Page |1
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
LAWS COVERED
1. Letters of Credit (Code of Commerce Arts
567-572)
2. Trust Receipts Law (PD 115)
3. Warehouse Receipts Law (Act 2137)
4. Transportation Law:
a. Civil Code (Arts.1732-1756)
b. Warsaw Convention
c. Carriage of Goods by Sea Act
(COGSA)
5. Corporation Code (BP 68)
6. Insurance Code (PD 612 as amended by
Republic Act 10607)
7. Securities Regulation Code (RA 8799)
8. Banking Laws:
a. General Banking Law (RA 8791)
b. Central Bank Law (RA 7653)
c. Secrecy of Bank Deposits (RA 1405)
d. Foreign Currency Deposit Law (RA
6426)
e. Anti-Money Laundering Law (RA
9160 as amended by RA 10365)
9. Intellectual Property Law (RA 8293 as
amended by RA 10372)
10. Foreign Investments Act (RA 7042)
11. Financial Rehabilitation and Insolvency
Law (RA 10142)
12. Negotiable Instruments Law (Act no. 2031)
13. Chattel Mortgage and Real Estate Mortgage
Law
14. Civil Code provisions on Partnership and
Agency
DEFINITION OF COMMERCIAL LAW
Branch of private law that regulates the
juridical relations arising from commercial
acts.
The sources of commercial law are:
1. Principal – Statute Law, Agreements,
Customs and Court decisions.
2. Auxilliary – Natural Law, Foreign
Statutory Law and Foreign Court
Decisions, and Opinions.
TIPS IN RESOLVING COMMERCIAL LAW
QUESTION:
The definition of Commercial Law provides
the framework for any question relating to
Commercial Law. Therefore, it is important
to KNOW AND UNDERSTAND:
1. Is there is a commercial transaction
2. What is the commercial transaction?
3. Who are the parties?
4. In what capacity are the parties
involved in this commercial transaction?
5. What are the parties’ responsibilities
and liabilities, if any?
6. Do the parties have a valid
defense/remedies
1987 CONSTITUTIONAL PROVISIONS
RELEVANT TO PHILIPPINE COMMERCIAL
LAW
DECLARATION OF STATE PRINCIPLES (Art.
II)
Section 19. The State shall develop a self-
reliant and independent national economy
effectively controlled by Filipinos.
Section 20. The State recognizes the
indispensable role of the private sector,
encourages private enterprise, and provides
incentives to needed investments.
ARTICLE XII (National Economy and
Patrimony)
Section 1. The goals of the national economy
are a more equitable distribution of
opportunities, income, and wealth; a sustained
increase in the amount of goods and services
produced by the nation for the benefit of the
people; and an expanding productivity as the
key to raising the quality of life for all,
especially the underprivileged.
The State shall promote industrialization and
full employment based on sound agricultural
development and agrarian reform, through
industries that make full of efficient use of
human and natural resources, and which are
competitive in both domestic and foreign

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
markets. However, the State shall protect
Filipino enterprises against unfair foreign
competition and trade practices.
In the pursuit of these goals, all sectors of the
economy and all region s of the country shall be
given optimum opportunity to develop. Private
enterprises, including corporations,
cooperatives, and similar collective
organizations, shall be encouraged to broaden
the base of their ownership.
xxx
Section 6. The use of property bears a social
function, and all economic agents shall
contribute to the common good. Individuals
and private groups, including corporations,
cooperatives, and similar collective
organizations, shall have the right to own,
establish, and operate economic enterprises,
subject to the duty of the State to promote
distributive justice and to intervene when the
common good so demands.
xxx
Section 10. The Congress shall, upon
recommendation of the economic and planning
agency, when the national interest dictates,
reserve to citizens of the Philippines or to
corporations or associations at least sixty per
centum of whose capital is owned by such
citizens, or such higher percentage as Congress
may prescribe, certain areas of investments.
The Congress shall enact measures that will
encourage the formation and operation of
enterprises whose capital is wholly owned by
Filipinos.
In the grant of rights, privileges, and
concessions covering the national economy and
patrimony, the State shall give preference to
qualified Filipinos.
The State shall regulate and exercise authority
over foreign investments within its national
jurisdiction and in accordance with its national
goals and priorities.
Page |2
Section 11. No franchise, certificate, or any
other form of authorization for the operation of
a public utility shall be granted except to
citizens of the Philippines or to corporations or
associations organized under the laws of the
Philippines, at least sixty per centum of whose
capital is owned by such citizens; nor shall such
franchise, certificate, or authorization be
exclusive in character or for a longer period
than fifty years. Neither shall any such
franchise or right be granted except under the
condition that it shall be subject to amendment,
alteration, or repeal by the Congress when the
common good so requires. The State shall
encourage equity participation in public
utilities by the general public. The participation
of foreign investors in the governing body of
any public utility enterprise shall be limited to
their proportionate share in its capital, and all
the executive and managing officers of such
corporation or association must be citizens of
the Philippines.
Section 12. The State shall promote the
preferential use of Filipino labor, domestic
materials and locally produced goods, and
adopt measures that help make them
competitive.
Section 13. The State shall pursue a trade
policy that serves the general welfare and
utilizes all forms and arrangements of
exchange on the basis of equality and
reciprocity.
Section 14. The sustained development of a
reservoir of national talents consisting of
Filipino scientists, entrepreneurs,
professionals, managers, high-level technical
manpower and skilled workers and craftsmen
in all fields shall be promoted by the State. The
State shall encourage appropriate technology
and regulate its transfer for the national
benefit. The practice of all professions in the
Philippines shall be limited to Filipino citizens,
save in cases prescribed by law.
Section 15. The Congress shall create an
agency to promote the viability and growth of
cooperatives as instruments for social justice
and economic development.

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GUILLER B. ASIDO, Ll.M.
Section 16. The Congress shall not, except by
general law, provide for the formation,
organization, or regulation of private
corporations. Government-owned or controlled
corporations may be created or established by
special charters in the interest of the common
good and subject to the test of economic
viability.
Section 17. In times of national emergency,
when the public interest so requires, the State
may, during the emergency and under
reasonable terms prescribed by it, temporarily
take over or direct the operation of any
privately-owned public utility or business
affected with public interest.
Section 18. The State may, in the interest of
national welfare or defense, establish and
operate vital industries and, upon payment of
just compensation, transfer to public
ownership utilities and other private
enterprises to be operated by the Government.
Section 19. The State shall regulate or prohibit
monopolies when the public interest so
requires. No combinations in restraint of trade
or unfair competition shall be allowed.
Section 20. The Congress shall establish an
independent central monetary authority, the
members of whose governing board must be
natural-born Filipino citizens, of known
probity, integrity, and patriotism, the majority
of whom shall come from the private sector.
They shall also be subject to such other
qualifications and disabilities as may be
prescribed by law. The authority shall provide
policy direction in the areas of money, banking,
and credit. It shall have supervision over the
operations of banks and exercise such
regulatory powers as may be provided by law
over the operations of finance companies and
other institutions performing similar functions.
Until the Congress otherwise provides, the
Central Bank of the Philippines operating
under existing laws, shall function as the
central monetary authority.
Page |3
Section 21. Foreign loans may only be
incurred in accordance with law and the
regulation of the monetary authority.
Information on foreign loans obtained or
guaranteed by the Government shall be made
available to the public.
LETTERS OF CREDIT
 A letter of credit is a written instrument
whereby the writer requests or authorizes
the addressee to pay money or deliver
goods to a third person and assumes
responsibility for payment of debt therefor
to the addressee.
Two Essential Conditions for a Letter of
Credit
 A letter of credit is issued in favor of a
definite person and not to order. It is not a
negotiable instrument governed by the
Negotiable Instruments Law.
 It is limited to specified amount, which may
be one or more but always with a maximum
amount.
If any of the two circumstances is missing, it
is not a letter of credit. It is a mere
recommendation.
Parties to a Letter of Credit
1. Issuer – This is the entity that will issue the
credit. It usually is a bank but it can be any
financial institution of substance. The issuer
assumes the full obligation topay the
beneficiary upon the presentation of the
documents specified in the credit.
2. Applicant – The applicant is also known as
the account party or customer. He requests
from the issuer the credit he wants for his
beneficiary. He pays the issuer for the credit
with cash or collateral so as to secure the
issuer the funds necessary for the
reimbursement obligation to the
beneficiary.
3. Beneficiary – The beneficiary is the party
that will be identified in the credit as the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
entity entitled to draw or demand payment
under the letter of credit.
4. Advising Bank – The role of the advising
bank is to notify the beneficiary that a
credit has been issued by another bank. It
assumes no responsibility other than
notifying the beneficiary. However, its
obligation is limited to accurately advising
the terms of the credit that has been issued.
In this capacity it is only playing “post
office”.
5. Confirming Bank – The responsibility of
the confirming bank is that it becomes
directly obligated on the credit and now
assumes the rights and obligations of the
issuer. Typically, the confirming bank’s role
is one for geographic convenience, i.e., a
bank located close to the beneficiary.
However, it can also be a well-known bank,
that will assume the responsibility for a
lesser known bank by confirming their
credit, therefore, rendering the credit more
acceptable to the beneficiary.
Kinds of Letters of Credit
1. Commercial L/C
- Used as a method of payment in a
contract sale of goods, so that the
seller (beneficiary) can obtain
payment directly from the issuer
instead of the beneficiary.
2. Stand by L/C
- This involves non-sale transactions.
The L/C is used as guarantee, or
secure either a monetary or non-
monetary obligation, whereby the
issuer pays the creditor, if the debt
defaults on the obligation.
Important Doctrines in Letters of Credit
1. Independence Rule – This principle of
independence clearly states that the
obligation of the paying bank is in reading
the text of the credit which is wholly
independent from sales or other contracts
on which the credit may be based. The
issuing bank is not required to evaluate if
the beneficiary has performed under the
Page |4
underlying contract or if it is contractually
entitled to payment. The issuer is only
obligated to pay upon presentation of
documents that conform to the
requirements of the letter of credit.
Transfield Philippines vs Luzon Hydro
Electric Corp. (GR No 146717, Nov 22, 2004,
Tinga)
Transfield entered into a turn-key contract
with Luzon Hydro Corp. (LHC). Under the
contract, Transfield were to construct a
hydro-electric plants in Benguet and Ilocos.
The contract provides for a period for
which the project is to be completed and
also allows for the extension of the period
provided that the extension is based on
justifiable grounds such as fortuitous event.
In order to guarantee performance by
Transfield, two stand-by letters of credit
were required to be opened. During the
construction of the plant, Transfield
requested for extension of time citing
fortuitous events brought about by
typhoon, barricades and demonstration.
LHC did not give due course to the
extension of the period prayed for but
referred the matter to arbitration
committee.
In the meanwhile, because of the delay in
the construction of the plant, LHC called on
the stand-by letters of credit because of
default. However, the demand was objected
by Transfield on the ground that there is
still pending arbitration on their request for
extension of time. LHC invoked the
“independence principle”. On the other
hand, Transfield claims fraud on the part of
LHC on calling the stand-by letters of credit.
Under the independence principle, a LC
accommodation is entirely distinct and
separate, independent agreement. It is not
supposed to be affected by the main
contract upon which it rests.
2. Strict Compliance Rule – The beneficiary
must make presentment in strict
compliance with the terms, conditions and

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
procedures of the credit. Further to this,
since the adherence of the requirements
must be strictly applied to the beneficiary,
the beneficiary must know precisely and
unequivocally what those requirements are.
3. Fraud Exception Principle -exists when the
beneficiary, for the purpose of drawing on
the credit, fraudulently presents to the
confirming bank, documents that contain,
expressly or by implication, material
representations of fact that to his
knowledge are untrue.
ON LETTER OF CREDIT “INDEPENDENCE
PRINCIPLE”
Where the trial court rendered a decision
finding the buyer solely liable to pay the seller
and omitted by inadvertence to insert in its
decision the phrase “without prejudice to the
decision that will be made against the issuing
bank “, the bank cannot evade responsibility
based on this ground. The seller who is entitled
to draw on the credit line of the buyer from a
bank against the presentation of sales invoices
and official receipts of the purchases and who
obtained a court judgment solely against the
buyer even though the suit is against the bank
and the buyer may still enforce the liability of
the same bank under a letter of credit issued to
secure the credit line. The so-called
"independence principle" in a letter of credit
assures the seller or the beneficiary of prompt
payment independent of any breach of the
main contract and precludes the issuing bank
from determining whether the main contract is
actually accomplished or not. (Philippine
National Bank vs. San Miguel Corporation.
G.R. No. 186063, January 15, 2014)
Effect of Fraudulent Misrepresentation in
applying and securing an L/C:
G.R. No. 187979. April 25, 2012.]
ASIA UNITED BANK, petitioner, vs. GILBERT G.
GUY, PHILIP LEUNG, KATHERINE L. GUY,
RAFAEL H. GALVEZ and EUGENIO H. GALVEZ,
JR., respondents.
Page |5
We emphasize that fraud in its general sense, is
deemed to comprise anything calculated to
deceive, including all acts, omissions, and
concealment involving a breach of legal duty or
equitable duty, trust, or confidence justly
reposed, resulting in damage to another, or by
which an undue and unconscientious
advantage is taken of another. It is a generic
term embracing all multifarious means which
human ingenuity can device and which are
resorted to by one individual to secure an
advantage over another by false suggestions or
by suppression of truth and includes all
surprise, trick, cunning, dissembling and any
unfair way by which another is cheated.
It is true that ordinarily, in a letter of credit
transaction, the bank merely substitutes its
own promise to pay for the promise to pay of
one of its customers, who in turn promises to
pay the bank the amount of funds mentioned in
the letters of credit plus credit or commitments
fees mutually agreed upon. Once the issuing
bank shall have paid the beneficiary after the
latter's compliance with the terms of the letter
of credit, the issuing bank is entitled to
reimbursement for the amount it paid under
the letter of credit.
In the present case, however, no
reimbursement was made outright, precisely
because the letter of credit was secured by a
promissory note executed by SPI. The bank
would have not agreed to this transaction had
it not been deceived by Gilbert Guy, et al. into
believing the RMSI and SPI were one and the
same entity. Guy and his cohorts' acts in (1)
securing the letter of credit guaranteed by a
promissory note in behalf of SPI; and, (2) their
act of representing SPI as RMSI's Division, were
indicia of fraudulent acts because they fully
well know, even before transacting with the
bank, that: (a) SPI was a separate entity from
Smartnet Philippines, the RMSI's Division,
which has the Omnibus Credit Line; and (b)
despite this knowledge, they misrepresented to
the bank that SPI is RMSI's division. Had it not
for this false representation, AUB would have
not granted SPI's letter of credit to be secured
with a promissory note because SPI as a
corporation has no credit line with AUB and
SPI by its own, has no credit standing.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
[G.R. No. 160732. June 21, 2004.]
METROPOLITAN WATERWORKS AND
SEWERAGE SYSTEM, petitioner, vs. HON.
REYNALDO B. DAWAY, in his capacity as
Presiding Judge of the Regional Trial Court
of Quezon City, Branch 90 and MAYNILAD
WATER SERVICES, INC., respondents.
We held in Feati Bank & Trust Company v.
Court of Appeals that the concept of guarantee
vis-a-vis the concept of an irrevocable letter of
credit are inconsistent with each other. The
guarantee theory destroys the independence of
the bank's responsibility from the contract
upon which it was opened and the nature of
both contracts is mutually in conflict with each
other. In contracts of guarantee, the
guarantor's obligation is merely collateral and
it arises only upon the default of the person
primarily liable. On the other hand, in an
irrevocable letter of credit, the bank
undertakes a primary obligation. We have also
defined a letter of credit as an engagement by a
bank or other person made at the request of a
customer that the issuer shall honor drafts or
other demands of payment upon compliance
with the conditions specified in the credit.
Letters of credit were developed for the
purpose of insuring to a seller payment of a
definite amount upon the presentation of
documents and is thus a commitment by the
issuer that the party in whose favor it is issued
and who can collect upon it will have his credit
against the applicant of the letter, duly paid in
the amount specified in the letter. They are in
effect absolute undertakings to pay the money
advanced or the amount for which credit is
given on the faith of the instrument. They are
primary obligations and not accessory
contracts and while they are security
arrangements, they are not converted thereby
into contracts of guaranty. What distinguishes
letters of credit from other accessory contracts,
is the engagement of the issuing bank to pay
the seller once the draft and other required
shipping documents are presented to it. They
are definite undertakings to pay at sight once
the documents stipulated therein are
presented.
Page |6
TRUST RECEIPTS LAW
 "Trust Receipt" shall refer to the written or
printed document signed by the entrustee
in favor of the entruster containing terms
and conditions substantially complying
with the provisions of Presidential Decree
no.115. No further formality of execution or
authentication shall be necessary to the
validity of a trust receipt.
Parties to a Trust Receipt
 "Entrustee" shall refer to the person
having or taking possession of goods,
documents or instruments under a trust
receipt transaction, and any successor in
interest of such person for the purpose or
purposes specified in the trust receipt
agreement.
 "Entruster" shall refer to the person
holding title over the goods, documents, or
instruments subject of a trust receipt
transaction, and any successor in interest of
such person.
A trust receipt may be denominated in the
Philippine currency or any foreign currency
acceptable and eligible as part of
international reserves of the Philippines,
the provisions of existing law, executive
orders, rules and regulations to the
contrary notwithstanding: Provided,
however, That in the case of trust receipts
denominated in foreign currency, payment
shall be made in its equivalent in Philippine
currency computed at the prevailing
exchange rate on the date the proceeds of
sale of the goods, documents or
instruments held in trust by the entrustee
are turned over to the entruster or on such
other date as may be stipulated in the trust
receipt or other agreements executed
between the entruster and the entrustee.
Rights of Entruster
 The entruster shall be entitled to the
proceeds from the sale of the goods,
documents or instruments released under a

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
trust receipt to the entrustee to the extent
of the amount owing to the entruster or as
appears in the trust receipt;
 or to the return of the goods, documents or
instruments in case of non-sale, and to the
enforcement of all other rights conferred on
him in the trust receipt provided such are
not contrary to the provisions of this
Decree
Obligations of Entrustee
 The entrustee shall (1) hold the goods,
documents or instruments in trust for the
entruster and shall dispose of them strictly
in accordance with the terms and
conditions of the trust receipt; (2) receive
the proceeds in trust for the entruster and
turn over the same to the entruster to the
extent of the amount owing to the entruster
or as appears on the trust receipt; (3)
insure the goods for their total value
against loss from fire, theft, pilferage or
other casualties; (4) keep said goods or
proceeds thereof whether in money or
whatever form, separate and capable of
identification as property of the entruster;
(5) return the goods, documents or
instruments in the event of non-sale or
upon demand of the entruster; and (6)
observe all other terms and conditions of
the trust receipt not contrary to the
provisions of PD 115.
Who bears liability in case of loss
 The risk of loss shall be borne by the
entrustee. Loss of goods, documents or
instruments which are the subject of a trust
receipt, pending their disposition,
irrespective of whether or not it was due to
the fault or negligence of the entrustee,
shall not extinguish his obligation to the
entruster for the value thereof.
INC., PERCIVAL G. LLABAN and MANUEL
P. LUCENTE, petitioners, vs.
METROPOLITAN BANK & TRUST
COMPANY, respondent. (G.r. No. 159622.
July 30, 2004. Landl & Company (Phil.))
Page |7
The Trust Receipts Law was enacted to
safeguard commercial transactions and to
offer an additional layer of security to the
lending bank. Trust receipts are
indispensable contracts in international
and domestic business transactions. The
prevalent use of trust receipts, the danger
of their misuse and/or misappropriation of
the goods or proceeds realized from the
sale of goods, documents or instruments
held in trust for entruster banks, and the
need for regulation of trust receipt
transactions to safeguard the rights and
enforce the obligations of the parties
involved are the main thrusts of the Trust
Receipts Law.
The second paragraph of Section 7 provides
a statutory remedy available to an entruster
in the event of default or failure of the
entrustee to comply with any of the terms
and conditions of the trust receipt or any
other agreement between the entruster and
the entrustee. More specifically, the
entruster “may cancel the trust and take
possession of the goods, documents or
instruments subject of the trust or of the
proceeds realized therefrom at any time”.
The law further provides that “the entruster
in possession of the goods, documents or
instruments may, on or after default, give
notice to the entrustee of the intention to
sell, and may, not less than five days after
serving or sending of such notice, sell the
goods, documents or instruments at public
or private sale, and the entruster may, at a
public sale, become a purchaser. The
proceeds of any such sale, whether public
or private, shall be applied (a) to the
payment of the expenses thereof; (b) to the
payment of the expenses of re-taking,
keeping and storing the goods, documents
or instruments; (c) to the satisfaction of the
entrustee's indebtedness to the entruster.
The entrustee shall receive any surplus but
shall be liable to the entruster for any
deficiency.”

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
JESUS V. TIOMICO, petitioner, vs. THE
HON. COURT OF APPEALS (FORMER
FIFTH DIVISION) and PEOPLE OF THE
PHILIPPINES, respondent (G.R. No.
122539. March 4, 1999.)
The Court has repeatedly upheld the
validity of the Trust Receipts Law and
consistently declared that the said law does
not violate the constitutional proscription
against imprisonment for non-payment of
debts. The case of People vs. Nitafan held:
"The Trust Receipts Law punishes 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. The law does
not seek to enforce payment of a loan. Thus,
there can be no violation of the right against
imprisonment for non-payment of a debt."
MELVIN COLINARES and LORDINO
VELOSO, petitioners, vs. HONORABLE
COURT OF APPEALS, and THE PEOPLE OF
THE PHILIPPINES, respondents. (G.R. No.
90828. September 5, 2000.)
There are two possible situations in a trust
receipt transaction. The first is covered by
the provision which refers to money
received under the obligation involving the
duty to deliver it (entregarla) to the owner
of the merchandise sold. The second is
covered by the provision which refers to
merchandise received under the obligation
to "return" it (devolvera) to the owner.
Hur Tin Yang vs. People of the
Philippines. (G.R. No. 195117, August 14,
2013)
When both parties entered 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, it is not a
trust receipt transaction penalized under
Sec. 13 of PD 115 in relation to Art. 315,
par. 1(b) of the RPC, as the only obligation
actually agreed upon by the parties would
be the return of the proceeds of the sale
transaction. This transaction becomes a
mere loan, where the borrower is obligated
Page |8
to pay the bank the amount spent for the
purchase of the goods.
SUPPLEMENTAL NOTES ON TRUST
RECEIPTS
ON TRUST RECEIPTS
Can an entrustee invoke the principle of res
perit domino to evade liability under the
Trust Receipts?
Where the entrustee tendered the return of the
articles to the entrustee because they did not
meet its manufacturing requirements but the
latter refused to accept and as a consequence,
the entruster stored them in its warehouse
which was, however, gutted by fire, the
entrustee’s obligation was not extinguished
despite the tender and its invocation of the
principle of res perit domino. Under the Trust
Receipts law, the loss of the goods under trust
receipt regardless of the cause and the period
or time it occurred, does not extinguish the
civil obligation of the entrustee. A trust receipt
has two features, the loan and security
features. The loan is brought about by the fact
that the entruster financed the importation or
purchase of the goods under TR. Until and
unless this loan is paid, the obligation to pay
subsists. The principle of res perit domino will
not apply if under the trust receipt, the bank 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 that it wants, which it
cannot do, just to give consistency with the
purpose of the trust receipt of giving a stronger
security for the loan obtained by the importer.
To consider the bank as the true owner from
the inception of the transaction would be to
disregard the loan feature thereof. (Rosario
Textiles vs. Home Bankers [2005])

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
If the entrustee is a corporation in violation
of the Trust Receipts Law, to whom shall the
penalty be imposed?
Recognizing the impossibility of imposing the
penalty of imprisonment on a corporation, it
was provided that if the entrustee is a
corporation, the penalty shall be imposed upon
the directors, officers, employees or other
officials or persons responsible for the offense.
However, the person signing the trust receipt
for the corporation is not solidarily liable with
the entrustee-corporation for the civil liability
arising from the criminal offense unless he
personally bound himself under a separate
contract of surety or guaranty.
May a civil case filed by the entruster against
the entrustee proceed separately from the
criminal action?
Yes. A civil case filed by the entruster against
the entrustees based on the failure of the latter
to comply with their obligation under the Trust
Receipt agreement is proper because this
breach of obligation is separate and distinct
from any criminal liability for misuse and/or
misappropriation of goods or proceeds realized
from the sale of goods released under the trust
receipts. Being based on an obligation ex
contractu and not ex delicto, the civil action
may proceed independently of the criminal
proceedings instituted against the entrustees
regardless of the result of the latter. (Sarmiento
vs. Court of Appeals [2002])
Page |9
WAREHOUSE RECEIPTS OF LAW
Purpose of the Law
1. To prescribe the rights and duties of a
warehouseman;
2. To regulate the relationship between a
warehouseman and:
 The depositor of the goods or;
 Holder of warehouse receipt for the
goods;
 The person lawfully entitled to the
possession of the goods or
 Other persons
 A warehouse receipt is a written
acknowledgement by a warehouseman
that he has received and held certain
goods therein described in store for the
person to whom it is issued.
A warehouseman is the person
lawfully engaged in the business of
storing goods for compensation for such
Kinds
 Negotiable - if deliverable to order or to
bearer;
 Non-negotiable - if deliverable to a
specified person. It must be stamped,
otherwise warehouseman is liable to
person believing it to be negotiable.
 Conflicting Claims - remedy of a
warehouseman is to file an action for
interpleader.
 Warehouseman's Lien - this is effective on
the goods deposited which operates as a
retaining lien until his charges are paid. The
lien is lost (a) by surrender of goods, and
(b) refusal to deliver goods when demand is
proper.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Responsibilities of Warehouseman
 General Rule
Warehouseman must keep the goods of the
depositor separate from the goods of other
depositors, or from the goods of the same
depositor from a separate receipt.
Exceptions:
1. If the goods are fungible, i.e., any unit of
the goods is, from its nature or by
mercantile custom, treated as the
equivalent of any other unit
2. The commingling is authorized by
agreement or by custom
Warehouseman’s Lien
 Object of the Lien
- on the goods deposited with him
or on the proceeds thereof in his
hands.
 Purpose
- for all lawful charges for storage
and preservation of goods,
money advanced by him in
relation to such goods such as
expenses of transportation or
labor.
Remedies available to warehouseman if
charges are not paid
1. To refuse to deliver the goods until his lien
is satisfied.
2. To sell the goods and apply the proceeds
thereof to the value of the lien.
3. To institute an action for collection
judicially.
P a g e | 10
INSURANCE LAW
TEN IMPORTANT POINTS IN INSURANCE
LAW
1. Definition of Insurance
2. Nature of Insurance
3. What may be insured
4. Know the Parties to the contract
5. Importance of Insurable Interest
6. Effect of concealment and representation
7. Incontestability Clause
8. Basic Rules on Fire Insurance
9. Basic Rules on Motor Vehicle Insurance
10. Basic Rules on Marine Insurance
Nature and Definition of Insurance Contract
A contract of insurance is an agreement
whereby one undertakes for a consideration to
indemnify another against loss, damage or
liability arising from an unknown or contingent
event (Section 2 [1], Insurance Code of 1978)
A contract of suretyship shall be deemed to be
an insurance contract, only if made by a surety
who or which, as such is doing an insurance
business as hereinafter provided.
 “Doing an Insurance Business” - shall
include (a) making or proposing to make, as
insurer, any insurance contract; (b) making
or proposing to make as surety, any
contract of suretyship as a vocation and not
as merely incidental to any other legitimate
business or activity of the surety; (c) doing
any kind of business, including a
reinsurance business, specifically
recognized as constituting the doing of an
insurance business within the meaning of
this Code; (d) doing or proposing to do any
business in substance equivalent to any of
the foregoing in a manner designed to
evade the provisions of this Code.
In the application of the provisions of this
Code the fact that no profit is derived from
the making of insurance contracts,
agreements or transactions or that no
separate or direct consideration is received
therefor, shall not be deemed conclusive to
show that the making thereof does not

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
constitute the doing or transacting of an
insurance business. (section 2 [a],
Insurance Code)
Nature of Insurance Contract
 Contract of Adhesion
 Contract of Indemnity
 Consensual
 Voluntary
 Unilateral
 Aleatory
 Conditional
 Personal
 Property
 A contract of insurance is a contract of
adhesion, thus, any ambiguity should be
resolved against the insurer, or it should be
construed liberally in favor of the insured
and strictly against the insurer.
 Rationale for the Rule:
Limitations of liability should be regarded
with extreme jealousy and must be
construed in such a way as to preclude the
insurer from non-compliance with its
obligations.
MALAYAN INSURANCE CORPORATION,
petitioner, vs. THE HON. COURT OF
APPEALS and TKC MARKETING
CORPORATION, respondents. (G.R. No.
119599. March 20, 1997)
Through the years, the courts have held that in
these type of contracts, the parties do not
bargain on equal footing, the weaker party's
participation being reduced to the alternative
to take it or leave it. Thus, these contracts are
viewed as traps for the weaker party whom the
courts of justice must protect. Consequently,
any ambiguity therein is resolved against the
insurer, or construed liberally in favor of the
insured.
GULF RESORTS, INC., petitioner, vs.
PHILIPPINE CHARTER INSURANCE
CORPORATION, respondent. (G.R. No. 156167.
May 16, 2005)
P a g e | 11
While it is to be liberally construed in favor of
the insured, like other contracts, it must be
construed according to the sense and meaning
of the terms which the parties themselves have
used. If such terms are clear and unambiguous,
they must be taken and understood in their
plain, ordinary and popular sense.
Contracts of insurance are contracts of
indemnity upon the terms and conditions
specified in the policy. The parties have the
right to impose such reasonable conditions at
the time of the making of the contract as they
may deem wise and necessary.
The agreement has the force of law between
the parties. The terms of the policy constitute
the measure of the insurer’s liability, and in
order to recover, the insured must show
himself within those terms.
If the insured cannot comply with the terms
and conditions of the contract, he is not
entitled as a rule to recover the loss or damage
suffered. This is a condition precedent to the
right to recovery.
• Contracts of insurance, like other
contracts, are to be construed according
to the sense and meaning of the terms
which the parties themselves have used.
If such terms are clear and
unambiguous, they must be taken and
understood in their plain, ordinary and
popular sense. Accordingly, in
interpreting the exclusions in an
insurance contract, the terms used
specifying the excluded classes therein
are to be given their meaning as
understood in common speech. A
contract of insurance is a contract of
adhesion. So, when the terms of the
insurance contract contain limitations
on liability, courts should construe them
in such a way as to preclude the insurer
from non-compliance with his
obligation. (Alpha Insurance and
Surety Co. vs. Castor, GR No. 198174,
September 2, 2013)

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Other Nature of Contract of Insurance
 Consensual – Perfected by the meeting
of the minds of the parties
 Voluntary – The parties may
incorporate such terms and conditions
as they may deem convenient
 Aleatory – The liability of insurer is
dependent on the happening of an event
which is uncertain, or though certain, is
to occur at some future undetermined
time.
What may be insured?
Any contingent or unknown event, whether
past or future, which may damnify a person
having insurable interest, or create a liability
against him, may be insured against. (section
3, Insurance Code)
An insurance for or against the drawing of any
lottery, or for or against any chance or ticket in
a lottery drawing a prize is NOT allowed.
(section 4, Insurance Code)
 Consent of the husband is not necessary for
the validity of an insurance policy taken out
by a married woman on her life and that of
her children.
 A minor of 18 years or more may contract
for life, health and accident insurance,
provided that the insurance is taken on his
own life and the beneficiary is the minor’s
father, mother, husband, wife, child, brother
or sister.
 All rights, title and interest in the policy of
insurance taken out by an original owner
on the life or health of a minor shall
automatically vest in the minor upon the
death of the original owner.
Parties to a Contract of Insurance
 Every person, partnership, association or
corporation duly authorized to transact
insurance business may be an insurer.
(section 6, Insurance Code)
P a g e | 12
 Insurer – Party who assumes or accepts
the risk of loss and undertakes for a
consideration to indemnify another on
the happening of a specified contingency
or event.
 Insurance Corporation - Corporations
formed or organized to save any person or
persons or other corporations harmless
from loss, damage, or liability arising from
any unknown or future or contingent event,
or to indemnify or to compensate any
person or persons or other corporations for
any such loss, damage, or liability, or to
guarantee the performance of or
compliance with contractual obligations or
the payment of debt of others shall be
known as "insurance corporations".
The provisions of the Corporation Law shall
apply to all insurance corporations now or
hereafter engaged in business in the
Philippines insofar as they do not conflict
with the provisions of this chapter (section
185, Insurance Code)
 SECTION 186. No person, partnership, or
association of persons shall transact any
insurance business in the Philippines
except as agent of a person or corporation
authorized to do the business of insurance
in the Philippines, unless possessed of the
capital and assets required of an insurance
corporation doing the same kind of
business in the Philippines and invested in
the same manner; nor unless the
Commissioner shall have granted to him or
them a certificate to the effect that he or
they have complied with all the provisions
of law which an insurance corporation
doing business in the Philippines is
required to observe.
 Every person, partnership, or association
receiving any such certificate of authority
shall be subject to the insurance laws of the
Philippines and to the jurisdiction and
supervision of the Commissioner in the
same manner as if an insurance corporation
authorized by the laws of the Philippines to
engage in the business of insurance
specified in the certificate.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 SECTION 187. No insurance company
shall transact any insurance business in the
Philippines until after it shall have obtained
a certificate of authority for that purpose
from the Commissioner upon application
therefor and payment by the company
concerned of the fees hereinafter
prescribed.
 Insured – The person in whose favor the
contract is operative and who is
indemnified against or is to receive a
certain sum upon the happening of a
specified contingency or event. Anyone
except a public enemy may be insured.
(section 7, Insurance Code)
 Public Enemy
FILIPINAS COMPAÑIA DE SEGUROS,
petitioner, vs. CHRISTERN, HUENEFELD
& CO., INC., respondent. (G.R. No. L-2294.
May 25, 1951)
There is no question that majority of the
stockholders of the respondent corporation
were German subjects. This being so, we have
to rule that said respondent became an
enemy corporation upon the outbreak of the
war between the United States and Germany.
 Cestui Que Vie – Person on whose life
the insurance is written.
 Beneficiary – Person designated to
receive the proceeds of the policy when
the risk attaches.
 Kinds of Beneficiary
- Insured himself
- Third Person who paid
consideration
- Third person through mere
bounty of insured
- SECTION 11. The insured shall
have the right to change the
beneficiary he designated in the
policy unless he has expressly
waived this right in said policy.
P a g e | 13
- SECTION 12. The interest of a
beneficiary in a life insurance
policy shall be forfeited when the
beneficiary is the principal,
accomplice, or accessory in
willfully bringing about the death
of the insured; in which event,
the nearest relative of the
insured shall receive the
proceeds of said insurance if not
otherwise.
 Beneficiary acquires a vested right in the
policy.
SECTION 181. A policy of insurance upon
life or health may pass by transfer, will or
succession to any person, whether he has
an insurable interest or not, and such
person may recover upon it whatever the
insured might have recovered.
 Note Articles 43 (4), 50 and 64 of the
Family Code – Innocent spouse may revoke
the designation of the other spouse who
acted in bad faith as beneficiary, even if
such designation be stipulated as
irrevocable.
Rules in case beneficiary predeceases
insured
 Irrevocable designation of Beneficiary –
Beneficiary has acquired vested right; Legal
representatives are entitled to the proceeds
as assets of his estate; Unless, the proceeds
were made payable to the beneficiary only
if living.
 Revocable – Proceeds past to the estate of
the insured
 All rights, title and interest in the policy of
insurance taken out by an original owner
on the life or health of a minor shall
automatically vest in the minor upon the
death of the original owner, unless
otherwise provided for in the policy.
 SECTION 10. Every person has an insurable
interest in the life and health:
(a.) Of himself, of his spouse and of his
children;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
(b.) Of 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; and
(d.) Of any person upon whose life any
estate or interest vested in him depends.
 An insurable interest is one of the most
basic and essential requirements in an
insurance contract. In general, an insurable
interest is that interest which a person is
deemed to have in the subject matter
insured, where he has a relation or
connection with or concern in it, such that
the person will derive pecuniary benefit
or advantage from the preservation of
the subject matter insured and will suffer
pecuniary loss or damage from its
destruction, termination, or injury by the
happening of the event insured against.
VIOLETA R. LALICAN, petitioner, vs. THE
INSULAR LIFE ASSURANCE COMPANY
LIMITED, AS REPRESENTED BY THE
PRESIDENT VICENTE R. AVILON,
respondent. (G.R. No. 183526. August 25,
2009.)
The existence of an insurable interest gives
a person the legal right to insure the subject
matter of the policy of insurance. Section 10
of the Insurance Code indeed provides that
every person has an insurable interest in
his own life. Section 19 of the same code
also states that an interest in the life or
health of a person insured must exist when
the insurance takes effect but need not exist
thereafter or when the loss occurs.
 SECTION 13. Every interest in property,
whether real or personal, or any relation
thereto, or liability in respect thereof, of
such nature that a contemplated peril might
directly damnify the insured, is an insurable
interest.
P a g e | 14
 SECTION 14. An insurable interest in
property may consist in:
(a.) An existing interest;
(b.) An inchoate interest founded on an
existing interest; or
(c.) An expectancy, coupled with an existing
interest in that out of which the
expectancy arises.
 SECTION 15. A carrier or depository of
any kind has an insurable interest in a thing
held by him as such, to the extent of his
liability but not to exceed the value thereof.
 SECTION 16. A mere contingent or
expectant interest in anything, not founded
on an actual right to the thing, nor upon any
valid contract for it, is not insurable.
 SECTION 17. The measure of an
insurable interest in property is the extent
to which the insured might be damnified by
loss or injury thereof.
 SECTION 18. No contract or policy of
insurance on property shall be enforceable
except for the benefit of some person
having an insurable interest in the property
insured.
 SECTION 19. An interest in property
insured must exist when the insurance
takes effect, and when the loss occurs, but
need not exist in the meantime; and interest
in the life or health of a person insured
must exist when the insurance takes effect
but need not exist thereafter or when the
loss occurs.
Insurable Interest in Life
 General Rule : Must exist when the
insurance takes effect, but need not exist
thereafter or when the loss occurs. (section
19, Insurance Code)
 Exceptions:
1. When the insurance is taken by the
creditor on the life of the debtor, the
creditor is required to have insurable
interest not only at the contract but also
at the time of the debtor’s death.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
2. When the insurance is taken by the
employer on the life of the employee.
Insurable Interest in Property
 SECTION 13. Every interest in
property, whether real or personal, or any
relation thereto, or liability in respect
thereof, of such nature that a contemplated
peril might directly damnify the insured, is
an insurable interest.
 SECTION 14. An insurable interest in
property may consist in:
(a.) An existing interest;
(b.) An inchoate interest founded on an
existing interest; or
(c.) An expectancy, coupled with an existing
interest in that out of which the
expectancy arises.
 SECTION 15. A carrier or depository of any
kind has an insurable interest in a thing
held by him as such, to the extent of his
liability but not to exceed the value thereof.
 SECTION 16. A mere contingent or
expectant interest in anything, not founded
on an actual right to the thing, nor upon any
valid contract for it, is not insurable.
 SECTION 17. The measure of an
insurable interest in property is the
extent to which the insured might be
damnified by loss or injury thereof.
 SECTION 18. No contract or policy of
insurance on property shall be enforceable
except for the benefit of some person
having an insurable interest in the property
insured.
 SECTION 19. An interest in property
insured must exist when the insurance
takes effect, and when the loss occurs, but
need not exist in the meantime; and interest
in the life or health of a person insured
must exist when the insurance takes effect
but need not exist thereafter or when the
loss occurs.
P a g e | 15
• Existing Interest – May be legal title
or equitable title (e.g. Trustee /
Mortgagor / Lessor / Mortgagee)
• Inchoate Interest* - Stockholder’s
inchoate interest in properties of the
corporation
Inchoate – a legal right or
entitlement that is only partial and
incomplete, which may later develop
into a full property right.
Change of Interest
 Sections 20 – 24, Insurance Code
 Rules when insurable interest changes
during the course of an insurance policy
 What may be transferred or assigned:
1. Thing insured (section 20)
2. The Policy itself (section 58)
3. The claim itself (section 83)
 SECTION 20. Except in the cases
specified in the next four sections, and in
the cases of life, accident, and health
insurance, a change of interest in any part
of a thing insured unaccompanied by a
corresponding change of interest in the
insurance, suspends the insurance to an
equivalent extent, until the interest in the
thing and the interest in the insurance are
vested in the same person.
 SECTION 21. 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.
Concealment and Representation
 Concealment – There is concealment
where the insured has knowledge of facts,
material to the risk, and good faith and fair
dealing require him to reveal them, and he
fails to do so.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
SECTION 26. A neglect to communicate that
which a party knows and ought to
communicate, is called a concealment.
 Representation – A statement incidental to
the contract of insurance relative to some
fact having reference thereto and upon the
faith of which the contract is entered into.
SECTION 44. A representation is to be
deemed false when the facts fail to
correspond with its assertions or
stipulations.
 Relevant Provisions of Law
Sections 26 to 48, Insurance Code
 Both take place before the contract is
entered into;
 Both give rise to the same remedy:
discovery of the concealment or
misrepresentation before loss or death
will entitle the insurer to cancel the
policy, except where there is an
incontestability clause.
SECTION 27. A concealment whether
intentional or unintentional entitles the
injured party to rescind a contract of
insurance.
 General Rule: If concealment or
misrepresentation is discovered before
loss or death, then the insurer can
cancel the policy. If it is discovered after
death or loss, the company can refuse to
pay.
SECTION 48. Whenever a right to rescind
a contract of insurance is given to the
insurer by any provision of this chapter,
such right must be exercised previous to
the commencement of an action on the
contract.
After a 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 years from
the date of its issue or of its last
reinstatement, the insurer cannot prove
that the policy is void ab initio or is
P a g e | 16
rescindable by reason of the fraudulent
concealment or misrepresentation of the
insured or his agent.
 Intentional or fraudulent omission to
communicate information
 Rationale: The basis of the rule
vitiating the contract in cases of
concealment is that it misleads or
deceives the insurer into accepting the
risk or accepting it at the rate of
premium agreed upon. The insurer,
relying upon the belief that the assured
will disclose every material fact within
his actual or presumed knowledge, is
misled into a belief that the
circumstance withheld does not exist,
and he is thereby induced to estimate
the risk upon a false basis that it does
not exist.
Bernardo Argente vs. West Coast Life
Insurance Co., (G.R. No. 28499, March
19, 1928)
 EXCEPTION
SECTION 48 (2nd paragraph)
After a 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 years from the
date of its issue or of its last reinstatement,
the insurer cannot prove that the policy is
void ab initio or is rescindable by reason of
the fraudulent concealment or
misrepresentation of the insured or his
agent.
 Incontestability clause
 The so-called "incontestability clause"
precludes the insurer from raising the
defenses of false representations or
concealment of material facts insofar as
health and previous diseases are concerned
if the insurance has been in force for at least
two years during the insured's lifetime.
Emilio Tan vs. Court of Appeals (G.R. No.
48049, June 29, 1989)

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 The "Incontestability Clause" under Section
48 of the Insurance Code provides that an
insurer is given two years – from the
effectivity of a life insurance contract and
while the insured is alive – to discover or
prove that the policy is void ab initio or is
rescindable by reason of the fraudulent
concealment or misrepresentation of the
insured or his agent. After the two-year
period lapses, or when the insured dies
within the period, the insurer must make
good on the policy, even though the policy
was obtained by fraud, concealment, or
misrepresentation.
Manila Bankers Life Insurance
Corporation vs. Cresencia P. Aban (G.R. No.
175666, July 29, 2013)
 Under Section 227 (j) of Insurance Code
The policyholder shall be entitled to have
the policy reinstated at any time within
three years from the date of default of
premium payment unless the cash
surrender value has been duly paid, or the
extension period has expired, upon
production of evidence of insurability
satisfactory to the company and upon
payment of all overdue premiums and any
indebtedness to the company upon said
policy, with interest rate not exceeding that
which would have been applicable to said
premiums and indebtedness in the policy
years prior to reinstatement.
 Exceptions to the Exception:
1. Non-Payment of premiums (Section
227)
2. Violation of condition re military/naval
service in time of war (Section 227)
3. No insurable interest
4. Cause of death was excepted or not
covered
5. Fraud of vicious type
6. Proof of death was not given
P a g e | 17
Warranties
 A statement in the policy, part of the
contract, a condition on which the contract
depends and is conclusively presumed
material, it is the essence of warranty that
its breach bars recovery even though the
breach has nothing to do with the loss.
(sections 67 to 76, Insurance Code)
 SECTION 67. A warranty is either expressed
or implied.
 SECTION 68. A warranty may relate to the
past, the present, the future, or to any or all
of these.
 SECTION 69. No particular form of words is
necessary to create a warranty.
 SECTION 70. Without prejudice to section
fifty-one, every express warranty, made at
or before the execution of a policy, must be
contained in the policy itself, or in another
instrument signed by the insured and
referred to in the policy as making a part of
it.
 SECTION 71. A statement in a policy of
matter relating to the person or thing
insured, or to the risk, as a fact, is an
express warranty thereof.
 SECTION 72. A statement in a policy, which
imparts that it is intended to do or not to do
a thing which materially affects the risk, is a
warranty that such act or omission shall
take place.
Losses, Claims and Proceeds
 SECTION 83. An agreement not to transfer
the claim of the insured against the insurer
after the loss has happened, is void if made
before the loss except as otherwise
provided in the case of life insurance.
 SECTION 80. If a peril insured against has
existed, and the insurer has been liable for
any period, however short, the insured is
not entitled to return of premiums, so far as
that particular risk is concerned.
 Types of Losses Compensable:

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
1. Actual Total Loss entitles insured
to full recovery
2. Constructive Total Loss when
insured exercised right
abandonment. This right may be
exercised when the property insured
suffers a damage from a marine peril
of at least ¾ if insured merely
notifies insurer of his exercise of
right of abandonment, immediately
ownership over damaged property
passes to insurer and it pays the
insured as if there is actual total loss.
3. Partial Loss carries with it co-
insurance; owner shall bear part of
the loss.
Over Insurance
 SECTION 82. In case of an over-insurance
by several insurers, the insured is entitled
to a ratable return of the premium,
proportioned to the amount by which the
aggregate sum insured in all the policies
exceeds the insurable value of the thing at
risk.
 There is over insurance when the insured
insures the same property for an amount
greater than the value of the property with
the same insurance company.
In case of loss, the company is bound to pay
only to the extent of the real value of the
property lost. The insured is entitled to
recover the amount of premium
corresponding to the excess in value of the
property.
Double Insurance
 SECTION 94. Where the insured is over-
insured by double insurance:
a) 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;
P a g e | 18
b) Where the policy under which the
insured claims is a valued policy, the
insured must give credit as against the
valuation for any sum received by him
of under any other policy without regard
to the actual value of the subject
matter insured;
c) Where the policy under which the
insured claims is an unvalued policy he
must give credit, as against the full
insurable value, for any sum received by
him under any policy;
d) Where the insured receives any sum in
excess of the valuation in the case of
valued policies, or of the insurable value
in the case of unvalued policies, he must
hold such sum in trust for the insurers,
according to their right of contribution
among themselves;
e) 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.
Reinsurance
 SECTION 95. A contract of reinsurance is
one by which an insurer procures a third
person to insure him against loss or liability
by reason of such original insurance.
 REINSURANCE TREATY AND
REINSURANCE POLICY, DISTINGUISHED.
— A reinsurance policy is a contract of
indemnity one insurer makes with another
to protect the first insurer from a risk it has
already assumed, while a reinsurance
treaty is merely an agreement between two
insurance companies whereby one agrees
to cede and the other to accept reinsurance
business pursuant to provisions specified in
the treaty.
Reinsurance treaties and reinsurance
policies are not synonymous. Treaties are
contracts for insurance while reinsurance
policies are contracts of insurance.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
THE PHILIPPINE AMERICAN LIFE
INSURANCE COMPANY, petitioner, vs.
THE AUDITOR GENERAL, respondent.
(G.R. No. L-19255. January 18, 1968.)
 SECTION 96. Where an insurer obtains
reinsurance, except under automatic
reinsurance treaties, he must communicate
all the representations of the original
insured, and also all the knowledge and
information he possesses, whether
previously or subsequently acquired, which
are material to the risk.
 SECTION 97. A reinsurance is presumed to
be a contract of indemnity against liability,
and not merely against damage.
 SECTION 98. The original insured has no
interest in a contract of reinsurance.
Fire Insurance
 Sections 167 – 173, Insurance Code
 A contract by which the insurer for a
consideration agrees to indemnify the
insured against loss of, or damage to,
property by hostile fire, including lss by
lighting, windstorm, tornado or earthquake,
and other allied risks, when such risks are
covered by extension to fire insurance
policies or under separate policies. (Section
167)
 The presence of heat, steam, or even smoke
is evidence of fire, but taken by itself it will
not prove the existence of fire. Unless
accompanied by ignition, heat sufficient to
cause charring or scorching does not
constitute fire. To constitute fire,
combustion must proceed at a rate
sufficiently fast to produce a flame, a glow
or incandescence. Regardless of the amount
of heat, there can be no fire until ignition
takes place.
(Miravite, “The Insurance Code of the
Philippines” citing D.L.Bickelhauf, p.478)
P a g e | 19
How do you recover from Fire Insurance
1. Provide NOTICE OF LOSS – this must be
immediately given, unless delay is waived
expressly or impliedly by the insurer; and
2. Provide PROOF OF LOSS – based on best
evidence obtainable, unless delay is waived
expressly or impliedly by the insurer.
Measure of Indemnity
1. OPEN POLICY – entitled to recover only the
expense necessary to replace the thing lost
or injured in the condition it was at the time
of the injury.
2. VALUED POLICY – the parties are bound by
the valuation, in the absence of fraud or
mistake.
X constructed a house for which he spent
P300,000.00 which he insured against fire
for the same amount. When built, the house
was already worth P600,000.00. However,
one day, 1/5 of the house was destroyed by
accidental fire. How much can X recover ?
 If policy is an open policy, X can recover
his actual loss of P120,000.00, which is
1/5 of P600,000.00, the value of the
property at the time of loss.
 If the policy is a valued policy, and the
house was valued at P300,000.00, X can
recover only 1/5 of P300,000.00 or
P60,000.00.
 Alteration in the use of the thing insured
made without the consent of the insurer
entitles the latter to rescind the contract
of insurance.
Requisites for rescission in case of
alteration
1. The use or condition of the thing is
specifically limited or stipulated in the
policy;
2. Such use or condition as limited by the
policy is altered;
3. The alteration is made without the consent
of the insurer;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
4. The alteration is made by means within the
control of the insured;
5. The alteration increases the risk; (section
168); and
6. There must be a violation of a policy
provision.
 An alteration in the risk or condition of
the thing insured which does not
increase the risk will not affect a
contract of fire insurance.
 Under section 75, the insurer is given
the right to insert terms and conditions
in the policy which if violated would
avoid it. An alteration made in the use or
condition of the thing insured will thus
avoid a policy under the same section if
such alteration is expressly prohibited
altough it does not increase the risk.
Rule on pledge, hypothecate or transfer fire
policy
 As a rule, after a loss has occured, insured
may pledge, hypothecate or transfer a fire
insurance policy or rights thereunder. This
he may even do so even without the
consent of or notice to the insurer. In such
case, it is not the personal contract which is
being assigned, but a claim under or a right
of action on the policy against the insurer.
 This rule however is subject to the
provisions of Section 173 of the Insurance
Code.
 No policy of fire insurance shall be pledged,
hyothecated, or transferred to any person,
firm or company who acts as agent for or
otherwise represents the issuing company,
and any such pledge, hypothecation, or
transfer hereacter made shall be void and of
no effect insofar as it may affect other
creditors of the insured. (section 173,
Insurance Code)
P a g e | 20
OPTION TO REBUILD CLAUSE
 Section 172 of the Insurance Code.
 Insurer may have the option to reinstate or
replace the property damaged or destroyed
any part thereof, instead of paying the
amount of the loss or damage.
 Reserved by the insurer in order to protect
himself from unfairness in the appraisal
and award rendered by arbitrators, in case
of loss.
This option must be exercised within a
stipulated period or within a reasonable
time.
CASUALTY INSURANCE
 Section 174, Insurance Code
 Casualty Insurance includes all forms of
insurance against loss or liability arising
from accident or mishap which are not
within the scope of other types of
insurance, namely: marine, fire, surety, ship
and life.
Example : Robbery and theft insurance,
accident insurance
 Liability Insurance is a contract of
indemnity for the benefit of the insured and
those in privity with him, or those to whom
the law upon the grounds of public policy
extends the indemnity against liability
 Section 174 defines casualty insurance
by process of elimination.
 Applies to almost any kind of insurance
 Includes therfore any loss or damage
when an accident is the cause of loss
 The terms 'accident' and 'accidental', as
used in insurance contracts have not
acquired any technical meaning and are
construed by the courts in their
ordinary and common acceptation.
Thus, the terms have been taken to

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
mean that which happen by chance or
fortuitously, without intention and
design, and which is unexpected,
unusual, and unforeseen. An accident is
an event that takes place without one's
foresight or expectation — an event that
proceeds from an unknown cause or is
an unusual effect of a known cause and,
therefore, not expected."
[G.R. No. 100970. September 2, 1992.]
FINMAN GENERAL ASSURANCE
CORPORATION, petitioner, vs. THE
HONORABLE COURT OF APPEALS and
JULIA SURPOSA, respondents.
 There is no accident when a deliberate
act is performed unless some additional,
unexpected, independent, and
unforeseen happening occurs which
produces or brings about the result of
injury or death. In other words, where
the death or injury is not the natural or
probable result of the insured's
voluntary act, or if something
unforeseen occurs in the doing of the act
which produces the injury, the resulting
death is within the protection of the
policies insuring against death or injury
from accident." [De la Cruz vs. Capital
Insurance & Surety Co., Inc., 17 SCRA
559 (1966)].
Two General Divisions of Casualty
Insurance
1. Accident or Health Insurance
Insurance against specified perils which
may affect the person and/or property of
the insured
Examples - personal accident,
robbery/theft insurance
2. Third Party Liability – Insurance against
specified perils which may give rise to
liability on the part of the insured for claims
for injuries or damage to property of others.
P a g e | 21
(a.) Insurance against specified perils which
may affect the person and/or property
of the insured
(b.) Insurance against specified perils which
may give rise to liability on the part of
the insured for claims for injuries to
others or damage to their property.
Insurable Interest in Casualty Insurance
The insurable interest is to be found in the
interest of the insured has in the safety of the
person or property who may maintain, or in
the freedom from damage of property which
may become the basis of suits against him in
case of their injury or destruction.
The insurable interest does not depend upon
whether the insured has a legal or equitable
interest in property but upon whether he may
be charged at law with liability against which
insurance is taken out.
 Attaches when the liability of the insured
attaches, regardless of actual loss at that
time.
 The right of the person injured to sue the
insurer of the party at fault (insured)
depends on whether the contract of
insurance is intended to benefit third
persons also or only the insured.
Subject to two tests:
1. Where the contract provides for
indemnity against liability to third
persons, then third persons to whom
the insured is liable, can sue the insurer.
2. Where the contract is for indemnity
against actual loss or payment then
third persons cannot proceed against
the insurer , the contract being solely to
reimburse the insured for liability
actually discharged by him through
payment to third persons, said third
person’s recourse being limited to the
insured alone.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Compulsory Motor Vehicle Liability
Insurance
 Sections 373 – 389, Insurance Code of the
Philippines
 A protection coverage that will answer for
legal liability for losses and damages for
bodily injuries or property damage that
may be sustained by another arising from
the use and operation of a motor vehicle by
its owner.
 SECTION 373. For purposes of this
chapter:
(a.) "Motor Vehicle" is any vehicle as defined
in section three, paragraph (a) of
Republic Act Numbered Four Thousand
One Hundred Thirty-Six, otherwise known
as the "Land Transportation and Traffic
Code;
RA 4136, as amended, provides:
SECTION 3. Words and phrases defined.
— As used in this Act:
(b.) "Motor Vehicle" shall mean any vehicle
propelled by any power other than
muscular power using the public
highways, but excepting road rollers,
trolley cars, street-sweepers, sprinklers,
lawn mowers, bulldozers, graders, fork-
lifts, amphibian trucks, and cranes if not
used on public highways, vehicles which
run only on rails or tracks, and tractors,
trailers and traction engines of all kinds
used exclusively for agricultural
purposes.
(c.) Trailers having any number of wheels,
when propelled or intended to be
propelled by attachment to a motor
vehicle, shall be classified as separate
motor vehicle with no power rating.
(d.) "Third Party" is any person other than a
passenger as defined in this section and
shall also exclude a member of the
household, or a member of the family
within the second degree of
consanguinity or affinity, of a motor
vehicle owner or land transportation
P a g e | 22
operator, as likewise defined herein, or
his employee in respect of death or bodily
injury, arising out of and in the course of
employment”
(e.) "Owner" or "Motor Vehicle Owner" means
the actual legal owner of a motor vehicle,
in whose name such vehicle is duly
registered with the Land Transportation
Commission;
(f.) "Land transportation operator" means
the owner or owners of motor vehicles for
transportation of passengers for
compensation, including school buses
 The injured for whom the contract of
insurance is intended can sue directly the
insurer. The general purpose of statutes
enabling an injured person to proceed
directly against the insurer is to protect
injured persons against the insolvency
of the insured who causes such injury,
and to give such injured person a certain
beneficial interest in the proceeds of the
policy, and statutes are to be liberally
construed so that their intended
purpose may be accomplished. It has
even been held that such a provision
creates a contractual relation which inures
to the benefit of any and every person who
may be negligently injured by the named
insured as if such injured person were
specifically named in the policy. (S 449 7
Am. Jur., 2d, pp. 118-119)
 SECTION 374. It shall be unlawful for any
land transportation operator or owner of a
motor vehicle to operate the same in the
public highways unless there is in force in
relation thereto a policy of insurance or
guarantee in cash or surety bond issued in
accordance with the provisions of this
chapter.
 SECTION 375. The Commissioner shall
furnish the Land Transportation
Commissioner with a list of insurance
companies authorized to issue the policy of
insurance or surety bond required by this
chapter.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 SECTION 376. The Land Transportation
Commission shall not allow the registration
or renewal of registration of any motor
vehicle without first requiring from the land
transportation operator or motor vehicle
owner concerned the presentation and filing
of a substantiating documentation in a form
approved by the Commissioner evidencing
that the policy of insurance or guaranty in
cash or surety bond required by this chapter
is in effect.
 [G.R. No. 60506. August 6, 1992.]
FIGURACION VDA. DE MAGLANA, EDITHA
M. CRUZ, ERLINDA M. MASESAR,
LEONILA M. MALLARI, GILDA ANTONIO
and the minors LEAH, LOPE, JR., and
ELVIRA, all surnamed MAGLANA, herein
represented by their mother,
FIGURACION VDA. DE MAGLANA,
petitioners, vs. HONORABLE FRANCISCO
Z. CONSOLACION, Presiding Judge of
Davao City, Branch II, and AFISCO
INSURANCE CORPORATION,
respondents.
ISSUE: WHEN DOES THE INSURER’S
LIABILITY IN A COMPREHENSIVE MOTOR
VEHICLE LIABILITY INSURANCE ACCRUE?
"[W]here an insurance policy insures directly
against liability, the insurer's liability
accrues immediately upon the occurrence of
the injury or event upon which the liability
depends and does not depend on the recovery
of judgment by the injured party against the
insured. The underlying reason behind the
third-party liability (TPL) of the Compulsory
Motor Vehicle Liability Insurance is "to
protect injured persons against the
insolvency of the insured who causes such
injury, and to give such injured person a
certain beneficial interest in the proceeds of
the policy..." (Shafer vs. Judge, RTC of
Olongapo City, Br. 75, G.R. No. 78848, Nov.
14, 1988, 167 SCRA 386, 391)
 [G.R. No. 101439. June 21, 1999.]
GOVERNMENT SERVICE INSURANCE
SYSTEM (GSIS), petitioner, vs. COURT OF
APPEALS (former Tenth Division),
VICTORIA JAIME VDA. DE KHO, for
P a g e | 23
herself and minor ROY ROLAND, GLORIA
KHO VDA. DE CALABIA for herself and
minors MARY GRACE, WILLIE, JR.,
VOLTAIRE, GLENN, and MAY, all
surnamed CALABIA, DANIEL KHO,
JOSEFINA KHO, EMERITA KHO APEGO,
ANTONIO KHO and TERESITA KHO,
respondents.
A Chevrolet truck, driven by Guillermo
Corbeta and owned by the National Food
Authority (NFA), collided with a Toyota
Tamaraw owned and operated by Victor Uy.
The truck was insured with the GSIS against
liabilities for death and injuries to third
persons with the maximum indemnity for
death of P12,000. Five passengers died and
10 others were injured in the accident. All
were passengers of the Toyota Tamaraw.
One of the three cases filed was for damages
based on quasi-delict against GSIS, as insurer
of the truck, NFA, the driver Corbeta, Uy and
the insurer, Mabuhay Insurance and
Guaranty Co., MIGC the insurer of the Toyota
Tamaraw. Hospital charges and fees
rendered to the victims were conclusively
established at the trial.
Thereafter, judgment was rendered ordering
MIGC, Corbeta, NFA and GSIS to pay jointly
and severally private respondents, heirs and
victims of the collision, damages after a
finding that the negligence of Corbeta was
the proximate cause of the collision. On
appeal, the Court of Appeals rendered
judgment affirming in toto the assailed
decision. Hence, this recourse by GSIS
challenging the adjudged solidary liability on
the ground that its liability under the
insurance contract is different from the
liability of NFA arising from quasi-delict and
the lack of cause of action for failure of
respondents to file their insurance claim
within six (6) months from date of accident.
EXTENT OF LIABILITY OF INSURER. —
However, although the victim may proceed
directly against the insurer for indemnity,
the third-party liability is only up to the
extent of the insurance policy and those
required by law.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
INSURER NOT SOLIDARILY LIABLE WITH
INSURED AND/OR OTHER PARTY AT FAULT.
While it is true that where the insurance
contract provides for indemnity against
liability to third persons, and such third
persons can directly sue the insurer, the
direct liability of the insurer under indemnity
contracts against third party liability does
not mean that the insurer can be held liable
in solidum with the insured and/or the other
parties found at fault. For the liability of the
insurer is based on contract; that of the
insured carrier or vehicle owner is based on
tort. The liability of GSIS based on the
insurance contract is direct, but not solidary
with that of the NFA. The latter's liability is
based separately on Article 2180 of the Civil
Code.
The requirement that notice of insurance
claims must be filed within six (6) months
from date of accident may be waived. The
defense of laches or prescription in the case
at bar was deem waived for failure of
petitioner to promptly interpose the defense
of delay in filing the notice of insurance
claim.
 [G.R. No. 144274. September 20, 2004]
NOSTRADAMUS VILLANUEVA, petitioner,
vs. PRISCILLA R. DOMINGO and
LEANDRO LUIS R. DOMINGO,
respondents.
Petitioner Villanueva was a former owner
who remained to be the registered owner of
a car that got involved in a traffic mishap.
The incident caused damage to the car
registered to Priscilla Domingo and driven by
Leandro Luis Domingo, both respondents
herein. The driver of the vehicle registered in
petitioner's name was found to be at fault. As
a result, a complaint was filed against
several persons including petitioner. After
trial, the trial court found the petitioner
liable and ordered him to pay the respondent
actual, moral and exemplary damages plus
appearance and attorney's fees. The Court of
Appeals affirmed the trial court's decision
P a g e | 24
but deleted the appearance and attorney's
fees.
 Whether the registered owner of a motor
vehicle may be held liable for damages
arising from a vehicular accident
involving his motor vehicle which was
being operated by the employee of the
vehicle's buyer without the latter's
consent?
We have consistently ruled that the
registered owner of any vehicle is directly
and primarily responsible to the public
and third persons while it is being
operated. The rationale behind such
doctrine was explained way back in 1957
in Erezo vs. Jepte: The principle upon
which this doctrine is based is that in
dealing with vehicles registered under
the Public Service Law, the public has the
right to assume or presume that the
registered owner is the actual owner
thereof, for it would be difficult for the
public to enforce the actions that they
may have for injuries caused to them by
the vehicles being negligently operated if
the public should be required to prove
who the actual owner is.
Whether the driver is authorized or not
by the actual owner is irrelevant to
determining the liability of the registered
owner who the law holds primarily and
directly responsible for any accident,
injury or death caused by the operation
of the vehicle in the streets and highways.
To require the driver of the vehicle to be
authorized by the actual owner before
the registered owner can be held
accountable is to defeat the very purpose
why motor vehicle legislations are
enacted in the first place.
'We believe that it is immaterial whether
or not the driver was actually employed
by the operator of record. It is even not
necessary to prove who the actual owner
of the vehicle and the employer of the
driver is. Granting that, in this case, the
father of the driver is the actual owner
 P a g e | 25
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

and that he is the actual employer,
following the well-settled principle that
the operator of record continues to be the
operator of the vehicle in contemplation
of law, as regards the public and third
person, and as such is responsible for the
consequences incident to its operation,
we must hold and consider such owner-
operator of record as the employer, in
contemplation of law, of the driver. And,
to give effect to this policy of law as
enunciated in the above cited decisions of
this Court, we must now extend the same
and consider the actual operator and
employer as the agent of the operator of
record.'
"THEFT" clause, and not the "AUTHORIZED
DRIVER" clause, that should apply.
". . . Theft is an entirely different legal
concept from that of accident. Theft is
committed by a person with the intent to
gain or, to put it in another way, with the
concurrence of the doer's will. On the other
hand, accident, although it may proceed or
result from negligence, is the happening of
an event without the concurrence of the will
of the person by whose agency it was caused.
(Bouvier's Law Dictionary, Vol. I, 1914 ed., p.
101).

 “AUTHORIZED DRIVER" CLAUSE, MEANING.

Under the "authorized driver" clause, an

authorized driver must not only be permitted
to drive by the insured. It is also essential
that he is permitted under the law and
regulations to drive the motor vehicle and is
not disqualified from so doing under any
enactment or regulation. At the time of the
accident, Stokes had been in the Philippines
for more than 90 days. Hence, under the law,
he could not drive a motor vehicle without a
Philippine driver's license. He was therefore
not an "authorized driver" under the terms
of the insurance policy in question, and
MALAYAN was right in denying the claim of
the insured.

 [G.R. No. L-34768. February24,1984.]

JAMES STOKES, as Attorney-in-Fact of
Daniel Stephen Adolfson and DANIEL
STEPHEN ADOLFSON, plaintiffs-
appellees, vs. MALAYAN INSURANCE CO.,
INC., defendant-appellant.

Can an insurance company deny a claim

based on a finding that the motor vehicle
when it was carnapped was being driven by
an unauthorized driver?

Where a car is admittedly, as in this case,

unlawfully and wrongfully taken without the
owner's consent or knowledge, such taking
constitutes theft, and, therefore, it is the
 P a g e | 26
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

LIFE INSURANCE

Reference Life Insurance Accident Insurance

No limit as to amount, except the
insured’s health and his capacity to pay Limit is to the value of the
As to amount
the premiums; exception: in case life of property to be insured
debtor is insured.

As to legal basis No need for any legal basis There must be legal basis

As to time of Must exist only at the time of the Must exist at the time of
insurable interest perfection of the contract perfection and the time of loss.

DISTINCTION BETWEEN LIFE INSURANCE AND MARINE AND FIRE INSURANCE

Life Insurance Marine and Fire Insurance

Not a contract of indemnity Contracts of Indemnity
It is a valued policy May be open or valued
May be transferred or assigned to another
Must have an insurable interest
person even without insurable interest
Consent of insurer is not essential to the
Consent, in the absence of waiver is essential
validity of the assignment of contract
Insurable interest in the life or health of the
Insurable interest must exist at the time when it
insured need not exist after the insurance takes
takes effect and when the loss occurs
effect
Insurable interest need not have any legal basis Insurable interest must have legal basis
The contingency that is contemplated is a
certain event, the only uncertainty being when Contingency insured may or may not take place
it will take place
The liability is certain Liability is uncertain
No need to present prove financial loss Submit proof
May be cancelled by either party and is usually
A long-term contract
only for 1 year

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Kinds of Life Insurance Policies
1. Ordinary Life Policy
 Insured is required to pay a certain fixed
premium annually or at more frequent
intervals throughout life and the
beneficiary is entitled to receive payment
under the policy only after the death of
the insured
 Also known as “whole life, regular life, or
straight life policy.”
2. Limited Payment Life Policy
 Payable only upon death of the insured
 Premium is payable only during a limited
period
3. Term Payment Life Policy
 Coverage only if the insured dies during a
limited period
4. Endowment Policy
 Insurer binds himself to pay a fixed sum
to the insured if he survives for a
specified period, or if he dies within such
period, to some other person indicated.
Scope of Life Insurance
(1.) Life Insurance
(a.) Actual death
(b.) Living Death
(c.) Retirement Death
(2.) Health Insurance – When health
insurance is written by life insurers,
injury or illness are also viewed as
casualties.
Contract of Life Annuity
 Refer to Article 2021, Civil Code
 By the aleatory contract of life annuity,
the debtor binds himself to pay an annual
pension or income during the life of one
or more determinate persons in
consideration of a capital consisting of
money or other property, whose
ownership is transferred to him at once
with the burden of the income.
P a g e | 27
Life Insurance Life Annuity
The purchaser of a life The purchaser of a life
insurance expects his annuity expects his
insurer to pay his insurer to pay him a
beneficiary a specified periodic income as
sum upon his death. long as he lives.
 Section 180 (2nd paragraph)
Every contract or pledge for the payment
of endowments or annuities shall be
considered a life insurance contract for
purpose of this Code.
Rule on Suicide
 Sec. 180-A. The insurer in a life insurance
contract shall be liable in case of suicides
only when it is committed after the policy
has been in force for a period of two years
from the date of its issue or of its last
reinstatement, unless the policy
provides a shorter period: Provided,
however, that suicide committed in the
state of insanity shall be compensable
regardless of the date of commission.
Insurer is liable for suicide in the following
cases:
1. Suicide is committed after the policy has
been in force for a period of two (2) years
from the date of its issue or of its last
reinstatement;
2. Insurance policy provides for a shorter
period instead of two years; and
3. Suicide is committed in the state of
insanity regardless of the date of
commission, unless suicide is an excepted
risk.
When is insurer not liable in cases of suicide
1. suicide is not by reason of insanity and is
committed within the two year period;
2. suicide is by reason of insanity but is not
among the risks assumed by the insurer
regardless of the date of commission;
3. insurer can show that the policy was
obtained with the intention to commit suicide
even in the absence of any suicide exclusion
in the policy.
 P a g e | 28
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

Right of insured to assign life insurance  Cargo Owner

policy
Over the cargo and expected profits
 Sec. 181. A policy of insurance upon life or (section 105)
health may pass by transfer, will or
succession to any person, whether he has an  Creditor/Lender
insurable interest or not, and such person Amount of the Loan
may recover upon it whatever the insured
might have recovered.  Only Perils of the Sea, unless in case of
an All Risk Policy where perils of the
 All life insurance policies are declared by law ship are covered as well.
to be assignable regardless of whether the
assignee has an insurable interest in the life
of the insured or not.
PERILS OF THE SEA vs. PERILS OF THE SHIP
 Sec. 182. Notice to an insurer of a transfer or
bequest thereof is not necessary to preserve PERILS OF THE SEA PERILS OF THE SHIP
the validity of a policy of insurance upon life Includes only those A loss which in the
or health, unless thereby expressly required. casualties due to the: ordinary course of
events, results from
Measure of indemnity under life insurance the:
policy

 Sec. 183. Unless the interest of a person 1. Unusual violence 1. Natural and
insured is susceptible of exact pecuniary inevitable action of
measurement, the measure of indemnity the sea;
under a policy of insurance upon life or
health is the sum fixed in the policy. 2. Extraordinary 2. Ordinary wear and
action of the wind tear of the ship
- Valued policy and wave

3. Other 3. Negligent failure of

extraordinary the ship’s owner to
MARINE INSURANCE causes connected provide the vessel
with navigation with the proper
 Ship Owner
equipment to
 Cargo Owner convey the cargo
under ordinary
 Charterer conditions
 Owner/Debtor
Concealment in Marine Insurance
 Creditor/Lender
 Sections 107 – 110, Insurance Code

 MATTERS ALTHOUGH CONCEALED WILL

Insurable Interest in Marine Insurance
NOT VITIATE THE CONTRACT EXCEPT
 Ship Owner WHEN THEY CAUSED THE LOSS.

Over the vessel to the extent of its value,
provided that if chartered, the recovery is
only up to the amount not recoverable
from the charterer
He also has insurable interest on the
expected freightage (section 103)
No insurable interest if he will be
compensated by charterer for the value of
the vessel, in case of loss.
Section 110 of the Insurance Code
1. National Character of the Insured;
2. Liability of the thing insured to capture or
detention;
3. Liability to seizure from breach of foreign
laws of trade
4. Want of necessary documents; and
5. Use of false or simulated papers
 P a g e | 29
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

DISTINCTION ON CONCEALMENT IN MARINE INSURANCE AND OTHER INSURANCE

ITEM MARINE INSURANCE OTHER PROPERTY INSURANCE

The information or belief of a
The information or the belief or 3rd party is not material and
expection of 3rd persons in need not be communicated
Information of 3rd persons
reference to a material fact is unless it proceeds from an agent
material and must be concealed. of the insured whose duty is to
give information
The concealment of any fact in
relation to any of the matters
Concealment of any material fact
stated in section 110 does not
will vitiate the entire contract,
Effect of concealment vitiate the entire contract but
whether the loss results from the
merely exonerates the insurer
risk concealed
from a risk resulting from the
fact concealed

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Implied Warranties
1. Seaworthiness of the ship
2. Against improper deviation
3. Against illegal venture
4. Warranty of neutrality
5. Presence of insurable interest
 Seaworthiness
- ship’s fitness to perform the service and
to encounter the ordinary perils of the
voyage, contemplated by the parties to
the policy.
 General Rule on Seaworthiness
The warranty of seaworthiness is complied with
if the ship be seaworthy at the time of the
commencement of the risk. Prior or subsequent
unseaworthiness is not a breach of the warranty
nor is it material that the vessel arrives in safety
at the end of her voyage.
 Ex ceptions to the General Rule on
seaworthiness :
1. In case of Time Policy , the ship must be
seaworthy at the commencement of every
voyage she may undertake during the
period of the coverage;
2. In the case of Cargo Policy, each vessel
upon which the cargo is shipped or
transhipped must be seaworthy at the
commencement of each particular
voyage;
3. In the case of Voyage Policy,
contemplating a voyage at different
stages, the ship must be seaworthy at the
commencement of each stage of the
voyage
Deviation
 Departure from the course of the voyage
insured, or an unreasonable delay in
pursuing the voyage or, the
commencement of an entirely diffrerent
voyage. (section 123)
 Instances of Deviation
1.Deviation from the agreed voyage;
2. Departure of vessel from the course of
the sailing fixed by mercantile usage;
P a g e | 30
3. Departure of vessel from the most
natural, direct and advantegous route if
not fixed by mercantile usage
4. Unreasonable delay in pursuing the
voyage;
5. Commencement of an entirely different
voyage. (sections 121-123, Insurance
Code)
Proper Deviation
 When caused by circumstances outside the
control of the ship captain or ship owner
 When necessary to comply with a warranty
or to avoid a peril (REAL PERIL)
 When made in good faith to avoid a peril
(NON-EXISTING/ASSUMED PERIL)
 When made in good faith to save human life
or to relieve another vessel in distress
(section 124)
Effect - In case of loss, the insurer is
liable.
Improper Deviation
 Every deviation not specified in Section 124
 Effect – In case of loss or damage subsequent
to an improper deviation, the insurer is not
liable. (section 124)
Loss
Rules in case of Loss
A. Total
1. Actual
1.1. Total Destruction;
1.2. Irretrievable loss by sinking or being
broken up;
1.3. Damage rendering the thing valueless to
the owner for the purpose for which he
held it; or
1.4. Other event which effectively deprives
the owner of the possession, at the port
of destination, of the thing insured.
2. Constructive
2.1. Actual loss of more than ¾ of the value
of the object;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
2.2. Damage reducing, by more than ¾ of the
value of the vessel and of the cargo; and
2.3. Expense of the transshipment exceeds ¾
of the value of the cargo.
B. Partial – that which is not total (section 128)
IN CASE OF CONSTRUCTIVE TOTAL LOSS,
INSURED’s REMEDIES ARE :
1. Abandon the goods or vessel to the insurer
and claim for whole insured value; (section
139)
2. Without abandoning the vessel, claim for
partial actual loss (section 155)
Abadonment - Act of the insured by which,
after a constructive total loss, he declared the
relinquishment to the insurer of his interest
in the thing insured. (section 138)
REVISED SECURITIES ACT (RA 8799)
 Referred to as the “Blue Sky Law”
 State Policies (Section 2)
- Establish a socially conscious free market
that regulates itself;
- Encourage widest participation of
ownership in enterprises and enhance
democratization of wealth;
- Promote development of the capital
market;
- Protect investors and ensure full and fair
disclosure about securities; and
- Minimize if not totally eliminate insider
trading and other fraudulent or
manipulative devices and practices which
create distortions in the free market.
Intended Effects
1. Prevention of excesses and fraudulent
transactions, merely by requirement that
their details be revealed
2. Placing the market during the early stages
of offering of a security a body of
information, which operating indirectly
through investment services and expert
investors, will tend to produce a more
accurate appraisal of a security
P a g e | 31
PSE vs. Court of Appeal, 281 SCRA 232
Key Features
1. Requires the sale or offer for sale of any
security in the Philippines to be
registered and permitted by SEC, unless
such securities are exempt securities or
sold in exempt transactions;
2. Requires registration of those who
participate in the offer and sale of
securities, like brokers, dealers and
salesmen and securities exchanges;
3. Provides requirements to ensure that
transactions involving securities would be
pursued on sound, fair and equitable
principles and to prevent market
manipulation;
4. Expanded SEC powers and functions,
including the power to promulgate rules
and regulations and to exercise
investigatory powers and removed its
quasi-judicial powers under PD 902-A.
 Section 3.1
Securities" are shares, participation or
interests in a corporation or in a
commercial enterprise or profit-making
venture and evidenced by a certificate,
contract, instruments, whether written or
electronic in character. It includes:
(a.) Shares of stocks, bonds, debentures,
notes evidences of indebtedness,
asset-backed securities;
(b.) Investment contracts, certificates of
interest or participation in a profit
sharing agreement, certifies of deposit
for a future subscription;
(c.) Fractional undivided interests in oil, gas
or other mineral rights;
(d.) Derivatives like option and warrants;
(e.) Certificates of assignments, certificates of
participation, trust certificates, voting
trust certificates or similar instruments
(f.) Proprietary or nonproprietary
Membership certificates in corporations;
and
(g.) Other instruments as may in the future be
determined by the Commission.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Nature and Composition of SEC (Section 4)
 Collegial body, composed of a chairperson
and (4) Commissioners, appointed by the
President for a term of (7) seven years each
and who shall serve as such until their
successor shall have been appointed and
qualified.
 The Commissioners must be natural-born
citizens of the Philippines, at least forty (40)
years of age for the Chairperson and at least
thirty-five (35) years of age for the
Commissioners, of good moral character, or
unquestionable integrity, of known probity
and patriotism, and with recognized
competence in social and economic
disciplines: Provided, That the majority of
Commissioners, including the Chairperson,
shall be members of the Philippine Bar
SEC Powers and Functions (Section 5)
A. Have jurisdiction and supervision over all
corporations, partnership or associations
who are the grantees of primary
franchises and/or a license or a permit
issued by the Government;
B. Formulate policies and recommendations
on issues concerning the securities
market, advise Congress and other
government agencies on all aspect of the
securities market and propose legislation
and amendments thereto;
C. Approve, reject, suspend, revoke or
require amendments to registration
statements, and registration and licensing
applications;
D. Regulate, investigate or supervise the
activities of persons to ensure
compliance;
E. Supervise, monitor, suspend or take over
the activities of exchanges, clearing
agencies and other SROs;
F. Impose sanctions for the violation of laws
and rules, regulations and orders, and
issued pursuant thereto;
G. Prepare, approve, amend or repeal rules,
regulations and orders, and issue
opinions and provide guidance on and
supervise compliance with such rules,
regulation and orders;
H. Enlist the aid and support of and/or
deputized any and all enforcement
P a g e | 32
agencies of the Government, civil or
military as well as any private institution,
corporation, firm, association or person in
the implementation of its powers and
function under its Code;
I. Issue cease and desist orders to prevent
fraud or injury to the investing public;
J. Punish for the contempt of the
Commission, both direct and indirect, in
accordance with the pertinent provisions
of and penalties prescribed by the Rules
of Court;
K. Compel the officers of any registered
corporation or association to call
meetings of stockholders or members
thereof under its supervision;
L. Issue subpoena duces tecum and summon
witnesses to appear in any proceedings of
the Commission and in appropriate cases,
order the examination, search and seizure
of all documents, papers, files and
records, tax returns and books of
accounts of any entity or person under
investigation as may be necessary for the
proper disposition of the cases before it,
subject to the provisions of existing laws;
M. Suspend, or revoke, after proper notice
and hearing the franchise or certificate of
registration of corporations, partnership
or associations, upon any of the grounds
provided by law; and
N. Exercise such other powers as may be
provided by law as well as those which
may be implied from, or which are
necessary or incidental to the carrying
out of, the express powers granted the
Commission to achieve the objectives and
purposes of these laws.
Section 5.2. The Commission’s jurisdiction
over all cases enumerated under section 5
of Presidential Decree No. 902-A is
hereby transferred to the Courts of
general jurisdiction or the appropriate
Regional Trial Court: Provided, That the
Supreme Court in the exercise of its
authority may designate the Regional
Trial Court branches that shall exercise
jurisdiction over the cases. The
Commission shall retain jurisdiction over
pending cases involving intra-corporate
disputes submitted for final resolution
which should be resolved within one (1)
year from the enactment of this Code. The

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Commission shall retain jurisdiction over
pending suspension of
payment/rehabilitation cases filed as of
30 June 2000 until finally disposed.
 From the above, it can be said that the SEC's
 Juxtaposing the jurisdiction of the RTC
under RA 8799 and the powers that were
retained by the SEC, it is clear that the
SEC retained its administrative,
regulatory, and oversight powers over all
corporations, partnerships, and
associations who are grantees of primary
franchises, and/or a license or permit
issued by the Government. However, the
Securities Regulations Code (SRC) is clear
that when there is a controversy arising
out of intra-corporate relations, between
and among stockholders, members or
associates, and between, any, or all of
them and the corporation, it is the RTC,
not SEC, which has jurisdiction over the
case.
Florencio Orendain vs. BF Homes, Inc.,
(G.R. No. 146313, October 31, 2006)
To determine whether a case involves
an intra-corporate controversy to be
heard and decided by the RTC, two
elements must concur:
 At the outset, it must be emphasized that
1. the status or relationship of the parties
and
2. the nature of the question that is
subject of their controversy.
The first element requires that the
controversy must arise out of intra-
corporate or partnership relations: (a)
between any or all of the parties and the
corporation, partnership or association of
which they are stockholders, members or
associates; (b) between any or all of them
and the corporation, partnership or
association of which they are
stockholders, members or associates and
(c) between such corporation,
partnership or association and the State
 It is a settled rule that jurisdiction over the
insofar as it concerns their individual
franchises. On the other hand, the second
element requires that the dispute among
the parties be intrinsically connected with
the regulation of the corporation. 15 If the
nature of the controversy involves
matters that are purely civil in character,
necessarily, the case does not involve an
intra-corporate controversy.
P a g e | 33
Eustacio Atwel, et al. vs. Concepcion
Progressive Ass'n., Inc., (G.R. No.
169370, April 14, 2008)
regulatory authority over private
corporations encompasses a wide margin of
areas, touching nearly all of a corporation's
concerns. This authority more vividly
springs from the fact that a corporation owes
its existence to the concession of its
corporate franchise from the state. Under its
regulatory responsibilities, the SEC may pass
upon applications for, or may suspend or
revoke (after due notice and hearing),
certificates of registration of corporations,
partnerships and associations (excluding
cooperatives, homeowners' association, and
labor unions); compel legal and regulatory
compliances; conduct inspections; and
impose fines or other penalties for violations
of the Revised Securities Act, as well as
implementing rules and directives of the SEC,
such as may be warranted.
Provident International Resources Corp.,
et al. vs. Joaquin T. Venus, et al., (G.R. No.
167041, June 17, 2008)
pursuant to Section 5.2 of Republic Act No.
8799, the SEC's jurisdiction over intra-
corporate controversies has been transferred
to the RTCs or Special Commercial Courts
(SCC) designated by the Court pursuant to
A.M. No. 00-11-03-SC promulgated on 21
November 2000.
In view of the said transfer of jurisdiction, the
SEC Hearing Panel which the SEC constituted
and the Interim Management Committee
which the SEC Hearing Panel appointed have
become functus officio.
GD Express Worldwide N.V., et al. vs. Court of
Appeals, et al., G.R. No. 136978, May 8, 2009
subject matter is conferred by law. The
determination of the rights of a director and
corporate officer dismissed from his
employment as well as the corresponding
liability of a corporation, if any, is an intra-
corporate dispute subject to the jurisdiction
of the regular courts.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Leslie Okol vs. Slimmers World
International, et al., (G.R. No. 160146,
December 11, 2009)
 A criminal charge for violation of the
Securities Regulation Code is a specialized
dispute. Hence, it must first be referred to an
administrative agency of special competence,
i.e., the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a
controversy involving a question within the
jurisdiction of the administrative tribunal,
where the question demands the exercise of
sound administrative discretion requiring the
specialized knowledge and expertise of said
administrative tribunal to determine
technical and intricate matters of fact. The
Securities Regulation Code is a special law. Its
enforcement is particularly vested in the SEC.
Hence, all complaints for any violation of the
Code and its implementing rules and
regulations should be filed with the SEC.
Where the complaint is criminal in nature,
the SEC shall indorse the complaint to the
DOJ for preliminary investigation and
prosecution as provided in Section 53.1
earlier quoted.
Manuel V. Baviera vs. Esperanza
Paglinawan, et al., (G.R. Nos. 168380 &
170602, February 8, 2007)
SEC’s power on Securities Transactions
 Section 8.1 Securities shall not be sold or
offered for sale or distribution within the
Philippines, without a registration statement
duly filed with and approved by the
Commission. Prior to such sale, information
on the securities, in such form and with such
substance as the Commission may prescribe,
shall be made available to each prospective
purchaser.
 Section 8.2. The Commission may
conditionally approve the registration
statement under such terms as it may deem
necessary.
 Section 8.3. The Commission may specify the
terms and conditions under which any
written communication, including any
summary prospectus, shall be deemed not to
constitute an offer for sale under this Section.
 Section 8.4. A record of the registration of
securities shall be kept in Register Securities
in which shall be recorded orders entered by
the Commission with respect such securities.
P a g e | 34
Such register and all documents or
information with the respect to the securities
registered therein shall be open to public
inspection at reasonable hours on business
days.
 Section 8.5. The Commission may audit the
financial statements, assets and other
information of firm applying for registration
of its securities whenever it deems the same
necessary to insure full disclosure or to
protect the interest of the investors and the
public in general.
Exceptions:
 The following securities may be sold
without need of registration.
(a.) Any security issued or guaranteed by the
Government of the Philippines, or by any
political subdivision or agency thereof, or
by any person controlled or supervised
by, and acting as an instrumentality of
said Government.
(b.) Any security issued or guaranteed by the
government of any country with which
the Philippines maintains diplomatic
relations, or by any state, province or
political subdivision thereof on the basis
of reciprocity: Provided, That the
Commission may require compliance with
the form and content for disclosures the
Commission may prescribe.
(c.) An isolated transaction in which any
security is sold, offered for sale,
subscription or delivery by the owner
therefore, or by his representative for the
owner’s account, such sale or offer for
sale or offer for sale, subscription or
delivery not being made in the course of
repeated and successive transaction of a
like character by such owner, or on his
account by such representative and such
owner or representative not being the
underwriter of such security.\
(d.) The distribution by a corporation actively
engaged in the business authorized by its
articles of incorporation, of securities to
its stockholders or other security holders
as a stock dividend or other distribution
out of surplus.
(e.) The sale of capital stock of a corporation
to its own stockholders exclusively,
where no commission or other
remuneration is paid or given directly or

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
indirectly in connection with the sale of
such capital stock.
(f.) The issuance of bonds or notes secured
by mortgage upon real estate or tangible
personal property, when the entire
mortgage together with all the bonds or
notes secured thereby are sold to a single
purchaser at a single sale
(g.) The issue and delivery of any security in
exchange for any other security of the
same issuer pursuant to a right of
conversion entitling the holder of the
security surrendered in exchange to make
such conversion: Provided, That the
security so surrendered has been
registered under this Code or was, when
sold, exempt from the provision of this
Code, and that the security issued and
delivered in exchange, if sold at the
conversion price, would at the time of
such conversion fall within the class of
securities entitled to registration under
this Code. Upon such conversion the par
value of the security surrendered in such
exchange shall be deemed the price at
which the securities issued and delivered
in such exchange are sold.
(h.) Broker’s transaction, executed upon
customer’s orders, on any registered
Exchange or other trading market.
(i.) Subscriptions for shares of the capitals
stocks of a corporation prior to the
incorporation thereof or in pursuance of
an increase in its authorized capital
stocks under the Corporation Code, when
no expense is incurred, or no commission,
compensation or remuneration is paid or
given in connection with the sale or
disposition of such securities, and only
when the purpose for soliciting, giving or
taking of such subscription is to comply
with the requirements of such law as to
the percentage of the capital stock of a
corporation which should be subscribed
before it can be registered and duly
incorporated, or its authorized, capital
increase.
(j.) The exchange of securities by the issuer
with the existing security holders
exclusively, where no commission or
other remuneration is paid or given
directly or indirectly for soliciting such
exchange.
P a g e | 35
(k.) The sale of securities by an issuer to
fewer than twenty (20) persons in the
Philippines during any twelve-month
period.
(l.) The sale of securities to any number of
the following qualified buyers:
a. Bank;
b. Registered investment house;
c. Insurance company;
d. Pension fund or retirement plan
maintained by the Government of the
Philippines or any political
subdivision thereof or manage by a
bank or other persons authorized by
the Bangko Sentral to engage in trust
functions;
e. Investment company or;
f. Such other person as the Commission
may rule by determine as qualified
buyers, on the basis of such factors as
financial sophistication, net worth,
knowledge, and experience in
financial and business matters, or
amount of assets under management.
 Section 10.3. Any person applying for an
exemption under this Section, shall file with
the Commission a notice identifying the
exemption relied upon on such form and at
such time as the Commission by the rule may
prescribe and with such notice shall pay to
the Commission fee equivalent to one-tenth
(1/10) of one percent (1%) of the maximum
value aggregate price or issued value of the
securities.
 Section 12.1. All securities required to be
registered under Subsection 8. I shall be
registered through the filing by the issuer in
the main office of the Commission, of a sworn
registration statement with the respect to
such securities, in such form and containing
such information and document as the
Commission prescribe. The registration
statement shall include any prospectus
required or permitted to be delivered under
Subsections 8.2, 8.3, and 8.4.
 Section 13.1. The Commission may reject a
registration statement and refuse
registration of the security there-under, or
revoke the affectivity of a registration
statement and the registration of the security
there-under after the due notice and hearing
by issuing an order to such effect, setting
forth its finding in respect thereto, if it finds
that:

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Grounds for suspension
 Section 15.1. If at any time, the information
contained in the registration statement filed
is or has become misleading, incorrect,
inadequate or incomplete in any material
respect, or the sale or offering for sale of the
security registered thereunder may work or
tend to work a fraud, the Commission may
require from the issuer such further
information as may in its judgement be
necessary to enable the Commission to
ascertain whether the registration of such
security should be revoked on any ground
specified in this Code. The Commission may
also suspend the right to sell and offer for the
sale such security pending further
investigation, by entering an order specifying
the grounds for such action, and by notifying
the issuer, underwriter, dealer or broker
known as participating in such offering
 Section 15.2. The refusal to furnish
information required by the Commission may
be a ground for the issuance of an order of
suspension pursuant to Subsection 15.1.
Upon the issuance of any such order and
notification to the issuer, underwriter, dealer
or broken know as participating in such
offering, no further offer or sale of any such
security shall be made until the same is lifted
or set aside by the Commission. Otherwise
such sale shall be void.
 15.3. Upon issuance of an order of
suspension, the Commission shall conduct a
hearing. If the Commission determines that
the sale of any security should be revoked is
shall issue an order prohibiting sale of such
security.
 15.4. Until the issuance of a final order, the
suspension of the right to sell, though binding
upon the persons notified there of, shall be
deemed confidential, and shall not be
published, unless it shall appear that the
order of suspension has been violated after
notice. If, however, the Commission finds that
the sale of the security will neither be
fraudulent nor result in fraud, it shall
forthwith issue an order revoking the order
of suspension, and such security shall be
restored to its status as a registered security
as of the date of such order of suspension.
Protection of Shareholder Interests
1. Tender Offers (Section 19)
2. Proxy Solicitations (Section 20)
P a g e | 36
3. Internal Record Keeping and Accounting
Controls (Section 22)
4. Transactions of Directors, Officers, and
Principal Stockholders (Section 23)
Tender Offer
 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.
 Tender offer is a publicly announced
intention by a person acting alone or in
concert with other persons to acquire equity
securities of a public company. A public
company is defined as a corporation which is
listed on an exchange, or a corporation with
assets exceeding P50,000,000.00 and with
200 or more stockholders, at least 200 of
them holding not less than 100 shares of such
company. Stated differently, a tender offer is
an offer by the acquiring person to
stockholders of a public company for
them to tender their shares therein on the
terms specified in the offer. Tender offer
is in place to protect minority
shareholders against any scheme that
dilutes the share value of their
investments. It gives the minority
shareholders the chance to exit the
company under reasonable terms, giving
them the opportunity to sell their shares
at the same price as those of the majority
shareholders.
Cemco Holdings, Inc. vs. National Life
Insurance Co. of the Phil., Inc., (G.R. No.
171815, August 7, 2007)
 The coverage of the mandatory tender offer
rule covers not only direct acquisition but
also indirect acquisition or "any type of
acquisition".
Cemco Holdings, Inc. vs. National Life
Insurance Co. of the Phil., Inc., (G.R. No.
171815, August 7, 2007)
 It shall be lawful for any person to make any
untrue statement of a material fact or omit to
state any material fact necessary in order to
make the statements made in the light of the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
circumstances under which they are made,
not mis-leading, or to engaged to any
fraudulent, deceptive or manipulative acts or
practices, in connection with any tender offer
or request or invitation for tenders, or any
solicitation for any security holders in
opposition to or in favor of any such favor of
any such offer, request, or invitation. The
Commission shall, for the purposes of this
subsection, define and prescribe means
reasonably designed to prevent, such acts
and practices as are fraudulent, deceptive
and manipulative.
Proxy Solicitation
 Section 20. Proxy solicitations. - 20.1. Proxies
must be issued and proxy solicitation must be
made in accordance with rules and
regulations to be issued by the Commission;
20.2. Proxies must be in writing, signed by
the stockholder or his duly authorized
representative and file before the scheduled
meeting with the corporate secretary.
20.3. Unless otherwise provided in the proxy,
it shall be valid only for the meeting for
which it is intended. No proxy shall be valid
only for the meting for which it is intended.
No proxy shall be valid and effective for a
period longer than five (5) years at one time.
20.4. No broker or dealer shall give any
proxy, consent or any authorization, in
respect of any security carried for the
account of the customer, to a person other
than the customer, without written
authorization of such customer.
20.5. A broker or dealer who holds or acquire
the proxy for at least ten percent (10%) or
such percentage as the commission may
prescribe of the outstanding share of such
issuer, shall submit a report identifying the
beneficial owner of ten days after such
acquisition, for its own account or customer,
to the issuer of security, to the exchange
where the security is traded and to the
Commission.
Internal Record Keeping
Section 22. Internal Record Keeping and
Accounting Control. - Every issuer which has a
class of securities that satisfies the requirements
of Subsection 17.2 shall:
22.1. Device and maintain a system of
internal accounting controls sufficient to
provide reasonable assurance that: (a)
P a g e | 37
Transactions and access to assets are
pursuant to management authorization; (b)
Financial statements are provided in
conformity with generally accepted
accounting principles that are adopted by
the Accounting standards council and the
rules promulgated by the Commission with
the regard to the preparation of the financial
statements; and (c) Recorded assets are
compared with existing assets at reasonable
intervals and differences are reconciled.
Manipulative Practices and Insider Trading
 Sections 24 – 27
Wash Sales
 To create a false or misleading appearance of
active trading in any listed security traded in
an Exchange of any other trading market
(hereafter referred to purposes of this
Chapter as "Exchange"):
(i) By effecting any transaction in such
security which involves no change in the
beneficial ownership thereof;
(ii) By entering an order or orders for the
purchase or sale of such security with the
knowledge that a simultaneous order or
orders of substantially the same size, time
and price, for the sale or purchase of any
such security, has or will be entered by or
for the same or different parties; or
(iii) By performing similar act where
there is no change in beneficial
ownership.
Marking the Close
 Also known as “portfolio funding”
 The practice of buying a security at the very
end of the trading day at a significantly
higher price than the current price of the
security. The purpose of the practice of
marking the close is to raise the closing price
of the security, making it appear to be higher-
valued than it actually is.
Painting the Tape
 The illegal practice in which traders buy and
sell a specific security among themselves,
creating the illusion of high trading volume
and significant investor interest, which can
attract unsuspecting investors who might
then buy the stock and enable the traders to
profit.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Squeezing the float
 Squeezing the float – 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 as to create artificial prices;
 Also known as “Pump and Dump”
 Pump and dump is a form of stock fraud in
which people artificially inflate the price of
stock in order to profit.
Hype and Dump
 Also known as “Pump and Dump”
 Pump and dump is a form of stock fraud in
which people artificially inflate the price of
stock in order to profit.
Improper Matched Orders
 Engaging in transactions where both the buy
and sell orders are entered at the same time
with the same price and quantity by different
but colluding parties.
Boiler Room Operations
 refers to the use of high pressure sales tactics
to sell stocks to clients who are "cold called",
or called randomly, most likely after being
picked out of a phone directory.
Boiler rooms are often set up in inexpensive
office spaces, where armies of telemarketers
make these cold calls. While the stock they
sell may be real (most likely an unknown
micro-cap stock), the information these
salespeople use to hype their product could
be false or misleading because of their
overwhelming desire to sell the stock and
claim commissions.
Scalping
 "Scalping refers to recommending that others
purchase a security while secretly selling the
same security in the market."
Daisy Chain
 series of manipulative transactions on a
security intended to create an impression of a
high trading volume, suggesting interest in
assets or securities that may not actually be
there. This tends to increase the share price,
which in turn encourages other investors to
buy the security. When other investors
P a g e | 38
become interested, the manipulating traders
dump the security at an artificially high price.
Flipping
 Quick-profit strategy in which the shares of a
new issue or IPO are bought for selling
immediately upon an increase in their market
price
 Section 24.2. No person shall use or employ,
in connection with the purchase or sale of
any security any manipulative or deceptive
device or contrivance. Neither shall any short
sale be effected nor any stop-loss order be
executed in connection with the purchase or
sale of any security except in accordance with
such rules and regulations as the Commission
may prescribe as necessary or appropriate in
the public interest for the protection of
investors.
Regulation of Option Trading
 Section 25. Regulation of Option Trading. – No
member of an Exchange shall, directly or
indirectly endorse or guarantee the
performance of any put, call, straddle, option
or privilege in relation to any security
registered on a securities exchange. The
terms "put", "call", "straddle", "option", or
"privilege" shall not include any registered
warrant, right or convertible security.
 Option Trading is a contract that gives the
buyer the right, but not the obligation, to buy
or sell an underlying asset at a specific price
on or before a certain date.
The danger of damage to the public consists
of the fact that a person to whom an option
has been given can abuse the same and
control a large number of shares for a certain
period of time and thus, manipulate the
market.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
INSIDER’s TRADING
GENERAL RULE:
Section 27. It shall be unlawful for an insider to
sell or buy a security of the issuer, while in
possession of material information with respect to
the issuer or the security that is not generally
available to the public
UNLESS:
a) The insider proves that the information was
not gained from such relationship; or
b) If the other party selling to or buying from
the insider (or his agent) is identified, the
insider proves: (i) that he disclosed the
information to the other party, or (ii) that he
had reason to believe that the other party
otherwise is also in possession of the
information.
PRESUMPTION
A purchase or sale of a security of the issuer
made by an insider, or such insider’s spouse or
relatives by affinity or consanguinity within the
second degree, legitimate or common-law, shall
be presumed to have been effected while in
possession of material non-public information if
transacted after such information came into
existence but prior to dissemination of such
information to the public and the lapse of a
reasonable time for the market to absorb such
information: Provided, however, That this
presumption shall be rebutted upon a showing
by the purchaser or seller that he was not aware
of the material non-public information at the
time of the purchase or sale.
Who is an insider?
Someone who has access to material, nonpublic
information about the security.
 The intent of the law is the protection of
investors against fraud, committed when an
insider, using secret information, takes
advantage of an uninformed investor.
Insiders are obligated to disclose material
information to the other party or abstain
from trading the shares of his corporation.
This duty to disclose or abstain is based on
two factors: first, the existence of a
relationship giving access, directly or
indirectly, to information intended to be
available only for a corporate purpose and
not for the personal benefit of anyone; and
second, the inherent unfairness involved
when a party takes advantage of such
P a g e | 39
information knowing it is unavailable to
those with whom he is dealing.
Defense of an Insider:
Section 30 of the Revised Securities Act allows
the insider the defense that in a transaction of
securities, where the insider is in possession of
facts of special significance, such information is
“generally available” to the public. Whether
information found in a newspaper, a specialized
magazine, or any cyberspace media be sufficient
for the term “generally available” is a matter
which may be adjudged given the particular
circumstances of the case. The standards cannot
remain at a standstill. A medium, which is
widely used today was, at some previous point in
time, inaccessible to most. Furthermore, it
would be difficult to approximate how the rules
may be applied to the instant case, where
investigation has not even been started.
Respondents failed to allege that the
negotiations of their agreement with GHB were
made known to the public through any form of
media for there to be a proper appreciation of
the issue presented.
 Section 56 – Civil liabilities on account of
false registration statement
 Section 57 – Civil liabilities in connection
with prospectus, communications and
reports
 Section 58 - Civil Liability for Fraud in
Connection with Securities Transactions
 Section 59. Civil Liability for Manipulation of
Security Prices
 Section 60. Civil Liability with Respect to
Commodity Futures Contracts and Pre-need
Plans
 Section 61. Civil Liability on account of
insider trading.
 SEC. 62. Limitation of Actions. - 62.1. No
action shall be maintained to enforce any
liability created under Section 56 or 57 of
this Code unless brought within two (2)
years after the discovery of the untrue
statement or the omission, or, if the action
is to enforce a liability created under
Subsection 57.1(a), unless brought within
two (2) years after the violation upon
which it is based. In no event shall any
such action be brought to enforce a
liability created under Section 56 or
Subsection 57.1 (a) more than five (5)
years after the security was bona fide
offered to the public, or under Subsection

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
57.1 (b) more than five (5) years after the
sale.
 62.2. No action shall be maintained to
enforce any liability created under any
other provision of this Code unless
brought within two (2) years after the
discovery of the facts constituting the
cause of action and within five (5) years
after such cause of action accrued.
 SEC. 63. Amount of Damages to be
Awarded. - 63.1. All suits to recover
damages pursuant to Sections 56, 57, 58,
59, 60 and 61 shall be brought before the
Regional Trial Court, which shall have
exclusive jurisdiction to hear and decide
such suits. The Court is hereby authorized
to award damages in an amount not
exceeding triple the amount of the
transaction plus actual damages.
Exemplary damages may also be awarded
in cases of bad faith, fraud, malevolence or
wantonness in the violation of this Code
or the rules and regulations promulgated
thereunder.
The Court is also authorized to award
attorney’s fees not exceeding thirty
percentum (30%) of the award.
SUPPLEMENTAL NOTES ON SECURITIES
REGULATION CODE
May the Department of Justice immediately
take cognizance and investigate cases
involving violations of the Securities
Regulation Code?
No. A criminal charge for violation of the
Securities Regulation Code is a specialized
dispute. Hence, it must first be referred to an
administrative agency of special competence, i.e.,
the SEC. Under the doctrine of primary
jurisdiction, courts will not determine a
controversy involving a question within the
jurisdiction of the administrative tribunal, where
the question demands the exercise of sound
administrative discretion requiring
specialized knowledge and expertise of said
administrative tribunal to determine technical
and intricate matters of fact. The Securities
Regulation Code is a special law. Its enforcement
is particularly vested in the SEC. Hence, all
P a g e | 40
complaints for any violation of the Code and its
implementing rules and regulations should be
filed with the SEC. Where the complaint is
criminal in nature, the SEC shall indorse the
complaint to the DOJ for preliminary
investigation and prosecution.
What is the Howey Test?
The Howey Test is applied to determine whether
an investment contract shall be required as a
security to be registered under the Securities
Regulation Code. The Securities Regulation Code
treats investment contracts as securities that
have to be registered with the SEC before they
can be distributed and sold. An investment
contract is a contract, transaction, or scheme
where a person invests his money in a common
enterprise and is led to expect profits primarily
from the efforts of others.
The United States Supreme Court held
in Securities and Exchange Commission v. W.J.
Howey Co.that, for an investment contract to
exist, the following elements, referred to as
the Howey test must concur: (1) a contract,
transaction, or scheme; (2) an investment of
money; (3) investment is made in a common
enterprise; (4) expectation of profits; and (5)
profits arising primarily from the efforts of
others
What is a public company?
A “public company,” as contemplated by the SRC
is not limited to a company whose shares of
stock are publicly listed; even companies whose
shares are offered only to a specific group of
people, are considered a public company,
provided they fall under Subsec. 17.2 of the SRC,
which provides: “any corporation with a class of
equity securities listed on an Exchange or with
assets of at least Fifty Million Pesos
(P50,000,000.00) and having two hundred (200)
or more holders, at least two hundred (200) of
which are holding at least one hundred (100)
shares of a class of its equity securities.”
the
Philippine Veterans Bank meets the
requirements and as such, is subject to the
reportorial requirements for the benefit of its
shareholders.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
SEC vs. Prosperity (2012) in relation to
Howey and Turner Test to determine
whether an investment contract is a
“security”.
SEC Prosperity.Com, Inc. (PCI) sold computer
software and hosted websites without providing
internet service. To make a profit, PCI devised a
scheme in which, for the price of US$234.00
(subsequently increased to US$294), a buyer
could acquire from it an internet website of a 15-
Mega Byte (MB) capacity. At the same time, by
referring to PCI his own down-line buyers, a
first-time buyer could earn commissions,
interest in real estate in the Philippines and in
the United States, and insurance coverage
worth P50,000.00.
To benefit from this scheme, a PCI buyer must
enlist and sponsor at least two other buyers as
his own down-lines. These second tier of buyers
could in turn build up their own down-lines. For
each pair of down-lines, the buyer-sponsor
received a US$92.00 commission. But referrals in
a day by the buyer-sponsor should not exceed 16
since the commissions due from excess referrals
inure to PCI, not to the buyer-sponsor.
PCI appears to be engaged in network marketing,
a scheme adopted by companies for getting
people to buy their products outside the usual
retail system where products are bought from
the stores shelf. Under this scheme, adopted by
most health product distributors, the buyer can
become a down-line seller. The latter earns
commissions from purchases made by new
buyers whom he refers to the person who sold
the product to him. The network goes down the
line where the orders to buy come.
The commissions, interest in real estate, and
insurance coverage worth P50,000.00 are
incentives to down-line sellers to bring in other
customers. These can hardly be regarded as
profits from investment of money under
the Howey test.
P a g e | 41
The Supreme Court recognized there were two
tests in determining whether a contract was an
investment contract.
The first is the Howey test, which traces
its roots to the SEC v. W.J. Howey Co. (328
US 293 [1946]) case in the United States.
The decision held that a contract,
transaction or scheme is an investment
contract where a person (a) invests his
money (b) in a common enterprise (c)
with an expectation of profits (d) solely
from the efforts of others.
The other test is the Turner test based on
a later case at the Court of Appeals—SEC
vs. Turner (474 F.2d 476, 9th Cir. 1973)—
which basically has the same elements as
the Howey test except that the profit was
described “primarily” from the efforts of
others.
What is Tender Offer?
A tender offer is an offer by the acquiring person
to stockholders of a public company for them to
tender their shares; it gives the minority
shareholders the chance to exit the company
under reasonable terms, giving them the
opportunity to sell their shares at the same price
as those of the majority shareholders. The
mandatory tender offer is still applicable even if
the acquisition, direct or indirect, is less than
35% when the purchase would result in
ownership of over 51% of the total outstanding
equity securities of the public company.
LAW ON MORTGAGE
 Real Mortgage
 Chattel Mortgage
 Real Mortgage - It is a contract whereby the
debtor secures to the creditor the fulfillment
of a principal obligation, specially subjecting
to such security immovable property or real
rights over immovable property in case the
principal obligation is not complied with at
the time stipulated.
Objects of Real Mortgage
1. Immovables

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
2. Alienable real rights in accordance with the
laws, imposed upon immovables.
FUTURE PROPERTY CANNOT BE THE OBJECT
OF MORTGAGE.
1. Mortgagor retains possession of the property
he may deliver said property to the
mortgagee without altering the nature of the
contract of mortgage
2. It is not an essential requisite that the
principal of the credit bears interest
Essential Requisites of Mortgage
1. Constituted to secure the fulfillment of
principal obligation
2. Mortgagor must be the absolute owner of the
thing mortgaged
3. Persons constituting the mortgage must have
the free disposal of their property, and in the
absence thereof, that they be legally
authorized for the purpose
4. Cannot exist without a valid obligation
5. When the principal obligation becomes due,
the thing in which the mortgage consists may
be alienated for the payment to the creditor
6. Appears in a public document duly recorded
in the Registry of Property to be validly
constituted
Effects of Mortgage
1. Creates real rights, a lien inseparable from
the property mortgaged, enforceable against
the whole world
2. Creates merely an encumbrance
Effect of invalidity of mortgage on the
principal obligation
1. Principal obligation remains valid
2. Mortgage deed remains evidence of a
personal obligation
Foreclosure of Mortgage
 It is the remedy available to the mortgagee by
which he subjects the mortgaged property to
the satisfaction of the obligation secured by
the mortgaged
Kinds of Foreclosure
1. Judicial - Rule 68, Rules of Court
2. Extrajudicial - RA 3135
P a g e | 42
CHATTEL MORTGAGE LAW
 Sec. 4. Validity. — A chattel mortgage shall
not be valid against any person except the
mortgagor, his executors or administrators,
unless the possession of the property is
delivered to and retained by the mortgagee
or unless the mortgage is recorded in the
office of the register of deeds of the province
in which the mortgagor resides at the time of
making the same, or, if he resides without the
Philippine Islands, in the province in which
the property is situated: Provided, however,
That if the property is situated in a different
province from that in which the mortgagor
resides, the mortgage shall be recorded in the
office of the register of deeds of both the
province in which the mortgagor resides and
that in which the property is situated, and for
the purposes of this Act the city of Manila
shall be deemed to be a province
 Section 5. A chattel mortgage shall be
deemed to be sufficient when made
substantially in accordance with the
following form, and shall be signed by the
person or persons executing the same, in the
presence of two witnesses, who shall sign the
mortgage as witnesses to the execution
thereof, and each mortgagor and mortgagee,
or, in the absence of the mortgagee, his agent
or attorney, shall make and subscribe an
affidavit in substance as hereinafter set forth,
which affidavit, signed by the parties to the
mortgage as above stated, and the certificate
of the oath signed by the authority
administering the same, shall be appended to
such mortgage and recorded therewith.
 Sec. 6. Corporations. — When a corporation
is a party to such mortgage the affidavit
required may be made and subscribed by a
director, trustee, cashier, treasurer, or
manager thereof, or by a person authorized
on the part of such corporation to make or to
receive such mortgage. When a partnership is
a party to the mortgage the affidavit may be
made and subscribed by one member
thereon.
 Sec. 7. Descriptions of property. — The
description of the mortgaged property shall
be such as to enable the parties to the
mortgage, or any other person, after
reasonable inquiry and investigation, to
identify the same.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
A chattel mortgage shall be deemed to cover
only the property described therein and not
like or substituted property thereafter
acquired by the mortgagor and placed in the
same depository as the property originally
mortgaged, anything in the mortgage to the
contrary notwithstanding.
 Sec. 13. When the condition of a chattel
mortgage is broken, a mortgagor or person
holding a subsequent mortgage, or a
subsequent attaching creditor may redeem
the same by paying or delivering to the
mortgagee the amount due on such mortgage
and the reasonable costs and expenses
incurred by such breach of condition before
the sale thereof. An attaching creditor who so
redeems shall be subrogated to the rights of
the mortgagee and entitled to foreclose the
mortgage in the same manner that the
mortgagee could foreclose it by the terms of
this Act.
 FORECLOSURE (SIMILAR BUT NOT
IDENTICAL WITH REM) SECTION 14,
CHATTEL MORTGAGE LAW
1. There is a 30-day cooling off period
before the public auction, from the time
the condition is broken.
2. Notice – at least 10 days’ notice of the
time, day, place, and purpose of such sale
has been posted at 2 or more public
places in such municipality. Personal
notice or mail shall also be given to the
mortgagor or person holding under him
and the persons holding subsequent
mortgages of the time and place of sale.
3. Sheriff should possess the property as he
needs to deliver the same to the winning
bidder. If the mortgagor refuses to do so,
the mortgagee can
seek the help of the court. There could als
o be a stipulation in the contract as well.
But if the debtor is not willing and able,
the loss is with the creditor.
4. There is a 30-day equity of redemption
period (payment of obligation)
5. After foreclosure, there could be recovery
of deficiency, but there is Recto Law
(1484) pertaining to sale of personal
property in installments and there is
P a g e | 43
Chattel Mortgage to secure payment of
price.
1. Registration shall be done in the Register
of Deeds where the mortgagor resides
and when the property is situated
somewhere else, it needs to be registered
also in the Register of Deeds of the area
where the property is situated.
 Chattel mortgage would not be valid a
nd binding as against third persons
absent any registration
 If what is mortgaged is a car,
registration with the LTO is
also needed. Absent this, again,
it would not be binding and invalid as
against third persons
FOREIGN INVESTMENTS ACT
 Republic Act No. 8179
AN ACT TO FURTHER LIBERALIZE FOREIGN
INVESTMENTS, AMENDING FOR THE
PURPOSE REPUBLIC ACT NO. 7042, AND FOR
OTHER PURPOSES
 RA 7042, SEC. 2. Declaration of Policy. - It is
the policy of the State to attract, promote and
welcome productive investments from
foreign individuals, partnerships,
corporations, and governments, including
their political subdivisions, in activities which
significantly contribute to national
industrialization and socio-economic
development to the extent that foreign
investment is allowed in such activity by the
Constitution and relevant laws. Foreign
investments shall be encouraged in
enterprises that significantly expand
livelihood and employment opportunities for
Filipinos; enhance economic value of farm
products; promote the welfare of Filipino
consumers; expand the scope, quality and
volume of exports and their access to foreign
markets; and/or transfer relevant
technologies in agriculture, industry and
support services. Foreign investments shall
be welcome as a supplement to Filipino
capital and technology in those enterprises
serving mainly the domestic market.
 As a general rule, there are no restrictions on
extent of foreign ownership of export
enterprises. In domestic market enterprises,

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
foreigners can invest as much as one hundred
percent (100%) equity except in areas
included in the negative list. Foreign
owned firms catering mainly to the domestic
market shall be encouraged to undertake
measures that will gradually increase Filipino
participation in their businesses by
taking in Filipino partners, electing Filipinos
to the board of directors, implementing
transfer of technology to Filipinos, generating
more employment for the economy and
enhancing skills of Filipino workers.
 “Investment” shall mean equity participation
in any enterprise organized or existing under
the laws of the Philippines.
 “Foreign investment” shall mean an equity
investment made by a non-Philippine
national in the form of foreign exchange
and/or other assets actually transferred to
the Philippines and duly registered with the
Central Bank which shall assess and appraise
the value of such assets other than foreign
exchange.
 Foreign Investments Negative List” or
“Negative List” shall mean a list of areas of
economic activity whose foreign ownership is
limited to a maximum of forty percent (40%)
of the equity capital of the enterprises
engaged therein.
 “Philippine national” shall mean a citizen of
the Philippines, or a domestic partnership or
association wholly owned by citizens of the
Philippines; or a corporation organized
under the laws of the Philippines of which at
least sixty percent (60%) of the capital stock
outstanding and entitled to vote is owned
and held by citizens of the Philippines; or a
corporation organized abroad and registered
as doing business in the Philippines under
the Corporation Code of which one hundred
percent (100%) of the capital stock
outstanding and entitled to vote is wholly
owned by Filipinos or a trustee of funds for
pension or other employee retirement or
separation benefits, where the trustee is a
Philippine national and at least sixty percent
(60%) of the fund will accrue to the benefit of
Philippine nationals: Provided, That where a
corporation and its non-Filipino stockholders
own stocks in a Securities and Exchange
Commission (SEC) registered enterprise, at
least sixty percent of the capital stock
outstanding and entitled to vote of each of
both corporations must be owned and held
P a g e | 44
by citizens of the Philippines, in order that
the corporation shall be considered a
Philippine national."
 SEC. 4. Scope. – This Act shall not apply to
banking and other financial institutions
which are governed and regulated by the
General Banking Act and other laws under
the supervision of the Central Bank.
 Sec. 7. Foreign Investments in Domestic
Market Enterprises. - Non-Philippine
nationals may own up to one hundred
percent (100%) of domestic market
enterprises unless foreign ownership therein
is prohibited or limited by the Constitution
and existing law or the Foreign Investment
Negative List under Section 8 hereof."
 SEC.9. Investment Rights of Former
Natural-born Filipinos. - For purposes of
this Act, former natural born citizens of the
Philippines shall have the same investment
rights of Philippine citizen in Cooperatives
under Republic Act No. 6938, Rural Banks
under Republic Act No. 7353, Thrift Banks
and Private Development Banks under
Republic Act No. 7906, and Financing
Companies under Republic Act No. 5980.
These rights shall not extend to activities
reserved by the Constitution including (1) the
exercise of profession; (2) in defense-related
activities under Section 8 (b) hereof, unless
specifically authorized by the Secretary of
National Defense; and (3) activities covered
by Republic Act No. 1180 (Retail Trade Act),
Republic Act No. 5487 (Security Agency Act),
Republic Act No. 7076 (Small Scale Mining
Act), Republic Act No. 3018, as amended
(Rice and Corn Industry Act), and P.D. 449
(Cockpits Operation and Management)".
 SEC. 10. Other Rights of natural Born
Citizen Pursuant to the Provisions of
Article XII, Section 8 of the Constitution. -
Any natural born citizen who has lost his
Philippine citizenship and who has the legal
capacity to enter into a contract under
Philippine Laws may be a transferee of a
private land up to maximum area of five
thousand (5,000) square meters in the case
of urban land or three (3) hectares in the case
of rural land to be used by him for business
or other purposes. In the case of married
couples, one of them may avail of the
privilege herein granted: Provided, That If
both shall avail of the same, the total is

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
acquired shall not exceed the maximum
herein fixed
 In case the transferee already owns urban or
rural land for business or other purposes, he
shall be entitled to be a transferee of
additional urban or rural land for business or
other purposes which when added to those
already owned by him shall not exceed the
maximum areas herein authorized.
A transferee under this Act may acquire not
more than two (2) lots which should be
situated in different municipalities or cities
anywhere in the Philippines: Provided, That
the Total land area thereof shall not exceed
five thousand (5,000) square meters in the
case of urban land or three (3) hectares in the
case of rural land for use by him for business
or other purposes. A transferee who has
already acquired urban land shall be
disqualified form acquiring rural land and
vice versa.
 Small and medium-sized domestic market
enterprises with paid in equity capital less
than the equivalent of Two hundred
thousands US dollars (US$200,000.00), are
reserved to Philippines nationals: Provided,
That if (1) they involve advance technology
as determined by the Department of Science
and Technology, or (2) they employ at least
fifty (50) direct employees, then a minimum
paid-in capital of One hundred thousand US
dollars (US$100,000.00) shall be allowed to
non-Philippines nationals.
Negative List “A”
 Mass Media except recording, practice of
licensed profession, retail trade, cooperative
and small-scale mining, etc. where foreign
ownership is prohibited; Advertising,
ownership of land, operation and
management of public utilities, etc., where
only minority foreign ownership is
prohibited
Negative List “B”
 Refers to areas that are defense-related,
those with adverse effects on public health
and morals and domestic market enterprises
with paid-up capital of less than US$200,000,
provided they involved advanced technology
as determined by the Department of Science
and Technology (DOST) or directly employ at
least fifty (50) employees, in which case, the
P a g e | 45
paid-up capital shall be lowered to
US$100,000 only to non-Philippine nationals
Basic Rights of Foreign Investors
 Right to REPATRIATION OF INVESTMENTS
In the case of foreign investments, the right
to repatriate the entire proceeds of the
liquidation of the investments in the currency
in which the investment was originally made
at the exchange rate prevailing at the time of
repatriation.
 Right to REMITTANCE OF EARNINGS
The right to remit, at the exchange rate
prevailing at the time of remittance, such as
may be necessary to meet the payment of
interest and the principal on foreign loans
and foreign obligations arising from
technological assistance contracts.
 Right to FREEDOM FROM EXPROPRIATION
There shall be no expropriation by the
government of the property represented by
the investments or of the property of
enterprises except for public use or in the
interest of national welfare and defense and
upon payment of just compensation. In such
cases, foreign investors or enterprises shall
have the right to remit sums received as
compensation for the expropriated property
in the currency in which the investment was
originally made and at the exchange rate
prevailing at the time of remittance.
GENERAL BANKING ACT AND OTHER
RELATED LAWS
The banking system has become an indispensable
institution in the modern world and plays a vital
role in the economic life of every civilized society.
Whether as mere passive entities for the safe-
keeping and saving of money or as active
instruments of business and commerce, banks
have attained an ubiquitous presence among the
people, who have come to regard them with
respect and even gratitude and, above all, trust
and confidence. In this connection, it is important
that banks should guard against injury
attributable to negligence or bad faith on its part.
As repeatedly emphasized, since the banking
business is impressed with public interest, the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
trust and confidence of the public in it is of
paramount importance.
SECURITY BANK AND TRUST COMPANY,
petitioner, vs. RIZAL COMMERCIAL BANKING
CORPORATION, respondent. (G.R. No. 170984.
January 30, 2009.)
 General Banking Laws
 General Banking Law (RA 8791)
 New Central Bank Act (RA 7653)
 Special Banking Laws
 Rural Bank Act (RA 7353)
 Private Development Banks Act (RA
4093)
 Savings and Loan Association Act (RA
3779)
 Thrift Banks Act (RA 7906)
 Other Laws affecting banks
 Secrecy of Bank Deposits (RA 1405)
 Unclaimed Balances Law (Act
no.3936)
 Philippine Deposit Insurance
Corporation (RA 3591)
 Special Purpose Vehicle Act (RA 9182)
 Anti-Money Laundering Act (RA 9160
as amended by RA 9194)
 Access Devices and Regulation Act
 RA 8791, SECTION 2. Declaration of Policy.
— The State recognizes the vital role of banks
in providing an environment conducive to
the sustained development of the national
economy and the fiduciary nature of
banking that requires high standards of
integrity and performance. In furtherance
thereof, the State shall promote and maintain
a stable and efficient banking and financial
system that is globally competitive, dynamic
and responsive to the demands of a
developing economy.
 SECTION 3. Definition and Classification
of Banks. —
4.1. "Banks" shall refer to entities engaged
in the lending of funds obtained in the
form of deposits. (2a)
Nature of Banking Business
 Debtor-Creditor Relationship
 Fiduciary Duty
 Not a trust agreement
 Indispensable Institution
 Impressed with public interest
 Not expected to be infallible
P a g e | 46
Liability of Banks for Acts of Officers and
Employees
 Primary Liability
 Highest Degree of Responsibility
 Respondeat Superior
 Negligence of Manager
 Negligence of Officers
 Negligence of Tellers
 Right to recover from employees
 Liability for Damages
Governance of BSP
 The Monetary Board exercises the powers
and functions of the BSP, such as the conduct
of monetary policy and supervision of the
financial system. Its chairman is the BSP
Governor, with five full-time members from
the private sector and one member from the
Cabinet.
 The Governor is the chief executive officer of
the BSP and is required to direct and
supervise the operations and internal
administration of the BSP. A deputy governor
heads each of the BSP's operating sector as
follows:
Monetary Stability Sector takes charge of the
formulation and implementation of the BSP’s
monetary policy, including serving the
banking needs of all banks through accepting
deposits, servicing withdrawals and
extending credit through the rediscounting
facility.
Supervision and Examination Sector enforces
and monitors compliance to banking laws to
promote a sound and healthy banking
system.
Resource Management Sector serves the
human, financial and physical resource needs
of the BSP
Constitutional Basis: Section 20, Art. XII of 1987
Constitution
Central Monetary Authority that shall function
and operate as an independent and accountable
body corporate in the discharge of its mandated
responsibilities concerning money, banking and
credit.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Primary Objective
 Maintain Price Stability conducive to a
balanced and sustainable economy.
Responsibilityof BSP(Section 3, NCBA)
1. Provide policy directions in the areas of
money, banking and credit
2. Supervision over operation of banks
3. Exercise regulatory powers over the
operation of finance companies and non-
bank financial institutions performing quasi-
banking functions
4. Maintain price stability conducive to a
balanced and sustainable growth of economy.
5. Promote and maintain monetary stability and
the convertibility of the peso.
The authority of the BSP
A. Supervisory Powers
B. Policy Directions; ratios, ceilings and
limitations
SECTION 4. Supervisory Powers. — The
operations and activities of banks shall be
subject to supervision of the Bangko Sentral.
"Supervision" shall include the following:
4.5. The issuance of rules of conduct or the
establishment of standards of operation
for uniform application to all institutions
or functions covered, taking into
consideration the distinctive character of
the operations of institutions and the
substantive similarities of specific
functions to which such rules, modes or
standards are to be applied;
4.6. The conduct of examination to
determine compliance with laws and
regulations if the circumstances so
warrant as determined by the Monetary
Board;
4.7. Overseeing to ascertain that laws and
regulations are complied with;
4.8. Regular investigation which shall not be
oftener than once a year from the last
date of examination to determine
whether an institution is conducting its
business on a safe or sound basis:
Provided, That the
deficiencies/irregularities found by or
discovered by an audit shall be
immediately addressed
4.9. Inquiring into the solvency and liquidity
of the institution; or
P a g e | 47
4.10. Enforcing prompt corrective action.
• The Monetary Board may forbid a bank from
doing business and place it under
receivership without prior notice and hearing
it the MB finds that a bank: (a) is unable to
pay its liabilities as they become due in the
ordinary course of business; (b) has
insufficient realizable assets to meet
liabilities; (c) cannot continue in business
without involving probable losses to its
depositors and creditors; and (d) has
willfully violated a cease and desist order of
the Monetary Board for acts or transactions
which are considered unsafe and unsound
banking practices and other acts or
transactions constituting fraud or dissipation
of the assets of the institution. (Alfeo D. Vivas,
vs. Monetary Board and PDIC, G.R. No.
191424, August 7, 2013)
 Does the BSP have supervision over the
operations of and exercise regulatory
powers over quasi-banks, trust entities
and other financial institutions?
The Bangko Sentral shall also have
supervision over the operations of and
exercise regulatory powers over quasi-
banks, trust entities and other financial
institutions which under special laws are
subject to Bangko Sentral supervision.
For the purposes of this Act, "quasi-banks"
shall refer to entities engaged in the
borrowing of funds through the issuance,
endorsement or assignment with recourse or
acceptance of deposit substitutes as defined
in Section 95 of Republic Act No. 7653
(hereafter the "New Central Bank Act”) for
purposes of relending or purchasing of
receivables and other obligations.
• The Monetary Board may forbid a bank from
doing business and place it under
receivership without prior notice and hearing
it the MB finds that a bank: (a) is unable to
pay its liabilities as they become due in the
ordinary course of business; (b) has
insufficient realizable assets to meet
liabilities; (c) cannot continue in business
without involving probable losses to its
depositors and creditors; and (d) has
willfully violated a cease and desist order of
the Monetary Board for acts or transactions
which are considered unsafe and unsound
banking practices and other acts or
transactions constituting fraud or dissipation
 P a g e | 48
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

of the assets of the institution. (Alfeo D.
Vivas, vs. Monetary Board and PDIC, G.R.
No. 191424, August 7, 2013)
Policy Directions; Ratios, Ceilings and
Limitations
SECTION 5. Policy Direction; Ratios, Ceilings
and Limitations. — The Bangko Sentral shall
provide policy direction in the areas of
money, banking and credit.
The Monetary Board may prescribe ratios,
ceilings, limitations, or other forms of
regulation on the different types of accounts
and practices of banks and quasi-banks
which shall, to the extent feasible, conform to
internationally accepted standards, including
those of the Bank for International
Settlements (BIS). The Monetary Board may
exempt particular categories of transactions
from such ratios, ceilings and limitations, but
not limited to exceptional cases or to enable a
bank or quasi-bank under rehabilitation or
during a merger or consolidation to continue
in business with safety to its creditors,
depositors and the general public
 The BSP has the exclusive power and
authority to issue the national currency.
BSP’s notes and coins are issued against, and
in amounts not exceeding, the assets of the
BSP. All notes and coins issued by the BSP are
fully guaranteed by the government and are
considered legal tender for all private and
public debts.
Who bears liability for banks and notes
issued?
Bangko Sentral shall be liabilities of the
Bangko Sentral and may be issued only
against, and in amounts not exceeding, the
assets of the Bangko Sentral. Said notes
and coins shall be a first and paramount lien
on all assets of the Bangko Sentral.
The Bangko Sentral's holdings of its own
notes and coins shall not be considered as
part of its currency issue and, accordingly,
shall not form part of the assets or liabilities
of the Bangko Sentral.
Checks as Legal Tender
 Section 60. Legal Character. – Checks
representing demand deposits do not
have legal tender power and their
acceptance in the payment of debts, both
public and private, is at the option of the
creditor: Provided, however, That a check
which has been cleared and credited to the
account of the creditor shall be equivalent to
a delivey to the creditor of cash in an amount
equal to the amount credited to his account.
Monetary Stabilization
SECTION 61. Guiding Principle. — The
Monetary Board shall endeavor to control any
expansion or contraction in monetary aggregates
which is prejudicial to the attainment or
maintenance of price stability
The policy may mean two things:
1. Increasing money supply during
recession to stimulate spending; or
2. Restricting it during inflation to curtail
spending.

 SECTION 51. Liability for Notes and

Coins. — Notes and coins issued by the
Difference between an Ordinary Corporation and a Banking Corporation

Point Ordinary Corporation Banking Corporation

Classification May be stock or non-stock
Stocks Issued May issue par value or no par
value
Registration May be registered without any
certificate of authority issued by
another govt agency
Acquisition of Shares May purchase/acquire its own
shares for a legitimate corporate
purpose, provided it has
unrestricted retained earnings
Must generally be a stock
Par value stocks only
Requires certificate of authority
from Monetary Board
May not purchase/aqcuire its
shares or accept them as security
for a loan. Except when
authorized by the Monetary
Board

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Number of Directors 5-15
Declaration of Dividends May declare
Classification of Banks
Type of Bank Power
Commercial Bank In addition to the general powers
incident to corporations and those
provided in other laws, a KB shall
have the authority to exercise all
such powers as may be necessary to
carry on the business of commercial
banking, such as accepting drafts
and issuing letters of credit;
discounting and negotiating
promissory notes, drafts, bills of
exchange, and other evidences of
debt; accepting or creating demand
deposits; receiving other types of
deposits and deposit substitutes;
buying and selling foreign exchange
and gold or silver bullion; acquiring
marketable bonds and other debt
securities; and extending credit,
subject to such rules as the Monetary
Board may promulgate. These rules
may include the determination of
bonds and other debt securities
eligible for investment, the
maturities and aggregate amount of
such investment.
Type of Bank Power
Thrift Bank 1. grant loans, whether secured or 1.
unsecured; 2.
2. invest in readily marketable bonds
and other debt securities, commercial
papers and accounts receivable, 3.
drafts, bills of exchange, acceptances
or notes arising out of commercial
transactions;
3. issue domestic letters of credit;
4. extend credit facilities to private and 4.
government employees;
5. extend credit against the security of
jewelry, precious stones and articles
P a g e | 49
5-15. In case of merger or
consolidation, number of
directors shall not exceed 21
Conditional, subject to section 57
of GBL (RA 8791)
Authority
1. Invest in the equities of allied
enterprises as may be
determined by the Monetary
Board;
2. purchase, hold and convey real
estate as specified under Sections
51 and 52 of R.A. No. 8791;
3. receive in custody funds,
documents and valuable objects;
4. act as financial agent and buy
and sell, by order of and for the
account of their customers,
shares, evidences of
indebtedness and all types of
securities;
5. make collections and payments
for the account of others and
perform such other services for
their customers as are not
incompatible with banking
business;
6. upon prior approval of the
Monetary Board, act as managing
agent, adviser, consultant or
administrator of investment
management/advisory/-
consultancy accounts;
7. out safety deposit boxes; and
8. engage in quasi-banking
functions.
Authority
open current or checking accounts;
engage in trust, quasi-banking
functions and money market
operations;
act as collection agent for government
entities, including but not limited to,
the Bureau of Internal Revenue (BIR),
Social Security System (SSS) and the
Bureau of Customs (BOC);
act as official depository of national
agencies and of municipal, city or
provincial funds in the municipality,
city or province where the TB is

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
of similar nature, subject to such rules
and regulations as the Monetary
Board may prescribe;
6. accept savings and time deposits;
7. rediscount paper with the Land Bank
of the Philippines, (LBP), Development
Bank of the Philippines (DBP), and
other government-owned or
controlled corporations;
8. accept foreign currency deposits as
provided under R.A. No. 6426, as
amended;
9. act as correspondent for other
financial institutions;
10. purchase, hold and convey real estate
as specified under Sections 51 and 52
of R.A. No. 8791; and
11. offer other banking services as
provided in Section 53 of R.A. No.
8791.
Rural Banks Universal Banks
1. accept current or checking accounts:  Licensed by the BSP to do both commercial
Provided, that such RB has net assets of at and investment banking
least P5 million; accept savings and time  Authority to exercise:
deposits;
2. act as trustee over estates or properties of
farmers and merchants;
3. act as official depository of municipal, city or
provincial funds in the municipality, city or
province where it is located;
4. sell domestic drafts; and
5. invest in allied undertakings.
Cooperative Banks
A Coop Bank shall be organized primarily to
provide financial and credit services to
cooperatives and may perform any or all of the
services offered by RBs.
P a g e | 50
located;
5. issue mortgage and chattel mortgage
certificates, buy and sell them for its
own account or for the account of
others, or accept and receive them in
payment or as amortization of its loan;
and
6. to invest in the equity of allied
undertakings.
RBs. In addition to the powers provided in
other laws, an RB may perform any or all
of the following services:
1. extend loans and advances primarily
for the purpose of meeting the normal
credit needs of farmers, fishermen or
farm families as well as cooperatives,
merchants, private and public
employees;
2. accept savings and time deposits;
3. act as correspondent of other financial
institutions;
4. rediscount paper with the LBP, DBP or
any other bank, including its branches
and agencies. Said banks shall specify
the nature of paper deemed
acceptable for rediscount, as well as
the rediscount rate to be charged by
any of these banks;
5. Act as collection agent; and
6. Offer other banking services as
provided in Section 53 of R.A. No.
8791.
 Powers authorized for a commercial
bank
 Powers of an investment house
as provided in existing laws
 Power to invest in non-allied
enterprises
 P a g e | 51
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

Difference between a Universal Bank (UB) municipalities

and a Commercial Bank (KB)
Type of Bank Capital Requirement
UB KB Cooperative Banks P10.0 M
Has additional power No such power. Only Islamic Bank P 1.0 B
other than those such powers as are
authorized for necessary to carry on - 25% of the authorized capital
commercial banks, the business of subscribed
including the power of banking. - of which 25% has been paid
an investment house - Paid up capital be not less than what
and the power to the law requires and in no case shall the
invest in non-allied paid-in capital be less than the
enterprises minimum capital requirement ( note:
May invest in equities May only invest in section 13, Corporation Code of
of allied, whether equities of allied Philippines and BSP Basic Guidelines in
financial or non- enterprises, whether Operating Banks)
financial and non-allied financial or non-
enterprises. financial  Incorporators/Subscribers
Highest capitalization Second highest  persons of integrity and of good
requirement minimum capital standing in the business community;
(P4.9 B) requirement (P2.4 B)  not previously convicted of any crime
involving moral turpitude;
 Not less than 5 but not more than 15;
21 in case of merger and
consolidation.
Organization of Banks
Rules:
 Capabilities
1. Foreign individuals and non-bank
Asessment of the following : ownership corporations may own up to 40% of the
structure; directors and senior management; voting stocks of a domestic bank. Provided,
operating plan, internal controls; and the that aggregate foreign voting stocks owned
projected financial condition and capital by them shall not exceed 40% of the
base. outstanding voting stock.
2. A Filipino individual and a domestic non-
Type of Bank Capital Requirements bank corporation may each own up to 40% of
Universal Bank P4. 9 B the voting stock of a domestic bank. No rule
Commercial Bank P2.4 B on aggregate ceiling.
Thrift Bank P 1.0 B
• head office within P 500.0 M  Foreign stockholdings (Grandfather Rule)
MM P250.0 M
• head office outside - In case of an individual, percentage of
MM (in Cebu and foreign owned voting stocks shall be
Davao) determined by citizenship of the
• head office outside individual stockholders in that bank.
MM (other areas)
Rural Bank P 100.0 M - In case of corporations, citizenship of
• Within MM P 50.0 M corporation shall follow citizenship of the
• Cities of Cebu and P 10.0 M controlling Stockholders, irrespective of
Davao P 5.0 M the place of incorporation. Controlling
• 1st, 2nd, 3rd class P 5.0 M stockholders mean those who hold more
cities and 1st class than 50% of the voting stock.
municipalities
• 4th, 5th and 6th  Commercial Banks – 60% owned by Filipino
class cities and in citizens
2nd, 3rd, and 4th  Thrift Banks – 40% at least owned by Filipino
municipalities citizens
• 5th and 6th class  Rural Banks – wholly owned by Filipinos

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 Family Groups or related interests (sections
12 and 13, GBL)
- Stockholdings of individuals related to
each other within the 4th degree of
consanguinity or affinity, legitimate or
common law shall be considered family
groups or related interests. Must be fully
disclosed in all transactions.
- 2 or more corporations owned or
controlled by the same family group or
group of persons shall be considered
related interests. Must be fully disclosed.
 There is no limit on the number of shares
that can be owned by the same family or
related interest without prejudice to the 40%
restriction on nationality.
 Number of Directors – at least 5, maximum of
15. two of whom shall be independent
directors (not an officer or employee)
 Number consistent with section 10,
Corporation Code
 Merger or consolidation – maximum of 21
 Meetings – may be conducted thru modern
technologies (note: SEC Rule and section 25
of Corporation Code
 Incorporators/subscribers and proposed
directors and officers must be persons of
integrity and of good credit standing in the
business community. Subscribers must have
adequate financial strength to pay for their
proposed subscription.
 Incorporators/Subscribers/Directors and
Officers must not have been convicted of any
crime involving moral turpitude.
 At least 2/3 of the members of the Board of
Directors of any commercial bank shall be
Filipino citizens;
 At least a majority of the members of the
Board of Directors of any thrift bank shall be
Filipino citizens;
 All members of the Board of a rural bank
shall be Filipino citizens.
 Compensation and other benefits may be
regulated by BSP in exceptional cases:
1. Bank is under comptrollership or
conservatorship;
2. Bank is found to be conducting business
in an unsafe or unsound manner (section
56, GBL)
3. Bank is found to be in unsatisfactory
financial condition.
Fit and Proper Rule
Monetary Board to issue rules and regulations to
determine qualifications and disqualifications of
P a g e | 52
bank directors or officers and disqualify those
unfit.
Factors to consider – integrity, experience,
education, training and competence.
Rules on disqualification
What happens when borrower submits false
statements to bank?
 Bank may terminate the loan
 Demand immediate repayment or liquidation
of the obligation
Article 1198, Civil Code of the Philippines
(Debtor loses the right to make use of the
period)
The bank invests the money that it holds in trust
of its depositors. For this reason, we have held
that the business of a bank is one affected with
public interest, for which reason the bank should
guard against loss due to negligence or bad faith.
In approving the loan of an applicant, the bank
concerns itself with proper information
regarding its debtors. The petitioner, as a bank
and a financial institution engaged in the grant of
loans, is expected to ascertain and verify the
identities of the persons it transacts business
with.
UNITED COCONUT PLANTERS BANK,
petitioner, vs. TEOFILO C. RAMOS,
respondent. (G.R. No. 147800. November 11,
2003)
The business of a bank is one affected with
public interest, for which reason the bank should
guard against loss due to negligence or bad faith.
In approving the loan of an applicant, the bank
concerns itself with proper [information]
regarding its debtors." Any investigation
previously conducted on the property offered by
petitioners as collateral did not preclude PNB
from considering new information on the same
property as security for a subsequent loan.
[G.R. No. 161319. January 23, 2007.] SPS. EDGAR
AND DINAH OMENGAN, petitioners, vs.
PHILIPPINE NATIONAL BANK, HENRY M.
MONTALVO AND MANUEL S. ACIERTO, *
respondents.
Rule on setting interest rates

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
While the Court recognizes the right of the parties
to enter into contracts and who are expected to
comply with their terms and obligations, this rule
is not absolute. Stipulated interest rates are illegal
if they are unconscionable and the Court is
allowed to temper interest rates when necessary.
In exercising this vested power to determine what
is iniquitous and unconscionable, the Court must
consider the circumstances of each case. What
may be iniquitous and unconscionable in one case,
may be just in another. In a number of cases, this
Court equitably reduced the interest rate agreed
upon by the parties for being iniquitous,
unconscionable, and/or exorbitant.
TRADE & INVESTMENT DEVELOPMENT
CORPORATION OF THE PHILIPPINES (Formerly
Philippine Export & Foreign Loan Guarantee
Corporation, petitioner, vs. ROBLETT
INDUSTRIAL CONSTRUCTION CORPORATION,
ROBERTO G. ABIERA and LETICIA ABIERA, and
PARAMOUNT INSURANCE CORPORATION,
respondents. (G.R. No. 139290. May 19, 2006.)
Escalation clauses are not void per se. However,
one "which grants the creditor an unbridled
right to adjust the interest independently and
upwardly, completely depriving the debtor of the
right to assent to an important modification in
the agreement" is void. Clauses of that nature
violate the principle of mutuality of contracts.
Article 1308 of the Civil Code holds that a
contract must bind both contracting parties; its
validity or compliance cannot be left to the will
of one of them.
For this reason, we have consistently held that a
valid escalation clause provides:
1. That the rate of interest will only be
increased if the applicable maximum rate of
interest is increased by law or by the
Monetary Board; and
2. That the stipulated rate of interest will be
reduced if the applicable maximum rate of
interest is reduced by law or by the Monetary
Board (de-escalation clause).
EQUITABLE PCI BANK, AIMEE YU and BEJAN
LIONEL APAS, petitioners, vs. NG SHEUNG
NGOR ** doing business under the name and
style "KEN MARKETING," KEN APPLIANCE
DIVISION, INC. and BENJAMIN E. GO,
respondents. (G.R. No. 171545. December 19,
2007.)
P a g e | 53
Restrictions on Bank Exposure to Directors,
Officers, Stockholders and their Related
Interests (DOSRI)
 SECTION 36. Restriction on Bank
Exposure to Directors, Officers, Stockholders
and Their Related Interests. — No director or
officer of any bank shall, directly or
indirectly, for himself or as the
representative or agent of others, borrow
from such bank nor shall he become a
guarantor, indorser or surety for loans from
such bank to others, or in any manner be an
obligor or incur any contractual liability to
the bank except with the written approval of
the majority of all the directors of the bank,
excluding the director concerned: Provided,
That such written approval shall not be
required for loans, other credit
accommodations and advances granted to
officers under a fringe benefit plan approved
by the Bangko Sentral. The required approval
shall be entered upon the records of the bank
and a copy of such entry shall be transmitted
forthwith to the appropriate supervising and
examining department of the Bangko Sentral.
Dealings of a bank with any of its directors,
officers or stockholders and their related
interests shall be upon terms not less
favorable to the bank than those offered to
others.
After due notice to the board of directors of
the bank, the office of any bank director or
officer who violates the provisions of this
Section may be declared vacant and the
director or officer shall be subject to the
penal provisions of the New Central Bank Act.
The Monetary Board may regulate the
amount of loans, credit accommodations and
guarantees that may be extended, directly or
indirectly, by a bank to its directors, officers,
stockholders and their related interests, as
well as investments of such bank in
enterprises owned or controlled by said
directors, officers, stockholders and their
related interests. However, the outstanding
loans, credit accommodations and guarantees
which a bank may extend to each of its
stockholders, directors, or officers and their
related interests, shall be limited to an
amount equivalent to their respective
unencumbered deposits and book value of
their paid-in capital contribution in the bank:
Provided, however, That loans, credit
accommodations and guarantees secured by

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
assets considered as non-risk by the
Monetary Board shall be excluded from such
limit: Provided, further, That loans, credit
accommodations and advances to officers in
the form of fringe benefits granted in
accordance with rules as may be prescribed
by the Monetary Board shall not be subject to
the individual limit.
Banks were not created for the benefit of
their directors and officers; they cannot use
the assets of the bank for their own benefit,
except as may be permitted by law. Congress
has thus deemed it essential to impose
restrictions on borrowings by bank directors
and officers in order to protect the public,
especially the depositors. Hence, when the
law prohibits directors and officers of
banking institutions from becoming in any
manner an obligor of the bank (unless with
the approval of the board), the terms of the
prohibition shall be the standards to be
applied to directors' transactions such as
those involved in the present case.
JOSE C. GO, petitioner, vs. BANGKO
SENTRAL NG PILIPINAS, respondent. (G.R.
No. 178429. October 23, 2009.)
Prohibited Transactions of Banks
1. Prohibited to act as insurer
2. Conducting business in an unsafe or unsound
manner
3. Prohibition on Dividend Declaration
4. Unauthorized advertisement or business
representation
Prohibited acts of borrower
 Fraudulently over valuing any property for
credit facility
 Furnishing false or make misrepresentations
 Attempt to defraud a bank
 Offering any director, officer or employee any
gift, fee or commission
Conservatorship in Banks
FIRST PHILIPPINE INTERNATIONAL BANK
(Formerly Producers Bank of the Philippines)
and MERCURIO RIVERA, petitioners, vs.
COURT OF APPEALS, CARLOS EJERCITO, in
substitution of DEMETRIO DEMETRIA, and
JOSE JANOLO, respondents. (G.R. No. 115849.
January 24, 1996.)
P a g e | 54
Hence, the conservator merely takes the place of
a bank's board of directors. What the said
board cannot do — such as repudiating a
contract validly entered into under the
doctrine of implied authority — the
conservator cannot do either. Ineluctably, his
power is not unilateral and he cannot simply
repudiate valid obligations of the Bank. His
authority would be only to bring court actions to
assail such contracts — as he has already done
so in the instant case. A contrary understanding
of the law would simply not be permitted by the
Constitution. Neither by common sense. To rule
otherwise would be to enable a failing bank to
become solvent, at the expense of third parties,
by simply getting the conservator to unilaterally
revoke all previous dealings which had one way
or another come to be considered unfavorable to
the Bank, yielding nothing to perfected
contractual rights nor vested interests of the
third parties who had dealt with the Bank.
WHEN BANK IS UNDER RECEIVERSHIP /
LIQUIDATION
 The receiver or liquidator meanwhile acts
not only for the benefit of the bank, but for its
creditors as well.
 In Provident Savings Bank vs. Court of
Appeals, we further stated that: When a bank
is prohibited from continuing to do business
by the Central Bank and a receiver is
appointed for such bank, that bank would not
be able to do new business, i.e., to grant new
loans or to accept new deposits. However, the
receiver of the bank is in fact obliged to
collect debts owing to the bank, which debts
form part of the assets of the bank. The
receiver must assemble the assets and pay
the obligation of the bank under receivership
and take steps to prevent dissipation of such
assets. Accordingly, the receiver of the bank
is obliged to collect pre-existing debts due to
the bank, and in connection therewith, to
foreclose mortgages securing such debts.
SPS. CESAR A. LARROBIS, JR. and VIRGINIA
S. LARROBIS, petitioners, vs. PHILIPPINE
VETERANS BANK, respondent. (G.R. No.
135706. October 1, 2004.)
 The appointment of a receiver operates to
suspend the authority of the bank and of its
directors and officers over its property and
effects, such authority being reposed in the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
receiver, and in this respect, the receivership
is equivalent to an injunction to restrain the
bank officers from intermeddling with the
property of the bank in any way. (65 Am. Jur.
2d Receivers, §146 [1963]. In a nutshell, the
insolvency of a bank and the consequent
appointment of a receiver restrict the bank's
capacity to act, especially in relation to its
property.
MIGUELA R. VILLANUEVA, RICHARD R.
VILLANUEVA, and MERCEDITA
VILLANUEVA-TIRADOS, petitioners, vs.
COURT OF APPEALS, CENTRAL BANK OF
THE PHILIPPINES, ILDEFONSO C. ONG, and
PHILIPPINE VETERANS BANK,
respondents. (G.R. No. 114870. May 26,
1995.)
 The Monetary Board may summarily and
without need for prior hearing forbid the
institution from doing business in the
Philippines and designate the Philippine
Deposit Insurance Corporation as receiver of
the banking institution.
 For a quasi-bank, any person of recognized
competence in banking or finance may be
designed as receiver. (Section 30, NCBA)
 "The designation of a conservator under
Section 29 of this Act or the appointment of a
receiver under this section shall be vested
exclusively with the Monetary Board.
Furthermore, the designation of a rests upon the existence of deposits with
conservator is not a precondition to the
designation of a receiver."
*Congress itself has recognized that a bank
receiver only has powers of administration.
Section 30 of the New Central Bank Act
expressly provides that "[t]he receiver shall
immediately gather and take charge of all the
assets and liabilities of the institution,
administer the same for the benefit of its
creditors, and exercise the general powers of
a receiver under the Revised Rules of Court
but shall not, with the exception of
administrative expenditures, pay or commit
any act that will involve the transfer or
disposition of any asset of the institution . . .“
ABACUS REAL ESTATE DEVELOPMENT
CENTER, INC., petitioner, vs. THE MANILA
BANKING CORPORATION, respondent.
(G.R. No. 162270. April 6, 2005.)
P a g e | 55
 The receiver shall determine as soon as
possible, but not later than ninety (90) days
from take over, whether the institution may
be rehabilitated or otherwise placed in such
a condition so that it may be permitted to
resume business with safety to its
depositors and creditors and the general
public: Provided, that any determination for
the resumption of business of the institution
shall be subject to prior approval of the
Monetary Board. (section 30, NCBA)
DEPOSIT INSURANCE
ROLE OF THE PDIC
1. Insure the deposits of all banks which are
entitled to the benefits of insurance and
which shall have all the powers granted by
law
2. It shall serve as a basic policy, promote and
safeguard the interests of the depositing
public by way of providing permanent and
continuing insurance coverage on all
insured deposits
 The Philippine Deposit Insurance
Corporation (PDIC) was created by law and,
as such, is governed primarily by the
provisions of the special law creating it. The
liability of the PDIC for insured deposits
therefore is statutory and, under Republic
Act No. 3591, as amended, such liability
the insured bank, not on the negotiability
or non-negotiability of the certificates
evidencing these deposits.
 The authority for this conclusion finds
support in decisions by American state courts
applying their respective bank guaranty laws.
The fact that the certificates state that the
certificates are insured by PDIC does not ipso
facto make the latter liable for the same
should the contingency insured against arise.
As stated earlier, the deposit liability of PDIC
is determined by the provisions of R.A. No.
3591, and statements in the certificates that
the same are insured by PDIC are not binding
upon the latter.
PHILIPPINE DEPOSIT INSURANCE
CORPORATION, petitioner, vs. COURT OF
APPEALS, ROSA AQUERO, GERARD YU,
ERIC YU, MINA YU, ELIZABETH NGKAION,
MERLY CUESCANO, LETICIA TAN, FELY
RUMBANA, LORNA ACUB, represented by

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
their Attorney-in-Fact, JOHN FRANCIS
COTAOCO, respondents. [G.R. No. 118917.
December 22, 1997.]
 In order that a claim for deposit insurance
with the PDIC may prosper, the law requires
that a corresponding deposit be placed in the
insured bank.
 Personal Filing of claims is required by the
PDIC
 Maximum Deposit Insurance for each
depositor is P500,000.00, regardless of the
number of accounts the depositor has in the
closed bank.
ANTI- MONEY LAUNDERING ACT
 Money Laundering is a crime whereby the
proceeds of an unlawful activity as defined in
the Anti- Money Laundering Act are
transacted or attempted to be transacted to
make them appear to have originated from
legitimate sources.
 Unlawful Activity is the offense which
generates dirty money. It is commonly called
the predicate crime. It refers to any act or
omission or series or combination thereof
involving or having direct relation to the
following:
Predicate Crimes/Unlawful Activity
 Kidnapping for ransom
 Drug trafficking and related offenses
 Graft and corrupt practices
 Plunder
 Robbery and Extortion
 Jueteng and Masiao
 Piracy
 Qualified theft
 Swindling
 Smuggling
 Violations under the Electronic Commerce
Act of 2000
 Hijacking; destructive arson; and murder,
including those perpetrated by terrorists
against non-combatant persons and similar
targets
 Fraudulent practices and other violations
under the Securities Regulation Code of 2000
 Felonies or offenses of a similar nature that
are punishable under the penal laws of other
countries.
P a g e | 56
Money Laundering Offenses and Penalties
 Knowingly transacting or attempting to
transact any monetary instrument/property
which represents, involves or relates to the
proceeds of an unlawful activity. Penalty is 7
to 14 years imprisonment and a fine of not
less than P3M but not more than twice the
value of the monetary instrument/property.
 Knowingly performing or failing to perform
an act in relation to any monetary
instrument/property involving the proceeds
of any unlawful activity as a result of which
he facilitated the offense of money
laundering. Penalty is 4 to 7 years
imprisonment and a fine of not less than
P1.5M but not more than P3M.
 Knowingly failing to disclose and file with the
AMLC any monetary instrument/property
required to be disclosed and filed. Penalty is
6 months to 4 years imprisonment or a fine
of not less than P100,000 but not more than
P500,000, or both.
Covered Institutions are those mandated by
the AMLA to submit covered and suspicious
transaction reports to the AMLC. These are:
 Banks and all other entities, including their
subsidiaries and affiliates, supervised and
regulated by the Bangko Sentral ng Pilipinas
 Insurance companies and all other
institutions supervised or regulated by the
Insurance Commission
 Securities dealers, pre-need companies,
foreign exchange corporations and other
entities supervised or regulated by the
Securities and Exchange Commission
 Covered transactions are single transactions
in cash or other equivalent monetary
instrument involving a total amount in excess
of Five Hundred Thousand (P500,000) Pesos
within one (1) banking day
Suspicious transactions are transactions with
covered institutions, regardless of the
amounts involved, where any of the following
circumstances exists:
 there is no underlying legal/trade obligation,
purpose or economic justification;
 the client is not properly identified;
 the amount involved is not commensurate
with the business or financial capacity of the
client;
 the transaction is structured to avoid being
the subject of reporting requirements under
the AMLA;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 there is a deviation from the client’s
profile/past transactions;
 the transaction is related to an unlawful
activity/offense under the AMLA; and
 transactions similar or analogous to the
above
Provisional Remedies
 Freezing of Monetary Instruments or
Property under Section 10
 Authority to inquire into Bank Deposits
under Section 11
 The Court of Appeals, upon application ex
parte (without notice to the other party) by
the AMLC and after determination that
probable cause exists that any monetary
instrument or property is in any way related
to an unlawful activity, may issue a freeze
order which shall be effective immediately.
The freeze order shall be for a period of 20
days unless extended by the court
 Freezing of Monetary Instruments or
Property under Section 10 – Involves
physical seizure of the assets
 Authority to inquire into Bank Deposits
under Section 11 – does not involve physical
seizure of the assets
Authority to inquire into bank deposits
 Not a search warrant
 Right to notice and right to be heard
Related Web of Accounts
 Provisional remedy on freeze of accounts
covers as well related web of accounts.
 Related web of accounts is defined as those
accounts, the funds and sources of which
originated from and/or materially linked to
the monetary instrument (s) or properties
subject of the freeze order.
Mutual Assistance among States
 Request for assistance from a foreign state,
based on the principles of mutuality and
reciprocity.
 AMLC may also obtain assistance from a
foreign state
Prohibitions
1. Shall not be used for political persecution or
harassment;
P a g e | 57
2. Shall not be used as an instrument to hamper
competition in trade and commerce;
3. No case for money laundering may be filed to
the prejudice of a candidate for an electoral
office during an election period
 Restitution for any aggrieved party shall be
governed by the provisions of the Civil Code.
 No person may be prosecuted under the
penal provisions of the AMLA for acts
committed prior to the enactment of the law
on 17 October 2001.
 When there is a suspicious transaction report
or a covered transaction report deemed
suspicious after investigation by the AMLC
and the court has, in a petition filed for the
purpose, ordered the seizure of any
monetary instrument or propert, in whole or
in part, directly or indirectly, related to said
report, the Revised Rules on Court on
forfeiture shall apply.
The primary objective of a freeze order is to
temporarily preserve monetary instruments
or property that are in any way related to an
unlawful activity or money laundering, by
preventing the owner from utilizing them
during the duration of the freeze order. The
effectivity of the freeze order was limited to a
period not exceeding six months, which may
be extended by the CA should it become
completely necessary. Nonetheless, when the
Republic has not offered any explanation why
it took six years before a civil forfeiture case
was filed in court, it can only be concluded
that the continued extension of the freeze
order beyond the six-month period violated
the party’s right to due process. (Ret. Lt. Gen.
Jacinto Ligot, et. al. vs. Republic of the
Philippines, G.R. No. 176944, March 6, 2013)
SECRECY OF BANK DEPOSITS AND FOREIGN
CURRENCY DEPOSITS LAW
On the one hand, Republic Act No. 1405 provides
for four (4) exceptions when records of deposits
may be disclosed. These are under any of the
following instances: a) upon written permission
of the depositor, (b) in cases of impeachment, (c)
upon order of a competent court in the case of
bribery or dereliction of duty of public officials
or, (d) when the money deposited or invested is
the subject matter of the litigation, and e) in
cases of violation of the Anti-Money Laundering
Act (AMLA), the Anti-Money Laundering Council
(AMLC) may inquire into a bank account upon
order of any competent court. On the other hand,

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
the lone exception to the non-disclosure of
foreign currency deposits, under Republic Act
No. 6426, is disclosure upon the written
permission of the depositor.
These two laws both support the confidentiality
of bank deposits. There is no conflict between
them. Republic Act No. 1405 was enacted for the
purpose of giving encouragement to the people
to deposit their money in banking institutions
and to discourage private hoarding so that the
same may be properly utilized by banks in
authorized loans to assist in the economic
development of the country. It covers all bank
deposits in the Philippines and no distinction
was made between domestic and foreign
deposits. Thus, Republic Act No. 1405 is
considered a law of general application. On the
P a g e | 58
other hand, Republic Act No. 6426 was intended
to encourage deposits from foreign lenders and
investors. It is a special law designed especially
for foreign currency deposits in the Philippines.
A general law does not nullify a specific or
special law. Generalia specialibus non derogant.
Therefore, it is beyond cavil that Republic Act
No. 6426 applies in this case.
GOVERNMENT SERVICE INSURANCE SYSTEM,
petitioner, vs. THE HONORABLE 15TH
DIVISION OF THE COURT OF APPEALS and
INDUSTRIAL BANK OF KOREA, TONG YANG
MERCHANT BANK, HANAREUM BANKING
CORP., LAND BANK OF THE PHILIPPINES,
WESTMONT BANK and DOMSAT HOLDINGS,
INC., respondents. [G.R. No. 189206. June 8,
2011.]
 P a g e | 59
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

INTELLECTUAL PROPERTY LAW

 Intellectual property rights" have furthermore been defined under Section 4 of the Code to consist of:
a) Copyright and Related Rights; b) Trademarks and Service Marks; c) Geographic Indications; d)
Industrial Designs; e) Patents; f) Layout-Designs (Topographies) of Integrated Circuits; and g)
Protection of Undisclosed Information. (Coca-Cola Bottlers, Phils., Inc. vs. Quintin J. Gomez, et al., G.R.
No. 154491, November 14, 2008)

Patents Trade Marks Copyrights

Grant issued by the government
through the Intellectual Property
Office of the Philippines (IP
Philippines). It is an exclusive
right granted for a product,
process or an improvement of a
product or process which is new,
inventive and useful. This
exclusive right gives the inventor
the right to exclude others from
making, using, or selling the
product of his invention during
the life of the patent.
A tool used that differentiates
goods and services from each
other. It is a very important
marketing tool that makes the
public identify goods and
services. A trademark can be one
word, a group of words, sign,
symbol, logo, or a combination of
any of these. Generally, a
trademark refers to both
trademark and service mark,
although a service mark is used
to identify those marks used for
services only.
Copyright is the legal protection
extended to the owner of the
rights in an original work.
“Original work” refers to every
production in the literary,
scientific and artistic domain.
Among the literary and artistic
works enumerated in the IP Code
includes books and other
writings, musical works, films,
paintings and other works, and
computer programs.

Patents Trade Marks Copyrights

A patent has a term of protection
of twenty (20) years providing an
inventor significant commercial
gain. In return, the patent owner
must share the full description of
the invention. This information is
made available to the public in
the form of the Intellectual
Property Official Gazette and can
be utilized as basis for future
research and will in turn promote
innovation and development.
In the Philippines, a trademark The term of protection of
can be protected through copyright for original and
registration. Registration gives derivative works is the life of the
the trademark owner the author plus fifty (50) years after
exclusive right to use the mark his death. The Code specifies the
and to prevent others from using terms of protection for the
the same or similar marks on different types of works.
identical or related goods and
services.
The trademark protection
granted by IP Philippines
protects your mark only in the
Philippines. If you want your
mark protected outside the
country, you will need to file
applications in the countries
where you want your mark
registered.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Technology Transfer Arrangements
Section 4.2. The term "technology transfer
arrangements" refers to contracts or agreements
involving the transfer of systematic knowledge
for the manufacture of a product, the application
of a process or rendering of a service including
management contracts; and the transfer,
assignment or licensing of all forms of
intellectual property rights, including licensing
of computer software except computer software
developed for mass market.
The signing of Republic Act 8293, otherwise
known as the Intellectual Property (IP) Code, on
June 6, 1997 liberalizes regulations on
technology transfer registration particularly the
rate of fees or royalties and strengthens
intellectual property rights protection in the
Philippines. Voluntary Licensing has been
provided by the Code. Recorded with the IP
Philippines of agreements that involve
transmission of rights is necessary. However,
registration is no longer required where the
agreement is in conformity of the requirements
of the law under Sections 87 and 88.
 Section 87 of the IP Code covers the
prohibited clauses which are adverse to
competition and trade.
 On the other hand, Section 88 of the IP Code
contains provisions which need to be
included in voluntary license agreement
Patentable Inventions (Sec.21)
 A Technical Solution to a Problem In any
field of human activity;
 It must be NEW (“novelty’)
 It must involve an INVENTIVE STEP
 It must be INDUSTRIALLY APPLICABLE
Statutory Classes of Invention
 A useful machine
 A product or composition
 A method or process, or
 An improvement of any of the foregoing
 Microorganism
 Non-biological & microbiological process
Requirements for Patentability
 NOVELTY
 INVENTIVE STEP
 INDUSTRIAL APPLICABILITY
P a g e | 60
Section 23. Novelty. - An invention shall not be
considered new if it forms part of a prior art.
(Sec. 9, R.A. No. 165a)
 The element of novelty is an essential
requisite of the patentability of an invention
or discovery. If a device or process has been
known or used by others prior to its
invention or discovery by the applicant, an
application for a patent therefor should be
denied; and if the application has been
granted, the court, in a judicial proceeding in
which the validity of the patent is drawn in
question, will hold it void and ineffective. It
has been repeatedly held that an invention
must possess the essential elements of
novelty, originality and precedence, and for
the patentee to be entitled to the protection
the invention must be new to the world.
(Angelita Manzano vs. Court of Appeals, et al.,
G.R. No. 113388, September 5, 1997)
 Section 24. Prior Art. - Prior art shall consist
of:
24.1. Everything which has been made
available to the public anywhere in the world,
before the filing date or the priority date of
the application claiming the invention; and
24.2. The whole contents of an application for
a patent, utility model, or industrial design
registration, published in accordance with
this Act, filed or effective in the Philippines,
with a filing or priority date that is earlier
than the filing or priority date of the
application: Provided, That the application
which has validly claimed the filing date of an
earlier application under Section 31 of this
Act, shall be prior art with effect as of the
filing date of such earlier application:
Provided further, That the applicant or the
inventor identified in both applications are
not one and the same. (Sec. 9, R.A. No. 165a)
Novelty and utility are likewise questions of
fact. The validity of patent is decided on the
basis of factual inquiries. Whether evidence
presented comes within the scope of prior art
is a factual issue to be resolved by the Patent
Office. There is question of fact when the
doubt or difference arises as to the truth or
falsehood of alleged facts or when the query
necessarily invites calibration of the whole
evidence considering mainly the credibility of
witnesses, existence and relevance of specific
surrounding circumstances, their relation to
each other and to the whole and the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
probabilities of the situation. (Angelita
Manzano vs. Court of Appeals, et al., G.R. No.
113388, September 5, 1997)
Section 20.6. "Priority date" means the date
of filing of the foreign application for the
same invention referred to in Section 31 of
this Act. (n)
Non-Patentable Inventions
Section 22. Non-Patentable Inventions. - The
following shall be excluded from patent
protection:
22.1. Discoveries, scientific theories and
mathematical methods;
22.2. Schemes, rules and methods of performing
mental acts, playing games or doing business,
and programs for computers;
22.3. Methods for treatment of the human or
animal body by surgery or therapy and
diagnostic methods practiced on the human or
animal body. This provision shall not apply to
products and composition for use in any of these
methods;
22.4. Plant varieties or animal breeds or
essentially biological process for the production
of plants or animals. This provision shall not
apply to micro-organisms and non-biological and
microbiological processes.
Provisions under this subsection shall not preclude
Congress to consider the enactment of a law
providing sui generis protection of plant varieties
and animal breeds and a system of community
intellectual rights protection:
22.5. Aesthetic creations; and
22.6. Anything which is contrary to public order
or morality. (Sec. 8, R.A. No. 165a)
OWNERSHIP OF PATENT
 Section 29. First to File Rule. - If two (2) or
more persons have made the invention
separately and independently of each other,
the right to the patent shall belong to the
person who filed an application for such
invention, or where two or more applications
are filed for the same invention, to the
applicant who has the earliest filing date or,
the earliest priority date. (3rd sentence, Sec.
10, R.A. No. 165a.)
P a g e | 61
 Section 30. Inventions Created Pursuant to a
Commission. - 30.1. The person who
commissions the work shall own the patent,
unless otherwise provided in the contract.
xxx
30.2. 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 invention is the
result of the performance of his regularly-
assigned duties, unless there is an
agreement, express or implied, to the
contrary. (n)
 Section 31. Right of Priority. - An application
for patent filed by any person who has
previously applied for the same invention in
another country which by treaty, convention,
or law affords similar privileges to Filipino
citizens, shall be considered as filed as of the
date of filing the foreign application:
Provided, That: (a) the local application
expressly claims priority; (b) it is filed within
twelve (12) months from the date the earliest
foreign application was filed; and (c) a
certified copy of the foreign application
together with an English translation is filed
within six (6) months from the date of filing
in the Philippines. (Sec. 15, R.A. No. 165a)
GROUNDS FOR CANCELLATION
 Section 61. Cancellation of Patents.
61.1. Any interested person may, upon
payment of the required fee, petition to
cancel the patent or any claim thereof, or
parts of the claim, on any of the following
grounds:
(a) That what is claimed as the
invention is not new or Patentable;
(b) That the patent does not disclose
the invention in a manner sufficiently
clear and complete for it to be carried
out by any person skilled in the art; or;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
(c) That the patent is contrary to
public order or morality.
61.2. Where the grounds for cancellation
relate to some of the claims or parts of the
claim, cancellation may be effected to such
extent only. (Secs. 28 and 29, R.A. No. 165a)
 Section 65. Cancellation of the Patent. - 65.1.
If the Committee finds that a case for
cancellation has been proved, it shall order
the patent or any specified claim or claims
thereof cancelled.
65.2. If the Committee finds that, taking into
consideration the amendment made by the
patentee during the cancellation proceedings,
the patent and the invention to which it
relates meet the requirement of this Act, it
may decide to maintain the patent as
amended: Provided, That the fee for printing
of a new patent is paid within the time limit
prescribed in the Regulations.
65.3. If the fee for the printing of a new
patent is not paid in due time, the patent
should be revoked.
65.4. If the patent is amended under
Subsection
65.5. Thereof, the Bureau shall, at the same
time as it publishes the mention of the
cancellation decision, publish the abstract,
representative claims and drawings
indicating clearly what the amendments
consist of. (n)
 Section
66. Effect of Cancellation of Patent or
Claim. - The rights conferred by the
patent or any specified claim or claims
cancelled shall terminate. Notice of the
cancellation shall be published in the IPO
Gazette. Unless restrained by the Director
General, the decision or order to cancel by
Director of Legal Affairs shall be
immediately executory even pending
appeal. (Sec. 32, R.A. No. 165a)
 Section 79. Limitation of Action for
Damages. - No damages can be recovered
for acts of infringement committed more
than four (4) years before the institution
of the action for infringement. (Sec. 43,
R.A. No. 165)
P a g e | 62
 Section 81. Defenses in Action for
Infringement. - In an action for
infringement, the defendant, in addition
to other defenses available to him, may
show the invalidity of the patent, or any
claim thereof, on any of the grounds on
which a petition of cancellation can be
brought under Section 61 hereof. (Sec. 45,
R.A. No. 165)
 Section 82. Patent Found Invalid May be
Cancelled. - In an action for infringement,
if the court shall find the patent or any
claim to be invalid, it shall cancel the
same, and the Director of Legal Affairs
upon receipt of the final judgment of
cancellation by the court, shall record that
fact in the register of the Office and shall
publish a notice to that effect in the IPO
Gazette. (Sec. 46, R.A. No. 165a)
Patent Infringement
 Ordinarily understood to mean as the
unauthorized replication or use of a
patented invention or process.
Technically, however, patent
infringement is committed either literally
or by equivalents.
 Literal infringement exists when every
limitation recited in a patent claim is
found in the infringing device (or
process). Infringement by equivalents, on
the other hand, happens when a device
(or process) appropriates a prior
invention by incorporating its innovative
concept and, although with some
modification and change, performs
substantially the same function in
substantially the same way to achieve
substantially the same result.
Doctrine of Equivalents
 Legal Basis:
Section 75.2. For the purpose of
determining the extent of protection
conferred by the patent, due account shall
be taken of elements which are equivalent
to the elements expressed in the claims,
so that a claim shall be considered to
cover not only all the elements as
expressed therein, but also equivalents.
(n)
 (a)n infringement also occurs when a
device appropriates a prior invention by

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
incorporating its innovative concept and,
albeit with some modification and change,
performs substantially the same function
in substantially the same way to achieve
substantially the same result." The reason
for the doctrine of equivalents is that to
permit the imitation of a patented
invention which does not copy any literal
detail would be to convert the protection
of the patent grant into a hollow and
useless thing. Such imitation would leave
room for - indeed encourage - the
unscrupulous copyist to make
unimportant and insubstantial changes
and substitutions in the patent which,
though adding nothing, would be enough
to take the copied matter outside the
claim, and hence outside the reach of the
law. Pascual Godines v. Court of Appeals,
et al. (G.R. No. 97343), September 13,
1993 Smith Kline Beckman Corp. v. Court
of Appeals, et al. (G.R. No. 126627),
August 14, 2003)
TRADEMARKS
 A trademark can be one word, a group of
words, sign, symbol, logo, or a
combination of any of these. Generally, a
trademark refers to both trademark and
service mark, although a service mark is
used to identify those marks used for
services only.
 Section 121.1. "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; (Sec. 38,
R.A. No. 166a)
 Section 121.2. "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; (Sec. 40, R.A. No. 166a)
 Section 122. How Marks are Acquired. -
The rights in a mark shall be acquired
through registration made validly in
accordance with the provisions of this
law. (Sec. 2-A, R A. No. 166a)
P a g e | 63
 Registration gives the trademark owner the
exclusive right to use the mark and to
prevent others from using the same or
similar marks on identical or related goods
and services.
The right to a trademark is granted to the one
who first files a trademark application with
the IP Philippines. Before applying for
trademark registration, it would help if you
conduct a search in the trademarks database
to determine if there are identical or similar
marks that would prevent the registration of
your mark. This is to prevent future conflicts
with marks that are already registered or
with earlier filing dates.
What cannot be registered
 DESCRIPTIVE
These are marks that describe the
characteristics of the goods or services.
 MISLEADING
Marks that are likely to deceive or have the
tendency to misinform the consumers about
the actual characteristics of the goods or
services.
 GENERIC and customary to trade
Generic marks are names of products they
seek to identify.
 CONSISTS OF NAMES, PORTRAITS OF
PERSONS, MAPS, FLAGS AND OTHER
POLITICAL SYMBOLS
Marks that contain names or portraits of
living individuals may be rejected unless the
individual gives written consent
 SHAPE AND COLOR
Shapes must be distinctive from the usual
shape of goods or containers of the goods, in
order to be considered a trademark.
 MARKS THAT MAY CAUSE CONFUSION
Your mark cannot be registered if it is
identical with or similar to a registered mark
or a mark with earlier filing date for goods
and services that are exactly the same or for
goods and services that are related.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Consumers should not confuse your mark
with the marks of others.
 Identical with, or confusingly similar to
WELL-KNOWN MARKS
Marks that are identical with or similar to
marks that are known internationally and, in
the Philippines, will be refused registration
 In determining similarity and likelihood
of confusion, jurisprudence has developed
two tests, the dominancy test and the
holistic test. Tests are applied in cases
involving INFRINGEMENT
 The totality or holistic test only relies on
visual comparison between two trademarks
whereas the dominancy test relies not only
on the visual but also on the aural and
connotative comparisons and overall
impressions between the two trademarks
 Section 155 of R.A. No. 8293 states:
Remedies; Infringement. — Any person who
shall, without the consent of the owner of the
registered mark:
 155.1. Use in commerce any
reproduction, counterfeit, copy, or
colorable imitation of a registered mark
or the same container or a dominant
feature thereof in connection with the
sale, offering for sale, distribution,
advertising of any goods or services
including other preparatory steps
necessary to carry out the sale of any
goods or services on or in connection
with which such use is likely to cause
confusion, or to cause mistake, or to
deceive; or
 155.2. Reproduce, counterfeit, copy or
colorably imitate a registered mark or a
dominant feature thereof and apply such
reproduction, counterfeit, copy or
colorable imitation to labels, signs, prints,
packages, wrappers, receptacles or
advertisements intended to be used in
commerce upon or in connection with the
sale, offering for sale, distribution, or
advertising of goods or services on or in
connection with which such use is likely
to cause confusion, or to cause mistake, or
to deceive, shall be liable in a civil action
for infringement by the registrant for the
remedies hereinafter set forth: Provided,
P a g e | 64
That the infringement takes place at the
moment any of the acts stated in
Subsection 155.1 or this subsection are
committed regardless of whether there is
actual sale of goods or services using the
infringing material.
The Elements of infringement under R.A. No.
8293 are as follows:
1. The trademark being infringed is registered
in the Intellectual Property Office; however,
in infringement of trade name, the same need
not be registered;
2. The trademark or trade name is reproduced,
counterfeited, copied, or colorably imitated
by the infringer;
3. 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;
4. 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
5. It is without the consent of the trademark or
trade name owner or the assignee thereof.
 The element of likelihood of confusion is the
gravamen of trademark infringement. There
are two types of confusion in trademark
infringement: confusion of goods and
confusion of business. SOCIETE DES
PRODUITS NESTLE, S.A., vs. MARTIN T. DY,
JR. G.R. No. 172276, August 8, 2010.
 The dominancy test focuses on the
similarity of the main, prevalent or essential
features of the competing trademarks that
might cause confusion. Infringement takes
place when the competing trademark
contains the essential features of another.
Imitation or an effort to imitate is
unnecessary. The question is whether the
use of the marks is likely to cause confusion
or deceive purchasers.
 The holistic test considers the entirety of the
marks, including labels and packaging, in
determining confusing similarity. The focus
is not only on the predominant words but

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
also on the other features appearing on the
labels.
 In cases involving trademark infringement,
no set of rules can be deduced. Each case
must be decided on its own merits.
Jurisprudential precedents must be studied
in the light of the facts of each particular case.
Withal, the protection of trademarks as
intellectual property is intended not only to
preserve the goodwill and reputation of the
business established on the goods bearing
the mark through actual use over a period of
time, but also to safeguard the public as
consumers against confusion on these goods.
While respondent’s shoes contain some
dissimilarities with petitioner’s shoes, this
Court cannot close its eye to the fact that for
all intents and purpose, respondent had
deliberately attempted to copy petitioner’s
mark and overall design and features of the
shoes. Let it be remembered, that defendants
in cases of infringement do not normally copy
but only make colorable changes. The most
successful form of copying is to employ
enough points of similarity to confuse the
public, with enough points of difference to
confuse the courts. SKECHERS USA, INC., vs.
INTER PACIFIC INDUSTRIAL TRADING
CORPORATION, GR no.164321 (March
2011)
 Jurisprudence also formulated the following
“true test” of unfair competition: whether
the acts of the defendant have the intent of
deceiving or are calculated to deceive the
ordinary buyer making his purchases under
the ordinary conditions of the particular
trade to which the controversy relates. One of
the essential requisites in an action to
restrain unfair competition is proof of fraud;
the intent to deceive, actual or probable must
be shown before the right to recover can
exist. SUPERIOR COMMERCIAL
ENTERPRISES INC., vs. KUNNAN
ENTERPRISES LTD. AND SPORTS CONCEPT
& DISTRIBUTOR, INC., G.R.No.169974,
April 2010
 Unfair competition has been defined as the
passing off (or palming off) or attempting to
pass off upon the public of the goods or
business of one person as the goods or
business of another with the end and
probable effect of deceiving the public. The
essential elements of unfair competition are
(1) confusing similarity in the general
P a g e | 65
appearance of the goods; and (2) intent to
deceive the public and defraud a competitor.
SUPERIOR COMMERCIAL ENTERPRISES
INC., vs. KUNNAN ENTERPRISES LTD. AND
SPORTS CONCEPT & DISTRIBUTOR, INC.,
G.R.No.169974, April 2010
 In McDonald’s Corporation v. L.C. Big Mak
Burger, Inc., we held that there can be
trademark infringement without unfair
competition such as when the infringer
discloses on the labels containing the
mark that he manufactures the goods,
thus preventing the public from being
deceived that the goods originate from the
trademark owner. SUPERIOR
COMMERCIAL ENTERPRISES INC., vs.
KUNNAN ENTERPRISES LTD. AND SPORTS
CONCEPT & DISTRIBUTOR, INC.,
G.R.No.169974, April 2010
Hoarding is not Unfair Competition and does
not fall within IP Code
 Given the IP Code's specific focus, a first test
that should be made when a question arises
on whether a matter is covered by the Code is
to ask if it refers to an intellectual property as
defined in the Code. If it does not, then
coverage by the Code may be negated.
 A second test, if a disputed matter does not
expressly refer to an intellectual property
right as defined above, is whether it falls
under the general "unfair competition"
concept and definition under Sections 168.1
and 168.2 of the Code. The question then is
whether there is "deception" or any other
similar act in "passing off" of goods or
services to be those of another who enjoys
established goodwill.
 Under all the above approaches, we conclude
that the "hoarding" - as defined and charged
by the petitioner - does not fall within the
coverage of the IP Code and of Section 168 in
particular. It does not relate to any patent,
trademark, trade name or service mark that
the respondents have invaded, intruded into
or used without proper authority from the
petitioner. Nor are the respondents alleged to
be fraudulently "passing off" their products
or services as those of the petitioner. The
respondents are not also alleged to be
undertaking any representation or
misrepresentation that would confuse or
tend to confuse the goods of the petitioner
with those of the respondents, or vice versa.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
What in fact the petitioner alleges is an act
foreign to the Code, to the concepts it
embodies and to the acts it regulates; as
alleged, hoarding inflicts unfairness by
seeking to limit the opposition's sales by
depriving it of the bottles it can use for these
sales. (Coca-Cola Bottlers, Phils., Inc. vs.
Quintin J. Gomez, et al., G.R. No. 154491,
November 14, 2008)
Who is deemed guilty of unfair
competition
Essentially, what the law punishes is the act
of giving one's goods the general appearance
of the goods of another, which would likely
mislead the buyer into believing that such
goods belong to the latter. Examples of this
would be the act of manufacturing or selling
shirts bearing the logo of an alligator, similar
in design to the open-jawed alligator in La
Coste shirts, except that the jaw of the
alligator in the former is closed, or the act of
a producer or seller of tea bags with red tags
showing the shadow of a black dog when his
competitor is producing or selling popular
tea bags with red tags showing the shadow of
a black cat.
Manuel C. Espiritu, Jr., et al. vs. Petron
Corp., et al., (G.R. No. 170891, November 24,
2009)
 A “collective mark” as 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. (Section 122, RA 8293)
CONTINUING OFFENSE
 Respondent's imitation of the general
appearance of petitioner's goods was done
allegedly in Cavite. It sold the goods allegedly
in Mandaluyong City, Metro Manila. The
alleged acts would constitute a transitory or
continuing offense. Thus, clearly, under
Section 2 (b) of Rule 126, Section 168 of Rep.
Act No. 8293 and Article 189 (1) of the
Revised Penal Code, petitioner may apply for
a search warrant in any court where any
element of the alleged offense was
committed, including any of the courts within
the National Capital Region (Metro Manila).
P a g e | 66
Sony Computer Entertainment, Inc. vs.
Supergreen, Inc., (G.R. No. 161823, March
22, 2007)
COPYRIGHT
Copyright is the legal protection extended to
the owner of the rights in an original work.
“Original work” refers to every production in
the literary, scientific and artistic domain.
Among the literary and artistic works
enumerated in the IP Code includes books
and other writings, musical works, films,
paintings and other works, and computer
programs.
 Works are protected by the sole fact of their
creation, irrespective of their mode or form
of expression, as well as their content, quality
and purpose. Thus, it does not matter if, in
the eyes of some critics, a certain work has
little artistic value. So long as it has been
independently created and has a minimum of
creativity, the same enjoys copyright
protection.
 Section 172 of the IP Code lists the works
covered by copyright protection from the
moment of their creation
 There are two types of rights under
copyright:
1. economic rights, so-called because they
enable the creator to obtain remuneration
from the exploitation of his works by
third parties, and
2. moral rights, which makes it possible for
the creator to undertake measures to
maintain and protect the personal
connection between himself and the
work.
 Economic rights include:
 Reproduction
 Transformation First public
distribution
 Rental
 Public display
 Public performance
 Other communication to the public of
the work.
 Moral rights include:
 Right of Attribution
 Right of Alteration

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 Right of Integrity (object to any
prejudicial distortion)
 Right to restrain use of his name.
Related Rights in Copyright:
 Authors create works to disseminate them to
as large an audience as possible. Obviously,
they cannot do the dissemination by
themselves. They need the help of persons or
entities who contribute substantial creative,
technical or organizational skill in the
process of making the works available to the
public and whose interests ought to be
protected to encourage them to continue
with their work. Hence, their rights are
referred to as “related rights” or “neighboring
rights” since they are related to or are
neighboring on the author’s copyright.
The related rights of: (a) performers; (b)
producers of sound recordings; and (c)
broadcasting organizations.
 The natural person who created the literary
and artistic work owns the copyright to the
same.
For work created during or in the course of
employment (works for hire):
Employee - if the work is not part of his
regular duties, even if he used the time,
facilities and materials of the employer;
Employer - if the work is the result of the
performance of his regularly assigned duties
unless there is an express or implied
agreement to the contrary.
 For commissioned works: the person who
commissioned the work owns the work but
the copyright thereto remains with the
creator unless there is a written agreement
to the contrary.
 For audiovisual works: the producer, the
author of the scenario, the composer of the
music, the film director, and the author of the
work so adapted.
 In general, the term of protection of
copyright for original and derivative works is
the life of the author plus fifty (50) years
after his death. The Code specifies the terms
of protection for the different types of works.
 For audiovisual works: the producer, the
author of the scenario, the composer of the
P a g e | 67
music, the film director, and the author of the
work so adapted.
 In calculating the term of protection, the term
of protection subsequent to the death of the
author shall run from the date of his death or
of publication, but such terms shall always be
deemed to begin on the first day of January of
the year following the event which gave rise
to them (i.e. death, publication, making).
 Copyright protection is not intended to give
the copyright owner absolute control over all
possible exploitation of his work. The law
provides for limitations (“statutory fair
uses”) on the economic rights of authors
comprising of acts which do not constitute
copyright infringement even if done without
the consent of the copyright holder
 Copyright infringement consists in infringing
any right secured or protected under the
Code. It may also consist in aiding or abetting
such infringement.
 The law also provides for the liability of a
person who at the time when copyright
subsists in a work has in his possession an
article which he knows, or ought to know, to
be an infringing copy of the work for the
purpose of:
 Selling or letting for hire, or by way of
trade offering or exposing for sale or
hire, the article;
 Distributing the article for the
purpose of trade, or for any other
purpose to an extent that will
prejudice the rights of the copyright
owner in the work; or
 Trade exhibit of the article in public.
 Copyright, in the strict sense of the term, is
purely a statutory right. It is a new or
independent right granted by the statute, and
not simply a pre-existing right regulated by
it. Being a statutory grant, the rights are only
such as the statute confers, and may be
obtained and enjoyed only with respect to
the subjects and by the persons, and on terms
and conditions specified in the statute.
Accordingly, it can cover only the works
falling within the statutory enumeration or
description.
 A copyright certificate provides prima facie
evidence of originality which is one element
of copyright validity. It constitutes prima

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
facie evidence of both validity and ownership
and the validity of the facts stated in the
certificate.
 When is there a substantial reproduction of a
book? It does not necessarily require that the
entire copyrighted work, or even a large
portion of it, be copied. If so much is taken
that the value of the original work is
substantially diminished, there is an
infringement of copyright and to an injurious
extent, the work is appropriated.
Pacita I. Habana, et al. vs. Felicidad C.
Robles, et al., G.R. No. 131522, July 19,
1999; Filipino Society of Composers vs.
Benjamin Tan, (G.R. No. L-36402, March 16,
1987)
 The essence of a copyright infringement is
the similarity or at least substantial similarity
of the purported pirated works to the
copyrighted work. Hence, the applicant must
present to the court the copyrighted films to
compare them with the purchased evidence
of the video tapes allegedly pirated to
determine whether the latter is an
unauthorized reproduction of the former.
This linkage of the copyrighted films to the
pirated films must be established to satisfy
the requirements of probable cause. Mere
allegations as to the existence of the
copyrighted films cannot serve as basis for
the issuance of a search warrant.
20th Century Fox Film Corp. vs. Court of
Appeals, G.R. Nos. L-76649-51, August 19,
1988; Columbia Pictures Industries, Inc.,
et al. vs. Court of Appeals, et al., (G.R. No.
97156, October 6, 1994)
Infringement of a copyright is a trespass on a
private domain owned and occupied by the
owner of the copyright, and, therefore,
protected by law, and infringement of
copyright, or piracy, which is a synonymous
term in this connection, consists in the doing
by any person, without the consent of the
owner of the copyright, of anything the sole
right to do which is conferred by statute on
the owner of the copyright.
Pacita I. Habana, et al. vs. Felicidad C.
Robles, et al., G.R. No. 131522, July 19,
1999; Wilson Ong Ching Kian Chuan vs.
Court of Appeals, et al., (G.R. No. 130360,
August 15, 2000)
P a g e | 68
 The presentation of master tapes is not
always necessary to meet the requirement of
probable cause in copyright infringement
cases
 It is true that such master tapes are object
evidence, with the merit that in this class of
evidence the ascertainment of the
controverted fact is made through
demonstrations involving the direct use of
the senses of the presiding magistrate. Such
auxiliary procedure, however, does not rule
out the use of testimonial or documentary
evidence, depositions, admissions or other
classes of evidence tending to prove the
factum probandum, especially where the
production in court of object evidence would
result in delay, inconvenience or expenses
out of proportion to its evidentiary value.
Columbia Pictures, Inc. vs. Court of
Appeals, et al., G.R. No. 110318, August 28,
1996; Columbia Pictures Entertainment,
Inc., et al. vs. Court of Appeals, et al., G.R.
No. 111267, September 20, 1996; People
of the Phil., et al. vs. Christopher Choi, (G.R.
No. 152950, August 3, 2006)
 At most, the certificates of registration and
deposit issued by the National Library and
the Supreme Court Library serve merely as a
notice of recording and registration of the
work but do not confer any right or title upon
the registered copyright owner or
automatically put his work under the
protective mantle of the copyright law. It is
not a conclusive proof of copyright
ownership. As it is, non-registration and
deposit of the work within the prescribed
period only makes the copyright owner liable
to pay a fine.
Manly Sportwear Mfg., Inc. vs. Dadodette
Ent., et al., (G.R. No. 165306, September 20,
2005)
 It is not the application or registration of a
trademark that vests ownership thereof, but
it is the ownership of a trademark that
confers the right to register the same.
Registration merely creates a prima facie
presumption of the validity of the
registration, of the registrant’s ownership of
the trademark, and of the exclusive right to
the use thereof; it is rebuttable; thus, it must
give way to evidence to the contrary.
 P a g e | 69
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GUILLER B. ASIDO, Ll.M.

Birkenstock Orthopaedie Gmbh and Co.
Kg vs. Philippine Shoe Expo Marketing
Corporation, (G.R. No. 194307, November 20,
2013)
 The gravamen of the offense of infringement
of a registered trademark is the likelihood of
confusion. In applying the Holistic Test,
confusion was remote because the jeans
made and sold by Levi’s Philippines were not
only very popular but also quite expensive, as
opposed to Diaz’s tailored jeans which were
acquired on a “made-to-order” basis;
moreover, since the jeans are expensive, the
casual buyer is predisposed to be more
cautious and discriminating in and would
prefer to mull over his purchase. (Victorio
Diaz vs. People of the Philippines, G.R. No.
180677, February 18, 2013)
 The mere unauthorized use of a container
bearing a registered trademark in connection
with the sale, distribution or advertising of
goods or services which is likely to cause
confusion among the buyers or consumers
can be considered as trademark
infringement. Petitioners’ act of refilling,
without the respondents’ consent, the LPG
containers bearing the registered marks of
the respondents will inevitably confuse the
consuming public, who may also be led to
believe that the petitioners were authorized
refillers and distributors of respondent’s LPG
products.
business of another with the end and
probable effect of deceiving the public. The
mere use of the LPG cylinders for refilling
and reselling, which bear the trademarks
"GASUL" and "SHELLANE" will give the LPGs
sold by REGASCO the general appearance of
the products of the petitioners.
Republic Gas Corporation (REGASCO), et.
al. vs. Petron Corporation, et. al., (G.R. No.
194062, June 17, 2013)
 Under the Paris Convention to which the
Philippines is a signatory, a trade name of a
national of a State that is a party to the Paris
Convention, whether or not the trade name
forms part of a trademark, is protected
without the obligation of filing or
registration. It follows then that the applicant
for registration of trademark is not the lawful
owner thereof and is not entitled to
registration if the trademark has been in
prior use by a national of a country which is a
signatory to the Paris Convention.
EcoleDe Cuisine Manille (Cordon Bleu of
the Philippines), Inc. vs. Renaus Cointreau
& Cie and Le Cordon Bleu Int’l, B.V., (G.R.
No. 185830, June 5, 2013)

Republic Gas Corporation (REGASCO), et.

al. vs. Petron Corporation, et. al., (G.R. No.
194062, June 17, 2013)

 The Rules on the Issuance of the Search and

Seizure in Civil Actions for Infringement of
Intellectual Property Rights are not
applicable in a case where the search
warrants were applied in anticipation of
criminal actions for violation of intellectual
property rights under RA 8293. Rule 126 of
the Revised Rules of Court would apply and a
warrant shall be validly issued upon finding
the existence of probable cause.

Century Chinese Medicine Co., et. al. vs.

People of the Philippines, (G.R. No. 188526,
November 11, 2013)

 Unfair competition has been defined as the

passing off (or palming off) or attempting to
pass off upon the public of the goods or
business of one person as the goods or

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
NEGOTIABLE INSTRUMENTS LAW
 Deficiencies that DO NOT AFFECT the rights
of a subsequent HIDC:
1. Incomplete but delivered instrument
(section 14)
2. Complete but undelivered (section 16)
3. Complete and delivered issued without
consideration or a consideration
consisting of a promise which was not
fulfilled. (section 28)
 Deficiencies that AFFECT THE RIGHTS OF A
HIDC:
1. Incomplete but undelivered instrument
(sec.15)
2. Maker/Drawer’s signature forged
CONSIDERATION
 Presumption: Section 24
1. This presumption is rebuttable.
2. Any consideration sufficient to support a
simple contract is “value.”
3. Section 25 – Antecedent or pre-existing
debt
4. Absence of consideration includes
situations when the consideration is
contrary to law, morals or public policy
5. Section 28 provides for cases where there
is lack or no consideration at all. Such
want of consideration is a defense against
immediate parties but not against a
holder in due course.
P a g e | 70
 Of the four fundamental contracts of making,
drawing, accepting and indorsing, the general
rule is that each of these contracts must be
supported by a valuable consideration.
(sections 24 to 28)
EXCEPT:
Section 29 on Accommodation Party We
promise to pay jointly and severally to
Jose or order the amount of P50,000.00.
sgd. Pedro and Juan May Pedro set up the
defense that he received no part of the
P50,000.00.
 An accommodation party is one who has
signed the instrument as maker, drawer,
acceptor, or indorser, without receiving
value therefor, and for the purpose of
lending his name to some other person.
Such a person is liable on the instrument
to a holder for value, notwithstanding
such holder, at the time of taking the
instrument, knew him to be only an
accommodation party. (section 29)
 Accommodation Party is more than a surety
since he is primarily and unconditionally
liable on the instrument and cannot excuse
itself as such by the fact that the creditor
extended the time for payment without its
knowledge or consent.
 Accommodated party cannot recover from
the accommodation party, since as between
them, absence of consideration is a defense.
 Sec. 26. What constitutes holder for
value. - Where value has at any time
been given for the instrument, the
holder is deemed a holder for value in
respect to all parties who become such
prior to that time.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 Absence or failure of consideration is a
matter of defense as against any
person not a holder in due course; and
partial failure of consideration is a
defense pro tanto, whether the failure
is an ascertained and liquidated
amount or otherwise. (section 28)
Absence or failure of consideration is not
inadequacy of consideration under Art.
1355 of the Civil Code.
 Indorsement is usually written at the
back of instrument
 May be in any form as long as meant to be
an indorsement
 Not only a mode of transfer, it is also a
contract.
 Sec. 40. Indorsement of instrument
payable to bearer. - Where an
instrument, payable to bearer, is
indorsed specially, it may nevertheless
be further negotiated by delivery; but
the person indorsing specially is liable
as indorser to only such holders as
make title through his indorsement.
 Sec. 48. Striking out indorsement. - The
holder may at any time strike out any
indorsement which is not necessary to
his title. The indorser whose
indorsement is struck out, and all
indorsers subsequent to him, are
thereby relieved from liability on the
instrument.
Where the holder of an instrument
payable to his order transfers it for
value without indorsing it, the transfer
vests in the transferee such title as the
transferor had therein, and the
transferee acquires in addition, the
right to have the indorsement of the
transferor.
 Sec. 47. Continuation of negotiable
character. - An instrument negotiable
in its origin continues to be negotiable
until it has been restrictively indorsed
or discharged by payment or
otherwise.
 Sec. 34. Special indorsement; indorsement in
blank. - A special indorsement specifies the
person to whom, or to whose order, the
instrument is to be payable, and the
P a g e | 71
indorsement of such indorsee is necessary to
the further negotiation of the instrument. An
indorsement in blank specifies no
indorsee, and an instrument so indorsed
is payable to bearer, and may be
negotiated by delivery.
 Sec. 35. Blank indorsement; how changed to
special indorsement. - The holder may convert
a blank indorsement into a special
indorsement by writing over the signature of
the indorser in blank any contract consistent
with the character of the indorsement.
 Sec. 39. Conditional indorsement. - Where an
indorsement is conditional, the party
required to pay the instrument may
disregard the condition and make payment to
the indorsee or his transferee whether the
condition has been fulfilled or not. But any
person to whom an instrument so indorsed is
negotiated will hold the same, or the
proceeds thereof, subject to the rights of the
person indorsing conditionally. (Endorser
binds himself to pay, upon no other condition
than the failure of the parties to do so, and of
due notice to him of such failure)
 Endorser binds himself to pay, upon no other
condition than the failure of the parties to do
so, and of due notice to him of such failure
 Sec. 119. Instrument; how discharged. - A
negotiable instrument is discharged:
(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;
(e.) When the principal debtor becomes
the holder of the instrument at or after
maturity in his own right.
 Sec. 38. Qualified indorsement. - A
qualified indorsement constitutes the
indorser a mere assignor of the title to the
instrument. It may be made by adding to
the indorser's signature the words
"without recourse" or any words of
similar import. Such an indorsement does
 P a g e | 72
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

not impair the negotiable character of the Real Defenses

instrument.
 Those available against ALL holders.
 Has limited liability, i.e., he is liable if the  They attach to the res regardless of the
instrument is dishonored by non- merits or demerits of the holder
acceptance or non-payment due to:  Real defenses do not render the instrument
• Forgery; valueless.
• lack of good title on the part of  The instrument is unenforceable only against
endorser the party entitled to set up the defense but
• lack of capacity to endorse on the not against those whom such a defense is not
part of the prior parties’ fact that available as such, as in the case of forgery
at the time of endorsement, the which is not available to persons estopped.
instrument was valueless, or nor (sec.23)
valid, and he knew of the fact.
Examples of Real Defense
Classes of Holder
 Section 15
 Simple Holder (section 51)  Section 23
 Holder for value (section 26)  Section 14 (fraud in factum or fraud in esse
 HIDC (secs.52 and 57) contractus)
 Fraudulent alteration by holder (secs.124
Rights of Holders in General and 125)
 Prescription; Discharge at or after maturity
1. A holder: (secs.88, 118, 121 and 122)
a. May Sue thereon in his own name
b. Payment to him in due course Personal Defenses
discharges the instrument (section
88)  Those which grow out of the agreement or
2. In the hands of a holder other a HIDC, a the conduct of a particular person in regard
negotiable instrument is subject to the same to the instrument which renders it
defenses as if it were non-negotiable inequitable for him, though holding the legal
title, to enforce it against the party sought to
HOLDER IN DUE COURSE be made liable but which h are not available
against a HIDC.
 Defined under section 52  Filling up wrong date (sec.10, EO 173)
 Section 53 in relation to section 193  Section 14
 Section 54 “Reasonable Period” - 90 days  Section 16
in relation to BP 22.  Section 55 (absence or failure of
consideration)
Defenses  Simple Fraud or fraud in inducement (sec.55)
 Acquisition of instrument by unlawful means
REAL DEFENSES PERSONAL DEFENSES (sec. 55)
Forgery Duress (intimidation)
Illegality Illegality Personal Defenses
Alteration (deliberate) Discharge before
maturity  Negotiation in breach of faith (sec.55)
Discharge after Alteration  Negotiation under circumstances that
maturity (unintentional) amount to fraud (sec.55)
Incompleteness Fraud in inducement  Innocent alteration or spoliation (secs.124-
Fraud in Factum Incompleteness 125)
(delivered)  Set-off between immediate parties (sec.58)
Discharge by payment or renunciation or
Incapacity No consideration
release before maturity (Secs. 50,121, 122)
Insolvency Set-off
 Discharge of party secondarily liable by
discharge of prior party (sec.20 [c])
 P a g e | 73
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

LIABILITIES OF PARTIES
PARTY LIABILITY
Sec. 60. Liability of maker. - The maker of a negotiable instrument, by making it,
Maker engages that he will pay it according to its tenor, and admits the existence of the
payee and his then capacity to indorse.
Sec. 61. Liability of drawer. - The drawer by drawing the instrument admits the
existence of the payee and his then capacity to indorse; and engages that, on due
presentment, the instrument will be accepted or paid, or both, according to its
tenor, and that if it be dishonored and the necessary proceedings on dishonor be
Drawer
duly taken, he will pay the amount thereof to the holder or to any subsequent
indorser who may be compelled to pay it. But the drawer may insert in the
instrument an express stipulation negativing or limiting his own liability to the
holder.
Sec. 62. Liability of acceptor. - The acceptor, by accepting the instrument, engages
that he will pay it according to the tenor of his acceptance and admits:
Acceptor a. The existence of the drawer, the genuineness of his signature, and his capacity
and authority to draw the instrument; and
b. The existence of the payee and his then capacity to indorse.

 Acceptor is liable only to the original tenor of
the bill prior to alteration since section 132
defines acceptance as “assent to the order of
the drawer.”
 Sec. 63. When a person deemed indorser. - A
person placing his signature upon an
instrument otherwise than as maker, drawer,
or acceptor, is deemed to be indorser unless
he clearly indicates by appropriate words his
intention to be bound in some other capacity.
Is there any order in which indorsers are
liable?
Sec. 68. Order in which indorsers are liable. - As
respect one another, indorsers are liable prima
facie in the order in which they indorse; but
evidence is admissible to show that, as between
or among themselves, they have agreed
otherwise. Joint payees or joint indorsees who
indorse are deemed to indorse jointly and
severally.
 Primarily liable – Maker and Acceptor
 Secondarily liable - Drawer and Indorser
 For PNs, it is necessary that:
• In all other cases, it is necessary that;
• Protest for nonpayment by drawee is
necessary to charge an acceptor for
honor(sec.167); and
• Protest for nonpayment by the
acceptor for honor is also required
(sec.170)
What constitutes sufficient presentment
 Sec. 72. What constitutes a sufficient
presentment. - Presentment for payment, to
be sufficient, must be made:
(a) By the holder, or by some person
authorized to receive payment on his
behalf;
(b) At a reasonable hour on a business day;
(c) At a proper place as herein defined; To
the person primarily liable on the
instrument, or if he is absent or
inaccessible, to any person found at the
place where the presentment is made.
 Sec. 74. Instrument must be exhibited. - The
instrument must be exhibited to the person
from whom payment is demanded, and when
it is paid, must be delivered up to the party
paying it.

• Presentment for payment must be
made to the person primarily liable
(sec.71)
• If the PN is dishonored by
nonpayment, notice of dishonor by
nonpayment must be given to the
person secondarily liable (sec.80)
unless excused.
 Sec. 79. When presentment not required to
charge the drawer. - Presentment for
payment is not required in order to charge
the drawer where he has no right to expect or
require that the drawee or acceptor will pay
the instrument.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 Sec. 80. When presentment not required to
charge the indorser. - Presentment is not
required in order to charge an indorser
where the instrument was made or accepted
for his accommodation and he has no reason
to expect that the instrument will be paid if
presented.
 Sec. 81. When delay in making
presentment is excused. - Delay in making
presentment for payment is excused when
the delay is caused by circumstances beyond
the control of the holder and not imputable to
his default, misconduct, or negligence. When
the cause of delay ceases to operate,
presentment must be made with reasonable
diligence.
 The exceptions provided in secs. 79 and 80
are relative and pertain only to the drawer
and endorser involved, since as to other
parties secondarily liable, the lack of
presentment discharges them.
 Sec. 83. When instrument dishonored by
non-payment. - The instrument is
dishonored by non-payment when:
a. It is duly presented for payment and
payment is refused or cannot be
obtained; or
b. Presentment is excused and the
instrument is overdue and unpaid.
 Sec. 84. Liability of person secondarily
liable, when instrument dishonored. -
Subject to the provisions of this Act, when the
instrument is dishonored by non-payment,
an immediate right of recourse to all parties
secondarily liable thereon accrues to the
holder.
 NOTICE OF DISHONOR - Bringing either
verbally or by writing, to the knowledge of
the drawer or endorser of an instrument, the
fact that a specified negotiable instrument,
upon proper proceedings taken, has not been
accepted or has not been paid, and that the
party notified is expected to pay it.
 Sec. 89. To whom notice of dishonor must
be given. - Except as herein otherwise
provided, when a negotiable instrument has
been dishonored by non-acceptance or non-
payment, notice of dishonor must be given to
the drawer and to each indorser, and any
drawer or indorser to whom such notice is
not given is discharged.
P a g e | 74
 Persons primarily liable need not be given
notice of dishonor, because they are the very
ones who dishonored the instrument. This is
also the rule with respect to a joint maker
and an accommodation maker.
 Sec. 90. By whom given. - The notice may be
given by or on behalf of the holder, or by or
on behalf of any party to the instrument who
might be compelled to pay it to the holder,
and who, upon taking it up, would have a
right to reimbursement from the party to
whom the notice is given.
Sec. 91. Notice given by agent. - Notice of
dishonor may be given by any agent either in
his own name or in the name of any party
entitled to given notice, whether that party
be his principal or not.
Discharge of Negotiable Instrument
It is the release of all parties, whether primary or
secondary, from the obligation on the instrument
Discharge renders the instrument non-
negotiable.
 Sec. 119. Instrument; how discharged. - A
negotiable instrument is discharged:
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;
e. When the principal debtor becomes
the holder of the instrument at or
after maturity in his own right.
 Sec. 120. When persons secondarily liable
on the instrument are discharged. - A
person secondarily liable on the instrument
is discharged:
a. By any act which discharges the
instrument;
b. By the intentional cancellation of his
signature by the holder;
c. By the discharge of a prior party;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
d. By a valid tender or payment made by
a prior party;
e. By a release of the principal debtor
unless the holder's right of recourse
against the party secondarily liable is
expressly reserved;
f. By any agreement binding upon the
holder to extend the time of payment
or to postpone the holder's right to
enforce the instrument unless made
with the assent of the party
secondarily liable or unless the right
of recourse against such party is
expressly reserved.
 Sec. 121. Right of party who discharges
instrument. - Where the instrument is
paid by a party secondarily liable thereon,
it is not discharged; but the party so
paying it is remitted to his former rights
as regard all prior parties, and he may
strike out his own and all subsequent
indorsements and against negotiate the
instrument, except:
a. Where it is payable to the order of
a third person and has been paid
by the drawer; and
b. Where it was made or accepted for
accommodation and has been paid
by the party accommodated.
ALTERATION
 Sec. 124. Alteration of instrument; effect of.
- Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a
party who has himself made, authorized, or
assented to the alteration and subsequent
indorsers.
But when an instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce payment thereof according to its
original tenor.
 Sec. 125. What constitutes a material
alteration? - Any alteration which changes:
a. The date;
b. The sum payable, either for principal
or interest;
c. The time or place of payment:
d. The number or the relations of the
parties;
P a g e | 75
e. The medium or currency in which
payment is to be made;
f. Or which adds a place of payment
where no place of payment is
specified, or any other change or
addition which alters the effect of the
instrument in any respect, is a
material alteration
 Sec. 124. Alteration of instrument; effect of.
- Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a
party who has himself made, authorized, or
assented to the alteration and subsequent
indorsers.
 But when an instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce payment thereof according to its
original tenor.
BILL OF EXCHANGE
 Sec. 126. Bill of exchange, defined. - A bill of
exchange is an unconditional order in writing
addressed by one person to another, signed
by the person giving it, requiring the person
to whom it is addressed to pay on demand or
at a fixed or determinable future time a sum
certain in money to order or to bearer.
Pay to X or order P250,000.00
To: Y
sgd. Z
Until Y accepts, he is not liable as acceptor
because under sec.18, drawee is never liable
because his signature does not appear on the
face of instrument. Drawee must first accept.
 Sec. 127. Bill not an assignment of funds in
hands of drawee. - A bill of itself does not
operate as an assignment of the funds in the
hands of the drawee available for the
payment thereof, and the drawee is not liable
on the bill unless and until he accepts the
same.
Rules pertaining to Bill of Exchange
 Sec. 128. Bill addressed to more than one
drawee. - A bill may be addressed to two or
more drawees jointly, whether they are

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
partners or not; but not to two or more
drawees in the alternative or in succession.
 Sec. 130. When bill may be treated as
promissory note. - Where in a bill the drawer
and drawee are the same person or where
the drawee is a fictitious person or a person
not having capacity to contract, the holder
may treat the instrument at his option either
as a bill of exchange or as a promissory note.
ACCEPTANCE
Definition
 Sec. 132. Acceptance; how made, by and so
forth. - The acceptance of a bill is the
signification by the drawee of his assent to
the order of the drawer. The acceptance must
be in writing and signed by the drawee. It
must not express that the drawee will
perform his promise by any other means
than the payment of money.
 Sec. 133. Holder entitled to acceptance on
face of bill. - The holder of a bill presenting
the same for acceptance may require that the
acceptance be written on the bill, and, if such
request is refused, may treat the bill as
dishonored.
 Sec. 134. Acceptance by separate
instrument. - Where an acceptance is written
on a paper other than the bill itself, it does
not bind the acceptor except in favor of a
person to whom it is shown and who, on the
faith thereof, receives the bill for value.
 Sec. 136. Time allowed drawee to accept. - The
drawee is allowed twenty-four hours after
presentment in which to decide whether or
not he will accept the bill; the acceptance, if
given, dates as of the day of presentation.
Note: After 24 hours, drawee fails to return
instrument, he will be presumed to have
impliedly accepted.
Kinds of Checks
1. Cashier’s Check - Drawn by cashier of bank,
in the name of the bank against the bank
itself payable to a third person or order.
2. Manager’s Check – Drawn by the manager of
a bank in the name of the bank against the
P a g e | 76
bank itself payable to a third person. Similar
to cashier’s check.
3. Memorandum Check – Check given by the
borrower to a lender for the amount of a
short loan, with the understanding that it will
not be presented to a bank, but will be
redeemed by maker himself when the loan
falls due and which understanding is
evidenced by the writing the word
“memorandum,” “memo” on the check
 Significance of the 90-day Period UNDER
BP 22 For Presentment of the Check
Arceo vs. People (2006)
Petitioner asserts that there was no violation
of BP 22 because the check was presented to
the drawee bank only on December 5, 1991
or 120 days from the date thereof (August 4,
1991). He argues that this was beyond the
90-day period provided under the law in
connection with the presentment of the
check.
In Wong v. Court of Appeals, the Court ruled that
the 90-day period provided in the law is not an
element of the offense. Neither does it discharge
petitioner from his duty to maintain sufficient
funds in the account within a reasonable time
from the date indicated in the check. According
to current banking practice, the reasonable
period within which to present a check to the
drawee bank is six months. Thereafter, the
check becomes stale and the drawer is
discharged from liability thereon to the
extent of the loss caused by the delay.
Thus, Cenizal’s presentment of the check to the
drawee bank 120 days (four months) after its
issue was still within the allowable period.
Petitioner was freed neither from the obligation
to keep sufficient funds in his account nor from
liability resulting from the dishonor of the check.
SUPPLEMENTAL NOTES ON NEGOTIABLE
INSTRUMENTS LAW
ON NEGOTIABLE INSTRUMENTS LAW
The principal consideration always to answer
any purported question on negotiable
instruments is to determine first whether indeed
it is negotiable and compliant with the provision
of section 1 of the Negotiable Instruments Law.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
In the case of Rodrigo Rivera vs. Spouses Chua
(GR no.184458, January 14, 2015), the Supreme
Court noted that a promissory note made out to
a specific person is not a negotiable instrument,
it is not even payable to order or bearer.
In the same case, the Supreme Court reiterated
that Section 1 of the Negotiable Instruments Law
requires the concurrence of the following
elements, and that the absence of one makes the
instrument non-negotiable,1 to wit:
1. It must be in writing and signed by the
maker or drawer;
2. It must contain an unconditional
promise or order to pay a sum certain
in money;
3. Must be payable on demand, or at a
fixed or determinable future time;
4. Must be payable to order or bearer;
and
5. Where the instrument is addressed to
a drawee, he must be named or
otherwise indicated therein with
reasonable certainty.
This does not mean however that, even if the
instrument is not negotiable, there is no more
liability to be incurred under the terms of the
promissory note issued that remains to be
unpaid.
Even if the promissory note is non-negotiable
and therefore outside of the coverage of section
702 of the law which provides that presentment
for payment is not necessary to charge the
person liable on the instrument, liability for
damages, including those who are guilty of delay
in the performance of their obligation is laid
1 Section 1, Negotiable Instruments Law
2 Section 70, Effect of want of demand on principal
debtor. – Presentment for payment is not necessary
in order to charge the person primarily liable on the
instrument; but if the instrument is, by its terms,
payable at a special place, and he is able and
willing to pay it there at maturity, such ability and
willingness are equivalent to tender of payment
upon his part. But except as herein otherwise
provided, presentment for payment is necessary in
order to charge the drawer and indorsers.
P a g e | 77
down under Article 11703 of the Civil Code of the
Philippines.
What are the effects of a manager’s check and
a cashier’s check, and is the payment therein
subject to the condition that the payee
complies with his obligations to the purchaser
of the checks?
The Supreme Court in the case of Metropolitan
Bank vs. Chiok (GR no.172652, November 26,
2014) stated that,” The legal effects of a
manager’s check and a cashier’s check are the
same. A manager’s check, like a cashier’s check, is
an order of the bank to pay, drawn upon itself,
committing in effect its total resources, integrity,
and honor behind its issuance. By its peculiar
character and general use in commerce, a
manager’s check or cashier’s check is regarded
substantially to be as good as the money it
represents.”
The Supreme Court however warned that,
clearing of the manager’s check and cashier’s
checks should not be confused with acceptance.
Manager’s and Cashier’s checks are still subject
to the clearing to ensure that the same have not
been materially altered or otherwise completely
counterfeited. It must be clarified however, that
while they are subject to clearing, these checks
cannot be countermanded for being drawn up
against a closed account, for being drawn up
against insufficient funds, or for similar reasons
such as a condition not appearing on the face of
the check. The accepted banking practice is that
these checks are good as cash.
If a check is materially altered4, will the 24-
hour period for clearing apply?
3Article 1170. Those who in the performance of their
obligations are guilty of fraud, negligence, or delay,
and those who in any manner contravene the
tenor thereof, are liable for damages.
4 Section 125. What constitutes material
alteration. Any alteration which changes:
a) The date;
b) The sum payable, either for principal or interest;
c) The time or place of payment;
d) The number or the relation of the parties;

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
In Areza vs. Express Savings Bank (GR
no.176697, September 10, 2014) , the Supreme
Court ruled that, “as a rule now stands, the 24
hour period is still in force, that is, any check
which should be refused by the drawee bank in
accordance with the long standing and accepted
banking practices shall be returned through the
PCHC/local clearing office, as the case may be
not later than the next regular clearing (24
hour).
The modification, however, is that items which
have been the subject of material alteration or
bearing forged endorsement may be returned
even beyond the 24 hours so long that the same
is returned within the prescriptive period fixed
by law. The prescriptive period is ten (10) years
because a check or endorsement thereon is a
written contract. Moreover, the item need not be
returned through the clearing house but by
direct presentation to the presenting bank.”
A promissory note was indorsed to a financing
company, and a chattel mortgage over the
property subject of the note was also assigned
to them. However, the actual property subject
of the chattel was never delivered to the
mortgagee who decided not to pay the
principal loan as well since there was non-
delivery of the property. The Financing
e) The medium or currency in which payment is to
be made; Or which adds a place of payment
where no place of payment is specified, or any
other change or addition which alters the effect
of the instrument in any respect is a material
alteration.
xxx
Section 124. Alteration of instrument; effect of.
Where a negotiable instrument is materially
altered without the assent of all parties liable
thereon, it is avoided, except as against a party
who has himself made, authorized, and assented
to the alteration and subsequent indorsers.
But when the instrument has been materially
altered and is in the hands of a holder in due
course not a party to the alteration, he may
enforce the payment thereof according to its
original tenor. (Emphasis ours.)
P a g e | 78
Company now seeks foreclosure. Is the
Financing Company who holds the promissory
note a holder in due course?
Yes. The Financing Company is a holder in due
course. Sec. 52 of the Negotiable Instruments
Law (NIL) provides:
Section 52. What constitutes a holder in
due course. A holder in due course is a
holder who has taken the instrument
under the following conditions:
(a) That it is complete and regular upon
its face;
(b) That he became the holder of it
before it was overdue, and without
notice that it had been previously
dishonored, if such was the fact;
(c) That he took it in good faith and for
value;
(d) That at the time it was negotiated to
him he had no notice of any infirmity in
the instrument or defect in the title of the
person negotiating it.
A holder in due course, holds the instrument free
from any defect of title of prior parties and from
defenses available to prior parties among
themselves, and may enforce payment of the
instrument for the full amount. Since the
Financing Company is a holder in due course, the
mortgagor cannot raise the defense of non-
delivery of the object and nullity of the sale
against the corporation. The NIL considers every
negotiable instrument prima facie to have been
issued for a valuable consideration. (Spouses
Pedro Violago vs. BA Finance Corporation
[2008])
Can a check be used as evidence of
indebtedness?
A check "constitutes an evidence of
indebtedness" and is a veritable "proof of an
obligation.” Hence, it can be used "in lieu of and
for the same purpose as a promissory note. The
Supreme Court has pointed out that a check
functions more than a promissory note since it
not only contains an undertaking to pay an
amount of money but is an "order addressed to a
 P a g e | 79
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

bank and partakes of a representation that the Although a contract of suretyship is in essence
drawer has funds on deposit against which the accessory or collateral to a valid principal
check is drawn, sufficient to ensure payment obligation, the suretys liability to the creditor
upon its presentation to the bank. (Ting Ting is immediate, primary and absolute; he
Pua vs. Spouses Lo Ben Ting [2013]) is directly and equally bound with the
principal. As an equivalent of a regular party to
This very same principle underpins Section 24 of the undertaking, a surety becomes liable to the
the Negotiable Instruments Law (NIL), which debt and duty of the principal obligor even
provides as follows: without possessing a direct or personal interest
in the obligations nor does he receive any benefit
Section 24. Presumption of therefrom
consideration. – Every
negotiable instrument is
deemed prima facie to have
been issued for a valuable
consideration; and every
person whose signature
appears thereon to have
become a party for value.

Who is an accommodation party and what is

his liability, if any?

An accommodation party is one who meets all

the three requisites: (1) he must be a party to the
instrument, signing as maker, drawer, acceptor,
or indorser; (2) he must not receive value
therefor; and (3) he must sign for the purpose of
lending his name or credit to some other
person. An accommodation party lends his name
to enable the accommodated party to obtain
credit or to raise money; he receives no part of
the consideration for the instrument but
assumes liability to the other party/ies
thereto. The accommodation party is liable on
the instrument to a holder for value even though
the holder, at the time of taking the instrument,
knew him or her to be merely an accommodation
party, as if the contract was not for
accommodation.

The relation between an accommodation party

and the accommodated party is one of principal
and surety the accommodation party being the
surety. As such, he is deemed an original
promisor and debtor from the beginning; he is
considered in law as the same party as the
debtor in relation to whatever is adjudged
touching the obligation of the latter since their
liabilities are interwoven as to be inseparable.
(Eusebio Gonzales vs. PCIB [2011])

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
CORPORATION CODE
Sec. 2. Corporation defined. — A corporation is
an artificial being created by operation of law,
having the right of succession and the powers,
attributes and properties expressly authorized
by law or incident to its existence.
Classifications
 Municipal Corporations – corporations
organized by the State for purposes of
governing portions of the State
 Public quasi corporations - private
corporations that render public service,
supply public wants, or pursue other
eleemosynary objectives. While purposely
organized for the gain or benefit of its
members, they are required by law to
discharge functions for the public benefit.
Examples of these corporations are utility, 22
railroads, warehouse, telegraph, telephone,
water supply corporations and
transportation companies. 23 It must be
stressed that a quasi-public corporation is a
species of private corporations, but the
qualifying factor is the type of service the
former renders to the public: if it performs a
public service, then it becomes a quasi-public
corporation. [G.R. No. 169752. September 25,
P a g e | 80
2007.]; PHILIPPINE SOCIETY FOR THE
PREVENTION OF CRUELTY TO ANIMALS,
petitioners, vs. COMMISSION ON AUDIT, DIR.
RODULFO J. ARIESGA (in his official capacity
as Director of the Commission on Audit), MS.
MERLE M. VALENTIN and MS. SUSAN
GUARDIAN (in their official capacities as
Team Leader and Team Member,
respectively, of the audit Team of the
Commission on Audit), respondents.
 The true criterion, therefore, to determine
whether a corporation is public or private
is found in the totality of the relation of
the corporation to the State. If the
corporation is created by the State as the
latter's own agency or instrumentality to
help it in carrying out its governmental
functions, then that corporation is considered
public; otherwise, it is private. Applying the
above test, provinces, chartered cities, and
barangays can best exemplify public
corporations. They are created by the State as
its own device and agency for the
accomplishment of parts of its own public
works.
 The Constitution vests in the COA audit
jurisdiction over "government-owned and
controlled corporations with original
charters," as well as "government-owned or
controlled corporations" without original

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
charters. GOCCs with original charters are
subject to COA pre-audit, while GOCCs
without original charters are subject to COA
post-audit. GOCCs without original charters
refer to corporations created under the
Corporation Code but are owned or
controlled by the government. The nature or
purpose of the corporation is not material in
determining COA's audit jurisdiction. Neither
is the manner of creation of a corporation,
whether under a general or special law.
 Stock Corporations – capital stock divided
into shares and are authorized to distribute
profits on the basis of shares held.
- par value
- no par value
 Non-Stock – organized for non-profit
purposes, do not issue stocks and are
composed of persons called as members
May no par value shares be issued by the
corporation at different prices?
Yes. "A no-par value share does not purport to
represent any stated proportionate interest in
the capital stock measured by value, but only an
aliquot part of the whole number of such shares
of the issuing corporation. The holder of no-par
shares may see from the certificate itself that he
is only an aliquot sharer in the assets of the
corporation. But this character of proportionate
interest is not hidden beneath a false appearance
of a given sum in money, as in the case of par
value shares. The capital stock of a corporation
issuing only no-par value shares is not set forth
by a stated amount of money, but instead is
expressed to be divided into a stated number of
shares, such as, 1,000 shares. This indicates that
a shareholder of 100 such shares is an aliquot
sharer in the assets of the corporation, no matter
what value they may have, to the extent of
100/1,000 or 1/10.
 A corporation sole is "one formed by the
chief archbishop, bishop, priest, minister,
rabbi or other presiding elder of a religious
denomination, sect, or church, for the
purpose of administering or managing, as
trustee, the affairs, properties and
temporalities of such religious denomination,
sect or church." A corporation aggregate
formed for the same purpose, on the other
hand, consists of two or more persons.
P a g e | 81
May a corporation sole convert into a
corporation aggregate by mere amendment
of its articles of incorporation?
Yes. Section 109 of the Corporation Code allows
the application to religious corporations of the
general provisions governing non-stock
corporations.
For non-stock corporations, the power to amend
its articles of incorporation lies in its members.
The code requires two-thirds of their votes for
the approval of such an amendment. So how will
this requirement apply to a corporation sole that
has technically but one member (the head of the
religious organization) who holds in his hands its
broad corporate powers over the properties,
rights, and interests of his religious
organization?
Although a non-stock corporation has a
personality that is distinct from those of its
members who established it, its articles of
incorporation cannot be amended solely through
the action of its board of trustees. The
amendment needs the concurrence of at least
two-thirds of its membership. If such approval
mechanism is made to operate in a corporation
sole, its one member in whom all the powers of
the corporation technically belongs, needs to get
the concurrence of two-thirds of its membership.
The one member, here the General
Superintendent, is but a trustee, according to
Section 110 of the Corporation Code, of its
membership.
 Ecclesiastical – members are spiritual
persons
 Lay – non-ecclesiastical corporations
 Foreign corporations are further classified
into (1) resident foreign corporations and (2)
non-resident foreign corporations.
A resident foreign corporation is a foreign
corporation engaged in trade or business
within the Philippines or having an office or
place of business therein while a non-
resident foreign corporation is a foreign
corporation not engaged in trade or business
within the Philippines and not having any
office or place of business therein.
 De Jure – corporation formed with all
requirements of law
 De Facto – defectively formed from a bona
fide attempt to incorporate under existing
laws and which exercises corporate powers

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
 Can there be a municipal corporation de
facto?
No. An unconstitutional act is not a law; it
confers no rights; it imposes no duties; it
affords no protection; it creates no office; it
is, in legal contemplation, as inoperative as
though it had never been passed."
 Corporation by estoppel is founded on
principles of equity and is designed to
prevent injustice and unfairness. It applies
when persons assume to form a corporation
and exercise corporate functions and enter
into business relations with third persons.
Where there is no third person involved
and the conflict arises only among those
assuming the form of a corporation, who
therefore know that it has not been
registered there is no corporation by
estoppel.
Reynaldo M. Lozano vs. Eliezer R. De Los
Santos, (G.R. No. 125221, June 19, 1997); Lim
Tong Lim vs. Phil. Fishing Gear Industries,
(G.R. No. 136448, November 3, 1999); Merrill
Lynch Futures, Inc. vs. Court of Appeals
(G.R. No. 97816, July 24, 1992): People of the
Phil. vs. Patricio Botero, (G.R. No. 117010,
April 18, 1997)
Nationality of Corporations
 DOMICILLIARY TEST - The nationality of a
private corporation is determined by the
character and citizenship of its controlling
stockholders.
 GRANDFATHER RULE - In case of an
individual, percentage of foreign owned
voting stocks shall be determined by
citizenship of the individual stockholders.
In case of corporations, citizenship of
corporation shall follow citizenship of the
controlling stockholders, irrespective of the
place of incorporation. Controlling
stockholders mean those who hold more than
50% of the voting stock.
Separate juridical personality
 As a general rule, a corporation will be
deemed a separate legal entity until sufficient
reason to the contrary appears. But the rule
is not absolute. A corporation's separate and
distinct legal personality may be disregarded
and the veil of corporate fiction pierced when
P a g e | 82
the notion of legal entity is used to defeat
public convenience, justify wrong, protect
fraud, or defend crime.
Siain Enterprises vs. Cupertino Realty
Corp., et al., (G.R. No. 170782, June 22, 2009)
 It is elementary that a corporation has a
personality distinct and separate from its
individual stockholders or members. Being
an officer or stockholder of a corporation
does not make one's property the property
also of the corporation, for they are separate
entities.
Adelio Cruz vs. Quiterio Dalisay, (A.M. No.
R-181-P, July 31, 1987); Traders Royal Bank
vs. Court of Appeals, (G.R. No. 78412,
September 26, 1989)
 While a share of stock represents a
proportionate or aliquot interest in the
property of the corporation, it does not vest
the owner thereof with any legal right or title
to any of the property, his interest in the
corporate property being equitable or
beneficial in nature. Shareholders are in no
legal sense the owners of corporate property,
which is owned by the corporation as a
distinct legal person.
Concepcion Magsaysay-Labrador vs. Court
of Appeals, (G.R. No. 58168, December 19,
1989); Good Earth Emporium, Inc. vs.
Court of Appeals, (G.R. No. 82797, February
27, 1991)
 A corporation — being an artificial person
which has no feelings, emotions or senses,
and which cannot experience physical
suffering or metal anguish — is not entitled
to moral damages.
Solid Homes, Inc. vs. Court of Appeals, (G.R.
No. 117501, July 8, 1997)
 The Supreme Court laid down the test in
determining the applicability of the doctrine
of piercing the veil of corporate fiction, to
wit:
1. Control, not mere majority or complete
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

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
separate mind, will or existence of its
own.
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 rights; and,
3. The aforesaid control and breach of duty
must proximately cause the injury or
unjust loss complained of.
Concept Builders, Inc. v. NLRC, (G.R. No.
108734, May 29, 1996); "G" Holdings, Inc.
vs. NAMAWU, et al., (G.R. No. 160236,
October 16, 2009)
 The term "capital" and other terms used to
describe the capital structure of a
corporation are of universal acceptance, and
their usages have long been established in
jurisprudence. Briefly, capital refers to the
value of the property or assets of a
corporation.
 The term "capital" in Section 11, Article XII of
the 1987 Constitution refers only to shares of
stock entitled to vote in the election of
directors, and thus in the present case only to
common shares, and not to the total
outstanding capital stock (common and non-
voting preferred shares. Gamboa vs. Teves
(2011)
 Voting rights are exercised during regular or
special meetings of stockholders; regular
meetings to be held annually on a fixed date,
while special meetings may be held at any
time necessary or as provided in the by-laws,
upon due notice. The Corporation Code
provides for a whole range of matters which
can be voted upon by stockholders, including
a limited set on which even non-voting
stockholders are entitled to vote on. On any
of these matters which may be voted upon by
stockholders, the proxy device is generally
available.
GSIS vs. Court of Appeals, et al., (G.R. Nos.
183905 & 184275, April 16, 2009)
 A preferred share of stock is one which
entitles the holder thereof to certain
preferences over the holders of common
stock. The preferences are designed to induce
persons to subscribe for shares of a
corporation. Preferred shares take a
multiplicity of forms. The most common
P a g e | 83
forms may be classified into two: (1)
preferred shares as to assets; and (2)
preferred shares as to dividends. The former
is a share which gives the holder thereof
preference in the distribution of the assets of
the corporation in case of liquidation; the
latter is a share the holder of which is
entitled to receive dividends on said share to
the extent agreed upon before any dividends
at all are paid to the holders of common
stock. There is no guaranty, however, that the
share will receive any dividends.
Republic Planters Bank vs. Enrique A.
Agana, Sr., (G.R. No. 51765, March 3, 199)7
 The advantages accorded to the preferred
shares are undeniable, namely: the
significant premium in the price being
offered; the preference enjoyed in the
dividends as well as in the liquidation of
assets; and the voting rights still retained by
preferred shares in major corporate actions.
All things considered, conversion to
preferred shares would best serve the
interests and rights of the government or the
eventual owner of the CIIF SMC shares.
COCOFED, et al. vs. Republic of the Phil.,
(G.R. Nos. 177857-58, September 17, 2009)
 Redeemable shares are shares usually
preferred, which by their terms are
redeemable at a fixed date, or at the option of
either issuing corporation, or the
stockholder, or both at a certain redemption
price. A redemption by the corporation of its
stock is, in a sense, a repurchase of it for
cancellation. The present Code allows
redemption of shares even if there are no
unrestricted retained earnings on the books
of the corporation. This is a new provision
which in effect qualifies the general rule that
the corporation cannot purchase its own
shares except out of current retained
earnings. However, while redeemable shares
may be redeemed regardless of the existence
of unrestricted retained earnings, this is
subject to the condition that the corporation
has, after such redemption, assets in its
books to cover debts and liabilities inclusive
of capital stock. Redemption, therefore, may
not be made where the corporation is
insolvent or if such redemption will cause
insolvency or inability of the corporation to
meet its debts as they mature.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Republic Planters Bank vs. Enrique A.
Agana, (Sr., G.R. No. 51765, March 3, 1997)
 Treasury shares - stocks issued and fully
paid for and re-acquired by the corporation
either by purchase, donation, forfeiture or
other means. Treasury shares are therefore
issued shares but being in the treasury they
do not have the status of outstanding shares.
Consequently, although a treasury share, not
having been retired by the corporation re-
acquiring it, may be re-issued or sold again,
such share, as long as it is held by the
corporation as a treasury share, participates
neither in dividends, because dividends
cannot be declared by the corporation to
itself, nor in the meetings of the corporation
as voting stock, for otherwise equal
distribution of voting powers among
stockholders will be effectively lost and the
directors will be able to perpetuate their
control of the corporation, though it still
foregoing essential features of a treasury
stock are lacking in the questioned shares .
SAN MIGUEL CORPORATION, NEPTUNIA
CORPORATION LIMITED, ANDRES
SORIANO III AND ANSCOR-HAGEDORN
SECURITIES, INC., petitioners, vs.
Sandiganbayan (G.R. Nos. 104637-38.
September 14, 2000.)
 The charter of a corporation is a contract
between three parties: (a) It is a contract
between the state and the corporation to
which the charter is granted; (b) it is a
contract between the stockholders and the
state and (c) it is also a contract between the
corporation and its stockholders. (Cook on
Corporations, vol. 2, sec. 494 and cases cited.)
Government of the Phil. vs. Manila
Railroad Company, (G.R. No. 30646, January
30, 1929)
 Sec. 17 - Grounds When Articles of
Incorporation or Amendment May Be
Rejected or Disapproved
The amendment of the articles of
incorporation requires merely that (a) the
amendment is not contrary to any provision
or requirement under the Corporation Code,
and that (b) it is for a legitimate purpose.
IEMELIF, et al. vs. Nathanael Lazaro, et al.,
(G.R. No. 184088, July 6, 2010)
P a g e | 84
 Parties organizing a corporation must choose
a name at their peril; and the use of a name
similar to one adopted by another
corporation, whether a business or a
nonprofit organization, if misleading or likely
to injure in the exercise of its corporate
functions, regardless of intent, may be
prevented by the corporation having a prior
right, by a suit for injunction against the new
corporation to prevent the use of the name.
Ang Mga Kaanib Sa Iglesia Ng Dios Kay
Kristo Hesus vs. Iglesia Ng Dios Kay Cristo
Jesus, (G.R. No. 137592, December 12, 2001)
 The corporation, upon such change in its
name, is in no sense a new corporation, nor
the successor of the original corporation. It is
the same corporation with a different name,
and its character is in no respect changed. A
change in the corporate name does not make
a new corporation, and whether effected by
special act or under a general law, has no
effect on the identity of the corporation, or on
its property, rights, or liabilities. The
corporation continues, as before, responsible
in its new name for all debts or other
liabilities which it had previously contracted
or incurred.
Republic Planters Bank vs. Court of
Appeals, (G.R. No. 93073, December 21, 1992)
 Organization and commencement of
transaction of corporate business are but
conditions subsequent and not prerequisites
for acquisition of corporate personality. The
adoption and filing of by-laws is also a
condition subsequent. Under Section 19 of
the Corporation Code, a corporation
commences its corporate existence and
juridical personality and is deemed
incorporated from the date the Securities
and Exchange Commission issues
certificate of incorporation under its
official seal. This may be done even before
the filing of the by-laws, which under Section
46 of the Corporation Code, must be adopted
"within one month after receipt of official
notice of the issuance of its certificate of
incorporation."
Chung Ka Bio vs. Intermediate Appellate
Court, (G.R. No. L-71837, July 26, 1988)
 The word "term" has acquired a definite
meaning in jurisprudence. In several cases,
we have defined "term" as the time during

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
which the officer may claim to hold the office
as of right and fixes the interval after which
the several incumbents shall succeed one
another. The term of office is not affected by
the holdover. The term is fixed by statute and
it does not change simply because the office
may have become vacant, nor because the
incumbent holds over in office beyond the
end of the term due to the fact that a
successor has not been elected and has failed
to qualify.
Term is distinguished from tenure in that an
officer's "tenure" represents the term during
which the incumbent actually holds office.
The tenure may be shorter (or, in case of
holdover, longer) than the term for reasons
within or beyond the power of the
incumbent.
Valle Verde Country Club, Inc., et al. vs.
Victor Africa, (G.R. No. 151969, September 4,
2009)
 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.
Valle Verde Country Club, Inc., et al. vs.
Victor Africa, (G.R. No. 151969, September 4,
2009)
 As a general rule, officers and directors of a
corporation hold over after the expiration of
their terms until such time as their
successors are elected or appointed.
The holdover doctrine has, to be sure, a
purpose which is at once legal as it is
practical. It accords validity to what would
otherwise be deemed as dubious corporate
acts and gives continuity to a corporate
enterprise in its relation to outsiders.
P a g e | 85
Hans Christian M. Señeres vs. COMELEC, et
al., (G.R. No. 178678, April 16, 2009)
 The power and the responsibility to decide
whether the corporation should enter into a
contract that will bind the corporation are
lodged in the board of directors, subject to
the articles of incorporation, by-laws, or
relevant provisions of law. However, just as a
natural person may authorize another to do
certain acts for and on his behalf, the board of
directors may validly delegate some of its
functions and powers to officers, committees
or agents. The authority of such individuals
to bind the corporation is generally derived
from law, corporate by-laws or authorization
from the board, either expressly or impliedly
by habit, custom or acquiescence in the
general course of business.
Cebu Mactan Members Center, Inc. vs.
Masahiro Tsukahara, (G.R. No. 159624, July
17, 2009)
 A corporation, like a natural person who may
authorize another to do certain acts for and
in his behalf, through its board of directors,
may legally delegate some of its functions
and powers to its officers, committees or
agents appointed by it. In the absence of an
authority from the board of directors, no
person, not even the officers of the
corporation, can validly bind the corporation.
Luzviminda Visayan vs. NLRC, (G.R. No.
69999, April 30, 1991)
 Under Section 23 of the Corporation Code of
the Philippines, authority over corporate
funds is exercised by the Board of Directors
who, in the absence of an appropriate
delegation of authority, are the only ones
who can act for and in behalf of the
corporation.
People's Broadcasting (Bombo Radyo
Phils., Inc.) vs. Secretary of the DOLE, et
al., (G.R. No. 179652, May 8, 2009)
 It must be borne in mind that Sec. 23, in
relation to Sec. 25 of the Corporation Code,
clearly enunciates that all corporate powers
are exercised, all business conducted, and all
properties controlled by the board of
directors. A corporation has a separate and
distinct personality from its directors and
officers and can only exercise its corporate
powers through the board of directors. Thus,

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
it is clear that an individual corporate officer
cannot solely exercise any corporate power
pertaining to the corporation without
authority from the board of directors. This
has been our constant holding in cases
instituted by a corporation.
Cagayan Valley Drug Corp. vs.
Commissioner of Internal Revenue, (G.R.
No. 151413, February 13, 2008)
Business Judgment Rule
 the SEC and the courts are barred from
intruding into business judgments of
corporations, when the same are made in
good faith. The said rule precludes the
reversal of the decision of the PSE to deny
PALI's listing application, absent a showing of
bad faith on the part of the PSE
Philippine Stock Exchange, Inc. vs. Court
of Appeals, (G.R. No. 125469, October 27,
1997)
Doctrine of apparent authority
 The authority of a corporate officer in dealing
with third persons may be actual or apparent.
The doctrine of "apparent authority," with
special reference to banks, was laid out in
Prudential Bank vs. Court of Appeals, G.R. No.
108957, June 14, 1993, where it was held
that: "Conformably, we have declared in
countless decisions that the principal is liable
for obligations contracted by the agent. The
agent's apparent representation yields to the
principal's true representation and the
contract is considered as entered into
between the principal and the third person
(citing National Food Authority vs.
Intermediate Appellate Court, G.R. No. 75640,
April 5, 1990).”
First Philippine International Bank vs.
Court of Appeals, (G.R. No. 115849, January
24, 1996)
 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
knowledge thereof, whether within or
P a g e | 86
beyond the scope of his ordinary powers. It
requires presentation of evidence of similar
act(s) executed either in its favor or in favor
of other parties. 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.
People's Aircargo and Warehousing Co.
Inc. vs. Court of Appeals, (G.R. No. 117847,
October 7, 1998); Inter-Asia Investments
Industries, Inc. vs. Court of Appeals, (G.R.
No. 125778, June 10, 2003)
 Whatever authority the officers or agents of a
corporation may have is derived from the
board of directors or other governing body,
unless conferred by the charter of the
corporation. A corporate officer's power as
an agent of the corporation must therefore be
sought from the statute, the charter, the by-
laws, or in a delegation of authority to such
officer, from the acts of the board of
directors, formally expressed or implied from
a habit or custom of doing business.
Ignacio Vicente vs Ambrosio M. Geraldez,
(G.R. No. L-32473, July 31, 1973)
 The board of directors of a corporation is a
creation of the stockholders. The board of
directors, or the majority thereof, controls
and directs the affairs of the corporation; but
in drawing to itself the power of the
corporation, it occupies a position of
trusteeship in relation to the minority of the
stock. The board shall exercise good faith,
care, and diligence in the administration of
the affairs of the corporation and protect not
only the interest of the majority but also that
of the minority of the stock. Where the
majority of the board of directors wastes or
dissipates the funds of the corporation or
fraudulently disposes of its properties, or
performs ultra vires acts, the court, in the
exercise of its equity jurisdiction, and upon
showing that intracorporate remedy is
unavailing, will entertain a suit filed by the
minority members of the board of directors,
for and in behalf of the corporation, to
prevent waste and dissipation and the
commission of illegal acts and otherwise
redress the injuries of the minority
stockholders against the wrongdoing of the
majority. The action in such a case is said to
be brought derivatively in behalf of the
 P a g e | 87
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

corporation to protect the rights of the
minority stockholders thereof.
Santiago Cua, Jr., et al. vs. Miguel Ocampo
Tan, et al., (G.R. Nos. 181455-56 & 182008,
December 4, 2009)
 Theory of Specific Capacity - the
corporation cannot exercise powers except
those expressly/impliedly given.
 Theory of General Capacity - a corporation
is said to hold such powers as are not
prohibited/withheld from it by general law
 It is well settled in this jurisdiction that
where corporate directors are guilty of a
breach of trust — not of mere error of
judgment or abuse of discretion — and
intracorporate remedy is futile or useless, a
stockholder may institute a suit in behalf
of himself and other stockholders and for
the benefit of the corporation, to bring
about a redress of the wrong inflicted
directly upon the corporation and
indirectly upon the stockholders.
Santiago Cua, Jr., et al. vs. Miguel Ocampo
Tan, et al., (G.R. Nos. 181455-56 & 182008,
December 4, 2009)

Derivative Suit

DERIVATIVE INDIVIDUAL SUIT CLASS SUITS

Where the acts complained of Where a stockholder or member Where the wrong is done to a
constitute a wrong to the is denied the right of inspection, group of stockholders, as where
corporation itself, the cause of his suit would be individual preferred stockholders' rights
action belongs to the corporation because the wrong is done to him are violated, a class or
and not to the individual personally and not to the other representative suit will be proper
stockholder or member. Although stockholders or the corporation. for the protection of all
in most every case of wrong to stockholders belonging to the
the corporation, each stockholder same group.
is necessarily affected because
the value of his interest therein
would be impaired, this fact of
itself is not sufficient to give him
an individual cause of action
since the corporation is a person
distinct and separate from him
and can and should itself sue the
wrongdoer.

 In cases of mismanagement where the whenever officials of the corporation refuse

wrongful acts are committed by the directors
or trustees themselves, a stockholder or
member may find that he has no redress
because the former are vested by law with
the right to decide whether or not the
corporation should sue, and they will never
be willing to sue themselves. The corporation
would thus be helpless to seek remedy.
Because of the frequent occurrence of such a
situation, the common law gradually
recognized the right of a stockholder to sue
on behalf of a corporation in what eventually
became known as a "derivative suit." It has
been proven to be an effective remedy of the
minority against the abuses of management.
Thus, an individual stockholder is permitted
to institute a derivative suit on behalf of the
corporation wherein he holds stock in order
to protect or vindicate corporate rights,
to sue or are the ones to be sued or hold the
control of the corporation. In such actions,
the suing stockholder is regarded as the
nominal party, with the corporation as the
party in interest.
 The power and the responsibility to decide
whether the corporation should enter into a
contract that will bind the corporation are
lodged in the board, subject to the articles of
incorporation, bylaws, or relevant provisions
of law. In the absence of authority from the
board of directors, no person, not even its
officers, can validly bind a corporation.
However, just as a natural person may
authorize another to do certain acts for and
on his behalf, the board of directors may
validly delegate some of its functions and
powers to its officers, committees or agents.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
The authority of these individuals to bind the
corporation is generally derived from law,
corporate bylaws or authorization from the
board, either expressly or impliedly by habit,
custom or acquiescence in the general course
of business.
Violeta Tudtud Banate, et al. vs. Phil.
Countryside Rural Bank (Liloan, Cebu),
Inc., et al., (G.R. No. 163825, July 13, 2010)
 the distinction between "proxy solicitation"
and "proxy validation" cannot be dismissed
offhand. The right of a stockholder to vote by
proxy is generally established by the
Corporation Code, but it is the Securities
Regulation Code which specifically regulates
the form and use of proxies, more
particularly the procedure of proxy
solicitation, primarily through Section 20.
GSIS vs. Court of Appeals, et al., (G.R. Nos.
183905 & 184275, April 16, 2009)
 Under Section 5 (c) of Presidential Decree No.
902-A, in relation to the SRC, the jurisdiction
of the regular trial courts with respect to
election-related controversies is specifically
confined to "controversies in the election or
appointment of directors, trustees, officers or
managers of corporations, partnerships, or
associations". Evidently, the jurisdiction of
the regular courts over so-called election
contests or controversies under Section 5 (c)
does not extend to every potential subject
that may be voted on by shareholders, but
only to the election of directors or trustees, in
which stockholders are authorized to
participate under Section 24 of the
Corporation Code.
GSIS vs. Court of Appeals, et al., (G.R. Nos.
183905 & 184275, April 16, 2009)
 The underlying policy of the Corporation
Code is that the business and affairs of a
corporation must be governed by a board of
directors whose members have stood for
election, and who have actually been elected
by the stockholders, on an annual basis. Only
in that way can the directors' continued
accountability to shareholders, and the
legitimacy of their decisions that bind the
corporation's stockholders, be assured. The
shareholder vote is critical to the theory that
legitimizes the exercise of power by the
P a g e | 88
directors or officers over properties that they
do not own.
 This theory of delegated power of the board
of directors similarly explains why, under
Section 29 of the Corporation Code, in cases
where the vacancy in the corporation's board
of directors is caused not by the expiration of
a member's term, the successor "so elected to
fill in a vacancy shall be elected only for the
unexpired term of his predecessor in office".
The law has authorized the remaining
members of the board to fill in a vacancy only
in specified instances, so as not to retard or
impair the corporation's operations; yet, in
recognition of the stockholders' right to elect
the members of the board, it limited the
period during which the successor shall serve
only to the "unexpired term of his
predecessor in office".
Valle Verde Country Club, Inc., et al. vs.
Victor Africa, (G.R. No. 151969, September 4,
2009)
 It also bears noting that the vacancy referred
to in Section 29 contemplates a vacancy
occurring within the director's term of office.
When a vacancy is created by the expiration
of a term, logically, there is no more
unexpired term to speak of. Hence, Section 29
declares that it shall be the corporation's
stockholders who shall possess the authority
to fill in a vacancy caused by the expiration of
a member's term.
Valle Verde Country Club, Inc., et al. vs.
Victor Africa, (G.R. No. 151969, September 4,
2009)
Doctrine of corporate opportunity
 Section 31 lays down the "doctrine of
corporate opportunity" and holds personally
liable corporate directors found guilty of
gross negligence or bad faith in directing the
affairs of the corporation, which results in
damage or injury to the corporation, its
stockholders or members, and other persons.
Manuel Luis S. Sanchez vs. Republic of the
Phil., (G.R. No. 172885, October 9, 2009)
 The personal liability of corporate officers
validly attaches only when (a) they assent to
a patently unlawful act of the corporation; or

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
(b) they are guilty of bad faith or gross
negligence in directing its affairs; or (c) they
incur conflict of interest, resulting in
damages to the corporation, its stockholders
or other persons.
H.L. Carlos Construction, Inc. vs. Marina
Properties Corp., et al., (G.R. No. 147614,
January 29, 2004)
 The general rule is that obligations incurred
by the corporation, acting through its
directors, officers, and employees, are its sole
liabilities. However, solidary liability may be
incurred, but only under the following
exceptional circumstances: (1) When
directors and trustees or, in appropriate
cases, the officers of a corporation: (a) vote
for or assent to patently unlawful acts of the
corporation; (b) act in bad faith or with gross
negligence in directing the corporate affairs;
(c) are guilty of conflict of interest to the
prejudice of the corporation, its stockholders
or members, and other persons; (2) When a
director or officer has consented to the
issuance of watered stocks or who, having
knowledge thereof, did not forthwith file with
the corporate secretary his written objection
thereto; (3) When a director, trustee or
officer has contractually agreed or stipulated
to hold himself personally and solidarily
liable with the corporation; or (4) When a
director, trustee or officer is made, by specific
provision of law, personally liable for his
corporate action.
Andrea Uy, et al. vs. Arlene Villanueva, et
al., G.R. No. 157851, June 29, 2007; Shrimp
Specialists, Inc. vs. Fuji-Triumph Agri-
Industrial Corp., (G.R. Nos. 168756 & 171476,
December 7, 2009)
 Section 31 makes a director personally liable
for corporate debts if he willfully and
knowingly votes for or assents to patently
unlawful acts of the corporation. Section 31
also makes a director personally liable if he is
guilty of gross negligence or bad faith in
directing the affairs of the corporation. The
bad faith or wrongdoing of the director must
be established clearly and convincingly. Bad
faith is never presumed.
Seaoil Petroleum Corp. vs. Autocorp
Group, et al., (G.R. No. 164326, October 17,
2008)
P a g e | 89
 The general rule is that obligations incurred
by the corporation, acting through its
directors, officers, and employees, are its sole
liabilities. However, solidary liability may be
incurred, but only under the following
exceptional circumstances:
1. When directors and trustees or, in
appropriate cases, the officers of a
corporation: (a) vote for or assent to
patently unlawful acts of the corporation;
(b) act in bad faith or with gross
negligence in directing the corporate
affairs; (c) are guilty of conflict of interest
to the prejudice of the corporation, its
stockholders or members, and other
persons;
2. When a director or officer has consented
to the issuance of watered stocks or who,
having knowledge thereof, did not
forthwith file with the corporate
secretary his written objection thereto;
3. When a director, trustee or officer has
contractually agreed or stipulated to hold
himself personally and solidarily liable
with the corporation; or
4. When a director, trustee or officer is
made, by specific provision of law,
personally liable for his corporate action.
Shrimp Specialists, Inc. vs. Fuji-
Triumph Agri-Industrial Corp., (G.R.
Nos. 168756 & 171476, December 7, 2009)
 The mere interlocking of directors and
officers does not warrant piercing the
separate corporate personalities of the two
corporations. Not only must there be a
showing that there was majority or complete
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.
"G" Holdings, Inc. vs. NAMAWU, et al., (G.R.
No. 160236, October 16, 2009)
 To validly increase its authorized capital
stock, corporation must issue at least 25% of
such stock.
 The corporation must issue at least twenty-
five percent (25%) of the newly or
contemporaneously authorized capital stock
in the course of complying with the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
requirements of the Corporation Code for
increasing its authorized capital stock.
Nestle Philippines, Inc. vs. CA and SEC,
(G.R. No. 86738, November 13, 1991)
 The grant of preemptive rights preserves
the proportionate shares of the original
partners so as not to dilute their respective
interests with the issuance of the new shares.
Unlike the right of first refusal, a preemptive
right gives a partner a preferential right over
the newly issued shares only to the extent
that it retains its original proportionate share
in the joint venture.
 Notice Requirement
 To give the stockholders knowledge of the
intended sale of shares of stock of the
corporation, in order that they may exercise
their preemptive right.
 While the Corporation Code allows the
transfer of all or substantially all the
properties and assets of a corporation, the
transfer should not prejudice the creditors of
the assignor. The only way the transfer can
proceed without prejudice to the creditors is
to hold the assignee liable for the obligations
of the assignor. The acquisition by the
assignee of all or substantially all of the
assets of the assignor necessarily includes the
assumption of the assignor's liabilities, unless
the creditors who did not consent to the
transfer choose to rescind the transfer on the
ground of fraud. To allow an assignor to
transfer all its business, properties and assets
without the consent of its creditors and
without requiring the assignee to assume the
assignor's obligations will defraud the
creditors. The assignment will place the
assignor's assets beyond the reach of its
creditors.
Strategic Alliance Development Corp. vs.
Radstock Securities Limited, et al., (G.R.
Nos. 178158 & 180428, December 4, 2009)
 The requirement of unrestricted retained
earnings to cover the shares is based on the
trust fund doctrine which means that the
capital stock, property and other assets of a
corporation are regarded as equity in trust
for the payment of corporate creditors. The
reason is that creditors of a corporation are
preferred over the stockholders in the
P a g e | 90
distribution of corporate assets. There can be
no distribution of assets among the
stockholders without first paying corporate
creditors. Hence, any disposition of corporate
funds to the prejudice of creditors is null and
void.
Boman Environmental Development
Corporation vs. Court of Appeals, (G.R. No.
77860, November 22, 1988)
TRUST FUND DOCTRINE
 Is a "rule that the property of a corporation is
a trust fund for the payment of creditors, but
such property can be called a trust fund 'only
by way of analogy or metaphor.' As between
the corporation itself and its creditors it is a
simple debtor, and as between its creditors
and stockholders its assets are in equity a
fund for the payment of its debts"
 The "Trust Fund" doctrine considers this
subscribed capital as a trust fund for the
payment of the debts of the corporation, to
which the creditors may look for satisfaction.
Until the liquidation of the corporation, no
part of the subscribed capital may be
returned or released to the stockholder
(except in the redemption of redeemable
shares) without violating this principle. Thus,
dividends must never impair the subscribed
capital; subscription commitments cannot be
condoned or remitted; nor can the
corporation buy its own shares using the
subscribed capital as the consideration
therefor.
 Under the trust fund doctrine, a corporation
has no legal capacity to release an original
subscriber to its capital stock from the
obligation of paying for his shares, in
whole or in part, without a valuable
consideration, or fraudulently, to the
prejudice of creditors. The creditor is
allowed to maintain an action upon any
unpaid subscriptions and thereby steps into
the shoes of the corporation for the
satisfaction of its debt. To make out a prima
facie case in a suit against stockholders of an
insolvent corporation to compel them to
contribute to the payment of its debts by
making good unpaid balances upon their
subscriptions, it is only necessary to establish
that the stockholders have not in good faith
paid the par value of the stocks of the
corporation.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Donnina C. Halley vs. Printwell, Inc., (G.R.
No. 157549, May 30, 2011)
ULTRA VIRES ACTS
 In legal parlance, "ultra vires" act refers to
one which is not within the corporate powers
conferred by the Corporation Code or articles
of incorporation or not necessary or
incidental in the exercise of the powers so
conferred.
Lopez Realty, Inc. vs. Florentina Fontecha,
(G.R. No. 76801, August 11, 1995)
 A distinction should be made between
corporate acts or contracts which are illegal
and those which are merely ultra vires. The
former contemplates the doing of an act
which is contrary to law, morals, or public
order, or contravene some rules of public
policy or public duty, and are, like similar
transactions between individuals, void. They
cannot serve as basis of a court action, nor
acquire validity by performance, ratification,
or estoppel. Mere ultra vires acts, on the
other hand, or those which are not illegal and
void ab initio, but are not merely within the
scope of the articles of incorporation, are
merely voidable and may become binding
and enforceable when ratified by the
stockholders.
Maria Carla Pirovano vs. The De La Rama
Steamship Co., (G.R. No. L-5377, December
29, 1954)
BY LAWS
 Non-filing of by-laws will not automatically
dissolve the corporation.
 With the adoption of PD 902-A, it is now clear
that the failure to file by-laws within the
required period is only a ground for
suspension or revocation of the certificate of
registration of corporations. Non-filing of the
by-laws will not result in automatic
dissolution of the corporation.
Chung Ka Bio vs. Intermediate Appellate
Court, (G.R. No. L-71837, July 26, 1988)
P a g e | 91
VOTING TRUST AGREEMENTS
 A voting trust agreement may confer upon a
trustee not only the stockholder's voting
rights but also other rights pertaining to his
shares as long as the voting trust agreement
is not entered "for the purpose of
circumventing the law against monopolies
and illegal combinations in restraint of trade
or used for purposes of fraud." Thus, the
traditional concept of a voting trust
agreement primarily intended to single out a
stockholder's right to vote from his other
rights as such and made irrevocable for a
limited duration may in practice become a
legal device whereby a transfer of the
stockholders’ shares is effected subject to the
specific provision of the voting trust
agreement. The execution of a voting trust
agreement, therefore, may create a
dichotomy between the equitable or
beneficial ownership of the corporate shares
of a stockholder, on the one hand, and the
legal title thereto on the other hand.
Ramon C. Lee vs. Court of Appeals, (G.R. No.
93695, February 4, 1992)
STOCK TRANSFERS
 The only limitation imposed by Section 63 of
the Corporation Code is when the
corporation holds any unpaid claim against
the shares intended to be transferred.
 A corporation, either by its board, its by-laws,
or the act of its officers, cannot create
restrictions in stock transfers, because: ". . .
restrictions in the traffic of stock must have
their source in legislative enactment, as the
corporation itself cannot create such
impediment. By-laws are intended merely for
the protection of the corporation, and
prescribe regulation, not restriction; they are
always subject to the charter of the
corporation. The corporation, in the absence
of such power, cannot ordinarily inquire into
or pass upon the legality of the transactions
by which its stock passes from one person to
another, nor can it question the consideration
upon which a sale is based..."
 The right of a transferee/assignee to have
stocks transferred to his name is an inherent
right flowing from his ownership of the
stocks. Thus: "whenever a corporation
refuses to transfer and register stock in cases

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
like the present, mandamus will lie to compel
the officers of the corporation to transfer said
stock in the books of the corporation." The
corporation's obligation to register is
ministerial.
Rural Bank of Salinas, Inc. vs. Court of
Appeals, (G.R. No. 96674, June 26, 1992); Eric
L. Lee vs. Henry J. Trocino, et al., (G.R. No.
164648, June 19, 2009)
REGISTRATION IN BOOKS
 The corporation did not keep books and
records. Perforce, no transfer was ever
recorded, much less effected as to prejudice
third parties. The transfer must be registered
in the books of the corporation to affect third
persons.
Concepcion Magsaysay-Labrador vs. CA
and Adelaida Rodriguez-Magsaysay, (G.R.
No. 58168, December 19, 1989)
RIGHT OF INSPECTION
 stockholder may exercise his statutory right
of inspection, the only express limitation
being that (1) the right of inspection should
be exercised at reasonable hours on business
days; (2) the person demanding to examine
and copy excerpts from the corporation's
records and minutes has not improperly used
any information secured through any
previous examination of the records of such
corporation; and (3) the demand is made in
good faith or for a legitimate purpose.
Rep. of the Phil. (PCGG) vs.
Sandiganbayan, et al., (G.R. No. 88809, July
10, 1991); Victor Africa vs. PCGG, (G.R. No.
83831, January 9, 1992); Ma. Belen
Flordeliza C. Ang-Abaya, et al. vs. Eduardo
G. Ang, (G.R. No. 178511, December 4, 2008)
MERGER AND CONSOLIDATION
 Consolidation is the union of two or more
existing entities to form a new entity called
the consolidated corporation.
 A merger, on the other hand, is a union
whereby one or more existing corporations
are absorbed by another corporation that
survives and continues the combined
business. The merger, however, does not
become effective upon the mere agreement of
the constituent corporations. Since a merger
P a g e | 92
or consolidation involves fundamental
changes in the corporation, as well as in the
rights of stockholders and creditors, there
must be an express provision of law
authorizing them.
For a valid merger or consolidation, the
approval by the Securities and Exchange
Commission (SEC) of the articles of merger or
consolidation is required. These articles must
likewise be duly approved by a majority of
the respective stockholders of the constituent
corporation
 The Corporation Code does not mandate the
absorption of the employees of the non-
surviving corporation by the surviving
corporation in the case of a merger. The rule
is that unless expressly assumed, labor
contracts such as employment contracts and
collective bargaining agreements are not
enforceable against a transferee of an
enterprise, labor contracts being in
personam, thus binding only between the
parties. A labor contract merely creates an
action in personam and does not create any
real right which should be respected by third
parties. This conclusion draws its force from
the right of an employer to select his
employees and to decide when to engage
them as protected under our Constitution,
and the same can only be restricted by law
through the exercise of the police power.
BPI vs. BPI Employees Union-Davao
Chapter-Federation of Unions in BPI
Unibank, (G.R. No. 164301, August 10, 2010),
citing Sundowner Development Corp. v.
Drilon, (G.R. No. 82341, December 6, 1989)
RIGHT OF APPRAISAL
 [Appraisal right] means that a stockholder
who dissented and voted against the
proposed corporate action, may choose to get
out of the corporation by demanding
payment of the fair market value of his
shares. When a person invests in the stocks
of a corporation, he subjects his investment
to all the risks of the business and cannot just
pull out such investment should the business
not come out as he expected. He will have to
wait until the corporation is finally dissolved
before he can get back his investment, and
even then, only if sufficient assets are left
after paying all corporate creditors. His only
way out before dissolution is to sell his

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
shares should he find a willing buyer. If there
is no buyer, then he has no recourse but to
stay with the corporation. However, in
certain specified instances, the Code grants
the stockholder the right to get out of the
corporation even before its dissolution
because there has been a major change in his
contract of investment with which he does
not agree and which the law presumes he did
not foresee when he bought his shares. Since
the will of two-thirds of the stocks will have
to prevail over his objections, the law
considers it only fair to allow him to get back
his investment and withdraw from the
corporation.
Santiago Cua, Jr., et al. vs. Miguel Ocampo
Tan, et al., (G.R. Nos. 181455-56 & 182008,
December 4, 2009)
Definition; Rights Foreign Corporations
 To be doing or "transacting business in the
Philippines" for purposes of Section 133 of
the Corporation Code, the foreign
corporation must actually transact business
in the Philippines, that is, perform specific
business transactions within the Philippine
territory on a continuing basis in its own
name and for its own account. 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. If a foreign corporation does
not transact such kind of business in the
Philippines, even if it exports its products to
the Philippines, the Philippines has no
jurisdiction to require such foreign
corporation to secure a Philippine business
license.
B. Van Zuiden Bros., Ltd. vs. GTVL Mfg.
Industries, Inc., (G.R. No. 147905, May 28,
2007)
 A foreign corporation may sue in this
jurisdiction for infringement of trademark
and unfair competition although it is not
doing business in the Philippines because the
Philippines was a party to the Convention of
the Union of Paris for the Protection of
Industrial Property.
Converse Rubber Corp. vs. Universal
Rubber Products, Inc., (L-27906, January 8,
1987)
P a g e | 93
 A foreign corporation 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.
Aboitiz Shipping Corp. vs. Insurance Co. of
North America, (G.R. No. 168402, August 6,
2008)
 In the recent case of Ang-Abaya, et al. v. Ang,
et al., the Court had the occasion to
enumerate the requisites before the penal
provision under Section 144 of the
Corporation Code may be applied in a case of
violation of a stockholder or member's right
to inspect the corporate books/records as
provided for under Section 74 of the
Corporation Code.
Requisites
1. A director, trustee, stockholder or member
has made a prior demand in writing for a
copy of excerpts from the corporation's
records or minutes;
2. Any officer or agent of the concerned
corporation shall refuse to allow the said
director, trustee, stockholder or member of
the corporation to examine and copy said
excerpts;
3. If such refusal is made pursuant to a
resolution or order of the board of directors
or trustees, the liability under this section for
such action shall be imposed upon the
directors or trustees who voted for such
refusal; and,
4. Where the officer or agent of the corporation
sets up the defense that the person
demanding to examine and copy excerpts
from the corporation's records and minutes
has improperly used any information secured
through any prior examination of the records
or minutes of such corporation or of any
other corporation, or was not acting in good
faith or for a legitimate purpose in making his
demand, the contrary must be shown or
proved.
Sy Tiong Shiou, et al. vs. Sy Chim, et al.,
(G.R. Nos. 174168 & 179438, March 30, 2009)
 Section 145 of the Corporation Code clearly
provides that "no right or remedy in favor of

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
or against any corporation, its stockholders,
members, directors, trustees, or officers, nor
any liability incurred by any such
corporation, stockholders, members,
directors, trustees, or officers, shall be
removed or impaired either by the
subsequent dissolution of said corporation."
Even if no trustee is appointed or designated
during the three-year period of the
liquidation of the corporation, the Court has
held that the board of directors may be
permitted to complete the corporate
liquidation by continuing as "trustees" by
legal implication.
SUPPLEMENTAL NOTES AND QUESTIONS FOR
CORPORATION LAW
ON CORPORATION LAW
X is president of AB, a family owned
corporation which defrauded Y when they
failed to deliver a motor vehicle which was
admittedly previously sold and delivered
already to another person instead. X and Y are
cousins and it was thru the former’s
representation that the latter decided to buy
the motor vehicle from AB. X now raises the
defense that he is not a party to the contract
and there is no ground to pierce the veil of
corporate fiction.
There is ground to pierce the veil of corporate
fiction.
The test in determining the applicability
of the doctrine of piercing the veil of
corporate fiction is as follows:
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;
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 acts in contravention of plaintiffs’
legal rights; and
P a g e | 94
3. The aforesaid control and breach of
duty must proximately cause the injury or
unjust loss complained of.
In a dispute involving the corporation and its
stockholders, how should the articles of
incorporation and by-laws be appreciated and
construed?
In the case of Forest Hills Golf and Country Club,
Inc., vs. Gardpro (GR no.164686, October 22,
2014), the Supreme Court had emphasized that
the Articles of Incorporation defines the
contractual relationship between the
corporation with its stockholders, the
corporation and the state, and the stockholders
and the state. Hence, they are binding not just on
the corporation but also on the stockholders
themselves. On the other hand, the by-laws are
considered to be the “private statutes” by which
the corporation is to be governed. In construing
and applying the provisions of the articles of
incorporation and the by-laws of the corporation
therefore, the plain meaning or literal meaning
rule embodied in Article 1370 of the Civil Code
shall apply.
May the directors of a corporation be
compelled to participate in arbitration
proceedings, when they were not parties to the
contract that contained the arbitration
clause?
In the case of Lanuza Jr., vs. BF Corporation (GR
no.174938, October 1, 2014), the High Court
stated that, while arbitration promotes the
parties’ autonomy in resolving their disputes, it
also recognized the decision made in Heirs of
Augusto Salas Jr., vs. Laperal Realty Corporation
(378 Phil.Reports 369) that, an arbitration clause
shall not apply to persons who were neither
parties to the contract nor assignees of previous
parties.
In Lanuza, the Court therefore ruled that, “As a
general rule, a corporation’s representative who
did not personally bind himself or herself to an
arbitration agreement cannot be forced to
participate in arbitration proceedings made
pursuant to an agreement entered into by the
corporation. He or she is not a party to that
agreement.” This rule is consistent as well with

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
the separate and juridical personality of juridical
persons vis-à-vis, their directors, officers,
stockholders and agents.
The ruling in Lanuza however should be
considered as an application of the general rule,
except of course when there are ground to pierce
the veil of corporate fiction.
Can the doctrine of piercing the veil of
corporate fiction be used to establish or
acquire jurisdiction over a corporation?
No. This is so because the doctrine of piercing
the veil of corporate fiction comes to play
only during the trial of the case after the court
has already acquired jurisdiction over the
corporation. Hence, before this doctrine can be
applied, based on the evidence presented, it is
imperative that the court must first have
jurisdiction over the corporation.
The implication of the above comment is
twofold: (1) the court must first acquire
jurisdiction over the corporation or corporations
involved before its or their separate
personalities are disregarded; and (2) the
doctrine of piercing the veil of corporate entity
can only be raised during a full-blown trial over a
cause of action duly commenced involving
parties duly brought under the authority of the
court by way of service of summons or what
passes as such service. (Kukan International vs.
J.Amor Reyes [2010])
Is the paid-up capital of a corporation a
reflection of its financial capacity to meet its
recurrent and long-term obligations?
No. Paid-up capital is merely seed money to start
a corporation or a business entity. Paid-up
capitalization of PhP 5,000 is not and should not
be taken as a reflection of the firm’s capacity to
meet its recurrent and long-term obligations. It
must be borne in mind that the equity portion
cannot be equated to the viability of a business
concern, for the best test is the working capital
which consists of the liquid assets of a given
business relating to the nature of the business
concern.
P a g e | 95
Neither should the level of paid-up capital of
Kukan, Inc. upon its incorporation be viewed as a
badge of fraud, for it is in compliance with Sec.
13 of the Corporation Code, which only requires
a minimum paid-up capital of PhP 5,000.
May minority stockholders file their derivative
suit against the corporation’s board of
directors for acts of mismanagement?
In Ching vs. Subic Bay Golf and Country Club,
Inc., (GR no.174353, September 10, 2014), the
High Court ruled that a stockholders’ right to
institute a derivative suit is not based on any
express provision of the Corporation Code or
even the Securities Regulation Code, but is
impliedly recognized when the said laws make
corporate directors or officers liable for damages
suffered by the corporation and its stockholders
for violation of their fiduciary duties.
The following are the elements of a derivative
suit, which must all concur:
1. He was a stockholder or a member at the
time the acts or transactions subject of
the action occurred and at the time the
action was filed;
2. He exerted all reasonable efforts and
alleges the same with particularity in the
complaint, to exhaust all remedies
available under the articles of
incorporation, by-laws, laws or rules
governing the corporation or partnership
to obtain the relief he desires;
3. No appraisal rights are available for the
act or acts complained of;
4. The suit is not a nuisance or harassment
suit.
In corporate rehabilitation proceedings,
whose rights shall prevail over the other?
This was the issue that the Supreme Court had to
confront with in the case of Aquino vs. Pacific
Plans, Inc., (GR no.193108, December 10, 2014)
involving the plan holders and other creditors of
pre-need company Pacific Plans.
In this case, the Supreme Court had the
opportunity to discuss the “Cram Down”5 power
5 See section 64 of the Financial Rehabilitation and
Insolvency Law (FRIA): Section 64. Creditor
Approval of Rehabilitation Plan. – The rehabilitation

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
of the rehabilitation court. This prerogative
given to the Rehabilitation Court maintains that
the court may approve a rehabilitation plan over
the objection of the creditors if, in its judgment,
the rehabilitation of the debtors is feasible and
the opposition of creditors is manifestly
unreasonable. The High Court noted that:
“While the voice and participation of the
creditors is crucial in the determination of
the viability of the rehabilitation plan, as
they stand to benefit or suffer in the
implementation thereof, the interests of all
stakeholders is the ultimate and prime
consideration.”
In relation to corporate rehabilitation
proceedings, the Supreme Court in the case of
Philippine Bank of Communications vs. Basic
Polyprinters and Packaging Corporation (GR
receiver shall notify the creditors and stakeholders
that the Plan is ready for their examination. Within
twenty (2Q) days from the said notification, the
rehabilitation receiver shall convene the creditors,
either as a whole or per class, for purposes of voting
on the approval of the Plan. The Plan shall be
deemed rejected unless approved by all classes of
creditors w hose rights are adversely modified or
affected by the Plan. For purposes of this section,
the Plan is deemed to have been approved by a
class of creditors if members of the said class
holding more than fifty percent (50%) of the total
claims of the said class vote in favor of the Plan. The
votes of the creditors shall be based solely on the
amount of their respective claims based on the
registry of claims submitted by the rehabilitation
receiver pursuant to Section 44 hereof.
Notwithstanding the rejection of the Rehabilitation
Plan, the court may confirm the Rehabilitation Plan
if all of the following circumstances are present:
(a)The Rehabilitation Plan complies with the
requirements specified in this Act.
(b) The rehabilitation receiver recommends the
confirmation of the Rehabilitation Plan;
(c) The shareholders, owners or partners of the
juridical debtor lose at least their controlling
interest as a result of the Rehabilitation Plan; and
(d) The Rehabilitation Plan would likely provide
the objecting class of creditors with
compensation which has a net present value
greater than that which they would have
received if the debtor were under liquidation.
P a g e | 96
no.187581, October 2014) ruled as well that the
purpose of such proceedings is two-fold – (1.) To
efficiently and equitably distribute the assets of
the insolvent debtor to its creditors; and (2.) To
provide the debtor with a fresh start.
The “material financial commitment” rule was
also discussed in the same aforementioned case.
This rule becomes significant in determining the
earnestness and good faith of the financially
distressed corporation in financing its proposed
rehabilitation plan. This material financial
commitment may include the readiness,
willingness and ability of the corporation to
contribute funds or property to guarantee the
operation of the corporation during the period of
rehabilitation.
Will the fact that a person acting as President,
Chairman and Treasurer of the corporation
justify already the piercing of the veil of
corporate fiction based on the alter-ego
theory?
No. In the case of WPM International Trading vs.
Labayen (GR no.182770, September 17, 2014)
ruled that, “The control necessary to invoke the
instrumentality or alter ego rule is not majority
or even complete stock control but such
domination of finances, policies and practices
that the controlled corporation has, so to speak,
no separate mind, will or existence of its own,
and is but a conduit for its principal. The control
must be shown to have been exercised at the
time the acts complained of took place.
Moreover, the control and breach of duty must
proximately cause the injury or unjust loss for
which the complaint is made.”
May the Securities and Exchange Commission
(SEC) issue a cease and desist order against a
corporation engaging in the sale of pre-need
plans without proper registration?
In Primamanila Plans vs. SEC (GR no.193791,
August 6, 2014), the Supreme Court upheld the
authority of the SEC to issue a cease and desist
order. This may be done motu proprio, it being
unnecessary that it results from a verified
complaint from an aggrieved party. A prior
hearing is also not required whenever the
Commission finds it appropriate to issue a cease

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
and desist order that aims to curtail fraud or
grave or irreparable injury to investors.
May a Hospital Corporation be liable for
negligent acts committed by its Doctor-
Consultants, who are not under their employ?
Yes. Hospitals may be found liable for the
negligent acts committed by its doctor-
consultants, even if there is no employer-
employee relationship between them.
As a rule, hospitals are not liable for the
negligence of its independent contractors.
However, it may be found liable if the physician
or independent contractor acts as an ostensible
agent of the hospital, under the doctrine of
apparent authority, based on proof of the
existence of two important factors – (a.) The
hospital’s manifestations, and (b.) The patient’s
reliance.
Is every action filed on behalf of a corporation
a derivative suit?
No. Not every suit filed on behalf of the
corporation is a derivative suit. For a derivative
suit to prosper, the minority stockholder suing
for and on behalf of the corporation must allege
in his complaint that he is suing on a derivative
cause of action on behalf of the corporation and
all other stockholders similarly situated who
may wish to join him in the suit.
The following are the requisites for a derivative
suit to prosper:
a) The party bringing suit should be a
shareholder as of the time of the act or
transaction complained of, the number of
his shares not being material;
b) He has tried to exhaust intra-corporate
remedies, i.e., has made a demand on the
board of directors for the appropriate relief
but the latter has failed or refused to heed
his plea; and
c) The cause of action actually devolves on
the corporation, the wrongdoing or harm
having been, or being caused to the
corporation and not to the particular
stockholder bringing the suit.
P a g e | 97
In such actions, the corporation is the real party-in-
interest while the suing stockholder, on behalf of
the corporation, is only a nominal party.
What is the rule on venue in derivative suits?
Derivative suits to be instituted shall be
commenced and tried in the Regional Trial Court
which has jurisdiction over the principal office of
the corporation, partnership, or association
concerned. Where the principal office of the
corporation, partnership or association is
registered in the Securities and Exchange
Commission as Metro Manila, the action must be
filed in the city or municipality where the head
office is located.
May the doctrine of piercing the veil of
corporate fiction apply to a corporation not
impleaded in the suit?
No. A corporation not impleaded in a suit cannot
be subject to the court’s process of piercing the
veil of its corporate fiction. In that situation, the
court has not acquired jurisdiction over the
corporation and, hence, any proceedings taken
against that corporation and its property would
infringe on its right to due process. The doctrine
of piercing the veil of corporate fiction comes to
play only during the trial of the case after the
court has already acquired jurisdiction over the
corporation. Before this doctrine can be applied,
the court must first have jurisdiction over the
corporation.
What is the meaning of capital in a
corporation?
The term capital and other terms used to
describe the capital structure of a corporation
are of universal acceptance and their usages
have long been established in
jurisprudence. Briefly, capital refers to the value
of the property or assets of a
corporation. The capital subscribed is the total
amount of the capital that persons
(subscribers or shareholders) have agreed to
take and pay for, which need not necessarily by,
and can be more than, the par value of the
shares.
In fine, it is the amount that the corporation
receives, inclusive of the premiums if any, in

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
consideration of the original issuance of the
shares. In the case of stock dividends, it is the
amount that the corporation transfers from
its surplus profit account to its capital
account. It is the same amount that can be
loosely termed as the trust fund of the
corporation. The Trust Fund doctrine considers
this subscribed capital as a trust fund for the
payment of the debts of the corporation, to
which the creditors may look for
satisfaction. Until the liquidation of the
corporation, no part of the subscribed capital
may be returned or released to the stockholder
(except in the redemption of redeemable shares)
without violating this principle. Thus, dividends
must never impair the subscribed capital;
subscription commitments cannot be condoned
or remitted; nor can the corporation buy its own
shares using the subscribed capital as the
considerations therefor.
How do you value the amount of dividends to
be declared?
Dividends, regardless of the form these are
declared, that is, cash, property or stocks, are
valued at the amount of the declared dividend
taken from the unrestricted retained earnings of
a corporation. Thus, the value of the declaration
in the case of a stock dividend is the actual value
of the original issuance of said stocks.
The Supreme Court has also said that in the case
of stock dividends, it is the amount that the
corporation transfers from its surplus profit
account to its capital account or it is the amount
that the corporation receives in consideration of
the original issuance of the shares. It is the
distribution of current or accumulated earnings
to the shareholders of a corporation pro rata
based on the number of shares owned. Such
distribution in whatever form is valued at the
declared amount or monetary equivalent.
Is there consideration involved in the issuance
of stock dividends?
Yes. The declaration of stock dividends is
equivalent to a forced purchase of stocks. By
declaring stock dividends, a corporation ploughs
P a g e | 98
back a portion or its entire unrestricted retained
earnings either to its working capital or for
capital asset acquisition or investments. It is
simplistic to say that the corporation did not
receive any actual payment for these. When the
dividend is distributed, it ceases to be a property
of the corporation as the entire or portion of its
unrestricted retained earnings is distributed pro
rata to corporate shareholders.
WHAT IS THE CONTROVERSY TEST IN
INTRACORPORATE DISPUTES?
Under the nature of the controversy test, the
Incidents of that relationship must also be
considered for the purpose of ascertaining
whether the controversy itself is intra -
corporate. The controversy must not only be
rooted in the existence of an intra corporate
relationship but must as well pertain to the
enforcement of the parties’ correlative rights and
obligations under the Corporation Code and the
internal and intra – corporate regulatory rules of
the corporation. If the relationship and its
incidents are merely incidental to the
controversy or if there will still be conflict even if
the relationship does not exist, then no intra
corporate controversy exists.
WHAT IS THE ALTER-EGO THEORY?
Case law lays down a three-pronged test to
determine the application of the alter ego theory,
which is also known as the instrumentality
theory, namely:
(A) 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
(B) 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; and
(C) The aforesaid control and breach of duty
must have proximately caused the injury or
unjust loss complained of.

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
WHAT IS THE THREE-PRONGED TEST TO
DETERMINE THE APPLICATION OF THE ALTER
EGO THEORY?
In this connection, case law lays down a three-
pronged test to determine the application of the
alter ego theory, which is also known as the
instrumentality theory, namely:
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;
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; and;
3. The aforesaid control and breach of duty
must have proximately caused the injury or
unjust loss complained of.
The first prong is the "instrumentality" or
"control" test. This test requires that the
subsidiary be completely under the control and
domination of the parent. It inquires whether a
subsidiary corporation is so organized and
controlled and its affairs are so conducted as to
make it a mere instrumentality or agent of the
parent corporation such that its separate
existence as a distinct corporate entity will be
ignored. In addition, the control must be shown
to have been exercised at the time the acts
complained of took place.
The second prong is the "fraud" test. This test
requires that the parent corporation’s conduct in
using the subsidiary corporation be unjust,
fraudulent or wrongful. It examines the
relationship of the plaintiff to the corporation. It
recognizes that piercing is appropriate only if the
parent corporation uses the subsidiary in a way
that harms the plaintiff creditor. As such, it
requires a showing of "an element of injustice or
fundamental unfairness."
P a g e | 99
The third prong is the "harm" test. This test
requires the plaintiff to show that the
defendant’s control, exerted in a fraudulent,
illegal or otherwise unfair manner toward it,
caused the harm suffered. A causal connection
between the fraudulent conduct committed
through the instrumentality of the subsidiary
and the injury suffered or the damage incurred
by the plaintiff should be established. The
plaintiff must prove that, unless the corporate
veil is pierced, it will have been treated unjustly
by the defendant’s exercise of control and
improper use of the corporate form and, thereby,
suffer damages.
What is the role of the Corporate Secretary in a
corporation?
It is the signature of the corporate secretary, as
the one who is tasked to prepare and record the
minutes, that gives the minutes of the meeting
probative value and credibility.
The non-signing by the majority of the members
of Board of Trustees of the said minutes does not
necessarily mean that the supposed resolution
was not approved by the board. The signing of
the minutes by all the members of the board is
not required. There is no provision in the
Corporation Code of the Philippines that
requires that the minutes of the meeting should
be signed by all the members of the board.
The proper custodian of the books, minutes and
official records of a corporation is usually the
corporate secretary. Being the custodian of
corporate records, the corporate secretary has
the duty to record and prepare the minutes of
the meeting. The signature of the corporate
secretary gives the minutes of the meeting
probative value and credibility.
Thus, without the certification of the corporate
secretary, it is incumbent upon the other
directors or stockholders as the case may be, to
submit proof that the minutes of the meeting is
accurate and reflective of what transpired during
the meeting. (LOPEZ REALTY, INC. AND
ASUNCION LOPEZ-GONZALES vs. SPOUSES
REYNALDO TANJANGCO AND MARIA LUISA
ARGUELLES-TANJANGCO, G.R. No. 154291,
November 12, 2014)

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Can the refusal to inspect corporate books be
the basis of a criminal complaint?
Yes. All the rights guaranteed to corporators
under Section 74 of the Corporation Code are
mandatory for the corporation to respect. All
such rights are just the same underpinned by the
same policy consideration of keeping public
confidence in the corporate vehicle thru an
assurance of transparency in the corporation's
operations. (ADERITO Z. YUJUICO AND
BONIFACIO C. SUMBILLA vs. CEZAR T.
QUIAMBAO AND ERIC C. PILAPIL, G.R. No.
180416, June 02, 2014)
MAY A DISSOLVED CORPORATION STILL
CONTINUE TO FILE CASES?
Yes. A dissolved corporation may still continue to
file cases within the prescribed three-year period
under Section 122 of the Corporation Code.
SEC. 122. Corporate liquidation. Every
corporation whose charter expires by its own
limitation or is annulled by forfeiture or
otherwise, or whose corporate existence for
other purposes is terminated in any other
manner, shall nevertheless be continued as a
body corporate for three (3) years after the
time when it would have been so dissolved,
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.
At any time during said three (3) years, said
corporation is authorized and empowered to
convey all of its property to trustees for the
benefit of 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.
Upon winding up of the corporate affairs, any
asset distributable to any creditor or
P a g e | 100
stockholder or member who is unknown or
cannot be found shall be escheated to the city
or municipality where such assets are
located.
Will a change in corporate name result in the
creation of a new corporation?
No. A change in the corporate name does not
make a new corporation, whether effected by a
special act or under a general law. It has no
effect on the identity of the corporation, or on
its property, rights, or liabilities because the
corporation upon such change in its name, is in
no sense a new corporation, nor the successor
of the original corporation.
The mere change in the corporate name is not
considered under the law as the creation of a
new corporation; hence, the renamed
corporation remains liable for the illegal
dismissal of its employee separated under that
guise. Verily, the amendments of the articles of
incorporation of Zeta to change the corporate
name to Zuellig Freight and Cargo Systems, Inc.,
did not produce the dissolution of the former as
a corporation. (Zuellig Freight and Cargo
Systems. National Labor Relations Commission,
et al., G.R. No. 157900, July 22, 2013)
What are the rules on corporate merger?
Merger is a re-organization of two or more
corporations that results in their consolidating
into a single corporation, which is one of the
constituent corporations, one disappearing or
dissolving and the other surviving. To put it
another way, merger is the absorption of one or
more corporations by another existing
corporation, which retains its identity and takes
over the rights, privileges, franchises, properties,
claims, liabilities and obligations of the absorbed
corporation(s). The absorbing corporation
continues its existence while the life or lives of
the other corporation(s) is or are terminated.
The Corporation Code requires the following
steps for merger or consolidation:
(a.) The board of each corporation draws up
a plan of merger or consolidation. Such plan
must include any amendment, if necessary,
to the articles of incorporation of the
surviving corporation, or in case of
consolidation, all the statements required in

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
the articles of incorporation of a WHEN IS PROXY AVAILABLE?
corporation.
(b.) Submission of plan to stockholders or
members of each corporation for approval.
A meeting must be called and at least two
(2) weeks’ notice must be sent to all
stockholders or members, personally or by
registered mail. A summary of the plan
must be attached to the notice. Vote of two-
thirds of the members or of stockholders
representing two thirds of the outstanding
capital stock will be needed. Appraisal
rights, when proper, must be respected.
(c.) Execution of the formal agreement,
referred to as the articles of merger o[r]
consolidation, by the corporate officers of
each constituent corporation. These take
the place of the articles of incorporation of
the consolidated corporation or amend the
articles of incorporation of the surviving
corporation.
(d.) Submission of said articles of merger or
consolidation to the SEC for approval.
(e.) If necessary, the SEC shall set a hearing,
notifying all corporations concerned at least
two weeks before.
(f.) Issuance of certificate of merger or
consolidation.
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 Securities and Exchange Commission
(SEC) of a certificate of merger.
IS THERE A DIFFERENCE BETWEEN
PROXY SOLICITATION AND PROXY
VALIDATION?
It is plain that proxy solicitation is a procedure
that antecedes proxy validation. The former
involves the securing and submission of proxies,
while the latter concerns the validation of such
secured and submitted proxies.
P a g e | 101
Shares of stock in corporations may be divided
into voting shares and non-voting shares, which
are generally issued as preferred or redeemable
shares. Voting rights are exercised during
regular or special meetings of stockholders;
regular meetings to be held annually on a fixed
date, while special meetings may be held at any
time necessary or as provided in the by-laws,
upon due notice. The Corporation Code provides
for a whole range of matters which can be voted
upon by stockholders, including a limited set on
which even non-voting stockholders are entitled
to vote on. On any of these matters which may be
voted upon by stockholders, the proxy device is
generally available.
Is a corporation entitled to moral damages?
As a rule, a corporation is not entitled to moral
damages because, not being a natural person, it
cannot experience physical suffering or
sentiments like wounded feelings, serious
anxiety, mental anguish and moral shock. The
only exception to this rule is when the
corporation has a reputation that is debased,
resulting in its humiliation in the business realm.
But in such a case, it is essential to prove the
existence of the factual basis of the damage and
its causal relation to petitioner’s acts. (Manila
Electric Company vs. T.E.A.M. Electronics
Corporation, Technology Electronics Assembly
and Management Pacific Corporation; and Ultra
Electronics Instruments, Inc., G.R. No. 131723,
December 13, 2007)
What is the purpose of financial
rehabilitation?
Rehabilitation proceedings have a two-pronged
purpose, namely: (a) to efficiently and equitably
distribute the assets of the insolvent debtor to its
creditors; and (b) to provide the debtor with a
fresh start, viz: Rehabilitation proceedings in our
jurisdiction have equitable and rehabilitative
purposes. On the one hand, they attempt to
provide for the efficient and equitable
distribution of an insolvent debtor's remaining
assets to its creditors; and on the other, to
provide debtors with a "fresh start" by relieving
them of the weight of their outstanding debts
 P a g e | 102
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

and permitting them to reorganize their affairs. Article 1732 makes no distinction between one
The purpose of rehabilitation proceedings is to whose principal business activity is the carrying
enable the company to gain a new lease on life of persons or goods or both, and one who does
and thereby allow creditors to be paid their such carrying only as an ancillary activity (in
claims from its earnings. local idiom, as "a sideline"). Article 1732 also
carefully avoids making any distinction between
Premiere Development Bank vs. Alfredo C.
a person or enterprise offering transportation
Flores, et al., (G.R. No. 175339, December 16,
2008) service on a regular or scheduled basis and one
offering such service on an occasional, episodic
or unscheduled basis. Neither does Article 1732
TRANSPORTATION LAW distinguish between a carrier offering its
services to the "general public," i.e., the general
Laws Covered community or population, and one who offers
services or solicits business only from a narrow
1. Civil Code segment of the general population
 Arts. 1732-1734 (General
Provisions) First Phil. Industrial Corp. vs. Court of Appeals,
 Arts.1736-1753 (Vigilance over G.R. No. 125948, December 29, 1998
Goods)
 Arts.1754-1766 (Safety of National Steel Corp. vs. Court of Appeals, G.R. No.
Passengers) 112287 & 112350, December 12, 1997
2. Warsaw Convention
3. Carriage of Goods by Sea Act (COGSA) Engracio Fabre, Jr. vs. Court of Appeals, G.R. No.
111127, July 26, 1996
Civil Code Provisions It is not necessary that the carrier be issued a
certificate of public convenience, and this public
Art. 1732 - Common carriers
character is not altered by the fact that the
Vector Shipping Corp., et al. vs. Adelfo B. Macasa, carriage of the goods in question was periodic,
et al., G.R. No. 160219, July 21, 2008 occasional, episodic or unscheduled

Alejandro Arada vs. Court of Appeals, G.R. No. Asia Lighterage and Shipping, Inc. vs. Court of
98243, July 1, 1992 Appeals, G.R. No. 147246, August 19, 2003

Pedro de Guzman vs. CA and Ernesto Cendaña, G.R.
No. L-47822, December 22, 1988
Philippine Air Lines, Inc. vs. Court of Appeals, G.R.
No. L-46558, July 31, 1981
The test to determine a common carrier is
"whether the given undertaking is a part of the
business engaged in by the carrier which he has
held out to the general public as his occupation
rather than the quantity or extent of the business
transacted." . . .
Planters Products, Inc. vs. Court of Appeals, G.R.
No. 101503, September 15, 1993
Estrellita M. Bascos vs. Court of Appeals, G.R. No.
101089, April 7, 1993
Philippine American General Insurance Company
vs. PKS Shipping Company, G.R. No. 149038, April
9, 2003
FGU Insurance Corp. vs. G.P. Sarmiento Trucking
Corp., G.R. No. 141910. August 6, 2002
Virgines Calvo vs. UCPB General Insurance Co.,
G.R. No. 148496. March 19, 2002
Loadstar Shipping Co. vs. Court of Appeals, G.R.
No. 131621. September 28, 1999
A freight forwarder's liability is limited to
damages arising from its own negligence,
including negligence in choosing the carrier;
however, where the forwarder contracts to
deliver goods to their destination instead of
merely arranging for their transportation, it
becomes liable as a common carrier for loss or

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
damage to goods. A freight forwarder assumes
the responsibility of a carrier, which actually
executes the transport, even though the
forwarder does not carry the merchandise itself.
Unsworth Transport International (Phils.), Inc. vs.
Court of Appeals, et al., G.R. No. 166250, July 26,
2010
Art. 1733 - Common carriers are bound to
observe extraordinary diligence
Virgines Calvo vs. UCPB General Insurance Co.,
G.R. No. 148496. March 19, 2002
Phil-Am General Insurance Co., Inc. vs. Court of
Appeals, G.R. No. 116940, June 11, 1997
Trans-Asia Shipping Lines vs. Court of Appeals,
G.R. No. 118126, March 4, 1996
Planters Products, Inc. vs. Court of Appeals, G.R.
No. 101503, September 15, 1993
American Home Assurance, Co. vs. Court of
Appeals, G.R. No. 94149, May 5, 1992
Heirs of Amparo De Los Santos vs. Court of
Appeals, G.R. No. 51165, June 21, 1990
Philippine Air Lines, Inc. vs. Court of Appeals, G.R.
No. L-46558, July 31, 1981
Common carriers are bound to observe
extraordinary diligence over the goods they
transport.
We need only to stress that from the nature of
their business and for reasons of public policy,
common carriers are bound to observe
extraordinary diligence over the goods they
transport according to all the circumstances of
each case. In the event of loss, destruction or
deterioration of the insured goods, common
carriers are responsible, unless they can prove
that the loss, destruction or deterioration was
brought about by the causes specified in Article
1734 of the Civil Code. In all other cases,
common carriers are presumed to have been at
fault or to have acted negligently, unless they
prove that they observed extraordinary
diligence.
Aboitiz Shipping Corp. vs. New India Assurance
Co., Ltd., G.R. No. 156978, August 24, 2007
P a g e | 103
A common carrier and, as such, is obliged to
exercise extraordinary diligence in transporting
its passengers safely.
Victory Liner, Inc. vs. Pablo Race, G.R. No. 164820,
December 8, 2008
A common carrier, from the nature of its
business and for reasons of public policy, is
bound to observe extraordinary diligence for the
safety of the passengers it transports.
Armando G. Yrasuegui vs. Philippine Airlines, Inc.,
G.R. No. 168081, October 17, 2008
A common carrier is bound by law to exercise
extraordinary diligence and utmost care in
ensuring for the safety and welfare of its
passengers with due regard for all the
circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al.,
G.R. No. 123238, September 22, 2008
Mere proof of delivery of the goods in good order
to a common carrier and of their arrival in bad
order at their destination constitutes a prima
facie case of fault or negligence against the
carrier. If no adequate explanation is given as to
how the deterioration, loss, or destruction of the
goods happened, the transporter shall be held
responsible.
Unsworth Transport International (Phils.), Inc.
vs. Court of Appeals, et al., G.R. No. 166250, July
26, 2010
Art. 1734 - When common carriers are not
responsible for loss, destruction, or deterioration
of goods
Iron Bulk Shipping Phil., Co., Ltd. vs. Remington
Industrial Sales Corp., G.R. No. 136960, December
8, 2003
DSR-Senator Lines vs. Federal Phoenix Assurance
Co., Inc., G.R. No. 135377, October 7, 2003
Asia Lighterage and Shipping, Inc. vs. Court of
Appeals, G.R. No. 147246, August 19, 2003
Phil. American General Insurance vs. MGG Marine
Services, G.R. No. 135645, March 8, 2002

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Eastern Shipping Lines, Inc. vs. Court of Appeals,
G.R. No. 97412, July 12, 1994
Planters Products, Inc. vs. Court of Appeals, G.R.
No. 101503, September 15, 1993
American Home Assurance, Co. vs. Court of
Appeals, G.R. No. 94149, May 5, 1992
Though it is true that common carriers are
presumed to have been at fault or to have acted
negligently if the goods transported by them are
lost, destroyed, or deteriorated, and that the
common carrier must prove that it exercised
extraordinary diligence in order to overcome the
presumption, the plaintiff must still, before the
burden is shifted to the defendant, prove that the
subject shipment suffered actual shortage. This
can only be done if the weight of the shipment at
the port of origin and its subsequent weight at
the port of arrival have been proven by a
preponderance of evidence, and it can be seen
that the former weight is considerably greater
than the latter weight, taking into consideration
the exceptions provided in Article 1734 of the
Civil Code.
Asian Terminals, Inc. vs. Simon Enterprises, Inc.,
G.R. No. 177116, February 27, 2013
The Berth Term Grain Bill of Lading states that
the subject shipment was carried with the
qualification "Shipper's weight, quantity and
quality unknown," meaning that it was
transported with the carrier having been
oblivious of the weight, quantity, and quality of
the cargo. This interpretation of the quoted
qualification is supported by Wallem Philippines
Shipping, Inc. v. Prudential Guarantee &
Assurance, Inc., a case involving an analogous
stipulation in a bill of lading, wherein the
Supreme Court held that:
Indeed, as the bill of lading indicated that the
contract of carriage was under a "said to weigh"
clause, the shipper is solely responsible for the
loading while the carrier is oblivious of the
contents of the shipment.
The fact that the cargo was shipped with the
arrangement "Shipper's weight, quantity and
quality unknown," indeed means that the weight
of the cargo could not be determined using as
P a g e | 104
basis the figures written on the Berth Term Grain
Bill of Lading... Consequently, the respondent
must still prove the actual weight of the subject
shipment at the time it was loaded at the port of
origin so that a conclusion may be made as to
whether there was indeed a shortage for which
petitioner must be liable. . . The respondent
having failed to present evidence to prove the
actual weight of the subject shipment when it
was loaded onto the M/V "Tern," its cause of
action must then fail because it cannot prove the
shortage that it was alleging. Indeed, if the
claimant cannot definitively establish the weight
of the subject shipment at the point of origin, the
fact of shortage or loss cannot be ascertained.
The claimant then has no basis for claiming
damages resulting from an alleged shortage.
Asian Terminals, Inc. vs. Simon Enterprises, Inc.,
G.R. No. 177116, February 27, 2013 citing
Wallem Philippines Shipping, Inc. v. Prudential
Guarantee & Assurance, Inc., 445 Phil. 136, 153
(2003)
Art. 1735 - When common carriers are
presumed to have been at fault or to have acted
negligently
Presumption of Fault or Negligence by Common
Carriers
A business intended to serve the travelling
public primarily, a contract of carriage is imbued
with public interest. The law governing common
carriers consequently imposes an exacting
standard. Article 1735 of the Civil Code provides
that in case of lost or damaged goods, common
carriers are presumed to have been at fault or to
have acted negligently, unless they prove that
they observed extraordinary diligence as
required by Article 1733. Thus, in an action
based on a breach of contract of carriage, the
aggrieved party does not have to prove that the
common carrier was at fault or was negligent. All
that he has to prove is the existence of the
contract and the fact of its non-performance by
the carrier.
Air France vs. Bonifacio H. Gillego, G.R. No.
165266, December 15, 2010

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Aboitiz Shipping Corp. vs. Insurance Company of
North America, G.R. No. 168402, August 6, 2008
Eastern Shipping Lines, Inc. vs. Court of Appeals,
G.R. No. 97412, July 12, 1994
Home Insurance Corp. vs. Court of Appeals, G.R.
No. 109293, August 18, 1993
Extraordinary diligence must include
safeguarding the shipment from damage coming
from natural elements such as rainfall.
Aboitiz Shipping Corp. vs. Insurance Co. of North
America, G.R. No. 168402, August 6, 2008
Art. 1736 - Extraordinary responsibility of
common carriers
Eastern Shipping Lines, Inc. vs. Court of Appeals,
G.R. No. 80936, October 17, 1990
Explicit is the rule under Article 1736 of the Civil
Code that the extraordinary responsibility of the
common carrier begins from the time the goods
are delivered to the carrier. This responsibility
remains in full force and effect even when they
are temporarily unloaded or stored in transit
unless the shipper or owner exercises the right
of stoppage in transit and terminates only after
the lapse of a reasonable time for the acceptance
of the goods by the consignee or such other
person entitled to receive them. And, there is
delivery to the carrier when the goods are ready
for and have been placed in the exclusive
possession, custody and control of the carrier for
the purpose of their immediate transportation
and the carrier has accepted them. Where such a
delivery has thus been accepted by the carrier,
the liability of the common carrier commences
eo instanti.
Benito Macam vs. Court of Appeals, G.R. No.
125524, August 25, 1999
Aniceto G. Saludo, Jr. vs. Court of Appeals, G.R. No.
95536, March 23, 1992
Art. 1739 - Common carrier must exercise due
diligence to prevent or minimize loss before,
during and after natural disaster to be exempt
from liability
P a g e | 105
Alejandro Arada vs. Court of Appeals, G.R. No.
98243, July 1, 1992
Eastern Shipping Lines, Inc. vs. Intermediate
Appellate Court, G.R. No. L-69044. May 29, 1987
Art. 1742 - Common carrier must exercise due
diligence to forestall or lessen loss
Iron Bulk Shipping Phil., Co., Ltd. vs. Remington
Industrial Sales Corp., G.R. No. 136960,
December 8, 2003
Art. 1744 - Stipulation limiting liability of
common carrier to degree less than
extraordinary diligence
Samar Mining Co., Inc. vs. Nordeutscher Lloyd, G.R.
No. L-28673. October 23, 1984
Amparo Servando vs. Phil. Steam Navigation Co.,
G.R. Nos. L-36481-2. October 23, 1982
It is to be noted that the Civil Code does not limit
the liability of the common carrier to a fixed
amount per package. In all matters not regulated
by the Civil Code, the rights and obligations of
common carriers are governed by the Code of
Commerce and special laws. Thus, the COGSA
supplements the Civil Code by establishing a
provision limiting the carrier's liability in the
absence of a shipper's declaration of a higher
value in the bill of lading.
Unsworth Transport International (Phils.), Inc. vs.
Court of Appeals, et al., G.R. No. 166250, July 26,
2010
Art. 1745 - Stipulations considered
unreasonable, unjust and contrary to public
policy
Valenzuela Hardwood and Industrial Supply vs.
Court of Appeals, G.R. No. 102316, June 30, 1997
Estrellita M. Bascos vs. Court of Appeals, G.R. No.
101089, April 7, 1993
Pedro de Guzman vs. CA and Ernesto Cendaña, G.R.
No. L-47822, December 22, 1988
Art. 1749 - Stipulation limiting common
carrier's liability to value of the goods appearing
in bill of lading

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Phil. Charter Insurance Corp. vs. Neptune Orient
Lines, et al., G.R. No. 145044, June 12, 2008
Yao Ka Sin Trading vs. Court of Appeals, G.R. No.
53820, June 15, 1992
A stipulation in the bill of lading limiting the
common carrier's liability for loss or destruction
of a cargo to a certain sum, unless the shipper or
owner declares a greater value, is sanctioned by
law.
Philippine Charter Insurance Corp. vs. Neptune
Orient Lines, et al., G.R. No. 145044, June 12, 2008
A bill of lading is a written acknowledgement of
the receipt of goods and an agreement to
transport and to deliver them at a specified place
to a person named or on his or her order. It
operates both as a receipt and as a contract. It is
a receipt for the goods shipped and a contract to
transport and deliver the same as therein
stipulated. As a receipt, it recites the date and
place of shipment, describes the goods as to
quantity, weight, dimensions, identification
marks, condition, quality, and value. As a
contract, it names the contracting parties, which
include the consignee; fixes the route,
destination, and freight rate or charges; and
stipulates the rights and obligations assumed by
the parties.
Unsworth Transport International (Phils.), Inc. vs.
Court of Appeals, et al., G.R. No. 166250, July 26,
2010
Art. 1750 - Contract fixing the sum that may be
recovered by the owner or shipper for the loss,
destruction, or deterioration of the goods, when
valid
Phil. Charter Insurance Corp. vs. Neptune Orient
Lines, et al., G.R. No. 145044, June 12, 2008
A stipulation in the bill of lading limiting the
common carrier's liability for loss or destruction
of a cargo to a certain sum, unless the shipper or
owner declares a greater value, is sanctioned by
law.
Philippine Charter Insurance Corp. vs. Neptune
Orient Lines, et al., G.R. No. 145044, June 12, 2008
Art. 1753 - Governing law
P a g e | 106
American Home Assurance, Co. vs. Court of
Appeals, G.R. No. 94149, May 5, 1992
Maritime Company of the Phils. vs. Court of
Appeals, G.R. No. 47004, March 8, 1989
Eastern Shipping Lines, Inc. vs. Intermediate
Appellate Court, G.R. No. L-69044. May 29, 1987
Art. 1755 - Duty of common carrier for safety of
passengers
Art. 1755 - Duty or common carrier for safety of
passengers
Japan Airlines vs. Jesus Simangan, G.R. No. 170141,
April 22, 2008
Fortune Express vs. Court of Appeals, G.R. No.
119756, March 18, 1999
Trans-Asia Shipping Lines vs. Court of Appeals,
G.R. No. 118126, March 4, 1996
Dangwa Transportation Co., Inc. vs. Court of
Appeals, G.R. No. 95582, October 7, 1991
Heirs of Amparo De Los Santos vs. Court of
Appeals, G.R. No. 51165, June 21, 1990
Kapalaran Bus Line vs. Angel Coronado, G.R. No.
85331, August 25, 1989
Philippine Air Lines, Inc. vs. Court of Appeals, G.R.
No. L-46558, July 31, 1981
A common carrier is bound by law to exercise
extraordinary diligence and utmost care in
ensuring for the safety and welfare of its
passengers with due regard for all the
circumstances.
Philippine Airlines, Inc. vs. Court of Appeals, et al.,
G.R. No. 123238, September 22, 2008
A common carrier is bound to carry the
passengers safely as far as human care and
foresight can provide, using the utmost diligence
of very cautious persons, with a due regard for
all the circumstances.
Armando G. Yrasuegui vs. Philippine Airlines,
Inc., G.R. No. 168081, October 17, 2008
Japan Airlines vs. Jesus Simangan, G.R. No.
170141, April 22, 2008

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Art. 1756 - Common carriers presumed at fault
or negligent in case of death of or injuries to
passengers
Heirs of Amparo De Los Santos vs. Court of
Appeals, G.R. No. 51165, June 21, 1990
Batangas Laguna Tayabas Bus Co. vs.
Intermediate Appellate Court, G.R. Nos. 74387-90,
Nov. 14, 1988
Philippine Air Lines, Inc. vs. Court of Appeals, G.R.
No. L-46558, July 31, 1981
Art. 1759 - When common carriers are liable for
negligence or willful acts of its employees
Baliwag Transit, Inc. vs. Court of Appeals, G.R. No.
116110, May 15, 1996
Art. 1762 - Contributory negligence of
passenger
Philippine National Railways vs. Court of Appeals,
G.R. No. L-55347. October 4, 1985
Art. 1763 - When common carrier is responsible
for willful acts or negligence of other passengers
or of strangers
Fortune Express vs. Court of Appeals, G.R. No.
119756, March 18, 1999
Jose Pilapil vs. Court of Appeals, G.R. No. 52159.
December 22, 1989
A common carrier is bound to carry its
passengers safely as far as human care and
foresight can provide, using the utmost diligence
of very cautious persons, with due regard for all
the circumstances.
Armando G. Yrasuegui vs. Philippine Airlines, Inc.,
G.R. No. 168081, October 17, 2008
Art. 1764 - Damages against common carriers
Japan Airlines vs. Jesus Simangan, G.R. No. 170141,
April 22, 2008
Fortune Express vs. Court of Appeals, G.R. No.
119756, March 18, 1999
Trans-Asia Shipping Lines vs. Court of Appeals,
G.R. No. 118126, March 4, 1996
P a g e | 107
Suplicio Lines, Inc. vs. Court of Appeals, G.R. No.
113578, July 14, 1995
Philippine Airlines, Inc. vs. Court of Appeals, G.R.
No. 54470, May 8, 1990
The "receipt by a person of a share in the profits
of a business is prima facie evidence that he is a
partner in the business."
Philex Mining Corp. vs. CIR, G.R. No. 148187, April
16, 2008
As a general rule, moral damages are not
recoverable in actions for damages predicated
on a breach of contract, unless there is fraud or
bad faith. As an exception, moral damages may
be awarded in case of breach of contract of
carriage that results in the death of a passenger,
in accordance with Article 1764, in relation to
Article 2206 (3) of the Civil Code.
[Articles 1764 and 2206] set forth the persons
entitled to moral damages. The omission from
Article 2206 (3) of the brothers and sisters of the
deceased passenger reveals the legislative intent
to exclude them from the recovery of moral
damages for mental anguish by reason of the
death of the deceased. Inclusio unius est exclusio
alterius.
Sulpicio Lines, Inc. vs. Domingo E. Curso, et al., G.R.
No. 157009, March 17, 2010
As a general rule, indeed, moral damages are not
recoverable in an action predicated on a breach
of contract. This is because such action is not
included in Article 2219 of the Civil Code as one
of the actions in which moral damages may be
recovered. By way of exception, moral damages
are recoverable in an action predicated on a
breach of contract: (a) where the mishap results
in the death of a passenger, as provided in Article
1764, in relation to Article 2206 (3), of the Civil
Code; and (b) where the common carrier has
been guilty of fraud or bad faith, as provided in
Article 2220 of the Civil Code.
Philtranco Service Enterprises, Inc. vs. Felix Paras,
et al., G.R. No. 161909, April 25, 2012
Art. 1766 - Code of commerce and other special
laws

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
American Home Assurance, Co. vs. Court of
Appeals, G.R. No. 94149, May 5, 1992
WARSAW CONVENTION
Warsaw Convention" means the Convention for
the Unification of Certain Rules Relating to
International Carriage by Air signed at Warsaw
on 12 October 1929, or the Warsaw Convention
as amended at The Hague, 1955.
February 9, 1951
WARSAW CONVENTION FOR THE UNIFICATION
OF CERTAIN RULES RELATING TO
INTERNATIONAL CARRIAGE BY AIR *
The President of the German Reich, the Federal
President of the Republic of Austria, His Majesty
the King of the Belgians, the President of the
United States of Brazil, His Majesty the King of
the Bulgarians, the President of the Nationalist
Government of China, His Majesty the King of
Denmark and Iceland, His Majesty the King of
Egypt, His Majesty the King of Spain, the Chief of
State of the Republic of Estonia, the President of
the Republic of Finland, the President of the
French Republic, His Majesty the King of Great
Britain, Ireland, and the British Dominions
beyond the Seas, Emperor of India, the President
of the Hellenic Republic, His Most Serene
Highness the Regent of the Kingdom of Hungary,
His Majesty the King of Italy, His Majesty the
Emperor of Japan, the President of the Republic
of Latvia, Her Royal Highness the Grand Duchess
of Luxemburg, the President of the United
Mexican States, His Majesty the King of Norway,
Her Majesty the Queen of the Netherlands, the
President of the Republic of Poland, His Majesty
the King of Rumania, His Majesty the King of
Sweden, the Swiss Federal Council, the President
of the Czechoslovak Republic, the Central
Executive Committee of the Union of Soviet
Socialist Republics, the President of the United
States of Venezuela, His Majesty the King of
Yugoslavia:
Having recognized the advantage of regulating in
a uniform manner the conditions of international
transportation by air in respect of the documents
P a g e | 108
used for such transportation and of the liability
of the carrier,
Having nominated to this end their respective
Plenipotentiaries, who, being thereto duly
authorized, have concluded and signed the
following convention:
CHAPTER I
Scope of Definitions
ARTICLE 1. (1) This convention shall apply to
all international transportation of persons,
baggage, or goods performed by aircraft for hire.
It shall apply equally to gratuitous
transportation by aircraft performed by an air
transportation enterprise.
(2) For the purposes of this convention the
expression "international transportation" shall
mean any transportation in which, according to
the contract made by the parties, the place of
departure and the place of destination, whether
or not there be a break in the transportation or a
transshipment, are situated either within the
territories of two High Contracting Parties, or
within the territory of a single High Contracting
Party, if there is an agreed stopping place within
a territory subject to the sovereignty, suzerainty,
mandate or authority of another power, even
though that power is not a party to this
convention. Transportation without such an
agreed stopping place between territories
subject to the sovereignty, suzerainty, mandate,
or authority of the same High Contracting Party
shall not be deemed to be international for the
purposes of this convention.
(3) Transportation to be performed by
several successive air carriers shall be deemed,
for the purposes of this convention, to be one
undivided transportation, if it has been regarded
by the parties as a single operation, whether it
has been agreed upon under the form of a single
contract or of a series of contracts, and it shall
not lose its international character merely
because one contract or a series of contracts is to
be performed entirely within a territory subject
to the sovereignty, suzerainty, mandate, or
authority of the same High Contracting Party.

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ARTICLE 2. (1) This convention shall apply to
transportation performed by the state or by legal
entities constituted under public law provided it
falls within the conditions laid down in Article 1.
2. This convention shall not apply to
transportation performed under the terms of any
international postal convention.
CHAPTER II
Transportation Documents
SECTION I
Passenger Ticket
ARTICLE 3. (1) For the transportation of
passengers, the carrier must deliver a passenger
ticket which shall contain the following
particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The agreed stopping places, provided that
the carrier may reserve the right to alter the
stopping places in case of necessity, and that if
he exercises that right, the alteration shall not
have the effect of depriving the transportation of
its international character;
(d) The name and address of the carrier or
carriers;
(e) A statement that the transportation is
subject to the rules relating to liability
established by this convention.
(2) The absence, irregularity, or loss of the
passenger ticket shall not affect the existence or
the validity of the contract of transportation,
which shall none the less be subject to the rules
of this convention. Nevertheless, if the carrier
accepts a passenger without a passenger ticket
having been delivered he shall not be entitled to
avail himself of those provisions of this
convention which exclude or limit his liability.
SECTION II
Baggage Check
ARTICLE 4. (1) For the transportation of
baggage, other than small personal objects of
P a g e | 109
which the passenger takes charge himself, the
carrier must deliver a baggage check.
(2) The baggage check shall be made out in
duplicate, one part for the passenger and the
other part for the carrier.
(3) The baggage check shall contain the
following particulars:
(a) The place and date of issue;
(b) The place of departure and of destination;
(c) The name and address of the carrier or
carriers;
(d) The number of the passenger ticket;
(e) A statement that delivery of the baggage
will be made to the bearer of the baggage check;
(f) The number and weight of the packages;
(g) The amount of the value declared in
accordance with article 22 (2);
(h) A statement that the transportation is
subject to the rules relating to liability
established by this convention.
(4) The absence, irregularity, or loss of the
baggage check shall not affect the existence or
the validity of the contract of transportation
which shall none the less be subject to the rules
of this convention. Nevertheless, if the carrier
accepts baggage without a baggage check having
been delivered, or if the baggage check does not
contain the particulars set out at (d), (f), and (h)
above, the carrier shall not be entitled to avail
himself of those provisions of the convention
which exclude or limit his ability.
SECTION III
Air Waybill
ARTICLE 5. (1) Every carrier of goods has the
right to require the consignor to make out and
hand over to him a document called an "air
waybill"; every consignor has the right to require
the carrier to accept this document.
(2) The absence, irregularity, or loss of this
document shall not affect the existence or the
validity of the contract of transportation which

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GUILLER B. ASIDO, Ll.M.
shall, subject to the provisions of Article 9, be
none the less governed by the rules of this
convention.
ARTICLE 6. (1) The air waybill shall be made
out by the consignor in three original parts and
be handed over with the goods.
(2) The first part shall be marked "for the
carrier” and shall be signed by the consignor.
The second part shall be marked "for the
consignee"; it shall be signed by the consignor
and by the carrier and shall accompany the
goods. The third part shall be signed by the
carrier and handed by him to the consignor after
the goods have been accepted.
(3) The carrier shall sign on acceptance of the
goods.
(4) The signature of the carrier may be
stamped; that of the consignor may be printed or
stamped.
(5) If, at the request of the consignor, the
carrier makes out the air waybill, he shall be
deemed, subject to proof to the contrary, to have
done so on behalf of the consignor.
ARTICLE 7. The carrier of goods has the right
to require the consignor to make out separate
waybills when there is more than one package.
ARTICLE 8. The air waybill shall contain the
following particulars:
a. The place and date of its execution;
b. The place of departure and of
destination;
c. The agreed stopping places, provided
that the carrier may reserve the right to
alter the stopping places in case of
necessity, and that if he exercises that
right the alteration shall not have the
effect of depriving the transportation of
its international character;
d. The name and address of the consignor;
e. The name and address of the first carrier;
f. The name and address of the consignee,
if the case so requires;
g. The nature of the goods;
P a g e | 110
h. The number of packages, the method of
packing, and the particular marks or
numbers upon them;
i. The weight, the quantity, the volume, or
dimensions of the goods;
j. The apparent condition of the goods and
of the packing;
k. The freight, if it has been agreed upon,
the date and place of payment, and the
person who is to pay it;
l. If the goods are sent for payment on
delivery, the price of the goods, and, if
the case so requires, the amount of the
expenses incurred;
m. The amount of the value declared in
accordance with Article 22 (2).
n. The number of parts of the air waybill;
o. The documents handed to the carrier to
accompany the air waybill;
p. The time fixed for the completion of the
transportation and a brief note of the
route to be followed, if these matters
have been agreed upon;
q. A statement that the transportation is
subject to the rules relating to liability
established by this convention.
ARTICLE 9. If the carrier accepts goods
without an air waybill having been made out, or
if the air waybill does not contain all the
particulars set out in Article 8 (a) to (i), inclusive,
and (q), the carrier shall not be entitled to avail
himself of the provisions of this convention
which exclude or limit his liability.
ARTICLE 10. (1) The consignor shall be
responsible for the correctness of the particulars
and statements relating to the goods which he
inserts in the air waybill.
(2) The consignor shall be liable for all
damages suffered by the carrier or any other
person by reason of the irregularity,
incorrectness or incompleteness of the said
particulars and statements.
ARTICLE 11. (1) The air waybill shall be prima
facie evidence of the conclusion of the contract,
of the receipt of the goods and of the conditions
of transportation.

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(2) The statements in the air waybill relating
to the weight, dimensions, and packing of the
goods, as well as those relating to the number of
packages, shall be prima facie evidence of the
facts stated; those relating to the quantity,
volume and condition of the goods shall not
constitute evidence against the carrier except so
far as they both have been, and are stated in the
air waybill to have been, checked by him in the
presence of the consignor, or relate to the
apparent condition of the goods.
ARTICLE 12. (1) Subject to his liability to carry
out all his obligations under the contract of
transportation, the consignor shall have the right
to dispose of the goods by withdrawing them at
the airport of departure or destination, or by
stopping them in the course of the journey on
any landing, or by calling for them to be
delivered at the place of destination, or in the
course of the journey to a person other than the
consignee named in the air waybill, or by
requiring them to be returned to the airport of
departure. He must not exercise this right of
disposition in such a way as to prejudice the
carrier or other consignors, and he must repay
any expenses occasioned by the exercise of this
right.
(2) If it is impossible to carry out the orders
of the consignor the carrier must so inform him
forthwith.
(3) If the carrier obeys the orders of the
consignor for the disposition of the goods
without requiring the production of the part of
the air waybill delivered to the latter, he will be
liable, without prejudice to his right of recovery
from the consignor, for any damage which may
be caused thereby to any person who is lawfully
in possession of that part of the air waybill.
(4) The right conferred on the consignor shall
cease at the moment when that of the consignee
begins in accordance with Article 13, below.
Nevertheless, if the consignee declines to accept
the waybill or the goods, or if he cannot be
communicated with, the consignor shall resume
his right of disposition.
ARTICLE 13. (1) Except in the circumstances set
out in the preceding article, the consignee shall
P a g e | 111
be entitled, on arrival of the goods at the place of
destination, to require the carrier to hand over to
him the air waybill and to deliver the goods to
him, on payment of the charges due and on
complying with the conditions of transportation
set out in the air waybill.
(2) Unless it is otherwise agreed, it shall be
the duty of the carrier to give notice to the
consignee as soon as the goods arrive.
(3) If the carrier admits the loss of the goods,
or if the goods have not arrived at the expiration
of seven days after the date on which they ought
to have arrived, the consignee shall be entitled to
put into force against the carrier the rights which
flow from the contract of transportation.
ARTICLE 14. The consignor and the consignee
can respectively enforce all the rights given them
by Articles 12 and 13, each in his own name,
whether he is acting in his own interest or in the
interest of another, provided that he carries out
the obligations imposed by the contract.
ARTICLE 15. (1) Articles 12, 13, and 14 shall not
affect either the relations of the consignor and
the consignee with each other or the relations of
third parties whose rights are derived either
from the consignor or from the consignee.
(2) The provisions of Article 12, 13, and 14
can only be varied by express provision in the air
waybill.
ARTICLE 16. (1) The consignor must furnish
such information and attach to the air waybill
such documents as are necessary to meet the
formalities of customs, octroi, or police before
the goods can be delivered to the consignee. The
consignor shall be liable to the carrier for any
damage occasioned by the absence, insufficiency,
or irregularity of any such information or
documents, unless the damage is due to the fault
of the carrier or his agents.
(2) The carrier is under no obligation to
enquire into the correctness or sufficiency of
such information or documents.
CHAPTER III
Liability of the Carrier

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ARTICLE 17. The carrier shall be liable for
damage sustained in the event of the death or
wounding of a passenger or any other bodily
injury suffered by a passenger, if the accident
which caused the damage so sustained took
place on board the aircraft or in the course of
any of the operations of embarking or
disembarking.
ARTICLE 18. (1) The carrier shall be liable for
damage sustained in the event of the destruction
or loss of, or of damage to, any checked baggage
or any goods, if the occurrence which caused the
damage so sustained took place during the
transportation by air.
(2) The transportation by air within the
meaning of the preceding paragraph shall
comprise the period during which the baggage or
goods are in charge of the carrier, whether in an
airport or on board an aircraft, or, in the case of a
landing outside an airport, in any place
whatsoever.
(3) The period of the transportation by air
shall not extend to any transportation by land, by
sea, or by river performed outside an airport. If,
however, such transportation takes place in the
performance of a contract for transportation by
air, for the purpose of loading, delivery or
transshipment, any damage is presumed, subject
to proof to the contrary, to have been the result
of an event which took place during the
transportation by air.
ARTICLE 19. The carrier shall be liable for
damage occasioned by delay in the
transportation by air of passengers, baggage, or
goods.
ARTICLE 20. (1) The carrier shall not be liable if
he proves that he and his agents have taken all
necessary measures to avoid the damage or that
it was impossible for him or them to take such
measures.
(2) In the transportation of goods and
baggage the carrier shall not be liable if he
proves that the damage was occasioned by an
error in piloting, in the handling of the aircraft,
or in navigation and that, in all other respects, he
P a g e | 112
and his agents have taken all necessary
measures to avoid the damage.
ARTICLE 21. If the carrier proves that the
damage was caused by or contributed to by the
negligence of the injured person the court may,
in accordance with the provisions of its own law,
exonerate the carrier wholly or partly from his
liability.
ARTICLE 22. (1) In the transportation of
passengers, the liability of the carrier for each
passenger shall be limited to the sum of 125,000
francs. Where, in accordance with the law of the
court to which the case is submitted, damages
may be awarded in the form of periodical
payments, the equivalent capital value of the said
payments shall not exceed 125,000 francs.
Nevertheless, by special contract, the carrier and
the passenger may agree to a higher limit of
liability.
(2) In the transportation of checked baggage
and of goods, the liability of the carrier shall be
limited to a sum of 250 francs per kilogram,
unless the consignor has made, at the time when
the package was handed over to the carrier, a
special declaration of the value at delivery and
has paid a supplementary sum if the case so
requires. In that case the carrier will be liable to
pay a sum not exceeding the declared sum,
unless he proves that the sum is greater than the
actual value to the consignor at delivery.
(3) As regards objects of which the passenger
takes charge himself the liability of the carrier
shall be limited to 5,000 francs per passenger.
(4) The sums mentioned above shall be
deemed to refer to the French franc consisting of
65½ milligrams of gold at the standard of
fineness of nine hundred thousandths. These
sums may be converted into any national
currency in round figures.
ARTICLE 23. Any provision tending to relieve
the carrier of liability or to fix a lower limit than
that which is laid down in this convention shall
be null and avoid, but the nullity of any such
provision shall not involve the nullity of the
whole contract, which shall remain subject to the
provisions of this convention.

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ARTICLE 24. (1) In the cases covered by Articles
18 and 19 any action for damages, however
founded, can only be brought subject to the
conditions and limits set out in this convention.
(2) In the cases covered by Article 17 the
provisions of the preceding paragraph shall also
apply, without prejudice to the questions as to
who the persons are who have the right to bring
suit and what are their respective rights.
ARTICLE 25. (1) The carrier shall not be entitled
to avail himself of the provisions of this
convention which exclude or limit his liability, if
the damage is caused by his wilful misconduct or
by such default on his part as, in accordance with
the law of the court to which the case is
submitted, is considered to be equivalent to
wilful misconduct.
(2) Similarly, the carrier shall not be entitled
to avail himself of the said provisions, if the
damage is caused under the same circumstances
by any agent of the carrier acting within the
scope of his employment.
ARTICLE 26. (1) Receipt by the person entitled
to the delivery of baggage or goods without
complaint shall be prima facie evidence that the
same have been delivered in good condition and
in accordance with the document of
transportation.
(2) In case of damage, the person entitled to
delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the
latest, within 3 days from the date of receipt in
the case of baggage and 7 days from the date of
receipt in the case of goods. In case of delay the
complaint must be made at the latest within 14
days from the date on which the baggage or
goods have been placed at his disposal.
(3) Every complaint must be made in writing-
upon the document of transportation or by
separate notice in writing dispatched within the
times aforesaid.
(4) Failing complaint within the times
aforesaid, no action shall lie against the carrier,
save in the case of fraud on his part.
P a g e | 113
ARTICLE 27. In the case of the death of the
person liable, an action for damages lies in
accordance with the terms of this convention
against those legally representing his estate.
ARTICLE 28. (1) An action for damages must be
brought, at the option of the plaintiff, in the
territory of one of the High Contracting Parties,
either before the court of the domicile of the
carrier or of his principal place of business or
where he has a place of business through which
the contract has been made or before the court
at the place of destination.
(2) Questions of procedure shall be governed
by the law of the court to which the case is
submitted.
ARTICLE 29. (1) The right to damages shall be
extinguished if an action is not brought within 2
years, reckoned from the date of arrival at the
destination, or from the date on which the
aircraft ought to have arrived, or from the date
on which the transportation stopped.
(2) The method of calculating the period of
limitation shall be determined by the law of the
court to which the case is submitted.
ARTICLE 30. (1) In the case of transportation to
be performed by various successive carriers and
falling within the definition set out in the third
paragraph of Article 1, each carrier who accepts
passengers, baggage or goods shall be subject to
the rules set out in this convention, and shall be
deemed to be one of the contracting parties to
the contract of transportation insofar as the
contract deals with that part of the
transportation which is performed under his
supervision.
(2) In the case of transportation of this
nature, the passenger or his representative can
take action only against the carrier who
performed the transportation during which the
accident or the delay occurred, save in the case
where, by express agreement, the first carrier
has assumed liability for the whole journey.
(3) As regards baggage or goods, the
passenger or consignor shall have a right of
action against the first carrier, and the passenger
or consignee who is entitled to delivery shall

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GUILLER B. ASIDO, Ll.M.
have a right of action against the last carrier, and
further, each may take action against the carrier
who performed the transportation during which
the destruction, loss, damage, or delay took
place. These carriers shall be jointly and
severally liable to the passenger or to the
consignor or consignee.
CHAPTER IV
Provisions Relating to Combined
Transportation
ARTICLE 31. (1) In the case of combined
transportation performed partly by air and
partly by any other mode of transportation, the
provisions of this convention shall apply only to
the transportation, by air, provided that the
transportation by air falls within the terms of
Article 1.
(2) Nothing in this convention shall prevent
the parties in the case of combined
transportation from inserting in the document of
air transportation conditions relating to other
modes of transportation, provided that the
provisions of this convention are observed as
regards the transportation by air.
CHAPTER V
General and Final Provisions
ARTICLE 32. Any clause contained in the
contract and all special agreements entered into
before the damage occurred by which the parties
purport to infringe the rules laid down by this
convention, whether by deciding the law to be
applied, or by altering the rules as to jurisdiction,
shall be null and void. Nevertheless, for the
transportation of goods arbitration clauses shall
be allowed, subject to this convention, if the
arbitration is to take place within one of the
jurisdictions referred to in the first paragraph of
article 28.
ARTICLE 33. Nothing contained in this
convention shall prevent the carrier either from
refusing to enter into any contract of
transportation or from making regulations which
do not conflict with the provisions of this
convention.
P a g e | 114
ARTICLE 34. This convention shall not apply to
international transportation by air performed by
way of experimental trial by air navigation
enterprises with the view to the establishment of
regular lines of air navigation, nor shall it apply
to transportation performed in extraordinary
circumstances outside the normal scope of an air
carrier's business.
ARTICLE 35. The expression "days" when used
in this convention means current days, not
working days.
ARTICLE 36. This convention is drawn up in
French in a single copy which shall remain
deposited in the archives of the Ministry for
Foreign Affairs of Poland and of which one duly
certified copy shall be sent by the Polish
Government to the Government of each of the
High Contracting Parties.
ARTICLE 37. (1) This convention shall be
ratified. The instruments of ratification shall be
deposited in the archives of the Ministry for
Foreign Affairs of Poland, which shall give notice
of the deposit to the Government of each of the
High Contracting Parties.
(2) As soon as this convention shall have
been ratified by five of the High Contracting
Parties it shall come into force as between them
on the ninetieth day after the deposit of the fifth
ratification. Thereafter it shall come into force
between the High Contracting Parties which
shall have ratified and the High Contracting
Party which deposits its instrument of
ratification on the ninetieth day after the deposit.
(3) It shall be the duty of the Government of
the Republic of Poland to notify the Government
of each of the High Contracting Parties of the
date on which this convention comes into force
as well as the date of the deposit of each
ratification.
ARTICLE 38. (1) This convention shall, after it
has come into force, remain open for adherence
by any state.
(2) The adherence shall be effected by a
notification addressed to the Government of the
Republic of Poland, which shall inform the

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GUILLER B. ASIDO, Ll.M.
Government of each of the High Contracting
Parties thereof.
(3) The adherence shall take effect as from
the ninetieth day after the notification made to
the Government of the Republic of Poland.
ARTICLE 39. (1) Any one of the High
Contracting Parties may denounce this
convention by a notification addressed to the
Government of the Republic of Poland, which
shall at once inform the Government of each of
the High Contracting Parties.
(2) Denunciation shall take effect six months
after the notification of denunciation and shall
operate only as regards the party which shall
have proceeded to denunciation.
ARTICLE 40. (1) Any High Contracting Party
may, at the time of signature or of deposit of
ratification or of adherence, declare that the
acceptance which it gives to this convention does
not apply to all or any of its colonies,
protectorates, territories under mandate, or any
other territory subject to its sovereignty or its
authority, or any other territory under its
suzerainty.
(2) Accordingly, any High Contracting Party
may subsequently adhere separately in the name
of all or any of its colonies, protectorates,
territories under mandate, or any other territory
subject to its sovereignty or to its authority or
any other territory under its suzerainty which
have been thus excluded by its original
declaration.
(3) Any High Contracting Party may
denounce this Convention, in accordance with its
provisions, separately or for all or any of its
colonies, protectorates, territories under
mandate, or any other territory subject to its
sovereignty or to its authority, or any other
territory under its suzerainty.
ARTICLE 41. Any High Contracting Party shall
be entitled not earlier than two years after the
coming into force of this convention to call for
the assembling of a new international conference
in order to consider any improvements which
may be made in this convention. To this end it
will communicate with the Government of the
P a g e | 115
French Republic which will take the necessary
measures to make preparations for such
conference.
ADDITIONAL PROTOCOL
With Reference to Article 2
The High Contracting Parties reserve to
themselves the right to declare at the time of
ratification or of accession that the first
paragraph of Article 2 of this convention shall
not apply to international transportation by air
performed directly by the state, its colonies,
protectorates, or mandated territories, or by any
other territory under its sovereignty, suzerainty,
or authority. (Please see contracting parties)
WARSAW CONVENTION RELATED
PHILIPPINE CASES
[G.R. No. 151783. July 8, 2003.]
VICTORINO SAVELLANO, VIRGINIA B.
SAVELLANO and DEOGRACIAS B. SAVELLANO,
petitioners, vs. NORTHWEST AIRLINES,
respondent.
Petitioners were passengers of respondent
airline and their contract of carriage with the
latter was for the San Francisco-Tokyo(Narita)-
Manila flights. Petitioners claimed, however, that
this itinerary was not followed when the aircraft
used for the first segment of the journey
developed engine trouble. Petitioners likewise
claimed that the contents of their baggage which
was not allowed to be placed inside the
passengers' baggage compartment were stolen.
Consequently, petitioners filed a case for
damages which was decided by the trial court in
their favor. On appeal, the Court of Appeals
reversed the decision of the trial court. Hence,
this petition.
The Supreme Court ruled that the change of
petitioners' flight itinerary does not fall under
the situation covered by the phrase "may alter or
omit stopping places shown in the ticket in case
of necessity." A case of necessity must first be
proven. The burden of proving it necessarily fell
on respondent. This responsibility it failed to
discharge. Respondent failed to show a case of
necessity for changing the stopping place from
Tokyo to Los Angeles and Seoul. Thus,
respondent committed a breach of the contract
of carriage. However, the Court ruled that moral
damages cannot be awarded in the case at bar

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GUILLER B. ASIDO, Ll.M.
because of the absence of bad faith, ill will,
malice or wanton conduct on the part of
respondent. Neither are exemplary damages
proper in the present case because respondent
has not been proven to have acted in a wanton,
fraudulent, reckless, oppressive or malevolent
manner. Nevertheless, the Court awarded
nominal damages to petitioners. Nominal
damages are recoverable if no actual, substantial
or specific damages were shown to have resulted
from the breach, as in the case at bar. The Court
also held that the claim for the alleged lost items
from the baggage of petitioners cannot prosper
because they failed to give timely notice of the
loss to respondent.
A claim for the alleged lost items from the
baggage of petitioners cannot prosper because
they failed to give timely notice of the loss to
respondent. The Conditions printed on the
airline ticket plainly read: "2. Carriage hereunder
is subject to the rules and limitations relating to
liability established by the Warsaw Convention
unless such carriage is not 'International
carriage' as defined by that Convention... "7.
Checked baggage will be delivered to bearer of
the baggage check. In case of damage to baggage
moving in international transportation
complaint must be made in writing to carrier
forthwith after discovery of damage, and at the
latest, within 7 days from receipt; in case of
delay, complaint must be made within 21 days
from date the baggage was delivered..." The
pertinent provisions of the Rules Relating to
International Carriage by Air (Warsaw
Convention) state: "Article 26 (1) Receipt by the
person entitled to delivery of luggage or goods
without complaint is prima facie evidence that
the same have been delivered in good condition
and in accordance with the document of carriage.
(2) In case of damage, the person entitled to
delivery must complain to the carrier forthwith
after the discovery of the damage, and, at the
latest, within three days from the date of receipt
in the case of luggage and seven days from date
of receipt in the case of goods. In the case of
delay the complaint must be made at the latest
within fourteen days from the date on which the
luggage or goods have been placed at his
disposal. (3) Every complaint must be made in
writing upon the document of carriage or by
separate notice in writing dispatched within the
times aforesaid. (4) Failing complaint within the
times aforesaid, no action shall lie against the
carrier, save in the case of fraud on his part."
[G.R. No. 119641. May 17, 1996.]
P a g e | 116
PHILIPPINE AIRLINES, INC., petitioner, vs.
COURT OF APPEALS, DR. JOSEFINO MIRANDA
and LUISA MIRANDA, respondents.
Although the Warsaw Convention has the force
and effect of law in this country, being a treaty
commitment assumed by the Philippine
government, said convention does not operate as
an exclusive enumeration of the instances for
declaring a carrier liable for breach of contract of
carriage or as an absolute limit of the extent of
that liability. The Warsaw Convention declares
the carrier liable in the enumerated cases and
under certain limitations. However, it must not
be construed to preclude the operation of the
Civil Code and pertinent laws. It does not
regulate, much less exempt, the carrier from
liability for damages for violating the rights of its
passengers under the contract of carriage,
especially if willful misconduct on the part of the
carrier's employees is found or established.
(Cathay Pacific Airways, Ltd. vs. Court of Appeals,
et al., G.R. No. 60501, March 5, 1993)
[G.R. No. 171092. March 15, 2010.]
EDNA DIAGO LHUILLIER, petitioner, vs.
BRITISH AIRWAYS, respondent.
Petitioner contends that in Santos III v.
Northwest Orient Airlines, the cause of action
was based on a breach of contract while her
cause of action arose from the tortious conduct
of the airline personnel and violation of the Civil
Code provisions on Human Relations. In
addition, she claims that our pronouncement in
Santos III v. Northwest Orient Airlines that "the
allegation of willful misconduct resulting in a
tort is insufficient to exclude the case from the
comprehension of the Warsaw Convention," is
more of an obiter dictum rather than the ratio
decidendi. She maintains that the fact that said
acts occurred aboard a plane is merely
incidental, if not irrelevant.
We disagree with the position taken by the
petitioner. Black defines obiter dictum as "an
opinion entirely unnecessary for the decision of
the case" and thus "are not binding as
precedent." In Santos III v. Northwest Orient
Airlines, Augusto Santos III categorically put in
issue the applicability of Article 28 (1) of the
Warsaw Convention if the action is based on tort.
In the said case, we held that the allegation of
willful misconduct resulting in a tort is
insufficient to exclude the case from the realm of
the Warsaw Convention. In fact, our ruling that a
cause of action based on tort did not bring the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
case outside the sphere of the Warsaw
Convention was our ratio decidendi in disposing
of the specific issue presented by Augusto Santos
III. Clearly, the contention of the herein
petitioner that the said ruling is an obiter dictum
is without basis.
Relevant to this particular issue is the case of
Carey v. United Airlines, where the passenger
filed an action against the airline arising from an
incident involving the former and the airline's
flight attendant during an international flight
resulting to a heated exchange which included
insults and profanity. The United States Court of
Appeals (9th Circuit) held that the "passenger's
action against the airline carrier arising from
alleged confrontational incident between
passenger and flight attendant on international
flight was governed exclusively by the Warsaw
Convention, even though the incident allegedly
involved intentional misconduct by the flight
attendant."
In Bloom v. Alaska Airlines, the passenger
brought nine causes of action against the airline
in the state court, arising from a confrontation
with the flight attendant during an international
flight to Mexico. The United States Court of
Appeals (9th Circuit) held that the "Warsaw
Convention governs actions arising from
international air travel and provides the
exclusive remedy for conduct which falls within
its provisions." It further held that the said
Convention "created no exception for an injury
suffered as a result of intentional conduct” which
in that case involved a claim for intentional
infliction of emotional distress.
It is thus settled that allegations of tortious
conduct committed against an airline
passenger during the course of the
international carriage do not bring the case
outside the ambit of the Warsaw Convention.
xxx
Under Article 28 (1) of the Warsaw Convention,
the plaintiff may bring the action for damages
before —
1. the court where the carrier is domiciled;
2. the court where the carrier has its principal
place of business;
3. the court where the carrier has an
establishment by which the contract has
been made; or
4. the court of the place of destination.
P a g e | 117
In this case, it is not disputed that respondent is
a British corporation domiciled in London,
United Kingdom with London as its principal
place of business. Hence, under the first and
second jurisdictional rules, the petitioner may
bring her case before the courts of London in the
United Kingdom. In the passenger ticket and
baggage check presented by both the petitioner
and respondent, it appears that the ticket was
issued in Rome, Italy. Consequently, under the
third jurisdictional rule, the petitioner has the
option to bring her case before the courts of
Rome in Italy. Finally, both the petitioner and
respondent aver that the place of destination is
Rome, Italy, which is properly designated given
the routing presented in the said passenger
ticket and baggage check. Accordingly, petitioner
may bring her action before the courts of Rome,
Italy. We thus find that the RTC of Makati
correctly ruled that it does not have jurisdiction
over the case filed by the petitioner.
[G.R. No. 152122. July 30, 2003.]
CHINA AIRLINES, petitioner, vs. DANIEL
CHIOK, respondent.
In denying the petition, the Supreme Court ruled
that petitioner cannot evade liability to
respondent. even though it may have been only a
ticket issuer for the Hong Kong-Manila sector.
Although the contract of air transportation was
between petitioner and respondent, with the
former endorsing to PAL the Hongkong-to-
Manila segment of the journey, such contract of
carriage has always been treated in this
jurisdiction as a single operation. According to
the Court, for reasons of public interest and
policy, the ticket-issuing airline acts as principal
in a contract of carriage and is thus liable for the
acts and the omissions of any errant carrier to
which it may have endorsed any sector of the
entire, continuous trip. The Court likewise
affirmed the award of moral and exemplary
damages. Both the trial and appellate courts
found that the respondent had satisfactorily
proven the existence of the factual basis for the
damages adjudged against petitioner CAL and
PA.
[G.R. No. 122308. July 8, 1997.]
PURITA S. MAPA, CARMINA S. MAPA and
CORNELIO P. MAPA, petitioners, vs. COURT OF
APPEALS AND TRANS-WORLD AIRLINES INC.,
respondents.
Petitioners filed with the trial court a complaint
for damages. The trial court dismissed the case

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
for lack of jurisdiction in light of Article 28(1) of
the Warsaw Convention. The trial court held that
the Warsaw Convention is applicable in case at
bar, since the Philippines and the United States
are parties to the convention, the contracts of
transportation come within the meaning of
"International Transportation." The trial court
also held that the Philippines, not being one of
the places specified in Art. 28 (1) of the Warsaw
Convention where the complaint may be
instituted then it has no jurisdiction over the
present case. On appeal to the Court of Appeals,
the appellate court affirmed the ruling of the trial
court. Hence, the present petition. The Supreme
Court ruled that the contracts does not fall under
the category of international transportation as
provided by the Warsaw Convention. The only
way to bring the contracts between petitioners
Purita and Carmina Mapa on the one hand, and
TWA on the other, within the category of
international transportation is to link them or to
make them an integral part of the Manila — Los
Angeles travel of Purita and Carmina through Pal
aircraft. However, the alleged international
tickets issued by TWA were not presented in
evidence, clearly then; there is at all no factual
basis of the finding that the TWA tickets were
issued in conjunction with the international
tickets.
THIRD DIVISION
[G.R. No. 149547. July 4, 2008.]
PHILIPPINE AIRLINES, INC., petitioner, vs.
HON. ADRIANO SAVILLO, Presiding Judge of
RTC Branch 30, Iloilo City, and SIMPLICIO
GRIÑO, respondents.
In determining whether PAL's Motion to Dismiss
should have been granted by the trial court, it
must be ascertained if all the claims made by the
private respondent in his Complaint are covered
by the Warsaw Convention, which effectively
bars all claims made outside the two-year
prescription period provided under Article 29
thereof. If the Warsaw Convention covers all of
private respondent's claims, then Civil Case No.
23773 has already prescribed and should
therefore be dismissed. On the other hand, if
some, if not all, of respondent's claims are
outside the coverage of the Warsaw Convention,
the RTC may still proceed to hear the case.
The Warsaw Convention applies to "all
international transportation of persons, baggage
or goods performed by any aircraft for hire." It
seeks to accommodate or balance the interests of
passengers seeking recovery for personal
P a g e | 118
injuries and the interests of air carriers seeking
to limit potential liability. It employs a scheme of
strict liability favoring passengers and imposing
damage caps to benefit air carriers. The cardinal
purpose of the Warsaw Convention is to provide
uniformity of rules governing claims arising from
international air travel; thus, it precludes a
passenger from maintaining an action for
personal injury damages under local law when
his or her claim does not satisfy the conditions of
liability under the Convention.
Article 19 of the Warsaw Convention provides
for liability on the part of a carrier for "damages
occasioned by delay in the transportation by air
of passengers, baggage or goods." Article 24
excludes other remedies by further providing
that "(1) in the cases covered by articles 18 and
19, any action for damages, however founded,
can only be brought subject to the conditions and
limits set out in this convention." Therefore, a
claim covered by the Warsaw Convention can no
longer be recovered under local law if the statute
of limitations of two years has already lapsed.
Nevertheless, this Court notes that jurisprudence
in the Philippines and the United States also
recognizes that the Warsaw Convention does not
"exclusively regulate" the relationship between
passenger and carrier on an international flight.
This Court finds that the present case is
substantially similar to cases in which the
damages sought were considered to be outside
the coverage of the Warsaw Convention.
In United Airlines v. Uy, this Court distinguished
between the (1) damage to the passenger's
baggage and (2) humiliation he suffered at the
hands of the airline's employees. The first cause
of action was covered by the Warsaw Convention
which prescribes in two years, while the second
was covered by the provisions of the Civil Code
on torts, which prescribes in four years.
Similar distinctions were made in American
jurisprudence. In Mahaney v. Air France, a
passenger was denied access to an airline flight
between New York and Mexico, despite the fact
that she held a confirmed reservation. The court
therein ruled that if the plaintiff were to claim
damages based solely on the delay she
experienced — for instance, the costs of renting
a van, which she had to arrange on her own as a
consequence of the delay — the complaint would
be barred by the two-year statute of limitations.
However, where the plaintiff alleged that the
airlines subjected her to unjust discrimination or

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
undue or unreasonable preference or
disadvantage, an act punishable under the
United States laws, then the plaintiff may claim
purely nominal compensatory damages for
humiliation and hurt feelings, which are not
provided for by the Warsaw Convention. In
another case, Wolgel v. Mexicana Airlines, the
court pronounced that actions for damages for
the "bumping off" itself, rather than the
incidental damages due to the delay, fall outside
the Warsaw Convention and do not prescribe in
two years.
CARRIAGE OF GOODS BY SEA ACT
Covers only overseas trade
It does not apply to undelivered or lost goods.
An action to recover must be filed within a
period of one year from the discharge; If there is
no delivery, the one-year period starts from the
day the vessel left port in case of undelivered or
lost cargo, or from delivery to the arrastre in
case of damaged good.
[G.R. No. 166250. July 26, 2010.]
UNSWORTH TRANSPORT INTERNATIONAL
(PHILS.), INC., petitioner, vs. COURT OF
APPEALS and PIONEER INSURANCE AND
SURETY CORPORATION, respondents.
It is to be noted that the Civil Code does not limit
the liability of the common carrier to a fixed
amount per package. In all matters not regulated
by the Civil Code, the rights and obligations of
common carriers are governed by the Code of
Commerce and special laws. Thus, the COGSA
supplements the Civil Code by establishing a
provision limiting the carrier's liability in the
absence of a shipper's declaration of a higher
value in the bill of lading. 30 Section 4 (5) of the
COGSA provides:
(5) Neither the carrier nor the ship shall in any
event be or become liable for any loss or damage
to or in connection with the transportation of
goods in an amount exceeding $500 per package
of lawful money of the United States, or in case of
goods not shipped in packages, per customary
freight unit, or the equivalent of that sum in other
currency, unless the nature and value of such
goods have been declared by the shipper before
shipment and inserted in the bill of lading. This
declaration, if embodied in the bill of lading, shall
P a g e | 119
be prima facie evidence, but shall not be
conclusive on the carrier.
[G.R. No. 171337. July 11, 2012.]
BENJAMIN CUA (CUA HIAN TEK), petitioner,
vs. WALLEM PHILIPPINES SHIPPING, INC. and
ADVANCE SHIPPING CORPORATION,
respondents.
The COGSA is the applicable law for all contracts
for carriage of goods by sea to and from
Philippine ports in foreign trade; 28 it is thus the
law that the Court shall consider in the present
case since the cargo was transported from Brazil
to the Philippines.
Under Section 3 (6) of the COGSA, the carrier is
discharged from liability for loss or damage to
the cargo "unless the suit is brought within one
year after delivery of the goods or the date when
the goods should have been delivered." 29
Jurisprudence, however, recognized the validity
of an agreement between the carrier and the
shipper/consignee extending the one-year
period to file a claim.
The Carriage of Goods by Sea Act (COGSA),
Public Act No. 521 of the 74th US Congress, was
accepted to be made applicable to all contracts
for the carriage of goods by sea to and from
Philippine ports in foreign trade by virtue of CA
No. 65.
Section 1 of CA No. 65 states:
Section 1. That the provisions of Public Act
Numbered Five hundred and twenty-one of the
Seventy-fourth Congress of the United States,
approved on April sixteenth, nineteen hundred
and thirty-six, be accepted, as it is hereby accepted
to be made applicable to all contracts for the
carriage of goods by sea to and from Philippine
ports in foreign trade: Provided, That nothing in
the Act shall be construed as repealing any
existing provision of the Code of Commerce which
is now in force, or as limiting its application.
Section 1, Title I of CA No. 65 defines the relevant
terms in Carriage of Goods by Sea, thus:
Section 1. When used in this Act. —
(a) The term "carrier" includes the owner or
the charterer who enters into a contract of
carriage with a shipper.
(b) The term "contract of carriage" applies
only to contracts of carriage covered by a bill of

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
lading or any similar document of title, insofar as
such document relates to the carriage of goods
by sea, including any bill of lading or any similar
document as aforesaid issued under or pursuant
to a charter party from the moment at which
such bill of lading or similar document of title
regulates the relations between a carrier and a
holder of the same.
(c) The term "goods" includes goods, wares,
merchandise, and articles of every kind
whatsoever, except live animals and cargo which
by the contract of carriage is stated as being
carried on deck and is so carried.
(d) The term "ship" means any vessel used
for the carriage of goods by sea.
(e) The term "carriage of goods" covers the
period from the time when the goods are loaded
to the time when they are discharged from the
ship.
It is noted that the term "carriage of goods"
covers the period from the time when the goods
are loaded to the time when they are discharged
from the ship; thus, it can be inferred that the
period of time when the goods have been
discharged from the ship and given to the
custody of the arrastre operator is not covered
by the COGSA.
The prescriptive period for filing an action for
the loss or damage of the goods under the COGSA
is found in paragraph (6), Section 3, thus:
6) Unless notice of loss or damage and the
general nature of such loss or damage be given in
writing to the carrier or his agent at the port of
discharge before or at the time of the removal of
the goods into the custody of the person entitled
to delivery thereof under the contract of
carriage, such removal shall be prima facie
evidence of the delivery by the carrier of the
goods as described in the bill of lading. If the loss
or damage is not apparent, the notice must be
given within three days of the delivery.
Said notice of loss or damage may be endorsed
upon the receipt for the goods given by the
person taking delivery thereof.
The notice in writing need not be given if the
state of the goods has at the time of their receipt
been the subject of joint survey or inspection.
In any event the carrier and the ship shall be
discharged from all liability in respect of loss or
damage unless suit is brought within one year
after delivery of the goods or the date when the
goods should have been delivered: Provided,
P a g e | 120
That if a notice of loss or damage, either
apparent or concealed, is not given as provided
for in this section, that fact shall not affect or
prejudice the right of the shipper to bring suit
within one year after the delivery of the goods or
the date when the goods should have been
delivered.
From the provision above, the carrier and the
ship may put up the defense of prescription if the
action for damages is not brought within one
year after the delivery of the goods or the date
when the goods should have been delivered. It
has been held that not only the shipper, but also
the consignee or legal holder of the bill may
invoke the prescriptive period. However, the
COGSA does not mention that an arrastre
operator may invoke the prescriptive period of
one year; hence, it does not cover the arrastre
operator.
SUPPLEMENTAL NOTES ON
TRANSPORTATION LAW
The diligence requirement imposed on common
carriers is a constant question in every bar exam.
In the case of Nedlloyd B.V.Rotterdam vs.
Glowlaks Enterprises, Ltd., (GR no.156330,
November 19, 2014), the Supreme Court again
repeated that, “Common carriers are responsible
for the loss, destruction or deterioration of goods
unless the same is due to flood, storm, earthquake
or other natural disaster or calamity.
Extraordinary diligence is that extreme care and
caution which persons of unusual prudence and
circumspection use for securing or preserving
their own property or rights.”
Thus, the High Court reiterated in the same case
that, “When the goods shipped are either lost or
arrived in damaged condition, a presumption
arises against the carrier of its failure to observe
that diligence, and there not be an express finding
of negligence to hold it liable. To overcome the
presumption of negligence, the common carrier
must establish by adequate proof that it exercised
extraordinary diligence over the goods. It must do
more than merely show that some other party
could be responsible for the damage.”
What are the remedies of a consignee if the
goods he was expecting to be delivered are
rendered useless?

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
This was one of the issues that the Supreme
Court had to address in the case of Loadstar
Shipping Company vs. Malayan Insurance Inc.,
(GR no.185565, November 26, 2014). In this
case, the High Court stated that, “If goods are
rendered useless for sale, consumption, or for the
intended purpose, the consignee may reject the
goods and demand payment of such goods at their
market price on that day pursuant to Article 365
of the Code of Commerce of the Philippines. In case
the damaged portion of the goods can be
segregated from those 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.”
What is a slot charter agreement?
It is a contract of affreightment, whereby the use
of the shipping space on vessels is leased in part
or as a whole, to carry goods for others. It may be
for a determinate period of time (time charter)
or for a single or consecutive voyage (voyage
charter). The charterer is free from liability to
third persons in respect of the ship.
What is a bareboat or demise charter
agreement?
In a charter by demise or bareboat, the whole
vessel is let to the charterer with a transfer to
him of its entire command and possession and
consequent control over its navigation, including
the master and its crew. The charterer therefore
becomes the owner for the voyage or service
stipulated and hence liable for damages or loss
sustained by the goods transported.
What is the degree of diligence requirement
for an arrastre operator?
In Asian Terminals Inc, vs. First Lepanto Taisho
Insurance Corp. (GR no.185964, June 16, 2014),
the Supreme Court emphasized that, “The
relationship between the consignee and arrastre
operator is akin to that existing between the
consignee and/or the owner of the shipped
goods and the common carrier, or that between a
P a g e | 121
depositor and a warehouseman. Hence, in the
performance of its obligations, an arrastre
operator should observe the same degree of
diligence as that required of a common carrier
and a warehouseman. Being the custodian of
goods discharged from a vessel, an arrastre
operator’s duty is to take care of the goods and
to turn them over to the party entitled to their
possession.”
If a contract of carriage and bill of lading is
silent on the computation of damages, what
contract will govern the parties?
Where a contract of carriage as well as of bill of
lading is silent as regards the computation of
damages, the relevant provisions of the Civil
Code of the Philippines and the Code of
Commerce shall govern the contract between the
parties.
What is the “Limited Liability Rule?”
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. Consequently, 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. The ship owner’s or agent’s
liability is merely co-extensive with his interest
in the vessel, such that a total loss of the vessel
results in the liability’s extinction. The vessel’s
total destruction extinguishes maritime liens
because there is no longer any res to which they
can attach. (Monarch Insurance v. CA, G.R. No.
92735, June 8, 2000)
Are there any exceptions to the “Limited
Liability Rule’?
1. Repairs and provisioning of the vessel before
the loss of the vessel; (Art. 586)
2. Insurance proceeds. If the vessel is insured,
the proceeds will go to the persons entitled to
claim from the shipowner; (Vasquez v. CA, G.R.
No. L-42926, Sept. 13, 1985)
3. Workmen’s Compensation cases (now
Employees’ Compensation under the Labor
 P a g e | 122
NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.

Code); (Oching v. San Diego, G.R. No. 775, Dec. 2. Pre-Negotiated (sec. 76)
17, 1946)
3. Out of Court or Informal (sec. 83)
4. When the shipowner is guilty of fault or
negligence; Note: But if the captain is the one Voluntary Involuntary Pre-
Negotiated
Informal

who is guilty, doctrine may still be invoked,

hence, abandonment is still an option. Petitioner Debtor Creditor Debtor with None
Creditor
5. Private carrier; or
Conditions 2/3 Vote of Aggregate Pre- Out of Court
6.Voyage is not maritime in character. stockholders claim of P1M Negotiated
and or at Rehab Plan. 67% of
least 25% of Approved secured
capital stock, by 2/3 of obligations
including total 75% of
What is the notice requirement under COGSA? secured liabilities of unsecured
creditors debtor, obligation.
Under Section 3 (6) of the COGSA, notice of loss holding more including Creditors
than 50% of secured holding at
or damages must be filed within three days of total creditors least 85% of
unsecured holding total
delivery. Under the same provision, however, a claim more than liabilities
failure to file a notice of claim within three days 50% of total
unsecured
secured and
unsecured of
will not bar recovery if a suit is nonetheless filed claims debtor

within one year from delivery of the goods or

from the date when the goods should have been
delivered. (Wallem Philippines vs. Salem
Philippines [2010]
FINANCIAL REHABILITION AND INSOLVENCY
LAW
• The FRIA integrates rehabilitation and
restructuring along with insolvency law.
Furthermore, it moves from the debtor-
controlled process of the older system to
a framework where the creditors take the
fore in determining the future of the
distressed corporation.
• “Section 4. Definition of Terms. – As used in
this Act, the term:
FIRST METHOD: COURT SUPERVISED
• In court supervised rehabilitation
proceedings, the rehabilitation of the
debtor officially commences after the
court makes the finding that the Petition
(whether voluntary or involuntary) is
sufficient in form or substance. More
specifically, the rehabilitation
proceedings are deemed to commence on
the date of the issuance of the
Commencement Order, pursuant to
Sections 15 and 16 of the law
COMMENCEMENT ORDER

xxx • “Section 15. Action on the Petition. – If the

“(p) Insolvent shall refer to the financial
condition of a debtor that is generally
unable to pay its or his liabilities as they
fall due in the ordinary course of business
or has liabilities that are greater than its
or his assets.”
Three modes of rehabilitation
1. Court Supervised
a. Voluntary (section 12)
b. Involuntary (section 13)
Court finds the petition for rehabilitation
to be sufficient in form and substance, it
shall, within five (5) working days from the
filing of the petition, issue a
Commencement Order. If within the same
period, the court finds the petition deficient
in form and substance, the court may, in its
discretion, give the petitioner/s a
reasonable time within which to amend or
supplement the petition, or to submit such
documents as may be necessary or proper
to put the petition in proper order. In such
case, the five (5) working days provided
above for the issuance of the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Commencement Order shall be reckoned
from the date of the filing of the amended
or supplemental petition or the submission
of such documents.
• Under Section 16, the “Commencement
Order” shall, among others: (i) declare
that the debtor is under rehabilitation, (ii)
direct publication of the Order and notice
to creditors, (iii) appoint a rehabilitation
receiver, (iv) set the date of the initial
hearing for the determination of whether
or not the debtor can be rehabilitated, (v)
direct all creditors to file their claims at
least five (5) days from initial hearing and
(vi) direct the government, through the
Bureau of Internal Revenue (BIR) to
either file its Comment to the Petition for
Rehabilitation or present its claims
against the debtor.
SUSPENSION OR STAY ORDER
• In addition, the Commencement Order
shall include a Suspension or Stay Order
prohibiting the sale or disposition of
assets of the debtor and ordering the
suspension of all actions against the
debtor and/or the debtor’s estate. The
scope and/or coverage of the stay
order under the FRIA remain as broad
as before. However, certain cases are
allowed to proceed until the execution
stage
• Section 18. Exceptions to the Stay or
Suspension Order. – The Stay or
Suspension Order shall not apply:
“(a) to cases already pending appeal in
the Supreme Court as of commencement
date: Provided, that any final and
executory judgment arising from such
appeal shall be referred to the court for
appropriate action;
• Note that pursuant to sub-paragraph (c)
“(b) subject to the discretion of the court,
to cases pending or filed at a specialized
court or quasi-judicial agency which,
upon determination by the court, is
capable of resolving the claim more
quickly, fairly and efficiently than the
P a g e | 123
court: Provided, that any final and
executory judgment of such court or
agency shall be referred to the court and
shall be treated as a non-disputed claim
“(c) to the enforcement of claims against
sureties and other persons solidarily
liable with the debtor, and third party or
accommodation mortgagors as well as
issuers of letters of credit, unless the
property subject of the third party or
accommodation mortgage is necessary for
the rehabilitation of the debtor as
determined by the court upon
recommendation by the rehabilitation
receiver;
“(d) to any form of action of customers or
clients of a securities market participant
to recover or otherwise claim moneys or
securities entrusted to the latter in the
ordinary course of the latter’s business as
well as any action of such securities
market participant or the appropriate
regulatory agency or self-regulating
organization to pay of settle such claims
or liabilities;
“(f) the clearing and settlement of
financial transactions through the
facilities of a clearing agency or similar
entities duly authorized, registered
and/or recognized by the appropriate
regulatory agency like the Bangko Sentral
ng Pilipinas (BSP) and the SEC as well as
any form of actions of such agencies or
entities to reimburse themselves for any
transactions settled for the debtor; and
“(g) Any criminal action against the
individual debtor or owner, partner,
director or officer of a debtor shall not be
affected by any proceeding commenced
under this Act.”
above, the suspension order does not
cover the enforcement of claims against
“persons solidarily liable with the debtor”
including “issuers of letters of credit.”

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
This follows the rule in MWSS vs. Daway
[GR No. 160732, 21 June 2004] which
held that a letter of credit is excluded
from the jurisdiction of the
rehabilitation court.
• On the other hand, the Stay or Suspension
Order applies with equal force to the
enforcement of both secured and
unsecured claims except that under
Section 60 of the FRIA, the issuance of
the Stay or Suspension Order “shall not
be deemed in any way to diminish or
impair the security or lien of a secured
creditor, or the value of his lien or
security, except that his right to
enforce said security or lien may be
suspended during the term of the Stay
Order.” Again, this paraphrases the
“equality in equity” principle the effects of
which were explained in the case of
Tsuneishi Heavy Industries (Cebu), Inc. v.
Negros Navigation Co., Inc. et. al. [GR
166845, 10 December 2008],
• Continuous Supply of Goods and Services
To ensure continuous delivery of goods
and services necessary for the debtor’s
business, the FRIA adopts the provision
under the 2008 Rules granting the
rehabilitation court authority to include
in the Commencement Order a
prohibition enjoining the debtor’s
suppliers from withholding supply of
essential goods and services
Waiver of Taxes
• Section 19 of the law provides that from
the time of the issuance of the
Commencement Order until the approval
of the Rehabilitation Plan or dismissal of
the petition, the imposition of all taxes
shall be waived, thus:
• “Section 19. Waiver of Taxes and Fees Due
to the National Government and to Local
Government Units. – Upon issuance of the
Commencement Order by the court, and
until the approval of the Rehabilitation
Plan or dismissal of the Petition, which is
P a g e | 124
earlier, the imposition of all taxes and fees,
including penalties interests and charges
thereof, due to the national government or
to LGUs shall be considered waived, in
furtherance of the objectives of
rehabilitation.”
• Section 57 of the law grants the debtor
the power to confirm or cancel pre-
existing contracts within ninety (90) days
from the issuance of the Commencement
Order in order to weed out extremely
onerous contracts that may have been the
cause of the debtor’s predicament.
Validity of Contracts
• “Section 57. Treatment of Contracts. –
Unless cancelled by virtue of a final
judgment of a court of competent
jurisdiction issued prior to the issuance of
the Commencement Order, or at anytime
thereafter by the court before which the
rehabilitation proceedings are pending, all
valid and subsisting contracts of the debtor
with creditors and other third parties as at
the commencement date shall continue in
force: Provided, That within ninety (90)
days following the commencement of
proceedings, the debtor, with the consent
of the rehabilitation receiver, shall notify
each contractual counterparty of whether
it is confirming the particular contract.
Contractual obligations arising or
performed during this period, and
afterwards for confirmed contracts, shall
be considered administrative expenses.
Contracts not confirmed within the
required deadline shall be considered
terminated. Claims for actual damages, if
any, arising as a result of the election to
terminate a contract shall be considered a
pre-commencement claim against the
debtor. Nothing contained herein shall
prevent the cancellation or termination of
any contract of the debtor for any ground
provided by law.
• The initial appointment of the
Rehabilitation Receiver (as one of the
elements of the Commencement Order
under Section 16) is subject to the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
discretion of the court, which may retain
the original appointee or choose another
from the petitioners’ nominees. However,
this discretion is limited in the following
circumstances:
• (a) In case the debtor is a securities
market participant, in which case the
court shall give priority to the nominee of
the appropriate securities or investor
protection fund; or
• (b) If the qualified natural or juridical
person is nominated by more than 50% of
secured creditors and general unsecured
creditors, in which case the court “shall
appoint the creditors’ nominee.”
• The Rehabilitation Receiver will not
supplant the existing management of the
debtor corporation unless otherwise
ordered by the court on motion of any
interested party, thus:
“Section 36. Displacement of Existing
Management by the Rehabilitation
Receiver or Management Committee. - -
Upon motion of any interested party, the
court may appoint and direct the
rehabilitation receiver to assume the
powers of management of the debtor, or
appoint a management committee that
will undertake the management of the
debtor, upon clear and convincing evidence
of any of the following circumstances:
a) Actual or imminent danger of
dissipation, loss, wastage or destruction
of the debtor’s assets or other properties;
(b) Paralyzation of the business
operations of the debtor; or
(c) Gross mismanagement of the debtor,
or fraud or other wrongful conduct on the
part of, or gross or willful violation of this
Act by, existing management of the debtor
or the owner, partner, director, officer or
representative/s in management of the
debtor.
P a g e | 125
“In case the court appoints the rehabilitation
receiver to assume the powers of
management of the debtor, the court may:
“(1) require the rehabilitation receiver to
post an additional bond;
“(2) authorize him to engage the services
or employ persons or entities to assist
him in the discharge of his managerial
functions; and
“(3) authorize a commensurate increase
in his compensation.”
• As part of its functions, the Rehabilitation
Receiver retains the authority to file an
action to annul certain pre-
commencement transactions intended to
defraud the creditors. Indeed, this power
can be traced back to the basic authority
of the receiver to undertake measures to
preserve property under receivership
under the Rules of Court23.
• Should the receiver refuse to institute
proceedings, any creditor may take up the
cudgels of the corporation with leave of
court. If successful, Section 59 of the law
provides that the fruits of the case will
redound to the pro-active creditor to the
extent of the value of its credit plus costs,
Administration Proceedings
• Within forty (40) days from the issuance
of the Commencement Order, the court
shall set the case for Initial Hearing to
determine whether or not there is
substantial likelihood that the debtor can
be rehabilitated
• Within forty (40) days from the Initial
Hearing, the Rehabilitation Receiver is
required to submit his written Report to
the court, which will include a
determination of (a) whether or not there
is substantial likelihood for the debtor to
be successfully rehabilitated or in the
alternative (b) whether the debtor should
be dissolved or liquidated. After
submission of report, the Court shall act
on the petition by: (i) giving due course to

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
the petition, (ii) dismissing the petition or
(iii) converting the proceedings into one
for liquidation.
• In the event the court gives due course to
the petition, the court will require the
Rehabilitation Receiver to review the
Rehabilitation Plan, taking into
consideration the views of the debtor and
all creditor classes. While the consultation
is a necessary procedure, the Receiver is
not bound by the objections of the parties.
• Section 62 of the FRIA provides that
Rehabilitation Plan must include
provisions establishing classes and
subclasses of voting creditors. After
identifying the appropriate creditor
classes and sub-classes, the Plan must
“specify the treatment of each class or
subclass” and “provide for equal
treatment for all claims within the same
class.”
• Similar to the 2008 Rules, Section 62
grants additional protection to secured
creditors by requiring the Plan to
“maintain the security interest of secured
creditors and preserve the liquidation
value of the security.”
• Once satisfied with the version of the
Rehabilitation Plan, the receiver must
convene the creditors and present the
plan to them for approval. Unlike the old
procedure however, the vote of the
debtor is not required for the approval of
the plan.
• “Section 64. Creditor Approval of the
Rehabilitation Plan. – The rehabilitation
receiver shall notify the creditors and
stakeholders that the Plan is ready for
their examination. Within twenty (20) days
from the said notification, the
rehabilitation receiver shall convene the
creditors, either as a whole or per class, for
purposes of voting on the approval of the
Plan. The Plan shall be deemed rejected
unless approved by all classes of creditors
whose rights are adversely modified or
affected by the Plan. For purposes of this
P a g e | 126
section, the Plan is deemed to have been
approved by a class of creditors if members
of the said class holding more than fifty per
cent (50%) of the total claims of the said
class vote in favor of the Plan. The votes of
the creditors shall be based solely on the
amount of their respective claims based on
the registry of claims submitted by the
rehabilitation receiver pursuant to Section
44 hereof.
• Rehabilitation Court can confirm even if
creditors object
Notwithstanding the rejection of the
Rehabilitation Plan, the court may
confirm the Rehabilitation Plan if all of
the following circumstances are present:
“(a) the Rehabilitation Plan complies with
all the requirements specified in this Act;
“(b) the rehabilitation receiver
recommends the confirmation of the
Rehabilitation Plan;
“(c) The shareholders, owners or partners
of the juridical debtor lose at least their
controlling interest as a result of the
Rehabilitation Plan; and
“(d) The Rehabilitation Plan would likely
provide the objecting class of creditors
with compensation which has a net
present value greater than that which
they would have received if the debtor
were under liquidation.”
Cram Down Provision
Even if the Rehabilitation Plan is not
approved by the creditors, the court may still
confirm the Plan if it can be shown that
objecting class of creditors shall receive a
“net present value greater than that they
would have received if the debtor were
under liquidation.” Under the Interim Rules,
the debtor can force court approval of a
Rehabilitation Plan over the objection of
creditors by merely showing that “[t]he plans
would likely provide the objecting class of
creditors with compensation greater than
that which they would have received if the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
assets of the debtor were sold by a liquidator
within a three-month period.” The 2008
Rules 33 changed the basis to “present
value projected in the plan”. Requiring
that the computation be based on “net
present value” is intended to prevent
debtors from railroading a rehabilitation
plan disadvantageous to the creditors by
the simple expedient of stretching
• In corporate rehabilitation
proceedings, whose rights shall prevail
over the other?
• This was the issue that the Supreme
Court had to confront with in the case of
Aquino vs. Pacific Plans, Inc., (GR
no.193108, December 10, 2014) involving
the plan holders and other creditors of
pre-need company Pacific Plans. The
Supreme Court ruled that: “While the
voice and participation of the creditors is
crucial in the determination of the viability
of the rehabilitation plan, as they stand to
benefit or suffer in the implementation
thereof, the interests of all stakeholders is
the ultimate and prime consideration.”
• In relation to corporate rehabilitation
proceedings, the Supreme Court in the
case of Philippine Bank of
Communications vs. Basic Polyprinters
and Packaging Corporation (GR
no.187581, October 2014) ruled as well
that the purpose of such proceedings is
two-fold – (1.) To efficiently and
equitably distribute the assets of the
insolvent debtor to its creditors; and
(2.) To provide the debtor with a fresh
start.
• The “material financial commitment” rule
was also discussed in the same
aforementioned case. This rule becomes
significant in determining the earnestness
and good faith of the financially
distressed corporation in financing its
proposed rehabilitation plan. This
material financial commitment may
include the readiness, willingness and
ability of the corporation to contribute
funds or property to guarantee the
P a g e | 127
operation of the corporation during the
period of rehabilitation.
One Year Rule
• To prevent the debtor (or any interested
party) from dragging out the proceedings
in the hopes of obtaining a settlement on
the basis of attrition, the law fixes a
maximum period of one year (from the
time of the filing of the petition) within
which the plan must be confirmed.
Otherwise, the proceedings will turn into
one of liquidation. This should force the
parties to negotiate in earnest.
• SECOND METHOD: PRE-NEGOTIATED
REHABILITATION
• Debtor by himself or jointly with
Creditors
File a petition for the approval of a pre-
negotiated rehabilitation plan provided
that it has been endorsed by creditors
holding at least 2/3 of the total liabilities
of the debtor, including secured creditors
holding more than 50 percent of the total
secured claims and unsecured creditors
holding more than 50 percent of the total
unsecured claims
• The FRIA gives the parties the freedom to
undertake the proceedings without a
receiver.
• The Order under Section 77 of the law
which directs interested parties to file
their objections to the Pre-Negotiated
Rehabilitation Plan also requires
publication and personal delivery of a
copy of the Petition to each creditor who
is not a petitioner but who holds at least
10%37 of the total liabilities of the
debtor.
• Grounds to object Pre-Negotiated
Rehabilitation
“Section 79. Objection to the Petition or
Rehabilitation Plan. – Any creditor or other
interested party may submit to the court a
verified objection to the petition or the

NOTES ON MERCANTILE LAW REVIEW 2018
GUILLER B. ASIDO, Ll.M.
Rehabilitation Plan not later than eight (8)
days from the date of the second
publication of the Order mentioned in
Section 77 hereof. The objection shall be
limited to the following:
“(a) The allegations in the petition or the
Rehabilitation Plan, or the attachments
thereto are materially false or misleading;
“(b) The majority of any class of the
creditors do not in fact support the
Rehabilitation Plan;
“(c) The Rehabilitation Plan fails to
accurately account for a claim against the
debtor and the claim is not categorically
declared as a contested claim; or
“(d) The support of the creditors, or any of
them, was induced by fraud.
• If, after due hearing, the courts find merit
to the objection, it will order the debtor to
cure the defect.
• On the other hand, if it finds that the
petitioners acted in bad faith or that the
defect is incurable, it may order the
conversion of proceedings into one for
liquidation38. As in the 2008 Rules, the
Rehabilitation Plan will be deemed
approved if the court fails to act within a
period of 120 days.
THIRD METHOD OF REHABILITATION:
OUT OF COURT SETTLEMENT
• Pursuant to Section 89 of the Act, “[t]he
insolvent debtor and creditor may seek
court assistance for the execution or
implementation” of the Rehabilitation
Plan, provided that it meets the minimum
requirements of the law.
• To allow the parties to negotiate a
feasible workout plan, the debtor and
creditors holding more than 50% of the
debt may agree on a standstill period
pending the completion of the plan for up
to 120 days, provided in addition that
P a g e | 128
notice to all creditors is published in a
newspaper of general circulation once a
week for two consecutive weeks. The said
notice must invite the creditors to
participate in the negotiation of the plan
and inform them that the plan will be
binding on all creditors if the required
votes are obtained.
Cram down effect
• An out-of-court Rehabilitation Plan
approved by at least 67% of secured
creditors, 75% of unsecured creditors,
and 85% of all creditors42 will be
“crammed down” all creditors pursuant to
Section 86 of the law.
• Section 86. Cram Down Effect. – A
restructuring/workout agreement or
Rehabilitation Plan that is approved
pursuant to an informal workout
framework referred to in this chapter shall
have the same legal effect as confirmation
of a Plan under Section 69 hereof. The
notice of the Rehabilitation Plan or
restructuring agreement or Plan shall be
published once a week for at least three (3)
consecutive weeks in a newspaper of
general circulation in the Philippines. The
Rehabilitation Plan or restructuring
agreement shall take effect upon the lapse
of fifteen (15) days from the date of the last
publication of the notice thereof.”
Cross Border Insolvency
• By virtue of Section 139 of the FRIA, the
Philippines is now deemed to adopt the
provisions of the UNCITRAL Model Law on
Cross Border Insolvency (1997) subject to
procedural rules to be promulgated by the
Supreme Court. Essentially, the law
provides a framework for the recognition
of foreign insolvency proceedings and
grants certain parties in such proceedings
access to Philippine courts for purposes of
obtaining some form of affirmative or
other relief.