UST LAW PRE-WEEK NOTES 2018

DOCTRINE OF STRICT COMPLIANCE v.

LETTERS OF CREDIT INDEPENDENCE PRINCIPLE

Basis Doctrine of Doctrine of

A letter of credit is any arrangement, however named or Strict Independence
described, whereby a bank acting upon the request of its Compliance
client (applicant) or on its own behalf, agrees to pay Documents Relationship of
another, against stipulated documents provided the tendered by the the buyer and
terms of the credit are complied with. seller or the bank is
beneficiary separate and
It is a financial device developed by merchants as a Principle must strictly distinct from the
convenient and relatively safe mode of dealing with conform to the relationship of
sales of goods to satisfy the seemingly irreconcilable terms of the the buyer and
interests of a seller, who refuses to part with his goods letter of credit. seller in the
before he is paid, and a buyer, who wants to have in main contract.
control of the goods before paying. The use of credits in A Assures the
commercial transactions serves to reduce the risk of correspondent seller or
nonpayment of the purchase price under the contract of bank which beneficiary of
sale of the goods and to reduce the risk of non- departs from prompt
performance of an obligation in a non-sale setting. what has been payment
(Transfield Philippines, Inc. v. Luzon Hydro Corp., GR. No. stipulated and independent of
146717, November 22, 2004) acts on its own any breach of
risk may not the main
KINDS OF LETTER OF CREDIT thereafter be contract and
able to recover. precludes the
Consequence
COMMERCIAL L/C STANDBY L/C issuing bank
of the
Involves the payment of from
Involves non-sale Doctrine
money under a contract determining
transactions. whether the
of sale.
Payable upon main contract is
certification by the actually
beneficiary of the accomplished
applicant’s non- or not.
Payable upon the
performance of the
presentation by the Banks deal with
agreement. The
seller-beneficiary of documents not
documents that
documents that show he goods.
accompany the
has taken affirmative Beneficiary The beneficiary,
beneficiary's draft must
steps to comply with the cannot draw on upon tender of
show that the applicant
sales agreement the letter of the required
has not performed the
undertaking. (Transfield credit if he did documents,
Philippines, Inc. v. Luzon not comply may draw on
Hydro Corp., supra) with its terms the LC,
and conditions. irrespective of
Payment to
THREE (3) DISTINCT BUT INTERTWINED whether the
the
CONTRACTS IN A LETTER OF CREDIT contract
Beneficiary
TRANSACTION (2002, 2008 BAR) underlying the
LC has been
1. Between the applicant/buyer/importer/account fulfilled or not.
party and the beneficiary/seller/exporter – The
applicant is the one who procures the letter of XPN: Fraud
credit and obliges himself to reimburse the issuing Exception
bank upon receipt of the documents of title while Principle.
the beneficiary is the one who in compliance with
the contract of sale ships the goods to the buyer and FRAUD EXCEPTION PRINCIPLE
delivers the documents of title and draft to the
issuing bank to recover payment for the goods. The The Exception to the Independence Principle (2010
relationship between them is governed by the law Bar)
on sales if it is a commercial L/C but if it is a stand-
by letter of credit it is governed by the law on "Fraud exception" exists when the beneficiary, for the
obligations and contract. purpose of drawing on the credit, fraudulently presents
2. Between the issuing bank and the beneficiary/ to the confirming bank, documents that contain,
seller/exporter – The issuing bank is the one that expressly or by implication, material representations of
issues the letter of credit and undertakes to pay the fact that to his knowledge are untrue.
beneficiary upon strict compliance of the latter to
the requirements set forth in the letter of credit. On The principle provides that the untruthfulness of a
the other hand, the beneficiary surrenders certificate accompanying a demand for payment under
document of title to the bank in compliance with a standby letter of credit may qualify as fraud sufficient
the terms of the L/C. Their relationship is governed to support an injunction against payment. The
by the terms of the L/C. beneficiary may be enjoined from collecting on the
3. Between the issuing bank and the applicant/ letter of credit.
buyer/importer – The applicant obliges himself to
reimburse the issuing bank upon receipt of the Injunction should not be granted unless:
documents of title. Their relationship is governed
by the terms of the application and agreement for a) There is clear proof of fraud;
the issuance of the L/C by the bank. b) The fraud constitutes fraudulent abuse of the
independent purpose of the letter of credit and

1
 MERCANTILE LAW

not only fraud in the performance of the obligation issuing or

or contract supporting the letter of credit; and confirming
c) Irreparable injury might follow if injunction is not bank). If the
granted or the recovery of damages would be
party primarily
seriously damaged. (transfield v. Luzon hydro corp.,
supra) liable on the L/C
refuses to honor
KINDS OF BANK ROLE LIABILITY the draft, the
Notifying/Advisi Convey to Does not incur negotiating
ng Bank the seller any obligation bank has the
the more than just right to proceed
notifying the
existence of against the
seller/beneficia
the letter of ry of the drawer thereof.
credit. opening of the Paying Bank Undertakes
L/C after it has to encash
Warrants determined its the drafts
the apparent drawn by
apparent authority. It the exporter
authenticity does not
of the LC. guarantee the
(Bank of genuineness or TRUST RECEIPT LAWS
America NT due execution of
& SA v. CA, the L/C. It is not
G.R. No. liable for A Trust Receipt (TR) – any transaction between the
105395, damages even if
entruster and the entrustee, whereby the entruster
December the L/C turns
who owns or holds absolute title or security interest
10, 1993) out to be
over specified goods, documents or instruments (GDI)
spurious
releases the same to the possession of the entrustee,
provided the who in turn binds himself to the GDI with the obligation
spurious
to turn over the proceeds to the entruster to the extent
character is not of the entrustee’s obligation, or if unsold, to return the
apparent on the GDI to the entruster.
face of the
instrument.
LOAN/SECURITY FEATURE
Confirming Bank Lends Assumes a
credence to direct Two features of a trust receipt transaction
the L/C obligation to the
issued by a seller and its 1. Loan feature - is brought about by the fact that the
lesser- liability is a entruster financed the importation or purchase of
known primary one as the goods under TR. (Sps. Vintola v. IBAA, G.R. No.
bank. if the 73271, May 29, 1987)
correspondent 2. Security feature - property interest in the GDI to
bank itself had secure performance of some obligation of the
issued the letter entrustee or of some third persons to the entruster.
of credit. (Rosario Textile Mills Corp. v. Home Bankers Savings
Negotiating Buys or Depends on the and Trust Company, G.R. No. 137232, June 29, 2005)
Bank discounts stage of
the drafts negotiation, OWNERSHIP OF THE GOODS, DOCUMENTS, AND
contemplate INSTRUMENTS UNDER A TRUST RECEIPT
thus:
d by the
letter of Real owner of the articles subject of the Trust
credit. 1. Before
negotiation – No Receipt transaction
liability with
The real owner of the articles subject of the TR is the
respect to the entrustee who binds himself to hold the designated
seller. Merely GDI. The entruster merely holds a security interest. If
suggests its under the trust receipt, the bank is made to appear as
willingness to the owner, it was but an artificial expedient, more of
negotiate. legal fiction than fact, for if it were really so, it could
dispose of the goods in any manner it wants, which it
cannot do, just to give consistency with purpose of the
2. After
trust receipt of giving a stronger security for the loan
negotiation – A obtained by the importer. To consider the bank as the
contractual true owner from the inception of the transaction would
relationship be to disregard the loan feature thereof. (Rosario Textile
will then arise, Mills Corp. v. Home Bankers Savings and Trust Company,
making the supra)
bank liable. As
NOTE: The entrustee cannot mortgage the goods
holder, it has
because one of the requisites of a valid mortgage is that
the right to the mortgagor must be the absolute owner of the
payment from property mortgaged or must have free disposal thereof.
the bank Entrustee is not the absolute owner of the goods under
primarily liable trust receipt nor has free disposal thereof. (DBP v.
on the draft Prudential Bank, G.R. No. 143772, November 22, 2005)
(either the

2 UST BAR OPERATIONS

ACADEMICS COMMITTEE 2018
 UST LAW PRE-WEEK NOTES 2018
THE PRINCIPLE OF RES PERIT DOMINO
Res perit domino is not a valid defense against an
entruster in cases of loss or destruction of the GDI
secured by a TR.For the principle of res perit domino to
apply, the entruster must be the owner of the goods at
the time of the loss. A TR is a security agreement,
pursuant to which a bank acquires a ‘security interest’
in the goods. It secures an indebtedness and there can
be no such thing as security interest that secures no
obligation. If under a trust receipt transaction, the
entruster is made to appear as the owner, it was but an
artificial expedient, more of legal fiction than fact, for if it
were really so, it could dispose of the goods in any manner
it wants. Thus, the ownership of the goods remaining
with the entrustee, he cannot be relieved of the
obligation to pay his/her loan in case of loss or
destruction. (Rosario Textile Mills v. Home Bankers
Association, supra)
Loss of GDI which are the subject of a TR, 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.(Sec. 10, P.D. 115)
NOTE: In case of loss, the entrustee may not be
criminally prosecuted but the civil obligation is NOT
extinguished.
VALIDITY OF 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 written terms of a trust
receipt shall be valid as against all creditors of the
entrustee for the duration of the TR agreement. (Sec. 12,
P.D. 115)
To a certain extent, such interest becomes a "lien" on the
goods because the entruster's advances will have to be
settled first before the entrustee can consolidate his
ownership over the goods. (Prudential Bank v. NLRC, G.R.
No. 1995)
NOTE: Only a purchaser for value and in good faith can
defeat the security interest of the entruster.
ESTAFA IN TRUST RECEIPT TRANSACTIONS
Estafa is deemed committed if the entrustee:
1. Fails to turn over the proceeds of the sale of the GDI
covered by the TR transaction to the extent of the
amount owing to the entruster; or
2. Fails to return the GDI if they were not sold or
disposed of in accordance with the terms of the trust
receipt. (Sec. 13, PD 115)
Note: P.D. 115 does not violate the constitutional
prohibition against imprisonment for non-payment of a
debt. What is being punished is the dishonesty and
abuse of confidence in the handling of money or goods
to the prejudice of another regardless of whether the
latter is the owner or not. It does not seek to enforce
payment of the loan. (People v. Nitafan, G.R. No. 81559,
April 6, 1992)
Q: Is lack of intent to defraud a bar to the
prosecution of these acts or omissions? (2006 Bar)
A: NO. The mere failure to account or return gives rise
to the crime which is malum prohibitum. There is no
requirement to prove intent to defraud. (Ching v.
Secretary of Justice, G.R. No. 164317, February 6, 2006)
3
TRANSACTIONS NOT CONSIDERED AS A TRUST
RECEIPT
1. A sale by a person in the business of selling for
profit who retains general property rights in the
GDI.
2. Where the seller retains title or other interest as
security for the payment of the purchase price. (Sec.
4, P.D. 115)
3. If the entrustee is already the owner or in
possession of the goods before delivery of the loan
and execution of the trust receipt transaction, the
transaction shall be considered a simple loan even
though the parties may have denominated the
agreement as one of TR. To be in the nature of TR,
the entruster should have financed the acquisition
or importation of the goods. The funds should have
been delivered before or simultaneously with
delivery of the goods. (Colinares v. CA, G.R. No.
90828, September 5, 2000; Consolidated Bank and
Trust Corporation v. CA, G.R. No. 114286, April 19,
2001)
4. When both parties enter into an agreement
knowing fully well that the return of the goods
subject of the trust receipt is not possible even
without any fault on the part of the trustee. The
goods were never intended by the entrustee for
resale or for the manufacture of items to be sold.
(Ng v. People; Land Bank v. Perez; Hur Tin Yang v.
People; 2007 Bar)
WAREHOUSEMAN’S LIEN
A warehouseman may refuse delivery of the subject
goods because, in accordance with Section 29 of the
Warehouse Receipts Law, the warehouseman loses his
lien upon goods by surrendering possession thereof. In
other words, the lien may be lost where the
warehouseman surrenders the possession of the goods
without requiring payment of his lien, because a
warehouseman’s lien is possessory in nature.(PNB v.
Judge Se , G.R. No. 119231, April 18, 1996)
Instances when a warehouseman may lose his lien
1. By surrendering possession thereof, or
2. Where a valid demand by the lawful holder of
the receipts for the delivery of the goods is refused
by the warehouseman, despite the absence of a
lawful excuse.
NEGOTIABLE INSTRUMENTS LAW
REQUISITES OF NEGOTIABILITY (WUPOA)
1. It must be in Writing and signed by the maker or
drawer;
2. Must contain an Unconditional promise or order to
pay a sum certain in money;
NOTE: An indication of particular fund out of which
reimbursement is to be made or a particular account
to be debited with the amount does not make the
instrument non-negotiable. But an order or promise
to pay out of a particular fund is conditional.
3. Must be Payable on demand, or at a fixed or
determinable future time;
4. Must be payable to Order or to bearer; and
5. Where the instrument is Addressed to a drawee, he
must be named or otherwise indicated therein with
reasonable certainty. (NIL, Sec.1)
Rules of construction in case of ambiguities in a
Negotiable Instrument
 MERCANTILE LAW
1. Words prevail over figures.
2. If date from which interest is to run is
unspecified, interest runs from the date of the
instrument; if undated, from the issue thereof.
3. If undated, instrument is considered dated as of
the time it was issued.
4. Written provisions prevail over printed.
5. If there is doubt whether it is a bill or note, the
holder may treat it as either at his election.
6. When not clear in what capacity it was signed,
deemed signed as an indorser.
7. When two or more persons signed a negotiable
instrument stating "I promise to pay," in case of
liability, they shall be deemed to be jointly and
severally liable. (Sec. 17, NIL)
PAYMENT BY INSTALLMENT
Payment by installment is certain if the dates of each
installment are fixed and the amount to be paid for each
installment is stated. (Sundiang Sr. & Aquino, 2009)
NOTE: A sum is certain within the contemplation of
Section 1(b) of the NIL if the amount that is to be
unconditionally paid by the maker or drawee can be
determined on the face of the instrument even if it
requires mathematical computation. (Sundiang Sr. &
Aquino, 2014)
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 to
his order. It may be drawn payable to the order of:
1. A Payee who is not a maker, drawer, or drawee;
2. The Drawer or maker;
3. The Drawee;
4. Two or more payees Jointly;
5. One or some of Several payees; or
6. The Holder of an office for the time being.(Sec. 8,
NIL)
An order instrument is negotiated by indorsement
completed by delivery (Sec. 30, NIL). If an order
instrument is not indorsed, the negotiation is
incomplete and the instrument is in effect, merely
assigned. The transferee acquires the right to have the
indorsement of the transferor. It is only at the time of
indorsement that negotiation takes effect and the
transferee acquires all the rights of a holder.
(Dimaampao & Dumlao-Escalante, 2014)
PAYABLE TO BEARER (ENaF PaLa)
1. When it is Expressed to be so payable; (e.g. I
promise to pay to bearer P10,000.00)
2. When it is payable to a person Named therein or
bearer; (e.g. Pay to P or bearer P10,000.00)
3. When it is payable to the order of a Fictitious
person or non-existing person, and such fact was
known to the person making it so payable; (e.g. Pay
to John Doe or order)
4. When the name of the Payee does not purport to be
the name of any person; (Pay to cash)
5. When the only or the Last indorsement is an
indorsement in blank (NIL, Sec 9).
FICTITIOUS-PAYEE RULE
The fictitious-payee rule contemplates that the payee is
fictitious or not intended to be true recipient of the
proceeds. The check is considered a bearer
instrument negotiable by delivery alone. The
underlying theory is that the maker of the check knew
that the fictitious payee cannot indorse the instrument
so that he must have intended for it to be negotiated by
mere delivery. (PNB v. Rodriguez, G.R. No. 170325,
4 UST BAR OPERATIONS
September 26, 2008)
GR: In case of controversy, the drawer is liable and the
drawee bank is absolved from liability.
XPN: When there is commercial bad faith, whereby the
drawee bank acts dishonestly and is a party to the
fraudulent scheme. The check is deemed payable to
order, and consequently, the drawee bank bears the
loss. (Ibid)
KINDS OF NEGOTIABLE INSTRUMENT
1. Promissory notes (PN) – An unconditional promise
in writing made by one person to another, signed
by the maker, engaging to pay on demand, or at a
fixed or determinable future time, a sum certain in
money to order or to bearer.(NIL, Sec. 184)
2. Bill of exchange (BOE) – 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.(NIL, Sec. 126)
3. Check – A bill of exchange drawn on a bank payable
on demand. (NIL, Sec. 185)
PROMISSORY NOTE v. BILL OF EXCHANGE
When can you treat a bill of exchange as a
promissory note? (2015 BAR)
1. Where in a bill the drawer and the drawee are the
same person (NIL, Sec. 130)
2. The drawee is a fictitious person (NIL, Sec. 130)
3. The drawee does not have the capacity to contract
(NIL, Sec. 130)
4. Whether the instrument is so ambiguous that there
is doubt whether it is a bill or a note, the holder may
treat it either at his election (NIL, Sec. 17[e])
PARTIES TO A NEGOTIABLE INSTRUMENT
Who are the parties to a negotiable instrument?
What are their liabilities?
In a promissory note there are two parties.
 The maker who makes the promise and signs the
instrument and is primarily liable for the payment
of the obligation;
 The payee to whom payment is originally payable.
In a bill of exchange there are four parties.
 The drawer who issues and draws the bill and
whose liability to pay is only secondary, except
when drawee refused to accept; can limit his
liability by putting “without recourse”;
 The drawee upon whom the bill is drawn may not
be held liable until he becomes acceptor;
NOTE: A bill of exchange may be addressed to two
or more drawees jointly, whether partners or not;
but not to two or more drawees in the alternative
or in succession. (Sec. 128, NIL)
 The payee to whom payment is originally payable;
and
 The acceptor who is the drawee who accepts the
bill.
COMPLETION AND DELIVERY
INCOMPLETE BUT DELIVERED (Sec. 14)
ACADEMICS COMMITTEE 2018
 UST LAW PRE-WEEK NOTES 2018
Where the instrument is wanting in any material
particular (e.g. a signature in blank paper delivered by
the person making the signature in order that it may be
converted into a negotiable instrument), the person in
possession thereof has a prima facie authority to
complete it by filling up the blanks therein. (NIL, Sec. 14)
In order 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
reasonable time.
NOTE: Persons negotiating after its completion are
liable because of their warranties.
If 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 reasonable time.(ibid)
INCOMPLETE AND UNDELIVERED (Sec. 15)
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. (NIL, Sec. 15)
NOTE: Persons, whose signature was placed thereon
after delivery, are liable because of their warranties.
Q: PN makes a promissory note for P5, 000.00, but
leaves the name of the payee in blank because he
wanted to verify its correct spelling first. He
mindlessly left the note on top of his desk at the end
of the workday. When he returned the following
morning, the note was missing. It turned up later
when X presented it to PN for payment. Before X, T
who turned out to have filched the note from PN’s
office, had endorsed the note after inserting his own
name in the blank space as the payee. PN
dishonored the note, contending that he did not
authorize its completion and delivery. But X said he
had no participation in, or knowledge about the
pilferage and alteration of the note and therefore he
enjoys the rights of a holder in due course under the
Negotiable Instruments Law. Who is correct and
why?
A: The instrument is incomplete and undelivered. PN is
correct in dishonoring the said instrument. Sec. 15
provides that 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. Thus, X contention has
no merit, since under this section it is a real defense that
can be interposed against any holder even a holder in
due course.
COMPLETE BUT UNDELIVERED (Sec. 16)
It is incomplete and revocable until delivery of the
instrument for the purpose of giving it effect (NIL, Sec.
16).Delivery is essential to the validity of any negotiable
instrument. (Sundiang Sr. & Aquino, 2009)
Where a debtor who drew two checks payable to his
creditor never delivered the checks to his creditor and a
third party was able to collect the proceeds of the checks
by forging the endorsement of the creditor as payee, the
creditor has no cause of action against anyone on the
basis of the checks, since the payee acquires no interest
in the check until its delivery to him. (Development Bank
of Rizal v. Sim Wei, G.R. No. 85419, March 9, 1993)
5
NOTE: The defense of want of delivery of a complete
instrument is only a personal defense which means
that it is only available against a holder NOT in due
course.
Presumption as to delivery
If the instrument is in the possession of an HIDC, valid
delivery is conclusively presumed.
If the instrument is in the possession of a party other
than an HIDC, possession of such party constitutes only
prima facie presumption of delivery.
FORGERY
It is the counterfeit making or fraudulent alteration of
any writing. It happens when a signature is affixed by
one who does not claim to act as an agent and who has
no authority to bind the person whose signature he has
forged.
Forgery in a negotiable instrument does not avoid the
instrument but only the forged signature. The
signature is wholly inoperative. In other words, rights
may still exist and be enforced by virtue of such
instrument as to those signatures thereto are found to
be genuine.
Persons precluded from setting up the defense of
forgery (2010 BAR)
1. Those who admit/warrant the genuineness of the
signature, such as indorsers, persons negotiating
by delivery and acceptor; (NIL, Sec 56)
2. Those who by their acts, silence, or negligence, are
estopped from claiming forgery;
3. A holder of a bearer instrument who subsequently
negotiates such instrument with a prior forged
indorsement - forged indorsement is not necessary
to his title it being a bearer instrument.(NIL, Sec. 48)
CUT-OFF PRINCIPLE
In order instruments, parties prior to forgery are
relieved or cut-off of liability. They cannot be held liable
by any holder, including a holder in due course.
Legal consequences when a bank honors a forged
check:
 Drawer's signature is forged, then the drawee
bank is liable because the bank is bound to know
the signature of its customers. It is also in a
superior position to detect the forgery because it
has a specimen of the signature of the maker.
Lastly, by accepting the instrument, it becomes an
acceptor who admits the genuineness of the
drawer’s signature.
 Payee’s signature is forged, then drawee bank is
liable because it owes to the drawer-depositor an
absolute and contractual duty to pay the check only
to the person to whom it is made payable.
 Indorser’s signature is forged, drawee bank
bears the loss as it is under strict liability to pay
the check to the order of the payee. Payment under
forged indorsement is not to the drawer’s order.
Hence, if the drawee bank pays a check bearing
forged signature of indorser, it does so at its own
peril.
However, the drawee bank may pass the liability
to the collecting bank who cannot interpose the
defense of forgery. The collecting bank is an
indorser who warrants that the instrument is
genuine and in all respect what it purports to be
 MERCANTILE LAW

(NIL, Sec. 16). The collecting bank had no right to be
paid by the drawee bank since the forged
indorsement is inoperative. The collecting bank my
ultimately recover from the forger.
Q: Ofelia Camacho Cheah accommodated a friend’s
friend to deposit and encash a check issued by the
Bank of America. The check was deposited to
Ofelia’s account in PNB. A US dollar denominated
check is normally subject to a 15-day clearing
period. However, 12 days after the check’s deposit,
the bank informed Ofelia that the check was cleared
and credited to her account. Hence, Ofelia
immediately withdrew the check’s amount and the
accommodated friend was able to take entire
amount. It was only days after said withdrawal that
PNB was informed by its correspondent bank of the
insufficiency of funds to which the check was drawn.
At that time, it was too late to recover the money
withdrawn. Is PNB liable for the money lost on the
said transaction?
A: Yes. The payment of the amounts of checks without
previously clearing them with the drawee bank
especially so where the drawee bank is a foreign bank
and the amounts involved were large is contrary to
normal or ordinary banking practice. Jurisprudence
provides that when the bank allowed the withdrawal of
the value of a check prior to its clearing, before the check
shall have been cleared for deposit, the collecting bank
can only ‘assume’ at its own risk that the check would be
cleared and paid out. (PNB v. Spouses Cheah, G.R. No.
170895 & 170892, April 25, 2012, Del Castillo, J.)
GR: Every holder is deemed prima facie to be an HIDC.
XPN: When it is shown that the title of any person who
has negotiated the instrument was defective. But this is
only as regards a party who became such after the
acquisition of the defective title.
SHELTER PRINCIPLE or HOLDER IN DUE COURSE BY
SUBROGATION
Under the "shelter principle," the HIDC, by negotiating
the instrument, to a party not a HIDC, transfers all his
rights as such holder to the latter who acquires the right
to enforce the instrument as if he was a HIDC. The
principle applies to a "sheltered" holder who is not a
party to any fraud or illegality impairing the validity of
the instrument. (NIL, Sec. 58)
DEFENSES AGAINST THE HOLDER
1. Real or Absolute Defenses – those that are attached
to the instrument itself and are available against all
parties, both immediate and remote, including
holders in due course.
2. Personal or Equitable Defenses – defenses which are
only available against a holder not in due course.
Those which grow out of the agreement or conduct
of a particular person which renders it inequitable
for him, though holding the legal title, to enforce it
against the party sought to be made liable.
Real or Absolute Defenses (IM In Ultra. AFForD
PODIF)

ACCOMODATION PARTY 1. Incomplete and undelivered instrument

2. Minority (available only to the minor)
Requisites to be an accommodation party (SNoL) 3. Incapacity as far as incapacitated persons are
concerned
1. Accommodation party must Sign as maker, drawer, 4. Ultra–vires acts of a corporation
acceptor or indorser 5. Want of Authority, apparent and real
2. No value is received by the accommodation party 6. Fraudulent alteration
from the accommodated party 7. Forgery
3. The purpose is to Lend the name. (NIL, Sec. 29) 8. Duress amounting to Forgery
9. Prescription
An accommodation party cannot set up lack of 10. Other infirmities appearing on the face of the
consideration against any holder, even as to one who is instrument
not a holder in due course. 11. Discharge in insolvency
12. Illegal Contract
Holder for value may recover from an accommodation 13. Fraud in Factum or Esse Contractus
party notwithstanding his knowledge that the
accommodation party is only signing as such. Personal or Equitable Defenses(InnocentS2 ADD FUn
In Fraud)
NOTE: It does not mean, however, that one cannot be an
accommodation party merely because he has received 1. Innocent alteration or spoliation
some consideration for the use of his name. The phrase 2. Discharge of party Secondarily liable by discharge
“without receiving value therefor” only means that no of prior party.
value has been received “for the instrument” and not 3. Set-off between immediate parties
“for lending his name.” 4. Filling up of blanks not in accordance with the
Authority given
HOLDER IN DUE COURSE (HIDC) 5. Acquisition of instrument by Duress or force and
fear; unlawful means or for an illegal consideration
A holder in due course is a holder who has taken the 6. Discharge by payment or renunciation or release
instrument under the following conditions(COFI): before maturity
7. Failure or absence of consideration.
1. That is Complete and regular upon its face; 8. Undelivered complete instrument
2. Became the holder before it was Overdue, and 9. Insertion of a wrong date
without notice that it has been previously 10. Fraud in inducement or simple fraud
dishonored, if such was the fact;
3. Took it in good Faith and for value; and LIABILITIES OF PARTIES
4. At the time it was negotiated to him, he had no
notice of any Infirmity in the instrument or defect Parties primarily liable (MAC)
in the title of the person negotiating it. (NIL, Sec. 52)
1. Maker – of a promissory note;
A holder in due course holds the instrument free from 2. Acceptor – of a bill of exchange; and
any defect of title of prior parties and from defenses 3. Certifier of a check
available to prior parties among themselves, and may
enforce payment of the instrument for the full amount Parties secondarily liable
thereof. 1. Drawer of a bill

6 UST BAR OPERATIONS

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 UST LAW PRE-WEEK NOTES 2018

2. Indorser of a note or a bill He has the same warranties as a qualified indorser. but
unlike a qualified indorser, a person negotiating by
Negotiable instrument should be presented for payment mere delivery is liable only to his immediate transferee.
to the party primarily liable. (NIL, Sec. 72[d]) (NIL, par. 2, Sec. 65)

PRIMARILY LIABLE SECONDARILY LIABLE
Unconditionally bound Conditionally bound
Undertakes to pay only
after the ff. conditions
have been fulfilled:
1. Due presentment for
payment or acceptance
Absolutely required to
to primary party; (NIL,
pay the instrument
Sec. 143)
upon maturity
2. Dishonor by such
party; (NIL, Sec.70)
3. Taking of proceedings
required by law. (NIL,
Sec.152)
WARRANTIES
DRAWER
NOTE: Person negotiating by mere delivery and a
qualified indorser’s secondary liability is limited. They
are only liable as to their warranties.
DISCHARGE OF NEGOTIABLE INSTRUMENT
a. By payment in due course by or on behalf of the
principal debtor;
b. By payment in due course by the party
accommodated, where the instrument is made or
accepted for his accommodation;
c. By the intentional cancellation thereof by the
holder;
d. By any other act which will discharge a simple
contract for the payment of money; and
e. When the principal debtor becomes the holder of
the instrument at or after maturity in his own
right.(Sec. 119, NIL)

a. The existence of payee and his then capacity to Requisites of payment in due course
indorse;
b. That the instrument will be accepted or paid upon 1. It is made at or after the date of Maturity;
due presentment by the party primarily liable 2. To the Holder thereof; and
according to its tenor; and 3. In Good faith and without notice that holder’s title
c. That if dishonored, he will pay the party entitled is defective.(NIL, Sec. 88)
to be paid. (NIL, Sec. 61)
The term “in good faith” refers to the maker or acceptor
GENERAL INDORSER and not to the holder.

a. Instrument is genunine; Reasonable time as applied to presentment

b. He had good title to it;
c. All prior parties had capacity to contract; Reasonable time is relative. Regard is to be had to the
d. Instrument, at the time of indorsement, was facts of each case, usage of business and trade, and the
valid and subsisting; and nature of the instrument. With respect to checks, current
e. On due presentment, it shall be accepted or banking practice dictates that the check becomes stale if
paid, or both according to its tenor it is not presented for payment within 6 months (180
days) from issuance.
If the instrument is dishonored and the necessary
proceedings on dishonor be duly taken, he will pay the NOTICE OF DISHONOR
holder. (NIL, Sec. 66)
It is a notice given by the holder to the parties
IRREGULAR INDORSER secondarily liable, that the instrument was dishonored
by non-payment or non-acceptance by the
He is not a party to the instrument but he places his drawee/maker.
signature in blank before delivery. He is not a party but
he becomes one because of his signature in the NOTE: Persons primarily liable need not be given
instrument. notice of dishonor because they are the ones who
dishonored the instrument.
a. In an order instrument, liable to the payee and all
subsequent parties Instances when notice of dishonor is NOT necessary
b. If bearer instrument or payable to order of maker
or drawer, liable to all parties subsequent to the 1. Waiver of notice (NIL, Sec. 109)
maker or drawer 2. Waiver of protest (NIL, Sec. 111)
c. If he signs for accommodation of the payee, liable 3. When notice is dispensed with when after exercise
to all parties subsequent to payee. (NIL, Sec. 64) of reasonable diligence, notice cannot be given or
does not reach the parties sought to be charged
NOTE: The maker, general and qualified indorser, are (NIL, Sec. 112)
absolutely liable in the instrument. 4. When notice need not be given to the drawer (NIL,
Sec. 114)
QUALIFIED INDORSER 5. When notice need not be given to the indorser (NIL,
Sec. 115)
a. Instrument is genuine; 6. Where due notice of dishonor by non-acceptance
b. He has good title to it; has been given (notice of dishonor by non-payment
c. Capacity to contract of all prior parties; and; not necessary)(NIL, Sec. 116.)
d. No knowledge of any fact which would impair the
validity of the instrument. (NIL, Sec.65) ACCEPTANCE

NOTE: He is liable to all parties who derive their title It is a signification by the drawee of his assent to the
through his indorsement. order of the drawer. (NIL, Sec. 132)

PERSONS NEGOTIATING BY DELIVERY Requisites of acceptance:

1. GR: It must be in writing

7
 MERCANTILE LAW

XPN: Constructive acceptance and to a foreign bill Need not be Must be presented
payable in another state unless the other state presented for acceptance in
Presentment
requires for written acceptance. for certain cases (NIL,
for
acceptance Sec. 143)
Acceptance
2. Signed by the drawee; (NIL, Sec.
3. Must express a promise to pay money; and 185)
4. Delivered to the holder.
What is the effect of erasure or alteration on checks?
NOTE: Before delivery or notification, acceptor
may revoke or cancel his acceptance.
Pursuant to Philippine Clearing House Corporation
Memorandum Circular No. 15-460A effective January
Upon acceptance, the bill, in effect becomes a note. The
4, 2016, the following shall no longer be eligible or
drawee who thereby becomes an acceptor assumes the
acceptable for clearing:
liability of the maker (who has primary liability) and the
drawer, that of the first indorser.
a. Any check that shows or indicates on its face
erasure or alteration regardless of any signature or
Constructive acceptance
initials that appear to indicate authorization of the
alteration or erasure; or
The drawee is deemed to have accepted the instrument:
b. Does not indicate the date, payee, amount payable
1. If he destroys the same;
in figures, amount payable in words, or signature of
2. Refuses within 24 hours after delivery or within
the drawer.
such other period as the holder may allow;
3. To return the bill accepted or not accepted to the
MANAGER’S CHECK
holder. (Sec. 137)
The Supreme Court held in various decisions that a
BASIS CHECKS BOE
manager’s check is as good as cash. A manager’s check
Always May or may not be is a check drawn by the bank against itself. It is deemed
drawn on a drawn on a bank and pre-accepted by the bank from the moment of issuance.
bank or need not be drawn The check becomes the primary obligation of the bank
banker against a deposit which issues it and constitutes its written promise to
Drawee
against a pay. By issuing it, the bank in effect commits its total
previous resources, integrity and honor behind the check.
deposit of (Metrobank and Trust Company v. Chiok, GR No.
funds 172652,November 26, 2014, 2015 BAR)
Always Either payable on
payable on demand or at a fixed CROSS CHECK
Payability demand or determinable
future time (NIL, A cross check is done by writing two (2) parallel lines on
Sec.4) the left top portion of the check.
Ordinarily Intended for
intended circulation as Effects of crosschecking:
Function for instrument of credit
immediate a. That the check may not be encashed but only
payment deposited in the bank;
Must be Must be presented b. That the check may be negotiated only once - to one
presented for payment within a who has an account with a bank; and
for payment reasonable time after c. That the act of crossing the check serves as a
within a its last negotiation warning to the holder that the check has been issued
Presentment
reasonable (NIL, Sec. 171) for definite purpose so that he must inquire if he has
for Payment
time after received the check pursuant to the purpose.
its Otherwise, he is not an HIDC.(SIHI v. IAC, G.R. No.
issue(NIL, 72764, July 13, 1989)
Sec.186)
When a They remain liable
check is despite acceptance INSURANCE LAW
accepted or (NIL, Sec. 84)
certified,
the drawer
CONCEPT OF INSURANCE
& indorsers
Discharge of
are
Liability Q: What is a Contract of Insurance?
discharged
from
A: It is an agreement whereby one undertakes for a
liability
consideration to indemnify another against the loss,
thereon
damage or liability arising from an unknown or
(NIL, Sec.
contingent event (IC, Sec. 2[a]).
188)
Death of the Death of the drawer Q: May a member of the MILF or its breakaway
drawer of a of an ordinary bill group, the Abu Sayyaf, be insured with a company
check with does not revoke the
licensed to do business under the Insurance Code of
the authority of the
Effect of the the Philippines? Explain.
knowledge drawee to pay.
Death of the
of the bank A: YES. A member of the MILF or the Abu Sayyaf may be
Drawer
revokes the
insured with a company licensed to do business under
authority of
the Insurance Code of the Philippines. What is
the bank to prohibited to be insured is a public enemy. A public
pay. enemy is a citizen or national of a country with which
the Philippines is at war. Such member of the MILF or

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ACADEMICS COMMITTEE 2018
 UST LAW PRE-WEEK NOTES 2018

the Abu Sayyaf is not a citizen or national of another
country, but of the Philippines.
Elements of an Insurance Contract
1. Scheme to distribute losses – Such assumption of
risk is part of a general scheme to distribute actual
losses among a large group or substantial number
of persons bearing a similar risk.
2. Payment of premium – As consideration for the
insurer’s promise, the insured makes a ratable
contribution called “premium,” to a general
insurance fund.
3. Existence of insurable interest – The insured
possesses an interest of some kind susceptible of
pecuniary estimation, known as “insurable
interest.”
4. Assumption of Risk – The insurer assumes that risk
of loss for a consideration.
5. Risk of loss – The insured is subject to a risk of loss
through the destruction or impairment of that
interest by the happening of designated peril.
PARTIES TO AN INSURANCE CONTRACT
3. That the ship shall carry the necessary documents to
show nationality or neutrality and that it will not
carry document which will cast reasonable
suspicion thereon;
4. That the ship shall not carry contraband, especially
if it is making voyage through belligerent waters.
Q: A marine insurance policy on a cargo states that
“the insurer shall be liable for losses incident to
perils of the sea”. During the voyage, seawater
entered the compartment where the cargo was
stored due to the defective drainpipe of the ship.
The insured filed an action on the policy for
recovery of the damages caused to the cargo. May
the insured recover damages? (1998 BAR)
A: NO. The proximate cause of the damage to the cargo
insured was the defective drainpipe of the ship. This is
peril of the ship, and not peril of the sea. The defect in
the drainpipe was the result of the ordinary use of the
ship. To recover under a marine insurance policy, the
proximate cause of the loss or damage must be peril of
the sea.

1. Insurer – party who assumes or accepts the risk of
loss and undertakes for a consideration to
indemnify the insured on the happening of a
specified contingency or event. The term “insurer”
no longer includes “individuals” under RA 10607.
2. Insured – person in whose favor the contract is
operative and is indemnified.
The insured is not always the person to whom the
proceeds are paid.
COMPULSORY MOTOR VEHICLE LIABILITY
INSURANCE
No fault indemnity clause (1994 BAR)
It is a clause where the insurer is required to pay a third
party injured or killed in an accident without the
necessity of proving fault or negligence on the part of
the insured. There is a stipulated maximum amount to
be recovered.

3. Assured/Beneficiary – a person designated by the Theft clause

terms of the policy to receive the proceeds of the
insurance. He may be the insured or a third party in There is theft if the vehicle is taken with intent to gain
the contract for whose benefit the policy is issued without the consent of the insured-owner. Thus, there is
and to whom the loss is payable. theft even if:

MARINE INSURANCE 1. The vehicle is returned;

2. The vehicle was stolen by the driver of the
GR: In the usual form of a marine policy, the risks insured (Alpha Insurance and Surety Company
insured against are only “perils of the sea”. v. Castor, G.R. 198174, September 2, 2013);
(2014 BAR)
XPN: When the insurance is an “all risk policy” and thus 3. The vehicle was taken to the owner of a repair
covers even “perils of the ship”. shop for the purpose of repair and in order to
attach accessories.(Paramount Insurance v.
XPN to XPN: When the risks are expressly excepted by Spouses Remondeulaz, G.R.
the “all risk policy”. No.173773,November28, 2012)

“Perils of the sea or perils of navigation” (1998 Bar) INSURABLE INTEREST

It includes only those casualties due to the (WiN): BASIS LIFE PROPERTY
1. Unusual violence or extraordinary action of WInd GR: Every
and wave, or person has an
2. Other extraordinary causes connected with unlimited
Navigation. (De Leon, 2010) insurable
interest in his
“Perils of the ship” own life

It is a loss which, in the ordinary course of events,

results from the (NON):
1. Natural and inevitable action of the sea;
2. Ordinary wear and tear of the ship; As to XPN: Where Limited to the actual
3. Negligent failure of the ship’s owner to provide the extent life insurance value of the property
vessel with proper equipment to convey the cargo is taken out by
under ordinary conditions. a creditor on
the life of the
WARRANTIES IMPLIED IN MARINE INSURANCE debtor,
(2000 BAR) insurable
interest is
1. That the ship is seaworthy to make the voyage limited to the
and/or to take in certain cargoes; amount of
2. That the ship shall not deviate from the voyage debt. (See
insured; discussion on

9
 MERCANTILE LAW

Mortgagor- If the designated beneficiaries are disqualified by law to

Mortgagee) receive the proceeds, the policy remains valid and
GR: Must exist both at binding but the proceeds will be given to the estate of
the time the policy takes the insured.
Must exist at effect and the time of
When
the time the loss, but need not exist CHANGE IN BENEFICIARY
must
policy takes in the period in
insurab
effect and between.(Sec. 19) GR: The insured shall have the right to change the
le
need not exist beneficiary he designated in the policy.
interest
thereafter (IC,
exist
Sec. 19). XPN: If the insured expressly waived this right in the
said policy.
XPN: Secs. 21-24; 25
The NOTE: In the event the insured does not change the
beneficiary beneficiary during his lifetime, the designation shall be
need not have deemed irrevocable. (IC, Sec. 11)
insurable
interest over Effects of Irrevocable Designation of a Beneficiary:
the life of the
insured if the a. The beneficiary designated in a life insurance
insured contract cannot be changed without the consent of
himself the beneficiary. (Gercio v. Sun Life Assurance of
As to secured the Canada, 48 Phil. 53, 28 September 1925)
the policy. The beneficiary must b. A new beneficiary cannot be added to the
benefici However, if have insurable interest irrevocably designated beneficiary for this would
ary’s the life over the thing insured. in effect reduce the latter’s vested rights. (Go v.
interest insurance was Redfern, 72 Phil. 71, 25 April 1941)
obtained by c. The irrevocably designated beneficiary may obtain
the a policy loan to the extent stated in the schedule of
beneficiary, values attached to the policy.
the latter d. The insured cannot take the cash surrender value
must have assign or even borrow on said policy without the
insurable consent of the beneficiary.
interest over e. The insured cannot assign the policy if the
the life of the designation of the beneficiary is irrevocable. The
insured. irrevocable beneficiary has a vested right.
(Sundiang Sr. & Aquino, 2014)
INSURABLE INTEREST IN LIFE
INSURABLE INTEREST IN PROPERTY
1. Insurance upon one’s life – are those taken out by
the insured upon his own life (IC, Section 10[a]) for Every interest in property, whether real or personal, or
the benefit of himself, or of his estate, in case it any relation thereto, or liability in respect thereof, of
matures only at his death, for the benefit of third such nature that contemplated peril might directly
person who may be designated as beneficiary. damnify the insured, is insurable interest. (IC, Sec. 13)

2. Insurance upon life of another – are those taken out
by the insured upon the life of another. Where a
person names himself beneficiary in a policy he
takes on the life of another, he must have
insurable interest in the life of the latter (De
Leon, 2010). This class includes the following:
a. His spouse and of his children.
b. Any person on whom he depends wholly or in
part for education or support, or in whom he
has a pecuniary interest.
c. Of any person under a legal obligation to him
for the payment of money, or respecting
property or services, of which death or illness
might delay or prevent the performance.
d. Of any person upon whose life any estate or
interest vested in him depends (IC, Sec. 10).
Persons prohibited from being designated as
beneficiaries (1998 BAR)
GR: Insurable interest must exist both at the time the
insurance contract takes effect and at the time of loss.
XPNS:
1. A change in interest in a thing insured, after the
occurrence of an injury which results in a loss, does not
affect the right of the insured to indemnity for the loss.
(IC, Sec. 21)
2. A change of interest in one or more several distinct
things, separately insured by one policy, does not avoid
the insurance as to the others. (IC, Sec. 22)
3. A change on interest, by will or succession, on the
death of the insured, does not avoid an insurance; and
his interest in the insurance passes to the person taking
his interest in the thing insured. (IC, Sec. 23)
4. A transfer of interest by one of several partners, joint
owners, or owners in common, who are jointly insured,
to the others, does not avoid an insurance even though
it has been agreed that the insurance shall cease upon
an alienation of the thing insured. (IC, Sec. 24)

1. Those made between persons who were guilty of MORTGAGOR-MORTGAGEE

adultery or concubinage at the time of designation.
NOTE: There need not be a finding of guilt in a
criminal action.
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 or ascendants by reason of his office.
Each has an insurable interest in the property
mortgaged and this interest is separate and distinct
from the other. Therefore, insurance taken by one in his
name only and in his favor alone does not inure to the
benefit of the other. The same is not open to objection
that there is double insurance (RCBC vs. CA, 289 G.R. Nos.
128833-34, 128866, April 20, 1998; IC, Sec. 8).

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ACADEMICS COMMITTEE 2018
 UST LAW PRE-WEEK NOTES 2018
1. Mortgagor –As owner, has an insurable interest to
the extent of its value even though the mortgage
debt equals such value.
2. Mortgagee –Has an insurable interest in the
mortgaged property to the extent of the debt
secured; such interest continues until the mortgage
debt is extinguished. (Sundiang Sr. & Aquino, 2014)
Insurable interest on the LIFE of a debtor
Section 10 (c) of the Insurance Code is specific that
every person has an insurable interest over the life and
health of any person under a legal obligation to him for
the payment of money.
Q: X borrowed from CCC Bank. She mortgaged her
house and lot in favor of the bank. X insured her
house. The bank also got the house insured.
a. Is this double insurance? Explain your answer.
b. Is this legally valid? Explain your answer.
c. In case of damage, can X and CCC bank
separately claim for the insurance proceeds?
(2012 BAR)
A:
a. NO, there is no double insurance. Double insurance
exists where the same person is insured by several
insurers separately with respect to the same
subject and interest.
b. YES, X and CCC Bank can both insure the house as
they have different insurable interests therein. X,
the borrower-mortgagor, has an insurable interest
in the house being the owner thereof while CCC
Bank, the lender, also has an insurable interest in
the house as mortgagee thereof.
c. YES. If X obtained an open policy then she could
claim an amount corresponding to the extent of the
damage based on the value of the house
determined as of the date the damaged occurred,
but not to exceed the face value of the insurance
policy; however, if she obtained a valued policy
then she could claim an amount corresponding to
the extent of the damage based on the agreed upon
valuation of the house.
As for CCC Bank, it could claim an amount
corresponding to the extent of the damage but not
to exceed the amount of the loan it extended to X or
so much thereof as may remain unpaid.
DOUBLE INSURANCE AND OVERINSURANCE
DOUBLE INSURANCE OVER INSURANCE
There may be no over
insurance as when the
When the amount of the
sum total of the
insurance is beyond the
amounts of the policies
value of the insured’s
issued does not exceed
insurable interest.
the insurable interest of
the insured.
There may be only one
There are two or more insurer, with whom the
insurers insuring the insured takes insurance
same subject matter. beyond the value of his
insurable interest.
Double insurance is valid. What is prohibited is for the
insured to recover more than his interest or value of the
property pursuant to the “principle of indemnity”.
In double insurance, the insurers are considered as co-
insurers. Each one is bound to contribute ratably to the
loss in proportion to the amount for which he is liable
under his contract. This is known as the “principle of
contribution” or “contribution clause”
11
In case the insured is overinsured by double insurance,
the insured, unless the policy otherwise provides, may
claim payment from the insurers in such order as he
may select, up to the amount for which the insurers are
severally liable under their respective contracts.[IC, Sec.
94 (a)]Each insurer is bound, as between himself and
the other insurers, to contribute ratably to the loss in
proportion to the amount for which he is liable under
his contract. [IC, Sec. 94 (e)]
“OTHER INSURANCE CLAUSE”
The insurer may insert an “other insurance clause”
which will prohibit double insurance. The rationale is to
prevent the danger that the insured will over insure his
property and thus avert the possibility of perpetration
of fraud. It is lawful and specifically allowed under Sec.
75 of the Insurance Code which provides that “a policy
may declare that a violation or a specified provision
thereof shall avoid it, otherwise the breach of an
immaterial provision does not avoid it.”
CO-INSURANCE and RE-INSURANCE. (1994 BAR)
Co-insurance is the percentage in the value of the
insured property which the insured himself assumes or
undertakes to act as insurer to the extent of the
deficiency in the insurance of the insured property. In
case of loss or damage, the insurer will be liable only for
such proportion of the loss or damage as the amount of
insurance bears to the designated percentage of the full
value of the property insured.
Reinsurance is where the insurer procures a third
party, called the reinsurer, to insure him against liability
by reason of such original insurance. Basically,
reinsurance is an insurance against liability which the
original insurer may incur in favor of the original
insured.
PERFECTION OF THE INSURANCE CONTRACT
The contract of insurance is perfected when the assent
or consent is manifested by the meeting of the offer
and the acceptance upon the thing and the cause which
are to constitute the contract. Mere offer or proposal is
not contemplated (De Lim v. Sun Life Assurance Co., G.R.
No. L-15774, November 29, 1920).
Cognition Theory - acceptance made by letter shall not
bind the person making the offer except from the time it
came to his knowledge.
PREMIUM PAYMENT
“Cash and carry” rule
GR: No policy or contract of insurance issued by an
insurance company is valid and binding unless and until
the premium thereof has been paid. Any agreement to
the contrary is void.
XPN: A policy is valid and binding even when there is
non-payment of premium:
1. In case of life or industrial life policy whenever the
grace period provision applies, or whenever under
the broker and agency agreements with duly
licensed intermediaries, a ninety (90)-day credit
extension is given. No credit extension to a duly
licensed intermediary should exceed ninety (90)
days from date of issuance of the policy (IC, Sec. 77).
2. When there is acknowledgment in a policy of a
receipt of premium, which the law declares to be
conclusive evidence of payment, even if there is
stipulation therein that it shall not be binding until
the premium is actually paid. This is without
 MERCANTILE LAW
prejudice however to right of insurer to collect
corresponding premium (Sec. 77, ibid).
Section 77 of the Insurance Code in effect allows
waiver by the insurer of the condition
prepayment by making an acknowledgment in the
insurance policy of receipt of premium as
conclusive evidence of payment so far as to
make the policy binding despite the fact that
premium is actually unpaid. (Makati Tuscany
Condominium Corp. vs. Court of Appeals G.R. No.
95546, November 6, 1992)
3. When there is an agreement allowing the insured
to pay the premium in installments and partial
payment has been made at the time of loss (Makati
Tuscany Condominium Corp. v. CA, G.R. No. 95546,
Nov. 6, 1992)
4. When there is an agreement to grant the insured
credit extension for the payment of the premium.
(Art. 1306, NCC), and loss occurs before the
expiration of the credit term (UCPB General
Insurance v. Masagana Telemart, G.R. No. 137172,
Apr. 4, 20012006, 2007 Bar).
5. When estoppel bars the insurer to invoke non-
recovery on the policy.
6. When the public interest so requires, as
determined by the Insurance Commissioner
Non-payment of premium
Non-payment of the first premium prevents the contract
from becoming binding notwithstanding the acceptance
of the application or the issuance of the policy, unless
waived.
With respect to subsequent premiums, non-payment
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. (De Leon, 2010)
Payment by post-dated check
A postdated check bearing a date prior to the loss,
assuming availability of the funds thereof, would be
sufficient even if it remains unencashed at the time of
the loss, constitutes valid payment of premium. The
subsequent effects of encashment would retroact to the
date of the instrument and its acceptance by the
creditor. (2007 BAR)
REFUND OF PREMIUM
Insured entitled to recover the whole or entire
premiums paid: (2000 Bar)
1. When no part of the thing insured has been exposed
to any of the perils insured against (IC, Sec. 80);
2. When the contract is voidable because of the fraud
or misrepresentations of the insurer or his agent
(IC, Sec. 82);
3. When the insurance is voidable because of the
existence of facts of which the insured was ignorant
without his fault (IC, Sec. 82);
4. When the insurer never incurred any liability
under the policy because of the default of the
insured other than actual fraud (IC, Sec. 82); or
5. When rescission is granted due to insurer’s breach
of contract (IC, Sec. 74).
Insured is not entitled to return of premiums paid
1. If the peril insured against has existed, and the
insurer has been liable for any period, the peril
being entire and indivisible (IC, Sec. 81);
2. In life insurance policies (IC, Sec. 80 [b]);
3. If the policy is annulled, rescinded or if a claim is
denied by reason of fraud(IC, Sec. 82);or
12
4. If contract is illegal and the parties are in pari
delicto.
CONCEALMENT
Concealment is a neglect to communicate that which a
party knows and ought to communicate.
Requisites of concealment:
1. A party knows a fact which he neglects to
communicate or disclose to the other party;
2. Such party concealing is duty bound to disclose
such fact to the other;
3. Such party concealing makes no warranty as to the
fact concealed;
4. The other party has no means of ascertaining the
fact concealed; and
5. The fact must be material
Matters relating to the health of the insured are material
and relevant to the approval of the issuance of the life
insurance policy as these definitely affect the insurer’s
action to the application. It is well-settled that the
insured need not die of the disease he had failed to
disclose to the insurer, as it is sufficient that his non-
disclosure misled the insurer in forming his estimates of
the risks of the proposed insurance policy or in making
inquiries. (Sunlife Assurance Company of Canada v. CA,
G.R. No. 105135, June 22, 1995; 2001 BAR)
If there is concealment, the remedy of the insurer is
rescission since concealment vitiates the contract of
insurance. Good faith is not a defense in concealment.
Concealment, whether intentional or unintentional
entitles the injured party to rescind the contract of
insurance.(IC, Sec. 27)
MISREPRESENTATION
Misrepresentation is an oral or written statement of a
fact or condition affecting the risk made by the insured
to the insurance company, tending to induce the insurer
to assume the risk.
Requisites of misrepresentation:
1. The insured stated a fact which is untrue;
2. Such fact was stated with knowledge that it is
untrue and with intent to deceive or which he
states positively as true without knowing it to be
true and which has a tendency to mislead; and
3. Such fact in either case is material to the risk.
TEST OF MATERIALITY (2000 BAR)
It is determined not by the event, but solely by the
probable and reasonable influence of the facts upon the
party to whom the communication is due, in forming his
estimate of the disadvantages of the proposed contract,
or in making his inquiries. (IC, Sec. 31)
INCONTESTABILITY CLAUSE
After the policy of life insurance made payable on the
death of the insured shall have been in force during the
lifetime of the insured for a period of two (2) years from
the date of its issue or its last reinstatement, the insurer
cannot prove that the policy is void ab initio or is
rescindible by reason of the fraudulent concealment or
misrepresentation of the insured or his agent (IC, Sec.
48).
Defenses not barred by incontestability clause
1. That the person taking the insurance lacked
insurable interest as required by law;
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 UST LAW PRE-WEEK NOTES 2018
2. That the cause of the death of the insured is an
excepted risk;
3. That the premiums have not been paid (IC, Secs. 77,
233[b], 236[b]);
4. That the conditions of the policy relating to military
or naval service have been violated (IC, Secs. 233[b],
234[b]);
5. That the fraud is of a particularly vicious type;
6. That the beneficiary failed to furnish proof of death
or to comply with any condition imposed by the
policy after the loss has happened(IC, Secs. 233 [b],
234 [b]); or
7. That the action was not brought within the time
specified (IC, Sec. 63).
PRESCRIPTION OF ACTIONS
If there is no stipulation or the stipulation is void, the
insured may bring the action within 10 years in case the
contract is written.
Parties may validly agree that an action on the policy
should be brought within a limited period of time,
provided such period is not less than 1 year from the
time the cause of action accrues. If the period agreed
upon is less than 1 year from the time the cause of action
accrues, such agreement is void. (IC, Sec. 63)
a. The stipulated prescriptive period shall begin to
run from the date of the insurer’s rejection of the
claim filed by the insured or beneficiary and not
from the time of loss.
b. In case the claim was denied by the insurer but the
insured filed a petition for reconsideration, the
prescriptive period should be counted from the
date the claim was denied at the first instance
and not from the denial of the reconsideration.(Sun
Life Office, Ltd. vs. CA, supra)
SUBROGATION
If the plaintiff’s property has been insured, and he has
received indemnity from the insurance company for the
injury or loss arising out of wrong or breach of contract
complained of, the insurance company shall be
subrogated to the rights of the insured against the
wrongdoer or the person who has violated the
contract.(NCC, Art. 2207)
The payment by the insurer to the insured operates as
an equitable assignment to the insurer of all the
remedies that the insured may have against the third
party whose negligence or wrongful act caused the loss.
The right of subrogation is not dependent upon, nor
does it grow out of, any privity of contract. It accrues
simply upon payment by the insurance company of the
insurance claim. (Malayan Insurance Co., Inc., vs. Alberto,
et al., G.R. No. 194320, February 1, 2012)
TRANSPORTATION LAW
COMMON CARRIERS
A common carrier is a person engaged in the business
of carrying or transporting passengers or goods or both,
by land, water, or air, for compensation, offering
services to the public. (Art. 1732, NCC)
Q: AM Trucking, a small company, operates two
trucks for hire on a selective basis. It caters only to
a few customers, and its trucks do not make
regular or scheduled trips. It does not have a
certificate of public convenience.
On one occasion, Reynaldo contracted AM to
13
transport, for a fee, 100 sacks of rice from Manila
to Tarlac. However, AM failed to deliver the cargo
because its truck was hijacked when the driver
stopped in Bulacan to visit his girlfriend.
May Reynaldo hold AM liable as a common carrier?
A: YES. The fact that AM Trucking operates only two
trucks for hire on a selective basis, caters only to a few
customers, does not make regular or scheduled trips,
and does not have a certificate of public convenience
are of no moment. The law does not distinguish
between one whose principal business activity is the
carrying of persons or goods or both and anyone
who does such carrying only as an ancillary activity;
between a person or enterprise offering
transportation service on a regular or scheduled basis
and one on an occasional, episodic or unscheduled
basis; and between a carrier offering its services to the
general public and one who offers services or solicits
business only from a narrow segment of the general
population. (De Guzman v. CA, G.R. No. L-47822
December 27, 1988)
Q: Spouses Dante and Leona Cruz lodged a
Complaint against Sun Holidays, Inc. with the RTC
for damages arising from the death of their son who
perished with his wife while on board the boat M/B
Coco Beach III that capsized en route to Batangas
from Puerto Galera, Oriental Mindoro where the
couple had stayed at Coco Beach Island Resort
owned by Sun Holidays.
Spouses contended that as a common carrier, it was
guilty of negligence in allowing M/B Coco Beach to
sail notwithstanding storm warning bulletins issued
by PAGASA. Sun Holidays denied being a common
carrier, alleging that its boats are not available to
the general public as they only ferry resort guests
and crew members.
Is Sun Holidays liable as a common carrier?
A: YES. Sun Holiday’s ferry services are so intertwined
with its main business as to be properly considered
ancillary thereto. The constancy of respondent’s ferry
services in its resort operations is underscored by its
having its own Coco Beach boats. And the tour packages
it offers, which include the ferry services, may be availed
of by anyone who can afford to pay the same. These
services are thus available to the public. (Spouses Dante
Cruz v. Sun Holidays, G.R. No. 18312, June 29, 2010)
EXTRAORDINARY DILIGENCE
Carriage of Goods Transport of
Passengers
Commencement
Commences from the
moment the person:
Commences from the
1. Purchases the ticket
time the goods are
from the carrier;
unconditionally placed in
2. Presents himself at
the possession of and
the proper place and in a
received by the carrier
proper manner to be
for transportation. (CC,
transported; and
Art. 1736)
3. With the intent to
board the conveyance.
Duration
1. GR: Continues until the 1. All persons who
goods are delivered, remain on the premises
actually or a reasonable time after
constructively, by the leaving the conveyance
carrier to the consignee are to be deemed
or to the person who has passengers, and what is
a right to receive them, a reasonable time or a
and even when they are reasonable delay within
temporarily unloaded or this rule is to be
 MERCANTILE LAW

stored in transit. (CC, Art.
1737)
XPN: The shipper or
owner had made use of
the right or stoppage in
transit. (Ibid.)
2. Continues 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 has been
given a reasonable
opportunity thereafter to
remove them or
otherwise dispose of
them. (CC, Art. 1738)
determined from all the
circumstances, and
includes a reasonable
time to see after his
baggage and prepare for
his departure. (La
Mallorca v. CA, G.R. No. L-
21486, May 14, 1966)
2. Carrier-passenger
relationship continues
until the passenger has
been landed at the port
of destination and has
left the vessel-owner’s
premises. The victim’s
presence in a vessel
after 1 hour from his
disembarkation is not
enough in order to
absolve the carrier from
liability in his death.
(Aboitiz Shipping Corp. v.
CA, GR No. 84458,
November 6, 1989)
the other vehicle at
fault
Culpa Contractual;
Direct and primary
The liability of the
common carrier and his
driver as well as the
Against the common
operator of the other
carrier at fault
vehicle and his driver is
joint and several. (J.
Dimaampao, citing Tiu v.
Arriesgado, G.R. No.
138060, September 1,
2004)
VIGILANCE OVER GOODS
GR: The common carrier is presumed to have been at
fault or to have acted negligently when the goods
transported are lost, destroyed, or deteriorated. (Art.
1735, NCC)
XPNs: When the same is due to any of the following
causes only: (FA2 – C O)

1. Fortuitous events (flood, storm, earthquake,

CONTINUING-OFFER RULE lightning, or other natural disaster or calamity).
Provided, the following conditions are present:
It is the duty of common carriers of passengers, a. Natural disaster was the proximate and only
including common carriers by railroad train, streetcar, cause;
or motorbus, to stop their conveyances for a reasonable b. Carrier exercised due diligence to prevent or
length of time in order to afford passengers an minimize loss before, during, and after the
opportunity to board and enter, and they are liable for occurrence of the natural disaster; and
injuries suffered by boarding passengers resulting from c. The common carrier has not negligently
the sudden starting up or jerking of their conveyances incurred delay in transporting the goods. (Art.
while they are doing so. (Dangwa v. CA, G.R. No. 95582, 1739-1740, NCC)
October 7, 1991)
2. Act of the public enemy in war, whether
CAUSES OF ACTION FOR FAILURE TO OBSERVE international or civil, provided:
DILIGENCE REQUIRED a. Act was the proximate and only cause; and
b. Carrier exercised due diligence to prevent or
PERSON WHO HAS BASIS OF CAUSE OF minimize loss before, during, and after the act.
CAUSE OF ACTION ACTION AGAINST THE (Art. 1739-1740, NCC)
COMMON CARRIER
Third person who Tort (extra-contractual 3. Act or omission of the shipper or owner of the
suffered damages negligence) goods, provided:
Breach of the contract of a. If proximate and only cause – exempting
Shipper of the goods
carriage (Culpa b. If contributory negligence – mitigating
damaged
Contractual)
Heir/s of the 4. The Character of the goods or defects in the packing
deceased or in the containers; provided, carrier exercised
Breach of the contract of
passengers or the due diligence to forestall or prevent loss. (Art 1742,
carriage (Culpa
passenger himself NCC)
Contractual)
for the injuries
sustained by him If the fact of improper packing is known to the
carrier or its servants, or apparent upon ordinary
CAUSE OF ACTION OF observation, but it accepts the goods
THE INJURED BASIS OF CAUSE OF notwithstanding such condition, it is not relieved
PASSENGER OR HIS ACTION from responsibility for loss or injury resulting
HEIRS, IF THE therefrom. (Southern Lines Inc., v. CA, GR No. L-
PASSENGER DIES: 16629, January 31, 1962)
Culpa criminal
5. Order or act of competent authority; provided, the
If the driver is convicted authority is with power to issue the order. (Art.
and it turns out that he is 1743, NCC)
insolvent, the heirs/
Against the negligent passengers may run after If the officer acts without legal process, the
driver the employer of the common carrier will be held liable. (Ganzon v. CA,
driver, pursuant to the GR No. L-48757, May 30, 1988)
employer’s subsidiary
liability under Article 103, In all cases other than those enumerated above, there is
in relation to Arts. 100 presumption of negligence even if there is an agreement
and 102, RPC. limiting the liability of the common carrier in the
Against the carrier Tort vigilance over the goods. (NCC, Art. 1752)
and driver operating
Shipper’s Load and Count

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 UST LAW PRE-WEEK NOTES 2018
Under a "Shipper's Load and Count" arrangement, the
shipper is solely responsible for the loading of the
container, while the carrier is oblivious to the contents
of the shipment. (Marina Port Services, Inc. v. American
Home Assurance Corporation, G.R. No. 201822, August 12,
2015, Del Castillo, J.)
DELAY IN THE DELIVERY OF GOODS
The carrier shall be liable for damages immediately and
proximately resulting from such neglect of duty. (Ibid;
Art. 1170, NCC)
In the absence of a special contract, a carrier is not an
insurer against delay in the transportation of goods. The
effects of delay are the following:
a. Excusable delay in carriage merely suspends and
generally does not terminate the contract of
carriage.
b. The carrier shall be made liable when vessel or
vehicle is unreasonably delayed.
c. Carrier remains duty bound to exercise
extraordinary diligence.
d. Natural disaster shall not free the carrier from
responsibility. (Dimaampao & Dumlao-Escalante,
2014)
CONTRIBUTORY NEGLIGENCE
IN CARRIAGE OF GOODS: If the shipper or owner
merely contributed to the loss, destruction or
deterioration of the goods, the proximate cause thereof
being the negligence of the common carrier, the latter
shall be liable for damages, which however, shall be
equitably reduced. (NCC, Art. 1741)
IN PASSENGERS: Contributory negligence is the failure
of a person who has been exposed to injury by the fault
or negligence of another, to use such degree of care for
his safety and protection an ordinarily prudent man
would use under the circumstances. (Martin, 1989,
citing Rakes v. Atlantic Gulf Co., G.R. No. 1719, January 23,
1907)
NOTE: Contributory negligence on the part of the
passenger does NOT justify the common carrier’s
exemption from liability. (Martin, 1989) It will only
mitigate the liability of the common carrier. (J.
Dimaampao)
STIPULATIONS LIMITING LIABILITY
Even if there is an agreement limiting the liability of the
common carrier in the vigilance over the goods, the
common carrier is still disputably presumed to have
been negligent in case of its loss, destruction or
deterioration. (NCC, Art. 1752)
A contract fixing a sum that may be recovered for the
loss, destruction, and deterioration is binding provided
it is:
a. Just and reasonable under the circumstances; and
b. Has been fairly and freely agreed upon.
LIABILITIES OF THE COMMON CARRIER
Acts of its employees
Common carriers are liable for the death of or injuries
to passengers through the NEGLIGENCE OR WILLFUL
ACTS of the former’s employees, although such
employees may have acted beyond the scope of their
authority or in violation of the orders of the common
carriers. The liability of the common carriers does NOT
cease upon proof that they exercised all the diligence of
15
a good father of a family in the selection and supervision
of their employees. (NCC, Art. 1759)
Acts of co-passengers or 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
carrier’s employees through the exercise of the
diligence of a good father of a family would have
prevented or stopped the act or omission. (NCC, Art.
1763)
Acts of criminals
GR: A common carrier is NOT absolved from liability
committed by thieves or robbers.
XPN: Where such thieves or robbers acted with grave or
irresistible threat, violence, or force.
NOTE: Hijacking is considered as force majeure where
three of the five hold-uppers were armed with firearms
and the robbers not only took away the truck and its
cargo but also kidnapped the driver and his helper. (De
Guzman v. CA, G.R. No. L-47822, December 22, 1988)
EXTENT OF LIABILITY FOR DAMAGES
Kinds of damages that may be recovered in case of
death of a passenger
1. An indemnity for the Death of the victim;
2. An indemnity for loss of Earning capacity of the
deceased;
3. Moral damages;
4. Exemplary damages;
5. Attorney's fees and expenses of litigation;
6. Interest in proper cases (Briñas v. People, G.R. No. L-
30309, November 25, 1983); and
7. Hospital and funeral expenses
In case of death of a passenger, the common carrier is
liable to pay P50, 000 as indemnity for the life of a
passenger. (Victory Liner v. Gammad, G.R. No. 159636,
November 25, 2004)
Carrier is NOT liable for exemplary damages where
there is no proof that it acted in a wanton, fraudulent,
reckless, oppressive or malevolent manner.
MORAL DAMAGES
GR: Moral damages are NOT recoverable for breach of
contract of carriage in view of Articles 2219-20 of the
Civil Code.
XPNs:
a. Where the mishap results in the death of the
passenger; and
b. Where it is proved that the common carrier was
guilty of fraud or bad faith, even if death does not
result.
(Darnes v. Quiñones, G.R. No. 206468, August 2, 2017,
Del Castillo, J.)
BILL OF LADING
It is a written acknowledgment of receipt of goods and
agreement to transport them to a specific place and to a
named person or to his order. (Unsworth Transport
International [Phils] v. CA, G.R. No. 166520, July 26, 2010;
1992, 1998 Bar)
Parties to a bill of lading
1. Shipper; and
 MERCANTILE LAW

2. Carrier Doctrine of inscrutable fault

NOTE: A consignee, although not a signatory to the
contract of carriage between the shipper and the
carrier, becomes a party to the contract by reason of
either:
a) the relationship of agency between the consignee
and the shipper/ consignor;
b) the unequivocal acceptance of the bill of lading
delivered to the consignee, with full knowledge of
its contents; or
c) availment of the stipulation pour autrui, i.e., when
the consignee, a third person, demands before the
carrier the fulfillment of the stipulation made by
the consignor/shipper in the consignee’s favor,
specifically the delivery of the goods/cargoes
shipped.
In collision of vessel, where fault is established but it
cannot be determined which of the two vessels were at
fault, both shall be deemed to have been at fault.
Doctrine of limited liability
It is also called the “no vessel, no liability doctrine”, it
provides that liability of ship owner is limited to ship
owner’s interest over the vessel. In case of loss, the ship
owner’s liability is also extinguished. Limited liability
likewise extends to ship’s appurtenances, equipment,
freightage, and insurance proceeds. This can be availed
only by the shipowner and the shipping agent.
Instances where doctrine of limited liability shall
NOT apply

(MOF Company, Inc., v. Shin Yang Brokerage Corporation, G.R. 1. Repairs and provisioning of the vessel before the
No. 172822, December 18, 2009, Del Castillo, J.) loss of the vessel; (CC, Art. 586)
2. Insurance proceeds. If the vessel is insured, the
THREE-FOLD CHARACTER OF A BILL OF LADING proceeds will go to the persons entitled to claim
from the shipowner; (Vasquez vs. CA, G.R. No. L-
1. As a receipt, it recites the date and place of 42926, Sept. 13, 1985)
shipment, describes the goods as to quantity, 3. Claims of the crew under the Workmen’s
weight, dimensions, identification marks and Compensation Act;
condition, quality, and value. 4. When the shipowner is guilty of fault or negligence;
2. As a contract, it names the contracting parties, 5. When the vessel is not abandoned; and
which include the consignee, fixes the route, 6. When vessel is not seaworthy.
destination, and freight rate or charges, and
stipulates the rights and obligations assumed by ACCIDENTS AND DAMAGES IN MARITIME
the parties. (Phoenix Assurance Co., Ltd. v. United COMMERCE
States Lines, G.R. No. L-24033, Feb. 22, 1968)
3. As a document of title, it regulates the relations Accidents in maritime commerce (CASA)
between a carrier and a holder of the same.
1. Collision
CHARTER PARTY 2. Averages
3. Shipwreck; and
A charter party is a contract by which an entire ship, or 4. Arrival under stress
some principal part thereof, is let by the owner to
another person for a specified time or use in General average vs. Particular average
consideration of the payment of freight. (Caltex v.
Sulpicio Lines, G.R. No. 131166, September 30, 1999) GENERAL AVERAGE PARTICULAR
AVERAGE
CLASSES OF CHARTER PARTY Damages or expenses Damages or expenses
deliberately caused in caused to the vessel or
1. Bareboat or demise - The ship owner gives order to save the vessel, cargo that did not inure
possession of the entire vessel to the charterer. In turn, its cargo or both from real to the common benefit,
the charterer supplies, equips, and mans the vessel. The and known risk. and borne by respective
charterer is the owner pro hac vice. owners.
Both the ship and cargo No common danger to
Negligence of the charterer gives rise to its liability to are subject to the same both the vessel and the
others. The charterer assumes the rights and liabilities danger cargo
of the owner to third parties who deal with the vessel. There is a deliberate Expenses and damages
sacrifice of part of the are not deliberately
2. Contract of affreightment- owner of the vessel vessel, cargo, or both made
leases a part or all of its space to haul goods for others Damage or expenses Did not inure to
Charterer is not regarded as owner. Ship owner retains incurred to the vessel, its common benefit and
ownership over the vessel. Ship owner remains liable cargo, or both, redounded profit of all persons
and carrier must answer for any breach of duty. to the benefit of the interested in the vessel
respective owners. and her cargo.
It can either be:
All those who have Only the owner of the
benefited shall satisfy the goods benefiting from
a. Time charter – Vessel is chartered for a particular average. the damage shall bear
time or duration. While the ship owner still retains
the expense of average.
possession and control of the vessel, the charterer
has the right to use all vessel’s facilities and
Requisites of general average(CD-PS)
designate vessel’s destination.
b. Voyage charter – Vessel is chartered for a carriage
1. Common danger present;
of goods from one or more ports of loading to one
2. Deliberate sacrifice of part of the vessel or cargo;
or more ports of unloading. An owner who retains
3. Successful saving of vessel and/or cargo; and
possession of the ship remains liable as carrier and
4. Proper procedure and legal steps.
must answer for loss or non-delivery of the goods
received for transportation. (Cebu Salvage Corp. v.
a. Assembly to be called by captain of all the
Philippine Home Assurance Corp., G.R. No. 150403,
cargo owners and other officers of the vessel;
January 25, 2007)
b. Deliberation;

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c. Resolution of the captain;
d. Entry of resolution in the logbook;
e. Delivery of the minutes of the meeting to the
maritime judicial authority of the first port of
arrival within 24 hours from arrival; and
f. Ratification by captain under oath.
(Dimaampao & Dumlao-Escalante, 2014)
Persons liable for the amount of loss
In general average: All persons having an interest in the
vessel and cargo therein at the time of the occurrence of
the average shall contribute. (Art. 812, CC)
The suit for loss or damage should be brought within
one year from:
1. Delivery of the goods, in case of damage; or
2. The date when the goods should have been
delivered, in case of loss.
NOTE: The one-year period is computed from the
delivery of goods to the operator and not to the
consignee. The parties may agree to extend the one-year
period to file a case under the COGSA. (Universal
Shipping Lines, Inc. v. Intermediate Appellate Court, G.R.
No. 74125, July 31, 1990)

In particular average: The owner of the things which
gave rise to the expenses or suffered the damage shall
bear the simple or particular averages. (Art. 810, CC)
Rules on collision of vessels
The prescriptive period for an action against a broker is
ten (10) years and not one year under the COGSA, since
the broker is not a carrier, charterer or holder of the bill
of lading. (Reyma Brokerage Inc. v. Philippine Home
Assurance Corporation, G.R. No. 93464, October 7, 1991)

a. Collision refers to the contact of two moving
vessels. If one vessel is moving while the other is
stationary, this is known as allision.
b. The vessel at fault shall indemnify the damages
sustained or losses incurred. (Art. 826, Code of
Commerce)
c. If both vessels are at fault, each shall be solidarily
liable for losses or damages to the cargoes. (Arts.
827 – 828, Code of Commerce)
Instances where there is NO liability under
COGSA(FDUD)
1. If the nature or value of goods knowingly and
fraudulently misstated by shipper;
2. If damage resulted from Dangerous nature of
shipment loaded without consent of carrier;
3. If Unseaworthiness not due to negligence; and
4. If Deviation was to save life or property at sea.

In this situation, the common carrier operating the Procedure and prescriptive period for filing
vessel is precluded from interposing the defense of maritime claims in coastwise carriage and
due diligence in the selection and supervision of its international carriage
employees in an action against it by a shipper of the
other colliding vessel. Coastwise International

Q: Two vessels figured in a collision resulting in (within the (foreign port to

considerable loss of cargo. The damaged vessels Philippines) Philippines)
were safely conducted to a port. Kim, a passenger
and Ruby, a shipper who suffered damage to his NOTICE OF DAMAGE (FILING OF CLAIM)
cargo, did not file maritime protest. Can Kim and
Ruby successfully maintain an action to recover
losses and damages arising from the collision? Condition precedent NOT a condition precedent
(2007 BAR) before filing case in before filing
court
A: Ruby, the shipper can successfully maintain an action
to recover losses and damages arising from the collision
notwithstanding his failure to file a maritime protest When the damage is
since the filing thereof is required only on the part of When damage to apparent, the claim should
Kim, who, being a passenger of the vessel at the time of goods is apparent, the be filed immediately upon
the collision, was expected to know the circumstances shipper must discharge of the goods
of the collision. Kim's failure to file a maritime protest
immediately file his
will therefore prevent him from successfully
maintaining an action to recover his losses and claim with the carrier
damages. (CC, Art 836)
When damage is not
CARRIAGE OF GOODS BY SEA ACT (COGSA) apparent clam should be
If not apparent, the filed within 3 days from
COGSA applies in terms of loss or damage of goods shipper must file his delivery
transported: claim within 24 hours
from delivery
1. To and from Philippine ports in foreign trade; and
2. To domestic trade when there is a paramount FILING OF CASE IN COURT (FILING OF ACTION)
clause in the contract.
Within 6 years if no bill Shipper has 1 year form
COGSA applies only in case of non-delivery or damage,
and not to misdelivery or conversion of goods. (Ang v. of lading has been date of delivery (delivered
American Steamship Agencies, Inc., G.R. No. L-22491, issued; or but damaged goods), or the
January 27, 1967) date when the vessel left
port, or from the date of
Amount of the carrier’s liability under the COGSA delivery to the arrastre
Within 10 years, if a (non-delivery or loss)
1. The liability limit is set at $500 per package or bill of lading has been within to file his case in
customary freight unless the nature and value of issued
such goods is declared by the shipper. court.
2. Shipper and carrier may agree on another
maximum amount, but not more than amount of
damage actually sustained.

17
 MERCANTILE LAW

NOTE: The one-year realm of Warsaw Convention. A cause of action based

prescriptive period does on tort did not bring the case outside the sphere of the
not apply to misdelivery or Warsaw Convention. (Lhuiller v. British Airways, GR No.
171092, March 15, 2010)
conversion.

Doctrine of combined or connecting services THE CORPORATION CODE

(BP BLG. 68)
The carrier which delivered the goods to the consignee
shall assume the obligations, rights and actions of those
who preceded him in the conveyance of the goods. Attributes of a Corporation [ALS– PAPI]
The shipper or consignee should proceed against the
one who executed the contract or against the others 1. It is an Artificial being
who received the goods without reservation. But even if 2. It is created by operation of Law
there is reservation, they are not exempted from 3. It enjoys the right of Succession
liabilities that they may have incurred by reason of their 4. It has the Powers, Attributes and Properties
own acts. (CC, Art. 373) expressly authorized by law or Incident to its
existence.
Remedy: The carrier may then file a third-party (Sec. 2, CC)
complaint against the one who is really responsible. The
carrier is an indispensable party. But the shipper or Distinguish the following classes of corporation.
consignee may sue all of them as alternative defendants.
As to existence of stocks
WARSAW CONVENTION
STOCK CORPORATION NON-STOCK
The WC applies to all international carriage of persons, CORPORATION
luggage or goods performed by aircraft for reward. It
applies equally to gratuitous carriage by aircraft It has capital stock All others are non-stock
performed by an air transport undertaking. (WC, Art. divided into shares and corporation
1[1]) is authorized to One where no part of its
distribute to the holders income is distributable
Limitations to the liability of air carriers
of such shares dividends as dividends to its
1. Carriage of persons – 250,000 francs for each or allotment of the members, trustees, or
passenger. Nevertheless, by special contract, the surplus profits on basis officers. Any profit which
carrier and the passenger may agree to a higher of the share held. (CC, it may obtain as an
limit of liability. Sec. 3) incident to operations
shall, whenever
NOTE: By special contract, the carrier and the necessary or proper, be
passenger may agree to a higher limit of liability.
used for furtherance of
(Alitalia v. IAC, G.R. No. 71929, December 4, 1990)
the purpose or purposes
2. Carriage of registered baggage and of cargo –250 for which the
francs per kilogram unless the passenger or corporation was
consignor has made, at the time when the package organized. (CC, Sec. 87)
was handed over to the carrier, a special
declaration of interest in delivery at destination
and has paid a supplementary sum if the case so As to how it is created and its function
requires.
3. Objects which the passenger takes charge himself – PRIVATE PUBLIC CORPORATION
5,000 francs per passenger. CORPORATION
Carrier is NOT entitled to the foregoing limit if the
damage is caused by willful misconduct or default on its Formed for some private Formed for the
part. (WC, Art. 25) purpose, benefit or end government of a portion
of the State for the
Where the loss of the baggage of a passenger was due to general good or welfare
the fault or recklessness of an airline company, the
limitation on the liability of airline companies under the If NOT created for If the corporation is
Warsaw Convention is not applicable. (Alitalia v. IAC, political or public created for political or
G.R. No. 71929, December 4, 1990)
purpose although whole public purpose
FILING OF CLAIM or substantially the connected with the
whole interest in the administration of
GR: Claim for damages must be brought within 2 years corporation belongs to government
reckoned from the date of arrival at the destination, or the State
from the date on which the aircraft ought to have
arrived, or from the date on which the carriage stopped,
otherwise, right to damages shall be extinguished. As to legal status

XPN: Where delaying tactics were employed by airline DE JURE DE FACTO CORPORATIO
itself to deny the passenger time to file his complaint. CORPORATION N BY
CORPORATIO
(United Airlines v. Uy, G.R. No. 127768, November 19, ESTOPPEL
N
1999)

NOTE: The allegation of willful misconduct resulting in Organized in A Corporation 1. All persons
a tort is insufficient to exclude the case from the accordance where there who assume to

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 UST LAW PRE-WEEK NOTES 2018

with the exists a flaw in its act as a church. It may be formed by the chief archbishop,
requirements incorporation. corporation bishop, priest, minister, rabbi or other presiding elder of
of the law. knowing it to such religious denomination, sect or church.
be without
authority to do NOTEL A corporation sole does not have any nationality
so shall be but for purposes of applying nationalization laws,
Requisites: liable as nationality is determined not by the nationality of its
NOTE: If there general presiding elder but by the nationality of its members,
is substantial 1. Organized partners for all constituting the sect in the Philippines.
compliance, a under a debts,
valid Law. liabilities and NATIONALITY OF CORPORATIONS
de jure
damages
corporation 2. Attempt in
incurred or How is the nationality of a corporation determined?
results. good faith to arising as a
(Dimaampao form a result. In Philippine jurisdiction, the nationality of a
and Escalante, corporation 2. One who corporation is primarily governed by the Place of
2017) according to assumes an Incorporation Test. This means that a corporation is
the obligation to considered a national of the country where it is
requiremen an ostensible incorporated regardless of the nationality of the
corporation as controlling stockholders. (Sec. 123, CC)
ts of the law
such, cannot
(Colorable resist In certain instances, however, the nationality of the
Compliance) performance corporation is determined by the Control Test.
thereof on the Nationality of the corporation is determined by the
ground that nationality of the controlling stockholders. This test is
there was in applied during: war; for wholly or partly nationalized
NOTE: fact no activities.
Issuance of corporation
Certificate (CC, Sec. 21) Grandfather Rule
of
Incorporati Where there is This rule is used to ascertain the Filipino equity in a
no third corporation engaged in nationalized and/or partly
on by SEC is
person nationalized areas of activities as provided for under the
a minimum involved and Constitution and other nationalization laws, where
requiremen the conflict corporate shareholders are present in the situation, by
t for the arises only attributing the nationality of the second or even
formation of among those subsequent tier of ownership to determine the
the assuming the nationality of the corporate shareholder.
corporation form of a
corporation In other words, by ascertaining the nationality of the
in good
who know that controlling stockholders of the investing-corporation.
faith. the
(Sundiang corporation If the percentage of Filipino ownership in the
Sr. & Aquino, has not been corporation or partnership is less than 60%, only the
2009) registered, number of shares corresponding to such percentage
there is NO shall be counted as of Philippine nationality. Under the
corporation by Strict Rule or Grandfather Rule Proper, the combined
estoppel. totals in the Investing Corporation and the Investee
(Lozano v. Corporation must be traced (i.e., “grandfathered”) to
3. Use of Judge Delos determine the total percentage of Filipino ownership.
corporate Santos, G. R. (SEC Opinion, 27 October 2011); (Dimaampao and
Powers - No. 125221, Escalante, 2017)
The June 19, 1997)
corporation What does “capital” mean in this constitutional
must have provision,
performed
the acts “Section 11, Article XII of the Constitution: No
which are franchise, certificate, or any other form of
peculiar to a authorization for the operation of a public utility
corporation shall be granted except to citizens of the Philippines
like or to corporations or associations organized under
entering the laws of the Philippines at least sixty per centum
into a of whose capital is owned by such citizens.”?
subscriptio
n For purposes of determining compliance [with the
agreement, constitutional or statutory ownership], the required
adopting percentage of Filipino ownership shall be applied to
by-laws, BOTH (a) the total number of outstanding shares of
and electing stock entitled to vote in the election of directors; AND
directors (b) the total number of outstanding shares of stock,
(Actual whether or not entitled to vote. (Roy III v. Herbosa, G.R.
User) No. 207246, April 18, 2017, EN BANC)

Corporation Sole Illustration:

One established for the purpose of administering and 1)

managing, as trustee, the affairs, property and
temporalities of any religious denomination, sect or ABC Corporation

19
 MERCANTILE LAW

(public utility)  Non-voting Preferred Shares – 100 (20%

Filipino; 80% Foreign)

XYZ Corp. Foreigner ABC Corporation is complaint. For purposes of

(60%) (40%) determining compliance, the required percentage of
Filipino ownership shall be applied to BOTH (a) the total
number of outstanding shares of stock entitled to vote in
Filipinos Foreigners the election of directors; AND (b) the total number of
(60%) (40%) outstanding shares of stock, whether or not entitled to
vote. (Roy III v. Herbosa, G.R. No. 207246, April 18, 2017,
Under the Control Test, ABC Corporation is compliant EN BANC)
with the foreign equity limitation. XYZ Corp. shall be
considered as wholly Filipino owned. Hence, both ABC and NOTE: In case of mixed shares issued by the corporation,
XYZ Corp. are considered as Philippine nationals. The it need not be 60% or more ALL THE WAY or in EVERY
application of the grandfather rule is not necessary CLASS OF SHARES issued, as long as the two
anymore. requirements mentioned above is complied with.

2) In the illustration above 80% of the voting shares and

60% of the outstanding capital stock is Filipino owned,
ABC Corporation hence compliant with the constitutional requirement.
(public utility)
DOCTRINE OF SEPARATE JURIDICAL PERSONALITY

XYZ Corp. Foreigner The doctrine of corporate juridical personality states

(60%) (40%) that a corporation is a juridical entity with legal
personality separate and distinct from those acting for
and in its behalf and, in general, from the people
Filipinos Foreigners comprising it. (Francisco v. Mallen Jr. G.R. No. 173169,
(50%) (50%) September 22, 2010)

ABC Corp. is not compliant. Since the Filipino equity in
the investing-corporation is less than 60%, it cannot be
considered as Philippine national. Hence, you apply the
grandfather rule, where only the shares that
correspond to the percentage owned by the Filipinos
must be registered as such, and the rest are foreign
owned.
Only 50% of the 60%equity of the investing corporation
shall be considered as owned by Filipino nationals.
3) Narra Nickel Case
Significance of the doctrine of separate personality
1. Liability for acts or contracts – As a general rule, the
obligation of the corporation is not the liability of
the stockholders, officers or directors. (1992,
1996, 2010 Bar)
A corporation may not, generally, be made to
answer for acts or liabilities of its stockholders or
those of the legal entities to which it may be
connected, and vice versa. (Cease vs. CA, G.R. No. L-
33172, October 18, 1979)

ABC Corporation 2. Right to bring actions – may bring civil and criminal
(public utility) actions in its own name in the same manner as
natural persons. (Art. 46, Civil Code)

XYZ Corp. Foreigner NOTE: Rights belonging to the corporation cannot

(60%) (40%)
Filipinos Foreigners
(60%) (40%)
In the case of Narra Nickel Mining v. Redmont (2014), the
Filipino subscriptions were not paid by them but
allegedly financed by foreign nationals. Hence the
Supreme Court applied in this case the grandfather rule,
since there is doubt as to the ownership of the shares
owned by Filipinos.
Although on its face, XYZ Corp. may be considered as
Philippine national, since there is doubt as to the Filipino
equity, you apply the grandfather rule, where only the
shares that correspond to the percentage owned by the
Filipinos must be registered as such, and the rest are
foreign owned.
In the example above, only 60% of the 60% (36%) shares
of the investing corporation shall be of Filipino equity.
Hence ABC Corp. is not compliant.
4) ABC Corp. – 300 outstanding capital stock
 Common shares – 100 (100% Filipino owned)
 Voting Preferred Shares – 100 (60% Filipino;
40% Foreign
be invoked by the stockholders (or directors and
officers) even if the latter owns substantial
majority of the shares of the shares in that
corporation and rights of the stockholders,
directors and officers cannot be invoked by the
corporation. (Stonehill vs. Diokno, G.R. 19550, June
19, 1967)
3. Right to acquire and possess property – property
conveyed to or acquired by the corporation is in
law the property of the corporation itself as a
distinct legal entity and not that of the stockholders
or members. (Art. 44[3], Civil Code)
NOTE: The interest of the stockholders over the
properties are merely inchoate. (Saw vs. CA, G.R. No.
90580, April 8, 1991; 1996, 2000 Bar)
4. Acquisition of jurisdiction – service of summons
may be made only on the president, general
manager, corporate secretary, treasurer or in-
house counsel. (Rules of Court, Rule 14, Sec. 11)
5. Changes in individual membership – corporation
remains unchanged and unaffected in its identity
by changes in its individual membership or
ownership of its stocks.
LIABILITY OF CORPORATION

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As to tort. A corporation may be held accountable for
tort when the act was committed by the officer or agent
under the express direction or authority from the
stockholders or members acting as a body or generally
from the directors as the governing body.
As to crime. If the crime is committed by a corporation
or other juridical entity, the directors, officers,
employees or other officers thereof responsible for the
offense shall be charged and penalized for the crime,
precisely because of the nature of the crime and the
penalty therefor. A corporation cannot be arrested and
imprisoned; hence, cannot be penalized for a crime
punishable by imprisonment. However, a corporation
may be charged and prosecuted for a crime if the
imposable penalty is fine; (forfeiture; revocation).
Even if the statute prescribes both fine and
imprisonment as penalty, a corporation may be
prosecuted and, if found guilty, may be fined. (Ching v.
Secretary of Justice, G.R. No. 164317, February 6, 2006)
RECOVERY OF MORAL DAMAGES
GR: A juridical person is, as a general rule, not entitled
to moral damages because, unlike a natural person, it
cannot experience physical suffering or such sentiments
as wounded feelings, serious anxiety, mental anguish or
moral shock
XPNs:
1. Article 2219 paragraph 7 of the Civil Code
expressly authorizes the recovery of moral
damages in cases of libel, slander or any other form
of defamation. This provision does not qualify
whether the plaintiff is a natural or juridical person.
Therefore, a juridical person such as the
corporation can validly complain for libel or any
other form of defamation and claim for moral
damages. (Filipinas Broadcasting Network, Inc. v.
AMEC-BCCM, G.R. No. 141994, January 17, 2005)
2. When the corporation has a reputation that is
debased, resulting in its humiliation in the business
realm. (Manila Electric Company v. T.E.A.M.
Electronics Corporation, et. al., G.R. No. 131723,
December 13, 2007)
DOCTRINE OF PIERCING THE CORPORATE VEIL
The Doctrine of Piercing the Corporate Veil is the
doctrine that allows the State to disregard for certain
justifiable reasons the notion that a corporation has a
personality separate and distinct from the persons
composing it.
Tests in determining the applicability of the
Doctrine of Piercing the Corporate Veil (ECAO)
1. When the corporation is used to defeat public
convenience as when the corporate fiction is used
as a vehicle for the evasion of an existing obligation;
(Equity Cases)
2. In fraud cases or when the corporate entity is used
to justify a wrong, protect fraud, or defend a crime;
(Control Test)
3. In Alter ego cases, where a corporation is merely a
farce since it is a mere alter ego or business conduit
of a person, or where the corporation is so
organized and controlled and its affairs are so
conducted as to make it merely an instrumentality,
agency, conduit or adjunct of another corporation.
(Timoteo H. Sarona v. National Labor Relations
Commission, Royale Security Agency, et al., G.R. No.
185280, January 18, 2012)
Where it appears that business enterprises are
owned, conducted and controlled by the same
parties, law and equity will disregard the legal
21
fiction that these corporations are distinct entities
and shall treat them as one. (Vicmar Development
Corp. v. Camilo Elarcosa, et al., G.R. No. 202215,
December 09, 2015, Del Castillo, J.)
4. The Objective test where the end result in piercing
the veil of corporate fiction is to make the
stockholders liable for debts and obligations of the
Corporation not to make the Corporation liable for
the debts and obligations of the stockholders.
(Umali v CA, G.R. No. 89561, September 13, 1990)
ALTER EGO THEORY/INSTRUMENTALITY THEORY
This theory espouses that the corporate entity is a mere
farce as it is the alter ego, business conduit or
instrumentality of a person or another entity. This
contemplates of:
1. Control, not mere majority or complete stock
control, but complete domination, not only of
finances but of policy and business practice in
respect to the transaction attacked so that the
corporate entity as to this transaction had at the
time no separate mind, will or existence of its own
(Instrumentality or Control test);
2. Such control must have been used by the defendant
to commit fraud or wrong, to perpetuate the
violation of a statutory or other positive legal duty,
or dishonest and unjust act in contravention of
plaintiff’s legal right; (Fraud test) and
3. The aforesaid control and breach of duty must have
proximately caused the injury or unjust loss
complained of (Harm test).(PNB v. Hydro
Resources Contractors Corp., G.R. Nos. 167530,
167561,and 167603 693 SCRA 294 March 13, 2013)
CORPORATE NAME
The SEC shall not approve the proposed corporate name
if:
1. There is already a prior right over the use of such
corporate name; and
2. The proposed name is either:
a) identical, or
b) deceptively or confusingly similar to that of
any existing corporation or to any other
name already protected by law; or
c) patently deceptive, confusing or contrary to
existing law. (Industrial Refractories
Corporation of the Philippines v. CA, et al., G.R.
No. 122174, October 3, 2002)
PRINCIPLE OF PRIORITY OF ADOPTION
Priority of adoption determines the right to the
exclusive use of a corporate name with freedom from
infringement. Further, to determine whether a given
corporate name is “identical” or “confusingly or
deceptively similar” with another entity’s corporate
name, the corporate names must be evaluated in their
entirety. (Lyceum of the Philippines v. CA, G.R. No.
101897, March 5, 1993)
DOCTRINE OF SECONDARY MEANING
It is the doctrine which states that a word or phrase
originally incapable of exclusive appropriation with
reference to an article on the market, because
geographically or otherwise descriptive, might
nevertheless have been used so long and so exclusively
by one producer with reference to his article that, in that
trade and to that branch of the purchasing public, the
word or phrase has come to mean that the article was
his product. (Philippine Nut Industry, Inc. v. Standard
Brands. Inc. G.R. No.L-23035, July 31, 1975)
 MERCANTILE LAW
BY-LAWS
Requisites for valid by-laws (CoMorO-RAG)
1. Must be consistent with the COrporation Code,
other pertinent laws and regulations;
2. Must not be contrary to MORals and public policy;
3. Must not impair Obligations and contracts or
property rights of stockholders;
4. Must be Reasonable;
5. Must be consistent with the charter or AOI;
6. Must be of General application and not directed
against a particular individual.
NOTE: Thirds persons are not bound by the provisions
of the by-laws of a corporation, unless they have
knowledge or notice of the by-laws at the time the
contract was executed. (China Banking Corp. v. CA, G.R.
No. 117604, March 26, 1997)
Effect of non-filing of the by-laws within the
required period
Failure to submit the by-laws within 30 days from
incorporation does not automatically dissolve the
corporation. It is merely a ground for suspension or
revocation of its charter after proper notice and
hearing, under Section 6(I) of PD 902-A. The
corporation is, at the very least, a de facto corporation
whose existence may not be collaterally attacked.
(Sawadjaan v. CA, G.R. No. 142284, June 8, 2005)
CORPORATE POWERS
Express or general powers of a corporation (Theory
of General Capacity)
A corporation has no power except those expressly
conferred upon it by the Corporation Code and those
that are implied or incidental to its existence. Every
corporation has the following general powers:
(SuSuCo-ABS-PEDRO)
1. To SUe and be sued;
2. Of Succession;
3. To adopt and use of Corporate seal;
4. To amend its Articles of Incorporation;
5. To adopt its By-laws;
6. For Stock corporations: issue and sell stocks to
subscribers and treasury stocks; for non-stock
corporations: admit members;
7. To Purchase, receive, take or grant, hold, convey,
sell, lease, pledge, mortgage and deal with real and
personal property, securities and bonds;
8. To Enter into merger or consolidation;
9. To make reasonable Donations for public welfare,
hospital, charitable, cultural, scientific, civic or
similar purposes, provided that no donation is
given to any:
a. Political party,
b. Candidate and
c. Partisan political activity.
10. To establish pension, Retirement, and other plans
for the benefit of its directors, trustees, officers and
employees – basis of which is the Labor code;
11. To exercise Other powers essential or necessary to
carry out its purposes. (CC, Sec. 36)
Specific powers of a corporation (Theory of Specific
Capacity).
The specific powers of a corporation are the following:
1. Extend or shorten corporate term (Sec. 37, CC);
2. Increase or decrease capital stock (Sec. 38, CC);
22
3. Incur, create or increase bonded indebtedness
(Sec. 38, CC); and
4. Deny pre-emptive rights (Sec. 39, CC);
5. Sell, lease, exchange, mortgage, pledge or
otherwise dispose of all or substantially all of its
property, assets, and goodwill (Sec. 40);
6. Purchase or acquire own shares (Sec. 41, CC);
7. Invest in another corporation or business or for
any purpose other than the primary purpose (Sec.
42, CC);
8. Declare dividends (Sec. 43,CC);
9. Enter into management contract (Sec. 44, CC);
ULTRA VIRES ACTS
An ultra vires act refers to an act outside or beyond
express, implied and incidental corporate powers. The
concept also includes those acts that may ostensibly be
within such powers but are, by general or special laws,
either proscribed or declared illegal. (Rural Bank of
Milaor v. Ocefemia, G.R. No. 137686, February 8, 2000)
GR: Acts which are clearly beyond the scope of the
corporation’s authority are null and void and cannot be
given any effect. (Gancayco v. City Government of Quezon
City, 658 SCRA 853, October 11, 2011)
XPN: Stockholders ratify the ultra vires acts. For valid
ratification, all the stockholders must give their consent
to such ratification; the rights of the State are not
involved; the creditors are not prejudiced; and the act or
contracts must be wholly executed. (Dimaampao and
Escalante, 2017)
DOCTRINE OF APPARENT AUTHORITY(2015 BAR)
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 possessing the
power to do those acts; and thus, the corporation will, as
against anyone who has in good faith dealt with it
through such agent, be estopped from denying the
agent’s authority.
Apparent authority is derived not merely from practice.
Its existence may be ascertained through:
1. The general manner in which the corporation
holds out an officer or agent as having the power to
act, or in other words, the apparent authority to act
in general, with which it clothes him; or
2. The acquiescence in his acts of a particular nature,
with actual or constructive notice thereof, within or
beyond the scope of his ordinary powers.
It is not the quantity of similar acts which establishes
apparent authority but the vesting of a corporate officer
with the power to bind the corporation. (Advance Paper
Corp. v. Arma Traders Cor.p, GR No. 176897, December
11, 2013)
TRUST FUND DOCTRINE
The subscribed capital stock of the corporation is a trust
fund for the payment of debts of the corporation which
the creditors have the right to look up to satisfy their
credits, and which the corporation may not dissipate.
The creditors may sue the stockholders directly for the
latter’s unpaid subscription.
Exceptions to the trust fund doctrine
The Code allows distribution of corporate capital only in
these instances:
1. Amendment of the AOI to reduce authorized capital
stock;
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2. Purchase of redeemable shares by the corporation
regardless of existence of unrestricted retained
earnings;
3. Dissolution and eventual liquidation of the
corporation;
4. Dividends from investments in wasting asset
corporation (one solely or principally engaged in
the exploitation of “wasting assets,” distributing
net proceeds from exploitation of their holdings,
such as mines, oil wells, without allowance or
deduction for depletion);
5. In close corporation, where there is a deadlock
(Sec. 104, CC)
6. Purchase own shares of stock
7. Payment for the fair value of the shares of
dissenting stockholders. (Dimaampao and
Escalante, 2017)
BUSINESS JUDGMENT RULE
Contracts intra vires entered into by the board of
directors are binding upon the corporation beyond the
interference of courts. The courts are barred from
intruding into business judgments of corporations,
when the same are made in good faith. (Ong v Tiu, G.R.
No. 144476. April 8, 2003)
NOTE: The director/trustee or officer is personally
and solidary liable if he:
1. Willfully and knowingly votes for or assent to
patently unlawful acts of the corporation (Sec. 31,
CC);
2. Is guilty of gross negligence or bad faith in
directing the affairs of the corporation (Sec. 31,
CC);
3. Acquires any personal or pecuniary interest in
conflict with his duty as such director or trustee
(Sec. 31,CC);
4. Acquires a business opportunity which should
belong to the corporation, thereby obtaining
profits to the prejudice of such
corporation(Doctrine of Corporate
Opportunity)(Sec. 34,CC);
5. Consents to the issuance of watered stocks or who,
having knowledge thereof, did not forthwith file
with the corporate secretary his written objection
thereto;
6. Contractually agrees or stipulates to hold himself
personally and solidarily liable with the
Corporation;
7. Is made, by specific provision of law, personally
liable for his corporate action. (MAM Realty
Development Corp. v. NLRC, 244 SCRA 797, June 2,
1995 in Dimaampao and Escalante, 2017)
BOARD OF DIRECTORS/TRUSTEES/OFFICERS
In the November 2010 stockholders’ meeting of
Greenville Corporation, 8 directors were elected to
the board. The directors assumed their posts in
January 2011. Since no stockholders' meeting was
held in November 2011, the 8 directors served in a
holdover capacity and thus continued discharging
their powers.
In June 2012, 2 of Greenville Corporation's directors
– Director A and Director B – resigned from the
board. Relying on Section 29 of the Corporation
Code, the remaining 6 directors elected 2 new
directors to fill in the vacancy caused by the
resignation of Directors A and B.
Stockholder X questioned the election of the new
directors, initially, through a letter-complaint
addressed to the board, and later (when his letter-
complaint went unheeded), through a derivative
suit filed with the court. He claimed that the vacancy
23
in the board should be filled up by the vote of the
stockholders of Greenville Corporation. Greenville
Corporation's directors defended the legality of
their action, claiming as well that Stockholder X's
derivative suit was improper.
Rule on the issues raised. (2013 BAR)
The remaining directors of the corporation’s Board,
even if still constituting a quorum, cannot elect another
director to fill in a vacancy caused by the resignation of
a hold-over director. Section 23 of the CC means 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 member’s election to
the Board and until his successor’s election and
qualification – is not part of the director’s
original term of office, nor is it a new term; the holdover
period, however, constitutes part of
his tenure. Corollary, when an incumbent member of
the board of directors continues to serve in a holdover
capacity, it implies that the office has a fixed term, which
has expired, and the incumbent is holding the
succeeding term. With the expiration of term of office, a
vacancy resulted which, by the terms of Section 29 of the
Corporation Code, must be filled by the stockholders of
VVCC in a regular or special meeting called for the
purpose. His resignation as a hold-over director did not
change the nature of the vacancy; the vacancy due to the
expiration of the term had been created long before his
resignation. (Valle Verde Country Club, Inc., et al., v.
Africa, G.R. No. 151969, September 4, 2009)
The derivative suit was improper. In a derivative suit,
the corporation, not the individual stockholder, must be
the aggrieved party and that the stockholder is suing on
behalf of the corporation. What stockholder X is
asserting is his individual right as a stockholder to elect
the two directors. The case partake more of an election
contest under the rules on intra-corporate controversy.
(Legaspi Towers 300, Inc. v. Muer, G.R. No. 170783, June
18, 2012)
CONTRACTS
Briefly discuss the doctrine of corporate
opportunity. (2005 BAR)
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. (CC, Sec. 34)
However, if such act is ratified by a vote of the
stockholders representing at least 2/3 of the
outstanding capital stock, the director is excused from
remitting the profit realized. (ibid)
Chito Santos is a director of both Platinum
Corporation (PLATINUM) and KWIK Silver
Corporation (KWIK). He owns 1% of the outstanding
capital stock of PLATINUM and 40% of KWIK.
PLATINUM plans to enter into a contract with KWIK
that will make both companies earn very
substantial profits. The contract is presented at the
respective board meetings of PLATINUM and KWIK.
1. In order that the contract will not be voidable,
what conditions will have to be complied with?
Explain.
2. If these conditions are not met, how may this
contract be ratified? Explain. (1995 BAR)
1. At the meeting of the Board of Directors of
PLATINUM to approve the contract, Chito Santos
would have to make sure that:
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a) His presence as director at the meeting is not
necessary to constitute a quorum for such
meeting;
b) His vote is not necessary for the approval of
the contract; and
c) The contract is fair and reasonable under the
circumstances.
At the meeting of the Board of Directors of KWIK to
approve the contract, Chito would have to make sure
that:
a) There is no fraud involved; and
b) The contract is fair and reasonable under the
circumstances.
2. If the conditions relating to quorum and required
number of votes are not met, the contract must be
ratified by the vote of stockholders representing at
least 2/3 of the outstanding capital stock in a
meeting called for the purpose. Furthermore, the
adverse interest of Chito in the contract must be
disclosed and the contract is fair and reasonable.
Explain the contracts between corporations with
interlocking directors.
A contract between two or more corporations having
interlocking directors shall not be invalidated on that
ground alone. Provided that:
1. Contract is not fraudulent;
2. Contract is fair and reasonable under the
circumstances; and
3. If the interest of the interlocking director in one
corporation or corporations is merely nominal (not
exceeding 20% of the outstanding capital stock), he
shall be subject to the provisions of Sec. 32 insofar
as the latter corporation or corporations are
concerned. (CC, Sec. 33)
EXECUTIVE COMMITTEE
Corporate powers are exercised only by the board,
except when delegated to an executive committee.
What are the corporate powers that may not be
delegated?
The executive committee by a vote of majority may
exercise such powers as may be delegated to it.
However, the following cannot be delegated:
a) Approval of any action for which shareholders’
approval is also required;
b) Filling of vacancies in the board;
c) Adopt, amend or repeal by-laws;
d) Amend or repeal of any resolution of the board
which by its express terms is not so amendable or
repealable; and
e) Distribution of cash dividends to the shareholders.
(Sec. 35, CC)
STOCKHOLDERS AND MEMBERS
Rights of a stockholder and member (1996 BAR)
1. Management Right:
a. To attend and vote in person or by proxy at a
stockholders’ meetings (Secs. 50, 58);
b. To elect and remove directors (Secs. 24, 28);
c. To approve certain corporate acts (Sec. 58);
d. To adopt and amend or repeal the by-laws or
adopt new by-laws (Secs. 46, 48);
e. To compel the calling of the meetings (Sec. 50);
f. To enter into a voting trust agreement (Sec.
59);
g. To have the corporation voluntarily dissolved
(Secs. 118, 119).
24
2. Proprietary rights
a. To transfer stock in the corporate book (Sec.
63);
b. To receive dividends when declared (Sec. 43);
c. To the issuance of certificate of stock or other
evidence of stock ownership ( Sec. 64);
d. To participate in the distribution of corporate
assets upon dissolution (Sec. 118, 119);
e. To pre-emption in the issue of shares (Sec. 39).
3. Remedial rights
a. To inspect corporate books (Sec. 74);
b. To recover stock unlawfully sold for
delinquent payment of subscription (Sec. 69);
c. To be furnished with most recent financial
statements or reports of the corporation’s
operation (Sec. 74, 75);
d. To bring suits (derivative suit, individual suit,
and representative suit);
e. To demand payment in the exercise of
appraisal right (Secs. 41, 81).
VOTING TRUST AGREEMENT
A VTA is an agreement whereby one or more
stockholders transfer their shares of stocks to a trustee,
who thereby acquires for a period of time the voting
rights (and/or any other specific rights) over such
shares; and in return, trust certificates are given to the
stockholder/s, which are transferable like stock
certificates, subject, to the trust agreement.
Its principal purpose is to acquire control of the
corporation.
It is the trustee of the shares who acquires legal title to
the shares under the voting trust agreement and thus
entitled to the right to vote and the right to be elected in
the board of directors while the trustor-stockholder has
the beneficial title which includes the right to receive
dividends. (Lee v. CA, G.R. No. 93695, February 4, 1992)
RIGHT OF APPRAISAL (2007 Bar)
It refers to the right of the stockholder to demand
payment of the fair value of his shares, after dissenting
from a proposed corporate action involving a
fundamental change in the charter or articles of
incorporation in the cases provided by law. (De Leon,
2010)
NOTE: Upon demand, all rights pertaining to a
stockholder shall be deemed suspended.
The corporation need not pay the value of the shares of
a dissenting stockholder if at the time of the demand, the
corporation has no unrestricted retained earnings. No
payment shall be made to any dissenting stockholder
unless the corporation has unrestricted retained
earnings in its books to cover the payment. The trust
fund doctrine backstops the requirement of
unrestricted retained earnings to fund the payment of
the shares of stocks of the withdrawing stockholders.
The fact that the Corporation subsequent to the demand
for payment and during the pendency of the collection
case posted surplus profit did not cure the prematurity
of the cause of action. (Philip Turner, et al., v. Lorenzo
Shipping Corp., G.R. No. 157479, November 24, 2010)
PRE-EMPTIVE RIGHT
It is the preferential right of shareholders to subscribe
to all issues or disposition of shares of any class in
proportion to their present shareholdings. (CC, Sec. 39)
Its purpose is to enable the shareholder to retain his
proportionate control in the corporation and to retain
his equity in the surplus.
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REMEDIAL RIGHTS
Actions that the stockholders or members can bring
1. Derivative suit – suit by a shareholder to enforce a
corporate cause of action on behalf of the
corporation in order to protect or vindicate its
rights when its officials refuse to sue, or are the
ones to be sued, or hold control of it. (Forest Hills
Golf and Country Club, Inc. v. Fil- Estate Properties,
Inc., G.R. No. 206649, July 20, 2016, Del Castillo, J.)
2. Individual suit – an action brought by a stockholder
against the corporation for direct violation of his
contractual rights as such individual stockholder,
such as the right to vote and be voted for, the right
to share in the declared dividends, the right to
inspect corporate books and records, and others.
3. Representative suit – one brought by a person in his
own behalf and on behalf of all similarly situated.
Requisites for the existence of a derivative suit.(C-
SENA)
1. Corporate cause of action: the cause of action must
devolve upon the corporation itself; the
wrongdoing or harm having been caused to the
corporation and not to the particular stockholder
brining the suit (Reyes v. Hon. RTC of Makati Br. 142,
G.R. No. 165744, August 11, 2008);
2. Stockholder: the party bringing the suit must be a
stockholder
a. At the time the acts or transactions subject of
the action occurred and
b. at the time the action was filed
NOTE: if the cause of action is continuing in nature,
the only requisite is that the party is a stockholder
at the time the action was filed. (Dean Divina’s
Lecture, April 29, 2015)
3. Exhaustion of all intra-corporate remedies
available under the AOI, By-Laws, laws or rules
governing the corporation or partnership to obtain
the relief he desires;
4. Not a Nuisance or Harassment suit;
5. Appraisal right is not available(Rule 8 of the Interim
Rules of Procedure Governing Intra-Corporate
Controversies, cited in Anthony S. Yu, et al., v. Joseph
S. Yukayguan, et al., G.R. No. 177549, June 18, 2009)
NOTE: A derivative suit is an intra-corporate
controversy hence under the jurisdiction of the RTC
acting as a special commercial court.
WATERED STOCK
A watered stock is a stock issued in exchange for cash,
property, share, stock dividends, or services lesser than
its par value or issued value. (CC, Sec. 65)
Watered stocks can either be par or no par value shares.
The watered stocks refer only to original issue of
stocks but not to a subsequent transfer of such stocks
by the corporation, for then it would no longer be an
“issue” but a sale thereof.(De Leon, 2010, citing Rochelle
Roofing Co. v. Burley, 115 NE 478)Hence, treasury shares
are not subject to the prohibition on the issuance of
watered stocks.
DISSOLUTION
It is the extinguishment of the franchise of a corporation
and the termination of its corporate existence.
(Sundiang Sr. & Aquino, 2009)
Two legal steps in corporate dissolution
25
1. The termination of the corporate existence at least
as far as the right to go on doing ordinary business
is concerned;
2. The winding up of its affairs, the payment of its
debts, and the distribution of its assets among the
shareholders or members and other persons
interested. After winding up, the existence of the
corporation is terminated for all purposes.
Intra-corporate disputes remain even when the
corporation is dissolved. The dissolution of the
corporation simply prohibits it from continuing its
business. However, despite such dissolution, the parties
involved in the litigation are still corporate actors. The
dissolution does not automatically convert the parties
into total strangers or change their intra-corporate
relationships. Neither does it change or terminate
existing causes of action, which arose because of the
corporate ties between the parties. (Aguirre II v. FQB+7,
Inc., et al., G.R. No. 170770, January 9, 2013, Del Castillo,
J.)
How are corporations dissolved?
a) Voluntarily;
b) Involuntarily;
c) By shortening corporate term; and
d) Expiration of the term. (dimaampao and escalante,
2017)
VOLUNTARY DISSOLUTION
a) By the vote of the BOD/ BOT and the stockholders/
members where no creditors are affected (CC, Sec.
118);
b) By the judgment of the SEC after hearing of petition
for voluntary dissolution, where creditors are
affected (CC, Sec. 119);
c) By amending the AOI to shorten the corporate term
(CC, Sec. 120);
d) In case of a corporation sole, by submitting to the
SEC a verified declaration of the dissolution for
approval (CC, Sec. 115);
e) Merger or consolidation
INVOLUNTARY DISSOLUTION
a) By expiration of corporate term provided for in the
AOI (CC, Sec. 11);
b) By legislative enactment
c) By failure to formally organize and commence the
transaction of its business within 2 years from the
date of incorporation (CC, Sec. 22);
d) By order of the SEC on grounds under existing laws
(CC, Sec. 121);
e) Judicial decree on Quo Warranto Proceeding (CC,
Sec. 20).
LIQUIDATION
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. (Sundiang Sr. & Aquino, 2014)
Methods of liquidation
1. By the corporation itself or its board of directors or
trustees (CC , Sec. 122 [1]);
2. By a trustee to whom the assets of the corporation
had been conveyed. (CC, Sec. 122[2]) (Board of
Liquidators v. Kalaw, G.R. No. L-18805, Aug. 14,
1967);
3. By a management committee or rehabilitation
receiver appointed by SEC. (CC, Sec. 119)
 MERCANTILE LAW
Corporate life does not cease to exist immediately
upon dissolution
It shall continue as a body corporate for 3 years from the
time of dissolution, for the purpose of prosecuting and
defending suits by or against it and enabling it to settle
and close its affairs, to dispose of and convey its
property and to distribute its assets, but not for the
purpose of continuing the business for which it was
established. (Dimaampao and Escalante, 2017)
CONVEYANCE TO A TRUSTEE WITHIN THE 3-YEAR
PERIOD
At anytime during the 3-year period for liquidation, said
corporation is authorized and empowered to convey all
of its property to trustees for the benefit of its
stockholders, members, creditors and other persons in
interest.
From and after any such conveyance by the corporation
of its property in trust for the benefit of its stockholders,
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. (par. [2], Sec. 122, CC)
Meaning of trustee
The word “trustee” as used in the law must be
understood in its general concept. It has been held that
a counsel who prosecuted and defended the interest of
a corporation and who in fact appeared in behalf of the
corporation before and after its dissolution by
amendment of its articles of incorporation may be
considered a trustee of the corporation at least with
respect to the matter in litigation only. The purpose in
the transfer of the assets of the corporation to a trustee
upon its dissolution is more for the protection of its
creditors and stockholders. The appointment of said
counsel can be considered a substantial compliance.
(Gelano v. CA, G.R. No. L- 39050, February 24, 1981)
CORPORATE REHABILITATION
REHABILITATION
It refers to the restoration of the debtor to a condition of
successful operation and solvency, if it is shown that its
continuance of operation is economically feasible and
its creditors can recover by way of the present value of
payments projected in the plan, more if the debtor
continues as a going concern than if it is immediately
liquidated.[Sec. 4(gg), FRIA]
What is the nature of rehabilitation proceedings?
Rehabilitation proceedings are summary and non-
adversarial in nature, and do not contemplate
adjudication of claims that must be threshed out in
ordinary court proceedings.
The jurisdiction of the rehabilitation court is over claims
against the debtor that is under rehabilitation, not over
claims by the debtor against its own debtors or against
third parties. The corporation under rehabilitation must
file a separate action against its debtors/insurers to
recover whatever claim it may have against them. (Steel
Corp. v. Mapfre Insular Insurance Corp., G.R. No. 201199,
October 16, 2013, in Divina, 2014)
CRAM-DOWN CLAUSE
Section 23. Approval of the Rehabilitation Plan. – The
court may approve a rehabilitation plan over the
opposition of creditors, holding a majority of the total
liabilities of the debtor if, in its judgment, the
26
rehabilitation of the debtor is feasible and the
opposition of the creditors is manifestly unreasonable.
(Sec. 23, Rule 4, Interim Rules of Procedure on Corporate
Rehabilitation)
This provision, which is currently incorporated in the
FRIA, is necessary to curb the majority creditors’ natural
tendency to dictate their own terms and conditions to
the rehabilitation, absent due regard to the greater long-
term benefit of all stakeholders. Otherwise stated, it
forces the creditors to accept the terms and conditions
of the rehabilitation plan, preferring long-term viability
over immediate but incomplete recovery. (BPI v. Sarabia
Manor Hotel, G.R. no. 175844, July 29, 2013)
NON-STOCK CORPORATION
It is one where no part of its income is distributable as
dividends to its members, trustees or officers. Any profit
which it may obtain as an incident to its operations shall
whenever necessary or proper, be used in furtherance
of the purpose or purposes for which it was organized.
(CC, Sec. 87)
Characteristics of a non-stock corporation
1. It does not have capital stock divided into shares;
2. No part of its income during its existence is
distributable as dividends to its members, trustees,
or officers;
3. As a general rule, it is not empowered to engage in
business with the object of making income or
profits directly or indirectly. However, it is not
prohibited to make income or profits as an incident
to its operation (CC, Sec. 87);
4. There is non-transferability of membership (CC,
Sec. 90);
5. The right to vote of members may be limited,
broadened, or even denied in the AOI or the by-
laws (CC, Sec. 89);
6. Non-stock corporations may, through their articles
of incorporation or their by-laws designate their
governing boards by any name other than as BOT
(CC, Sec. 138);
7. By-laws may provide that the members may hold
their meetings at any place even outside the place
where the principal office of the corporation is
located, provided that such place is within the
Philippines (CC, Sec. 93). A non-stock corporation is
not allowed to distribute any of its assets or any
incidental income or profit made by the
corporation during its existence;
8. Non-availability of conversion into stock
corporation. (SEC Opinion, February 24, 1989)
FOREIGN CORPORATIONS
A foreign corporation is one, 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.
(CC, Sec. 123)
Discuss the underlying reason in requiring foreign
corporation to obtain license to do business in the
Philippines.
The purpose of the law is to subject the foreign
corporation doing business in the Philippines to the
jurisdiction of the courts.
A foreign corporation doing business in the Philippines
with a license may sue and can be sued in the
Philippines. If it is doing business without a license, it
cannot sue but may be sued in the Philippines. (Sec. 133,
CC)
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A foreign corporation not doing business, but merely
transacts in an isolated transaction or on a cause of
action entirely independent of its business transaction,
need not obtain a license and may sue and be sued in our
courts.
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 corporation’s corporate
personality in a suit brought before Philippine courts.
(Agilent Technologies Singapore [Pte.] Ltd. V. Integrated
Silicon Technology Philippines Corporation, G.R. No.
154618, 14 April 2004, in Dimaampao and Escalante,
2017)
DOCTRINE OF DOING BUSINESS
Meaning of “doing business in the Philippines”
under the Foreign Investment Act of 1991 (FIA)
(1998, 2016 BAR)
The phrase "doing business in the Philippines" under
the FIA include:
1. Soliciting orders, service contracts, opening
offices, whether called "liaison" offices or
branches; appointing representatives or
distributors domiciled in the Philippines;
2. Onewho in any calendar year stay in the
country for a period or periods totalling 180
days or more; participating in the
management, supervision or control of any
domestic business, firm, entity or corporation
in the Philippines; and
3. 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
NOTE: Passive equity investment shall not be construed
as doing business.
XPN: The phrase "doing business: shall NOT be deemed
to include mere 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. (2016 Bar)
Jurisdictional tests of “doing or transacting business
in the Philippines” for foreign corporations
1. Twin Characterization Test
a. Continuity Test – Doing business implies a
continuity of commercial dealings and
arrangements, and contemplates 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.
b. Subsequent 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 (Sundiang
Sr. & Aquino, 2009)
2. Contract Test - Whether the contracts entered into
by the foreign corporation, or by an agent acting
27
under the control and direction of the foreign
corporation, are consummated in the Philippines.
NOTE: Actual transaction of business within the
Philippine territory is an essential requisite for the
Philippines to acquire jurisdiction over a foreign
corporation and thus require the foreign corporation to
secure a Philippine business license. (B. Van Zuiden
Bros., Ltd. v. GTVL Manufacturing Industries, Inc., G.R. No.
147905, May 28, 2007)
Test for determining if an unlicensed foreign
corporation is doing business in the Philippines
(2002 BAR)
The test is whether or not the unlicensed foreign
corporation has performed an 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 corporation.
A foreign corporation which is not licensed to do
business in the Philippines is not absolutely
incapacitated from filing a suit in local courts
Only when that foreign corporation is “transacting” or
“doing business” in the country will a license be
necessary before it can institute suits. It may, however,
bring suits on isolated business transactions, which is
not prohibited under Philippine law. Thus, a foreign
insurance company may sue in Philippine courts upon
the marine insurance policies issued by it abroad to
cover international-bound cargoes shipped by a
Philippine carrier, even if it has no license to do business
in this country. It is the act of engaging in business
without the prescribed license which bars a foreign
corporation from access to our courts. (Aboitiz Shipping
Corp. v. Insurance Co. of North America, G.R. No. 168402,
August 6, 2008, in Divina, 2010)
Any foreign corporation not doing business in the
Philippines may maintain an action in our courts upon
any cause of action, provided that the subject matter and
the defendant are within the jurisdiction of the court. It
is not the absence of the prescribed license but
"doing business" in the Philippines without such
license which debars the foreign corporation from
access to our courts. In other words, although a foreign
corporation is without license to transact business in
the Philippines, it does not follow that it has no capacity
to bring an action. Such license is not necessary if it is
not engaged in business in the Philippines. (Columbia
Pictures v. CA, G.R. No. 110318, August 28, 1996)
MERGER AND CONSOLIDATION
GR: Where one corporation sells or otherwise transfers
all of its assets to another corporation, the latter is not
liable for the debts and liabilities of the transferor.
XPNs:
1. Where the purchaser expressly or impliedly agrees
to assume such debts;
2. Where the transaction amounts to a consolidation
or merger of the corporations;
3. Where the purchasing corporation is merely a
continuation of the selling corporation; and
4. Where the transaction is entered into fraudulently
to escape liability for such debts. (Edward J. Nell Co.
v. Pacific Farms, Inc., G.R. No. L-20850, November 29,
1965)
The Nell Doctrine states the general rule that the
transfer of all the assets of a corporation to another shall
 MERCANTILE LAW
not render the latter liable to the liabilities of the
transferor. If any of the above-cited exceptions are
present, then the transferee corporation shall assume
the liabilities of the transferor.
The legal basis of the last in the four (4) exceptions to
the Nell Doctrine, where the purchasing corporation is
merely a continuation of the selling corporation, is
challenging to determine. Dean Cesar Villanueva
explained that this exception contemplates the
“business-enterprise transfer.” In such transfer, the
transferee corporation’s interest goes beyond the assets
of the transferor’s assets and its desires to acquire the
latter’s business enterprise, including its goodwill.
Section 40 suitably reflects the business-enterprise
transfer under the exception of the Nell Doctrine
because the purchasing or transferee corporation
necessarily continued the business of the selling or
transferor corporation. Given that the transferee
corporation acquired not only the assets but also the
business of the transferor corporation, then the
liabilities of the latter are inevitably assigned to the
former. Section 40 refers to the sale, lease, exchange or
disposition of all or substantially all of the corporation's
assets, including its goodwill. The sale under this
provision does not contemplate an ordinary sale of all
corporate assets; the transfer must be of such degree
that the transferor corporation is rendered incapable of
continuing its business or its corporate purpose.
The purpose of the business-enterprise transfer is to
protect the creditors of the business by allowing them a
remedy against the new owner of the assets and
business enterprise. Otherwise, creditors would be left
“holding the bag,” because they may not be able to
recover from the transferor who has “disappeared with
the loot,” or against the transferee who can claim that he
is a purchaser in good faith and for value. Based on the
foregoing, as the exception of the Nell doctrine relates to
the protection of the creditors of the transferor
corporation, and does not depend on any deceit
committed by the transferee corporation, then fraud is
certainly not an element of the business enterprise
doctrine. Indeed, the transferee corporation may inherit
the liabilities of the transferor despite the lack of fraud
due to the continuity of the latter’s business. (Y-I Leisure
Philippines, Inc. v. Yu, G.R. No. 207161, September 18,
2015)
What is meant by a de facto merger? Discuss (2016
BAR)
De facto merger means that a corporation called the
acquiring corporation acquired the assets and liabilities
of another corporation in exchange for equivalent value
of shares of stock of the acquiring corporation.
NOTE: There is no such thing as de facto merger in the
present Corporation Code.
A merger does not become effective upon the mere
agreement of the constituent corporations. All the
requirements specified in the law must be complied
with in order for merger to take effect. Section 79 of the
Corporation Code further provides that the merger shall
be effective only upon the issuance by the SEC of a
certificate of merger.(Bank of Commerce v. Radio
Philippines Network Inc., G.R. No. 195615, April 21, 2014)
SECURITIES REGULATION CODE
The SRC is the law that regulates securities (its issuance,
distribution and sale) and the person who deals with
such securities. It is enacted to protect the public from
unscrupulous promoters, who stake business or
28
venture claims which have really no basis, and sell
shares or interests therein to investors. The SRC also
serves to protect investors, promote investor
confidence, and stabilize the financial markets.
SECURITIES REQUIRED TO BE REGISTERED
Securities are shares, participation or interests in a
corporation or in a commercial enterprise or profit-
making venture and evidenced by a certificate, contract,
instrument, whether written or electronic in character.
It includes: (DO DIET)
1. Debt instruments – bonds, debentures, notes,
evidence of indebtedness, asset-backed securities
2. Other instruments as may in the future be
determined by the SEC.
3. Derivatives– options and warrants
4. Investments instruments – Investment contracts,
fractional undivided interests in oil, gas, or other
mineral rights
5. Equity instruments – Shares of stock, certificates of
interest or participation in a profit sharing
agreement, certificates of deposit for a future
subscription, proprietary or non-proprietary
membership certificates in corporations.
6. Trust instruments – Certificates of assignments,
certificates of participation, trust certificates,
voting trust certificates or similar instruments.
(SRC, Sec. 3;1996 BAR)
Test on determining whether or not it is a security:
Does it represent a share, participation, or interest in a
commercial enterprise or any profit making venture? If
yes, then, it is a security. If it is a security, then, it cannot
be sold, or offered for sale or distribution within the
Philippines without a registration statement duly filed
with and approved by the SEC. (Divina, 2014)
Requirement before securities are sold or offered
for sale or distribution within the Philippines
They are required to be registered with and approved by
the SEC. Registration also includes the disclosure to SEC
of all material and relevant information about the issuer
of the security. Prior to the sale, the information on the
securities, in such form and with such substance as the
SEC may prescribe, shall be made available to each
prospective purchaser. (SRC, Sec. 8)
In Securities Law, what is a shortswing transaction?
A shortswing is a transaction where a person buys
securities and sells or disposes of the same within a
period of six months.
PROHIBITIONS ON FRAUD, MANIPULATIONS
AND INSIDER TRADING
Explain the manipulation of security prices. (2001
BAR)
The price of securities should be dictated by market
forces. It cannot be pegged or stabilized. The following
acts are considered as manipulation of security prices
and are therefore prohibited:
1. Transactions intended to create a false or
misleading appearance of active trading in any
listed security traded in an Exchange or any other
trading market:
a. Wash Sale – is a transaction in which there is
no genuine change in the beneficial (or actual)
ownership of a security;
b. Matched Sale – is a change of ownership in the
securities by entering an order for the
purchase or sale of a security with the
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knowledge that a simultaneous order 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;
c. Similar transactions where there is no change
of beneficial ownership.
2. Effecting a series of transactions that will raise or
depress the price of securities to induce the
purchase or sale of securities respectively, or
creating active trading to induce transactions
through manipulative devices:
a. Marking the close – buying and selling of
securities at the close of the market in an effort
to alter the closing price of these securities.
b. Painting the tape – engaging in a series of
transactions effected by brokers in securities
that are reported publicly to give the
impression or illusion of activity or price
movement in a security, which may
trick investors into trading in these securities
because of the alleged trading volume or
indications of interest.
c. Squeezing the float – refers to taking advantage
of a shortage of securities in the market by
controlling the demand side and exploiting
market congestion during such shortages in a
way to create artificial prices. This prevents
the actual market from determining the price
of these securities.
d. Hype and dump – engaging in buying activity at
increasingly higher prices and then selling
securities in the market at the higher prices.
e. Boiler room operations – refers to activities
that involve the use of high pressure sale
tactics such as direct mail offers or telephone
follow-ups to investors to promote purchase
and sale of securities wherein there is
misrepresentation in these securities. This is a
fraudulent transaction that tricks investors
into trading in a fake market.
f. Daisy chain – refers to a series of purchase and
sales of the same issue at successively higher
prices by the same group of people with the
purpose of manipulating prices are drawing
unsuspecting investors into the market
leaving them defrauded of their money and
securities.
g. Front-Running – is the prohibited practice of a
broker-dealer executing its proprietary order
before the customer’s order for the same
security. This violates the fiduciary
responsibility by the broker-dealer to its
customer accounts as well as placing the
customer’s order first.
h. Churning – involves the excessive trading of
securities by a broker-dealer in a customer’s
discretionary account in order to generate
commissions, without regard to the
customer’s investment objective.
3. Circulating or disseminating 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
that security for the purpose of inducing the
purchase or sale of such security.
4. 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.
5. To effect, either alone or with others, any series of
transactions for the purchase and/or sale of any
29
security traded in an exchange for the purpose of
pegging, fixing or stabilizing the price of such
security, unless otherwise allowed by the Code or
by rules of the Commission.
INSIDER TRADING
A purchase or sale made by an insider, or such insider’s
spouse or his relative by affinity or consanguinity within
the second degree, legitimate or common-law, shall be
presumed to be effected while in possession of material
non-public information if transacted after such
information came into existence but prior to the public
dissemination of such information, and lapse of
reasonable time for the market to absorb such
information. (Bar 2015)
Material non-public information (1995 BAR)
1. Information about the issuer or the security 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
2. 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. (SRC, Sec. 27.2)
Definition of “fact of special significance”, in insider
trading (1991 BAR)
It is, in addition to being material, such fact as would
likely, on being made generally available, to affect the
market price of a security to a significant extent, or
which a reasonable person would consider as especially
important under the circumstances in determining his
course of action in the light of such factors as the degree
of its specificity, the extent of its difference from
information generally available previously, and its
nature and reliability. (RSA, Sec. 30 [c])
TENDER OFFER RULE(2016, 2010, 2002 BAR)
Tender offer means a publicly announced intention by a
person acting alone or in concert with other persons to
acquire equity securities of a public company. It is also
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 their minority shareholders against any
scheme that dilutes the share value of any investments.
It gives the minority shareholders the chance to exit the
company under reasonable terms, giving them
opportunity to sell their shares at the same price as
those of the majority shareholders. (CEMCO HOLDINGS,
INC. v. National Life Insurance Company, Inc. G.R. No.
171815, August 7, 2007)
MANDATORY TENDER OFFER (2002 BAR)
Tender offer is required to be made when:
1. Any person or group of persons acting in
concert, who intends to acquire fifteen percent
(15%) of equity securities in a public company
in one or more transactions within a period of
twelve (12) months.
2. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares that
are sufficient to gain control of the board in a
public company in one or more transactions
within a period of twelve (12) months.
 MERCANTILE LAW
If the tender offer is oversubscribed, the
aggregate amount of securities to be acquired
at the close of such tender offer shall be
proportionately distributed across selling
shareholders with whom the acquirer may
have been in private negotiations and other
shareholders. For purposes of SRC Rule 19.2.2,
the last sale that meets the threshold shall not
be consummated until the closing and
completion of the tender offer
NOTE: If the acquisition is made through the
Exchange trading system tender offer is not
required provided after acquisition through
the Exchange trading system, they fail to
acquire their target of thirty five percent
(35%) or such outstanding voting shares that
is sufficient to gain control of the board.
3. Any person or group of persons acting in
concert, who intends to acquire thirty five
percent (35%) of the outstanding voting
shares or such outstanding voting shares that
are sufficient to gain control of the board in a
public company directly from one or more
stockholders.
The sale of shares pursuant to the private
transaction or block sale shall not be
completed prior to the closing and completion
of the tender offer.
4. Any acquisition that would result in
ownership of over fifty percent (50%) of the
total outstanding equity securities of a public
company.
NOTE: Tender offer shall be made at a price
supported by a fairness opinion provided by
an independent financial advisor or equivalent
third party. The acquirer in such a tender offer
shall be required to accept all securities
tendered.
(2015 SRC Rules, Sec. 19.2)
Coverage of the application of tender offer
The mandatory tender offer rule covers not only direct
acquisition but also indirect acquisition or “any type of
acquisition.” The legislative intent of Section 19 of the
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. (Cemco Holdings v. National Life Insurance
Company, G.R. No. 171815, August 7, 2007)
INTRA-CORPORATE CONTROVERSIES
An intra-corporate controversy has been regarded in its
broad sense to pertain to disputes that involve any of the
following relationships:
a. between the corporation, partnership or
association and the public;
b. between the corporation, partnership or
association and the State in so far as its franchise,
permit or license to operate is concerned;
30
c. between the corporation, partnership or
association and its stockholders, partners,
members or officers; and
d. among the stockholders, partners or associates,
themselves.
The venue for actions involving intra-corporate
controversies is now under the jurisdiction of the RTC
acting as a special commercial court. (Sec. 5, A.M. NO.
01-2-04-SC)
It is the RTC and not the Sandiganbayan which has
jurisdiction over cases which do not involve a
sequestration-related incident but an intra-corporate
controversy. Issues regarding the propriety of the
election of a party as a Director and his authority to act
in that capacity should be determined only by the RTC
pursuant to the pertinent law on jurisdiction because
they do not concern the recovery of ill-gotten wealth.
TESTS TO DETERMINE INTRA-CORPORATE
CONTROVERSY
1. Relationship Test – No doubt exists that the parties
were members of the same association, but this
conclusion must still be supplemented by the
controversy test before it may be considered as an
intra-corporate dispute.
2. Controversy Test – The dispute must be rooted in
the existence of an intra-corporate relationship,
and must refer to the enforcement of the parties’
correlative rights and obligations under the
Corporation Code, as well as the internal and intra-
corporate regulatory rules of the corporation, in
order to be an intra-corporate dispute (Gulfo v.
Ancheta, G.R. No. 175301, August 15, 2012).
BANKING LAWS
THE NEW CENTRAL BANK ACT
(NCBA, R.A. 7653)
BANGKO SENTRAL NG PILIPINAS
Responsibilities (1992, 1998 BAR)
(PSR)
1. To provide Policy directions in the areas of money,
banking, and credit;
2. To Supervise bank operations; and
3. To Regulate the operations of finance companies
and non-bank financial institutions performing
quasi-banking functions, and similar institutions.
(NCBA, Sec. 3)
GROUNDS FOR CLOSURE OF A BANK
OR A QUASI-BANK
1. Cash Flow test – Inability to pay liabilities as they
become due in the ordinary course of business
(NCBA, Sec. 30 [a], 1997 Bar)
2. Balance sheet test – Insufficiency of realizable
assets to meet its liabilities (NCBA, Sec 30 [b], 1997
Bar)
3. Inability to continue business without involving
probable losses to its depositors and creditors
(NCBA, Sec 30 [c], 1997 Bar)
4. Willful violation of a cease and desist order under
Section 37 that has become final, involving acts or
transactions which amount to fraud or a dissipation
of the assets (NCBA, Sec 30 [d], 1997 Bar)
5. Notification to the BSP or public announcement of
a bank holiday (GBL, Sec 53)
6. Suspension of payment of its deposit liabilities
continuously for more than 30 days (GBL, Sec 53)
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7. Persisting in conducting its business in an unsafe or deprive a

unsound manner (GBL, Sec 56) corporation and its
corporate officers
CLOSE-NOW-HEAR-LATER DOCTRINE of the power to
recover its
It is to prevent unwarranted dissipation of the bank’s unlawfully
assets and as a valid exercise of police power to protect detained property.
the depositors, creditors, stockholders and the general (Umale v. ASB
public. No prior hearing is necessary in appointing a Realty Corporation,
receiver and in closing the bank. It is enough that G.R. No. 181126,
subsequent judicial review is provided for. The remedy June 15, 2011, Del
is subsequent. Injunction does not lie against BSP in the Castillo, J.)
exercise of the power and function. A receiver (and a conservator) can only
perform acts of administration and not
However, the closure and liquidation of a bank, which is acts of dominion. The receiver cannot
considered an exercise of police power may be the approve an option to purchase real
subject of judicial inquiry. The order of closure property. He has only the authority to
(receivership or conservatorship) may be assailed: administer the same for the benefit of
its creditors. (Abacus Real Estate
a. by the stockholders representing at least majority Development Center, Inc. v. Manila
of the outstanding capital stock; Banking Corp, G.R. No. 162270, April 6,
b. within ten days from receipt by the board of 2005)
directors of the order; and Conservatorship
c. through a petition for certiorari on the ground that shall not exceed
the action taken by the BSP was in excess of 1 year.
jurisdiction or with grave abuse of discretion as to
amount to lack of jurisdiction. NOTE: When
the Monetary
NOTE: It is only the BSP who can place the banks under Board is
conservatorship or receivership, courts are not vested satisfied that the
with such power. The bank may be
bank can
placed under
continue to
CONSERVATOR RECEIVER receivership for a
Duration operate on its
maximum period
Appointed if the own,
Appointed if the of 90 days from
bank is already conservatorship
bank is in the take over
insolvent which shall be
state of
means that its terminated.
illiquidity or
liabilities are Otherwise, the
the bank fails or
greater than its bank shall be
refuses to
assets. placed in
maintain a state
receivership.
of liquidity
NOTE: For banks, (Dimaampao,
adequate to
When the receiver would 2017)
protect its
appointed be the Philippine
depositors and
Deposit Insurance NOTE: Designation of conservator is not a precondition
creditors. The
Corporation; for to the designation or receiver. (Sec. 31)
bank still has
quasi-banks, it
more assets
could be any Powers of a conservator do not extend to the
than its
person of revocation of valid and perfected contracts
liabilities but its
recognized
assets are not
competence in The law merely gives the conservator power to revoke
liquid or not in
banking or finance. contracts that are deemed to be defective – void,
cash.
(NCBA, Sec. 30) voidable, unenforceable or rescissible. Hence, the
To rehabilitate the conservator merely takes the place of the bank’s board.
bank and hold and
administer its LIQUIDATION
assets for the
benefit of its Acts of liquidation are those which constitute the
creditors. conversion of the assets of the banking institution to
money or the sale, assignment or disposition of the same
Appointment of to creditors and other parties for the purpose of paying
To restore the receiver operates debts of such institution. (Banco Filipino v. Central Bank,
bank into a state to suspend the G.R. No. 70054, December 11, 1991)
of liquidity and authority of the
Powers to take charge of bank and its If the receiver determines that the institution can no
and the assets, officers over its longer be rehabilitated, the Monetary Board shall notify
Function liabilities, and properties and the board of directors and direct the receiver to proceed
the effects. with its liquidation.
management of
the bank. NOTE: Being Liquidator of a distressed bank can prosecute and
placed under defend suits against the bank
corporate
rehabilitation and Prosecution of suits, collection and the foreclosure of
having a receiver mortgages against debtors of the bank by the liquidator
appointed to carry are among the usual and ordinary transactions
out the pertaining to the administration of a bank. (Banco
rehabilitation plan Filipino v. Central Bank, ibid.)
do not ipso facto

31
 MERCANTILE LAW
FILING OF THE CLAIMS AGAINST
THE INSOLVENT BANK
All claims against the insolvent bank should be filed in
the liquidation proceeding. It is not necessary that a
claim be initially disputed in a court or agency before it
is filed with the liquidation court. (Ong v. CA, G.R. No.
112830, February 1, 1996)
NOTE: Where it is the bank that files a claim against
another person or legal entity, the claim should be filed
in the regular courts.
STAY ORDER
After the Monetary Board has declared that a bank is
insolvent and has ordered it to cease operations, the
assets of the insolvent bank are held in trust for the
equal benefit of all creditors. One cannot obtain an
advantage or preference over another by attachment,
execution or otherwise. The final judgment against the
bank should be stayed as to execute the judgment would
unduly deplete the assets of the banks to the obvious
prejudice of other depositors and creditors. (Lipana v.
Development Bank of Rizal, G.R. No. L-73884, September
24, 1987)
RATIONALE: The reason behind the indiscriminate
suspension or stay order in relation to the creditors’
claim is to expedite the rehabilitation of the distressed
corporation by enabling the management committee or
the rehabilitation receiver to effectively exercise its/his
powers free from any judicial or extrajudicial
interference that might unduly hinder or prevent the
rescue of the debtor company. It also recognizes the
assets of a corporation under rehabilitation held under
trust for the equal benefit of all creditors under the
doctrine equality is equity, whereby all the creditors
ought to stand on equal footing, and not one of them
should be paid ahead of others. (2006 BAR)
LAW ON SECRECY OF BANK DEPOSITS
(R.A. 1405, AS AMENDED)
PROHIBITED ACTS
1. Examination/inquiry/looking into all deposits of
whatever nature with banks or banking institutions
in the Philippines (including investment in bonds
issued by the government) by any person,
government official or office. (RA 1405, Sec. 2)
2. Disclosure by any official or employee of any
banking institution to any unauthorized person of
any information concerning said deposit. (RA 1405,
Sec. 3)
However, non-bank official or employee is not
covered by the prohibition. Neither is disclosure by a
bank official or employee of information about bank
deposit in favor of a co-employee in the course of the
performance of his duties covered by the prohibition.
NOTE: Confidentiality granted by RA 1405 does NOT
extend to Letters of Credit and Trust Receipts.
DEPOSITS COVERED
1. All deposits of whatever nature with banks or
banking institutions found in the Philippines;
2. Investments in bonds issued by the Philippine
government, its branches, and institutions (R.A.
1405, Sec. 2); and
3. Trust accounts (Ejercito v. Sandiganbayan, G.R. No.
157294-95, November 30, 2006)
32
INSTANCES WHERE EXAMINATION OR DISCLOSURE
OF INFORMATION ABOUT DEPOSITS CAN BE
ALLOWED
(1990-1992, 1994, 1995, 1997, 1998, 2000, 2001,
2004-2006 BAR)
1. Upon written consent of the depositor (RA 1405,
Sec. 2)
2. In cases of impeachment (ibid.)
3. Upon order of competent court in cases of bribery
or dereliction of duty of public officials (ibid.)
4. In cases where the money deposited or invested is
the subject matter of the litigation (ibid.)
a. In an action filed by the bank to recover the
money transmitted by mistake, necessarily, an
inquiry into the whereabouts of the amount
extends to whatever is concealed by being held
or recorded in the name of the persons other
than the one responsible for the illegal
acquisition. ( 1992 Bar)
b. In a case of plunder, itnecessarily involves an
inquiry into the whereabouts of the amount
purportedly acquired illegally. (Ejercito v.
Sandiganbayan, supra)
c. In a special proceeding to settle the estate of
deceased depositor, his bank deposits may be
inquired into, since his bank deposits are
subject matter of the case, because all of his
assets are supposed to be collated. (Sy v. RTC of
Iloilo, 93 O.G. 54072)
5. Upon order of the Commissioner of Internal
Revenue:
a. A decedent to determine his estate;
b. Any taxpayer who has filed for an application
for compromise of his tax liability; or
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (NIRC, Sec. 6 [f])
6. In case of dormant accounts/deposits for at least 10
years under the Unclaimed Balances Act (Act No.
3936, Sec. 2)
7. Presidential Commission on Good Government
(PCGG) may require the production of bank records
material to its investigation (Opinion of the
Secretary of Justice, February 27, 1987)
8. The PDIC and the BSP may examine deposit
accounts and all information related to them in case
of a finding of unsafe or unsound banking practices
(RA 3591, as amended, Sec. 8)
9. With court order:
a. In cases of unexplained wealth under Sec. 8 of
the Anti-Graft and Corrupt Practices Act (PNB
v. Gancayco, L-18343, September 30, 1965)
b. The Anti-Money Laundering Council
(AMLC) may inquire into any deposit with any
bank in case of violation of RA 9160 or the
AMLA if there is probable cause that it is
related to an unlawful activity (RA 9160, as
amended, Sec. 11)
10. Without court order: If the AMLC determines that a
particular deposit or investment with any banking
institution is related to the following (HK-MADS):
a. Hijacking,
b. Kidnapping,
c. Murder,
d. Destructive Arson,
e. Violation of the Dangerous Drugs Act; or
f. Acts of Terrorism or in violation of Human
Security Act.
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NOTE: Ombudsman cannot inspect an account as there
is yet no pending litigation before any court of
competent authority. Mere investigation of Ombudsman
is not enough, inspection during an investigation merely
amounts to a fishing expedition. (Marquez v. Desierto,
G.R. No. 135822, June 27, 2001)
FOREIGN CURRENCY DEPOSIT ACT
(R.A. 6426, AS AMENDED)
GR: Foreign currency deposits cannot be inquired or
looked into. All foreign currency deposits are
absolutely confidential.(RA 6426, Sec. 8)
XPNs:
Based on law:
1. The depositor has given his written permission
(ibid.)
2. The Commissioner of Internal Revenue is
authorized to inquire into bank deposits of the
following:
ii.
a. A decedent to determine his estate;
b. Any taxpayer who has filed for an application for
compromise of his tax liability; or
c. A specific taxpayer upon request for tax
information from a foreign tax authority
pursuant to an international convention or
agreement on tax matters to which the
Philippines is a party. (NIRC, Sec. 6 [f])
2. AMLC may inquire into any deposit with a bank or
financial institution, upon order of any competent
court based on an ex parte application, in case of
violation of RA 9160 if there is probable cause that
it is related to an unlawful activity. (RA 9160, Sec.
11) AMLC can investigate:
a. any property of funds related to financing
terrorism; or
b. property or funds of any person if there is
probable cause to believe he is committing or
attempting or conspiring to commit terrorism
or financing terrorism. (RA 10168, Sec. 10)
3. Upon ex parte application by a law enforcer
authorized by the Anti-Terrorism Council, the
justices of the CA designated as special court to
handle anti-terrorism cases may authorize the
examination of deposits in a financial institution
upon finding probable cause of the commission of
terrorism or conspiracy to commit terrorism.(RA
9372, Sec. 27-28)
4. PDIC and BSP may examine deposit accounts and
all information related to them in case of a finding
of unsafe or unsound banking practices.(RA 3591,
as amended, Sec. 8)
Based on jurisprudence:
1. Where the funds deposited in a joint foreign
currency savings account belonged exclusively to
one of the depositors and were held in trust for him
by the other depositor and the other depositor
unilaterally closed the joint account and
transferred the funds to her personal account, the
latter cannot invoke the exemption from court
processes under RA 6426 because she is not the
owner of the deposit in the account. (Van Twest v.
CA, G.R. No. 106253, February 10, 1994)
2. A father who sued his daughter for illegally
withdrawing funds from his foreign currency
deposit and transferring to another bank in the
name of her sister, can inquire into the deposit of
the sister, because the money deposited belongs to
33
him. (China Banking Corp. v. CA, G.R. No. 140687,
December 18, 2006)
3. The exemption from court process of foreign
currency deposits under RA 6426 cannot be
invoked by a foreign transient who raped a minor,
escaped and was held liable for damages to the
victim. The garnishment of his foreign currency
deposit should be allowed to prevent an injustice
and for equitable grounds. The law was enacted to
encourage foreign currency deposit and not to
benefit a wrongdoer. (Salvacion v. Central Bank of
the Philippines, G.R. No. 94723, August 21, 1997)
GARNISHMENT OF DEPOSITS,
INCLUDING FOREIGN DEPOSITS
The prohibition against examination or inquiry does not
preclude its being garnished for satisfaction of
judgment. The disclosure is purely incidental to the
execution process and it was not the intention of the
legislature to place bank deposits beyond the reach of
judgment creditor. (PCIB v. CA, G.R. No. 84526, January
28, 1991)
With respect to foreign deposits, they shall be exempt
from attachment, garnishment, or any other order or
process of any court, legislative body, government
agency or any administrative body whatsoever. (RA
6426, Sec 8)
XPN: The garnishment of a foreign currency deposit
should be allowed to prevent injustice and for equitable
grounds. (Salvacion v. Central Bank, supra.)
GENERAL BANKING LAW OF 2000
(R.A. No. 8791)
Banks are entities engaged in the lending of funds
obtained from the public in the form of deposits.
Quasi-banks are entities engaged in the borrowing of
funds through the issuance, endorsement or assignment
with recourse or acceptance of deposit substitutes for
purposes of re-lending or purchasing of receivables and
other obligations. (GBL, Sec 4)
NOTE: Unlike banks, quasi-banks do not accept
deposits. Neither are funds obtained insured with the
PDIC.
Ownership of a bank
Individuals and non-bank corporations, whether
foreign or Filipino, may own or control up to 40% of the
voting stock of a domestic bank.
In case of foreign individuals, the 40% requirement
refers to the AGGREGATE shares held by foreigners in
one corporation.
RATIONALE: The prohibition under the Constitution
applies since a bank is a “nationalized activity”.
NOTE: An entire family may own an entire bank,
provided, not one of them own more than 40% of the
capital stock of the corporation.
Instances where the 40% limit does not apply to
corporations:
1. In case of a wholly owned thrift bank
subsidiary of universal bank
2. If the shares of the stockholder-corporation
are listed in the stock exchange, it can own up
to 60% of a bank.
3. If the stockholder-corporation is in existence
for at least 10 years.
 MERCANTILE LAW
NOTE: The privilege provided in Nos. 1 & 2 can
be exercised only once. Meaning, it can have
60% ownership of ONLY ONE bank.
CLASSIFICATIONS OF BANKS (2002, 2010 BAR)
1. Universal banks – Primarily governed by the GBL.
They can exercise the powers of an investment
house and invest in non-allied enterprises and have
the highest capitalization.
2. Commercial banks – Ordinary banks governed by
the GBL which have a lower capitalization
requirement than universal banks and cannot
exercise the powers of an investment house. It may
only invest in allied enterprises.
3. Thrift banks– These are a) Savings and mortgage
banks; b) Stock savings and loan associations; and
c) Private development banks, which are primarily
governed by the Thrift Banks Act. (RA 7906)
4. Rural banks – These 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 – Banks whose majority shares
are owned and controlled by cooperatives
primarily to provide financial and credit services to
cooperatives. It shall include cooperative rural
banks. They are governed primarily by the
Cooperative Code.(RA 6938)
6. Islamic banks–Banks whose business dealings and
activities are subject to the basic principles and
rulings of Islamic Shari’ a, such as the Al Amanah
Islamic Investment Bank of the Philippines which
was created by RA 6848.
7. Other classification of banks as determined by the
Monetary Board of the BSP.
DIRECTORS
1. Composition: 5 to 15
2. At least 2 directors shall be independent
3. Foreigners may become directors to the extent of
foreign participation in the equity of the bank
4. In case of bank merger or consolidation. Directors
shall not exceed 21.
Acquisition of real estate
For its own use: Total investment in real estate and
improvements, including equipment, for the own use of
the bank shall not exceed50% of combined capital
account.
For satisfaction of debt: Real property acquired by
bank because of a mortgage, conveyance in satisfaction
of debt, or under judgement shall be disposed within 5
years. (Sec. 52)
SINGLE BORROWER’S LIMIT
GR: Single borrower’s limit – The total amount of loans,
credit accommodations and guarantees that the bank
could grant to one (1) borrower should at no time
exceed 25% of the bank’s net worth. (GBL, Sec 35.1)
(2002, 2015 BAR)
XPNS:
a. As the Monetary Board may otherwise prescribe
for reasons of national interest; and
b. Deposits of rural banks with GOCC financial
institutions like LBP, DBP, and PNB.
NOTE: An additional 10% is allowed if the loan is
secured by a trust receipt, shipping documents,
warehouse receipts and other similar documents which
must be fully covered by an insurance.
34
RESTRICTIONS ON BANK EXPOSURE TO DOSRI
(DIRECTORS, OFFICERS, STOCKHOLDERS AND
THEIR RELATED INTERESTS) (2002 BAR)
No director or officer of any banking institution shall,
either directly or indirectly, for himself or as the
representative or agent of other:
1. Borrow any of the deposits of funds of such
banks;
2. Become a guarantor, indorser, or surety for
loans from such bank to others; or
3. In any manner be an obligor for money
borrowed from the bank or loaned by it. (sec.
83)
The prohibition above will NOT apply if the following
requirements are present:
Approval requirement - Loan must be approved by
the majority of all the directors not including the
director concerned.
Reportorial requirements - Loan must be entered in
the books of the corporation (GBL, Sec. 36)and Central
Bank must be informed of prior to the transaction.
Ceiling requirement - The amount of the loan shall
not exceed the book value of the paid-in contribution
and the amount of the unencumbered deposits. (Go v.
BSP, G.R. No. 178429, October 23, 2009)
NOTE: “Stockholder” within the purview of the DOSRI
prohibition means one who owns at least 1% of the
bank, NOT at least 1 share in the bank.
“Related Interest” – relatives of the director, officer or
stockholder within the 1st degree of affinity or
consanguinity.
Arms-length rule
It provides that any dealings of a bank with any of its
DOSRI shall be upon terms not less favorable to the bank
than those offered to others.(GBL, Sec. 36 [2])
Effect of non-compliance with the foregoing
requirement
Violation of DOSRI is a crime and carries with it penal
sanction. It does not make the transaction void but only
renders the responsible officers and directors
criminally liable. (Republic v. Sandiganbayan, G.R. No.
166859, 169203, 180702, April 12, 2011)
A bank officer violates the DOSRI law when he acquires
bank funds for his personal benefit, even if such
acquisition was facilitated by a fraudulent loan
application. DOSRI cannot be allowed to interpose the
fraudulent nature of the loan as a defense to escape
culpability or their circumvention of the law. The
prohibition under the law covers loan by a bank director
or officer which are made directly, indirectly, for himself
or as the representative or agent of others. At the same
time, he is liable for estafa through falsification of
commercial documents. The bank money which came to
his possession as a result of the fraudulent loan
application was not his. He remained bank’s fiduciary
with respect to that money, which makes it capable of
misappropriation or conversion in his hands (Soriano v.
People of the Philippines, et al., G.R. No. 162336, February
1, 2010, Del Castillo, J.)
Other limitations imposed upon banks with respect
to its loan function
1. Loans and other credit accommodations secured by
REM shall not exceed 75% of the appraised value of
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the real estate security plus 60% of the appraised the business or financial
value of the insured improvements. (GBL, Sec. 37) capacity of the client;
2. Chattel mortgage/intangible property such as 4. Taking into account all
patents, trademarks, etc. shall not exceed 75% of the
known circumstances, it
appraised value of the security. (GBL, Sec. 38)
3. Loans being contractual, the period of payment may be perceived that
may be subject to stipulation by the parties. In the the client's transaction is
case of amortization, the amortization schedule has Structured in order to
no fixed period as it depends on the project to be avoid being the subject of
financed such that if it was capable of raising reporting requirements
revenues, it should be at least once a year with a under the Act;
grace period of 3 years if the project to be financed
5. Any circumstances
is not that profitable which could be deferred up to
5 years if the project was not capable of raising relating to the
revenues. (GBL, Sec. 44) transaction which is
observed to Deviate
from the profile of the
SPECIAL LAWS client and/or the client's
past transactions with
the covered institution;
ANTI-MONEY LAUNDERING ACT 6. The transactions are in a
(R.A. 9160, AS AMENDED BY RA 9194,
way related to an
10167, 10365)
Unlawful activity or
Money laundering is committed by any person who, offense under this Act
knowing that any monetary instrument or property that is about to be, is
represents, involves, or relates to the proceeds of any being or has been
unlawful activity: committed; or
7. Any transaction that is
a. transacts said monetary instrument or property;
similar or Analogous to
b. converts, transfers, disposes of, moves, acquires,
possesses or uses said monetary instrument or any of the foregoing."
property; (RA 9160, Sec. 3[b-1])
c. conceals or disguises the true nature, source,
location, disposition, movement or ownership of or FREEZING OF MONEY INSTRUMENTOR PROPERTY
rights with respect to said monetary instrument or
property; Upon a verified ex parte petition by the AMLC and after
d. attempts or conspires to commit money laundering determination that probable cause exists that any
offenses referred to in paragraphs (a), (b) or (c); monetary instrument or property is in any way related
e. aids, abets, assists in or counsels the commission of to an unlawful activity as defined in Section 3(i) hereof,
the money laundering offenses referred to in the Court of Appeals may issue a freeze order which
paragraphs (a), (b) or (c) above; and shall be effective immediately, and which shall not
f. performs or fails to perform any act as a result of exceed six (6) months depending upon the
which he facilitates the offense of money circumstances of the case.
laundering referred to in paragraphs (a), (b) or (c)
above. If there is no case filed against a person whose account
has been frozen within the period determined by the
Money laundering is also committed by any covered court, the freeze order shall be deemed ipso
person who, knowing that a covered or suspicious facto lifted.
transaction is required under this Act to be reported to
the Anti-Money Laundering Council (AMLC), fails to do NOTE: It is solely the CA which has the authority to issue
so. (Sec. 4, RA 10365, amending Sec. 4, RA 9160) a freeze order. It also has the exclusive jurisdiction to
extend existing freeze orders previously issued by the
COVERED AND SUSPICIOUS TRANSACTIONS AMLC vis-à-vis accounts and deposits related to money-
laundering activities. (Republic v. Cabrini Green &
COVERED SUSPICIOUS Ramos, G.R. No. 154522, May 5, 2006)

'Covered 'Suspicious transaction' is a A person whose account has been frozen may file a
transaction' is a transaction with a covered motion to lift the freeze order and the court must
resolve this motion before the expiration of the freeze
transaction in cash institution, regardless of the
order.
or other equivalent amount involved, where any
monetary of the following NOTE: No court shall issue a temporary restraining
instrument circumstances exist: order or a writ of injunction against any freeze order,
involving a total except the Supreme Court. (Sec. 8, RA 10365, amending
amount in excess of (J I C S D U A) RA 9160)
Five hundred
1. There is no underlying AUTHORITY TO INQUIRE INTO BANK DEPOSITS
thousand pesos (Ph
500,000.00) within legal or trade obligation,
purpose or economic The AMLC may inquire into or examine any particular
one (1) banking day. deposit or investment, including related accounts, with
(RA 9160, Sec. 3 [b]) Justification;
any banking institution or non-bank financial institution
2. The client is not properly provided:
Identified;
3. The amount involved is 1. It is upon order of any competent court;
not Commensurate with 2. Based on an ex parte application; and
3. In cases of violations of this Act, when it has been
established that there is probable cause that the

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 MERCANTILE LAW
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.
The inquiry conducted by the AMLC is not violative of
The Law on Secrecy of Bank Deposits or Ra 1405, as
amended; Foreign Currency Deposit Act or RA No. 6426,
as amended; General Banking Laws or RA 8791; and
other similar laws.
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.
NOTE: In case there is a pending case for forfeiture
pending before the Regional Trial Court, application for
bank inquiry order may be made on such court.
Cases where no court order shall be required in
order for the AMLC to inquire into deposit,
investment or related accounts
XPNs: No need of court order in cases of (KHDAM)
1. Kidnapping,
2. Hijacking,
3. Drugs- violation of Dangerous Drugs Act,
4. Arson,
5. Murder. (Sec. 11 R.A. 9160, as amended)
SAFE HARBOR PROVISION
No administrative, criminal or civil proceedings, shall lie
against any person for having made a COVERED
transaction report or a SUSPICIOUS transaction report
in the regular performance of his duties and in good
faith, whether or not such reporting results in any
criminal prosecution under this Act or any other
Philippine law.(Sec. 9[c], R.A. 9160, as amended; Rule IX,
2016 Revised Implementing Rules and Regulations of
Republic Act No. 9160, as amended)
ELECTRONIC COMMERCE ACT OF 2000 (R.A. NO.
8792) AND A.M. NO. 01-7-01-SC OR THE RULES ON
ELECTRONIC EVIDENCE
Electronic document
This refers to information or the representation of
information, data, figures, symbols or other modes of
written expression, described or however represented,
by which a right is established or an obligation
extinguished, or by which a fact may be proved and
affirmed, which is received, recorded, transmitted,
stored, processed, retrieved or produced electronically.
[Sec. 5(f), RA 8792]
It includes digitally signed documents and any print-out
or output, readable by sight or other means, which
accurately reflects the electronic data message or
electronic document. [Sec. 1(h), Rule 2, A.M. No. 01-7-01-
SC]
NOTE: For purposes of the Rules on Electronic
Evidence, the term "electronic document" may be used
interchangeably with "electronic data message."
FORMATION OF VALIDITY OF
ELECTRONIC CONTRACTS
GR: The elements required under existing laws for the
formation of contracts, i.e. offer and acceptance, may be
expressed in, demonstrated and proved by means of
electronic data messages or electronic documents. [Sec
16 (1), RA 8792]
36
NOTE: No contract shall be denied validity or
enforceability on the sole ground that it is in the form of
an electronic data message or electronic document, or
that any or all of the elements required under existing
laws for the formation of contracts is expressed,
demonstrated and proved by means of electronic data
messages or electronic documents. (Ibid.)
XPN: When the parties otherwise agree.
Electronic transactions made through networking
among banks
Electronic transactions made through networking
among banks, or linkages thereof with other entities or
networks, and vice versa, shall be deemed
consummated upon the actual dispensing of cash or the
debit of one account and the corresponding credit to
another. [Sec 16 (2), RA 8792]
NOTE: The obligation of one bank, entity, or person
similarly situated to another arising therefrom shall be
considered absolute and shall not be subjected to the
process of preference of credits. (Ibid.)
Choice of security methods
The parties to any electronic transaction shall be free to
determine the type of level of electronic data message
and electronic document security needed, and to select
and use or implement appropriate technological
methods that will suit their need. Sec. 24, RA 8792)
FINANCIAL REHABILITATION AND INSOLVENCY
ACT (R.A. 10142)
REHABILITATION
Rehabilitation refers to the restoration of the debtor to
a condition of successful operation and solvency, if it is
shown that its continuance of operation is economically
feasible and its creditors can recover by way of the
present value of payments projected in the plan, more if
the debtor continues as a going concern than if its
immediately liquidated. (Dimaampao, 2017)
Q: Can a distressed corporation file a petition for
corporate rehabilitation after the dismissal of its
earlier petition for liquidation? Explain.
A: YES. The dismissal of a petition for liquidation does
not preclude the distressed corporation from filing a
petition for corporate rehabilitation. The dismissal of
the petition for liquidation implies that corporation may
still be restored to successful operation and solvency.
(Dimaampao, 2017)
Q: Can the corporation file a petition for
rehabilitation first, and after it is dismissed, file a
petition for liquidation?
A: YES. The dismissal of a petition for rehabilitation
connotes that the corporation can no longer be restored.
Ergo, it can file a petition for liquidation. (Dimaampao,
2017)
Q: Explain the phrase “equality is equity” in
corporate rehabilitation proceedings.
A: “Equality is Equity” means that once the corporation
is taken over by a receiver, all the creditors stand on
equal footing and no one may be paid ahead of the
others. This is consistent with the “pari passu” principle
in that all assets of a corporation under rehabilitation
receivership are held in trust for the benefit of all
creditors, precluding one from obtaining an advantage
or preference over another by the expediency of
attachment, execution or otherwise. (Dimaampao, 2017)
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LIQUIDATION 2. Utility Model – An invention qualifies for

registration as a utility model if it is new and
In a broad sense, it is equivalent to winding up, that is, industrially applicable. (Sec. 109, IPC)
the comprehensive process of settling accounts, 3. Industrial Design – any composition of lines or
ascertaining and adjusting debts, collecting assets and colors or any three-dimensional form, whether or
paying off claims. It is a declaration by the trial court of not associated with lines or colors, provided that
the corporation’s insolvency so that its creditors may be such composition or form gives a special
able to file their claims in the settlement of corporation’s appearance to and can serve as pattern for an
debts and obligations. (Pacific Banking Corporation industrial product or handicraft. It must be new or
Employees Organization v. CA, G.R. No. 109373, March 20, ornamental. (Sec. 112, 113 IPC)
1995)
An industrial design is not considered new if it
differs from prior designs only in minor respects
INTELECTUAL PROPERTY LAW that can be mistaken as such prior designs by an
ordinary observer. (World Intellectual Property
Organization, 2004)
Coverage of intellectual property rights
DOCTRINE OF EXHAUSTION
1. Copyright and Related Rights;
Also known as the doctrine of first sale, provides that the
2. Trademarks and Service Marks;
3. Geographic indications; patent holder has control of the first sale of his
invention. He has the opportunity to receive the full
4. Industrial designs;
consideration for his invention from his sale. Hence, he
5. Patents;
exhausts his rights in the future control of his invention.
6. Layout designs (Topographies) of Integrated
It espouses that the patentee who has already sold his
Circuits;
invention and has received all the royalty and
7. Protection of Undisclosed Information (TRIPS).
consideration for the same will be deemed to have
released the invention from his monopoly. The
Distinctions among trademark, patent, and
copyright invention thus becomes open to the use of the purchaser
without further restriction (Adams v. Burke, 84 U.S. 17,
1873).
INTELLECTUAL
DEFINITION GR: Patent rights are exhausted by first sale in the
PROPERTIES
Philippines (Domestic exhaustion).
Any visible sign capable of
distinguishing the goods XPN: On drugs and medicines: first sale in any
Trademarks and (trademark) or services jurisdiction exhausts the rights of the owner thereof
Service Marks (service mark) of an enterprise (International exhaustion). (R.A. 9502)
and shall include a stamped or
marked container of goods. NON-PATENTABLE INVENTIONS
Any technical solution of a
problem in any field of human 1. Plant varieties or animal breeds or essentially
activity which is new, involves biological process for the production of plants or
an inventive step and is animals. This provision shall not apply to micro-
Patents organisms and non-biological and microbiological
industrially applicable. It may
be, or may relate to, a product, processes
or process, or an improvement 2. Aesthetic creations
of any of the foregoing. 3. Discoveries, scientific theories and mathematical
Axists over original and methods
derivative intellectual creations 4. Schemes, rules and methods of performing mental
Copyright and acts, playing games or doing business, and
in the literary and artistic
Related Rights programs for computers
domain protected from the
moment of their creation. 5. Anything which is contrary to public order or
morality (IPC as amended by R.A. 9502, Sec. 22).
PATENTS 6. Methods for treatment of the human or animal
body
Improvement – enhancement or modification of any of 7. In the case of drugs and medicines, mere discovery
the foregoing subject to patentability criteria. of a new form or new property of a known
substance which does not result in the
Criteria for Patentability: enhancement of the efficacy of that substance
8. Computer programs are not patentable but are
1. Novelty – An invention shall not be considered new copyrightable. However, they can be patentable if
if it forms part of a prior art.(Sec. 23, IPC) they are part of a process (e.g. business process
2. Inventive Step–if, having regard to prior art, it is with a step involving the use of a computer
not obvious to a person skilled in the art at the time program).
of the filing date or priority date of the application
claiming the invention. OWNERSHIP OF PATENT
3. Industrially Applicable – An invention that can be
produced and used in any industry. (IPC, Sec. 27) 1. Inventor, his heirs, or assigns (IPC, Sec 28);
2. Joint invention – Jointly by the inventors (IPC, Sec.
Coverage of patents: 28);
3. Two or more persons invented separately and
1. Invention – any technical solution of a problem in independently of each other – To the person who
any field of human activity which is new, involves an filed an application;
inventive step and is industrially applicable. It may 4. Two or more applications are filed – the applicant
be, or may relate to, a product, or process, or an who has the earliest filing date or, the earliest
improvement of any of the foregoing. (Sec. 21, IPC) priority date. (First-to-file rule)(IPC, Sec. 29).

37
 MERCANTILE LAW
5. If made pursuant to a commission – person who
commissions the work shall own the patent, unless
otherwise provided in the contract.
6. If made pursuant to an employment – In case the
employee made the invention in the course of his
employment contract, the patent shall belong to:
a. 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;
b. The employer, if the inventive activity is the
result of the performance of his regularly-
assigned duties, unless there is an agreement,
express or implied, to the contrary (IPC, Sec.
30).
LIMITATIONS OF PATENT RIGHTS
1. Parallel imporation – In case of drugs and
medicine, the owner of a patent has NO RIGHT to
prevent third parties from making, using, offering
for sale, importing a patented product, when it 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.
2. Prior user - Person other than the applicant, who
in good faith, started using the invention in the
Philippines, or undertaken serious preparations to
use the same, before the filing date or priority date
of the application shall have the right to continue
the use thereof, but this right shall only be
transferred or assigned further with his enterprise
or business.
3. Where the act is done privately and on a non-
commercial scale or for a non-commercial
purpose(IPC, Sec. 72.2).
4. Exclusively for experimental use of the invention for
scientific purposes or educational purposes. (IPC,
Sec. 72.3).
5. Use by 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; or
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; or
c. In the case of drugs and medicines, there is a
national emergency or other circumstance of
extreme urgency requiring the use of the
invention; or
d. In the case of drugs and medicines, there is a
public non-commercial use of the patent by
the patentee, without satisfactory reason; or
e. In the case of drugs and medicines, the
demand for the patented article 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.
The use by the Government, or third person authorized
by the Government, shall be subject, where applicable,
to the following provisions:
1. In situations of national emergency or other
circumstances of extreme urgency, the right holder
shall be notified as soon as reasonably practicable;
2. In the case of public non-commercial use of the
patent by the patentee, without satisfactory reason,
the right holder shall be informed promptly;
38
3. If the demand for the patented article in the
Philippines is not being met to an adequate extent
and on reasonable terms as determined by the
Secretary of Health, the right holder shall be
informed promptly;
4. The scope and duration of such use shall be limited
to the purpose for which it was authorized;
5. Such use shall be non-exclusive;
6. The right holder shall be paid adequate
remuneration in the circumstances of each case,
taking into account the economic value of the
authorization; and
7. The existence of a national emergency or other
circumstances of extreme urgency, in the case of
drugs and medicines shall be subject to the
determination of the President of the Philippines
for the purpose of determining the need for such
use or other exploitation, which shall be
immediately executory.
PATENT INFRINGEMENT
Literal Infringement - Resort must be had, in the first
instance, to the words of the claim. If accused matter
clearly falls within the claim, infringement is made out
and that is the end of it. 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 exactly identity of all material
elements (Godines v. The Honorable Court of Appeals, G.R.
No. 97343, September 13, 1993).
Doctrine of Equivalents – There is infringement when
a device appropriates a prior invention by incorporating
its innovative concept and, despite some modification
and change, performs substantially the same function in
substantially the same way to achieve substantially the
same result. (Ibid.).
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 (Smithkline Beckman
Corporation v. CA, G.R. No. 126627, August 14, 2003).
Meaning of “equivalent device”: It is such as a
mechanic of ordinary skill in construction of similar
machinery, having the forms, specifications and
machine before him, could substitute in the place of the
mechanism described without the exercise of the
inventive faculty.
Doctrine of file wrapper estoppel: It balances the
doctrine of equivalents. Patentee is precluded from
claiming as part of patented product that which he had
to excise or modify in order to avoid patent office
rejection, and he may omit any additions that he was
compelled to add by patent office regulations.
Contributory Infringement
Anyone who actively induces the infringement of a
patent or provides the infringer with a component of a
patented product or of a product produced because of a
patented process knowing it to be especially adopted for
infringing the patented invention and not suitable for
substantial non-infringing use shall be liable as a
contributory infringer and shall be jointly and severally
liable with the infringer (Sec. 76.6, IPC).
DEFENSES IN ACTION FOR INFRINGMENT
1. Invalidity of the patent (IPC, Sec. 81);
2. Any of the grounds for cancellation of patents:
a. That what is claimed as the invention is not
new or patentable
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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
c. That the patent is contrary to public order or
morality (IPC, Sec. 61).
3. Prescription
TRADEMARK
Mark means 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.
Collective mark means 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.
Trade name means the name or designation identifying
or distinguishing an enterprise (IPC, Sec. 121.1, 121.2,
121.3).
ACQUISITION OF OWNERSHIP OF A MARK
The rights in a mark shall be acquired through
registration made validly in accordance with the
provisions of the IP Code. Actual prior use in commerce
in the Philippines has been abolished as a condition for
the registration of trademark.
Only the owner of the trademark, trade name or service
mark used to distinguish his goods, business or service
from the goods, business or service of others is entitled
to register the same. An exclusive distributor does not
acquire any proprietary interest in the principal's
trademark and cannot register it in his own name unless
it is has been validly assigned to him.(Superior
Commercial Enterprises, Inc. v. Kunnan Enterprises, G.R.
No. 169974, April 20, 2010)
ACQUISITION OF TRADE NAME
Ownership of a mark or trade name may be acquired not
necessarily by registration but by adoption and use in
trade or commerce. As between actual use of a mark
without registration, and registration of the mark
without actual use thereof, the former prevails over the
latter. (Shangri-la Hotel Management Ltd. v. Developers
Group of companies, March 31, 2006 G.R. No. 159938). A
trade name 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. (Coffee Partners,
Inc. v. San Francisco Coffee & Roastery, Inc., G.R. No.
169504, March 3, 2010).
NON-REGISTRABLE MARKS
1. Consists of immoral, deceptive or scandalous matter
or falsely suggest a connection with persons,
institutions, beliefs, or national symbols;
2. Consists of the flag or coat of arms or other insignia
of the Philippines or any of its political subdivisions,
or of any foreign nation;
3. Consists of a name, portrait or signature identifying
a particular living individual except by his written
consent, or the name, signature, or portrait of a
deceased President of the Philippines, during the life
of his widow except by written consent of the
widow;
39
4. Identical with a registered mark belonging to a
different proprietor 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;
The law does not prohibit or enjoin every
similarity. The similarity must be such that the
ordinary purchaser will be deceived into the belief
that the goods are those of another
5. Is identical with an internationally well-known
mark, whether or not it is registered here, used for
identical or similar goods or services;
6. Is identical with an internationally well-known
mark which is registered in the Philippines with
respect to non-similar goods or services. Provided,
that the interests of the owner of the registered
mark are likely to be damaged by such use;
7. Is likely to mislead the public as to the nature,
quality, characteristics or geographical origin of the
goods or services;
8. Consists exclusively of signs that are generic for the
goods or services that they seek to identify;
9. Consists exclusively of signs that have become
customary or usual to designate the goods or
services in everyday language and established
trade practice;
10. Consists exclusively 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;
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;
12. Consists of color alone, unless defined by a given
form; or
13. Is contrary to public order or morality (IPC, Sec. 123).
WELL-KNOWN MARKS
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 or
similar goods or services: Provided, That in
determining whether a mark is well-known, account
shall be taken of the knowledge of the relevant sector of
the public, rather than of the public at large, including
knowledge in the Philippines which has been obtained
as a result of the promotion of the mark;
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
preceding paragraph, 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: Provided,
1. That use of the mark in relation to those goods or
services would indicate a connection between
those goods or services, and the owner of the
registered mark: and
2. That the interests of the owner of the registered
mark are likely to be damaged by such use (Sec.
123.IPC).
 MERCANTILE LAW

REGISTRATION OF A MARK The passing off of

Unauthorized use of a
one’s goods as those
trademark.
A certificate of registration of a mark shall be prima facie of another.
evidence of the validity of the registration, the Fraudulent intent is Fraudulent intent is
registrant’s ownership of the mark, and of the unnecessary. essential.
registrant’s exclusive right to use the same in GR: Prior registration of the Registration is not
connection with the goods or services and those that are trademark is a prerequisite necessary(Del
related thereto specified in the certificate (IPC, Sec. 138). to the action. Monte Corp. v. CA,
G.R. No. 78325,
A certificate of registration shall remain in force for ten XPN: Well-known marks January 23, 1990).
(10) years, provided that the registrant shall file a
declaration of actual use and evidence to that effect, or SIMILARITY BETWEEN THE TWO: The similarity lies
shall show valid reasons based on the existence of in both their ability to disrupt fair competition amongst
obstacles to such use, as prescribed by the Regulations, business enterprises and other businesses. They can
within one (1) year from the fifth anniversary of the date also create confusion, mistake, and deception as to the
of the registration of the mark. Otherwise, the mark minds of the consumers with regard to the source or
shall be removed from the Register by the Office. (IPC, identity of their products or services due to its similarity
Sec. 145) in appearance or packaging.

TESTS TO DETERMINE CONFUSING SIMILARITY COPYRIGHT

BETWEEN MARKS
DOMINANCY TEST – it focuses on the similarity of the
prevalent features of the competing marks. If the
competing trademark contains the main or essential or
dominant features of another, and confusion and
deception are likely to result, infringement takes place.
Duplication or imitation is not necessary; nor is it
necessary that the infringing label should suggest an
effort to imitate. The question is whether the use of
marks involved is likely to cause of confusion or mistake
in the mind of the public or deceive purchasers. (2012
BAR)
HOLISTIC TEST – Confusing similarity is to be
determined on the basis of visual, aural, connotative
comparisons and overall impressions engendered by the
marks in controversy as they are encountered in the
marketplace. The trademarks in their entirety as they
appear in their respective labels are considered in
relation to the goods to which they are attached.
A right over literary and artistic works which are
original intellectual creations in the literary and artistic
domain protected from the moment of creation (IPC, Sec.
171.1).
Principle of automatic protection: Works are
protected by the sole fact of their creation irrespective
of their content, quality or purpose. Such rights are
conferred from the moment of creation. (IPC, Sec. 172.2)
Elements of copyrightability
1. Originality – Must have been created by the
author’s own skill, labor, and judgment without
directly copying or evasively imitating the work of
another
2. Expression – Must be embodied in a medium
sufficiently permanent or stable to permit it to be
perceived, reproduced or communicated for a
period more than a transitory duration.

The dominancy test only relies on visual comparisons COPYRIGHTABLE WORKS

between two trademarks whereas the totality or holistic
test relies not only on the visual but also on the aural
and connotative comparisons and overall impressions
between the two trademarks (Societe Des Produits Nestl,
S.A. v. CA, G.R. No. 112012, Apr. 4, 2001).
TRADEMARK INFRINGEMENT AND REMEDIES
Elements of trademark infringement:
a. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated by the
infringer;
b. The infringing mark or trade name is used in
connection with the sale, offering for sale, or
advertising of any goods, business or services; or
the infringing mark or trade name is applied to
labels, signs, prints, packages, wrappers,
receptacles or advertisements intended to be used
upon or in connection with such goods, business or
services;
c. The use or application of the infringing mark or
trade name is likely to cause confusion or mistake
or to deceive purchasers or others as to the goods
or services themselves or as to the source or origin
of such goods or services or the identity of such
business; and
d. It is without the consent of the trademark or trade
name owner or the assignee thereof
TRADEMARK INFRINGEMENT vs.
UNFAIR COMPETITION
TRADEMARK UNFAIR
INFRINGEMENT COMPETITION
1. Literary and Artistic Works
a. Books, pamphlets, articles and other writings
b. Lectures, sermons, addresses, dissertations
prepared for Oral delivery, whether or not
reduced in writing or other material form
c. Letters
d. Dramatic, choreographic works
e. Musical compositions
f. Works of Art
g. Periodicals and Newspapers
h. Works relative to Geography, topography,
architecture or science
i. Works of Applied art
j. Works of a Scientific or technical character
k. Photographic works
l. Audiovisual works and cinematographic
works
m. Pictorial illustrations and advertisements
n. Computer programs; and
o. Other literary, scholarly, scientific and artistic
works (IPC, Sec. 172.1).
2. Derivative Works
a. Dramatizations, translations, adaptations,
abridgements, arrangements, and other
alterations of literary or artistic works;
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 (IPC, Sec. 173).

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 UST LAW PRE-WEEK NOTES 2018
Derivative works shall be protected as new works,
provided that such new work shall not affect the force of
any subsisting copyright upon the original works
employed or any part thereof, or be construed to imply
any right to such use of the original works, or to secure
or extend copyright in such original works (IPC, Sec.
173.2).
NON-COPYRIGHTABLE WORKS
1. Idea, procedure, system, method or operation,
concept, principle, discovery or mere data as such
2. News of the day and other items of press
information
3. Any official text of a legislative, administrative or
legal nature, as well as any official translation
thereof
4. Pleadings
5. Decisions of courts and tribunals – this refers to
original decisions and not to annotated decisions
such as the SCRA or SCAD as these already fall
under the classification of derivative works, hence
copyrightable
6. Any work of the government of the Philippines
7. TV programs, format of TV programs (Joaquin v.
Drilon, G.R. No. 108946, Jan. 28, 1999)
8. Systems of bookkeeping; and
9. Statutes.
RIGHTS OF COPYRIGHT OWNER
1. Economic rights – The right to carry out, authorize
or prevent the following acts:
a. Reproduction of the work or substantial
portion thereof
b. Carry-out derivative work (dramatization,
translation, adaptation, abridgement,
arrangement or other transformation of the
work)
c. First distribution of the original and each copy
of the work by sale or other forms of transfer
of ownership
d. Rental right
e. Public display
f. Public performance
g. Other communications to the public.
2. Moral rights – For reasons of professionalism and
propriety, the author has the right:
a. To require that the authorship of the works be
attributed to him (attribution right)
b. To make any alterations of his work prior to,
or to withhold it from publication
c. To preserve integrity of work, object to any
distortion, mutilation or other modification
which would be prejudicial to his honor or
reputation; and
d. 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 (IPC, Sec.193).
NATURE AND TERM OF MORAL RIGHTS: These are
personal rights independent from the economic rights.
Being a personal right, it can only be given to a natural
person. Hence, even if he has licensed or assigned his
economic rights, he continues to enjoy the above-
mentioned moral rights (Amador, 2007). The rights of an
author shall last during the lifetime of the author and IN
PERPETUITY after his death.
3. Droit de suite or “art proceeds right” is the artist’s
resale right, which requires that a percentage of the
resale price of an artistic work is paid to the author.
The right is exercisable even after the author’s
death, provided the work is still in copyright (David
Bainbridge, Intellectual Property, 3rd Ed., p. 220
41
1996, also cited in Copyright Law of the Philippines
by D. Funa).
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%) (Sec. 200, IPC).
Must carry rule
It is limitation on copyright which obligates operators to
carry the signals of local channels within their
respective systems. This is to give the people wider
access to more sources of news, information, education,
sports event and entertainment programs other than
those provided for by mass media and afforded
television programs to attain a well informed, well-
versed and culturally refined citizenry and enhance
their socio-economic growth (ABS-CBN Broadcasting
Corporation v. Philippine Multimedia System, G.R. No.
175769-70, Jan. 19, 2009).
The rule mandates that the local television (TV)
broadcast signals of an authorized TV broadcast station,
such as the GMA Network, Inc., should be carried in full
by the cable antenna television (CATV) operator,
without alteration or deletion. In this case, the Central
CATV, Inc. was found not to have violated the must-
carry rule when it solicited and showed advertisements
in its cable television system. Such solicitation and
showing of advertisements did not constitute an
infringement of the “television and broadcast markets”
under Section 2 of E.O. No. 205 (GMA Network, Inc. v.
Central CATV, Inc., G.R No. 176694, July 18, 2014).
OWNERSHIP OF COPYRIGHT
1. Original and literary artistic works – author
2. Joint authorship – co-authors, but if work of joint
authorship consists of parts that can be used
separately, then the author of each part shall be the
original owner of the copyright in the part that he
has created (IPC, Sec. 178.2).
3. Audiovisual work – Producer, the author of the
scenario, the composer of the music, the film
director, and the author of the work so adapted
4. Anonymous and Pseudonymous works – publishers
shall be deemed to represent the authors of articles
and other writings published without the names of
the authors or under pseudonyms, unless the
contrary appears, or the pseudonyms or adopted
name leaves no doubt as to the author's identity, or
if the author of the anonymous works discloses his
identity (IPC, Sec. 179).
5. Commissioned work – The person who
commissioned the work shall own the work but the
copyright thereto shall remain with the creator,
unless there is a written stipulation to the contrary
(IPC, Sec. 178.4).
6. Collective works – When an author contributes to a
collective work, his right to have his contribution
attributed to him is deemed waived unless he
expressly reserves it. (IPC, Sec. 196).
7. In the course of employment –
a. The employee, if not a part of his regular
duties even if the employee uses the time,
facilities and materials of the employer.
b. The employer, if the work is the result of the
performance of his regularly-assigned duties,
unless there is an agreement, express or
implied, to the contrary. (IPC, Sec. 178.3).
8. Letters – the writer subject to the provisions of
Article 723 of the Civil Code. (IPC, Sec. 178.6).
 MERCANTILE LAW

LIMITATIONS ON COPYRIGHT

DOCTRINE OF FAIR USE

“Fair use” permits a secondary use that “serves the

copyright objective of stimulating productive thought
and public instruction without excessively diminishing
the incentives for creativity”. The fair use of a
copyrighted work for criticism, comment, news
reporting, teaching including limited number of copies
for classroom use, scholarship, research, and similar
purposes is not an infringement of copyright.

NOTE: 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 several factors (IPC, Sec. 182.2). If
you copy to the extent that you reduce the marketability
of the book, it is no longer fair use.

Substantial reproduction: It is not necessarily

required 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 is appropriated. It is no defense that the
pirate did not know whether or not he was infringing
any copyright; he at least knew that what he was
copying was not his, and he copied at his peril. In cases
of infringement, copying alone is not what is prohibited.
The copying must produce an “injurious effect” (Habana
v. Robles, G.R. No. 131522, July 19, 1999).

COPYRIGHT INFRIGEMENT

Q: In an action for damages on account of an

infringement of a copyright, the defendant (the
alleged pirate) raised the defense that he was
unaware that what he had copied was a copyright
material. Would this defense be valid? (1997 BAR)

A:NO. In copyright infringement, intent is irrelevant. A

person may consciously or unconsciously copy or
infringe a copyrighted material and still be held liable
for such act.

A person infringes a right protected under this Act when

one:

a. Directly commits an infringement;

b. Benefits from the infringing activity of another
person who commits an infringement if the person
benefiting has been given notice of the infringing
activity and has the right and ability to control the
activities of the other person;
c. With knowledge of infringing activity, induces,
causes or materially contributes to the infringing
conduct of another (IPC,Sec. 216, as amended by R.A.
No. 10372).

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MERCANTILE LAW RECENT CASES
NEGOTIABLE INSTRUMENTS LAW
COMPLETION AND DELIVERY
 Evangelista v. Screenex Inc., G.R. No. 211564,
November 20, 2017
While it is true that the delivery of a check produces the
effect of payment only when it is cashed, pursuant to Art.
1249 of the Civil Code, the rule is otherwise if the debtor
is prejudiced by the creditor's unreasonable delay in
presentment. The acceptance of a check implies an
undertaking of due diligence in presenting it for
payment, and if he from whom it is received sustains
loss by want of such diligence, it will be held to operate
as actual payment of the debt or obligation for which it
was given. Hence, the delivery of the checks, despite the
subsequent failure to encash them within a period of 10
years or more, had the effect of payment. Debtor is
considered discharged from his obligation to pay and
can no longer be pronounced civilly liable for the
amounts indicated thereon.
LIABILITY OF BANKS
 BDO v. Engr. Lao, G.R. No. 227005, June 19, 2017
In cases of unauthorized payment of checks to a person
other than the payee named therein, the drawee bank
may be held liable to the drawer. The drawer in turn
may seek reimbursement from the collecting bank.
Although the rule on the sequence of recovery of a
forged or lacking endorsement check has been deeply
engrained in jurisprudence, exceptional circumstances
would justify it simplification. In this case, drawer was
allowed to collect directly from collecting bank even if
there was no privity of contract between them (instead
from the drawee bank with whom it has a contractual
relationship) since drawee bank was not made a party
to the appeal.
INSURANCE LAW
 Oriental Assurance Corp. v. Ong, G.R. No. 189524,
October 11, 2017
The fact that insurer is not a party to the shipment
contract does not mean that it cannot be bound by their
provisions. The insurer is subrogated to the rights of the
consignee simply upon its payment of the insurance
claim. As subrogee, petitioner merely stepped into the
shoes of the consignee and may only exercise those
rights that the consignee may have against the
wrongdoer who caused the damage. And since the right
of action of the consignee is subject to a precedent
condition, such as the 15-day period filing of claim to the
shipper, necessarily a suit by the insurer is subject to the
same precedent condition.
TRANSPORTATION LAW
 Loadstar Shipping Co. v. Malayan Insurance Co.,
G.R. No. 185565, April 26, 2017
In domestic shipments,if the goods are delivered but
arrived at the destination in damaged condition, the
remedies to be pursued by the consignee depend on the
extent of damage on the goods.
If the goods are rendered useless for sale, consumption
or for the intended purpose, the consignee may reject
the goods and demand the payment of such goods at
their market price on that day. In case the damaged
portion of the goods can be segregated from those
43
delivered in good condition, the consignee may reject
those in damaged condition and accept merely those
which are in good condition. But if the consignee is able
to prove that it is impossible to use those goods which
were delivered in good condition without the others,
then the entire shipment may be rejected. To reiterate,
the nature of damage must be such that the goods are
rendered useless for sale, consumption or intended
purpose for the consignee to be able to validly reject
them.
If the effect of damage on the goods consisted merely of
diminution in value, the carrier is bound to pay only the
difference between its price on that day and its
depreciated value.
 Sanico and Castro v. Colipano, G.R. No. 209969,
September 27, 2017
Q: In an action for damages for breach of contract of
carriage, may the driver and the owner/operator
both be held liable for damages?
A: NO. Only the operator (or the carrier) breached the
contract of carriage. It is only the carrier which was the
party to the contract of carriage and since the cause of
action is based on a breach of a contract of carriage, the
liability of carrier is direct as the contract is between
him and the passenger. The driver cannot be made liable
as he is not a party to the contract of carriage.
CORPORATION LAW
PIERCING THE VEIL
 Dutch Movers Inc. and Lee et. al v. Lequin et. al,
G.R. No. 210032, April, 25, 2017
Piercing the veil of corporate fiction is allowed, and
responsible persons may be impleaded, and be held
solidarily liable even after final judgment and on
execution, provided that such persons deliberately used
the corporate vehicle to unjustly evade the judgment
obligation, or resorted to fraud, bad faith, or malice in
evading their obligation. In this case, petitioners were
impleaded from the inception of this case. They had
ample opportunity to debunk the claim that they
illegally dismissed respondents, and that they should be
held personally liable for having controlled DMI and
actively participated in its management, and for having
used it to evade legal obligations to respondents.
 I/AME Litton and Co. Inc. v. Litton and Co., G.R. No.
191525, December 13, 2017
 The piercing of the corporate veil is premised on the
fact that the corporation concerned must have been
properly served with summons or properly
subjected to the jurisdiction of the court a quo.
Corollary thereto, it cannot be subjected to a writ of
execution meant for another in violation of its right
to due process.
There exists, however, an exception to this rule: if
it is shown "by clear and convincing proof that the
separate and distinct personality of the corporation
was purposefully employed to evade a legitimate
and binding commitment and perpetuate a fraud or
like wrongdoings.”
The resistance of the Court to offend the right to due
process of a corporation that is a non-party in a main
case, may disintegrate not only when its director,
officer, shareholder, trustee or member is a party to
the main case, but when it finds facts which show
 MERCANTILE LAW
that piercing of the corporate veil is merited. Thus,
as the Court has already ruled, a party whose
corporation is vulnerable to piercing of its corporate
veil cannot argue violation of due process.
 The mere fact that the corporation involved is a non-
profit corporation does not by itself preclude a
court from applying the equitable remedy of
piercing the corporate veil. The equitable character
of the remedy permits a court to look to the
substance of the organization, and its decision is not
controlled by the statutory framework under which
the corporation was formed and operated. While it
may appear to be impossible for a person to exercise
ownership control over a non-stock, not-for-profit
corporation, a person can be held personally liable
under the alter ego theory if the evidence shows that
the person controlling the corporation did in fact
exercise control, even though there was no stock
ownership.
 Reverse Piercing of the Corporate Veil - in a
traditional veil-piercing action, a court disregards
the existence of the corporate entity so a claimant
can reach the assets of a corporate insider. In a
reverse piercing action, however, the plaintiff seeks
to reach the assets of a corporation and make the
corporation liable for the debt of the shareholders.
It has two (2) types: outsider reverse piercing and
insider reverse piercing. Outsider reverse piercing
occurs when a party with a claim against an
individual or corporation attempts to be repaid with
assets of a corporation owned or substantially
controlled by the defendant. In contrast, in insider
reverse piercing, the controlling members will
attempt to ignore the corporate fiction in order to
take advantage of a benefit available to the
corporation, such as an interest in a lawsuit or
protection of personal assets.
PROPIETARY RIGHTS OF A STOCKHOLDER
RIGHT TO INSPECT
 Roque v. People, G.R. No. 211108, June 7, 2017
In any case, the revocation of a corporation's Certificate
of Registration does not automatically warrant the
extinction of the corporation itself such that its rights and
liabilities are likewise altogether extinguished. The
termination of the life of a juridical entity does not, by
itself, cause the extinction or diminution of the rights
and liabilities of such entity nor those of its owners and
creditors. Thus, the revocation of BMTODA's
registration does not automatically strip off Ongjoco of
his right to examine pertinent documents and records
relating to such association.
MEETINGS
Q: King sought to annul the stockholder’s meeting
wherein a new set of Board of Director were duly
elected. His ground, among others, is that the notice
of meeting failed to state the object and purpose
thereof as required by its corporate by-laws. Is
King’s contention correct?
A: NO. Under the corporate by laws, a notice for special
meeting shall state the object and purpose thereof.
However, the meeting being assailed is not a special
meeting but an annual regular meeting. The agenda for
the meeting which includes the election of new board of
directors was the standard order of business in a regular
annual meeting of stockholders of the corporation. (Lao
v. Lim, G.R. No. 201306, Aug. 9, 2017)
PENAL PROVISIONS
44
 Ient and Schulze v. Tullet Prebon (Phils.) Inc., G.R.
No. 189518, January 11, 2017
Q: Are violations of Sec. 31 and 34 of the Corporation
Code carry with it criminal liability?
A: NO. A scrutiny of the provisions of the code providing
specific liability for its violation bolsters this answer.
Giving a broad and flexible interpretation to the term
"penalized" in Section 144 only has utility if there are
provisions in the Corporation Code that specify
consequences other than "penal" or "criminal" for
violation of, or non-compliance with, the tenets of the
Code. Section 22 imposes the penalty of involuntary
dissolution for non-use of corporate charter. Sections
22, 31, 34, 65, 66, and 67, provide for civil or pecuniary
liabilities for the acts covered therein but what is
significant is the fact that, of all these provisions that
provide for consequences other than penal, only Section
74 expressly states that a violation thereof is likewise
considered an offense under Section 144. If indeed
Section 144 automatically imposes penal sanctions on
violations of provisions for which no criminal penalty
was imposed, then such language in Section 74 defining
a violation thereof as an offense would have been
superfluous. There would be no need for legislators to
clarify that, aside from civil liability, violators of Section
7 4 are exposed to criminal liability as well. The lack of
specific language imposing criminal liability in Sections
31 and 34 shows legislative intent to limit the
consequences of their violation to the civil liabilities
mentioned therein. Had it been the intention of the
drafters of the law to define Sections 31 and 34 as
offenses, they could have easily included similar
language as that found in Section 74.
Moreover, The Corporation Code was intended as a
regulatory measure, not primarily as a penal statute.
Sections 31 to 34 in particular were intended to impose
exacting standards of fidelity on corporate officers and
directors but without unduly impeding them in the
discharge of their work with concerns of litigation.
Considering the object and policy of the Corporation
Code to encourage the use of the corporate entity as a
vehicle for economic growth, we cannot espouse a strict
construction of Sections 31 and 34 as penal offenses in
relation to Section 144 in the absence of unambiguous
statutory language and legislative intent to that effect.
OTHER CORPORATIONS
 Lim v. Moldex Land Inc., G.R. No. 206038, January
25, 2017
For stock corporations, the quorum is based on the
number of outstanding voting stocks while for non-
stock corporations, only those who are actual, living
members with voting rights shall be counted in
determining the existence of a quorum.
The basis in determining the presence of quorum in
non-stock corporations is the numerical equivalent of
all members who are entitled to vote, unless some
other basis is provided by the By-Laws of the
corporation. The qualification "with voting rights"
simply recognizes the power of a non-stock corporation
to limit or deny the right to vote of any of its members.
When the by-laws declare that quorum shall constitute
majority of the “members in good standing”, it is a mere
qualification as to which members shall be counted for
quorum purposes. Delinquent members, are stripped of
voting rights.
Likewise, quorum may be different from voting rights
depending on the by-laws of the non-stock corporation.
For example, if there are 100 members in a non-stock
corporation, 60 of which are members in good standing,
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then the presence of 50% plus 1 of those members in
good standing will constitute a quorum. Thus, 31
members in good standing will suffice in order to
consider a meeting valid as regards the presence of
quorum. The 31 members will naturally have to exercise
their voting rights. It is in this instance when the number
of voting rights each member is entitled to becomes
significant. If 29 out of the 31 members are entitled to 1
vote each, another member (known as A) is entitled to
20 votes and the remaining member (known as B) is
entitled to 15 votes, then the total number of voting
rights of all 31 members is 64. Thus, majority of the 64
total voting rights, which is 33 (50% plus 1), is
necessary to pass a valid act. Assuming that only A and
B concurred in approving a specific undertaking, then
their 35 combined votes are more than sufficient to
authorize such act.
SECURITIES REGULATION CODE
JURISDICTION
 Dy Teban Trading Inc. v. Dy, G.R. No. 185647,
July 26, 2017
Q: After finding that the action filed before the RTC
acting as Special Commercial Court is not an intra-
corporate dispute but a civil action for injunction, is
the RTC divested of jurisdiction?
A: NO. The fact that a particular branch which has been
designated as a Special Commercial Court does not shed
the RTC's general jurisdiction over ordinary civil cases
under the imprimatur of statutory law, (BP) 129. To
restate, the designation of Special Commercial Courts
was merely intended as a procedural tool to expedite
the resolution of commercial cases in line with the
court's exercise of jurisdiction. The RTC'sgeneral
jurisdiction over ordinary civil cases is therefore not
abdicated by an internal rule streamlining court
procedure.
 Oca v. Custodio, G.R. No. 199825, July 26, 2017
In intra-corporate controversies, all orders of the trial
court are immediately executory: “Section 4. Executory
nature of decisions and orders - All decisions and orders
issued under these Rules shall immediately be
executory except the awards for moral damages,
exemplary damages and attorney's fees, if any. No
appeal or petition taken therefrom shall stay the
enforcement or implementation of the decision or
order, unless restrained by an appellate court.
Interlocutory orders shall not be subject to appeal.”
Questioning the trial court orders does not stay its
enforcement or implementation. There is no showing
that the trial court orders were restrained by the
appellate court. Hence failure to comply with such
orders may render a person liable for contempt of court.
BANKING LAWS
NEW CENTRAL BANK ACT
 Cu v. Small Business Guarantee and Finance
Corp., G.R. No. 211222, August 7, 2017
Criminal case for BP 22 against the bank officers should
be dismissed due to the order for receivership.
The closure of the bank, placing it under receivership
per Monetary Board Orders and the filing of the petition
for assistance in the liquidation proceedings effectively
suspended the demandabililty of the loan, thus the BP
22 case cannot proceed and was properly dismissed.
 Apex Bancrights Holdings Inc. v. BSP and PDIC ,
G.R. No. 214866, October 2, 2017
45
Nothing in Section 30 of RA 7653 requires the BSP,
through the Monetary Board, to make an independent
determination of whether a bank may still be
rehabilitated or not. As expressly stated in the afore-
cited provision, once the receiver determines that
rehabilitation is no longer feasible, the MB is simply
obligated to: (a) notify in writing the bank's board of
directors of the same; and (b) direct the PDIC to proceed
with liquidation.
SPECIAL LAWS
ANTI-MONEY LAUNDERING ACT
 Republic v. Bolante, G.R. No. 186717, April 17,
2017
The court receiving the application for inquiry order
cannot simply take the AMLC's word that probable
cause exists that the deposits or investments are related
to an unlawful activity. It will have to exercise its own
determinative function in order to be convinced of
such fact. For the trial court to issue a bank inquiry
order, it is necessary for the AMLC to be able to show
specific facts and circumstances that provide a link
between an unlawful activity or a money laundering
offense, on the one hand, and the account or monetary
instrument or property sought to be examined on the
other hand.
FINANCIAL REHABILITATION AND INSOLVENCY
ACT
 Metrobank v. Liberty Corrugated, G.R. No.
184317, January 25, 2017
The phrase “any debtor who foresees the impossibility
of meeting its debts” in the law must not be applied in
its literal sense, such that debtors whose debt has
matured cannot anymore file a petition for
rehabilitation.
A corporation that may seek corporate rehabilitation is
characterized not by its debt but by its capacity to pay
this debt. The condition that triggers rehabilitation
proceedings is not the maturation of a corporation's
debts but the inability of the debtor to pay these.
 BIR v. Lepanto Ceramics, Inc., G.R. No. 224764,
April 24, 2017
Under Sec. 16 of FRIA, one of the claims suspended upon
the issuance of Commencement Order are (deemed to
include a Stay or Suspension Order), “claims of the
government, whether national or local, including taxes,
tariffs and customs duties”.
The acts of sending a notice of informal conference and
a Formal Letter of Demand are part and parcel of the
entire process for the assessment and collection of
deficiency taxes from a delinquent taxpayer- an action
or proceeding for the enforcement of a claim which
should have been suspended pursuant to the
Commencement Order. Unmistakably, foregoing acts of
BIR are in clear defiance of the Commencement Order.
 People v. Mateo, G.R. No. 210612, October 9, 2017
The prosecution of the officers of the corporation has no
bearing on the pending rehabilitation of the
corporation, especially since they are charged in their
individual capacities. Such being the case, the purpose
of the law for the issuance of the stay order is not
compromised, since the appointed rehabilitation
receiver can still fully discharge his functions as
mandated by law. It bears to stress that the
rehabilitation receiver is not charged to defend the
 MERCANTILE LAW

officers of the corporation. If there is anything that the
rehabilitation receiver might be remotely interested in
is whether the court rules for the civil liability. Such a
scenario, however, is not a reason to suspend the
criminal proceedings, because should the court
prosecuting the officers of the corporation find that an
award or indemnification is warranted, such award
would fall under the category of claims, the execution of
which would be subject to the stay order issued by the
rehabilitation court.
INTELLECTUAL PROPERTY LAW
 Juan v. Juan, G.R. No. 221372, August 23, 2017
and which are Puregold's products. While both "-MATE"
and "MATCH" contain the same first three letters, the
last two letters in Puregold's mark, "C" and "H,"
rendered a visual and aural character that made it easily
distinguishable from Nestle's mark. Also, the
distinctiveness of Puregold's mark with two separate
words with capital letters "C" and "M" made it
distinguishable from Nestle's mark which is one word
with a hyphenated small letter "-m" in its mark. In
addition, there is a phonetic difference in pronunciation
between Nestle's "-MATE" and Puregold's "MATCH." As
a result, the eyes and ears of the consumer would not
mistake Nestle's product for Puregold's product.

Q: Roberto Juan filed a complaint for unfair

competition against his brother before the RTC. He
claims that he has been using the mark “Lavandera
Ko” since 1994 in his laundry business and that
registered the same as business name from the DTI.
The RTC dismissed the complaint on the ground that
neither of the parties had the right to the exclusive
use or appropriation of the mark “Lavandera Ko”
because the same was already used as a mark in a
musical composition of another person back in
1942. Is the RTC correct?

A: NO. The RTC erred in denying the parties the proper

determination as to who has the ultimate right to use the
said trade name by ruling that neither of them has the
right or a cause of action, since "Lavandera Ko" is
protected by a copyright, and not a trade name.By their
very definitions, copyright and trade or service name
are different. Copyright is the right of literary property
as recognized and sanctioned by positive law. Trade
name, on the other hand, is any designation which is
adopted and used by person to denominate goods which
he markets, or services which he renders, or business
which he conducts, or has come to be so used by other,
and through its association with such goods, services or
business, has acquired a special significance as the name
thereof.

As such, "Lavandera Ko," being a musical composition

with words is protected under the copyright law and not
under the trademarks, service marks and trade names
law.

 Societes Des Produits, Nestle, S.A. v. Puregold

Price Club Inc., G.R. No. 217194, September 6,
2017

Q: Puregold filed with the IPO registration of the

trademark "COFFEE MATCH" for use on coffee, tea,
cocoa, sugar, artificial coffee, etc. Nestle filed an
opposition against Puregold's application for
registration. Nestle alleged that it is the exclusive
owner of the "COFFEE-MATE" trademark and that
there is confusing similarity between the "COFFEE-
MATE" trademark and Puregold's "COFFEE MATCH"
application. Is Nestle’s contention correct?

A: NO. Puregold's mark may be registered.The word

"COFFEE" is the common dominant feature between
Nestle's mark "COFFEE-MATE" and Puregold's mark
"COFFEE MATCH." However, following Section 123,
paragraph (h) of RA 8293 which prohibits exclusive
registration of generic marks, the word "COFFEE"
cannot be exclusively appropriated by either Nestle or
Puregold since it is generic or descriptive of the goods
they seek to identify. Consequently, consideration on
the word or words paired with the generic or
descriptive word must be made, in this particular case
"-MATE" for Nestle's mark and "MATCH" for Puregold's
mark, to determine the distinctiveness and
registrability of Puregold's mark "COFFEE MATCH."
The distinctive features of both marks are sufficient to
warn the purchasing public which are Nestle's products

46 UST BAR OPERATIONS

ACADEMICS COMMITTEE 2018