TABLE OF CONTENTS

TABLE OF CONTENTS
TABLE OF CONTENTS
TABLE OF CONTENTS
 TABLE OF CONTENTS

LETTERS OF CREDIT Remedies Available.................8

Definition and Nature .............. 1 Warehousemans Lien .............8

DEFINITION ...................................... 1
PURPOSE .......................................... 1
ESSENTIAL REQUISITES ................... 1 NEGOTIABLE
NATURE ............................................ 1 INSTRUMENTS LAW
DURATION OF LETTERS OF CREDIT.. 1
TYPES OF LETTERS OF CREDIT ......... 2
Definition................................. 11
Parties to a Letter of Credit .... 2
RIGHTS AND OBLIGATIONS OF THE Forms and Interpretation....... 11
PARTIES ........................................... 2
Kinds of Negotiable
Basic Principles Instruments............................ 16
of Letter of Credit .................... 3 PROMISSORY NOTE ........................ 16
DOCTRINE OF INDEPENDENCE ........ 3 BILL OF EXCHANGE ......................... 16
FRAUD EXCEPTION PRINCIPLE ........ 3
DOCTRINE OF STRICT COMPLIANCE 4 Completion and Delivery .......17
INSERTION OF DATE ....................... 18
EFFECT OF ANTE-DATING AND POST-
DATING ........................................... 18
TRUST RECEIPTS LAW COMPLETION OF BLANKS .............. 18
INCOMPLETE AND UNDELIVERED
Concept of Trust Receipt INSTRUMENTS ............................... 18
Transaction .............................. 6 COMPLETE AND UNDELIVERED
LOAN/SECURITY FEATURE ..............6 INSTRUMENTS ............................... 18
OWNERSHIP OF THE GOODS, INCOMPLETE AND DELIVERED
DOCUMENTS INSTRUMENTS ............................... 19
AND INSTRUMENTS UNDER A TRUST
RECEIPT ............................................6 Signature................................ 19
SIGNING IN TRADE NAME .............. 20
Rights of the Entruster ........... 6 SIGNATURE OF AGENT .................. 20
VALIDITY OF THE SECURITY INDORSEMENT BY MINOR OR
INTEREST CORPORATION .............................. 20
AS AGAINST THE CREDITORS OF THE FORGERY ....................................... 20
ENTRUSTEE/
INNOCENT PURCHASERS FOR VALUE Consideration.........................23
.......................................................... 7
Accommodation Party ......... 24
Obligation and Liability LIABILITY ....................................... 24
of the Entrustee ....................... 7

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 TABLE OF CONTENTS

ACCOMMODATION PARTY AS EFFECT OF MATERIAL ALTERATION

SURETY...........................................24 ........................................................38

Negotiation ............................ 24 Acceptance ........................... 38

NEGOTIATION DISTINGUISHED DEFINITION ....................................38
FROM ASSIGNMENT .......................25 MANNER .........................................38
MODES OF NEGOTIATION ...............25 TIME FOR ACCEPTANCE .................39
RULES GOVERNING ACCEPTANCE .39
Rights of the Holder..............28
Presentment
Liabilities of Parties ............... 33 for Acceptance ...................... 40
PARTIES PRIMARILY LIABLE .......... 33 WHEN PRESENTMENT FOR
PARTIES SECONDARILY LIABLE ..... 33 ACCEPTANCE NECESSARY ............ 40
WHEN PRESENTMENT FOR
Warranties ............................. 34 ACCEPTANCE EXCUSED ................ 40
TIME/PLACE/MANNER OF
Presentment for Payment .... 34 PRESENTMENT ............................... 41
EFFECT OF FAILURE TO MAKE
Notice of Dishonor ................ 35 PRESENTMENT ............................... 41
PARTIES TO BE NOTIFIED ............... 36 DISHONOR BY NON-ACCEPTANCE . 41
PARTIES WHO MAY GIVE NOTICE OF
DISHONOR ..................................... 36 Promissory Notes .................. 41
EFFECT OF NOTICE ......................... 36
FORM OF NOTICE............................ 36 Checks ................................... 42
WAIVER .......................................... 36 DEFINITION ................................... 42
DISPENSATION WITH NOTICE ........ 37 KINDS ............................................ 42
EFFECT OF FAILURE TO GIVE NOTICE PRESENTMENT FOR PAYMENT ......43
........................................................ 37

Discharge of INSURANCE CODE

Negotiable Instrument ......... 37
DISCHARGE OF NEGOTIABLE Concept of Insurance ........... 45
INSTRUMENT ................................. 37 CONTRACT OF INSURACE .............. 45
DISCHARGE OF PARTIES DOING OR TRANSACTING
SECONDARILY LIABLE .................... 37 AN INSURANCE BUSINESS ............ 45
RIGHT OF PARTY WHO DISCHARGED
INSTRUMENT ................................. 37 Elements of an Insurance
RENUNCIATION BY HOLDER .......... 37
Contract .................................47
Material Alteration ................ 38
CONCEPT ........................................ 38 Characteristics/Nature
of Insurance Contracts ......... 48

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 TABLE OF CONTENTS
Classes ...................................49
MARINE ......................................... 49
FIRE ................................................ 53
CASUALTY ..................................... 54
SURETYSHIP ...................................55
LIFE.................................................55
COMPULSORY MOTOR VEHICLE
LIABILITY
INSURANCE .................................... 57
Insurable Interest .................. 57
IN GENERAL.................................... 57
WHEN INSURABLE INTEREST
SHOULD EXIST ............................... 58
CHANGE OF INTEREST ................... 58
IN LIFE/HEALTH INSURANCE ........ 58
IN PROPERTY INSURANCE ............ 60
DOUBLE INSURANCE AND OVER
INSURANCE .................................... 62
MULTIPLE OR SEVERAL INTERESTS
ON SAME PROPERTY ...................... 63
Perfection of the Contract
of Insurance ...........................64
OFFER AND
ACCEPTANCE/CONSENSUAL ........ 64
PREMIUM PAYMENT ..................... 64
NON-DEFAULT OPTIONS IN LIFE
INSURANCE ....................................65
REINSTATEMENT OF A LAPSED
POLICY
OF LIFE INSURANCE .......................66
REFUND OF PREMIUMS..................66
Rescission of Insurance
Contracts ............................... 67
CONCEALMENT .............................. 67
MISREPRESENTATION/OMISSIONS
....................................................... 68
BREACH OF WARRANTIES .............. 70
3
Claims Settlement
and Subrogation.....................71
CONCEPT OF LOSS .......................... 71
CAUSES OF LOSS ............................ 71
NOTICE AND PROOF OF LOSS ......... 71
GUIDELINES ON CLAIMS
SETTLEMENT .................................. 72
Insurance Commissioner ......75
JURISDICTION AND ADJUDICATORY
POWERS ......................................... 75
REVOCATION OF CERTIFICATE OF
AUTHORITY .................................... 75
LIQUIDATION OF INSURANCE
COMPANY ....................................... 75
TRANSPORTATION
LAWS
Common Carriers .................. 77
CONCEPT ........................................ 77
DILIGENCE REQUIRED OF COMMON
CARRIERS ....................................... 78
LIABILITIES ..................................... 79
Vigilance Over Goods ............79
LIABILITY IN GENERAL ................... 79
EXEMPTING CAUSES ...................... 79
CONTRIBUTORY NEGLIGENCE........ 81
DURATION OF LIABILITY................. 81
STIPULATION FOR LIMITATION OF
LIABILITY ....................................... 82
LIABILITY FOR BAGGAGE OF
PASSENGERS ................................ 84
Safety of Passengers ............ 85
LIABILITY IN GENERAL .................. 85
VOID STIPULATIONS...................... 85
DURATION OF LIABILITY................ 85
LIABILITY FOR ACTS OF OTHERS ... 86
 TABLE OF CONTENTS
EXTENT OF LIABILITY FOR DAMAGES
....................................................... 88
Bill of Lading .........................89
DEFINITION ................................... 89
THREE-FOLD CHARACTER ............ 89
DELIVERY OF GOODS ..................... 89
PERIOD FOR FILING CLAIMS .......... 90
PERIOD FOR FILING ACTIONS ........ 91
Maritime Commerce ..............91
CHARTER PARTIES ......................... 91
LIABILITY OF SHIP OWNERS
AND SHIPPING AGENTS .................92
ACCIDENTS AND DAMAGES
IN MARITIME COMMERCE ............. 94
CARRIAGE OF GOODS BY SEA ACT .. 97
The Warsaw Convention .......98
APPLICABILITY .............................. 98
LIMITATION OF LIABILITY .............. 98
WILLFUL MISCONDUCT ..................99
CORPORATION CODE
Corporation........................... 101
DEFINITION ................................... 101
ATTRIBUTES OF THE CORPORATION
....................................................... 101
Classes of Corporations ...... 102
STOCK CORPORATION ................. 102
NON-STOCK CORPORATION ........ 102
OTHER CORPORATIONS ............... 102
Nationality of Corporations 105
PLACE OF INCORPORATION TEST 105
CONTROL TEST ............................. 105
GRANDFATHER RULE................... 106
4
Corporate Juridical
Personality ........................... 107
DOCTRINE OF SEPARATE JURIDICAL
PERSONALITY............................... 107
DOCTRINE OF PIERCING THE
CORPORATE VEIL ......................... 107
Incorporation
and Organization................. 109
PROMOTER .................................. 109
NUMBER AND QUALIFICATIONS
OF INCORPORATORS ................... 109
CORPORATE NAME LIMITATIONS
ON USE ......................................... 109
CORPORATE TERM ....................... 109
MINIMUM CAPITAL STOCK AND
SUBSCRIPTION
REQUIREMENT ............................. 109
ARTICLES OF INCORPORATION .... 109
REGISTRATION AND ISSUANCE OF
CERTIFICATE
OF INCORPORATION ..................... 113
ADOPTION OF BY-LAWS ................ 114
Corporate Powers ................. 115
GENERAL POWERS,
THEORY OF GENERAL CAPACITY ... 115
SPECIFIC POWERS,
THEORY OF SPECIFIC CAPACITY .... 116
HOW EXERCISED .......................... 120
TRUST FUND DOCTRINE ............... 122
Board of Directors
and Trustees ........................ 123
DOCTRINE OF CENTRALIZED
MANAGEMENT ............................. 123
BUSINESS JUDGMENT RULE......... 125
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS
OF DIRECTORS OR TRUSTEES ...... 125
ELECTIONS ................................... 126
REMOVAL ..................................... 127
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FILLING OF VACANCIES .................127 Mergers

COMPENSATION ...........................127
FIDUCIARY DUTIES AND LIABILITY
and Consolidations.............. 172
RULES ........................................... 128 DEFINITION AND CONCEPT .......... 172
RESPONSIBILITY FOR CRIMES ...... 130 CONSTITUENT V. CONSOLIDATED
INSIDE INFORMATION .................. 130 CORPORATION ............................. 172
CONTRACTS .................................. 131 PLAN OF MERGER OR
EXECUTIVE COMMITTEE ................ 131 CONSOLIDATION .......................... 172
MEETINGS .................................... 132 ARTICLES OF MERGER OR
CONSOLIDATION .......................... 172
PROCEDURE ................................. 172
Stockholders EFFECTIVITY ..................................173
and Members .......................133 LIMITATIONS .................................173
RIGHTS OF STOCKHOLDERS AND EFFECTS ........................................173
MEMBERS ......................................133
PARTICIPATION IN MANAGEMENT
...................................................... 134
PROPRIETARY RIGHTS ................. 138
SECURITIES
REMEDIAL RIGHTS ....................... 142 REGULATION CODE
OBLIGATIONS OF A STOCKHOLDER
...................................................... 143 State Policy .......................... 175
MEETINGS .................................... 144
Securities Required
Capital Structure ................. 146
SUBSCRIPTION AGREEMENTS ..... 146 to be Registered .................. 175
CONSIDERATION FOR STOCKS..... 147
SHARES OF STOCK ....................... 147 Procedure for Registration
PAYMENT OF BALANCE OF of Securities ......................... 178
SUBSCRIPTION .............................. 151
CERTIFICATE OF STOCK ................ 152 Prohibitions on fraud,
STOCK AND TRANSFER BOOK ...... 155
DISPOSITION AND ENCUMBRANCE manipulation
OF SHARES ................................... 155 and insider trading .............. 179
MANIPULATION OF SECURITY
Dissolution PRICES .......................................... 179
SHORT SALES ............................... 180
and Liquidation ................... 156 FRAUDULENT TRANSACTIONS .... 180
MODES OF DISSOLUTION ............. 156
INSIDER TRADING ........................ 180
METHODS OF LIQUIDATION ......... 159

Other Corporations ............. 160 Protection of Investors ......... 181

TENDER OFFER RULE .................... 181
CLOSE CORPORATIONS................ 160
RULE ON PROXY SOLICITATION ... 182
NON-STOCK CORPORATIONS ...... 167
DISCLOSURE RULE ....................... 182
RELIGIOUS CORPORATIONS ........ 167
FOREIGN CORPORATIONS ........... 168

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Civil Liability......................... 184 Law on Secrecy

CIVIL LIABILITIES ON ACCOUNT OF of Bank Deposits................. 200
FALSE POLICY ......................................... 200
REGISTRATION STATEMENT ........ 184 PURPOSE ..................................... 200
CIVIL LIABILITIES ARISING IN PROHIBITED ACTS ....................... 200
CONNECTION WITH DEPOSITS COVERED .................... 200
PROSPECTUS, COMMUNICATIONS ZONES OF PRIVACY ..................... 200
AND REPORTS .............................. 185 GARNISHMENT OF DEPOSITS ..... 202
CIVIL LIABILITY OF FRAUD IN CONFIDENTIALITY OF FOREIGN
CONNECTION WITH CURRENCY DEPOSITS ................. 202
SECURITIES TRANSACTIONS........ 186 PENALTIES .................................. 203
CIVIL LIABILITY FOR MANIPULATION
OF SECURITY General Banking Law
PRICES .......................................... 186
CIVIL LIABILITY WITH RESPECT TO of 2000 ............................... 203
COMMODITY POLICY ......................................... 203
FUTURES CONOTRACTS AND PRE- DEFINITION AND CLASSIFICATION
NEED PLANS ................................. 186 OF BANKS .................................... 203
CIVIL LIABILITY ON ACCOUNT DISTINCTIONS BETWEEN BANKS,
OF INSIDER TRADING ................... 186 QUASI-BANKS AND TRUST ENTITIES
LIABILITIES OF CONTROLLING ..................................................... 204
PERSONS, AIDER BANK POWERS AND LIABILITIES . 204
AND ABETTOR AND OTHER DILIGENCE REQUIRED OF BANKS .......
SECONDARY STIPULATION ON INTERESTS .......207
LIABILITY ...................................... 187 GRANT OF LOANS AND SECURITY
REQUIREMENTS .......................... 208
PENALTIES FOR VIOLATION ......... 212
BANKING LAWS Philippine Deposit Insurance
The New Central Bank Act . 195 Corporation Act ................... 213
PURPOSE OF THE PDIC ................. 213
STATE POLICIES ........................... 195
POWERS OF THE PDIC .................. 213
SALIENT FEATURES...................... 195
FUNCTIONS OF THE PDIC.............. 213
CREATION OF THE BANGKO
SENTRAL
NG PILIPINAS................................ 195 Foreign Currency
RESPONSIBILITY AND PRIMARY Deposit Act .......................... 216
OBJECTIVE .................................... 195 CONFIDENTIALITY ........................ 216
MONETARY BOARD ...................... 195 PRIVILEGES .................................. 216
HOW THE BSP HANDLES BANKS IN
DISTRESS ..................................... 197
HOW THE BSP HANDLES EXCHANGE
CRISIS ........................................... 199

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PRIOR USE OF MARK AS A

INTELLECTUAL REQUIREMENT ............................. 231
PROPERTY CODE TESTS TO DETERMINE CONFUSING
SIMILARITY
BETWEEN MARKS ......................... 232
Intellectual Property Rights, WELL-KNOWN MARKS ................. 232
In General ............................ 218 RIGHTS CONFERRED BY
STATE POLICIES ........................... 218 REGISTRATION ............................. 233
INTELLECTUAL CONVENTIONS USE BY THIRD PARTIES OF NAMES,
GOVERNING INTELLECTUAL ETC. SIMILAR
PROPERTY RIGHTS ....................... 218 TO REGISTERED MARK .................234
INTELLECTUAL PROPERTY RIGHTS INFRINGEMENT AND REMEDIES ..234
...................................................... 218 UNFAIR COMPETITION ................. 237
DIFFERENCES BETWEEN TRADE NAMES OR BUSINESS NAMES
COPYRIGHTS, TRADEMARKS AND ...................................................... 239
PATENTS ...................................... 218 COLLECTIVE MARKS ..................... 239
TECHNOLOGY TRANSFER
ARRANGEMENTS .........................220 Copyrights ........................... 240
DEFINITION ................................. 240
Patents ................................ 220 BASIC PRINCIPLES ....................... 240
PATENTABLE INVENTIONS...........220 COPYRIGHTABLE WORKS ............ 240
NON-PATENTABLE INVENTIONS.. 221 NON-COPYRIGHTABLE WORKS ....242
OWNERSHIP OF A PATENT ........... 222 RIGHTS OF COPYRIGHT OWNER ...243
GROUND FOR CANCELLATION OF A RULE ON OWNERSHIP OF
PATENT ........................................ 222 COPYRIGHT .................................. 247
REMEDY OF THE TRUE AND ACTUAL LIMITATIONS ON COPYRIGHT...... 248
INVENTOR .................................... 223
RIGHTS CONFERRED BY A PATENT
...................................................... 223
LIMITATIONS OF PATENT RIGHTS 224
SPECIAL LAWS
PATENT INFRINGEMENT .............. 225
LICENSING .................................... 226 Chattel and Real Estate
ASSIGNMENT AND TRANSMISSION Mortgage Laws ................... 254
OF RIGHTS .................................... 229
Anti-Money
Trademarks......................... 229 Laundering Act ................... 254
DEFINITION OF MARKS, COLLECTIVE
POLICY OF THE LAW .................... 254
MARKS,
COVERED INSTITUTIONS ............. 254
TRADE NAMES.............................. 229
OBLIGATIONS OF COVERED
ACQUISITION OF OWNERSHIP OF
INSTITUTIONS ............................. 255
MARK ...........................................230
COVERED TRANSACTIONS .......... 256
ACQUISITION OF OWNERSHIP OF
SUSPICIOUS TRANSACTIONS ...... 256
TRADENAME ................................230
NON-REGISTRABLE MARKS .........230

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 TABLE OF CONTENTS

WHEN IS MONEY LAUNDERING

COMMITTED .................................256
UNLAWFUL ACTIVITIES OR
PREDICATE CRIMES ..................... 257
ANTI-MONEY LAUNDERING COUNCIL
......................................................258
FREEZING OF MONETARY
INSTRUMENT
OR PROPERTY ..............................259
AUTHORITY TO INQUIRE INTO BANK
DEPOSITS .................................... 260

Foreign Investments Act..... 261

POLICY OF THE LAW ..................... 261
DEFINITION OF TERMS ................. 261
REGISTRATION OF INVESTMENTS
ON NON-PHILIPPINE NATIONALS 262
FOREIGN INVESTMENTS IN EXPORT
ENTERPRISE ................................. 263
FOREIGN INVESTMENTS
IN DOMESTIC MARKET ENTERPRISE
...................................................... 263
FOREIGN INVESTMENT NEGATIVE
LIST .............................................. 263

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TABLE OF CONTENTS

9
UP LAW BOC LETTERS OF CREDIT
Definition and Nature of
Letter of Credit
DEFINITION
Letters of credit are those issued by one
merchant to another, or for the purpose of
attending to a commercial transaction. [Art.
567, Code of Commerce]
A letter of credit is one whereby one person
requests some other person to advance
money or give credit to a third person, and
promises that he will repay the same to the
person making the advancement, or accept
the bills drawn upon himself for the like
amount. [Campos, Notes and Selected Cases
on Negotiable Instruments Law]
A written instrument whereby the writer
requests or authorizes the addressee to pay
money or deliver goods to a third person and
assumes responsibility for payment of debt
therefor to the addressee [Transfield
Philippines v. Luzon Hydro, 2004].
An engagement by a bank or other person
made at the request of a customer that the
issuer shall honor drafts or other demands of
payment upon compliance with the conditions
specified in the credit [Prudential Bank v.
Intermediate Appellate Court, 1992].
PURPOSE
Its purpose is to substitute for, and support, the
agreement of the buyer-importer to pay money
under a contract or other arrangement, but
does not necessarily constitute as a condition
for the perfection of such arrangement [Reliance
Commodities, Inc. v. Daewoo Industrial Co., Ltd.,
1993]
ESSENTIAL REQUISITES OF
LETTERS OF CREDIT:
(1) Issued in favor of a definite person and not to
order.
(2) Limited to a fixed and specified amount, or
to one or more undetermined amounts, but
within a maximum the limits of which has to
be stated exactly.
PAGE 1
MERCANTILE LAW
Those which do not have one of these
conditions shall be mere letters of
recommendation. [Art. 568, Code of
Commerce]
NATURE
(1) Financial device L/Cs are developed by
merchants as a convenient and relatively
safe mode of dealing with sales of goods to
satisfy the seemingly irreconcilable interests
of a seller, who refuses to part with his goods
before he is paid, and a buyer, who wants to
have control of the goods before paying.
[Bank of America, NT&SA v. Court of Appeals,
1993]
A letter of credit is one of the modes of
payment, set out in Sec. 8, Central Bank
Circular No. 1389, "Consolidated Foreign
Exchange Rules and Regulations," dated
13 April 1993, by which commercial banks
sell foreign exchange to service payments
for, e.g., commodity imports [Reliance
Commodities v. Daewoo, 1993].
(2) Composite of three distinct contracts An
L/C transaction involves three distinct but
intertwined relationships:
(a) First Contract between the party applying
for the L/C (buyer/importer/account
party) and the party for whose benefit the
L/C is issued (seller/exporter/beneficiary).
(b) Second Contract between the buyer and
the issuing bank. This contract is
sometimes called the "Application and
Agreement" or the "Reimbursement
Agreement".
(c) Third Contract between the issuing bank
and the seller, in order to support the
contract, under (a) above [Reliance
Commodities v. Daewoo, 1993].
DURATION OF LETTERS OF
CREDIT
(1) Period stipulated by the parties; or
(2) If no period is fixed;
(a) 6 months from date if used in the
Philippines
(b) 12 months if abroad
UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW

TYPES OF LETTERS OF CREDIT Parties to a Letter of Credit

(1) As to the type of the main contract
RIGHTS AND OBLIGATIONS OF
Commercial Letter Of Standby Letter Of
Credit Credit THE PARTIES
There would be at least three parties to a letter
Method of payment in Used to guarantee or of credit:
a contract of sale secure an obligation in (1) Buyer/Exporter/Account Party one who
a non-sale transaction procures the letter of credit and obliges
Reduce the risk of non- Reduce the risk of non- himself to reimburse the issuing bank upon
payment of purchase performance of a receipt of documents of title.
price under a contract contractual obligation
of sale (2) Issuing Bank the bank which undertakes:
The seller can obtain The credit is payable (1) to pay the seller upon receipt of the draft
payment from the upon certification of a and proper documents of title; and (2) to
issuer of L/C upon the partys surrender the documents to the buyer upon
presentation of nonperformance of the reimbursement.
documents that show agreement The obligation of the issuing bank to pay
he has taken the seller is direct, primary, absolute,
affirmative steps to definite and solidary with the buyer, in the
comply with the sale absence of stipulation in the letter of credit
agreement [Metropolitan Waterworks and Sewerage
System v. Daway, 2004]
Beneficiary must Beneficiary must certify
demonstrate that he that his obligor has not (3) Seller/Importer/Beneficiary one who ships
has performed the performed the contract the goods to the buyer in compliance with a
contract contract of sale and delivers the documents
of title and draft to the issuing bank to
(2) As to revocability recover payment.
(a) Revocable L/C - One which can be Depending on the transaction, the number
revoked by the issuing bank without the of parties to the letter of credit may be
consent of the buyer and seller increased. Thus, the different types of
(b) Irrevocable L/C - One which the issuing correspondent banks:
bank cannot revoke without the consent
of the buyer and seller [Feati Bank and (4) Advising/Notifying Bank the bank which
Trust Co. v. CA, 1991] conveys to the seller the existence of the
credit.
(3) As to the obligation assumed by The bank assumes no liability except to
correspondent bank notify and/or transmit to the seller the
(a) Unconfirmed L/C - One which continues existence of the letter of credit. A notifying
to be the obligation of the issuing bank bank is not a privy to the contract of sale
(b) Confirmed L/C - One which is supported between the buyer and the seller, its
by the absolute assurance to the relationship is only with that of the issuing
beneficiary that the confirming bank will bank and not with the beneficiary to whom
undertake the issuing bank's obligation he assumes no liability.
as its own according to the terms and The bank may suggest to the seller its
conditions of the credit [Feati Bank and willingness to negotiate, but this fact alone
Trust Co. v. CA, 1991] does not imply that the notifying bank
promises to accept the draft drawn under
the documentary credit [Feati Bank and
Trust Co. v. CA, 1991].

PAGE 2
UP LAW BOC LETTERS OF CREDIT
(5) Confirming Bank the bank which lends
credence to the letter of credit issued by a
lesser known issuing bank.
The bank assumes a direct obligation to
the seller and its liability is a primary one
as if the bank itself had issued the letter of
credit [Feati Bank and Trust Co. v. CA, 1991].
(6) Negotiating Bank the bank which discounts
the draft presented by the seller.
The bank buys or discounts a draft under
the letter of credit. Its liability is dependent
upon the stage of the negotiation. If before
negotiation, it has no liability with respect
to the seller but after negotiation, a
contractual relationship will then prevail
between the negotiating bank and the
seller [Feati Bank and Trust Co. v. CA, 1991].
(7) Paying Bank the bank which undertakes to
encash the drafts drawn by the seller.
Basic Principles of Letter of
Credit
DOCTRINE OF INDEPENDENCE
The principle of independence assures the
seller or the beneficiary of prompt payment
independent of any breach of the main
contract and precludes the issuing bank from
determining whether the main contract is
actually accomplished or not.
Under this principle, banks assume no liability
or responsibility for the form, sufficiency,
accuracy, genuineness, falsification or legal
effect of any documents, or for the general
and/or particular conditions stipulated in the
documents or superimposed thereon, nor do
they assume any liability or responsibility for
the description, quantity, weight, quality,
condition, packing, delivery, value or existence
of the goods represented by any documents,
or for the good faith or acts and/or omissions,
solvency, performance or standing of the
consignor, the carriers, or the insurers of the
goods, or any other person whomsoever
[Transfield Philippines v. Luzon Hydro, 2004;
Bank of America, NT&SA v. Court of Appeals,
1993].
PAGE 3
MERCANTILE LAW
The concept of guarantee vis-a-vis the
concept of an irrevocable credit are
inconsistent with each other.
In the first place, the guarantee theory
destroys the independence of the bank's
responsibility from the contract upon which it
was opened. In the second place, the nature
of both contracts is mutually in conflict with
each other. In contracts of guarantee, the
guarantor's obligation is merely collateral and
it arises only upon the default of the person
primarily liable. On the other hand, in an
irrevocable credit the bank undertakes a
primary obligation. [Feati v. Court of Appeals,
1991]
The independent nature of the letter of credit
may be
(a) Independent in toto - the credit is
independent from the justification aspect
and is a separate obligation from the
underlying agreement;
(b) Only as to the justification aspect like in a
commercial letter of credit or repayment
standby, which is identical with the same
obligations under the underlying
agreement. [Transfield Philippines v. Luzon
Hydro, 2004; Bank of America, NT&SA v.
Court of Appeals, 1993].
FRAUD EXCEPTION PRINCIPLE
The principle that limits the application of the
independence principle only to instances
where it would serve the commercial function
of the credit and not when fraud attends the
transaction.
In the case of Transfield Philippines v. Luzon
Hydro, 2004, the petitioner alleged
misrepresentation as constituting fraud. The
Court, however, made no ruling as to whether
the same indeed constitutes fraud.
It asserts that the "fraud exception" exists
when the beneficiary, for the purpose of
drawing on the credit, fraudulently presents to
the confirming bank, documents that contain,
expressly or by implication, material
representations of fact that to his knowledge
are untrue. In such a situation, petitioner
UP LAW BOC LETTERS OF CREDIT MERCANTILE LAW

insists, injunction is recognized as a remedy

available to it.

Citing Dolan's treatise on letters of credit,

petitioner argues that the independence
principle is not without limits and it is
important to fashion those limits in light of
the principle's purpose, which is to serve the
commercial function of the credit. If it does
not serve those functions, application of the
principle is not warranted, and the common
law principles of contract should apply.
[Transfield Philippines v. Luzon Hydro, 2004]

The untrutufulness of a certificate

accompanying a demand for payment under a
standby credit may qualify as fraud sufficient
to support an injunction against payment. The
remedy of injunction is available when the
following are present:
(1) Clear proof fraud;
(2) Fraudulent abuse of the independent
purpose of the letter of credit and only
fraud under the main agreement and
(3) Irreparable injury might follow if injunction
is not granted or the recovery of damages
would be seriously damaged

DOCTRINE OF STRICT
COMPLIANCE
The settled rule in commercial transactions
involving letters of credit requires that the
documents tendered by the seller must
strictly conform to the terms of the letter of
credit.
Otherwise, the issuing bank or the concerned
correspondent bank is not obliged to perform
its undertaking under the contract.
The tender of documents by the beneficiary
(seller) must include all documents required
by the letter. A correspondent bank which
departs from what has been stipulated under
the letter of credit, as when it accepts a faulty
tender, acts on its own risks and it may not
thereafter be able to recover from the buyer or
the issuing bank, as the case may be, the
money thus paid to the beneficiary. [Feati v.
Court of Appeals, 199])

PAGE 4
UP LAW BOC TRUST RECEIPTS LAW
Definition/Concept of a
Trust Receipt Transaction
A trust receipt is a written or printed document
whereby the entrustee binds himself:
(1) to hold the designated goods, documents or
instruments in trust for the entruster, and
(2) to sell or otherwise dispose of the goods,
documents or instruments with the
obligation to turn over to the entruster the
proceeds thereof to the extent of the amount
owing to the entruster or as appears in the
trust receipt or the goods, documents or
instruments themselves if they are unsold or
not otherwise disposed of, in accordance with
the terms and conditions specified in the
trust receipt. [PD 115, Sec. 4]
A trust receipt transaction is any transaction by
and between an entruster and the entrustee,
whereby the entruster (who owns or holds
absolute title or security interests over certain
specified goods, documents or instruments)
releases the same to the possession of the
entrustee upon the latter's execution and
delivery to the entruster of a signed document
called a trust receipt. (PD 115, Sec. 4)
LOAN/SECURITY FEATURE
In a letter of credit-trust receipt arrangement,
a bank extends a loan covered by the letter of
credit, and the trust receipt acts as the
security for the loan. In other words, the
transaction involves a loan feature
represented by the letter of credit, and a
security feature which is in the covering trust
receipt. [Vintola v. Insular Bank of Asia and
America (1987)]
The security feature is what provides the much
needed financial assistance to our traders in
the importation or purchase of goods or
merchandise through the use of those goods
or merchandise as collateral for the
advancements made by a bank. The title of
the bank to the security is the one sought to
be protected and not the loan which is a
separate and distinct agreement. [People v.
Nitafan (1992)]
PAGE 6
MERCANTILE LAW
OWNERSHIP OF THE GOODS,
DOCUMENTS AND
INSTRUMENTS UNDER A TRUST
RECEIPT
To secure that the banker (entrustee) shall be
repaid at the critical point that is, when the
imported goods finally reach the hands of the
intended vendee the banker takes the full
title to the goods at the very beginning, and
he continues to hold that title as his
indispensable security until the goods are
sold.
The importer (entruster) becomes absolute
owner of the imported merchandise as soon
as he has paid its price. The ownership of the
merchandise continues to be vested in the
owner thereof or in the person who has
advanced payment (entrustee), until he has
been paid in full, or if the merchandise has
already been sold, the proceeds of the sale
should be turned over to him by the importer
or by his representative or successor in
interest. [Prudential Bank v. National Labor
Relations Commission (1995)]
Rights of the Entruster
(1) In case of sale: Right to the proceeds from
the sale of the goods, documents or
instruments released under a trust receipt to
the entrustee to the extent of the amount
owing to the entruster or as appears in the
trust receipt
(2) In case of non-sale: Right to the return of the
goods, documents or instruments
(3) Right to the enforcement of all other rights
conferred on him in the trust receipt (which
are not contrary to the provisions of PD 115)
(4) Right to cancel the trust and take possession
of the goods, documents or instruments
subject of the trust or of the proceeds
realized therefrom at any time upon default
or failure of the entrustee to comply with any
of the terms and conditions of the trust
receipt or any other agreement between the
entruster and the entrustee
(5) Right to sell the goods, documents or
instruments at public or private sale, not less
UP LAW BOC TRUST RECEIPTS LAW
than five days after serving or sending of
notice to the entrustee of the intention to sell
(6) Right to purchase at a public sale the goods,
documents, or instruments
(7) Right to recover deficiency from the entrustee
should the proceeds be insufficient [PD 115,
Sec. 7]
The entruster holding a security interest shall
not, merely by virtue of such interest or having
given the entrustee liberty of sale or other
disposition of the goods, documents or
instruments under the terms of the trust receipt
transaction be responsible as principal or as
vendor under any sale or contract to sell made by
the entrustee. [PD 115, Sec. 8]
VALIDITY OF THE SECURITY
INTEREST AS AGAINST THE
CREDITORS OF THE
ENTRUSTEE/INNOCENT
PURCHASERS FOR VALUE
The entruster's security interest in goods,
documents, or instruments pursuant to the
terms of a trust receipt shall be valid as
against all creditors of the entrustee for the
duration of the trust receipt agreement. [PD
115, Sec. 12]
A purchaser of goods from an entrustee with
right to sell, or of documents or instruments
through their customary form of transfer, who
buys the goods, documents, or instruments
for value and in good faith from the entrustee,
acquires said goods, documents or
instruments free from the entruster's security
interest. [PD 115, Sec. 11]
OBLIGATION AND LIABILITY OF
THE ENTRUSTEE
(1) Hold the goods, documents or instruments in
trust for the entruster and shall dispose of
them strictly in accordance with the terms
and conditions of the trust receipt;
(2) Receive the proceeds in trust for the
entruster and turn over the same to the
entruster to the extent of the amount owing
to the entruster or as appears on the trust
receipt;
PAGE 7
MERCANTILE LAW
(3) Insure the goods for their total value against
loss from fire, theft, pilferage or other
casualties;
(4) Keep said goods or proceeds thereof whether
in money or whatever form, separate and
capable of identification as property of the
entruster;
(5) Return the goods, documents or instruments
in the event of non-sale or upon demand of
the entruster; and
(6) Observe terms and conditions of the trust
receipt not contrary to PD 115. [PD 115, Sec. 9]
PAYMENT/DELIVERY OF
PROCEEDS OF SALE OR
DISPOSITION OF GOODS,
DOCUMENTS OR
INSTRUMENTS
The failure of an entrustee to turn over the
proceeds of the sale of the goods, documents or
instruments covered by a trust receipt to the
extent of the amount owing to the entruster or
as appears in the trust receipt shall constitute
the crime of estafa, punishable under RPC 315,
par. 1 (b). [PD 115, Sec. 13]
RETURN OF GOODS,
DOCUMENTS OR
INSTRUMENTS IN CASE OF
NON-SALE
The failure to return the goods, documents or
instruments if they were not sold or disposed of
in accordance with the terms of the trust receipt
shall constitute estafa, punishable under RPC
315, par. 1 (b). [PD 115, Sec. 13]
LIABILITY FOR LOSS OF GOODS,
DOCUMENTS OR
INSTRUMENTS
The risk of loss shall be borne by the entrustee.
Loss of goods, documents or instruments which
are the subject of a trust receipt, pending their
disposition, irrespective of whether or not it was
due to the fault or negligence of the entrustee,
shall not extinguish his obligation to the
entruster for the value thereof. [PD 115, Sec. 10]
UP LAW BOC TRUST RECEIPTS LAW
PENAL SANCTION IF OFFENDER
IS A CORPORATION
If the violation or offense is committed by a
corporation, partnership, association or other
juridical entities, the penalty shall be imposed
upon the directors, officers, employees or other
officials or persons therein responsible for the
offense, without prejudice to the civil liabilities
arising from the criminal offense. [PD 115, Sec.
13]
Remedies Available
UPON DEFAULT OR FAILURE OF
THE ENTRUSTEE TO COMPLY
WITH THE TERMS AND
CONDITIONS
(a) The entruster may cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom.
(b) The entruster may sell the goods, documents
or instruments not less than five days after
serving or sending of the requisite notice,
and the entruster may become a purchaser
at a public sale.
(c) The proceeds shall be applied (a) to the
payment of the expenses thereof; (b) to the
payment of the expenses of re-taking,
keeping and storing the goods, documents or
instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster.
[PD 115, Sec. 7]
IN CASE OF FAILURE TO TURN
OVER THE PROCEEDS OF THE
SALE, OR FAILURE TO RETURN
IN CASE OF NON-SALE
File a criminal case for estafa under RPC 315,
par. 1 (b). [PD 115, Sec. 13]
PAGE 8
MERCANTILE LAW
Warehousemans Lien
The warehousemans lien under the Warehouse
Receipts Law is the warehousemans legal right
or interest in the depositors property. It is
similar to the depositarys right of retention,
which is a means or device by which the
depositary is able to obtain payment of what
may be due because of the deposit [Gomez-
Somera].
CLAIMS INCLUDED IN THE
WAREHOUSEMANS LIEN
A warehouseman shall have a lien on the goods
deposited or the proceeds thereof in his hands:
(1) All lawful charges for storage and
preservation of the goods
(2) All lawful claims for money advanced,
interest, insurance, transportation, labor,
weighing, coopering, and other charges and
expenses in relation to other goods
(3) All reasonable charges and expenses for
notice and advertisements of sale
(4) Sale of the goods where default had been
made in satisfying the warehousemans lien
[Act No. 2137, Sec. 27]
However, if a negotiable receipt is issued for the
goods, the warehouseman shall have no lien
thereon except for charges for storage of goods
subsequent to the date of the receipt unless the
receipt expressly enumerated other charges for
which a lien is claimed. In such case, there shall
be a lien for the charges enumerated so far as
they are within Sec. 27 although the amount of
the charges is not stated in the receipt. [Act No.
2137, Sec. 30]
AGAINST WHAT PROPERTY THE
LIEN MAY BE ENFORCED
(a) Against all goods, whenever deposited,
belonging to the person who is liable as
debtor for the claims in regard to which the
lien is asserted, and
(b) Against all goods belonging to others which
have been deposited at any time by the
person who is liable as debtor for the claims
in regard to which the lien is asserted if such
person had been so entrusted with the
possession of goods that a pledge of the
UP LAW BOC TRUST RECEIPTS LAW
same by him at the time of the deposit to one
who took the goods in good faith for value
would have been valid. [Act No. 2137, Sec. 28]
SATISFACTION OF LIEN BY SALE
A warehouseman's lien for a claim, which has
become due, may be satisfied as follows:
(a) An itemized statement of the
warehouseman's claim, showing the sum
due at the time of the notice and the date or
dates when it becomes due,
(b) A brief description of the goods against
which the lien exists,
(c) A demand that the amount of the claim as
stated in the notice of such further claim as
shall accrue, shall be paid on or before a day
mentioned, not less than ten days from the
delivery of the notice if it is personally
delivered, or from the time when the notice
shall reach its destination, according to the
due course of post, if the notice is sent by
mail,
(d) A statement that unless the claim is paid
within the time specified, the goods will be
advertised for sale and sold by auction at a
specified time and place. [Act No. 2137, Sec.
33]
In accordance with the terms of a notice so
given, a sale of the goods by auction may be
had to satisfy any valid claim of the
warehouseman for which he has a lien on the
goods. [Act No. 2137, Sec. 33]
From the proceeds of such sale, the
warehouseman shall satisfy his lien including
the reasonable charges of notice,
advertisement and sale. The balance, if any,
shall be held by the warehouseman and
delivered on demand to the person to whom
he would have been bound to deliver or
justified in delivering goods. [Act No. 2137, Sec.
33]
AT ANY TIME BEFORE THE
GOODS ARE SO SOLD
General rule: The warehouseman shall retain
the possession of the goods according to the
terms of the original contract of deposit
PAGE 9
MERCANTILE LAW
Exception: Any person claiming a right of
property or possession may pay the
warehouseman the amount necessary to satisfy
his lien and to pay the reasonable expenses and
liabilities incurred. The warehouseman shall
deliver the goods to the person making
payment. [Act No. 2137, Sec. 33]
EFFECT OF SALE
The warehouseman shall not be liable for failure
to deliver the goods to the depositor or owner of
the goods or to a holder of the receipt given for
the goods when they were deposited, even if
such receipt be negotiable. [Act No. 2137, Sec.
36]
OTHER METHODS OF
ENFORCING LIEN
Other remedies allowed by law for the
enforcement of a lien against personal property
are not precluded. The right to recover so much
of the warehouseman's claim as shall not be
paid by the proceeds of the sale is not barred as
well. [Act No. 2137, Sec. 35]
HOW LIEN MAY BE LOST
(1) By surrendering possession of the goods
(2) By refusing to deliver the goods when a
demand is made with which he is bound to
comply [Act No. 2137, Sec. 29]
LIEN DOES NOT PRECLUDE
OTHER REMEDIES
Whether or not a warehouseman has a lien
upon the goods, he is entitled to all remedies
allowed by law to a creditor against a debtor for
the collection of all charges and advances which
the depositor has contracted to pay. (Act No.
2137, Sec. 32)
UP LAW BOC NEGOTIABLE INSTRUMENTS
Definition
DEFINITION AND PURPOSE
Written contract for the payment of money, by
its form and on its face, intended as substitute
for money and intended to pass from hand to
hand to give the holder in due course (HDC)
the right to hold the same and collect the sum
due.
Instruments are negotiable when they
conform to all the requirements prescribed by
the Negotiable Instruments Law [NIL; Act
2031, 03 February 1911].
However, the fact that an instrument does not
meet the foregoing requisites will not affect
its validity, the only consequence being that it
will be governed not by the NIL but by the
general law on contracts [Campos].
Negotiable Instruments Not Legal tender
Art. 1249, Civil Code. The payment of debts in
money shall be made in the currency stipulated,
and if it is not possible to deliver such currency,
then in the currency which is legal tender in the
Philippines.
The delivery of promissory notes payable to
order, or bills of exchange or other mercantile
documents shall produce the effect of payment
only when they have been cashed, or when
through the fault of the creditor they have been
impaired.
In the meantime, the action derived from the
original obligation shall be held in the
abeyance. [1170]
Section 52, New Central Bank Act. Legal Tender
Power. - All notes and coins issued by the
Bangko Sentral shall be fully guaranteed by the
Government of the Republic of the Philippines
and shall be legal tender in the Philippines for
all debts, both public and private: Provided,
however, That, unless otherwise fixed by the
Monetary Board, coins shall be legal tender in
amounts not exceeding Fifty pesos (P50.00) for
denominations of Twenty-five centavos and
above, and in amounts not exceeding Twenty
pesos (P20.00) for denominations of Ten
centavos or less.
Although considered as medium for payment
PAGE 11
MERCANTILE LAW
of obligations, negotiable instruments are not
legal tender.
Negotiable instruments shall produce the
effect of payment only when they have been
encashed or when through the fault of the
creditor they have been impaired. [Art. 1249,
Civil Code]
BUT a CHECK which has been cleared and
credited to the account of the creditor shall be
equivalent to a delivery to the creditor of cash.
Settled is the rule that payment must be
made in legal tender. A check is not legal
tender and, therefore, cannot constitute a
valid tender of payment. Since a negotiable
instrument is only a substitute for money and
not money, the delivery of such an instrument
does not, by itself, operate as payment. Mere
delivery of checks does not discharge the
obligation under a judgment. The obligation
is not extinguished and remains suspended
until the payment by commercial document is
actually realized. [BPI vs. Royeca, 2008]
Forms and Interpretation
REQUISITES OF NEGOTIABILITY
Section 1, Negotiable Instruments Law (NIL).
Form of negotiable instruments. - An
instrument to be negotiable must conform to
the following requirements:
(a) It must be in writing and signed by the
maker or drawer;
(b) Must contain an unconditional promise or
order to pay a sum certain in money; Must
be payable on demand, or at a fixed or
determinable future time; Must be payable
to order or to bearer; and
(e) Where the instrument is addressed to a
drawee, he must be named or otherwise
indicated therein with reasonable certainty.
REQUISITES OF A PROMISSORY
NOTE
Section 184, NIL. Promissory note, defined. - A
negotiable promissory note within the meaning
of this Act is an unconditional promise in
writing made by one person to another, signed
UP LAW BOC NEGOTIABLE INSTRUMENTS
by the maker, engaging to pay on demand, or at
a fixed or determinable future time, a sum
certain in money to order or to bearer. Where a
note is drawn to the maker's own order, it is not
complete until indorsed by him.
REQUISITES OF A BILL OF
EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A
bill of exchange is an unconditional order in
writing addressed by one person to another,
signed by the person giving it, requiring the
person to whom it is addressed to pay on
demand or at a fixed or determinable future
time a sum certain in money to order or to
bearer.
Section 184 (defining a promissory note) and
Section 126 (defining a bill of exchange) of the
NIL contain the same requisites as in Section 1.
FIRST REQUIREMENT: IN
WRITING AND SIGNED BY THE
MAKER OR DRAWER
Section 18, NIL. Liability of person signing in
trade or assumed name. - No person is liable on
the instrument whose signature does not
appear thereon, except as herein otherwise
expressly provided. But one who signs in a
trade or assumed name will be liable to the
same extent as if he had signed in his own
name.
IN WRITING
What is considered "In writing" - includes print;
written or typed. Section 191 of the NIL provides
that the word written includes printed, and
writing includes print.
Rationale for requirement: Since an instrument
is a document, there must be something in
written form that can be transferred from
person to person. [Abad]
SIGNED
General Rule: No person is liable on the
instrument whose signature does not appear
thereon.
PAGE 12
MERCANTILE LAW
Notes:
One who signs in a trade or assumed name
will be liable to the same extent as if he had
signed in his own name
Signature of any party may be made by duly
authorized agent; no particular form of
appointment necessary [Sec. 19, NIL]
Signature is binding and may be in ones
handwriting, printed, engraved, lithographed
or photographed so long as it is intended or
adopted as the signature of the signer or
made with his authority [Campos].
Signature may appear on any part of the
instrument. However, if the signature is so
placed upon the instrument that it is not clear
in what capacity the person intended to sign,
he is deemed an indorser. [Sec. 17[f], NIL]
SECOND REQUIREMENT:
CONTAINING AN
UNCONDITIONAL PROMISE TO
PAY OR ORDER TO PAY A SUM
CERTAIN IN MONEY
Section 3, NIL. When promise is unconditional. -
An unqualified order or promise to pay is
unconditional within the meaning of this Act
though coupled with:
(a) An indication of a particular fund out of
which reimbursement is to be made or a
particular account to be debited with the
amount; or
(b) A statement of the transaction which gives
rise to the instrument.
But an order or promise to pay out of a
particular fund is not unconditional.
UNCONDITIONAL
The promise or order to pay, to be
unconditional, must be unqualified [Campos].
Must not be dependent upon a contingent
event that is not certain to happen. [Abad]
The fact that the condition appearing on the
instrument has been fulfilled will not convert
it into a negotiable one [see Sec. 4, NIL]
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

Indicating a Particular (a) with interest; or

Fund
Fund (b) by stated installments; or
for Reimbursement
(non-negotiable) (c) by stated installments, with a provision that,
(1) The drawee pays There is only one act upon default in payment of any installment
the payee from his the drawee pays or of interest, the whole shall become due;
own funds directly from the or
afterwards. particular fund (d) with exchange, whether at a fixed rate or at
(2) The drawee pays indicated. the current rate; or
himself from the (e) with costs of collection or an attorney's fee,
particular fund in case payment shall not be made at
indicated. maturity.
Particular fund Particular fund Note: A sum is certain if from the face of the
indicated is not the indicated is the direct instrument it can be determined even if it
direct source of source of payment. requires mathematical computation. [Sundiang
payment. [Sundiang and Aquino] and Aquino]
When conditional: A negotiable instrument is PAYABLE IN MONEY
conditional when reference to the fund clearly
The instrument must be capable of being
indicates an intention that such fund alone
transformed into money, since negotiable
should be the source of payment. [Metropolitan
instruments are intended to be substitutes for
Bank vs. CA, 1991]
money
ORDER OR PROMISE TO PAY Money as used in the law is not necessarily
limited to legal tender as defined by law but
As to promissory note: Promise to pay should
includes any particular kind of current money.
be express on the face of the instrument
[see, Sec. 6(e), NIL and PNB v. Zulueta]
[Campos].
An agreement to pay in foreign currency is
The word "promise" is not absolutely
valid. [RA 8183]
necessary. Any expression equivalent to a
promise is sufficient [Campos]. NON-NEGOTIABLE
Mere acknowledgment of a debt is insufficient
An instrument which contains an order or
[Campos].
promise to do an act in addition to the
As to bill of exchange: Order command payment of money (with the exception of
made by the drawer addressed to the drawee certain acts enumerated in Sec. 5 of the NIL)
ordering the latter to pay the payee or the Payable in personal property like
holder a sum certain in money; the instrument
merchandise, shares of stock or gold.
is, by its nature, demanding a right.
Maker or the person primarily liable has the
Words which are equivalent to an order are
option to require something to be done in lieu
sufficient.
of payment of money. [Campos]
A mere request or authority to pay does not
But it is negotiable if the option to require
constitute an order. Although the mere use of
something to be done in lieu of payment of
polite words like "please" does not of itself
money is with the holder
deprive the instrument of its characteristics as
an order, its language must clearly indicate a
demand upon the drawee to pay. PAYABLE ON DEMAND, OR AT A
FIXED OR DETERMINABLE FUTURE
SUM PAYABLE MUST BE CERTAIN TIME
Section 2, NIL. What constitutes certainty as to Rationale: to inform the holder of the
sum. - The sum payable is a sum certain within instrument of the date when he may enforce
the meaning of this Act, although it is to be payment thereof.
paid:

PAGE 13
UP LAW BOC NEGOTIABLE INSTRUMENTS
ON DEMAND
Section 7, NIL. When payable on demand. - An
instrument is payable on demand:
(a) When it is so expressed to be payable on
demand, or at sight, or on presentation; or
(b) In which no time for payment is expressed.
Where an instrument is issued, accepted, or
indorsed when overdue, it is, as regards the
person so issuing, accepting, or indorsing it,
payable on demand.
Note: The holder may call for payment any time;
and the maker has an option to pay at any time.
The refusal of the holder to accept payment will
terminate the running of interest, if any, but the
obligation to pay the note remains.
AT A FIXED TIME
Only on the stipulated date, and not before,
may the holder demand its payment.
Should he fail to demand payment, the
instrument becomes overdue but remains
valid and negotiable. It is merely converted to
a demand instrument with respect to the
person who issued, accepted, or indorsed it
when overdue. [Sec. 7, NIL]
AT A DETERMINABLE FUTURE TIME
Section 4, NIL. Determinable future time; what
constitutes. - An instrument is payable at a
determinable future time, within the meaning of
this Act, which is expressed to be payable:
(a) At a fixed period after date or sight; or
(b) On or before a fixed or determinable future
time specified therein; or
(c) On or at a fixed period after the occurrence of
a specified event which is certain to happen,
though the time of happening be uncertain.
An instrument payable upon a contingency is
not negotiable, and the happening of the event
does not cure the defect.
Note: It is required that the maturity of the
instrument can be absolutely determined with
certainty. [Abad]
Examples:
At a fixed period after date or sight, e.g., 30
days after date.
PAGE 14
MERCANTILE LAW
On or before a fixed or determinable future
time specified therein, e.g., payable on or
before December 1, 2000
On or at a fixed period after the occurrence of
a specified event which is certain to happen,
though the time of happening be uncertain,
e.g., payable within 60 days after the death
of Jose
EFFECT OF ACCELERATION PROVISIONS
If option (absolute or conditional) to
accelerate maturity is on the maker, the
instrument is still NEGOTIABLE [Campos].
If option to accelerate is on the holder and can
be exercised only after the happening of a
specified event/act over which he has no
control (conditional), the instrument is still
NEGOTIABLE [Campos].
Note: If option on the part of the holder is
absolute, the instrument is non-negotiable.
INSECURITY CLAUSES
Provisions in the contract which allow the
holder to accelerate payment if he deems
himself insecure. The instrument is rendered
non-negotiable. [Sundiang and Aquino]
PROVISIONS EXTENDING TIME OF
PAYMENT
General rule: Negotiability not affected. Effect is
similar with that of an acceleration clause at the
option of the maker [Campos].
Exception: Where a note with a fixed maturity
provides that the maker has the option to
extend time of payment until the happening of
contingency, the instrument is NOT negotiable.
The time for payment may never come at all.
PAYABLE TO ORDER OR TO BEARER
(ASKED IN 1998)
INSTRUMENT MUST CONTAIN WORDS OF
NEGOTIABILITY
For example:
(1) Pay to the order of Juan Cruz, or I promise
to pay to the order of Juan Cruz
(2) Pay to Juan Cruz or order, or I promise to
pay Juan Cruz or order
Note: Instrument need not follow the language
of the law, but any term which clearly indicates
UP LAW BOC NEGOTIABLE INSTRUMENTS
an intention to conform to the legal
requirements is sufficient.
NEGOTIABILITY DETERMINED FROM THE
FACE OF THE INSTRUMENT
The negotiability or non-negotiability of an
instrument is determined from the face of the
instrument itself. Where words "or bearer"
printed on a check are cancelled by the drawer,
instrument becomes not negotiable. [Caltex vs.
CA, 1992]
PAYABLE TO BEARER
Section 9, NIL. When payable to bearer. - The
instrument is payable to bearer:
(a) When it is expressed to be so payable; or
(b) When it is payable to a person named
therein or bearer; or
(c) When it is payable to the order of a fictitious
or non-existing person, and such fact was
known to the person making it so payable;
or
(d) When the name of the payee does not
purport to be the name of any person; or
(e) When the only or last indorsement is an
indorsement in blank.
Examples:
(1) Expressed to be so payable - "I promise to
pay the bearer the sum"
(2) Payable to a person named therein or bearer
-"Pay to A or bearer"
(3) Payable to the order of a fictitious person or
non-existing person, and such fact was
known to the person making it so payable -
Pay to John Doe or order"
(4) Name of payee does not purport to be the
name of any person "Pay to cash"; "Pay to
sundries."
(5) Only or last indorsement is an indorsement
in blank.
FICTITIOUS PAYEE RULE
It is not necessary that the person referred to in
the instrument is really non-existent or fictitious
to make the instrument payable to bearer. The
person to whose order the instrument is made
payable may in fact be existing but he is still
fictitious or non-existent under Sec. 9(c) of the
NIL if the person making it so payable does not
PAGE 15
MERCANTILE LAW
intend to pay the specified persons. [PNB v.
Rodriguez, 2008]
A check drawn payable to the order of cash is a
check payable to bearer, and the bank may pay
it to the person presenting it for payment
without the drawer's indorsement. [Ang Tek Lian
vs. CA, 1950]
PAYABLE TO ORDER
Section 8, NIL. When payable to order. - The
instrument is payable to order where it is drawn
payable to the order of a specified person or to
him or his order. It may be drawn payable to the
order of:
(a) A payee who is not maker, drawer, or
drawee; or
(b) The drawer or maker; or
(c) The drawee; or
(d) Two or more payees jointly; or
(e) One or some of several payees; or
(f) The holder of an office for the time being.
Where the instrument is payable to order, the
payee must be named or otherwise indicated
therein with reasonable certainty.
Notes: Without the words "to order" or "to the
order of" the instrument is payable only to the
person designated therein and is therefore non-
negotiable. [Consolidated Plywood Industries vs.
IFC Leasing, 1987]
WHERE THE MAKER IS THE PAYEE
(1) In effect making himself liable to himself.
Thus, the instrument produces no legal
effect.
(2) Will produce legal effects only once the
payee-maker indorses the instrument to
another person because such indorsement
will then give rise to rights and obligations.
[Abad]
IF BILL OF EXCHANGE, DRAWEE MUST BE
NAMED OR DESIGNATED WITH
REASONABLE CERTAINTY
(1) Applies only to a bill of exchange
(2) A bill may be addressed to 2 or more
drawees jointly whether they are partners or
not, but not to 2 or more drawees in the
alternative or in succession [Sec. 128, NIL].
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

Examples:
(1) To Juan Cruz and Jose Reyes negotiable Kinds of Negotiable
(2) To Juan Cruz or Jose Reyes not
negotiable; no certainty as to drawee
Instrument
DETERMINATION OF NEGOTIABILITY PROMISSORY NOTE
In determining the negotiability of an Section 184, NIL. Promissory note, defined. - A
instrument, the instrument in its entirety and negotiable promissory note within the meaning
by what appears on its face must be of this Act is an unconditional promise in
considered. It must comply with the writing made by one person to another, signed
requirements of Sec. 1 of the Negotiable by the maker, engaging to pay on demand, or at
Instruments Law. [Caltex Phils. v. CA, 1992] a fixed or determinable future time, a sum
The acceptance of a bill of exchange is not certain in money to order or to bearer. Where a
important in the determination of its note is drawn to the maker's own order, it is not
negotiability. The nature of acceptance is complete until indorsed by him.
important only on the determination of the
kind of liabilities of the parties involved. KINDS OF PROMISSORY NOTES
[PBCOM vs. Aruego, 1993] (1) Certificate of deposit a form of promissory
note which is a written acknowledgment of a
Omissions and Additional Provisions bank of its receipt of a certain sum with a
Provisions That Do Not That Do Not Affect promise to repay the same.
Affect Negotiability Negotiability (2) Bonds a certificate or evidence of a debt on
(1) Non-dating of the (1) Authorizes the sale which the issuing company or governmental
instrument of collateral body promises to pay the bondholders a
(2) Non-specification of securities on specified amount of interest for a specified
value given, or that default; length of time, and to repay the loan on the
any value had been (2) Authorizes expiration date.
given confession of (3) Debenture a promissory note or bond
(3) Non-specification of judgment on backed by the general credit of a corporation
place where it is default; and usually not secured by a mortgage or
drawn or place (3) Waives the benefit lien on any specific property. (Sundiang and
where it is payable of law intended to Aquino)
(4) Bears a seal protect the debtor;
or BILL OF EXCHANGE
Section 126, NIL. Bill of exchange, defined. - A
bill of exchange is an unconditional order in
(5) Designation of (4) Allows the creditor
writing addressed by one person to another,
particular kind of the option to require
signed by the person giving it, requiring the
currency in which something in lieu of
person to whom it is addressed to pay on
payment is to be money. (Sec. 5)
demand or at a fixed or determinable future
made. (Sec. 6)
time a sum certain in money to order or to
Note: Negotiability is
bearer. (Sec. 126)
affected when
instrument contains a
promise or order to do KINDS OF BILLS OF EXCHANGE
any act in addition to (1) Draft used synonymously with bill of
the payment of money. exchange although it normally refers to a bill
of exchange used in documentary exchange
like letters of credit transactions.
(2) Inland and foreign bill an Inland bill is a bill
which is, or on its face purports to be, both

PAGE 16
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

drawn and payable within the Philippines. holder may treat it as either at his election
Any other bill is a foreign bill. [Sec. 17[e], NIL]
(3) Time draft draft that is payable at a fixed
date. Promissory Note Bill of Exchange
(4) Sight or demand draft payable when the
holder presents it for payment. Unconditional promise Unconditional order
(5) Trade acceptance used in contracts of sale Involves 2 parties Involves 3 parties
where the seller as drawer orders the buyer
(as drawee) to pay a sum certain to the same Maker is primarily Drawer is only
seller (payee). liable secondarily liable
(6) Bankers acceptance a time draft across the Only one presentment: Two presentments: for
face which the drawee has written the word for payment acceptance and for
accepted. [Sundiang and Aquino] payment
(7) Check - A bill of exchange drawn on a bank
payable on demand [Sec. 185]. It is the most
common form of bill of exchange. Bill of Exchange Check
Not necessarily It is necessary that a
INSTANCES WHEN A BILL OF drawn on a deposit. check be drawn on a
EXCHANGE MAY BE TREATED AS A The drawee need not bank deposit.
PROMISSORY NOTE: be a bank Otherwise, there would
be fraud.
Section 130, NIL. When bill may be treated as
promissory note. - Where in a bill the drawer Death of a drawer of a Death of the drawer of
and drawee are the same person or where the BOE, with the a check, with the
drawee is a fictitious person or a person not knowledge of the bank, knowledge of the bank,
having capacity to contract, the holder may does not revoke the revokes the authority of
treat the instrument at his option either as a bill authority of the drawee the banker to pay.
of exchange or as a promissory note. to pay.

Section 17, NIL. Construction where instrument May be presented for Must be presented for
is ambiguous. - Where the language of the payment within payment within a
instrument is ambiguous or there are reasonable time after reasonable time after
omissions therein, the following rules of its last negotiation. its issue.
construction apply: May be payable on Always payable on
x---x demand or at a fixed or demand
determinable future
(e) Where the instrument is so ambiguous that time
there is doubt whether it is a bill or note, the
holder may treat it as either at his election;
x---x Completion and Delivery
(1) The drawer and the drawee are the same TWO STEPS INVOLVED IN THE
person;
(2) Drawee is a fictitious person; EXECUTION OF NEGOTIABLE
(3) Drawee does NOT have the capacity to INSTRUMENTS
contract (Sec. 130, NIL] (1) Writing of the instrument completely in
(4) Where the bill is drawn on a person who is accordance with the requisites of
legally absent; negotiability under Sec. 1.
(5) Where the instrument is so ambiguous that (2) Delivery of the instrument by the maker or
there is doubt whether it is a bill or note, the the drawer to the payee in order to give legal
effect thereto. [Abad]

PAGE 17
UP LAW BOC NEGOTIABLE INSTRUMENTS
Note: It may sometimes be dificult to locate the
boundary line between a complete and an
incomplete instrument... It would seem that if
an instrument contains all the requisites for
making it a negotiable one, it should be
considered as complete though it in fact may
have blanks as to non-essentials... [Campos]
INSERTION OF DATE
Section 13, NIL. When date may be inserted. -
Where an instrument expressed to be payable
at a fixed period after date is issued undated, or
where the acceptance of an instrument payable
at a fixed period after sight is undated, any
holder may insert therein the true date of issue
or acceptance, and the instrument shall be
payable accordingly. The insertion of a wrong
date does not avoid the instrument in the hands
of a subsequent holder in due course; but as to
him, the date so inserted is to be regarded as
the true date.
Any holder may insert the true date of issue or
acceptance of an instrument where:
(1) The instrument is expressed to be payable at
a fixed period after date is issued undated; or
(2) The acceptance of an instrument payable at
a fixed period after sight is undated.
EFFECT OF ANTE-DATING AND
POST-DATING
Section 12, NIL. Ante-dated and post-dated.- The
instrument is not invalid for the reason only
that it is ante-dated or post-dated, provided
this is not done for an illegal or fraudulent
purpose. The person to whom an instrument so
dated is delivered acquires the title thereto as
of the date of delivery.
COMPLETION OF BLANKS
Section 14, NIL. Blanks; when may be filled. -
Where the instrument is wanting in any
material particular, the person in possession
thereof has a prima facie authority to complete
it by filling up the blanks therein. And a
signature on a blank paper delivered by the
person making the signature in order that the
paper may be converted into a negotiable
PAGE 18
MERCANTILE LAW
instrument operates as a prima facie authority
to fill it up as such for any amount. In order,
however, that any such instrument when
completed may be enforced against any person
who became a party thereto prior to its
completion, it must be filled up strictly in
accordance with the authority given and within
a reasonable time. But if any such instrument,
after completion, is negotiated to a holder in
due course, it is valid and effectual for all
purposes in his hands, and he may enforce it as
if it had been filled up strictly in accordance
with the authority given and within a
reasonable time
.
INCOMPLETE AND
UNDELIVERED INSTRUMENTS
Section 15, NIL. Incomplete instrument not
delivered. - Where an incomplete instrument
has not been delivered, it will not, if completed
and negotiated without authority, be a valid
contract in the hands of any holder, as against
any person whose signature was placed thereon
before delivery.
In this case a real defense exists and not even a
holder in due course can recover on the
instrument, for the law is specific that it is not a
valid contract in the hands of any holder
[Campos].
Note: A drawee bank whose negligent custody
of the checks, after partial execution,
contributed to its escape, is stopped from
raising the real defense under Sec. 15 of the NIL
[Campos].
COMPLETE AND UNDELIVERED
INSTRUMENTS
Section 16, NIL. Delivery; when effectual; when
presumed. - Every contract on a negotiable
instrument is incomplete and revocable until
delivery of the instrument for the purpose of
giving effect thereto. As between immediate
parties and as regards a remote party other
than a holder in due course, the delivery, in
order to be effectual, must be made either by or
under the authority of the party making,
drawing, accepting, or indorsing, as the case
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

may be; and, in such case, the delivery may be Hence:

shown to have been conditional, or for a special DELIVERED
purpose only, and not for the purpose of
transferring the property in the instrument. But Quadrant 1 Quadrant 2
where the instrument is in the hands of a holder Complete Incomplete
in due course, a valid delivery thereof by all Delivered Delivered
parties prior to him so as to make them liable to
COMPLETE
him is conclusively presumed. And where the
instrument is no longer in the possession of a Quadrant 3 Quadrant 4
party whose signature appears thereon, a valid Complete Incomplete
and intentional delivery by him is presumed Undelivered Undelivered
until the contrary is proved.

Non-delivery of a complete instrument is a Quadrant 1

personal defense [Campos]
Delivery of an instrument is a prerequisite for
liability. If the instrument is complete in all its
particulars, but is not delivered, there is no
contract. However if the instrument is no
longer in the possession of a party who has
signed it, a delivery is presumed until the
contrary is proved [Campos].
If the holder of the instrument is a holder in
due course, the instrument is not merely
prima facie deemed delivered, but this fact is
conclusively presumed [Campos].
INCOMPLETE AND DELIVERED
INSTRUMENTS [Sec. 14, NIL]
(1) Holder has prima facie authority to fill up the
instrument.
(2) The instrument must be filled up strictly in
accordance with the authority given and
within reasonable time
(3) HDC may enforce the instrument as if filled
up according to (2) above.
This provision merely raises a personal defense
[Campos]
Rights and obligations attach
Quadrant 2
Apply Sec. 14
There is prima facie authority to fill the blanks
but first prove that you have authority to fill
up
Note further that for the presumption to
apply, issuance is necessary
Quadrant 3
Apply Sec. 15
Cannot be a valid contract as to ANY holder
No contract, zero chance of becoming
negotiable instrument
Quadrant 4
Apply Sec. 16
Until it is delivered, the instrument remains to
be revocable
Maker or drawer can withhold release
However, once it is found in the hands of a
holder, there is a presumption of delivery
o If he is a HNIDC prima facie presumption
o If he is a HIDC conclusive presumption

COMPLETE AND DELIVERED

INSTRUMENTS Signature
In a complete and delivered instrument, rights Sec. 18. Liability of person signing in trade or
and liabilities under the negotiable instruments assumed name. - No person is liable on the
law attach. instrument whose signature does not appear
thereon, except as herein otherwise expressly
provided. But one who signs in a trade or
assumed name will be liable to the same extent
as if he had signed in his own name.

PAGE 19
UP LAW BOC NEGOTIABLE INSTRUMENTS
General rule: One whose signature does not
appear on the instrument shall not be liable
thereon.
Exceptions:
(1) The principal who signs through an agent
(2) The forger
(3) One who indorses in a separate instrument
(allonge) OR where an acceptance is written
on a separate paper
(4) One who signs his assumed or trade name
(5) A person negotiating by delivery (as in the
case of a bearer instrument) is liable only to
his immediate indorsee.
SIGNING IN TRADE NAME
One who signs in a trade or assumed name will
be liable to the same extent as if he had signed
in his own name [Sec. 18, NIL]
SIGNATURE OF AGENT
Sec. 19. Signature by agent; authority; how
shown. - The signature of any party may be
made by a duly authorized agent. No particular
form of appointment is necessary for this
purpose; and the authority of the agent may be
established as in other cases of agency.
Sec. 20. Liability of person signing as agent, and
so forth. - Where the instrument contains or a
person adds to his signature words indicating
that he signs for or on behalf of a principal or in
a representative capacity, he is not liable on the
instrument if he was duly authorized; but the
mere addition of words describing him as an
agent, or as filling a representative character,
without disclosing his principal, does not
exempt him from personal liability.
Signature of any party may be made by duly
authorized agent, established as in ordinary
agency.
SIGNATURE PER
PROCURATION
A signature per procuration operates as notice
to the holder that the agent has a limited
authority to sign, and the principal is bound
only in case the agent in so signing acted
PAGE 20
MERCANTILE LAW
within the actual limits of his authority (Sec.
21, NIL)
According to the majority rule, the words per
proc or procuration must appear on the
note for this rule in Section 21 to be applicable
[Campos]
LIABILITY OF AN AGENT
General rule: Where a person adds to his
signature words indicating that he signs on
behalf of a principal, then he is not liable if he
was duly authorized.
Exceptions:
(1) Mere addition of words describing him as an
agent WITHOUT disclosing his principal (Sec.
20, NIL)
(2) Where a broker or agent negotiates an
instrument without indorsement, he incurs
all liabilities in Sec. 65 of the NIL, unless he
discloses name of principal and the fact that
he is only acting as an agent. [Sec. 69, NIL]
Requisites to negative personal liablity of agent:
(1) He must be duly authorized;
(2) He must act within the scope of his authority
(3) He must indicate in the instrument that he is
signing merely as agent; and
(4) He must disclose his principal.
INDORSEMENT BY MINOR OR
CORPORATION
The indorsement or assignment of the
instrument by a corporation or by an infant
(minor) passes the property therein,
notwithstanding that from want of capacity,
the corporation or infant may incur no liability
thereon [Sec. 22, NIL].
The above provision does not change the rule
in civil law on minor's contracts, which
provides that a contract enetered into by a
minor is voidable, and the minor cannot be
held liable thereon unless he ratifies it upon
reaching majority.
However, under Section 22 of the NIL, should
the minor indorse a negotiable instrument,
although he cannot be held liable on his
contract of indorsement, title to the
instrument passes to his indorsee and the
UP LAW BOC NEGOTIABLE INSTRUMENTS
latter can rightfully recover from the maker,
free from the defense of minority [Campos].
REAL defense but available only to the
incapacitated party (i.e. the minor or the
corporation).
FORGERY
Sec. 23. Forged signature; effect of. - When a
signature is forged or made without the
authority of the person whose signature it
purports to be, it is wholly inoperative, and no
right to retain the instrument, or to give a
discharge therefor, or to enforce payment
thereof against any party thereto, can be
acquired through or under such signature,
unless the party against whom it is sought to
enforce such right is precluded from setting up
the forgery or want of authority.
Counterfeit making or fraudulent alteration of
any writing, which may consist of:
(1) Signing of anothers name with intent to
defraud; or
(2) Alteration of an instrument in the name,
amount, name of payee, etc. with intent to
defraud.
General rule: When a signature is forged or
made without the authority of the person, only
the forged signature (not the instrument itself
and the other genuine signatures) is wholly
inoperative
Effects:
(1) No right to retain the instrument
(2) No right to give a discharge therefor
(3) No right to enforce payment thereof against
any party thereto can be acquired through or
under such signature
Exception: The party against whom it is sought
to be enforced is precluded from setting up the
forgery or want of authority as a defense [Sec.
23, NIL].
PERSONS PRECLUDED FROM
SETTING UP DEFENSE OF FORGERY
[CAMPOS]
(1) Those who warrant or admit the genuineness
of the signature in question. This includes
indorsers, persons negotiating by delivery
and acceptors.
PAGE 21
MERCANTILE LAW
(2) Those who, by their acts, silence, or
negligence, are estopped from setting up the
defense of forgery.
RULES ON FORGERY
PROMISSORY NOTE
Makers signature forged
(1) Maker is not liable because he never became
a party to the instrument.
(2) Indorsers subsequent to forgery are liable
because of their warranties.
(3) Party who made the forgery is liable.
Payees signature forged
(1) Payee is not liable.
(2) Maker is still liable. (REASON: Indorsement
is not necessary to title and the maker
engages to pay holder)
(3) Indorsers subsequent to forgery are liable.
(4) Party who made the forgery is liable.
Indorsers signature forged
(1) Maker, payee, indorser whose signature/s
was/were forged, and all indorsers preceding
the forgery are not liable.
(2) Indorsers subsequent to forgery are liable.
(3) Party who made the forgery is liable.
BILL OF EXCHANGE
Drawers signature forged
(1) Drawer is not liable because he was never a
party to the instrument.
(2) Drawee is liable if it paid or accepted the
instrument (no recourse to drawer) because
he admitted the genuineness of the drawers
signature [Sec. 62, NIL; Price v. Neal]. Drawee
cannot recover from the collecting bank
because there is no privity between the
collecting bank and the drawer. The
collecting bank does not give any warranty
re: the drawers signature.[(Associated Bank
vs. CA]
(3) Indorsers subsequent to forgery are liable
(such as collecting bank or last endorser)
(4) Party who made the forgery is liable
Payees signature forged
(1) Payee is not liable
(2) Drawer is still secondarily liable
(3) Drawee is liable if it paid or accepted the
instrument [Sec. 62, NIL; Price v. Neal], but it
UP LAW BOC NEGOTIABLE INSTRUMENTS
may pass liability back through the collection
chain
(4) Indorsers subsequent to forgery are liable
(such as collecting bank)
(5) Party who made the forgery is liable
Indorsers signature forged
(1) Drawer, payee, indorser whose signature/s
was/were forged and all indorsers preceding
the forgery are not liable.
(2) Drawee is liable if it paid or accepted the
instrument [Sec. 62, NIL; Price v. Neal].
(3) Indorsers subsequent to forgery are liable.
(such as collecting bank)
(4) Party who made the forgery is liable.
ACCEPTANCE AND PAYMENT UNDER
MISTAKE
Sec. 62. Liability of acceptor. - The acceptor, by
accepting the instrument, engages that he will
pay it according to the tenor of his acceptance
and admits:
(a) The existence of the drawer, the genuineness
of his signature, and his capacity and
authority to draw the instrument; and
(b) The existence of the payee and his then
capacity to indorse.
(1) When the drawee accepts or pays a forged
instrument
Price v. Neal doctrine: As between equally
innocent persons, the drawee who pays
money on, or accepts, a check or draft the
signature on which was forged CANNOT
recover the money from the one who
received it. The drawee is bound to know
the signature of its depositor.
A bank is bound to know the signatures of
its depositors. If a bank pays a forged
check it must be considered as making the
payment out of its own funds and cannot
charge the account of the depositor whose
signature was forged. [PNB vs. Quimpo,
1988]
A bank is liable, irrespective of its good
faith, in paying a forged check. [Samsung
vs. Far East Bank, 2004]
(2) Extensions of Price v. Neal doctrine
Notes: The bar to recovery on the part of a
drawee who pays money on, or accepts, a
PAGE 22
MERCANTILE LAW
check or draft, is extended to overdrafts
and stop payment orders.
(a) Overdraft occurs when a check is issued
for an amount more than what the drawer
has in deposit with the drawee bank. Rule:
The drawee who pays the holder of the
bill cannot recover from the holder what
he paid under mistake [Campos]
(b) Stop Payment Order is one issued by the
drawer of a check countermanding his
first order to the drawee bank to pay the
check. Rule: The drawee bank is bound to
follow the order, provided it is received
prior to its certification or payment of the
check [Campos].
(3) Effects of Negligence of Depositor
If such negligence of the depositor was the
proximate cause of the loss, the drawee-
bank would NOT be liable
The negligence of the depositor/drawer
would consist of the failure to to carefully
examine bank statements, cancelled
checks, his check stubs, and other
pertinent records within a reasonable time
and to report any errors without
unreasonable delay to the drawee bank.
If a drawer/depositors negligence and
delay should cause a bank to honor a
forged check, the drawer cannot later
complain should bank refuse to recredit his
account [Campos].
(4) Effect of Payment under Forged
Indorsements
In the case of a drawee's acceptance or payment
of a bill on which only an INDORSEMENT has
been forged, the drawee can recover the
amount paid out by him. RATIONALE: The
drawee makes no warranty as to the
genuineness of any indorsement [Campos].
(5) Effect of negligence of drawee in informing
recipient of forgery
The rule is that a drawee's acceptance or
payment of a bill on which only an
INDORSEMENT has been forged is not a
bar to his right to recover the amount paid
out by him; however, there is an exception
to this rule.
UP LAW BOC NEGOTIABLE INSTRUMENTS
If it is shown that the drawee on learning of
the forgery did not give prompt notice of it
to the holder and that damage resulted to
said holder, recovery by the drawee is
barred [Clearfield Trust Co. v. US, 1943]
(6) Effect of negligence of drawer in case of
forged indorsement on checks
The drawer, as soon as he comes to know of a
forged indorsement should promptly notify the
drawee bank. Otherwise, should his negligent
delay be the proximate cause of any subsequent
loss to the bank, the latter may properly charge
it to the drawer's account.
(7) Comparing the liability of a collecting bank
and a drawee bank
A collecting bank is only liable for forged
indorsements and not forgeries of the drawer or
makers signature [PNB v CA, 1968].
Rationale: In presenting the checks for clearing,
the collecting agent made an express guarantee
on the validity of all the prior endorsements.
The collecting bank or last indorser generally
suffers the loss because it has the duty to
ascertain the genuineness of all prior
indorsements considering that the act of
presenting the check for payment to the
drawee is an assertion that the party making
the presentment had done its duty to
ascertain the genuineness of the
indorsements [BPI v CA, 1992].
A drawee bank is not liable for forged
indorsements.
Rationale: The drawee bank is not similarly
situated as the collecting bank because the
former makes no warranty as to the
genuineness of any indorsement. The drawee
banks duty is but to verify the genuineness of
the drawers signature and not of the
indorsement because only the drawer is its
client.
Note:
However, it should be noted that as an
exception to the rule that a drawee bank is
not liable for a forged indorsement, when the
negligence of the drawee bank is the
proximate cause of the collecting banks
payment of a check with a forged
PAGE 23
MERCANTILE LAW
indorsement, the drawee bank may be held
liable to the collecting bank.
Furthermore, when both the collecting bank
and the drawee bank are guilty of negligence,
the degree of negligence of each will be
weighed in considering the amount of loss
which each should bear [BPI v CA, 1992]
Consideration
Section 25, NIL. Value, what constitutes. Value
is any consideration sufficient to support a
simple contract. An antecedent or pre-existing
debt constitutes value; and is deemed such
whether the instrument is payable on demand
or at a future time.
Section 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Value" means valuable consideration;
x---x
Value and consideration are generally
convertible terms. However, they may have
different implications. When the payee of a
noet sues the maker, or the payee of a bill
sues the drawer, or an indorsee sues his
immediate indorser, the word consideration
is the more proper term to use. But where a
holder sues any party to the instrumetn with
whom he himself has not dealt, the term
value is more appropriate.
An antecedent or pre-existing debt
constitutes value; and is deemed such
whether the instrument is payable on demand
or at a future time. [Sec. 25, NIL]
Value need not be full and a holder will be
one for value even if he gave less than the
face value of the instrument, provided the
intention of the transferor is to transfer the
full amount represented by the instrument.
WHO IS A HOLDER FOR VALUE
(HFV)?
(1) A holder of an instrument for which value,
which need not be in full, has been given at
any given time but only with respect to all
parties who have become parties to the
UP LAW BOC NEGOTIABLE INSTRUMENTS
instrument prior to the time at which value
has been given. [Sec 26, NIL]
(2) A holder who has a lien on the instrument
but only to the extent of his lien. [Sec 27, NIL]
BURDEN OF PROOF -
PRESUMPTION OF
CONSIDERATION
Section 24, NIL. Presumption of consideration. -
Every negotiable instrument is deemed prima
facie to have been issued for a valuable
consideration; and every person whose
signature appears thereon to have become a
party thereto for value.
EFFECT OF WANT OF
CONSIDERATION
Section 28, NIL. Effect of want of consideration. -
Absence or failure of consideration is a matter
of defense as against any person not a holder in
due course; and partial failure of consideration
is a defense pro tanto, whether the failure is an
ascertained and liquidated amount or
otherwise.
Absence or failure of consideration is a matter
of defense as against any person not a holder
in due course, hence, it is a personal defense
Partial failure of consideration is a defense
pro tanto, meaning a defense to the extent of
the failure [Abad].
Accommodation Party
Section 29, NIL. Liability of accommodation
party. - An accommodation party is one who has
signed the instrument as maker, drawer,
acceptor, or indorser, without receiving value
therefor, and for the purpose of lending his
name to some other person. Such a person is
liable on the instrument to a holder for value,
notwithstanding such holder, at the time of
taking the instrument, knew him to be only an
accommodation party.
An accommodation party is one who has signed
the instrument as maker, drawer, acceptor, or
indorser, without receiving value therefor, and
for the purpose of lending his name to some
other person.
PAGE 24
MERCANTILE LAW
LIABILITY OF AN
ACCOMMODATION PARTY
Section 28 of the NIL states that the holder for
value to whom the instrument thus executed
is subsequently negotiated has a right of
recourse against the accommodation party in
spite of the formers knowledge that no
consideration passed between the
accommodation and accommodated parties.
Does this mean that the accommodation
party is liable to a holder even if he is not a
holder in due course, provided he is a holder
for value? The Supreme Court has ruled that
an accommodation party is liable ONLY to a
HOLDER IN DUE COURSE. However, the
mere fact that the holder knew of the
accommodation does not prevent him from
being a holder in due course in order to
recover from the accommodation party.
[Stelco Marketing Corp. v. CA, 1992]
ACCOMMODATION PARTY AS
SURETY
An accommodation Party is generally
regarded as a surety for the party
accommodated
When the accomodation party makes
payment to holder of the note, he has the
right to sue the accommodated party for
reimbursement. [Agro Conglomerates, Inc. v.
CA, 2000]
Note: A corporation cannot act as an
accommodation party. The issue or
endorsement of negotiable instruments by a
corporation without consideration and for the
accommodation of another is ultra vires
[Crisologo v. CA, 1989]
Negotiation
Section 30, NIL. What constitutes negotiation. -
An instrument is negotiated when it is
transferred from one person to another in such
manner as to constitute the transferee the
holder thereof. If payable to bearer, it is
negotiated by delivery; if payable to order, it is
negotiated by the indorsement of the holder
and completed by delivery.
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

NEGOTIATION DISTINGUISHED Requisites

(1) Mechanical act of writing the instrument
FROM ASSIGNMENT completely and in accordance with the
Negotiation Assignment requirements of Section 1 of the NIL; and
(2) The delivery of the complete instrument by
The transfer of the The transferee does not the maker or drawer, with the intention of
instrument from one become a holder, nor giving effect to it, to the payee or holder.
person to another so as can he become a
to constitute the holder in due course; Presumption of delivery
transferee the holder and he merely steps (1) Where the instrument is no longer in the
thereof [Sec.30, NIL]. into the shoes of the possession of a party whose signature
transferor. As such, any appears thereon, a valid and intentional
defense available delivery by him is presumed until the
against the transferor contrary is proved [Sec. 16, NIL]
is available against the (2) If it is in the hands of a holder in due course,
transferee. the presumption of a valid delivery is
conclusive [Sec. 16, NIL]
Transfer is a broader term than negotiation. If
an instrument is transferred without Presumption as to date
negotiation, the transfer is a mere assignment (1) Date is not an essential element of
which constitutes the transferee as a mere negotiability; it is not included in the
assignee, not a holder, subject to all defenses requirements for an instrument to be
existing among prior parties. Transfer thus negotiable under Sec. 1 of the NIL.
includes both an ordinary assignment and a (2) An undated instrument is considered to be
negotiation [Campos]. dated as of the time it was issued [Sec. 17 (c),
NIL]
MODES OF NEGOTIATION
BY INDORSEMENT COMPLETED BY
BY DELIVERY IF PAYABLE TO DELIVERY IF PAYABLE TO ORDER
BEARER [SEC. 30] [SEC. 30]
Section 191, NIL. Definition and meaning of Section 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract terms. - In this Act, unless the contract
otherwise requires: otherwise requires:
x---x x---x
"Delivery" means transfer of possession, actual "Indorsement" means an indorsement
or constructive, from one person to another; completed by delivery;
x---x x---x
"Issue" means the first delivery of the
instrument, complete in form, to a person who INDORSEMENT; HOW DONE
takes it as a holder; Section 31, NIL. Indorsement; how made. - The
x---x indorsement must be written on the instrument
itself or upon a paper attached thereto. The
Delivery means transfer of possession of signature of the indorser, without additional
instrument by the maker or drawer, with words, is a sufficient indorsement.
intent to transfer title to the payee and
recognize him as holder thereof (1) Where placed The indorsement must be
Issuance is the FIRST delivery of the written [Sec. 31, NIL]:
instrument complete in form to a person who (a) On the instrument itself [Sec. 31, NIL], or
takes it as a holder. (b) On a separate piece of paper attached to
the instrument called allonge[Sec. 31,
NIL]

PAGE 25
UP LAW BOC NEGOTIABLE INSTRUMENTS
(2) Signature of the indorser, without additional
words, is a sufficient indorsement [Sec. 31,
NIL]
(3) Must be of the ENTIRE instrument
Section 32, NIL. Indorsement must be of entire
instrument. - The indorsement must be an
indorsement of the entire instrument. An
indorsement which purports to transfer to the
indorsee a part only of the amount payable, or
which purports to transfer the instrument to two
or more indorsees severally, does not operate as
a negotiation of the instrument. But where the
instrument has been paid in part, it may be
indorsed as to the residue.
(a) CANNOT indorse a part only of the amount
payable; BUT if the instrument has been
paid in part, then the instrument may be
indorsed as to the residue [Sec. 32] NIL
(b) CANNOT transfer the instrument to two or
more indorsees severally [Sec. 32, NIL]
(c) If not an indorsement of the entire
instrument, the transfer remains valid, but
as a mere assignment which subjects the
holder to all defenses on the instrument
[Campos]
(4) If name misspelled in indorsement,
indorsement will be prima facie deemed not
valid.
Section 43, NIL. Indorsement where name is
misspelled, and so forth. - Where the name of a
payee or indorsee is wrongly designated or
misspelled, he may indorse the instrument as
therein described adding, if he thinks fit, his
proper signature.
(a) The indorsement should be made by the
holder in the manner he was designated,
otherwise the signature will prima facie
not be a valid indorsement of the
instrument [Sec 43, NIL]
(5) Indorsement where there are joint payees
(a)Where the instrument is payable or
indorsed to A and B, they are joint
payees and an indorsement by either A or
B only will not constitute a valid
negotiation, UNLESS the one indorsing is
authorized by the other [Campos].
PAGE 26
MERCANTILE LAW
(b) But where the instrument is payable to A
or B, they payees are merely in the
alternative, and either one may valdily
negotiate the same [Campos].
KINDS OF INDORSEMENT
Section 33, NIL. Kinds of indorsement. - An
indorsement may be either special or in blank;
and it may also be either restrictive or qualified
or conditional.
There are four bases of classification of
indorsements under the NIL:
(1) Special or in blank
(2) Restrictive or Non-Restrictive
(3) Qualified or unqualified
(4) Conditional or unconditional
All of the four bases of classification coexist with
each other; thus, an indorsement may be
special and qualified at the same time. It may
also be special and unqualified, special and
restrictive, special, unrestrictive and unqualified
and so on [Campos].
AS TO MANNER OF FUTURE
METHOD OF NEGOTIATION
Section 34, NIL. Special indorsement;
indorsement in blank. - A special indorsement
specifies the person to whom, or to whose order,
the instrument is to be payable, and the
indorsement of such indorsee is necessary to
the further negotiation of the instrument. An
indorsement in blank specifies no indorsee, and
an instrument so indorsed is payable to bearer,
and may be negotiated by delivery.
Section 40, NIL. Indorsement of instrument
payable to bearer. - Where an instrument,
payable to bearer, is indorsed specially, it may
nevertheless be further negotiated by delivery;
but the person indorsing specially is liable as
indorser to only such holders as make title
through his indorsement.
Section 35, NIL. Blank indorsement; how
changed to special indorsement. - The holder
may convert a blank indorsement into a special
indorsement by writing over the signature of the
indorser in blank any contract consistent with
the character of the indorsement.
UP LAW BOC NEGOTIABLE INSTRUMENTS
(1) Special
(a) Specifies the person to whom/to whose
order the instrument is to be payable;
indorsement of such indorsee is necessary
to further negotiation.
(b) A special indorser is liable to all
subsequent holders, unless the
instrument is an originally bearer
instrument, in which case he is liable only
to those who take title through his
indorsement [Sec. 40, NIL].
(c) An instrument, payable to bearer, and
indorsed specially, may nevertheless be
further negotiated by delivery. [Sec 40,
NIL]
Originally bearer instrument always
remains a bearer instrument [Sundiang
and Aquino]
(2) Blank
(a) Specifies no indorsee, instrument so
indorsed is payable to bearer, and may be
negotiated by delivery
(b) The holder may convert a blank
indorsement into a special indorsement
by writing over the signature of the
indorser in blank any contract consistent
with the character of the indorsement.
[Sec 35, NIL]
(c) An order instrument may be converted
into a bearer instrument by means of a
blank indorsement, and may be later
reconverted into an order instrument by a
subsequent special indorsement
AS TO TITLE TRANSFERRED
Section 36, NIL. When indorsement restrictive. -
An indorsement is restrictive which either:
(a) Prohibits the further negotiation of the
instrument; or
(b) Constitutes the indorsee the agent of the
indorser; or
(c) Vests the title in the indorsee in trust for or to
the use of some other persons.
But the mere absence of words implying power
to negotiate does not make an indorsement
restrictive.
Section 37, NIL. Effect of restrictive indorsement;
rights of indorsee. - A restrictive indorsement
confers upon the indorsee the right:
(a) to receive payment of the instrument;
PAGE 27
MERCANTILE LAW
(b) to bring any action thereon that the indorser
could bring;
(c) to transfer his rights as such indorsee, where
the form of the indorsement authorizes him
to do so.
But all subsequent indorsees acquire only the
title of the first indorsee under the restrictive
indorsement.
(1) Restrictive Such indorsement either:
(a) Prohibits further negotiation of
instrument
(b) Constitutes indorsee as agent of indorser
(c) Vests title in indorsee in trust for another
[Sec 36, NIL]
RIGHTS OF RESTRICTIVE INDORSEE
(a) Receive payment
(b) Bring any action thereon that the indorser
could bring.
(c) Transfer his rights as such indorsee, but
all subsequent indorsees acquire only the
title of first indorsee under restrictive
indorsement. [Sec 37, NIL]
(2) Non-restrictive
AS TO KIND OF LIABILITY ASSUMED
BY INDORSER
Section 38, NIL. Qualified indorsement. - A
qualified indorsement constitutes the indorser a
mere assignor of the title to the instrument. It
may be made by adding to the indorser's
signature the words "without recourse" or any
words of similar import. Such an indorsement
does not impair the negotiable character of the
instrument.
(1) Qualified
(a) Constitutes indorser as mere assignor of
title
(b) Made by adding the words without
recourse [Sec. 38, NIL].
(c) But this does not mean that the
transferee only has the rights of an
assignee; transfer remains a negotiation
and transferee can still be a holder
capable of acquiring a title free from
defenses of prior parties.
(d) Effects:
UP LAW BOC NEGOTIABLE INSTRUMENTS
(i) Relieves the qualified indorser of his
liability to pay the instrument should
the maker be unable to pay
(ii) The qualified indorser does not
guarantee the solvency of the maker,
but merely his legal title to the
instrument
(iii)The instrument may still be further
negotiated; no effect on its
negotiability
(2) Non-qualified
AS TO PRESENCE/ABSENCE OF
EXPRESS LIMITATIONS
Section 39, NIL. Conditional indorsement. -
Where an indorsement is conditional, the party
required to pay the instrument may disregard
the condition and make payment to the
indorsee or his transferee whether the condition
has been fulfilled or not. But any person to
whom an instrument so indorsed is negotiated
will hold the same, or the proceeds thereof,
subject to the rights of the person indorsing
conditionally.
(1) Conditional
(a) Additional condition annexed to indorsers
liability; such condition must be expressed
(b) Where an indorsement is conditional, a
party required to pay the instrument may
disregard the condition, and make
payment to the indorsee or his transferee,
whether condition has been fulfilled or
not.
(c) But any person to whom an instrument so
indorsed is negotiated, will hold the same,
or the proceeds thereof, subject to the
rights of the person indorsing
conditionally. [Sec. 39, NIL]
(2) Unconditional
OTHER KINDS OF INDORSEMENT
(1) Absolute One by which the indorser binds
himself to pay, upon no other condition than
the failure of prior parties to do so, and of due
notice to him of such failure
(2) Joint Where instrument payable to the
order of two or more payees or indorsees not
partners, all must indorse, unless the one
indorsing has authority to endorse for the
others [Sec. 41, NIL]
PAGE 28
MERCANTILE LAW
(3) Irregular Where a person, not otherwise a
party to the instrument, places thereon his
signature in blank before delivery, he is liable
as indorser
Rights of the Holder
DEFINITION OF A HOLDER
Section 191, NIL. Definition and meaning of
terms. - In this Act, unless the contract
otherwise requires:
x---x
"Holder" means the payee or indorsee of a bill
or note who is in possession of it, or the bearer
thereof;
A holder is a payee or indorsee of a bill or note
who is in possession of it, or the bearer thereof
[Sec. 191, NIL). He has the following rights [Sec.
51, NIL]:
(1) To sue on the instrument in his own name
Unindorsed intruments: Section. 49, NIL.
Transfer without indorsement; effect of.
Where the holder of an instrument payable
to his order transfers it for value without
indorsing it, the transfer vests in the
transferee such title as the transferor had
therein, and the transferee acquires in
addition, the right to have the indorsement
of the transferor. But for the purpose of
determining whether the transferee is a
holder in due course, the negotiation takes
effect as of the time when the indorsement
is actually made.
Note: This section applies only to an
instrument payable to the order of the
transferor. This cannot apply to bearer
instruments.
Cancellation of indorsement: Section 48,
NIL. Striking out indorsement. The holder
may at any time strike out any indorsement
which is not necessary to his title. The
indorser whose indorsement is struck out,
and all indorsers subsequent to him, are
thereby relieved from liability on the
instrument.
Indorsement by agent: Section 20, NIL.
Liability of person signing as agent, and so
forth. Where the instrument contains or a
person adds to his signature words
UP LAW BOC NEGOTIABLE INSTRUMENTS
indicating that he signs for or on behalf of
a principal or in a representative capacity,
he is not liable on the instrument if he was
duly authorized; but the mere addition of
words describing him as an agent, or as
filling a representative character, without
disclosing his principal, does not exempt
him from personal liability.
(2) Payment in due course to the holder
discharges instrument
HOLDER IN DUE COURSE (HDC)
Section 52, NIL. What constitutes a holder in
due course. - A holder in due course is a holder
who has taken the instrument under the
following conditions:
(a) That it is complete and regular upon its
face;
(b) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he
had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
Section 58, NIL. When subject to original
defense. - In the hands of any holder other than
a holder in due course, a negotiable instrument
is subject to the same defenses as if it were non-
negotiable. But a holder who derives his title
through a holder in due course, and who is not
himself a party to any fraud or illegality
affecting the instrument, has all the rights of
such former holder in respect of all parties prior
to the latter.
Section 59, NIL. Who is deemed holder in due
course. - Every holder is deemed prima facie to
be a holder in due course; but when it is shown
that the title of any person who has negotiated
the instrument was defective, the burden is on
the holder to prove that he or some person
under whom he claims acquired the title as
holder in due course. But the last-mentioned
rule does not apply in favor of a party who
became bound on the instrument prior to the
acquisition of such defective title.
PAGE 29
MERCANTILE LAW
WHO ARE HDCS:
(1) Holder in due course (HDC) under Sec. 52,
NIL
(2) HDC under Sec. 58, NIL: A holder who
DERIVES title to the instrument through a
HDC has all the rights of the latter even
though he himself satisfies none of the
requirements of due course holding
HDC under Sec. 59, NIL (presumption): Every
holder is deemed prima facie to be a holder
in due course
Sec. 191 of the NIL defines holder as the payee
or indorsee of a bill or note, who is in possession
of it, or the bearer thereof. The word holder in
the first clause of Sec. 52 and in the second
subsection thereof may be replaced by the
definition in Sec. 191 so as to read a holder in
due course as a payee or an indorsee in
possession, etc. [De Ocampo v. Gatchalian, 1961]
THE SIGNIFICANCE OF DUE
COURSE HOLDING
A holder in due course can acquire a better
title than his predecessors because he takes
the instrument free from any defect of title of
prior parties. He is furthermore free from
defenses available to prior parties among
themselves [Campos].
A holder not in due course, on the other hand,
takes the instrument subject to all defenses
because he is treated as a transferee of a non-
negotiable paper. Real defenses, however,
which attach to the instrument itself would be
available even against a holder in due course
[Campos].
When is the question of whether a holder is a
holder in due course relevant. It should be kept
in mind that the question of whether a holder
is a holder in due course or not is signifant
only when there is an existing defense
between prior parties [Campos].
RIGHTS OF A HOLDER IN DUE
COURSE
Section 51, NIL. Right of holder to sue; payment. -
The holder of a negotiable instrument may to
sue thereon in his own name; and payment to
him in due course discharges the instrument.
UP LAW BOC NEGOTIABLE INSTRUMENTS
Section 57, NIL. Rights of holder in due course. -
A holder in due course holds the instrument free
from any defect of title of prior parties, and free
from defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount thereof against
all parties liable thereon.
Section 58, NIL. When subject to original defense.
- In the hands of any holder other than a holder
in due course, a negotiable instrument is subject
to the same defenses as if it were non-
negotiable. But a holder who derives his title
through a holder in due course, and who is not
himself a party to any fraud or illegality
affecting the instrument, has all the rights of
such former holder in respect of all parties prior
to the latter.
(1) To sue on the instrument in his own name
[Sec. 51, NIL]
(2) To receive payment on the instrument [Sec.
51, NIL]
(3) Holds instrument free of any defect of title of
prior parties [Sec. 57, NIL]
(4) Free from defenses available to prior parties
among themselves [Sec. 57, NIL]
(5) May enforce payment of instrument for full
amount, against all parties liable [Sec. 57,
NIL]
REQUISITES OF A HOLDER IN
DUE COURSE [SEC. 52, NIL]
Sec. 52, NIL. What constitutes a holder in due
course. A holder in due course is a holder who
has taken the instrument under the following
conditions:
(a) That it is complete and regular upon its face;
(b) That he became the holder of it before it was
overdue, and without notice that it has been
previously dishonored, if such was the fact;
(c) That he took it in good faith and for value;
(d) That at the time it was negotiated to him, he
had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
That the instrument is complete and regular
upon its face
(1) It is incomplete when it is wanting in any
material particular or particular proper to be
PAGE 30
MERCANTILE LAW
inserted in a negotiable instrument without
which the same will not be complete.
MATERIAL PARTICULARS
Section 125, NIL. What constitutes a material
alteration. - Any alteration which changes:
(a) Date
(b) Sum payable, either for principal or interest
(c) Time or place of payment
(d) Number or relations of the parties
(e) Medium or currency in which payment is to
be made
(f) Or which adds a place of payment where no
place of payment is specified
(g) Or any other change or addition which alters
the effect of the instrument in any respect
The items enumerated under Sec. 125 of the NIL
are material particulars.
(2) That he became the holder of it before it was
overdue and without notice that it had been
previously dishonored, if such was the fact
Section 53, NIL. When person not deemed holder
in due course. - Where an instrument payable on
demand is negotiated on an unreasonable
length of time after its issue, the holder is not
deemed a holder in due course.
OVERDUE THE FOLLOWING CANNOT BE
HDCS:
(a) A holder who became such after the date of
maturity of the instrument [instrument is
overdue; Sec. 53, NIL];
(b) In case of demand instruments: a holder who
negotiates it after an unreasonable length of
time after its issue [Sec. 53, NIL]
(c) Instruments with fixed maturity but subject
to acceleration: ultimate date of maturity is
the date of maturity for the purpose of
determining whether a purchaser is a HDC
(d) Undated instruments: Prima facie
presumption that it was negotiated before it
was overdue [Sec. 45, NIL]
Notes:
(1) An overdue instrument is still negotiable, but
it is subject to the defenses (real and
personal) existing at the time of the transfer.
(2) As to what constitutes a reasonable time,
regard is to be had to the nature of the
UP LAW BOC NEGOTIABLE INSTRUMENTS
instrument, the usage of trade or business
with respect to such instrument, and the
facts of the particular case. (Sec. 193, NIL)
(3) An instrument is not invalid for the reason
only that it is ANTE-DATED OR POSTDATED
provided it is not done for an illegal or
fraudulent purpose. The person to whom an
instrument so dated is delivered acquires the
title thereto as of the date of delivery (Sec. 12,
NIL).
THAT HE TOOK IT IN GOOD FAITH AND FOR
VALUE
Value
(1) Any consideration sufficient to support a
simple contract [Sec. 25, NIL].
(2) An antecedent or pre-existing debt
constitutes value, whether the instrument is
payable on demand or at a future time [Sec.
25, NIL]
Holder for value
(1) Where value has at any time been given for
the instrument, the holder is deemed a
holder for value in respect to all parties who
become such prior to that time [Sec. 26, NIL];
and
(2) Where the holder has a lien on the
instrument, he is deemed a HFV to the extent
of his lien [Sec .27, NIL].
(3) The holder is a holder for value only to the
extent that the consideration agreed upon
has been paid, delivered, or performed.
[Sundiang and Aquino]
Presumption:
Every negotiable instrument is deemed prima
facie issued for valuable consideration; and
every person whose signature appears
thereon is deemed to have become a party
thereto for value [Sec. 24, NIL].
Such presumption cannot be overcome by the
petitioners bare denial of receipt of the
consideration. [Bayani vs. People, 2004]
Good faith
Holder must have taken the instrument in good
faith and that at the time it was negotiated to
him he had no notice of any infirmity in the
instrument or defect in the title of the person
negotiating it.
PAGE 31
MERCANTILE LAW
Actual knowledge
What constitutes notice of defect. To constitute
notice of an infirmity in the instrument or defect
in the title of the person negotiating the same,
the person to whom it is negotiated must have
had actual knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking
the instrument amounted to bad faith. [Sec. 56,
NIL]
That at the time it was negotiated to him he had
no NOTICE of any infirmity in the instrument or
defect in the title of the person negotiating it
Section 55, NIL. When title defective. - The title of
a person who negotiates an instrument is
defective within the meaning of this Act when
he obtained the instrument, or any signature
thereto, by fraud, duress, or force and fear, or
other unlawful means, or for an illegal
consideration, or when he negotiates it in
breach of faith, or under such circumstances as
amount to a fraud.
Section 56, NIL. What constitutes notice of
defect. - To constitutes notice of an infirmity in
the instrument or defect in the title of the
person negotiating the same, the person to
whom it is negotiated must have had actual
knowledge of the infirmity or defect, or
knowledge of such facts that his action in taking
the instrument amounted to bad faith.
WHAT CONSTITUTES NOTICE OF DEFECT
OR BAD FAITH
Under Section 56, in order to constitute notice,
the holder must:
(a) have ACTUAL and not merely
constructive knowledge of the defect; OR
(b) have acted in bad faith [Campos]
Gross negligence IN ITSELF would not
constitute notice since it is not the equivalent of
actual knowledge nor of bad faith [Campos].
The question of good faith or bad faith is a
question of fact which must be determined in
accordance with the particular circumstances of
each case [Campos].
UP LAW BOC NEGOTIABLE INSTRUMENTS
Suspicious circumstances
General rule: A purchaser of an instrument is
not required to investigate every suspicious
circumstance; failure to investigate such
circumstances does not constitute him as being
in bad faith or having a notice of defect
[Campos].
Rationale: The general principle that a
purchaser who has knowledge of certain facts is
put on inquiry does not operate to its full extent
in the law of negotiable instruments.
Negotiable instruments are usually issued in
pursuance of commercial transactions where
time is of the essence. To require investigation
of every suspicious circumstance would hamper
their function of facilitating exchange; thus
negligence in tracking down a suspicious
circumstance which would put a prudent man
on inquiry is not of itself sufficient to prevent
recovery [Campos].
Exceptions:
(a) Suspicious circumstances TOGETHER WITH
other circumstances, may be admitted as
evidence of bad faith.
(b) Where the suspicious circumstances are so
cogent and obvious
A check with 2 parallel lines in the upper left
hand corner means that it could only be
deposited and may not be converted to cash.
Consequently, such circumstance should put
the payee on inquiry and upon him devolves
the duty to ascertain the holders title to the
check or the nature of his possession. Failing
in this respect, the payee is declared guilty of
gross negligence amounting to legal absence
of good faith and as such the consensus of
authority is to the effect that the holder of the
check is not a holder in good faith. [State
Investment House vs. IAC, 1989]
Defective title
Title is NOT defective when at the time it was
negotiated to him, he had NO notice of:
(1) any infirmity in instrument
(2) any defect in title of person negotiating
Title is DEFECTIVE when [Sec. 55, NIL]
(1) instrument/signature obtained by fraud,
duress, force or fear or other unlawful means
OR for an illegal consideration; or
PAGE 32
MERCANTILE LAW
(2) instrument is negotiated in breach of faith, or
fraudulent circumstances
NOTICE of infirmity or defect actual
knowledge of the infirmity or defect OR
knowledge of such facts that his action in taking
the instrument amounted to bad faith [Sec.56,
NIL]
RIGHT of a transferee who receives NOTICE of
any infirmity or defect BEFORE he has PAID
THE FULL amount for the instrument. He will be
deemed a HDC only to the extent of the amount
therefore paid by him [Sec.54, NIL]
DEFENSES AGAINST THE
HOLDER
PRESUMPTION IN FAVOR OF DUE
COURSE HOLDING
Every holder is deemed prima facie to be a
holder in due course [Sec. 59, NIL].
(1) BURDEN SHIFTS when it is shown that the
title of any person who has negotiated the
instrument was defective. Holder MUST then
PROVE that he or some person under whom
he claims acquired the title as a holder in
due course.
(2) But the last mentioned rule does not apply in
favor of a party who became bound on the
instrument prior to the acquisition of such
defective title. [Sec. 59, NIL]
HOLDER NOT IN DUE COURSE
(1) One who became a holder of an instrument
without any, some or all of the requisites under
Sec. 52 of the NIL
(2) With respect to demand instruments, if it is
negotiated an unreasonable length of time
after its issue, the holder is deemed not a
holder in due course. [Sec. 53, NIL]
(3) Rights of a holder not in due course [Sec. 51,
NIL]:
(a) To sue on the instrument under in his own
name
(b) To enforce the instrument
The only disadvantage of a holder who is not a
holder in due course is that the negotiable
instrument is subject to defenses as if it were
non-negotiable. [Chan Wan vs. Tan Kim (1960)]
UP LAW BOC NEGOTIABLE INSTRUMENTS
Liabilities of Parties
Primary liability: The unconditional promise
attaches the moment the maker makes the
instrument while the acceptors assent to the
unconditional order attaches the moment he
accepts the instrument. No further act is
necessary in order for the liability to accrue.
Presentment for payment is all that is
necessary.
PARTIES PRIMARILY LIABLE
[SEC. 60 AND 62]
Persons who by the terms of the instrument are
absolutely required to pay the same
MAKER [SEC. 60]
Promises to pay according to the tenor of the
instrument (promissory note)
ACCEPTOR [SEC. 62]
Upon acceptance of the bill of exchange,
engages to pay the bill according to the tenor
of the acceptance.
Unconditionally liable; he is duty-bound to
pay the holder at date of maturity, WON
holder demands payment from him, and he is
not relieved from liability even if the
instrument should become overdue due to
failure of holder to make such demand.
Note: Until he accepts the bill of exchange, the
drawee assumes no liability to pay the
instrument.
PARTIES SECONDARILY LIABLE
Secondary liability: A party secondarily liable is
not bound to pay unless the following have
been fulfilled:
(1) Due presentment or demand to the primary
party
(2) Dishonor by such party
(3) Notice of dishonor to secondary party, and, in
cases of foreign bills of exchange, protest of
the bill
DRAWER [SEC. 61]
(1) Engages that the instrument will be
accepted or paid, or both, according to its
tenor on due presentment;
PAGE 33
MERCANTILE LAW
(2) Engages that he will pay the amount of the
instrument to the holder or to any
subsequent indorser who may be compelled
to pay the same if the instrument be
dishonored upon due presentment and
proceedings on dishonor be taken,
Limiting liability: Drawer may insert in the
instrument an express stipulation
negativing/limiting his own liability to the
holder.
INDORSERS
The following indorsers assume the liability to
pay the instrument:
(1) General or Unqualified Indorser; and
(2) Irregular Indorser
GENERAL OR UNQUALIFIED INDORSER
[SEC. 66]
Engages that he will pay the amount of the
instrument to the holder or to any subsequent
indorser who may be compelled to pay the
same if the instrument be dishonored upon due
presentment and proceedings on dishonor be
taken.
Who is a General or Unqualified Indorser? Every
person who indorses WITHOUT qualification
[Sec. 66]
A person placing his signature upon an
instrument other than as a maker, drawer, or
acceptor unless he indicates by appropriate
words his intention to be bound in some other
capacity [Sec. 63].
A person, who places his signature on an
instrument negotiable by delivery, incurs all the
liabilities of an indorser [Sec. 67].
Note: A qualified indorser does not assume the
liability to pay the instrument since he is merely
an assignor of the title to the instrument.
However, he becomes liable once he breaches a
warranty.
Who is a qualified indorser? One who is
constituted as a mere assignor of the title to the
instrument by adding to his signature the words
"without recourse" or any words of similar
import.
UP LAW BOC NEGOTIABLE INSTRUMENTS
IRREGULAR INDORSER
When a person not otherwise a party to an
instrument, places thereon his signature in
blank before delivery, he is liable as an indorser,
in accordance with these rules:
(1) Instrument payable to order of 3rd person:
liable to payee and to all subsequent parties
(2) Instrument payable to the order of
maker/drawer, or payable to bearer: liable to
all parties subsequent to maker/drawer
(3) Signs for accommodation of payee: liable to
all parties subsequent to payee [Sec. 64]
ORDER OF LIABILITY AMONG INDORSERS
[SEC. 68]
(1) Among themselves: liable prima facie in the
order they indorse, but proof of another
agreement admissible
(2) As to the Holder: Holder may sue any of the
indorsers, regardless of order of indorsement
(3) Joint payees/indorsees deemed to indorse
solidarily
Warranties
The primary or secondary liability of the parties
should be distinguished from their warranties.
(1) Primary or secondary liability of the parties
makes them liable to pay the sum certain in
money stated in the instrument.
(2) Warranties are affirmations of the fact on the
part of the parties that impose no direct
obligation to pay in the absence of breach
thereof. [Aquino]
In case of breach of warranties, the person
who breached the same may either be liable
or he may be barred from asserting a
particular defense.
MAKERS WARRANTIES
(1) The maker admits the existence of the payee
AND
(2) His then capacity to indorse [Sec. 60]
DRAWERS WARRANTIES
(1) The drawer admits the existence of the payee
AND
(2) His then capacity to endorse
ACCEPTORS WARRANTIES
(1) As to the drawer, the acceptor admits:
PAGE 34
MERCANTILE LAW
(a) His existence
(b) Genuineness of his signature
(c) Capacity and authority to draw the
instrument
(2) As to the payee, the acceptor admits:
(a) His existence
(b) His then capacity to indorse [Sec. 62]
The acceptor is precluded from setting up
certain defenses by reason of his warranties like
the defense that the drawer is a minor or the
signature of the drawer is forged. [Aquino]
GENERAL INDORSERS
WARRANTIES
(1) That the instrument is genuine in and in all
respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to contract
(4) That the instrument is, at the time of his
indorsement, valid and subsisting [Sec. 66]
These warranties are in favor of all subsequent
holders in due course. [Ang Tiong v. Ting, 1968]
QUALIFIED INDORSERS
WARRANTIES
(1) That the instrument is genuine in and in all
respects what it purports to be
(2) That he has a good title to it
(3) That all prior parties had capacity to contract
(4) That he has no knowledge of any fact which
would impair the validity of the instrument or
render it valueless. [Sec. 68]
Presentment for Payment
PRESENTMENT MEANS
(1) The production of a Bill of Exchange to the
drawer or acceptor for payment; or
(2) The production of a Promissory Note to the
party liable for payment.
DATE AND TIME OF
PRESENTMENT
(1) Bearing fixed maturity/not payable on
demand on the day it falls due if day of
maturity falls on Sunday or a holiday, the
instruments falling due or becoming payable
on Saturday are to be presented for payment
UP LAW BOC NEGOTIABLE INSTRUMENTS
on the next succeeding business day [Sec.
85]
(2) Payable on demand within a reasonable
time after its issue, iv at the option of the
holder, may be presented for payment before
twelve o'clock noon on Saturday when that
entire day is not a holiday [Sec. 85]
(3) Demand bill of exchange within a
reasonable time after the last negotiation.
[Sec. 71]
Note: Although presentment was made within a
reasonable time from last negotiation, it may
have been made within an unreasonable time
from issuance. Thus holder may still not be a
holder in due course under Sec. 71.
NECESSITY OF PRESENTMENT
FOR PAYMENT
When necessary: In order to charge the drawer
and indorsers [Sec. 70]
When NOT necessary:
(1) To charge the person primarily liable on the
instrument [Sec. 70]
(2) To charge the drawer where he has no right
to expect or require that the drawee or
acceptor will pay the instrument. [Sec. 79]
(3) To charge an indorser where the instrument
was made or accepted for
accommodation and he has no reason to
expect that the instrument will be paid if
presented. [Sec. 80]
(4) When the bill of exchange has previously
been dishonored by non-acceptance and has
not been subsequently accepted
PARTIES TO WHOM
PRESENTMENT FOR PAYMENT
SHOULD BE MADE
General rule: Presentment for payment must be
made to the person primarily liable on the
instrument or if he is absent or inaccessible, to
any person found at the place where the
presentment is made.
Exceptions: Where the person primarily liable
is/are:
(1) Dead presentment for payment must be
made to his personal representative
MERCANTILE LAW
(2) Partners presentment for payment may be
made to any one of them, even though there
has been a dissolution of the firm
(3) Several persons, not partners (joint debtors)
presentment for payment must be made to
them all
DISPENSATION WITH
PRESENTMENT FOR PAYMENT
When Excused:
(1) Where, after the exercise of reasonable
diligence, presentment cannot be made;
(2) Where the drawee is a fictitious person;
(3) By waiver of presentment, express or implied.
[Sec. 82]
DISHONOR BY NON-PAYMENT
The instrument is dishonored by non-payment
when:
(1) It is duly presented for payment and
payment is refused or cannot be obtained; or
(2) Presentment is excused and the instrument
is overdue and unpaid [Sec. 83].
In case of waiver of protest, whether in the case
of a foreign bill of exchange or other NI
deemed to be a waiver not only of a formal
protest but also of presentment and notice of
dishonor [Sec. 111]
his
Notice of Dishonor
Notice given by holder or his agent to party or
parties secondarily liable that the instrument
was dishonored by:
(1) Non-acceptance by the drawee of a bill; or
(2) Non-payment by the acceptor of a bill; or
(3) Non-payment by the maker of a note [Sec.
89]
Requisites:
(1) Given by holder or his agent, or by any party
who may be compelled by the holder to pay
[Sec. 90]
(2) Given to secondary party or his agent [Sec.
97]
(3) Given within the periods provided by law
[Sec. 102]
(4) Given at the proper place [Secs. 103 and 104]
PAGE 35
UP LAW BOC NEGOTIABLE INSTRUMENTS
PARTIES TO BE NOTIFIED
(1) Non-acceptance (bill) to persons
secondarily liable, namely, the drawer and
indorsers as the case may be
(2) Non-payment (both bill and note) to
indorsers
Note: Notice must be given to persons
secondarily liable. Otherwise, such parties are
discharged. Notice may be given to the party
himself or to his agent.
WHEN GIVEN
Notice may be given as soon as the instrument
is dishonored [Sec. 102]
WHEN NOT NECESSARY TO GIVE
TO DRAWER
Notice of dishonor is not required to be given to
the drawer in any of the following cases:
(1) Drawer and drawee are the same;
(2) Drawee is a fictitious person or not having
the capacity to contract;
(3) Drawer is the person to whom the
instrument is presented for payment;
(4) The drawer has no right to expect or require
that the drawee or acceptor swill honor the
instrument;
(5) Where the drawer has countermanded
payment [Sec. 114]
WHEN NOT NECESSARY TO GIVE
TO INDORSER
Notice of dishonor is not required to be given to
an indorser in the following cases:
(1) Drawee is a fictitious person or does not have
the capacity to contract, and indorser was
aware of that fact at the time he indorsed the
instrument;
(2) Indorser is the person to whom the
instrument is presented for payment;
(3) Instrument was made or accepted for his
accommodation. (Sec. 115)
WHO WILL BENEFIT
If given by or on behalf of the holder [Sec. 92]:
(1) All subsequent holders
(2) All prior parties (as to holder) who have a
right of recourse against the party to whom it
is given.
PAGE 36
MERCANTILE LAW
If given by the indorser [Sec. 93]:
(1) Holder
(2) All parties subsequent to the party to whom
notice is given.
PARTIES WHO MAY GIVE NOTICE
OF DISHONOR
The notice may be given by or on behalf of the
holder, or by or on behalf of any party to the
instrument who might be compelled to pay it to
the holder, and who, upon taking it up, would
have a right to reimbursement from the party to
whom the notice is given. [Sec. 90]
WHO SHOULD GIVE [SEC. 90]
(1) Holder
(2) Agent or representative of holder.
(3) Any party who may be compelled to pay like
indorsers.
(4) Agent of any party who may be compelled.
EFFECT OF NOTICE
Notice of dishonor is required to charge
parties secondarily liable.
Upon valid notice of dishonor, immediate
right of recourse against the indorser arises. It
is as if the indorser becomes primarily liable in
the sense that the holder need not claim
payment from the person primarily liable
[Sundiang and Aquino].
FORM OF NOTICE [SEC. 96]
The notice may be:
(1) In writing; or
(2) Merely oral
The notice may be given in any terms which:
(1) Sufficiently identify the instrument; and
(2) Indicate that it has been dishonored by
non-acceptance or non-payment
It may in all cases be given by delivering it
personally or through the mails
WAIVER
Notice of dishonor may be waived either before
the time of giving notice has arrived or after
the omission to give due notice, and the
waiver may be expressed or implied. [Sec. 109]
Where the waiver is embodied in the
instrument itself, it is binding upon all parties;
UP LAW BOC NEGOTIABLE INSTRUMENTS
but, where it is written above the signature of
an indorser, it binds him only. [Sec. 110]
DISPENSATION WITH NOTICE
(1) When party to be notified knows about the
dishonor, actually or constructively [Secs. 114-
117]
(2) If waived [Sec. 109]
(3) When after due diligence, it cannot be given
[Sec. 112].
EFFECT OF FAILURE TO GIVE
NOTICE
Failure to give notice to parties secondarily
liable discharges such parties
An omission to give notice of dishonor by non-
acceptance does not prejudice the rights of a
holder in due course subsequent to the
omission [Sec. 117]
Discharge of
Negotiable Instrument
Discharge: The release of all parties, whether
primary or secondary, from the obligation on the
instrument. It renders the instrument without
force and effect and, consequently, non-
negotiable [De Leon]
DISCHARGE OF NEGOTIABLE
INSTRUMENT
A negotiable instrument is discharged:
(1) By payment in due course by or on behalf of
the principal debtor;
(2) By payment in due course by the party
accommodated, where the instrument is
made or accepted for his accommodation;
(3) By the intentional cancellation thereof by the
holder;
(4) By any other act which will discharge a
simple contract for the payment of money;
(5) When the principal debtor becomes the
holder of the instrument at or after maturity
in his own right. [Sec. 119]
PAGE 37
MERCANTILE LAW
BY PAYMENT IN DUE COURSE
(ASKED IN 2000)
Payment is made in due course when it is made
at or after the maturity of the payment to the
holder thereof in good faith and without notice
that his title is defective. [Sec. 88]
Requisites:
(1) Payment must be made at or after maturity.
(2) Payment must be made to the holder.
(3) Payment must be made in good faith and
without notice that holders title is defective.
If payment is made before maturity and the
note is negotiated to a HDC, the latter may
recover on the instrument.
Payment to one of several payees or indorsees
in the alternative discharges the instrument,
but payment to one of several joint payees or
joint indorsers is not a discharge. The party
receiving payment must have been authorized
by others to receive payment.
BY WHOM MADE:
(1) payment in due course by or on behalf of
principal debtor
(2) payment in due course by party
accommodated where party is made/
accepted for accommodation
BY INTENTIONAL
CANCELLATION
A cancellation made unintentionally or under
a mistake or without the authority of the
holder, is inoperative.
But where an instrument or any signature
thereon appears to have been cancelled, the
burden of proof lies on the party who alleges
that the cancellation was made
unintentionally or under a mistake or without
authority. [Sec. 123]
BY OTHER ACTS THAT
DISCHARGE A SIMPLE
CONTRACT
FOR PAYMENT OF MONEY
Any other act which discharges a simple
contract for payment of money [Art. 1231 of the
Civil Code], ex. issuance of a renewal note
(novation).
UP LAW BOC NEGOTIABLE INSTRUMENTS
BY REACQUISITION OF
PRINCIPAL DEBTOR IN HIS OWN
RIGHT
Principal debtor becomes holder of instrument
at or after maturity in his own right
BY MATERIAL ALTERATION
Material alteration without assent of all parties
liable avoids instrument except as against party
to alteration and subsequent indorsers [Sec.
124]
DISCHARGE OF PARTIES
SECONDARILY LIABLE
GROUNDS UNDER SEC. 120
A person secondarily liable on the instrument is
discharged:
(1) By any act which discharges the instrument;
(2) By the intentional cancellation of his
signature by the holder;
(3) By the discharge of a prior party;
(4) By a valid tender or payment made by a prior
party;
(5) By a release of the principal debtor unless
the holder's right of recourse against the
party secondarily liable is expressly reserved;
(6) By any agreement binding upon the holder
to extend the time of payment or to
postpone the holder's right to enforce the
instrument unless made with the assent of
the party secondarily liable or unless the
right of recourse against such party is
expressly reserved. [Sec. 120]
OTHER GROUNDS
(1) Failure to make due presentment [Secs. 70,
144]
(2) Failure to give notice of dishonor
(3) Certification of check at instance of holder
(4) Reacquisition by prior party
(5) Where instrument negotiated back to a prior
party, such party may reissue and further
negotiate, but not entitled to enforce
payment against any intervening party to
whom he was personally liable
(6) Where instrument is paid by party
secondarily liable, it is not discharged, but
(a) the party so paying it is remitted to his
former rights as regard to all prior parties
PAGE 38
MERCANTILE LAW
(b) and he may strike out his own and all
subsequent indorsements, and again
negotiate instrument, except: where it is
payable to order of 3rd party and has been
paid by drawer or where its
made/accepted for accommodation and
has been paid by party accommodated
(7) By taking a qualified acceptance
RIGHT OF PARTY WHO
DISCHARGED INSTRUMENT
Where the instrument is paid by a party
secondarily liable thereon, it is not discharged;
but the party so paying it is remitted to his
former rights as regards to all prior parties, and
he may strike out his own and all subsequent
indorsements, and again negotiate the
instrument, except:
(1) Where it is payable to the order of a third
person, and has been paid by the drawer;
(2) Where it was made or accepted for
accommodation, and has been paid by the
party accommodated. [Sec. 121]
RENUNCIATION BY HOLDER
[SEC. 122]
The holder may expressly renounce his rights
against any party to the instrument before, at,
or after its maturity. An absolute and
unconditional renunciation of his rights
against the principal debtor made at or after
the maturity of the instrument discharges the
instrument.
Renunciation must be in writing unless the
instrument is delivered up to the person
primarily liable thereon
Renunciation does not affect the rights of an
HDC without notice
Material Alteration
CONCEPT
Any change in the instrument which affects or
changes the liability of the parties in any way.
Any alteration which changes the date, sum
payable, time or place of payment, number of
relation of the parties, or medium of currency
of payment where none is specified or which
alters the effect of the instrument in any
UP LAW BOC NEGOTIABLE INSTRUMENTS
respect [PNB v. CA, GR No. L-26001, Oct. 21,
1968]
An alteration is said to be material if it alters
the effect of the instrument. In other words, a
material alteration is one which changes the
items which are required to be stated under
Sec. 1 of the NIL [ibid.]
CHANGES IN THE FOLLOWING
CONSTITUTE MATERIAL
ALTERATIONS [SEC. 125]
(1) Date
(2) Sum payable, either for principal or interest
(3) Time or place of payment
(4) Number or relations of the parties
(5) Medium or currency in which payment is to
be made
(6) That which adds a place of payment where
no place of payment is specified
(7) Any other change or addition which alters
the effect of the instrument in any respect.
EFFECT OF MATERIAL
ALTERATION
(1) Alteration by a party Avoids the instrument
except as against the party who made,
authorized, or assented to the alteration and
subsequent indorsers. However, if an altered
instrument is negotiated to a HDC, he may
enforce payment thereof according to its
original tenor regardless of whether the
alteration was innocent or fraudulent.
(2) Alteration by a stranger (spoliation) the
effect is the same as where the alteration
was made by a party wherein a HDC can
recover on the original tenor of the
instrument [Sec. 124].
Acceptance
DEFINITION
The signification by the drawee of his assent to
the order of the drawer [Sec. 132]
REQUISITES [SEC. 132]:
(1) Must be in writing
(2) Signed by the drawee
PAGE 39
MERCANTILE LAW
(3) Must not express that the drawee will
perform his promise by and other means
than the payment of money
KINDS OF ACCEPTANCE
(1) General assents without qualification to the
order of the drawer
(2) Qualified which in express terms varies the
effect of the bill as drawn:
(a) Conditional makes payment by the
acceptor dependent on the fulfillment of
a condition therein stated
(b) Partial an acceptance to pay part only of
the amount for which the bill is drawn.
(c) Local an acceptance to pay only at a
particular place.
(d) Qualified as to time
(e) The acceptance of some one or more of
the drawees but not of all. [Sec. 141]
PROOF OF ACCEPTANCE
[SUNDIANG AND AQUINO]
The written acceptance may be in the
instrument itself or in a separate instrument.
However, under Sec. 133, the holder of a bill
presenting the same for acceptance may require
the acceptance be written on the bill, and, if
such request is refused, may treat the bill as
dishonored
Effects: When an acceptance is written on a
paper than the bill itself, it does not bind the
acceptor except in favor of a person to whom it
is shown and who, on the faith thereof, receives
the bill for value.
MANNER
EXPRESS ACCEPTANCE
Must be in writing and signed by the drawee
and must not express that the drawee will
perform his promise by any other means than
the payment of money. [Sec. 132] If request for a
written acceptance is refused, the holder may
treat the bill as dishonored [Sec. 133]
IMPLIED ACCEPTANCE
(1) If the drawee refuses to return the instrument
within 24 hours after it was delivered for
acceptance.
(2) If the drawee destroys the same.
UP LAW BOC NEGOTIABLE INSTRUMENTS
(3) If the drawee makes an unconditional promise
in writing before the instrument is drawn, with
respect to every person who, upon the faith
thereof, receives the bill for value.
TIME FOR ACCEPTANCE [SEC. 136]
The drawee is allowed twenty-four hours after
presentment in which to decide whether or
not he will accept the bill.
The acceptance, if given, dates as of the day of
presentation.
RULES GOVERNING
ACCEPTANCE
Q: What is the implication of payment without
acceptance by a drawee?
A: Act No. 2031, or the Negotiable Instruments
Law (NIL), explicitly provides that the
acceptor, by accepting the instrument,
engages that he will pay it according to the
tenor of his acceptance. This provision applies
with equal force in case the drawee pays a bill
without having previously accepted it. His
actual payment of the amount in the check
implies not only his assent to the order of the
drawer and a recognition of his
corresponding obligation to pay the
aforementioned sum, but also, his clear
compliance with that obligation. Actual
payment by the drawee is greater than his
acceptance, which is merely a promise in
writing to pay. The payment of a check
includes its acceptance. [FEBTC vs. Gold
Palace Jewellery Co,, Nachura, 2008]
RIGHT TO UNQUALIFIED
ACCEPTANCE
The holder may refuse to take a qualified
acceptance and if he does not obtain an
unqualified acceptance, he may treat the bill
as dishonored by non-acceptance.
Where a qualified acceptance is taken, the
drawers and indorsers are discharged from
liability on the bill unless they have expressly
or impliedly authorized the holder to take a
qualified acceptance, or subsequently assent
thereto.
When the drawer or indorser receives notice of
a qualified acceptance, he must, within a
reasonable time, express his dissent to the
PAGE 40
MERCANTILE LAW
holder or he will be deemed to have assented
thereto.
However, acceptance is presumed to be
unqualified or absolute. [Sundiang and
Aquino]
Presentment for
Acceptance
Requisites:
(1) By the holder, or by some person authorized
to receive payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At a proper place as herein defined;
(4) To the person primarily liable on the
instrument, or if he is absent or inaccessible,
to any person found at the place where the
presentment is made.
General rule: Presentment for acceptance is not
necessary in order to render any party to the bill
liable. [Sec. 143, last par.]
WHEN PRESENTMENT FOR
ACCEPTANCE NECESSARY
Presentment for acceptance must be made:
(1) Where the bill is payable after sight, or in any
other case, where presentment for
acceptance is necessary in order to fix the
maturity of the instrument; or
(2) Where the bill expressly stipulates that it shall
be presented for acceptance; or
(3) Where the bill is drawn payable elsewhere
than at the residence or place of business of
the drawee. [Sec. 143]
Note: It is not necessary to present a check for
acceptance because it is not one of those
required under Sec. 143.
WHEN PRESENTMENT FOR
ACCEPTANCE EXCUSED
Presentment for acceptance is excused and a
bill may be treated as dishonored by non-
acceptance in either of the following cases:
(1) Where the drawee is dead, or has absconded,
or is a fictitious person or a person not having
capacity to contract by bill.
UP LAW BOC NEGOTIABLE INSTRUMENTS
(2) Where, after the exercise of reasonable
diligence, presentment cannot be made.
(3) Where, although presentment has been
irregular, acceptance has been refused on
some other ground. [Sec. 148]
TIME/PLACE/MANNER OF
PRESENTMENT
WHEN MADE
A bill may be presented for acceptance on any
day on which negotiable instruments may be
presented for payment under the provisions of
Sections 72 and 85 of this Act. When Saturday is
not otherwise a holiday, presentment for
acceptance may be made before twelve o'clock
noon on that day. [Sec. 146]
WHAT CONSTITUTES
SUFFICIENT PRESENTMENT?
Presentment for payment, to be sufficient, must
be made:
(1) By the holder, or by some person authorized
to receive payment on his behalf;
(2) At a reasonable hour on a business day;
(3) At the proper place as herein defined [see
Sec. 73];
(4) To the person primarily liable on the
instrument or if he is absent or inaccessible,
to any person found at the place where the
presentment is made. [Sec. 72]
Time of maturity: Every negotiable instrument is
payable at the time fixed therein without grace.
When they day of maturity falls upon Sunday, or
a holiday, the instrument is payable on the next
succeeding business day. Instruments falling
due or becoming payable on Saturday are to be
presented for payment on the next succeeding
business day, except that instrument payable on
demand may, at the option of the holder be
presented for payment before twelve oclock
noon on Saturday when that entire day is not a
holiday. [Sec. 85]
HOW MADE [SEC. 145]
In general:
(1) By or on behalf of the holder
(2) At a reasonable hour
(3) On a business day
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MERCANTILE LAW
(4) Before the bill is overdue
(5) To the drawee or his agent
Where a bill is addressed to 2 or more drawees
who are not partners presentment must be
made to them all XPT. One has authority to
accept/refuse for all
Where the drawee is dead presentment may
be made to his personal representative
Where the drawee has been adjudged a
bankrupt or insolvent or has made an
assignment for the benefit of creditors
presentment may be made to him or to his
trustee or assignee.
EFFECT OF FAILURE TO MAKE
PRESENTMENT [SEC. 144]
Failure to make presentment discharges the
drawer and all indorsers [Sec. 144].
DISHONOR BY NON-
ACCEPTANCE
When dishonored by non-acceptance: A bill is
dishonored by non-acceptance:
(1) When it is duly presented for acceptance and
such an acceptance as is prescribed by this
Act is refused or cannot be obtained; or
(2) When presentment for acceptance is excused
and the bill is not accepted. [Sec. 149]
Duty of holder: Where a bill is duly presented for
acceptance and is not accepted within the
prescribed time, the person presenting it must
treat the bill as dishonored by non-acceptance or
he loses the right of recourse against the drawer
and indorsers. [Sec. 150]
Effect: When a bill is dishonored by non-
acceptance, an immediate right of recourse
against the drawer and indorsers accrues to the
holder and no presentment for payment is
necessary. [Sec. 151]
Promissory Notes
A promissory note is:
(1) An unconditional promise in writing
(2) Made by one person to another
(3) Signed by the maker
UP LAW BOC NEGOTIABLE INSTRUMENTS
(4) Engaging to pay on demand, or at a fixed or
determinable future time
(5) A sum certain in money to order or to bearer
(6) Where a note is drawn to the maker's own
order, it is not complete until indorsed by
him. [Sec. 184]
There are originally 2 parties in a promissory
note:
(1) Maker party who executes the written
promise to pay.
(2) Payee party in whose favor the promissory
note is made payable.
Checks
DEFINITION
A check is a bill of exchange drawn on a bank
payable on demand. Except as herein otherwise
provided, the provisions of this Act applicable to
a bill of exchange payable on demand apply to
a check. [Sec. 185]
KINDS
(1) Cashiers Check One drawn by the cashier
of a bank, in the name of the bank against
the bank itself payable to a third person. It is
a primary obligation of the issuing bank and
accepted in advance upon issuance [Tan vs.
CA 1994].
(2) Managers Check A check drawn by the
manager of a bank in the name of the bank
itself payable to a third person. It is similar to
the cashiers check as to the effect and use.
In issuing a managers check, the bank
assumed the liabilities of the acceptor under
Sec. 62, NIL [Equitable PCI Bank v. Ong
(2006)]
(3) Memorandum Check A check given by a
borrower to a lender for the amount of a
short loan, with the understanding that it is
not to be presented at the bank, but will be
redeemed by the maker himself when the
loan falls due and which understanding is
evidenced by writing the word
memorandum, memo or mem on the
check.
(4) Certified Check An agreement whereby the
bank against whom a check is drawn
PAGE 42
MERCANTILE LAW
undertakes to pay it at any future time when
presented for payment [Sec. 187]
(a) Certification is equivalent to acceptance.
[Sec. 187]
(b) Where the holder of a check procures it to
be accepted or certified, the drawer and
all indorsers are discharged from liability.
[Sec. 188]
(c) A check of itself does not operate as an
assignment of any part of the funds to the
credit of the drawer with the bank, and
the bank is not liable to the holder unless
and until it accepts or certifies the check.
[Sec. 189]
(5) Crossed Check The NIL is silent with
respect to crossed checks, although the Code
of Commerce makes reference to such
instruments.
Article 541 of the Code of Commerce states: The
maker or any legal holder of a check shall be
entitled to indicate therein that it be paid to a
certain banker or institution, which he shall do
by writing across the face the name of said
banker or institution, or only the words and
company.
Under usual practice, crossing a check is done
by placing two parallel lines diagonally on the
left top portion of the check [State Investment
House vs. IAC, 1989].
TYPES: SPECIAL AND GENERAL
The crossing may be special wherein between
the two parallel lines is written the name of a
bank or a business institution, in which case the
drawee should pay only with the intervention of
that bank or company, or crossing may be
general wherein between two parallel diagonal
lines are written the words "and Co." or none at
all as in the case at bar, in which case the
drawee should not encash the same but merely
accept the same for deposit (supra).
EFFECTS
(1) The check may not be encashed; it may only
be deposited with the bank;
(2) The check may be negotiated only once to a
person who has an account with the bank;
and
UP LAW BOC NEGOTIABLE INSTRUMENTS MERCANTILE LAW

(3) It serves as a warning to a holder that the

check has been issued for a definite purpose.
[Bataan Cigar vs. CA, 1994]

PRESENTMENT FOR PAYMENT

A check of itself does not operate as an
assignment of any part of the funds to the credit
of the drawer with the bank. The bank is not
liable to the holder, unless and until it accepts or
certifies the check. [Sec. 189]

TIME
When to present? A check must be presented for
payment within reasonable time after its issue.

EFFECT OF DELAY
The drawer will be discharged from liability
thereon to the extent of the loss caused by the
delay. [Sec. 186]

Certification of checks: An agreement whereby

the bank against whom a check is drawn,
undertakes to pay it at any future time when
presented for payment

Effects:
(1) Equivalent to acceptance [Sec. 187] and is the
operative act that makes banks liable
(2) Assignment of the funds of the drawer in the
hands of the drawee [Sec. 189]
(3) If obtained by the holder, discharges the
persons secondarily liable thereon [Sec. 188]

Refusal of drawee bank to certify: The holder has

no action against the bank but he has a right of
action against the drawer. The drawer in turn
has right of action against the bank based on
the original contact of deposit between them.

PAGE 43
UP LAW BOC INSURANCE CODE
Concept of Insurance
On August 15, 2013, RA 10607 was signed into
law. It is a restatement of the Insurance Code
[PD 612], with amendments.
While RA 10607 restated the whole law, most
of the amendments touch only the
administrative portion of the Code, and very
little on the substantive portion.
Unless otherwise indicated, the section
numbers pertain to RA 10607.
CONTRACT OF INSURANCE
A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or
contingent event.
A contract of suretyship shall be deemed to be
an insurance contract only if made by a surety
who or which, as such, is doing an insurance
business [Section 2(a)].
A contract of insurance involves public interest.
Thus, the business is regulated by the state
through the requirement of license or
certificate of authority [White Gold Marine
Services v. Pioneer (2005)].
DEFINITION
Thus, a contract of insurance is:
(1) A contract of indemnity;
(2) Wherein one undertakes for a consideration;
(3) To indemnify another against loss, damage,
or liability;
(4) Arising from an unknown or contingent
event.
A contingent event is one that is not certain to
take place. An unknown event is one which is
certain to happen, but the time of its
happening is not known. A past event may be
a designated event only in cases where it has
happened already but the parties do not know
about it, e.g., prior loss of a ship at sea
(applicable only to marine insurance).
FORM
A policy of insurance is different from the
contract of insurance. The policy is the formal
written instrument evidencing the contract of
PAGE 45
MERCANTILE LAW
insurance entered into between the insured
and the insurer.
No policy, certificate or contract of insurance
shall be issued or delivered within the
Philippines unless in the form previously
approved by the Commissioner.
No application form shall be used with, and
no rider, clause, warranty or endorsement
shall be attached to, printed or stamped upon
such policy, certificate or contract unless the
form of such application, rider, clause,
warranty or endorsement has been approved
by the Commissioner [Section 232].
INSURANCE AND GAMBLING
DISTINGUISHED
A contract of insurance is a contract of
indemnity and is not a wagering or gambling
contract. It is based on contingency, but it is not
a contract of chance for profit. Unlike gambling,
in insurance contracts, one insured gains is not
at the expense of the another insured. Also, a
gambling contract tends to increase inequality
of fortune, while an insurance contract tends to
equalize fortune.
DOING OR TRANSACTING
INSURANCE BUSINESS
The term doing an insurance business
or transacting an insurance business includes:
(1) Making or proposing to make, as insurer, any
insurance contract;
(2) Making or proposing to make, as surety, any
contract of suretyship as a vocation and not
as merely incidental to any other legitimate
business or activity of the surety;
(3) Doing any kind of business, including a
reinsurance business, specifically recognized
as constituting the doing of an insurance
business within the meaning of the Insurance
Code;
(4) Doing or proposing to do any business in
substance equivalent to any of the foregoing
in a manner designed to evade the provisions
of the Insurance Code.
The fact that no profit is derived from the
making of insurance contracts, agreements or
transactions or that no separate or direct
consideration is received therefor, shall not be
deemed conclusive to show that the making
UP LAW BOC INSURANCE CODE
thereof does not constitute the doing or
transacting of an insurance business (Section
2(b)).
General rule: An insurance business consists in
undertaking, for a consideration, to indemnify
another against loss, damage or liability arising
from an unknown or contingent event.
Exception: Although the business is not formally
designated as one of insurance and no profit is
derived or no separate or direct consideration is
received, it is deemed to be doing an insurance
business if it undertakes any of the activities
included in the term doing an insurance
business or transacting an insurance business.
Philippine Health Care Providers Inc. v. CIR
(2009) has stated that:
(1) Contracts of law firm with clients whereby in
consideration of periodical payments, the law
firm promises to represent such clients in all
suits for or against them are not insurance
contracts;
(2) A contract by which a corporation, in
consideration of a stipulated amount, agrees
at its own expense to defend a physician
against all suits for damages for malpractice
is one of insurance, and the corporation will
be deemed as engaged in the business of
insurance.
GOVERNING LAW
The Insurance Code primarily governs
insurance contracts, unless there is a special
law which specifically govern (e.g., insurance
contract under the RA 1161 or Social Security
Act), in which case, the Insurance Code
governs subsidiarily.
Matters not expressly provided for in the
Insurance Code and special laws are regulated
by the Civil Code.
BANCASSURANCE
RA 10607 introduced provisions governing
bancassurance.
The term bancassurance shall mean the
presentation and sale to bank customers by
an insurance company of its insurance
products within the premises of the head
office of such bank duly licensed by the
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MERCANTILE LAW
Bangko Sentral ng Pilipinas or any of its
branches under such rules and regulations
which the Commissioner and the Bangko
Sentral ng Pilipinas may promulgate. To
engage in bancassurance arrangement, a
bank is not required to have equity ownership
of the insurance company. No insurance
company shall enter into a bancassurance
arrangement unless it possesses all the
requirements as may be prescribed by the
Commissioner and the Bangko Sentral ng
Pilipinas.
No insurance product, whether life or non-life,
shall be issued or delivered pursuant to a
Bancassurance arrangement, unless in the
form previously approved by the
Commissioner (Section 375).
Personnel tasked to present and sell
insurance products within the bank premises
shall be duly licensed by the Commissioner
and shall be subject to the rules and
regulations of this Act (Section 376).
This is introduced in RA 10607 amending the
Insurance Code.
PRE-NEED PLANS
Pre-need plans are contracts, agreements,
deeds or plans for the benefit of the
planholders which provide for the
performance of future services, payment of
monetary considerations or delivery of other
benefits at the time of actual need or agreed
maturity date, as specified therein, in
exchange for cash or installment amounts
with or without interest or insurance coverage
and includes life, pension, education,
interment and other plans, instruments,
contracts or deeds [Section 4(b), RA 9829
(Pre-Need Code)].
Pre-need plans are not governed by the
Insurance Code but by the Pre-Need Code of
the Philippines. They are not considered as
insurance contracts because even pre-need
plans can be insured, thereby implying that
the two are not the same.
Pre-need plans are considered as securities
and used to be governed by the Securities
Regulation Code. They are not considered as
insurance contracts because it is not an
insurance for an unknown or contingent event
UP LAW BOC
but an event certain happening at a certain
time.
Nevertheless, the Insurance Commissioner
shall have the primary and exclusive power to
adjudicate any and all claims involving pre-
need plans. If the amount of benefits does not
exceed P100,000, which decision shall be
final and executory [Sec. 58(a), Pre-Need
Code].
Elements of an
Insurance Contract
IN GENERAL
(1) Subject matter in which the insured has an
insurable interest;
(2) Consideration which refers to the premium
payments based on probability of loss and
extent of liability;
(3) Object and Purpose which is the transfer and
distribution of risk of loss, damage or liability;
(4) Cause which refers to an event or peril
insured against;
(5) A meeting of minds of the parties upon all
the foregoing essentials.
SUBJECT MATTER
The insured must have an insurable interest in
the subject matter of the insurance contract.
Insurable interest is the interest which the law
requires the owner of an insurance policy to
have in the person or thing insured.
General rule: A person is deemed to have an
insurable interest in the subject matter insured
where he has a relation or connection with or
concern in it that he will derive pecuniary or
financial benefit or advantage from its
preservation and will suffer pecuniary loss or
damage from its destruction, termination, or
injury by the happening of the event insured
against [Lalican v. Insular Life Ins. Co. (2009)].
Exception: The expectation of benefit from the
continued life of the person insured need not be
of a pecuniary nature.
INSURANCE CODE MERCANTILE LAW
CONSIDERATION
An insurance premium is the agreed price for
assuming and carrying the risk. It is the
consideration paid to the insurer for
undertaking to indemnify the insured against
a designated peril. It is based on probability of
loss and extent of liability.
Premiums are difference from assessments.
An assessment, in insurance law, is a sum
specifically levied by mutual insurance
companies or associations, upon a fixed and
definite plan, to pay losses and expenses.
While premiums are levied and paid to meet
anticipated loss, assessments are collected to
meet actual loss.
OBJECT AND PURPOSE
Insurance contracts serve to distribute the risk
of economic loss, damage or liability among as
many as possible of those who are subject to
the same kind of risk. By paying premiums
which inured to a general fund out of which
payment will be made for an economic loss of a
defined type, each member contributes to a
small degree toward compensation for losses
suffered by any member of the group.
CAUSE
Cause refers to an event or peril insured
against.
Peril is the contingent or unknown event
which may cause a loss. Its existence creates a
risk and its occurrence results in loss.
The event or peril insured against must be
such that its happening will:
(1) Damnify or cause loss to a person having
insurable interest; or
(2) Create liability against him.
The unknown event may be past or future.
Even if the proximate cause of the loss is a
fortuitous event, the insurer may still be liable
if it is the event or peril insured against [De
Leon, The Insurance Code of the Philippines
Annotated (2010)].
MEETING OF THE MINDS
The two parties to a contract of insurance whose
minds need to meet regarding the essential
elements are:
PAGE 47
UP LAW BOC INSURANCE CODE
(1) The insurer or the party who assumes or
accepts the risk of loss and undertakes for
consideration to indemnify the insured or to
pay hum a certain sum on the happening of
the event or peril insured against, and
(2) The insured or the person in whose favor the
contract is operative and whose loss is the
occasion for the payment of the insurance
proceeds by the insurer
The insured is not always the person whom
the proceeds are paid. Such person is the
beneficiary.
Characteristics of an
Insurance Contract
IN GENERAL
An insurance contract is:
(1) Consensual;
(2) Voluntary;
(3) Aleatory;
(4) Executory and unilateral, but synallagmatic;
(5) Conditional;
(6) Contract of indemnity;
(7) Contract of adhesion;
(8) Personal contract;
(9) Property;
(10) Uberrimae fides contract (utmost good
faith).
CONSENSUAL
It is perfected by the meeting of the minds of
the parties. There must be concurrence of offer
and acceptance. Unless otherwise stipulated,
the policy is not essential to the existence of the
contract. It merely evidences the terms and
conditions thereof [Campos, Insurance (1983)].
VOLUNTARY
General rule: It is voluntary in the sense that it is
not compulsory and the parties are free to
incorporate such terms and conditions they may
deem convenient provided they are not contrary
to law, morals, good customs, public order, or
public policy.
PAGE 48
MERCANTILE LAW
Exceptions: Insurance contracts particularly
liability insurance, may be required by law in
certain instances:
For motor vehicles [Sections 373-389];
For employees [Articles 168-184, Labor
Code];
As a condition to granting a license to conduct
business or calling affecting the public safety or
welfare [De Leon (2010)].
Also, there are insurance which may arise by
operation of law. Social insurance for members
of the Government Service Insurance System
(GSIS) and for the employees of the private
sector covered by the Social Security System
(SSS) is established by law.
ALEATORY
It is aleatory because it depends upon some
contingent event. The obligation of the insurer
to pay depends on the happening of an event
which is uncertain, or though certain, is to occur
at an indeterminate time [Article 2010, Civil
Code]. However, it cannot be considered as
gambling, wagering, or a contract of chance
because the risk is created by the contract itself.
EXECUTORY AND UNILATERAL
BUT SYNALLAGMATIC
Once the insured pays the premium, the
contract already takes effect. After the
payment of premiums, the insurance imposes
a unilateral obligation on the insurer who
promise to indemnify in case of loss.
It is also synallagmatic and reciprocal such
that even if the contingent event does not
occur, the insurer has still provided protection
against the risk. When the designated peril
does not happen, the insured nevertheless
gets the protection against such risk for the
period covered by the insurance contract.
CONDITIONAL
It is conditional because it is subject to
conditions, the principal of which is the
happening of the event insured against.
However, many other conditions are usually
required (such as payments of premium or
performance of other act) as precedent to the
right of the insured to claim benefit under the
insurance.
UP LAW BOC INSURANCE CODE
CONTRACT OF INDEMNITY (FOR
NON-LIFE INSURANCE)
The insured who has insurable interest over
the property is only entitled to recover the
amount of actual loss sustained. The burden is
upon him to establish the amount of such loss.
General rule: This applies only to property
insurance. An insurance contingent on the life of
a person is not an indemnity contract because
the value of a life is immeasurable.
Exception: However, where the basis of the
insurable interest of the policy owner on the life
of the insured is a commercial relationship (e.g.,
creditor-debtor, mortgagor/guarantor-
mortgagee, supporter and supportee), then
such contract is an indemnity contract
CONTRACT OF ADHESION (FINE
PRINT RULE)
Insurance contracts are already presented to
the insured in its printed form on a take it or
leave it basis. What is needed only is the
adhesion of the insured for the contract to be
made. Such contracts of adhesion are valid.
However, ambiguity in them shall be interpreted
liberally in favor of the insured and strictly
against the insurer who prepared the same
PERSONAL CONTRACT
Each party takes into consideration the
character, conduct and/or credit of the other
and in making of the contract, each is
enjoined by law to deal with the other in
utmost good faith [Campos (1983)].
The insured cannot assign, before the
happening of the loss, his rights under a
property policy to others without the consent
of the insurer [Sections 20, 58, and 83].
Property insurance is personal in the sense
that it is the damage to the personal interest
not the property that is being reimbursed.
PROPERTY (FOR LIFE
INSURANCE)
Life insurance policies, unlike property
insurance, are generally assignable or
transferrable [Section 81] as they are in the
PAGE 49
MERCANTILE LAW
nature of property and do not represent a
personal agreement between the insurer and
the insured. They are considered property in
legal contemplation.
UBERRIMAE FIDES CONTRACT
Each party is required to deal with each other in
utmost good faith and disclose conditions
affecting the risk, of which he is aware, or any
material fact which the applicant knows and
those which he ought to know. Violation of this
duty gives the aggrieved party the right to
rescind the contract. Where the aggrieved party
is the insured, the bad faith of the insurer will
preclude it from denying liability on the policy
based on breach of warranty [Campos (1983)].
Classes
MARINE INSURANCE
DEFINITION
Marine insurance is a type of transportation
insurance which is concerned with the perils of
property in, or incidental to, transit as opposed
to property perils at a generally fixed location.
Marine insurance includes:
(1) Insurance against loss of or damage to:
(a) Vessels, craft, aircraft, vehicles, goods,
freights, cargoes, merchandise, effects,
disbursements, profits, moneys, securities,
choses in action, instruments of debts,
valuable papers, bottomry, and
respondentia interests and all other kinds
of property and interests therein, in
respect to, appertaining to or in
connection with any and all risks or perils
of navigation, transit or transportation, or
while being assembled, packed, crated,
baled, compressed or similarly prepared
for shipment or while awaiting shipment,
or during any delays, storage,
transhipment, or reshipment incident
thereto, including war risks, marine
builders risks, and all personal property
floater risks;
(b) Person or property in connection with or
appertaining to a marine, inland marine,
transit or transportation insurance,
UP LAW BOC INSURANCE CODE
including liability for loss of or damage
arising out of or in connection with the
construction, repair, operation,
maintenance or use of the subject matter
of such insurance (but not including life
insurance or surety bonds nor insurance
against loss by reason of bodily injury to
any person arising out of ownership,
maintenance, or use of automobiles);
(c) Precious stones, jewels, jewelry, precious
metals, whether in course of
transportation or otherwise; and
(d) Bridges, tunnels and other
instrumentalities of transportation and
communication (excluding buildings, their
furniture and furnishings, fixed contents
and supplies held in storage); piers,
wharves, docks and slips, and other aids
to navigation and transportation,
including dry docks and marine railways,
dams and appurtenant facilities for the
control of waterways.
(2) Marine protection and indemnity 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 [Section 101].
DIVISIONS
Marine insurance has two major divisions:
(1) Ocean marine insurance insures against risk
connected with navigation, to which a ship,
cargo, freightage, profits or other insurable
interest in movable property, may be
exposed during a certain voyage or a fixed
period of time. Its scope includes:
(a) Ships or hulls;
(b) Goods or cargoes;
(c) Earnings such as freight, passage money,
commissions, or profits; and
(d) Liability (protection and indemnity
insurance).
(2) Inland marine insurance covers the land or
over the land transportation perils of
property shipped by railroads, motor trucks,
airplanes, and other means of
PAGE 50
MERCANTILE LAW
transportation. It also covers risks of lake,
river or other inland waterway transportation
and other waterborne perils outside those
covered by ocean marine insurance.
BOTTOMRY AND RESPONDENTIA
DISTINGUISHED
Bottomry loan is a loan that is obtained for the
value of the vessel on a voyage and the lender
is repaid only if the vessel subject of the loan
arrives safely at its destination. The insurable
interest of a ship owner on its bottomed boat
is the difference between the amount of the
loan and the value of the boat. Thus, if the
amount of the loan does not cover the total
value of the boat, the owner can still insured
the boat.
Respondentia loan is a loan that is obtained
as security for the value of the cargo to be
transported and the lender is repaid only if
the cargo arrives safely at its destination.
RISKS
PERILS OF THE SEA
Ocean marine insurance protects ships at sea
and the cargo or freight on such ships from
standard perils of the sea or perils of
navigation which includes casualties arising
from the violent action of the elements and
does not cover ordinary wear and tear or other
damage usually incident to the voyage. The
mere fact that an injury is due to violence of
some marine force does not necessarily bring
it within the protection of the policy if such
violence was not unusual or unexpected.
Perils of the sea or perils of navigation include
only those casualties due to the unusual
violence or extraordinary causes connected
with navigation. It has been said to include
only such losses as are of extraordinary nature
or arise from some overwhelming power
which cannot be guarded against by the
ordinary exertion of human skill or prudence,
as distinguished from the ordinary wear and
tear of the voyage and from injuries suffered
by the vessel in consequence of her not being
unseaworthy [Sundiang and Aquino, Reviewer
on Commercial Law (2013)].
The phrase also extends to barratry which
refers to the willful and intentional act on the
part of the master or the crew, in pursuance of
UP LAW BOC
some unlawful or fraudulent purpose, without
the consent of the owner, and to the prejudice
of his interest (e.g., burning the ship,
unlawfully selling the cargo).
No honest error of judgment or mere
negligence, unless criminally gross, can be
barratry [Roque v. IAC (1985)].
PERILS OF THE SHIP
Perils of the ship are those which cause a loss
which in the ordinary course of events, results:
(1) From the ordinary, natural and inevitable
action of the sea;
(2) From ordinary wear and tear of the ship; and
(3) From the negligent failure of the ships
owner to provide the vessel with the proper
equipment to convey the cargo under
ordinary conditions.
In the absence of stipulation, the risks insured
against are only perils of the sea [Go Tiaco y
Hermanos v. Union Ins. Society of Canton
(1919)].
However, in an all risk policy, all risks are
covered unless expressly excepted. The
burden rests on the insurer to prove that the
loss is caused by a risk that is excluded
[Filipino Merchants Ins. Co. v. CA (1989)].
LOSS
Loss may be total or partial. Total loss may be
actual or constructive.
(1) Actual total loss is the irretrievable loss of the
thing or any damage which renders the thing
valueless to the owner for the purpose for
which he held it. It can be presumed from the
continued absence of the ship without being
heard of for a period of time depending on
the circumstances of the case.
(2) Constructive total loss or technical total
loss is one in which the loss, although not
actually total, is of such character that the
insured is entitled, if he thinks fit, to treat it
as total by abandonment.
As to when a constructive total loss exists, three
rules exist:
(1) English rule, which states that there is
constructive total loss when the subject
matter of the insurance, while still existent in
INSURANCE CODE MERCANTILE LAW
specie, is so damaged as not to be worth,
when repaired, the cost of the repairs;
(2) American rule, which states that there is
constructive total loss when it is so damaged
that the costs of repairs would exceed one-
half of the value of the thing as acquired;
also known as the fifty percent rule;
(3) Philippine rule, which states that the insured
may not abandon the thing insured unless
the loss or damage is more than three-
fourths of its value.
Thus, under Section 141, a person insured by a
contract of marine insurance may abandon the
thing insured, or any particular portion thereof
separately valued by the policy, or otherwise
separately insured, and recover for a total loss
thereof, when the cause of the loss is a peril
insured against:
(1) If more than three-fourths thereof in value is
actually lost, or would have to be expended
to recover it from the peril;
(2) If it is injured to such an extent as to reduce
its value more than three-fourths;
(3) If the thing insured is a ship, and the
contemplated voyage cannot be lawfully
performed without incurring either an
expense to the insured of more than three-
fourths the value of the thing abandoned or
a risk which a prudent man would not take
under the circumstances; or
(4) If the thing insured, being cargo or
freightage, and the voyage cannot be
performed, nor another ship procured by the
master, within a reasonable time and with
reasonable diligence, to forward the cargo,
without incurring either an expense to the
insured of more than three-fourths the value
of the thin abandoned or a risk which a
prudent man would not take under the
circumstances. But freightage cannot in any
case be abandoned unless the ship is also
abandoned.
ABANDONMENT
DEFINITION
Abandonment, in marine insurance, is the act of
the insured by which, after a constructive total
loss, he declares the relinquishment to the
insurer of his interest in the thing insured
[Section 140].
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CONDITIONS
Aside from the requirement under Section 141
already mentioned:
(1) An abandonment must be neither partial nor
conditional [Section 142];
(2) An abandonment must be made within a
reasonable time after receipt of reliable
information of the loss, but where the
information is of a doubtful character, the
insured is entitled to a reasonable time to
make inquiry [Section 142];
(3) Abandonment is made by giving notice
thereof to the insurer, which may be done
orally, or in writing: Provided, That if the
notice be done orally, a written notice of such
abandonment shall be submitted within
seven days from such oral notice [Section
145];
(4) Abandonment must be absolute and total.
No notice of abandonment is required for
recovery of loss in cases of actual total loss.
Where the information upon which an
abandonment has been made proves
incorrect, or the thing insured was so far
restored when the abandonment was made
that there was in fact no total loss, the
abandonment becomes ineffectual.
CHARACTERISTICS
Thus, a valid abandonment has the following
characteristics:
(1) There must be an actual relinquishment by
the person insured of his interest in the thing
insured;
(2) There must be a constructive total loss;
(3) The abandonment be neither partial nor
conditional;
(4) It must be made within a reasonable time
after receipt of reliable information of the
loss;
(5) It must be factual;
(6) It must be made by giving notice thereof to
the insurer which may be done orally or in
writing; and
(7) The notice of abandonment must be explicit
and must specify the particular cause of the
abandonment.
EFFECTS
(1) An abandonment is equivalent to a transfer
by the insured of his interest to the insurer,
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MERCANTILE LAW
with all the chances of recovery and
indemnity [Section 148];
(2) If a marine insurer pays for a loss as if it were
an actual total loss, he is entitled to whatever
may remain of the thing insured, or its
proceeds or salvage, as if there had been a
formal abandonment [Section 149];
(3) Upon an abandonment, acts done in good
faith by those who were agents of the insured
in respect to the thing insured, subsequent to
the loss, are at the risk of the insurer, and for
his benefit [Section 150].
AVERAGE
Average is defined as the extraordinary or
accidental expense incurred during the voyage
for the preservation of the vessel, cargo or both
and all the damages to the vessel and cargo
from the time it is loaded and the voyage
commenced until it ends and the cargo is
unloaded.
There are two kinds of averages:
(1) Gross or general averages; and
(2) Simple or particular averages.
Gross averages include damages and expenses
which are deliberately caused by the master of
the vessel or upon his authority, in order to save
the vessel, her cargo, or both at the same time
from a real and known risk. This must be borne
equally by all of the interests concerned in the
venture.
To claim general average contributions, the
requisites are:
(1) There must be a common danger to the
vessel or cargo;
(2) Part of the vessel or cargo was sacrificed
deliberately;
(3) The sacrifice must be for the common safety
or for the benefit of all;
(4) It must be made by the master or upon his
authority;
(5) It must not be caused by any fault of the
party asking contribution;
(6) It must be successful (i.e., resulted in the
saving of the vessel and/or cargo)
(7) It must be necessary.
Particular averages include damages and
expenses caused to the vessel or her cargo,
UP LAW BOC INSURANCE CODE
which have not inured to the common benefit
and profit of all the persons interested in the
vessel and her cargo. A particular average loss
is suffered by and borne alone by the owner of
the cargo or of the vessel, as the case must be.
FIRE INSURANCE
DEFINITION
Fire insurance includes insurance against loss
by fire, lightning, windstorm, tornado or
earthquake and other allied risks, when such
risks are covered by extension to fire insurance
policies or under separate policies [Section
169].
A fire insurance is a contract of indemnity by
which the insurer, for a stipulated premium,
agrees to indemnify the insured against loss
of, or damage to, a property caused by hostile
fire.
Fire or other so-called allied risks
enumerated above must be the proximate
cause of the damage or loss.
Fire is oxidation which is so rapid as to
produce either a flame or a glow.
Spontaneous combustion is usually rapid
oxidation. Fire is always caused by
combustion, but combustion does not always
cause fire.
The presence of heat, steam, or even smoke is
evidence of fire, but taken by itself will not
prove the existence of fire.
Fire cannot be considered a natural disaster
or calamity since it almost always arises from
some acts of man or by human means. It
cannot be an act of God unless caused by
lightning or a natural disaster or casualty not
attributable to human agency [Phil. Home
Assurance Corp. v. CA (1996)].
RISKS
Hostile fire is one that escapes from the place
where it was intended to burn and ought to
be, or one which remains completely within its
proper place but because of the unsuitable
materials used to light it, it becomes
inherently dangerous and uncontrollable. This
kind of fire will make the insurer liable.
Friendly fire is one that burns in a place where
it is intended to burn and ought to be like fire
burning in a stove or a lamp.
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MERCANTILE LAW
ALTERATIONS IN USE OR
CONDITION
(1) An alteration in the use or condition of a
thing insured from that to which it is limited
by the policy made without the consent of
the insurer, by means within the control of
the insured, and increasing the risks, entitles
an insurer to rescind a contract of fire
insurance [Section 170].
(2) An alteration in the use or condition of a
thing insured from that to which it is limited
by the policy, which does not increase the
risk, does not affect a contract of fire
insurance [Section 171].
(3) A contract of fire insurance is not affected by
any act of the insured subsequent to the
execution of the policy, which does not
violate its provisions, even though it
increases the risk and is the cause of the loss
[Section 172].
Thus, in order that the insurer may rescind a
contract of fire insurance for any alteration
made in the use or condition of the thing
insured, the following requisites must be
present:
(1) The use or condition of the thing is
specifically limited or stipulated in the policy;
(2) Such use or condition as limited by the policy
is altered;
(3) The alteration is made without the consent
of the insurer;
(4) The alteration is made by means within the
control of the insured; and
(5) The alteration increased the risk.
Every contract of insurance is made with
reference to the conditions surrounding the
subject matter of the risk. Thus, there is an
implied promise or undertaking on the part of
the insured that he will not change the premises
or the character of the business carried there so
as to increase the risk of loss by fire.
MEASURE OF INDEMNITY
(1) In an open policy, only the expense necessary
to replace the thing lost or injured in the
condition it was at the time of the injury will
be paid;
UP LAW BOC INSURANCE CODE
(2) In a valued policy, the parties are bound by
the valuation, in the absence of fraud or
mistake, similar to marine insurance.
In the absence of express valuation in a fire
insurance policy, the insured is only entitled to
recover the amount of actual loss sustained
and the burden of proof is upon him to
establish the amount of such loss by
preponderance of evidence.
Where the face value of the policy is less than
the agreed valuation, then even in case of
total loss, the insured can only recover up to
the policys face value, which is always the
maximum limit of the insurers liability [Tan
Chuco v. Yorkshire Fire & Life Ins. Co. (1909)].
In an open policy, the actual loss, as
determined, will represent the total indemnity
due the insured except only that the total
indemnity shall not exceed the total value of
the policy [Devt. Ins. Corp. v. IAC (1986)].
CASUALTY INSURANCE
DEFINITION
Casualty insurance is insurance covering loss
or liability arising from accident or mishap,
excluding certain types of loss which by law or
custom are considered as falling exclusively
within the scope of other types of insurance
such as fire or marine. It includes, but is not
limited to, employers liability insurance,
motor vehicle liability insurance, plate glass
insurance, burglary and theft insurance,
personal accident and health insurance as
written by non-life insurance companies, and
other substantially similar kinds of insurance
[Section 176].
Casualty insurance includes all forms of
insurance against loss or liability arising from
accident or mishap excluding certain types of
loss or liability which are not within the scope
of other types of insurance such as fire,
marine, suretyship and life. It includes, but is
not limited to, employers liability insurance,
workmens compensation insurance, public
liability insurance, motor vehicle liability
insurance, plate glass insurance, burglary and
theft insurance, personal accident and health
insurance as written by non-life insurance
companies, and other substantially similar
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MERCANTILE LAW
kinds of insurance (e.g., robbery and theft
insurance).
It is governed by the general provisions
applicable to all types of insurance plus
stipulations in the insurance contract
INTENTIONAL AND ACCIDENTAL
INJURY DISTINGUISHED
Intentional implies the exercise of the
reasoning faculties, consciousness and
volition. Where a provision of the policy
excludes intentional injury, it is the intention
of the person inflicting the injury that is
controlling. If the injuries suffered by the
insured clearly resulted from the intentional
act of the third person, the insurer is relieved
from liability as stipulated.
Accidental means that which happens by
chance or fortuitously, without intention or
design, which is unexpected, unusual and
unforeseen. The terms do not, without
qualification, exclude events resulting in
damage due to fault, recklessness or
negligence of third parties. The concept is not
necessarily synonymous with no fault. It
may be utilized simply to distinguish
intentional or malicious acts from negligent or
careless acts of man.
DIVISIONS
Casualty insurance has two general divisions:
liability and indemnity insurance.
LIABILITY INSURANCE
Under policies of this type, the insurer assumes
the obligation to pay the third party in whose
favor the liability of the insured arises. The
liability of the insurer attaches as soon as the
liability of the insured to the third party is
established. It covers liability incurred from
quasi-delict or criminal negligence but cannot
cover deliberate criminal acts.
INDEMNITY INSURANCE
Under this kind of insurance, no action will lie
against the insurer unless brought by the
insured for loss actually sustained and paid by
him. Liability of the insurer attaches only after
the insured has paid his liability to the third
party.
UP LAW BOC INSURANCE CODE
NO ACTION CLAUSE
A no action clause is a requirement in a policy
of liability insurance which provides that suit
and final judgment be first obtained against
the insured; that only thereafter can the
person injured recover on the policy [Guingon
v. Del Monte (1967)].
But, the no-action clause cannot prevail over
the Rules of Court provisions which are aimed
at avoiding multiplicity of suits. Parties (the
insured and the insurer) may be joined as
defendants in a case commenced by the third
party claiming under a liability insurance, as
the right to relief in respect to the same
transactions is alleged to exist [see Section 5,
Rule 2 and Section 6, Rule 3].
SURETYSHIP
A contract of suretyship is an agreement
whereby a party called the surety guarantees
the performance by another party called the
principal or obligor of an obligation or
undertaking in favor of a third party called the
oblige [Section 175].
It is an agreement whereby a surety
guarantees the performance or undertakes to
answer, under specified terms and conditions,
for the debt, default or miscarriage of the
principal or obligor, such as failure to perform,
or breach of trust, negligence and the like, in
favor of a third party.
It shall be deemed as insurance contract if the
suretys main business is that of suretyship,
and not where the contract is merely
incidental to any other legitimate business or
activity of the surety.
The contract of a surety is evidenced by a
writing called surety bond which is
essentially a promise to guarantee the
obligation of the obligor. In turn, the obligor
executes an indemnity agreement in favor of
the insurer.
It is an accessory contract unlike a contract of
insurance which is the principal contract itself.
The liability of the surety or sureties under a
bond is joint and several, or solidary. This
means that upon the default of the principal
obligor, the surety becomes primarily liable.
Unlike a guarantor, a surety is not entitled to
the benefit of exhaustion of the principal
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obligors assets and assumes a regular party
to the undertaking.
It is limited or fixed to the amount of the
bond.
What is unique to a contract of suretyship is
that when the obligee accepts the bond, the
bond becomes valid and enforceable whether
or not the premium has been paid by the
obligor unlike in an insurance contract where
payment of premium is necessary for the
contract to be valid. If the obligee has not yet
accepted, then payment of premium is still
necessary for the contract of suretyship to be
valid.
LIFE INSURANCE
DEFINITION
Life insurance is insurance on human lives
and insurance appertaining thereto or
connected therewith.
Every contract or undertaking for the payment
of annuities including contracts for the
payment of lump sums under a retirement
program where a life insurance company
manages or acts as a trustee for such
retirement program shall be considered a life
insurance contract for purposes of the
Insurance Code [Section 181].
An insurance upon life may be made payable
on the death of the person, or on his surviving
a specified period, or otherwise contingently
on the continuance or cessation of life.
Every contract or pledge for the payment of
endowments or annuities shall be considered
a life insurance contract for purposes of the
Insurance Code [Section 182].
TYPES
INDIVIDUAL LIFE
It is an insurance on human lives and insurance
appertaining thereto or connected therewith. It
may be made payable on the death of the
person, or on his surviving a specified period, or
otherwise contingently on the continuation or
cessation of life
GROUP LIFE
It is a blanket policy covering a number of
individuals who are usually a cohesive group
(e.g., employees of a company) and subjected to
a common risk. No medical examination is
UP LAW BOC INSURANCE CODE
usually required of each person insured (in
contrast to individual life insurance). Group
insurance covers a number of persons in a
single contract.
INDUSTRIAL LIFE
Industrial life insurance is that form of life
insurance under which the premiums are
payable either monthly or oftener, if the face
amount of insurance provided in any policy is
not more than 500 times that of the current
statutory minimum daily wage in the City of
Manila, and if the words industrial policy are
printed upon the policy as part of the descriptive
matter [Section 235].
MICROINSURANCE
Microinsurance is a financial product or service
that meets the risk protection needs of the poor,
where:
(1) The amount of contributions, premiums, fees
or charges, computed on a daily basis, does
not exceed 7.5% of the current daily
minimum wage rate for nonagricultural
workers in Metro Manila; and
(2) The maximum sum of guaranteed benefits is
not more than 1,000 times of the said
current daily minimum wage rate [Section
187].
No insurance company or mutual benefit
association shall engage in the business of
Microinsurance unless it possesses all the
requirements as may be prescribed by the
Commissioner, who shall issue such rules and
regulations governing microinsurance [Section
188].
EXAMPLES OF LIFE INSURANCE
POLICIES
(1) Ordinary or whole life policy, where the
insurer agrees to pay the face value of the
policy upon the death of the insured;
(2) Limited payment plan, where the insured
agrees to pay premiums only for a specified
number of years. If he survives such period,
he stops paying any further premium, and
when he dies, the insurer pays the proceeds
to his beneficiary;
(3) Term plan, where the insurers liability arises
only upon the death of the insured within the
agreed term or period. If the insured survives,
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MERCANTILE LAW
the contract terminates and the insurer is not
liable;
(4) Pure endowment policy, where the insurer
pays the insured if the insured survives a
specified period. If the insured dies within the
period, the insurer is released from liability
and unless the contract otherwise provides,
need not reimburse any part of the
premiums paid;
(5) Endowment policy, where the insured is paid
the face value of the policy if he outlives the
designated period. If he dies within said
period, the insurer pays the proceeds to the
beneficiary. This is a combination of term
policy and pure endowment policy.
RISKS
DEATH OR SURVIVAL
It may be made payable on the death of the
person, or on his surviving a specified period,
or otherwise contingently on the continuation
or cessation of life [Campos (1983)].
Death of the insured must be proven by the
beneficiary before the insurer can be made to
pay.
SUICIDE
Insurer is liable in the following cases:
(1) If committed after two years from the date of
the policys issue or its last reinstatement.
Any stipulation extending the 2-year period is
void;
(2) If committed in a state of insanity regardless
of the date of the commission unless suicide
is an excepted peril;
(3) If committed after a shorter period provided
in the policy.
Since suicide is contrary to the laws of nature
and the ordinary rules of conduct, it is never
presumed. The burden of proving lies with the
insurer who seeks to avoid liability under a life
policy excepting it from coverage [Campos
(1983)].
DEATH AT THE HANDS OF THE LAW
Death at the hands of the law (e.g., legal
execution) is one of the risks assumed by the
insurer under a life insurance policy in the
absence of a valid policy exception [Vance on
Insurance (1951)].
UP LAW BOC INSURANCE CODE
KILLING BY THE BENEFICIARY
General rule: The interest of a beneficiary in a
life insurance policy shall be forfeited when the
beneficiary is the principal accomplice or
accessory in willfully bringing about the death of
the insured. In such event, the other
beneficiaries so named shall receive their share
and divide among them the forfeited share of
the guilty beneficiary. In the absence of other
beneficiaries, proceeds shall be paid according
to the policy contract, and if silent, it shall be
paid to the estate of the insured [Section 12)]
Exceptions:
(1) Accidental killing;
(2) Self-defense;
(3) Insanity of the beneficiary at the time he
killed the insured;
(4) Negligence.
Note: Conviction of the beneficiary is necessary
before his interest in the insurance policy is
forfeited in favor of the others indicated in
Section 12.
COMPULSORY MOTOR VEHICLE
LIABILITY INSURANCE
Compulsory motor vehicle liability insurance is
a policy of insurance or guaranty in cash or
surety bond to indemnify the death, bodily
injury, and/or damage to property of a third-
party or passenger, as the case may be,
arising from the use of a motor vehicle
[Section 387].
It is a requisite for registration or renewal of
registration of a motor vehicle by every land
transportation operator or owner [Section
390]. It is the only compulsory insurance
under the Insurance Code.
It is a species of compulsory insurance that
provides for protection coverage that will
answer for legal liability for losses and
damages for bodily injuries or property
damage that may be sustained by another
arising from the use and operation of motor
vehicle by its owner. It applies to all vehicles
whether public or private vehicles.
To the extent that motor vehicle insurance is
compulsory, it must be a liability policy, and
the provision making it merely an indemnity
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MERCANTILE LAW
insurance contract cannot have any effect
[Campos (1983)].
The insurers liability is direct and primary so
the insurer need not wait for final judgment in
the criminal case to be liable. Its purpose is to
give immediate financial assistance to victims
of motor vehicle accidents and/or their
dependents, especially if they are poor,
regardless of the financial capability of motor
vehicle owners or operators responsible for
the accident sustained [Shafer v. Judge, RTC
(1988)].
The claimants/victims may be a passenger or
a third party. The insured may be the party at
fault as against claims of third parties (third
party liability) or the victim of the contingent
event.
The following clauses are relevant to
compulsory motor vehicle liability insurance:
(1) Authorized driver clause is a stipulation in a
motor vehicle insurance which provides that
the driver, other than the insured owner,
must be duly licensed to drive the motor
vehicle, otherwise the insurer is excused from
liability;
(2) Theft clause is a stipulation including theft
as one of the risks insured against. If there is
such a provision and the vehicle was
unlawfully taken, the insurer is liable under
the theft clause and the authorized driver
clause does not apply. The insured can
recover even if the thief has no drivers
license.
Insurable Interest
IN GENERAL
In general, an insurable interest is that interest
which a person is deemed to have in the
subject matter insured, where he has a
relation or connection with or concern in it,
such that the person will derive pecuniary
benefit or advantage from the preservation of
the subject matter insured and will suffer
pecuniary loss or damage from its destruction,
termination, or injury by the happening of the
event insured against. The existence of an
insurable interest gives a person the legal
right to insure the subject matter of the policy
UP LAW BOC INSURANCE CODE
of insurance [Lalican v. Insular Life Ins.
(2009)].
An insurable interest is one of the most basic
and essential requirements in an insurance
contract. As such, it may NOT be waived by
stipulation. Absence of insurable interest
renders the insurance contract void.
The insurable interest need not always be
pecuniary in nature.
Ratio:
(1) As a deterrence to the insured. A policy issued
to a person without interest is a mere wager
policy or contract and is void for illegality. A
wager policy is obviously contrary to public
interest. There is a moral hazard in removing
insurable interest as a requirement for the
validity of an insurance policy in that:
(a) It allows the insured to have an interest in
the destruction of the subject matter
rather than in its preservation. [Myer v.
Grand Lodge]
(b) It affords a temptation or an inducement
to the insured, having nothing to lose and
everything to gain, to bring to pass the
event upon happening of which the
insurance becomes payable. [White v.
Equitable Nuptial Benefit Union]
(2) As a measure of limit of recovery. The
insurable interest is the measure of the
upper limit of his provable loss under the
contract. Sound public policy requires that
insurance should not provide the insured
means of making a net profit from the
happening of the event insured against.
WHEN INSURABLE INTEREST
SHOULD EXIST
Policy Insurable interest required
Effectivity
Intervening Occurrence
of
period of loss
insurance
Life or
health
Property
Insurable interest over life/health may be lost
after the insurance takes effect as long as it
exists at the time the insurance takes effect. On
the other hand insurable interest property need
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MERCANTILE LAW
not exist during the intervening period or from
the time between it the policy takes effect and
the loss occurs. The alienation of insured
property will not defeat a recovery if the insured
has subsequently reacquired the property and
possesses an insurable interest at the time of
loss [Womble v. Dubuque Fire &Marine Ins. Co.].
CHANGE OF INTEREST
Change of interest means the absolute transfer
of the property insured.
General rule: A change of interest in the thing
insured does not transfer the policy, but
suspends the insurance to an equivalent extent
until the interest in the thing and the interest in
the insurance policy are vested in the same
person. Thus, the contract is not rendered void
but is merely suspended.
Exceptions:
(1) Life, health, and accident insurance;
(2) A change of interest in the thing insured
after the occurrence of an injury which
results in a loss does not affect the policy;
(3) A change in the interest in one or more of
several things, separately insured by one
policy, such as a conveyance of one or more
things, does not affect the policy with respect
to the others not so conveyed;
(4) A change of interest by will or succession on
the death of the insured. The death of the
insured does not avoid insurance policy. It
does not affect the policy except his interest
passes to his heir or legal representative who
may continue the insurance policy on the
property by continuing paying premiums;
(5) A transfer of interest by one of several
partners, joint owners, or owners in common,
who are jointly insured, to the others. This
does not avoid the insurance. It will avoid the
policy only as to the selling partners or co-
owners but not as to others. The rule applies
even though it has been agreed that the
insurance cease upon alienation of the thing.
(6) Automatic transfers of interest in cases in
which the policy is so framed that it will inure
to the benefit of whosoever may become the
owner of the interest insured during the
circumstance of the risk. It is an exception to
the general rule that upon maturity, the
proceeds of a policy shall be given exclusively
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to the proper interest if the person in whose
name or for whose benefit it is made.
(7) An express prohibition against alienation in
the policy [Article 1306, Civil Code], in which
case alienation will not merely suspend the
contract but avoid it entirely.
IN LIFE/HEALTH INSURANCE
Every person has an insurable interest in the life
and health:
(1) Of himself, of his spouse and of his children;
(2) Of any person on whom he depends wholly
or in part for education or support, or in
whom he has a pecuniary interest;
(3) Of any person under a legal obligation to
him for the payment of money, or respecting
property or services, of which death or illness
might delay or prevent the performance; and
(4) Of any person upon whose life any estate or
interest vested in him depends [Section 10].
Unless the interest of a person insured is
susceptible of exact pecuniary measurement,
the measure of indemnity under a policy of
insurance upon life or health is the sum fixed in
the policy.
Life insurance policies may be divided into two
general classes:
(1) Insurance upon ones life;
(2) Insurance upon life of another.
IN LIFE INSURANCE
INTEREST IN ONES OWN LIFE
Cestui que vie is the insured himself. The
insured can designate anyone to be the
beneficiary of the policy.
Each has unlimited interest in his own life,
whether the insurance is for the benefit of
himself or another.
The beneficiary designated need not have any
interest in the life of the insured when person
takes out policy on his own life. But if a person
obtains a policy on the life of another and
names himself as the beneficiary, he must
have insurable interest therein.
INTEREST IN LIFE OF ANOTHER
In life insurance, unless based on commercial
relationship, the policy owner does not
necessarily have pecuniary interest on the
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MERCANTILE LAW
life of the cestui que vie. Mere relationship is a
sufficient interest to be insured.
The insurable interest must be based on
moral and legal grounds. Such interest exists
whenever the insured has a responsible
expectation of deriving benefit from the
continuation of the life of the other person or
of suffering detriment through its termination.
There is no insurable interest in the life of an
illegitimate spouse.
A creditor may take out insurance on the life
of his debtor but his insurable interest is only
up to the amount of the debt.
An assignee of the insurance contract is not
required to have insurable interest in the life
of the insured, for to require such interest in
him is to diminish the investment value of the
contract to the owner. Note, however, that
assignment is different from a change in the
designated beneficiary.
When the beneficiary is the principal,
accomplice or accessory in willfully bringing
about the death of the insured, interest of
beneficiary in life insurance policy is forfeited.
BENEFICIARY
A beneficiary is the person who is named or
designated in a contract of life, health, or
accident insurance as the one who is to receive
the proceeds or benefits which become payable,
according to the terms of the contract, if the
insured risk occurs.
General rule: A person may designate a
beneficiary, irrespective of the beneficiarys lack
of insurable interest, provided he acts in good
faith and without intent to make the transaction
merely a cover for a forbidden wagering
contract [De Leon (2010)].
Exceptions: Any person who is forbidden from
receiving any donation under Article 739, Civil
Code cannot be named beneficiary of a life
insurance policy by the person who cannot
make any donation to him [Article 2012, Civil
Code]. Article 739 provides that the following
donations are void:
(1) Those made between persons who were
guilty of adultery or concubinage at the time
of the donation;
UP LAW BOC INSURANCE CODE
(2) Those made between persons found guilty of
the same criminal offense, in consideration
thereof;
(3) Those made to a public officer or his wife,
descendants and ascendants, by reason of
his office.
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.
In general, the policy owner can change the
beneficiary without the consent of such
beneficiary. However, when this right to
change is expressly waived, the consent of the
beneficiary is necessary. This means that
despite the waiver, he can still change the
beneficiary provided he obtained the
beneficiarys consent.
INTEREST IN HEALTH INSURANCE
General rule: Interest in the life or health of a
person must exist when the insurance takes
effect (at inception), but need not exist
thereafter or when the loss occurs.
Exceptions:
(1) In the case of a creditors insurance taken on
the life of the debtor, insurable interest
disappears once the debt has been paid. At
this point, the creditor/insured can no longer
recover on the policy;
(2) In the case of a companys insurance taken
on the life of an employee, insurable interest
disappears once the employee leaves the
company, in which case, the company can no
longer recover on the policy.
TRANSFER OF POLICY
Interest can be transferred even without the
notice to the insurer of such transfer or
bequest, unless there is a stipulation to the
contrary.
There is no right of subrogation in life
insurance, because it is not a contract of
indemnity.
IN PROPERTY INSURANCE
An insurable interest in property may consist in:
(1) An existing interest;
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MERCANTILE LAW
(2) An inchoate interest founded on an existing
interest; or
(3) An expectancy, coupled with an existing
interest in that out of which the expectancy
arises [Section 14].
The insurable interest may be in the property
itself (e.g., ownership), or any relation thereto
(e.g., interest of a trustee or a commission
agent), or liability in respect thereof (e.g.,
interest of a carrier or depository of goods).
The relation of the insured to the property is
such that he will be benefited by its continued
existence or will suffer a direct pecuniary loss
by its destruction.
An existing interest may be a legal title or
equitable title. Examples of those having
existing interest are owners as regards their
properties, trustees in the case of the seller of
property not yet delivered, mortgagors over
the property mortgaged, and lessor, lessee
and sub-lessee over the property leased.
An inchoate interest must be founded on
existing interests. It exists but is incomplete or
unripe until the happening of an event.
Examples of inchoate interests are the
interest of stockholders with respect to
dividends in case of profits and shares in the
assets, and the interest of a partner in the
properties belonging to the partnership.
An expectancy must be coupled with an
existing interest out of which the expectancy
arises. For example, a farmer who planted
crops has insurable interest over his harvest
which can be expected.
A mere contingent or expectant interest in
anything, not founded on an actual right to
the thing, nor upon any valid contract for it, is
not insurable.
A mere hope or expectation of benefit which
may be frustrated by the happening of some
event uncoupled with any present legal right
will not support a contract of insurance. A son
has no insurable interest over the property of
his father because such is just a mere
expectancy and has no legal basis before he
inherits such property.
Insurable interest in property may be based
on a perfected contract of sale, vesting an
equitable title even before delivery of the
UP LAW BOC INSURANCE CODE MERCANTILE LAW

goods [Filipino Merchants Ins. Co. v. CA MEASURE OF INDEMNITY

(1989)]. Being a contract of indemnity, the measure of
When the seller retains ownership only to insurable interest in property is the extent to
insure that the buyer will pay its debt, the risk which the insured might be damnified by the
of loss is borne by the buyer. Insurable loss of injury thereof. The insured cannot
interest in property does not imply a property recover a greater value than that of his actual
interest in, or a lien upon, or possession of the loss because it would be a wagering policy
subject matter of the insurance, and neither contrary to public policy and void.
ownership nor a beneficial interest is requisite Thus, a mortgagor has an insurable interest
to the existence of such an interest. Anyone equal to the value of the mortgaged property
has an insurable interest in property who and a mortgagee, only to the extent of the
derives a benefit from its existence or would credit secured by the mortgage.
suffer loss from its destruction [Gaisano
Cagayan Ins. v. Ins. Co. of North America, INTEREST IN LIFE AND PROPERTY
(2006)].
DISTINGUISHED
TIME OF EXISTENCE Life Property
General rule: Interest in property insured must Extent
exist both at inception and at time of loss, but Limited to actual Unlimited (save in
not in the intervening period. value of the interest life insurance
thereon effected by a creditor
Exceptions: on the life of the
(1) A change in interest over the thing insured debtor amount of
after the loss contemplated. The insured may debt only)
sell the remains without prejudice to his right
to recover; Existence
(2) A change of interest in one or more several Must exist when the Must exist at the
distinct things, separately insured by one insurance takes time the insurance
policy. This does not avoid the insurance as effect and when the takes effect, BUT
to the others; loss occurs, BUT need not exist
(3) A change in interest by will or succession need not exist in the thereafter
upon the death of the insured; meantime
(4) A transfer of interest by one of several
partners, joint owners, or owners in common Expectation of benefit to be derived
who are jointly insured. The acquiring co- Must have legal Need not have legal
owner has the same interest; his interest basis basis
merely increases upon acquiring other co- Interest of beneficiary
owners interest.
Must have insurable Need not have
TRANSFER OF POLICY interest over the insurable interest
thing insured over the life of the
Interest cannot be transferred without the
insured if the insured
insurers consent, because the insurer has
himself secured the
approved the policy based on the personal
policy. But if the
qualifications and insurable interest of the
insurance was
insured.
obtained by the
When there is an express prohibition against beneficiary, the
alienation in the policy, and there is latter must have
alienation, the contract of insurance is not insurable interest
merely suspended but avoided. over the life of the
insured (Sundiang
and Aquino (2013))

PAGE 61
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DOUBLE AND OVER
INSURANCE; REINSURANCE
DOUBLE INSURANCE
Double insurance exists where the same person
is insured by several insurers separately in
respect to the same subject and interest
[Section 95].
Requisites:
(1) The same person is insured;
(2) Two or more insurers insuring separately;
(3) The same subject matter;
(4) The same interest insured; and
(5) The same risk or peril insured against
Double insurance is not prohibited under the
law, unless the policy contains a stipulation to
the contrary. Usually, insurance policy
contains other insurance clause which
requires disclosure of other existing insurance
policy. In such case, non-disclosure will avoid
the policy. Such clause is intended to prevent
over insurance and thus avert the perpetration
of fraud.
If over-insured, then the insurers will pay pro-
rata (or whatever is stated in contract) in case
of loss.
Nonetheless, under Section 64(f), an insurer
may cancel an insurance policy, other than
life, based on a [d]iscovery of other insurance
coverage that makes the total insurance in
excess of the value of the property insured
subject to the requirement of prior notice.
Also, under Section 83, [i]n case of an over
insurance by several insurers other than life,
the insured is entitled to a ratable return of
the premium, proportioned to the amount by
which the aggregate sum insured in all the
policies exceeds the insurable value of the
thing at risk.
RULES FOR PAYMENT
Section 96 enunciates the principle of
contribution which requires each insurer to
contribute RATABLY to the loss or damage
considering that the several insurances cover
the same subject matter and interest against
the same peril. If the loss is greater than the
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MERCANTILE LAW
sum total of all the policies issued, each insurer
is liable for the amount of his policy.
DOUBLE AND OVER INSURANCE
DISTINGUISHED
Double insurance Over insurance
Amount of insurance Amount of insurance
may or may not exceed exceeds the value of the
the value of the insureds insurable
insureds insurable interest
interest
There are always There may be one or
several insurers more insurers
REINSURANCE
A contract of reinsurance is one by which an
insurer procures a third person to insure him
against loss or liability by reason of such
original insurance [Section 97].
Reinsurance is a contract of indemnity. It has
been referred to as an insurance of an
insurance. There is no relationship between
the reinsurer of the reinsurance contract and
the insured under the original insurance
contract.
ORIGINAL INSURANCE CONTRACT AND
REINSURANCE CONTRACT DISTINGUISHED
The original insurance contract is separate and
distinct from the reinsurance contract.
Insurance contract is independent from the
reinsurance contract. Insurance contract covers
indemnity against damages. Reinsurance covers
indemnity against liability.
REINSURANCE TREATY AND POLICY
DISTINGUISHED
A reinsurance treaty is an agreement between
two insurance companies whereby one agrees
to cede and the other to accept reinsurance
business pursuant to provisions specified in
the treaty [De Leon (2010)].
A reinsurance policy is a contract of indemnity
one insurer makes with another to protect the
first insurer from a risk it has already
assumed.
Reinsurance treaties and reinsurance policies
are not synonymous. Treaties are contracts for
UP LAW BOC INSURANCE CODE MERCANTILE LAW

insurance; policies are contracts of insurance (2) If the proceeds are less than the credit,
[Philamlife v. Auditor General (1958)]. then the mortgagee may recover from the
mortgagor the deficiency. Upon payment,
DOUBLE INSURANCE AND the insurer is subrogated to the rights of
REINSURANCE DISTINGUISHED the mortgagee against the mortgagor to
the extent of the amount paid.
Double insurance Reinsurance When a mortgagor takes out an insurance for
Same interest Different interest his own benefit, he can only recover from the
insurer but the mortgagee has a lien on the
Insurer remains as the Insurer becomes the
proceeds by virtue of the mortgage. A
insurer insured in relation to
mortgagor can make the proceeds payable to
the reinsurer
or assigned to the mortgagee.
Insured is a party in The original insured is
interest in the not a party in the OPEN LOSS PAYABLE MORTGAGE
insurance contracts reinsurance contract CLAUSE
Property is the subject The original insurer's An open loss payable clause simply states
matter risk is the subject that the proceeds of the insurance contract is
matter payable to the mortgagee as beneficiary.
Insured has to give his Insureds consent is not The contract, however, is procured by the
consent necessary mortgagor for his interest in the property. He
is the party to the contract, not the
mortgagee.
MULTIPLE OR SEVERAL The acts of the mortgagor prior to the loss,
INTERESTS ON SAME which would otherwise avoid the insurance,
affects the mortgagee, even if the property is
PROPERTY in the hands of said mortgagee.
The Insurance Code recognizes that both the
mortgagor and mortgagee have each
separate and distinct insurable interest in the
UNION MORTGAGE OR STANDARD
mortgaged property and that they may take MORTGAGE CLAUSE
out separate policies with the same or This clause is similar to an open loss payable
different insurance companies. Consequently, clause, except that it is stipulated that the
insurance taken by one on his own name only acts of the mortgagor cannot invalidate the
does not inure to the benefit of the other. insurance, provided that if the mortgagor fails
The mortgagor may insure the mortgaged to pay the premiums due, the mortgagee
property in its full value but the mortgagee shall, on demand, pay said premiums.
can insure it only in the extent of the debt When a mortgagee insured his own interest
secured. and a loss occurs, he is entitled to recover on
When a mortgagee insures his own interest in the insurance. However, he may no longer
the mortgaged property without reference to claim against the mortgagor, for his claim is
the right of the mortgagor, mortgagee is discharged up to the amount the insurer has
entitled to the proceeds of the policy in case paid him [Palileo v. Cosio (1955)].
of loss to the extent of his credit.
(1) If the proceeds are more than the total
amount of credit, then mortgagor has no
right to the balance. If the proceeds are
equal to the credit, then insurer is
subrogated to the mortgagees rights and
mortgagee can no longer recover the
mortgagors indebtedness.

PAGE 63
UP LAW BOC INSURANCE CODE
Perfection of the
Insurance Contract
OFFER AND ACCEPTANCE/
CONSENSUAL
An insurance contract is consensual. It is
therefore perfected by mere consent. Consent
is manifested by the meeting of the offer and
the acceptance upon the object or the cause
which are to constitute the contract.
There is an offer when the insured submits an
application to the insurer. There is acceptance
when the insurer approves the application.
The insurance contract becomes effective
upon payment of first premium, provided
there has been an approval of the application.
A contract of insurance must be assented to
by both parties, either in person or through
their agents and so long as an application for
insurance has not been either accepted or
rejected, it is merely a proposal or an offer to
make a contract [Perez v. CA (2000)].
Also, according to Enriquez v. Sun Life
Assurance Co. (1920):
(1) Submission of application, even with
premium payment is a mere offer on the
part of the applicant, and does not bind
the insurer;
(2) An insurance contract is also not perfected
where the applicant dies before the
approval of his application or it does not
appear that the acceptance of the
application ever came to the knowledge of
the applicant;
(3) An acceptance made by letter shall not
bind the person making the offer except
from the time it came to his knowledge.
The parties may impose additional conditions
precedent to the validity of the policy as a
contract as they see fit. Usually, it is stipulated
in the application that contract shall not
become binding until the policy is delivered
and the first premium is paid [De Leon (2010)].
DELAY IN ACCEPTANCE
Delay in acting on the application does not
constitute acceptance even though the
insured has forwarded his first premium with
his application [Perez v. CA (2000)].
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MERCANTILE LAW
When there is delay in acceptance due to the
negligence of the insurance company which
takes unreasonably long time before the
application is processed and the applicant
dies, the contract is not perfected. In this case,
the insurer can be liable for damages in
accordance with the tort theory. The
insurance business is imbued with public
interest, thus it is the duty of the insurer to act
with reasonable promptness in acting on
applications submitted to it.
The measure of damage is the face value of
the policy. In life insurance, the proceeds will
inure to the insureds estate and not to the
beneficiary.
The insurer is liable under the policy because
its delay in formally accepting/denying the
application and payment of premium is taken
as an implied acceptance.
DELIVERY OF POLICY
Delivery is the act of putting the insurance
policy (the physical document) into the
possession of the insured. The delivery can be
a proof of the acceptance of the insurer of the
offer of the insured. It is not, however, a pre-
requisite of a valid contract of insurance.
Actual manual delivery is not necessary for
the validity of the contract. Constructive
delivery may be sufficient. The contract may
be completed without delivery depending on
the intention of the parties.
Actual delivery to the insured is not essential
to give the policy binding effect as long as the
insured has complied with every condition
required of him [New York Life Ins. Co. v.
Babcock (1898)].
There are conflicting views as to whether
delivery to the agent of the insurance
company can be considered delivery to the
insured.
In Bradley v. New York Life Ins. (1921), the agent
of the insurance company is not the agent of
the insured. Thus delivery to the agent cannot
be considered delivery to the insured.
PREMIUM PAYMENT
An insurance premium is the agreed price for
assuming and carrying the risk, that is, the
consideration paid an insurer for undertaking to
UP LAW BOC
indemnify the insured against the specified
peril.
General rule: No insurance policy issued or
renewal is valid and binding until actual
payment of the premium [Section 77]. Any
agreement to the contrary is void.
Exceptions:
(1) In case of life and industrial life whenever the
grace period provision applies (Section 77);
(2) Where there is an acknowledgment in the
contract or policy of insurance that the
premium has already been paid;
(3) Where there is an agreement to grant the
insured credit extension for the payment of
the premium despite full awareness of grace
period proided by law [UCPB v. Masagana
Telemart (2001)];
(4) Where there is an agreement allowing the
insured to pay premium in installment and
partial payment has been made at the time
of the loss [Makati Tuscany v. CA (1992)];
(5) Where the parties are barred by estoppel
[UCPB v. Masagana Telemart (2001)].
AUTHORITY OF AGENT TO RECEIVE
PREMIUM
Where an insurer authorizes an insurance
agent or broker to deliver a policy to the
insured, it is deemed to have authorized said
agent to receive the premium in its behalf.
The insurer is bound by its agents
acknowledgement of receipt of payment of
premium [American Home Assurance Co. v.
Chua (1999)].
PAYMENT BY POST-DATED CHECK
The payment of premium by a postdated
check at a stated maturity subsequent to the
loss is insufficient to put the insurance into
effect.
But payment by a check bearing a date prior
to the loss, assuming availability of funds,
would be sufficient, even if it remains
unencashed at the time of the loss. The
subsequent effects of encashment would
retroact to the date of the instrument and its
acceptance by the creditor [Vitug, Commercial
Laws and Jurisprudence (2006)].
INSURANCE CODE MERCANTILE LAW
NON-PAYMENT OF PREMIUM
(1) Non-payment of first premium, unless
waived, prevents the contract from becoming
binding notwithstanding the acceptance of
the application nor the issuance of the policy.
(2) Non-payment of subsequent premiums does
not affect the validity of the contracts unless,
by express stipulation, it is provided that the
policy shall in that event be suspended or
shall lapse. In case of individual life
insurance, the policy holder is entitled a
grace period of either 30 days or one month
within which payment of any premium after
the first may be made. In cases of industrial
life insurance, the grace period is four weeks,
and where premiums are paid monthly,
either 30 days or one month.
EXCUSES FOR NON-PAYMENT
(1) Fortuitous events which render payment by
the insured wholly impossible will not prevent
forfeiture of the policy when the premium
remains unpaid. In other words, it is not an
excuse.
(2) Non-payment of premiums occasioned by
war causes an insurance to be not merely
suspended, but is completely abrogated. It
would be unjust to allow the insurer to retain
the reserve value of the policy, which is the
excess of the premiums paid over the actual
risk carried during the years when the policy
had been in force in time of war [Constantino
v. Asia Life Ins. Co. (1950)].
NON-DEFAULT OPTIONS IN
LIFE INSURANCE
The law requires that in case of life or
endowment insurance, the policy shall contain a
provision specifying the options to which the
policy holder is entitled in the event of default in
a premium payment after three full annual
premiums shall have been paid [Sec 227(f)].
CASH SURRENDER VALUE (CSV)
It is the amount that the insured is entitled to
receive if he surrenders the policy and releases his
claims upon it. The right to CSV accrues only
after three full annual premium payments. The
Insured is given the right to claim the amount
less than the reserve, reduced by surrender
charge.
PAGE 65
UP LAW BOC INSURANCE CODE
The cash value or cash surrender value is an
amount which the insurance company holds
in trust for the insured to be delivered to him
upon demand. When the companys credit for
advances is paid out of the cash value or cash
surrender value, that value and the companys
liability is diminished [Manufacturers Life Ins.
v. Meer (1951)].
Ratio: The premium is uniform throughout a
lifetime, but the risk is varied (i.e., higher risk when
older, lower when young). Thus, the cost of
protection is more expensive during the early years
of the policy.
ALTERNATIVE TO CSV
(1) Extended insurance/term insurance, where the
insured, after having paid three full annual
premiums, is given the right to have the policy
continued in force from date of default for a time
either stated or equal to the amount of the CSV,
taken as a single premium. The face value of the
policy remains the same but only within the
term. It is also called term insurance where
CSV is taken as a single premium (no further
payments) to extend the policy for a fixed period
of time. Reinstatement is allowed if made within
the term purchased; no reinstatement after the
lapse of the term purchased
(2) Paid-up insurance, where, after the insurance is
paid-up, the insured who has paid three full
annual premiums is given the right, upon
default, to have the policy continued from the
date of default for the whole period of insurance
without further payment of premiums. It is also
called reduced paid-up because in effect the
policy, terms and conditions are the same but
the face value is reduced to the paid-up value.
(3) Automatic premium loan (APL), where, upon
default, the insurer lends/advances to the
insured without any need of application on his
part, amount necessary to pay overdue
premium, but not to exceed the CSV of the
policy. It only applies if requested in writing by
the insured either in the application or at any
time before expiration of the grace period. In
effect, the insurance policy continues in force for
a period covered by the payment. After the
period, if insured still does not resume paying
his premiums, policy lapses, unless CSV still
remains. If there is still CSV, APL continues until
CSV is exhausted. This is beneficial for the
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MERCANTILE LAW
insured because it continues the contract and all
its features with full force and effect.
REINSTATEMENT OF A LAPSED
LIFE INSURANCE POLICY
Reinstatement of a lapsed life insurance policy
is not a non-default option. It does not create a
new contract, but merely revives the original
policy so insurer cannot require a higher
premium than the amount stipulated in the
contract. It does not apply to group/industrial
life insurance.
Requisites:
(1) It must be exercised within three years from
date of default;
(2) The insured must present evidence of
insurability satisfactory to the insurer;
(3) He must pay all back premiums and all
indebtedness to the insurer
(4) The CSV must not have been duly paid to the
insured nor the extension period expired;
(5) The application must be filed during the
insureds lifetime [Andres v. Crown Life Ins.
(1958)].
REFUND OF PREMIUMS
Return of premiums can be made in the following
cases:
(1) If the thing insured was never exposed to the
risks insured against, the whole premium
should be refunded;
(2) When the contract is voidable due to the
fraud or misrepresentation of insurer or his
agent, the whole premium should be
refunded
(3) When by any default of the insured other
than actual fraud, the insurer never incurred
any liability under the policy, the whole
premium should be refunded;
(4) When the contract is voidable because of the
existence of facts of which the insured was
ignorant without his fault, the whole
premium should be refunded;
(5) Where the insurance is for a definite period
and the insured surrenders his policy, the
portion of the premium that corresponds to
the unexpired time at a pro rata rate, unless a
short period rate has been agreed upon and
appears on the face of the policy should be
return;
UP LAW BOC INSURANCE CODE
(6) When there is over-insurance by several
insurers, the return premiums should be
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk;
(7) When rescission is granted due to the
insurers breach of contract.
Rescission of Insurance
Contracts
CONCEALMENT
A neglect to communicate that which a party
knows and ought to communicate, is called a
concealment [Section 26].
A concealment whether intentional or
unintentional entitles the injured party to
rescind a contract of insurance [Section 27].
Requisites:
(1) A party knows a fact which he neglects to
communicate or disclose to the other;
(2) Such party concealing is duty bound to
disclose such fact to the other;
(3) Such party concealing makes no warranty of
the fact concealed;
(4) The other party has not the means of
ascertaining the fact concealed;
(5) The fact concealed is material.
Concealment may be committed by either the
insurer or the insured [Qua Chee Gan v. Law
Union & Rock Ins. Co. (1955); Fieldmens Ins. Co.
v. Vda. de Songco (1968)].
PROOF OF FRAUD IN CONCEALMENT
General rule: Fraud need not be proven in order
to prove concealment. Good faith is not a
defense.
Exception: When the concealment is made by
the insured in relation to the falsity of a
warranty, the non-disclosure must be
intentional and fraudulent in order that the
contract may be rescinded.
TEST OF MATERIALITY
Materiality is determined not by the event, but
solely by the probable and reasonable
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MERCANTILE LAW
influence of the fact upon the party to whom
the communication is due, in forming his
estimate of the disadvantages of the
proposed contract, or in making his inquiries
[Section 31].
The test is in the effect which the knowledge
of the fact in question would have on the
contract. It need not increase the risk or
contribute to any loss or damage suffered. It is
sufficient if the knowledge of it would
influence the party in making the contract (De
Leon (2010)).
EFFECTS
General rule: Concealment vitiates the contract
and entitles the insurer to rescind, even if the
death or loss is due to a cause not related to the
concealed matter.
Exceptions:
(1) Incontestability clause, which clause
stipulates that the policy shall be
incontestable after a stated period. The
incontestability clause is a mandatory
provision in life policies. The policy must be
payable on the death of the insured and has
been in force during the lifetime of the
insured for at least two years from its date of
issue or of its last reinstatement;
(2) Concealment after the contract has become
effective, because concealment must take
place at the time the contract is entered into
in order that the policy may be avoided.
Information obtained after the perfection of
the contract is no longer necessary to be
disclosed by the insured, even if the policy
has not been issued.
(3) Waiver or estoppel;
(4) Marine insurance, where concealment of the
following matters does not vitiate the entire
contract, but merely exonerates the insurer
from a loss resulting from the risk concealed:
(a) The national character of the insured;
(b) The liability of the thing insured to
capture and detention;
(c) The liability to seizure from breach of
foreign laws of trade;
(d) The want of necessary documents; and
(e) The use of false and simulated papers
[Section 112].
UP LAW BOC INSURANCE CODE MERCANTILE LAW

CONCEALMENT IN MARINE AND Note: If the applicant is aware of the existence

ORDINARY PRIVATE INSURANCE
DISTINGUISHED
Marine Ordinary
insurance insurance
Required disclosure
Exact and whole truth Substantial truth
Effect of concealment
Concealment of the Any kind of
matters specified in concealment will make
Section 112 will not the insurer not liable.
entirely avoid the
contract but will merely
exonerate the insurer
from losses resulting
from the risk concealed
CONCEALMENT IN NON-MEDICAL
INSURANCE
The waiver of medical examination in a non-
medical insurance contract renders even more
material the information required of the
applicant concerning the previous conditions
of health and diseases suffered. The fact that
the matter concealed had no bearing on the
cause of death is not important because it is
well settled that the insured need not die of
the disease he had failed to 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 making
inquiries [Sunlife v. Sps. Bacani (1995)].
Where matters of opinion or judgment are
called for, answers made in good faith and
without intent to deceive will not avoid the
policy even though they are untrue. Reason:
The insurer cannot simply rely on those
statements. He must make further inquiry
[Philamcare Health Systems v. CA (2002)].
MATTERS WHICH MUST BE
DISCLOSED EVEN IN THE ABSENCE
OF INQUIRY
Each party to a contract of insurance must
communicate to the other, in good faith, all
facts within his knowledge which are material
to the contract and as to which he makes no
warranty, and which the other has not the
means of ascertaining [Section 28].
of some circumstance which he knows would
influence the insurer in acting upon his
application, good faith requires him to disclose
that circumstance, though unasked [Vance
(1951)].
The fact of being a mongoloid is a material
fact that needs to be disclosed [Great Pacific
Life v. CA (1979)].
Mere possibility of previous hypertension is
not enough to establish concealment [Great
Pacific Life (1999)].
MATTERS WHICH NEED NOT BE
DISCLOSED
(1) Matters already known to the insurer [Section
30(a));
(2) Matters which each party are bound to know
[Section 30(b) and Section 32];
(3) Matters of which the insurer waives
communication [Section 30(c) and Section
33];
(4) Matters which prove or tend to prove the
existence of a risk excluded by a warranty
and which are not otherwise material
[Section 30(d)];
(5) Matters which relate to a risk excepted in the
policy, and which are not otherwise material
[Section 30(e)];
(6) Information of the nature or amount of the
interest of one insured unless if inquired
upon by the insurer, except if required by
Section 51 [Section 34]
(7) Matters of opinion [Section 35].
Each party to a contract of insurance is bound to
know all the general causes which are open to
his inquiry, equally with that of the other, and
which may affect the political or material perils
contemplated; and all general usages of trade
[Section 32].
MISREPRESENTATION/
OMISSIONS
A representation is to be deemed false when
the facts fail to correspond with its assertions
or stipulations [Section 44].
If a representation is false in a material point,
whether affirmative or promissory, the injured

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UP LAW BOC INSURANCE CODE
party is entitled to rescind the contract from
the time when the representation becomes
false [Section 45].
There is false representation if the matter is
true at the time it was made/represented but
false at the time the contract takes effect
[Section 44]. Corollarily, there is no false
representation if the matter is true at the time
the contract takes effect although false at the
time it was made/represented.
A representation must be presumed to refer
to the date on which the contract goes into
effect [Section 42]. Thus, a representation may
be altered or withdrawn before the insurance
is effected but not afterwards [Section 41].
Representations are factual statements made
by the insured at the time of, or prior to, the
issuance of the policy, which give information
to the insurer and induce him to enter into the
insurance contract.
KINDS OF REPRESENTATIONS
(1) Affirmative, which refers to any allegation as
to the existence or non-existence of a fact
when the contract begins.
(2) Promissory, which is any promise to be
fulfilled after the contract has come into
existence; or any statement concerning what
is to happen during the existence of the
insurance [Section 39]. A promissory
representation is substantially a condition or
warranty [De Leon (2010)].
(3) Oral or written [Section 36].
Requisites:
(1) The insured stated a fact which is untrue;
(2) Such fact was stated with knowledge that it
is untrue and with intent to deceive or which
he states positively as true without knowing
it to be true and which has a tendency to
mislead;
(3) Such fact in either case is material to the risk.
Like in concealment, fraud or intent is not
essential to entitle the insurer to rescind on the
ground of misrepresentation [Section 45].
TEST OF MATERIALITY
The materiality of a representation is
determined by the same rules as the materiality
of a concealment [Section 46].
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MERCANTILE LAW
EFFECTS
General rule: The injured party is entitled to
rescind from the time when the representation
becomes false [Section 45].
Exceptions:
(1) Incontestability clause;
(2) Misrepresentation after contract takes effect;
(3) Waiver, made by acceptance of insurer of
premium payments despite knowledge of the
ground for rescission [Section 45];
(4) A representation of the expectation, belief,
opinion, or judgment of the insured,
although false, and even if material to the
risk [Philamcare Health Systems, Inc. v. CA
(2002)];
(5) Representation by insured based on
information obtained from third persons (not
his agent), provided the insured:
(a) Has no personal knowledge of the facts;
(b) Believes them to be true; and
(c) Explains to the insurer that he does so on
the information of others.
A representation cannot qualify an express
provision or an express warranty of insurance
[Section 40] because a representation is not
part of the contract but only a collateral
inducement to it. However, it may qualify as
an implied warranty.
There is fraud and misrepresentation when
another person takes the place of the insured
in the medical examination [Eguaras v. Great
Eastern (1916)].
The insurer is not entitled to rescission for
misrepresentation of age if the birth date on
the policy leads to the conclusion that the
insured is beyond the age covered and yet
insurer continued to accept payment and had
issued the policy. Insurer is deemed estopped
[Edillon v. Manila Bankers Life (1982)].
Marine Ordinary
insurance insurance
Who may commit
May be committed by Committed only by
either insured or insured.
insurer
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Marine Ordinary (3) Affirmative warranty, which asserts the

insurance insurance existence of a fact or condition at the time it
is made;
Act involved (4) Promissory warranty or executory warranty,
Passive form Active form which is one where the insured stipulates
Insured withholds Insured makes that certain facts or conditions pertaining to
information of material erroneous statements the risk shall exist or that certain things with
facts from the insurer; of facts with the intent reference thereto shall be done or omitted. It
he maintains silence of inducing the insurer is in the nature of a condition subsequent
when he ought to to enter into the [Sections 72 and 73].
speak insurance contract
EFFECT
Materiality MATERIAL WARRANTY
Determined by the same rules General rule: Violation of a material warranty, or
Effect other material provision of the policy, on the
part of either the insured or insurer, entitles the
Same effects on the part of the insured; insurer other to rescind [Section 74].
has right to rescind
Injured party is entitled to rescind a contract of Breach of a material warranty may either be:
insurance on ground of concealment or false (1) Without fraud, in which case, the insurer will
representation, whether intentional or not. be exonerated from the time it occurs. If
made during the inception, it will prevent the
policy from taking effect [Section 76].
BREACH OF WARRANTIES (2) With fraud, in which case, the policy is
Warranty is a statement or promise by the avoided ab initio.
insured set forth in the policy itself or
incorporated in it by proper reference, the Exceptions:
untruth or nonfulfillment of which in any (1) Loss occurs before the time of performance of
respect and without reference to whether the the warranty [Section 73];
insurer was in fact prejudiced by such untruth (2) The performance becomes unlawful [Section
or non-fulfilment, renders the policy voidable 73];
by the insurer [Vance (1951)]. (3) The performance becomes impossible
A warranty may also be made by the insurer. [Section 73];
A warranty may relate to the past, the (4) Waiver or estoppel.
present, the future, or to all of these [Section
68]. IMMATERIAL WARRANTY
No particular form of words is necessary to General rule: Breach of an immaterial provision
create a warranty [Section 69]. does not avoid the policy [Section 75].

KINDS OF WARRANTIES Exception: Breach of an immaterial provision

(1) Express warranty, which is an agreement
contained in the policy or clearly
incorporated therein as part thereof;
(2) Implied warranty, which is deemed included
in the contract although not expressly
mentioned (e.g., implied warranty of
seaworthiness of the vessel in marine
insurance and implied warranty not to alter
the circumstances of the thing insured);
avoids the policy when the parties stipulate that
violation of a particular provision, though
immaterial, shall avoid the policy. In effect, the
parties converted the immaterial provision into
a material one [Sundiang and Aquino (2013)].
A condition in the policy which requires insured
to disclose to the insurer of any insurance that, if
violated by the insured, would ipso facto avoid
the contract [Pioneer v. Yap (1974)].
Insurer is barred by waiver (or estoppel) to claim
violation of the so-called hydrants warranty

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when, despite knowing fully that only 2 fire CAUSES OF LOSS

hydrants existed (out of the 11 hydrants (1) Remote cause is an event preceding another
required), it still issued the insurance policies in a causal chain, but separated from it by
and received the premiums [Qua Chee Gan v. other events;
Law Union (1955)]. (2) Proximate cause is that cause, which, in
natural and continuous sequence, unbroken
Warranty Representation by any efficient intervening cause, produces
the injury, and without which the result
Nature would not have occurred [Vda. De Bataclan
Part of the contract Mere collateral v. Medina (1957)].
inducement (3) Immediate cause is the cause, not the
proximate cause, which immediately
Form
precedes the loss.
Written on the policy, May be written in the
actually or by reference policy or may be oral LIABILITY FOR LOSS
Materiality Loss for which the Loss for which the
Presumed material Must be proved to be insurer is liable insurer is liable
material Loss the proximate Loss the proximate
Compliance cause of which is the cause of which is the
peril insured against peril insured against
Must be strictly Requires only [Section 86] [Section 86]
complied with substantial truth and
compliance Loss the immediate Loss the immediate
cause of which is the cause of which is the
Applicability of incontestability clause peril insured against peril insured against
Does not apply Applies except where the except where the
proximate cause is an proximate cause is an
excepted peril excepted peril

Claims Settlement and Loss through

negligence of insured
Loss through
negligence of insured
Subrogation except where there was
gross negligence
except where there was
gross negligence
amounting to willful amounting to willful
CONCEPT OF LOSS acts acts
Loss in insurance law embraces injury or
Loss caused by efforts
damage [Bonifacio Bros. v. Mora (1967)].
to rescue the thing
from peril insured
Requisites: Recovery upon a loss requires that:
against if, during the
(1) The insured must have insurable interest in
course of the rescue,
the subject matter;
the thing is exposed to
(2) The interest is covered by the policy;
a peril not insured
(3) There be a loss; and
against, which
(4) The loss must be one for which the insurer is
permanently deprives
liable;
the insured of its
(5) Notice and proof of loss must be given if
possession in whole or
policy is fire insurance or when the same is
in part [Section 87]
stipulated in the policy.

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UP LAW BOC INSURANCE CODE
NOTICE AND PROOF OF LOSS
NOTICE OF LOSS
This refers to the formal notice given the insurer
by the insured or claimant under a policy of the
occurrence of the loss insured against.
PURPOSE
Its purpose is to apprise the insurance
company so that it may make proper
investigation and take such action as may be
necessary to protect its interest.
In fire insurance, an insurer is exonerated, if
notice thereof be not given to him by an
insured, or some person entitled to the benefit
of the insurance, without unnecessary delay
[Section 90].
In other types of insurance, failure to give
notice will not exonerate the insurer, unless
there is a stipulation in the policy requiring
the insured to do so.
However, it has been held that formal notice
of loss is not necessary if insurer has actual
notice of loss.
FORM
In the absence of any stipulation in the policy,
notice may be given orally or in writing.
The notice of loss may be in the form of an
informal or provisional claim containing a
minimum of information as distinguished
from a formal claim which contains the full
details of the loss, computations of the
amounts claimed, and supporting evidence,
together with a demand or request for
payment [De Leon (2010)].
PROOF OF LOSS
It is the formal evidence given to the insurance
company by the insured or claimant, under a
policy, of: the occurrence of the loss, the
particulars thereof, and the data necessary to
enable the company to determine its liability
and the amount.
PURPOSE
Its purpose is to give the insurer information
by which he may determine the extent of his
liability but also; to afford him a means of
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MERCANTILE LAW
detecting any fraud that may have been
practiced upon him, and to operate as a check
upon extravagant claims.
Like a notice of loss, in the absence of any
stipulation in the policy, proof may be given
orally or in writing.
The insured is not bound to give such proof as
would be necessary in a court of justice; but it
is sufficient for him to give the best evidence
which he has in his power at the time [Section
91].
RULES FOR RECOVERY
General rule: Timely compliance with the notice
and proof of loss is a condition precedent to the
right to recover if the policy is fire insurance, or
when the same is stipulated in the policy.
Exceptions:
(1) For both notice and proof of loss, waiver:
(a) Defects in a notice or proof of loss may be
waived when such defects, which the
insured might remedy, are not specified,
without unnecessary delay, to him as
ground of objection by the insurer (Section
92);
(b) Delay in presentation to an insurer of
notice or proof of loss is waived if caused
by any act of his, or if he omits to take
objection promptly and specifically upon
that ground;
(2) For notice of loss, a formal notice of loss is
not necessary if insurer has actual notice of
loss.
GUIDELINES ON CLAIMS
SETTLEMENT
Claims settlement is the indemnification of
the loss suffered by the insured. The claimant
may be the insured or reinsured, the insurer
who is entitled to subrogation, or a third party
who has a claim against the insured
Where a policy gives the insurer the control of
the decision to settle claim or litigate it, the
insurer nevertheless is required to observe a
certain measure of consideration for the
interest of the insured.
UP LAW BOC INSURANCE CODE MERCANTILE LAW

Claims Life insurance Non-life insurance

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

In case of litigation, it is the duty of the (1) Knowingly misrepresenting to claimants

Commissioner or the Court to determine
whether the claim has been unreasonably
denied or withheld.
Failure to pay any such claim within the time
prescribed shall be considered prima facie
evidence of unreasonable delay in payment.
UNFAIR CLAIMS SETTLEMENT;
SANCTIONS
No insurance company doing business in the
Philippines shall refuse, without just cause, to
pay or settle claims arising under coverages
provided by its policies, nor shall any such
company engage in unfair claim settlement
practices.
Any of the following acts by an insurance
company, if committed without just cause and
performed with such frequency as to indicate a
general business practice, shall constitute
unfair claim settlement practices:
pertinent facts or policy provisions relating to
coverage at issue;
(2) Failing to acknowledge with reasonable
promptness pertinent communications with
respect to claims arising under its policies;
(3) Failing to adopt and implement reasonable
standards for the prompt investigation of
claims arising under its policies;
(4) Not attempting in good faith to effectuate
prompt, fair and equitable settlement of
claims submitted in which liability has
become reasonably clear; or
(5) Compelling policyholders to institute suits to
recover amounts due under its policies by
offering without justifiable reason
substantially less than the amounts
ultimately recovered in suits brought by
them.
Evidence as to numbers and types of valid and
justifiable complaints to the Commissioner
against an insurance company, and the
Commissioners complaint experience with

PAGE 73
UP LAW BOC INSURANCE CODE
other insurance companies writing similar
lines of insurance shall be admissible in
evidence in an administrative or judicial
proceeding for the purpose of determining
whether unfair claim settlement practices
have been committed.
If it is found, after notice and an opportunity
to be heard, that an insurance company has
violated this section, each instance of
noncompliance may be treated as a separate
violation and shall be considered sufficient
cause for the suspension or revocation of the
companys certificate of authority [Section
247].
PRESCRIPTION OF ACTION
In the absence of an express stipulation in the
policy, it being based on a written contract,
the action prescribes in ten years [Article 1144,
Civil Code].
However, the parties may validly agree on a
shorter period provided it is not less than one
year from the time the cause of action accrues
[Section 63].
In motor vehicle insurance, action prescribes
in one year.
The cause of action accrues from the rejection
of the claim of the insured and not from the
time of loss. A stipulation stating that the
prescriptive period for filing an action is one
year from the happening of loss is void. In
such cases, since the stipulation is void and it
is upon a written contract, the time limit is ten
years from the time the cause of action
accrues.
Prescription is essential for the prompt
settlement of claims as it demands for suits to
be brought while the evidence as to the origin
and cause of the loss or destruction has not
yet disappeared.
SUBROGATION
Subrogation is a process of legal substitution.
The insurer, after paying the amount covered
by the insurance policy, steps into the shoes of
the insured and avails himself of the latter's
rights that exist against the wrongdoer at the
time of loss.
The insurer becomes entitled to recover from
the wrongdoer the amount of the loss it may
have paid to the insured.
PAGE 74
MERCANTILE LAW
Note: Subrogation applies only to property
insurance and non-life insurance.
RIGHTS TRANSFERRED
The rights to which the subrogee succeeds are
the same as, but not greater than, those of
the person for whom he is substituted.
The subrogee-insurer cannot acquire any
claim, security, or remedy the subrogor did
not have. In other words, a subrogee cannot
succeed to a right not possessed by the
subrogor. A subrogee can recover only if the
insured likewise could have recovered
[Sulpicio Lines, Inc. v. First Lepanto-Taisho Ins.
Corp. (2005); Lorenzo Shipping Corp. v. Chubb
and Sons, Inc. (2004)].
The insured can no longer recover from the
offended party what was paid to him by the
insurer but he can recover any deficiency if the
damages suffered are more than what was
paid. The deficiency is not covered by the right
of subrogation.
The insurer must present the policy as
evidence to determine the extent of its
coverage [Wallen Phil. Shipping v. Prudential
Guarantee (2003)].
WHEN THERE IS NO RIGHT OF
SUBROGATION
(1) Where the insured by his own act releases the
wrongdoer or third party liable for the loss or
damage;
(2) Where the insurer pays the insured the value of
the loss without notifying the carrier who has in
good faith settled the insureds claim for loss;
(3) Where the insurer pays the insured for a loss or
risk not covered by the policy [Pan Malayan Ins.
Co. v. CA (1997)];
(4) In life insurance;
(5) For recovery of loss in excess of insurance
coverage [De Leon (2010)].
Since the insurer can be subrogated to only
such rights as the insured may have, should the
insured, after receiving payment from the
insurer, release the wrongdoer who caused the
loss, the insurer loses his rights against the
latter. But in such a case, the insurer will be
entitled to recover from the insured whatever it
has paid to the latter, unless the release was
made with the consent of the insurer [Manila
Mahogany v. CA (1987)].
UP LAW BOC INSURANCE CODE
Insurance Commissioner
JURISDICTION AND
ADJUDICATORY POWERS
The Insurance Commissioner has the power to
adjudicate disputes relating to an insurance
companys liability to an insured under a policy.
A complaint or claim filed with such official is
considered an action or suit the filing of
which would have the effect of tolling the
suspending the running of the prescriptive
period.
(1) Concurrent jurisdiction (with regular civil
courts) over cases where any single claim
does not exceed P5,000,000 involving
liability arising from:
(a) Insurance contract;
(b) Contract of suretyship;
(c) Reinsurance contract;
(d) Membership certificate issued by
members of mutual benefit association
[Section 439];
(2) Primary and exclusive jurisdiction over
claims for benefits involving pre-need plans
where the amount of benefits does not
exceed P100,000 [Sec. 55, Pre-Need Code].
For the purpose of proceeding under its
adjudicatory powers under the Insurance
Code, the Commissioner or any officer thereof
designated by him, is empowered to
administer oaths and affirmation, subpoena
witnesses, compel their attendance, take
evidence and require the production of any
books, papers, documents or contracts or
other records which are relevant or material to
the inquiry [Section 439].
Note: However, the Insurance Commission has
no jurisdiction to decide the legality of a
contract of agency entered into between an
insurance company and its agent. The same is
not covered by the term doing or transacting
insurance business under Section 2, neither is it
covered by Section 439, which grants the
Commissioner adjudicatory powers [Sundiang
and Aquino (2013)].
REVOCATION OF CERTIFICATE
OF AUTHORITY
The Certificate of Authority issued to the
domestic or foreign company by the
PAGE 75
MERCANTILE LAW
Commission may be revoked or suspended by
the Insurance Commissioner for any of the
following grounds [Section 254]:
(1) The company is in an unsound condition;
(2) That it has failed to comply with the
provisions of law or regulations obligatory
upon it;
(3) That its condition or method of business is
such as to render its proceedings hazardous
to the public or its policyholders;
(4) That its paid-up capital stock, in the case of
a domestic stock corporation, or its available
cash assets, in the case of a domestic mutual
company, or its security deposits, in the case
of a foreign company, is impaired or
deficient;
(5) That the margin of solvency required of such
company is deficient.
The Commissioner is authorized to suspend or
revoke all certificates of authority granted to
such insurance company, its officers and
agents, and no new business shall thereafter
be done by such company or for such
company by its agents in the Philippines while
such suspension, revocation, or disability
continues or until its authority to do business
is restored by the Commissioner.
Before restoring such authority, the
Commissioner shall require the company
concerned to submit to him a business plan
showing the companys estimated receipts
and disbursements, as well as the basis
therefor, for the next succeeding three years.
LIQUIDATION OF INSURANCE
COMPANY
If the company is determined by the
Commissioner to be insolvent or cannot
resume business, he shall, if public interest
requires, order its liquidation [Section 256].
This should be distinguished from a situation
where a conservator is appointed when the
Commissioner finds that a company is in a
state of continuing inability or unwillingness
to maintain a condition of solvency or liquidity
adequate to protect the policyholders and
creditors. The conservator will take charge of
the management of the insurance company
[Section 255].
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

Common Carriers clientele does not exclude it from the

definition of a common carrier [First Phil.
CONCEPT Industrial v. CA (1998)].
Common carriers are: The true test for a common carrier is not the
(1) Persons, corporations, firms or associations; quantity or extent of the business actually
(2)Engaged in the business of carrying or transacted, or the number and character of
transporting; the conveyances used in the activity, but
(3) Passengers or goods or both; whether the undertaking is a part of the
(4) By land, water, or air; activity engaged in by the carrier that he has
(5) For compensation; held out to the general public as his business
(6) Offering their services to the public [Article or occupation. If the undertaking is a single
1732]. transaction, not a part of the general business
or occupation engaged in, as advertised and
Carriers are persons or corporations who held out to the general public, the individual
undertake to transport or convey goods, or the entity rendering such service is a
property or persons, from one place to another, private, not a common, carrier. The question
gratuitously or for hire, and are classified as: must be determined by the character of the
(1) Private or special carriers, who transport or business actually carried on by the carrier, not
undertake to transport in a particular by any secret intention or mental reservation
instance for hire or reward [Agbayani, it may entertain or assert when charged with
Commercial Laws of the Philippines (1987)]; the duties and obligations that the law
and imposes [Teodoro v. Nicolas (2012)].
(2) Common or public carriers, defined in Article A common carrier need not have fixed and
1732. publicly known routes. Neither does it have to
maintain terminals or issue tickets [Asia
Article 1732 makes no distinction: Lighterage and Shipping v. CA (2003)].
(1) Between one whose principal business
activity is the carrying of persons or goods or
both, and one who does such carrying only as Common carrier Private carrier
an ancillary activity [Fabre v. CA (1996)];
(2) Between a person or enterprise offering Availability
transportation service on a regular or
scheduled basis and one offering such service Holds himself out in Agrees in some special
on an occasional, episodic, or unscheduled common, that is, to all case with some private
basis [Loadstar Shipping Co., Inc. v. CA persons who choose to individual to carry for
(1999)]; employ him, as ready hire
(3) Between a carrier offering its services to the to carry for hire
general public and who offers services or
Binding effect
solicits business only from a narrow segment
of the general population [De Guzman v. CA
Bound to carry all who Not bound to carry for
(1988)].
offer and tender any reason, such
reasonable goods as it is
One engaged in the business of transporting compensation for accustomed to carry,
petroleum products from refineries via pipeline carrying them unless it enters into a
is a common carrier. It is engaged in the special agreement to
business of transporting or carrying goods, do so
i.e., petroleum products, for hire as a public
employment. It undertakes to carry for all Diligence required
persons indifferently, that is, to all persons
who choose to employ its services, and Extraordinary Ordinary diligence
transports the goods by land and for diligence
compensation. The fact that it has a limited

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Common carrier Private carrier
Governing law
Civil Code; Code of Law on obligations
Commerce and special and contracts
laws, if not regulated
by the Civil Code
(Article 1766); law of
the country to which
the goods are to be
transported, if
regarding liability for
loss, destruction, or
deterioration of goods
Regulation
A public service, Not subject
therefore subject to regulation as
regulation common carrier
It is not necessary that the carrier be issued a
certificate of public convenience [Loadstar
Shipping Co., Inc. v. CA (1999)].
With respect to the issuance of a certificate of
public convenience, the issue of kabit system
arises. It is an arrangement whereby a person
who has been granted a certificate of
convenience allows another person who owns
motor vehicles to operate under such
franchise for a fee (Lita Enterprises, Inc. v. IAC
(1984)].
The kabit system is invariably recognized as
being contrary to public policy and therefore
void and inexistent under Article 1409. Thus,
for the safety of passengers and the public,
the registered owner of the vehicle is not
allowed to prove that another person has
become the owner so that he may be thereby
relieved of responsibility [Lim v. CA (2002)].
Ratio: One of the primary factors considered in
the granting of a certificate of public
convenience for the business of public
transportation is the financial capacity of the
holder of the license, so that liabilities arising
from accidents may be duly compensated. The
kabit system renders illusory such purpose and,
worse, may still be availed of by the grantee to
escape civil liability caused by a negligent use of
MERCANTILE LAW
a vehicle owned by another and operated under
his license. If a registered owner is allowed to
escape liability by proving who the supposed
owner of the vehicle is, it would be easy for him
to transfer the subject vehicle to another who
possesses no property with which to respond
financially for the damage done [Dizon v.
Octavio (1955)].
DILIGENCE REQUIRED
STANDARD OF DILIGENCE
Common carriers, from the nature of their
business and for reasons of public policy, are
bound to observe extraordinary diligence,
according to all the circumstances of each case:
In the vigilance over the goods; and
For the safety of the passengers transported
by them [Article 1733].
to
a Extraordinary diligence in the vigilance over the
goods is expressed in Articles 1734, 1735, and
1745, Nos. 5, 6, and 7, while the extraordinary
diligence for the safety of the passengers is
further set forth in Articles 1755 and 1756.
Ratio: As stated in Article 1733, extraordinary
diligence is required because of the nature of
the business of common carriers and for
reasons of public policy.
EXTRAORDINARY DILIGENCE
Requires rendering service with the greatest
skill and utmost foresight [Agbayani (1987)];
Requires carrying passengers safely as far as
human care and foresight can provide, using
the utmost diligence of very cautious persons,
with a due regard for all the circumstances
[Article 1755];
Does not require common carriers to exercise
all the care, skill, and diligence of which the
human mind can conceive, nor such as will
free the transportation of passengers from all
possible perils.
Note: A common carrier is not an insurer of the
safety of its passengers and is not bound
absolutely and at all events to carry them safely
and without injury [Yobido v. CA (1997)].
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PRESUMPTION OF NEGLIGENCE
The mere proof of delivery of goods in good
order to a carrier, and of their arrival at the
place of destination in bad order, makes out
a prima facie case against the carrier, so that
if no explanation is given as to how the injury
occurred, the carrier must be held
responsible. It is incumbent upon the carrier
to prove that the loss was due to accident or
some other circumstance inconsistent with its
liability [Ynchausti Steamship v. Dexter and
Unson (1920)].
In case of death of or injuries to passengers,
common carriers are presumed to have been
at fault or to have acted negligently, unless
they prove that they observed extraordinary
diligence as prescribed in Arts 1733 and 1755
[Article 1756].
LIABILITIES
The obligation of the common carrier consists
in the transportation of passengers or goods
or both [Article 1732].
The liabilities of a common carrier arises from
a contract of carriage. Thus, the cause of
action, when there is failure on its part to exert
extraordinary diligence according to all
circumstances, is for breach of contract [Isaac
v. A.L. Ammen (1957)].
In what follows, these liabilities in case of
breach, both with respect to vigilance over the
goods and safety of the passengers
transported, will be discussed.
Vigilance Over Goods
LIABILITY, IN GENERAL
The law of the country to which the goods are
to be transported shall govern the liability of
the common carrier for their loss, destruction
or deterioration [Article 1753].
Under Philippine law, the liability of the
common carrier with respect to vigilance over
goods, in general, are as follows:
Common carriers are responsible for the loss,
destruction, or deterioration of the goods
[Article 1734]. In fact, they are liable even in
those cases where the cause of the loss or
damage is unknown [Agbayani (1987)].
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MERCANTILE LAW
Moreover, if the goods are lost, destroyed, or
deteriorated, common carriers are presumed
to have been at fault or to have acted
negligently [Article 1735].
EXEMPTING CAUSES
Common carriers are not responsible for the
loss, destruction, or deterioration of the goods if
the same is due to any of the following causes
only:
Flood, storm, earthquake, lightning, or other
natural disaster or calamity;
Act of the public enemy in war, whether
international or civil;
Act of omission of the shipper or owner of the
goods;
The character of the goods or defects in the
packing or in the containers;
Order or act of competent public authority
[Article 1734].
In all other cases of loss, destruction, or
deterioration, the common carrier is presumed
to have been at fault or to have acted
negligently, unless they prove that they
observed extraordinary diligence [Article 1735].
The analysis, therefore, is two-pronged:
Whether or not the cause of the loss,
destruction, or deterioration is included
under Article 1734;
If not, whether or not the common carrier
exercised extraordinary diligence.
Thus, in De Guzman v. CA (1988), it was held
that hijacking, not being included in Article 1734,
must be dealt with under the provisions of
Article 1735, and thus, the common carrier is
presumed to have been at fault or negligent.
NATURAL DISASTER OR CALAMITY
Requisites:
The natural disaster must have been the
proximate and only cause of the loss;
The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the occurrence of the
flood, storm or natural disaster [Article 1739];
The common carrier must not have
negligently incurred delay [Article 1740];
UP LAW BOC TRANSPORTATION LAW
In order that a common carrier may be
absolved from liability where the loss,
destruction or deterioration of the goods is
due to a natural disaster or calamity, it must
be shown that the such natural disaster or
calamity was the proximate and only cause of
the loss; there must be an entire exclusion of
human agency from the cause of the injury of
the loss [Philippine American General
Insurance Co., Inc. v. MGG Marine Services, Inc.
(2002)].
Moreover, even in cases where a natural
disaster is the proximate and only cause of the
loss, a common carrier is still required to
exercise due diligence to prevent or minimize
loss before, during and after the occurrence of
the natural disaster, for it to be exempt from
liability under the law for the loss of the goods
[Article 1739].
Fire may not be considered a natural disaster
or calamity. This must be so as it arises
almost invariably from some act of man or by
human means. It does not fall within the
category of an act of God unless caused by
lightning or by other natural disaster or
calamity. It may even be caused by the actual
fault or privity of the carrier [Eastern Shipping
Lines v. IAC (1987)].
ACT OF PUBLIC ENEMY
Requisites:
The act of the public enemy was committed
either in an international or civil war [Art.
1734];
The act of the public enemy must have been
the proximate and only cause;
The common carrier must exercise due
diligence to prevent or minimize the loss
before, during and after the act of the public
enemy causing the loss, destruction or
deterioration of the goods [Article 1739].
ACT OR OMISSION OF SHIPPER OR
OWNER
The act or omission of the shipper must have
been the proximate and only cause of the loss,
destruction, or deterioration of the goods.
If the shipper or owner merely contributed to
the loss, destruction or deterioration of the
goods, the proximate cause being the
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MERCANTILE LAW
negligence of the common carrier, the latter
shall be liable for the damages, which shall,
however, be equitably reduced [Article 1741].
CHARACTER OF THE GOODS
Requisites:
The loss, destruction, or deterioration of the
goods is due to the character of the goods or
defects in the packing or in the containers
[Article 1739];
The common carrier must exercise due
diligence to forestall or lessen the loss [Article
1741].
If the fact of improper packing is known to the
carrier or its servants or apparent upon ordinary
observation, but it accepts the goods
notwithstanding such condition, it is not
relieved of liability for loss or injury resulting
therefrom [Southern Lines v. CA (1962)].
ORDER OF COMPETENT AUTHORITY
Requisites:
There must be an order or act of competent
public authority through which the goods are
seized or destroyed [Article 1734];
The said public authority must have had the
power to issue the order [Article 1743].
The intervention of the municipal officials was
not of a character that would render impossible
the fulfillment by the carrier of the obligation. A
carrier is not duty bound to obey an illegal order
(of a mayor) to dump into the sea the scrap iron.
There is absence of sufficient proof that the
issuance of the order was attended with such
force or intimidation as to completely overpower
the will of the carriers employees [Ganzon v. CA
(1988)].
FORCE MAJEURE
Force majeure, in general, has also been
invoked as an exempting cause based on Article
1174, which states that no person shall be
responsible for a fortuitous event which could
not be foreseen, or which, though foreseen, was
inevitable.
A fortuitous event has the following
characteristics:
The cause of the unforeseen and unexpected
occurrence, or the failure of the debtor to
UP LAW BOC TRANSPORTATION LAW
comply with his obligations, must be
independent of human will;
It must be impossible to foresee the event
which constitutes the caso fortuito, or if it can
be foreseen, it must be impossible to avoid;
The occurrence must be such as to render it
impossible for the debtor to fulfill his
obligation in a normal manner; and
The obligor must be free from any
participation in the aggravation of the injury
resulting to the creditor.
There must be an entire exclusion of human
agency from the cause of injury or loss.
Moreover, a common carrier may not be
absolved from liability in case of force majeure
or fortuitous event alone. The common carrier
must still prove that it was not negligent in
causing the death or injury resulting from an
accident [Yobido v. CA (1997)].
Loss of a ship and of its cargo, in a wreck due
to accident or force majeure must, as a
general rule, fall upon their respective owners,
except in cases where the wrecking or
stranding of the vessel occurred through the
malice, carelessness, or lack of skill on the
part of the captain or because the vessel put
to sea is insufficiently repaired and prepared.
In order that the exemption due to force
majeure would apply, the carrier must prove
that the loss or destruction of the
merchandise was due to accident and force
majeure and not to fraud, fault, or negligence
on the part of the captain or owner of the ship
[Tan Chiong Sian v. Inchausti (1912)].
CONTRIBUTORY NEGLIGENCE
The liability of the common carrier shall be
equitably reduced when the loss, destruction,
or deterioration of the goods when:
The negligence of the common carrier was the
proximate cause thereof; and
The shipper or owner merely contributed to
such loss, destruction, or deterioration [Article
1741].
DURATION OF LIABILITY
A contract of transportation is consensual in
nature; therefore it is perfected upon the
meeting of the minds of the parties [Article
1305].
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MERCANTILE LAW
However, the responsibility to exercise
extraordinary diligence begins from the time
the goods are unconditionally placed in the
possession of and received by the carrier for
transportation [Article 1736].
The carriers responsibility terminates in any of
the following cases:
When the goods are delivered actually or
constructively by the carrier to the consignee
or to the person who has a right to receive
them [Article 1736];
When the goods are temporarily unloaded or
stored in transit by reason of the exercise of
the shipper or owner of his right of stoppage
in transit;
When the consignee has been advised of the
arrival of the goods at the place of destination
and has had reasonable opportunity to
remove them or dispose of them from the
warehouse of the carrier at the place of
destination [Article 1738].
DELIVERY OF GOODS TO COMMON
CARRIERS
Under Article 1736, delivery means
unconditionally placing the goods in the
possession of the carrier and the carrier
receiving them for transportation.
Thus, if the common carrier received the
goods not for transportation but only for
safekeeping, then the duty of extraordinary
diligence has not yet started.
Unconditionally placing the goods in the
possession of the carrier means the shipper
cannot get them back from the common
carrier at will.
The liability of the carrier as common carrier
begins with the actual delivery of the goods
for transportation and not merely with the
formal execution of a receipt or bill of lading;
the issuance of a bill of lading is not necessary
to complete delivery and acceptance. Even
where it is provided by statute that liability
commences with the issuance of the bill of
lading actual delivery and acceptance are
sufficient to bind the carrier [Cia. Maritima v.
Ins. Co. of North America (1964)].
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ACTUAL OR CONSTRUCTIVE
DELIVERY
The extraordinary responsibility of the common
carrier ends when, subject to Article 1738, the
goods are delivered actually or constructively by
the carrier to:
The consignee; or
The person who has a right to receive them
[Article 1736], such as agents, brokers, and the
like.
Article 1738 provides that the extraordinary
liability of the common carrier continues to be
operative even during the time the goods are
stored in a warehouse of the carrier at the place
of destination, until the consignee has:
Been advised of the arrival of the goods; and
Had reasonable opportunity thereafter to
remove them or otherwise dispose of them.
Delivery of the cargo to the customs authorities
is not delivery to the consignee or to the person
who has a right to receive them as
contemplated in Article 1736 because in such
case the goods are still in the hands of the
government and the owner cannot exercise
dominion over them. However, the parties may
agree to limit the liability of the carrier
considering that the goods still have to go
through the inspection of the customs
authorities before they are actually turned over
to the consignee. This is a situation where it may
be said that the carrier loses control of the
goods because of a custom regulation and it is
unfair that it be made responsible for what may
happen during the interregnum [Lu Do v.
Binamira (1957)].
TEMPORARY UNLOADING OR
STORAGE
The common carriers duty to observe
extraordinary diligence over the goods remains
in full force and effect even when they are
temporarily unloaded or stored in transit, unless
the shipper or owner has made use of the right
of stoppage in transitu [Article 1737].
General rule: Extraordinary diligence over the
goods remains even when the goods are
temporarily unloaded or stored in transit.
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Exception: The duty to observe such diligence
ceases when shipper or owner made use of the
right of stoppage in transitu.
Stoppage in transitu is the act by which the
unpaid vendor of goods stops their progress
and resumes possession of them constructively
while they are in the course of transit from him
to the purchaser, and not yet actually delivered
to the latter [Agbayani (1987)].
Basis: Under Article 1530, when the buyer of the
goods becomes insolvent, the unpaid seller who
has parted with the possession of the goods at
any time while they are in transit, may resume
the possession of the goods as he would have
had if he had never parted with the possession.
When the right of stoppage in transitu is
exercised, the common carrier holds the goods
in the capacity of an ordinary bailee or
warehouseman upon the theory that the
exercise of the right of stoppage in transitu
terminates the contract of carriage. Hence, only
ordinary diligence is required [Agbayani (1987)].
STIPULATION FOR LIMITATION
OF LIABILITY
There are two possible stipulations limiting the
liability of the common carrier:
Stipulation limiting the common carriers
liability as to the diligence required; and
Stipulation limiting the common carriers
liability as to the amount of liability.
AS TO DILIGENCE REQUIRED
A stipulation between the common carrier and
the shipper or owner limiting the liability of the
former for the loss, destruction, or deterioration
of the goods to a degree less than extraordinary
diligence shall be valid, provided it be:
In writing, signed by the shipper or owner;
Supported by a valuable consideration other
than the service rendered by the common
carrier; and
Reasonable, just and not contrary to public
policy [Article 1744].
An agreement limiting the common carriers
liability for delay on account of strikes or riots is
also valid [Article 1748].
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AS TO AMOUNT OF LIABILITY
A stipulation that the common carriers liability
is limited to the value of the goods appearing in
the bill of lading, unless the shipper or owner
declares a greater value, is binding [Article
1749].
A contract fixing the sum that may be recovered
by the owner or shipper for the loss, destruction
or deterioration of the goods is valid if:
It is reasonable and just under the
circumstances; and
It has been fairly and freely agreed upon
[Article 1750].
The fact that the conditions are printed at the
back of the ticket stub in letters so small that
they are hard to read would not warrant the
presumption that the [shipper] was aware of
those conditions such that he had fairly and
freely agreed to those conditions [Shewaram v.
PAL (1966)].
While a passenger may not have signed the
plane ticket, he is nevertheless bound by the
provision thereof; such provisions have been
held to be part of the contract of carriage and
valid and binding upon the passenger
regardless of the latters lack of knowledge or
assent to the regulation. It is what is known as a
contract of adhesion wherein one party imposes
a ready-made form of contract on the other. The
one who adheres to the contract is in reality free
to reject it entirely. A contract limiting liability
upon an agreed valuation does not offend
against the policy of the law forbidding one
from contracting against his own negligence
[Ong Yiu v. CA (1979)].
EFFECT OF STIPULATIONS
The effect of these stipulations is subject to the
following provisions:
An agreement limiting the common carriers
liability may be annulled by the shipper or
owner if the common carrier refused to carry
the goods unless the former agreed to such
stipulation [Article 1746].
If the common carrier, without just cause,
delays the transportation of the goods or
changes the stipulated or usual route, the
contract limiting the common carriers liability
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MERCANTILE LAW
cannot be availed of in case of the loss,
destruction, or deterioration of the goods
[Article 1747]. The limitation may be availed of
if the delay or change of route was due to a
just cause.
The fact that the common carrier has no
competitor along the line or route, or a part
thereof, to which the contract refers shall be
taken into consideration on the question of
whether or not a stipulation limiting the
common carriers liability is reasonable, just
and in consonance with public policy [Article
1751].
Even when there is an agreement limiting the
liability of the common carrier in the vigilance
over the goods, the common carrier is
disputably presumed to have been negligent
in case of their loss, destruction or
deterioration [Article 1752].
VOID STIPULATIONS
Any of the following or similar stipulations shall
be considered unreasonable, unjust and
contrary to public policy:
That the goods are transported at the risk of
the owner or shipper;
That the common carrier will not be liable for
any loss, destruction, or deterioration of the
goods;
That the common carrier need not observe
any diligence in the custody of the goods;
That the common carrier shall exercise a
degree of diligence less than that of a good
father of a family, or of a man of ordinary
prudence in the vigilance over the movables
transported;
That the common carrier shall not be
responsible for the acts or omission of his or
its employees;
That the common carriers liability for acts
committed by thieves, or of robbers who do
not act with grave or irresistible threat,
violence or force, is dispensed with or
diminished;
That the common carrier is not responsible for
the loss, destruction, or deterioration of goods
on account of the defective condition of the
car, vehicle, ship, airplane or other equipment
used in the contract of carriage [Article 1745].
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The following stipulations are also void:
Stipulation exempting the common carrier
from any and all liability for loss or damage
occasioned by its own negligence;
Stipulation providing for an unqualified
limitation of such liability to an agreed
stipulation [Heacock v. Macondray (1921)].
LIABILITY FOR BAGGAGE OF
PASSENGERS
Baggage are things that a passenger will bring
with him consistent with a temporary absence
from where he lives. Passengers baggage must
have a direct relationship with the passenger
who is traveling.
For instance, a balikbayan box or suitcase is
passengers baggage. However, 10,000 cans of
corned beef is not considered as passenger
baggage. They are considered as goods. They
are not part of the contract of carriage [of
passenger]. A separate contract of carriage [or
bill of lading] must be entered into in order to
transport them. These goods will then be
transported whether or not a person is
physically traveling with them [Agbayani (1987)].
There are two kinds of passengers baggage,
which are governed differently:
Passenger baggage in the custody of the
passenger [or carry-on luggage]; and
Passenger baggage not in the custody of the
passenger [or checked-in luggage].
The liability is greater for baggage that is in the
custody of the carrier, or checked-in baggage,
as compared to those in the possession of the
passenger.
CHECKED-IN BAGGAGE
The provisions of Articles 1733-1753 shall apply
to passengers baggage which is not in his
personal custody or in that of his employee
[Article 1754].
In other words, the rules governing the
responsibility of a common carrier in the
transportation of goods just discussed apply.
Thus, extraordinary diligence is required.
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BAGGAGE IN POSSESSION OF
PASSENGERS
As to baggage other than checked-in baggage,
they are governed by Articles 1998, and 2000-
2003, concerning the responsibility of hotel-
keepers [Article 1754].
Article 1998, as applied by analogy, the baggage
of passengers in their personal custody or in
that of their employees, while being
transported, are regarded as necessary
deposits. The common carriers are responsible
as depositaries, provided that:
Notice was given to them, or to their
employees, of the effects brought by the
passengers; and
The passengers take the precautions which
the common carrier advised relative to the
care and vigilance of their baggage.
In case of loss or injury to the baggage of
passengers in their personal custody, or in that
of their employees, while being transported, the
carrier is liable if the loss or injury is caused by:
His servants;
His employees;
Strangers [Article 2000]; or
A thief or robber done without the use of arms
or irresistible force [Article 2001].
The carrier is not liable if loss or injury is caused
by:
Force majeure [Article 2000];
Theft or robbery with the use of arms or
irresistible force [Article 2001];
The acts of the passenger, his family, servants,
or visitors;
The character of the baggage [Article 2002].
The following provisions also figure out in
determining the liability of the common carrier:
The fact that passengers are constrained to
rely on the vigilance of the common carrier
shall be considered in determining the degree
of care required of him [Article 2000].
The common carrier cannot free himself from
responsibility by posting notices to the effect
that he is not liable for the articles brought by
the passenger.
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Any stipulation whereby the responsibility of
the common carrier as set forth in Articles
1998-2001 is suppressed or diminished shall
be void [Article 2003].
Safety Of Passengers
LIABILITY, IN GENERAL
Under Philippine law, the liability of the
common carrier with respect to the safety of
passengers, in general, are as follows:
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost
diligence of very cautious persons, with a due
regard for all the circumstances [Article 1755].
In case of death of or injuries to passengers,
common carriers are presumed to have been
at fault or to have acted negligently, unless
they prove that they observed extraordinary
diligence [Article 1756].
VOID STIPULATIONS
General rule: The responsibility of a common
carrier for the safety of passengers cannot be
dispensed with or lessened by stipulation by the
posting of notices, by statements on tickets, or
otherwise [Article 1757].
Exception: When a passenger is carried
gratuitously, a stipulation limiting the common
carriers liability for negligence is valid.
Exception to the exception: Even when a
passenger is carried gratuitously, a stipulation
limiting the common carriers liability for willful
acts or gross negligence is invalid.
The reduction of fare does not justify any
limitation of the common carriers liability
[Article 1758].
DURATION OF LIABILITY
As in the contract of carriage for goods, the
perfection of the contract of carriage of
passengers does not necessarily coincide with
the commencement of the duty of extraordinary
diligence. It may occur at the same time or later.
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Based on jurisprudence, the duty that the carrier
of passengers owes to its patrons extends to
persons boarding the cars as well as those
alighting therefrom [Del Prado v. Manila
Railroad (1929)].
This is also reflected in Article 17, Warsaw
Convention, which applies to international air
carriage. It provides that the liability of a
common carrier for injury to the passenger lasts
from embarkation to disembarkation, including
the period when the passenger is on board the
aircraft.
In maritime commerce, Article 698, Code of
Commerce relates to the period of the voyage:
In case a voyage already begun should be
interrupted:
The passengers shall be obliged to pay the
fare in proportion to the distance covered; and
If the interruption is due to a fortuitous event,
without right to recover for losses and
damages; if caused by the captain exclusively,
with a right to indemnity.
If the interruption should be caused by the
disability of the vessel, and a passenger should
agree to await the repairs:
He may not be required to pay any increased
price of passage; but
His living expenses during the stay shall be for
his own account.
In case of delay in the departure of the vessel,
the passengers have:
The right to remain on board;
If the delay is not due to a fortuitous event or
force majeure, with the right to be furnished
with food for the account of the vessel.
If the delay should exceed ten days:
Passengers requesting the same shall be
entitled to the return of the fare; and
If it is due exclusively to the fault of the
captain or ship agent, they may also demand
indemnity for losses and damages.
A vessel exclusively devoted to the
transportation of passengers must take them
directly to the port or ports of destination, no
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matter what the number of passengers may be,
making all the stops indicated in its itinerary.
WAITING FOR CARRIER OR
BOARDING OF CARRIER
As to the commencement of the duty of the
common carrier, in Del Prado v. Manila
Railroad (1929), it was held that the duty
extends to persons boarding the cars as well
as those alighting therefrom.
Thus, it is the duty of common carriers of
passengers to stop their conveyances at a
reasonable length of time in order to afford
passengers an opportunity to board and
enter, and they are liable for injuries suffered
by boarding passengers resulting from the
sudden starting up or jerking of their
conveyances while they are doing so [Dangwa
Transportation v. CA (1991)].
In this connection, however, a person
boarding a moving car must be taken to
assume the risk of injury from boarding the
car under the conditions open to his view, but
he cannot fairly be held to assume the risk
that the motorman, having the situation in
view, will increase the peril by accelerating the
speed of the car before he is planted safely on
the platform [Del Prado v. Manila Railroad
(1929)].
ARRIVAL AT DESTINATION
As to the termination of the duty of the common
carrier, it has been held that the relation of
carrier and passenger does not cease at the
moment the passenger alights from the carriers
vehicle at a place selected by the carrier at the
point of destination, but continues until the
passenger has had a reasonable time or a
reasonable opportunity to leave the carriers
premises. What is a reasonable time or a
reasonable delay within this rule is to be
determined from all the circumstances:
A person who, after alighting from a train,
walks along the station platform is considered
still a passenger;
A passenger, who has alighted at his
destination and is proceeding by the usual
way to leave the companys premises, but
before actually doing so is halted by the
report that his brother, a fellow passenger,
has been shot, and he in good faith and
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without intent of engaging in the difficulty,
returns to relieve his brother, is deemed
reasonably and necessarily delayed and thus
continues to be a passenger entitled as such
to the protection of the railroad and company
and its agents [La Mallorca v. CA (1966)].
The reasonableness of time should be made
to depend on the attending circumstances of
the case, such as the kind of common carrier,
the nature of its business, the customs of the
place, and so forth, and therefore precludes a
consideration of the time element per se
without taking into account such other
factors. The primary factor to be considered is
the existence of a reasonable cause as will
justify the presence of the victim on or near
the petitioners vessel.
In the case of a shipper, the passengers of
vessels are allotted a longer period of time to
disembark from the ship than other common
carriers such as a passenger bus, since such
vessels are capable of accommodating a
bigger volume of both passenger and
baggage as compared to the capacity of a
regular commuter bus. Consequently, a ship
passenger will need at least an hour as is the
usual practice, to disembark from the vessel
and claim his baggage whereas a bus
passenger can easily get off the bus and
retrieve his luggage in a very short period of
time [Aboitiz Shipping v. CA (1989)].
The relation of carrier and passenger
continues until the latter has been landed at
the port of destination and has left the
carriers premises. Hence, the carrier
necessarily would still have to exercise
extraordinary diligence in safeguarding the
comfort, convenience and safety of its
stranded passengers until they have reached
their final destination [PAL v. CA (1993)].
LIABILITY FOR ACTS OF
OTHERS
EMPLOYEES
Common carriers are liable for the death of or
injuries to passengers through the negligence
or willful acts of the formers employees,
although such employees may have acted
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beyond the scope of their authority or in
violation of the orders of the common carriers.
This liability does not cease even upon proof
that they exercised all the diligence of a good
father of a family in the selection and
supervision of their employees [Article 1759].
Also, this liability cannot be eliminated or
limited by stipulation, by the posting of
notices, by statements on the tickets or
otherwise [Article 1760].
Ratio: The servant is clothed with delegated
authority and charged with the duty to execute
the carriers undertaking to carry the passenger
safely [Agbayani (1987)]. Also, the defense of
diligence in the selection and supervision of
employees does not obtain because the liability
is not based on quasi-delict, but on culpa
contractual. However, there must be a
reasonable connection between the act and the
contract of carriage.
Note: The employee must be on duty at the time
of the act.
It is enough that the assault happens within
the course of the employees duty. It is no
defense for the carrier that the act was done
in excess of authority or in disobedience of the
carriers orders. The carriers liability here is
absolute in the sense that it practically
secures the passengers from assaults
committed by its own employees.
Accordingly, it is the carriers strict obligation
to select its drivers and similar employees
with due regard not only to their technical
competence and physical ability, but also, no
less important, to their total personality,
including their patterns of behavior, moral
fibers, and social attitude [Maranan v. Perez
(1967)].
OTHER PASSENGERS AND
STRANGERS
A common carrier is responsible for injuries
suffered by a passenger on account of the
willful acts or negligence of other passengers or
of strangers, if the common carriers employees
through the exercise of the diligence of a good
father of a family could have prevented or
stopped the act or omission [Article 1763].
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Note: The law speaks of injuries suffered by the
passenger but not death. However, there
appears to be no reason why the common
carrier should not be held liable under such
circumstances. The word injuries should be
interpreted to include death [Agbayani (1987)].
Under Article 1763, a tort committed by a
stranger which causes injury to a passenger
does not accord the latter a cause of action
against the carrier. The negligence for which a
common carrier is held responsible is the
negligent omission by the carriers employees to
prevent the tort from being committed when
the same could have been foreseen and
prevented by them. Further, when the violation
of the contract is due to the willful acts of
strangers, as in the instant case, the degree of
care essential to be exercised by the common
carrier for the protection of its passenger is only
that of a good father of a family [Pilapil v. CA
(1989)].
MANUFACTURERS OF EQUIPMENT
While the carrier is not an insurer of the safety
of the passengers, it should nevertheless be
held answerable for the flaws of its equipment,
if such flaws were discoverable. The rationale
for the common carriers liability for
manufacturing defects is the fact that the
passenger has neither choice nor control over
the carrier in the selection and use of the
equipment and appliances in use by the carrier.
Having no privity whatever with the
manufacturer or vendor of the defective
equipment, the passenger has no remedy
against him [Necesito v. Paras (1958)].
CONTRIBUTORY NEGLIGENCE
The passenger must observe the diligence of
a good father of a family to avoid injury to
himself [Article 1762].
The contributory negligence of the passenger
does not bar recovery of damages for his
death or injuries, if the proximate cause
thereof is the negligence of the common
carrier, but the amount of damages shall be
equitably reduced [Article 1762].
It is negligence per se for a passenger on a
railroad to voluntarily or inadvertently
UP LAW BOC TRANSPORTATION LAW
protrude his arm, hand, elbow, or any other
part of his body through the window of a
moving car beyond the outer edge of the
window or outer surface of the car, so as to
come in contact with objects or obstacles near
the track; no recovery can be had for an injury
which but for such negligence would not have
been sustained [Isaac v. A. L. Ammen
Transportation (1975)]. In this case, the
negligence of the passenger was not
contributory, but was the proximate cause of
the injury.
EXTENT OF LIABILITY FOR
DAMAGES
Damages recoverable from common carriers,
both in cases of carriage of passengers and
goods, shall be awarded in accordance with Title
XVIII concerning Damages.
Article 2206, on liability, in case of death, for
loss of earning capacity, support, and moral
damages for mental anguish, shall also apply to
the death of a passenger caused by the breach
of contract by a common carrier [Article 1764].
Thus, the damages recoverable are:
Actual or compensatory damages;
Moral damages;
Exemplary damages;
Nominal, temperate, and liquidated damages;
Attorneys fees.
ACTUAL OR COMPENSATORY
DAMAGES
Actual or compensatory damages refer to
adequate compensation for such pecuniary loss
suffered as duly proved [Article 2199].
Actual damages are recoverable, including, in
case of death, liability for:
Loss of earning capacity; and
Support for a period not exceeding five years
[Article 2206].
Under Article 2201, the liability for damages
include:
In case the common carrier acted in good
faith:
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MERCANTILE LAW
The natural and probable consequence of the
breach of the obligation; and
Those which the parties have foreseen or
could have reasonably foreseen at the time
the obligation was constituted;
In case of fraud, bad faith, malice or wanton
attitude, all damages which may be
reasonably attributed to the non-performance
of the obligation.
In the absence of a showing that common
carriers attention was called to the special
circumstances requiring prompt delivery of a
passengers luggage, the common carrier
cannot be held liable for the cancellation of
passengers contracts [for exhibition of films] as
it could not have foreseen such an eventuality
when it accepted the luggage for transit [Pan-
Am World Airways v. IAC (1988)].
MORAL DAMAGES
Moral damages, though incapable of pecuniary
computation, if they are the proximate result of
the common carriers wrongful act or omission,
may be recovered [Article 2217].
In cases of breach of contract of carriage, moral
damages may be recovered where:
The common carrier acted fraudulently;
The common carrier acted in bad faith [Article
2220];
Death of a passenger resulted [Article 2206].
Bad faith contemplates a state of mind
affirmatively operating with furtive design or
with some motive of self-interest or will or for
ulterior purpose [Air France v. Carrascoso
(1966)].
When it comes to contracts of common
carriage, inattention and lack of care on the part
of the carrier resulting in the failure of the
passenger to be accommodated in the class
contracted for amounts to bad faith or fraud
which entitles the passenger to the award of
moral damages in accordance with Article 2220
[Ortigas v. Lufthansa (1975)].
Willful and deliberate overbooking on the part
of the airline carrier constitutes bad faith. Under
Section 3, Economic Regulations No. 7 of the
Civil Aeronautics Board, overbooking, which
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does not exceed ten percent, is not considered
as deliberate and therefore does not amount to
bad faith [United Airlines v. CA (2001)].
EXEMPLARY DAMAGES
In a contract of carriage, exemplary damages
may be awarded if the common carrier acted in
wanton, fraudulent, reckless, oppressive, or
malevolent manner [Article 2232].
NOMINAL, TEMPERATE, AND
LIQUIDATED DAMAGES
Nominal damages are adjudicated in order
that a right of the plaintiff, which has been
violated by the defendant, may be vindicated
or recognized, not for the purpose of
indemnifying the plaintiff for any loss suffered
by him [Article 2221]. It may be awarded in
case of breach of contract of carriage and in
every case where any property right has been
invaded [Article 2222].
Temperate or moderate damages, which are
more than nominal but less than
compensatory damages, may be recovered
when some pecuniary loss has been suffered
but its amount cannot, from the nature of the
case, be proved with certainty [Article 2224].
Liquidated damages are those damages
agreed upon by the parties to a contract, to be
paid in case of breach thereof [Article 2226].
ATTORNEYS FEES
Under Article 2208, as applicable to a contract
of carriage, attorneys fees and expenses of
litigation may be recovered in the following
cases:
When exemplary damages are awarder;
When the common carriers act or omission
has compelled the plaintiff to litigate with
third persons or to incur expenses to protect
his interest;
Where the common carrier acted in gross and
evident bad faith in refusing to satisfy the
plaintiffs valid, just and demandable claim;
In any other case where the court deems it
just and equitable that attorneys fees and
expenses of litigation should be recovered.
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Bill of Lading
DEFINITION
A bill of lading is a written acknowledgement,
signed by the master of a vessel or other
authorized agent of the carrier, that he has
received the described goods from the
shipper, to be transported on the expressed
terms to the described place of destination,
and to be delivered there to the designated
consignee or parties [70 Am. Jur. 2d 924].
It is not, however, indispensable for the
creation of a contract of carriage. [Cia.
Maritima v. Ins. Co. of North America (1964)].
In the absence of a bill of lading, disputes
shall be determined by the legal proofs which
the parties may present in support of their
respective claims, according to the general
provisions established in the Code of
Commerce for commercial contracts [Article
354, Code of Commerce].
The bill of lading becomes effective usually
upon its delivery to and acceptance by the
shipper [Aquino, Essentials of Transportation &
Public Utilities Law (2011)].
In the absence of fraud, concealment, or
improper conduct, it is presumed that the
stipulations of the bill are known to the
shipper, and he is generally bound by his
acceptance whether he reads the bill or not
[Magellan Mfg. Marketing Corp. v. CA (1991)].
THREE-FOLD CHARACTER
Receipt as to the quantity and description of
the goods shipped;
Contract to transport and deliver the goods to
the consignee or other person therein
designated, on the terms specified in such
instrument; and
Document of title, which makes it a symbol of
the goods.
DELIVERY OF GOODS
The goods should be delivered to the consignee
or any other person to whom the bill of lading
was validly transferred or negotiated.
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PERIOD OF DELIVERY
Delivery should be made within the period
fixed for the delivery of the goods as
stipulated in the bill of lading [Article 370,
Code of Commerce].
In case of failure to deliver, the carrier shall
pay the indemnity agreed upon in the bill of
lading, neither the shipper nor consignee
being entitled to anything else.
Should there be no period previously fixed,
the carrier is bound to forward the goods in
the first shipment of the same or similar
merchandise which he may make to the point
of delivery. Should he not do so, he shall be
liable for damages cause by the delay [Article
358, Code of Commerce].
If no indemnity is fixed and there is delay, the
carrier shall be liable for the damages which
may have been caused by the delay [Article
370, Code of Commerce].
DELIVERY WITHOUT SURRENDER OF
BILL OF LADING
After the contract has been complied with, the
bill of lading which the carrier has issued shall
be returned to him, and by virtue of the
exchange of this title with the thing
transported, the respective obligations and
actions shall be considered cancelled, unless
in the same act the claim which the parties
may wish to reserve be reduced to writing,
exception being made of the provisions of
Article 366, on period for filing claims [Article
353, 2nd par., Code of Commerce].
If, in case of loss or for any other reason
whatsoever, the consignee cannot return,
upon receiving the merchandise, the bill of
lading subscribed by the carrier, he shall give
said carrier a receipt for the goods delivered.
This receipt produces the same effects as the
return of the bill of lading [Article 353, 3rd
par., Code of Commerce].
REFUSAL OF CONSIGNEE TO TAKE
DELIVERY
The consignee may refuse to take delivery in the
following cases:
If only part of the goods transported should
be delivered, when he proves that he cannot
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make use thereof without the others [Article
363, Code of Commerce];
When the goods are rendered useless for
purposes of sale or consumption in the use for
which they are properly destined, in which
case the consignee may demand payment of
the goods at current market prices [Article
365, Code of Commerce];
In case part of the goods is in good condition
and separation is possible, the consignee may
refuse to receive only the damaged goods
[Article 365, Code of Commerce];
Where the delay is through the fault of the
carrier [Article 371, Code of Commerce].
In case of dispute as to the condition of the
goods, the same shall be examined by experts
appointed by the parties, and the third one, in
case of disagreement, appointed by the
judicial authority.
If the persons interested should not agree
with the report, said judicial authority shall
order the deposits of the merchandise in a
safe warehouse, and the parties interested
shall make use of their rights in the proper
manner. [Article 367, Code of Commerce].
PERIOD FOR FILING CLAIMS
Pursuant to Article 366, Code of Commerce, a
claim, on account of damage found upon
opening the packages, must be made against
the carrier:
Within 24 hours, if the indications of the
damage cannot be ascertained from the
exterior of the packages (i.e., latent damage);
or
At the time of receipt, if the indications
damage can be so ascertained (i.e., patent
damage).
No claim whatsoever shall be admitted against
the carrier with regard to the condition in which
the goods transported were delivered:
After the periods mentioned have elapsed; or
After the transportation charges have been
paid.
The periods mentioned commence upon
delivery of cargo to the consignee at the place of
destination
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Thus, Article 366 is limited to cases of claims for
damage to goods actually turned over by the
carrier and received by the consignee. It does
not apply to misdelivery of goods.
Failure to file a claim bars recovery [Aquino
(2011)].
Ratio: The rule protects the carrier by affording
it an opportunity to make an investigation of a
claim while the matter is still fresh and easily
investigated so as to safeguard itself from false
and fraudulent claims [UCPB General Ins. Co.,
Inc. v. Aboitiz Shipping (2009)].
However, the periods prescribed may be subject
to modification by agreement of the parties.
[PHILAMGEN v. Sweet Lines, Inc. (1992)].
PERIOD FOR FILING ACTIONS
OVERLAND TRANSPORTATION AND
COASTWISE SHIPPING
The general rules under the Civil Code on
extinctive prescription apply. Thus, action for
damages must be filed in court:
Within 6 years, if a bill of lading was not
issued [Article 1145, Civil Code].
Within 10 years, if a bill of lading was issued
[Article 1146, Civil Code].
INTERNATIONAL CARRIAGE OF
GOODS BY SEA
Suit must be brought within one year:
After delivery of the goods; or
From the date when the goods should have
been delivered.
Otherwise, the carrier and the ship shall be
discharged from all liability in respect of loss or
damage.
The absence of notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or
the date when the goods should have been
delivered [Section 3(6), Carriage of Goods by Sea
Act].
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The period for filing the claim is one year, in
accordance with the Carriage of Goods by Sea
Act. The Carriage of Goods by Sea Act, as
adopted and embodied in Commonwealth Act
No. 65, applies because it is a special law, and,
as such, prevails over the general provisions of
the Civil Code on prescription of actions
[Maritime Agencies & Services, Inc. v. CA (1990)].
Maritime Commerce
CHARTER PARTIES
A charter party is a contract by virtue of which
the owner or agent of a vessel binds himself to
transport merchandise or persons for a fixed
price.
It is a contract by which the owner or agent of
the vessel leases for a certain price the whole or
portion of a vessel for the transportation of the
goods or persons from one port to another.
It is a contract whereby the whole or part of the
ship is let by the owner to a merchant or other
person for a specified time or use for the
conveyance of goods, in consideration of the
payment of freight [Caltex v. Sulpicio Lines
(1999)].
Towage is not a charter party. It is a contract for
the hire of services by which a vessel is engaged
to tow another vessel from one port to another
for consideration.
In modern maritime law and usage, there are
three distinguishable types of charter parties:
Bareboat or demise charter;
Time charter; and
Voyage or trip charter [Litonjua Shipping, Inc.
v. National Seamen Board (1989)].
Note: Both time and voyage charters are said to
be contracts of affreightment, where a common
or public carrier is not converted into a private
carrier.
A contract of affreightment is one in which the
owner of the vessel leases part or all of its space
to haul goods for others. It is a contract for
special service to be rendered by the owner of
the vessel and under such contract the general
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owner retains the possession, command and
navigation of the ship, the charterer or freighter
merely having use of the space in the vessel in
return for his payment of the charter hire
[Puromines, Inc. v. CA (1993)].
BAREBOAT OR DEMISE CHARTER
In a bareboat or demise charter, the ship
owner leases to the charterer the whole
vessel, transferring to the latter the entire
command, possession and consequent
control over the vessels navigation, including
the master and the crew, who thereby become
the charterers servants [Aquino (2011)].
To create a demise, the owner of a vessel
must completely and exclusively relinquish
possession, command and navigation thereof
to the charterer, anything short of such a
complete transfer is a contract of
affreightment (time or voyage charter party)
or not a charter party at all.
Although a charter party may transform a
common carrier into a private one, the same,
however, is not true in a contract of
affreightment on account of the distinctions
between a contract of affreightment and a
demise or bareboat charter [Puromines, Inc. v.
CA (1993)].
Note: In a bareboat or demise charter, the
common carrier is converted to private carrier.
The charterer, to whom the owner of the vessel
relinquishes, completely and exclusively, the
possession, command and navigation of the
vessel, by virtue of a demise charter, is
considered the owner pro hac vice. He mans and
equips the vessel and assumes all responsibility
for navigation, management and operation. He
thus acts as the owner of the vessel in all
important aspects during the duration of the
charter [Puromines, Inc. v. CA (1993)].
TIME CHARTER
A time charter is a contract for the use of a
vessel for a specified period of time or for the
duration of one or more specified voyages.
In this case, the owner of a time-chartered
vessel retains possession and control through
the master and crew, who remain his
employees. What the time charterer acquires
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is the right to utilize the carrying capacity and
facilities of the vessel and to designate her
destinations during the term of the charter
[Litonjua Shipping Co., Inc. v. National Seamen
Board (1989)].
VOYAGE OR TRIP CHARTER
In a voyage charter, the vessel is leased for a
single or particular voyage. The master and
crew remain the employ of the owner of the
vessel [Litonjua Shipping Co., Inc. v. National
Seamen Board (1989)].
LIABILITY OF SHIP OWNERS
AND SHIPPING AGENTS
The ship owner has possession, control and
management of the vessel and the
consequent right to direct her navigation and
receive freight earned and paid, while his
possession continues; he is the person who is
primarily liable for damages sustained in the
operation of the vessel, based on the
provisions of the Code of Commerce.
A ship agent is the person entrusted with the
provisioning of a vessel, or who represents her
in the port in which she happens to be [Article
595, Code of Commerce].
The ship agent, even though he is not the
owner, is liable in every way to the creditor for
losses and damages, without prejudice to his
right against the owner, the vessel and its
equipment and freight [Aquino (2011)].
LIABILITY FOR ACTS OF CAPTAIN
The owner of a vessel and the agent shall be
civilly liable for the acts of the captain and for
the obligations contracted by the latter to
repair, equip, and provision the vessel [Article
586, Code of Commerce].
The captain shall be liable to the agent, and the
latter to third persons:
For all the damages suffered by the vessel
and his cargo by reason of want of skill or
negligence on his part;
For all the thefts committed by the crew,
reserving his right of action against the guilty
parties;
For the losses, fines, and confiscations
imposed on account of violation of the laws
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and regulations of customs, police, health,
and navigation;
For the losses and damages caused by
mutinies on board the vessel, or by reason of
faults committed by the crew in the service
and defense of the same, if he does not prove
that he made full use of his authority to
prevent or avoid them;
For those arising by reason of an undue use of
powers and non-fulfillment of the obligations
which are his;
For those arising by reason of his going out of
his course or taking a course which he should
not have taken without sufficient cause, in the
opinion of the officers of the vessel at a
meeting with the shippers or supercargoes
who may be on board;
For those arising by reason of his voluntarily
entering a port other than that of his
destination;
For those arising by reason of non-observance
of the provisions contained in the regulations
on situation of lights and maneuvers for the
purpose of preventing collisions [Article 618].
The agent shall also be civilly liable for the
indemnities in favor of third persons which arise
from the conduct of the captain in the care of
the goods which the vessel carried; but he may
exempt himself therefrom by abandoning the
vessel with all her equipment and the freight he
may have earned during the voyage [Article 587,
Code of Commerce].
Note: The owner or agent shall not be liable for
the obligations contracted by the captain if the
latter exceeds his powers and privileges.
However, if the amounts claimed were made
use of for the benefit of the vessel, the owner or
agent shall be liable [Article 588, Code of
Commerce].
DOCTRINE OF LIMITED LIABILITY
(HYPOTHECARY RULE)
STATEMENT OF THE RULE
The real and hypothecary nature of maritime
law simply means that the liability of the carrier
in connection with losses related to maritime
contracts is confined to the vessel, which is
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MERCANTILE LAW
hypothecated for such obligations or which
stands as the guaranty for their settlement.
It has its origin by reason of the conditions and
risks attending maritime trade in its earliest
years when such trade was replete with
innumerable and unknown hazards since
vessels had to go through largely uncharted
waters to ply their trade. It was designed to
offset such adverse conditions and to encourage
people and entities to venture into maritime
commerce despite the risks and the prohibitive
cost of shipbuilding.
Thus, the liability of the vessel owner and agent
arising from the operation of such vessel were
confined to the vessel itself, its equipment,
freight, and insurance, if any, which limitation
served to induce capitalists into effectively
wagering their resources against the
consideration of the large profits attainable in
the trade [Aboitiz Shipping Corp. v. General
Accident Fire and Life Assurance Corp. (1993)].
Thus, under the doctrine of abandonment:
The agent shall be civilly liable for the
indemnities in favor of third persons which
arise from the conduct of the captain in the
care of the goods which the vessel carried, but
he may exempt himself therefrom by
abandoning the vessel with all her equipment
and the freight he may have earned during
the voyage [Article 587, Code of Commerce];
The owners of a vessel shall be civilly liable in
the proportion of their contribution to the
common fund, for the results of the acts of the
captain, referred to in Article 587. Each part
owner may exempt himself from this liability
by the abandonment before a notary of the
part of the vessel belonging to him [Article
590, Code of Commerce].
In case of collision, the liability of the ship
owner shall be understood as limited to the
value of the vessel with all her appurtenances
and all the freight earned during the voyage
[Article 837, Code of Commerce].
If the vessel and her freight should be totally
lost, by reason of capture or wreck, all rights
of the crew to demand any wages whatsoever
shall be extinguished, as well as the agent for
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the recovery of the advances made [Article
643, Code of Commerce].
If the ship owner or agent may in any way be
held civilly liable at all for injury to or death of
passengers arising from the negligence of the
captain in cases of collisions or shipwrecks, his
liability is merely co-extensive with his interest
in the vessel such that a total loss thereof
results in its extinction. This is based on the
exclusively real and hypothecary nature of
maritime law, which operates to limit such
liability to the value of the vessel, or to the
insurance thereon, if any. [Yangco v. Laserna
(1941)]
Exceptions:
Claims under the Workmens Compensation
Act [Abueg v. San Diego];
Expenses for repairing, provisioning and
equipping the vessel;
There is an actual finding of negligence on the
part of the vessel owner or agent [Aboitiz
Shipping v. General Accident Fire and Life
Assurance Corp. (1993)];
Vessel is insured, to the extent of the
insurance proceeds [Vasquez v. CA (1985)];
There was no total loss;
Collision between two negligent vessels.
ACCIDENTS AND DAMAGES IN
MARITIME COMMERCE
AVERAGES
The following shall be considered averages:
All extraordinary or accidental expenses
incurred during the navigation for the
preservation of the vessel or cargo, or both;
All damages or deterioration the vessel may
suffer from the time she puts to sea from the
port of departure until she casts anchor in the
port of destination, and those suffered by the
merchandise from the time it is loaded in the
port of shipment until it is unloaded in the
port of consignment [Article 806, Code of
Commerce].
There are two kinds of averages:
Particular or simple average; and
Gross or general average.
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SIMPLE AVERAGE
Particular or simple averages shall include all
damages and expenses caused to the vessel
or cargo that did not inure to the common
benefit and profit of all persons interested in
the vessel and her cargo [Article 809, Code of
Commerce].
The owner of the goods which gave rise to the
expense or suffered the damage shall bear
this average [Article 810, Code of Commerce].
GENERAL AVERAGE
General or gross averages shall include all the
damages and expenses which are deliberately
caused in order to save the vessel, her cargo, or
both at the same time, from a real and known
risk [Article 811, Code of Commerce].
Requisites
(1) There must be a common danger. This
means, that both the ship and the cargo,
after it has been loaded, are subject to the
same danger, whether during the voyage, or
in the port of loading or unloading, that the
danger arises from the accidents of the sea,
dispositions of the authority, or faults of men,
provided that the circumstances producing
the peril should be ascertained and
imminent or may rationally be said to be
certain and imminent. This last requirement
excludes measures undertaken against a
distant peril;
(2) That for the common safety, part of the
vessel or of the cargo or both is sacrificed
deliberately;
(3) That from the expenses or damages caused
follows the successful saving of the vessel
and cargo;
(4) That the expenses or damages should have
been incurred or inflicted after taking proper
legal steps and authority [Magsaysay, Inc. v.
Agan (1955)].
The gross or general average shall be borne by
those who benefited from the sacrifice. These
include the ship owner and the owners of the
cargoes that were saved. Contribution may also
be imposed on the insurers of the vessel or
cargoes that were saved, as well as lenders on
bottomry or respondentia.
UP LAW BOC TRANSPORTATION LAW
Cases of general average
The goods or cash invested in the redemption
of the vessel or cargo captured by enemies,
privateers, or pirates, and the provisions,
wages, and expenses of the vessel detained
during the time the arrangement or
redemption is taking place;
The goods jettisoned to lighten the vessel,
whether they belong to the vessel, to the
cargo, or to the crew, and the damage
suffered through said act by the goods kept;
The cables and masts which are cut or
rendered useless, the anchors and the chains
which are abandoned in order to save the
cargo, the vessel, or both;
The expenses of removing or transferring a
portion of the cargo in order to lighten the
vessel and place her in condition to enter a
port or roadstead, and the damage resulting
therefrom to the goods removed or
transferred;
The damage suffered by the goods of the
cargo through the opening made in the vessel
in order to drain her and prevent her sinking;
The expenses caused through floating a
vessel intentionally stranded for the purpose
of saving her;
The damage caused to the vessel which it is
necessary to break open, scuttle, or smash in
order to save the cargo;
The expenses of curing and maintaining the
members of the crew who may have been
wounded or crippled in defending or saving
the vessel;
The wages of any member of the crew
detained as hostage by enemies, privateers, or
pirates, and the necessary expenses which he
may incur in his imprisonment, until he is
returned to the vessel or to his domicile,
should he prefer it;
The wages and victuals of the crew of a vessel
chartered by the month during the time it
should be embargoed or detained by force
majeure or by order of the Government, or in
order to repair the damage caused for the
common good;
The loss suffered in the value of the goods
sold at arrivals under stress in order to repair
the vessel because of gross average;
The expenses of the liquidation of the average
[Article 811, Code of Commerce];
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If in lightening a vessel on account of a storm,
in order to facilitate her entry into a port or
roadstead, part of her cargo should be
transferred to lighters or barges and be lost,
the owner of said part shall be entitled to
indemnity, as if the loss has originated from a
gross average [Article 817, Code of Commerce];
If, as a necessary measure to extinguish a fire
in a port; roadstead; creek, or bay, it should be
decided to sink any vessel, this loss shall be
considered gross average, to which the
vessels saved shall contribute.
Procedure for recovery
Assembly and deliberation with the sailing
mate and other officers;
Resolution of the captain adopted;
Hearing of the persons interested. In case an
interested person should not be heard, he
shall not contribute to the gross average
[Article 813, Code of Commerce];
Resolution to be entered in the log book,
stating the motives and reasons therefore as
well as the votes and reason for disagreement
[Article 814, Code of Commerce];
Minutes to be signed by all the persons
present or in urgent cases, the captain;
Captain shall deliver one copy of the minutes
to the maritime judicial authority of the first
port he may make within 24 hours [Article 814,
Code of Commerce];
Captain shall ratify the minutes under oath
[Article 814, Code of Commerce].
COLLISIONS
Collision is an impact or sudden contact
between two moving vessels [Aquino (2011)].
Allision is the striking of a moving vessel
against one that is stationary.
ZONES OF COLLISION
In all collisions between vessels at sea, there
exist three divisions or zones of time:
The first division covers all the time up to the
moment when the risk of collision may be said
to have begun;
The second division covers the time between
the moment when the risk of collision begins
and the moment when it has become
practically certain;
UP LAW BOC TRANSPORTATION LAW
The third zone covers the time between the
moment when the collision has become a
practical certainty and the moment of actual
contact [A. Urrutia & Co. v. Baco River
Plantation Co. (1913)].
Note: Liability in collision cases is negligence-
based. The person who caused the injury is both
civilly and criminally liable [Aquino (2011)].
SPECIFIC RULES
When only one vessel is at fault, the owner of
the vessel at fault shall indemnify the losses
and damages suffered, after an expert
appraisal [Article 826, Code of Commerce];
When both vessels are at fault, each shall
suffer its own damages, and both shall be
solidarily responsible for the losses and
damages occasioned to their cargoes [Article
826, Code of Commerce];
In case of inscrutable fault, that is, if it cannot
be decided which of the two vessels was the
cause of the collision, each shall bear his own
damage and both shall be jointly responsible
for the losses and damages suffered by their
cargoes [Article 828, Code of Commerce];
When it is due to a fortuitous event, each
vessel and its cargo shall bear its own
damages [Article 830, Code of Commerce];
When, by reason of fortuitous event, a vessel
properly anchored and moored collides with
another, the injury occasioned shall be looked
upon as particular average to the vessel run
into [Article 832, Code of Commerce];
When a third vessel at fault, the owner of the
third vessel shall indemnify the losses and
damages caused, the captain thereof being
civilly liable to said owner [Article 831, Code of
Commerce].
ARRIVAL UNDER STRESS
Arrival under stress is the arrival of a vessel at
the nearest and most convenient port instead of
the port of destination, if during the voyage the
vessel cannot continue the trip to the port of
destination.
It is lawful when the inability to continue voyage
is due to lack of provisions, well-founded fear of
seizure, privateers, pirates, or accidents of the
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MERCANTILE LAW
sea disabling it to navigate [Article 819, Code of
Commerce].
It is unlawful when:
The lack of provisions should arise from the
failure to take the necessary provisions for the
voyage, according to usage and custom, or if
they should have been rendered useless or
lost through bad stowage or negligence in
their care;
The risk of enemies, privateers, or pirates
should not have been well known or manifest,
and based on positive and justifiable facts;
The injury to the vessel should have been
caused by reason of her not being repaired,
rigged, equipped, and arranged in a
convenient manner for the voyage, or by
reason of some erroneous order of the
captain; or
Malice, negligence, want of foresight, or lack
of skill on the part of the captain is the reason
for the act causing the damage [Article 820,
Code of Commerce].
SHIPWRECKS
Shipwreck denotes loss or wreck of a vessel at
sea as a consequence of running against
another vessel or thing at sea or on coast
where the vessel is rendered incapable of
navigation.
If the wreck was due to malice, negligence or
lack of skill of the captain, the owner of the
vessel may demand indemnity from said
captain. [Article 841, Code of Commerce].
SALVAGE
Salvage is defined as the service which one
person renders to the owner of a ship or goods,
by his own labor, preserving the goods or the
ship which the owner or those entrusted with
the care of them have either abandoned in
distress at sea, or are unable to protect and
secure.
It is founded on equity and is compensation for
actual services rendered.
Three elements are necessary to a valid salvage
claim:
A marine peril;
UP LAW BOC TRANSPORTATION LAW
Service voluntarily rendered when not
required as an existing duty or from a special
contract;
Success, in whole or in part, or that the service
rendered contributed to such success
[Erlanger & Galinger v. Swedish East Asiatic Co.
Ltd (1916)].
CARRIAGE OF GOODS BY SEA
ACT (COGSA)
APPLICATION
COGSA (Commonwealth Act No. 65) is a special
law that governs all contracts of carriage of
goods by sea between or to and from the
Philippine ports.
Its application is according to the following
scheme:
If the common carrier is coming to the
Philippines:
First: Civil Code;
Second: COGSA (in foreign trade);
Third: Code of Commerce;
If the private carrier is coming to the
Philippines:
First: COGSA;
Second: Code of Commerce;
Third: Civil Code (excluding rules on
common carriers);
If the private or common carrier is from the
Philippines to a foreign country, the the law of
the foreign country applies [Article 1753]
unless the parties make COGSA applicable.
Under Article 1766, in all matters not regulated
by the Civil Code, the rights and obligations of
common carriers shall be governed by the Code
of Commerce and special laws. Thus, although
a special law, COGSA only applies when the
Civil Code has no provision dealing with the
matter.
NOTICE OF LOSS OR DAMAGES
Notice of claim and the general nature of the
loss or damage must be given in writing to the
carrier or his agent at the port of discharge
before or at the time of the removal of the
goods [Section 3(6), COGSA].
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MERCANTILE LAW
If damage is not patent or cannot be
ascertained from the package, the shipper
should file the claim with the carrier within
three days from delivery.
Under Section 3(6), COGSA, a failure to file a
notice of claim within three days will not bar
recovery if it is nonetheless filed within one
year. This one-year prescriptive period also
applies to the shipper, the consignee, the
insurer of the goods or any legal holder of the
bill of lading. Inasmuch as the neither the Civil
Code nor the Code of Commerce states a
specific prescriptive period on the matter, the
COGSA may be applied [Belgian Overseas
Chartering and Shipping v. Philippine First Ins.
Co. (2002)].
PERIOD OF PRESCRIPTION
The carrier and the ship shall be discharged
from all liability in respect of loss or damage
unless suit is brought within one year after
delivery of the goods or the date when the
goods should have been delivered.
The absence of a notice shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods
or the date when the goods should have been
delivered [Section 3 (6)].
COGSA, as a special law, prevails over the
general provisions of the Civil Code on
prescription of actions [Maritime Agencies &
Services, Inc. v. CA (1990)].
LIMITATION OF LIABILITY
Under Section 4(5), COGSA, the limit is set at
a maximum of $500 per package or
customary freight unit.
This is deemed incorporated in the bill of
lading even if not mention therein [Eastern
Shipping v. IAC (1987)].
The declaration made by the shipper stating
an amount bigger than $500 per package will
make the carrier liable for such bigger
amount, but only if the amount so declared is
the real value of goods [Aquino (2011)].
The Civil Code does not limit the liability of
the common carrier to a fixed amount per
package. In all matters not regulated by the
Civil Code, the right and the obligations of
common carriers shall be governed by the
Code of Commerce and special laws. Thus,
UP LAW BOC TRANSPORTATION LAW
the COGSA, which is suppletory to the
provisions of the Civil Code, supplements the
latter by establishing a statutory provision
limiting the carriers liability in the absence of
a shippers declaration of a higher value in the
bill of lading. [Belgian Overseas v. Philippine
First Ins. Co. (2002)].
The Warsaw Convention
APPLICABILITY
The Warsaw Convention applies to:
All international carriage of persons,
baggage, or cargo performed by aircraft for
reward;
Gratuitous carriage by aircraft performed by
an air transport undertaking [Article 1(1),
Warsaw Convention].
International air carriage or international air
transport means transportation by air between
points of contact of two high contracting
parties, or those countries that have acceded to
the Warsaw Convention, wherein the place of
departure and the place of destination are
situated:
Within the territories of two high contracting
parties, regardless of whether or not there be
a break in the transportation or a
transshipment; or
Within the territory of a single high
contracting party, if there is an agreed
stopping place within a territory subject to the
sovereignty, mandate or authority of another
power, even though the power is not a party
to the Convention [Article 1(2), Warsaw
Convention].
A carriage to be performed by several
successive air carriers is deemed, for the
purposes of the Convention, to be one undivided
carriage, if it has been regarded by the parties
as a single operation, whether it had been
agreed upon under the form of a single contract
or of a series of contracts [Article 1(3), Warsaw
Convention].
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MERCANTILE LAW
The carrier is liable for damages for:
Death or injury of a passenger if the accident
causing it took place:
On board the aircraft;
In the course of the operations of embarking
or disembarking; or
When there was delay [Article 17 and 19,
Warsaw Convention];
Destruction, loss, or damage to any baggage
or goods that are checked in, if damage
occurred:
During the transportation by air; or
When there was delay [Section 18 and 19,
Warsaw Convention];
Delay in the transport by air of passengers,
baggage or goods.
The carriage by air contemplated comprises the
period in which the baggage or goods are in
charge of the carrier, whether in an airport or on
board an aircraft, or, in the case of a landing
outside an airport, in any place whatsoever
[Article 18, Warsaw Convention].
LIMITATION OF LIABILITY
With respect to the following limitations of
liability, Article 23, Warsaw Convention provides
that any provision tending to relieve the carrier
of liability or to fix a lower limit than that which
is laid down shall be null and void, but the
nullity of any such provision does not involve the
nullity of the whole contract.
Also, under Article 25, Warsaw Convention:
The carrier shall not be entitled to avail
himself of the provisions which exclude or
limit his liability, if the damage is caused by
his wilful misconduct or by such default on his
part as is considered to be equivalent to wilful
misconduct;
Similarly the carrier shall not be entitled to
avail himself of the said provisions, if the
damage is caused as aforesaid by any agent
of the carrier acting within the scope of his
employment.
Under Article 29, Warsaw Convention, the right
to damages under the WC is extinguished after
two years from the date of arrival at the
destination or from the date on which the
aircraft ought to have arrived, or from the date
UP LAW BOC TRANSPORTATION LAW MERCANTILE LAW

on which the carriage stopped. The method of otherwise no special or extraordinary form of
calculating the period of limitation shall be resulting injury [Alitalia Airways v. CA (1990)].
determined by the law of the court seized of the
case.
WILLFUL MISCONDUCT
LIABILITY TO PASSENGERS A common carrier may not avail of the limitation
in the following cases:
General rule: In the carriage of passengers, the
liability of the carrier for each passenger is Willful misconduct;
limited to 250,000 francs passenger. Default amounting to willful misconduct
[Article 25, Warsaw Convention];
Exception: By special contract, the carrier and Accepting passengers without ticket [Article
the passenger may agree to a higher limit 3(2), Warsaw Convention];
[Article 22(1), Warsaw Convention]. Accepting goods without airway bill or
baggage without baggage check.
LIABILITY FOR CHECKED BAGGAGE
Receipt by the person entitled to the delivery of
General rule: In the carriage of baggage and
goods, the liability of the carrier is limited to baggage or cargo without complaint is prima
250 francs per kilogram. facie evidence that the same have been
delivered in good condition and in accordance
Exception: The limit does not apply when the with the document of carriage [Article 26,
Warsaw Convention].
consignor has made, at the time when the
package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires. In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless he proves that that sum is greater than
the actual value to the consignor at delivery
[Article 22(2), Warsaw Convention].

LIABILITY FOR HAND-CARRIED

BAGGAGE
As regards hand-carried baggage, the liability
of the carrier is limited to 5,000 francs per
passenger [Article 22(3), Warsaw Convention].
The Guatemala Protocol of 1971 increased the
limit for passengers to $100,000 and to
$1,000 for baggage. However, the Supreme
Court noted in Santos III v. Northwest Orient
Airlines (1992), that the Guatemala Protocol is
still ineffective [Sundiang and Aquino (2013)].
The Warsaw Convention should be deemed a
limit of liability only in those cases where the
cause of death or injury to person, or
destruction, loss or damage to property or
delay in its transport is not attributable to or
attended by any willful misconduct, bad faith,
recklessness, or otherwise improper conduct
on the part of any official or employee for
which the carrier is responsible; and there is

PAGE 99
UP LAW BOC CORPORATION LAW
Corporation
DEFINITION
A corporation is an artificial being created by
operation of law, having the right of succession
and the powers, attributes, and properties
expressly authorized by law or incident to its
existence. [Sec. 2, unless otherwise indicated, all
sections cited herein are from B.P. 68, or the
Corporation Code]
ATTRIBUTES OF THE
CORPORATION
(1) An Artificial Being
A corporation exists by fiction of law. Hence, it
can act only through its directors, officers and
employees.
Shipside, Inc. v. Court of Appeals (2001): Being
only a juridical entity, the physical acts of the
corporation, like the signing of documents, can
be performed only by natural persons duly
authorized for the purpose by corporate by-laws
or by a special act of the Board of Directors.
Moral Damages
NAPOCOR v. Philipp Brothers Oceanic (2001):
Moral damages cannot be awarded in favor of
corporations because they do not have feelings
and mental state. They may not even claim
moral damages for besmirched reputation.
Pilipinas Broadcasting Network v. Ago Medical
and Educational Center (2005): However, a
corporation can recover moral damages under
Art 2219 (7) if it was the victim of defamation.
Criminal Liability
West Coast Life Ins. Co. v. Hurd (1914); Time Inc.
v. Reyes (1971): Since a corporation as a person is
a mere legal fiction, it cannot be proceeded
against criminally because it cannot commit a
crime in which personal violence or malicious
intent is required. Criminal action is limited to
the corporate agents guilty of an act amounting
to a crime and never against the corporation
itself.
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MERCANTILE LAW
Doctrine of Separate Personality
Yutivo Sons Hardware v. CTA (1961): A
corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from those persons composing it as well
as from any other legal entity to which it may be
related.
(2) Created by operation of law
Mere consent of the parties to form a
corporation is not sufficient. The State must
give its consent either through a special law
(in case of government corporations) or a
general law (i.e., Corporation Code in case of
private corporations).
A corporation comes into existence upon the
issuance of the CERTIFICATE OF
INCORPORATION. Then and only then will it
acquire juridical personality to sue and be
sued, enter into contracts, hold or convey
property or perform any legal act in its own
name.
(3) Has the right of succession
Its continued existence during its stated term
cannot be affected by any change in the
members or stockholders or by any transfer of
shares by a stockholder to a 3rd person.
(4) Has the powers, attributes and properties
expressly authorized by law or incident to its
existence
Monfort Hermanos Agricultural Dev. Corp. v.
Monfort III (2004): A corporation has no power
except those expressly conferred on it by the
Corporation Code and by its articles of
incorporation, those which may be incidental to
such conferred powers, those that are implied
from its existence, and those reasonably
necessary to accomplish its purposes. In turn, a
corporation exercises said powers through its
Board of Directors and/or its duly authorized
officers and agents.
UP LAW BOC CORPORATION LAW
Classes of Corporations
STOCK CORPORATION (ASKED
IN 01 AND 04)
Corporations which have capital stock divided
into shares and are authorized to distribute to
the holders of such shares dividends or
allotments of the surplus profits on the basis
of shares held [Sec. 3]
It is organized for profit.
The governing body of a stock corporation is
usually the Board of Directors (except in
certain instances, e.g. close corporations).
NON-STOCK CORPORATION
(ASKED IN 04)
All other corporations are non-stock
corporations [Sec. 3]
One where no part of the income is
distributable as dividends to its members,
trustees, or officers, subject to the provisions
of the Code on dissolution [Sec. 87].
Not organized for profit.
Its governing body is usually the Board of
Trustees. However, non-stock corporations
may, through their articles of incorporation or
their by-laws, designate their governing
boards by any name other than as board of
trustees [Sec. 138].
CIR v. Club Filipino de Cebu (1962):
There are two elements for a stock corporation
to exist:
1) Capital stock divided into shares, and
2) An authority to distribute to the holders of
such shares, dividends or allotments of the
surplus profits on the basis of shares held. (Test
of WON a stock corporation)
Even if there is a statement of capital stock, the
corporation is still NOT a stock corporation if
dividends are NOT supposed to be declared,
that is, there is no distribution of retained
earnings.
Note: Under Sec. 43 of the Corporation Code, a
corporation is deemed to have the power to
declare dividends. Thus, so long as the
corporation has capital stock and there is no
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MERCANTILE LAW
prohibition in its Articles of Incorporation or in
its by-laws for it to declare dividends, such
corporation is a stock corporation.
OTHER CORPORATIONS
(a) Public corporation (Asked in 04) One
formed or organized for the government of a
portion of the state. Its purpose is for the
general good and welfare [Sec. 3, Act 1456].
Polytechnic University of the Phils. v. Court of
Appeals (2001): Beyond cavil, a government-
owned and controlled corporation has a
personality of its own, distinct and separate
from that of the government, and the
intervention in a transaction of the Office of
the President through the Executive
Secretary does not change the independent
existence of a government entity as it deals
with another government entity.
Boy Scouts of the Philippines v. COA (2011):
Not all corporations, which
are not government owned or controlled,
are ipso facto to be considered private
corporations as there exists another distinct
class of corporations or chartered
institutions which are otherwise known as
public corporations. These corporations
are treated by law as agencies or
instrumentalities of the government which
are not subject to the tests of ownership or
control and economic viability but to
different criteria relating to their public
purposes/interests or constitutional policies
and objectives and their administrative
relationship to the government or any of its
Departments or Offices.
As presently constituted, the BSP is a
public corporation created by law for a
public purpose. It is not a private
corporation which is required to be owned
or controlled by the government and be
economically viable to justify its existence
under a special law.
(b) Private corporation (Asked in 04) One
formed for some private purpose, benefit,
aim or end [Sec. 3, Act 1456]; it may be either
stock or non-stock, government-owned or
controlled or quasi-public.
UP LAW BOC CORPORATION LAW
Baluyot v. Holganza (2000): The TEST to
determine whether a corporation is
government-owned or controlled, or
private in nature, is if a corporation is
created by its own charter for the exercise of
a public function, or by incorporation under
the general corporation law.
(c) Close corporation - One whose articles of
incorporation provide that: (1) All the
corporation's issued stock of all classes,
exclusive of treasury shares, shall be held of
record by not more than a specified number
of persons, not exceeding twenty (20); (2) all
the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer permitted by this Title; and (3)
The corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class.
Notwithstanding the foregoing, a corporation
shall not be deemed a close corporation
when at least two-thirds (2/3) of its voting
stock or voting rights is owned or controlled
by another corporation which is not a close
corporation within the meaning of this Code.
[Sec. 96]
(d) Educational corporation One organized for
educational purposes [Sec. 106].
(e) Religious corporations
Corporation sole is one formed for the
purpose of administering and managing, as
trustee, the affairs, property and
temporalities of any religious denomination,
sect, or church, by the chief archbishop,
bishop, priest, rabbi, or other presiding elder
of such religious denomination, sect or
church [Sec.110]
Roman Catholic Apostolic, etc v. Register of
Deeds of Davao City (1957): A corporation
sole has no nationality but for the purpose
of applying nationalization laws, nationality
is determined not by the nationality of its
presiding elder but by the nationality of its
members constituting the sect in the
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MERCANTILE LAW
Philippines. Thus, the Roman Catholic
Church can acquire lands in the Philippines
even if it is headed by the Pope.
Corporation aggregate is a religious
corporation incorporated by more than one
person.
(f) Eleemosynary corporation One organized
for a charitable purpose
(g) Domestic corporation One formed,
organized, or existing under the laws of the
Philippines.
(h) Foreign corporation One formed, organized
or existing under any laws other than those
of the Philippines and whose law allows
Filipino citizens and corporations to do
business in its own country and state (Sec.
123).
(i) Corporation created by special laws or charter
- Corporations which are governed primarily
by the provisions of the special law or charter
creating them. Corporation Code has
suppletory application. [Sec. 4]
(j) Subsidiary corporation One in which
control, usually in the form of ownership of
majority of its shares, is in another
corporation (the parent corporation).
(k) Parent corporation Its control lies in its
power, directly or indirectly, to elect the
subsidiarys directors thus controlling its
management policies.
Holding company a parent company
which has no other business aside from the
holding of the shares of its subsidiaries
which it controls
Investment company a parent company
which holds shares in other corporations not
for the purpose of controlling them but
merely to invest therein
(l) Corporation De Jure A corporation
organized in accordance with the
requirements of the law.
(m) De facto corporation A corporation where
there exists a flaw in its incorporation.
UP LAW BOC CORPORATION LAW
Rule on De Facto Corporations - The due
incorporation of any corporation claiming in
good faith to be a corporation under this
Code, and its right to exercise corporate
powers, shall not be inquired into collaterally
in any private suit to which such corporation
may be a party. Such inquiry may be made by
the Solicitor General in a quo warranto
proceeding (Sec. 20).
Grant of juridical personality is an exercise of
State power and not a matter of private
affair. Consequently, under the de facto
corporation doctrine, the defect in the
juridical personality of a corporation cannot
be inquired into by private individuals, much
less used as a defense to avoid claims,
except in quo warranto proceedings brought
on behalf of the State where the main action
is to question the validity or existence of such
juridical personality (Villanueva).
Requisites of De Facto Corporation:
(1) There is an apparently valid statute under
which the corporation may be formed;
(2) There has been colorable compliance
with the legal requirements in good faith;
and
(3) There has been user of corporate powers,
i.e. the transaction of business as if it were
a corporation. [Campos, 1990]
Hall v. Piccio (1950): An association of
persons cannot claim to be a corporation if it
has not been issued a certificate of
incorporation since it cannot claim good faith
compliance with the requirements of the law.
(k) Corporation by estoppel Where a group of
persons misrepresent themselves as a
corporation, they are subsequently estopped
from claiming lack of corporate life in order
to avoid liability; also, a third party who had
dealt with an unincorporated association as
a corporation is precluded from denying its
corporate existence on a suit brought by the
alleged corporation on the contract.
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Sec. 21. All persons who assume to act as a
corporation knowing it to be without
authority to do so shall be liable as general
partners for all debts, liabilities and
damages incurred or arising as a result
thereof. Provided, however, That when any
such ostensible corporation is sued on any
transaction entered by it as a corporation or
on any tort committed by it as such, it shall
not be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation as such, cannot resist
performance thereof on the ground that
there was in fact no corporation.
International Express Travel v. CA (2000): The
doctrine of estoppel applies to a third party
only when he tries to escape liability on a
contract from which he has benefited on the
irrelevant ground of defective incorporation.
It does not apply to a third party who is not
trying to escape liability from the contract
but rather is the one claiming from the
contract.
De Facto Corporation vs. Corporation by
Estoppel
Where all the requisites of a De Facto
corporation are present, the defectively
formed corporation will have the status of
a De Jure corporation in all cases brought
by or against it, except only as to the State
in a direct proceeding.
If any of the requisites is absent, then the
Estoppel doctrine can apply but ONLY IF
under the circumstances of the particular
case then before the court, either (a) the
defendant association is estopped from
defending on the ground of its lack of
capacity to be sued, or (b) the defendant
third party had dealt with the plaintiff as a
corporation and is deemed to have
admitted its existence.
UP LAW BOC CORPORATION LAW
Nationality of
Corporations
PLACE OF INCORPORATION
TEST
The corporation is a national of the country
under whose laws it is organized or
incorporated [Sec. 123].
Domestic corporations organized and
governed under and by Philippine laws
Foreign Corporations organized under laws
other than those of the Philippines and can
operate only in the territory of the state under
whose laws it was formed. However, they may
be licensed to do business here [Campos].
CONTROL TEST
A corporation shall be considered a Filipino
corporation if the Filipino ownership of its
capital stock is at least 60%, and where the 60-
40 Filipino-alien equity ownership is NOT in
doubt [SEC Opinion dated 6 November 1989;
DOJ Opinion No. 18, s. 1989].
Therefore, its shareholdings in another
corporation shall be considered to be of Filipino
nationality when computing the percentage of
Filipino equity of that second corporation [SEC
Opinion dated 23 November 1993].
Control test is applied in the following:
Exploitation of natural resources - Only
Filipino citizens or corporations whose
capital stock are at least 60% owned by
Filipinos can qualify to exploit natural
resources. [Sec. 2, Art. XII, Consti.]
Public Utilities - xxx no franchise,
certificate or any other form of authorization
for the operation of a public utility shall be
granted except to citizens of the Philippines
or to corporations or associations organized
under the laws of the Philippines at least
60% of whose capital is owned by such
citizens. [Sec. 11, Art. XII, Consti.]
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Gamboa v. Teves (G.R. No. 176579, June 28,
2011): The term "capital" in Section 11, Article
XII of the 1987 Constitution refers only to shares
of stock entitled to vote in the election of
directors, and thus in the present case only to
common shares, and not to the total
outstanding capital stock (common and non-
voting preferred shares).
The 60 percent of the "capital" assumes, or
should result in, "controlling interest" in the
corporation. Compliance with the required
Filipino ownership of a corporation shall be
determined on the basis of outstanding capital
stock whether fully paid or not, but only such
stocks which are generally entitled to vote are
considered.
For stocks to be deemed owned and held by
Philippine citizens or Philippine nationals, mere
legal title is not enough to meet the required
Filipino equity. Full beneficial ownership of the
stocks, coupled with appropriate voting rights is
essential. Thus, stocks, the voting rights of
which have been assigned or transferred to
aliens cannot be considered held by Philippine
citizens or Philippine nationals.
Individuals or juridical entities not meeting the
aforementioned qualifications are considered as
non-Philippine nationals.
Gamboa v. Teves, (G.R. No. 176579, October 9,
2012): (The SC reversed the previous 2011 ruling)
Since the constitutional requirement of at least
60 percent Filipino ownership applies not only
to voting control of the corporation but also to
the beneficial ownership of the corporation, it is
therefore imperative that such requirement
apply uniformly and across the board to all
classes of shares, regardless of nomenclature
and category, comprising the capital of a
corporation. Under the Corporation Code,
capital stock consists of all classes of shares
issued to stockholders, that is, common shares
as well as preferred shares, which may have
different rights, privileges or restrictions as
stated in the articles of incorporation.
Since a specific class of shares may have rights
and privileges or restrictions different from the
UP LAW BOC CORPORATION LAW
rest of the shares in a corporation, the 60-40
ownership requirement in favor of Filipino
citizens in Section 11, Article XII of the
Constitution must apply not only to shares with
voting rights but also to shares without voting
rights. Preferred shares, denied the right to vote
in the election of directors, are anyway still
entitled to vote on the eight specific corporate
matters mentioned above under Section 6 of
the Corporation Code. Thus, if a corporation,
engaged in a partially nationalized industry,
issues a mixture of common and preferred non-
voting shares, at least 60 percent of the common
shares and at least 60 percent of the preferred
non-voting shares must be owned by Filipinos.
Of course, if a corporation issues only a single
class of shares, at least 60 percent of such
shares must necessarily be owned by Filipinos.
In short, the 60-40 ownership requirement in
favor of Filipino citizens must apply separately to
each class of shares, whether common, preferred
non-voting, preferred voting or any other class of
shares. This uniform application of the 60-40
ownership requirement in favor of Filipino
citizens clearly breathes life to the constitutional
command that the ownership and operation of
public utilities shall be reserved exclusively to
corporations at least 60 percent of whose
capital is Filipino-owned. Applying uniformly
the 60-40 ownership requirement in favor of
Filipino citizens to each class of shares,
regardless of differences in voting rights,
privileges and restrictions, guarantees effective
Filipino control of public utilities, as mandated
by the Constitution.
SEC Memorandum Circular No. 8 dated 20 May
2013
Sec. 1. Covered corporations: All corporations
engaged in identified areas of activities or
enterprises specifically reserved, wholly or
partly, to Philippine Nationals by the
Constitution, the FIA and other existing laws,
amendments thereto and IRRs of said laws
except as may otherwise be provided therein.
Sec. 2. All covered corporations shall, at all
times, observe the constitutional or statutory
ownership requirement. For purposes of
determining compliance therewith, the
required percentage of Filipino ownership
shall be applied to BOTH
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MERCANTILE LAW
(a) the total number of outstanding shares of
stock entitled to vote in the election of
directors; AND
(b) the total number of outstanding shares of
stock, whether or not entitled to vote in the
election of directors.
GRANDFATHER RULE
Method used to determine the nationality of a
corporation, in cases where corporate
shareholders are present in the situation, by
which the percentage of Filipino equity in a
corporation engaged in nationalized and/or
partly nationalized areas of activities, is
computed by attributing the nationality of
second or even subsequent tier ownership to
determine the nationality of the corporate
shareholder [Villanueva].
SEC Opinion re: Silahis Intl Hotel (May 4, 1987): It
involves the computation of Filipino ownership
of a corporation in which another corporation of
partly Filipino and partly foreign equity owns
capital stock. The percentage of shares held by
the second corporation in the first is multiplied
by the latters own Filipino equity, and the
product of these percentages is determined to
be the ultimate Filipino ownership of the
subsidiary corporation.
The Grandfather Rule must be applied to
accurately determine the actual participation,
both direct and indirect, of foreigners in a
corporation engaged in a nationalized activity or
business.
Redmont Consolidated Mines, Corp v. McArthur
Mining, Inc., et al. (2010): Compliance with the
constitutional limitation(s) on engaging in
nationalized activities must be determined by
ascertaining if 60% of the investing
corporations outstanding capital stock is owned
by Filipino citizens, or as interpreted, by
natural or individual Filipino citizens. If such
investing corporation is in turn owned to some
extent by another investing corporation, the
same process must be observed. One must not
stop until the citizenships of the individual or
natural stockholders of layer after layer of
investing corporations have been established,
the very essence of the Grandfather Rule.
UP LAW BOC
Corporate Juridical
Personality
A private corporation formed or organized
under this code commences to have corporate
existence and juridical personality and is
deemed incorporated from the date the SEC
issues a certificate of incorporation under its
official seal [Sec. 19]
DOCTRINE OF SEPARATE
JURIDICAL PERSONALITY
(ASKED IN 95, 96, 99 AND 00)
Concept
A corporation has a personality separate and
distinct from that of its stockholders and
members and is not affected by the personal
rights, obligations, and transactions of the
latter.
Merely a legal fiction for purposes of
convenience and to sub-serve the ends of
justice
Land Bank of the Philippines v. CA (2001): A
corporation, upon coming into existence, is
invested by law with a personality separate and
distinct from the persons comprising it as well
as from any other legal entity to which it may be
related. By this attribute, a stockholder may not,
generally, be made to answer for acts or
liabilities of said corporation, and vice versa.
Property
Wise & Co. v. Man Sun Lung, (1940):
Stockholders have no claim on corporate
property as owners, but mere expectancy or
inchoate right to the same upon dissolution of
the corporation after all corporate creditors
have been paid. Such right is limited only to
their equity interest (doctrine of limited liability).
Although a stockholders interest in the
corporation may be attached by his personal
creditor, corporate property cannot be used to
satisfy his claim.
CORPORATION LAW MERCANTILE LAW
LIABILITY FOR TORTS AND CRIMES
PNB v. CA (1978): As a separate juridical
personality, a corporation can be held liable for
torts committed by its officers for corporate
purpose.
RECOVERY OF MORAL DAMAGES
General Rule: A Corporation has the power to
sue in its corporate name. [Sec. 36]
Exception:
NAPOCOR v. Philipp Brothers Oceanic (2001):
Moral Damages cannot be awarded in favor of
corporations because they do not have feelings
and mental state. They may not even claim
moral damages for besmirched reputation.
Pilipinas Broadcasting Network v. Ago Medical
and Educational Center (2005): HOWEVER, a
corporation can recover moral damages under
Art 2219 (7) if it was the victim of defamation.
Constitutional Rights
Bataan Shipyard & Engg Co. v. PCGG (1987):
Corporate entities are entitled to due process,
equal protection, and protection against
unreasonable searches and seizures. However,
a corporation is not entitled to the privilege
against self-incrimination.
DOCTRINE OF PIERCING THE
CORPORATE VEIL
Koppel Phil v. Yatco (1946): Piercing the veil of
corporate entity is merely an equitable remedy,
and may be granted only in cases when the
corporate fiction is used to defeat public
convenience, justify wrong, protect fraud or
defend crime (Yutivo Sons v. CTA, 1961) or
where the corporation is a mere alter ego or
business conduit of a person.
Land Bank of the Philippines v. CA (2001): In
order to disregard the separate juridical
personality of a corporation, the wrongdoing
must be clearly and convincingly established. In
the absence of any malice or bad faith, a
stockholder or an officer of a corporation cannot
be made personally liable for corporate
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UP LAW BOC CORPORATION LAW
liabilities. The mere fact that a stockholder
owns majority of the stock of a corporation is
not a ground to conclude that said stockholder
and corporation are one and the same.
Suldao v. Cimech System Construction, Inc.
(2006): The veil of corporate fiction treats as
separate and distinct the affairs of a corporation
and its officers and stockholders. As a general
rule, a corporation will be looked upon as a
legal entity, unless and until sufficient reason to
the contrary appears. When the notion of legal
entity is used to defeat public convenience,
justify wrong, protect fraud, or defend crime, the
law will regard the corporation as an association
of persons. Also, the corporate entity may be
disregarded in the interest of justice in such
cases as fraud that may work inequities among
members of the corporation internally, involving
no rights of the public or third persons. In both
instances, there must have been fraud and
proof of it.
GROUNDS FOR APPLICATION OF
DOCTRINE
The corporate fiction may be pierced if used:
To defraud the government of taxes due it.
To evade payment of civil liability.
By a corporation which is merely a conduit or
alter ego of another corporation.
To evade compliance with contractual
obligations.
To evade financial obligation to its employees.
PNB v. Andrada Electric & Engineering Co.
(2002): Only in these and similar instances may
the veil be pierced and disregarded: to ward off
a judgment credit, to avoid inclusion of
corporate assets as part of the estate of the
decedent, to escape liability arising from a debt,
or to perpetuate fraud and/or confuse
legitimate issues either to promote or to shield
unfair objectives to cover up an otherwise
blatant violation of the prohibition against
forum shopping.
Seaoil vs Autocorp Group [2008, Nachura]:
Q: Is a corporation liable for the individual acts
of its stockholders or members? Is there an
exception to the general rule?
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MERCANTILE LAW
A: It is settled that a corporation has a
personality separate and distinct from its
individual stockholders or members, and is not
affected by the personal rights, obligations and
transactions of the latter. The corporation may
not be held liable for the obligations of the
persons composing it, and neither can its
stockholders be held liable for its obligation.
Of course, this Court has recognized
instances when the corporations separate
personality may be disregarded. However, we
have also held that the same may only be done
in cases where the corporate vehicle is being
used to defeat public convenience, justify
wrong, protect fraud, or defend crime. Moreover,
the wrongdoing must be clearly and
convincingly established. It cannot be
presumed.
TEST IN DETERMINING
APPLICABILITY
General Rule: The mere fact that a corporation
owns all or substantially all of the stocks of
another corporation is NOT sufficient to justify
their being treated as one entity.
Exception: The subsidiary is a mere
instrumentality of the parent corporation.
PNB v. Ritratto Group (2001):
Circumstances rendering subsidiary an
instrumentality:
The parent corporation owns all or most of
the subsidiarys capital stock.
The parent and subsidiary corporations have
common directors or officers.
The parent corporation finances the
subsidiary.
The parent corporation subscribes to all the
capital stock of the subsidiary or otherwise
causes its incorporation.
The subsidiary has grossly inadequate capital.
The parent corporation pays the salaries and
other expenses or losses of the subsidiary.
The subsidiary has substantially no business
except with the parent corporation or no
assets except those conveyed to or by the
parent corporation.
In the papers of the parent corporation or in
the statements of its officers, the subsidiary is
UP LAW BOC CORPORATION LAW
described as a department or division of the
parent corporation or its business or financial
responsibility is referred to as the parent
corporations own.
The parent corporation uses the property of
the subsidiary as its own.
The directors or executives of the subsidiary
do not act independently in the interest of the
subsidiary but take their orders from the
parent corporation in the latters interest.
The formal ledger requirements of the
subsidiary are not observed.
Incorporation and
Organization
PROMOTER
Promoters are persons who, acting alone or with
others, take initiative in founding and organizing
the business or enterprise of the issuer and
receives consideration therefor (RA 8799, The
Securities Regulation Code).
LIABILITY OF PROMOTER
General Rule: The promoter binds himself
PERSONALLY & assumes the responsibility of
looking to the proposed corporation for
reimbursement.
Exceptions:
(1) Express or implied agreement to the contrary
(2) Novation, not merely adoption or ratification
of the contract
LIABILITY OF CORPORATION FOR
PROMOTERS CONTRACTS
General Rule
Cagayan Fishing Development Co., Inc. v.
Sandiko (1937): A corporation is NOT bound by
the contract. A corporation, until organized, has
no life and no legal existence. It could not have
had an agent (the promoter) who could legally
bind it.
Exceptions:
A corporation may be bound by the contract if it
makes the contract its own by:
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Adoption or ratification of the ENTIRE
contract after incorporation.
Note:
Builders Duntile Co. v. Dunn Mfg. Co. (1929): A
corporations power to adopt a contract (by its
promoters) must be understood to be limited
to such contracts as the corporation itself,
after its organization, would be authorized to
make.
Novation or the intent to novate the original
contract is required to adopt or ratify the pre-
incorporation contract. [Campos, 1990]
Rizal Light v. PSC and Morong Electric (1968):
The Courts ruling in Cagayan Fishing v.
Teodoro Sandiko, that a corporation should
have a full and complete organization and
existence as an entity before it can enter into
any kind of a contract or transact any
business, is NOT ABSOLUTE. One of the
exceptions recognized by American courts is
that a contract made by the promoters of a
corporation on its behalf may be adopted,
accepted or ratified by the corporation when
organized.
Acceptance of benefits under the contract
with knowledge of the terms thereof.
Performance of its obligation under the
contract
NUMBER AND QUALIFICATIONS
OF INCORPORATORS [SEC. 10]
(1) Natural Persons
(2) Any number from 5-15
(3) Majority are residents of the Philippines
(4) Each incorporator must own or be a
subscriber to at least 1 share of the capital
stock of the corporation
CORPORATE NAME
LIMITATIONS ON USE OF
CORPORATE NAME
Corporate name [Sec. 18]
(1) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
UP LAW BOC CORPORATION LAW
(2) Not patently deceptive, confusing or contrary
to existing laws
Required by law to include the word
Corporation or Inc. [Campos, 1990]
Change of corporate name requires the
amendment of the AOI: majority vote of the
board and the vote or written assent of
stockholders holding 2/3 of the outstanding
capital stock [Sec. 16].
Republic Planters Bank v. CA (1992):
Amendment of a corporations AOI changing its SUBSCRIBED AND PAID FOR THE
corporate name does not extinguish the
personality of the original corporation. It is the
same corporation with a different name, and its
character is not changed. Consequently, the
new corporation is still liable for the debts and
obligations of the old corporation.
CORPORATE TERM [SEC. 11]
General Rule: A corporation shall exist for a
period not exceeding 50 years from the date of
incorporation
Exceptions:
(1) Sooner dissolved
(2) Period extended
For periods not exceeding 50 years in any
single instance by an amendment of the
AOI
Extensions may not be made earlier than 5 ARTICLES
years prior to the original or subsequent
expiry date(s)
o EXCEPT: If the SEC determines that
there are justifiable reasons for an earlier
extension
Rationale:
Benguet Consolidated Mining Co. v. Pineda
(1956): Corporations are creatures of the law
through the State legislature. The State is
therefore concerned that this privilege be
enjoyed by corporations only under the CONTENTS
conditions and not beyond the period that it
sees fit to grant; and particularly, that it not be
abused in fraud and to the detriment of other
parties; and for this reason, it has been ruled
that the limitation to a definite period is an
exercise of control in the interest of the public.
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MINIMUM CAPITAL STOCK AND
SUBSCRIPTION
REQUIREMENTS [SEC. 12]
NONEstock corporations incorporated under
the Corporation Code shall not be required to
have a minimum authorized capital stock
EXCEPT as provided for by special law and
subject to the provisions of Sec. 13
AMOUNT OF CAPITAL STOCK TO BE
PURPOSES OF INCORPORATION
[SEC. 13]
(1) At the time of incorporation, at least 25% of
the authorized capital stock stated in the AOI
should be subscribed;
(2) At least 25% of the total subscription must
be paid upon subscription;
(3) The balance to be payable on
Dates fixed in the subscription contract or
Upon call by the BOD in the absence of
fixed dates
(4) The paid-up capital can in no case be lower
than P5,000.00
ARTICLES OF INCORPORATION
NATURE AND FUNCTION OF
Constitutes the charter of the corporation and
sets forth the rules and conditions upon which
the association or corporation is founded
Defines the contractual relationships between
the State and the corporation, the
stockholders and the State, and the
corporation and the stockholders
The Articles must be filed with the SEC for the
issuance of the Certificate of Incorporation.
(1) CORPORATE NAME
(a) Must not be identical or deceptively or
confusingly similar to that of any existing
corporation or to any other name already
protected by law
UP LAW BOC CORPORATION LAW
(b) Not patently deceptive, confusing or
contrary to existing laws
Lyceum of the Philippines v. CA (1993): The policy
underlying the prohibition against the
registration of a corporate name which is
identical or deceptively or confusingly similar
to that of any existing corporation or which is
patently deceptive or patently confusing or
contrary to existing laws is:
(1) The avoidance of fraud upon the public which
would have occasion to deal with the entity
concerned;
(2) The prevention of evasion of legal
obligations and duties, and
(3) The reduction of difficulties of administration
and supervision over corporations.
To determine whether a given corporate name
is "identical" or "confusingly or deceptively
similar" with another entity's corporate name,
one must evaluate corporate names in their
entirety.
SEC Memo Circ. No.5, s.2008: The corporate
name shall contain the word Corporation or
Incorporated, or the abbreviations Corp. or
Inc. respectively.
SEC Memo Circ. No. 12, s. 2008: Business or
trade name which is different from the
corporate name shall be indicated in the articles
of incorporation. A company may have more
than one business or trade name.
Change of corporate name requires the
amendment of the AOI: majority vote of the
board and the vote or written assent of
stockholders holding 2/3 of the outstanding
capital stock [Sec. 16].
Republic Planters Bank v. CA (1992):
Amendment of a corporations AOI changing its
corporate name does not extinguish the
personality of the original corporation. It is the
same corporation with a different name, and its
character is not changed. Consequently, the
new corporation is still liable for the debts and
obligations of the old corporation.
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MERCANTILE LAW
(2) PURPOSE CLAUSE
Must indicate the PRIMARY and SECONDARY
purposes if there is more than one purpose,
which should not contradict or change the
nature of the corporation (Sec. 14(2))
Must not be patently unconstitutional, illegal,
immoral, and contrary to government rules
and regulations (Sec. 17 (2)).
People v. United Medical Service, 200 N.E. 157,
cited in Campos: Must not be for the purpose of
practicing a profession.
Ulep v. The Legal Clinic (1993): Under the present
state of our law and jurisprudence, a
corporation cannot be organized for or engage
in the practice of law in this country. This
interdiction, just like the rule against unethical
advertising, cannot be subverted by employing
some so-called paralegals supposedly
rendering the alleged support services. The
remedy for the apparent breach of this
prohibition is the concern and province of the
Solicitor General who can institute the
corresponding quo warranto action, after due
ascertainment of the factual background and
basis for the grant of the corporate charter, in
light of the putative misuse thereof.
(3) PRINCIPAL OFFICE
Must be within the Philippines [Sec. 14 (3)]
AOI must specify both province or city or
town where it is located
Sundiang and Aquino citing SEC Circular No. 3-
2006: A specific address is now required; Metro
Manila is no longer allowed.
Chua Gan vs. Samahang Magsasaka (1935):
Important for (1) determining venue in an action
by or against the corporation, and (2)
determining the province where a chattel
mortgage of shares should be registered.
Hyatt Elevators v. Goldstar Elevators (2005):
The residence of a corporation is the place where
its principal office is located, as stated in its
Articles of Incorporation. To insist that the
proper venue is the actual principal office and
not that stated in its Articles of Incorporation
UP LAW BOC CORPORATION LAW
would indeed create confusion and work untold
inconvenience. Enterprising litigants may, out
of some ulterior motives, easily circumvent the
rules on venue by the simple expedient of
closing old offices and opening new ones in
another place that they may find well to suit
their needs.
(4) CORPORATE TERM
Maximum life of 50 years.
Extendible for a period not exceeding 50
years at any one instance. No extension,
however, can be made earlier than 5 years
before the end of the term. [Sec. 11]
Extension requires an amendment of the AOI
subject to the exercise of appraisal right by the
dissenting stockholder [Sec. 37].
(5) NAMES, CITIZENSHIP AND RESIDENCES
OF INCORPORATORS
(6) NUMBER, NAMES, CITIZENSHIP AND
RESIDENCES OF DIRECTORS/TRUSTEES.
(ASKED IN 05 AND 08)
Stock corporations: DIRECTORS
Non-stock corporations: TRUSTEES
General Rule: Not less than 5 but not more than
15 directors/trustees
Exception: Non-stock corporations whose
articles or by-laws may provide for more than 15
trustees [Sec. 92]
Educational non-stock corporations:
trustees may NOT be less than 5 NOR exceed
15
number of trustees shall be in multiples of 5
[Sec. 108]
Nationalized or partially-nationalized industries:
Aliens may be directors but only in such number
as may be proportional to their allowable
ownership of shares
(7) IF STOCK CORPORATION:
authorized capital stock in lawful money of
the Philippines
the number of shares into which the ACS is
divided
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MERCANTILE LAW
If with par value shares, the par value of each
share [Sec. 14(8), Sec. 15(7)].
names, citizenship and residences of original
subscribers
amount subscribed and paid on each
subscription
fact that some or all shares are without par
value
(8) IF NON-STOCK:
amount of capital
names, nationalities & residences of
contributors
amount contributed by each
(9) AMOUNT PAID BY EACH SUBSCRIBER
ON THEIR SUBSCRIPTION, WHICH SHALL
NOT BE LESS THAN 25% OF SUBSCRIBED
CAPITAL AND SHALL NOT BE LESS THAN
P5,000 [SEC. 15 (8 & 9)]
(10) NAME OF TREASURER ELECTED BY THE
SUBSCRIBERS [SEC. 15 (10)]
(11) OTHER MATTERS
Classes of shares, as well as preferences or
restrictions on any such class [Sec. 6].
Denial or restriction of pre-emptive right
[Sec.39].
Prohibition against transfer of stock which
would reduce stock ownership to less than the
required minimum in the case of a
nationalized business or activity [Sec. 15(11)].
No transfer clause
J.G. Summit Holdings, Inc. v. CA (2005): If the
foreign shareholdings of a landholding
corporation exceeds 40%, it is not the foreign
stockholders ownership of the shares which is
adversely affected but the capacity of the
corporation to own land that is, the
corporation becomes disqualified to own
land. No law disqualifies a person from
purchasing shares in a landholding corporation
even if the latter will exceed the allowed foreign
equity, what the law disqualifies is the
corporation from owning land.
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AMENDMENT
Amendment of the Articles of Incorporation
[Sec. 16]
Any provision or matter stated in the articles of
incorporation may be amended
By a majority vote of the board of directors or
trustees
And the vote or written assent of
o 2/3 of the outstanding capital stock,
without prejudice to the appraisal right of
dissenting stockholders in accordance with
the provisions of this Code,
o 2/3 of the members if it be a non-stock
corporation.
Limitations:
Cannot effect amendment when it will
contravene any provision of requirement
imposed by the Code or by special laws
The amendment must be for a legitimate
purpose
Must be approved by the directors/trustees
and the stockholders/members through the
vote requirement
Appraisal Right
Both the original and the amended articles
together must contain all the provisions
required by law to be set out in the articles.
If the corporation is governed by a special law
the amended articles must be accompanied
by a favorable recommendation of the
appropriate government agency to the effect
that such amendment is in accordance with
law [Lopez, 2004]
Will take effect only
o Upon their approval by the SEC by the
issuance of a certificate of amended articles
o Or from the date of filing with the SEC if not
acted upon within 6 months from the date
of filing for a cause not attributable to the
corporation
Procedure:
The original and amended articles together
shall contain all provisions required by law to
be set out in the articles of incorporation
The articles, as amended shall be indicated by
underscoring the change or changes made
A copy shall be submitted to the SEC
o Duly certified under oath by the corporate
secretary and a majority of the directors or
trustees
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MERCANTILE LAW
o Stating the fact that the amendment or
amendments have been duly approved by
the required vote of the stockholders or
members
The following items are amendable under Sec.
16:
Change of name of the Corporation
Adding to or changing the purpose/s
Change of principal office
Change in the number of directors or trustees
Increase or decrease in authorized capital
stock (subject to Sec. 38)
NON-AMENDABLE ITEMS
The following items state accomplished facts,
therefore, cannot be amended:
The names, nationalities and residences of the
incorporators
(Otherwise, an amendment would go against
the definition of incorporators in Sec. 5)
First set of directors or trustees
Original stock subscriptions and paid-in
capital
Treasurer-in-trust
Place and date of execution
Witnesses [De Leon]
Notes: AOI must be accompanied by Treasurers
sworn statement of compliance with Sec. 13 on
amount of capital to be subscribed and paid for
the purposes of incorporation; otherwise, SEC
shall not accept the AOI. [Sec. 14]
REGISTRATION AND ISSUANCE
OF CERTIFICATE OF
INCORPORATION
REGISTRATION OF THE ARTICLES OF
INCORPORATION
DOCUMENTS TO BE FILED WITH SEC
(ASKED IN 02):
(1) Articles of incorporation
(2) Treasurers Affidavit certifying that 25% of
the total authorized capital stock has been
subscribed and at least 25% of such has
been fully paid in cash or property
UP LAW BOC CORPORATION LAW
(3) Bank certificate covering the paid-up capital.
(Note: Current SEC rules no longer require
this if payment for shares is made in cash)
(4) Letter authority authorizing the SEC to
examine the bank deposit and other
corporate books and records to determine
the existence of paid-up capital
(5) Undertaking to change the corporate name
in case there is another person or entity with
same or similar name that was previously
registered
(6) Certificate of authority from proper
government agency whenever appropriate
like BSP for banks and Insurance
Commission for insurance corporations.
[Sundiang and Aquino]
ISSUANCE OF CERTIFICATE OF
INCORPORATION BY SEC
Effect: Commencement of corporate existence
and juridical personality [Sec. 19]
REVOCATION of certificate of incorporation:
If incorporators are found guilty of fraud in
procuring the same after due notice and hearing
[Sec. 6(i), PD 902-A]
GROUNDS FOR DISAPPROVING AOI:
[SEC. 17]
AOI does not SUBSTANTIALLY comply with
the form prescribed
Purpose is patently unconstitutional, illegal,
immoral, contrary to government rules and
regulations
Treasurers Affidavit concerning the amount
of capital subscribed and or paid is false
Required percentage of ownership of Filipino
citizens has not been complied with.
REMEDY in case of rejection of AOI - petition for
review in accordance with the Rules of Court
[Sec. 6, last par., PD 902-A]
SEC shall give the incorporators reasonable
time to correct or modify objectionable portions
of the articles or amendment [Sec. 17].
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MERCANTILE LAW
ADOPTION OF BY-LAWS
ADOPTION OF BY-LAWS [SEC. 46]
May be done either:
Prior to incorporation - approved and signed
by all the incorporators & submitted to SEC
together with AOI; or
After incorporation - within 1 month after
receipt of official notice of the issuance of its
certificate of incorporation by the SEC.
EFFECT OF FAILURE TO FILE THE BY-
LAWS WITHIN THE PERIOD
Loyola Grand Villas Homeowners Association v.
CA (1997): Does not imply the "demise" of the
corporation. By-laws may be required by law for
an orderly governance and management of
corporations but they are not essential to
corporate birth. Therefore, failure to file them
within the period required by law by no means
tolls the automatic dissolution of a corporation.
Note: Section 22 on the effect of failure to
formally organize within 2 years from
incorporation, the corporations corporate
powers cease and the corporation is deemed
dissolved. Organization includes: the filing &
approval of by-laws with the SEC and the
election of directors and officers [Campos,
1990].
SMC v. Mandaue Packing Products Plants Union
FFW (2005): By-laws has traditionally been
defined as regulations, ordinances, rules or laws
adopted by an association or corporation or the
like for its internal governance, including rules
for routine matters such as calling meetings
and the like. The importance of by-laws to a
labor organization cannot be gainsaid. Without
such provisions governing the internal
governance of the organization, such as rules on
meetings and quorum requirements, there
would be no apparent basis on how the union
could operate. Without a set of by-laws which
provides how the local/chapter arrives at its
decisions or otherwise wields its attributes of
legal personality, then every action of the
local/chapter may be put into legal controversy.
UP LAW BOC CORPORATION LAW
However, if those key by-law provisions on
matters such as quorum requirements,
meetings, or on the internal governance of the
local/chapter are themselves already provided
for in the constitution, then it would be feasible
to overlook the requirement for by-laws. Indeed
in such an event, to insist on the submission of a
separate document denominated as By-Laws
would be an undue technicality, as well as a
redundancy.
NATURE AND FUNCTIONS OF BY-
LAWS
Product of agreement of the
stockholders/members and establish the
rules for internal government of the
corporation [Campos, 1990]
A rule or law of a corporation for its
government [13 Am. Jur., 283]
China Banking Corp v CA (1997): Mere internal
rules among stockholders and cannot affect
or prejudice 3rd persons who deal with the
corporation unless they have knowledge of
the same.
According to its function, by-laws may be
defined as the rules and regulations or private
laws enacted by the corporation to regulate,
govern and control its own actions, affairs and
concerns and its stockholders or members
and directors and officers with relation thereto
and among themselves in their relation to it.
[9 Fletcher Cyc. Corp., 1963 rev. ed., Sec. 4166
at 622 cited in Lopez, 1994]
REQUISITES OF VALID BY-LAWS
Must be approved by the affirmative vote of
the stockholders representing MAJORITY of
the outstanding capital stock or majority of
members (If filed pre-incorporation: must be
approved and signed by all incorporators)
Must be kept in the principal office of the
corporation, subject to inspection of
stockholders or members during office hours
[Sec. 74]
Grace Christian High School v. CA (1997): No
provision of the by-laws can be adopted if it is
contrary to law.
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MERCANTILE LAW
BINDING EFFECTS
ONLY from date of issuance of SEC of
certification that by-laws are not inconsistent
with the Code
Pending approval, they CANNOT bind
stockholders or corporation
AMENDMENT OR REVISION
Effected by: MAJORITY vote of the members of
the BOARD and MAJORITY VOTE OF THE
OWNERS of the OCS or members, in a meeting
duly called for the purpose
DELEGATION TO THE BOD OF POWER TO
AMEND OR REPEAL BY-LAWS
By vote of stockholders representing 2/3 of the
OCS or 2/3 of the members
HOW DELEGATION REVOKED
Any power delegated to the board of directors
or trustees to amend or repeal any by-laws or
adopt new by-laws shall be considered as
revoked whenever stockholders owning or
representing a majority of the outstanding
capital stock or a majority of the members in
non-stock corporations, shall so vote at a
regular or special meeting.
Corporate Powers
GENERAL POWERS, THEORY OF
GENERAL CAPACITY [SEC. 36]
(1) Sue and be sued in its corporate name;
(2) Succession;
(3) Adopt and use a corporate seal;
(4) Amend its Articles of Incorporation;
(5) Adopt by-laws;
(6) For stock corporations - issue or sell stocks
to subscribers and sell treasury stocks; for
non-stock corporation - admit members to
the corporation;
(7) Purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, pursuant to its lawful business;
(8) Enter into merger or consolidation with other
corporations as provided in the Code;
(9) Make reasonable donations, including those
for the public welfare or for hospital,
UP LAW BOC CORPORATION LAW
charitable, cultural, scientific, civic, or similar
purposes: Provided, no corporation, domestic
or foreign, shall give donations in aid of any
political party or candidate or for purposes of
partisan political activity;
(10) Establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees; and
(11) Exercise such other powers as may be
essential or necessary to carry out its
purposes
Note:
The Corporation has implied powers which are
deemed to exist because of the following
provisions:
Except such as are necessary or incidental to
the exercise of the powers so conferred [Sec.
45]
Such powers as are essential or necessary to
carry out its purpose or purposes as stated in
the AOI catch-all phrase [Sec. 36(11)].
SPECIFIC POWERS, THEORY OF
SPECIFIC CAPACITY [SEC. 37-44]
(a) Power to Extend or Shorten Corporate Term
(b) Power to Increase or Decrease Capital Stock
or Incur, Create, Increase Bonded
Indebtedness
(c) Power to Deny Pre-Emptive Rights
(d) Power to Sell or Dispose of Corporate Assets
(e) Power to Acquire Own Shares
(f) Power to Invest Corporate Funds in Another
Corporation or Business
(g) Power to Declare Dividends
(h) Power to Enter Into Management Contract
EXTEND OR SHORTEN THE CORPORATE
TERM [SEC. 37]
(a) Must be approved by majority vote of the
Board of Directors/ Board of Trustees
(BOD/BOT)
(b) Ratified at a meeting by SH representing 2/3
of the outstanding capital stock/ 2/3 of
members of non-stock corporations
(c) Written notice of meeting (includes proposed
action, time and place of meeting) shall be
addressed to each SH/member at his place
of residence and deposited to the addressee
in the post office, or served personally
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MERCANTILE LAW
(d) Appraisal right may be exercised by the
dissenting stockholder for BOTH extension
and shortening of corporate term (See also
Sec. 81)
INCREASE OR DECREASE CAPITAL STOCK
[SEC. 38]
INCUR, CREATE OR INCREASE BONDED
INDEBTEDNESS [SEC. 38]
(a) Same requirements above from a-c
(b) A certificate in duplicate must be signed by a
majority of the directors of the corporation
(countersigned by the chairman and the
secretary of the SH meeting), setting forth:
(1) That requirements of this section have
been complied with
(2) The amount of the increase or diminution
of the capital stock
(3) In case of increase,
(a) the amount of capital stock or number
of shares of no-par stock actually
subscribed
(b) names, nationalities and residences of
the persons subscribing
(c) the amount of no-par stock subscribed
by each
(d) the amount paid by each on his
subscription, or the amount of capital
stock or number of shares of no-par
stock allotted to each stockholder if
such increase is for the purpose of
making effective stock dividend
(4) any bonded indebtedness to be incurred,
created or increased
(5) the actual indebtedness of the
corporation on the day of the meeting
(6) the amount of stock represented at the
meeting
(7) the vote authorizing the increase or
diminution of the capital stock, or the
incurring, creating or increasing of any
bonded indebtedness
(c) prior approval of SEC is required
(d) duplicate certificates shall be kept on file in
the office of the corporation and the other
shall be filed with the SEC, attached in the
original articles of incorporation.
(i) From and after approval of the SEC of its
certificate of filing, the capital stock shall
stand increased or decreased and the
UP LAW BOC CORPORATION LAW
incurring, creating or increasing of any
bonded indebtedness authorized
(ii) SEC shall not accept for filing any
certificate of increase unless accompanied
by the sworn statement of the treasurer of
the corporation showing:
(a) That at least 25% of such increased
capital stock have been subscribed and
(b) that at least 25% of the amount
subscribed has been paid or that there
has been transferred to the corporation
property the value of which is
equivalent to 25% of the subscription
(c) SEC shall not approve any decrease in
the capital stock if its effect shall
prejudice the rights of corporate
creditors
(e) Bonds issued by a corporation shall be
registered with the SEC
DENY PREEMPTIVE RIGHT [SEC. 39]
All SH of a Stock Corporation have
preemptive right to subscribe to all issues or
disposition of shares of any class, in
proportion to their respective shareholdings
Except if such right is denied by the AOI or an
amendment thereto
Pre-emptive right shall not extend to:
(a) shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public
(b) shares to be issued in good faith with the
approval of 2/3 of the stockholders
representing outstanding capital stock, in
exchange for property needed for corporate
purposes or in payment of a previously
contracted debt
SELL OR DISPOSE OF SUBSTANTIALLY ALL
ITS ASSETS [SEC. 40]
(a) Same requirements from a-c as Sec. 37
above
(b) Any dissenting SH may exercise his appraisal
right
(c) Deemed to cover substantially all the
corporate property and assets
(d) After authorization by the SH/members, the
BOD/BOT may abandon such sale, lease,
exchange, mortgage, pledge or other
disposition, subject to the rights of third
parties under any contract relating thereto,
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MERCANTILE LAW
without further action or approval by the SH/
members
(e) Corporation is not restricted in its power to
sell or dispose of its assets without the
authorization of SH or members:
(i) if the same is necessary in the usual and
regular course of business of the
corporation or
(ii) if the proceeds of the sale will be
appropriated for the conduct of its
remaining business
Caltex (Phils.) Inc. v. PNOC Shipping and
Transport Corp. (2006): While the Corporation
Code allows the transfer of all or substantially
all the properties and assets of a corporation,
the transfer should not prejudice the creditors of
the assignor. The only way the transfer can
proceed without prejudice to the creditors is to
hold the assignee liable for the obligations of
the assignor. The acquisition by the assignee of
all or substantially all of the assets of the
assignor necessarily includes the assumption of
the assignors liabilities, unless the creditors
who did not consent to the transfer choose to
rescind the transfer on the ground of fraud. To
allow an assignor to transfer all its business,
properties and assets without the consent of its
creditors and without requiring the assignee to
assume the assignors obligations will defraud
the creditors. The assignment will place the
assignors assets beyond the reach of its
creditors.
ACQUIRE ITS OWN SHARES [SEC. 41]
(a) For a legitimate corporate purpose/s,
including but not limited to the following:
(i) To eliminate fractional shares arising out
of stock dividends
(ii) To collect or compromise an
indebtedness to the corporation, arising
out of unpaid subscription, in a
delinquency sale, and to purchase
delinquent shares sold during said sale;
and
(iii) To pay dissenting or withdrawing
stockholders
(b) Provided there are unrestricted retained
earnings (URE) in the corporate books to
cover the shares purchased or acquired
UP LAW BOC CORPORATION LAW
INVEST IN ANOTHER CORPORATION OR
BUSINESS [SEC. 42]
(a) Same requirements from a-c as Sec. 37
above
(b) Any dissenting SH shall have appraisal right
(c) Where the investment is reasonably
necessary to accomplish the corporations
primary purpose, the approval of the SH/
members is not necessary
Notes:
If it is for the same purpose, or incidental, or
related to its PRIMARY purpose, the board
can invest the corporate fund WITHOUT the
consent of the stockholders. No appraisal
right.
If the investment is in another corporation of
different business or purpose BUT in
pursuance of the SECONDARY purpose, the
affirmative vote of majority of the board
consented by stockholders/ members is
required.
If the investment is OUTSIDE the purpose/s
for which the corporation was organized, AOI
must be amended first, otherwise it will be an
Ultra Vires act.
De La Rama v. Ma-ao Sugar Central Co. (1969): A
private corporation, in order to accomplish its
purpose as stated in its articles of incorporation,
and subject to the limitations imposed by the
Corporation Law, has the power to acquire,
hold, mortgage, pledge or dispose of shares,
bonds, securities, and other evidences of
indebtedness of any domestic or foreign
corporation. Such an act, if done in pursuance of
the corporate purpose, does not need the
approval of the stockholders; but when the
purchase of shares of another corporation is
done solely for investment and not to
accomplish the purpose of its incorporation, the
vote of approval of the stockholders is
necessary.
DECLARE DIVIDENDS [SEC. 43]
(a) Out of URE
(b) Payable in cash, in property, or in stock to all
SH on the basis of outstanding stock held by
them
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MERCANTILE LAW
(c) Any cash dividend due on delinquent stock
shall first be applied to the unpaid balance
on the subscription plus costs and expenses
(d) Stock dividends shall be withheld from the
delinquent stockholder until his unpaid
subscription is fully paid
(e) Should be approved by 2/3 of SH
representing the outstanding capital stock at
a regular/special meeting called for that
purpose
(f) Stock corporations- prohibited from retaining
surplus profits in excess of 100% of their
paid-in capital stock, except:
(i) When justified by definite corporate
expansion projects or programs approved
by the BOD
(ii) When the corporation is prohibited under
any loan agreement with any financial
institution or creditor from declaring
dividends without its consent, and such
consent has not yet been secured
(iii) When it can be clearly shown that such
retention is necessary under special
circumstances obtaining in the
corporation
Nielson & Co. v. Lepanto Consolidated Mining
(1968): Under Section 16 of the Corporation Law
stock dividends cannot be issued to a person
who is not a stockholder in payment of services
rendered.
A corporation may legally issue shares of stock
in consideration of services rendered to it by a
person not a stockholder, or in payment of its
indebtedness. A share of stock issued to pay for
services rendered is equivalent to a stock issued
in exchange of property, because services is
equivalent to property. However, it is the shares
of stock that are originally issued by the
corporation and forming part of the capital that
can be exchanged for cash or services rendered,
or property. A share of stock coming from stock
dividends declared cannot be issued to one who
is not a stockholder of a corporation.
ENTER INTO MANAGEMENT CONTRACTS
[SEC. 44]
(a) Should be approved by the BOD and by SH
owning at least the majority of the
outstanding capital stock or at least a
majority of the members of both the
UP LAW BOC CORPORATION LAW MERCANTILE LAW

managing and the managed corporation at a Types of Ultra Vires Acts

meeting duly called for that purpose Acts done beyond the powers of the
(b) Should be approved by the 2/3 of corporation as provided in the law or its
stockholders owning outstanding capital articles of incorporation;
stock/members of the managed corporation Acts or contracts entered into in behalf of a
when: corporation by persons who have no corporate
(i) A stockholder or stockholders authority (Note: This is technically ultra vires
representing the same interest of both the acts of officers and not of the corporation);
managing and managed corporations Acts or contracts, which are per se illegal as
own more than 1/3 of the total being contrary to law. [Villanueva]
outstanding capital stock entitled to vote
of the managing corporation; or APPLICABILITY OF ULTRA VIRES DOCTRINE
(ii) A majority of the members of the BOD of
Montelibano v. Bacolod-Murcia Milling Co., Inc.,
the managing corporation also constitute
G.R. No. 15092, May 18, 1962: It is a question,
a majority of the BOD of the managed
therefore, in each case of the logical relation of
corporation
the act to the corporate purpose expressed in
(c) No management contract shall be entered
the charter. If that act is one which is lawful in
into for a period longer than 5 years for any
itself, and not otherwise prohibited, is done for
one term
the purpose of serving corporate ends, and is
(d) a-c above applies to any contract whereby a
reasonably tributary to the promotion of those
corporation undertakes to manage or
ends, in a substantial, and not in a remote and
operate all or substantially all of the
fanciful sense, it may fairly be considered within
business of another corporation, whether
the charter powers. The test to be applied is
such are called service contracts, operating
whether the act in question is in direct and
agreements or otherwise
immediate furtherance of the corporations
(e) Service contracts or operating agreements
business, fairly incident to the express powers
which relate to exploration, development,
and reasonably necessary to their exercise. If so,
exploitation or utilization of natural
the corporation has the power to do it;
resources may be entered into for such
otherwise, not.
periods as may be provided in the pertinent
laws and regulations

Notes: 2 general restrictions on the power of CONSEQUENCES OF ULTRA VIRES ACTS

the corporation to acquire and hold properties: Executed contract courts will not set aside or
property must be reasonably and necessarily interfere with such contracts;
required by the business Executory contracts no enforcement even at
that the power shall be subject to the the suit of either party (void and
limitations prescribed by other special laws unenforceable);
and the Constitution (corporation may not Partly executed and partly executory
acquire more than 30% of voting stocks of a principle of no unjust enrichment at expense
bank; corporations are restricted from of another shall apply;
acquiring public lands except by lease of not Executory contracts apparently authorized but
more than 1000 hectares) ultra vires the principle of estoppel shall
apply.
ULTRA VIRES ACTS
Definition - Ultra Vires acts are those acts which Ultra Vires Acts Illegal Acts
a corporation is not empowered to do or
Not necessarily Unlawful; against law,
perform because they are not conferred by its
unlawful, but outside morals, public policy,
AOI or by the Corporation Code, or not
the powers of the and public order
necessary or incidental to the exercise of the
corporation
powers so conferred [Sec. 45].

PAGE 119
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Ultra Vires Acts Illegal Acts
Can be ratified Cannot be ratified
Can bind the parties if Cannot bind the parties
wholly or partly
executed
Seaoil vs. Autocorp Group [2008, Nachura]:
An ultra vires act is distinguished from illegal
act, the former being voidable which may be
enforced by performance, ratification, or
estoppel, while the latter is void and cannot be
validated.
Pirovano v. De La Rama Steamship Co. (1954): A
distinction should be made between corporate
acts or contracts which are illegal and those
which are merely ultra vires. The former
contemplates the doing of an act which is
contrary to law, morals, or public policy or
public duty, and are, like similar transactions
between the individuals void. They cannot serve
as basis of a court action, nor require validity.
Ultra vires acts on the other hand, or those
which are not illegal and void ab initio, but are
not merely within the scope of the articles of
incorporation, are merely voidable and may
become binding and enforceable when ratified
by the stockholders.
REMEDIES IN CASE OF ULTRA VIRES ACTS
State
- Dissolution of the corporation thru a quo
warranto proceeding
- Injunction
- Suspension or revocation of the certificate
of registration by the SEC
Stockholders
- Injunction
- Derivative suit
Creditors
- Nullification of contract in fraud of creditors
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MERCANTILE LAW
HOW (CORPORATE POWERS)
EXERCISED
BY THE SHAREHOLDERS
Corporate Acts Requiring Approval of
Stockholders or Members (Voting and Non-
Voting Shares)
General Rule: Vote necessary to approve a
particular corporate act as provided in this Code
shall be deemed to refer only to stocks with
voting rights [Sec. 6]
Exceptions: (Sec. 6)
Voting and non-voting shares shall be entitled
to vote in the following cases:
(1) Amendment of AOI
(2) Adoption, Amendment and Repeal of By-
Laws [Sec. 48]
(3) Sale, Lease, Mortgage or Other Disposition
of Substantially all corporate assets [Sec. 40]
(4) Incurring, Creating or Increasing Bonded
Indebtedness [Sec. 38]
(5) Increase or Decrease of Capital Stock [Sec.
38]
(6) Merger and Consolidation [Sec. 76-80]
(7) Investment of funds in another corporation
or business or for any purpose other than the
primary purpose for which it was organized
[Sec. 42]
Requisites [Sec. 42] (Asked in 95):
Approval of majority of the board of
directors or trustees
Ratification by the stockholders
representing at least 2/3 of the OCS or the
members at a meeting duly called for the
purpose
Written notice addressed to each
stockholder or member at his place of
residence as shown on the books of the
corporation
Appraisal right available to dissenting
stockholders or members
(8) Dissolution of the Corporation(Sec. 118-121)
UP LAW BOC CORPORATION LAW
Corporate Acts Requiring Approval of
Stockholders or Members (Voting Shares
Only)
Declaration of Stock Dividends [Sec. 43]
Management Contracts [Sec. 44]
Fixing the Consideration of No-Par shares
[Sec. 62]
Fixing the Compensation of Directors [Sec. 30]
BY THE BOARD OF DIRECTORS
Board as Repository of Corporate Powers
GENERAL RULE (Doctrine of Centralized
Management)
The corporate powers of the corporation shall
be exercised, all business conducted, and all
property of controlled and held by the board of
directors or trustees. [Sec. 23]
Exceptions:
Executive Committee duly authorized in the
by-laws [Sec. 35];
A contracted manager which may be an
individual, a partnership, or another
corporation.
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
In case of close corporations, the stockholders
may manage the business of the corporation
rather than by a board of directors, if the AOI
so provide [Sec. 97]
Spouses Constantine Firme v. Bukal Enterprises
and Development Corporation (2003): The power
to purchase real property is vested in the board
of directors or trustees. While a corporation may
appoint agents to negotiate for the purchase of
real property needed by the corporation, the
final say will have to be with the board, whose
approval will finalize the transaction.
Requisites of a VALID Corporate Act by the
Board of Directors [Sec. 25]:
The Board must act as a BODY in a meeting.
(Note: Current SEC regulations allow BOD
meetings by teleconferencing or
videoconferencing)
There must be a VALIDLY constituted
meeting.
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MERCANTILE LAW
Their act must be supported by a MAJORITY
OF THE QUORUM duly assembled (Exception:
Election of officers requires a vote of majority
of ALL the members of the board)
The act must be within the powers conferred
to the Board.
BY THE OFFICERS
Corporate Officer Corporate Employee
Position is provided for Employed through the
in the by-laws or under action of the managing
the Corporation Code officer of the
corporation
RTC has jurisdiction in NLRC has jurisdiction
case of labor dispute in case of labor
disputes
Who are Corporate Officers [Sec. 25]
President must be a director;
Treasurer may or may not be a director; as a
matter of sound corporate practice, must be a
resident and citizen of the Phil (SEC opinion)
Secretary need not be a director unless
required by the by-laws; must be a resident
and citizen of the Philippines; and
Other officers as may be provided in the by-
laws.
Note: Any two (2) or more positions may be held
concurrently by the same person, EXCEPT that
no one shall act as president and secretary or as
president and treasurer at the same time.
Additional qualifications of officers may be
provided for in the by-laws [Sec. 47(5)].
Matling Industrial and Commercial Corp. v. Coros
(2010): Conformably with Section 25 of the
Corporation Code, a position must be expressly
mentioned in the by-Laws in order to be
considered as a corporate office. Thus, the
creation of an office pursuant to or under a by-
Law enabling provision is not enough to make a
position a corporate office. Guerrea v. Lezama
(1958), the first ruling on the matter, held that
the only officers of a corporation were those
given that character either by the Corporation
Code or by the By-Laws; the rest of the
UP LAW BOC CORPORATION LAW
corporate officers could be considered only as
employees or subordinate officials.
A different interpretation can easily leave the
way open for the Board of Directors to
circumvent the constitutionally guaranteed
security of tenure of the employee by the
expedient inclusion in the By-Laws of an
enabling clause on the creation of just any
corporate officer position.
Real v. Sangu Philippines (2011):
An office is created by the charter of the
corporation and the officer is elected (or
appointed) by the directors or stockholders
(Easycall Communications Phils., Inc. v. King,
2005).
Corporate officers in the context of PD No.
902-A are those officers of the corporation
who are given that character by the
Corporation Code or by the corporations by-
laws. There are three specific officers whom a
corporation must have under Section 25 of
the Corporation Code. These are the
president, secretary and the treasurer. The
number of officers is not limited to these
three. A corporation may have such other
officers as may be provided for by its by-laws
like, but not limited to, the vice-president,
cashier, auditor or general manager. The
number of corporate officers is thus limited by
law and by the corporations by-laws [Garcia
v. Eastern Telecommunications Philippines,
Inc., 2009].
Disqualifications [Sec. 27]
Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years
Convicted by final judgment of a violation of
the Corporation Code committed within 5
years prior to the date of his election or
appointment. This includes violations of rules
and regulations issued by the SEC to
implement the provisions of the Corporation
Code.
Authority of Corporate Officers
A person dealing with a corporate officer is put
on inquiry as to the scope of the latters
authority but an innocent person cannot be
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prejudiced if he had the right to presume under
the circumstances the authority of the acting
officers.
Associated Bank v. Pronstroller [2008, Nachura]:
Q: What is the Doctrine of Apparent Authority?
A: If a corporation knowingly permits one of its
officers, or any other agent, to act within the
scope of an apparent authority, it holds him out
to the public as possessing the power to do
those acts; the corporation will, as against
anyone who has in good faith dealt with it
through such agent, be estopped from denying
the agents authority.
TRUST FUND DOCTRINE
Philippine Trust Co. v. Rivera (1923): Under Sec.
43 of Code, the corporation can declare
dividends only out of "unrestricted retained
earnings;" and that under Sec. 122, no
corporation shall distribute any of its assets or
property except upon lawful dissolution and
after payment of all its debts and liabilities.
These provisions in essence provide for the
"trust fund doctrine" where the "subscription to
the capital of a corporation constitute a fund to
which creditors have a right to look for
satisfaction of their claims."
Ong Yong v. Tiu (2003): "The Trust Fund
Doctrine, first enunciated by this Court in the
1923 case of Philippine Trust Co. v. Rivera'
provides that subscriptions to the capital stock
of a corporation constitute a fund to which the
creditors have a right to look for the satisfaction
of their claims.
This doctrine is the underlying principle in the
procedure for the distribution of capital assets,
embodied in Corporation Code, which allows
the distribution of corporate capital only in three
instances:
(1) amendment of the Articles of Incorporation
to reduce the authorized capital stock,
(2) purchase of redeemable shares by the
corporation, regardless of the existence of
unrestricted retained earnings, and
(3) dissolution and eventual liquidation of the
corporation.
UP LAW BOC CORPORATION LAW
Furthermore, the doctrine is articulated in Sec.
41 on the power of a corporation to acquire its
own shares and in Sec. 122 on the prohibition
against the distribution of corporate assets and
property unless the stringent requirements
therefore are complied with.
Boman Environmental Development Corporation
v. CA (1988):
Trust Fund Doctrine means that the capital
stock, properties and other assets of a
corporation are regarded as equity in trust for
the payment of corporate creditors. Stated
simply, the trust fund doctrine states that all
funds received by the corporation in payment of
the shares of stock shall be held in trust for the
corporate creditors and other stockholders of
the corporation. Under such doctrine no fund
shall be used to buy back the issued shares of
stock except only in instances specifically
allowed by the Corporation Code.
Steinberg v. Velasco (1929):
The creditors of a corporation have the right to
assume that so long as there are debts and
liabilities, the Board of Directors will not use
corporate assets to purchase its own shares of
stock or to declare dividends to its stockholders
when the corporation is insolvent.
NTC v. CA (1999): The subscribed capital is the
same amount that can loosely be termed as the
trust fund of the corporation. The Trust
Fund doctrine considers this subscribed capital
as a trust fund for the payment of the debts of
the corporation, to which the creditors may look
for satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital
may be returned or released to the stockholder
(except in the redemption of redeemable
shares) without violating this principle. Thus,
dividends must never impair the subscribed
capital; subscription commitments cannot be
condoned or remitted; nor can the corporation
buy its own shares using the subscribed capital
as the consideration therefor.
Donnina Halley v. Printwell, Inc. (2011): The trust
fund doctrine is not limited to reaching the
stockholders unpaid subscriptions. The scope of
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the doctrine when the corporation is insolvent
encompasses not only the capital stock, but also
other property and assets generally regarded in
equity as a trust fund for the payment of
corporate debts. All assets and property
belonging to the corporation held in trust for
the benefit of creditors that were distributed or
in the possession of the stockholders, regardless
of full payment of their subscriptions, may be
reached by the creditor in satisfaction of its
claim.
Also, under the trust fund doctrine, a corporation
has no legal capacity to release an original
subscriber to its capital stock from the
obligation of paying for his shares, in whole or in
part, without a valuable consideration, or
fraudulently, to the prejudice of creditors. The
creditor is allowed to maintain an action upon
any unpaid subscriptions and thereby steps into
the shoes of the corporation for the satisfaction
of its debt.
To make out a prima facie case in a suit against
stockholders of an insolvent corporation to
compel them to contribute to the payment of its
debts by making good unpaid balances upon
their subscriptions, it is only necessary to
establish that the stockholders have not in good
faith paid the par value of the stocks of the
corporation.
Board of Directors and
Trustees
DOCTRINE OF CENTRALIZED
MANAGEMENT
BOARD IS SEAT OF CORPORATE
POWERS
General Rule: Unless otherwise provided in this
Code, the corporate powers of all corporations
formed under this Code shall be exercised, all
business conducted and all property of such
corporations controlled and held by the board of
directors or trustees to be elected from among
the holders of stocks, or where there is no stock,
from among the members of the corporation,
UP LAW BOC CORPORATION LAW
who shall hold office for one (1) year until their
successors are elected and qualified. [Sec. 23]
Exceptions
In case of an Executive Committee duly
authorized in the by-laws; [Sec. 35]
In case of a contracted manager which may
be an individual, a partnership, or another
corporation
Note: In case the contracted manager is another
corporation, the special rule in Sec. 44 applies.
In case of close corporations, the stockholders
may manage the business of the corporation
rather than by a board of directors, if the AOI
so provide. [Sec. 97]
Spouses Constantine Firme v. Bukal Enterprises
and Development Corporation (2003):
The power to purchase real property is vested in
the board of directors or trustees. While a
corporation may appoint agents to negotiate for
the purchase of real property needed by the
corporation, the final say will have to be with the
board, whose approval will finalize the
transaction.
Great Asian Sales Center Corp v. CA, (2002):
The Corporation Code of the Philippines vests in
the board of directors the exercise of the
corporate powers of the corporation, save in
those instances where the Code requires
stockholders approval for certain specific acts.
Gamboa v. Teves, (2011):
Indisputably, one of the rights of a stockholder
is the right to participate in the control or
management of the corporation. This is
exercised through his vote in the election of
directors because it is the board of directors that
controls or manages the corporation.
Banate v. Philippine Countryside Rural Bank,
(2010):
Section 23 of the Corporation Code expressly
provides that the corporate powers of all
corporations shall be exercised by the board of
directors. The power and the responsibility to
decide whether the corporation should enter
into a contract that will bind the corporation are
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lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of
law. In the absence of authority from the board
of directors, no person, not even its officers, can
validly bind a corporation.
However, just as a natural person may authorize
another to do certain acts for and on his behalf,
the board of directors may validly delegate
some of its functions and powers to its officers,
committees or agents. The authority of these
individuals to bind the corporation is generally
derived from law, corporate by-laws or
authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in
the general course of business.
REQUISITES OF A VALID CORPORATE ACT
BY THE BOARD OF DIRECTORS
(1) The Board must act as a BODY in a meeting.
(2) There must be a VALIDLY constituted
meeting.
(3) There act must be supported by a MAJORITY
OF THE QUORUM duly assembled
(Exception: Election of officers requires a
vote of majority of ALL the members of the
board)
(4) The act must be within the powers conferred
to the Board.
LIMITATIONS ON POWERS OF BOARD OF
DIRECTORS/TRUSTEES
Limitations imposed by the Constitution,
statutes, articles of incorporation or by-laws;
Certain acts of the corporation that require
joint action of the stockholders and board of
directors:
- Removal of director [Sec. 28]
- Amendments of AOI [Sec. 16]
- Fundamental changes [Sec. 6]
- Declaration of stock dividends [Sec. 43]
- Entering into management contracts [Sec.
44]
- Fixing of consideration of non-par shares
[Sec. 62]
- Fixing of compensation of directors [Sec. 30]
Cannot exercise powers not possessed by the
corporation.
UP LAW BOC CORPORATION LAW
PRINCIPLE ON DELEGATION OF
BOARD POWER
Peoples Aircargo v. CA, (1998):
Under Sec 23, the power and the responsibility
to decide whether the corporation should enter
into a contract that will bind the corporation is
lodged in the board, subject to the articles of
incorporation, by-laws, or relevant provisions of
law. However, just as a natural person may
authorize another to do certain acts for and on
his behalf, the board of directors may validly
delegate some of its functions and powers to
officers, committees or agents. The authority of
such individuals to bind the corporation is
generally derived from law, corporate by-laws or
authorization from the board, either expressly or
impliedly by habit, custom or acquiescence in
the general course of business,.
BUSINESS JUDGMENT RULE
General Rule: Directors cannot be held liable
for mistakes or errors in the exercise of their
business judgment if they acted in good faith,
with due care & prudence. Contracts intra vires
entered into by the board of directors are
binding upon the corporation & courts will not
interfere.
Exception: If the contracts are so
unconscionable & oppressive as to amount to a
wanton destruction of the rights of the minority
or if they violate their duties under Sections 31 &
34.
CONSEQUENCES OF THE BUSINESS
JUDGMENT RULE
Sec. 23 embodies the essence of the Business
Judgment Rule, that unless otherwise provided
in the Code, all corporate powers and
prerogatives are vested directly in the Board of
Directors. Consequently:
The resolution, contracts and transactions of
the board cannot be overturned or set aside
by the stockholders or members and not even
by the courts under the principle that the
business of the corporation has been left to
the hands of the board
Directors and duly authorized officers cannot
be held personally liable for acts or contracts
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MERCANTILE LAW
done with the exercise of their business
judgment.
Exceptions
When the Corporation Code expressly
provides otherwise
When the Directors or officers acted with
fraud, gross negligence or in bad faith.
When Directors or officers act against the
corporation in conflict of interest situation.
[Villanueva]
REMEDIES IN CASE OF
MISMANAGEMENT
Receivership
Injunction if the act has not yet been done
Dissolution if abuse amounts to a ground for
quo warranto but Solicitor General Refuses to
act
Derivative suit or complaint filed with the SEC
(now the RTC) [PD 902-A]
Note: Dean Villanueva opined that a derivative
suit may be an exception to such Rule: this
occurs when it is apparent that the Board is not
in a position to validly exercise its business
judgment for the protection of the corporation,
e.g., when the Board itself has committed an
act causing damage to the corporation or when
the Board is placed in a conflict of interests
scenario whereby it is unlikely that it would use
such business discretion to file such suit for the
best interest of the corporation.
TENURE, QUALIFICATIONS AND
DISQUALIFICATIONS OF
DIRECTORS OR TRUSTEES
TENURE
Directors shall hold office for one (1) year until
their successors are elected and qualified [Sec.
23].
Term: One (1) year
Tenure: The period within which the director
actually holds office, including the holdover
period after the end of his term.
UP LAW BOC CORPORATION LAW
Valle Verde Country Club v. Africa, 2009:
In several cases, we have defined "term" as
the time during which the officer may claim to
hold the office as of right, and fixes the
interval after which the several incumbents
shall succeed one another. The term of office
is not affected by the holdover. The term is
fixed by statute and it does not change simply
because the office may have become vacant,
nor because the incumbent holds over in
office beyond the end of the term due to the
fact that a successor has not been elected and
has failed to qualify.
Term is distinguished from tenure in that an
officers "tenure" represents the term during
which the incumbent actually holds office.
The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons
within or beyond the power of the incumbent.
Based on the above discussion, when Section
23 of the Corporation Code declares that "the
board of directorsshall hold office for one (1)
year until their successors are elected and
qualified," we construe the provision to mean
that the term of the members of the board of
directors shall be only for one year; their term
expires one year after election to the office.
The holdover period that time from the
lapse of one year from a members election to
the Board and until his successors election
and qualification is not part of the directors
original term of office, nor is it a new term; the
holdover period, however, constitutes part of
his tenure.
QUALIFICATIONS
If STOCK, director must own at least 1 share of
the capital stock, which stock shall stand in
his own name [Sec. 23].
o Exception: Trustee in a voting trust may be
elected director/trustee.
If NON-STOCK, trustee must be a member.
(a) Majority of the directors/trustees must be
residents of the Philippines.
(b) Natural person
(c) Of Legal Age
(d) Other qualifications as may be prescribed
in the by-laws of the corporation.
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Lee v. CA (1992): With the omission of the phrase
"in his own right" the election of trustees and
other persons who in fact are not beneficial
owners of the shares registered in their names
on the books of the corporation becomes
formally legalized. Hence, this is a clear
indication that in order to be eligible as a
director, what is material is the legal title to, not
beneficial ownership of, the stock as appearing
on the books of the corporation.
DISQUALIFICATIONS [SEC. 27]
Convicted by final judgment of an offense
punishable by imprisonment for a period
exceeding 6 years; or
A violation of the Corporation Code,
committed within five years from the date of
his election. This includes violations of rules
and regulations issued by the SEC to
implement the provisions of the Corporation
Code.
Gokongwei, Jr. v. SEC (1979): An amendment to
the corporations by-laws which renders a
stockholder ineligible to be a director, if he be
also a director in a corporation whose business
is in competition with that of the other
corporation, has been sustained as valid. This is
based upon the principle that where the director
is so employed in the service of a rival company,
he cannot serve both, but must betray one or
the other. Such an amendment "advances the
benefit of the corporation and is good."
ELECTIONS
CUMULATIVE VOTING
CUMULATIVE VOTING FOR ONE
CANDIDATE
A stockholder is allowed to concentrate his
votes and give one candidate as many votes as
the number of directors to be elected multiplied
by the number of his shares shall equal.
Illustration: If there are 5 directors to be elected
and Pedro, as shareholder, has 100 shares,
Pedro can give 500 (5 x 100 shares) votes to
just one candidate.
UP LAW BOC CORPORATION LAW
CUMULATIVE VOTING BY DISTRIBUTION
A stockholder may cumulate his shares by
multiplying the number of his shares by the
number of directors to be elected and distribute
the same among as many candidates as he
shall see fit.
Illustration: In the illustration above, Pedro
instead may choose to give 100 votes to
candidate 1, 100 votes to candidate 2, 100 votes
to candidate 3, 150 votes to candidate 4, and 50
votes to candidate 5.
STRAIGHT VOTING
Every stockholder may vote such number of
shares for as many persons as there are
directors to be elected.
QUORUM
There must be present, in person or by
representative authorized to act by written
proxy, the owners of majority of the OCS or
majority of the members entitled to vote in
the meeting.
Election must be by ballot if requested.
A stockholder cannot be deprived in the
articles of incorporation or in the by-laws of
his statutory right to use any of the methods
of voting in the election of directors.
No delinquent stock shall be voted.
The candidates receiving the highest number
of votes shall be declared elected.
REMOVAL
General Rule: Any Director or Trustee of a
corporation may be removed from office, with or
without cause. [Sec. 28]
Exception: Directors who have been elected by
minority stockholders exercising cumulative
voting can only be removed for cause. Removal
without cause may not be used to deprive
minority stockholders or members of the right of
representation to which they may be entitled
under Section 24.
Other requisites:
by a vote of the stockholders holding or
representing 2/3 of the outstanding capital
stock, or if the corporation be a non-stock
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MERCANTILE LAW
corporation, by a vote of 2/3 of the members
entitled to vote
At a regular or special meeting after proper
notice is given
FILLING OF VACANCIES
VACANCY (1) BY REMOVAL; OR (2) BY
EXPIRATION OF TERM; OR (3) WHEN
THE REMAINING DIRECTORS DO
NOT CONSTITUTE A QUORUM
Vacancy/ies must be filled by the
stockholders in a regular or special meeting
called for that purpose.
A director or trustee elected to fill a vacancy
shall be elected only for the unexpired term of
his predecessor in office.
VACANCY BY REASON OF INCREASE
IN THE NUMBER OF THE
DIRECTORS/TRUSTEES
Vacancy/ies must be filled by the stockholders:
in a regular or special meeting called for that
purpose; or
in the same meeting authorizing the increase
of directors or trustees if so stated in the
notice of the meeting.
VACANCY BY OTHER CAUSES
Vacancy/ies may be filled by the vote of at least
a majority of the remaining directors or trustees,
if still constituting a quorum.
COMPENSATION [SEC. 30]
General Rule: Directors are only entitled to
reasonable per diems. They are not entitled to
compensation as directors.
Exception:
When AOI, by-laws, or an advance contract
provides for compensation.
Compensation other than per diems may also
be granted to directors by the vote of the
stockholders representing at least a majority
of the OCS at a regular or special
stockholders meeting.
UP LAW BOC CORPORATION LAW
The total yearly compensation of directors shall
not exceed 10% of the net income before
income tax of the corporation during the
preceding year.
COMPENSATION OF DIRECTORS AS
CORPORATE OFFICERS
Western Institute of Technology v. Salas (1997):
The position of being chairman and Vice-
Chairman, like that of treasurer and secretary,
are not considered directorship positions but
officership positions that would entitle the
occupants to compensation. Likewise, the
limitation placed under Sec. 30 of the
Corporation Code that directors cannot receive
compensation exceeding 10% of the net income
of the corporation would not apply to the
compensation given to such positions since it is
being given in their capacity as officers of the
corporation and not as board members.
FIDUCIARY DUTIES AND
LIABILITY RULES
DUTIES
Strategic Alliance Development Corp v. Radstock
Securities Ltd. (2009):
In this jurisdiction, the members of the board of
directors have a three-fold duty: duty of
obedience, duty of diligence, and duty of loyalty.
Accordingly, the members of the board of
directors
(1) Duty of Obedience - shall direct the affairs of
the corporation only in accordance with the
purposes for which it was organized;
(2)Duty of Diligence - shall not willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or act in bad
faith or with gross negligence in directing the
affairs of the corporation; and
(3) Duty of Loyalty - shall not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees.
DUTY OF OBEDIENCE
The Directors or Trustees and Officers to be
elected shall perform the duties enjoined on
them by law and by the by-laws of the
corporation [Sec. 25]
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DUTY OF DILIGENCE
Directors or trustees who (i) willfully and
knowingly vote for or assent to patently
unlawful acts of the corporation or (ii) who are
guilty of gross negligence or bad faith in
directing the affairs of the corporation or (iii)
acquire any personal or pecuniary interest in
conflict with their duty as such directors or
trustees shall be liable jointly and severally for
all damages resulting therefrom suffered by the
corporation, its stockholders or members and
other persons. [Sec. 31]
Republic of the Philippines v. Sandiganbayan
(First Division) et al. (2011): The conditions for the
application of Section 31 of the Corporation
Code require factual foundations to be first laid
out in appropriate judicial proceedings. Hence,
concluding that a person breached fiduciary
duties as an officer and member of the Board of
Directors of a corporation without competent
evidence thereon would be unwarranted and
unreasonable.
DUTY OF LOYALTY
Directors and trustees should not acquire any
personal or pecuniary interest in conflict with
their duty as such directors or trustees,
otherwise they shall be held liable jointly and
severally for all damages resulting therefrom
suffered by the corporation, its stockholders or
members and other persons. [Sec. 31]
Where a director, by virtue of his office,
acquires for himself a business opportunity
which should belong to the corporation,
thereby obtaining profits to the prejudice of
such corporation, he must account to the
latter for all such profits by refunding the
same, unless his act has been ratified by a
vote of the stockholders owning or
representing at least two-thirds (2/3) of the
outstanding capital stock (Sec. 34)
DOCTRINE OF CORPORATE OPPORTUNITY
Unless his act is ratified, a director shall refund
to the corporation all the profits he realizes on a
business opportunity which:
corporation is financially able to undertake
from its nature, is in line with corporations
business and is of practical advantage to it;
and
UP LAW BOC CORPORATION LAW
one in which the corporation has an interest or
a reasonable expectancy.
The rule shall be applied notwithstanding the
fact that the director risked his own funds in the
venture. [Sec. 34]
By embracing the opportunity, the self-interest
of the officer or director will be brought into
conflict with that of his corporation. Hence, the
law does not permit him to seize the
opportunity even if he will use his own funds in
the venture. [Sundiang and Aquino]
NOTE:
Differences between Section 31 and Section 34:
First, while both involve the same subject
matter (business opportunity) they concern
different personalities; Sec. 34 is applicable
only to directors and not to officers, whereas
Sec. 31 applies to directors, trustees and
officers.
Second, Sec. 34 allows a ratification of a
transaction by a self-dealing director by vote
of stockholders representing at least 2/3 of
the outstanding capital stock. [Villanueva]
SOLIDARY LIABILITY FOR DAMAGES
Willfully and knowingly voting for and
assenting to patently unlawful acts of the
corporation; [Sec. 31]
Gross negligence or bad faith in directing the
affairs of the corporation; [Sec. 31]
Acquiring any personal or pecuniary interest
in conflict of duty; [Sec. 31]
Consenting to the issuance of watered stocks,
or, having knowledge thereof, failing to file
objections with secretary; [Sec. 65]
Agreeing or stipulating in a contract to hold
himself liable with the corporation; or
By virtue of a specific provision of law
LIABILITY FOR WATERED STOCKS
Watered Stocks stocks issued for a
consideration less than its par or issued value
or for a consideration in any form other than
cash, valued in excess of its fair value.
Any director or officer of a corporation
consenting to the issuance of watered stocks
or who, having knowledge thereof, does not
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forthwith express his objection in writing and
file the same with the corporate secretary
shall be solidarily liable with the stockholder
concerned to the corporation and its creditors
for the difference in value [Sec. 65].
PERSONAL LIABILITIES
General Rule:
Price v. Innodata Phils., Inc. (2008): Members of
the Board, who purport to act in good faith for
and in behalf of the corporation within the
lawful scope of their authority, are not liable for
the consequences of their acts. When the acts
are of such nature and done under those
circumstances, they are attributed to the
corporation alone and no personal liability is
incurred.
The provisions on seizing corporate opportunity
and disloyalty [Secs. 31 and 34] shall also apply
to corporate officers.
Note: Members of the BOD who are also officers
are held to a more stringent liability because
they are in-charge of day-to-day activities
[Campos]
Doctrine Of Limited Doctrine Of Immunity
Liability
Shields the corporators Protects a person
from corporate liability acting for and in behalf
beyond their agreed of the corporation from
contribution to the being himself
capital or shareholding personally liable for his
in the corporation. authorized actions
Tramat Mercantile, Inc. vs. CA, (1994), reiterated
in Atrium Management Corp. v. CA, (2001):
Liability of Director, Trustee or Officer (Asked in
96 and 97)
Personal liability of a corporate director, trustee
or officer along (although not necessarily) with
the corporation may so validly attach, as a rule,
only when:
He assents (a) to a patently unlawful act of
the corporation, or (b) for bad faith or gross
negligence in directing its affairs, or (c) for
conflict of interest, resulting in damages to
UP LAW BOC CORPORATION LAW
the corporation, its stockholders or other
persons;
He consents to the issuance of watered
stocks or who, having knowledge thereof,
does not forthwith file with the corporate
secretary his written objection thereto;
He agrees to hold himself personally and
solidarily liable with the corporation; or
He is made, by a specific provision of law, to
personally answer for his corporate action
SPECIAL FACTS DOCTRINE
Strong v. Repide (1909): Even though a director
may not be under the obligation of a fiduciary
nature to disclose to a shareholder his
knowledge affecting the value of the shares,
that duty may exist in special cases.
General Rule:
Majority view: Directors only owe its duty to the
corporation. They owe no fiduciary duty to
stockholders but they may deal with each other
at fair and reasonable terms, as if they were
unrelated. No duty to disclose facts known to
the director or officer. [Taylor v. Wright, 1945]
Note: Minority View (Realistic View) recognizes
the directors obligation to the stockholders
individually as well as collectively, and refuses
to permit him to profit at the latters expense by
the use of information obtained as a result of
official position and duties.
Exception:
Special Facts Doctrine: Conceding the absence
of a fiduciary relationship in the ordinary case,
courts nevertheless hold that where special
circumstances or facts are present which make
it inequitable for the director to withhold
information from the stockholder, the duty to
disclose arises and concealment is fraud.
[Strong v. Repide, 1909]
RESPONSIBILITY FOR CRIMES
Since a corporation as a person is a mere legal
fiction, it cannot be proceeded against
criminally because it cannot commit a crime in
which personal violence or malicious intent is
required.
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West Coast Life Ins. Co. v. Hurd (1914); Time Inc.
v. Reyes (1971): Criminal action is limited to the
corporate agents guilty of an act amounting to a
crime and never against the corporation itself.
Since the BOD is the repository of corporate
powers and acts as the agent of the corporation,
the directors may be held criminally liable.
Ong v. CA (2003): The Trust Receipts Law
recognizes the impossibility of imposing the
penalty of imprisonment on a corporation.
Hence, if the entrustee is a corporation, the law
makes the officers or employees or other
persons responsible for the offense liable to
suffer the penalty of imprisonment. The reason
is obvious: corporations, partnerships,
associations and other juridical entities cannot
be put to jail. Hence, the criminal liability falls
on the human agent responsible for the
violation of the Trust Receipts Law.
INSIDE INFORMATION
The fiduciary position of insiders1, directors,
and officers prohibits them from using
confidential information relating to the
business of the corporation to benefit
themselves or any competitor corporation in
which they may have a mere substantial
interest.
Since loss and prejudice to the corporation is
not a requirement for liability, the corporation
has a cause of action as long as there is unfair
use of inside information
It is inside information if it is not generally
available to others and is acquired because of
the close relationship of the director or officer
to the corporation
1 Insider means: (a) the issuer; (b) a director or officer (or person
performing similar functions) of, or a person controlling the issuer;
(c) a person whose relationship or former relationship to the issuer
gives or gave him access to material information about the issuer
or the security that is not generally available to the public; (d) a
government employee, or director, or officer of an exchange,
clearing agency and/or self-regulatory organization who has
access to material information about an issuer or a security that is
not generally available to the public; or (e) a person who learns
such information by a communication from any of the foregoing
insiders (3.8, Sec Regulations Code)
UP LAW BOC CORPORATION LAW
CONTRACTS
BY SELF-DEALING DIRECTORS WITH
THE CORPORATION
General Rule: A contract of the corporation with
one or more of its directors or trustees is
VOIDABLE, at the option of such corporation.
[Sec. 32]
Exception: Such contract is VALID if all of the
following conditions are present:
That the presence of such director or trustee
in the board meeting in which the contract
was approved was not necessary to constitute
a quorum for such meeting;
That the vote of such director or trustee was
not necessary for the approval of the contract;
That the contract is fair and reasonable under
the circumstances; and
That in case of an officer, the contract has
been previously authorized by the board of
directors.
Ratification
In case of absence of the first two conditions
above, contract may be ratified if:
Stockholders representing at least 2/3 of the
outstanding capital stock or at least 2/3 of the
members in a meeting called for the purpose
voted to ratify the contract.
Full disclosure of the adverse interest of the
directors or trustees involved is made at such
meeting.
Contract is fair and reasonable under the
circumstances
BETWEEN CORPORATIONS WITH
INTERLOCKING DIRECTORS
IF THE INTERESTS OF THE INTERLOCKING
DIRECTOR IN THE CORPORATIONS ARE
BOTH SUBSTANTIAL (STOCKHOLDINGS
EXCEED 20% OF OUTSTANDING CAPITAL
STOCK).
General Rule: A contract between two or more
corporations having interlocking directors shall
not be invalidated on that ground alone. [Sec.
32]
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MERCANTILE LAW
Exception: If contract is fraudulent or not fair
and reasonable under the circumstances
IF THE INTEREST OF THE INTERLOCKING
DIRECTOR IN ONE OF THE CORPORATIONS
IS NOMINAL (STOCKHOLDINGS 20% OR
LESS) WHILE SUBSTANTIAL IN THE OTHER,
THE CONTRACT SHALL BE VALID, IF THE
FOLLOWING CONDITIONS ARE MET:
(1) The presence of such director or trustee in
the board meeting in which the contract was
approved was NOT necessary to constitute a
quorum for such meeting
(2) That the vote of such director or trustee was
not necessary for the approval of the contract
(3) That the contract is fair and reasonable
under the circumstances.
Where (1) and (2) are absent, the contract can
be ratified by the vote of the stockholders
representing at least 2/3 of the outstanding
capital stock or at least 2/3 of the members in a
meeting called for the purpose voted to ratify
the contract, provided that:
Full disclosure of the adverse interest of the
directors/trustees involved is made on such
meeting;
The contract is fair and reasonable under the
circumstances.
MANAGEMENT CONTRACTS [SEC 44]
See: Corporate Powers above.
EXECUTIVE COMMITTEE
CREATION
The by-laws of a corporation may create an
executive committee, composed of not less
than three members of the board, to be
appointed by the board.
Said committee may act, by majority vote of
all its members, on such specific matters
within the competence of the board, as may
be delegated to it in the by-laws or on a
majority vote of the board [Sec. 35].
LIMITATION ON ITS POWERS
CANNOT act on the following:
Matters needing stockholder approval [Sec.
35];
UP LAW BOC CORPORATION LAW
Filling up of board vacancies;
Amendment, repeal or adoption of by-laws
[Sec. 35];
Amendment or repeal of any resolution of the
Board which by its express terms is not
amendable or repealable [Sec. 35];
Cash dividend distribution [Sec. 35]; and
Acts which would render the BOD powerless
and free from all responsibilities imposed on it
by law [Campos]
Filipinas Port Services Inc. v. Go (2007): Under
Section 35 of the Corporation Code, the creation
of an executive committee must be provided for
in the by-laws of the corporation. Unfortunately,
the by-laws of the corporation in this case are
silent as to the creation by its BOD of an
executive committee.
Notwithstanding the silence of the by-laws on
the matter, the SC did not rule that the BODs
creation of the executive committee is illegal or
unlawful.
(a) One reason is the absence of a showing as to
the true nature and functions of said
executive committee considering that the
"executive committee," referred to in Section
35 of the Corporation Code which is as
powerful as the BOD and in effect acting for
the board itself, should be distinguished
from other committees which are within the
competency of the board to create at
anytime and whose actions require
ratification and confirmation by the board.
(b) Another reason is that the BOD has the
power to create positions not provided for in
the by-laws since the board is the
corporations governing body.
MEETINGS
REGULAR OR SPECIAL
WHO MAY ATTEND?
The members of the Board themselves;
directors in Board meetings cannot be
represented or voted by proxies.
Expertravel & Tours, Inc. v. CA, (May 26, 2005):
In the Philippines, teleconferencing and
videoconferencing of members of board of
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MERCANTILE LAW
directors of private corporations is a reality, in
light of Republic Act No. 8792. The Securities
and Exchange Commission issued SEC
Memorandum Circular No. 15, on November 30,
2001, providing the guidelines to be complied
with in relation to such conferences.
WHEN AND WHERE
When? [Sec.53]
Regular meetings of directors or trustees shall
be held monthly, unless the by-laws provide
otherwise.
Special meetings of the board of directors or
trustees may be held at any time upon the call
of the president or as provided in the by-laws.
Where? [Sec. 53]
Meetings of directors or trustees of corporations
may be held anywhere in or outside of the
Philippines, unless the by-laws provide
otherwise.
NOTICE
Notice of regular or special meetings stating
the date, time and place of the meeting must
be sent to every director or trustee at least
one (1) day prior to the scheduled meeting,
unless otherwise provided by the by-laws.
A director or trustee may waive this
requirement, either expressly or impliedly
WHO PRESIDES
The president presides, unless the by-laws
provide otherwise. [Sec. 54]
QUORUM
General Rule: Majority of the number of
directors or trustees as fixed in the articles of
incorporation. [Sec. 25]
EXCEPTIONS
(1) Unless the articles of incorporation or the by-
laws provide for a GREATER majority, or
(2) In case of election of officers where a vote of
a majority of all the members of the board is
needed.
Tan v. Sycip (2006): Whether or not "dead
members" are entitled to exercise their voting
rights (through their executor or administrator),
UP LAW BOC CORPORATION LAW
depends on the articles of incorporation or by-
laws.
The quorum in a members meeting is to be
reckoned as the actual number of members of
the corporation. What happens in the event of
the death of one of them?
In stock corporations, shareholders may
generally transfer their shares. Thus, on the
death of a shareholder, the executor or
administrator duly appointed by the Court is
vested with the legal title to the stock and
entitled to vote it. Until a settlement and
division of the estate is effected, the stocks of
the decedent are held by the administrator or
executor.
On the other hand, membership in and all
rights arising from a non-stock corporation
are personal and non-transferable, unless the
articles of incorporation or the bylaws of the
corporation provide otherwise. In other words,
the determination of whether or not dead
members are entitled to exercise their voting
rights (through their executor
administrator), depends on the AOI or by-
laws.
RULE ON ABSTENTION
A vote of abstention is considered to be a vote in
itself. Abstentions will not be counted towards
the affirmative and such refusal to vote does not
indicate acquiescence in the action of those who
vote.
Stockholders and
Members
RIGHTS OF A STOCKHOLDER
AND MEMBERS
Direct or indirect participation
management [Sec. 6]
Voting rights [Sec. 6]
Right to remove directors [Sec. 28]
Proprietary rights
- Right to dividends [Secs. 43 and 71]
- Appraisal right [Sec. 81]
- Right to issuance of stock certificate for fully
paid shares [Sec. 64]
MERCANTILE LAW
- Proportionate participation in the
distribution of assets in liquidation [Sec. 122]
- Right to transfer of stocks in corporate
books [Sec. 63]
- Pre-emptive right [Sec. 39]
Right to inspect books and records [Sec. 74]
Right to be furnished with the most recent
financial statements/reports [Sec. 75]
Right to recover stocks unlawfully sold for
delinquent payment of subscription [Sec. 69]
Right to file individual suit, representative suit
and derivative suits
DOCTRINE OF EQUALITY OF SHARES
CIR v. CA, CTA, and A. Soriano Corporation
(1999): All stocks issued by the corporation are
presumed equal with the same privileges and
liabilities, provided that the Articles of
Incorporation is silent on such differences.
Doctrine of Equality of Shares provides that
or where the Articles of Incorporation do not
provide for any distinction of the shares of stock,
all shares issued by the corporation are
presumed to be equal and enjoy the same rights
and privileges and are also subject to the same
liabilities. (Sundiang and Aquino)
The default rule is that all stockholders have
equal right and obligations, expressed in the
last paragraph of Section 6 of the Corporation
Code which provides, each share shall be equal
in all respects to every other share. [Villanueva]
Note:
However, when preferences or restrictions are
made to apply to a class of shares, then such
preferences on restrictions shall exist and be
valid only when provided in the articles of
incorporation and stated in the certificate of
stock. [Villanueva]
in Section 6 of the Corporation Code also
contains a Board-enabling clause that
although the default rule is that all
shareholders have equal rights and
obligations, nevertheless, when authorized by
the articles of incorporation, the Board of
Directors, may fix the terms and conditions of
preferred shares of stock or any series thereof,
or to classify its shares for the purpose of
PAGE 133
UP LAW BOC CORPORATION LAW
insuring compliance with constitutional or
legal requirements; but such terms and
conditions shall be effective upon filing of a
certificate thereof with the SEC. Thus, a
preference or restriction on shares may be
valid and effective only if the same has
formally been registered with the SEC and
thereby becomes public records binding on
the public. [Villanueva]
Nature of the Rights of Members
The eleemosynary nature of every non-stock
corporation defines the characteristic of
membership therein as being essentially
personal in character and therefore
essentially non-transferable in nature.
Section 89 of the Corporation Code specifically
provides that in a non-stock corporation, the
right of members of any class or classes to
vote may be limited, broadened or denied to
the extent specified in the articles of
incorporation or the by-laws.
SEC Opinion, 4 September 1995: The SEC has
opined that the rule in Section 6 allowing non-
voting shares to vote on specified fundamental
matters does not apply to non-voting members
of a non-stock corporation; that insofar as
members of a non-stock corporation, the
applicable provision is Section 89, which
specifically provides that members may be
denied entirely their voting rights in the articles
of incorporation or by-laws of the corporation.
PARTICIPATION IN
MANAGEMENT
PROXY
Stockholders and members may vote in
person or by proxy in all meetings of
stockholders or members [Sec. 58].
The right to issue a proxy is vested with public
interest when it comes to stock corporations;
although it may be regulated under the by-
laws, it cannot be denied, since it is an aspect
of ownership interest of stockholders.
However, the right of members to vote by
proxy may be denied under the articles of
incorporation or by-laws of a non-stock
corporation [Sec. 89]
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MERCANTILE LAW
Requisites for a Valid and Enforceable Proxy:
(a) It must be in writing
(b) Signed by the stockholder or member of
record; and
(c) Filed with the corporation before the
scheduled meeting with the Corporate
Secretary
Procedural Matters Relating to Proxies:
(a) Proxy solicitation involves the securing and
submission of proxies, while proxy
validation concerns the validation of such
secured and submitted proxies;
(b) The SECs power to pass upon the validity of
proxies in relation to election controversies
has effectively been withdrawn, tied as it is to
its abrogated quasi-judicial powers, and has
been transferred to the RTC Special
Commercial Courts pursuant to the terms of
Section 5.2 of the Securities Regulation
Code;
(c) Nevertheless, although an intra-corporate
controversy may animate a disgruntled
shareholder to complain to the SEC a
corporations violations of SEC rules and
regulations, but that motive alone should not
be sufficient to deprive the SEC of its
investigatory and regulatory powers,
especially so since such powers are
exercisable on a motu proprio basis.
GSIS v. CA (2009): The fact that the jurisdiction
of the RTC Special Commercial Courts is
confined to the voting on election of officers,
and not all matter which may be voted upon by
stockholders, elucidates that the power of the
SEC to regulate proxies remains extant and
could very well be exercised when stockholders
vote on matters other than the election of
directors.
VOTING TRUST
An arrangement created by one or more
stockholders for the purpose of conferring
upon a trustee or trustees the right to vote
and other rights pertaining to the shares for a
period not exceeding five (5) years at any time
[Sec. 59].
Under a voting trust arrangement, a
stockholder of a stock corporation parts with
the naked or legal title, including the power to
UP LAW BOC CORPORATION LAW MERCANTILE LAW

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

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UP LAW BOC CORPORATION LAW
(b) Amendments to by-laws [Sec. 48]
Requires approval by majority of the
BOD/BOT and approval by stockholders
owning at least the majority of the
outstanding capital stock/majority of
members
Includes all stockholders with or without
voting rights
(c) Revocation of delegation to the BOD of
the power to amend or repeal or adopt by-
laws [Sec. 48]
Requires approval by stockholders owning at
least the majority of the outstanding capital
stock/majority of members
(d) Calling a meeting to remove directors
[Sec. 28]
Meeting for the removal of directors or trustees,
or any of them, must be called by the secretary
on order of the president or on the written
demand of the stockholders representing or
holding at least a majority of the outstanding
capital stock/majority of members
(e) Granting compensation other than per
diems to directors [Sec. 30]
Compensation other than per diems may be
granted to directors by the vote of the
stockholders representing at least a majority of
the outstanding capital stock
(f) Consideration for no-par shares [Sec. 62]
When the AOI or the BOD does not provide for
the value of no-par shares, the value of such
shares shall be determined by the stockholders
representing at least a majority of the
outstanding capital stock
BY A TWO-THIRDS VOTE
(a) Amendment of Articles of Incorporation
[Sec. 16]
Amendment of the AOI may be made by a
majority vote of the BOD/BOT and the vote or
written assent of the stockholders
representing at least two-thirds 2/3 of the
outstanding capital stock, without prejudice to
the appraisal right of dissenting stockholders.
Includes all stockholders with or without
voting rights
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MERCANTILE LAW
Amendment of AOI of close corporations [Sec
103]
Amendment to the AOI which seeks to delete or
remove any provision required to be contained
in the AOI of Close Corporations or to reduce a
quorum or voting requirement stated in said
AOI requires the affirmative vote of at least 2/3
of the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the AOI at a meeting duly called.
(b) Delegating the power to amend or repeal
by-laws or adopt new by-laws [Sec. 48]
Delegation to the BOD/BOT of the power to
amend or repeal by-laws or adopt new by-
laws requires approval by at least two-thirds
(2/3) of the outstanding capital
stock/membership.
Revocation of the delegation requires only
majority vote of the outstanding capital
stock/membership.
(c) Extending/shortening corporate term
[Sec. 37]
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital
stock/membership.
Includes all stockholders with or without
voting rights
(d) Increasing/decreasing capital stock [Sec.
38]
Requires approval by a majority vote of the
BOD and approval by at least two-thirds (2/3)
of the outstanding capital stock.
Includes all stockholders with or without
voting rights
(e) Incurring, creating, increasing bonded
indebtedness [Sec. 38]
Requires approval by a majority vote of the
BOD and approval by at least two-thirds (2/3)
of the outstanding capital stock.
Includes all stockholders with or without
voting rights
UP LAW BOC CORPORATION LAW
(f) Issuance of shares not subject to pre-
emptive right [Sec. 39]
Shares issued in good faith in exchange for
property or previously incurred indebtedness
with the approval of the stockholders
representing two-thirds (2/3) of the outstanding
capital stock are not subject to pre-emptive
rights.
(g) Sale/disposition of all or substantially all
of corporate assets (Sec. 40)
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital
stock/membership.
Includes all stockholders with or without
voting rights
Note: In non-stock corporations where there
are NO members with voting rights, the vote
of at least the majority of the BOT will be
sufficient authorization for any sale or
disposition of all or substantially all of
corporate assets. (Sec. 40)
(h) Investment of funds in another business
[Sec. 42]
Requires approval by a majority vote of the
BOD/BOT and approval by at least two-thirds
(2/3) of the outstanding capital
stock/membership.
Includes all stockholders with or without
voting rights
(i) Dividend declaration [Sec. 43]
No stock dividend shall be issued without the
approval of stockholders representing not less
than two-thirds (2/3) of the outstanding capital
stock.
(j) Power to enter into management contracts
[Sec. 44]
Please see discussion under By a Majority Vote
(k) Removal of directors or trustees [Sec. 28]
Any director or trustee may be removed from
office by a vote of the stockholders holding or
representing at least two-thirds (2/3) of the
outstanding capital stock/membership.
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MERCANTILE LAW
(l) Ratifying contracts with respect to
dealings with directors/ trustees [Sec. 32]
A contract of the corporation with one or more
of its directors is voidable, at the option of such
corporation, unless all the following conditions
are present:
The directors presence in the BOD meeting in
which the contract was approved was not
necessary to constitute a quorum
The vote of such director was not necessary
for the approval of the contract
The contract is fair and reasonable under the
circumstances
In case of an officer, the contract has been
previously authorized by the BOD.
Where any of the first two conditions is absent,
in the case of a contract with a director, such
contract may be ratified by the vote of the
stockholders representing at least two-thirds
(2/3) of the outstanding capital stock provided
that the contract is fair and reasonable under
the circumstances.
(m) Ratifying acts of disloyalty of a director
[Sec. 34]
General Rule: Where a director, by virtue of his
office, acquires for himself a business
opportunity which should belong to the
corporation, thereby obtaining profits, he must
account to the corporation for all such profits by
refunding it.
Exception: His act may be ratified by a vote of
the stockholders owning or representing at least
two-thirds (2/3) of the outstanding capital
stock.
(n) Stockholders approval of the plan of
merger or consolidation (Sec. 77)
Requires approval by majority of each of the
BOD/BOT of the constituent corporations of
the plan of merger or consolidation and
approval by at least two-thirds (2/3) of the
outstanding capital stock/membership of
each corporation at separate corporate
meetings duly called.
Amendments to the plan of merger or
consolidation also requires approval by
majority vote of each of the BOD and two-
thirds (2/3) vote of the outstanding capital
UP LAW BOC CORPORATION LAW
stock/membership of each corporation voting
separately.
Includes all stockholders with or without
voting rights
(o) Distribution of assets in non-stock
corporations [Sec. 96]
The BOT shall, by majority vote, adopt a
resolution recommending a plan of distribution
which shall be approved by at least two-thirds
(2/3) of the members with voting rights.
(p) Incorporation of a religious society [Sec.
116]
Any religious society or religious order, or any
diocese, synod, or district organization of any
religious denomination, sect or church, unless
forbidden by the constitution, rules, regulations,
or discipline of the religious denomination, sect
or church of which it is a part, or by competent
authority, may, upon written consent and/or by
an affirmative vote at a meeting called for the
purpose of at least two-thirds (2/3) of its
membership, incorporate for the administration
of its temporalities or for the management of its
affairs, properties and estate.
(q) Voluntary dissolution of a corporation
[Sec. 118-119]
Requires a resolution adopted by a majority vote
of the BOD/BOT, and by a resolution duly
adopted by the affirmative vote of the
stockholders owning at least two-thirds (2/3) of
the outstanding capital stock/membership at a
meeting to be held upon call for such purpose.
BY CUMULATIVE VOTING
Election of Directors or Trustees [Sec. 24] - A
stockholder may vote such number of shares for
as many persons as there are directors to be
elected or he may cumulate said shares and
give one candidate as many votes as the
number of directors to be elected multiplied by
the number of his shares shall equal, or he may
distribute them on the same principle among as
many candidates as he shall see fit:
Provided, That the total number of votes cast by
him shall not exceed the number of shares
owned by him as shown in the books of the
corporation multiplied by the whole number of
directors to be elected.
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MERCANTILE LAW
PROPRIETARY RIGHTS
RIGHT TO DIVIDENDS
General Rule: The right to dividends vests upon
lawful declaration by the BOD. From that time,
dividends become a debt owing to the SH. No
revocation can be made.
Exceptions:
Dividends are revocable if NOT yet announced
or communicated to the stockholders.
Stock dividends, even if already declared, may
be revoked prior to actual issuance since
these are not distributions but merely
representations of changes in the capital
structure.
Note: Right to dividends vests upon declaration
so whoever owns the stock at such time also
owns the dividends. Subsequent transfer of
stock would not carry with it right to dividends
UNLESS agreed upon by the parties.
RIGHT OF APPRAISAL
Right to withdraw from the corporation and
demand payment of the fair value of the shares
after dissenting from certain corporate acts
involving fundamental changes in corporate
structure [Sec. 81]. The amount paid to the
stockholder is the fair value of his shares as of
the day prior to the date on which the vote was
taken, excluding any appreciation or
depreciation in anticipation of the corporate
action [Sec. 82].
INSTANCES OF APPRAISAL RIGHT
Extension or reduction or corporate term [Sec.
81]
Amendment to AOI which involves change in
the rights of stockholders, authorize
preferences superior to those stockholders, or
restrict the right of any stockholder [Sec. 81]
Investment of corporate funds in another
business or purpose [Sec. 42]
Sale or disposal of all or substantially all
assets of the corporation [Sec. 81]
Merger or consolidation [Sec. 81]
UP LAW BOC CORPORATION LAW
REQUIREMENTS FOR EXERCISE OF
APPRAISAL RIGHT [SECS. 82, 86]
Stockholder must have voted against the
corporate act.
Stockholder must make a written demand on
the corporation within 30 days after the vote
was taken for payment of the fair value of his
shares.
Stockholder must submit his certificates of
stock to the corporation for notation within
ten (10) days after demand for payment.
Otherwise, right to appraisal may be
terminated at the option of corporation.
EFFECT OF DEMAND [SEC. 83]
ALL rights accruing to such shares, including
voting and dividend rights, shall be
suspended
EXCEPT the right of such stockholder to
receive payment of the fair value thereof
Immediate RESTORATION of voting and
dividend rights if the dissenting stockholder is
not paid the value of his shares within 30 days
after the award.
EXTINGUISHMENT OF APPRAISAL RIGHT
[SEC. 84]
Withdrawal of demand by the stockholder
WITH CONSENT of the corporation
Abandonment of the proposed action
Disapproval by SEC of the proposed action
RIGHT TO INSPECT
BASIS OF RIGHT
As the beneficial owners of the business, the
stockholders have the right to know the
financial condition and management of
corporate affairs.
Gokongwei Jr. v. SEC (1979): A stockholders
right of inspection is based on his ownership of
the assets and property of the corporation.
Therefore, it is an incident of ownership of the
corporate property, whether this ownership or
interest is termed an equitable ownership, a
beneficial ownership, or quasi-ownership. Such
right is predicated upon the necessity of self-
protection.
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MERCANTILE LAW
RECORDS/BOOKS TO BE KEPT [SEC. 74]
Books that record all business transactions of
the corporation which shall include contract,
memoranda, journals, ledgers, etc;
Minute book for meetings of the
stockholders/members;
Minute book for meetings of the
board/trustees;
Stock and transfer book
Stock transfer agent - One engaged principally
in the business of registering transfers of stocks
in behalf of a stock corporation (licensed by the
SEC).
The corporate secretary is the one duly
authorized to make entries in the stock and
transfer book.
Torres et al v. CA (1997): It is the corporate
secretary's duty and obligation to register valid
transfers of stocks and if said corporate officer
refuses to comply, the transferor-stockholder
may rightfully bring suit to compel
performance.
FINANCIAL STATEMENTS [SEC. 75]
Within 10 days from written request, the
corporation shall furnish its most recent
financial statement (balance sheet and profit
or loss statement as of last taxable year)
At a regular meeting, the Board shall present
a financial report of the operations of the
corporation for the preceding year, which shall
include financial statements duly signed and
certified by an independent CPA.
Exception: If the paid-up capital is less than
P50,000 the financial statements may be
certified under oath by the treasurer or any
responsible officer of the corporation (instead of
an independent CPA).
REQUIREMENTS FOR THE EXERCISE OF
THE RIGHT OF INSPECTION [SEC. 74]
(1) It must be exercised at reasonable hours on
business days and in the place where the
corporation keeps all its records (i.e.,
principal office).
UP LAW BOC CORPORATION LAW
(2) The stockholder has not improperly used any
information he secured through any previous
examination.
(3) Demand is made in good faith or for a
legitimate purpose. If the corporation or its
officers contest such purpose or contend that
there is evil motive behind the inspection, the
burden of proof is with the corporation or
such officer to show the same.
Gokongwei v. SEC (1979): TEST to determine
whether the purpose is legitimate A legitimate
purpose is one which is germane to the interests
of the stockholder as such and not contrary to
the interests of the corporation
Gonzales v. PNB (1983): Among the changes
introduced in the new Code with respect to the
right of inspection granted to a stockholder are
the following:
(1) The records must be kept at the principal
office of the corporation;
(2) The inspection must be made on business
days;
(3) The stockholder may demand a copy of the
excerpts of the records or minutes;
(4) The refusal to allow such inspection shall
subject the erring officer or agent of the
corporation to civil and criminal liabilities.
However, while seemingly enlarging the right of
inspection, the new Code has prescribed
limitations to the same. It is now expressly
required as a condition for such examination
that the one requesting it must not have been
guilty of using improperly any information
through a prior examination, and that the
person asking for such examination must be
"acting in good faith and for a legitimate
purpose in making his demand."
Veraguth v. Isabela Sugar (1932): Directors of a
corporation have the unqualified right to inspect
the books and records of the corporation at all
reasonable times. The right of inspection is not
to be denied on the ground that the director or
shareholder is on unfriendly terms with the
officers of the corporation whose records are
sought to be inspected. A director or
stockholder can make copies, abstracts, and
memoranda of documents, books, and papers
as an incident to the right of inspection, but
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MERCANTILE LAW
cannot, without an order of a court, be
permitted to take books from the office of the
corporation. However, a director or stockholder
does not have any absolute right to secure
certified copies of the minutes of the
corporation until these minutes have been
written up and approved by the directors.
Africa v. PCGG (1992): A stockholder of a
sequestered company has the right to inspect
and/or examine the records of the corporation
pursuant to Sec. 74 of the Corporation Code.
REMEDIES WHEN INSPECTION IS REFUSED
Mandamus
Injunction
Action for damages
File an action under Sec. 144 to impose a
penal offense by fine and/or imprisonment
PRE-EMPTIVE RIGHT
DEFINITION AND DISTINGUISHED FROM
RIGHT OF FIRST REFUSAL
Pre-emptive right is an option privilege of an
existing stockholder to subscribe to a
proportionate part of shares subsequently
issued by the corporation before the same can
be disposed of in favor of others; this right
includes all issues and disposition of shares of
any class. It is a common law right and may
be exercised by stockholders even without
legal provision. On the other hand, a right of
first refusal arises only by virtue of contract
stipulations, by which the right is strictly
construed against the right of person to
dispose or deal with their property.
Stockholders of a corporation shall enjoy pre-
emptive right to subscribe to ALL ISSUES OR
DISPOSITIONS OF SHARES OF ANY CLASS,
in proportion to their respective
shareholdings. The purpose is to enable the
shareholder to retain his proportionate
control in the corporation and to retain his
equity in the surplus.
Note:
The broad phrase all issues or disposition of
shares of any class is construed to include not
only new shares issued in pursuance of an
increase in capital stock or from the unissued
shares which form part of the ACS, but also
UP LAW BOC CORPORATION LAW
covers treasury shares. Treasury shares would
come under the term disposition. Likewise
considering that it is not included among the
exceptions enumerated therein, where pre-
emptive right shall not extend, the intention is
to include it in its application. [SEC Opinion, 14
January 1993].
A pre-emptive right is a right claimed against
the corporation on unissued shares of its capital
stock, and likewise on treasury shares held by
the corporation; while the right of first refusal is
a right exercisable against another stockholder
on his shares of stock. [Villanueva]
Basis of Preemptive Right: to preserve the
existing proportional rights of the stockholders
[Campos]
LIMITATIONS TO EXERCISE OF PRE-
EMPTIVE RIGHT [SEC. 39]
Such pre-emptive right shall NOT extend to
shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
It shall also NOT extend to shares to be issued
in good faith with the approval of the
stockholders representing 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
It shall not take effect if denied in the AOI or
an amendment thereto.
If one shareholder does not want to exercise
his pre-emptive right, the other shareholders
are not entitled to purchase the
corresponding shares of the shareholder who
declined. But if nobody purchased the same
and later on the board re-issued the shares,
the pre-emptive right applies. [Sundiang and
Aquino]
REMEDIES IN CASE OF UNWARRANTED
DENIAL
Injunction
Mandamus
The suit should be individual and not
derivative because the wrong done is to the
stockholders individually
SEC can cancel shares if the third party is not
innocent
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MERCANTILE LAW
WAIVER/ DENIAL OF PREEMPTIVE RIGHT
Allowed by the Code provided that it is made
in the AOI
- Waiver made through AOI would bind
present and subsequent SH
- 2/3 vote of the outstanding capital stock is
necessary before waiver is binding
- Result of Non-placement of waiver clause in
AOI: waiver shall not bind future
stockholders but only those who agreed to it
The SH must be given reasonable time within
which to exercise their pre-emptive rights.
Upon expiration of such period, any SH who
did not exercise such will be deemed to have
waived it. This is necessary so as to not hinder
future financing plans of the corporation.
Some new investors may be willing to invest
only if all the new shares will be issued to
them (Campos).
RIGHT TO VOTE
Non-voting shares are not entitled to vote
except as provided for in the last paragraph of
Sec. 6.
Preferred or redeemable shares may be
deprived of the right to vote
Fractional shares of stock cannot be voted
Treasury shares have no voting rights as long
as they remain in the treasury.
No delinquent stock shall be voted [Sec. 71]
A transferee of stock cannot vote if his
transfer is not registered in the stock and
transfer book of the corporation.
RIGHT OF FIRST REFUSAL
The right of first refusal provides that a
stockholder who may wish to sell or assign his
shares must first offer the shares to the
corporation or to the other existing stockholders
under terms and conditions which are
reasonable; and that only when the corporation
or the other stockholders do not or fail to
exercise their option, is the offering stockholder
at liberty to dispose of his shares to third
parties.
Lambert v. Fox (1914): An agreement entered
into between the two majority stockholders of a
corporation whereby they mutually agreed not
to sell, transfer, or otherwise dispose of any part
UP LAW BOC CORPORATION LAW
of their shareholdings till after one year from
the date of the agreement.
PCGG v. SEC, unreported (1988): The right of first
refusal is primarily an attribute of ownership,
and consequently can be effected only through
a contractual commitment by the owner of the
shares; consequently, the waiver of a right of
first refusal when duly constituted can be
effected only by the registered owner.
REMEDIAL RIGHTS
INDIVIDUAL SUIT
A suit brought by the shareholder in his own
name against the corporation when a wrong is
directly inflicted against him.
REPRESENTATIVE SUIT
A suit brought by the stockholder in behalf of
himself and all other stockholders similarly
situated when a wrong is committed against a
group of stockholders.
DERIVATIVE SUIT
Chua v. CA (2004): It is a suit by a shareholder
to enforce a corporate cause of action. The
corporation is a necessary party to the suit, and
the relief which is granted is a judgment against
a third person in favor of the corporation.
It is a suit brought by one or more
stockholders/members in the name and on
behalf of the corporation to redress wrongs
committed against it, or protect/vindicate
corporate rights whenever the officials of the
corporation refuse to sue, or the ones to be
sued, or has control of the corporation.
[Sundiang and Aquino]
Suits of stockholders based on wrongful or
fraudulent acts of directors or other persons.
Requisites of Derivative Actions
(1) That the person instituting the action be a
stockholder or member at the time the acts
or transactions subject of the action occurred
and the time the action was filed;
(2) That the stockholder or member exerted all
reasonable efforts, and alleges the same
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MERCANTILE LAW
with particularity in the complaint, to
exhaust all remedies available under the
Articles of Incorporation, by-laws, laws or
rules governing the corporation or
partnership to obtain the relief he desires.
(3) That there is no appraisal right available for
the act(s) complained of; and
(4) That the suit is not a nuisance or harassment
suit. [Rule 8, Interim Rules of Procedure for
Intra-Corporate Controversies]
Requisites of a Derivative Suit according to
Jurisprudence
SMC v. Kahn, 1989:
(a) the party bringing the suit should be a
shareholder as of the time of the act or
transaction complained of, the number of his
shares not being material;
(b) he has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
board of directors for the appropriate relief
but the latter has failed or refused to heed
his plea; and
(c) the cause of action actually devolves on the
corporation, the wrongdoing or harm having
been, or being caused to the corporation and
not to the particular stockholder bringing the
suit. [Lisam Enterprises, Inc., represented
by Lolita A. Soriano and Lolita A. Soriano
v. Banco de Oro Unibank, Inc., et al., 2012]
Note: The wrong contemplated in a derivative
suit is one in which the injury alleged be indirect
as far as the stockholders are concerned and
direct only insofar as the corporation is
concerned. [De Leon]
Gochan v. Young (2001): BUT the personal injury
suffered by the stockholder cannot disqualify
him from filing a derivative suit in behalf of the
corporation. It merely gives rise to an additional
cause of action for damages against the erring
corporate officers.
Requisites based on jurisprudence
(1) Evangelista vs. Santos (1950); SMC v. Kahn
(1989): The cause of action actually devolves
on the corporation, the wrong or harm
having been, or being caused to it and not
the shareholder filing the suit.
UP LAW BOC CORPORATION LAW
(2) Symaco Trading Corp. v. Santos (2005): The
reliefs sought pertain to the corporation.
Recent rulings on the matter
Reyes v. RTC of Makati (2008): Status of heirs as
co-owners of shares before partition of estate
does not make them shareholders until there is
compliance with Sec. 63 on the manner of
transferring shares, thus the heirs are not
automatically registered shareholders of the
corporation.
Yu v. Yukayguan (2009): Stockholder may
commence a derivative suit for
mismanagement, waste or dissipation of
corporate assets because of a special injury to
him for which he is otherwise without redress. In
effect, the suit is an action for specific
performance of an obligation owed by the
corporation to the stockholders to assist its right
of action when the corporation is put on default
by the wrongful refusal of the directors or
management to make suitable measures for its
protection.
Bitong v. CA (1998):
The power to sue and be sued in any court by a
corporation even as a stockholder is lodged in
the BOD that exercises its corporate powers and
not in the president or officer thereof. But
where corporate directors are guilty of a breach
of trust, not of mere error of judgment or abuse
of discretion, and intra-corporate remedy is
futile or useless, a SH may institute a derivative
suit in behalf of himself and other stockholders
and for the benefit of the corporation, to bring
about a redress of the wrong inflicted directly
upon the corporation and indirectly upon the
stockholders.
Jurisdiction over derivative suits lies with the
RTC [Sec. 5.2, Securities Regulation Code]
OBLIGATION OF A
STOCKHOLDER
LIABILITY TO THE CORPORATION
FOR UNPAID SUBSCRIPTION [SEC. 67]
A subscription contract is unconditional (i.e.,
obligation to pay is not be subject to any
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MERCANTILE LAW
contingency) and indivisible (as to the amount
and transferability [Fua Cun v. Summers,
1923]. Hence, if the subscriber paid 20% of his
subscription, he is not entitled to the issuance of
certificates corresponding to 20% of the shares.
China Banking Corp. v. CA (1997): Unpaid claim
refers to any unpaid subscription and not to any
indebtedness which a subscriber may owe the
corporation rising from any other transaction.
LIABILITY TO THE CORPORATION
FOR INTEREST ON UNPAID
SUBSCRIPTION IF SO REQUIRED BY
THE BY-LAWS [SEC. 66]
General Rule: Subscribers for stock are NOT
liable to pay interest on his unpaid subscription
Exception: If so required in the by-laws at the
rate fixed in the by-laws. If no rate is fixed in the
by-laws, such rate shall be deemed to be the
legal rate [Sec. 66]
Notes:
Transfer for consideration of treasury shares is
a sale (or disposition) by the corporation (not
subscription). A transfer of previously issued
shares by a stockholder to a third person is a
sale (or disposition). Transfer of unissued
shares is subscription.
Shareholders are not creditors of the
corporation with respect to their
shareholdings thereto and the principle of
compensation or set-off has no application.
Subscription contract is NOT required to be in
writing.
LIABILITY FOR WATERED STOCKS
[SEC. 65]
DEFINITION
These are shares issued as fully paid when in
truth no consideration is paid, or the
consideration received is known to be less than
the par value or issued value of the shares. (Sec.
65)
These include the following:
Issued without consideration (bonus share)
 UP LAW BOC CORPORATION LAW
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
Issued for consideration other than actual cash
(i.e., property or services), the fair valuation of
which is less than its par or issued value
Issue stock dividend when there are no
sufficient retained earnings or surplus profit to
justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks. Subsequent
increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
determined at the time of issuance of the stock.
LIABILITY OF DIRECTORS OR OFFICERS
Any director or officer of a corporation
consenting to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith express his objection in writing and file
the same with the corporate secretary shall be
SOLIDARILY liable with the stockholder
concerned to the corporation and its creditors
for the difference in value [Sec. 65].
LIABILITY FOR DIVIDENDS
UNLAWFULLY PAID
When a director, trustee or officer attempts to
acquire or acquires, in violation of his duty, any
interest adverse to the corporation in respect of
any matter which has been reposed in him in
confidence, as to which equity imposes a
disability upon him to deal in his own behalf, he
shall be liable as a trustee for the corporation
and must account for the profits which
otherwise would have accrued to the
corporation [Sec. 31].
Violations of any of the provisions of the
Corporation Code not otherwise specifically
penalized therein shall be punished by a fine of
not less than one thousand (P1,000.00) pesos
but not more than ten thousand (P10,000.00)
pesos or by imprisonment for not less than
thirty (30) days but not more than five (5) years,
or both, in the discretion of the court [Sec. 144].
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MERCANTILE LAW
LIABILITY FOR ASSUMING TO ACT AS
A CORPORATION KNOWING IT TO BE
WITHOUT AUTHORITY
All persons who assume to act as a
corporation knowing it to be without authority
to do so shall be liable as general partners for
all debts, liabilities and damages incurred or
arising as a result thereof.
When any such ostensible corporation is sued
on any transaction entered or on any tort
committed by it as a corporation, it shall not
be allowed to use as a defense its lack of
corporate personality.
One who assumes an obligation to an
ostensible corporation cannot resist
performance thereof on the ground that there
was in fact no corporation [Sec. 21].
MEETINGS
General Rule: Stockholders or members
approval is expressed in a meeting duly called
and held for the purpose.
Exception: In case of amendment of AOI,
approval may be expressed by referendum or
written assent of the stockholders or members
[Sec. 16]
Who May Attend and Vote?
Stockholders, either in person or by proxy
Pledgors or mortgagors [Sec. 55]
Pledgee or mortgagee, IF expressly given such
right by the pledgor or mortgagor in writing
which is recorded on the corporate books [Sec.
55]
Executors, administrators, receivers, and other
legal representatives duly appointed by the
court, without need of any written proxy [Sec.
55]
ALL joint owners of stocks, or any one of them
with the consent of ALL the co-owners,
unless there is a written proxy, signed by all
the co-owners [Sec. 56]
Any one of the joint owners of shares owned in
an "and/or" capacity or a proxy thereof [Sec.
56]
UP LAW BOC CORPORATION LAW
REGULAR OR SPECIAL
WHEN AND WHERE
When? [Sec. 50]
Regular meetings of stockholders or members
shall be held annually on a date fixed in the by-
laws, or if not so fixed, on any date in April of
every year as determined by the board of
directors or trustees.
Where?
Stock: City or municipality where the principal
office of the corporation is located, or, if
practicable, in the principal office of the
corporation: Provided, Metro Manila shall be
considered a city or municipality. [Sec. 51]
Non-stock: Any place even outside the place
where the principal office is located, within the
Philippines [Sec. 93]
NOTICE [Sec. 50]
Regular Meetingwritten notice sent to all SH
or members at least 2 weeks prior to the
meeting, unless a different period is required
by the by-laws
Special Meetingwritten notice sent at least 1
week prior to the meeting, unless otherwise
provided in the by-laws.
Subject to waiver, expressly or impliedly (i.e.,
attendance despite no notice)
Effect of Failure to Give Notice: Failure to give
notice would render a meeting VOIDABLE at the
instance of an absent stockholder, who was not
notified of the meeting [Board v. Tan, 1959].
WHO CALLS THE MEETINGS
The president, unless the by-laws provide
otherwise. [Sec. 54]
Any petitioning stockholder or member upon
order of the SEC when there is no person
authorized to call a meeting. Such petitioning
stockholder or member shall preside thereat
until at least a majority of the stockholders or
members present have chosen one of them as
presiding officer. [Sec. 50]
QUORUM
General Rule: Stockholders representing
majority of the OCS or majority of the members
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MERCANTILE LAW
Exception: The Code or the by-laws provide
otherwise
Where quorum is present at the start of a lawful
meeting, stockholders present cannot without
justifiable cause break the quorum by walking
out from said meeting so as to defeat the
validity of any act proposed and approved by
the majority. (However, stockholders can break
the quorum for justifiable causes.) [Johnston vs.
Johnston, 1965 CA decision]
MINUTES OF THE MEETINGS
A record of all the minutes of all meetings of
stockholders or members, or of the board of
directors or trustees shall be kept and preserved
at the principal office of every corporation.
Contents:
time and place of holding the meeting;
how the meeting was authorized;
the notice given;
whether the meeting was regular or special, if
special its object;
those present and absent; and
every act done or ordered done at the
meeting.
Upon demand by any director/trustee or
SH/member, the following shall also be noted in
the minutes:
the time when any director, trustee,
stockholder or member entered or left the
meeting;
the yeas and nays on any motion or
proposition;
the protest of any director/trustee or
stockholder/member on any action or
proposed action.
Notes:
The minutes of any meetings shall be open to
inspection by any director/trustee or
stockholder/member at reasonable hours on
business days.
The director/trustee or stockholder/member
may demand, in writing, for a copy of excerpts
from said records or minutes, at his expense.
UP LAW BOC CORPORATION LAW
Any officer or agent of the corporation refusing
to allow the examination and copying of the
minutes shall be:
(1) liable to the director/trustee or stockholder/
member; and
(2) guilty of an offense punishable under Sec.
144 [Sec. 74]
HOWEVER, the officer of agent may use as a
defense that:
(1) the person demanding examination or copy
thereof made improper use of any
information secured through any prior
examination of the records or minutes of
such corporation or of any other corporation
thereby;
(2) the person demanding examination or copy
acts in bad faith or has no legitimate purpose
in making his demand.
Capital Structure
SUBSCRIPTION AGREEMENTS
Any contract for the acquisition of unissued
stock in an existing corporation or a corporation
still to be formed shall be deemed a
subscription contract (Sec. 60).
CHARACTERISTICS
A subscription is a contract for the acquisition of
unissued stock of a corporation whether existing
or still to be formed, and is in effect the
contribution or promised contribution of a
person to the capital of a corporation (Campos).
There can be a subscription only with reference
to unissued shares of the Authorized Capital
Stock (ACS), in the following cases:
(1) The original issuance of the ACS at the time
of incorporation.
(2) The opening, during the life of the
corporation, of the portion of the original
ACS previously unissued; or
(3) The increase in ACS achieved through a
formal amendment of the Articles and
registration thereof with the SEC. [Villanueva]
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MERCANTILE LAW
STATUS AS SHAREHOLDER
One may become a shareholder in a corporation
in either of two ways:
(1) By entering into a SUBSCRIPTION
CONTRACT with an existing or still to be
formed corporation (he becomes a
stockholder upon acceptance of the
corporation of his offer to subscribe whether
the consideration is fully paid or not).
Once a subscription contract is perfected,
the stockholder becomes a debtor to the
corporation and may be liable to pay any
unpaid portion thereof upon call by the
board of directors.
(2) By acquisition of already issued shares
through:
(a) purchase of TREASURY SHARES from
the corporation
(b) acquisition of shares from existing
shareholders by SALE OR ANY OTHER
CONTRACT [Sundiang and Aquino]
Notes:
Transfer of unissued shares = SUBSCRIPTION
Transfer of already issued shares = NOT
SUBSCRIPTION; can either be:
SALE/DISPOSITION BY CORPORATION of
treasury shares
SALE/DISPOSITION BY STOCKHOLDER TO
A THIRD PERSON
TYPES OF SUBSCRIPTION
CONTRACTS
PRE-INCORPORATION SUBSCRIPTION
[SEC. 61]
It is a subscription for shares of stock of a
corporation still to be formed.
When pre-incorporation subscription is
IRREVOCABLE:
(1) For a period of at least 6 months from the
date of subscription, UNLESS (a) all of the
other subscribers consent to the revocation,
or (b) the incorporation fails to materialize
within six (6) months or within a longer
period as may be stipulated in the contract of
subscription; or
(2) After the submission of the AOI to the SEC.
UP LAW BOC CORPORATION LAW MERCANTILE LAW

POST-INCORPORATION SUBSCRIPTION LIMITATIONS ON

It is entered into after incorporation.
INTEREST ON UNPAID
SUBSCRIPTION
General Rule: Stockholder is NOT liable to pay
interest on his unpaid subscription.
Exception: If so required by the by-laws
Rate: that fixed in the by-laws, otherwise, the
legal rate [Sec. 66]
Notes:
Shareholders are NOT creditors of the
corporation with respect to their
shareholdings thereto and the principle of
compensation or set-off has no application.
Subscription contract is NOT required to be in
writing.
CONSIDERATION FOR STOCKS
FORMS OF CONSIDERATION [SEC.
62]
Actual cash
Property, tangible or intangible, actually
received by the corporation and necessary or
convenient for its use and lawful purposes at
a fair valuation equal to the par or issued
value of the stock issued
- Property should NOT be encumbered.
Otherwise, it would impair
consideration.
- Valuation is initially determined by the
incorporators or the board of directors,
subject to approval by the SEC.
Labor performed for or services actually
rendered to the corporation;
Amounts transferred from unrestricted
retained earnings to stated capital
(declaration of stock dividends); and
Outstanding shares exchanged for stocks in
the event of reclassification or conversion;
Previously incurred indebtedness of the
corporation;
CONSIDERATION
Stocks shall NOT be issued:
for a consideration less than the par or issued
price thereof
in exchange for promissory notes or future
service
Notes: Promissory notes and future service may
be used as consideration provided that
certificates of stock will be issued ONLY AFTER
actual encashment of promissory note or
performance of such services.
SHARES OF STOCK
NATURE OF STOCK
o Shares of stock are units into which the
capital stock is divided. A share of stock
represents interest of the holder thereof to
participate in the management of the
corporation, to share proportionally in the
profits of the business and, upon liquidation,
to obtain an aliquot part of corporate assets
after all corporate debts have been paid.
[Campos]
A stockholder may own the share even if he is
not holding a certificate of stock.
Share of Stock Certificate of Stock
Evidence of the
the holders ownership of
Unit of interest in a the stock and of his
corporation right as a shareholder
and up to the extent
specified therein.
An incorporeal or
Concrete and tangible
intangible property
May be issued by the
May be issued only if
corporation even if the
the subscription is fully
subscription is not fully
paid
paid
Stockholders of F. Guanzon and Sons, Inc. v
Register of Deeds of Manila (1962): A share of
stock only typifies an aliquot part of the
corporation's property, or the right to share in its

PAGE 147
UP LAW BOC CORPORATION LAW
proceeds to that extent when distributed
according to law and equity, but its holder is not
the owner of any part of the capital of the
corporation. Nor is the shareholder entitled to
the possession of any definite portion of its
property or assets. The stockholder is not a co-
owner or tenant in common of the corporate
property.
SUBSCRIPTION AGREEMENTS (SEE
ABOVE)
CONSIDERATION FOR SHARES OF
STOCK (SEE ABOVE)
WATERED STOCK
DEFINITION
These are shares issued as fully paid when in
truth no consideration is paid in any form, or the
consideration received is known to be less than
the par value or issued value of the shares. [Sec.
65]
These include the following:
Issued without consideration (bonus share)
Issued as fully paid when the corporation has
received less sum of money than its par or
issued value (discounted share)
Issued for consideration other than actual
cash (i.e., property or services), the fair
valuation of which is less than its par or issued
value
Issue stock dividend when there are no
sufficient retained earnings or surplus profit to
justify it.
Note: Subsequent increase in the value of the
property used in paying the stock does not do
away with the watered stocks. Subsequent
increase in the value of the property used in
paying the stock does not cure the defect in
issuance. The existence of watered stocks is
determined at the time of issuance of the stock.
LIABILITY OF DIRECTORS FOR WATERED
STOCKS
Any director or officer of a corporation
consenting to the issuance of watered stocks or
who, having knowledge thereof, does not
forthwith express his objection in writing and file
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MERCANTILE LAW
the same with the corporate secretary shall be
solidarily liable with the stockholder concerned
to the corporation and its creditors for the
difference in value [Sec. 65].
TRUST FUND DOCTRINE FOR LIABILITY FOR
WATERED STOCKS
Where the corporation issues watered stock
and thereby assumes an ostensible
capitalization in excess of its real assets, the
transaction necessarily involves the
misleading of subsequent creditors, and
whether done with that purpose actually in
mind or not, is at least a constructive fraud
upon creditors. Hence, it is held that recovery
may be had by a creditor in such case, even
though the corporation itself has no cause of
action against the stockholders. Some of the
earlier decisions put the right of recovery in
such a case upon the so-called trust fund
doctrine. In any view of the matter, however,
the creditors right of action to compel the
making good of the representation as to the
corporations capital is based on fraud, and
the trust fund doctrine is only another way of
expressing the same underlying idea. [De
Leon]
Despite the view of foreign authors that the
fraud theory is the prevailing view, it would
seem that in the Philippine jurisdiction, the
trust fund doctrine on watered stock prevails.
Philippine Trust Corp. v. Rivera (1923): It is
established doctrine that subscription to the
capital of a corporation constitute a fund to
which creditors have a right to look for
satisfaction of their claims and that the
assignee in insolvency can maintain an action
upon any unpaid stock subscription in order to
realize assets for the payment of its debts (citing
Velasco v. Poizat, 1918). A corporation has no
power to release an original subscriber to its
capital stock from the obligation of paying for
his shares, without a valuable consideration for
such release; and as against creditors a
reduction of the capital stock can take place
only in the manner and under the conditions
prescribed by the statute or the charter or the
articles of incorporation. Moreover, strict
compliance with the statutory regulations is
necessary.
UP LAW BOC CORPORATION LAW MERCANTILE LAW

SITUS OF THE SHARES OF STOCK PREFERRED SHARES

Chua Guan v. Samahang Magsasaka, Inc. (1935):
It is a general rule that for purposes of
execution, attachment and garnishment, it is
not the domicile of the owner of a certificate but
the domicile of the corporation which is decisive.
CLASSES OF SHARES OF STOCK
Shares of stock of stock corporations may be
divided into classes or series of shares or both.
Each class or series of shares may have rights,
privileges or restrictions, as stated in the AOI.
Classification of shares:
Common shares
Preferred shares
Par value shares
No-par value shares
Founders shares
Redeemable shares
Treasury shares
Convertible shares
Non-voting shares
General Rule: No share may be deprived of
voting rights [Sec. 6]
Exceptions:
Preferred or
Redeemable shares,
Provided by the Code (e.g., Treasury shares)
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS [Sec.
6]
Doctrine of Equality of Shares
Each share shall be EQUAL in ALL respects to
every other share, except as otherwise provided
in the AOI and stated in the certificate of stock
[Sec. 6]
COMMON SHARES
The most common type of shares, which enjoy
no preference but the owners thereof are
entitled to management of the corporation and
to equal pro-rata division of profits after
preference. It represents a residual ownership
interest in the corporation.
Stocks which are given preference by the issuing
corporation in dividends and the distribution of
assets of the corporation in case of liquidation
or such other preferences as may be stated in
the AOI which do not violate the Corporation
Code.
Limitations:
Preferred shares can only be issued with par
value.
Preferred shares must be stated in the
Articles of Incorporation and in the certificate
of stock.
The BOD may fix the terms and conditions
only when so authorized by the AOI and such
terms and conditions shall be effective upon
filing a certificate thereof with the SEC.
PAR VALUE SHARES
o These are shares with a stated value set out in
the AOI. This remains the same regardless of
the profitability of the corporation. This gives
rise to financial stability and is the reason why
banks, trust corporations, insurance
companies and building and loan associations
must always be organized with par value
shares.
Par value is minimum issue price of such share
in the AOI which must be stated in the
certificate.
NO-PAR VALUE SHARES
These are shares without a stated value.
A no par share does not purport to represent
any stated proportionate interest in the
capital stock measured by value, but only an
aliquot part of the whole number of such
shares of the issuing corporation [Agbayani]
Limitations:
No-par value shares cannot have an issue
price of less than P5.00 per share [Sec. 6].
They shall be deemed fully paid and non-
assessable and the holders of such shares
shall not be liable to the corporation or to its
creditors in respect thereto [Sec. 6].
Entire consideration received by the
corporation for its no-par value shares shall
be treated as capital and shall not be
available for distribution as dividends [Sec. 6].

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AOI must state the fact that the corporation
issues no-par shares and the number of
shares.
Banks, insurance companies, trust companies,
building and loan associations, and public
utilities cannot issue no-par value shares [Sec.
6].
The issued price may be fixed in the AOI, or by
the BOD pursuant to authority conferred upon
it by the AOI, or, in the absence thereof, by
majority vote of the outstanding shares in a
meeting called for the purpose [Sec. 62].
FOUNDERS SHARES [SEC. 7]
These are shares, classified as such in the AOI,
which are given certain rights and privileges
not enjoyed by the owners of other stocks.
Where exclusive right to vote and be voted for
in the election of directors is granted, such
right must be for a limited period not to
exceed 5 years subject to approval by SEC.
The 5 year period shall commence from date
of approval by SEC.
REDEEMABLE SHARES [SEC. 8]
These are shares which permit the issuing
corporation to redeem or purchase its shares.
Limitations:
Redeemable shares may be issued only when
expressly provided for in the AOI [Sec. 8].
The terms and conditions affecting said
shares must be stated both in the AOI and in
the certificate of stock [Sec. 8].
Redeemable shares may be deprived of voting
rights in the AOI.
The corporation is required to maintain a
sinking fund to answer for redemption price if
the corporation is required to redeem.
The redeemable shares are deemed retired
upon redemption unless otherwise provided in
the AOI (i.e., if the AOI allows for reissuance of
such shares).
Republic Planters Banks v. Agana (1997): URE
is NOT necessary before shares can be
redeemed but there must be sufficient assets
to pay the creditors and to answer for
operations.
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MERCANTILE LAW
Redemption cannot be made if such
redemption will result in insolvency or
inability of the corporation to meet its
obligations [SEC Opinion, 24 Aug 1987].
Note: Redeemable shares reacquired shall be
considered retired and no longer issuable,
unless otherwise provided in the Articles of the
redeeming corporation [SEC Rules Governing
Redeemable and Treasury Shares, 26 April 1982].
TREASURY SHARES [SEC. 9]
These are shares which have been issued and
fully paid for, but subsequently re-acquired by
the issuing corporation by purchase,
redemption, donation or through some other
lawful means. Such shares may again be
disposed of for a reasonable price fixed by the
BOD.
CIR v. Manning (1975) cited in San Miguel
Corporation v. Sandiganbayan (2000): Treasury
shares are issued shares, but being in the
treasury, do not have the status of outstanding
shares. Consequently, although a treasury
share, not retired by reacquisition, may be re-
issued or resold, such share, as long as it is held
by the corporation as a treasury share,
participates neither in the dividends, because
dividends cannot be declared by the corporation
to itself nor in the meetings of the corporation
as voting stock, for otherwise equal distribution
of voting powers among stockholders will be
effectively lost and the directors will be able to
perpetuate their control of the corporation,
though it still represents a paid for interest in
the property of the corporation.
Note: Delinquent stocks, which are stocks that
have not been fully paid, may become treasury
stocks upon bid of the corporation in absence of
other bidders [Sec.68].
CONVERTIBLE SHARES
A type of preferred stock that the holder can
exchange for a predetermined number of
common shares at a specified time
NON-VOTING SHARES [SEC. 6]
General Rule: Non-Voting Shares are not
entitled to vote.
UP LAW BOC CORPORATION LAW
Exceptions:
Amendment of the AOI
Adoption and amendment of by-laws
Sale, lease, exchange, other disposition of all
or substantially all of the corporate property
Incurring, creating or increasing bonded
indebtedness
Increase or decrease of capital stock
Merger and consolidation
Investment of corporate funds in another
corporation or business
Dissolution of the corporation
PAYMENT OF BALANCE OF
SUBSCRIPTION [SEC. 66 & 67]
CALL BY BOARD OF DIRECTORS
The board of directors of any stock
corporation may at any time declare due and
payable to the corporation unpaid
subscriptions to the capital stock and may
collect the same or such percentage thereof,
in either case with accrued interest, if any, as it
may deem necessary.
Payment shall be made on the date specified
in the contract of subscription or on the date
stated in the call. Failure to pay on such date
shall render the entire balance due and
payable and shall make the stockholder liable
for interest at the legal rate on such balance,
unless a different rate of interest is provided
for in the by-laws. If within 30 days from said
date no payment is made, all stocks covered
by said subscription shall become delinquent
and subject to sale under Sec. 68 unless the
BOD orders otherwise.
There are two (2) instances when call is not
necessary to make the subscriber liable for
payment of the unpaid subscription:
When, under the terms of the subscription
contract, subscription is payable, not upon
call, but immediately, or on a specified day, or
when it is payable in installments at specified
times; and
If the corporation becomes insolvent, which
makes the liability on the unpaid subscription
due and demandable, regardless of any
stipulation to the contrary in the subscription
agreement [Villanueva]
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MERCANTILE LAW
NOTICE REQUIREMENT
Where call is necessary, notice must be given to
the stockholder concerned. A call without notice
to the subscriber is practically no call at all.
Lingayen Gulf Electric Power Co., Inc. v. Baltazar
(1965): The notice is regarded as a condition
precedent to the right of recovery. It must,
therefore, be alleged and proved to maintain an
action for the call.
The right to notice of call, however, may be
waived by the subscriber. [De Leon]
SALE OF DELINQUENT SHARES [SEC.
68]
Delinquent Shares - These are shares for which
the corresponding subscription or balance
remains unpaid after a grace period of 30 days
from the date specified in the contract of
subscription or from the date stated in the call
made by the BOD. [Sec. 67]
EFFECT OF DELINQUENCY [SEC. 71]
No delinquent stock shall be voted for or be
entitled to vote or to representation at any
stockholders meeting
The holder thereof shall NOT be entitled to
any of the rights of a stockholder except the
right to dividends. But the dividends it will
receive will be subject to Sec. 43, that is, cash
dividends shall first be applied to the unpaid
balance on the subscription plus costs and
expenses, and stock dividends shall be
withheld until the unpaid subscription is fully
paid.
Such shares shall be subject to delinquency
sale.
CALL BY RESOLUTION OF THE BOARD OF
DIRECTORS [SEC. 68]
The board of directors may, by resolution, order
the sale of delinquent stock and shall
specifically state the amount due on each
subscription plus all accrued interest, and the
date, time and place of the sale which shall not
be less than 30 days nor more than 60 days
from the date the stocks became delinquent,
which is 30 days after the date specified in the
contract of subscription or on the date stated in
the call.
UP LAW BOC CORPORATION LAW
NOTICE OF SALE
If the BOD resolves to proceed with the sale:
(1) Notice of sale and a copy of the resolution
shall be sent to every delinquent stockholder
either personally or by registered mail.
(2) Notice of sale shall furthermore be
published once a week for two (2)
consecutive weeks in a newspaper of general
circulation in the province or city where the
principal office of the corporation is located.
AUCTION SALE AND THE HIGHEST BIDDER
Procedure for delinquency sale [Sec. 68]
Call for payment made by the BOD.
Notice of call served on each stockholder.
Notice of delinquency issued by the BOD
upon failure of the stockholder to pay within
30 days from date specified.
Service of notice of delinquency on the non-
paying subscriber, PLUS publication in a
newspaper of general circulation in the
province or city where the principal office of
the corporation is located, once a week for two
(2) consecutive weeks.
NOTE
Requirements on notice and publication are
mandatory. Lacking such requirements, the
stockholder may question the sale as provided
under Sec. 69.
Public auction - the highest bidder is one who
is willing to pay the balance of the
subscription for the least number of shares. If
there are no bidders, the corporation must bid
for the whole number of shares regardless of
how much the SH has paid. Such stocks will
pertain to the corporation as fully paid
treasury stocks.
The delinquent stockholder may stop the
auction by paying to the corporation on or
before the date specified for the sale the
balance due on his subscription, plus accrued
interest, costs of advertisement and expenses
of the sale.
Otherwise, the public auction shall proceed
and the delinquent shares shall be sold to the
bidder that will pay the full amount of the
balance of subscription with accrued interest,
costs and expenses of the sale, for the
smallest number of shares or fraction of a
share. The stock so purchased shall be
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MERCANTILE LAW
transferred to such purchases in the books of
the corporation and a certificate of such stock
shall be issued in his favor. The remaining
shares, if any, shall be credited in favor of the
delinquent stockholder who shall likewise be
entitled to the issuance of a certificate of stock
covering such shares.
Irregularities in the delinquency sale [Sec. 69]
Action to recover delinquent stock must be on
the ground of irregularity or defect in the
notice of sale.
Party seeking to recover must first pay or
tender to the party holding the stock the sum
for which the same was sold, with interest
from the date of sale at the legal rate.
The action must be commenced within six (6)
months from the date of sale.
CERTIFICATE OF STOCK
NATURE OF THE CERTIFICATE
A certificate of stock is an instrument formally
issued by the corporation with the intention that
the same constitute the best evidence of the
rights and status of a SH (not a condition
precedent to the acquisition of such rights).
Makati Sports Club v. Cheng (2010): A certificate
of stock is the paper representative or tangible
evidence of the stock itself and of the various
interests therein. The certificate is not a stock in
the corporation but is merely evidence of the
holders interest and status in the corporation,
his ownership of the share represented
thereby. It is not in law the equivalent of such
ownership. It expresses the contract between
the corporation and the stockholder, but is not
essential to the existence of a share of stock or
the nature of the relation of shareholder to the
corporation.
UNCERTIFICATED SHARES
Uncertificated Shares/Securities
Security evidenced by electronic or similar
records [Sec. 3.14, Securities Regulation Code]
Notwithstanding Sec. 63 of the Corporation
Code (certificate of stock and transfer of shares),
a corporation whose securities are registered
UP LAW BOC CORPORATION LAW
pursuant to the SRC or listed on securities
exchange may:
If so resolved by the Board of Directors and
agreed by a shareholder, investor or securities
intermediary, issue shares to, or record the
transfer of some or all its shares into the
name of such shareholders, investors or,
securities intermediary in the form of
uncertified securities
The use of uncertified securities in these
circumstances shall be without prejudice to the
rights of the securities intermediary
subsequently to require the corporation to issue
a certificate in respect of any shares recorded in
its name; and
If so provided in its articles of incorporation
and by-laws, issue all of the shares of a
particular class in the form of uncertificated
securities and subject to a condition that
investors may not require the corporation to
issue a certificate in respect of any shares
recorded in their name.
Transfers of uncertificated securities, how made
Valid as between parties - validly made and
consummated by appropriate book-entries in
the securities intermediaries, or in the stock
and transfer book held by the corporation or
the stock transfer agent.
A transfer made pursuant to the foregoing has
the effect of delivery of a security in bearer form
or duly indorsed in blank representing the
amount of security or right transferred,
including the unrestricted negotiability of that
security by reason of such delivery.
Valid as to corporation when the transfer is
recorded in the books of the corporation so as
to show the names of the parties to the
transfer and the number of shares transferred
(Sec. 43, Securities Regulation Code).
NEGOTIABILITY
Theory of Quasi-Negotiability
A stock certificate is regarded as quasi-
negotiable only in the sense that it may be
transferred by endorsement, coupled with
delivery.
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MERCANTILE LAW
De los Santos v. Republic (1955): This
notwithstanding, it is well-known that the
instrument is non-negotiable, because the
holder thereof takes it without prejudice to such
rights or defenses as the registered owner or
creditor may have under the law, except insofar
as such rights or defenses are subject to the
limitations imposed by the principles governing
estoppel. Certificates of stock are not negotiable
instruments. Consequently, a transferee under a
forged assignment acquires no title which can
be asserted against the true owner, unless the
latters negligence has been such as to create
an estoppel against him. If the owner of the
certificate has endorsed it in blank, and it is
stolen from him, no title is acquired by on
innocent purchaser for value.
REQUIREMENTS FOR VALID TRANSFER OF
STOCKS
For a valid transfer of stocks, the requirements
are as follows:
There must be delivery of the stock certificate;
The certificate must be endorsed by the owner
or his attorney-in-fact or other persons legally
authorized to make the transfer; and
Bitong v. Court of Appeals (1998): To be valid
against third parties, the transfer must be
recorded in the books of the corporation.
No shares of stock against which the
corporation holds an unpaid claim shall be
transferable in the books of the corporation
[Sec. 63].
Republic v. Estate of Hans Menzi (2005): The
Corporation Code acknowledges that the
delivery of a duly indorsed stock certificate is
sufficient to transfer ownership of shares of
stock in stock corporations. Such mode of
transfer is valid between the parties. In order to
bind third persons, however, the transfer must
be recorded in the books of the
corporation. Clearly then, the absence of a deed
of assignment is not a fatal flaw which renders
the transfer invalid.
UP LAW BOC CORPORATION LAW
Requisites for a valid transfer per Sec. 63:
(a) Between the parties:
(i) Delivery
(ii) Indorsement
(b) To be valid as to third persons:
(i) Recorded in the books of the corporation
Rural Bank of Lipa City v. CA (2001): The
execution of a deed of sale does not necessarily
make the transfer effective. The delivery of the
stock certificate duly indorsed by the owner is
the operative act that transfers the shares. The
absence of delivery is a fatal defect which is not
cured by mere execution of a deed of
assignment.
Ponce v. Alsons Cement Corp. (2002): The stock
and transfer book is the basis for ascertaining
the persons entitled to the rights and subject to
the liabilities of a stockholder. Where a
transferee is not yet recognized as a
stockholder, the corporation is under no specific
legal duty to issue stock certificates in the
transferees name.
Citing Hager v. Bryan (1911): A mandamus should
not issue to compel the secretary of a
corporation to make a transfer of the stock on
the books of the company, unless it affirmatively
appears that he has failed or refused so to do,
upon the demand either of the person in whose
name the stock is registered, or of some person
holding a power of attorney for that purpose
from the registered owner of the stock.
Batangas Laguna Tayabas Bus Co. v. Bitangas
(2001): A transfer of shares is not valid unless
recorded in the books of the corporation. The
purpose of registration is two-fold: (a) to enable
the transferee to exercise all the rights of a
stockholder, including the right to vote and to
be voted for, and (b) to inform the corporation of
any change in share ownership so that it can
ascertain the persons entitled to the rights and
subject to the liabilities of a stockholder.
Until challenged in a proper proceeding, a
stockholder of record has a right to participate
in any meeting; his vote can be properly
counted to determine whether a stockholders
resolution was approved, despite the claim of
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MERCANTILE LAW
the alleged transferee. On the other hand, a
person who has purchased stock, and who
desires to be recognized as a stockholder for the
purpose of voting, must secure such a standing
by having the transfer recorded on the
corporate books. Until the transfer is registered,
the transferee is not a stockholder but an
outsider.
ISSUANCE
FULL PAYMENT
General Rule: No certificate of stock shall be
issued to a subscriber until the full amount of
his subscription together with interest and
expenses (in case of delinquent shares), if any is
due, has been paid [Sec. 64]
Exception:
Baltazar v. Lingayen Gulf Electric Power
Company (1965): Where it was the practice of
the corporation since its inception to issue
certificates of stock to its individual SHs for
unpaid shares of stock and to give full voting
power to shares fully paid.
PAYMENT PRO RATA
Nava Peers Mktg. Corp. and Fua Cun v. Summers
(1923):The entire subscription must be paid first
before the certificates of stock can be issued.
Partial payments are to be applied pro rata to
each share of stock subscribed.
LOST OR DESTROYED CERTIFICATES
Procedure for re-issuance in case of loss, stolen
or destroyed certificates:
Registered owner to file an affidavit of loss
with the corporation.
Publication of notice of loss in a newspaper of
general circulation published in the place
where the corporation has its principal office,
once a week for 3 consecutive weeks at the
expense of the owner of the certificate of stock
Cancellation of the certificate in the books of
the corporation and issuance of new
certificates, after the expiration of 1 year from
the date of the last publication and there is no
contest. The right to make such contest shall
UP LAW BOC CORPORATION LAW
be barred after the expiration of the one-year
period.
Issuance of new certificates before 1 year
period if the registered owner files a bond and
there is no pending contest regarding the
ownership of said certificates.
Note: Except in cases of fraud, bad faith, or
negligence on the part of the corporation and its
officers, no action may be brought against the
corporation which shall have issued certificates
of stock in lieu of those lost, stolen or destroyed
pursuant to the above procedure.
STOCK AND TRANSFER BOOK
CONTENTS
a record of all stocks in the names of the
stockholders alphabetically arranged;
the installments paid and unpaid on all stock
for which subscription has been made, and
the date of payment of any installment;
a statement of every alienation, sale or
transfer of stock made, the date thereof, and
by and to whom made; and
such other entries as the by-laws may
prescribe.
WHO MAY MAKE VALID ENTRIES
An SEC-licensed stock transfer agent; or
The Corporate Secretary of the stock
corporation provided all rules and regulations
imposed on stock transfer agents shall be
applicable, except payment of license fee.
DISPOSITION AND
ENCUMBRANCE OF SHARES
ALLOWABLE RESTRICTIONS ON THE
SALE OF SHARES
General Rule: Shares of stock so issued are
personal property and may be transferred [Sec.
63]. (FREE TRANSFERABILITY OF SHARES)
Exception: In CLOSE corporations, restrictions
on the right to transfer shares may be provided
in the AOI, by-laws and certificates [Sec. 98].
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MERCANTILE LAW
SALE OF PARTIALLY PAID SHARES
Under Section 63 of the Corporation Code, no
shares of stock against which the corporation
holds any unpaid claim shall be transferable in
the books of the corporation. Therefore, a
corporation may refuse to acknowledge and
register a sale or assignment of shares which
are not fully paid, and may continue to hold the
original subscriber liable on the payment of the
subscription.
However, in China Banking Corp. v. CA (1997),
the court said that the above principle in Section
63 cannot be utilized by the corporation to
refuse to recognize ownership over pledged
shares purchased at public auction. The term
unpaid claims refers to any unpaid claims
arising from unpaid subscription, and not to any
indebtedness which a subscriber or stockholder
may owe the corporation arising from any other
transactions. Obligations arising from unpaid
monthly dues do not fall within the coverage of
Section 63.
SALE OF A PORTION OF SHARES
NOT FULLY PAID
The SEC has opined on several occasions that a
stockholder who has not paid the full amount of
his subscription cannot transfer part of his
subscription in view of the indivisible nature of a
subscription contract. The reason behind the
principle of disallowing transfer of not fully paid
subscription to several transferee is that it
would be difficult to determine whether or not
the partial payments made should be applied
as full payment for the corresponding number
of shares which can only be covered by such
payment or as proportional payment to each
and all of the entire number of subscribed
shares, and it would be difficult to determine
the unpaid balance to be assumed by each
transferee. [Villanueva]
SALE OF ALL OF SHARES NOT FULLY
PAID
On the other hand, the SEC has opined that the
entire subscription, although not yet fully paid,
may be transferred to a single transferee, who
as a result of the transfer must assume the
unpaid balance. It is necessary, however, to
secure the consent of the corporation since the
UP LAW BOC CORPORATION LAW
transfer of subscription rights and obligations
contemplates a novation of contract which
under Article 1293 of the Civil Code cannot be
made without the consent if the creditor.
[Villanueva]
SALE OF FULLY PAID SHARES
Shares of stock so issued are personal property
and may be transferred by delivery of the
certificate or certificates indorsed by the owner
or his attorney-in-fact or other person legally
authorized to make the transfer. No transfer
however shall be valid except as between the
parties until the transfer is recorded in the
books of the corporation showing the names of
the parties to the transaction, the date of the
transfer, the number of the certificate or
certificates and the number of shares
transferred [Sec. 63]
REQUISITES OF A VALID TRANSFER
Same as requirements for valid transfer of
stocks
INVOLUNTARY DEALINGS WITH
SHARES
The right of a stockholder to pledge,
mortgage or otherwise encumber his shares is
recognized under Section 55 of the
Corporation Code, which regulates the manner
of voting on pledged or mortgaged shares.
If the restriction on the right to pledge or
mortgage shares of stock absolutely prohibits
the stockholders from pledging or
mortgaging their shares without the consent
of the board of directors, it would be violative
of the statutory right of the stockholders to
encumber shares of stock as allowed in
Section 55. However, when the restriction
merely allows the corporation or existing
stockholders to accept the offer within the
option period, and thereafter, if no one
accepts the offer, the stockholder is free to
pledge or mortgage his shares in favor of any
third party, such provision is reasonable, valid
and binding.
By the strict application of Section 63 of the
Corporation Code to cover only the sale,
assignment or absolute disposition of shares
of stock, the Supreme Court has placed a bias
against voluntary sales, assignments or
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MERCANTILE LAW
dispositions of shares of stock vis--vis
pledges, mortgages, attachment or levy
thereof. To be valid and binding on third
parties, the voluntary sale, assignment or
disposition of shares requires the essential
element of registration in the stock and
transfer book; otherwise the sale, assignment
or disposition is considered void as to third
parties, even when they have actual notice.
Whereas, when it comes to pledge, mortgage,
encumbrance, attachment or levy of shares,
registration thereof in the stock and transfer
book is not essential either for validity or as a
species of notifying third parties. [Villanueva]
Dissolution and
Liquidation
Dissolution of a corporation is the
extinguishment of its franchise and the
termination of its corporate existence or
business purpose. However, for the purpose
only of winding up its affairs and liquidating its
assets, its corporate existence continues for a
period of 3 years from such dissolution [Sec.
122].
MODES OF DISSOLUTION
According to some decisions, the method of
effecting dissolution as prescribed by law are
exclusive, and a corporation cannot be dissolved
except in the manner prescribed by law. [De
Leon]
VOLUNTARY
Note: If no dissolution papers are filed with the
SEC by a corporation claiming dissolution
voluntarily, such corporation is still deemed
legally existing, notwithstanding the fact that it
has ceased to operate. [De Leon]
WHERE NO CREDITORS ARE AFFECTED
[SEC. 118]
Notice of the meeting should be given to the
stockholders or members by personal delivery
or registered mail at least 30 days prior to the
meeting.
The notice of meeting should also be published
for 3 consecutive weeks in a newspaper
UP LAW BOC CORPORATION LAW
published in the place where the principal office
of said corporation is located. If no newspaper
is published in such place, then in a newspaper
of general circulation in the Philippines.
The resolution to dissolve must be approved by
the majority of the directors/trustees and
approved by the stockholders representing at
least 2/3 of the OCS or 2/3 of members.
Non-voting shares are entitled to vote in
this matter [Sec. 6. Par 6(8)]
A copy of the resolution shall be certified by the
majority of the directors or trustees and
countersigned by the secretary.
The signed and countersigned copy will be filed
with the SEC and the latter will issue the
certificate of dissolution.
Note:
Daguhoy Enterprises v. Ponce (1954): Thus,
except for the expiration of its term, no
dissolution can be effective without some act of
the State.
WHERE CREDITORS ARE AFFECTED [SEC.
119]
A petition shall be signed by a majority of its
board of directors or trustees or other officers
having management of its affairs.
The petition must be verified by its president,
or secretary or one of its director or trustees.
Approval of the stockholders representing at
least 2/3 of the OCS or 2/3 of members in a
meeting called for that purpose.
Filing of a petition with the SEC signed by
majority of directors or trustees or other
officers having the management of its affairs
verified by the President or Secretary or
Director. Claims and demands must be
stated in the petition.
If the petition is sufficient in form and
substance, the SEC shall issue an order fixing
the date on or before which objections to the
petition may be filed. Such date shall not be
less than 30 days nor more than 60 days after
the entry of the order.
A copy of the order shall be published at least
once a week for 3 consecutive weeks in a
newspaper of general circulation, or if there is
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MERCANTILE LAW
no newspaper in the city or municipality of the
principal office, posting for 3 consecutive
weeks in 3 public places is sufficient.
After the expiration of the time to file
objections, a hearing shall be conducted upon
prior 5 day notice to hear the objections.
Judgment shall be rendered dissolving the
corporation and directing the disposition of
assets. The judgment may include
appointment of a receiver.
As long as 2/3 vote is obtained, no
member/ stockholder can prevent such
dissolution unless the majority stockholders
acted in bad faith. The latter may be held
liable for damages. (Campos)
BY SHORTENING OF CORPORATE TERM
A voluntary dissolution may be effected by
amending the AOI. Upon approval of the
amended AOI or the expiration of the shortened
term, as the case may be, the corporation shall
be deemed dissolved without any further
proceedings.
A publication of notice of dissolution is required
and cannot be dispensed with by alleging that it
was not required in Section 120 and that no
creditors will be prejudiced by its dissolution.
[SEC Opinion, August 30, 1988]
SEC Opinion No. 06-20, March 13, 2006:
If the shortened term expires before the SEC
approval- the corporation will be dissolved
upon the SEC approval
If the shortened term expires after the SEC
approval - the corporation will be dissolved
upon the expiration of the shortened term
If SEC fails to act within 6 months from filing
of the amended AOI and shortened term
expires after the 6-month period - the
corporation will be dissolved upon the
expiration of the shortened term
If SEC fails to act within 6 months from filing
of the amended AOI and shortened term
expires before the 6-month period- the
corporation will be dissolved at the end of the
6-month period. [Campos]
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INVOLUNTARY
BY EXPIRATION OF CORPORATE TERM
Once the period expires, the corporation is
automatically dissolved without any other
proceeding and it cannot thereafter be
considered a de facto corporation.
FAILURE TO ORGANIZE AND COMMENCE
BUSINESS WITHIN 2 YEARS FROM
INCORPORATION
Failure to formally organize and commence the
transaction of its business or construction of its
works within two years - its corporate powers
shall cease and the corporation shall be
deemed dissolved [Sec. 22].
Dissolution in this case is automatic.
(Campos)
Contrary view: Since there is a defense
available to the corporation, that is, if its
failure to organize and commence its business
is due to causes beyond the control of the
corporation as may be determined by the SEC,
therefore, the dissolution is not automatic.
Mentholatum v. Mangaliman (1946): Transacting
business implies a continuity of acts or dealings
in the accomplishment of the purpose for which
the corporation was formed.
Formal organization includes not only the
adoption of the by-laws but also the
establishment of the body which will administer
the affairs of the corporation and exercise its
powers
By-laws should be adopted within one month
of receipt of official notice of the issuance of
the certificate of incorporation, otherwise the
certificate may be suspended or revoked [PD
902-A, Sec. 6 (i)(5)]
Failure to operate for at least 5 consecutive
years after commencement of business -
ground for suspension or revocation of its
corporate franchise or certificate of
incorporation.
Note: Dissolution in this case is not automatic.
[Campos]
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MERCANTILE LAW
The corporation may show that the failure to
commence its business or to continuously
operate is due to causes beyond its control [Sec.
22].
LEGISLATIVE DISSOLUTION
The inherent power of Congress to make laws
carries with it the power to amend or repeal
them. Involuntary corporate dissolution may be
effected through the amendment or repeal of
the Corporation Code. [implied from Section
145, De Leon]
The limitations on the power to dissolve
corporations by legislative enactment are as
follows:
(1) Under the Constitution, the amendment,
alteration, or repeal of the corporate
franchise of a public utility shall be made
only when the common good so requires;
(2) Under Section 145 of the Code, it is provided
that: No right or remedy in favor of or
against any corporation, its stockholders,
members, directors, trustees, or officers, nor
any liability incurred by any such corporation,
stockholders, members, directors, trustees,
or officers, shall be removed or impaired
either by the subsequent dissolution of said
corporation or by any subsequent
amendment or repeal of this Code or of any
part thereof;
(3) While Congress may provide for the
dissolution of a corporation, it cannot impair
the obligation of existing contracts between
the corporation and third persons, or take
away the vested rights of its creditors. [De
Leon]
DISSOLUTION BY THE SEC ON GROUNDS
UNDER EXISTING LAWS
A corporation may be dissolved by the SEC,
upon a verified complaint and after proper
notice and hearing, on the following grounds
[Sec. 6, par. i, PD 902-A]:
Fraud in procuring its certificate of
registration
Serious misrepresentation as to what the
corporation can or is doing to the great
prejudice of or damage to the general public
Refusal to comply or defiance of any lawful
order of the Commission restraining
UP LAW BOC CORPORATION LAW
commission of acts which would amount to a
grave violation of its franchise
Continuous inoperation for a period of at least
five years
Failure to file by-laws within the required
period
Failure to file required reports in appropriate
forms as determined by the Commission
within the prescribed period
Other grounds
Other grounds:
Violation by the corporation of any provision
of the Corporation Code [Sec. 144 BP 68]
In case of a deadlock in a close corporation,
and the SEC deems it proper to order the
dissolution of the corporation as the only
practical solution to the dispute [Sec. 104 BP
68]
METHODS OF LIQUIDATION
Liquidation is the process by which all the assets
of the corporation are converted into liquid
assets (cash) in order to facilitate the payment
of obligations to creditors, and the remaining
balance if any is to be distributed to the
stockholders. It is a proceeding in rem.
BY THE CORPORATION ITSELF
Under Section 122 of the Corporation Code, a
corporation whose corporate existence is
terminated in any manner continues to be a
body corporate for three (3) years after its
dissolution for purposes of prosecuting and
defending suits by and against it and to enable
it to settle and close its affairs, culminating in
the disposition and distribution of its remaining
assets. It may, during the three-year term,
appoint a trustee or a receiver who may act
beyond that period.
Pepsi-Cola Products Philippines, Inc. v. CA
(2004): The termination of the life of a corporate
entity does not by itself cause the extinction or
diminution of the rights and liabilities of such
entity. If the three-year extended life has
expired without a trustee or receiver having
been expressly designated by the corporation,
within that period, the board of directors (or
trustees) itself, may be permitted to so continue
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MERCANTILE LAW
as "trustees" by legal implication to complete
the corporate liquidation.
Alhambra Cigar and Cigarette Mfg. v. SEC (1968):
A corporation under liquidation may not amend
its articles of incorporation to extend its
lifespan. When a corporation is liquidating
pursuant to the statutory period of three years
to liquidate, it is only allowed to continue for the
purpose of final closure of its business and no
other purposes. In fact, within that period, the
corporation is enjoined from continuing the
business for which it was established.
CONVEYANCE TO A TRUSTEE WITHIN A 3-
YEAR PERIOD
From and after any such conveyance by the
corporation of its property in trust for the benefit
of its SH/members/creditors and others in
interest, all interest which the corporation had
in the property terminates, the legal interest
vests in the trustees, and the beneficial interest
in the stockholders, members, creditors or other
persons in interest.
Reburiano v. CA (1999): The trustee (of a
dissolved corporation) may commence a suit
which can proceed to final judgment even
beyond the three-year period (of liquidation) . . .
, no reason can be conceived why a suit already
commenced by the corporation itself during its
existence, not by a mere trustee who, by fiction,
merely continues the legal personality of the
dissolved corporation, should not be accorded
similar treatment to proceed to final
judgment and execution thereof.
Board of Liquidators v Kalaw (1967): Unless the
trusteeship is limited in its duration by the deed of
trust, there is no time limit within which the
trustee must finish liquidation.
BY MANAGEMENT COMMITTEE OR
REHABILITATION RECEIVER
Leyte Asphalt & Mineral Oil Co. Ltd., v. Block
Johnston & Breenbrawn (1928): However, the
mere appointment of a receiver, without
anything more does not result in the dissolution
of the corporation nor bar it from the exercise of
its corporate rights.
UP LAW BOC CORPORATION LAW
Upon five (5) days notice, given after the date
on which the right to file objections as fixed in
the order has expired, the Commission shall
proceed to hear the petition and try any issue
made by the objections filed; and if no such
objection is sufficient, and the material
allegations of the petition are true, it shall
render judgment dissolving the corporation and
directing such disposition of its assets as justice
requires, and may appoint a receiver to collect
such assets and pay the debts of the
corporation [Sec. 119]
LIQUIDATION AFTER THREE YEARS
Phil. Veterans Bank v. Employees Union (2001):
Q: What is the difference between Liquidation
and Rehabilitation?
A: Liquidation is the winding up of a corporation
so that assets are distributed to those entitled
to receive them. It is the process of reducing
assets to cash, discharging liabilities and
dividing surplus or loss. On the other hand,
rehabilitation contemplates a continuance of
corporate life and activities in an effort to
restore and reinstate the corporation to its
former position of successful operation and
solvency. Both cannot be undertaken at the
same time.
Reburiano v CA (1999): If full liquidation can only
be effected after the 3-year period and there is
no trustee, the directors may be permitted to
complete the liquidation by continuing as
trustees by legal implication.
Aguirre vs. FQB+, Inc. (2013): A corporations
board of directors is not rendered functus officio
by its dissolution. Since Section 122 allows a
corporation to continue its existence for a
limited purpose, necessarily there must be a
board that will continue acting for and on behalf
of the dissolved corporation for that purpose.
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MERCANTILE LAW
Other Corporations
CLOSE CORPORATIONS
A close corporation is one whose articles of
incorporation provide that:
(1) All the corporation's issued stock of all
classes, exclusive of treasury shares, shall be
held of record by not more than a specified
number of persons, not exceeding twenty
(20);
(2) All the issued stock of all classes shall be
subject to one or more specified restrictions
on transfer permitted by this Title; and
(3) The corporation shall not list in any stock
exchange or make any public offering of any
of its stock of any class [Sec. 96].
Notes:
A corporation shall not be deemed a close
corporation when at least two-thirds (2/3) of
its voting stock or voting rights is owned or
controlled by another corporation which is not
a close corporation within the meaning of this
Code.
Any corporation may be incorporated as a
close corporation, except mining or oil
companies, stock exchanges, banks, insurance
companies, public utilities, educational
institutions and corporations declared to be
vested with public interest.
The AOI must state that the number of
stockholders shall not exceed 20.
The AOI must contain restriction on the
transfer of issued stocks (which must appear
in the AOI, by-laws and certificate of stock)
San Juan Structural and Steel Fabricators v. CA
(1998): The mere ownership by a single
stockholder or by another corporation of all or
nearly all of the capital stock of a corporation is
not of itself sufficient ground for disregarding
the separate corporate personalities. So too, a
narrow distribution of ownership does not, by
itself, make a close corporation.
When a corporations AOI does not contain the
provisions enumerated under Sec. 96 of the
Code, such corporation is not a close
corporation. It does not become one either, just
because only a few individuals owned 99.866%
of its subscribed capital stock.
UP LAW BOC CORPORATION LAW
General Rule: Free transferability of shares -
Shares of stock so issued are personal property
and may be transferred
Exception:
In close corporations: Considering the special
circumstances attending a close corporation
(e.g. formed by persons who know each other
well, thus they would want to choose the
persons who will be allowed in their group), it is
justifiable and even imperative for its
stockholders to protect themselves from future
conflicts by placing restrictions on the right of
each one of them to transfer his shares to an
outsider.
Restriction on the transfer must NOT be more
onerous than granting the existing SH or
corporation the option to purchase the shares
(Right of First Refusal).
The stocks cannot be listed in the stock
exchange nor be publicly offered.
CHARACTERISTICS OF A CLOSE
CORPORATION
The stockholders themselves can directly
manage the corporation and perform the
functions of directors without need of election
[Sec. 97]:
When they manage, stockholders are liable as
directors;
There is no need to call a meeting to elect
directors;
The stockholders active in the management of
the close corporation are personally liable for
corporate torts unless the corporation has
obtained reasonably adequate liability
insurance [Sec. 100(5)].
VALIDITY OF RESTRICTIONS ON
TRANSFER OF SHARES
Validity of Restrictions [Sec. 98]
Restrictions must appear in the articles of
incorporation and in the by-laws as well as in
the certificate of stock; otherwise, the same
shall not be binding on any purchaser thereof
in good faith.
Restrictions shall not be more onerous than
granting the existing stockholders or the
corporation the option to purchase the shares
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MERCANTILE LAW
of the transferring stockholder with such
reasonable terms, conditions or period stated
therein. After expiration of said period and
upon failure of the existing stockholders or
the corporation to purchase said shares, the
transferring stockholder may sell his shares to
any third person.
Presumptions [Sec. 99]:
If the stock certificate CONSPICUOUSLY
shows the restriction, the purchaser or
transferee is CONCLUSIVELY presumed to
have notice of the restriction, provided this
appears in the AOI.
Where a conclusive presumption of notice
arises, the corporation may, at its option,
refuse to register the transfer, unless
- all the stockholders have consented to the
transfer, or
- the AOI has been properly amended to
remove the restriction.
If it appears in the certificate, but NOT
CONSPICUOUSLY, then although he may be
presumed to have notice of the restriction, he
can prove the contrary.
ISSUANCE OR TRANSFER OF STOCK
IN BREACH OF QUALIFYING
CONDITIONS
If stock of a close corporation is issued or
transferred to any person who is not entitled
under any provision of the articles of
incorporation to be a holder of record of its
stock, and if the certificate for such stock
conspicuously shows the qualifications of the
persons entitled to be holders of record
thereof, such person is conclusively presumed
to have notice of the fact of his ineligibility to
be a stockholder.
If the articles of incorporation of a close
corporation states the number of persons, not
exceeding twenty (20), who are entitled to be
holders of record of its stock, and if the
certificate for such stock conspicuously states
such number, and if the issuance or transfer of
stock to any person would cause the stock to
be held by more than such number of
persons, the person to whom such stock is
issued or transferred is conclusively presumed
to have notice of this fact.
UP LAW BOC CORPORATION LAW
If a stock certificate of any close corporation
conspicuously shows a restriction on transfer
of stock of the corporation, the transferee of
the stock is conclusively presumed to have
notice of the fact that he has acquired stock in
violation of the restriction, if such acquisition
violates the restriction.
Whenever any person to whom stock of a
close corporation has been issued or
transferred has, or is conclusively presumed
under this section to have, notice either (a)
that he is a person not eligible to be a holder
of stock of the corporation, or (b) that transfer
of stock to him would cause the stock of the
corporation to be held by more than the
number of persons permitted by its articles of
incorporation to hold stock of the corporation,
or (c) that the transfer of stock is in violation of
a restriction on transfer of stock, the
corporation may, at its option, refuse to
register the transfer of stock in the name of the
transferee.
The provisions of subsection (4) shall not be
applicable if the transfer of stock, though
contrary to subsections (1), (2) of (3), has been
consented to by all the stockholders of the
close corporation, or if the close corporation
has amended its articles of incorporation in
accordance with this Title.
The term "transfer", as used in this section, is
not limited to a transfer for value.
The provisions of this section shall not impair
any right which the transferee may have to
rescind the transfer or to recover under any
applicable warranty, express or implied [Sec.
99]
WHEN BOARD MEETING IS
UNNECESSARY OR IMPROPERLY
HELD
When Unnecessary Any action by the directors
of a close corporation without a meeting shall
nevertheless be deemed valid if:
Before or after such action is taken, written
consent thereto is signed by all the directors;
or
All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
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MERCANTILE LAW
The directors are accustomed to take informal
action with the express or implied
acquiescence of all the stockholders; or
All the directors have express or implied
knowledge of the action in question and none
of them makes prompt objection thereto in
writing [Sec. 101]
Manuel R. Dulay Enterprises v. CA (1993):
In a close corporation, a board resolution
authorizing the sale or mortgage of the
subject property is not necessary to bind the
corporation for the action of its president. At
any rate, corporate action taken at a board
meeting without proper call or notice in a
close corporation is deemed ratified by the
absent director unless the latter promptly files
his written objection with the secretary of the
corporation after having knowledge of the
meeting.
Dulay's protestations of complete innocence
to the effect that he never participated nor
was even aware of any meeting or resolution
authorizing the mortgage or sale of the
subject premises is difficult to believe. On the
contrary, he is very much privy to the
transactions involved. To begin with, he is an
incorporator and one of the board of directors
designated at the time of the organization of
the corporation. In ordinary parlance, the said
entity is loosely referred to as a "family
corporation."
Here, the sale of real property was contracted
by the president of a close corporation with
the knowledge and acquiescence of its board
of directors.
When Improperly Held
When a directors meeting is held without
proper call or notice, an action taken therein
within the corporate powers is deemed
ratified by a director who failed to attend.
UNLESS he promptly files his written
objection with the secretary of the corporation
after having knowledge thereof [Sec. 101]
PRE-EMPTIVE RIGHT
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be
issued, including reissuance of treasury shares,
whether for money, property or personal services,
UP LAW BOC CORPORATION LAW MERCANTILE LAW

or in payment of corporate debts, UNLESS the

articles of incorporation provide otherwise [Sec.
102].

AMENDMENT OF ARTICLES OF
INCORPORATION
Amendment to the AOI which seeks to:
delete or remove any provision required to be
contained in the AOI of Close Corporations
(under the Title on Close Corporations); or
to reduce a quorum or voting requirement
stated in said AOI

Requires the affirmative vote of at least 2/3 of

the outstanding capital stock, whether with or
without voting rights, or of such greater
proportion of shares as may be specifically
provided in the AOI at a meeting duly called.

DEADLOCKS
Requisites
(1) The directors or stockholders are so divided
respecting the management of the
corporation's business and affairs
(2) The votes required for any corporate action
cannot be obtained that the business and
affairs of the corporation can no longer be
conducted to the advantage of the
stockholders generally

Powers of the SEC in case of Deadlock in Close

Corporations
Cancel or alter any provision in the articles of
incorporation or by-laws
Cancel, alter or enjoin any resolution of the
corporation
Direct or prohibit any act of the corporation
Require the purchase at their fair value of
shares of any stockholder either by any
stockholder or by the corporation regardless
of the availability of unrestricted retained
earnings.
Appoint a provisional director
Dissolve the corporation
Granting such other relief as the
circumstances may warrant.

PAGE 163
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Close Corporations Regular Corporations

Management / Board Authority
There can be classification of directors into one or There are no classification of board of directors
more classes, each of whom may be voted for and
elected solely by a particular class of stock; and
The articles of incorporation of a close corporation Corporate Powers devolved upon board of
may provide that the business of the corporation directors whose powers are executed by officers.
shall be managed by the stockholders of the Cannot provide that it be managed by
corporation rather than by a board of directors. So stockholders
long as this provision continues in effect:
Board of directors must be elected in a
No meeting of stockholders need be called to elect stockholders meeting
directors.
Stockholders of a corporation are separate and
Unless the context clearly requires otherwise, the distinct from directors
stockholders of the corporation shall be deemed to
be directors for the purpose of applying the
provisions of this Code.

The stockholders of the corporation shall be

subject to all liabilities of directors.
The articles of incorporation may likewise provide
that all officers or employees or that specified
officers or employees shall be elected or appointed
by the stockholders, instead of by the board of
directors.
Meetings
Unless the by-laws provide otherwise, any action
by the directors of a close corporation without a
meeting shall nevertheless be deemed valid if:
(1) Before or after such action is taken, written
consent thereto is signed by all the directors; or
(2) All the stockholders have actual or implied
knowledge of the action and make no prompt
objection thereto in writing; or
(3) The directors are accustomed to take informal
action with the express or implied acquiescence
of all the stockholders; or
(4) All the directors have express or implied
knowledge of the action in question and none of
them makes prompt objection thereto in
writing.
If a director's meeting is held without proper call or
notice, an action taken therein within the corporate
powers is deemed ratified by a director who failed
to attend, unless he promptly files his written
objection with the secretary of the corporation
after having knowledge thereof.
Officers must be elected by the Board of Directors
The directors or trustees shall not act individually
nor separately but as a body in a lawful meeting.
They will act only after discussion and deliberation
of matters before them. Contracts entered into
without a formal board resolution does not bind
the corporation except when ratified or when
majority of the board has knowledge of the
contract and the contract benefited the
corporation.
Absence of a prompt objection in writing does not
ratify acts done by directors without a valid
meeting. There must be express or implied
ratification.
Express ratification may consist of a Board
Resolution to that effect
Implied ratification may consist of acceptance of
benefits from said unauthorized act while having
knowledge of said act

PAGE 164
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Close Corporations
Voting / Quorum
The AOI may provide for a classification of
directors into one or more classes, each of which
may be voted for and elected solely by a particular
class of stock.
The AOI may provide for a greater quorum or
voting requirements in meetings of stockholders or
directors than those provided in this Code.
Pre-emptive Right
The pre-emptive right of stockholders in close
corporations shall extend to all stock to be issued,
including reissuance of treasury shares, whether
for money, property or personal services, or in
payment of corporate debts, unless the articles of
incorporation provide otherwise.
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MERCANTILE LAW
Regular Corporations
Failure to give notice would render a meeting
voidable.
Attendance to a meeting despite want of notice
will be deemed implied waiver
All proceedings had and any business transacted
at any meeting of the stockholders or members, if
within the powers or authority of the corporation,
shall be valid even if the meeting be improperly
held or called, provided all the stockholders or
members of the corporation are present or duly
represented at the meeting. (51)
No share may be deprived of voting rights, except
Preferred or Redeemable shares, unless otherwise
provided by the Code
There shall always be a class/series of shares
which have COMPLETE VOTING RIGHTS
EACH SHARE SHALL BE EQUAL IN ALL
RESPECTS TO EVERY OTHER SHARE, except as
otherwise provided in the AOI
For Board of directors, the by-laws or AOI can
provide for a greater majority in quorum
For stockholders, the AOI can provide for a
different percentage in quorum
Limitations on the exercise of pre-emptive right:
(a) Such pre-emptive right shall not extend to
shares to be issued in compliance with laws
requiring stock offerings or minimum stock
ownership by the public;
(b) Not extend to shares to be issued in good faith
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
Shall not take effect if denied in the Articles of
Incorporation or an amendment thereto.
UP LAW BOC CORPORATION LAW MERCANTILE LAW

Close Corporations Regular Corporations

Transferability
Restrictions on the right to transfer shares must
appear in the AOI and in the by-laws as well as in
the certificate of stock otherwise the same shall
not be binding on any purchaser thereof in good
faith
Withdrawal Right
Any stockholder of a close corporation may, for any
reason, compel the said corporation to purchase
his shares at their fair value, which shall not be less
than their par or issued value, when the
corporation has sufficient assets in its books to
cover its debts and liabilities exclusive of capital
stock
Any stockholder of a close corporation may, by
written petition to the SEC, compel the dissolution
of such corporation whenever:
(a) Any of acts of the directors, officers or those in
control of the corporation is illegal, or
fraudulent, or dishonest, or oppressive or
unfairly prejudicial to the corporation or any
stockholder, or
(b) Corporate assets are being misapplied or
wasted.
Restrictions on the right to transfer not allowed
Stockholders may require the corporation to buy-
back their shares at fair value when the
Corporation has Unrestricted Retained Earnings:
(a) In case of any amendment to the articles of
incorporation which has the effect of:
(i) changing or restricting the rights of any
stockholder or class of shares, or
(ii) authorizing preferences in any respect
superior to those of outstanding shares of
any class, or
(iii) extending or shortening the term of
corporate existence
(b) In case of sale, lease, exchange, transfer,
mortgage, pledge or other disposition of all or
substantially all of the corporate property and
assets as provided in the Code; and
(c) In case of merger or consolidation
(d) Investment of corporate funds in another
corporation or businessDiversion of funds of
corporation from primary purpose to secondary
purpose (41)

The corporation may buy-back shares of

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

PAGE 166
UP LAW BOC CORPORATION LAW MERCANTILE LAW

NON-STOCK CORPORATIONS Procedure for the Plan for Distribution

Board of Trustees, by majority vote in a
resolution, shall adopt a plan for
DEFINITION distribution of the assets of the
One where no part of its income is distributable
corporation
as dividends to its members, trustees, or
Written notice for a meeting must be
officers, subject to the provisions of this Code on
sent to all members entitled to vote,
dissolution. [Sec.87]
stating the time and place of such
meeting and the purpose thereof
PURPOSES At such meeting, the plan must be
Charitable approved by 2/3 votes of the members
Religious having the right to vote, who are
Educational present or represented by proxy
Professional [Villanueva]
Cultural
Fraternal RELIGIOUS CORPORATIONS
Literary Corporation Sole [Sec. 110]
Scientific A special form of corporation, usually
Social associated with clergy and consists of one
Civic services person only and his successors, who are
Similar purposes, such trade, industry or incorporated by law to give some legal
agriculture and like chambers, or capacities and advantages.
combinations thereof A registered corporation sole can acquire land
if its members constitute at least 60%
TREATMENT OF PROFITS Filipinos [SEC Opinion, 8 August 1994].
Any profit which a non-stock corporation may
obtain as an incident to its operations shall, Nationality
whenever necessary or proper, be used for the Roman Catholic Apostolic Church v. Land
furtherance of the purpose or purposes for Registration Commission (1957): A corporation
which the corporation was organized. [Sec. sole does not have any nationality but for
87,2nd sentence] purposes of applying our nationalization laws,
nationality is determined by the nationality of the
DISTRIBUTION OF ASSETS UPON members.
DISSOLUTION
Order of Distribution of Assets Upon Dissolution Religious Societies
of Non-Stock Corporation Non-stock corporation formed by a religious
society, group, diocese, synod, or district of any
All its creditors shall be paid.
religious denomination, sect, or church after
Assets held subject to return on dissolution getting the approval of 2/3 of its members.
shall be delivered back to the givers.
Assets held for charitable, religious purposes,
etc., without a condition for their return on Iglesia Evangelica Metodista En Las Filipinas
dissolution, shall be conveyed to one or more (Corporation Sole) Inc., et al v. Bishop Nathanael
organizations engaged in similar activities as Lazaro, et al (2010): The Corporation Code
dissolved corporation provides no specific mechanism for amending
the articles of incorporation of a corporation
All other assets shall be distributed to
sole. But Section 109 allows the application to
members, as provided in the AOI or by-laws
religious corporations of the general provisions
[Sec. 94]
governing non-stock corporations.

For non-stock corporations, the power to amend

its AOI lies in its members. The code requires

PAGE 167
UP LAW BOC CORPORATION LAW
two-thirds of their votes for the approval of such
an amendment. So how will this requirement
apply to a corporation sole that has technically
but one member (the head of the religious
organization) who holds in his hands its broad
corporate powers over the properties, rights,
and interests of his religious organization?
Although a non-stock corporation has a
personality that is distinct from those of its
members who established it, its AOI cannot be
amended solely through the action of its
BOT. The amendment needs the concurrence
of at least two-thirds of its membership. If such
approval mechanism is made to operate in a
corporation sole, its one member in whom all the
powers of the corporation technically belongs,
needs to get the concurrence of two-thirds of its
membership. The one member is but a trustee
of its membership.
There is no point to dissolving the corporation
sole of one member to enable the corporation
aggregate to emerge from it. The one member,
with the concurrence of two-thirds of the
membership of the organization for whom he
acts as trustee, can self-will the
amendment. He can, with membership
concurrence, increase the technical number of
the members of the corporation from sole or
one to the greater number authorized by its
amended articles.
FOREIGN CORPORATIONS
Foreign Corporation are those formed,
organized, or existing under any laws other than
those of the Philippines and whose laws allow
Filipino citizens and corporations to do business
in its own country or state [Sec. 123].
BASES OF AUTHORITY OVER
FOREIGN CORPORATIONS
CONSENT
As a rule, a foreign corporation can have no
legal existence or status beyond the bounds of
the State or sovereignty by which it is created or
incorporated and organized. It exists only in
contemplation of law and by force of the law
and where that law ceases to operate, the
corporation can have no existence. This
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MERCANTILE LAW
principle, however, does not prevent a
corporation from acting in another State or
country with the latters express or implied
consent. This is the consent doctrine which is
provided in Sections 125 and 126. But every
power which a corporation exercises as such in
another State depends for its validity upon the
laws of the sovereignty in which it is exercised. A
corporation can exercise none of the functions
and privileges conferred by its charter in
another State or country except by the comity
and consent of such State or country. (De Leon)
DOCTRINE OF DOING BUSINESS (RELATE
TO DEFINITION UNDER THE FOREIGN
INVESTMENTS ACT, R.A. NO. 7042)
Tests of Doing Business in the Philippines
(Asked in 98 and 02)
Twin Characterization Test - Mentholatum v.
Mangaliman (1941)
Under the Continuity Test, doing business
implies a continuity of commercial dealings
and arrangements, or performance of acts
normally incidental to the purpose and object
of the organization.
Under the Substance Test, a foreign
corporation is doing business in the country if
it is continuing the body or substance of the
enterprise of business for which it was
organized
Contract test - Pacific Vegetable Oil v. Singson
(1955): A foreign corporation is doing business
in the Philippines if the contracts entered into
by the foreign corporation or by an agent acting
under the control and direction of the foreign
corporation are consummated in the
Philippines.
Doing Business Under the Foreign
investment Act of 1991 [Sec. 3(d), RA 7042)
(Asked in 98 and 02]
Doing Business
Soliciting orders, service contracts, or opening
offices;
Appointing representatives, distributors
domiciled in the Philippines or who stay for a
period or periods totaling 180 days or more;
UP LAW BOC CORPORATION LAW
Participating in the management, supervision,
or control of any domestic business, firm,
entity, or corporation in the Philippines;
Any act or acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to some extent the performance
of acts or works or the exercise of some
functions, normally incident to and in
progressive prosecution of the purpose and
object of its organization.
Cargill v. Intra-Strata Assurance Corporation
(2010): Doing business in the Philippines
relates to acts that imply a continuity of
commercial dealings or arrangements, and
contemplate to that extent the performance of
acts or works, or the exercise of some of the
functions normally incident to, and in
progressive prosecution of, commercial gain or
of the purpose and object of the business
organization. It also relates to business
activities not only casual, but so systematic
and regular as to manifest continuity and
permanence of activity to constitute doing
business here To constitute doing business in
the Philippines, the activity should involve
profit-making.
European Resources and Technologies Inc. v.
Ingenieuburo Birkhanh + Nolte (2004): A single
act or transaction may be considered as doing
business when a corporation performs acts for
which it was created or exercises some of the
functions for which it was organized. The act of
participating in a bidding process constitutes
doing business because it shows the foreign
corporations intention to engage in business in
the Philippines. In this regard, it is the
performance by a foreign corporation of the acts
for which it was created, regardless of volume of
business, that determines whether a foreign
corporation needs a license or not.
Not Doing Business
Mere investment as shareholder and exercise
of rights as investor;
Having a nominee director or officer to
represent its interest in the corporation;
Appointing a representative or distributor
which transacts business in its own name and
for its own account.
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MERCANTILE LAW
Jurisprudential Rules on Not Doing
Business in the Philippines
Agilent Tech. Singapore Ltd. v. Integrated Silicon
Tech. Phils. Corp. (2004): Products
manufactured off-shore and returned back to
foreign corporation
Marshall-Wells Co. v. Henry Eiser & Co. (1924):
Single isolated transaction.
Antam Consolidated v. CA (1986): Multiple
transactions are still considered a single
transaction where there are constantly failed
attempts in complying with the contract by one
of the contracting parties.
General Garments v. Director of Patents (1971):
Trademark protection; foreign corporations not
doing business are merely protecting their
property rights.
Le Chemise Lacoste v. Fernandez (1984): A
foreign firm which does business through
middlemen acting on their own names shall not
be deemed doing business in the Philippines.
Cargill v. Intra-Strata Assurance Corporation
(2010): A foreign company that merely imports
goods from a Philippine exporter, without
opening an office or appointing an agent in the
Philippines, is NOT doing business in the
Philippines.
NECESSITY OF A LICENSE TO DO
BUSINESS
REQUISITES FOR ISSUANCE OF A LICENSE
The foreign corporation should file a copy of
its articles of incorporation and by-laws, and a
verified application [See Sec. 125]
accompanied by the following:
- Name and address of its designated
resident agent who will receive summons
and notices for the corporation; a special
power of attorney should also be submitted
for such purpose
- An agreement that if it ceases to transact
business or if there is no more resident
agent, summons shall then be served
through the SEC
- Oath of Reciprocity stating that the foreign
corporations country allows Filipino citizens
UP LAW BOC CORPORATION LAW
and corporations to do business in said
country
Within 60 days from issuance of license, the
corporation should deposit at least P100,000
(cash, property, bond) for the benefit of
creditors subject to further deposit every six
months (See Sec. 126).
Avon Insurance PLC v. CA (1997): Before a
foreign corporation can transact business in the
Philippines, it must first obtain a license to
transact business here and secure the proper
authorizations under existing law. If a foreign
corporation engages in business activities
without the necessary requirements, it opens
itself to court actions against it, but it shall not
be allowed maintain or intervene in an action,
suit or proceeding for its own account in any
court or tribunal or agency in the Philippines.
The purpose of the law in requiring that foreign
corporations doing business in the country be
licensed to do so, is to subject the foreign
corporations doing business in the Philippines
to the jurisdiction of the courts, otherwise, a
foreign corporation illegally doing business here
because of its refusal or neglect to obtain the
required license and authority to do business
may successfully though unfairly plead such
neglect or illegal act so as to avoid service and
thereby impugn the jurisdiction of the local
courts.
The same danger does not exist among foreign
corporations that are indubitably not doing
business in the Philippines. Indeed, if a foreign
corporation does not do business here, there
would be no reason for it to be subject to the
States regulation.
RESIDENT AGENT
Resident Agent is an individual, who must be of
good moral character and of sound financial
standing, residing in the Philippines, or a
domestic corporation lawfully transacting
business in the Philippines, designated in a
written power of attorney by a foreign
corporation authorized to do business in the
Philippines, on whom any summons and other
legal processes may be served in all actions or
other legal proceedings against the foreign
corporation [Sec. 127-128].
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MERCANTILE LAW
PERSONALITY TO SUE
A foreign corporation transacting business in
the Philippines is required to secure a license to
have the personality to sue before, or intervene
in, any court or administrative proceeding.
[Campos; Sec. 133]
Agilent Technologies Singapore v. Integrated
Silicon Technologies (2004):
The principles regarding the right of a foreign
corporation to bring suit in Philippine courts
may thus be condensed in four statements:
if a foreign corporation does business in the
Philippines without a license, it cannot sue
before the Philippine courts [Sec. 133,
Corporation Code];
if a foreign corporation is not doing business
in the Philippines, it needs no license to sue
before Philippine courts on an isolated
transaction or on a cause of action entirely
independent of any business transaction
[Eastboard Navigation, Ltd. v. Juan Ysmael&
Company, Inc., 102 Phil. 1, 1957];
if a foreign corporation does business in the
Philippines without a license, a Philippine
citizen or entity which has contracted with
said corporation may be estopped from
challenging the foreign corporations
corporate personality in a suit brought before
Philippine courts [Merrill Lynch Futures v.
Court of Appeals, G.R. No. 97816, 24 July 1992,
211 SCRA 824]; and
if a foreign corporation does business in the
Philippines with the required license, it can
sue before Philippine courts on any
transaction.
SUABILITY OF FOREIGN
CORPORATIONS
A Foreign Corporation whether or not doing
business in the Philippines may be sued for acts
done against persons in the Philippines.
Facilities Management Corporation v. De La Osa
(1979): Indeed if a foreign corporation, not
engaged in business in the Philippines, is not
barred from seeking redress from courts in the
Philippines, a fortiori, that same corporation
cannot claim exemption from being sued in
Philippine courts for acts done against a person
or persons in the Philippines
UP LAW BOC CORPORATION LAW
INSTANCES WHEN UNLICENSED
FOREIGN CORPORATIONS MAY BE
ALLOWED TO SUE
Isolated transactions, i.e. not doing business
in the Philippines, [Sec. 133, Corporation Code];
Action to protect good name, goodwill, and
reputation of a foreign corporation;
The subject contracts provide that Philippine
courts will be the venue to controversies;
A license subsequently granted enables the
foreign corporation to sue on contracts
executed before the grant of the license;
Recovery of misdelivered property;
Where the unlicensed foreign corporation has
a domestic corporation.
Merrill Lynch Futures v. Court of Appeals (1992):
When the Philippine citizen or entity is estopped
from challenging the foreign corporations
personality to sue
Status Consequence
Doing Business in the Can sue and be sued
PH, WITH a license
Doing Business in the Cannot sue, but may
PH, WITHOUT a license be sued in the PH
NOT doing business in May sue;
the PH, on isolated may be sued
transactions [Facilities Management
v. Dela Osa 89 SCRA
131]
GROUNDS FOR REVOCATION OF
LICENSE
UNDER THE CORPORATION CODE
Failure to file its annual report or pay any fees
as required by this Code;
Failure to appoint and maintain a resident
agent in the Philippines as required by this
Title;
Failure, after change of its resident agent or of
his address, to submit to the Securities and
Exchange Commission a statement of such
change as required by this Title;
Failure to submit to the Securities and
Exchange Commission an authenticated copy
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MERCANTILE LAW
of any amendment to its articles of
incorporation or by laws or of any articles of
merger or consolidation within the time
prescribed by this Title;
A misrepresentation of any material matter in
any application, report, affidavit or other
document submitted by such corporation
pursuant to this Title;
Failure to pay any and all taxes, imposts,
assessments or penalties, if any, lawfully due
to the Philippine Government or any of its
agencies or political subdivisions;
Transacting business in the Philippines
outside of the purpose or purposes for which
such corporation is authorized under its
license;
Transacting business in the Philippines as
agent of or acting for and in behalf of any
foreign corporation or entity not duly licensed
to do business in the Philippines; or
Any other ground as would render it unfit to
transact business in the Philippines [Sec. 134]
UNDER SPECIAL LAWS
Insurance Code
The Insurance Commissioner is authorized to
suspend or revoke all certificates of authority
granted to an insurance company, whether
domestic or foreign, when:
it is in unsound condition; or
it has failed to comply with the provisions of
law or regulations obligatory upon it; or
its condition or method of business is such as
to render its proceedings hazardous to the
public or to its policyholders; or
its paid-up capital stock, in the case of a
foreign company, is impaired or deficient, or
that the margin of solvency required of such
company is deficient [Sec. 247, Insurance
Code]
General Banking Act
The Monetary Board may revoke the license to
transact business in the Philippines of any
foreign bank, if it finds that:
the foreign bank is insolvent; or
in imminent danger thereof; or
its continuance in business will involve
probable loss to those transacting business
with it.
UP LAW BOC CORPORATION LAW
Mergers and
Consolidations
DEFINITION AND CONCEPT
Merger a corporation absorbs the other and
remains in existence while the others are
dissolved. [Sec.76]
One of the constituent corporations remains
as an existing juridical person, whereas the
other corporation shall cease to exist. Merger
is the disappearance of one of the
corporations [generally by amending the
articles of incorporation and shortening its
term of existence (Sec.40)] with the other
corporation acquiring all the assets, rights of
action, and assuming all the liabilities of the
disappearing corporation.
Consolidation a new corporation is created,
and consolidating corporations are extinguished
[Sec.76]
If there is consolidation, there will be
disappearance of all constituent corporations
with the emergence of a new corporate entity
which shall obtain all the assets of the
disappearing corporations, and likewise shall
assume all their liabilities.
CONSTITUENT VS.
CONSOLIDATED CORPORATION
Constituent Corporations the parties to a
merger or consolidation
Consolidated Corporation - The new single
corporation created through consolidation.
Surviving Corporation one of the constituent
corporations which remain in existence after the
merger
PLAN OF MERGER OR
CONSOLIDATION [SEC. 76]
Each of the constituent corporations must draw
up a Plan of Merger or Consolidation which
shall set forth:
Names of the corporation involved;
Terms and mode of carrying it;
Statement of changes, if any, in the present
articles of the surviving corporation to be
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MERCANTILE LAW
formed in the case of merger; and with
respect to the consolidated corporation in
case of consolidation
ARTICLES OF MERGER OR
CONSOLIDATION
Each of the constituent corporation shall
execute Articles of Merger or Consolidation
signed by the president/vice-president, and
certified by the secretary/assistant secretary
setting forth:
Plan of merger or consolidation;
For stock corporation, the number of shares
outstanding; for non-stock, the number of
members;
As to each corporation, number of shares or
members voting for and against such plan
respectively.
The Articles of Merger or Consolidation:
take the place of the Articles of Incorporation
of the consolidated corporation; or
amend the Articles of Incorporation of the
surviving corporation.
PROCEDURE
Approval by majority vote of each of the board
of directors or trustees of the constituent
corporations of the plan of merger or
consolidation.
Approval by the stockholders or members of
each of such corporations. The affirmative
vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock of each corporation in the case of stock
corporations or at least two-thirds (2/3) of the
members in the case of non-stock
corporations shall be necessary for the
approval of such plan.
o Holders of non-voting shares are entitled to
vote on the plan. [Sec. 6, par. 6(6)]
Notice of such meetings shall be given to all
stockholders or members of the respective
corporations, at least two (2) weeks prior to
the date of the meeting, either personally or
by registered mail. Said notice shall state the
purpose of the meeting and shall include a
copy or a summary of the plan of merger or
consolidation.
Any dissenting stockholder in stock
corporations may exercise his appraisal right
UP LAW BOC CORPORATION LAW
in accordance with the Code. Provided, that if
after the approval by the stockholders of such
plan, the board of directors decides to
abandon the plan, the appraisal right shall be
extinguished.
Amendment to the plan of merger or
consolidation may be made by approval of the
majority vote of the respective boards of
directors or trustees of all the constituent
corporations and ratified by the affirmative
vote of stockholders representing at least
two-thirds (2/3) of the outstanding capital
stock or of two-thirds (2/3) of the members of
each of the constituent corporations. Such
plan, together with any amendment, shall be
considered as the agreement of merger or
consolidation.
Articles of Merger or Articles of Consolidation
shall be executed by each of the constituent
corporations.
Submission of Four (4) copies of the Articles
of Merger or Articles of Consolidation to the
SEC for approval.
o Mergers and consolidations of corporations
governed by special laws requires a
recommendation from the appropriate
government agency [Sec. 79 (1)]
If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least
two (2) weeks before.
Issuance of certificate of merger or
consolidation.
EFFECTIVITY
Upon issuance of the certificate of merger or
consolidation, such merger or consolidation
shall become effective [Sec. 79].
PNB v. Andrada Electric & Engr. Co., Inc. (2002):
Merger or consolidation does not become
effective by mere agreement of the constituent
corporations. The approval of the SEC is
required.
Notwithstanding Section 79, parties may
stipulate a specific effective date of merger (or
consolidation) where no third party will be
prejudiced [SEC Opinion No. 09-13, July 1, 2009].
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MERCANTILE LAW
LIMITATIONS
In the case of merger or consolidation of banks
or banking institutions, building and loan
associations, trust companies, insurance
companies, public utilities, educational
institutions and other special corporations
governed by special laws, the favorable
recommendation of the appropriate
government agency shall first be obtained [Sec.
79]
EFFECTS [SEC. 80]
The constituent corporations shall become a
single corporation.
The separate existence of the constituents
shall cease, except that of the surviving or the
consolidated corporation.
o The absorbed or constituent corporations
are ipso facto dissolved by operation of law
[SEC Opinion, July 16, 1981]; there is no
liquidation of the assets of the dissolved
corporations [Campos].
The surviving or the consolidated corporation
shall possess all the rights, privileges,
immunities and powers and shall be subject
to all the duties and liabilities of a
corporation.
The surviving or the consolidated corporation
shall possess all rights, privileges, immunities
and franchises of each constituent
corporation and the properties shall be
deemed transferred to and vested in the
surviving or consolidated corporation without
further act or deed.
All liabilities of the constituents shall pertain
to the surviving or the consolidated
corporation [assumption of liability is
automatic [De Leon; Campos]].
Any claim, action or proceeding pending by or
against any of the constituent corporations
may be prosecuted by or against the surviving
or consolidated corporation; and
The rights of the creditors or lien upon the
property of any of each constituent
corporation shall not be impaired by such
merger or consolidation.
UP LAW BOC SECURITIES REGULATION CODE
State policy
Section 2. Declaration of State Policy. The State
shall
(1) Establish a socially conscious, free
market that regulates itself;
(2) Encourage the widest participation of
ownership in enterprises;
(3) Enhance the democratization of wealth;
(4) Promote the development of the capital
market;
(5) Protect investors;
(6) Ensure full and fair disclosure about
securities;
(7) Minimize if not totally eliminate insider
trading and other fraudulent or
manipulative devices and practices
which create distortions in the free
market
Securities required to be
registered
General Rule: Securities shall not be sold or
offered for sale or distribution to the public
within the Philippines, without a registration
statement duly filed with and approved by the
Commission [Sec. 8.1]
The Securities Regulation Code (SRC)
regulates public offering within the
Philippines.
Exceptions:
(1) Exempt securities [Sec. 9]
(a) Any security issued or guaranteed by the
Government of the Philippines/ its
(2) Exempt transactions
political subdivision or agency/its
instrumentality/ or any person controlled
or supervised thereby;
Rationale for the exception: The public
does not need protection from the
government itself. The government will
always be solvent to pay its obligations
because of its ability to raise revenues
through taxation.
(b) Any security issued or guaranteed by the
government of any country with which the
Philippines maintains diplomatic
relations, or by any state, province or
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MERCANTILE LAW
political subdivision thereof on the basis
of reciprocity: Provided, That the
Commission may require compliance with
the form and content for disclosures the
Commission may prescribe;
Rationale: This is rooted in comity
among nations.
(c) Certificates issued by a receiver or by a
trustee in bankruptcy duly approved by
the proper adjudicatory body;
Rationale: This is not a public offering.
Besides, protection is already afforded
by that proper adjudicatory body and
additional SEC protection is not
necessary.
(d) Any security or its derivatives the sale or
transfer of which, by law, is under the
supervision and regulation of the Office of
the Insurance Commission, Housing and
Land Use Rule Regulatory Board, or the
Bureau of Internal Revenue.
Rationale: The issuers are governmental
agencies covered by exception (a) above.
SEC protection would be a duplication.
(e) Any security issued by a bank except its
own shares of stock [Sec. 9.1]
Rationale: Banks are under the
supervision of the Bangko Sentral. SEC
protection is a duplication.
(f) Any class of security with respect to which
the SEC finds that registration is not
necessary in the public interest and for
the protection of investors [Sec. 9.2]
NOTE: The exemption of securities by
the SEC must be made through the
issuance of a rule or regulation [Sec.
9.2]
(a) At any judicial sale, or sale by an executor,
administrator, guardian or receiver or
trustee in insolvency or bankruptcy.
Rationale for exclusion: A court will
presumably not order the sale if the
public will be prejudiced thereby.
(b) By or for the account of a pledge holder,
or mortgagee or any of a pledge lien
holder selling or offering for sale or
delivery in the ordinary course of business
and not for the purpose of avoiding the
provision of this Code, to liquidate a bona
UP LAW BOC SECURITIES REGULATION CODE
fide debt, a security pledged in good faith
as security for such debt.
Rationale: This is not a voluntary sale
contemplated by the SRC.
(c) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
thereof, or by his representative for the
owners account, such sale or offer for
sale, subscription or delivery not being
made in the course of repeated and
successive transaction of a like character
by such owner, or on his account by such
representative and such owner or
representative not being the underwriter
of such security.
Rationale: Isolated and not meant to be
an ongoing public offering.
(d) The distribution by a corporation actively
engaged in the business authorized by its
articles of incorporation, of securities to its
stockholders or other security holders as a
stock dividend or other distribution out of
surplus.
Rationale: The offerees are not the
public but shareholders already familiar
with their company.
(e) The sale of capital stock of a corporation
to its own stockholders exclusively, where
no commission or other remuneration is
paid or given directly or indirectly in
connection with the sale of such capital
stock.
Rationale: Same as (d) above.
(f) The issuance of bonds or notes secured by
mortgage upon real estate or tangible
personal property, when the entire
mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale.
Rationale: This is not a public sale.
(g) The issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to make
such conversion: Provided, That the
security so surrendered has been
registered under this Code or was, when
sold, exempt from the provision of this
Code, and that the security issued and
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MERCANTILE LAW
delivered in exchange, if sold at the
conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under
this Code. Upon such conversion the par
value of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered
in such exchange are sold.
Rationale: The SEC has already
registered the convertible security and
presumably also passed upon the
security to be issued upon conversion.
(h) Brokers transaction, executed upon
customers orders, on any registered
Exchange or other trading market.
Rationale: If brokers transactions are
registered each time, the transactions on
the exchange will be unduly hampered.
Besides, the brokers are subject to a
code of conduct protective of the
interest of the investors.
(i) Subscriptions for shares of the capitals
stocks of a corporation prior to the
incorporation thereof or in pursuance of
an increase in its authorized capital stocks
under the Corporation Code, when no
expense is incurred, or no commission,
compensation or remuneration is paid or
given in connection with the sale or
disposition of such securities, and only
when the purpose for soliciting, giving or
taking of such subscription is to comply
with the requirements of such law as to
the percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized capital
increased.
Rationale: This is not a public offering.
Besides, the SEC is involved in the
subscription process, as a regulator.
(j) The exchange of securities by the issuer
with the existing security holders
exclusively, where no commission or other
remuneration is paid or given directly or
indirectly for soliciting such exchange.
Rationale: This is not a public offering.
(k) The sale of securities by an issuer to fewer
than twenty (20) persons in the
UP LAW BOC SECURITIES REGULATION CODE
Philippines during any twelve-month
period.
Rationale: This is not a public offering
but a private placement.
(l) The sale of securities to any number of the
following qualified buyers:
(i) Bank;
(ii) Registered investment house;
(iii) Insurance company;
(iv) Pension fund or retirement plan
maintained by the Government of the
Philippines or any political subdivision
thereof or managed by a bank or other
persons authorized by the Bangko
Sentral to engage in trust functions;
(v) Investment company or;
(vi) Such other person as the Commission
may by rule determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in financial
and business matters, or amount of
assets under management. [Sec. 10.1]
Rationale: These are sophisticated
investors that could fend for themselves.
(m) Any transaction with respect to which the
SEC finds that registration is not
necessary in the public interest and
protection of investors such as by the
reason of the small amount involved or
the limited character of the public offering
[Sec. 10.2]
NOTE: Application for exemption under Section
10 must be accompanied by:
(1) A notice identifying the exemption relied
upon;
(2) Payment of fee equivalent to 1/10 of 1% of
the maximum value aggregate price or
issued value of the securities.
Sec v. Prosperity.com, Inc. (2012):
[This case involves the application of
the Howey test in order to determine if a
particular transaction is an investment
contract.] The sole issue is whether or not
Prosperity.com Inc.s (PCI) scheme constitutes
an investment contract that requires
registration under the SRC.
The SRC treats investment contracts as
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MERCANTILE LAW
securities that have to be registered with the
SEC before they can be distributed and sold. An
investment contract is a contract, transaction, or
scheme where a person invests his money in a
common enterprise and is led to expect profits
primarily from the efforts of others.
Apart from the definition which the IRR
provides, Philippine jurisprudence has so far not
done more to add to the same. Of course, the
United States Supreme Court, grappling with
the problem, has on several occasions discussed
the nature of investment contracts. That courts
rulings, while not binding in the Philippines,
enjoy some degree of persuasiveness insofar as
they are logical and consistent with the
countrys best interests.
The US SC held in Securities and Exchange
Commission v. W.J. Howey Co. (1946) that, for an
investment contract to exist, the following
elements, referred to as the HOWEY TEST must
concur:
(1) a contract, transaction, or scheme;
(2) an investment of money;
(3) investment is made in a common enterprise;
(4) expectation of profits; and
(5) profits arising primarily from the efforts of
others.
Thus, to sustain the SEC position in this case,
PCIs scheme or contract with its buyers must
have all these elements.
Power Homes Unlimited Corporation v. Sec and
Manero (2008):
An investment contract is defined in the
Amended IRR of R.A. No. 8799 (SRC) as a
contract, transaction or scheme (collectively
contract) whereby a person invests his money
in a common enterprise and is led to expect
profits primarily from the efforts of others.
Although the proponents must establish all four
elements, the US Supreme Court stressed that
the Howey Test embodies a flexible rather than
a static principle, one that is capable of
adaptation to meet the countless and variable
schemes devised by those who seek the use of
the money of others on the promise of profits.
After Howey came the 1973 US case of SEC v.
Glenn W. Turner Enterprises, Inc. et al. In this
UP LAW BOC SECURITIES REGULATION CODE
case, the 9th Circuit of the US Court of Appeals
ruled that the element that profits must come
solely from the efforts of others should not be
given a strict interpretation. It held that a literal
reading of the requirement solely would lead
to unrealistic results. It reasoned out that its
flexible reading is in accord with the statutory
policy of affording broad protection to the
public. Our RA 8799 (SRC) appears to follow this
flexible concept for it defines an investment
contract as a contract, transaction or scheme
whereby a person invests his money in a
common enterprise and is led to expect profits
not solely but primarily from the efforts of
others.
Thus, to be a security subject to regulation by
the SEC, an investment contract in our
jurisdiction must be proved to be: (1) an
investment of money, (2) in a common
enterprise, (3) with expectation of profits,
(4) primarily from efforts of others.
Procedure for registration
of securities
(1) Filing of a sworn registration statement with
the SEC [Sec. 12.1]
Shall include any prospectus required or
permitted to be delivered under
Subsections 8.2, 8.3, and 8.4 [Sec. 12.1]
Chapter III, Section 8. Requirement of
Registration of Securities
x x x newspapers of general circulation in the
8.2 The Commission may conditionally approve
the registration statement under such terms as
it may deem necessary.
8.3 The Commission may specify the terms and
conditions under which any written
communication, including any summary
prospectus, shall be deemed not to constitute
an offer for sale under this Section.
8.4. A record of the registration of securities
shall be kept in Register of Securities in which
shall be recorded orders entered by the
Commission with respect to such securities.
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MERCANTILE LAW
Such register and all documents or information
with respect to the securities registered therein
shall be open to public inspection at reasonable
hours on business days.
Shall include the effect of the securities
issue on ownership, on the mix of
ownership, especially foreign and local
ownership [Sec. 12.3]
Shall be signed by the issuers executive
officer, its principal operating officer, its
principal financial officer, its comptroller,
its principal accounting officer, its
corporate secretary, or persons performing
similar functions accompanied by a duly
verified resolution of the board of directors
of the issuer corporation [Sec. 12.4]
Shall be accompanied by:
(a) Written consent of the expert named as
having certified any part of the
registration statement or any document
used in connection therewith; and
(b) Where the registration statement
includes shares to be sold by selling
shareholders - a written certification by
such selling shareholders as to the
accuracy of any part of the registration
statement contributed to by such
selling shareholders [Sec. 12.4].
(2) Payment to the SEC of a fee of not more than
one-tenth (1/10) of one per centum (1%) of the
maximum aggregate price at which such
securities are proposed to be offered [Sec.
12.5a]
(3) Publication of the notice of the filing of
registration statement. [Sec. 12.5b]
The publication must be in two (2)
Philippines, once a week for two (2)
consecutive weeks, or in such other
manner as the Commission by the rule
shall prescribe [Sec. 12.5b]
(4) Declaration by the SEC whether the
registration statement is effective or rejected.
Declaration is made within 45 days from
filing of the registration statement or on
such later date to which the issuer has
consented unless applicant has been
allowed to amend the registration
statement under Sec. 14 [Sec. 12.6].
UP LAW BOC SECURITIES REGULATION CODE
NOTE: Grounds for: (1) rejection/revocation of
registration statement and (2) refusal of
registration/revocation of securities thereunder:
(a) The issuer:
(i) Has been judicially declared
insolvent;
(ii) Has violated any of the provision of
this Code, the rules promulgated
pursuant thereto, or any order of
the Commission of which the issuer
has notice in connection with the
offering for which a registration
statement has been filed
(iii) Has been or is engaged or is about
to engage in fraudulent
transactions;
(iv) Has made any false or misleading
representation of material facts in
any prospectus concerning the
issuer or its securities;
(v) Has failed to comply with any
requirements that the Commission
may impose as a condition for
registration of the security for which
the registration statement has been
filed; or
(b) The registration statement is on its face
incomplete or inaccurate in any
material respect or includes any untrue
statements of a material fact required
to be stated therein or necessary to
make the statement therein not
misleading; or
(c) The issuer, any officer, director or
controlling person performing similar
functions, or any under writer has been
convicted, by a competent judicial or
administrative body, upon plea of guilty,
or otherwise, of an offense involving
moral turpitude and /or fraud or is
enjoined or restrained by the
Commission or other competent or
administrative body for violations of
securities, commodities, and other
related laws [Sec. 13.1]
(d) If any issuer shall refuse to permit an
examination to be made by the
Commission [Sec. 13.3]
NOTE: A registration statement may be
withdrawn by the issuer only with the
consent of the Commission [Sec. 13.6].
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MERCANTILE LAW
(5) Statement under oath by the issuer in all
prospectus that:
(a) registration requirements have been met
and
(b) all information are true and correct as
represented by the issuer or the one
making the statement.
Statement under oath must be made upon
effectivity of the registration statement.
[Sec. 12.7]
Prohibitions on fraud,
manipulation and insider
trading
MANIPULATION OF SECURITY
PRICES
It shall be unlawful for any person acting for
himself or through a dealer or broker, directly or
indirectly:
(a) To create a false or misleading appearance
of active trading in any listed security traded
in an Exchange of any other trading market
("Exchange"):
(i) By effecting any transaction in such
security which involves no change in the
beneficial ownership thereof;
(ii) By entering an order or orders for the
purchase or sale of such security with
the knowledge that a simultaneous
order or orders of substantially the
same size, time and price, for the sale or
purchase of any such security, has or
will be entered by or for the same or
different parties; or
(iii) By performing similar act where there is
no change in beneficial ownership.
(b) To affect, alone or with others, securities or
transactions in securities that:
(i) Raises their price to induce the
purchase of a security, whether of the
same or a different class of the same
issuer or of controlling, controlled, or
commonly controlled company by
others; or
(ii) Creates active trading to induce such a
purchase or sale through manipulative
devices such as marking the close,
UP LAW BOC SECURITIES REGULATION CODE
painting the tape, squeezing the float,
hype and dump, boiler room operations
and such other similar devices.
(c) To circulate or disseminate information that
the price of any security listed in an
Exchange will or is likely to rise or fall
because of manipulative market operations
of any one or more persons conducted for
the purpose of raising or depressing the
price of the security for the purpose of
inducing the purchase or sale of such
security.
(d) To make false or misleading statement with
respect to any material fact, which he knew
or had reasonable ground to believe was so
false or misleading, for the purpose of
inducing the purchase or sale of any security
listed or traded in an Exchange.
(e) To effect, either alone or others, any series
of transactions for the purchase and/or sale
of any security traded in an Exchange for
the purpose of pegging, fixing or stabilizing
the price of such security; unless otherwise
allowed by this Code or by rules of the
Commission [Sec. 24.1]
SHORT SALES
The SEC is regulating transactions wherein the
seller does not yet own or have the securities he
is selling. He is required to show that he has
made arrangements to effect delivery of such
securities on settlement date; otherwise, the
sale will not be allowed.
(a) No person shall use or employ, in connection
with the purchase or sale of any security any
manipulative or deceptive device or
contrivance.
(b) No short sale shall be effected nor any stop-
loss order be executed in connection with the
purchase or sale of any security except if
allowed by the SEC [Sec. 24.2]
Note: The SEC may allow certain acts or
transactions under Sec. 24 (on Manipulation of
Security Prices and Short Sales), for public
interest and protection of investors [Sec. 24.3]
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FRAUDULENT TRANSACTIONS
It shall be unlawful for any person, directly or
indirectly, in connection with the purchase or
sale of any securities to:
(a) Employ any device, scheme, or artifice to
defraud; [Sec. 26.1]
(b) Obtain money or property by means of any
untrue statement of a material fact of any
omission to state a material fact necessary in
order to make the statements made, in the
light of the circumstances under which they
were made, not misleading [Sec. 26.2]
(c) Engage in any act, transaction, practice or
course of business which operates or would
operate as a fraud or deceit upon any person
[Sec. 26.3]
INSIDER TRADING
What is sought to be addressed here is the
asymmetry in information about a public
company (such as a company listed on the
Philippine Stock Exchange) between insiders
and outsiders.
Insiders could have material information not
yet known to the public about the company,
and they might use this information to benefit
themselves at the expense of the outsiders or
the public. Therefore, they must not trade in
the shares of the company pending the
disclosure of such information to the public.
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or a person
controlling the issuer; gives or gave him
access to material information about the
issuer or the security that is not generally
available to the public;
(c) A government employee, director, or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
material information about an issuer or a
security that is not generally available to the
public; or
(d) A person who learns such information by a
communication from any foregoing insiders
[Sec. 3.8]
UP LAW BOC SECURITIES REGULATION CODE
Material non-public information means:
(a) It has not been generally disclosed to the
public and would likely affect the market
price of the security after being disseminated
to the public and the lapse of a reasonable
time for the market to absorb the
information; or
(b) Would be considered by a reasonable person
important under the circumstances in
determining his course of action whether to
buy, sell or hold a security [Sec. 27.2]
It shall be unlawful for an insider:
(a) To sell or buy a security of the issuer, while
in possession of material information with
respect to the issuer or the security that is
not generally available to the public,
unless:
(i) The insider proves that the information
was not gained from such relationship;
or
(ii) If the other party selling to or buying
from the insider (or his agent) is
identified, the insider proves:
(1) That he disclosed the information to
the other party, or
(2) That he had reason to believe that
the other party otherwise is also in
possession of the information [Sec.
27.1]
NOTE: Presumption that purchase or sale is
effected while in possession of material non-
public information arises:
(1) If the purchase or sale is transacted after
such information came into existence but
prior to dissemination of such information
to the public; and
(2) The lapse of a reasonable time for market
to absorb such information.
Presumption may be rebutted by showing of
purchasers or sellers awareness of the
material non-public information at the time
of purchase or sale [Sec. 27.1]
(b) To communicate material nonpublic
information about the issuer or the security
to any person who, by virtue of the
communication, becomes an insider where
the insider communicating the information
knows or has reason to believe that such
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person will likely buy or sell a security of
the issuer while in possession of such
information [Sec. 27.3]
Protection of investors
TENDER OFFER RULE
This protects the minority shareholders.
If a person or a group of persons (acting in
concert) intends and is in discussion with
certain shareholders of a public company
(normally, the controlling shareholders) to
acquire a substantial stake in such company
(now, the threshold is 35% of the outstanding
class of shares in a public company), the
acquirer must make an offer to all the
shareholders of the company to tender their
shares at the price being offered to the
controlling shareholders.
o Before, the minority shareholders are left
out; so, the acquirer only dealt with the
controlling shareholders and disregarded
the minority.
When a tender offer has commenced or is about
to commence, It shall be unlawful for:
(a) Any person (except the tender offeror) who is
in possession of material nonpublic
information relating to such tender offer, to
buy or sell the securities of the issuer that are
sought or to be sought by such tender offer
if:
(i) Such person knows or has reason to
believe that the information is nonpublic
and has been acquired directly or
indirectly from the tender offeror, those
acting on its behalf, the issuer of the
securities sought or to be sought by such
tender offer, or any insider of such issuer
(b) Any tender offeror, those acting on its behalf,
the issuer of the securities sought or to be
sought by such tender offer, and any insider
of such issuer to communicate material
nonpublic information relating to the tender
offer to any other person where such
communication is likely to result in a
violation of (a) [Sec. 27.4].
UP LAW BOC SECURITIES REGULATION CODE
Cemco Holdings, Inc. v. National Life Insurance
Company of the Philippines, Inc. (2007):
Tender offer is a publicly announced intention
by a person acting alone or in concert with other
persons to acquire equity securities of a public
company. Stated differently, a tender offer is an
offer by the acquiring person to stockholders of
a public company for them to tender their
shares therein on the terms specified in the
offer. Tender offer is in place to protect minority
shareholders against any scheme that dilutes
the share value of their investments. It gives the
minority shareholders the chance to exit the
company under reasonable terms, giving them
the opportunity to sell their shares at the same
price as those of the majority shareholders.
The coverage of the mandatory tender offer rule
covers not only direct acquisition but also
indirect acquisition or any type of acquisition.
[Case at bar: The indirect acquisition by CEMCO
Holdings of 36% of UCC shares through the
acquisition of the non-listed UCHC shares is
covered by the mandatory tender offer rule.]
The legislative intent of Section 19 of the
Securities Regulation Code is to regulate
activities relating to acquisition of control of the
listed company and for the purpose of
protecting the minority stockholders of a listed
corporation. Whatever may be the method by
which control of a public company is obtained,
either through the direct purchase of its stocks or
through an INDIRECT means, mandatory tender
offer applies.
What is decisive is the determination of the
power of control. The legislative intent behind
the tender offer rule makes clear that the type
of activity intended to be regulated is the
acquisition of control of the listed company
through the purchase of shares. Control may
[be] effected through a direct and indirect
acquisition of stock, and when this takes place,
irrespective of the means, a tender offer must
occur. The bottom line of the law is to give the
shareholder of the listed company the
opportunity to decide whether or not to sell in
connection with a transfer of control.
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RULES ON PROXY
SOLICITATION
(1) Proxies shall be:
(a) Issued in accordance with SEC rules and
regulations; Proxy solicitations shall also
be made in accordance with the said rules
and regulations [Sec. 20.1]
(b) In writing [Sec. 20.2]
(c) Signed by the stockholder or his duly
authorized representatives [Sec. 20.2]
(d) Filed before the scheduled meeting with
the corporate secretary [Sec. 20.2]
(e) Valid only for the meeting for which it is
intended unless otherwise provided in the
proxy [Sec. 20.3]
Note: No proxy shall be valid and effective
for a period longer than five (5) years at
one time [Sec. 20.3]
(2) A broker or dealer shall:
(a) Not give any proxy, consent or any
authorization, in respect of any security
carried for the account of the customer, to
a person other than the customer, without
written authorization of such customer
[Sec. 20.4]
(b) If he holds or acquires the proxy for at
least ten percent (10%) or such
percentage as the Commission may
prescribe of the outstanding share of such
issuer, submit a report identifying the
beneficial owner within ten days after
such acquisition, for its own account or
customer, to the issuer of security, to the
exchange where the security is traded and
to the Commission [Sec. 20.5]
DISCLOSURE RULE
Issuers, equity holders, and insiders are required
to disclose certain information to the SEC.
DISCLOSURE BY THE ISSUER
(1) To the SEC
Every issuer shall file with the Commission:
(a) Annual Report within one hundred thirty-
five (135) days, after the end of the issuers
fiscal year, or such other time as the
Commission may prescribe
UP LAW BOC SECURITIES REGULATION CODE
(b) Such other periodical reports for interim
fiscal periods and current reports on
significant developments of the issuer as
the Commission may prescribe as
necessary to keep current information on
the operation of the business and
financial condition of the issuer [Sec. 17.1]
NOTE: Under this Section, issuer includes:
(a) An issuer which has sold a class of its
securities pursuant to a registration under
section 12 hereof.
o BUT the requirement shall be
suspended for any fiscal year after the
year such registration became effective
if such issuer, as of the first day of any
such fiscal year, has less than one
hundred (100) holder of such class of
securities or such other number as the
Commission shall prescribe and it
notifies the Commission of such;
(b) An issuer with a class of securities listed
for trading on an Exchange; and
(c) An issuer with assets of at least Fifty
million pesos (50,000,000.00) or such
other amount as the Commission shall
prescribe, and having two hundred (200)
or more holders each holding at least one
hundred (100) share of a class of its equity
securities.
o The obligation of such issuer to file
report shall be terminated ninety (90)
days after notification to the
Commission by the issuer that the
number of its holders holding at least
one hundred (100) shares is reduced to
less than one hundred (100) (Sec. 17.2)
Philippine Veterans Bank v. Callangan (2011):
The ISSUE in this case is whether the Phil.
Veterans Bank qualifies as a public company
under Section 17.2 of the Securities Regulation
Code (SRC) in relation with Rule 3(1)(m) of the
Amended Implementing Rules and Regulations
of the SRC, required to comply with the
reportorial requirements set forth in Section 17.1
of the SRC.
Under Rule 3(1)(m) of the Amended
Implementing Rules and Regulations of the
SRC, a public company is defined as any
corporation with a class of equity securities
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MERCANTILE LAW
listed on an Exchange or with assets in excess of
P50,000,000.00 and having 200 or more
holders, at least 200 of which are holding at
least 100 shares of a class of its equity
securities.
It is clear that a public company, as
contemplated by the SRC, is not limited to a
company whose shares of stock are publicly
listed; even companies like the Bank, whose
shares are offered ONLY to a specific group of
people, are considered a public company,
PROVIDED they meet the requirements
enumerated [under Sections 17.1 and 17.2 of the
SRC and/or under the Amended IRR of the
SRC].
(2) To the equity holders
An annual report shall be furnished by every
issuer which has a class of equity securities
satisfying any of the requirements in Subsection
17.2 to each holder of such equity security (Sec.
17.5)
DISCLOSURE BY EQUITY HOLDERS
Any person who acquires directly or indirectly
the beneficial ownership of more than five of per
centum (5%) of such class or in excess of such
lesser per centum as the Commission by rule
may prescribe, shall, within ten (10) days after
such acquisition or such reasonable time as
fixed by the Commission, submit to: (1) the
issuer of the securities; (2) to the Exchange
where the security is traded; and (3) to the
Commission, the following information:
(a)The personal background, identity, residence,
and citizenship of, and the nature of such
beneficial ownership by, such person and all
other persons by whom or on whose behalf
the purchases are effected; in the event the
beneficial owner is a juridical person, the line
of business of the beneficial owner shall also
be reported;
(b)If the purpose of the purchases or prospective
purchases is to acquire control of the
business of the issuer of the securities, any
plans or proposals which such persons may
have that will effect a major change in its
business or corporate structure;
(c) The number of shares of such security which
are beneficially owned, and the number of
UP LAW BOC SECURITIES REGULATION CODE
shares concerning which there is a right to
acquire, directly or indirectly, by; (i) such
person, and (ii) each associate of such
person, giving the background, identity,
residence, and citizenship of each such
associate; and
(d)Information as to any contracts,
arrangements, or understanding with any
person with respect to any securities of the
issuer including but not limited to transfer,
joint ventures, loan or option arrangements,
puts or call guarantees or division of losses
or profits, or proxies naming the persons with
whom such contracts, arrangements, or
understanding have been entered into, and
giving the details thereof.
NOTE: If it appears to the SEC that securities
were acquired by person in the ordinary
course of his business and were not acquired
for the purpose of and do not have the effect
of changing or influencing the control of the
issuer nor in connection with any transaction
having such purpose or effect it may permit
any person to file in lieu of the statement
required by subsection 17.1 hereof, a notice
stating:
(1) The name of such person;
(2) The shares of any equity securities subject
to Subsection 17.1 which are owned by him;
(3) The date of their acquisition; and
(4) Such other information as the commission
may specify [Sec. 18.3]
DISCLOSURE BY INSIDER
An insider has the duty to disclose material
information with respect to the issuer or the
security that is not generally available to the
public [Sec. 27.1]
An INSIDER means:
(a) The issuer;
(b) A director or officer (or any person
performing similar functions) of, or a person
controlling the issuer; gives or gave him
access to material information about the
issuer or the security that is not generally
available to the public;
(c) A government employee, director, or officer
of an exchange, clearing agency and/or self-
regulatory organization who has access to
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MERCANTILE LAW
material information about an issuer or a
security that is not generally available to the
public; or
(d) A person who learns such information by a
communication from any foregoing insiders
[Sec. 3.8]
Material non-public information means:
(a) It has not been generally disclosed to the
public and would likely affect the market
price of the security after being disseminated
to the public and the lapse of a reasonable
time for the market to absorb the
information; or
(b) Would be considered by a reasonable person
important under the circumstances in
determining his course of action whether to
buy, sell or hold a security [Sec. 27.2]
A beneficial owner of 10% of a public
company becomes a principal shareholder
required to disclose his interest to the SEC,
the company, and the Philippine Stock
Exchange (if the company is listed there).
Civil liability
CIVIL LIABILITIES ON ACCOUNT
OF FALSE REGISTRATION
STATEMENT [SEC. 56]
Civil liabilities arise when the registration
statement or any part thereof contains on its
effectivity:
(1) An untrue statement of a material fact; or
(2) Omission to state a material fact required to
be stated therein or necessary to make such
statements not misleading
Who may be liable?
(a) Issuer and every person who signed the
registration statement;
(b) Director of/partner in the issuer at the time of
the filing of the registration statement or any
part, supplement or amendment thereof;
(c) One who is named in the registration
statement as being or about to become (b)
and whose written consent thereto is filed
with the registration statement;
UP LAW BOC SECURITIES REGULATION CODE
(d) Auditor/auditing firm named as having
certified any financial statements used in
connection with the registration statement or
prospectus;
(e) One who, with his written consent filed with
the registration statement, has been named
as having prepared or certified any part of the
registration statement/any report or
valuation which is used in connection with
the registration statement;
(f) Selling shareholder who contributed to and
certified as to the accuracy of a portion of the
registration statement;
(g) Underwriter with respect to such security
[Sec. 56.1]
WHO MAY SUE?
Any person who acquires the security AND who
suffers damage
UNLESS it is proved that at the time of such
acquisition he knew of such untrue statement
or omission [Sec. 56.1]
NOTE: When the security is acquired AFTER
the issuer has made generally available to its
security holders an INCOME STATEMENT
covering a period of at least twelve (12)
months beginning from the effective date of
the registration statement, the right of
recovery under Section 56 shall be
conditioned on proof that such person
acquired the security RELYING UPON such
untrue statement in the registration
statement or relying upon the registration
statement AND NOT KNOWING of such
income statement [Sec. 56.2].
CIVIL LIABILITIES ARISING IN
CONNECTION WITH
PROSPECTUS,
COMMUNICATIONS AND
REPORTS [SEC. 57]
(1) LIABILITY OF SELLERS/OFFERORS
WHO MAY BE LIABLE?
(a) Offeror or seller of a security in violation of
Chapter on Registration of Securities;
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MERCANTILE LAW
(b) Offeror or seller of a security, whether or not
exempted by the provisions of this Code, by
means of a prospectus or other written or
oral communication which includes an:
untrue statement of a material fact OR
omits to state a material fact necessary in
order to make the statements, in the light
of the circumstances under which they
were made, not misleading (the purchaser
not knowing of such untruth or omission)
DEFENSE: No knowledge of untruth or
omission, despite the exercise of reasonable
care [Sec. 57.1].
WHO MAY SUE?
Purchaser of the security may sue to recover:
(1) Consideration paid for such security with
interest thereon, LESS the amount of any
income received thereon, upon the tender of
such security; or
(2) For damages if he no longer owns the
security [Sec. 57.1].
(2) LIABILITY OF MAKERS OF FALSE
MISLEADING STATEMENTS
WHO MAY BE LIABLE?
Any person who shall make or cause to be made
any statement in any report, or document filed
pursuant to this Code or any rule or regulation
thereunder, which statement as at the time and
in the light of the circumstances under which it
was made false or misleading with respect to
any material fact
DEFENSE: Good faith and lack of knowledge of
the false and misleading statement [Sec. 57.2].
WHO MAY SUE?
Purchaser or seller of security who purchased
or sold at a price which was affected by such
statement, NOT KNOWING that such
statement was false or misleading, and
RELYING UPON such statement
SUE FOR: Damages caused by such reliance
[Sec. 57.2]
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

CIVIL LIABILITY OF FRAUD IN under Section 11 (on Commodity Future

CONNECTION WITH SECURITIES
TRANSACTIONS [SEC. 58]
WHO MAY BE LIABLE?
Any person who engages in any act or
transaction in violation of Sections 19.2
(fraudulent, deceptive, or manipulative acts or
practices in connection with tender offers), 20
(Proxy Solicitations) or 26 (Fraudulent
Transactions), or any rule or regulation of the
Commission thereunder.
WHO MAY SUE?
Any person who purchases or sells any
security, grants or refuses to grant any proxy,
consent or authorization, or accepts or
declines an invitation for tender of a security
SUE FOR: Damages as a result of the act or
transaction.
CIVIL LIABILITY FOR
MANIPULATION OF SECURITY
PRICES [SEC. 59]
WHO MAY BE LIABLE?
Any person who WILLFULLY participates in any
act or transaction in Section 24 (Manipulation of
Security Prices).
WHO MAY SUE?
Any person who shall purchase or sell any
security at a price which was affected by such
act or transaction
SUE FOR: Damages as a result of the act or
transaction.
CIVIL LIABILITY WITH RESPECT
TO COMMODITY FUTURES
CONTRACTS AND PRE-NEED
PLANS [SEC. 60]
WHO MAY BE LIABLE?
Any person who engages in any act or
transactions in WILLFUL violation of any rule or
regulation promulgated by the Commission
Contracts) or 16 (on Pre-Need Plans) [Sec. 60.1]
WHO MAY SUE?
Any person sustaining damages as a result of
such act or transaction [Sec. 60.1]
CIVIL LIABILITY ON ACCOUNT
OF INSIDER TRADING
(1) LIABILITY FOR NON-DISCLOSURE
WHO MAY BE LIABLE?
(1) Any insider who violates Subsection 27.1 (on
Insiders Duty to Disclose When Trading);
and
(2) Any person in the case of a tender offer who
violates Subsection 27.4 (a)(I), or any rule or
regulation thereunder, by purchasing or
selling a security while in possession of
material information not generally available
to the public [Sec. 61.1]
WHO MAY SUE?
Any investor who, contemporaneously with the
purchase or sale of securities that is the subject
of the violation, purchased or sold securities of
the same class
UNLESS such insider, or such person in the
case of a tender offer, proves that such
investor KNEW the information or would have
purchased or sold at the same price
REGARDLESS of disclosure of the information
to him [Sec. 61.1]
(2) LIABILITY FOR COMMUNICATING
NON-PUBLIC INFORMATION
ABOUT ISSUER
WHO MAY BE LIABLE?
(1) An insider who violates Subsection 27.3;
(2) Any person in the case of a tender offer who
violates Subsection 27.4 (a), or any rule or
regulation thereunder communicating
material nonpublic information shall be
jointly and severally liable under Subsection
61.1 with, and to the same extent as, the
insider, or person in the case of a tender
offer, to whom the communication was
directed and who is liable under Subsection

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UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

61.1 by reason of his purchase or sale of a Commission thereunder, who, without just
security [Sec. 61.2]. cause, hinders, delays or obstructs the making or
filing of any such document, report, or
LIABILITIES OF CONTROLLING information [Sec. 51.3]
PERSONS, AIDER AND (3) LIABILITY OF AIDER/ABETTOR
ABETTOR AND OTHER
SECONDARY LIABILITY WHO MAY BE LIABLE?
Any person who aids, abets, counsels,
(1) LIABILITY OF CONTROLLING commands, induces or procures any violation
of this Code, or any rule, regulation or order of
PERSONS the Commission thereunder [Sec. 51.4]
Every person who substantially assists the act
WHO MAY BE LIABLE?
or omission of any person primarily liable
Every person who controls any person liable
under Sections 57, 58, 59 and 60 of this Code,
under this Code or the rules or regulations of
with knowledge or in reckless disregard that
the Commission thereunder, shall ALSO be
such act or omission is wrongful
liable jointly and severally with and to the same
extent as such controlled persons to any person Jointly and severally liable as an aider and
to whom such controlled person is liable [Sec. abettor for damages resulting from the
51.1] conduct of the person primarily liable [Sec.
51.5]
NOTE: CONTROL may be: NOTE: An aider and abettor shall be LIABLE
(a) By or through stock ownership, agency, or ONLY:
otherwise, or o To the extent of his relative contribution in
(b) In connection with an agreement or causing such damages in comparison to
understanding with one or more other that of the person primarily liable, or
persons [Sec. 51.1] o To the extent to which the aider and abettor
was unjustly enriched thereby
o whichever is GREATER [Sec. 51.5]
DEFENSE: Lack of knowledge of the existence
of facts by reason of which the liability of the NOTE: It shall be unlawful for any person,
controlled person is alleged to exist [Sec. 51.1] DIRECTLY or INDIRECTLY, to do ANY act or
thing which it would be unlawful for such
person to do under the provisions of this Code
(3) LIABILITY OF DIRECTOR/OFFICER or any rule or regulation thereunder [Sec. 51.2]
FOR DELAY IN THE FILING OF
REQUIRED DOCUMENTS
WHO MAY BE LIABLE?
Any director or officer of, or any owner of any
securities issued by, any issuer required to file
any document, report or other information
under this Code or any rule or regulation of the

PAGE 187
UP LAW BOC
Civil Liability Arising
When the registration statement
or any part thereof contains on
its effectivity:
An untrue statement of a
material fact; or
Omission to state a material
fact required to be stated
therein or necessary to make
such statements not
misleading
SECURITIES REGULATION CODE
Who may be liable?
(a) Issuer and every person who
signed the registration
statement;
(b) Director of/partner in the
issuer at the time of the filing
of the registration statement
or any part, supplement or
amendment thereof;
(c) One who is named in the
registration statement as
being or about to become (b);
(d) Auditor/auditing firm named
as having certified any
financial statements used in
connection with the
registration statement or
prospectus;
(e) One who, with his written
consent filed with the
registration statement, has
been named as having
prepared or certified any part
of the registration
statement/any report or
valuation which is used in
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with respect to
such security [Sec. 56.1]
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MERCANTILE LAW
Who may Sue?
Any person who acquires the
security and who suffers damage
unless it is proved that at the
time of such acquisition he knew
of such untrue statement or
omission [Sec. 56.1]
NOTE: When the security is
acquired after the issuer has
made generally available to its
security holders an income
statement covering a period of at
least twelve (12) months
beginning from the effective date
of the registration statement, the
right of recovery under this
subsection shall be conditioned
on proof that such person
acquired the security relying
upon such untrue statement in
the registration statement or
relying upon the registration
statement and not knowing of
such income statement [Sec.
56.2]
UP LAW BOC
Civil Liability Arising
When the registration statement
or any part thereof contains on
its effectivity:
An untrue statement of a
material fact; or
Omission to state a material
fact required to be stated
therein or necessary to make
such statements not
misleading
SECURITIES REGULATION CODE
Who may be liable?
(a) Issuer and every person who
signed the registration
statement;
(b) Director of/partner in the
issuer at the time of the filing
of the registration statement
or any part, supplement or
amendment thereof;
(c) One who is named in the
registration statement as
being or about to become (b);
(d) Auditor/auditing firm named
as having certified any
financial statements used in
connection with the
registration statement or
prospectus;
(e) One who, with his written
consent filed with the
registration statement, has
been named as having
prepared or certified any part
of the registration
statement/any report or
valuation which is used in
connection with the
registration statement;
(f) Selling shareholder who
contributed to and certified
as to the accuracy of a
portion of the registration
statement;
(g) Underwriter with respect to
such security [Sec. 56.1]
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MERCANTILE LAW
Who may Sue?
Any person who acquires the
security and who suffers damage
unless it is proved that at the
time of such acquisition he knew
of such untrue statement or
omission [Sec. 56.1]
NOTE: When the security is
acquired after the issuer has
made generally available to its
security holders an income
statement covering a period of at
least twelve (12) months
beginning from the effective date
of the registration statement, the
right of recovery under this
subsection shall be conditioned
on proof that such person
acquired the security relying
upon such untrue statement in
the registration statement or
relying upon the registration
statement and not knowing of
such income statement [Sec.
56.2]
UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

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

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

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

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

Defense: Good faith and lack of

knowledge of the false and
misleading statement [Sec. 57.2].

Fraud in Connection with Any person who engages in any
Securities Transactions [Sec. 58] act or transaction in violation of
Sections 19.2, 20 or 26, or any
rule or regulation of the
Commission thereunder
Any other person who purchases
or sells any security, grants or
refuses to grant any proxy,
consent or authorization, or
accepts or declines an invitation
for tender of a security who
sustained damages as a result of
the transaction.

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UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

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

Manipulation of Security Prices Any person who willfully Any person who shall purchase
[Sec. 59] participates in any act or or sell any security at a price
transaction in Section 24 which was affected by such act
(Manipulation of Security Prices). or transaction

With Respect to Commodity Any person who engages in any Any person sustaining damages
Futures Contracts and Pre-need act or transactions in willful as a result of such act or
Plans [Sec. 60] violation of any rule or regulation transaction [Sec. 60.1]
promulgated by the Commission
under Section 11 (on Commodity
Future Contracts) or 16 (on Pre-
Need Plans) [Sec. 60.1]

On Account of Insider Trading
(a) Liability for non-disclosure
(a)Any insider who violates
Subsection 27.1;
(b) and any person in the case of
a tender offer who violates
Subsection 27.4 (a)(I), or any
rule or regulation thereunder,
by purchasing or selling a
security while in possession of
material information not
generally available to the
public [Sec. 61.1]
Any investor who,
contemporaneously with the
purchase or sale of securities
that is the subject of the
violation, purchased or sold
securities of the same class
unless such insider, or such
person in the case of a tender
offer, proves that such investor
knew the information or would
have purchased or sold at the
same price regardless of
disclosure of the information to
him [Sec. 61.1]

On Account of Insider Trading (a) An insider who violates

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

PAGE 191
 UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

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

Liabilities of Controlling Persons, Every person who controls any

Aider and Abettor and Other person liable under this Code or
Secondary Liability the rules or regulations of the
Commission thereunder, shall
(a) Liability of Controlling also be liable jointly and severally
Persons with and to the same extent as
such controlled persons to any
person to whom such controlled
person is liable [Sec. 51.1]

NOTE: Control may be by or

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

Defense: Lack of knowledge of

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

7. Liabilities of Controlling Persons, It shall be unlawful for any

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

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 UP LAW BOC SECURITIES REGULATION CODE MERCANTILE LAW

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

7. Liabilities of Controlling Persons, It shall be unlawful for any

Aider and Abettor and Other person to aid, abet, counsel,
Secondary Liability command, induce or procure any
violation of this Code, or any rule,
(c) Liability of Aider/Abettor regulation or order of the
Commission thereunder [Sec.
51.3]

Every person who substantially

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

BUT an aider and abettor shall

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

NOTE: It shall be unlawful for

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

PAGE 193
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PAGE 194
UP LAW BOC BANKING LAWS
The New Central Bank Act
[RA No. 7653]
STATE POLICY
The State shall maintain a central monetary
authority that shall function and operate as an
independent and accountable body corporate in
the discharge of its mandated responsibilities
concerning money, banking and credit. [Sec. 1]
SALIENT FEATURES
(1) Assurance of BSP independence by providing
for the majority of the members of the
Monetary Board to come from the private
sector. [Sec. 6, NCBA]
(2) The BSP may now concentrate on monetary
policy, and will shed itself of fiscal agency
functions and its responsibilities in respect of
finance companies without quasi-banking
functions, which in the past, had distracted it
from its primary function. [Secs. 3, 129, & 130,
NCBA]
(3) Provides safeguards to ensure that unlike
the old Central Bank which sustained huge
losses, the BSP would have a positive net
income position by the following provisions:
(a) Capitalization of P50B; [Sec.2, NCBA]
(b) Maintenance of positive net foreign asset
position; [Sec.71, NCBA]
(c) Charging interests on all loans and
advances to banks; [Sec. 85, NCBA]
(d) Authority to collect interests on loans and
advances to closed financial institutions;
and
(e) BSP cant acquire shares in banking
enterprise, in development banking and
financing [Sec. 128, NCBA]
CREATION OF THE BANGKO
SENTRAL NG PILIPINAS (BSP)
There is hereby established an independent
central monetary authority, which shall be a
body corporate known as the Bangko Sentral ng
Pilipinas [Sec. 2].
NATURE OF THE BSP
(1) A central monetary authority;
(2) An independent and accountable body; and
PAGE 195
MERCANTILE LAW
(3) A government-owned corporation but enjoys
fiscal and administrative autonomy. [Secs. 1 &
2]
The BSP shall have a capitalization of P50B to
be fully subscribed by the Government. [Sec. 2]
RESPONSIBILITY AND PRIMARY
OBJECTIVE
PRIMARY OBJECTIVES
(1) To maintain price stability conducive to a
balanced and sustainable growth of the
economy.
(2) To promote and maintain monetary stability
and the convertibility of the peso.
OTHER RESPONSIBILITIES
(1) To provide policy directions in the areas of
money, banking, and credit
(2) To supervise operations of banks [Sec. 3]
All powers, duties and functions vested by law
in the Central Bank of the Philippines not
inconsistent with the NCBA shall be deemed
transferred to the BSP. All references to the
Central Bank of the Philippines in any law or
special charters shall be deemed to refer to the
BSP. [Sec. 136]
MONETARY BOARD
The body through which the powers and
functions of the Bangko Sentral are exercised
[Sec 6, NCBA]
POWERS AND FUNCTIONS
(1) Issue rules and regulations it considers
necessary for the effective discharge of the
responsibilities and exercise of the powers
vested in it;
(2) Direct the management, operations, and
administration of Bangko Sentral, organize
its personnel and issue such rules and
regulations as it may deem necessary or
desirable for this purpose;
(3) Establish a human resource management
system which governs the selection, hiring,
appointment, transfer, promotion, or
dismissal of all personnel;
UP LAW BOC BANKING LAWS
(4) Adopt an annual budget for and authorize
such expenditures by Bangko Sentral as are
in the interest of the effective administration
and operations of Bangko Sentral in
accordance with applicable laws and
regulations; and
(5) Indemnify its members and other officials of
Bangko Sentral, including personnel of the
departments performing supervision and
examination functions, against all costs and
expenses reasonably incurred by such
persons in connection with any civil or
criminal action, suit or proceeding, to which
any of them may be made a party by reason
of the performance of his functions or duties,
unless such members or other officials is
found to be liable for negligence or
misconduct. [Sec. 15]
COMPOSITION
The MB shall be composed of 7 members
appointed by the President with a 6-year term.
[Sec. 6, NCBA]
MEMBERS
(1) The BSP Governor or his designated
alternate (a deputy governor);
(2) A Cabinet member to be designated by the
President or his designated alternate (an
Undersecretary in his department); and
(3) 5 members from the private sector [Sec. 6,
NCBA]
No member of the MB may be reappointed
more than once.
QUALIFICATIONS
(1) Natural-born citizens of the Philippines;
(2) At least 35 years old (the Governor must be
at least 40 years old);
(3) Of good moral character;
(4) Of unquestionable integrity;
(5) Of known probity and patriotism; and
(6) With recognized competence in social and
economic disciplines. [Sec. 8]
DISQUALIFICATIONS
In addition to the disqualifications under the
Code of Conduct and Ethical Standards for
Public Officials and Employees (RA 6713), a
member of the Monetary Board is disqualified:
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MERCANTILE LAW
(1) Direct connection with any multilateral
banking or financial institution; or
(2) Substantial interest in any private bank in
the Philippines, within 1 year prior to his
appointment [Sec. 9]
PROHIBITION ON MEMBERS OF THE
MB
(1) To be a director, officer, employee,
consultant, lawyer, agent or stockholder of
any bank, quasi-bank, or any other institution
which is subject to supervision or
examination by the BSP;
(2) To hold any other public office or public
employment during their tenure; and
(3) To be employed in any multilateral banking
or financial institution within 2 years after the
expiration of his term.
Exception: When he serves as an official
representative of the government to such
institution. [Sec. 9]
GROUNDS FOR REMOVAL OF ANY
MEMBER OF THE MB
(1) If the member is subsequently disqualified
under Sec. 8;
(2) If he is physically or mentally incapacitated
that he cannot properly discharge his duties
and responsibilities and such incapacity has
lasted for more than 6 months;
(3) If he is guilty of acts or operations which are
of fraudulent or illegal character or which are
manifestly opposed to the aims and interests
of the BSP; and
(4) If he no longer possesses the qualifications
under Sec. 8. [Sec. 10]
VACANCIES, HOW FILLED
Cause: death, resignation, or removal of any
member
Effect: a new member will be appointed to
complete the unexpired period of the term of
the member concerned. [Sec. 7]
CIVIL LIABILITY OF MEMBERS OF
THE MB
Members of the MB, officials, examiners, and
employees of the BSP are liable when:
UP LAW BOC BANKING LAWS
(1) They willfully violate the provisions of the
NCBA;
(2) They are guilty of negligence, abuses or acts
of malfeasance or misfeasance; or
(3) Fail to exercise extraordinary diligence in the
performance of his duties. [Sec. 16]
HOW THE BSP HANDLES BANKS
IN DISTRESS
Liquidity Ability of an asset to be converted
into cash. An entity is liquid when it is able to
pay its liabilities when they fall due.
Solvency When current assets are more than
current liabilities, providing the ability to pay
debts. An entity is solvent when it is able to
meet its long term obligations/liabilities.
Insolvency When the actual market value of
assets are insufficient to pay its liabilities, not
considering capital stock and surplus which are
not liabilities for such purpose. An entity is
insolvent when it is unable to meet current and
long-term obligations.
CONSERVATORSHIP
GROUNDS FOR APPOINTMENT OF A
CONSERVATOR
Whenever, on the basis of a report submitted by
the appropriate supervising or examining
department, the MB finds that a bank or quasi-
bank is:
(1) In a state of continuing inability; or
(2) Unwillingness to maintain a condition of
liquidity deemed adequate to protect the
interest of depositors and creditors [Sec. 29]
DURATION
Period: shall not exceed 1 year [Sec. 29]
The expenses attendant to the conservatorship
shall be borne by the bank or quasi-bank
concerned [Sec. 29]
GROUNDS FOR TERMINATION OF
CONSERVATORSHIP BY MB
(1) When it is satisfied that the institution can
continue to operate on its own and the
conservatorship is no longer necessary
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MERCANTILE LAW
(2) When, on the basis of the report of the
conservator or of its own findings, the MB
determines that the continuance in business
of the institution would involve probable loss
to its depositors or creditors (the bank or
quasi-bank would then be placed under
receivership) [Sec. 29]
EFFECTS OF CONSERVATORSHIP
(1) Bank/Quasi-bank retains juridical personality
(2) Not a precondition to the designation of a
receiver, and;
(3) Perfected transactions cannot be repudiated
QUALIFICATIONS OF A
CONSERVATOR
The conservator should be competent and
knowledgeable in bank operations and
management. [Sec. 29]
The appointment of a conservator shall be
vested exclusively in the MB. [Sec. 30]
POWERS AND DUTIES OF A
CONSERVATOR
(1) To take charge of the assets, liabilities, and
the management thereof
(2) To reorganize the management
(3) To collect all monies and debts due said
institution, and
(4) To exercise all powers necessary to restore
its viability
(5) To report and be responsible to the MB
(6) To overrule or revoke the actions of the
previous management and board of directors
of the bank or quasi-bank. [Sec. 29]
While the Central Bank law gives vast and far
reaching powers to the conservator of a bank,
such powers must be related to the preservation
of the assets of the bank, the reorganization of
the management and the restoration of
viability. Such powers cannot extend to the
post-facto repudiation of perfected
transactions, otherwise they would infringe
against the non-impairment clause of the
Constitution. [First Philippine International Bank
v. CA, 1996]
UP LAW BOC BANKING LAWS
REMUNERATION
General Rule: The conservator shall receive
remuneration in an amount not to exceed 2/3 of
the salary of the president of the institution in 1
year, payable in 12 equal monthly payments.
Exception: A conservator connected with the
BSP, in which case said conservator shall not be
entitled to receive any remuneration or
emolument. [Sec. 29]
RECEIVERSHIP
Grounds
Whenever the MB finds that a bank or quasi-
bank:
(1) Is unable to pay its liabilities as they become
due in the ordinary course of business:
Provided, That this shall not include inability
to pay caused by extraordinary demands
induced by financial panic in the banking
community;
(2) Has insufficient realizable assets, as
determined by the BSP, to meet its liabilities;
or
(3) Cannot continue in business without
involving probable losses to its depositors or
creditors; or
(4) Has willfully violated a cease-and-desist
order under Sec. 37 that has become final,
involving acts or transactions which amount
to fraud or a dissipation of the assets of the
institution [Sec. 30]
RECEIVER
(1) If a banking institution: the PDIC
(2) If a quasi-bank: any person of recognized
competence in banking or finance
The appointment of a receiver shall be vested
exclusively in the MB. And the designation of a
conservator is not a precondition to the
designation of a receiver.
POWERS AND DUTIES OF A RECEIVER
(1) Immediately gather and take charge of all
the assets and liabilities of the institution
(2) Administer the assets for the benefit of the
creditors
(3) Exercise the general powers of a receiver
under the Revised Rules of Court
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MERCANTILE LAW
(4) Not to pay or commit any act that will
involve the transfer or disposition of any
asset of the institution, except:
(a) Administrative expenditures
(b) Receiver may deposit or place funds in
non-speculative investments
(5) Subject to prior approval of the MB,
determine, as soon as possible, but not later
than 90 days from take-over, whether the
institution may be rehabilitated or otherwise
placed in such a condition so that it may be
permitted to resume business with safety to
its depositors and creditors and the general
public.
The assets of the institution under receivership
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of
garnishment, levy, attachment, or execution.
CLOSE NOW, HEAR LATER SCHEME
Sec. 29 of the Central Bank Act does NOT
contemplate prior notice and hearing before a
bank may be directed to stop operations and
placed under receivership. It is enough that
such action is made subject of a subsequent
judicial review. When the law provides for the
filing of a case within 10 days after the receiver
takes charge of the assets of the bank, it is
unmistakable that the assailed actions should
precede the filing of the case. The legislature
could not have intended to authorize no prior
notice and hearing in the banks closure and at
the same time allow a suit to annul it on the
basis of absence thereof [Central Bank vs. CA GR
No. 76118, March 30, 1993]
LIQUIDATION
Should the determination be that the institution
cannot be rehabilitated or permitted to resume
business, the MB shall notify in writing the
board of directors of the institution of its
findings and direct the receiver to proceed with
the liquidation of the institution.
PROCEDURE
(1) The receiver shall file ex parte with the proper
RTC, and without requirement of prior notice
or any other action, a petition for assistance
in the liquidation of the institution pursuant
to the liquidation plan adopted by the PDIC
UP LAW BOC BANKING LAWS
(if quasi-bank, liquidation plan adopted by
the MB)
(2) Upon acquiring jurisdiction, the court shall,
upon motion by the receiver after due notice,
(a) Adjudicate disputed claims against the
institution,
(b) Assist the enforcement of individual
liabilities of the stockholders, directors,
and officers, and
(c) Decide on other issues as may be material
to implement the liquidation plan
(3) The receiver shall convert the assets of the
institutions to money, dispose of the same to
creditors and other parties, for the purpose of
paying the debts of such institution in
accordance with the rules on concurrence
and preference of credit under the Civil Code
The assets of the institution under receivership
and liquidation shall be deemed in custodia
legis and shall be exempt from any order of
garnishment, levy, attachment, or execution.
DISPOSITIONS
In case of a liquidation of a bank or quasi-
bank, after payment of the cost of
proceedings, including reasonable expenses
and fees of the receiver to be allowed by the
court, the receiver shall pay the debts of such
institution, under order of the court, in
accordance with the rules on concurrence and
preference of credit in the Civil Code. [Sec. 31]
All revenues and earnings realized by the
receiver in winding up the affairs and
administering the assets of any bank or quasi-
bank shall be used to pay the costs of
proceedings, salaries of such personnel whose
employment is rendered necessary in the
discharge of the liquidation together with
other additional expenses caused thereby.
The balance of revenues and earnings, after
the payment of all said expenses, shall form
part of the assets available to creditors. [Sec.
32]
EFFECTS OF APPOINTMENT OF
RECEIVER/LIQUIDATION
(1) Retention of juridical personality
(2) Suspension of operations/ Stoppage of
business
(3) Assets are deemed in custodial legis, i.e.,
exempt from garnishment, levy or execution
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MERCANTILE LAW
(4) Stay of execution of judgment to prevent
depletion of bank assets
(5) Bank is not liable to pay interest on deposits
which accrued during the period of
suspension of operation
(6) Restriction of banks capacity to do new
business (new loans, deposits) but with
obligation to collect pre-existing debts
HOW THE BSP HANDLES
EXCHANGE CRISIS
LEGAL TENDER POWER
All notes and coins issued by the BSP shall be
fully guaranteed by the Government of the
Republic of the Philippines and shall be legal
tender in the Philippines for all debts, both
public and private.
Limitation: Coins shall be legal tender in
amounts not exceeding P50 for denominations
of 25 centavos and above, and in amounts not
exceeding P20 for denominations of 10
centavos or less unless otherwise fixed by the
MB.
The maximum amount of coins to be considered
as legal tender is: [BSP Circular 537 (2006)]
(1) P1,000.00 for denominations of 1-Piso, 5-
Piso and 10-Piso coins; and
(2) P100.00 for denominations of 1-sentimo, 5-
sentimo, 10-sentimo, and 25-sentimo coins.
[Sec. 52]
RATES OF EXCHANGE
The MB shall:
(1) Determine the exchange rate policy of the
country;
(2) Determine the rates at which the Bangko
Sentral shall buy and sell spot exchange;
(3) Establish deviation limits from the effective
exchange rate or rates as it may deem
proper.
(4) Determine the rates for other types of
foreign exchange transactions by the BSP,
including purchases and sales of foreign
notes and coins.
Limitation: The margins between the effective
exchange rates and the rates established by the
MB may not exceed the corresponding margins
UP LAW BOC
for spot exchange transactions by more than
the additional costs or expenses involved in
each type of transactions. [Sec. 74]
Law on Secrecy of Bank
Deposits [RA No. 1405, as
amended]
POLICY
(1) To give encouragement to the people to
deposit their money in banking institutions;
and
(2) To discourage private hoarding. [Sec. 1]
PURPOSE
That money may be properly utilized by banks
in authorized loans to assist in the economic
development of the country. [Sec. 1]
The absolute confidentiality rule in R.A. No.
1405 actually aims at protection from
unwarranted inquiry or investigation if the
purpose of such inquiry or investigation is
merely to determine the existence and nature,
as well as the amount of the deposit in any
given bank account. [China Banking
Corporation v. Ortega, 1973]
PROHIBITED ACTS
(1) No person, government official, bureau or
office may examine, inquire into or look into
such deposits. [Sec. 2]
(2) No official or employee of any banking
institution may disclose to any unauthorized
person any information concerning said
deposits. [Sec. 3]
DEPOSITS COVERED
All deposits of whatever nature with banks or
banking institutions in the Philippines are
considered as of an absolutely confidential
nature. [Sec. 2]
Investment in bonds issued by the
Government of the Philippines, its political
subdivisions and its instrumentalities, are
included. [Sec. 2]
The confidentiality of foreign-currency
deposits is governed by the Foreign Currency
Deposit Act.
BANKING LAWS MERCANTILE LAW
Money-market placement is not covered by
RA 1405 because it is not deposited in the
bank.
Of Whatever Nature
The term deposits as used in RA 1405 is to be
understood broadly and not limited only to
accounts which give rise to a creditor-debtor
relationship between the depositor and the
bank.
If the money deposited under an account may
be used by banks for authorized loans to third
persons, then such account, regardless of
whether it creates a creditor-debtor
relationship between the depositor and the
bank, falls under the category of accounts
which the law precisely seeks to protect for
the purpose of boosting the economic
development of the country.
Considering the use of the phrase of
whatever nature RA 1405 applies not only to
money which is deposited but also to those
which are invested. Thus, the protection
afforded by RA 1405 extends to trust
accounts. [Ejercito v. Sandiganbayan [2006],
Special Division]
Indeed, by force of statute, all bank deposits
are absolutely confidential, and that nature is
unaltered even by the legislated
exceptionsThere is disfavor towards
construing these exceptions in such a manner
that would authorize unlimited discretion on
the part of the government or of any party
seeking to enforce those exceptions and
inquire into bank deposits. If there are doubts
in upholding the absolutely confidential
nature of bank deposits against affirming the
authority to inquire into such accounts, then
such doubts must be resolved in favor of the
former. [Republic v. Eugenio, 2008]
ZONES OF PRIVACY
Under the RA 1405, bank deposits are
statutorily protected or recognized zones of
privacy. [People v. Estrada, G.R. No. 164368,
April 2, 2009; Marquez v. Desierto, G.R. No.
135882, June 27, 2001, 359 SCRA 772; Ople v.
Torres, G.R. No. 107737. October 1, 1999, 316
SCRA 43]
It is conceded that while the fundamental law
has not bothered with the triviality of
PAGE 200
UP LAW BOC BANKING LAWS
specifically addressing privacy rights relative
to banking accounts, there, nevertheless,
exists in our jurisdiction a legitimate
expectation of privacy governing such
accounts. The source of this right of
expectation is statutory, and it is found in R.A.
No. 1405, otherwise known as the Bank
Secrecy Act of 1955. [BSB Group, Inc., v. Go,
2010]
Exceptions [Sec. 2]:
(1) Upon written permission of the depositor
(2) In cases of impeachment
(3) Upon order of competent court in the
following cases:
(a) Bribery [Sec. 2]
(b) Dereliction of duty of public officials [Sec.
2]
(c) Unexplained wealth under Sec. 8 of RA
3019 or the Anti-Graft and Corrupt
Practices Act [PNB v. Gancayco, 1965;
Banco Filipino v. Purisima, 1988; Marquez
v. Desierto, 2001]
The exception applies to cases of
concealment of illegally acquired
property in anti-graft cases. The inquiry
into illegally acquired property or
property NOT "legitimately acquired"
extends to cases where such property is
concealed by being held by or recorded
in the name of other persons. [Banco
Filipino v. Purisima, 1988]
(d) Those under the Anti-Money Laundering
Act of 2001 [RA 9160, hereinafter AMLA],
when there is probable cause that the
deposits or investments involved are in
any way related to an unlawful activity or
a money laundering offense, except that
no court order is required if:
(i) Funds or property involved consists of
investments; or
(ii) Said investments are related to:
Kidnapping for ransom;
Unlawful activities under
Comprehensive Drugs Act of 2002
[RA 9165];
Hijacking and other violations under
RA 6235; and
Destructive arson and murder,
including those perpetrated by
terrorists against non-combatants
and similar targets.
PAGE 201
MERCANTILE LAW
(d) In cases where the money deposited or
invested is the subject matter of litigation
By the phrase subject matter of the action
is meant the physical facts, the things real
or personal, the money, lands, chattels,
and the like, in relation to which the suit is
prosecuted, and not the delict or wrong
committed by the defendant. [Mathay v.
Consolidated Bank and Trust Company,
1974]
We note with approval the difference
between the subject of the action from the
cause of action. We also find petitioner's
definition of the phrase subject matter of
the action is consistent with the term
subject matter of the litigation, as the
latter is used in the Bank Deposits Secrecy
Act.
Where the plaintiff is fishing for
information so it can determine the
culpability of private respondent and the
amount of damages it can recover from the
latter. It does not seek recovery of the very
money contained in the deposit. The
subject matter of the dispute may be the
amount of P999,000.00 that petitioner
seeks from private respondent as a result
of the latter's alleged failure to inform the
former of the discrepancy; but it is not the
P999,000.00 deposited in the drawer's
account. By the terms of R.A. No. 1405, the
money deposited itself should be the
subject matter of the litigation. [Union
Bank v. Court of Appeals, 1999]
The exception even extends to cases of
concealment of illegally acquired property
not involving anti-graft cases as long as
money deposited was the subject matter of
litigation. [Mellon Bank, N.A. v. Magsino,
1990]
Other exceptions:
(1) When inquiry is conducted under the
authority of the Commissioner of Internal
Revenue into the bank accounts of the
following:
(a) A decedent in order to determine his
gross estate
(b) Any taxpayer who has filed an application
for compromise of his tax liability, which
application shall include a written waiver
UP LAW BOC BANKING LAWS
of his privilege under RA 1405 or under
other general or special laws
Information obtained from banks and
financial institutions may be furnished to a
foreign tax authority pursuant to an existing
convention or agreement. [Sec. 6(F), NIRC, as
amended by RA 10021]
(2) BSP inquiry or examination in the course of
its periodic or special examination of the
bank [Sec. 11, AMLA]
(3) Disclosure of certain information about bank
deposits which have been dormant for at
least 10 years, to the Treasurer of the
Philippine in a sworn statement, a copy of
which is posted in the bank premises [Sec. 2,
Unclaimed Balances Law (Act No. 3926, as
amended)]
(4) The PDIC and/or the BSP can inquire into or
examine deposit accounts and all
information related thereto in case there is a
finding of unsafe and unsound banking
practice [Sec. 8, paragraph 8, R.A. 3591, as
amended by R.A. 9576].
(5) The Secretary of Justice in his Opinion No. 13
s. 1987 concluded that the Presidential
Commission on Good Government can
compel banks to disclose or produce bank
records without violating the bank secrecy
laws. [Morales, The Philippine General
Banking Law]
NOT an exception:
Power of the Ombudsman to examine and
have access to bank accounts and records
under Sec. 15(8) of RA 6770 [Morales, The
Philippine General Banking Law]
The SC in Marquez v. Desierto [G.R.
No.135882, June 27, 2001] and Ombudsman v.
Ibay [G.R. No. 137538, September 3, 2001]
restricted the Ombudsmans power as
follows:
[B]efore an in camera inspection may be
allowed, there must be a pending case before
a court of competent jurisdiction. Further, the
account must be clearly identified, the
inspection limited to the subject matter of the
pending case before the court of competent
jurisdiction. The bank personnel and the
account holder must be notified to be present
during the inspection, and such inspection
may cover only the account identified in the
pending case.
PAGE 202
MERCANTILE LAW
GARNISHMENT OF DEPOSITS
General Rule: The prohibition against
examination of or inquiry into a bank deposit
under Republic Act 1405 does not preclude its
being garnished to insure satisfaction of a
judgment. [China Banking Corporation v. Ortega,
1973; Philippine Commercial and Industrial Bank
v. Court of Appeals, 1991]
the prohibition against examination of or
inquiry into a bank deposit under Republic Act
1405 does not preclude its being garnished to
insure satisfaction of a judgment. Indeed there
is no real inquiry in such a case, and if the
existence of the deposit is disclosed the
disclosure is purely incidental to the execution
process. It is hard to conceive that it was ever
within the intention of Congress to enable
debtors to evade payment of their just debts,
even if ordered by the Court, through the
expedient of converting their assets into cash
and depositing the same in a bank. [China
Banking Corporation v. Ortega, 1973]
Exception: Foreign Currency Deposits
The foreign currency deposits shall be exempt
from attachment, garnishment, or any other
order or process of any court, legislative body,
government agency or any administrative
body whatsoever. [Sec. 8, Foreign Currency
Deposit Act]
However, in Salvacion vs. CB (1997), where a
Filipino child was raped by a foreigner, the SC
allowed, pro hac vice, garnishment of foreign
currency deposits stating: If we rule that the
questioned Section 113 of CB Circular No. 960
which exempts from attachment,
garnishment, or any other order or process of
any court, legislative body, government
agency or any administrative body
whatsoever, is applicable to a foreign
transient, injustice would result especially to a
citizen aggrieved by a foreign guest.
CONFIDENTIALITY OF FOREIGN
CURRENCY DEPOSITS
General Rule: Foreign currency deposits are
confidential.
UP LAW BOC
Exceptions:
(1) Upon written permission of the depositor
[Sec. 8, Foreign Currency Deposit Act;
Intengan vs CA; 2002]
(2) Upon order of a competent court in cases of
violation of the Anti-Money Laundering Act
of 2001
(3) During Bangko Sentrals periodic or special
examinations, and
(4) Disclosure of the Treasurer of the Philippines
when the unclaimed balances law applies
[Act 3936, as amended by PD 679]
(5) BSP/PDIC inquiry if there is a finding of
unsafe and unsound banking practice
PENALTIES
(1) Imprisonment of not more than 5 years; or
(2) Fine of not more than twenty thousand
pesos; or
(3) Both, in the discretion of the court [Sec. 5]
General Banking Law of
2000 [R.A. No. 8791]
POLICY
To promote and maintain a stable and efficient
banking and financial system that is globally
competitive, dynamic and responsive to the
demands of a developing economy. [Sec. 2]
DEFINITION AND
CLASSIFICATION OF BANKS
Bank entities engaged in the lending of funds
obtained in the form of deposits [Sec. 3.1]
CORE BANKING FUNCTIONS:
(1) Taking of deposits from the public
(2) Lending out these funds [Morales, The
Philippine General Banking Law]
CLASSIFICATION OF BANKS [SEC.
3.2]
(1) Universal Banks (UB)
(2) Commercial Banks (KB)
(3) Thrift Banks
(a) Savings and mortgage banks
(b) Stock savings and loan associations
(c) Private development banks
(4) Rural Banks
BANKING LAWS MERCANTILE LAW
(5) Cooperative Banks
(6) Islamic Banks
(7) Other classification of banks as may be
determined by the Monetary Board of the
BSP
(1) UNIVERSAL BANKS
(2) COMMERCIAL BANKS
(3) THRIFT BANKS - The term thrift banks
also refers to any banking corporation
organized for the following purposes:
(a) Accumulating the savings of depositors and
investing them, together with capital loans
secured by bonds, mortgages in real estate
and insured improvements thereon, chattel
mortgage, bonds and other forms of security
or in loans for personal or household finance,
whether secured or unsecured, or in
financing for homebuilding and home
development; in readily marketable and debt
securities; in commercial papers and
accounts receivables, drafts, bills of
exchange, acceptances or notes arising out
of commercial transactions; and in such
other investments and loans which the
Monetary Board may determine as necessary
in the furtherance of national economic
objectives;
(b) Providing short-term working capital,
medium- and long-term financing, to
businesses engaged in agriculture, services,
industry and housing; and
(c) Providing diversified financial and allied
services for its chosen market and
constituencies especially for small and
medium enterprises and individuals.
[Sec.3(a), R.A. 7906]
(4) RURAL BANKS
These banks are mandated to make needed
credit available and readily accessible in the
rural areas on reasonable terms and which are
primarily governed by the Rural Banks Act of
1992 (RA 7353].
(5) COOPERATIVE BANKS
A cooperative bank is one organized for the
primary purpose of providing a wide range of
financial services to cooperatives and their
members. [Art. 23(i), R.A. 9520]
It may perform any or all of the services offered
by a rural bank, including the operation of an
PAGE 203
UP LAW BOC BANKING LAWS MERCANTILE LAW

FCDU subject to certain conditions. [Morales, BANK POWERS AND

The Philippine General Banking Law]
LIABILITIES
(6) ISLAMIC BANKS Powers
These are banks the business dealings and
UB KB
activities of which are subject to the basic
principles and rulings of Islamic Sharia. The Al (1) Corporate Powers (1) Corporate Powers
Amanah Islamic Investment Bank of the (2) Banking and (2) Banking and
Philippines, created by RA 6848, is the only Incidental Powers Incidental Powers
Islamic bank in the country at this time. (3) Powers of an [Sec. 29]
investment house (3) Power to invest in
(7) OTHER CLASSIFICATION OF BANKS AS (4) Power to invest in allied enterprises
MAY BE DETERMINED BY THE MONETARY non-allied [Sec. 30]
BOARD OF THE BSP enterprises [Sec. 23]
e.g., Philippine Veterans Bank [RA 3518], (5) Power to invest in
Landbank of the Philippines [RA 3844], allied enterprises
Development Bank of the Philippines [RA 85] [Sec. 24]

DISTINCTION OF BANKS FROM

QUASI-BANKS AND TRUST
ENTITIES
Quasi-banks entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes for purposes
of relending or purchasing receivables and
other obligations. [Sec. 4, last paragraph]
Deposit substitutes funds obtained from the
public, other than deposits, through the
issuance, endorsement, or acceptance of
deposit-substitute instruments for the
borrower's own account, for the purpose of
relending or purchasing of receivables and
other obligations. It includes bankers
acceptances, promissory notes, participations,
certificates of assignment and similar
instruments with recourse, and repurchase
agreements. [Sec. 95, New Central Bank Act]
Trust Entities a stock corporation or a person
duly authorized by the Monetary Board to
engage in trust business. [Sec. 79]
Trust Business - any activity resulting from
trusteeship involving the appointment of a
trustee by a trustor for the administration,
holding, management of funds and/or
properties of the trustor by the trustee for the
use, benefit or advantage of the trustor or of
beneficiaries.
CORPORATE POWERS [SEC. 36,
CORPORATION CODE]
(1) To sue and be sued in its corporate name;
(2) Succession by its corporate name for the
period stated in the AOI and the certificate of
incorporation
(3) To adopt and use a corporate seal
(4) To amend its AOI
(5) To adopt by-laws, not contrary to law,
morals, or public policy, and to amend or
repeal them
(6) To issue or sell stocks to subscribers and to
sell treasury stocks.
(7) To purchase, receive, take or grant, hold,
convey, sell, lease, pledge, mortgage and
otherwise deal with such real and personal
property, including securities and bonds of
other corporations, as the transaction of the
lawful business of the corporation may
reasonably and necessarily require, subject
to the limitations prescribed by law and the
Constitution
(8) To enter into merger or consolidation
(9) To make reasonable donations, including
those for the public welfare or for hospital,
charitable, cultural, scientific, civic, or similar
purposes: provided that no corporation,
domestic or foreign, shall give donations in
aid of any political party or candidate or for
purposes of partisan political activity
(10) To establish pension, retirement, and other
plans for the benefit of its directors, trustees,
officers and employees

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UP LAW BOC BANKING LAWS
(11) To exercise such other powers as may be
essential or necessary to carry out its
purposes as stated in the AOI.
BANKING AND INCIDENTAL POWERS
All such powers as may be necessary to carry on
the business of commercial banking [Sec. 29]
(1) Accepting drafts
(2) Issuing letters of credit
(3) Discounting and negotiating promissory
notes, drafts, bills of exchange, and other
evidence of debt
(4) Accepting or creating demand deposits
(5) Receiving other types of deposits and
deposit substitutes
(6) Buying and selling foreign exchange and
gold or silver bullion
(7) Acquiring marketable bonds and other debt
securities
(8) Extending credit
(1) ACCEPTING DRAFTS
By accepting a draft, a bank creates a bankers
acceptance, which is a negotiable time draft or
bill of exchange drawn on and accepted by a
commercial bank. This is different from trade
acceptance, which is accepted by the buyer.
[Morales, The Philippine General Banking Law)
(2) ISSUING LETTERS OF CREDIT
(3) DISCOUNTING AND NEGOTIATING
PROMISSORY NOTES, DRAFTS, BILLS OF
EXCHANGE, AND OTHER EVIDENCE OF
DEBT
(4) ACCEPTING OR CREATING DEMAND
DEPOSITS
General Rule: Only a Universal Bank (UB)
Commercial Bank (KB) can accept or create
demand deposits
Exception: Banks other than a UB or KB with
prior approval of, and subject to such conditions
and rules as may be prescribed by the Monetary
Board [Sec. 33, GBL]
Fixed, savings, and current deposits of money in
banks and similar institutions shall be governed
by the provisions concerning simple loan. [Art.
1980, NCC]
PAGE 205
MERCANTILE LAW
Presumption of ownership of deposits
It is presumed that money deposited in a bank
account belongs to the person in whose name
the deposit account is opened.
A depositor is presumed to be the owner of
funds standing in his name in a bank deposit;
and where a bank is not chargeable with
notice that the money deposited in such
account is the property of some other person
than the depositor, the bank is justified in
paying out the money to the depositor or
upon his order, and cannot be liable to any
other person as the true owner. [Fultron Iron
Works Co. v. China Banking Corporation, 1930]
No duty to set-off
A bank is under no duty or obligation to make
an application or set-off against the deposit
accounts of a borrower. To apply the deposit to
the payment of a loan is a privilege, a right of
set-off which the bank has the option (but not
the obligation) to exercise. [BPI v. CA, 1994]
Safety deposit boxes
The rent of safety deposit boxes is a special kind
of deposit and cannot be characterized as an
ordinary contract of lease because the full and
absolute possession and control of the deposit
box is not given to the renters. The prevailing
rule is that the relation between the bank
renting out and the renter is that of bailor and
bailee the bailment being for hire and mutual
benefit. [CA Agro-industrial Dev. Corp. v. CA,
1983]
(5) RECEIVING OTHER TYPES OF DEPOSITS
AND DEPOSIT SUBSTITUTES
Types of Deposits:
1. Time Deposit - Interest rate stipulated
depending on the number of days. During
this period, the money deposited may not
be withdrawn without incurring penalty.
High interest rates.
2. Savings Deposit - Bank pays an interest
rate, but not as high as time deposits.
3. Demand Deposits/Current Accounts - No
interest is paid by the bank because the
depositor can take out his funds any time. It
is called demand deposit because the
depositor can withdraw the money he
deposited on the very same day when he
UP LAW BOC BANKING LAWS MERCANTILE LAW

deposited it or at any time thereafter. b) Shall have the right to demand immediate
[VILLANUEVA, Commercial Law Review] repayment or liquidation of the obligation
4. Negotiable Order of Withdrawal Accounts [Sec. 40]
Interest-bearing deposit accounts that
combine the payable on demand feature of Limit on loans, credit accommodations and
checks and investment feature of savings guarantees
accounts [Sec. X223, Manual of Regulations General rule: Shall not exceed
for Banks] 75% of the appraised value of
the respective real estate
(6) BUYING AND SELLING FOREIGN security, plus 60% of the
EXCHANGE AND GOLD OR SILVER BULLION appraised value of the insured
Against Real
improvements, and such loans
estate
(7) ACQUIRING MARKETABLE BONDS AND may be made to the owner of
OTHER DEBT SECURITIES the real estate or to his
assignees
(8) EXTENDING CREDIT Exception: The Monetary Board
otherwise prescribes [Sec. 37]
Know your customer rule General rule: Shall not exceed
Before granting a loan or other credit On security of
75% of the appraised value of
accommodation, a bank must ascertain that the chattels and
the security, and such loans
debtor is capable of fulfilling its commitments intangible
and other credit
to the bank. [Sec. 40] properties
accommodations may be
(patents,
made to the title-holder of the
The bank may demand from its credit trademarks,
chattels and intangible
applicants a statement of their assets and trade names,
properties or his assignees
liabilities and of their income and expenditure and
Exception: The Monetary Board
and such information as may be prescribed by copyrights)
otherwise prescribes [Sec. 38]
law or by rules and regulations of MB to enable
the bank to properly evaluate the credit Grant of loans
application which includes the corresponding a) Only in amounts and for the periods of time
financial statements submitted for taxation essential for the effective completion of the
purposes to the BIR. [Sec. 40] operations to be financed; and
b) Consistent with safe and sound banking
Credit enhancement practices. [Sec. 39]
If the borrower is less than creditworthy, third Purpose of loans
persons may enhance his credit by providing The purpose shall be stated in the application
guarantees and other security devices in favor of and in the contract between the bank and the
the bank. [Morales, The Philippine General borrower. [Sec. 39]
Banking Law, opinion]
Effect of usage of loan proceeds for purposes
A bank cannot lend pesos to a non-resident other than those agreed upon with the bank
[BSP Circular No. 22; Sec. 22, Manual of The bank shall have the right to terminate the
Regulations on Foreign Exchange Transactions]. loan or other credit accommodation and
[Morales, The Philippine General Banking Law] demand immediate repayment of the
obligation. [Sec. 39]
Material misrepresentation
If there is material misrepresentation, the Amortization on loans and other credit
bank accommodations
a) May terminate any loan or other credit a) In case of loans and other credit
accommodation granted on the basis of accommodations with maturities of more
said statements; and than 5 years, provisions must be made for
periodic amortization payments, but such
payments must be made at least annually:

PAGE 206
UP LAW BOC
Provided, however, That when the borrowed
funds are to be used for purposes which do
not initially produce revenues adequate for
regular amortization payments therefrom,
the bank may permit the initial amortization
payment to be deferred until such time as
said revenues are sufficient for such
purpose, but in no case shall the initial
amortization date be later than 5 years from
the date on which the loan or other credit
accommodation is granted.
b) In case of loans and other credit
accommodations to microfinance sectors,
the schedule of loan amortization shall take
into consideration the projected cash flow of
the borrower and adopt this into the terms
and conditions formulated by banks. [Sec.
44]
All are subject to such rules as the Monetary
Board may promulgate. [Sec. 29, GBL]
DILIGENCE REQUIRED OF
BANKS
Banks assume a degree of diligence higher
than that of a good father of a family. Its
fiduciary duty imposes upon it a higher level
of accountability than that expected of a
depositor. [Philippine Banking Corporation vs.
CA, G.R. No. 127469, January 15, 2004]
The General Banking Law of 2000 requires of
banks the highest standards of integrity and
performance. The banking business is
impressed with public interest. Of paramount
importance is the trust and confidence of the
public in general in the banking industry.
Consequently, the diligence required of banks
is more than that of a Roman pater familias or
a good father of a family. The highest degree
of diligence is expected. [Philippine
Commercial Bank vs. Balmaceda, G.R. No.
158143, September 21, 2011]
Notwithstanding the degree of diligence
required, a bank is not expected to be
infallible [Prudential Bank vs. CA, 2000].
FIDUCIARY DUTY
(a) Failure on the part of the bank to satisfy the
degree of diligence required of banks may
warrant the award of damages.
BANKING LAWS MERCANTILE LAW
(b) Under Sec. 2, the degree of diligence is high
standards of integrity and performance and
no longer highest degree of diligence as
was decided prior to the effectivity of the
General Banking Law of 2000 but also
(mistakenly) even thereafter. In numerous
cases, the Supreme Court has held that the
highest degree of diligence and care is
expected from banks [Simex International v.
CA (1990); Philippine Bank of Commerce v. CA
(1997); Westmont Bank v. Ong (2002);
Solidbank v. Spouses Tan (2003); Samsung
Construction v. FEBTC (2004); Citibank, N.A.
v. Spouses Cabamongan (2006); Philippine
Savings Bank v. Chowking Food Corporation
(2008); Bank of America NT &SA v. Philippine
Racing Club (2009)].
As a business affected with public interest
and because of the nature of its functions, the
bank is under obligation to treat the accounts
of its depositors with meticulous care, always
having in mind the fiduciary nature of their
relationship.
In every case, the depositor expects the bank
to treat his account with the utmost fidelity,
whether such account consists only of a few
hundred pesos or of millions. The bank must
record every single transaction accurately,
down to the last centavo, and as promptly as
possible. This has to be done if the account is
to reflect at any given time the amount of
money the depositor can dispose as he sees
fit, confident that the bank will deliver it as
and to whomever he directs. A blunder on the
part of the bank, such as the failure to duly
credit him his deposits as soon as they are
made, can cause the depositor not a little
embarrassment if not financial loss and
perhaps even civil and criminal litigation
[Simex International v. CA, 1990].
This fiduciary relationship means that the
banks obligation to observe high standards
of integrity and performance is deemed
written into every deposit agreement between
a bank and its depositor [Philippine Banking
Corporation vs. CA, G.R. No. 127469, January
15, 2004].
Banks are expected to exercise the highest
degree of diligence in the selection and
supervision of their employees [PCI Bank v.
CA, 2001].
PAGE 207
UP LAW BOC BANKING LAWS
It cannot be over emphasized that the
banking business is impressed with public
interest. Of paramount importance is the trust
and confidence of the public in general in the
banking industry. Consequently, the diligence
required of banks is more than that of a
Roman pater familias or a good father of a
family. The highest degree of diligence is
expected [Phil. Savings Bank v. Chowking Food
Corporation, 2008].
The banking business is so impressed with
public interest where the trust and confidence
of the public in general is of paramount
importance such that the appropriate
standard of diligence must be a high degree
of diligence, if not the utmost diligence [Bank
of America NT&SA v. Phil. Racing Club, 2009].
Under the doctrine of last clear chance, a
bank may be held liable for loss despite the
negligence of a depositor. Examples of these
cases are the following:
(a) For disbursing funds to a dishonest
employee despite the employees failure to
strictly abide with the banks internal
procedure. [PBC v. CA, 1997]
(b) Allowing the execution of a mortgage on
parcels of land as security for a loan not
owned by the prospective borrower.
[Canlas v. Court of Appeals, 2000]
(c) Crediting the deposit in favor of another
depositor, a check where the signature of
the drawer was forged. [Westmont Bank v.
Ong, 2002]
NATURE OF BANK FUNDS AND
BANK DEPOSITS
The relationship between a depositor and a
bank is that of a creditor and debtor in
relation to the banks deposit functions [Gullas
vs. PNB, G.R. No. L-43191, November 13, 1935]
and not that of depositor and depositary.
The contract between the bank and its
depositor is governed by the provisions of the
NCC on simple loan [Consolidated Bank and
Trust Corporation vs. CA, G.R. No. 138569,
September 11, 2003].
Bank deposits are in the nature of irregular
deposits [Serrano vs. Central Bank, G.R. No. L-
30511, February 14, 1980]. Therefore, Art. 1287
of the Civil Code, which prohibits
PAGE 208
MERCANTILE LAW
compensation when one of the debts arises
from depositum, does not apply.
Current and savings deposits are loans to a
bank because the bank can use the same and
they earn interest [BPI vs. CA, G.R. No. 104612,
May 10, 1994].
The relationship being contractual in nature,
mandamus is therefore NOT an available
remedy since mandamus does not lie to
enforce the performance of contractual
obligations [Maclaring Lucman vs. Alimatar
Malawi, G.R. No. 159794, December 19, 2006]
Money deposited is commingled with other
money constituting a common fund.
STIPULATION ON INTERESTS
The Monetary Board may prescribe the
maturities, as well as related terms and
conditions for various types of bank loans and
other credit accommodations.
Any change by the Board in the maximum
maturities shall apply only to loans and other
credit accommodations made after the date
of such action.
The Monetary Board shall regulate the
interest imposed on micro finance borrowers
by lending investors and similar lenders such
as, but not limited to, the unconscionable
rates of interest collected on salary loans and
similar credit accommodations [Sec. 43]
GRANT OF LOANS AND
SECURITY REQUIREMENTS
(PRUDENTIAL MEASURES)
RATIO OF NET WORTH TO TOTAL
RISK ASSETS
The minimum ratio which the net worth of a
bank must bear to its total risk assets which
may include contingent accounts [i.e. net worth:
total risk assets] [Sec. 34]
General Rule: A bank must conform to the risk-
based capital ratio prescribed by the MB
Exceptions: The MB may alter or suspend
compliance with such ratio whenever necessary
for a maximum period of 1 year.
(1) In case of a bank merger or consolidation; OR
UP LAW BOC BANKING LAWS
(2) When a bank is under rehabilitation under a
program approved by the BSP; [Sec. 34]
PURPOSE
A bank must not be allowed to expand the
volume of its loans and investments in a
manner that is disproportionate to its net worth.
[Morales, The Philippine General Banking Law]
EFFECT OF NON-COMPLIANCE
(1) The MB may limit or prohibit the distribution
of net profits by such bank and may require
that part or all of the net profits be used to
increase the capital accounts of the bank
until the minimum requirement has been
met.
(2) The MB may restrict or prohibit the
acquisition of major assets and the making of
new investments by the bank, with the
exception of purchases of readily marketable
evidences of indebtedness of the RP and the
BSP and any other evidences of
indebtedness or obligations the servicing
and repayment of which are fully guaranteed
by the RP, until the minimum required
capital ratio has been restored. (Sec. 34, GBL)
SINGLE BORROWERS LIMIT
General Rule: The total loans, credit
accommodations and guarantees that may be
extended by a bank to any person, partnership,
association, or corporation or other entity shall
at no time exceed 20% of the net worth of such
bank. [Sec. 35.1]
Exceptions:
(1) The Monetary Board otherwise prescribes for
reasons of national interest. [Sec. 35.1] Now,
the single borrowers limit is 25% of the net
worth of the lending bank.
(2) Wholesale lending activities of government
banks to participating institutions for
relending to end-user borrowers: separate
limit of 35% net worth. [BSP Circular No. 425
dated March 25, 2004]
INCREASE OF LIMIT
The Monetary Board may increase the limit
prescribed by an additional 10% of the net
worth, when:
(1) The additional liabilities of any borrower are
adequately secured by trust receipts,
shipping documents, warehouse receipts or
PAGE 209
MERCANTILE LAW
other similar documents transferring or
securing title;
(2) Covering readily marketable, non-perishable
goods; and
(3) Which must be fully covered by insurance
[Sec. 35.2]
PURPOSE
To prevent the bank from making excessive
loans and other credit accommodations to a
single borrower or corporate group, including
guarantees for the account of such borrower or
group. The bank is prohibited from placing
many eggs in the basket of one client. [It] is a
damage-control mechanism [and] a device for
risk amelioration. [Morales, The Philippine
General Banking Law]
BASIS FOR DETERMINING COMPLIANCE
The basis for determining compliance with the
SBL is the total credit commitment of the bank
to the borrower. [Sec. 35.1]
INCLUSIONS IN THE CEILING
(1) The direct liability of the maker or acceptor of
paper discounted with or sold to such bank
and the liability of a general indorser, drawer
or guarantor who obtains a loan or other
credit accommodation from or discounts
paper with or sells papers to such bank;
(2) In the case of an individual who owns or
controls a majority interest in a corporation,
partnership, association or any other entity,
the liabilities of said entities to such bank;
(3) In the case of a corporation, all liabilities to
such bank of all subsidiaries in which such
corporation owns or controls a majority
interest; and
(4) In the case of a partnership, association or
other entity, the liabilities of the members
thereof to such bank. [Sec. 35.3]
GUIDELINES ON THE WHOLESALE LENDING
OF GOVERNMENT BANKS
(1) It shall apply only to loans granted by
participating financial institutions (PFIs) on a
wholesale basis for on-lending to end-user
borrowers;
(2) It shall apply only to loan programs funded
by multilateral, international, or local
development agencies, organizations, or
institutions, especially designed for
UP LAW BOC BANKING LAWS
wholesale lending activities of government
banks;
(3) The end-user borrowers of the PFIs shall be
subject to the 25% SBL, not the increased
ceiling of 35%; and
(4) Government banks shall observe appropriate
criteria for accrediting PFIs and for the
grant/renewal of credit lines to accredited
PFIs. [BSP Circular No. 425 dated March 25,
2004]
EXCLUSIONS FROM THE CEILING (NON-
RISK LOANS)
Loans and other credit accommodations
(1) Secured by obligations of the BSP or of the
Philippine Government;
(2) Fully guaranteed by the government as to
the payment of principal and interest;
(3) Covered by assignment of deposits
maintained in the lending bank and held in
the Philippines;
(4) Under letters of credits to the extent covered
by margin deposits; and
(5) Specified by the Monetary Board as non-risk
items [Sec. 35.5]
COMBINATION OF LIABILITIES
The MB may prescribe the combination of the
liabilities of subsidiary corporations or members
of the partnership, association, entity or such
individual under certain circumstances,
including but not limited to any of the following
situations:
(1) The parent-corporation, partnership,
association, entity or individual guarantees
the repayment of the liabilities;
(2) The liabilities were incurred for the
accommodation of the parent corporation or
another subsidiary or of the partnership or
association or entity or such individual; or
(3) The subsidiaries though separate entities
operate merely as departments or divisions
of a single entity. [Sec. 35.4, GBL]
Loans and other credit accommodations,
deposits maintained with, and usual guarantees
by a bank to any other bank or non-bank entity,
whether locally or abroad, shall be subject to
the prescribed limits. [Sec. 35.6]
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MERCANTILE LAW
RESTRICTIONS ON BANK EXPOSURE
TO DOSRI (DIRECTORS, OFFICERS,
STOCKHOLDERS, AND THEIR
RELATED INTERESTS)
General Rule: No director or officer of any
bank
(1) Shall, directly or indirectly, for himself or as
the representative or agent of others, borrow
from such bank, nor
(2) Shall he become a guarantor, endorser or
surety for loans from such bank to others, or
in any manner be an obligor or incur any
contractual liability to the bank
Exceptions:
(1) Valid insider lending [Sec. 36]
(2) Loans, credit accommodations and
guarantees extended by a cooperative bank
to its cooperative shareholders [Sec. 36]
REQUIREMENTS FOR VALID INSIDER
LENDING
(1) In the regular course of business;
(2) Upon terms not less favorable to the bank
than those offered to others;
(3) There is a written approval of the majority of
all the directors of the bank, excluding the
director concerned (Except: granted to
officers under a fringe benefit plan approved
by the BSP);
(4) The required approval shall be entered upon
the record of the bank and a copy of such
entry shall be transmitted forthwith to the
appropriate supervising and examining
department of the BSP;
(5) Limited to an amount equivalent to the
DOSRI borrowers unencumbered deposits
and book value of his paid-in capital
contribution in the bank [Sec. 36]
Exceptions:
(1) Non-risk items; and
(2) Loans in the form of fringe benefits.
A DOSRI borrower is required to waive the
secrecy of his deposits of whatever nature in all
banks in the Philippines. [Sec. 26, NCBA]
PURPOSE
The general policy behind DOSRI rules is to
level the lending field between the insiders
UP LAW BOC BANKING LAWS
and the outsiders. The objective is to prevent
the bank from becoming a captive source of
finance for DOSRI. [Morales, The Philippine
General Banking Law]
LOAN-LOSS PROVISIONING
The following are subject to regulation by the
Monetary Board:
(1) The amount of reserves for bad debts or
doubtful accounts or other contingencies;
and
(2) The writing off of loans, other credit
accommodations, advances and other
assets. [Sec. 49]
Purpose
For effective banking supervision. There is a
problem of mismatch when a loan becomes
non-performing. The bank is paying interest
on the money it borrowed from the depositors
or other placers of funds, but is not recouping
that interest from the loan it made.
Eventually, the bank may have to write off
loan losses against profits. To cushion this
eventuality, the bank is required to set aside
reserved for bad debts and other doubtful
accounts or contingencies. [Morales, The
Philippine General Banking Law]
To address the non-performing asset
problem, RA 9182 Special Purpose Vehicle
Act was passed. The Monetary Board
approved certain accounting guidelines on
the sale by banks and other financial
institutions for housing under the said Act.
[Morales, The Philippine General Banking Law]
[N.B. RA 9182 is no longer in effect.]
RESERVES
Purposes
(1) To control the volume of money created by
the credit operations of the banking system,
the BSP requires all banks to maintain
reserves against their deposit and deposit-
substitute liabilities.
(2) As a ready source of funds that will respond
to unusually large number of withdrawals or
preterminations of deposits or deposit-
substitutes, taking in the shape of a bank
run. [Morales, The Philippine General Banking
Law]
PAGE 211
MERCANTILE LAW
UNIFIED RESERVE
(1) Statutory or legal and liquidity reserve [N.B.
The two reserves have been combined or
unified: 18% for deposits and deposit
substitutes] [BSP Circular No. 753 dated
March 29, 2012]
(a) For deposit-substitutes evidenced by
repurchase agreements covering
government securities: 2% [BSP Circular
No. 444 dated August 18, 2004]
(b) For foreign currency deposit units: 100%
[BSP Circular No. 1389 dated April 13, 1993,
as amended]; 30% of this cover must be in
the form of liquid assets [BSP Circular-
Letter dated June 6, 1997, as cited in
Morales]
(2) Reserve: The required reserves are to be kept
in the form of deposits placed in the banks
Demand Deposit Account with the BSP [BSP
Circular No. 753 dated March 29, 2012]
The BSP shall not pay interest on the reserves
maintained with it unless the Monetary Board
decides otherwise as warranted by
circumstances. [Sec. 94, NCBA]
PDIC INSURANCE
Banks are required to insure their deposit
liabilities with the PDIC.
PARTIAL INSURANCE
Each depositor is a beneficiary of the
insurance for a maximum amount of
P500,000, or its foreign currency equivalent
in the case of an FCDU deposit. [RA 9576,
2009]
Note: PDIC only insures deposit (not deposit
substitute) liabilities of a bank or banking
institution [Sec.5, RA 3591, as amended]
PURPOSE
Full insurance might encourage risky banking
activities. A limited insurance of bank deposits
serves to limit moral hazard.
EQUITY INVESTMENT LIMITS (ALLIED
VS. NON-ALLIED)
This is a prudential measure by limiting the
exposure of banks in different businesses for the
purpose of control, affiliation or other
continuing business advantage.
UP LAW BOC BANKING LAWS MERCANTILE LAW

General Rule UB [Sec. 24] KB [Sec. 30] PENALTIES FOR VIOLATION

Violation of any of the provisions of the GBL
Total (allied & non- (of allied shall be subject to Sections 34, 35, 36 and 37 of
investment in allied enterprises) the New Central Bank Act, unless otherwise
equities: enterprises) Not exceeding provided under therein.
Not exceeding 35% of the net
50% of the net worth of the CRIMINAL SANCTIONS
worth of the bank (1) Refusal by an institution subject to
bank examination and supervision by the
The equity (allied/non- (allied) Monetary Board to file the required report or
investment in allied) Not exceeding permit any lawful examination into its affairs
any one Not exceeding 25% of the net [Sec. 34, NCBA]
enterprise: 25% of the net worth of the (a) Fine: Not less than Fifty thousand pesos
worth of the bank (P50,000) nor more than One hundred
bank thousand pesos (P100,000); or
(b) Imprisonment: Not less than one (1) year
Net Worth the total of the unimpaired paid-in nor more than five (5) years; or
capital including paid-in surplus, retained (c) Both fine and imprisonment: in the
earnings and undivided profit, net of valuation discretion of the Court.
reserves and other adjustments (2) Willful making of a false or misleading
The acquisition of such equity is subject to the statement on a material fact to the Monetary
prior approval of the MB. Board or to the examiners of the Bangko
Sentral (Sec. 35, NCBA)
The equity investment of a Universal Bank in (a) Fine: Not less than One hundred
(1) Financial Allied Enterprises 100% of the thousand pesos (P100,000) nor more
equity in a thrift bank, rural bank, or financial than One hundred thousand pesos
allied enterprise. [Sec 25 GBL]. A publicly- (P200,000); or
listed UB or KN may own up to 100% of the (b) Imprisonment: Not more than five (5)
voting stock of only one other UB or KB. years; or
(2) Non-Financial Allied Enterprises 100% of (c) Both fine and imprisonment, in the
the equity of that enterprise [Sec 26 GBL] discretion of the Court.
(3) Non-Allied Enterprises Not exceeding 35% (3) Willful violation of the NCBA and other
of the total equity in a single non-allied pertinent banking laws (including the GBL)
enterprise not shall it exceed 35% of the being enforced or implemented by the
voting stock in that enterprise. [Sec 27 GBL] Bangko Sentral or any order, instruction, rule
(4) Quasi-banks 40% of the equity of quasi- or regulation issued by the Monetary Board
banks [Sec 28] [Sec. 36, NCBA]
(a) Fine: Not less than Fifty thousand pesos
The equity investment of Commercial Banks in (P50,000) nor more than One hundred
(1) Financial Allied enterprises 100% of the thousand pesos (P200,000); or
equity of a thrift or rural bank. [Sec 31 GBL]. (b) Imprisonment: Not less than two (2) years
Where the equity investment of a KB is in nor more than ten (10) years; or
other financial allied enterprises, including (c) Both fine and imprisonment, in the
other KBs, such investment shall remain a discretion of the Court.
minority holding in that enterprise.
(2) Non-Financial Allied enterprises 100% of ADMINISTRATIVE SANCTIONS
the equity of said enterprises. [Sec 32 GBL] (1) Willful violation of its charter or by-laws;
(3) Quasi-banks 40% of the equity of quasi- willful delay in the submission of reports or
banks. [Sec 28] publications thereof as required by law, rules
and regulations; Criminal Acts in Nos. 1 to 3
above; and/or conducting business in an

PAGE 212
UP LAW BOC BANKING LAWS
unsafe or unsound manner as may be
determined by the Monetary Board
(a) Fine not exceeding Thirty thousand pesos
(P30,000) a day for each violation, taking
into consideration the attendant
circumstances, such as the nature and
gravity of the violation or irregularity and
the size of the bank or quasi-bank; or
(b) Suspension of rediscounting privileges or
access to Bangko Sentral credit facilities;
(c) Suspension of lending or foreign
exchange operations or authority to
accept new deposits or make new
investments;
(d) Suspension of interbank clearing
privileges; and/or
(e) Revocation of quasi-banking license.
(2) Suspension or Removal of Director
(a) If the offender is a director or officer of a
bank, quasi-bank or trust entity, the
Monetary Board may also suspend or
remove such director or officer [Sec. 66].
(b) Resignation or termination from office
shall not exempt such director or officer
from administrative or criminal sanctions.
[Sec. 37, NCBA]
(3) Dissolution of Bank
(a) If the violation is committed by a
corporation, such corporation may be
dissolved by quo warranto proceedings
instituted by the Solicitor General [Sec.
66]
(b) Whenever a bank or quasi-bank persists
in carrying on its business in an unlawful
or unsafe manner, the Monetary Board
may commence proceedings in
liquidation. [Sec. 36, NCBA in relation to
Sec. 30, NCBA]
Philippine Deposit
Insurance Corporation Act
[R.A. 3951, as amended]
PURPOSE OF THE PDIC
(1) To insure the deposits of all banks which are
entitled to the benefits of insurance under
this Act
PAGE 213
MERCANTILE LAW
(2) To promote and safeguard the interests of
the depositing public by way of providing
permanent and continuing insurance
coverage on all insured deposits [Sec. 1]
POWERS OF THE PDIC
(1) To adopt and use a corporate seal
(2) To have succession until dissolved by Act of
Congress
(3) To make contracts
(4) To sue and be sued; no attachment or
execution shall be issued against it before
final judgment
(5) To appoint officers and employees not
provided in this Act, define their duties, fix
their compensation, dismiss them
(6) Prescribe by-laws regulating the manner in
which their general business may be
conducted
(7) To exercise express and incidental powers
(8) To conduct examination of banks with prior
approval of the MB
(9) To act as receiver
(10) To prescribe rules and regulations
(11) To establish its own provident fund which
shall consist of contributions made both by
PDIC and by its officers and employees to a
common fund for the payment of benefits to
such officers or employees or their heirs
(12) To compromise, condone or release, in
whole or in part, any claim or settled liability
to PDIC [Sec. 8]
FUNCTIONS OF THE PDIC
INSURANCE
The deposit liabilities of any bank or banking
institution, which is engaged in the business
of receiving deposits on the effective date of
this Act, or which thereafter may engage in
the business of receiving deposits, shall be
insured with the PDIC [Sec.5]
Bank and Banking Institution - shall include
banks, commercial banks, savings bank,
mortgage banks, rural banks, development
banks, cooperative banks, stock savings and
loan associations and branches and agencies
in the Philippines of foreign banks and all
other corporations authorized to perform
banking functions in the Philippines [Sec. 4(b),
as amended]
UP LAW BOC BANKING LAWS
Deposit - the unpaid balance of money or its
equivalent received by a bank in the usual
course of business and for which it has given
or is obliged to give credit to a commercial,
checking, savings, time or thrift account, or
issued in accordance with Bangko Sentral
rules and regulations and other applicable
laws, together with such other obligations of a
bank, which, consistent with banking usage
and practices, the Board of Directors shall
determine and prescribe by regulations to be
deposit liabilities of the bank [Sec. 4(f), as
amended].
What is not considered a deposit? Any
obligation of a bank which is payable at the
office of the bank located outside of the
Philippines [Sec. 4(f), as amended].
Insured deposit - the amount due to any bona
fide depositor for legitimate deposits in an
insured bank net of any obligation of the
depositor to the insured bank as of the date of
closure, but not to exceed 500,000 or its
equivalent in foreign currency [Sec. 4(g), as
amended]
EXCLUSIONS
The PDIC shall not pay deposit insurance for the
following accounts or transactions, whether
denominated, documented, recorded or booked
as deposit by the bank:
(1) Investment products such as bonds and
securities, trust accounts, and other similar
instruments;
(2) Unfunded, fictitious or fraudulent deposit
accounts or transactions;
(3) Deposits accounts or transactions
constituting, and/or emanating from, unsafe
and unsound banking practice/s, as
determined by the PDIC, in consultation with
the BSP, after due notice and hearing, and
publication of a cease and desist order
issued by the PDIC against such deposit
accounts or transactions; and
(4) Deposits that are determined to be the
proceeds of an unlawful activity as defined
under Republic Act 9160, as amended [Sec.
4(f)]
EXTENT OF LIABILITY
The liability of the Corporation is to the extent
of the insured deposit [Sec.14].
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Whenever an insured bank shall have been
closed by the Monetary Board pursuant to
Section 30 of R.A. 7653, payment of the
insured deposits on such closed bank shall be
made by the PDIC as soon as possible either
(1) by cash or (2) by making available to each
depositor a transferred deposit in another
insured bank in an amount equal to insured
deposit of such depositor [Sec. 14].
Note: Insured deposit shall not exceed
500,000 [Sec. 4(g), as amended].
DETERMINATION OF INSURED DEPOSITS
The determination of insured deposits shall
commence upon the PDICs actual takeover of
the closed bank [Sec. 16(a), as amended].
The amount of the insured deposit shall be
determined according to such regulations as
the Board of Directors may prescribe, In
determining such amount due to any
depositor, there shall be added together all
deposits in the bank maintained in the same
right and capacity for his benefits either in his
own name or in the name of others [Sec. 4(g),
as amended].
Note: The PDIC may require proof of claims to
be filed before paying the insured deposits,
and that in any case where the PDIC is not
satisfied as to the viability of a claim for an
insured deposit, it may require final
determination of a court of competent
jurisdiction before paying such claim [Sec. 14]
PER DEPOSITOR, PER CAPACITY RULE
In determining the amount due to any
depositor, there shall be added together all
deposits in the bank maintained in the same
right and capacity for his benefits either in his
own name or in the name of others [Sec. 4(g), as
amended]
JOINT ACCOUNTS
A joint account regardless of whether the
conjunction 'and,' 'or,' 'and/or' is used, shall be
insured separately from any individually-owned
deposit account [Sec. 4(g), as amended].
IF THE ACCOUNT IS HELD BY TWO OR
MORE NATURAL PERSONS OR TWO OR
MORE JURIDICAL PERSONS
General rule: The maximum insured deposit
shall be divided into as many equal shares as
UP LAW BOC BANKING LAWS
there are individuals or juridical persons [Sec.
4(g), as amended].
Exception: Unless a different sharing is
stipulated in the document of deposit [Sec. 4(g),
as amended].
IF THE ACCOUNT IS HELD BY A JURIDICAL
PERSON OR ENTITY JOINTLY WITH ONE OR
MORE NATURAL PERSONS
The maximum insured deposits shall be
presumed to belong entirely to such juridical
person or entity [Sec. 4(g), as amended].
Note: The aggregate of the interest of each
co-owner over several joint accounts, whether
owned by the same or different combinations
of individuals, juridical persons or entities,
shall likewise be subject to the maximum
insured deposit of P500,000.00 [Sec. 4(g), as
amended].
MODE OF PAYMENT
Payment of the insured deposits on such
closed bank shall be made by the PDIC as
soon as possible either:
(1) by cash;
(2) by making available to each depositor a
transferred deposit in another insured
bank in an amount equal to insured
deposit of such depositor [Sec. 14]
Note: Transfer Deposit means a deposit in an
insured bank made available to a depositor by
the PDIC as payment of insured deposit of
such depositor in a closed bank and assumed
by another insured bank [Sec. 4(h), as
amended].
EFFECT OF PAYMENT
(1) The PDIC shall be discharged from liability to
the depositor [Sec. 16(b)]
(2) The PDIC, upon payment of any depositor as
provided for in Section 14 shall be
subrogated to all rights of the depositor
against the closed bank to the extent of such
payment [Sec. 15]
(3) Payments by the PDIC of insured deposits in
closed banks partake of the nature of public
funds, and as such, must be considered a
preferred credit similar to taxes due to the
National Government in the order of
preference under Article 2244 of the New
Civil Code [Sec. 15]
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MERCANTILE LAW
FAILURE TO SETTLE CLAIM OF INSURED
DEPOSITOR
General rule: Failure to settle the claim within
six (6) months from the date of filing of claim for
insured deposit shall, upon conviction, subject
the directors, officers or employees of the PDIC
responsible for the delay to imprisonment from
six (6) months to one (1) year.
Exceptions:
(1) Such failure was not due to grave abuse of
discretion, gross negligence, bad faith, or
malice of the directors, officers or employees;
or
(2) The validity of the claim requires the
resolution of issues of facts and or law by
another office, body or agency including the
case mentioned in the first proviso or by
PDIC together with such other office, body or
agency.
FAILURE OF DEPOSITOR TO CLAIM
INSURED DEPOSITS
All rights of the depositor against the PDIC
with respect to the insured deposit shall be
barred:
(1) If he fails to claim the insured deposits
within two (2) years from actual takeover
of the closed bank by the receiver; or
(2) If he does not enforce his claim filed with
the corporation within two (2) years after
the two-year period to file a claim.
BUT all rights of the depositor against the
closed bank and its shareholders or the
receivership estate to which the PDIC may
have become subrogated, shall thereupon
revert to the depositor.
Thereafter, the PDIC shall be discharged from
any liability on the insured deposit [Sec. 16(e),
as amended].
BANK EXAMINATION
The PDIC may examine an insured bank with
prior approval of the MB if, in its opinion, such
bank or its directors or agents have violated, are
violating or about to violate any provision of the
PDIC Act or any order, rule or instruction issued
by the PDIC or any written condition imposed by
the PDIC in connection with any transaction
with or grant by it. [Sec. 7 in relation to Sec. 8]
UP LAW BOC BANKING LAWS
FINANCIAL ASSISTANCE
The PDIC may grant financial assistance to
distressed banks if it is proven to be a less costly
alternative than closure [Sec. 17(d)].
RECEIVERSHIP OF CLOSED
BANKS [SEC. 10]
LIQUIDATION OF CLOSED
BANKS [SEC. 17 (D)]
Foreign Currency Deposit
Act [RA 6426]
The FCDA allows any person to deposit, and
banks to accept deposit, any foreign currency
acceptable as part of the Philippines
international reserve. (Secs. 2 & 3)
SECRECY OF FOREIGN
CURRENCY DEPOSITS
All foreign currency deposits are declared as
and considered of an absolutely confidential
nature and, except upon the written
permission of the depositor, in no instance
shall be examined, inquired or looked into by
any person, government official, bureau or
office, whether judicial or administrative, or
legislative or any other entity whether public
or private. [Sec. 8]
The foreign currency deposits shall be exempt
from attachment, garnishment, or any other
order or process of any court, legislative body,
government agency or any administrative
body whatsoever. [Sec. 8]
Exceptions:
(1) Upon written permission of the depositor
[Sec. 8; Intengan vs CA, 2002]
(2) Upon order of a competent court in cases of
violation of the Anti-Money Laundering Act
of 2001 [as in the case of peso deposits, supra]
(3) During Bangko Sentrals periodic or special
examinations [as in the case of peso
deposits, supra], and
(4) Disclosure of the Treasurer of the Philippines
when the unclaimed balances law applies
[Act 3936, as amended by PD 679]
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MERCANTILE LAW
(5) BSP/PDIC inquiry if there is a finding of
unsafe and unsound banking practice [as in
the case of peso deposits, supra]
(6) In Salvacion vs. CB (1997), where a Filipino
child was raped by a foreigner, the SC
allowed, pro hac vice, garnishment of foreign
currency deposits stating: If we rule that the
questioned Section 113 of CB Circular No.
960 which exempts from attachment,
garnishment, or any other order or process of
any court, legislative body, government
agency or any administrative body
whatsoever, is applicable to a foreign
transient, injustice would result especially to
a citizen aggrieved by a foreign guest.
PRIVILEGES
(1) Tax exemption the FCD, including interests
and all other income or earnings of such
deposits, are exempt from any and all taxes
whatsoever if these deposits are made by
non-residents and irrespective of whether or
not the non-residents are engaged in trade
or business in the Philippines (Sec. 6 as
amended). Interests on FCDs of residents are
subject to 7.5% withholding tax.
(2) Exemption from attachment, garnishment or
any other order or process of any court,
legislative or administrative body, or
government agency whatsoever [Sec. 8]
Exception: The CA, upon application ex parte by
the AMLC and after determination that a
probable cause exists that any monetary
instrument or property is in any way related to
an unlawful activity, the AMLC, may freeze the
account [Sec. 10, RA 9160].
PAGE 217
UP LAW BOC INTELLECTUAL PROPERTY CODE
Intellectual Property
Rights in General
STATE POLICIES
(1) To protect and secure the exclusive rights of
scientists, inventors, artists and other gifted
citizens to their intellectual property and
creations, particularly when beneficial to the
people, for such periods as provided in this
Act.
(2) To promote the diffusion of knowledge and
information for the promotion of national
development and progress and the common
good.
(3) To streamline administrative procedures of
registering patents, trademarks and
copyright, to liberalize the registration on the
transfer of technology, and to enhance the
enforcement of intellectual property rights in
the Philippines. [Sec. 2, RA 8293]
INTERNATIONAL
CONVENTIONS GOVERNING
INTELLECTUAL PROPERTY
RIGHTS
(1) Berne Convention for the Protection of
Literary and Artistic Works as revised by the
Brussels Act (August 1, 1951)
(2) Paris Convention for the Protection of
Industrial Property Rights (September 27,
1965)
(3) International Convention for the Protection
of Performers, Producers of Phonograms and
Broadcasting Organizations (Rome
Convention, September 25, 2984)
(4) Convention Establishing the World
Intellectual Property Organization (July 14,
1980)
(5) Budapest Treaty on the International
Recognition of the Deposit of
Microorganisms for the Purposes of Patent
Procedure (October 21, 1981)
(6) Agreement on Trade Related Aspects of
Intellectual Property Including Trade in
Counterfeit Goods of General Agreement on
Tariffs and Trade.
(7) Patent Cooperation Treaty (August 17, 2001)
(8) Madrid Protocol
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MERCANTILE LAW
INTELLECTUAL PROPERTY
RIGHTS
DEFINITION - Those property rights which
result from the physical manifestation of
original thought. [Ballantines Law Dictionary]
Note: There are no property rights protected by
law in mere ideas or mental conceptions. When
creations of mind are put in tangible form, there
is appropriate subject of property that is
protected by law. [63A Am Jur 3rd Property,
Section 5]
INTELLECTUAL PROPERTY RIGHTS
UNDER THE INTELLECTUAL
PROPERTY CODE
(1) Copyright;
(2) Related Rights of copyright;
(3) Trademarks and Service Marks;
(4) Geographic Indications;
(5) Industrial Designs;
(6) Patents;
(7) Layout-Designs (Topographies) of Integrated
Circuits; [Sec. 4, RA 8293]
(8) Protection of Undisclosed Information
(TRIPS Agreement).
DIFFERENCES BETWEEN
COPYRIGHTS, TRADEMARKS
AND PATENT
Patentable Inventions - Refer to any technical
solution of a problem in any field of human
activity, which is new, involves an inventive step
and is industrially applicable. It may be, or refer
to, any product, process, or an improvement of
any of the foregoing. [Sec. 21, RA 8293] It is
vested from the issuance of letters of patent.
Trademark - any visible sign capable of
distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include
a stamped or marked container of goods. [Kho
v. CA, et al. (2002)] It is vested from registration.
Trade Name - the name or designation
identifying or distinguishing an enterprise [Sec.
121.3, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Copyright - right granted by statute to the
author or originator of literary, scholarly,
scientific, or artistic productions, including
computer programs. A copyright gives him the
legal right to determine how the work is used
and to obtain economic benefits from the work.
For example, the owner of a copyright for a book
or a piece of software has the exclusive rights to
use, copy, distribute, and sell copies of the work,
including later editions or versions of the work. If
another person improperly uses material
covered by a copyright, the copyright owner can
obtain legal relief. [Rule 2, Copyright Safeguards
and Regulations]
Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent
the following acts:
(1) Reproduction of the work or substantial
portion of the work
(2) Dramatization, translation or adaptation,
abridgment, arrangement or other
transformation of the work.
(3) The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership.
(4) Rental of the original or a copy of an
audiovisual or cinematographic work, a
work embodied in a sound recording, a
computer program, a compilation of data
and other materials or a musical work in
graphic form, irrespective of the ownership
of the original or the copy which is the
subject of the rental.
(5) Public Display of the original or a copy of
the work.
(6) Public Performance of the Work;
(7) Other Communication to the public of the
work. [Sec. 177, IPC]
Copyright is confined to literary and artistic
works which are original intellectual creations in
the literary and artistic domain protected from
the moment of their creation. [Kho v. CA, et al.
(2002)] It is vested from the moment of
creation.
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MERCANTILE LAW
OTHER FORMS OF INTELLECTUAL
PROPERTY
GEOGRAPHIC INDICATION
One which identifies a good as originating in the
territory of a TRIPS member, or a region or
locality in that territory where a given quality,
reputation or other characteristic of a good is
essentially attributable to its geographical
origin [Art. 22, TRIPS Agreement]
INDUSTRIAL DESIGN
Any composition of lines or colors or any three-
dimensional form, whether or not associated
with lines or colors: Provided, that such
composition or form gives a special appearance
to and can serve as pattern for an industrial
product or handicraft. (Sec. 112.1, RA 8293)
LAYOUT DESIGN (TOPOGRAPHY) OF AN
INTEGRATED CIRCUIT
Layout Design (Topography). The three-
dimensional disposition, however expressed, of
the elements, at least one of which is an active
element, and of some or all the
interconnections of an integrated circuit, or such
a three-dimensional disposition prepared for an
integrated circuit intended for manufacture.
(Sec. 112.3, RA 8293)
Integrated Circuit. a product, in its final form,
or an intermediate form, in which the elements,
at least one of which is an active element and
some or all of the interconnections are
integrally formed and/or on a piece of material,
and which is intended to perform an electronic
function. [Sec. 112.2, RA 8293]
UNDISCLOSED INFORMATION
(1) Is a secret in a sense that it is not, as a body
or in the precise configuration and assembly
of components, generally known among or
readily accessible to persons within the
circles that normally deal with the kind of
information in question;
(2) Has a commercial value because it is secret;
and
(3) Has been subject to reasonable steps under
the circumstances, by the person lawfully in
control of the information, to keep it secret
[Art. 39, TRIPS]
UP LAW BOC INTELLECTUAL PROPERTY CODE
TECHNOLOGY TRANSFER
ARRANGEMENTS
Refers to contracts or agreements involving:
(1) the transfer of systematic knowledge for the
manufacture of a product;
(2) the application of a process, or rendering of a
service including management contracts;
(3) The transfer, assignment or licensing of all
forms of intellectual property rights,
including licensing of computer software
except computer software developed for
mass market. [Sec. 4.2, RA 8293]
Patents
PATENTABLE INVENTIONS
A patentable invention is any technical solution
of a problem in any field of human activity which
is new, involves an inventive step and is
industrially applicable shall be Patentable. It
may be, or may relate to, a product, or process,
or an improvement of any of the foregoing. [Sec.
21, RA 8293]
INVENTION PATENT
STANDARDS:
Novelty. An invention shall not be considered
new if it forms part of a prior art. [Sec. 23, RA
8293]
Prior art shall consist of:
(1) Everything which has been made available to
the public anywhere in the world, before the
filing date or the priority date of the
application claiming the invention; [Sec. 24.1,
RA 8293]
(2) The whole contents of an application for a
patent, utility model, or industrial design
registration, published in accordance with
this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier
than the filing or priority date of the
application: Provided, That the application
which has validly claimed the filing date of
an earlier application under Section 31 of this
Act, shall be prior art with effect as of the
filing date of such earlier application:
Provided further, That the applicant or the
PAGE 220
MERCANTILE LAW
inventor identified in both applications are
not one and the same. [Sec. 24.2, RA 8293]
Non-Prejudicial Disclosures: This is an exception
to the General Rule on Prior Art under Sec. 24.
It provides that the disclosure of the information
contained in the application during the 12
months preceding the filing date or the priority
date of the application shall not prejudice the
applicant on the ground of lack of novelty if
such disclosure was made by:
(1) The inventor
(2) A patent office and the information
contained (1) in another application filed by
the inventor and should not have been
disclosed by the office, or (2) in an
application filed without the knowledge or
consent of the inventor by a third party which
obtained the information directly or indirectly
from the inventor
(3) A third party which obtained the information
directly or indirectly from the inventor [Sec.
25, RA 8293]
(a) Inventive Step. An invention involves an
inventive step if, having regard to prior art,
it is not obvious to a person skilled in the
art at the time of the filing date or priority
date of the application claiming the
invention. [Sec. 26.1, RA 8293, as amended
by RA 9502]
Cheaper Medicines Act: In case of drugs
and medicines, there is no inventive step if
the invention results from the mere
discovery of a new form or new property of
a known substance which does not result
in enhancement of the known efficacy of
that substance, or the mere discovery of
any new property or new use of a known
substance or the mere use of a known
process unless such known process
results in a new product that employs at
least one reactant. [Sec. 26.2, RA 8293 as
amended by RA 9502]
(b) Industrial Applicability. An invention
that can be produced and used in any
industry shall be industrially applicable.
[Sec. 27, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
UTILITY
It is any technical solution of a problem in any
field of human activity which is new and
industrially applicable. Unlike an invention
patent, a utility model need not be inventive.
The law merely requires that it be novel and
industrially applicable. [Sec. 109.1, RA 8293]
A utility model registration shall expire,
without any possibility of renewal, at the end
of the seventh year after the date of the filing
of the application. [Sec. 109.3, RA 8293]
STATUTORY CLASSES OF UTILITY MODELS
A Utility Model may be, or may relate to:
(a) A useful machine;
(b) An implement or tool;
(c) A product or composition;
(d) A method or process; or
(e) An improvement of any of the foregoing.
[Rule 201, Rules and Regulations on Utility
Models and Industrial Designs as amended]
GROUNDS FOR CANCELLATION OF UTILITY
MODELS
(a) That the claimed invention does not qualify
for registration as a utility model and does
not meet the requirements of registrability;
(b) That the description and the claims do not
comply with the prescribed requirements;
(c) That any drawing which is necessary for the
understanding of the invention has not been
furnished;
(d) That the owner of the utility model
registration is not the inventor or his
successor in title [Sec 109.4, RA 8293]
INDUSTRIAL DESIGN
An industrial design is any composition of lines
or colors or any three-dimensional form,
whether or not associated with lines or colors:
Provided that such composition or form gives a
special appearance to and can serve as pattern
for an industrial product or handicraft. [Sec.
112.1, RA 8293 as amended by RA 9150]
LAY-OUT DESIGNS (TOPOGRAPHIES) OF
INTEGRATED CIRCUITS
Integrated Circuit means a product, in its final
form, or an intermediate form, in which the
elements, at least one of which is an active
element and some or all of the interconnections
are integrally formed in and/or on a piece of
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MERCANTILE LAW
material, and which is intended to perform an
electronic function. [Sec. 112.2, RA 8293 as
amended by RA 9150]
Layout-Design is synonymous with 'Topography'
and means the three-dimensional disposition,
however expressed, of the elements, at least
one of which is an active element, and of some
or all of the interconnections of an integrated
circuit, or such a three-dimensional disposition
prepared for an integrated circuit intended for
manufacture. [Sec. 112.3, RA 8293 as amended
by RA 9150]
NON-PATENTABLE
INVENTIONS
The following shall be excluded from patent
protection:
(1) Discoveries, scientific theories and
mathematical methods, and in the case of
drugs and medicines, the mere discovery of a
new form or new property of a known
substance which does not result in the
enhancement of the known efficacy of that
substance, or the mere discovery of any new
property or new use for a known substance,
or the mere use of a known process unless
such known process results in a new product
that employs at least one new reactant.
Salts, esters, ethers, polymorphs,
metabolites, pure form, particle size,
isomers, mixtures of isomers, complexes,
combinations, and other derivatives of a
known substance shall be considered to be
the same substance, unless they differ
significantly in properties with regard to
efficacy; [Sec. 22.1, RA 8293 as amended by
RA 9502]
(2) Schemes, rules and methods of performing
mental acts, playing games or doing
business, and programs for computers; [Sec.
22.2, RA 8293]
(3) Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human
or animal body. This provision shall not apply
to products and composition for use in any of
these methods; [Sec. 22.3, RA 8293]
(4) Plant varieties or animal breeds or
essentially biological process for the
UP LAW BOC INTELLECTUAL PROPERTY CODE
production of plants or animals. This
provision shall not apply to micro-organisms
and non-biological and microbiological
processes; [Sec. 22.4, RA 8293]
(5) Aesthetic creations; [Sec. 22.5, RA 8293]
(6) Anything which is contrary to public order or
morality. [Sec. 22.6, RA 8293]
Cheaper Medicines Act: In addition to
discoveries, scientific theories and mathematical
methods, the IP Code now includes, in case of
drugs and medicines:
(1) The mere discovery of a new form or new
property of a known substance which does
not result in the enhancement of the known
efficacy of that substance
(2) the mere discovery of any new property or
new use of a known substance
(3) the mere use of a known process unless such
known process results in a new product that
employs at least one reactant [Sec. 26.2, RA
8293 as amended by RA 9502]
OWNERSHIP OF A PATENT
RIGHT TO A PATENT
General Rule: The right to patent belongs to the
inventor, his heirs, or assigns. When two (2) or
more persons have jointly made an invention,
the right to a patent shall belong to them
jointly. (Sec.28, RA 8293)
Exception: Inventions created pursuant to a
commission (Work for Hire Doctrine)
(1) The employer has the right to the patent if
the invention is the result of the performance
of the employees regularly assigned duties
[Sec. 30.2, RA 8293]
(2) In case of inventions created pursuant to a
commission, the person who commissions
the work shall own the patent [Sec. 30.1, RA
8293]
FIRST-TO-FILE RULE
If two (2) or more persons have made the
invention separately and independently of each
other, the right to the patent shall belong to the
person who filed an application for such
invention, or where two or more applications are
filed for the same invention, to the applicant
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MERCANTILE LAW
who has the earliest filing date or, the earliest
priority date. [Sec. 29, RA 8293]
INVENTIONS CREATED PURSUANT
TO A COMMISSION
Commission - Person who commissions the
work shall own the patent, unless otherwise
provided in the contract [Sec. 30.1, RA 8293)
Employment Contract
Patent belongs to the employee if the
inventive activity is not a part of his regular
duties even if the employee uses the time,
facilities and materials of the employer. [Sec.
30.2 (a), RA 8293]
Patent belongs to the employer if the
invention is the result of the performance of
his regularly-assigned duties, unless there is
an agreement, express or implied, to the
contrary. [Sec. 30.2 (b), RA 8293]
RIGHT OF PRIORITY
An application for patent filed by any person
who has previously applied for the same
invention in another country which by treaty,
convention, or law affords similar privileges to
Filipino citizens, shall be considered as filed as
of the date of filing the foreign application:
Provided, That: (a) the local application
expressly claims priority; (b) it is filed within
twelve (12) months from the date the earliest
foreign application was filed; and (c) a certified
copy of the foreign application together with an
English translation is filed within six (6) months
from the date of filing in the Philippines. [Sec.
31, RA 8293]
GROUNDS FOR CANCELLATION
OF A PATENT
Any interested person may, upon payment of
the required fee, petition to cancel the patent or
any claim thereof, or parts of the claim, on any
of the following grounds:
(a) That what is claimed as the invention is not
new or patentable;
(b) That the patent does not disclose the
invention in a manner sufficiently clear and
complete for it to be carried out by any
person skilled in the art; or
UP LAW BOC INTELLECTUAL PROPERTY CODE
(c) That the patent is contrary to public order or
morality. [Sec. 61.1, RA 8293]
Where the grounds for cancellation relate to
some of the claims or parts of the claim,
cancellation may be effected to such extent
only. [Sec. 61.2, RA 8293]
REQUIREMENT OF THE PETITION
The petition for cancellation shall be in writing,
verified by the petitioner or by any person in his
behalf who knows the facts, specify the grounds
upon which it is based, include a statement of
the facts to be relied upon, and filed with the
Office. Copies of printed publications or of
patents of other countries, and other supporting
documents mentioned in the petition shall be
attached thereto, together with the translation
thereof in English, if not in English language.
[Sec. 62, RA 8293]
NOTICE OF HEARING
Upon filing of a petition for cancellation, the
Director of Legal Affairs shall forthwith serve
notice of the filing thereof upon the patentee
and all persons having grants or licenses, or any
other right, title or interest in and to the patent
and the invention covered thereby, as appears
of record in the Office, and of notice of the date
of hearing thereon on such persons and the
petitioner. Notice of the filing of the petition
shall be published in the IPO Gazette. [Sec. 63,
RA 8293]
EFFECT OF CANCELLATION OF
PATENT OR CLAIM
The rights conferred by the patent or any
specified claim or claims cancelled shall
terminate. Notice of the cancellation shall be
published in the IPO Gazette. Unless restrained
by the Director General, the decision or order to
cancel by Director of Legal Affairs shall be
immediately executory even pending appeal.
[Sec. 66, RA 8293]
REMEDY OF THE TRUE AND
ACTUAL INVENTOR
If a person, who was deprived of the patent
without his consent or through fraud is declared
by final court order or decision to be the true
and actual inventor, the court shall order for his
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MERCANTILE LAW
substitution as patentee, or at the option of the
true inventor, cancel the patent, and award
actual and other damages in his favor if
warranted by the circumstances. [Sec. 68, RA
8293]
TIME TO FILE ACTION IN COURT
The action shall be filed within one (1) year from
the date of publication made in accordance with
Sections 44 and 51, respectively. [Sec. 70, RA
8293]
REMEDY OF PERSONS NOT HAVING
THE RIGHT TO A PATENT
If a person other than the applicant, is declared
by final court order or decision as having the
right to the patent, such person may, within
three (3) months after the decision has become
final:
(1) Prosecute the application as his own
application in place of the applicant;
(2) File a new patent application in respect of
the same invention;
(3) Request that the application be refused; or
(4) Seek cancellation of the patent, if one has
already been issued. [Sec. 67, RA 8293]
RIGHTS CONFERRED BY A
PATENT
A patent shall confer on its owner the following
exclusive rights:
(1) Where the subject matter of a patent is a
product, to restrain, prohibit and prevent any
unauthorized person or entity from making,
using, offering for sale, selling or importing
that product. [Sec. 71.1(a), RA 8293]
(2) Where the subject matter of a patent is a
process, to restrain, prevent or prohibit any
unauthorized person or entity from using the
process, and from manufacturing, dealing in,
using, selling or offering for sale, or
importing any product obtained directly or
indirectly from such process. [Sec. 71.1(b), RA
8293]
(3) Patent owners shall also have the right to
assign, or transfer by succession the patent,
and to conclude licensing contracts for the
same. [Sec. 71.2, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Pearl Dean, Inc. v. Shoemart, Inc. (2003): To be
able to effectively and legally preclude others
from copying and profiting from the invention, a
patent is a primordial requirement. No patent,
no protection. The ultimate goal of a patent
system is to bring new designs and technologies
into the public domain through disclosure Ideas,
once disclosed to the public without the
protection of a valid patent, are subject to
appropriation without significant restraint.
LIMITATIONS OF PATENT
RIGHTS
The owner of a patent has no right to prevent
third parties from performing, without his
authorization, the acts referred to in Section 71
hereof in the following circumstances:
(a) Using a patented product which has been
put on the market in the Philippines by the
owner of the product, or with his express
consent, insofar as such use is performed
after that product has been so put on the
said market: Provided, That, with regard to
drugs and medicines, the limitation on
patent rights shall apply after a drug or
medicine has been introduced in the
Philippines or anywhere else in the world by
the patent owner, or by any party authorized
to use the invention: Provided, further, That
the right to import the drugs and medicines
contemplated in this section shall be
available to any government agency or any
private third party; [Sec. 72.1, RA 8293 as
amended by RA 9502]
(b) Where the act is done privately and on a
non-commercial scale or for a non-
commercial purpose: Provided, That it does
not significantly prejudice the economic
interests of the owner of the patent; [Sec.
72.2, RA 8293 as amended by RA 9502]
(c) Where the act consists of making or using
exclusively for experimental use of the
invention for scientific purposes or
educational purposes and such other
activities directly related to such scientific or
educational experimental use; [Sec. 72.3, RA
8293 as amended by RA 9502]
(d) In the case of drugs and medicines, where
the act includes testing, using, making or
selling the invention including any data
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MERCANTILE LAW
related thereto, solely for purposes
reasonably related to the development and
submission of information and issuance of
approvals by government regulatory
agencies required under any law of the
Philippines or of another country that
regulates the manufacture, construction, use
or sale of any product: Provided, That, in
order to protect the data submitted by the
original patent holder from unfair
commercial use provided in Article 39.3 of
the Agreement on Trade-Related Aspects of
Intellectual Property Rights (TRIPS
Agreement), the Intellectual Property Office,
in consultation with the appropriate
government agencies, shall issue the
appropriate rules and regulations necessary
therein not later than one hundred twenty
(120) days after the enactment of this law;
[Sec. 72.4, RA 8293 as amended by RA 9502]
(e) Where the act consists of the preparation for
individual cases, in a pharmacy or by a
medical professional, of a medicine in
accordance with a medical shall apply after a
drug or medicine has been introduced in the
Philippines or anywhere else in the world by
the patent owner, or by any party authorized
to use the invention: Provided, further, That
the right to import the drugs and medicines
contemplated in this section shall be
available to any government agency or any
private third party; [Sec. 72.5, RA 8293 as
amended by RA 9502]
There shall be no infringement of trademarks
or tradenames of imported or sold drugs and
medicines allowed as well as imported or
sold off-patent drugs and medicines:
Provided, That said drugs and medicines
bear the registered marks that have not been
tampered, unlawfully modified, or infringed.
[Sec.159.4 RA 8293 as amended by RA 9502]
PRIOR USER
Notwithstanding Section 72 hereof, any prior
user, who, in good faith was using the
invention or has undertaken serious
preparations to use the invention in his
enterprise or business, before the filing date
or priority date of the application on which a
patent is granted, shall have the right to
continue the use thereof as envisaged in such
UP LAW BOC INTELLECTUAL PROPERTY CODE
preparations within the territory where the
patent produces its effect. [Sec. 73.1, RA 8293]
The right of the prior user may only be
transferred or assigned together with his
enterprise or business, or with that part of his
enterprise or business in which the use or
preparations for use have been made. [Sec.
73.2, RA 8293]
USE BY THE GOVERNMENT
A Government agency or third person
authorized by the Government may exploit
the invention even without agreement of the
patent owner where:
(a) The public interest, in particular, national
security, nutrition, health or the
development of other sectors, as
determined by the appropriate agency of
the government, so requires; [Sec. 74.1(a),
RA 8293]
(b) A judicial or administrative body has
determined that the manner of
exploitation, by the owner of the patent or
his licensee, is anti-competitive. [Sec.
74.1(b), RA 8293]
The use by the Government, or third person
authorized by the Government shall be
subject, mutatis mutandis, to the conditions
set forth in Sections 95 to 97 and 100 to 102
on compulsory licensing. [Sec. 74.2, RA 8293]
All cases arising from the implementation of
this provision shall be cognizable by courts
with appropriate jurisdiction provided by law.
No court except the Supreme Court of the
Philippines, shall issue any temporary
restraining order or preliminary injunction or
such other provisional remedies that will
prevent its immediate execution. [Sec. 74.3,
RA 8293 as amended by RA 9502]
PATENT INFRINGEMENT
It is the making, using, offering for sale, selling,
or importing a patented product or a product
obtained directly or indirectly from a patented
process, or the use of a patented process
without the authorization of the patentee. [Sec
76.1, RA 8293 as amended by RA 9502]
CONTRIBUTORY INFRINGER
One who actively induces the infringement of a
patent or provides the infringer with a
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MERCANTILE LAW
component of a patented product or of a
product produced because of a patented
process knowing it to be especially adopted for
infringing and not suitable for substantial non-
infringing. He is jointly and severally liable with
the infringer. [Sec. 76.6, RA 8293]
DOCTRINE OF PATENT EXHAUSTION
It espouses that the patentee who has already
sold his invention and has received all the
royalty and consideration for the same will be
deemed to have released the invention from his
monopoly. The invention thus becomes open to
use of the purchaser without further restriction.
[Adams v. Burke, in Notes on Selected
Commercial Laws, Catindig 2003 ed.]
TESTS IN PATENT INFRINGEMENT
LITERAL INFRINGEMENT
In using literal infringement as a test, resort
must be had in the first instance to the words of
the claim. To determine whether the particular
item falls within the literal meaning of the
patent claims, the court must juxtapose the
claims of the patent and the accused product
within the overall context of the claims and
specifications, to determine whether there is
exact identity of all material elements. [Godinez
v. CA (1993)]
DOCTRINE OF EQUIVALENTS
Under the doctrine of equivalents, an
infringement also occurs when a device
appropriates a prior invention by
incorporating its innovative concept and,
albeit with some modification and change,
performs substantially the same function in
substantially the same way to achieve
substantially the same result. [Godinez v. CA
(1993)]
In order to infringe a patent, a machine or
device must perform the same function, or
accomplish the same result by identical or
substantially identical means and the
principle or mode of operation must be
substantially the same. [Del Rosario v. CA
(1996)]
The doctrine of equivalents provides that an
infringement also takes place when a device
appropriates a prior invention by
incorporating its innovative concept and,
although with some modification and change,
UP LAW BOC INTELLECTUAL PROPERTY CODE
performs substantially the same function in
substantially the same way to achieve
substantially the same result. The principle or
mode of operation must be the same or
substantially the same. The doctrine of
equivalents thus requires satisfaction of the
function-means-and-result test, the patentee
having the burden to show that all three
components of such equivalency test are met.
[Smith Klein Beckman Corp. v. CA (2003)]
DEFENSES IN ACTION FOR
INFRINGEMENT
In an action for infringement, the defendant, in
addition to other defenses available to him, may
show the invalidity of the patent, or any claim
thereof, on any of the grounds on which a
petition of cancellation can be brought under
Section 61. [Sec 81, RA 8293]
PATENT FOUND INVALID MAY BE
CANCELLED:
In an action for infringement, if the court shall
find the patent or any claim to be invalid, it shall
cancel the same, and the Director of Legal
Affairs upon receipt of the final judgment of
cancellation by the court, shall record that fact
in the register of the Office and shall publish a
notice to that effect in the IPO Gazette. [Sec 82,
RA 8293]
DOCTRINE OF FILE WRAPPER ESTOPPEL
Patentee is precluded from claiming as part of
patented product that which he had to excise or
modify in order to avoid patent office rejection,
and he may omit any additions he was
compelled to add by patent office regulations.
[Advance Transformer Co. v. Levinson 837 F.2d
1081(1988)]
LICENSING
VOLUNTARY
Voluntary Licensing is the grant by the patent
owner to a third person of the right to exploit
the patented invention. [Sec. 85, RA 8293]
MANDATORY PROVISIONS
The following provisions shall be included in
voluntary license contracts:
(1) That the laws of the Philippines shall govern
the interpretation of the same and in the
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MERCANTILE LAW
event of litigation, the venue shall be the
proper court in the place where the licensee
has its principal office; [Sec. 88.1, RA 8293]
(2) Continued access to improvements in
techniques and processes related to the
technology shall be made available during
the period of the technology transfer
arrangement; [Sec. 88.2, RA 8293]
(3) In the event the technology transfer
arrangement shall provide for arbitration, the
Procedure of Arbitration of the Arbitration
Law of the Philippines or the Arbitration
Rules of the United Nations Commission on
International Trade Law (UNCITRAL) or the
Rules of Conciliation and Arbitration of the
International Chamber of Commerce (ICC)
shall apply and the venue of arbitration shall
be the Philippines or any neutral country;
[Sec. 88.3, RA 8293]
(4) The Philippine taxes on all payments
relating to the technology transfer
arrangement shall be borne by the licensor.
[Sec. 88.4, RA 8293]
PROHIBITED CLAUSES
The following provisions shall be deemed prima
facie to have an adverse effect on competition
and trade:
(a) Those which impose upon the licensee the
obligation to acquire from a specific source
capital goods, intermediate products, raw
materials, and other technologies, or of
permanently employing personnel indicated
by the licensor; [Sec. 87.1, RA 8293]
(b) Those pursuant to which the licensor
reserves the right to fix the sale or resale
prices of the products manufactured on the
basis of the license; [Sec. 87.2, RA 8293]
(c) Those that contain restrictions regarding the
volume and structure of production; [Sec.
87.3, RA 8293]
(d) Those that prohibit the use of competitive
technologies in a non-exclusive technology
transfer agreement; [Sec. 87.4, RA 8293]
(e) Those that establish a full or partial
purchase option in favor of the licensor; [Sec.
87.5, RA 8293]
(f) Those that obligate the licensee to transfer
for free to the licensor the inventions or
improvements that may be obtained through
the use of the licensed technology; [Sec. 87.6,
RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(g) Those that require payment of royalties to
the owners of patents for patents which are
not used; [Sec. 87.7, RA 8293]
(h) Those that prohibit the licensee to export the
licensed product unless justified for the
protection of the legitimate interest of the
licensor such as exports to countries where
exclusive licenses to manufacture and/or
distribute the licensed product(s) have
already been granted; [Sec. 87.8, RA 8293]
(i) Those which restrict the use of the technology
supplied after the expiration of the
technology transfer arrangement, except in
cases of early termination of the technology
transfer arrangement due to reason(s)
attributable to the licensee; [Sec. 87.9, RA
8293]
(j) Those which require payments for patents
and other industrial property rights after
their expiration, termination arrangement;
[Sec. 87.10, RA 8293]
(k) Those which require that the technology
recipient shall not contest the validity of any
of the patents of the technology supplier;
[Sec. 87.11, RA 8293]
(l) Those which restrict the research and
development activities of the licensee
designed to absorb and adapt the
transferred technology to local conditions or
to initiate research and development
programs in connection with new products,
processes or equipment; [Sec. 87.12, RA
8293]
(m) Those which prevent the licensee from
adapting the imported technology to local
conditions, or introducing innovation to it, as
long as it does not impair the quality
standards prescribed by the licensor; [Sec.
87.13, RA 8293]
(n) Those which exempt the licensor for liability
for non-fulfillment of his responsibilities
under the technology transfer arrangement
and/or liability arising from third party suits
brought about by the use of the licensed
product or the licensed technology; ]Sec.
87.14, RA 8293]
(o) Other clauses with equivalent effects. [Sec.
87.15, RA 8293]
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MERCANTILE LAW
Effect of Non-Compliance with Any
Provisions of Secs. 87 And 88
The technology transfer arrangement shall
automatically be rendered unenforceable, unless
said technology transfer arrangement is
approved and registered with the
Documentation, Information and Technology
Transfer Bureau under the provisions of Section
91 on exceptional cases. [Sec. 92, RA 8293]
Right of Licensor. Unless otherwise provided
in the technology transfer agreement, the
licensor shall have the right to:
(a) Grant further licenses to third person
(b) Exploit the subject matter of the technology
transfer agreement [Sec. 89, RA 8293]
Right of the Licensee. To exploit the subject
matter of the technology transfer agreement
during the whole term of the agreement. [Sec.
90, RA 8293]
Exceptional cases
(a) In exceptional or meritorious cases where
substantial benefits will accrue to the
economy, such as high technology content,
increase in foreign exchange earnings,
employment generation, regional dispersal
of industries and/or substitution with or use
of local raw materials
(b) The case of BOI-registered companies with
pioneer status [Sec. 91, RA 8293]
COMPULSORY
Compulsory Licensing is the grant of the
Director of Legal Affairs of a license to exploit a
patented invention, even without the agreement
of the patent owner, in favor of any person who
has shown his capability to exploit the
invention. [Sec. 93, Ra 8293 as amended by RA
9502]
GROUNDS
The Director General of the Intellectual Property
Office may grant a license to exploit a patented
invention, even without the agreement of the
patent owner, in favor of any person who has
shown his capability to exploit the invention,
under any of the following circumstances:
(a) National emergency or other circumstances
of extreme urgency; [Sec. 93.1, RA 8293 as
amended by RA 9502]
UP LAW BOC INTELLECTUAL PROPERTY CODE
(b) Where the public interest, in particular,
national security, nutrition, health or the
development of other vital sectors of the
national economy as determined by the
appropriate agency of the Government, so
requires; [Sec. 93.2, RA 8293 as amended by
RA 9502]
(c) Where a judicial or administrative body has
determined that the manner of exploitation
by the owner of the patent or his licensee is
anti-competitive; [Sec. 93.3, RA 8293 as
amended by RA 9502]
(d) In case of public non-commercial use of the
patent by the patentee, without satisfactory
reason; [Sec. 93.4, RA 8293 as amended by
RA 9502]
(e) If the patented invention is not being worked
in the Philippines on a commercial scale,
although capable of being worked, without
satisfactory reason: Provided, That the
importation of the patented article shall
constitute working or using the patent; [Sec.
93.5, RA 8293 as amended by RA 9502]
(f) Where the demand for patented drugs and
medicines is not being met to an adequate
extent and on reasonable terms, as
determined by the Secretary of the
Department of Health. [Sec. 93.6, RA 8293
as amended by RA 9502]
(g) If the invention protected by a patent,
hereafter referred to as the "second patent,"
within the country cannot be worked without
infringing another patent, hereafter referred
to as the "first patent," granted on a prior
application or benefiting from an earlier
priority, a compulsory license may be
granted to the owner of the second patent to
the extent necessary for the working of his
invention, subject to certain conditions. [Sec.
97, RA 8293]
(h) Manufacture and export of drugs and
medicines to any country having insufficient
or no manufacturing capacity in the
pharmaceutical sector to address public
health problems: Provided, That, a
compulsory license has been granted by such
country or such country has, by notification or
otherwise, allowed importation into its
jurisdiction of the patented drugs and
medicines from the Philippines in
compliance with the TRIPS Agreement. [Sec.
93-A.2, RA 8293 as amended by RA 9502]
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MERCANTILE LAW
PERIOD OF FILING A PETITION FOR
COMPULSORY LICENSE
At any time after the grant of patent. However, a
compulsory license may not be applied for on
the ground stated in Sec. 93.5 before the
expiration of a period of four (4) years from the
date of filing of the application or three (3) years
from the date of the patent whichever period
expires last. [Sec. 94, RA 8293 as amended by
RA 9502]
REQUIREMENT TO OBTAIN A LICENSE ON
REASONABLE COMMERCIAL TERMS
General Rule: The license will only be granted
after the petitioner has made efforts to obtain
authorization from the patent owner on
reasonable commercial terms and conditions
but such efforts have not been successful within
a reasonable period of time. [Sec. 95.1, RA 8293
as amended by RA 9502]
Exceptions: The requirement of authorization
shall not apply in the following cases:
(a) Where the petition for compulsory license
seeks to remedy a practice determined after
judicial or administrative process to be anti-
competitive;
(b) In situations of national emergency or other
circumstances of extreme urgency;
(c) In cases of public non-commercial use.
(d) In cases where the demand for the patented
drugs and medicines in the Philippines is not
being met to an adequate extent and on
reasonable terms, as determined by the
Secretary of the Department of Health. [Sec.
95.2, RA 8293 as amended by RA 9502]
TERMS AND CONDITIONS OF COMPULSORY
LICENSE
(a) The scope and duration of such license shall
be limited to the purpose for which it was
authorized; [Sec. 100.1, RA 8293]
(b) The license shall be non-exclusive; [Sec.
100.2, RA 8293]
(c) The license shall be non-assignable, except
with that part of the enterprise or business
with which the invention is being exploited;
[Sec. 100.3, RA 8293]
(d) Use of the subject matter of the license shall
be devoted predominantly for the supply of
the Philippine market: Provided, that this
limitation shall not apply where the grant of
UP LAW BOC INTELLECTUAL PROPERTY CODE
the license is based on the ground that the
patentee's manner of exploiting the patent is
determined by judicial or administrative
process, to be anti-competitive. [Sec. 100.4,
RA 8293]
(e) The license may be terminated upon proper
showing that circumstances which led to its
grant have ceased to exist and are unlikely to
recur: Provided, That adequate protection
shall be afforded to the legitimate interest of
the licensee; [Sec. 100.5, RA 8293]
(f) The patentee shall be paid adequate
remuneration taking into account the
economic value of the grant or authorization,
except that in cases where the license was
granted to remedy a practice which was
determined after judicial or administrative
process, to be anti-competitive, the need to
correct the anti-competitive practice may be
taken into account in fixing the amount of
remuneration. [Sec. 100.6, RA 8293]
ASSIGNMENT AND
TRANSMISSION OF RIGHTS
ASSIGNMENT OF RIGHTS
The assignment may be of the entire patent or a
portion thereof, or be limited to a specified
territory. [Sec. 104, RA 8293]
TRANSMISSION OF RIGHTS:
Patents or applications for patents and
invention to which they relate, shall be
protected in the same way as the rights of
other property under the Civil Code. [Sec.
103.1, RA 8293]
Inventions and any right, title or interest in
and to patents and inventions covered
thereby, may be assigned or transmitted by
inheritance or bequest or may be the subject
of a license contract. [Sec. 103.2, RA 8293]
REQUIREMENTS FOR RECORDING
OF ASSIGNMENT
(a) It must be in writing and accompanied by an
English translation, if it is in a language other
than English or Filipino
(b) It must be notarized
(c) It must be accompanied by an appointment
of a resident agent, if the assignee is not
residing in the Philippines
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MERCANTILE LAW
(d) It must identify the letters patent involved by
number and date and give the name of the
owner of the patent and the title of the
invention. In the case of an application for a
patent, it should state the application
number and the filing date of the application
and give the name of the applicant and the
title of the invention. If the assignment was
executed concurrently with or subsequent to
the execution of the application but before
the application is filed or before its
application number is ascertained, it should
adequately identify the application by its
date of execution, the name of the applicant,
and the title of the invention.
(e) It must be accompanied by the required fees.
[Sec. 105; Rules and Regulations on
Inventions, Rule 1200]
EFFECT OF NON-RECORDING OF
ASSIGNMENT WITH THE IPO
The non-recording will not affect the binding
agreement between the assignor and assignee.
However, such registration would be necessary
to bind third parties. An assignment would be
void as against any subsequent purchaser or
mortgagee for valuable consideration and
without notice unless recorded in the IPO within
3 months from the date of the assignment or
prior to the subsequent purchase or mortgage.
[Sec. 106, RA 8293]
Trademarks
DEFINITION OF MARKS,
COLLECTIVE MARKS, TRADE
NAMES
Marks - Any visible sign capable of
distinguishing the goods (trademark) or services
(service mark) of an enterprise and shall include
a stamped or marked container of goods [Sec.
121.1, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Trademark Service Mark
Any visible sign which Any visible sign capable
is adopted and used of distinguishing the
to identify the source services of an enterprise
of origin of goods, from the service of other
and which is capable enterprises.
of distinguishing
them from goods
emanating from a
competitor.
Protection - Is not limited to similar marks but
also products that may case insidious damage.
Collective Marks - Any visible sign designated as
such in the application for registration and
capable of distinguishing the origin or any other
common characteristic, including the quality of
goods or services of different enterprises which
use the sign under the control of the registered
owner of the collective mark. [Sec. 121.2, RA
8293]
Trade Name
The name or designation identifying or
distinguishing an enterprise [Sec. 121.3, RA
8293].
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
occupations. [Converse Rubber Corp. v.
Universal Rubber Products, Inc. (1980)]
FUNCTIONS OF A TRADEMARK
(1) To point out distinctly the origin or ownership
of the goods and to which it is affixed;
(2) To secure him, who has been instrumental in
bringing into the market a superior article of
merchandise, the fruit of his industry and
skill;
(3) To assure the public that they are producing
the genuine article;
(4) To prevent fraud and imposition; and
(5) To protect the manufacturer against
substitution and sale of an inferior and
different article as its product [Mirpuri v. CA
(1998)]
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MERCANTILE LAW
ACQUISITION OF OWNERSHIP
OF MARK
The rights to a mark shall be acquired
through registration made validly in
accordance with law. [Sec. 122, RA 8293]
A certificate of registration shall remain in
force for 10 years [Sec. 145, RA 8293] and may
be renewed for periods of 10 years at its
expiration upon payment of the prescribed fee
and upon filing of a request. [Sec 146, RA
8293]
ACQUISITION OF OWNERSHIP
OF TRADE NAME
Notwithstanding any laws or regulations
providing for any obligation to register trade
names, such names shall be protected, even
prior to or without registration, against any
unlawful act committed by third parties. [Sec.
165.2 (a), RA 8293) The ownership of a trade
name is acquired through adoption and use.
A name or designation may not be used as a
trade name if by its nature or the use to which
such name or designation may be put, it is
contrary to public order or morals and if, in
particular, it is liable to deceive trade circles or
the public as to the nature of the enterprise
identified by that name. [Sec. 165.1, RA 8293]
Any change in the ownership of a trade name
shall be made with the transfer of the
enterprise or part thereof identified by that
name. [Sec. 165.4, RA 8293]
NON-REGISTRABLE MARKS
A mark cannot be registered if it:
(1) Consists of immoral, deceptive or scandalous
matter, or matter which may disparage or
falsely suggest a connection with persons,
living or dead, institutions, beliefs, or
national symbols, or bring them into
contempt or disrepute; [Sec 123.1(a), RA
8293]
(2) Consists of flags, coat of arms or other
insignia of the Philippines or any foreign
country; [Sec 123.1(b), RA 8293]
(3) Consists of a name, portrait or signature
identifying a particular living individual
except by his written consent, or of a
deceased President of the Philippines, during
UP LAW BOC INTELLECTUAL PROPERTY CODE
the life of his widow, except by written
consent of the widow; [Sec 123.1(c), RA 8293]
(4) Is identical with a registered mark of another
or a mark with an earlier filing or priority
date, in respect of:
(a)The same goods or services, or
(b) Closely related goods or services, or
(c) If it nearly resembles such a mark as to be
likely to deceive or cause confusion; [Sec
123.1(d), RA 8293]
(5) Is identical with, or confusingly similar to, or
constitutes a translation of a well-known
mark, whether or not registered in the
Philippines, and used for identical or similar
goods or services; [Sec 123.1(e), RA 8293]
(6) Is identical with, or confusingly similar to, or
constitutes a translation of a well-known
mark which is registered in the Philippines,
and used for goods or services which are not
similar; [Sec 123.1(f), RA 8293]
(7) Likely to mislead the public, particularly as to
the nature, quality, characteristics or
geographical origin of the goods or services;
[Sec 123.1(g), RA 8293]
(8) Consists exclusively of signs that are generic
for the goods or services that they seek to
identify; [Sec 123.1(h), RA 8293]
(9) Consists exclusively of signs or of indications
that have become customary or usual to
designate the goods or services in everyday
language or in a bona fide and established
trade practice; [Sec 123.1(i), RA 8293]
(10) Consists exclusively of signs or of indications
that may serve in trade to designate the kind,
quality, quantity, intended purpose, value,
geographical origin, time or production of
the goods or rendering of the services, or
other characteristics of the goods or services;
[Sec 123.1(j), RA 8293]
(11) Consists of shapes that may be necessitated
by technical factors or by the nature of the
goods themselves or factors that affect their
intrinsic value; [Sec 123.1(k), RA 8293]
(12) Consists of color alone, unless defined by a
given form; [Sec 123.1(l), RA 8293]
(13) Is contrary to public order or morality. [Sec
123.1(m), RA 8293]
DOCTRINE OF SECONDARY
MEANING
When the marks referred to in nos. 10, 11 and
12 has become distinctive, because of its long,
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continuous and exclusive use for 5 years, as
used in connection with the applicants goods
or services in commerce and in the mind of
the public indicates a single source to
consumers, it may be registered. The Office
may accept as prima facie evidence that the
mark has become distinctive, as used in
connection with the applicant's goods or
services in commerce, proof of substantially
exclusive and continuous use thereof by the
applicant in commerce in the Philippines for
five (5) years before the date on which the
claim of distinctiveness is made. [Sec 123.2,
RA 8293]
The nature of the goods to which the mark is
applied will not constitute an obstacle to
registration. [Sec 123.3, RA 8293]
PRIOR USE OF MARK AS A
REQUIREMENT
USE OF MARK AS A REQUIREMENT
The applicant or the registrant shall file a
declaration of actual use of the mark with
evidence to that effect, as prescribed by the
Regulations within three (3) years from the
filing date of the application. Otherwise, the
application shall be refused or the mark shall
be removed from the Register by the Director.
[Sec. 124.2, RA 8293]
For the requirement of actual use in
commerce in the Philippines before one may
register a trademark, trade name and service
mark under the law pertains to the territorial
jurisdiction of the Philippines and is not only
confined to a certain region, province, city or
barangay. [McDonalds Corporation v. MacJoy
Fastfood (2007)]
Trademark is a creation of use and, therefore,
actual use is a pre-requisite to exclusive
ownership; registration is only an
administrative confirmation of the existence of
the right of ownership of the mark, but does
not perfect such right; actual use thereof is
the perfecting ingredient. [Shangri-La
International Hotel v. DCC (2006)]
NON-USE OF MARK WHEN EXCUSED
(1) If caused by circumstances arising
independently of the will of the trademark
UP LAW BOC INTELLECTUAL PROPERTY CODE
owner. Lack of funds shall not excuse non-
use of a mark; [Sec. 152.1, RA 8293]
(2) A use which does not alter its distinctive
character though the use is different from
the form in which it is registered. [Sec. 152.2,
RA 8293]
(3) Use of a mark in connection with one or
more of the goods/services belonging to the
class in which the mark is registered. [Sec.
152.3, RA 8293]
(4) The use of mark by a company related to the
applicant or registrant
(5) The use of mark by a person controlled by
the registrant. [Sec. 152.4, RA 8293]
The use of a mark by a company related with
the registrant or applicant shall inure to the
latter's benefit, and such use shall not affect the
validity of such mark or of its registration:
Provided, that such mark is not used in such
manner as to deceive the public. [Sec.152.4, RA
8293]
TESTS TO DETERMINE
CONFUSING SIMILARITY
BETWEEN MARKS
DOMINANCY TEST
Infringement is determined by the test of
dominancy rather than by differences or
variations in the details of one trademark and of
another. Similarity in size, form and color, while
relevant is not conclusive. If the competing
trademark contains the main or essential or
dominant features of another, and confusion is
likely to result, infringement takes place. [Asia
Brewery v. CA and San Miguel (1993)]
HOLISTIC TEST
To determine whether a trademark has been
infringed, we must consider the mark as a
whole and not as dissected. If the buyer is
deceived, it is attributable to the marks as a
totality, not usually to any part of it. The court
therefore should be guided by its first
impression, for the buyer acts quickly and is
governed by a casual glance, the value of
which may be dissipated as soon as the court
assumed to analyze carefully the respective
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MERCANTILE LAW
features of the mark. [Del Monte Corporation,
et al. v. CA (1990)]
The dominancy test considers the dominant
features in the competing marks in
determining whether they are confusingly
similar. Under the dominancy test, courts give
greater weight to the similarity of the
appearance of the product arising from the
adoption of the dominant features of the
registered mark, disregarding minor
differences. Courts will consider more the
aural and visual impressions created by the
marks in the public mind, giving little weight
to factors like prices, quality, sales outlets and
market segments. [McDonalds Corporation v.
L.C. Big Mak Burger, Inc., et al. (2004)]
AS TO THE GOODS OR SERVICES IN
CONNECTION WITH WHICH THE
MARKS ARE USED (DOCTRINE OF
RELATED GOODS/SERVICES)
(1) Goods are related when they belong to the
same class or have the same descriptive
properties or physical attributes, or they
serve the same purpose or flow through the
same channel of trade.
(2) The use of identical marks on non-competing
but related goods may likely cause
confusion.
(3) Corollarily, the use of identical marks on
non-competing and unrelated goods is not
likely to cause confusion.
WELL-KNOWN MARKS
A well-known mark is a mark which a
competent authority of the Philippines has
designated to be well-known internationally
and in the Philippines.
In determining whether a mark is well-known,
account shall be taken of the knowledge of
the relevant sector of the public, rather than
the public at large, including knowledge in
the Philippines which has been obtained as a
result of the promotion of the mark. [Sec
123.1(e), RA 8293]
DETERMINANTS (NEED NOT
CONCUR)
(a) The duration, extent and geographical area
of any use of the mark;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(b) The market share in the Philippines and
other countries of the goods/services to
which the mark applies;
(c) The degree of the inherent or acquired
distinction of the mark;
(d) The quality-image or reputation acquired by
the mark;
(e) The extent to which the mark has been
registered in the world;
(f) The exclusivity of the registration attained by
the mark in the world;
(g) The extent of use of the mark in the world;
(h) The exclusivity of use in the world;
(i) The commercial value attributed to the mark
in the world;
(j) The record of successful protection of the
rights in the mark;
(k) The outcome of litigations dealing with the
issue of whether the mar is well-known; and
(l) The presence or absence of identical or
similar testmarks validly registered or used
on other similar goods [Rule 102, Rule on
Trademarks]
PROTECTION EXTENDED TO WELL-
KNOWN MARKS
IF NOT REGISTERED IN THE PHILIPPINES
A mark cannot be registered if it is identical with
or confusingly similar to, or constitutes a
translation of a mark which is considered by the
competent authority of the Philippines to be
well-known internationally and in the
Philippines, whether or not it is registered here,
as being already the mark of a person other
than the applicant for registration and used for
identical goods or services. [(Sec 123.1(e), RA
8293]
IF REGISTERED IN THE PHILIPPINES
A mark cannot be registered if it is identical with
or confusingly similar to, or constitutes a
translation of a mark considered well-known in
accordance with the Sec. 123.1 (e), which is
registered in the Philippines with respect to
goods or services which are not similar to those
with respect to which registration is applied for.
[Sec 123.1(f), RA 8293]
PRIORITY RIGHT.
An application for registration of a mark filed
in the Philippines by a person referred to in
Section 3, and who previously duly filed an
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MERCANTILE LAW
application for registration of the same mark
in one of those countries, shall be considered
as filed as of the day the application was first
filed in the foreign country. [Sec. 131.1, RA
8293]
No registration of a mark in the Philippines by
a person described in this section shall be
granted until such mark has been registered
in the country of origin of the applicant. [Sec.
131.2, RA 8293]
SIGNIFICANCE OF PRIORITY RIGHT
A Philippine application filed by another
applicant after the priority date but earlier than
the foreign applicants actual filing may be
refused registration if it is identical to the mark
with a priority date. [The Law on Trademark,
Infringement and Unfair Competition, Agpalo]
RIGHTS CONFERRED BY A WELL-
KNOWN MARK
(1) Right to be protected whether or not it is
registered in the Philippines;
(2) If registered under Sec 123.1(e), extension of
protection to goods and services which are
not similar to those in respect of which the
mark is registered, provided that:
(a) The use of the mark in relation to
unrelated or dissimilar goods or services
would indicate a connection between
those goods or services and the owner of
the mark; and
(b) The interests of the owner of the
registered mark are likely to be damaged
by such use. [Sec. 147.2, RA 8293]
RIGHTS CONFERRED BY
REGISTRATION
Except in cases of importation of drugs and
medicines allowed under Section 72.1 of this Act
and of off-patent drugs and medicines, the
owner of a registered mark shall have the
exclusive right to prevent all third parties not
having the owner's consent from using in the
course of trade identical or similar signs or
containers for goods or services which are
identical or similar to those in respect of which
the trademark is registered where such use
would result in a likelihood of confusion. In case
of the use of an identical sign for identical
goods or services, a likelihood of confusion shall
UP LAW BOC INTELLECTUAL PROPERTY CODE
be presumed. [Sec. 147.1, RA 8293 as amended
by RA 9502]
LIMITATIONS ON SUCH RIGHTS
(1) Duration (except that, inasmuch as the
registration of a trademark could be renewed
every 10 years, a trademark could
conceivably remain registered forever);
(2) Territorial (except well-known marks).
Registration of the mark shall not confer on the
registered owner the right to preclude third
parties from using bona fide their names,
addresses, pseudonyms, a geographical name,
or exact indications concerning the kind, quality,
quantity, destination, value, place of origin, or
time of production or of supply, of their goods or
services: Provided, That such use is confined to
the purposes of mere identification or
information and cannot mislead the public as to
the source of the goods or services. [Sec. 148, RA
8293]
ASSIGNMENT AND TRANSFER OF
APPLICATION AND REGISTRATION
(1) An application for registration of a mark, or
its registration, may be assigned or
transferred with or without the transfer of the
business using the mark. [Sec. 149.1, RA
8293]
(2) Such assignment or transfer shall, however,
be null and void if it is liable to mislead the
public, particularly as regards the nature,
source, manufacturing process,
characteristics, or suitability for their
purpose, of the goods or services to which
the mark is applied. [Sec. 149.2, RA 8293]
(3) The assignment of the application for
registration of a mark, or of its registration,
shall be in writing and require the signatures
of the contracting parties. Transfers by
mergers or other forms of succession may be
made by any document supporting such
transfer. [Sec. 149.3, RA 8293]
(4) Assignments and transfers of registrations of
marks shall be recorded at the Office on
payment of the prescribed fee; assignment
and transfers of applications for registration
shall, on payment of the same fee, be
provisionally recorded, and the mark, when
registered, shall be in the name of the
assignee or transferee. [Sec. 149.4, RA 8293]
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MERCANTILE LAW
(5) Assignments and transfers shall have no
effect against third parties until they are
recorded at the Office. [Sec. 149.5, RA 8293]
Any license contract concerning the registration
of a mark, or an application therefor, shall
provide for effective control by the licensor of
the quality of the goods or services of the
licensee in connection with which the mark is
used. If the license contract does not provide for
such quality control, or if such quality control is
not effectively carried out, the license contract
shall not be valid. [Sec. 150.1, RA 8293]
PROTECTION LIMITED TO GOODS
SPECIFIED IN REGISTRATION
CERTIFICATE
The certificate of registration can confer upon
the petitioner the exclusive right to use its own
symbol only to those goods specified in the
certificate, subject to any conditions a
limitations stated therein. One who has adopted
and used a trademark on his goods does not
prevent the adoption and use of the same
trademark by others for products which are of a
different description. [Faberge, Inc. v. IAC and Co
Beng Kay (1992)]
USE BY THIRD PARTIES OF
NAMES, ETC. SIMILAR TO
REGISTERED MARK
The IPC deems unlawful any subsequent use of
the trade name by a third party, whether as a
trade name or a mark or collective mark, or any
such use of a similar trade name or mark, likely
to mislead the public. [Sec. 165.2 (b), RA 8293]
INFRINGEMENT AND REMEDIES
TRADEMARK INFRINGEMENT
Any person who shall, without the consent of
the owner of the registered mark:
(1) Use in commerce any reproduction,
counterfeit, copy, or colorable imitation of a
registered mark or the same container or a
dominant feature thereof in connection with
the sale, offering for sale, distribution,
advertising of any goods or services including
other preparatory steps necessary to carry
out the sale of any goods or services on or in
UP LAW BOC INTELLECTUAL PROPERTY CODE
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive; [Sec. 155.1, RA 8293]
(2) Reproduce, counterfeit, copy or colorably
imitate a registered mark or a dominant
feature thereof and apply such reproduction,
counterfeit, copy or colorable imitation to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be
used in commerce upon or in connection
with the sale, offering for sale, distribution, or
advertising of goods or services on or in
connection with which such use is likely to
cause confusion, or to cause mistake, or to
deceive. [Sec. 155.2, RA 8293]
Mighty Corporation v. E. & J. Gallo Winery (2004):
A crucial issue in any trademark infringement
case is the likelihood of confusion, mistake or
deceit as to the identity, source or origin of the
goods or identity of the business as a
consequence of using a certain mark. Likelihood
of confusion is admittedly a relative term, to be
determined rigidly according to the particular
(and sometimes peculiar) circumstances of each
case. In determining likelihood of confusion, the
court must consider: (a) the resemblance
between the trademarks; (b) the similarity of the
goods to which the trademarks are attached; (c)
the likely effect on the purchaser; and (d) the
registrants express or implied consent and
other fair and equitable considerations.
McDonalds Corporation v. L.C. Big Mak Burger,
Inc., et al., (2004): To establish trademark
infringement, the following elements must be
shown: (1) the validity of the mark; (2) the
plaintiffs ownership of the mark; and (3) the use
of the mark or its colorable imitation by the
alleged infringer results in likelihood of
confusion. Of these, it is the element of
likelihood of confusion that is the gravamen of
trademark infringement. Two types of confusion
arise from the use of similar or colorable
imitation marks, namely, confusion of goods
(product confusion) and confusion of business
(source or origin confusion). While there is
confusion of goods when the products are
competing, confusion of business exists when
the products are non-competing but related
enough to produce confusion or affiliation.
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In order to bring a civil action for
infringement, it is not required that there is an
actual sale of the goods or services using the
infringing material. [Sec. 155.2, RA 8293]
Infringement takes place upon the mere use
or reproduction of the registered mark.
No article of imported merchandise which
shall copy or simulate the name of any
domestic product, or manufacturer, or dealer,
or which shall copy or simulate a mark
registered in accordance with the provisions of
this Act, or shall bear a mark or trade name
calculated to induce the public to believe that
the article is manufactured in the Philippines,
or that it is manufactured in any foreign
country or locality other than the country or
locality where it is in fact manufactured, shall
be admitted to entry at any customhouse of
the Philippines. [Sec. 166, RA 8293]
A mere distributor and not the owner cannot
assert any protection from trademark
infringement as it had no right in the first
place to the registration of the disputed
trademarks. [Superior Commercial Enterprises
v. Kunnan Enterprises (2010)]
FALSE DESIGNATIONS OF ORIGIN;
FALSE DESCRIPTION OR
REPRESENTATION
Any person who, on or in connection with any
goods or services, or any container for goods,
uses in commerce any word, term, name,
symbol, or device, or any combination thereof,
or any false designation of origin, false or
misleading description of fact, or false or
misleading representation of fact, which:
(a) Is likely to cause confusion, or to cause
mistake, or to deceive as to the affiliation,
connection, or association of such person
with another person, or as to the origin,
sponsorship, or approval of his or her goods,
services, or commercial activities by another
person; [Sec. 169.1(a), RA 8293]
(b) In commercial advertising or promotion,
misrepresents the nature, characteristics,
qualities, or geographic origin of his or her or
another person's goods, services, or
commercial activities, shall be liable to a civil
action for damages and injunction [Sec. 169.1
(b), RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
Any goods marked or labeled in contravention
of the provisions of this Section shall not be
imported into the Philippines or admitted entry
at any customhouse of the Philippines. The
owner, importer, or consignee of goods refused
entry at any customhouse under this section
may have any recourse under the customs
revenue laws or may have the remedy given by
this Act in cases involving goods refused entry
or seized. [Sec. 169.2, RA 8293]
INFRINGEMENT OF NAME AND
MARKS OF OWNERSHIP STAMP ON
CONTAINERS
General Rule:
It is unlawful for any person, without the
consent of the manufacturer, bottler or seller
who has registered the mark of ownership to
fill such bottles, boxes, kegs, barrels or other
containers so marked and stamped, for the
purpose of sale, dispose of, or wantonly
destroy the same, whether filled or not, to use
the same for drinking vessels or drain pipes,
foundation pipes, for any other purpose than
that registered. [Sec. 2, RA 623 as amended by
RA 5700]
The use of the same without apparent
permission from the trademark owners
thereof shall be prima facie presumption that
such possession or use is unlawful. [Sec. 3, RA
623 as amended by RA 5700]
Exceptions:
(1) Use of the bottles as containers for sisi,
bagoong, patis, and similar native products
[Sec. 6 RA 623 as amended by RA 5700]
(2) Persons in whose favor the containers were
sold [Distelleria Washington v. LA Tondena
Distillers (1997)]
DAMAGES
The owner of a registered mark may recover
damages from any person who infringes his
rights, and the measure of the damages
suffered shall be either the reasonable profit
which the complaining party would have
made, had the defendant not infringed his
rights, or the profit which the defendant
actually made out of the infringement, or in
the event such measure of damages cannot
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MERCANTILE LAW
be readily ascertained with reasonable
certainty, then the court may award as
damages a reasonable percentage based
upon the amount of gross sales of the
defendant or the value of the services in
connection with which the mark or trade
name was used in the infringement of the
rights of the complaining party. [Sec. 156.1, RA
8293]
The owner of the registered mark shall not be
entitled to recover profits or damages unless
the acts have been committed with
knowledge that such imitation is likely to
cause confusion, or to cause mistake, or to
deceive. Such knowledge is presumed if the
registrant gives notice that his mark is
registered by displaying with the mark the
words '"Registered Mark" or the letter R
within a circle or if the defendant had
otherwise actual notice of the registration.
[Sec. 158, RA 8293]
Should damages be recoverable, the
measure of the damages suffered shall be
either:
(a)The reasonable profit which the
complaining party would have made, had
the defendant not infringed his rights; or
(b) The profit which the defendant actually
made out of the infringement; or
(c) A reasonable percentage based upon the
amount of gross sales of the defendant or
the value of the services in connection
with which the mark or trade name was
used in the infringement of the rights of
the complaining party if such measure of
damages cannot be readily ascertained
with reasonable certainty. [Sec. 156.1, RA
8293]
REQUIREMENT OF NOTICE
Notice of registration of trademark is necessary
for an owner of a trademark to recover damages
in an action for infringement since knowledge
that such imitation is likely to cause confusion,
or to cause mistake, or to deceive is an element
of infringement. Requirement of notice may be
complied by displaying with the mark the words
'"Registered Mark" or the letter R within a circle.
[Sec. 158, RA 8293]
UP LAW BOC INTELLECTUAL PROPERTY CODE
OTHER REMEDIES AVAILABLE:
(1) Injunction [Sec. 156.4];
(2) Impounding of sales invoices and other
documents [Sec. 156.2];
(3) Double damages in case of actual intent to
defraud or to mislead [Sec. 156.3];
(4) Court order for the disposal or destruction of
the infringing goods [Sec. 157];
(5) Criminal Action;
(6) Administration sanctions
Any foreign national, who qualifies under the
principle on reciprocity and does not engage in
business in the Philippines, whether or not it is
licensed to do business in the Philippines, may
bring civil or administrative action for:
(1) Opposition
(2) Cancellation
(3) Infringement
(4) Unfair Competition
(5) False designation of origin or false
description [Sec. 160. RA 8293]
LIMITATIONS TO ACTIONS FOR
INFRINGEMENT
The remedies given to the owner of a right
infringed shall be limited as follows:
(1) Registered mark shall have no effect against
any person who, in good faith, before the
filing date or the priority date, was using the
mark for the purposes of his business or
enterprise: Provided, That his right may only
be transferred or assigned together with his
enterprise or business or with that part of his
enterprise or business in which the mark is
used. [Sec. 159.1, RA 8293]
(2) Where an infringer who is engaged solely in
the business of printing the mark or other
infringing materials for others is an innocent
infringer, the owner of the right infringed
shall be entitled as against such infringer
only to an injunction against future printing.
[Sec. 159.2, RA 8293]
(3) Where the infringement complained of is
contained in or is part of paid advertisement
in a newspaper, magazine, or other similar
periodical or in an electronic communication,
the remedies of the owner of the right
infringed as against the publisher or
distributor of such newspaper, magazine, or
other similar periodical or electronic
communication shall be limited to an
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MERCANTILE LAW
injunction against the presentation of such
advertising matter in future issues of such
newspapers, magazines, or other similar
periodicals or in future transmissions of such
electronic communications.
The limitations shall apply only to
innocent infringers: Provided, That such
injunctive relief shall not be available to the
owner of the right infringed with respect to
an issue of a newspaper, magazine, or other
similar periodical or an electronic
communication containing infringing matter
where restraining the dissemination of such
infringing matter in any particular issue of
such periodical or in an electronic
communication would delay the delivery of
such issue or transmission of such electronic
communication is customarily conducted in
accordance with the sound business practice,
and not due to any method or device
adopted to evade this section or to prevent or
delay the issuance of an injunction or
restraining order with respect to such
infringing matter. [Sec. 159.3, RA 8293]
(4) There shall be no infringement of
trademarks or tradenames of imported or
sold drugs and medicines allowed under
Section 72.1 as well as imported or sold off-
patent drugs and medicines: Provided, That
said drugs and medicines bear the registered
marks that have not been tampered,
unlawfully modified, or infringed upon as
defined under Section 155. [Sec. 159.4 RA
8293 as amended by RA 9502]
UNFAIR COMPETITION
A person who has identified in the mind of the
public the goods he manufactures or deals in,
his business or services from those of others,
whether or not a registered mark is employed,
has a property right in the goodwill of the said
goods, business or services so identified,
which will be protected in the same manner
as other property rights. [Sec. 168.1, RA 8293]
Any person who shall employ deception or
any other means contrary to good faith by
which he shall pass off the goods
manufactured by him or in which he deals, or
his business, or services for those of the one
having established such goodwill, or who
shall commit any acts calculated to produce
UP LAW BOC INTELLECTUAL PROPERTY CODE
said result, shall be guilty of unfair
competition, and shall be subject to an action
therefor. [Sec. 168.2, RA 8293]
The following shall be deemed guilty of unfair
competition:
(a) Any person, who is selling his goods and
gives them the general appearance of goods
of another manufacturer or dealer, either as
to the goods themselves or in the wrapping
of the packages in which they are contained,
or the devices or words thereon, or in any
other feature of their appearance, which
would be likely to influence purchasers to
believe that the goods offered are those of a
manufacturer or dealer, other than the
actual manufacturer or dealer, or who
otherwise clothes the goods with such
appearance as shall deceive the public and
defraud another of his legitimate trade, or
any subsequent vendor of such goods or any
agent of any vendor engaged in selling such
goods with a like purpose; [Sec. 168.3(a), RA
8293]
(b) Any person who by any artifice, or device, or
who employs any other means calculated to
induce the false belief that such person is
offering the services of another who has
identified such services in the mind of the
public; [Sec. 168.3(b), RA 8293]
(c) Any person who shall make any false
statement in the course of trade or who shall
commit any other act contrary to good faith
of a nature calculated to discredit the goods,
business or services of another. [Sec. 168.3(c),
RA 8293]
McDonalds Corporation v. L.G. Big Mak Burger,
Inc., et al. (2004): The elements of an action for
unfair competition are: (1) confusing similarity in
the general appearance of the goods, and (2)
intent to deceive the public and defraud a
competitor. The confusing similarity may or may
not result from similarity in the marks, but may
result from other external factors in the
packaging or presentation of the goods. The
intent to deceive and defraud may be inferred
from the similarity in appearance of the goods
as offered for sale to the public. Actual
fraudulent intent need not be shown.
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MERCANTILE LAW
Caterpillar, Inc v. Samson (2006): An action for
unfair competition is based on the proposition
that no dealer in merchandise should be
allowed to dress his goods in simulation of the
goods of another dealer, so that purchasers
desiring to buy the goods of the latter would be
induced to buy the goods of the former. The
most usual devices employed in committing this
crime are the simulation of labels and the
reproduction of form, color and general
appearance of the package used by the pioneer
manufacturer or dealer.
Coca-Cola v. Gomez (2008): Articles 168.1 and
168.2 provide the concept and general rule on
the definition of unfair competition. The law
does not thereby cover every unfair act
committed in the course of business; it covers
only acts characterized by deception or any
other means contrary to good faith in the
passing off of goods and services as those of
another who has established goodwill in
relation with these goods or services, or any
other act calculated to produce the same result.
What unfair competition is, is further
particularized under Section 168.3 when it
provides specifics of what unfair competition is
without in any way limiting the scope of
protection against unfair competition. Part of
these particulars is provided under Section
168.3(c) which provides the general catch-all
phrase that the petitioner cites. Under this
phrase, a person shall be guilty of unfair
competition who shall commit any other act
contrary to good faith of a nature calculated to
discredit the goods, business or services of
another.
From jurisprudence, unfair competition has
been defined as the passing off (or palming off)
or attempting to pass off upon the public the
goods or business of one person as the goods or
business of another with the end and probable
effect of deceiving the public. It formulated the
true test of unfair competition: whether the
acts of defendant are such as are calculated to
deceive the ordinary buyer making his
purchases under the ordinary conditions which
prevail in the particular trade to which the
UP LAW BOC INTELLECTUAL PROPERTY CODE
controversy relates. One of the essential
requisites in an action to restrain unfair
competition is proof of fraud; the intent to
deceive must be shown before the right to
recover can exist. The advent of the IP Code has
not significantly changed these rulings as they
are fully in accord with what Section 168 of the
Code in its entirety provides. Deception, passing
off and fraud upon the public are still the key
elements that must be present for unfair
competition to exist.
Infringement of
Unfair Competition
Trademark
Unauthorized use of a Passing off of ones
trademark goods as those of
another
Fraudulent intent is Fraudulent intent
unnecessary essential
Prior registration of the Registration is
trademark is a necessary
prerequisite to the
action
[In and Out Burger vs Sehwani (2008)]
The law on unfair competition is broader and
more inclusive than the law on trademark
infringement. The latter is more limited but it
recognizes a more exclusive right derived from
the trademark adoption and registration by the
person whose goods or business is first
associated with it. Hence, even if one fails to
establish his exclusive property right to a
trademark, he may still obtain relief on the
ground of his competitors unfairness or fraud.
Conduct constitutes unfair competition if the
effect is to pass off on the public the goods of
one man as the goods of another. [Mighty
Corporation v. E. & J. Gallo Winery (2004)]
TRADE NAMES OR BUSINESS
NAMES
It is the name or designation identifying or
distinguishing an enterprise. [Sec. 121.3, RA
8293]
Any individual name or surname, firm name,
device or word used by manufacturers,
industrialists, merchants, and others to
identify their businesses, vocations or
MERCANTILE LAW
occupations [Converse Rubber Corp. v.
Universal Rubber Products, Inc. (1980)]
WHAT MAY NOT BE USED AS TRADE
NAME
(1) If by its nature or the use to which the name
or designation may be put, it is contrary to
public order or morals.
(2) If it is liable to deceive trade circles or the
public as to the nature of the enterprise
identified by the name
(3) If the trade name is similar to a mark or a
trade name owned by another person and its
use would likely mislead the public.
[Sec.165.1, RA 8293]
Acquisition of ownership: Trade names are
protected even prior to or without registration.
is The ownership of a trade name is acquired
through adoption and use.
not
Right of owner: The IPC deems unlawful any
subsequent use of the trade name by a third
party, whether as a trade name or a mark or
collective mark, or any such use of a similar
trade name or mark, likely to mislead the public.
[Sec. 165.2 (b), RA 8293]
Trade names, unlike trademarks, need not be
registered with the IPO before an infringement
suit may be filed by its owner against the owner
of an infringing trademark. All that is required is
that the trade name is previously used in trade
or commerce in the Philippines. [Prosource
International v. Horphag Research Management
(2009)]
COLLECTIVE MARKS
A Collective mark is any visible sign
designated as such in the application for
registration and capable of distinguishing the
origin or any other common characteristic,
including the quality of goods or services of
different enterprises which use the sign under
the control of the registered owner of the
collective mark [Sec. 121.2, RA 8293]
An application for registration of a collective
mark shall designate the mark as a collective
mark and shall be accompanied by a copy of
the agreement, if any, governing the use of
the collective mark. [Sec. 167.2, Ra 8293]
PAGE 239
UP LAW BOC INTELLECTUAL PROPERTY CODE
GROUNDS FOR CANCELLATION
In addition to the grounds under Section 149,
the Court shall cancel the registration of a
collective mark if the person requesting the
cancellation proves:
(1) That only the registered owner uses the
mark; or
(2) That he uses or permits its use in
contravention of the agreements referred to
in Subsection 166.2; or
(3) That he uses or permits its use in a manner
liable to deceive trade circles or the public as
to the origin or any other common
characteristics of the goods or services
concerned. [Sec. 167.3, RA 8293]
The registration of a collective mark, or an
application therefor shall not be the subject of a
license contract. [Sec. 167.4, RA 8293]
Copyrights
DEFINITION
Is that system of legal protection an author
enjoys of the form of expression of ideas.
[Aquino, Intellectual Property Law]
BASIC PRINCIPLES, SECTIONS
172.2, 175 AND 181
WORKS ARE PROTECTED BY THE
SOLE FACT OF THEIR CREATION
Principle of Automatic Protection: Copyright is
vested from the very moment of creation. [Sec.
172.2, RA 8293]
The enjoyment and exercise of copyright,
including moral rights, shall not be the subject
of any formality; such enjoyment and such
exercise shall be independent of the existence
of protection in the country of origin of the work.
[Article 5(2), Berne Convention for the Protection
of Literary and Artistic Works]
The Denicola Test in intellectual property law
states that if design elements of an article
reflect a merger of aesthetic and functional
considerations, the artistic aspects of the work
cannot be conceptually separable from the
PAGE 240
MERCANTILE LAW
utilitarian aspects; thus, the article cannot be
copyrighted.
PROTECTION EXTENDS ONLY TO
THE EXPRESSION OF AN IDEA, NOT
THE IDEA ITSELF.
No protection shall extend, under this law, to
any idea, procedure, system method or
operation, concept, principle, discovery or mere
data as such, even if they are expressed,
explained, illustrated or embodied in a work.
[Sec 175, RA 8293]
THE COPYRIGHT IS DISTINCT FROM
THE PROPERTY IN THE MATERIAL
OBJECT SUBJECT TO IT. [Sec 181, RA
8293]
COPYRIGHT IS A STATUTORY RIGHT.
Copyright, in the strict sense of the term is
purely a statutory right. Being a mere statutory
grant, the rights are limited to what the statute
confers. It may be obtained and enjoyed only
with respect to the subjects and by the persons,
and on terms and conditions specified in the
statute. Accordingly, it can cover only the works
falling within the statutory enumeration or
description. [Pearl and Dean vs. Shoemart
(2003)]
COPYRIGHTABLE WORKS
ORIGINAL LITERARY AND ARTISTIC
WORKS
Sec. 172.1, RA 8293. Literary and artistic works,
hereinafter referred to as "works", are original
intellectual creations in the literary and artistic
domain protected from the moment of their
creation and shall include in particular:
(a) Books, pamphlets, articles and other
writings;
(b) Periodicals and newspapers;
(c) Lectures, sermons, addresses, dissertations
prepared for oral delivery, whether or not
reduced in writing or other material form;
(d) Letters;
(e) Dramatic or dramatico-musical
compositions; choreographic works or
entertainment in dumb shows;
(f) Musical compositions, with or without words;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(g) Works of drawing, painting, architecture,
sculpture, engraving, lithography or other
works of art; models or designs for works of
art;
(h) Original ornamental designs or models for
articles of manufacture, whether or not
registrable as an industrial design, and other
works of applied art;
(i) Illustrations, maps, plans, sketches, charts
and three-dimensional works relative to
geography, topography, architecture or
science;
(j) Drawings or plastic works of a scientific or
technical character;
(k) Photographic works including works
produced by a process analogous to
photography; lantern slides;
(l) Audiovisual works and cinematographic
works and works produced by a process
analogous to cinematography or any process
for making audio-visual recordings;
(m) Pictorial illustrations and advertisements;
(n) Computer programs; and
(o) Other literary, scholarly, scientific and artistic
works
WHEN A WORK IS CONSIDERED ORIGINAL:
(a) The work is an independent creation of the
author; and
(b) It must not be copied from the work of
another.
A person to be entitled to a copyright must be
the original creator of the work. He must have
created it by his own skill, labor and judgment
without directly copying or evasively imitating
the work of another. [Ching Kian Chuan vs. CA
(2001)]
By originality is meant that the material was
not copied, and evidences at least minimal
creativity; that it was independently created
by the author and that it possesses at least
some minimal degree of creativity. Copying is
shown by proof of access to copyrighted
material and substantial similarity between
the two works. The applicant must thus
demonstrate the existence and validity of
copyright because in the absence of copyright
protection, even the original creation may be
freely copied. [Ching v. Salinas (2005)]
PAGE 241
MERCANTILE LAW
Originality is not determined by novelty,
aesthetic merit or ingenuity but that it is an
independent creation.
The requirement in US Law that the
expression should be fixed in a tangible
medium is not applicable here since our law
expressly provides that works are protected
irrespective of their mode or form of
expression. [Sec. 172.2, RA 8293]
DERIVATIVE WORKS
The following derivative works shall also be
protected by copyright:
(a) Dramatizations, translations, adaptations,
abridgments, arrangements, and other
alterations of literary or artistic works; and
(b) Collections of literary, scholarly or artistic
works, and compilations of data and other
materials which are original by reason of the
selection or coordination or arrangement of
their contents. [Sec. 173.1, RA 8293]
DERIVATIVE WORKS ARE PROTECTED AS
NEW WORKS PROVIDED THEY SHALL NOT:
(a) Affect the force of any subsisting copyright
upon the original works employed or any part
thereof; or
(b) Be construed to imply any right to such use
of the original works, or to secure or extend
copyright in such original works. [Sec. 173.2,
RA 8293]
The provisions of the intellectual property code
shall apply to works in which copyright
protection obtained prior to the effectivity of the
law is subsisting. provided that the application
of the code shall not result in the diminution of
such protection. [Sec. 239.3 IPC]
Ching Kian Chuan vs CA 363 SCRA 142 (2001):
(Vermicelli Case) A person entitled to copyright
must be the original creator of the work. He
must have created it by his own skill, labor, and
judgment without directly copying or evasively
imitating the work of another.
Sambar vs Levi Strauss 378 SCRA 364 (2002):
To be entitled to copyright, the thing being
copyrighted must be original, created by the
author through his own judgment without
directly copying or evasively imitating the work
of another.
UP LAW BOC INTELLECTUAL PROPERTY CODE
NON-COPYRIGHTABLE WORKS
UNPROTECTED SUBJECT MATTER
(a) Any idea, procedure, system method or
operation, concept, principle, discovery or
mere data as such, even if they are
expressed, explained, illustrated or
embodied in a work;
(b) News of the day and other miscellaneous
facts having the character of mere items of
press information;
(c) Any official text of a legislative,
administrative or legal nature, as well as any
official translation thereof;
(d) Pleadings;
(e) Original decisions of courts and tribunals
(This pertains to the original decisions not
the SCRA published volumes since these are
protected under derivative works under Sec
173.1) [Sec. 175, RA 8293]
The format or mechanics of a TV show is not
copyrightable as copyright does not extend to
ideas, procedures, processes, systems,
methods of operation, concepts, principles or
discoveries regardless of the form in which
they are described, explained, illustrated or
embodied. [Joaquin Jr. et al vs. Drilon, et al
(1999)]
No one may claim originality as to facts as
these do not owe their origin to an act of
authorship. The first person to find and report
a particular fact has not created the same; he
has merely discovered its existence. [Feist
Publication v Rural Telephone Services (1991)]
WORKS OF THE GOVERNMENT OF THE
PHILIPPINES - work created by an officer or
employee of the Philippine Government or any
of its subdivisions and instrumentalities,
including government-owned or controlled
corporations as a part of his regularly prescribed
official duties. [Sec. 171.11, RA 8293]
General Rule: Government cannot own
copyright
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MERCANTILE LAW
Exceptions:
(1) When copyright is assigned or bequested in
favor of the government [Sec 176.3];
(2) Author of speeches, lectures, sermons,
addresses and dissertations shall have
exclusive right of making a collection of his
work.
However, prior approval of the government
agency or the office wherein the work is
created shall be necessary for the
exploitation of such work for profit. [Sec.
176.1]
Notwithstanding the foregoing provisions,
the Government is not precluded from
receiving and holding copyrights transferred
to it by assignment, bequest or otherwise;
nor shall publication or republication by the
Government in a public document of any
work in which copyright is subsisting be
taken to cause any abridgment or annulment
of the copyright or to authorize any use or
appropriation of such work without the
consent of the copyright owner. [Sec. 176.3,
RA 8293]
In writing judicial decisions, a judge should
make the proper attribution in copying
passages from any judicial decision, statute,
regulation, or other Works of the
Government. However, the failure to make
such attribution does not violate the Law on
Copyright. The law expressly provides that
Works of the Government are not subject to
copyright. This means that there is neither a
legal right by anyone to demand attribution,
nor any legal obligation from anyone to
make an attribution, when Works of the
Government are copied. The failure to make
the proper attribution of a Work of the
Government is not actionable but is merely a
case of sloppy writing. Clearly, there is
no legal obligation, by a judge or by any
person, to make an attribution when copying
Works of the Government. However,
misquoting or twisting, with or without
attribution, any judicial decision, statute,
regulation or other Works of the Government
in judicial writing, if done to mislead the
parties or the public, is actionable. [J. Carpio
Dissenting Opinion, In The Matter Of the
Charges of Plagiarism, Etc., Against Assoc.
UP LAW BOC INTELLECTUAL PROPERTY CODE
Justice Mariano Del Castillo, A.M. 10-7-17-SC
(2011)]
WORKS OF THE PUBLIC DOMAIN
These include works whose term of copyright
has expired.
USEFUL ARTICLES
Useful Article Doctrine - Works whose sole
purpose is utilitarian have no separate artistic
value. This can be distinguished from a work of
applied art, which has utilitarian functions but
there is an identifiable artistic work or creation
incorporated thereto.
RIGHTS OF COPYRIGHT OWNER
COPYRIGHT OR ECONOMIC RIGHTS
Copyright or economic rights shall consist of the
exclusive right to carry out, authorize or prevent
the following acts:
(a) Reproduction of the work or substantial
portion of the work; [Sec. 177.1, RA 8293]
(b) Dramatization, translation, adaptation,
abridgment, arrangement or other
transformation of the work; [Sec. 177.2, RA
8293]
(c) The first public distribution of the original
and each copy of the work by sale or other
forms of transfer of ownership; [Sec. 177.3, RA
8293]
(d) Rental of the original or a copy of an
audiovisual or cinematographic work, a work
embodied in a sound recording, a computer
program, a compilation of data and other
materials or a musical work in graphic form,
irrespective of the ownership of the original
or the copy which is the subject of the rental;
[Sec. 177.4, RA 8293]
(e) Public display of the original or a copy of the
work; [Sec. 177.5, RA 8293]
(f) Public performance of the work; [Sec. 177.6,
RA 8293]
(g) Other communication to the public of the
work [Sec. 177.7, RA 8293]
Economic rights also give the author the right to
assign or license the copyright and/or the
material object in whole or in part, and they
allow the owner to derive financial reward from
the use of his works by others. [Sec. 180.1, RA
8293 as amended by RA 10372]
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MERCANTILE LAW
Copyright in a work of architecture - shall
include the right to control the erection of any
building which reproduces the whole or a
substantial part of the work either in its original
form or in any form recognizably derived from
the original: Provided, That the copyright in any
such work shall not include the right to control
the reconstruction or rehabilitation in the same
style as the original of a building to which that
copyright relates. [Sec. 186, RA 8293]
Communication to the Public of Copyrighted
Works - Includes point-to-point transmission of
a work, including video on demand, and
providing access to an electronic retrieval
system, such as computer databases, servers, or
similar electronic storage devices. Broadcasting,
rebroadcasting, retransmission by cable, and
broadcast and retransmission by satellite are all
acts of communication to the public within the
meaning of the IPC. [Rule 11, Copyright
Safeguards and Regulations]
First Public Distribution of Work- An exclusive
right of first distribution of work includes all acts
involving distribution, specifically including the
first importation of an original and each copy of
the work into the jurisdiction of the Republic of
the Philippines. [Rule 12, Copyright Safeguards
and Regulations]
CIVIL CODE PROVISIONS ON
OWNERSHIP OF INTELLECTUAL
CREATION:
Article 721. By intellectual creation, the following
persons acquire ownership:
(1) The author with regard to his literary,
dramatic, historical, legal, philosophical,
scientific or other work;
(2) The composer; as to his musical
composition;
(3) The painter, sculptor, or other artist, with
respect to the product of his art;
(4) The scientist or technologist or any other
person with regard to his discovery or invention.
Article 722. The author and the composer,
mentioned in Nos. 1 and 2 of the preceding
article, shall have the ownership of their
creations even before the publication of the
UP LAW BOC INTELLECTUAL PROPERTY CODE
same. Once their works are published, their
rights are governed by the Copyright laws.
The painter, sculptor or other artist shall have
dominion over the product of his art even before
it is copyrighted. The scientist or technologist
has the ownership of his discovery or invention
even before it is patented.
Article 723. Letters and other private
communications in writing are owned by the
person to whom they are addressed and
delivered, but they cannot be published or
disseminated without the consent of the writer
or his heirs. However, the court may authorize
their publication or dissemination if the public
good or the interest of justice so requires.
MORAL RIGHTS [SEC. 193]
The author of a work shall, independently of the
economic rights in Section 177 or the grant of an
assignment or license with respect to such right,
have the right:
(1) To require that the authorship of the works
be attributed to him, in particular, the right
that his name, as far as practicable, be
indicated in a prominent way on the copies,
and in connection with the public use of his
work; [Sec. 193.1, RA 8293]
(2) To make any alterations of his work prior to,
or to withhold it from publication; [Sec. 193.2,
RA 8293]
(3) To object to any distortion, mutilation or
other modification of, or other derogatory
action in relation to, his work which would be
prejudicial to his honor or reputation; [Sec.
193.3, RA 8293]
(4) To restrain the use of his name with respect
to any work not of his own creation or in a
distorted version of his work. [Sec. 193.4, RA
8293]
In addition to the right to publish granted by
the author, his heirs, or assigns, the publisher
shall have a copyright consisting merely of the
right of reproduction of the typographical
arrangement of the published edition of the
work. [Sec.174, RA 8293]
The author of speeches, lectures, sermons,
addresses, and dissertations mentioned in the
preceding paragraphs shall have the exclusive
PAGE 244
MERCANTILE LAW
right of making a collection of his works. [Sec.
176.2, RA 8293]
WAIVER OF MORAL RIGHTS
General Rule: Moral rights can be waived in
writing, expressly stating such waiver [Sec. 195,
RA 8293] or by contribution to a collective work
unless such is expressly reserved [Sec. 196, RA
8293].
Exceptions:
Even if made in writing, waiver is still not valid if:
(a) Use of the name of the author, title of his
work, or his reputation with respect to any
version or adaptation of his work, which
because of alterations substantially tends to
injure the literary or artistic reputation of
another author; [Sec. 195.1, RA 8293]
(b) It uses the name of the author in a work that
he did not create. [Sec. 195.1, RA 8293]
Moral rights are not assignable or subject to
license. [Sec. 198, RA 8293]
The right of an author under Section 193.1.
shall last during the lifetime of the author and
in perpetuity after his death while the rights
under Sections 193.2. 193.3. and 193.4. shall
be coterminous with the economic rights [Sec.
198, RA 8293 as amended by RA 10372]
RIGHTS TO PROCEEDS IN
SUBSEQUENT TRANSFERS (DROIT
DE SUITE OR FOLLOW UP RIGHTS)
In every sale or lease of an original work of
painting or sculpture or of the original
manuscript of a writer or composer, subsequent
to the first disposition thereof by the author, the
author or his heirs shall have an inalienable
right to participate in the gross proceeds of the
sale or lease to the extent of five percent (5%).
This right shall exist during the lifetime of the
author and for fifty (50) years after his death.
[Sec. 200, RA 8293]
Works not covered - Prints, etchings, engravings,
works of applied art, or works of similar kind
wherein the author primarily derives gain from
the proceeds of reproductions. (Sec. 201, RA
8293)
First Sale Doctrine - After the first sale of the
lawfully made copy of the copyrighted work,
UP LAW BOC INTELLECTUAL PROPERTY CODE
anyone who is the owner of that copy can sell or
dispose of that copy in any way without any
liability for copyright infringement. The first sale
of an authorized copy of the work exhausts the
authors right to control distribution of copies.
NEIGHBORING RIGHTS
PERFORMERS RIGHTS
(1) As regards their performances, the right of
authorizing:
(a) The broadcasting and other
communication to the public of their
performance; and
(b) The fixation of their unfixed performance.
[Sec. 203.1, RA 8293]
(2) Such right shall be maintained and exercised
fifty (50) years after his death, by his heirs,
and in default of heirs, the government,
where protection is claimed. [Sec. 204.2, RA
8293]
(3) The right of authorizing the direct or indirect
reproduction of their performances fixed in
sound recordings, or audiovisual works or
fixations in any manner or form; [Sec. 203.2,
RA 8293, as amended by 10372]
(4) Subject to the provisions of Section 206, the
right of authorizing the first public
distribution of the original and copies of their
performance fixed in the sound recording or
audiovisual works or fixations through sale or
rental or other forms of transfer of
ownership; [Sec. 203.3, RA 8293, as amended
by RA 10372]
(5) The right of authorizing the commercial
rental to the public of the original and copies
of their performances fixed in sound
recordings or audiovisual works or fixations,
even after distribution of them by, or
pursuant to the authorization by the
performer; [Sec. 203.4, RA 8293, as amended
by RA 10372]
(6) The right of authorizing the making available
to the public of their performances fixed in
sound recordings or audiovisual works or
fixations, by wire or wireless means, in such a
way that members of the public may access
them from a place and time individually
chosen by them. [Sec. 203.5, RA 8293, as
amended by RA 10372]
(7) Independently of a performer's economic
rights, the performer, shall, as regards his
PAGE 245
MERCANTILE LAW
live aural performances or performances
fixed in sound recordings or audiovisual
works or fixations, have the right to claim to
be identified as the performer of his
performances, except where the omission is
dictated by the manner of the use of the
performance, and to object to any distortion,
mutilation or other modification of his
performances that would be prejudicial to his
reputation. [Sec. 204.1, RA 8293, as amended
by RA 10372]
(8) Unless otherwise provided in the contract, in
every communication to the public or
broadcast of a performance subsequent to
the first communication or broadcast thereof
by the broadcasting organization, the
performer shall be entitled to an additional
remuneration equivalent to at least five
percent (5%) of the original compensation he
or she received for the first communication or
broadcast. [Sec. 206, RA 8293]
RIGHTS OF PRODUCERS OF SOUND
RECORDING
(1) The right to authorize the direct or indirect
reproduction of their sound recordings, in
any manner or form; the placing of these
reproductions in the market and the right of
rental or lending; [Sec. 208.1, RA 8293]
(2) The right to authorize the first public
distribution of the original and copies of their
sound recordings through sale or rental or
other forms of transferring ownership; [Sec.
208.2, RA 8293]
(3) The right to authorize the commercial rental
to the public of the original and copies of
their sound recordings, even after
distribution by them by or pursuant to
authorization by the producer. [Sec. 208.3,
RA 8293]
(4) If a sound recording published for
commercial purposes, or a reproduction of
such sound recording, is used directly for
broadcasting or for other communication to
the public, or is publicly performed with the
intention of making and enhancing profit, a
single equitable remuneration for the
performer or performers, and the producer of
the sound recording shall be paid by the user
to both the performers and the producer,
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

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

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UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

RULES ON OWNERSHIP OF COPYRIGHT

OWNERSHIP OF COPYRIGHT
Work Ownership
Single Creator of an
Belongs to the author of the work [Sec. 178.1, RA 8293]
Original Work
Belongs of the co-authors; in the absence of agreement, their rights shall be
Works of Joint governed by the rules on co-ownership. However, if the work consists of parts that
Authorship can be used separately and identified, the author of each part owns the copyright
of the part he has created. [Sec. 178.2, RA 8293; Asked in 95, 04]
Belongs to the employee if the creation is not a part of his regular duties, even if
Work created during
he used the time, facilities and materials of the employer. However, belongs to the
the course of
employer if the work is in the performance of the employees regular duties unless
employment
there is an agreement to the contrary. [Sec. 178.3, RA 8293; Asked in 08]
Work commissioned The person who commissioned the work holds ownership of the work per se, but
by a person other copyright remains with the creator unless there was a stipulation to the contrary.
than the employer [Sec. 178.4, RA 8293; Asked in 95, 04]
Belongs to the producer, author of the scenario, composer of the music, film
director, and author of the adapted work. However, subject to stipulations, the
Audio visual works producers shall exercise the copyright as may be required for the exhibition of the
work, except for the right to collect license fees for the performance of musical
compositions in the work. [Sec. 178.5, RA 8293]
Belongs to the writer, but the court may authorize their publication or
Letters dissemination of the public good or interest of justice requires, pursuant to Art.
723, New Civil Code. [Sec. 178.6, RA 8293]
Publishers are deemed to represent the authors, unless the contrary appears, the
Anonymous and
pseudonyms or adopted names leave no doubt as to the authors identity or if the
pseudonymous works
author discloses his identity. [Sec. 179, RA 8293]
A contributor is deemed to have waived his right unless he expressly reserves it.
Collective works
[Sec. 196, RA 8293]

DURATION OF COPYRIGHT
Works Term

Original Literary and Artistic Works Lifetime of author and for fifty (50) years after his death (Sec
including Posthumous Works 213.1, RA 8293)
Derivative Works including Posthumous Lifetime of author and for fifty (50) years after his death [Sec
Works 213.1, RA 8293]
Joint Authorship Lifetime of the last surviving author and for fifty (50) years after
his death (Sec 213.2, RA 8293)
Anonymous or Pseudonymous Works Fifty (50) years from date of first lawful publication [Sec. 213.3,
RA 8293]
Applied Art Twenty-five (25) years from date of making [Sec. 213.4, RA
8293]
Published Photographic Works Fifty (50) years from publication [Sec. 213.5, RA 8293]
Unpublished Photographic Works Fifty (50) years from the making [Sec. 213.5, RA 8293]
Published Audio-visual Works Fifty (50) years from publication [Sec. 213.6, RA 8293]
Unpublished Audio-visual Works Fifty (50) years from the making [Sec. 213.6, RA 8293]

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UP LAW BOC INTELLECTUAL PROPERTY CODE
PRESUMPTION OF AUTHORSHIP
The natural person whose name is indicated on
a work in the usual manner as the author shall,
in the absence of proof to the contrary, be
presumed to be the author of the work. This
provision shall be applicable even if the name is
a pseudonym, where the pseudonym leaves no
doubt as to the identity of the author. The
person or body, corporate whose name appears
on an audio-visual work in the usual manner
shall, in the absence of proof to the contrary, be
presumed to be the maker of said work. [Sec.
219, RA 8293]
The term of protection subsequent to the death
of the author shall run from the date of his
death or of publication, but such terms shall
always be deemed to begin on the first day of
January of the year following the event which
gave rise to them. [Sec. 214, RA 8293]
TRANSFER OR ASSIGNMENT OF
COPYRIGHT
The copyright may be assigned or licensed in
whole or in part. Within the scope of the
assignment or license, the assignee or
licensee is entitled to all the rights and
remedies which the assignor or licensor had
with respect to the copyright. [Sec. 180.1, RA
8293 as amended by RA 10372]
The copyright is not deemed assigned or
licensed inter vivos in whole or in part unless
there is a written indication of such intention.
[Sec. 180.2, RA 8293 as amended by RA 10372]
The submission of a literary, photographic or
artistic work to a newspaper, magazine or
periodical for publication shall constitute only
a license to make a single publication unless a
greater right is expressly granted. If two (2) or
more persons jointly own a copyright or any
part thereof, neither of the owners shall be
entitled to grant licenses without the prior
written consent of the other owner or owners.
[Sec. 180.3, RA 8293]
The copyright is distinct from the property in
the material object subject to it.
Consequently, the transfer, assignment or
licensing of the copyright shall not itself
constitute a transfer of the material object.
Nor shall a transfer or assignment of the sole
copy or of one or several copies of the work
PAGE 248
MERCANTILE LAW
imply transfer, assignment or licensing of the
copyright. [Sec. 181, RA 8293 as amended by
RA 10372]
The owners of copyright and related rights or
their heirs may designate a society of artists,
writers, composers and other right-holders to
collectively manage their economic or moral
rights on their behalf. For the said societies to
enforce the rights of their members, they shall
first secure the necessary accreditation from
the Intellectual Property Office. [Sec. 183, RA
8293 as amended by RA 10372]
LIMITATIONS ON COPYRIGHT
DOCTRINE OF FAIR USE
The fair use of copyrighted work for criticism,
news reporting, teaching (including multiple
copies for classroom use), research and
similar purposes is not an infringement of
copyright.
A privilege, in persons other than the owner
of the copyright, to use the copyrighted
material in a reasonable manner without his
consent, notwithstanding the monopoly
granted to the owner by the copyright. It is
meant to balance the monopolies enjoyed by
the copyright owner with the interests of the
public and of society.
Decompilation: Refers to the reproduction of the
code and translation of the forms of the
computer program to achieve the inter-
operability of an independently created
computer program with other programs. This
may also constitute fair use [Sec. 185.1, RA
8293].
The fact that a work is unpublished shall not by
itself bar a finding of fair use if such finding is
made upon consideration of all the above
factors. [Sec 185.2, RA 8293]
FACTORS TO CONSIDER IN DETERMINING
FAIR USE
(1) The purpose and character of the use,
including whether such use is of a
commercial nature or is for non-profit
educational purposes;
(2) The nature of the copyrighted work;
UP LAW BOC INTELLECTUAL PROPERTY CODE
(3) The amount and substantiality of the portion
used in relation to the copyrighted work as a
whole; and
(4) The effect of the use upon the potential
market for or value of the copyrighted work
[Sec. 185.1, RA 8293; (Harper & Row v. Nation
Enterprise, 471 US 539, 105 S.Ct. 2218, 85
L.Ed.2d 588]
Joaquin vs Drilon 302 SCRA 225 (1999): The
format of a show is not copyrightable.
Feist Publications Inc vs. Rural Tel Service 499 US
340 (1991): A compilation is not copyrightable
per se, but it is copyrightable only if its facts
have been selected, coordinated, or arranged in
such a way that the resulting work as a while
constitutes an original work of authorship.
Otherwise known as the Sweat of the Brow or
Industrious Collection Test.
In the Matter of the Charges of Plagiarism etc
Against Associate Justice Mariano C. Del Castillo
AM No 10-7-17-SC (2011): An exception is carved
out for lawyers and officers of the court against
plagiarism when writing judicial documents that
will be part of court record.
COPYRIGHT INFRINGEMENT
Infringement of Copyright and Related Rights:
means any violation of the rights under the
Intellectual Property Code and/or the
applicable Intellectual Property Law, including
the act of any person who at the time when
copyright subsists in a work has in his
possession an article which he known, or ought
to know, to be an infringing copy of the work f or
the purpose of:
(a) Selling, letting for hire, or by way of trade
offering or exposing for sale, or hire, the
article
(b) Distributing the article for purpose of trade,
or for any other purpose to an extent that will
prejudice the rights of the copyright owner in
the work; or
(c) Trade exhibit of the article in public. [Sec. 1(l),
Rule 1, Rules and Regulations on
Administrative Complaints for Violation of
Laws involving Intellectual Property Rights]
PAGE 249
MERCANTILE LAW
Habana et al vs. Robles et al. (1999):
Infringement consists in the doing by any
person, without the consent of the owner of the
copyright, of anything the sole right to do which
is conferred by statute on the owner of the
copyright. For there to be substantial
reproduction of a book, it does not necessarily
require that the entire copyrighted work, or even
a large portion of it, be copied. If so much is
taken that the value of the original work is
substantially diminished, there is an
infringement of copyright and to an injurious
extent, the work appropriated. It is no defense
that the pirate did not know whether or not he
was infringing any copyright; he at least knew
that what he was copying was not his, and he
copied at his peril. In cases of infringement,
copying alone is not what is prohibited. The
copying must produce an injurious effect.
Copyright infringement and unfair competition
are not limited to the act of selling counterfeit
goods. They cover a whole range of acts from
copying, assembling, packaging to marketing,
including the mere offering for sale of
counterfeit goods. [Microsoft Corp vs. Maxicorp
Inc. (2004)]
Columbia Pictures v. CA (1996): A copy of a
piracy is an infringement of the original, and it is
no defense that the pirate, in such cases, did not
know what works he was indirectly copying, or
did not know whether or not he was infringing
any copyright; he at least knew that what he
was copying was not his, and he copied at his
peril. In determining the question of
infringement, the amount of matter copied from
the copyrighted work is an important
consideration. To constitute infringement, it is
not necessary that the whole or even a large
portion of the work shall have been copied. If so
much is taken that the value of the original is
sensibly diminished, or the labors of the original
author are substantially and to an injurious
extent appropriated by another, that is sufficient
in point of law to constitute a piracy.
UP LAW BOC INTELLECTUAL PROPERTY CODE
THE FOLLOWING SHALL NOT
CONSTITUTE INFRINGEMENT OF
COPYRIGHT:
(a) Recitation or performance of a work once it
has been made accessible to the public if (1)
privately done AND free of charge OR (2)
strictly for a charitable or religious
institution; [Sec. 184.1(a), RA 8293]
(b) Making of quotations from a published work:
(i) compatible with fair use, (ii) extent is
justified by the purpose, (iii) source and name
of the author, appearing on work, must be
mentioned; [Sec. 184.1(b), RA 8293]
(c) Reproduction or communication to the
public by mass media of articles on current
political, social, economic, scientific or
religious topic, lectures, addresses and other
works, delivered in public: (i) for information
purposes, (ii) not expressly reserved, and (iii)
source is already indicated; [Sec. 184.1(c), RA
8293]
(d) Reproduction and communication to the
public of literary, scientific or artistic works as
part of reports of current events by means of
photography, cinematography
broadcasting to the extent necessary for the
purpose; [Sec. 184.1(d), RA 8293]
(e) Inclusion of a work in a publication,
broadcast or other communication to the
public, sound recording or film if made by
way of illustration for teaching purposes
compatible with fair use and the source and
the name of the author appearing on work,
must be mentioned; [Sec. 184.1(e), RA 8293]
(f) Recording made in schools, universities, or
educational institutions of a work included in
a broadcast for the use of schools,
universities or educational institutions. Such
recording must be deleted within a
reasonable period; such recording may not
be made from audio-visual works which are
part of the general cinema, repertoire of
feature films except of brief excerpts of the
work; [Sec. 184.1(f), RA 8293]
(g) Making of ephemeral recordings; (i) by a
broadcasting organization, (ii) by means of
its work or facilities, (iii) for use in its own
broadcast; [Sec. 184.1(g), RA 8293]
(h) Use made of a work by or under the direction
or control of the government for public
MERCANTILE LAW
interest compatible with fair use; [Sec.
184.1(h), RA 8293]
(i) Public performance or the communication to
the public of a work in a place where no
admission fee is charged by a club on
institution for charitable or educational
purpose only and the aim is not profit-
making; [Sec. 184.1(i), RA 8293]
(j) Public display of the original or a copy of the
work not made by means of a film, slide,
television, image or otherwise on screen or by
means of any other device or process either
the work has been published, sold, given
away, or transferred to another person by the
author or his successor in title; [Sec. 184.1(j),
RA 8293]
(k) Use made of a work for the purpose of any
judicial proceedings or for the giving of
professional advice by a legal practitioner.
[Sec. 184.1(k), RA 8293]
(l) The reproduction or distribution of published
articles or materials in a specialized format
exclusively for the use of the blind, visually-
and reading-impaired persons: Provided,
That such copies and distribution shall be
or made on a nonprofit basis and shall indicate
the copyright owner and the date of the
original publication. [Sec. 184.1(l), RA 8293 as
amended by RA 10372]
REPRODUCTION OF PUBLISHED WORK
General Rule: The private reproduction of a
published work in a single copy, where the
reproduction is made by a natural person
exclusively for research and private study, shall
be permitted, without the authorization of the
owner of copyright in the work. [Sec. 187.1, RA
8293]
Exceptions: Such permission shall not extend to:
(a) A work of architecture in the form of building
or other construction;
(b) An entire book, or a substantial part thereof,
or of a musical work in graphic form by
reprographic means;
(c) A compilation of data and other materials;
(d) A computer program except as provided in
Section 189; and
(e) Any work in cases where reproduction would
unreasonably conflict with a normal
exploitation of the work or would otherwise
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UP LAW BOC INTELLECTUAL PROPERTY CODE
unreasonably prejudice the legitimate
interests of the author. [187.2, RA 8293]
REPROGRAPHIC REPRODUCTION BY
LIBRARIES
Any library or archive whose activities are not for
profit may, without the authorization of the
author of copyright owner, make a single copy
of the work by reprographic reproduction:
(a) Where the work by reason of its fragile
character or rarity cannot be lent to user in
its original form;
(b) Where the works are isolated articles
contained in composite works or brief
portions of other published works and the
reproduction is necessary to supply them,
when this is considered expedient, to persons
requesting their loan for purposes of
research or study instead of lending the
volumes or booklets which contain them;
(c) Where the making of such a copy is in order
to preserve and, if necessary in the event that
it is lost, destroyed or rendered unusable,
replace a copy, or to replace, in the
permanent collection of another similar
library or archive, a copy which has been lost,
destroyed or rendered unusable and copies
are not available with the publisher. [Sec.
188.1, RA 8293]
It shall not be permissible to produce a volume
of a work published in several volumes or to
produce missing tomes or pages of magazines
or similar works, unless the volume, tome or
part is out of stock: Provided, That every library
which, by law, is entitled to receive copies of a
printed work, shall be entitled, when special
reasons so require, to reproduce a copy of a
published work which is considered necessary
for the collection of the library but which is out
of stock. [Sec. 188.2, RA 8293)]
REPRODUCTION OF COMPUTER PROGRAM
The reproduction in one (1) back-up copy or
adaptation of a computer program shall be
permitted, without the authorization of the
author of, or other owner of copyright in, a
computer program, by the lawful owner of that
computer program: Provided, That the copy or
adaptation is necessary for:
(a) The use of the computer program in
conjunction with a computer for the purpose,
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MERCANTILE LAW
and to the extent, for which the computer
program has been obtained; and
(b) Archival purposes, and, for the replacement
of the lawfully owned copy of the computer
program in the event that the lawfully
obtained copy of the computer program is
lost, destroyed or rendered unusable. [Sec.
189.1, RA 8293]
No copy or adaptation mentioned in this Section
shall be used for any purpose other than the
ones determined in this Section, and any such
copy or adaptation shall be destroyed in the
event that continued possession of the copy of
the computer program ceases to be lawful. [Sec.
189.2, RA 8293]
IMPORTATION FOR PERSONAL PURPOSES
The importation of a copy of a work by an
individual for his personal purposes shall be
permitted without the authorization of the
author of, or other owner of copyright in, the
work under the following circumstances:
(a) When copies of the work are not available in
the Philippines and:
(1) Not more than one (1) copy at one time is
imported for strictly individual use only; or
(2) The importation is by authority of and for
the use of the Philippine Government; or
(3) The importation, consisting of not more
than three (3) such copies or likenesses in
any one invoice, is not for sale but for the
use only of any religious, charitable, or
educational society or institution duly
incorporated or registered, or is for the
encouragement of the fine arts, or for any
state school, college, university, or free
public library in the Philippines.
(b) When such copies form parts of libraries and
personal baggage belonging to persons or
families arriving from foreign countries and
are not intended for sale: Provided, that such
copies do not exceed three (3). [Sec. 190.1, RA
8293 is repealed by RA 10372]
Copies imported as allowed by this Section may
not lawfully be used in any way to violate the
rights of owner the copyright or annul or limit
the protection secured by this Act, and such
unlawful use shall be deemed an infringement
and shall be punishable as such without
UP LAW BOC INTELLECTUAL PROPERTY CODE MERCANTILE LAW

prejudice to the proprietor's right of action. [Sec.

190.2, RA 8293 is repealed by RA 10372]

Importation and Exportation of Infringing

Materials. Subject to the approval of the
Secretary of Finance, the Commissioner of
Customs is hereby empowered to make rules
and regulations for preventing the importation
or exportation of infringing articles prohibited
under Part IV of this Act and under relevant
treaties and conventions to which the
Philippines may be a party and for seizing and
condemning and disposing of the same in case
they are discovered after they have been
imported or before they are exported [Sec. 190,
RA 8293 as amended by RA 10372]

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PAGE 253
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The Chattel Mortgage
Law and Real Estate
Mortgage Law
(Now part of Civil Law)
Anti-Money Laundering
Act [R.A. 9160, as
amended by R.A. 9194]
Money laundering is a crime whereby the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources. [Sec. 4]
POLICY OF THE LAW
It is the policy of the State to protect and
preserve the integrity and confidentiality of bank
accounts and to ensure that the Philippines
shall not be used as a money laundering site for
the proceeds of any unlawful activity. Consistent
with its foreign policy, the State shall extend
cooperation in transnational investigations and
prosecutions of persons involved in money
laundering activities whenever committed. [Sec.
2]
COVERED INSTITUTIONS
(1) Banks, non-banks, quasi-banks, trust
entities, and all other institutions and their
subsidiaries and affiliates supervised or
regulated by the Banko Sentral ng Pilipinas
(BSP);
(2) Insurance companies and all other
institutions supervised or regulated by the
Insurance Commission;
(3) (a) securities dealers, brokers, salesmen,
investment houses and other similar entities
managing securities or rendering services as
investment agent, advisor, or consultant,
(b) mutual funds, close-end investment
companies, common trust funds, pre-
need companies and other similar
entities,
(c) foreign exchange corporations, money
changers, money payment, remittance,
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MERCANTILE LAW
and transfer companies and other similar
entities, and
(d) other entities administering or otherwise
dealing in currency, commodities or
financial derivatives based thereon,
valuable objects, cash substitutes and
other similar monetary instruments or
property supervised or regulated by the
Securities and Exchange Commission
[Sec. 3 (a)]
RA 10365 (Amending RA 9160, approved
February 15, 2013 and took effect on March 7,
2013) referred to the foregoing as Covered
Persons and added the following persons:
(1) jewelry dealers in precious metals, who, as a
business, trade in precious metals, for
transactions in excess of One million pesos
(P1,000,000.00);
(2) jewelry dealers in precious stones, who, as a
business, trade in precious stones, for
transactions in excess of One million pesos
(P1,000,000.00);
(3) company service providers which, as a
business, provide any of the following
services to third parties: (i) acting as a
formation agent of juridical persons; (ii)
acting as (or arranging for another person to
act as) a director or corporate secretary of a
company, a partner of a partnership, or a
similar position in relation to other juridical
persons; (iii) providing a registered office,
business address or accommodation,
correspondence or administrative address for
a company, a partnership or any other legal
person or arrangement; and (iv) acting as (or
arranging for another person to act as) a
nominee shareholder for another person;
and
(4) persons who provide any of the following
services:
(a) managing of client money, securities or
other assets;
(b) management of bank, savings or
securities accounts;
(c) organization of contributions for the
creation, operation or management of
companies; and
(d) creation, operation or management of
juridical persons or arrangements, and
buying and selling business entities.
UP LAW BOC SPECIAL LAWS
Notwithstanding the foregoing, the term
covered persons shall exclude lawyers and
accountants acting as independent legal
professionals in relation to information
concerning their clients or where disclosure of
information would compromise client
confidences or the attorney-client relationship:
Provided, That these lawyers and accountants
are authorized to practice in the Philippines and
shall continue to be subject to the provisions of
their respective codes of conduct and/or
professional responsibility or any of its
amendments. [Sec. 1, RA 10365]
OBLIGATIONS OF COVERED
INSTITUTIONS
(1) Customer Identification
(2) Record Keeping
(3) Reporting of Covered and Suspicious
Transactions [Sec. 9]
CUSTOMER IDENTIFICATION
Covered institutions shall establish and record
the true identity of its clients based on official
documents. They shall maintain a system of
verifying the true identity of their clients and,
in case of corporate clients, require a system
of verifying their legal existence and
organizational structure, as well as the
authority and identification of all persons
purporting to act on their behalf.
The provisions of existing laws to the contrary
notwithstanding, anonymous accounts,
accounts under fictitious names, and all other
similar accounts shall be absolutely
prohibited. Peso and foreign currency non-
checking numbered accounts shall be
allowed. The BSP may conduct annual
testing solely limited to the determination of
the existence and true identity of the owners
of such accounts.
RECORD KEEPING
All records of all transactions of covered
institutions shall be maintained and safely
stored for five (5) years from the dates of
transactions.
With respect to closed accounts, the records
on customer identification, account files and
business correspondence, shall be preserved
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MERCANTILE LAW
and safely stored for at least five (5) years
from the dates when they were closed.
REPORTING OF COVERED AND
SUSPICIOUS TRANSACTIONS
Covered institutions shall report to the AMLC
all covered transactions and suspicious
transactions within five (5) working days from
occurrence thereof, unless the Supervising
Authority prescribes a longer period not
exceeding ten (10) working days.
Should a transaction be determined to be
both a covered transaction and a suspicious
transaction, the covered institution shall be
required to report the same as a suspicious
transaction.
When reporting covered or suspicious
transactions to the AMLC, covered institutions
and their officers and employees
[,representatives, agents, advisors,
consultants or associates not included;
repealed by RA 9194] shall not be deemed to
have violated Republic Act No. 1405, as
amended, Republic Act No. 6426, as amended,
Republic Act No. 8791 and other similar laws,
but are prohibited from communicating,
directly or indirectly, in any manner or by any
means, to any person, the fact that a covered
or suspicious transaction report was made,
the contents thereof, or any other information
in relation thereto. In case of violation
thereof, the concerned officer and employee
of the covered institution shall be criminally
liable. However, no administrative, criminal or
civil proceedings, shall lie against any person
for having made a covered or suspicious
transaction report in the regular performance
of his duties in good faith, whether or not such
reporting results in any criminal prosecution
under this Act or any other law.
When reporting covered or suspicious
transactions to the AMLC, covered institutions
and their officers and employees are
prohibited from communicating directly or
indirectly, in any manner or by any means, to
any person or entity, the media, the fact that a
covered or suspicious transaction report was
made, the contents thereof, or any other
information in relation thereto. Neither may
such reporting be published or aired in any
manner or form by the mass media, electronic
UP LAW BOC SPECIAL LAWS
mail, or other similar devices. In case of
violation thereof, the concerned officer and
employee of the covered institution and
media shall be held criminally liable.
Sec. 7 of RA 10365 amended the foregoing to
read as follows:
Covered persons shall report to the AMLC all
covered transactions and suspicious
transactions within five (5) working days from
occurrence thereof, unless the AMLC prescribes
a different period not exceeding fifteen (15)
working days.
Lawyers and accountants acting as
independent legal professionals are not required
to report covered and suspicious transactions if
the relevant information was obtained in
circumstances where they are subject to
professional secrecy or legal professional
privilege.
x x x
x x x
When reporting covered or suspicious
transactions to the AMLC, covered persons and
their officers and employees are prohibited from
communicating, directly or indirectly, in any
manner or by any means, to any person or
entity, the media, the fact that a covered or
suspicious transaction has been reported or is
about to be reported, the contents of the report,
or any other information in relation thereto.
Neither may such reporting be published or
aired in any manner or form by the mass
media, electronic mail, or other similar devices.
In case of violation thereof, the concerned
officer and employee of the covered person and
media shall be held criminally liable.
COVERED TRANSACTIONS
A transaction in cash or other equivalent
monetary instrument involving a total amount
in excess of five hundred thousand pesos
(P500,000.00) within one banking day. [Sec. 3
[b], as amended by Sec. 1 of RA 9194]
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SUSPICIOUS TRANSACTIONS
Transactions with covered institutions,
regardless of the amounts involved, where any
of the following circumstances exist:
(1) There is no underlying legal or trade
obligation, purpose or economic justification;
(2) The client is not properly identified;
(3) The amount involved is not commensurate
with the business or financial capacity of the
client;
(4) Taking into account all known
circumstances, it may be perceived that the
clients transaction is structured in order to
avoid being the subject of reporting
requirements under the Act;
(5) Any circumstance relating to the transaction
which is observed to deviate from the profile
of the client and/or the clients past
transactions with the covered institution;
(6) The transaction is in anyway related to an
unlawful activity or offense under this Act
that is about to be, is being or has been
committed; or
(7) Any transaction that is similar or analogous
to any of the foregoing [Sec. 3 [b-1], added by
Sec. 2 of RA 9194]
WHEN IS MONEY LAUNDERING
COMMITTED
Money laundering is a crime whereby the
proceeds of an unlawful activity are transacted,
thereby making them appear to have originated
from legitimate sources. It is committed by the
following:
(1) Any person knowing that any monetary
instrument or property represents, involves,
or relates to the proceeds of any unlawful
activity, transacts or attempts to transact
said monetary instrument or property.
(2) Any person knowing that any monetary
instrument or property involves the
proceeds of any unlawful activity, performs
or fails to perform any act as a result of
which he facilitates the offense of money
laundering referred to in paragraph (a)
above.
(3) Any person knowing that any monetary
instrument or property is required under
this Act to be disclosed and filed with the
Anti-Money Laundering Council (AMLC),
fails to do so. [Sec. 4]
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Sec. 4 of RA 10365 amends this section as
follows:
Money laundering is committed by any person
who, knowing that any monetary instrument or
property represents, involves, or relates to the
proceeds of any unlawful activity:
(a) transacts said monetary instrument or
property;
(b) converts, transfers, disposes of, moves,
acquires, possesses or uses said monetary
instrument or property;
(c) conceals or disguises the true nature, source,
location, disposition, movement or ownership
of or rights with respect to said monetary
instrument or property;
(d) attempts or conspires to commit money
laundering offenses referred to in
paragraphs (a), (b) or (c);
(e) aids, abets, assists in or counsels the
commission of the money laundering
offenses referred to in paragraphs (a), (b) or
(c) above; and
(f) performs or fails to perform any act as a
result of which he facilitates the offense of
money laundering referred to in paragraphs
(a), (b) or (c) above.
Money laundering is also committed by any
covered person who, knowing that a covered or
suspicious transaction is required under this Act
to be reported to the Anti-Money Laundering
Council (AMLC), fails to do so.
UNLAWFUL ACTIVITIES OR
PREDICATE CRIMES
Unlawful activity refers to any act or omission or
series or combination thereof involving or
having direct relation to the following:
(1) Kidnapping for ransom under Article 267 of
Act No. 3815, otherwise known as the
Revised Penal Code, as amended;
(2) Sections 4, 5, 6, 8, 9, 10, 12, 13, 14, 15, and 16
of Republic Act No. 9165, otherwise known
as the Comprehensive Dangerous Drugs Act
of 2002;
(3) Section 3 paragraphs B, C, E, G, H and I of
Republic Act No. 3019, as amended;
otherwise known as the Anti-Graft and
Corrupt Practices Act;
SPECIAL LAWS MERCANTILE LAW
(4) Plunder under Republic Act No. 7080, as
amended;
(5) Robbery and extortion under Articles 294,
295, 296, 299, 300, 301 and 302 of the
Revised Penal Code, as amended;
(6) Jueteng and Masiao punished as illegal
gambling under Presidential Decree No.
1602;
(7) Piracy on the high seas under the Revised
Penal Code, as amended and Presidential
Decree No. 532;
(8) Qualified theft under Article 310 of the
Revised Penal Code, as amended;
(9) Swindling under Article 315 of the Revised
Penal Code, as amended;
(10) Smuggling under Republic Act Nos. 455
and 1937;
(11) Violations under Republic Act No. 8792,
otherwise known as the Electronic Commerce
Act of 2000;
(12) Hijacking and other violations under
Republic Act No. 6235; destructive arson and
murder, as defined under the Revised Penal
Code, as amended, including those
perpetrated by terrorists against non-
combatant persons and similar targets;
(13) Fraudulent practices and other violations
under Republic Act No. 8799, otherwise
known as the Securities Regulation Code of
2000;
(14) Felonies or offenses of a similar nature that
are punishable under the penal laws of other
countries. [Sec. 3 (i)]
RA 10365 added the following:
(1) Terrorism and conspiracy to commit
terrorism as defined and penalized under
Sections 3 and 4 of Republic Act No. 9372
(2) Financing of terrorism under Section 4 and
offenses punishable under Sections 5, 6, 7
and 8 of Republic Act No. 10168, otherwise
known as the Terrorism Financing Prevention
and Suppression Act of 2012:
(3) Bribery under Articles 210, 211 and 211-A of
the Revised Penal Code, as amended, and
Corruption of Public Officers under Article
212 of the Revised Penal Code, as amended;
(4) Frauds and Illegal Exactions and
Transactions under Articles 213, 214, 215 and
216 of the Revised Penal Code, as amended;
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(5) Malversation of Public Funds and Property
under Articles 217 and 222 of the Revised
Penal Code, as amended;
(6) Forgeries and Counterfeiting under Articles
163, 166, 167, 168, 169 and 176 of the Revised
Penal Code, as amended;
(7) Violations of Sections 4 to 6 of Republic Act
No. 9208, otherwise known as the Anti-
Trafficking in Persons Act of 2003;
(8) Violations of Sections 78 to 79 of Chapter IV,
of Presidential Decree No. 705, otherwise
known as the Revised Forestry Code of the
Philippines, as amended;
(9) Violations of Sections 86 to 106 of Chapter
VI, of Republic Act No. 8550, otherwise
known as the Philippine Fisheries Code of
1998;
(10) Violations of Sections 101 to 107, and 110 of
Republic Act No. 7942, otherwise known as
the Philippine Mining Act of 1995;
(11) Violations of Section 27(c), (e), (f), (g) and (i),
of Republic Act No. 9147, otherwise known as
the Wildlife Resources Conservation and
Protection Act;
(12) Violation of Section 7(b) of Republic Act No.
9072, otherwise known as the National
Caves and Cave Resources Management
Protection Act;
(13) Violation of Republic Act No. 6539,
otherwise known as the Anti-Carnapping Act
of 2002, as amended;
(14) Violations of Sections 1, 3 and 5 of
Presidential Decree No. 1866, as amended,
otherwise known as the decree Codifying the
Laws on Illegal/Unlawful Possession,
Manufacture, Dealing In, Acquisition or
Disposition of Firearms, Ammunition or
Explosives;
(15) Violation of Presidential Decree No. 1612,
otherwise known as the Anti-Fencing Law;
(16) Violation of Section 6 of Republic Act No.
8042, otherwise known as the Migrant
Workers and Overseas Filipinos Act of 1995,
as amended by Republic Act No. 10022;
(17) Violation of Republic Act No. 8293,
otherwise known as the Intellectual Property
Code of the Philippines;
(18) Violation of Section 4 of Republic Act No.
9995, otherwise known as the Anti-Photo
and Video Voyeurism Act of 2009;
SPECIAL LAWS MERCANTILE LAW
(19) Violation of Section 4 of Republic Act No.
9775, otherwise known as the Anti-Child
Pornography Act of 2009;
(20) Violations of Sections 5, 7, 8, 9, 10(c), (d)
and (e), 11, 12 and 14 of Republic Act No.
7610, otherwise known as the Special
Protection of Children Against Abuse,
Exploitation and Discrimination;
ANTI-MONEY LAUNDERING
COUNCIL
The Anti-Money Laundering Council shall be
composed of the Governor of the Bangko
Sentral ng Pilipinas as chairman, the
Commissioner of the Insurance Commission and
the Chairman of the Securities and Exchange
Commission as members. [Sec. 7]
FUNCTIONS
The AMLC shall act unanimously in the
discharge of its functions as defined hereunder:
(1) to require and receive covered or suspicious
transaction reports from covered institutions;
(2) to issue orders addressed to the appropriate
Supervising Authority or the covered
institution to determine the true identity of
the owner of any monetary instrument or
property subject of a covered transaction or
suspicious transaction report or request for
assistance from a foreign State, or believed
by the Council, on the basis of substantial
evidence, to be, in whole or in part, wherever
located, representing, involving, or related to,
directly or indirectly, in any manner or by any
means, the proceeds of an unlawful activity.
(3) to institute civil forfeiture proceedings and
all other remedial proceedings through the
Office of the Solicitor General;
(4) to cause the filing of complaints with the
Department of Justice or the Ombudsman
for the prosecution of money laundering
offenses;
(5) to investigate suspicious transactions and
covered transactions deemed suspicious
after an investigation by AMLC, money
laundering activities, and other violations of
this Act;
(6) to apply before the Court of Appeals, ex
parte, for the freezing of any monetary
instrument or property alleged to be the
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proceeds of any unlawful activity as defined
in Section 3(i) hereof;
(7) to implement such measures as may be
necessary and justified under this Act to
counteract money laundering;
(8) to receive and take action in respect of, any
request from foreign states for assistance in
their own anti-money laundering operations
provided in this Act;
(9) to develop educational programs on the
pernicious effects of money laundering, the
methods and techniques used in money
laundering, the viable means of preventing
money laundering and the effective ways of
prosecuting and punishing offenders;
(10) to enlist the assistance of any branch,
department, bureau, office, agency or
instrumentality of the government, including
government-owned and -controlled
corporations, in undertaking any and all anti-
money laundering operations, which may
include the use of its personnel, facilities and
resources for the more resolute prevention,
detection and investigation of money
laundering offenses and prosecution of
offenders; and
(11) to impose administrative sanctions for the
violation of laws, rules, regulations and
orders and resolutions issued pursuant
thereto. [Sec. 7]
Sec. 6 of RA 10365 added the following power to
the AMLC:
(1) to require the Land Registration Authority
and all its Registries of Deeds to submit to
the AMLC, reports on all real estate
transactions involving an amount in excess of
Five hundred thousand pesos
(P500,000.00) within fifteen (15) days from
the date of registration of the transaction, in
a form to be prescribed by the AMLC. The
AMLC may also require the Land
Registration Authority and all its Registries
of Deeds to submit copies of relevant
documents of all real estate transactions.
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MERCANTILE LAW
FREEZING OF MONETARY
INSTRUMENT OR PROPERTY
The Court of Appeals, upon application ex parte
by the AMLC and after determination that
probable cause exists that any monetary
instrument or property is in any way related to
an unlawful activity as defined in Section 3(i)
hereof, may issue a freeze order which shall be
effective immediately. The freeze order shall be
for a period not exceeding six (6) months
depending upon the circumstances of the case.
No court can issue a temporary restraining order
or a writ of injunction against any freeze order,
except the Supreme Court. [Sec. 10]
Sec. 8 of RA 10365 revised the freezing
mechanism to be as follows:
Upon a verified ex parte petition by the AMLC
and after determination that probable cause
exists that any monetary instrument or property
is in any way related to an unlawful activity as
defined in Section 3(i) hereof, the Court of
Appeals may issue a freeze order which shall be
effective immediately, and which shall not
exceed six (6) months depending upon the
circumstances of the case: Provided, That if
there is no case filed against a person whose
account has been frozen within the period
determined by the court, the freeze order shall
be deemed ipso facto lifted: Provided, further,
That this new rule shall not apply to pending
cases in the courts. In any case, the court should
act on the petition to freeze within twenty-four
(24) hours from filing of the petition. If the
application is filed a day before a nonworking
day, the computation of the twenty-four (24)-
hour period shall exclude the nonworking days.
A person whose account has been frozen may
file a motion to lift the freeze order and the
court must resolve this motion before the
expiration of the freeze order.
No court shall issue a temporary restraining
order or a writ of injunction against any freeze
order, except the Supreme Court.
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AUTHORITY TO INQUIRE INTO
BANK DEPOSITS
Notwithstanding the provisions of Republic Act
No. 1405, as amended, Republic Act No. 6426,
as amended, Republic Act No. 8791, and other
laws, the AMLC may inquire into or examine any
particular deposit or investment with any
banking institution or non-bank financial
institution upon order of any competent court in
cases of violation of this Act when it has been
established that
(1) there is probable cause that the deposits
OR
(2) investments involved are related to an
unlawful activity as defined in Section 3(i)
hereof or a money laundering offense
under Section 4 hereof;
except that no court order shall be required in
cases involving unlawful activities defined in
Sections 3(i)(1), (2) and (12).
To ensure compliance with this Act, the Bangko
Sentral ng Pilipinas (BSP) may inquire into or
examine any deposit or investment with any
banking institution or non-bank financial
institution when the examination is made in the
course of a periodic or special examination, in
accordance with the rules of examination of the
BSP. [Sec.11]
Sec. 2 of RA 10167 amended Sec. 11 to read as
follows:
Notwithstanding the provisions of Republic Act
No. 1405, as amended; Republic Act No. 6426,
as amended; Republic Act No. 8791; and other
laws, the AMLC may inquire into or examine any
particular deposit or investment, including
related accounts, with any banking institution or
non-bank financial institution upon order of any
competent court based on an ex parte
application in cases of violations of this Act,
when it has been established that there is
probable cause that the deposits or
investments, including related accounts
involved, are related to an unlawful activity as
defined in Section 3(i) hereof or a money
laundering offense under Section 4 hereof;
except that no court order shall be required in
cases involving activities defined in Section
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MERCANTILE LAW
3(i)(1), (2), and (12) hereof, and felonies or
offenses of a nature similar to those mentioned
in Section 3(i)(1), (2), and (12), which are
Punishable under the penal laws of other
countries, and terrorism and conspiracy to
commit terrorism as defined and penalized
under Republic Act No. 9372."
"The Court of Appeals shall act on the
application to inquire into or examine any
deposit or investment with any banking
institution or non-bank financial institution
within twenty-four (24) hours from filing of the
application."
"To ensure compliance with this Act, the
Bangko Sentral ng Pilipinas may, in the course
of a periodic or special examination, check the
compliance of a Covered institution with the
requirements of the AMLA and its
implementing rules and regulations."
"For purposes of this section, related accounts
shall refer to accounts, the funds and sources of
which originated from and/or are materially
linked to the monetary instrument(s) or
property(ies) subject of the freeze order(s)."
"A court order ex parte must first be obtained
before the AMLC can inquire into these related
Accounts: Provided, That the procedure for the
ex parte application of the ex parte court order
for the principal account shall be the same with
that of the related accounts."
"The authority to inquire into or examine the
main account and the related accounts shall
comply with the requirements of Article III,
Sections 2 and 3 of the 1987 Constitution, which
are hereby incorporated by reference."
Amendments under RA 9194
(1) Lowers the threshold amount for single
covered transactions (cash or other
equivalent monetary instrument) from P4M
to P500,000.00 within one (1) banking day.
(2) Expands the reporting requirements to
include the reporting of suspicious
transactions regardless of the amount
involved
(3) Authorizes AMLC to inquire into or examine
any particular deposit or investment, with
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any banking institution or non-bank financial
institution and their subsidiaries and
affiliates upon order of any competent court
in cases of violation of this Act, when it has
been established that there is probable
cause that the deposits or investments are
related to an unlawful activity. However, no
court order is required in cases involving
unlawful activities of kidnapping for ransom,
narcotics offenses and hijacking, destructive
arson and murder, including those
perpetrated by terrorists against non-
combatant persons and similar targets.
(4) Authorizes the Bangko Sentral ng Pilipinas
to inquire into or examine any deposit or
investment with any banking institution or
non-bank financial institution and their
subsidiaries and affiliates when the
examination is made in the course of a
periodic or special examination, in
accordance with the rules of examination of
the BSP to ensure compliance with R.A. No.
9160, as amended.
(5) Transfers the authority to freeze any
money/property from the AMLC to the Court
of Appeals.
Foreign Investments Act
[R.A. 7042]
POLICY OF THE LAW
It is the policy of the State to attract, promote
and welcome productive investments from
foreign individuals, partnerships, corporations,
and governments, including their political
subdivisions, in activities which significantly
contribute to national industrialization and
socio-economic development to the extent
that foreign investment is allowed in such
activity by the Constitution and relevant laws.
Foreign investments shall be encouraged in
enterprises that significantly expand
livelihood and employment opportunities for
Filipinos; enhance economic value of farm
products; promote the welfare of Filipino
consumers; expand the scope, quality and
volume of exports and their access to foreign
markets; and/or transfer relevant
technologies in agriculture, industry and
support services. Foreign investments shall be
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MERCANTILE LAW
welcome as a supplement to Filipino capital
and technology in those enterprises serving
mainly the domestic market.
As a general rule, there are no restrictions on
extent of foreign ownership of export
enterprises. In domestic market enterprises,
foreigners can invest as much as one hundred
percent (100%) equity except in areas
included in the negative list. Foreign owned
firms catering mainly to the domestic market
shall be encouraged to undertake measures
that will gradually increase Filipino
participation in their businesses by taking in
Filipino partners, electing Filipinos to the
board of directors, implementing transfer of
technology to Filipinos, generating more
employment for the economy and enhancing
skills of Filipino workers. [Sec. 2]
DEFINITION OF TERMS
Foreign Investment - An equity investment
made by a nonPhilippine national in the form of
foreign exchange and/or other assets actually
transferred to the Philippines and duly
registered with the Central Bank which shall
assess and appraise the value of such assets
other than foreign exchange. [Sec. 3(c)]
Doing Business in the Philippines - Includes:
(a) soliciting orders, service contracts, opening
offices, whether called liaison offices or
branches;
(b) appointing representatives or distributors
domiciled in the Philippines or who in any
calendar year stay in the country for a period
or periods totalling one hundred eighty (180)
days or more;
(c) participating in the management,
supervision or control of any domestic
business, firm, entity or corporation in the
Philippines; and any other act or acts that
imply a continuity of commercial dealings or
arrangements, and contemplate to that
extent the performance of acts or works, or
the exercise of some of the functions
normally incident to, and in progressive
prosecution of, commercial gain or of the
purpose and object of the business
organization
Provided, however, That the phrase doing
business shall not be deemed to include mere
UP LAW BOC SPECIAL LAWS
investment as a shareholder by a foreign entity
in domestic corporations duly registered to do
business, and/or the exercise of rights as such
investor; nor having a nominee director or
officer to represent its interests in such
corporation; nor appointing a representative or
distributor domiciled in the Philippines which
transacts business in its own name and for its
own account [Sec. 3 [d]]
Export Enterprise - An enterprise wherein a
manufacturer, processor or service (including
tourism) enterprise exports sixty percent (60%)
or more of its output, or wherein a trader
purchases products domestically and exports
sixty percent (60%) or more of such purchases
[Sec. 3 (e)]
Domestic Market Enterprise - An enterprise
which produces goods for sale, or renders
services to the domestic market entirely or if
exporting a portion of its output fails to
consistently export at least sixty percent (60%)
thereof [Sec. 3 (f)]
REGISTRATION OF
INVESTMENTS ON NON-
PHILIPPINE NATIONALS
Philippine National
(a) Citizen of the Philippines
(b) Domestic partnership or association wholly
owned by citizens of the Philippines
(c) Corporation organized under the laws of the
Philippines of which at least 60% of the
capital stock outstanding and entitled to
vote is owned and held by citizens of the
Philippines
(d) Corporation organized abroad and
registered as doing business in the
Philippines under the Corporation Code of
which 100% of the capital stock outstanding
and entitled to vote is wholly owned by
Filipinos
(e) trustee of funds for pension or other
employee retirement, where the trustee is a
Philippine national and at least 60% of the
fund will accrue to the benefit of Philippine
nationals
Provided, That where a corporation and its non-
Filipino stockholders own stocks in a Securities
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MERCANTILE LAW
and Exchange Commission (SEC) registered
enterprise, at least sixty percent (60%) of the
capital stock outstanding and entitled to vote of
each of both corporations must be owned and
held by citizens of the Philippines and at least
sixty percent (60%) of the members of the
Board of Directors of each of both corporations
must be citizens of the Philippines, in order that
the corporation shall be considered a Philippine
national [Sec. 3(a)]
Registration of Investments on Non-Philippine
Nationals
Without need of prior approval, a non-Philippine
national may, upon registration with the
Securities and Exchange Commission (SEC), or
with the Bureau of Trade Regulation and
Consumer Protection (BTRCP) of the
Department of Trade and Industry in the case of
single proprietorships, do business as defined in
Section 3 (d) of this Act or invest in a domestic
enterprise up to one hundred percent (100%) of
its capital, unless participation of non-
Philippine nationals in the enterprise is
prohibited or limited to a smaller percentage by
existing law and/or under the provisions of this
Act. The SEC or BTRCP, as the case may be,
shall not impose any limitations on the extent of
foreign ownership in an enterprise additional to
those provided in this Act: Provided, however,
That any enterprise seeking to avail of incentives
under the Omnibus Investment Code of 1987
must apply for registration with the Board of
Investments (BOI), which shall process such
application for registration in accordance with
the criteria for evaluation prescribed in said
Code: Provided, finally, That a non-Philippine
national intending to engage in the same line of
business as an existing joint venture, in which he
or his majority shareholder is a substantial
partner, must disclose the fact and the names
and addresses of the partners in the existing
joint venture in his application for registration
with SEC. During the transitory period as
provided in Section 15 hereof, SEC shall disallow
registration of the applying non-Philippine
national if the existing joint venture enterprise,
particularly the Filipino partners therein, can
reasonably prove they are capable to make the
investment needed for the domestic market
activities to be undertaken by the competing
applicant. Upon effectivity of this Act, SEC shall
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effect registration of any enterprise applying
under this Act within fifteen (15) days upon
submission of completed requirements. [Sec. 5]
FOREIGN INVESTMENTS IN
EXPORT ENTERPRISE
Foreign investment in export enterprises
whose products and services do not fall within
Lists A and B of the Foreign Investment
Negative List provided under Section 8 hereof
is allowed up to one hundred percent (100%)
ownership.
Export enterprises which are non-Philippine
nationals shall register with BOI and submit
the reports that may be required to ensure
continuing compliance of the export
enterprise with its export requirement. BOI
shall advise SEC or BTRCP, as the case may
be, of any export enterprise that fails to meet
the export ratio requirement. The SEC or
BTRCP shall thereupon order the non-
complying export enterprise to reduce its
sales to the domestic market to not more than
forty percent (40%) of its total production;
failure to comply with such SEC or BTRCP
order, without justifiable reason, shall subject
the enterprise to cancellation of SEC or
BTRCP registration, and/or the penalties
provided in Section 14 hereof. [Sec. 6]
FOREIGN INVESTMENT IN
DOMESTIC MARKET
ENTERPRISE
Non-Philippine nationals may own up to one
hundred percent (100%) of domestic market
enterprises unless foreign ownership therein is
prohibited or limited by the Constitution
existing law or the Foreign Investment Negative
List under Section 8 hereof. [Sec. 7]
FOREIGN INVESTMENT
NEGATIVE LIST
The Foreign Investment Negative List shall have
two (2) components lists; A, and B.
(1) List A shall enumerate the areas of activities
reserved to Philippine nationals by mandate
of the Constitution and specific laws.
(2) List B shall contain the areas of activities and
enterprises regulated pursuant to law:
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MERCANTILE LAW
(a) which are defense-related activities,
requiring prior clearance and
authorization from Department of
National Defense (DND) to engage in
such activity, such as the manufacture,
repair, storage and/or distribution of
firearms, ammunition, lethal weapons,
military ordinance, explosives,
pyrotechnics and similar materials; unless
such manufacturing or repair activity is
specifically authorized, with a substantial
export component, to a non-Philippine
national by the Secretary of National
Defense; or
(b) which have implications on public health
and morals, such as the manufacture and
distribution of dangerous drugs; all forms
of gambling; nightclubs, bars,
beerhouses, dance halls; sauna and
steam bathhouses and massage clinics.
Small and medium-sized domestic market
enterprises, with paid-in equity capital less than
the equivalent two hundred thousand US
dollars (US$200,000) are reserved to Philippine
nationals, Provided that if: (1) they involve
advanced technology as determined by the
Department of Science and Technology or (2)
they employ at least fifty (50) direct employees,
then a minimum paid-in capital of one hundred
thousand US dollars (US$100,000.00) shall be
allowed to non-Philippine nationals.
Amendments to List B may be made upon
recommendation of the Secretary of National
Defense, or the Secretary of Health, or the
Secretary of Education, Culture and Sports,
endorsed by the NEDA, approved by the
President, and promulgated by a Presidential
Proclamation.
Transitory Foreign Investment Negative List
established in Sec. 15 hereof shall be replaced
at the end of the transitory period by the first
Regular Negative List to be formulated and
recommended by NEDA, following the process
and criteria provided in Sections 8 of this Act.
The first Regular Negative List shall be
published not later than sixty (60) days before
the end of the transitory period provided in said
section, and shall become immediately effective
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at the end of the transitory period. Subsequent

Foreign Investment Negative Lists shall become
effective fifteen (15) days after publication in a
newspaper of general circulation in the
Philippines: Provided, however, That each
Foreign Investment Negative List shall be
prospective in operation and shall in no way
affect foreign investment existing on the date of
its publication.

Amendments to List B after promulgation and

publication of the first Regular Foreign
Investment Negative List at the end of the
transitory period shall not be made more often
than once every two (2) years. [Sec. 8]

PAGE 264