Professional Documents
Culture Documents
COLLEGE OF LAW
Bar Operations 2008
COMMERCIAL LAW
Commercial Law
TABLE OF CONTENTS CRIMINAL LAW I
TABLE OF CONTENTS
I. Corporation Law 3
II. Negotiable Instruments Law 88
III. Insurance Code 125
IV. Transportation Law
203
V. Code of Commerce
255
VI. Banking Law
275
VII. Intellectual Property Law
327
succession and is not affected by the death 1. Devices or schemes employed by, or any
or insolvency of a stockholder; also, act of, the BOD, business associates,
dissolution before a corp.s term requires a officers or partners, amounting to fraud or
2/3rds vote of the stock (Secs. 118 and misrepresentation which may be
119, Corp. Code), always subject to SEC detrimental to the interest of the public
intervention and/or of the stockholders, partners or
5. Powersa corporation has only such members of any corporation, partnership,
powers as are expressly granted to it and or association;
such as are necessary to the exercise of the 2. Controversies arising out of intra-
powers so granted or fro the corporate, partnership, or association
accomplishment of its purpose(sec.2, 36 relations, between and among
(11), and 45); In a partnership, as long as stockholders, members or associates; and
the parties have agreed to it, the between, any or all of them and the
partnership can perform any act as long as corporation, partnership, or association of
it does not violate any law or right of which they are stockholders, members or
others. associates, respectively;
3. Controversies in the election or
1.5 Government Regulation of Corporations appointment of directors, trustees,
officers, or managers of corporations,
By the Legislature
partnerships, or associations;
Basis: police power of the state (Northern Ry Co. v. 4. Derivative suits; and
State of Washington, 300 U.S. 154) and the fact 5. Inspection of corporate books.
that corporations owe their existence to the state
Manner: by amending or repealing the Corp. Code Morato v CA (2004)
or any part thereof
Petitioners, stockholders of TF Ventures, Inc., filed
a petition with the SEC against private respondents
NDC v Phil Veterans Bank (1990) for the declaration of nullity of stockholders and
directors meetings and damages. They assail the
PD 1717 ordered the rehabilitation of the Agrix validity of the notice and stockholders meeting of
Group of Companies to be administered by NDC. TF Ventures, Inc. and the organizational meeting of
Sec 4(1) provides that all mortgages and liens the members of the BOD. The petition was referred
presently attached be extinguished, and that all to the Securities Investigation and Clearing
accrued obligations shall not bear interest. Among Department (SICD) of the SEC for investigation and
those ordered extinguished was a lien in favor of resolution.
Phil Veterans Bank over prop in LB. NDC filed to Meanwhile, one of the private respondents
foreclose the mortgage. (Matsura, Chairman of the BOD), wrote a letter to
the Examiners and Appraisers Dept of the SEC,
HELD: New Agrix was created by special decree requesting for an examination of the basis for the
even if 1973 Consti mandates that Batasang capital increase of T.F. Ventures, Inc. from
Pambansa, cannot, except by general law, provide P10,000,000 to P100,000,000, alleging the
for formation, organization and regulation of commission of devices, schemes and criminal acts.
private corps, unless for GOCCs. The letter was forwarded by the SEC to the
NDC was only mandated to extend loan and to Prosecution and Enforcement Dept (PED).
manage company. New Agrix was entirely private Petitioners contended that with the filing of the
and should have been organized under Corp Law. letter-petition with the PED, Matsura resorted to
forum shopping.
enforced by the Commission; to file and supervision, monitoring, suspension or take over
prosecute in accordance with law and the activities of exchanges, clearing agencies and
rules and regulations issued by the other SROs; (e) the imposition of sanctions for the
Commission and in appropriate cases, the violation of laws and the rules, regulations and
corresponding criminal or civil case before orders issued pursuant thereto; (f) the issuance of
the Commission or the proper court or cease-and-desist orders to prevent fraud or injury
body upon prima facie finding of violation to the investing public; (g) the compulsion of the
of any laws or rules and regulations officers of any registered corporation or association
administered and enforced by the to call meetings of stockholders or members
Commission; and to perform such other thereof under its supervision; and, (h) the exercise
powers and functions as may be provided of such other powers as may be provided by law as
by law or duly delegated to it by the well as those which may be implied from, or which
Commission. are necessary or incidental to the carrying out of,
the express powers granted the Commission to
Prosecution under this Decree or any achieve the objectives and purposes of these laws.
Act, Law, Rules and Regulations enforced
and administered by the Commission shall However, Section 8 of P.D. No. 902-A, as amended,
be without prejudice to any liability for has already been repealed, as provided for in
violation of any provision of the Revised Section 76 of RA 8799.
Penal Code.
Thus, under the new law, the PED ceased to exist.
Under the said provision, the SEC, through the However, the SEC retains jurisdiction to continue
PED, is vested with authority to investigate, either with its investigation of the letter-petition of
motu proprio or upon complaint, any act or respondent Matsuura.
omission, fraudulent schemes, devices or
misrepresentations in violation of any law, rules or When RA 8799 took effect, the SEC case had not
regulations, administered and enforced by the SEC, yet been submitted for decision by the SEC.
and to file and prosecute appropriate civil or Hence, the said case should be transferred to the
criminal cases upon a prima facie finding of RTC of Makati City, to be raffled to the appropriate
violation of such laws, rules or regulations. The branch thereof assigned to try such cases. Despite
petitioners, in the SEC case, sought the nullification the repeal of Section 8 of P.D. No. 902-A and the
of the Notice for the Annual Stockholders Meeting, abolition of the PED, the SEC may continue with its
the stockholders meeting and organizational investigation of the letter-petition of respondent
meeting held on September 22, 1997, on their Matsuura.
claim that the holding of the same was in violation
of the Corporation Code and the By-Laws of the
petitioner corporation. In his answer to the The Sandiganbayan has jurisdiction over
petition, the respondent asserted the validity of the presidents, directors or trustees, or managers
said meeting and prayed, by way of counterclaim, of government-owned or controlled
for the nullification of the October 20, 1997 corporations organized and incorporated under
meeting of the petitioners, and for damages. In the Corporation Code for purposes of the
contrast, the respondent alleged in his letter- provisions of RA 3019, otherwise known as the
petition in the PED case that the petitioners were Anti-Graft and Corrupt Practices Act. Basis: Sec
engaged in fraudulent schemes, devices or 4, RA 8249 (People v Sandiganbayan, 2005)
misrepresentations in violation of the law, and SEC Union Bank v. Danilo Concepcion
rules and regulations. The complainant Matsuura GR No. 160727 June 26, 2007
asked the PED to investigate the complaint and file EYCO Group of Companies filed a petition for
the corresponding administrative, civil or criminal suspension of payment, appointment of
cases before the SEC, the proper court or body, for receiver/committee and approval of
violation of the laws, rules or regulations rehabilitation plan with alternative prayer for
administered and enforced by the SEC. The fact liquidation and dissolution of corporations.
that the SICD has not yet resolved the SEC case Suspension was granted by the SEC Hearing
does not constitute a bar to the resolution of the Panel. Union Bank became part of the
PED case. The proceedings in the said cases are ManCom which represented the creditor
independent and separate of each other and may banks but later on broke away without
thus proceed separately. notifying the group. It filed a slew of cases
with the Makati RTC and applied for
Note that while this case was pending in the SC, RA preliminary attachment. Union Bank filed a
8799, Securities Regulation Code, took effect on motion to dismiss the case pending with the
August 8, 2000. Section 5.2 of the law provides SEC, and when the SEC issued an order
that SECs jurisdiction over all cases under Sec 5 of appointing regular members of the ManCom,
PD 902-A is transferred to the RTCs. Union Bank filed a petition for certiorari with
the CA seeking the nullification of the SEC
Among the powers and functions of the SEC which
Order and again assailing the jurisdiction of
were transferred to the RTC include the following:
the SEC. It alleged that the jurisdiction over a
(a) jurisdiction and supervision over all
basic petition for suspension of payments was
corporations, partnerships or associations who are
with the RTC under Act No. 1956 (Insolvency
the grantees of primary franchises and/or a license
Law). The CA and later on the SC ruled that
or permit issued by the Government; (b) the
the jurisdiction is with the SEC pursuant to PD
approval, rejection, suspension, revocation or
902-A. The proceeding in the RTC was thus
requirement for registration statements, and
suspended. Concepcion was later appointed as
registration and licensing applications; (c) the
liquidator by the SEC en banc and he filed a
regulation, investigation or supervision of the
motion to intervene and set aside order of
activities of persons to ensure compliance; (d) the
attachment in the said RTC case. The SEC en
banc approved of the liquidation plan that cannot be fully equated to due process in its
Concepcion submitted but his motion to strict jurisprudential sense. It is the
intervene with the RTC was denied for lack of administrative order, not the preliminary
standing. The RTC also declared EYCO in report, which is the basis of any further
default in the said case, proceeded to receive remedies the losing party in an administrative
evidence ex parte and later rendered partial case may pursue. Thus, petitioner has no right
judgment ordering EYCO to pay P400M to to be notified of the preliminary report by the
Union Bank. Concepcion appealed the decision Financial Analysis and Audit Division of the
and was sustained by the CA, which modified SEC.
the partial judgment of the RTC. Union Bank
now comes to the SC assailing the CAs order. Petitioners claim that the SECs referral of the
petition for rehabilitation to the said division
HELD: Denied. CA Order AFFIRMED. What is violated its right to due process deserves no
being assailed is the validity of the consideration. Petitioners right to
appointment of Concepcion as liquidator and administrative due process only entitles it to
his standing to intervene in the RTC case. an opportunity to be heard and to a decision
Albeit jurisdiction over a petition to declare a based on substantial evidence. No more, no
corporation in a state of insolvency strictly lies less.
with regular courts, the SEC possessed, during
the period material, ample power under P.D.
No. 902-A as amended, to declare a
Chapter II
corporation insolvent as an incident of and in
continuation of its already acquired jurisdiction
over the petition to be declared in the state of CLASSIFICATION OF PRIVATE
suspension of payments in the two instances CORPORATIONS
provided in Section 5(d) thereof.
Said Section 5(d) vests the SEC with exclusive
and original jurisdiction over petitions for
1. General Classification under 3:
suspension of payments which may either be:
(a) a simple petition for suspension of
1.1 Stock corporation
payments based on the provisions of the
Insolvency Law, i.e., the petitioning
One which has a capital stock divided into
corporation has sufficient assets to cover all
shares and is authorized to distribute to the
its debts, but foresees the impossibility of
holders of such shares dividends or
meeting the obligations as they fall due, or (b)
allotments of the surplus profits (i.e.,
a similar petition filed by an insolvent
retained earnings on the basis of the shares
corporation accompanied by a prayer for the
held (3)
creation of a management committee and/or
It is organized for profit.
rehabilitation receiver based on the provisions
of P.D. No. 902-A, as amended by P.D. No. The governing body of a stock corporation
1758. The petition of EYCO in this case was a is usually the Board of Directors (Except in
mix of both situations. EYCOs petition for certain instances for close corporations)
suspension for payment was, for all intents
and purposes, still pending with the SEC as of
June 30, 2000. Accordingly, the SECs 1.2 Non-stock corporation
jurisdiction thereon, by the express terms of
R.A. No. 8999, still subsists until [the All other corporations are non-stock
suspension of payment case and its incidents corporations (3)
are] finally disposed. One where no part of the income is
distributable as dividends to its members,
trustees, or officers, subject to the
provisions of the Code on dissolution.
Viva Footwear v. SEC
Provided that any profit which a non-stock
GR No. 163235 April 27, 2007
corporation may obtain as an incident to its
Petitioner Viva Footwear Manufacturing
operation shall whenever necessary or
Corporation is a domestic corporation engaged
proper be used for the furtherance of the
in the manufacture of rubber footwear.
purpose or purposes for which the
Respondents Philippine National Bank (PNB)
corporation was organized. (87)
and Philippine Bank of Communications
Not organized for profit.
(PBCom) are two of petitioners creditors. The
SEC, upon petition by Viva, declared the latter Its governing body is usually the Board of
to be in a state of suspension of payments. Trustees.
The petition for rehabilitation was eventually
dismissed because it was not viable to do so CIR vs. Club Filipino, Inc de Cebu (1962)
as it was not financially sound. Viva now
claims that its right to due process was Club Filipino is a civic corporation organized to
violated when the SEC referred the develop and cultivate sport of all class and
rehabilitation plan to the Financial Analysis denomination for the healthful recreation and
and Audit Division without notice to petitioner. entertainment of its SH and members. Its AOI and
by-laws are silent as to dividends and their
HELD: NO MERIT. DISMISSED. In distribution but it was provided that upon its
administrative proceedings, due process dissolution, the Clubs remaining assets after
simply means an opportunity to seek a paying debts shall be donated to a charitable Phil.
reconsideration of the order complained of; it Institution.
3) Majority of the incorporators must be residents The promoter brings together persons
of the Philippines interested in the business enterprise and
General rule: need not be a citizen sets in motion the machinery that leads to
Exceptions: public utilities (Art XII, Sec 11. the formation of the corporation.
Consti), schools (Art XIV, Sec 4(2), Promoter is a person who, acting alone or
Consti), banks (General Banking Act), retail with others, takes initiative in founding and
trade (RA 1180), savings and loan organizing the business or enterprise of the
associations (RA 3799), investment houses issuer and receives consideration therefor. 1
(Sec 5, PD 129), and other areas of
investment as congress may by law provide 3.2. DRAFTING OF ARTICLES OF
(Art XII, Sec. 10, Consti). INCORPORATION
Even though there are no legal restrictions
as to alien ownership, where > 40% of the These constitute the charter of the corporation
outstanding capital stock will be owned and
controlled by aliens, must get written 1. CORPORATE NAME
authorization from BOI before it can No corporate name may be allowed by
register with SEC. (purpose is to enable the SEC if the proposed name is
BOI to determine whether such corporation identical or deceptively or confusingly
wherein aliens own a substantial number of similar to that of any existing
shares would contribute to the sound and corporation or to any other name
balanced development of the national already protected by law or is patently
economy) deceptive, confusing or contrary to
existing laws. (18)
4) Incorporators must be of legal age A corporate name is essential to the
corporations acquisition of juridical
personality
2. Conditions Precedent for Incorporation Change of corporate name shall require
the approval of the SEC. SEC will issue
2.1 Consent or agreement of at least 5 natural amended certificate of incorporation
persons with respect to: under the amended name (Ibid)
A change in corporate name involves
1. Compliance with the Corp Code; an amendment of the Articles, which
2. Contribution/pooling of resources requires a majority vote of the board
delivered to and held in trust by a and the vote or written assent of
designated trustee; stockholders holding 2/3 of the
3. Governance of: outstanding capital stock (16) Note:
Contributions; Does not include the non-voting stock.
Distribution of contributions; It is the sole means of identifying the
Division of profits/sharing of corporation from its members or
losses; stockholders, and from other entities
Pursuit of purpose/objectives; and corporations
Corporate combination; and Amendment in a corps AOI changing
Transactions with third parties; its corporate name does not extinguish
and the personality of the original
4. Continuity or termination of existence. corporation. The corp upon such
change of its name, is in no sense a
2.2 Mandatory Requirements of the Code: new entity, nor the successor of the
original corp. it is the same corp with a
1. Execution of constitutive documents different name, and its character is not
(AOI, By-laws); changed. Consequently, the new
2. Payment/delivery of contributions corp is still liable for the debts and
delivered to and held in trust by a obligations of the old corp (Republic
designated trustee; Planters Bank v CA, 1992)
3. Submission of constitutive documents This is essential because through it,
to SEC for review or evaluation; and corporation can sue and be sued
4. SEC action issuance of certificate of SEC may allow incorporators to reserve
registration. the name for a particular period
To distinguish from partnerships and
Note that once contributions are made before other business orgs, the law requires
incorporation, such subscriptions are irrevocable corporations to append the word
for a period of 6 months (general rule). Corporation or Inc to its chosen
Exceptions: name
1. When all of the other subscribers consent A corporation should transact business
to the revocation; or only through its chosen name
2. When the incorporation fails to materialize
(Sec. 61)
Philips Export BV (PEBV) v CA (1992)
3. Steps in the formation of a
PEBV is a foreign corp under the law of
corporation Netherlands, although not engaged in business in
the Phils. It is the registered owner of the Philips
3.1. PROMOTION
1
Sec. 3.10, The Securities Regulation Code (RA 8799)
trademark, and owns two local companies with the o so that management will know
name Philips also. what lines of business it is
authorized to act
PEBV asked the cancellation of the word Philips o so that anyone who transacts with
from Standard Philips, a local manufacturer, the corporation may ascertain
alleging infringement of its exclusive right to use whether a transaction he is
the same. SEC and CA ruled for Std Philips, saying entering is one with the general
there was no confusion (unlike in Converse case). authority of the management
Under Sec 14(2) a corporation can
Held:
have as many purposes as it wants
Corps right to use its corp and trade name is a provided:
property right, a right in rem. o AOI specify the corporations
primary and secondary purposes
General Rule: Corp must have a name by which it
which need not be related to each
is to sue and be sued and do all legal acts.
other
Accdg to Corp Code, no corp name may be allowed o Corporation for which special
provisions are made can only have
1) if complainant corp acquired a prior right
the purpose peculiar to them
over name and
o Purposes must be lawful
2) proposed name is
If purpose is lawful, SEC is not
a) identical or
authorized to inquire whether
b) deceptively or confusingly similar or
corporation has hidden motives and
c) patently deceptive, confusing or
mandamus will lie to compel it to issue
contrary to existing law
certificate
PEBVs local companies were incorporated 26 yrs
PD 902-A, Sec 6(h) gives SEC, after
before Std Philips.
consultation with BOI, NEDA, or other
TEST OF CONFUSING SIMILARITY IN CORP NAMES: appropriate government agency, the
Whether similarity is such as to mislead a person power to refuse or deny the application
using ordinary care and discrimination for registration of any corporation if its
establishment, organization, operation
Philips is the dominant word. No need to prove that
will not be consistent with the declared
there was actual confusion, as long as probable or
national economic policies
likely to occur. Std Philips purpose, as per its
A corporation may not be formed for
articles of incorp also includes sale and
manufacture of electrical products, which is PEBVs the purpose of practicing a profession
line of business. Even if SEC guidelines mandate
that a corp could add 2 other words to proposed 3. PRINCIPAL OFFICE
name, only one word Std was added. Corp not Must be within the Philippines (14 (3))
counted. AOI must specify both province or city
or town where it is located
Note: A prior user can consent to the use of its Important in (1) determining venue in
name an action by or against the corporation
(2) determining the province where a
2. PURPOSE CLAUSE chattel mortgage of shares should be
Where a corporation has more than 1 registered (Chua Gan v Samahang
purpose, the AOI shall state which is Magsasaka)
the primary purpose and which is The statement of the principal office
secondary (14(2)) establishes the residence of the
A non-stock corporation may not corporation
include those which contradict or
change its nature (Ibid) 4. TERM OF EXISTENCE
SEC can reject or disapprove the AOI if When a corporation is organized, the
the stated purpose is patently maximum life that can be stipulated in
unconstitutional, illegal, immoral, the AOI is 50 years. But during the life
contrary to government rules and of the corporation, the life or term can
regulations.(17 (2)) be extended to another 50 years at any
Purpose clause confers as well as limits one instance (11)
the powers which a corporation may But such extension of the life a
exercise corporation cannot be made earlier
A corporation only has such powers as than 5 years before the end of its
are expressly granted to it by law and original term. Exception: where there
by its AOI, those which may be are justifiable reasons for an earlier
incidental to such conferred powers extension as may be determined by the
(45), those reasonably necessary to SEC. (Ibid)
accomplish its purposes (Section 36 Exception: Condominium corporations
(11), and those which may be incident can be organized for a period of 200
to its existence (2). years
Reasons for purpose clause: Extension involves an amendment of
o so that a stockholder contemplating the AOI. Thus, the requisites under
an investment will know what lines 16 must be complied with. Any
of business his money is to be dissenting stockholder may exercise his
risked appraisal right (37).
5. INCORPORATORS AND DIRECTORS; divided, and the par value of each par
NUMBER AND QUALIFICATIONS value shares (14(8), 15(7))
Directors is used for stock o Stock corporations are not required to
corporations, while trustees is used have any minimum authorized capital
for stock corporations. stock except when special laws provide
GENERAL RULE: not less than 5 but otherwise (12)
not more than 15
EXCEPTIONS: Subscribed capital stock
i) Non-stock corporations articles or o It is the amount of the capital stock
by-laws may provide for more than subscribed whether fully paid or not. It
15 trustees (92). connotes an original subscription
Exception: Educational non- contract for the acquisition by a
stock corporations trustees subscriber of unissued shares in a
may not exceed 15. However, corporation (60,61)
the number of trustees shall be o At least 25% of authorized capital stock
in multiples of 5 (108) must be subscribed (13)
ii) Merger of banks new board is o Subscription mutual agreement of the
allowed to have such number of subscribers to take and pay for the
directors as is equivalent to the stock of a corporation
total number of directors of the o Pre-incorporation subscription
merging banks, though it may amount which each incorporator or
exceed fifteen (General Banking stockholder agrees to contribute to a
Act, as amended). proposed corporation
Incorporators and directors of a stock
corporation must own at least one Outstanding capital stock
share of stock of the corporation. In a o It is the portion of the capital stock
non-stock corporation, a trustee must which is issued and held by persons
be a member thereof. other than the corporation itself.
In nationalized industries, aliens may Under 137, it is the total shares of
be directors of a corporation only in stock issued under the binding
such number as may be proportional to subscription agreements to subscribers
their allowable ownership of shares, 2 or stockholders, whether or not fully or
e.g. if the articles provide for 10 partially paid, except treasury shares.
directors, and alien ownership is limited It is thus broader than subscribed
to 40% of the capital, then aliens may capital stock
occupy a maximum of 4 board seats. o The terms subscribed capital stock
and issued or outstanding capital
6. CAPITAL STOCK; SUBSCRIPTION; stock are used synonymously since
PAYMENT subscribed capital stock, as
distinguished from the certificate of
Capital stock stock, can be issued even if not fully
o Capital stock is the amount fixed in the paid. But while every subscribed share
AOI, to be subscribed and paid in or (assuming there is a binding
secured to be paid in by the subscription agreement) is
shareholders of a corporation, either in outstanding, an issued share may not
money or property, labor or services, have the status of outstanding share
at the organization of the corporation (as in the case of treasury shares)
or afterwards and upon which is to
conduct its operation. (Fletcher) Paid-up capital
o The capital stock limits the maximum o 25% of subscribed capital stock must
amount or number of shares that may be paid-up for the purpose of
be issued by the corporation without incorporation, but in no case shall be
formal amendment of the AOI. It less than P 5000 (13)
remains the same even though the o Portion of the authorized capital stock
actual value of the shares as which has been subscribed and paid.
determined by the assets of the Not all funds or assets received by the
corporation is diminished or increased. corporation can be considered paid-up
capital, for this term has a technical
Authorized capital stock signification in corporation law. Such
o ACS is synonymous with capital stock must from part of the authorized
where the shares of the corporation capital stock of the corporation,
have par value. If the shares of stock subscribed and then actually paid-up.
have no par value, the corporation has [MSCI-NACUSIP Local Chapter v.
no ACS, but it has capital stock the National Wages and Productivity
amount of which is not specified in the Commission]
AOI as it cannot be determined until all o Must be in the form of (a) cash
the shares have been issued. In this deposited in a bank or (b) property
case, the two terms are not which may be used or actually needed
synonymous (De Leon) by the corporation in its operations
o State the authorized capital stock in o Capital cant consist or be invested in
lawful money of the Philippines, the money market placement
number of shares into which the ACS is o Corporations with more stringent
capital requirements:
2
Sec. 2-A, CA 108 (Anti-Dummy Law) as amended by PD 716.
8. TREASURERS AFFIDAVIT
The sworn statement of the Treasurer
elected by the subscribers stating at least 4. Grounds for disapproving articles of
25% of the authorized capital stock of the incorporation (17)
corporation has been subscribed and that
at least 25% of the total subscription has
a) AOI does not substantially the form
been fully paid to him in actual cash and/or
prescribed
property, the fair valuation of which is
b) Purpose is patently unconstitutional, illegal,
equal to at least 25% of the said
immoral, contrary to government rules and
subscription, such paid-up capital being not
regulations
less than 5,000.00 (14)
c) Treasurers Affidavit concerning the amount
of capital subscribed and or paid is false
9. OTHER MATTERS
d) Percentage requirement of ownership of
Classes of shares, as well as the
Filipino citizens as required by the
preferences or restrictions on any such
Constitution not complied with.
class (6)
After consulting with BOI, NEDA,
Denial or restriction of pre-emptive
appropriate government agency, SEC may
right (39)
deny registration of any corporation if its
Prohibition against transfer of stock
establishment will not be consistent with
which would reduce stock ownership to declared national policies
less than the required minimum in the Certificate of authority required of the
case of a nationalized business or
following:
activity (15(11))
De facto corp is like a de jure corp, has all Lozano vs. delos Santos (1997)
the powers and liabilities of de facto corp
THE ONLY DIFF: its incorporation can be This case involved two incorporated drivers
attacked by State in quo warranto action associations that decided to unite and elect one set
Ratio: Only State can give it legal of officers to be given authority to collect the daily
existence, so only the State is wronged dues of the drivers who are members of the
consolidated association.
5.2 CORPORATION BY ESTOPPEL HELD: Doctrine of estoppel applies when persons
assume to form a corporation and exercise
It is a status acquired by persons who corporate functions and enter into business
assume to act as a corporation knowing it relations with third persons. Where there are no
to be without authority. Such persons shall third persons involved and the conflict arises only
be liable as general partners for all debts, among those assuming to form a corporation, who
liabilities and damages incurred or arising therefore know that it has not been registered,
as a result thereof. (21) there is no corporation by estoppel.
When such ostensible corporation is sued
International Express Travel v. CA (2000)
on any transaction entered by it as a
corporation or any tort committed by it as
The doctrine of corporation by estoppel may apply
such, it shall not be allowed to use as a
to:
defense as lack of corporate personality
o a third party - a 3 rd party who had
(21)
dealt with an unincorporated association as a
One who assumes an obligation to an
corporation may be precluded from denying
ostensible corporation as such, cannot
its corporate existence on a suit brought by
resist performance thereof on the ground
the alleged corporation on the contract even if
that there was in fact no corporation (21)
he did not know of the defective
Note that an unincorporated corporation is
incorporation. 3rd party is considered to have
not barred from transacting business admitted the existence of a corporation by the
before the commencement of corporate fact that he dealt with it as a corporation
existence. Limit: personal liability.
o the alleged corporation - when a
Complication: when the corporation did not
third person has entered into a contract with
come about
an association which represented itself to be a
Against whom will estoppel lie? Who
corporation, the association is estopped from
committed the active misrepresentation? denying its corporate capacity in a suit against
Where a person convinces other parties to it by such 3rd person. It cannot allege lack of
invest money for the formation of a personality to be sued to evade responsibility
corporation, but which has never duly on a contract it has entered into and by virtue
incorporated, there can be no resulting of which it has received advantages and
partnership among them, and the mere benefits
passive investors cannot be held liable to o associates as partners - when
share in the losses suffered by the business business associates fraudulently
enterprise (Pioneer Surety v CA, 1989) misrepresents the existence of a corporation
When applicable: and the 3rd party contacts with the association
1. Persons assuming to act as corp are as a corporation without knowing the serious
liable as gen partners; defects in its incorporation, such 3 rd party may
2. 3rd party who had dealt with an sue associates as general partners. Where
unincorporated association as a corp both the associates and the 3rd party were
may be precluded from denying its ignorant of the defective incoroporation, 3 rd
corporate existence on a suit brought party cant hold the associates liable since they
by the alleged corp person deemed were in good faith. If 3rd party knew of defects
to have admitted the existence of the in incorporation and still dealt with the
corp corporation, he must be deemed to have
3. alleged corp that has entered into a chosen to deal with the corporation as such
contract by virtue of which it has and should be limited in his recovery to the
received advantages and benefits corporate assets.
However, if business associates
fraudulently misrepresent the existence of
a corp, 3rd party can sue them as gen 6. Internal Organization of the
partners. 3rd party is not estopped from Corporation
asserting their liability because he had
recognized the corporations existence.
6.1 APPROVAL OF BY-LAWS
Ratio: They cannot profit by their own
misrepresentation.
1. Definition of by-laws
Hence, if associates did not know of thee
These are regulations, ordinances, rules
defective incorp, they cant be personally
or laws adopted by an association or
held liable by innocent 3rd party (Cf
corporation or the like for its internal
Salvaierra v Garlitos, 1958)
governance. By- laws define the rights
But if 3rd party knew of defects of incorp,
and obligations of various officers,
he is estopped from recovering from
persons or groups within the corporate
individual associates, but must recover
structure and provide rules for routine
only from corp assets
matters such as calling meetings.
Every corporation under this code shall Cannot bind stockholders or corporation
have the power and capacity: to adopt pending approval
by-laws not contrary to law, morals, or By-laws or any amendment thereto of
public policy, and to amend or repeal any bank, banking institution, building
the same in accordance with this code and loan association, trust company,
(36 (5)) insurance company, public utility,
These are subordinate to the AOI, Corp educational institution or other special
Code, and other statutes. (Fleischer vs. corporations governed by special laws
Nolasco(1925)) must be accompanied by a certificate
of the appropriate govt agency to the
2. When to adopt by-laws (46) effect that such by-laws are in
Every corporation formed under this accordance with law
code must within 1 month after receipt By-laws, like AOI are contracts of
of official notice of the issuance of its adhesion. They will bind the
certificate of incorporation by the SEC corporation and stockholders including
adopt a code of by-laws for its those who vote against as well as those
government not inconsistent with this who became members after approval
code. Contracts entered into without strict
May be adopted and filed prior to compliance with by-laws may be
incorporation, in such case, shall be binding on the corporation due to long
approved and signed by all acquiescence and usage (Board of
incorporators submitted to SEC Liquidators vs. Kalaw (1967))
together with AOI By-laws are mere internal rules among
stockholders and cannot affect or
Failure to file By-laws on time: prejudice 3rd persons who deal with the
corporation unless they have
knowledge of the same (China Banking
Loyola Grand Villas Homeowners Assn v. CA Corp v CA, 1997)
(1997)
6. Contents (47)
Subject to the provisions of the
The Supreme Court held that although the Constitution, this Code, other special
Corporation Code requires the filing of by-laws laws, and the articles of incorporation,
within one month after the issuance of the a private corporation may provide in its
Certificate of Incorporation, it does not expressly by-laws for:
provide for the consequences of non-filing within a) The time, place and manner of
the said period. Failure to file the by-laws within calling and conducting regular or
that period does not imply the "demise" of the special meetings of the directors or
corporation. By-laws may be required by law for an trustees;
orderly governance and management of b) The time and manner of calling and
corporations but they are not essential to corporate conducting regular or special
birth. Therefore, failure to file them within the meetings of the stockholders or
period required by law by no means tolls the members;
automatic dissolution of a corporation. c) The required quorum in meetings of
stockholders or members and the
manner of voting therein;
3. How filed (46)
d) The form for proxies of
Must be approved by the affirmative
stockholders and members and the
vote of the stockholders representing manner of voting them; By laws
the majority of the outstanding capital may not prohibit the use of proxies-
stock or majority of members (if filed Peoples Home Savings Bank vs.
prior to incorporation, must be Superior Court, cited in Campos
approved and signed by all e) The qualifications, duties and
incorporators) compensation of directors or
Must be signed by the stockholders or trustees, officers and employees;
members voting for it f) The time for holding the annual
Must be filed with the SEC certified by election of directors of trustees and
the majority of directors/trustees and the mode or manner of giving
countersigned by the secretary of the notice thereof;
corporation which shall be attached to g) The manner of election or
original AOI appointment and the term of office
of all officers other than directors
4. Where kept (46) or trustees;
Must be kept in the principal office of h) The penalties for violation of the
the corporation; subject to inspection by-laws;
of stockholder or member during office i) In the case of stock corporations,
hours (Cf 74) the manner of issuing stock
certificates; and
5. Effectivity of by-laws j) Such other matters as may be
In all cases, the by-laws shall be necessary for the proper or
effective only from the issuance of SEC convenient transaction of its
of certification that bylaws are not corporate business and affairs.
inconsistent with the Code
Juridical personality of the corporation ends considered as a means of evading such thus
when liquidation ends (payment of debts and the need for the piercing.
distribution of assets) and inchoate rights or
In applying the doctrine, determine:
expectancies of stockholders are realized. Until
1. the rights and obligations of the
such conveyance is made, title over the assets
parties.
remains with the corporation.
2. the possibility of non-enforcement
of such rights and obligations
because of the shield or veil.
2. Piercing the veil of corporate
3. look into the circumstances and
fiction underlying purpose of putting up
the corporation
g) The subsidiary has substantially no corporate veil shall be lifted and he shall be held
business except with parent corporation personally liable for the particular corporate
or no assets except those conveyed to obligation involved.
or by the parent corporation
h) In the papers of the parent corporation
or in the statements of its officers, the
subsidiary is described as a department
or division of the parent corporation or 3. Nationality of the Corporation
its business or financial responsibility is
referred to as the parent corporations 3.1 The place of incorporation test.
own The corporation is a national of the country
i) The parent corporation uses the under whose laws it is organized or
property of the subsidiary as its own incorporated(123):
j) The directors or executives of the Domestic corporations organized and
subsidiary do not act independently in governed under and by Philippine laws
the interest of the subsidiary but take Foreign corporations organized under
their orders from the parent laws other than those of the Philippines an
corporation in the latters interest can operate only in the territory of the
k) The formal ledger requirements of the state under whose laws it was formed.
subsidiary are not observed (PNB v However, they may be licensed to do
Ritratto Group, 2001). business here.
The subsidiary cannot be considered a
mere instrumentality of the parent 3.2 Nationality of the Corporation as
corporation just by the combination of the determined by the Control Test
11 signs listed above. For the veil of Exploitation of Natural Resources - Section
corporate entity of the subsidiary to be 2, Art. XII CONST. only Filipino Citizens or
pierced so that it is considered just an Corporations whose capital stock are at
instrumentality, the act questioned must least 60% owed by Filipinos can qualify to
have an illegal or unfair purpose which exploit natural resources.
results to prejudice to third persons who Public Utilities - Sec. 11, Art XII, CONST.
may seek redress from the corporate entity xxx no franchise, certificate or any other
form of authorization for the operation of a
De Leon vs. NLRC (2001) public utility shall be granted except to
citizens of the Philippines or to corporations
or associations organized under the laws of
FACTS: FISI contracted with FTC for security
the Philippines at least 60% of whose
services. Subsequently, the stockholders of FISI
capital is owned by such citizens.
sold all their participation in the corporation to a
War-time Test - If the controlling
new set of stockholders which renamed the
stockholders are enemies, then the
corporation MISI. Afterwards, FTC preterminated
nationality of the corporation will be base
its contract of security services with MISI causing
on the citizenship of the majority
petitioner security guards to lose their employment
stockholders in times of war (Filipinas
and file ULP case against FTC, FISI and MISI.
Compania de Seguros v Christian Huenfeld,
HELD: There was ER-EE relationship between FTC
1951) .
and petitioners. It was shown that FISI was a
Investment Test - Sec. 3(a) and (b),
mere adjunct of FTC. Records show that FISI and
Foreign Investments Act of 1991 (RA7042).
FTC have the same owners and business address,
It considers for purpose of investment a
and FISI provided security services only to FTC.
Philippine National as a corporation
The purported sale of the shares of the former
organized under the laws of the Philippines
stockholders to a new set of stockholders who
of which at least 60% of the capital stock
changed the name of the corporation to MISI
outstanding and entitled to vote is owned
appears to be part of a scheme to terminate the
and held by citizens of the Philippines, or a
services of FISI's security guards posted at the
trustee of the funds for pension or other
premises of FTC and bust their newly-organized
employee retirement or separation
union which was then beginning to become active
benefits, where the trustee is a Philippine
in demanding the company's compliance with Labor
national and at least 60% of the fund will
Standards laws. Under these circumstances, the
accrue to the benefit of Philippine nationals.
Court cannot allow FTC to use its separate
corporate personality to shield itself from liability
for illegal acts committed against its employees.
3.3 Grandfather rule
Used to determine the nationality of a
Francisco vs. Mejia (2001)
corporation by which the percentage of Filipino
equity in corporations engaged in nationalized
With specific regard to corporate officers, the and/or partly nationalized areas of activities,
general rule is that the officer cannot be held provided for under the constitution and other
personally liable with the corporation, whether nationalization laws, is computed, in cases
civilly or otherwise, for the consequences of his where corporate shareholders are present in
acts, if he acted for and in behalf of the the situation, by attributing the nationality of
corporation, within the scope of his authority and in the second or even subsequent tier of
good faith. In such cases, the officer's acts are ownership to determine the nationality of the
properly attributed to the corporation. However, if corporate stockholder. (Villanueva, 2003)
it is proven that the officer has used the corporate
fiction to defraud a third party, or that he has acted
negligently, maliciously or in bad faith, then the SEC formula: SEC Letter Opinion
Shares belonging to corporations or Corp. is not bound by the contract Since the
partnerships at least 60% of the capital of corp. did not yet exist at the time of the contract, it
which is owned by Filipino citizens shall be could not have had an agent who could legally bind
considered as of Philippine nationality, but it.
if the percentage of Filipino ownership in
the corporation or partnership is less than 3.2 Exception:
60% only the number of shares
corresponding to such percentage shall be Corp. may be bound by the contract if it makes the
considered as of Philippine nationality. contract its own: How?
a. Adoption or ratification
By express resolution
Implied from the acts of responsible
officers of the corp.
* The corp. cannot adopt only the part of the
contract which may be beneficial to it &
then discard the part that is burdensome.
* The contract to be capable of adoption or
ratification, must be one within the powers
of the corp. to enter.
b. Acceptance of benefits under the contract
with knowledge of the terms thereof
2. Certain act of the corp that require o When directors or officers act
joint action of the SHs and BOD against the corp in conflict-of-
Their resolutions on matters other than interest situation
the exceptions are legally not effective
nor binding and may be treated as 1) Requirements
merely advisory or may be totally Qualifying share (23)- Every director
disregarded. (Ramirez v. Orientalist Co. must own at least one (1) share of the
et. al., 38 Phil. 634; 1918); Wolfson v. capital stock of the corporation of which
Manila Stock Exchange, 72 Phil. 492; he is a director, which share shall stand
1941) in his name on the books of the
Unless Otherwise Provided may corporation. Any director who ceases to
pertain to instances where a be the owner of at least one (1) share
management contract is entered hence of the capital stock of the corporation
corporate powers are exercised by the of which he is a director shall thereby
managing company and not the board cease to be a director.
Authority of BOD can be delegated to
agents/ officers/ committees (AOI, Lee vs. CA (1992)
statutes, by-laws, resolutions) (YU
Chuck v Kong Li Po, 46 Phil 608). Summons was served upon Lee and Lacdao,
Delegation may be explicit, implicit, or president and vice president of ALFA. The two,
based on exigencies of the business however contended that they are no longer
(cf. Board of Liquidators v Kalaw) corporate officers of the corporation because of the
The BOD may delegate its corporate voting trust agreement executed to DBP, hence,
powers to either an executive not authorized to receive summons. Summons
committee or officials or contracted must be served upon DBP
managers. The delegation, except for
the executive committee, must be for HELD:
specific purposes. The delegation Execution of a voting trust creates a dichotomy
makes the officers agents of the between equitable or beneficial ownership of the
corporation. For such officers to be corporate shares of a stockholder and legal title
deemed fully clothed by the corporation thereto. The change from the old code to the new
to exercise a power of the BOD, the code with respect to qualifying shares of directors
latter must specially authorize them to is the omission of the phrase in his own right
do so. (ABS-CBN Broadcasting Corp v pertaining to beneficial ownership of shares. In the
CA, 1999) new corpo code, persons may be directors if they
The directors or trustees shall not act are stockholders although not in their own right
individually nor separately but as a hence includes trustees. There is clear indication
body in a lawful meeting. Contracts that to be a director, what is material is legal title
entered into without a formal board and not beneficial ownership. With the execution of
resolution does not bind the corporation the voting trust agreement, Lee and Lacdao were
except when majority of the board has divested of their legal title to their shares hence
knowledge of the contract and the can no longer be directors and are no longer
contract benefited the corporation. corporate officers. Because of this, they are not
(ratification) authorized to receive summons
Directors owe their duties to
corporation as a whole rather than to
Requirements/Disqualifications:
individual shareholders of classes of
o Residence (23) - a majority of the
shareholders
directors or trustees of all
Business Judgment Rule
corporations organized under this
- Sec 23 embodies the essence of the
Code must be residents of the
business judgment rule, that unless
Philippines
otherwise provided in the Code, all corp
o Nationality no requirement for
powers and prerogatives are vested
citizenship of a director or trustee
directly in the BOD. Consequently, the
so even an alien may be elected as
rule has two consequences:
such excepts in business activities
The resolution, contracts and
totally closed to aliens
transactions of the BOD, cannot be
o Disqualification of directors,
overturned or set aside by the SHs
trustees or officers (27):
or members and not even by the
Convicted by final judgment of
courts under the principle that the
an offense punishable by
business of the corp has been left
imprisonment for a period
to the hands of the BOD; and
exceeding six (6) years, or
Directors and duly authorized
Violation of this Code
officers cannot be held personally committed within five (5) years
liable for acts or contracts done prior to the date of his election
with the exercise of their business or appointment
judgment.
By-laws may provide for
Exceptions:
additional
o When the Corp Code expressly
qualifications/disqualifications
provides otherwise; as long as such additional
o When the directors or officers qualifications/disqualifications
acted with fraud, gross shall not modify requirements
negligence or in bad faith; and as prescribed in the corporation
The president shall preside at all meetings a. A president, who shall be a director
of the directors or trustee, unless the by- b. A treasurer who may or may not be
laws provide otherwise. a director (SEC opinion that the
treasurer must be a resident and
NOTICE REQUIREMENTS (53) citizen of the Phil.)
Notice of regular or special c. A secretary who shall be a resident
meetings stating the date, time and and citizen of the Philippines, and
place of the meeting must be sent to d. Such other officers as may be
every director or trustee at least one provided for in the By-laws
(1) day prior to the scheduled meeting, Any two (2) or more positions may be
unless otherwise provided by the by- held concurrently by the same person,
laws. except that no one shall act as
A director or trustee may waive this president and secretary or as president
requirement, either expressly or and treasurer at the same time.
impliedly Additional qualifications of officers may
be provided for in the by-laws (47(5))
QUORUM REQUIREMENTS (25)
Unless the articles of incorporation or the Ongkingco v. NLRC (1997)
by-laws provide for a greater majority, a
majority of the number of directors or Where the By-laws of the condominium corporation
trustees as fixed in the articles of specifically includes the position of
incorporation shall constitute a quorum for Superintendent/Administrator in a roster of
the transaction of corporate business, and corporate officers, then such position is clearly a
every decision of at least a majority of the corporate officer position and issues of
directors or trustees present at a meeting reinstatement would be within the jurisdiction of
at which there is a quorum shall be valid as the SEC and not the NLRC.
a corporate act, except for the election of
Tabaug v. NLRC (1997)
officers which shall require the vote of a
majority of all the members of the board.
When the By-laws of the corporation provide that
one of the powers of the Board of Trustees is to
Filipinas Port Services Inc., represented by appoint a Medical Director,
stockholders, Eliodoro C. Cruz v. Victoriano Comptroller/Administration, Chief of Services, and
S. Go, et al. such other officers as it may deem necessary and
GR No. 161886 prescribe their powers and duties then such
March 16, 2007 specifically designated positions should be
Cruz, a stockholder of the corporation, filed a considered corporate officers positions.
derivative suit against the members of the
board questioning the creation of certain 2. Disqualifications (27)
positions. Cruz thus prayed that the respondent No person convicted by final judgment of
members of the board of directors be made to an offense punishable by imprisonment for
pay Filport, jointly and severally, the sums of a period exceeding six (6) years, or a
money variedly representing the damages violation of this Code committed within five
incurred as a result of the creation of the (5) years prior to the date of his election or
offices/positions complained of and the appointment, shall qualify as a director,
aggregate amount of the questioned increased trustee or officer of any corporation.
salaries.
3. Authority of corporate officers
HELD: The boards creation of the positions of The authority of corporate officers to
Assistant Vice Presidents for Corporate bind the corporation is usually not
Planning, Operations, Finance and considered inherent in their office but is
Administration, and those of the Special derived from law, the corporate by-
Assistants to the President and the Board laws or by delegation from the BOD
Chairman, was in accordance with the regular either expressly or impliedly by habit,
business operations of Filport as it is authorized custom, or acquiescence in the general
to do so by the corporations by-laws, pursuant course of business
Gen rule: A person dealing with a
to the Corporation Code. Besides, the
determination of the necessity for additional corporate officer is put on inquiry as to
the scope of the latters authority but
offices and/or positions in a corporation is a
an innocent person cannot be
management prerogative which courts are not
prejudiced if he had the right to
wont to review in the absence of any proof that presume under the circumstances the
such prerogative was exercised in bad faith or authority of the acting officers.
with malice.
prepared and approved by Commissioner of Bureau board, it is not sufficient to give them effect.
of Customs, seminar-workshops conducted but Stockholders or members approval expressed
payment was not made in a meeting duly called and held for the
purpose is still necessary. Exception:
HELD: Corporation is liable to Sano for services Corporations may be bound by
rendered. General rule is that absent the authority unanimous agreement of its stockholders
from the Board of Directors, no person, not even its although expressed elsewhere than at a
officers, can bind the corporation. However, acts of meeting
person in behalf of the corporation may be ratified.
When corporation previously allowed First Contract, 7) Requirements of stockholders or
it gave president apparent authority to execute in members meeting (notice and
its behalf the other contract, and is estopped from quorum)
denying such authority. Corporation accepted
operations manual and the seminars and have WHEN? (50)
already benefited from the contract. This ratifies Regular meetings of stockholders or
the act of the president and makes it binding upon members shall be held annually on a date
the corporation. President is presumed to have fixed in the by-laws, or if not so fixed, on
authority to act within the domain of the general any date in April of every year as
objectives of the corporation determined by the board of directors or
trustees.
Rural Bank of Milaor vs. Ocfemia (2000)
WHERE?
When a bank, by its acts and failure to act, has Stockholder's or member's
clearly clothed its manager with apparent authority meetings, whether regular or special,
to sell an acquired asset in the normal course of shall be held in the city or municipality
business, it is legally obliged to confirm the where the principal office of the
transaction by issuing a board resolution to enable corporation is located, and if practicable
the buyers to register the property in their names. in the principal office of the
It has a duty to perform necessary and lawful acts corporation: Provided, That Metro
to enable the other parties to enjoy all benefits of Manila shall, for purposes of this
the contract which it had authorized. section, be considered a city or
municipality. (51)
Members of non-stock corporations
2.3 BOARD COMMITTEES may provide in by-laws that meetings
may be held any place even outside the
(SEC opinion-requirin all members must be place where the principal office is
members of the board) located provided proper notice is sent
The by-laws of a corporation may and that it is within the Philippines
create an executive committee, composed (93)
of not less than three members of the
board, to be appointed by the board. (35) WHO MAY ATTEND AND VOTE?
Said committee may act, by majority Stockholders may attend and vote in
vote of all its members, on such specific person, or by proxy.
matters within the competence of the a. Pledgors, mortagors, executors,
board, as may be delegated to it in the by- receivers and administrators (55)
laws or on a majority vote of the board, In case of pledged or mortgaged
except with respect to: shares in stock corporations, the
o Approval of any action for which pledgor or mortgagor shall have the
shareholders' approval is also required; right to attend and vote at
o The filling of vacancies in the board; meetings of stockholders
o The amendment or repeal of by-laws or o UNLESS, the pledgee or mortgagee is
the adoption of new by-laws; expressly given by the pledgor or
o The amendment or repeal of any mortgagor such right in writing
resolution of the board which by its which is recorded on the
express terms is not so amendable or appropriate corporate books.
repealable; and Executors, administrators,
o A distribution of cash dividends to the receivers, and other legal
shareholders. representatives duly appointed by
Cannot go as far as to render the BOD the court may attend and vote in
powerless and free from all responsibilities behalf of the stockholders or
imposed on it by law (Campos) members without need of any
Must be provided in the by-laws and written proxy.
must be composed of not less than 3 b. Joint owner of stocks (56)
members of the board The consent of all the co-owners shall
Essential the executive committee acts be necessary in order to vote, U NLESS
by majority vote of all the members there is a written proxy, signed by all
the co-owners, authorizing one or some
of them or any other person to vote
2.4 STOCKHOLDERS OR MEMBERS such share or shares PROVIDED, That
when the shares are owned in an
Stockholders action is needed in major "and/or" capacity by the holders
changes(6) in the corporation which would thereof, any one of the joint owners
affect their contract with the corporation and can vote said shares or appoint a proxy
although such action is usually initiated by the therefor.
c. Treasury shares (Cf 41, 57. 68) a majority of the outstanding capital
Definition (9): These are shares stock or a majority of the members in
of stock which have been issued the case of non-stock corporations.
and fully paid for but subsequently By-laws may provide for a greater
re-acquired by the issuing or lesser quorum (47(3))
corporation by purchase, Where quorum is present at the
redemption, donation or through start of a lawful meeting, stockholders
some other lawful means. Such present cannot without justifiable cause
shares may again be disposed of break the quorum by walking out from
for a reasonable price fixed by the said meeting so as to defeat the
BOD. validity of any act proposed and
Treasury shares shall have no approved by the majority (Johnston v
voting rights as long as such shares Johnston, 1965 CA decision)
remain in the Treasury. (57)
WHY ATTEND MEETINGS?
WHO PRESIDES? To make substantial changes
The president shall preside at all To exercise control
meetings of of the stockholders or To be apprised of events
members, unless the by-laws provide To elect BOD
otherwise. ( 54) To confirm actions requiring
When there is no person authorized to confirmation
call a meeting, the SEC, upon petition
of a stockholder or member on a 8) Corporate Acts Requiring Approval of
showing of good cause therefor, may ALL Stockholders (including non-voting
issue an order to the petitioning shares)
stockholder or member directing him to
call a meeting of the corporation by a. AMENDMENT OF ARTICLES OF
giving proper notice required by this INCORPORATION discussed in Chapter
Code or by the by-laws. ( 50) XIV
The petitioning stockholder or member
shall preside thereat until at least a b. EXTEND OR SHORTEN CORPORATE
majority of the stockholders or TERM discussed in Chapter XIV
members present have been chosen
one of their number as presiding c. INCREASE OR DECREASE OF CAPITAL
officer. (50) STOCK discussed in Chapter XIV
SHARES (62) The issued price of no- shall pay the fair value thereof as
par value shares may be fixed in the of the day prior to the date on
AOI or by the BOD pursuant to which the vote was taken,
authority conferred upon it by the AOI excluding any appreciation or
or the by-laws, or in the absence depreciation in anticipation of such
thereof, by the stockholders at a corporate action (provided that the
meeting duly called for the purpose proposed corp action is
representing at least a majority of the implemented or affected).
outstanding capital stock. If within a period of sixty (60) days
from the date the corporate action
d. FIXI was approved by the stockholders,
NG COMPENSATION OF DIRECTORS the withdrawing stockholder and
(30) Any such compensation (other the corporation cannot agree on the
than per diems) may be granted to the fair value of the shares, it shall be
directors by the vote of the determined and appraised by three
stockholders representing at least a (3) disinterested persons
majority of the outstanding capital o One of whom shall be named
stock at a regular or special by the stockholder, another by
stockholders meeting. the corporation, and the third
by the two thus chosen
6. Appraisal right The findings of the majority of the
One of the ways to get out of the corporation. appraisers shall be final
It is an exception to the trust fund doctrine. The award shall be paid by the
The other way is to sell the shares of stock. corporation within thirty (30) days
after such award is made
a. Definition (81) No payment shall be made to any
This is a remedy available to a dissenting stockholder unless the
stockholder who dissented and voted corporation has unrestricted
against certain extraordinary matters to retained earnings in its books to
withdraw or get out of the corporation cover such payment (Cf 41).
by demanding payment of the value of Ratio: to protect the creditors and
his shares, as provided in the code. the remaining SHs
Upon payment by the corporation
b. Instances of appraisal right (81) of the agreed or awarded price, the
a) In case any amendment to the stockholder shall forthwith transfer
articles of incorporation which has his shares to the corporation.
the effect of (cf 16):
- changing or restricting the d. Effect of demand and termination of
rights of any stockholder or right (83)
class of shares, or From the time of demand for payment
- authorizing preferences in of the fair value of a stockholder's
any respect superior to shares until either (1) the
those of outstanding shares abandonment of the corporate action
of any class, or involved or (2) the purchase of the said
- extending or shortening shares by the corporation, all rights
the term of corporate accruing to such shares, including
existence (cf 37) voting and dividend rights, shall be
b) In case of sale, lease, suspended,
exchange, transfer, mortgage, pledge EXCEPT the right of such
or other disposition of all or stockholder to receive payment of the
substantially all of the corporate fair value thereof, PROVIDED, if the
property and assets as provided in the dissenting stockholder is not paid the
Code (cf 40); and value of his shares within 30 days after
c) In case of merger or consolidation the award, his voting and dividend
d) In case of investment of corporate rights shall immediately be restored.
funds in another corporation or
business or for any other purpose e. When right to payment of fair value of
(42) the shares ceases (84)
c. What are the requirements for the No demand for payment may be
successful exercise of appraisal right? withdrawn unless the corporation
(Section 82 and 86) consents thereto.
By making a written demand on the Instances when right to payment
corporation within thirty (30) days ceases:
after the date on which the vote 1) If such demand for payment is
was taken for payment of the fair withdrawn with the consent of
value of his shares the corporation
o Failure to make the demand 2) If the proposed corporate
within such period shall be action is abandoned or
deemed a waiver of the rescinded by the corporation
appraisal right. 3) If the proposed corporate
By surrendering the certificate or action disapproved by the SEC
certificates of stock, the corporation
Stockholder cannot demand that he be However, the SH of the parent corp can
allowed to take the corporate books look at the books of the latter with respect
outs of the corporations principal office to its investments to the subsidiary.
for the purpose of inspecting them o If they are practically one and the
(Veraguth, Supra) same in so far as management and control
is concerned, and inspection is demanded
because of gross mismanagement of
subsidiary by the parents directors who are
also directors of subsidiary, who are also
directors of the subsidiary, then the latter
3.2 Limitation as to purpose will be treated as a mere agent or
instrumentality of the respondent parent
Is the stockholders purpose material? YES. corporation and the latter may be
There is however a presumption that his compelled to open the subsidiarys books to
purpose is a proper one and the corporation its stockholders (Gokongwei v. SEC, Supra)
cannot refuse to grant him the right on its
mere belief that his motive is improper.
5. Remedies available if inspection
Otherwise, such refusal may open its refused
guilty officers or directors to liability for Mandamus
damages, UNLESS they can successfully o The writ should be directed against
prove in their defense: the corporation, but the secretary
o that the stockholder was not thereof may be joined as party
acting in good faith defendant since he is customarily
o that he improperly used the charged with the custody of all
information obtained in the past corporate records and is
o that he used the information for presumably the parson against
an illegitimate purpose whom the order of the court will be
made affective in case mandamus
is granted.
Gonzales v. PNB (1983) o And even the president of the corp.
may be made respondent if
Section 74 of the Corporation Code has been necessary to the effectuation of the
interpreted by the Supreme Court as no longer courts order (Philpotts v. Phil.
allowing the unqualified right of inspection of Manufacturing Co., 1919)
stockholder of corporate records and that the Injunction
person making the demand has to show that he Action for damages any officer or
is acting in good faith and for a legitimate agent of the corporation who shall refuse to
purpose. allow any director, trustees, stockholder or
member of the corporation to examine and
Burden of proving that the purpose is copy excerpts from its records or minutes, in
improper or illegal is on corporation and accordance with the provisions of this Code,
its officers. shall be liable to such director, trustee,
Good purposes: to investigate acts of stockholder or member for damages
management; to investigate financial File an action to impose a penal offense
conditions; fix value of shares; mailing by fine and/or imprisonment
list for proxies; information for litigation o Any officer or agent of the
Not good and honest purposes: obtain corporation who shall refuse to allow any
corporate secrets (e.g., formula); director, trustees, stockholder or member
nuisance suit; to embarrass the company of the corporation to examine and copy
TEST to determine whether the purpose as excerpts from its records or minutes, in
proved by the corporation or as admitted by accordance with the provisions of this Code
the stockholder is a legitimate one or not? A x x x and in addition, shall be guilty of an
legitimate purpose is one which is germane to offense which shall be punishable under
the interests of the stockholder as such and not Section 144 of the Corporation Code
contrary to the interests of the corporation o If such refusal is made pursuant to
(Gokongwei v. SEC, 1979). a resolution or order of the board of
directors or trustees, the liability under this
section for such action shall be imposed
4. Who may exercise right
upon the directors or trustees who voted
Director, trustee, stockholder, member, for such refusal
personally or through an agent o It shall be a defense to any action
o The right to inspect corporate books may that the person demanding to examine and
be done with the assistance of technical copy has improperly used any information
men (e.g., lawyers and accountants) and secured through any prior examination of
it may be delegated. The right includes the records, or is not acting in good faith or
the right to copy or to take notes. (W.G. for a legitimate purpose in making his
Philpotts v Phililppine Mfg Co., 1919) demand (74, par 3)
The transferor of shares and the voting trustee, o Other valid grounds for denying
in accordance with Section 59 access to books or records: immediately
Stockholders of a parent corporation with prior to the annual SHs meeting; holder of
respect to subsidiary: books is unavailable; the books are being
o If two are legally separate and audited; on-going inventory count;
independent entity, no right of inspection.
corporation so that the suit for relief should be There shall always be a class/series of
by the corporation. Besides, the requisites shares which have a COMPLETE VOTING
before a derivative suit can be filed by a RIGHTS
stockholder are present in this case, to wit: EACH SHARE SHALL BE EQUAL IN ALL
RESPECTS TO EVERY OTHER SHARE, except as
a) the party bringing suit should be a otherwise provided in the AOI and as stated in
shareholder as of the time of the act or the certificate of stock
transaction complained of, the number
of his shares not being material; 2.1 Common
b) he has tried to exhaust intra-corporate A stockholder, owner of at least one
remedies, i.e., has made a demand on common share, has the following rights:
the board of directors for the o right to vote at meetings
appropriate relief but the latter has o right to dividends
failed or refused to heed his plea; and o right to examine corporate books
c) the cause of action actually devolves on Most commonly issued
the corporation, the wrongdoing or
Entitles owner to equal pro-rata
harm having been, or being caused to
division of profits after preference
the corporation and not to the
particular stockholder bringing the suit.
2.2 Preferred
Stocks which are given preference by the
3. Requirements under the Interim Rules issuing corporation in dividends and the
of Procedure for Intra-Corporate distribution of assets of the corporation in
Controversies (Rule 8) case of liquidation or such other
preferences as may be stated in the AOI
which are not violative of the Corporation
1. He was a stockholder or member at the time
Code. (6)
the acts or transactions subject of the action
Limitations on preferred shares:
occurred and the time the action was filed;
2. He exerted all reasonable efforts, and alleges o Preferred shares can only be issued
the same with particularity in the complaint, to with par value
exhaust all remedies available under the AOI, o Preferred shares must be:
by-laws, laws or rules governing the a. Stated in the Articles of
corporation or partnership to obtain the relief Incorporation and in the certificate
he desires. of stock or
3. No appraisal rights are available for the act(s) b. May be fixed by the BOD where
complained of; and authorized by the AOI, provided:
4. The suit is not a nuisance or harassment suit. such terms and conditions shall be
effective upon filing of a certificate
Derivative suits are within the jurisdiction of the thereof with the SEC.
RTC (5.2, Securities Regulation Code) Entitles holder to some preferences
in dividends, distribution of assets upon
liquidation or both:
o preference as to dividends
dividends are payable only when profits
Chapter XI are earned and as a general rule, even
if there are existing profits, BOD has
FINANCING THE CORPORATION, discretion to declare dividends or not
a. Participating after getting
their fixed dividend preference
CAPITAL STRUCTURE
ahead of CS, they share with the
CS the rest of the dividends
UNLESS expressly provided, they are
1. Sources of Financing non-participating
b. Cumulative dividends in
3 main sources: arrears accrue, must be paid first
1. Contributions by stockholders (Equity) before common stock dividends are
2. Loans or advances from creditors (Borrrowing) paid.
3. Profits that the business may earn c. Non cumulative contract
makes dividends depend upon
existence of profits for the year
2. Classification of Shares (6) o as to voting
Shares of stock of stock corporations rights usually does not have voting
may be divided into classes or series of shares rights; but unless clearly withheld, PS
or both would have right to vote
Note: even if deprived of voting rights,
Each class or series of shares may have
PS holders are entitled to vote on the
rights, privileges, restrictions, stated in the AOI
matters enumerated under 6
No share may be deprived of voting
o preference upon liquidation in the
rights, except:
absence of provision, participate pro
o Preferred or
rata with common stock
o Redeemable shares, o not a creditor; theres no assurance
o unless otherwise provided by the Code that you will get back investments but
if the corporation profits, you
participate in the profits
2.5 Founders (7) A type of preferred stock that the holder can
Those shares, classified as exchange for a predetermined number of the
such in the AOI, which are given certain corporations common shares at a specified time
rights and privileges not enjoyed by the
owners of other stocks. (7) 2.9 Non-voting shares (6)
Where exclusive right to
vote and be voted for in the election of Shares which have, generally, no
directors is granted, such right must be for voting rights; except in the following
a limited period not to exceed 5 years circumstances:
subject to approval by SEC. 5 year period o Amendment of the AOI
shall commence from date of approval by o Adoption and amendment of by-laws
SEC. (Ibid) o Sale, lease, exchange, other disposition
of all or substantially all of the
2.6 Redeemable corporate property
Those shares, expressly so provided in the o Incurring, creating or increasing
AOI, which may be purchased or taken up bonded indebtedness
by the corporation upon the expiration of a o Increase or decrease of capital stock
fixed period regardless of the existence of o Merger and consolidation
With floating coupon rate With guaranteed 4.1 Definition of pre-emptive rights option
coupon rate privilege of an existing stockholder to subscribe to
a proportionate part of shares subsequently issued
D. Convertibles by the corp before the same can be disposed of in
favor of the others; includes all issues and
E. Combo of B+C+D
disposition of shares of any class
All stockholders of a stock corporation
F. Founders shares
shall enjoy pre-emptive right to subscribe
G. Treasury Shares to all issues or disposition of shares of any
class, in proportion to their respective
shareholdings, unless such right is denied
3. Nature of Subscription Contract by the AOI or an amendment thereto
This is to prevent dilution in shareholding
Includes not only new shares in pursuance
of an increase of capital stock but would
3.1 Subscription Contract cover the issue of previously unissued
shares which form part of the existing
Any contract for the acquisition of capital stock as well as treasury shares
unissued stock in an existing or a Where the shares are issued in exchange
corporation still to be formed shall be for property needed for corporate purposes
deemed a subscription contract,
or for debt previously granted, SH cannot
notwithstanding the fact that the parties demand his pre-emptive right for right may
may refer to it as a purchase or some other
prejudice corporate interest (39)
contract. (60)
Transfer for consideration of treasury 4.2 Limitation to exercise of pre-emptive right
shares is a sale by the corporation (not (39):
subscription). A transfer of fully paid a. Such pre-emptive right
shares by a stockholder to a third person is shall not extend to shares to be issued in
a sale. But it seems that assignment by a compliance with laws requiring stock
subscriber of his unpaid subscription would offerings or minimum stock ownership by
require that the requisites for valid release the public;
from subscription must be complied with b. Not extend to shares to
Shareholders are not creditors of the be issued in good faith with the approval of
corporation with respect to their the stockholders representing two-thirds
shareholdings thereto and the principle of (2/3) of the outstanding capital stock, in
compensation or set-off has no application exchange for property needed for corporate
Not necessarily required to be in writing purposes or in payment of a previously
Once subscription contract is perfected, contracted debt
SH becomes the debtor of the corporation. c. Shall not take effect if
He is liable to pay any unpaid portion of denied in the AOI or an amendment
the subscription. He can also be made thereto.
personally liable to the creditors of the
corporation to the extent of his unpaid 4.3 Remedies in case of unwarranted denial:
subscription a. Injunction
General Rule: SH is not liable to pay b. Mandamus
interest on his unpaid subscription. in any case, the suit should be
individual and not derivative because the
Water in stock refers to the difference between the by registered mail. At this point, there
fair market value at the time of the issuance and is no need for publication.
the par or issued value of said stock. Subsequent If the stockholder does not pay the
increase in the value of the property used in paying amount on the date designated in the
the stock does not do away with the water in the notice, the Board shall issue, by
stock. The existence of such water is determined resolution, a "notice of delinquency."
at the time of issuance of the stock. Notice of delinquency shall be
served on the non-paying subscriber
Evils: deprives corp of needed capital; dilutes either personally or by registered mail,
proportionate interest of existing and future PLUS publication in a newspaper of
SH; injures present and future creditors general circulation in the province or
because it reduces value of corp assets city where the principal office of the
corporation is located, once a week for
Any director or officer of a corporation two (2) consecutive weeks. The notice
consenting to the issuance of stocks or who, shall state the amount due on each
having knowledge thereof, does not forthwith subscription plus accrued interest, and
express his objection in writing and file the the date, time and place of the sale
same with the corporate secretary (65) which shall not be less than 30 days
o for a consideration less than its par or nor more than 60 days from the date
issued value or the stocks become delinquent.
o for a consideration in any form other than The amount due in the notice must
cash, valued in excess of its fair value, include all expenses: publication, legal,
shall be solidarily liable with the etc.
stockholder concerned to the corporation and o Note: the notices are jurisdictional.
its creditors for the difference between the fair In the public auction, the highest
value received at the time of issuance of the bidder is one who is willing to pay the
stock and the par or issued value of the same. balance of the subscription for the least
number of shares. The corporation will
give the highest bidder the certificate of
3. How Payment of Shares Enforced stock in the number of his bid; the
remaining number will be issued a
3.1 Delinquency sale certificate of stock in favor of the
subscriber as fully paid. If there are no
a. Ho bidders, the corporation must bid for
w do shares become delinquent (67) the whole number of shares regardless
Payment of any unpaid of how much the SH has paid. Such
subscription or any percentage thereof, stocks will pertain to the corporation as
together with the interest accrued, if fully paid treasury stocks.
any, shall be made on the date
specified in the contract of subscription c. When sale may be questioned (69)
or on the date stated in the call made
by the board. No action to recover
Failure to pay on such date delinquent stock sold can be sustained
shall render the entire balance due and upon the ground of irregularity or
payable and shall make the stockholder defect in the notice of sale, or in the
liable for interest at the legal rate on sale itself of the delinquent stock,
such balance, unless a different rate of unless the party seeking to maintain
interest is provided in the by-laws, such action first pays or tenders to the
computed from such date until full party holding the stock the sum for
payment. which the same was sold, with interest
If within thirty (30) days from the date of sale at the legal rate;
from the said date no payment is and
made, all stocks covered by said No such action shall be
subscription shall thereupon become maintained unless it is commenced by
delinquent and shall be subject to sale the filing of a complaint within six (6)
as hereinafter provided, unless the BOD months from the date of sale.
orders otherwise.
Despite the fact that the Issuance of Certificate Once full payment
subscription is partially paid, the entire for the stocks have been tendered to the
subscription becomes delinquent corporation in any of the valid forms of
Subscriber is not barred consideration for the issuance of stocks,
from paying the balance plus the the purchaser or the subscribers entitled to
expenses incurred by the corp before be issued the corresponding certificate of
the date of the delinquency sale (68). stock which evidences their ownership of
shares in a particular corporation (64)
b. Procedure for delinquency sale (68)
The BOD must make a call by Apocada v NLRC
resolution demanding the payment of
the balance of the subscription ("notice Apocada was employed in Intans Phil wherein he
of call"). subscribed to 1500 shares. He subsequently
The notice of call shall be served on resigned and instituted a complaint with NLRC
each stockholder either personally or against corporation for payment of unpaid wages,
COLA, balance of gasoline and representation
expenses, bonus. Corporation applied what is due Subscribers for stock shall pay to the
to Apocada the balance of his unpaid subscription. corporation INTEREST on all unpaid
HELD: Set-off is not proper. Unpaid subscriptions subscriptions from the date of subscription, if
are not yet due and payable. They become due so required by, and at the rate of interest fixed
and payable when a call is made by the in the by-laws. If no rate of interest is fixed in
corporation. There is no such call yet. Set-off the by-laws, such rate shall be deemed to be
against wages is not valid under labor code. the legal rate. (66) General rule: unpaid
subscriptions can not be charged with interest.
Exception: when required by the by-laws.
3.2 Court Action (70) No certificate of stock shall be issued to a
subscriber until the full amount of his
Gen. Rule A valid call is a prerequisite to subscription, together with the interest and
liability where court action is the remedy expenses (in case of delinquent shares) if any
chosen (Da Silva v. Aboitiz, 1923). is due, has been paid. (64)
Exceptions: No shares of stock against which the
corporation holds any unpaid claim shall be
1. the subscription contract specifies a date of transferable in the books of the corporation
payment (63).
2. the corp. has become insolvent all
unpaid subscriptions are immediately Attributes of a subscription contract:
recoverable in a court action by the unconditional (obligation to pay must not be
assignee in insolvency [Velasco vs. Poizat, subject to any contingencies) and indivisible
1918] (as to the amount and transferabilityFua Cun
As a defense to a court action, the SH may v. Summers, 1923)
contend that the subscription was induced by
fraudulent misrepresentation, provided he is
not barred by ratification, or guilty of laches. 6. Issuance of Certificate
Stockholders cannot escape liability on their
unpaid subscription on the ground that these A certificate of stock is the best evidence of the
were induced by an unfulfilled commitment of rights and status of a SH (although not a condition
the President of the Phil. that the Phil. precedent to the acquisition of such rights), and is
government would invest P9.00 for every peso convenient for the purposes of transfer (Campos).
subscribed (PNB v. Bitulok Sawmill Inc., 1968)
Contents of a certificate:
- certifies that the person named is a holder
or owner of a stated number of shares
4. Effect of Delinquency
- kind of shares issued
- date of issuance
a) Any cash dividends due on
- par value, if par value shares
delinquent stock shall first be applied to the
- signed by the proper officer of the corp.
unpaid balance on the subscription plus costs
(usually the pres., and the sec.)
and expenses, while stock dividends shall be
- bears the corporate seal
withheld from the delinquent stockholder until
his unpaid subscription is fully paid. (43)
b) No delinquent stock shall be: Over-issue of shares occurs when certificates are
o voted for or issued for more than the number of shares
o be entitled to vote or to authorized by the articles. Any share certificate w/c
o representation at any stockholder's represents an over-issue would be void. No rights
meeting, or liabilities can arise therefrom in favor or against
o nor shall the holder thereof be the holders and bona fide purchasers would have
entitled to any of the rights of a the right to damages for misrepresentation against
stockholder (71) the corp. but cant acquire the rights of
Except the right to dividends in stockholders.
accordance with the provisions of this
General rule: entire subscription must be paid first
Code,
before the certificates of stock can be issued.
until and unless he pays the amount
Partial payments are to be applied pro rata to each
due on his subscription with accrued
share of stock subscribed. (Nava v Peers Mktg
interest, and the costs and expenses of
Corp and Fua Cun v Summers).
advertisement, if any.
Note that the provision on dividends
pertain to delinquent stock hence a call
must have been made Exception: in the Baltazar v Lingayen Gulf Electric
Power Co case, it was the practice of the corp to
Stock dividends on delinquent shares
issue certificates of stock to its individual SHs for
are not applied but are included in
unpaid shares of stock and to give full voting
delinquency sale wherein it is liquidated
power to shares fully paid.
5. Rights and Obligations of Holders
of Unpaid But Non-Delinquent Stock 7. Lost or Destroyed Certificate (73)
Holders of subscribed shares not fully paid Procedure for re-issuance in case of loss, stolen or
which are not delinquent shall have ALL the destroyed certificates:
rights of a stockholder. (72) 1. The registered owner of certificates of stock or
his legal representative shall file with the
- Although the requirements in Section 38 Clemente, President of Rural Bank of Salinas and
have been met, no reduction of capital owner of shares in said corporation executed a
stock will be approved by the SEC if it will Special Power of Attorney to his wife Melania giving
prejudice the rights of corporate creditors. her full power to sell or otherwise dispose of shares
- There can be no reduction of capital stock of stock of the Bank. Before death of Clemente,
which will in effect release the stockholders Melania, pursuant to said SPA, executed deed of
from the payment of the balance of their Assignment of formers shares. After death of
subscription if it will adversely affect the Clemente, Melania presented to bank deed of
right of he creditors in collecting their assignment for registration which the bank refused.
claims (Phil. Trust Co. vs. Rivera (1923) Mandamus filed by Melania to compel bank to
- Appraisal RightAlthough Section 38 does register the transfer.
not grant the appraisal right in case of
reduction of capital stock, when it has the HELD: Transfer before death valid, stock not yet
effect of altering the rights of any part of estate. Shares of stock are personal
stockholder or class of stockholders, the property and may be transferred by delivery.
appraisal right may be exercised under Registration in corporate books is not necessary.
section 81 (1) (Campos) The transfer effected in this case is valid. The
- Except by decrease of capital stock and as corporation may not impose any restriction on such
otherwise allowed by this Coded, no transfer. The right of transferee/assignee to have
corporation shall distribute any of he assets stocks transferred to his name is inherent right,
or property except upon lawful dissolution duty of the corporation to register the transfer is
and after payment of all its debts and ministerial.
liabilities. (122)
o CamposIt seems that under the Rural Bank of Lipa v. CA (2001)
exception, a reduction surplus may
be distributed as dividends to the For the valid transfer of stocks, there must be strict
stockholders, as long as SEC compliance with the mode of transfer prescribed by
approval has been obtained and the law, which are:
rights of creditors is not prejudiced. a) there must be delivery of the stock certificate;
b) the certificate must be endorsed by the owner or
2.3 Change in corporate term (37) his attorney-in-fact or other persons legally
authorized to make the transfer; and
c) to be valid against third parties, the transfer
Approval and Voting Requirement must be recorded in the books of the corporation.
a) Approved by a majority vote of the board
of directors or trustees and
b) Ratified at a meeting by the stockholders Razon v IAC
representing at least two-thirds (2/3) of the
outstanding capital stock or by at least Chudian was issued 1,500 shares at E Razon Inc
two-thirds (2/3) of the members in case of with the corresponding stock certificate no 3. Said
non-stock corporations. stock certificates were delivered to Enrique Razon
allegedly because it was the latter who paid for all
Conflict in the availability of appraisal right the subscription on the shares of stock in defendant
YES only for extension of corporate term corporation with the understanding that has was
(37) the owner of said shares of stock and was to have
YES for both shortening and extension (81) possession until such time as he was paid by other
nominal incorporators/stockholders. Later on,
parties delivered it for deposit with bank under the
joint custody of the parties. Administrator of the
estate of Chudian filed a complaint against Enrique
Razon et al praying that the said stock certificates
be delivered to estate of Chudian along with all
cash and stock dividends and pre-emptive rights
accruing thereto.
1.2 Registration
Purpose of registration Rivera v Florendo (1986)
a) enable the Rivera is the registered owner of 4899 shares of
transferee to exercise all the rights of a stock of Fujiyama Hotel & Restaurant Inc. It is
stockholder alleged that one Akasako is the real owner of the
b) to inform the 4899 shares under Riveras name, and as such
corporation of any change in share owner he sold 2550 shares to Milagros. Rivera
ownership so that it can ascertain the refused to indorse the certificates to Milagros
persons (a) entitled to the rights (b) despite the assurance he gave to Milagros before
subject to the liabilities of a SH the sale was consummated. The other
c) until registration is incorporators also sold their shares to Milagros and
accomplished, the transfer, though one Jureidini. As regards these transfers, the
valid between the parties, cannot be certificates were properly indorsed by their
effective against the corporation respective owners. Milagros and Jureidini
Effect of lack of registration: attempted to have all the certificates registered in
a) transferee cannot vote their names but the corporation refused to do so.
b) transferee cannot be voted for
c) transferee cannot prevail over HELD: Mandamus will not lie where the shares of
rights of a subsequent attaching stock are not even indorsed by the registered
creditor (Uson v. Diosomito, 1935) owner Rivera who is specifically resisting the
d) transferee not entitled to dividends registration thereof in the books of the corp. Even
e) stockholder on record has the right the shares of stock sold by the other incorporators
to participate in meetings. cannot be also the subject of mandamus on the
strength of the mere indorsement of the supposed
No registration of transfer of unpaid shares owners of said shares in the absence of express
instructions from them. The right of the parties will
If there is any unpaid have to be threshed out in an ordinary action.
balance on the stockholders subscription
there can be no stock certificate on which
indorsement can be made. The shares are
thus not transferable on the corporate
books. (63) 2. Restrictions on Transfer; Close
However, the stockholder Corporations
can still transfer his interest in the
corporation by way of a deed of
assignment. 2.1 General Rule: Free transferability of
shares
Shares are personal property Shares of stock cancellation (Hodges v. Lezama, 1965). It is the
so issued are personal property and may be duty of the purchaser to determine that the
transferred (63) indorsement was genuine. But with respect to a
subsequent purchaser in good faith and for value,
the corporation is estopped from denying the
2.2 Exception: In close corporations
validity of the newly issued certificate because by
Considering the special circumstances issuing such, it has represented that the person
attending a close corporation (e.g. formed by named therein is a stockholder of the corporation.
persons who know each other well, thus they Except where recognition of the original and new
would want to choose the persons who will be subscriber will result to an overissue of shares.
allowed in their group), it is justifiable and even The new SH would now have right to damages
imperative for its stockholders to protect against the corporation and the latter against those
themselves from future conflicts by placing who made false representation.
restrictions on the right of each one of them to
transfer his shares to an outsider (97 & 98). 4. Collateral Transfers
1.5 Failure to organize and commence Quo Warranto Proceedings (Sec. 2, Rule 66
business; cessation of business for 5 years ROC)
(22) When it has offended
Failure to formally organize and against a provision of an Act for its
commence the transaction of its creation and renewal
business or construction of its works When it has forfeited its
within two years its corporate powers privileges and franchises by nonuser
shall cease and the corporation is When it has committed or
deemed dissolved omitted an act which amounts to a
o Transacting surrender of its corporate rights,
business implies a continuity of privileges or franchise
acts or dealings in the When it has misused a
accomplishment of the purpose for
right, privilege, or franchise conferred
which the corporation was formed
upon it by law or when it has exercised
(Mentholatum v. Mangaliman,
a right, privilege or franchise in
1946)
contravention of law
o Formally organize
includes not only the adoption of
the by-laws but also the
establishment of the body which 2. Effects of Dissolution; Winding-Up
will administer the affairs of the and Liquidation
corporation and exercise its powers
Commence 2.1 Loss of juridical personality
d transaction of its business but Corporation loses its
subsequently becomes continuously juridical personality and can no longer
inoperative for a period of at least five lawfully continue its business except for
years ground for suspension or the purpose of winding up. For this
revocation of its corporate franchise or purpose, it may sue and be sued,
certificate of incorporation although upon the expiration of three
years, all pending actions by or against
1.6 Involuntary dissolution the dissolved corporation abate
(National Abaca Corp. vs. Pore, 1961)
Revocation of certificate of registration by cannot even be a de facto
the SEC (121) corporation, hence subject to collateral
A corporation may be dissolved attack (Buenaflor vs. Camarines Sur
by the Securities and Exchange Industry Corp., 1960)
Commission upon filing of a verified cannot enter into new
complaint and after proper notice and contracts which would have the effect
hearing on grounds provided by of continuing the business (Cebu Port
existing laws, rules and regulations Labor Union vs. States Marine Co,
Grounds for revocation (Sec. 6, 1957)
par i, PD 902-A)
o Fraud in procuring its certificate of 2.2 Executory contracts
registration No right or remedy in favor
o Serious misrepresentation as to of or against any corporation, its
what the corporation can or is stockholders, members, directors,
doing to the great prejudice of or trustees, or officers, nor any liability
damage to the general public incurred by any such corporation,
o Refusal to comply or defiance of stockholders, members, directors,
any lawful order of the Commission trustees, or officers, shall be removed
restraining commission of acts or impaired either by the subsequent
which would amount to a grave dissolution of said corporation or by
violation of its franchise any subsequent amendment or repeal
o Continuous inoperation for a period of this Code or of any part thereof.
of at least five years (145)
o Failure to file by-laws within the The prevailing view is that
required period executory contracts are not
extinguished. However, some
1.3 What corporate approvals are Such other provisions with respect to
required? (77) the proposed merger or consolidation
1. Approval by majority vote of each of as are deemed necessary or desirable.
the board of directors or trustees of the
constituent corporations of the plan of 1.5 What are articles of merger or
merger or consolidation. consolidation? (78)
2. Approval by the stockholders or After the approval by the stockholders
members of each of such corporations or members, articles of merger or
in separate meetings. The affirmative articles of consolidation shall be
vote of stockholders representing at executed by each of the constituent
least two-thirds (2/3) of the corporations:
outstanding capital stock of each 1) to be signed by the president or
corporation in the case of stock vice-president and
corporations or at least two-thirds (2/3) 2) certified by the secretary or
of the members in the case of non- assistant secretary of each
stock corporations shall be necessary corporation
for the approval of such plan The articles of merger or consolidation
3. Notice of such meetings shall be given shall set forth:
to all stockholders or members of the 1) The plan of the merger or the plan
respective corporations, at least two of consolidation;
(2) weeks prior to the date of the 2) As to stock corporations, the
meeting, either personally or by number of shares outstanding, or in
registered mail. Said notice shall state the case of non-stock corporations,
the purpose of the meeting and shall the number of members; and
include a copy or a summary of the 3) As to each corporation, the number
plan of merger or consolidation. of shares or members voting for
4. Any dissenting stockholder in stock and against such plan, respectively.
corporations may exercise his appraisal
right in accordance with the Code. 1.6 When is the effectivity of merger or
Provided, that if after the approval by consolidation? (79)
the stockholders of such plan, the Effectivity: Upon issuance by the SEC
board of directors decides to abandon of the certificate of merger and
the plan, the appraisal right shall be consolidation
extinguished. If the Commission is satisfied that the
5. Amendment to the plan of merger or merger or consolidation of the
consolidation may be made by corporations concerned is not
approved of the majority vote of the inconsistent with the provisions of this
respective boards of directors or Code and existing laws, it shall issue a
trustees of all the constituent certificate of merger or of
corporations and ratified by the consolidation, at which time the merger
affirmative vote of stockholders or consolidation shall be effective.
representing at least two-thirds (2/3) The articles of merger or of
of the outstanding capital stock or of
consolidation shall be submitted to the
two-thirds (2/3) of the members of
Securities and Exchange Commission in
each of the constituent corporations.
quadruplicate for its approval.
Such plan, together with any
In the case of merger or consolidation
amendment, shall be considered as the
of banks or banking institutions,
agreement of merger or consolidation.
building and loan associations, trust
companies, insurance companies,
1.4 What is a plan of merger or
public utilities, educational institutions
consolidation? (76)
and other special corporations
The board of directors or trustees of each
governed by special laws, the favorable
corporation, party to the merger or
recommendation of the appropriate
consolidation, shall approve a plan of
government agency shall first be
merger or consolidation setting forth the
obtained.
following:
If, upon investigation, the Securities
The names of the corporations
and Exchange Commission has reason
proposing to merge or consolidate,
to believe that the proposed merger or
hereinafter referred to as the
consolidation is contrary to or
constituent corporations;
inconsistent with the provisions of this
The terms of the merger or
Code or existing laws, it shall set a
consolidation and the mode of carrying
hearing to give the corporations
the same into effect;
concerned the opportunity to be heard.
A statement of the changes, if any, in
Written notice of the date, time and
the articles of incorporation of the place of hearing shall be given to each
surviving corporation in case of constituent corporation at least two (2)
merger; and, with respect to the weeks before said hearing. The
consolidated corporation in case of Commission shall thereafter proceed as
consolidation, all the statements provided in this Code.
required to be set forth in the articles
of incorporation for corporations 1.7 What are the effects of a merger or
organized under this Code; and consolidation? (80)
1) The constituent corporations shall Ordinarily, in the merger of two or more existing
become a single corporation which: corporations, one of the combining corporations
In case of merger, shall be the survives and continues the combined business,
surviving corporation designated in while the rest are dissolved and all their rights,
the plan of merger; and properties and liabilities are acquired by the
In case of consolidation, shall be surviving corporation. Although there is dissolution
the consolidated corporation of the absorbed corporations, there is no winding
designated in the plan of up of their affairs or liquidation of their assets,
consolidation; because the surviving corporation automatically
2) The separate existence of the acquires all their rights, privileges and powers, as
constituent corporations shall cease, well as their liabilities.
except that of the surviving or the
consolidated corporation;
3) The surviving or the consolidated 1.8 Procedure for Merger or Consolidation
corporation shall possess all the rights, (Villanueva)
privileges, immunities and powers and 1) Board of each corporation shall draw up
shall be subject to all the duties and a plan of merger or consolidation,
liabilities of a corporation organized setting forth:
under this Code; names of corporations involved
4) The surviving or the consolidated (constituent corporations)
corporation shall thereupon and terms and mode of carrying it out
thereafter possess: statement of changes, if any, in the
all the rights, privileges, immunities present articles of surviving
and franchises of each of the corporation; or the articles of the
constituent corporations; and new corporation to be formed in
all property, real or personal, and case of consolidation.
all receivables due on whatever 2) Plan for merger or consolidation shall
account, including subscriptions to be approved by majority vote of each
shares and other choses in action, board of the concerned corporations at
and all and every other interest of, separate meetings.
or belonging to, or due to each 3) The same shall be submitted for
constituent corporation approval by the stockholders or
these shall be deemed transferred members of each such corporation at
to and vested in such surviving or separate corporate meetings duly called
consolidated corporation without for the purpose. Notice should be
further act or deed; and given to all stockholders or members at
5) The surviving or consolidated least two (2) weeks prior to date of
corporation shall: meeting, either personally or by
be responsible and liable for all the registered mail.
liabilities and obligations of each of 4) Affirmative vote of 2/3 of the
the constituent corporations in the outstanding capital stock in case of
same manner as if such surviving stock corporations, or 2/3 of the
or consolidated corporation had members of a non-stock corporation
itself incurred such liabilities or shall be required.
obligations; and 5) Dissenting stockholders may exercise
any pending claim, action or the right of appraisal. But if Board
proceeding brought by or against abandons the plan to merge or
any of such constituent consolidate, such right is extinguished.
corporations may be prosecuted by 6) Any amendment to the plan must be
or against the surviving or approved by the same votes of the
consolidated corporation. board members of trustees and
The rights of creditors or liens upon stockholders or members required for
the property of any of such the original plan.
constituent corporations shall not 7) After such approval, Articles of Merger
be impaired by such merger or or Articles of Consolidation shall be
consolidation executed by each of the constituent
corporations, signed by president or VP
and certified by secretary or assistant
secretary, setting forth:
Babst v. CA (2001) plan of merger or consolidation
in stock corporation, the number of
shares outstanding; in non-stock,
It is settled that in the merger of two existing the number of members
corporations, one of the corporations survives and as to each corporation, number of
continues the business, while the other is dissolved shares or members voting for and
and all its rights, properties and liabilities are against such plan, respectively
acquired by the surviving corporation. 8) Four copies of the Articles of Merger or
Consolidation shall be submitted to the
SEC for approval. Special corporations
ASSOCIATED BANK v. CA (1998) like banks, insurance companies,
building and loan associations, etc.,
need the prior approval of the
7042. Petitioner did not also open an office stated in the certificate of authority
here in the Philippines, appoint a representative issued by the appropriate
or distributor, or manage, supervise or control a government agency;
local business. While petitioner and respondent o The names and addresses of the
entered into a series of transactions implying a present directors and officers of the
continuity of commercial dealings, the corporation;
perfection and consummation of these o A statement of its authorized
transactions were done outside the Philippines. capital stock and the aggregate
number of shares which the
The series of transactions between petitioner
corporation has authority to issue,
and respondent transpired and were
itemized by classes, par value of
consummated in Hong Kong. The SC found no shares, shares without par value,
single activity which petitioner performed here and series, if any;
in the Philippines pursuant to its purpose and o A statement of its outstanding
object as a business organization. Moreover, capital stock and the aggregate
petitioners desire to do business within the number of shares which the
Philippines is not discernible from the corporation has issued, itemized by
allegations of the complaint or from its classes, par value of shares, shares
attachments. without par value, and series, if
Therefore, there is no basis for ruling that any;
petitioner is doing business in the Philippines. o A statement of the amount actually
The SC categorically stated its disagreement paid in; and
with the Court of Appeals ruling that the o Such additional information as may
proponents to the transaction determine be necessary or appropriate in
whether a foreign corporation is doing business order to enable the Securities and
in the Philippines, regardless of the place of Exchange Commission to determine
delivery or place where the transaction took whether such corporation is entitled
place. To accede to such theory makes it to a license to transact business in
possible to classify, for instance, a series of the Philippines, and to determine
transactions between a Filipino in the United and assess the fees payable.
Attached to the application for license
States and an American company based in the
shall be a duly executed certificate
United States as doing business in the
under oath by the authorized official or
Philippines, even when these transactions are
officials of the jurisdiction of its
negotiated and consummated only within the
incorporation, attesting to the fact that:
United States o The laws of the country or state of
the applicant allow Filipino citizens
3. Requirements for the issuance of a and corporations to do business
license therein
o The applicant is an existing
3.1. Documentary requirements (125) corporation in good standing.
A foreign corporation applying for a If such certificate is in a foreign
license to transact business in the language, a translation thereof in
Philippines shall submit to the SEC: English under oath of the translator
o Copy of its articles of incorporation shall be attached thereto.
and by-laws, certified in accordance The application shall likewise be
with law accompanied by a statement under
o Their translation to an official oath of the president or any other
language of the Philippines, if person authorized by the corporation,
necessary. showing to the satisfaction of the SEC
The application shall be under oath and other governmental agency in the
and, unless already stated in its articles proper cases that the:
of incorporation, shall specifically set o Applicant is solvent and in sound
forth the following: financial condition, and
o The date and term of incorporation; o Setting forth the assets and
o The address, including the street liabilities of the corporation as of
number, of the principal office of the date not exceeding one (1)
the corporation in the country or year immediately prior to the filing
state of incorporation; of the application.
o The name and address of its Foreign banking, financial and
resident agent authorized to accept insurance corporations shall, in addition
summons and process in all legal to the above requirements, comply with
proceedings and, pending the the provisions of existing laws
establishment of a local office, all applicable to them.
notices affecting the corporation; In the case of all other foreign
o The place in the Philippines where corporations, no application for license
the corporation intends to operate; to transact business in the Philippines
o The specific purpose or purposes shall be accepted by the SEC without
which the corporation intends to previous authority from the appropriate
pursue in the transaction of its government agency, whenever required
business in the Philippines: by law.
Provided, That said purpose or
purposes are those specifically 3.2 Deposit requirements (126)
the parties thereto, may provide that in The consequence is that the
exercising any voting rights, the shares business and affairs of the
held by them shall be voted as therein corporation can no longer be
provided, or as they may agree, or as conducted to the advantage of the
determined in accordance with a stockholders generally
procedure agreed upon by them.
3. No provision in any written agreement 2. Resolution of deadlocks
signed by the stockholders, relating to The SEC, upon written petition by
any phase of the corporate affairs, shall any stockholder, shall have the
be invalidated as between the parties power to arbitrate the dispute.
on the ground that its effect is to make In the exercise of such power, the
them partners among themselves. Commission shall have authority to
4. A written agreement among some or all make such order as it deems
of the stockholders in a close appropriate, including an order:
corporation shall not be invalidated on o Cancelling or altering any
the ground that it so relates to the provision contained in the
conduct of the business and affairs of articles of incorporation, by-
the corporation as to restrict or laws, or any stockholder's
interfere with the discretion or powers agreement;
of the board of directors: o Cancelling, altering or enjoining
Provided, That such agreement any resolution or act of the
shall impose on the stockholders corporation or its board of
who are parties thereto the directors, stockholders, or
liabilities for managerial acts officers;
imposed by this Code on directors. o Directing or prohibiting any act
5. To the extent that the stockholders are of the corporation or its board
actively engaged in the management or of directors, stockholders,
operation of the business and affairs of officers, or other persons part
a close corporation, the stockholders to the action;
shall be held to strict fiduciary duties to o Requiring the purchase at their
each other and among themselves. fair value of shares of any
Said stockholders shall be personally stockholder, either by the
liable for corporate torts unless the corporation regardless of the
corporation has obtained reasonably availability of unrestricted
adequate liability insurance. retained earnings in its books,
or by the other stockholders;
o Appointing a provisional
1.6 Amendment of articles of director;
incorporation (103) o Dissolving the corporation; or
Any amendment to the articles of o Granting such other relief as
incorporation which seeks to delete or the circumstances may
remove any provision required by this Title warrant.
to be contained in the articles of
incorporation or to reduce a quorum or
voting requirement stated in said articles of 3. Provisional Director
incorporation shall not be valid or effective An impartial person who is neither
unless approved by the affirmative vote of a stockholder nor a creditor of the
at least two-thirds (2/3) of the outstanding corporation or of any subsidiary or
capital stock, whether with or without affiliate of the corporation, and
voting rights, or of such greater proportion whose further qualifications, if any,
of shares as may be specifically provided in may be determined by the
the articles of incorporation for amending, Commission.
deleting or removing any of the aforesaid A provisional director is not a
provisions, at a meeting duly called for the receiver of the corporation and
purpose. does not have the title and powers
of a custodian or receiver.
A provisional director shall have all
1.7 Deadlocks the rights and powers of a duly
elected director of the corporation,
1. Deadlocks, Defined: including the right to notice of and
to vote at meetings of directors,
Notwithstanding any contrary until such time as he shall be
provisions in the articles of removed by order of the
incorporation or by-laws or Commission or by all the
agreement of stockholders of a stockholders.
close corporation His compensation shall be
The directors or stockholders are so determined by agreement between
divided respecting the management him and the corporation subject to
of the corporation's business and approval of the Commission, which
affairs may fix his compensation in the
The votes required for any absence of agreement or in the
corporate action cannot be obtained event of disagreement between the
There can be classification of directors into one There are no classification of board of directors
or more classes, each of whom may be voted
for and elected solely by a particular class of
stock; and
Corporate Powers devolved upon board of
The articles of incorporation of a close directors whose powers are executed by officers.
corporation may provide that the business of Cannot provide that it be managed by
the corporation shall be managed by the stockholders
stockholders of the corporation rather than by a
board of directors. So long as this provision
continues in effect:
Board of directors must be elected in a
1. No meeting of stockholders need be called stockholders meeting
to elect directors
2. Unless the context clearly requires Stockholders of a corporation are separate and
otherwise, the stockholders of the distinct from directors
corporation shall be deemed to be directors
for the purpose of applying the provisions
of this Code
3. The stockholders of the corporation shall be
subject to all liabilities of directors. Officers must be elected by the Board of
Directors
The articles of incorporation may likewise
provide that all officers or employees or that
specified officers or employees shall be elected
or appointed by the stockholders, instead of by
the board of directors.
3. The directors are accustomed to take Express ratification may consist of a Board
informal action with the express or implied Resolution to that effect
acquiescence of all the stockholders; or
Implied ratification may consist of acceptance of
4. All the directors have express or implied benefits from said unauthorized act while having
knowledge of the action in question and knowledge of said act
none of them makes prompt objection
thereto in writing. Failure to give notice would render a meeting
voidable.
If a director's meeting is held without proper
call or notice, an action taken therein within the Attendance to a meeting despite want of notice
corporate powers is deemed ratified by a will be deemed implied waiver
director who failed to attend, unless he
promptly files his written objection with the All proceedings had and any business transacted
secretary of the corporation after having at any meeting of the stockholders or members,
knowledge thereof. if within the powers or authority of the
corporation, shall be valid even if the meeting be
improperly held or called, provided all the
stockholders or members of the corporation are
present or duly represented at the meeting.
(51)
The pre-emptive right of stockholders in close a. Such pre-emptive right shall not extend to
corporations shall extend to all stock to be shares to be issued in compliance with laws
issued, including reissuance of treasury shares, requiring stock offerings or minimum stock
whether for money, property or personal ownership by the public;
services, or in payment of corporate debts,
unless the articles of incorporation provide b. Not extend to shares to be issued in good faith
otherwise. with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock, in exchange for property needed
for corporate purposes or in payment of a
previously contracted debt
5. Transferability
Restrictions on the right to transfer shares Restrictions on the right to transfer not allowed
must appear in the AI and in the by-laws as
well as in the certificate of stock otherwise the
same shall not be binding on any purchaser
thereof in good faith
Any stockholder of a close corporation may, for Stockholders may require the corporation to
any reason, compel the said corporation to buy-back their shares at fair value when the
purchase his shares at their fair value, which Corporation has unrestricted Retained Earnings:
shall not be less than their par or issued value, a. In case any amendment to the articles of
when the corporation has sufficient assets in its incorporation which has the effect of:
books to cover its debts and liabilities exclusive changing or restricting the rights of
of capital stock any stockholder or class of shares, or
authorizing preferences in any respect
Any stockholder of a close corporation may, by superior to those of outstanding shares
written petition to the SEC, compel the of any class, or
dissolution of such corporation whenever: extending or shortening the term of
Any of acts of the directors, officers or those in corporate existence
control of the corporation is illegal, or b. In case of sale, lease, exchange, transfer,
fraudulent, or dishonest, or oppressive or mortgage, pledge or other disposition of all
unfairly prejudicial to the corporation or or substantially all of the corporate property
any stockholder, or and assets as provided in the Code; and
Corporate assets are being misapplied or c. In case of merger or consolidation
wasted. d. Extension or shortening of the term of the
corporation (37)
e. Diversion of funds of corporation from
primary purpose to secondary purpose
(41)
2. Educational Corporations
b. StockThe number and erm of directors shall
be governed by the provisions on stock
2.1 Incorporation
corporations.
a. Governing Laws: Special Laws and the
Corporation Code (106)
3. Religious Corporations
b. Pre-requisites to Incorporation: Except upon
3.1 Classes of Religious Corporations ( 109)
favorable recommendation of the (Ministry of
Education and Culture), the SEC shall not accept
a. Corporation Sole
or approve the articles of incorporation and by-
laws of any educational institution (107)
b. Religious Corporationsgoverned by the
Corporation Code and the general provisions on
2.2 Board of Trustees (108)
non-stock corporations insofar as thye may be
applicable.
a. Non-stock
2. During any vacancy in the office, the rabbi or presiding elder, duly certified to
person or persons authorized and be correct by any notary public.
empowered by the rules, regulations or
discipline of the religious denomination, f. Effect of the Filing of the Articles (112):
sect or church represented by the 1. Such chief archbishop, bishop, priest,
corporation sole to administer the minister, rabbi or presiding elder shall
temporalities and manage the affairs, become a corporation sole.
estate and properties of the corporation
sole during the vacancy shall exercise all 2. All temporalities, estate and properties
the powers and authority of the of the religious denomination, sect or
corporation sole during such vacancy. church theretofore administered or
managed by him as such chief
c. Purpose-- For the purpose of administering archbishop, bishop, priest, minister,
and managing, as trustee, the affairs, property rabbi or presiding elder shall be held
and temporalities of any religious denomination, in trust by him as a corporation sole,
sect or church. (110) for the use, purpose, behalf and sole
benefit of his religious denomination,
d. The Articles of Incorporation must set forth sect or church, including hospitals,
that (111): schools, colleges, orphan asylums,
1. The presiding elder of such religious parsonages and cemeteries thereof.
denomination, sect or church is the chief
archbishop, bishop, priest, minister, g. Acquisition and Alienation of Property (113):
rabbi or presiding elder of his religious 1. Purpose for holding and purchasing the
denomination, sect or church and that real and personal property, or receiving
he desires to become a corporation sole; gifts and bequestsFor its church,
charitable, benevolent or educational
2. The rules, regulations and discipline of purposes.
his religious denomination, sect or
church are not inconsistent with his 2. Conditions for sale or mortgage of real
becoming a corporation sole and do not property held by it:
forbid it; i. By obtaining an order for that
purpose from the Court of First
3. As such chief archbishop, bishop, Instance of the province where
priest, minister, rabbi or presiding elder, the property is situated upon
he is charged with the administration of proof made to the satisfaction of
the temporalities and the management the court that:
of the affairs, estate and properties of *notice of the application
his religious denomination, sect or for leave to sell or
church within his territorial jurisdiction, mortgage has been given
describing such territorial jurisdiction; by publication or
otherwise in such manner
and for such time as said
4. The manner in which any vacancy
court may have directed,
occurring in the office of chief
and *that it is to the
archbishop, bishop, priest, minister,
interest of the corporation
rabbi of presiding elder is required to be
that leave to sell or
filled, according to the rules, regulations
mortgage should be
or discipline of the religious
granted.
denomination, sect or church to which
ii. The application for leave to sell
he belongs; and
or mortgage must be made by
petition, duly verified, by the chief
5. The place where the principal office of archbishop, bishop, priest,
the corporation sole is to be established minister, rabbi or presiding elder
and located, which place must be within acting as corporation sole, and
the Philippines. may be opposed by any member
of the religious denomination, sect
The articles of incorporation may include any or church represented by the
other provision not contrary to law for the corporation sole:
regulation of the affairs of the corporation.
3. When the Intervention of the Courts
e. Filing/submission of the Articles of shall not be necessaryIn cases where
Incorporation (112): the rules, regulations and discipline of the
religious denomination, sect or church,
religious society or order concerned
1. Verification before filing, by affidavit represented by such corporation sole
or affirmation of the chief archbishop, regulate the method of acquiring, holding,
bishop, priest, minister, rabbi or selling and mortgaging real estate and
presiding elder, as the case may be, personal property, such rules, regulations
and discipline shall control.
2. Accompanied by a copy of the
commission, certificate of election or h. Dissolution (115):
letter of appointment of such chief
archbishop, bishop, priest, minister,
b. Internal Requirement
c. SEC Requirement
are trampled upon and public welfare is Upon the issuance of the suspension order, no
safeguarded. further offer or sale of such security shall be
made until the same is lifted or set aside by
the Commission. Otherwise, such sale shall be
4.7 Oath of Issuer void.
Upon effectivity of the registration Notice of issuance of such order shall be given
statement, the issuer shall state under to the issuer and every dealer and broker who
oath in every prospectus that all shall have notified the Commission of an
registration requirements have been met intention to sell such security.
and that all information are true and
correct as represented by the issuer or
the one making the statement. 6. Securities and Transactions from
Registration
Any untrue statement of fact or omission
to state a material fact required to be 6.1 Exempt Securities (Sec. 9)
stated or necessary to make the
statement therein not misleading shall (a) Any security issued or guaranteed by
constitute fraud. the Government of the Philippines, or
by any political subdivision or agency
5. Suspension of Offer and Sale thereof, or by any person acting as an
(Sec. 13) instrumentality of said Government.
(b) Any security issued or guaranteed by
If the Commission deems it necessary, it the government of any country with
may issue an order suspending the offer which the Philippines maintains
and sale of the securities pending any diplomatic relations, or by any state,
investigation. The order shall state the province or political subdivision
grounds for taking such actions, but thereof on the basis of reciprocity.
such order of suspension although (c) Certificates issued by a receiver or by
binding upon persons notified thereof, a trustee in bankruptcy duly approved
shall be deemed confidential, and shall by the proper adjudicatory body.
not be published. (d) Any security or its derivatives the sale
If, at any time, the Commission finds or transfer of which is under the
that a registration statement contains supervision and regulation of the
any false statement or omits to state Office of the Insurance Commission,
any fact required to be stated therein or Housing and Land Use Regulatory
necessary to make the statements Board, or the Bureau of Internal
therein not misleading, the Commission Revenue.
may conduct an examination, and, after (e) Any security issued by a bank except
due notice and hearing, issue an Order its own shares of stock.
suspending the effectivity of the
registration statement. (Sec. 14) Union Bank vs. SEC (2001)
Failure of the issuer, underwriter, or any
Although the shares of stock of banking
other person to cooperate, or his
institutions are exempt from registration
obstruction or refusal to undergo an
requirements, a bank whose shares are listed
examination, shall be a ground for the
in the stock market is covered by the RSA and
issuance of a suspension order. (Sec.
the implementing rule on the reportorial
14)
requirements of listed companies. The RSA
If, at any time, the information
exempts from registration the securities
contained in the registration statement
issued by banking or financial institutions, but
filed is or has become misleading,
nowhere does its state or even imply that
incorrect, inadequate or incomplete in
bank as a listed corporation is exempt from
any material respect, or the sale or
complying with reports required by the RS
offering for sale of the security
IRRs.
registered thereunder may work or tend
to work a fraud, the Commission may
The Commission may, by rule or regulation
require from the issuer such further
after public hearing, add to the foregoing any
information necessary to enable the
class of securities if it finds that the enforcement
Commission to ascertain whether the
of this Code with respect to such securities is not
registration of such security should be
necessary in the public interest and for the
revoked. The Commission may also
protection of investors.
suspend the right to sell and offer for
sale such security pending further
6.2 Exempt Transactions (Sec. 10)
investigation. (Sec. 15)
The refusal to furnish information
(a) At any judicial sale, or sale by an
required by the Commission may be a
executor, administrator, guardian or
ground for the issuance of an order of
receiver or trustee in insolvency or
suspension. (Sec. 15)
bankruptcy.
(b) By or for the account of a pledge
The order shall be deemed confidential, and
holder, or mortgagee or similar lien
shall not be published.
holder selling or offering for sale or
delivery in the ordinary course of
business and not for the purpose of
avoiding the provisions of this Code, issuances of shares from already authorized
to liquidate a bona fide debt, a but still unissued capital stock.
security pledged in good faith as
security for such debt. (j) The exchange of securities by the
(c) An isolated transaction in which any issuer with its existing security holders
security is sold, offered for sale, exclusively, where no commission or
subscription or delivery is not being other remuneration is paid.
made in the course of repeated and (k) The sale of securities by an issuer to
successive transactions by the owner fewer than 20 persons in the
or his representative and such owner Philippines during any twelve-month
or representative not being the period.
underwriter of such security. (l) The sale of securities to any of the
(d) The distribution by a corporation to following qualified buyers:
its stockholders or other security Bank;
holders as a stock dividend or other Registered investment house;
distribution out of surplus. Insurance company;
(e) The sale of capital stock of a Pension fund or retirement plan
corporation to its own stockholders maintained by the Government or
exclusively, where no commission or any political subdivision or
other remuneration is paid or given managed by a bank or other
directly or indirectly in connection persons authorized by the Bangko
with the ale of such capital stock. Sentral to engage in trust
(f) The issuance of bonds or notes functions;
secured by mortgage upon real Investment company; or
estate or tangible personal property,
Such other person as the
where the entire mortgage together
Commission determine as
with all the bonds or notes secured
qualified buyers, on the basis of
thereby are sold to a single
such factors as financial
purchaser at a single sale.
sophistication, net worth,
(g) The issue and delivery of any
knowledge, and experience in
security in exchange for any other
financial and business matters, or
security of the same issuer pursuant
amount of assets under
to a right of conversion: Provided,
management.
That the security surrendered has
been registered under this Code or
The Commission may exempt other
was, when sold, exempt, and that
transactions, if it finds that the
the security delivered in exchange, if
requirement of registration is not
sold at the conversion price, would
necessary in the public interest or for the
at the time of such conversion fall
protection of the investors such as by
within the class of securities entitled
reason of the small amount involved or
to registration under this Code.
the limited character of the public
Upon such conversion the par value
offering.
of the security surrendered in such
exchange shall be deemed the price
Any person applying for an exemption of a
at which the securities issued and
transaction shall file with the
delivered in such exchange are sold.
Commission a notice identifying the
(h) Brokers transactions, executed upon
exemption relied upon on such form and
customers orders, on any registered
at such time as the Commission by rule
Exchange or other trading market.
may prescribe and with such notice shall
(i) Subscriptions for shares of the
pay to the Commission a fee equivalent to
capital stock of a corporation prior to
1/10 of 1% of the maximum aggregate
incorporation or in pursuance of an
price or issued value of the securities.
increase in its authorized capital
stock, when no expense is incurred,
or no commission, compensation or
remuneration is paid or given, and 7. Tender Offer and Proxy Solicitation
only when the purpose for soliciting,
giving or taking of such subscriptions 7.1 Tender Offers (Sec. 19)
is to comply with the requirements
of such law as to the percentage of Parties Required to make Tender
the capital stock which should be Offer
subscribed before it can be
registered and duly incorporated, or (a) Any person or group of persons
its authorized capital increased. acting in concert who intends to
acquire at least 15% of any class
Nestle Philippines vs. Court of Appeals of any equity security of a listed
(1991) corporation or of any class of any
equity security of a corporation
The language of the RSA exempting from with assets of at least
registration issuance o additional capital P50,000,000 and having 200 or
stock, must be interpreted to cover only more stockholders with at least
issuance of shares of stock as part of and in 100 shares each or
the course of increasing he authorized capital (b) who intends to acquire at least
stock of a corporation. It does not cover 30% of such equity over a period
8.2 Recovery of Damages for Unfair Use of It shall be unlawful for any person acting
Information for himself or through a dealer or broker,
directly or indirectly:
a. For the purpose of preventing the unfair use
of information which may have been obtained by (a) To create a false or misleading
such beneficial owner, director, or officer by appearance of active trading in any
reason of his relationship to the issuer listed security traded in an Exchange
or any other trading market:
any profit realized by him from any
purchase and sale, or any sale and By effecting any transaction in
purchase, of any equity security of such security which involves no
such issuer within any period of less change in the beneficial ownership
than six (6) months, thereof;
o unless such security was By entering an order or orders for
acquired in good faith in the purchase or sale of such
connection with a debt security with the knowledge that a
previously contracted, simultaneous order or orders of
shall inure to and be recoverable by substantially the same size, time
the issuer, irrespective of any and price, for the sale or purchase
intention of holding the security of any such security, has or will be
purchased or of not repurchasing the entered by or for the same or
security sold for a period exceeding different parties; or
6 months. By performing similar act where
there is no change in beneficial
b. Suit to recover such profit may be instituted ownership.
before the RTC by the issuer, or by the owner of
any security of the issuer in the name and in (b) To effect, alone or with others, a
behalf of the issuer if the issuer shall fail or series of transactions in securities
refuse to bring such suit within 60 days after that:
request or shall fail diligently to prosecute the
same thereafter. But; Raises their price to induce the
No such suit shall be brought more than purchase of a security;
t2 years after the date such profit was Depresses their price to induce the
realized. sale of a security; or
Creates active trading to induce
It shall be unlawful for any beneficial owner, such a purchase or sale through
director, or officer to sell any equity security manipulative devices such as
of such issuer if the person selling the marking the close, painting the
security or his principal: tape, squeezing the float, hype and
dump, boiler room operations and
(a) Does not own the security sold; or such other similar devices.
(b) If owning the security, does not
deliver it against such sale within 20 (c) To circulate or disseminate
days thereafter, or does not within 5 information that the price of any
days after such sale deposit it in the security listed in an Exchange will or is
mails or other usual channels of likely to rise or fall because of
transportation; manipulative market operations of any
one or more persons conducted for
But no person shall be deemed to have the purpose of raising or depressing
violated this subsection if he proves that the price of the security for the
notwithstanding the exercise of good faith purpose of inducing the purchase or
he was unable to make such delivery or sale of such security.
deposit within such time, or that to do so
would cause undue inconvenience or (d) To make false or misleading
expense. statement with respect to any
material fact, which he knew or had
The provisions of Subsection 23. 2 shall not reasonable ground to believe was so
apply to any purchase and sale, or sale and false or misleading, for the purpose of
purchase and the provisions of Subsection inducing the purchase or sale of any
23.3 shall not apply to any sale, of an equity security listed or traded in an
security not then or thereafter held by him Exchange.
in an investment account, by a dealer in the
ordinary course of his business and incident (e) To effect any series of transactions for
to the establishment or maintenance by him the purchase and/or sale of any
of a primary or secondary market, otherwise security traded in an Exchange for the
than on an Exchange, for such security. purpose of pegging, fixing or
stabilizing the price of such security,
9. Prohibitions unless otherwise allowed by this Code
or by rules of the Commission.
If, after due notice and hearing, the (i) Has been judicially declared
Commission determines the applicant insolvent.
or registrant:
29.4. It shall be sufficient cause for refusal,
(a) Has willfully violated any provision revocation or suspension of a broker's or
of this Code, any rule, regulation dealers registration, if any associated person
or order made hereunder, or any thereof or any juridical entity controlled by
other law administered by the such associated person has committed any act
Commission, or in the case of a or omission or is subject to any disability
registered broker, dealer or enumerated earlier.
associated person has failed to
supervise, with a view to Transactions and Responsibility of Brokers and
preventing such violation, Dealers (Sec. 30)
another person who commits
such violation; a. Prohibition against dealing or otherwise
(b) Has willfully made or caused to be selling or buying, for its account of
made a materially false or customers, securities listed on an
misleading statement in any Exchange issued by any corporation where
application for registration or any stockholder, director, associated
report filed with the Commission person or salesman, or authorized clerk of
or a self-regulatory organization, said broker or dealer and all the relatives
or has willfully omitted to state of the foregoing within the fourth civil
any material fact that is required degree o consanguinity or affinity, is at
to be stated therein; the time holding office in said issuer
(c) Has failed to satisfy the corporation as a director, president, vice-
qualifications or requirements for president, manager, treasurer,
registration and the rules and comptroller, secretary or any office or
regulations; trust and responsibility, or is a controlling
(d) Has been convicted by a person of the issuer.
competent judicial or
administrative authority of an b. Prohibition against effecting any
offense involving moral transaction in securities or induce or
turpitude, fraud, embezzlement, attempt to induce the purchase or sale of
counterfeiting, theft, estafa, any security except in compliance with
misappropriation, forgery, such rules and regulations as the
bribery, false oath, or perjury, or Commission shall prescribe to ensure fair
of a violation of securities, and honest dealings in securities and
commodities, banking, real provide financial safeguards an other
estate or insurance laws; standards for the operation o brokers and
(e) Is enjoined or restrained by a dealers.
competent judicial or
administrative body from
engaging in securities, 11. Regulation of Exchanges
commodities, banking, real
estate or insurance activities or 11.1 Nature of Stock Exchanges
from willfully violating laws
governing such activities; Lopez, et. al vs. Court of Appeals (1988)
(f) Is subject to an order of a
competent judicial or An exchange is a voluntary association or
administrative body refusing, corporation organized for the purpose of
revoking or suspending any furnishing to its members a convenient and
registration, license or other suitable place to transact their business of
permit under this Code, the rules promoting uniformity in the customs and
and regulations promulgated usages of merchants, of inculcating principles
thereunder, any other law of justice and equity in trade, of facilitating
administered by the the speedy adjustment of business disputes,
Commission; of acquiring and dissemination valuable
(g) Is subject to an order of a self- commercial and economic information and
regulatory organization generally of securing to its members the
suspending or expelling him benefits of co-operation in the furtherance of
from membership or their legitimate pursuits.
participation therein or from
association with a member or Carolina Industries vs. CMS Stock
participation thereof; Brokerage (1980)
(h) Has been found by a competent
judicial or administrative The rules and regulations of the Exchange
authority, to have willfully form part of the contract covering securities
violated any provisions of transacted within the facilities of Exchange.
securities, commodities,
banking, real estate or insurance
laws, or has willfully aided,
abetted, counseled, commanded, Sec Opinion #11 (2003)
induced or procured such
violation; or
It is important to stress that the (c) Copies of the rules of the Exchange;
Securities Regulation Code (SRC) treats and
exchanges as a special specie of (d) An undertaking that in the event a
corporation and subjects them to rules member firm becomes insolvent or
not otherwise applicable to regular when the Exchange shall have found
corporations. that the financial condition of its
member firm has so deteriorated
The stock exchange performs a function that it cannot readily meet the
vital to the national economy, a function demands of its customers for the
vested with public interest. It is said that delivery of securities and/or
the economy moves on the basis of the payment of sales proceeds, the
rise and fall of the stocks traded and Exchange shall take over the
thus, the integrity of the exchange operation of the insolvent member
overseeing these transactions can never firm and immediately proceed to
be over emphasized. It is for this reason settle the member firms liabilities to
that the SRC provides for stricter rules its customers.
on exchange regulation. The SRC
devotes a whole chapter on exchanges Registration of an Exchange shall be granted
and other securities trading markets, upon compliance with the following
and it is replete with provisions designed provisions:
to professionalize the exchange,
encourage greater public participation, (a) That the applicant is organized as a
ensure increased transparency, greater stock corporation;
responsibility and improve corporate (b) That the applicant is engaged solely in
governance. These provisions are not the business of operating an
found in the Corporation Code and are exchange: Provided, however, That
meant as additional legal requirements the Commission may, upon
applicable only to exchanges. application, exempti an Exchange
organized as a stock corporation and
It is thus incorrect to argue that the owned and controlled by another
provisions of the Corporation Code alone juridical person from this restriction;
govern the operation of exchanges. (c) Where the Exchange is organized as a
While the Corporation Code applies to stock corporation, that no person
corporations in general, the SRC is a may beneficially own or control,
special law that primarily governs the directly or indirectly, more than 5%
regulation of exchanges. As between a of the voting rights of the Exchange
specific statute and a general statute, and no industry or business group
the former must prevail since it evinces may beneficially own or control
the legislative intent more clearly than a more than 20% of the voting rights
general statute does. of the Exchange: Provided,
however, That the Commission may
Thus the SEC has the power of adopt rules, regulations or issue an
supervision over exchanges. order, upon application, exempting
Supervision entails overseeing or the an applicant from this prohibition
power or authority to see that where it finds that such ownership
subordinate subject performs its duties. or control will not negatively impact
If the latter fails or neglects to fulfill on the exchanges ability to
them the former may take such action or effectively operate in the public
step as prescribed by law to make them interest;
perform its duties. In this specific (d) The expulsion, suspension, or
instance, the SEC can even take over disciplining of a member and
the management of the exchange as persons associated with a member
authorized by the SRC. for conduct or proceeding
inconsistent with just and equitable
11.2 Registration Procedure (Sec. 33) principles of fair trade, and for
violations of provisions of this Code
Any Exchange may be registered as such or the rules of the Exchange;
with the Commission by filing an (e) A fair procedure for the disciplining of
application for registration in such form members and persons associated
and containing such information and with members, the denial of
supporting documents as the membership to any person seeking
Commission by rule shall prescribe, to be a member, the barring of any
including the following: person from association with a
member, and the prohibition or
(a) An undertaking to comply and limitation of any person from access
enforce compliance by its to services offered by the Exchange;
members with the provisions of (f) That the brokers in the board of the
this Code, its implementing rules Exchange shall comprise of not
or regulations and the rules of the more than 49% of such board and
Exchange; shall proportionately represent the
(b) The organizational charts of the Exchange membership in terms of
Exchange, rules of procedure, and volume/value of trade and paid up
a list of its officers and members; capital, and that any natural person
associated with a juridical entity
(h) The president and other Subsection (c) mandates that the ownership
management of the Exchange to of the stocks of the exchange be broadened
consist only of persons who are and democratized, thereby ensuring greater
not members and are not public participation.
associated in any capacity, directly
or indirectly with any broker or On the other hand, Subsections (f) and (g)
dealer or member or listed mandate a board composition where no more
company of the Exchange: than 49% of the seats shall be occupied by
Provided, That the Exchange may brokers, and no less than 51% to be
only appoint, and a person may comprised of (3) independent directors and
only serve, as an officer of the persons representing other sectors of the
exchange if such person has not market. With respect to independent
been a member or affiliated with directors, their election in the Board is
any broker, dealer, or member of intended to ensure that the Board will
the Exchange for a period of at faithfully discharge its fiduciary responsibilities
least 2 years prior to such to its stockholders.
appointment;
(i) The transparency of transactions on These provisions aim for a more
the Exchange; representative, democratic, independent
(j) The equitable allocation of Board of Directors that is autonomous from
reasonable dues, fees, and other the control of any sector of the market.
charges among members and
issuers and other persons using
any facility or system which the 12. Independent Directors
Exchange operates or controls;
(k) Prevention of fraudulent and
Any corporation with
manipulative acts and practices,
promotion of just and equitable
a class of equity securities listed for
principles of trade, and, in general,
trading on an Exchange or
protection of investors and the
with assets in excess of P50,000,000.00
public interest; and
and having 200 or more holders, at least
(l) The transparent, prompt and
of 200 of which are holding at least 100
accurate clearance and settlement
shares of a class of its equity securities or
of transactions effected on the
which has sold a class of equity securities
Exchange.
regulations as the Commission shall (e) Any person has refused to permit any
prescribe. lawful examinations into its affairs,
Otherwise, the broker shall sell the The Commission may consider the offer
security purchased starting on the next based on timing, the nature of the
trading day but not beyond 10 trading investigation or proceeding, and the public
days following the last day for the interest.
customer to pay such purchase price,
unless such sale cannot be effected The Commission may only agree to a
within said period for justifiable reasons. settlement offer based on its findings that
such settlement is in the public interest.
The sale shall be without prejudice to Any agreement to settle shall have no
the right of the broker or dealer to legal effect until publicly disclosed. Such
recover any deficiency from the decision may be made without a
customer. To prevent indirect violation determination of guilt on the part of the
of restrictions on borrowings under person making the offer.
Section 49, the broker shall, unless
otherwise directed by the customer, pay 16. Civil Liabilities (Sec. 56)
the net sales price of the securities sold
for a customer within the same period as 16.1 On Account of False Registration
above prescribed by the Commission Statement
20. Penalties
But a bearer instrument remains as such may disregard the condition, and make
whether it has been indorsed specially or in payment to the indorsee or his
blank. It is the liability of the indorser transferee, whether condition has been
which is affected. fulfilled or not
o Any person to whom an instrument so
indorsed is negotiated will hold the
2. as to kind of title transferred: same/proceeds subject to rights of
person indorsing conditionally
a. restrictive such indorsement either:
1) prohibits further negotiation of b. unconditional
instrument,
o In this kind of restrictive
indorsement, the prohibition to 5. other classifications:
transfer or negotiate must be
written in express words at the a. Absolute One by which the indorser binds
back of the instrument, so that himself to pay, upon no other condition
any subsequent party may be than the failure of prior parties to do so,
forewarned that ceases to be and of due notice to him of such failure
negotiable. However, the restrictive b. Joint - Where instrument payable to the
indorsee acquires the right to receive order of two or more payees or indorsees
payment and bring any action not partners, all must indorse, unless the
thereon as any indorser, but he can one indorsing has authority to endorse for
no longer transfer his rights as such the others (Sec. 41, NIL)
indorsee where the form of the c. Irregular - Where a person, not otherwise a
indorsement does not authorize him party to the instrument, places thereon his
to do so. (Gempesaw v CA 1993) signature in blank before delivery, he is
liable as indorser
a. conditional additional condition annexed The transaction [in Sec. 49, NIL] is an equitable
to indorsers liability. (Sec. 39, NIL) assignment and the transferee acquires the
instrument subject to defenses and equities
available among prior parties. Thus, if the
o Where an indorsement is conditional, a transferor had legal title, the transferee acquires
party required to pay the instrument such title and, in addition, the right to have the
2. DISHONOR
a. Non-acceptance b. VALUE - any consideration sufficient to
i. Occurs when drawee refuses to support a simple contract. An
accept the order of the drawer as antecedent or pre-existing debt
stated in the bill constitutes value, whether the
ii. Applicable only to bills of exchange instrument is payable on demand or at
iii. May occur before the date of a future time. (Sec.25, NIL)
maturity of the bill
b. Non-payment MERCHANTS NATIONAL BANK OF ST. PAUL v.
i. Occurs when the party primarily STA. MARIA SUGAR CO. (1914)
liable fails to pay at the date of
maturity
ii. Date of Maturity The mere discounting of the note and placing the
1) payable after sightdate of amount of said discount to the credit of the HFV
presentment would not then have constituted a transfer for
2) Payable on the occurrence of a value. But if the sum had subsequently been
specified eventdate is fixed checked out, then value would have passed. The
by happening of event general rule as to the application of payments,
3. An instrument is not invalid for the reason there being no special facts to interfere, is that the
only that it is ANTE-DATED OR POST- first payments apply to the oldest debts. The first
DATED provided not done for an illegal or debits are to be charged against the first credits. It
fraudulent purpose. The person to whom an follows therefore, upon the facts as found, that the
instrument so dated is delivered acquires bank was a bona fide HFV without notice, and, in
accordance with the stipulation, judgment should
in good faith despite the fact that the checks were NOTE: The instrument in this case was non-
crossed. The crossing of a check does not impair negotiable, so the active participation discussion
the negotiability of an instrument nor necessarily was merely obiter.
preclude its holder from being a holder in due
course. The crossing of a check only means that it
could only be deposited and may not be converted SALAS v. Court of Appeals (1990)
into cash. Thus, such should put the holder on
inquiry and upon him devolves the duty to
ascertain the holders title to the check or nature of Salas defaulted in payments for motor vehicle, the
his possession. purchase of which was financed by Filinvest. On
demand, his defense was that the purchase was
The effects are that: invested with fraud on the sellers part. Filinvest
1. The check may not be encashed but only (the financing company) was held to be a holder in
deposited in the bank. good faith, despite privity to the allegedly
2. The check may be negotiated only once to one fraudulent sale. Salas defenses were good only
who has an account with a bank. against the seller-indorser, and where the note was
3. The act of crossing serves as a warning to the negotiable and validly negotiated to Filinvest, the
holder that the check was issued for a definite latter was a holder in good faith, and may recover
purpose so that he must inquire if he has received from Salas.
the check pursuant to that purpose. Otherwise, he
would not be a holder in due course.
Note: This is the less protective doctrine not so
Where the holder Mr. C, as in this case, did not much favorable to dealers but as compared to
have knowledge of Mr. As fraudulent actions on Consolidated, the rule here was actually in the ratio
Mr. B, and the fact that he was the payee in said decidendi and not mere obiter.
check, he was legally warranted to deposit the
instrument in his account with the drawee bank. 3.4. That at time it was negotiated to him, he
Mr. C was a holder in good faith. had no notice of :
o any infirmity in instrument
iii. FINANCING COMPANY o any defect in title of person
negotiating;
1. title DEFECTIVE when (Sec. 55, NIL):
In installment sales, the buyer usually issues a a. instrument / signature obtained by
note payable to the seller to cover the purchase fraud, duress, force or fear or other
price. unlawful means OR for an illegal
consideration; or
b. instrument is negotiated in breach of
Many times, pursuant to a previous arrangement faith, or fraudulent circumstances
with the seller, a finance company pays the full
price of the property sold and the note is indorsed
to it by the seller, subrogating it to the right to 2. NOTICE of infirmity or defect
collect the price from the buyer. a. actual knowledge of the infirmity or
defect OR knowledge of such facts that
his action in taking the instrument
RULE In such cases, the tendency of the courts amounted to bad faith (Sec.56, NIL)
b. Notice to an AGENT is chargeable
is to protect the buyer against the finance company
in the event that the goods sold turn out to be against the principal.
c. INSUFFICIENT NOTICE
defective. The finance company will be subject to
the defense of failure of consideration and cannot i. CONSTRUCTIVE NOTICE (ex.
recover the purchase price from the buyer. notice of defenses disclosed by
public records, doctrine of lis
pendens) is insufficient to charge a
purchaser of a NI with notice.
CONSOLIDATED PLYWOOD v. IFC (1987)
Just as a purchaser of a
negotiable instrument is not
put on inquiry, neither is he
A FINANCING COMPANY that is the indorsee of a
charged with notice of
note issued by a buyer payable to the seller of
defenses or equities
goods is NOT a holder in good faith as to the
disclosed by public records,
buyer. In case the goods sold turn out to be
nor is he affected by the
defective, it cannot recover the purchase price of
doctrine of lis pendens.
the goods from the buyer. The TEST OF PROXIMITY
However, notice to an
to the transaction was applied in this case. Where
agent is chargeable against
the financing company was privy to the initial
the principal.
transaction, it was bound with notice of the
ii. Notice of an ACCOMODATION
warranties attaching to the transaction. It
PARTY is not notice of a defect.
ACTIVELY PARTICIPATED in the transaction, thus it
Thus, an accomodation
cannot be a holder in good faith. This is the
party (one who has signed
protective doctrine favoring the interests of
the instrument as maker,
individual dealers over those of financing
drawer, acceptor or
companies.
endorser, without
receiveing value therefor,
and for the purpose of
Chapter V.
1. This is a personal defense only because
DEFENSES & EQUITIES provision states that if any instrument
so completed is negotiated to a holder
1. Defenses in General in due course, it is valid and effectual
for all purposes
1.1. REAL defense attaches to instrument 2. 2 Kinds of Writings:
on the principle that there was no contract at i. Where instrument is wanting in
all; available against ALL holders including any material particular: person
holders in due course. They are those which in possession has prima facie
attach to the instrument itself and generally, authority to complete it by filing up
disclose an absence of one of the essential blanks therein
elements of a contract. ii. Signature on blank paper
delivered by person making the
1.2. PERSONAL defense grows out of the
signature IN ORDER that the paper
agreement or conduct of a particular person in
may be CONVERTED into a NI
regard to the instrument which renders it
operates as prima facie authority to
inequitable FOR HIM, though holding the legal
fill up as such for any amount
title, to enforce it against the party sought to
3. The authority to fill up is limited by the
be made liable; not available against a
following:
HDC.can be raised only against holders not on
a. When completed, it may be
due course. Here, the true contract appears ,
enforced upon the parties thereto
but for some reason , the defendant is excused
only if it was filled strictly in
from the obligation to perform.
accordance with the authority given
1.3. Equities or Claims of Ownership are of b. The filling up must be within a
2 Kinds reasonable time
1. Legal one who has legal title to the NOTE: If the signature on a paper is
instrument may recover possession given only for autograph purposes
thereof even from holder in due course and the same is converted into a NI,
2. Equitable may only recover from a this will amount to forgery,
holder not in due course constituting thus a valid defense
even against a HDC
2. Real Defenses
4.1. Forgery (Sec. 23): made without SAMSUNG CONSTRUCTION CO., INC. VS. FAR
authority of person whose signature it purports EAST BANK AND TRUST CO. AND CA (2004)
to be
Consequently, if a bank pays a forged check, it
must be considered as paying out of its funds and
cannot charge the amount so paid to the account
1. In general, a REAL defense:
of the depositor. A bank is liable, irrespective of
Effect
its good faith, in paying a forged check.
fide disbursements he had made. Since the legal nature of the paper he
drawee bank, in the instant case, did not pay is executing
according to the original tenor of the instrument, as
directed by the drawer, then it has no right to claim
reimbursement from the drawer, much less, the
right to deduct the erroneous payment it made
from the drawers account which it was expected to
treat with utmost fidelity.
request is denied, may treat the bill expressly accepting or refusing it; two
as dishonored views:
1) Effect: holder may go against
i. Constitutes constructive notice
the partys secondarily liable
the drawer and the indorsers ii. Constitutes dishonor because
iii. Acceptance of an INCOMPLETE bill Sec.137, NIL uses the word "refuses"
(Sec 138, NIL)
1) A bill may be accepted: d. Acceptance, if given, will retroact to date
a) before it has been signed of presentation.
by the drawer, or
b) while otherwise incomplete, SUMCAD v. PROVINCE OF SAMAR (1956)
or
c) when it is overdue, or There was implied acceptance in view of the
d) after it has been dishonored circumstances of the case (furnishing of
by a previous refusal to photostatic copies, presentment for
accept, or by non payment certification) by voluntary assuming the
2) But when a bill payable after obligation of holding so much deposit as would
sight is dishonored by non- be sufficient to cover the amount of the check.
acceptance and drawee
subsequently accepts it, the 3. ACCEPTANCE ON A SEPARATE
holder, in the absence of diff INSTRUMENT
agreement, is entitled to have
bill accepted as of date of the e. Extrinsic acceptance - acceptance is
1st presentment. written on a paper other than the bill
a) Sec. 138, NIL allows itself; doesnt bind the acceptor except
acceptance to be made in favor of a person to whom it is
while the bill is shown and who, on the faith thereof,
incomplete. receives the bill for value. (Sec. 134,
b) The bill may be accepted NIL); acceptance of an existing bill
even after it is overdue or f. Virtual acceptance - unconditional
dishonored, since an promise in writing to accept a bill
instrument DOES NOT before it is drawn; deemed an actual
LOSE ITS NEGOTIABILITY acceptance in favor of every person
by the mere fact that its who, upon the faith thereof, receives
maturity date has passed or the bill for value. (Sec. 135, NIL);
the drawees refusal to acceptance of future bill
accept or pay it. g. In both cases, the acceptance must
d. PERIOD within which to accept clearly and unequivocally identify
i. The drawee is allowed 24 hours the bill to which the acceptance refers.
after presentment to decide WON
he will accept the bill; the 4. KINDS OF ACCEPTANCE: An
acceptance, if given, dates as of acceptance is either (1) general or (2)
the day of presentation. (Sec. 136, qualified.
NIL) a. GENERAL - assents without
ii. Effect of non-acceptance within the qualification to the order of the drawer.
prescribed period (Sec.139, NIL); Includes acceptance
1) Where bill is duly presented to pay at a particular place; unless
and is not accepted within expressly states that bill is to be paid
prescribed time, the person there only and not elsewhere. (Sec.
presenting it must treat the bill 140, NIL)
as dishonored by non- b. QUALIFIED - in express terms varies
acceptance or he loses right of the effect of the bill as drawn. (Sec.
recourse against the drawer 139, NIL)
and indorsers. (Sec. 150, NIL) i. Conditional; payment by the
acceptor dependent on the
2. CONSTRUCTIVE ACCEPTANCE: occurs in fulfillment of a condition therein
the following circumstances stated;
ii. Partial; to pay part only of the
a. SEC 137, NIL: Where the drawee amount for which the bill is drawn;
iii. Local; to pay only at a particular
i. destroys the bill, or
place;
ii. refuses within 24hrs or such other iv. Qualified as to time;
period as the holder may allow, to v. The acceptance of some, one or
return the bill accepted or non- more of the drawees but not of all.
accepted to the holder (Sec. 141, NIL)
1) The holder may refuse to take
b. Under the clearing house rules, the
a qualified acceptance; may
drawee banks failure to return within the
treat the bill as dishonored by
prescribed time will be deemed payment or
non-acceptance.
acceptance of the check.
2) Where a qualified acceptance is
c. If there is not demand for the return of taken, the drawer and indorsers
the bill and the drawee keeps it until after are discharged from liability
the expiration of said period without on the bill unless they have
authorized the holder to take
a qualified acceptance, or
subsequently assent thereto.
Demand drafts have not been presented either
3) When the drawer or an indorser
for acceptance or for payment, thus the bank never
receives notice of a qualified
had any chance of accepting or rejecting them; as
acceptance, he must, within a
such, these cannot be subject of escheat.
reasonable time, express his
dissent to the holder or he will Cashier's check is the substantial equivalent of a
be deemed to have assented certified check and is thus subject to escheat.
thereto. (Sec. 142, NIL) Telegraphic transfers are likewise subject to
c. TRADE - a draft or bill of exchange escheat because upon making payment complete
with a definite maturity, drawn by a the transaction insofar as he is concerned, though
seller on a buyer for the purchase price insofar as the remitting bank is concerned, the
of goods, bearing across its face the contract is executory until the credit is established.
acceptance of the buyer; always states
upon its face the transaction from
which it arose. PAL V. CA (1990)
d. BANKER'S acceptance - a negotiable
time draft or bill of exchange drawn on
and accepted by a commercial bank. A check, whether a manager's check or ordinary
check, and an offer of a check in payment of a debt
2.5. CHECKS : acceptance and certification is not a valid tender of payment and may be
1. Definition: A check is an instrument in the refused receipt by the obligee or creditor.
form and nature of a BE, but an unlike an The issuance of the check to a person authorized to
ordinary bill, always payable on demand and receive it operates to release the judgment debtor
always drawn on a bank. from any further obligations on the judgment.
2. Kinds:
a. Cashier's or manager's - drawn by a
bank on itself and its issuance has the
effect of acceptance; since the drawer and
drawee are the same, the holder may treat INTERNATIONAL CORPORATE BANK v GUECO
it is either a BE or PN. (2001)
b. Memorandum check - where the word
"memorandum" or "memo" is written A managers check is one drawn by the banks
across its face, signifying that the drawer manager upon the bank itself. It is similar to a
will pay the holder absolutely, without need cashiers check both as to effect and use. A
of presentment. cashiers check is a check of the banks cashier on
c. Traveler's check - upon which the his own or another check. In effect, it is a bill of
holder's signature must appear twice -- exchange drawn by the cashier of a bank upon the
first when it is issued, and again when it is bank itself, and accepted in advance by the act of
cashed. its issuance. It is really the banks own check and
d. Crossed when the name of a may be treated as a promissory note with the bank
particular banker or a company is written as a maker. The check becomes the primary
between the parallel lines drawn. obligation of the bank which issues it and
constitutes its written promise to pay upon
STATE INVESTMENT HOUSE V. IAC demand. The mere issuance of it is considered
an acceptance thereof. If treated as promissory
Crossed check should put the payee on inquiry to note, the drawer would be the maker and in which
ascertain the holders title to the check or the case the holder need not prove presentment for
nature of his possession. Failing this, the payee is payment or present the bill to the drawee for
declared guilty of gross negligence to the effect acceptance
that the holder of the check is not a holder in good
faith. Effects of a crossed check: EPCIB v ONG (2006)
(a) the check may not be encashed but only
deposited in the bank; A managers check is an order of the bank to pay,
(b) the check may be negotiated only once to drawn upon itself, committing in effect its total
one who has an account with the bank; and resources, integrity and honor behind its issuance.
(c) the act serves as a warning to the holder By its peculiar character and general use in
that the check has been issued for a commerce, a managers check is regarded
definite purpose so that he must inquire if substantially to be as good as the money it
he has received the check pursuant to that represents.
purpose, otherwise, he is not a HDC.
3. Clearing
BATAAN CIGAR & CIGARETTE FACTORY, INC. a. Clearing - check collection process
v. CA b. Clearing house - where
representatives of different banks meet
The negotiability of a check is not affected by its every afternoon of every business day to
being crossed, whether specially or generally. It receive the envelopes containing checks
may legally be negotiated as long as the one who drawn against the bank he represents for
encashes the check with the drawee bank is examination and clearance.
another bank, or if it is especially crossed, by the
bank mentioned between the parallel lines. 4. Certification
a.Definition
RP v. PNB (1961)
i. an agreement by which a bank the rule enunciated under Section 639 of the
promises to pay the check at any Central Bank Act to the effect that a check which
time it is presented for payment has been cleared and credited to the account of the
ii. When check certified by bank on creditor shall be equivalent to a delivery to the
which it is drawn, equivalent to creditor in cash in an amount equal to the amount
acceptance credited to his account shall apply in this case x x
b. Requisites for a Valid Certification x.
i. Must be in writing
ii. Made on the check or another
instrument 5. Surrender of Check
iii. Check must be payable a. The surrender of the check by the
1) Checks cannot be certified holder to the drawee bank upon its
before payable payment is not negotiation. By
c. Liability paying the check, the drawee bank
i. Bank which certifies extinguishes it as a negotiable
1) Becomes liable as an instrument and converts it into a mere
acceptor voucher.
2) REFUSAL to certify a check b. Distinction between surrender of check
doesnt constitute dishonor; the upon payment thereof and negotiation
holder at that stage cannot exercise i. The delivery of the check by the
his right of recourse against the holder to the drawee bank upon its
drawer and the indorsers payment is not negotiation. By
ii. If procurement by: paying the check, the drawee bank
1)Holder extinguishes it as a negotiable
a) The bank becomes the instrument and converts it into a
solidary debtor, and mere voucher.
b) The drawer and all ii. In the case of a deposit of a check
indorsers discharged from by the holder thereof in a bank
all liability (versus ordinary other than the drawee bank, the
bill of exchange not signature at the back of the check
discharged) would constitute an indorsement,
2) Drawer unless otherwise indicated. The
a) secondary parties not holder in negotiating the check to
released the depositary bank, which in turn
will collect on the check from the
ROMAN CATHOLIC BISHOP V. IAC (1990) drawee bank, through the
clearinghouse.
therefore collection is more difficult than when the clearing with the drawee bank, contrary to normal
drawee bank is a local one even though the check banking practice. HELD: Drawer (embassy) not
in question is a managers check liable. BA is guilty of negligence in giving B special
treatment as a privileged client, in disregard of
elementary principles of prudence that should
attend banking transactions. Hence, it should
3. Secondary Parties suffer the loss. BA could not have been a HDC.
3.1. Liability of DRAWER NOTE: The Camposes note that the drawer
1. Sec. 61, NIL was not held liable because the decision was
a. Admits existence of payee and his then based on 23 on forgery instead of 124 on
capacity to endorse material alteration. If BA had been a HDC,
b. Engages that on due presentment the Embassy could have been held liable for
instrument will be accepted, or paid, or the original amount of the checks
both, according to its tenor
c. That if it be dishonored + necessary 3. CRIMINAL LIABILITY FOR BOUNCING
proceedings on dishonor duly taken, CHECK
will pay the amount thereof to the a. Under BP 22
holder or to a subsequent indorser who
may be compelled to pay it PEOPLE v NITAFAN(1992)
2. Limiting Liability: drawer may insert in the
instrument an express stipulation Lim issued a memorandum check which was
negativing / limiting his own liability to subsequently dishonored for insufficiency of funds.
holder A memorandum check has the same effect as an
ordinary check and within the ambit of BP 22.
PNB v. PICORNELL (1922) What the law punishes is the issuance itself of a
bouncing check & not the purpose for which it was
Picornell obtained money from PNB Cebu to issued nor the terms & conditions relating to its
purchase tobacco to be shipped to Manila. Picornell issuance.
then drew a bill of exchange drawn against his
principal, Hyndman, Tavera & Ventura (HTV), in b. Estafa under the RPC
favor of PNB or his order. Upon presentation of the
bill, HTV accepted it. However, HTV subsequently PACHECO v CA (1999)
refused to pay the bill because some of the tobacco
shipped were damaged. The essential elements in order to sustain a
HELD: conviction under the above paragraph are:
A. Liability of Acceptor (HTV) 1. that the offender postdated or issued a check in
PNB is a holder in due course and the payment of an obligation contracted at the time the
partial want of consideration does not exist check was issued;
with respect to the bank who paid full value 2. that such postdating or issuing a check was
for the bill of exchange. done when the offender had no funds in the bank,
The want of consideration between the or his funds deposited therein were not sufficient to
acceptor and drawer does not affect the cover the amount of the check;
rights of the payee who is a remote party. 3. deceit or damage to the payee thereof.
The payee or holder gives value to the
drawer, and if he is ignorant of the equities PEOPLE v REYES (2005)
between the drawer and acceptor, his is in
the position of a bona fide indorsee. There is no estafa through bouncing checks when it
B. Liability of Drawer (Picornell) is shown that private complainant knew that the
As drawer of the bill, he warranted that it drawer did not have sufficient funds in the bank at
would be accepted upon proper the time the check was issued to him. Such
presentment & paid in due course. As it knowledge negates the element of deceit and
was not paid, he became liable to the constitutes a defense in estafa through bouncing
payment of its value to PNB. checks.
The fact that Picornell was an agent of HTV
in the purchase of the tobacco does not
necessarily make him an agent of HTV in 3.2. Liability of INDORSERS:
drawing the bill of exchange. These are 2
1. Indorser
different contracts. He cannot claim
exemption from liability by invoking the a. Sec. 63, NIL: A person placing his
existence of agency. signature upon an instrument other than as
Drawer received notice of protest in a maker, drawer, or acceptor unless he
fulfillment of the condition set by law for indicates by appropriate words his intention
his liability to arise. to be bound in some other capacity
Drawer's liability is only secondary as the
liability of the acceptor is primary. i SAPIERA vs CA (1999). It is
undisputed that the four (4) checks
BANCO ATLANTICO v AUDITOR GENERAL issued by de Guzman were signed
(1978) by petitioner at the back without
any indication as to how she should
B fraudulently altered checks payable to her drawn be bound thereby and, therefore,
by the Embassy by increasing the amounts. B she is deemed to be an indorser
negotiated these checks by indorsement to BA w/c thereof.
paid the full amount of the checks without first
b. Sec. 67, NIL: A person, who places his After an instrument is dishonored by nonpayment,
signature on an instrument negotiable by indorsers cease to be merely secondarily liable;
delivery, incurs all the liabilities of an they become principal debtors whose liability
indorser. becomes identical to that of the original obligor.
The holder of a negotiable instrument need not
c. Sec 64, NIL: Irregular Indorser
even proceed against the maker before suing the
iWhen a person not otherwise a
indorser.
party to an instrument, places
thereon his signature in blank
before delivery, he is liable as an
3.3. Accomodation Party
indorser, in accordance w/ these
rules: 1. Accomodation Party: one who signed
1) Instrument payable to order of instrument as maker/drawer/acceptor/ indorser
3rd person: liable to payee and w/o receiving value thereof, for the purpose of
to all subsequent parties lending his name to some other person
2) Instrument payable to the
order of maker/drawer, or 2. Liability : Liable on the instrument to HFV
payable to bearer: liable to all even if holder knew he was only an AP
parties subsequent to
maker/drawer MAULINI v. SERRANO (1914)
3) Signs for accommodation of In accommodation indorsement, the indorser
payee, liable to all parties makes the indorsement for the accommodation of
subsequent to payee the maker. Such an indorsement is generally for
2. WARRANTIES: the purpose of better securing the payment of the
a. Every person negotiating an instrument note, i.e. he lends his name to the maker not to
by delivery or by a qualified indorsement the holder. An accommodation note is one which
warrants: (Sec. 65, NIL) the accommodation party has put his name,
without consideration, for the purpose of
ii Instrument genuine, in all respects accommodation some other party who is to use it
what it purports to be and is expected to pay it.
iii He has good title to it Note: Campos disagrees with this ruling, referring
iv All prior parties had capacity to to the case of Goodman v Gaul where an
contract accommodation indorsement may be made for the
v He has no knowledge of any fact accommodation of the payee or holder.
w/c would impair validity of
instrument or render it valueless ANG TIONG v. TING (1968)
vi in case of negotiation by delivery
only, warranty only extends in It is not a valid defense that the accommodation
favor of immediate transferee party did not receive any valuable consideration
b. General or Unqualified Indorser: when he executed the instrument. Nor is it correct
Every person who indorses without to say that the holder for value is not a holder in
qualification, warrants to all subsequent due course merely because at the time he acquired
HDCs: (Sec. 66, NIL) the instrument, he knew that the indorser was only
an accommodation party.
i. instrument genuine, good title,
The fact that the accommodation party stands only
capacity of prior parties
as a surety in relation to the maker is a matter of
ii. instrument is at time of indorsement concern exclusively between accommodation
valid and subsisting indorser & accommodated party. It is immaterial
to the claim of a holder for value. The liability of
iii. eon due presentment, it shall be
the accommodation party remains primary &
accepted or paid, or both, according to
unconditional.
tenor
iv. if it is dishonored, and necessary
proceedings on dishonor be duly taken,
he will pay the amt. To holder, or to
any subsequent indorser who may be SADAYA v. SEVILLA (1967)
compelled to pay it
The solidary accommodation maker who made
3. Order of Liability among Indorsers (Sec. 68, payment has the right of contribution from his co-
NIL): accommodation maker. This right springs from an
a. among themselves: liable prima facie in implied promise between the accommodation
the order they indorse, but proof of another makers to share equally the burdens that may
agreement admissible ensue from their having consented to stamp their
signatures on the promissory note. The following
b. but holder may sue any of the indorsers, are the rules on reimbursement:
regardless of order of indorsement 1. A solidary accommodation maker of a note may
c. joint payees/indorsees deemed to demand from the principal debtor
indorse jointly and severally reimbursement for the amount he paid to the
payee; and
2. A solidary accommodation maker who pays on
TUAZON v RAMOS (2005) the note may directly demand reimbursement
from his co-accommodation maker without first
directing his action against the principal debtor
provided that :
(a) he made the payment by virtue of a behalf of a principal, not liable if he was
judicial demand or duly authorized
(b) the principal debtor is insolvent.
b. WHEN LIABLE:
TRAVEL-ON, INC. v. CA i. mere addition of words describing
him as an agent without disclosing his
Travel-On was entitled to the benefit of the principal
statutory presumption that it was a HDC, that the
ii. Where a broker or agent negotiates
checks were supported by valuable consideration.
an instrument without indorsement, he
The only evidence private respondent offered was
incurs all liabilities in Sec. 65, unless he
his own testimony that he had issued the checks to
discloses name of principal and fact
Travel-On as payee to "accommodate" its General
that hes only acting as agent. (Sec.
Manager; this claim was in fact a claim that the
69, NIL)
checks were merely simulated, that private
respondent did not intend to bind himself thereon.
Only evidence of the clearest and most convincing INSULAR DRUG v. PNB
kind will suffice for that purpose.
The right of an agent to indorse commercial paper
CRISOLOGO-JOSE v. CA. will not be lightly inferred. A salesman with
authority to collect money does not have the
Section 29 of the NIL does not apply to implied authority to indorse checks received in
corporations which are accommodation parties payment. Any person taking checks made payable
because the issue or indorsement of negotiable to a corporation does so at his peril & must abide
paper by a corporation without consideration is by the consequences if the agent who indorses the
ultra vires. Hence, one who has taken the same is without authority.
instrument with knowledge of the accommodation
cannot recover against a corporation - PBC v ARUEGO (1981)
accommodation party EXCEPT if the officer or
agent of the corp. was specifically authorized to Aruego obtained a credit accommodation from PBC.
execute or indorse the paper for the For every printing of the publication, the printer
accommodation of a third person. collected the cost of printing by drawing a draft
against PBC, which will later be sent to Aruego for
Corporate officers, such as the president and vice- acceptance. PBC seeks recovery on these drafts.
president, have no power to execute for mere Aruego invokes the defense that he signed the
accommodation a NI of the corporation for their document in his capacity as President of the Phil.
individual debts or transactions in which the Education Foundation & only as an accommodation
corporation has no legitimate concern. It is the party.
signatories thereof that shall be personally liable HELD: Aruego is personally liable because nowhere
therefor. in the draft did he disclose that he was signing as a
representative of the Phil Education Foundation.
Neither did he disclose his principal.
AGRO CONGLOMERATES v CA (2000)
As an accommodation party, Aruego is liable on the
instrument to a holder for value, notwithstanding
An accommodation party is a person who has
such holder, at the time of the taking of the
signed the instrument as maker, acceptor, or
instrument knew him to be only an accommodation
indorser, without receiving value therefor, and for
party. Aruego signed as a drawee/acceptor. As
the purpose of lending his name to some other
drawee, he is primarily liable for the drafts.
person and is liable on the instrument to a holder
for value, notwithstanding such holder at the time
of taking the instrument knew (the signatory) to be
an accommodation party. He has the right, after
4. Presentment
paying the holder, to obtain reimbursement from
the party accommodated, since the relation
between them has in effect become one of
principal and surety, the accommodation party 4.1. Definition:
being the surety.
1. the production of a BE to the drawee for his
ACCEPTANCE, or to the drawer or acceptor
for PAYMENT; or
3.4. Liability of an AGENT
2. the production of a PN to the party liable
1. AGENCY: for payment
5.3. Form and Contents (Sec 96) ii. Convenient hour: depends on the
usual hours of opening of business
1. Form of Notice: houses and the post-office
a. may either be in writing, or oral iii. If given otherwise - within the time
that notice would have been received in
b. Campos: must be in a language that will
due course of mail, if it had been
inform the addressed party that the
deposited in the post office within the
instrument has been duly presented
time specified above
2. Contents must contain any terms which
sufficiently
c. Delay (Sec. 113, NIL)
a.identify the instrument, and
i. Excused: when the delay is caused by
b. indicate that it has been dishonored by
circumstances beyond the control of
non-acceptance or non-payment;
the holder and not imputable to his
3.Mode of delivery default, misconduct, or negligence
a. Personal service ii. But, when the cause of delay ceases
to operate, notice must be given with
i. There must be actual personal
reasonable diligence.
service, or
ii. An ordinary intelligent and diligent
effort to make personal service 4. Sender deemed to have given due notice
(Sec. 105, NIL)
b. Through the mails
a. Where notice of dishonor is duly
c. Campos: Through the telephone
addressed and deposited in the post office,
i Party to be notified must be fully
identified as the party at the i. deposit in post office when
receiving end of the line deposited in any branch post office or
4.The ff. notice still sufficient: (Sec. 95, NIL) in any letter box under the control of
the post-office department. (Sec. 106,
a. a written notice, not signed
NIL)
b. insufficient written notice, supplemented
b. notwithstanding any miscarriage in the
and validated by verbal communication
mails
c. instrument suffering from misdescription
UNLESS the party to whom the notice is
given is in fact misled thereby. 4. Place where notice must be sent (Sec.
108, NIL)
a. to the address, if any, added by the
5.4.Time and Place party to his signature; if address not
given:
i to the post-office nearest to his 1. when given by/on behalf of holder: inures to
place of residence or where he is benefit of (Sec. 92, NIL)
accustomed to receive his letters;
a. all subsequent holders and
or
ii If he lives in one place and has his b. all prior parties who have a right of
place of business in another, to recourse vs. the party to whom its given
either place; or
iii If he is sojourning in another place, 2. where notice given by/on behalf of a party
to the place where he is so entitled to give notice: inures for benefit (Sec.
sojourning. 93, NIL)
b. Notice sent to place not in accord with a. holder
NIL, still SUFFICIENT
i Where the notice is actually b. all parties subsequent to party to whom
received by the party within the notice given
time specified in this Act,
5.6. To whom notice MAY be given i before the time of giving notice has
arrived or
1. If given by an agent ii after the omission to give due
a. to his principal, in case of an notice; may be expressed or
instrument dishonored in the hands of implied. (Sec. 109, NIL)
an agent (Sec. 94, NIL), or b. Parties affected by waiver
b. to the parties liable thereon
c. ex: collecting bank i. Dependent upon where the waiver is
2. IN GENERAL (Sec. 97) written
a. Party himself ii. Where the waiver is embodied in the
b. Or his agent in that behalf instrument itself - binding upon all
3. If party is dead and death known to the parties;
party giving notice (Sec. 98, NIL)
a. MUST be given to a personal iii. where written above the signature of
representative, if there be one, and if an indorser - binds him only. (Sec.
with reasonable diligence, he can be 110, NIL)
found;
b. If no personal representative MAY be
sent to the last residence or last place 5.9. When Notice Not Necessary
of business of the deceased.
1.When not necessary to charge drawer
4. To partners : to any one partner, even
(Sec. 114, NIL)
though there has been a dissolution. (Sec.
99, NIL) a. drawer/drawee same person
5. To joint parties(Sec. 100, NIL)
a. to each of the party b. drawee fictitious, incapacitated
b. unless one of them has authority to c. drawer is person to whom instrument is
receive such notice for the others. presented for payment
6. to bankrupt (Sec. 101, NIL)
a. to the party himself or d. drawer has no right to expect/require
b. to his trustee or assignee that drawee/acceptor will honor instrument
e. drawer countermanded payment
5.7. In whose favor notice operates
STATE INVESTMENT HOUSE v CA (1993) 2. EXCEPT bill drawn payable at the place of
business or residence of person other than
Moulic issued 2 checks to Victoriano as security for the drawee has been dishonored by
pieces of jewelry to be sold on commission. nonacceptance,
Victoriano negotiated these checks to State a. it must be protested for non-payment
Investment. As Moulic failed to sell the jewelry, at the place where it is expressed to be
she returned them to Victoriano. However, she payable, and
failed to retrieve her checks. Moulic withdrew her b. no further presentment for payment to,
funds from the drawee bank. Upon presentment, or demand on, the drawee is
the checks were dishonored. necessary. (Sec. 156, NIL)
HELD: State Investment is a holder in due course H. Protest for better security against the
& is not subject to the personal defense of lack of drawer and indorsers where the acceptor has
consideration. been adjudged a bankrupt or an insolvent or
There is no need to serve the drawer a notice has made an assignment for the benefit of
of dishonor because she was responsible for creditors before the bill matures (Sec. 158,
the dishonor of her checks. After withdrawing NIL)
her funds, she could not have expected her checks I. Delay excused
to be honored. 1. Requisites:
a. when caused by circumstances beyond
2. Where not necessary to charge indorser the control of the holder, and
(Sec. 115, NIL) b. not imputable to his default,
misconduct, or negligence.
a. drawee fictitious, incapacitated, and
2. When the cause of delay ceases to operate,
indorser aware of the fact at time of
the bill must be noted or protested with
indorsement
reasonable diligence.;
b. indorser is person to whom instrument J. When protest dispensed with - by any
presented for payment circumstances which would dispense with
notice of dishonor. (Sec. 159, NIL)
c. instrument made/accepted for his K. Waiver of protest: deemed to be a waiver not
accommodation only of a formal protest but also of
presentment and notice of dishonor. (Sec.
111, NIL)
7. Protest
TAN LEONCO v GO INQUI(1907)
A. Definition: testimony of some proper person In exchange for the abaca from Tan Leonco's
that the regular legal steps to fix the liability of plantations, Go Inqui drew a bill of exchange
drawer and indorsers have been taken against Lim Uyco. Upon presentment of the
B. When necessary: draft, it was refused payment due to a stop
1. In case of a FOREIGN BILL appearing on its order from the drawer. The bill was not
face to be such; protested.
2. protest for non-acceptance if dishonored by HELD: The action is not brought upon the bill
nonacceptance & of exchange which was used only as evidence
3. protest for nonpayment if not previously of the indebtedness. Under these conditions,
dishonored by nonpayment. protest & notice of nonpayment are
4. Effect of failure to protest: the drawer and unnecessary in order to render the drawer
indorsers are discharged. (Sec. 152, NIL) liable.
C. Form
1. annexed to the bill or must contain a copy NOTE: The ruling of the Court on protest is
thereof, and merely obiter dictum.
2. must be under the hand and seal of the
notary making it;
D. Contents 8. Acceptance or Payment for Honor
1. The time and place of presentment;
2. The fact that presentment was made and
the manner thereof; A. Acceptance
3. The cause or reason for protesting the bill; 1. Practice of accepting for honor is obsolete
4. The demand made and the answer given, if 2. When bill may be accepted for honor.
any, or the fact that the drawee or acceptor When a BE has been (1) protested for
could not be found. (Sec. 153, NIL). dishonor by non-acceptance or protested
E. By whom for better security and (2) is not overdue
1. A notary public; or any person not being a party already liable
2. any respectable resident of the place where may, with the CONSENT of the holder,
the bill is dishonored, in the presence of intervene and accept the bill supra protest
two or more credible witnesses. (Sec. 154, for the honor of any party liable thereon or
NIL) for the honor of the person for whose
F. Time account the bill is drawn.
1. on the day of its dishonor unless delay is 3. The acceptance for honor may be for part
excused; only of the sum for which the bill is drawn;
2. when duly noted, the protest may be 4. where there has been an acceptance for
subsequently extended as of the date of honor for one party, there may be a further
the noting. (Sec. 155, NIL); acceptance by a different person for the
G. Place honor of another party. (Sec. 161, NIL)
1. at the place where it is dishonored,
5. Referee in case of need person whose E. Acceptance - may be written on any part
name is inserted by the drawer of a bill and and it must be written on one part only. If
any indorser to whom the holder may the drawee accepts more than one part and
resort in case bill is dishonored by non- such accepted parts negotiated to different
acceptance or non-payment; option of the holders in due course, he is liable on every
holder to resort to the referee (Sec. 131, such part as if it were a separate bill. (Sec.
NIL) 181, NIL)
B. PAYMENT FOR HONOR - any person may F. Payment - When the acceptor of a bill
intervene and pay bill protested for non- drawn in a set pays it without requiring the
payment supra protest (Sec. 171, NIL) part bearing his acceptance to be delivered
up to him, and the part at maturity is
outstanding in the hands of a holder in due
6.3 INSTRUMENTS PAYABLE AT BANK
course, he is liable to the holder thereon.
(Sec. 182, NIL)
Sec 87: Where the instrument is made payable at a G. Effect of discharging one of a set.
bank, it is equivalent to an order to the bank ton Except as herein otherwise provided, the
pay the same for the account of the principal whole bill is discharged. (Sec. 183, NIL)
debtor therein
iii Where the drawee bank charges 2. where instrument is paid by party
the check to the account, indicating secondarily liable, its not discharged, but
intention to honor the check a. the party so paying it is remitted to his
2. intentional cancellation by holder former rights as regard to all prior
a. if unintentional or under mistake or parties
without authority of holder, b. and he may strike out his own and all
inoperative; subsequent indorsements, and again
b. where instrument or signature appears negotiate instrument, except
to have been cancelled, burden of proof i where its payable to order of 3rd
on party which alleges it was party and has been paid by drawer
unintentional, etc. (Sec. 123, NIL) ii where its made/accepted for
3. any other act which discharges a simple accommodation and has been paid
contract for payment of money by party accommodated
a. ex. issuance of a renewal note
novation Chapter VIII
b. Refer to Art 1231 of the Civil Code
4. principal debtor becomes holder of OTHER FORMS OF COMMERCIAL
instrument at or after maturity in his own PAPER
right
5. renunciation of holder: (Sec. 122, NIL) 1. In General
a. holder may expressly renounce his
rights vs. any party to the instrument,
before or after its maturity 1.1. Commercial papers
b. absolute and unconditional renunciation 1. also Negotiable instruments;
of his rights against PRINCIPAL 2. merely special forms of either PNs or BEs;
DEBTOR made at or after maturity 3. also governed by the NIL
discharges the instrument
c. renunciation does not affect rights of 1.2. Quasi-negotiable includes commercial paper
HDC w/o notice. which though not governed by the NIL, have
d. Renunciation must be in writing unless certain attributes of negotiability.
instrument delivered up to person
primarily liable thereon 2. Bonds and Debentures
material alteration review Sec. 125, NIL: 2.1. Bonds
what constitutes material alteration (Sec. 124,
NIL: material alteration w/o assent of all 1. evidences of indebtedness, in the nature of
parties liable avoids instrument except as a PNs
against party to alteration and subsequent 2. usually accompanied by a mortgage of the
indorsers) property of the issuer
3. issued by the government (municipal &
other public corporations) & private
3. OF SECONDARY PARTIES (Sec. corporations;
120, NIL)11 a. though not to mature for a long time,
assure some regular income to
bondholders in the form of interest*,
A. by discharge of instrument
usually payable annually
B. intentional cancellation of signature by holder
b. bonds and interest coupons (evidences
C. discharge of prior party
interest obligations)*
D. valid tender of payment by prior party
E. release of principal debtor, unless holders right may be negotiable in form,
of recourse vs. 2ndary party reserved therefore governed by NIL (Sec
F. any agreement binding upon holder to extend 65);
time of payment, or to postpone holders right both are actually promissory
to enforce instrument, UNLESS notes
1. made with assent of party secondarily c. they run for long periods of time, and
liable, or are often sold to the public in general
2. right of recourse reserved. d. funds generated by such bonds are
G. Failure to make due presentment (Secs. 70, used to finance corporate projects and
144, NIL) public works;
H. failure to give notice of dishonor e. there is no warranty on the part of such
I. certification of check at instance of holder indorser or negotiator that prior parties
J. reacquisition by prior party had capacity to contract. The qualified
1. where instrument negotiated back to a indorser & negotiator by delivery of a
prior party, such party may reissue and bond do not warrant therefore that the
further negotiate, but not entitled to corporation which issued the bonds has
enforce payment vs. any intervening party any judicial capacity to act. A general
to whom he was personally liable indorser thereof however would be
liable for such want of capacity.
11
Suggested Mnemonics: CuPID CRRAFFT:
intentional Cancellation, Prior Party and Instrument
Discharge, Certification, Release, Reacquisition, any
Agreement, Failure to make due presentment,
Failure to give notice of dishonor, valid Tender of
payment.
The company and its officers cannot shift the A. or share certificate is the customary and
burden of loss to the bank because of the terms of convenient evidence of the holders interest in
their Commercial Letter of Credit Agreement with the corporation which issues it.
the bank provides that latter shall not be B. not a NI, but is included in the term securities
responsible for the any difference in character or bec does not contain any promise or order to
condition of the property. Furthermore, the bank pay money;
was able to prove the existence of a custom in C. described as Quasi-Negotiable bec
international banking and financing circles negating oftentimes, by application of the principles of
any duty of the bank to verify whether what has estoppel, and to effectuate the ends of justice
been described in letters of credits or drafts or and the intention of the parties, the courts
shipping documents actually tallies with what was decree a better title to the transferee than
loaded aboard ship. Banks, in providing financing actually existed in his transferor, and is the
in international business transactions do not deal same as would be reached if the certificate
with the property to be exported or shipped to the were negotiable.
importer, but deal only with documents. D. When the shareholder signs the back of
certificates of stock without filling in the blanks
LEE v CA (2002) (for the name of the transferee and attorney-
in-fact) and the certificate is delivered to
Modern letters of credit are usually not made another, the latter appears to be the owner
between natural persons. They involve bank to thereof. A bona fide purchaser of value without
bank transactions. Historically, the letter of credit notice, will be protected in his acquisition,
was developed to facilitate the sale of goods although such third person has diverted the
between, distant and unfamiliar buyers and sellers. certificate from the purpose for which he was
It was an arrangement under which a bank, whose entrusted therewith. (Principle of Estoppel)
credit was acceptable to the seller, would at the E. The same rule is applicable if the certificate is
instance of the buyer agree to pay drafts drawn on in bearer form.
it by the seller, provided that certain documents F. The rule is applicable where the certificate is
are presented such as bills of lading accompanied lost or stolen while signed in blank. Even a
the corresponding drafts. Expansion in the use of purchaser in good faith cannot acquire title as
letters of credit was a natural development in against the true owner. (?)
commercial banking. Parties to a commercial letter G. At common law, stock certificates are given the
of credit include: attributes of negotiability only where the owner
(a) the buyer or the importer, thereof has entrusted the wrongdoer with the
(b) the seller, also referred to as possession of such certificate and clothed him
beneficiary, with apparent ownership thereof.
(c) the opening bank which is usually the
buyers bank which actually issues the SANTAMARIA v HONGKONG & SHANGHAI
letter of credit, BANK (1951)
(d) the notifying bank which is the
correspondent bank of the opening bank Plaintiff, in failing to take the necessary precaution
through which it advises the beneficiary of upon delivering the certificate of stock to her
the letter of credit, broker, was chargeable with negligence in the
(e) negotiating bank which is usually any transaction which resulted to her own prejudice,
bank in the city of the beneficiary. The and as such, she is estopped from asserting title to
services of the notifying bank must always it as against the defendant bank.
be utilized if the letter of credit is to be A certificate of stock, indorsed in blank, is deemed
advised to the beneficiary through cable, quasi-negotiable, and as such the transferee
(f) the paying bank which buys or discounts thereof is justified in believing that it belongs to the
the drafts contemplated by the letter of holder and transferor.
credit, if such draft is to be drawn on the
opening bank or on another designated DE LOS SANTOS, McGRATH (1955)
bank not in the city of the beneficiary. As a
rule, whenever the facilities of the opening Although a stock certificate is sometimes regarded
bank are used, the beneficiary is supposed as quasi-negotiable, in the sense that it may be
to present his drafts to the notifying bank transferred by endorsement, coupled with delivery
for negotiation and it is well settled that the instrument is non-
(g) the confirming bank which, upon the negotiable, because the holder thereof takes it
request of the beneficiary, confirms the without prejudice to such rights or defense as the
letter of credit issued by the opening bank. registered owner or credit may have under the law,
except in so far as such rights or defenses are
TRANSFIELD VS. LUZON HYDRO (2004) subject tot eh limitations imposed by the principles
governing estoppel.
Can the beneficiary invoke the independence
principle? Yes. CAPCO v. MACASAET (1990)
To say that the independence principle may only be
invoked by the issuing banks would render Certificates of stocks are considered as quasi-
nugatory the purpose for which the letters of credit negotiable instruments. When the owner or
are used in commercial transactions. As it is, the shareholder signs the printed form of sale or
independence doctrine works to the benefit of both assignment at the back of every stock certificates
the issuing bank and the beneficiary. without filling in the blanks provided for the name
of the transferee as well as for the name of the
Certificate of Stock attorney-in-fact, the said owner or shareholder, in
effect, confers on another all the indicia of
ownership of the said stock certificates.
The promise of the insurer is to make good interest not the property that is
only the loss of the insured being reimbursed
Any contract that contemplates a possible Life insurance GENERALLY
gain to the insured by the happening of any ASSIGNABLE as they are in the
event upon which the liability of the insurer nature of property and do not
becomes fixed is contrary to the nature of represent a personal agreement
insurance between insured and insurer
No person may secure insurance upon
property in which he has no interest. 3.9. A contract of adhesion
If the insured has no insurable interest, the Policy is presented to the insured already in
contract is void and unenforceable as being its printed form
contrary to public policy because it affords Take it or leave it
a temptation to the insured to wish or bring
about the happening of the loss 3.10. Of highest degree of good faith
Each party is enjoined by law to deal with
3.7. An investment (life insurance) each other in good faith
Measure of economic security for the Disclosure or the duty to disclose
insured during life, and beneficiary after Violation of the duty gives the other party
death the right to rescind the contract
Financial assistance during financial crisis
Liability of insurer is face value of the policy 3.11. It is property in legal contemplation
and not the earning capacity of the insured
at the time of death
4. Requisites of a valid contract of
3.8. A personal contract insurance
Each party having in view the credit,
character and conduct of another A subject matter in which the insurer has
As a rule, the insured cannot assign, before an insurable interest
the happening of the loss, his rights under Event or peril insured against which may
a property policy without the consent of the be any (future) contingent or unknown
insurer. The obligation of the insurer to event, past or future (Sec. 3), and a
pay does not attach or run with the duration for the risk thereof
property whether it be real property or A promise to pay or indemnify in a fixed
personal or ascertainable amount
If a person whose property is A consideration for the promise known as
insured sells it to another, the
a premium
buyer cannot be his successor in
A meeting of the minds of the parties
the contract of insurance unless, of
upon all of the foregoing essentials
course, the sale is with the consent
The parties must be competent to enter
of the insurer or unless by express
into the contract
stipulation of the parties, the
Under Sec. 226, no policy of insurance
contract is made to run with the
property of the transferee shall be issued or delivered within the
Where the insurance is on account Philippines unless in the form previously
of the owner or for whom it may approved by the Insurance Commissioner
concern or where the loss is The purpose must not be contrary to law
payable to bearer, the subsequent or public policy
transferees or owners become by
the terms of the contract, the real
parties to the contract of insurance.
All insurance contracts share a common
trait of personal-ness
Personal insurance (includes life,
health, accident, and disability
insurance) applies only to a
particular individual, and it is not
possible, for example, for the
insured unilaterally declaring that
his health insurance policy shall
now be deemed to cover the health
of someone else
Liability insurance each person
purchases coverage for his own (or
a group of related persons)
potential liability to others. The
insurer prices the coverage
depending on the characteristics
and traits of the particular insured
Property insurance - the insurance
is on the insureds interest in the
property, not on the property itself.
It is the damage to the personal
5. Contracts for Contingent Services; Pre- Court upheld the Attorney Generals contention
need Plans and Similar Arrangements and issued an injunction holding that the
contract had all the elements of an insurance
5.1. Contracts for Contingent Personal contract. Whether this clause in the contract is
Services ancillary to defendants chief business or is
It does not necessarily follow that a mainly for advertising ends was held irrelevant
contract containing the abovementioned in view of the prohibition against the making of
elements would be an insurance contact insurance contracts by companies not
The primary purpose of the parties making authorized by law.
the contract may negate the existence of It would seem, however, that the purpose of
an insurance contract the stipulation, taken with its effects in case of
A law firm which enters into contracts the death of the buyer, did not warrant a
with clients in consideration of holding that the furniture company should first
periodical payments, where it promises secure a license to engage in the insurance
to represent such clients in all suits for business. Although all the elements of an
or against them, is not engaged in an insurance contract may seem to be present,
insurance business. Its contracts are yet the furniture buyer and/or his heirs did not,
simply for the purpose of rendering under the circumstances, need the protection
personal services which the law aims to give the insuring public
A contract by which a consideration of by the requirement of a prior license.
a stipulated amount, agrees at its own
expense to defend a physician against First of all, when the buyer purchased the
all suits for damages for malpractice is furniture, he must have seen and examined it
one of insurance, and the corporation and must have believed that it was worth the
will be deemed as engaged in the amount he agreed to pay for it. Secondly, the
business of insurance furniture was delivered to him at the time of
Unlike the lawyers retainer contract, the contract and used by him thereafter. Upon
the essential purpose of such a contract his death, his heirs continued enjoying the use
is not to render personal services, but of the furniture. Therefore, the buyer and/or
to indemnify against loss or damage his heirs stood to lose nothing by the
resulting from the defense of actions questioned stipulation, and if at all, stood to
for malpractice. gain by it.
A corporation which enters into
contracts with car owners and agrees
to engage and pay for the services of a 5.3. Pre-need Plans
lawyer to handle any damage case
arising from collision of their cars, is
engaged in the insurance business and
Philamcare Health Systems vs. CA
must therefore comply with the laws
relative to the transaction of insurance
business and should be licensed as Ratio: Section 3 of the Insurance Code states that
such before it can lawfully transact any contingent or unknown event, whether past or
such business future, which may damnify a person having an
Such contracts do not provide for the insurable interest against him, may be insured
payment of any sum directly to the against. Every person has an insurable interest in
contractee, but it does provide for the the life and health of himself. Section 10 provides:
relief of the contractee from the Every person has an insurable interest in the life
expenses of employing an attorney and health (1) for himself, of his spouse and of his
It would be immaterial that the children; (2) of any person on whom he depends
contract states on its face that it is not wholly or in part for education or support, or in
a contract of insurance, for the nature whom he has a pecuniary interest; (3) of any
of the contract cannot be changed by person under a legal obligation to him for the
such a declaration payment of the money, respecting property or
service, of which death or illness might delay or
5.2. Contracts with Contingent Incidental prevent the performance; and (4) of any person
Benefit upon whose life any estate or interest vested in
In the case of Attorney General ex rel Monk vs. him depends. In the case at bar, the insurable
C.E. Osgood Co., the defendant company was interest of respondents husband in obtaining the
engaged in the business of selling household health care agreement was on his own health. The
furniture on the installment plan. Under the health care agreement was in the nature of non-life
contracts with its customers, although delivery insurance, which is primarily a contract of
would be made at the time of the contract, title indemnity. Once the member incurs hospital,
to the furniture would not pass until all medical or any other expense arising from
payments have been completed. Said sickness, injury or other stipulated contingent, the
contracts also provided that should the buyer health care provider must pay for the same to the
die before full payment of the agreed price, the extent agreed upon under the contracts.
unpaid balance would be remitted to the extent
of $500. 6. Classification under the Code
6.1. Life - defined as a mutual agreement by
The Insurance Commissioner, through the Atty. which a party agrees to pay a given sum on the
Gen., claiming that this last provision made it happening of a particular event contingent on the
an insurance contract brought suit to restrain duration of human life, in consideration of the
the defendant from pursuing its business payment of a smaller sum immediately, or in
without first securing the proper license. The periodical payments by the other party
c) Industrial life
a) Marine
Sec. 229. The term "industrial life insurance" Sec. 99. Marine Insurance includes:
as used in this Code shall mean that form of life (1) Insurance against loss of or damage to:
insurance under which the premiums are payable (a) Vessels, craft, aircraft, vehicles, goods,
either monthly or oftener, if the face amount of freights, cargoes, merchandise, effects,
insurance provided in any policy is not more than disbursements, profits, moneys, securities, choses
five hundred times that of the current statutory in action, evidences of debts, valuable papers,
minimum daily wage in the City of Manila, and if bottomry, and respondentia interests and all other
the words "industrial policy" are printed upon the kinds of property and interests therein, in respect
policy as part of the descriptive matter. to, appertaining to or in connection with any and all
An industrial life policy shall not lapse for non- risks or perils of navigation, transit or
payment of premium if such non-payment was due transportation, or while being assembled, packed,
to the failure of the company to send its crated, baled, compressed or similarly prepared for
representative or agent to the insured at the shipment or while awaiting shipment, or during any
residence of the insured or at some other place delays, storage, transhipment, or reshipment
indicated by him for the purpose of collecting such incident thereto, including war risks, marine
premium; Provided, That the provisions of this builder's risks, and all personal property floater
paragraph shall not apply when the premium on risks;
the policy remains unpaid for a period of three (b) Person or property in connection with or
months or twelve weeks after the grace period has appertaining to a marine, inland marine, transit or
expired. transportation insurance, including liability for loss
of or damage arising out of or in connection with
the construction, repair, operation, maintenance or
Form of life insurance under which the
use of the subject matter of such insurance (but
premiums are payable either monthly or not including life insurance or surety bonds nor
oftener insurance against loss by reason of bodily injury to
Face amount of insurance provided in any any person arising out of ownership, maintenance,
policy is not more than five hundred times or use of automobiles);
that of the current statutory minimum daily (c) Precious stones, jewels, jewelry, precious
wage in the City of Manila metals, whether in course of transportation or
Shall not lapse for non-payment of otherwise;
premium if such non-payment was due to (d) Bridges, tunnels and other instrumentalities
the failure of the company to send its of transportation and communication (excluding
representative or agent to the insured at buildings, their furniture and furnishings, fixed
the residence of the insured or at some contents and supplies held in storage); piers,
other place indicated by him for the wharves, docks and slips, and other aids to
purpose of collecting such premium navigation and transportation, including dry docks
This shall not apply when the premium and marine railways, dams and appurtenant
on the policy remains unpaid for a facilities for the control of waterways.
period of three months or twelve weeks (2) "Marine protection and indemnity
after the grace period has expired. insurance," meaning insurance against, or against
legal liability of the insured for loss, damage, or
6.2. Non-life include policies covering risks to expense incident to ownership, operation,
which property may be exposed, as well as those chartering, maintenance, use, repair, or
which cover the risk of liability to third persons. It construction of any vessel, craft or instrumentality
covers a specified period of time (not more than 1 in use of ocean or inland waterways, including
year) and has a definite period of coverage. liability of the insured for personal injury, illness or
death or for loss of or damage to the property of
another person.
do so would constitute abandonment of claim and stand. Also, except for the fact that the victims
can no longer be recoverable. were not fare-paying passengers, their status as
Held: The 12-month prescriptive period beneficiaries under the policy is recognized.
commenced upon receipt by Tan of the Even assuming there was an ambiguity,
rejection/denial of his claim by Sun Insurance ambiguities or obscurities must be strictly
and does not stop upon filing of the motion for interpreted against the party that caused them.
reconsideration. The words of the provisions in This rigid application of the rule of ambiguities
the insurance policy is clear and free from any has become necessary in view of current
doubt or ambiguity whatsoever and thus must be business practices.
taken and understood in its plain, ordinary and
popular sense. Malayan Ins. vs. CA
Also, the Schedule of Indemnities also does not respondent, Country Bankers Insurance
purport to restrict the kind of damages that may Corporation. The policy contained the following
be paid by the insurer once liability has arisen, condition: 3. The insured shall give notice to
under the Liability to Third Party clause, and does the Company of any insurance or insurances
not say that the limit is subject to the list already effected, or which may subsequently be
indicated in the Schedule of Indemnities. All effected, covering any of the property or
other types of damages may be awarded against properties consisting of stocks in trade Fire of
the insurer once liability is shown to have arisen. accidental origin broke out at the public market
A contract of insurance is a contract of adhesion of San Francisco, Agusan del Sur. Geagonias
and must be construed strictly against the party insured stocks-in-trade were completely
which prepared the contract. destroyed prompting him to file with CBIC a
claim under the policy. The company denied the
Qua Chee Gan vs. Law Union claim and the basis of which was the petitioner's
alleged violation of Condition 3 of the policy.
Facts: This case involved a claim on a fire Held: Geagonia is not precluded from recovering
insurance policy which contained a provision as from Country Bankers. Condition 3 of the policy
to the installation of fire hydrants the number of is a condition which is not proscribed by law. Its
which depended on the height of the external incorporation in the policy is allowed by Section
wall perimeter of the bodega that was insured. 75 of the Insurance Code which provides that
When it was determined that the bodega should "[a] policy may declare that a violation of
have eleven fire hydrants in the compund as specified provisions thereof shall avoid it,
required by the terms of the policy, instead of otherwise the breach of an immaterial provision
only two that it had, the claim under the policy does not avoid the policy." Its violation would
was resisted on that ground. thus avoid the policy. However, in order to
Held: The said deviation from the terms of the constitute a violation, the other insurance must
policy did not prevent the claim under the same. be upon the same subject matter, the same
We are in agreement with the trial Court that the interest therein, and the same risk. As to a
appellant is barred by waiver (or rather estoppel) mortgaged property, the mortgagor and the
to claim violation of the so called fire hydrants mortgagee have each an independent insurable
warranty, for the reason that knowing fully that interest therein and both interests may be
the number of hydrants demanded therein never covered by one policy, or each may take out a
existed from the very beginning, the appellant separate policy covering his interest, either at the
nevertheless issued the policies in question same or at separate times. . It is a cardinal
subject to such warranty, and received the principle of law that forfeitures are not favored
corresponding premiums. It would be perilously and that any construction which would result in
received the corresponding premiums. It would the forfeiture of the policy benefits for the person
be perilously close to conniving at fraud upon the claiming, will be avoided, if it is possible to
insured to allow the appellant to claim now as construe the policy in a manner which would
void ab initio the policies that it had issue to the permit recovery, as, for example, by finding a
plaintiff without warning of their fatal defect, of waiver for such forfeiture. Provisions, conditions
which it was informed, and after it had misled the or exceptions in policies which tend to work a
defendant into believing that the policies were forfeiture of insurance policies should be
effective. When the policy contains a condition construed most strictly against those for whose
which renders it voidable at its inception, and this benefits they are inserted, and most favorably
result is known to the insurer, it will be presumed toward those against whom they are intended to
to have intended to waive the conditions and to operate.
execute a binding contract, rather than to have
deceived the insured into thinking he is insured Sun Insurance vs. CA
when in fact he is not, and to have taken his
money without consideration. The insurance Facts: Sun Insurance issued a Personal Accident
company is liable on the insurance contract. Policy to Lim with a face value of 200K. Two
months later he was dead with a bullet wound on
Del Rosario vs. Equitable Insurance his head. Lims death was caused when he was
playing with his handgun which accidentally fired.
Facts: The insurer has bound itself under the His wife sought payment on the policy but her
policy to pay P1,000-3,000 as indemnity for the claim was rejected. The contention of Sun
death of the insured for bodily injury, the policy Insurance was that Lim willfully exposed himself
containing specific amounts that may be to needless peril and thus removed himself from
recovered. The policy, however, does not the coverage of the insurance policy. Under the
positively state any definitive amount that may exceptions clause of the policy, the insurance
be recoverable in case of death by drowning, company shall not be liable when the insured
although it is a ground for recovery apart from person attempting to commit suicide or willfully
death for bodily injury. exposing himself to needless peril except in an
Held: There is an ambiguity in this respect in attempt to save human life.
the policy, which ambiguity must be interpreted Held: The cause of Lims death was an accident
in favor of the insured and strictly against the within the limits set forth in the policy and
insurer to allow a greater indemnity, that is, therefore not exempt from the liability of the
P3,000. insurer. The definition of an accident is an event
which happens without any human agency or, if
Geagonia vs. CA happening through human agency, an event
which under the circumstances, is unusual to and
Facts: Geagonia is the owner of Norman's Mart not expected by the person to whom it
located in the public market of San Francisco, happens Contrary to the contention of Sun
Agusan del Sur. He obtained from the private Insurance, Lim did not intentionally expose
agreement that insurer will extend Held: NO. Under the CC, Consent is shown by the
credit. Insurer cannot be presumed concurrence of offer and acceptance. An
to have extended credit from the acceptance shall not bind the person making the
mere fact of unconditional delivery offer except from the time it came to his
of the policy w/o prepayment of knowledge.
premium, and even if such
presumption may be inferred, there 8.2. Premium Payment
must be a clear and express Sec. 77 &78; 64
acceptance by insured of the
insurers offer to extend credit.
Sec. 7712 An Insurer is entitled to payment of the
premium as soon as the thing insured is exposed to
Perez v CA
the peril insured against. Notwithstanding any
agreement to the contrary, no policy or contract of
Facts: Perez, already previously insured with BF
insurance issued by an insurance company is valid
Lifeman Insurance Co. applied for additional
and binding unless and until the premium thereof
coverage. He paid premium and was issued a
has been paid, except in the case of a life or an
receipt by the agent of BF Lifeman. However, he
industrial life policy whenever the grace period
died before his application papers were transmitted
provision applies.
to the head office of BF Lifeman.
Issue: WON the insurance policy was perfected
Held: No. There was no acceptance of the offer. Premium the agreed price for assuming
The perfection of the contract was conditioned and carrying the risk, that is, the
upon compliance with the provision in the consideration paid an insurer for undertaking
application form w/c stated that perfection only lies to indemnify the insured against the specified
when the applicant pays and the premium and peril.
receives and accepts the policy while still in good - if only one premium is paid for
health. Thus, the assent of BF Life was not given several things not separately valued or
when it merely received the application form of separately insured, the contract is indivisible
Perez in its provincial office. Also, delivery to Perez or entire, not divisible or severable, as to
would be impossible as he is already dead. So long items insured.
as an application for insurance has not been SIR: WORST SECTION of the Insurance
accepted or rejected by the insurer, it is merely an Code. This is the cash-and-carry provision
offer or proposal to make a contract. The contract (see below for explanation why)
to be binding from date of application must have Why it raises several questions (Campos):
been a completed contract that leaves nothing to --Is it intended to apply to all classes of
be done, passed upon or determined, before it shall insurance, or does the word thing limit it to
take effect.. property insurance? As to exception, it only
applies to life policies w/in the grace period
Vda. De Sindayen v Insular Life Assurance Co. w/c does not support the theory that it
applies only to property insurance.
FACTS Dec. 1932 Arturo Sindayen had partially - As to grace period, grace period in life
paid his agent the first premium for a life insurance insurance applies only to premiums
policy. Agent and Sindayen agreed that policy, subsequent to the first, therefore, how can
when and if issued, should be delivered to this be an exception to the rule?
Sindayens aunt who will complete the payment of - With respect to non-life policies, the first
the first annual premium. Jan. 16, 1933 agent sentence gives the insurer the right to
received approved policy and delivered it to demand the payment of the premium as
Sindayens aunt on Jan. 18. However, before the soon as the thing insured is exposed to
policy was given to Arturo himself, he died on Jan. peril insured against This assumes the
19. contract is binding even before the
ISSUE: WON Insular Life assumed the risk covered payment of the premium meaning the
by Sindayens policy contract is perfected when the applicants
HELD: YES. Delivery to the insured in person is not offer is accepted by the insurer. This
necessary, and may be made by mail or duly assumption is inconsistent w/ the next
constituted agent (in this case, Sindayens aunt). sentence w/c says that no policy can be
Insurance company is bound by the acts of its binding w/o premium payment.
agent. In this case, the agent is not a mere - Also, Sec. 77 and 78 seem contradictory.
automaton and is vested w/ some discretion in - However, Sir says above does not apply
deciding WON the condition as to the health of the to life insurance because Life Insurance
applicant has been complied with. Once he decides lapses upon non-payment.
that it has and delivers the policy, then, in the Present provision came from Sec 72 of the
absence of fraud, the insurance company is old Insurance Code. However, Sec. 77 has
estopped from claiming the policy has no effect. omitted the portion of Sec. 72 w/c permitted
credit extension of the premium due
Enriquez v Sun Life Assurance Co. (meaning, extension of period to pay the
premium). Apparently, the intention is to put
Facts: Herrer applied for insurance and paid the the contract of insurance on a cash-and-
premium, however, he died before he received the carry basis meaning the premium must be
notice of acceptance (of his application) sent by paid in cash as a condition precedent for a
Sun Life from its Montreal head office. non-life insurance policy to be valid and
Issue: WON the insurance contract was perfected binding, and an agreement to grant the
w/o the notice of acceptance coming to the
knowledge of the applicant 12
This was asked 2006, 1978, and 1977. Note the
effects of non-payment of premiums.
- If the contract is automatically cancelled upon that the fire took place before the tender of
the non-payment in full by the insured, then the premium payment under the renewed policy.
efficacy of the contract will be fully dependent on (Note: This is a motion for reconsideration from
his will. This violates the principle of mutuality of previous SC decision declaring that there was no
contracts. renewal of the policy and that UCPB not liable)
Issue: WON Sec 77 of the Insurance Code must
be strictly applied despite its practice of granting
a 60-90 day credit term for payment of premium
Held: NO There are exceptions to Sec 77:
a.) The first is provided by Sec. 77 itself and
Makati Tuscany v CA that is, in case of a life or industrial life policy
whenever the grace period applies
Facts: American Home Assurance (AHAC) issued b.) Sec 78: An acknowledgment in a policy or
in favor or Makati Tuscany an insurance policy on contract of insurance of the receipt of premium is
the latters bldg for 1 year. It was renewed over conclusive evidence of its payment, so far as to
the course of 3 years. In 1982, the total make the policy binding, notwithstanding any
premiums were paid in four installments but in stipulation therein that it shall not be binding
1983, Tuscany paid only 2 installments and until premium is actually paid.
refused to pay the remaining balance. Reason for c.) Sec. 77may not apply if the parties have
discontinuation: policy contained a reservation agreed to the payment in installments of the
wherein Acceptance of payment by AHAC will premium and partial payment has been made at
not waive any of the company rights to deny the time of the loss.
liability on any claim under the policy arising d.) The insurer may grant credit extension for
before such payments or after the expiration of the payment of the premium
the credit clause of the policy, and Subject to no e.) It would be unjust and inequitable if
loss prior to premium payment. If there be any recovery on the policy would not be permitted
loss, such is not covered. AHAC filed a suit to against UCPB, w/c consistently granted the 60-90
recover the remaining balance. Makati Tuscany day credit term for the payment of the premiums
filed counterclaim for the total amount of despite its full awareness of Sec. 77. Estoppel
premiums it had paid during the previous years. bars it from taking refuge under the action, since
Issue: WON payment by installment of Masagana relied on good faith on such a practice
premiums due on an insurance policy invalidates Dissent (Vitug):
the contract of insurance -Estoppel cannot create a contract of insurance
Held: NO The policies are valid even if the neither can it be invoked to create a PRIMARY
premiums paid in installments because the LIABILITY. So essential is the premium payment
records clearly show that the two parties to the creation of the vinculum juris that it would
intended the policies to be binding and effective be doubtful to have that payment validly excused
notwithstanding the staggered payment of the even for a fortuitous event
premiums. Te acceptance of the installment Dissent (Pardo):
payments over the period of 3 years speak loudly - Masagana tried to pay the overdue premiums
of intention of insurer to honor the policies it before giving written notice that a fire has razed
issued to Makati Tuscany. the property. This shows the fraudulent character
- Sec 77 merely prohibits the parties from of the claim. Failure to give notice is was a
stipulating that the policy is valid even if material misrepresentation affecting the risk
premiums were not paid, but it does not insured against.
expressly prohibit an agreement granting credit - Estoppel cannot give validity to an act that is
extensions. Sec. 78 also allows the insurer to prohibited by law or against public policy. Actual
waive the condition of full payment by payment of premiums is a condition precedent to
acknowledging in the policy that there has been the validity of an insurance contract other than
receipt of premium despite the fact that premium the insurance policy. Any agreement to the
is actually unpaid. If the Code allows a waiver contrary is VOID as against the law and public
when no actual payment has been made, then a policy.
waiver should also be allowed in this case where
the insurer has already acknowledged receipt of
partial payment.
NOTE: Difference with Tibay case: In Tibay, there
was an express stipulation w/c said that payment
shall be made in full. In this case, the policy was
binding because of the prior agreement to allow
installment payments, hence full payment under
Sec.77 deemed waived.
valid, provided that all the terms are In case of conflict between rider and
agreed upon. In our Insurance Code, printed stipulation, the rider prevails as
although written form not required for being a more deliberate expression of the
validity, some provisions say that a agreement of the contracting parties.
PRINTED POLICY is best evidence of Warranty inserted or attached to a
contract. SC has not ruled categorically on policy to eliminate specific potential
this matter. increases of hazard during the policy term
The following are required to appear in owing to: 1) actions of the insured or 2)
insurance policies: condition of the property.
The policy, which must be in Clause an agreement between the
printed form (except group insurance insurer and the insured on certain matters
policies which may be typewritten), may relating to the liability of the insurer in case
contain blank spaces; any word, phrase, of loss.
clause, mark, sign, symbol, signature, Endorsement any provision added to an
number, or word necessary to complete insurance contract altering its scope or
the contract of insurance shall be written application. Ex. Endorsements extending
on the blank spaces provided. the perils covered. Most times, they are
Any rider, clause, warranty, or merely typewritten additions to the
endorsement may only be deemed part contract, changing its amount, rate, or
of the insurance policy if, after having term.
been attached to the policy itself, its
descriptive title or name is also
mentioned and written in the blank
spaces in the policy.
Required clauses in the policy:
The parties between whom
the contract is made; ii. Cover Notes or binding receipts
The amount to be
insured except in the cases of
open or running policies; Sec 52. Cover notes may be issued to bind
The premium, or if the insurance temporarily pending the issuance of the
insurance is of a character where policy. Within sixty days after issue of a cover note,
the exact premium is only a policy shall be issued in lieu thereof, including
determinable upon the termination within its terms the identical insurance bound
of the contract, a statement of the under the cover note and the premium therefore.
basis and rates upon which the final Cover notes may be extended or renewed
premium is to be determined; beyond such sixty days with the written approval of
The property or life the Commissioner if he determines that such
insured; extension is not contrary to and is not for the
The interest of the purpose of violating any provisions of this Code.
insured in property insured, if he The Commissioner may promulgate rules and
is not the absolute owner thereof; regulations governing such violation and may be
The risks insured such rules and regulations dispense with the
against; and requirement of written approval by him in the case
The period during which of extension in compliance with such rules and
the insurance is to continue. regulations (n)
Express warranties
must also be contained in the policy, or in Cover notes/Binders a written
another instrument signed by the insured memorandum of the most important items of a
and referred to in the policy as making a preliminary ocntract intended to give
part of it. temporary protection (to insured) pending the
investigation of the risk by the insurer, or until
i. Riders, clauses, endorsements the issue of the formal policy, provided it is
If parties wish to include special later determined that the applicant was
stipulations, may attach riders, insurable at the time it was given.
endorsements, warranties. It is a binding contract and has full force
Rider a printed or typed stipulation and effect during its duration.
contained on a slip of paper attached to the Insurer not obliged to give cover notes but
policy and forming an integral part of the many do so in order to gain goodwill.
policy. Usually contain only the bare essentials of
To be binding: an insurance contract: i.e. the name of the
-Must be attached/pasted to the policy parties, risk insured against, amount of
- Descriptive title or name of the rider, insurance, premium, property/life insured.
clause, warranty, or endorsement is Issuance of cover notes is ordinarily a
mentioned and written on the blank spaces conclusive evidence of making a contract
provided in the policy. The issuance and effectivity of cover notes
Countersignature by insured are governed by the following rules:
General Rule: Not necessary if rider 1) May be issued temporarily, pending
attached to the policy when issued. issuance of policy
Exception: Necessary when added AFTER 2) Deemed a contract of insurance
policy is issued. REASON: To prevent an insurer within meaning of 1[1]
from adding or inserting provisions w/o the
consent of the insured.
Sec 61. A valued policy is one which expresses on Essential Requisites for a person to be a party
its face an agreement that the thing insured shall in an insurance contract:
be valued at a specified sum. Must be COMPETENT to enter (has
capacity)
Sec. 62. A running policy is one which Must possess INSURABLE INTEREST
contemplates successive insurances, and which Must NOT be a PUBLIC ENEMY13
provides that the object of the policy may be from
time to time defined, especially as to the subjects 9.1. Insurer
of insurance, by additional statements or
indorsements.
Sec. 6. Every person, partnership, association, or
corporation duly authorized to transact insurance
8.5. Kinds of insurance policies: business as elsewhere provided in this Code, may
be an insurer. (a)
Open or Unvalued Policy
- One in which a certain agree sum is written on
the face of the policy not as the value of the Sec 184 For purposes of this Code, the term
property insured, but as the maximum limit of the insurer or insurance company shall include all
insurers liability (i.e. face value) in case of individuals, partnerships, associations, or
destruction by the peril insured against. corporations, including government-owned or
- Insurer only pays the actual cash value of the controlled corporations or entities, engaged as
property as determined at the time of loss. principals in the insurance business, excepting
mutual benefit associations. Unless the context
Valued Policy otherwise requires, the term shall also include
- One in which the parties expressly agree on the professional reinsurers, defined in Section 280.
value of the subject matter of the insurance. Domestic company shall include companies
-Two values:
1) Face value of the policy w/c is the max amt 13
Who is a public enemy and the prohibition was
insurer pays in case of loss asked in 2002.
formed, organized or existing under the laws of the Art. 110 (Family Code) The spouses retain the
Philippines. Foreign company when used without ownership, possession, administration and
limitation shall include companies formed, enjoyment of their exclusive properties.
organized, or existing under any laws other than
those in the Philippines. Either spouse may, during the marriage, transfer
the administration of his or her exclusive property
to the other by means of a public instrument,
Sec 185 Corporations formed or organized to save which shall be recorded in the registry of property
any person or persons or other corporations of the place the property is located. (137a, 168a,
harmless from loss, damage, or liability arising 169a)
from any unknown or future or contingent event, or
to indemnify or to compensate any person or
persons or other corporations for any such loss, Art. 111 (Family Code) A spouse of age may
damage, or liability, or to guarantee the mortgage, encumber, alienate or otherwise dispose
performance of or compliance with contractual of his or her exclusive property, without the
obligations or the payment of debts or others shall consent of the other spouse, and appear alone in
be known as insurance corporations court to litigate with regard to the same. (n)
The provisions of the Corporation Law (BP
Blg 68) shall apply to all insurance corporations
now or hereafter engaged in business in the Art. 1390 (Civil Code). The following contracts
Philippines insofar as they do not conflict with the are voidable or annullable, even though there may
provisions of this Chapter. have been no damage to the contracting parties:
(1) Those where one of the parties is incapable of
giving consent to a contract;
Insurer party who assumes or accepts the
risk of loss and undertakes for a consideration
(2) Those where the consent is vitiated by mistake,
to indemnify the insured or to pay him a
violence, intimidation, undue influence or fraud.
certain sum on the happening of a specified
contingency or event; This can be an individual,
These contracts are binding, unless they are
a corporation, an association, even the State,
annulled by a proper action in court. They are
as long as it is authorized to engage in a
susceptible of ratification.
business of insurance.
Summary of 184 and 185:
184: What term insurer includes Insured the party in whose favor the
185: What Insurance Corporations are contract is operative and who is indemnified
regulated by the State: To engage in the against, or is to receive a certain sum upon the
business of insurance, required to get happening of a specified contingency or event.
certificate of authority from the Insurance He is the person whose loss is the occasion for
Commissioner, and must possess sufficient the payment of the proceeds by the insurer;
capital assets. (Will not include other But the proceeds need not go to him but the
requirements, medyo technical. We only need designated beneficiary or someone the insured
to know defn of insurer and insurance assigns the proceeds to.
corporations); Banking institutions are not As in all other contracts, only persons who
allowed to engage in insurance business have the capacity to enter into a contract may
(General Banking Act 173) be insured.
Policy must specify the parties between whom
9.2. Insured the contract is made. (Sec. 51)
Public enemy citizen or subject of a nation
Sec. 7 Anyone except a public enemy must be at war with the Philippines. Does not include
insured robbers, thieves, criminals.
- a private corporation may be deemed an
enemy corporation if controlled by enemy
Sec. 56 When the description of the insured in a aliens.
policy is so general that it may comprehend any
person or any class of persons, only he who can 9.3. Beneficiaries
show that it was intended to include him can claim
the benefit under the policy. Sec 11 The insured shall have the right to change
the beneficiary he designated in the policy, unless
he has expressly waived this right in said policy.
RA 6809 - Lowered the age of EMANCIPATION
AND AGE OF MAJORITY
Art. 234. Emancipation takes place by the Refers to the person who designated in a
attainment of majority. Unless otherwise provided, contract of life, health or accident insurance as
majority commences at the age of eighteen years. the one who is to receive the benefits which
(as amended by RA 6809) become payable, according to the terms of the
contract, upon the death of the insured.
Art. 236. Emancipation for any cause shall Words used in designating the beneficiaries of a
terminate parental authority over the person and life policy will not be given their technical
property of the child who shall then be qualified significance but will be construed broadly.
and responsible for all acts of civil life, save the Chosen exclusively by insured who may
exceptions established by existing laws in special designate anyone (irrespective of lack of
cases. x x x (as amended by RA 6809) insurable interest) so long as s/he not
disqualified by law.
Proceeds of life insurance policy become the would not have intended to extend such
exclusive property of the beneficiary upon the provision of funds to the heirs/ assignees of
death of the insured. the beneficiary.
Cestui que vie
- Person on whose life the policy was In designating the
taken. beneficiaries, words used will not be given
- Must be a risk acceptable to the insurer their technical significance but will be
Kinds of beneficiaries either insured himself broadly construed so that the benefit shall
or his personal representatives or someone be received by those intended by the
other than the insured. If others are recipients, insured as the object of his bounty.
their relations to the insured may be:
The interest of a
Insured himself one who bought beneficiary in a life insurance policy shall be
the policy and paid the premiums. forfeited when the beneficiary is the
Such is an immediate party to the principal, accomplice, or accessory in
contract and is usually called the willfully bringing about the death of the
assured (creditor insures debtors insured. In this case, the nearest relative of
life). the insured shall receive the proceeds of
said insurance if not otherwise disqualified
Third person who paid a
consideration - as when insured The right to receive the
took up the policy for the benefit of proceeds of life insurance policies shall
the creditor or to secure some follow the order of intestate succession in
other obligation; or the Civil Code in default of any specific
designation in the policy:
Third person through mere bounty
of insured no consideration paid a. Legitimate children;
but made beneficiary (may be the b. Father and mother, if living;
insureds estate or a third party). c. Grandfather and grandmother; or
ascendants nearest in degree, if living;
In the 2nd and 3rd cases, beneficiary is not a party d. Illegitimate children;
to the contract. In all 3 cases, proceeds of a life e. Surviving spouse; and
insurance policy become the exclusive property of f. Collateral relatives, to wit:
the beneficiary upon insureds death. So if insured f.a. brothers and sisters of the full
was judicially insolvent before he died, proceeds to blood;
go to the beneficiary and not to the assignee in f.b. brothers and sisters of the half-
insolvency. blood; and
f.c. nephews and nieces
Rules governing beneficiaries g. In default of above, State is entitled to
Selection of the receive the proceeds
beneficiary must be in good faith and
without intent to make the transaction a General Rule: The
cover for a forbidden wagering contract. person designated in the policy as the
insured or the beneficiary shall be the only
General Rule: The insured may change one entitled to recover the proceeds of the
the designated beneficiary without the consent policy.
of the latter and retain the right to receive the Exception: A third person may recover
cash value of the policy, to take out loans from the policy as against the insured if
against the cash value, to assign the policy or there has been a prior contract of express
to surrender it without the beneficiarys or implied trust between the insured and
consent. However, this right belongs only the third person. A third person may
personally to the insured and cannot be recover from the policy as against the
exercised by his representatives or assignees insurer only if such person has been
upon his death. specifically given the right of recovery in
Exception: If there has been an express the insurance policy.
waiver of the right to change the beneficiary
without the latters consent, the beneficiary i. Statutory Limitations on life insurance
acquires an absolute vested interest to all
benefits under the policy. A new beneficiary Art. 2012 (Civil Code) Any person who is
cannot be added to the original one/s because forbidden from receiving any donation under Article
such would amount to the diminution of the 739 cannot be named beneficiary of a life insurance
original benefits. The insured also loses the policy by the person who cannot make any
power to destroy the policy because the donation to him, according to said article. (n)
beneficiary can pay the premiums himself to
ensure the continued effectivity of the contract.
Art. 739 (Civil Code) The following donations
DE LEON is inclined to shall be void:
believe that, in case the beneficiary dies
before the insured, the proceeds shall go to (1) Those made between persons who were guilty
the estate of the insured, rather than to the of adultery or concubinage at the time of the
estate of the beneficiary. He believes that donation;
the purpose of the insured in taking out the
policy is to provide a fund for the benefit of
those he is accustomed to supporting. He
Insurable interest in the property of a partnership subrogation to the insurer to the extent of
exists in both the partnership and the partners and the insurance money paid.
a partner has an insurable interest in the firm
property which will support the policy taken out c. Change of creditor payment of the
thereon for his own benefit. But a partner who insurance to the mortgagee due to loss
takes out the policy in own name limits the does not extinguish the principal obligation
coverage to his individual share unless the terms but only changes the creditor. The
clearly show the policy was meant to cover all the mortgagee cant claim both the insurance
shares. and the debt.
Chapter III
14
This topic came out in 2002, 2001, 2000, 1997, Sec 12 The interest of a beneficiary in a life
1996, 1994, 1984, 1983, 1982, 1980, 1979 and insurance policy shall be forfeited when the
1977. Note the difference between insurable interest beneficiary is the principal, accomplice, or
in property versus insurable interest in life insurance; accessory in willfully bringing about the death of
insurable interest in bank deposits; and existing the insured, in which event, the nearest relative of
interest in property insurance.
give life policies the ordinary characteristics Policy not indemnifying loss but
of property. To require insurable interest in rather giving financial security to insured or
assignee is to diminish the investment to beneficiaries
value of the contract to the owner. Law gives insured the right to
No insurable interest is required where convert policy into cash by selling it to a 3 rd
policy is procured by the person whose life person who doesnt have any insurable
is insured on his own initiative. Since interest in his life.
anyone can be named beneficiary, an Policy is an investment
assignment would not be invalidated by the Exceptions: (cases where interest of the
lack of insurable interest of the assignee. insured is capable of exact pecuniary benefit)
Assignment is distinguished from a change Creditor who takes insurance out
in the designated beneficiary. on life of debtor to secure debt
Once debt has been paid insurable
COMMERCIAL or CONTRACT RELATIONS interest disappears
Creditor may take out insurance on life of his No liability to pay proceeds because
debtor there is not longer anything to
The extent of the creditors interest indemnify
is only as to the amount of debt and cost of If debt already been paid should be
carrying the insurance on debtors life. The denied recovery on the policy
total value must not make the policy a Debtor should have the right to
wagering or speculative one. This kind of take over the policy from creditor after
policy is not taken out for the benefit of the the termination of relationship prevent
debtor. The debtor cannot claim the the premium paid from going to waste.
proceeds because the creditor does not act Company takes out
as an agent of the former. insurance on life of employee
Employee leaves
company
Policy is to
indemnify employee for losses upon
death of employee not resigning
Sec 183 Unless the interest of a person insured is Company cannot
susceptible of exact pecuniary measurement, the recover on life of employee who has
measure of indemnity under a policy of insurance already left/resigned there is nothing
upon life or health is the sum fixed in the policy. to indemnify
Relationship slightly
Debtor may insure self and name creditor as different because no esact pecuniary
beneficiary value dan be given. BUT same principle
Creditor is entitled to full proceeds holds that the cannot recover.
of policy just as any other beneficiary when
debtor dies even if his credit is much less. 3. Insurable Interest In property
Debtor assigns policy to creditor as collateral
security 3.1. Definition
Creditor can only recover amount
of his credit
Sec 13 Every interest in property, whether real or
Balance will go to designated
personal, or any relation thereto, or liability in
beneficiary
respect thereof, of such nature that a contemplated
peril might directly damnify the insured, is an
EMPLOYER/BUSINESS ASSOCIATE
insurable interest.
May take out policy on life of business partner
Interest exists death of partner
results in interruption of operations which Contract of indemnity - measure of insurable
can lead to financial losses. interest in property is the extent to which the
Firm may take out policy on officers/employees insured might be indemnified by loss or injury.
Services are valuable to the
business
Proceeds of policy not taxable 3.2. In what it may consist of
income because it serves as indemnity to
the employee for the loss the business Sec 14 An insurable interest in property may
suffers upon the death of the valued officer consist in:
of employee. a) an existing interest;
b) An inchoate interest founded on an existing
2.3. Time when it should exist interest; or
c) An expectancy, coupled with an existing interest
Sec 19 An interest in property insured must exist in that out of which the expectancy arises
when the insurance takes effect, and when the loss
occurs, but need not exist in the meantime and
interest in the life or health of a person insured Sec 16 A mere contingent or expectant interest in
must exist when the insurance takes effect, but anything, not founded on an actual right to the
need not exist thereafter or when the loss occurs. thing, nor upon any valid contract for it, is not
insurable.
General Rule: insurable interest must exist
only at inception
Insurable interest deemed to exist as long as - Interest does not rise to the dignity of
such interest, relation or liability is of such a title yet he stands in such a relation to
nature that a contemplated part might directly such corporate property to vest him with
damnifty the insured an inchoate right to dividends in case of
Even without legal or equitable title as long as profits and to share in the assets upon
it can be shown that the insured will be liquidation
benefited by propertys continued existence or - Interest not measured by value of
will suffer pecuniary loss by its destruction. what is destroyed
FORMS OR INSURABLE INTEREST - Interest is to share in the distribution
INTEREST in the property itself, of the proceeds only after payment of
whether such property be real or personal corporations debts
ex. Ownership of or a lien on property - Must prove actual injury, otherwise
any RELATION to such property cannot recover more than nominal
ex. interest of a commission agent on damages
goods he is selling
LIABILITY in respect thereof GENERAL CREDITOR
ex. interest of carrier on cargo which he No insurable interest in the property of
ought to carry safely to destination the debtor
NATURE OF INSURABLE INTEREST No right to posses, no lien, no relation
An existing interest that would cause him direct damage
may arise from Cannot take out policy on debtors
legal title (ex. mortgagor of the property
property mortgaged; lessor of the Cannot recover as appointee or
property leased; assignee of property beneficiary on policy taken out by
for the benefit of creditors, etc.); debtor
clearly definably based on some legal
title JUDGEMENT CREDITOR
may also be from Sufficient interest in debtors property
equitable title (ex. Purchaser of because given right to levy (general
property before delivery; builders in the lien)
building under construction or upon In order to recover must show debtor
completion of building) has no other property with which to
An satisfy debt
inchoate interest founded on an existing May insure debtors property due to
interest pecuniary interest
must be founded on
an existing contract but not yet clearly MORTGAGE CREDITOR
defined or identified (Ex. A stockholder Has insurable interest (general lien)
has an inchoate interest in the property Direct prejudice if there is loss
of the corporation w/c is founded on an
Recognized by insurance Code (SEC8)
existing interest arising from his
ownership shares)
3.4. When it should exist
A partner has an
insurable interest in the firms property
which will support a separate policy for Sec 19 An interest in property insured must exist
his benefit when the insurance takes effect, and when the loss
An expectancy, coupled with an occurs, but need not exist in the meantime; and
existing interest in that out of which the interest in the life or health of a person insured
expectancy arises must exist when the insurance takes effect, but
such must be coupled with an need not exist thereafter or when the loss occurs.
existing interest in that our of which
such expectancy arises. (Ex. Farmer
General Rule: Interest must exist at inception and
insuring future crops if it be grown on
at time of loss, but not in the meantime
land owned by him at the time of the
PROPERTY must exist when the insurance takes
issuance of the policy)
effect and when the loss occurs but not exist in
the meantime.
3.3. Measure of interest in property
Nature of contract as indemnity
Mere transfer of thing does not carry transfer of
Sec 15 A carrier or depository of any kind has an policy
insurable interest in a thing held by him as such, to Doesnt own it anymore cannot recover
the extent of his liability but not to exceed the New owner not a party to contract cannot
value thereof. recover
Can recover if valid assignment to buyer
made, notation of contract
Sec 17 A mere contingent or expectant interest in Transfer suspends the contract until same
anything, not founded on an actual right to the person owns thing and policy
thing, not upon any valid contract for it, is not Exception:
insurable. (21) A CHANGE IN INTEREST IN A THING
INSURED. After occurrence of an injury which
Other Interests
results in a loss does not affect the right of the
STOCKHOLDER/PARTNER to FIRM
insured to indemnify for the loss
- Has sufficient interest in property of
corporation
2.3. EXCEPTIONS
Makes more definite the coverage indicated
by the general description of the risk by
excluding certain specified risks that
otherwise could have been included under
the general language describing the risk
assumed.
TEST: If the applicant is aware of the existence of Sec. 35. Neither party to a contract of insurance is
some circumstance which he knows would bound to communicate, even upon inquiry,
influence the insurer in acting upon his application, information of his own judgment upon the matters
good faith requires him to disclose that in question.
circumstance, though unasked.
Sections 30, 32 35 pertains to
3.4. Fraudulent Intent matters which need not be disclosed
Exception found in Sec. 30 last phrase
Sec. 29. An intentional and fraudulent omission, of first sentence: except in answer to
on the part of one insured, to communicate the inquiries of the other
information of matters proving or tending to prove
the falsity of a warranty, entitles the insured to Matters Which Need Not Be Disclosed:
rescind. 1. Mattes already known to the insurer
2. Matters of which the insurer waives
communication he is in estoppel.
3. Matters that concern only risks
excepted, either expressly or by warranty,
from the liability assumed under the
When Fraudulent Intent Necessary: policy. **Important Note: The undisclosed
fact must NOT BE MATERIAL otherwise the
Under section 29, concealment relates to insured is still bound to make disclosure.
the falsity of a warranty. 4. Information of the nature or amount of
For the section to operate it is necessary the interest of one insured except if
that the nondisclosure be intentional and inquired upon by the insurer.
fraudulent before the contract may be 5. Matters each party are bound to know
rescinded. such as public events, general information
The concealment refers to matters proving etc.
or tending to prove the falsity of the 6. The right to information of material
warranty. fact may be waived either expressly, by
the terms of insurance or impliedly by
3.5. MATTERS WHICH NEED NOT BE neglecting to make inquiry as to the facts
DISCLOSED already communicated.
7. If the interest of the insured to the The duty of disclosure ends with the
property being insured is absolute then completion and effectivity of the contract.
there is no necessity to disclose the
extent of his interest, if not then he is Sunlife Assurance vs CA,
required to disclose under Section 51 245 SCRA 268 (1995)
8. Matters of opinion.
Insured need not die of the disease he had failed to
3.6. MATERIALITY disclose to the insurer. It is sufficient that his
nondisclosure misled the insurer in forming his
estimates of the risks of the proposed policy or in
Sec. 31. Materiality is to be determined not by the making inquiries.
event, but solely by the probable and reasonable
influence of the fact upon the party to whom the 4. MI SREPRES EN TA TI ON
communication is due, in forming his estimate of
the disadvantages of the proposed contract, or in 4.1. Definition
making his inquiries.
Sec. 36. A representation may be oral or written
Test of Materiality: The effect which the
knowledge of the fact in question would have on 4.2. Representation vs. Misrepresentation
the making of the contract. To be material, a fact
need not increase the risk or contribute to any loss Representation:
or damage suffered. IT IS SUFFICIENT IF THE factual statements made by the insured at
KNOWLEDE OF IT WOULD INFLUENCE THE PARTY the time of, or prior to, the issuance of the
IN MAKING THE CONTRACT. policy to give information to the insurer and
otherwise induce him to enter into the
Materiality is to be determined not by the insurance contract. They may also be made
event, but solely by the probable and by the insurer but cases nearly always refer
reasonable influence of the facts upon the to representations made by the insured.
party to whom the communication is due,
in forming his estimate of the Misrepresentation:
disadvantages of the proposed contract, or a statement (a) as a fact of something
in making his inquiries. HOWEVER, matters which is untrue; (b) which the insured
that may be deemed immaterial in other stated with knowledge that it is untrue and
respects will be deemed material if made with an intent to deceive, or which he
the subject of an inquiry. states positively as true without knowing it
The DUTY TO COMMUNICATE is to the to be true and which has a tendency to
extent that, in good faith, all facts within mislead; (c) where such fact in either case
the knowledge of either party which are is material to the risk
material to the contract and as to which he
makes no warranty, and which the other
has not the means of ascertaining, must be
communicated. The EXCEPTION to this
rule is that both parties are charged with 4.3. Distinguished from Concealment
the knowledge of the general causes which
are open to his inquiry, equally with that of In concealment, the insured maintains
the other, and which may affect the silence when he ought to speak, while in
political or material perils contemplated; misrepresentation, the insured makes a
and all general usages of trade. The statement of fact which is not true active
Insurance Code exempts a party from the form of concealment.
duty to communicate with regard to
matters which are deemed of public
Sec. 37. A representation may be made at the
knowledge and which a prudent man
time of, or before, issuance of the policy (a)
engaged in the insurance business ought to
know.
GENERALLY, the right to information of Sec. 38. The language of a representation is to be
material facts may be waived, either by the interpreted by the same rules as the language of
terms of the insurance or by neglect to contracts in general.
make inquiry as to such facts, PROVIDED
they are distinctly implied in other facts of
which information is communicated. 4.4. Construction of Representations:
Concealment must take place at the time o Construed liberally in favor of the
the contract is entered into in order that insured and are required to be only
the policy may be avoided. Information substantially true.
obtained after the perfection of the contract
is no longer necessary to be disclosed by Sec. 39. A representation as to the future is to be
the insured, even if the policy has not been deemed a promise, unless it appears that I was
issued (**Exception is when the contract is merely a statement of belief or expectation.
to be effective only upon the issuance of
the policy the insured is still duty bound
to disclose to the insurer any material fact 4.5. Kinds of Representation:
which comes to his knowledge.) 1. Oral or Written (Sec. 36)
2. Made at the time of issuing the policy or withdrawn before the contract actually
before (Sec. 37) takes effect but not afterwards since the
3. Affirmative or promissory (Sec. 39 insurer has already been led by the
& 42) representation in assuming the risk
contemplated.
Affirmative Representation:
Is any allegation as to the existence or
Sec. 42. A representation must be presumed to
non-existence of a fact when the contract refer to the date on which the contract goes in
begins. effect.
Promissory Representation:
Is any promise to be fulfilled after the NO FALSE REPRESENTATION IF:
contract has come into existence or any If it is true at the time the contract
statement concerning what is to happen takes effect although false at the time
during the existence of the insurance. A it was made/represented.
promise representation is substantially a
condition or warranty. THERE IS FALSE REPRESENTATION IF:
If it is true at the time it was
made/represented but false at the time
4.6. When Representation Deemed a Mere the contract takes effect.
Expression of Opinion:
Sec. 43. When a person insured has no personal
General Rule: a representation of the
knowledge of a fact, he may nevertheless repeat
expectation, belief, opinion, or judgment of the
information which he has upon the subject, and
insured, although false, will not avoid the policy,
which he believes to be true, with the explanation
even if such was material to the risk.
that he does so on the information of others; or he
Exception: Such representation will avoid
may submit the information, in its whole extent, to
the policy if there is a concurrence of materiality
the insurer; and in neither case is he responsible
and fraudulence or intent to deceive. However, if
for its truth, unless it proceeds from an agent of
the representation is one of fact, the insurer need
the insured, whose duty is to give the information.
only prove the materiality of the representation,
because in such cases the intent to deceive is
presumed.
Art. 44. A representation is to be deemed false
ILLUSTRATION: The statement I am an
when the facts fail to correspond with its
intelligent student will produce the following
assertions or stipulations.
effects:
o A representation, not being a part of the Fraud or intent to misrepresent facts not
contract of insurance, may be altered or essential to entitle the injured party to
other insurance upon the same property, the Ratio: The insurer is deemed estopped from
total absence of such notices nullifies the policy. claiming that the insured is disqualified. She did
not conceal nor misrepresent her age and the
Eguaras v Great Eastern insurance corporation has been given sufficient
information to know that the insured is over 60
Facts: The insured applied for a life insurance years of age, yet they continued to accept the
policy with defendant and named beneficiary his premium payment and issued her the policy.
mother-in-law, the petitioner in the case.
Insured falsely answered questions on the New Life Enterprise v Court of Appeals
application form regarding his health and medical
history. Also, when he the insurance companys Facts: The insured contracted 3 insurance
physician conducted a physical examination, policies from 3 different insurance companies for
another person pretending to be the insured was the stocks-in-trade of New Life Enterprises. It
presented. Insured died of intestinal occlusion. was undisputed that the plaintiff failed to indicate
Ratio: The insured permitted fraud to be any co-insurance in any of the three policies.
committed against the insurance company in the When the building occupied by the insured
fact that he allowed a healthy and robust person enterprise was gutted and the stocks-in-trade
to substitute in his place since he knew that he insured against were burned, the plaintiff filed
was in bad health. It is immaterial the cause of claims with the 3 insurers which were all denied.
death since at the time he applied for the The reason was that the insured violated the
insurance on his life he was affected by a malady terms of policy in relation to co-insurance.
that would have been sufficient cause for the Ratio: The terms of the contract are clear and
rejection of his application by the insurance unambiguous. The insured is specifically required
company. The contract of insurance is null and to disclose to the insurer any other insurance and
void because it is false, fraudulent and illegal. its particulars which he may have effected on the
same subject. The excuse of the plaintiff that the
Great Pacific Life v CA (1999) agent of the insurance company was aware of the
other insurers or that he failed to read the terms
Facts: A group life insurance was executed of the policies cannot be accepted when the
between GrePaLife and DBP for mortgagors of words and language of the documents are clear
DBP to the amount of debt to DBP. The insured and plain or readily understandable by an
in this case was one such mortgagor to DBP. ordinary reader. There is absolute no room for
GrePaLife granted insurance and a couple of interpretation or construction and the courts are
months later, insured died of massive cerebral not allowed to make contracts for the parties.
hemorrhage. Upon DBPs claim GrePaLife The parties must abide by the terms of the
denied claiming non-disclosure of insured that he contract because such terms constitute the
was suffering from hypertension at the time of measure of the insurers liability and compliance
application for the insurance based on the therewith is a condition precedent to the
testimony of a doctor who declared that the insureds right to recovery from the insurer.
cause of death was possible hypertension
several years ago American Home v CA
Ratio: GrePaLife failed to establish that the
insured concealed a material fact as the medical Facts: The insured took out a fire insurance
findings were not conclusive since the doctor who policy to cover the stocks-in-trade of his business
gave the testimony did not conduct an autopsy from the plaintiff insurer. When a fire gutted the
on the insured nor had he any knowledge of business, he filed a claim against plaintiff insurer
insureds previous hospital confinements. The and several other insurance companies for which
death certificate only stated that hypertension as he also had a policy for the same stocks-in-trade.
possible cause of death. Concealment exist The plaintiff insurer refused payment claiming
where the assured had knowledge of a fact that the insured violated the policy in several
material to the risk, and honesty, good faith and instances for our purposes the violation was the
fair dealing requires that he should communicate failure of the insured to disclose co-insurance.
it to the assurer, but he intentionally withholds However, during trial, the trial court found that
the same. Fraudulent intent on the part of the although the insured failed to disclose co-
insured must be established to entitle the insurer insurance, the loss adjuster of the insurance
to rescind the contract. Misrepresentation as a company had previous knowledge of the co-
defense of the insurer to avoid liability is an insurance prior to the claim.
affirmative defense and the duty to establish Ratio: The insurer is estopped from claiming
such defense rests upon the insurer. exemption from liability due to the violation of
the policy on non-disclosure. It cannot be said
Edillon v Manila Bankers Life that petitioner was deceived by respondent by
the latters non-disclosure of the other insurance
Facts: The insured applied for a 90-day contracts when petitioner actually had prior
insurance coverage against accident and injuries. knowledge as petitioners loss adjuster had
She clearly indicated in the application form that known all along of the other existing insurance
her date of birth was July 11, 1904 (which made contracts. The loss adjuster being an employee
her almost 65 at the time of application). The of petitioner is deemed a representative of the
insurer accepted her premium payment and latter whose awareness of the other insurance
issued her a certificate of insurance. Under the contracts binds the petitioner and thus there was
insurance policy, there contained a provision no violation of the other insurance clause by
which excludes the company from any liability to the respondent and petitioner is liable to pay its
pay claims when the insured is under 16 or over share of the loss.
60. Insured died of a vehicular accident during
the effectivity of the insurance coverage.
Life insurance policy wording that provides 1. The policy is a life insurance policy
a time limit on the insurers right to dispute
2. It is payable on the death of the
a policys validity based on material
insured
misstatements in the application.
Incontestability means that after the 3. It has been in force during the
requisites are shown to exist, the insurer lifetime of the insured for a period of
shall be estopped from contesting the at least two years from the date of
policy or setting up any defense, except as issue or its last reinstatement. This
is allowed, on the ground of public policy two-year period may be shortened but
it cannot be extended by stipulation.
Sec. 48. Whenever a right to rescind a contract of The period of two years for contesting a life
insurance is given to the insurer by any provision insurance policy by the insurer may be
of this chapter, such right must be exercised shortened but it cannot be extended by
previous to the commencement of an action on the stipulation.
contract.
.After a policy of life insurance made payable on
Sec. 227 In the case of individual life or
the death of the insured shall have been in force
endowment insurance, the policy shall contain in
during the lifetime of the insured for a period of
substance the following conditions:
two years from the date of its issue or of its last
reinstatement, the insurer cannot prove that the
(b) A provision that the policy shall be
policy is void ab initio or is rescindable by reason
incontestable after it shall have been in force
of the fraudulent concealment or
during the lifetime of the insured for a period of
misrepresentation of the insured or his agent.
two years from its date of issue as shown in the
policy, or date of approval of last reinstatement,
5. RESCISSION except for non-payment of premium and except for
violation of the conditions of the policy relating to
5.1. Grounds military or naval service in time of war.
1. Concealment
2. False representation misrepresentation
3. Breach of Warranty
Defenses Not Barred by Incontestable Clause:
5.2. When Insurer Must Exercise Right to 1. That the person taking the insurance
Rescind: lacked insurable interest as required by
law.
Non-Life Policy 2. That the cause of the death of the
Must be exercised prior to the insured is an excepted risk.
commencement of an action on the 3. That the premiums have not been paid.
contract. The insurer is no longer entitled 4. That the conditions of the policy
to rescind a contract of insurance after the relating to military or naval service
insured has filed an action to collect the have been violated.
amount of the insurance. 5. That the fraud is of a particularly
**However, it has been held that where vicious type, as where the policy was
taken out in furtherance of a scheme to
any of the material representations is false,
murder the insured, or where the insured
the insurers tender of the premiums and
substitutes another person for the medical
notice that the policy is cancelled before
examination, or where the beneficiary
commencement of the suite, operates to
feloniously kills the insured.
rescind a contract of insurance
6. That the beneficiary failed to furnish
proof of death or to comply with any
Life Policy
conditions imposed by the policy after
The defense is available only during the
the loss has happened.
first two years of a life insurance policy. Or
7. That the action was not brought within
upon the first two years after
the time specified.
reinstatement.
Argente v West Coast Life Ins. Co.
5.3. Incontestability clauses16
The principle of incontestability states that,
Facts: The insured spouses signed an application
after the requisites are shown to exist, the for joint insurance which was accepted by the
insurer shall be estopped from contesting insurer. The wife died of cerebral apoplexy a
the policy or setting up any defense, except couple of month after the effectivity of the policy.
as is allowed, on the grounds of public When the husband filed a claim, the insurer denied
policy. In life insurance policies, the the claim due to fraud and misrepresentation of the
incontestability begins after two years from insured. It appeared that the answers the spouses
the time the policy took effect. After this gave in their medical examinations with regard to
period, the insurer is no longer allowed to their health and previous illnesses and medical
declare the policy void or file an action for attendance were untrue.
rescission on the grounds of concealment of Ratio: The spouses were guilty of concealment.
misrepresentation of the insured. It has the As to the issue of the application of section 47 (now
following requisites: sec. 48) on the time the insurer must exercise the
right to rescind, the court held that a failure to
16
This was covered in 1998, 1997, 1994, 1991, and exercise the right of rescission cannot prejudice
1984. Take note of the 2 year period and the date of any defense to the action which the concealment
issuance and their relevance. may furnish. Where any of the material
Sec. 75. A policy may declare that a violation of Increase of Risk or Hazard in General
specified provision thereof shall avoid it, otherwise Increase of hazard takes place whenever
the breach of an immaterial provision does not the insured property is put to some new
avoid the policy. use, and the new use increases the chance
of loss.
Sec. 76. A breach of warranty without fraud, Premise: Every insurance policy is made in
merely exonerates an insurer from the time that it reference to the conditions surrounding the subject
occurs, or where it is broken in its inception, matter of the risk and the premium is fixed with
prevents the policy from attaching to the risk. reference thereto. There is thus an implied promise
or undertaking on the part of the insured that he
Fraud is not essential to entitle the insurer will not change the premises or the character of the
business carried there, or to be carried on there, so
to rescind a contract for breach of
as to increase the risk of loss by fire.
warranty.
Falsity, not fraud, is the basis of liability in
General Rule: Insurer is not liable if there was
warranty.
an increase in the risk or hazard. There is increase
If the breach of the warranty was
in hazard when the new use increases the chance
WITHOUT FRAUD insured is entitled to: of loss. The increase of the risk of loss must in all
1. Return of premium paid at a pro-rata cases be of a substantial character.
rate from the time of breach if it occurs Exceptions: (Alterations which will not warrant
after the inception of the contract the avoidance of the policy):
2. To all the premiums if it is broken 1. The use of the property is changed but it did
during the inception of the not in any way increased the risk of loss
contract. In this case the contract is 2. The use of materials prohibited from being
void ab initio and never became used as per the policy if such materials are
binding. necessary or ordinarily used in the insureds
If the breach of the warranty was WITH business.
FRAUD policy is void ab initio and the 3. Increase in risks brought about by the
insured is not entitled to the return of the undertaking of necessary repairs in the
premium paid premises
4. Increase in risks due to negligent acts
6.6. Warranties in Fire Insurance temporarily endangering the property, or
temporary acts or conditions which have
Sec. 167. As used in this Code, the term fire ceased prior to the occurrence of the loss.
insurance shall include insurance against loss by 5. Alteration made by accident or without the
fire, lightning, windstorm, tornado or earthquake knowledge of the insured.
and other allied risks, when such risks are covered Qualifier: However, the acts of the insureds
by extension to fire insurance policies or under tenants which cause alterations are deemed
separate policies. (a) presumptively known to the insured.
Exception to the exception: Under Section
75, the breach of an immaterial provision will not
A fire insurance is a contract of indemnity
avoid the policy, but the insurer is given the right
by which the insurer, for consideration, to insert terms which, if violated, would avoid it.
agrees to indemnify the insured against The increase in risk brought by an alteration is
loss of, or damage to, property by fire. therefore irrelevant if there is already a provision in
the policy which stipulates that ANY alteration, of
Sec. 168. An alteration in the use or condition of a whatever nature and effect, shall avoid the policy.
thing insured from that to which it is limited by the For sec. 168 to operate, entitling the
policy made without the consent of the insurer, by insurer the right to rescind, there must
means within the control of the insured, and be an actual increase of risk and while
increasing the risk, entitles an insurer to rescind a it is not necessary that the increased
contract of fire insurance. risk should have cause or contributed
to the loss, it is necessary that the
increase be of a substantial character.
EXCEPTIONS/& EXCLUSION
Sec. 48. Whenever a right to rescind a contract of (a) non payment of premium;
insurance is given to the insurer by any provision (b) conviction of a crime arising out of acts
of this chapter, such right must be exercised increasing the hazard insured against
previous to the commencement of an action on the (c) discovery of fraud or material
contract. misrepresentation;
After a policy of life insurance made payable on (d) discovery of willful or reckless acts or
the death of the insured shall have been in force omissions increasing the hazard insured
during the lifetime of the insured for a period of against;
two years from the date of its issue or of its last (e) physical changes in the property insured
reinstatement, the insurer cannot prove that the which results in the property becoming
policy is void ab initio or is rescindable by reason uninsurable; or
of the fraudulent concealment or (f) a determination by the Commissioner that
misrepresentation of the insured or his agent. the continuation of the policy would violate
or would place the insurer in violation of
this Code.
Sec. 63. A condition, stipulation, or agreement, in
any policy of insurance, limiting the time for
commencing an action thereunder to a period of Sec. 65. All notices of cancellation mentioned in
less than one year from the time when the cause the preceding section shall be in writing, mailed or
of action accrues is void. delivered to the named insured at the address
shown in the policy and shall state:
When Cause of Action Accrues (a) which of the grounds set forth in section
The right of the insured to the payment of 64 is relied upon; and
his loss accrues from the happening of the (b) that, upon written request of the named
loss. insured, the insurer will furnish the facts
The cause of action in an insurance on which the cancellation is based.
contract does not accure UNTIL THE
INSUREDS CLAIM IS FINALLY REJECTED
BY THE INSURER, because before such final Form and Sufficiency of Notice of Cancellation
rejection, there is no real necessity for 1. There must be prior notice of
binging suit. cancellation to the insured.
The period is to be computed not from the 2. The notice must be based on the
time the loss actually occurs but from the occurrence, after the effective of the
time when the insured has a right to bring policy, of one or more of the grounds
an action against the insurer. mentioned in section 64.
**Cause of Action requires as essential 3. It must be in writing, mailed or
elements not only a legal right of the plaintiff delivered to the named insured at the
and a correlative obligation of the defendant address shown in the policy.
but also AN ACT OR OMISSION OF THE 4. It must state which of the grounds set
DEFENDANT IN VIOLATION OF SAID LEGAL forth is relied upon
RIGHT, the cause of action in favor of the 5. It is the duty of the insurer upon
insured does not accrue until the insurer written request of the insured to
refuses expressly or impliedly to comply with furnish the facts in which the
his duty to pay the amount of the loss. cancellation is based. The premium
referred to in Section 64 must be a
General Rule: a clause in the policy to the premium subsequent to the first, because it
effect that an action upon the policy must be speaks of non-payment after the effective
brought within a certain period is valid and will date of the policy. If there was no
prevail over the general law on limitations of premium paid at all, the action appropriate
actions as prescribed by the Civil Code, if not would be a declaration of nullity, based on
contrary to Sec. 63, IC. Section 77 which provides that no policy
Exceptions: In industrial life insurance or contract of insurance issued by an
policies, the period cannot be less than 6 years insurance company is valid and binding
after the cause of action accrues. unless and until the premium thereof has
been paid
Jacqueline Jiminez Vda. De Gabriel vs. CA,
G.R. No. 103883 (November 14, 1996) Sec. 170. A contract of fire insurance is not
Under 384 of the Insurance Code, notice of claim affected by any act of the insured subsequent to
must be filed within six months from the date of the execution of the policy, which does not violate
accident, otherwise teh claim shall be deemed its provisions, even though it increases the risk
waived. Action or suit must be brought to proper and is the cause of a loss.
cases, with the Commission of the court within one
year from the denial of claim, otherwise, the
claimants right of action shall prescribe. Sec. 227 In the case of individual life or
endowment insurance, the policy shall contain in
Sec. 64. No policy of insurance other than life substance the following conditions:
shall be cancelled by the insurer except upon prior
notice thereof to the insured and no notice of (b) A provision that the policy shall be
cancellation shall be effective unless it is based on incontestable after it shall have been in force
the occurrence, after the effective date of the during the lifetime of the insured for a period of
policy, of one or more of the following: two years from its date of issue as shown in the
policy, or date of approval of last reinstatement,
except for non-payment of premium and except for builder's risks, and all personal property floater
violation of the conditions of the policy relating to risks;
military or naval service in time of war. (b) Person or property in connection with or
appertaining to a marine, inland marine, transit or
transportation insurance, including liability for loss
Sec. 380. No cancellation of the policy shall be of or damage arising out of or in connection with
valid unless written notice thereof is given to the the construction, repair, operation, maintenance or
land transportation operator or owner of the use of the subject matter of such insurance (but
vehicle and to the Land Transportation Commission not including life insurance or surety bonds nor
at least fifteen days prior to the intended effective insurance against loss by reason of bodily injury to
date thereof. any person arising out of ownership, maintenance,
Upon receipt of such notice, the Land or use of automobiles);
Transportation Commission, unless it receives (c) Precious stones, jewels, jewelry, precious
evidence of a new valid insurance or guaranty in metals, whether in course of transportation or
cash or surety bond as prescribed in this Chapter, otherwise;
or an endorsement of revival of the cancelled one, (d) Bridges, tunnels and other instrumentalities
shall order the immediate confiscation of the plates of transportation and communication (excluding
of the motor vehicle covered by such cancelled buildings, their furniture and furnishings, fixed
policy. The same may be reissued only upon contents and supplies held in storage); piers,
presentation of a new insurance policy or that a wharves, docks and slips, and other aids to
guaranty in cash or surety bond has been made or navigation and transportation, including dry docks
posted with the Commissioner and which meets and marine railways, dams and appurtenant
the requirements of this chapter, or an facilities for the control of waterways.
endorsement or revival of the cancelled one. (As (2) "Marine protection and indemnity
amended by PD No. 1455) insurance," meaning insurance against, or against
legal liability of the insured for loss, damage, or
expense incident to ownership, operation,
chartering, maintenance, use, repair, or
construction of any vessel, craft or instrumentality
in use of ocean or inland waterways, including
liability of the insured for personal injury, illness or
death or for loss of or damage to the property of
another person.
Peril of the Ship Facts: Remington Industrial Sales filed for the
- Loss which in the ordinary course of recovery of losses incurred due to the rusting of
events results from (a) the Natural steel pipes it imported from Japan while it was in
and inevitable action of the sea; (b) transit. Cathay Insurance refused payment
ordinary Wear and Tear of the ship; claiming that the rusting was not due to a peril of
(c) the negligent failure of the the sea since it was not a casualty which could
ships owner to provide the vessel not be foreseen.
with proper equipment to convey the Held: There is no question that rusting of steel
cargo under ordinary conditions pipes in the course of voyage is a peril of the
- The insurer does not undertake to sea in view of the toll on the cargo by wind,
insure against perils of the ship. water and salt conditions. (HANGLABO! But in
any case, the SC decided through construction)
Note: Everything that happens thru the inherent We would fail to observe a cardinal rule in the
vice of the thing, or by the act of the owner, interpretation of contracts, namely, that any
master or shipper shall not be reputed a peril if not ambiguity therein should be construed against
otherwise borne in the policy the issuer/drafter, namely, the insurer.
ships be raised
liability for the
requisite to make the structure, but by the
risks assumed
ship seaworthy requires insurer
in every
therefor, a warranty of - ship to be without
insurance upon
seaworthiness is properly showing
any marine
complied with if, at the laden concealmen
venture
commencement of each - competent t or
whether of
portion, the ship is master misreprese
vessel, cargo,
seaworthy with - sufficient ntation by
or freight.
reference to that number of the insured.
portion. competent b. The
4.1. Implied
officers admission
warranties in marine
and crew may mean:
insurance
Sec. 118. When - requisite (1) that the
a) Seaworthiness
the ship becomes appurtena warranty
b) Deviation
unseaworthy during the nces and of
c) Other Implied
voyage to which an equipment seaworthi
Warranties:
insurance relates, an (ballasts, ness is to
- Carry the
unreasonable delay in cables, be taken
requisite
repairing the defect anchors, as
documents to
exonerates the insurer cordage, fulfilled;
show
on ship or shipowner's sails, food, or
nationality or
interest from liability water, fuel, (2) that the
neutrality
from any loss arising lights, risk of
- Not engage
therefrom. necessary/p unseawort
in any illegal
Sec. 119. A ship roper stores hiness is
venture
which is seaworthy for and assumed
d) it is also
the purpose of an implements by the
impliedly warranted
insurance upon the ship for the insurer
that the insured
may, nevertheless, by voyage) c. Insertion of
has an insurable
reason of being unfitted - In a fit waiver
interest in the
to receive the cargo, be state as to clauses in
subject matter
unseaworthy for the repair, cargo
insured
purpose of the equipment, policies is in
insurance upon the crew and in recognition
General
cargo. all other of the
provisions on realistic
respects to
warranties also fact that
perform the
apply to marine cargo
Sec. 120. Where voyage
insurance owners
the nationality or insured and
ONLY marine cannot
neutrality of a ship or to
insurance has encounter control the
cargo is expressly
IMPLIED the state of the
warranted, it is implied
WARRANTIES ordinary vessel.
that the ship will carry
provided by law perils of Wh
the requisite
documents to show navigation ere
a) Seaworthiness: - Must also unseaworthines
such nationality or
Meaning be in a s unknown to
neutrality and that it
Ship is suitable owner of cargo
will not carry any
seaworthy condition insured:
documents which cast
reasonable suspicion when to carry a. SUBJECT
reasonably fit the cargo MATTER IS
thereon.
to perform the put on CARGO: the
services and to board or implied
Warranty, in encounter the intended to warranty of
marine ordinary perils be put on seaworthine
insurance, has of the voyage board ss attaches
been defined as contemplated Such warranty to whoever
a stipulation, by the parties can be is insuring
either to the policy. excluded only the cargo,
expressed or NOT absolute by clear WON he is
implied, guarantee that provisions of the
forming part of vessel will the policy shipowner.
the policy as to safely meet all Where b. Lack of
some fact, possible perils knowledge
seaworthiness
condition or CIRCUMSTANC by the
admitted by
circumstance ES determine insured is
insurer:
relating to the WON vessel is immaterial
a. Admission
risk. reasonably in ordinary
is stipulated
Implied seaworthy marine
in the
Warranties - Seaworthiness contract: insurance
conditions upon extends not the issue of and is not a
the only to seaworthine defense in
underwriter's condition of ss cannot order to
notice thereof
to the insurer
which may be
done orally or
in writing (143)
7. Notice must
be explicit
and must
specify the
particular
cause of the
abandonment
(144)
Sec. 160. When profits are valued and Sec. 166. In the case of a partial loss of ship
insured by a contract of marine insurance, a loss of or its equipment, the old materials are to be
them is conclusively presumed from a loss of the applied towards payment for the new. Unless
property out of which they are expected to arise, otherwise stipulated in the policy, a marine insurer
and the valuation fixes their amount. is liable for only two-thirds of the remaining cost of
repairs after such deduction, except that anchors
must be paid in full.
Sec. 161. In estimating a loss under an open
policy of marine insurance the following rules are to
A. Valued Policy
be observed:
Valuation fixes in advance the value of the
(a) The value of a ship is its value at the property and thus avoids the necessity of
beginning of the risk, including all articles or proving its actual value in case of loss
charges which add to its permanent value or which Valuation is conclusive between the parties
are necessary to prepare it for the voyage insured; in the adjustment of either a total or partial
(b) The value of the cargo is its actual cost to loss.
the insured, when laden on board, or where the
Exception: If there is FRAUD on the part of from the loss of the property and the
the insured, insurer would have the right to valuation agreed upon in the policy
RESCISSION fixes the amount of recovery.
The change in a vessels value after a long
period of voyage cannot bind the parties, B. Open Policy
as the insured value stated in the policy is Loss is estimated in accordance with
conclusive upon them. certain rules laid down in the code (refer to
Neither party can give evidence of the real table below)
value of the thing insured. But when the Cost of insurance must be added to the
thing has been hypothecated by bottomry value of ship, cargo, or freightage as the
or respondentia before its insurance and case may be
without the knowledge of the person who However, maximum recovery may only be
actually procured the insurance, the insurer up to the face value of the policy
may show the real value but he is not
entitled to rescind the contract unless he
can prove that the valuation was in fact
fraudulent. WHAT VALUE in OPEN POLICY
When insured a co-insurer in marine Ship Value at beginning of risk (incl
insurance all articles which add to its
- In marine insurance, the insured is permanent value or which are
expected to cover by insurance the full necessary to prepare if for the
value of the property insured. If the voyage insured), not the value
value of his interest exceeds the at time she was built
amount of the insurance, he is Cargo Actual cost when laden on
considered the co-insurer for an board.
amount determined by the difference IF actual cost cant be
between the insurance taken out and determined, market value at
the value of the property: time and place of lading, PLUS
expenses incurred in
_ (partial) Loss___ Amount Amount purchasing and placing them on
value of thing X of Profits = of Recovery board.
insured
Expected profits are not
considered since they can be
- Section 157 applies only if (1) the loss is separately isnured.
partial and (2) the amount of insurance is Freightage Gross freightage without
less than the insured entire insurable reference to cost of earning it
interest in the property insured.
Loss of profits separately insured The cost of insurance is added in
- If the profits to be realized are calculating the value of the ship, cargo, or
separately insured from the vessel or
freightage of other subject matter in an
cargo, the insured is entitled to open policy.
recover, in case of loss, such proportion
Where cargo insured against partial loss is
of the profits as the value of the
damaged
property lost bears to the value of the
- Section 162 is applicable if the cargo
whole property:
is insured against a partial loss and it
suffers damage as a result of which its
Value of property lost____ Amount of Amount of market value at the port of destination
Value of the whole property X profits = recovery is reduced:
insured
Sec. 243. The amount of any loss or damage 2.2. Civil Code Rules on Presumption of Death
for which an insurer may be liable, under any
policy other than life insurance policy, shall be
paid within thirty days after proof of loss is Art. 390. After an absence of seven years, it
received by the insurer and ascertainment of being unknown whether or not the absentee still
the loss or damage is made either by lives, he shall be presumed dead for all
agreement between the insured and the insurer purposes except for those of succession.
or by arbitration; but if such ascertainment is The absentee shall not be presumed dead for
not had or made within sixty days after such the purpose of opening his succession till after
receipt by the insurer of the proof of loss, then an absence of ten years. If he disappeared
the loss or damage shall be paid within ninety after the age of seventy-five years, an absence
days after such receipt. Refusal or failure to of five years shall be sufficient in order that his
pay the loss or damage within the time succession may be opened. (n)
prescribed herein will entitle the assured to
collect interest on the proceeds of the policy for Art. 391. The following shall be presumed dead
the duration of the delay at the rate of twice the for all purposes, including the division of the
ceiling prescribed by the Monetary Board, estate among the heirs:
unless such failure or refusal to pay is based on (1) A person on board a vessel lost during a
the ground that the claim is fraudulent. sea voyage, or an aeroplane which is
missing, who has not been heard of for
four years since the loss of the vessel or
Sec. 244. In case of any litigation for the aeroplane;
enforcement of any policy or contact of (2) A person in the armed forces who has
insurance, it shall be the duty of the taken part in war, and has been missing
Commissioner or the Court, as the case may be, for four years;
to make a finding as to whether the payment of (3) A person who has been in danger of
the claim of the insured has unreasonably death under other circumstances and
denied or withheld; and in the affirmative case, his existence has not been known for
the insurance company shall be adjudged to pay four years. (n)
damages which shall consist of attorneys fees
and other expenses incurred by the insured Art. 392. If the absentee appears, or without
person by reasons of such unreasonable denial appearing his existence is proved, he shall
or withholding of payment plus interest of twice recover his property in the condition in which it
the ceiling prescribed by the Monetary Board of may be found, and the price of any property
the amount of the claim due the insured, from that may have been alienated or the property
the date following the time prescribed in Section acquired therewith; but he cannot claim either
two hundred forty-two or in Section two fruits or rents. (194)
hundred forty-three, as the case may be, until
the claim is fully satisfied; Provided, That the
failure to pay any such claim within the time Londres v National Life Insurance Co.
prescribed in said section shall be considered
prima facie evidence of unreasonable delay in Facts: National Life issued a life insurance policy
payment. on the life of Jose C. Londres in the amount of
Php3,000.00 on April 14, 1943 (during the war
period). He died on Feb. 7, 1945. His beneficiary
2.1. Unfair Claims Settlement filed a claim which National denied claiming that
there was a lack of proof of death and a slew of
Sec. 241 (1) provides instances of unfair claims other special defenses, including the payment
settlement done by an insurance company: should be made based on the Ballantyne scales.
Ratio: National must pay the beneficiary of the
(a) knowingly misrepresenting to insured the amount of the policy (3,000.00) as the
claimants pertinent facts or policy agreement was that the obligation will be made in
provisions relating to coverages at the currency prevailing at the end of the stipulated
issue; period which in this case is the Philippine currency.
(b) failing to acknowledge with The proof of death was substantially made by the
reasonable promptness pertinent claimant and was not properly disproved by
communications with respect to National.
claims arising under its policies;
(c) failing to adopt and implement Fernandez v National Life Insurance Co.
reasonable standards for the prompt
investigation of claims arising under Facts: National insured the life of Juan Fernandez
its policies; for the period of July 15, 194 to July 14, 1945.
(d) not attempting in good faith to Juan died on Nov. 2, 1944. His beneficiaries filed
effectuate prompt, fair and their claim 7 years after his death or on Aug. 1,
equitable settlement of claims 1952. The dispute is WON the Ballantyne scale is
submitted in which liability has applicable in computing the amount which should
become reasonably clear; or be paid to the beneficiaries. The CFI rendered
(e) compelling policyholders to institute judgment that National should pay the proceed of
suits to recover amounts due under PHp 500.00 Ballantyne scale applicable.
its polices by offering without
justifiable reason substantially less
Ratio: CFI correct. Ballantyne scale is applicable rate of twice the ceiling prescribed by the
since in life insurance, the policy matures upon the Monetary Board and Sec. 244. In case of any
expiration of the term set forth therein in this litigation for the enforcement of any policy or
case upon the death of Juan. The obligation of contract of insurance, it shall be the duty of the
National arose as of that date and not at the time Commissioner or the Court, as the case may
of the claim. Since the National could have paid his be to make a finding as to whether the
obligation at any time during the Japanese payment of the claim of the insured has been
occupation. Payment after liberation must be unreasonably denied or withheld; and in the
adjusted in accordance with the Ballantyne affirmative case, the insurance company shall be
schedule. adjusted to pay damages which shall consist of
attorneys fees and other expenses incurred
by the insured person by reason of such
Tio Khe Chio v CA & Eastern Assurance unreasonable denial or withholding of
payment plus interest of twice the ceiling
Facts: Tio Khe Chio imported fishmeal. These prescribed by the Monetary Board of the
were insured with Eastern Assurance. The vessel amount of claim due the insured.
used to ship the fishmeal was Far Eastern Shipping
Co. When the goods reached Manila, they were
found to be damaged and therefore useless. The Noda v Cruz-Arnaldo
issue is WON the interest to be paid by Eastern
Assurance is 12% or 6%? Facts: Noda obtained from Zenith 2 fire insurance
Ratio: 6% only, as Sec. 243 and 244 of the policies for 2 of his properties. Both was destroyed
Insurance Code is not applicable to the case as by fire. When Noda filed a claim, it was denied by
these provisions apply only when the court finds an Zenith due to premiums not paid and the other one
unreasonable delay or refusal in the payment of was settled only for 15K++. IC denied Noda to
the claims. The applicable law according to SC is claim full amount due to insufficient proof of the
Art. 2209 of the Civil Code which stipulates that in value of his losses.
the absence of stipulation the legal interest Ratio: Noda was able to prove sufficient losses,
applicable is 6% since the document offered by Noda were offered
by Zenith itself to proof the amount of its liability
Cathay v CA being 1/6th of the total loss only. Thus could very
well be considered as an admission of its liability up
Facts: Lugay insured against fire with the 6 to the amount recommended.
insurance companies named as petitioner in this
case for the total sum of 4 million her printing
press which was razed by fire on December 15, Finman General v CA
1982. She filed a claim submitting all the required
proof of loss. After nearly 10 months of waiting for Facts: USIPHIL obtained a fire insurance policy
her claim to be paid she filed a suit to collect her from FINMAN. The property insured was loss due
claim. After the trial on the merits, the TC rendered to fire and USIPHIL filed a claim. H.H. Bayne was
judgment in favor of Lugay and directed the 6 appointed by FINMAN to undertake evaluation.
insurance companies to pay their share in the USIPHIL submitted all the required proof of losses
insurance and further made them pay plaintiff substantially. Despite all these, FINMAN refused to
interest at the rate of 2x the ceiling being pay USIPHILS claim due to failure to comply with
prescribed by the Monetary board from the time Condition 13 of the policy. TC and CA rule din
when the case was filed. Upon appeal to the CA, favor of USIPHIL and ordered FINMAN to pay +
the CA affirmed the decision of the TC. double the interest (24%)
Ratio: The award made by the TC of double Ratio: Substantial compliance, not strict
interest is justified under Sections 243 and 244 of compliance with the requirements will be deemed
the Insurance Code which provides that Sec. 243. sufficient. The double interest of 24% is authorized
Refusal or failure to pay the loss or damage by Sections 243 and 244 of the Insurance Code.
within the time prescribed herein will entitle the
assured to collect interest on the proceeds of
the policy for the duration of the delay at the
Effect of Refusal or Failure to pay Entitles beneficiary to collect Entitles beneficiary to collect
claim within time prescribed: interest on the proceeds of interest on the proceeds of policy
policy for the duration of the for the duration of the delay at
In case of litigation, it is delay at rate of twice ceiling rate of twice ceiling prescribed by
the duty of the prescribed by the monetary the monetary board (unless
Commissioner or the board (unless refusal to pay refusal to pay is based on ground
Court to determine WON is based on ground that that claim in fraudulent)
claim has been claim in fraudulent)
unreasonably denied of In case damages awarded, this
withheld. In case damages awarded, includes attorneys fees and other
this includes attorneys fees expenses incurred due to delay
Failure to pay any such and other expenses incurred (plus the interest)
claim within the time due to delay (plus the
prescribed shall be interest)
considered prima facie
evidence of unreasonable
delay in payment.
Firemans Fund v Jamila & Co. Facts: Winthrop Products consigned to Winthrop
Stearns drugs and medicines (from NY to Mla)
Facts: Firestone loss some properties due to the through Macondray & Co. Insured with St. Paul
acts of its employees and the security guards Fire. Arrastre services provided by Mla. Port
provided by the security agency of Jamila & Co. Services. Upon arrival to Manila one drum and
Firemans Fund, the insurer of Firestone paid the several cartons arrived in bad condition. Winthrop
loss and proceeded against Jamila and Jamilas Stearms filed a claim for damages. St. Paul paid
insurer First Quezon City Ins. Co. Both denied claim. St. Paul then proceeded against the Arrastre
Service who resisted action which claimed it 2. Pooling the resources of many
delivered goods in same condition it received from companies also extends greater coverage of
the carrier (Macondray). Macondray denied liability insurance protection, extended even among
claiming liability ceased upon discharge of goods APPLICANTS requiring large amounts and those not
from ships tackle. Note: there is a bill of lading eligible for insurance at standard rates.
which stipulated that the amount of the liability 3. UNDERWRITERS benefit through the
should only be Php1K++, but St. Paul paid amount placing of additional insurance in an
US$1k++ expanded market.
Ratio: St. Paul should receive the amount 4. The insurance INDUSTRY benefits by
according to the bill of lading. The purpose of the reducing the waste arising out of policies
bill of lading is to provide for the rights and which are applied for but not issued.
liabilities of the parties. The stipulation in the bill 5. The REINSURER benefits through the
of lading limiting the common carriers liability to acquisition of business which is expected to
the value of the goods appearing in the bill is valid prove profitable in the long run.
and binding. St. Paul after paying the claim of the
insured for damages under the policy is subrogated
merely to the rights of the assured as subrogee, it 4. BENEFITS OF REINSURANCE TO THE
can recover only the amount that is recoverable by INSURED
the latter. Since the right of Winthrop in case of
1. It gives insurance companies greater
loss or damage to the goods is limited or restricted
financial stability and thus makes the
by the provision in the bill of lading, a suit by St.
insureds individual policy more reliable.
Paul as subrogee is necessarily subject to like
2. If a large amount of insurance is needed,
limitations and restrictions.
the insured may obtain it without
negotiating with numerous companies.
3. It enables the insured to obtain
Chapter VII protection promptly, without the delay
REINSURANCE that would be required to divide and
distribute the amount among many
companies.
Title 12 Reinsurance 4. All the insurance can be written under
identical contract provisions, whereas
Sec. 95. A contract of reinsurance is one by otherwise these might vary with the
which an insurer procures a third person to different companies among whom the
insure him against loss or liability by reason of insurance is divided.
such original insurance. 5. Small companies are encouraged to
divide large exposures for safety and
enabled to accept a wide variety of
1. DEFINITION OF REINSURANCE applicants.
5. NATURE OF CONTRACT OF
It is a contract whereby one party, the
reinsurer, agrees to indemnify another, the REINSURANCE
reinsured, either in whole or in part, The subject of the contract of reinsurance is the
against loss or liability which the latter may primary insurers risk and not the property insured
sustain or incur during a separate and under the original policy.
original contract of insurance with a third 1. CONTRACT OF INDEMNITY AGAINST
party, the original insured. LIABILITY. The reinsurer agrees to
A contract of reinsurance is an insurance of indemnify the insurer, not against actual
an insurance or when insurance business is payment made but against liabilities
transferred from one insurance company to incurred. It is not necessary that the
another. Sometimes called treaties. insurer first pay the loss accruing to
demand payment from reinsurer.
2. CONTRACT SEPARATE FROM ORIGINAL
INSURANCE POLICY. Contracts of insurance
2. RATIONALE OF REINSURANCE and reinsurance are independent from each
other. The practice is for the reinsurer to
It is one type of liability insurance. pay the insurer even before the latter has
It represents a further extension of the indemnified the original insured.
fundamental idea of insurance, that is, 3. CONTRACT BASED ON ORIGINAL POLICY.
distribution among many of the risks The reinsurance policy is necessarily based
resting upon one. on the original contract, and the rights of
Where an insurer desires to entirely relieve the parties in the reinsurance are greatly
himself of liability under contracts made affected by the latters terms and
and reinsures all his risks. conditions. The reinsured risk must be the
Contracts/treaties of reinsurance are plainly same as that covered by the original policy.
beneficial to the public inasmuch as they 4. INSURABLE INTEREST REQUIREMENT
promote both efficiency and stability in the APPLICABLE. The doctrine of insurable
conduct of the insurance business. interest used in the original policy is also
applicable to reinsurance. Hence, the
primary insurer is not entitled to contract
3. BENEFITS OF REINSURANCE TO THE for reinsurance exceeding the limits of the
INSURER policy ceded to the reinsurer.
5. RULE ON SUBROGATION AVAILABLE. In
1. Insurers are able to issue policies in
general, a reinsurer, on payment of a loss,
excess of such retention limits or the
acquires the same rights by subrogation as
maximum claim it wishes to pay out of its own
resources.
are acquired in similar cases where the reinsurer is obligated to accept a fixed share of the
original insurer pays a loss. risk which has to be reinsured under the contract.
Philam v Auditor
Coquia v Fieldmens Insurance
Facts: Philamlife had a reinsurance treaty with
AIRCO with an agreement to pay reinsurance Facts: Fieldmens issued to Manila Yellow
premiums on an annual basis. The Central Bank Taxicab a common carrier accident insurance
collected foreign exchange margin on the policy which will indemnify the insured in the
remittances of Philamlife to AIRCO. Philamlife event of accident caused by or arising out of the
filed for refund contending that the reinsurance use of Motor Vehicle against all sums which the
premiums remitted were paid pursuant to the insured will become legally liable to pay in
reinsurance treaty and therefore were pre- respect of: death or bodily injury to any fare-
existing obligations expressly exempt fro the paying passenger including the driver, conductor
margin fee. and/or inspector While policy was in force,
Ratio: Philamlife is not entitled to refund. Carlito Coquia driving the insured vehicle met an
Reinsurance treaties and reinsurance policies are accident and died. His heirs field complaint
not one and the same. Reinsurance treaties are against Fieldmens
contracts FOR insurance while reinsurance Ratio: Heirs of Coquia have cause of action
policies are contracts OF insurance. Philamlifes against Fieldmens under Art. 1311 of the Civil
obligation to remit reinsurance premiums (contracts pour autrui). This rule is the exception
becomes fixed and definite only upon the to the general rule that only parties to a contract
execution of the reinsurance policy, because it is may bring an action. Under this exception, third
only after a reinsurance policy is made that parties may demand the enforcement of the
payment of reinsurance premiums may be contract which was made for his benefit.
exacted as it is only after Philamlife seeks to
remit the reinsurance premiums that the Eternal Gardens Memorial Park Corp. v. The
obligation to pay the margin fee arises. Phil. American Life Insurance Co.
April 9, 2008
2.3. Authority to Provide Financial The Corporation may not use its authority to
Assistance purchase the voting or common stock of an insured
bank but it can enter into and enforce agreements
What entities are covered? that it determines to be necessary to protect its
financial interests.
Insured banks in danger of closing
When the Corporation has determined that 3. Concept of Insured Deposits
an insured bank is in danger of
closing The term insured deposit means the amount
the continued operation of such due to any depositor for deposits in an insured
bank is essential to provide bank net of any obligation of the depositor to the
adequate banking service in the
insured bank as of the date of closure, but not to The Corporation shall publish the notice once a
exceed P250,000.00. week for at least 3 consecutive weeks in a
newspaper of general circulation or, when
In determining such amount due to any depositor, appropriate, in a newspaper circulated in the
there shall be added together all deposits in the community or communities where the closed bank
bank maintained in the same right and capacity for or its branches are located.
his benefit either in his own name or in the name of
others. 4.4. Calculation of Liability
(See Part III)
A joint account regardless of whether the
conjunction and, or, and/or is used, shall be Special Provisions for Joint Accounts (PDIC Bulletin
insured separately from any individually-owned 2004-04)
deposit account:
1. A joint account regardless of whether the
Provided, That conjunction and, or or and/or is used,
a. If the account is held jointly by two or more shall be insured separately from an
natural persons, or by two or more juridical individually-owned deposit account.
persons or entities, the maximum insured 2. If the account is held jointly by two or more
deposit shall be divided into as many equal natural persons, or by two or more juridical
shares as there are individuals, juridical persons or entities, the maximum insured
persons or entities, unless a different deposit shall be divided into as many equal
sharing is stipulated in the document of shares as there are individuals, juridical
deposit and persons or entities, unless a different
b. If the account is held by a juridical person sharing is stipulated in the document of
or entity jointly with one or more natural deposit.
persons, the maximum insured deposit
shall be presumed to belong entirely to Document of deposit referred to in the
such juridical person or entity preceding paragraph pertains to joint
c. The aggregate of the interests of each co- account agreements, account ledgers,
owner over several joint accounts, whether certificate of time deposits, passbooks or
owned by the same or different other evidence of deposits, specimen
combinations of individuals, juridical signature cards, corporate resolutions,
persons or entities, shall likewise be contracts or similar instruments, copies of
subject to the maximum insured deposit of which must be in the custody or possession
P250,000.00 of the bank upon takeover by PDIC.
Sec 13(b)? If it falls under any one of the however, the term public utility implies a public use
examples given under CA 146 Sec 13(b), then it and service to the public.
is a public utility. Tatad v Garcia
What constitutes a public utility is not their
WHAT DOES REGULARLY SUPPLYING THE PUBLIC ownership but their use to serve the public.
MEAN?
The utility must hold itself out to the public as a PAL v. Civil Aeronautics Board (1997)
public utility by demand and as a matter of right, WON certificates of Public Convenience and
and not by permission. To determine what Necessity (franchise required) as used in RA 776
constitutes regularity, look at it from the to authorize the Board is different from
perspective of the public, and not the operator. Certificates of Public Convenience (no franchise
It is a service or a readiness to serve an indefinite required)? No
portion of the population subject only to the There is no authoritative basis in
limitations of the service as given by the grant such distinguishing a Certificate of Public Convenience
that [the utility] incurs a liability as a violation of and Necessity (franchise required) and a Certificate
its duty if it refuses, such that the availment of the of Public Convenience (no franchise required)
service has become, through time, a matter of based only on the use of the words convenience
right and not of mere privilege. (also in US v. Tan and necessity. The use of the word necessity in
Piaco) conjunction with public convenience in a
certificate of authorization to a public service entity
ARE ALL PUBLIC UTILITIES COMMODITIES OR SERVICE to operate, does not in any way modify the nature
OF PUBLIC CONSEQUENCE? of such certification, or the requirements for the
Yes. All public utilities have a public consequence. issuance of the same. It is the law which
But not all businesses bearing public consequence determines the requisites for the issuance of such
are public utilities. This is because almost all types certification, and not the title indicating the
of business have some form of regulation from the certificate.
State.
WHAT IS THE DIFFERENCE BETWEEN A
TO WHOM DOES PUBLIC REFER TO? IS THE WORD PUBLIC UTILITY AND A PUBLIC SERVICE?
PUBLIC IN PUBLIC UTILITY THE SAME IN PUBLIC
SERVICE? For all intents and purposes, they are the
There are three senses of the word public in same and are used interchangeably.
Transportation Law: a) public utility; b) public However, public utility is a broader concept
service; and c) definition of a common carrier that embraces public service. A public service is
under Art. 1732 of the Civil Code. necessarily a public utility, but not all public utilities
To determine a public utility, the two tests above & are public services.
the definition under Albano v. Reyes apply.
WHEN IS A PUBLIC UTILITY NOT A PUBLIC
WHAT IS A PUBLIC SERVICE? SERVICE?
Kilusang Mayo Uno Labor Center v. Garcia Jr. If it is not included in the enumeration in the
(1994) Public Service Act (CA 146 Sec. 13(b)) and Albano
In determining public need, the presumption v. Reyes.
of need for a service shall be deemed in favor of
the applicant. The burden of proving that there is HOW DO THEY DIFFER IN CONSTITUTIONAL
no need for a proposed service shall be with the RESTRICTIONS AND REQUIREMENTS?
oppositor(s).
Public convenience and necessity exists when If a business is a public utility, then it is
the proposed facility or service meets a reasonable subject to the limitations and restrictions provided
want of the public and supply a need which the for in the 1987 Constitution (Art 12 Secs.
existing facilities do not adequately supply. The 11,17,18,19) Since a public service is necessarily a
existence or nonexistence of public convenience public utility, therefore public services are subject
and necessity is therefore a question of fact that to the same Constitutional limitations and
must be established by evidence, real and/or restrictions.
testimonial; empirical data; statistics and such If a public utility is not a public service, it is
other means necessary, in a public hearing still subject to the same Constitutional limitations
conducted for that purpose. The object and and restrictions.
purpose of such procedure, among other things, is
to look out for, and protect, the interests of both Therefore, public utility = Constitution
the public and the existing transport operators. public service = Constitution + Public
Service Act
Albano v. Reyes (1989)
Franchises issued by Congress are not B. Transportation
required before each and every public utility may DEFINITION
operate. The movement of goods or persons from one
A public utility is a business or service place to another, by a carrier. (Blacks Law
engaged in regularly supplying the public with Dictionary)
some commodity or service of public consequence, A contract of transportation is one whereby a
such as electricity, gas, water, transportation, certain person or association of persons obligate
telephone or telegraph services. Apart from themselves to transport persons, things, news from
statutes which define public utilities that are within one place to another for a fixed price. It is the
the purview of such statutes, it would be difficult to removal of goods or persons from one place to
construct a definition of a public utility which would another.
fit every conceivable case. As its name indicates,
and employees of the Public Service Commission of profit or trust with the Government of the
shall enjoy the same privileges and rights as the Philippines.
officer and employees of the classified civil service SECTION 10
of the Government of the Philippines. They shall The Commission shall have its office in the City of
also be entitled to receive from the Government of Manila or at such other place as may be
the Philippines their necessary travelling expenses designated, and may hold hearings on any
while travelling on the business of the Commission, proceedings at such times and places, within the
which shall be paid on proper voucher therefor, Philippines, as it may provide by order in writing:
approved by the Secretary of Justice, out of funds Provided, That during the months of April and May
appropriated for the contingent expenses of the of each year, at least three Commissioners shall be
Commission. on vacation in such manner that once every two
When the exigency of the service so requires and years at least three of them shall be on duty during
with the approval of the Secretary of Justice, and April and May: Provided, however, That in the
subject to the provisions of Commonwealth Act interest of public service, the Secretary of Justice
Numbered Two hundred forty-six, as amended, may require any or all the Commissioners not on
funds may be set aside from the appropriations duty to render services and perform their duties
provided for the Commission and/or from the fees during the vacation months. (As amended by
collected under Section forty of this Act to defray Republic Act Nos. 176 and 3792)
the expenses to be incurred by the Public Service SECTION 11
Commissioner or any of the Associate The Commission shall have the power to make
Commissioners, officers or employees of the needful rules for its Government and other
Commission to be designated by the Commissioner, proceedings not inconsistent with this Act and shall
with the approval of the Secretary of Justice, in the adopt a common seal, and judicial notice shall be
study of modern trends in supervision and taken for such seal. True copies of said rules and
regulation of public services. (As amended by other amendments shall be promptly furnished to
Republic Act No. 3792) the Bureau of Printing and shall be forthwith
published in the Official Gazette.
SECTION 13
SECTION 6 (a) The Commission shall have jurisdiction,
The Secretary of Justice, upon recommendation of supervision, and control over all public services and
the Public Service Commissioner, shall appoint all their franchises, equipment, and other properties,
subordinate officers and employees of the and in the exercise of its authority, it shall have
Commission as may be provided in the the necessary powers and the aid of the public
Appropriation Act. The Public Service Commissioner force: Provided, That public services owned or
shall have general executive control, direction, and operated by government entities or government-
supervision over the work of the Commission and owned or controlled corporations shall be regulated
of its members, body and personnel, and over all by the Commission in the same way as privately-
administrative business. (As amended by Republic owned public services, but certificates of public
Act Nos. 178 and 3792) convenience or certificates of public convenience
SECTION 7 and necessity shall not be required of such entities
The Secretary of the Commission, under the or corporations: And provided, further, That it shall
direction of the Commissioner, shall have charge of have no authority to require steamboats, motor
the administrative business of the Commission and ships and steamship lines, whether privately-
shall perform such other duties as may be required owned, or owned or operated by any Government
of him. He shall be the recorder and official controlled corporation or instrumentality to obtain
reporter of the proceedings of the Commission and certificate of public convenience or to prescribe
shall have authority to administer oaths in all their definite routes or lines of service.
matters coming under the jurisdiction of the (b) The term "public service" includes every
Commission. He shall be the custodian of the person that now or hereafter may own, operate,
records, maps, profiles, tariffs, itineraries, reports, manage, or control in the Philippines, for hire or
and any other documents and papers filed with the compensation, with general or limited clientele,
Commission or entrusted to his care and shall be whether permanent, occasional or accidental, and
responsible therefor to the Commission. He shall done for general business purposes, any common
have authority to designate from time to time any carrier, railroad, street railway, traction railway,
of his delegates to perform the duties of Deputy sub-way motor vehicle, either for freight or
Secretary with any of the Commissioners. passenger, or both with or without fixed route and
SECTION 8 whether may be its classification, freight or carrier
The Commission shall furnish the Secretary such of service of any class, express service, steamboat or
its findings and decisions as in its judgment may be steamship line, pontines, ferries, and water craft,
of general public interest; the Secretary shall engaged in the transportation of passengers or
compile the same for the purpose of publication in freight or both, shipyard, marine railways, marine
a series of volumes to be designated "Reports of repair shop, [warehouse] wharf or dock, ice plant,
the Public Service Commission of the Philippines," ice-refrigeration plant, canal, irrigation system,
which shall be published in such form and manner gas, electric light, heat and power water supply
as may be best adapted for public information and and power, petroleum, sewerage system, wire or
use, and such authorized publications shall be wireless communications system, wire or wireless
competent evidence of the reports and decisions of broadcasting stations and other similar public
the Commission therein contained without any services: Provided, however, That a person
further proof or authentication thereof. engaged in agriculture, not otherwise a public
SECTION 9 service, who owns a motor vehicle and uses it
No member or employee of the Commission shall personally and/or enters into a special contract
have any official or professional relation with any whereby said motor vehicle is offered for hire or
public service as herein defined, or hold any office compensation to a third party or third parties
engaged in agriculture, not itself or themselves a
public service, for operation by the latter for a proper notice and hearing in accordance with the
limited time and for a specific purpose directly rules and provisions of this Act, subject to the
connected with the cultivation of his or their farm, limitations and exceptions mentioned and saving
the transportation, processing, and marketing of provisions to the contrary:
agricultural products of such third party or third (a) To issue certificates which shall be known as
parties shall not be considered as operating a certificates of public convenience, authorizing the
public service for the purposes of this Act. operation of public service within the Philippines
(c) The word "person" includes every individual, whenever the Commission finds that the operation
co-partnership, joint-stock company or of the public service proposed and the
corporation, whether domestic or foreign, their authorization to do business will promote the public
lessees, trustees, or receivers, as well as any interest in a proper and suitable manner. Provided,
municipality, province, city, government-owned or That thereafter, certificates of public convenience
controlled corporation, or agency of the and certificates of public convenience and necessity
Government of the Philippines, and whatever other will be granted only to citizens of the Philippines or
persons or entities that may own or possess or of the United States or to corporations, co-
operate public services. (As amended by Com. Act partnerships, associations or joint-stock companies
454 and RA No. 2677) constituted and organized under the laws of the
SECTION 14 Philippines; Provided, That sixty per centum of the
The following are exempted from the provisions of stock or paid-up capital of any such corporations,
the preceding section: co-partnership, association or joint-stock company
(a) Warehouses; must belong entirely to citizens of the Philippines
(b) Vehicles drawn by animals and bancas moved or of the United States: Provided, further, That no
by oar or sail, and tugboats and lighters; such certificates shall be issued for a period of
(c) Airships within the Philippines except as more than fifty years.
regards the fixing of their maximum rates on (b) To approve, subject to constitutional
freight and passengers; limitations any franchise or privilege granted under
(d) Radio companies except with respect to the the provisions of Act No. Six Hundred and Sixty-
fixing of rates; seven, as amended by Act No. One Thousand and
(e) Public services owned or operated by any twenty-two, by any political subdivision of the
instrumentality of the National Government or by Philippines when, in the judgment of the
any government-owned or controlled corporation, Commission, such franchise or privilege will
except with respect to the fixing of rates. (As properly conserve the public interests, and the
amended by Com. Act 454, RA No. 2031, and RA Commission shall in so approving impose such
No. 2677) conditions as to construction, equipment,
SECTION 15 maintenance, service, or operation as the public
With the exception of those enumerated in the interests and convenience may reasonably require,
preceding section, no public service shall operate in and to issue certificates of public convenience and
the Philippines without possessing a valid and necessity when such is required or provided by any
subsisting certificate from the Public Service law or franchise.
Commission known as "certificate of public (c) To fix and determine individual or joint rates,
convenience," or "certificate of public convenience tolls, charges, classifications, or schedules thereof,
and necessity," as the case may be, to the effect as well as commutation, mileage, kilometrage, and
that the operation of said service and the other special rates which shall be imposed
authorization to do business will promote the public observed and followed thereafter by any public
interests in a proper and suitable manner. service: Provided, That the Commission may, in its
The Commission may prescribe as a condition for discretion, approve rates proposed by public
the issuance of the certificate provided in the services provisionally and without necessity of any
preceding paragraph that the service can be hearing; but it shall call a hearing thereon within
acquired by the Republic of the Philippines or any thirty days, thereafter, upon publication and notice
instrumentality thereof upon payment of the cost to the concerns operating in the territory affected:
price of its useful equipment, less reasonable Provided, further, That in case the public service
depreciation; and likewise, that the certificate shall equipment of an operator is used principally or
be valid only for a definite period of time; and that secondarily for the promotion of a private business,
the violation of any of these conditions shall the net profits of said private business shall be
produce the immediate cancellation of the considered in relation with the public service of
certificate without the necessity of any express such operator for the purpose of fixing the rates.
action on the part of the Commission. (d) To fix just and reasonable standards,
In estimating the depreciation, the effect of the use classifications, regulations, practices,
of the equipment, its actual condition, the age of measurement, or service to be furnished, imposed,
the model, or other circumstances affecting its observed, and followed thereafter by any public
value in the market shall be taken into service.
consideration. (e) To ascertain and fix adequate and serviceable
The foregoing is likewise applicable to any standards for the measurement of quantity,
extension or amendment of certificates actually in quality, pressure, initial voltage, or other condition
force and to those which may hereafter be issued, pertaining to the supply of the product or service
to permit to modify itineraries and time schedules rendered by any public service, and to prescribe
of public services, and to authorizations to renew reasonable regulations for the examination and
and increase equipment and properties. test of such product or service and for the
SECTION 1620 measurement thereof.
Proceedings of the Commission, upon notice and (f) To establish reasonable rules, regulations,
hearing. - The Commission shall have power, upon instructions, specifications, and standards, to
secure the accuracy of all meters and appliances
20
The powers of the Public Service Commission for measurements.
were asked in 1993.
(g) To compel any public service to furnish safe, (n) To suspend or revoke any certificate issued
adequate, and proper service as regards the under the provisions of this Act whenever the
manner of furnishing the same as well as the holder thereof has violated or willfully and
maintenance of the necessary material and contumaciously refused to comply with any order
equipment. rule or regulation of the Commission or any
(h) To require any public service to establish, provision of this Act: Provided, That the
construct, maintain, and operate any reasonable Commission, for good cause, may prior to the
extension of its existing facilities, where in the hearing suspend for a period not to exceed thirty
judgment of said Commission, such extension is days any certificate or the exercise of any right or
reasonable and practicable and will furnish authority issued or granted under this Act by order
sufficient business to justify the construction and of the Commission, whenever such step shall in the
maintenance of the same and when the financial judgment of the Commission be necessary to avoid
condition of the said public service reasonably serious and irreparable damage or inconvenience
warrants the original expenditure required in to the public or to private interests.
making and operating such extension. (o) To fix, determine, and regulate, as the
(i) To direct any railroad, street railway or traction convenience of the state may require, a special
company to establish and maintain at any junction type for auto-busses, trucks, and motor trucks to
or point of connection or intersection with any be hereafter constructed, purchased, and operated
other line of said road or track, or with any other by operators after the approval of this Act; to fix
line of any other railroad, street railway or traction and determine a special registration fee for auto-
to promote, such just and reasonable connection buses, trucks, and motor trucks so constructed,
as shall be necessary to promote the convenience purchased and operated: Provided, That said fees
of shippers of property, or of passengers, and in shall be smaller than more those charged for auto-
like manner direct any railroad, street railway, or busses, trucks, and motor trucks of types not made
traction company engaged in carrying regulation under the subsection.
merchandise, to construct, maintain and operate, SECTION 18
upon reasonable terms, a switch connection with It shall be unlawful for any individual, co-
any private sidetrack which may be constructed by partnership, association, corporation or joint-stock
any shipper to connect with the railroad, street company, their lessees, trustees or receivers
railway or traction company line where, in the appointed by any court whatsoever, or any
judgment of the Commission, such connection is municipality, province, or other department of the
reasonable and practicable and can be out in with Government of the Philippines to engage in any
safety and will furnish sufficient business to justify public service business without having first secured
the construction and maintenance of the same. from the Commission a certificate of public
(j) To authorize, in its discretion, any railroad, convenience or certificate of public convenience
street railway or traction company to lay its tracks and necessity as provided for in this Act, except
across the tracks of any other railroad, street grantees of legislative franchises expressly
railway or traction company or across any public exempting such grantees from the requirement of
highway. securing a certificate from this Commission as well
(k) To direct any railroad or street railway as concerns at present existing expressly
company to install such safety devices or about exempted from the jurisdiction of the Commission,
such other reasonable measures as may in the either totally or in part, by the provisions of section
judgment of the Commission be necessary for the thirteen of this Act.
protection of the public are passing grade crossing SECTION 19
of (1) public highways and railroads, (2) public Unlawful Acts. - It shall be unlawful for any public
highways and streets railway, or (3) railways and service:
street railways. (a) To provide or maintain any service that is
(l) To fix and determine proper and adequate rates unsafe, improper, or inadequate or withhold or
of depreciation of the property of any public service refuse any service which can reasonably be
which will be observed in a proper and adequate demanded and furnished, as found and determined
depreciation account to be carried for the by the Commission in a final order which shall be
protection of stockholders, bondholders or creditors conclusive and shall take effect in accordance with
in accordance with such rules, regulations, and this Act, upon appeal of otherwise.
form of account as the Commission may prescribe. (b) To make or give, directly or indirectly, by itself
Said rates shall be sufficient to provide the or through its agents, attorneys or brokers, or any
amounts required over and above the expense of of them, discounts or rebates on authorized rates,
maintenance to keep such property in a state of or grant credit for the payment of freight charges,
efficiency corresponding to the progress of the or any undue or unreasonable preference or
industry. Each public service shall conform its advantage to any person of corporation or to any
depreciation accounts to the rates so determined locality or to any particular description of traffic or
and fixed, and shall set aside the moneys so service, or subject any particular person or
provided for out of its earnings and carry the same corporation or locality or any particular description
in a depreciation fund. The income from of traffic to any prejudice or disadvantage in any
investments of money in such fund shall likewise respect whatsoever; to adopt, maintain, or enforce
be carried in such fund. This fund shall not be any regulation, practice or measurement which
expended otherwise than for depreciation, shall be found or determined by the Commission to
improvements, new construction, extensions or be unjust, unreasonable, unduly preferential or
conditions to the properly of such public service. unjustly discriminatory in a final order which shall
(m) To amend, modify or revoke at any time be conclusive and shall take effect in accordance
certificate issued under the provisions of this Act, with the provisions of this Act, upon repeal or
whenever the facts and circumstances on the otherwise.
strength of which said certificate was issued have (g) To sell, alienate, mortgage, encumber or lease
been misrepresented or materially changed. its property, franchises, certificates, privileges, or
rights or any part thereof; or merge or consolidate
It is an authorization issued by the PSC for the or her investment is protected by not allowing a
operation of public services for which a franchise subsequent operator to be granted a license for the
is required by law. (e.g. electric, telephone) same route. The rationale for this rule is for the
What is the difference between a CPC & a CPCN? preservation of public convenience and to prevent
A CPCN requires a franchise from Congress. ruinous competition.
The public utility cannot be issued a CPCN and What are some of the instances where the prior
cannot operate, therefore, without a franchise from operator rule does NOT apply?
Congress The prior operator rule does not apply when
A CPC does not. the CPC or CPCN granted to the applicant is a
What is a franchise? maiden franchise that covers a new route, even if it
It is a legislative grant from Congress or a overlaps with the route of the prior operator.
local legislative body. If it is of nationwide The prior operator rule is inapplicable where
application (e.g. Philippine Air Lines), then it must the corporate existence of the prior operator has
take the form of a Republic Act. expired.
How does one get a franchise? Regular operators are preferred over irregular
It is the same procedure for any law (file a bill, operators.
3 readings in Congress, etc) The applicant must The Commission cannot grant a CPC or CPCN
a)prove that he or she is a Filipino citizen; b) that comprises a larger territory than that applied
demonstrate financial capacity, and c) must show for.
that he or she is applying for a business of public How do you know whether there is ruinous
convenience, that the public shall benefit from the competition enough for the prior operator rule to
grant of the franchise. take effect?
Is a franchise enough in order to operate? Ruinous competition means that there is
No. All public utilities require either a CPC or actual ruin of the business of the operator; that the
CPCN to operate. Those public utilities for which existing operator will not gain enough profits if
franchises have been granted still require a CPCN another person is allowed to enter the business;
in order to operate. Those public utilities that did that which will result in the deprivation of sufficient
not require a franchise for there creation still gain in respect of reasonable return of investment,
require a CPC in order to operate. therefore the oppositor, alleging this, must show
Raymundo v. Luneta Motor Corporation that he will be deprived of a reasonable return on
(1933) his investment.
The Public Service Law, Act No. 3108, as The mere possibility of reduction in the
amended, authorizes certificates of public earnings of the business or the deterioration in the
convenience to be secured by public service income of his business is not sufficient to prove
operators from the PSC. A CPC granted to the ruinous competition. It must be shown that the
owner or operator of public service motor vehicles business would not have sufficient gains to pay a
grants a right in the nature of a limited franchise. fair rate of interest on his capital investments.
The Code of Civil Procedure establishes the Does the prior operator rule create a monopoly?
general rule that "property, both real and personal, Legally speaking, there cannot be a monopoly
or any interest therein of the judgment debtor, not when a property is operated as a public utility. The
exempt by law, and all property and rights of prior operator rule does not encourage a monopoly
property seized and held under attachment in the because the theory is that one operator keeps the
action, shall be liable to execution." The statutory prices low.
exemptions do not include franchises or Batangas Transportation Co. v. Cayetano
certificates; of public convenience. The word Orlanes (1928)
"property" as used in section 450 of the Code of
Civil Procedure comprehends every species of title, So long as the 1 st licensee keeps and performs
inchoate or complete, legal or equitable. The TEST the terms and conditions of its license and complies
to determine whether or not property can be with the reasonable rules and regulations of the
attached and sold upon execution is whether the Commission and meets the demands of the public,
judgment debtor has such a beneficial interest it should have more or less of a bested and
therein that he can sell or otherwise dispose of it preferential right over a person who seeks to
for value. acquire another and a later license over same
Now the Public Service Law permits the PSC to route. Otherwise, the first licensee would not have
approve the sale, alienation, mortgaging, protection on his investment and would be subject
encumbering, or leasing of property, franchises, to ruinous competition and this defeat the very
privileges, or rights or any part thereof (sec. 16 purpose and intent for the PSC was created.
[h]), and in practice the purchase and sale of San Pablo v. Pantranco (1987)
certificates of public convenience has been Before private respondent may be issued a
permitted by the PSC. If the holder of a CPC can franchise or CPC for the operation of the said
sell it voluntarily, there is no valid reason why the service as a common carrier, it must comply with
same certificate cannot be taken and sold the usual requirements of filing an application,
involuntarily pursuant to court process. payment of the fees, publication, adducing
CPCs secured by public service operators are liable evidence at a hearing and affording the oppositors
to execution, and the Public Service Commission is the opportunity to be heard, among others, as
authorized to approve the transfer of the provided by law. Considering the environmental
certificates of public convenience to the execution circumstances of the case, the conveyance of
creditor. passengers, trucks and cargo from Matnog to Allen
is certainly not a ferry boat service but a coastwise
or interisland shipping service. Under no
What is the prior operator rule? circumstance can the sea between Matnog and
The prior operator rule works to protect the Allen be considered a continuation of the highway,
prior operator if it maintains an adequate service Matnog and Allen are separated by an open sea. Its
and is able to meet the demands of the public. His CPC as a bus transportation cannot be merely
amended to include this water service under the news to be transported, or to present his own
guise that it is a mere private ferry service. person or those of other or others in the case of
transportation of passengers
What is an example of the kabit system?21 Carrier or conductor - one who binds himself to
A, a grantee of a CPC from the LTFRB, is given transport person, things, or news, as the case may
the authority to operate 10 units of taxis. B, a non- be, or one employed in or engaged in the business
grantee, wishes to operate as a common carried of carrying good for others for hire
and kabits with the CPC of A who will obtain Consignee - the party to whom the carrier is to
approval from the LTFRB to operate another taxi. deliver the things being transported; to whom the
The taxi will be registered in the name of A, who carrier may lawfulyy make delivery in accordance
will be paid by B. with its contract of carriage. The shipper and the
Assume that A executed a deed of sale in consignee may be the same person.
favor of B in case B decides not to go on with the
arrangement, in order to safeguard the rights of B.
However, in case of injury to a passenger of the
taxi actually operated by B (and previously sold to
B as well) it is still A who will be liable. The illegal
contract of sale between A & B cannot be put up as
a defense.
A does not have a cause of action against B
either. They are in pari delicto.
21
This was asked in 2005. Know the definition of the
Kabit System and the liability of the party.
ARTICLE 350
What is overland transport?
The shipper as well as the carrier of merchandise
Overland transport applies to transport on land and
and goods may mutually demand of each other the
on small bodies of water, waterways, both natural
issue of a bill of lading in which there shall be
and artificial, including transport on rivers which
stated:
are not very large. (If it is transport at sea, then it
1. The name, surname, and domicile of the
is admiralty)
shipper.
2. The name, surname, and domicile of the
carrier.
B. Nature of Contract
3. The name, surname and domicile of the
ARTICLE 349 person to whom or to whose order the goods are
A contract for all kinds of transportation over land addressed, or whether they are to be delivered to
or river shall be considered commercial: the bearer of the said bill.
1. When it involves merchandise or any 4. A description of the goods, stating their
commercial goods. generic character, their weight, and the external
2. When, no matter what its object may be, marks or signs of the packages containing the
the carrier is a merchant or is customarily engaged same.
in making transportation for the public. 5. The cost of the transportation.
6. The date on which the shipment is made.
7. The place of the delivery to the carrier.
C. Effect of Civil Code 8. The place and time at which the delivery is
to be made to the consignee.
Art 1766 9. The damages to be paid by the carrier in
In all matters not regulated by this Code, the rights case of delay, if any agreement is made on this
and obligations of common carriers shall be point.
governed by the Code of Commerce and by special
laws. ARTICLE 351
In shipments made over railroads or by other
Art. 2270 enterprises which are subject to schedules or the
The following laws and regulations are hereby time fixed by regulations, it shall be sufficient that
repealed: the bills of lading or declarations of shipment
(1) Those parts and provisions of the Civil Code of furnished by the shipper refer, with regard to the
1889 which are in force on the date when this new rate, terms, and special conditions of the
Civil Code becomes effective: transportation, to the schedules and regulations,
(2) The provisions of the Code of Commerce the application of which is requested; and should
governing sales, partnership, agency, loan, deposit no schedule be determined the carrier must apply
and guaranty; the rate of the merchandise paying the lowest, with
(3) The provisions of the Code of Civil Procedure on the condition inherent thereto, always including
prescription as far as inconsistent with this Code; such statement or reference in the bill of lading
and delivered to the shipper.
(4) All laws, Acts, parts of Acts, rules of court, Is the form material?
executive orders, and administrative regulations No. As long as it contains an acknowledgment by
which are inconsistent with this Code. (n) the carrier of the receipt of goods for transporation,
it is in legal effect, a bill of lading.
D. Contract of Carriage FUNCTION
ARTICLE 353
1. BILL OF LADING
The legal basis of the contract between the shipper
DEFINITION, SUBJECT MATTER
and the carrier shall be the bills of lading, by the
ARTICLE 352
contents of which all disputes which may arise with
regard to their execution and fulfillment shall be statement or reference to them in the bill of lading
decided without admission of other exceptions than which he delivers to the shipper.
forgery or material errors in the drafting thereof.
After the contract has been complied with the bill of Is a bill of lading essential to a contract of
lading issued by the carrier shall be returned to transportation?
him, and by virtue of the exchange of this No. While under Art. 350 the shipper and the
certificate for the article transported, the respective common carrier may mutually demand that a bill of
obligations and actions shall be considered as lading be made, it is not obligatory. The fact that a
canceled, unless in the same act the claims which bill of lading is not issued does not preclude the
the contracting parties desired to reserve are existence of a contract of transportation.
reduced to writing, exception being made of the Where no bill of lading is issued, the disputes
provisions of Article 366. between the parties shall be decided according to
If in case of loss or for any other reason the rules laid down in Art. 354.
whatsoever, the consignee can not return upon
receiving the merchandise the bill of lading E. Responsibility of the carrier
subscribed by the carrier, he shall give said carrier 1. WHEN IT COMMENCES
a receipt for the goods delivered, this receipt ARTICLE 355
producing the same effects as the return of the bill The liability of the carrier shall begin from the
of lading. moment he receives the merchandise, in person or
through a person intrusted thereto in the place
indicated for their reception.
2. REFUSAL TO TRANSPORT
ARTICLE 356 2. ROUTE
Carrier may refuse to accept packages which ARTICLE 359
appear unfit for transportation; and if said If there should be an agreement between the
transportation is to be made by railway and the shipper and the carrier with regard to the road over
shipment is insisted on, the company shall carry which the transportation is to be made, the carrier
them, being exempt from all liability if its can not change the route, unless obliged to do so
objections are so stated in the bill of lading. by force majeure; and should he do so without
being forced to, he shall be liable for any damage
3. DOUBTFUL DECLARATION OF which may be suffered by the goods transported
CONTENTS for any other cause whatsoever, besides being
ARTICLE 357 required to pay the amount which may have been
If the carrier by reason of well-founded suspicions stipulated for such a case.
as to the correctness of the declaration of the When on account of the said force majeure the
contents of a package should determine to examine carrier is obliged to take another route, causing an
it, he shall do so before witnesses, in the presence increase in the transportation charges, he shall be
of the shipper or of the consignee. reimbursed for said increase after presenting the
Should the shipper or consignee to be cited not formal proof thereof.
appear, the examination shall be made before a
notary, who shall draft a certificate of the result of 3. CARE OF GOODS
the examination, for the proper purposes. ARTICLE 361
If the declaration of the shipper should be correct, Merchandise shall be transported at the risk and
the expenses caused by the examination and those venture of the shipper, if the contrary was not
of carefully repacking the packages shall be expressly stipulated.
defrayed by the carrier, and in a contrary case by Therefore, all damages and impairment suffered by
the shipper. the goods during the transportation, by reason of
accident, force majeure, or by virtue of the nature
or defect of the articles, shall be for the account
and risk of the shipper. cdta
The proof of these accidents is incumbent on the
carrier.
4. NO BILL OF LADING
ARTICLE 354 ARTICLE 362
In the absence of a bill of lading the respective The carrier, however, shall be liable for the losses
claims of the parties shall be decided by the legal and damages arising from the causes mentioned in
proofs that each one may submit in support of his the foregoing article if it is proved that they
claims, in accordance with the general provisions occurred on account of his negligence or because
established in this Code for commercial contracts. he did not take the precautions usually adopted by
careful persons, unless the shipper committed
ARTICLE 351 fraud in the bill of lading, making him believe that
In transporation made by railroads or other the goods were of a class or quality different from
enterprises which are subject to schedules or the what they really were.
time fixed by regulations, it shall be sufficient that If, notwithstanding the precaution referred to in
the bills of lading or the declarations of shipment this article, the goods transported run the risk of
furnished by the shipper refer, with respect to the being lost on account of the nature or by reason of
rate, terms, and special conditions of the an unavoidable accident, without there being time
transportation, to the schedules and regulations, for the owners of the same to dispose thereof, the
the application of which he requests, and should no carrier shall proceed to their sale, placing them for
schedule by determined, the carrier must apply the this purpose at the disposal, of the judicial
rate of the merchandise paying the lowest, with the authority or the officials determined by special
conditions inherent therein, always including such provisions.
he not do so, the damages occasioned by the delay contents of a package should determine to examine
shall be suffered by him. it, he shall do so before witnesses, in the presence
TWO OR MORE CARRIERS of the shipper or of the consignee.
ARTICLE 373 Should the shipper or consignee to be cited not
A carrier who delivers merchandise to a consignee appear, the examination shall be made before a
by virtue of agreements or combined services with notary, who shall draft a certificate of the result of
other carriers shall assume the obligations of the the examination, for the proper purposes.
carriers who preceded him, reserving his right to If the declaration of the shipper should be correct,
proceed against the latter if he should not be the expenses caused by the examination and those
directly responsible for the fault which gives rise to of carefully repacking the packages shall be
the claim of the shipper or of the consignee. defrayed by the carrier, and in a contrary case by
The carrier making the delivery shall also assume the shipper.
all the actions and rights of those who may have
preceded him in the transportation. ARTICLE 353
The sender and the consignee shall have an The legal basis of the contract between the shipper
immediate right of action against the carrier who and the carrier shall be the bills of lading, by the
executed the transportation contract, or against the contents of which all disputes which may arise with
other carriers who received the goods transported regard to their execution and fulfillment shall be
without reserve. decided without admission of other exceptions than
The reservations made by the latter shall not forgery or material errors in the drafting thereof.
exempt them, however, from the liabilities they After the contract has been complied with the bill of
may have incurred by reason of their own acts. lading issued by the carrier shall be returned to
OBLIGATION TO KEEP REGISTRY him, and by virtue of the exchange of this
ARTICLE 378 certificate for the article transported, the respective
Transportation agents shall be obliged to keep a obligations and actions shall be considered as
special registry, with the formalities required by canceled, unless in the same act the claims which
Article 36, in which there shall be entered, in the contracting parties desired to reserve are
progressive order of numbers and dates, all the reduced to writing, exception being made of the
goods the transportation of which is undertaken, provisions of Article 366.
stating the circumstances required by Articles 350 If in case of loss or for any other reason
et seq. for the responsive bills of lading. whatsoever, the consignee can not return upon
receiving the merchandise the bill of lading
subscribed by the carrier, he shall give said carrier
COMPLIANCE WITH ADMINISTRATIVE REGULATIONS a receipt for the goods delivered, this receipt
ARTICLE 377 producing the same effects as the return of the bill
The carrier shall be liable for all the consequences of lading.
arising from noncompliance on his part with the AMOUNT OF DAMAGES FOR LOSS
formalities prescribed by the laws and regulations ARTICLE 372
of the public administration during the entire The appraisement of the goods which the carrier
course of the trip and on the arrival at the point of must pay in case of their being lost or mislaid shall
destination, except when his omission arises from be fixed in accordance with what is stated in the bill
his having been induced into error by false of lading, no proofs being allowed on the part of
statements of the shipper in the declaration of the the shipper that there were among the goods
merchandise. declared therein articles of greater value, and
If the carrier has acted in accordance with a formal money.
order received from the shipper or consignee of the Horses, vehicles, vessels, equipment, and all the
merchandise both shall incur liability. other principal and accessory means of
transportation, shall be especially obligated in favor
of the shipper, although with relation to railroads
said obligation shall be subordinated to the
F. Rights and Obligations of Shipper and/or provisions of the laws of concession with regard to
Consignee property and to those of this Code with regard to
the manner and form of making attachments and
retentions against the said companies.
1. RIGHTS TO DAMAGES
Art. 1744
CONDITION IMPOSED ON RIGHT
A stipulation between the common carrier and the
ARTICLE 366
shipper or owner limiting the liability of the former
Within the twenty-four hours following the receipt
for the loss, destruction, or deterioration of the
of the merchandise a claim may be brought against
goods to a degree less than extraordinary diligence
the carrier on account of damage or average found
shall be valid, provided it be:
therein on opening the packages, provided that the
(1) In writing, signed by the shipper or owner;
indications of the damage or average giving rise to
(2) Supported by a valuable consideration other
the claim can not be ascertained from the exterior
than the service rendered by the common carrier;
of said packages, in which case said claim would
and
only be admitted on the receipt of the packages.
(3) Reasonable, just and not contrary to public
After the periods mentioned have elapsed, or after
policy.
the transportation charges have been paid, no
AMOUNT OF DAMAGES FOR DELAY
claim whatsoever shall be admitted against the
ARTICLE 371(3).
carrier with regard to the condition in which the
Should the abandonment not occur the indemnity
goods transported were delivered.
for loss and damages on account of the delays can
not exceed the current price of the goods
ARTICLE 357
transported on the day and at the place where the
If the carrier by reason of well-founded suspicions
delivery was to have been made. The same
as to the correctness of the declaration of the
provision shall be observed in all cases where this 3. RIGHT TO CHANGE CONSIGNMENT
indemnity is due. ARTICLE 360
The shipper may, without changing the place where
the delivery is to be made, change the
2. RIGHT TO ABANDON consignment of the goods delivered to the carrier,
ARTICLE 371 and the latter shall comply with his orders,
In cases of delay on account of the fault of the provided that at the time of making the change of
carrier, referred to in the foregoing articles, the the consignee the bill of lading subscribed by the
consignee may leave the goods transported on the carrier be returned to him, if one were issued,
hands of the carrier, informing him thereof in exchanging it for another containing the novation
writing before the arrival of the same at the point of the contract.
of destination. The expenses arising from the change of
When this abandonment occurs, the carrier shall consignment shall be defrayed by the shipper.
satisfy the total value of the goods, as if they had
been lost or mislaid. aisadc 4. OBLIGATION TO PAY
Should the abandonment not occur the indemnity TRANSPORTATION CHARGES
for loss and damages on account of the delays can
not exceed the current price of the goods ARTICLE 374
transported on the day and at the place where the The consignees to whom the remittance may have
delivery was to have been made. The same been made can not defer the payment of the
provision shall be observed in all cases where this expenses and transportation charges on the goods
indemnity is due. that they received after twenty-four hours have
elapsed from the time of the delivery; and in case
ARTICLE 360 of delay in making this payment, the carrier may
The shipper may, without changing the place where request the judicial sale of the goods he
the delivery is to be made, change the transported to a sufficient amount to cover the
consignment of the goods delivered to the carrier, transportation charges and the expenses incurred.
and the latter shall comply with his orders,
provided that at the time of making the change of ARTICLE 375
the consignee the bill of lading subscribed by the The goods transported shall be specifically
carrier be returned to him, if one were issued, obligated to answer for the transportation charges
exchanging it for another containing the novation and for the expenses and fees caused by the same
of the contract. during their transportations, or until the time of
The expenses arising from the change of their delivery.
consignment shall be defrayed by the shipper. This special right shall be limited to eight days
after the delivery has been made, and after said
ARTICLE 363 prescription the carrier shall have no further right
With the exception of the cases prescribed in the of action than that corresponding to an ordinary
second paragraph of Article 361, the carrier shall creditor.
be obliged to deliver the goods transported in the
same condition in which, according to the bill of
lading, they were at the time of their receipt, ARTICLE 376
without any detriment or impairment, and should The preference of the carrier to the payment of
he not do so, he shall be obliged to pay the value what is due him for the transportation and
of the goods not delivered at the point where they expenses of the goods delivered to the consignee
should have been and at the time the delivery shall not be affected by the bankruptcy of the
should have taken place. latter, provided the action is brought within the
If part of the goods transported should be delivered eight days mentioned in the foregoing article.
the consignee may refuse to receive them, when he Art. 2241
proves that he can not make use thereof without With reference to specific movable property of the
the others. debtor, the following claims or liens shall be
preferred:
ARTICLE 365 (9) Credits for transportation, upon the goods
If, on account of the damage, the goods are carried, for the price of the contract and incidental
rendered useless for purposes of sale or expenses, until their delivery and for thirty days
consumption in the use for which they are properly thereafter;
destined the consignee shall not be bound to
receive them, and may leave them on the hands of 5. OBLIGATION TO RETURN BILL OF
the carrier, demanding payment therefor at current LADING
market prices. ARTICLE 353. (2) (3)
If among the goods damaged there should be some After the contract has been complied with the bill of
in good condition and without any defect lading issued by the carrier shall be returned to
whatsoever, the foregoing provision shall be him, and by virtue of the exchange of this
applicable with regard to the damaged ones, and certificate for the article transported, the respective
the consignee shall receive those which are sound, obligations and actions shall be considered as
this separation being made by distinct and separate canceled, unless in the same act the claims which
articles, no object being divided for the purpose, the contracting parties desired to reserve are
unless the consignee proves the impossibility of reduced to writing, exception being made of the
conveniently making use thereof in this form. provisions of Article 366.
The same provision shall be applied to merchandise If in case of loss or for any other reason
in bales or packages, with distinction of the whatsoever, the consignee can not return upon
packages which appear sound. receiving the merchandise the bill of lading
subscribed by the carrier, he shall give said carrier
a receipt for the goods delivered, this receipt
producing the same effects as the return of the bill irrespective of whether the causes of action arose
of lading. out of the same or different transactions;
G. Applicability of Provisions
ARTICLE 379
The provisions contained in Articles 349 et seq. C. Vessels
shall also be understood as relating to persons 1. MEANING
who, although they do not personally effect the Vessels are those engaged in navigation,
transportation of commercial goods, contract to do whether coastwide or on the high seas, including
so through others, either as contractors for a floating docks, pontoons, dredges, scows, and any
special and fixed transaction or as freight and other floating apparatus destined for the services of
transportation agents. the industry or maritime commerce.
In either case they shall be subrogated to the place Vessels engaged in the business of carrying
of the carriers with regard to the obligations and or transporting passengers or goods for
liability of the latter, as well as with regard to their compensation, offering their services to the public,
right. are common carriers, and are governed primarily
by the Civil Code and suppletorily by the Code of
Commerce and special laws.
repairs, details of equipment, armament, fulfillment of their contracts, except for reasons of
provisions, fuel, and freight of the vessel, and, in insubordination in serious matters, robbery, theft,
general, in all that relates to the requirements of habitual drunkenness, and damage caused to the
navigation. vessel or to its cargo by malice or manifest or
proven negligence.
ARTICLE 598
The agent can not order a new voyage, nor make ARTICLE 606
contracts for a new charter, nor insure the vessel, If the captain should be a part owner in the vessel,
without the authority of her owner or by virtue of a he can not be discharged without the agent
resolution of the majority of the co-owners, unless returning him the amount of his interest therein,
these privileges were granted him in the certificate which, in the absence of an agreement between the
of his appointment. parties, shall be appraised by experts appointed in
If he should insure the vessel without authority the manner established in the law of civil
therefor he shall be secondarily liable for the procedure.
solvency of the underwriter.
ARTICLE 607
ARTICLE 599 If the captain who is a part owner should have
The managing agent of an association, shall give obtained the command of the vessel by virtue of a
his co-owners an account of the results of each special agreement contained in the articles of co-
voyage of the vessel, without prejudice to always partnership, he can not be deprived thereof except
having the books and correspondence relating to for the reasons mentioned in Article 605.
the vessel and to its voyages at the disposal of the
same. ARTICLE 608
In case of the voluntary sale of the vessel, all
ARTICLE 600 contracts between the agent and captain shall
After the account of the managing agent has been terminate, the right to proper indemnity being
approved by a relative majority, the co-owners reserved in favor of the captain, according to the
shall satisfy the expenses in proportion to their agreements made with the agent.
interest, without prejudice to the civil or criminal They vessel sold shall remain subject to the
actions which the minority may deem fit to institute security of the payment of said indemnity if, after
afterwards. the action against the vendor has been instituted,
In order to enforce the payment, the managing the latter should be insolvent.
agent shall have a right of action to secure
execution, which shall be instituted by virtue of a ARTICLE 618
resolution of the majority, and without further The captain shall be civilly liable to the agent, and
proceedings than the acknowledgment of the the latter to the third persons who may have made
signatures of the persons who voted the resolution. contracts with the former
1. For all the damages suffered by the vessel
ARTICLE 601 and his cargo by reason of want of skill or
Should there be any profits, the co-owners may negligence on his part. If a misdemeanor or crime
demand of the managing agent the amount due has been committed he shall be liable in
them, by means of an executory action without accordance with the Penal Code. cda
further requisites than the acknowledgment of the 2. For all the thefts committed by the crew,
signatures of the instrument approving the reserving his right of action against the guilty
account. parties.
3. For the losses, fines, and confiscations
ARTICLE 602 imposed an account of violation of the laws and
The agent shall indemnify the captain for all the regulations of customs, police, health, and
expenses he may have incurred from his own funds navigation.
or from those of other persons, for the benefit of 4. For the losses and damages caused by
the vessel. mutinies on board the vessel, or by reason of faults
committed by the crew in the service and defense
ARTICLE 603 of the same, if he does not prove that he made full
Before a vessel goes out to sea the agent shall use of his authority to prevent or avoid them.
have at his discretion, a right to discharge the 5. For those arising by reason of an undue use
captain and members of the crew whose contract of powers and non-fulfillment of the obligations
did not state a definite period nor a definite which are his in accordance with Articles 610 and
voyage, paying them the salaries earned according 612.
to their contracts, and without any indemnity 6. For those arising by reason of his going out
whatsoever, unless there is a special and specific of his course or taking a course which he should
agreement in respect thereto. not have taken without sufficient cause, in the
opinion of the officers of the vessel, at a meeting
ARTICLE 604 with the shippers or supercargoes who may be on
If the captain or any other member of the crew board.
should be discharged during the voyage, they shall No exception whatsoever shall exempt him
receive their salary until the return to the place from this obligation.
where the contract was made, unless there are 7. For those arising by reason of his
good reasons for the discharge, all in accordance voluntarily entering a port other than his
with Articles 636 et seq. of this Code. destination, with the exception of the cases or
without the formalities referred to in Article 612.
ARTICLE 605 8. For those arising by reason of the non-
If the contracts of the captain and members of the observance of the provisions contained in the
crew with the agent should be for a definite period regulations for lights and evolutions for the purpose
or voyage, they can not be discharged until the of preventing collisions.
arriving at the facts he shall make a statement of A captain who borrows money on bottomry, or who
the result of the proceedings in the log book and in pledges or sells merchandise or provisions in other
that of the sailing mate, and shall deliver to the cases and without the formalities prescribed in this
captain the original records of the proceedings, Code, shall be liable for the principle, interest, and
stamped and folioed, with a memorandum of the costs, and shall indemnify for the damages he may
folios, which he must rubricate, in order that it may cause.
be presented to the judge or court of the port of The captain who commits fraud in his accounts
destination. shall reimburse the amount defrauded, and shall be
The statement of the captain shall be accepted if it subject to the provisions contained in the Penal
is in accordance with those of the crew and Code.
passengers; if they disagree, the latter shall be
accepted, always saving proof to the contrary. ARTICLE 583
ARTICLE 625 If the ship being on a voyage the captain should
The captain, under his personal responsibility, as find it necessary to contract one or more of the
soon as he arrives at the port of destination, should obligations mentioned in Nos. 8 and 9 of Article
get the necessary permission from the health and 580, he shall apply to the judge or court if he is in
customs officers, and perform the other formalities Spanish * territory, and otherwise to the consul of
required by the regulations of the administration, Spain, * should there be one, and, in his absence
delivering the cargo without any defalcation, to the to the judge or court or to the proper local
consignee, and in a proper case, the vessel, rigging authority, presenting the certificate of the registry
and freightage to the ship agent. of the vessel treated of in Article 612, and the
instruments proving the obligation contracted.
If by reason of the absence of the consignee or on The judge or court, the consul or the local authority
account of the nonappearance of a legal holder of as the case may be, in view of the result of the
the bills of lading, the captain should not know to proceedings instituted, shall make a temporary
whom he is to legally make the delivery of the memorandum in the certificate of their result, in
cargo, he shall place it at the disposal of the proper order that it may be recorded in the registry when
judge or court or authority, in order that he may the vessel returns to the port of her registry, or so
determine what is proper with regards to its that it can be admitted as a legal and preferred
deposit, preservation and custody. obligation in case of sale before the return, by
PROHIBITED ACTS AND TRANSACTIONS reason of the sale of the vessel by virtue of a
declaration of unseaworthiness.
ARTICLE 613 The lack of this formality shall make the captain
A captain who navigates for freight in common or personally liable to the creditors who may be
on shares can not make any transaction for his prejudiced through his fault.
exclusive account, and should he do so the profit
shall belong to the other persons in interest, and 3. OTHER OFFICERS AND CREW
the losses shall be for his own exclusive account. CONTRACTS AND FORMALITIES
ARTICLE 634
ARTICLE 614 The captain may make up his crew with the
A captain who, having made an agreement to make number he may consider advisable, and in the
a voyage, fails to perform his undertaking, without absence of Spanish * sailors he may ship foreigners
being prevented by fortuitious accident or force residing in the country, the number thereof not to
majeure, shall indemnify for all the losses which he exceed one-fifth of the total crew. If in foreign
may cause, without prejudice to the criminal ports the captain should not find a sufficient
penalties which may be proper. number of Spanish * sailors, he may make up the
crew with foreigners, with the consent of the consul
ARTICLE 615 or marine authorities.
Without the consent of the agent, the captain can The agreements which the captain may make with
not have himself substituted by another person; the members of the crew and others who go to
and should he do so, besides being liable for all the make up the complement of the vessels, to which
acts of the substitute and bound to the indemnities reference is made in Article 612, must be reduced
mentioned in the foregoing article, the substitute to writing in the account book without the
as well as the captain may be discharged by the intervention of a notary public or clerk, signed by
agent. the parties thereto, and vised by the marine
authority if they are executed in Spanish *
ARTICLE 617 territory, or by the consuls or consular agents of
The captain can not contract loans on Spain * if executed abroad, stating therein all the
respondentia, and should he do so the contracts obligations which each one contracts and all the
shall be void. rights they acquire, said authorities taking care
Neither can he borrow money on bottomry for his that these obligations and rights are recorded in a
own transactions, except on the portion of the concise and clear manner, which will not give rise
vessel he owns, provided no money has been to doubts or claims. cd
previously borrowed on the whole vessel, and The captain shall take care to read to them the
provided there does not exist any other kind of lien articles of this Code, which concern them, stating
or obligation thereon. When he is permitted to do that they were read in the said document.
so, he must necessarily state what interest he has If the book includes the requisites prescribed in
in the vessel. Article 612, and there should not appear any signs
In case of violation of this article the principal, of alterations in its clauses, it shall be admitted as
interest, and costs shall be charged to the private evidence in questions which may arise between the
account of the captain, and the agent may captain and the crew with regard to the
furthermore have the right to discharge him. agreements contained therein and the amounts
paid on account of the same.
ARTICLE 621
Every member of the crew may request a copy of competent authority is proper in the first port
the captain, signed by the latter, of the agreement touched, which will be obligatory on the captain.
and of the liquidation of his wages, as they appear
in the book.
ARTICLE 640 A sailor who falls sick shall not lose his right to
The following shall be just causes for the revocation wages during the voyage, unless the sickness is the
of the voyage: result of his own fault. At any rate, the costs of the
1. A declaration of war or interdiction of attendance and cure shall be defrayed from the
commerce with the power to whose territory the common funds, in the form of a loan.
vessel was bound. If the sickness should be caused by an injury
2. The blockade of the port of destination or received in the service or defense of the vessel the
the breaking out of an epidemic after the sailor shall be attended and cured from the
agreement. common funds, there being deducted before
3. The prohibition to receive in said port the anything else from the proceeds of the freight, the
goods which make up the cargo of the vessel. cost of the attendance and cure.
4. The detention or embargo of the same by
order of the Government, or for any other reason
independent of the will of the agent.
5. The inability of the vessel to navigate. ARTICLE 645
If a sailor should die during the voyage his heir
ARTICLE 641 shall be given the wages earned and not received,
If, after a voyage has been begun, any of the first according to his engagement and the reason for his
three causes mentioned in the foregoing article death, namely
should occur, the sailors shall be paid at the port If he should have died a natural death and should
the captain may deem it advisable to make for the have been engaged on wages there shall be paid
benefit of the vessel and cargo, according to the what may have been earned up to the date of his
time they may have served thereon; but if the death.
vessel is to continue the voyage, the captain and If the engagement had been made for a fixed sum
the crew may mutually demand the enforcement of for the whole voyage there shall be paid half the
the contract. amount earned if the sailor died on the voyage out,
In case of the occurrence of the fourth cause, the and the whole amount if he died on the return
crew shall continue to be paid half wages, if the voyage.
agreement is by month but if the detention should And if the engagement had been made on shares
exceed three months, the engagement shall be and the death should have occurred after the
rescinded and the crew shall be paid what they voyage was begun, the heirs shall be paid the
should have earned, according to the contract, if entire portion due the sailor; but should the latter
the voyage had been made. And if the agreement have died before the departure of the vessel from
had been made for a fixed sum for the voyage, the the port, the heirs shall not be entitled to claim
contract must be complied within the terms agreed anything.
upon. If the death should have occurred in the defense of
In the fifth case, the crew shall not have any other the vessel, the sailor shall be considered as living,
right than be entitled to recover the wages earned; and his heirs shall be paid, at the end of the
but if the disability of the vessel should have been voyage, the full amount of wages or the full part of
caused by the negligence or lack of skill of the the profits due him as to the others of his grade.
captain, engineer, or sailing mate, they shall The sailor shall likewise be considered as present in
indemnify the crew for the loss suffered, always the event of his capture when defending the vessel,
reserving the criminal liability which may be in order to enjoy the same benefits as the rest; but
proper. should he have been captured on account of
carelessness or other accident not related to the
ARTICLE 642 service, he shall only receive the wages due up to
If the crew has been engaged to work on shares the day of his capture.
they shall not be entitled, by reason of the
revocation, delay, or greater extension of the ARTICLE 646
voyage, to anything but the proportionate part of The vessel with her engines, rigging, equipment,
the indemnity paid into the common funds of the and freights shall be liable for the wages earned by
vessel by the persons liable for said occurrences. the crew engaged per month or for the trip, the
liquidation and payment ought to take place
ARTICLE 643 between one voyage and the other.
If the vessel and her freight should be totally lost, After a new voyage has been undertaken, credits
by reason of capture or wreck, all rights of the crew such as the former shall lose their right of
to demand any wages whatsoever shall be preference.
extinguished, as well as that of the agent for the
recovery of the advances made. ARTICLE 647
If a portion of the vessel or freight should be The officers and the crew of the vessel shall be
saved, or part of either, the crew engaged on exempted from all obligations contracted, if they
wages, including the captain, shall retain their deem it proper, in the following cases:
rights on the salvage, so far as they go, on the 1. If, before the beginning of the voyage, the
remainder of the vessel as well as value of the captain attempts to change it, or there occurs a
freightage or the cargo saved; but sailors who are naval war with the power to which the vessel was
engaged on shares shall not have any right destined.
whatsoever to the salvage of the hull, but only on 2. If a disease should break out and be
the portion of the freightage saved. If they should officially declared epidemic in the port of
have worked to collect the remainder of the ship- destination.
wrecked vessel, they shall be given an award in 3. If the vessel should change owner or
proportion to the efforts made and to the risks captain.
encountered in order to accomplish the salvage.
ARTICLE 644
deliberately caused in order to save the vessel, her In order to incur the expenses and cause the
cargo, or both at the same time, from a real and damages corresponding to gross average, a
known risk, and particularly the following: previous resolution of the captain, adopted after
1. The goods or cash invested in the deliberation with the sailing mate and other officers
redemption of the vessel or cargo captured by of the vessel, and with a hearing of the persons
enemies, privateers, or pirates, and the provisions, interested in the cargo who may be present, shall
wages, and expenses of the vessel detained during be required.
the time the arrangement or redemption is taking If the latter shall object, and the captain and
place. officers, or a majority, or the captain, if opposed to
2. The goods jettisoned to lighten the vessel, the majority, should consider certain measures
whether they belong to the vessel, to the cargo, or necessary, they may be executed under his
to the crew, and the damage suffered through said liability, without prejudice to the freighters
act by the goods kept. exercising their rights against the captain before
3. The cables and masts which are cut or the judge or court of competent jurisdiction, if they
rendered useless, the anchors and the chains which can prove that he acted with malice, lack of skill, or
are abandoned in order to save the cargo, the negligence.
vessel, or both. If the persons interested in the cargo, being on the
4. The expenses of removing or transferring a vessel, should not be heard, they shall not
portion of the cargo in order to lighten the vessel contribute to the gross average, which contribution
and place her in condition to enter a port or shall be paid by the captain, unless the urgency of
roadstead, and the damage resulting therefrom to the case should be such that the time necessary for
the goods removed or transferred. previous deliberation was lacking.
5. The damage suffered by the goods of the
cargo through the opening made in the vessel in ARTICLE 814
order to drain her and prevent her sinking. The resolution adopted to cause the damages
6. The expenses caused through floating a which constitute a general average must
vessel intentionally stranded for the purpose of necessarily be entered in the log book, stating the
saving her. motives and reasons therefor, the votes against it,
7. The damage caused to the vessel which it and the reasons for the disagreement should there
is necessary to break open, scuttle, or smash in be any, and the irresistible and urgent causes
order to save the cargo. which moved the captain if he acted of his own
8. The expenses of curing and maintaining the accord.
members of the crew who may have been wounded In the first case the minutes shall be signed by all
or crippled in defending or saving the vessel. the persons present who could do so before taking
9. The wages of any member of the crew action if possible, and if not at the first opportunity;
detained as hostage by enemies, privateers, or in the second case by the captain and by the
pirates, and the necessary expenses which he may officers of the vessel.
incur in his imprisonment, until he is returned to In the minutes and after the resolution there shall
the vessel or to his domicile, should he prefer it. be stated in detail all the goods cast away, and
10. The wages and victuals of the crew of a mention shall be made of the injuries caused to
vessel chartered by the month during the time it those kept on board. The captain shall be obliged
should be embargoed or detained by force majeure to deliver one copy of these minutes to the
or by order of the Government, or in order to repair maritime judicial authority of the first port he may
the damage caused for the common good. make within twenty-four hours after his arrival, and
11. The loss suffered in the value of the goods to ratify it immediately by an oath.
sold at arrivals under stress in order to repair the
vessel because of gross average. ARTICLE 860
12. The expenses of the liquidation of the If, notwithstanding the jettison of the merchandise,
average. breakage of masts, ropes, and equipment, the
vessel should be lost running said risk, no
ARTICLE 817 contribution whatsoever by reason of gross
If in lightening a vessel on account of a storm, in average shall be proper.
order to facilitate her entry into a port or The owners of the goods saved shall not be liable
roadstead, part of her cargo should be transferred for the indemnity of those jettisoned, lost, or
to lighters or barges and be lost, the owner of said damaged.
part shall be entitled to indemnity, as if the loss
has originated from a gross average, the amount MAGSAYSAY INC. vs AGAN (1955)
thereof being distributed between the entire vessel REQUISITES FOR GENERAL AVERAGE:
and cargo which caused the same. 1. There must be a common danger. This
If, on the contrary, the merchandise transferred means, that both the ship and the cargo, after it
should be saved and the vessel should be lost, no has been loaded, are subject to the same danger,
liability can be demanded of the salvage. whether during the voyage, or in the port of
loading or unloading; that the danger arises from
ARTICLE 818 the accidents of the sea, dispositions of the
If, as a necessary measure to extinguish a fire in a authority, or faults of men, provided that the
port; roadstead; creek, or bay, it should be decided circumstances producing the peril should be
to sink any vessel, this loss shall be considered ascertained and imminent or may rationally be said
gross average, to which the vessels saved shall to be certain and imminent. This last requirement
contribute. exclude measures undertaken against a distant
peril.
(b) Essential Requisites 2. That for the common safety, part of the
vessel or of the cargo or both is sacrificed
ARTICLE 813 deliberately.
3. That from the expenses or damages caused In the absence of agreements, the following rules
follows the successful saving of the vessel and shall be observed:
cargo. 1. The proof of the average shall take place in
4. That the expenses or damages should have the port where the repairs are made, should any be
been incurred or inflicted after taking proper legal necessary, or in the port of unloading.
steps and authority 2. The liquidation shall take place in the port
of unloading should it be a Spanish * port.
(c) Effects 3. Should the average have occurred outside
of the waters under the jurisdiction of the
ARTICLE 812 Philippines or the cargo should have been sold in a
In order to satisfy the amount of the gross or foreign port by reason of an arrival under stress,
general averages, all the persons having an the liquidations shall be made in the port of
interest in the vessel and cargo therein at the time arrival.
of the occurrence of the average shall contribute. 4. If the average should have occurred near
the port of destination, so that said port can be
(d) Jettison made, the proceedings treated of in Rules 1 and 2
shall be held there.
ARTICLE 815
The captain shall supervise the jettison, and shall ARTICLE 847
order the goods cast overboard in the following In case of making the liquidation of the averages
order: privately by virtue of agreement, as well as when a
1. Those which are on deck, beginning with judicial authority takes part therein at the request
those which embarrass the handling of the vessel of any of the parties interested who do not agree
or damage her, preferring, if possible, the heaviest thereto, all of them shall be cited and heard, should
ones and those of least utility and value. cda they not have renounced this right.
2. Those in the hold, always beginning with Should they not be present or not have a legitimate
those of the greatest weight and smallest value, to representative, the liquidation shall be made by the
the amount and number absolutely indispensable. consul in a foreign port, and where there is none,
by the judge or court of competent jurisdiction,
ARTICLE 816 according to the laws of the country, and for the
In order that the goods jettisoned may be included account of the proper person.
in the gross average and the owners thereof be When the representative is a person well known in
entitled to indemnity, it shall be necessary in so far the place where the liquidation takes place, his
as the cargo is concerned that their existence on intervention shall be admitted and produce legal
board be proven by means of the bill of lading; and effects, even though he be authorized only by a
with regard to those belonging to the vessel, by letter of the shipowner, freighter, or underwriter.
means of the inventory made up before the
departure, in accordance with the first paragraph of ARTICLE 848
Article 612. Claims for averages shall not be admitted if they do
not exceed 5 per cent of the interest which the
claimant may have in the vessel or cargo if it is
(e) Jason Clauses (York - Antwerp Rules, gross average, and 1 per cent of the goods
Rule D) damaged if particular average, deducting in both
cases the expenses of appraisal, unless there is an
Rights to contribution in general average shall not agreement to the contrary.
be affected, though the event which gave rise to
the sacrifice or expenditure may have been due to ii. Appraisal of general average
the fault of one of the parties to the adventure; but
this shall not prejudice any remedies which may be ARTICLE 850
open against that party for such fault. If by reason of one or more accidents of the sea
particular and gross averages of the vessel or the
What are the York-Antwerp Rules and the cargo, or of both, should take place on the same
Jason Clause? voyage, the expenses and damages corresponding
The York-Antwerp Rules is an international system to each one shall be determined separately in the
of rules (they are not law or international treaties, port where the repairs are made or where the
but are just widely in use) for the liquidation and cargo is discharged, or sold, or the merchandise is
payment of average to avoid the problem of benefited.
characterization. For this purpose the captains shall be obliged to
demand of the expert appraisers and of the
The Jason Clause is a standard provision in contractors making the repairs, as well as of those
maritime contracts. It provides for uniform rules on appraising and taking part in the unloading, repair,
adjustment, proof and liquidation of avergaes in sale, or the benefiting of the merchandise, that
maritime accidents to address various systems of they separate and detail exactly in their
determining the same. appraisements or estimates and accounts all the
expenses and damages belonging to each average,
PROOF AND LIQUIDATION OF AVERAGES and in those of each average those corresponding
to the vessel and to the cargo, stating also
i. Modes separately whether there are or not any damages
proceeding from the nature of the goods, and not
ARTICLE 846 by reason of a sea accident; and in case there
The persons interested in the proof and liquidation should be expenses common to the different
of averages may mutually agree and bind averages and to the vessel and her cargo, there
themselves at any time with regard to the liability, must be calculated the amount corresponding to
liquidation, and payment thereof. cdt each and stated distinctly.
Immediately thereafter he shall proceed with the provisions, well founded fear of seizure, privateers
distribution of the amount of the average, for which or pirates, or by reason of any accident of the sea
purpose he shall fix: disabling her to navigate, he shall assemble the
1. The contributing capital, which he shall officers and shall call the persons interested in the
determine by the value of the cargo, in accordance cargo who may be present, and who may attend
with the rules established in Article 854. the meeting without the right to vote; and if, after
2. That of the vessel in her actual condition, examining the circumstances of the case, the
according to a statement of experts. reasons should be considered well founded, it shall
3. The 50 per cent of the amount of the be decided to make the nearest and most
freight, deducting the remaining 50 per cent for convenient port drafting and entering in the log
wages and maintenance of the crew. book the proper minutes, which shall be signed by
After the amount of the gross average has been all.
determined in accordance with the provisions of The captain shall have the deciding vote and the
this Code, it shall be distributed pro rata among the persons interested in the cargo may make the
goods which are to cover the same. objections and protests they may deem proper,
which shall be entered in the minutes in order that
ARTICLE 865 they may make use thereof in the manner they
The distribution of the gross average shall not be may consider advisable.
final until it has been agreed to, or in the absence
thereof, until it has been approved by the judge or ARTICLE 820
court after an examination of the liquidation and a The arrival under stress shall not be considered
hearing of the persons interested who may be legal in the following cases:
present, or of their representatives. 1. If the lack of provisions should arise from
the failure to take the necessary provisions for the
ARTICLE 866 voyage, according to usage and custom, or if they
After the liquidation has been approved it shall be should have been rendered useless or lost through
the duty of the captain to collect the amount of the bad stowage or negligence in their care.
distribution, and he shall be liable to the owners of 2. If the risk of enemies, privateers, or pirates
the goods averaged for the losses they suffer should not have been well known, manifest, and
through his delay or negligence. based on positive and justifiable facts.
3. If the injury to the vessel should have been
ARTICLE 867 caused by reason of her not being repaired, rigged,
If the contributors should not pay the amount of equipped, and arranged in a convenient manner for
the assessment within the third day after having the voyage, or by reason of some erroneous order
been requested to do so, the goods saved shall be of the captain.
attached, at the request of the captain, and shall 4. Whenever malice, negligence, want of
be sold to cover the payment. foresight, or lack of skill on the part of the captain
is the reason for the act causing the damage.
ARTICLE 868
If the persons interested in receiving the goods FORMALITIES
saved should not give security sufficient to answer
for the amount corresponding to the gross average, ARTICLE 819
the captain may defer the delivery thereof until If the captain during the navigation should believe
payment has been made. aisadc that the vessel can not continue the voyage to the
port of destination on account of the lack of
SECTION III provisions, well founded fear of seizure, privateers
Liquidation of Ordinary Averages or pirates, or by reason of any accident of the sea
disabling her to navigate, he shall assemble the
ARTICLE 869 officers and shall call the persons interested in the
The experts which the judge or court or the cargo who may be present, and who may attend
persons interested may appoint, according to the the meeting without the right to vote; and if, after
cases, shall proceed with the appraisement and examining the circumstances of the case, the
examination of the averages in the manner reasons should be considered well founded, it shall
prescribed in Article 853 and in Article 854, Rules 2 be decided to make the nearest and most
to 7, in so far as they are applicable. convenient port drafting and entering in the log
book the proper minutes, which shall be signed by
iv. Liquidation of particular average all.
The captain shall have the deciding vote and the
ARTICLE 869 persons interested in the cargo may make the
The experts which the judge or court or the objections and protests they may deem proper,
persons interested may appoint, according to the which shall be entered in the minutes in order that
cases, shall proceed with the appraisement and they may make use thereof in the manner they
examination of the averages in the manner may consider advisable.
prescribed in Article 853 and in Article 854, Rules 2
to 7, in so far as they are applicable. ARTICLE 822
If in order to make repairs to the vessel or because
2. ARRIVALS UNDER STRESS there should be danger of the cargo suffering
damage it should be necessary to unload, the
CAUSES captain must request authorization of the judge or
court of competent jurisdiction to lighten the
ARTICLE 819 vessel, and do so with the knowledge of the person
If the captain during the navigation should believe interested or representative of the cargo, should
that the vessel can not continue the voyage to the there be one.
port of destination on account of the lack of
In a foreign port, it shall be the duty of the Spanish The captain shall answer for the damages caused
* consul, where there is one, to give the by his delay, if the reason for the arrival under
authorization. stress having ceased, he should not continue the
In the first case, the expenses shall be defrayed by voyage.
the ship agent or owner, and in the second, they If the reason for said arrival should have been the
shall be for the account of the owners of the fear of enemies, privateers, or pirates, before
merchandise, for whose benefit the act took place. sailing, a discussion and resolution of a meeting of
If the unloading should take place for both reasons, the officers of the vessel and persons interested in
the expenses shall be defrayed in proportion to the the cargo who may be present shall take place, in
value of the vessel and that of the cargo. accordance with the provisions contained in Article
819.
EXPENSES
3. COLLISIONS
ARTICLE 821
The expenses caused by the arrival under stress NOTE:
shall always be for the account of the shipowner or
agent, but the latter shall not be liable for the Collision the impact of two vessels both of which
damage which may be caused the shippers by are moving.
reason of the arrival under stress, provided the
latter is legitimate. Allision the striking of a moving vessel agains
Otherwise, the shipowner or agent and the captain one that is stationary.
shall be jointly liable.
CLASSES AND EFFECTS
ARTICLE 822
If in order to make repairs to the vessel or because i. Fortuitous
there should be danger of the cargo suffering
damage it should be necessary to unload, the ARTICLE 830
captain must request authorization of the judge or If a vessel should collide with another by reason of
court of competent jurisdiction to lighten the an accident or through force majeure, each vessel
vessel, and do so with the knowledge of the person and her cargo shall be liable for their own damage.
interested or representative of the cargo, should
there be one. ARTICLE 831
In a foreign port, it shall be the duty of the Spanish If a vessel should be forced to collide with another
* consul, where there is one, to give the one by a third vessel, the owner of the third vessel
authorization. shall indemnify for the losses and damages caused,
In the first case, the expenses shall be defrayed by the captain thereof being civilly liable to said
the ship agent or owner, and in the second, they owner.
shall be for the account of the owners of the
merchandise, for whose benefit the act took place. ARTICLE 832
If the unloading should take place for both reasons, If, by reason of a storm or other cause of force
the expenses shall be defrayed in proportion to the majeure, a vessel which is properly anchored and
value of the vessel and that of the cargo. moored should collide with those in her immediate
vicinity, causing them damage, the injury
RESPONSIBILITY OF THE CAPTAIN occasioned shall be looked upon as particular
average to the vessel run into.
ARTICLE 823
The care and preservation of the cargo which has ii. Culpable
been unloaded shall be in charge of the captain,
who shall be responsible for the same, except in ARTICLE 826
cases of force majeure. If a vessel should collide with another through the
fault, negligence, or lack of skill of the captain,
ARTICLE 824 sailing mate, or any other member of the
If the entire cargo or part thereof should appear to complement, the owner of the vessel at fault shall
be damaged, or there should be imminent danger indemnify the losses and damages suffered, after
of its being damaged, the captain may request of an expert appraisal. aisadc
the judge or court of competent jurisdiction or the
consul, in a proper case, the sale of all or of part of
the former, and the person taking cognizance of ARTICLE 827
the matter shall authorize it after an examination If both vessels may be blamed for the collision,
and declaration of experts, advertisements, and each one shall be liable for his own damages, and
other formalities required by the case and an entry both shall be jointly responsible for the losses and
in the book, in accordance with the provisions of damages suffered by their cargoes.
Article 624.
The captain shall, in a proper case, justify the ARTICLE 831
legality of the procedure, under the penalty of If a vessel should be forced to collide with another
answering to the shipper for the price the one by a third vessel, the owner of the third vessel
merchandise would have brought if it should have shall indemnify for the losses and damages caused,
arrived at the port of its destination in good the captain thereof being civilly liable to said
condition. owner.
ARTICLE 825 25
See footnote 12. Distinguish inscrutable fault with
the doctrine of last clear chance and with the
LIABILITIES26
ARTICLE 828
The provisions of the foregoing article are i. Shipowner or agent
applicable to the case in which it can not be
decided which of the two vessels was the cause of ARTICLE 837
the collision. The civil liability contracted by the shipowners in
the cases prescribed in this section, shall be
PRESUMPTION OF LOSS BY COLLISION understood as limited to the value of the vessel
with all her appurtenances and all the freight
ARTICLE 833 earned during the voyage.
A vessel shall be presumed as lost thru a collision
which, upon being run into, sinks immediately, and ARTICLE 838
also any vessel which is obliged to make a port to When the value of the vessel and her
repair the damages caused by the collision should appurtenances should not be sufficient to cover all
be lost during the voyage, or should be obliged to the liabilities, the indemnity due by reason of the
be stranded in order to be saved. death or injury of persons shall have preference.
ARTICLE 829
In the cases above mentioned the civil action of the
owner against the person liable for the damage is
reserved, as well as the criminal liabilities which
may be proper.
ARTICLE 834
If the vessels colliding should have pilots on board
discharging their duties at the time of the collision,
their presence shall not exempt the captains from
the liabilities they incur; but the latter shall have
the right to be indemnified by the pilots without
prejudice to the criminal liability which the latter
may incur.
iii. Conditions, protest27 If several vessels navigate under convoy, and any
of them should be wrecked, the cargo saved shall
Maritime Protest a written statement under be distributed among the rest in the proportion to
oath, made by the master of a vessel, after the the amount each one can receive.
occurrence of an accident or disaster in which the If any captain should refuse, without sufficient
vessel or cargo is lost or injured, with respect to cause, to receive what may correspond to him, the
the circumstances attending such occurrence. It is captain of the wrecked vessel shall enter a protest
usually intended to show that the loss or damage against him before two sea officials of the losses
resulted from a peril of the sea, or from some other and damages resulting therefrom, ratifying the
cause for which neither the master nor owner was complaint within twenty-four hours after arrival at
responsible, and conludes with the protestation the first port, and including it in the proceedings he
against any liability of the owner for such loss or must institute in accordance with the provisions
damage. contained in Article 612.
Should it not be possible to transfer to the other
ARTICLE 835 vessels the entire cargo of the one wrecked, the
The action for the recovery of losses and damages goods of the highest value and smallest volume
arising from collisions can not be admitted if a shall be saved first, the designation thereof being
protest or declaration is not presented within made by the captain, in concurrence with the
twenty-four hours to the competent authority of officers of his vessel.
the point where the collision took place, or that of
the first port of arrival of the vessel, if in Spain, *
and to the consul of Spain * if it should have F. Special Contracts of Maritime Commerce
occurred in a foreign country.
1. CHARTER PARTIES28
ARTICLE 836
In so far as the damages caused to persons or to DEFINITION
the cargo are concerned, the absence of a protest A charter party is a contract by virture of which the
can not prejudice the persons interested who were owenr or agent of a vessel binds himself to
not on board or were not in a condition to make transport merchandise or persons for a fixed price.
known their wishes. It is a contract by which the owner or agent of the
vessel leases for a certain price the whole or
ARTICLE 839 portion of a vessel for the transportation of the
If the collision should occur between Spanish * goods or persons from one port to another. Towage
vessels in foreign waters, or if it should take place is not a charter party. It is a contract for the hire of
in open waters, and the vessels should make a services by which a vessel is engaged to tow
foreign port, the Spanish * consul in said port shall another vessel from one port to another for
hold a summary investigation of the accident, consideration.
forwarding the proceedings to the captain-general
of the nearest department * for continuation and KINDS
conclusion.
As to extent of vessel hired:
4. SHIPWRECKS
Total
ARTICLE 840
Partial - charterer as a rule does not
The losses and deteriorations suffered by a vessel
acquire the right to fix the date
and her cargo by reason of shipwreck or stranding
when the vessel
shall be individually for the account of the owners,
should depart, unless such right is
the part of the wreck which may be saved
expressly granted in
belonging to them in the same proportion.
the contract
ARTICLE 841
As to time:
If the wreck or stranding should arise through the
malice, negligence, or lack of skill of the captain, or
Until a fixed day or for a determined
because the vessel put to sea insufficiently repaired
number of days or months
and prepared, the owner or the freighters may
For a voyage
demand indemnity of the captain for the damages
caused to the vessel or cargo by the accident, in
As to freightage:
accordance with the provisions contained in Articles
For a fixed amount for the whole cargo
610, 612, 614, and 621.
ARTICLE 842 For a fixed rate per ton
The goods saved from the wreck shall be specially For so much per month
liable for the payment of the expenses of the
respective salvage, and the amount thereof must Coastwise Lighterage Corp vs. CA and Phil.
be paid by the owners of the former before they Gen. Insurance Co. (1995)
are delivered to them, and with preference to any The distinction between the two kinds of charter
other obligation, if the merchandise should be sold. parties (i.e. bareboat or demise and contract of
ARTICLE 843
28
The topic was covered in 2004, 2003, 1991, and
doctrine of limited liabilities. 1989. Take note of the definition and kinds of a
26
See footnote 15. charter party, who should bear the loss of cargo in
27
Take note of the concept of maritime protest, and case of death of crewmembers, validity of stipulation
when and where it should be file. This was asked in exempting owner from liability, and owner pro hac
2007, 1988, 1978, and 1977. vice.
affreightment) is more clearly set out in the case of the cargo consists, or in any other manner
Puromines, Inc. vs. Court of Appeals: whatsoever agreed upon.
Under the demise or bareboat charter of the vessel, 9. The amount of primage to be paid to the
the charterer will generally be regarded as the captain.
owner for the voyage or service stipulated. The 10. The days agreed upon for loading and
charterer mans the vessel with his own people and unloading.
becomes the owner pro hac vice, subject to liability 11. The lay days and extra lay days to be
to others for damages caused by negligence. To allowed and the rate of demurrage.
create a demise, the owner of a vessel must
completely and exclusively relinquish possession, ARTICLE 653
command and navigation thereof to the charterer, If the freight should be received without the
anything short of such a complete transfer is a charter party having been signed, the contract shall
contract of affreightment (time or voyage charter be understood as executed in accordance with what
party) or not a charter party at all. appears in the bill of lading, which shall be the only
A contract of affreightment is one in which the instrument with regard to the freight to determine
owner of the vessel leases part or all of its space to the rights and obligations of the owner, of the
haul goods for others. It is a contract for special captain, and of the charterer. cdt
service to be rendered by the owner of the vessel
and under such contract the general owner retains ARTICLE 654
the possession, command and navigation of the The charter parties executed with the intervention
ship, the charterer or freighter merely having use of a broker, who certifies to the authenticity of the
of the space in the vessel in return for his payment signatures of the contracting parties made in his
of the charter hire. presence, shall be full evidence in court; and if said
Although a charter party may transform a common signatures should not agree the ones identical with
carrier into a private one, the same however is not the signatures the broker must keep in his registry,
true in a contract of affreightment on account of if kept in accordance to law, shall be final.
the aforementioned distinctions between the two. The contracts shall also be admitted as evidence,
Thus, Coastwise, by the contract of affreightment, even though a broker has not taken part therein, if
was not converted into a private carrier, but the contracting parties acknowledge the signatures
remained a common carrier and was still liable as to be the same as their own.
such. Should no broker have taken part in the charter
party and should the signatures not have been
Owner Pro Hac Vice demise charter to whom acknowledged, doubts shall be decided by what is
the owner of the vessel has completely and provided for in the bill of lading, and in the absence
exclusively relinquished possession, command and thereof by the proofs submitted by the parties.
navigation of the vessel. In this kind of charter,
the charterer mans and equips the vessel and ARTICLE 655
assumes all responsibility for navigation, Charter parties executed by the captain in the
management and operation. He thus acts as the absence of the agent shall be valid and efficient,
owner of the vessel in all important aspects during even though in executing them he should have
the duration of the charter. acted in violation of the orders and instructions of
the agent or shipowner; but the latter shall have a
FORMS AND EFFECTS right of action against the captain to recover
damages.
Charter Parties
1. Forms and Effects of Charter Parties ARTICLE 656
If in the charter party the time in which the loading
ARTICLE 652 and unloading is to take place is not stated, the
A charter party must be drawn in duplicate and customs of the port where these acts take place
signed by the contracting parties, and when either shall be observed. After the period stipulated or the
does not know how or can not do so, by two customary one has passed, and should there not be
witnesses at their request. in the freight contract an express clause fixing the
The charter party shall include, besides the indemnification for the delay, the captain shall be
conditions unrestrictedly stipulated, the following entitled to demand demurrage for the usual and
statements: extra lay days which may have elapsed in loading
1. The kind, name, and tonnage of the vessel. and unloading.
2. Her flag and port of registry.
3. The name, surname, and domicile of the ARTICLE 657
captain. If during the voyage the vessel should be rendered
4. The name, surname, and domicile of the unseaworthy the captain shall be obliged to charter
agent, if the latter should make the charter party. another one at his expense, in good condition, to
5. The name, surname, and domicile of the take the cargo to its destination, for which purpose
charterer, and if he states that he is acting by he shall be obliged to look for a vessel not only at
commission, that of the person for whose account the port of arrival but in the other ports within a
he makes the contract. distance of 150 kilometers.
6. The port of loading and unloading. If the captain should not furnish a vessel to take
7. The capacity, number of tons or weight, or the cargo to its destination, either through
measure which they respectively bind themselves indolence or malice, the freighters, after a demand
to load and transport, or whether it is the total of the captain to charter a vessel within an
cargo. unextendible period, may charter one and apply to
8. The freightage to be paid, stating whether the judicial authority requesting that the charter
it is to be a fixed amount for the voyage or so party which may have been made be immediately
much per month, or for the space to be occupied, approved.
or for the weight or measure of the goods of which
The same authority shall judicially compel the If, on the contrary, there should be several charter
captain to confirm the charter made by the parties, and by reason of the want of space all the
shippers for his account and under his cargo contracted for can not be received, and none
responsibility. of the charterers desires to rescind the contract,
If the captain, notwithstanding his efforts, should preference shall be given to the person who has
not find a vessel to charter, he shall deposit the already loaded and arranged the freight in the
cargo at the disposal of the freighters, to whom he vessel, and the rest shall take the place
shall communicate the facts on the first opportunity corresponding to them in the order of the dates of
presenting itself, the charter being regulated in their contracts.
such cases by the distance covered by the vessel, Should there be no priority, the charterers may
there being no right to any indemnification load, if they wish, pro rata of the amounts of
whatsoever. weight or space they may have engaged, and the
person from whom the vessel was chartered shall
Is there a valid contract if there was no be obliged to indemnify them for the loss and
charter party and bill of lading? damage.
If we take Art. 653 literally, no. However, if we
take into account the fact that delivery of the cargo ARTICLE 670
does not constitute the making of a contract but If the person from whom the vessel is chartered,
rather the partial performance thereof, the mere after receiving a part of the freight, should not find
fact of delivery and receipt of such cargo, the good sufficient to make up at least three-fifths of the
faith and mutual consent with which they have amount which the vessel can hold, at the price he
been made, should be a better substitute for the may have fixed, he may substitute for the
chater party than the bill of lading which is nothing transportation another vessel inspected and
more than proof of such delivery. declared suitable for the same voyage, the
expenses of transfer being defrayed by him, as well
What is primage? as the increase, should there be any, in the price of
It was formerly a small allowance or compensation the charter. Should he not be able to make this
payable to the master and marines of a ship, to the change, the voyage shall be undertaken at the time
former for the use of his cables and ropes to agreed upon; and should no time have been fixed,
discharge the goods of the merchant; to the latter within fifteen days from the time of beginning to
for the lading and unlading in any port of haven. load, should nothing to the contrary have been
Today, it is no longer a gratuity but is included in stipulated.
the freight rate. If the owner of the part of the freight already
loaded should procure some more at the same
What is demurrage? price and under similar or proportionate conditions
It is the sum fixed by the contract of carriage, or to those accepted for the freight received, the
which is allowed, as remuneration to the owner of a person from whom the vessel is chartered or the
ship for the detention of his vessel beyond the captain can not refuse to accept the rest of the
number of days allowed by the charter party for cargo; and should he do so, the freighter shall have
loading and unloading of for sailing. It is an a right to demand that the vessel put to sea with
extended freight or reward to the vessel in the cargo she may have on board.
compensation for the earnings she is improperly
caused to lose. ARTICLE 671
After three-fifths of the vessel is loaded, the person
What are lay days? from whom she is chartered can not, without the
Lay days are days allowed to charter parties for consent of the charterers or freighters substitute
loading and unloading the cargo. the vessel designated in the charter party by
another one, under the penalty of making himself
RIGHTS AND OBLIGATIONS OF SHIPOWNERS thereby liable for all the losses and damages
occurring during the voyage to the cargo of the
2. Rights and Obligations of Owners person who did not consent to the change.
ARTICLE 669
The owners or the captain shall observe in charter ARTICLE 672
parties the capacity of the vessel or that expressly If the vessel has been chartered in whole, the
designated in the registry of the same, a difference captain can not, without the consent of the person
greater than 2 per cent between that stated and chartering her, accept freight from any other
her true capacity not being permissible. person; and should he do so, said charterer may
If the owners or the captain should contract to oblige him to unload it and require him to
carry a greater amount of cargo than the vessel indemnify him for the losses suffered thereby.
can hold, in view of her tonnage, they shall
indemnify the freighters whose contracts they do ARTICLE 673
not fulfill for the losses they may have caused them The person from whom the vessel is chartered shall
by reason of their default, according to the cases, be liable for all the losses caused the charterer by
viz: reason of the voluntary delay of the captain in
If the vessel has been chartered by one freighter putting to sea, according to the rules prescribed,
only, and there should appear to be an error or provided he has been requested to put to sea at
fraud in her capacity, and the charterer should not the proper time through a notary or judicially.
wish to rescind the contract, when he has a right to
do so, the charter should be reduced in proportion ARTICLE 674
to the cargo the vessel can not receive, the person If the charterer should carry to the vessel more
from whom the vessel is chartered being freight than that contracted for, the excess may be
furthermore obliged to indemnify the charterer for admitted in accordance with the price stipulated in
the losses he may have caused. the contract, if it can be well stowed without
injuring the other freighters, but if in order to stow
said freight it should be necessary to stow it in consider most convenient, without the captain
such manner as to throw the vessel out of trim the being allowed to refuse to receive on board the
captain must refuse it or unload it at the expense freight delivered by the second charterers,
of its owner. provided the conditions of the first charter are not
The captain may likewise, before leaving the port, changed, and that the person from whom the
unload the merchandise placed on board vessel is chartered be paid the full price agreed
clandestinely, or transport it, if he can do so and upon even though the full cargo is not embarked,
keep the vessel in trim, demanding by way of with the limitation established in the next article.
freightage the highest price which may have been cdtai
stipulated for said voyage.
ARTICLE 680
ARTICLE 675 A charterer who does not make up the full cargo he
If the vessel has been chartered to receive the bound himself to ship shall pay the freightage of
cargo in another port, the captain shall appear the amount he fails to ship, if the captain did not
before the consignee designated in the charter take other freight to make up the cargo of the
party, and, should the latter not deliver the cargo vessel, in which case he shall pay the first
to him, he shall inform the charterer and await his charterer the difference should there be any.
instructions, and in the meantime the lay days
agreed upon shall begin to run, or those allowed by ARTICLE 681
custom in the port, unless there is a special If the charterer should ship goods different from
agreement to the contrary. those indicated at the time of executing the charter
Should the captain not receive an answer within party, without the knowledge of the person from
the time necessary therefor, he shall make efforts whom the vessel was chartered or of the captain,
to find freight; and should he not find any after the and should thereby give rise to losses, by reason of
lay days and extra lay days have elapsed, he shall confiscation, embargo, detention, or other causes,
make a protest and return to the port where the to the person from whom the vessel was chartered
charter was made. or to the shippers, the person giving rise thereto
The charterer shall pay the freightage in full, shall be liable with the value of his shipment and
discounting that which may have been earned on furthermore with his property, for the full
the merchandise which may have been carried on indemnity to all those injured through his fault.
the voyage out or on the return trip, if carried for
the account of third persons. ARTICLE 682
The same shall be done if a vessel, having been If the merchandise shipped should have been for
chartered for the round trip, should not be given the purpose of illicit commerce, and was taken on
any cargo for her return. board with the knowledge of the person from whom
the vessel was chartered or of the captain, the
ARTICLE 676 latter, jointly with the owner of the same, shall be
The captain shall lose the freightage and shall liable for all the losses which may be caused the
indemnify the charterers if the latter should prove, other shippers, and even though it may have been
even against the certificate of inspection, should agreed, they can not demand any indemnity
one have taken place at the port of departure, that whatsoever of the charterer for the damage caused
the vessel was not in a condition to navigate at the the vessel.
time of receiving the cargo.
ARTICLE 683
ARTICLE 677 In case of making a port to repair the hull,
The charter party shall be enforced if the captain machinery, or equipment of the vessel, the
should not have any instructions from the freighters must wait until the vessel is repaired,
charterer, and a declaration of war or a blockade being permitted to unload her at their own expense
should take place during the voyage. should they deem it advisable.
In such case the captain shall be obliged to make If, for the benefit of the cargo subject to
the nearest safe and neutral port, and request and deterioration, the freighters or the court, or the
await orders from the freighter; and the expenses consul, or the competent authority in a foreign land
incurred and salaries earned during the detention should order the merchandise to be unloaded, the
shall be paid as general average. expenses of loading and unloading shall be for the
If, by orders of the freighter, the cargo should be account of the former.
discharged at the port of arrival, the freight for the
voyage out shall be paid in full. ARTICLE 684
If the charterer, without the occurrence of any of
ARTICLE 678 the cases of force majeure mentioned in the
If the time necessary, in the opinion of the judge or foregoing article, should wish to unload his
court, in which to receive orders from the freighters merchandise before arriving at the port of
should have elapsed without the captain having destination, he shall pay the full freight, the
received any instructions, the cargo shall be expenses of the stop made at his request, and the
deposited, and it shall be liable for the payment of losses and damages caused the other freighters,
the freight and expenses incurred by reason of the should there be any.
delay which shall be paid from the proceeds of the
part first sold. ARTICLE 685
In charters for transportation of general freight any
OBLIGATIONS OF CHARTERERS of the freighters may unload the merchandise
before the beginning of the voyage, by paying one-
3. Obligations of Charterers half the freight, the expense of stowing and
ARTICLE 679 restowing the cargo, and any other damage which
The charterer of an entire vessel may subcharter may be caused the other shippers.
the whole or part thereof for the amounts he may
ARTICLE 686 In such case the charterer must pay half the freight
After the vessel has been unloaded and the cargo stipulated besides the demurrage for the lay days
placed at the disposal of the consignee, the latter and extra lay days elapsed.
must immediately pay the captain the freight due 2. If the person from whom the vessel was
and the other expenses to which he may be liable chartered should sell her before the charterer has
for said cargo. begun to load her and the purchaser should load
The primage must be paid in the same proportion her for his own account.
and at the same time as the freight, all the In such case the vendor shall indemnify the
changes and modifications to which the latter charterer for the losses he may suffer.
should be subject also governing the former. If the new owner of the vessel should not load her
for his own account the charter party shall be
ARTICLE 687 respected, and the vendor shall indemnify the
The charters and freighters can not abandon purchaser if the former did not inform him of the
merchandise damaged on account of the inherent charter pending at the time of making the sale.
vice of the goods or by reason of an accidental
case, for the payment of the freight and other ARTICLE 690
expenses. aisadc The charter party shall be rescinded and all action
The abandonment shall be proper, however, if the arising therefrom shall be extinguished if, before
cargo should consist of liquids and should they the vessel puts to sea from the port of departure,
have leaked out, there not remaining in the any of the following cases should occur:
containers more than one-quarter of their contents. 1. A declaration of war or interdiction of
commerce with the power to whose ports the
RESCISSION vessel was going to sail.
2. A condition of blockade of the port of
4. Total or Partial Rescissions of Charter destination of said vessel, or the breaking out of an
Parties epidemic after the contract was executed.
ARTICLE 688 3. The prohibition to receive the merchandise
A charter party may be annulled at the request of of the vessel at the said port.
the charterer: 4. An indefinite detention, by reason of an
1. If before loading the vessel he should embargo of the vessel by order of the government
abandon the charter, paying half of the freightage or for any other reason independent of the will of
agreed upon. the agent.
2. If the capacity of the vessel should not 5. The impossibility of the vessel to navigate,
agree with that stated in the certificate of the without fault of the captain or agent.
tonnage, or if there is an error in the statement of The unloading shall be made for the account of the
the flag under which she sails. charterer.
3. If the vessel should not be placed at the ARTICLE 691
disposal of the charterer within the period and in If the vessel can not put to sea on account of the
the manner agreed upon. closing of the port of departure, or any other
4. If, after the vessel has put to sea, she temporary cause, the charter shall be in force
should return to the port of departure, on account without any of the contracting parties having a
of risk of pirates, enemies, or bad weather, and the right to claim damages.
freighters should agree to unload her. The subsistence and wages of the crew shall be
In the second and third cases the person from considered as general average.
whom the vessel was chartered shall indemnify the During the interruption the charterer may, at the
charterer for the losses he may suffer. proper time and for his own account, unload and
In the fourth case the person from whom the load the merchandise, paying demurrage if the
vessel was chartered shall have a right to the reloading should continue after the reason for the
freightage in full for the voyage out. detention has ceased.
If the charter should have been made by the
months, the charterers shall pay the full freightage ARTICLE 692
for one month, if the voyage were to a port in the A charter party shall be partially rescinded, unless
same waters, and two months, if the voyage were there is an agreement to the contrary, and the
to a port in different waters. captain shall only be entitled to the freight for the
From one port to another of the Peninsula and voyage out, if, by reason of a declaration of war,
adjacent islands, the freightage for one month only closing of ports, or interdiction of commercial
shall be paid. relations during the voyage, the vessel should
5. If a vessel should make a port during the make the port designated for such a case in the
voyage in order to make urgent repairs and the instructions of the charterer.
freighters should prefer to dispose of the 2. LOANS ON BOTTOMRY AND
merchandise. RESPONDENTIA29
When the delay does not exceed thirty days, the
freighters shall pay the full freight for the voyage Ordinary Loan Loan on Bottomry or
out. Respondentia
Should the delay exceed thirty days, they shall only
pay the freight in proportion to the distance Collateral is not Collateral required
covered by the vessel. required
Collateral may be any Collateral must be a
ARTICLE 689 property, real or vessel or cargo subject
At the request of the person from whom the vessel personal to maritime risks
is chartered the charter party may be rescinded: Absolutely repayable Depends upon the safe
1. If the charterer at the termination of the
extra lay days does not place the cargo alongside 29
The definitions of loan on bottomry and loan on
the vessel. respondentia were asked in 1980 and 1975.
The surplus principal shall be returned with legal If while on voyage the captain should find it
interest for the whole period of the duration of the necessary to contract one or more obligations
disbursement. mentioned in subdivisions 8 and 9 of Article 580,
he shall apply to the judge or court if he is in
ARTICLE 727 Philippine territory, and otherwise to the consul of
If the full amount of the loan contracted to load the the Republic of the Philippines, should there be
vessel should not be made use of for the cargo, the one, and in his absence, to the judge or court or
surplus shall be returned before clearing. proper local authority, presenting the certificate of
The same procedure shall be observed with regard the registration sheet treated of in Article 612 and
to the goods taken as a loan if they could not all the instruments proving the obligation contracted.
have been loaded.
The judge or court, the consul, or the local
ARTICLE 728 authority, as the case may be, in view of the result
The loan which the captain takes at the point of of the proceedings instituted, shall make a
residence of the owners of the vessel shall only temporary memorandum of their result in the
affect that part of the latter which belongs to the certficate, in order that it may be recorded in the
captain, if the other owners or their agents should registry when the vessel returns to the port of its
not have given their express authorization thereto registry, or so that it can be admitted as a legal
or should not have taken part in the transaction. and preferred obligation in case of sale before its
If one or more of the owners should be requested return, by reason of the sale of the vessel on
to furnish the amount necessary to repair or account of a declaration of unseaworthiness.
provision the vessel, and should not do so within
twenty-four hours, the interest which the parties in EFFECTS OF CONTRACT
default may have in the vessel shall be liable for
the loan in the proper proportion. ARTICLE 719
Outside of the residence of the owners the captain A loan on bottomry or respondentia shall be
may contract loans in accordance with the considered that which the repayment of the sum
provisions of Articles 583 and 611. loaned and the premium stipulated, under any
condition whatsoever, depends on the safe arrival
BY WHOM in port of the goods on which it is made, or of their
value in case of accident.
ARTICLE 611
In order to comply with the obligations mentioned ARTICLE 726
in the foregoing article, the captain, when he has If the lender should prove that he loaned a larger
no funds and does not expect to receive any from amount than the value of the article liable for the
the agent, shall procure the same in the successive bottomry loan, by reason of fraudulent measures
order stated below: employed by the borrower the loan shall only be
1. By requesting said funds of the consignees valid for the amount at which said object is
or correspondents of a vessel. appraised by experts.
2. By applying to the consignees of the cargo The surplus principal shall be returned with legal
or to the persons interested therein. interest for the whole period of the duration of the
3. By drawing on the agent. disbursement.
4. By borrowing the amount required by
means of a bottomry bond. ARTICLE 727
5. By selling a sufficient amount of the cargo If the full amount of the loan contracted to load the
to cover the amount absolutely necessary to repair vessel should not be made use of for the cargo, the
the vessel, and to equip her to pursue the voyage. surplus shall be returned before clearing.
In the two latter cases he must apply to the judicial The same procedure shall be observed with regard
authority of the port, if in Spain * and to the to the goods taken as a loan if they could not all
Spanish * consul, if in a foreign country; and where have been loaded.
there should be none, to the local authority,
proceeding in accordance with the prescriptions of ARTICLE 729
Article 583, and with the provisions of the law of Should the goods on which money is taken not be
civil procedure. subjected to any risk, the contract shall be
considered an ordinary loan, the borrower being
ARTICLE 617 under the obligation to return the principal and
The captain can not contract loans on interest at the legal rate, if the interest stipulated
respondentia, and should he do so the contracts should not have been lower.
shall be void.
Neither can he borrow money on bottomry for his ARTICLE 730
own transactions, except on the portion of the Loans made during the voyage shall have
vessel he owns, provided no money has been preference over those made before the clearing of
previously borrowed on the whole vessel, and the vessel, and they shall be graduated by the
provided there does not exist any other kind of lien inverse order to that of their dates.
or obligation thereon. When he is permitted to do The loans for the last voyage shall have preference
so, he must necessarily state what interest he has over prior ones.
in the vessel. Should several loans have been made at a port
In case of violation of this article the principal, made under stress and for the same purpose, all of
interest, and costs shall be charged to the private them shall be paid pro rata.
account of the captain, and the agent may
furthermore have the right to discharge him.
ARTICLE 583
ARTICLE 700
30
The presentation of the bill of lading and the In all that relates to the preservation of order and
liability of the ship owner when bill of lading is not police on board the vessel the passengers shall
presented were asked in 2005. In 1998 it definition conform to the orders given by the captain, without
and two-fold character was also asked. any distinction whatsoever.
examination of the vessel, in order to ascertain thereof, taking advantage of the semaphore,
whether she is watertight, and whether the rigging telegraph, mail, etc., according to the cases; notify
and engines are in good condition; and if she has him the freight he may have received, stating the
the equipment required for good navigation, name and domicile of the shippers, freight earned,
preserving a certificate of the memorandum of this and amounts borrowed on bottomry bond, advise
inspection, signed by all the persons who may have him of his departure, and give him any information
taken part therein, under their liability. and data which may be of interest.
The experts shall be appointed one by the captain 13. To observe the rules on the situation of
of the vessel and the other one by the persons who lights and evolutions to prevent collisions.
request the examination, and in case of 14. To remain on board in case of danger to
disagreement a third shall be appointed by the the vessel, until all hope to save her is lost, and
marine authority of the port. before abandoning her to hear the officers of the
5. To remain constantly on board the vessel crew, abiding by the decision of the majority; and if
with the crew during the time the freight is taken he should have to take a boat he shall take with
on board and carefully watch the stowage thereof; him, before anything else, the books and papers,
not to consent to any merchandise or goods of a and then the articles of most value, being obliged
dangerous character to be taken on, such as to prove in case of the loss of the books and papers
inflammable or explosive substances, without the that he did all he could to save them.
precautions which are recommended for their 15. In case of wreck he shall make the proper
packing, management and isolation; not to permit protest in due form at the first port reached, before
that any freight be carried on deck which by reason the competent authority or the Spanish * consul,
of its disposition, volume, or weight makes the within twenty-four hours, stating therein all the
work of the sailors difficult, and which might incidents of the wreck, in accordance with case 8 of
endanger the safety of the vessel; and if, on this article.
account of the nature of the merchandise, the 16. To comply with the obligations imposed by
special character of the shipment, and principally the laws and rules of navigation, customs, health,
the favorable season it takes place, he allows and others.
merchandise to be carried on deck, he must hear
the opinion of the officers of the vessel, and have I. Carriage of Goods by Sea Act
the consent of the shippers and of the agent. (Commonwealth Act No. 65; Public Act No. 65;
6. To demand a pilot at the expense of the Public Act 521, 74th US Congress)
vessel whenever required by navigation, and
principally when a port, canal, or river, or a CA No. 65 ACT TO DECLARE THAT
roadstead or anchoring place is to be entered with PUBLIC ACT NUMBERED FIVE HUNDRED AND
which neither he, the officers nor the crew are TWENTY-ONE, KNOWN AS "CARRIAGE OF
acquainted. GOODS BY SEA ACT," ENACTED BY THE
7. To be on deck at the time of sighting land SEVENTY-FOURTH CONGRESS OF THE UNITED
and to take command on entering and leaving STATES, BE ACCEPTED, AS IT IS HEREBY
ports, canals, roadsteads, and rivers, unless there ACCEPTED BY THE NATIONAL ASSEMBLY
is a pilot on board discharging his duties. He shall
not spend the night away from the vessel except WHEREAS, the Seventy-fourth Congress of the
for serious causes or by reason of official business. United States enacted Public Act Numbered Five
cdtai hundred and twenty-one, entitled:
8. To present himself, when making a port in
"Carriage of Goods by Sea Act";
distress, to the maritime authority if in Spain * and
WHEREAS, the primordial purpose of the said Acts
to the Spanish * consul if in a foreign country,
is to bring about uniformity in ocean bills of lading
before twenty-four hours have elapsed, and make
and to give effect to the Brussels Treaty, signed by
a statement of the name, registry, and port of
the United States with other powers;
departure of the vessel, of its cargo, and reason of
WHEREAS, the Government of the United States
arrival, which declaration shall be vised by the
has left it to the Philippine Government to decide
authority or by the consul if after examining the
whether or not the said Act shall apply to carriage
same it is found to be acceptable, giving the
of goods by sea in foreign trade to and from
captain the proper certificate in order to show his
Philippine ports;
arrival under stress and the reasons therefor. In
WHEREAS, the said Act of Congress contains
the absence of marine officials or of the consul, the
advanced legislation, which is in consonance with
declaration must be made before the local
modern maritime rules and the practices of the
authority.
great shipping countries of the world;
9. To take the steps necessary before the
WHEREAS, shipping companies, shippers, and
competent authority in order to enter in the
marine insurance companies, and various
certificate of the Commercial Registry of the vessel
chambers of commerce, which are directly affected
the obligations which he may contract in
by such legislation, have expressed their desire
accordance with Article 583.
that said Congressional Act be made applicable and
10. To put in a safe place and keep all the
extended to the Philippines; therefore,
papers and belongings of any members of the crew
Be it enacted by the National Assembly of the
who might die on the vessel, drawing up a detailed
Philippines:
inventory, in the presence of passengers as
Section 1
witnesses, and, in their absence, of members of the
That the provisions of Public Act Numbered Five
crew.
hundred and twenty-one of the Seventy-fourth
11. To conduct himself according to the rules
Congress of the United States, approved on April
and precepts contained in the instructions of the
sixteenth, nineteen hundred and thirty-six, be
agent, being liable for all that he may do in
accepted, as it is hereby accepted to be made
violation thereof.
applicable to all contracts for the carriage of goods
12. To give an account to the agent from the
by sea to and from Philippine ports in foreign trade:
port where the vessel arrives, of the reason
Provided, That nothing in the Act shall be construed uncovered, or on the cases or coverings in which
as repealing any existing provision of the Code of such goods are contained, in such a manner as
Commerce which is now in force, or as limiting its should ordinarily remain legible until the end of the
application. voyage.
Section 2 (b) Either the number of packages or pieces, or the
This Act shall take effect upon its approval. quantity or weight, as the case may be, as
Approved: October 22,1936. furnished in writing by the shipper.
An Act Relating to the Carriage of Goods by Sea. (c) The apparent order and condition of the goods:
Be it enacted by the Senate and House of Provided, That no carrier, master, or agent of the
Representatives of the United States of America in carrier, shall be bound to state or show in the bill of
Congress assembled, That every bill of landing or lading any marks, number, quantity, or weight
similar document of title which is evidence of a which he has reasonable ground for suspecting not
contract for the carriage of goods by sea to or from accurately to represent the goods actually received,
ports of the United States, in foreign trade, shall or which he has had no reasonable means of
have effect subject to the provisions of the Act. checking.
(4) Such a bill of lading shall be prima facie
TITLE I evidence of the receipt by the carrier of the goods
Section 1 as therein described in accordance with paragraphs
When used in this Act (3) (a), (b), and (c) of this section: Provided, That
(a) The term "carrier" includes the owner or the nothing in this Act shall be construed as repealing
charterer who enters into a contract of carriage or limiting the application of any part of the Act, as
with a shipper. amended, entitled "An Act relating to bills of lading
(b) The term "contract of carriage" applies only to in interstate and foreign commerce," approved
contracts of carriage covered by a bill of lading or August 29, 1916 (U. S. C. title 49, secs. 81-124),
any similar document of title, insofar as such commonly known as the "Pomerene Bills of Lading
document relates to the carriage of goods by sea, Act."
including any bill of lading or any similar document (5) The shipper shall be deemed to have
as aforesaid issued under or pursuant to a charter guaranteed to the carrier the accuracy at the time
party from the moment at which such bill of lading of shipment of the marks, number, quantity, and
or similar document of title regulates the relations weight, as furnished by him; and the shipper shall
between a carrier and a holder of the same. indemnify the carrier against all loss damages, and
(c) The term "goods" includes goods, wares, expenses arising or resulting from inaccuracies in
merchandise, and articles of every kind such particulars. The right of the carrier to such
whatsoever, except live animals and cargo which indemnity shall in no way limit his responsibility
by the contract of carriage is stated as being and liability under the contract of carriage or to any
carried on deck and is so carried. person other than the shipper.
(d) The term "ship" means any vessel used for the (6) Unless notice of loss or damage and the general
carriage of goods by sea. nature of such loss or damage be given in writing
(e) The term "carriage of goods" covers the period to the carrier or his agent at the port of discharge
from the time when the goods are loaded on to the before or at the time of the removal of the goods
time when they are discharged from the ship. into the custody of the person entitled to delivery
RISKS thereof under the contract of carriage, such
Section 2 removal shall be prima facie evidence of the
Subject to the provisions of section 6, under every delivery by the carrier of the goods as described in
contract of carriage of goods by sea, the carrier in the bill of lading. If the loss or damage is not
relation to the loading handling, stowage, carriage, apparent, the notice must be given within three
custody, care, and discharge of such goods, shall days of the delivery.
be subject to the responsibilities and liabilities and Said notice of loss or damage maybe endorsed
entitled to the rights and immunities hereinafter set upon the receipt for the goods given by the person
forth. taking delivery thereof.
The notice in writing need not be given if the state
RESPONSIBILITIES AND LIABILITIES of the goods has at the time of their receipt been
Section 3 the subject of joint survey or inspection.
1) The carrier shall be bound, before and at the In any event the carrier and the ship shall be
beginning of the voyage, to exercise due diligence discharged from all liability in respect of loss or
to damage unless suit is brought within one year after
(a) Make the ship seaworthy; delivery of the goods or the date when the goods
(b) Properly man, equip, and supply the ship; should have been delivered: Provided, That if a
(c) Make the holds, refrigerating and cooling notice of loss or damage, either apparent or
chambers, and all other parts of the ship in which concealed, is not given as provided for in this
goods are carried, fit and safe for their reception section, that fact shall not affect or prejudice the
carriage and preservation. right of the shipper to bring suit within one year
(2) The carrier shall properly and carefully load, after the delivery of the goods or the date when
handle, stow, carry, keep, care for, and discharge the goods should have been delivered
the goods carried. In the case of any actual or apprehended loss or
(3) After receiving the goods into his charge the damage the carrier and the receiver shall give all
carrier, or the master or agent of the carrier, shall, reasonable facilities to each other for inspecting
on demand of the shipper, issue to the shipper a and tallying the goods.
bill of lading showing among other things (7) After the goods are loaded the bill of lading to
(a) The leading marks necessary for identification be issued by the carrier, master, or agent of the
of the goods as the same are furnished in writing carrier to the shipper shall, if the shipper so
by the shipper before the loading of such goods demands, be a "shipped" bill of lading Provided,
starts, provided such marks are stamped or That if the shipper shall have previously taken up
otherwise shown clearly upon the goods if any document of title to such goods, he shall
surrender the same as against the issue of the the benefit of this exception to show that neither
"shipped" bill of lading, but at the option of the the actual fault or privity of the carrier nor the fault
carrier such document of title may be noted at the or neglect of the agents or servants of the carrier
port of shipment by the carrier, master, or agent contributed to the loss or damage.
with name or name the names of the ship or ships (3) The shipper shall not be responsible for loss or
upon which the goods have been shipped and the damage sustained by the carrier or the ship arising
date or dates of shipment, and when so noted the from any cause without the act, fault, or neglect of
same shall for the purpose of this section be the shipper, his agents, or servants.
deemed to constitute a "shipped" bill of lading. (4) Any deviation in saving or attempting to save
(8) Any clause, covenant, or agreement in a life or property at sea, or any reasonable deviation
contract of carriage relieving the carrier or the ship shall not be deemed to be an infringement or
from liability for loss or damage to or in connection breach of this Act or of the contract of carriage,
with the goods, arising from negligence, fault, or and the carrier shall not be liable for any loss or
failure in the duties and obligations provided in this damage resulting therefrom: Provided, however,
section, or lessening such liability otherwise than That if the deviation is for the purpose of loading
as provided in this Act, shall be null and void and of cargo or unloading cargo or passengers it shall,
no effect. A benefit of insurance in favor of the prima facie, be regarded as unreasonable.
carrier, or similar clause, shall be deemed to be a (5) Neither the carrier nor the ship shall in any
clause relieving the carrier from liability. event be or become liable for any loss or damage
to or in connection with the transportation of goods
RIGHTS AND IMMUNITIES in an amount exceeding $600 per package lawful
Section 4 money of the United States, or in case of goods not
(1) Neither the carrier nor the ship shall be liable shipped in packages, per customary freight unit, or
for loss or damage arising or resulting from the equivalent of that sum in other currency,
unseaworthiness unless caused by want of due unless the nature and value of such goods have
diligence on the part of the carrier to make the ship been declared by the shipper before shipment and
seaworthy, and to secure that the ship is properly inserted in the bill of lading. This declaration, if
manned, equipped, and supplied, and to make to embodied in the bill of lading, shall be prima facie
the holds, refrigerating and cool chambers, and all evidence, but shall not be conclusive on the carrier.
other parts of the ship in which goods are carried By agreement between the carrier, master, or
fit and safe for their reception, carriage, and agent of the carrier, and the shipper another
preservation in accordance with the provisions of maximum amount than that mentioned in this
paragraph (1) of section 3. Whenever loss or paragraph may be fixed: Provided, That such
damage has resulted from unseaworthiness, the maximum shall not be less than the figure above
burden of proving the exercise of due diligence named. In no event shall the carrier be liable for
shall be on the carrier or other persons claiming more than the amount of damage actually
exemption under the section. sustained.
(2) Neither the carrier nor the ship shall be Neither the carrier nor the ship shall be responsible
responsible for loss or damage arising or resulting in any event for loss or damage to or in connection
from with the transportation of the goods if the nature or
(a) Act, neglect, or default of the master, mariner, value thereof has been knowingly and fraudulently
pilot, or the servants of the carrier in the misstated by the shipper in the bill of lading.
navigation or in the management of the ship; (6) Goods of an inflammable, explosive, or
(b) Fire, unless caused by the actual fault or privity dangerous nature to the shipment whereof the
of the carrier; carrier, master or agent of the carrier, has not
(c) Perils, dangers, and accidents of the sea or consented with knowledge of their nature and
other navigable waters; character, may at any time before discharge be
(d) Act of God; landed at any place or destroyed or rendered
(e) Act of war, innocuous by the carrier without compensation,
(f) Act of public enemies; and the shipper of such goods shall be liable for all
(g) Arrest or restraint of princes, rulers, or people, damages and expenses directly or indirectly arising
or seizure under legal process; out of or resulting from such shipment. If any such
(h) Quarantine restrictions; goods shipped with such knowledge and consent
(i) Act or omission of the shipper or owner of the shall become a danger to the ship or cargo, they
goods, his agent or representative; may in like manner be landed at any place, or
(j) Strikes or lockouts or stoppage or restraint of destroyed or rendered innocuous by the carrier
labor from whatever cause, whether partial or without liability on the part of the carrier except to
general; Provided, That nothing herein contained general average, if any.
shall be construed to relieve a carrier from
responsibility for the carrier's own acts; SURRENDER OF RIGHTS AND IMMUNITIES
(k) Riots and civil commotions AND INCREASE OF RESPONSIBILITIES AND
(l) Saving or attempting to save life or property at LIABILITIES
sea; Section 5
(m) Wastage in bulk or weight or any other loss or A carrier shall be at liberty to surrender in whole or
damage arising from inherent defect, quality, or in part all or any of his rights and immunities or to
vice of the goods; increase any of his responsibilities and liabilities
(n) Insufficiency of packing; under this Act, provided such surrender or increase
(o) Insufficiency of inadequacy of marks; shall be embodied in the bill of lading issued to the
(p) Latent defects not discoverable by due shipper.
diligence; and The provisions of this Act shall not be applicable to
(q) Any other cause arising without the actual fault charter parties; but if bills of lading are issued in
and privity of the carrier and without the fault or the case of a ship under charter party, they shall
neglect of the agents or servants of the carrier, but comply with the terms of this Act. Nothing in this
the burden of proof shall be on the person claiming Act shall be held to prevent the insertion in a bill of
lading of any lawful provision regarding general goods by sea, such bill of lading shall be subject to
average. the provisions of the Carriage of Goods by Sea
Act."
SPECIAL CONDITIONS Section 11
Section 6 Where under the customs of any trade the weight
Notwithstanding the provisions of the preceding of any bulk cargo inserted in the bill of lading is a
sections, a carrier, master or agent of the carrier, weight ascertained or accepted by a third party
and a shipper shall, in regard to any particular other than the carrier or the shipper, and the fact
goods be at liberty to enter into any agreement in that the weight is so ascertained or accepted is
any terms as to the responsibility and liability of stated in the bill of lading, then, notwithstanding
the carrier for such goods, and as to the rights and any thing in this Act, the bill of lading shall not be
immunities of the carrier in respect of such goods, deemed to be prima facie evidence against the
or his obligation as to seaworthiness (so far as the carrier of the receipt of goods of the weight so
stipulation regarding seaworthiness is not contrary inserted in the bill of lading, and the accuracy
to public policy), or the care or diligence of his thereof at the time of shipment shall not be
servants or agents in regard to the loading, deemed to have been guaranteed by the shipper.
handling stowage, carriage, custody, care, and Section 12
discharge of the goods carried by sea: Provided, Nothing in this Act shall be construed as
That in this case no bill of lading has been or shall superseding any part of the Act entitled "An act
be issued and that the terms agreed shall be relating to navigation of vessels, bills of lading, and
embodied in a receipt which shall be a non- to certain obligations, duties, and rights in
negotiable document and shall be marked as such. connection with the carriage of property," approved
Any agreement so entered into shall have full legal February 13,1893, or of any other law which would
effect: Provided, That this section shall not apply to be applicable in the absence of this Act, insofar as
ordinary commercial shipments made in the they relate to the duties, responsibilities, and
ordinary course of trade but only to other liabilities of the ship or carrier prior to the time
shipments where the character or condition of the when the goods are loaded on or after the time
property to be carried or the circumstances, terms, they are discharged from the ship.
and conditions under which the carriage is to be Section 13
performed are such as reasonably to justify a This Act shall apply to all contracts for carriage of
special agreement. goods by sea to or from ports of the United States
Section 7 in foreign trade. As used in this Act the term
Nothing contained in this Act shall prevent a carrier "United States" includes its districts, territories, and
or a shipper from entering into any agreement, possessions: Provided, however, That the Philippine
stipulation, condition, reservation, or exemption as legislature may by law exclude its application to
to the responsibility and liability of the carrier or transportation to or from ports of the Philippine
the ship for the loss or damage to or in connection Islands. The term "foreign trade" means the
with the custody and care and handling of goods transportation of goods between the ports of the
prior to the loading on and subsequent to the United States and ports of foreign countries.
discharge from the ship on which the goods are Nothing in this Act shall be held to apply to
carried by sea. contracts for carriage of goods by sea between any
Section 8 port of the United States or its possessions, and
The provisions of this Act shall not affect the rights any other port of the United States or its
and obligations of the carrier under the provisions possession: Provided, however, That any bill of
of the Shipping Act, 1916, or under the provisions lading or similar document of title which is evidence
of section 4281 to 4289, inclusive, of the Revised of a contract for the carriage of goods by sea
Statutes of the United States, or of any between such ports, containing an express
amendments thereto; or under the provisions of statement that it shall be subject to the provisions
any other enactment for the time being in force of this Act, shall be subjected hereto as fully as if
relating to the limitation of the liability of the subject hereto as fully as if subject hereto by the
owners of seagoing vessels. express provisions of this Act: Provided, further,
That every bill of lading or similar document of title
which is evidence of a contract for the carriage of
goods by sea from ports of the United States, in
TITLE II foreign trade, shall contain a statement that it shall
Section 9 have effect subject to the provisions of this Act.
Nothing contained in this Act shall be construed as Section 14
permitting a common carrier by water to Upon the certification of the Secretary of
discriminate between competing shippers similarly Commerce that the foreign commerce of the United
place in time and circumstances, either (a) with States in its competition with that of foreign
respect to the right to demand and receive bills of nations is prejudiced the provisions, or any of
lading subject to the provisions of this Act; or (b) them, of Title I of this Act, or by the laws of any
when issuing such bills of lading, either in the foreign country or countries relating to the carriage
surrender of any of the carrier's rights and of goods by sea, the President of the United States,
immunities or in the increase of any of the carrier's may, from time to time, by proclamation, suspend
responsibilities and liabilities pursuant to section 6, any or all provisions of Title I of this Act for such
title I, of this Act or (c) in any other way prohibited periods of time or indefinitely as may be
by the Shipping Act, 1916, s amended. designated in the proclamation. The President may
Section 10 at any time rescind such suspension of Title I
Section 25 of the Interstate Commerce Act is hereof, and any provisions thereof which may have
hereby amended by adding the following proviso at been suspended shall thereby be reinstated and
the end of paragraph 4 thereof: "Provided, again apply to contracts thereafter made for the
however, That insofar as any bill of lading carriage of goods by sea. Any proclamation of
authorized hereunder relates to the carriage of suspension or rescission of any such suspension
shall take effect on a date named therein, which Subject to the provisions of Section 6, under every
date shall be not less than ten days from the issue contract of carriage of goods by sea, the carrier in
of the proclamation. relation to the loading, handling, stowage, carriage,
Any contract for the carriage of goods by sea, custody, care, and discharge of such goods shall be
subject to the provisions of this Act, effective subject to the responsibilities and liabilities and
during any period when title I hereof, or any part entitled to the rights and immunities hereinafter set
thereof, is suspended, shall be subject to all forth..
provisions of law now or hereafter applicable to
that part of Title I which may have thus been RESPONSIBILITIES AND LIABILITIES
suspended. Sec. 3
Section 15 (1) The carrier shall be bound before and at the
This Act shall take effect ninety days after the date beginning of the voyage to exercise due diligence
of its approval; but nothing in this Act shall apply to
during a period not to exceed one year following its (a) Make the ship seaworthy;
approval to any contract for the carriage of goods (b) Properly man,equip, and supply the ship;
by sea, made before the date on which this Act is (c) Make the holds, refrigerating and cooling
approved, nor to any bill of lading or similar chambers, and all other parts of the ship in which
document of title issued, whether before or after goods are carried, fit and safe for their reception,
such date of approval in pursuance of any such carriage, and preservation.
contract as aforesaid. (2) The carrier shall properly and carefully
Section 16 load, handle, stow, carry, keep, care for,and
This Act may be cited as the "Carriage of Goods by discharge the goods carried.
Sea Act." (3) After receiving the goods into his carrier, or
Approved, April 16, 1936. the master or agent of the carrier, shall, on
demand of the shipper, issue to the shipper a bill of
lading showing among other things .
PUBLIC ACT 521 CARRIAGE OF (a) The loading marks necessary for
GOODS BY SEA ACT identification of the goods as the same are
furnished in writing by the shipper before the
Section 1 loading of such goods starts, provided such
That the provisions of Public Act No. 521 of the 7th marksare stamped or otherwise shown clearly upon
Congress of the United States, approved on April the goods if uncovered,in such a manner as should
16, 1936, be accepted, as it is hereby accepted to ordinarily remain legible until the end of the
be made applicable to all contracts for the carriage voyage..
of goods by sea to and from Philippine ports in (b) Either the number of packages or pieces, or
foreign trade: Provided, that nothing in this Act the quantity or weight, as the casemay be, as
shall be construed as repealing any existing furnished in writing by the shipper.
provision of the Code of Commerce which is now in (c) The apparent order and conditions of the
force, or as limiting its application. . goods: Provided, that no carrier, master, or agent
of the carrier, shall be bound to state or show in
Sec. 2 the bill of lading any marks, number, quantity, or
This Act shall take effect upon its approval. weight which he has reasonable ground for
(Approved October 22, 1936). suspecting not accurately to represent the good
actually received or which he has had no
TITLE I reasonable means of checking..
Sec. 1 (4) Such a bill of lading shall be prima facie
When used in this Act . evidence of the receipt by the carrier of the goods
(a) The term "carrier" includes the owner or as therein described in accordance with paragraphs
the charterer who enters into a contract of carriage (3) (a), (b), and (c), of this section: (The rest of
with a shipper. the provision is not applicable to the Philippines).
(b) The term "contract of carriage" applies only (5) The shipper shall be deemed to have
to contracts of carriage by covered by a bill of guaranteed to the carrier the accuracy at the time
lading or any similar document of title, insofar as of shipment of the marks, number, quantity, and
such document relates to the carriage of goods by weight, as furnished by him; and the shipper shall
sea, including any bill of lading or any similar indemnify the carrier against all loss, damages, and
document as aforesaid issued under or pursuant to expenses arising or resulting from inaccuracies in
a character party from the moment at which such such particulars. The right of the carrier to such
bill of lading or similar document of title regulates indemnity shall in no way limit his responsibility
the relations between a carrier and a holder of the and liability under the contract of carriage to any
same. . person other than the shipper..
(c) The term "goods" includes goods, wares, (6) Unless notice or loss or damage and the
merchandise, and articles of every kind general nature of such loss or damage by given in
whatsoever, except live animals and cargo which writing to the carrier or his agent at the port of
by the contract of carriage is stated as being discharge or at the time of the removal of the
carried on deck and is so carried.. goods into the custody of the person entitled to
(d) The term "ship" means any vessel used for delivery thereof under the contract of carriage,
the carriage of goods by sea.. such removal shall be prima facie evidence of the
(e) The term "carriage of goods" covers the delivery by the carrier of the goods as described in
period from the time when the goods are loaded to the bill of lading. If the loss or damage is not
the time when they are discharged from the ship. apparent, the notice must be given within three
days of the delivery..
RISKS Said notice of loss or damage may be endorsed
Sec. 2 upon the receipt for the goods given by the person
taking delivery thereof.
The notice in writing need not be given if the state (g) Arrest or restraint of princes, rulers, or
of the goods has at the time of their receipt been people, or seizure under legal process;
the subject of joint survey or inspection. (h) Quarantine restrictions;.
In any event the carrier and the ship shall be (i) Act or omission of the shipper or owner of
discharged from all liability in respect of loss or the goods, his agent or representative;.
damage unless suit is brought within one year after (j) Strikes or lockouts or stoppage or restraint
delivery of the goods or the date when the goods of labor from whatever cause, whether partial or
should have been delivered: Provided, that, if a general: Provided, that nothing herein contained
notice of loss or damage, either apparent or shall be construed to relieve a carrier from
concealed, is not given as provided for in this responsibility for the carrier's own acts;.
section, that fact shall not affect or prejudice the (k) Riotsand civil commotions;.
right of the shipper to bring suit within one year (l) Saving or attempting to save life or
after the delivery of the goods or the date when property at sea;.
the goods should have been delivered. (m) Wastage in bulk or weight or any other loss
In the case of any actual or apprehended loss or or damage arising from inherent defect, quality, or
damage, the carrier and the receiver shall give all vice of the goods;
reasonable facilities to each other for inspecting (n) Insufficiency or packing;
and tallying the goods.. (o) Insufficiency or inadequacy of marks;.
(7) After the goods are loaded the bill of lading (p) Latent defects not discoverable by due
to be issued by the carrier, master, or agent of the diligence; and.
carrier to the shipper shall if the shipper so (q) Any other cause arising without the actual
demands, be a "shipped" bill of lading: Provided, fault and privity of the carrier and without the fault
that if the shipper shall have previously taken up or neglect of the agents or servants of the carrier,
any document of title to such goods, he shall but the burden of proof shall be on the person
surrender the same as against the issue of the claiming the benefit of this exception to show that
"shipped" bill of lading, but at the option of the neither the actual fault or privity of the carrier nor
carrier such document of title may be noted at the the fault or neglect of the agents or servants of the
port of shipment by the carrier, master, or agent carrier contributed to the loss or damage.
with the name or names of the ship or ships upon (3) The shipper shall not be responsible for loss
which the goods have been shipped and the date or or damage sustained by the carrier or the ship
dates of shipment, and when so noted the same arising or resulting from any cause without the act,
shall for the purpose of this section be deemed to or neglect of the shipper, his agents, or his
constitute a "shipped" bill of lading. servants..
(8) Any clause, covenant, or agreement in a (4) Any deviation in saving or attempting to
contract of carriage relieving the carrier of the ship save life or property at sea, or any reasonable
from liability for loss or damage to or in connection deviation shall not be deemed to be an
with the goods, arising from negligence, fault, or infringement or breach or this Act or of the contract
failure in the duties and obligations provide in this of carriage, and carrier shall not be liable for any
section or lessening such liability otherwise than as loss or damage resulting therefrom: Provided,
provided in this Act, shall be null and void and of however, that if the deviation is for the purpose of
no effect. A benefit of insurance in favor of the loading or unloading cargo or passengers it shall,
carrier, or similar clause, shall be deemed to be a prima facie, be regarded as unreasonable..
clause relieving the carrier from liability. (5) Neither the carrier nor the ship shall in any
event be or become liable for any loss or damage
RIGHTS AND IMMUNITIES to or in connection with the transportation of goods
Sec. 4 in an amount exceeding $500 per package of lawful
(1) Neither the carrier nor the ship shall be liable money of the United States, or in case of goods not
for loss or damage arising or resulting from shipped in packages, per customary freight unit, or
unseaworthiness unless caused by want of due the equivalent of that sum in other currency,
diligence on the part of the carrier to make the ship unless the nature and value of such goods have
seaworthy and to secure that the ship is properly been declared by the shipper before shipment and
manned, equipped, and supplied, and to make the inserted in the bill of lading. This declaration, if
holds, refrigerating and cooling chambers, and all embodied in the bill of lading, shall be prima facie
other parts of the ship in which goods are carried evidence, but shall not be conclusive on the
fit and safe for their reception, carriage, and carrier..
preservation, in accordance with the provisions of By agreement between the carrier, master or agent
paragraph (1) of Section (3). Whenever loss or of the carrier, and the shipper another maximum
damage has resulted from unseaworthiness, the amount than that mentioned in this paragraph may
burden of proving the exercise of due diligence be fixed: Provided, that such maximum shall not be
shall be on the carrier or other person claiming less than the figure above named. In no event shall
exemption under this section.. the carrier be liable for more than the amount of
(2) Neither the carrier nor the ship shall be damage actually sustained..
responsible for loss or damage arising or resulting Neither the carrier nor the ship shall be responsible
from in any event for loss damage to or in connection
(a) Act, neglect, or default of the master, with the transportation of the goods if the nature or
mariner, pilot, or the servants of the carrier in the value thereof has been knowingly and fraudulently
navigation or in the management of the ship; misstated by the shipper in the bill of lading..
(b) Fire, unless caused by the actual fault or (6) Goods of an inflammable, explosive, or
privity of the carrier;. dangerous nature to the shipment whereof, the
(c) Perils, dangers, and accidents of the sea or carrier, master or agent of the carrier, has not
other navigable water;. consented with knowledge of their nature and
(d) Act of God;. character, may at any time before discharge be
(e) Act of war;. landed at any place or destroyed or rendered
(f) Act of public enemies; innocuous by the carrier without compensation,
and the shipper of such goods shall be liable for all amendments thereto, or under the provisions of
damages and expenses directly or indirectly arising any other enactment for the time being in force
out of or resulting from such shipment. If any such relating to the limitation of the liability of the
goods shipped with such knowledge and consent owners of seagoing vessels..
shall become a danger to the ship or cargo, they
may in like manner be landed at any place, or TITLE II
destroyed or rendered innocuous by the carrier Sec. 9
without liability on the part of the carrier except to Nothing contained in this Act shall be construed as
general average if any.. permitting a common carrier by water to
discriminate between competing shippers similarly
SURRENDER OF RIGHTS AND IMMUNITIES placed in time and circumstances, either (a) with
AND INCREASE OF RESPONSIBILITIES AND respect to their right to demand and receive bills of
LIABILITIES lading subject to the provisions of this Act; or (b)
Sec. 5 when issuing such bills of lading either in the
A carrier shall be at liberty to surrender in whole or surrender of any of the carrier's rights and
in part all or any of his rights and immunities or to immunities or in the increase of any of the carrier's
increase any of his responsibilities and liabilities responsibilities and liabilities pursuant to Section 5,
under this Act, provided such surrender or increase Title I, of this Act; (c) in any other way prohibited
shall be embodied in the bill of lading issued to the by the Shipping Act, 1916, as amended..
shipper.
The provisions of this Act shall not be applicable to Sec. 10
charter parties; but if bills of lading are issued in (Not applicable to the Philippines.).
the case of a ship under a charter party, they shall
comply with the terms of this Act. Nothing in this Sec. 11
Act shall be held to prevent the insertion in a bill of When under the custom of any trade the weight of
lading of any lawful provisions regarding general any bulk cargo inserted in the bill of lading is a
average.. weight ascertained or accepted by a third party
other than the carrier or the shipper and the fact
SPECIAL CONDITIONS that the weight as ascertained or accepted is stated
Sec. 6 in the bill of lading, then notwithstanding anything
Notwithstanding the provisions of the preceding in this Act, the bill of lading shall not be deemed to
section, a carrier, master or agent of the carrier, be prima facie evidence against the carrier of the
and a shipper shall, in regard to any particular receipt of goods of the weight so inserted in the
goods be at liberty to enter into any agreement in bills of lading, and the accuracy thereof at the time
any terms as to the responsibility and liability of of shipment shall not be deemed to have been
the carrier for such goods, and as to the rights and guaranteed by the shipper..
immunities of the carrier in respect to such goods,
or his obligation to seaworthiness, (so far as the Sec. 12
stipulation regarding seaworthiness is contrary to (Not applicable to the Philippines.).
public policy), or the care or diligence of his
servants or agents in regard to the loading, Sec. 13
handling, stowage, carriage, custody, care and This Act shall apply to all contracts for carriage of
discharge of the goods carried by sea; provided, goods by seas to or from ports of the United States
that in this case no bill of lading has been or shall in foreign trade. As used in this Act the term
be issued and that the terms agreed shall be a "United States" includes its districts, territories, and
non-negotiable document and shall be marked as possessions: Provided, however, that the Philippine
such. . Legislature may by law exclude its application to
Any agreement so entered into shall have full legal transportation to or from ports of the Philippine
effect: Provided, that this section shall not apply to Islands. The term "foreign trade" means the
ordinary commercial shipments made in the transportation of goods between the ports of the
ordinary course of trade but only to other United States and ports of foreign countries.
shipments where the character or condition of the Nothing in this Act shall be held to apply to
property to be carried or the circumstances, terms contracts for carriage of goods by sea between any
and conditions under which the carriage is to be port of the United States or its possessions and any
performed are such as reasonably to justify a other port of the United States or its possessions:
special agreement. Provided, however, that any bill of lading or similar
document of the title which is evidence of a
Sec. 7 contract for the carriage of goods by sea between
Nothing contained in this Act shall prevent a carrier such ports, containing an express statement that it
or a shipper from entering into any agreement, shall be subject to the provisions of this Act; shall
stipulation, condition, reservation, or exemption as be subjected hereto as fully as if subject hereto by
to the responsibility and liability of the carrier or the express provisions of this Act: Provided,
the ship for the loss or damage to or in connection further, that every bill of lading or similar
with the custody and care and handling of goods document of title which is evidence of a contract for
prior to the loading on and subsequent to the the carriage of goods by sea from ports of the
discharge from the ship on which the goods are United States in foreign trade, shall contain a
carried by sea.. statement that it shall have effect subject to the
provisions of this Act. .
Sec. 8
The provisions of this Act shall not affect the rights Sec. 14
and obligations of the carrier under the provisions Upon the certification of the Secretary of
of the Shipping Act, 1916, or under the provisions Commerce that the foreign commerce of the United
of Sections 4281 to 4292, inclusive, of the Revised States in its competition with that of foreign
Statutes of the United States, or of any nations is prejudiced by the provisions, or any of
them, of the Title I of this Act, or by the laws of is notwitstanding that COGSA is a special law.
any foreign country or countries relating to the Goods in a foreign country shipped
carriage of goods by sea, the President of the to the Philippines are governed by the Civil Code
United States may, from time to time by
proclamation, suspend any or all provisions of Title 2) Art. 1753, CC (Conflict of Laws provision)
I of this Act for such periods of time or indefinitely
as may be designated in the proclamation. The 2. LIMIT OF LIABILITY PER PACKAGE
President may at any time rescind such suspension
of Title I hereof, and any provisions thereof which BELGIAN OVERSEAS vs. PHILIPPINE FIRST
may have been suspended shall thereby be INSURANCE CO., INC. (2002)
reinstated and again apply to contracts thereafter The Civil Code does not limit the liability of the
made for carriage of goods by sea. Any common carrier to a fixed amount per package. In
proclamation of suspension or rescission of any all matters not regulated by the Civil Code, the
such suspension shall take effect on the date right and the obligations of common carriers shall
named therein, which date shall be not less than be governed by the Code of Commerce and special
ten days from the issue of the proclamation. laws. Thus, the COGSA, which is suppletory to the
Any contract for the carriage of goods by sea, provisions of the Civil Code, supplements the latter
subject to the provisions of this Act, effective by establishing a statutory provision limiting the
during any period when Title I hereof, or any part carrier's liability in the absence of a shipper's
thereof, is suspended, shall be subject to all declaration of a higher value in the bill of lading. In
provisions of law now or hereafter applicable to the case before us, there was no stipulation in the
that part of Title I which may have thus been Bill of Lading limiting the carrier's liability. Neither
suspended.. did the shipper declare a higher valuation of the
goods to be shipped. Petitioners' liability should
Sec. 15 be computed based on US$500 per package
This Act shall take effect ninety days after the date and not on the per metric ton price declared
of its approval; but nothing in this Act shall apply in the Letter of Credit.
during a period not to exceed one year following its
approval to any contract for the carriage of goods On Notice of Claim/On Prescription of Action:
by sea, made before the date on which this Act is First, the provision of COGSA provides that the
approved nor to any bill of lading or similar notice of claim need not be given if the state of the
document of title issued, whether before or after goods, at the time of their receipt, has been the
such date of approval in pursuance of any such subject of a joint inspection or survey. Prior to
contract as aforesaid.. unloading the cargo, an Inspection Report as to the
condition of the goods was prepared and signed by
Sec. 16 representatives of both parties. Second, as stated
This Act may be cited as the "Carriage of Goods by in the same provision, a failure to file a notice of
Sea Act.". claim within three days will not bar recovery if it is
nonetheless filed within one year. This one-year
1. CONTRACTS COVERED UNDER COGSA prescriptive period also applies to the shipper, the
consignee, the insurer of the goods or any legal
COGSA is a special law that governs in all contracts holder of the bill of lading. "Inasmuch as the
of carriage of: neither the Civil Code nor the Code of Commerce
goods states a specific prescriptive period on the matter,
by sea the Carriage of Goods by Sea Act (COGSA)--which
between or to and from Philippine provides for a one-year period of limitation on
ports claims for loss of, or damage to, cargoes sustained
vessels involved in foreign trade during transit--may be applied suppletorily to the
case at bar." In the present case, the cargo was
Application of laws: discharged on July 31, 1990, while the Complaint
If the common carrier is was filed by respondent on July 25, 1991, within
coming to the Philippines: the one-year prescriptive period.
First: Civil Code
Second: COGSA (in foreign 3. NOTICE OF LOSS OF CLAIM
trade)
Third: Code of Commerce 4. PRESCRIPTION OF ACTION
Article 18
1. The carrier is liable for damage sustained in the
event of the destruction or loss of, or of damage to,
any registered luggage or any goods, if the
occurrence which caused the damage so sustained
took place during the carriage by air.
2. The carriage by air within the meaning of the
preceding paragraph comprises the period during
which the luggage or goods are in charge of the
carrier, whether in an aerodrome or on board an
aircraft, or, in the case of a landing outside an
aerodrome, in any place whatsoever.
3. The period of the carriage by air does not extend
to any carriage by land, by sea or by river
performed outside an aerodrome. If, however, such
a carriage takes place in the performance of a
contract for carriage by air, for the purpose of
loading, delivery or transshipment, any damage is
presumed, subject to proof to the contrary, to have
been the result of an event which took place during
the carriage by air.
Article 19
The carrier is liable for damage occasioned by delay
in the carriage by air of passengers, luggage or
goods.
Article 20
1. The carrier is not liable if he proves that he and
his agents have taken all necessary measures to
avoid the damage or that it was impossible for him
or them to take such measures.
2. In the carriage of goods and luggage the carrier
is not liable if he proves that the damage was
occasioned by negligent pilotage or negligence in
the handling of the aircraft or in navigation and
that, in all other respects, he and his agents have
taken all necessary measures to avoid the damage.
Article 21
If the carrier proves that the damage was caused
by or contributed to by the negligence of the
injured person the Court may, in accordance with
the provisions of its own law, exonerate the carrier
wholly or partly from his liability.
Article 22
1. In the carriage of passengers the liability of the
carrier for each passenger is limited to the sum of
125,000 francs. Where, in accordance with the law
of the Court seised of the case, damages may be
awarded in the form of periodical payments, the
equivalent capital value of the said payments shall
not exceed 125,000 francs. Nevertheless, by
special contract, the carrier and the passenger may
agree to a higher limit of liability.
transportation of passengers, luggage and goods. compensation. When the employee's lack of due
Note however, that the limitations of liability in the care contributed to his death or injury, the
Convention favor the carrier. compensation shall be equitably reduced. AND
NORTHWEST AIRLINES, INC., vs. CUENCA under 1712 If a fellow worker's intentional
(1965) malicious act is the only cause of the death or
The Articles merely declare the carrier liable for injury, the employer shall not be answerable
damages in the enumerated cases, if the conditions
therein specified are present. Neither said PAL vs. CA, DR. JOSEFINO MIRANDA and
provisions nor others in the aforementioned LUISA MIRANDA (1996)
Convention regulate or exclude liability for other The appellees do not seek payment for loss of any
breaches of contract by the carrier. Under baggage. They are claiming damages arising from
petitioner's theory, an air carrier would be exempt the discriminatory off-loading of their baggage.
from any liability for damages in the event of its That cannot be limited by the printed conditions in
absolute refusal, in bad faith, to comply with a the tickets and baggage checks. Neither can the
contract of carriage, which is absurd. Warsaw Convention exclude nor regulate the
liability for other breaches of contract by air
ALITALIA vs IAC (1990) carriers. A recognition of the Warsaw Convention
Under the Warsaw Convention, an air does not preclude the operation of our Civil Code
carrier is made liable for damages for: and related laws in determining the extent of
1. the death, wounding or other bodily injury liability of common carriers in breach of contract of
of a passenger if the accident causing it took place carriage, particularly for willful misconduct of their
on board the aircraft or in the course of its employees. Said convention does not operate as an
operations of embarking/disembarking exclusive enumeration of the instances for
2. the destruction or loss of, or damage to, declaring a carrier liable for breach of contract of
any registered luggage or goods, if the occurrence carriage or as an absolute limit of the extent of that
causing it took place during the carriage by air liability. The Warsaw Convention declares the
3. delay in the transportation by air of carrier liable in the enumerated cases and under
passengers, luggage or goods. certain limitations. However, it must not be
In these cases, the Convention provides construed to preclude the operation of the Civil
that the action for damages, however founded, Code and pertinent laws. It does not regulate,
can only be brought subject to the conditions and much less exempt, the carrier from liability for
limits set out therein. damages for violating the rights of its passengers
The Warsaw Convention however denies to under the contract of carriage, especially if willful
the carrier availment of the provisions w/c exclude misconduct on the part of the carrier's employees
or limit his liability, if the damage is caused by his is found or established, which is the case before
willful misconduct or by such default on his part as, Us.
in accordance w/ the law of the court seized of the
case, is considered to be equivalent to willful
misconduct, or if the damage is similarly caused by E. When Limitations Unavailable
any agent of the carrier acting w/n the scope of his TWA v. CA and Vinluan (1988)
employment. The petitioners contention that it is not liable is
The Convention does not operate as an devoid of merit. Private respondent had a first
exclusive enumeration of the instances of an class ticket for Flight No. 41 of petitioner from New
airlines liability, or as an absolute limit of the York to San Francisco on April 20, 1979. It was
extent of that liability. twice confirmed and yet respondent
Moreover, it should be deemed a limit of unceremoniously told him that there was no first
liability only in those cases where the cause of the class seat available for him and that he had to be
death or injury to person, or destruction, loss or downgraded to the economy class. As he protested,
damage to property or delay in its transport is not he was arrogantly threatened by one Mr. Braam.
attributable to or attended by any willful Worst still, while he was waiting for the flight, he
misconduct, bad faith, recklessness, or otherwise saw that several Caucasians who arrived much
improper conduct on the part of any official or later were accommodated in first class seats when
employee for which the carrier is responsible, and the other passengers did not show up. The
there is otherwise no special or extraordinary form discrimination is obvious and the humiliation to
of resulting injury. which private respondent was subjected is
The Convention has invariably been held undeniable. Consequently, the award of moral and
inapplicable, or as not restrictive of the carriers exemplary damages by the respondent court is in
liability, where there was satisfactory evidence of order.
malice or bad faith attributable to its officers and At the time of this unfortunate incident, the private
employees. respondent was a practicing lawyer, a senior
partner of a big law firm in Manila. He was a
Note: Liability of carrier in case of loss of luggage is director of several companies and was active in
limited to a sum of $USD 20 per kilo or $USD 9.07 civic and social organizations in the Philippines.
per pound unless a higher value is declared in Considering the circumstances of this case and the
advance and additional charges are paid. social standing of private respondent in the
community, he is entitled to the award of moral
and exemplary damages. However, the moral
D. Limitations on Liability damages should be reduced to P300,000.00, and
the exemplary damages should be reduced to
PAL INC. v CA and JESUS SAMSON (1981) P200,000.00. This award should be reasonably
Ratio: The limitation of their liability under 1711 of sufficient to indemnify private respondent for the
NCC: If the mishap was due to the employee's own humiliation and embarrassment that he suffered
notorious negligence, or voluntary act, or and to serve as an example to discourage the
drunkenness, the employer shall not be liable for
F. Conditions on Liability
b) Special law if its the appropriate If one merchant does not present his
law like the Insurance Code books, while the other presents his and are
c) Civil Code to be applied in a kept in accordance with law, the one who
suppletory manner to other special presents will prevail, unless the reason for
laws. failure to produce is caused by a fortuitous
(This is not the same as in Art. 2. If what is event.
involved is an act of commerce, apply Art. If both books are kept in accordance with
2. But if it is a commercial contract, apply law and they conflict, the court will decide
Art. 50.) on the basis of the rules of preponderance
of evidence by taking into consideration the
7. Commercial Registry totality of the evidence presented by both
sides.
a. A book where entries are made of merchants
and of documents affecting their commercial 8. Cuentas en Participacion
transactions, or
b. An office established for the purpose of copying A partnership the existence of which was
and recording verbatim certain classes of
only known to those who had an interest in
documents of commercial nature the same, being no mutual agreements
between the partners and without a
7.1. Nature of registration: corporate name indicating to the public in
by individual merchants optional
some way that there were other people
by corporation compulsory, as it is the fact besides the one who ostensibly managed
of registration which creates the corporation and conducted the business, is exactly the
partnerships with a capital of P3000 or more accidental partnership of cuentas en
or where the contributions consists of real participacion defined in article 239 of the
estate properties compulsory, per Art. Code of Commerce.
1772, Civil Code
Philippine vessels Those who contract with the person under
with more than 3 tons gross
whose name the business of such
compulsory
partnership of cuentas en participacion is
with gross tonnage of 3 tons or less
conducted, shall have only a right of action
optional (Bar Review Materials in
against such person and not against the
Commercial Law J. Miravite, 2005 ed.)
other persons interested, and the latter, on
the other hand, shall have no right of
7.2. Effect of failure to register
action against the third person who
an individual merchant who fails to register
contracted with the manager unless such
cannot request the inscription of any
manager formally transfers his right to
document in the mercantile registry, nor
them. (Art 242 of the code Of Commerce.)
take advantage of its effects (Art. 18, Code
(Bourns vs Carman, 1906)
of Commerce)
failure to register the articles of
Joint Account Partnership
incorporation will not create the corporation
No firm name Has a firm name
failure to register the partnership does not
No common fund Has common fund
affect the existence of juridical personality,
whether or not it has P3000 or more or real No juridical personality Has juridical personality
estate properties in contributions by the Only ostensible partner All general partners
partners (Bar Review Materials in liable to 3rd persons liable to 3rd persons
Commercial Law J. Miravite, 2005 ed.) Only ostensible partner All general partners
manages manage
7.3. Bookkeeping of Commerce Liquidation done by Liquidation entrusted to
ostensible partner any partner/s
National Internal Revenue Code: a taxpayer
must keep a journal and a ledger. But if his
gross quarterly receipts do not exceed P5000,
he can keep a simplified set of books. In the
case of corporations and partnerships, if their
gross income exceed P25,000 quarterly, their
books must be audited by an independent CPA.
NIRC also requires that the books must be kept
for 3 years. In case of corporations, the
Corporation Code requires them to keep record
of all business transactions, minutes of meeting
of BOD and stockholder, and stock and transfer
book.
Art. 48 lays down certain evidentiary rules
regarding keeping of books:
This is an admission against interest. The
entries in the books of merchants may be
used as evidence against them.
If the books of 2 merchants conflict where
1 book is kept in accordance with law while
the other is not, the former will prevail.
b. LoC
1. Definition
Buyer procures LoC and obliges himself to
An engagement by a bank or other person reimburse the issuing bank upon receipt of the
documents of title
made at the request of a customer that the
issuer (bank) will honor a draft or other
demands for payment or other complaints with
the conditions specified in the credit. Issuing bank issues LoC in favor of seller
(Prudential Bank vs. IAC, 1992).
An instrument issued by a bank in behalf of a
customer authorizing a beneficiary to draw a
draft or drafts which will be honored on
presentation to the bank if drawn in accordance Issuing bank opens a LoC
with the terms and conditions specified in the with a correspondent bank
letter of credit. abroad (bank-to-bank
Art. 567, Code of Commerce: those issued by transaction
one merchant to another or for the purpose of
attending to a commercial transaction.
2. Purpose
To satisfy the seemingly irreconcilable interests Seller ships goods to the buyer and delivers
of a seller, who refuses to part with his goods documents of title and draft to the issuing (or
before he is paid, and a buyer, who wants to negotiating) bank to recover payment
have control of the goods before paying. (Bank
of America vs. CA, 1993)
The primary purpose of the LoC is to substitute
for and support the agreement of the 5. Perfection of the LoC
buyer/importer to pay money under a contract
or other arrangement. It creates in the From the time the correspondent bank makes
seller/exporter a secure expectation of payment to persons in whose favor the LoC has
payment. been opened (Belman Inc. vs. Central Bank,
1958)
3. Nature Take note: The opening of a LoC is only a mode
of payment, which is not an essential requisite
The buyer may be required to contract a bank to of a contract (Johannes Schuback & Sons vs.
issue a letter of credit in favor of the seller so CA, 1993). A contract can still be perfected,
that the issuing bank can authorize the seller to even without the perfection of a LoC.
draw drafts and engage to pay them upon their
presentment simultaneously with the tender of 6. Rules on LoC
documents required by the letter of credit. The
seller gets paid only if he delivers the documents Bank of America vs. CA (1993)
of title over the goods, while the buyer gets the
goods only after reimbursing the bank. If there is no provision in the Code of
Basic principle: bank deals with documents only. Commerce, follow Uniform Customs and
As such, they are not qualified to deal with Practice or generally observed usages and
goods. They will act on the basis of documents customs
only. Rule of Strict Conformity/Compliance:
3 distinct and separate contracts in the LoC: Documents tendered must strictly conform to
One links the party applying for the LoC the terms of the LoC. The tender of documents
(buyer) and the party for whose benefit the by the beneficiary (seller) must include all
LoC is issued (seller). documents required by the letter. A
Between the account party (buyer) and the correspondent bank which departs from what
issuing bank. Under this contract, has been stipulated under the letter of credit,
(sometimes called the "Application and as when it accepts a faulty tender, acts on its
Agreement" or the "Reimbursement own risks and it may not thereafter be able to
Agreement"), the account party applies to recover from the buyer or the issuing bank, as
the issuing bank for a specified LoC and the case may be, the money thus paid to the
agrees to reimburse the bank for amounts beneficiary
paid by that bank
Between the issuing bank and the Feati Bank vs CA (1991)
beneficiary (seller), in order to support the
contract. It is the LoC proper in which the An advising or notifying bank does not incur
bank promises to pay the seller pursuant to any obligation by the notification. Its only
the terms and conditions stated therein obligation is to check the apparent authenticity
Independent contracts involved in a LoC: of the LoC
contract of sale between buyer and seller Negotiating bank has a right of recourse
contract of the issuing bank against the issuer bank. Until the negotiating
11. Sight Drafts the fixtures and equipment used in and about
the business (Sec 2)
No presentment required before
Exempt Transactions:
acceptance.
Sale or mortgage is made in the ordinary
course of business
12. Margin Fee When accompanied with a written waiver
by all the seller/mortgagors creditors (Sec.
Tax on sale of foreign exchange. Since the 2)
contract of sale is consensual, it falls due Sale by virtue of a judicial order (Sec. 8)
as soon as the local bank opens the LoC Sale by assignee in insolvency or those
(Pacific Oxygen Company vs. Central Bank, beyond the reach of creditors
1968). Sale of properties exempt from attachment
or execution (Rule 39, Sec. 13, Rules of
Court)
In the course of trade or business The term (fixtures) refers to such articles of
Sale, transfer, mortgage or assignment of all, merchandise usually possessed and annexed to the
or substantially all, of the business or trade premises occupied by merchants to enable them
conducted or of all, or substantially all, of better to store, handle, and display their wares
although removable without material injury to the
premises at or before the end of tenancy.
35
This topic came out in 2007, 2006, 2005, 2001, 2000,
Comments ad Cases on Sales De Leon, 2000 ed.
1997, 1995, 1994, 1993, 1988. Specific questions were
asked of sec. 2 and sec. 5. In 1982 questions on the
rights and liabilities of parties were asked, these are Lands and buildings are not goods, merchandise
covered in sections 3, 4, 5 and 9. and fixtures therefore not covered by the BSL.
(American Foreign Banking Corp. vs Herridge, Sec. 5. A receipt in which it is stated that
49 Phil 975). the goods received will be delivered to the
bearer or to the order of any person named
3.3. Effect of Non-compliance: in such receipt
No provision shall be inserted in a
Sec. 2. A warehouseman shall be liable to negotiable receipt that it is non-negotiable.
any person injured thereby for all damages Such provision shall be void.
caused by the omission from a negotiable
receipt of any of the terms herein required. It is negotiated either by delivery or
If any of these requisites in Sec 2 are indorsement
absent, it becomes a deposit only When negotiable receipt not required to be
surrendered
3.4. Effect of omission of any of the essential
terms: Estrada vs CAR (1961)
Validity of receipt is not affected
Warehouseman is liable for damages (No surrender needed if ordered by court) The SC
Negotiability of receipt is not affected ordered the manager of Moncada Bonded
The issuance of a warehouse receipt in Warehouse to release shares in palay without the
the form provided by the law is merely necessity of producing and surrendering the
permissive and directory and not original of the warehouse receipts issued. The SC
mandatory in the sense that if the stated our order must be carried out in the
requirements are not observed, then the meantime that this cases have not been finally
goods delivered for storage become decided in order to ameliorate the precarious
ordinary deposits situation in which said petitioners find themselves.
ii. Negotiable 37
The comparison between negotiable versus non-
negotiable warehouse receipts was asked in 2007, 1988,
1984, 1983 and 1982.
Non-Negotiable Negotiable
directly contracted Note: Negotiable Warehouse Receipt is different
with him from a Negotiable Instrument
Negotiation defeats
the lien of the seller Note: Negotiation takes effect as of the time when
of the goods (sec. 9) the indorsement is actually made.
Goods represented can be Goods represented
subject to attachment or cannot be subject to Negotiable Negotiable Warehouse
levy by execution (Sec. 42) attachment or levy Instruments Receipts
by execution, unless Allow negotiation
in proper If deliberately altered, If altered, it is still valid,
circumstances (Sec. it becomes null and but can be enforced only
25)38 void accdg to its original tenor
Sec 3. A warehouseman may insert in a receipt 1. the person lawfully entitled to the
issued by him any other terms and conditions possession of the goods, or his agent;
provided that such terms and conditions shall 2. a person who is either himself entitled
not: to delivery by the terms of a non-
xxx negotiable receipt issued for the goods,
a) in any wise impair his obligation to exercise or who has written authority from the
that degree of care which a reasonably person so entitled either indorsed upon
careful man would exercise in regard to the receipt or written upon another
similar goods of his own paper; or
3. a person in possession of a negotiable
General Rule: Warehouseman is required receipt by the terms of which the goods
to exercise such degree of care which a are deliverable to him or order, or to
reasonable careful owner would exercise bearer, or which has been indorsed to
over similar goods of his own. He shall be him or in blank by the person to whom
liable for any loss or injury to the goods delivery was promised by the terms of
caused by his failure to exercise such care. the receipt or by his mediate or
immediate indorser.
Exception: He shall not be liable for any
loss or injury which could not have been Sec. 10. When a warehouseman delivers the
avoided by the exercise of such care. goods to one who is not in fact lawfully entitled
to the possession of them, the warehouseman
Exception to the exception: He may limit shall be liable as for conversion to all having a
his liability to an agreed value of the right of property or possession in the goods if
property received in case of loss. He he delivered the goods otherwise than as
cannot stipulate that he will not be authorized by (b) and (c) of Sec 9
responsible for any loss caused by his
negligence. Though he delivered the goods as authorized
by said subdivisions he shall be so liable, if
To be paid prior to such delivery he had either:
ownership [PNB vs. Sayo, 292 SCRA 202 Civil liabilities Criminal
(1998)] liabilities
receipt for
Rules on attachment/execution of goods goods of
deposited: which he is an
In case of negotiable receipt, the goods owner without
cannot be attached or levied in execution stating such
unless: fact of
receipt is first surrendered ownership
its negotiation is enjoined (Sec. 51)
receipt is impounded by the court (Sec. 5. delivery of
25) goods without
Creditors remedies: seek for the obtaining
attachment of the receipt or seek aid from negotiable
courts to compel the debtor to satisfy warehouse
claims by means allowed by law in regard receipt (Sec.
to property which cannot readily be 54)
attached or levied upon by ordinary process 3rd persons Negotiation of
(Sec. 26) warehouse
receipt issued
Not applicable: for mortgaged
If the depositor is not the owner of the goods with
goods (thief) or one who has no right intent to
to convey title to the goods binding deceive
upon the owner
Actions for recovery or manual delivery
of goods by the real owner
Where attachment is made prior to the
issuance of receipt General Bonded Warehouse Act
are not mandatory. Under Section 1 of the No person shall engage in the business of receiving
Warehouse Receipts Act, the issuance of a commodities for storage without first securing a
warehouse receipt in the form provided by it is license therefore from the Director of the Bureau of
merely permissive and directory and not Commerce and Industry. Said license shall be
obligatory. annual and shall expire on the thirty-first day of
December.
Commodities
Any farm, agricultural or horticultural Any person applying for a license shall set forth in
product; the application
animal and animal husbandry or the place or places where the business
livestock, dairy or poultry product; and warehouse are to be established or
water, marine or fish product; located and
mineral, chemical, drug or medicinal the maximum quantity of commodities
product; to be received.
forestry product; and any raw,
processed, manufactured or finished There shall be imposed an annual license fee of:
product or by-product P50 for the first 1000 square meters of
good, article, or merchandise, either of protected enclosure or 1000 cubic meters
domestic or of foreign production or of storage space, or any fraction of such
origin, which may be traded or dealt in enclosure or space, and
openly and legally. 2 centavos for each additional square
meter or cubic meter.
3. Business of Receiving Commodities for
Storage 5. Requirement of Bond
The business of receiving commodities for storage The application shall be accompanied by a cash
shall include any contract or transaction wherein bond or a bond secured by real estate or signed by
1. the warehouseman is obligated to a duly authorized bonding company at not less
return the very same commodities than 33 1/3% of the market value of the maximum
delivered to him or pay its value; quantity or commodities to be received.
2. the commodities delivered is to be Said bond shall be so conditioned as to respond for
milled for and on account of the the market value of the commodities actually
owner thereof; delivered and received at any time the
3. the commodities delivered is warehouseman is unable to return the commodities
commingled with the commodities or to pay its value.
delivered by or belonging to other The bond shall be approved by the Director of the
persons and the warehouseman is Bureau of Commerce and Industry before issuing a
obligated to return the commodities of license under this Act.
the same kind or pay its value. Whenever the Director shall determine that a bond
approved by him has become insufficient, he may
The kinds of commodity to be deposited must require an additional bond or bonds to be given by
be those, which may be traded or dealt in the warehouseman concerned.
openly and legally. Thus, illegal and prohibited Any person injured by the breach of any obligation
goods may not be validly received (Sec. 2) to secure which a bond is given, shall be entitled to
The warehouseman is not covered by law if the sue on the bond in his own name in any court of
owner merely rents space to a certain group of competent jurisdiction to recover the damages he
persons because the law covers warehouse that may have sustained by such breach.
accepts goods: (a) storage, (b) milling and
commingling with the obligation to return the Nothing contained herein shall except any property
same quantity or to pay their value. of assets of any warehouseman from being sued on
in case the bond given is not sufficient to respond
Limjoco vs Director of Commerce (1965) for the full market value of the commodities
received by such warehouseman.
Any contract or transaction wherein the palay
delivered is to be milled for and on account of the 6. Requirement of Insurance
owner shall be deemed included in the business of
receiving rice for storage. In other words, it is Every person licensed to engage in the business of
enough that the palay is delivered, even if only to receiving commodities for storage shall insure the
have it milled. commodities so received and stored against fire.
In this case it is a fact that palay is delivered to
appellant and sometimes piled inside her "camalig" For palay and corn license, a bond with the
in appreciable quantities, to wait for its turn in the National Grains Authority is required; also an
milling process. This is precisely the situation insurance cover is required
covered by the statute.
The main intention of the law-maker is to give
7. Duties of Bonded Warehouseman
protection to the owner of the commodity against
possible abuses (and we might add negligence) of
the person to whom the physical control of his 7.1. Storage of Commodities
properties is delivered.
Every warehouseman shall receive for storage,
4. Requirement of License so far as his license and the capacity of his
warehouse permit, any commodities, of the
kind customarily stored therein by him, which
may be tendered to him in a suitable condition iii. connivance with a warehouseman for the
for warehousing, in the usual manner and in purpose of evading the license requirement
the ordinary and usual course of business, (Sec. 13)
without making any discrimination between
persons desiring to avail themselves of
warehouse facilities.
1.III
Trust Receipts Law
7.2. Give the necessary bond (PD 115)
7.3. Insure against fire the commodity
received (Sec. 6) 1. Definition of Trust Receipt
The proceeds of any such sale, whether public IBAA did not become the real owner of the goods
or private, shall be applied ; it was merely the holder of a security title for
to the payment of the expenses the advances it had made to the Vintolas. The
thereof; goods remain the Vintolas own property. The
to the payment of the expenses of re- trust receipt arrangement did not convert the
taking, keeping and storing the goods, IBAA into an investor. The fact that the Vintolas
documents or instruments; were unable to sell the seashells does not affect
to the satisfaction of the entrustee's IBAA's right to recover the advances made under
indebtedness to the entruster. the Letter of Credit
The entrustee shall receive any surplus but 7.3. Risk of Loss borne by entrustee
shall be liable to the entruster for any
deficiency. Sec. 10. The risk of loss shall be borne by the
entrustee ; irrespective of whether or not it was
6.2. Duties of Entruster due to the fault or negligence of the entrustee,
To give possession of the goods to the shall not extinguish his obligation to the entruster
entrustee for the value thereof.
To give at least 5 days notice to the
entrustee of the intention to sell the goods 7.4. Non-Liability of Entruster for Sale by
at an intended public sale Entrustee
Acts involving the violation of trust receipt Here, BPI chose not to file a separate civil action to
agreements occurring after 29 Jan 1973 would recover payment under the trust receipts. Instead,
make the accused criminally liable for estafa under respondent bank sought to recover payment in
par1(b), Art 315 of the RPC, pursuant to the Criminal Case Nos. 8848 and 8849. Although the
explicit provision in Sec. 13 of P.D. 115. trial court acquitted petitioner Jose Tupaz, his
acquittal did NOT extinguish his civil liability. His
Allied vs. Ordoez liability arose not from the criminal act of which he
was acquitted (ex delicto) but from the trust
The penal provisions of PD 115 encompasses any receipt contract (ex contractu) of 30 September
act violative of the obligation covered by the trust 1981. Petitioner Jose Tupaz signed the trust
receipt. It is not limited to transactions in goods receipt of 30 September 1981 in his personal
which are to be sold, reshipped or stored, but also capacity. Acquittal in a criminal case for estafa
applies to goods processed as a component of a does not extinguish civil liability arising from
product ultimately sold to the general public. breach of trust receipt contract.
Deposit substitute taking may be classified as a under the NCBA and other applicable laws.
core-banking operation, especially in the case (Sec. 6)
of UBs and KBs, which are allowed, under Sec. No person, association, or corporation unless
6 of the GBL, to engage in Quasi-banking duly authorized to engage in the business of a
activities (more appropriately termed deposit bank, QB, trust entity, or savings and loan
substitute operations, as there is nothing association shall advertise or hold itself out as
"quasi" about banks performing these being engaged in the business of such bank,
operations themselves). Since a deposit QB, trust entity, or association, or use in
substitute is merely a product of the activity connection with its business title, the word or
called Quasi-banking (deposit substitute words "bank", "banking", "banker", "QB ",
operations), deposit substitute taking may be "quasi-banking", "quasi-banker", "savings and
considered a core banking function in the sense loan association", "trust corporation", "trust
that it mobilizes savings through deposit- company" or words of similar import or
substitute taking. It should likewise be noted transact in any manner the business of any
that the purpose of a deposit-substitute is such bank, corporation or association. (Sec.
relending, which is also a core banking 64)
function. (Morales)
The BSP supervises QBs, i.e. entities engaged An entity authorized by the BSP to perform UB
in obtaining deposit substitutes. This or KB functions shall likewise have the
supervision was premised on the finding by the authority to engage in quasi-banking functions.
Joint IMF-CBP Banking Survey Commission that (Sec. 6)
institutions regularly engaged in the lending
of funds obtained from the public through the Note: The determination of whether a person or
issuance of their own debt instruments (other entity is performing banking or quasi-banking
than deposit instruments) [and] beyond the functions without Bangko Sentral authority shall be
pale of CB regulatory authority weakened to a decided by the MB. To resolve such issue, the MB
large extent the effectiveness of CB action in may, through the appropriate supervising and
the field of credit regulations. This unregulated examining department of the BSP, examine,
segment of the financial system was the inspect or investigate the books and records of
money market that had developed since the such person or entity. Upon issuance of this
1960s by what later became known as authority, such person or entity may commence to
investment houses. The said money market engage in banking operations or quasi-banking
involved short-term instruments, and emerged functions and shall continue to do so unless such
in response to interest rate ceilings imposed by authority is sooner surrendered, revoked,
the Usury Law. These ceilings then applied to suspended or annulled by the BSP in accordance
deposits in banks but not to placements course with this Act or other special laws. The department
through the investment houses. Naturally, head and the examiners of the appropriate
investors flocked to these houses for higher supervising and examining department are hereby
yields. Before long, the deposit generating authorized to administer oaths to any such person,
ability of the banks was seriously undermined employee, officer, or director of any such entity
by the competition. In 1972, the hitherto and to compel the presentation or production of
unfettered money market was called Quasi- such books, documents, papers or records that are
banking and subjected to CB regulation, and reasonably necessary to ascertain the facts relative
funds placed with quasi-banks were labeled as to the true functions and operations of such person
deposit substitutes. (Morales) or entity. Failure or refusal to comply with the
required presentation or production of such books,
documents, papers or records within a reasonable
time shall subject the persons responsible therefor
to the penal sanctions provided under the NCBA.
1.07. CLASSIFICATION OF BANKS
(Sec. 6)
5. Inquiring into the solvency and liquidity amendment thereto, unless accompanied by a
of the institution; or certificate of authority issued by the MB, under its
6. Enforcing prompt corrective action. seal. Such certificate shall not be issued unless the
(Sec. 4) MB is satisfied from the evidence submitted to it
that:
* The BSP shall also have supervision over
QBs, trust entities and other financial 1. all requirements of existing laws and
institutions which under special laws are regulations to engage in the business for
subject to BSP supervision. (Sec. 4) which the applicant is proposed to be
incorporated have been complied with;
2. the public interest and economic conditions,
The BSP shall, when examining a bank, have
both general and local, justify the
the authority to examine an enterprise which is authorization; and
wholly or majority-owned or controlled by the 3. the amount of capital, the financing,
bank. (Sec. 7) organization, direction and administration,
as well as the integrity and responsibility of
the organizers and administrators
B. Policy Direction reasonably assure the safety of deposits
and the public interest. (Sec. 14)
The BSP shall provide policy direction in the areas
of money, banking and credit. For this purpose, the
MB may prescribe ratios, ceilings, limitations, or 2.03. PSE-LISTED BANKING CORPORATION
other forms of regulation on the different types of SUBJECT TO SEC REPORTORIAL RULES
accounts and practices of banks and QBs which
shall, to the extent feasible, conform to A commercial banking corporation listed in the PSE
internationally accepted standards, including those must adhere not only to the banking and other
of the Bank for International Settlements (BIS). allied special laws, but also to the rules
The Monetary Board may exempt particular promulgated by the SEC, the government entity
categories of transactions from such ratios, ceilings tasked not only with the enforcement of the
and limitations, but not limited to exceptional cases Revised Securities Act, but also the supervision of
or to enable a bank or quasi-bank under all corporations, partnerships or associations which
rehabilitation or during a merger or consolidation to are grantees of government-issued primary
continue in business with safety to its creditors, franchises and/or licenses or permits to operate in
depositors and the general public. (Sec. 5) the Phils.. That such banking institution is under
the supervision of BSP and PSE, does not exempt it
from complying with the continuing discluse
C. Authority of BSP over Building and Home requirements embodied in the RSA Rules. The
Associations bank is primarily subject to the control of BSP; and
as a corporation trading its securities in the stock
Within a period of 3 years from the effectivity of market, it is under the supervision of SEC. There is
the GBL, the BSP shall phase out and transfer its no over-supervision here; each regulating authority
supervising and regulatory powers over operates within the sphere of its powers; the
building and loan associations to the Home stringent requirement imposed are understandable,
Insurance and Guaranty Corporation which shall considering the paramount importance given to the
assume the same. (Sec. 94) interests of the investing public. (Union Bank of the
Phils. v SEC, 2001)
the prescribed minimum capital requirement for The following are Temporarily disqualified:
new banks Directors/officers/employees disqualified
by the MB
.Persons who refuse to fully disclose the
extent of their business interest. This
disqualification shall be in effect as long
as the refusal persists;
Directors who have been absent or who
Section 3 Board of Directors and have not participated for whatever
Officers reasons in more than 50% of all
meetings, both regular and special, of the
board of directors during their
3.01. COMPOSITION OF THE BOARD OF
incumbency, or any 12 month period
DIRECTORS
during said incumbency. This
The provisions of the Corporation Code to the disqualification applies for purposes of
contrary notwithstanding, there shall be at the succeeding election;
least 5, and a maximum of 15 members of the Persons who are delinquent in the
board of directors of bank, 2 of whom shall be payment of their obligations.
independent directors. An "independent Delinquency in the payment of
director" shall mean a person other than an obligations means that an obligation of a
officer or employee of the bank, its subsidiaries person with a bank/quasi bank/trust
or affiliates or related interests. (Sec. 15) entity where he/she is a director or
In the case of a bank merger or consolidation, officer, or at least two obligations with
the number of directors shall not exceed 21. other banks/financial institution, under
(Sec. 17) different credit lines or loan contracts,
Non-Filipino citizens may become members of are past due. This disqualification shall
the board of directors of a bank to the extent of be in effect as long as the delinquency
the foreign participation in the equity of said persists.
bank. (Sec. 15 with Sec. 7, RA 7721) Persons convicted for offenses involving
dishonesty, breach of trust or violation of
banking laws but whose conviction has
3.02. QUALIFICATIONS / not yet become final and executory;
DISQUALIFICATIONS OF DIRECTORS (BSP Directors and officers of closed
CIRCULAR 296 ; 2001) banks/quasi-banks/trust entities pending
their clearance by the MB;
A director shall have the following minimum Directors disqualified for failure to
qualifications: observe/discharge their duties and
At least 25 years of age at the time of responsibilities prescribed under existing
his election or appointment; regulations. This disqualification applies
At least a college graduate or have at until the lapse of the specific period of
least 5 years experience in business; disqualification or upon approval by the
Must have attended a special seminar MB;Directors who failed to attend the
for board of directors conducted or special seminar for board of directors
accredited by the BSP: required;
Must be fit and proper for the position Persons dismissed/terminated from
of a director of the bank/quasi- employment for cause. This
bank/trust entity. In determining disqualification shall be in effect until
whether a person is fit and proper for they have cleared themselves of
the position of a director, the following involvement in the alleged irregularity;
matters must be considered: Those under preventive suspension; or
- integrity/probity; Persons with derogatory records with the
- competence; NBI, court, police, interpol and monetary
- education; authority (central bank) of other
- diligence; and countries (for foreign directors and
- experience/training. officers) involving violation of any law,
rule or regulation of the Government or
The following are Permanently disqualified from any of its instrumentalities adversely
being directors : affecting the integrity and/or ability to
Directors/officers/employees permanently discharge the duties of a bank/quasi
disqualified by the MB; bank/trust entity director/officer. This
Persons who have been convicted by final disqualification applies until they have
judgement for offenses involving cleared themselves of involvement in the
dishonesty or breach of trust; alleged irregularity.
Persons who have been convicted by final
judgement for violation of banking laws;
Persons who have been judicially 3.03.
declared insolvent, spendthrift or QUALIFICATIONS/DISQUALIFICATIONS
incapacitated to contract; or OF OFFICERS (BSP CIRCULAR 296 ; 2001)
Directors, officers or employees of closed An officer shall have the following minimum
banks/quasi-banks/trust entities who qualifications:
were responsible for such institutions At least 21 years of age;
closure. At least a college graduate, or have at
least 5 years experience in banking or
trust operations or related activities or in the board of directors of the bank, the MB may
a field related to his position and disqualify, suspend or remove any bank
responsibilities, or have undergone director or officer who commits or omits an act
training in banking or trust operations which render him unfit for the position. In
acceptable to the appropriate supervising determining whether an individual is fit and
and examining department of the BSP: proper to hold the position of a director or
Provided, however, That trust officers officer of a bank, regard shall be given to his
shall have at least 2 years of actual integrity, experience, education, training, and
experience or training in trust operations competence. (Sec. 16)
or fund management or other related
fields; and The suspension of bank officers which is only
Must be fit and proper for the position he preventive in nature would require no notice or
is being proposed/appointed to. In hearing, and until such time that the officers
determining whether a person is fit and have proved their innocence, they may be
proper for a particular position, the preventively suspended from holding office so
following matters must be considered: as not to influence the conduct of investigation,
- integrity/probity; and to prevent the commission of further
- competence; irregularities. (Busego v CA, 1999)
- education;
- diligence; and As a general rule, a banking corporation is
- experience/training. liable for the wrongful or tortuous acts and
The disqualifications for directors declarations of its officers or agents within the
mentioned for shall likewise apply to course and scope of their employment. A bank
officers, except that stated in Items b.2 will be held liable for the negligence of its
(persons who refuse to fully disclose the officers or agents when acting within the course
extent of their business interest ) and b.7 and scope of their employment. It may be
(directors disqualified for failure to liable for the tortuous acts of its officers even
observe/discharge their duties and as regards that species of tort of which malice
responsibilities). is an essential element. A bank holding out its
Except as may be authorized, the officers and agents as worthy of confidence will
spouse or a relative within the 2nd not be permitted to profit by the frauds these
degree of consanguinity or affinity of any officers or agents were enabled to perpetrate in
person holding the position of Chairman, the apparent course of their employment; nor
President, Executive Vice President or will it be permitted to shirk its responsibility for
any position of equivalent rank, General such frauds, even though no benefit may
Manager, Treasurer, Chief Cashier or accrue to the bank therefrom. If an officer or
Chief Accountant is disqualified from official of a bank in his official capacity receives
holding or being elected or appointed to money to satisfy an evidence of indebtedness
any of said positions in the same lodged for his bank collection, the bank is liable
bank/quasi-bank; and the spouse or for his misappropriation of such sum. (PCI
relative within the second degree of Bank v CA, 2001)
consanguinity or affinity of any person
holding the position of Manager, Cashier, 3.05. GOOD GOVERNANCE (BSP CIRCULAR
or Accountant of a branch or office of a 283; 2001)
bank/quasi-bank/trust entity is The position of a bank/quasi-bank/trust entity
disqualified from holding or being director is a position of trust. A director assumes
appointed to any of said positions in the certain responsibilities to different constituencies or
same branch or office. stakeholders These constituencies or stakeholders
In the case of UBs, CBs, and TBs, any have the right to expect that the institution is being
appointive or elective officials whether run in a prudent and sound manner.
full time or part time, except in cases
where such service is incident to financial The board of directors is primarily responsible for
assistance provided by the government the corporate governance of the bank/quasi-
or government-owned or controlled bank/trust entity. To ensure good governance of
corporations or in cases allowed under the bank/quasi-bank/trust entity, the board of
existing law. directors should establish strategic objectives,
In the case of Cooperative Banks, any policies and procedures that will guide and direct
officer or employee of the Cooperative the activities of the bank/quasi-bank/ trust entity
Development Authority or any elective and the means to attain the same as well as the
public official, except a barangay official. mechanism for monitoring managements
Except as may otherwise be allowed performance.
under The Anti-Dummy Law, as
amended, foreigners cannot be officers or 3.06. REGULATION OF THE COMPENSATION
employees of banks. AND OTHER BENEFITS OF DIRECTORS AND
OFFICERS
3.04. FIT AND PROPER RULE To protect the funds of depositors and
To maintain the quality of bank management creditors, the MB may regulate the payment by
and afford better protection to depositors and the bank to its directors and officers of
the public in general, the MB shall prescribe, compensation, allowance, fees, bonuses, stock
pass upon and review the qualifications and options, profit sharing and fringe benefits only
disqualifications of individuals elected or in exceptional cases and when the
appointed bank directors or officers and circumstances warrant, such as but not limited
disqualify those found unfit. After due notice to to the following instances when a bank is
1975) (Morales; Villanueva cites Serrano v. CB, HELD: Bank was negligent and so Sps. Tan entitled
1980; Ppl v. Ong, 1991) to damages. Failure to present original deposit slip,
which could have proven its claim that it did not
4.05. PRESUMPTION OF OWNERSHIP OF receive respondents missing check was a
DEPOSITS suppression of the best evidence that could have
It is presumed that money deposited in a bank bolstered its claim and confirmed its innocence, the
account belongs to the person in whose name presumption now arises that it withheld the same for
the deposit account is opened. A bank is fraudulent purposes. Citing the case of Canlas v.
justified in paying out the money to the Asian Savings Bank (2000), the Court held that the
depositor or upon his order, and cannot be degree of diligence required of banks is more than
liable to any other person who turned out to he that of a good father of a family in keeping with their
the true owner of the funds deposited. Thus, it responsibility to exercise the necessary care and
was held in Fulton Iron Works Co v China prudence in handling their clients money. It find no
Banking Corp (1930), The specialized function compelling reason to disallow the application of the
of a bank is to serve as a place of deposit for provisions on common carriers to this case if only to
money, to keep it safely while on deposit, and emphasize the fact that banking institutions (like
to pay it out, upon demand, to the person who petitioner) have the duty to exercise the highest
effected the deposit or upon his order. A bank
degree of diligence when transacting with the public.
is not a guardian of trust funds deposited w/ it
By the nature of their business, they are required to
in the sense that it must see to their proper
observe the highest standards of integrity and
application, not is it its business to pry into the
uses to which money on deposit in its vault are performance, and utmost assiduousness as well.
being put; and so long as it serves its function
and pays the money out in good faith to the 4.07. OPTION TO EXERCISE SET-OFF ON
person who deposited it, or upon his order, DEPOSIT FOR OUTSTANDING LOAN
w/out knowledge or notice that it is in fact A bank is under no duty or obligation to make an
assisting in the misappropriation of the fund, application or set-off against the deposit accounts
the bank will be protected. As is well said it of a borrower. To apply the deposit to the
would seriously interfere w/ commercial payment of a loan is a privilege, a right of set-off
transactions to charge banks w/ the duty of which the bank has the option to exercise, but not
supervising the administration of trust funds, the obligation. (BPI v. CA, 1994)
when, in due course of business, they receive
checks and drafts in proper form drawn upon
such funds in their custody. The law imposes 4.08. NOTE ON SAFETY DEPOSIT BOXES
no such duty upon them. Note however that In the case of rent of safety deposit box. The
there is a limitation in this regard as per contract is a special kind of deposit and cannot be
survivorship agreements. (Morales) characterized as an ordinary contract of lease
because the full and absolute possession and
control of the deposit box is not given to the
4.06. OBLIGATION OF BANKS TO DEPOSITORS renters. The prevailing rule is that the relation
between the bank renting out and the renter is that
The bank is under the obligation to treat of bailer and bailee the bailment being for hire and
mutual benefiit. (CA Agro-industrial Dev. Corp. v.
deposit accounts of it depositors with
CA, 1983; reiterated in Sia v. CA, 1993, according
meticulous care. It must bear the blame for 43
failing to discover the mistake of its employees to Villanueva)
despite the established procedure requiring
bank papers to pass through bank personnel 4.09. MB ORDER OF CLOSURE
whose duty it is to check and countercheck In case a bank or QB notifies the BSP or publicly
them for possible errors. (Metropolitan Bank announces a bank holiday, or in any manner
and Trust Co. v. CA, 1994 and Firestone Tire v suspends the payment of its deposit liabilities
CA, 2001) continuously for more than 30 days, the MB may
summarily and without need for prior hearing close
As a business affected with public interest and such banking institution and place it under
because of the nature of its functions, a bank is receivership of the Phil. Deposit Insurance Corp.
under obligation to treat the accounts of its (PDIC). (Sec. 53)
depositors with meticulous case, always having
in mind the fiduciary nature of their
relationship. (PCI Bank v. CA, 1997) Section 5 Loans
basis (head office plus branches) and consolidated The basis for determining compliance with SBL
basis (parent bank plus subsidiary financial allied is the total credit commitment of the bank to
undertakings, but excluding insurance the borrower. (Sec. 35.1)
companies). The ratio shall be maintained daily. Unless the MB prescribes otherwise, the total
amount of loans, credit accommodations and
guarantees prescribed in the preceding
paragraph may be increased by an additional
5.03. POWER OF THE MB IN THIS REGARD 10% of the net worth of such bank provided
The MB may the additional liabilities of any borrower are
- require that such ratio be determined on adequately secured by trust receipts, shipping
the basis of the net worth and risk assets of documents, warehouse receipts or other similar
a bank and its subsidiaries, financial or documents transferring or securing title
otherwise; covering readily marketable, non-perishable
- prescribe the composition and the manner goods which must be fully covered by
of determining the net worth and total risk insurance. (Sec. 35.2)
assets of banks and their subsidiaries. Inclusions. The above prescribed ceilings shall
Provided, that include:
- in the exercise of this authority, the MB a. the direct liability of the maker or acceptor
shall, to the extent feasible, conform to of paper discounted with or sold to such
internationally accepted standards, bank and the liability of a general indorser,
including those of the Bank for drawer or guarantor who obtains a loan or
International Settlements (BIS), other credit accommodation from or
relating to risk-based capital discounts paper with or sells papers to such
requirements; bank;
- the MB may alter or suspend b. in the case of an individual who owns or
compliance with such ratio whenever controls a majority interest in a
necessary for a maximum period of 1 corporation, partnership, association or any
year; and, other entity, the liabilities of said entities to
- such ratio shall be applied uniformly to such bank;
banks of the same category. (Sec. 33) c. in the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
corporation owns or controls a majority
In case of a bank merger or consolidation, or interest; and
when a bank is under rehabilitation under a d. in the case of a partnership, association or
program approved by the BSP, the MB may other entity, the liabilities of the members
temporarily relieve the surviving bank, thereof to such bank. (35.3)
consolidated bank, or constituent bank or
corporations under rehabilitation from full * Even if a parent corporation, partnership,
compliance with the required capital ratio under association, entity or an individual who
such conditions as it may prescribe. (Sec. 33) owns or controls a majority interest in such
entities has no liability to the bank, the MB
may prescribe the combination of the
liabilities of subsidiary corporations or
members of the partnership, association,
5.04. EFFECT OF NON-COMPLIANCE
entity or such individual under certain
The MB may limit or prohibit the distribution of circumstances, including but not limited to
net profits by such bank and may require that any of the following situations:
part or all of the net profits be used to increase
the capital accounts of the bank until the a. the parent corporation, partnership,
minimum requirement has been met. association, entity or individual
The MB may, furthermore, restrict or prohibit guarantees the repayment of the
the acquisition of major assets and the making liabilities;
of new investments by the bank, with the b. the liabilities were incurred for the
exception of purchases of readily marketable accommodation of the parent
evidences of indebtedness of the RP and the corporation or another subsidiary or of
BSP and any other evidences of indebtedness the partnership or association or entity
or obligations the servicing and repayment of or such individual; or
which are fully guaranteed by the RP, until the c. the subsidiaries though separate
minimum required capital ratio has been entities operate merely as departments
restored. (Sec. 33) or divisions of a single entity. (35.4)
subject to the limits as herein interests shall be upon terms not less
prescribed. (35.6) favorable to the bank than those offered to
others. (Sec. 36 par. 2)
- After due notice to the board of directors of
Exclusions. For purposes of this Section, loans,
the bank, the office of any bank director or
other credit accommodations and guarantees officer who violates the provisions of this
shall exclude: Section may be declared vacant and the
director or officer shall be subject to the
a. loans and other credit accommodations penal provisions of the NCBA. (Sec. 36 par.
secured by obligations of the BSP or of the 3)
Phil. Govt; - The MB may regulate the amount of loans,
b. loans and other credit accommodations credit accommodations and guarantees that
fully guaranteed by the govt as to the may be extended, directly or indirectly, by
payment of principal and interest; a bank to its DOSRI, as well as investments
c. loans and other credit accommodations of such bank in enterprises owned or
covered by assignment of deposits controlled by said directors, officers,
maintained in the lending bank and held in stockholders and their related interests.
the Phils.;
d. loans, credit accommodations and * The outstanding loans, credit
acceptances under letters of credit to the accommodations and guarantees which a
extent covered by margin deposits; and bank may extend to each of its DOSRI,
e. other loans or credit accommodations shall be limited to an amount equivalent to
which the MB may from time to time, their respective unencumbered deposits
specify as non-risk items. (35.5) and book value of their paid-in capital
contribution in the bank.
5.06. RESTRICTION ON BANK EXPOSURE TO
44
DOSRI ** The loans, credit accommodations and
guarantees secured by assets considered
DOSRI = Directors, Officers, Stockholders and their
as non-risk by the MB shall be excluded
Related Interests;
from such limit.
NOTE: The MB shall define the term "related
*** The loans, credit accommodations and
interests." (Sec. 36 par. 5)
advances to officers in the form of fringe
benefits granted in accordance with rules
GR: A director or officer of any bank shall
as may be prescribed by the Monetary
neither,
Board shall not be subject to the individual
1. directly or indirectly, for himself or as
limit. (Sec. 36 par. 4)
the representative or agent of others,
borrow from such bank; nor
5.07. LIMITS ON LOANS AND OTHER CREDIT
2. become a guarantor, indorser or surety
ACCOMMODATIONS ON
for loans from such bank to others, or
in any manner be an obligor or incur
Loans and other credit accommodations
any contractual liability to the bank.
against
EXC. Except with the written approval of
real estate shall not exceed 75%
the majority of all the directors of the
bank, excluding the director of the appraised value
of the respective real
concerned. The required approval
shall be entered upon the records of estate security, plus
60% of the appraised
the bank and a copy of such entry
shall be transmitted forthwith to the value of the insured
improvements, and
appropriate supervising and
examining department of the BSP. such loans may be
made to the owner of
* Such written approval shall not be the real estate or to his
assignees. (Sec. 37)
required for loans, other credit
accommodations and advances security of shall not exceed 75%
granted to officers under a fringe chattels of the appraised value
benefit plan approved by the BSP. and of the security, and
(Sec. 36 par. 1) intangible such loans and other
properties credit accommodations
** The limit on loans, credit (such as, may be made to the
accommodations and guarantees but not title-holder of the
prescribed herein shall not apply to limited to, chattels and intangible
loans, credit accommodations and patents, properties or his
guarantees extended by a trademarks, assignees. (Sec. 38)
cooperative bank to its cooperative trade
shareholders. (Sec. 36 par. 6) names, and
copyrights)
Principles Involved.
Exception. In both cases, the MB may prescribe
- Dealings of a bank with any of its directors, otherwise. (Sec. 37-38)
officers or stockholders and their related
44
This topic was asked in 2006 specifically on requisites
before a bank can lend to DOSRI.
Development Assistance Incentives. The BSP Any real property acquired or held under these
shall provide incentives to banks which, without circumstances shall be disposed of by the bank
government guarantee, extend loans to finance within a period of 5 years or as may be
educational institutions, cooperatives, hospitals prescribed by the MB. The bank may, after said
and other medical services, socialized or low- period, continue to hold the property for its
cost housing, local government units and other own use, subject to the limitation that the total
activities with social content. (Sec. 46) investment in real estate and improvements
thereof, including bank equipment, shall not
Renewal or Extension of Loans and Other Credit exceed 50% of combined capital accounts.
(Sec. 52)
Accommodations. The MB may, by regulation,
prescribe the conditions and limitations under
which a bank may grant extensions or renewals
of its loans and other credit accommodations.
(Sec. 48) 6.04. OTHER BANKING SERVICES
1. Receive in custody funds, documents and
Provisions for Losses and Write-Offs. The MB valuable objects;
may fix, by regulation or by order in a specific 2. Act as financial agent and buy and sell, by
case, the amount of reserves for bad debts or order of and for the account of their customers,
doubtful accounts or other contingencies. shares, evidences of indebtedness and all types
Writing off of loans, other credit of securities;
accommodations, advances and other assets 3. Make collections and payments for the account
shall be subject to regulations issued by the of others and perform such other services for
MB. (Sec. 49) their customers as are not incompatible with
banking business;
4. Upon prior approval of MB, act as managing
agent, adviser, consultant or administrator of
investment management/advisory/consultancy
Section 6 Other Operations accounts; and
5. Rent out safety deposit boxes. (Sec. 53)
6.01. MAJOR INVESTMENTS The bank shall perform the services permitted
under 1-4 as depositary or as an agent.
For the purpose of enhancing bank supervision, the Accordingly, it shall keep the funds, securities
MB shall establish criteria for reviewing major and other effects which it receives duly
acquisitions or investments by a bank including separate from the bank's own assets and
corporate affiliations or structures that may expose liabilities. (Sec. 53)
the bank to undue risks or in any way hinder
effective supervision. (Sec. 50) The MB may regulate all these operations in
order to ensure that such operations do not
endanger the interests of the depositors and Section 4.2. Banks may outsource
other creditors of the bank. (Sec. 53) credit card services; printing of bank
loan statements and other non-deposit
records, bank forms and promotional
6.05. PROHIBITIONS materials; credit investigation and
A. Against Acting as an Insurer collection; processing of export, import
A bank shall not directly engage in and other trading transactions; transfer
insurance business as the insurer. (Sec. agent services for debt and equity
54) securities; property appraisal;
B. Prohibited Transactions of Directors, property management services;
Officers, Employees, or Agents of Any messenger, courier and postal services;
Bank* security guard services; vehicle service
1. Making false entries in any bank report contracts; janitorial services.
or statement or participating in any Section 5. Service Providers. When allowed
fraudulent transaction, thereby by law and under this circular, banks may
affecting the financial interest of, or enter into outsourcing contracts only with
causing damage to, the bank or any service providers with demonstrable
person; technical and financial capability
2. Without order of a court of competent commensurate to the services to be
jurisdiction, disclosing to any rendered.
unauthorized person any information Consistent with the provisions of the
relative to the funds or properties in Banks Secrecy Law, no bank shall
the custody of the bank belonging to employ casual or nonregular personnel
private individuals, corporations, or any or too lengthy probationary personnel
other entity: Provided, That with in the conduct of its business involving
respect to bank deposits, the provisions bank deposits. (Subsec. 55.4)
of existing laws shall prevail;
3. Accepting gifts, fees or commissions or 6.06. PROHIBITED TRANSACTIONS OF
any other form of remuneration in BORROWERS OF BANK*
connection with the approval of a loan
or other credit accommodation from
1. Fraudulently overvaluing property offered as
said bank;
security for a loan or other credit
4. Overvaluing or aiding the overvaluing
accommodation from the bank;
of any security for the purpose of
2. Furnishing false or misrepresenting or
influencing in any way the actions of
suppressing material facts for the purpose of
the bank or any bank; or
obtaining, renewing, or increasing a loan or
5. Outsourcing inherent banking functions.
other credit accommodation or extending the
(SubSec. 55.1)
period thereof;
C. BSP Circular 268 (2000)
3. Attempting to defraud the said bank in the
Section 2.1 Outsourcing of inherent
event of a court action to recover a loan or
banking functions shall refer to any
other credit accommodation; or
contract between the bank and a service
4. Offering any director, officer, employee or
provider for the latter to supply the
agent of a bank any gift, fee, commission, or
manpower to service the deposit
any other form of compensation in order to
transactions of the former.
influence such persons into approving a loan or
Section 2.2 Banks cannot outsource
other credit accommodation application.
management functions except as may be
(SubSec. 55.2)
authorized by the Monetary Board when
circumstances justify.
* No examiner, officer or employee of the BSP
Section 3. Outsourcing of Information
or of any department, bureau, office, branch or
Technology Systems/Processes. Subject to
agency of the Govt that is assigned to
prior approval of the MB, banks may
supervise, examine, assist or render technical
outsource all information technology
assistance to any bank shall commit any of the
systems and processes except for functions
acts enumerated in Subsecs. 55.1 and 55.2 or
excluded in Section 3.1.
aid in the commission of the same. The making
Section 3.1 Functions affecting the
of false reports or misrepresentation or
ability of the bank to ensure the fit of
suppression of material facts by personnel of
technology services deployed to meet
the BSP shall constitute fraud and shall be
its strategic and business objectives
subject to the administrative and criminal
and to comply with all pertinent
sanctions provided under the NCBA. (Subsec.
banking laws and regulations may not
55.3)
be outsourced. Subject to prior
approval of the MB, consultants and/or
service providers may be engaged to
provide assistance/support.
6.07. CONDUCTING BUSINESS IN AN UNSAFE
Section 4. Outsourcing of Other Banking
OR UNSOUND MANNER
Functions.
Section 4.1 Subject to prior approval
of the MB, banks may outsource data In determining whether a particular act or
imaging, storage, retrieval and other omission, which is not otherwise prohibited by any
related systems; clearing and law, rule or regulation affecting banks, QBs or trust
processing of checks not included in the entities, may be deemed as conducting business in
Philippine Clearing House System; an unsafe or unsound manner, the MB shall
printing of bank deposit statements.
EXTENDING CREDIT,
6.14. OTHER RELATED PROVISIONS OF THE
GBL
SUBJECT TO SUCH RULES AS THE MB
MAY PROMULGATE. THESE RULES MAY
The Bangko Sentral may charge equitable INCLUDE THE DETERMINATION OF
rates, commissions or fees, as may be BONDS AND OTHER DEBT SECURITIES
prescribed by the Monetary Board for ELIGIBLE FOR INVESTMENT, THE
supervision, examination and other services MATURITIES AND AGGREGATE AMOUNT
which it renders under this Act. (Sec. 65) OF SUCH INVESTMENT. (SEC. 29)
Unless otherwise provided, the violation of any BSP Circular 271 (2002)
of the provisions of this Act shall be subject to (1) invest in the equities of
Secs 34, 35, 36 and 37 of the NCBA. If the allied enterprises;
offender is a director or officer of a bank, (2) purchase, hold and convey
quasi-bank or trust entity, the MB may also real estate;
suspend or remove such director or officer. If (3) receive in custody funds,
the violation is committed by a corporation, documents and valuable
such corporation may be dissolved by quo objects;
warranto proceedings instituted by the (4) act as financial agent;
Sol.Gen.. (Sec. 66) (5) make collections and
payments for the account
The provisions of any law to the contrary of others;
notwithstanding, the BSP shall be consulted by (6) act as managing agent,
other government agencies or instrumentalities adviser, consultant or
in actions or proceedings initiated by or administrator of
brought before them involving controversies in investment
banks, QBs or trust entities arising out of and management/advisory/-
involving relations between and among their consultancy accounts;
directors, officers or stockholders, as well as (7) rent out safety deposit
disputes between any or all of them and the boxes; and
bank, QBs or trust entity of which they are (8) engage in quasi-banking
directors, officers or stockholders. (Sec. 63) functions.
Equity Investments
In the case of a foreign bank which has more 7.04. SUMMONS AND LEGAL PROCESS
than 1 branch in the Phils., all such branches
shall be treated as 1 unit for the purpose of the Upon the Phil. Agent or Head of the Foreign
GBL, and all references to the Phil. branches of Bank Designated to Accept Service
foreign banks shall be held to refer to such
units. (Sec. 74) Summons and legal process served upon
the Phil. agent or head of any foreign bank
In all matters not specifically covered by designated to accept service thereof shall
special provisions applicable only to a foreign give jurisdiction to the courts over such
bank or its branches and other offices in the bank, and service of notices on such agent
Phils., any foreign bank licensed to do business or head shall be as binding upon the bank
in the Phils. shall be bound by the provisions of which he represents as if made upon the
the GBL and all other laws, rules and bank itself.
regulations applicable to banks organized under
the laws of the Phils. of the same class, except Should the authority of such agent or head
those that provide for the creation, formation, to accept service of summons and legal
organization or dissolution of corporations or processes for the bank or notice to it be
for the fixing of the relations, liabilities, revoked, or should such agent or head
responsibilities, or duties of stockholders, become mentally incompetent or otherwise
members, directors or officers of corporations unable to accept service while exercising
to each other or to the corporation. (Sec. 77) such authority, it shall be the duty of the
The conduct of offshore banking business in the bank to name and designate promptly
Philippines shall be governed by Offshore another agent or head upon whom service
Banking System Decree (PD 1034) (Sec. 72) of summons and processes in legal
proceedings against the bank and of
7.02. ACQUISITION OF VOTING STOCK IN A notices affecting the bank may be made,
DOMESTIC BANK and to file with the SEC a duly
authenticated nomination of such agent.
Within 7 years from the effectivity of the GBL (Sec. 76)
and subject to guidelines issued pursuant to
the Foreign Banks Liberalization Act, the MB
may authorize a foreign bank to acquire up to Upon the BSP Deputy Governor In-Charge of
100% of the voting stock of only 1 domestic the Supervising and Examining Departments
bank.
In the absence of the agent or head or
Within the same period, the MB may authorize should there be no person authorized by
any foreign bank, which prior to the effectivity the bank upon whom service of summons,
of the GBL availed itself of the privilege to processes and all legal notices may be
acquire up to 60% of the voting stock of a bank made, service of summons, processes and
under the Foreign Banks Liberalization Act and legal notices may be made upon the BSP
the Thrift Banks Act, to further acquire voting Deputy Governor In-Charge of the
shares of such bank to the extent necessary for supervising and examining departments
it to own 100% of the voting stock thereof. and such service shall be as effective as if
made upon the bank or its duly authorized
In the exercise of this authority, the MB shall agent or head.
adopt measures as may be necessary to ensure
that at all times the control of 70% of the The said Deputy Governor shall register
resources or assets of the entire banking and transmit by mail to the president or the
system is held by banks which are at least secretary of the bank at its head or
majority-owned by Filipinos. principal office a copy, duly certified by
him, of the summons, process, or notice.
Any such right, privilege or incentive granted to The sending of such copy of the summons,
a foreign bank shall be equally enjoyed by and process, or notice shall be a necessary part
extended under the same conditions to banks of the services and shall complete the
organized under Philippine laws. (Sec. 73) service.
advance by the party at whose instance the and its branches shall be treated as one
service is made. (Sec. 76) unit. (Sec. 93)
The MB may revoke the license to transact 8.03. APPLICABILITY OF CIVIL CODE
business in the Phils. of any foreign bank, if it
finds that the foreign bank is insolvent or in Art 1442 of the Civil Code: The principles of the
imminent danger thereof or that its general law of trusts, insofar as they are not in
continuance in business will involve probable conflict w/ the Civil Code, the Code of Commerce,
loss to those transacting business with it. the Rules of Court and special laws [including the
GBL] are hereby adopted.
After the revocation of its license, it shall be
unlawful for any such foreign bank to transact
business in the Phils. unless its license is 8.04. HISTORY
renewed or reissued. The BSP shall take the
necessary action to protect the creditors of The idea of property held in trust is a great
such foreign bank and the public. legacy from the Wars of the Roses and the
messiness of the English Reformation. The purpose
The provisions of the NCBA on sanctions and of the arrangement is to separate the benefits from
penalties shall likewise be applicable. (Sec. 78) the responsibilities of ownershipto permit, for
example, land or a business left to a widow or
children to be managed by a strong third party
committed to act solely in the interest of the
beneficiaries of the trust. Though beneficiaries
have since the 15th century had the right to call
trustees to the law courts to account for their
stewardship, in fact the guts of the system is the
pride of the trustee, for whom the opportunity to
employ his powers unselfishly should be an honor
and a privilege. Obviously, the trustee as
Section 8 Trust Operations described in law needs a soul, and comments could
be made about the American innovation of 1818
8.01. AUTHORITY TO ENGAGE IN TRUST which first chartered a soulless corp to perform
BUSINESS trust functions. The trust company, so called,
performed a number of functions closely analogous
Only a stock corporation or a person duly to banking: its basic job, after all, was to invest
authorized by the MB to engage in trust business and manage safely the assets left w/ it by others.
shall act as a trustee or administer any trust or The question of the standard of care to which such
hold property in trust or on deposit for the use, a company could be held was variously resolved
benefit, or behalf of others. For purposes of the xxx. In 1833 the Supreme Judicial Council of
GBL, such a corporation is referred to as a trust Massachusetts ruled that a trustee could manage a
entity. (Sec. 79) trust in any way a prudent man would treat his
own assets; but other states lagged far behind and
will into the 20th century most laws prescribed a
A trust receipt is a written/printed document and legal list of investments approved for trusts xxx
delivered by the entrustee in favor of the entruster, (Morales quoting Martin Mayer in The Bankers
whereby the latter releases the goods, documents (1974))
or instruments over which he holds absolute title or
a security interest ot the possession of the former,
upon the entrustees promist to hold said goods in 8.05. PRUDENT MAN AND SELF-DEALING
trust for the entruster, an to sell or otherwise RULES
dispose of the goods, etc. with the obligation to
turn over the proceeds thereof to the extent of
what is owing to the enstruster; or to return the Prudent Man Rule
45 A trust entity shall administer the funds or
goods if UNSOLD, or for other purposes.
property under its custody with the diligence
8.02. BRANCHES OF TRUST ENTITY that a prudent man would exercise in the
conduct of an enterprise of a like character and
with similar aims. (Sec. 80 par. 1)
The ordinary business of a trust entity shall
be transacted at the place of business
The MB shall promulgate such rules and
specified in its articles of incorporation.
regulations as may be necessary to prevent
Such trust entity may, with prior approval
of the MB, establish branches in the circumvention of the prudent man rule and the
responsibility therein imposed on a trust entity.
Philippines, and the said entity shall be
responsible for all business conducted in (Sec. 80 par. 3)
such branches to the same extent and in
the same manner as though such business This rule is part of the code of conduct required
had all been conducted in the head office. of a trustee and thus set out in the behavioral
For the purpose of this Act, the trust entity guidelines of the Manual of Regulation of
Banks: Sec X401 Statement of Principles. The
cardinal principle common to all trust and other
fiduciary relationships is fidelity. Policies
45
In 2007, the definition of Trust Receipt was asked.
predicated upon this principle are directed instrument itself). (Morales on the basis of
towards confidentiality, scrupulous care, safety Subsec. X409.3 of the Manual of Regulations
and prudent management of property including for Banks and Subsec. 4409Q.3 of the Manual
reasonable probability of income w/ proper of Regulations for Non-Bank Financial
accounting and appropriate reporting thereon. Institutions)
Practices are designed to promote efficiency in
administration and operation; to adhere and
conform w/ the terms of the instrument or Rationale of the Rules
contract; and to maintain absolute separation
of property free from any intrusion of conflict of For the protection of the public xxx, there is
interest. need for writing into the law provisions
A bank authorized to engage in trust and intended to ensure that trust managers shall
fiduciary business is under no obligation, handle trust accounts along the prudent man
either legal or moral, to accept any such concept of managing funds in trust, since
business being offered nor has it the right trustors usually entrust their funds xxx in full
to accept if the same is contrary to law, confidence, secure in the belief that the trustee
rules, regulations public order and public will manage his funds as a prudent man would.
policy. It shall advertise its services in a
dignified manner and enter such business There is need therefore to put in safeguards in
only when demand for such service is the law so as to ensure that the expected
evident, when specially equipped to render prudence in management shall indeed be the
such service and upon full appreciation of norm, Such safeguards or guidelines may take
the responsibilities involved. It shall be the form of prohibition form purchasing or
ready and willing to give full disclosure of acquiring property for the trust or for account
the services being offered and shall conduct of the trustor or beneficiary of the trust from
its dealing w/ transparency. Harmonious the bank proper or any of its depts or
relationship shall likewise be pursued w/ directors, officers or employees, unless
other professions to achieve the common specifically authorized by the trustor.
goal of mutual service to the public and
protection of its interest. (Morales noting It has been said that the essence of
that there is a similar statement of trusteeship is that the trustee would not be
principles in Sec 4401Q of the Manual of motivated by self-interest, that on no account
Regulations for Non-Financial Institutions) shall it receive any personal advantage from
the trusteeship, that it shall permit no dealings
of any character between itself as an individual
Self-Dealing Rule or corp and itself in its capacity as trustee, and
GR:No trust entity shall, for the account of the that it shall receive from the trust no profit or
trustor or the beneficiary of the trust, financial return, directly or indirectly, other
than its rightful compensation for services
1. purchase or acquire property from, or rendered. (Morales citing Recommendation 70
2. sell, transfer, assign or lend money or of Joint IMF-CBP Banking Survey Commission)
property to, or
3. purchase debt instruments of
a. any of the departments, directors,
officers, stockholders, or employees 8.06. REGISTRATION REQUIREMENT
of the trust entity
b. relatives within the 1st degree of
The SEC shall not register the articles of
consanguinity or affinity, or the
incorporation and by-laws or any amendment
related interests, of such directors,
thereto, of any trust entity, unless
officers and stockholders,
accompanied by a certificate of authority issued
by the BSP. (Sec. 80)
EXC.
Reiterates the requirements under the
1. the transaction is specifically authorized
Corporation Code. (Morales)
by the trustor and
2. the relationship of the trustee and the
Note: Sec 17 par 2 of the Corporation Code: No
other party involved in the transaction
articles of incorporation or amendment to the
is fully disclosed to the trustor or
articles of incorporation of banks, banking and
beneficiary of the trust prior to the
Quasi-banking institutions, building and loan
transaction. (Sec. 80 par. 2)
associations, trust companies and other financial
intermediaries, insurance companies, public
The MB shall promulgate such rules and
utilities, educational institutions, and other corps
regulations as may be necessary to prevent
governed by special laws shall be accepted or
circumvention of the self-dealing rule or the
approved by the SEC unless accompanied by a
evasion of the responsibility therein imposed on
favorable recommendation of the appropriate
a trust entity. (Sec. 80 par. 3)
government agency to the effect that such articles
or amendment is in accordance with law. AND Sec
Basically, a trustee cannot engage in a self
46 par 4: The SEC shall not accept for filing the
dealing transaction unless: (1) the transaction
by-laws or any amendment thereto of any bank,
is specifically authorized by the trustor and (2)
banking institution, building and loan association,
the relationship of the trustee and its
trust company, insurance company, public utility,
counterparty is fully disclosed to the trustor or
educational institution or other special corps
beneficiary of the trust prior to the transactions
governed by special laws, unless accompanied by a
(either in a separate instrument of in the trust
- The MB shall require every trust entity to - Upon the application of any executor,
increase the amount of its cash or administrator, guardian, trustee, receiver,
securities on deposit with the BSP depositary or any other person in interest,
whenever in its judgment such increase is the court may, after notice and hearing,
necessary by reason of the trust business order that the subject matter of the trust or
of such entity. (Sec. 84) any part thereof be deposited with a trust
entity. Upon presentation of proof to the
court that the subject matter of the trust
has been deposited with a trust entity, the
court may order that the bond given by
2. Paid-In Capital and Security such persons for the faithful performance of
- The paid-in capital and surplus of such their duties be reduced to such sums as it
entity must be at least equal to the amount may deem proper: Provided, however, That
required to be deposited with the BSP in the reduced bond shall be sufficient to
accordance with the provisions of this secure adequately the proper
paragraph. (Sec. 84) administration and care of any property
remaining under the control of such
3. Reserves persons and the proper accounting for such
property. Property so deposited with any
- In addition to basic security, a trust entity trust entity shall be held by such entity
is required to maintain reserves against under the orders and direction of the court.
peso-denominated common trust funds as (Sec.85)
well as certain trust and other fiduciary
accounts. (Morales citing Subsec X405.5 - No bond or other security shall be required
Manual of Regulation for banks; Subsec by the court from a trust entity for the
4405Q.5 Manual of regulation for Non-bank faithful performance of its duties as court-
Financial Institutions) appointed trustee, executor, administrator,
guardian, receiver, or depositary. However,
the court may, upon proper application with
it showing special cause therefor, require
the trust entity to post a bond or other
Failure to Maintain such Amounts
security for the protection of funds or
Should the capital and surplus fall below property confided to such entity. (Sec. 86)
said amount, the MB shall have the same
authority as that granted to it under the - That trust entities need not post a bond,
provisions of the fifth paragraph of Sec. 34 unless required by the court, for the faithful
of the GBL. performance of Sec 85 GBL duties is based
on the presumption that trust entities
A trust entity so long as it shall continue to be already have a basic security deposit with
solvent and comply with laws or regulations the BSP. (Morales)
shall have the right to collect the interest
earned on such securities deposited with the
BSP and, from time to time, with the approval
of the BSP, to exchange the securities for
others.
8.11. SEPARATION OF TRUST BUSINESS AND then subsidiaries of trust companies. When
ASSETS FROM THE OTHER BUSINESSES AND monopolies were being made in the 19 th and
ASSETS OF THE BANK 20th centuries, the devise used was the trust,
as it could hold the stock of all companies w/in
The trust business and all funds, properties or the group. Accordingly, then the US Congress
securities received by any trust entity as was breaking up monopolies, what were passed
executor, administrator, guardian, trustee, were anti-trust laws. (Morales)
receiver, or depositary shall be kept separate
and distinct from the general business including
all other funds, properties, and assets of such 8.13. LOANS OR INVESTMENTS PRESCRIBED
trust entity. The accounts of all such funds, BY MB
properties, or securities shall likewise be kept
separate and distinct from the accounts of the Unless otherwise specifically enumerated in the
general business of the trust entity. (Sec. 87) agreement or indenture and directed in writing by
the client, court of competent jurisdiction or other
Trust Business Separation. Trust and other competent authority, loans and investments of the
[trust or other fiduciary] fund shall be limited to:
fiduciary business of a bank shall be carried out
1. (a) evidences of indebtedness of the RP
through a trust dept which shall be
and BSP, and
organizationally, operationally, administratively
(b) any other evidences of indebtedness or
and functionally separate and distinct from the
obligations the servicing and repayment of
other depts and/or business of the institution.
which are fully guaranteed by the RP or
(Morales citing Subsec X406.1.a Manual of
(c) loans against such government
Regulations for Banks)
securities;
2. loans fully guaranteed by the RP as to the
Trust Assets Separation. All moneys,
payment of principal and interest;
properties or securities by a bank in its capacity
3. loans fully secured by [a] a hold-out on, [b]
as trustee, fiduciary or invesmtnet manager
assignment or [c] pledge of deposits
shall be kept physically separate and distinct
maintained either w/ the bank or other
fromt eh other assets of its other business and
banks, or of deposit substitutes of the
shal be under the joint custody of at least 2
bank, or of [d] chattel mortgage bonds
persons, one of whom shall be an officer of the
issued by the trustee or fiduciary; and
trust or investment management dept,
4. loans fully secured by real estate or
designated for that purpose by the board of
chattels (Morales referring to Subsec
directors. The investment of each trust, other
X409.2 Ibid; similar rule in Subsec 4409Q.2
fiduciary or investment management account
Manual o Regulations for Non-Bank
shall be kept physically separate from those of
Financial Institutions)
other trust, other fiduciary or investment
management accounts, and adequately
identifies as the assets of property of the
8.14. REAL ESTATE INVESTMENTS
relevant account. (Morales citing Sec X422
Ibid.)
Unless otherwise specifically directed by the
trustor or the nature of the trust, real estate
Investment of Non-Trust Funds. The
acquired by a trust entity in whatever manner
investment of funds other than trust funds of a
and for whatever purpose, shall likewise be
trust entity which is a bank, financing company
governed by the relevant provisions of Sec. 52
or an investment house shall be governed by
of the GBL. (Sec. 89)
the relevant provisions of the GBL and other
applicable laws. (Sec. 90)
The reference to Sec 52 is w/out prejudice to
the directives of the trustor or the nature of the
If the trust entity is a unit of a bank, a
trust itself. It is to be understood that the trust
financing company or an investment house,
entity can take specific directives from the
then non-trust business activities are
trustor only if the trust is revocable. But if it is
conducted by other units of such bank,
irrevocable, then the trustor is out of the
financing company or investment house.
picture and the trust entity should take
(Morales)
instructions from the beneficiaries themselves
in the context of the trust instrument in
question. (Morales)
8.12. INVESTMENT LIMITATIONS
8.15. SANCTIONS AND PENALTIES
Unless otherwise directed by the instrument
creating the trust, the lending and investment A trust entity or any of its officers and directors
of funds and other assets acquired by a trust found to have willfully violated any pertinent
entity as executor, administrator, guardian, provisions of the GBL, shall be subject to the
trustee, receiver or depositary of the estate of sanctions and penalties provided under Sec. 66
any minor or other incompetent person shall be of the GBL and Secs. 36 and 37 of the NCBA.
limited to loans or investments as may be
prescribed by law, the MB or any court of 8.16. EXEMPTION OF TRUST ASSETS FROM
competent jurisdiction. (Sec. 88) CLAIMS
Historical Note. It used to be that a trust No assets held by a trust entity in its capacity
company, particularly in the US could own as trustee shall be subject to any claims other
anything. In fact, many national banks were
than those of the parties interested in the 9.03. RECEIVERSHIP AND INVOLUNTARY
specific trusts. (Sec. 92) LIQUIDATION
Rationale. The creditors of the trustee will not The grounds and procedures for placing a bank
be able to attach, garnish or otherwise claim under receivership or liquidation, as well as the
the trust assets, because the trustee is not the powers and duties of the receiver or liquidator
beneficial owner thereof. Only the :parties appointed for the bank shall be governed by
interested in the specific trust (normally, the the provisions of Secs. 30, 31, 32, and 33 of
beneficiaries of the trust) can claim those the NCBA: Provided, That the petitioner or
assets. This is further reinforced by the plaintiff files with the clerk or judge of the court
following: Art 2240 Civil Code. Property held in which the action is pending a bond, executed
by the insolvent debtor as a trustee of an in favor of the BSP, in an amount to be fixed by
express or implied trust, shall be excluded from the court. This shall also apply to the extent
the insolvency proceedings. (Morales) possible to the receivership and liquidation
proceedings of QBs. (Sec. 69)
9.02. VOLUNTARY LIQUIDATION 2. In line with this policy, and considering its
unique functions and responsibilities, the
In case of the voluntary liquidation of any bank central monetary authority established under
organized under the laws of the Phils., or of the NCBA, while being a govt-owned
any branch or office in the Phils. of a foreign corporation, shall enjoy fiscal and
bank, written notice of such liquidation shall be administrative autonomy. (Sec. 1)
sent to the MB before such liquidation is
undertaken, and the MB shall have the right to NOTE
intervene and take such steps as may be The NCBA establishes the independent central
necessary to protect the interests of creditors. monetary authority, which is a body corporate
(Sec. 68) known as the BSP. (Sec. 2)
of the Board. The Governor shall submit a department head in accordance with the
report to the President and Congress within 72 position and compensation plans approved by
hours after the action has been taken. At the the MB, as well as to impose disciplinary
soonest possible time, the Governor shall call a measures upon personnel of the BSP, subject
meeting of the MB to submit his action for to the provisions of Section 15(c) of this Act:
ratification. (Sec. 19) Provided, That removal of personnel shall be
with the approval of the MB;
c. collect all monies and debts due said attendant to the conservatorship shall be borne
institution, and by the bank or quasi-bank concerned. (Sec. 29)
d. exercise all powers necessary to
restore its viability. (Sec. 29) 2. Closure
2. Period of Conservatorship
1. When closure is ordered
The conservatorship shall not exceed 1 year. (Sec.
29) The MB shall terminate the conservatorship Whenever, upon report of the head of the
when it is satisfied that the institution can continue supervising or examining department, the MB finds
to operate on its own and the conservatorship is no that a bank or quasi-bank:
longer necessary. The conservatorship shall
likewise be terminated should the MB, on the basis
of the report of the conservator or of its own is unable to pay its liabilities as they
findings, determine that the continuance in become due in the ordinary course of
business of the institution would involve probable business: Provided, That this shall
loss to its depositors or creditors, in which case the not include inability to pay caused by
provisions of Section 30 shall apply. (Sec. 29) extraordinary demands induced by
financial panic in the banking
3. Conservator community;
has insufficient realizable assets, as
The conservator shall report and be responsible to determined by the BSP, to meet its
the MB and shall have the power to overrule or liabilities; or
revoke the actions of the previous management cannot continue in business without
and board of directors of the bank or quasi-bank. involving probable losses to its
(Sec. 29) depositors or creditors; or
has willfully violated a cease and
While the Central Bank law gives vast desist order under Sec. 37 that has
and far-reaching powers to the conservator of a become final, involving acts or
bank, such powers must be related to the transactions which amount to fraud
preservation of the assets of the bank, the or a dissipation of the assets of the
reorganization of the management and the institution;
restoration of viability. Such powers cannot
extend to the post-facto repudiation of in which cases, the MB may summarily and without
perfected transactions, otherwise they would need for prior hearing forbid the institution from
infringe against the non-impairment clause of doing business in the Philippines (Sec. 30)
the Constitution. The law merely gives the
conservator power to revoke contracts that are
deemed to be defective - i.e., void, voidable,
unenforceable or rescissible. The conservator
merely takes the place of a banks board of
directors. What the said board cannot do - such
as repudiating a contract validly entered into
under the doctrine of implied authority - the 2. Related Provisions in RA 8791 (General Banking
conservator cannot do either. Ineluctably, his Law of 2000)
power is not unilateral and he cannot simply
repudiate valid obligations of the Bank. His
authority would be only to bring court actions In case a bank or quasi-bank notifies the BSP
to assail such contracts. (First Philippine or publicly announces a bank holiday, or in any
International Bank vs CA ; 1996) manner suspends the payment of its deposit
liabilities continuously for more than 30 days,
The conservator should be competent and the MB may summarily and without need for
knowledgeable in bank operations and prior hearing close such banking institution and
management. (Sec. 29) place it under receivership of the Philippine
Deposit Insurance Corporation. (Sec 53)
The conservator shall receive remuneration to
be fixed by the MB in an amount not to exceed Whenever a bank, quasi-bank or trust entity
2/3 of the salary of the president of the persists in conducting its business in an unsafe
institution in 1 year, payable in 12 equal or unsound manner, the MB may take action
monthly payments: Provided, That, if at any under Sec 30. Conducting business in an
time within one-year period, the unsafe or unsound manner means:
conservatorship is terminated on the ground
that the institution can operate on its own, the - The act or omission has resulted or
conservator shall receive the balance of the may result in material loss or
remuneration which he would have received up damage, or abnormal risk or danger
to the end of the year; but if the to safety, stability, liquidity or
conservatorship is terminated on other solvency or
grounds, the conservator shall not be entitled - to the institution's depositors,
to such remaining balance. The MB may creditors, investors, stockholders or
appoint a conservator connected with the BSP, to the Bangko Sentral or to the public
in which case he shall not be entitled to receive in general or
any remuneration or emolument from the BSP - The act or omission has caused any
during the conservatorship. The expenses undue injury, or has given any
The MB shall, in accordance with its Within the 30 days following the end of each
authority under this Act, determine and fiscal year56, the BSP shall determine its net
provide for such operating departments profits or losses. In the calculation of net
and other offices, including a public profits, the BSP shall make adequate allowance
information office, of the BSP as it deems or establish adequate reserves for bad and
convenient for the proper and efficient doubtful accounts. (Sec. 43)
conduct of the operations and the Within the first 60 days following the end of
accomplishment of the objectives of the
each fiscal year, the MB shall determine and
BSP. The functions and duties of such
carry out the distribution of the net profits, in
operating departments and other offices
accordance with the following rule: 50% of the
shall be determined by the MB. (Sec. 38)
net profits shall be carried to surplus and the
remaining 50% shall revert back to the
National Treasury, except as otherwise
4. Reports and Publications
provided in the transitory provisions of this Act.
(Sec. 44)
The BSP shall publish a general balance
sheet showing the volume and composition Profits or losses arising from any revaluation of
of its assets and liabilities as of the last the BSP's net assets or liabilities in gold or
working day of the month within sixty (60) foreign currencies with respect to the Philippine
days after the end of each month except peso shall not be included in the computation
for the month of December, which shall be of the annual profits and losses of the BSP.
submitted within ninety (90) days after the Any profits or losses arising in this manner
end hereof. (Sec. 39) shall be offset by any amounts which, as a
The MB shall publish and submit the consequence of such revaluations, are owed by
following reports to the President and to the Philippines to any international or regional
the Congress: intergovernmental financial institution of which
not later than 90 days after the end of each the Philippines is a member or are owed by
quarter, an analysis of economic and these institutions to the Philippines. Any
financial developments, including the remaining profit or loss shall be carried in a
condition of net international reserves and special frozen account which shall be named
monetary aggregates; "Revaluation of International Reserve" and the
within 90 days after the end of the year, net balance of which shall appear either among
the liabilities or among the assets of the BSP,
the preceding year's budget and profit and
depending on whether the revaluations have
loss statement of the BSP showing in
produced net profits or net losses. The
reasonable detail the result of its
Revaluation of International Reserve account
operations;
shall be neither credited nor debited for any
120 days after the end of each semester, a
purposes other than those specifically
review of the state of the financial system;
authorized in this section. (Sec. 45) 57
and
as soon as practicable, abnormal 54
The statistical appendix shall present, as a minimum,
movements in monetary aggregates and the following data: (a) the monthly movement of monetary
the general price level, and, not later than aggregates and their components; (b) the monthly movement
72 hours after they are taken, remedial of purchases and sales of foreign exchange and of the
measures in response to such abnormal international reserves of the BSP; (c) the balance of
movements. (Sec. 39) payments of the Philippines; (d) monthly indices of consumer
prices and of import and export prices; (e) the monthly
movement, in summary form, of exports and imports, by
5. Annual Report volume and value; (f) the monthly movement of the accounts
of the BSP and of other banks; (g) the principal data on
government receipts and expenditures and on the status of
Before the end of March of each year, the BSP the public debt, both domestic and foreign; and (h) the texts
shall publish and submit to the President and of the major legal and administrative measures adopted by
the Congress an annual report on the condition the Government and the MB during the year which relate to
of the BSP including a review of the policies the functions or operations of the BSP or of the financial
system. (Sec. 40)
and measures adopted by the MB during the 55
Failure to comply with the reportorial requirements
past year and an analysis of the economic and
pursuant to this article without justifiable reason as may be
financial circumstances which gave rise to said determined by the MB shall cause the withholding of the
policies and measures. The annual report shall salary of the personnel concerned until the requirements are
also include a statement of the financial complied with. (Sec. 40)
The balance sheets and other financial statements of
the BSP shall be signed by the officers responsible for their
53 preparation, by the Governor, and by the auditor of the BSP.
Toward this end, the BSP is hereby authorized to (Sec. 41)
defray the costs of study, at home or abroad, of qualified 56
The fiscal year of the BSP shall begin on January first
employees of the BSP, of promising university graduates or of
and end on December thirty-first of each year. (Sec. 42)
any other qualified persons who shall be determined by 57
proper competitive examinations. The MB shall prescribe Sections 43 and 43-A of RA 265, as amended,
rules and regulations to govern the training program of the creating the Monetary Adjustment Account (MAA) and the
BSP. Exchange Stabilization Adjustment Account (ESAA),
4. any willful making of a false or misleading order. If no such hearing is requested within said
statement to the Board or the appropriate period, the order shall be final. If a hearing is
supervising and examining department or conducted, all issues shall be determined on the
its examiners; basis of records, after which the MB may either
5. any willful failure or refusal to comply with, reconsider or make final its order. (Sec. 37)
or violation of, any banking law or any
order, instruction or regulation issued by 7. Daily Fines
the MB, or any order, instruction or ruling
by the Governor; or The Governor is hereby authorized, at his
6. any commission of irregularities, and/or discretion, to impose upon banking institutions, for
conducting business in an unsafe or any failure to comply with the requirements of law,
unsound manner as may be determined by MB regulations and policies, and/or instructions
the MB, issued by the MB or by the Governor, fines not in
excess of P10,000 a day for each violation, the
the following administrative sanctions (which imposition of which shall be final and executory
need not be applied in the order of their severity), until reversed, modified or lifted by the MB on
whenever applicable: appeal. (Sec. 37)
and coins of the denominations which most part of the assets or liabilities of the BSP. (Sec.
nearly approximate those requested. (Sec. 55) 51)
The BSP shall withdraw from circulation and
shall demonetize all notes and coins which for 5. LEGAL TENDER POWER
any reason whatsoever are unfit for circulation
and shall replace them by adequate notes and All notes and coins issued by the BSP shall be fully
coins: Provided, however, That the BSP shall guaranteed by the Government of the Republic of
not replace notes and coins the identification of the Philippines and shall be legal tender in the
which is impossible, coins which show signs of Philippines for all debts, both public and private:
filing, clipping or perforation, and notes which Provided, however, That, unless otherwise fixed by
have lost more than 2/5 of their surface or all the MB, coins shall be legal tender in amounts not
of the signatures inscribed thereon. Notes and exceeding P50 for denominations of 25 centavos
coins in such mutilated conditions shall be and above, and in amounts not exceeding P20 for
withdrawn from circulation and demonetized 58
denominations of 10 centavos or less. (Sec. 52)
without compensation to the bearer. (Sec. 56)
The BSP may call in for replacement notes of 6. DEMAND DEPOSITS
any series or denomination which are more
than 5 years old and coins which are more 10 For purposes of this Act, the term "demand
years old. Notes and coins called in for deposits" means all those liabilities of the BSP
replacement in accordance with this provision and of other banks which are denominated in
shall remain legal tender for a period of 1 year Philippine currency and are subject to payment
from the date of call. After this period, they in legal tender upon demand by the
shall cease to be legal tender but during the presentation of checks. (Sec. 58)
following year, or for such longer period as the
MB may determine, they may be exchanged at Only banks duly authorized to do so may
par and without charge in the BSP and by accept funds or create liabilities payable in
agents duly authorized by the BSP for this pesos upon demand by the presentation of
purpose. After the expiration of this latter checks, and such operations shall be subject to
period, the notes and coins which have not the control of the MB in accordance with the
been exchanged shall cease to be a liability of powers granted it with respect thereto under
the BSP and shall be demonetized. The BSP this Act. (Sec. 59)
shall also demonetize all notes and coins which
have been called in and replaced. (Sec. 57) Checks representing demand deposits do not
have legal tender power and their acceptance
3. EXCLUSIVE ISSUE POWER in the payment of debts, both public and
private, is at the option of the creditor:
Provided, however, That a check which has
The BSP shall have the sole power and been cleared and credited to the account of the
authority to issue currency, within the territory creditor shall be equivalent to a delivery to the
of the Philippines. No other person or entity, creditor of cash in an amount equal to the
public or private, may put into circulation amount credited to his account. (Sec. 60)
notes, coins or any other object or document
which, in the opinion of the MB, might circulate
as currency, nor reproduce or imitate the
facsimiles of BSP notes without prior authority
from the BSP. The MB may issue such
regulations as it may deem advisable in order
to prevent the circulation of foreign currency or
E. Monetary Administration by the BSP
of currency substitutes as well as to prevent
the reproduction of facsimiles of BSP notes. The
BSP shall have the authority to investigate, 1. DOMESTIC MONETARY STABILIZATION
make arrests, conduct searches and seizures in
accordance with law, for the purpose of
maintaining the integrity of the currency. The MB shall endeavor to control any expansion
Violation of this provision or any regulation or contraction in monetary aggregates which is
issued by the BSP pursuant thereto shall prejudicial to the attainment or maintenance of
constitute an offense punishable by price stability.59 (Sec. 61)
imprisonment of not less than 5 years but not
more than 10 years. In case the RPC provides Whenever abnormal movements in the
for a greater penalty, then that penalty shall be monetary aggregates, in credit, or in prices
imposed. (Sec. 50) endanger the stability of the Philippine
economy or important sectors thereof, the MB
4. LIABILITY FOR NOTES AND COINS shall take such remedial measures as are
appropriate and within the powers granted to
Notes and coins issued by the BSP shall be the MB and the BSP under the provisions of this
liabilities of the BSP and may be issued only Act; and submit to the President of the
against, and in amounts not exceeding, the Philippines and the Congress, and make public,
assets of the BSP. Said notes and coins shall a detailed report which shall include, as a
be a first and paramount lien on all assets of
the BSP. 58
This topic on Legal Tender was asked in 2000.
The BSP's holdings of its own notes and 59
For purposes of this article and of this Act, the MB
coins shall not be considered as part of its shall formulate definitions of monetary aggregates, credit and
currency issue and, accordingly, shall not form prices and shall make public such definitions and any changes
thereof. (Sec. 62)
minimum, a description and analysis of: (1) the 2. assets in foreign currencies in the form of:
causes of the rise or fall of the monetary documents and instruments customarily
aggregates, of credit or of prices; (2) the employed for the international transfer of
extent to which the changes in the monetary funds;
aggregates, in credit, or in prices have been 3. demand and time deposits in central banks,
reflected in changes in the level of domestic treasuries and commercial banks abroad;
output, employment, wages and economic foreign government securities; and foreign
activity in general, and the nature and notes and coins. (Sec. 66)
significance of any such changes; and (3) the
measures which the MB has taken and the The MB shall endeavor to hold the foreign
other monetary, fiscal or administrative exchange resources of the BSP in freely
measures which it recommends to be adopted. convertible currencies; moreover, the Board
shall give particular consideration to the
Whenever the monetary aggregates, or the prospects of continued strength and
level of credit, increases or decreases by more convertibility of the currencies in which the
than 15%, or the cost of living index increases reserve is maintained, as well as to the
by more than 10%, in relation to the level anticipated demands for such currencies. The
existing at the end of the corresponding month MB shall issue regulations determining the
of the preceding year, or even though any of other qualifications which foreign exchange
these quantitative guidelines have not been assets must meet in order to be included in the
reached when in its judgment the international reserves of the BSP. The BSP shall
circumstances so warrant, the MB shall submit be free to convert any of the assets in its
the reports mentioned in this section, and shall international reserves into other assets as
state therein whether, in the opinion of the described in subsecs (a) and (b) of Sec. 66.
Board, said changes in the monetary (Sec. 66)
aggregates, credit or cost of living represent a
threat to the stability of the Philippine economy Whenever the international reserve of the BSP
or of important sectors thereof. falls to a level which the MB considers
inadequate to meet prospective net demands
The MB shall continue to submit periodic on the BSP for foreign currencies, or whenever
reports to the President of the Philippines and the international reserve appears to be in
to Congress until it considers that the imminent danger of falling to such a level, or
monetary, credit or price disturbances have whenever the international reserve is falling as
disappeared or have been adequately a result of payments or remittances abroad
controlled. (Sec. 63) which, in the opinion of the MB, are contrary to
the national welfare, the MB shall:
stability of the Philippines has disappeared. with the provisions of Section 74 of this Act. 60
(Sec. 67) (Sec. 70)
The MB may authorize the BSP to grant the provisions of the preceding section. (Sec.
loans to and receive loans from foreign 79)
banks and other foreign or international
entities, both public and private, and may The banks shall report to the BSP the
engage in such other operations with these volume and composition of their purchases and
entities as are in the national interest and sales of gold and foreign exchange each day,
are appropriate to its character as a central and must furnish such additional information as
bank. The BSP may also act as agent or the BSP may request with reference to the
correspondent for such entities. Upon movements in their accounts in foreign
authority of the MB, the BSP may pledge currencies. The MB may also require other
any gold or other assets which it possesses persons and entities to report to it currently all
as security against loans which it receives transactions or operations in gold, in any shape
from foreign or international entities. (Sec. or form, and in foreign exchange whether
75) entered into or undertaken by them directly or
through agents, or to submit such data as may
4. REGULATION OF FOREIGN EXCHANGE be required on operations or activities giving
OPERATIONS OF THE BANKS rise to or in connection with or relating to a
gold or foreign exchange transaction. The MB
In order that the BSP may at all times shall prescribe the forms on which such
have foreign exchange resources sufficient to declarations must be made. The accuracy of
enable it to maintain the international stability the declarations may be verified by the BSP by
and convertibility of the peso, or in order to whatever inspection it may deem necessary.
promote the domestic investment of bank (Sec. 80)
resources, the MB may require the banks to sell
to the BSP or to other banks all or part of their 5. LOANS TO BANKING AND OTHER
surplus holdings of foreign exchange. Such FINANCIAL INSTITUTIONS
transfers may be required for all foreign
currencies or for only certain of such
currencies, according to the decision of the MB. Guiding Principles. The rediscounts, discounts,
The transfers shall be made at the rates loans and advances which the BSP is
established under the provisions of Sec. 74 of authorized to extend to banking institutions
this Act. (Sec. 76) under the provisions of the present article of
this Act shall be used to influence the volume
The MB may, whenever warranted, of credit consistent with the objective of price
determine the net assets and net liabilities of stability. (Sec. 81)
banks and shall, in making such a
determination, take into account the bank's 1. Normal Credit Operations
networth, outstanding liabilities, actual and
contingent, or such other financial or
performance ratios as may be appropriate Authorized Types of Operations.
under the circumstances. Any such Subject to the principle stated in the preceding
determination of net assets and net liabilities section of this Act, the BSP may normally and
shall be applied in all banks uniformly and regularly carry on the following credit
without discrimination. (Sec. 76) operations with banking institutions operating
in the Philippines:
The MB may require the banks to
1. Commercial credits. The BSP
maintain a balanced position between their
may rediscount, discount, buy and
assets and liabilities in Philippine pesos or in
sell bills, acceptances, promissory
any other currency or currencies in which they
notes and other credit instruments
operate. The banks shall be granted a
with maturities of not more than
reasonable period of time in which to adjust
180 days from the date of their
their currency positions to any such
rediscount, discount or acquisition
requirement. (Sec. 77)61
by the BSP and resulting from
transactions related to:
In order to restrain the banks from
taking speculative positions with respect to
the importation, exportation,
future fluctuations in foreign exchange rates,
purchase or sale of readily
the MB may issue such regulations governing
saleable goods and products, or
bank purchases and sales of non-spot
their transportation within the
exchange as it may consider necessary for said
Philippines;
purpose. (Sec. 78)
the storing of non-perishable
The banks shall bear the risks of non- goods & products w/c are duly
insured & deposited, under
compliance with the terms of the foreign
conditions assuring their
exchange documents and instruments which
preservation, in authorized
they buy and sell, and shall also bear any other
bonded warehouses or in other
typically commercial or banking risks, including
places approved by the MB.
exchange risks not assumed by the BSP under
2. Production credits. The BSP may
61 rediscount, discount, buy and sell
The powers granted under this section shall be
bills, acceptances, promissory notes
exercised only when special circumstances make such action
necessary, in the opinion of the MB, and shall be applied to all and other credit instruments having
banks alike and without discrimination. (Sec. 77) maturities of not more than 360
At least once every month the MB shall review Against Peso Deposits. The MB may fix and, when
the portfolio of the BSP in relation to its future it deems necessary, alter the minimum reserve
credit policy. In reviewing the BSP's portfolio, ratios to peso deposits, as well as to deposit
the MB shall especially consider whether a substitutes, which each bank and/or quasi-bank
sufficiently large part of the portfolio consists of may maintain, and such ratio shall be applied
assets with early maturities, in order that a uniformly to all banks of the same category as well
contraction in BSP credit may be effected as to quasi-banks. (Sec. 96)
promptly whenever the national monetary
policy so requires. (Sec. 93) Against Foreign Currency Deposits. The MB is
similarly authorized to prescribe and modify the
minimum reserve ratios applicable to deposits
8. BANK RESERVES denominated in foreign currencies. (Sec. 97)
the preceding section of this Act, is below the Deposits maintained by banks with the BSP as part
required minimum, the bank or quasi-bank shall of their reserve requirements shall be exempt from
pay the BSP 1/10 of 1% per day on the amount of attachment, garnishments, or any other order or
the deficiency or the prevailing ninety-one-day process of any court, government agency or any
treasury bill rate plus three percentage points, other administrative body issued to satisfy the
whichever is higher: Provided, however, That banks claim of a party other than the Government, or its
and quasi-banks shall ordinarily be permitted to political subdivisions or instrumentalities. (Sec.
offset any reserve deficiency occurring on one or 103)
more days of the week with any excess reserves
which they may hold on other days of the same
week and shall be required to pay the penalty only 9. SELECTIVE REGULATION OF BANK
on the average daily deficiency during the week. OPERATIONS
In cases of abuse, the MB may deny any bank or
quasi-bank the privilege of offsetting reserve Guiding Principle. The MB shall use the powers
deficiencies in the aforesaid manner. (Sec. 101) granted to it to ensure that the supply,
availability and cost of money are in accord
If a bank or quasi-bank chronically has a reserve with the needs of the Philippine economy and
deficiency, the MB may limit or prohibit the making that bank credit is not granted for speculative
of new loans or investments by the institution and purposes prejudicial to the national interests.
may require that part or all of the net profits of the Regulations on bank operations shall be applied
institution be assigned to surplus. The MB may to all banks of the same category uniformly and
modify or set aside the reserve deficiency penalties without discrimination. (Sec. 104)
provided in this section, for part or the entire Margin Requirements Against Letters of Credit.
period of a strike or lockout affecting a bank or a The MB may at any time prescribe minimum
quasi-bank as defined in the Labor Code, or of a cash margins for the opening of letters of
national emergency affecting operations of banks credit, and may relate the size of the required
or quasi-banks. The MB may also modify or set margin to the nature of the transaction to be
aside reserved deficiency penalties for financed. (Sec. 105)
rehabilitation program of a bank. (Sec. 101) Required Security Against Bank Loans. In order
to promote liquidity and solvency of the
banking system, the MB may issue such
7. Interbank Settlement regulations as it may deem necessary with
respect to the maximum permissible maturities
The BSP shall establish facilities for interbank of the loans and investments which the banks
clearing under such rules and regulations as the MB may make, and the kind and amount of
may prescribe: Provided, That the BSP may charge security to be required against the various
administrative and other fees for the maintenance types of credit operations of the banks. (Sec.
of such facilities. 106)
Portfolio Ceilings. Whenever the MB considers it
The deposit reserves maintained by the banks in advisable to prevent or check an expansion of
the BSP in accordance with the provisions of bank credit, it may place an upper limit on the
Section 94 of this Act shall serve as basis for the amount of loans and investments which the
clearing of checks and the settlement of interbank banks may hold, or may place a limit on the
balances, subject to such rules and regulations as rate of increase of such assets within specified
the MB may issue with respect to such operations: periods of time. The MB may apply such limits
Provided, That any bank which incurs on to the loans and investments of each bank or to
overdrawing in its deposit account with the BSP specific categories thereof. In no case shall the
shall fully cover said overdraft, including interest MB establish limits which are below the value of
thereon at a rate equivalent to 1/10 of 1% per day the loans or investments of the banks on the
or the prevailing ninety-one-day treasury bill rate date on which they are notified of such
plus three percentage points, whichever is higher, restrictions. The restrictions shall be applied to
not later than the next clearing day: Provided, all banks uniformly and without discrimination.
further, That settlement of clearing balances shall (Sec. 107)
not be effected for any account which continues to Minimum Capital Ratios. The MB may prescribe
be overdrawn for 5 consecutive banking days until minimum ratios which the capital and surplus
such time as the overdrawing is fully covered or of the banks must bear to the volume of their
otherwise converted into an emergency loan or assets, or to specific categories thereof, and
advance pursuant to the provisions of Sec. 84 of may alter said ratios whenever it deems
this Act: Provided, finally, That the appropriate necessary. (Sec. 108)
clearing office shall be officially notified of banks
with overdrawn balances. Banks with existing RELATED PROVISIONS IN RA 8791 (GENERAL
overdrafts with the BSP as of the effectivity of this BANKING ACT OF 2000)
Act shall, within such period as may be prescribed
by the MB, either convert the overdraft into an Except as the MB may otherwise prescribe,
emergency loan or advance with a plan of
loans and other credit accommodations against
payment, or settle such overdrafts, and that, upon
real estate shall not exceed 75% of the
failure to so comply herewith, the BSP shall take
appraised value of the respective real estate
such action against the bank as may be warranted
security, plus 60% of the appraised value of the
under this Act. (Sec. 102)
insured improvements, and such loans may be
made to the owner of the real estate or to his
assignees. (Sec 37)
8. Exemption from Attachment and Other
Purposes
maturing holdings of securities with the same type implications of the contemplated action. Such
as the maturing securities. (Sec. 117) opinions must similarly be requested by all
political subdivisions and instrumentalities of
Methods of Placing Government Securities. The BSP the Government before any credit operation
may place the securities through direct sale to abroad is undertaken by them. The opinion of
financial institutions and the public. The BSP shall the MB shall be based on the gold and foreign
not be a member of any stock exchange or exchange resources and obligations of the
syndicate, but may intervene therein for the sole nation and on the effects of the proposed
purpose of regulating their operations in the operation on the balance of payments and on
placing of government securities. (Sec. 118) monetary aggregates. (Sec. 123)
The Government, or its political subdivisions or Whenever the Government, or any of its
instrumentalities, shall reimburse the BSP for the political subdivisions or instrumentalities,
expenses incurred in the placing of the aforesaid contemplates borrowing within the Philippines,
securities. (Sec. 118) the prior opinion of the MB shall likewise be
requested in order that the Board may render
Servicing and Redemption of the Public Debt. The an opinion on the probable effects of the
servicing and redemption of the public debt shall proposed operation on monetary aggregates,
also be effected through the BSP. (Sec. 119) the price level, and the balance of payments.
(Sec. 123)
2. BSP Support of the Government Securities Representation on the National Economic and
Market Development Authority (NEDA). In order to
assure effective coordination between the
The Securities Stabilization Fund. There shall be economic, financial and fiscal policies of the
established a "Securities Stabilization Fund" (SSF) Government and the monetary, credit and
which shall be administered by the BSP for the exchange policies of the BSP, the Deputy
account of the Government. The operations of the Governor designated by the Governor of the
SSF shall consist of purchases and sales, in the BSP shall be an ex officio member of the NEDA
open market, of bonds and other evidences of Board. (Sec. 124)
indebtedness issued or fully guaranteed by the
Government. The purpose of these operations 4. PRIVILEGES AND PROHIBITIONS
shall be to increase the liquidity and stabilize the
value of said securities in order thereby to promote 1. Privileges
investment in government obligations. The MB shall
use the resources of the SSF to prevent, or 1. Tax Exemptions. The BSP shall be exempt for a
moderate, sharp fluctuations in the quotations of period of 5 years from the approval of this Act
said government obligations, but shall not from all national, provincial, municipal and city
endeavor to alter movements of the market taxes, fees, charges and assessments. This
resulting from basic changes in the pattern or level exemption shall apply to all property of the
of interest rates. (Sec. 120)63 BSP, to the resources, receipts, expenditures,
profits and income of the BSP, as well as to all
Phase-out of Fiscal Agency Functions. Unless contracts, deeds, documents and transactions
circumstances warrant otherwise and approved by related to the conduct of the business of the
the Congress Oversight Committee, the BSP shall, BSP: Provided, however, That said exemptions
within a period of 3 years but in no case longer shall apply only to such taxes, fees, charges
than 5 years from the approval of this Act, phase and assessments for which the BSP itself would
out all fiscal agency functions provided for in otherwise be liable, and shall not apply to
Secs.117-120 and 120 as well as in other pertinent taxes, fees, charges, or assessments payable
provisions of this Act and transfer the same to the by persons or other entities doing business with
Department of Finance. (Sec. 129) the BSP: Provided, further, That foreign loans
and other obligations of the BSP shall be
Profits and Losses of the Fund. The SSF shall retain exempt, both as to principal and interest, from
net profits which it may make on its operations, any and all taxes if the payment of such taxes
regardless of whether said profits arise from capital has been assumed by the BSP. (Sec. 125)
gains or from interest earnings. The SSF shall 2. Exemption from Customs Duties. The
correspondingly bear any net losses which it may importation and exportation by the BSP of
incur. (Sec. 122) notes and coins, and of gold and other metals
and the importation of all equipment needed
for bank note production, minting of coins,
metal refining and other security printing
3. FUNCITON AS FINANCIAL ADVISOR OF THE operations shall be fully exempt from all
GOVT customs duties and consular fees and from all
other taxes, assessments and charges related
Financial Advice on Official Credit Operations. to such importation or exportation. (Sec. 126)
Before undertaking any credit operation 3. Applicability of the Civil Service Law (CSL).
abroad, the Government, through the Appointments in the BSP, except as to those
Secretary of Finance, shall request the opinion, which are policy-determining, primarily
in writing, of the MB on the monetary confidential or highly technical in nature, shall
be made only according to the CSL and
63 regulations: Provided, That no qualification
Resources of the SSF. Subject to Sec. 132 of this Act,
the resources of the SSF shall come from the balance of the
requirements for positions in the BSP shall be
fund as held by the CB under RA 265 as of the effective date imposed other than those set by the MB:
of this Act. (Sec. 121)
2. PROHIBITIONS B. Coverage
C. Prohibited Acts
and persons indebted to him or controlling his or the National Internal Revenue Code of
property; delivery of property to officer. (Onate 1997)
v Aborgar, 1994)
3. The exception applies to cases of concealment 3. in the following cases under the Anti-Money
of illegally acquired property in anti-graft Laundering Lact of 2001 (RA 9160):
cases. The inquiry into illegally acquired
property or property NOT "legitimately a. when a banking and other covered
acquired" extends to cases where such institutions are required to report to the
property is concealed by being held by or Anti-Money Laundering Council (AMLC) any
recorded in the name of other persons. This single, series or combination of transations
proposition is made clear by R.A. No. 3019 involving a total amount in excess of P4.0
which quite categorically states that the term, Million (or an equivalent in foreign
"legitimately acquired property of a public currency) within 5 working days from
officer or employee shall not include .. property occurrence thereof, unless the Supervising
unlawfully acquired by the respondent, but its Authority concerned prescribes a longer
ownership is concealed by its being recorded in period not to exceed 19 working days.
the name of, or held by, respondent's spouse, (Sec. 9(c) RA 9160)
ascendants, descendants, relatives or any other
persons." (Banco Filipino vs Purisima ; 1988) b. when the AMLC inquires into or examines
4. It also extends to cases of concealment of any particular deposit or investment upon
illegally acquired property not involving anti- order of any competent court, when it has
graft cases. In the case of Mellon Bank, N.A. v. been established that there is probable
Magsino, 1990, which involved the erroneous cause that deposits or investments involved
wire transfer and of US$ 1 Million instead of the are in any way related to money laundering
intended US$ 1,000, and the resulting illegal offense, except that no court order is
conversion by the recipients, the Supreme required in the following cases:
Court held that an inquiry into the
whereabouts of money illegally acquired i. kidnapping for ransom
extends to whatever is concealed or being held ii. unlawful activities under Sections 4, 5,
or recorded in the name of persons other than 6, 8, 9, 10, 12, 13, 14, 15, and 16 of
the one responsible for the illegal acquisition, the Comprehensive Dangersous Drugs
inasmuch as the case is aimed at recovering Act of 2002
the amount converted. iii. hijacking and other violations under TA
6235, and
OTHER EXCEPTIONS iv. destructive arson and murder including
those perpetrated by terrorists against
1. upon order of a competent court in cases of non-combatants and similar targets.
unexplained wealth under RA 3019 or the Anti- (Sec. 11 RA 9160)
Graft and Corrupt Practices Act (PNB v.
Gancayco, 1965; Banco Filipino v. Purisima, c. Bangko Sentrals inquiry into or
1988; Marquez v. Desierto, 2001) examination of deposits or investments
with any bank, when the inquiry or
a. Sec. 8 of RA 3019 provides that bank examination is made in the course of the
deposits shall be taken into consideration Bangko Sentrals periodic or special
in the enforcement of this section, examination of such bank (Sec. 11 RA
notwithstanding any provision of law to the 9160)
contrary.
b. Sec. 8 of RA 3019 is intended to amend 4. In the following cases under the NIRC:
Sec. 2 of RA 1405 by providing an
additional exception to the rule against the a. Inquiry by the Commissioner of Internal
disclosure of bank deposits. Cases of Revenue into the deposits of a decedent for
unexplained wealth are similar to cases of the purpose of determining the gross estate
bribery or dereliction of duty. (PNB v. of such decedent. (Sec. 6(F), NIRC)
Gancayco)
c. In Banco Filipino v. Purisima, 1988, the b. In case a taxpayer offers to compromise his
court went further and stated that the tax liabilities on the ground of financial
provisions of the Anti-Graft Law warrant incapacity, he must waive, in writing the
examination of bank records not only in the secrecy of his bank deposits in favor of the
name of the respondent but also those in Commissioner of Internal Revenue (Sec.
the name of the respondents relatives or in 6(F), NIRC)
the name of other persons.
a) Thus Villanueva says that these two E. When May Foreign Currency Deposits
instances as excluded from the
Be Examined/Garnished
enumeration of exceptions to the
secrecy of bank deposits
GENERAL RULE:
(Villanueva, Commercial Law
Review, 2004).
Sec. 8. Secrecy of Foreign Currency Deposits.- All
b) Morales however notes that With
foreign currency deposits authorized under this Act,
the Amendment of the Anti-Money
as amended by PD 1035, as well as foreign
Laudering Act of 2001, exception
currency deposits authorized under PD 1034, are
(1) has been substantially
declared and considered of an absolutely
resurrected. While there is no
confidential nature and, except upon the written
similar development of exception
permission of the depositor, in no instance shall
(2), the exclusion of the Bangko
such foreign currency deposits be examined,
Sentral examiners and independent
inquired or looked into by any person, government
auditors from the coverage of the
official bureau or office whether judicial or
Secrecy of Bank Deposits Law finds
administrative or legislative or any other entity
basis in Opinion No. 243 (s. 1975)
whether public or private: Provided, however, that
of then Secretary of Justice Pedro
said foreign currency deposits shall be exempt from Exception of the Secrecy of Bank
attachment, garnishment, or any other order or
Deposits Act
process of any court, legislative body, government
agency or any administrative body whatsoever
1. POLICY OF THE LAW
EXCEPTIONS:
to protect and preserve the integrity and
1. upon written permission of the depositor (Sec.
8, Foreign Currency Deposit Act ; Intengan vs confidentiality of bank accounts
CA ; 2002) to ensure that the Philippines shall not be used
as a money laundering site for the proceeds of
2. upon order of a competent court in cases of any unlawful activity
violation of the Anti-Money Laundering Act of consistent with its foreign policy, to extend
2001 [as in the case of peso deposits, supra] cooperation in transnational investigations and
prosecutions of persons involved in money
3. during Bangko Sentrals periodic or special laundering activities whenever committed.
examinations [as in the case of peso deposits, (Sec. 2 RA 9160)
supra], and
executory. This provision shall apply in the Council, on the basis of substantial
both civil and criminal forfeiture. evidence, to be, in whole or in part,
wherever located, representing, involving,
3. Payment in Lieu of Forfeiture or related to directly or indirectly, in any
manner or by any means, the proceeds of
Where the court has issued an order of an unlawful activity.
forfeiture of the monetary instrument to institute civil forfeiture proceedings and
or property subject of a money all other remedial proceedings through the
laundering offense, and said order Office of the Solicitor General;
cannot be enforced because any to cause the filing of complaints with the
particular monetary instrument or DOJ or the Ombudsman for the prosecution
property of money laundering offenses;
cannot, with due diligence, be located, to investigate suspicious transactions and
or covered transactions deemed suspicious
has been substantially altered, after an investigation by AMLC, money
destroyed, diminished in value or laundering activities and other violations of
otherwise rendered worthless by any the Anti-Money Laundering Act;
act or omission, directly or indirectly, to apply before the Court of Appeals, ex
attributable to the offender, or parte, for the freezing of any monetary
has been concealed, removed, instrument or property alleged to be the
converted or otherwise transferred to proceeds of any unlawful activity;
prevent the same from being found or to implement such measures as may be
to avoid forfeiture thereof, or necessary and justified under the Anti-
is located outside the Philippines or has Money Laundering Act to counteract money
been placed or brought outside the laundering;
jurisdiction of the court, or to receive and take action in respect of,
has been commingled with other any request from foreign states for
monetary instruments or property assistance in their own anti-money
belonging to either the offender himself laundering operations provided in this Act;
or a third person or entity, thereby to develop educational programs on the
rendering the same difficult to identify pernicious effects of money laundering, the
or be segregated for purposes of methods and techniques used in the money
forfeiture, laundering, the viable means of preventing
the court may, instead of enforcing the money laundering and the effective ways of
order of forfeiture of the monetary prosecuting and punishing offenders;
instrument or property or part thereof to enlist the assistance of any branch,
or interest therein, accordingly order department, bureau, office, agency, or
the convicted offender to pay an instrumentality of the government,
amount equal to the value of said including GOCCs, in undertaking any and all
monetary instrument or property. This anti-money laundering operations, which
provision shall apply in both civil and may include the use of its personnel,
criminal forfeiture. (Sec. 12) facilities and resources for the more
resolute prevention, detection, and
investigation of money laundering offenses
NOTE and prosecution of offenders; and
Restitution for any aggrieved party shall be to impose administrative sanctions for the
governed by the Civil Code. (Sec. 17) violation of laws, rules, regulations, and
orders and resolutions issued pursuant
thereto. (Sec. 7)
12. ANTI-MONEY LAUNDERING COUNCIL
(AMLC) Secretariat
The AMLC is also authorized to establish a
Composition: Three Members secretariat to be headed by an Executive
1. Governor of the BSP (chairman), Director who shall be appointed by the
2. Commissioner of the Insurance Commission Council for a term of 5 years.
3. Chairman of the SEC. The Executive Director must be a member
of the Philippine Bar, at least thirty-five
years of age and of good moral character,
Functions unquestionable integrity and known
The AMLC shall shall act unanimously in the probity.
discharge of its functions which are as follows: All members of the Secretariat must have
served for at least 5 years either in the
to require and receive covered or
Insurance Commission, the SEC or the BSP
suspicious transaction reports from covered and shall hold full-time permanent positions
institutions; within the BSP. (Sec. 8)
to issue orders addressed to the
appropriate Supervising Authority or the
covered institutions or to request for
assistance from a foreign State to
determine the true identity of the owner of
any monetary instrument or property
subject of a covered transaction or 13. MUTUAL ASSISTANCE AMONG STATES
suspicious transaction report, believed by
1. Request for Assistance from a Provided, That the court shall not issue
Foreign State. such an order unless the application is
accompanied by an authenticated copy
Where a foreign State makes a request for of the order of a court in the requesting
assistance in the investigation or State ordering the forfeiture of said
prosecution of a money laundering offense, monetary instrument or property of a
the AMLC may execute the request or person who has been convicted of a
refuse to execute the same and inform the money laundering offense in the
foreign State of any valid reason for not requesting State, and a certification of
executing the request or for delaying the an affidavit of a competent officer of
execution thereof. The principles of the requesting State stating that the
mutuality and reciprocity shall, for this conviction and the order of forfeiture
purpose, be at all times recognized. are final and that no further appeal lies
in respect or either.
2. Power of the AMLC to Act on a
Request for Assistance from a Foreign 4. Limitations on Request for
State. Mutual Assistance.
The AMLC may execute a request for The AMLC may refuse to comply with any
assistance from a foreign State by: request for assistance where the action
1) tracking sought by the request contravenes any
down, freezing, restraining and seizing provision of the Constitution or the
assets alleged to be proceeds of any execution of a request is likely to prejudice
unlawful activity under the procedures the national interest of the Philippines
laid down in the Anti-Money Laundering unless there is a treaty between the
Act; Philippines and the requesting State
2) giving relating to the provision of assistance in
information needed by the foreign relation to money laundering offenses.
State within the procedures laid down
in this Act; and 5. Requirements for Requests for
3) applying for Mutual Assistance from Foreign State.
an order of forfeiture of any monetary
instrument or property in the court: A request for mutual assistance from a
Provided, That the court shall not issue foreign State must
such an order unless the application is 1) confirm that
accompanied by an authenticated copy an investigation or prosecution is being
of the order of a court in the requesting conducted in respect of a money
State ordering the forfeiture of said launderer named therein or that he has
monetary instrument or property of a been convicted of any money
person who has been convicted of a laundering offense;
money laundering offense in the 2) state the
requesting State, and a certification of grounds on which any person is being
an affidavit of a competent officer of investigated or prosecuted for money
the requesting State stating that the laundering or the details of his
conviction and the order of forfeiture conviction;
are final and that no further appeal lies 3) gives
in respect or either. sufficient particulars as to the identity
of said person;
3. Obtaining Assistance from 4) give
Foreign States. particulars sufficient to identity any
covered institution believed to have any
The AMLC may make a request to any information, document, material or
foreign State for assistance in: object which may be of assistance to
1) tracking the investigation or prosecution;
down, freezing, restraining and seizing 5) ask from
assets alleged to be proceeds of any the covered institution concerned any
unlawful activity; information, document, material or
2) obtaining object which may be of assistance to
information that it needs relating to any the investigation or prosecution;
covered transaction, money laundering 6) specify the
offense or any other matter directly or manner in which and to whom said
indirectly, related thereto; information, document, material or
3) to the object detained pursuant to said
extent allowed by the law of the request, is to be produced;
Foreign State, applying with the proper 7) give all the
court therein for an order to enter any particulars necessary for the issuance
premises belonging to or in the by the court in the requested State of
possession or control of, any or all of the writs, orders or processes needed
the persons named in said request, by the requesting State; and
and/or search any or all such persons 8) contain
named therein and/or remove any such other information as may assist in
document, material or object named in the execution of the request.
said request:
6. Authentication of Documents.
7. Extradition.
1. State Policies
Chapter II.
Sec. 2. Declaration of State Policy. - The State PATENTS
recognizes that an effective intellectual and
industrial property system is vital to the
development of domestic and creative activity, 1. What are Patentable
facilitates transfer of technology, attracts foreign
investments, and ensures market access for our 1.1. Inventions
products. It shall protect and secure the exclusive
rights of scientists, inventors, artists and other Sec. 21. Patentable Inventions. - Any technical
gifted citizens to their intellectual property and solution of a problem in any field of human
creations, particularly when beneficial to the activity which is new, involves an inventive
people, for such periods as provided in this Act. step and is industrially applicable shall be
The use of intellectual property bears a social patentable. It may be, or may relate to, a
function. To this end, the State shall promote the product, or process, or an improvement of any
diffusion of knowledge and information for the of the foregoing. (Sec. 7, RA 165a)
promotion of national development and progress
and the common good. Sec. 23. Novelty. - An invention shall not be
It is also the policy of the State to streamline considered new if it forms part of a prior art.
administrative procedures of registering patents, (Sec. 9, RA 165a)
trademarks and copyright, to liberalize the
registration on the transfer of technology, and to Sec. 24. Prior Art. - Prior art shall consist of:
enhance the enforcement of intellectual property
rights in the Philippines. 24.1. Everything which has been made
available to the public anywhere in the
world, before the filing date or the priority
date of the application claiming the
2. Intellectual Property Rights invention; and
Sec. 4.1 The term "intellectual property rights" 24.2. The whole contents of an application
consists of: for a patent, utility model, or industrial
1. Copyright and Related Rights; design registration, published in accordance
2. Trademarks and Service Marks; with this Act, filed or effective in the
3. Geographic Indications; Philippines, with a filing or priority date that
4. Industrial Designs; is earlier than the filing or priority date of
5. Patents; the application: Provided, That the
6. Layout-Designs (Topographies) of application which has validly claimed the
Integrated Circuits; and filing date of an earlier application under
7. Protection of Undisclosed Information Section 31 of this Act, shall be prior art
[TRIPS]. with effect as of the filing date of such
earlier application: Provided further, That
Kho v. CA, et al., 379 SCRA 410 [2002] the applicant or the inventor identified in
both applications are not one and the
Trademark, copyright and patents are different same. (Sec. 9, RA 165a)
intellectual property rights that cannot be
interchanged with one another. A trademark is any Sec. 26. Inventive Step. - An invention
visible sign capable of distinguishing the goods involves an inventive step if, having regard to
(trademark) or services (service mark) of an prior art, it is not obvious to a person skilled in
enterprise and shall include a stamped or marked the art at the time of the filing date or priority
container of goods. date of the application claiming the invention.
In relation thereto, a trade name means the name Sec. 27. Industrial Applicability. - An invention
or designation identifying or distinguishing an that can be produced and used in any industry
enterprise. Meanwhile, the scope of a copyright is shall be industrially applicable.
confined to literary and artistic works which are
original intellectual creations in the literary and 1.2. Utility Model
artistic domain protected from the moment of their
creation. Patentable inventions, on the other hand, Sec. 109.1 (a) An invention qualifies for
refer to any technical solution of a problem in any registration as a utility model if it is new and
field of human activity which is new, involves an industrially applicable.
inventive step and is industrially applicable. (b) Section 21, "Patentable Inventions", shall
apply except the reference to inventive step as
3. Reverse Reciprocity a condition of protection.
1.3. Industrial Designs Sec. 29. First to File Rule. - If two (2) or more
persons have made the invention separately
Sec. 112.1 An Industrial Design is any and independently of each other, the right to
composition of lines or colors or any three- the patent shall belong to the person who filed
dimensional form, whether or not associated an application for such invention, or where two
with lines or colors: Provided, That such or more applications are filed for the same
composition or form gives a special appearance invention, to the applicant who has the earliest
to and can serve as pattern for an industrial filing date or, the earliest priority date. (3rd
product or handicraft; Sentence, Sec. 10, RA 165a.)
36.1. The application shall contain one (1) or final action by the examiner. (Sec. 16, RA
more claims which shall define the matter for 165a)
which protection is sought. Each claim shall be
clear and concise, and shall be supported by 6.2. Classification and Search
the description.
Sec. 43. Classification and Search. - An
36.2. The Regulations shall prescribe the application that has complied with the formal
manner of the presentation of claims. requirement shall be classified and a search
conducted to determine the prior art.
Sec. 37. The Abstract. - The abstract shall consist
of a concise summary of the disclosure of the 6.3. Publication
invention as contained in the description, claims
and drawings in preferably not more than one Sec. 44. Publication of Patent Application. -
hundred fifty (150) words. It must be drafted in a
way which allows the clear understanding of the 44.1. The patent application shall be
technical problem, the gist of the solution of that published in the IPO Gazette together with
problem through the invention, and the principal a search document established by or on
use or uses of the invention. The abstract shall behalf of the Office citing any documents
merely serve for technical information. that reflect prior art, after the expiration of
eighteen (18) months from the filing date
6. Procedure for Grant of Patent or priority date.
40.2. If any of these elements is not Sec. 44.2. After publication of a patent
submitted within the period set by the application, any interested party may inspect
Regulations, the application shall be the application documents filed with the Office.
considered withdrawn.
Sec. 47. Observation by Third Parties. -
Sec. 41. According a Filing Date. - The Office Following the publication of the patent
shall examine whether the patent application application, any person may present
satisfies the requirements for the grant of date observations in writing concerning the
of filing as provided in Section 40 hereof. If the patentability of the invention. Such
date of filing cannot be accorded, the applicant observations shall be communicated to the
shall be given an opportunity to correct the applicant who may comment on them. The
deficiencies in accordance with the Office shall acknowledge and put such
implementing Regulations. If the application observations and comment in the file of the
does not contain all the elements indicated in application to which it relates.
Section 40, the filing date should be that date
when all the elements are received. If the 6.5. Request for Substantive Examination
deficiencies are not remedied within the
prescribed time limit, the application shall be Sec. 48. Request for Substantive Examination.
considered withdrawn. -
1. Formality Examination
48.1. The application shall be deemed
Sec. 42. Formality Examination. - withdrawn unless within six (6) months
from the date of publication under Section
42.1. After the patent application has been 41, a written request to determine whether
accorded a filing date and the required fees a patent application meets the
have been paid on time in accordance with requirements of Sections 21 to 27 and
the Regulations, the applicant shall comply Sections 32 to 39 and the fees have been
with the formal requirements specified by paid on time.
Section 32 and the Regulations within the
prescribed period, otherwise the application 48.2. Withdrawal of the request for
shall be considered withdrawn. examination shall be irrevocable and shall
not authorize the refund of any fee.
42.2. The Regulations shall determine the
procedure for the re-examination and SEC. 49. Amendment of Application. - An
revival of an application as well as the applicant may amend the patent application
appeal to the Director of Patents from any during examination: Provided, That such
amendment shall not include new matter the patent, and to conclude licensing
outside the scope of the disclosure contained in contracts for the same. (Sec. 37, RA 165a)
the application as filed.
Pearl and Dean, Inc v. Shoemart Inc (2003)
6.6. Grant or Refusal of Application
To be able to effectively and legally preclude others
Sec. 50. Grant of Patent. - from copying and profiting from the invention, a
patent is a primordial requirement. No patent, no
50.1. If the application meets the protection. The ultimate goal of a patent system is
requirements of this Act, the Office shall to bring new designs and technologies into the
grant the patent: Provided, That all the public domain through disclosure. Ideas, once
fees are paid on time. disclosed to the public without the protection of a
50.2. If the required fees for grant and valid patent, are subject to appropriation without
printing are not paid in due time, the significant restraint.
application shall be deemed to be
withdrawn. 8. Term
50.3. A patent shall take effect on the date Sec. 54. Term of Patent. - The term of a patent
of the publication of the grant of the patent shall be twenty (20) years from the filing date of
in the IPO Gazette. (Sec. 18, RA 165a) the application. (Sec. 21, RA 165a)
Sec. 51. Refusal of the Application. - Sec. 109.3. A utility model registration shall
expire, without any possibility of renewal, at the
51.1. The final order of refusal of the end of the seventh year after the date of the filing
examiner to grant the patent shall be of the application.
appealable to the Director in accordance
with this Act. Sec. 118. The Term of Industrial Design or
Layout-Design Registration. - 118.1. The
51.2. The Regulations shall provide for the registration of an industrial design shall be for a
procedure by which an appeal from the period of five (5) years from the filing date of the
order of refusal from the Director shall be application.
undertaken.
118.2. The registration of an industrial design
6.7. Publication of the Grant of Patent may be renewed for not more than two (2)
consecutive periods of five (5) years each, by
Sec. 52. Publication Upon Grant of Patent. - paying the renewal fee. xxx xxx xxx
52.1. The grant of the patent together with 118.5. Registration of a layout-design shall be
other related information shall be published valid for a period often (10) years, without
in the IPO Gazette within the time renewal, and such validity to be counted from
prescribed by the Regulations. the date of commencement of the protection
accorded to the layout-design. The protection
52.2. Any interested party may inspect the of a layout-design under this Act shall
complete description, claims, and drawings commence:
of the patent on file with the Office. (Sec.
18, RA 165a) a) on the date of the first commercial
exploitation, anywhere in the world, of
7. Rights Conferred by Patent the layout-design by or with the
consent of the right holder: Provided,
Sec. 71. Rights Conferred by Patent. - That an application for registration is
filed with the Intellectual Property
71.1. Office within two (2) years from such
A patent shall confer on its owner the following date of first commercial exploitation;
exclusive rights: or
b) on the filing date accorded to the
(a) Where the subject matter of a patent application for the registration of the
is a product, to restrain, prohibit and layout-design if the layout-design has
prevent any unauthorized person or not been previously exploited
entity from making, using, offering for commercially anywhere in the world.
sale, selling or importing that
product; 9. Limitations on Rights of Patentees
(b) Where the subject matter of a patent
is a process, to restrain, prevent or Sec. 72. Limitations of Patent Rights. - The owner
prohibit any unauthorized person or of a patent has no right to prevent third parties
entity from using the process, and from performing, without his authorization, the acts
from manufacturing, dealing in, using, referred to in Section 71 hereof in the following
selling or offering for sale, or circumstances:
importing any product obtained
directly or indirectly from such 72.1. Using a patented product which has been
process. put on the market in the Philippines by the
owner of the product, or with his express
71.2. Patent owners shall also have the consent, insofar as such use is performed after
right to assign, or transfer by succession
that product has been so put on the said 10. Notice Requirement
market;
Sec. 80. Damages; Requirement of Notice. -
72.2. Where the act is done privately and on a Damages cannot be recovered for acts of
non-commercial scale or for a non-commercial infringement committed before the infringer had
purpose: Provided, That it does not significantly known; or had reasonable grounds to know of the
prejudice the economic interests of the owner patent. It is presumed that the infringer had known
of the patent; of the patent if on the patented product, or on the
container or package in which the article is supplied
72.3. Where the act consists of making or to the public, or on the advertising material relating
using exclusively for the purpose of to the patented product or process, are placed the
experiments that relate to the subject matter of words "Philippine Patent" with the number of the
the patented invention; patent. (Sec. 44, RA 165a)
72.4. Where the act consists of the preparation
for individual cases, in a pharmacy or by a 11. Patent Infringement
medical professional, of a medicine in
accordance with a medical prescription or acts 11.1. Civil Action
concerning the medicine so prepared;
Sec. 76. Civil Action for Infringement. -
72.5. Where the invention is used in any ship,
vessel, aircraft, or land vehicle of any other 76.1. The making, using, offering for sale,
country entering the territory of the Philippines selling, or importing a patented product or
temporarily or accidentally: Provided, That such a product obtained directly or indirectly
invention is used exclusively for the needs of from a patented process, or the use of a
the ship, vessel, aircraft, or land vehicle and patented process without the authorization
not used for the manufacturing of anything to of the patentee constitutes patent
be sold within the Philippines. (Secs. 38 and infringement.
39, RA 165a)
76.2. Any patentee, or anyone possessing
Sec. 73. Prior User. - any right, title or interest in and to the
patented invention, whose rights have been
73.1. Notwithstanding Section 72 hereof, any infringed, may bring a civil action before a
prior user, who, in good faith was using the court of competent jurisdiction, to recover
invention or has undertaken serious from the infringer such damages sustained
preparations to use the invention in his thereby, plus attorneys fees and other
enterprise or business, before the filing date or expenses of litigation, and to secure an
priority date of the application on which a injunction for the protection of his rights.
patent is granted, shall have the right to
continue the use thereof as envisaged in such 76.3. If the damages are inadequate or
preparations within the territory where the cannot be readily ascertained with
patent produces its effect. reasonable certainty, the court may award
by way of damages a sum equivalent to
73.2. The right of the prior user may only be reasonable royalty.
transferred or assigned together with his
enterprise or business, or with that part of his 76.4. The court may, according to the
enterprise or business in which the use or circumstances of the case, award damages
preparations for use have been made. (Sec. 40, in a sum above the amount found as actual
RA 165a) damages sustained: Provided, That the
award does not exceed three (3) times the
Sec. 74. Use of Invention by Government. - amount of such actual damages.
74.1. A Government agency or third person 76.5. The court may, in its discretion,
authorized by the Government may exploit the order that the infringing goods, materials
invention even without agreement of the patent and implements predominantly used in the
owner where: infringement be disposed of outside the
channels of commerce or destroyed,
(a) the public interest, in particular, without compensation.
national security, nutrition, health or
the development of other sectors, as 76.6. Anyone who actively induces the
determined by the appropriate agency infringement of a patent or provides the
of the government, so requires; or infringer with a component of a patented
(b) A judicial or administrative body has product or of a product produced because
determined that the manner of of a patented process knowing it to be
exploitation, by the owner of the especially adopted for infringing the
patent or his licensee, is anti- patented invention and not suitable for
competitive. substantial non-infringing use shall be
liable as a contributory infringer and shall
74.2. The use by the Government, or third be jointly and severally liable with the
person authorized by the Government shall be infringer. (Sec. 42, RA 165a)
subject, mutatis mutandis, to the conditions set
forth in Sections 95 to 97 and 100 to 102.
(Sec. 41, RA 165a)
Sec. 87. Prohibited Clauses. - Except in cases 87.14. Those which exempt the licensor for
under Section 91, the following provisions shall be liability for non-fulfillment of his responsibilities
deemed prima facie to have an adverse on under the technology transfer arrangement
competition and trade: and/or liability arising from third party suits
brought about by the use of the licensed
87.1. Those which impose upon the licensee product or the licensed technology; and
the obligation to acquire from a specific source
capital goods, intermediate products, raw 87.15. Other clauses with equivalent effects.
materials, and other technologies, or of (Sec. 33-C[2], RA 165a)
permanently employing personnel indicated by
the licensor; 15. Compulsory Licensing
87.2. Those pursuant to which the licensor Sec. 93. Grounds for Compulsory Licensing. - The
reserves the right to fix the sale or resale Director of Legal Affairs may grant a license to
prices of the products manufactured on the exploit a patented invention, even without the
basis of the license; agreement of the patent owner, in favor of any
person who has shown his capability to exploit the
87.3. Those that contain restrictions regarding invention, under any of the following
the volume and structure of production; circumstances:
87.4. Those that prohibit the use of 93.1. National emergency or other
competitive technologies in a non-exclusive circumstances of extreme urgency;
technology transfer agreement;
93.2. Where the public interest, in particular,
87.5. Those that establish a full or partial national security, nutrition, health or the
purchase option in favor of the licensor; development of other vital sectors of the
national economy as determined by the
87.6. Those that obligate the licensee to appropriate agency of the Government, so
transfer for free to the licensor the inventions requires; or
or improvements that may be obtained through
the use of the licensed technology; 93.3. Where a judicial or administrative body
has determined that the manner of exploitation
87.7. Those that require payment of royalties by the owner of the patent or his licensee is
to the owners of patents for patents which are anti-competitive; or
not used;
93.4. In case of public non-commercial use of
87.8. Those that prohibit the licensee to export the patent by the patentee, without satisfactory
the licensed product unless justified for the reason;
protection of the legitimate interest of the
licensor such as exports to countries where 93.5. If the patented invention is not being
exclusive licenses to manufacture and/or worked in the Philippines on a commercial
distribute the licensed product(s) have already scale, although capable of being worked,
been granted; without satisfactory reason: Provided, That the
importation of the patented article shall
87.9. Those which restrict the use of the constitute working or using the patent. (Secs.
technology supplied after the expiration of the 34, 34-A, and 34-B, RA 165a)
technology transfer arrangement, except in
cases of early termination of the technology Sec. 97. Compulsory License Based on
transfer arrangement due to reason(s) Interdependence of Patents. - If the invention
attributable to the licensee; protected by a patent, hereafter referred to as the
"second patent," within the country cannot be
87.10. Those which require payments for worked without infringing another patent, hereafter
patents and other industrial property rights referred to as the "first patent," granted on a prior
after their expiration, termination application or benefiting from an earlier priority, a
arrangement; compulsory license may be granted to the owner of
the second patent to the extent necessary for the
87.11. Those which require that the working of his invention, subject to the following
technology recipient shall not contest the conditions:
validity of any of the patents of the technology
supplier; 97.1. The invention claimed in the second
patent involves an important technical advance
87.12. Those which restrict the research and of considerable economic significance in
development activities of the licensee designed relation to the first patent;
to absorb and adapt the transferred technology
to local conditions or to initiate research and 97.2. The owner of the first patent shall be
development programs in connection with new entitled to a cross-license on reasonable terms
products, processes or equipment;
to use the invention claimed in the second (c) That the patent is contrary to public
patent; order or morality.
97.3. The use authorized in respect of the first 61.2. Where the grounds for cancellation relate
patent shall be non-assignable except with the to some of the claims or parts of the claim,
assignment of the second patent; and cancellation may be effected to such extent
only. (Secs. 28 and 29, RA 165a)
97.4. The terms and conditions of Sections 95,
96 and 98 to 100 of this Act. (Sec. 34-C, RA Sec. 62. Requirement of the Petition. - The petition
165a) for cancellation shall be in writing, verified by the
petitioner or by any person in his behalf who knows
16. Assignment and Transfer of Patent the facts, specify the grounds upon which it is
based, include a statement of the facts to be relied
Sec. 104. Assignment of Inventions. - An upon, and filed with the Office. Copies of printed
assignment may be of the entire right, title or publications or of patents of other countries, and
interest in and to the patent and the invention other supporting documents mentioned in the
covered thereby, or of an undivided share of the petition shall be attached thereto, together with the
entire patent and invention, in which event the translation thereof in English, if not in English
parties become joint owners thereof. An language. (Sec. 30, RA 165)
assignment may be limited to a specified territory.
(Sec. 51, RA 165) Sec. 63. Notice of Hearing. - Upon filing of a
petition for cancellation, the Director of Legal
Sec. 105. Form of Assignment. - The assignment Affairs shall forthwith serve notice of the filing
must be in writing, acknowledged before a notary thereof upon the patentee and all persons having
public or other officer authorized to administer oath grants or licenses, or any other right, title or
or perform notarial acts, and certified under the interest in and to the patent and the invention
hand and official seal of the notary or such other covered thereby, as appears of record in the Office,
officer. (Sec. 52, RA 165) and of notice of the date of hearing thereon on
such persons and the petitioner. Notice of the filing
Sec. 106. Recording. - of the petition shall be published in the IPO
Gazette. (Sec. 31, RA 165a)
106.1. The Office shall record assignments,
licenses and other instruments relating to the Sec. 66. Effect of Cancellation of Patent or Claim. -
transmission of any right, title or interest in The rights conferred by the patent or any specified
and to inventions, and patents or application claim or claims cancelled shall terminate. Notice of
for patents or inventions to which they relate, the cancellation shall be published in the IPO
which are presented in due form to the Office Gazette. Unless restrained by the Director General,
for registration, in books and records kept for the decision or order to cancel by Director of Legal
the purpose. The original documents together Affairs shall be immediately executory even
with a signed duplicate thereof shall be filed, pending appeal. (Sec. 32, RA 165a)
and the contents thereof should be kept
confidential. If the original is not available, an
authenticated copy thereof in duplicate may be Chapter III.
filed. Upon recording, the Office shall retain the
duplicate, return the original or the INDUSTRIAL DESIGNSAND LAY-OUT
authenticated copy to the party who filed the DESIGNS (TOPOGRAPHIES) OF
same and notice of the recording shall be
published in the IPO Gazette.
INTEGRATED CIRCUITS
that are commonplace shall be protected only if 120.1. At any time during the term of the
the combination, taken as a whole, is original. industrial design registration, any person upon
payment of the required fee, may petition the
1.1. Rights Conferred on Registered Owner of Director of Legal Affairs to cancel the industrial
Lay-out Design design on any of the following grounds:
Sec. 119.4. Rights Conferred to the Owner of a (a) If the subject matter of the industrial
Layout-Design Registration. - The owner of a design is not registerable within the
layout-design registration shall enjoy the following terms of Sections 112 and 113;
rights: (b) If the subject matter is not new; or
(c) If the subject matter of the industrial
(1) to reproduce, whether by incorporation in design extends beyond the content of
an integrated circuit or otherwise, the the application as originally filed.
registered layout-design in its entirety or
any part thereof, except the act of 120.2. Where the grounds for cancellation
reproducing any part that does not relate to a part of the industrial design,
comply with the requirement of cancellation may be effected to such extent
originality; and only. The restriction may be effected in the
(2) to sell or otherwise distribute for form of an alteration of the effected features of
commercial purposes the registered the design.
layout design, an article or an integrated
circuit in which the registered layout- 120.3. Grounds for Cancellation of Layout-
design is incorporated. Design of Integrated Circuits.- Any interested
person may petition that the registration of a
Sec. 119.5. Limitations of Layout Rights. - The layout-design be canceled on the ground that:
owner of a layout design has no right to prevent
third parties from reproducing, selling or otherwise (a) the layout-design is not protectable
distributing for commercial purposes the registered under this Act;
layout-design in the following circumstances: (b) the right holder is not entitled to
protection under this Act; or
(1) Reproduction of the registered layout- (c) where the application for registration
design for private purposes or for the of the layout-design, was not filed
sole purpose of evaluation, analysis, within two (2) years from its first
research or teaching; commercial exploitation anywhere in
(3) Where the act is performed in respect of a the world.
layout-design created on the basis of such
analysis or evaluation and which is itself Where the grounds for cancellation are
original in the meaning as provided established with respect only to a part of the
herein; layout-design, only the corresponding part of
(4) Where the act is performed in respect of a the registration shall be canceled.
registered lay-out-design, or in respect of Any canceled layout-design registration or part
an integrated circuit in which such a thereof, shall be regarded as null and void from
layout-design is incorporated, that has the beginning and may be expunged from the
been put on the market by or with the records of the Intellectual Property Office.
consent of the right holder; Reference to all canceled layout-design
(5) In respect of an integrated circuit where registration shall be published in the IPO
the person performing or ordering such Gazette.
an act did not know and had no
reasonable ground to know when
acquiring the integrated circuit or the
article incorporating such an integrated Chapter IV.
circuit, that it incorporated an unlawfully TRADEMARKS
reproduced layout-design: Provided,
however, That after the time that such
person has received sufficient notice that 1. Marks and Names
the layout-design was unlawfully
reproduced, that person may perform any Sec. 121. Definitions. - As used in Part III, the
of the said acts only with respect to the following terms have the following meanings:
stock on hand or ordered before such
time and shall be liable to pay to the right 121.1. "Mark" means any visible sign capable
holder a sum equivalent to at least 5% of of distinguishing the goods (trademark) or
net sales or such other reasonable royalty services (service mark) of an enterprise and
as would be payable under a freely shall include a stamped or marked container of
negotiated license in respect of such goods; (Sec. 38, RA 166a)
layout-design; or
(6) Where the act is performed in respect of 121.2. "Collective mark" means any visible
an identical layout-design which is original sign designated as such in the application for
and has been created independently by a registration and capable of distinguishing the
third party. origin or any other common characteristic,
including the quality of goods or services of
1.2. Grounds for Cancellation of Registration different enterprises which use the sign under
the control of the registered owner of the
Sec. 120. Cancellation of Design Registration. collective mark; (Sec. 40, RA 166a)
121.3. "Trade name" means the name or (a) Consists of immoral, deceptive or
designation identifying or distinguishing an scandalous matter, or matter which may
enterprise; (Sec. 38, RA 166a) disparage or falsely suggest a connection
with persons, living or dead, institutions,
1.1. Product name and container not proper beliefs, or national symbols, or bring them
subjects of copyright and patent registration into contempt or disrepute;
(b) Consists of the flag or coat of arms or
Kho v. CA, et al., 379 SCRA 410 [2002] other insignia of the Philippines or any of
its political subdivisions, or of any foreign
The name and container of a beauty cream product nation, or any simulation thereof;
are proper subjects of a trademark inasmuch as (c) Consists of a name, portrait or signature
the same falls squarely within its definition. In identifying a particular living individual
order to be entitled to exclusively use the same in except by his written consent, or the
the sale of the beauty cream product, the user name, signature, or portrait of a deceased
must sufficiently prove that she registered or used President of the Philippines, during the life
it before anybody else did. The petitioners of his widow, if any, except by written
copyright and patent registration of the name and consent of the widow;
container would not guarantee her right to the (d) Is identical with a registered mark
exclusive use of the same for the reason that they belonging to a different proprietor or a
are not appropriate subjects of the said intellectual mark with an earlier filing or priority date,
rights. Consequently, a preliminary injunction order in respect of:
cannot be issued for the reason that the petitioner 1) The same goods or services, or
has not proven that she has a clear right over the 2) Closely related goods or services,
said name and container to the exclusion of others, or
not having proven that she has registered a 3) If it nearly resembles such a mark
trademark thereto or used the same before anyone as to be likely to deceive or cause
did. confusion;
(e) Is identical with, or confusingly similar to,
2. Acquisition of Ownership or constitutes a translation of a mark
which is considered by the competent
Sec. 122. How Marks are Acquired. - The rights in authority of the Philippines to be well-
a mark shall be acquired through registration made known internationally and in the
validly in accordance with the provisions of this Philippines, whether or not it is registered
law. (Sec. 2-A, RA 166a) here, as being already the mark of a
person other than the applicant for
Sec. 165. Trade Names or Business Names. - registration, and used for identical or
similar goods or services: Provided, That
165.1. A name or designation may not be used in determining whether a mark is well-
as a trade name if by its nature or the use to known, account shall be taken of the
which such name or designation may be put, it knowledge of the relevant sector of the
is contrary to public order or morals and if, in public, rather than of the public at large,
particular, it is liable to deceive trade circles or including knowledge in the Philippines
the public as to the nature of the enterprise which has been obtained as a result of the
identified by that name. promotion of the mark;
(f) Is identical with, or confusingly similar to,
165.2. (a) Notwithstanding any laws or or constitutes a translation of a mark
regulations providing for any obligation to considered well-known in accordance with
register trade names, such names shall be the preceding paragraph, which is
protected, even prior to or without registration, registered in the Philippines with respect
against any unlawful act committed by third to goods or services which are not similar
parties. to those with respect to which registration
(b) In particular, any subsequent use of the is applied for: Provided, That use of the
trade name by a third party, whether as a mark in relation to those goods or services
trade name or a mark or collective mark, or would indicate a connection between
any such use of a similar trade name or mark, those goods or services, and the owner of
likely to mislead the public, shall be deemed the registered mark: Provided further,
unlawful. That the interests of the owner of the
registered mark are likely to be damaged
by such use;
3. Use of Mark as a Requirement (g) Is likely to mislead the public, particularly
as to the nature, quality, characteristics or
Sec. 124.2. The applicant or the registrant shall geographical origin of the goods or
file a declaration of actual use of the mark with services;
evidence to that effect, as prescribed by the (h) Consists exclusively of signs that are
Regulations within three (3) years from the filing generic for the goods or services that they
date of the application. Otherwise, the application seek to identify;
shall be refused or the mark shall be removed from (i) Consists exclusively of signs or of
the Register by the Director. indications that have become customary
or usual to designate the goods or
4. Non-Registrable Marks services in everyday language or in bona
fide and established trade practice;
Sec. 123.1. A mark cannot be registered if it: (j) Consists exclusively of signs or of
indications that may serve in trade to
designate the kind, quality, quantity,
than the applicant for registration, and used for the name or names of the color or
identical or similar goods or services: Provided, colors claimed and an indication, in
That in determining whether a mark is well-known, respect of each color, of the
account shall be taken of the knowledge of the principal parts of the mark which
relevant sector of the public, rather than of the are in that color;
public at large, including knowledge in the (h) Where the mark is a three-
Philippines which has been obtained as a result of dimensional mark, a statement to
the promotion of the mark; that effect;
(f) Is identical with, or confusingly similar to, or (i) One or more reproductions of the
constitutes a translation of a mark considered well- mark, as prescribed in the
known in accordance with the preceding paragraph, Regulations;
which is registered in the Philippines with respect (j) A transliteration or translation of the
to goods or services which are not similar to those mark or of some parts of the mark,
with respect to which registration is applied for: as prescribed in the Regulations;
Provided, That use of the mark in relation to those (k) The names of the goods or services
goods or services would indicate a connection for which the registration is sought,
between those goods or services, and the owner of grouped according to the classes of
the registered mark: Provided further, That the the Nice Classification, together with
interests of the owner of the registered mark are the number of the class of the said
likely to be damaged by such use; Classification to which each group of
goods or services belongs; and
Sec. 147.2. The exclusive right of the owner of a (l) A signature by, or other self-
well-known mark defined in Subsection 123.1(e) identification of, the applicant or his
which is registered in the Philippines, shall extend representative.
to goods and services which are not similar to
those in respect of which the mark is registered: 124.2. The applicant or the registrant shall
Provided, That use of that mark in relation to those file a declaration of actual use of the mark
goods or services would indicate a connection with evidence to that effect, as prescribed
between those goods or services and the owner of by the Regulations within three (3) years
the registered mark: Provided, further, That the from the filing date of the application.
interests of the owner of the registered mark are Otherwise, the application shall be refused
likely to be damaged by such use. or the mark shall be removed from the
Register by the Director.
7. Registration
124.3. One (1) application may relate to
7.1. Requirements for Registration several goods and/or services, whether
they belong to one (1) class or to several
Sec. 124. Requirements of Application. - classes of the Nice Classification.
124.1. The application for the registra 124.4. If during the examination of the
(a) A request for registration; application, the Office finds factual basis to
tion of the mark shall be in Filipino or in English reasonably doubt the veracity of any
and shall contain the following: indication or element in the application, it
(b) The name and address of the may require the applicant to submit
applicant; sufficient evidence to remove the doubt.
(c) The name of a State of which the (Sec. 5, RA 166a)
applicant is a national or where he
has domicile; and the name of a
State in which the applicant has a 7.2. Priority Right
real and effective industrial or
commercial establishment, if any; Sec. 131. Priority Right. -
(d) Where the applicant is a juridical
entity, the law under which it is 131.1. An application for registration of a mark
organized and existing; filed in the Philippines by a person referred to
(e) The appointment of an agent or in Section 3, and who previously duly filed an
representative, if the applicant is application for registration of the same mark in
not domiciled in the Philippines; one of those countries, shall be considered as
(f) Where the applicant claims the filed as of the day the application was first filed
priority of an earlier application, an in the foreign country.
indication of:
1) The name of the State with 131.2. No registration of a mark in the
whose national office the earlier Philippines by a person described in this section
application was filed or it filed shall be granted until such mark has been
with an office other than a registered in the country of origin of the
national office, the name of applicant.
that office,
2) The date on which the earlier 131.3. Nothing in this section shall entitle the
application was filed, and owner of a registration granted under this
3) Where available, the application section to sue for acts committed prior to the
number of the earlier date on which his mark was registered in this
application; country: Provided, That, notwithstanding the
(g) Where the applicant claims color as foregoing, the owner of a well-known mark as
a distinctive feature of the mark, a defined in Section 123.1(e) of this Act, that is
statement to that effect as well as not registered in the Philippines, may, against
or to deceive, shall be liable in a civil action for Sec. 170. Penalties. - Independent of the civil and
infringement by the registrant for the remedies administrative sanctions imposed by law, a criminal
hereinafter set forth: Provided, That the penalty of imprisonment from two (2) years to five
infringement takes place at the moment any of (5) years and a fine ranging from Fifty thousand
the acts stated in Subsection pesos (P50,000) to Two hundred thousand pesos
(P200,000), shall be imposed on any person who is
155.1. or this subsection are committed found guilty of committing any of the acts
regardless of whether there is actual sale of mentioned in Section 155, Section 168 and
goods or services using the infringing material. Subsection 169.1. (Arts. 188 and 189, Revised
(Sec. 22, RA No 166a) Penal Code)
Sec. 156. Actions, and Damages and Injunction Sec. 159. Limitations to Actions for Infringement. -
for Infringement. - Notwithstanding any other provision of this Act, the
remedies given to the owner of a right infringed
156.1. The owner of a registered mark may under this Act shall be limited as follows:
recover damages from any person who
infringes his rights, and the measure of the 159.1. Notwithstanding the provisions of
damages suffered shall be either the Section 155 hereof, a registered mark shall
reasonable profit which the complaining party have no effect against any person who, in good
would have made, had the defendant not faith, before the filing date or the priority date,
infringed his rights, or the profit which the was using the mark for the purposes of his
defendant actually made out of the business or enterprise: Provided, That his right
infringement, or in the event such measure of may only be transferred or assigned together
damages cannot be readily ascertained with with his enterprise or business or with that part
reasonable certainty, then the court may award of his enterprise or business in which the mark
as damages a reasonable percentage based is used.
upon the amount of gross sales of the
defendant or the value of the services in 159.2. Where an infringer who is engaged
connection with which the mark or trade name solely in the business of printing the mark or
was used in the infringement of the rights of other infringing materials for others is an
the complaining party. (Sec. 23, First Par., RA innocent infringer, the owner of the right
166a) infringed shall be entitled as against such
infringer only to an injunction against future
156.2. On application of the complainant, the printing.
court may impound during the pendency of the
action, sales invoices and other documents 159.3. Where the infringement complained of
evidencing sales. is contained in or is part of paid advertisement
156.3. In cases where actual intent to mislead in a newspaper, magazine, or other similar
the public or to defraud the complainant is periodical or in an electronic communication,
shown, in the discretion of the court, the the remedies of the owner of the right infringed
damages may be doubled. (Sec. 23, First Par., as against the publisher or distributor of such
RA 166) newspaper, magazine, or other similar
periodical or electronic communication shall be
156.4. The complainant, upon proper showing, limited to an injunction against the
may also be granted injunction. (Sec. 23, presentation of such advertising matter in
Second Par., RA 166a) future issues of such newspapers, magazines,
or other similar periodicals or in future
Sec. 157. Power of Court to Order Infringing transmissions of such electronic
Material Destroyed. - communications. The limitations of this
subparagraph shall apply only to innocent
157.1. In any action arising under this Act, in infringers: Provided, That such injunctive relief
which a violation of any right of the owner of shall not be available to the owner of the right
the registered mark is established, the court infringed with respect to an issue of a
may order that goods found to be infringing be, newspaper, magazine, or other similar
without compensation of any sort, disposed of periodical or an electronic communication
outside the channels of commerce in such a containing infringing matter where restraining
manner as to avoid any harm caused to the the dissemination of such infringing matter in
right holder, or destroyed; and all labels, signs, any particular issue of such periodical or in an
prints, packages, wrappers, receptacles and electronic communication would delay the
advertisements in the possession of the delivery of such issue or transmission of such
defendant, bearing the registered mark or electronic communication is customarily
trade name or any reproduction, counterfeit, conducted in accordance with the sound
copy or colorable imitation thereof, all plates, business practice, and not due to any method
molds, matrices and other means of making or device adopted to evade this section or to
the same, shall be delivered up and destroyed. prevent or delay the issuance of an injunction
or restraining order with respect to such
157.2. In regard to counterfeit goods, the infringing matter.
simple removal of the trademark affixed shall
not be sufficient other than in exceptional cases
which shall be determined by the Regulations, Mighty Corporation v. E. & J. Gallo Winery,
to permit the release of the goods into the 434 SCRA 473 [2004]
channels of commerce. (Sec. 24, RA 166a).
A crucial issue in any trademark infringement case
is the likelihood of confusion, mistake or deceit as
to the identity, source or origin of the goods or committed with knowledge that such imitation is
identity of the business as a consequence of using likely to cause confusion, or to cause mistake, or to
a certain mark. Likelihood of confusion is deceive. Such knowledge is presumed if the
admittedly a relative term, to be determined rigidly registrant gives notice that his mark is registered
according to the particular (and sometimes by displaying with the mark the words "Registered
peculiar) circumstances of each case. In Mark" or the letter R within a circle or if the
determining likelihood of confusion, the court must defendant had otherwise actual notice of the
consider: [a] the resemblance between the registration. (Sec. 21, RA 166a)
trademarks; [b] the similarity of the goods to
which the trademarks are attached; [c] the likely 9. Unfair Competition
effect on the purchaser; and [d] the registrants
express or implied consent and other fair and Sec. 168. Unfair Competition, Rights, Regulation
equitable considerations. and Remedies. -
McDonalds Corporation v. L.C. Big Mak 168.1. A person who has identified in the mind
Burger, Inc., et al., 437 SCRA 10 [2004] of the public the goods he manufactures or
deals in, his business or services from those of
To establish trademark infringement, the following others, whether or not a registered mark is
elements must be shown: [1] the validity of the employed, has a property right in the goodwill
mark; [2] the plaintiffs ownership of the mark; of the said goods, business or services so
and [3] the use of the mark or its colorable identified, which will be protected in the same
imitation by the alleged infringer results in manner as other property rights.
likelihood of confusion. Of these, it is the element
of likelihood of confusion that is the gravamen of 168.2. Any person who shall employ deception
trademark infringement. Two types of confusion or any other means contrary to good faith by
arise from the use of similar or colorable imitation which he shall pass off the goods manufactured
marks, namely, confusion of goods (product by him or in which he deals, or his business, or
confusion) and confusion of business (source or services for those of the one having established
origin confusion). While there is confusion of goods such goodwill, or who shall commit any acts
when the products are competing, confusion of calculated to produce said result, shall be guilty
business exists when the products are non- of unfair competition, and shall be subject to an
competing but related enough to produce confusion action therefor.
of affiliation.
168.3. In particular, and without in any way
Canon Kabushiki Kaisha v. CA, et al., 336 limiting the scope of protection against unfair
SCRA 266 [2000] competition, the following shall be deemed
guilty of unfair competition:
The likelihood of confusion of goods or business is a
relative concept, to be determined according to the (a) Any person, who is selling his goods
particular, and sometimes peculiar, circumstances and gives them the general
of each case. In cases of confusion of business or appearance of goods of another
origin, the question that usually arises is whether manufacturer or dealer, either as to
the respective goods or services of the senior user the goods themselves or in the
and the junior user are so related as to likely cause wrapping of the packages in which
confusion of business or origin, and thereby render they are contained, or the devices or
the trademark or tradenames confusingly similar. words thereon, or in any other feature
Goods are related when they belong to the same of their appearance, which would be
class or have the same descriptive properties; likely to influence purchasers to
when they possess the same physical attributes or believe that the goods offered are
essential characteristics with reference to their those of a manufacturer or dealer,
form, composition, texture or quality. They may other than the actual manufacturer or
also be related because they serve the same dealer, or who otherwise clothes the
purpose or are sold through the same channels of goods with such appearance as shall
distribution. deceive the public and defraud
another of his legitimate trade, or any
Samson v. Daway, 434 SCRA 612 [2004] subsequent vendor of such goods or
any agent of any vendor engaged in
R.A. No. 8293 and R.A. No. 166 are special laws selling such goods with a like purpose;
conferring jurisdiction over violations of intellectual (b) Any person who by any artifice, or
property rights to the Regional Trial Court. They device, or who employs any other
should therefore prevail over R.A. No. 7691, which means calculated to induce the false
is a general law. Hence, jurisdiction is properly belief that such person is offering the
lodged with the Regional Trial Court even if the services of another who has identified
penalty therefore is imprisonment of less than six such services in the mind of the
years, or from 2 to 5 years and a fine ranging from public; or
P50,000 to P200,000. (c) Any person who shall make any false
statement in the course of trade or
who shall commit any other act
8.1. Notice Requirement contrary to good faith of a nature
calculated to discredit the goods,
Sec. 158. Damages; Requirement of Notice. - In business or services of another.
any suit for infringement, the owner of the
registered mark shall not be entitled to recover
profits or damages unless the acts have been
1. Basic Principles
Del Monte Corporation, et al. v. CA, 181 SCRA
410 [1990]
1. Works are protected by the sole fact of their
The following are the distinctions between creation.
infringement of trademark and unfair competition: Sec. 172.2. Works are protected by the sole
1. Infringement of trademark is the fact of their creation, irrespective of their mode
unauthorized use of a trademark, whereas or form of expression, as well as of their
unfair competition is the passing off of content, quality and purpose. (Sec. 2, PD No.
ones goods as those of another. 49a)
2. In infringement of trademark, fraudulent
intent is unnecessary, whereas in unfair 2. Protection extends only to the expression of an
competition fraudulent intent is essential. idea, not the idea itself.
3. In infringement of trademark the prior
registration of the trademark is a Sec. 175. Unprotected Subject Matter. -
prerequisite to the action, whereas in unfair Notwithstanding the provisions of Sections 172 and
competition registration is not necessary. 173, no protection shall extend, under this law, to
any idea, procedure, system method or operation,
concept, principle, discovery or mere data as such,
Mighty Corporation v. E. & J. Gallo Winery, even if they are expressed, explained, illustrated or
434 SCRA 473 [2004] embodied in a work; xxx xxx xxx
5. Standard for Copyright Protection lifetime of the author and for fifty (50) years after
his death. (Sec. 31, PD No. 49)
Ching Kian Chuan v. Court of Appeals, 363
SCRA 142 [2001] Sec. 201. Works Not Covered. - The provisions of
this Chapter shall not apply to prints, etchings,
A person to be entitled to a copyright must be the engravings, works of applied art, or works of
original creator of the work. He must have created similar kind wherein the author primarily derives
it by his own skill, labor, and judgment without gain from the proceeds of reproductions. (Sec. 33,
directly copying or evasively imitating the work of PD No. 49)
another.
8. Moral Rights
Ching v Salinas (2005)
Sec. 193. Scope of Moral Rights. - The author of a
Ownership of copyrighted material is shown by work shall, independently of the economic rights in
proof of originality and copyrightability. By Section 177 or the grant of an assignment or
originality is meant that the material was not license with respect to such right, have the right:
copied, and evidences at least minimal creativity;
that it was independently created by the author 193.1. To require that the authorship of the
and that it possesses at least same minimal degree works be attributed to him, in particular, the
of creativity. Copying is shown by proof of access right that his name, as far as practicable, be
to copyrighted material and substantial similarity indicated in a prominent way on the copies,
between the two works. The applicant must thus and in connection with the public use of his
demonstrate the existence and the validity of his work;
copyright because in the absence of copyright
protection, even original creation may be freely 193.2. To make any alterations of his work
copied. prior to, or to withhold it from publication;
177.7. Other communication to the public of 178.3. In the case of work created by an
the work (Sec. 5, PD No. 49a) author during and in the course of his
employment, the copyright shall belong to:
7. Droit de Suite
(a) The employee, if the creation of the
Sec. 200. Sale or Lease of Work. - In every sale or object of copyright is not a part of his
lease of an original work of painting or sculpture or regular duties even if the employee
of the original manuscript of a writer or composer, uses the time, facilities and materials
subsequent to the first disposition thereof by the of the employer.
author, the author or his heirs shall have an (b) The employer, if the work is the result
inalienable right to participate in the gross of the performance of his regularly-
proceeds of the sale or lease to the extent of five assigned duties, unless there is an
percent (5%). This right shall exist during the agreement, express or implied, to the
contrary.
not conflict with the normal exploitation of library which, by law, is entitled to receive
the work and does not unreasonably copies of a printed work, shall be entitled,
prejudice the right holder's legitimate when special reasons so require, to reproduce a
interest. copy of a published work which is considered
necessary for the collection of the library but
Sec. 187. Reproduction of Published Work. - which is out of stock. (Sec. 13, PD 49a)
Sec. 192. Notice of Copyright. - Each copy of a 180.2. The copyright is not deemed assigned
work published or offered for sale may contain a inter vivos in whole or in part unless there is a
notice bearing the name of the copyright owner, written indication of such intention.
and the year of its first publication, and, in copies
produced after the creators death, the year of such 180.3. The submission of a literary,
death. (Sec. 27, PD No. 49a) photographic or artistic work to a newspaper,
magazine or periodical for publication shall
discussions and examples and the failure to lieu of actual damages and
acknowledge the same is an infringement of profits, such damages which to
copyright. For there to be substantial reproduction the court shall appear to be just
of a book it does not necessarily require that the and shall not be regarded as
entire copyrighted work, or even a large portion of penalty.
it, be copied. If so much is taken that the value of (c) Deliver under oath, for
the original work is substantially diminished, there impounding during the pendency
is an infringement of copyright and to an injurious of the action, upon such terms
extent, the work is appropriated. It is no defense and conditions as the court may
that the pirate did not know whether or not he was prescribe, sales invoices and
infringing any copyright; he at least knew that other documents evidencing
what he was copying was not his, and he copied at sales, all articles and their
his peril. In cases of infringement, copying alone is packaging alleged to infringe a
not what is prohibited. The copying must produce copyright and implements for
an injurious effect. making them.
(d) Deliver under oath for
Columbia Picture Entertainment, Inc v CA destruction without any
compensation all infringing
It is evidently incorrect to suggest, as the ruling in copies or devices, as well as all
20th Century Fox may appear to do, that in plates, molds, or other means for
copyright infringement cases, the presentation of making such infringing copies as
master tapes of the copyrighted films is always the court may order.
necessary to meet the requirement of probable (e) Such other terms and conditions,
cause and that, in the absence thereof, there can including the payment of moral
be no finding of probable cause for the issuance of and exemplary damages, which
a search warrant. It is true that such master tapes the court may deem proper, wise
are object evidence, with the merit that in this and equitable and the destruction
class of evidence the ascertainment of the of infringing copies of the work
controverted fact is made through demonstrations even in the event of acquittal in a
involving the direct use of the senses of the criminal case.
presiding magistrate. (City of Manila v. Cabangis,
10 Phil. 151 [1908]; Kabase v. State, 31 Ala. App. 216. 2. In an infringement action, the
77, 12 So. 2ND, 758, 764). Such auxiliary court shall also have the power to order the
procedure, however, does not rule out the use of seizure and impounding of any article which
testimonial or documentary evidence, depositions, may serve as evidence in the court
admissions, or other classes of evidence tending to proceedings. (Sec. 28, PD 49a)
prove the factum probandum (See Phil. Movie
Workers Association v. Premiere Productions, Inc.,
92 Phil. 843 [1953]) especially where the 17.2. Criminal Action
production in court of object evidence would result
in delay, inconvenience or expenses out of Sec. 217. Criminal Penalties. -
proportion to its evidentiary value.
217. 1. Any person infringing any right
17. Remedies for Infringement secured by provisions of Part IV of this Act
or aiding or abetting such infringement
17.1. Civil Action shall be guilty of a crime punishable by:
Sec. 216. Remedies for Infringement. - (a) Imprisonment of one (1) year to
three (3) years plus a fine ranging
216.1. Any person infringing a right from Fifty thousand pesos
protected under this law shall be liable: (P50,000) to One hundred fifty
thousand pesos (P150,000) for the
(a) To an injunction restraining such first offense.
infringement. The court may also (b) Imprisonment of three (3) years
order the defendant to desist and one (1) day to six (6) years
from an infringement, among plus a fine ranging from One
others, to prevent the entry into hundred fifty thousand pesos
the channels of commerce of (P150,000) to Five hundred
imported goods that involve an thousand pesos (P500,000) for the
infringement, immediately after second offense.
customs clearance of such goods. (c) Imprisonment of six (6) years and
(b) Pay to the copyright proprietor or one (1) day to nine (9) years plus a
his assigns or heirs such actual fine ranging from Five hundred
damages, including legal costs thousand pesos (P500,000) to One
and other expenses, as he may million five hundred thousand
have incurred due to the pesos (P1,500,000) for the third
infringement as well as the and subsequent offenses.
profits the infringer may have (d) In all cases, subsidiary
made due to such infringement, imprisonment in cases of
and in proving profits the plaintiff insolvency.
shall be required to prove sales
only and the defendant shall be 217. 2. In determining the number of
required to prove every element years of imprisonment and the amount of
of cost which he claims, or, in fine, the court shall consider the value of
the infringing materials that the defendant the defendant does not put in issue
has produced or manufactured and the the question whether copyright
damage that the copyright owner has subsists in the work or other subject
suffered by reason of the infringement. matter; and
(b) Where the subsistence of the
217. 3. Any person who at the time when copyright is established, the plaintiff
copyright subsists in a work has in his shall be presumed to be the owner of
possession an article which he knows, or the copyright if he claims to be the
ought to know, to be an infringing copy of owner of the copyright and the
the work for the purpose of: defendant does not put in issue the
question of his ownership.
(a) Selling, letting for hire, or by way (d) Where the defendant, without good
of trade offering or exposing for faith, puts in issue the questions of
sale, or hire, the article; whether copyright subsists in a work
(b) Distributing the article for purpose or other subject matter to which the
of trade, or for any other purpose action relates, or the ownership of
to an extent that will prejudice the copyright in such work or subject
rights of the copyright owner in the matter, thereby occasioning
work; or unnecessary costs or delay in the
(c) Trade exhibit of the article in proceedings, the court may direct that
public, shall be guilty of an offense any costs to the defendant in respect
and shall be liable on conviction to of the action shall not be allowed by
imprisonment and fine as above him and that any costs occasioned by
mentioned. (Sec. 29, PD No. 49a) the defendant to other parties shall be
paid by him to such other parties.
SUMMERVILLE vs. CA (2007)
19. Presumption of Ownership
Summerville holds copyrights and patents over
ROYAL brand playing cards; it alleges that fakes Sec. 219. Presumption of Authorship. -
thereof proliferate. Stemming from a letter-
complaint, seizure of cards [CROWN brand] inside a 219.1. The natural person whose name is
[fake, allegedly] ROYAL brand plastic container, indicated on a work in the usual manner as the
and the printing machines manufacturing the cards author shall, in the absence of proof to the
were seized. contrary, be presumed to be the author of the
Are the machines and cards inside the supposedly work. This provision shall be applicable even if
infringing case proper subjects of the seizure? NO. the name is a pseudonym, where the
First, private respondents are the owners of pseudonym leaves no doubt as to the identity
copyrights and patents pertaining to the CROWN of the author.
brand. Second, the cards, and the machines are
useless to prove trademark infringement with 219.2. The person or body, corporate whose
respect to the plastic container, hence unnecessary name appears on an audio-visual work in the
to retain. usual manner shall, in the absence of proof to
the contrary, be presumed to be the maker of
18. Affidavit Evidence said work.