Roland Glenn T. Tuazon Ateneo de Manila University TABLE OF CONTENTS: 1. NEGOTIABLE INSTRUMENTS LAW 2. MERCANTILE INSTRUMENTS: a. LETTERS OF CREDIT b. TRUST RECEIPTS LAW c. WAREHOUSE RECEIPTS LAW d. CHATTEL MORTGAGE LAW e. REAL ESTATE MORTGAGE/FORECLOSURE f . SECURITIES REGULATION CODE g. FOREIGN INVESTMENTS ACT 3. INSURANCE 4. INTELLECTUAL PROPERTY LAW 5. BANKING LAWS a. TRUTH IN LENDING ACT b. ANTI-MONEY LAUNDERING ACT c. PHIL. DEPOSIT INSURANCE LAW d. CONFIDENTIALITY OF DEPOSITS e. GENERAL BANKING LAW f . CENTRAL BANK ACT 6. CORPORATION LAW 7. TRANSPORTATION LAW ANNEX 1: IN-DEPTH DISCUSSION ON LATTER PART OF NIL Negotiable Instruments Law HISTORY: contrast a negotiable instrument with a non-negotiable PN: o First objection: a person stepping into the shoes of the seller is exposed otherwise to the defenses that the buyer may launch against the seller Laws solution exempt from personal defenses o Second objection: I dont know the maker, I just know the one negotiating it to me. How will I know hes solvent? Laws solution will make the indorser liable regardless (Accumulation of secondary contracts) The more indorsers, the more you can sue Two general parts in the law: 1 o 1 what makes an instrument negotiable o 2 rights and obligations of parties Two basic forms: o Promise to pay (PN) o Order to pay (bill of exchange) What If it does not comply with requisites of negotiability? o If it does not comply with the requisites of negotiability, it is still a contract, but not covered by the NIL. Either: o Payable to order negotiated by indorsement, and delivery o Payable to bearer delivery is sufficient o N.B. If payable to a specific person, it is not negotiable What are the four basic contracts involved? o 1. Making o 2. Drawing o 3. Negotiating o 4. Accepting To show consent o N.B. But for all, there must be delivery What are the basic principles of the NIL? o 1. Bad faith If a person is in BF, he cannot invoke defenses. Ex. Issued a negotiable instrument to pay for a car that is defective. The indorsee knows that the car is defective, he is in bad faith. o 2. Estoppel Ex. A father allowing a son to steal a check and forge his signature is estopped from denying it o 3. Comparative fault If a bank honors a check with a forged signature, the bank is considered negligent too But if the negligence of the drawer outweighs the negligence of the bank, the law shifts the fault to the drawer o 4. The law will only protect you from personal defenses if you are a holder in due course (Sec. 52) Good faith With value Before overdue (see below) With no notice of defenses o 5. General rule: there must be demand , before an instrument becomes overdue. Exception: If time is of the essence. Ex. Reserve requirements of banks must be kept afloat, so overnight, banks sometimes transact with each other 2 An overdue instrument is shouting to the high heavens I have been dishonored! Requisites and kinds of negotiable instruments What are the requirements for a negotiable instrument? o 1a. It must be in writing o 1b. It must be signed symbol of consent If one signed another name or a symbol, it will bind him if he intended for it to bind him Location is immaterial o 2a. Must contain a promise or order to pay Need not use exact words, even equivalent words are fine Creates a NEW obligation to pay, not a mere acknowledgement of an old debt Exception 1: date of payment is mentioned, or at least, a date of maturity Exception 2: insertion of or order (words of negotiability) in the old terms Authorization to pay or a mere request does not create a binding obligation to pay. o 2b. The promise to pay or order must be unconditional Do not look into evidence aliunde. You must confine yourself within the four corners of the instrument to deem whether it is absolute. Distinguish between uncertain events and certain events, although indeterminate (ex. Moment of death) o 2c. Sum certain, and payable in money Because it is meant to be a substitute for money Specify the denomination; cannot just be a number. o 3. Payable on demand or on a determinable future time o 4. Payable to order or bearer Need not use exact words, but there must be reasonable certainty so people know from whom they could demand payment Ex. instead of order pay to X or his indorsees; pay to X or his assigns Ex. instead of bearer pay to X or holder; pay to X or possessor o 5. Where the instrument is addressed to a drawee, he must be named or otherwise indicated with reasonable certainty If name of the drawee is left blank, it is an incomplete instrument which can be filled up as a remedy When is a sum certain: o Does a stipulation of interest still make it a sum certain? Yes. It must be in writing. N.B. Remember the rules on unconscionable interest rates o When does the interest become 12% by default? 3 1. Unconscionable interest 2. Stipulated an interest but no rate o What is required for the instrument to be valid? 1. Amount of installments must be indicated 2. Date of maturity of each installment specified Ex. Promise to pay Jose Cruz or order P100,000 in 10 installments. not negotiable N.B. You have to specify both AMOUNT and WHEN EACH is due. You cannot just give the starting point (ex. Nov 2005) o Does the stipulation of an acceleration clause make it a sum certain? Yes. An acceleration clause: failure to pay an installment will make the entire balance due and demandable. o Is it valid to stipulate payment in foreign currency? Yes. If you talk about an exchange rate, you have to talk about at least two currencies. It cannot be just one. o Is I will pay reasonable attorneys fees in case there is failure to pay a sum certain? Yes. Because you know how much is due at the date of maturity. This is the reckoning point at the date of maturity, the sum is still certain. N.B. Stipulations on attorneys fees are always subject to court control anyway. When is a promise is unconditional: o Do instructions on how payment will be entered in the books of account affect unconditionality? No. o Does reimburse yourself from X fund affect unconditionality? No. o What is the test? It must indicate the source of reimbursement, not source of payment. The latter is not negotiable. What about treasury warrants? It is not negotiable because it is payable out of a particular fund. When does reference to a particular fund not destroy negotiability? Payment must not be limited to come from such fund. o What is the rule on how the original obligation came about? In general, it does not affect unconditionality But not if mention of the original contract makes the instrument subject to the formers terms and conditions o Does mention of a CM securing the original obligation make it non-negotiable? 4 Negotiable, because the promise to pay is still conditional, as long as it is not dependent to the CM. When is it payable at a determinable future time: o Distinguish between various insecurity clauses: 1 st situation: Pay Jose Cruz or order; if the holder feels insecure, he may demand that I post reasonable securities, and if I fail to do so, he can declare the entire balance due and demandable. One view: non-negotiable date of maturity becomes uncertain because holder can accelerate payment, and there is an additional undertaking other than payment of money. Other view: negotiable the undertaking to put up a security is merely an accessory obligation. The date of maturity is not uncertain because acceleration is within control of the maker; he can prevent it by giving the additional security. (better view) 2 nd situation: same if the holder feels unsecure, he can declare the entire balance due and demandable. It is not negotiable, because here, the holder has the absolute option to make the obligation due and demandable. o Differentiate: When the maker may choose to pay before a certain date, it is still negotiable (ex. on or before June 15) Why? o It benefits everyone because all other secondary contracts are discharged. When the holder may absolutely choose to have the obligation due, it is not negotiable. Why? o Everybody becomes secondarily liable by ripening their obligation. o What if its hinged upon a contingency? Non-negotiable even if the condition occurs. o Philippine Education v. Soriano: A money order is not negotiable, because although it says pay to the order of, under Postal Regulations, obligation to pay is conditional, depending on different grounds where the post office can refuse to pay. Also, it can only be indorsed once. o Does an extension clause affect negotiability? No, if the extension is for a definite time too. Ex. Payable within 2 years from date, subject to one year extension Option to extend belongs to holder or maker/acceptor. What additional provisions do not affect negotiability: o What is the general rule? Other obligation or undertaking aside from payment of money makes it non-negotiable (secured by CM over my car, which I will keep in good condition) 5 o What are the exceptions? 1. Authority for holder to foreclose pledge, CM, or collateral securities 2. Authorizes confession of judgment if instrument not paid upon maturity N.B. the SC said, however, this is a void stipulation 3. Waiver of benefit of law 4. Waiver of notice of dishonor 5. Waiver of venue 6. Waiver of exemption from execution o What if the holder has the option to require something other than payment of money? It is valid, as long as the other option is money. Ex. If option is upon holder to demand either cash or rice, it is still negotiable because the holder can ALWAYS demand money If the maker has the option, not valid. What omissions do not affect negotiability? o 1. Not dated o 2. Failure to mention consideration It is presumed in this contract o 3. Does not specify place where it is drawn or payable o 4. Bears a seal o 5. Designates currency in which payment will be made When it is payable on demand? o 1. Upon sight or presentation o 2. Instrument is silent on when payment is made o 3. When it is overdue As to the maker, he is discharged BUT as to the indorser, it is upon demand Upon whose order may an order instrument be paid? o 1. Payee (who is not maker, drawer, or drawee) o 2. Drawer Ex. Jose Cruz writing a check saying Pay to the order of Jose Cruz (better than making a check paid to cash) In this example, it is not complete until Jose indorses it, because there has to be delivery (at least two parties to a contract) o 3. Drawee o 4. Two or more payees jointly Ex. Pay to the order of Jose Cruz AND Manuel Santos 6 o 5. One or some of several payees Ex. Pay to the order of Jose Cruz OR Manuel Santos Contra: For drawees, it CANNOT be alternative or successive, but it can be jointly. Ex. drawee can be drawn against A and B but not A or B o 6. Holder of an office for the time being Ex . Treasurer of the city of Makati o What if the drawee is not indicated with reasonable certainty? It is not negotiable. When it is payable to bearer? o 1. To bearer Caltex: The Certificates of Time Deposit [in this case] are negotiable instruments. The documents provide that the amounts deposited shall be repayable to the depositor. And who, according to the document, is the depositor? It is the bearer. o 2. To person or bearer o 3. Order of fictitious person What is the general rule? There must be intent by the maker or drawer of the NI that the instrument be issued to a fictitious person (knowledge is paramount) Weller and Martin: Either partner can sign or issue checks. X wanted to steal money from the partnership. He drew a check payable to a corporation where he was just the corporate secretary. He was just the corp. sec., and was not authorized to indorse; but he indorsed the check to himself nonetheless. Y, his partner, sued the bank for restoration of the amount. HELD: it is payable to bearer. The Drawer did not intend the payee (the Corporation) to get the proceeds of the check, EVEN IF the payee actually existed or not. It fell under this provision. If, however, the company required two signatories to all checks, and X signed it with intent to steal, and Y signed it not knowing Xs intent, then it does not become payable to bearer. For the payee to be fictitious, both must have same intent. American Sash: Had a payroll clerk, who prepares checks payable to employees. He then makes the officers sign the checks. Clerk padded payroll with ghost employees, had the officers sign the checks (the officers did not know that the employees didnt exist), and the clerk collected money. Issue: is this payable to fictitious persons. These ghost employees did not actually exist. HELD: It was not a bearer instrument. The DRAWERS were the officers who signed the checks. Their intent controls. So the checks DID NOT become payable to bearer because they DID NOT KNOW that the ghost employees were not part of the payroll. Rodriguez v. PNB: Employees of PNB formed a savings and loan association (SLA). Rodriguez spouses meanwhile, had current accounts with PNB. Whenever the SLA lends to members, it issues post- dated checks. But most of the time, the SLA does not 7 have enough money. The borrowers thus endorse the checks to Rodriguez; in turn, Rodriguez rediscounts the checks (issuing checks lower than face value). The SLA has a policy: when a member has an outstanding loan, they cannot get another loan. So the officers who wanted to borrow more, to circumvent this, they made it appear that it is the other members who are borrowing. The SLA, in accordance with the usual procedure, issued post-dated checks to the supposed borrowers (but really for the officers). The officers indorsed the checks to Rodriguez. Rodriguez issued discounted checks. PNB found out about this and closed the SLA account. Meanwhile, the checks issued to Rodriguez, which bounced because the SLA account was shut down since the checks they issued were cleared, and the checks issued to them were from a closed account. Contention of spouses: How can PNB accept the indorsement of those checks, when the ones who indorsed were the officers and not the supposed borrowers. Contention of PNB: it is intended for fictitious persons, since there was no intent that they actually get the money (even if the supposed borrowers really exist). HELD: Rodriguez spouses won. For the checks to be considered as payable to fictitious persons, the fact must be known to the person issuing the negotiable instrument. Here, the Rodriguez spouses did not know that the supposed payees were not the real borrowers (when it fact it was the officers). PNB must reinstate the amounts to the Rodriguez spouses. o 4. Payee is not name of existing person Classic example: payable to cash o 5. Last indorsement is in blank Completion and delivery What is the effect of ante-dating or post-dating? o Does not affect negotiability When can the holder insert a date in the instrument? o When the date of acceptance is not inserted by the drawee, the holder may insert date of issue or date of acceptance o What if he places the wrong date? If negotiated to a holder in due course, that is the correct date as far as the holder in due course is concerned even if it is not Purpose: the law protects a holder in due course, who is relying on that date in good faith o But what if the one who put the wrong date presented it for payment to the acceptor/drawee? Not valid. Cannot claim because he was not in GF. o A check drawn by X says Pay to the order of Y P10000 thirty days after sight. It was accepted by E on Sept. 15, but did not date the instrument. Y negotiated it to Z, telling the latter that the instrument was accepted November 1. Z placed in the instrument this date. Can he collect from E? Yes, even if it is more than 30 days from acceptance. Z is a HIDC and the Nov 1 date is true as to him. If Y inserted the wrong date instead and did not indorse it to Z, can he collect from E? No. He is not a HIDC. 8 What is the rule for incomplete but delivered instruments? o When it is wanting of a material particular the person possessing it has prima facie authority to fill up the blanks CONTROLLING FACTOR: The blank or incomplete instrument must have been delivered with intent that the holder turn it into a negotiable instrument o In a case, a person signed an instrument in blank and left it with the bank. The bank filled it up with an amount. What happens? The amount inserted by the bank controls. o What are the two requirements for this instrument to be enforceable? 1. It must be filled up in accordance with the authority given to him 2. It must be filled up within reasonable time o X gave a check with a blank amount to Y, telling Y that he should fill it up according to what X ultimately owes Y, but not over P50000. X owes Y P30000, but Y put P60000. Can Y collect P60000 from X? No. It was beyond the authority given him. Y indorsed the check to Z, a HIDC. Can Z collect P60000 from X? Yes. The defense does not apply to him. o X asked Y to sign a piece of paper claiming that it was a witness signature that the Z will pay X what Z owes. But X actually made it appear that it was a PN where Y promised to pay money to her. HELD: The court believed the contention that Y never intended for the signature to be for a PN. There must be intent to leave a signature to make a PN. What about incomplete and undelivered instruments? o Will not be a valid contract in the hands of any holder, as against the person whose signature was placed on the instrument prior to delivery (real defense) BUT indorsers are liable o Ex. X left signed checks, and an employee took them and filled up amounts. This is an incomplete and undelivered instrument. o Ex. X went abroad and left signed checks for payment of debts. Abusive employees put their own names and signed their own names. HELD: By pre-signing checks and leaving them with employees, it became possible for them to do this. The officers were negligent and shared in the loss (60-40). What about complete but undelivered instruments? o The NI is incomplete until delivered, but this does not prejudice a HIDC o Ex. You cannot sue if you hold checks that were not delivered to you. You never acquired a right over them. BUT a HIDC will not be subject to this defense it is a personal defense o BPI Family Savings: BPI issued a check payable to City Treasurer of Iloilo to pay for local taxes. They did not deliver it to the treasurer, and just gave it to the employee. The employee used it to pay for somebody elses local taxes. HELD: There was no payment because BPI never delivered it to the city treasurer, so BPI cannot claim to have paid. 9 o Associated Bank: Somebody was selling RTW clothes, and shopping malls (buyers) issued crossed checks. Somehow, the checks fell into the hands of someone else, who indorsed it to someone else, and were deposited to Associated Bank. The seller was wondering why she wasnt being paid. [If you are legalistic, the RTW seller must sue the shopping malls, etc., because the checks were not delivered to her. In turn, the shopping malls, etc. must sue the drawee banks, and then the drawee banks sue Associated Bank why it cleared the checks. HELD: The SC allowed the RTW seller to sue Associated Bank directly because it cleared the checks. o It may be shown that delivery between immediate parties is conditional, or for a special purpose. o Ex. A godson is taking the CPA test, but X is not in the Philippines. He gave P10,000 check on the condition that he pass the test. The godson cannot enforce payment on the check. BUT if the godson negotiates the check to a holder in due course, the law will protect the HDC. Rules of interpretation 1. Words prevail over figures o Romero: Amount indicated in words is One Million Two Hundred Pesos. Amount in figures: 1,200,000. Balance in the account is 1,100,000. The check bounced. The words prevailed. 2. Payment of interest o Runs from date from instrument o Or if none, date of issue 3. If not dated, assumed to be dated from time of issue 4. Written > printed provisions 5. If ambiguous whether a bill or note, the holder has the option to treat it as either 6. Ambiguous role of signature deemed an indorser o Because the indorser has the least liability among all characters in a NI 7. If I promise to pay note is signed by two or more persons deemed solidarily liable Signature What is the general rule as to signatures? o A person whose signature does not appear on the instrument is not liable What are the exceptions? o 1. Duly authorized agent signing for principal o 2. Forger liable for signature he forges o 3. Signature in separate paper (allonge) because the instrument has no more space o 4. Estoppel o 5. Signing under trade/assumed name o 6. Instrument can be negotiated by mere delivery What must an agent write to avoid personal liability? o 1. Agent must disclose he is an agent o 2. Disclose his principal 10 3. He has authority What if the party is a minor or a corporation without capacity? o Maker of a PN cannot refuse to pay to a holder on the ground that the indorser is a minor. Neither can he raise the defense that the prior indorsee is a minor. o ONLY the minor can raise the defense of minority, no one else. o Can apply this principle by analogy to other incapacitated persons (Ex. corporation action ultra vires) o Exceptions: 1. The minor actively misrepresented his age and it appears that he is physically of such age 2. Minor kept fruits/benefits 3. Minor spent the money in good faith Forgery What if a persons signature is forged? o Did not give consent to the contract o Except when he is estopped What are the kinds of forgery? o 1. Signature is copied o 2. Fraud in esse contractus (fraud in factum) Misled to signing instrument, not knowing it was a negotiable instrument o 3. Duress amounting to forgery It must be duress in the execution (ex. Grab the hand of the intimidated), NOT duress in inducement o 4. Fraudulent impersonation In general, it is NOT a forgery The person to whom the note was given is presumed to be intended to receive the note (because he knew the intended payee) Four general rules for forgeries: o 1. A party whose signature is forged is not liable unless hes estopped o 2. An acceptor who pays on a BOE cannot recover the money because he admits the genuineness of the signature of the drawer o 3. A Holder in Due Course acquires good title if forged indorsement is not necessary for his title Ex. in a bearer instrument o 4. A person negotiating an instrument after forgery is liable (due to warranties) Forgery of promissory note: o A. Order instrument: A (signature forged by B)-B-C-D-E E cannot collect from A (not bound) E can collect from B (forger) E can collect from C, D as indorsers (warranted the instrument) 11 o B. Bearer instrument: A (signature forged by B)-B-C-D-E Indorsing an instrument that need not be indorsed leads to a warrant of such o C. Order instrument: A-B-C (signature forged by D)-D-E E cannot collect from A or B (since it is an order instrument, there is a cut-off to A and B, since Cs signature is forged) E cannot collect from C (no consent) E can collect from D as indorser/forger o D. Bearer instrument: A -B or bearer-C (signature forged by D)- D-E N.B. This is an instrument payable to bearer; delivery is sufficient, no need for indorsement. Can E collect from A? Depends. If E is not a holder in due course, A will claim that there was no delivery of complete instrument by B since C stole it from him If E is a holder in due course, he may collect from A since it is payable to bearer Can E run after C? No, Cs indorsement was forged Neither can he run after B, because he cannot trace his right to him [cut off by the forgery]. He can run after D, because by indorsing the instrument (even if bearer), he warranted it. o N.B. if a bearer instrument is indorsed even if it is not needed, the indorser warrants the instrument as what it purports to be. Forgery of Bill of Exchange: o A. Order instrument: A (signature forged by B) and then indorsed to C-D-E. X accepted as drawee. Can E collect from A? No. No consent. Can E run after X? Yes. By accepting, X admits the instrument is genuine. What is Xs remedy? o Sue B, the forger. Can E run after B? o Yes (forger) Can E run after C and D? Yes. Warranted by indorsement o B. Same, but X did not accept. How does the answer change? 12 Same for everyone, except E cannot run after X because he did not accept. o C. Same as A, but bearer instrument. How does the answer change? Same rules on indorsement of a bearer instrument if there was indorsement even if there is no need to do so, there is warrant of the genuineness of the instrument by the indorsers. o D. Bearer instrument, but an indorsers signature was forged Even if Cs indorsement to D is forged, the payee can still collect from A (because he just promised to pay the bearer). Remedy of the acceptor is to just run after the thief. o E. BOE issued by A payable to B or order C (signature forged by D)-D-E. X accepted and paid. Can X debit As account? No, because it went against As order to pay B or order, which was cut off by the forgery of Cs signature. Can X get money back from E? Yes, because X only admits As signature as genuine (it was) and not the indorsers signatures. Can E run after A, B, or C? No. They were all cut off by the forgery. Can E run after D? Yes, he forged. o F. BOE issued by A payable to B or bearer C (signature forged by D)-D-E. X accepted and paid. Can X debit As account? Yes, because A promised to pay the bearer. Can X get money back from E? No. E is the bearer. What is the remedy? C can run after D, the forger. o G. BOE issued by A payable to B or bearer C (signature forged by D)-D-E. X did not accept. Can E run after X? No, X did not accept. Can E run after C? No, did not consent. Can E run after D? Yes (warranted and forged) Can E run after B? No, cut off by the forgery. Can E run after A? 13 Yes, can go after A if E is a HDC. BUT cannot go after A if E is not HDC. N.B. (reason: complete but undelivered instrument is a personal defense) What are the exceptions to these general rules? o 1. When there is estoppel (ex. father saying that his sons forgery of his signature was genuine) o 2. When there is unreasonable delay by the drawer in informing the drawee about the forgery Drawer can check the statements sent by the bank to him Test : If the drawer had acted quickly, would the drawee have been able to stop or freeze payment? X left a check book with his friend, who was in the car. The friend forged his signature in a check book left lying there. o HELD: Not negligent; no reason to suspect friend of bad faith. An external auditor was hired to reconcile records. He managed to forge the signatures of the officers of Casa Montessori over a long time. Sued bank, which refused to reinstate the amounts. Bank argued Casa was negligent. o HELD: An external auditor is not an employee. It is an independent contractor, so you cannot blame Casa for negligence in hiring an employee. o Estoppel does not apply, because Casa had no way to know the auditor was stealing money, because he was precisely the one tasked with safeguarding the school records and comparing with bank records. Effect of comparative fault? o Split accountability for the loss (usually 50-50 but can adjust depending on level of negligence) Illustrate comparative fault principle: o Robbers broke into Triumph Lumber. Check book was stolen, but Triumph did not report it to the bank. Robbers were able to cash checks. HELD: Triumph was negligent for not reporting the theft. The bank should also be held negligent for authenticating the checks. o MWSS did not have their checks printed by the central bank. They had a private printing press print their checks. The signatures of the officers of MWSS were forged. PNB paid. HELD: MWSS must bear the loss for failing to exercise caution did not ask printing press to surrender plates, account for spoilage, and MWSS did not examine the signatures in the bank returns. o Ilusorio was leaving for abroad and he left his checkbook with his secretary, who he asked to reconcile bank statements. Secretary forged his signature. HELD: Ilusorio should bear the loss for his negligence. He trusted his secretary. o Gempesaw owes several groceries. She trusted a bookkeeper blindly. When she ordered supplies, the bookkeeper prepared the checks, and Gempesaw signed the checks without verifying the statements. The bookkeeper was able to steal more than P1M. HELD: Negligent; did not confirm or examine the invoices, receipts, etc. before signing the checks used to pay the suppliers. 14 o Province of Tarlac had account with PNB. Province issues checks to the physician/head of the clinic. The cashier already retired, but he was still hanging around. Cashier was able to forge when he picked up the checks. HELD: Province was negligent, for allowing the cashier to pick up the checks even when he was retired, so he was able to indorse the checks through forgeries. Split accountability 50-50. What is the general duty of the collecting bank when the indorsement is forged? o The collecting bank must return the money to the drawee bank, because the payee did not indorse the check. o N.B. This is NOT a case of negotiation, but presentment for payment. So the collecting bank cannot claim there was warranty. X, employee of Ford, was tasked to pay sales tax (P18M), made a check payable to Insular Bank (for payees account only), the authorized collecting agent of BIR. X showed a fake BIR receipt to Ford. Instead, X deposited a worthless check with Insular Bank, which X substituted for the check issued by Ford. In their internal records, X made it appear the worthless check was deposited. X stole the real check, and Citibank honored it. X collected from Bank of America. Ford had to pay BIR again. They sued. o HELD: Citibank must return the money to Ford, because Ford ordered it to pay the BIR, which Citibank disobeyed. It says for payees account only and there was no indorsement from BIR. Citibank was guilty only of negligence. o Citibank manager (who was complicit) was criminally liable. o JJ doesnt agree with the court as regards Insular Banks liability. o Check: G.R. 121413 29 Jan. 2001 Rules on clearing o Checks are brought to a clearing house and are run through a clearing house. They check the magnetic strips on the checks. The amount will then be transferred to the collecting bank. o Then the checks will be physically given to the drawee bank. The drawee bank has 24 hours to honor/dishonor the check. o If it dishonors it, the drawee bank returns the check to the clearing house. The computer will return the amounts paid. o Any return beyond 24 hours: time-barred. Here, the doctrine applies to the forged signature of the drawer. This 24 hour rule SHOULD NOT apply when it is the payees or indorsees signature that is forged, because the drawee bank has no way to find out, until the drawer informs them. (But the SC has at times wrongly applied the 24 hour rule to the payees forged signature.) o New rules (to prevent ping-pong of checks): If a check is dishonored, you can only present it one more time. [Usual reason why one failure is allowed drawn against insufficient funds] What is the effect when the drawee bank does not return the check within 24 hours? The drawee cannot ask the computer to reverse the entries. 15 BUT you are not precluded from suing to collect after. But since the computer cannot reverse, while you are litigating, you do not have the amount. Consideration and Holders for Value IMPT THINGS TO REMEMBER: o 1. Failure of consideration is a personal defense. This usually applies when X and Y have a transaction and Xs instrument bounces, but Ys prestation is only partially fulfilled. o 2. But if you bring in a third party (HIDC), then failure of consideration is not a defense anymore. o 3. As discussed in the next section, an accommodation party is liable to a Holder for Value. Under the law, consideration is presumed o Travel Inc.: Travel agency sued on the basis of a bouncing check issued by a guy bringing in passengers. The CA was wrong for asking the agency to prove the value of the ticket purchased. There is a presumption of valuable consideration, and that the check was for such amount. o Ex. in BP 22, there is no need to prove the check was issued for valuable consideration In civil law, generosity, love, affection, etc. are valid consideration. o [N.B. Sundiang says love and affection, etc. cannot be considered valuable consideration. But Jack says that a donation is a simple contract and the law simply requires consideration sufficient to support a simple contract. So love and affection is valuable consideration.] Rule on holder for value vis--vis prior parties : o Rule: Where value is given for the NI, the holder is a holder for value in respect to all parties who became such prior to [the time consideration was given] o A issued a PN to B, but there is no consideration. B indorsed it to C for consideration. C, then to D. What is Ds status as holder for value? D is a holder for value with respect to A, B, and C because C gave value. A and b are parties who became bound prior to the value given. What is the rule on holder who has a lien on the instrument? o He is a holder for value only to the extent of the lien. o Ex. Company appealing a lost case posts supersedeas bond (ex. P500000). Surety Company asks for collateral. The surety company is a holder for value to the extent of P500K, even if the company issued a certificate of time deposit negotiable for P1M. What is the nature of absence of consideration? o 1. Defense against a person not a HIDC (personal defense) o 2. Partial failure of consideration is a proportionate defense. Ex. Somebody issued a check for P20000 for 10 sacks of rice. The check bounced. The seller however only delivered 5 sacks of rice. HELD: He can only sue for P10000 Want of consideration between drawer and payee cannot be invoked as defense of drawee who accepted a BOE o A drew a BOE for the amount of P10M in favor of B, the payee, in exchange for 10 cars. B only delivered 5 cars. X, the drawee, did not accept. Can A launch the defense of partial failure of consideration against B? 16 Yes. Want of consideration is a defense against the payee. o [Same facts] X accepted. Can X refuse to pay on account of partial failure of consideration? No. The acceptor cannot use want of consideration as defense. By accepting, he admits authority of the drawer to draw the instrument, and that he will pay. Accommodation party Who is an accommodation party? o Signs as party but does not received consideration or value therefore, from the underlying contract. Only lends his credit. What is the accommodation partys liability? o Liable to a holder for value, even if the holder for value knew him as merely an accommodation party at the time that holder took the instrument. Ex. Some banks try to get borrowers to get surety companies to sign borrowing agreements. Surety companies charge premiums for signing as co-makers. The surety company, not receiving any part of the proceeds, is deemed an accommodation party. Must there be independent consideration for the accommodation? o No, it is not an absolute prerequisite. The consideration that supports the surety is the same consideration for the original obligation. May a corporation be an accommodation party? o As a general rule: a corporation cannot be an accommodation party to an instrument, because there is no business purpose to such [unless that is the business of the corporation]. Prudencio: Construction project. The constructor borrowed from PNB working capital. The bank required two other signors. The firm got the Prudencio spouses who issued checks. The project was failing. PNB agreed to release part of the security money to help the project. But the project died anyway. PNB sued Prudencio spouses. HELD: Prudencio spouses are accommodation parties. The court held that PNB is not a holder in due course, because it knew that the spouses did not receive consideration. When PNB released a portion of the money, it was in BF. o JJs comment: the law says Holder for value not HIDC. You cannot claim PNB was in bad faith when it released the money because the project was already failing. PNB took a risk, rather than ensure the certain failure of the project, the released funds could have improved the project. o Sec. 52: definition of HIDC point in which a person must be is in GF is when he took the instrument. The release of the funds happened long after. o SO IF YOU FOLLOW THE IMPORT OF SEC 29, which makes accommodation parties liable to holders for value, then the Prudencio Spouses should pay PNB because PNB is a holder for value! X was exchanging a post-dated check for cash to the disbursing officer of AFP. AFP asked Y, Xs sister, to sign as accommodation indorser. The check bounced. Y was acquitted for conspiracy charges, but was held civilly liable. Correct? o HELD: Yes. Thats what an accommodation party is tasked to do when the check bounces, she pays. Negotiation Can bearer instruments be negotiated? o Yes. When a bearer instrument is indorsed although unnecessary, it is still ultimately negotiated. 17 o See Caltex case. When pledging a NI, there are no specific provisions. Fall back on the NCC. Must comply with requirements of putting it in a public instrument and indorsement. Where must the indorsement appear? o On the instrument itself or to a paper attached to it What must be indorsed? o The entire instrument. Indorsing only part of the amount will make it cumbersome. o 1. Prohibited to indorse to 2 or more indorsees severally. Ex: A check for P100K is negotiated to Jose Cruz for 50K and Manuel Santos for P50K. Ratio: This in effect is two indorsements of 50K each (two partial indorsements) o 2. PARTIAL indorsement is treated under law as an assignment. It is subject to personal defenses. EXCEPTION: When it has been paid in part (ex. on installments) Types of indorsements: o Special specified person to whom it is being indorsed o Blank does not name any person Indorsement of an order instrument in blank can convert the indorsement into a special indorsement by writing his name This ensures that the order instrument does not become a bearer instrument Ex. A issued a PN to B or order for P10K. B indorses it to C, but in blank. What can C do? C can insert To C over the signature to keep it an order instrument. C CANNOT put To C, waiving notice of dishonor. The contract must be consistent with the tenor of the indorsement Types of restrictive indorsements: Negotiability Passing of title Consideration presumed Defense available Pay to Jose Cruz only X Yes Yes X, because indorsee is a HIDC, defenses against indorser cannot apply to him To Jose Cruz, for collection only (as agent only) Yes, but subject to same restriction that he only holds it for collection X, because the indorsee is a mere agent of the indorser X, because there is no transfer of title Yes, defenses against indorser can be raised against indorsee because he is just an agent To Jose Cruz, as trustee for Glenn Tuazon (indorsee named as Yes, but subject to same trust Yes Yes, because there is transfer of title X, because title transfers 18 trustee) Rights of indorsee in restrictive indorsement: o A) collect payment o B) bring action indorser could bring o C) transfer rights, if allowed to do so What is a qualified indorsement? o Done by writing without recourse although the instrument is still negotiable o This can be done if the instrument will fall due for a long time (ex. 5 years), and the indorser does not want to be insecure for such a long time. o But qualified indorser still has some warranties under Sec. 65; 1. Genuine as to what it purports to be (ex. not forged or materially altered) 2. Warrants his valid title 3. All prior parties have capacity to contract 4. That he is not aware of any fact that makes the instrument valueless (ex. that the maker is insolvent) o Ex. A issues a PN to B or order for P50K. B indorses to C, then C to D. D indorses to E without recourse. Can E collect from D? No. The indorsement is qualified. If As signature turned out to be forged, can E collect from D? Yes. Because he warranted that the instrument is genuine as to what it purports to be. If D turned out to have forged Cs indorsement to him, can E collect from D? Yes, more so. He warranted his valid title to E. What is the effect of a conditional indorsement? o 1. The maker (or acceptor) may disregard the condition because the maker made an unconditional promise to pay. The indorser cannot change the original obligation o 2. The maker can also say lets wait and see if the condition is fulfilled o 3. If the maker pays, but the conditioned turned out to be unfulfilled after, the remedy of the conditional indorser is to run after the indorsee to get back the money. The conditional indorser cannot run after the maker/acceptor because the M/A has every right to dispose of his obligation while he feels solvent. What is the effect of an indorser signing of an instrument payable to bearer? o It can still be indorsed through mere delivery o But the special indorser is only liable to those who can make title through his indorsement 19 o Rule: a bearer instrument is always a bearer instrument o Contra: a WHR can be converted from a bearer to an order instrument by a special indorsement What if the instrument is payable to two or more payees? o All must endorse o But if they are partners, there is mutual agency What if the instrument payable to a cashier or fiscal officer? o Assumed that the instrument is payable to the corporation he represents What is the effect if the name is misspelled? o Must indorse the instrument according to the misspelled name, because other parties will not know that there was a mistake made o If he wants, after signing as the misspelled name, he can sign his real name, so it will appear wrong name indorsed to real name What if there is date attached to the negotiation? o The date is presumed to be correct, but rebuttable. o If there is no date, the negotiation is presumed to have been done before it was overdue Useful to establish HIDC What if it indicates a place? o Law of that country will govern as to questions of indorsement N.B. Not every restrictive indorsement will destroy negotiability o Only that in subsection A (Pay to X only) will destroy o Crossed check is still negotiable Can strike out an indorsement not needed for his title: o Ex. bearer instrument: can strike out indorsements B to E o If its an order instrument, can E strike out B? No. Because it is payable to the order of B. You cannot take him out, or else, E cannot draw title to the instrument. o ABCDE. E cancels the indorsement of C to D. He loses the right to run after C. D is also discharged, because D lost his chance to run after C. o RULE: The indorser who is struck out and ALL indorsers after him are eliminated Ex. If there is indorsement from A to Z, and you cancel C, persons C to Y are discharged. What about Instruments transferred without indorsement? o Transferee will only step into the shoes of the transferor o So defenses against transferor apply to the transferee too o But the transferee can compel the transferor to indorse it o What is the time period to determine if he is a HIDC? The reckoning point is that time of indorsement, not the initial transfer 20 Ex. Did not know necklace was fake at time of transfer; knew it was fake at time of indorsement = not HIDC Indorsement to a prior indorser: o Ex. A-B-C-D-E-B o Can B run after C, D, and E? No. Because they in turn can run after B too! There is compensation under law. The law will not allow them to run around in circles. Rights of the Holder What are the rights of a holder? o 1. Can sue in own name o 2. Payment in due course discharges the instrument Payment at or after maturity is in due course, and without notice his title is defective Holder in due course (Sec 52) o Requisites: 1. Instrument is complete and regular on its face 2. Must have become a holder before it was overdue and without notice of prior dishonor, if so 3. Took it in GF and for value 4. When he took, no notice of infirmity in instrument or defect in title of the indorser This elaborates #3 When is there defect in the title of the indorser? If he took it through unlawful means (ex. stole it), illegal consideration (ex. issued for marijuana), or negotiated it in breach of faith, fraud (ex. issued for fake ring), or duress (ex. issued as ransom money) o Rule on instruments payable on installments and HIDC: Status on payment Knowledge Effect An installment has not been paid and there is no acceleration clause Holder is aware HDC as to installments not due on the face of the instrument An installment is not paid and there is an acceleration clause (automatic) Holder is aware Not a HDC An installment is not paid and there is an acceleration clause (automatic) Holder is not aware HDC as to installments not due on the face of the instrument An installment is not paid and there is an optional acceleration clause Holder not aware of the exercise of this option HDC as to installments not due on the face of the instrument An installment is not paid and there is an optional acceleration clause Holder is aware of its exercise Not a HDC What is the test to know whether or not he is a HIDC? o A holder must be aware that something is wrong, but chose not to investigate further as to not be a HDC. o Check: was it honest for him to take the instrument under these circumstances? 21 X issued a crossed check to Y, in order to buy a car from Z. However, Y took the check and paid it to ABC hospital, and the value of the check was greater than his bill to ABC hospital (which gave change). X stopped payment. ABC sued X. X launched defense of failure of consideration. Issue: is ABC a HIDC? o No. Since the check was crossed, it can only be deposited. ABC should have inquired as to the title of Y, but it did not. o If the checks are crossed, the taker must inquire as to the nature of the indorsers title X paid Y a check, drawn against ABC bank. Y altered the amounts. Y deposited it in DEF (her bank). Y told DEF not to present the check for payment right away, even if it was already due, and to let Y to draw the amount anyway. The alteration was discovered. ABC refused to pay. DEF sued to recover. Is DEF a HDC? o No. The circumstances show that the check was already due but Y asked DEF not to present it for payment yet. And DEF allowed Y to withdraw even if the check has not been cleared yet. The claimant received a check that was not indorsed to it by the payee, and the check had a notice of prior dishonor due to DAIF (drawn against insufficient funds). o HELD: Claimant is not a HIDC. In two cases, there was lack or failure of consideration between the maker/drawer and payee of the NI. In one case, it was merely issued as security, and in the other, the car delivered had the wrong chassis number. But in both cases, the payee already indorsed the check to another person. o HELD: Those persons are HIDCs and the defense of failure/lack of consideration does not vest. May a payee be a HIDC? o Yes, because the law simply provides holder. A payee is a holder, too. What about negotiation of an instrument payable on demand after an unreasonable length of time? o Holder is not a HIDC. o Consider the nature of the instrument, customs, and particular facts What about a transferee who receives notice of infirmity before he has paid the full amount agreed upon as consideration for the instrument? o He is a HIDC only to the extent of the amount paid by him. o Ex. X issued a post-dated check to Y with value of P100K, and X told Y to just pay him P80K right away because X could not wait for the maturity of the check. Y has only paid P40K so far. Then Y found out that the check was issued for a fake ring. The check was presented but it was dishonored. Y sued Z, the drawer. Can he collect? HELD: Yes, but only to P50K, since that is half the value of the check, and Y only paid half of the agreed consideration. He is a HIDC only to the extent of half the check. What are the rights of a HIDC? o 1. Sue in own name and receive payment o 2. Free from personal defenses o 3. May enforce payment against all parties liable thereon 22 o Exception: when he cannot recover full payment 37 restrictive indorsement [GT: I dont know why.] Maybe JJ meant qualified indorsement under 38? 54 notice before full amount is paid 124 when materially altered, a HDC may still enforce against the maker/drawee according to the original tenor of the instrument General rule: the instrument is avoided as to those not party to the alteration or did not indorse it o But not everyone can invoke real defenses against a HDC. For instance, an indorser warrants an instrument is genuine in all respects it purports to be. Also, an acceptor warrants the authority of the drawer to pay. Personal defenses Real defenses Theres a contract with some inequitable or iniquitous fact behind it No contract because an element is missing; or void against public policy Voidable contract Void contract Ex: no consideration, undelivered complete instrument, acquired by force/illegal means, illegal consideration, negotiation in breach of faith, mistake, ultra vires act of corporation Ex; material alteration (so the consent is not anymore to this instrument); undelivered incomplete instrument (no consent); forgery (no consent); minority (lack of capacity) Not applicable to HDC Applicable to HDC Personal defenses are available against a non-HDC. This does not mean the non-HDC cannot collect. It just means that personal defenses may be raised against him. (58b) IMPT. Shelter Principle (GT) o What it simply says is that a holder who (1) derives title from a HDC (2 ) and is not a party to the illegality or fraud has the same rights as the HDC as to the prior parties to the indorser, even if he is not. o Ex. A was induced by B through fraud to issue a PN to B or order. B C, who was NOT aware of the fraud (HDC). C D who was aware of the fraud but not a party to it. What is the effect? D is a holder in due course as to the parties prior to the indorser (A and B) What if D indorses it to E, who is not an HDC? Since E derives title from D, who is not an HDC, E does not have the rights of an HDC. o There can be no curing. So D cant indorse the instrument to F, an HDC, and have it re-indorsed back to him to cure his title. He resumes his position as not a HDC. PRESUMPTION: o General rule every holder is a HDC o Exception if it is shown that the title of the negotiator is defective, then the holder has to prove that either the holder or the negotiator is a HDC o Exception to the exception the exception does not apply to a party that has become bound to the instrument prior to the acquisition of defective title Ex. A B C D E. D swindled C, then indorsed to E. When E runs after A, he is not required to prove that he is a HDC because A was bound 23 to the instrument before the defective title occurred. Fossum: o X issued a check to Y, but there was failure of consideration. Y negotiated to Z, who was not a HIDC (he was aware of the failure of consideration between X and Y). Z sued X to collect. X refused and raised personal defense of lack of consideration. What is the implication? The burden of proof shifts upon Z to prove that either Z or Y is a HIDC. In this case, it failed to do so. In this case, Z loses the presumption of being HDC because Ys title, as negotiating party, is defective. Y has no benefit of the presumption because it is not a holder anymore. Liabilities of parties Obligations Warranties Maker Pay according to tenor 1. Existence of payee 2. Capacity of payee to indorse Drawer If dishonored, and process of dishonor completed: 1. He will pay the amount to holder, 2. Or to a subsequent indorser who pays for it <But drawer may express stipulation limiting his liability> 1. Existence of payee 2. Capacity of payee to indorse 3. On due presentment, it will be accepted/paid according to its tenor Acceptor Pay according to tenor of acceptance 1. Existence of drawer, 2. Genuineness of drawers signature 3. Drawers capacity and authority to draw 4. Existence of payee and capacity to indorse Qualified indorser or indorser by delivery 1. Instrument is genuine and is what it purports to be 2. He has good title 3. All prior parties had capacity to contract 4. Has no knowledge of any fact that would impair the instrument <IF BY DELIVERY warranties only extend to immediate transferee> General indorser Either: 1. Upon due presentment he will accept/pay according to tenor 2. Or if dishonored, he will pay the amount to the holder, or to a subsequent indorser compelled to pay it 1. Instrument is genuine and is what it purports to be 2. He has good title 3. All prior parties had capacity to contract 4. The instrument is valid and subsisting at the time of his indorsement Liability of Maker: o X issued a PN to Y. Y collected, by X failed to pay. He lodged the defense that he used the money to pay for his sick daughters expenses, and his daughter is a beneficiary of a trust administered by Y. HELD: X must pay. He made an unconditional promise to pay. What he did with the money is none of the courts business. Liability of drawer: o What is the nature of the drawers liability? 24 Merely secondary liable only if the instrument is dishonored. He can put without recourse to limit his liability. o D issued a check to P, drawn against BPI. P presented for payment, and BPI debited Ds account. However, P was unable to receive the money because BPI withheld payment, pending investigation of some anomalies. P ran after D. HELD: D must pay, even if his account has already been debited. He warranted that P will be paid, and if not, he will make good the check. Liability of acceptor: o X issued a check for P4000 to Y. Y indorsed it to Z. Z altered the amount to P40000, and negotiated to H. H presented it for acceptance to E. E accepted it. For how much can the check be enforced against the acceptor? View 1: P40000 because that is the tenor of the acceptance. View 2 (better view): Acceptance is assent to the order of the drawer (132), which is just P4000. He did not consent to P40000, since there must be knowledge. (124) In fact, for a HDC, even if there is alteration, he can enforce payment according to the original tenor o Acceptor admits existence of drawer because without the drawer, the BOE cannot exist. He admits authority of the drawer to draw. o Acceptor admits existence and capacity of payee to indorse, because the instrument is meant to circulate. o N.B. Acceptor does not admit signature of indorser. What is an irregular indorser? o He signs in blank before delivery. He is called such because you would normally expect the payee as the first signature there. But here, the irregular indorsers signature is found there first. o What is his liability? He is actually an accommodation party Must be an additional party (not a regular party signing again will not increase the credit value of the check) o A (X irregular indorser) B C D E: X is liable to B, C, D and E. RULE: liable to all subsequent parties. (If payable to the maker or drawer or bearer, he is liable to all parties subsequent to the maker or drawer) What are the warranties where negotiation is by delivery? o See the list of warranties in the law [see table] o Person negotiating by delivery: only liable to the person to whom he delivered the instrument. Not liable to subsequent parties o Unlike a general indorser, a qualified indorser does not warrant that the instrument will be paid. He is liable only if the maker or acceptor is insolvent and he is aware of that fact (since here, there is a breach of warranty). o N.B. In general, a qualified indorser or one negotiating by delivery DOES NOT ANSWER FOR SOLVENCY. It only warrants the four listed warranties and is liable for breach of such. Examples: 25 Breach of W1 (genuine) : the instrument is forged Breach of W2 (good title) : He stole the NI Breach of W3 (prior parties had capacity to contract) : Prior party is a minor Breach of W4 (no knowledge of fact that would impair the instrument): Knew that M/D was insolvent; or that there was failure of consideration o What is the underlying principle behind this? Same as Statute of Frauds. An undertaking to answer for the debt of another must be in writing to be enforceable. He must be only liable to the person he dealt with What is the liability of a general indorser? o 1. Same as first 3 warranties of qualified indorser o 2. Last warranty he warrants that the instrument is valid and subsisting o If maker is insolvent, even if the indorser was not aware, he is liable. o X deposited (through indorsement) a check with ABC bank, drawn against DEF bank. X was able to withdraw money although not cleared. Eventually, the check bounced. ABC asked for return of money. HELD: X must pay. When he indorsed, he warranted. If for any reason (whatever reason) the drawee does not pay, he is liable. o There is a 45-day holding period if the check deposited is drawn abroad. But RCBC accommodates employees, allowing them to withdraw right away. An employee X, received a check, and deposited. Bank required X to indorse the check as an irregular indorser. She was then allowed to withdraw. Some employee (Y) placed below the indorsement: valid up 75,000 pesos only. The drawee bank dishonored the check, since the indorsement was irregular. RCBC asked X to return the immediately withdrawn money. HELD: RCBC cannot collect. The check was dishonored because of the partial indorsement made by Y. This is why the American bank dishonored. o Signature of indorser was forged. Payee presented the check for payment to the drawee. It was paid. Payee signed at the back. Then the forgery was discovered. Must the payee reimburse drawee? No. It did not indorse the check. The signature is to acknowledge payment, not to indorse. o The law mentions that warranties of general indorser apply only to HDC. Should we follow this? JJ doesnt think so. What if it is indorsed when not required? o He incurs liabilities of an indorser, whether general or qualified What is the presumption? o Indorsers are presumed to be liable in the manner in which they indorsed. But parole evidence however may be accepted to prove otherwise. o Ex. A B C, C can prove that while Bs signature appears first, C indorsed it to him 26 What if the rule for indorsement by agent? o If he fails to disclose that he is just an agent, or fails to disclose his principal, he will be liable as an indorser Click here for longer discussion on presentment, acceptance, and dishonor and some parts not included in the syllabus How to enforce liability (presentment, dishonor) How do you enforce liability to those primarily liable? o 1. No need to do anything to hold a maker liable because he already promised to pay. o 2. A drawee is liable once he accepts the instrument. How do you charge those secondarily liable? o In a PN: 1. Presentment for payment made within required period to the maker (and then dishonored by non- payment) 2. Notice of dishonor is given to the secondarily liable party o In a BOE: 1. Presentment for acceptance to the drawee OR negotiation within reasonable time after it was acquired in the following instances: A. Bill payable after sight or acceptance needed to fix maturity of instrument B. Bill expressly requires acceptance C. Bill is payable elsewhere than residence or place of business of drawee 2. If dishonored by non-acceptance: A. Give notice of dishonor to the indorsers and drawer B. (If foreign bill, protest for dishonor by non- acceptance) 3. If the bill is accepted: A. Presentment for payment to the acceptor o If dishonored by non-payment, give notice of dishonor to those secondarily liable B. (If foreign bill, protest for dishonor by non- payment) When is presentment for payment necessary? o For primary persons never necessary o For secondary persons, generally needed to make presentment except: 1. To drawer who has no right to expect that the drawee or acceptor will pay 2. Indorser where the instrument was made or accepted for his accommodation and he has no reason to expect instrument will be paid if presented 3. Dispensed with under Sec. 82: 27 A) after exercise of reasonable diligence, presentment cannot be made B) drawee is fictitious person C) waiver or presentment 4. Instrument dishonored by non-acceptance What are the requisites for presentment for payment? o 1. Presented by the holder or some person authorized by him o 2. Made at reasonable hour on business day on proper date o 3. At proper place o 4. To person primarily liable, or if absent, to any person found at the place where presentment is made o 5. Person must exhibit the instrument and surrender it X drew a check in 1990. The holder, Y, presented the check to the drawee bank only in 1994. It was dishonored by the bank. Y gave notice of dishonor to X. What is the ruling? o The dishonor was proper because it was presented beyond reasonable time. Reasonable time is relative, depending on circumstances. But for checks, they become stale in 6 months. o X is no longer liable based on the check. But if there is an underlying contract between X and Y, X is still liable contractually just not through that particular check. What is the implication of failure to make proper presentment for payment? Does it discharge the person primarily liable? o It discharges those secondarily liable on the instrument. o It does not discharge the person primarily liable (maker or drawee/acceptor) because its their obligation. But the payee or holder cannot demand interest subsequent to maturity and costs of collection. When is a bill required to be presented for acceptance? o [See enumeration above payable after sight etc., expressly required, payable elsewhere] o Note that a check does not fall under this enumeration When is presentment for acceptance excused or dispensed with? o 1. DELAY EXCUSED for bill payable elsewhere than place of business or residence of drawee and the holder failed to present for acceptance even after reasonable diligence The delay thats excused is the delay in presenting it for payment due to the delay in presentment for acceptance o 2. Drawee is dead, has absconded, is fictitious, or has no capacity to contract o 3. Presentment cannot be made even after exercise of reasonable diligence o 4. Although presentment has been irregular, acceptance refused on some other ground Requisites for valid acceptance? o 1. In writing o 2. Signed by the drawee o 3. Drawee must assent to the promise to pay a sum certain in money and not any other means 28 o What is proof of acceptance? It must be written on the instrument itself If there is acceptance and the holder requests that it be written on the bill, but the drawee refuses treat it as dishonored by non-acceptance o What if it is written on another paper? It only binds the acceptor to persons to whom it is shown to and on faith thereof, accepted the bill for value o What is the rule on future bills? If there is an unconditional promise in writing to accept a bill before it is drawn, and a person on faith thereof took a bill for value When is a bill deemed accepted? o 1. Bill delivered to the drawee and he destroys the same o 2. Bill delivered to the drawee but he refuses within 24 hours or within other period allowed by the holder to return the bill What are the kinds of acceptance? o 1. Conditional payment dependent on a condition o 2. Partial only for part of the amount o 3. Local only on a particular place o 4. Qualified as to time o 5. Acceptance of some of the drawees but not all What is the rule on qualified acceptances? o The holder has a right to refuse a qualified acceptance and deem it as dishonor by non-acceptance. o If he accepts qualified acceptance, the drawer and indorsers are discharged from liability on the bill. Unless they assent to the qualified acceptance They must express dissent to the holder within reasonable time from receipt of notice of the qualified acceptance Who should give notice of dishonor? o 1. The holder o 2. His agent or representative o 3. Any party who may be compelled to pay (e.g. indorsers) o 4. Agent of #3 Who benefits from the notice? o If given by the holder, benefits all subsequent holders and all prior parties who have a right of recourse against the party to whom it was given Ex. M P or order A B C D (holder). M dishonors: D may notify C since C may be compelled to pay D. C may then notify any person who may be liable to him (P, A, or B). And so on. If D notified B straight up, C benefits because he need not notify B. 29 o If given by indorser who may be compelled to pay, it benefits the holder and all parties subsequent to the party to whom notice was given Same example: If D notified C, and C notified P, then D benefits through the notice of C, an indorser. It also benefits A and B. What is the effect of valid notice of dishonor? o Immediate right of recourse against the secondarily liable party arises. He becomes primarily liable. How must notice be given? o Parties reside in same place: 1. If at place of business, given before close of business hours the next day 2. If at residence, given before usual hours of rest the next day 3. If sent by mail, deposited in post office in time to reach him in usual course the next day o Parties reside in different places 1. If sent by mail, deposited in post office in time to go by mail the day follow day of dishonor. If there is no mail then, on the next mail thereafter 2. If given through other means, within time that it would be received in due course of mail in the same time frame as above When is notice of dishonor not required in general? o In general: when after exercise of reasonable diligence, it cannot be given or it does not reach the parties When is notice of DH not needed to be given to drawer? o 1. Drawer and drawee are the same person o 2. Drawee is fictitious person or has no capacity to contract o 3. Drawer is the person to whom instrument was presented for payment Ex. C went to the office of X, the drawee, but he was not there. But R, the drawer, who was the office manager, was there. And the drawer dishonored. o 4. Drawer has no right to expect that drawee or acceptor will honor Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry. The check was in the hands of Y who had ABC investment house rediscount it. The check bounced. HELD: X had no right to expect the bank will pay because she withdrew all her funds. o 5. Drawer countermanded payment Meaning, drawer stopped payment. o N.B. In all these cases, the drawer KNEW that there was or would be dishonor. When is notice of DH not needed to be given to indorser? o 1. Drawee is fictitious person or has no capacity to contract and the indorser is aware of this fact upon indorsement 30 o 2. Indorser is the person to whom presentment for payment was made o 3. Instrument was made or accepted for his accommodation Drawer Indorser Drawer and drawee same person Drawee fictitious or no capacity Drawee is fictitious or no capacity, and indorser knows Drawer is to whom instrument was presented for payment Indorser is to whom instrument was presented for payment Drawer has no right to expect it will be paid by drawee Made or accepted for indorsers accommodation (same principle: no right to expect it will be paid) Drawer countermanded When can there be waiver of notice of dishonor? o 1. Before actual time for giving it comes o 2. Or after failure to give it o Can waiver be implied? Yes. o Who is affected by a waiver in an instrument? If written on the instrument all the parties If written over a signature just that person o Waiver of protest Includes presentment and notice of dishonor (steps to hold a person secondarily liable) Failure to give notice of dishonor by non-acceptance does not prejudice rights of a HIDC subsequent to the omission. o Ex. A drew a BOE payable to B. B indorsed to C. C presented the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B. C indorsed the instrument to D, a HIDC. D will not be precluded by Cs failure to give notice of DH to A and B. Discharge How is a negotiable instrument discharged? o 1. Payment in due course by holder o 2. Payment in due course by accommodated party o 3. Intentional cancellation by holder o 4. Any other act that discharges simple contract for money o 5. Principal debtor becomes holder of instrument in his own right How those secondarily liable are discharged: o 1. Discharge of instrument o 2. Intentional cancellation of his signature by the holder o 3. Discharge of a prior party o 4. Valid tender of payment by prior party o 5. Release of principal debtor, unless holders right of recourse against secondarily liable party is expressly reserved o 6. By extension of time of payment or right to enforce instrument Except if secondarily liable party assents Or right to recourse is expressly reserved What is the effect of an absolute and unconditional renunciation? 31 o A holder renouncing against prior parties terminates recourse to that party o If against primarily liable person discharges the instrument o But it does not affect subsequent HIDC . So if C renounces all claims against A and B, then negotiates it to D, who is a HIDC, D is not prejudiced by the prior renunciation. What is the form of renunciation? o It must be absolute and unconditional o If it is merely oral and the instrument is not surrendered, the renunciation is not effective. o It is not effective if unintentional or by mistake OTHER methods of discharge: o 48 striking out indorsements (relieves that person and all those subsequent to him) o 89 those secondarily liable to whom notice was not given o 122 renunciation by holder o 142 qualified acceptance by drawee discharges those secondarily liable Unless they assent to it. Failure to dissent within reasonable time is an assent o 186 stale check o 188 holder of a check procures it to be accepted or certified Material Alteration What is the effect of a material alteration? o Discharges all parties not party to the alteration o Binds the one who made the alteration, those who assented, and subsequent indorsers What is the right of a HIDC? o If he is not party to the alteration, he may enforce it according to the instruments original tenor What is a material alteration? o 1. Date goes into the obligation o 2. Sum payable, principal or interest into amount o 3. Time or place of payment into enforcement o 4. Number or relations of parties into obligation o 5. Medium or currency of payment into amount A issued a PN to B for 4K. B indorsed to C. C changed the amount to 40K and indorsed to D. D indorsed to E. E is a HIDC. What is Es right? o Enforce the instrument for 4K against A or B o Enforce the instrument for 40K against C (made the alteration) or D (indorsed and warranted) BOE Can a BOE be addressed to more than one drawee? o Depends. If joint drawees, yes. o If alternative or successive, no. When can a BOE be considered a PN? 32 o 1. Drawer and drawee are the same person o 2. Drawee is fictitious person or has no capacity to contract o But can the holder treat it as a BOE still? Yes. Promissory notes and checks What is the nature of a check? o Special kind of BOE. o No need to present for acceptance you can present them for payment immediately o Rules on BOE apply to checks too, such as the 24 hour acceptance rule. If you dont return it in 24 hours, it is deemed accepted What are cashiers and managers checks? o Drawer and drawee is the same What are memorandum checks? o Its just usually used as evidence of credit, by a drawer who received goods. He usually redeems it for cash What is a travelers check? o You sign it twice (first as a specimen signature, and second when paying. You present your passport too) Crossing a check has three consequences: o 1. Can be negotiated only once o 2. Cannot be encashed; must be deposited General can be deposited in any bank Special must be deposited only in that bank o 3. To be a HIDC, the holder must inquire as to what purpose the check was issued for o But is it still negotiable? Yes, it is still negotiable. o What if you try to encash a crossed check? It will be denied. You cannot run after the drawer because there is no proper presentment for payment Payee of a check presented a check in the morning; the bank said the drawer had insufficient funds. Presented again in the afternoon, but the computers are offline, so the bank accepted it. Bank found out after and chased after the payee to recover. o HELD: By accepting, the bank admitted authority of drawer to draw. Customer bought a managers check and asked that his account be debited to purchase it. The bank realized that it made a mistake because the account was actually closed. The customer already used the check to buy goods. o HELD: It was a managers check so the store owner was a HIDC. Certified checks: o Banks usually do not do this anymore Check must be presented for payment within reasonable amount of time o Banking practice: 6 months, or else stale 33 o What happens when the check goes stale? View one (2 cases): the obligation is discharged. Payment of an obligation with an NI the obligation is discharged when there is encashment or the value is impaired due to the fault of the holder. View two: the obligation remains because the drawers bank account was not prejudiced. And there was no loss caused by the delay. This will only happen if the bank becomes insolvent, that if the payee didnt dilly- dally, he would have received money. Sito: When the payee delays in presenting a check for payment, the indorsers are discharged, because they have an interest to discharge their potential secondary liability. Unreasonable delay will discharge them. o So contrast the rules: the drawer will not be discharged; the indorsers will be discharged MERCANTILE INSTRUMENTS Letters of credit What is a Letter of Credit (LOC)? o An instrument issued by banks on behalf of a customer authorizing a beneficiary to draw a draft/drafts which will be honored upon presentation to the bank o Must be drawn in accordance with the terms and conditions specified in the letter of credit o Purpose : to ensure certainty of payment Illustrate the nature of a LOC: o ABC Company wants to buy chemicals from Dupont. But Dupont has no assurance that when it ships chemicals, it will be paid. So ABC gets a letter of credit (LOC) with PBC. PBC then corresponds with a bank in the US (ex. Citibank) PBC will transmit to Citibank the text of the LOC, through SWIFT. Dupont then finds out that when it delivers the chemicals, the bank will pay him. Since the bank is more trustworthy, Dupont is now willing to sell the materials. o Dupont ships the chemicals to PBC. So when the bill of lading arrives, PBC will tell ABC Company that the goods arrived. PBC tells ABC Company that it will release the goods if there is a trust receipt arrangement between them. So the proceeds of the goods can be used to pay PBC if ABC does not pay. o Dupont will not collect directly from PBC. Dupont will issue a BOE addressed to PBC, to pay Dupont. Dupont then submits the bill of lading, delivery receipt, etc. to PBC as proof of delivery so that Dupont will be paid. What is the nature of a LOC? o A contract between the customer who applied for it and the bank, with a stipulation in favor of a third person o An LOC is a primary, absolute, and unconditional obligation. It cannot be affected by defects in the underlying obligation Philamlife: X took a loan from ABC. ABC required X to open a standby LOC from Z bank. Z bank issued the LOC, payable when ABC shows documents proving that X defaulted on the loan. ABC gave this document. Z bank, however, refused to pay the whole amount stating that X informed it that X had already made some payments, so these have to be deducted. HELD: Cannot do this! The LOC is a primary, 34 absolute, and unconditional obligation. It is not an accessory obligation, so the defect in the underlying contract cannot affect it. If there really was overpayment, X just has to run after ABC. o Purposes: 1. Safe mode of importing goods 2. Reduce risk of nonpayment 3. Substitute for and support the agreement of purchase (although not necessary to perfect it) Types of LOC? o 1. Commercial LOC issued as payment pursuant to contract of sale The seller will be paid if the seller gives proof that he complied with obligation to deliver o 2. Stand-by LOC Secondary payment mechanism, where a seller is paid upon certification of a partys non-performance of an agreement Show proof that the applicant has not performed his contract o 3. Confirmed LOC Beneficiary stipulates that the obligation of the issuing bank should also be the obligation of another bank to himself (usually the notifying bank) o 4. Back-to-back LOC Credit with identical documentary requirements and covering the same merchandise as another LOC except for a difference in the price of the merchandise as shown by the invoice and the draft The second LOC can be negotiated only after the first is negotiated When is it considered a consummated contract? o When the bank pays the creditor (seller-exporter), and not when the debtor-buyer pays the bank because the bank can give an extension of payment to the debtor. What is the governing law? o 1. Governed now by UCP 600 (Uniform Customs and Practice for Documentary Credits). This is revised every 10 years or so. The observance of UCP is justified by Art. 2 of the Code of Commerce, which provides that in the absence of a particular provision in the COC, commercial transactions are governed by usages and customs. o 2. Code of Commerce, Art. 568: LOC must be issued in favor of a definite person and not to order Limited to fixed or specific amount or to an undetermined amount but with maximum limit stated exactly Who are the parties to a letter of credit (essential) and their obligations? o 1. Buyer (applicant) 35 procures LOC obliges to reimburse the bank upon receipt of documents title o 2. Issuing bank undertakes to pay seller upon receipt of draft and proper documents needed and to surrender the documents to the buyer upon reimbursement Obligation is solidary with the buyer. It is a primary obligation (unlike a guaranty, which requires default by the obligor) o 3. Seller (beneficiary) ships goods to the buyer delivers documents of title and draft to the issuing bank to recover payment o Who are the optional parties? 1. Advising (notifying) bank May be utilized to convey to the seller the existence of the credit BUT does not assure that the issuing bank will pay and may refuse to accept the drafts without being liable 2. Confirming bank Lends credence to the LOC issued by a lesser known issuing bank Is directly liable to pay the seller-beneficiary 3. Paying bank Undertakes to encash drafts drawn by the seller-exporter 4. Negotiating bank Instead of going to the place of the issuing bank to claim payment, the buyer may approach another bank to have the draft discounted There are 3 underlying contracts in a LOC: o 1. Application of customer for LOC where customer-buyer undertakes that he will reimburse the bank when it pays the draft, and also pays for bank charges o 2. LOC bank tells beneficiary-seller that if it draws the draft, it will pay him after submitting documents o 3. Underlying contract of sale between buyer and seller Independence principle (always asked in Bar) o Basic principle: cannot invoke defect in one of the other 3 contracts to avoid compliance with obligation o A bank which issued a LOC is obliged to pay the draft so long as the beneficiary submits the documents required by the LOC, without verifying if he actually complied with the obligation in the underlying contract 36 o Banks deal with documents only! They do not deal with goods nor are they required to examine them. Ex. Seller-beneficiary submitted the documents required, so the bank must pay, even if the goods delivered turned out to be fake. o PBC v. Chua Tiep Seng: The bank does not guarantee the genuineness of the documents submitted to it. All that is required is the bank act in good faith. o There was a case (Feati Bank) where somebody shipped timber to someone abroad. There was an agreement that payment is by LOC. Among the documents is a certification of the buyer that the goods delivered were the proper goods. The buyer collected the goods but refused to send the certification! HELD: The LOC requires buyers certification, so the bank need not pay. (This is a stupid move by the seller, because he is at the mercy of the buyer.) o A seller can commit fraud by submitting forged or false documents. To combat this, the buyer may require a surveyors certificate to examine the goods. But the seller may always give a fake one if he really wanted to defraud the buyer. Interpretation of Letters of Credit MUST BE STRICT (Rule of Strict Compliance) o 1. Particular genus If the LOC requires that the seller submit an invoice for pine lumber, but the invoice states pine timber, the bank may refuse to pay o 2. Quality specifications If the LOC requires Italian marble and the document just says marble, the bank may refuse to pay o 3. Misspellings If the LOC requires noodles but the document says woodles the Bank may refuse to pay who knows what a woodle is or could be. When the bank discovers a discrepancy, what does it do? o It forwards the documents to the buyer and notifies the latter of discrepancies it discovered. If the buyer agrees to waive the discrepancy, then the bank pays. If the buyer does not waive, the bank does not pay. o Cojack: Buyer is a con artist, so it ordered 3M worth of bags from Cojac company. It opened a letter of credit, and the condition is that an invoice from Cojack be submitted. Cojac submitted an invoice, of course, without the misspelled K. The bank asked the buyer if he waives the discrepancy; the buyer refused. The bank did not pay. Later, the buyer just paid 1M to Cojac. Red clause o A clause, usually written in red ink, where the beneficiary/seller may get payment in advance, meaning, even if the beneficiary/seller has not yet delivered the goods to the buyer. This is usually because the beneficiary will purchase goods from a third party producer that does not accept anything but cash (hunters, lumberjacks, etc.). If the beneficiary does not deliver the goods, too bad. The buyer still bears the risk. Evergreen clause o A provision that allows an expiring LOC to be automatically extended for indefinite number of periods until the issuing bank informs the beneficiary of its termination. o Ex. A foreign company not doing business here sues and asks for a provisional remedy. The court requires a bond, so the company obtains one from a surety firm. The surety firm requires that the company open a stand-by LOC with a bank, 37 which will pay the surety firm if the company is held liable. This LOC will most likely contain an evergreen clause, to keep renewing it until the case is over. May the seller in the Feati bank case (where the buyer refused to issue a certification so the seller was not paid) sue the correspondent bank when it failed or advance funds? o No. The correspondent bank cannot be sued unless it confirmed the letter of credit. It becomes solidarily liable. Revocable, irrevocable o Revocable: no need to notify the beneficiary, can be done anytime o Usually its irrevocable, for certainty of payment Revolving letter of credit o Automatically replenishes, whether per month, when the amount is finished, or it can be cumulative, etc. Bank lien over applicants property o Usual stipulation in a LOC if the applicant has a deposit there, too. o CASE: The depositor/applicant owed the bank for a LOC, but he also assigned the certificate of time deposit to a third party, who has the better right? o HELD: The bank. It had a lien on the deposit. FRAUD EXCEPTION: when can there be enjoinment of payment in a stand-by LOC? o 1) Proof of fraud is strong, 2) fraud must involve abuse of independence principle, 3) irreparable injury (Transfield) o Distinguish between out and out fraud vis--vis failure to meet specifications: In a landmark case by the CA of New York, instead of the seller delivering goods, he delivered rubbish. The court allowed the buyer to have a preliminary injunction to stop payment be issued because this involves out- and-out fraud. However, if there is mere failure to meet specifications, you cannot enjoin payment Metro v. Daway: Case for corporate rehabilitation does not suspend payment from a stand-by LOC. It is a solidary obligation, there is no need to exhaust the resources of the applicant corporation that applied for the stand-by LOC. Trust receipts What is a Trust receipt transaction (TRT)? o The entruster (bank), who has absolute title over the goods, releases these to the entrustee o The entrustee (buyer) executes and delivers a trust receipt, where: 1. He holds the goods in trust for the entruster 2. Sell or otherwise dispose of the goods 3. Turn over to the bank/entruster the proceeds of the sale to the extent he is indebted 4. Or turn over the goods to the bank, in case unsold Note: if the entrustee returns the goods, he does not incur any further liability. The entruster/bank then sells the goods 38 What is the nature of the entrusters title? o The entruster has a security interest. By fiction of law, ownership is with the entruster-bank, until it has been paid or the proceeds of sale turned over to him. o But since it is a mere security interest, the entruster is not responsible as principal in the contracts entered into by the entrustee. The entrustee bears the losses (ex. if the imported goods burn or are stolen). o Since the entrustee is not the owner of the goods he cannot mortgage them yet. Or, at least, he has no free disposal of them yet. Allied Banking: X imported goods, and opened a LOC with ABC bank. When the equipment arrived, X took the goods from ABC and issued a trust receipt in ABCs favor. X installed the goods in his factory. X failed to pay. ABC sued X for violation of PD 115. X claimed the goods were not covered because he did not sell nor manufacture/process them. HELD: The goods were covered. It says sell or otherwise dispose. Otherwise dispose covers the installed goods. o Otherwise dispose can cover giving goods to a sister company For estafa, there has to be misappropriation o Meralco/steel towers case: X fabricated steel towers (hired by Meralco). X imported materials, which X received and gave a trust receipt to ABC bank for. X used the materials to build the steel towers. But Meralco hasnt paid X yet, so X couldnt pay ABC bank. ABC sued X for estafa. HELD: No estafa, no misappropriation. o Another case: X could not sell the goods covered by the TR. X tried returning the goods to ABC, but it refused. HELD: X did not commit estafa. Can the trustee execute a Chattel Mortgage over the goods covered by the TR? o No. He does not have free disposition of the property. Can a TR cover a purchase independent from the credit? o No. o Illustrate: X purchased goods. Independent of this purchase, X applied for a credit facility with ABC bank. ABC bank required X to sign a trust receipt for the goods he just purchased. HELD: This is invalid. The bank did not have any lien or title to the goods; they were purchased separately from the credit application. Can TR apply even to domestic transactions? o Yes, TR can apply even in domestic transactions What is the nature of ownership/security interest? o X imported puka shells, covered by a trust receipt with ABC bank. X failed to sell the puka shells. X decided to return the shells and claim he is not liable anymore because X claimed ABC was the real owner of the shells and X just held it in trust. HELD: X is wrong. ABC can still recover the money. A TRT is a security transaction, and the buyer is still really the owner of the goods; it just relies on a legal fiction to create a lien. ABC still has the right to recover the money; or it can sell the goods. o PNB Case: The bank getting back the goods does not terminate the obligation. It just has a lien, and to realize it, the bank must foreclose otherwise, it is pactum comissorium. The bank then returns the excess or runs after the deficiency. Rights and liabilities of parties: 39 o 1. Entruster not liable in any sale or contract entered into by the entrustee. He merely has a security interest. o 2. Entrustee bears risk of loss thus, loss of the goods does not extinguish the obligation o 3. A purchaser for value and in GF of goods covered by TR is free from entrusters security interest o 4. Failure of entrustee to turn over proceeds of the sale constitutes estafa or may be basis of suit for damages o 5. If the parties agree to reschedule debts and impose conditions incompatible with the TR, then there is a novation and no liability under TRL avails. Warehouse Receipts Law What are the three functions of a WHR? o 1. Contract for deposit o 2. Evidence of receipt of goods o 3. Represents the goods and operates as a transferable document that carries with it control over the goods When is a WHR negotiable? o If payable to order or bearer o If payable to order or bearer, can one insert a stipulation that it is non-negotiable? No. The stipulation is void. o This is a key difference between WHR and negotiable instruments: For NIs, a negotiable instrument can be made non- negotiable. For negotiable WHR, it cannot be converted into a non- negotiable WHR. The stipulation is void. o What if an order instrument is only delivered but not indorsed? 1. Transferee acquires right against the transferor 2. There is no direct obligation by the WHM against the transferee 3. The transferee can compel the transferor to complete the negotiation by indorsing the instrument o What is the effect of negotiation? 1. The holder receives title to the goods as the indorser had [NOTE: the holder never obtains better rights than the indorser, unlike under the NIL] and title that the depositor had over the goods X stole goods from Y and deposited with WHM. X negotiated the WHR to Z. WHM found out that the goods were stolen and delivered them to Y. Can Z hold WHM liable? o No. The depositor, X, never had title over the goods, so the transferee Z never acquired title over them either. 2. Direct obligation of the WHM to hold the goods for him 40 o Who can negotiate a WHR? 1. Owner thereof 2. Person to whom possession of the WHR has been entrusted to by the owner, if by the terms of the receipt: 1. The WHM must deliver the goods to the order of the person to whom possession has been entrusted, or 2. If at the time of the entrusting, the receipt is in such form that it may be negotiated by mere delivery Can a thief negotiate a WHR? YES, but the WHR must be in such form that he need not forge any signature. When is it non-negotiable? o Not payable to order or bearer AND there is a large print, usually in red, that it is non-negotiable N.B. so if its order or bearer the WHM cannot insist on putting the red print that its non-negotiable o What is the consequence of not marking it so? If someone relied in GF that it is negotiable and acted upon it, it will be treated as negotiable. What is the rule on duplicate WHR? o Same as non-negotiable if the holder thought in GF that it was the original, he could sue the WHM for damages What is the effect of absence of any of the required provisions to be found on a WHR? o It does not invalidate the WHR. WHRs are liberally construed to better serve their purpose. What is the right of a transferee of a non-negotiable WHR? o 1. Title of the goods subject to the terms of any agreement with the transferor o 2. Right to notify the WHM of the transfer and acquire the direct obligation of the WHM to hold the goods for him o What is implication of failure to notify the WHM of the transfer? Prior to notification, the title of the transferee can be defeated by: a) an attaching or executing creditor of the transferor, or by b) notification by the transferor or another transferee of a second transfer Ex. X deposited 10 crates of goods with WHM. WHM delivered a non-negotiable receipt to X. X transferred the WHR to Y, for value. Meanwhile, C, a creditor of X, obtained a judgment against X for unpaid debt and was levying against the 10 crates of goods. Who has a better right? C, because Y did not obtain title over the goods due to lack of notification to the WHM. If Y had informed WHM of the transfer prior to the levy, then Y would have had a better right. What are the obligations of the WHM? o 1. Safeguard the goods 41 o 2. Deliver the goods To deliver What are the conditions before the WHM delivers the goods? o 1. Holder pays the WHMs liens o 2. If the WHR is negotiable, to surrender the receipt o 3. Readiness and willingness to sign an acknowledgment of receipt of the goods To whom must the WHM deliver the goods to discharge his liability? o 1. Person lawfully entitled to the goods or his agent o 2. Person entitled to delivery under non-negotiable WHR or who has authority from the person entitled to delivery (SPA) o 3. For negotiable WHR, the person in possession o When is there misdelivery or conversion? 1. Delivery to one not in fact lawfully entitled to the goods 2. The holder of a WHR informs the WHM prior to delivery not to make such delivery, but he still did 3. The bailee had information that the delivery he was about to make was to one not lawfully entitled to the possession of the goods, but he still did Rules on refusal to deliver: o 1. WHM cannot refuse to deliver the goods just because of a third party claim But he may submit the situation for interpleader o 2. WHM is excused for failure to deliver if he sold the goods to satisfy an unpaid lien o 3. WHM is excused for selling perishable or hazardous goods What are valid defenses for non-delivery or misdelivery? o 1. Loss or destruction of goods fortuitously o 2. WHM has a right over the goods A. Failure to satisfy the WHMs lien B. legal title over the goods through transfer o 3. Holder of receipt does not comply with requirements Failure to surrender the WHR Failure to satisfy the WHMs lien Failure to show willingness to sign an acknowledgment when the goods are delivered, upon request by the WHM o 4. Right or title of third persons A. Request by person lawfully entitled to goods to WHM not to deliver the goods Can lead to interpleader B. WHM has information that the delivery about to be made was to one not lawfully entitled to possession of the goods WHM ascertains the facts first 42 C. Disposed to third person to satisfy WHMs lien or because the goods are perishable D. Delivery to claimant with better right E. Attachment or levy by creditor where the document is surrendered or its negotiation is enjoined, or document is impounded F. Document of title is attached by creditor What is the effect of alteration? o Unlike in NIL, it does not discharge the WHM. The WHM is liable under the original tenor of the WHR. What is the effect of loss of the receipt? o The claimant has to file a case in court and get a court order telling the WHM to deliver the goods, after proof of loss. He also has to post a bond, in case the WHR falls in the hands of a person who took it in GF and for value. The latter goes against the bond. How does a creditor go about attaching/levying the goods covered by a negotiable WHR? o Ask for enjoinment of indorsement or renegotiation of the receipt have the WHR frozen or surrendered, so it doesnt end up in the hands of someone who takes it for value and in GF. Until this is done, the WHM cannot be compelled to deliver. The WHM in general, as a bailee, cannot claim ownership over the goods. What are the exceptions? o 1. WHR negotiated to him, so takes the goods in his own right o 2. Has unpaid lien, so he foreclosed it and bought the goods during auction What if the WHM delivers the goods without asking for surrender of the WHR? o He is liable for damages to any person who takes the WHR in GF and for value. o What if the WHM makes partial delivery of the goods? He must cancel the WHR and issue a new one reflecting the balance of the goods, or indicate partial delivery on the receipt. Again, failure to do so makes him liable to one who takes the WHR in GF and for value. Can an unpaid seller claim right over the goods over the holder of the receipt who purchased it for value? o No. The vendors lien does not affect the transfer of title to the purchaser for value. o X sold Y 10 sacks of rice on credit. Y deposited the sacks with WHM, who issued a receipt. Y delivered the receipt to Z who purchased it for value and for good faith. Who has a better right over the rice, Z or X who is still unpaid? Z. While X has a vendors lien, it cannot defeat the rights of a purchaser for value of the receipt. The only way for the unpaid seller to get the goods is to validly reacquire to the receipt from Z and surrender the receipt for cancellation. What is the effect of pledge of a receipt? o The pledgee is in the same footing as a vendee for purposes of the WHR law. He is thus also preferred. o Except of course, once the underlying obligation is paid, the pledgee has to return the WHR to the pledgor. 43 o X sold Y 10 sacks of rice by quedan, on credit. Y loaned money from ABC bank and to secure his indebtedness, Y delivered the quedan to ABC bank. Y died. Who has the better right, ABC bank (pledgee) or X (unpaid seller)? Same principle as above ABC bank wins. Even as a pledgee, it has the same preference as a purchaser. Xs recourse is run after Ys estate. What are the warranties of the transferor? o NOTE: MOST IMPORTANTLY the indorser or one who negotiates for value is not a guarantor. He is not liable to the bona fide purchaser if the WHM fails to deliver the goods. He does not guarantee to performance of the WHM of his duty. o 1. The receipt is genuine o 2. He has a legal right to negotiate or transfer it o 3. He has no knowledge of any fact which would impair the validity or worth of the receipt o 4. He has a right to transfer title to the goods and that the goods are merchantable or fit for a particular purpose What is the rule on attachment or levy of the goods covered by a negotiable receipt? o There can be no attachment or levy of the goods unless the receipt is first surrendered to the WHM or its negotiation is enjoined o What can the creditor do? 1. Have the courts attach the receipt 2. Compel the holder to deliver the receipt to him by injunction or otherwise o What if the receipt is non-negotiable? Remember the discussion above about whether the transferee was able to notify the WHM first before the creditor could attach or levy. To safeguard If the goods are lost, he is presumed to be at fault But not for fortuitous events What is the duty in keeping goods? o He must segregate the goods belonging to different depositors o But he is allowed to commingle if: It is stipulated It is customary to do so What are the rules on commingled goods? o Each depositor gets a pro rata portion of the common mass upon claim o What happens if there is partial loss? The depositors also share in the loss proportionately Key distinctions between NI and Negotiable WHR: Negotiable Instrument Negotiable WHR When deliberately altered, becomes void When altered, still valid, but it may be enforced only according to the original tenor If payable to bearer, always remain so payable regardless of the way it was endorsed, whether specially or in blank If payable to bearer and it is endorsed specially, it will be converted in a receipt deliverable to order 44 HDC may obtain a title better than the negotiating party Endorsee, even if he is a HDC, obtains only such title as the person negotiating had over the goods WHMs lien What are included in the WHMs lien? o 1. All lawful charges for storage and preservation o 2. All lawful claims for money advanced, interest, insurance, transportation, labor, weighing, coopering, and other charges in relation to the goods o 3. Reasonable charges and expenses for notice, advertisements, and for sale of goods (to satisfy WHM lien) What is the rule on notice? o The charges present at the time of issue of the WHR must be stated or else there is no lien. He will only have a lien on charges occurring after the WHR was issued. What are the properties subject to the lien? o 1. All goods deposited belonging to the person liable for the claims o 2. All goods belonging to others which have been deposited by the person who is liable for the claims if the person has been entrusted with possession of the goods, such that a pledge by him of the goods at the time of deposit would have been valid When is the lien lost? o 1. Surrendering possession of the goods But can he claim a lien over other goods deposited to him but under different bailments? No. His lien only pertains to that one and the same bailment, which was lost upon surrender. o 2. Refusing to deliver the goods when he should have complied How is the lien enforced? o 1. Valid refusal to deliver the goods until the lien is satisfied o 2. Causing EJ sale of the property and applying the proceeds to the value of the lien o 3. Filing civil action for collection of claims INSURANCE In general Elements: o 1. Insured possesses interest susceptible of pecuniary estimation o 2. Insured is subject to risk of loss o 3. As consideration, the insured pays premium Someone organized a jeepney association. They give membership fees and if a driver gets into an accident, the association pays indemnity. Sued by Insurance Commission for not having license to do Insurance Business. o Held: Was conducting insurance business without license. All requisites concurred. 45 o Contra Maxicare: Even if all elements are present, but if primary purpose of contract is to provide services, then it is not an insurance contract. In Maxicare there is no insurance contract because physicians pay for the first six sessions of therapy after injury or loss, but the main purpose is to give medical services. But here, even if you did not get injured or sick, you can avail of medical checkup. What are the characteristics of an insurance contract? o 1. Aleatory If you dont lose what was insured, there is no indemnity. o 2. Personal It does not adhere to the property insured because the personality of both parties is crucial and is the primary consideration for the contract. Ex. teenagers will be charged higher insurance over cars. The buyer of a car, for instance, will only be insured if the insurance company allows for an endorsement of the sellers insurance contract. o 3. Unilateral It is only the insurer that has an obligation to perform (the insured already paid). o 4. Conditional Can you insure against losing the lottery? o No, this is wagering. Parties Who can be the insurer? o One authorized by the Insurance Commission Who can be insured? o Anyone except a public enemy (citizen of a country with which the Philippines is at war with) o Wenfeld: German company filed claim with Insurance Company, and the Philippines was under US at that time. The Germany and USA were at war (WWII) so the company cannot collect. What is the standing of mortgagors to sue on an insurance contract and what is the effect of his acts? o 1. The mortgagor can sue the insurance company if it does not pay. o 2. If the mortgagor performs an act that prejudices, the mortgagee cannot collect. Ex. The Mortgagor brought fireworks to the building and it exploded. The mortgagee cannot collect. o 3. The mortgagor can have the mortgagee perform acts that benefit the contract Insurable interest When is there insurable interest over life? o 1. Own life, spouse and children Children even if emancipated Spouse need valid and existing marriage 46 o 2. Based on support or pecuniary interest Ex. a key basketball player you signed for your team; a concert impresario in an opera you organized o 3. Based on legal obligation, whose death might delay or prevent performance o 4. Any person upon whose life any estate or interest vested in him depends Ex. X is allowed to stay in the family home of his parents as usufruct. They have interest to continue the life of their parents o Note: for the first, mere relationship is enough. For 2-4, there must be pecuniary interest. So the interest of the creditor over the debtors life ceases upon full payment. So mere friendship does not fall under any of the categories. When is there insurable interest over property? o 1. Existing interest o 2. Inchoate interest on an existing interest Ex. stocks, which is based on subscription contract o 3. Expectancy coupled with existing interest o N.B. MAIN DIFFERENCE: there must be a valid pecuniary interest What is the value of insurable interest over property? o The insurance cannot go beyond the value of the property o Whereas in life, you cannot put value over life of a person EXCEPT: if there is a way to place pecuniary value in the life of the person. Who can be the beneficiary in life insurance? o 1. If over own life, he can designate anybody, even if the latter has no insurable interest. But: you cannot name one to whom you are prohibited to make donations to Ex. co-guilty party of adultery/concubinage o 2. If you are the beneficiary, you need to have insurable interest over the life of the insured X took an insurance policy over his own life for 1M and named his friend Y as beneficiary. X died, and his debt to Y is worth 50k. The executor of Xs estate claims only 50k must go to Y and the 950k must go to Xs estate. Correct? o No. Since the insured took a policy out of his own life, he is free to name anyone as beneficiary. o The rule would be different if Y took an insurance out of Xs life the insurable interest is only P50k. Can the insured change the beneficiary? o Yes, unless it was made irrevocable in the policy. o If the beneficiary is irrevocable, can it still be changed? Yes. But if irrevocable, can only change beneficiary with the latters consent. 47 Ex. A father made his child an irrevocable beneficiary of an insurance contract. If the father wanted to revoke, the child must consent. What is the rule for beneficiaries in life insurance? o 1. The beneficiary/assignee must have insurable interest o 2. If the policy is going to be assigned, the insurer must consent o Contra: Assignment of a life insurance policy The assignee need not have insurable interest When does the beneficiary forfeit? o If he causes the insureds death. Except: When the killing is lawful (ex. self-defense, the beneficiary is the executioner in death penalty) o What is the effect of unlawful killing? Benefits go to the estate of the insured Various situations re: insurable interest over property: o 1. Importer has insurable interest in goods he is buying even if undelivered, because he can compel delivery. The seller also has insurable interest because he has legal title. o 2. Contractor has insurable interest over the building he is erecting because under the law, he bears the risk of loss prior to completion. o 3. Mortgagor and Mortgagee both have insurable interest o 4. Lessor and lessee both have insurable interest o 5. Mere possessor. Ex. X Colleges was allowed to use a building by the owner, as a school. It insured the building. It caught fire. HELD: There was insurable interest. o 6. Partners, over the property of a partnership o 7. Carrier, over goods it is transporting since he will be liable o 8. WH man, over goods for safekeeping since he will be liable What is the nature of a mere contingent interest over something? o Not insurable. o Ex. Creditor with no collateral over properties of buyer o Ex. Expectant heir o Ex. Fictitious contract of sale (completely simulated) Can smuggled property be insured? o No against public policy When must insurable interest exist in life insurance? o In life, need only exist when the policy takes effect o Ex. X insured his wifes life. They annulled their marriage. But the wife failed to revoke the insurance. X can collect. When must interest exist in property insurance? o When the policy takes effect and when loss occurs o Need not exist in the meantime 48 Ex. Owned a car, insured, then sold it. Then repurchased, and then loss in fire. o A person mortgaged his building. The property had been sold in foreclosure. Then it was lost by fire. He had no more right to redemption. HELD: Lost insurable interest. o What if he still possessed the right of redemption? He still has insurable interest What happens when there is change of interest? o If you sold your car, if the buyer wants insurance, you have to endorse the policy. o Change in interest after the loss does not change indemnity. It is already an accrued liability at this time. It is a chose in action. o Change in interest in one or more listed things: A taxi company insured 20 units. Sold 4 of them. The insurance over 16 is still valid. o Change of interest in will or succession does not avoid insurance. X insured Family Home against fire. X died and children inherited. The house burned. The children can collect. What if the children bought the house from the father when he was still alive? Insurance does not transfer. o For co-owners, partners, etc: X Y and Z co-owned a house. X bought Y and Zs shares and became sole owner. The house burned. Insurance company must pay because X was part of the original insured. But if there is a new person brought into the group, the insurance is avoided. Can one stipulate against insurable interest? o No. Stipulation that there need not be an insurance interest for an insurance contract NULL AND VOID. What is the interest of a mortgagor over property he mortgaged? o The extent of the value of the property o How can the mortgagee be made the beneficial payee in the mortgagors policy? 1. Assign (with insurers consent) or pledge (no need for insurers consent) the insurance K 2. The original policy may have a mortgage clause or there is a rider making the policy payable to the mortgagee as long as he has interest (loss payable clause) 3. Independent contract between mortgagor and mortgagee 4. Acquired by the mortgagor under a contract duty to insure the mortgagees benefit (in which case the mortgagee acquires an equitable lien on proceeds collected by the mortgagor) What is the extent of the mortgagees interest on the property mortgaged to him? o To the extent of the debt secured o The interest exists until the debt is extinguished 49 o N.B. the mortgagee may procure the policy and have the mortgagor pay for the premiums Distinguish: o Standard/union mortgage clause subsequent acts of mortgagor cannot affect the rights of the mortgagee o Open/loss payable mortgage clause acts of the mortgagor can affect the mortgagees rights, because the former is a party to the contract D had a loan of 3M from C. To secure it, D mortgaged his house worth 5M in favor of C. o Who has insurable interest over the house? D 5M (value of house) C 3M (extent of loan) o Will insurance procured by D in his own name and for his own benefit inure to benefit of C? No. Insurance is a personal contract and just like any other contract, it just involves the parties unless there is a stipulation pour autrui (see examples above) But under Art. 2127 of the NCC, the mortagee has an equitable lien on the proceeds of the policy. o C procured insurance. D fully paid C. The house burned down. Can C recover? Can D recover? No and no. C has no more insurable interest. D is not a party to the insurance contract. Concealment What is the nature of concealment? o Failure to communicate what a party knows and ought to communicate o Need not be intentional What is the consequence? o Insurer can rescind Requisites: o 1. Party must have known the fact concealed Ex. he did not know he had cancer o 2. Must be material to the policy Test: Insurer would not have entered into the contract had he known of the fact concealed or the conditions in the K would have been different Concealment in life insurance: Failure to disclose serious ailments Need not disclose very minor sickness/injury A Couple got an insurance policy for their mongoloid baby, but they did not say he was a mongoloid. HELD: concealment There is a law prohibiting insurance companies from refusing to issue insurance to someone with AIDS, as long as he discloses that he has AIDS 50 Is good faith a defense in concealment? No. Whether it is intentional or unintentional, the injured party can rescind. So if X, a laundrywoman, did not disclose that she had stomach cancer because she did not know, there is still concealment. o 3. Party must make no warranty of the fact concealed In this case, if there was a warranty, the violation is not a concealment but a breach of contract o 4. Other party has no means to ascertain the fact concealed If a party discloses that he has been hospitalized and gave the contact # of the hospital, the insurers failure to look into his records there were means to ascertain the fact If the agent commits a concealment, the applicant will be bound by that, the insured made the agent his own agent for the purpose of filling up the application form There are matters the party need not indicate: o 1. Insurer could have known The inspectors went to the place and found that it was near a squatters area. But the company issued a fire insurance policy anyway. A fire broke out. The insurance company cannot use the defense that it was near a squatters area, because it sent inspectors. o 2. Matters of public knowledge/insurer should have known Insured an oil tanker. Cannot use the defense, why did you not disclose that there was a war in Afghanistan. They should have known. o 3. Information of ones own judgment. o 4. Matters which pertain to excluded or exempted risks. Ex. need not disclose that members of NPA are burning houses in their neighborhood if the fire insurance policy exempts rebellion/coup/etc.-related destruction What if the insured dies from another reason apart from the fact concealed? o Insurer still not liable because it wouldnt have issued a policy. Can there be waiver? o Yes. Either express (in the terms of insurance) or implied (as when there is failure to make follow up inquiries as to facts already communicated). Is there need to disclose nature or amount of ones interest? o No. EXCEPT if one is not the absolute owner of the insured property. Representations What is a representation in general? o Statements made to induce the other party to enter into the contract What is a misrepresentation? o 1. Untrue statement 51 o 2. With knowledge and intent to deceive; or stated as true without knowing it to be true and which tends to mislead o 3. Fact is material What is the consequence? o Voidable at option of insurer o But waived for acceptance of premium payments despite knowledge of ground for rescission What are the kinds of representations? o PROMISSORY: Representation as to the future o AFFIRMATIVE: Representation as to a present fact What is the nature of a representation? o Can be written or oral o Representation is not part of the contract. It is a collateral inducement. o But it may qualify as an implied warranty As a rule, parole evidence is not allowed to vary the terms and conditions of the contract. It may qualify an implied warranty. It is imposed by law. When is a representation presumed to refer to? o A representation is presumed to refer to the date on which the policy goes into effect. o If somebody applied to insure his vessel. Ex. voyage from Manila to Cebu. Where is the vessel? It is anchored in Manila Yacht Club. But it is actually in Curimao. However, when the policy takes effect and the vessel is in Manila already, there is no misrepresentation. What if the insured has no personal knowledge of a fact? o He may repeat the information he has on the subject which he believes to be true o Ex. There is a question in life insurance about medical history of the family. If one thinks his father died as a soldier, in action, when he actually died of AIDS, and he says the former. o But if the info came from the insureds agent, and exercise of due diligence was possible, he is liable for the truth of the statement o Ex. There is no misrepresentation because he relied on what the physician told him. Representation is false if facts do not coincide with what was asserted o Test for defense: substantially true in every particular material to the risk o EXCEPT: Marine insurance where what is required is the exact and whole truth o Ex. Have you ever applied for a life insurance policy and the application was rejected? He said no. But before, he had an application denied, but then accepted on reconsideration. HELD: No misrepresentation. o Do you take alcoholic beverages? Applicant said no. But he has been drinking since he was 16. He died of liver failure. HELD: Misrepresentation. But if he only drank small amounts on cocktail parties, it is not material. There is no misrepresentation. 52 o Insured filled up the application form. The insurance company said that they will only accept if the applicant is not more than 60 years old. He was more than 60 years old. HELD: he wrote on the application form his date of birth, but the company still issued a policy. There was no misrepresentation. Test of materiality? o SAME AS CONCEALMENT. o If the other party would not have entered into the contract, or under different conditions Warranties Express or implied: o Express found in terms and conditions o Implied imposed by law Only exists in Marine insurance Usually embodied in a rider o These riders, issued with the policy, need not be signed What is the difference of warranties from representations? o Warranties are express and placed in the contract o Representations are not written and are but collateral inducements May relate to: o Past ex. warranty that insured was never confined o Present ex. warranty that insured is in good health o Future ex. warranty in fire insurance that owner of property will not store flammable materials When does non-compliance with a future warranty not avoid the policy? o 1. Loss occurs prior to the warranty taking effect o 2. Performance becomes unlawful o 3. Performance becomes impossible Give an example: o Somebody tried to insure his house for fire. Inspectors said his neighborhood is not nice. Insurer said that it will insure, but insured must put up a firewall within 30 days. A fire razed his house in 10 days. o HELD: the insurer is liable. Same if there is no cement available (impossible) or if it becomes unlawful. What is the effect of violation of warranty? o Allows the other party to rescind. o Even if not rescinded, it can be launched as defense by the insurer. o Can the insured argue that it is not material? No. The fact that it is in the policy entitles the insurer to rescind. The basis is not materiality but breach of contract. When there is breach of warranty, it is presumed to be material. 53 If there is a breach of warranty, and loss occurs EVEN IF not related to the breach of warranty, the insurer is not liable. o Ex. cannot bring explosive materials into his house. He brought fireworks inside. His kitchen caught fire without relation to the fireworks. Insurer not liable. o Because the risk increased regardless. o What is the exception? When it is merely incidental to the business. For instance, placing alcohol to retouch the varnish of ones insured furniture store does not breach the warranty against placing inflammable materials. Ex. where there was gasoline in the warehouse for consumption of the owners car within 2 days. Or mothballs in a drug store. Double insurance not just to those he acquired before but also the future. Failure to give information is a breach of warranty. o X obtained fire insurance over his house with Insurer A. He warranted against past and future double insurance. Then he obtained fire insurance over his house with Insurer B. The same clause is included. The house burns down. Is Insurer A liable? Is insurer B liable? Both are not liable. There was breach of future double insurance warranty for contract A and breach of past double insurance for contract B. o X insured his stocks in trade. Mortgaged them, and insured them again, where there is loss proceeds go to mortgagee. Fire destroyed the things. Insurer said X did not disclose second insurance. HELD: No need to disclose. Different interests involved. First goes to the mortgagor. Second goes to the mortgagee. It is not double insurance. When is there a waiver by the insurer? o Despite knowledge of the breach, it accepts the renewal premium X was issued an ordinary drivers license. Can only drive 4 wheeled vehicles. He drove a 10 wheeler. Vehicle involved in accident. o HELD: Insurer not liable because X is not authorized to drive the 10-wheeled vehicle. How is the authorized driver clause interpreted? o Usually it means that its just the owner of the policy and an authorized third party with a license that must drive the vehicle. o Is the expiration of ones license a violation of the authorized driver clause? No. While it may be a violation of the law, it does not violate the authorized driver clause that would breach the warranties in an insurance policy. The requirement for a license applies for a third party not the insured himself. o When the car is stolen or misused by a repairman, is it a violation of the ADC? No. It is considered theft under the policy. What does under influence of liquor clause mean? o No need to actually be drunk, as long as he is under the influence 54 When there is breach of warranty without fraud, what is the rule? o It only exempts the insurer from the time the breach occurred. o Give an example. X obtained fire insurance over his house. Warranted against storage of inflammable materials. On Sept 31, a fire broke out. On December 31 he stored inflammable materials (fireworks) then a fire broke out. The insurer is not liable for the Dec 31 fire, but is liable for the Sept fire. o What if there was fraud, i.e. there were inflammable materials inside the house? The policy doesnt attach in the first place. Compare a warranty from a representation: Warranty Representation Part of the contract Collateral inducement Written in policy/rider Need not be written Conclusively presumed to be material Must be established to be material Fact must be strictly complied with Fact can be merely substantially true Rescission of insurance contracts Sec48(a) action to rescind If insurer has right to rescind, insurer must rescind prior to commencement of action on the contract Tender of premiums and notice that the policy is cancelled before suit is deemed a rescission Sec 48(b) incontestability clause If a life insurance policy has been in force for at least 2 years since first effect or last reinstatement insurer is BARRED from questioning it or alleging misrepresentation or concealment, or deceit/fraud o N.B. Really, what you are barring are defenses against fraudulent misrepresentation or concealment, but not anything else Requisites for incontestability clause: o 1. Life insurance o 2. Payable proceeds upon death o 3. In force for 2 years since issuance or reinstatement Can the 2 year period be shortened by agreement? Yes, but it cannot be lengthened by stipulation. o What if the policy lapsed but was reinstated? The 2 year period will run again. BUT there are still defenses that can be invoked even after this period: o 1. Claimant has no insurable interest o 2. Uncovered risks (ex. insured engaged in car racing) o 3. Policy lapsed and insured did not pay o 4. Policy was entered into pursuant to scheme to kill insured (vicious fraud) o 5. Someone substituted for the insured during medical test 55 This fraud is not barred by the clause there is NO perfected contract with the insured because it was another person o 6. If insured is riding in a plane and it is not a commercial flight (ex. 8-seater plane) o 7. Entered into military without consent o 8. Failure to furnish proof of death o 9. Action not filed on time What defenses are barred? o 1. Misrepresentation o 2. Concealment o 3. Fraud When must the two year period lapse? o It must have lapsed while the insured was alive. If the insured dies within two years, the heirs cannot wait for the 2 years to lapse and claim incontestability. The Policy What is a preliminary policy/cover note? o Has terms and conditions of policy that will be issued. Insurance company cannot collect separate premium on preliminary policy and actual policy. o Common in car insurance and marine insurance Because there is still some delay or information to be determined (ex. looking for third-party liability in car insurance first [give to LTO the cover note] or looking for adequate carrier for goods for marine goods since the policy depends on the state of the boat What must be the form of policies? o Must be in printed form. It cant be handwritten anymore. Before you issue a new policy, the terms and conditions have to be approved by insurance commission. What is the rule on riders and additional attached clauses? o Does not bind insured UNLESS the descriptive name/title of the rider or clause is mentioned and written on the blank spaces in the policy What is the rule on additional riders or clauses issued after the original? o Must be countersigned by the insured or owner o N.B. No need for signature of insured for earlier riders and additional clauses When must a policy be issued upon issue of cover note? o Within 60 days, the policy must be issued. If the cover note extends beyond 60 days, written agreement of insured must be obtained. But now: there is a circular that allows cover notes to extend beyond 60 days. Who receives insurance proceeds? o Applied exclusively to person in whose name or for whose benefit the policy is made 56 o If description is so general that it may comprehend any class or persons, only he who can show it was intended to include him can claim the benefit. When does insurance taken by one partner or part-owner apply to the interest of his co-partners or co-owners? o The terms of the policy must be applicable to the joint or common interest Rules on interpretation: o If the provision is clear, there is no room to interpret o Tantoco Terminal: had two mills. Old mill was insured. When the new mill was finished it was insured. The policy however mentioned the old mill. Burned. Insurer refused. HELD: Clearly they intended the new mill to be insured, not the old one even if the policy says otherwise. o Fortune: Security guard and driver of armored van had possession of the money. They stole money. Insurance company refused to pay because it claimed they were not employees of the company, but the agency. HELD: The insurance company pays. The very purpose of the insurance is to insure against acts of those holding the money, which in this case are the two. What is an Open policy? o There must be a maximum amount mentioned. It is a maximum liability of the insurer. o So there can be an amount mentioned, but you still have to quantify the value within this amount. What is a Valued policy? o One expressing a policy that the thing be valued at a specified sum Ex. Marine policies are usually this What is a Running policy? o Successive insurances Ex. Goodyear, instead of getting insurance whenever it ships tires to distributors, it gets a running policy that covers all of these o In any case, it would have to notify the insurance company which would issue an indorsement, for it to be covered What is the rule on validity of agreements limiting times for commencing action? o In general, a clause in an insurance policy that action upon the policy must be brought upon by the insured within a certain period is valid o But if the period fixed is less than one year from the time cause of action accrues, the stipulation is void (the period becomes the default 10 years, from a written contract) In industrial life insurance period cannot be less than 6 months from accrual of cause of action o When does cause of action accrue? From rejection of the claim by the insurer, because prior to this, there is no necessity to bring suit yet o What if the clause says that action must be brought one year from loss? 57 Its void, because you have to submit your claim to the insurer first, and this takes time. The insurer might decide beyond one year sometimes. In this case, the action given to the insured will be less than 1 year from the time cause of action accrues. o N.B. One year period to file a case is not like period for appeal. Asking for reconsideration from the company does not suspend running of the period. When can non-life policies be cancelled? o 1. Only with prior notice AND o 2. On the following grounds: 1. Non-payment of premium 2. Conviction of crime from acts increasing hazard insured against 3. Discovery of fraud/material misrepresentation 4. Discovery of willful or reckless acts increasing hazard insured against Ex. a bus company that always gets into accidents every week 5. Physical changes in property that makes it uninsurable 6. Determination by Commissioner that continuation of policy will place the insurer in violation of the code Ex. Maximum risk it can insure is 20% of its net worth (Ex. 100M net worth, so they can issue up to 20M). It can issue policies beyond that but it must be reinsured. Notice of cancellation: o 1. Must be in writing o 2. State ground for cancellation o 3. State that if the insured asks for the facts as basis, the insurer will disclose When can there be automatic renewal in a non-life policy? o Insured can automatically renew the policy as long as he is willing to pay the premium o Except: 45 days before expiration of policy, the insurer informs him that it will not renew If insurer does not do this, insured can renew as a matter of right Policy written for term longer than 1 year, it will be treated as written for successive terms of 1 year o Ex. construction contract requires policy covering the building as it is completed. There were 2 fires, and 3 years. It will be treated as if it is expiring at every anniversary of the policy. Premiums When is the insurer entitled to the payment of the premium? o As soon as the thing insured is exposed to the peril insured against What is the effect of payment of premium to the liability of the insurer? o Notwithstanding any agreement to the contrary, no policy is binding until the premium has been paid. 58 What are the exceptions? o 1. An acknowledgement under the policy that the premium has been paid is conclusive evidence, even if there is no actual payment yet But this does not estop the insurer from recovering the payments afterwards o 2. Payment in installments Makati Tuscany: In fact, if only a few installments were paid, the insurer can sue to collect the rest Tibay: The policy provided that it will not be binding until all installments have been paid. Thus, here, Makati Tuscany does not apply. o 3. Grace period in life and industrial life policies by default, there is a 30 day grace period. But it can be increased o 4. Grant of credit by the insurer to the insured Masagana added this. There was a market insuring its premises with UCPB since 1988, and every year there is usually a 60-90 credit period to pay renewal. The market burned within the period and UCPB paid the premiums a day after. The insurer was held liable. o 5. Estoppel As in Masagana where UCPB always granted Masagana a credit period. What is Cash Surrender Value? o Amount of cash the insurer receives upon surrender of the life insurance policy prior to maturity What is Paid-up Insurance? o When the insured defaults, he gets the cash surrender value. The insurer then applies the cash surrender value to check how much insurance it can buy until the end of the policy. o Can the insured apply for reinstatement at the end of the policy? Yes, but he has to undergo medical examination again to show he is insurable, and pay the premium in arrears What are the rules on refund of premium? o Insured entitled to a refund of the premium if no part of the interest was exposed to the peril Ex. Insured shipment of rice was never shipped o What if the insurance is for a particular period and there was surrender prior to the end of the period? Entitled to refund corresponding to unexpired time Deducting any previous payment of the insurer due to losses o What the exception to partial refund rule? In life insurance, because the insurance on human life is not divisible. So no matter how short, the insured is not entitled to a return of the premium. o X insured a shipment of goods from Manila to Cebu. Can he can cancel it halfway, i.e. when it is in Romblon, and ask for refund of premium? 59 No. The insurer was already exposed to the risk; he cannot ask or the return of the premium. It is not divisible. o What if the contract is avoided due to fault of the insurer? Insured gets the premium returned. o Avoided due to fault of the insured, but not actual fraud? Insured gets return of premium, if the insurer did not incur any liability. Ex. Pre-condition for fire insurance over house is to build a firewall. Insured didnt get to build it, so the policy never attached. o Avoided due to fault of insured, with actual fraud? No return. Ex. Insured claimed he had a firewall, but he really did not. Can there be return of the premium due to over insurance? o Yes. The insured gets a ratable return of the premium. o Ex. a house worth 10M is insured for 10M with X, 5M with Y, 5M with Z. Paid premiums: 10K to X, 5K to Y, 5K to Z. He is entitled to return of premium: 5K from X, 2.5K from Y, 2.5K from Z. Agreement not to transfer the policy after loss has occurred is void, because at that time, the liability has accrued. It is a chose in action. Loss, claims settlement, subrogation When will the occurrence of the peril insured against make the insurer liable? o 1. If it is the immediate cause. Ex. Insured against fire. Faulty wiring exploded (proximate cause) and led to fire. o 2. If it is the proximate cause of the immediate cause Ex. Insured against fire. Fire broke out and burned down a tree, which fell and destroyed a house. o 3. If it is damaged in the process of rescuing the insured against the peril insured against. Ex. Saving insured furniture from a house fire. When they were brought out, they were stolen. Insurer is liable. Ex. Fire broke out in neighbors house. To prevent the fire from spreading to the other house contained insured furniture, the firemen pointed their hoses. The furniture was soaked and damaged insurer is liable. When is the insurer not liable even if there is loss? o 1. The insurer is not liable for loss caused by connivance of insured Ex. told someone to steal his car, sell parts, and claim insurance o 2. Loss from unlawful act not liable Ex. committed arson o 3. Loss in which peril insured against is only a remote cause Ex. fire insurance policy covers store and stocks in trade. The house across the street caught fire. Everyone congregated. While distracted, robbers 60 broke into the store and stole the stocks in trade. Fire is just a remote cause. o 4. Loss, the proximate cause of which is an excepted risk Fire insurance policies say that they do not cover loss due to coup detat, rebellion, riots, etc. o 5. Loss where the insured is guilty of gross negligence SMC hired a shipping company to transport thousand cases of beer. The SMC rep met the captain and told the latter that the boat should be moved to a safer place since there is a typhoon brewing. The captain ignored it and tied the barge to the wharf. During the typhoon the rope broke, the barge was cut loose. Burden is on the insurer to prove that it is an excepted risk o But for fire insurance, the burden is on the insured to prove that it is not under an exempted risk o Ratio: because the thing is in possession of the insured, so he can best give an explanation for the loss How must notice to the insurer of loss be given? o 1. Notice must be given without unnecessary delay If reported an unreasonable time later ex. 6 months opportunity is gone Usually policies have a provision that claims must be filed within a certain time. Beyond that, barred. Delay in presentation of a claim/proof of loss is waived if the insurance company did not invoke that as a reason to deny the claim o 2. When proof is required, insured is not required to give proof that stands in court Noda: police report should be sufficient Defects in the notice or substantiation thereof which the insurer didnt specify are waived, because the insured is usually a layman o 3. If the policy requires a certificate, and the insured cannot produce it, it is enough to say that he cannot produce it not because the document is prejudicial but because he could not procure it I cannot submit the report not because the contents of the report are prejudicial, but because the investigator is abroad and cannot be found What is the rule on subrogation and release of liability? o General rule: when the insurer pays the insured, the insurer becomes subrogated to the rights of the insured and can run after the wrongdoer o But the insurer will be discharged from its liability to the insured if the insured committed any act that would prevent the insurer from recovering from the wrongdoer In motor vehicle insurance, the insured settled with the wrongdoer for P2500. The insured still claimed from the insurer, which paid. The insurer ran after the wrongdoer, which raised the defense that there was a settlement. The insurer thus can recover from the insured because it paid by mistake. o What are the grounds when there is no subrogation? 1. Insured by his own act releases the wrongdoer from liability 61 2. Insurer mistakenly paid for an excepted risk 3. Life insurance 4. Recovery of loss in excess of insurance coverage Double insurance Requisites: o 1. Insured must be the same Ex. mortgagor mortgagee not the same o 2. Several insurers If someone takes an insurance from Insurer X, then takes another after 6 months, no double insurance o 3. Same subject matter Ex. factory and stocks in trade not the same o 4. Same interest Ex. Insured property with proceeds payable to him, then mortgaged same property with proceeds payable to the mortgagee for his interest no double insurance o 5. Risk is the same Ex. against fire, and then against earthquake not the same What is the consequence of double insurance? o Usually there is a clause in insurance policies that will release insurers from liability if there is double insurance What is the consequence of over-insurance? o The insurers can ask for reimbursement based on proportionate liability o Ex. A house worth 10M is insured for 10M with X, 5 M with Y, 5M with Z: Owner cannot recover more than 10M, the value of the house If owner recovered 10M from X, X can ask for 2.5M from Y and 2.5M from Z. In the same way, depending on who the owner collects from, they have to reimburse each other in the said proportions. o In car insurance policies, there is a usual clause that for over- insurance you can just collect proportionately. So two insurers covering a car worth P500K can only be liable for P250K each, and nothing more. Reinsurance What is reinsurance? o Insurer obtains another insurance to cover for loss for liability due to the original insurance o The reinsurer is a liability insurer o What is retrocession? Subsequent layers after the first reinsurance Two types: o Treaty o Facultative case by case 62 Can a reinsurer intervene in the original action? o A reinsurer cannot intervene in the case of insurer and insured because the reinsurer has his own interest anyway. So he has to wait until the original insurer sues the reinsurer to recover, if it wants to raise defenses. Insurance is covered by the rule of uberrimae fides What is the nature of a contract of reinsurance? o It is presumed to be against liability, not damages. So even if the original insurer fails to pay, the reinsurer will be liable to pay. Most of the time, there is a clause that says that the original reinsurance need not litigate with every reinsurer. If the original insurer paid, the reinsurers will pay too. They will rise and fall with the fortunes of the original insurer. Can the insured sue the reinsurer directly? o No. There is no privity of contract between them. What is the exception? o The cut-through clause Insured can go straight to the reinsurer o Ok in California, invalid in England Marine insurance What is an all-risk policy? o All the insured has to prove is that the property was lost; no need to prove that it was due to fortuitous events. o The only defense the insurer can raise is that the loss was due to misconduct of the insured. What is its not an all-risk policy? o It only covers perils of the sea. Perils of the sea: o 1. Connected with navigation o 2. Unusual movement of the sea/winds There must be a fortuitous event. A normal typhoon is not a fortuitous event. It does not cover perils of the ship. What are these? o If the ship is not sea worthy, or that the cause is due to the poor condition of the ship. o Ex. if it springs a leak. What is barratry? o Insuring against the willful misconduct of the master or crew, not mere wrong judgment. o A ship captain cuts loose a barge. Was this barratry? Just an error of judgment. There has to be willful misconduct by the master or crew of the ship. So the insured cannot claim from the barratry clause. When is arrest of the ship recoverable from? o Covers arrest of the ship by administrative or executive order as settled in English jurisprudence. But in Malayan our SC included arrest by court order. What is the insurable interest of the owner of a vessel that has been chartered? 63 o Only the amount which the charterer did not agree to cover, in case of loss. o Ex. the ship is worth 10M. The charterer agreed to pay 5M in case of loss. The insurable interest is 5M. What is freight? o It is the expected profits of the owner of a ship which has been chartered to ship goods. These expected profits (freight) can be insured. o What is the insurable interest of the charterer? To the extent that can be indemnified for his loss. o O is the owner of a boat. C chartered it, agreeing to pay P500K if the vessel arrives safely and C was able to solicit goods paying freight of P600K. The vessel sinks. What happens? C need not pay O, because the ship did not arrive safely. C can only collect 100K because that is the profit which was lost. Insurer answers for general average o Those who were saved will contribute to the general average o Insurance policy will cover share in general average o DOES NOT cover particular average Ex. fruits became rotten due to nature of the fruits Rule on concealment is stricter, because the ship is usually in the high seas so the insurer is at a disadvantage harder to inspect. What is the different rule as to concealment in marine insurance? o Usually, the cause of the loss need not be due to the fact concealed. But for the following matters, concealment does not avoid the policy EXCEPT if these were also the cause of the loss: 1. National character of the insured 2. Liability of the thing to capture/detention 3. Liability to seizure due to breach of foreign laws 4. Want of necessary documents 5. Use of false/simulated papers o Ex. Insured conceal that certain important documents are missing. The vessel encountered a perfect storm and sank. The insurer is still liable even if there was concealment, because the fact concealed was not the cause of the loss. What is the different rule as to belief of a third person as to marine insurance? o Marine insurance belief of a third person as regards what is material o Ex. surveyor saying that the ship is not seaworthy MUST BE DISCLOSED it is material What is the rule on misrepresentation as to expectation? o If there is no fraud, misrepresentation as to expectation does not avoid the policy. o Ex. The insurer asks the owner when the vessel will go out to sea, and the latter said April. The vessel only went to sea on June. The misrepresentation was not tainted with fraud and does not avoid the policy. 64 Subject Ordinary insurance Marine insurance Concealment Can rescind even if concealed fact was not cause of loss Five exceptional grounds apply Belief of a third person Need not be disclosed; immaterial Must be disclosed; material Misrepresentation as to expectation Can rescind If there is no fraud, cannot rescind Implied warranties N/A Four implied warranties automatically apply What is the presumption on knowledge of loss? o There is a presumption if the knowledge of the loss could have been received by the owner in usual rate of communication. What are the implied warranties? o 1. Sea worthy May there be a waiver of warranty of seaworthiness? Yes. If there is a waiver, even if the ship is not seaworthy, the insurer is still liable. o 2. will not deviate o 3. Will not engage in illegal ventures o 4. It will carry necessary papers if nationality was expressly warranted When is a ship seaworthy? o If it can perform the services and encounter the peril of the voyage contemplated. o Warranty of seaworthiness extends from the hull also that it is properly laden, and the complement of the vessel (master, etc.) is fit When must a ship be seaworthy? o At the start of the voyage o If there are different portions of the voyage, it must be seaworthy in all such portions o If it is an insurance of cargo taken by different ships, all the ships must be seaworthy o What if the ship becomes unseaworthy during the voyage? There must be no delay in the repairs; else, the insurer is discharged. What must the voyage route follow? o Usual maritime usage o If none, then the most natural, direct, and advantageous Deviation Three types of deviation? o 1. Departure from course of the voyage o 2. Unreasonable delay in pursuing the voyage o 3. Commencement of an entirely different voyage When it is proper to make deviations? o 1. Caused by circumstances which neither the master or owner has control 65 Ex. when there is a typhoon o 2. Necessary to comply with a warranty or avoid a peril (whether insured against or not) Ex. when the engine gets busted o 3. Made in GF, upon reasonable belief to avoid a peril Ex. received of reports waiting in ambush, thus deviated o 4. Made in GF, to save human life or another ship Once the vessel deviates, even if it returns to the original route, the insurer is exonerated. Loss Loss is either total or partial Total loss is either: o A. Actual total loss Actual loss of the thing, renders it valueless Examples of total loss: 1. Total destruction o Ex. the ship burned 2. Loss by sinking or being broken up o The ship sank or was broken up, making it irretrievable 3. Damage to thing rendering it valueless for the purpose it was shipped o Ex. palay got wet and became seedlings o Ex. a race horse broke its legs, so it cannot race anymore 4. Any other event depriving the owner of possession of the thing at the port of destination o Ex. Ship was ordered seized Is there need for abandonment for actual total loss? No, the insurer become liable upon actual total loss o B. Constructive total loss Unique in marine insurance Abandonment is act of insured after constructive total loss. He relinquishes his share to the insurer If damage is more than of value of property insured, insured can declare constructive total loss What if the ship cannot continue but the cargo is transferred, what is the effect? o The marine policy on the cargo remains o The insurer is liable for expenses for transfer, discharge, storage, reshipment, and all other expenses to save the cargo o What if loss occurs? The insurer is liable for the general average\ 66 What are the requisites of abandonment? o 1. Actual relinquishment by the person insured of his interest over the thing insured o 2. Constructive total loss o 3. Unconditional and not partial abandonment o 4. Made within reasonable time from receipt of information of loss o 5. Must be factual Ex. So in a case where the shipment of oranges was reportedly lost, but they actually just ripened during the trip and were sold by the captain, there is no factual basis for abandonment o 6. Give notice to insurer whether orally or in writing o 7. Notice of abandonment must specify the particular cause What is the effect of abandonment? o The insurer gets all the interest of the insured over the vessel (ex. salvage, proceeds of the salvage, etc.) This same effect will result if the insurer paid as if there was actual total loss as if there had been abandonment o Acts done in good faith by the agents of the insured after abandonment is for the risk/benefit of the insurer (ex. effort to repair the ship is for the risk/benefit of the insurer. So the insurer pays for it, and if the ship gets repaired, benefits.) Insurer is liable for those acts of insured in good faith o Ex. salvors fee, repairs in GF Acceptance: o If abandonment is proper but insurer refuses unjustly, it does not prejudice the insured o Acceptance of the abandonment can be express or implied Mere silence of insurer after notice is not an acceptance o Acceptance is conclusive and cannot be revoked [except if the ground is not factual, like the oranges case] o What if the insurer unjustly refuses to accept the abandonment? The insured can sell the vessel and earn scrap value. The insurer is liable for the balance. Upon accepted abandonment, who is entitled to the earned freightage? o Freightage earned before the loss to the insurer of the freightage o Freightage earned after the loss to the insurer of the ship Measure of indemnity What is the Co-insurance clause? o It applies by default only to marine insurance. It has to be stipulated in fire or other insurance. o The prerequisites are: 1. Loss is partial 2. The property is insured for less than its total value 67 o What is the effect? The insurer is liable only for the difference between the amount of insurance and the value of the property. o Huh? Give an example na lang. Vessel X was worth 1M but was insured for only 800K. It was damaged to the extent of 200K. The insured can recover 160,000 which is 1/5 of 800k (since 200K is 1/5 of 1M) What is the difference in what the insured can recover if the profits are separately insured and if not? o Profits separately insured: Sugar being shipped is worth 100M and has expected profit of 120M. 50M worth of sugar was destroyed. Insured can recover 60M as insurance for expected profit. (Because for every 5 M of sugar it earns 6M sugar [100:120], so loss of 50M worth of sugar is loss of 60M in profits) o Not separately insured: Sugar being shipped is worth 100M and has expected profit of 120M. 50M worth of sugar was destroyed. Insured can recover of 20M, which is 10M for expected profit. Is a marine insurer liable for expenses attendant upon damage and subsequent repairs? o Yes, the insurance is liable pursuant to sue and labor expenses, because the insurer is presumed to be willing to incur these expenses to avoid loss. Is a marine insurer liable for contribution expenses made by the insured for general average loss? o Yes. Fire insurance What are the requisites of alteration? o 1. Change in the use or condition of a thing insured o 2. Which is limited by the policy o 3. Without consent of insurer o 4. Through means within control of insured o 5. Increasing the risk What is the consequence of alteration? o The insurer can rescind the contract Give an example of alteration that increases the risk. o Conversion of a bookstore to a restaurant Give an example which does not. o Conversion of a residential condominium into an office condominium. What is a hostile fire and friendly fire? o Hostile fire fire that escapes and burns in a place where it is not supposed to o Friendly fire fire that burns in a place where it is supposed to burn Friendly fire can convert into hostile fire o X is seeking to recover from the insurer for soot marks caused on the wall by a gas stove burner. Can X recover? No. The marks were caused by friendly fire. 68 Does co-insurance apply to fire insurance? o Not by law. But it is a standard clause placed by companies. What is the rule on valuation for fire insurance (if there is none provided in the policy)? o The valuation must reflect depreciation suffered by the property before it was burned. o SMC had a building worth 100M, which burned. But instead of depreciating, the value of construction materials that year skyrocketed. So SMC is trying to recover insurance based on those new prices. But the insurer claimed SMC thus was underinsured in this case. SMC said that it was not, based on the old prices. What happens? SMC cannot use new valuation for the amount to be recovered, and old prices to disclaim underinsurance. What is the effect if the insurance gives the insurer the option to rebuild the property instead of paying? o This is valid. The contract is novated and it becomes a contract for a piece of work. o The insurer becomes liable for quality of the work done. Casualty insurance If intentional injuries caused by the insured or a third person are excepted, what does intentional mean? o Exercise of reasoning faculties, consciousness, and volition of the person. o It is the intention of the person inflicting the injury that controls. o Usual accident policy doesnt cover death or injury caused by assault or murder. You have to pay extra to cover this. What does accident or accidental mean? o No technical meaning. Something that happens by chance or fortuitously, without design or intention. o Is this the same as no fault? No. It just distinguishes itself from intentional. What is the rule on third party liability? o There can be a provision allowing a third party to directly sue the insurer. But the insurer is not solidarily liable; just directly liable. The liability of the insurer is contractual, not quasi- delictual. The liability of the insurer is limited by the policy. o If there is no such provision, the contracts are separate, so the third person cannot sue the insurer. o What if the indemnity is against actual loss or payment? The third party cannot sue the insurer, because it has to wait for the insured to pay him. The insured recovers from the insurer. o What if the indemnity is against liability? The insured need not pay first before proceeding against the insurer. Is the insurer liable even if the insured commits criminal negligence? 69 o Yes. This is still accidental. What is not covered is intentional or deliberate criminal acts. A guy was showing off his gun. A friend asked if it was loaded, and he said no. To prove it, he pointed the gun at himself and pulled the trigger. There was a bullet. He died. Can the heirs collect? o HELD: Yes, because it was accidental. o JJs viewpoint: No, because he was stupid. Sometimes, there is a clause where the insurer will defend the case on behalf of the insured in court. In a case, the insured sued the insurer not because of the liability clause (because the insured was not yet made liable) but because the insurer was negligent in defending the case. Suretyship What is suretyship? o Agreement where surety guarantees the performance by another of an undertaking or obligation in favor of a third party. Examples? o Fidelity bond contract of insurance against loss from misconduct o Fidelity guaranty insurance for consideration, one agrees to indemnify the assured against loss arising from want of integrity, fidelity, or honesty of persons holding positions of trust What is the nature of a suretyship agreement? o Solidary agreement, but only to the extent of the contractual amount in the bond o The court/obligee is not concerned w/n the premium has been paid. It will go against the surety when the obligation is not paid or the insured absconds. What if the bond is not accepted? o The principal-applicant is entitled to return of the premiums paid. o But not entitled to return of taxes paid (ex. DST) and other service fees, like what was spent to review the application. o What is the exception? If there was fault of the insurance company, leading to denial of the application. Even the taxes paid shall be returned. What is a continuing bond? o One that will last until the end of the case. The company is entitled to charge premiums every year. Life insurance Kinds: o 1. Ordinary life, general life, or old line policy Insured pays a premium every year until he dies. Surrender value after 3 years. o 2. Limited payment policy Insured pays premium for limited period. If he outlives the period, he does not get anything. o 3. Endowment policy Insured pays premium for specified period. If he outlives the period, the face value of the policy is paid to him. If not, the beneficiaries receive the benefit. o 4. Term insurance 70 Insured pays premium only once, and is insured for a specified period. If he outlives the period, no person benefits from the insurance. No cash surrender value. N.B. kind of like life insurance policies you take before flying commercial o 5. Industrial life Insured pays premiums weekly, or monthly, or oftener What is the effect of death of insured through suicide? o The insurer is only liable if the insured committed suicide after the policy has been in force for a period of two years from date of issue or last reinstatement, unless shorter period is provided o If the suicide was committed in a state of insanity, the insurer is liable too, regardless of date of suicide The business of insurance Certificate of authority from the Commissioner lasts one year What is the margin of solvency for insurance companies? o For a domestic firm, the excess of its admitted assets excluding paid-up capital, over the amount of liabilities, unearned premiums, and reinsurance reserves o For a foreign firm, the excess of its admitted assets in the Philippines excluding security deposits, over the amount of liabilities, unearned premiums, and reinsurance reserves Agents and brokers: o Must be licensed Soliciting for compensation without license criminally liable o Rebate of premiums is also prohibited. o Can agreements regarding kickbacks be enforced? No, they are illegal. Compulsory motor vehicle liability insurance Third party excludes o Driver, etc. o Relative by affinity/consanguinity within 2 nd degree o Employee [see qualification] What if a provision says that final judgment is needed before liability attaches? o Its a void provision. If you have to wait until final judgment, it will take a really long time. What is the no fault clause? o The injured third party or passenger can claim for death or injury without necessity of proving fault or negligence, under the ff conditions: o 1. Indemnity shall not exceed P15,000 N.B. this value can adjust please check o 2. Ff proof of loss is sufficient to substantiate the claim: If theres death, death certificate If theres injury, medical certificate 71 In all cases, police report o 3. Claim is against one motor vehicle only From whom must the insured claim against? o If a passenger, mounting, or dismounting the vehicle, against the insurer of the vehicle he is riding in o Else, against the insurer of the directly offending vehicle What is the right of the insurer paying under the no-fault clause? o It can directly claim against the owner of the offending vehicle What if the claim exceeds the amount awarded under the no fault clause? o If the claim exceeds 15,000, then the insured can still claim it from the insurer, but he has to prove there was negligence or fault. o The insurer cannot ask the insured to waive the rest of the claim as a precondition to pay under the no fault clause. What are the important periods? o Claim from the insurer within 6 months from accident o Go to court within 1 year from denial of claim Importance of a license: o If the one recovering is the driver himself, he can recover damages even if his license is expired. The authorized driver clause does not apply to the owner. o If it is someone else, who is authorized, he must have a valid license o What if the car is unlawfully taken and driven by a person who is not authorized? The theft clause applies, and not the authorized driver clause Ex. a repairman took the car out for a joyride Intellectual Property Law In general What do intellectual property rights cover? o 1. Copyright o 2. Trademarks o 3. Geographic indications Indication identifying a good as originating in a certain place where a given quality, characteristic, or reputation is attributable to the place o 4. Industrial designs o 5. Patents o 6. Layout designs of integrated circuits o 7. Protection of undisclosed information Natural and legal persons can prevent information lawfully within their control from being disclosed to, acquired by, or used by others without their consent in a manner contrary to honest commercial practices. As long as: 72 A. It is a secret B. It has commercial value because it is a secret C. It has been subject or reasonable steps to keep it a secret Differentiate between copyrights, trademarks, and patents: o Copyright : literary and artistic works which are original intellectual creations, protection upon creation o Trademark : visible sign of distinguishing goods (servicemark if services) of an enterprise, including stamped or marked container of goods o Patent : technical solution of a problem in any field of human activity which is new, involves an inventive step, and industrially applicable What are technology transfer agreements? o Contracts involving transfer of systematic knowledge for the manufacture of a product, application of process, rendering of service (including management contracts), and transfer, assignment, or licensing of all forms of IP rights (including non- mass market computer software) o N.B. this cannot cover mass market software such as Windows Copyright Rights of intellectual creator exists from moment of creation o Even if you havent registered yet with the National Library Who owns the copyright? One creator Creator, heirs, assigns Joint creators, where individual parts are not identifiable Co-owned by authors Joint creators, if the joint authorship consists of separate and identifiable parts Copyright over the parts they prepared Commissioned work Creator (although the commissioning person owns the work) Audio-visual work For exhibition, producer For other purposes: producer, author of scenario, composer, director, photo director, author of work Anonymous Publisher But if the writer can be identified (ex. Quijano de Manila is Nick Joaquin, he still gives consent) Employees work in regular course of employment Employer Employees work, if not part of his duties Employee What are covered: o Even choreography, musical compositions, drawings, paintings, architecture, sculptures, computer etc. o Are email and letters also covered? Yes. Any form of text is covered. o Can a dictionary be copyrighted? A dictionary can be copyrighted. While no one has a monopoly on words, the court held that the original writer used his judgment in selecting which words will be used. o For DVDs? 73 The producer, music composer, director of photography, screenwriter, author of the work on which the movie is based, etc. But for collecting, the producer has the right o Architect exclusive rights over the plans he makes. Also covered by special law You cannot use these same plans to make another building Are derivative works also covered by copyright? o Yes, but you have to get the consent of the original creator. Examples of these are dramatizations of novels, translations, or adaptations (ex. Miss Saigon, from Madame Butterfly) o What about compilations? Yes, they are covered by the rule on derivative works. This involves judgment of, for instance, the best Filipino short stories. So he has to get the consent of those whose stories he included in the compilation. And if someone else wants to make another compilation, he cannot use the same set of stories since these were chosen by the first compiler; unless, of course, he gets permission. What is the main principle? o To be protected it must be original. What are not copyrightable? o 1. Mere data, idea, procedure, system, etc. even if embodied in a work o 2. News of the day or miscellaneous facts amounting to press information o 3. Official text of legislative, administrative, or legal nature, and their translations o 4. Works of the government But if the work will be economically exploited, need permission of the government agency Transfer or assignment of copyright: o If you sell, mortgage, convey your copyright, you must register it with the National Library to bind third parties. o The transfer or assignment must be in writing What if an authors work is distorted? o Owner can object to the distortion of his work. o Will transfer to new media distort a work? No. How long is the copyright? o Lifetime of author + 50 years o What if there are several authors? From death of last author o What if the author is anonymous? 74 Count 50 years from first publication (commence from Jan 1 following the date of publication) What if the authors identity is found out? You change the period to his lifetime + 50 years o What if its work of applied art (artistic creation with utilitarian functions or incorporated in a useful article)? 25 years from making o What about broadcast? 20 years from date of broadcast o They are not extended by assignment The economic rights of author need his permission for: o 1. Reproduction or substantial reproduction (ex. photocopying an entire book) o 2. Derivative works o 3. Public distribution or exhibition Businesses started playing certain songs to drum up business. Is this exploitation of the work? Technically, this is economic exploitation of the work. Ex. The character Charlie Brown is copyrighted. So sporting goods cannot use Charlie Brown on their goods. Or a bakery cannot use Cookie Monster. Some artist connoisseurs bought Xs paintings for a cheap price. Then they sold the paintings for a fortune when he became famous. What is Xs right? o He must get 5% of the selling price. (Sec 200 Droit de suede) o This ensures that the artist benefits from the higher price o This right exists as long as the copyright exists. What is infringement? o Piracy or substantial reproduction, and so much is taken that the value of the original work is substantially diminished Is infringement the same as plagiarism? o No. Every act of infringement is plagiarism. Not every act of plagiarism is infringement. o Plagiarism is passing off the work of another as ones own. It may consist of copying verbatim the work of another w/o acknowledgement, or rewriting in ones own words the idea expressed by another BUT you cannot have a copyright over an idea. So copying an idea is plagiarism, but not infringement. Must copying be substantial for plagiarism? o No. Because infringement requires substantial copying, plagiarism does not. o Case: There was a book on grammar and styles of writing, and it quoted actual literary works exhibiting those figures of speech. There was infringement when another book copied even the same examples. Is intent needed for plagiarism? 75 o Law requires bad faith or intentionality o But academic institutions as a matter of discipline remove this requirement There must be copying for there to be infringement. How do you establish this? o Through circumstantial evidence o Ex. a book has a missing page 23. Another book that is similar is also missing page 23. Action for infringement. Remedies? o 1. Injunction to restrain infringement o 2. Payment of damages Within 4 years But usually its hard to prove the amount lost since infringers do not have accounts or receipts. So usually temperate damages are awarded. o 3. Order delivery under oath of the infringing works and tools/instruments that produced the work Moral and exemplary damages awarded o 4. Criminal case When is there no infringement of copyright? o [Limited use] o 1. Used for the benefit of a charitable institution, or if privately and for free o 2. Ephemeral recordings by broadcasting organization using own facilities for broadcast use Production of works as part of current events Ex. newscast covering ribbon cutting in an event, and the camera caught a mural in the footage this is valid use, the artist cannot demand money o [Valid purpose] o 3. Used as teaching aid Ex. using Filipino folk dance songs to teach native dances o 4. Used for judicial proceedings or giving advice Ex. citing law book in legal opinion or memorandum to court o 5. Fair use For criticism. Ex. quoting portions of a book for comment For research and private study o [Back-up] o 6. Reproduction by libraries of fragile works, isolated articles in composite works, brief portions of published work, or to preserve or replace a copy o 7. One back-up copy of computer programs Four factors to determine fair use: 76 o 1. Purpose If one is citing portions of a work because one is writing a brief or a thesis, is this fair use? Yes. If one is citing portions to use for an anthology, is this fair use? No. This is economic exploitation o 2. Nature of work What is example of nature preventing copyright? Trying to copyright the phone book invalid because of nature of the work Example of a statement that can be reproduced? Ex. simple fact that Rizal died on December 30. Cannot claim that one stole that fact from another book. o 3. Extent Amount of work used Infringement requires substantial copying. But this does not just involve quantitative, but also qualitative Ex. Quoth the raven nevermore is just five words but is qualitatively the heart of the E.A. Poes The Raven Ex. In a satirical work, you are poking fun at another work. For it to work, the viewer/listener must identify the work being satirized. So copying must really be substantial. Libraries can make photocopies (ex. the book is fragile already ex. Maximo Kalaws The Malolos Congress or Apolinario Mabinis books). If you only need isolated portions of the work for a thesis or research; instead of photocopying the whole book, you can just copyright the 10 or so pages. To complete a set, where it is missing one book or so, and it cannot be procured the library can borrow a book and photocopy it o 4. Effect on the market Patents What can be patented? o 1. Any technical solution to a human problem which is new, involves an inventive step, and industrially applicable Ex. Machine, computer, cellphone, product, medicines, process, etc. Example of process: Developing a synthetic replacement for wood alcohol to prevent jamming the barrel of a gun o 2. An improvement on current machines Ex. colored television, 3G phones o 3. Microorganisms created artificially in a laboratory Ex. those to combat oil slicks 77 Budapest treaty: governs the patentability of microorganisms What cannot be patented? o 1. Discoveries Newton cannot patent the law on gravity But he can patent inventions based on it Ex. parachutes o 2. Mathematical methods, scientific formulae, schemes, forms, or methods to do mental acts o 3. Methods for treatment of animal or human bodies If patented, patients have to pay royalties to get treatment, which is not humanitarian Contra: machines used for treatment can be patented o 4. Plant varieties, animals, etc. o 5. Aesthetic creations Covered by industrial design o 6. Against public policy Ex. invention to help commit suicide To patent an invention: o 1. New When is it not new? 1. Already available to the public anywhere in the world o Ex. a plow 2. Prior filed or effective patent, utility model, or industrial design When is prior disclosure of the information in the patent in the 12 months preceding application for patent non-prejudicial? 1. Disclosed by the inventor 2. Disclosed by the patent office and the information was in an application filed by the inventor or a third party who got the information from the inventor but did not get his consent in filing the application 3. Disclosed by third party who obtained the information directly/indirectly from the inventor o 2. Involves an inventive step If it is useful, but it is not an invention and anyone with mechanical skill can do it it cannot be patented Ex. putting a block of wood over two rollers to rewind printer ribbon is not patentable. It does not show flash of genius o 3. Industrially applicable Something that spins perpetually. Has no industrial use, so it cannot be patented. The rule on invention patents: who wins? 78 o First to file gets the right. o The same rule applies for industrial design o Must be registered with intellectual property office. What is the first-to-file rule? o First to file first to apply wins. o If they file the same day, they will be joint owners of the patent. o What is the right to priority for a foreign registered patent? If there was an earlier application for patent filed in a foreign country that allows same rights for Filipino citizens, then one can use that date of filing in the foreign country as the same date of filing in the subsequent Filipino application Provided, that it is filed within 12 months of earliest foreign registration and the local application expressly claims this priority rule What is the remedy of the actual inventor after proving in court that the one who filed attained it through fraud? o 1. Order patent to be cancelled OR o 2. Substitute the actual inventor in the patent (alternative) If two or more persons invented it? o The patent is owned jointly Ex. Wright brothers over flying machine o What if it is commissioned? Follow their agreement. If there is none, the one who commissioned the work owns the patent. o What about employees? If it is part of his duties, it belongs to the employer. If it is not, he owns the patents. Ex. an employee in the NFA invented a machine to salvage rotten rice. It belongs to him because its not his job to do it. What is the value of registration? o Assignments in order to bind third parties must be registered with the Intellectual Property Office. Otherwise, subsequent buyers or mortgagees in good faith will be protected. What is an industrial design? o Any composition, lines, colors, etc. which form a pattern for making a product. Ornamental design may be copyrighted Ex. design for jewelry, clothes, shoes, cars, tiles, etc. o Compare to: Integrated circuits electronic components of digital equipment (ex. cars with electronic keys, elevators, etc.) What is required for it to be registrable? o The design must be new. Someone copied a design for a suitcase from a foreign catalogue. This is cannot be registered under industrial design. Someone registered as industrial design the Y design on jockey briefs. 79 How long is the term of protection for ID? o Term of protection for industrial design is 5 years, renewable for two consecutive terms of 5 years. EXCEPT : period of 10 years for layout design o Period starts from first commercial exploitation anywhere in the world Compare patents and industrial design: o Limitations of the right of owners of industrial design are the same as patents, but industrial design cannot be the subject of compulsory licensing What is the term of a patent? o 20 years from date of filing of application What is infringement? o Infringement is the making, using, or importing of the patent of the product without authorization by the owner o But importation of medicines has been excluded parallel importation is allowed (see notes below) What are the grounds to cancel registration of a patent? o 1. What is patented is not new or patentable o 2. Patent does not disclose the invention in a manner sufficiently clear and complete for it to be carried out by a person skilled in the art o 3. Patent is contrary to public order or morality Two tests to determine infringement: o 1. Literal infringement When you file an application for a patent, you submit a claim explaining how the product works. If you compare the patented product with the claim, and it is exactly the same, then it is literal infringement. o 2. Doctrine of equivalence If you appropriate an invention and make some changes, but it performs substantially the same functions, and it achieves the same results, its the same thing. N.B. Having the same effect, but not proving that it achieves it through the same means does not prove equivalence What is contributory infringement? o Aside from the infringer, anyone who induces the infringer or provides the infringer with the component knowing that it is specially adapted for infringing and not for any other use is an infringer too. o Betamax case: the VCR was alleged as being used to pirate, but it was proved to be usable for lawful purposes Is an improver an infringer? o Yes, if there is no consent from the owner of the patent. What if there is a pending petition to cancel a patent? o A petition for infringement may prosper, because it is still effective. Can a foreign corporation not doing business here sue for infringement? 80 o Yes, as long as its country gives Filipinos reciprocal right to do this. Defenses against infringement? o 1. Prescription Action prescribes after 4 years from infringement o 2. Patent is not new or patentable o 3. Patent does not disclose an invention in a manner that will make a skilled person to make that invention o 4. Against public policy Remedies? o 1. Damages If the damages cannot be readily ascertained, the court can award reasonable royalty Court may treble the actual damages (equivalent to exemplary damages) so trebling and exemplary damages are mutually exclusive o 2. Injunction o 3. Destruction of infringing product and implements used to make that product o 4. Cancellation of patent if the invention is not new, patentable, or does not disclose the invention sufficiently to make a person skilled in the art to produce it o 5. Criminal action against the infringer for repeated infringement even after finality of judgment against him Cheaper Medicines Law amendments: o The CML provides for what medicines cannot be patented. o If you just discovered a new form for the medicine it is not patentable as a separate invention. Ex. Medicine sold in liquid form, and then converted to capsule form. It cannot be patented. o Neither if you just discover a new property, but did not add a new chemical reagent. Ex. Viagra was originally used for heart ailments, but serendipitously they discovered it can cure erectile dysfunction. It cannot be patented again because there was no chemical reagent added. Voluntary licensing: o IPL regulates technology transfers. o There was a decree providing for regulation of technology transfer arrangements. We cannot abolish it, for being constitutionally mandated, so it was restored, when initially omitted. Prohibited provisions in licensing agreements: o [Anti-competitive measures] o 1. That the licensee must get goods, products, raw materials from specific sources. Then the license becomes a captive market of the supplier. o 2. Prohibits the use of competitive technology, and the technology transfer agreement was not exclusive o 3. Require that the technology recipient should not contest the validity of any of the patents of the tech supplier 81 o [Too much control] o 4. The licensor can fix the sale or resale price of the products produced under the license o 5. Restricting volume and structure of production o 6. Prohibit the licensee to export the product, except if it is because some other country has exclusive contract with the owner of the patent o [Exploitative benefit to licensor] o 7. Gives licensor option to buy the product used by the licensee (purchase option) o 8. Obligates licensee to transfer for free to the licensor the improvements or licensed obtained through the licensed technology o 9. Exempting the licensor from obligations under the agreement or to third parties brought about by suits re: use of the licensed product o [Beyond actual use] o 10. Require payments of royalties for patents which are not used o 11. Restricting use of the technology even after expiration of the patent o 12. Require payment of patents after expiration of agreement o [Anti-adaptation] o 13. Restricting R&D of the licensee which gear towards adaptation/application of the technology to local context, or for new products, processes, or equipment o 14. Preventing licensee from adapting imported technology to local conditions or introducing innovations to it, as long as it does not impair the quality standards imposed by the licensor o [Catch-basin] o 15. Analogous cases Law provides compulsory provisions : o 1. Philippine Law must govern o 2. In case of litigation, proper court in the Philippines governs o 3. If there is arbitration, venue is Philippines or a neutral country only Governed by UNCITRAL rules or ICC ONLY o 4. Licensor bears all taxes When may the IPO grant exceptions from prohibited or mandatory provisions? o If there is substantial benefit for the country: High technology content Increase in for-ex earnings Generate jobs What if the agreement does not comply with the prohibited or mandatory provisions? o It is unenforceable What is the right of the licensor and licensee? 82 o The licensor is not prohibited from entering into licensing agreement with a third person or exploiting the subject matter himself UNLESS there is provision to the contrary o The licensee can exploit the subject matter of the agreement during the whole term What are rules on the rights of the owner of the patent? o 1. For patented products: restrain, prohibit, and prevent unauthorized persons from making, using, selling, or importing the product o 2. For patented processes: restrain, prohibit, and prevent unauthorized persons from using the process or manufacturing, dealing with, using, selling, or importing any product obtained directly/indirectly from the process What are the limits on these patent rights i.e. when can the owner of the patent not claim the rights above? o 1. When product has been put on the market by the patent owner or with his consent If you bought the patented product, you should be able to use the product. So the old rule that you can buy an IBM product but you cannot use it unless you pay a royalty is not allowed. The moment a patented medicine is allowed to be used anywhere in the world. Ex. it was registered in the US and the inventor allows it to be used elsewhere, automatically you can use it here. (Of course you must buy the patented medicine) o 2. Charitable purpose o 3. Valid parallel importation o 4. Where the act is done privately, for non-commercial purposes o 5. Used for educational/scientific purposes Once a patent expires, the owner loses his exclusive rights and anybody can make that invention. But in the case of medicines, use of that for experiment should be allowed even if the patent has not yet expired. You need lead time to study that medicine (ex. 3 years), so the moment the patent expires, they will be ready to produce that medicine. o 6. Act is to prepare a medicine in accordance with prescription or acts concerning the medicine so prepared, by a pharmacy or medical professional, for individual cases o 7. Government or a 3 rd person authorized by government may exploit an invention when public interest, national security, safety, etc. requires it Ex. if there is public health need for a medicine and the demand is not fulfilled by the supply, the government can import it If a person is allowed to use it for these needs, the use is non-exclusive (so others can use it too) This use can only be enjoined by the Supreme Court o 8. Invention is used in a ship, vessel, craft, or land vehicle of another country entering Philippine territory temporarily or accidentally It must be exclusively used for the vessel What is the prior user rule? 83 o When there is a prior user in GF of the invention or has undertaken serious preparations to do so, before the filing or priority date of the application by another, the prior user can keep on using the invention even when the patent is granted to another. o The right of the prior user may only be transferred along with the enterprise or business, and not separately. When can the government use the invention even without prior agreement by the patent owner (compulsory licensing)? o 1. National emergency o 2. Public interest/national security, health, development of vital national economy o 3. Judicial or administrative determination that the exploitation of the patent has been used for anti-competitive purposes o 4. Has not satisfied the demands of the market (for medicine) o 5. Public non-commercial use of the patent with no satisfactory reason o 6. Where the demand for patented medicine is not being met, and on reasonable terms determined by the Sec. of Health What is the effect/role of compulsory licensing? o N.B. Most cases involve medicine. o Compulsory license in medicine usually is done to decrease prices through competition Petition to compulsory license: o Can only be filed after four years from filing of the application of the patent, or three years from the date the patent, whichever ends later must fall within both periods o Medicines anytime What are the terms of the licensing agreement? o Usually parties are given time to negotiate terms and conditions of compulsory license, but then the Director will step in after Trademarks What is a trademark? o Visible sign capable of distinguishing goods/services/enterprise Ex. including Coca-Cola bottle, which was specially designed What can be a trademark? o 1. Anything fanciful can be used as a trademark. If a word is arbitrary and fanciful, it is entitled to immediate protection. Ex. selecta (Spanish word for selected), maiden form bra, Big Mac, Citi o 2. Secondary meaning is only required if it is originally not trademarkable, but after long use, it has acquired another meaning What cannot be registered? o [public policy] o 1. Immoral o 2. Public order or morality 84 o [same or misleading] o 1. Identical with a registered mark A. Referring to same goods/services or closely related goods/services Ex. Ang Tibay is registered for shoes and slippers. Ang Tibay cannot be registered for pants and shirts, because theyre both haberdashery products and its reasonable to assume they expanded. B. Not exactly identical but one is a colorable imitation that could cause confusion (see tests below) C. Too similar to a trademark known around the world D. Identical to a translation of a foreign trademark Ex. Promesa soaps becomes promise o 2. Deceptive o 3. Likely to mislead public publicly known symbol Ex. red/white/blue barbershop pole o [relating to persons] o 4. May disparage or falsely create belief that it is related to a person living or dead o 5. With signature of living individual unless with his consent o 6. Name of deceased president during lifetime of the widow, except with the latters consent o [generic symbols] o 7. National symbol o 8. Flag of Philippines or other foreign country o 9. Uses geographical indicator known for that product Ex. Isabella tobacco o 10. Signs that are customary or usual in everyday language o 11. Signs that are used to designate the kind or quality of the product Ex. Shoes or Funeral Parlor o 12. Over a color or shape o 13. Emblem of the United Nations (under special law) What if the applicant is registering a similar trademark for closely related goods? o The prior trademark will be protected. o Examples of closely related goods (INVALID): Ex. X-7 Soap X-7 Pomade (both bathroom products) Ex. Wonder Beauty Soap Wonder Laundry Soap o Examples of not closely related goods (VALID): Ex. Esso Oil =/= Esso Cigarettes Ex. Bruth briefs =/= Bruth soaps 85 Ex. cigarettes =/= liquor Ex. Jollibee sandals =/= Jollibee restaurant What are the tests to determine if two products are confusingly similar? o 1. Dominance test This looks past trivial differences This applies if a questioned TM contained the main pictures of the older TM, such that confusion would likely result Deception need not be actually proved Ex. Both Paddocks and Dockers jeans had the words as the dominant design, and not the eagle, so its not confusingly similar to Levis o 2. Holistic test Consider the TMs in their entirety What must be considered? 1. Relevant market (is it targeted to physicians? Illiterate household helpers?) Ex. Physicians are less likely to be confused 2. Kind of product, since more expensive products will have more prudent buyers o Ordinary household items are not purchased with great care. Examples: Ex. Fruit of Eve was challenged by Fruit of the Loom. Fruit of Eve was rectangular with concave sides, and just had a green apple. Fruit of Loom was circular, and had a red apple, with bananas, and grapes. Ex. Lorenzana Patis had a carp. Lorenz patis had a bangus and had the same font. Ex. Lard was sold with a big Roman V. Another used III Ex. Black Cat Tea and Black Dog Tea Ex. Master Roast and Famous Master, since the dominant word is master What if the TM is internationally well-known? o It can be protected even if not sold here, whether or not registered o Passage of time will not bar action to protect that international trademark What is the rule on secondary meanings? o Trademarks which originally may not be registrable may be registered if it already obtained a second meaning. Ex. California manufacturing Not just the State but the manufacturer of Ladys Choice mayonnaise Ex. Some colors or shapes o What are the requirements? 86 1. The use of such as a trademark must be exclusive 2. The name has been used for at least 5 years (long period of time, according to law) Is prior use necessary to register a trademark? o No. Prior use is no longer a requirement to register a trademark When must a registered trademark be used? o Within 3 years from registration o What if you did not use it? If you did not use it, you must file an affidavit of non- use and explain why. Otherwise, it will be cancelled. o What is the ONLY acceptable reason? Force majeure N.B. other reasons like poor economy are invalid How long is the duration of registration? o 10 years, with indefinite renewal for similar periods What if someone just imports or distributes a foreign product? o He cannot register the TM. He does not own it. Can a TM be assigned or transferred? o Yes. A trademark may be assigned or transferred without transferring the business. What is the principle in registration? o The law adopts the Torrens principle. If the assignment is to bind third parties, it must be registered in the IPO. o Otherwise a third party may buy it in GF. What are the inter partes cases (contested cases before the IPO)? o 1. Opposition against registration of mark Within 30 days after publication Ground: registration will damage the oppositor o 2. Petition to cancel the registration of mark A. Within 5 years of registration Ground: confusingly similar B. Any time Grounds: o 1. Mark became generic (aspirin became generic, cellophane, Thermos bottle) o 2. Abandonment failure to use for uninterrupted period of 3 years o 3. Misrepresentation of source of goods o N.B. compare this with periods for actions under copyright and patent which are generally both 4 years When is there infringement of trademark? 87 o Use, copying, etc. o Includes preparatory steps to carry out the sale of goods This applies to those who make fake shirts. They make the shirts first, without attaching the label. They will only sell the label when they are about the sell the shirts. So this way, even if they havent attached the labels, the manufacturer can be held liable for infringement. o Copying, counterfeiting, making colorable imitations of TMs and using it for labels, packages, etc. Three elements to prove infringement? o 1. The TM is valid o 2. The plaintiff owns it o 3. There is likelihood of confusion due to use of defendant When is registration not needed for an action? o 1. For unfair competition A. Passing off a product format of another B. Giving goods the appearance of another o 2. False designation of origin The law says the right is acquired from time of registration. When is this counted? o From filing of the date of application o Or from the priority date. This is when there is actual registration in other countries covered by the reciprocity rule. Types of confusion? o 1. Confusion of goods o 2. Confusion of business Goods are different but the product can be reasonably assumed to originate form the plaintiff, deceiving the public Chattel Mortgage What are the requisites of Chattel Mortgage? o 1. Constituted to provide security for a principal obligation If the principal obligation fails, there can be no CM o 2. The mortgagor must be the absolute owner of the property mortgaged X bought a car and placed it up for CM. But when he signed the CM mortgage, the car hasnt been delivered to him yet. HELD: Cannot CM the car because delivery is needed to transfer ownership. Seller sold an oil tanker, and seller has not been fully paid. They agreed the buyer will not register the property until there has been full payment. The buyer breached the agreement and registered it. HELD: The registration was valid, because the mortgagee was in GF and the buyer was the absolute owner by that time anyway. 88 o 3. Must have free disposal of the property Trustee cannot CM property because he has no free disposal o 4. Must be personal property Ex. moving vehicles, shares of stock, machinery placed by persons on property of another, etc. Can personal property considered real property under the NCC by subject to CM? Yes. What is the status of standing crops? They are real property under the NCC but personal property under CM Law, so it can be chattel mortgaged. Property which may be real property under the NCC may be personal property under special law. The parties considered the house as personal property, and subjected it to CM. Does it bind them and third parties? By estoppel this classification binds the parties. But this does not bind third parties, because it will not occur to third parties to check with the CM registry if real property is treated as personal. o 5. Mortgage must be registered If the residence of the mortgagor and the property are in different places, they must be registered in both places Ex. Shares of stock have situs in the principal office of the corporation (ex. Makati) and the mortgagor lives in Pasig. It must be registered in both. Register with appropriate specialized agency: If Motor Vehicle, with LTO, aircraft, Civil Aeronatics, ships, Maritime office, copyright, National Library, trademark, IPO. What if it is not registered? Valid between the parties, but not against third persons. o 6. Affidavit of GF What if there is no affidavit of GF? Binds the parties, but not third parties. But if a third party actually knows of the execution of a CM and the CM was done in good faith, it will bind the third party. Can the CM extend to improvements and future property? o No. o Contra: In REM, the mortgage extends to improvements introduced on the real property by the mortgagor. Ex. REM over land with one property, and another building is built, the REM extends on it. 89 o There was a CM over machines in a factory. But then more machines were introduced later on. Does the CM extend over the new improvements? No. Because the machines were treated as personal property so the parties are estopped and cannot apply the REM principle. Can a CM secure future loans or indebtedness? o No. Cannot constitute CM to provide security for future indebtedness, whereas REM can be used to do this. The provision that it will cover future loans is void. You can amend the CM over the first loan to cover the new one if the first loan still exists. If the first loan has been extinguished, you constitute a new CM. o Because here, the parties have to swear that they constituted it to secure a valid obligation and not to defraud creditors. o You cannot swear by an obligation that does not exist yet. Someone mortgaged his car and it was completely wrecked, collected money from Insurance, and bought a new car, does the CM cover the new car? o No. Must constitute a new CM. Who owns the property under CM? Can he sell it? o Still the mortgagor. He can sell the property since he retains ownership. o The sale is valid, but he can be liable under the RPC for selling something that has been mortgaged under CM Law. If a personal property was mortgaged and the mortgagor has a judgment creditor who levied on the property mortgaged, who wins? o The creditor must respect the CM. He can only garnish on the equity of redemption and not the property itself. If the mortgagor defaults, can the mortgagee appropriate the property? o No. This is pactum commissorium which is invalid. o Can the mortgagee take the property? Not forcibly. He can file for replevin to get it, and then sell it. Is a private sale of the property to foreclose valid? o Yes. To foreclose, what is needed? o 1. Publication in the newspaper is not needed, o 2. Notice must be posted in two or more public places, where the mortgagee resides or where the property is located at least 10 days before the sale. o 3. Notice to mortgagor o What if there is a stipulation as to where the property must be sold? It must be followed What if the proceeds of the foreclosure exceed the amount owed? o Return to the mortgagor. 90 o If there is deficiency, the E can run after mortgagor for it. o Exception? Art 1484. Sale of property payable in installment basis. If sale was done to cover for the balance of the price, if the foreclosure sale results in deficiency, the E can no longer sue for payment of the deficiency. Extrajudicial foreclosure of REM What is required before property can be foreclosed extra-judicially? o There must be stipulation giving the mortgagee a SPA to foreclose it extra-judicially. If a loan is overdue, what will not preclude foreclosure of the REM? o 1. Allegations that the mortgagee did not furnish the mortgagor an updated statement of account o 2. Negotiation for restructuring of the loan What is the rule on interest rates? o While the ceiling rates on interests have been lifted by the monetary board, it doesnt mean the parties can stipulate on any rate of interest. If it is unconscionable, it will be void. Ex. 5% a month or 6% a month are contra bonus mores for being unconscionable. o What is the effect of this on the foreclosure? The foreclosure is thus void, because you have to first determine the amount that is properly due to the mortgagee. o What if the provision says the bank can unilaterally increase the interest? The provision is void, violating mutuality of contracts in the NCC. The parties have to agree in advance a formula on how to increase the interest rate. This will make the formula valid. What if the foreclosure was done in another place as opposed to what was stipulated in the agreement? o Valid. If there were no words of exclusivity, there is waiver of venue (Rule 4 of ROC). What is the notice requirement? o 1. Notice must be published once a week for 3 consecutive weeks in a newspaper of general circulation N.B. If you publish it on Monday the first week, it must ALWAYS be Monday the next two weeks. Not Wednesday or Friday. o 2. It must be posted in 3 public places where the property is located o Is personal notice to the mortgagor needed? What if there is failure to do so? No need. No effect. o What if there was no posting but there was publishing? It is sufficient. 91 o What if the sale is postponed? You must give notices again through posting and publishing. o What are the exceptions? 1. Sale not finished that day and will continue the next day 2. Waiver (see below What if mortgagor talks to the bank) o What if there are clerical errors in spelling the name of the mortgagor? If the property is properly described, then it is valid. o But what if the notice puts the wrong date when the mortgage was executed? This made the foreclosure invalid because there was no mortgage constituted on that date What if the mortgagor talks to the bank before foreclosure promising to pay the loan, and the bank makes him sign a waiver of republication, is it valid? o Yes. o While commentators have said that third parties who want to buy the property will be prejudiced since they did not know, this waiver is valid because it is for the benefit of the owner of the property. Can the foreclosure be done by a Notary Public and not a sheriff? o Yes, although the courts now require the payment of filing fees for foreclosure even if it is a notary public who does it. The judge also has to confirm it after. To what extent does Rule 39 apply to EJ foreclosure of mortgage? o Only to the extent of redemption. o But not for other provisions, such as the requirement in Rule 39 that the sheriff must sell the properties one by one and stop as soon as the loan is covered. So if a subdivision developer mortgaged all the lots, they can be sold in EJ foreclosure lump sum. What happens to the excess or deficiency after foreclosure? o Excess goes to mortgagor o Mortgagee can sue for payment of deficiency Is there a right to redemption? o Yes. How do you redeem? o 1. Tender the correct redemption price, or o 2. File a case to compel delivery of property for redemption (tantamount to tender of payment) BUT this doctrine is based on the premise that the redemption price is not settled. If the redemption price is not disputed, this doctrine does not apply. If after filing the case, the redemption price was determined when before it was unknown, he must then tender the redemption price. Can the parties agree to extend the redemption period? 92 o Yes, this is valid. o Ex. In a case, the sheriff placed that there are 2 years to redeem and the bank-mortgagee did not object. Under the Banking Law, i.e. the mortgagee is a bank, what is provided? o If the mortgagor is a natural person, he has one year to redeem. If the property is covered by Torrens title, count from registration of the sale. o If the mortgagor is an artificial person like a corporation, the redemption period is three months from date of sale or the date when the deed of sale was registered whichever comes first. In the ROC, if real property is sold on execution you have to pay 1% per month for interest. What if the lender-mortgagee is a bank? o The rate stipulated on the loan document governs. What if there are two loans falling due on two dates, where one was due, and the second fell due during redemption? o The R must pay for BOTH loans; otherwise the first redemption is not valid. What can the buyer of the foreclosed property do? o He can ask for a writ of possession. Granting this is ministerial and non-litigious. This is ex parte and there is no need to require presentation of evidence. o He must just allege that there was a valid mortgage, default, foreclosure sale, and the sale was according to Act 3135. When can you ask for a writ of possession? o Either during redemption period or after lapse of redemption period. o Does the rule in Rule 39 where enforcement of decision is through motion for 5 years and independent action til 10 years apply here? No. This right is imprescriptible. o What if you enter into a new contract ex. a K of lease? That new contract will govern the relationship of the parties. You cannot file for writ of possession you file for ejectment. o To whom can the writ of possession not be enforced against? The writ of possession cannot be enforced against a third party who is in possession of the land in GF and is not in privity with the parties in the mortgage. The case has to be ejectment. o What if the owner-mortgagor of the property has a lessee on the property? A lessee stands in privity with the owner of the property so the lessee has to respect the writ of possession. But the writ of possession cannot be enforced against the lessee when: 1. The lease hasnt expired and it is annotated on the title 2. The lease is not annotated but the buyer has actual knowledge 93 3. House Rental Law: if the property of the apartment is covered by the House Rental Law, the buyer must honor the lease even if it is not registered. He cannot evict the tenant until the expiration of the contract o What if a third partys rights are adverse against the owner- mortgagor? If the rights of the third party are adverse against the mortgagor, it cannot be enforced against him because it violates due process. It violates their rights without prior hearing. Ex. A third party claims that he bought the property prior to it being mortgaged. How can the mortgagor question the validity of foreclosure? o Within 30 days from when buyer takes possession, the mortgagor can file a petition to annul the foreclosure sale. N.B. if he fails to file the petition within the 30 day period, it will be barred. o But what if possession hasnt been delivered yet (since you count the period from there)? When no writ of possession has yet been issued, the mortgagor can file a case to litigate to question the validity of foreclosure (ordinary civil case) What if the owners duplicate remained with the mortgagor (since he failed to surrender it), and there was failure to register? o The court should order the register of deeds to annotate the deed of sale even if the owners duplicate was not given. o Otherwise, the owner can prevent mortgage from being effective just by withholding the owners duplicate. N.B. for other aspects of CM Law and REM Law, see Civil Law and Remedial Law notes. Truth in Lending Act What is the purpose of the law? o To protect citizens from lack of awareness as to true cost of credit by assuring full disclosure of the cost o To prevent uninformed use of credit to the detriment of national economy What is the basic obligation of the lender? o The debtor must be informed how much it is costing him to borrow money the charges he has to pay Which creditors are covered? o 1. Any person engaged in the business of extending credit, who requires a finance charge o 2. Any person engaged in the business of loaning or selling property/services on a time, credit, or installment basis (either as principal or agent), who requires a finance charge What does the Act cover? o 1. Any loan, mortgage, deed of trust, advance, or discount o 2. Any contract to sell, contract of sale property or services, on installment basis; 94 o 3. Lease purchase contract with financing company o 4. Hire, bailment, lease of property o 5. Option, demand, lien, pledge, or claim against property or money o 6. Purchase, acquisition of, or any credit upon the security of any obligation arising from any of the foregoing What must be indicated? o Cash price o How much downpayment will go to the principal, and the interest o Total amount to be financed + finance charges Percentage of finance charges vis--vis total amount Central bank prescribed a form to be used by banks to give this information. But this law is not limited to financial institutions. This law even covers private persons (5-6 lending, for instance). o What if the form is not given to the debtor? Need not follow the exact form, as long as the instrument reveals the pertinent information Effects of failure to comply? o 1. The credit agreement is still binding o 2. The borrower is entitled to be paid double the finance charges (not less than 100 pesos, not more than 2,000 pesos) o 3. When the debtor sues the creditor for payment of finance charges, he can get attys fees. o 4. The creditor who did not comply with the law may be prosecuted criminally Manual of regulation for banks o If a bank lends more than P500,000, it can charge a handling fee. o If that was not disclosed in the statement to comply with the Truth in Lending Act, the bank cannot charge the handling fee The statement given did not mention that the bank can increase the penalty in case of default. Can the bank charge this increase in a penalty? o No. Anti Money Laundering Act What is money laundering? o Crime where proceeds of illegal activity are transacted, to make them appear to have originated from legitimate sources Who are guilty? o 1. Person who transacts the money coming from the illegal activity o 2. He who knows that the money came from an illegal source, but performs acts to facilitate the transaction Ex. Bank officer who helps open bank account, with knowledge that the funds came from kidnapping o 3. Person who does not comply with disclosure requirements of law 95 Who are covered? o 1. Banks o 2. Quasi-banks o 3. Financing institutions (ex. financing companies, pawnshops, investment houses, trust companies, institutions supervised by Central Bank, insurance companies, securities dealers, brokers, investment houses, investment managers, mutual funds, common trust funds, pre-need companies, foreign exchange corporations, money changers) o 4. Those engaged in exchange of valuable property like jewelry, paintings, etc. Does it cover real estate companies? o NO. So if someone uses illegally obtained money to buy land, the real estate company is not required to comply with AMLA. What are the two kinds of transactions? o 1. Covered transactions More than P500,000 or its equivalent on one banking day Automatically, these have to be reported although legitimate o 2. Suspicious transactions The amount is irrelevant, even if less than P500,000. If it is suspicious, it mus be reported. Ex. there is no underlying legal or trade obligation or justification. Ex. the transaction is structured to avoid reporting (for instance, instead of remitting an amount more than P500,000, everyday he remits P499,999.) The underlying crimes whose commission will give rise to violation of AMLA: o [By public officers] o 1. Violation of Graft and corrupt practices o 2. Plunder o [Grave crimes with property implications] o 1. Kidnap for ransom o 2.Violation of dangerous drugs law o 3. Piracy o 4. Hijacking, destructive arson, murder (N.B. this is the HK-MAD enumeration + piracy) o [Obtaining property illegally] o 1. Robbery and extortion o 2. Jueteng and illegal betting on jai alai o 3. Qualified theft o 4. Swindling o 5. Smuggling o [Commercial violations] 96 o 1. Violation of e-commerce law o 2. Securities regulation code violation What is the composition of the AMLC? o 1. Governor of Bangko Sentral, 2. Chairman of SEC, 3. Insurance Commissioner How are decisions reached? o Decisions must be unanimous (all 3 of them) Powers of the AMLC? o 1. Implement measures to prevent AML o 2. Coordinate with foreign countries for enforcement of AML o 3. Investigate transactions o 4. Recommend for prosecution o 5. Apply for order, ex parte, for freezing accounts (with the CA) o 6. Could institute forfeiture proceedings o 7. Enforce sanctions for violations What are duties of covered institutions? o Establish true identities of their clients o Are anonymous accounts allowed? No. The Bank must know who actually owns the account, even if its just numbers indicated. What is the effect of compliance with required reporting under this law? o Transaction is removed from coverage of law on secrecy of bank deposits o The officers who make the reports in GF are given immunity from prosecution. Petition for ex-parte order to freeze an account: o Filed with the CA o The freeze order is valid for 20 days. But it may extend the period o Contra: in the case of inquiring into deposits or investments, it is not ex parte so the court has to conduct a hearing first. General rule: The AMLC must get court order to investigate any deposit in accordance with this law. Then they have to establish probable cause. o When is court order not required to inquire? In case of: kidnapping, DDL, hijacking, destructive arson, and murder (HK-MAD) Contrast with powers of the BSP? o The BSP is authorized to inquire into any deposit or investment to ensure that the Bank is complying with this law. o It may be done in accordance with its regular annual inspection, or through special examination. o So the Monetary Board can inspect the accounts even without the order. 97 Phil. Deposit Insurance Corporation Law What is the mandatory coverage of the PDIC? o The law requires that checking accounts, savings accounts, and time deposits must be insured with the PDIC o Does the PDIC law cover trust accounts? No. Remember this. It applies to deposits. o What about other obligations of the banks? If considered deposit liabilities upon order of the PDIC, may be covered also o Deposits of a branch of a domestic bank abroad (ex. BPI has a branch abroad) what is the rule? Not required to be insured. But the domestic bank may ask the PDIC to insure the deposits of the branches abroad. What banking transactions are not covered by insurance? o 1. Investment products like bonds, securities, trust receipts o 2. Deposit accounts that are unfunded Ex. Issued a check that bounced, so he had no money. Then the bank closed. Cannot recover from PDIC. o 3. Deposits from unsafe/unsound bank practices o 4. Proceeds from money laundering o 5. Contents of safety deposit box What is the maximum coverage? o P500,000 What is the period to claim? o Within 2 years from actual takeover by the receiver Somebody has a current account, saving accounts, time deposits, and if you add it all up, the value exceeds P500000. If the bank closes, how much can he collect? o P500000 only. You add it up. Its not per account. What is the rule to determine what is covered? o Add up all deposits altogether. But if he has another deposit in another capacity (ex. guardian of minor, administrator of estate), this is a different capacity so its another P500K. (Per capacity rule) o X has a separate account and a joint account (X and/or Y). What is the rule? Two separate accounts, one for the separate account, one for the joint account. The rule is that joint accounts are insured separately from any individually-owned account. What if there are two or more depositors, such as in a joint account? o The P500K will be divided among them unless there is a different agreement. o What if the account is held jointly by a juridical entity and one or more natural persons? 98 It is presumed that the deposit entirely belongs to the corporation. The natural persons are assumed to be just officers. If you have a person with several joint accounts, then what is the total he can get? o Add all joint accounts together, and subject to the ceiling o Ex. three separate joint accounts, with A, B, and with C, then his share will be added up and the shares on the three accounts cannot exceed P500K What if the depositor owes the bank too? o There will be set-off with what he collects. Two ways for PDIC to comply: o 1. Hand over the money to the depositor o 2. Open another account in another bank in the name of the depositor What is the right of PDIC after payment? o There is subrogation, so in liquidation of the bank, the PDIC can represent the depositor. What if there is monetary or financial instability in the banking system? o If established by the Monetary Board, the PDIC directors may adjust the maximum coverage. But they must be unanimous and it will have to be approved by the President. What if somebody owns a negotiable certificate and it is payable to bearer? o He cannot collect unless his name is recorded in the books of the bank. Can a person split his deposits or create fictitious accounts? o No. It is illegal to create fictitious deposit accounts or split deposits to circumvent the maximum liability in case of closure of the bank. o Ex. He has 1M so he transfers P500K to the name of his relative. What is the period to pay? o It must be within 120 days from closure of the bank. If beyond this, there is no payment, it is a criminal act. Decisions of PDIC are FINAL. What is the remedy? o Certiorari. Corporation Law Corporation, defined It is an artificial person, created by law. o What is the implication? It cannot recover moral damages since it cannot experience wounded feelings, mental anguish, etc. It can, however, recover damages for besmirched reputation. It has the right of succession. What is this? 99 o Stockholders may come and go but its personality remains the same Cannot perform an act unless authorized by law. o As opposed to natural persons who can do anything as long as not prohibited by law Does a defective incorporation result into partnership? o No. A partnership requires delectus personarum, which is not always existent in a corporation, so it is not a fall back. o But the liability of persons who form a defective corporation they are liable as partners. o Those who merely subscribed are not liable as such. Nationality of corporations Primary test: o Place of incorporation test is the principal doctrine: country under whose laws it was organized When does the control test also apply in addition to the place of incorporation test? o 1. Exploitation of natural resources o 2. Operating public utilities, mass media, advertising o 3. War-time test During war time, the nationality of a private corporation is determined by control test o 4. Grandfather rule What is the Grandfather rule in corporations and how did the FIA change it? o XYZ and ABC both own 50% of the corporation. ABC is 50% Filipino and 50% foreign. XYZ is 60% Filipino and 40% foreign. What are the implications? XYZ makes it 30% Filipino and 20% foreign. ABC makes it 25% and 25%. So it becomes 55% Filipino and 45% foreign. How did the foreign investments act change this rule? o XYZ becomes 100% Filipino because it is at least 60% Filipino. So XYZ contributes full 50% Filipino ownership, added to ABCs 25% = the corporation is 75% Filipino and is thus qualified to own land. Corporate juridical personality It has separate juridical personality. Implications? o The corporate property does not belong to SHs. The SHs cannot recover property or intervene in a case of the corporation to recover property. Case: A SH sued to annul foreclosure of a mortgage. He wanted to annotate a notice lis pendens. This was not allowed because he was just a SH. Case: SH cannot question the search warrant filed by the government against a corporation, or a sequestration order against the corporation. o If there is a judgment against corporation, it cannot be enforced against property of the SHs, and vice versa. 100 o A SH cannot be sued if the corporation breaches its contract. The purpose of the law is justice and fairness. Therefore, when the law creates a device like the corporate vehicle, and it is abused, the law will not allow that. So there is piercing the veil of corporate fiction. When is there piercing? o 1. If it is used to commit fraud, violate the law, etc. (fraud cases) Requisites for this to apply? 1. Complete control, not just of stocks but also policy and business practice 2. Control used to commit fraud or wrong 3. Proximately causes injury or loss Case: There was a tax imposed on the sale of cars of a corporation. This companys 95% owner would sell the cars exclusively to the second corporation, owned 95% of his wife, for a very cheap price, and the wifes corporation sells to the public. This was tax fraud and there was piercing. o 2. In the internal dealings, if the SHs show that they are not treating the corporation as a separate juridical personality (alter ego cases) The corporation is only a conduit or alter ego of the controlling SH. Here, no fraudulent intent but there is systemic disregard for separate juridical personality, and so third persons could not be expected to be bound by such Ex. there was a controlling SH where she gave four minor employees 1 share each, and had the four endorse the certificates in blank to her. The controlling SH also confused her own funds with the corporations. There were no meetings held, etc. Is mere control of a corporation sufficient to pierce? o No. It must be control plus something else. o If a holding company is exercising control over management of a subsidiary this is in itself is not enough. The management must be control for the purpose of committing fraud. Against whom can you invoke this rule against? o You can invoke this only against the majority SHs. You cannot invoke it against minority SHs. Can the corporation use piercing for its favor? o No. The underlying basis for piercing is that the separate juridical personality is being used to commit fraud. The corporation cannot invoke it for its favor. o Ex. A SH sued on behalf of a corporation, claiming that since he was the controlling SH, the veil must be pierced. INVALID cannot use piercing for the corporations favor. Piercing can apply even for affiliate companies: o Ex. Merrill-Lynch Phils. was organized. The AOI said primary purpose is to transmit orders of customers if you want to play the stock market abroad. A client placed an order to sell his holdings of silver. Merrill-Lynch NY delayed it, and by the time it was sold, the price of silver plummeted. The client sued both M- L Philippines and M-L NY. MLP said the contract was with MLNY. MLNY said it was not doing business in the Philippines 101 so it cannot be sued. HELD: MLNY earns business in the Philippines but circumvents it through MLP. So it was pierced. In piercing cases, how can an officer be held liable while still respecting the due process clause? o The general rule is that a judgment cannot bind a person not impleaded in a case. Check if the officers were actually given the chance to be apprised and be involved in the defense of the case. o If the officers were sued in their official capacity, there is no problem. When the corporation however has ceased to exist already it has been held as an exception to the rule that an officer must be impleaded under AC Ransom. What is the corporations liability for torts? o Corporation liable for a tortuous act by an officer or agent only when the corporation has expressly directed the commission of the act o Who is this proved? 1. Corporation issued a resolution 2. Corporation took advantage of the act What is the corporations liability for criminal acts? o An officer may be held personally liable for the crime per se if there is a law expressly making the person liable for the corporations criminal offense Capital Structure What is needed to form a corporation? o 5-15 incorporators Majority are residents Only natural persons At least one share each o Can a corporation be a subscriber? Yes. A corporation can be a subscriber but not an incorporator. What is the maximum corporate life? o 50 years, extendible for additional periods of 50 years o You can only extend in the last five years of its corporate existence Minimum required paid up capital? o Generally, none Except for banks, public utilities, insurance companies, etc. o For all, at least 25% of the authorized shares must be subscribed o At least 25% of those must be paid. Minimum paid-up is P5000. o Must everyone pay for 25% of their subscriptions? It is not required that everyone must pay 25%. Someone can pay less, although one paid 100%. You just have to pay the 25%, total. A corporation may be stock or non-stock (NS). 102 o Stock: 1. Must have shares and 2. Must be authorized to declare dividends So country clubs are NS because they cannot declare dividends o A government corporation is governed by its own special Law. But the Corporation Code is suppletory to its charters. So there can be no amendment of the Special Law authorizing that there be less than 5 directors because the Corporation Code is still suppletorily applicable. Distinguish: o Corporators: those who compose the corporation o Incorporators: sign the AOI o SHs: for stock corporation o Members: for NS What is the 25-25 rule? o At least 25% of the authorized capital stock must be subscribed, and 25% of the subscription must be paid o What if 5 natural persons held 1 share each and the rest of the shares are held by a holding company? Is this valid? Yes. While a corporation cannot be an incorporator, it can be a subscriber. You count the subscription of the corporation to see whether the 25-25 rule is met. Classification of shares: o Generally, broad discretion. o Shares are presumed to be equal, so unless provided otherwise, they get same voting rights, dividends. What are exceptions to this general rule? o 1. Shares must not be denied voting rights unless: A. Preferred B. Redeemable o 2. Banks, trust companies, insurance companies, etc. are not allowed to issue no-par-value shares. Because they need capital. o 3. Preferred shares must be par value shares. What are preferred shares as to assets? Priority in distribution of assets in case of liquidation What are preferred shares as to dividends? Priority in distribution of dividends in case of liquidation Can preferred shares be given preference over creditors? No, because this violates Trust Fund Doctrine. Ex. You are liquidating a corporation. You cannot benefit shares prior to the creditors. 103 o 4. Cumulative vs. Non-cumulative shares Cumulative preferred shares: entitle holders to payment of current dividends AND back dividends before holders of common shares are paid Non-cumulative preferred shares: entitle holders to payment of current dividends only, before holders of common shares are paid o 5. Participating vs. non-participating Participating: entitle holders to participate with holders of common shares in retained earnings after the stipulated dividend paid to preferred shares i.e. paid their dividends, THEN still share in the common pie Non-participating: entitle holders only to stipulated preferred dividends and nothing more This is the DEFAULT RULE o 6. You can classify shares according to nationalization requirements. Ex. SMC (class A shares can only be owned by Filipinos, class B anyone) to make sure its always 60% owned by Filipinos o 7. Redeemable shares How can these be issued? May only be issued when expressly provided in the AOI. Terms and conditions stated in AOI. What happens in redemption? Corporation pays money in exchange for the stock. Option rests entirely upon the corporation, and cannot be compelled or refused. Shares deemed retired after redemption. What is required for the corporation to do? Corp required to maintain a sinking fund to cover for redemption price if required to redeem No need for unrestricted retained earnings before shares are redeemed but there must be sufficient assets to pay creditors/answer for operations, or else there can be no redemption (The latter qualification is based on the Trust Fund Doctrine) o 8. Founders shares If theres a right to exclusively for or be voted for as director, it must not be for a period exceeding 5 years What are treasury shares? o Those issued and fully paid for, and then reacquired by the corporation Still considered issued; not considered as outstanding Considered fully paid for and held by the corporation o May be distributed as property dividends o What is their status? 104 Not outstanding, not cancelled. In a state of dormancy, which in the possession of the corporation. They will become outstanding again when the corporation sells the treasury shares o Can there be stock dividends declared from treasury shares? No. These are not outstanding. Cannot vote and cannot have dividends declared from them. This is a tax evasion scheme. Besides, the terminology is wrong. You can only declare stock dividends from authorized but unissued shares. From treasury shares, you can declare property dividends. o Can cash dividends be declared from the shares? NOT entitled to dividends because the corporation cannot declare dividends for itself When do non-voting shares vote? o [Key agreements] 1. AOI amendment 2. BLs adoption and amendment o [Property-related] 1. Increase/decrease of bonded indebtedness 2. Increase/decrease of capital stock 3. Sale/disposition of all/substantially all of corporate property o [Changes in the corporation] 1. Merger/consolidation 2. Investment of funds in another corporation or another business purpose 3. Corporate dissolution What are watered stocks? o 1. Issued without consideration o 2. Discounted shares o 3. Issued as stock dividend when there are no sufficient retained earnings/surplus o Who is liable? Solidary liability of director/officer who issued it and all those who didnt oppose it in writing which was filed to the secretary Liability is the difference in value Incorporation and organization Who is a promoter? o Promoter one who, acting alone or with others, takes initiative in founding and organizing business/enterprise and receives consideration for it. Distinguish: o Promoters contracts : both parties know corporation doesnt exist yet 105 o Contracts entered into with defective corporations (de facto or by estoppel): at least one party is unaware that the corporation is not yet constituted What is pre-incorporation subscription? o 1. Acquisition of unissued stock in existing or still to be formed corporation is deemed a subscription regardless of appellation o 2. Subscription is irrevocable for 6 months 1. But revocation valid thereafter if the corporation did not materialize (offer theory) 2. Or all other subscribers consented to the revocation (contract theory) When is revocation disallowed already? When the AOI have been submitted to SEC o Is a corporation bound by a promoters contract once it is formed? It is not, unless it had received benefits from the contract by the time it was constituted What about other promoters contracts? o In general contract law this would have been void because a non-existent corporation cannot give consent until it is formed, but these are exceptions to this general rule. o What is needed to validate and enforce promoters contracts? The corporation has to ratify the acts when it is formed o Who are personally liable for the promoters contracts? The investors who are the moving spirit behind the incorporation personally liable for expenses incurred by the corporation. Those who are not are not. Promoters are also and personally liable for pre- incorporation expenses. Subscription: o Subscription, not payment, grants rights to stockholders, even if not fully paid for. Holders of non-delinquent shares have all the rights of a stockholder. o This is a consensual contract No need for tradition, unlike sales shares deemed issued already. Only need to register in the Stock and Transfer Book for dispositions, so no need to register for issuance Not covered by SOF because subscription itself executes the contract. o When a condition for issuance of shares is void, then it becomes a pure, valid subscription agreement. Ignore the condition. What is valid consideration for issuance of shares? o 1. Actual cash Cannot be a PN or future services o 2. Property: Actually received, necessary or convenient for corporate purpose, with fair valuation Appraised by SEC 106 o 3. Labor actually performed o 4. Previously incurred indebtedness o 5. Amounts transferred from unrestricted retained earnings to stated capital o 6. Outstanding shares exchanged for stocks in event of reclassification/conversion What if the consideration is unlawful? o It would violate the TFD if the subscription is deemed void. So its better to just consider the subscription valid, but the consideration void. o The subscriber has outstanding payable consideration in cash, and the directors/officers are liable for watered stocks. Articles of incorporation: o 1. Name of the corporation Registration of business names is with SEC o 2. Purposes Can have several secondary purposes so if the primary purpose does not become profitable, you can shift without amending the AOI SEC can only reject if patently illegal o 3. Place of principal business Must be in the Philippines The SEC now requires that you put even the street and number o 4. Term for which it will exist Period of maximum 50 years, extendable No extension until last 5 years of term o 5. Names, nationalities, residences of directors o 6. Names, nationalities, residences of incorporators o 7. If a Stock Corporation, amount of authorized capital stock If there are par value shares, the amount each The amount subscribed and paid each by the incorporators What is required for amendment? o Must be authorized by 2/3 of the SHs and majority of the directors o When does it take effect? Upon approval by SEC Or lapse of six months from filing Grounds for disapproving application/amendment? o 1. Articles not sufficient in form o 2. Purpose is illegal, unconstitutional, illegal, immoral, etc. o 3. Treasurers affidavit is false o 4. Did not comply with nationalization requirement 107 N.B. Applies where required. The SEC will endorse it with the relevant government agency (education CHED, etc.) What is the requirement as to the name? o Required to submit undertaking that you will change the corporate name if it is the same or confusingly similar. o What must be considered? 1. The same/confusingly similar name 2. Engaged in the same line of business Can you make a corporation that practices a profession? o No. o Acevedo: It is not engaged in the practice of optometry. It hires employees engaged in optometry. So its allowed. How does the SEC check for the starting capital? o When you incorporate, the SEC will require you to waive secrecy of bank deposits, so they can check starting capital. o Can the proceeds of a bank loan be counted as paid-up capital? No. This is a liability, not paid-up capital. You cannot include it. When does a de facto corporation exist? o 1. Valid law under which it was organized o 2. Attempt in good faith to form a corporation There must also be a certificate issued by the SEC with a blue ribbon and the seal. Without this, cannot claim to be a corporation. o 3. User of corporate powers What is the scope of the de facto corporation doctrine? o Situations where the defective enterprise contracts with an outsider. The suit by or against the defective enterprise must be against the de facto corporation and not the individuals behind it. Can its existence be attacked collaterally? o No. Just directly, through quo warranto, and only by the Sol- Gen. What is the nature of its acts? o Valid, like that of a de jure corporation. o Even the acts of the officers are valid, although they also have liabilities of valid officers. Can a corporation to practice a profession be a de facto corporation? o No. There is no law allowing that. What is a corporation by estoppel? o So defective in form that it is neither de jure or de facto, but it is a corporation as to those who cannot deny its corporate existence. When it applies: o Someone must deal with the association like a corporation and contracted with this association, and after receiving benefits, 108 claims that the association is not a corporation. So it covers obligations to the defective corporation. Differences between de facto and estoppel? o 1. De facto has real existence in law; estoppel has none o 2. De facto may exist even if there are no dealings between parties on a corporate basis; estoppel needs these o 3. A corporation cannot be de facto unless the requisites are present; estoppel, even without any requisite Two associations of jeep drivers incorporated as NS, non-profit. They agreed to merge. One president got majority votes. The other guy refused to recognize the others win and continued to collect dues. o HELD: There was no intra-corporate dispute because there was no valid merger; there were no articles of merger. There is no corporation by estoppel because both presidents knew they did not merge. What is the nature of the liabilities of those behind a corporation by estoppel? o If the incorporators knew there was no corporation (fraud) liable as general partners (all properties) o If the incorporators did not know or there was no fraud liable as limited partners (only properties they intended to invest) Can the person behind the corporation claim that it is a corporation by estoppel, when the person was being sued for execution of properties (because the corporation did not exist)? o No. Cannot invoke this. Because the person KNOWS that there was no corporation, so there was no genuine belief on his part. What are by-laws? o Intramural document, to govern intra-corporate relationship. When are by-laws valid? o 1. Do not contravene law o 2. Reasonable and non-discriminatory o 3. Do not contradict Articles of Incorporation If there is conflict, AOIs win out Is it possible that an express by-law provision be violated and still bind the corporation? o Yes, as long as there is corporate approval through the BOD, express or implied, whether empowered or ratified. When can a third party be bound by by-laws? o He must be duly informed in time of the pertinent provisions, actually or constructively. Otherwise, he cannot be prejudiced by the by-laws because its an intramural document. How can BLs be adopted? o Majority vote of outstanding capital stock. o What if BLs are not adopted within 1 month from incorporation? Not a ground to automatically dissolve the corporation, but it can be a ground for the SEC to revoke the certificate. o How can BLs be amended or repealed? 1. Majority of BOD + Majority of outstanding capital stock 109 2. 2/3 of outstanding capital stock may delegate to the BOD the power to amend or repeal the by-laws. N.B. Majority of outstanding capital stock may revoke this delegation. What should be included in the by-laws? o 1. When regular and special meetings are held o 2. Quorum o 3. Proxies o 4. Qualifications, duties, compensation of directors or officers Can impose additional qualifications (like minimum number of shares) o 5. When annual election of officers is done, and manner of appointment o 6. Manner of issuance of stock certificates o Citibank: By-laws allowed country managers to sue and defend lawsuits, and delegate this power. So a delegation of this power to the lawyer is valid. Valley Golf: A member pledged his proprietary shares to Chinabank. He forfeited, and Chinabank foreclosed and bought the shares. Chinabank sought registration of the shares by Valley Golf refused because the shares were delinquent. Valley Golf claimed its bylaws gave it a lien over proprietary shares. o HELD: Valley Golf lost. By-laws do not bind third parties without actual knowledge. Corporate Powers What is the underlying theory behind corporate powers? o All powers are exercised by the BOD. o No person or officer can bind the corporation; it has to be the BOD. Agents must not exceed the power granted by BOD. o There are instances, however, where stockholders or members have to give their consent this is where the underlying contractual relationship is being altered or amended. A Corporation can sue or be sued in its own name. It must indicate its corporate name in the pleadings and not use an acronym A. Power to extend or shorten corporate term: o Majority of BOD + 2/3 of OCS o There is right of appraisal for dissenting stockholders (although some commentators say there shouldnt be for mere shortening of corporate term) B. Power to increase or decrease capital stock: o Majority of BOD + 2/3 of OCS o Need SEC approval: For increase to check whether there is subscription to at least 25% of increased stock, and at least 25% paid-up For decrease it must not prejudice corporate creditors o Until approval, the funds are just held by the corporation in trust for the stockholders. Its not part of paid-up capital yet. o Is there a right of appraisal? 110 No C. Power to create, incur, or increase bonded indebtedness: o Majority of BOD + 2/3 of OCS o What is a bonded indebtedness? Usually a very large amount With first lien on important corporate assets For a long period of time o Need SEC approval To check if the corporation has at least P25M net worth and 3 years operating experience o Is there a right of appraisal? No D. Power to deny preemptive rights: o Where is there a right of preemption by SHs? 1. If there is increase of capital stock OR 2. If the corporation acquired treasury shares o What is the purpose of preemption? So a SH can prevent dilution of his % ownership. o When is there no right to preemption? 1. Provided for in the AOI 2. Shares issued to comply with order to make a public offering to comply with the law 3. When the shares issued are in exchange for property for a corporate purpose 4. Conversion of corporate debt to SH equity E. Sale/lease/exchange/mortgage all or substantially all of its property: o Majority of BOD + 2/3 of OCS o What is the test of substantially all? W/N it can still continue business afterwards. Qualitative test, whereas it is quantitative for all. o Compare to sale in usual and regular course of business, which is covered by business judgment doctrine. This does not need SH approval. o Is there a right of appraisal? Yes F. Power to purchase own shares: o What is required? The corporation must have unrestricted retained earnings o Exception? Redeemable shares, which do not require URE for them to be redeemed by the corporation 111 o When can the corporation buy shares from SHs? 1. To eliminate fractional shares because of stock dividends 2. To collect indebtedness out of an unpaid subscription 3. To pay dissenting or withdrawing stockholders entitled to payment of their shares 4. To decrease cost of doing business, by decreasing amount of dividends to be paid in the future 5. Other similar situations (non-exclusive enumeration) o What happens to the shares? They become treasury shares. These cannot vote. G. Power to invest corporate funds in another corporation or business: o When do you need SH approval? If it is in line with the primary purpose of the company, then you dont need SH approval If it is not, you need Majority of BOD + 2/3 of OCS o Example: SMC buying a brewery abroad is in line with primary purpose Mau Sugar Central buying a company manufacturing sugar bags same doctrine o What is the nature of investing in another corporation, deposit accounts, money markets, treasury bills, and the like? These do not require SH approval because this fits in the power, discretion, and purpose of corporation to obtain best returns. THUS, the investment in another corporation that requires SH approval above implies some management power involved of the other company, and not just investment per se. H. Power to declare dividends: o It must have unrestricted retained earnings. Otherwise, it will be illegal. In effect you are returning the investment of the SHs. Creditors can sue the SHs for the dividends they illegally obtained o In what forms? Stock, property, or cash dividends For property or cash dividends, no need for SH approval For stock dividends, 2/3 SH approval is needed o Presumed that rights of shares are equal. So they will receive the same amount. o Even if a subscription has not been fully paid, the SH will receive dividends. What is the exception? If it is delinquent. The cash dividends will be applied to his outstanding dues. 112 o A corporation made public offering of shares with par value of P100. But it was able to sell it in the stock market for a premium, i.e. P120/share. What happens to the premium surplus? The surplus cannot be declared as cash or stock dividends, because dividends can only be declared from corporate earnings. They must be retained as part of capital. o Nielsen had a mgt. contract with Lepanto mining (because Nielsen had technical expertise). During the war, the Japanese took over the management of Lepanto. After the war, Nielsen wanted to continue the unexpired management contract with Lepanto, and the latter refused. The agreement included that everything Lepanto declared dividends, part of it should go to Nielsen. HELD: Lepanto is guilty of breach of contract, and must pay Nielsen, including the dividends that were not given. o Stock dividends can only be declared out of the authorized, but unissued shares. Treasury shares cannot be declared as stock dividends, but as property dividends. Book keeping entry: from retained earnings capital o Sometimes property is reappraised to increase value. What are the conditions? 1. There are earnings from operations 2. The property must have depreciated So land cannot be reappraised 3. The depreciation allowance must have been deducted o Stock corporations are prohibited from retaining surplus profits in excess of 100% of paid-in capital stock. Exceptions? 1. Justified by definite corporate expansion projects approved by the board 2. Corporation obtained a loan and there is a condition in the loan that the corporation cannot declare dividends without creditors approval 3. Special circumstances justify retention If you invoke any of these provisions, your financial statements must include an explanation The power to demand dividends is one of the few powers of SHs where they can initiate action. o Once a cash dividend has been declared, it cannot anymore be revoked. Because otherwise, a corporation can manipulate the price. (Ex. the corporation says we will declare dividends in a month, so prices go up and shares are bought. If they can revoke it, then the prices can go down and the corporation can re-buy the shares.) o What are the tax implications? There is no tax consequence for stock dividends, because its still the same pie, cut in smaller pieces You only get taxed when you sell the stocks. o Dividends will be given to stock holders in the books. If a sale of shares is made and the buyer is not put into the stock and transfer book, it only binds the parties but not the corporation. 113 So the remedy is the seller gets the dividends and turns it over to the buyer I. Management contracts o There is now regulation of management contracts to prevent abuse. It is usually done when one company has technical or special expertise. o Requirement? Approval by BOD And majority of the SHs of BOTH corporations o Except, when are 2/3 votes needed from the managed corporation? 1. If a SH or SHs who own stocks in both corporations have more than 1/3 of shares in managing corporation 2. Majority of BOD in the managing corporation is majority of BOD in the managed corporation o Validity? 5 years for any one term. You can keep renewing it. o Does the principle that a principal can terminate an agent any time apply here? No. This is a contract for lease of services. o What if the management contract is with an outsider individual and not a corporation? No need for SH approval because the corporation is really just appointing an agent in this instance. Power Requirements Non- voting stocks vote? Appraisal right? Increase or decrease corporate term Majority of BOD + 2/3 of OCS Yes Yes Increase or decrease capital stock Majority of BOD + 2/3 of OCS Yes Yes Create, incur, increase bonded indebtedness Majority of BOD + 2/3 of OCS Yes No Denying pre-emptive rights 1. Provided in AOI 2. Comply with public offering law 3. For property 4. Debt for equity No No Substantially all of property Majority of BOD + 2/3 of OCS Yes Yes Purchase own shares 1. Eliminate fractions 2.Pay subscription indebtedness 3. Pay appraising SH 4. Decrease cost of business 5. Other similar No No Invest corporate funds in another business Majority of BOD + 2/3 of OCS Yes Yes (if going into another line of business) Declare dividends URE exceeding 100% of paid-in capital stock (subject to exceptions) Can be demanded by SHs No No Enter into management contracts Majority of BOD + Majority of OCS of managing company + Majority of OCS of managed company Change to 2/3 of OCS of managed company if: 1. Common SH/s possess Yes No 114 more than 1/3 shares in managing company, or 2. Commonly shared majority of BOD Ultra vires acts: o What is the scope of a corporations allowable powers? Powers of corporation include those necessary to achieve the primary purpose: Ex. a hotel can hire entertainers o What are the type of ultra vires acts? 1. Acts done beyond powers of the corporation, as provided by law or AOI 2. Acts on behalf of a corporation done by those without authority 3. Acts which are per se illegal o What is the SCs attitude in interpreting whether acts are ultra vires? Strict, if the act is per se illegal. If the act is not per se illegal, as long as fairly incidental and reasonably necessary to corporate purpose, acts are deemed valid. But if the AOI or purpose clause has limiting words, then the court will hold the corporation to such limited business. Ex. Transportation of goods by water o What is the effect if an act is ultra vires? First type of ultra vires : void and does not bind the corporation, but can be ratified by the SHs through: 1. Performance 2. Ratification 3. Estoppel Second type : no authority so unenforceable contract But if the corporation cloaked the person with apparent authority, the corporation cannot deny the contract entered into by that person with external indicia of authority Third type : always void o When can ultra vires be invoked? For purposes of enforceability, if it has been fully executed by both sides, one cannot invoke ultra vires If it has been partially executed (by one side), it cannot be invoked because one side is in estoppel If it is merely executory on both sides then ultra vires can be invoked Can a corporation guarantee the debt of another? o No, because it might prejudice the claims of its creditors and it violates the trust fund doctrine o When is it valid? If it has a business purpose, for instance: 115 1. A mother company guaranteeing the debt of the subsidiary 2. Will result in increased business 3. Will enhance the chances of collecting from the party whose obligation is guaranteed What is the Trust Fund Doctrine? o Capital stock, property, and other assets of the corporation are regarded as equity in trust for the payment of corporate creditors. o Implications: Corporation may not dissipate the subscribed capital stock (which the creditors can check to satisfy their credits). Creditors may sue SHs directly for unpaid subscription. o Examples of when the TFD is violated: 1. Corporation releases or condones payment of unpaid subscription. 2. Payment of dividends without URE. 3. Properties transferred in fraud of creditors. 4. Properties disposed or undue preference given to some creditors even if the corporation is insolvent. o The TFD is the backbone as to why there is a strict procedure in distribution of corporate assets, and that it can only be done if: 1) there is amendment of AOI to decrease ACS, 2) purchase of redeemable shares regardless of URE, 3) dissolution and liquidation of the corporation. The Corporation cannot distribute assets whimsically. Stockholders and members Who can vote? o Any share, except those deprived of right to vote, which is allowed only for preferred and redeemable shares o There must always be a class with complete voting rights o For joint owners of shares, consent of all is needed, unless one is constituted an agent o Pledgor or mortgagor still votes for his shares. Take note of instances when even non-voting shares can vote (fundamental changes in the corporation) What are the kinds of meetings of SHs? o Meetings may be regular or special. o Provision on meetings applies only if there is no provision in the bylaws or articles to the contrary. What matters can be taken up? o General meeting: anything can be taken up o Special meeting: only matters previously indicated can be taken up If everybody is present and nobody objected, it is tantamount to waiver But if some were absent and those present waived, those absent may question the waiver Where must it be held? o City or municipality where the corporation is located 116 Metro Manila considered a city o Need not be in the office What determines quorum? o What is provided for in the BLs. Most of the time its a majority o Once a quorum is announced to be present, the SH is competent to take up matters, even if some leave after What is the power of executors, administrators, receivers, and guardians? o Can vote the shares of stocks they administer without need for proxy What if there are two or more owners of shares? o They must go together, but if and/or, either can vote o If both attend and cannot agree on how to vote, the vote is not counted There are different devices how to get votes. How? o 1. Proxy solicitation o 2. Voting trusts o 3. Pooling agreement, where several SHs agree to vote their shares together What are required for a valid proxy agreement? o 1. In writing o 2. Signed by the SH o 3. Filed with corporate secretary before the meeting o How long is a proxy valid? Unless it provides that it is a continuing proxy, its only valid for the period for which it was issued o What is the ceiling for continuous proxies? 5 years, maximum validity o Is it revocable? Yes, unless it is coupled with an interest If he shows up to vote, the attendance to vote will result in nullifying the proxy, unless it is coupled with an interest BUT he must show up to vote. If he doesnt vote, it doesnt revoke the proxy. What are required for a valid voting trust agreement? o 1. In writing and notarized o 2. Cannot exceed 5 years at a time (except for longer loan) o 3. Certified true copy of agreement filed with the corporation and SEC o What is the maximum duration? 5 years o What are the powers of the trustee? Trustee is qualified to sit in the board 117 If the voting trust agreement was given to a lender, as is required in a loan agreement, it is coupled with an interest o Can the voting trust agreement be coterminous with a loan? Yes. It will remain until the loan has been paid; for instance, 10 years. o Is it revocable for a period of time? No, because it is based on contract, unlike proxies which are based on agency. o Who receives dividends? The trustee, with obligation to turn over dividends to the beneficial owner. Derivative suits requisites? o 1. Cause of action which calls for such remedy If its covered by business judgment rule, cannot sue There must be violation of the rights of the corporation not just the private parties The cause of action must benefit the corporation, and not the particular stockholder bringing suit o 2. Must be filed in the name of the corporation Since the cause of action belongs to the corporation, the corporation gets the damages that are awarded o 3. Must be a SH when the offense was committed, but the acts continued when he became one o 4. Must have exhausted intra-corporate remedies Unless excused Ex. BOD of corporation granted its own directors excessive compensation. No need to compel the BOD to file a suit on behalf of the corporation since the object of the suit is to nullify the BODs own acts. This is futile. o 5. No right of appraisal for the rights complained of Contrast with other kinds of suits? o Individual suit brought by the SH in his own name against the corporation for a wrong directly inflicted on him o Representative suit brought by SH in his own behalf and all other SHs similarly situated when a wrong is inflicted on them as a group Nature of right to inspection? o 1. SHs: to protect themselves Must be exercised in his interest as SH for some purpose germane to the corporations interest. But the corporation has the burden of proof to contest GF. o 2. Directors: broader, because they make decisions o Remedies for refusal to allow inspection? Mandamus Criminal case Damages o Grounds to deny inspection? 1. Must improperly use information received before 118 2. Asking for trade secrets 3. No good faith 4. No valid purpose Ex. bought one share just to inspect o What is the rule for SHs of corporations with wholly-owned subsidiaries? Even if not a SH of the subsidiary, if consistent with equity, GF, and fairness, the SH can inspect records of the subsidiary Appraisal rights: o Any dissenting SH can ask to be bought out. o When is there appraisal right? 1. Amendment affects the rights of SHs 2. Creating preferred shares 3. Shortening or extending corporate life 4. Increase authorized capital stock 5. Going into another line of business 6. Merger/consolidation 7. Corp. sells, leases, mortgages, encumbers, or disposes all or substantially all of its assets 8. Close corporations (anytime) o N.B. If the amendment does not affect the rights of SHs (ex. change of corporate name), no appraisal rights. o What is the rule for close corporations? Can ask anytime to be bought out o When can a SH be asked to be bought out? Must have voted against the action, not for the action. o When can the SH exercise right? Within 30 days of the action o What is the value of shares based on? Value the day before the action was done. This is because the action would inevitably change the value of the shares. What if they cannot decide on the value of the shares within 60 days from the time the action was taken? Appraisal will be done Pay within 30 days after award was made Cost of appraisal borne by corporation. But if the value offered is close to the value offered by the corporation, then the SH will bear the cost because it was close to the amount offered by the corporation. o SH cannot be paid unless there are unrestricted retained earnings, otherwise you violate the Trust Fund doctrine. Exception? 119 For close corporations, where even if there are no UREs he can ask to be bought out. o What is the effect of appraisal? The SH will lose all his rights, except to receive payment o When will his right to be paid cease? 1. Demand for payment is withdrawn with consent of corporation, or 2. Act he is protesting against is reversed or disapproved by SEC, or 3. SEC says he is not entitled to appraisal rights What is the effect of this? His SH rights will be restored o When will his SH rights be restored? 1. Any of the three above 2. The corp. fails to pay within 30 days What are the obligations of SHs? o 1. Liability to corporation for unpaid subscription o 2. Liability to corporation for interest on unpaid subscription if required by by-laws o 3. Liability to creditors of corporation for unpaid subscription o 4. Liability for watered stock Solidary with corporate officers responsible o 5. Liability for dividends unlawfully paid o 6. Liability for failure to create corporation Directors and officers Powers of the corporation are vested where? o Board Can the president make a decision on behalf of the corporation, without board authorization? o No. It does not bind the corporation o Islamic directory of the Phils: Acquired parcel of land. When martial law was declared, the members of the Board fled to the Middle East. A corrupt member of the board sold the land to Iglesia. HELD: Invalid, because it was not the board that sold to INC. o A corporate officer cannot file a case for BP22. There must be board authorization. Requirements to be a director? o 1.Must own at least 1 share of stock in his name in the STB What if he is merely holding that as trustee? He is still qualified. The by-laws can require a bigger number (ex. 50K shares for San Miguel) The moment a SH ceases to hold even one share, he automatically ceases to be a director 120 o 2. Majority of directors must be Philippine residents o 3. Independent directors Required for banks (at least 2) and listed companies (either 2 or 20% of board, whichever is fewer) o 4. Not disqualified: A. Criminal offense punishable by more than 6 years B. Or violation of Corp. Code 5 years prior to election C. Public officials, appointed or elected, cannot serve in BOD of non-rural banks Directors must be elected every year among the SHs of the corporation. At what point must the director be a SH, at point of nomination or assumption of office? o There are conflicting decisions in US jurisprudence (some say when nominated, some say upon assumption of office). Majority view: enough when he assumes office. o JJ believes that the minority rule must prevail The provision says that they must be elected from among the holders of stock. So he must be a SH at time of election. There are two devises peculiar to election of directors: o 1. Proxy voting A person need not be personally present to vote; can just give written proxy. Even if his shares have not been fully paid, as long as not delinquent o 2. Cumulative voting If someone holds multiple shares, he can cast all those votes for one person (ex. 1,000 shares 1,000 votes in favor of one person) o Can the board pass a resolution prohibiting proxy voting and cumulative voting? No. Its provided by law as mechanisms to allow minority SHs to win positions as directors. What if shares are delinquent? o Not allowed to vote How may a director be removed? o 2/3 vote of SHs (or members if non-stock) o In what kind of meeting? At regular or special meeting, but the notice must specifically state removal of the officer will be taken up o What if its not mentioned? Cannot be taken up Who are the directors that cannot be removed without cause? o 1. Director representing minority of SHs o 2. Independent directors (as required by law either 2 independent directors or 20% of the board, whichever is less) The law mentions conviction as a DQ for becoming a member of the board. Can the By laws add other qualifications? o Yes. 121 o For instance, providing that SHs holding shares in rival companies cannot run for the board. Term of office of directors? o Usually one year. o But if the annual meeting is delayed, they remain in hold-over capacity until successors are elected. How are vacancies filled? (CLV DISCUSSION) o 1. Special vote by majority of directors Assuming they still compose a quorum o 2. General or special meeting of SHs This is required when the remaining directors do not compose a quorum anymore o 3. If vacancy is due to increase in seats must be through election by SHs o What is the term of the replacement? Only the unexpired term of the one replaced Do they get compensation? o None, except: 1, If the by-laws provide 2. Reasonable per diems. o Who fixes the compensation? SHs, not directors; otherwise, there would be conflict of interest SHs can give directors performance bonus. o Is there a limit to director compensation? The total yearly compensation of the directors cannot exceed 10% of the income prior to tax. o What about officers? The prohibitions re: compensation do not apply to them because they perform services beyond the ordinary duties of a director Special qualifications of officers: o President must be director o Sec must be resident of Philippines and a citizen o Treasurer need not be a director Can an officer occupy two or more positions? o Yes. o Exceptions: 1. President cannot be the same as treasurer 2. President cannot be the same as secretary o Because there are some requirements that require assent of President and treasurer/secretary as check and balance. There were two separate conflicting lists of officers shown. Which wins out? o The ones mentioned in the General Information Sheet win out because its required to be filed with the SEC. 122 What is the business judgment rule? o Courts will not set aside decisions/resolutions of officers of the corporation unless there is bad faith or illegality or gross negligence o Courts will not second guess the wisdom of the officers even if there are losses Differentiate treatment of officers from non-officers? o 1. Officers are hired or fired by the BOD in exercise of business judgment. Non-officers are protected by security of tenure. o 2. Officers are subject to common law duties of loyalty and diligence. Non-officers are not bound by these. When can officers be held personally liable? o 1a. Assented to patently unlawful act of corporation Ex. approved bribe o 1b. Bad faith Ex. fired a manager who was instituting reforms to prevent shenanigans bad faith Ex. cooked the books of account to pretend losses, to justify retrenchment o 1c. Gross negligence o 1d. Conflict of interest o 2. Issued watered stock or being aware of this, did not object to the corporate secretary. o 3. Bound oneself solidarily to the obligations of the corporation o 4. By provision of law Examples of bad faith: o Did not remit SSS collections o A director acquired interest adverse to the corporation o Director received kickback from contractors o Grabbed corporate opportunity (ex. the director bought a goods up for sale which is in the line of business of the company which he works in) What is the duty of loyalty? o The Doctrine of corporate opportunity. Directors or Trustees who acquire personal or pecuniary interest in conflict with their duty as director are liable solidarily for damages. o Officer X acquires interest adverse to corporation. What are his responsibilities? 1. Liable for all damages to the corporation 2. Compensate for all lost potential profits CANNOT be waived/ratified o Officer Y by virtue of his office acquires a business opportunity for himself which should belong to the corporation. What are his responsibilities? 1. Account all profits to the corporation 2. Refund profits that would have accrued to the corporation o Which can be waived or ratified? 123 Adverse interest cannot be ratified or waived by the SHs Business opportunity can be ratified by 2/3 of the outstanding capital stock What is the nature of contracts of the corporation with its own directors and officers? o They are voidable. The corporation has the exclusive right to annul the contract. o When will it be not voidable? 1. Presence of the director must not be needed for quorum 2. His vote was not be needed to approve the contract 3. The contract was fair and reasonable It must be an arms-length transaction 4. If the party is an officer, prior authorization of the BOD o What is the effect of the first two defects? Can be ratified by the SHs in a meeting with full disclosure. What about contracts between corporations with interlocking directors? o They are not per se prohibited. o But if a director has substantial interest in one and minimal in another, he would be tempted to favor the first. When is there substantial interest? When his equity exceeds 20%. o What is the effect if a director has substantial interest in one and minimal in the other corporation? 1. Presence of director must not be needed for quorum 2. His vote was not needed to approve the contract N.B. these are the same first two requirements as in self-dealing directors What is an executive committee? o By laws can provide for it, composed of at least 3 members of the BOD. N.B. They must be directors. o What powers are delegated? The BOD must specify what powers are delegated. The BOD cannot just make a blanket delegation of its powers to the Ex Com. o What cannot be delegated? 1. Matters requiring SH approval 2. Filling vacancies in the board 3. Amending/repealing by-laws 4. Amending/repealing board resolution which by its express terms cannot be amended/repealed 124 5. Declaration of stock dividends o What is the power of the board over resolutions of the Ex Com? BOD can approve or revoke it. What is the exception? When rights of third parties are involved. Ex. A third party entered into a K with the Ex Com, relying in good faith on the power of the Ex Com to enter into contracts. Powers are vested on the board. An officer acting alone cannot bind the board. What is the exception? o Ratification by the authority who should have performed that act. What is the general scope of powers of the officers of a corporation? o Can operate without authorization on the usual course of business, or administrative matters o Ex. Insurance company can sell insurance even without board resolution Capital affairs What are the requisites to issue a certificate of stock (COS)? o 1. Signed by the P/VP and countersigned by the secretary/asst. secretary o 2. Delivery of the COS o 3. Pay par value of the shares (or entire value if no par value) o 4. Original certificate surrendered, if the shares are being transferred What are the remedies of the SH when the corporation refuses to issue a COS? o 1. Specific performance o 2. Damages if specific performance not granted o 3. Mandamus to compel issuance of COS o 4. Rescind the subscription contract What is the nature of the duty to issue a COS? o It is ministerial , so even if there is a case filed, the buyer must be given a certificate What are the unpaid claims contemplated by the law? o Payment for subscription, not unpaid claims for monthly dues When is the COS issued? o No certificate will be issued until full amount paid What is the nature of a subscription contract? o It is indivisible. o If somebody has not yet paid full subscription, he cannot assign part of the shares; it is all or nothing o If he sells all the shares, it is a novation of contract, with a substitution of debtor. So you need corporations consent. 125 The buyer becomes the debtor for the unpaid balance. What is the nature of shares of stock? o Quasi-negotiable. Just like N.I., endorse at the back and deliver. All transfer of shares are valid just between the parties until registered in the STB. o No need to execute separate deed of sale or assignment, because they are quasi-negotiable. o If there is a deed of sale which is a public document, it is akin to delivery even if the stock certificate is not itself delivered (as in usual rule in Sales Law). How does one sell shares? o 1. He must Sign AND deliver the COS; and Mere signing without delivery no sale o 2. Have transaction recorded in the STB What if there is a conflict between the Stock and Transfer Book and the AOI? o The AOI wins. The AOI is the basic contract between the SHs and the corporation, while the STB is merely kept for convenience. Who may post in the STB? o The president cannot post the entries, it must be the Secretary. o If the secretary refuses, compel performance, but one cannot record the entries himself. What are the allowable restrictions in sale of shares? o Procedural : Restriction must appear in the AOI, BL, and COS o Substantive : Not more onerous than allowing the corporation to purchase the shares of the transferring SH for reasonable terms What if the seller of the COS is not the true owner? o The buyer cannot get valid title. o The first buyer, however, was given a fake COS. Effect? None. The real owner cannot be deprived. o What if the first buyer sold to a second buyer, signing and delivering the fake COS? The new buyer will be protected. Give her shares too. The corporation runs after the seller for damages. What is the exception? When there are no more shares to issue. In this case, the new buyer does not obtain any shares, but can sue for damages. Directors responsible for issuance of shares who issue watered- down stocks and those who know about it and didnt give their objections: o Solidarily liable with the non-paying SH If someone only paid part of the stocks, when must the rest be paid? o 1. By provision o 2. Upon call by the directors o What is the nature of the call? 126 It must be uniform for all, not just for particular persons. o When is there interest payable? Only if there is a provision If there is no rate mentioned, just that interest must be paid, apply the legal rate What is the nature of the unpaid portion of the subscription? o It is an asset of the corporation, and is thus a receivable o What is the implication? Creditors can run after these. A. But first they have to sue the corporation, and if unsatisfied, the creditors can sue SHs on unpaid subscriptions. B. If the corporation is insolvent, the SHs can automatically be included as co-defendants. If after 30 days of call there is no payment, what happens? o 1. The shares become delinquent. o 2. The directors can auction the shares Personal notice sent through registered mail Published in newspaper of GC for 2 weeks o How can the SH prevent sale of the shares? Pay unpaid dues, interest, and costs (for publication, etc.) o How is the bidding for the shares done? There is a fixed price, but those willing to accept the least amount of shares for the highest price get it. o What if there are dividends before sale? They will be applied to the unpaid dues. o If the SH wants to question the sale, what are prerequisites? File case within 6 months from the date of sale He must tender payment of unpaid dues and interest What is the other option of the corporation, apart from auction of the shares? o Sue the SH in a collection case. What is the remedy for a lost COS? o 1. Owner submits affidavit of loss o 2. Corporation verifies the affidavit and publishes notice in newspaper of GC for 3 consecutive weeks at owners expense o 3. After 1 year from publication, right to contest is barred and the corporation can issue a new COS to the SH o What if the applicant issues a bond to cover for damages? The 1 year period is waived o What if there is a contest of the application? 127 The corporation cannot issue COS until resolved o What is the free and harmless clause? If there is no bad faith or gross negligence, there can be no action against the corporation for issuance of the new certificate o What if the corporation fails to comply with the procedure above and just issues a new COS? It is valid, but the corporation cannot avail of the free and harmless clause What is the rule on involuntary dealings with shares? o A. Mortgage, if not covered by COS Mortgage binding on third parties with notice o B. Mortgage, if covered by COS Register in the CM registry of both the domicile of the owner and place of principal office of the corporation No need to register if the COS was delivered to the pledgee/mortgagee No need to log in the STB o C. Attachment or levy Creditor must leave with the president or managing agent a copy of the writ and a notice stating the stock was attached Priority rules: o A. Two judgment creditors Whoever serves writ first o B. Judgment creditor v. mortgagee/pledgee Whichever is first in service of writ v. registry in CM registry o C. Mortgagee/pledgee v. buyer/assignee First between registry v. STB entry o D. Judgment creditor v. buyer/assignee First between service of writ v. STB entry Dissolution and liquidation When and how can a corporation voluntarily dissolve? o 1. Vote of majority of BOD + 2/3 of OCS What if dissolution will not prejudice any creditor? 1. Just need SEC approval 2. After 3 consecutive weeks publication in newspaper of GC, dissolution takes effect What if creditors are affected? 1. Petition filed and all the names of the creditors will be mentioned. 2. Set for hearing, so if someone has objections, he can oppose. 3. Order published in newspaper of GC for 3 consecutive weeks 128 4. SEC will decide w/n dissolution is proper o 2. Amending the AOI, shortening corporate life Fastest and simplest way Who decides on dissolution? o The SEC o There must be a tax clearance first from the BIR before the SEC dissolves a corporation (because this is the last chance to recover taxes) Involuntary dissolution: o 1. Based on grounds provided in the Corp. Code (see above) o 2. Violations of PD 902-A (SEC reorganization act see above for some acts) o 3. Quo Warranto What are the specific grounds? o 1. Does not commence business within 2 years from its registration o 2. Suspended transactions for 5 years o 3. Failure to adopt and file BLs within required time o 4. Offended provision of law for creation (or renewal) o 5. Commission or omission of act deemed as surrender of corporate rights o 6. Misuse or right or privilege granted by law o 7. Receiver recommended against continuation of business o 8. Serious misrepresentation to public o 9. Refusal to comply with SEC order leading to grave abuse of franchise o 10. Failure to file reports with SEC within prescribed period What if the corporation claims that the economy was depressed and there was no demand for its goods; thus, there was no business? o Even so, it has to file an ITR and the general information sheet, even if not operating. Is dissolution automatic? o No, the SEC determines the cause first. Can a minority stockholder file a dissolution case? o Yes. o For what grounds? 1. Majority is mismanaging assets 2. Dissipating its assets 3. Fraudulently disposing its properties o Can a receiver be appointed in an action for involuntary dissolution? Yes. N.B. You do not dissolve a corporation for every single minor infraction. This is like the death penalty for corporations. 129 o Ex. do not dissolve a company just because one employee does not wear an ID o Ex. but you can dissolve a corporation that engages in banking without authorization from the Monetary Board because it harms public interest Where is the dissolution case filed? o SEC, not RTC Three ways of providing for mechanics for dissolution: o 1. Directors themselves can take care of winding up o 2. Appoint trustee to whom they assign assets of the corporation; will acquire legal title over properties of corporation to pay off creditors and distributing the residue to SH N.B. Three year period does not count anymore if this option is chosen o 3. Receiver appointed What is the effect of dissolution on existing rights and obligations? o It does not impair its rights and obligations o Ex. Even if a corporation has been dissolved, it must still be paid How long must winding up be? o Three years from the time SEC approved dissolution What can the corporation do and not do during this period? o It can only wind up its affairs disposing its properties. It cannot for example renew a contract of lease. It must not pertain to acts of that of a going concern. Will corporate dissolution abate any ongoing case against or filed by the corporation not finished within the three year period? o Yes, under the old rule. o This now only applies if: 1. The directors are in charge of winding up (option 1) 2. Receivership (option 3) But not if under trusteeship (option 2), because suit can be filed against the trustee provided the prescriptive period has not lapse. The trust will last until the affairs have been wound up. o What is the common practice now for the cases that are still pending before the three years end? Appoint a trustee. The lawyer handling the case is often constituted as the trustee himself. Sometimes, its the directors themselves that are the trustees. Non-stock/non-profit What are the characteristics of NSNP corporations? o 1. No shares of stock o 2. Not be authorized to declare dividends As indicated in the by-laws or AOI Only exception: distribution as a consequence of dissolution o 3. Eleemosynary purpose 130 For what purposes may a NSNP corporation be organized? o 1. Charitable o 2. Religious order, to manage its properties o 3. Educational o 4. Others: professional associations, cultural, fraternal, literary, scientific, social, civic service, similar purpose like chambers of commerce What is the rule on the right to vote? o By default, each member may vote o Unless limited, broadened, or denied in the AOI or BLs o For stock corporations, even non-voting shares vote for certain transactions. Does this rule apply to NSNP? No. They can even be denied voting rights for these fundamental issues, unlike in stock corporations. o NSNP corporations can make classifications of members. Example: Golf and country clubs for instance have honorary members. But usually associate and honorary members do not have voting rights, just playing rights. What are the peculiar rules in proxy voting? o Can be allowed to vote by e-mail or similar means. o Membership is not transferred in proxies. Ex. X is a member of a golf and country club. He died. His son Y inherits his shares. He does not automatically become a member. He has to be approved first. But he has proprietary rights, so he can sell it, pledge it, etc. What is the policy in elections of the board? o 1. There can be more than 15 directors Purpose: to broaden representation o 2. By default, the voting is staggered, 1/3 of positions are voted for every year (for policy continuation) N.B. But you can also provide that everybody will be elected every year or any other system How are assets distributed upon dissolution? o 1. Pay all liabilities and obligations of the corporation o 2. Return all assets held by corporation with resolutory condition of dissolution o 3. Transfer assets received by the corporation subject to limitations of usage for eleemosynary purposes to organizations with similar purpose o 4. Other assets distributed according to BLs or AOI, or follow plan of distribution Can a NSNP corporation be converted to a stock corporation through amendment of AOI? o No, because this is tantamount to distribution of profits to the members. You have dissolve the NSNP corporation first. Close corporations Why are close corporations important? 131 o Most corporations in the Philippines are family corporations. What is the definition of a close corporation? What are the features that make up a close corporation? o 1. AOI provides there are at most 20 SHs and none more o 2. There are restrictions on transfers Ex. before a SH sells shares, he must ask permission from the other SHs Usually it provides too that if none of the SHs are willing to buy the shares, it must be offered to the corporation itself o 3. Prohibition on listing shares in the stock market o 4. Articles may provide for classification of shares Ex. If there are three brothers, there can be class A, B, and C shares one for each brother and his family, to ensure that each has equal ownership; can only hold shares of the class pertaining to his family o 5. Can provide for higher quorum or voting requirements o 6. Can agree that the SHs manage the corporation and not the directors In this case, the SHs have powers, duties, obligations of directors Which corporations are not allowed to be close corporations? o Those vested with public interest. o Specifically: 1. Mining companies, oil companies 2. Stock exchanges, banks, insurance companies 3. Public utilities 4. Schools How can the restrictions on transfers bind third parties? o 1. Must appear in AOI, and o 2. Must also appear in BLs, and o 3. Must also appear at the back of the COS Whats the effect of pre-incorporation agreements? o They remain binding even after incorporation o Ex. a pre-agreement that the president comes from Family A, the treasurer from Family B, etc. When are board meeting not necessary? o Board meetings not necessary if everyone signs or SHs know that the board members were signing minutes without a meeting and they did not object. What is the nature of the preemptive right? o Covers ALL issuances of stock. o There is right of pre-emption even if debt is being converted to equity. What is required for amendment of AOI? 132 o If the amendment seeks to delete any provision required by the title on Close Corporations or reduce quorum/voting requirement not valid or effective unless there is 2/3 vote of OCS (all, even those with no voting rights), or a higher proportion of votes if required by AOI. What are the remedies that may be done by SEC in case of deadlock in close corporations? o 1. Amend/alter provision in the AOI that causes the deadlock o 2. Alter, prohibit, or cancel any resolution or action of the corporation, board, SHs, or officers o 3. Require the purchase of the shares of a SH even if there are no unrestricted retained earnings o 4. Appoint a provisional director as tiebreaker o 5. For extreme cases, dissolving the corporation Educational corporations How many trustees must be there? o Always multiples of five (5, 10, 15, etc.) How long must their terms be? o Five years o Every year, only 1/5 is elected to provide for continuity o But can there be contrary stipulations as to term and elections of trustees? Yes. Religious corporations How can a religious organization administer its properties? o 1. NSNP corporation o 2. Corporation sole One person only: ex. the Archbishop o 3. Religious aggregate or society How does a corporation sole come about? o 1. File affidavit with the SEC, stating that: A. the affiant is the head of a religious sect and would want to be corporation sole B. His religion allows him to incorporate as a corporation sole C. He is charged with administration of properties o 2. Submit the following: A. Inventory B. Manner for choosing successor C. Where he will hold office Can the archbishop be a foreigner and hold land? o Yes. He is actually just administering it, and the property really belongs to the faithful. What if the corporation sole wants to dispose property? 133 o He must get authorization from RTC unless his religion allows him to dispose or mortgage real property What is the nature of a religious aggregate or society? o Incorporated to manage its properties. o The articles provide that members constitute a religious society and at least 2/3 of members have agreed to incorporate. Foreign corporations What is a foreign corporation? o 1. One formed, organized, existing under laws other than those of the Philippines o 2. AND whose laws allow Philippine corporations to do business there What is the effect of a foreign corporation having no license and doing business? o It cannot sue. o If its not doing business, and has no license: can sue. What is required to do business here: o Must appoint resident agent to receive summonses for the corporation Resident agent required to be in good financial standing o What else must it do? To say that if it has no resident agent, summonses may be served to the SEC Also, any officer in the Philippines may be served with summons X is a foreign corporation with no license. It entered into a contract with another corporation, which breached the contract. X got a license, and then it sued. The other corporation said that the contract is void. Valid? o The contract is valid; the only effect is that there is no power to sue for the foreign corp. Here, it can sue. How can you sue a corporation not doing business here and also without a license? o Make the action quasi in rem by attaching its property to obtain jurisdiction over it. What if the corporation is doing business and is not licensed and the other party was aware of it? o Then it cannot have the case dismissed because the other party benefited from the contract. When is it considered doing business? o 1. There must be habituality. Transactions must not be isolated. If the corporation is just buying here, its not doing business because there is no profit from buying Except isolated transactions that indicate intent to habitually do business is doing business. Ex. renting out a space for lease and sending officers here. o 2. Substantial portion of the business of the primary purpose of the corporation If a shipping company goes here and hires a cook, thats not doing business because its not as 134 substantial portion of its business of the primary purpose o 3. Contract consummated in the Philippines If the contract is consummated abroad then the foreign corporation is not doing business here Foreign investments act has a definition of what is doing business. The definition includes: o 1. Soliciting orders Even if its isolated transaction, as long as its indicative of doing business o 2. Service contracts o 3. Opening offices Whether liaison office or branch o 4. Appointing representatives or distributors who are either Domiciled here Or staying here for at least 180 days o 5. Participating in management, supervision, or control of any domestic business, firm, entity, or corporation here o 6. Any other acts implying continuity of dealings/operations here What doing business under FIA does not include: o 1. Mere investment of a foreign entity in a local entity or exercise of rights as investor o 2. Having nominee officer or director to represent its interests in that local corporation o 3. Having a distributor or representative doing business in its own name What are the grounds to revoke a license? o 1. Failure to file annual report or pay fees o 2. Failure to appoint or maintain a resident agent o 3. Failure to submit to SEC notice of change of resident agent or address o 4. Failure to submit to SEC notice of amendment of AOI or by- laws or articles of mergers/consideration o 5. Misrepresentation of material matter o 6. Failure to pay taxes or fees due to the Government o 7. Transacting business outside of purpose clause o 8. Transacting business as agent of foreign corporation not licensed to do business here o 9. Any other ground that would render it unfit to do business here Merger and consolidation What is a merger, and what is a consolidation? o Merger one corporation absorbed by another o Consolidation combine to form a new corporation What is the procedure? 135 o 1. Plan for merger or consolidation drafted by each corporations BOD Approved by majority of BOD and at least 2/3 of OCS Any amendment subject to same voting requirement o 2. Articles of merger or consolidation executed by each corporation, signed by P or VP and certified by Sec/Asst. Sec, setting forth: A. Plan of merger or consolidation B. For stock corporation, the number of outstanding shares, and for non stock, the number of members C. The result of voting o 3. Four copies of Articles submitted to SEC for approval For special corporations, must have approval of the designated government agency as well (ex. banks) Can dissenting SHs exercise appraisal right? o Yes. When does merger or consolidation take place? o Upon SEC approval What is the effect of merger or consolidation? o 1. The separate existence of the absorbed corporation will cease to exist o 2. Acquire rights, portfolio of business, and assume liabilities of the absorbed corporations o Is it bound to absorb the employees? No, as long as it is done in GF. The decision to retain employees is within legitimate sphere of management prerogative. XYZ corp issued a PN to D. XYZ was then absorbed by ABC. D then sought to enforce the PN against ABC. Is it liable, even if the PN was in XYZs name? o Yes. ABC assumed XYZs liabilities. Laws on confidentiality of bank transactions (RA 1405) What is the purpose of this law? o To encourage people to deposit in banks and avoid private hoarding What is secrecy of bank deposits? o Bank deposits and investment in bonds issued by the government are confidential o The very existence of the account is confidential Who are covered by the prohibition under law? o Prohibition against giving details is only limited to bank officers and employees. So this prohibition does not cover private persons. What deposits are covered? o 1. ALL DEPOSITS OF WHATEVER NATURE, with banks or banking institutions 136 o 2. Investments in bonds issued by the Philippine Government, its subdivisions and instrumentalities Does this law cover trust accounts? o Yes. o The law says that deposits of whatever kind or nature are covered by this law. So concept of deposit is not limited to savings, time, or current deposits. Exceptions? o 1. Depositor gave written consent o 2. If a bank officer or SH will borrow money from his own bank, hes required to waive secrecy of bank deposits o 3. Examination in an impeachment case o 4. When there is an order from the court in cases of bribery or dereliction of duty o 5. When the money/bank account is the subject matter of the litigation Even if it is no longer in the possession of the defendant Ex. in a case, the money was transferred from account to account to make it difficult to trace Ex. To settle the estate of the deceased (in Special Proceedings) Contra: X sold treasury bills to Y for a sum of money. X refused to deliver the bills. Y sued for specific performance. Y then wanted to examine the bank account of X. HELD: This is NOT covered by this exception because the account is not the subject matter of litigation. o 6. Under the AMLA, the AMLC can inquire into deposits where there is probable case of money laundering (some requiring court order, some not see discussion of AMLA), or if there are covered or suspicious transactions o 7. Under the HSA, Anti-terror council can apply with CA for authority to examine deposits upon probable cause of commission of terrorism/conspiracy o 8. Under the NIRC, the CIR can examine bank deposits if: 1. The depositor died, to check net estate 2. Taxpayer applied for compromise of tax liability on ground that he is in no financial position to pay 3. Upon the request of information from the foreign tax authority pursuant to an international convention or agreement to which the Philippines is party o 9. The PDIC may examine deposits in case of findings that banks engage in unsafe or unsound bank practices o 10. Under the Unclaimed Balances Act, disclosure to the Treasurer of the Philippines of dormant deposits of at least 10 years Gangcaico: The OMB Law provides that the OMB can inquire into bank deposits during investigation. This was the old doctrine. But in this case it was reversed. Requisites now before OMB can examine: o 1. There must be a case in court already o 2. The account must be clearly identified 137 o 3. Inspection covers only the account identified o 4. Bank employees and owner are notified Is there a violation of secrecy of bank deposits if the account is garnished? o No, there is none. Bank accounts can still be garnished. The amount is not actually disclosed. Foreign Currency Deposits Act o Foreign deposits are exempt from examination o And also exempt from garnishment BUT see exception below, in the rape case Judgment was rendered against a foreign national who raped a Filipino child. He escaped. The only source of money he had was a foreign currency deposit with Chinabank. The bank argued it cannot be garnished. HELD: It can be garnished. The FCDA was for the purposes of encouraging investment, which this situation does not fall under. o Only one exception under the FCDA itself: Depositor gave written consent o Which exceptions under other laws apply to FCDA? 1. AMLA exceptions 2. HSA exceptions 3. NIRC exceptions o Who can inquire? 1. PDIC 2. AMLC N.B. But not the Anti-terrorism council because the law forgot to provide for it General Banking Law: o There is secrecy of bank transactions. No officer or employee may disclose information about funds or property belonging to private individuals without court order. This covers all funds and property, unlike FCDA. o It covers even safety deposit boxes. o It does not cover public officials accounts (ex. Clarissa Ocampo during impeachment trial) requisites: 1. Funds belonged to public officer 2. It was disclosed to an official body (ex. Senate) 3. And it was by court processes General Banking Law Types, def ini t i on What is the definition of banks? o An entity engaged in lending funds obtained in the form of deposits o Receives money from the public and lends it out to them 138 o What is required? Banks must be STOCK corporation with funds obtained from the public Public means that there must be at least 20 depositors How are banks classified? o 1. Universal banks o 2. Commercial banks o 3. Thrift banks (RA 7906 primary) A. Savings and mortgage banks B. Stock savings and loan associations C. Private development banks o 4. Rural banks (RA 7353 primary) o 5. Cooperative banks (RA 6938) o 6. Islamic banks (RA 6848) What are the powers of a universal bank? o 1. Everything commercial banks can do o 2. Powers of an investment house o 3. Power to invest in non-allied enterprises What are the powers of a commercial bank, in addition to ordinary powers? o [Instruments] o 1. Accepting and issuing LOC o 2. Discounting and negotiating PNs, drafts, BOEs, and evidences of debt o 3. Accepting and creating demand deposits (checks and drafts) o [Deposit, credit] o 4. Receiving other types of deposits and deposit substitutes o 5. Extending credit o [Foreign exchange, securities] o 6. Buying and selling foreign exchange, gold, and silver bullion o 7. Acquiring marketable bonds and debt securities What are thrift banks? o Those that provide short-term working capital, medium-to-long term financing to businesses engaged in agriculture, services, industry, and housing, by o 1. Accumulating savings of depositors and investing them o 2. Capital loans secured by mortgages, bonds, CM, etc. What are rural banks? o Those that provide credit facilities to farmers and merchants, to their cooperatives, people of rural communities o Special rules: 1. Can have elective or appointive local officials serve as director, officer, or consultant 2. Must have purely 100% Filipino equity 139 3. Cooperatives or corporations primarily organized to hold equities in rural banks may be incorporators What are cooperative banks? o Those organized primarily to provide financial and credit services to cooperatives What are quasi-banks? o Entities engaged in borrowing through deposit substitutes for the purpose of relending or purchasing receivables/other obligations o (Ex. money market placements) What are trust entities? o Trust entities are those authorized by the MB to act as trustee or administrator of any trust, or hold property in trust or on deposit for benefit/use of others. o These funds and properties in trust must be kept separate from those held under general banking functions. Central Bank (CB) supervises bank operations. o CB can examine companies where banks or quasi-banks have controlling interest o Nobody can engage in banking or quasi-banking without Monetary Board authorization. Shares, etc What kind of shares can banks issue? o Banks can only issue par-value shares so you can ensure it met the minimum paid-up capital requirement. Can banks acquire their own shares? o No, unless given as security as loan. o The bank has to dispose these shares within six months after it got them. What is the limit on ownership of shares? o Unlike the former law, the GBL does not impose a limit on the number of shares that can be owned by the same family or related interest. o Rules on family groups and related interests What are family groups? Stockholdings of individuals related to each other within 4 th degree of consanguinity or affinity, legitimate or common law, are considered family groups. What are related interests? Two or more corporations owned or controlled by the same group of persons or family group are related interests. What is required? The family group or related interests MUST disclose such fact in all their transactions with the bank. o Foreign individuals and foreign non-bank corporations can only own up to 40% of total voting shares of a local bank. The restriction here refers to TOTAL equity participation of foreigners in the bank 140 What is the test of foreign citizenship under this rule? Control test of majority stockholders, and not place of incorporation o Filipino individuals and domestic non-bank corporations can only own up to 40% of the voting stock of a local bank. The restriction here refers to individual equity participation of non-bank domestic corporations o Foreign banks Up to 60% equity of domestic banks (see discussion immediately below) Equity investments of universal banks in financial allied enterprises: o Universal bank can own up to 100% equity of a thrift bank, rural bank, or financial allied enterprise o Universal or commercial bank can own up to 100% voting stock of only one other universal or commercial bank. Type of shareholder Limitation on shares Family groups, related interests Unlimited, but must disclose Foreign individuals and non-bank foreign corporations 40% of total voting shares of local bank Filipino individuals and domestic non- ban k corporations 40% individual equity Foreign banks 60% equity of domestic banks Universal bank 100% equity of thrift bank, rural bank, or financial allied enterprise 100% equity of only one other universal or commercial bank Commercial bank 100% equity of only one other universal or commercial bank What are the three modes of entry for foreign banks in the Philippines? o 1. Acquiring up to 60% of an existing domestic bank o 2. Investing up to 60% of a new banking subsidiary incorporated under Philippine laws o 3. Establishing branches with full banking authority o What is common among the three? Need MB approval o What is the extent of their powers? Same functions and privileges as a Philippine bank of the same category o When is a head office guarantee required? Only for establishment of branches (mode 3) Requirements on directors? o 5-15 o At least 2 must be independent not connected with the bank, its subsidiaries, or affiliates o What if there are bank mergers? Can have up to 21. Appointive or elective official limits? o Cannot work in a bank, whether part or full time. o Exceptions? 141 1.Incidental to financial assistance (ex. PDIC gave financial assistance; can require that an officer sit as trustee in that companys law) 2. Provided by existing laws (ex. DBP is required to invest in all rural banks, so they can have people sit in the boards) How can meetings be conducted? o Can conduct meetings by teleconference or video conference. Rule on banks and their branches: o Universal and commercial banks may open branches in the Philippines or abroad with prior approval by the CB. o A bank and its branches shall be treated as one unit. Powers of banks Special powers of commercial banks (and universal)? o Commercial banks automatically have the power to engage in quasi-banking. o Can automatically accept opening of current accounts Unlike other banks (e.g. saving and mortgage or thrift banks) which can accept current accounts, only with special authorization from Monetary Board. o Commercial banks can invest in allied enterprises, subject to MB approval. N.B. For universal, even non-allied enterprises Universal banks: o Universal banks may act as an investment house o But universal banks HAVE TO list shares in the stock market What is the nature of deposits? o They are in the nature of simple loans. Thus, the bank is the debtor, and the depositor is the creditor. o Thus, the bank can make use as its own the money deposited. The money is not held in trust or for safekeeping. o Third persons may not have a right to the money deposited unless there is court order for garnishment. The debtor-creditor relationship is between the bank and the depositor, and not third persons. o Officers are not liable for estafa if they used the money deposited or failed to return the amount. o Does right to compensation exist? Yes. The bank can set-off indebtedness of the depositor with deposits, if the requisites apply. BUT the bank must inform the depositor prior to such set-off. What is the degree of diligence required to be exercised by banks? o Extraordinary diligence in the handling of deposits o What about deposit substitutes (ex. money market placements)? Just ordinary diligence o What are essential for a bank to be a mortgagee in GF? 142 1. Ascertain mortgagors title or ownership of the property mortgaged 2. Check both duplicate original title of the property and the title in the ROD 3. Conduct ocular inspection of the property if there is something which would arouse suspicion and require an ocular inspection Single Borrowers Limit (SBL) the law limits this to 20% of net worth of the bank to a single borrower o The MB has discretion to raise this o In computing this, if the loan is secured with treasury bills or CB bills, bills of lading, trust receipts, and other readily-marketable goods the ceiling can be increased by 10% o Who are included in the calculated of SBL? Loan to corporation where the SB has majority interest, subsidiaries of a corporation, members of a partnership/association o What is not included? 1. Loans that are secured by obligations of the BSP or the government 2. Loans covered by assignment of deposits maintained in the lending bank and held in the Philippines 3. Loans under LOC to extent covered by the margin deposits (security deposit by a customer with a broker for futures or option contracts) 4. Other non-risk items as specified by the MB DOSRI loans (bank exposure to Directors, Officers, Stockholders and Related Interests) o What are requisites to be covered under the DOSRI rule? 1. Borrower is a director, officer, stockholder, or has related interest 2. He contracts a loan or any form of financial accommodation 3. The loan or accommodation is from: a) his bank, b) a bank that is a subsidiary of a bank holding company [and both his bank and lending bank are subsidiaries], c) a bank in which controlling proportion of shares is owned by the same interest that owns a controlling proportion of 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 allowed by law, whichever is lower o Generally, DOSRI transactions are allowed, however, what restrictions must be complied with? 1. Procedural: Approved by majority of the directors excluding the director concerned 2. Terms must be arms-length 3. Limits on amount that would be lent 143 Loan must be limited also to amount equivalent to his encumbered deposits and book value of their paid-in capital contribution to the bank o N.B. so, not just his deposits but also his paid-in capital contribution When does an individual ceiling not apply? o 1. Fringe benefits extended by the bank to officers o 2. Loans by cooperative banks to members o 3. Secured by collateral which MB considers as non-risk items 4. Aggregate ceiling The MB may regulate amount of loans, credits, accommodations extended to DOSRIs, including bank investment in their enterprises. Current Manual for Regulation of Banks provision sets ceilings: o 15% of total loan portfolio of bank o 100% of combined capital accounts o Whichever is lower 5. Reportorial requirement: approval of the loan must be entered in bank records and a copy of the entry transmitted to the Supervising and Examination Sector of the BSP Value of collaterals? o If secured by REM up to 75% of value of property o 60% of the improvements o CM 75% Statement of purpose: o When a borrower loans money from a bank, he must state his purpose for doing so o If he diverts it for some other reason, the bank may demand immediate payment Foreclosure: o Check special laws on banks foreclosure [already know this] Note that the purchaser in the auction sale, whether judicial or extra-judicial shall have the right to enter upon and take possession of the property immediately after the date of the confirmation of the auction sale o If the property will be redeemed, the mortgagor must pay amounts due on the mortgage. Ex. there are two loans secured by the REM, and the 2 nd loan became due during redemption period, he must pay both. Total investment in real estate, including equipment for use by the bank: o 1. Cannot exceed 50% of capital o 2. If it acquires real property it must be disposed within 5 years 144 Is it valid to stipulate that the bank will not be liable for losses of property in the safety deposit box? o This is void. This is a bailment and this is part of the nature of the obligation. o Stipulation that a bank is not liable for delay in wire-transfer is similarly void. Can a bank engage in insurance? o No. o But the bank can sell insurance policies if the insurance company is a subsidiary or affiliate of the bank. Prohibitions Prohibitions against officers or employees: o 1. Making false records of transactions affecting the operations of the bank o 2. Disclosing bank deposits to unauthorized persons without prior court authorization o 3. Overvaluing securities o 4. Accept gifts or fees to approve a loan o 5. Outsourcing inherent bank functions Ex. lending and accepting deposits o 6. Employing employees with lengthy probationary periods Cannot do the usual S.M. practice for bank tellers (replacing them every 5 months or so) o 7. Engaging in unsafe or unsound banking practice: A. material loss/damage or abnormal risk/danger to institution B. same, to depositors, creditors, investors, SH, public in general C. undue injury or unwarranted benefits through manifest partiality, evident BF, or gross negligence D. manifestly and grossly disadvantageous to the bank (w/n the officer or director profits) o 8. Declaring dividends: A. that are greater than accumulated net profits B. if its clearing account with BSP is overdrawn C. deficient in required liquidity floor for government deposits for 5 days or more D. does not comply with liquidity standards/ratios E. committed major violation as prescribed by BSP An urban bank was closed, and that some favored clientele received advance warning so they could take out their loans. Is there a violation? o Yes, this was an act that caused unwarranted benefit to parties due to partiality, bad faith, etc. Head office guarantees prompt payment by its Philippine branches. Banco Filipino: SC appointed judge Cosico to receive evidence and he made a finding that Banco Filipino (BF) must be closed. The sc issued a resolution that these hearings were not thorough, so they appointed Judge Ynares. Ynares said BF was solvent and had 1B in assets. The closure violated due process because the bank was closed before the 145 investigation was finished. The law was then changed saying that a bank may be closed before completing examination. BPI family bank had three depositors. A deposited a check issued by B. The money inside Bs account came from an authorization allegedly signed by C to debit his account and transfer the amount to B. Depositor C claimed it was forged so the bank debited the account of A, because the money was eventually credited to him. HELD: Wrong, because money was the medium of exchange. Money is money, and no evidence of title is required to transfer. o Ex. A robber held up passengers in a jeepney and went to a department store to buy clothes using the money. The victims cannot claim the money back from the store. This the analogy of the SCs reasoning. Senator Villar floated bonds abroad in dollars and started Camella Homes. There were talks that Ayala will start a joint venture with Camella. A customer asked to invest her funds in the long term commercial papers of Camella homes. But Ayala did not push through with the JV. The long term papers plunged in value, so the customer lost money. The customer sued the bank. HELD: The customer bears the risks because she gave the instructions to the bank. She cannot blame the bank for her bad investment decision. Central Bank Act (RA 7653) What are the State policies? o 1. State maintains a central monetary authority that functions and operates as an independent and accountable body corporate in discharging mandated responsibilities re: money, banking, and credit. o 2. BSP is a GOCC that enjoys fiscal and administrative autonomy. Creation of the Bangko Sentral ng Pilipinas (BSP): o It is the central monetary authority mentioned above What is the responsibility and primary objective of the BSP? o 1. Provide policy directions in areas of money, banking, and credit. o 2. Supervise operations of banks o 3. Exercise regulatory powers over finance companies and quasi-banks and those performing quasi-banking functions What is the Monetary Board (MB)? o It exercises the powers and functions of the BSP o It is composed of 7 members, appointed by the President for 6- year terms: 1. Governor of BSP (treated as department head subject to CONA confirmation) 2. Cabinet member designated by President 3. 5 from private sector (staggered terms) How does the Monetary Board (MB) act? o It needs 4 votes to approve any decision o In case of emergency, the governor with 2 concurring members of the board can act on any matter requiring MB decision But have to report to the President and Congress within 72 hours What steps can the MB take when the bank is under distress? 146 o 1. Place it under conservatorship When the bank is having liquidity problems What are the powers of the conservator? 1. Take charge of assets, liabilities, and management thereof 2. Reorganize the management of the bank 3. Collect all monies and debts due the bank 4. Exercise all powers necessary to restore viability 5. Can overrule the decisions of the bank officers/directors when it will prejudice the bank o To what power does this apply? Only to defective contracts o Can it apply to valid contracts? No. This will impair freedom of contracts How long can conservatorship last? 1 year. Afterwards, it will be determined if it can survive When is conservatorship terminated? 1. MB is satisfied the institution can operate on its own and conservatorship is no longer necessary 2. Continuance of business will involve probable loss to depositors or creditors move on to receivership/liquidation (see next part) o 2. Receivership Must there be prior conservatorship? No. What is the difference? The bank must be in insolvent here When can you declare receivership? 1. Unable to pay liabilities as they become due in the ordinary course of business o Does not include inability to pay due to extraordinary demands o Ex. Equitable bank run after impeachment trial 2. Insufficient realizable assets to meet liabilities 3. Cannot continue without probable loss to depositors or creditors 4. Willfully violated cease and desist order that has become final, or dissipation of assets of the bank o In this case, forbidding from doing business and appointment of PDIC as receiver is summary 147 Who is the statutory receiver? The PDIC is the statutory receiver But if quasi-bank, any person of recognized competence in banking or finance Duties of the receiver? 1. Gather and take charge of all assets and liabilities, and administer these for the creditors 2. General powers of receiver in ROC o Cannot pay or dissipate any of the assets UNLESS it is for administrative expenditures 3. May deposit or place funds of the institution in non-speculative interests Case: Manila Banking was placed under receivership. The officers sold real property belonging to Manila Banking and the receiver approved it. HELD: Invalid. The moment the bank was placed under receivership, the officers lost their authority to dispose its properties because they now pass under the control of the receiver. The receiver cannot approve the sale because his powers are limited to acts of administration. What must the receiver decide within 90 days from taking over? 1. Whether the institution may be rehabilitated or is in a condition that it may resume business (with safety to general public and creditors). o MB must approve this determination of resumption 2. Otherwise, proceed to liquidation o 3. Liquidation What is the close now, hear later scheme? No prior hearing needed to appoint a receiver and close the bank. It is enough that subsequent judicial review is given. To require prior hearing would defeat purpose of closure. General Bank: It was closed and nobody was willing to invest fresh capital. Allied Bank bought and rehabilitated it. The old orders to close it were questioned. They claimed there was an unusual bank run. But the court found that there was bankruptcy because they extended unlimited credit facilities What happens in liquidation? 1. Receiver files ex parte in the RTC petition for assistance in liquidation o According to liquidation plan by PDIC (or MB, if quasi-bank) 2. RTC adjudicates disputed claims against the institution, liabilities of officers and employees, and issues re: liquidation plan 148 3. Convert assets to cash and pay claims according to concurrence and preference of credits Effect of receivership or liquidation? 1. Assets of institution cannot be garnished, attached, levied, executed o Because they are deemed in custodia legis when in the hands of the receiver 2. No preference even if the claimant- depositor obtained a writ of preliminary attachment o Remedy is to join in liquidation proceedings. 3. Appointment of receiver does not dissolve corporation. It does not eliminate legal personality of bank. It can sue and be sued, but all actions pass through the receiver/liquidator. Can the BSP forbid the bank to do business? Yes, but when the BSP decides this, the bank can still foreclose mortgages and the prescriptive period to foreclose is not tolled. Is an insolvent bank closed by the BSP liable to pay interests on deposits of clients? No. A bank cannot pay interest when it is not operating. But interests on loans extended by the BSP are still demandable. What is the character of all these remedies? o No prior hearing required o Final and executory o What is the remedy? Within 10 days, file a petition for certiorari o From when do you count the 10 days? Count from receipt of order by the BOD Filing must be authorized by majority of SHs interest MB may impose sanctions including liquidation of a bank when: o [violations] o 1. There are violations of articles and by-laws o 2. Willful failure to comply with banking law/regulation of Mb o 3. Conducting business with irregularities o [re: information and supervision] o 4. Failure to submit reports o 5. Refusal of examination o 6. Willfully making false statements to MB What is the provisional remedy against erring officers? 149 o 1. MB may place under preventive suspension any officer of the bank pending investigation up to 120 days o 2. If the officers continue with the violation, can issue a cease and desist order Officers can request for a hearing within 5 days from order to question the cease and desist order, or else it becomes final Only the CB can issue currency and all notes issued by the CB are legal currency: o Coins, denominations of 25c, 10c, and 5c are legal tender up to 100 pesos. o Denominations of 1, 5, and 10 are legal tender up to 1000 pesos. o N.B. The old rates were 25 and 50 pesos, but they have been changed to these rates in 2006 by CB Circular 537 o Someone went shopping in the supermarket and paid coins to the cashier, total more than 1000 pesos. The cashier said it is not legal tender. Is she correct? Yes. o What is its powers regarding money function? May prevent circulation of foreign currency or of currency substitutes, or of reproduction of facsimiles of BSP notes Investigate, make arrests, conduct search and seizure in accordance with law to maintain integrity of currency What is the responsibility and primary objective of the BSP? o Maintain price stability conducive to a balanced and sustainable growth of the economy. Promote and maintain monetary stability and the convertibility of the peso. There are different tools held by the MB for this purpose: o 1. CB maintains international reserves. The CB maintains an account with the Federal Reserve system in the US. The CB thus can buy and sell foreign currency. o 2. With concurrence of MB and with president, the MB can restrict sales of foreign currency. Back in the 60s the MB ordered all banks to surrender all their foreign currency to the CB. o 3. Require exchange obtained by anyone to be sold to the bank. There are laws on paper saying that upon earning money in dollars, you have to sell them to the bank within 5 days. But because of our commitment to the IMF, this is not implemented anymore. The MB can: o 1. Determine exchange policy, o 2. Require banks to sell excess foreign exchange, o 3. Buy and sell credit instruments from banks (Discount policy) Extend loans and advances (w/ charges and interests) to banking institutions to influence volume of credit o 4. Extend loans to banks for up to 7 days without collateral for the sake of liquidity This can influence the volume of credit, consistent with the objective of price stability 150 o 5. In national emergency, by vote of at least 5 members, the MB can approve of extraordinary loans Amount must not exceed 50% of the banks total deposits and deposit substitutes Loans released in two tranches (installments) o 6. Can buy and sell debt instruments (Open Market Operations) BSP may buy and sell in the open market evidence of indebtedness directly issued by the government or by a government instrumentality (and guaranteed by the Government) o 7. Reserve requirements can increase this (to decrease the amount available for loans by the banks) vis--vis deposit liabilities Securities Regulations Code State policy and SEC What is the purpose and scheme of the Securities Regulations Code? o 1. Protect public investors from fraudulent schemes o 2. Encourage public investments by regulating sale and disposition of securities o 3. Establish a socially conscious free market that self-regulates, encourages widest participation of ownership in enterprises, enhance democratization of wealth, and promote development of capital market o 4. Protect investors, ensure full and fair disclosure of securities, minimize/eliminate insider trading and fraudulent/manipulative devices that distort the free market Composition of SEC: o 1 chairperson, 4 commissioners o Collegial body o 7 year terms each What are the powers and functions of the SEC? o [Registration and supervisory] o 1. Jurisdiction and supervision over business organizations o 2. Approve, reject, suspend, revoke, require amendments to registration statements, and registration/licensing applications o 3. Supervise, monitor, suspend, take over exchanges, clearing agencies, and SROs o [Regulation] o 1. Regulate, investigate, supervise activities of persons to ensure compliance with SRC o 2. Compel officers of registered corporations or association to call meetings of SHs or members o 3. Issue subpoenas duces tecum or summon witnesses in proceedings, or procure books o [quasi-legislative] o 1. Formulate policies and recommendations on issues re: securities market and make recommendations to Congress 151 o 2. Issue rules and regulations and opinions o [compliance and punishment] o 1. Impose sanctions for violation of rules and regulations o 2. Enlist aid and support of government agencies to implement its powers and functions o 3. Issue cease and desist orders to prevent fraud/injury to public o 4. Punish for contempt according to ROC o 5. Suspend or revoke the franchises or certificates of registration o 6. Exercise necessary or incidental powers Which cases have been transferred to RTC jurisdiction from the SEC? o 1. Investors and corporate affairs Particularly fraudulent devices and schemes employed by directors detrimental to public interest/other firms Ex. insider trading, etc. o 2. State and corporate affairs In relation to legal existence of corporations, partnerships, and associations o 3. Intra-corporate and partnership relations e.g. Controversies in election, appointment or directors or trustees o 4. Petitions for suspension of payment corporate rehabilitation Registration of securities What is an investment contract requisites? o 1. Investment of money N.B. a no money out transaction is not an investment o 2. In a common enterprise N.B. thus charitable institutions are not covered o 3. With expectation of profits o 4. To be derived primarily from efforts of others N.B. So if the investor contributes actual work, its not an investment contract What are securities? o Shares, participation, or interests in a corporation/commercial enterprise/profit-making venture, and evidenced by a certificate, contract, instrument (written or electronic) o In particular: 1. Shares of stock, bonds, debentures, notes, evidence of indebtedness, asset-backed securities 2. Investment Ks, certificates of interest or participation in profit-sharing agreement, certificates of deposit for future subscription Investment K a person seeks to use the money of others on the promise of profits 152 3. Fractional undivided interests in oil, gas, or other mineral rights 4. Derivatives (options and warrants) Options contracts that give the buyer the right to buy/sell an underlying security at a predetermined price on or before an expiry date o Call options rights to buy o Put options rights to sell Warrants right to subscribe/purchase new shares or existing shares in a company on or before an expiry date 5. Certificates of assignments, certificates of participation, trust certificates, voting trust certificates, and the like 6. Proprietary or non-proprietary membership certificates in corporations; other instruments o XYZ borrows money from persons and in exchange issues postdated checks in an amount equivalent to their value + interest, maturing after 2 months. The lenders can re-lend these amounts after and even increase contribution when the checks mature. The SEC found out and issued a cease and desist order for selling unregistered securities. Is the SEC right? Yes, it is. It is one thing to issue checks for isolated transactions, but another for an elaborate scheme that turns postdated checks as instruments for pseudo- investment. Securities also include commercial papers evidencing indebtedness of any person or entity. What are specific examples of securities? o A foreign exchange trading transaction is an investment contract o Pyramiding scheme is an investment contract Because there is expectation of profit from the efforts of other people (you get commissions) o Someone with exploration contracts for oil or gas can sell participation rights o Derivatives limitless (depends on creativity of the human mind) Different from spot trading. Spot trading is where X bought $1000 (where exchange rate is 43 pesos to a dollar), but the seller gives credit: 10 days to pay. Here, you are not speculating, you have already agreed to a price, you are just given credit. Whereas in derivatives, you must have a license from the MB. Rules on registration? o 1. No securities can be sold or offered without registration statement filed with and approved by the SEC o 2. Prior to sale, information on securities made available to each prospective purchaser Which securities need not be registered? o 1. Security issued or guaranteed by the Phil. Government, political subdivision or agency, or instrumentality of government o 2. Security issued or guaranteed by government of any country with which Philippines maintains diplomatic relations (or subdivision) on the basis of reciprocity 153 o 3. Certificates issued by receiver/trustee in bankruptcy approved by proper adjudicatory body o 4. Security or derivatives which sale or transfer is under supervision of Insurance Comm, HLURB, BIR o 5. Security issued by a bank except its own shares of stock o N.B. Usually these are issued by the government or regulated by another agency. For instance, certificates issued in bankruptcy proceedings, lots, condominiums, securities issued by banks. o Why are they exempt securities? These are non-speculative in nature. The return on investment is somewhat assured. What transactions are exempt from registration? o [A. isolated and minor transactions] o 1. Isolated transactions Not in repeated and successive transactions o 2. Sale of securities to less than 20 persons within 12 months (deemed isolated) o [B. with existing underlying relationships] o 1. Stock dividends (to existing SHs) o 2. Sale of shares to existing SHs o 3. Issue and delivery of security in exchange for any other security of the same issuer pursuant to right of conversion If a corporation floated bonds and there is an option to exchange it for stocks o 4. Pre-incorporation subscription or pursuant to increase in A.C.S. without compensation or remuneration for the transaction and where purpose of solitication is to comply with legal requirements o 5. Exchange of securities by the issuer with its existing security holders exclusively, where no remuneration is paid o [C. secured by mortgage and the like] o 1. Sale by pledgee or mortgagee foreclosing o 2. Issuance of bonds secured by mortgage, where the entire mortgage + all the bonds/notes secured thereby sold to one buyer (who is the underwriter) Ex. Meralco will float $500M bonds secured by mortgage on its assets. One bank bought all that. This is exempt. o [D. sophisticated transactions] o 1. Judicial sale or any extra-judicial sale/execution sale by admin/guardian/receiver/trustee in insolvency or bankruptcy o 2. Brokers transactions, executed upon customers orders, on any registered exchange or trading market o 3. Sale to banks, etc. and other sophisticated investors not needing protection from the SEC Bank Regulated investment house Insurance company 154 Pension fund/retirement plan maintained by the RP government or those authorized by government Investment company Others, as deemed by the SEC Grounds for disapproving application for registration of securities? o 1. If corporation is insolvent o [violations] o 2. Violation of SRC o 3. Engaged in fraudulent transactions or about to engage in such o 4. Issuing officer/SH convicted of moral turpitude or fraud o [misinformation or lack thereof] o 5. False or misleading annotations as to material facts o 6. Failed to comply with conditions for registration o 7. Registration is inaccurate or incomplete Protection of investors What is the shift of the Philippine securities registration system? o It has shifted from a merit-based system to a disclosure-based system. So even if securities are potentially valueless (ex. issued by a company on the brink of insolvency), as long as these facts are properly disclosed, the SEC will not deny registration. What is a tender offer? o Publicly announced intention by a person or group of persons to acquire equity securities of a public company (a type of takeover bid). It is a public, open offer to all stockholders of the corporation. It is an offer for them to tender their shares on the terms specified in the offer. o Purpose: To protect minority SHs from any scheme to dilute their shares. It gives them the chance to exit the company under reasonable terms and the chance to sell their shares at the same price as those of majority SHs. When is a tender offer required? o If a person or group intends to acquire: 1. At least 35% equity of a listed corporation 2. At least 35% equity of an unlisted corporation, if it has at least 50M+ assets and 200 SHs with at least 100 shares each 3. At least 35% of equity of a listed corporation over a period of 12 months o NOTE: in the codal this was 15% and 30% but the SEC rules changed these to 35% o N.B. This requirement applies even to indirect means of acquiring control Ex. Shares of mother corp. which owns a subsidiary will be sold What are not covered by the tender offer rule? 155 o [New stocks] o 1. Purchase from unissued capital o 2. Purchase of shares from increase in ACS o [In relation to proceedings] o 1. Purchases in connection with privatization undertaken by the government o 2. Purchases in connection with corporate rehabilitation under court supervision o 3. Merger or consolidation o [Public sales] o 1. Purchases through open market at prevailing market price o 2. Purchase in connection with foreclosure proceedings involving a pledge/security arrangement What is the procedure for making a tender offer? o 1. File a declaration with SEC of intent to make tender offer o 2. Furnish the issuer of securities the necessary info o 3. Publish and send out requests/invitation to tender shares o 4. SHs deposit securities pursuant to the offer or request Requisites if the depositor wants to withdraw the securities deposited? 1. Done throughout period the offer remains open, and 2. Not yet been accepted by the offeror, and 3. After 60 days from the date of the original tender offer or request o except as the SEC may otherwise prescribe o What if the securities offered exceeded what the person/group intend to purchase? The offered securities are purchased pro rata, disregarding fractions This rule also covers: securities deposited within 10 days from increased consideration offer N.B. if the person/group offers higher consideration to attract more offers, the initial depositors must also be given the higher consideration What is proxy solicitation? o A request that a corporate shareholder authorize another person to cast the shareholders vote at a corporate meeting. What is the rule on proxy solicitation? o No broker or dealer can give any proxy in respect to any security carried for the account of the customer to a person other than the customer, if without express written authorization of the customer o A broker or dealer who holds or acquires proxy for at least 10% of the shares must identify who the beneficial owner is, within 10 days of acquisition, in a report given to: 1. SEC, 156 2. Issuer of the security, and 3. The exchange where the security is traded Prohibited and Fraudulent Acts What are prohibited acts? o [Market manipulations] o 1. Manipulation of security prices, false transactions, where to falsely show active trading, there are multiple transactions Wash sales (transaction that involves no change in beneficial ownership thereof) Matched orders Market rigging or jiggling o 2. Effecting alone or with others a series of transactions in securities that: Raise price to induce purchase Depress price to induce sale Create active trading to induce purchase/sale through manipulative devices o 3. Series of transactions for purchase/sale of security to peg, fix, or stabilize its price o 4. Manipulative or deceptive devices or contrivance in purchase or sale of security o [Deception] o 1. Circulate or disseminate information that the price of a security will rise or fall because of manipulative market operations o 2. Make false/misleading statement with respect to material facts, which he knew or had ground to believe was false/misleading to induce purchase or sale of any security What are covered by the short-swing profit rule? o Directors, officers, and principal stockholders (owns more than 10% of a particular class of securities) (i.e. corporate insiders) who enter into a purchase-and-sale or sale-and-purchase transaction within a gap of 6 months o What is the effect? The corporate insider must return any profits derived to the securities-issuer o What transactions are exempted from forfeiture of profits? 1. If the securities were acquired in good faith in connection with a debt contracted prior 2. If the beneficial owner was not such both at the time of purchase and sale o When is suit filed? 2 years from when profit was realized, in the RTC Brought by the issuer, or the owner of the securities issued by the issuer if after 60 days from request to prosecute, the issuer fails to do so What is a short sale? 157 o It is the sale of a security that the seller doesnt own. A short seller often borrows shares from a broker and sells them to a third person, hoping the price will drop. He then buys back from the public, at a lower price, the same number and type of shares he borrowed from the broker and returns them, profiting from the lower value of shares. o N.B. This is perfectly legal. Contrast this with the short-swing profit sale (which the code actually calls short sales) What are fraudulent transactions? o Obtain money or property through untrue statements o Involves deceit What is insider trading? (Usually asked in the Bar) o Illegal for an insider to buy or sell security while in possession of material information not available to the public Unless that insider proves that the information was not obtained from insider relationship Or if he had reason to believe the other party knew of this information or he himself made it known o Who is an insider? 1. Issuer 2. Officer of issuer 3. Person whose relationship gives him access to material information 4. Government employee, director, etc. (of SEC) with access to this information 5. Person who learns this info from the foregoing persons N.B. not if it wasnt communicated to the person (ex. just randomly stumbled upon a letter containing such information) o When is information material? If it will affect the price Or important in the decision to buy, sell, or hold the security Civil liabilities: o Any person acquiring a security may sue if the registration or statement is untrue as to a material fact o Who: 1. Issuer and every person who signed the registration statement 2. [See enumeration in the Code] prospectus, fraudulent transactions, insider trading, etc. Time sharing: o Can offer staying in cottages, clubs, etc. to non-members because sometimes they are empty. These are securities that must be registered. What is the effect of contracts made in violation of the SRC? o 1. Void as regards the rights of any person who, in violation of any such provision, shall have made or engaged in the performance of the contract 158 Ex. Company who knowingly issued unregistered securities (the infirmity of which the buyer wasnt aware of) cannot file action for specific performance to compel payment N.B. It is unilaterally void only as for the violator. So the buyer can void it because the seller was fraudulent, but the seller cannot decide to invoke that it is void. o 2. Void as regards a non-party to the contract who was aware of the violation Transportation Law Distinguish common carrier from private carrier: Common carrier Private carrier Holds self out in common to all persons who choose to employ him Agrees to carry persons/goods for hire in a special agreement Bound to all who offer such goods as it is accustomed to carry and tender reasonable compensation Only by virtue of special agreement Subject to regulation; as a public service Not subject to regulation to same regulations Extraordinary diligence Diligence of GFF Cannot stipulate exemption from liability for negligence (void against PP) May validly stipulate such What are common carriers? o Hold themselves out to the public as ready to engage in carrying goods or passengers or both for compensation as public employment. Even if thats not his primary business Does not need to have a regular schedule, and can have limited service (ex. school bus) o What about transportation of oil through a pipeline? Still a common carrier it does not have to be a vehicle. o Is a travel agency a common carrier? No, it only makes arrangements for the passenger. What is the level of diligence for a common carrier? o Extraordinary diligence, as opposed to GFF for a private carrier o Both in transportation of persons and custody of goods o Can a common carrier invoke the last clear chance defense? No, it is a defense in quasi-delict, but does not apply to liability of passengers. o What about diligence in selection and supervision of employees? No, its just a defense in quasi-delict but not breach of transportation contract. o What about defects in the parts, even if brand new? Its still not a defense. Even if its brand new, the common carrier cannot be complacent. Defect in components or car part is not a good defense. What are the defenses available to the carrier? o 1. Fortuitous event 159 When is fortuitous event not allowed to be invoked? If there is negligence or delay When is extraordinary diligence required, even during a fortuitous event? Before, during, and even after the event (fortuitous event does not justify major delays after the event) If there is failure to comply with this there is concurrent negligence by the transporter Is fire a fortuitous event? As a rule, no, except if caused by lightning. Its traceable to human negligence. What about robbery? Robbers must be acting with irresistible force o 2. Acts of public enemy in war o 3. Acts or omissions of the shipper or owner o 4. Character of the goods or faulty packaging Character of goods: ex. ripening of fruits Faulty packaging: If obvious from external appearance that they are not properly packed, and still the carrier accepted it, it is liable. An owner under-declared the weight of his package to save money. The carrier accepted it. This caused the goods to spill from the package. Held? There is shared liability. Extraordinary diligence includes the carrier examining the goods and noticing that they are obviously under-declared. o 5. Order of competent public authority o 6. Exercise of extraordinary diligence If the goods are damaged or lost, what is presumed? The carrier is presumed to have been in fault Burden of proof is on the carrier to prove exercise of extraordinary diligence When does responsibility of the carrier begin? o From the time the goods were placed in its possession until the goods are actually delivered o Carrier was delivering hemp, but it cannot approach the wharf because the water was shallow. It sent a lighter to send the hemp, but it sank. HELD: The carrier is liable. The transportation through the lighter was a preparatory act to delivery, and so was within the K of transportation. o Carrier was delivering oil, and when it got to the wharf, it was pumping oil into a tank. The hose was severed, without the carrier noticing, and the oil placed in the tanks spilled into the water. Caltex, the shipper, sued. 160 HELD: No final delivery yet because the oil spilled back. Carrier was liable. o X was waiting for the LRT on the platform, after buying a token and entering the turnstile. He got into an altercation with the guard who assaulted him. X fell onto the tracks and got hit by the train. Is LRT liable? Yes, because he was there in pursuit of boarding the LRT. o After alighting a bus, but waiting to pick up luggage, the same bus hit one of the passengers. Is the bus liable? Yes, responsibility only ends after passage of reasonable time and opportunity to leave the destination. The contract of carriage does not automatically end upon alighting. Contract of carriage includes chance to get the baggage. Upon landing on the dock, and the goods were placed in a warehouse, but there was no consignee was there delivery? o No. o What are the defenses? 1. There was delivery Notice given to consignee re: the arrival of the goods Given reasonable opportunity to remove them or dispose of them 2. There was exercise of extraordinary diligence When does the K of transportation terminate? o 1. When the goods are actually received o 2. When there is unreasonable delay in receiving the goods What is the implication? The carrier becomes a depositary, and diligence is reduced to GFF. o What if the goods were placed in a bonded warehouse prior to loading or in transit? The common carrier is still liable, because it has control and responsibility over the goods How could the carrier avoid liability? o Through stoppage in transitu This is exercised by the seller/owner, before it has reached the consignee. Its as if the owner never parted with ownership of the goods. o Legal effect: the contract of carriage is terminated; the shipper becomes akin to a warehouseman/bailee What is the nature of services of an arrastre operator? o The legal relationship between the arrastre operator and the consignee is akin to that of warehouseman/depositary and depositor o Maritime law does not apply to govern the arrastre operators responsibility When is a stipulation limiting carrier liability valid? 161 o It must be reasonable to be valid. o What are unreasonable? 1. No liability at all 2. Limited liability up to a certain amount 3. Goods transported at risk of owner 4. Exercise of diligence less than GFF N.B. so this is the minimum 5. That the common carrier is not liable for acts of its employees o What is valid: 1. Limiting carrier liability in case of strikes or riots 2. Limiting liability up to a certain amount UNLESS the shipper declares the actual damage o N.B. if the carrier is a private carrier, such stipulations otherwise deemed unreasonable are valid. Which countrys laws govern the transshipment of goods between countries? o The law of the country wherein the goods will be shipped governs. o Ex. If there are two carriers (A and B) with a transshipment agreement and As transportation ends in Davao, its liability is governed by Philippine law even if B proceeds to deliver to USA. What specific laws will govern under Philippine law? o Primary: New Civil Code provision on common carriers o Secondary: Code of Commerce and other special laws: Public Service Act, Customs and Tariff Code, Civil Aeronautics Act o Tertiary: Carriage of Goods by Sea Act o Can the parties deviate from this hierarchy? Yes. Stipulate in contract of carriage what laws should govern (Paramount Clause). It applies by reason of contract, as long as it is not against public policy. What are the rules governing baggage of passengers? o If it is checked in, liable as common carrier o If it is hand carried, it is considered necessary deposit only required to exercise diligence of GFF How does gratuitous transportation affect stipulation limiting liability? o It becomes valid o But not for willful acts and gross negligence Contributory negligence of passenger will not exculpate carrier but minimize liability o Ex. Passenger left his elbow hanging out the bus window, got hit and severed. His contributory negligence reduced the carriers liability. o A bus was cruising along the highway. One passenger ran amuck and started hurting the passengers with a knife. The other passengers panicked and ran out, and fell, died. 162 HELD: The bus company was liable because a passenger ran amuck and the employees did not do anything, stop the bus, or whatever. o A bystander threw a stone at a bus and it struck a passenger. Carrier liable? HELD: No. It has no control over this occurrence. It is required to exercise extraordinary diligence but is not an absolute insurer. What is the rule re: explosives, etc? o Airline companies liable because they are authorized to search bags o Bus not authorized to search bags, so not liable. If the carrier ends up in an accident, what are the remedies of the passenger? o A passenger can sue under breach of contract or quasi-delict. o N.B. Breach of contract is easier to prove because there is presumption and the defense of diligence in selection/supervision is not available. o Why would you sue under quasi-delict then? There are more damages recoverable, but the case is tougher. But you can recover moral damages from physical injuries here. What damages can be recovered in breach of contract? o 1. Passenger was injured: Medical expenses Loss of income if incapacitated to work Attorneys fees, if the carrier unjustifiably resisted the claim If the driver was negligent, you cannot impose exemplary damages on the employer unless there is something that makes the employer liable (ex. awareness of the drivers recklessness) Moral damages? General rule: not demandable Exceptions: o Obligor acted in bad faith or fraud o Gross negligence tantamount to bad faith o 2. Passenger died Medical expenses Funeral expenses Where there is no proof of funeral expenses, award of 25K as temperate damages Moral damages Exemplary damages apply same doctrine above Lost income (80 actual age) (annual income) (2/3) = indemnity 163 What bout injuries caused by acts or omissions of employees of the common carrier? o The CC is liable EVEN IF the act was done in violation of orders, or beyond scope of the employees authority (Respondeat superior) o Must be in the course of his employment Ex. If the liability is for damages caused to another automobile, then diligence of GFF is a defense. Ex. But if at the same time, there is liability for injuries caused to passenger, diligence of GFF is not a defense. What if the passenger was caused by co-passenger or stranger? o If the act of the stranger could have been prevented or stopped by the personnel using GFF, there is liability. o If not, it is a fortuitous event. Can this liability be eliminated by stipulation, posted notices, statements on tickets, or otherwise? o No. Warsaw Convention When does the Warsaw Convention apply? o To transport of persons, baggage, goods in international air transport o Although domestic flights may apply it in a Paramount clause When is there international transport? o 1. Point of departure and point of destination are in two high contracting States to the convention o 2. Point of departure and point of destination is within one high contracting State, and there is an intermediate point, which is a State that may or may not be a high contracting party o What is the single operation rule? The moment a person is covered by the WC, then it also covers even domestic portions of the itinerary Ex. ML Amsterdam Madrid Barcelona o KLM issues a ticket from ML to Amsterdam. Then it helps the passenger secure a ticket from Amsterdam to Paris, but flown through Air France. Is KLM liable for problems in the flight to Paris? NO. It is a mere agent of the other airline company. What documents are involved in international transport by air? o Passenger ticket o Baggage check o Airway bill Is the issuance of an airway bill necessary in order to establish contract of carriage? o Yes, because an airway bill is a document that would establish a contract of carriage between the carrier and the owner of goods. It establishes receipt of goods and the condition of the goods loaded on board. Can the carrier accept the goods without issuing an airway bill? 164 o Yes, but it would be liable to the shipper, had it delivered the goods to the consignee without asking for surrender of the airway bill. o The carrier will be liable to shipper for misdelivery. o Also liable to real person with lawful right over the goods who holds the airway bill. When does the right of the shipper to dispose the goods cease? o From the time when the right of the consignee begins (when the goods are delivered to the latter) o He couldnt recall the goods anymore or stop delivery in transit. If the consignee refuses to exercise his rights as consignee, what happens? o The shipper resumes right over the goods and can exercise rights and obligations over goods under Warsaw Convention Rights of consignee upon arrival of goods at port of destination: o 1. Right to demand from the carrier to deliver the airway bill and the goods to him o 2. Pay transportation costs to carrier if stipulated When is the consignee allowed to enforce provisions of contract (airway bill)? o 1. Goods not delivered before expiry of 7 days from the time they were supposed to arrive o 2. Goods are missing o N.B. Consignee will have right to enforce rights under contract of carriage When must claim notice be given to the carrier? o Baggage loss: 3 days from receipt of baggage o Goods loss: 7 days from receipt of goods o Delay in delivery of baggage or goods: 14 days from delivery o What if the consignee does not give such claim notice to the carrier? Further action by the consignee is barred (similar to the rule in the Code of Commerce and unlike COGSA) o See directly below for period to file claims in cour What is the period to file claims for damages in court? o 2 years from arrival at the destination, or when arrival should have happened, or stoppage of carriage o What is the exception for period to file claims? Action based on passenger being humiliated (follow tort law) 4 years o Where can you sue the airline company? 1. Where you bought the ticket 2. Where the airline company was incorporated 3. Where the airline company has its principal office 4. Point of destination o In a roundtrip flight (ex. SF ML SF), can you sue in ML? 165 No, because in a roundtrip flight, your point of departure is the same as your point of destination. When can you sue in ML? If the return date is left open. Meaning, ML is the point of destination. Who is the defendant? o 1. As regards passengers: In case of successive carriers, the carrier in which the accident or delay occurred Unless by express agreement, the first carrier assumed liability for the whole journey o 2. As regards baggage or goods: Passenger or consignor can sue first carrier, Passenger or consignee can sue last carrier, or Against carrier I which destruction, damage, or loss occurred N.B. all carriers are jointly and severally liable What is the liability of carriers to passengers? o Liable for death or injury if caused on board, during embarkation, or disembarkation What is the period of responsibility for the air carrier? o As soon as the carrier has possession and custody over the baggage and goods What are the defenses available to the carrier? o 1. Carrier/agents took all necessary measures to avoid damage or it was impossible to take these measures o 2. Error in piloting and the carrier/agents had taken all necessary measures to prevent the accident or it was impossible to take these measures Ex. pilot mistakenly identified one airport as another o 3. Error in handling of aircraft and the carrier/agents had taken all necessary measures to prevent the accident or it was impossible to take these measures o 4. Error in navigating and the carrier/agents had taken all necessary measures to prevent the accident or it was impossible to take these measures o 5. Contributory negligence Liability reduced appropriately by the degree of negligence contributed by the shipper/consignees What is the concept of limited liability? o Liability to passengers (injury on board, injury during embarkation or disembarkation, or delay) or goods (damage or delay) is limited to the stated amounts. When does limited liability NOT apply? o Limited liability does not apply when there is dol or willful misconduct Ex. the PAL situation where bags were unloaded so it could take in more freight Ex. Recklessness in handling luggage 166 What is the limitation of liability? o 1. Carriage of passengers 250K francs Except if by special contract, the carrier and passenger agree to a higher limit o 2. Carriage of registered baggage and cargo 250 francs per kg (of the baggage concerned, not total baggage) Except if the passenger or consignor has made a special declaration of interest in the delivery and has paid a supplementary sum if it is required In this case, what happens to the liability? The limit will be the declared amount Unless it is proven the actual value is higher o 3. Hand-carried baggage 5K francs per passenger o What is the effect of the Guatemala Protocol? Increased limits to $100K for passenger and $1K for baggage, but its not yet effective Do you apply Warsaw Convention when suing on a tort? (Ex. humiliation) o No. When a passenger is downgraded, can he recover damages? o Yes. How much are airlines allowed to overbook? o Up to 10%. o If everybody shows up, then the airline company asks for volunteers to be transferred to the next flight. o If no one wants to be transferred, the last ones to check in will be left behind. o N.B. But our SC does not accept this reasoning. X and his wife went to HK with another couple, with their friends. When they were returning, X was informed that he was being transferred to first class, against his wishes. He sued. o HELD: He won. There was still a breach of contract, in spite of the upgrade. X was a soprano who was scheduled to perform in KL. X booked with Sing Air a flight from Frankfurt to ML, and then ML to KL. Because of the bad weather, Sing Air wasnt able to fly her to ML on time to reach KL. So X just flew directly to KL with another flight and wasnt able to practice, and performed badly. o HELD: Sing Air was liable; it was not beyond remedy. Couldve booked another flight to make it possible. A Northwest flight was aborted so the passengers were all rebooked in different NW flights. A family was rebooked in an itinerary that was more roundabout and longer compared to other passengers. o HELD: NW was liable. PAL in a stopover unloaded pieces of baggage of its passengers to take in additional cargo and freight. o HELD: this was bad faith, leading to moral damages. Unloading baggage to prevent airplane from being overweight, for safety considerations o HELD: not liable 167 JAL was unable to land in MLA for two weeks because Pinatubo erupted and the runway had lahar. o HELD: It is a fortuitous event. JAL not liable for accommodations, food, etc. Immigration refuses to let a passenger leave due to defects in passport/travel documents. o HELD: This is not the airlines fault. Maritime law What is the 3-fold character of a BOL? o 1. Contract o 2. Receipt for goods o 3. Symbol of the goods What does a clean bill of lading bar? o Any argument by the shipper that the goods were damaged when it received them. The clean BOL shows that they were in good condition when received. What if the package appears unfit for transportation? o The carrier can refuse to accept the goods What if the carrier suspects the goods as misdeclared? o It can open the package. If the carrier is right, the owner shoulders costs of inspection. If the carrier is wrong, it bears the costs. When can the consignee of the goods refuse to take delivery of the goods and just claim damages? o 1. When the partial loss makes the entire thing useless o 2. When the damage makes the goods useless for the purpose for which they were intended o 3. Delay through fault of carrier o 4. Damage apparent from external appearance of package When must claim be made? Immediately, or else barred What if the damage is not apparent? Within 24 hours from receipt, or else barred When does this provision not apply? For international shipping, the COGSA applies If goods are transshipped, who is liable? o The ultimate carrier o What if the goods were actually damaged during the first leg? The ultimate carrier is still liable It can just sue the prior carrier for reimbursement o Against whom does the shipper or consignee have right of action? Carrier who executed the transportation contract, or other carriers who received the goods without reservation 168 When does a reservation have no effect in relieving responsibility? When the carrier who made the reservation is responsible When must the consignee pay for freight and expenses? o Within 24 hours of receipt o Otherwise, the carrier may ask that the goods be dissolved until enough to pay arrears The contract between buyer and seller stated that there should be no transshipment. The shipping company issued a BOL which stated on its face that there will be transshipment. When the goods arrived, the buyer refused to receive the goods. The seller sued the vessel. HELD? o The seller lost. The BOL clearly stated that there will be transshipment but the seller agreed. The goods which arrived to the buyer did not meet specifications so the buyer refused to receive the goods. The carriage piled up. Who is liable? o The consignee. The contract of sale and the contract of shipment are two different contracts. The consignee should have just received the goods and sued the seller. The goods were shipped from ML to Davao by one shipper, then Davao to SF by another. The goods were damaged upon arrival in Davao, but suit was made upon arrival in SF. HELD? o Period for filing the claim was barred. Should have claimed in Davao. Registration of vessels with the Maritime Industry Authority o Where the sale was not registered, the sale does not bind third persons Goods arrived at the pier. Then the vessel hired a harbor pilot, which crashed and damaged the goods. Claim was against the vessel. Vessel claimed it was not liable because the harbor pilot was not part of the crew. HELD? o Vessel liable. The captain still retained control over the vessel. When he saw that the harbor pilot was about to crash the ship, he should have intervened. Responsibilities of ship owners and ship agents? o 1. Acts of the captain o 2. Contracts signed by the captain to repair, provision, or equip the vessel o 3. For indemnities due to third persons due to conduct in the care of the goods o 4. Quasi-delict in case of negligence in selection/supervision of employees o 5. Collision due to the fault of the captain Real and hypothecary nature of maritime commerce: o If liability is incurred, it is not the owner that incurs the liability attaches to the thing. So if the vessel sinks, the liability is extinguished. The liability of the ship owner is limited to the value of the vessel, earned freightage, and proceeds of insurance. No vessel, no liability. What is the effect of abandonment? 169 Abandonment of the vessel and all her equipment and freight leads to exemption from liability. o What are the exceptions (usually asked)? 1. If the ship owner is at fault (i.e. the vessel is not seaworthy) Ex. the ship did not have enough lifeboats 2. The vessel was insured the proceeds of the insurance will take the place of the vessel 3. Even if the vessel sinks, the ship owner will be liable for repairs and provisioning of the vessel undertaken before its loss N.B.: workmans compensation is not anymore an exception the sinking of the ship is irrelevant for claims for injury, sickness, or death in the course of employment. File claim with ECC What are Charter parties? o In essence, a lease of the vessel o What are the basic types of CPs? 1. Bareboat charter The ship owner turns over the possession of the vessel to the charterer The charterer undertakes to provide the officers, supplies, provisions during the voyage What is owner pro hac vice? o Owner for this occasion o If it is a public carrier, it temporarily becomes a private carrier (diligence becomes GFF) 2. Time charter Contract for the use of the vessel for a specific duration or voyages 3. Voyage charter/contract of affreightment Contract for carriage of goods from one or more ports of loading to one or more ports of unloading o What is the nature of the time/vessel charter? The owner of the ship retains ownership and control If the charterer does not pay, there is a lien by the ship owner over the goods In a bareboat charter, there is no such lien if the charterer does not pay the ship owner The vessel remains a common carrier o In a charter party with a private carrier, a stipulation that the ship owner will not be liable for damages is valid, or a stipulation that the owner will not be liable for damages due to fault of the captain is valid. Averages o Averages may be particular or general o Items mentioned in Art. 809 and 811 are merely illustrative. It is not exhaustive. 170 General averages Particular averages Common danger to vessel and cargo None Deliberate sacrifice of part of the vessel or cargo, with authority Accidental damage Inured to common benefit No such common benefit All persons with interest in the vessel and cargo saved must contribute in the indemnity Owner of the thing damaged bears damage alone General average samples: o [Enemies and bad people!] o 1. Goods or cash invested in redemption of the vessel or cargo captured by pirates/enemies, etc. or expenses for repair o 2. Curing and maintaining members of the crew who were wounded in defending the vessel or saving it o 3. Wages of member of the crew detained as hostage o [Too heavy, brother] o 1. Goods jettisoned to lighten the vessel o 2. Removing or transferring portion of cargo to lighten the vessel o 3. Loss suffered in value of goods sold at arrivals under stress to lighten load o [Emo solutions] o 1. Cables or masts cut or anchors and chains abandoned o 2. Damages suffered by goods through opening made in vessel for draining (to avoid sinking) o 3. Floating a vessel intentionally stranded to save it o 4. Damage to the vessel which had to be opened, scuttled, or broken to save cargo o [Expenses pursuant to average] o 1. Expenses to liquidate average o 2. Wages of crew of a vessel chartered by the month during the time vessel was detained by force majeure When are there particular averages? o The damage did not benefit persons interested in the cargo o Ex. fruits became rotten o Ex. pirates intercepted the vessel, so the captain threw money overboard What are the requisites of general averages? o 1. There is common danger There is no common danger when the damage was due to fault of the captain o 2. For common safety part of the vessel/cargo is sacrificed foundation of general averages o 3. It was successful o 4. Legal steps should have been taken before general average is made i.e. the captain conferred with the officers, the cargo owner, entered in log book, marine protest made Protest must be made within 24 hours (unless the captain is injured, or is unable to do so for some reason) 171 What are the rules on apportionment of liability in collisions? (Maritime tort) o The provisions on civil tort do not apply ex. last clear chance, rule of comparative fault, due diligence in selection/supervision of employee o If two vessels collided and it is the fault of one: Latter bears it own costs Bears the other vessels costs Bears cost of goods damaged o If both are at fault: Each one will bear its loss Do not consider LCC, comparative fault, etc. Solidarily liable for the damaged goods onboard both vessels o If you cannot tell which one is at fault: Same rules as if both are at fault Rule of inscrutable fault o If a third vessel is at fault: The third vessel is liable for losses and damages o If collision was due to fortuitous event: Each shall bear their own damage What is the doctrine of error in extremis in collisions? o There are three zones in collision: First time up to the moment when risk of collision begins Second when risk of collision begins until the moment it becomes a practical certainty Third when collision is certain up to the time of impact o Thus, even when a ship with right of way suddenly changes its course during third zone, in an effort to avoid collision due to the other vessels fault, the act is in extremis and cannot create responsibility on the part of the former (meaning, since its a useless effort, the ship with right of way must not be penalized for it). Carriage of goods by sea act/COC When does the COGSA apply? o Shipment from foreign country to the Philippines o It is valid for parties in inter-island shipping to stipulate that the COGSA applies Even if the cargo owner did not file a claim, it can still sue. Filing a claim is not a condition precedent. 1 year period to file a case o Count the one year from the last day delivery was made (if unloaded Mon-Wed, count from Wed) o If the goods were not delivered, count it from the last day the vessel was here and could have delivered the goods 172 o Does the provision in the civil code that the filing of the claim interrupts the prescriptive period apply? No, it does not. Public policy dictates expeditious disposition of the cases under COGSA. o Can the consignee-insured sue the insurer instead? No. This is a circumvention of the rule. The insurer will step into his shoes and will find himself barred from recovery. o When does the one year prescription not apply? 1. Agreement by parties to extend the period 2. In case of misdelivery delivered to wrong party Apply NCC: 10 years under a written K, 5 years if suing under tort 3. Delay in the delivery of the goods o IMPT: COGSA doesnt apply to misdelivery and delayed delivery. COGSA only applies to non-delivery and damaged goods. $500/carton limit o BUT if the nature and value of the goods are stated in the bill of lading and the BOL indicates this greater amount, the ship owner is liable for that greater amount It must apply on the BOL itself, not a mere reference to another document Compare the prescriptive periods: o Code of commerce: Period to file a claim: Immediately if damage is apparent Within 24 hours if damage is not apparent What is the caveat? o For both cases, the claim must be made before the payment of the transportation charge Prescription for court claim Claim is a condition precedent For non-delivery or misdelivery: o Within 6 years if there is no BOL o Within 10 years if there is a BOL o COGSA : Claim is not a condition precedent. But periods are here anyway: Immediately if damage is apparent Within 3 days from delivery if damages is not apparent Prescription for court claim Within 1 year form delivery or when the goods should have been delivered Public service law What are not public utilities: 173 o In the old law, ice plants were regulated as public utility, but when the PSC was abolished, there is no more body regulating them. o In case of tricycles, it is now the municipalities/cities who issue certificates of public convenience o A shipyard is not a public utility, because you have to render services to the public. A shipyard does not. The law mentions entities that are not public utilities: o Warehouses o Vehicles drawn by animals o Bancas, tugboats, lighters o Tricycles o Pedal-driven pedicabs o Public utilities operated by national or local government Ex. PNR, Olongapo City power plant But these are regulated by appropriate regulatory agency Can foreigners own public utility properties? o Mere ownership of the properties used by public utilities does not make one a public utility. So a foreign entity can own the LRT facilities and lease it out. In case of radio and telecommunication companies, what is required? o A legislative franchise. What is granted is a certificate of necessity and public convenience. o If legislative franchise is not required, its just a certificate of public convenience. o So: if the legislative grants a franchise, its a CNPC. If no legislative franchise is needed and what is just needed is authorization given by the regulatory body, its a CPC. When can a CPC be revoked? o 1. Violation or refusal to comply with order, rule or regulation of the authority o 2. Holder is just a dummy o 3. Holder ceases operations or abandons services Requirements to get a Certificate of Public convenience? o 1. Applicant must be Filipino or corp/association organized in the Philippines and 60% Filipino o 2. Applicant must prove public service and interest is promoted o 3. Applicant is financially capable What is the prior operator rule? o Before allowing a new applicant to come in, a prior operator must first be given the chance to expand his service o Provided that his service is efficient, to prevent ruinous competition Not all competition is ruinous competition, but the returns in income should drastically lower the income of the prior operator that he loses a lot of money o Exceptions? 1. Prior operator is operating less units than authorized 174 2. Operator denies there is a need to expand his service 3. The old operator did not apply until a new applicant emerged 4. Service of the prior operator must be deficient 5. Prior operator given a chance to expand but failed to do so 6. Abandoned his service 7. Routes are different, although partially overlapping Who has the burden of proof to establish need for public transportation service? o Always the applicant Unlawful acts: o 1. Provide unsafe or inadequate service o 2. Charge rates not authorized Up to how long is suspension allowed? o Director can suspend up to 30 days the certificate of authority. Acts requiring commission approval: o 1. Fixing rates BUT Usually regulatory agencies are allowed to issue provisional rate increases This needs no hearing. Reason: they are temporary by nature and subject to adjustment after final hearing. o 2. Construct, maintain, operate new units to extend facilities Somebody had a certificate of public convenience for inter-island shipping and had one vessel which was indicated. It became unseaworthy, and he sold the CPC. The sale is void because there was no valid subject matter of the sale. NOTE: the CPC indicates what units will be used. If you replace the unit you have to get approval. o 3. Increase capitalization o 4. Sell, mortgage, lease, encumber its CPC and properties o Sale of units covered by a CPC without commission approval valid? Yes, but only between the parties and not to third persons. What is the standard that should be used when an admin body fixes rates of public utilities? o The only standard is that it must be reasonable and just. o Factors considered: 1. Rate of return (usually 12%) 2. Rate base 3. Return itself or computed revenue to be earned by the public utility There is a circular saying that provincial buses can charge more or less with allowed variance of up to 15% in costs. Is this valid? o No, because this is undue delegation. 175 What is the fair rate of return for investment? o 12% - citing US jurisprudence o But the SC also approved using present value of properties used to render public service as basis o Meralco case: Court adopted the present value of the assets used to render services as basis to determine rate of return. Now and then, this is why power plants can submit adjusted rates because they just had their assets reappraised, and these increased in value. If a customer claims he was overcharged, where does he file? o With the courts o NOT with regulatory agency, because this does not involve rate- fixing. o Same file with the court if you want to question how Meralco arrived at its calculations and to ask for an explanation on the particulars. If a customer claims that his service of electricity was improperly disconnected, where does he file? o With the ERC, which has the power to direct the power companies to reconnect the service Generally: need 72 hour notice prior to disconnection of service o EPIRA provision If a customer was caught in flagrante delicto using a jumper, the service can be disconnected immediately. o Requisites? 1. Caught in flagrante delicto When the owner was not present and just his househelper was, there, not in flagrante 2. A representative of the ERC or officer of the law must be present when the inspection was conducted When is notice and hearing required? o 1. Issuance of CPC/CNPC o 2. Fixing standards and qualifications o 3. Fixing standards of measuring quantity o 4. Establishment of rules to secure accuracy of meters and measuring appliances o 5. Order to compel operators to furnish proper service o 6. Allowing extension of facilities When is notice and hearing not required? o 1. Investigation of public utilities o 2. Valuation of properties of public utilities o 3. Examination and test of measuring appliances o 4. Grant of special permits to make extra or special trips in territories specified in the certificate o 5. Investigation of accidents o 6. Compel compliance with law and regulations Kabit system is this legal? o No, because someone not financially capable to render public service will be able to do so. So to protect the public, the actual 176 operator and ostensible operator (grantee of franchise) are SOLIDARILY liable to victims. o But the ostensible operator (with the franchise) can sue the actual operator for indemnity. o Can the ostensible operator sue the actual operator to recover units which were the subject of Kabit system? No. They are in pari delicto. You cant come to court with unclean hands. o Kabit system jurisprudence talks about liabilities to third parties. So if a kabit jeepney is hit by a truck from behind, the truck is still liable. If a taxi was used as a get-away vehicle by robbers, can the CPC be cancelled? o No, not unless there is proof of collusion. Foreign investments act What is the policy of the FIA? o To attract and promote foreign investments in activities that contribute to national development and socio-economic development of the country, to the extent allowed by the Constitution o In general, no restrictions on foreign investments, except for industries in the negative list, but foreign firms are encouraged to undertake measures to gradually improve Philippine participation in the enterprise Define foreign investment: o Equity investment by non-Philippine nationals in the form of foreign exchange or assets actually transferred to the Philippines, and duly registered with the BSP which shall assess/appraise the other assets other than foreign exchange Define doing business: o 1. Soliciting orders o 2. Service contracts o 3. Opening offices whether liaison offices or branches o 4. Appointing representatives staying in the Philippines 180 days or more o 5. Participating in management of domestic business o 6. Any other act that implies continuity of business dealings for commercial gain or pursuant to objective of the organization o Does not include: 1. Mere investment as SH in domestic firm 2. Exercising rights as SH or having nominee director/officer in that corporation 3. Appointing representative/distributor that acts in its own name Define export enterprise: o Enterprise where the manufacturer, processor, or service (including tourism) enterprise exports at least 60% of its output o Or purchase-and-export of at least 60% of the products Define domestic market enterprise: 177 o Enterprise which produces goods for sale or renders service to the domestic market entirely, or export fails to consistently reach at least 60% of its output Is there need for prior approval before a non-Philippine enterprise may invest or do business in the Philippines? o None. The enterprise just has to register with the SEC or the BTRCP (for sole proprietorships, the Bureau of Trade Regulation and Consumer Protection). o The SEC or BTRCP cannot limit the amount of investment made by the firm. Of course, subject to constitutional limitations and the negative lists. o If they seek incentives, register with the BOI. What is the rule on foreign investments in export-oriented enterprises? o Can be up to 100%, if not on the negative lists o If the export-oriented enterprise is not a Philippine national, register with BOI, which will check compliance with the 60% export requirement, and require reduction of domestic sales if they fail to comply, under threat of cancellation of registration by the SEC/BTRCP. What is the rule on foreign investments in domestic market enterprises? o Can be up to 100%, if not prohibited or limited in the Constitution or negative lists Negative lists: o Board of Investments draws up negative list A and B. o List A: covers business enterprises reserved for Filipinos by the Constitution and specific laws. o List B: commercial activities which are nationalized and: 1. Defense-related activities due to national security reasons Unless approved by the Sec. of National Defense 2. Activities which impact public health and morals Ex. manufacture and sale of dangerous drugs (since there are drugs that are regulated, not totally prohibited) 3. Small and medium sized domestic enterprises where the paid in capital is less than $200,000 But if it involves highly-advanced technologies (approved by DOST) or they employ at least 50 employees the paid up capital can be at least $100,000 o Outside of these two lists, its open to all foreigners. What is the right of Natural Born Filipinos and naturalized citizens? o They have the same rights as Filipinos although they have lost their citizenship as to investments. o Ex. in rural banks o Natural born Filipinos who lost their citizenships can acquire up to 3 hectares of rural land or 500 sq. m. of urban land o Cannot acquire more than 2 lots, which must be in different municipalities or cities 178 Annex 1: in-depth discussion of presentment, dishonor, acceptance in NIL Presentment for payment When is presentment for payment necessary? When is it not necessary? o Presentment for payment not necessary to charge the primarily liable person Maker and acceptor If the instrument is payable in special place and he is able and willing to pay there at maturity = such willingness is equivalent to tender of payment What does this imply? o If the person primarily liable is there on the place where it is payable on the stated time, holder loses right to recover interest due subsequent to maturity + costs of collection o BUT he does not lose the right to get paid o But for those secondarily liable (indorsers and drawer) there is need for presentment for payment What if the holder does not make presentment to the person primarily liable? Those secondarily liable are discharged But he can still go after the person primarily liable So, the bottomline: the instrument must be presented for payment on date it is due to charge the secondarily liable persons see Sec. 71 for special rules on when an instrument must be presented o What is presentment? Production of BOE to drawee for acceptance or payment, or acceptor for payment, or of a PN to the maker for payment o What constitutes presentment? 1. Personal demand for payment 2. Readiness to present the note and surrender it if paid Sec 71 o Instrument not payable on demand Make presentment on date due o instrument payable on demand Must be presented within reasonable time from issue If its a BOE, you make it after a reasonable time after last negotiation What does negotiation here cover? o Negotiation for value, not negotiation for collection between banks 179 Sec 72 when presentment is sufficient o REQUISITES: 1. Made by holder or agent 2. Reasonable hour on business day 3. At proper place defined 4. To person primarily liable Is absent/inaccessible to any person found in place where presentment is made o There is a wife who presented a negotiable certificate of time deposit. Bank refused to pay her because they paid the husband. HELD: it was not presented by the husband, but the wife. Bank should pay the wife. Sec 73 proper place for presentment o If there is a stipulation where presentment must be made, it must be made there. o If none provided, but address of maker is stated, go there o If none provided, to usual place of business/residence o Wherever he may be found/last known place of business/residence Sec 74 o NI must be exhibited to the person from whom payment is demanded o So he can check genuineness o This is why telephone as demand is not allowed o First Pacific (?) Check negotiated by car dealer to financing company. When the instrument not paid, company sued maker and indorser. Indorser said he was discharged because there was no proper presentment for payment. HELD: Letter of demand is not sufficient. Law requires that the instrument be shown to the maker. Therefore, presentment not valid and indorsement is discharged. o Failure excused on two grounds: 1) Instrument was lost 2) payment refused on some other ground Ex. no funds, and not because it was not shown Sec 75 o Presentment where instrument payable at bank must be made during banking hours. Law assumes that the bank will be the source of the funds. o But if presentment is made beyond banking hours, it is valid if the funds will not come from the bank, as long as it falls on the date of maturity. Sec 76-78 o Applies when principal debtors is: Dead Liable as partners Liable as Joint debtors o If there is an address stipulated, pay there. o If dead, give to executor/admin 180 If there is one, and he can be found with reasonable diligence o If partners, to any of the partners Even if dissolved already o If joint debtors, to all of them When presentment is not required to charge those secondarily liable: o DRAWER presentment not required to charge the drawer when there is no reasonable expectation that the drawee or acceptor will pay the instrument Ex. knows there are no funds or there is stoppage of payment o INDORSER when instrument was made/accepted for indorsers accommodation, and indorser has no reason to expect it will be paid if presented Fortuitous event excuses delay in presentment Presentment for PAYMENT excused if: o 1. Cannot be done even after reasonable diligence o 2. Drawee is fictitious person o 3. Waiver of presentment express or implied When is an instrument dishonored by non-payment? o 1. Duly presented for payment and payment is refused or cannot be obtained o 2. Presentment is excused and it is overdue and unpaid What is the effect of dishonor by non-payment? o Under the law, the moment it is dishonored, there is immediately a right of recourse against those secondarily liable. NO NEED to go to the primarily liable. Sec 85 o If payable in a fixed period, it must be paid on that day o If on a Sunday or holiday, then go to next business day o If on a Saturday On next business day. Because even if some offices hold business on Saturday, they are usually half day. The law wants a whole business day Except instruments payable on demand can present before 12 noon, Saturday, if it is not a holiday o Contrast: Ex. Payable on Friday. But it was declared a public holiday. So it becomes Saturday. But the law says present it on next business day. So Monday. Ex. BUT if it is payable on demand then the maker/acceptor MUST pay provided it is presented on working hours of Saturday. Sec 86 o Time exclude first day, include last day Sec 87 when instrument is payable at a bank o Implied: that it is an order to the bank to pay for account of the principal debtor o First National bank: PN payable at FNB. Maker had sufficient funds. But holder did not show up at day of maturity. Dilly- 181 dallied then the maker became insolvent. Had he shown up by then, he would have been paid. HELD: No. The fact remains that he is the maker, so he is primarily liable, and should pay. o N.B. Remember, failure to make proper presentment only discharges those secondarily liable. The primarily liable person is still liable, although the holder may not claim interest subsequent to maturity and costs of collection. Sec 88 Payment in due course o 1. At or after maturity o 2. To the holder o 3. By the debtor, in GF and w/o notice that the holders title is defective Notice of dishonor Sec 89 dishonor o Give notice of dishonor o Any party may be compelled to pay it to the holder with right of reimbursement o A B C D E D giving notice to B will benefit E o Notice given by a holder benefits all subsequent holders and prior parties that have right of recourse against the one given notice against o Notice may be given by holder himself or agent of the holder. Sec 90 Who can give notice of dishonor o 1. Holder o 2. Agent of holder o 3. Party to the instrument who may be compelled to pay the holder, but only to those other parties he may seek reimbursement from o 4. Agent of such party o What about strangers? Cannot give notice, except as agents o Who is considered a stranger? Party discharged from the instrument Person primarily liable who dishonored the instrument Sec 91 o Notice may be given by a party or an agent o Agent need not be authorized by the party Because this is beneficial o If the agent wants to give notice, on a instrument dishonored on Monday, two options: A) notify principal On Tuesday Principal has until Wednesday to notify secondarily liable parties B) notify parties who are secondarily liable 182 o If agent receives notice of dishonor, he must be authorized Because this is prejudicial Form of notice: o In writing or oral As long as it sufficiently describes the instrument and indicates that it has been dishonored Misdescription does not vitiate notice unless the party to whom it is given is in fact misled o Personal or through mail o If written, need not be signed In sufficient written notice may be supplemented by verbal/oral communication Rule as to jointly liable parties: o If partners? Notice to one is notice to all o If joint payees or joint indorsees who indorse? Sec 68 treats them as solidarily liable o If joint drawers or joint accommodation indorsers, and others not covered by 68? Give notice to all Sec 103 and 104 time within which notice must given o Know the difference in rules where parties reside in the same place (103) or different places (104) o SAME PLACE: 1. If given at place of business before close of business hours the next day 2. If given at residence before usual hours of rest the next day 3. If by mail sufficient to reach him the next day o DIFF PLACES: 1. If by post office in time to go by mail the next day; if no mail at a convenient hour that day, the next mail 2. If not by post office within the time it would have been received in due course had it been sent by post office o N.B. This same time is counted again, after a party receives notice of dishonor, to give that party a chance to give notice to antecedent parties What is the effect of miscarriage in mails? o Sec 105 if notice was duly addressed and deposited in the post-office, due notice is deemed given o What is deposit in the post office? Deposited in any branch of the P.O. Deposited in any P.O. box Sec 108: WHERE notice must be sent o 1. Post office nearest to residence or where he is accustomed to receiving letters o 2. To place of business or residence 183 o 3. Place where he is sojourning o If notice is actually received, although not according to these provisions, what happens? It is still valid When can there be waiver of notice of dishonor? o 1. Before actual time for giving it comes o 2. Or after failure to give it o Can waiver be implied? Yes. Who is affected by a waiver in an instrument? o If written on the instrument all the parties o If written over a signature just that person Waiver of protest o Includes presentment and notice of dishonor (steps to hold a person secondarily liable) When is notice of DH not needed to be given to drawer? o 1. Drawer and drawee are the same person o 2. Drawee is fictitious person or has no capacity to contract o 3. Drawer is the person to whom instrument was presented for payment Ex. C went to the office of X, the drawee, but he was not there. But R, the drawer, who was the office manager, was there. And the drawer dishonored. o 4. Drawer has no right to expect that drawee or acceptor will honor Ex. X withdrew her money from her bank account and issued a check to cover for expected proceeds of jewelry she had to sell. She failed to sell the jewelry. The check was in the hands of Y who had ABC investment house rediscount it. The check bounced. HELD: X had no right to expect the bank will pay because she withdrew all her funds. o 5. Drawer countermanded payment Meaning, drawer stopped payment. o N.B. In all these cases, the drawer KNEW that there was or would be dishonor. When is notice of DH not needed to be given to indorser? o 1. Drawee is fictitious person or has no capacity to contract and the indorser is aware of this fact upon indorsement o 2. Indorser is the person to whom presentment for payment was made o 3. Instrument was made or accepted for his accommodation Drawer Indorser Drawer and drawee same person Drawee fictitious or no capacity Drawee is fictitious or no capacity, and indorser knows Drawer is to whom instrument was presented for payment Indorser is to whom instrument was presented for payment Drawer has no right to expect it will be paid by drawee Made or accepted for indorsers accommodation (same principle: no right to expect it will be paid) Drawer countermanded 184 If an instrument was not accepted, and notice of dishonor by non- acceptance is given, is there need to give notice of dishonor by non- payment? o No. o What is the exception? If it was accepted in the meantime. Failure to give notice of dishonor by non-acceptance does not prejudice rights of a HIDC subsequent to the omission. o Ex. A drew a BOE payable to B. B indorsed to C. C presented the BOE for acceptance to X. X dishonored the instrument. C did not give notice of dishonor to A or B. C indorsed the instrument to D, a HIDC. D will not be precluded by Cs failure to give notice of DH to A and B. Acceptance Acceptance assent to order of drawer o Must be in writing and signed by drawee What if the drawee refuses to sign? If drawee refused to write and sign, holder may treat it as dishonored What if the acceptance is written on a different sheet of paper? It does not bind the drawee, except to someone to whom it is shown and receives the bill for value upon faith thereof NB: this applies when the bill exists as of time of acceptance What if there is a promise to accept in writing? Deemed an actual acceptance in favor of those who receive the bill for value upon faith thereof NB: this applies for bills that do not exist yet when the promise is made (Ex. BOE pursuant to a LOC) o Cannot be other than payment of money Must accept within 24 hours from presentment o Acceptance deemed done on date of presentment o When is a bill deemed accepted? Failed to act on it within 24 hours Does the drawee have a right to retain the bill for the whole 24 hours? o No. The holder can ask for it back. But the drawee will still have the rest of the 24 hours to decide. Destroys the bill NB: destruction must be on purpose o What are the special situations when can the drawee accept pa rin? 1. Even before it is signed by the drawer 2. Even when it is incomplete 3. When it is overdue 185 4. Dishonored by prior non-acceptance or non- payment What is the special rule if the bill was dishonored by prior non-acceptance, but it was accepted thereafter? The holder can consider the date of first presentment as date of acceptance Kinds of acceptance: o 1. General Includes local but not confined only at a particular place o 2. Qualified Conditional Partial Local (ONLY at a particular place) As to time Only some of drawees, but not all What is the right of parties as to qualified acceptance? o Holder can deem it DH by non-acceptance o If holder allows qualified acceptance, indorser and drawer discharged Unless they assent Failure to dissent is assent Presentment for acceptance When is presentment for acceptance needed? o 1. Bill payable after sight or acceptance needed to fix maturity of instrument o 2. Bill expressly requires acceptance o 3. Bill is payable elsewhere than residence or place of business of drawee o What about other cases? No need for presentment for acceptance to render any party to the bill liable What is the option of the holder? o Must present the bill for acceptance within reasonable time o Or negotiate the bill within reasonable time What is the consequence of failure to present for acceptance? o Discharges those secondarily liable Time for presentment same as presentment for payment Special rule when there is little time to present for acceptance before presenting for payment, where presentment for acceptance is needed? o Delay caused by prior presentment for acceptance is excused and does not discharge those secondarily liable When is presentment for acceptance excused? o 1. Drawee is dead, has absconded, fictitious, lacks capacity 186 o 2. Cannot make presentment even after reasonable diligence o 3. Although presentment is irregular, acceptance refused on some other ground What if a bill is DH by non-acceptance? o Immediate recourse to secondarily liable parties avail; no need for presentment for payment [Step-by-step guide on presentment for acceptance, dishonor, payment] Step 1: Presentment for acceptance required if o 1. BOE is payable after sight, or acceptance is needed to fix the maturity of the instrument o 2. BOE expressly requires presentment for acceptance o 3. BOE payable elsewhere apart from residence or place of business of drawee OTHER OPTION May choose to negotiate it within a reasonable time Consequence: will discharge drawer and all other indorsers EXCEPTIONS no need to present if/or treated as dishonored if: o 1. Drawee is dead, has absconded, fictitious, or lacks capacity to contract o 2. Presentment cannot be made even after reasonable diligence o 3. Although presentment is irregular, acceptance was refused on some other ground Step 2: Give notice of dishonor by non-acceptance to secondarily liable persons o EXCEPT, no need to give notice: if instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented o AND will not prejudice rights of HIDC after omission to give notice of dishonor o IF foreign bill, Protest for non-acceptance or protest for non-payment needed Except 1. If instrument was made/accepted for his accommodation and he has no reason to expect the instrument will be paid if presented 2. Delay is excused for fortuitous circumstances Except: will not prejudice rights of HIDC after omission to protest Step 3: Give notice of dishonor by non-payment to secondarily liable persons (if dishonored by non-payment) o See notes above o EXCEPT: When presentment for payment is excused 1. Drawee is fictitious person 2. Presentment cannot be made even after reasonable diligence 3. Waiver of presentment, express or implied Protest 187 Protest necessary for DH of a bill that on its face appears to be a foreign bill Made by Notary Public or respectable resident + two or more credible witnesses When must it be done? o Day of DH o If bill is noted in the notarial register, protest may be made anytime Where? o Place of DH o Except when expressly payable at the residence/business of another person apart from the drawee What is protest for better security? o If the drawee was adjudged bankrupt or insolvent, or made assignment for benefit of creditors even before the bill matures o Is this mandatory? Nope o What is the purpose? To inform the drawer/indorsers that the drawee is insolvent and therefore they should prepare to pay When is protest excused or dispensed with? o Dispensed with for same grounds notice of DH is dispensed with o Excused for fortuitous event When is protest also done? o When bill is lost, destroyed, wrongly detained protest made on copy/written particulars of the bill Bills in set Main Principle: each part of the bill, numbered and referring to the other parts, the whole of the parts constitute one bill o [usually, it is done to ensure that bills can be collected from even if one part is lost in the mail or so] o [So usually bills in a set are several copies of the same thing, sent separately] What if different parts are negotiated to different HIDCs? o The one whose title accrues first is the true owner o But the one who gets acceptance or payment first is the one who will be able to collect Indorser of two different parts is liable on every such part How should the drawee accept? o Accept on any part, and on one part ONLY. If he accepts on multiple parts and these are severed, he is liable on all parts. o If he pays and did not get back the part with the acceptance, and it once again falls in the hands of an HIDC, he can still be liable Discharge of one part is discharge of all 188