
corporation.
SEC REORGANIZATION DECREE
O (P.D. No. 902-A) rig
i nal
and Exclusive Jurisdiction of the RTC (Sec. 5
in relation to Sec. 5.2 OF RA 8799):
1. Fraudulent devices and schemes employed
by directors detrimental to the public interest
and to other firms;
2. Intra-corporate disputes;
3. Disputes with the state in relation to their
franchise and right to exist as such;
4. Controversies in election, appointment of
directors or trustees;
5. Petition to be declared in a state of
suspension of payments;
6. Petition for rehabilitation; and
7. Appointment of rehabilitation receiver or
management committee (provisional
remedies).
Note: A corporate officer’s dismissal is always a
corporate act and/or an intra-corporate
controversy. However, the corporate officers
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contemplated are those whose offices are
created by the Corporation Code or the by-laws.
Intra-Corporate Dispute (1996, 1997, 2006 Bar
Exams)
Elements:
1. Status or relationship of the parties –
controversy must be between and among
corporators, between corporators and the
corporation
2. Nature of the question – intrinsic connection
with the regulation or the internal affairs of
the corporation
Examples:
1. Action by a corporate officer to recover
compensation from the corporation
2. Action by a stockholder to compel issuance
of certificate of stocks
3. Action for recovery of corporate funds
Note: Allegations in the complaint determines
jurisdiction.
Grounds for Suspension or Cancellation of
Certificate of Registration (SEC. 6[L])
1. fraud in procuring registration;
2. serious misrepresentation as to objectives of
corporation;
3. refusal to comply with lawful order of SEC;
4. continuous inoperation for at least 5 years;
5. failure to file by-laws within required period;
6. failure to file reports; and
7. Others similar grounds.
Interim Rules of Procedute on Corporate
Rehabilitation (effective December 15, 2000)
Corporate Rehabilitation
A process to try to conserve and administer the
corporation’s assets in the hope that it may
eventually be able to return from financial stress
to solvency.
Nature: in rem, summary, and non-adversarial
Applicability: These Rules apply to petitions for
rehabilitation filed by corporations, partnerships
and associations pursuant to P.D. 902-A
Steps:
1. Filing verified petition with the appropriate
RTC by:
a. corporate debtor who foresees the
impossibility of meeting its debts when
they respectively fall due; or
b. creditors holding at least 25% of the
debtor’s total liabilities;
2. The following shall be annexed to the petition:
a. audited financial statements at end of its
last fiscal year;
b. interim financial statement;
c. schedule of debts and liabilities;
d. inventory of assets;
e. rehabilitation plan;
 Far Eastern University
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f. schedule of payments and
disposition of assets effected within 3
months preceding the filing of the petition;
g. schedule of cash flow for the
last 3 months’
h. statement of possible claims;
i. affidavit of general financial
condition;
j. at least 3 nominations for
rehabilitation receiver;
k. certificate under oath that
directors and stockholders have
irrevocably approved/ consented to all
actions/matters necessary under the
rehabilitation plan.
3. The court shall issue the stay order not later
than 5 days from the filing of the petition, which
among others, shall:
a. appoint a rehabilitation receiver;
b. stay all actions for claims against the
debtor, which shall cover both secured
and unsecured creditors;
c. set an initial hearing for the petition (not
earlier than 45 days but not later than 60
days from filing of the petition); and
d. direct the creditors to file their verified
comment or opposition not later than 10
days before the initial hearing; their
failure to do so would bar them from any
participating in the proceedings.
4. Publication of the stay order in a newspaper
of general circulation once a week for 2
consecutive weeks;
5. Referral of rehabilitation plan to rehabilitation
receiver;
6. Meetings between corporate debtor with
creditors. Discussions on the rehabilitation plan;
7. Submission of final rehabilitation plan to the
RTC for approval;
8. The petition shall be dismissed (which results
into the automatic lifting of the stay order unless
RTC ordered otherwise) if no rehabilitation plan
is approved after 180 days from initial hearing;
9. Approval or disapproval of the rehabilitation
plan by RTC.
Rehabilitation Receiver
 A person appointed by the RTC, in
behalf of all the parties for the purpose of
preserving and conserving the property and
preventing its possible destruction or
dissipation, if it were left in the possession of
any of the parties.
 He acts in a fiduciary capacity and with
impartiality towards all interested.
 He does not take over the management
and control of the debtor, but shall closely
oversee and monitor the operations of the
debtor during the pendency of the
proceedings.
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Powers and Functions of Management
Committee and Rehabilitation Receiver (Sec.
6[d], P.D. 902-A)
1. To take custody
of, and control over, all the existing assets
and property of such entities under
management;
2. To evaluate the
existing assets and liabilities, earnings and
operations of such corporations,
partnerships or other associations;
3. To determine
the best way to salvage and protect the
interest of the investors and creditors;
4. To study,
review and evaluate the feasibility of
continuing operations and structure and
rehabilitate such entities if determined to be
feasible by the RTC;
5. To report and
be responsible to the RTC until dissolved;
and
6. May overrule or
revoke the actions of the previous
management and board of directors of the
entity under management, notwithstanding
any provision of law, articles of incorporation
or by-laws to the contrary.
 Mere
disagreement among stockholders as to the
affairs of the corporation would not in itself
suffice as a ground for the appointment of a
management committee. At least where
there is no imminent danger of loss of
corporate property or of any other injury to
stockholders, management of corporate
business should not be wrested away from
duly elected officers, who are prima facie
entitled to administer the affairs of the
corporation, and placed in the hands of the
management committee. However, where
the dissension among stockholders is such
that the corporation cannot successfully
carry on its corporate functions the
appointment of a management committee
becomes imperative. (Jacinto and Colayco
vs. First Women’s Credit Corporation, G.R.
No. 154049, August 28, 2003)
 RA 8799 effectively amended Sec. 5 of
PD 902-A, jurisdiction over intra-corporate
disputes is now vested in the RTCs.
However, while Sec. 5 was amended, there
is no repeal of Sec. 6 thereof declaring that
the fraudulent acts or schemes, which the
SEC shall exclusively investigate and
prosecute, are those in violation of any law
or rules and regulations administered and
enforced by the SEC alone. The filing of
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civil/intra-corporate case before SEC does
not preclude the simultaneous and
concomitant filing of a criminal action before
the regular courts; such that a fraudulent act
may give rise to liability for violation of the
rules and regulations of the SEC cognizable
by the SEC itself, as well as criminal liability
for violation of the Revised Penal Code
cognizable by the regular courts, both
charges to be filed and proceeded
independently, and may be simultaneously
with the other. (Fabia vs. CA, G.R.No.
132684. September 11, 2002.)
Automatic Stay
 Effect of appointment of a management
committee or rehabilitation receiver
 All actions for claims against the
corporation shall be suspended accordingly.
 Purpose/justification: To enable the
management committee or the rehabilitation
receiver to effectively exercise its powers
free from any judicial or extrajudicial
interference that might unduly hinder or
prevent the rescue of the debtor company.
(Rubberworld v. NLRC)
 No definite duration; deemed to apply
during the entire period that the corporate
debtor is under management committee or
the rehabilitation receiver. (BF Homes v. CA)
SECURITIES REGULATION CODE
(R.A. 8799)
Securities Regulation (1995, 1996, 2001, 2004
Bar Exams)
• The Code is also known as the “Blue
Sky Law”, because it was enacted to protect
the public from unscrupulous promoters who
stake business or venture claims which have
really no basis and sell shares or interests
therein to investors, who are then left
holding certificates representing nothing
more than a square of the blue sky.
• The Code is self-executory and failure of
SEC to issue rules and regulations shall not
in any manner affect its self-executory
nature. (Subsec. 72.1)
Powers and Functions of the SEC:
1. Shall have jurisdiction and supervision
over all corporations, partnerships or
associations who are grantees of primary
franchises;
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2. Formulate policies and
recommendations on securities market,
advise Congress and other government
agencies on all aspects of securities market,
and propose legislation and amendments
thereto;
3. Approve, reject, suspend, revoke, or
require amendments to the registration
statements, and registration licensing
applications;
4. Regulate, investigate or supervise
activities of persons to ensure compliance;
5. Supervise, monitor, suspend or take
over activities of exchanges, clearing
agencies and other SROs;
6. Impose sanctions for violation of laws
and rules, regulations, and orders;
7. Prepare, approve, amend or repeal rules
and regulation and orders, and issue
opinions and provide guidance on and
supervise compliance therewith;
8. Enlist aid and support of and/or deputize
any and all enforcement agencies of
Government, as well as any private
institution, corporation, firm, association or
person in the implementation of its powers
and functions;
9. Issue cease and desist orders to prevent
fraud or injury to investing public;
10. Punish for both direct and indirect
contempt;
11. Compel corporate officers to call
meetings of stockholders or members
thereof under its supervision;
12. Issue subpoena duces tecum and
summon witnesses, and order the
examination, search and seizure of all
documents, papers, file and records, tax
returns, and books of accounts of any entity
or person under investigation;
13. Suspend, or revoke, after proper notice
and hearing, franchise or certificate of
registration of corporations, partnerships or
associations; and
14. Exercise such other powers as may be
provided by law, implied from, or which are
necessary or incidental to the carrying out of
express powers.
Securities
Shares, participation or interest in a corporation
or in a commercial enterprise or profit-making
venture and evidenced by a certificate, contract,
instrument, whether written or electronic in
character. (Sec. 3)
Kinds:
a. Debt Instruments: bonds, debentures,
notes, and other evidences of indebtedness,
asset-backed securities;
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b. Equity Instruments: shares of stock,
certificate of deposit for a future
subscription, proprietary or nonpropriety
membership certificates in corporations;
c. Investment Instruments: investment
contracts, fractional undivided interests in
oil, gas or other mineral rights;
d. Derivatives: like options and warrants;
e. Trust Instruments: certificates of
assignments, certificates of participation,
trust certificates, voting trust certificates or
similar certificates;
f. Catch-All: other instruments as may in
the future determined by the Commission.
Registration of Securities
General Rule: Securities shall NOT be sold or
offered for sale or distribution within the
Philippines (a) without registration statement
duly filed and approved by SEC; and (b) Prior to
such sale, information on the securities in such
form and with such substance as SEC may
prescribe, shall be made available to each
prospective purchaser.
Exception: The following securities may be sold
without need of registration;
A. Exempt Securities:
a. Those issued or guaranteed by
the Government or by any political
subdivision, agency, or by any
person controlled or supervised by,
and acting as an instrumentality of
the Government;
b. Those issued or guaranteed by
the government of any country with
which the Philippines has diplomatic
relations, or by any state, province,
or political subdivision thereof on
the basis of reciprocity, although the
SEC may require compliance with
the form and content of disclosures;
c. Certificates issued by receiver
or by trustee in a bankruptcy duly
approved by proper adjudicatory
body;
d. Any security or its derivatives
the sale or transfer of which, by law,
is under supervision and regulation
of OIC, HLURB, or BIR;
e. Any security issued by bank,
except its own shares.
B. Exempt Transactions
a. Judicial sale by executor,
administrator, guardian/receiver in
insolvency or bankruptcy;
b. Sale of pledged or foreclosed
property to liquidate debts;
c. Sale on isolated transaction by
owner;
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d. Distribution of stock dividends;
e. Sale of capital stock exclusively to
stockholders where no commission
is paid;
f. The issuance of bonds or notes
secured by mortgage upon real
estate or tangible personal property,
where the entire mortgage are sold
to a single purchaser at a single
sale;
g. Issuance of security in exchange of
any security from same issuer
pursuant to the right of conversion;
h. Broker’s transactions;
i. Pre-incorporation subscription
pursuant to the increase of the
authorized capital stock;
j. Exchange of securities by issuer
with securities holders exclusively;
k. Sale to less than 20 persons during
any 12 month period;
l. Sale of securities to banks,
registered investment house,
insurance companies, pension fund
or retirement plan maintained by the
government or other persons
authorized by the BSP to engage in
trust functions.
Procedure for Registration of Securities:
1. The Issuer(originator, maker, obligor, or
creator of the security) shall file with the
SEC a sworn registration statement;
2. The registration statement shall include
a prospectus (document made by and
on behalf of an issuer, underwriter or
dealer to sell or offer securities for sale
to the public through a registration
statement filed with SEC);
3. The submission of the following
information: the effect of the securities
issue on ownership, on the mix of
ownership, especially foreign and local
ownership;
4. The registration statement shall be
signed by Issuer’s executive officer,
principal operation officer, principal
officer, comptroller, principal accounting
officer, secretary or persons performing
similar functions accompanied by a duly
verified petition of the Board of Director’s
of the Issuer;
5. Filing of the written consent of the expert
named;
6. Written certification of the selling
shareholders, if the registration
statement includes shares to be sold by
selling shareholders;
7. Payment of fees to the SEC by the
Issuer;
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8. Publication in 2 newspapers of general
circulation in the Philippines, once a
week for 2 consecutive weeks, reciting
that a registration statement has been
filed;
9. The SEC may compel the production of
all the books of such Issuer, and may
administer oaths to, and examine the
officers of such Issuer or any other
person connected therewith as to its
business and affairs;
10. Within 45 days after the date of filing of
the registration statement, or by such
later date to which the issuer has
consented, SEC shall declare the
registration statement effective or
rejected, unless the applicant is allowed
to amend the registration statement.
Grounds for Rejection and Revocation: (Sec.
13.1)
1. The issuer:
a. has been judicially declared
insolvent;
b. has violated the provisions of the
Code or orders issued by the SEC;
c. has been engaged in fraudulent
transactions;
d. has made false or misleading
representation in any material facts;
e. has failed to comply with any
requirement the SEC may impose
as a condition of registration;
2. The registration statement is on its face
inaccurate or incomplete, or includes ant
untrue statement or omits to state a
material fact required to be stated
therein;
3. The issuer, any officer, director or
controlling person performing similar
functions, has been convicted by a
competent judicial or administrative
body (it includes a foreign court of
competent jurisdiction), of an offense
involving moral turpitude and/or fraud or
is restrained by the SEC or other bodies
for violation of securities, commodities
and other related laws;
4. Non-production of all books and papers,
administration of oath or examination of
its officers as required by the SEC.
Pre-Need Plans
Contracts which provide for the performance of
future services or the payment of future
monetary consideration at the time of actual
need, for which planholders pay in cash or
installment at stated prices, with or without
interest or insurance coverages and includes
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life, pension, interment, and other plans which
SEC shall approve. (Subsec. 3.9)
Tender Offer (2002 Bar Exam)
A publicly announced intention by a person
acting alone or in concert with other persons to
acquire equity securities of a “public company”
 It is mandatory to make a tender offer for
equity shares of a public company in an
amount equal to the number of shares
that the person intends to acquire in the
following circumstances:
a. The person intends to acquire 15%
or more of the equity shares of a
public company pursuant to an
agreement made between or
among the person and one or more
sellers;
b. The person intends to acquire 30%
or more of the equity shares of a
public company within a period of
12 months; or
c. The person intends to acquire
shares that would result in
ownership of more than 50% of the
equity shares of a public company.
(Sec. 19)
 Securities deposited may be withdrawn
at any time throughout the period that
the tender offer remains open and if the
securities deposited have not been
previously accepted for payment, and at
any time after 60 days from the date of
the original tender offer or request or
invitation.
 Unlawful and Prohibited Acts Relating to
Tender Offers: To make an untrue
statement of a material fact or omit to
state any material fact in order to make
the statements made, not misleading, or
to engage in any fraudulent, deceptive,
or manipulative act or practices.
How Tender Offer is made:
1. By filing with the SEC a declaration to
make a tender offer;
2. By furnishing the issuer or the originator
of the security a statement containing
such information required under Sec. 17
of the SRC:
a. Annual Report (includes balance
sheet, profit and loss statement);
and
b. Periodical reports for interim fiscal
periods; and
3. By publishing all request or invitations
for tender, or materials, making a tender
offer or requesting on inviting letters of
such a security.
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Public Company:
1. Any corporation with a class of equity
securities listed on an Exchange; or
2. Any corporation with assets in excess of
P50M and having 200 or more holders,
at least 200 of which are holding at least
100 shares of a class of its securities.
Unlawful Acts:
1. UNLAWFUL SALE OF SECURITIES--
For any beneficial owner, director, or
officer to sell any security if the seller or
his principal does not own or does not
deliver it within 20 days from sale. (Sec.
23.3)
2. Manipulation of security prices. (Sec.
24.1)
3. MANIPULATIVE AND DECEPTIVE
DEVICES-- Employment of manipulative
or deceptive device or contrivance in
connection with purchase and sale of
authorities. Execution of “short sale”,
“stop-loss order” not in accordance with
SEC rules. (Sec 24.2)
4. OPTION TRADING-- For any member of
Exchange directly or indirectly endorse
or guarantee the performance of any
“put”, “call”, “straddle”, “option” or
“privilege” in relation to any security
registered. (Sec. 25)
5. FRAUDULENT TRANSACTION--
Fraudulent transactions in the sale of
securities. (Sec. 26)
6. Insider trading (Sec. 27)
7. For an insider to communicate material
non-public information about the issuer
or security (Sec. 27.3)
8. Unlawful Tender Offer (Sec. 27.4)
9. Use of Extensive Credit. (Sec. 48.1)
Definition of terms:
1. SHORT SALE— A contract for sale of
shares of stock which the seller does not
own, or certificates which are not within
his control, so as to be available for
delivery at the time when delivery must
be made.
2. STOP-LOSS ORDER—The direction by
a customer to his broker that if the
commodity touches the price named, the
broker shall close the trade at the best
available price.
3. PUT—An option that, in consideration of
a premium paid, give the purchase the
right to make the seller take for him a
given number of shares of a named
stock between a given time at a
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stipulated price which is usually below
the prevailing market price of the stock
at the time the “put” is purchased.
4. CALL— An option that, in consideration
of a premium paid, entitles the buyer the
right to compel the seller to deliver to
him a certain number of shares within a
given time at a stipulated price which is
usually higher than the prevailing market
price of the stock at the time the “call” is
bought. “Call” is the reverse of “put”.
5. STRADDLE—The double privilege of a
“put” and a “call”, and secures to the
holder the right to demand of the seller
at a certain price within a certain time a
certain number of shares of specified
stock, or to require him to take, at the
price within the same time, the same
shares of stock.
6. WASH SALE—the operation of
simultaneously buying and selling the
same stock. It is any transaction in any
security which involves no change in the
beneficial ownership thereof. It is the
reverse of “matched orders” wherein
there is a change in the ownership of the
securities.
7. SHORT SWING TRANSACTION—One
where a person buys securities and sells
the same within a period of six months.
Unlawful Sale of Securities (Sec. 23.3)
• It shall be unlawful for any such
beneficial owner, director, or officer,
directly or indirectly, to sell any equity
security of such issuer if person selling
security or his principal:
a. does not own the security sold;
or
b. if owning the security, does not
deliver it against such sale
within 20 days thereafter, or
does not within 5 days after
such sale deposit it in the mails
or other usual channels of
transportation.
• No person shall be deemed to have
violated the Code if he proves the
exercise of good faith.
• Prohibition does NOT apply to a dealer
in the ordinary course of his business
and incident to the establishment or
maintenance by him of a primary or
secondary market, otherwise than in an
Exchange, for such security.
Insider’s Trading (Sec. 27)
 The selling or buying of a security by an
insider while in possession of material
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non-public information with respect to
the issuer or the security. It is
considered unlawful unless:
1. The insider proves that the
information was not gained from
such relationship; or
2. If the other party selling to or buying
form the insider (or his agent) is
identified, the insider proves:
a. that he disclosed the
information to the other party;
or
b. that he had reason to
believe that the other party
otherwise is also in possession
of the information.
Presumption: A purchase or sale made by
an insider, his spouse, or relatives, shall be
presumed to have been effected while in
possession of material nonpublic
information if transacted after such
information came into existence but prior to
public dissemination of such information.
(Sec 27.1)
Insider
A person who, with respect to a particular
security, may be any of the following:
a. The issuer;
b. The director or officer of, or a
person controlling, controlled by, or
under common control with the
Issuer;
c. A person whose relationship or
former relationship to Issuer gives
or gave him access to a fact of
special significance about Issuer or
the security that is not generally
available;
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;
e. A person who learns such a fact
from any of the foregoing insiders
with knowledge that the person
from whom he learns the fact is an
insider.
Material Non-Public Information (Sec. 27.2)
1. Information about the Issuer or the
security which 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 information; or
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2. Information about the Issuer or the
security which would be considered by a
reasonable person important under the
circumstances in determining his course
of action to buy, sell or hold security.
Self- Regulatory Organizations (SROs)
Organizations whose operation are related to or
connected with securities market such as but not
limited to associations of:
a. brokers and dealers;
b. transfer agents;
c. custodians;
d. fiscal and paying agents;
e. computer services;
f. news disseminating services;
g. proxy solicitors;
h. statistical agencies;
i. securities- rating agencies; and
j. securities information processors.
Margin
Sum of money, or its equivalent, placed in the
hands of a stockbroker by principal or persons
on whose account the purchase is to be made,
as a security to the former against losses to
which he may be exposed by a subsequent
depression in the market value of the stock.
Purpose: Margin limitations are provided in the
Code to prevent excessive use of credit for the
purchase or carrying of securities.
Margin Trading
A kind of trading that allows a broker to advance
for the customer part of the purchase price of a
security and to keep it as a collateral for such
advance.
• The credit extended must be for an
amount not greater than whichever is
higher of:
1. 65% of current market price of the
security;
2. 100% of the lowest market price of
security during the preceding 36
calendar months, but not greater
than 75% of the current market
price. (Sec. 48)
Margin Call
When a broker makes a demand on the investor
to deposit money or securities with the broker
when a purchase is made or when the investor’s
equity in a margin account declines below a
minimum standard set by the exchange or the
broker.
Compliance with SRC Provisions
Any condition, stipulation or provision binding
any person to waive compliance with any
provision of the SRC or of any rule or regulation
thereunder, or of any rule of an Exchange
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required thereby, as well as the waiver itself,
shall be void.
BANKING LAWS
I.
INTRODUCTION
Banks – entities engage in the lending of funds
obtained in the form of deposits from the public
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 of receivables and other obligations
 Entities authorized to perform universal
or commercial banking functions may
also engage in quasi-banking functions
(Sec. 6)
Deposit substitutes – an alternative form of
obtaining funds from the public, other than
deposits, through the issuance, endorsement, or
acceptance of debt instruments for the
borrower’s own account, for the purpose of
relending or purchasing of receivables and other
obligations.
Nature of Business:
 A bank has a vital role in providing an
environment conducive to the sustained
national economy. Banking is fiduciary in
nature that requires high standards of
integrity and performance.
• The appropriate standard of diligence
must be very high, if not the highest
degree of diligence; highest degree of
care (PCI Bank v. CA, 350 SCRA 446)
• This applies only to cases
where banks are acting in their fiduciary
capacity, as depository of the deposits of
their depositors (Reyes v. CA).
• An innocent mortgage is not
expected to conduct an exhaustive
investigation on the history of the
mortgagor’s title, in case of a banking
institution, it must exercise due diligence
before entering into said contract, and
cannot rely upon what is or is not
annotated on the title. (DBP v. CA, 331
SCRA 267)
• The banks are expected to
ascertain and verify the identities of the
persons it transacts business with
(UCPB v. Ramos, G.R. No. 147800,
November 11, 2003)
• Due diligence required of
banks extend even to persons or
institutions, like the GSIS, regularly
engaged in the business of lending
money secured by real estate
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mortgages (GSIS v. Santiago, G.R. No.
155206, October 28, 2003)
Consequences of nature of business:
1. It is subject to heavy and close
supervision and/or regulation by the
BSP (Central Bank of the Phils. v. CA,
208 SCRA 652).
2. It is required to exercise utmost
diligence in the handling of deposits
(Simex International Manila Inc., 183
SCRA 361).
3. Special rules on strikes and lockouts:
any strike or lockout involving banks, if
unsettled after 7 calendar days shall be
reported by the BSP to the Sec. of
Labor who has 2 options:
a. He may assume jurisdiction over and
decide the dispute; or
b. certify it to the NLRC for compulsory
arbitration
The President may also intervene at any
time and assume jurisdiction over such
labor dispute in order to settle or
terminate the same.
Financial Intermediaries – persons or entities
whose principal functions include the lending,
investing or placement of funds on evidences of
indebtedness or equity deposited with them,
acquired by them or otherwise coursed through
them, either for their own account or for the
account of others.
Foreign Stockholdings - Foreign individuals
and non-bank corporations may own or control
up to 40% of the voting stock of a domestic
bank. This rule shall apply to Filipinos and
domestic non-bank corporations. (Sec. 11)
 Grandfather Rule: The percentage of
foreign-owned voting stocks in a bank shall
be determined by the citizenship of the
individual stockholders in that bank. The
citizenship of the corporation which is a
stockholder in a bank shall follow the
citizenship of the controlling stockholders of
the corporation, irrespective of the place of
incorporation.
Note: Non-Filipino citizens may become
members of the board of directors of a bank to
the extent of the foreign participation in the
equity of said bank.
II. GENERAL BANKING LAW (GBL) [R.A.
8791
Declaration of Policy: to promote and maintain
a stable and efficient banking and financial
system that is globally competitive, dynamic and
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responsive to the demands of a developing 4. May 4. May not

economy. purchase/acquire its purchase/acquire its
own shares for a shares or accept them
Scope of Application: The GBL primarily legitimate corporate as security for a loan.
governs universal banks and commercial banks. purpose; provided Except: when
It suppletorily governs thrift banks, rural banks that, it has authorized by the
and other banking institutions. unrestricted retained Monetary Board. In
earnings in its books such case, the bank
A. Classification of Banks (2002 Bar Exam) to cover the shares must sell or dispose of
1. Universal Banks – primarily governed by the to be said shares within 6
GBL, can exercise the powers of an purchased/acquired. months from the time
investment house and invest in non-allied of their acquisition.
enterprises and have the highest (Sec. 10)
capitalization requirement. 5. Must be composed 5. Also composed of 5
2. Commercial Banks – ordinary banks of 5 to 15 directors, to 15 directors w/ 2
governed by the GBL, which have a lower each of whom shall independent directors
capitalization requirement than universal own at least one (1) (Sec. 15). In case of
banks and cannot exercise the powers of an share of the capital merger or
investment house and invest in non-allied stock of the consolidation, the
enterprises. corporation. number of directors
shall not exceed 21.
3. Thrift Banks – these are a) Savings and
(Sec. 17)
mortgage banks; b) Stock savings and loan
associations; c) Private development banks,
Independent Director –
which are primarily governed by the Thrift
a person other than an
Banks Act.
officer or employee of
4. Rural Banks – mandated to make needed the bank, its
credit available and readily accessible in the subsidiaries or affiliates
rural areas on reasonable terms and which or related interests.
are primarily governed by the Rural Banks 6. May declare 6. May not declare
Act. dividends out of its dividends, if any of the
5. Cooperative Banks – those banks organized unrestricted retained conditions set forth
whose majority shares are owned and earnings. under Sec. 57 are
controlled by cooperatives primarily to present.
provide financial and credit services to
cooperatives. It shall include cooperative
rural banks. They are governed primarily by
Universal Bank Commercial Bank
the Cooperative Code.
6. Islamic Banks – banks whose business Authority to exercise No such additional
dealings and activities are subject to the additional powers powers
basic principles and rulings of Islamic other than those
Shari’a, such as the Al Amanah Islamic authorized for
Investment Bank of the Philippines. commercial banks
May invest in the May only invest in
7. Other classification of banks as determined
equities of allies, equities of allied
by the Monetary Board of the BSP.
whether financial or enterprises, whether
non-financial, and financial or non-
ORDINARY BANKING
non-allied financial
CORPORATION CORPORATION
enterprises (Sec. 24)
1. May be a stock or 1. Must generally be a
1. The powers 1. General powers
non-stock stock corporation
authorized for a incident to corporations
corporation
commercial bank; Such powers as may be
2. May issue par 2. May issue par value 2. The powers of an necessary to carry on
value or no par value stocks only. (Sec. 9) investment house; the business of
stocks. and commercial banking.
3. May be registered 3. Must secure a 3. The power to
with the SEC without certificate of authority invest in non-allied
any certificate of from the Monetary enterprises. (Sec.23)
authority issued by a Board before it can a. Accepting drafts and
government agency. register with SEC. issuing letter of credits;

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b. Discounting and in any one 25% 25%

negotiating promissory enterprise of net of net worth
notes, drafts, bills of worth
exchange and other Equity investment
evidence of debt; in financial allied 100% 100%
c. Accepting or creating enterprise - thrift of equity of equity
demand deposits; bank, rural bank or In other financial
receiving other types of any financial allied allied enterprises
deposits and deposit enterprise (Sec. investment shall
substitutes; 25) remain a
d. Buying and selling A publicly-listed minority holding.
foreign exchange and bank may own up (Sec. 31)
other debt securities; to 100% of the
e. Extending credit. voting stock of
(Sec. 29) only one other
UB / CB. (Sec. 25)
Equity investment
Universal & Other Banks in non-financial 100% 100%
Commercial Banking allied enterprises of equity of equity
Authorized to engage Not so authorized Equity investment
in quasi-banking in non-allied
functions without need enterprise
for approval. Equity investment 40% 40%
May accept or create Must seek approval of in Quasi-Banks of equity of equity
demand deposits Monetary Board before
without need for accepting or creating  Allied Enterprises – those entities which
approval demand deposits (Sec. enhance or complement banking.
Demand deposits – 33)
Liabilities of the BSP
 Non-financial Allied Enterprises – pertains
to activities that do not involve money
and of other banks
matters (such as warehousing, safety
which are
deposit boxes)
denominated in
Philippine currency
Net Worth -- the total of the unimpaired paid-in
and are subject to
capital including paid-in surplus, retained
payment in legal
earnings and undivided profit, net valuation
tender upon demand
reserves and other adjustments as may be
by the presentation of
required by the Bangko Sentral.
checks. (Sec. 58,
Risk-Based Capital – The Monetary Board shall
NCBA)
prescribe the minimum ratio which the net worth
of a bank must bear to its total risk assets which
EQUITY INVESTMENTS: may include contingent accounts. Provided: the
Universal Comm’l Bank Monetary Board may require or suspend
Bank (Sec. 30-32) compliance with such ratio whenever necessary
(Sec. 24- for a maximum period of one year; that such
28) ratio shall be applied uniformly to banks of the
Power to invest May invest May invest only same category.
in allied in the equities of Effects of non-compliance with the
and non- allied enterprises prescribed minimum ratio:
allied (Sec. 30) 1. Distribution of net profits may be limited or
enterprises prohibited and MB may require that part or
(Sec. 24) all of the net profits be used to increase the
Total investment in 50% 35% capital accounts of the bank until the
allied enterprises of net of net worth minimum requirement has been met; or
worth 2. Acquisition of major assets and making of
Total investment in new investments may be restricted.
non-allied 50% N/A EXCEPT: purchases of evidence of
enterprises of net indebtedness guaranteed by the
worth Government.
Equity investment

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3. In case of a bank merger or consolidation, or
when a bank is under rehabilitation under a
program approved by BSP, the MB may
temporarily relieve the surviving bank,
consolidated bank, or constituent bank or
corporations under rehabilitation from full
compliance with the required capital ratio.
III. ORGANIZATION AND OPERATION
Authority to Register/Incorporate
 The SEC shall not register the articles of
incorporation of any bank or nay amendment
thereto unless accompanied by a certificate
of authority issued by the Monetary Board
under its seal ( Sec. 14)
 The certificate of authority shall not be
issued unless the Monetary Board is
satisfied:
1. that all requirements of existing laws
and regulations for which the applicant
is proposed to be incorporated have
been complied with;
2. that the public interest and economic
conditions, both general and local,
justify the authorization;
3. that the amount of the capital, the
financing, organization, direction and
administration, as well as the integrity
and responsibility of the organizers and
administrators, reasonably assure the
safety of deposits and the public
interest.
B. Organization of a Bank or Quasi-Bank
Requirements:
1. the entity must be organized as a stock
corporation
2. funds must be obtained from the public (20
or more persons)
3. minimum capital requirements prescribed by
the Monetary Board are satisfied
• an investment company that performs
functions as such is not a bank. Thus
an investment company that is engaged
solely in investing, reinvesting or
trading in securities is NOT engaged in
banking (Banas v. Asia Pacific Finance
Corp., Oct. 18, 2000)
• An investment company which loans out
the money of its customers, collects the
interests, and charges a commission to
both lender and borrower is engaged in
banking.
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C. Authority to engage in banking or quasi-
banking functions
 A person or entity cannot engage in banking
or quasi-banking functions without a
certificate of authority from the BSP.
 The determination of whether a person or
entity is performing banking or quasi-
banking functions without BSP authority
shall be decided by the Monetary Board.
Fit and Proper Rule. To maintain the quality of
bank management and afford better protection
to depositors and the public in general the
Monetary Board shall prescribe, pass upon and
review the qualifications and disqualifications of
individuals elected or appointed bank directors
or officers and disqualify those found unfit.
 After due notice to the board of directors of
the bank, the Monetary Board may
disqualify, suspend or remove any bank
director or officer who commits or omits an
act which render him unfit for the position.
In determining whether an individual is fit and
proper to hold the position of a director or officer
of a bank, regard shall be given to his:
a. integrity,
b. experience,
c. education,
d. training, and
e. competence. (Sec. 16)
Prohibition on Public Officials. - No appointive
or elective public official whether full-time or
part-time shall at the same time serve as officer
of any private bank, save in cases where such
service is incident to financial assistance
provided by the government or a government
owned or controlled corporation to the bank or
unless otherwise provided under existing laws.
(Sec. 19)
Exceptions:
1. as otherwise provided under Sec. 5 of
the Rural Bank Act
- Nothing in the Act shall be construed
as prohibiting any appointive or elective
public official from serving as director,
officer, consultant or in any capacity in
the bank.
2. where such service is incident to
financial assistance provided by the
government-owned or -controlled
corporation to the bank
3. as otherwise provided under existing
laws.
IV. FUNCTIONS OF BANKS
 Far Eastern University
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1. Deposit Function he must prove the same before a competent

jurisdiction. (Fulton Ironworks v. Chinabank,
November 6, 1930)
a. As debtor-creditor
i. Savings
3. The bank has the right to compensation. It
ii. Time can set off the deposits with the
iii. Demand indebtedness of the depositor that are due
and demandable. (Gullas v. PNB, 62 Phil.
Characteristics: 519)
• In the nature of irregular deposits 4. The bank cannot be held liable for estafa if
(Serrano v. Central Bank, 96 they authorized the use of the money
SCRA96) deposited by the depositor even if the bank
• Contract of loan/mutuum with the failed to return the amount deposite
depositor as creditor (Guingona v. City Fiscal of Manila, 128
SCRA 577).
• Bank acquires ownership of the thing
deposited and the right to use and
Depositors:
dispose.
1. Minors :
• Money deposited is commingled with
a. at least seven years of age
other money, constituting a common
b. able to read and write
fund
c. not disqualified by any incapacity
• Not preferred credits (Central Bank v. d. it should only be savings or time
Morfe, 20 SCRA 507) deposits
b. As lessor-lessee
 Parents may deposit for their
minor children or wards (Sec.1
 Safety deposit boxes (2004 Bar PD No.734)
Exam) – the relations between a bank  If the guardian shall give notice
renting out safety deposit boxes and in writing to any thrift bank not to
its customer with respect to the make payments of deposits,
contents of the box is that of a bailor dividends, or interest to the
and bailee, the bailment for hire and minor of whom he is the
mutual benefit. It cannot be guardian, then such payment
considered as a contract of lease shall be made to the guardian.
because the full possession and (Sec. 22, Thrift Banks Act of
control of the safety deposit box is not 1995)
given to the renters (Sila v. CA, 222 2. Married Women are allowed to open bank
SCRA 24).
accounts without assistance of their
husbands (RA No. 7192)
c. As trustee-trustor – trustt account
d. As bailee-bailor – deposit strictly for Kinds of Deposits
safekeeping and for specific purposes
e. As agent-principal DEMAND DEPOSITS SAVINGS
i. Deposit of check for collection ACCOUNT
ii. Deposit for specific purpose 1. Only a universal or 1. Evidenced by a
iii. Deposit for safekeeping commercial bank can passbook .
accept or create 2. Banks are
Simple Loan - fixed, savings and current demand deposits. prohibited from
deposits of money in banks and similar 2. Other banks can issuing / accepting
institutions shall be governed by the provisions only accept demand withdrawal slips or
concerning simple loan. deposits except upon other similar
prior approval of the instruments to effect
1. The bank can use as its own the money Monetary Board. withdrawals without
deposited. The amount is not being held in 3. Temporary the passbooks except
trust for the depositor not is it being kept for overdrawing against for bank authorized
safety (Tang Tiong Tick vs. American current accounts shall by the BSP to adopt
Aphothecaries , 65 Phil. 414). not be allowed unless the no passbook
2. The duty of a bank is to its creditor-depositor caused by normal withdrawal system.
and not to third persons. If a third person bank charges and 3. A bank is negligent
has a valid right over the money deposited, other fees incidental to if it allows the

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handling such withdrawal without its deposit liabilities continuously for more
accounts. requiring the than 30 days, the Monetary Board may
4. Drawings against presentation of a summarily and without need for prior
uncollected deposits passbook. (BPI v. hearing close such banking institution and
(uncleared checks) are CA) place it under receivership of the PDIC.
generally prohibited.
Deposits that are exempt from garnishment:
NOW ACCOUNTS TIME DEPOSITS 1. Foreign Currency Deposits .
(Negotiable Order of Exception: The SC ruled in Salvacion v.
Withdrawal) Central Bank of the Philippines (August 20,
Interest bearing An account with fixed 1997) that the FCD of an American tourist
deposit accounts that term who was found guilty of repeatedly raping a
combine the payable twelve (12) year old child is subject to
on demand feature of garnishment.
checks and investment 2. Those exempt under the Rules of Civil
feature of savings Procedure like the provision for the family for
account. four months.

2. Loan Function

Note: Demand , savings , NOW accounts , time Requirement for grant of loans:
deposits and deposit substitutes shall not be  Before granting of a loan, a bank must
subject to interest ceilings. ascertain that the debtor is capable of
fulfilling his commitments to the bank.
Note: A bank other than a universal or Rules:
commercial bank must seek approval of 1. A bank may demand from its applicants a
Monetary Board before accepting or creating statement of their assets and liabilities and
demand deposits. (Sec. 33) of their income and expenditures and other
information.
Deposit Substitutes - An alternative form of 2. Should such statements prove to be false or
obtaining funds from the public, other than incorrect the bank may terminate any loan
deposits, through the issuance, granted on the basis of said statements and
endorsement, or acceptance of debt shall have the right to demand immediate
instruments for the borrower’s own repayment or liquidation of obligation (Sec.
account, for the purpose of re-lending or 40).
purchasing of receivables and other
obligations (Sec. 95, RA 7653).
CLASSIFICATION OF LOANS
Deposit Deposit Substitute Unclassified Loans Classified Loans
No security given to Guaranteed by Those that do not have Those that have
guarantee repayment; certificates and other a greater-than-normal extraordinary risks of
the depositor relies on instruments risk, and the borrower loss in collection due
the stability and has apparent ability to to some defects such
reputation of the bank. satisfy it in full and no as bad debts or those
loss in ultimate under litigation.
collection is
 A bank has the right to set-off to the anticipated.
deposits in its hands for the payment of nay
outstanding indebtedness to it on the part of
the depositor (Gullas v. PNB, 62 Phil 519) Limitation on Loans, Credit Accomodations
and Gurantees (2002, 2006 Bar Exams)
 Failure by the bank to pay the depositor is
failure to pay a simple loan and not a A. Single Borrower’s Limit
breach of trust (CBTC v. CA, G.R. No.  the total amount of loans extended by a
138569, September 11,2003) bank to any person, partnership,
association, corporation or other entity shall
Suspension of Payment on Its Deposit at no time exceed 20% of the net worth of
Liabilities such bank.
 In case a bank or quasi-bank notifies the  The total amount of loans may be
BSP or publicly announces a bank holiday, increased by additional 10% of the net worth
or in any manner suspends the payment of of such bank provided the additional

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liabilities of any borrower are adequately
secured by trust receipts, shipping
documents, warehouse receipts or other
similar documents transferring or securing
title covering readily marketable, non-
perishable goods which must be fully
covered by insurance;
The prescribed ceiling shall include:
a. The direct liability of the maker or
acceptor of paper discounted with or
sold to such bank and the liability of a
general endorser, drawer or guarantor
who obtains a loan or other credit
accommodation from or discount paper
with or sells paper to such banks;
b. 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 the said
entities to the bank;
c. In a case of a corporation, all liabilities to
such bank of all subsidiaries in which
such corporation owns or controls a
majority interest; and
d. In the case of a partnership, association,
or other entity, the liabilities of the
member thereof to such bank.
Exclusions from the Limits:
a. loans secured by obligations of the
Bangko Sentral or the Philippine
Government;
b. loans fully guaranteed by the
government;
c. loans covered by assignment of deposits
maintained in the lending bank and held
in the Philippines;
d. loans, credit accommodations and
acceptances under letters of credit to the
extent covered by margin deposits; and
e. other loans or credit accommodations
which the MB may specify as non-risk
items.
B. DOSRI accounts
 Restrictions on bank exposure to
Directors, Officers, Stockholder and their
Related Interests (DOSRI)
 No director or officer of any bank shall,
directly or indirectly, for himself or as the
representative or agent of others, borrow
from such bank nor 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 except with the written approval of the
majority of all the directors of the bank,
excluding the director concerned (Sec. 36)
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Requisites:
1. The borrower is a director, officer or any
stockholder of a bank (and related
interests)
2. He contracts a loan or any form of
financial accommodation.
3. The loan or accommodation is from:
a. his bank , or
b. a bank that is a subsidiary
of a bank holding company
of which both his bank and
lending bank are
subsidiaries
c. a bank in which a controlling
proportion of the shares is
owned by the same interest
that owns a controlling
proportion of the shares of
his bank;
4. The loan or financial accommodation is
in excess of 5% of capital and surplus of
the lending bank or in the maximum
amount permitted by law, whichever is
lower.
Who are covered (BSP Circular No. 170):
1. Directors – of the lending bank
2. Officers – either identified in the by-
laws or are generally know as such
3. Stockholders – those whose
stockholdings and/or together with any
of the following persons, amount to 2%
or more of the total subscribed capital
stock of the bank;
a. His spouse or relative within the
first degree of
affinity/consanguinity or relative by
legal adoption, partnership,
wherein any of the foregoing is a
general partner;
b. A co-owner with the stockholder or
the stockholder’s spouse or
relative mentioned above of
property/right/interest (mortgaged,
pledged, or assigned to secure the
loan or credit accommodations,
except when the mortgage, pledge
or assignment covers only said co-
owner’s undivided interest).
4. Related interests
a. Spouse, relatives within the first
degree of consanguinity of a DOS,
partnerships of which a DOS or
any of the foregoing is a general
partner;
b. Co-owner with the DOS or his
spouse or relative within the first
degree of consanguinity or affinity,
or relative by legal adoption, of the
property/interest/right mortgaged,
pledged, assigned to secure the
 Far Eastern University
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loans or credit accommodations,
except when the mortgage, pledge
or assignment covers only said co-
owner’s undivided interest.
c. Corporation with inter-locking
directors or 20% of the capital
stock is owned by the DOS and/or
their spouses or relative
mentioned above, or wholly or
majority owned or controlled by
any related entities in items (b),
(d), and (e).
Principles Involved:
 Dealings of a bank with any of its
directors, officers or stockholders
and their related interests shall be
upon terms not less favorable to the
bank than those offered to others;
 After due notice to the board of
directors of the bank, the office of
any bank director or officer who
violates the provisions of this
Section may be declared vacant and
the director or officer shall be
subject to the penal provisions of the
New Central Bank Act;
 DOSRI account shall be limited to
an amount equivalent to their
respective unencumbered deposits
and book value of their paid-in
capital contribution in the bank.
Provided:
 That loans, credit accommodations
and guarantees secured by assets
considered as non-risk by the
Monetary Board shall be excluded
from such limit
 That loans, credit accommodations
and advances to officers in the form
of fringe benefits granted shall not
apply to loans, credit
accommodations and guarantees
extended by a cooperative bank to
its cooperative shareholders.
Note: Stockholdings of individuals related to
each other within the 4th degree of
consanguinity or affinity, legitimate or
common-law, shall be considered family
groups or related interests and must be fully
disclosed in all transactions by such
corporations or related groups of persons
with the bank.
Grant and Purpose of Loans and Other Credit
Accomodations
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A bank shall grant loans and other credit
accommodations only in amounts and for the
periods of time essential for the effective
completion of the operations to be financed.
Such grant of loans and other credit
accommodations shall be consistent with safe
and sound banking practices. (Sec. 39)
The Monetary Board is hereby authorized to
issue such regulations as it may deem
necessary with respect to unsecured loans or
other credit accommodations that may be
granted by banks.
Requirement for Grant of Loans:
Before granting a loan, a bank must ascertain
that the debtor is capable of fulfilling his
commitments to the bank.
1. A bank may demand from its applicants
a statement of their assets and liabilities
and of their income and expenditures
and other information.
2. Should such statements prove to be
false or incorrect, the bank may
terminate any loan granted on the basis
of said statements and shall have the
right to demand immediate repayment or
liquidation of obligation. (Sec. 40)
Restrictions under the GBL and NCBA:
a. No director or officer of any bank shall,
directly or indirectly, borrow from such bank
nor shall be guarantor, endorser or surety for
loans from such bank to others, or in any
manner be obligor or incur any contractual
liability to the bank, except with the written
approval of the majority of all the directors of
the bank, excluding the director concerned.
The written approval shall not be required for
loans granted to officers under a fringe
benefit plan approved by the Bangko
Sentral.
b. Dealings of a bank with any of its DORSI
shall be upon terms not less favorable to the
bank than those offered to others. (ARMS
LENGTH RULE)
c. Loans extended to DORSI shall be limited to
an amount equivalent to their respective
unencumbered deposits and book value of
their paid-in capital contribution in the bank.
Except :
i. Loans, credit accommodations,
and guarantees secured by assets
considerd as non-risk by the
Monetary Board.
ii. Loans, credit accommodations,
and advances to officers in the
form of fringe benefits.
iii. Cooperative bank with regard to its
cooperative shareholders.
 Far Eastern University
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d. The resolution approving the loan shall be
entered in the records of the bank and
transmitted to the BSP.
e. Waiver of secrecy of deposits of whatever
nature in all banks in the Philippines by the
borrower. No waiver is required if the
related interests are the borrower.
f. Information obtained form examination are
strictly confidential.
Other Functions
a. Receive in custody funds, documents and
valuable objects;
b. Act as financial agent and buy and sell, by
order of and for the account of their
customer, shares, evidences of
indebtedness and types of securities;
c. Make collection and payments for the
account of others and perform such other
services for their customer as are not
incompatible with banking business;
d. Upon prior approval of the Monetary Board,
act as managing agent, adviser, consultant
or administrator of investment management/
advisory/consultancy accounts; and
e. Rent out safety deposit boxes.
Note: The bank shall act as depositary or as an
agent shall keep the funds, securities and other
effects which it receives duly separated from its
own assets and liabilities. (Sec. 53)
Prohibitions:
1. Prohition to act as insurer - A bank shall not
directly engage in insurance business as the
insurer. (Sec. 54)
2. Prohibited transactions by bank officials - No
director, officer, employee, or agent of any
bank shall -
a. Make false entries in any bank report or
statement or participate in any
fraudulent transaction;
b. Without order of a court of component
jurisdiction, disclose to any unauthorized
person any information relative to the
funds or properties in the custody of the
bank belonging to private individuals,
corporations, or any other entity;
c. Accept gifts or any other form of
remuneration in connection with the
approval of a loan or other credit
accommodation from said bank;
d. Overvalue or aid in overvaluing any
security for the purpose of influencing in
any way the actions of the bank or any
bank; or
e. Outsource inherent banking functions.
3. Prohibited acts by borrower - No borrower of
a bank shall -
a. Fraudulently overvalue property offered
as security for a loan from the bank;
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b. Make misrepresentations for the
purpose of obtaining, renewing, or
increasing a loan or extending the period
thereof;
c. Attempt to defraud the said bank in the
event of a court action to recover a loan
or other credit accommodation; or
d. Offer any director, officer, employee or
agent of a bank any gift, fee,
commission, or any other form of
compensation in order to influence such
persons into approving a loan or other
credit accommodation application.
3. Prohibited acts by BSP officers - No
examiner, officer or employee of the
Bangko Sentral or any department,
bureau, office, branch or agency of the
Government that is assigned to
supervise, examine, assist or render
technical assistance to any bank shall
make false reports or suppress material
facts.
4. No bank shall employ casual or non
regular personnel or too lengthy
probationary personnel in the conduct of
its business involving bank deposits.
(Sec. 55)
5. Conducting Business in an Unsafe or
Unsound Manner - In determining
whether a particular act or omission,
which is not otherwise prohibited by any
law, rule or regulation affecting banks,
quasi-banks or trust entities, may be
deemed as conducting business in an
unsafe or unsound manner for purposes
of this Section, the Monetary Board shall
consider any of the following
circumstances:
 The act or omission has resulted or
may result in material loss or
damage, or abnormal risk or danger
to the safety, stability, liquidity or
solvency of the institution;
 The act or omission has resulted or
may result in material loss or
damage or abnormal risk to the
institution's depositors, creditors,
investors, stockholders or to the
Bangko Sentral or to the public in
general;
 The act or omission has caused any
undue injury, or has given any
unwarranted benefits, advantage or
preference to the bank or any party
in the discharge by the director or
officer of his duties and
responsibilities through manifest
partiality, evident bad faith or gross
inexcusable negligence; or
 Far Eastern University
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 The act or omission involves
entering into any contract or
transaction manifestly and grossly
disadvantageous to the bank, quasi-
bank or trust entity, whether or not
the director or officer profited or will
profit thereby
Whenever a bank, quasi-bank or trust entity
persists in conducting its business in an
unsafe or unsound manner, the Monetary
Board may, without prejudice to the
administrative sanctions provided in Section
37 of the New Central Bank Act, take action
under Section 30 of the same Act and/or
immediately exclude the erring bank from
clearing, the provisions of law to the contrary
notwithstanding.
6. Prohibition on dividend declaration – No
bank or quasi-bank shall declare
dividends, if at the time of declaration:
a. Its clearing account with the Bangko
Sentral is overdrawn;
b. It is deficient in the required liquidity floor
for government deposits for 5 or more
consecutive days;
c. It does not comply with the liquidity
standards/ratios prescribed by the
Bangko Sentral for purposes of
determining funds available for dividend
declaration;
d. It has committed a major violation as
may be determined by the Bangko
Sentral.
Foreign Banks
 The entry of foreign banks in the
Philippines through the establishment of
branches shall be governed by the
provisions of the Foreign Bank
Liberalization Act.
 The Monetary Board may revoke the
license to transact business in the
Philippines of any foreign bank if it finds
that the foreign bank is insolvent or in
imminent danger thereof or that its
continuance in business will involve
probable loss to those transacting
business with it.
Trust Operations
• Only a stock corporation or a person
duly authorized by the Monetary Board
shall act as a trustee or administer any
trust or hold property in trust or on
deposit for the use, benefit, or behalf of
others.
V. THE NEW CENTRAL BANK ACT
(R.A. No. 7653)
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Declaration of Policy
- The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharege of its mandated responsibilities
concerning money, banking and credit.
Bangko Sentral
- a government-owned corporation established
as an independent central monetary authority
Responsibility and Primary Objective
1. Provide policy
directions in the areas of money, banking,
and credit
2. Supervise the operations of banks and
exercise such regulatory powers over the
operations of finance companies and non-
bank financial institutions performing quasi-
banking functions.
Powers and Functions:
1. Issuer of Currency (Sec. 50)
2. Custodian of Reserves (Sec. 94)
3. Clearing Channel or House - especially
where the PCHC does not operate
4. Banker of the Government - the BSP
shall be the official depository of the
Government and shall represent it in all
monetary fund dealings. (Secs. 110 and
111)
5. Financial Advisor of the Government
(Sec. 123)
Under Article VII, Sec. 20 of the 1987
Constitution, the President may contract
or guarantee foreign loans but with the
prior concurrence of the Monetary
Board.
6. Source of Credit (Sec. 81)
7. Supervisor of the Banking System (Sec.
25)
Shall include the power to:
a. Examine – extends to enterprises
wholly or majority-owned or
controlled by the bank. (Sec. 7, RA
8791); this power may not be
restrained by a writ of injunction
unless there is convincing proof that
the action of the BSP is plainly
arbitrary. (Sec. 25)
b. Place a bank under receivership or
liquidation (Sec. 30)
c. Initiate criminal prosecution of erring
officers of banks.
 Far Eastern University
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Monetary Board
The powers and functions of BSP are exercised
by the Monetary Board, composed of 7
members appointed by the President of the
Philippines for a term of 6 years:
1. The governor as Chairman
2. A member of the Cabinet designated by
the President
3. 5 members who shall come from the
private sector, all of whom shall serve
full-time;
No member of the Monetary Board may be
reappointed more than once.
Qualifications of Members of the Monetary
Board:
1. must be natural-born citizens of the
Philippines,
2. at least 35 years of age, with the
exception of the Governor who should at
least be 40 years of age,
3. of good moral character, of
unquestionable integrity, of known
probity and patriotism, and
4. with recognized competence in social
and economic disciplines.
Disqualifications and Inhibition on Governor
and Board Members:
1. disqualified from 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
Bangko Sentral, in which case such
member shall resign from, and divest
himself of any and all interests in such
institution before assumption of office
(Sec. 9);
2. those coming from the private sector
shall not hold any other public office or
public employment during their tenure
(Sec. 9);
3. cannot be connected directly with any
multilateral banking or financial
institution or has a substantial interest in
any private bank in the Philippines,
within one (1) year prior to his
appointment (Sec. 9);
4. cannot be employed in any such
institution within two (2) years after the
expiration of his term except when he
serves as an official representative of
the Philippine Government to such
institution (Sec. 9);
5. the Governor of the Bangko Sentral and
the full-time members of the Board shall
limit their professional activities to those
pertaining directly to their positions with
the Bangko Sentral. Accordingly, they
may not accept any other employment,
whether public or private, remunerated
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or ad honorem, with the exception of
positions in eleemosynary, civic, cultural
or religious organizations or whenever,
by designation of the President, the
Governor or the full-time member is
tasked to represent the interest of the
Government or other government
agencies in matters connected with or
affecting the economy or the financial
system of the country (Sec. 20);
6. in case any member of the Monetary
Board with personal or pecuniary
interest in any matter in the agenda of
the Monetary Board shall disclose his
interest to the Board and shall retire
from the meeting when the matter is
taken up (Sec. 14).
Supervision and Examination of Banks
 The BSP shall have supervision over,
and conduct periodic or special
examinations of, banking institutions and
quasi-banks, including their subsidiaries and
affiliates engaged in allied activities.
 Subsidiary – a corporation more than
50% of the voting stock of which is owned by
a bank or quasi-bank
 Affiliate – a corporation the voting
stock of which, to the extent of 50% or less,
is owned by a bank or quasi-bank or which
is related or linked to such institution or
intermediary through common stockholders
or other factors determined by the Monetary
Board.
 No Restraining Order against BSP
No restraining order or injunction shall be
issued by the court enjoining the Bangko
Sentral from examining any institution
subject to supervision or examination by the
Bangko Sentral, unless there is convincing
proof that the action of the Bangko Sentral is
plainly arbitrary and made in bad faith and
the petitioner or plaintiff files with the clerk or
judge of the court in which the action is
pending a bond executed in favor of the
Bangko Sentral, in an amount to be fixed by
the court.
Refusal to Make Reports or Permit
Examination. - Any officer, owner, agent,
manager, director or officer-in-charge of any
institution subject to the supervision or
examination by the Bangko Sentral who,
being required in writing by the Monetary
Board or by the head of the supervising and
examining department willfully refuses to file
the required report or permit any lawful
examination into the affairs of such
 Far Eastern University
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institution shall be punished under the Act.
(Sec. 34)
False Statement. - The willful making of a
false or misleading statement on a material
fact to the Monetary Board or to the
examiners of the Bangko Sentral shall be
punished. (Sec. 35)
Prohibitions on Bank Officers, Directors,
Lawyers, Agents
Personnel of the Bangko Sentral are hereby
prohibited from:
1. being an officer, director, lawyer or
agent, employee, consultant or stockholder,
directly or indirectly, of any institution subject
to supervision or examination by the Bangko
Sentral;
Exception: non-stock savings and loan
associations and provident funds organized
exclusively for employees of the Bangko
Sentral, and except as otherwise provided in
this Act;
2. directly or indirectly requesting or
receiving any gift, present or pecuniary or
material benefit for himself or another, from
any institution subject to supervision or
examination by the Bangko Sentral;
3. revealing in any manner, except under
orders of the court, the Congress or any
government office or agency authorized by
law, information relating to the condition or
business of any institution;
4. borrowing from any institution subject to
supervision or examination by the Bangko
Sentral shall be prohibited unless said
borrowings are adequately secured, fully
disclosed to the Monetary Board. (Sec. 27)
Conservatorship
Whenever the Monetary Board finds that a bank
or a quasi-bank is in a state of continuing
inability or unwillingness to maintain a condition
of liquidity deemed adequate to protect the
interest of depositors and creditors, the
Monetary Board may appoint a conservator to:
a. Take charge of the assets, liabilities, and
the management thereof;
b. Reorganize the management;
c. Collect all monies and debts due said
bank; and
d. Exercise all powers necessary to restore
its viability, with the power to overrule or
rebuke the actions of the previous
management and board of directors of
the bank or quasi-bank.
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Such power to revoke cannot extend to post
facto repudiation of perfected transactions,
otherwise they would infringe against the non-
impairment clause of the Constitution. Sec. 28-
A gives the conservator power to revoke
contracts that are deemed defective – i.e., void,
voidable, unenforceable or rescissible. (First
Phil. Int’l Bank v. CA, 252 SCRA 259)
Duration – Period not exceeding one year
When conservatorship terminated:
1. When the Monetary Board is satisfied
that the institution can continue to
operate on its own and the
conservatorship is no longer necessary;
2. But if the continuance in business of the
bank would involve probable loss to its
depositors or creditors, proceedings for
receivership and liquidation shall be
pursued (Sec. 29).
Receivership:
Whenever the Monetary Board finds that a bank
or quasi-bank:
1. is unable to pay its liabilities as they
become due in the ordinary course of
business. But shall not include inability
to pay cause by extraordinary demands
induced by financial panic in the banking
community;
2. has insufficient realizable assets to meet
its liabilities;
3. cannot continue business without
involving probable losses to its
depositors or creditors; or
4. has willfully violated a cease and desist
order involving acts or transactions
which amount to fraud or a dissipation of
the assets of the institution.
Note: The designation of a conservator is not a
precondition to the designation of a receiver.
Liquidation - If the receiver determines that the
bank cannot be rehabilitated:
1. He shall file ex parte, with the proper
RTC, a petition for assistance in the
liquidation of the institution pursuant to a
liquidation plan adopted by the PDIC for
general application to all closed banks.
In case of quasi-banks, the liquidation
plan shall be adopted by the Monetary
Board.
2. He shall convert the assets of the
institution to money for the purpose of
paying the debts of the institution. (Sec.
30)
Effect of appointment of receiver / liquidation
on creditor’s claims: The assets under
 Far Eastern University
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receivership or liquidation shall be deemed in
custodia legis in the hands of the receiver and
shall be exempt from garnishment, levy,
attachment or execution (Sec. 30).
Close Now and Hear Later Scheme
Sec. 29 of the Central Bank Act does not
contemplate prior notice and hearing before a
bank is placed under receivership. It is enough
that such action is made the subject of a
subsequent judicial review. The purpose of the
scheme is to protect the depositors, creditors,
stockholders and general public (Central Bank v.
CA, 220 SCRA 536).
Legal Tender – all notes and coins issued by
the Bangko Sentral and fully guaranteed by the
Government.
Note: Coins shall be legal tender in amounts:
a. Not exceeding P50.00 - 25 centavos or
above
b. Not exceeding P20.00 - 10 centavos or
less.
 The BSP may call in for replacement
notes for any series or denomination
which are more than 5 years old and
coins which are more than 10 years
old.
 Notes and coins called in for
replacement shall remain legal tender
for a period of one year from the date of
call. After that period, they shall cease
to be legal tender during the following
year or for such longer period as MB
may determine. After the expiration of
this latter period, the notes and coins
which have not been exchanged shall
cease to be a liability of BSP and shall
be demonetized (Sec. 57).
Demand Deposits – all those liabilities of the
Bangko Sentral and of other banks which are
denominated in Philippine currency and are
subject to payment in legal tender upon demand
by the presentation of checks. (Sec. 58)
Checks representing demand deposits do not
have legal tender power and their acceptance in
the payment of debts, both public and private, is
at the option of the creditor.
However, a check which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash in
an amount equal to the amount credited to his
account.
3 Important Tools to Achieve Price Stability:
1. Loans to Banks (Sec. 83)
- If BSP wants to increase money supply,
it opens rediscount window
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- If BSP wants to decrease money supply,
it closes rediscount window or charges
very high interest rates for rediscounted
notes
2. Open Market Operations (Sec. 90)
- If BSP wants to increase money supply,
it buys government securities
- If BSP wants to decrease money supply,
it sells government securities
3. Reserve Requirements
- The required reserves of each bank shall
be proportional to the volume of its
deposit liabilities
Since the required reserves are imposed
primarily to control the volume of money, the
Bangko Sentral shall not pay interests thereon.
Deposits maintained with the Bangko Sentral as
part of the reserve requirements shall be exempt
from attachment, garnishment, or any other
order or process of any court or agency.
Prohibitions on the BSP:
1. The BSP shall not acquire shares of any
kind or accept them as collateral, and shall
not participate in the ownership or
management of any enterprise, either
directly or indirectly; and
2. It shall not engage in development banking
and financing. (Sec. 128)
V. OTHER RELATED LAWS
(See notes on Anti-Money Laundering Act and
Truth in Lending Act under SPECIAL LAWS)
A. SECRECY OF BANK DEPOSITS LAW
(R.A. No. 1405)
(1995, 1996, 1997, 1998, 2000, 2001, 2005,
2005, 2006 Bar Exams)
Purpose: to give encouragement to the people
to deposit their money in banking institutions and
to discourage private hoarding so that the same
may be properly utilized by banks in authorized
loans to assist in the economic development of
the country (Sec. 1)
Acts prohibited:
1. the examination and inquiry or looking
into all deposits of whatever nature with
banks or banking institutions in the
Philippines (including investments in
bonds issued by the Government of the
Philippines, its political subdivisions and
its instrumentalities) by any person,
government official, bureau or office.
2. the disclosure by any official or
employee of any bank to any
unauthorized person of any information
concerning the said deposits.
 Far Eastern University
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General Rule: All deposits of whatever nature
with banks or banking institutions in the
Philippines are considered as of an absolutely
confidential nature and may not be examined,
inquired or looked into by any person,
government official, bureau or office.
Exceptions:
1. upon written permission of the depositor;
2. in cases of impeachment;
3. upon order of a competent court in
cases of bribery or dereliction of duty of
public officials;
4. In cases where the money deposited or
invested is the subject matter of the
litigation;
5. upon order of the court in cases of
unexplained wealth under Section 8 of
the Anti-Graft and Corrupt Practices Act
(PNB vs Gancayco 15 SCRA 91)
6. upon order of the Commissioner of
Internal Revenue in respect of the bank
deposits of a decedent for the purpose
of determining such decedent’s gross
estate (Sec. 6[F][1], NIRC)
7. upon order of the Commissioner of
Internal Revenue in respect of the bank
deposits of a taxpayer who has filed an
application for compromise of his tax
liability under Section 204(A)(2) of the
NIRC by reason of financial incapacity to
pay his tax liability (Sec. 6[F][2], NIRC)
8. upon order of the court in cases filed by
the Ombudsman and upon the latter’s
authority to examine and have access to
bank accounts and records (Marquez, et
al. vs Desierto, et al., GR No. 135882 in
relation to Sec. 15[8], RA 6770)
9. disclosure of the Treasurer of the
Philippines for dormant deposits for at
least 10 years under the Unclaimed
Balances Act (Sec. 2, RA 3936)
10. without need of a court order if the Anti-
Money Laundering Council determines
that a particular deposit or investment
with any banking institution is related to
any one of the following unlawful
activities:
a. kidnapping for ransom under Article
267 of the Revised Penal Code, as
amended
b. violations of sections 4, 5, 6, 8, 9, 10,
12, 13, 14, 15, and 16 of the
Comprehensive Dangerous Act of
2002 (RA 9165)
c. 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
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by terrorists against non-combatant
persons and similar targets
11. upon order o the court, if the AMLC
determines that a particular deposit or
investment with any banking institution is
related to any one of the unlawful
activities under Section 3 (i), except
those refereed to in Section(i)[1], [2] and
[12] of RA 9160 or a money laundering
offense under Section 4.
12. inquiry into or examination of any
deposit or investment with any banking
institution when the examination is made
by the Bangko Sentral ng Pilipinas to
insure compliance with the Anti-Money
Laundering Law in the course of a
periodic or special examination in
accordance with the rules of
examination of the BSP (Sec. 11, RA
9160; see also Sec. 4, RA 8791)
 Impeachment
• In impeachment proceedings, the
impeachment court may inquire into
bank deposits. Thus, during the
impeachment proceedings against
former President Estrada, Chief
Justice Davide ruled that Clarissa
Ocampo could testify on the Jose
Estrada/Jaime Dichaves accounts
maintained with Equitable PCIB
Bank, over the objections of the
defense that this would violate the
Bank Secrecy Law. Basis for this
ruling was that the inquiry would be
made in the course of an
impeachment proceeding.
Written Permission of Depositor
• A bank may allow an inquiry into a
deposit with the written consent of
the depositor. An oral or implied
authorization does not suffice. This
consent may be given voluntarily. In
some cases, however, the consent is
involuntary because the law requires
it.
• Thus, Section 26 of the New Central
Bank Act as implemented by BSP
Circular No. 170, series of 1998,
requires a director, officer or
stockholder of a bank or their related
interests to submit a written waiver of
the secrecy of all his deposits of
whatever nature in all banks of the
Philippines in favor of the Banko
Sentral, if he applies for a DOSRI
loan. However, the information
obtained from the examination
remains confidential and may be
used by BSP examiners only in legal
 Far Eastern University
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action it may initiate involving the
said deposits.
• A waiver of the Bank Secrecy Law is
also required in case of loans
secured by a hold-out or an
assignment of certificates of time
deposits. (Section X315, Manual of
Regulations for Banks).
Where Funds Deposited are Subject of
Litigation
• In a case where Sun Life brought a
collection case to recover the
proceeds of a check it had issued, the
insurance company wanted to
determine how the defendant had
applied the proceeds of the check.
The trial court allowed Sun Life to
examine pertinent records of the bank
in which the check was deposited.
The Supreme Court held that the
examination was authorized by
Section 10 of Rule 57, on the
examination of a person whose
property has been attached and
person indebted to him or controlling
his property. The Court struck down
the argument that the examination
would violate the Bank Secrecy Law,
explaining that the examination fell
within the exception “in cases where
the money deposited or invested is
the subject matter of litigation.” The
Court added that the examination of
bank records was not a fishing
expedition, but rather a method by
which Sun Life could trace the
proceeds of the check that it paid to
the petitioners. (Onate v Hon Zeus
Abrogar, 230 SCRA 181(1994).
• In another case, Mellon Bank remitted
$1 million rather that an intended
$1,000 to the recipient, who deposited
part of the remittance in a local bank.
When personnel of the depositary
bank testified on the bank deposits,
the defense moved to strike out the
testimonies of the depositary bank’s
witnesses. The Supreme Court
allowed their testimonies to remain on
the record, stating Section 2 of said
law allows the disclosure of bank
deposits in cases where the money
deposited is the subject matter of the
litigation. (Mellon Bank v. Magsino,
190 SCRA 633.
 Unexplained Wealth (RA3019)
• Although the Bank Secrecy Law did
not include cases covered by the Anti-
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Graft Law among the exceptions, the
Supreme Court held that they should be
included. The only conclusion possible is
that Section 8 of the Anti-Graft Law is
intended to amend Section 2 of Republic
Act No. 1405 by providing an additional
exception to the rule against disclosure
of band deposits.” (PNB v. Gancayco,
15 SCRA 91 (1965).
• This overturned an earlier case
decided by the High Court where it held
that a prosecution under the Anti-Graft
Law was not embraced within any of the
exceptions to the Bank Secrecy Law that
would allow disclosure by a bank of
information concerning a deposit.
(Tatalon Bario Council v. Bank of PI, 7
SCRA 10 (1963).
• In another case, the Supreme Court
expanded the exception under the Anti-
Graft Law, when it allowed an examination
not only of the accused’s deposits, but also
those of his spouse, ascendant,
descendants and relatives, and other
persons as well. (Banco Filipino v. Hon.
Fidel Purisima, 161 SCRA 576 (1988).
Here, the Court declared as proper the
production by subpoena duces tecum of
bank records of transactions by or in the
names of the wife, children and friends of a
special agent of the Bureau of customs
accused of having allegedly acquired
property manifestly out of proportion to his
salary and lawful income. The Court
explained:
• To sustain the petitioner’s theory,
and restrict the inquiry only to
property held by or in the name of the
government official or employee, or
his spouse and unmarried children, is
unwarranted in the light of the
provisions of the statutes in question,
and would make available to persons
in government who illegally acquire
property an easy and fool-proof
means of evading investigation and
prosecution; all they would have to
do would be to simply place the
property in the possession or name
of persons other than their spouse
and unmarried children. This is an
absurdity that we will not ascribe to
the lawmakers.
 Upon Order of the Ombudsman
• Although Section 8 of the law that
created the Office of the
Ombudsman expressly granted the
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Ombudsman the power to
“administer oaths, issue subpoena
and subpoena duces tecum and take
testimony in any investigation or
inquiry, including the power to
examine and have access to bank
accounts and records,” the Supreme
court held that the Ombudsman
could not inquire into bank deposits
until there was a pending case in
court involving the deposits.
(Marquez v. Desierto, 359 SCRA 772
(2001)
 Unclaimed Balances Law
• The Unclaimed Balances Law
(Republic Act No. 3936) requires
each bank to file a sworn statement
with the Treasurer of the Philippines
stating the deposits that the bank
holds in the names of persons known
to be dead or who have not made
deposits or withdrawals during the
preceding ten years or more. It is
also requires the bank to post a copy
of the sworn statement in the bank
premises. However, this is done only
after the bank shall have first
communicated with the depositor at
his last known residence or post
office address. Such a disclosure of
the deposits and the depositors, does
not violate the Bank Secrecy Law.
 Garnishment of Bank Deposit
• In China Banking Corporation v.
Court of Appeals, (193 SCRA 452
(1991) the Supreme Court held that
the garnishment of a bank deposit
does not violate the Bank Secrecy
Law. Said the court:
“It is clear from the
discussion of the conference
committee report on x x x Republic
Act. No. 1405, that the prohibition
against examination of or inquiry into
a bank deposit under Republic Act
No. 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 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.”(Phil.
Commercial & International Bank v.
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Court of Appeals, 93 SCRA 452
(1991).
 Confidentiality under General Banking
Law
• Section 55.1(b) of Republic Act No.
8791, better known as the General
Banking Law, contains a provision
that extends the confidentiality of
bank transactions beyond deposits.
The provision reads:
(b) Without order of a court of
competent jurisdiction, disclose to
any authorized person any
information relative to the funds or
properties in the custody of the bank
belonging to private individuals,
corporations, or any other entity;
Provided, That with respect to bank
deposits, the provisions of existing
laws shall prevail.
• Considered confidential under this
provision are transactions not
covered by the Bank Secrecy Law.
These would include, among others,
safety deposit boxes, trust accounts
and money market placements.
 Note that the exception
expressly set forth in the Bank
Secrecy Law, do not apply to
the confidential transactions
covered by the General Banking
Law. These confidential
transactions, however, are
within the ambit of the Anti-
Money Laundering Act.
 Foreign Currency Deposit Act
• The secrecy afforded foreign
currency deposits is greater that that
granted to peso deposits. For
Section 8 of Republic Act No. 6426
provides:
Sec. 8. Secrecy of foreign
currency deposits. - All foreign
currency deposits authorized under
this Act, as amended by PD No.
1035, as well as foreign currency
deposits authorized under PD No.
1034, are hereby declared as and
considered of an absolutely
confidential nature and, except upon
the written permission of the
depositor, in no instance shall such
foreign currency deposits be
examined, inquired or looked into by
any person, government official,
bureau or office whether judicial or
administrative or legislative, or any
 Far Eastern University
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other entity whether public or private:
Provided however, That said foreign
garnishment, or any other order or
process of any court, legislative
body, government agency or any
administrative body whatsoever.
• The FCDU Act allows only one
exception, and that is upon the
written permission of the depositor.
However, the Anti-Money Laundering
Act added at least one more
exception: upon order of a court of
competent jurisdiction for violations
of the Act, when it has been
established that there is probable
cause that the deposits involved are
in any way related to a money
laundering offense. In addition, the
Unclaimed Balances Law also
constitutes an exception to the FCDU
Act.
A. Foreign Currency Deposit Act
(RA No. 6426)
All foreign currency deposits authorized
under the Act are declared as and considered of
an absolutely confidential nature and in no
instance shall foreign currency deposits be
examined, inquired or looked into by any person,
government official, bureau or office.
Except:
1.when there is written consent of depositor
under Sec 8 of the Foreign Currency Deposits
Act ;
2. upon order of the court (or even without court
order in proper cases) when there is probable
cause of money laundering as provided for
under Sec.11 of the Anti-Money Laundering Act.
C. Philippine Deposit Insurance
Corporation (RA 3591, as amended by RA
9302)
Purpose:
 shall insure the deposits of all banks which
are entitled to the benefits of insurance
under this Act
 shall promote and safeguard the interests of
the depositing public by providing permanent
and continuing insurance coverage on all
insured deposits
The Board of Directors shall have the
authority:
1. To prepare and issue rules and
regulations
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2. To direct the management, operations
and administration of the PDIC
3. To establish a human resource
management system which shall govern
the selection, hiring, appointment,
transfer, promotion or dismissal of all
personnel
4. To appoint, establish the rank, fix the
remuneration, approve local and foreign
training of, and remove any officer or
employee of the PDIC, for cause,
subject to pertinent civil service laws
5. To adopt an annual budget for, and
authorize such expenditures by the
PDIC
6. To approve the methodology for
determining the level and amount of
provisioning for insurance and financial
assistance losses, which shall establish
reasonable levels of deposit insurance
reserves.
Main functions of the PDIC:
1. Risk Management:
 deals with the insurance assessment
and premium collection from member
banks.
 monitors the health of member banks,
examines and identifies “risk” areas in
banks, or their weaknesses.
 institutes corrective measures to prevent
closures thru bank rehabilitation and
provides financial assistance to
distressed banks and assists in the
reopening of closed banks, provided all
PDIC requirements are met.
2. Claims, Receivership and Liquidation.
 claims refers to the settlement of claims
for insured deposits
 receivership deals with the takeover and
control of all assets, liabilities and affairs
of closed banks
 liquidation covers the conversion of
loans, disposal of fixed assets into cash
deposits, and the implementation of final
settlement with creditors.
Insurance coverage:
 The deposit liabilities of any bank or
banking institution, which is engaged in
the business of receiving deposits, or
which thereafter may engage in the
business of receiving deposits, shall be
insured with the PDIC.
Deposit - 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 which
 Far Eastern University
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is evidenced by passbook, check and/or
certificate of deposit.
 any obligation of a bank which is
payable at the office of the bank located
outside of the Philippines shall not be a
deposit for any of the purposes of this
Act or included as part of the total
deposits or of insured deposit
 subject to the approval of the Board of
Directors, any insured bank which is
incorporated under the laws of the
Philippines which maintains a branch
outside the Philippines may elect to
include for insurance its deposit
obligations payable only at such branch.
Extent of liability: not to exceed P250,000 as of
the date of the bank’s closure(Sec. 4)
Rules:
 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 benefit either in his own
name or in the name of others.
 A joint account regardless of
whether the conjunction “and,” “or,”
“and/or” is used, shall be insured
separately from any individually-owned
deposit account, provided that
1. If the account is held jointly by
two or more natural persons, or by
two or more juridical persons or
entities, the maximum insured
deposit shall be divided into as
many equal shares as there are
individuals, juridical persons or
entities, unless a different sharing is
stipulated in the document of
deposit, and
2. If the account is held by a
juridical person or entity jointly with
one or more natural persons, the
maximum insured deposit shall be
presumed to belong entirely to such
juridical person or entity
 The aggregate of the interests 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 P250,000.00.
 Liability is per bank basis.
When liable: Whenever an insured bank shall
have been closed by the Monetary Board.
Form of payment: payment shall be made as
soon as possible either by
1. cash or
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2. making available to each depositor a
transferred deposit in another insured
bank in an amount equal to insured
deposit of such depositor
Transfer Deposit - 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.
 The PDIC may withhold payment of
such portion of the insured deposit of
any depositor in a closed bank as may
be required to provide for the payment of
any liability of such depositor as a
stockholder of the closed bank, or of any
liability of such depositor to the closed
bank or its receiver, which is not offset
against a claim due from such bank,
pending the determination and payment
of such liability by such depositor or any
other liable therefor. (Sec. 16)
 Except as otherwise prescribed by the
Board of Directors, neither the PDIC nor
such other insured bank shall be
required to recognize as the owner of
any portion of a deposit appearing on
the records of the closed bank under a
name other than that of the claimant,
any person whose name or interest as
such owner is not disclosed on the
records of such closed bank as part
owner of said deposit, if such
recognition would increase the
aggregate amount of the insured
deposits in such closed bank.
Effect of payment:
1. The PDIC, upon payment of any
depositor shall be subrogated to all
rights of the depositor against the closed
bank to the extent of such payment.
Extent: Such subrogation shall include
the right on the part of the PDIC to
receive the same dividends and
payments from the proceeds of the
assets of such closed bank and
recoveries on account of stockholders’
liability as would have been payable to
the depositor on a claim for the insured
deposits
Limitation: The depositor shall retain his
claim for any uninsured portion of his
deposit.
Nature of payments: All 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
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the National Government in the order of PDIC may have become

preference under Article 2244 of the subrogated, shall thereupon revert
New Civil Code. to the depositor
 the PDIC shall be discharged from
2. Payment of an insured deposit to any any liability on the insured deposit
person by the PDIC shall discharge the Permanent Insurance Fund
PDIC, and payment of a transferred  shall be three billion pesos
deposit to any person by the new bank (P3,000,000,000.00)
or by an insured bank in which a
transferred deposit has been made Deposit Insurance Fund
available shall discharge the PDIC and  shall be the capital account of the PDIC
such new bank or other insured bank, to and shall consist of the ff.: (i) the
the same extent that payment to such Permanent Insurance Fund; (ii)
person by the closed bank would have assessment collections; (iii) reserves for
discharged it from liability for the insured insurance and financial assistance
deposit. (Sec. 16) losses; and (iv) retained earnings

Period to settle claims by PDIC: 6 months D. Unclaimed Balances Law

from the date of filing of claim for insured
deposit.
Liability for failure to settle: will subject the
directors, officers or employees of the PDIC
responsible for the delay to imprisonment upon
conviction from 6 months to 1 year, where such
failure was due to:
a. grave abuse of discretion,
b. gross negligence,
c. bad faith, or
d. malice,
 the PDIC, in its discretion, 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
 the period shall not apply if the validity of
the claim requires the resolution of
issues of facts and or law by another
office, body or agency or by the PDIC
together with such other office, body or
agency.
Prescription:
Unless otherwise waived by the PDIC, all of the
depositor’s rights with respect to the insured
deposit shall be barred if the said depositor in
the closed bank fails to claim his insured
deposits with the PDIC:
a. within 2 years from actual takeover, or
b. does not enforce his claim within 2 years
after the 2-year period to file a claim.
Effects:
 all rights of the depositor against the
PDIC with respect to the insured
deposit shall be barred
 all rights of the depositor against the
closed bank and its shareholders or
the receivership estate to which the
(RA 3936)
Elements of Unclaimed balances:
1. there must be a claim or depost
of: (a) money; (b) bullion; (c) security; or (d)
other evidence of indebtedness.
2. the credit or deposit must be
with a bank, building and loan association,
or trust corporation; and
3. the credit or deposit is in favor of
a person: (a) who is dead; or (b) who has
not made further deposits or withdrawals
during the preceding 10 years or more.
Note: Demand drafts cannot be escheated
but telegraphic notes can be. (Republic v.
FNCB)
Legal Consequence
The unclaimed balances may be subject of
escheat proceedings, after proper publication
and the depositors still do not lay claim to them.
INTELLECTUAL PROPERTY CODE
(RA 8293)
INTRODUCTION
Laws Specifically Repealed
1. Patent Law-R.A. 165
2. Trademark Law R.A. 166
3. Copyright Law PD 49
4. Articles 188 & 189 RPC
Intellectual Property - Those property rights
which result from the physical manifestation of
original thought.

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Intellectual Property Rights (Sec. 4)
1. Copyright
2. Related rights or neighboring rights of
copyright
3. Patents
4. Mark
5. Geographical Indications
6. Industrial Designs (Topographies) of
Integrated Circuits
7. Protection of Undisclosed Information
International Law Related Provisions
1. Principle of Reciprocity - (as referring to
persons entitled to the benefits of IPC) any
person who is a national or who is domiciled or
has a real and effective industrial establishment
in a country which:
1. is party to any convention,
treaty, or agreement relating to intellectual
property rights or the repression of unfair
competition to which the Philippines is also
a party, or
2. extends reciprocal rights to
nationals of the Philippines by law, shall
be entitled to benefits to the extent
necessary to give effect to any provision of
such convention, treaty, or reciprocal law,
in addition to the rights to which any owner
of an intellectual property right is otherwise
entitled by the IPC.
2. Principle of Reverse Reciprocity - Any
condition, restriction, limitation, diminution,
requirement, penalty or any similar burden
imposed by the law of a foreign country on a
Philippine national seeking protection of
intellectual property rights in that country shall
reciprocally be enforceable upon nationals of
said country within Philippine jurisdiction.
3. National Treatment Principle - The
Philippines, upon becoming a member of the
WTO, has adhered to the Trade- Related
Aspects of Intellectual Property Rights (TRIPS),
which provides that protection afforded to the
member-state (with respect to intellectual
property) must be extended to the nationals of
other member-states.
4. Most Favored Nation Principle - Whatever
favor, allowance, consideration, privilege or
immunity a member-state grants the nationals of
another country is “immediately and
unconditionally
Jurisdiction over Disputes under the IPC
A. Original Jurisdiction
1. Director General - Over disputes relating to
the terms of a license involving the author’s right
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to public performance or other communication of
his work.
2. Bureau of Legal Affairs - Over:
a. Opposition to applications for
registration of marks;
b.Cancellation of trademarks;
c. Cancellation of patents, utility models,
and industrial designs;
d.Petitions for compulsory licensing
e.Administrative complaints for violation of
laws involving intellectual property rights
where the total damages claimed are not
less than P200,000.00. The Director of
Legal Affairs has the power to punish
contempt.
3. Documentation, Information and Technology
Transfer Bureau - Over disputes involving
technology transfer payments.
4. Regular Courts (Sec. 225)
B. Appellate Jurisdiction
1.Director General - Over all decision rendered
by the:
a. Director of Legal Affairs
b. Director of Patents
c. Director of Trademarks
d. Director of the Documentation,
Information and Technology
Transfer.
2. Court of Appeals –Over Decisions of the
Director General in the exercise of his appellate
jurisdiction over the decisions of the a)Director of
Legal affairs, b) Director of Patents, c)Director of
Trademarks.
3. Secretary of Trade and Industry
a. Over decisions of the Director in the
exercise of his appellate jurisdiction over
the decisions of the Director of the
Documentation, Information and
Technology Transfer.
b. Over decisions of the Director General in
the exercise of his original jurisdiction
relating to the terms of license involving
the author’s rights.
COPYRIGHT
(1995, 1997, 1998, 2005, 2006 Bar Exams)
Copyright: The right over military and artistic
works which are original intellectual creations in
the literary and artistic domain protected from
the moment of creation.
Requisites:
1. Originality
It does not mean novelty or ingenuity;
neither uniqueness nor creativity. It simply
means that the work owes its origin to the
author.
 Far Eastern University
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a. The work is an independent
creation of the author
b. It must not be copied
c. It must involve some intellectual
effort.
2. Expression
There must be fixation. To be fixed a work
must be embodied in a medium sufficiently
permanent or stable to permit it to be
perceived, reproduced, or otherwise
communicated for a period of more than
transitory duration.
 Strictly speaking, there is no work for
copyright purpose, unless there is
something tangible.
 It is fixation that defines the time from
when copyright subsists. Before the time
of fixation there can be no infringement.
Principles:
1. Works are protected by the sole
fact of their creation, irrespective of their
mode or form of expression, as well as their
content, quality or purpose.
2. The copyright of original literary
and artistic works belong to the author of the
work.
3. Protection extends only to the
expression of the idea, not to the idea itself
or to nay procedure, system, method, or
operation, concept or principle, discovery, or
mere data.
4. The copyright is distinct from the
property in the material object subject to it.
5. 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
specified in the statute. Accordingly, it can
cover only the works falling within the
statutory enumeration or description.
Definitions:
1. Author – is the natural person
who has created the work.
2. Collective Work – is a work which has
been created by two or more natural
persons at the initiative and under the
direction of another with the understanding
that it will be disclosed by the latter under his
own name and that contributing natural
persons will not be identified.
3. Joint Work– is a work prepared by two
or more authors with the intention that their
contributions be merged into inseparable or
interdependent parts of a unitary whole, i.e.
medical textbook that is jointly authored by
two or three experts.
4. Work of Applied Art – is an
artistic creation with utilitarian functions or
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incorporated in a useful article, whether
made by hand or produced on an industrial
scale.
5. Performers – are actors, singers,
musicians, dancers, and other persons who
act, sing, declaim, play in, interpret, or
otherwise perform literary and artistic work.
Formalities:
Principle of Automatic Protection - No formality
is required for the author to be vested with the
rights of copyright.
 Registration and Deposit with the
National Library and the Supreme Court
Library of 2 copies of the work within 3
weeks after first public dissemination is
only for the purpose of completing the
records of these libraries. Failure to do
so after formal demand subjects the
author to a fine.
When Rights over Copyright are
conferred
From the moment of creation The work is
deemed created if something original is
expressed in a fixed manner.
Who Owns the Copyright:
a) ONE CREATOR – creator or his heirs or
assigns owns copyright.
b) JOINT CREATION – co-authors shall be
the original owners of the copyright and
in the absence of agreement, their rights
shall be governed by the rules on co-
ownership. EXCEPTION: work of joint
authorship consists of parts that can be
used separately and the author of each
part shall be the original owner of the
copyright in the part that he has created.
c) COMMISSIONED WORK – the person
commissioning owns the work;
ownership of copyright remains with the
creator, unless there is a written
stipulation to the contrary.
d) AUDIO-VISUAL WORK – producer (for
purposes of exhibition); for all other
purposes, the producer, the author of
the scenario, the composer, the film
director, the photographic director and
the author of the work are the owners.
e) PSEUDONYMOUS and ANONYMOUS
WORKS- unless the author is
undisputably known, the publisher shall
be presumed to be the representative of
the author.
f) EMPLOYEE’S WORK DURING
COURSE OF EMPLOYMENT –
employer, if it is the result of regular
 Far Eastern University
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functions or duties but the employee
owns it if it is not part of his duties.
g) COLLECTIVE WORKS – Contributor is
deemed to have waived his right, unless
he expressly reserves it.
h) LETTERS – Writer. However, the court
may authorize their publication or
dissemination if the public good or the
interest of justice so requires.
BAR QUESTION (Q): May a person
have photocopies of some pages of the
book of Professor Rosario made without
violating the copyright law?
SUGGESTED ANSWER (SA): YES.
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, is permitted, without the
authorization of the owner of the
copyright in the work.
BAR Q: BR and CT are noted artists
whose paintings are highly prized by
collectors. Dr. DL commissioned them to
paint a mural at the main lobby of his
new hospital for children. Both agreed to
collaborate on the project for a total fee
of two million pesos to be equally divide
between them. It was also agreed that
Dr. DL had to provide all the materials
for the painting and pay for the wages of
technicians and laborers needed for the
work on the project.
Assume that the project is completed
and both Br and CT are fully paid the
amount of P2M as artists’ fee by DL.
Under the law on intellectual property,
who will own the mural? Who will own
the copyright in the mural? Why?
Explain.
SA: Under Section 178.4 of the
Intellectual property Code, in case of
commissioned work, the creator (in the
absence of a written stipulation to the
contrary) owns the copyright, but the
work itself belongs to the person who
commissioned its creation. Accordingly,
the mural belongs to DL. However, BR
and CT own the copyright since there is
no stipulation to the contrary.
Duration of Copyright
1. Literary Artistic Works and Derivative Works –
during the lifetime of the creator and for fifty
years after his death.
2. Joint Creation – the economic rights shall be
protected during the life of the last surviving
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author and for fifty years after the death of the
last surviving author.
3. Anonymous or a pseudonymous work – till the
end of fifty years following the date of their first
publication. The fifty-year period commences
from January 1 following the date of publication.
4. Work of applied art – twenty-five years from
the date of making.
 An artistic creation with utilitarian
functions or incorporated in a useful
article, whether made by hand or
produced on an industrial scale (Sec.
171.10)
5. Photographic works – fifty years from the
publication of the work, or from making if
unpublished (the same term is given to audio-
visual work produced by photography or
analogous processes).
6. Broadcast – twenty years from the date of
broadcast.
7.Newspaper Article – Lifetime of the author and
50 years thereafter
Copyrightable Objects
a) Literary and Artistic Works:
1. Books, pamphlets, articles and other
writings
2. Periodicals and newspapers
3. Lectures, sermons, addresses,
dissertations prepared for oral delivery,
whether or not reduced in writing or
other material form
4. Letters
5. Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows
6. Musical compositions, with or without
words
7. Works of drawing, painting, architecture,
sculpture, engraving, lithography or
other works of art; models or designs for
works of art
8. Original ornamental design or models
for articles of manufacture, whether or
not registrable as an industrial design,
and other works of applied art.
9. Illustrations, maps, plans sketches,
charts and three-dimensional works
relative to geography, topography,
architecture or science
10. Drawings or plastic works of a scientific
or technical character
11. Photographic works including works
produced by a process analogous to
photography; lantern slides
12. Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any
process for making audio-visual
recordings
 Far Eastern University
Institute of Law
13. Pictorial illustrations and advertisements
14. Computer programs
15. other literary, scholarly, scientific and
artistic works
• The author of speeches, lectures,
sermons, addresses, dissertations shall
have the exclusive right of making a
collection of his works. (Sec. 176.2,IPC)
b) Derivative Works:
1. dramatizations, translations,
adaptations, abridgements,
arrangements, and other alterations of
literary or artistic works; and
2. Collection of literary, scholarly or artistic
works, and compilations of data and
other materials which are original by
reason of the selection or coordination
or arrangement of their contents (Sec.
173 IPC)
Unprotected Works
a. Any idea, procedure, system,
method or operation, concept, principle,
discovery or mere data as such , even if they
are expressed, explained, illustrated or
embodied in a work. Thus, the format of a
television game show is not subject to a
copyright (Joaquin v. Drilon, January 28,
1999, No. 108946).
b. News of the day and other
miscellaneous facts having the character of
mere items of press information.
 No protection is given to “news of the
day and other miscellaneous facts
having the character of mere items of
press information.”
 A pure news report will no longer find
protection under the new law, but a
column or published comment will.
When newspapers and periodicals
include works enjoying independent
copyrights, the works so included
continue enjoying the rights for duration
proper to them.
c. Any official text of a legislative,
administrative or legal nature, as well as nay
official translation.
d. Any work of the Government of
the Philippines
 However, prior approval of the
government agency or office wherein the
work is created shall be necessary for
exploitation of such work for profit. Such
agency or office may, among other
things, impose as a condition the
payment of royalties. No prior approval
or conditions shall be required for the
use of any purpose of statutes, rules and
regulations, and speeches, lectures,
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sermons, addresses and dissertations,
pronounced, read or rendered in courts
of justice, before administrative
agencies, in deliberative assemblies and
in meetings of public character. (Sec.
175,IPC).
e. The tradename and
container of a medicated cream is the proper
subject of trademark. Hence, copyright and
patent registration of the name and
container would not guarantee the registrant
the right to the exclusive use of the same,
not being the proper subjects thereof. (Kho
v. CA, No. 115758, March 19, 2002).
f. In the same manner,
copyright registration of a drawing or
pictorial illustration which depicts light boxes
or box-type electrical devices protects the
drawing but no the light box depicted therein
(Pearl and Dean {Phil.}v Shoemart, Inc, No.
148222, August 15, 2003)
Rights of Authors
a) Economic Rights
b) Moral Rights
c) Right to participate in the gross proceeds
of the sale or lease of the original work or
DROIT DE SUITE.
Publisher’s Rights
a. The right to publish granted
by the author, his heirs, or assigns; b)
copyright consisting merely of the right of
reproduction of the typographical
arrangement of the published edition of the
work.
b. if submitted to newspaper,
magazine and the like, the right to publish
once materials sent by a writer, a
photographer, an artist to a periodical or
newspaper publisher, but such writer or
artist retains his copyright on the piece.
Limitations to the Rights of Copyright:
1. General Limitations (Sec. 184)
2. Fair use
3. In the case of a work of
architecture, the right to control the
reconstruction or rehabilitation in the same
style as the original of the building.
4. Private reproduction of
published work in a single copy by a natural
person for research and private study.
5. Reprographic reproduction in a
single copy by non-profit libraries, under
certain circumstances.
6. Reproduction under certain
circumstances, of a computer program in
one back-up copy by the lawful owner of the
program.
 Far Eastern University
Institute of Law

7. Importation for personal 10. Public display of the original or a copy of the
purposes under certain conditions. work not made by means of a film, slide,
television image or otherwise on screen or by
Acts that do not infringe copyright means of any other device or process provided
that either the work has been published, sold,
1. Recitation or performance of a given away, or transferred to another person by
work: the author or his successors in title
a. made accessible to the public 11. Any use made of a work for the purpose of
b. privately done any judicial proceedings; or for the giving of
c. free of charge professional advice by a legal practitioner
d. strictly for a charitable or
religious institution 12. Single copy reproduction of a published
2. Making of quotations from a work by natural person exclusively for research
published work: and private study (even without authorization of
a. compatible with fair use owner).
b. extent is justified by the purpose
c. source and name of the author, 13. Reproduction by libraries of:
appearing on work, must be mentioned a. fragile works
3. Reproduction or communication to the b. isolated articles in composite
public by mass media of articles on current works
political, social, economic, scientific or religious c. brief portions of published
topic, lectures, addresses and other works, d. work
delivered in public: e. to preserve or replace copy
a. for information purposes
b. not expressly reserved 14. One back-up copy of computer program
c. source is already indicated
4. Reproduction and communication to the Fair Use
public of literary, scientific or artistic works as
part of reports of current events by means of  Fair use of a copyrighted work for
photography, cinematography or broadcasting to criticism, comment, news reporting, teaching
the extent necessary for the purpose. including multiple copies for classroom use,
scholarship, research and similar purposes
5. Inclusion of a work in a publication, is not an infringement of copyright.
broadcast, or other communication to the public, a) Factors to consider to determine
sound recording or film if made by way of whether use is fair or not: (P-A-N-E)
illustration for teaching purposes compatible with 1. Purpose and the
fair use and the source and name of the author, character of the use
appearing on work, must be mentioned. 2. Nature of the
6. Recording made in schools, universities, or copyrighted work
educational institutions of a work included in a 3. Amount and
broadcast for the use of such schools, substantially of the portion used
universities or educational institutions. Such 4. Effect of the use upon
recording must be deleted within a reasonable the potential market of the
period; such recording may not be made from copyrighted work.
audio-visual works which are part of the general
cinema repertoire of feature films except for brief Importation for Personal Purposes
excerpts of the work.  The importation of a
7. Making of ephemeral recordings: copy of a work by an individual for his
a. by a broadcasting organization personal purposes shall be permitted without
b. by means of its own facilities the authorization of the author of, or other
c. for use in its own broadcast owner of copyright in, the work under the
8. Use made of a work by or under the following circumstances:
direction or control of the Government for public a) Copies of the work are not available in
interest compatible with fairs use. the Philippines, and:
9. Public performance or the communication to 1. One copy at one time is
the public of a work in a place where no imported, but strictly for
admission fee is charged by a club on institution individual use only
for charitable or educational purpose only and 2. By authority of and for the use
the aim is not profit-making of the Philippine Government

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 Far Eastern University
Institute of Law
3.
For the use of religious,
Charitable or educational
Society or institution if not more
than three copies per title
provided they are not for sale.
b) 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
Infringement
 Any violation of the owner’s
exclusive rights conferred by law. (Justice
Vitug, Pandect of Commercial Law, 1997
ed.)
 An appropriation of a copyrighted
work buy another who is not authorized.
 Copying alone is not what is
prohibited. The copying must produce
injurious effect. The author’s work is the
product of his long and assiduous research
and for another to represent it, as one’s own
is injury enough. (Habana vs. Robles)
 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 if law to constitute piracy. (Columbia
Pictures vs. CA)
a) How Made – when there is
piracy or substantial reproduction. If so
much is taken that the value of the original
author are substantially and to an injurious
extent appropriated by another (Habana v.
Robles, No. 131522, July 19, 1999)
b) Remedies
Judicial
a. Injunction to prevent
infringement
b. Action for damages which
should be filed within four years.
Damages are assessed on the basis of
the proof alleged by the plaintiff of sales
made by the defendant of the infringing
work minus whatever costs the
defendant may be able to prove and
appreciated by the court.
c. Criminal case. The infringer
also exposes himself to criminal liability
wherein the law prescribes penalties of
imprisonment and fines, including
subsidiary imprisonment in case of
insolvency.
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d. Seizure and impounding of
infringing materials for the purpose of
evidence
Administrative:
1. administrative
action
2. cease and desist
order
3. forfeiture of
paraphernalia used in committing the
offense
4. administrative
fines
BAR Q. Juan Xavier wrote and
published a story similar to an
unpublished copyrighted story of
Manoling Santiago. It was, however,
conclusively proven that Juan Xavier
was not aware that the story of Manoling
Santiago was protected by copyright.
Manoling Santiago sued Juan Xavier for
infringement of copyright. Is Juan Xavier
liable?
SA: YES. Juan Xavier is liable for
infringement of copyright. It is not
necessary that Juan Xavier is aware
that the story of Manoling Santiago was
protected by copyright. The work of
Manoling Santiago wais protected from
the time of its creation.
Plagiarism - The act of appropriating the
literary composition of another, or parts or
passages of his writings, or the ideas or
language of the same and passing them off as
the product of one’s mind. (Estela vs. Santiago)
- The incorporation in one’s own work that of
another without the proper acknowledgment
thereof.
BAR Q. In an action for damages on
account of an infringement of a
copyright, the defendant (the alleged
pirate) raised the defense that he was
unaware that what he had copied was a
copyright material. Would this defense
be valid?
SA: No. An intention to pirate is not
an element of infringement. Hence, an
honest intention is no defense to an
action for infringement.
ALTERNATIVE ANSWER: YES.
The owner of the copyright must make
others aware that the material in
question is under or covered by a
copyright This is done by the giving of
such notice at a prominent portion of the
copyright material. When the alleged
pirate is thus made aware thereof; his
 Far Eastern University
Institute of Law
act of pirating the copy material will
constitute infringement.
TRADEMARKS
(1996, 2005 Bar Exams)
Trademark – any visible sign capable of
distinguishing the goods or services of an
enterprise and shall include a stamped or
marked container of goods. In relation thereto, a
trade name means the name or designation
identifying or distinguishing an enterprise. (Kho
v. CA, No. 115758, March 11, 2002). Thus, the
basic requirements are:
1. There must be a visible sign.
2. It must be capable of
distinguishing the goods of an
enterprise.
Collective Mark – 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.
There is no need to register trade names in
order to secure protection for them.
Functions:
a. To indicate the origin of
the goods to which they are attached
b. To guarantee the
standard of quality of the goods
b. To advertise the
goods (Mirpuri v. CA, 318 SCRA 516, 1999)
How Marks are Acquired
1) The rights in a mark shall be acquired
through registration with the Intellectual Property
Office or IPO.
1. Registration is necessary before
one can file an action for infringement
2. Actual use
a. Prior use in the Philippines is not
required before registration
b. However, there must be actual
use after registration. The registrant
shall file a declaration of actual use of
the mark with evidence to that effect
within 3 years from the filing date of
application otherwise it may be
cancelled. (Secs. 142.2 and 151(c), IPC)
The registrant is required to file a
declaration of actual use and evidence
to that effect, or shall show valid reasons
for non-use within one year from the fifth
anniversary date of registration.
c. It is also provided that a
certificate of registration of a mark
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shall be prima facie evidence of the
validity of the registration, the
registrant’s ownership of the mark, and
of the registrant’s exclusive right to use
the same.
This means that registrant’s right
may be questioned by a person who has
a better right, including a prior actual
user. This also includes persons with
internationally known marks.
d. Registration is also not
important to protect the goodwill that
identifies in the mind of the public the
goods he manufactures or deals in.
e. Registration of a mark is not
necessary for purposes of filing a case
for unfair competition or false
designation of origin (Secs. 168.2 and
169,IPC). Unfair competition is present
when:1) there is passing of a product
format of another;2) giving goods or
service the appearance of goods of
another.
2) When the law states the right is acquired
from the time of registration, it is acquired form
the time of registration, it is actually referring to
the filing date of application.
1. the filing date of an application
shall be the date on which the IPO received
the following indications and elements:
i. express or implicit indication that the
registration of the mark is sought
ii. identity of the applicant
iii. indications sufficient to contact the
applicant or his representative
iv. reproduction of the mark
v. list of goods or services for
which registration is sought.
2. However, the right may also be
protected from the priority date. Subject
to the rules on reciprocity, where the
application is filed in the Philippines and
the same applicant previously filed an
application in the countries covered by
the reciprocity rule under Sec. 3 of the
IPC, the application is deemed filed as
of the day the application was first filed
as of the day the application was first
filed in the foreign country. However,
there will be no registration in the
Philippines until registered in such
foreign country.
 Ownership of a mark or trade name may
be acquired not necessarily by
registration but by adoption and use in
trade or commerce. As between actual
use of a mark without registration, and
registration of the mark without actual
use thereof, the former prevails over the
latter. For a rule widely accepted and
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firmly entrenched, because it has come 2. Mark is used arbitrarily – a generic,

down through the years, is that actual descriptive or common term may be registered if
use in commerce or business is a pre- used in arbitrary or fanciful manner and with no
requisite to the acquisition of the right of relation to the product it identifies.
ownership. - a geographical name may be registered if it
 While the present law on trademarks is used in an arbitrary, artificial or fictitious sense
has dispensed with the requirement of merely to indicate ownership, independent of
prior actual use at the time of location or place of manufacture and for a
registration, the law in force at the time product not manufactured in the geographical
of registration must be applied (R.A. No. place.
166), and thereunder it was held that as 3. Descriptive word is used as a part of
a condition precedent to registration of coined mark.
trademark, trade name or service mark, 4. Descriptive word is used as part of
the same must have been in actual use composite mark.
in the Philippines before the filing of Composite Mark – is a mark consisting of
application for registration. (Shangrila two or more elements or a combination of words,
Intl Hotel Management v. Developers phrases or words and designs or symbols or
Group of Companies, March 31, color schemes.
2006,G.R. No. 159938)
What may become tradenames or marks- Marks that Cannot be Registered:
Generally, a word, name, symbol, emblem, sign, 1. Immoral, deceptive, or
device, figure or any combination thereof, which scandalous matter, or matter which may
may not validly monopolized and registered as disparage or falsely suggest a connection
mark or trade name because of some defects, with persons, living or dead, institutions,
as provided in Sec. 123 of R.A. 8293 may after beliefs, or national symbols, or bring them
such defects are removed, be appropriated and into contempt or disrepute;
registered as a mark or trade name. 2. Consists of the flag or coat of
What marks or tradenames cannot be arms or other insignia of the Philippines or
protected as such: any of its political subdivisions, or of any
1. 1.Those which consist foreign nation, or nay simulation thereof;
exclusively of sign or indications that may 3. Consists of a name, portrait or
serve in trade to designate the kind, quality, signature identifying a particular living
quantity, intended purpose, value, individual except by his written consent, or
geographical origin, time or production of the the name, signature, or portrait of a
goods or rendering of the services, or other deceased President of the Philippines,
characteristics of the goods or services. during the life of his widow, if many, except
2. Those which consist of shapes by written consent of the widow;
that may be necessitated by technical 4. Identical with a registered mark
factors or by the nature of the goods belonging to a different proprietor or a mark
themselves or factors that affect their with an earlier filing or priority date, in
intrinsic value respect of:
3. Those which consist of colors a. the same goods or
alone. services
4. a descriptive or common term or b. closely related goods
symbol or services
c. if it nearly resembles
Note: the abovementioned can still be such a mark as to be likely to deceive or
registered when: cause confusion;
5. Generic terms for goods or
1. They acquire a secondary meaning services;
Doctrine of Secondary Meaning - A word, 6. Characteristics of goods like
phrase, design or device originally incapable of quality or quantity;
exclusive appropriation with reference to an 7. Customary sign in everyday
article in the market because geographically or language;
otherwise descriptive, might nevertheless have 8. Color by itself.
been used so long and so exclusively by one
producer with reference to his article that, in that Internationally Well-Known Marks
trade and to that branch of the purchasing
public, the word, phrase, sign or device has a. The persons who may
come to mean that the article is his product. question the mark (that is, oppose

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registration, petition for the cancellation
thereof, sue for unfair competition) include
persons whose internationally well-known
mark, whether or not registered, is identical
with or confusingly similar to or constitutes a
translation of a mark that is sought to be
registered or is actually registered.
b. There is also
protection for internationally known marks
registered in the Philippines for goods that
are not similar with respect to which
registration is applied for.
Rights Conferred
1. The right to the exclusive
use of the mark for one’s own goods or
services .
2. The right to prevent others
from the use of the same mark for identical
goods or services in the course of trade.
3. The right to the exclusive
use of one’s already registered mark even
for goods or services into which one’s
venture expands, if used by others for
dissimilar products is likely to damage the
business interest of the first venturer (Sec.
147, IPC).
Duration – Ten years subject to indefinite
renewal for periods of ten year each.
Confusion of Trademarks:
The term confusing similarity refers to such
resemblance between a mark or trade name of a
person and that of another as to likely when
applied to or used on their respective goods,
business or services cause confusion or mistake
on the part of the purchasers as to the goods or
services themselves or as to their source or
origin.
The result of confusion is damage or
prejudice on the part of the owner of the senior
mark or trade name as well as on the part of the
buying public.
TWO TYPES OF CONFUSION OF MARKS
OR TRADE NAMES:
1.Confusion of Goods or Services- a
person’s goods or services are purchased as
those of another person, and the proper quality
of the former reflects adversely on the latter’s
reputation.
The confusing similar marks or trade
names are used on the same kind of products or
services.
2. Confusion of Business or Origin- exist
when one party’s product or service though
different from that of another, is such as might
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reasonably be assumed to originate from the
latter and the public would then be deceived into
the belief that there is some connection or
business association between the parties which
in fact is absent.
Confusion of Goods: The product or
service of one is identical or similar to that of the
other.
Colorable Imitation - Refers to such
similarity in form, content, words, sound,
meaning, special arrangement or general
appearance of the mark or trade name with that
of the other mark or trade name in their over-all
presentation or in their essential, substantive
and distinctive parts as would likely mislead or
confuse persons in the ordinary course of
purchasing the genuine article.
Infringement
 How Committed:
1. If a person, without the owner’s consent,
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 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,IPC)
2. If a person, without the owner’s consent,
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,IPC).
 While an administrative cancellation of a
registered trademark on any of the
grounds under Sec. 17 of R.A. No. 166,
is within the ambit of the BPTTT, an
action for infringement or any other
incidental remedy sought is within the
jurisdiction of the ordinary courts.
 An action for infringement or unfair
competition, including the available
remedies of injunction & damages in the
regular courts can proceed
independently or simultaneously with an
action for the administrative cancellation
of a registered trademark in the BPTTT.
 Far Eastern University
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(Levi Strauss vs. Vogue Traders

Clothing Company, June 29, 2005, G.R.
No. 132993)
 Use of trademark by a person
for a product in which the other party does
not deal, the use of the same trademark
cannot be objected to, it will only be
prohibited if the goods are related, that is,
they belong to the same class or have the
same descriptive properties (Canon Kabushi
Kaisha v CA, 336 SCRA 266, 2000).
Thus, a trademark certificate that covers
stationeries such as letterheads, envelopes,
calling cards and newsletters does not cover
light boxes or electrically operated backlit
advertising units.(Pearl & dean Phil. V
Shoemart, Inc., et al. No 148222, August 15,
2003)
 Tests in Determining if there is
colorable imitation
1. Test of Dominancy – focuses on the
similarly of the prevalent features of the
competing trademarks which might
cause confusion or deception and thus
constitute infringement. This test is
incorporated in the IPL and is therefore
controlling (Mcdonalds Corp. v L.C. Mak
Burger,Inc. 437 SCRA 10)
The test of dominancy requires that
if the competing trademark contains the
main or essential features of another
and confusion and deception is likely to
result, infringement takes place.
Duplication or imitation is not necessary;
nor is it necessary that the infringing
label should suggest an effort to imitate.
Similarity in size, form and color, while
relevant, is not conclusive. (Asia
Brewery, Inc. v CA, G.R. No. 193543,
224 SCRA 437)
ILLUSTRATION:
2. Holistic Test – mandates that the entirety
of the marks in question must be considered in
determining confusing similarity (Society des
Produits Nestle v CA 112012, April 4, 2001;
Amigo Manufacturing v. Cluett Peabody Co. No.
139300, march 14, 2001)
*Idem Sonans test (similarity of sounds or
pronunciations) alone cannot be applied (Amigo
Mfg. V. Cluett Peabody)
ILLUSTRATION:
FACTS: ABC filed a petition for cancellation
of the registered trademark STYLISTIC MR.LEE
used on skirts, jeans, blouses, socks, briefs,
jackets, jogging suits, dresses, shorts and
lingerie owned by EGM.
ISSUE: Is there confusing similarity?
HELD: NO. Although on its label the word
LEE is prominent, the trademark should be
considered as a whole and not piecemeal.
Jeans are expensive products hence the casual
buyer is predisposed to be more cautious.
(Emerald Garment vs. CA, 251 SCRA 60,
December 29, 1995)
Unfair Competition:
Section 168 of the IPC provides that 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. Hence, unfair competition may
be committed as follows:
168.2. 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
hiss for those of the one having established such
good will, or who shall commit any acts
calculated to produce said result, shall be guilty
of unfair competition, and shall be subject to an
action therefore.
168.3. In particular, and without in any way
limiting the scope of protection against unfair
competition, the following shall be deemed guilty
of unfair competition:
a) Any person, who is selling his goods
and gives them the general
appearance of goods of another
manufacturer or dealer, either as to
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 likely to influence purchasers

FACTS: ER Co. used the trademark PHILIPPINE PLANTERS CORDIAL PEANUTS which was registered in
the IPO. JR Co. filed suit with the Director of Patents for the cancellation of the registration of Er Co.’s trademark
on the ground the trademark of ER Co. would likely deceive the buying public because JR Co.s trademark which
is also registered is PLANTERS COCKTAIL PEANUTS.
ISSUE: Is there confusing similarity between the two trademarks?
HELD: YES. Although “planters” is an ordinary word, nevertheless, it is used in the labels not to describe the
nature of the product but o project the source or origin of the salted peanuts. The word PLANTERS easily
attracts and catches the eye of the ordinary consumer and it is that word and none other that sticks in his mind
when he thinks of salted peanuts.(Phil. Nut Industry Inc. Vs. Standard Brands Inc., 65 SCRA 575, July 31, 1975)

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to believe that the goods offered are
those of a manufacturer or dealer, or
who otherwise clothes the goods
with such appearance as shall
deceive the public and defraud
another of his legitimate trade, or
any subsequent vendor of such
goods or any agent of any vendor
engaged in selling such goods with
a like purpose;
b) Any person who by any artifice, or
device, or who employs any other
means calculated to induce the false
belief that such person is offering
the services of another who has
identified such services in the mind
of the public; or
c) Any person who shall make any
false statement in the course of
trade or who shall commit any other
act contrary to good faith of a nature
calculated to discredit the goods,
business or services of another.”
 Given the single registration of the
trademark “Dockers and Design” and
considering that respondent only uses
the assailed device but a different word
mark, the right to prevent the latter from
using the challenged “Paddocks” device
is far from clear. Stated otherwise, it is
not evident whether the single
registration of the trademark “Dockers
and Design” confers on the owner the
right to prevent the use of a fraction
thereof in the course of trade. It is also
unclear whether the use without the
owner’s consent of a portion of a
trademark registered in its entirety
constitutes material or substantial
invasion of the owner’s right.(Levi
Strauss vs. Clinton Apparel, September
20, 2005)
Distinctions between infringement of
trademark and unfair competition.
1. In infringement of trademark, there is
unauthorized use of a trademark, while unfair
competition under the IPC involves passing off
of one’s goods as those of another and giving
one’s goods the appearance of that of another.
2. It is not necessary to establish
fraudulent intent in a case for infringement of
trademark while it is necessary to establish
fraudulent intent in an unfair competition case.
3. Registration of the trademark is
necessary for the filing of an action for
infringement of trademark while prior registration
of a trademark is not necessary in unfair
competition.
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4. Unfair competition is broader as it
includes cases that are covered not only
by the IPC but also by Article 27 of the
New Civil Code (Del Monte Corp. v. CA,
181 SCRA 410)
Rights of Foreign Nationals:
1. those provided by local laws in favor of
nationals of country of which, by their laws, grant
similar rights or privileges to Filipino citizens
2. those provided by the Paris Convention
- a covenant among member countries for
the protection of industrial property
- the underlying principle is that foreign
nationals should be given the same treatment in
each member countries as that country makes
available to its own citizens.
Reciprocity Rights:
1. the right to register their marks or
tradenames or to claim priority rights in
connection wit their pending foreign application
(Philippine law govern the requirements for
registration)
Right of Priority
 The significance of priority right is that a
Phil. Application filed by another applicant after
the priority date but earlier than the foreign
applicant’s actual filing may be refused
registration because the law provides that a
mark cannot be registered if it is identical with a
mark with an earlier filing or priority date in
respect of the same goods or closely related
goods or if it merely resembles such mark as to
be likely to deceive or cause confusion.
2. the right to file an action for infringement
or unfair competition whether or not the foreign
corporation has been licensed to do business
under Phil. Laws
3. the right to oppose or to cancel the
registration of a mark which is identical or
substantially similar to their own marks or
tradenames.
PATENT
(2005, 2006 Bar Exams)
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. (Kho v. CA, No.
115758, March 11, 2002.
Requisites:
1. a technical solution of a problem in any field
of human activity;
2. it must be a novel intention
3. industrially applicable
 Far Eastern University
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TRIPS Agreement: is one of the many
agreements concluded during the Uruguay
Round of Negotiations of the WTO, provides
minimum standards for intellectual property
rights, including patents, which each member of
the WTO must incorporate in its national laws.
Definitions:
1. NOVEL – that which does not
form part of the prior art.
2. PRIOR ART – a)that which has
been made available to the public anywhere
in the world before the filing date or the
priority date of application; b) that which
forms part of an application whether for
patent, utility model or industrial design,
effective in the Philippines, Provided, That
the inventor or applicants are no the same
and the contents of the application are
published in accordance with the
requirements of patent application rules and
the filing date of prior art is earlier.
3. 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.
4. PERSON SKILLED IN THE
ART – presumed to be an ordinary
practitioner aware of what was common
general knowledge in the art at the relevant
date. He is presumed to have knowledge of
all references that are sufficiently related to
one another and to the pertinent art and to
have knowledge of all arts reasonable
pertinent to the particular problems with
which the inventor was involved. He is
presumed also to have had at his disposal
the normal means and capacity to routine
work and experimentation.
5. INDUSTRIAL APPLICABILITY –
an intervention that can be produced and
used in any industry.
Purposes: The patent law has a three-fold
purpose: first, patent law seeks to foster
and reward invention; second, it promotes
disclosures of inventions to stimulate further
innovation and to permit the public to
practice the invention once the patent
expires; third’ the stringent requirements for
patent protection seek to ensure that ideas
in the public domain remain there for free
use of the public (Pearl &Dean Phil. V.
Shoemart, Inc No. 148222, August 15,
2003).
Principles
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1. 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.
2. 2.If any person possessing
ordinary skill in the art was able to draw the
inferences and the constructs that the
supposed inventor drew from prior art, then
the latter did not really invent. (Test of Non-
obviousness)
3. 3.The application shall relate to
one invention only or to a group of
inventions forming a single general inventive
step.(Unity of Invention)
4. 4.An applicant may not file 2
applications for the same subject, one for
utility model registration and the other for the
grant of a patent whether simultaneously or
successively. (Parallel Application)
5. Whatever right one has to the
invention covered by the patent arises alone
from the grant of patent. (Creser Precision
System vs. CA, 286 SCRA 13)
Persons who may file an application:
1. As to nationality
a. Filipino nationals
b. Foreign nationals or those
domiciled or have a real and effective
commercial establishment in a country
which is bound by treaty (such as the
Paris Convention and the TRIPS
Agreement) to grant Filipinos the same
rights it grants to its own nationals.
c. Foreign nationals whose country
also accepts the patent application of
Filipinos.
2. As to the legal personality of the
applicant
a. inventor or his attorney-in-fact
b. assignee of the inventor
 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 disclosures. Ideas, once
disclosed to the public without the
protection of a valid patent, are subject
to appropriation without significant
restraint.
Classes of Patentable Inventions
1. useful machine
2. product
3. process
4. improvement of 1,2 or 3
5. micro-organism; and
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6. non-biological and making the gas-saving device. The

microbiological process (Rule 201, Rules
and Regulations on Inventions).
Non-Patentable Inventions:
a. discoveries, scientific theories
and mathematical method;
b. schemes, rules and methods of
performing mental acts, playing games, or
doing business, and programs for computer;
c. methods for treatment of the
human body or animal body by surgery or
therapy and diagnostic methods practiced
on the human or animal body;
d. plant varieties or animal breeds
of essentially biological process for the
production of plants or animals;
e. aesthetic creations;
f. anything which is contrary to
public order or morality.
invention of the gas-saving device is
not part of their regular duties as
employees. (Sec. 30.2 a, Intellectual
property Code)
Registration of Utility Models
 The provisions governing patents shall
apply, mutates mutandis, to the registration
of utility models.
 Where right to patent conflicts with right
to utility model registration in the cases
referred to in Sec. 29, said provision shall
apply as if the word “patent” were replaced
by words “patent or utility model
registration.”
 An invention qualifies for registration as
utility model if it is new and industrially
applicable.

BAR Q. Cezar works in a car

 PATENTABLE INVENTIONS – shall
apply except the reference to inventive step
manufacturing company owned by Joab.
as a condition of protection.
Cezar is quite innovative and loves to
tinker with things the materials and parts  A utility model registration shall expire,
of the car, he was able to invent a gas- without any possibility or renewal, at the end
saving device and likewise, came up of 7th year after date of filing of application.
with a similar gadget, also using scrap
materials and spare parts of the Protection of Industrial Design
company. Thereafter, Francis filed an  Only industrial design that are new or
application for registration pf his device ornamental shall benefit from protection
with the Bureau of Patents.  Only lay-out design that are original shall
a)Is the gas-saving device patentable? benefit from protection.
Explain.  A lay-out design consisting of
b)Assuming that it is patentable, who is combination of elements and
entitled to the patent? What, if any, is interconnections that are commonplace shall
the remedy of the losing party? be protected only if the combination taken as
c)Supposing Joab got wind of the a whole is original.
inventions of his employees and also  A lay-out design shall be considered
laid claim to the patents, asserting that original if it is the result of its creator’s own
Cezar and Francis were using his intellectual effort and is not commonplace
materials and company time in making among creators of lay-out designs and
the devices, will his claim prevail over manufacturers of integrated circuit at the
those of his employees? Explain. time of creation.
SA: :a)It is patentable because it is new,
it involves an inventive step and it is
industrially applicable. (Section 21,
Intellectual property Code) UTILITY MODEL INDUSTRIAL
b)Francis is entitled to the patent, DESIGN
because he had the earlier filing date Any new, model of Any composition of
(Sec.29, Intellectual property Code). implements or tools lines and colors or
The remedy of Cezar is to file a petition of any industrial any three
in Court for the cancellation of the product even if not dimensional for,
patent of Francis on the ground that he possessed of the whether or not
is the true and actual inventor, and ask quality of invention associated with lines,
for his substitution as patentee. (Secs. but which is of or colors Provided
67 and 68, Intellectual Property Code) practical utility. (Del that such composition
c)The claim of Joab will not prevail over Rosario vs. CA) or form gives a
those of his employees, even if they special appearance
used his materials and company time in to and can serve as

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pattern for an
industrial product or
handicraft. (Sec.
112.1)
 Bushing and cushion are not works
of art. They are utility models which may be
the subject of a patent not copyright.
The focus of copyright is the usefulness of
the artistic design and not its marketability.
While works of applied art, original,
intellectual, literary and artistic works are
copyrightable, useful articles and works of
industrial design are not.
(Ching v. Salinas, G.R. No. 161295, June
29, 2005)
Persons Entitled to Right:
1. The right to a patent belongs to the inventor,
his heirs, or assigns
2. When two or more persons have jointly
made an invention, the right to a patent shall
belong to them jointly.
3. First to File Rule – if two or more persons
have made the invention separately and
independently of each other the right to the
patent shall belong to the person who first
filed an application for such invention (Sec.
29, IPC)
Prior Art
 That which has been made available
to the public anywhere in the world before
the filing date or the priority date of the
application.
 General Rule: That which forms part
of an application whether for patent, utility
model of industrial design, effective in the
Philippines, provided that:
a.) the inventors or applicants are not the
same.
b.) the contents of the application are
published in accordance with the
requirements of patent application rules.
c.) the filing date of the prior art is earlier
Exception: Non-prejudicial disclosure
a.) Disclosure of information contained in the
application
b). Made by:
 The Inventor
 Patent Office and
information was contained: in
another application filed by the
inventor and should not have been
disclosed by the office; or in an
application filed without
knowledge or consent of the
inventor by a third party which
Commercial Law Study Guide
Centralized Bar Operations 2007
obtained the information directly or
indirectly from the inventor;
a third party which obtained the
information directly or indirectly from
the inventor (Sec. 25)
c.) Made during the 12 months preceding
the filing date or the priority date of the
application
Compulsory Licensing:
The Director of Legal Affairs may grant a license
to exploit a patented invention without any
agreement in favor of any person who has
shown his capability to exploit the invention.
Grounds:
1. National emergency or other
circumstances of extreme urgency.
2. Where the public interest
(national security, nutrition, health,
development of vital sectors of economy) so
requires.
3. Where a judicial or
administrative body has determined that the
manner of exploitation by the owner or his
licensee is anti-competitive, or
4. In case of public non-
commercial use of the patent by the
patentee, without satisfactory reason.
 The grant of compulsory license was
sustained for medicinal products (Smith
Kline and French Lab. V. CA, No. 121267,
October 23, 2001)
Concept of Divisional Applications
The concept of divisional applications comes
into play when two or more inventions are
claimed in a single application but are of such
nature that a single patent may not be issued for
them. The applicant thus required to divide, that
is, to limit the claims to which ever invention he
may elect, whereas those inventions not elected
may be made the subject of separate
applications which are called divisional
applications.(Smith Kline Beckman Corp. v. CA,
ibid)
Term/Duration of Patent: Twenty years from
filing date of application. (Sec. 54, IPC).
Infringement:
The making, using, offering for sale, selling or
the 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.
the Tests of Patent Infringement:
1. Economic Interest Test
When the process-discoverer’s economic
interests are compromised, i.e., when others can
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import the products that result from the process,
an act is said to be prohibited.
2. Literal Infringement Test
Resort, in the first, must be had to the “words” of
the claim. If the accused matter clearly falls
within the claim, infringement is made out and
that is the end of it.
The claims of patent and the accused product
must be juxtaposed within the over-all context of
claims and specification. (Godines vs. CA, 226
SCRA 338)
3.Doctrine of Equivalents Test
If two devices do the same work in substantially
the same way, the same result, and produce
substantially the same result, they are the same
even though they differ in name, form or shape.
(Godines vs. CA, 226 SCRA 338)
It 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. In other words, 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, No. 126627,
August 14, 2003).
The doctrine of equivalents cannot be
applied when the infringing invention is clearly
beyond what is written in the claim.
Doctrine of File Wrapper Estoppel
It balances the doctrine of equivalents.
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection,
and he may omit any additions he was
compelled to add by patent office regulations.
Defenses in Actions for Infringement:
1. invalidity of patent or claim
2. existence of ground for
cancellation.
SPECIAL LAWS
BULK SALES LAW
(Act 3952)
(1995, 1997, 1999, 2000, 2001, 2005, 2006 Bar
Exams)
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Purpose: To prevent secret or fraudulent sales
or conveyances of goods in bulk and, thereby,
protect the creditors of the seller.
Bulk Sale: Any sale, transfer, mortgage, or
assignment of: (SBE)
1. a stock of goods, wares, merchandise,
provisions, or materials otherwise than
in the ordinary course of trade and the
regular prosecution of business;
2. all, or substantially all, of the business or
trade theretofore conducted; and
3. all, or substantially all, of the fixtures and
equipment used in and about the
business.
Exceptions: (WOJAE)
1. written waiver from all the
creditors;
2. sale or transfer is made in the
ordinary course of business;
3. sale by virtue of a judicial order;
4. those sold by assignee or those
beyond the right of creditors; and
5. sale of properties exempt from
attachment or execution. (Rule 39,
Sec.13, Rules of Court)
Duties of Seller, Mortgagor or Assignor in
Bulk: (SPIN-R)
1. to deliver to the vendee, mortgagee, or
his agent or representative a sworn
written statement of the names and
addresses of all the creditors to whom
the vendor or mortgagor may be
indebted, together with the amount of
indebtedness due or owing, or to
become due or owing by said vendor or
mortgagor to each of said creditors.
2. to apply the purchase or mortgage
money to the pro rata payment of the
bona fide claims of the creditors of the
vendor or mortgagor.
3. at least 10 days before the sale, transfer
or execution of a mortgage upon any
stock of goods, wares, merchandise,
provisions or materials, in bulk, to make
a full detailed inventory thereof and to
preserve the same showing the quantity
and, to the extent possible, the cost
price to the vendor, transferor,
mortgagor or assignor of each article to
be included in the sale, transfer or
mortgage.
4. notify every creditor whose name and
address is set forth in the verified
statement of the vendor, transferor,
mortgagor, or assignor, at least 10 days
 Far Eastern University
Institute of Law
before transferring possession, of the
price, terms conditions of the sale,
transfer, mortgage, or assignment.
5. to register the sworn statement
containing the names and addresses of
all creditors o the vendor or mortgagor
with the Bureau of Trade Regulation and
Consumer Protection.
Effects Of Violation:
1. On the transaction:
VALID as between the parties.
VOID as to affected creditors.
2. On the purchaser:
1. holds the property in trust for
seller (whether in good faith or bad
faith);
2. acquires no right in the property
purchased as against the creditors
of the seller; and
3. liable to seller’s creditors for
properties forming part of bulk and
already disposed by him.
Note: The law imposes no direct obligation on
the buyer, mortgagee, transferee or assignee in
bulk sale. Strictly speaking, therefore, since
criminal provisions are to be construed strictly in
favor of the accused, a buyer in bulk sale cannot
be deemed to be subject to criminal liability
under the law, although it may be argued that
the buyer would be a principal by indispensable
cooperation, if he was aware of the intent of the
seller or conspired with the seller. (Villanueva,
Commercial Law Reviewer)
3. On the seller, mortgagor, transferor or
assignor:
Criminal liability for: (FKT)
a. failure to prepare and deliver the sworn
statement listing his creditors and the
application pro-rata of the proceeds
thereof to the listed creditors.
b. knowingly or willfully make, or deliver or
cause to be made or delivered, a
statement which shall not include the
names of all such creditors, with the
correct amount due and to become due to
each of them, or shall contain any false or
untrue statement.
c. transfer of title without consideration or for
a nominal consideration only.
Dinstinction on Fraudulent Transfer against
Creditors
Bulk Sales Law New Civil Code
Null and void Rescissible (Article
1381-1389)
—oOo—
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WAREHOUSE RECEIPTS LAW
(Act 2137)
(1998, 1999, 2000, 2005 Bar Exams)
Coverage: Seeks to encourage transactions
on negotiable warehouse
receipts, which may only be
issued by a warehouseman who
is engaged in the business of
receiving commodities on
deposits for storage.
In correlation with:
a. Articles 706 to 718 of Code of
Commerce (Bill of Ladings);
b. Articles 1507 to 1520 of Civil Code
(Documents on Title)
 The Civil Code provisions have
repealed the Code of Commerce
provisions on the Bill of Lading.
 Despite the fact that we have
Warehouse Receipts Law, the Civil
Code still have provisions on quedans.
 The sugar centrals which issue
quedans are not warehousemen, since
their service is offered only to sugar
planters and not to the public.
Purposes of the Law:
a. to prescribe the rights and duties of a
warehouseman ;
b. to regulate the relationship between a
warehouse man and i.) the depositor of
goods, or ii) the holder of a warehouse
receipt for the goods, or iii) the person
lawfully entitled to the possession of the
good, or iv) other persons.
Definitions:
1. Warehouseman - A person
lawfully engaged in the business of storing
goods for profit.
2. Warehouseman Receipt - A
written acknowledgement by a
warehouseman that he has received and
holds certain goods therein described in
store for the person to whom it is issued.
Form: No particular form. However, it must
contain the following terms: (ROAD-LoNe-SRD)
a. receipt number;
b. language indicating if the
warehouseman is an owner, solely or
jointly with others, of the goods
deposited;
 Far Eastern University
Institute of Law

c. statement of advances made by the be the debtor who will bear the loss as the true
warehouseman for which he claims a intent to the parties is not the negotiation of the
lien; warehouse receipt with its consequent transfer
d. date of issue; of title but merely as security.
e. location of the warehouse; Kinds of Warehouse Receipt
f. language to indicate if the receipt 1. Negotiable – one which states that the
were negotiable or non-negotiable, that goods received by the warehouse will be
is, whether the goods received will be delivered:
delivered to the bearer, to a specified a. to the bearer or
person, or to a specified person or his b. to the order of any person named in
order; such receipt.
g. signature of the warehouseman or 2. Non-Negotiable – one which states that the
his agent; goods received by the warehouseman will
h. rate of storage charges; and be delivered to the depositor or to any other
i. description of the goods or the specified person.
packages containing them.
Distinctions between a Negotiable
 Prohibited terms: Instrument and a Negotiable Warehouse
a. Such additional terms that are Receipt
contrary to the provisions of the
Warehouse Receipts Law;
b. Terms that reduces the degree of
diligence imposed by law. Distinctions between a Negotiable
Warehouse Receipt and a Non-Negotiable
Function of Warehouse Receipt: Warehouse Receipt
The negotiation of a warehouse receipt carries
with it the transfer of title over the commodity Negotiable Non-
covered by the receipt, so also with a negotiable
bill of lading. May be Negotiation Transfer or
Exception: Where a negotiable warehouse acquired assignment
receipt is indorsed and delivered to a creditor as through
collateral for a loan. Rights of  Title to the  title of the
the person goods of goods, as
Note: in case of loss of the commodity covered to whom it the person against the
by the receipt through a fortuitous event, it will is negotiating transferor
Negotiable Negotiable negotiated the receipt (merely
As to: Instrument Warehouse (holder)/ and title of steps into
Receipt transferee the person the shoes)
Subject Money Money to whose  right to notify
Object of Instrument Goods order the the
value itself deposited goods warehousem
None for were to be an of the
Liability of delivered. transfer and
Secondary failure to
intermediate  Direct acquire the
liability deliver the
parties obligation direct
goods
Valid but of the obligation of
enforceable warehouse the
Effect of man to warehousem
only in
deliberate Null and void hold an to hold
accordance
alteration possession the goods
with its
original tenor of the for him.
Can be goods for (Sec. 42)
An originally him as if
converted to
bearer the
Conversion an order
instrument warehouse
from bearer warehouse
will always man
to order receipt if
be such directly
specifically
endorsed contracted
Obtains only
the title
May obtain a which the 145
Significance
of a HIDC
better title Commercial
party Law Study Guide
negotiating
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had over the
goods
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Institute of Law

with him Note: The negotiation takes effect on

(Sec. 41 the date of indorsement only.
Negotiation
defeats the Effects of Negotiation:
lien of the 1. Warranties on sale of receipt: A person who,
seller of the for value, negotiates or transfers a receipt by
goods. indorsement or delivery, including one who
Attachment Cannot assigns for value a claim secured by a receipt,
or levy by unless in Can be unless a contrary intention appears, warrants:
execution proper subject to (GRIT)
of goods circumstance such a. that the receipt is genuine;
represented s b. that he has legal right to
negotiate or transfer it;
Note: Negotiation of the document has the effect c. that he has knowledge of no
of manual delivery so as to constitute the fact which would impair the validity
transferee the owner of the goods. Negotiation or worth of the receipt; and
carries with it both the title to and possession of d. that he has a right to transfer
the property. (Philippine Trust Co. vs. National title to the goods and that the goods
Bank, 42 Phil. 413) are merchantable.
Note: Sec. 44 (warranties on sale of
Kinds of Negotiation: receipt) is similar to Sec. 65 of NIL on
1. Negotiation by delivery: warranties of a qualified indorser.
a. Where, by terms of the 2. Indorser not a guarantor - The indorsement of
receipt, the warehouseman undertakes a receipt shall not make the indorser liable for
to deliver the goods to the bearer; or any failure on the part of the warehouseman or
b. Where, by the terms of the previous indorsers of the receipt to fulfill their
receipt, the warehouseman undertakes respective obligations.
to deliver the goods to the order of a 3. Negotiation defeats vendor's lien - Where a
specified person, and such person or a negotiable receipt has been issued for goods, no
subsequent indorsee of the receipt has seller's lien or right of stoppage in transitu shall
indorsed it in blank or to bearer. defeat the rights of any purchaser for value in
Note: A bearer document of title is not good faith to whom such receipt has been
always a bearer document. A special negotiated, whether such negotiation be prior or
indorsement has the effect of converting the subsequent to the notification to the
bearer instrument into an order instrument warehouseman who issued such receipt of the
2. Indorsement coupled with seller's claim to a lien or right of stoppage in
delivery transitu. Nor shall the warehouseman be
a. A negotiable receipt may be obliged to deliver or justified in delivering the
negotiated by the indorsement of the goods to an unpaid seller unless the receipt is
person to whose order the goods are, by first surrendered for cancellation.
the terms of the receipt, deliverable.
b. Such indorsement may be in Warehouseman’s Obligation To Deliver The
blank, to bearer or to a specified person. Goods
If indorsed to a specified person, it may  upon demand made either:
be again negotiated by the indorsement a. by the holder of a receipt for the goods;
of such person in blank, to bearer or to b. by the depositor, provided that such
another specified person. Subsequent demand is accompanied by:
negotiation may be made in like manner. i. an offer to satisfy the
warehouseman’s lien;
Effect of delivery without indorsement: ii. an offer to surrender the receipt if it
(ANT) is negotiable; and
 The transferee acquires title against iii. a readiness and willingness to sign
the transferor; an acknowledgment, when such
goods are delivered, that they have
 There is no direct obligation of the
been delivered if such is requested
warehouseman; and
by the warehouseman.
 The transferee can compel the
transferor to complete the Commingling of Goods
negotiation by indorsing the
instrument.

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General Rule: Warehouseman must keep the
goods of a depositor from the goods of other
depositors, or from the goods of the same
depositor for which a separate receipt has been
issued.
Exception: Commingling of goods is allowed if:
a. the goods are fungible; and
b. the commingling is authorized by
agreement or by custom.
What The Warehouseman Can Do In Case Of
Several Claims:
a. He can refuse to deliver the goods to
anyone of them until he has had reasonable
time to ascertain the validity of the various
claims;
b. He can require all claimants to
interplead, either as a defense to an action
brought against him for non-delivery of the
goods, or as an original suit, whichever is
appropriate.
When Justified In Delivering The Goods:
The person lawfully entitled to the possession of
the goods:
1. the person who is himself entitled to
delivery of goods by the terms of a non-
negotiable receipt or who has been
authorized to take delivery of the goods by
the person entitled to such delivery;
2. the person in possession of a negotiable
instrument receipt by the person to whom
delivery was promised by the terms of the
receipt by immediate endorsee.
When Liable For Misdelivery:
1. if he delivers the goods to one who is not in
fact lawfully entitled to the possession of the
goods;
2. If he delivers to a person holding a non-
negotiable receipt or a negotiable receipt, if
prior to the delivery he had either:
a. been requested not to make
such delivery by the person
lawfully entitled to a right of
property or possession in the
goods; or
b. had information that delivery
about to be made was to one
not lawfully entitled to the
possession of the goods.
When May Delivery Be Legally Refused:
(SHAPE-L)
1. where the goods have already been lawfully
sold to third persons to satisfy the
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warehouseman’s lien or disposed of
because of their perishable nature;
2. When the holder of the receipt does not
satisfy the conditions prescribed in Section 8
of the Act;
3. In case of adverse claimants;
4. Prior to delivery:
a. if he has been requested
by a person lawfully entitled to a right of
property or possession in the goods not
to make delivery to any person;
b. if he had information that
the delivery to be made was to one not
lawfully entitled to the passion of the
goods.
5. In the valid exercise of the warehouseman’s
lien;and
6. When the warehouseman has a legal title in
himself on the goods such title or right being
derived directly or indirectly from the transfer
made by the depositor at the time or
subsequent to the deposit for storage or
from the warehouseman’s lien.
Warehouseman’s Lien
Extent:
1. lawful charges for storage and preservation
of the goods;
2. lawful claims for money advanced; and
3. reasonable charges and expenses for notice
and advertisement of the sale, and the sale
of goods.
Remedies available to warehouseman
to enforce his lien: (SOR)
1. To refuse to deliver the goods until his lien is
satisfied;
2. To sell the goods and apply the proceeds to
the value of the lien;
3. By other means allowed by law to a creditor
against his debtor, for the collection from the
depositor of all charges and advances which
the depositor contracted with the
warehouseman to pay, or such other
remedies allowed by law for the enforcement
of a lien against personal property.
Against what property may
Lien be enforced:
1. All deposited goods of the person liable for
the lien; and
2. All goods belonging to others deposited by
the person liable for the lien.
How Lien May Be Lost:
1.By surrendering possession thereof; or
2.By refusing to deliver the goods when a
demand is made with which he is bound to
comply.
 Far Eastern University
Institute of Law
Rules on Attachment / Execution of Goods
Deposited:
1. If a negotiable receipt is issued, the goods
cannot be attached or levied in execution
unless:
a. The receipt is first surrendered; or
b. Its negotiation is enjoined; or
c. The receipt is impounded by the court.
2. If a non-negotiable receipt is issued, goods
can be attached provided it is done prior to
the notification of the warehouseman of the
transfer.
Reason: Absent such notice, both the
warehouseman and the sheriff have a right
to assume that the goods are still owned by
the person whose name appears in the
receipt.
—oOo—
GENERAL BONDED WAREHOUSE ACT
(Act No. 3893)
Purposes:
1. to regulate the business of receiving
commodities for storage in order;
2. to protect persons who may want to avail
themselves of warehouse facilities; and
3. to encourage the establishment of more
warehouses.
 to achieve this purpose, any person who
wants to engage in the business of
receiving commodities fro storage is
required by the Act to first secure a license
therefore from the Department of Trade
and Industry.
Any warehouseman receiving commodities for
storage, milling, or commingling must:
1. obtain prior license from the Bureau of
Commerce;
2. file a bond in an amount equivalent to 33
1/3% of the capacity of the warehouse
against which bond depositors may sue
directly (pour autrui);
3. open to the public; no discrimination allowed;
4. liable for double market value should he
accept if goods are damaged or destroyed.
 a warehouse accepting tobacco for
flueing is covered by law.
 Itinerant miller of palay who keeps
palay in process of milling under a
camalig falls within the law.
 A mill which must store palay
temporarily must still get the license
from the Bureau.
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Warehouseman - A person engaged in the
business of receiving commodity for storage.
 Included in the business of receiving
commodity for storage (Sec. 2)
 It includes entering into any contract
or transaction wherein:
a. the warehouseman is obligated to return
the very same commodity delivered to
him or to pay its value;
b. commodity delivered to him or to pay its
value;
c. the commodity delivered is to be milled
for the owner thereof;
d. the commodity delivered is commingled
with the commodity belonging to other
persons, and the warehouseman is
obligated to return commodity of the
same kind or to pay its value.
Commodities stored in a bonded warehouse
 Generally, these commodities could
be any raw, processed, manufactured or
finished product or by-product, goods,
article, or merchandise, either domestic or
foreign production or origin, which may be
traded or dealt in openly and legally.
 Prohibited substances, the
possession of which is proscribed by law,
may not be validly received for storage in a
bonded warehouse.
Bond Required To Be Put Up By The
Warehouseman
1. the bond may either be:
a. a cash bond;
b. a bond secured by real estate; or
c. a bond issued by a duly authorized
bonding company.
2. the amount of the bond must not be less
than 33 1/3% of the market value of the
maximum quantity of the commodity to be
received by the warehouseman.
3. It shall be so conditioned to respond for
the market value of the commodity actually
delivered at any time by the warehouseman
in case the latter is unable to return the
commodity or to pay its value.
Duties of a Bonded Warehouseman:
1. to receive for storage any commodity the
kind customarily stored by him in the
warehouse, so far as his license and the
capacity of his warehouse will permit,
without making any discrimination between
person desiring to avail themselves of
warehouse facilities.
2. to keep a complete record of all
commodities received by him, of the receipts
issued therefore, of the withdrawals, of the
 Far Eastern University
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liquidation, and of all receipts returned to
and cancelled by him.
Rights of Injured Person against
Warehouseman:
 He may sue on the bond put up by the
warehouseman to recover the damages he
may have sustained on account of such
breach.
 In case the bond is not sufficient to
cover the full market value of the commodity
stored, he may sue on any property or
assets of the warehouseman not exempt by
law from attachment and execution.
Offenses Penalized under the Act:
a. engaging in the business of receiving
commodities for storage without the
proper license (Sec. 11);
b. receiving a quantity of commodity
greater than that specified in the license
of the warehouseman (Sec. 12);
c. conniving or entering into a combination
with an unlicensed warehouseman for
the purpose of avoiding compliance with
the requirement of obtaining a license
before engaging in the business of
receiving commodities for storage (Sec.
13).
—oOo—
TRUST RECEIPTS LAW
(PD 115)
(1997, 2005, 2006 Bar Exams)
Definition: A commercial document whereby
the bank releases the goods in the possession
of the entrustee but retains ownership thereof
while the entrustee shall sell the goods and
apply the proceeds for the full payment of his
liability with the bank.
 It is a written / printed document signed
by the entrustee;
 in favor of the entruster;
 whereby the latter releases the goods,
documents or instruments to the possession
of the former upon the entrustee’s promise:
a. to hold said goods in trust for the
entruster;
b. to sell the goods;
c. turn over the proceeds thereof to the
extent of what is owing to the entruster;
or
d. to return the goods if unsold or for other
purposes.
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The Trust Receipt Law does not seek to enforce
the payment of loans. Thus, there can be no
violation of the right against imprisonment for
non-payment of a debt. It is not an offense
against property but an offense against public
order. (People vs. Nitafan, 207 SCRA 726)
Parties:
1. Entrustee –person having or taking
possession o goods, documents or
instruments under a trust receipt transaction,
and any successor in interest of such person
for the purpose or purposes specified in the
trust receipt agreement.
2. Entruseor – person holding title over the
goods, documents, or instruments subject of
a trust receipt transaction, and any
successor in interest of such person; not the
owner of the goods, but merely a holder of
security interest
3. Seller of the goods – Not strictly and
actually a party to the trust receipt
transaction; but merely a party to the
contract of sale with the buyer/importer
(entrustee).
Note: On issuing trust receipts, the bank, if not
paid what is due it, will be preferred over other
creditors of the entrustee. He is not liable to the
buyer of the goods as vendor.
Rights of the Entruster: (PROCN)
1. Entitled to the proceeds from the sale of
goods, documents or instruments;
2. Entitled to the return of goods , etc. in
case of non-sale;
3. Enforce all other rights conferred on him
under the trust receipts;
4. May cancel the trust and take
possession of goods, etc. on case of breach
of trust agreement; and
5. Give at least 5 days notice to the
entrustee of the intention to sell the goods,
etc.; he may purchase at a public sale.
 The entruster’s security interest shall be
valid as against all creditors of the
entrustee for the duration of the trust
receipt agreement. Security interest of
the entruster’s advances will have to be
settled first before the entrustee can
consolidate his ownership over the
goods.
 He is not liable as principal or vendor
under any sale or contract to sell made
by the entrustee.
 No agency relationship is established in
Trust Receipts Law.
Obligations of Entrustee: (RTIDS-ROH)
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1. Receive the proceeds in trust for the over the goods or the proceeds realized
entruster; from the sale thereof, shall render the
2. Turn over the proceeds to the entruster offender liable for estafa under Article 315,
to the extent of the amount owing to the par. 1-b of the Revised Penal Code.
entruster or as appears on the trust receipt;  If the violation or offense is committed
3. Insure the goods for their total value by a corporation, the penalty shall be
against loss from fire, theft, pilferage or other imposed upon the directors, officers,
casualties; employees or other officials or persons
4. Dispose the goods, etc. strictly in therein responsible for the offense, without
accordance with the terms and conditions of prejudice to the civil liabilities arising from
the trust receipt; the criminal offense. (Pilipinas Bank vs.
5. Keep said goods or proceeds thereof Ong, G.R. No. 133176)
separate and capable of identification as  In the event of default by the entrustee
property of the entruster; the entruster need not demand the return of
6. Return the goods, etc. in the event of the unsold goods to be able to enforce his
non-sale or upon demand of the entruster; rights under the trust receipt.
7. Observe all other terms and conditions  Fraud and deceit need not be proven for
of the trust receipt not contrary to law. and the offense is punished as malum prohibitum
8. Hold the goods, etc. in trust for the regardless of intent or malice.
entruster.  Surrender of the goods to the bank, if
unsold merely extinguishes the entrustee’s
 The risk of loss shall be borne by the criminal liability but is not relieved of its
entrustee. Loss of goods, etc. pending obligation to pay for the money borrowed.
disposition, whether due to the fault or Note: Mere failure to deliver the proceeds of the
negligence of the entrustee, shall not sale or the goods, if not sold, constitutes
extinguish his obligation to the entruster for violation of PD No. 115. However, what is being
the value thereof. punished by the law is the dishonesty and abuse
 It is assumed that the title and of confidence in the handling of money or goods
possession is turned over to the entrustee. to the prejudice of another regardless of whether
The law does not cover sales on credit with the latter is the owner. The mala prohibita nature
the title or other interest being retained by of the offense notwithstanding, intent to misuse
the seller as security thereof. or misappropriate the goods or their proceeds
 A purchaser for value and in good faith has to be established by the records. (Pilipinas
acquires said goods, etc. free from the Bank vs. Ong, G.R. No. 133176)
entruster’s security interest.
Trust Receipt Pledge
Civil Law Trust Receipts The property is in the The person doing the
Concepts Law Concept possession of the financing has
Although the person financed. possession of the
trustee is not the property.
Where there is a
owner of the goods There is no sale of the Conditional Sale
contract of sale, the
under a trust property from the There is a sale of the
buyer is to acquire
receipt (ownership entruster to the property from the seller
only whatever title
is retained by the entrustee. to the buyer.
the seller had at the
entrustor), anyone Chattel Mortgage
time the sale was Does not involve the
who acquires the Involves the creation of
perfected. (Art. creation of a lien.
goods from the a lien upon the
1505)
entrustee acquires property.
good title over the Consignment
The seller does not
goods. The consignor retains
retain title to the
Although the title to the property to
property but transfers
entrustee is not the secure the
Owner will bear the such title to the
owner of the goods indebtedness due form
risk of loss of the entruster.
covered by a trust the consignee.
object.
receipt, he bears
the risk of loss. —oOo—
Effects of breach of obligation:
 Acts involving the violation of trust
receipts agreement, such as failure to turn

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CHATTEL MORTGAGE LAW
(Act 1508)
(1996, 1997, 1999 Bar Exams)
Chattel Mortgage
An accessory contract by virtue of which
personal property is recorded in the Chattel
Mortgage Register as security for the
performance of an obligation. (Art. 2140, NCC)
Subject Matter:
personal or movable property:
1. Machinery treated as personal property
subsequently installed on leased land;
(Davao Sawmill v. Castillo, 61 Phil. 709)
2. Interest in business;
3. House of strong materials- personal
property for purposes of executing a
chattel mortgage as the parties to the
contract so agrees and no innocent third
party will be prejudiced.
4. Shares of stock; (need not be registered
in the stocks and transfer book.)
5. House of mixed materials;
6. Vessels recorded in the office of the
Philippine Coast Guard to be effective
as to third persons; not necessary to be
recorded in the Office of the Registry of
Deeds;
7. Motor Vehicles mortgage registered in
LTO (for vehicles used for public
services);
8. House intended to be demolished.
Extent of Chattel Mortgage:
1. After-acquired properties:
General Rule: covers only the property
described therein and not like or substituted
property acquired by the mortgagor and
placed in the same depository as the
property originally mortgaged.
Exception: This provision does not apply to
stores open to public for retail business
where the goods are constantly sold and
substituted with new stock (Torres v.
Limjap, 56 Phil 141).
Note: A stipulation in the chattel mortgage
which includes goods that are acquired in
renewal of or in substitution of goods on
hand when the mortgage was executed is
valid and binding. (Northern Motors, Inc. v.
Coquia, 66 SCRA 415).
2. After-incurred obligations
 While a pledge, real estate mortgage, or
antichresis may exceptionally secure
after-incurred obligations so long as
these future debts are accurately
described, a chattel mortgage can only
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cover obligations existing at the time the
mortgage is constituted.
 Promise expressed in a chattel
mortgage to cover debts yet to be
contracted may be binding but security
itself arise only after amending the old
contract conformably with the form
prescribed by the Chattel Mortgage Law.
(Acme Shoe Rubber and Plastic Corp.
v. CA, 260 SCRA 714)
 A deed of chattel mortgage is void
where it provides that the security stated
therein is for the payment of any and all
obligations hereinbefore contracted and
which may hereafter be contracted by
the mortgagor in favor of the mortgagee.
Essential requisites:
1. Constituted to secure the fulfillment of a
principal obligation;
2. The mortgagor be the absolute owner of
the thing mortgaged;
3. The persons constituting the mortgage
have the free disposal of the property or in
the absence thereof, that they are legally
authorized for the purpose;
4. The object be personal or movable
property.
Formal requisites: (SARD)
1. Signed by the person executing the
same in the presence of 2 witnesses;
2. Accompanied by an affidavit of good
faith and a certificate of oath;
3. Mortgaged property must be described
in such a manner as to enable anybody
reading the document, after reasonable
inquiry and investigation, to be able to
identify the same; and
4. Registration.
Affidavit of Good Faith
 Included in the contract of chattel
mortgage wherein the parties “severally
swear that the mortgage is made:
• for the purpose of securing the
obligation specified in conditions thereof,
and
• for no other purpose and that the same
is just and valid obligation and
• one not entered into for the purpose of
fraud.”
 The affidavit gives the mortgagee a
preferred status; it enjoys preference of third
person.
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 Effect of its absence: the contract is
valid between the parties but will not bind
third person without notice.
Where registered:
 Resident: place of residence
 Non-resident: where the property is
situated
 Where the mortgagor resides in a place
different from where the property is situated:
in the place where the mortgagor resides
and where the property is situated
 Exception: Where the amount of the
mortgage is more than P500,000 registration
of the mortgage in the province where the
property is situated is sufficient.
Note: where motor vehicles are involved, the
contract must be recorded also in the Land
Transportation Office where the vehicle is
registered (Sec. 5(e), Revised Motor Vehicles
Law);
 where the vehicle is a public utility and
the mortgage is executed to guaranty a
loan not payable within 1 year, the
approval of the Land Transportation
Franchising and Regulatory Board is
required.
Effect of failure to register: the contract is valid
between the parties but will not bind third person
without notice.
Remedies of Mortgagee in case of Default by
Mortgagor:
1. Foreclose the mortgage 30 days after the
condition is broken;
General Rule: public auction
Exception: there is an agreement for private
sale; hence, the mortgagor is in estoppel to
question it
Exception to the exception: when there is
fraud or duress
2. Bring ordinary action to recover money;
Note: Remedies are alternative.
Distribution of proceeds of foreclosure sale:
1. payment of the costs of keeping and
sale;
2. payment of the obligation secured by
such mortgage;
3. payment of the obligation secured by
subsequent mortgages; and
4. balance, if any shall be paid to the
mortgagor.
Rule on Recovery of Deficiency:
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General Rule: There is recovery of deficiency in
all mortgages (chattel and real).
Reason: Mortgages as accessory contracts
serve only as securities and not for the
satisfaction of the principal obligation. The
action may be brought within 10 years from the
time the cause of action accrues.
Exceptions:
1. Chattel mortgage on the thing sold (Art. 1484,
1485 NCC)
2. Pledge (Art. 2115, NCC)
Equity of Redemption
The following may redeem after the
condition of the chattel mortgage is broken
but before the sale thereof:
1. mortgagor;
2. a person holding a subsequent
mortgage;
3. a subsequent attaching creditor.
 An attaching creditor who
redeems shall be subrogated to the
rights of the mortgagee and entitled
to foreclose the mortgage.
 No right of redemption in chattel
mortgage after foreclosure sale
(Cabral vs. Evangelista 28 SCRA
1000).
Right acquired by 2nd mortgagee and
subsequent purchaser:
1. Before payment of debt
 After the mortgage is executed, the
mortgagor has only an equity of
redemption and only this right passes to
the 2nd mortgagee in case of a 2nd
mortgage.
 As between the 1st and the 2nd
mortgagee, the latter can only recover
the property from the former by paying
him the mortgage debt.
2. After payment of debt
 The judgment or attaching creditor who
purchased the property at the execution
sale could not acquire anything except
such right of redemption.
 He is not entitled to the actual
possession and delivery of the property
without first paying the mortgage debt.
—oOo—
RECTO LAW
(Arts 1484 and 1485, NCC)
(1996, 1997 Bar Exams)
Applicability:
 Far Eastern University
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1. Sale of personal property, the Chattel Pledge

As to:
price of which is payable on installment; and Mortgage
2. Contracts purporting to be Delivery of Not necessary Necessary
leases of personal property with option to the personal
buy. property
Registration Necessary for Not necessary
Seller’s Remedies in Case of Default: (ECF) of the the validity of
1. Exact fulfillment of the obligation, should property the mortgage.
the vendee fail to pay Sec. 14 of Act Art. 2112 of
Procedure
2. Cancel the sale, should the vendee’s No. 1508 the Civil Code
failure to pay cover 2 or more installments; Right of the Has a right to No right tot eh
and debtor to the the excess excess
3. Foreclose the chattel mortgage on the excess
thing sold, should the vendee’s failure to pay Creditor may Creditor
cover 2 or more installments. He can not Deficiency recover cannot
recover any unpaid balance of the price. Any recover
agreement to the contrary shall be void. Must be in Need not be in
Consent of writing and writing and
Notes: The remedies are alternative, not the annotated on may be oral.
cumulative. Foreclosure of chattel mortgage on mortgagee/ the back of
the things sold shall bar recovery of any pledgee the mortgage
deficiency, including recovery from a guarantor. instrument.
If the seller-mortgagee opts to exercise remedy Mortgagor Not required
#1, he shall be deemed to have waived his right must execute
Affidavit
as a mortgagee but may still levy on the an affidavit of
mortgaged property. good faith.

Offenses involving Chattel Mortgage under

the Art. 319 of the RPC: Distinctions between a Chattel Mortgage and
a Pacto de Retro Sale
1. Knowingly removing any personal
property mortgaged under the Chattel As to: Chattel Pacto de
Mortgage Law to any province or city other Mortgage Retro Sale
than the one in which it was located at the Nature of the
Accessory Principal
time of the execution of the mortgage contract
without the written consent of the Transferred
mortgagee; and Title to the Not subject to the
thing transferred right of
2. Selling or pledging personal property redemption
already mortgages, or any part thereof, Affidavit of
Required Not required
under the terms of the Chattel Mortgage Law good faith
without the consent of the mortgagee written
on the back of the mortgage and duly
recorded in the Chattel Mortgage Register. Distinctions between a Chattel Mortgage and
 The property removed or repledged, as a Real Estate Mortgage
the case may be, should be the same or
identical property that was mortgaged or As to: Chattel Real Estate
pledged before such removal or Mortgage Mortgage
pledging. Personal or
Real or
 The mortgagor is not relieved of criminal Object movable
immovable
liability even if the mortgage property
indebtedness is thereafter paid in full, or Affidavit of
Required Not required
the mortgagor-seller informed the good faith
purchaser that the thing sold had been Consent of
No consent
mortgaged, though the sale is valid. the
Consent needed and
mortgagee
must be any such
Distinctions between a Chattel Mortgage and in order to
written prohibition is
a Pledge alienate the
void
property

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Right exists 90 days nor more than 120 days from

in the entry of judgment.
Right of No such extrajudicial c. If the mortgagor fails to pay at such time,
redemption right and judicial the court, upon motion, shall order the
foreclosure property to be sold to the highest bidder
by banks at public auction.
Future Cannot Can d. Confirmation of sale by the court upon
obligations guarantee guarantee motion.
e. Application of proceeds of sale: (CAJB)
—oOo— 1. costs of the sale;
2. the amount due to the mortgagee;
3. claims of junior encumbrances or
REAL ESTATE MORTGAGE
persons holding subsequent
(Act 3135, as amended)
mortgages in the order of their
(1999, 2001, 2002, 2006 Bar Exams)
priority; and
Remedies of a Real Estate Mortgagee 4. the balance, if any, shall be paid to
1. Ordinary action for sum of money; the mortgagor or his duly authorized
2. Foreclosure agent, or to the person entitled to it.
a. judicial – file a petition in court under 2. Extrajudicial foreclosure (Act 3135)
Rule 68 if there is no stipulation
General Rule: There is right of redemption
authorizing extrajudicial foreclosure.
within 1 year from registration of the sale
b. extrajudicial (Act 3135) – file a petition with Registry of Deeds. (Sec. 6, Act No.
with sheriff’s office provided there is a 3135)
stipulation authorizing extrajudicial Exception: where the mortgagee is a bank
foreclosure. and the mortgagor is a juridical person,
redemption period is:
Kinds of Redemption: a. 3 months after foreclosure; or
1. Equity redemption – the right of the b. before registration of the sale;
mortgagor to redeem the mortgaged whichever is earlier. (Sec. 47,
property after his default in the performance General Banking Law)
of the conditions of the mortgage but before  Shall be made at public auction within
the sale of the mortgaged property or the province where the property is
confirmation of the sale. situated
2. Right of redemption – the right of the  Sale is made after:
mortgagor to redeem the mortgaged • posting the notice of the sale for
property within a certain period after it was not less than 20 days in at least 3
sold for the satisfaction of the mortgage public places at the municipality or
debt. city where the property is situated:
 Sheriff’s Office
Right of Redemption
 Assessor’s Office, and
1. Judicial foreclosure
 Register of Deeds; and
General Rule: No right of redemption. Only
equity of redemption within 90 days after • The publication thereof once a
judgment becomes final or even after week for 3 consecutive weeks in a
foreclosure sale but prior to confirmation of newspaper of general circulation in
sale (Limpin v. IAC, 166 SCRA 87). said municipality or city if the
Exceptions: property is worth more than 400
a. mortgagee is a bank – 1 year pesos.
from registration of the sale (Sec.
47, General Banking Law)  Personal notice to the mortgagor.
b. the purchaser consents General Rule: not required
Exception: contrary stipulation in the
Procedure: mortgage contract.
a. An action for the purpose should be
filed. Redemption Price
b. The court will order the mortgagor to pay General Rule: Bid / purchase price, 1% interest
the amount due with interest and other per month from date of registration to
charges within a period of not less than redemption, costs and expenses of sale. (Rule
39 Sec. 28)

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Exception: In banks, the amount of loan,
interest, costs and expenses of sale less income
derived by the bank (Sec. 47, General Banking
Law).
 Who may redeem:
1. Mortgagor or one in privity of title with
mortgagor;
2. Successor-in-interest: (TCS-JW)
a. the one to whom the debtor has
transferred his right of redemption;
or
b. one to whom the debtor has
conveyed his interest in the property
for the purpose of redemption; or
c. one who succeeds to the interest of
the debtor by operation of law; or
d. one or more joint debtors who were
joint owners of the property sold; or
e. the wife as regards her husband’s
homestead by reason of the fact that
some portion of her husband’s title
passes to her.
—oOo—
INSOLVENCY LAW
(Act No. 1956)
(1995, 1996, 1997, 1998, 2002, 2005 Bar
Exams)
Purposes:
1. To effect equitable distribution of the
insolvent’s property among his creditors;
and
2. To discharge the debtor from his
liabilities so that he can start afresh with
the property set apart to him as exempt.
(Mindanao Motor line, Inc. v. Alforque
57 SCRA 98 [1974])
Two Divisions of the Law
1. Suspension of Payments (Sections 2 to
13)
In suspension of payments, the debtor
possesses sufficient property to cover all
his debts, but foresees the impossibility
of meeting them when they respectively
fall due. The debtor can go to court and
ask for suspension of payments of his
debts: the creditors should give him
more time within which to convert some
of his properties to cash to be able to
pay his debts.
2. Insolvency Proceedings (Sections 14 to
82)
Insolvency proceedings work under the
premise that the debtor has neither cash
nor property of sufficient value with
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which to pay all his debts. The two types
of proceedings covered are:
2.1 Voluntary Insolvency – it is the
debtor who files the petition for
insolvency; and
2.2 Involuntary Insolvency – it is the
creditors who ask for the declaration
of the debtor’s insolvency.
SUSPENSION OF PAYMENTS
Note: The Regional Trial Court has jurisdiction
over a petition for suspension of payments. Sec.
5.2 of R.A. No. 8799 (Securities Regulation
Code) transferred petitions by corporations,
partnerships, or associations to be declared in
the state of suspension of payments from SEC
to the RTC.
The following may file a petition for
suspension of payments:
1.Individual Debtor
 He may petition the court of the
province or city in which he has resided
for six (6) months preceding the filing of
his petition that he be declared in the
state of suspension of payments (Sec.
2).
2.Corporate Debtor
 The corporation may possess
sufficient property to cover all his debts
but foresees the impossibility of meeting
them when they respectively fall due or
in cases where the corporation has no
assets to cover its liabilities but is under
management of a Rehabilitation
Receiver or Management Committee.
(Sec. 5 [d], PD 902-A)
Procedure: (PIPA-OC)
1. Filing of petition by the debtor (Sec. 2).
Annexed is the schedule of creditors, a
statement of debtors assets and
liabilities, and the debtor’s proposal for
the suspension of payments
2. Issuance by the court of an order calling
for a meeting of the creditors (Sec.3).
3. Publication of the order and service
thereof on the creditors (Sec. 4).
4. Meeting of creditors for the approval or
disapproval of the debtor’s proposition
(Sec. 8).
• The presence of creditors representing
at least 3/5 of the liabilities of the debtor
is the quorum required for the debtor’s
proposal to be properly approved (Sec.
8).
 Far Eastern University
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• Double Majority Rule: To obtain a votes

majority vote, at least 2/3 of the creditors
representing at least 3/5 of the total
liabilities of the debtor must vote on the INSOLVENCY PROCEEDINGS
same proposition. (Sec. 8 [e])
5. Objection, if any and if justified, to the Insolvency
decision of the meeting of the creditors  A state of inability of a person to pay his
(Sec. 11). debts at maturity. (equity test)
Grounds for objection:  The relative condition of a debtor’s
a. defects in the call for the meeting, assets and liabilities that the former, if all
in holding thereof, or in made immediately available, would not be
deliberations ha thereat, which sufficient to discharge the latter. (balance
prejudiced creditor’s rights sheet test)
b. fraudulent connivance between
 The insufficiency of the entire property
one or more creditors and debtor
and assets of an individual to pay his debts.
to vote in favor of the proposed
agreement
Distinctions between suspension of
c. fraudulent connivance of claims to
payments and insolvency:
obtain a majority (Sec. 12)
6. Court order to complement the Suspension of Insolvency
agreement (Sec. 11). Payments
The debtor has
 Suspension of payments is a proceeding sufficient property to
in rem; thus, for the court to acquire proper cover all his debts
The debtor does
jurisdiction, the application must be but foresees the
no sufficient
published as often as the court may require. impossibility of
property to pay
meeting them when
his debts
Effects of Filing of Petition by Individual they respectively fall
Debtor for Suspension of Payments: due
1. All pending executions against debtor’s
property are suspended, except The purpose is to
executions against properties specially discharge the
The purpose is to
mortgaged (Sec. 8); debtor from the
suspend the
2. No ordinary creditor may file an action in payment of
payment of debts.
court against the debtor (Sec. 9); certain debts.
3. Debtor may not dispose of his property,
except in the ordinary course of the Some of the
business in which he is engaged; The amount of the creditors may
indebtedness is not receive less than
4. Debtor cannot make any payments affected. their credits
outside of the necessary or legitimate
expenses of his business (Sec. 3). In case of
The number of involuntary
Distinctions between the insolvency law and creditors is insolvency, 3 or
PD 902-A: immaterial. more creditors
Insolvency Law PD 902-A are required.
Applies to either Only to corporate
individual or corporate debtors
debtor Distinctions between voluntary insolvency
Suspensive effect Suspensive effect and involuntary insolvency:
does not cover covers secured and
secured creditors unsecured creditors As to: Voluntary Involuntar
In absence of any No time limit as long Insolvency y
agreement among as corporate debtor Insolvenc
creditors, automatic under management y
stay expire after 3 committee/ Number of 3 or more
mos. rehabilitation receiver One is
creditors are
Agreement subject to No need to obtain sufficient
required
qualifying majority approval of creditors Who must By the By 3 or

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more 2. Issuance by the court of an

file debtor qualified order declaring, among other things, that
creditors the petitioner is insolvent (Sec. 18).
No need for Debtors 3. Publication of order and
the must have service thereof on the creditors (Sec.
Reason for
commission committed 19).
filing
of acts of any acts of
4. Meeting of Creditors for
insolvency insolvency
assignment of assignee in insolvency
Must not
Amount of (Sec. 30).
Exceeds be less
indebtedne
P1,000.00 than 5. Conveyance of debtor’s
ss property to assignee in insolvency (Sec.
P1,000.00
Bond Not required Required 32).
The 6. Liquidation of assets and
creditors payment of debts (Sec. 33).
must be 7. Discharge of the debtor
Philippine (Sec. 66).
residents 8. Objections to the discharge,
whose if any (Sec. 66).
credits 9. Appeal to the Supreme
accrued in Court in certain cases (Sec. 82).
the
Philippines Effects of Order Declaring Debtor Insolvent:
None
and none (SPAT)
of them
become a
1. All debtor’s assets placed in sheriff’s
creditor by custody until a receiver or assignee has
as to been appointed;
assignmen
creditors 2. Payment to debtor of any debt due him,
t within 30
days prior or delivery of any property due to him,
to the filing and the transfer or conveyance of any
of the property by him, are forbidden;
petition. 3. All civil proceedings against the
The order May be Granted insolvent are stayed, except those
of granted ex only after a pertaining to foreclosure of secured
adjudicatio parte hearing liens; and
n 4. Time and place fixed for a meeting of
Petition creditors to select the assignee in
must be filed insolvency.
with the
Length of
RTC where Voluntary Insolvency of Partnership (Sec. 51)
Where to residence
petitioner-  upon the petition of partners
file petition is
debtor  same requisites and conditions for
immaterial
resided 6 natural persons will also apply
months prior  partnerships duly registered with the
to filing SEC are now governed by PD 902-A when it
comes to rehabilitation/ suspension of
payments
Voluntary Insolvency
 The state desired by a debtor owing Voluntary Insolvency of Corporation (Sec.
debts exceeding the amount of P1, 000. He 52)
may be discharged from his liabilities by  How:
filing a petition with the RTC of the province 1. upon petition by any officer of
or city in which he has resided for 6 months the corporation, duly authorized by the
next preceding the filing of the petition. (Sec. board of directors, or
14) 2. upon the written assent of
Procedure: (PIPAC-LDOA) majority of the board.
1. Filing of petition by the
debtor. (Sec. 14)

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Exception: if the articles or by-laws of the
corporation provides otherwise, such
method shall be followed
 Same rules for natural persons shall
apply. However, no discharge shall be
granted to any corporation.
Exception: corporations engaged principally
in the banking business or to any other
corporation governed by special laws
providing for rules of liquidation in case of
insolvency
Involuntary Solvency
 The state to which the debtor may be
placed by:
 3 or more creditors
 who are residents of the Philippines
 whose credits accrued in the
Philippines
 in the amount not less than 1,000
pesos
 The creditors may file, with the RTC of
the province or city in which the debtor
resides or has his principal place of
business, a petition which must allege the
commission by the debtor of one or more
acts of insolvency. (Sec. 20)
Procedure: (FOSAT-FPACL-DOS)
1. Filing of petition by 3 or more creditors
of the debtor. (Sec. 20)
2. Order of the court requiring the debtor
to show cause why he should not be
declared insolvent (Sec. 21).
3. Service of the order on the debtor (Sec.
22).
4. Filing of answer or motion to dismiss by
the debtor (Sec. 23).
5. Trial of the case (Sec. 23).
6. If the court favors the debtor, then the
proceedings shall be dismissed (Sec.
23); if the court favors the creditors or
the debtor defaults, then the court shall
issue an order-adjudging debtor
insolvent (Sec. 24).
7. Publication of order and service thereof
on the creditors (Sec.25).
8. Meeting of creditors for election of the
assignee in insolvency (Sec. 30).
9. Conveyance of debtor’s property to
assignee in insolvency (Sec. 32).
10. Liquidation of assets and
payment of debts (Sec. 33).
11. Discharge of the debtor
(Sec. 66).
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12. Objections to the discharge,
if any (Sec. 66).
13. Appeal to the Supreme
Court in certain cases (Sec. 82).
Acts of Insolvency: (CRAFT-ACCD²I²)
1. Concealment of debtor to avoid legal
processes.
2. Concealment or removal of his property
to avoid legal processes.
3. Absence from the Philippines to defraud
creditors.
4. Failure to pay money on deposit or
received in a fiduciary capacity for a
period of thirty (30) days.
5. Transferring his property in
contemplation of insolvency.
6. Allowing his property to be taken under
legal process in preference of a
particular creditor to defraud other
creditors.
7. Confession of judgment in favor of any
creditor to defraud other creditors.
8. Making conveyance, assignment, or
transfer of his property to defraud other
creditors.
9. Default of merchant or tradesman to pay
his current obligations for a period of
thirty (30) days after demand.
10. Intention to depart from the Philippines
to defraud creditors.
11. Allowing default judgment in favor of a
creditor to defraud other creditors.
12. Insufficiency of property to satisfy an
execution issued against him. (Sec. 20)
Effects of Adjudication of Insolvency: (PTS)
1. Forbid the payment to the debtor of any
debt due to him and the delivery to him
of any property belonging to him;
2. Forbid the transfer of any property to
him;
3. Stay of all pending civil proceedings
against the insolvent. (Sections 18 and
24).
 Unpaid claims of wages are subordinate
to legal and contractual claims.
 The Insolvency Law still governs the
procedure when a corporate debtor
seeks to pursue voluntary insolvency
proceedings.
Date of Cleavage
 Date when the petition is filed, from
which we count backward or forward, in
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determining the effects provided for under
the Insolvency Law.
When important:
 A creditor by assignment of credit made
within 30 days from date of cleavage
shall be disqualified as petitioning
creditor. (Sec. 20)
 Attachment levied upon within a period
of 30 days before the date of cleavage
may be set aside by the assignee. (Sec.
32)
 Judgments on cases filed and decided
within 0 days prior to the date of
cleavage may be set aside by the
assignee. (Sec. 32)
 Judgments on cases filed before 30
days from the date of cleavage but
decided within 0 days because of
confession o judgment or declaration of
default of debtor may be set aside by
action of assignee. (Sec. 32)
 Properties acquired after date of
cleavage, after discharge of debtor in
good faith shall not be liable for debts
incurred prior to date of cleavage
 Fraudulent references made within 30
days prior to the date of cleavage may
be set aside in an action brought by
assignee. (Sec. 70)
Composition
 An agreement whereby the creditors of
an insolvent agree to accept a certain
percentage of their claims in full settlement
of such claims. It is the method of dividing
the estate of the insolvent debtor among his
creditors.
Discharge
 The release of the debtor from his
liabilities, which may be proved in the
insolvency proceedings such that they are
no longer a charge upon him.
 Only natural persons may ask for a
discharge (Sec. 52)
Requirements:
1. Debtor must have complied with
statutory requirements regarding
surrender of his assets for the benefit of
credits and regarding the rendition of an
account of his assets and liabilities.
2. He must have applied for discharge. and
3. Debtor must not have committed any of
the acts of insolvency under Section 65
preventing discharge of a debtor.
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Accord - an agreement between a debtor and a
single creditor for a discharge of the obligation
by a part payment or on different terms.
When may a debtor apply for discharge:
 Anytime after the expiration of 3 months
from the adjudication of insolvency BUT not
later than 1 year from such adjudication.
 Failure to apply within the said period,
debtor loses his right to be discharged.
(Sec. 64)
 But the debtor is still entitled to a
SECOND DISCHARGE. The second
discharge takes place:
 after 6 years from the first discharge
or,
 within 6 years from the first
discharge, if the second insolvency
proceeding is INVOLUNTARY.
(Sec. 65)
Legal Effects of Discharge: (C²ORS)
1. The insolvent debtor is released from:
a. all his debts and liabilities set
forth in the schedule; and
b. all debts, liabilities or claims
which were or might have been
proved against the estate in
insolvency (Sec. 69)
2. Takes effect not from the date it
was granted but retroacts to the date of
the commencement of the proceedings in
insolvency.
3. It operates as a discharge of the
insolvent and future acquisitions, but
permits mortgagees and other lien
creditors to have their satisfaction out of
the mortgage or subject of the lien.
4. It is a special defense which
may be pleaded and be a complete bar to
all suits brought on any such debts,
claims, liabilities or demands.
5. Where a debtor is judicially
declared insolvent, the remedy of the
guarantor or surety would be to file a
contingent claim in the insolvency
proceeding, if his rights as such guarantor
or surety is not to be barred by the
subsequent discharge of the insolvent
debtor from all his liabilities.
Discharge does not apply to:
1. Assessmen
ts due the government.
2. Debts due
to fraud, embezzlement, and defalcation
by the debtor.
 Far Eastern University
Institute of Law

3. Solidary Any person extending “credit” (i.e. loan, sale on

debts. installments, lease with option to buy) must give
4. Alimony. debtor a written statement containing:
5. Corporate 1. Cash price.
debts. 2. Amounts credited as down
6. Debts not payment or trade-in.
included in the schedule. 3. Difference between the
7. Debts cash price and amount credited as down
owing to creditors without notice. payment or trade-in.
4. Charges not incident to the
Fraudulent Preferences (Sec. 70) extension of credit.
5. Total amount to be
 If a debtor transferred property financed.
to any person to give him preference, such 6. Finance charge includes
transfer may be set aside by proper court interest, fees, charges, collection
action by the assignee and the property will charges, discounts and such other
be returned to the insolvent’s estate for charges incident to the extension of
equitable distribution among his creditors. credit.
Period: the transfer should take place within 7. Percentage of the finance
the 30 day period from the date of cleavage. charge to amount financed. (Sec. 4)

Presumed fraudulent transfer: Effect of non-disclosure

1. Not in the 1. The validity
ordinary course of business; of the transaction remains.
2. Under 2. The
confession of judgment; creditor is liable to the debtor for P100 or
3. Not for an amount equal to twice the finance
valuable consideration. charge, whichever is greater, plus
attorney’s fees, provided that the
—oOo— amount shall not exceed P2,000 on any
credit transaction.
TRUTH IN LENDING ACT Any action to recover penalty must be
(RA 3765) brought within 1 year from the date of
(2000 Bar Exam) violation.
3. The
Purposes: creditor can be held criminally liable.
The penalty that may be imposed is
1. To protect citizens from a imprisonment from 6 months to 1 year,
lack of awareness of the true cost of or a fine ranging from P1,000 to P5,000,
credit to the user; or both.
2. To protect a debtor from the 4. Finance
effects of misrepresentation or charges need not be paid.
concealment; and 5. Debtor may
3. To avoid circumvention of recover any interest payment made.
usury laws. (Sec. 6)
Applicability —oOo—
The law applies to creditors who extend loans,
sales in installments, and other credit ANTI-MONEY LAUNDERING ACT
transactions. It applies only to cases involving an (RA 9160, as amended by RA 9194)
extension of credit, and not to those in cash (2006 Bar Exam)
basis
NOTE: Banks and non-bank financial Declared Policies:
intermediaries authorized to engage in quasi-
banking functions are required to strictly adhere 1. To protect and preserve the
to this law by making true and effective cost of integrity and confidentiality of bank
borrowing an integral part of every loan contract. accounts, to ensure that the Philippines shall
Consolidated Bank v. CA 246 SCRA 193 (1995) not be used as a site for unlawful money
laundering activities;
Disclosure Requirement

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 Far Eastern University
Institute of Law
2. To pursue State’s foreign
policy to extend cooperation in transnational
investigations and prosecution on money
laundering activities.
Definitions:
1. Money Laundering – a crime whereby
the proceeds of an unlawful activity are
transacted, thereby making them appear to
have originated from legitimate sources.
2. Covered Transaction – a transaction in
cash or other equivalent monetary
instrument involving a total amount in
excess of P500,000.00 within 1 banking day.
Covered Institutions – refers to:
1. banks, non-banks, quasi-banks, trust
entities, and all other institutions and their
subsidiaries and affiliates supervised or
regulated by the Bangko Sentral ng
Pilipinas;
2. insurance companies and all other
institutions supervised or regulated by the
Insurance Commission; and
3. SEC supervised/regulated:
3.1 securities dealers, brokers, salesmen,
investment houses and other similar
entities managing securities or rendering
services as investment agent, advisor,
or consultant;
3.2 mutual funds, close-end investment
companies, common trust funds, pre-
need companies and other similar
entities;
3.3 foreign
exchange corporations, money
changers, money payment, remittance,
and transfer companies and other
similar entities; and
3.4 other
entities administering or otherwise
dealing in currency, commodities or
financial derivatives based thereon,
valuable objects, cash substitutes and
other similar monetary instruments or
property supervised or regulated by the
Securities and Exchange Commission.
Suspicious Transactions – transactions with
covered institutions, regardless of the amounts
involved, where any of the following
circumstances exist:
1. there is no underlying legal or trade
obligation, purpose or economic justification;
2. the client is not properly identified;
3. the amount involved is not commensurate
with the business or financial capacity of the
client;
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4. taking into account all known circumstances,
it may be perceived that the client's
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 client's past
transactions with the covered institution;
6. the transaction is in a way related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
7. any transaction that is similar or analogous
to any of the foregoing.
Unlawful activity - refers to any act or omission
or series or combination thereof involving or
having direct relation to following:
1. Kidnapping for ransom
2. Drug trafficking
3. Graft and corrupt practices
4. Plunder
5. Robbery and extortion
6. Jueteng and Masiao
7. Piracy on the high seas
8. Qualified theft
9. Swindling
10. Smuggling
11. Violations of the Electronic Commerce Act
12. Hijacking, destructive arson and murder,
including acts of terrorism against non-
combatant persons and similar targets
13. Fraudulent practices under the Securities
Regulation Code of 2000
14. Felonies or offenses of a similar nature that
are punishable under the penal laws of other
countries.
Obligations of Covered Institutions:
1. Establish and record, and maintain a
system of verifying, the true identities of
clients, including the legal existence and
organizational structure of a corporate
client, and their representatives, based
on official documents;
2. Keep records for 5 years;
3. Report Covered and Suspicious
Transactions to the Anti-Money
Laundering Council (AMLC) within 5
working days from occurrence.
Notes: The reporting duty of covered institutions
is not considered a violation of the Secrecy of
Bank Deposit Act, the Foreign Currency Deposit
Act and the General Banking Law of 2000.
Should a transaction be determined to
be both a covered transaction and a suspicious
transaction, the same should be reported as a
suspicious transaction.
 Far Eastern University
Institute of Law

Jurisdiction
 All cases on money laundering
shall be within the jurisdiction of
RTCs.
 However, those committed by
public officers, and private
persons in conspiracy with such
public officers, shall be within
the jurisdiction of the
Sandiganbayan.
Freeze of Account
 The power of the AMLC to freeze
accounts has been deleted under RA
9194
 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 , may issue a freeze order which
shall be effective immediately.
 The freeze order shall be for a period of
20 days unless extended by the court.
Powers:
1. Require and receive covered and suspicious
transactions reports from covered entities.
2. Investigate suspicious transactions, covered
transactions deemed suspicious, money
laundering activities and other violations of
the Act.
3. Apply ex parte before the CA for the freezing
of any monetary instrument or property
alleged to be proceeds of any unlawful
activity;
4. Institute forfeiture and other remedial
proceedings through the Solicitor General;
and
5. Seek court order to inquire into or examine
any particular deposit with any banking or
non-bank financial institution.
—oOo—

Authority to Inquire into Bank Deposits

 The AMLC may inquire into or examine

any particular deposit or investment with
any banking institution or non-bank
financial institution:
a. upon order of any competent court in
cases of violation of the Act
b. existence of probable cause that the
deposits or investments are related to an
unlawful activities as defined in Section
3(i) or a money laundering offense
under Section 4.
 However, no court order shall be
required in cases involving
kidnapping for ransom; drug
trafficking; hijacking, destructive
arson and murder, including
acts of terrorism against non-
combatant persons and similar
targets.

Anti-Money Laundering Council (AMLC)

Composition:
1. BSP Governor – AMLC Chairman
2. Insurance Commission Chairman
3. SEC Chairman

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